Deutsche Telekom Issues Profits Warning - May Write Down T-Mobile Value

Deutsche Telekom has issued a profits warning, and now expects adjusted EBITDA in 2009 to be 2 to 4 percent below last year. The company is now expecting to post EBITDA in the range of EUR18.7 billion - EUR19.1 billionn (US$24.7 billionn) after an initial forecast of EUR19.5 billion.

The group lays much of the blame ar the impact of the economic slowdown and the more intense competitive environment, particularly in the United States. In addition, there were dramatic movements in the exchange rates with the United Kingdom and Poland.

Disregarding the growth effect of OTE, Deutsche Telekom expects adjusted Group EBITDA to be between 2 and 4 percent lower for the full year in these unfavorable conditions. Free cash flow is expected to reach around EUR 6.4 billion on the back of measures that were initiated early.

Chief Financial Officer Timotheus Höttges said: "We are currently in difficult times for rapid, comprehensive and clear communication. For that reason, we have decided to inform our shareholders as early as possible."

Monthly ARPU at T-Mobile USA fell, partly as a result of lower roaming revenues due to the decrease in traveling. The roll-out of the 3G network, on the other hand, and increased expenditure for new customer business and retention lead to significantly increased costs.

The Polish company PTC suffered considerably from the sharp decline in its home currency, the zloty, which fell around 26 percent year-on-year against the euro. In operating business, customer acquisition expenses also increased significantly.

T-Mobile UK recorded a significant drop in revenues of around 21 percent due to the fall in the value of the pound sterling. Economic effects also had a negative impact on monthly revenue per customer here, too. The increased numbers of customers burdened the results for the first quarter with higher customer acquisition costs.

In the case of T-Mobile UK, Deutsche Telekom has initiated a nonscheduled impairment test. Even taking into account the improvements in results planned in the course of the year, the Board of Management expects an impairment charge on the goodwill of T-Mobile UK to be necessary. This will be reported as a special factor, however, and will not impact EBITDA, nor will it lead to a cash outflow.

Various cost-cutting measures being planned at T Mobile UK, particularly in the areas of administration, advertising and technology. The main task of the new management team is to strictly focus on repositioning the business in the difficult economic environment.

These new expectations are based on the assumption that the economic environment will not decline significantly further and that exchange rates will remain approximately at current levels.

Exchange rate effects negatively impact on European mobile communications business

Revenue from European mobile communications increased by 2 percent in the first quarter to EUR 5.1 billion. The development of adjusted EBITDA on the other hand remained below that of revenue, and below expectations, with a decrease of 9 percent to EUR 1.6 billion.

Excluding the first-time consolidation of the OTE group for two months of the current year, revenue decreased by 8 percent or around EUR 0.4 billion to EUR 4.6 billion, while adjusted EBITDA fell by 18 percent or around EUR 0.3 billion to EUR 1.4 billion.

The changes in exchange rates had a negative effect of around EUR 0.3 billion on revenue and around EUR 0.1 billion on adjusted EBITDA. This is due in particular to developments in the Polish and British currencies.

Rise in costs from the successful acquisition of new customers

In operating business, T Mobile UK and the Polish company PTC success-fully continued to attract new customers: T Mobile UK recorded 53,000 net contract additions (19,000 more than in the same period last year), and net contract additions in Poland totaled 198,000 (190,000 in the prior year). On the other hand, this also resulted in increased costs for which there were no corresponding revenues in the quarter.

On top of that, the sharp drop, for example, in roaming and visitor revenues in both countries as a result of the decrease in traveling due to the prevail-ing economic situation, also had a significant impact.

Recession weighs on revenues at T-Mobile USA

In the United States, T Mobile USA's revenue increased by 20 percent to EUR 4.1 billion. Adjusted EBITDA also grew by 10 percent to EUR 1.1 billion. The development of operations is being significantly boosted by the strength of the U.S. dollar against the euro: measured in dollars, however, revenue increased by 4 percent, and adjusted EBITDA fell by around 4 percent.

This was the result of various factors. In the contract customer segment, for example, the number of call minutes decreased by 8 percent in the first quarter. Revenue from roaming charges also decreased. This was a major factor in the decrease in revenue per contract customer of US$3 compared with the prior-year quarter to US$53. In addition, the customer mix at T-Mobile changed over the past quarters. Prepay business accounted for around 60 percent of a total of 415,000 new customers in the first quarter of 2009, compared with around 25 percent of 981,000 net additions in the same quarter of 2008.

In addition, the advance costs in the first quarter of 2009 resulting from the 3G roll-out contributed to the decline in results. The sale of more than 1 million G1 handsets since the market launch in October 2008 alone, and a total of over 1.5 million 3G-capable handsets sold in the United States, clearly shows, however, that customers are demanding products and ser-vices based on these increased bandwidths and that the provision of these products and services is an important selling point in competition. T-Mobile USA will therefore increase the number of POPs covered by the 3G network this year from 107 million to 205 million.

T-Mobile USA launched a campaign in February 2009 to combat churn as a consequence of expiring two-year contracts which is beginning to generate results. The churn rate among contract customers fell from 2.4 percent in the fourth quarter of 2008 to 2.3 percent in the first three months of this year.

Posted to the site on 21st April 2009