IHS Global Insight Perspective | |
Significance | Deutsche Telekom has issued a press release saying that it now expects its 2009 EBITDA to be 2-4% lower than last year, with free cash flow forecasted to amount to 6.4 billion euro (US$8.3 billion). |
Implications | The German telco is Europe's first major telecoms group to issue a profit warning amid the prolonged economic crisis. The blame is put largely on the international mobile units, with the operations back home actually performing better than expected. |
Outlook | Deutsche Telekom says that it will respond to the declining profitability by cutting costs particularly in the United Kingdom and Poland, with T-Mobile USA's 3G problems to be tackled by further investments in 3G infrastructure, new devices, and sales force. |
Based on its performance in the first quarter of this year, Deutsche Telekom—Germany's largest telecoms company—has cut its forecast for annual adjusted EBITDA to a level of 2-4% lower than in 2008. The operator also said that it now expects free cash flow of around 6.4 billion euro (US$8.3 billion).
The company, which is to release its quarterly results on 7 May, reports preliminarily that its net revenue including the stake OTE—acquired last year and consolidated into the results since the beginning of this February—increased by 6% year-on-year (y/y) to 15.9 billion euro, with adjusted EBITDA growing by 3% to 4.8 billion. However, excluding OTE, net revenue remained stable at around 15 billion euro, with adjusted EBITDA falling by 5% to 4.5 billion.
Coinciding with the disappointing announcement, Deutsche Telekom had also serious problems with its domestic mobile network yesterday, with malfunctioning software shutting down the local T-Mobile's voice and text message services for a couple of hours.
In 2008, Deutsche Telekom achieved full-year revenue to 61.666 billion euro and adjusted EBITDA of 19.459 billion (see World – Germany: 27 February 2009: Deutsche Telekom Beats Expectations in Q4, Adjusted EBITDA Up 1.3% Y/Y).
Outlook and Implications
- International Mobile Units Bitten by Recession: Deutsche Telekom blames much of the lower expectations on its three largest international mobile businesses, namely in the United States, the United Kingdom, and Poland. Currency fluctuations—which on one hand significantly hit the reported revenue from the United Kingdom and Poland, but on the other hand boosted the reported U.S. revenue—aside, there are clear signs that the economic crisis has finally caught up with the company. Without citing exact results at the units in the United Kingdom and Poland, Deutsche Telekom says that while both operations recorded net additions over the quarter, this came with higher costs than earlier and without corresponding increase in revenue; the results were also hindered by decrease in travelling, with roaming and visitor revenue in both countries falling notably. In the United States, where dollar-measured revenue grew by 4% and adjusted EBITDA fell by around 4% against last year, T-Mobile saw its price-plan ARPU decreasing by US$3 y/y to US$53. Moreover, the customer mix turned less profitable, with prepaid clientele accounting for around 60% of the 415,000 new customers—in comparison to 25% of the 981,000 added in the first quarter of 2008. Deutsche Telekom also cites the advance costs during the quarter resulting from T-Mobile USA's 3G roll-out as another factor contributing to the decline in results. The continuing effort in deploying more 3G infrastructure is in line with T-Mobile's main problem in the U.S. market, as its weaknesses in data offerings have prevented the carrier from countering the trend of deteriorating overall ARPU (see United States: 4 March 2009: U.S. Mobile Market Sees Growth Suppressed in Q4).
- Good Performance in Home Market: Deutsche Telekom also had some good news among the bad news, concerning its domestic performance. Fixed-line business T-Home increased its broadband clientele by around 390,000 over the quarter, which 53% of the sector's net additions and Deutsche Telekom's biggest share since 2005. Also, the outcome of the company's cost-cutting programme somewhat beat the expectations, with adjusted EBITDA—amid declining fixed telephony—at T-Home Germany coming down by 3% to 1.6 billion euro; this means that EBITDA fared better than revenue, which was down 6% to 4.8 billion. Furthermore, T-Mobile's German arm improved its service revenue by 1% y/y, thanks to a higher number of call minutes. Total revenue fell by 1% to 1.9 billion euro, which was better than a year earlier, when the annual decrease was still 3%; adjusted EBITDA shows a similar trend, declining 1% to 700 million euro.
- Operators Not That Resilient Anymore: Deutsche Telekom is the first major European integrated operator to issue a profit warning during the economic crisis, sending signals that the sector, which has been perceived as something of a safe haven, is now finally giving in to the prolonged slowdown. In anticipation of this, the firms have implemented drastic cost-cutting measures (see United Kingdom – Germany – Ireland – Spain: 23 March 2009: Telefónica and Vodafone Sign Network-Sharing Deal and World – United Kingdom: 25 February 2009: Vodafone Confirms 500 U.K. Job Losses as Cost-Cutting Bites), and Deutsche Telekom's announcement indicates that there is more to come. The company's press release mentions namely the wireless operations in the United Kingdom and Poland as those which will be most affected by the reductions, which will also involve job cuts in the areas such as advertising, administration, and technology. As for T-Mobile USA, Deutsche Telekom acknowledges that the weak point is still a somewhat flawed data service offering, and the company wants to tackle this by keeping expanding the 3G network and by adding new devices to its handset portfolio; also the sales network functioning under the unit's own brand will be beefed up.