Global Insight Perspective | |
Significance | Europe's largest telecoms carrier by sales posted a 3.9% year-on-year (y/y) increase in first-quarter sales, on a 2.7% EBITDA (earnings before interest, tax, depreciation and amortisation) rise. |
Implications | Growth at its wireless business continued to offset decline at the fixed-line unit, while restructuring expenses weighed down on core operating profit. |
Outlook | In the short term, the group's underlying core operating profit is expected to be burdened by the planned increase in spending in efforts to combat tougher competition and develop new services. |
Deutsche Telekom’s first-quarter sales reached 14.84 billion euro, compared 14.29 billion euro in the first three months of 2005. First-quarter underlying core earnings, or EBITDA, excluding one-offs, grew by 2.7% y/y to 4.97 billion euro, from 4.841 billion euro in the first three months of 2005. The telco recorded a 9.7% y/y rise in its first-quarter net profit to 1.08 billion euro, from 984 million euro in the same period in the previous year. Restructuring costs, staff reduction and partial retirement charges, and expenses related to the cost of subscriber acquisition at its internet unit T-Online from earlier quarters, were partially offset by a one-time gain of 116 million euro in special items. This was mostly a result of the 200 million-euro disposal of Malaysia's Celcom.
Growth at its fixed-line unit T-Com slowed with adjusted EBITDA down by 6.8% y/y to 2.28 billion euro, from 2.44 billion euro in the same period last year, while sales decreased by 6.1% y/y to 6.15 billion euro. Deutsche Telekom indicated that growth at T-Com (which also includes its broadband operations) is developing below expectations amid strong competition. In the first three months of this year, T-Com continued to lose more than 100,000 fixed-line customers per month. Meanwhile, the broadband market carried on growing. In the first quarter of 2006, the total number of DSL lines provided by T-Com increased by 735,000 to 9.2 million. In Germany, around 8.6 million lines provided by T-Com were in operation at end-March 2006. T-Com is capitalising on the growing demand for broadband internet access, mainly through DSL resale to third parties. The total number of resale lines outside of the group increased by 560,000 to 2.2 million in the first quarter of 2006.
Deutsche Telekom's wireless businesses - especially its U.S. operations - have continued to balance out the ongoing slump at its domestic fixed-line business, which has been hit by fierce competition from rivals such as MobilCom's internet unit freenet.de and Vodafone’s German fixed-line unit Arcor. Mobile unit T-Mobile International posted an 8% y/y increase in its first-quarter adjusted EBITDA to 2.28 billion euro, from 2.11 billion, euro, on a 12% y/y jump in sales to 7.58 billion euro. Solid revenue growth was driven by strong growth at its U.S. subsidiary T-Mobile USA, which added 1.04 million customers during the first three months of this year, against 957,000 in the first quarter of 2005. In Germany, the unit gained 700,000 customers, although the U.K. subscriber base declined by 700,000. The wireless unit's net customer additions were below the level of the last quarters, marking an end of the positive trend.
Outlook and Implications
Medium-Term Outlook: Owing to a positive performance in the first quarter, the company reiterated the group's guidance for 2006 and 2007 but changed its sales forecast for its two core units; it raised the revenue guidance for its mobile unit and cut its fixed-line business’s target. Deutsche Telekom expects its end-2006 sales to come in at the high end of its 62.1-62.7 billion-euro range, rising to 66.2 billion euro in 2007. The company raised its sales forecast for T-Mobile International to 31.9-32.3 billion euro in 2006, from earlier guidance of 30.9-31.3 billion euro. However, it anticipates that T-Com sales will grow at a slower-than-expected rate, to between 24.8-25.2 billion euro in 2006, down from the previous target of 25.4-25.8 billion euro. The telco forecasts that the group's EBITDA, adjusted for special items, will come in at 20.2-20.7 billion euro in 2006 and reach 22.2 billion euro in 2007. For comparison, its end-2005 adjusted EBITDA stood at 20.7 billion euro on sales of 59.6 billion euro. Deutsche Telekom pledged to increase its marketing expenditure in an effort to boost sales by attracting customers to its new triple-play service. It is also committed to raise efficiency by lowering costs, including optimising its IT network infrastructure, reducing personnel and cutting real-estate costs.
New Growth Drivers: Deutsche Telekom is currently rolling out its new, US$3.7-billion VDSL broadband network. This will provide bandwidth of up to 50 Mbps, and is planned to link 10 German cities including Berlin (the capital) by mid-year and 40 more by 2008 (see Germany: 20 March 2006: Government to Exempt Deutsche Telekom's Fibre-Optic Network from Price Regulationand Germany: 2 September 2005: Deutsche Telekom Unveils US$3.7 bil. Fibre-Optic Network Upgrade Plans). The new VDSL platform will enable the company to launch an array of new IP-based products and services, including IP TV and video-on-demand (VOD). Last month, Deutsche Telekom formed an alliance with U.S. software giant Microsoft for the delivery of IP TV services in Germany, which will enable it and internet unit T-Online - which has already run the Microsoft TV platform through extensive tests - to offer high-quality IP TV services over broadband to millions of consumers. Deutsche Telekom will use Microsoft TV IP TV edition software as a technical platform. Microsoft will also support the telco with joint marketing to help develop and promote IP TV in the country (see Germany: 22 March 2006: Deutsche Telekom Signs Microsoft for IP TV Deal). Deutsche Telekom is planning to merge T-Online with T-Com in order to create synergies in the development of joint products and streamline operations via a single customer service department. However, the move has been delayed owing to legal challenges from a group of T-Online shareholders, who claim that Deutsche Telekom's 3 billion-euro bid for T-Online in November 2004 undervalues T-Online shares.