Deutsche Telekom AG slid into the red during the fourth quarter as it struggled to contain the hemorrhaging of its fixed-line customers in 2006. Yet the carrier hinted that it is looking to acquisitions to kick-start growth in its mobile division.
For the fourth quarter, the Bonn-based carrier posted a net loss of 898m euros ($1.2bn) compared to a profit of 1.02bn euros ($1.35bn) a year ago. The carrier shocked the market in late January with its second profit warning in six months. Sales rose 2.4% to 15.9bn euros ($21bn) from 15.5bn ($20.5bn).
Fourth-quarter domestic sales declined 11.8% to 7.7bn euros ($10.2bn), while international sales rose 20.8% to 8.2bn euros ($10.8bn). This decline in Germany is mostly down to the fact the carrier has been losing fixed-line customers, having lost 2.1 million customers during the year with 33.2 million connections.
The one bright point is demand for broadband, which is still relatively low in Germany compared to other European countries. DT is now offering a combined triple-play offering (fixed-line, broadband, and mobile), and launched an IPTV service last year. It hopes to gain 1.5 million IPTV customers by 2010, and is counting on its new VSDL network to provide the bandwidth. However, this network is proving controversial as the EU is threatening to take the German government to court over a law change that will allow DT to refuse competitors access to the network. DT said the VDSL network will cover 50 major German cities by 2008, with an additional 750 cities covered by a ADSL2+ network.
We believe broadband is the major driver of our business, said CEO Rene Obermann. However, he was honest about DT’s problems in fixed-line. Fixed-line in Germany is declining, and we need to take action now otherwise one day we will get complete stuck, even though it may be a painful process, he said. We are not happy with our line loss and we intend to fight for every customer. The aim is to reduce line loss and stabilize the reduction.
DT is also facing a fiercely competitive mobile market. T-Mobile Deutschland recorded a 4.7% slide in annual sales to 8.2bn euros ($10.8bn), despite customer numbers rising 6.4% to 31.4 million in Germany. The revenue decline reflects the 10% fall in prices and the reduction in termination charges imposed by the regulator lat November.
Internationally, mobile growth went well, especially in the UK and US, although customer figures in the UK declined slightly. Despite this, DT said it more than satisfied with the contribution of the UK, while the US continues to be the main driver of mobile growth, after T-Mobile USA grew its customer base to over 25 million. Globally, T-Mobile now has approximately 106 million customers across 11 European countries and the US.
Despite good international growth, Obermann was clear about the difficulties it faces domestically. Germany is our most important market, he said. The best successes abroad are only of limited use if we don’t get business on our home market under control. Obermann said he is looking to focus, fix and grow the carrier’s businesses, although Germany is the priority for now.
DT said its 32,000 job-reduction scheme is well on track with 12,200 workers leaving the carrier by the end of last year. The company employs about 250,000 workers.
However, Obermann is facing the same problems of his predessor, Kai-Uwe Ricke, who resigned in November after he failed to gain the necessary support from disillusioned shareholders, namely the German government and private equity outfit Blackstone. DT is still struggling to overcome union opposition to the cuts, especially from the main services union Verdi, which continues to threaten strike action. It is reported that staff representatives on DT supervisory board are fighting moves to outsource 45,000 to 60,000 staff to lower paying subsidiaries. The Financial Times, quoting people close to the supervisory board, said the 10 employee representatives out of the 20 board members failed to back the move.
Obermann was also brutally honest about working practices at the carrier. The 34 working hours a week is clearly not enough, and we have to increase it, he said. He went to pledge to lower the high entry-level salaries for people joining the carrier, and said that while he was not discussing minimum wages at the moment, it was something it would to tackle in future. This is a radical statement for a German executive, especially as Deutsche Telekom has a large portion of staff classified as civil servants, a legacy from its days as an incumbent.
We have so far avoided compulsory redundancies, and it is not our intention to make compulsory redundancies, Obermann said. However we cannot guarantee we would not make compulsory redundancies as that would be premature. Let’s see how the negotiations continue.
In further efforts to turn around the fortunes of the struggling carrier, Obermann also suggested possible acquisitions in the mobile space in order to boost T-Mobile’s global presence, as well as asset sales. Consolidation is meaningful in certain markets, he said, but warned that DT would stick to strict financial guidelines when acquiring. Obermann said he is looking to raise 3bn euros ($3.9bn) over three years from asset sales, including the T-Systems Media and Broadcasting unit, as well as web units in France and Spain, radio towers in Germany and the US, and some real estate.
Its ADS shares on the New York Stock Exchange fell 4.2% to $17.20 as the markets reacted to the results, which were in marked contrast to the performance at Spanish carrier Telefonica SA, which saw a 42% rise in annual profits.
For the full year DT recorded a 43.4% fall in net profit to 3.2bn euros ($4.2bn) from 5.6bn euros ($7.4bn) in 2005. Sales rose 2.9% to 61.3bn euros ($81bn) from 59.6bn euros ($78.8bn) the previous year. Net debt at the carrier increased to 39.5bn euros ($52.3bn) from 38.7bn euros ($51.1bn) in 2005. DT described the increase as moderate.