Deutsche's CEO Discusses Q1 2011 Results - Earnings Call Transcript

May. 7.11 | About: Deutsche Telekom (DTEGY)

Deutsche Tele Ag Ads (OTCQX:DTEGY) Q1 2011 Earnings Call May 6, 2011 8:00 AM ET


Stephan Eger - Corporate Communications

René Obermann – Chief Executive Officer

Timotheus Höttges – Chief Financial Officer


Ulrich Rathe – Jefferies

Simon Weeden – Citigroup

Robin Bienenstock – Sanford Bernstein

Peter Kurt Nielsen – Cheuvreux

Hannes Wittig – J.P. Morgan

Frederic Boulan – Morgan Stanley

Thomas Friedrich – Uni Credit

Mathieu Robilliard – Exane BNP Paribas

Matthew Bloxham – Deutsche Bank

Justin Funnell – Credit Suisse

Emmet Kelly – Merrill Lynch


Good afternoon. And welcome to Deutsche Telekom’s Conference Call. On our customer’s request, this conference will be recorded.

Disclaimer, this presentation contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. These forward-looking statements include statements with regard to the expected development of revenue, earnings, profits from operations, depreciation and amortization, cash flows and personnel related measures.

You should consider them with caution. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Deutsche Telekom’s control. Among the factors that might influence our ability to achieve our objectives are the progress of our workforce reduction initiative and other cost-saving measures and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions and business combinations and our network upgrade and expansion initiatives.

In addition, stronger than expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on our costs and revenue development.

Further, the economic downturn in our markets and changes in interest and currency exchange rates, may also have an impact on our business development and the availability of financing on favorable conditions.

Changes to our expectations concerning future cash flows may lead to impairment write-downs of assets carried at historical cost, which may materially affect our results at the Group and operating segment levels.

If these or other risks and uncertainties materialize or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by forward-looking statements. We can offer no assurance that our estimates or expectations will be achieved.

Without prejudice to existing obligations under capital market law, we do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.

In addition to figures prepared in accordance with IFRS, Deutsche Telekom also presents non-GAAP financial performance measures, including, among others, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net income, free cash flow, gross debt and net debt.

These non-GAAP measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with IFRS. Non-GAAP financial performance measures are not subject to IFRS or any other generally accepted accounting principles. Other companies may define these terms in different ways.

Now please listen to the statements of René Obermann and Timotheus Höttges. Afterwards, you are welcome to ask your questions.

May I now hand you over to Mr. Stephan Eger.

Stephan Eger

Yeah. Good afternoon, ladies and gentlemen. Welcome to our Q1 Conference Call. As usually, I have René Obermann, our CEO; and Tim Höttges, our CFO with me. We’ll be starting with a quick presentation and then immediately go to Q&A.

I’ll hand over to our CEO, René Obermann.

René Obermann

Thanks, Stephan. Good afternoon, everybody, and good morning to the U.S. The first quarter of 2011 was a significant quarter. First and foremost, we found a structural solution for our U.S. business that addresses the key issues of spectrum and our relative lack of scale. The agreed sale of T-Mobile U.S.A to AT&T is a very good solution for all stakeholders. And we’ve also started together with our partners from AT&T the regulatory process.

As a result of the announced transaction starting Q1, the U.S. segment will be reported as discontinued operations. This deal, as well as the solutions which we found for our businesses in the U.K. and in Poland, remember, more than 10 years of legal battle. The solutions we found within the last 18 months show the quick and bold execution of this team.

With this transaction, the Fix part of our strategy, remember, Fix, Transform and Innovate is -- are the key headlines or the key terms of our strategy. The Fix part will be done to a large extent, having tackled the major portfolio issues in our Group.

The rigorous execution of our strategy also shows the commitment of this management team toward changing DT into what we call the New DT, part of this transformation process were also the new Group strategy presented last year, the new growth initiatives of DT and the new financial and shareholder remuneration policy. All these initiatives demonstrate the changed approach at DT towards our shareholder value generation and towards capital allocation.

Turning to the Q1 2011 results, it is fair to say that this was another strong quarter, good results for our German business, but a more difficult quarter in United States, as well as in some of our European countries. However, we reiterate our full year guidance, which we gave in February for the entire Group. Please remember that the telecommunications industry is typically a late-cyclical industry.

In some of our businesses on the business customer side, particularly at T-Systems or in Germany, we already see a positive development on the revenue side, order entry and so forth since 2010. On the consumer side, the trends vary from country to country.

Whereas we already see more positive developments in countries like Hungary or Poland, there is still no improvement to be seen in regions like Greece or Romania. And on top of the difficulties, we face regulatory interventions and some, I’d say, not very investor friendly taxation.

On the efficiency side, we continued to execute on our cost-cutting initiatives across the Group including a significant net cost reduction in Germany and Europe, because we realized revenue pressures would have to be met with higher efficiencies and we’re committed to continue our program.

In this context, I would also like to mention our purchasing joint venture with France Telecom. We’re going new ways in order to increase efficiency as well. That purchasing joint venture is expected to further increase CapEx and OpEx efficiencies over the next years.

In terms of figures, including the U.S. on a comparable basis meaning without T-Mobile U.K. in the Q1 2010 figures, Group revenues still decreased by 3% and adjusted EBITDA by 5%.

Free cash flow amounted to €1.1 billion versus €1.4 billion in Q1 last year. This decline does reflect a different seasonality of interest and of CapEx payments, but it doesn’t change our free cash flow expectation for the full year, let me be very clear on this.

Adjusted net income decreased from €0.9 billion to €0.7 billion, principally or basically in line with the decline in EBITDA.

So, let’s have a closer look now at the revenue and EBITDA development, including the United States. In Germany, revenues decreased by 3.2%. That was impacted in particular by the mobile termination rate cut in December, all over Europe regulators still believe that they should or have believed they should continue to termination rate cuts and I think it’s wrong, because it takes opportunities to invest and revenues from this industry away. But let’s see how it goes. We keep fighting for a better regulation here.

Excluding this cuts and adjusting for the discontinued mobile prepaid card business or the cash-card business and the first time consolidation of ClickandBuy, revenues would have decreased by just 2%, despite the revenue decline, adjusted EBITDA of the Germany division increased by 3.7% reflecting a good cost discipline, strong cost control.

Adjusted for the deconsolidation of T-Mobile U.K., revenues in the Europe segment decreased by 8%, while EBITDA decreased by 13.1%, clearly disappointing. This reflects the still difficult economic and regulatory environment in some of the countries.

As well as what we had to do for strategic reasons which makes a lot of sense, upfront market invests increase in a number of key countries, such as in Poland or in the Netherlands and you’ll see that we outperformed, for instance in the Netherlands the number one player.

The U.S. had a slight decrease in total revenues, while service revenues increased slightly. This is true both in euro and in dollar terms.

Adjusted EBITDA on the other hand, decreased significantly, impacted by higher retention, higher advertising and network expenses.

Systems Solutions had more than 6% revenue growth in Q1, while adjusted EBITDA was almost stable.

Finally, the EBITDA losses in GHS were on the same level as last year.

Taking a closer look at our financials, you can see on this chart that excluding the U.S. our revenue growth is slightly weaker, while the EBITDA development is significantly less negative than looking at the Group as a whole. We continued to make progress with regards to our growth areas.

Please note that the figures on the next chart, on growth areas, in particular mobile internet, these figures still include T-Mobile U.S.A. The best thing is that mobile internet revenues grew by 28% to now €1.2 billion in the last quarter, supported by strong growth in key countries such as in Germany, where it grew by 32%, in the Netherlands and in Poland.

And as you all know, I still believe we’ve only just begun with that story, we’ve just scratched the surface of mobile internet with new devices, tablets, car connectivity, et cetera, this thing is going to go up further.

Connected Home revenues grew by 2% year-on-year, including 3.5% growth in Germany. Our unique position in the German broadband market and the strong growth of Entertain and VDSL should benefit this growth area going forward.

Online consumer services grew by 2% as well, growth slowed down though by legacy areas such as Yellow Pages, which are included. However, key assets within T-Online Consumer Services continued to grow at a faster pace. For example, the Scout group grew by 8% year-on-year in the first quarter.

T-Systems external revenues continued their growth path at a rate of 5.5% with international revenues growing by 9.4%.

In the area of Intelligent networks, we can’t show any significant revenues yet. However, we were able to sign first contracts in this area, which will result in future revenues, for example with Voltaris, our first smart metering deal for 100,000 smart meters. We also made other cooperation agreements, for instance in the Connected Car area with a company called Gemalto for emergency cars.

Turning to guidance for 2011, we reiterate our guidance of Group EBITDA of around €19.1 billion and a stable to slightly growing free cash flow versus the 2010 level of €6.5 billion. Please recall that this guidance was provided on a constant currency basis, using the average exchange rate in 2010, so around $1.33 per euro.

Given the fact that the U.S. will be accounted for as discontinued operations under IFRS from Q1 onwards, we think it’s fair and transparent to split the guidance into discontinued operations, U.S. with a broadly stable EBITDA over 2010 of around $5.5 billion or around €4.2 billion on the basis of that exchange rate which I just mentioned, of course, currently the dollar is lower but it’s the average exchange rate throughout the year which matters.

Continued operations, it’s the second part, around €14.9 billion EBITDA is the goal here, compared to €15.1. So there is a slight reduction about €200 million less, primarily driven, as I said before, out of the European and here in particular, the Central Eastern European markets.

The expected EBITDA reduction is coming, it depends really on the economy developments to some extent whether we feel some improvements on the economy in markets like Greece, currently that’s not to be seen and to be honest, we don’t expect that short-term.

So, with that having said, I’d like to turn over to Tim, for a more detailed look at the divisions and the Group financials. Thank you.

Timotheus Höttges

Hello, everybody. I’d like to start with Germany and quite pleased about the overall development here, especially in terms of the profitability, which is now close to 40%. While revenues decreased by 3.2%, this was driven partially by the mobile termination cut and the discontinued mobile prepaid card business. We discontinued the trade with mobile prepaid cards due to our focus on higher margin businesses.

This business had a very low margin, excluding these two effects and adjusting for the first time consolidation of ClickandBuy, revenues would have declined by 2% and an improvement over the minus 2.2% decline, which we have seen in the first quarter last year.

Encouraging, adjusted EBITDA increased by 3.7% to €2.4 billion, driven by strong adjusted OpEx reductions of 7%. The margin improved to 39.7%, up 2.6 percentage points from last year.

As you know, we changed our reporting for the German division as of Q1. In particular, we now report the revenues and customer figures for private and business customers. We no longer report separate EBITDAs for mobile and fixed, as an artificial allotment, pro rata tell it fixed and mobile would be more and more meaningless in an ever more integrated operation.

Let’s have a look at the key drivers of the German segment. Fixed network revenues were down 5.1% year-on-year, mainly driven by the 1.6 million line losses over the last 12 months and the related decrease in single-play revenues and the decrease in wholesale revenues.

Revenues in the first quarter were impacted by two one-time, the discontinuation of the mobile prepaid card business and a negative revenue credit in connection with the card decision. Without the one-time, the underlying revenue decline was 4.3%, compared to a decrease of 3.7% on a like-for-like basis in 2010.

The main operational effect in Q1 was the decline in wholesale revenues by 6.6% due to lower usage that was interconnection and call-by-call and lower intercompany related revenues as well.

Connected Home revenues, that is double-play and triple-play revenues increased by 3.5%, supported by stable double-play and still small but strongly growing triple-play revenues, they latter grew by 43% year-on-year and now represents an annual revenue stream of more than €600 million.

In mobile, service revenues grew by 2%, adjusted for the reduction in mobile termination rates. The continued growth was driven by strong growth in data revenues, which now account for almost 23% of service revenues, by the way not including SMS, up almost 6 percentage points year-on-year.

Let’s turn to the market share development. We have a unique market position to target the data market segment here in Germany. In fixed broadband, we maintained a 46% market share, with a net add share of 34% in Q1. We purposely did not participate in some of the value destructive pricing competition, which we have seen in the German market lately.

We strongly improved the quality of our customer base, with retail fiber customers, VDSL, more than doubling to more than 400,000. This was driven in particular by solid IPTV growth of 40% year-on-year to now 1.3 million customers connected. Triple-play customers now account for more than 10% of our broadband customer base and remain a key focus for future growth.

On the mobile side, we estimate a relatively steady service revenue market share sequentially. Although, only one competitor has reported so far.

Our market share was supported by the strong ramp up in data revenues, which grew by almost one-third year-on-year, even faster than the growth rate in Q4. This reflects the successful launch of our newer – of our new T8 product portfolio. Approximately 1.5 million customers signed a new contract with a double-play share of more than 60%.

Smartphones accounted for close to 60% of handsets sold in Q1, up by an impressive 22 percentage points year-on-year. We sold close to 300,000 iPhones in Q1.

Let’s turn to the Europe segment now. The KPI trends remained solid despite economic environment in a number of markets. In particular, TV customers grew by 20% with the number of IPTV customers going up by 50%. IPTV is also a key growth driver for the number of broadband customers in general, which increased by 11% year-on-year to 4.7 million.

Supported by the increasing availability of cheaper smartphones, in particular Android, we have seen a virtual explosion in the smartphone share, which has increased rapidly to 43% of dispatched devices as of Q1. The smartphone uptick is also supporting the continuous growth in contract subscribers that we have seen over the past quarters.

With regard to our integrated operations in Europe, there is good news and bad news. First, the bad news, in these markets we are still facing a very difficult economic and regulatory environment, especially in Greece and Romania.

Additionally, the authority measures adopted by several countries, especially the special tax in Hungary are clearly burdening our results. The good news, we managed to maintain good margins in all markets despite the revenue trends.

Let me make a few comments specific to the different markets. In the OTE group, we continued to face challenging fixed-line regulation in Greece. Nevertheless, we had slightly positive broadband net adds in Greece and managed to exceed 1 million TV customers within the OTE group, while maintaining an almost stable margin.

Croatia remains our best IPTV market, with almost half of our total IPTV customers in the Europe division, increasing by close to a quarter year-on-year. The slight decline in EBITDA margin reflects strong market invest in mobile, which resulted in iPhone sales more than doubling. We had a clear frontloading investment in Croatia.

The underlying performance of the Magyar Telekom Group, if you take out the €20 million special tax in Q1, was actually quite impressive with 4% adjusted EBITDA growth, despite the topline pressures.

Accordingly, the underlying margin improved from 41% to 45%. In particular, strong growth in TV customers continued, which grew by 14% year-on-year to more than 800,000. If you would compare our Hungarian business with the already announced numbers of the competitors, you will see that our business here outperformed the competitors in all categories.

We also saw strong TV growth in Slovakia, with the number of TV customers almost doubling since Q1 last year. The decrease in margin was mainly due to fixed, reflecting lower basic subscription fees for IP internet and the integration of the IT provider program with mobile strong and stable at a high 48% margin.

When it comes to our mobile centric operation, we deliberately increased smart market investments. We even say frontloading. To counteract revenue currents from regulation in key markets like the Netherlands or in Poland. This resulted in strong KPIs, which will support future revenues and EBITDA developments in these markets.

In Poland, we achieved stable revenues despite regulation. We attacked by smart investment in high-value customers resulting in a smartphone share of phones sold of close to 40%, tripled year-on-year and we had a data growth of 26%.

That mobile revenue was severely impacted by the MTR cut of approximately 50% as of January 1st. Without the impact from regulation, service revenue growth would have been positive at 2.7%, much better by the way than the local incumbent.

Differently from the incumbent, we did not see any significant cannibalization of the SMS revenues. To the contrary, they are still growing at a high single-digit percentage rate. We choose to offset the regulatory impact with smart value-centric market invest, which resulted in continued strong mobile data revenue growth of 37%.

iPhone sales were even stronger in the first quarter than in the Christmas quarter with 75,000 handsets dispatched and this despite the loss of exclusivity. The improving quality of our customer base is reflected in a low stable contract churn of 1.3% and an increasing contract base up 13% year-on-year.

In the Czech Republic, we managed to improve our already high margin and maintain a very low contract churn of just 0.5%, despite strong customer retention in the quarter. By the way, even the Czech market like the Hungarian market is one of the markets now really recovering after the capital market crisis.

In Austria, strong market invest resulted in higher net adds and the contract churn at an impressive 0.9%. The margin was weaker this quarter but please recall that the margin benefited from an extraordinary reduction in cluster costs in Q1 last year.

In Systems Solutions, the good revenue momentum seen in previous quarters improved further to 6.1% growth in the first quarter with external revenues growing by 5.5%. This is a reflection of the Systems success in winning deals, as well as the economic recovery on the corporate side.

And the deal flow remains very strong, with order entry up more than 20% year-on-year. Recent big deals include Everything Everywhere, Fraport and Voltaris, our first significant smart metering deal.

Adjusted EBITDA remained almost stable at €189 million, with a margin of 8.4%, despite higher transformation cost for new contracts and to safeguard quality in deals.

On the other hand, the relatively high cash CapEx in 2010 due to investments in multiple new contracts and customers and the extension of dynamic computing platforms, resulted in higher depreciation and amortization charges, which impacted adjusted EBIT. The adjusted EBIT margin decreased to 1.3% from 2.2% the year before.

Profitability was supported by the continued execution of our Save for Service program with a €0.1 billion contribution in Q1.

Let’s turn now to the U.S. While we have agreed to sell T-Mobile U.S. to AT&T, we will continue our strategy announced at our January Investors Conference. The first quarter was certainly a tough quarter for us. The competitive environment was very intense and took its toll on our results.

Let me just mention the iPhone and first LTE handsets launched by Verizon as an example. Nevertheless, we continued to stabilize our service revenues, which were up 0.4% year-on-year, driven by strong data revenue trends and the in-sourcing of the handset insurance business, which was already included in our Q4 numbers.

In terms of net adds, we saw an increasing bifurcation between negative contract net adds and growing prepaid net adds.

Contract customers losses increased further due to the competitive impact already mentioned, which is clearly dissatisfying. The main reasons for this were lower gross adds and still high contract churn.

In addition, we increased our credit standards in Q4 as you already know. This has had a negative impact on contract gross adds in the short-term but should be beneficial overtime with regards to the contract churn rate.

We are encouraged by the strong prepaid customer growth, which demonstrates the success of our multi-brand strategy, including simple mobile in Wal-Mart to mention just two examples.

The EBITDA margin impacted by high upfront market investments, which were also driven by the competitive environment, in particular we saw significant increases year-on-year and sequentially in retention advertising and network expenses.

The latter increased in connection with the continued build-out of our 4G network in the U.S. During the transition period to fiber backhaul we are paying both copper and fiber backhaul for the same cell sites in some instances.

Smartphone uptake was very strong, with an increase of nearly 1 million in 3G and 4G smartphone customers on our network. This resulted in strong data ARPU growth, which increased by more than 20% year-on-year. Blended ARPU remained stable, despite the mix shift toward prepaid and contract ARPU.

Following this overview on the divisions, let’s take a closer look at free cash flow. Excluding the €400 million paid to the PTC Settlement, cash flow generated from operations was stable at around €3.9 billion. The reduction in free cash flow, therefore resulted only from a different seasonality of interest payment and cash CapEx.

In Q1, we had almost €0.2 billion more CapEx versus Q1 last year, due to unfortunate weather conditions and high uncertainty around the economic environment just one year ago.

Interest payments were seasonally higher, in particular due to a German loan note that pays interest only every five years. This different seasonality of interest payments and cash CapEx will be balanced out in future quarters.

Accordingly, we confirm our guidance of a stable to slightly growing free cash flow versus the 2010 level of €6.5 billion.

In terms of our cost-cutting program Save for Service, we achieved additional savings of €334 million in the first quarter, with the biggest contribution from Germany and Systems Solutions. This resulted in a net reduction of the Deutsche Telekom cost base by almost 7% at the corporate level with significant net OpEx savings in Germany and Europe.

Overall, we have now achieved a total run rate of cost savings amounting to €2.7 billion, almost two-thirds of the target of €4.2 billion for the entire 2010 to 2012 program.

Finally, our balance sheet ratios remain solid and well within their respective comfort zones. The ratios will further improve, following the completion of the sale of T-Mobile U.S. to AT&T next year.

In recognition of the impact of this deal, both Fitch and Standard & Poor’s recently changed the outlook for their long-term ratings on Deutsche Telekom to positive from stable and Moody’s has put us on their watch list with positive implications as well.

With these comments, we reiterate our full year guidance for 2011 and now I hand over back to René and are pleased to get your questions.

René Obermann

Thank you very much, Tim. I think we restrict ourselves to two questions per each analyst, as we will be having a shortcut off at 3 PM our time the latest. Thank you very much.

Question-and-Answer Session


Thank you very much. (Operator Instructions) Mr. Ulrich Rathe from Jefferies. May we have your question, please?

Ulrich Rathe – Jefferies

Thank you very much. My two questions maybe spent on German mobile, please. In the German Mobile volumes, the minutes carried on the network in total that number sort of grew to the tune of 9%, 10% annually over the last six quarters and that growth has declined to 4% in the first quarter. So is that what’s sort of the reason behind that volume growth slowing down? That would be my first question.

And I suppose in a way related to that, the mobile service revenue growth, excluding the mobile termination rate cuts, I know under the old accounting scheme but, nevertheless was 5% in Q4 year-on-year it is now 2% year-on-year. Is that simply the effect of the changed accounting or is there some reason why the service revenue growth is slowing down in mobile in Germany? Thank you.

Stephan Eger

Ulrich, thank you. It’s Stephan speaking. Well, first of all, under the old accounting i.e. including the intercompany revenues between Fixed and mobile and remember we pointed out that effect very well in the presentation we sent you guys over. The MTRs for the first quarter would have been actually 84 million, so that is definitely one impact.

When it comes to the modest mobile service revenue increase of 2% underlying versus 5%, I think there is a couple of points to mention. First of all, we don’t know what the German mobile market in general has done. So, we’ll be knowing better whether there is a small slowdown once Vodafone and O2 have reported.

Secondly, remember that we have a somewhat smaller subscriber base year-over-year 4 million, though the big bulk of that are inactive prepaid subscribers but there is certainly an element of that as well.

Thirdly, we have upgraded our customers quite aggressively to the complete tariffs in the last 18 months. And now, with a lot of customers already have taken that on board, so the adoption rate of the complete tariffs is slowing down a bit, so that has had an impact.

And, thirdly, I think also the new tariff which we have incorporated at the end of last year also has had an impact with some optimization within the tariff grid also taking place.

Question on the minutes of use decline, I think it’s too early to speak of a trend. If you look at the last couple of quarters, first of all, it’s a seasonal trend, fourth quarter I think is always a stronger quarter for normal Christmas and year end seasonality. And also, if you look at the last couple of quarters, it was also a bit like 6% then it was 9% now it’s down to 4%. I think it would be too early to speak of a trend.


Mr. Simon Weeden from Citigroup. May we have your question, please?

Simon Weeden – Citigroup

Yeah. Thank you very much. My first question is, I wondered if you could quantify for us the cash impact on German EBITDA from the MTR reductions for the quarter, so this would be taking into account the reduction mobile revenue but also the take through from Fixed and an effect that there was to the Fixed customers.

And then my second question relates to the U.S. I just wondered if you could comment on whether or not competitive conditions and your contract net addition performance was deteriorating as the quarter ended all getting better, obviously I guess with iPhone starting with Verizon in the mid-quarter and I might assume that it was still getting tougher at the moment? Thanks.

René Obermann

Okay. The impact on German EBITDA of MTR cuts is mild, let’s put it this way, it’s a few million only, Simon. It’s not even double digits so far. Revenue impact is bigger however and so overall, I still would like to reiterate that I consider these fourth MTR cuts for the entire industry, wrong. So, don’t get me wrong, I don’t want to say it’s easy and fine. There is an impact, it’s a few million, every million is a million too much.

U.S. competitive conditions, well, it was very tough, that quarter, basically lower growth adds led to our lower net contract adds 12% less than the year before 1.4 million gross adds. And then a high churn 2.4% in Q1, again which is totally dissatisfying.

Contract gross adds were lower due to the competitive intensity with new pricing offers Verizon iPhone, AT&T offer of iPhone, 3GS for $50, Sprint had a porting of I think for $125 or so and credit optimization processes also had some effects.

The U.S. market has been extremely competitive, prices came down by 50% over the last 10 years. In 23 out of key 25 markets customers can choose from five or more operators plus the virtual network operators AT&T over the top players. So it’s a very aggressive competitive marketplace.

And that competitive intensity just to say it once here and loud and clear, will remain very intense in the forthcoming years and therefore I have no reason to believe that that transaction can’t get approved.


Mrs. Robin Bienenstock from Sanford Bernstein. May we have your question, please?

Robin Bienenstock – Sanford Bernstein

Yeah. Thanks very much. And two questions, the first is with VDSL and Entertain going well I was wondering if you could tell us anything more about your (inaudible) and whether or not your view on VDSL and the mix of VDSL and FTTH is changing?

And the second question is larger cast, which is really given that net neutrality regulation appears to be going the way of operators. I was wondering at what point you think you might, that might actually translate into new revenue streams for operators in Europe.

René Obermann

It’s kind of hard to understand perfectly Robin but hope I got the first part right update on VDSL and Entertain. We sold -- finally we begin to sale actually VDSL connectivity and we now have 400,000 which doubling the number of VDSL connections.

And we keep selling it both aggressively with in package with Entertain, with various services but also standalone. And so resale hopefully is getting a bit more pushed, I think so far we haven’t been focused enough on the resale part, we’ll do both now, resale and retail aggressive selling.

Is FTTH changing? In a way we started, we begun the rollouts for cities and so forth. This year it’s going to be only 150,000 to maybe 180 or 200,000 in that order, next year with few 100,000 more. The final number for next year we would update you in due course because we’re working on a better pan how to get it as efficiently built out, as CapEx efficiently built out and is anything possible using the synergies with in the infrastructure of other carriers, together with other carriers infrastructure like ducts so forth and the planning is we make good progress.

So let me update you at the later stage on the FTTH plan for 2012, 2013 and maybe one-year forward. Long-term of course, it’s FTTH for us we will go for it. But we hope to do that in a more CapEx efficient way than what it looked like so far.

Net metrology translate into revenues, I find that hard to answer because I don’t think that from the European Commission angle, I think the commission understands and the politicians understand that different services require different classes of quality of different priorities for the internet package and that network should be able to manage that so called QoS, of course in a non-discriminatory way. So we would offer those kind of quality classes for all players and we will also discuss those kind of arrangements with different internet players but see how it goes. It’s too early to answer that Robin, I’m afraid.

Timotheus Höttges

And Robin, on the mix if you mean with mix the coverage, our VDSL coverage currently is about 31% or approximately 11 million homes and the IPTV coverage i.e. ADSL2 plus VDSL is about 56% or 20 million homes in Germany.


Mr. Peter Kurt Nielsen from Cheuvreux. May we have your question, please?

Peter Kurt Nielsen – Cheuvreux

Thank you. Yeah. Tim commented on SMS growth, but if I can just return to KPN’s comments a couple of weeks ago on cannibalization effects in its home markets, particularly on SMS and so called web-based applications. Have you see any similar trends in any of your markets?

René Obermann

Well, great question, since 45 years we always expect some issues with regards to messaging as oppose to SMS, internet-based with postal SMS, but so far now the SMS is still slightly growing.

In the Netherlands we’ve taken early measures against those cannibalization effects. Also in Germany we have a slight SMS growth, if I’m not mistaken and therefore, I’m happy to report so far Peter that it’s still a good source of revenue.

And I think it’s also a matter of marketing because for customers it makes a whole lot of sense to use SMS because they know that all their friends are online and it’s a very established way to communicate.

It just has to be – there has to be no bill shocks, there has be very consumer-friendly buckets and it’s a matter of pricing and marketing as well, it’s not just a matter of technology, not everybody is a techno-freak and not everybody wants to deploy these new applications such as What’sApp.

Timotheus Höttges

Maybe to add on that question here with regards to the comparison, our SMS revenues rose slightly by 1.5% year-on-year and the minutes of use rose by 16.7% in Germany. And if we compare ourselves in the Netherlands with KPN, our SMS revenues rose by close to 8% the first quarter and the minutes of use they rose by 2.8%. So, therefore, we had a different pattern than what was communicated from the incumbent.


Mr. Hannes Wittig from J.P. Morgan. May we have your question, please?

Hannes Wittig – J.P. Morgan

Yeah. Good afternoon. I have a question related to the German, I think that what it would increase to the (inaudible)...

René Obermann

Hannes, we cannot hear you.

Hannes Wittig – J.P. Morgan

I’m sorry, I was confused with my headphones, so apologies for that. And so first question is on the revenue developments in the German Fixed, understand that the underlying revenue is about 4% down and that’s similar to the trends that we’ve seen last year, but there was of course a bit of a trend improvement that seems to be happening during the year.

And so I just wanted to get your sense of what was driving the slight deterioration there and whether going forward, you’re sort of still comfortable with the idea of more stable revenue trajectory and how you would get there?

And secondly, at this point in time, are there any new sort of ideas related to how you will use any surplus funds that you will hopefully generate out of the disposal of T-Mobile United States? Thank you.

René Obermann

So, Tim.

Timotheus Höttges

Hi, Hannes. I’ll start, we had a revenue decline in the fixed line business of minus 5%, 5.1% to be very precise. And we had one-time effect in it, 0.6% coming from a decline by the discontinuation of profitless mobile prepaid card business and 0.2 percentage points coming from negative revenue credit for ULL 2002 court decisions, which we had to digest in the quarter, so this will be then an underlying revenue without one-timers of minus 4.3%.

Then, you even have to take the Strato effect out of the equation, which is 0.6 percentage points, so a decline by inorganic effect from last year, which brings you to an organic decline of minus 3.7%.

And the main driver for the shortfall was the revenue shortfall on the wholesale side as we mentioned that already and this is mainly coming from lower usage in the interconnection area and the call-by-call volumes, which we were facing.

What we could do about that? That is a good question. Yeah, there are different measures on its way. But we will follow-up on this development throughout the next quarters.


Mr. Frederic Boulan from Morgan Stanley. May we have your question, please?

René Obermann

I think the question -- there is still a third question open from Hannes, user proceeds from U.S. we’ve -- I think we’ve been constant and clear on this that we would use part of it is for our share investment in AT&T, $25 billion U.S would be paid in cash, $14 billion would be in shares in AT&T. But that’s, I think is a bit of flexible thing, AT&T can choose to pay a bit more cash and to issue a bit less shares.

But from what we get into Europe here, we use about €5 billion for share buybacks and that it has a very positive effect on the future dividend league and it helps the Group on the long run a lot and we would use the remainder for bringing our debt position down for strengthening our balance sheet and for having some more flexibility on the transformation moves in particularly big investments into the networks in the next coming years.

So we’ve strengthened our balance sheet with buyback shares and we keep about $14 billion from today’s point of view at least about $14 billion. And AT&T remained -- largest shareholder in AT&T was about 8%, which we’re very happy because that would be a great company with a lot of opportunities in the U.S market and we are a big shareholder there.

Timotheus Höttges

Maybe if I might I’d like to add something with regards to the transaction of the U.S. deal, you have seen the development on the dollar going up and down over the last days. The day after the announcement we have hedged the entire cash position of the deal $25 billion, so there were no negative impact with regards to the value loss on the dollar. Since that the opposite is the case and therefore disposition is fully hedge only that to let you know.


Now Mr. Frederic Boulan from Morgan Stanley. May we have your question, please?

Frederic Boulan – Morgan Stanley

Hi. Good afternoon. Two questions please from me. First of all on the domestic mobile. So if I know my numbers are right it looks like your mobile revenues ex-MTRs have only contracted to around 4% from 5%, still a very healthy level in a European context. Are you seeing any impact from more aggressive pricing being from O2 Blu tariff, United Internet unlimited offers or others?

And secondly on broadband, you seem to have seen a much lower FTTH rollout than your previous actually have some target for the end of next year. Is VDSL sufficient for now or is it more a regulatory problem? And lastly, how is pricing developing in this market? Thanks a lot.

Stephan Eger

Fred, hi. It’s Stephan speaking. Well, I don’t want to repeat myself with respect to what we think are the major differentials between the plus 2% and the plus 5% underlying in the mobile service revenue trend. So what I said before is obviously still valid.

Then again your question is did we see some more aggressive pricing from competitors, now just recently I don’t think so. So what we say what we’ve seen with Blu from ‘02 and revenue was already I think launched in the third quarter. So that is nothing which would now in the first quarter had any particular impact on us. That is true. So I think nothing more to add from what I said before on that result.

When it comes to the VDSK rollout whether that is still sufficient, I think that is part of what we’re now doing in Germany in our campus. I think we’re defining right now the right fiber strategy as René has pointed out and I will update you on the entire fiber strategy in a couple of months, latest at our Investor Day because in the end of the day it is as René pointed out it will be fiber is the future plus we’ll be also having the integrated network roll out. So we’ll be deciding what we’ll do with fiber to the home, what we’ll do with fiber to the curve, what we’ll be doing with LTE, but we’ll be keeping you updated in due course.


Mr. Thomas Friedrich from Uni Credit. May we have your question, please?

Thomas Friedrich – Uni Credit

Yeah. Thank you. I have two questions one relating to Germany, here we have all seen the change in the reporting. I think it’s now more combined. Is this all EBITDA for the two Fixed and mobile areas of the businesses? And I would like to know in this respect of this merger of these businesses, what are your current projects that you’re working maybe in the network area and what could be a potential or what could be in you view the major areas for cost savings in the future in this respect?

Second question relating to Austria, could you give us an update on your current view of the competitive situation there and what strategy would be optimal for you going forward i.e. maybe an ongoing strong push for market share or would you switch to strategy that tries to preserve EBITDA margins? Thank you.

Stephan Eger

Hi, Thomas. It’s Stephan again. Well, Germany, I think you’ve seen that we already started that project, which we call One Company a couple of years ago. In 2006 and 2007, we already put together distribution and the marketing efforts. So then in 2009, we did what we called One Company i.e. that is the full integration of our fixed mobile operations in Germany and that is in due course.

Remember, when it comes to potential cost savings we always said at the time when we did the AGM on that, that prospectively we see something in the area of round about I think 400 or 500 million of cost savings longer term there.

What are the major projects up and running that is for example one ERP i.e., that is one big accounting system across the board. That is also the integrated network planning which has not been the case in the past.

As I said before, the network we’re thinking of in the future is a fully integrated one and we decide exactly what we use in which area, depending on technology, depending on competition, depending on cable penetration. So that’s in a nutshell what we’re doing in that area.

René Obermann

With regard to Austria, maybe this market is highly competitive as you all know therefore everybody in this market is looking for possibilities to improve its productivity and improve its cost. We have recently announced let’s a combination with our known partner Orange to further explore on a 4G network deployment here in the market.

And I think the strategy over the last year that we were not fighting for every customer but for the valuable customer is paying off because you know we have an impressive churn rate of only 0.9% and we have a very good and sound contract base. So I think that is correct.

If you would now be worried about let’s say the short fall on the EBITDA, you have to take into consideration that this is only driven by one-timer a gain, which we have had last years in the first quarter, which we haven’t had this time. So therefore it is a competitive market, yeah, but there’s nothing which is – has been accelerated.


Mr. Mathieu Robilliard from Exane BNP Paribas. May we have your question, please?

Mathieu Robilliard – Exane BNP Paribas

Yeah. Good afternoon. Thank you. A question first on costs in Germany, obviously a very strong performance from the EBITDA point of view, when looking at employees numbers in the domestic business they haven’t moved too much, I mean, I know it’s struck with some seasonality.

So I wanted to understand if we should see that come down throughout the year, as in the past and also I note that unit SACs and FRCs in mobile were cut a bit year-on-year. So was most of the cost cutting done on the commercial side in Q1 and is that something that is sustainable?

And second, just quickly on the U.S., if you could give us a sense of the next timetables on the next elements for the deal approval and if everything is going as expected? Thank you.

René Obermann

Okay, Mathieu. Cuts in Germany employees that’s true in the quarter we had some -- the usual leaves by voluntary early retirement and so forth, but we also hired a few new people. So on balance it’s about in T-Home, sorry, in T-Deutschland it’s about 76,000 or so. And but throughout the year you’ll see some headcount -- the headcount net number by the end of the year will be somewhat lower perhaps in the vicinity of 4,000, of course, all, as usual with socially responsible measures.

So you will see further decrease in headcount but in Q1 we had compensated the early retirements and voluntary leavers with new hires, particularly young people also from our own education programs.

U.S. upcoming plans, let me update you on the regulatory timeline. What is today it’s the 6th of May, the next would probably be -- we have received the second request from DOJ on information. Sub-committee on antitrust will be held on 11th of May, sub-committee on antitrust competition policy and consumer rights of the Senate, there will be a hearing on this transaction and then on 26th of May there will be another sub-committee.

This one is on intellectual property competition and the internet of the house will be hearing regarding that transaction. Late May and mid-June I think we can expect petitions and comments on FCC applications and we expect the closing in the next year, perhaps in Q1 or Q2 at least in the first half of the year.

Together with our partner AT&T I think that’s fair to say we remain very confident that the transaction can close because there are overwhelming benefits for the markets. One is that there will be a fast LTE rollout to an extent, which would never be possible on a standalone basis for either one party.

Plus and which is very important there will be through the combination of both networks on the spectrum there will be an immediate capacity gain of significance for the new combined network, which is badly needed for the entire market. So the whole economy will benefit from that and it’s a great solution for the market and we’re very confident that this will be seen and finally, lead also to an approval.

Timotheus Höttges

Maybe coming back to the question with regards to the committed saving of 1.5 billion in the German environment, we have achieved 280 million of the OpEx savings in the first quarter and we stay very much committed to the full year savings. To be very clear from the first program which we had was the 5.9 billion program, which is – which has been executed. We launched a new program of a 4.2 billion which started 2010 until 2012.

From this program we have already achieved 65% of the savings being committed. We are much faster in the way how we are executing on this program than we originally thought and the main driver for that program is Germany. So Germany has committed until 2012 1.5 billion and what we see now in the different areas is that the team is working quite committed on the different areas.

What are the areas? I think a big portion is coming from the fixed line operation that’s the main part of today but there is IT infrastructure as well, an area which we’re addressing these days and general and administration is another part. And we have triggered another program which is called shape headquarter, which is just at the beginning where we define the new role of the headquarters here at (inaudible) in a new way, which is by the way led by Thomas Sattelberger and myself to even further generate new additional savings for the German environment.


Mr. Matthew Bloxham from Deutsche Bank. May we have your question, please?

Matthew Bloxham – Deutsche Bank

Yeah. Good afternoon. I just have quick ones. I just want if you could tell us what percent of the installed base in Germany is on smartphones. And secondly, on the DSL trends in Germany, you mentioned that your market share remains pretty good, but some of your cable competitors are doing these DSL plans. So there’s a lot of customers right now who have overlap between a cable and a DSL connection. I was just wondering whether you expect to see some tougher trends on your net adds in the coming quarters because of that?

René Obermann

Okay. Matthew, smartphone sales in Germany were very, very strong. The so-called loss of exclusivity did not lead to deterioration in Apple Phone sales, so that still went very nice, as Tim said earlier on around 300,000 in the quarter. But the overall number is about 58% or so or roughly 60% of smartphones.

So the strategy is, in Europe and particularly in Germany but in all European markets increase the number of smartphones together with data contracts and stimulate the usage to get the revenues and that works nicely. Therefore as you see 32% growth rate in mobile internet access revenues is splendid easily and we keep going.

DSL market share in Germany, I think is still good. I’m not excited about a number below 40%, so my team knows that. My expectation is that they get back to the 40% but I also want them to remain commercially solid and not waste money. So we always try to find the right balance here but 30 some percent is, okay, can be even better.

Trends on net adds in future quarters due to cable/DSL overlap an increasing competitions that’s kind of hard to give a prognosis here. And but, of course, we keep fighting with our overall proposition. It’s not just about the access. It’s also about the service delivery. It’s the video library. It’s the features and functionalities of entertainment. It’s the design of the device, etcetera into tariff. So the entire proposition, I think is still quite competitive, particularly in the video side areas but also in the ADS areas.

So can we keep fighting, but we have to realize the cable are very significant competitors and by the way I keep saying this since two years, I believe or three years. So that’s why my organization is very aware of that and I think we keep that in focus and defend ourselves as good as we can.


Mr. Justin Funnell from Credit Suisse. May we have your question, please?

Justin Funnell – Credit Suisse

Thank you. Two questions please. Obviously, you’re not suffering from cannibalization today and maybe not tomorrow but I just wondered if we could just discuss your pricing structure in Germany a bit. On slide 38 of the backup slides you very helpfully describe your pricing of complete mobile and obviously you have other plans as well.

But your pricing structure does seem to be pretty similar to the pricing structure that KPN appear to be having problems with in the Netherlands in the sense that it’s bolt-on for extra SMS or data, some minutes in the bundle but not everything.

I just wondered if you are thinking through to what’s really needed to change your pricing structure and accelerate a move towards all-in bundles and whether that’s something that will affect your business this year.

Secondly, in Eastern Europe, thanks again for the details obviously some good performances on key KPIs, ultimately the revenues were quite weak and you’ve described as a mix effects. Just wondering between, particularly the economy affect in that region whether you’re still actually seeing some quite significant headwinds there and where if so where that’s coming from please?

René Obermann

Justin, on your first question. Yeah, Justin I’m not able to answer that question because even if I was I wouldn’t review the plans for our next pricing moves and by the way, I’m not in a position to answer that because I’m not involved in the detailed pricing planning for the next quarters or so.

Strategy-wise, one thing is clear, we have to be simple and easy to understand for our customers and we have remain in a competitive position and we don’t want to sell at an undefendable premium to our customers and we do not wish to loose market share in wireless that’s for sure. So if need be, we’d be able and willing to act but I don’t know what the next pricing moves are of the top of my head and I would have to refer to my experts here.

The Eastern Europe situation, we are still seeing headwinds in the economy that is true and the crisis is certainly not over yet. Macro-economically the turnaround in Hungary, Poland, Slovakia, the Czech Republic and Bulgaria seems to be -- seems to happen and GDP growth is pretty much driven by experts and has still so far low impact on domestic demands.

For instance in Hungary or in Slovakia, Greece or Romania are still severe problems and recovery in Greece to be honest, we don’t see before quite sometime. So certainly not before next year but that’s speculative.

Short fall of private consumption in Greece is also a big problem minus 10% and Romania is also still minus even though minus 1. These are the main headwind factors for us. And nicely on top of that VAT increase in many of those countries during the crisis. If you recall, in Q1 it happened in Poland. It happened in Slovakia, each by 1 percentage point.

So disposable income is expected to grow partly and partly actually also strongly and for instance, Bulgaria, Slovakia, Hungary and that’s it for the moment, Greece not. Unemployment in 2011 is still high, for instance in Greece 15%, that’s the official unemployment. Croatia 18%, Slovakia 14%. So, it is very bad in terms of economical impact on our business.

As soon as we see a turnaround with some time lag, we can also expect a positive impact in our industry. We are late cyclical, as Tim said it earlier and that has been proven here again, in the good days and in the bad days. We’re coming a little later out of the bad days and we’re falling a little later than everybody else if economy goes down.


Ladies and gentlemen, the conference is about to end, should you still have further questions we kindly ask you to contact the Investor Relations department.

Mr. Emmet Kelly from Merrill Lynch. May we have your last question, please?

Emmet Kelly – Merrill Lynch

Yeah. Thanks very much for taking the question. And yeah, just one single question, could you talk a little bit about your 4G and LTE rollout in Germany, I believe 4G has been going now since around Christmas time and maybe some targets that you might have for the areas covered in Germany? I believe one of your competitors has talked maybe 5 to 10 million homes being within white spots in Germany and I do believe you have a regulatory obligation to cover those homes before you launch in the cities?

And also relating to LTE whether you are going to accelerate that plan because of the sale of the U.S. asset and just accelerating your LTE rollout? Thank you.

René Obermann

Okay. LTE, we opened up pre-commercial last year already in very rural areas because here we have its reverse rollout obligation. We started in a nicely return called (inaudible) for all those German speakers that’s nice name.

And ever since we rolled out about 2,000 something, 2,500 or so sites, hence we are going to continue to roll out fast, but again beginning in the rural areas, currently about a 1,000 or so local communities and I have to check the number of locations, probably just I think that number was little too high. I will just check it. No, about 1,000 areas, sorry my site number was wrong.

I’m bit confused here because I don’t get the right site number at this point, but we’re going into 2,000, 2,500 sites I think throughout the year. And beginning at the rural site coming then backwards into the cities and we’ll continue the rollout in the next two to three years very aggressively.

Regulatory obligations cover white spots, I think, I’ve answered. Plans to accelerate LTE rollout after sale of T-Mobile U.S. to AT&T. I think that’s been very clear, made very clear about Randall Stephenson, he has very ambitious plans for AT&T after the merger with T-Mobile, because that gives them the opportunity to build it out very fast and more than 95% within a very short timeframe for the U.S. market, that’s a very big commitment.

And we can’t rollout LTE, because we don’t have the spectrum position to rollout LTE at this point in time. We could only do it at a later stage by re-farming existing spectrum but that’s after the merger not necessary any more.

Stephan Eger

Thanks for listening in. I think we have to stop time wise with the conference call. I know there is a couple of people in the pipeline will call you guys right away from the IR Department after the call. Thank you and have a good weekend. Bye-bye.


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