Cost reductions becoming imperative for Deutsche Telekom

German incumbent Deutsche Telekom (DT) posted its fourth-quarter and full-year 2009 results yesterday. While the acquisition of OTE artificially inflated its top line, its underlying operational and financial KPIs point to difficult times ahead. Cutting its operational cost base through its “Save for Service” program will be a key focus area for the group in the short to medium term to ensure a sustainable flow of cash, allowing it to deliver on investment decisions and dividend payments.

At first glance, revenues for the year increased 4.8% when compared to 2008 to reach €64.6 billion, while EBITDA (adjusted for special factors) also rose, up 6.2% to reach €20.7 biilion. However, this growth was entirely inorganic, coming about as a result of its acquisition of OTE – without which underlying revenues and EBITDA would have fallen by approximately 4% each.
 
Domestically, DT continues to add broadband subscribers at a good pace (up 8.5% during 2009), but this was not enough to offset fixed revenue decline (down 5.3% during the same period). To compound this, its mobile subscriber base remained flat year-on-year, although it did manage to grow mobile revenues by 0.5% through a shift in its customer base from prepaid towards contracts. DT’s international operations fared better than its domestic operations, although performance was mixed. T-Mobile USA saw its own-branded customer base decline during 2009. Growth in wholesale and machine-to-machine customers offset this decline, allowing it to post positive subscriber growth of 3%, albeit significantly down on the 10% growth recorded one year earlier. DT’s European division saw subscriber growth balance out year-on-year, but revenues plummeted 11.6% on the back of negative exchange-rate effects and reductions in mobile termination rates.
 
With revenue growth increasingly hard to achieve, cutting costs from the business has become a key strategic priority for many mature market operators. DT’s latest set of results indicates that it is progressing well on this front. Its domestic cost-reduction program, Save for Service, was launched in 2006, targeting cost savings of between €4.2 and €4.7 billion by the end of 2010. However, during 2009 DT overtook that target, making an additional €1.8 billion of savings during the year alone, taking its total savings to €5.9 billion. DT expects continued domestic savings from the program during 2010, and plans to roll it out across its international operations.
 
Revenue growth will be difficult to attain
 
Attaining revenue growth so that the group is able to post positive organic growth in the future will be more difficult to attain. In the short term, DT continues to be impacted by the economic downturn. During 4Q09, it took a hit on its investment in OTE, recognizing an impairment loss of €500 million as a direct result of the worsening economic climate in Greece. DT’s exposure to the Greek economy could potentially impact its growth in the near term.
 
T-Systems was also negatively impacted by the economic downturn, witnessing a 9.1% decline in the total value of contracts signed, and a 5.8% decline in revenues. However, part of that decline was driven by the group’s Save for Service program, which has included the standardization and improvement of its internal IT systems. As a result T-Systems, which derives approximately 30% of its revenues from services to its parent group, posted an 8.7% decline in internal revenues.
 
Despite this, there was some positive news to add to the mix. DT is championing “growth and innovation” as two strategic goals for its domestic operation. Much of the responsibility on this front lies with its IPTV service, Entertain. DT has made strong progress during the last few years in growing its IPTV customer base, and achieved the top growth rate of the telcos included in our KPI analysis during both 2Q09 and 3Q09. In addition, more positive news came from the UK Office of Fair Trading (OFT), which has concluded that the joint venture between T-Mobile and Orange will not negatively impact competition in the UK. Getting the new operation up and running as soon as possible will be key to capitalizing on any cost savings, as well as avoiding the individual business units stagnating through lack of direction, and thereby losing market share.
 

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