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Deutsche Telekom receives further boost in growth from United States in the first quarter

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  • Net revenue up 8.0 percent to EUR 14.9 billion
  • Adjusted EBITDA down 3.9 percent as a result of market investments in the U.S.
  • Net profit more than tripled to EUR 1.8 billion due to partial sale of Scout24
  • T-Mobile US with 1.3 million new branded postpaid customers; total net additions of 2.4 million
  • Record number of VDSL and FTTH fiber-optic lines in Germany
  • Europe accelerates network build-out and drives forward revenue transformation

Thanks to the booming U.S. business, Deutsche Telekom upped the pace of growth in the first quarter of 2014. Revenue increased 8.0 percent year-on-year to EUR 14.9 billion in the first quarter. In organic terms, i.e., adjusted for changes in the composition of the Group, like the merger with MetroPCS in the United States, as well as currency effects, revenue still increased substantially by 4.2 percent. At the same time, adjusted EBITDA fell 3.9 percent to EUR 4.1 billion; in organic terms, it decreased by 8.3 percent. This decline was mainly attributable to higher market investments in the United States, which resulted in 2.4 million net customer adds between January and March.

"Our success story in the United States continues. The decision to invest boldly in this market was right on the mark," stated Tim Höttges, CEO of Deutsche Telekom. "We are once again delivering figures in the first quarter that confirm we are on the right track to achieving our leadership ambition in Europe's telecommunications industry."

The positive development in the first quarter comprises more than just the continued customer rush in the United States. In Germany, the Telekom and Congstar brands attracted 204,000 new mobile contract customers. At the same time, the 222,000 new lines based on the fiber-optic products VDSL and FTTH constitute a record high. In Europe, further progress was made with the migration to the IP platform and with the revenue transformation.

At EUR 1.8 billion, net profit was more than three times higher in the first three months than in the prior-year period. This is attributable to income from the partial sale of the Scout24 group. Adjusted for this factor, net profit decreased by 23.5 percent to EUR 587 million, reflecting the decline in adjusted EBITDA. Free cash flow declined 5.3 percent to EUR 983 million. Net debt was reduced by more than EUR 1 billion compared with the end of 2013 to EUR 38.0 billion.

Deutsche Telekom confirms its guidance for the full year 2014. Adjusted EBITDA is expected to be around EUR 17.6 billion, with free cash flow of around EUR 4.2 billion.

Germany– Record demand for fiber-optic products

On its home market, Deutsche Telekom held its lead in mobile service revenues, which were up 0.2 percent year-on-year. Customer growth in the German mobile business continued successfully. In the first quarter, Telekom won 551,000 mobile contract customers. Alongside customers gained in business with service providers, 204,000 of these additions were attributable to business under the Telekom and Congstar brands.

Fiber-optic products VDSL and FTTH recorded the highest net additions since market launch. In the first three months of this year, 222,000 customers opted for a fiber-optic line, compared with 156,000 in the same period in 2013. Of these customers, 93,000 came from the wholesale sector, mainly due to the success of what is known as the contingent model. The total number of fiber-optic lines increased by 53 percent within one year to over 1.7 million.

Development in the broadband market is still under pressure. The Company lost 7,000 broadband customers overall, hence the trend improved substantially compared with the previous three quarters. The network build-out has gained further momentum: Coverage with fiber-optic lines grew from 34 percent to 38 percent year-on-year; population coverage with the mobile standard LTE reached 74 percent after just 50 percent a year earlier. The migration to the all-IP platform is also progressing at an accelerating pace, with 2.6 million lines already migrated by the end of the first quarter.

Revenue in the Germany operating segment decreased 1.5 percent year-on-year to EUR 5.5 billion in the first quarter of 2014. Adjusted EBITDA was down 1.1 percent to EUR 2.2 billion, resulting in an adjusted EBITDA margin of 40.7 percent, which is slightly up on the prior-year level.

United States– Customer forecast revised upwards

T-Mobile US has once again caused a sensation on the U.S. mobile market with a new initiative. Since January, as part of the Un-carrier phase 4.0, the company has been reimbursing new customers' early termination fees charged by previous providers.

This contributed to further very strong customer growth. In the first quarter, T-Mobile US won 1.3 million new branded postpaid customers. In this customer segment, the churn rate fell to 1.5 percent, compared with 1.9 percent a year earlier. The total customer base increased by 2.4 million to 49.1 million. T-Mobile US revised its forecast for customer acquisition upwards, with 2.8 to 3.3 million net branded postpaid additions now expected in full year 2014. The previous forecast had been for between 2 and 3 million.

Customer growth also impacts on the financial figures. Total revenue increased by 43.3 percent to EUR 5.1 billion compared with the first quarter of 2013. In U.S. dollar terms, it increased by as much as almost 50 percent. Excluding the effect of the first-time consolidation of MetroPCS as of May 1, 2013, organic revenue growth amounted to 16.4 percent. Increased expenses for customer acquisition and marketing had a negative effect on adjusted EBITDA. In the first quarter of 2014, adjusted EBITDA decreased by 1.3 percent year-on-year in U.S. dollar terms; in euro terms, it declined by 5.0 percent to EUR 0.8 billion.

Europe– Revenue transformation advances

Transformation in business in Europe made further progress in the first quarter. The proportion of revenue generated by growth areas is now 25 percent compared with 22 percent a year earlier, thanks in particular to mobile data revenue and B2B/ICT business. LTE network coverage was substantially expanded. The number of base stations for the fourth-generation mobile communications standard increased from around 1,200 to some 6,700 within a year.

The migration to all-IP lines also progressed successfully. The proportion of IP-based lines grew by 10 percentage points to 29 percent. Following the complete migration in Macedonia, Slovak Telekom has now migrated 69 percent of lines and is on track to complete the IP conversion by the end of the year.

Revenue in the Europe operating segment declined by 2.6 percent in organic terms - i.e., adjusted for the effects of changes in the composition of the Group, such as the sale of the Bulgarian company Globul, and exchange rate effects - to EUR 3.1 billion. This was primarily due to regulatory decisions in mobile communications. The reported year-on-year revenue decline was 6.5 percent. In organic terms, adjusted EBITDA declined by 2.3 percent. On a reported basis, it declined by 6.4 percent to EUR 1.0 billion.

Systems Solutions – Realignment begins

A focus on profitability is the heart of the transformation program T-Systems 2015+. The financial figures for the first quarter of 2014 show the initial effects of this strategic realignment. In the first three months of this year, order entry in the Market Unit, which mainly comprises T-Systems' external business, declined by 28.4 percent year-on-year to EUR 1.4 billion. This reflects compliance with stricter profitability criteria for new business introduced as part of the restructuring.

It is therefore all the more pleasing that T-Systems has won one of the biggest systems integration orders in the history of the company. The contract with Daimler AG has an order volume in the three-digit million range. In the long term, T-Systems will assume sole responsibility for maintaining, developing, and integrating numerous software applications across all of the automaker's important business areas. In addition to cooperating in conventional systems integration business, the two companies will advance promising future topics such as connected cars and the cloud-based workplace together.

The abstention from less profitable activities is also having an impact on the Market Unit's revenue. Discontinued business activities, such as hardware reselling, as well as the still difficult industry climate resulted in a revenue decline of 6.7 percent to EUR 1.7 billion. Adjusted for the sales of T-Systems Italia and the Systems Integration business unit in France, as well as exchange rate effects, revenue decreased 4.1 percent in the first quarter.

This revenue decline also impacts on earnings. The adjusted EBIT margin fell to minus 0.4 percent in the first quarter, compared with plus 0.2 percent one year ago. The reduction of the Group's IT costs is progressing according to plan. They declined by another 4.3 percent in the first quarter of 2014 compared with the prior year.

The Deutsche Telekom Group at a glance:

 

 

Q1 2014

millions of €

Q1 2013

millions of €

Change

%

FY 2013

millions of €

Revenue

14,894

13,785

8.0

60,132

Proportion generated internationally

%

58.7

54.3

4.4p

57.8

EBITDA

5,638

4,079

38.2

15,834

Adjusted EBITDA

4,121

4,288

(3.9)

17,424

Net profit

1,817

564

n.a.

930

Adjusted net profit

587

767

(23.5)

2,755

Free cash flow a

983

1,038

(5.3)

4,606

Cash capex b (excl. spectrum)

2,065

2,087

(1.1)

8,861

Cash capex b

2,197

3,024

(27.3)

11,068

Net debt

37,964

37,119

2.3

39,093

Number of employees c

227,240

229,456

(1.0)

228,596

Comments on the table: MetroPCS was included in Deutsche Telekom's consolidated financial statements for the first time as of May 1, 2013.

a Before dividend payments, investments in spectrum, and before effects in connection with the AT&T transaction and compensation payments for MetroPCS employees. b Cash outflows for investments in property, plant and equipment, and intangible assets (excluding goodwill). c At reporting date.

Operating segments:

 Q1 2014 millions of €Q1 2013 millions of €Change %FY 2013 millions of €
Germany    
Total revenue

5,483

5,566

(1.5)

22,435

EBITDA

2,205

2,118

4.1

8,401

Adjusted EBITDA

2,230

2,255

(1.1)

8,936

Number of employees a

67,318

68,636

(1.9)

66,725

United States b

 

 

 

 

Total revenue

5,074

3,541

43.3

18,556

EBITDA

795

854

(6.9)

3,642

Adjusted EBITDA

844

888

(5.0)

3,874

Europe

 

 

 

 

Total revenue

3,125

3,343

(6.5)

13,704

EBITDA

1,012

1,139

(11.2)

4,371

Adjusted EBITDA

1,027

1,097

(6.4)

4,550

Systems Solutions

 

 

 

 

Order entry

1,414

1,976

(28.4)

7,792

Total revenue

2,052

2,226

(7.8)

9,038

Of which Market Unit

1,679

1,800

(6.7)

7,244

Adjusted EBIT margin (%)

(0.1)

0.2

(0.3p)

1.5

Adj. EBIT margin, Market Unit (%)

(0.4)

0.2

(0.6p)

2.8

EBITDA

81

108

(25.0)

358

Adjusted EBITDA

138

168

(17.9)

774

Comments on the table: ICSS/GNF business at the local business units (LBUs), which had previously been organizationally assigned to the Systems Solutions operating segment, was brought together as of January 1, 2014, and is now reported under the Europe operating segment. In addition, as of January 1, 2014, the local business customer units of T-Systems Czech Republic, which had previously been managed under the Systems Solutions operating segment, were merged with T-Mobile Czech Republic; they are reported in the Europe operating segment. Comparative prior-year figures have been adjusted retrospectively.

a At reporting date. b First-time inclusion of MetroPCS as of May 1, 2013.

Development of customer numbers

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

 

Mar. 31, 2014

thousands

Mar. 31, 2013

thousands

Change

thousands

Change

%

Germany    
Mobile customers

39,145

37,005

2,140

5.8

Of which contract customers

22,104

20,011

2,093

10.5

Fixed-network lines

21,202

22,113

(911)

(4.1)

Of which IP-based

2,640

1,215

1,425

n.a.

Broadband lines

12,354

12,443

(89)

(0.7)

Of which fiber   (FTTC/VDSL, vectoring, and FTTH)

1,375

1,015

360

35.5

TV (IPTV, satellite)

2,255

2,036

219

10.8

Unbundled local loop lines (ULLs)

9,207

9,422

(215)

(2.3)

United States a

 

 

 

 

Mobile customers

49,075

33,968

15,107

44.5

Of which branded postpaid customers

23,622

20,094

3,528

17.6

Of which branded prepay customers

15,537

6,028

9,509

n.a.

Europe b

 

 

 

 

Mobile customers

56,615

56,949

(334)

(0.6)

Of which contract cust.

25,521

25,035

486

1.9

Fixed-network lines

9,215

9,595

(380)

(4.0)

Of which IP-based

2,680

1,803

877

48.6

Retail broadband lines

4,784

4,560

224

4.9

TV (IPTV, satellite, cable)

3,558

2,969

589

19.8

Comments on the table: a First-time inclusion of MetroPCS as of May 1, 2013. b The fixed-network customers of our subsidiary Euronet Communications in the Netherlands have not been included in the Europe operating segment since January 2, 2014, following the sale of the shares held in the company. They have been eliminated from all historical customer figures to improve comparability.

Operating segments: Development of customer numbers in the first quarter of 2014

 Mar. 31, 2014 thousandsDec. 31, 2013 thousandsChange thousandsChange %
Germany    
Mobile customers

39,145

38,625

520

1.3

Of which contract customers

22,104

21,553

551

2.6

Fixed-network lines

21,202

21,417

(215)

(1.0)

Of which IP-based

2,640

2,141

499

23.3

Broadband lines

12,354

12,360

(6)

(0.0)

Of which fiber   (FTTC/VDSL, vectoring, and FTTH)

1,375

1,246

129

10.4

TV (IPTV, satellite)

2,255

2,177

78

3.6

Unbundled local loop lines (ULLs)

9,207

9,257

(50)

(0.5)

United States a

 

 

 

 

Mobile customers

49,075

46,684

2,391

5.1

Of which branded postpaid customers

23,622

22,299

1,323

5.9

Of which branded prepay customers

15,537

15,072

465

3.1

Europe b

 

 

 

 

Mobile customers

56,615

56,679

(64)

(0.1)

Of which contract customers

25,521

25,509

12

0.0

Fixed-network lines

9,215

9,284

(69)

(0.7)

Of which IP-based

2,680

2,472

208

8.4

Retail broadband lines

4,784

4,744

40

0.8

TV (IPTV, satellite, cable)

3,558

3,503

55

1.6

Comments on the table: a First-time inclusion of MetroPCS as of May 1, 2013. b The fixed-network customers of our subsidiary Euronet Communications in the Netherlands have not been included in the Europe operating segment since January 2, 2014, following the sale of the shares held in the company. They have been eliminated from all historical customer figures to improve comparability.

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 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 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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