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Despite €100B in sales, Deutsche Telekom fails to excite

Try as he might, Timotheus Höttges simply cannot enthuse shareholders about the performance of Deutsche Telekom, the company he manages. "2020 was a record year for Deutsche Telekom," he proclaimed on a call with reporters today, reeling off a list of impressive achievements. Sales and profits have soared, customer numbers have grown and dividends are still paid. Yet the German incumbent's share price remains about 5% lower than it was five years ago, when Höttges was far less ebullient.

Net debt remains a worry. At €120.2 billion (US$145.6 billion), it exceeds Deutsche Telekom's market capitalization by around €49 billion ($59.4 billion) and is outside its own safety zone. That constrains the company's ability to invest in higher-speed networks, acknowledged Christian Illek, its chief financial officer, although he expects leverage to fall in the next two to three years.

Despite the constraints, Deutsche Telekom plans to pump €18.4 billion ($22.3 billion) into capital expenditure this year, about €1.4 billion ($1.7 billion) more than it spent in 2020. Shareholders might ask why, given the disappointing returns on telecom infrastructure investment. Deutsche Telekom's refusal to boost dividend payments when profits have rocketed could also have been unpopular. Dividends per share were cut from €0.70 in 2018 to €0.60 the following year. They remain at that level.

Deutsche Telekom's Timotheus Hottges (right) is big on network construction.
Deutsche Telekom's Timotheus Höttges (right) is big on network construction.

A 5% decline in the share price over the last five years compares very favorably with the 63% collapse in Telefónica's stock and the 43% nosedive that Vodafone has seen over this period. But the only real difference between those operators and Deutsche Telekom is the German firm's successful expedition across the Atlantic, where its T-Mobile US business, strengthened by last year's merger with Sprint, continues to embarrass rival operators AT&T and Verizon on customer acquisition. The long-term goal, said Höttges, is to become the biggest mobile operator in the US.

It was thanks to US growth that Deutsche Telekom managed to cross the €100 billion ($121.2 billion) revenue milestone for the first time ever, with 2020 sales up one quarter, to nearly €101 billion ($122.4 billion). Basic earnings soared 41.6%, to €35 billion ($42.4 billion), and net profit was up 7.5%, to about €4.2 billion ($5.1 billion). Takeover activity last year had a flattering effect on the headline figures.

Of course, T-Mobile US was on a roll long before it acquired Sprint. Many observers thought that deal might slow it down, forcing managers to prioritize integration over marketing and customer growth. Far from it, judging by a like-for-like comparison. The "organic" improvement in adjusted earnings for the group came in at about 8%, said Höttges. "That is the number of the day."

America booms while Europe swoons

But the Deutsche Telekom group looks far less vibrant and dynamic without the US included. Sales in Germany were unchanged last year, and they fell both in Europe and at the long-suffering and loss-making T-Systems business. Higher profitability in Germany – with basic earnings up 1.6%, to €9.2 billion ($11.2 billion) – owes everything to cost savings and better efficiency. That includes a headcount reduction of more than 3,000 employees, some 4.4% of the German total.

Efficiency is not to be sniffed at. The completion of what Höttges described as a "gargantuan" shift to all-IP technology, which has cost about €1 billion ($1.2 billion), allows Deutsche Telekom to shut down older platforms. "It means we can offer broadband lines and integrated product bundles to more customers," he said. "We can bring products faster than ever and customers can manage their own lines and it is much easier to provide remote assistance in the event of a problem."

The operational figures are certainly encouraging. They include the addition of 121,000 broadband customers in the recent fourth quarter, up from just 47,000 adds a year earlier. With the completion of the all-IP program, line losses slumped to just 12,000, from a painful 172,000 in the fourth quarter of 2019.

How Deutsche Telekom is faring against troublesome cable rivals is unclear from its latest report, but Höttges was scathing about their ability to compete with full-fiber technology. "It is a shared medium. You are not offering gigabit connections," he said. "We will consistently hammer home the message we are offering high-speed lines."


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But the investment challenge that confronts the German telco is huge. By 2024, it plans to cover about 10 million properties with full-fiber networks, up from just 2.2 million today. Funds that previously went toward all-IP migration and copper-based broadband technologies will be redirected, and annual capital expenditure in Germany is forecast to rise from €5.5 billion ($6.7 billion) to €6 billion ($7.3 billion) over this period. But the message today was that other telcos would have to play their part if Germany is to have a nationwide full-fiber network by 2030.

In the meantime, Höttges is clearly miffed with German authorities when it comes to broadband deployment. Obtaining planning permits and laying cable remains far harder than in other European countries now better served by full-fiber networks, he told reporters. "Look at Spain and other countries. They are more practical," he said. "What we need at the federal level are better framework conditions."

He is equally upset by the so-called "ancillary cost privilege," whereby cable TV fees are automatically included in rental costs for some German apartment buildings. That shuts off a part of the market to broadband competition, according to Deutsche Telekom. "Twenty-five percent of the market doesn't have any competition because of this and no possibility to reuse infrastructure that is available on the streets," said Höttges. "This isn't customer friendly or promoting competition and the EU says it is unlawful."

The Huawei problem

Another worry for investors is Deutsche Telekom's heavy reliance on Huawei, a Chinese vendor that still elicits security concerns in Europe and the US. With an eye on German exports to China, Angela Merkel's government has refused to copy some other governments and impose restrictions on Huawei, and Deutsche Telekom thinks it can mitigate risk by keeping Chinese products out of its core network systems. But any change in the German political climate could be costly. Huawei provides about 65% of Deutsche Telekom's radio access network and has been largely responsible for a 5G rollout that now covers two-thirds of the German population.

The operator has also confirmed to Light Reading that Huawei provides the server equipment used by T-Systems to support cloud services for business customers. That is the fastest-growing part of Deutsche Telekom's business, with cloud revenues up 30% last year, according to Illek. Any future disruption might hurt T-Systems badly. The decline of its old-fashioned IT business meant total revenues fell 5.6% last year, to €4.2 billion ($5.1 billion). And operating losses widened by €225 million ($273 million), to €650 million ($788 million).

Deutsche Telekom remains not only Europe's biggest telecom operator but also its star performer. Its US business has confounded critics who thought successes would prove short-lived and predicted a Verizon or AT&T revival. But it is thanks only to US growth that Deutsche Telekom can discuss the investment hurdles it confronts in Europe without starting a panic.

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— Iain Morris, International Editor, Light Reading

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