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Deutsche Telekom AG (DT)

Q2 2007 Earnings Call

August 9, 2007 8:30 am ET

Executives

Stephan Eger - IR

Rene Obermann - CEO

Karl-Gerhard Eick - CFO

Analysts

Mike Williams - Citigroup

Stefan Borscheid - WestLB

Graeme Pearson - Lehman Brothers

Matthew Blocksom - Deutsche Bank

Ulrich Trabert - Dresdner Kleinwort

Justin Funnell - Credit Suisse

Hanas Stetik - J.P. Morgan

Thomas Friedrich - UniCredit

Nick Delfas - Morgan Stanley

David Strauch - Oddo Securities

James Ratzer - New Street Research

Andrew Beale - Arete Research

Christian Kenny - Lehman Brothers

Presentation

Good afternoon and welcome to Deutsche Telekom's H1 2007 results conference call. On our customers' request this conference will be recorded. This presentation contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. They include statements as to market potential, the target 2007 statements, as well as our dividend outlook. They are generally identified by the words expect, anticipate, belief, intend, estimate, aim, goal, plan, will, seek, outlook or similar expressions and include generally any information that relates to expectations or targets for revenue, adjusted EBITDA or other performance measures.

Forward-looking statements are based on statements that are based on current plans, estimates and projections. You should consider them with caution. Such statements are subject to risk and uncertainties most of which are difficult to predict and are generally beyond Deutsche Telekom's control including those described in the sections forward-looking statements and risk factors of the company's annual form on Form 20-F filed with the US Securities and Exchange Commission.

Among the relevant factors are the progress of Deutsche Telekom's workforce reduction initiative and the impact of other significant strategic or business initiatives, including acquisitions, dispositions and business combinations and cost saving initiatives. In addition, regulatory rulings stronger than expected competition, technological change, litigation and supervisory developments among other factors may have a material adverse effect on costs and revenue development.

If these or other risks and uncertainties materialize, or if the assumptions underlying any of these statements prove incorrect, Deutsche Telekom's actual results may be materially different from those expressed or implied by such statements. Deutsche Telekom can offer no assurance that its expectations or targets will be achieved. Deutsche Telekom does not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.

Deutsche Telekom does not reconcile its adjusted EBITDA guidance to a GAAP measure because it would require unreasonable effort to do so. As a general matter, Deutsche Telekom does not predict the net effect of future special factors because of their uncertainty. Special factors and interest, taxes, depreciation and amortization including impairment losses can be significant to the company's results.

In addition to figures prepared in accordance with IAS/IFRS, Deutsche Telekom presents so-called non-GAAP financial performance, measures, including EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBITD, adjusted net profit, 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. For further information relevant to the interpretation of these terms, please refer to the chapter "reconciliation of pro-forma figures", which is posted on Deutsche Telekom's investor relations website at www.deutchetelekom.com.

Operator

Now please listen to the reports of Rene Obermann and Dr. Karl-Gerhard Eick. Afterwards, you are welcome to ask your questions. May I now hand you over to Mr. Stephan Eger.

Stephan Eger

Good afternoon ladies and gentlemen. Let me welcome you to the first half year's results conference call of Deutsche Telekom.

I've got with me Rene Obermann, our CEO and Dr. Karl-Gerhard Eick, our CFO. As always we start with two quick presentations by Rene and Dr. Eick, which can be followed on our website. Thereafter we will have a Q&A session. With that said let me hand it over to Rene Obermann, our CEO.

Rene Obermann

Thank you, Stephan. Ladies and gentlemen, thanks for joining in. Let me start with a few words on the results for year-to-date and I will go into more detail on the implementation of the focus fixed in growth strategy. We have had a good first six months with overall results in line with our expectation.

Revenues grew 3.5% and by nearly 15% internationally and adjusted EBITDA amount to EUR 9.6 million in the first half which means we are on track to meet our full year guidance of EUR19 billion.

In Q2 adjusted EBITDA was actually by 1.8% year-on-year, adjusted EBITDA was particularly strong internationally where we saw an increase of nearly 22% in the first six months compared with 2006. Free cash flow amounted to EUR 2.3 billion, which is up 5% year-on-year.

Net income came in at EUR 1.1 billion. Net income was adversely affected by higher depreciation and amortization, net financial expense and taxes. While it is the international business which is driving the growth, we are also seeing significant progress in our key objective of improving our competitive position in Germany. And I'll talk more about this in a moment.

Asset sales are well on track. Disposals amounting to EUR 1.2 billion achieved so far, and of the EUR 2 billion of cost cutting targeted through the Save for Service program, we have already realized EUR 0.8 billion in the first half.

Let me turn now to the specifics of the focus fix and growth strategy. Starting with the objective of improving the competitiveness of our German business, there are five points which I want to highlight. First broadband, where our retail share is again over 40%. Second, fixed line, where the effects of the cost cutting program have resulted in a sequential domestic margin improvement of 1.3 percentage points in Q2 compared to Q1.

And third, German mobile, where we have seen robust contract customer growth amounting to 428,000 net adds in the first half. Fourth point, our second brand Congstar was successfully launched in mid July as announced. And fifth, in July, we setup the new telecom service organization. This as you know consisted of three units: technical services, technical infrastructure and call centers.

As a result of the agreement with the trade unions, around 50,000 employees have now been transferred to Telekom Service. The impact of this transfer will be to enable us to achieve clear and lasting improvements in our domestic cost base. The following points in particular are relevant. Working hours for 50,000 employees will be increased from 34 to 38 weekly without financial compensation. In addition, other changes in terms and conditions will increase weekly working hours as well.

There will be a salary cut of 6.5% for the 31,000 non-civil servants. This will be offset by compensation payment until 2010 for which we took a one-time charge of EUR 228 million in Q2, which was booked as a special factor. The impact of these measures will result in an effective cost hour reduction of between 20% and 25%. The variable proportion of non-civil servants pay will be increased up to 20%. There will be a pay fees for all Deutsche Telekom AG employees until the end of 2008, and there will be a significant lowering of the starting salary for new hires.

These agreements will result in overall annual savings of approximately EUR 700 million, although the full cash impact will not been seen until 2010. These savings will come from a combination of salary effects. These are a 6.5% reduction in salaries, and the salary fees for Telekom Service and DT AG employees for the years '07 and '08. Increased productivity due to the extension of working hours will allow us to significantly reduce the level of outsourcing and lower entry salary levels for new joiners.

For the third consecutive quarter, we have seen our broadband retail market share above 40% as announced and targeted in march. Specifically, in the first half of 2007 we realized almost 950,000 net retail DSL ads which compares with less than 100,000 in the first half of 2006. The input behind this extremely strong growth is the sale of the new bundled products, which overall more than doubled in the first half of the year to 7.4 million in total. Mobile contract net ads have also risen sharply increasing from 264,000 to 428,000 half to half year.

The new mobile tariff rates have been the driver behind this increase. The Max flat rate customers now number almost 540,000 making this the most successful mobile flat rate plan in Germany and also by the way it generates good ARPU. We have also seen a continuation in the improvement in contract MOUs that we saw in Q1. In the first half of '07 these were up by more than 10% year-on-year. It is a possible sign that necessity is finally starting to kick in.

The Save for Service target of achieving EUR 2 billion in cost reductions in 2007 is progressing well. In the first half of the year, we achieved actual savings of EUR 0.8 billion and we have to date implemented measures to realize total savings of EUR 1.4 billion. Just under 60% of the actual first half savings were realized in BBFN in the broadband fixed net with the rest roughly spread across the other divisions.

Some of the key cost cutting measures in '07 include a reduction in rental and energy cost at BBFN through personal reduction and a reduction in the number of locations. Increased use of off and near-shoring in IT T-Systems, and less reliance on manual processes in order management at BBFN through improved IT systems.

With regards to the voluntary head count reduction program, this is well on track. At the end of the first half of the year we had already achieved more than three-fifths of the target of 32,000 by December 2008. In the first half of 2007, over 8,200 employees left our group, after taking into account 1,600 new hires and 400 other personal additions the net domestic head count reduction amounted to around 6,200. In addition a further approximately 1,800 contracts for early or partial retirement and severance programs were signed at the end of June.

Let me turn now to the second strategic area, the international mobile business. Here, there are four developments which I would like to highlight. First, this business continues to show strong growth, with revenues overall increasing by over 10% and improving margins. Second, we saw an increase in international contract net ads of 2.5 million in the first half of the year. And third, we are close to finalizing the acquisition of Dutch business of Orange, which was significantly improved our position in the Netherlands and we hope to be signing that and finishing the negotiation soon.

And fourth, in the US we have just successfully launched T-Mobile HotSpot @Home based on UMA technology with very strong endorsement from customers, commentators and analysts alike.

We continue to see strong growth in both revenues and in adjusted EBITDA in mobile internationally. International revenues increased by over 15% half year to half year and now stand at over EUR 13 billion. Adjusted EBITDA growth however was even stronger at 26% with adjusted EBITDA just below EUR 4 billion at the end of the half year. I will talk more about the US in a moment. But just let me draw your attention to the performance in the United Kingdom, where adjusted EBITDA increased from EUR 336 million to EUR 500 million with margin improving to over 21%. Out total international contract customers now number around 56 million up more than 6 million in the last 12 months.

The US business has had another excellent half year. Service revenues have increased by over 17%, and the adjusted EBITDA margin was at 29% in Q2 up from 27% in Q1. Total net adds were at 1.8 million of which over three quarters were contract.

ARPU has grown strongly both in blended and contract, while contract churn has fallen, down from 2.1% to 1.9% in the first half, and 1.8% in the second quarter. Two important recent new products, which are helping to drive the development of the US business, are MyFaves -- more about this in a second, and T-Mobile HotSpot @Home which we launched in late June. This product has got off to a great start. It allows the customer to really cut the cord and use T-Mobile services as the only phone they will ever need. The third core part of our strategy is mobilizing the internet and Web 2.0 services, which are two mega trends that are becoming increasingly important.

Let me just highlight -- first, the very strong growth in total data revenues is up by nearly one third at EUR 2.6 billion. In the US alone, data revenues grew by 48% to EUR 0.9 billion driven in particular by strong messaging growth.

Second, non-messaging data revenue growth grew by over 44% to EUR 0.9 billion. Third, we saw UMTS data volumes in the first half of '07 more than 10 times that of the first half of last year. This clearly reflects the rollout of our fast network, high speed network HSDPA across our European properties as well as much more customer friendly tariff packages, which we have introduced earlier this year.

And fourth and fifth, the number of both web 'n' walk and MyFaves customers increased significantly. The number of web 'n' walk customers went up by over 500,000 in the first half of '07 and it now stands at 2.4 million. Just last week, we launched the new web 'n' walk time 120 option plan in Germany, which includes 120 minutes of internet surf time per month for just EUR 5. These customers in Germany generated an average ARPU for web 'n' walk services of EUR 6 per month in the second quarter of '07.

For UK customers, the average ARPU was significantly higher still at EUR 16. MyFaves was launched in October of last year in the US, and has already achieved a total customer base of over 2.5 million. It continues to be the most successful offering in the history of T-Mobile USA. Today 35% of our new customers are signing up for MyFaves.

In 2007 customer service, we are seeing improvements across the board in all important key measures of customer satisfaction versus our traditional rate plans. In addition to being a win for our customers, MyFaves is also a win for T-Mobile. It delivers higher ARPU typically around $4 per month addition, over traditional T-Mobile rate plans. Because MyFaves is integrated with a much-improved user interface, it’s making messaging services more easily accessible. And this means customers use these services more actively. As a result, for existing customers who convert to MyFaves we see an increase of $1.75 per month just in data revenues.

Turning now to the fourth element of our strategy, let me stress that business corporate solutions focused on network-centric ICT services is a co-part of our operation. As you are aware we are currently in the process of recruiting a CEO for that division. By network-centric ICT services, we mean the provision of critical IT and Teleco components for our business customers from one source and I'll get to the core ingredients and example in a second.

As part of the implementation of Focus fix and growth of our strategy, we have had discussions with potential partners and have accordingly fine-tuned the core ICT activities, which we want to pursue ourselves. We are now in a position to tailor the scope and structure of the business parts, which can be department. Well, let me stress this is a very complex process because of the multiple supply and services relationship, which need accuracy and due diligence in preparation.

In the future we will focus on achieving leadership in network-centric ICT for our business customers, who ask for integrated network and IT capabilities. Therefore, we will be concentrating on network-centric offerings, applications and processes. Core ingredients here for instance are global network services, VPN services, data center services, remote desktop application management capabilities and migration to all IP based systems, call center support, PBeaKK, which are based on IP, quality of service managements and so forth and so forth. So there are a couple of more specific examples and I’ll name only a few. Global IP based solutions for corporates in particular the integration of fixed and mobile services, for an instance things like Blackberry or other mail and messaging services or office automation products. Provision of highly complex applications in our data centers and overall networks from one source. With over one million SAP users, for example on our platform we are the world's leading provider in that area. The asset disposal program overall is progressing very well. Total sales to-date amount to EUR 1.2 billion with the sale of Club Internet concluded at the end of June and ya.com at the end July. We are still considering the other elements on the list and we will advise you on progress in due course.

Finally, the let me just conclude by reconfirming our guidance for 2007. We expect adjusted EBITDA of around EUR 19 billion and free cash flow of around EUR 6 billion. And with that having said I would like to hand over to Karl to talk more about the numbers. Thank you.

Karl-Gerhard Eick

Thank you, Rene. As always I will concentrate my remarks on the Group Financials and the headline figures for the three divisions. First group, overall as Rene said, it is a good first-half performance, with revenue growth of 3.5%. Although adjusted EBITDA was down 2.1% to EUR 9.6 billion in the six months, most importantly in the second quarter we saw adjusted EBITDA increase by 1.8% year-over-year and by 4.7% sequentially from the first quarter of this year.

The Mobile division remains to be the main driver behind this encouraging development. Adjusted net income, as already mentioned by Rene as well, was down 44.2% to EUR 1.1 billion. The steeper decline of net income as compared to adjusted EBITDA is due to increases in below the EBITDA line items, which I will come back to later. Let me also draw your attention to our strong free cash flow, which was up 5% to EUR 2.2 billion despite restructuring payments of EUR 1 billion in the first half of '07. Again, I will come back to this in a moment.

Turning now to mobile. Let me also review here the financial performance. We saw outstanding results in mobile with double-digit customer revenue and adjusted EBITDA growth. While revenues were up 10.5% to EUR 17.1 billion, the increase in adjusted EBITDA was even stronger up by 13.9% to EUR 5.3 billion. Part of the increase in revenues and adjusted EBITDA was due to the consolidation of PTC and tele.ring, which increased revenues by EUR 1.1 billion and adjusted EBITDA by EUR 0.4 billion in the first half.

Neither the sides of the adjusted EBITDA improvement -- there was an overall margin improvement of almost 1 percentage point to 31% despite a lower margin in Germany. Outside Germany, margins increased by all major markets including the US, the UK, Austria, Czech Republic and the Netherlands. The improvement was even stronger sequentially comparing the second quarter of '07 with Q1, with an increase of 1.6 percentage points to 31.8%. All the major three markets namely the US, Germany and the UK contributed to this increase.

Coming now to broadband fixed network, as expected the situation here remains difficult. Overall, revenues were down 6.1% to EUR 11.5 billion driven by the domestic revenue decline of 7.5% to EUR 10.1 billion. In contrast, international revenues actually increased by 7.4% to EUR 1.4 billion. Two segments, Network Communications and IP/Internet, accounted for over 90% of the domestic revenue decline.

Revenues from Network Communications decreased by 9.4% as a result of the line losses, and lower per minute prices due to the rapid adoption of new flat-rate tariffs. Revenues from IP/Internet decreased by 16% due to price cuts, which more than compensated for the increase in retail DSL lines.

The decline in revenues in these two segments was partially offset by growing revenues from wholesale services, which increase by 5.9%. The revenue development is also reflected in the development of adjusted EBITDA. Internationally, adjusted EBITDA increased consequentially by 5.7%, while domestically adjusted EBITDA decreased by 18.8% to EUR 3.3 billion. Initial savings from "Save for Service" were offset by higher subscriber acquisition and retention cost due to the popularity of the new bundled tariffs.

Compared to the year-on-year development, the sequential development is slightly more encouraging. While domestic revenues decreased by approximately EUR 200 million in the second quarter of 2007 compared to Q1, domestic adjusted EBITDA actually remained stable. The margin improved by 1.3 percentage points to 33.5%. This is a reflection of the initial cuts from Save for Service, as already mentioned.

In Business Customers, the overall picture follows the pattern of previous quarters. Due to internal cost cuts, also in IT total revenues declined more than external revenues, which decreased by 2.9% to EUR 4.4 billion, despite an increase in international revenues by nearly 10% to EUR 1.2 billion. Sequentially, comparing the second quarter of 2007 with the first quarter, total revenues grew by 1.9% to almost EUR 3 billion, with most of the increase coming from international sales. Adjusted EBITDA, which continued to decrease year-on-year, also increased sequentially by 7.3% to EUR 280 million. Accordingly, the margin increased by half a percentage point to 9.5% in the second quarter.

Coming now to the free cash flow, free cash flow increased by 5% to EUR 2.3 billion. This very encouraging development is basically due to lower cash CapEx, which decreased by EUR 0.5 billion excluding the Centrica transaction of EUR 0.1 billion, and is a result of lower income taxes paid, which decreased by EUR 0.4 billion particularly due to the reimbursement of prepaid taxes in Germany.

About half of the decrease in cash CapEx was due to BBFN, with the remainder primarily from the Mobile division. The improvement in cash CapEx and income taxes paid more than offset higher restructuring payments, which amounted to EUR 1 billion in the first half of 2007, compared to only EUR 0.2 billion in the first half of last year. The increase in restructuring payments is reflected in the change in working capital.

Finally, reported EBITDA benefited from non-cash items of EUR 0.4 billion, in particular from the sale of T-Online France. Unlike Q1, there were no additional material gains from the sale of non-current assets in Q2.

Turning to net income, this increased or decreased by a larger amount than EBITDA due to below the line items. Depreciation and amortization increased by EUR 0.3 billion, primarily due to higher amortization of intangible assets as a result of the purchase price allocation coming from the acquisition of tele.ring and PTC.

Due in particular to purchase price allocation, the values of the acquired customer base and brands of PTC and tele.ring are being amortized over up to 60 months. In the first half of '07, the total amortization amounted to EUR 0.3 billion, with EUR 0.6 billion expected for the full year '07. This amortization and thus the impact on net income will decrease in future years before reaching zero in 2012.

Reported net financial expense increased due to the fact that net financial expense in the first half of '06 included EUR 0.2 billion of capital gains from the sale of Celcom in Malaysia. Since this was booked as a special factor, it did not impact the adjusted net financial expense. P&L taxes increased as well, since P&L taxes in the first half of '06 benefited from the reversal of income tax accruals. These developments, in conjunction with higher minorities, led to a decrease in both reported and adjusted net income of approximately EUR 1 billion.

In the first half of '07, almost no cash taxes were paid due to the reimbursement of prepaid taxes in Germany and our tax loss carry-forwards in the US and UK, where we only paid minimum taxes as a result. However, due to the treatment of deferred taxes under IFRS we had P&L taxes of EUR 1 billion. This trend is expected to continue for the remainder of the year. As a result, we expect P&L taxes for the year of approximately EUR 2 billion but significantly lower cash tax payments. Due to the treatment of deferred taxes under IFRS, P&L taxes for the year will be materially higher than they would have been under German GAAP.

In this context let me say a few words about our dividend policy and repeat what we have already outlined several times. We want to continue paying an attractive dividend to our shareholders. Let me be clear that in determining future dividends we will not look exclusively at a particular payout ratio. That being said, we consider free cash flow before growth investments a key determinant of future dividends, within the context of maintaining our leverage ratios.

Last but not least, coming to the balance sheet ratios. Our overall ratios remained stable, despite the payment of the dividend in May in the second quarter, which impacted the balance sheet total, shareholders' equity and net debt. Net debt specifically increased by EUR 1.3 billion compared to the end of the first quarter of '07. Dividends of EUR 3.5 billion were partially offset by the free cash flow of EUR 1.8 billion in the second quarter and the proceeds from the sale of T-Online France of EUR 0.5 billion. Accordingly, gearing increased only slightly to 0.9 times, while the equity ratio actually improved due to the shortening of the balance sheet total, despite the reduction in the shareholders' equity as a result of the dividend payment.

Question-and-Answer Session

Operator

(Operator Instructions). Question Mr. Mike Williams from Citigroup may ask your question please?

Mike Williams - Citigroup

Yeah. Good afternoon gentlemen. Couple of questions if I may. Firstly on the T-Mobile USA a strong margin performance in the quarter helped by 10% constant currency reduction in SAC year-on-year and reduction in June. I wonder if you could talk a little bit about competitive intensity of the US mobile marketplace and that's more important the outlook for both contracts SAC ensuring for reminder of the year.

And then secondly the German broadband market is clearly slowed in Q2 despite sharp price reductions across the market. I interested to know what you think is holding back broadband penetration in Germany relative to the rest of Europe. What role the strike played in the quarter and do you expect to see an acceleration in broadband growth to the market overall in the second half of the year. Finally related to that, would you have expect to see line loss accelerate again from here if broadband market growth accelerated? Thanks very much.

Rene Obermann

All right, Mike. T-Mobile USA margin improvement that's correct. Competitive intensity, when it comes to tariffs and pricing I consider the markets still fairly stable with only four national carriers ends, really the leader has been established, the leaders are clear and so it's a very extremely stable market environment still. And I don't expected to be extremely aggressive on pricing when it comes to churn, its also benefiting from 24 months contract, which we introduced last year. I think it was in April, so that has an impact now. Churn rate is in contract around 1.8% can be expected to be fairly steady stable at this rate.

SACs I think its little more difficult to predict maybe a little more competitive intense in Q4 usually, but I don't expect the market to go crazy. When it comes broadband penetration in Germany a number of factors, first and foremost it's fairly seasonal and it's not so abnormal that the second quarter also last year didn't grow as fast as the first quarter.

Secondly, you could expect some acceleration in Q3 and Q4, because overall penetration in the market is still in the vicinity of 50%. So it should continue to grow particularly with very attractive consumer friendly pricing, which we Deutsche telecom have put to the market quite a while ago. So that kicks in. So we should, I'm sort of optimistic for Q3 and Q4 that is going to be a little better in growth.

Strike clearly has impacted the situation in Q2. We had 460,000 strike days overall with one strike and then the period particularly heavy in May and June. I mean a massive strike, it's about the same number of days for entire German industry had been strike as far as I know. So, it's been massive and it clearly has impacted our ability to proceed or us to deliver in time. So, overall again couple of factors impacted at seasonal strike and also the Q3 and Q4, we should see a bit of more strong growth.

Mike Williams - Citigroup

Great, thanks. And as that growth accelerates is it fair to assume just the increased activity from the alternative carriers will see line loss accelerate from this level, or do you think you've now got line loss under control?

Rene Obermann

No. The line loss is not going to be under, I mean don't depends on what's you mean by under control. I think we have to be realistic that line losses will continue in the next quarters at a fairly high level. The reason is simply that we are still keeping more than 80% around 83% or 84% of all PSTN lines, and we have dozens of competitors, and they fairly algometric regulation. So, let's be realistic and our way to handle this is of course we do retention programs. Of course, we go aggressively into our customer base and offer them migration upward towards DSL, and cheap entry packages or affordable entry packages. But, let face it, we will have to continue line losses to deal with line losses and cost cutting is one of the answers to this as fantasy lesser than sounds, we have to cut our costs, no question.

Mike Williams - Citigroup

Thank you very much. Very clear.

Operator

Mr. Stefan Borscheid from WestLB, may you ask your question please?

Stefan Borscheid - WestLB

Thanks. Good afternoon. Just one question on double play prices in Germany. When you cut your prices for your Call & Surf packages in June, you stated that you are not willing to expect more than a certain price difference compared to your competitors. But if I look at the prices now especially with companies like United Internet, the price gap seems to have increased compared to what was six months ago. So is it, therefore fair to assume that you will again have to cut your prices this year. And if so, do you believe that the regulator would agree to that or would you have to reduce your whole sale prices in order to be allowed to reduce the retail prices?

Karl-Gerhard Eick

On DSL retail price were not regulated. But I think your question is fair. However, I don't think when you take all price components into account that the price delta is also big. And if you compare apples-and-apples without pricing elements then I think our competitiveness currently is fairly strong, and United Internet as far as, I know, has not reported very strong growth, and we will continue to be price competitive. But I think, we can still allow a certain price differential and we will respond to market needs. But we don't necessarily need to leave pricing decreases because outsourcing groom downwards is getting somewhat more limited now.

Stefan Borscheid - WestLB

Okay. So, just a clarification, so you are quite happy with the pricing structures you see in the market?

Rene Obermann

Current situation at least how it is perceived by dealers, distributors and customers, we seem to be doing okay. In terms of pricing which doesn't mean, I am not making a statement here that I would always exclude price decreases that would be not serious. But at least currently that's not an intention short-term.

Stefan Borscheid - WestLB

Very good. Thanks.

Operator

Mr. Graeme Pearson from Lehman Brothers may you ask your question please?

Graeme Pearson - Lehman Brothers

Thanks. Good afternoon. I've got two questions. Firstly you said the contract usage in German mobile had increased by about 10% in the first half. Is it possible to give us the total usage trends in Q2 compared to Q1? And secondly the margin in the UK certainly seemed a lot better in Q2. I was just wondering, what your strategy is from here in the UK, is it to maximize the return from the customers you've got or is it to aggressively increase market share again going forward? Thanks.

Karl-Gerhard Eick

Just let me before I come to your question quickly refer back to Mr. Borscheid. You are aware that we had introduced new tariffs in DSL in June, right. I was referring to those tariffs now in the marketplace comparing to United Internet and they like to be seemingly competitive. Just wanted to clarify not that these tariffs had not come across to you, but suppose you know them and therefore I assume we are talking of the same, we have the same basis for our discussion. Voice minutes in total in the different markets, let me just see the trend here, so Germany went up in Q2 over last year by about I think it was 10 minutes or so, 9 to 10 minutes in contract. UK went up by about 13 minutes in contract, Austria went slightly up, Austria was not so much because Austrian prices had been very much aggressive in the last couple of years already.

Czech Republic went down a little bit although everything on a higher level than Germany. Germany is still lacking behind the other European markets by quite some margin, it sort of half or third comparing to some other markets. Netherlands stable beyond 300 minutes, actually small down beyond 300 minutes. So Europe overall on average in the Western European markets went up to about an average 200 minutes and again Germany lacking behind.

So I would there to say that in Germany, they are still quite a bit of room for improvement and the customer perception has to be worked on even further. Because customers had gotten used to high prices in mobile and now it takes time for them change their mind and they realize that it has become very affordable. And Central European markets, no big changes small, small decrease actually. So Western Europe small increase and Germany a lot of room for improvement still early trend indicate us seem all right and that refers to contract and prepaid. We shouldn't discuss because prepaid numbers are somewhat inflated by the inactivity. So that's I think that's about what I have to say about that.

The UK margin in the second quarter was significantly higher than the first quarter. It was I think in the vicinity of 23, 24% and that is very close the market average if I'm not mistaken the other competitors, while the market leader even is reporting around 25, 26 percentage. So wee are catching up. We are doing okay. The balance approach is the strategy. So we will not just go for big share increase, as long as we maintain a good position, we will balance our approach and also look towards decent, as good as possible margins.

Graeme Pearson - Lehman Brothers

Okay. Thanks.

Operator

Mr. [Matthew Blocksom] from Deutsche Bank. You may ask your questions, please.

Matthew Blocksom - Deutsche Bank

Yeah, Hi. The question was, firstly on the broadband market in Germany, a couple of your competitors have anecdotally being saying that since July they have been did a better than the first half 30% quarter particularly in the back of the make it products. I was just wondering whether you think this going to have any, this going to impact on your ability to keep the market share between 40% and 45%.

Secondly, just on the current medium tariff cost reduction target is that kind of 4.2 billion to 4.7 billion, you haven’t reduced but I was just wondering whether that still things you going what I think if I'm right in March the reason, the indications are you might even maybe trying to do that better than that. Just wondering where you are not medium term cost reduction. Then finally mobile M&A again kind of going to back to March you kind of indicated that you would be looking with the existing foot print and potential beyond this that you would be looking with the existing footprint and potentially beyond. I was just wondering now that you are close to just Netherlands, where you are in terms of looking at additional footprint expansion beyond that?

Rene Obermann

Second question on the cost program, I would probably like Karl to pickup. Broadband market with regards to our competition in July, I think it's not the right moment and time to discuss Q3. Whatever our competitors use to say at this point in time, I will keep quite about. All I can say is that we believe we are fairly competitive also at this point in time. So, let's see how it goes. The other part of the question was the cost program and then (inaudible) I think, you referred to that's a bit strange because we don't have negative yet. So, bitstream access we are preparing for and that is going to be by the end of the year. So, then we will decide ourselves, when we introduce our retail product and this one, but negatives at this point in time is not impacting it. And then cost program Karl?

Karl-Gerhard Eick

Yeah. Well, let me repeat what we've always said about our cost cutting exercise Save for Service was often almost I think we are well in line to achieve our 4.5 billion cost reduction program that's the number we've committed for this year. And we're clearly on track with EUR 800 million realized until the end of June EUR 1.4 billion implemented. The full year amount in '07 being implemented should be 2 billion that's why I see, we are very confident that we can achieve our targets in this respect as well.

And looking beyond, I think, the cost cutting is uncertainly an ongoing exercise. It will never come to an end. We've to try to slim our German activities specifically in wireline, in all parts of our businesses. That's why we are certainly not excluding an increase of this cost split as action program beyond over 10, I think, it's going to be more. But this is, I seeing a little bit early to give further guidance.

Matthew Blocksom - Deutsche Bank

Thanks. Any comments on whether it may well M&A?

Rene Obermann

Well, no, we're not making any comments, and not any speculations on M&A. The Netherlands thing, we hope to conclude soon. That is a step, which we need to integrate properly and digest, and make the best out of that. And then we will see how it goes.

Karl-Gerhard Eick

Yeah. Perhaps if I might add what we did in Austria, and what we did in Poland clearly supports our core targets of our M&A activities, which is in market consolidation, and neighbor markets because out of PTC and tele.ring, we really have nicely benefited in our developments. Also in the first half especially in the EBITDA, and revenue development clearly one has to take the pain of the purchase price allocation with kind of an additional amortization. But there is, I think, something which is forgiven more or less, and which also has to come into consideration. But I think, what we're doing right now underpins nicely the rightness and the correctness of our strategy.

Operator

Mr. (inaudible) from Societe Generale. May we have your question please?

Unidentified Analyst

Good afternoon. Two questions, please. The first is on the T-System, and I was wondering if you could comment on some price article stating that in fact you are looking a partner for your system integration business now it is that, can you comment on that? And the second question is and any interment on your part or any need for you to look at the coming auction in the US and if yes, what would be the impact?

Rene Obermann

The T-Systems part, we have defined clearly what are the core of our business in the future is where we believe we can aim, we can succeed and we have growth opportunities in and see we can provide successfully with vis-a-via our competition and this is clearly network-centric business but more and more supported by IT services or because it network-centric ICT offerings such as VPN, such as smart desktops, such as call center solutions, supporting or enabling dynamic computing, application hosting, IT based PBeaKK solutions, security solutions, quality of service management for instances of certain applications, which need to be prioritized and so forth.

So all kind of services to support the communication of people and machines and computers for our customers increasingly integrated between mobile and fixed. Its clearly, there is more and more convergence here that the number of services are being utilized via mobile devices as well.

So that means extension of for instance secure solutions, end-to-end security of those services and lot of other know-how intense solutions for corporate customers. So we feel well equipped to do that. That means we need to do, but if even we do that to a large extent under own management we will have to continue to do restructuring and cost cutting and efficiency management because Telco services in the corporate space are under price pressure as you know.

So that's part of our own job, but also then the parts which are more IT development related and that is something we feel we are not properly set up or completely sort of capable to manage that long-term successfully ourselves, which would like to partner. And that also has some restructuring areas, some restructuring goes with that. So I hope that answers your question.

Operator

Ulrich Trabert from Dresdner Kleinwort, you may ask your question, please.

Ulrich Trabert - Dresdner Kleinwort

Thank you. The first question is regarding the recently changed tax law in Germany, what is the impact that you see say in the medium term, but also specifically in 2007 on that. The second question I have is with regards to the settlements you reached for the unions, if I understand from statement from union representative correctly. They seem to tell their members that, they are forth coming scheduled wage round that they will try to use to offset the reductions that are currently part of the settlements.

I was just wondering, what's the interplay between the settlements you have reached and the scheduled wage round that are coming if you want to model which wage cost going forward. And the third question with regards to the regulatory decision on sub-loop unbundling, the cabinet unbundling. What is the time line for the next decisions they have, obviously they also on going talks now. Do you have any sense of when the next piece of news would hit the screen there? Thank you.

Rene Obermann

So before we go into these questions, last question it was open on AWS. Sorry on spectrum in the US, very quick answer. We have secured through the AWS auction at a very reasonable price a fair amount of spectrum we are now almost on par level with competition. So we feel that, we can be very opportunistic with regards to additional spectrum in the future for instance in the 700 MHz auction. At this point in time, we don't have any specific plan to pursue that. And as I said, in the future with regards to spectrum since we've secured a good position we will be very opportunistic that's it. Karl, will you talk about the other question.

Karl-Gerhard Eick

Well, first let me go through your question about the German tax reform. I think it's difficult when we look into the cash taxes, which was very, very low in the first semester. It's very difficult to estimate that our cash taxes being paid in the future are going to lower because less than zero tax it's difficult to be paid even if you pay zero taxes. And when it comes to the tax P&L i.e. the tax expenses then I've given guidance that all in this year we will see 2 billion P&L taxes approximately for full year. This will go quite lightly nicely down next year. But this is more impacted by the deferred tax situation under IFRS, and not so much influenced by the German tax reform.

Operator

Justin Funnell from Credit Suisse. May you ask your question please?

Justin Funnell - Credit Suisse

Thanks. Just background noise, if you can hear me? I just wondered, if you could make any comments about the outlook for your US margins you've been losing very little bit of revenue from Cingular roaming revenue in the last couple of years and that depressed your margin trends to some degree that's washing out now. You also have good data trends in your business and across the market. By saying that some of your payers' starts to monitor report increasing margins? Can we now think about your US margins increasing over the two or three years if the current trends continue? Just another sub-question on that is, I guess, would you presume that iPhone isn't going to disturb your strong performance in the US business during the second half it's just the reassurance?

And then just finally on German broadband, your adds have slowed a bit, your share about similar, it seems some of your, you are so competitive you have seen adds of Q2 versus Q1, which is works in the market trends. Essentially some market share going to somebody else. We are finally seeing actually Kabel getting some increasing traction in the German market. And finally fixed mobile convergence, it if works in the US, why not is that your HotSpot structure in Germany, which obviously about, what's the difference. Was it infrastructure in the US, when Germany was obviously not bad you are going to review and renew that product?

Karl-Gerhard Eick

Now, let me start for the US margin development, which has nicely developed over the last year more or less accordingly quarter-by-quarter despite all kind of special developments albeit the Cingular business, albeit other things. We are rather convinced that this is going on. We've always given guidance that the US margin in the longer perspective should be 35%. And there is no good reason to change this as of today.

So, now you've had a number of questions to the operational business Apple iPhone in the US. It's a little early to tell what the impact is and how much we are impacted. Definitely we will watch it and we will make sure that our terminal portfolio is continued to be a very attractive as you know our terminal portfolio has been received always very well, very much also targeted at similar markets segments.

So we are I don't think we lose competitiveness, but it's a little early to say what the impact is. Is cable, our cable competitors now are getting enormous attraction. I think they might have some more attraction, but I don't think we should be too much concerned yet. We will watch it carefully and will make sure that, vis-a-via our cable operators sustain competitiveness. When it comes to the judgment of I read a press article today judging the different triple-play offerings. It said that from the IP side from the Telco side, triple-play seem to work fine. I think they have some critical remarks on the other side.

Anyway we will watch it. We will make sure that quality and pricing and the offering is competitive against cable. HotSpot@Home why it did not work in Germany well that's a great question, at T-Mobile our concept T-Mobile@Home did work and its very successful. T-Com at that time last year launched a product, which we took off the market immediately after new management took over because the concept from our point of view was wrong.

It was too complex. It was not very competitive and attractive from an end-user point of view. Basically the technology we are using in the US is called UMA. It actually uses the Wi-Fi the HotSpot as a transparent channel and it goes it routes the calls all back into the service architecture service platforms from the mobile network, which means everything is managed within the T-Mobile domain. It helps in the US, indoor coverage and it also helps capacity problems we do not have in Germany. As you know them, the network has high capacity indoor coverage is extremely good in the German network. So we believe we are fairly well position with our T-Mobile@Home offering as of to-date.

Operator

Mr. [Hanas Stetik] from J.P. Morgan. May you ask your question please?

Hanas Stetik - J.P. Morgan

Yeah. Good afternoon. Thank you. I have just like to go back to the UK for one moment you said you will pursue a balanced approach, but certainly in the second quarter what was noticeable is the margin went up the revenue growth accelerated and its always been a bit of trade of that you have seen in the UK. Would you let say in the very near term focus on getting the revenue line up or would you be happy with keeping that margin trend.

I mean you seen you are being let say a bit more conservative in your pricing recently and your dealings with trade channels that suggesting that you would be rather more concerned about the margins and maybe you can confirm if that the right impression. Secondly, a question going back to Germany regarding the football rights just wondered, if you can either rule in or out, whether you would be a potential for those rights, if they are let say what it seems likely awarded in one chuck. So you can't really split out the IPTV rights?

Karl-Gerhard Eick

Yeah. UK I think we will continue balanced approach. The revenue growth in the UK you are right in Q2 slowed little down however it was still significant and the margins improved although proportionately, if you think about where we come from the in the UK historically, we've improved the business significantly from an operating cash flow position, also now from the margin position, from market position etc. The network is considered now by most customers being a good network on par level, we're increasing our performance in data throughput in the network.

So, we are trying to improve quality but continue to approach the market balanced because the market is overheated. It's overheated, as the competition has gone too far I find. Several distribution channels they were dictating the game basically. And therefore, one has to be balanced and reasonable, and that's what we will continue to do.

Football rights it's too early to discuss that issue will come up in the course of the year. I do personally hope that we can in the futuristic any license expenses on what we really need to do which is the IP side. But again, it's too early to say and we've to see how it goes.

Karl-Gerhard Eick

Just very quickly from my side. We've got quite a line up of respective questions. Can we ask you please to limit two questions, a person otherwise we won't to be able to serve everybody thanks.

Operator

Mr. Thomas Friedrich from UniCredit may we have your question please?

Thomas Friedrich - UniCredit

Good afternoon. Thank you. Yeah two questions, first of all yeah relating to IPTV we've seen some activity from your side on the product offerings there recently. Maybe you can give us an idea when you finally expect this product to really gain a little bit more traction and figures, you can communicate? Next question, the similar topic is Congstar do you plan to publish any KPIs in the coming quarters? Thanks.

Rene Obermann

IPTV is going to be launched at IFA and IFA is by the end of this month early next month one of the largest consumer trade shows in Europe. And then the tapes which are currently running should be finished, and we should get ready for broader market launch based on the VDSL network, but also based on our operated DSL network on to 16 megabit. It's a good product. I am using it really myself. So, subjectively speaking, I am fairly happy with it. I think many of the so far they did early flaws we did in the product in the provisioning and installation, and so forth have been addressed.

So, in September launch target minimum a 100,000 by the end of the year that should be possible. However as you know with new products and such a complex end to end thing from the device to the network to the service platforms and provisioning that does require a little bit of long battle at the beginning. I do believe in the product. As I said September launch, and let's see how it goes.

Congstar at least not planned for Q3. It would be too early. The initial reception in the market has been good. There have been some criticisms that it wasn't the cheapest tariff. But if it had been the cheapest tariff, there would have been criticism that we overheat the market. So, we believe that the right thing making it extremely flexible like a toolbox. So, customers were keen on that style of service and style of offering, and style of tariff, I think we can attract. So, probably in Q4 by the end of Q4, we will report.

Operator

Mr. Nick Delfas from Morgan Stanley, may we have your question now please?

Nick Delfas - Morgan Stanley

Yeah. Thanks very much. Just a quick question on the cost reduction progress at T-Com, obviously, the results were pretty good given the revenue profile. But you have committed 900 million net reduction in cost. I think your revenue at round 100 or so for the first half. Can you give a more color on how you planned to get from the 100 to 900, you've outlined in March? Thanks very much.

Karl-Gerhard Eick

Well, I think when we look into T-Com and the effect of our Save for Service, the second we have realized 450 in the first semester out of which 300 million is from personal cost and close to 200 million comes from the mobile cost side and the other cost. That's why I think we are well on track to achieve 900 million for full year.

Operator

Mr. David Strauch from Oddo, may you ask your question please?

David Strauch - Oddo Securities

Question concerning T-System could you please tell me you have continue, your scope what's kind of next step in terms of timing into find your partners please?

Rene Obermann

It's difficult to say. The process I mean we will not delay anything. We have done a lot of detailed work and figured out what type of capacities we need internally in order to provide our own for instance our own billing service to provide the service I've just mentioned earlier on to our customers.

Calculated capacities needed, people needed, facilities needed and so forth. We are now going into the next step, which is approaching potential partners with our sort of fine tuned and shaped approach. The areas we want to partner is very difficult I don't know, whether it takes a few months, whether it takes to the end of the year or whether it goes fast or even longer, I just can't say. We have to be, as fast as possible, but quality comes before timing.

Operator

James Ratzer from New Street Research, may you ask your question please.

James Ratzer - New Street Research

Yes, good afternoon. Two questions please. The first one was actually identical one to the one two questions we heard from Nick Delfas. I want to follow up on that one please about the cost reduction in the wireline business. I think the Save for Service target you get gross cost reduction targets, where is your full year results presentation missed a Mr. Hatcher showed slide for the net cost reduction in the wireline business of EUR 900 million, which included 1.5 billion of gross reduction and EUR 600 million of increased cost and 900 million net reduction for the first half year.

And you achieved about EUR 50 million of net cost reduction in T-Com Germany. So I think I would like to ask where the EUR 800 million is going to come from the second half. Do you still have confidence in that target of EUR 900 million in net reduction in the cost based. And actually changing in H2 relative to H1, so that the net cost reduction accelerates?

And the second question I have is just on the cost target as well pleased with regarding the head count agreement you reached with the union. Do you say the full benefits of this the EUR 700 million per annum already going to kick in from 2010? Why that the case please and why they are not kicking in really from 2008 onwards? Thank you.

Stephan Eger

Hi, James, it's Stephan. Just on the question with cost reduction. So when we speak about the cost reduction always we are speaking about the Save for Service program and you know that our target for BBFN for the full year is 1.2 billion of that in the first half year, we've achieved 500 million. So, there is another kind of roughly 800 million yet to go.

In the first half, you're right. If we speak about the net cost reductions obviously we had some other factors impacting our costs on the OpEx side. Obviously, we had the strike. We had external contractors, where we had to pay 200 million for which was also an outcome of the strike. Now with increased working hours, with the cost savings kicking in from Telekom Service, I think, we're more than confident that we can significantly reduce outsourcing and therefore get these costs down in the second half.

We also had increased SACs brought out of T-Point. We had other factors, which were kicking in on the costs side in the first half especially also distribution costs, and subscriber acquisition costs, which we not necessarily would see in the third quarter coming in. And also bear in mind that the impact of Telekom Service is only kicking in the second half.

So, all the effect of the 6.5% price production, increase in working hours that is only to be kicking in the second half. So, we are more than confident to reach the 1.2 billion cost savings from the Save for Service program as well as the 900 million OpEx reductions that we are talking about.

Secondly, on the headcount impact. We are speaking about cash, cash cost reductions which will be kicking in from 2010 and that's why obviously it looks like we pay a compensation, which is full compensation for the remainder of the year 2007 and 2008, and two-thirds in 2009, and one-third in 2010. That's why the full cash impact will be kicking in by 2010.

Operator

Mr. Damien Maltarp from Cazenove. May we have your question please?

Damien Maltarp - Cazenove

Thanks. Damien Maltarp from Cazenove. Three questions, just looking at the provisions in your balance sheet, the movements in your cash flow statement, it looks like there has been about a EUR 250 million provision release to the P&L. You did mention the reverse net income tax accrual does that account for the majority of it or is there anything else that you could highlight within that particular?

And the second question, apologies, but just going back to the broadband market the outlook commentary in your report for broadband line growth does look like more cautious in Q2 relative to the commentary in your Q1 report. Perhaps, you could just get into why that is the case? What has changed over the last few months to make it a bit more cautious? Thanks.

Karl-Gerhard Eick

The release of provision, I think, you've mentioned an important one, which was, I think the tax provision you've mentioned. And then I think, there is more or less very minor provision releases we've seen, which was not that significant. I would say a more normal course of action, normal course of business.

Damien Maltarp - Cazenove

The broadband line growth I'm not sure, I understand what you are referring to are you referring to any change in forecast for this year, and I'm not aware of that. Just a wording in the report in the outlook section for the report, just to read a little bit more cautiously in this report relative to the Q1 report maybe I'm just reading too much into it. But just sounded like there was a slight change of time there?

Rene Obermann

I think if there is a slight change in time it is not intended. It would be just segmentical. There is no change in ruling.

Operator

Mr. Andrew Beale from Arete Research may you ask your question please.

Andrew Beale - Arete Research

Hi, one question on BBFN on domestic and one on T-Mobile UK please. On BBFN on domestic can you explain why wholesale revenues were down very heavily over the Q1 or perhaps there was one of set to the positive in the first quarter, I would like to understand that.

Secondly, looking again at T-mobile in UK, I think if you compare your margin first half with Virgin mobile, Virgin mobile's margin in the first half is the virtual operation on your network and obviously pays the way sort of 20% gross margin to you. You have at the same margin, I guess the question is does not suggest there is something a bit wrong with the commercial offering at the moment or in term or the way that you are still approaching disposition side of the market and do you have any rules and how you modify them? Thank you

Rene Obermann

The BBFN on domestic wholesale revenue is, it has couple of reasons. One the price have decreased so we have to make some price adjustments as well and also volume went down its also a little seasonal. But bear in mind our strategy is that, we'd like to have a little higher share in direct and we are trying to be very successful in direct sales. And once we cooperate with wholesale partners, our emphasis is being put a bit more on direct sales and some of that became also evident in the discussions which were that almost officially via the media between some of our wholesale partners and our sales when they complained about prices and margins.

But also again as I said, our strategy is more towards direct sales we believe we need to own more of the customer relationship, which doesn't mean we will exclude wholesale in the future, but we are focusing very much on direct.

Virgin Mobile margins we reconstructed the Virgin Corporation contract a few years ago that also was a big public issue in the UK. In that restructured contract we could live much better with and I also think our partner could live as well. I am not sure you should compare one quarter margins and draw that conclusion, but one thing is clear we can't simply restructure an existing long-term contract because the resale partner is very efficient apparently with its costs and has great margin.

So we live with that contract fairly well and I think our partners do as one could deduct from their goods operating margin. But other than that there is no other opportunity for us every quarter, so to change that contract that's an existing long-term one.

Karl-Gerhard Eick

And again as Rene was rightly mentioning one, as one can not although interpret quarterly development, which is also to for your consideration about how is our services. Because it seem may be clear in my reading, my speech that how is the services year-on-year has increased by 5.9% and I don't see any good reason while this trend should not continue until end.

Operator

(inaudible) may you ask your question please.

Unidentified Analyst

Yes, good afternoon gentlemen. Just a returning to the focus on the cost line how your 800 million savings in H1. Could you please give us a break down by how much of those variable namely just as the function of the fact that in our domestic businesses your revenues are contracting and how much sort of fixed cost, you are actually taking currently for the business? And on the second question [Rena] you talked a little bit probably more enthusiastically then you have done about mobile elasticity in the Germany are you suggesting, as you think, the costs that we are actually seeing it comes through T-Mobile Germany's numbers. So, we should start to see quite strong pickup in usage growth. Thank you?

Rene Obermann

Let me start with the second point. Elasticity is still not bigger than one if my calculation is right it's still below one. But it's gradually picking up. I'm still of the belief that long-term that mobile voice is an untapped potential still to be honest. And I know, it's been, I keep talking about that since quite a while, and hasn't get fully materialized. But I just believe in it that at some stage we will see this runaround, and we will see an over proportionate increase in minutes particularly in the contract side of the business.

But I would not yet say we will see the elasticity bigger than one very soon. It may still take a while. Customers get, I mean, it takes a long time to change prospect minds or customer's mind, who got use to high mobile pricing for many, many years. You see a similar phenomenon in roaming even though roaming rates have been now significantly cutback. There is still some reluctance in using it extensively when aboard. So, I think, we're going to see better elasticity let's talk about it in our next conference call and compare results again.

Karl-Gerhard Eick

And to give some more details about the cost reduction amounting 800 million in the first semester difficult to say how much was fixed, how much also reliable. First and foremost, I would want to say this is not a reduction of manufacturing costs. And let me give you some more details. For example in common production, we've reduced our costs by slightly more than 200 million coming out of the migration to IP based networks and the reduction of OpEx in our infrastructure, which you clearly could describe as being fixed cost.

If we look into common IT, where we have reduced our costs by little bit less than 100. The standardization of our worldwide IT architecture also were considered to be kind of fixed cost as well as the reduction of our IT cost due to standardization in hardware and software.

Sales up to 200 million. This comes out of the harmonization of our sales channels as well as out of the optimization of processes and IT. Marketing slightly more than 100, which is a reduction primarily out of our marketing budget, which goes in line with the increase of our marketing efficiencies.

And last, but not least, shared services also up to 200 million, where we have seen cost reduction order for this reduction of our real estate which goes nicely in line with our disposals of real estate. So, basically it's not as reliable, and as one could expect. It is the assumption of the revenue development, but it's considered to be more kind of a fixed cost structure. In general that's how, I think, I can describe it.

Operator

Mr. (inaudible) Securities, your question please?

Unidentified Analyst

Hi, I've got two questions. The first one is regarding the roaming impact. Could you quantify the effect both for revenues and EBITDA for 2007 and 2008? And could you update us on the mobile termination in Germany? Thank you?

Karl-Gerhard Eick

For '07 the roaming, the new impact of new roaming regime is being factored in our guidance. So you should not expect any negative surprise coming from that. In fact we had some tariffs are ready on that level, which bundled and finally determine to be the right level. So it didn't hit us all that hard, but it's affected in any way. '08 I would have to look at the number what additional impact in '08 of the new roaming rate is. Bear in mind we are also getting some better IOTs into operator tariff. So what the net effect on our margins is. I don't consider that great, but I would have to look at the number.

Mobile termination we saw the latest trend last year, end of last year it kicked in first time in November. I think there is another rounds for mobile termination rates will have to go down the end of this year or early next year. And there is gliding part it's also affected in our calculation so no more detail on this one.

Operator

(inaudible) Capital, may you ask your question please.

Unidentified Analyst

Thank you. Thanks for that detail on MySpace for T-Mobile USA. Can you just refresh you term $4 a month and mentioned a $75 can you just go through what the revenue impacted of those customers. And then the T-Mobile HotSpot@Home I mean I am using it here, it works great. I am just curious if you can provide any information just like you did for MySpace, as far as the number of users that have signed up since the product have launched. I also see that on some of the FCC approval webpages here that you have gotten an approval for a new router that offers basically a telecom port. So is there a plan in 2007 to start offering home VoIP services in addition to the HotSpot@Home functionality that exist today? Thank you

Rene Obermann

MySpace you asked for more details I'm afraid I don't, I can't give you any more details. Overall ARPU in the US went up by $1 we shared with you the data points of 1.75, which was data revenue increase of those users so. But it actually tells you something about the type and the quality of those customers, who choose that service and will make use of the very customer friendly easy to use interface for instance, which makes messaging easier to use. So customers use it more intensely.

HotSpot@Home, there is no more detail at this point in time to be reported. I think its little too early since we only started that product recently. Let see how it goes the early reception, also the media reception for instance in the, I believe it was the New York Times there was a senior journalist described it as, it was described next to the iPhone as being one of the key innovation in the US mobile market, but its really to early too talk about any KPIs on this topic. We will update you as soon as we feel its relevant and we have enough substance. New router and telecom ports I can't make any product announcement here nor I will give you any product indication of our roadmap, forgive me on this one. It would just not be right.

Operator

Mr. [Christian Kenny] from Lehman Brothers. May you ask your question please?

Christian Kenny - Lehman Brothers

Hello. It's Christian Kenny from Lehman. And just two bigger picture questions I guess. The first one is you touch an inter-market consolidation, can you just share your thoughts on the UK and potentially Germany with that place. The second one would be on an update with regards to center sales we last discussed this at 3GSM in Barcelona? Thank you.

Rene Obermann

The last question I didn't understand, can you repeat it?

Christian Kenny - Lehman Brothers

An update on (inaudible), Rene. Where you just talk us that last at the 3GSM in Barcelona?

Rene Obermann

Yes. I still denied some center sales. I don't may be it's my, center sales. Just check on refresh my memory here. Internal market in the UK, I think it's clear that the market is overheated, and that's the market is particularly still very much impacted by the overcapacity. But I also think that all competitors have similar issues. It seems like and everybody is trying at the moment to get a more balanced approach and trying to improve some margin at least that's what my take, and my read of the market is.

I cannot know is there any speculation on by whom, what would we do is, I just simply can't understand. And the same applies to Germany. Germany has four players. UK has five networks. Germany has four. And I don't think the piece of cake, if one was buying the other for regulatory reasons, because the German market after all is sizeable. And also to be honest, I think the German market is still quite a healthy market, when it comes to operating margins between in the mid 30% to 40% in that range.

Also our EVA on the German business, our return on capital in the German business is high end. And of course we'd like to improve our margin still, but over all it's a good business. So, I don't think the German market is as difficult and problematic as the UK market, and you are more poised to judge, who is buying whom in the UK than I'm.

Center sales, so that's the in-home sell side. It's an interesting concept in general but we believe that UMA, which uses the Wi-Fi access as a transparent backchannel basically to the GSM domain. So, that every services managed by ourselves including the billing is for us the more feasible concept. It's technically proven. It's working and helps us to achieve both customer additional value as well as capacity increase and cost efficiency.

Operator

We would like to thank you for participating at this conference. The recording of this conference will be available for the next seven days by dialing +496992053333. We are looking forward to hear from you again. Good bye.

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Source: Deutsche Telekom AG Q2 2007 Earnings Call Transcript
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