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DT CEO to Fight Vodafone-Liberty Deal

Iain Morris

Sunnier outlook thanks to US business
The criticisms came as Deutsche Telekom made a slight increase to its earnings guidance for 2018 after a stronger-than-expected first-quarter showing by its T-Mobile US subsidiary, which will merge with local rival Sprint if US authorities approve the deal.

The German operator is now aiming for adjusted earnings (before interest, tax, depreciation and amortization) of €23.3 billion ($27.6 billion) this year, an increase of €100 million ($119 million) on previous financial guidance.

Results for the first three months of the year told a familiar story for investors, with growth in the US market offsetting the sluggish performance in Germany, Europe and at Deutsche Telekom's IT business.

The weak dollar meant that reported revenues fell 3.9%, to around €17.9 billion ($21.3 billion), compared with the year-earlier quarter, but Deutsche Telekom said revenues would have risen 3.1% were it not for unfavorable currency movements.

Adjusted EBITDA was stable, year-on-year, at about €5.5 billion ($6.5 billion), while net profit soared 32.8%, to €992 million ($1.2 billion), due to impairment charges in the year-earlier quarter linked to Deutsche Telekom's financial stake in BT Group plc (NYSE: BT; London: BTA), the UK's fixed-line incumbent.

Results in Germany were hit by the introduction of new accounting standards for determining and recognizing revenues. Sales fell 1.3%, to around €5.3 billion ($6.3 billion), while adjusted EBITDA was up 1.3%, to around €2.1 billion ($2.5 billion).

At its German mobile business, Deutsche Telekom reported the loss of 395,000 mobile customers in Germany, blaming this on "seasonal business fluctuations" at one of its wholesale customers. Despite this setback, mobile service revenues were up 3.2%, to around €1.7 billion ($2 billion). "There was a writedown by one low ARPU [average revenue per user] service provider but this is not material for financials," said Thomas Dannenfeldt, Deutsche Telekom's chief financial officer.

There were encouraging signs in the fixed broadband business, too, with the addition of about 95,000 subscribers. Deutsche Telekom has been investing in higher-speed network technologies to satisfy demand for more bandwidth. It is also pushing bundles of fixed, mobile and TV services that make customers more dependent on its products.

Even so, the operator's share of Germany's broadband market continued to edge down, falling to 39.6% from 39.8% a year earlier, due largely to competition from cable operators providing even higher-speed services.

Deutsche Telekom has this year promised to extend fiber-based networks to around 18 million households, or 45% of the country's total, and plans to increase overall spending in Germany to around €5.7 billion ($6.8 billion), from €5.4 billion ($6.4 billion) in 2017. (See DT to Splurge €12.5B in 2018 Capex as It Preps for 5G.)

But it has resisted making large-scale investments in all-fiber networks, citing cost and regulation as barriers. The supervectoring technology that will provide high-speed services for most households uses a mixture of copper and fiber and tops out at roughly 250 Mbit/s.

Germany's cable operators have been able to attract around half a million broadband customers over the last year, compared with 382,000 net additions at Deutsche Telekom, by offering much faster services.

In the US, T-Mobile continued to shame its rivals, registering more than 1.4 million net customer additions in the first quarter, according to Deutsche Telekom's earnings update, and reporting growth in both sales and EBITDA in US dollars.

Due to unfavorable foreign exchange effects, however, reported revenues from T-Mobile slid nearly 6%, to around €8.5 billion ($10.1 billion), while adjusted EBITDA was down 2.3%, to about €2.3 billion ($2.7 billion).

The update came days after Deutsche Telekom had agreed to merge T-Mobile with Sprint in a deal valued at $26.5 billion and aimed at producing a stronger rival to market leaders AT&T and Verizon. (See T-Mobile & Sprint: Marriage Made in Hell and T-Mobile to Buy Sprint for $26.5B to Create US 5G Powerhouse.)

Concerned about the impact of consolidation on competition, regulators have previously resisted merger efforts by the companies. But T-Mobile and Sprint are optimistic that President Donald Trump's administration will approve what Barack Obama's had blocked.

They continue to insist that a tie-up will be in a better position to invest in next-generation 5G networks, and that it will not lead to an increase in prices. Deutsche Telekom, which will be the combined entity's biggest shareholder with a 42% stake, has also said that employee numbers will grow after the merger.

The statements about pricing and jobs have attracted skepticism given ambitious targets for cost savings and forecasts of soaring profitability.

Taking on Sprint's net debt will increase leverage at Deutsche Telekom in the next few years, taking the German operator outside its "comfort zone" metrics. But Deutsche Telekom is confident that a sharp increase in free cash flow at T-Mobile will restore it to full health in 2021. (See T-Mobile, Sprint Combo Could Threaten German Digitization.)

Across the entire group, employee numbers fell by 423 in the quarter, to a total of 216,926 on March 31. Deutsche Telekom attributed the cuts to "efficiency enhancement measures" in Germany and a "decrease in customer acquisition employees" in the US.

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Deutsche Telekom's European business reported a 1.1% increase in sales, to around €2.8 billion ($3.3 billion), and a 2.5% rise in EBITDA, to €911 million ($1.1 billion), thanks to customer growth.

Revenues at the struggling T-Systems IT business fell 2.3%, to about €1.7 billion ($2 billion), because of a decline in sales of traditional IT products.

Due to investments in digitization, which included the hire of additional staff, adjusted EBITDA dropped 40.6%, to just €57 million ($68 million). Deutsche Telekom also blamed pressure on margins caused by "a reduction in the scope of individual corporate customer contracts for traditional IT business."

— Iain Morris, International Editor, Light Reading

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