Deutsche Telekom Issues Second Profit Warning in Six Months

Deutsche Telekom, Europe's biggest telecommunications company, yesterday cut its 2007 profit forecast for the second time in six months. Intense competition and the dollar's 10% slide against the euro have led to an anticipated drop in earnings of up to €1.2bn ($1.55bn). The company is anticipating EBITDA of €19 billion ($24.5 billion), down from earlier guidance of €19.7-20.2 billion. 2006 revenue is forecast at €61.3 billion versus an earlier projection of at least €61.5 billion. The warning builds pressure on new CEO René Obermann, who states there will be no change to the plan for “[n]ecessary structural reforms" put forward by his predecessor, Kai-Uwe Ricke. The plan includes major job cuts that should save the company €4.5bn by 2010. DT lost 2.3m German fixed-line customers in 2006 on discounting by Vodafone and Telecom Italia and competition from the Internet and wireless technology. Mobile customer numbers went up in both Europe and North America, but the unfavorable dollar-euro exchange rate erased €200m from projected profits for 2007. DT's T-Mobile USA division gained 902,000 customers in the U.S. in Q4, well behind the record 2.4 million customers added by Cingular Wireless. T-Mobile rates in Germany, which fell 11% in 2006, are expected to continue to decline. DT will increase marketing spending this year, primarily on its Internet and wireless businesses, and will open about 200 retail stores in Germany. The company will pay a dividend of at least $0.72/share for 2006 and will publish Q4 earnings on March 1.

• Sources: Financial Times, Bloomberg, Wall Street Journal
• Related commentary: Barron's Euro Dogs of the Dow 2007, Say Ach Ya To Germany: A Global Powerhouse, Who In Europe Is Likely to Be the Next LBO Target?
• Potentially impacted stocks and ETFs: Deutsche Telekom AG [ADR] (DT). Competitors: BT Group plc (BT), France Telecom (FTE), Vodafone Group plc (VOD), Telecom Italia S.p.A. [ADR] (TI). ETFs: iShares MSCI Germany Index Fund (EWG).

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