Germany's Deutsche Telekom is targeting €1.5 billion ($1.8 billion) in annual indirect cost savings outside the US market by 2021, with half of that amount to come from staff reductions.
The scale of the planned cuts, revealed at Deutsche Telekom's capital markets day in Bonn this morning, may alarm employees after the operator said it would use automation and digital technologies to achieve savings.
Under an earlier strategy, the operator had been targeting €2.4 billion ($2.8 billion) in annual indirect savings outside the US, compared with costs in 2014. A spokesperson for the operator described today's program as a successor to that initiative and said did not reflect any lowering of targets.
But asked if that implied cumulative savings of €3.9 billion ($3.6 billion) by 2021, compared with 2014, the spokesperson confirmed that Deutsche Telekom AG (NYSE: DT) had failed to achieve the €2.4 billion ($2.8 billion) target and said Timotheus Höttges, Deutsche Telekom's CEO, would provide a full update during a investor presentation later today.
The cost lag, which Light Reading had anticipated in earlier reporting, may partly reflect the German incumbent's failure to realize a 2018 target for all-IP transformation. In today's announcement, Deutsche Telekom said it would not conclude that process for consumers in Germany until next year. (See DT 'Cost Lag' Could Overshadow Transformation Agenda.)
Under the latest cost program, it expects about €750 million ($881 million) in savings to come from the sale of real estate and other measures related to the all-IP transformation, including the shutdown of older IT platforms.
The other €750 million ($881 million), it seems, will come from headcount reductions at the business. The operator is not disclosing its targets for planned job cuts, said Deutsche Telekom's spokesperson, but has already struck agreements on staff reduction measures, including a phased retirement initiative that will come into effect at the end of this year.
The remarks hint at positive progress during talks with German labor unions, which have previously held up efforts to reduce the size of the overall workforce.
Deutsche Telekom cut only about 1,000 jobs last year, leaving it with around 217,350 employees in total at the end of 2017. Those cuts followed a much bigger cull in 2016, however, when nearly 7,000 roles were terminated.
A commonly used accounting measure, indirect costs are expenses that cannot be allocated to a specific project or function, such as a facility or service a company has developed. They often include many personnel and administrative costs, for example. Together with direct costs, which can be attributed to particular items, they make up a company's operating costs.
Following previous analysis of Deutsche Telekom's various financial reports, Light Reading had established that operating costs were not falling as quickly as the German operator would like.
Deutsche Telekom does not break out details of total operating costs in financial statements. Yet by deducting earnings (before interest, tax, depreciation and amortization) from revenues, one can arrive at a ballpark figure. Last year, this was €26.3 billion ($30.9 billion) outside the US, just €680 million ($798 million) less than in 2014.
The lag is unsurprising given relatively slow progress on all-IP transformation and Deutsche Telekom's related pan-net overhaul, which entails the replacement of networks and service platforms in individual countries with more cloud-based regional infrastructure.
During a presentation at Mobile World Congress in March, Deutsche Telekom complained that suppliers were still not developing the open and fully interoperable technologies it needs to realize its pan-net vision. (See DT Demands Automation, Cloud Tech From Pan-Net Suppliers.)
Other large telcos have similarly complained that network functions virtualization (NFV), which figures prominently in Deutsche Telekom's pan-net plans, has failed to live up to expectations so far. (See NFV Is Down but Not Out.)
In today's announcement, Deutsche Telekom clung to previous guidelines on growth in revenues and earnings. It expects overall sales to increase by 1-2% annually between 2017 and 2021 and is forecasting a 2-4% increase in adjusted EBITDA over the same period. Dividend payments to shareholders will track the development of adjusted earnings per share, which will rise from €1 ($1.2) in 2018 to €1.2 ($1.4) in 2021, said the operator.
Deutsche Telekom faces huge investments in network infrastructure to cope with the demands of future 5G networks. Accordingly, it plans to increase the number of basestations in Germany from 27,000 in 2017 to 36,000 in 2021.
It has also indicated that it will deploy fiber-to-the-home networks to around 2 million households every year starting in 2021, under the right regulatory conditions.
That update might disappoint those hoping for a much bigger all-fiber commitment from Deutsche Telekom. Complaining about cost and regulatory constraints, the company is relying heavily on technologies that boost the capability of last-mile copper networks to meet broadband needs.
At the time of publication, Deutsche Telekom's share price was trading down about 1.7% in Frankfurt following today's update.
— Iain Morris, International Editor, Light Reading