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Author: Dan Bieler
Deutsche Telekom reported its financial results for Q3 2006. Net revenues came in at €15.5bn, up 2.8% year-on-year (-2.3% pro-forma domestic), EBITDA at €4.7bn, down 7% (a 3.6 percentage point decline in adjusted margin to 32.9%). Net income fell by 34% to €980m. Free cash flow before dividends dropped by 38% to €1.6bn. Net debt decreased to €38.3bn down from €38.8bn in Q2 2006, translating into a net debt/annualised EBITDA ratio of 1.9.
Comment: In our view, the performance in the last quarter does not yet translate into a clear turnaround for the group. However, the picture is far from simple, particularly for its domestic operations. Whilst Broadband/Fixed Network can report a slow down in the decline of domestic revenues from 13% in Q2 2006 to 5% in Q3 2006, the revenue decline at T-Mobile Germany has increased to 4% from 3% in the previous quarter (although the decline in service revenues has actually eased slightly to -2.6%). Business Customers, where Germany contributed 83% of revenues, reported a 2% increase of net revenues, albeit this growth was almost entirely driven by international activities. This is a clear improvement over the 0.3% decline of net revenues reported in Q2 2006.
The domestic EBITDA performance paints an equally mixed picture. Broadband/Fixed Network reports a reduced domestic EBITDA decline of 8% after 14% in the previous quarter. T-Mobile Germany managed to reduce the EBITDA decline from 10% in Q2 2006 to 5% in Q3 2006, thus keeping the margin fairly stable at 42%. Business Customers, meanwhile, saw a pick-up of its EBITDA decline from 23% last quarter to 30% in Q3 2006.
To be fair, few observers would expect much more evidence of a sustainable turnaround at this stage. Deutsche Telekom launched a number of new initiatives only recently (see previous Euroview commentary). However, Deutsche Telekom competes with players that have in many instances introduced their own initiatives before Deutsche Telekom, giving the impression that Deutsche Telekom pursues a more reactive than proactive strategy. Thankfully, from Deutsche Telekom's perspective, there is no guarantee that the early movers will always be the first ones over the finishing line.
In today's ICT business expertise in both telecommunications and IT counts, as well as financial strength and a broad footprint in terms of partnerships and international exposure. These 'soft assets' are crucial for success in the long term. Deutsche Telekom has many of these assets. The key will be to put them to good use for the medium and long term. We have few issues with Deutsche Telekom's strategy per-se. What continues to concern us is its ability to execute. Deutsche Telekom remains a long-term restructuring story, not least because it remains constrained by German labour laws.
To use the saying from the Old South: 'It ain't over until the fat lady sings'. Whilst we can already see her, our question is: when will she start to sing.
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