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Deutsche Telekom records successes worldwide in the third quarter

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  • Net revenue of the Group up by 0.8 percent in the third quarter and, for the first time, more than 60 percent of revenue generated abroad
  • Adjusted EBITDA down by 1.8 percent due to high market investments
  • Capital expenditure up by more than 10 percent
  • Guidance confirmed for the full year
  • Telekom extends market leadership in service revenues in German mobile communications compared with the prior year
  • Record branded postpaid customer growth at T-Mobile US
  • Europeincreases adjusted EBITDA by 35.7 percent

All strategy-related trends are clearly on an upward trajectory. An excellent performance in the German mobile market, record customer additions in the United States, strong financial development in Europe and improvements in Systems Solutions – these are Deutsche Telekom's results for the third quarter. These trends gave rise to an increase in the Group's net revenue by 0.8 percent compared with the prior-year period to EUR 15.6 billion. For the first time in the history of Deutsche Telekom, more than 60 percent of revenue was generated abroad.

Higher market investments in Germany and the United States had a noticeable effect on adjusted EBITDA. Nevertheless, the decline remained slight, down just 1.8 percent to EUR 4.6 billion. A moderate decline of 1.8 percent was also recorded for the first nine months of the year.

"The challenges vary regionally, but we are clearly making progress everywhere," said Tim Höttges, CEO of Deutsche Telekom. "Whether in the Unites States, Europe, or our home market of Germany, it has been a very successful quarter for us."

The Group substantially increased its capital expenditure once again. In the third quarter, cash capex excluding expenses for mobile spectrum amounted to EUR 2.5 billion and thus was 10.3 percent higher than a year earlier. At EUR 800 million, adjusted net profit remained more or less stable in the third quarter, down 2.8 percent. Unadjusted, it decreased 13.9 percent, as the proceeds from the sale of the Bulgarian subsidiaries had been posted in the prior-year quarter.

Free cash flow decreased by 21.2 percent to EUR 1.1 billion in the third quarter. This is in line with the guidance, as is the cumulative figure for the first nine months of EUR 3.2 billion. Deutsche Telekom has confirmed its forecast for the full year in line with market expectations. Adjusted EBITDA is expected to amount to around EUR 17.6 billion. Free cash flow is expected to total some EUR 4.2 billion.

Germany – Mobile market leadership defended

Telekom remains the clear leader in service revenues in the German mobile market, significantly extending its lead on the market number two. Mobile service revenues remained stable year-on-year in the third quarter, in a mobile market that is expected to have declined slightly. The mobile contract customer base increased significantly between July and September. Telekom won 432,000 mobile contract customers in the third quarter. At 235,000, net additions under the Telekom and Congstar brands were more than 40 percent up on the prior-year figure.

This success is also attributable to Telekom's multi-award winning network. Network coverage with the latest mobile standard LTE has now grown to 79 percent of the population. In the third quarter, Telekom sold almost 1.4 million smartphones in Germany – the second highest number of all time.

Demand for fiber-optic products VDSL and FTTH remains strong. In the third quarter, 225,000 new customers opted for a fiber-optic-based line, almost 90 percent more than in the prior year. Thus, the total number of fiber-optic-based lines climbed by almost 60 percent within one year to almost 2.2 million.

There was also an encouraging trend in the number of Entertain customers, which rose by 12.1 percent within a year to almost 2.4 million. In the broadband market, the decrease expected due to the large number of contracts expiring in the third quarter was much smaller than in the prior-year period, with a decline of 20,000 customers.

Revenue in the Germany operating segment only decreased slightly in the third quarter of 2014, as during the year so far, down 1.5 percent compared with the same period in the prior year, and amounted to EUR 5.6 billion. Adjusted EBITDA fell, as expected, due to a 2.1 percent increase in market investments to EUR 2.3 billion, resulting in an adjusted EBITDA margin of 41.6 percent. The reasons for the higher market investments were the successful launch of the MagentaEins, Magenta Mobil rate plans, and the launch of the iPhone 6.

United States – Customer forecast raised again

In the third quarter, T-Mobile US achieved record customer growth and, thanks to its increased revenue, clearly set itself apart from the competition. 1.4 million branded postpaid customer additions – this has never been seen before within three months at T-Mobile US. The majority related to phone net adds. This growth was also the best achieved among the four national competitors, as was the increase of 411,000 in the number of branded prepay customers in the third quarter. Overall, the number of T-Mobile US customers increased by 2.35 million to 52.9 million. Compared with the end of the first quarter of 2013 – the start of the Un-carrier strategy and before the business combination with MetroPCS – the customer base grew by around 19 million, or more than 55 percent – in just 18 months.

The key factors for this ongoing success were the Un-carrier strategy with its innovative and radically simplified rate plans, the modern handset portfolio including the new iPhone 6, and the outstanding network quality, with LTE network coverage that now includes 250 million people. The addition of another ten markets to the sales region for the MetroPCS brand in the third quarter of 2014 alone also made a contribution.

The expansion of the customer base has also given momentum to revenue development. In the three months of the year, total revenue increased by 8.7 percent to EUR 5.6 billion. Service revenues grew by 10.1 percent to EUR 4.2 billion. On a U.S. GAAP basis, T-Mobile US reported for the second time in a row the strongest growth in service revenues of the four mobile providers that operate nationwide in the United States.

Adjusted EBITDA declined slightly by 6.3 percent to EUR 1.0 billion. This was attributable to strong customer growth, as it entails higher customer acquisition expenses. T-Mobile US wants to maintain the momentum in customer acquisition again in the fourth quarter. For the third time this year, the company raised its expectation for growth in branded postpaid customers, bringing it up to 4.3 to 4.7 million in the full year, from the previous 3.0 to 3.5 million. In the first nine months of 2014, the growth in branded postpaid customers stood at 3.6 million, more than three times as much as in the prior year. Despite this strong customer growth, T-Mobile US confirms its forecast for adjusted EBITDA of between USD 5.6 and 5.8 billion on a U.S. GAAP basis, but now expects it to be at the lower end of this range.

Europe – Positive trend in many countries

The key financial indicators of the European national companies are showing a strong development. Following substantial losses owing to the difficult environment, the Europe segment recorded a revenue decline of just 3.6 percent in the third quarter of 2014 to EUR 3.3 billion. This decrease is almost entirely attributable to regulatory decisions relating to mobile communications. At the same time, adjusted EBITDA increased by 1.3 percent to EUR 1.2 billion, primarily due to systematic cost management. As a result, the adjusted EBITDA margin climbed by 34.0 percent within a year to 35.7 percent.

The operational highlights of the quarter included the allocation of Romtelcom and Cosmote to the overall Telekom Romania brand and the launch of a completely new rate plan system in Austria. There were strong developments in the business customer segment (B2B/ICT) – above all in Greece and Slovakia. In Hungary, Magyar Telekom increased its mobile customer numbers and revenues. OTE continues to perform exceptionally well in the difficult Greek market.

The revenue transformation continues to advance in the Europe segment. In the quarter just ended, 26 percent of revenue came from growth areas, 4 percentage points more than a year earlier. Rapid progress is also being made in the modernization of the networks. In mobile communications, the number of LTE sites more than quadrupled to around 11,900 within a year. As of the end of the third quarter, 35 percent of all fixed-network lines were IP-based. This is 11 percentage points higher than in the prior year.

Systems Solutions – Strong order entry thanks to toll collection in Belgium

Strong new business, moderate revenue declines, and a substantial increase in cloud revenue were key trends at T-Systems in the third quarter. Order entry in the Market Unit, which mainly comprises T-Systems' external business, increased by 37.6 percent year-on-year to EUR 2.4 billion. This is primarily due to the contract concluded at the end of July by the T-Systems subsidiary Satellic on the set-up of a toll collection system in Belgium. Thus, the company managed to close a major deal under the stricter profitability criteria introduced as part of the transformation program T-Systems 2015+.

In the third quarter, revenues of the Market Unit decreased by 4.7 percent to EUR 1.7 billion year-on-year. Ongoing price pressure in the industry had an adverse effect on revenue. In addition, this decline is due in part to the deliberate non-extension of contracts due to the higher profitability hurdles introduced as part of restructuring. At 3.3 percent, the adjusted EBIT margin of the Market Unit was 0.6 percentage points down year-on-year in the third quarter. However, this is a significant improvement compared with the first two quarters of this year and shows that the measures taken are having an impact.

The development in the growth area environment is particularly encouraging. Cloud revenues increased by almost 50 percent in the first nine months of the year compared to the prior-year period. The third quarter alone saw a year-on-year increase of 70 percent.

The Deutsche Telekom Group at a glance:

 

 

Q3 2014

millions of €

Q3 2013

millions of € a

Change

%

Q1-Q3 2014

millions of €

Q1-Q3 2013

millions of € a

Change

%

FY 2013

millions of € a

Net revenue

15,648

15,525

0.8

45,656

44,467

2.7

60,132

Proportion generated internationally

%

60.3

58.8

1.5p

59.5

57.3

2.2p

57.8

EBITDA

4,007

4,468

(10.3)

14,062

12,579

11.8

15,834

Adjusted EBITDA

4,575

4,659

(1.8)

13,125

13,364

(1.8)

17,424

Net profit  

506

588

(13.9)

3,034

1,682

80.4

930

Adjusted net profit

800

823

(2.8)

2,023

2,400

(15.7)

2,755

Free cash flow a

1,125

1,427

(21.2)

3,157

3,574

(11.7)

4,606

Cash capex b   (excl. spectrum)

2,493

2,260

10.3

6,755

6,415

5.3

8,861

Cash capex b

2,584

2,378

8.7

8,727

7,600

14.8

11,068

Net debt

 

 

 

41,809

39,726

5.2

39,093

Number of employees c

 

 

 

228,588

229,094

(0.2)

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:

 Q3 2014 millions of €Q3 2013 millions of €Change %Q1-Q3 2014 millions of €Q1-Q3 2013 millions of €Change %FY 2013 millions of €
Germany       
Total revenue

5,587

5,670

(1.5)

16,534

16,801

(1.6)

22,435

EBITDA

2,236

2,268

(1.4)

6,658

6,547

1.7

8,401

Adjusted EBITDA

2,324

2,375

(2.1)

6,810

6,909

(1.4)

8,936

Number of employees a

 

 

 

68,788

67,434

2.0

66,725

United States b

 

 

 

 

 

 

 

Total revenue

5,554

5,108

8.7

15,898

13,474

18.0

18,556

EBITDA

869

1,019

(14.7)

3,075

2,757

11.5

3,642

Adjusted EBITDA

1,014

1,082

(6.3)

2,941

2,900

1.4

3,874

Europe c

 

 

 

 

 

 

 

Total revenue

3,317

3,440

(3.6)

9,605

10,218

(6.0)

13,704

EBITDA

1,142

1,271

(10.1)

3,228

3,526

(8.5)

4,371

Adjusted EBITDA

1,184

1,169

1.3

3,309

3,383

(2.2)

4,550

Systems Solutions

 

 

 

 

 

 

 

Order entry

2,351

1,708

37.6

5,076

5,562

(8.7)

7,792

Total revenue

2,068

2,174

(4.9)

6,307

6,570

(4.0)

9,038

Of which Market Unit

1,678

1,761

(4.7)

5,031

5,342

(5.8)

7,244

Adjusted EBIT margin (%)

2.7

2.3

0.4p

1.0

1.6

(0.6p)

1.5

Adj. EBIT margin, Market Unit (%)

3.3

3.9

(0.6p)

0.9

2.3

(1.4p)

2.8

EBITDA

44

128

(65.6)

280

277

1.1

358

Adjusted EBITDA

197

197

0.0

623

575

8.3

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. Furthermore, 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 figures have been adjusted retrospectively. a   At reporting date. b   First-time inclusion of MetroPCS as of May 1, 2013. c   First-time inclusion of the GTS Central Europe group since May 30, 2014.

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

 

Sept. 30, 2014

thousands

June 30, 2014

thousands

Change

thousands

Change

%

Germany    
Mobile customers

39,653

39,337

316

0.8

Of which contract customers

22,812

22,379

433

1.9

Fixed-network lines

20,841

21,034

(193)

(0.9)

Of which IP-based

3,744

3,167

577

18.2

Broadband lines

12,340

12,361

(21)

(0.2)

Of which optical fiber a

1,608

1,494

114

7.6

TV (IPTV, satellite)

2,377

2,318

59

2.5

Unbundled local loop lines (ULLs)

8,954

9,101

(147)

(1.6)

United States

 

 

 

 

Mobile customers

52,890

50,545

2,345

4.6

Of which branded postpaid customers

25,909

24,530

1,379

5.6

Of which branded prepay customers

16,050

15,639

411

2.6

Europe b

 

 

 

 

Mobile customers

56,087

56,485

(398)

(0.7)

Of which contract customers

25,323

25,569

(246)

(1.0)

Fixed-network lines

9,073

9,172

(99)

(1.1)

Of which IP-based

3,169

2,934

235

8.0

Retail broadband lines

4,880

4,849

31

0.6

Television (IPTV, satellite, cable)

3,670

3,619

51

1.4

Comments on the table: a Sum of all FTTx access lines (e.g., FTTC/VDSL, vectoring, and FTTH). b   The fixed-network customers of our subsidiary Euronet Communications in the Netherlands have no longer 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 year-on-year comparison

 Sept. 30, 2014 thousandsSept. 30, 2013 thousandsChange thousandsChange %
Germany    
Mobile customers

39,653

37,936

1,717

4.5

Of which contract customers

22,812

20,915

1,897

9.1

Fixed-network lines

20,841

21,625

(784)

(3.6)

Of which IP-based

3,744

1,774

1,970

n.a.

Broadband lines

12,340

12,383

(43)

(0.3)

Of which optical fiber a

1,608

1,165

443

38.0

TV (IPTV, satellite)

2,377

2,121

256

12.1

Unbundled local loop lines (ULLs)

8,954

9,299

(345)

(3.7)

United States

 

 

 

 

Mobile customers

52,890

45,039

7,851

17.4

Of which branded postpaid customers

25,909

21,430

4,479

20.9

Of which branded prepay customers

16,050

14,960

1,090

7.3

Europe b

 

 

 

 

Mobile customers

56,087

56,825

(738)

(1.3)

Of which contract customers

25,323

25,385

(62)

(0.2)

Fixed-network lines

9,073

9,362

(289)

(3.1)

Of which IP-based

3,169

2,258

911

40.3

Retail broadband lines

4,880

4,682

198

4.2

Television (IPTV, satellite, cable)

3,670

3,398

272

8.0

Comments on the table: a Sum of all FTTx access lines (e.g., FTTC/VDSL, vectoring, and FTTH). b The fixed-network customers of our subsidiary Euronet Communications in the Netherlands have no longer 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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