Broadband services

T-Mobile US Spurs Growth at Deutsche Telekom

Deutsche Telekom has reported an increase in sales and earnings for 2014 thanks to ongoing success at its T-Mobile US business, although its other operating units continue to show signs of weakness.

The results indicate that Europe's biggest operator has become increasingly dependent on its US business for sales growth. Ultimately, however, it is thought to be interested in exiting the US market following aborted attempts to sell T-Mobile US Inc. to AT&T Inc. (NYSE: T) in 2011 and Sprint Corp. (NYSE: S) last year.

Full-year revenues rose by 4.2%, to nearly €62.7 billion (US$71.3 billion), while adjusted EBITDA edged up 0.8%, to €17.6 billion ($20 billion), compared with 2013. The operator's net profit more than tripled, to €2.9 billion ($3.3 billion), mainly due to the sale of the Scout24 online classifieds business last year.

Table 1: Headline Figures (€M)

2013 2014 Change
Revenue (€M) 60,132 62,658 4.2%
Adjusted EBITDA (€M) 17,424 17,569 0.8%
Adjusted net profit (€M) 2,755 2,422 -12.1%
Net profit (€M) 930 2,924 214.4%
Free cash flow (€M) 4,606 4,140 -10.1%
Cash capex (€M) 8,861 9,534 7.6%
Net debt (€B) 39.1 42.5 8.7%
Source: Deutsche Telekom

Having just achieved its full-year target for adjusted EBITDA, Deutsche Telekom AG (NYSE: DT) said it expected the figure to grow to €18.3 billion this year, on a constant currency basis, as cost savings and efficiency initiatives take effect, with sales rising at a lower rate of between 1% and 2%. (See Is DT About to Blow Our SDN Socks Off?)

Outside the US market, the operator saw revenues decline in both Germany and its other European territories, where competitive and regulatory conditions remain difficult, and at its T-Systems International GmbH business, which is restructuring to focus on more profitable cloud-based contracts.

Although operations in both Germany and Europe hit their own full-year targets for adjusted EBITDA, Deutsche Telekom does not expect revenue stability in Germany until next year and in Europe until 2016 or 2017.

T-Systems, meanwhile, fell just short of its €900 million ($1.02 billion) goal for adjusted EBITDA, reporting a figure of €835 million ($950 million).

The IT business is now expected to grow sales at its Market Unit, which mainly handles work outside the Deutsche Telekom Group, at a compound annual rate of 3% over the next four years. But this represents a less ambitious target than Deutsche Telekom unveiled just one year ago, when it was aiming for €7.7 billion ($8.8 billion) in Market Unit revenues by 2017. Under the new plan, revenues would reach €7.5 billion ($8.5 billion) in 2017 and €7.8 billion ($8.9 billion) in 2018.

Heavy spending on the rollout of high-speed networks in Germany and the US took a heavy toll on free cash flow, which fell to €4.1 billion ($4.7 billion) in 2014 from €4.6 billion ($5.2 billion) in 2013. Executives expect to generate €4.3 billion ($4.9 billion) this year but the figure is not expected to scale the 2012 heights of €6.2 billion ($7.1 billion) until 2018, growing at a compound annual rate of 10% between now and then.

Dividends were reduced from €0.70 ($0.80) for 2012 to €0.50 ($0.57) for 2013 because of the investment program and Deutsche Telekom has confirmed they will remain at this level for 2014. They are, however, expected to grow in line with free cash flow.

Capital expenditure rose by 7.6% in 2014, to €9.5 billion ($10.8 billion), and is expected to grow at a compound annual rate of between 1% and 2% during the next four years to support the expansion of 4G and vectoring networks in Germany and Europe.

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In its domestic market, the plan is to extend 4G to 95% of the population by 2018, up from 65% at the end of 2014, and to make vectoring available to 80% of households by the same date. The original plan was to extend vectoring to 65% of households by 2016. (See DT Expands Its Vectoring Commitments.)

European subsidiaries with fixed-line operations will also work on offering fiber services to around 80% of households in their respective markets, ensuring that 50% of the population can access services of at least 100 Mbit/s. The goal affects divisions in Croatia, Greece, Hungary, Slovakia and Romania.

Deutsche Telekom believes it can achieve targets in Germany "with a basically unchanged investment volume compared with the previous plans by increasing efficiency in network rollout." The operator spent €3.8 billion ($4.3 billion) on capital expenditure in Germany in 2014, 11.6% more than in 2013.

However, vectoring-enabled services -- supporting connection speeds of up to 100 Mbit/s -- were available to just 200,000 households in November (the most recent rollout update available), and the operator's DOCSIS-3.0-powered cable rivals are rapidly deploying technologies that will support connection speeds of 200 Mbit/s and higher. (See Tele Columbus to Launch 400Mbit/s Service and Speed Battle Rages in Germany.)

Deutsche Telekom's retail FTTx services are attracting plenty of interest, gaining another 191,000 customers in the fourth (October-to-December) quarter to give the operator nearly 1.8 million in total. But the overall broadband business remains stagnant: Deutsche Telekom's share of Germany's broadband market fell to 41.6% in the fourth quarter, from 43.1% in the same period of 2013. Revenues from "connected home" services -- meaning broadband and TV -- are supposed to be growing at a rate of 2% but were the same in 2014 as in 2013.

Following the publication of results, Deutsche Telekom's share price fell by 1.7% on the Frankfurt exchange in early-hours trading.

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

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