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Broadband services

Deutsche Telekom Buoyed by US Growth

Germany's Deutsche Telekom has reported a strong start to the financial year, as continued growth at its T-Mobile US business and an encouraging performance in its domestic market boosted headline results.

The operator appears to have thrived under the leadership of Timotheus Höttges, who replaced Réne Obermann as CEO at the start of 2014 and has presided over a 39% increase in the German incumbent's share price since taking the helm.

Höttges has outlined a vision of making Deutsche Telekom AG (NYSE: DT) the pre-eminent cross-border operator of all-IP networks in central and eastern Europe, but it was the US business that remained the engine of growth in the January-to-March quarter, thanks partly to favorable currency movements. (See T-Mobile Beats Sprint on Subs, Eyes Verizon on Network and T-Mobile US Spurs Growth at Deutsche Telekom.)

Overall revenues rose by 13.1%, to €16.8 billion (US$18.8 billion), compared with the same period in 2014, while adjusted earnings were up 11%, to €4.6 billion ($5.2 billion), after stripping out interest, tax, depreciation and amortization charges.

Although net profit sank by 56.7%, to €787 million ($882 million), the year-earlier figure had been boosted by the €1.5 billion ($1.7 billion) sale of the Scout24 online classifieds business to private-equity group Hellman & Friedman LLC .

Table 1: Deutsche Telekom Headline Results

Q1 2015 Q1 2014 Year-on-year change
Revenue €16.8B €14.9B 13.1%
−Germany €5.8B €5.5B 1.9%
−USA €6.9B €5.1B 36.1%
−Europe €3.1B €3.1B 0.6%
−T-Systems €1.3B €1.4B -9.1%
Adjusted EBITDA €4.6B €4.1B 11.0%
−Germany €2.2B €2.2B -0.9%
−USA €1.2B €0.8B 39.7%
−Europe €1.0B €1.0B -1.9%
−T-Systems €154M €138M 11.6%
Net profit €0.8B €1.8B -56.7%
Free cash flow €0.9B €1.0B -12.0%
Cash capex (before spectrum) €2.5B €2.1B 22.5%
Cash capex €4.4B €2.2B 101.6%
Net debt €46.3B €38.0B 22.0%
Source: Deutsche Telekom

Confirming its full-year guidance of €18.3 billion ($20.5 billion) in EBITDA, up from €17.6 billion ($19.7 billion) in 2014, Deutsche Telekom saw its share price open 1.3% higher in Frankfurt after the publication of results, although shares were trading up just 0.3% at 11:30 a.m. local time.

T-Mobile US Inc. has been increasing its market share at a dramatic clip after pioneering a no-subsidies model that allows customers to separate device payments from service charges. The speedy rollout of 4G and a formal agreement with iPhone maker Apple Inc. (Nasdaq: AAPL) have also brought success.

Deutsche Telekom claimed T-Mobile was the only US operator to increase its number of postpaid phone customers in the first three months of the year. It finished the quarter with 56.8 million customers, up from 55 million a year earlier. Boosted by foreign exchange effects, revenues from the business soared by 36.1%, to €6.9 billion ($7.7 billion), while EBITDA rose by nearly 40%, to €1.1 billion ($1.2 billion).

The German operator also recorded improvements in its domestic market, which accounts for about a third of its sales, outperforming rivals in the mobile sector and picking up another 76,000 customers in broadband.

That compared favorably with the addition of just 20,000 broadband customers in the last three months of 2014 and the loss of 20,000 between July and September.

Nevertheless, Deutsche Telekom continued to lose out to its broadband rivals, including cable operators touting higher-speed services. Its market share slid to 41.3%, according to its own estimates, from 41.6% in the preceding quarter and 42.6% in the same period of 2014. (See DT's Höttges Says Hybrid Is 'Not Answer to Cable', Speed Battle Rages in Germany and Tele Columbus to Launch 400Mbit/s Service.)

Revenues from broadband and TV services -- which are supposed to represent one of the operator's growth areas -- remained static at about €1.3 billion ($1.5 billion) on a year-on-year basis.

Although Deutsche Telekom bragged that line losses in Germany fell to a ten-year low, the unstoppable decline in the voice business sent total fixed-line revenues down by 2%, to around €1.8 billion ($2 billion).

Overall revenues from Germany grew by 1.9% thanks largely to the addition of 289,000 postpaid mobile customers and the related sale of more expensive smartphones. But device subsidies seemed chiefly responsible for a 0.9% fall in German EBITDA, to €2.2 billion ($2.5 billion).

Next page: Weakness in Europe and IT

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iainmorris 5/13/2015 | 9:32:34 AM
German gains This does appear to be one of the strongest performances in Germany for some time, with big improvements in broadband -- even if revenues are still not growing in that area. Still peculiar, though, that T-Mobile US is driving growth when Deutsche Telekom's strategy seems to be all about Europe. There's been less talk of a T-Mobile US sale in recent months, following aborted attempts to sell it to AT&T and Sprint, but is a divestment still on the cards?
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