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Deutsche Telekom Raises Outlook on US Growth

Iain Morris

Deutsche Telekom has raised its earnings outlook for the full year after its US business delivered another impressive set of results for the second quarter.

The German incumbent is now aiming for €23.4 billion (US$27.1 billion) in adjusted earnings (before interest, tax, depreciation and amortization), up from a previous forecast of €23.2 billion ($26.9 billion).

Deutsche Telekom AG (NYSE: DT)'s share price was up 0.6% in Frankfurt at the time of publication, to €14.35 ($16.64), but has fallen 3.6% since the beginning of the year.

In what has become a familiar story for Europe's biggest operator, results were buoyed by gains in the US market, where its T-Mobile US Inc. subsidiary continues to grow much faster than its competitors. In Germany and the rest of Europe, meanwhile, Deutsche Telekom has been trying to defend its businesses against both mobile and fixed broadband challengers. (See T-Mobile: 5G Lets Us Take Broadband Across America .)

Hit by dollar weakness and accounting changes, it reported a 2.8% fall in revenues for the second quarter, to around €18.4 billion ($21.3 billion), compared with the year-earlier period. The operator's adjusted EBITDA shrank 0.3%, to €5.9 billion ($6.8 billion), while net profit was down 43.4%, to €495 million ($574 million), due to the costs of a legal battle against Germany's government over a problematic system for collecting truck tolls on German roads.

T-Mobile US, which previously reported results, added another 1.6 million customers in the quarter, marking its 21st consecutive quarter of million-plus growth, and now has 75.6 million subscribers overall. In dollar terms, its service revenues were up 6.1%, to $7.8 billion, while EBITDA rose 5.1%, to $3 billion.

Deutsche Telekom is seeking approval for a merger of T-Mobile with rival Sprint Corp. (NYSE: S) that would leave the US with just three large mobile networks. The companies say a tie-up would put them in a stronger position to invest in new 5G networks and challenge market leaders AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), but opponents worry that a reduction in competition would lead to higher prices for consumers. (See T-Mobile & Sprint: Marriage Made in Hell.)

"T-Mobile and Sprint make this song and dance about being pioneers in 5G but you are reducing the number of mobile players in the US. Are you really going to promote competition? I don't think so," said Paolo Pescatore, an independent analyst formerly at CCS Insight, during a phone call with Light Reading.

In Germany, Deutsche Telekom has been focused on persuading customers to buy its "converged" services, which bundle fixed and mobile products in a single bill under the MagentaEINS brand. While it lost 137,000 mobile contract customers, to finish the quarter with about 24.9 million, Deutsche Telekom said about 3.9 million customers were now on its MagentaEINS deals, up from 3.4 million a year earlier. (See DT's Jan van Damme Flexes Quads.)

Deutsche Telekom added 80,000 broadband customers, giving it a total of about 13.4 million. Around 6.6 million of those are using fiber-based products, up from 6.2 million a year earlier.

The German operator has been investing in a high-speed technology called vectoring, which boosts copper-based connections by cutting out noise interference between lines. It is now rolling out another copper-fortifying technology called super-vectoring, which is currently available to about 6 million homes and boosts connection speeds to a theoretical maximum of 250 Mbit/s. Deutsche Telekom aims to cover two thirds of Germany with super-vectoring by the end of next year.

However, it has shied away from any large-scale investment in all-fiber networks -- citing cost and unfavorable regulation as barriers -- despite political concern about Germany's "gigabit" lag. (See Germany's Gigabit Lag.)

The Vodafone-Liberty threat
Deutsche Telekom's German challengers may grow stronger, too. CEO Timotheus Hφttges is clearly worried about a planned merger between mobile rival Vodafone Germany and Liberty Global's Unitymedia GmbH cable business, and believes German regulatory authorities should block the deal on competition grounds. (See DT CEO to Fight Vodafone-Liberty Deal and Vodafone Pounces on Liberty Cable Assets in €18.4B Deal.)

Vodafone already owns a large cable network thanks to its previous takeover of Kabel Deutschland, and would expand its broadband footprint with a Liberty Global Inc. (Nasdaq: LBTY) acquisition. It does not think the deal will encounter regulatory opposition because there is little overlap between Kabel Deutschland and Unitymedia.

Pescatore remains as unconvinced of the benefits of such consolidation as he is about the T-Mobile-Sprint deal. "Despite not having huge geographical overlap, you would be reducing the number of national players from three to two and I don't think that can promote competition," he told Light Reading.

A merger would create a "formidable force" in Germany, Pescatore added in emailed comments. "The outlook remains challenging for Deutsche Telekom in light of the Liberty Global and Vodafone deal."

Reported revenues in Germany slipped 0.9%, to €5.3 billion ($6.2 billion), while adjusted EBITDA rose 1.9%, to about €2.1 billion ($2.4 billion). Deutsche Telekom cut nearly 700 jobs in Germany between April and June, leaving it with a German workforce of 63,872 employees, according to its earnings update.

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The European business, which serves customers across a number of markets in central and eastern Europe, reported a 1.3% increase in revenues, to about €2.9 billion ($3.4 billion), and saw adjusted EBITDA rise 0.6%, to €953 million ($1.1 billion).

The underperforming Systems Solutions (T-Systems) business, which has been the recent focus of restructuring efforts at Deutsche Telekom, flagged a 0.8% dip in revenues, to about €1.7 billion ($2 billion). Deutsche Telekom blamed investments in growth areas for an 11% drop in adjusted EBITDA, to €121 million ($140 million), insisting the unit was "on track" to meet targets.

The operator aims to reduce annual costs at T-Systems by around €600 million ($696 million) by 2021 and has indicated that several thousand jobs will go under this plan. (See DT Will Cut 10k Jobs at T-Systems – Report.)

Under a group initiative revealed earlier this year, Deutsche Telekom wants to realize €1.5 billion ($1.7 billion) in annual indirect cost savings outside the US market by 2021. It expects half of that amount to come from staff reductions. (See DT Targets €1.5B in Automation Savings, Misses Former Target.)

Given Deutsche Telekom's overall labor costs in the 2017 financial year, the implication is that around 10,000 jobs will go under this program. Despite cuts in Germany, the operator's total headcount has fallen by just 142 so far this year, to 217,207 employees, with recruitment elsewhere offsetting the German reductions.

— Iain Morris, International Editor, Light Reading

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