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DT Lifts Profit Outlook on US, German Growth

Iain Morris

Deutsche Telekom has raised its earnings guidance for the year after its second-quarter results beat expectations thanks to the continued strong performance of its T-Mobile US business and growth in Germany.

The German operator is now expecting full-year earnings (before interest, tax, depreciation and amortization) of €22.3 billion ($26.4 billion), up from a previous forecast of €22.2 billion ($26.3 billion). It is still guiding for a revenue increase this year.

Customer growth at T-Mobile US Inc. fueled a 6% increase in Group revenues, to about €18.9 billion ($22.4 billion), compared with the year-earlier period, while adjusted EBITDA rose 8.9%, to €5.9 billion ($7 billion). Deutsche Telekom's net profit was up 40.7%, to €874 million ($1 billion).

Analysts polled by Reuters had been expecting adjusted EBITDA of between €5.63 billion ($6.67 billion) and €5.89 billion ($6.98 billion).

At the time of publication, Deutsche Telekom AG (NYSE: DT)'s share price was trading up 0.87% in Frankfurt, at €15.73 ($18.63).

Amid speculation about a possible merger between T-Mobile US and rival Sprint Corp. (NYSE: S), Deutsche Telekom hailed its subsidiary as the "undisputed growth superstar" in the US mobile market. (See Sprint's CEO Expects M&A-Related Announcement 'Soon'.)

Under the leadership of maverick CEO John Legere, T-Mobile US picked up another 1.3 million customers in the April-to-June quarter, meaning it has now signed up more than 1 million customers in each of the last 17 quarters. Service revenues at the business were up 8.5%, to $7.3 billion, while adjusted EBITDA grew 18%, to around $2.9 billion. (See T-Mobile Adds 1.3M Subs, Stays Quiet on 'Rumorville'.)

T-Mobile US is proving costly in other ways, though, spending nearly $8 billion on 600MHz licenses during a recent government auction. For Deutsche Telekom, that meant forking out €7.2 billion ($8.5 billion) in spectrum payments in the quarter, up from just €39 million ($46 million) a year earlier.

Even excluding those payments, capital expenditure across the business rose 12.4%, to nearly €3 billion ($3.6 billion), largely because of broadband investments in Germany.

The spectrum bill triggered a 13.5% increase in Deutsche Telekom's net debt, to €55.2 billion ($65.4 billion). With net debt at 2.5 times annual EBITDA, the operator is now at the upper end of its "comfort zone" ratio.

Having previously seen T-Mobile US as a distraction from its Europe-focused strategy, Deutsche Telekom failed to engineer a sale of the business to Sprint in 2014 when US authorities blocked its plans out of concern that consolidation would harm competition.

More recently, however, Deutsche Telekom has looked on T-Mobile US as a potential "kingmaker," hinting that it could become the controlling shareholder of a combined T-Mobile US and Sprint. Supporters of a tie-up believe it would create a stronger rival to market leaders AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ), and that President Donald Trump's new administration is prepared to wave through a deal. But Deutsche Telekom appears to face competition from US cable operators that also see the attractions of a merger with Sprint. (See Charter Rebuffs Sprint, Still a SoftBank Target?.)

Next page: Good signs in Germany and Europe; T-Systems uninspiring

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