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DT, TI Set to Spend Big

European carrier giants Deutsche Telekom AG (NYSE: DT) and Telecom Italia SpA (NYSE: TI) are set to invest heavily in the next few years to ramp up customer gains in their mobile and broadband businesses.

The news comes as competition for broadband customers intensifies, with local loop unbundling and regulatory changes attracting more players (including non-traditional service providers) into the access market, and as 3G gains momentum in Europe.

Both companies have just announced their third quarter and nine months' financials, with both performing slightly better than analysts' expectations.

DT plans Einkaufsorgie
That's a spending spree. The German incumbent posted revenues of €15 billion (US$17.6 billion), up nearly 5 percent compared with a year earlier, while net income was €2.4 billion ($2.8 billion), compared with a loss of €1.36 billion ($1.6 billion) a year earlier. That growth was driven mainly by the carrier's wireless group, T-Mobile International AG.

But the big news is what DT has in mind for the next two years. The carrier believes its revenues will grow by 5 percent in 2006 and 2007 from the near €60 billion ($70.4 billion) expected for the whole of this year. This should result in 2007 revenues of between €65.2 billion ($76.5 billion) and €66.2 billion ($77.7 billion).

That's way more than analysts at Lehman Brothers forecast: They predict growth of 2.8 percent in 2006 and then 1.1 percent in 2007, with 2007 revenues reaching €61.1 billion ($71.6 billion).

That growth comes at a cost, though: DT plans to ramp up its spending in 2006 by €1.2 billion ($1.4 billion), with the extra cash earmarked for "customer acquisition and the launch of new products next year, the aim being to considerably expand its customer and revenue base," according to the carrier's statement today. That push coincides with the rollout of its fiber-to-the-curb access network. (See DT Flings Billions at Fiber Access.)

DT expects this more aggressive approach to deliver 1 million triple-play customers by the end of 2006, help its DSL customer base to 11.5 million from the current 7.3 million by the end of next year, and sign up 500,000 "dual phone" users (one handset each for home and mobile use) by the end of 2007. (See DT Jumps on Convergence.)

The carrier also expects its mobile subscriber base to rise by 8.2 million by the end of 2006 from the current global base of 83.1 million, though it won't be bolstering that number by counter-bidding against Telefónica SA for U.K. mobile operator O2 plc (NYSE/London: OOM) -- DT has ruled itself out of that potential acquisition tussle. (See Telefónica Swoops In on O2.)

The carrier believes its competitive position will be improved by its cost-cutting measures, announced last week. (See Deutsche Telekom to Cut 32,000 Jobs.)

Overall, then, "sales and revenue growth is taking priority over boosting the operating performance in the coming year." The result? Lower margins next year. DT reckons its earnings before interest, tax, depreciation, and Abschreibung (EBITDA) will be between €20.2 billion ($23.7 billion) and €20.7 billion ($24.3 billion), slightly less than the anticipated figure for 2005. Analysts at Lehman had forecast 2006 EBITDA at €21.4 billion ($25.1 billion).

In a prepared statement, DT chairman Kai-Uwe Ricke noted: "Our intention is to make Deutsche Telekom strong for the future. And that means anticipating the future. For that reason, we will concentrate in the next two years on expanding our business activities and focusing far more on increasing our revenue. We will invest more in the market in 2006 -- primarily in new products and in our customer base -- even if that does weigh on our EBITDA."

The German giant reckons its EBITDA number will recover in 2007, though, and could be as high as €22.2 billion ($26 billion), slightly higher than Lehman's predicted €22 billion ($25.8 billion).

That upbeat assessment wasn't enough to stabilize DT's share price, which sank by 69 cents, nearly 4 percent, to $17.08 in morning trading on the NYSE.

TI goes capex crazy
That's pazzo. Further south, the management at Telecom Italia is also planning to shell out on its broadband and mobile capabilities as it integrates its fixed and mobile businesses. (See TI, TIM Complete Merger.)

And, again like DT, its financials were bolstered by a strong performance from its mobile operations, with strong growth in Italy and Brazil, while broadband growth also helped sales.

In the third quarter, revenues rose more than 6 percent to €7.43 billion ($8.7 billion), while net income was about 22 percent higher than a year earlier, at €850 million ($998 million).

The carrier's broadband growth is notable. It now has 6.36 million DSL customers in Europe, including 5.2 million in Italy (an increase of 1.2 million so far this year) and 1.15 million elsewhere on the continent, up by 731,000 since the end of 2004. It has 469,000 broadband users in Germany, 445,000 in France, and 237,000 in the Netherlands. (See Italians Prep Big French DSL Rollout.)

Now the incumbent is aiming to introduce a welter of new services and deploy the latest technologies in the coming year to encourage further growth -- but that costs money.

Telecom Italia has a planned capital expenditure budget of about €14.3 billion ($16.8 billion) for the three years 2005 to 2007, of which €10 billion ($11.7 billion) is earmarked for investment in "innovation and the development of new technologies," according to a recent statement.

So far this year (in the first nine months) it has already spent €3.2 billion ($3.8 billion) on capital expenditure, €200 million ($234 million) more than in the same period in 2004.

Its technical goals include the ability to offer broadband services powered by ADSL2+ technology, which can deliver access speeds up to 24 Mbit/s, to at least half of Italy's homes by the end of 2006. In mobile, it aims to have 75 percent of Italy's population within range of its 3G services by the same time, and introduce mobile TV services in 2006. (See TIM Trials Mobile TV.)

It also plans to deploy High Speed Downlink Packet Access (HSDPA) and UMA (Unlicensed Mobile Access) technology next year, as previously outlined. (See TI Plans Converged Services and TIM Outlines 3G Plans.)

New services to be launched before the end of this year include the widespread rollout of IPTV (due in 21 cities in December 2005), video calls between fixed videophones and 3G mobile handsets, and special flat monthly rates aimed at families with multiple mobile numbers. TI aims to offer its IPTV services to 35 percent of Italian homes by the end of 2006. (See Telecom Italia Trials IPTV.)

While Telecom Italia is spending, it's also saving through an ongoing initiative called "TI Program '07." By 2007, the creation of a unified IP backbone for both the domestic fixed and wireless businesses, the integration of back office systems, and consolidation of sales and purchasing activities across the group, is due to save the carrier nearly €1.5 billion ($1.76 billion) during 2005-2007 inclusive.

Analysts at Lehman, though, are concerned about the impact of mobile termination rate cuts and handset subsidies on margins in the carrier's wireless business and anticipate "stock weakness." Telecom Italia's share price is currently down by 42 cents, about 1.5 percent, to $27.86.

— Ray Le Maistre, International News Editor, Light Reading

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