Broadband services

Deutsche Telekom Depends on US for Growth

Deutsche Telekom has reported an increase in second-quarter sales despite revenue declines at all of its operating units outside the US.

The earnings update shows how dependent the German operator has become on the growth engine of T-Mobile US as the businesses it deems more strategically important continue to struggle.

Overall revenues rose by 2.2% in the April-to-June quarter, to around €17.8 billion ($19.6 billion), compared with the year-earlier period.

While Deutsche Telekom AG (NYSE: DT) was able to record a 3.6% increase in EBITDA, to €4.7 billion ($5.2 billion), its net profit sank by 12.8%, to €621 million ($692 million), because of rising depreciation and amortization expenses.

CEO Timotheus Höttges told investors the operator remained on track to report an "increase" in sales in 2016 as well as €21.2 billion ($23.6 billion) in "adjusted" EBITDA, up from €19.9 billion ($22.1 billion) last year.

The operator's share price was stable in Frankfurt following publication of the latest figures.

Under the leadership of the maverick John Legere, T-Mobile US Inc. has continued to attract new customers through promotional activity while registering healthy improvements in both sales and profits.

It added nearly 1.9 million new connections in the second quarter, including wholesale customers, boosting revenues by 10.1%, to €8.2 billion ($9.1 billion), and EBITDA by 34.3%, to €2.1 billion ($2.3 billion).

But the unit has also been a drain on resources, gobbling up €1.25 billion ($1.4 billion) in capital expenditure in the quarter -- way more than its net profit of €821 million ($915 million) -- because of heavy spending on the rollout of 4G networks.

Despite its turnaround under Legere, T-Mobile US remains dwarfed by market leaders AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), and critics have questioned whether its aggressive strategy will be sustainable in the long term.

Deutsche Telekom has previously tried selling the business to AT&T and Sprint Corp. (NYSE: S), the number-four player, but seen those efforts scuppered by regulatory authorities concerned about a lessening of competition.

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Closer to home, the picture looked grimmer for the German operator.

In its domestic market, revenues fell by 3.1%, to €5.4 billion ($6 billion), while EBITDA was down by 12.2%, to €1.8 billion ($2 billion).

Although Telekom Deutschland GmbH was able to growth in fixed-line service revenues for the first time in seven quarters, its mobile service revenues dipped by 0.8%, having grown by 0.1% in the year-earlier quarter.

In that respect, it was outperformed by number-two player Vodafone Germany , whose service revenues fell just 0.3% in the quarter.

As a result of fierce competition from Vodafone, as well as low-cost MVNOs using the network of Telefónica Deutschland GmbH , contract net additions fell to 156,000 in the April-to-June quarter, from 408,000 in the year-earlier period.

Moreover, while Deutsche Telekom picked up new broadband subscribers, and flagged good progress on customer conversion to fiber-based products, its share of Germany's retail broadband market fell to 40.4%, from 41.3% a year earlier, owing to the challenge from the country's cable operators.

Revenues throughout the European region fell by 3.2%, to €3.1 billion ($3.5 billion), with EBITDA holding steady at around €1 billion ($1.1 billion).

In its earnings update, Deutsche Telekom blamed competitive and regulatory factors for the sales setback but noted that customer numbers remained stable in the second quarter, compared with the year-earlier period.

That performance may have been helped by the recent launch of MagentaONE, Deutsche Telekom's "quad-play" package, in markets outside Germany.

At T-Systems International GmbH , Deutsche Telekom's IT business, an increase in sales of cloud-based services could not compensate for the decline in more traditional IT activities.

Overall revenues at T-Systems' Market Unit, which caters to needs outside the Deutsche Telekom Group, fell by 3%, to €1.6 billion ($1.8 billion), while EBITDA came in at €65 million ($72 million), compared with a loss of €16 million ($18 million) in the year-earlier quarter.

Of the €3.3 billion ($3.7 billion) in sales at the Market Unit over the first six months of the year, €0.7 billion ($0.78 billion) came from cloud business, 22% more than in the first half of 2015.

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

kq4ym 8/24/2016 | 11:14:27 AM
Re: Flee... The numbers can be tricky. Just which ones are the important one to designate true growth patterns or even a true forecast? Who knows? But as " its net profit sank by 12.8%" one might wonder how or if they can improve on that number in the competitive market where interest and borrowing cost keep profits hard to find.
KBode 8/16/2016 | 5:35:26 PM
Re: Flee... So you're saying the appearance of growth trumps actual growth? :) Kind of like the ISP push into home automation and security, numbers for which no ISP can be bothered to provide much real detail on. 
mendyk 8/11/2016 | 10:19:26 AM
Re: Flee... It's "fun with numbers" time again. Sure, the US is a growth market (of sorts) for Deutsche Telekom because its business base in the US is relatively low, while its base in its established markets is about as high as it's going to get. This is a variation on a theme that all businesses march to. When it's time to roll out the quarterlies, turn up the volume on newer areas that are almost always going to show stronger percentage growth. At some point, that tune gets old and tired, which is why it's imperative to find new "growth" fields, even if they ultimately have limited value.
KBode 8/11/2016 | 9:03:37 AM
Flee... It seems like only yesterday this company couldn't flee the United States fast enough, and they weren't entirely keen on John Legere's brash style. Funny how success changes things.
CM1972 8/11/2016 | 6:47:03 AM
Obvious The fact is, everything in economics depends on United States. Think about it. Every single thing.
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