(DT) Deutsche Telekom Tops Estimates on Cost-Cutting

November 9th, 2009

German telecom giant Deutsche Telekom (DT) announced results for third-quarter 2009 with reported earnings per ADS of 31 cents, beating the Zacks Consensus Estimate of 25 cents. Net income of €959 million (US$1.4 billion) reflects a 7.2% increase from €895 million (US$1.3 billion) reported a year ago.

This year-over-year growth was fueled by the company’s ongoing cost-cutting initiatives under the “Save for Service” program. Total savings from this program reached approximately €5.4 billion (US$7.7 billion) at the end of the quarter, exceeding the annual savings target of up to €4.7 billion (US$6.7 billion) originally expected to be achieved in 2010.

Group Revenue & EBITDA

Reported revenues of €16.3 billion (US$23.2 billion) reflects 5.2% year-over-year growth, primarily due to the consolidation of Greek operator OTE group, in which Deutsche Telekom holds a 30% stake. Domestic revenues grew 0.6% year over year to €7.2 billion (US$10.3 billion), while international revenues increased 9.2% year over year to €9.1 billion (US$12.9 billion). Approximately 56% of the revenue was generated outside Germany in the quarter.

Adjusted EBITDA (excluding special items) increased 5.5% year over year to €5.5 billion (US$7.9 billion), driven by improved operational efficiency and reduced cost. OTE contributed €1.5 billion (US$2.1 billion) and €0.6 billion (US$858 million) to the group’s revenue and adjusted EBITDA, respectively.

The following is a snapshot of operating results by segments:

Germany

Revenue from this segment fell 2% year over year to €6.5 billion (US$9.2 billion) as a result of continued erosion in fixed-network lines and unfavorable regulatory measures. German fixed-network and mobile communications operations were combined following the recently completed operational restructuring. Fixed-network revenue declined 3.5% year over year to €4.7 billion (US$6.7 billion), while mobile communications revenue grew 1.4% to €2.1 billion (US$3 billion).

German fixed telephony subscriber base continue to contract as reflected by 8% year over year decline in fixed-network lines that registered 26.65 million lines at the end of the quarter. Broadband business remains on the growth track as total retail broadband lines grew 10.3% year over year to 11.3 million, with 72,000 customers added in the quarter. German mobile communications subscriber base increased 1.4% year over year to 39.3 million.

United States (T-Mobile USA)

Revenue at Mobile Communication USA (T-Mobile USA), the fourth-largest US wireless carrier, grew 3% year over year to €3.8 billion (US$5.4 billion). However, in dollar terms, total revenue for the quarter represents a 2.3% annualized decline. Net income (measured in dollars) also decreased 5.7% year over year to US$417 million.

Blended ARPU for T-Mobile USA was US$47, down from US$52 and US$48 reported in the prior-year quarter and previous quarter, respectively, as growth in data services was offset by lower roaming and customer migration to unlimited plans. Blended churn (customers switching to other products) increased sequentially and year over year to 3.4% as a result of an increase in contract churn due to intense competition.

Higher contract churn affected customer retention at T-Mobile USA in the third quarter, as evidenced by a net loss of 77,000 customers. This is compared to a net gain of 325,000 and 670,000 customers in the previous and year-ago quarters, respectively.

T-Mobile USA remains challenged by the cutting-edge wireless handsets offerings from its larger peers such as AT&T (T) and Verizon (VZ), resulting in increased customer defection. The entity served 33.4 million mobile subscribers at the end of the quarter.

Europe

Revenue for the Europe operating segment (combines operations in the UK, Poland, the Netherlands, Austria and the Czech Republic) decreased 13.2% year over year to €2.6 billion (US$3.6 billion). The Europe segment served 44.4 million cellular customers at the end of the quarter.

Revenue from UK (T-Mobile UK), the largest contributor to the segment’s revenue, decreased 14.6% year over year to €853 million (US$1.2 billion) due to an adverse exchange rate impact and mobile termination rate (inter-operator fees) cuts. Deutsche Telekom has reportedly finalized agreement with France Telecom (FTE) for the merger of T-Mobile UK with Orange UK under a 50-50 joint venture, which will create the largest mobile operator in the UK with 37% market share.

Southern and Eastern Europe

The segment reported revenues of €2.6 billion (US$3.7 billion) for the quarter, reflecting an increase from €1.26 billion (US$1.8 billion) reported a year ago. This growth was fuelled by the inclusion of the OTE group. At the end of the quarter, the segment served 33.7 million mobile customers and 3.7 million broadband connections.

Systems Solutions (T-Systems)

The dismal global economic environment continues to negatively affect new order bookings at T-Systems. As a result, revenues for the segment declined 7.3% year over year to €2.1 billion (US$3 billion). Telecommunications revenue decreased 12.4% year over year to €803 million (US$1.1 billion), while computing and desktop services revenue declined 0.9% to €952 million (US$1.4 billion).

Outlook

Deutsche Telekom has reaffirmed its guidance for 2009, with adjusted EBITDA expected to fall by 2-4% from €19.5 billion (US$27.9 billion) achieved in 2008. Projected free cash flow for 2009 remains at €7 billion (U$10 billion), out of which OTE’s contribution is expected to be €0.6 billion (U$0.9 billion).

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(DT) Deutsche Telekom Tops Estimates on Cost-Cutting

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Shawn Meehan

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(DT) Deutsche Telekom Tops Estimates on Cost-Cutting

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Shawn Meehan

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