Global Insight Perspective | |
Significance | Deutsche Telekom saw its third-quarter net profit decline by 20.4% year-on-year (y/y), as it struggled to stem customer flight to rivals in Germany and re-organise its cost structure. |
Implications | The group is attempting to safeguard earnings in the fixed-line and mobile business in Germany. The company expects that its product portfolio streamlining efforts will drive the upturn in the short term. |
Outlook | With the cost-cutting programme in place, Deutsche Telekom plans to reaffirm its position as Europe's largest telecoms company in terms of revenue and earnings by 2010. The biggest challenge ahead of the group is to stem declining growth in its German home market. |
German incumbent Deutsche Telekom posted a 20.4% year-on-year (y/y) fall in its third-quarter net profit to 1.94 billion euro, from 2.44 billion euro in the same period last year, on a 2.8% y/y increase in revenues to 15.48 billion euro, from 15.06 billion euro respectively. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), the group's core operating profit, fell by 7.3% y/y to 5.10 billion euro in the third quarter of this year, from 5.50 billion euro in the same period last year.
The decline in its bottom line was due to the outflow of the company’s fixed-line telephony customers in its home market of Germany. In the third quarter, Deutsche Telekom lost another 500,000 landline connections, on the top of 500,000 lost in the previous quarter. But the company said that revenues in Germany have stabilised, and its recent promotional measures in the fixed-line and mobile business have already improved operational performance in Germany for the first few weeks of the fourth quarter. The loss of customers in Germany was offset by a solid growth of its mobile subscriber base at its wireless unit, T-Mobile International, which added 1.2 million net new users—the majority in the United States. T-Mobile USA, which remains the group's key driver of revenues, increased sales by 10% y/y in the third quarter. EBITDA at its mobile phone unit T-Mobile International fell by 2% y/y to 2.68 billion euro, while it dropped by 8% to 2.24 billion euro at its fixed-line and broadband internet unit T-Com.
Deutsche Telekom reiterated its 2006-end reduced targets for net revenues at between 61.5-62.1 billion euro and adjusted EBITDA between 19.2-19.7 billion euro. According to its outlook for 2007, the group expects a moderate growth in revenues and adjusted EBITDA. Deutsche Telekom slashed its earnings and sales forecast for 2006 and 2007 in August after worse-than-expected second-quarter results, due to the stagnating growth at home (see World: 10 August 2006: Deutsche Telekom Lifts Q2 Revenue by 2.6% Y/Y, Helped by International Operations). The company also expects to boost its future revenues by the planned inclusion of the recently acquired Polish leading mobile operator, PTC, into its earnings. PTC is expected to contribute around 300 million euro to net revenue and 100 million euro to the group's EBITDA this year, and 1.7 billion euro in revenue and EBITDA of 500 million euro next year.
Outlook and Implications
Competitive Pressures: The group has struggled with fixed-line customer flight to rivals on its domestic market. Competitors, including Vodafone's German fixed-line unit Arcor and telecoms services provider MobilCom, have been able to offer services at more competitive prices thanks to a smaller cost base, undercutting Deutsche Telekom's tariffs. In addition to its cost structures, the German incumbent has faced a tougher regulatory environment as the country's telecoms regulator aims to curb Deutsche Telekom's dominant market position (see Germany: 28 September 2006: Rivals to Surpass Deutsche Telekom's Sales Growth in 2006). To stay ahead of the competition, the group has recently launched a new, more aggressive pricing strategy and bundled triple- and quadruple-play products (see Germany: 7 November 2006: Deutsche Telekom Offers Loyalty Bonus for Triple-Play Customers, 17 October 2006: Deutsche Telekom's New Bundled Product Attracts a Million Users in a Month and 1 September 2006: Deutsche Telekom Slashes Prices to Stop Customer Flight).
Efficiency Measures: Deutsche Telekom CEO, Kai-Uwe Ricke, who has been under pressure since the release of the disappointing second-quarter results and the subsequent profit warning, announced details of the 2010 cost-cutting programme, as the telco attempts to revive growth on the domestic market. The telco estimates that annual savings will total 2 billion euro in costs in 2007. The company plans to cut 5.0 billion euro in annual costs by end-2010, of which between 4.2-4.7 billion euro have already been identified. The group also plans to reduce its German production costs by more than 30% by 2012; these costs currently amount to around 7 billion euro in Germany. Its capital expenditure will be reduced by 300 million euro by 2012. The cuts are likely to be achieved in distribution, IT, and administration, but not through drastic job cuts, as Deutsche Telekom would face more pressure from the German trade unions. This puts an end to speculation surrounding further redundancies. The telco, which employs around 250,000 staff worldwide, is attempting to safeguard 45,000 jobs in Germany. Last year, the group initiated a plan to cut 32,000 jobs by 2008. In addition, Deutsche Telekom plans to dispose of assets over the next three years, which should generate proceeds of around 3 billion euro, which will be reinvested in the company (see Germany: 23 October 2006: Deutsche Telekom Denies Plans for Further Job Cuts and 8 September 2006: Deutsche Telekom Announces US$6.4 bil. Cost-Cutting Programme).