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Executives

Stephan Eger - Corporate Communications

René Obermann - Chief Executive Officer

Timotheus Höttges - Chief Financial Officer

Niek Jan van Damme - Chief Executive Officer, Germany

Analysts

Peter Kurt Nielsen - Cheuvreux

Robin Bienenstock - Sanford Bernstein

Mathieu Robilliard -Exane BNP Paribas

Ulrich Rathe - Jefferies

Simon Weeden - Citigroup

Matthew Bloxham - Deutsche Bank

Hannes Wittig - JPMorgan

Thomas Friedrich - Uni Credit

James Britton - Nomura

John Karidis - MF Global Securities

Justin Funnell - Credit Suisse

Paul Marsch - Berenberg Bank

Deutsche Telekom AG ADS (OTCQX:DTEGY) Q2 2011 Earnings Call August 4, 2011 8:00 AM ET

Operator

Good afternoon and welcome to Deutsche Telekom’s Conference Call. On our customers’ 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 cost 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, the 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 Rene Obermann and Timotheus Hottges. Afterwards, you’re welcome to ask your questions. Niek Jan van Damme, our CEO for Germany is also joining at the Q&A session, and is looking forward to your questions. I now hand you over to Mr. Stephan Eger.

Stephan Eger

Good afternoon in Europe. Good morning to the U.S. Welcome to our Deutsche Telekom Q2 conference call. We’ll start as always with a brief presentation by Rene Obermann, our CEO; and Tim Hottges, our CFO, followed by a Q&A session, where Rene, Tim, and also Niek Jan, the CEO of our German business are happy to answer your questions. Without any further ado, I would like to hand over to my CEO, Rene.

Rene Obermann

Thanks, Stefan. Hi, there. Overall, I am very pleased with our second quarter results, although there are some areas that need special attention. With regards to the sale of T-Mobile USA to AT&T, the regulatory process is running according to plan and we remain confident that the deal will close during the first half of 2012. Germany successfully continued the stabilization of adjusted EBITDA with a margin in excess of 40% and line losses for the first time below 300,000. That’s a record low level and it shows that customer retention efforts show results. In Europe the margin recovery came through in Poland, the Netherlands and Austria as expected. With improved revenue and adjusted EBITDA trends also in other countries.

We continued to execute on cost cutting with a Save for Service contribution of €919 million in the first half of 2011 and a combined net cost reduction of €1.2 billion in Germany, the U.S., and Europe. These results demonstrate the hard cost discipline we are applying across the Group including the U.S., and let me make that very clear, the cost discipline will remain in place because clearly you know the environment is not easy and we will improve our efficiency further, also in headquarters and in the administration of the business.

We achieved a further milestone with the network JV with TPSA in Poland and the rebranding of PTC. In terms of financials, results from continuing operations were slightly better in revenue and EBITDA terms than in the first quarter. Encouragingly, free cash flow improved by almost 19% to €1.8 billion, which means that we are on track to achieve our guidance. Adjusted net income improved by 17% to €1 billion, and based on our results we reconfirm our 2011 full year guidance.

On a separate note, we are currently in a intense phase discussing the post-U.S. strategy including our fiber approach, fiber-to-the-home or fiber-to-the-building. And we plan to update you on our new strategy post-U.S. during an Investor Day following the closing of the U.S. deal. So not in the next couple of weeks or months, but following the closing of the U.S. deal. We’ll need some more time and we’ll work it out in detail to give you a good picture thereafter.

Coming back to the financials of Q2, revenues from continued operations decreased by 3.3%. It compares to a decline of 3.7% in the first quarter, so a slightly less sharp decline. This slight improvement in revenue trends reflects better trends in Europe, which more than offset slightly weaker trends in Germany and particularly System Solutions. U.S. revenues, which are not included in the operations – in the continuing operations, were heavily impacted by weaker equipment revenues and especially foreign exchange effects.

Adjusted EBITDA from continuing operations decreased by 2.6% compared to a decline of 2.7% in the first quarter. It reflects a stable EBITDA in Germany and improved trends in Europe and in our GHS, Group Headquarters Services. U.S. EBITDA remained weak, even though the margin improved from the first quarter, and if I compare it to some of our competitors from a margin perspective, we did, I’d say, reasonably well. And Tim will provide you with more details on the divisional performances later on. In terms of key group financials, an improved bottom line with adjusted net income and adjusted EPS up significantly and the strong free cash flow, up almost 19% year-over-year, stand out.

Turning to the growth areas, growth continued in key areas. Mobile internet revenues, for instance, grew by 13%. The apparent slowdown compared to Q1 is primarily due to foreign exchange effects, mainly the weaker U.S. dollar, because growth in Germany around 30% in mobile internet, and overall in Europe amounted to 23%, while the U.S. grew by 17% in dollar terms. Connected Home revenues were stable year-on-year. We grew in Germany by 3%, but it was offset by some weaker developments in Eastern Europe. Revenues from online consumer services grew by just 0.5%. We grew in new businesses, such as Scout, but we had some decrease in legacy areas such as yellow pages. Overall to be very honest, we’re still in some sort of cleanup mode in that business area, which is something we on the long term plan to grow further, but there is a way to go there. External revenues at T-Systems, excluding revenues from intelligent networks were stable. We also for the first time recorded some revenue in the intelligent networks area primarily coming from the health sector.

So the guidance for the full year 2011 is reconfirmed as highlighted at the beginning. Adjusted EBITDA of around €19.1 billion is split into the discontinued operations first, that is the U.S., with a stable EBITDA of around $5.5 billion, which translates into €4.2 billion, if the average exchange rate can be applied of $1.33 per euro. Second, the continuing operations with around €14.9 billion, of which we already achieved €7.4 billion in the first half of the year, so you can see we’re very well on track there. The free cash flow guidance remains unchanged at stable to slightly growing over the 2010 amount of €6.5 billion. In the first half of 2011, we already achieved €2.8 billion essentially in line with the prior year.

Please note that our guidance assumes constant currency based on the average exchange rate in 2010, and that our free cash flow guidance does not include €0.4 billion for the PTC settlements, which we happily concluded after so many years and now had to pay some money for. I’d like to turn over to Tim for a more detailed look at the divisions, and the group financials. Thanks.

Timotheus Hottges

Thank you, Rene. Hello, everybody. I’m pleased with our German results, especially the strong profitability. Revenues declined by 3.4%, slightly weaker than the trend in Q1, due to slightly weaker trends in mobile, but I will come back to that in a moment. Despite the revenue decline, adjusted EBITDA remained stable, driven by strong OpEx savings. This resulted in a margin of 40.7%, 1.4 percentage points higher than the year before. Fixed network revenues declined by 4.5%. Underlying fixed network revenues adjusted for the discontinuation of the mobile prepaid card business amounted to minus 3.8%, an improvement over the underlying 4.3% decline in the first quarter. This was driven by an improvement in wholesale revenues.

Adjusted for the mobile termination rate cuts, mobile service revenues were stable year-on-year. Even though mobile data revenues remained strong with 30% growth, mobile voice revenues were impacted by three main factors – first, a lower retail customer base, mainly driven by an increase in the service provider contract base and lower prepaid. Second, a shift of the existing retail customer base into the new tariff portfolio, which we have launched in November 2010; and thirdly, the unfavorable mix of new contracts driven by a shift to promotion bundles and a lower volume of complete contracts. These effects, taken together, resulted in underlying mobile growth slowing from 2% in Q1 to stable revenues in Q2 this year, similar to the observed trends seen at some top, not all, other German carriers. We have to work on that.

We remain the clear number one in broadband and mobile service revenues in Germany as well. Already more than 50% of the domestic fixed customer base are broadband customers. The highlight of our fixed network results were the lowest line losses since years at only 295,000, even lower than the already low level in Q1. IPTV growth remains solid, growing by more than a third year-on-year. All 330,000 new customers are on our Entertain offering. We now have more than 450,000 retail fiber customers, doubling year-on-year. In mobile, our contract churn improved even further to 1.1%, down 0.3 percentage points year-on-year. Contract net adds were very strong, with 171,000 of which approximately 100,000 were generated by service providers, including the new Turkcell relationship. Underlying retail contract net adds were strong too, especially compared to our main competitor in Germany.

The smartphone share amounted to 62% of handsets sold, up 31 percentage points year-on-year. iPhone sales remained strong with close to 250,000, that is exactly the same level as we had last year. As can be seen on the chart, our service revenue market share in mobile declined slightly in Q2 due to the aforementioned reasons. We definitely will defend our service revenue market leadership in Germany going forward, helped by some encouraging trends like good contract customer growth, industry leading contract churn rates and superior mobile data growth.

We are certainly aware of the cannibalization risk posed by messaging and voice over IP services. Looking at our service revenue risk, only about 15% of total service revenues are addressable by IP services. The vast majority of billed minutes and consumer contract SMSs are already accounted for by flat or bucket tariffs. We believe that the risk through offerings of IP messaging can be successfully mitigated by smart pricing, namely tiered pricing and increased penetration of bundles and rebalancing. Our concrete measures to mitigate the threat include the successful introduction of the new tariff portfolio with a focus on data and messaging in bundles and the launch of SMS data centric promotion bundles in the quarter.

Turning to the Europe division. There were clear and encouraging signs of stabilization. The growth in key market KPIs continued unabated. Let me just highlight the 25% growth in TV customers, even faster than in first quarter, and more than double smartphone share in percent of dispatched devices. In the context of smartphones, let me make a quick deep dive into a recent initiative to push low end smartphones across the countries in which we have mobile operations. A joint campaign across our European markets using the well-known Angry birds creative, leverage best practices and maximizes the business impact. The result of this campaign has been impressive. Smartphone dispatches more than doubled to over 1 million, only in the second quarter. The data attach rate leaped to more than 60% from low 37%, and we will see the impact coming in the further quarters.

With the exception of Croatia, revenue trends improved across the board in the integrated operations. As you can see from our Q2 figures, the environment in Greece remains very challenging for us. While OTE has a strong position in the Greek mobile market with Cosmote service revenue market share close to 50%, up 0.7 percentage point, the situation in fixed line remains very difficult, hampered by line losses and regulation. Generally speaking, further significant changes in the general framework have to be driven by the Greek government in order to attract further foreign direct investment in the planned privatization process.

Deutsche Telekom in particular is disappointed by the lack of progress on regulatory and labor law matters, which are severely and unfairly penalizing OTE. As you know, the Greek government has exercised its put option on a 10% stake in OTE in June, with the cash out taking place in early July. As a result, we do currently own 40% of OTE. Deutsche Telekom will have to decide whether we are interested or not in the remaining 10% stake of the Greek government. For the time being, we do not see any rush or necessity, given the current economic uncertainties.

Results in Croatia were impacted by still a challenging economic environment, for example, the high unemployment rates. We saw better revenue trends in fixed, with mobile revenues still suffering from regulation and price declines. Adjusted EBITDA trends also improved compared to Q1 for all integrated operations, with Hungary generating a small increase in underlying adjusted EBITDA due to excellent cost discipline. Across the integrated operations, margin remained solidly in the 40s with a notable exception of Greece, which generated a margin of 34%, down from 36% a year before. With respect to the performance versus competition, in Hungary we outperformed our mobile competitors on all available metrics. In Slovakia, we’ve performed eye-to-eye with our main competitors. This is a good news.

Trends in the mobile centric markets were also encouraging, with the expected and promised margin recovery in Poland, in the Netherlands and in Austria. Revenue trends in the Netherland, the Czech Republic and Austria improved compared to Q1 while Poland remained stable. EBITDA trends in all mobile centric operations recovered strongly compared to Q1 with the Czech Republic remaining at a high and stable level. In the Netherlands, specifically, underlying total revenue growth amounted to 5 percent points, while our performance was in line with the incumbent, it was not entirely satisfying compared to the closest competitor.

SMS revenues continued to grow with 8%. Therefore, we did not observe an IP cannibalization effect. Recent pricing trends in the Dutch mobile industry has been encouraging, with T-Mobile Netherlands switching to tiered data pricing, in line with the industry in Q3. In the Czech Republic, we regained service revenue market leadership in the second quarter and at the same time retained a strong EBITDA margin.

Let me come to T-Systems. In System Solutions, trends were weaker than in Q2 than in Q1. Revenues continued to grow but at a slower rate than in Q1, since we focused on big deal execution and quality assurance rather than winning new deals. Order entry decreased year-on-year also due to the exceptional strong order entry in Q2 of last year, mainly driven by one large contract win. New deals in Q2 included Valora, TOTAL, and Magna. In terms of profitability, the adjusted EBITDA margin in Q2 remained at a similar level to Q1 while the adjusted EBIT margin improved sequentially to 2%, though still down from the year before. The higher OpEx related to big deal execution had an impact on Q2 margin. We reduced CapEx by €92 million following the lower order entry and to protect cash flow. Total Save for Service cost savings amounted to €250 million in the first half year compared to €93 million in the first quarter.

In the U.S., overall trends remained difficult in the second quarter. Service revenues declined slightly by 1.3%, despite the positive impact from the in-sourcing of handset insurance. This was primarily the result of the loss of high ARPU contract customers in previous quarters, and to a lesser degree, rate plan optimization by customer. The margin recovered to 25.4% from 23.1% in the first quarter. This reflects, in particular, lower retention costs which were particularly higher in Q1 due to several promotions including the Valentine’s Day offer.

Slightly better contract customer trends followed the introduction of the new unlimited rate plans were seen. However, higher machine-to-machine net adds were also a contributor to the sequential improvement. Data ARPU trends remained solid with an acceleration in the sequential growth rate of blended data ARPU. The number of 3G, 4G smartphones on the network increased to almost 10 million, up more than 50% from Q2 of last year.

Turning to free cash flow, second quarter cash flow was strong with €1.8 billion. The improvement compared to last year was due to higher cash generated from operations, lower net interest payments and lower CapEx. Therefore, as expected, balancing out the higher level of interest payments and CapEx from the first quarter this year. Free cash flow in the first half amounted to €2.8 billion, basically in line with last year’s level of €2.9 billion. Compared to the last year, cash generated from operations benefited from an improved working capital, lower cash taxes and a dividend from everything everywhere, partially offsetting the weaker EBITDA. We are therefore confirming our guidance of slightly growing to stable free cash flow over the 2010 level of €6.5 billion. We expect the strongest quarterly contribution to free cash flow coming in Q4.

We made significant progress with regards to Save for Service, with savings of €990 million realized in the first half of 2011, resulting in a total run rate of €3.3 billion so far. Our target for the 2010 to 2012 remains unchanged at €4.2 billion. These cost savings were the biggest driver in reducing the Deutsche Telekom cost base by 7% or €1.6 billion in the first half of 2011. Large net OpEx savings were achieved, not only in Germany, but as well in the U.S. and in the Europe divisions.

Finally, our balance sheet remains solid. With ratios well within the target comfort zone ratio. In difficult capital market times, we have been focused on reducing our net debt and were able to reduce our net debt by €3 billion year-on-year. The sequential increase in the second quarter was temporary due to the dividend payment and we expect net debt to improve significantly in the course of the year, driven by the strong free cash flow expectation.

In terms of shareholders’ equity, the main driver for the year-on-year decline was translation of foreign exchange currency, especially U.S. dollar. In the so-called other comprehensive income, sequentially, the main driver was again the dividend payment. With this, Rene Obermann, Niek Jan van Damme, our CEO of Germany, and I are now ready for your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Mr. Peter Kurt Nielsen from Cheuvreux, may we have your question, please.

Peter Kurt Nielsen - Cheuvreux

Yes, thank you and good afternoon, Tim, Rene and Niek. I’d like to return to the weakness in German mobile service revenue growth in the first half, if you could elaborate a bit on that. And particularly, how you feel you are positioned to improve that trend in the second part of the year? Thank you.

Niek Jan van Damme

Mr. Kurt, thank you for your question. First of all, let me start with a perspective on our business. We are the only operator that showed substantial growth over the past years, and thereby starting from a high basis. Not to say that I am satisfied with the development of course. Some perspective of what happened. In November 2010, we introduced new price plans, which were meant to allow transition from a mobile revenue model metered by usage, thereby having a high risk of cannibalization. My colleague, Tim Hottges already pointed to that, and we transferred those customers to a model with forward and double play bundles and a very strong retention in that new price plan on our high value customer base.

I’d have to say that strategy was successful. If we look at the low churn, 1.1% on a monthly basis, the lowest in the industry, 60% of our new tariffs being sold as double play, and a 30% growth of data, which is unparalleled and which is beyond – which is above market average. What also happened is that 80% of the 2 million new contracts we did on this price plan were prolongation. That means customers optimized themselves, thereby reducing the ARPUs driven by higher number of minutes and SMSs in the bundle. This 80% is higher than we expected. Secondly, also, if you look at the mix effect in our base, year-on-year, we see an increase in service provider contract base which traditionally has a lower ARPU than our own base of course, and a lower prepaid base of 1.1 million active customers. On top of that, the unfavorable mix effect in new contracts driven to promotion bundles and lower volume of the complete bundles, our high-end price tariff in Q2.

I do see some positive developments as well, however, in the first half of the year. We have a higher contract growth than our key competitor. In fact we grew twice as fast as they did. As said already, lowest contract churn in the industry and outgrowing the market in mobile data revenue by weighted growth of 30% year-over-year. I think the data growth will be further fueled by the launch of LTE 1800 or up to 100 megabit in the bigger cities, which we have started in Cologne and which was received very well. Looking ahead, and some measures as well we’re taking, which specifically focus on two of our key segments, where we have been losing, youth and high-value voice-only customers. We have successfully launched a double-play promotional tariff at €24.95, which has rebalancing elements. Very positive customer acceptance in the month of June, 25% of our new tariffs were sold with this price plan.

Also very clearly more experience in selling the benefits of these new packages, which is total new tariff line for our agents in shop and in our customer service which you see is now getting into effect. For the youth segment also we have introduced SMS flat option, which is taken up in the market very well, and for our high value voice only customers, we are strongly pushing now on multi-SIM. Multi-SIM allowing customer to use up to three SIMs on one contract has the objective to lock in high value voice customers, who decide now for a data device, be it a tablet, or be it a laptop stick, and we think thereby we can very successfully prevent those customers from even considering a competitive tariff.

Operator

Mr. Robin Bienenstock from Sanford Bernstein, may we have your question, please.

Robin Bienenstock - Sanford Bernstein

Yeah, good morning. Thanks, very much. I guess, two questions, if I may. The first question is, can you tell me anything about the uptake of the LTE product where you’ve rolled it out? How customer ARPU has changed in places where you’ve seen this product roll out? And the second question is that you have very low out-of-bundle spend now in Germany, can you tell us how different that is to your out-of-bundle spend in other places, the Netherlands and the UK in particular? Thanks.

Rene Obermann

I think the – Robin, this is Rene speaking. The uptake LTE is still very early to judge with regards to impact on ARPU. The one thing, I can say is, now 1,500 small cities or villages are also covered with LTE, and we are in the low five digit range, so somewhere between 10,000 and 15,000 customers or so currently using it as a replacement of the DSL. So, it’s really too early to judge usage, ARPUs and so forth. I do think that the uptick in the second half of the year would increase because we continue to cover and to build out I think another 1,000 or so villages, Niek?

Niek Jan van Damme

Yeah, we now have 763 sites on air. We will increase to at least 1,500 covering up to 2,000 villages’ communities. The actual number on usage is 20,000 users, and as you said too early to give the ARPU at the moment.

Rene Obermann

So Robin, I was too conservative, so it’s 20,000 not 15,000, and the number of villages increasing to 2,000. So let’s talk about it at the end of the year or maybe early next year and see what the results are. Currently, the plan is around €40, and it replaces DSL more or less, where there is no DSL. So, it should be a good opportunity to grow revenue in the mid to long run.

Stephan Eger

Robin, would you be able to repeat the second part of your question.

Robin Bienenstock - Sanford Bernstein

Yes, sure. The second part of my question was, you look like you have remarkably low out-of-bundle spend in terms of only 11% of voice MOUs and only 17% of SMS revenues are out of bundle in Germany. And I was wondering if you can tell me how different that is in other countries? In other words, what percentage of your spend – of customer spend is out-of-bundle in places like the Netherlands or the UK?

Stephan Eger

May I look that up and come back to you after the call.

Robin Bienenstock - Sanford Bernstein

Super. Thanks very much.

Operator

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

Mathieu Robilliard -Exane BNP Paribas

Yes, good afternoon. Thank you. First on GHS, there were some comments reported by the press that you're planning some cost reduction effort and I was wondering if that's already included in the current plan or that's a new plan? And, linked to that, I noticed that the GHS cost or negative EBITDA is running below what it was in H1 2010 and I was wondering if that’s something we should expect for the rest of the year? And second, in terms of VDSL and IPTV take up in German fixed. Clearly going to the right direction but I guess in the big scheme of things it still remains a slow progression. And my question is, do you have initiatives ahead to try to ramp up this or you think basically there’s no more demand for this product at this stage than what you’re pulling? Thank you.

Rene Obermann

All right, Mathieu. The project, Shape Headquarter, which you referred to is part of our ongoing and successful work. I think we can say it’s very successful Save for Service initiative, which saved so far more than 8 billion since 2007 gross savings. Speaking of GHS and the group headquarter, we have to distinguish between more than 22,000 people within GHS and there are about 4,000 working in so called corporate functions. The difference is made up, for example, by our Vivento organization with about 9,600 people and the so called shared services, such as procurements, real estate management and our fleet management.

So as we improve efficiency everywhere, this particular program, Shape Headquarter, affects about 4,000 people and the central functions within GHS and has the clear focus to produce a leaner and much more efficient headquarter with less redundant functions. Because if we are honest to ourselves and we look into this company, there is still a lot of room for improvement on efficiency and it is a pure necessity, given that overall revenues have been shrinking that we will sell the U.S. business and clearly then we also need to adjust the capacities and we come through all the processes at head office and I am sure there is a lot of room for improvement. So, this is the next thing on the agenda. Niek, do you want to take up the VDSL thing?

Niek Jan van Damme

Yeah. On VDSL, as you said, there’s a very strong development year-on-year. Do not forget that we basically started selling the product a year ago. The uptick is even accelerating in the last few weeks, which are in Q3. So, Stephan urged me not to give you any precise numbers, but I can tell you, it’s encouraging. Has to do with a better wholesale offer, which also our wholesale partners are selling the product which is now much more a clear part of our strategy, and secondly a price reduction making the product extremely interesting for the customers and competitive to cable in many areas where we offer it. Don’t forget we are now out in 10.8 million fixed line households. This year we will further increase the coverage of our DSL by 600,000.

Rene Obermann

And Mathieu, with respect to the hybrid solution for IPTV, i.e., our Entertain product, you know that by September we’ll be launching that hybrid solution in the market and we’ll increase the coverage of the addressable market from round about 50% of the German population to 80% of that. Again, we’ll push some efforts into the IPTV area in the second half.

Operator

Mr. Ulrich Rathe from Jefferies, may we have your question, please.

Ulrich Rathe - Jefferies

Thanks very much. My first question is on the U.S. You told us at the time of the announcement of the agreement with AT&T that the deal does not depend on a particular operating result as such, by T-Mobile. However, you also said that the deal prescribed certain investments levels on the, market investment I suppose, and the CapEx. I was just wondering whether you can give us some – I mean you probably don't want to give us numbers, but give us some sense of how much flexibility you retain on adjusting investment levels in the U.S., given current top-line developments? That was my first question.

Second question is, on Eastern Europe, maybe. Now that the macro backdrop and the consumer behavior seems to improve slightly, what do you think will happen to competition? Because my understanding is that competition, certainly in these more integrated markets in Eastern Europe, was relatively low during the time of the pressure because everybody suffered the same and margins sort of stayed high because of that. How do you think that will change, potentially, if the growth outlook improves in Eastern Europe? Thank you.

Timotheus Hottges

So, with regard to the CapEx, very simple. We have a commitment given in the contract that we invest a certain amount of money or cash into the operations. That we keep our competitiveness and the quality of the network and let’s say the entire business until the closing. The first half year shows that, first, we are very much heavily in line with what we have promised. Therefore there is no need for reduction and with regard to the free cash flow situation of the U.S. there is even no need to consider whether we invest less into the operation here. So, I do not see any kind of stress with regard to the steering of their operation.

We keep the competitiveness of the business anyhow because we do not know how this – we do not have the final agreement of that deal yet and therefore we do everything what is needed, for instance, to invest into our HSPA network. That said, what are the implications? If we would not be in the position to invest the amount which we have promised in the contract. This will be then an adjustment to the purchase price. So even this is something which could be managed, but we do not have that on our agenda today. As I said, free cash flow and the CapEx is well in line with the contract obligations.

Rene Obermann

And with regards to Europe, still the economies are strong in Netherlands, Austria, Poland; turnaround is visible in Hungary, Slovakia, Czech Republic and Bulgaria. To be honest, I don’t – since this is an early trend, I don’t expect any major change to the competitive dynamic. We have been somewhat skeptical with regards to the European markets outside of Germany and therefore – and they are part of the overall forecast which foresee some reduction in EBITDA, as you know from our forecast we are doing less good than last year. So that is partly because of the Eastern European markets. We don’t expect any massive improvement there and nor do we expect any massive change to competitive dynamic. I think it’s too early to judge any long-term trends there.

Operator

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

Simon Weeden - Citigroup

Yes, thank you very much. I wondered if I could ask you a couple of questions. One is on the improved trend in German line loss and what you attribute that to and whether or not we can expect that to be sustained or even get better from here? And the second is whether you could elaborate a little bit on your comments which have appeared on the wires, on southeastern Europe and the improvements there, in terms of the operating environment, I think.

Niek Jan van Damme

As to line losses in Germany, we expect the positive trends or stabilization to continue, however we still foresee line losses for the years to come. That is strongly driven by regulation of course and cannot be stopped by us alone.

Rene Obermann

I think, the question on Europe more or less has been answered, Simon. Some visible turnaround in Hungary, Slovakia, Czech Republic and Bulgaria, but still very, very difficult situation in Greece; high unemployment, 15% official number, Croatia 18% official number. And the recovery in Greece we don’t foresee before 2013. So not a fundamental change but some early signs of recovery, and at the same time Greece remaining difficult. I think that’s the environment as I would describe it.

Operator

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

Matthew Bloxham - Deutsche Bank

Yeah, good afternoon. Just one question on the fiber-to-the-building/home project. Could you just give us a bit of an update on where the biggest uncertainties are around your developments there? Is it still that you are trying to find the right business model or is it more around regulatory uncertainty or how other participants in the market are prepared to kind of co-invest or co-operate with you? Can you give us some update on those things?

Rene Obermann

Absolutely. Look, we want to be prudent with regards to how we invest money, because we learned a couple of lessons from the past and therefore we decided to go on a strategy for the FTTH rollout, which has a number of pre-conditions before we roll out. A, we’re talking to the cities or the local communities with regards to cooperation, right. We need access to the infrastructure, to ducts and so forth to reduce the build-out costs. B, we have decided not to build out before we don’t have a certain level of interest or even pre-sales secured. So, our sales troops go out and try to acquire in the vicinity of 10% of people there before we start building out. Then, we look for co-investors. So, we have a fairly rigid approach to the FTTH build-out, when it comes to the next years, rather than just building it out blindly and then thereafter hoping for some miracle and then sell it later. So we try and parallelize – I think is the right word – sales marketing and build-out in a better way than in the past.

Does it mean it’s always going to be 100% pure and according to schedule? No, but that’s the directional statement I’m making here for the future in the investments for the fiber networks. Also, we have put together a paper towards the European Commission, which foresees 11 points. I’m not going to read them out to you all, but those 11 points mainly are designed to improve the investment framework, and they are mainly designed to allow, for instance, for quality of service and differentiated pricing. They’re designed to give us symmetrical open access to existing infrastructures and other things which improve the investment environment. So, it’s a difficult case admittedly. We are still trying to go into it, into fiber, and we’ve started and we will continue to build it out, but we try and do it in a more, let’s say in a more smart way than potentially networks were built in the past.

Operator

Mr. Hannes Wittig from JPMorgan may we have your question, please.

Hannes Wittig - JPMorgan

Yeah, good afternoon. I have two quick questions. The first one goes back to your comments, earlier comments, Tim, related to OTE. The last bond OTE issued was at 7.25% and credit markets have since become tougher, so the question is whether in the future you will be or DT will be, maybe, funding OTE more directly or might this be subject to the same conditions that you outlined earlier? And is there a scenario even where you would consider disposal of your current stake in OTE? So that's the first question. And second question, probably easier, related to your CapEx budget for the year. I just wanted to see, given your run rate is a little bit lighter than maybe it looked at the Q1 stage and I accept seasonality, but is there a scenario where you would spend, let's say, quite a bit less than last year for the full year 2011? Thank you.

Timotheus Hottges

So with regard to OTE, I think we had issued a bond, €500 million, for with the duration of three years, with a coupon of 7.25%. That was let’s say the refinancing and then we have the credit facilities in place. So for the remainder of this year, even for 2012, there are no additional refinancing needs for the OTE business. Then, we might have another refinancing round in 2013, but that is still some time to go. I think it was a wise decision to force the OTE management already at the first instance into an own refinancing, because it should be not the Deutsche Telekom shareholder being, let’s say immediately the last resource for lending here.

And therefore the outcome was that we had huge cash upstream within the organization that we are reducing overall debt in the Group and that the company is refinancing their needs on a standalone basis. By the way which was easily possible, and I was surprised how quick and successful OTE management got this refinancing without support of the Deutsche Telekom. Your question would be what would be in the worst, worst case, if there would be no refinancing for OTE? Then the question is – the answer is quite simple. Yes, definitely, we are the last resource for OTE as being let’s say the company controlling OTE, and fully consolidating the company. But whatever we do, we will not do that on the expense of Deutsche Telekom’s shareholder. We will always do that at arm’s length basis with the applicable interest rates which we might then see in 2013 or beyond.

Operator

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

Thomas Friedrich - Uni Credit

Yeah, good afternoon. I’d like to come back to the German mobile market for a moment. You have already described a little bit some tariff action that has been done, mentioned resellers, a stronger focus on resellers. I wonder, when looking at your performance with business customers, we saw Q-on-Q a slight decline in the contract ARPU to €34 from €35. This is in contrast to the trends at consumer, where you had an increase. The question for me is do you have special initiatives for business customers and mobile, going forward, that will unfold throughout the year and, yeah, if you could elaborate a little bit on that strategy? And second question, with respect to your push for lower-end smart phones that you described. Do you have certain specific partners that provide these smart phones, i.e., are they branded T-Mobile or are they branded by the manufacturer? That would be my questions. Thank you.

Niek Jan van Damme

Okay, let me first answer the question on business customers. You’re right. There is a slight decrease in the business segment driven by some very strong price competition on the mobile businesses site and a decrease in traditional voice access of about 32 million. It’s only partly offset by broadband connections. Our strategy here is to focus on the integrated solution we have launched, Deutschland LAN, which offers a fixed and mobile converged product which also offers an excellent platform to up-sell services like cloud computing, software as a service. So a full service suite to our customers. Secondly, we have gone through a reorganization in the sales areas which, specifically for business customers, which allows us to go for a much more effective approach of our business customers based on the potential there is in customers and not any more on the size. As to your question on the lower end priced handsets. they will not be T-Mobile branded. We will work together with our usual branded partners in the handset area

Rene Obermann

That is the German perspective, Niek gave you and internationally the picture is a little mixed. In the U.S., we do both. We have branded and non-branded devices and also now as you know companies like HTC have started to build their own brand and these are brands – and from my point of view, actually going quite successful.

Timotheus Hottges

I’m sorry. I was interrupted to giving you the answer on the CapEx side here, but a very straightforward. We have seen something exactly 4 billion of CapEx in the first half of the year, and we expect the same amount for the remainder of the year. So, that will be something in the round of let’s say what we have seen last year.

Operator

Mr. James Britton from Nomura, may we have your question, please.

James Britton - Nomura

Thanks very much. I've got two questions, please. Firstly, you mentioned that customers moving to the new tariff plans have diluted your revenue growth a little bit. Can you, perhaps, be precise about the impact that had this quarter? And then longer-term, should we expect the move to flat rate pricing to continue to have a negative effect on your revenue base for the next few years? And the second question, can you just explain why voice MOUs were down 7% in the Dutch market, if data substitution is not really an issue for you in this market? Thanks.

Niek Jan van Damme

Let me start with Germany. I don’t have the precise numbers here for the diluted ARPU in the new price plans. On an MIC basis, some of the tariffs go down almost 20%, but as I said, that’s just MIC basis. Much is included in the bundle itself. And as we have become more successful in selling additional options to the price plan, I can’t give you the latest number of ARPU. That’s to the German side.

Rene Obermann

Okay. To the Dutch side, voice usage is down for mainly following reasons. We’ve been approaching, in addition, mid and low-end contract customers in the last quarters with lower average usage. And consumers have free minutes in bundles which now can rollover to following months, so the budgets, usually once they are not – if they are not used up by the end of the month, they can be rolled over. That has an impact. And also we had some churn from business customers due to a network outage in March, so that made us lose some valuable customers which we need to gain back. So other than that, we gained strong momentum in data revenue since 2010. Hence there is no significant erosion in SMS or in voice revenue visible due to data revenues, at least. So, there is some good news in the Dutch market as well.

Operator

Mr. John Karidis from MF Global, may we have your question, please.

John Karidis - MF Global

Thank you very much. I have got two questions, please. And the first one regards the dividend, if you were to go through the approval process once but pay the dividend quarterly, do you think that that might help reduce the stock volatility a little bit and what would be sort of the main challenges in doing something like this, if you wanted to do this? And then secondly, as far as Germany is concerned and cable. As cable continues to win market share, given that a cable customer doesn't even generate wholesale revenue for Deutsche Telekom, do you think you are coming to a point in time when you have to rethink the balance between your retail and your wholesale strategy? And where do you think this might go from here? Thanks very much.

Timotheus Hottges

Let me answer the first question on the dividend. First, we stay committed to our policy here and second, under German law, it’s impossible to pay out the dividend on a quarterly basis. So, therefore, even if I would like that, it is unfortunately not possible. And we are very much monitoring as well the volatility of this share and if you could look over the last two years since we have announced our policy with regard to the share remuneration, the volatility significantly got reduced. So therefore I think we are on the right track and we have long-term investors in the stock and we have a commitment with regard to the remuneration policy.

Rene Obermann

You know, when it comes to cable competition, look – bring things into perspective, please. Our market share is still around 45% in broadband. We had something around 33%, 34% share in the second quarter. We could have done more if we had been even more aggressive on the price plan side. But so far the total market didn’t grow that fast and we had 85,000 net adds in DSL, and I think cable had somewhat more, but not to an extent that we pressured to bring the whole pricing further down. We try to maintain a good balance between profitability and market share. We’re not just focusing ourselves on market share, we try to keep a good balance. And therefore our strategy, our retail strategy to really focus on retail and the entire service experience to our customers still is the right strategy.

And where to go from here is clear, we need to improve our network availability in the technology mix from LTE on wireless in the countryside to fiber in those areas where we are now building it and where we get cheap, a fairly cheap way to build it and where we can afford it. So the technology mix, the good, entire service experience, devices, price plans, all that is a mix of elements which make our offers very attractive against cable. We will continue to fight the cable guys. We will not look and standstill. If they should increase further their market share then we’ll fight back, but for the time being we’re doing okay.

Operator

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

Justin Funnell - Credit Suisse

Thank you. A couple of questions, please. Just in Germany, I just wondered if you had any more progress to show us in terms of focusing on the housing associations and winning any contracts to, essentially, replace the cable operator there? Secondly, this price restructuring process in the Netherlands is really encouraging. I was wondering if you could see any other markets that you operate in, that you could follow the same route in terms of net price increases at the margin? Thank you.

Niek Jan van Damme

For Germany, on the housing associations, unfortunately we don’t have news for you to announce. I can tell you that we’re majorly investing in a lot of talks with the housing associations, there is a huge interest. As you can imagine, they want to get rid of the monopoly of cable. And I expect announcements very soon. I had hoped to do it today, unfortunately, still need some of your patience. Meanwhile, we are further investing. We have hired the best people in the markets, and we are definitely determined to making inroads in the housing associations to go in the profit potential, the profit pool of television and also of course as a basis for selling fiber in the future.

Rene Obermann

Okay. I think, from a strategic point of view, these pricing developments, nothing wrong with it. It seem to make sense. In some of the markets we’ve already introduced such offers within Europe and so we’re also considering to launch such offers in other countries. So, it seems to make sense from our point of view, but let’s see how the competition develops there.

Operator

Mr. Paul Marsch from Berenberg, may we have your question, please.

Paul Marsch - Berenberg Bank

Yeah, thanks. Just with respect to the U.S. deal. There have been some high-profile objections to the deal. For example, Senator Herb Kohl of the Senate Antitrust Committee and Senator Al Franken of the House Judiciary Committee. Do those objections worry you or should we regard them simply as noise in the approvals process? And then also, in the wake of the U.S. deal, when you say that you're reviewing your post-U.S. strategy, including the domestic fiber strategy. I’m just wondering if the level of ongoing CapEx or the CapEx envelope, post the U.S. is under consideration, or would it just be the balance of CapEx within that current envelope?

Rene Obermann

All right. The U.S. situation first, I would suggest, we also have high profile support and quite a number of very senior people now have expressed their public support. Amongst them, 26 governors in the United States, unprecedented for such a deal, 11 attorneys if I’m not mistaken, and also about I think 76 or so Democratic members of the House of Congress – of the House of Representatives and also some senators. So, there is indeed a lot of support also from the unions which we consider very important in this regard. From consumer organizations, from minority groups, from businesses, state officials, other companies of the industry. So, there is a high degree of support.

The process between ourselves, AT&T, and the Department of Justice and the SEC is ongoing. There’s enormous amount of information which we have provided and it’s no surprise that it takes time to analyze those information. And we expect therefore the transaction to get approval in the first half in 2012, as we always said. So far according to schedule and we believe this will get approved. That’s what our experts say by the way. So what was the other question? CapEx envelope after the U.S.? I’m afraid that’s far too early to answer. We’ll do what is right for our business and where the investments currently in the organic business. Our focus on is clear which is basically LTE and to some extent expansion of the fiber network. And so far so, but anything else we will talk to you in due course.

Operator

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.

Stephan Eger

Thanks a lot to all listeners in Europe and the U.S. As far as I’m informed there is still about five people who wanted to ask questions. We’ll come back to you personally after the call from the IR department. Thanks a lot. Have a good day. Bye-Bye.

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