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November 9, 2005

Deutsche Telekom back in black but disappoints with weak outlook

Deutsche Telekom AG, Europe's largest fixed-line carrier which recently announced plans to shed 32,000 staff in Germany in a long overdue restructuring program, has climbed back into the black thanks to the strong performance of its mobile phone unit. However, its weak outlook for 2006 cast a shadow over its better-than-expected third-quarter results.

By CBR Staff Writer

For the quarter ending September 30, the carrier posted net income of 2.41bn euros ($2.83bn) compared to a year-ago net loss of 1.36bn euros ($1.59bn). This beat analysts’ expectations of net income of 1.74bn euros ($2.02bn). Sales meanwhile increased to 15.04bn euros ($17.66bn) from 14.353bn euros ($16.86bn), beating consensus forecast of 14.85bn euros ($17.44bn).

Deutsche Telekom’s mobile unit continues to act as the growth engine of the Bonn, Germany-based carrier. The principal driver of T-Mobile’s success is its US operation, T-Mobile USA, the former VoiceStream operator that it bought at the height of the telecoms bubble.

T-Mobile USA continues to perform well after adding 1.1 million new customers in the quarter, but it still remains in fourth place in the US with only 20.3 million subscribers. In Germany, T-Mobile added around 530,000 new customers, while in the UK it added 259,000 more. Overall, T-Mobile won a better-than-expected 2.2 million customers, giving a total customer base of 83.1 million customers, up 80.9 million in the year-ago period.

Net debt increased by roughly 1.3bn euros ($1.52bn) to 40.8bn euros ($47.91bn). When CEO Kai-Uwe Ricke took charge in 2002, the carrier appeared to be in serious trouble after over-extending itself during the late 1990s. It was saddled with a colossal debt burden, which at the end of 2002 stood at 61.1bn euros ($75.97bn).

Looking forward, the carrier expects sales to grow by around 5% in both 2006 and 2007, adding that full-year 2007 revenues are expected to come in at 65.2bn euros ($76.61bn) to 66.2bn euros ($77.76bn). However, it cut its earnings forecast for next year to between 20.2bn euros ($23.73bn) and 20.7bn euros ($24.31bn) as it plans to spend an extra 1.2bn euros ($1.41bn) to win new customers and launch new products. The company had been targeting earnings of at least 20.7bn euros ($24.31bn) for 2006.

Our intention is to make Deutsche Telekom strong for the future. And that means anticipating the future, Ricke said. For that reason, we will concentrate in the next two years on expanding our business activities and focusing far more on increasing our revenue.

Deutsche Telekom also said it plans to pay a full-year dividend matching at least 2004’s 0.62 euros ($0.72) per share payment.

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The results were watched closely on the markets due to the company’s recent restructuring, which will mean the axing of roughly 8% of its workforce. This will involve no compulsory job losses, and will cost 4bn euros ($4.69bn).

Deutsche Telekom recently lost out to Spanish telecoms giant Telefonica SA when it acquired UK-based mobile operator O2 Plc for 17.7bn pounds ($31.3bn). O2 had long been a takeover target for Deutsche Telekom, although Ricke refused to launch a hostile takeover bid for O2 after its board backed the Telefonica deal. Earlier this year, Deutsche Telekom purchased Austrian mobile operator Tele.ring Telekom Services GmbH from US rural mobile carrier Alltel Corp for 1.3bn euros ($1.58bn).

The carrier’s American Depositary Shares on the New York Stock Exchange fell 3.49% to $17.15 in Wednesday afternoon trading.

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