DT Earnings: US Parties On, Europe Hungover

Deutsche Telekom's quarterly earnings story is becoming as predictable as a hangover after a night on the pilsner, with bounding growth in the US flattering Group figures that conceal declines everywhere else.

It was no different in the German operator's July-to-September quarter, as sales and earnings were buoyed by the strong performance of T-Mobile US Inc. -- which has gained more than 8.1 million customers since September last year -- despite difficulties elsewhere.

Group revenues rose 5.9%, to €18.1 billion (US$19.7 billion), compared with the year-earlier quarter, while EBITDA was up 7.2%, to €5.5 billion ($6 billion), over the same period. Net profit grew 30.2%, to about €1.1 billion ($1.2 billion).

The update comes just days after Deutsche Telekom AG (NYSE: DT) was reported to be considering a sale of its 12% stake in the UK's BT Group plc (NYSE: BT; London: BTA), which it acquired in exchange for its 50% stake in mobile operator EE earlier this year. (See Why Deutsche Telekom Might Brexit Too.)

The German incumbent appears to have been spooked by the recent Brexit referendum, which saw UK voters opt to leave the European Union, and is evidently concerned about the implications for BT. "Growth rates in the UK are expected to slow down in light of the uncertainty," said the operator in its earnings report.

The sale of a BT stake currently worth about £4.3 billion ($5.3 billion) would allow Deutsche Telekom to focus on its European heartlands and US activities, although various analysts believe the company is still looking to sell T-Mobile US or merge it with another player.

Previous efforts to negotiate a deal have encountered opposition from US competition authorities and it is doubtful whether a new administration, under incoming President Donald Trump, would look more favorably on merger attempts.

In the meantime, Deutsche Telekom's primary focus is on building a pan-European network that stitches together its collection of fixed and mobile operations in the region. Management figures believe this will sharply reduce costs and speed up service development in countries beset by competitive, economic and regulatory challenges. (See DT's Pan-Net Picks Up the Pace.)

While that project consumes resources without yet delivering a return, Deutsche Telekom is reliant on T-Mobile US as a growth engine, having set a target of increasing revenues and EBITDA at compound annual rates of 1-2% and 2-4% respectively over the 2014-18 period.

Although T-Mobile US remains much smaller than chief rivals AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), it has been growing its market share through clever marketing and appealing offers and served more than 69 million customers in September, up from about 61 million a year earlier.

In euro terms, revenues from T-Mobile US rose 17.3% in the quarter, to €8.3 billion ($9 billion), while EBITDA soared 52.7%, to about €2.2 billion ($2.4 billion).

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Contrast that with developments elsewhere. The German business, for example, witnessed a 0.8% fall in revenues, to €5.6 billion ($6.1 billion), and a 0.9% fall in EBITDA, to €2.1 billion ($2.3 billion).

Marginal growth in mobile service revenues -- for the first time in six quarters -- was offset by a decline in the fixed-line market that Deutsche Telekom blamed on "difficult competition," although revenues from broadband edged up.

Even so, the operator has been losing out to cable companies touting much higher-speed services than it can provide on its last-mile copper connections. Its share of Germany's broadband retail market dipped to 40.1% in the third quarter, from 41.2% a year earlier.

Besides investing in higher-speed technologies, Deutsche Telekom is also heavily promoting its "quad-play" packages, which include fixed voice, broadband, TV and mobile services under the MagentaEINS brand. Customer numbers had risen to about 2.6 million at the end of September, from 2 million last December, although the rate of take-up has been slowing down. (See DT's Jan van Damme Flexes Quads.)

In the rest of Europe, meanwhile, customer losses, price-based competition and adverse regulation combined to send revenues down 1.2% in the third quarter, to €3.2 billion ($3.5 billion), with EBITDA falling 2.7%, to €1.1 billion ($1.2 billion), compared with the year-earlier period.

Perhaps the biggest disappointment, however, came at the T-Systems IT business, which has been positioning itself as an alternative to large US cloud providers for organizations concerned about data security.

Overall revenues at T-Systems fell by 7.7%, to €1.9 billion ($2.1 billion), and while EBITDA doubled, to €71 million ($77 million), it represents just 3.9% of sales.

Deutsche Telekom blamed "strong competitive pressure" and the expiry of some contracts in the previous year for the setbacks.

The German operator's share price was trading down about 1% in Frankfurt at the time of publication.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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