- Guidance confirmed with more detail following the first quarter
- Revenue down by 3.0 percent and adjusted EBITDA down by 5.0 percent in the first three months of 2011
- Mobile Internet, smartphone penetration, and Internet TV growth drivers for the Group
- Adjusted EBITDA in Germany up by 3.7 percent
- Revenue from Systems Solutions up by over 6 percent
- European companies investing in growth
- Growth trend in data revenue continues apace with a 20 percent rise in the U.S., contract churn rate remains high at 2.4 percent
Deutsche Telekom has confirmed its guidance for the full year following the first quarter of 2011. Business in the first three months was shaped by positive developments overall in Germany and at T‑Systems, while the companies in the Europe operating segment faced a host of challenges, as did T-Mobile USA.
The first quarter was dominated by the planned sale of T‑Mobile USA to AT&T. This 39-billion-dollar deal represents a value-enhancing solution for business in the North American market that will also benefit in particular the company's customers in this region. The deal is still subject to legal and regulatory approval in the United States.
Together with the establishment of the Everything Everywhere joint venture in the UK and the securing of undisputed ownership in the Polish company PTC, the U.S. deal means that the "Fix" component of the strategy presented in March 2010 is now largely complete. The "Transform" and "Innovate" elements are now in the spotlight and the figures for the first quarter show that measures in these areas have also been successful. For example, revenue in the mobile Internet growth area climbed by 28 percent to EUR 1.2 billion year-on-year. The deal in the U.S. has not affected the target of generating – by 2015 – around half of the Group’s revenue in the growth areas specified in the strategy presentation.
The figures for the first quarter show a mixed picture overall. Adjusted for the deconsolidation of T-Mobile UK, which was still included in the figures for the first quarter of 2010, revenue declined by 3.0 percent to EUR 14.6 billion. Adjusted EBITDA decreased by 5.0 percent to EUR 4.5 billion. Adjusted net profit declined by 27.4 percent to EUR 0.7 billion. While Systems Solutions business and Germany business largely enjoyed encouraging development, the earnings situation in the U.S. and Europe segments was impacted by a raft of factors. These included a difficult competitive environment, intervention by the regulatory authorities, and tax burdens.
"We have done our homework correctly. The planned sale of T‑Mobile USA heralded the beginning of a new era for us," explained René Obermann, Chairman of the Board of Management of Deutsche Telekom. "The course has been set for the Group's realignment and we intend to pursue this course systematically. The figures for the first quarter show, however, that there are further challenges ahead."
Free cash flow decreased by 26.3 percent to EUR 1.1 billion in the first quarter of 2011. This was largely due to different seasonal influences on capital expenditure and interest payments compared with the prior year.
The company confirmed its outlook for the full year 2011. Deutsche Telekom continues to expect adjusted EBITDA of EUR 19.1 billion. This includes the T‑Mobile USA contribution of USD 5.5 billion based on an exchange rate of USD 1.33 per Euro, the same as on average in the previous year. Free cash flow is expected to total at least EUR 6.5 billion, not including the amount of EUR 0.4 billion for the settlement of the dispute regarding PTC in Poland.
Germany– Significant increase in profitability Business in Germany proved very profitable in the first quarter of 2011. The adjusted EBITDA margin climbed to 39.7 percent, up more than 2.6 percentage points on the prior year. While adjusted EBITDA increased by 3.7 percent to EUR 2.4 billion, revenue decreased 3.2 percent to EUR 6.0 billion. The decline in revenue was largely attributable to the reduction in mobile termination rates.
In fixed-network business, revenue declined by 4.6 percent in the first quarter, while an increase of 1.3 percent was reported in mobile communications business. For the first time in the first quarter of 2011, the Germany operating segment reported figures for the Consumers, Business Customers and Wholesale customer segments. While revenue generated with consumers declined by 3.6 percent and revenue in the wholesale area fell by 6.6 percent, earnings from business customers grew by 2.7 percent.
Mobile data business proved to be a growth driver once again, with revenue climbing by 32 percent compared with the first three quarters of 2010 to EUR 384 million. The extremely low churn rate of 1.0 percent, 0.3 percentage points below the prior-year figure, underscores the value of the contract customer base in German mobile business. More than 100,000 people opted for the Entertain IPTV product in the first quarter, pushing the total number of customers up to 1.3 million. At around 46 percent, Telekom retained its large share of the DSL customer base.
The encouraging decrease in line losses caused by regulation continued, with a drop of 9 percent year-on-year to 339,000 in the first quarter of 2011. For comparison: Two years ago, line losses were still at more than 600,000. Benchmark quality indicators, such as those on broadband stability and customer satisfaction, also saw significant improvement. As part of the "More broadband for Germany" initiative, more than 324 alliances were agreed with local authorities in the first three months of the year alone.
Europe– Investing in future growth The companies brought together under the Europe segment simultaneously reported major progress in key growth areas while battling ongoing negative influences from the economy, regulation and, in some cases, tax burdens. The extremely positive trend continued in mobile data revenues, which grew by 15 percent, the broadband customer base, which expanded by 11 percent, and in particular the market for Internet TV (IPTV), which saw customer growth of 50 percent. Smartphones accounted for more than 40 percent of all handsets sold, twice the proportion of one year previously.
The negative factors mentioned impacted on the segment's financial performance indicators. Total revenue adjusted for the deconsolidation of T‑Mobile UK dropped in the first quarter by 8 percent year-on-year to EUR 3.7 billion. The decline in adjusted EBITDA of 13 percent to EUR 1.2 billion was more marked.
Looking at the national companies, the picture reveals a host of different reasons for the decline in results. The mobile communications subsidiaries in the Netherlands and Poland successfully invested in attracting and retaining high-value customers in the first quarter. This had a negative impact on EBITDA, but resulted in positive developments in the contract customer base and data revenues, thus laying the foundations for future growth.
In Hungary, the figures were influenced by the special tax introduced last year as well as the internal reclassification of the business customer base, which was divided between the Europe and Systems Solutions operating segments. This puts the decline in revenue of 12 percent and in adjusted EBITDA of 11 percent into perspective. Adjusted for these external factors, revenue was down only slightly by 3 percent and adjusted EBITDA was actually up by 7 percent. Adjusted for the special tax and the reclassification, the adjusted EBITDA margin climbed by 4 percentage points to an impressive 44 percent.
The macroeconomic situation in countries such as Greece and Romania remained critical. This resulted in a year-on-year decrease in the OTE Group's revenue and adjusted EBITDA of 12.5 percent and 13.6 percent, respectively. Despite a generally shrinking market at present, mobile communications business in particular in Greece is performing excellently in a peer comparison. COSMOTE has been gaining service revenue market shares in Greece for several quarters now and is even building up margins in the tough environment. Fixed-network business in Greece was encouraging despite acute market intervention by the regulatory authorities, as a result of which the introduction of new products and rate plans was either delayed or denied.
Systems Solutions – Successes with cloud computing T‑Systems continued its growth course in the first quarter of 2011. Revenue from Systems Solutions increased by 6.1 percent year-on-year to EUR 2.3 billion. This was helped by international revenues, which climbed by 9.4 percent.
In the same period, adjusted EBITDA declined by 3.6 percent to EUR 0.2 billion. At the same time, adjusted EBIT amounted to EUR 29 million, EUR 18 million below the prior-year figure; correspondingly, the adjusted EBIT margin decreased year-on-year from 2.2 percent to 1.3 percent. These weaker figures in the first quarter are largely the result of increased expenses relating in part to the major new contracts concluded last year.
New business got off to a positive start in 2011. New orders increased by 20.3 percent compared with the first three months of 2010 to EUR 2.6 billion. This development was helped by the comprehensive outsourcing agreement with the UK mobile operator, Everything Everywhere.
Once again, T-Systems made gains in the field of cloud computing, securing a deal with Shell to work with Microsoft to build a mega-cloud. This major con-tract runs for five years and will give Shell employees worldwide the ability to access communication services from the cloud.
The future-oriented market for intelligent networks is starting to evolve. In the first quarter of 2011, T‑Systems concluded a new agreement in the energy business area with VOLTARIS on reading, transmitting, and processing energy data. The first signs of progress are also starting to show in the connected car and healthcare fields.
USA(discontinued operation since the first quarter of 2011) – Positive trends and ongoing challenges T‑Mobile USA continues to face some major challenges. The high churn rate among contract customers of 2.4 percent remained a weak point in the first quarter of 2011, resulting in a drop of 471,000 contract customers in the quarter. This was partially offset by growth of 372,000 in prepaid customers. As a result, the overall customer base declined by 99,000 compared with the end of 2010 to 33.6 million.
At USD 5.2 billion, or EUR 3.8 billion, total revenue from mobile communications business in the U.S. remained virtually stable year-on-year. Service revenues even increased slightly by 0.4 percent. Adjusted EBITDA on the other hand declined by 14.5 percent to USD 1.2 billion. Translated into euros, this corresponds to a drop of 13.6 percent. The negative development in results was largely due to higher market investment and network costs.
Notwithstanding the announced sale of T‑Mobile USA, the company will continue to pursue its strategy as an aggressive competitor on the market until the transaction has been closed. The "Grow" and "Reinvent" growth and efficiency programs announced in January are being implemented as planned.
The focus on attractive rate plans and smartphones, as well as outstanding network quality, is starting to pay off. Data revenue per user in the first quarter rose by more than 20 percent year-on-year to USD 13.10. In the same period, average total revenue per contract user climbed from USD 52 to USD 53. The first quarter saw growth of just under one million additional customers using 3G and 4G smartphones in the T‑Mobile USA network, boosting the total to 9.1 million.
Pro-forma figures adjusted for the deconsolidation of T‑Mobile UK as of April 1, 2010. In the United Kingdom, the former T-Mobile UK became part of the joint venture with France Télécom's subsidiary Orange UK called Everything Everywhere effective April 1, 2010. In the following table, revenue, adjusted EBITDA, and adjusted and unadjusted net profit for the first quarter of 2010 are presented both including and excluding T-Mobile UK to improve the transparency of the development of operations in both years. This presentation is a supplement to the table showing the actual figures.
Comments on the table: The first quarter of 2011 has been adjusted to eliminate the revenue and earnings contribution of T-Mobile UK to adjusted EBITDA, net profit, and adjusted net profit. No adjustments were made for the first quarter of 2011.
The Deutsche Telekom Group at a glance*:
The United States operating segment has been reported as a discontinued operation since the first quarter of 2011.
Comments on the table: * Deutsche Telekom defines EBITDA as profit/loss from operations before depreciation, amortization, and impairment losses.
a Before dividend payments, spectrum investment, and PTC transaction.
b Cash outflows for investments in property, plant and equipment, and intangible assets (excluding goodwill).
Germanyoperating segment*:
Europe operating segment*:
Comments on the table:
The figures for the national companies generally correspond to their respective unconsolidated financial statements and do not take consolidation effects at operating segment level into consideration.
a Deconsolidation of T-Mobile UK effective April 1, 2010.
b Other: national companies of Bulgaria, Albania, the F.Y.R.O. Macedonia, and Montenegro, as well as ICSS, Europe Headquarters, and, up to and including May 2010, T-Mobile International UK.
United Statesoperating segment*: The United States operating segment has been reported as a discontinued operation since the first quarter of 2011.
Systems Solutions operating segment*:
Comments on the table: a Non-core activities and consolidation.
Group Headquarters & Shared Services*:
* Deutsche Telekom defines EBITDA as profit/loss from operations before depreciation, amortization, and impairment losses.
Development of customer numbers in the first quarter of 2011. Germanyoperating segment:
Comments on the table: a Since April 1, 2010, Telekom Deutschland GmbH has automatically terminated prepaid cards that have not been topped up for two years and have been inactive for three months.
Europeoperating segment:
Comments on the table: a For better comparability, the customers of T-Mobile UK who were transferred to the Everything Everywhere joint venture as of April 1, 2010, following the merger of T-Mobile UK and Orange UK, were subtracted from all historical customer figures.
b With effect from January 1, 2011, the business customer base was reclassified and divided between the Europe and Systems Solutions operating segments. As part of this process, the mobile and fixed-network lines of corporate customers in Hungary were reassigned to T-Systems.
c Other: national companies of Albania, the F.Y.R.O. Macedonia, and Montenegro.
United Statesoperating segment: The United States operating segment has been reported as a discontinued operation since the first quarter of 2011.
Comments on the table: a One mobile communications card corresponds to one customer.
Net additions in the first quarter of 2011.
Germanyoperating segment:
Comments on the table: a Since April 1, 2010, Telekom Deutschland GmbH has automatically terminated prepaid cards that have not been topped up for two years and have been inactive for three months.
Europe operating segment:
Comments on the table: a For better comparability, the customers of T-Mobile UK who were transferred to the Everything Everywhere joint venture as of April 1, 2010, following the merger of T-Mobile UK and Orange UK, were subtracted from all historical customer figures.
b With effect from January 1, 2011, the business customer base was reclassified and divided between the Europe and Systems Solutions operating segments. As part of this process, the mobile and fixed-network lines of corporate customers in Hungary were reassigned to T-Systems.
c Other: national companies of Albania, the F.Y.R.O. Macedonia, and Montenegro.
United Statesoperating segment: The United States operating segment has been reported as a discontinued operation since the first quarter of 2011.
Comments on the table:
a One mobile communications card corresponds to one customer.
This media information contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. These forward-looking statements include statements with regard to the expected development of revenue, earnings, profits from operations, depreciation and amortization, cash flows, and personnel-related measures. You should consider them with caution. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Deutsche Telekom's control. Among the factors that might influence our ability to achieve our objectives are the progress of our workforce reduction initiative and other cost-saving measures, and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions, business combinations, and our network upgrade and expansion initiatives. In addition, stronger than expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on our costs and revenue development. Further, the economic downturn in our markets and changes in interest and currency exchange rates, may also have an impact on our business development and the availability of financing on favorable conditions. Changes to our expectations concerning future cash flows may lead to impairment write downs of assets carried at historical cost, which may materially affect our results at the group and operating segment levels. If these or other risks and uncertainties materialize, or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by forward-looking statements. We can offer no assurance that our estimates or expectations will be achieved. Without prejudice to existing obligations under capital market law, we do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.
In addition to figures prepared in accordance with IFRS, Deutsche Telekom also presents non-GAAP financial performance measures, including, among others, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net income, free cash flow, gross debt and net debt. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with IFRS. Non-GAAP financial performance measures are not subject to IFRS or any other generally accepted accounting principles. Other companies may define these terms in different ways.