Q3 FY11: T-Mobile Czech Republic provides jolt with 19% drop in EBITDA
4 January 2012
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René Obermann, Chief Executive of Deutsche Telekom (DT), singled out the Group’s Czech performance as a “downside” of its Q3 FY11 (July-September 2011) results, after seeing its traditionally strong profitability hit hard by distribution and regulatory issues, as well as renewed marketing spend.
T-Mobile Czech Republic (TMCZ) reported an 18.9% drop in “adjusted” earnings before interest, taxation, depreciation, and amortisation (EBITDA) during the three months, to EUR116m. Revenue fell 8.1% — to EUR272m — a much worse contraction than the 3.1% decline reported in Q2.
As well as undoing part of TMCZ’s recent work on efficiencies (Deutsche Telekomwatch, #1 and #3), the reduced profit will have been a significant jolt to DT, with TMCZ forming one of its highest margin businesses in Europe, and previously appearing resistant to profit erosion, having been one of only three OpCos not to report a drop in EBITDA during the previous quarter (Q2 FY11). TMCZ’s EBITDA margin fell 5.7 percentage points, to 42.6%, in Q3 — still well above average for DT’s Europe division (35.8%), but now third-placed within the region, behind Hrvatski Telekom (51%) and Slovak Telekom (45.7%).
Deutsche Telekom, Czech Republic financials (adjusted) and operational indicators, Q3 and 9m FY11
[Table omitted from extract]
Source: Deutsche Telekom, Deutsche Telekomwatch.
Lottery firm troubles hits sales
Obermann described the profit erosion as “dissatisfying”, pointing to a “strong” effect from mobile termination rate (MTR) reductions implemented in July 2011, and complaining that “regulators still play a big role” in the Group’s fortunes.
He also blamed the “one-off effects partially related to the bankruptcy of one service provider” — presumably in reference to the March 2011 suspension of TMCZ’s airtime distribution arrangement with financially troubled Czech lottery operator Sazka (Deutsche Telekomwatch, #1 and #3). Oddly, DT did not mention the relationship’s demise as an issue in Q2.
TMCZ has also yet to update on the status of the Sazka partnership — rival Vodafone Czech Republic, which suspended activity with Sazka at around the same time as TMCZ, re-enabled its tie-up in September 2011, after the lottery firm was bought out by creditors.
Retention spend forced up
Another less exceptional factor behind the EBITDA erosion was marketing spend — again reflecting the conflicts inherent in the Group’s aim to ensure profitable growth from data services.
TMCZ is said to have conducted a “smartphone push aimed at defending the customer base” during the three months, hurting profitability. According to DT, TMCZ’s EBITDA would have still declined by 7.6%, without counting the effects of the MTR cut and Sazka issue. This suggests something of an enforced departure in the OpCo’s strategy — TMCZ had trumpeted control of marketing expenses in the previous three months, although it did flag a decline in data revenue that presumably instigated the smartphone drive.
Looking forward, DT continued to describe the economic outlook in the Czech Republic as one of “moderate” growth.
[Further reference: Vodafonewatch, #95; Interim Group Report, January 1 to September 30, 2011, supporting documentation and presentations (PDF) -- DT, November 2011.]
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