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Andreas Leigers

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U.S. operations pay off for Deutsche Telekom

  • Group performance in first quarter of 2017 follows on seamlessly from success of the previous year
  • CEO Tim Höttges: "Our investments in the United States have paid off."
  • Net revenue of the Group up 5.8 percent to 18.6 billion euros
  • Adjusted EBITDA up 7.5 percent to 5.6 billion euros
  • Free cash flow up 50 percent to 1.2 billion euros
  • Positive revenue and earnings trends in Europe
  • As expected, substantial decline in net profit to 0.7 billion euros after impact of book gain from EE transaction in the prior-year quarter
  • Group reconfirms full-year forecast

Deutsche Telekom remains on a growth trajectory – particularly due to its operations in the United States, but also because of its success in the German market. The Group's first-quarter figures are a continuation of the recent positive trend, with substantial growth in customer numbers and increases in all key financial performance indicators. Net revenue grew by 5.8 percent compared with the prior-year quarter to reach 18.6 billion euros. At the same time, adjusted EBITDA rose 7.5 percent to 5.6 billion euros.

"The positive trends remain unbroken: We are growing in the United States and have recently returned to growth in Germany," said Tim Höttges, CEO of Deutsche Telekom. "We got off to a good start in 2017. And, after a glance across the Atlantic, I can only say that our investments in the United States have paid off."

In line with its plans, the Group once again increased its capital spending, particularly on networks on both sides of the Atlantic. Cash capex (excluding expenses for mobile spectrum) reached 3.2 billion euros in the first three months of the year, up 14.6 percent year-on-year. Free cash flow was extremely positive, rising 49.4 percent to 1.2 billion euros.

In the first quarter of 2016, the book gain of 2.5 billion euros from the sale of shares in EE, a UK-based mobile communications company, to BT Group had had a positive impact on the Group's net profit. As there was no comparable positive impact in the reporting period, net profit declined, as expected, by a substantial amount – coming in at 0.7 billion euros.

Adjusted net profit decreased by 10.3 percent to 0.9 billion euros, mainly due to expenses incurred to restructure the financing of T-Mobile US in the first quarter of 2017. The dividend from EE, which was paid for the last time a year ago, and income from the remeasurement of derivatives had had a positive impact on net profit in the corresponding prior-year quarter. In operational terms, net profit developed very positively in the first quarter of 2017.

The Group reconfirmed its full-year forecast. Assuming constant exchange rates, Deutsche Telekom expects to report adjusted EBITDA of around 22.2 billion euros and free cash flow of 5.5 billion euros for the 2017 full year.

Germany – Telekom continues to set records for fiber-optic roll-out

In the first quarter of 2017, Telekom continued to actively expand broadband business in its home market. The number of fiber-optic lines (FTTH/FTTC/vectoring) used by customers increased by 775,000 in the first three months of the financial year, the strongest quarterly increase in fiber-optic sales to date. Telekom's retail sales channels were instrumental in achieving this growth, accounting for 433,000 fiber-optic lines or well over half of the overall volume. That represents a new record for this sales channel. Compared with the first quarter of 2016, the number of fiber-optic lines rose by 2.6 million or 51 percent.

At the end of the first quarter of 2017, Telekom had some 3.2 million customers in Germany using one of the MagentaEINS rate plans, which allow them to combine fixed-network and mobile services as they choose. Entertain remains the only Internet-based television platform (IPTV) in Germany that is posting growth. At the end of the first quarter of 2017, just under three million Telekom customers made use of this product. During the reporting period, the number of Entertain customers grew by 76,000, a substantially stronger increase than in the preceding quarters.

Telekom continued to consolidate its leadership position in the German mobile communications market. Although overall market volume declined by around 1.2 percent, Telekom's mobile revenue decreased by only 0.8 percent. Adjusted for the effects of the new regulations on roaming and termination rates, revenue would actually have increased by 1.4 percent. The company recorded significant growth in data volumes in Germany, which increased by 63 percent compared with the first quarter of 2016.

In the first quarter of 2017, Telekom recorded revenue of 5.4 billion euros in Germany, up 0.2 percent year-on-year. Adjusted EBITDA came to 2.1 billion euros, 0.9 percent higher than in the prior-year quarter.

USA – High-value growth continues

The T-Mobile US success story continues in 2017. Its first-quarter figures demonstrate that not even new products launched by competitors could slow the company's pace of growth. T-Mobile US added 1.1 million new customers in the first quarter of 2017. In fact, the company gained more than a million new customers in each of the last 16 quarters to reach a customer base of 72.6 million at the end of the reporting quarter. The increase in branded postpaid customers amounted to 0.9 million, while some of the company's competitors had to post – in some cases substantial – declines in customer numbers.

The high value of T-Mobile US' customer additions is underscored by the growth in monthly average revenue per user (ARPU), which reached 47.53 U.S. dollars for branded postpaid telephony customers in the first quarter of 2017. That was a rise of 2.9 percent on the previous year. The ARPU trend for the company's branded prepay customers was also remarkable, with the corresponding figure of 38.52 U.S. dollars up 2.5 percent year-on-year.

Logically, this customer growth is having an increasingly positive impact on the company's financial KPIs: Last year, T-Mobile US was the only company among the four nationwide mobile network operators to increase its service revenues. In the first quarter of 2017, T-Mobile US posted a further year-on-year increase (11.6 percent) to reach 7.2 billion U.S. dollars in service revenues. At the same time, adjusted EBITDA increased by 20.7 percent to 2.5 billion U.S. dollars.

Europe – Growth in customer numbers

At Deutsche Telekom's European subsidiaries, the trend in rising customer numbers that began last year continued in the first quarter of 2017. The national companies added 130,000 new customers thanks to products bundling fixed-network and mobile communications. The number of broadband lines rose by 51,000, while the number of mobile contract customers grew by 167,000. In this context, it should not be forgotten that business in the Netherlands, which recently recorded substantial growth, has been reassigned to the Group Development segment. That means that the Europe operating segment's aggregate customer-growth figure was achieved by a smaller number of national companies.

Revenue and earnings trends in the Europe operating segment, which Srini Gopalan has been responsible for at Board level since the start of the year, have improved. In organic terms – i.e., excluding the effects of changes in exchange rates and in the composition of the Group – revenues rose by a slight 0.2 percent to reach 2.8 billion euros. The positive trend in key growth areas such as mobile data and smart home could not fully compensate for the decline in traditional telecommunications business. Key growth areas already account for 32 percent of total revenue in the Europe operating segment.

In organic terms, adjusted EBITDA declined by 1.8 percent to 0.9 billion euros, a considerably smaller decrease than in the preceding quarters. Lower indirect costs were one factor in this positive trend.

Systems Solutions – Stable performance after adjustment for toll-collection effect in 2016

Order entry at T-Systems totaled 1.3 billion euros in the first quarter of 2017, down 18.1 percent year-on-year. The main reason for the lower volume was the fact that no big deals were closed in the reporting quarter of a comparable size to the two contract renewals signed in the prior-year quarter.

The successful conclusion of the pilot phase of the Belgian toll collection project had a significant impact on last year's revenue and earnings, as explained in the first quarter of 2016. Year-on-year, this has produced a negative effect of 167 million euros in revenue and 105 million euros in adjusted EBITDA. Revenue in the first quarter of 2017 declined to 1.7 billion euros and adjusted EBITDA to 96 million. Adjusted for the effects of the toll collection contract in Belgium, both indicators developed stably.

Changes in the Group structure

A new Board of Management department entitled Technology and Innovation was created, which pools Deutsche Telekom's overarching network, innovation, and IT activities. This resulted in the following organizational changes: The Innovations, Telekom IT and Technology units of the Germany, Europe, and Systems Solutions operating segments have been transferred to a separate Board department. Technology and Innovation is not a separate reporting segment; instead, since January 1, 2017, it has been reported on as part of the Group Headquarters & Group Services segment. Comparative figures have been adjusted retrospectively.

In addition, the Company has reported on the Group Development operating segment since January 1, 2017. Group Development actively manages and increases the value of selected subsidiaries and equity investments of the Group. The following units and subsidiaries have been included: T-Mobile Netherlands (previously in the Europe operating segment), Deutsche Funkturm GmbH (DFMG, previously in the Germany operating segment), as well as Deutsche Telekom Capital Partners (DTCP) and the stakes in BT plc, Scout24 AG, Ströer SE & Co. KGaA, and Strato, which was sold as of March 31, 2017, (previously in the Group Headquarters & Group Services segment). Here, too, the comparative figures have been adjusted retrospectively.

The Deutsche Telekom Group at a glance:

 

 

Q1 2017
millions
of €

Q1 2016
millions
of €

Change %


FY 2016
millions
of €

Revenue

18,646

17,630

5.8

73,095

Proportion generated internationally (%)

67.3

65.5

1.8p

66.3

EBITDA

5,963

7,667

(22.2)

22,544

Adjusted EBITDA

5,550

5,163

7.5

21,420

Net profit

747

3,125

(76.1)

2,675

Adjusted net profit

939

1,047

(10.3)

4,114

Free cash flowa

1,228

822

49.4

4,939

Cash capexb

3,280

3,896

(15.8)

13,640

Cash capexb

(before spectrum)

3,245

2,831

14.6

10,958

Net debt

49,963

47,603

5.0

49,959

Number of employeesc

216,548

223,320

(3.0)

218,341

Comments on the table:
a  Before dividend payments and spectrum investment.
b  Cash outflows for investments in property, plant and equipment, and intangible assets (excluding goodwill).
c  At the reporting date.

Operating segments:

 

 

Q1 2017
millions of

Q1 2016
millions of 

Change %


FY 2016
millions 
of €

Germany

 

 

 

 

Total revenue

5,397

5,385

0.2

21,774

EBITDA

2,021

1,894

6.7

7,327

Adjusted EBITDA

2,070

2,052

0.9

8,237

Number of employeesa

64,973

68,506

(5.2)

65,452

United States

 

 

 

 

Total revenue

8,982

7,816

14.9

33,738

EBITDA

2,390

2,268

5.4

8,967

Adjusted EBITDA

2,386

1,908

25.1

8,561

Europe

 

 

 

 

Total revenue

2,781

2,763

0.7

11,454

EBITDA

877

909

(3.5)

3,773

Adjusted EBITDA

889

931

(4.5)

3,866

Systems Solutions

 

 

 

 

Order entry

1,274

1,556

(18.1)

6,851

Total revenue

1,704

1,859

(8.3)

6,993

Adjusted EBIT margin
(%)

(0.1)

5.4

(5.5p)

1.8

EBITDA

61

147

(58.5)

278

Adjusted EBITDA

96

196

(51.0)

530

Comments on the table:
a  At the reporting date.

Development of customer numbers
Operating segments: development of customer numbers in the first quarter of 2017

 

Mar. 31, 2017
thousands

Dec. 31, 2016
 thousands

Change
thousands

Change %

Germany

 

 

 

 

Mobile customers

42,114

41,849

265

0.6

Of which contract customers

25,270

25,219

51

0.2

Fixed-network lines

19,648

19,786

(138)

(0.7)

Of which retail IP-based

9,801

9,042

759

8.4

Broadband lines

12,989

12,922

67

0.5

Of which optical fibera

4,693

4,250

443

10.4

Television (IPTV, satellite)

2,955

2,879

76

2.6

Unbundled local loop lines (ULLs)

6,952

7,195

(243)

(3.4)

United States

 

 

 

 

Mobile customers

72,597

71,455

1,142

1.6

Of which branded postpaid customers

35,341

34,427

914

2.7

Of which branded prepay customers

20,199

19,813

386

1.9

Europe

 

 

 

 

Mobile customers

47,348

47,952

(604)

(1.3)

Of which contract customers

24,482

24,315

167

0.7

Fixed-network lines

8,486

8,531

(45)

(0.5)

Of which IP-based

5,190

5,016

174

3.5

Retail broadband lines

5,444

5,393

51

0.9

Television (IPTV, satellite, cable)

4,100

4,049

51

1.3

Comments on the table:
a  Sum of all FTTx access lines (e.g., FTTC/VDSL, vectoring, and FTTH).

Operating segments: development of customer numbers in year-on-year comparison

 

Mar. 31, 2017
thousands

Mar. 31, 2016
thousands

Change
thousands

Change %

Germany

 

 

 

 

Mobile customers

42,114

40,643

1,471

3.6

Of which contract customers

25,270

23,940

1,330

5.6

Fixed-network lines

19,648

20,093

(445)

(2.2)

Of which retail IP-based

9,801

7,470

2,331

31.2

Broadband lines

12,989

12,706

283

2.2

Of which optical fibera

4,693

3,286

1,407

42.8

Television (IPTV, satellite)

2,955

2,736

219

8.0

Unbundled local loop lines (ULLs)

6,952

7,867

(915)

(11.6)

United States

 

 

 

 

Mobile customers

72,597

65,503

7,094

10.8

Of which branded postpaid customers

35,341

32,736

2,605

8.0

Of which branded prepay customers

20,199

18,438

1,761

9.6

Europe

 

 

 

 

Mobile customers

47,348

48,540

(1,192)

(2.5)

Of which contract customers

24,482

23,719

763

3.2

Fixed-network lines

8,486

8,687

(201)

(2.3)

Of which IP-based

5,190

4,261

929

21.8

Retail broadband lines

5,444

5,254

190

3.6

Television (IPTV, satellite, cable)

4,100

3,922

178

4.5

Comments on the table:
a  Sum of all FTTx access lines (e.g., FTTC/VDSL, vectoring, and FTTH).

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. They should therefore be considered 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 Deutsche Telekom's ability to achieve its objectives are the progress of its staff restructuring initiatives and other cost-saving measures, and the impact of other significant strategic, labor, or business initiatives, including acquisitions, dispositions, business combinations, and network upgrade and build-out initiatives. In addition, stronger than expected competition, technological change, legal proceedings, and regulatory developments, among other factors, may have a material adverse effect on cost and revenue development. Further, an economic downturn in the markets, and changes in interest and currency exchange rates, may also have an impact on Deutsche Telekom's business development and the availability of financing on favorable conditions. Changes to Deutsche Telekom's expectations concerning future cash flows may lead to impairment write downs of assets carried at historical cost, which may materially affect the 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, the actual performance may materially differ from the performance expressed or implied by forward-looking statements. There is no assurance that the estimates or expectations will be achieved. Without prejudice to existing obligations under capital market law, Deutsche Telekom does 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 alternative performance measures, including, among others, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net profit, free cash flow, gross debt, and net debt. These performance measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with IFRS. Alternative performance measures are not subject to IFRS or any other generally accepted accounting principles. Other companies may define these terms in different ways.

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