Broadband services

DT Gets Familiar Earnings Boost From US Biz

Deutsche Telekom heralded growth at its German business for the first three months of the year, but it was the T-Mobile US subsidiary that continued to flatter the company's headline results.

Thanks to further customer gains across the Atlantic, where T-Mobile US Inc. is still exerting pressure on bigger rivals AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), the German incumbent flagged a 5.8% year-on-year increase in revenues for the first quarter, to about €18.6 billion ($20.3 billion), and saw "adjusted" earnings (before interest, tax, depreciation and amortization) rise 7.5%, to €5.6 billion ($6.1 billion).

Net profit took a battering, however, tumbling 76.1%, to just €747 million ($813 million), because of huge gains in the year-earlier quarter, when Deutsche Telekom AG (NYSE: DT) sold shares in its EE UK mobile subsidiary to BT Group plc (NYSE: BT; London: BTA), the country's fixed-line incumbent.

Revenues in Germany edged up 0.2%, to about €5.4 billion ($5.9 billion), due to success in the broadband market and the growing customer appetite for "converged" offerings that bundle fixed and mobile services in a single package. Adjusted EBITDA was up 0.9%, to €2.1 billion ($2.3 billion).

But the dazzling performance of T-Mobile saw revenues from the US soar 14.9%, to about €9 billion ($9.8 billion), and adjusted EBITDA rise 25.1%, to roughly €2.4 billion ($2.6 billion).

That growth will raise further questions about Deutsche Telekom's long-term outlook for the US division following previous efforts to sell it -- first to AT&T and more recently to number-four mobile operator Sprint Corp. (NYSE: S).

Concerned about the impact on competition, US authorities ultimately quashed those efforts, but Sprint owner SoftBank Corp. appears optimistic that a new administration under President Donald Trump will be less resistant to a deal involving Sprint and T-Mobile.

Any future transaction, however, is unlikely to see Deutsche Telekom quit the US market given how important T-Mobile has now become to sales growth.

Optimism that T-Mobile will continue to outperform its rivals led Deutsche Telekom to confirm its bullish financial guidance, with revenues expected to increase at a compound annual growth rate (CAGR) of 1-2% between 2014 and 2018.

Deutsche Telekom is also predicting that EBITDA will grow at a CAGR of 2-4% over the same period.

The "flattish" performance of other divisions will make it hard for Deutsche Telekom to achieve those goals without its engine of growth in the US.

That said, T-Mobile has been a considerable drain on Group resources, spending heavily on spectrum and network improvements in recent years, and its recently announced plan to build a nationwide 5G network by 2020 could be a further worry for investors. (See T-Mobile's 2020 Plan Piles Pressure on Europe's 5G Players, Is T-Mobile's 5G Plan Just a Pipe Dream?, T-Mobile Promises 'Nationwide' 5G in 2020 With New Spectrum and T-Mobile 5G Plan Could Drive Capex to Record Highs.)

On the Nasdaq exchange, T-Mobile's share price has fallen from $68.31 on May 1 to a current level of $66 due to concern about the impact that 5G spending could have.

Under threat from cable operators touting higher-speed services, Deutsche Telekom has also been making big investments in Germany in a broadband technology called vectoring, which boosts the connection speed of its last-mile copper connections to a theoretical maximum of 100 Mbit/s.

Capital expenditure in Germany in the quarter rose 15.1%, to about €1 billion ($1.1 billion), although group capex was down 15.8%, to around €3.3 billion ($3.6 billion), because of reduced spending in Europe and the US following an earlier wave of activity.

Despite the vectoring program, Deutsche Telekom executives have come under pressure to consider a much costlier deployment of fiber-to-the-home technology given the challenge from cable rivals, some of which are now offering connection speeds of up to 400 Mbit/s. (See DT Eyes FTTH Solution to German Opex Issue.)

Worryingly, Deutsche Telekom's share of Germany's broadband market fell to 39.9% in the quarter, from 40.6% a year earlier, while cable operators grew their share from 21.8% to 22.7% over the same period, according to the German operator's own figures.

For more fixed broadband market coverage and insights, check out our dedicated broadband content channel here on Light Reading.

Across its various other European businesses, Deutsche Telekom flagged good progress, with revenues up 0.7%, to around €2.8 billion ($3.1 billion), even though adjusted EBITDA was down 4.5%, to €889 million ($968 million).

Deutsche Telekom insisted the organic rate of EBITDA decline was just 1.8% and said this represented a "considerably smaller decrease" than in previous quarters.

But there was real disappointment at the T-Systems International GmbH IT division, with revenues dropping 8.4%, to €1.7 billion ($1.9 billion), and adjusted EBITDA falling 51%, to just €96 million ($105 million).

Deutsche Telekom said the completion of work on a Belgian toll collection project gave a significant boost to last year's figures, and that revenues and earnings would have "developed stably" in the quarter were it not for this effect.

Nevertheless, the operator also pointed out that order entry at T-Systems was down 18.1% in the quarter, to €1.3 billion ($1.4 billion), and that "no big deals were closed in the reporting quarter of a comparable size to the two contract renewals signed in the prior-year quarter."

Shares in Deutsche Telekom were trading down 0.5% in Frankfurt at the time of publication.

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

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