For the first quarter ending March 31, the carrier posted net income up 9.7% at 1.07bn euros ($1.38bn) from 984m euros ($1.25bn) in the year-ago period. The company said it received 200m euros ($256.5m) in an award related to the sale of its stake in Celcom Malaysia Bhd way back in 2003. Excluding that and other one-time items, its net income actually fell 1.3% to 963m euros ($1.23bn) in the quarter.
Sales meanwhile rose 3.9% to 14.84bn euros ($18.98bn) from 14.288bn euros ($18.27bn) in the year ago period. Analysts had predicted a profit of 1.01bn euros ($1.29bn) on sales of 15bn euros ($19.24bn) and consequently its ADS shares fell 2.75% to $16.96 on the New York Stock Exchange on Thursday May 11, 2006.
It seems clear now that there are some serious storm clouds gathering for Deutsche Telekom and its CEO Kai-Uwe Ricke. The carrier is starting its long delayed process of axing 32,000 jobs, a move that has prompted street protests and demonstrations in Germany over the past couple of months. The restructuring will cost 3.3bn euros ($4bn) and is actually pretty modest given that the workforce at Europe’s biggest carrier is still a huge 244,000.
And it is not just the workforce that DT is trimming. The carrier also cut its 2006 revenue forecast for the combined fixed-line and broadband unit by as much as 3.9% as DT saw an accelerated increase in the loss of traditional fixed-line revenues in Germany, as revenues fell 6.1% to 6.2bn euros ($7.95bn). Indeed, despite the growth in broadband access lines, Ricke was recently forced to admit that fixed-line sales were in free fall and the decline would not be offset by the growth of its mobile operations.
Unfortunately for DT, it is becoming increasingly clear how dependent it is on its mobile operation, T-Mobile International, to act as its growth driver. This is especially the case with its American mobile operation, T-Mobile USA, which has been consistently been the principle growth driver at the carrier in recent years.
Indeed, during the last quarter T-Mobile USA added 1.04 million customers to take its total US customer base to 22.7 million, ranking it in a distance fourth position behind the top three (Cingular, Verizon Wireless and Sprint Nextel). It is likely that T-Mobile USA unit is going to have to compete very aggressively in the US airwave auction in June in order to gain some much needed spectrum for 3G services. This could mean that DT will have to dip heavily into its pockets.
Yet there was a small crumb of good news on the other side of the Atlantic, where T-Mobile is Europe’s third-biggest mobile-phone company by customers.
T-Mobile Germany reached 30 million plus customers during the quarter, but continues to face a very tough environment in its domestic market. T-Mobile UK on the other hand posted excellent revenue growth in the UK thanks to a new 18-month long contract known as Flext. This helped the UK operation add a record 275,000 customers in one month alone, which also had a positive effect on ARPU levels.
On a worldwide basis now, T-Mobile saw a 10.9% rise in its global customer base to 87.7 million customers, and revenue rose 12.3% to 7.6bn euros ($9.74bn) compared with the first quarter of 2005.
The mobile communications strategic business area remains the growth driver, Ricke said in a statement. We are on track overall with our performance in the first quarter, so we can confirm the guidance for the current and next year.
Ricke can take credit for cutting over $27bn of debt from the carrier during his three and a half year tenure. When 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). Debt is now down to 37.8bn euros ($48.53bn).
Looking forward, the carrier reiterated its full year forecast and said that net revenues would now fall in the upper half of its previous range of 62.1bn euros ($79.77bn) to 62.7bn euros ($80.54bn).
DT was able to stick to its guns here, thanks to the strong growth of mobile phone sales due to its US performance and the acquisition of Tele.ring Telekom Services GmbH in Austria. This allowed the former monopoly to increase its sales forecast for the mobile division to between 31.9bn euros ($40.98bn) and 32.3bn euros ($41.5bn), from an earlier target of 30.9bn euros ($39.7bn).
However, the company was forced to cut its range for its broadband and fixed network division to a range of 24.8bn euros ($31.86bn) to 25.2bn euros ($32.37bn), down from as much as 25.8bn euros ($33.14bn).
In April, the US private equity firm, The Blackstone Group, acquired a 4.5% stake in Deutsche Telekom for 2.68bn euros ($4.77bn). Ricke and his management team will be under increasing pressure from investors like these to balance the need for investment in US spectrum and its 3bn euro ($3.5bn) high-speed fiber-optic network, with the need to sort out some of the carriers growing problem areas.
