Deutsche Telekom shrugs off virus, flexes pecs as sales, profits rise

If operators were strongman contestants, Deutsche Telekom would increasingly resemble one of those humanoid mountains from Central Europe, who look like they wrestle bears and bench-press combine harvesters before breakfast.

Shrugging off the coronavirus pandemic this morning, the Teutonic giant managed another quarter of sales growth across all its major business activities bar the T-Systems IT unit. Earnings and adjusted profits were up, and the virus is not expected to weaken the German operator later this year. "Deutsche Telekom is an anchor of stability in a global crisis," said CEO Timotheus H๖ttges, preferring a nautical analogy. "Our networks are working reliably as digital lifelines for society."

Headline figures showed a 2.3% year-on-year rise in sales, to about €19.9 billion ($21.5 billion), as well as 8.5% growth in adjusted net profit, to nearly €1.3 billion ($1.4 billion). Most impressive was a roughly 10% increase in adjusted earnings (before interest, tax, depreciation and amortization), to about €7.6 billion ($8.2 billion). It all comes weeks after Deutsche Telekom proclaimed itself "the clear number one" in Europe, forecasting sales growth at all operating segments in 2020 and EBITDA AL (earnings before interest, tax, depreciation and amortization, after leases) of €25.5 billion ($27.6 billion) – €800 million ($865 million) more than it made last year.

The guidance remains unchanged. That could partly reflect the limited impact coronavirus has so far had in Germany and certain other countries in Eastern Europe, compared with the hotspots of France, Italy, Spain and the UK. Deutsche Telekom today acknowledged that store closures, a decline in roaming revenues and the cancellation of IT projects by some clients would all have a sapping effect. Yet voice telephony revenues are growing, it said, and churn rates are down. "This is a display of strength," said analysts at Jefferies in a research note today.

Like any dedicated strongman, Deutsche Telekom has bulked up. On April 1, it concluded a merger of its T-Mobile US business with rival Sprint that leaves it as the biggest shareholder in the new-look entity. While that deal had no bearing on the first-quarter figures, the US market was already the main event for Deutsche Telekom, powering sales growth during several years of relative weakness in other parts of the business. That continued in the first quarter, with US sales up nearly 4%, to about €10.2 billion ($11 billion), and adjusted EBITDA rising 17%, to €3.9 billion ($4.2 billion).

The difference is that other units also look more muscular than they once did. A move into "convergence," or, more specifically, the provision of various fixed and mobile services in a single package, has brought success in Germany and some other European markets. In the former, sales were up 1%, to €5.4 billion ($5.8 billion), while adjusted EBITDA rose 2.6%, to about €2.2 billion ($2.4 billion). Across Europe, revenues grew 0.4%, to roughly €2.9 billion ($3.1 billion), and adjusted EBITDA gained 1.3%, to €1.1 billion ($1.2 billion).

The flabby bit is still T-Systems, and coronavirus could further hurt its sales performance this year if IT projects are being delayed. Although revenues were relatively stable year-on-year, at €1.6 billion ($1.7 billion), order entry slumped 13%, to €1.4 billion ($1.5 billion). Deutsche Telekom blamed that on a particularly strong performance in the year-earlier quarter, however, and insisted that sales of public cloud and security services were compensating for a sales decline in traditional IT activities. On a more positive note, T-Systems managed a small operating profit of €130 million ($141 million), compared with a loss of €33 million ($36 million) a year earlier. But its margin is still wafer thin.

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Besides the integration of T-Mobile and Sprint, perhaps the greatest challenge this year will be to maintain the pace of network deployment in Germany and other markets. At home, Deutsche Telekom aims to bring new 5G services to about 50% of Germans by the end of this year. It also continues to work on the rollout of higher-speed fiber-optic networks in Germany and Europe. And in the US, T-Mobile has just outlined plans to spend $60 billion over the next five years on the deployment of 5G networks.

How much will it all cost in 2020? Earlier this year, Deutsche Telekom said it expects to invest about €13 billion ($14.1 billion) in capital expenditure this year, down slightly from €13.1 billion ($14.2 billion) in 2019. That does not seem to factor in the Sprint acquisition, and equals about 16% of group revenues, a level the operator has managed in the past. One risk is that today's pandemic leads to supply chain disruption, something H๖ttges warned about when reporting 2019 results.

Another danger is that German authorities decide to impose restrictions on Huawei, a controversial Chinese equipment maker largely responsible for Deutsche Telekom's 5G network project. So far, Germany has resisted US entreaties to ban Huawei on security grounds. But Huawei's presence in Germany is still a sore point for some German politicians, and the coronavirus outbreak has led to a worsening of relations between China and Europe.

Deutsche Telekom's other, "traffic light" indicators all remain on green, though. At about 2.4 times annual earnings, the company's net debt of €77.4 billion ($83.7 billion), importantly, is firmly within a comfort zone ratio of 2.25 to 2.75. Like most communications service providers, the German incumbent is no great source of excitement to the investment community. Its share price was up just 1% this morning in Bonn and has fallen 6% since the start of the year, when pandemics happened only in movies. But a tough albeit unexciting player may seem like a fairly safe refuge.

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— Iain Morris, International Editor, Light Reading

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