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Deutsche Telekom plans to maintain growth while increasing investments

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  • Revenue growth planned with integrated products, cloud services, and in the United States
  • Adjusted EBITDA expected to increase by more than 6 percent to around 21.2 billion euros
  • Free cash flow expected to be up by around 8 percent at some 4.9 billion euros
  • Investments in terms of cash capex with a focus on network build-out and transformation set to increase to 11.2 billion euros

Increasing customer numbers for fiber-optic lines and integrated products, growing cloud revenues, and yet further growth in mobile customer numbers in the United States: Deutsche Telekom plans to maintain the dynamic growth of the last year and continue to grow profitably in 2016. Substantial increases are planned in revenue, adjusted EBITDA, and free cash flow, assuming constant exchange rates and a comparable composition of the Group compared with 2015.

Thus, the Group confirms its growth profile from the 2015 Capital Markets Day and the ambition levels communicated there.

Deutsche Telekom plans to achieve revenue growth in 2016, driven in the United States by continued customer growth and increasing service revenues. The basis for comparison for net revenue – as for the other key financial indicators – is the 2015 pro forma figure, assuming above all a comparable composition of the Group.

Revenue (in billions
of euros excluding
United States)
2015 reported2015 pro forma
(on a like-for-like basis)
2016 expected
Group

69.2

69.0

Increase
Germany

22.4

22.4

Slight decrease
United States
(in U.S. dollars)

32.1

32.1

Strong increase
Europe

12.7

12.9

Decrease
Systems Solutions

8.6

8.2

Stable trend
Of which Market Unit

7.1

6.7

Stable trend

Together with the revenue increase, adjusted EBITDA is set to increase substantially by more than 6 percent to around 21.2 billion euros. The earnings trend will be positively affected by the offer introduced by T-Mobile US to its customers in mid-2015 to lease mobile devices instead of buying them. The ambition level for the Group's earnings development for the four-year period is average annual growth of 2 to 4 percent.

Adjusted EBITDA
(in billions
of euros excluding
United States)
2015 reported2015 pro forma
(on a like-for-like basis)
2016 expected
Group

19.9

19.9

Approx. 21.2
Germany

8.8

8.8

Approx. 8.8
United States
(in U.S. dollars)

7.4

7.4

Approx. 9.2
Europe

4.3

4.3

Approx. 4.3
Systems Solutions

0.8

0.7

Approx. 0.8

Free cash flow (before dividend payments and spectrum investment) is expected to increase by around 8 percent to around 4.9 billion euros. For the period between 2014 and 2018, Deutsche Telekom has set an ambition level of average annual growth of around 10 percent. The dividend is expected to grow in line with free cash flow.

In order to support the Group's dynamic growth, a further increase in investments before mobile spectrum expenses to some 11.2 billion euros is planned for 2016. The core element is the build-out of the network infrastructure in terms of population coverage and increased transmission bandwidths. In addition, the switching to a consistent, IP-based infrastructure is being driven forward in Germany and the integrated subsidiaries in Europe. The generation of funds for the investments is also to be supported by efforts to achieve cost efficiencies, for example, by using the target costing approach or combining various functional services within Deutsche Telekom Services Europe, which was established in 2016. The new entity offers cross-segment and transnational services, such as accounting services, within the Group.

Cash capex (in billions
of euros excluding
United States)
2015 reported2015 pro forma
(on a like-for-like basis)
2016 expected
Group

10.8

10.8

Approx. 11.2
Germany

4.0

4.0

Increase
United States
(in U.S. dollars)

4.6

4.6

Stable trend
Europe

1.6

1.6

Strong increase
Systems Solutions

1.2

1.2

Slight decrease

United States
T-Mobile US expects to be able to continue the substantial increase in the number of customers over the last two years in 2016. Between 2.4 and 3.4 million net branded postpaid additions are expected for the current year. This continued customer growth is also expected to produce significant revenue growth, especially in mobile service revenues. By contrast, low-margin terminal equipment revenue is likely to decline to a certain extent as a result of the "JUMP! on Demand" leased device offering, for which the lease installments paid by the customer for the device are spread over the entire term of the agreement. This is in contrast to other contract models, where the purchase price is recognized in full at the start of the contract term. In this connection, the purchase price of the device will no longer be recognized as an ongoing expense affecting EBITDA at T-Mobile US, but rather will be classified as capital expenditure and the device will be depreciated over the term of the corresponding lease contract. The anticipated strong increase in adjusted EBITDA at T-Mobile US will largely be the result of this accounting standard.

Germany
In the German business, Deutsche Telekom expects the dynamic operational growth from the last year to continue. The core components are mobile and fixed-network broadband services as well as the integrated offer MagentaEins, which was introduced in mid-2014 and already had some two million customers as of the end of 2015. Telekom wants to increase its share in the TV market here.

The planned slight decline in revenue in the Germany operating segment is primarily due to a planned reduction in the low-margin merchandise business with mobile devices. Anticipated declines in traditional telephony and in text messaging revenues are to be offset by increasing service revenues, in particular in connection with MagentaMobil, growth in TV revenues, rising revenue from broadband business and the MagentaEins bundled products, and increases in the number of fiber-optic customers.

The Group expects adjusted EBITDA in Germany to remain stable, bolstered by savings in indirect costs as well as the reduction in shared functions. For this planned development, Deutsche Telekom intends to increase its cash capex in the Germany operating segment yet again in the current year to more than 4 billion euros. Cash capex had already increased substantially over the last two years: from 3.4 billion euros in 2013 to 3.8 billion euros in the following year, to 4.0 billion euros in 2015.

Europe
The integrated companies among the European subsidiaries plan to drive forward both the roll-out of the fiber-optic infrastructure and expand the LTE population coverage in mobile communications. The concept of the convergence brand MagentaOne with integrated offers for fixed-network and mobile communications was successfully launched in five markets in 2015. We have thus already won around one million FMC customers. Further national companies are to follow. These bundled products are to help to continue last year's growth of 4 percent in the number of retail broadband lines to 5.2 million and of 5.1 percent in the number of TV customers to 3.9 million in 2016 and the year after. After a revenue decline this year, revenue is expected to stabilize in 2017. Adjusted EBITDA is to remain stable in 2016 compared with the prior year thanks to increased productivity and a further reduction in indirect costs.

On the road to setting up a pan-European network, Hungary is expected to be the fifth national company to complete the transformation of fixed-network technology to IP in 2016. Deutsche Telekom plans to increase its capital expenditure on continued network build-out and the transformation towards a network platform based on standardized technology in 2016.

Systems Solutions
In line with the strategic area of operation "Lead in business", Deutsche Telekom is focusing Systems Solutions business primarily on the issues of cloud and security. The rapid growth in cloud business, which saw revenue increase by 30 percent at group level in the last year, is to continue. In parallel with this, the Telekom Security unit was established at the start of 2016 with some 1,000 specialists to pool the expertise and experience of the various group units in internal and external security.

Adjusted EBITDA in the Market Unit is set to increase slightly while revenue will remain on a par with the prior-year level. This trend will be supported by efficiency enhancements from the transformation program that T-Systems started in 2014.

Outlook for special factor in the first quarter of 2016
The sale of the British mobile communications company EE to the BT Group was completed in January 2016. In return for its 50-percent stake in EE, Deutsche Telekom received a financial stake of 12 percent in the BT Group's equity. Based on the data available as of the closing of the transaction on January 29, 2016, the income from the divestiture for Deutsche Telekom will amount to around 2.5 billion euros. This is recognized as a special factor in the first quarter of 2016, under EBITDA and in the same amount under net profit. This positive result has no effect on either adjusted EBITDA for the first quarter or the Group guidance for adjusted EBITDA for 2016 of 21.2 billion euros.

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 our ability to achieve our objectives are the progress of our 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 our 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 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 profit, 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.

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