Global Insight Perspective | |
Significance | Europe's largest telecoms group by revenue saw its first-quarter sales rise by 4.1% year-on-year (y/y) thanks to its burgeoning mobile business despite the 58% y/y decline in the group's net profit. |
Implications | Deutsche Telekom's wireless operations, fuelled by its high-growth U.S. operations, as well as rising demand for broadband access, compensated for the losses at its fixed-line unit, but the increasing costs related to the mass customer exodus to lower-cost rivals, weighed down its bottom line. |
Outlook | As Deutsche Telekom fails to stem customer losses at its German fixed-line business, the company is counting on a number of cost-cutting measures to improve its performance in the short term. |
The German incumbent posted a 58% year-on-year (y/y) slide in first-quarter net profit to 459 million euro, from 1.09 billion euro in the same period last year. The bottom line was hit by the continued customer exodus to rival operators, as well as by the one-off cost of 153 million euro following the sale of parts of its staffing agency, Vivento. First-quarter revenue at the group level increased by 4.1% y/y to 15.45 billion euro, from 14.84 billion euro, helped by growth at its mobile unit, T-Mobile International, which offset the declining fixed-line business. Domestic sales fell by 5.1% y/y to 7.8 billion euro, while international operations generated 7.7 billion euro in revenue, up by 15.5% y/y, thanks to strong growth at its U.S. wireless unit, T-Mobile USA. The group's core operating profit, measured as earnings before interest, tax, depreciation and amortisation (EBITDA), declined by 5.8% y/y to 4.682 billion euro, from 4.970 billion euro a year earlier, yielding an EBITDA margin of 30.3%, compared to 33.5%, respectively.
At the operational level, Deutsche Telekom lost 588,000 fixed-line customers in Germany in the first three months of this year. The first-quarter losses follow the flight of 2.1 million fixed-line users to competitors in 2006, which indicates that the telco had failed to stem this negative trend (see Germany: 23 April 2007: Deutsche Telekom Continues to Lose Customers in Q1). Its expanding domestic broadband operations helped to offset its shrinking traditional telephony business, with the addition of 572,000 net new high-speed internet subscribers. Strong customer gains at T-Mobile USA, which added 980,000 net new subscribers in the first quarter, against 1.04 million signed up in the first quarter of 2006, also helped to lift the first-quarter sales. Its domestic mobile unit, T-Mobile Deutschland, added 251,000 new customers, compared to 89,000 in the same period last year. The operator opened 43 new retail stores in Germany, which helped it to reach a total of 33 million subscribers.
Deutsche Telekom reiterated its full-year targets, aiming for 19 billion euro in an adjusted operating profit, flat on 2006, with free cash flow at 6 billion euro. The telco anticipates a moderate growth in revenue this year (see Germany: 3 April 2007: Deutsche Telekom Reiterates End-2007 EBITDA Target).
Outlook and Implications
Lay-offs: In response to the declining domestic fixed-line business, Deutsche Telekom has attempted to put together a cost-saving programme, which includes massive job cuts and disposal of non-core assets. The efficiency programme follows the reorganisation at the group level at the end of 2006, which was aimed at more efficient sales and customer services, as well as the cross-promotion of products. Its controversial plans to transfer 50,000 jobs to a legally separate service unit, T-Service, extending the working hours of the affected workers without increasing remuneration, have been met with strong opposition from the German trade union, Verdi. Following several unsuccessful rounds of negotiations, Deutsche Telekom is still willing to continue talks with Verdi to avoid a company-wide strike that the union has been stirring. This could be a blow to the new chief executive officer (CEO), René Obermann, who was elected in November 2006 and embarked on what he has termed a "focus, fix and grow" strategy (see Germany: 26 April 2007: Deutsche Telekom Supervisory Board to Vote on New CEO's Restructuring Plans). The transfer scheme is core to Obermann's plans to lower the cost base in Germany in efforts to avert the effects of its slowing fixed-line business. So far, Deutsche Telekom offered to drop its demand requiring the transferred staff to work up to 100 hours' overtime during peak times (see Germany: 1 May 2007: German Trade Union Seeks Government Intervention in Deutsche Telekom Dispute and Germany: 18 April 2007:Trade Union Rejects Deutsche Telekom's Proposal For T-Services).
Asset Disposals: Deutsche Telekom is counting on 3 billion euro from the sale of assets over the next three years, which will include its French and Spanish units, Club Internet and Ya.com, respectively, the T-Systems Media and Broadcasting unit and radio towers, and some real estate assets (see Europe: 7 May 2007: Deutsche Telekom Counts On US$1.3 bil. from Asset Sales). Deutsche Telekom earlier this week sold its French unit, Club Internet, to local rival, Neuf Cegetel. The transaction will be finalised by the end of June this year, pending the approval of French competition authorities. Deutsche Telekom will receive up to 500 million euro for Club Internet, which has 600,000 ADSL subscribers and 400,000 narrowband customers (see France: 16 April 2007: Neuf Cegetel Wins Bidding For Club Internet). Deutsche Telekom is also selling its loss-making Spanish unit, Ya.com, which is estimated to be worth 600 million euro. Ya.com is Spain's fourth-largest broadband provider, with approximately 400,000 broadband customers, representing a market share of 6% (see Spain: 2 April 2007: Deutsche Telekom Shortlists Three Buyers for Spanish Unit).