Deutsche Telekom Q2 FY11 management update: Group waits on Europe upturn, USA exit
7 October 2011
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Table 1. Deutsche Telekom, financial summary (excluding UK), Q2 FY11
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Execs positive but still captive to troubled investments
Deutsche Telekom (DT) posted another set of weather-beaten financials in its Interim Group Report for the three months to the end of June 2011 (Q2 FY11), seeing sales continue to erode at its three regional businesses — Europe, Germany, and the USA — but sticking to its targets for the full year.
Executives sought to reassure on the accompanying conference call, talking of “light at the end of the tunnel” in south-eastern Europe, and improving “signs” elsewhere, but the sense remained of a company (and management) that is hostage to fortune in many of its key markets.
In Greece, Europe area’s largest territory, DT’s future exposure and prospects remain wed to the government’s austerity programme, and the Group continued to express frustration with regulatory millstones weighing down local investment OTE.
USA escape snagged, Investor Day pushed back
T-Mobile USA (TMUS) — another lingering headache — continued to be afflicted by an “unsatisfactory” level of churn among higher value customers, and the results were post-dated by a worrying Department of Justice-initiated lawsuit to block DT’s proposed exit from the troubled OpCo, increasing the chances of a prolonged or unsuccessful approval process (see separate report).
This latter move could have implications for the timing and development of DT’s already delayed “post-US strategy”, which is expected to incorporate how the Group will approach next-generation infrastructure and services rollout, among other things. On the call, executives said the strategy is now due to be laid out in an Investor Day following the AT&T deal’s closure, rather than summer 2011, when it was originally expected (Deutsche Telekomwatch, #1). “We need some more time, and we will work it out in detail”, explained René Obermann, Chief Executive of DT.
Elsewhere, the Group sought to soothe nerves over the prospect of revenue cannibalisation by over-the-top (OTT) services in more mature markets; while mobile termination rate (MTR) reductions continued to cause pain to Germany and other operations in Europe. Enterprise arm Systems Solutions was again the only reporting area to post growth.
Obermann conceded the figures were “not a cause for celebration”, and there are “some areas that need special attention”, but said the Group is “confident” of hitting its FY11 guidance.
“ These results demonstrate the hard cost discipline we are applying across the Group, including the US. Let me make that very clear — the cost discipline will remain in place because clearly the environment is not easy. We will improve our efficiency further. ” – Obermann.
Group continues to “comb” for efficiencies; head office “next on agenda”
Overall, DT’s net revenue for continuing and discontinued operations was down 6.8%, to EUR14.48bn — a slight trend improvement on Q1′s 7.7% fall (Deutsche Telekomwatch, #1), but below the expectations (EUR14.7bn) of analysts polled by Bloomberg.
‘Adjusted’ earnings before interest, tax, depreciation, and amortisation (EBITDA) — which DT again chose to highlight prominently, making decoding data more difficult — dropped 6.5%, to EUR4.69bn; while net profit was again down hugely (-26.7%, to EUR348m), hit by one-time expenses, primarily from headcount reductions.
The flip side was that DT continued to cite “significant progress” in its Save for Service efficiency drive, saying it unlocked EUR990m in savings during the first half of 2011 (H1 FY11), and reaffirming its target to achieve EUR4.2bn in cost reductions across FY10-FY12. The results also came shortly after reports of an acceleration of its ongoing, Group-level Shape Headquarters programme, with a fresh, sizeable round of headcount reductions apparently facing DT’s approximately 4, 000 employees in corporate functions.
Regarding the latter plan, Obermann did not go into much detail, but evidently positioned Shape Headquarters as a work-in-progress, saying its “clear focus” is on “producing a leaner and much more efficient headquarters, with [fewer] redundant functions”.
“ If we are honest to ourselves, and we look into this company, there is still a lot of room for improvement and efficiency; and it is a pure necessity, given that overall revenues have been shrinking, that we will sell the US business, and, clearly, then we also need to adjust the capacities and we comb through all the processes at head office; and I’m sure there is a lot of room for improvement. So this is the next thing on the agenda. ” – Obermann.
Reliance on Germany increases amid international woes
Regarding reporting areas, home market OpCo Telekom Deutschland (TDE) continued to make heavy going of it, reporting a marginally worse (-3.4%) drop in sales than the previous quarter, with mobile service revenue hurt by MTR cuts and “slightly weaker trends” (including side-effects of efforts to migrate users to new bundled tariffs). Nevertheless, its contribution to Group revenue in H1 grew by two percentage points, to 52% — accentuating DT’s problems elsewhere. Efficiency efforts under the Group’s Save for Service push helped TDE’s ‘adjusted’ EBITDA margin surpass 40% (40.7%) “for the first time ever” during Q2.
In Europe, where new Head Claudia Nemat is shortly to take over leadership (Deutsche Telekomwatch, #2), declines were seen almost across the board, heightening pressure around DT’s aim to return the region to growth by FY13. Revenue fell 5.5% — a lower level of contraction than Q1 (-9.4%), but only Poland (at +0.4%) recorded increased sales, with Greece (-8.0%), Hungary (-8.0%), and Romania (-8.2%) worst. DT blamed the declines on “price erosion in almost all European countries”, fuelled by MTR reductions and competition, but claimed to be seeing “clear and encouraging signs of stabilisation” in the region. Overall, for H1, the Europe segment’s contribution to Group revenue dropped by three percentage points, to 33%.
At TMUS, the challenged US OpCo again showed competitive weakness, with churn, exacerbated by unfavourable currency movement, seeing DT post a shocking 16.2% drop in revenue from the business (see separate report). TMUS’s over-riding problem remained retention of contract customers — a net 280, 000 of which departed during Q2 alone. DT acknowledged that TMUS’s performance on this measure was “unsatisfactory”. “The United States remains a difficult market for Deutsche Telekom, but we see improvements compared with the first quarter”, claimed Obermann.
Systems Solutions was again the only operating division to register sales growth, seeing revenue increase by 1.5% during the three months, to EUR2.3bn. However, new orders were down (by 11%), and profitability remained wafer-thin (with 8.7% ‘adjusted’ EBITDA margin, down 1.6 percentage points). This prompted the unit to squeeze capital expenditure to “protect cash flow” (see separate report).
Revenue at DT’s Group Headquarters and Shared Services functions fell 7.5%, to EUR539m, while ‘adjusted’ EBITDA remained negative, at -EUR140m — again caused by the impact of more efficient facilities usage on the area’s Real Estate Services revenue (Deutsche Telekomwatch, #1).
Intelligent Networks sales off the mark; online arm continues “clean-up”
Table 2. Deutsche Telekom growth areas: progress update on 2015 ambitions
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There was little startling ‘news’ to emerge during Q2 from DT’s Growth Areas drive, which aims to boost certain advanced services’ revenue, from EUR15bn in FY09 to EUR29bn in FY15 (excluding the impact of any exit from TMUS).
The Group posted its first sales figure (of EUR30m) from the Intelligent Networks stream, “primarily” generated by health services (as opposed to Connected Car, energy, or media distribution offerings, which also form part of the area).
In online consumer services, growth was slight (0.5%), and Obermann said that DT remains in “clean-up mode” in that area — as reflected in the September 2011 sale of recruitment website JobScout24 (see separate report). “There is still some way to go” with rejigging of those assets, the Chief Executive added.
Mobile internet services saw 13% growth in revenue, to EUR1.2bn, with “constant” growth in smartphone uptake continuing to drive usage. DT said smartphones accounted for 46% of all devices sold in its Europe region during Q2, up from 21% a year earlier; while, for Germany, the equivalent figure was 62%, up from 31%.
DT maintains OTT cannibalisation risk in hand
As with other European operators, the threat of messaging and voice revenue cannibalisation by smartphone users accessing of OTT services was a prominent talking point, with DT playing down vulnerability.
The Group said it was “aware” of the risk, but claimed that, in Germany, only about “15% of total service revenues are addressable” by Internet Protocol (IP) messaging and voice services — thus restricting its supposed vulnerability to out-of-bundle consumer contracts, and incoming consumer revenue (a moot point). As with rivals, including Vodafone Group, DT claims “smart” migration of users to tiered integrated tariffs will mitigate substitution of messaging and voice revenue for OTT services, highlighting roll out of new tariffs with a “focus on data and messaging in bundles” in Germany, and the launch of tiered data tariffs in the Netherlands (see separate reports).
Customer declines pervade
Broadly, customer trends remained constant, but with contract churn at TMUS (2.4% in Q2) remaining a key worry, as mentioned.
Table 3. Deutsche Telekom, key performance and operational indicators, Q2 FY11
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Group sticks to estimates, but others pessimistic
Looking forward, the Group reiterated the FY11 financial guidance it laid out in Q1, namely:
- ‘Adjusted’ EBITDA from continuing operations (that is, excluding TMUS and EE): EUR14.9bn.
- ‘Adjusted’ EBITDA for TMUS: $5.5bn (or EUR4.2bn, per exchange rate used in the results). DT also booked EUR4.2bn from the US OpCo in FY10.
- Free cash flow: “at least” EUR6.5bn (unadjusted, excluding settlement of PTC deal). This would put it on a par, or above, FY10′s EUR6.5bn.
- Capex: EUR9bn (excluding spectrum). This compares with EUR9.9bn in FY10.
“ Although these [Q1 FY11 results] are not a cause for celebration, they still give us reason to be confident that we will achieve our targets in a persistently difficult environment. ” – Obermann.
There was some division among analysts over the Group’s chances of hitting its guidance, however.
“ Germany was solid and the US weak. What matters is that they still have their guidance firmly in view, and, after these results, that doesn’t seem unfounded. ” – Stefan Borscheid, Analyst at Landesbank Baden-Wuerttemberg.
“ After the second quarter numbers, it has become even more clear that Deutsche Telekom will most likely not achieve its [combined] EBITDA guidance of EUR19.1bn. We believe that Deutsche Telekom will heavily miss the US guidance due to both currency effects and a poor operational performance.” – Joeri Sels, Analyst, DZ Bank.
[Further reference: Interim Group Report, January 1 to June 30, 2011, supporting documentation and presentations -- DT, August 2011; Deutsche Telekom to cut administrative jobs at German headquarters in Bonn -- Bloomberg, 1 August 2011; Deutsche Telekom keeps to targets amid sobering markets -- Reuters, 4 August 2011; Deutsche Telekom second-quarter profit falls on T-Mobile USA client losses -- Bloomberg, 4 August 2011; Deutsche Telekom profit plunges but it keeps 2011 targets -- AFP, 4 August 2011; With no U.S. 'Plan B, ' stark choices face Deutsche Telekom -- Reuters, 1 September 2011.]
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Deutsche Telekom to cut administrative jobs at German headquarters in Bonn — Bloomberg
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