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Author: Dan Bieler
Deutsche Telekom has reported its Q2 2006 results. Net revenues came in at €30bn, up 3.2% year-on-year (down 4% domestic and up 13.5% international). EBITDA was €9.8bn, down 2.4% (down 5.8% domestic and up 4.1% international). Net income remained flat at €2bn. Operating free cash flow (OFCF) increased by 11% to €5.82bn resulting in an increase of cash efficiency from 17.9% to 19.4% - but in Q2 2006 OFCF decreased by 15%. Net debt decreased to €38.8bn, down from €44.5bn from Q1 2005, translating into a net debt/annualised EBITDA ratio of 2x.
The company also issued a profit warning, bringing down guidance for 2006 revenues by €600m and for EBITDA by €1bn. The share price nose-dived 11% at market opening.
Comment: Reality is beginning to catch up with Deutsche Telekom as it has not effectively adjusted to the changing world of telecoms. This set of financial results highlights that the growth at T-Mobile USA can no longer hide serious deficits in domestic performance.
The degradation of its financial performance particularly made itself felt in Q2 2006. The reasons for the poor performance are found at home. Nearly all domestic indicators signal problems. Domestic fixed-line revenues declined by 12.5% and EBITDA by 14%. Sales of local calls fell by 31%. OFCF at the Broadband/Fixnet division (including international activities) dropped by 24%. At T-Mobile Germany sales declined by 3.2%, EBITDA by 10% and OFCF by 15%. Business Customers (mostly Germany-based activities) reported net sales down 0.3%, EBITDA down 22.4% and OFCF down by 49%.
There will not be a quick fix to the domestic problems. It would also be simplistic to make the relatively high staffing levels at Deutsche Telekom responsible for these domestic financial results. In our view, the number of reasons for these problems has mushroomed in recent years. Deutsche Telekom has long underestimated the determination of its domestic competition. E-Plus's multi-branding strategy and offerings by mobile no-frills operators were belittled and bundled offerings by city carriers and cable operators not effectively countered. IP-based solutions were not pushed for fear of cannibalising existing businesses.
But change seems to be underway. Now, years after BT and KPN, Deutsche Telekom talks about accelerating the conversion to an IP-based production platform. Deutsche Telekom has announced a more aggressive approach to competition in its domestic markets, including price cuts, bundled products and innovations. The company now wants to launch new bundled mobile offers with off-net calls for well under 10 cents per minute. For too long this kind of approach was not on top of the agenda. Domestic competition has taken up the opportunity to chase customers during that period.
To be fair, most other incumbents report a similar financial performance in their respective domestic markets. However, others have been quicker to accept the admittedly uncomfortable changing realities in the converging ICT market place. Others have embraced bit-stream, naked DSL, no-frill offerings, IPTV and bundled offerings earlier. Others have also moved ahead in terms of introducing IP-based next-generation networks.
These changes hurt, but there is no alternative. However, KPN and BT hurt less today, having made good progress to tackle these challenges. We would expect that greater pain lies ahead for Deutsche Telekom in light of the changes it announced today.
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