Deutsche Telekom Reports Q2 Profit of €530M
BONN, Germany -- With its new strategy, T-Mobile US convincingly reversed the trend in new customer business in the second quarter. Deutsche Telekom's U.S. subsidiary recorded 688,000 new branded postpaid customers between April and June as compared with a loss of 557,000 in the prior-year quarter.
Deutsche Telekom also recorded customer growth in other markets, such as in Germany, with 434,000 mobile contract net additions and at European subsidiaries with 258,000 contract additions. In total, the Group gained around 1.38 million new mobile customers. The number of television customers increased by 121,000 in the quarter and 44,000 broadband customers were also added.
"We are winning droves of customers on both sides of the Atlantic. Our strategy is bearing fruit: We are in the middle of a massive turnaround in the United States and we want to carry on along this successful course. We are prepared to spend more on high-value growth this year than previously planned," said René Obermann, Chairman of the Board of Management of Deutsche Telekom. "In Germany, we have regained market leadership in terms of mobile service revenues thanks to our well-known best network quality and top service. And we gained more customers at European subsidiaries, too."
T-Mobile US's management is planning to invest more in customer acquisition and marketing for the rest of the year. The aim is to increase the number of branded postpaid customers by another 500,000 to 700,000 in the second half of the year. That means net growth in postpaid customers for the full year of between 1.0 and 1.2 million. Until now, the forecast had been to keep the customer base roughly stable in 2013.
This impacts on the Group's planning figures. Deutsche Telekom therefore expects adjusted EBITDA of around EUR 17.5 billion for the full year. Previously, the pro forma figure including MetroPCS for the entire year was EUR 18.4 billion and the figure including it for the actual eight months was EUR 18 billion. The current difference is the consequence of a conscious decision to continue T-Mobile US's growth course. There are no other changes regarding the rest of the Group.
The same applies to free cash flow, which is now expected to total around EUR 4.5 billion for the full year as opposed to the previous expectation of EUR 5 billion. The strong customer growth with a high level of handset sales, including the iPhone, also has an impact on the proportion of free cash flow Deutsche Telekom receives from the United States.
Revenue increased by 5.4 percent in the second quarter of 2013 compared with the same period last year to EUR 15.2 billion. This was due to the first-time consolidation of MetroPCS following the merger with T-Mobile US as of May 1, 2013, as well as much higher revenue from handset revenues in the United States thanks to strong new business. Revenue increased organically by 2.1 percent. At the same time, adjusted EBITDA declined 6.0 percent to EUR 4.4 billion due to increased expenditure in the United States.
In terms of cash capex, the Group increased its capital expenditure by 35 percent in the second quarter to EUR 2.2 billion, mainly due to the rapid build-out of the US mobile network. Free cash flow declined by 33.5 percent to EUR 1.1 billion. Reported net profit developed positively in the second quarter compared with the prior year, increasing by 10.0 percent to EUR 530 million. Adjusted net profit declined by 1.5 percent to EUR 820 million.
In its home market, Deutsche Telekom recorded encouraging trends in the second quarter of 2013. In mobile communications, the company regained market leadership in terms of service revenues. Adjusted for the cut in mobile termination rates (MTR), a plus of 1.0 percent was recorded compared with the prior year; in unadjusted figures, a minus of 1.0 percent was recorded. That makes Deutsche Telekom the only one of the four network operators in Germany to record an improvement in 2013.
In the second quarter, the Company increased its mobile contract customer base by 434,000. In addition to resellers (service providers), new customer growth was also attributable to 157,000 new customers under the Deutsche Telekom and Congstar brands. Customers once again confirmed the Company as having the best network quality in fixed-network and mobile communications, for example in the reader awards of the trade journal Connect. More than a third of the one million smartphones sold in the second quarter were LTE-enabled devices. Data revenue, up 17.6 percent, remains one of the driving forces in mobile communications and now generates more than a third of service revenues.
In the fixed network, the boom in sales of fiber-optic products continues. The total number of lines (VDSL and FTTH) climbed by 126,000 to 1.27 million in the second quarter. Of these customers, 45,000 came from the wholesale sector, mainly due to the successful launch of what is known as the contingent model. The number of fiber-optic connections increased by 69 percent within a year.
Revenue in the Germany operating segment remained almost stable in the second quarter of 2013, down 0.8 percent compared with the same period in the prior year, and amounted to around EUR 5.6 billion. Adjusted EBITDA fell 2.9 percent to EUR 2.3 billion due to an increase in investments in the market, which equates to an adjusted EBITDA margin of 40.6 percent and is in line with the target of around 40 percent in 2013.
At T-Mobile US, business development was shaped by three main issues in the second quarter: the first-time consolidation of MetroPCS from May 1, the conversion of the rate model as part of the "Un-carrier" strategy, and the increased investments in the market in connection with the drastic increase in sales of smartphones, including the Apple iPhone since April 12.
Revenue climbed 28.8 percent in the second quarter to USD 6.3 billion. In addition to the first-time consolidation of MetroPCS, this was primarily due to much higher revenue from handsets. The large number of new customers and existing customers acquired 4.3 million smartphones in total in the second quarter, accounting for 86 percent of all handsets sold. In the second quarter of 2012, by contrast, just 2.1 million smartphones were sold. Substantial increases in costs for customer acquisition and intensified marketing led to a 10.3 percent decrease in adjusted EBITDA to USD 1.2 billion.
As of June 30, 2013, T-Mobile US's customer base had grown to 44 million. Of these customers, 8.9 million prepay customers were attributable to the first-time consolidation of MetroPCS. Another 1.13 million were added across all customer segments in the second quarter of 2013, whereas there had been a decline of 205,000 customers in the prior-year period.
Behind this strong customer growth is the "Un-carrier" strategy combined with a broad modern handset portfolio. T-Mobile US has radically simplified its rate system, made it yet more attractive compared with its competitors' systems, and separated the mobile service contract, which can be terminated at any time, from the handset contract. At the same time, the roll-out of the LTE mobile network was accelerated. The network now covers 157 million people, compared with the original plan of covering around 100 million people by the middle of the year.
This strategy produced clear results in the second quarter. Gross new postpaid customer growth increased by 77 percent compared with the prior-year quarter to around 1.5 million. The churn rate in the postpaid customer segment fell to a record low of 1.6 percent. The relatively small net decline in the prepay customer base is attributable to migration of prepay customers to postpaid contracts. In business with service providers, T-Mobile US recorded net customer increases of 319,000, which is more than ten times as much as in the second quarter of 2012.
The Europe segment performed well in the second quarter in terms of customer numbers and growth areas, but continues to come up against regulatory decisions and intense price pressure in many markets, as well as the continued difficult overall economic situation.
Total revenue in the Europe operating segment declined 4.5 percent year-on-year to EUR 3.4 billion. Reduced mobile termination rates account for around 80 percent of this decrease. In addition, competition-induced price reductions and the ongoing strained economic situation continued to put revenue under pressure. Adjusted EBITDA fell by 7.4 percent to EUR 1.1 billion, driven mainly by declining revenue in almost all countries of the segment, as well as additional expenses for marketing new rate plans in the Netherlands and Austria. This is partially offset by efficiency enhancement measures at several national companies, which are having a positive impact on adjusted EBITDA, especially in Greece.
The growth areas in the Europe segment accounted for 21 percent of total revenue in the second quarter. TV business in particular recorded a positive trend, with revenue growth of 18 percent year-on-year. B2B/ICT also performed well in the second quarter, with revenue growth increasing to 7.7 percent from 4.3 percent in the first quarter. Mobile data revenue grew by 8.4 percent.
The trend in customer numbers is also encouraging. Including the business customers in Hungary who have been transferred to T-Systems, the number of mobile contract customers in the Europe operating segment increased by 258,000, the number of TV customers by 79,000, and the number of broadband customers by 58,000.
A further increase in efficiency at T-Systems resulted in another improvement in profitability in the second quarter. The Market Unit – which is primarily responsible for external business with Deutsche Telekom's corporate customers – generated an adjusted EBIT margin of 2.9 percent in the second quarter. This is compared with 1.4 percent in the same quarter of 2012.
The industry environment remained difficult with ongoing price pressure, which contributed to a 2.3 percent decrease in revenue to EUR 1.9 billion at the Market Unit. Adjusted for sales of operations in France and Italy as well as currency effects, the Market Unit's revenue remained more or less unchanged. By contrast, at the Telekom IT unit – which handles the Group's internal IT business in Germany – revenue declined by 30 percent. This high rate is due to the postponement of an internal IT project.
Order entry increased by 3.1 percent year-on-year to EUR 2.0 billion in the second quarter. The biggest deals included an agreement with the Finnish industrial company Kone. For the first half of the year, new orders increased by 16.6 percent to EUR 4.1 billion compared to the first six months of 2012.
Deutsche Telekom AG