Deutsche Telekom 1Q Net Drops, Sells French Operations"

BERLIN -(Dow Jones)- Deutsche Telekom, Europe's largest telecommunications company by sales, Thursday posted a 58% drop in first-quarter net profit as the customer exodus at its fixed-line business continued.

The Bonn-based telecoms giant said net profit in the three months to March 31 fell to EUR459 million from EUR1.09 billion a year-earlier, far below analysts' forecast of EUR773 million.

Earnings were also hit by EUR153 million in unexpected costs booked in the quarter after the sale of parts of its staffing agency Vivento.

Sales grew 4.1% to EUR15.45 billion from EUR14.84 billion, slightly ahead of analysts estimates of EUR15.31 billion, as growth at its wireless telephone business more than compensated for the shrinking fixed-line business.

"The net profit number clearly disappoints - this could weigh on the shares," a Frankfurt-based trader said. But the trader added that the report offered "a mixed bag" as customer gains in the U.S. were ahead of expectations, while fixed-line customer losses in Germany were in line.

The main reason for Deutsche Telekom's ongoing earnings slide has been the loss of fixed-line customers to low-cost rivals. The former fixed-line monopoly in Germany lost 588,000 fixed-line customers in the first quarter.

However, the shrinking traditional telephone business was partly offset by continued growth at Deutsche Telekom's high-speed Internet business in Germany, as it gained 572,000 subscribers.

Still, sales in Germany fell 5.1% to EUR7.8 billion, while sales derived from international operations shot up 15.5% to EUR7.7 billion - primarily fueled by strong growth at its wireless unit T-Mobile USA which recorded 980,000 new subscribers in the quarter.

"The group's financial figures are pointing in the right direction for us to achieve our targets for the year," Chief Executive Rene Obermann said in a statement. "But we are fully aware that here in Germany we are exposed to considerable competitive pressures."

Deutsche Telekom targets in 2007 an adjusted operating profit of EUR19 billion - similar to the level reached in 2006 - while predicting moderate sales growth and EUR6 billion in free cash flow.

In the first quarter, adjusted operating profit - measured in earnings before interest, taxes, depreciation and amortization before special items - fell 5.8% to EUR4.68 billion as earnings at its fixed-line unit dropped 19% to EUR1.7 billion.

Deutsche Telekom also said that it has reached an agreement to sell its French Internet business Club Internet to Neuf Cegetel. The transaction is expected to be completed by the end of the current second quarter.

According to a person familiar with the deal, Deutsche Telekom will receive an amount in the range of EUR460 million to EUR500 million for the Club Internet sale.

Deutsche Telekom is scheduled to host a media conference at 0800 GMT in which it is expected to provide an update on its controversial plans to transfer 50,000 of its service staff into new units, with the aim of amending the contracts to include longer working hours and lower wages.

Following several failed rounds of negotiations to come to an agreement on the terms of the contract amendments, labor union ver.di has been planning a broad strike among German staff of Deutsche Telekom, which may start already later this week.

Ver.di is expected to announce later Thursday whether it will push ahead with the strike, which could be the biggest at Deutsche Telekom since it was privatized in 1995 and comes a little less than six months after Chief Executive Rene Obermann took the top post.

The job transfer plan is central to Deutsche Telekom's plans to lower its cost base in Germany, a move much desired by its investors as they have grown increasingly impatient with the slow pace of change at the telecom titan and a sluggish share price.

Deutsche Telekom shares closed Wednesday down EUR0.04 or 0.2% at EUR12.65. The shares have slipped more than 3% since Obermann became CEO in mid-November amid a rising benchmark DAX index.

Company Web site: http://www.telekom.de

-By Joon Knapen, Dow Jones Newswires; +49-30-28884127; joon.knapen@dowjones.com

(Stefan Mechnig in Bonn contributed to this article.)

(END) Dow Jones Newswires"

Posted to the site on 10th May 2007