Deutsche Telekom Cites Domestic Stabilisation

Germany’s incumbent has reported a 2.8% year-on-year (y/y) increase in revenues, driven by a rise in international revenues of 14.4%. Domestic revenues, which now account for 49.3% of its total revenues, fell 6.9% over the same period. The group said that it was on course to meet its adjusted earnings before interest, tax, depreciation and amortisation (EBIDTA) target of 19 billion euro (US$27.8 billion) on the back of its cost-cutting programme. Over the past few months, Deutsche Telekom has announced a range of measures to reduce costs further this year and beyond, including mooted plans to sell off its media arm (see Germany: 7 November 2007: Deutsche Telekom to Sell Media Unit for US$1.0 bil.—Reports), the divestment of an infrastructure services division to Nokia Siemens (see Germany: 24 October 2007: Deutsche Telekom Agrees US$426-mil. Sale of VTS to Nokia Siemens), along with job cuts across the business (see Germany: 5 October 2007: Deutsche Telekom Plans to Cut 1,600 Jobs at T-Systems).

As well as successfully reducing its expenses, Deutsche Telekom also says that its “Focus, Fix and Grow” strategy is beginning to bear fruit. This strategy aims to target customer and ARPU growth through the provisioning of both better-priced and more interactive services to customers. This has included the launch of a low-cost brand (see Germany: 5 July 2007: Deutsche Telekom Plans Low-Cost Brand), as well as the provisioning of mobile Web 2.0 and bundled fixed-line (voice, broadband internet and IP TV). To date, mobile data and internet services have led the way, securing 42% revenue growth y/y in the first nine months, while domestic broadband growth has outperformed previous guidance. Better segmentation of mobile voice has also helped; at the end of September 2007, the operator had 811,000 Max flat-rate customers and 1.89 million T-Mobile@home clients in Germany. Nevertheless, the operator’s domestic revenues fell 6.9% as a result of continued fixed-line losses and lower call revenues due to competition. At the group as a whole, adjusted EBITDA in the first nine months fell 1.1% and net profit was down 67.4% on a y/y basis. The group said that net profit was particularly affected by the consolidation of PTC and tele.ring, which led to increased depreciation and amortisation, as well as the effects of corporate tax reform.

Outlook and Implications

• So Far So Good: Deutsche Telekom is at a relatively early stage in its restructuring programme. Its strategic importance to the German economy means that chief René Obermann does not have a completely free hand in introducing cost-cutting measures (see Germany: 10 September 2007: Verdi Threatens Deutsche Telekom with Strikes Over T-System Restructuring). Therefore meeting its adjusted EBITDA targets for 2007 is a positive start. On the “Focus, Fix and Grow” front, Deutsche Telekom is also making some inroads, with a 28% y/y growth in broadband customers and a reduction in fixed-line losses. Its IP TV service is at a very early stage of development, with 50,000 customer orders by the end of the third quarter.
• Invest to Grow: Deutsche Telekom said that it expects adjusted EBITDA to remain stable in 2008 as the operator increases investment in rolling out a 3G+ network in the United States and its domestic broadband network to support multimedia services (see Germany: 9 October 2007: Deutsche Telekom to Deploy VDSL2 in 12 German Cities, Kabel BW Plans Aggressive Expansion). The group is also on the lookout for possible acquisitions (see Europe: 3 September 2007: Deutsche Telekom Aims to Drive Consolidation in Europe).