For the second quarter ending June 30, Deutsche Telekom (DT) posted a net profit of E1 billion ($1.29 billion), down 14% from E1.17 billion ($1.5 billion) a year earlier. Sales rose 2.6% to E15.13 billion ($19.44 billion) from E14.74 billion ($18.94 billion).
The disappointing results, coupled with the overall downward trend of European stock markets following the foiling of a terrorist plot by the UK police and security services to blow up aircraft traveling to the US, meant that DT’s shares fell 7.9% to E11.09 ($14.25) on the Frankfurt Stock Exchange following the news.
For the last couple of quarters, worries have been increasing about DT and its CEO Kai-Uwe Ricke. The carrier has so far failed to begin its long-delayed process of axing 32,000 jobs over the next three years, despite announcing its cost-cutting plan last year.
The restructuring aimed to cut costs by E.3 billion euros ($4 billion) and was actually pretty modest given that the workforce at Europe’s biggest carrier was still a huge 243,695 at year-end. Indeed, the size of the workforce at DT actually rose 2.6% since then to a fraction under 250,000 at the end of June.
The restructuring plans had prompted street protests and demonstrations in Germany, where job cuts are a sensitive issue as unemployment is running at 11.6%, and the country has nearly five million unemployed. Yet these cost-cutting measures are seen as vital. For some time now, DT has been witnessing the loss of traditional fixed-line revenues in Germany accelerate. In the first quarter, revenues there fell 6.1% to E6.2 billion ($7.95 billion).
In the second quarter, fixed-line sales were down a further 5% to E6.14 billion ($7.84 billion), which just reinforces Mr Ricke’s admission earlier this year that DT’s fixed-line sales were in freefall.
This admission has been doubly reinforced now DT has admitted that it has lost an astonishing 500,000 customers during the second quarter. This means that DT has now lost around one million fixed-line customers in the six months of 2006, which, according to Mr Ricke, was much more than we expected.
To make matters worse, DT believes this downward trend for fixed-line is set to continue in the third quarter, but is predicting a recovery of sorts in the fourth quarter.
Another headache for Mr Ricke is that DT is losing the battle in its core market, Germany, which makes up the bulk of the carrier’s revenue base. It has admitted that revenues generated by all three strategic business areas in Germany fell by a total of 4% to E16.3 billion ($20.82 billion) for the first half of the year. In contrast, revenues generated outside of Germany rose by 13.5% to E13.6 billion ($17.37 billion).
The one area where DT and Germany on the whole are incredibly weak is in the broadband market. This offers DT a rare growth opportunity, as carriers such as BT Group are reaping large returns from DSL, but broadband levels in Germany are incredibly low for such a major western European country, with adoption levels of only 12% to 13%.
At the end of June 30, 2006, DT only had 10 million broadband lines in total, worldwide. Nine million were domestic, but of this 2.5 million were reseller lines. This means that, during the last quarter, 95% of the growth in DSL lines was down to resellers.
DT hopes to change this, but it will have a job to do here, as it also has an incredible 40.1 million narrowband lines worldwide, made of 34.2 million narrowband domestic lines, of which 24.9 million were standard analog line while 9.4 million were ISDN lines.
Overall, there will be a certain sympathy for the plight of Mr Ricke, as he has been warning of the problems facing DT’s fixed-line operations for a while now. Indeed, his prediction earlier this year that the decline in fixed-line would not be offset by the growth of its mobile operations has now proved to be true in the second quarter.
For the past several years now, it has been obvious to all how dependent DT was on its mobile operation, T-Mobile, to act as its growth driver. This was especially the case with its American mobile operation, T-Mobile USA, which had consistently been the principle growth driver at the carrier in recent years. Now it seems that T-Mobile, despite sales growing 9.2% to E7.85 billion ($10.03 billion) in the second quarter, can no longer compensate for the declines at the fixed-line and business customer unit.
Both T-Mobile Deutschland and T-Mobile USA added far fewer new customers than expected in the quarter. T-Mobile now has a total customer base of 90.2 million. T-Mobile Deutschland only grew its customer base 0.7% (or 170,000) to 30.4 million, yet this still leaves it in the number one slot in its domestic market.
In the UK, T-Mobile UK grew its customer base 1.8% (369,000) to 16.7 million, while across the Atlantic T-Mobile USA grew its customer base 2.6% (or 613,000) to 23.3 million. However, this increase fell substantially short of the second quarter of 2005, when 972,000 new additions were recorded in the US. Still, in a sign of how vital its fourth-placed mobile operation in the US is to the carrier, DT has entered the auction for more spectrum, although this is likely to add billions of dollars to the balance sheet.
Indeed that was the one area where DT had been making commendable progress, namely in reducing its net debt, although this did rise 2.7% to E38.8 billion ($49.55 billion) in the second quarter, from E37.7 billion ($48.23 billion) in the first quarter. Yet this is a far cry from when Mr Ricke took charge, when DT was saddled with a colossal debt burden, which at the end of 2002 stood at E61.1 billion ($75.97 billion).
Although the company has scaled back its investment plans for the current year, all of the problems facing DT have meant that the German carrier has had little choice but to join rivals such as France Telecom in cutting its forecasts for its full-year figures. Looking forward, it now expects annual operating profits for the current year to come in at between E19.2 billion ($24.5 billion) and E19.7 billion ($25.1 billion). This is roughly E1 billion ($1.28 billion) less than previously expected.
