Deutsche Telekom reports stable development in operations in the third quarter of 2012 at the same time as a considerable book loss

Deutsche Telekom showed an extremely positive development in operations in the third quarter of 2012. On the other hand, a considerable book loss had to be reported following an accounting-relevant special factor. Revenue from operations amounted to EUR 14.7 billion, the same level as in the previous year. Adjusted EBITDA declined by 2.6 percent to EUR 4.8 billion. By contrast, free cash flow increased by 37.4 percent to EUR 2.3 billion. For the first nine months of the year, adjusted EBITDA decreased slightly by 0.9 percent to EUR 14.0 billion, while free cash flow increased by 13.2 percent to EUR 5.1 billion. The Group reiterated its guidance and dividend statement for the full year 2012.

Adjusted net profit totaled EUR 0.9 billion, 28.3 percent less than in the prior year. However, taking into account the fact that depreciation and amortization were discontinued in the United States in the prior year due to the agreement in place at the time with AT&T, adjusted net profit remained stable on a like-for-like basis. In unadjusted terms, there was a net loss in the third quarter of EUR 6.9 billion. This was due to the asset impairments, including on goodwill, at T-Mobile USA. This non-cash special accounting factor of EUR 7.4 billion resulted from an impairment test in connection with the agreement on the merger with MetroPCS.

“We made a forward-looking decision for our U.S. business in full awareness of the accounting consequences,” said René Obermann, CEO of Deutsche Telekom. “Anyone seeing only the clear net loss is overlooking the fact that our operating business is completely on track. Unlike many of our competitors, we offer reliability.”

CFO Timotheus Höttges explained the impact of the impairment test: “The only reason why we had to recognize the impairment loss was that IFRS requires us to take the MetroPCS share price as valuation basis. The impairment loss, however, is not attributable to a change in management’s assessment of the development in operations in the United States. Any future increase in value of the larger and more powerful newly combined entity is not taken into account in the carrying amount determined at this point in time.”

Deutsche Telekom reduced its net debt by more than 10 percent year-on-year to EUR 39 billion. In the third quarter of 2012 alone, debt repayment amounted to EUR 2 billion. In light of its solid balance sheet ratios and stable operating performance, Deutsche Telekom can benefit from excellent conditions on the debt markets. In October alone, it succeeded in placing bonds with a total volume of more than EUR 1 billion at very favorable conditions. Regardless of this, investments in the future remained high. At EUR 2.2 billion, cash capex increased by 1.0 percent against the prior-year quarter.

Germany – positive trends continue

In Germany, the positive trend among users of the Internet-based television service Entertain, mobile contract customers, and VDSL lines continued in the third quarter of 2012. The number of Entertain customers reached 1.9 million by the end of September, 39 percent more than in the prior-year period. Year-on-year growth in fast VDSL lines even reached 55 percent. At the same time, line losses in Deutsche Telekom’s traditional fixed network decreased by 12 percent compared with the same quarter in the prior year. Mobile contract net additions reached 555,000 in the third quarter. 171,000 of these new customers were added in branded business under the Deutsche Telekom and Congstar brands, while the rest were added in the fast-growing, but much lower-revenue reseller segment (service providers).

At EUR 5.7 billion, revenue in the Germany operating segment was just 1.3 percent down on the prior-year level in the third quarter. At the same time, adjusted EBITDA declined 2.5 percent to EUR 2.4 billion due to increased market investments. The adjusted EBITDA margin therefore decreased slightly year-on-year, but at 41.9 percent, reached the high level of the second quarter.

The trend in mobile service revenues has improved over the course of the year. While declining by 1.8 percent and 1.0 percent respectively in the first two quarters of the year, the decrease was at just 0.5 percent in the third quarter. This is the first sign of success on the way to winning back market leadership in mobile service revenues. Mobile data revenues increased by 21.2 percent compared with the third quarter of 2011 to EUR 498 million.

Europe – good performance in a still challenging environment

The national companies included in the Europe operating segment recorded robust development overall in the third quarter of 2012, despite an increasingly challenging environment. Economic development deteriorated once again and regulatory interventions such as the reduction in mobile termination rates in 9 out of 13 countries had a negative impact on revenue development quarter-on-quarter. In combination with special taxes imposed in a number of countries, the negative impact on revenue in the third quarter amounted to more than EUR 100 million compared with the prior-year period. In Hungary, for example, telecommunications companies have been subject to an additional special levy since July. This is already the second special levy to hit earnings in the industry in Hungary.

Total revenue in the Europe segment declined 5.7 percent year-on-year to EUR 3.7 billion. At the same time, adjusted EBITDA decreased by 4.3 percent to EUR 1.3 billion. This results in an adjusted EDITDA margin for the third quarter of 2012 of 36.3 percent, 0.5 percentage points higher than one year before. Adjusted for the impact of exchange rate fluctuations, regulatory decisions in mobile communications and special levies, the decrease in revenue in the third quarter amounted to 3.1 percent and the drop in adjusted EBITDA to 1.7 percent.

Successful calling plans increased profit at T-Mobile Netherlands. The Dutch company increased its adjusted EBITDA margin to 34.6 percent – 6.3 percentage points higher than in the prior-year quarter. Romania also recorded an encouraging performance, with adjusted EBITDA up by 8.3 percent.

The mobile contract customer base for the whole segment increased by a million within a year, to 27.8 million. In the fixed-network segment, Internet-based television (IPTV) business performed well, with a 17.3 percent increase in the customer base. In Greece, OTE put a halt to losses in broadband customers, recording an increase of 3 percent.

United States – total number of customers increased

At T-Mobile USA, events were dominated by the announcement of the merger with MetroPCS and the appointment of the new CEO John Legere. The development of operations between July and September, however, showed a mixed picture, with encouraging trends and ongoing challenges.

T-Mobile USA recorded 160,000 net additions in the third quarter. This was thanks to the strong performance in the branded prepay segment, with 365,000 branded prepay net additions. The contract customer segment recorded a loss of 492,000 customers in the past quarter, which was better than in the second quarter, but is still unsatisfactory. The churn rate for branded contract customers stood at 2.3 percent, a year-on-year decline of 0.3 percentage points. Against the second quarter, it increased slightly. One reason for this was the launch of iPhone 5 by other mobile operators.

Revenue in the third quarter decreased by 5.9 percent year-on-year to USD 4.9 billion. Simultaneously, adjusted EBITDA decreased as expected by 14.2 percent to USD 1.2 billion as a result of increased spending on advertising. In euro terms, the strong development of the U.S. dollar exchange rate had a positive impact: Revenue increased by 6.3 percent and adjusted EBITDA declined by 3.0 percent.

Systems Solutions – continued growth in external revenues

In the third quarter of 2012, T-Systems used a new reporting logic for the first time. All internal IT activities in Germany, which had previously been distributed across the Germany, GHS, and T-Systems segments, were pooled within the Systems Solutions operating segment in the Telekom IT unit. As a milestone on the road to an efficient IT function, Telekom IT was launched as a cost center without margin charging as of July 1 of this year. This has a particularly substantial impact on earnings, since earnings attributable to revenues generated within the Group are eliminated. For better comparability, the prior-year figures were adjusted accordingly.

External revenues in the Systems Solutions operating segment increased by 0.8 percent in the third quarter to EUR 1.6 billion. Revenue development is negatively impacted by persistently high competitive and price pressure in the industry. As far as internal revenues are concerned, T-Systems aims to scale back Telekom IT revenue for the long term because this type of income translates directly into IT costs for the Deutsche Telekom Group. Seasonal effects in the project business and cost-cutting measures meant that Telekom IT’s revenues decreased substantially. Total revenue in the Systems Solutions segment decreased by 10.7 percent in the third quarter to EUR 2.2 billion. The segment’s adjusted EBIT margin stood at 1.2 percent in the past quarter, compared with -0.1 percent on a like-for-like basis in the third quarter of 2011. For the first nine months of 2012, this profitability indicator amounted to 0.6 percent, compared with -0.4 percent between January and September 2011.

Order entry declined by 5.8 percent compared with the prior-year quarter to EUR 1.6 billion.This reflects the ongoing trend towards smaller, cloud-based deals where the calculation of volumes is based on minimum purchase quantities. Contracts signed with the Catalan government, the chemicals company Clariant, and the oil company BP were some of the largest deals in the third quarter of 2012.

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