German telecom behemoth Deutsche Telekom (DT) has announced fourth-quarter results with adjusted (excluding impairment charges) earnings per ADS of 31 cents missing the Zacks Consensus Estimate of 33 cents.
 
Adjusted net profit of €905 million (US$1.3 billion) represents a 5% annualized improvement. However, on a reported basis, the carrier registered a net loss of €3 million (US$4 million) in the fourth quarter as it was hit by impairment charges of €500 million (US$738 million) in its Southern and Eastern Europe segments, primarily in Greece which is suffering from a severe financial crisis.
 
Reported net loss for the quarter, however, was much lower than the net loss of €730 million (US$963 million) registered in the year-ago quarter when results were dragged down by impairment charges and one-time costs related to job cuts of €1.1 billion (US$1.5 billion).
 
For full-year 2009, the company reported a net profit of €353 million (US$492 million) or €0.08 per share (11 cents per ADS), which tumbled 76% year-over-year largely due to €2.3 billion (US$3.4 billion) in impairment losses on goodwill. On an adjusted basis, earnings per ADS of US$1.08 beat the Zacks Consensus Estimate of 89 cents. The current Zacks Consensus Estimate for 2010 revenue and EPS are US$94.7 billion and US$1.11, respectively.
 
Group Revenue & EBITDA
 
Revenues for the quarter grew 0.6% year-over-year to €16.2 billion (US$24 billion), missing the Zacks Consensus Estimate of US$24.4 billion. Sales reflect the consolidation of Greek operator OTE group, in which Deutsche Telekom holds a 30% stake. Revenue for the full year increased 4.8% to €64.6 billion (US$90.1 billion), but was much below the Zacks Consensus Estimate of US$93.2 billion. 
 
Domestic revenues fell 3% year-over-year in the quarter to €7.1 billion (US$10.5 billion), while international revenues increased 3.5% year-over-year to €9.1 billion (US$13.4 billion). Approximately 56% of the revenue was generated outside Germany in the fourth quarter.
 
Adjusted EBITDA (excluding special items) for the quarter increased 8.6% year-over-year to €5 billion (US$7.4 billion), driven by improved operational efficiency and reduced cost. OTE contributed €5.4 billion (US$7.5 billion) and €2 billion (US$2.8 billion) to the group’s revenue and adjusted EBITDA, respectively, in 2009.
 
The company continues its aggressive cost-cutting initiatives under the “Save for Service” program, which generated total savings of approximately €5.9 billion (US$8.7 billion) at the end of 2009. Moving forward, the program is expected to deliver additional savings of €4.2 billion (US$6.2 billion) by 2012.
 
Results by Segment
 
Germany
 
Revenue from this segment fell 3.1% year-over-year to €6.4 billion (US$9.5 billion) as a result of continued erosion in fixed-network lines and regulatory pricing pressure. German fixed-network and mobile communications operations were combined following the operational restructuring in late 2009. Fixed-network revenue declined 6.3% year-over-year to €4.7 billion (US$6.9 billion), while mobile communications revenue grew 4.7% to €2.1 billion (US$3.1 billion).
 
Fixed-line voice subscriber base continues to contract (albeit at a lower pace) as reflected by a 7.3% year-over-year decline in fixed-network lines, reaching 26.24 million lines at the end of 2009. Broadband business remains on the growth track as total retail broadband lines grew 8.3% year-over-year to 11.5 million, with 177,000 lines added in the quarter. Mobile subscriber base increased 0.1% year-over-year to 39.1 million.
 
United States (T-Mobile USA)
 
Revenue at Mobile Communication USA (T-Mobile USA), the fourth-largest US wireless carrier, fell 15.7% year-over-year to €3.7 billion (US$5.5 billion) on account of lower service revenue. In dollar terms, total revenue for the quarter represents a 5.4% annualized decline.
 
Blended ARPU was US$46, down from US$47 and US$50 reported in the prior-year quarter and previous quarter, respectively, as growth in data services was offset by lower roaming and customer migration to unlimited plans. Blended churn (customer switch) remained flat year-over-year and improved sequentially at 3.3% as a result of reduced prepaid churn.
 
T-Mobile USA registered net additions of 371,000 customers in the quarter, fueled by strong holiday sales and new rate plans. This compares to a net loss of 77,000 customers in the previous quarter and a net gain of 621,000 customers in the year-ago quarter. The entity served 33.8 million mobile subscribers at the end of 2009, up 3.2%.
 
T-mobile USA is currently the sole carrier in the US for Google’s (GOOG) Nexus One “Superphone”. Moreover, the entity has joined the high-speed hoopla in the US with the recent upgrade of its nationwide 3G network to the HSPA 7.2 standard, which offers peak downlink speeds of 7.2 megabits per second (Mbps). Moreover, T-mobile USA plans to deploy the 4G network based on the Long-Term Evolution (“LTE”) standard in 2011.
 
However, T-mobile USA faces a consolidating industry and is struggling to compete with its larger peers like AT&T (T) and Verizon (VZ). Deutsche Telekom is mulling over spinning off T-mobile USA or launching an initial public offering for the unit.
 
Europe
 
Revenue for the Europe operating segment (operations in the UK, Poland, the Netherlands, Austria and the Czech Republic) decreased 11.5% year-over-year to €2.5 billion (US$3.7 billion). The segment served 44.2 million cellular customers at the end 2009.
 
Revenue from UK (T-Mobile UK), the largest contributor to the segment’s revenue, decreased 16.7% year-over-year to €815 million (US$1.2 billion) due to an adverse exchange rate impact and mobile termination rate (inter-operator fees) cuts. Deutsche Telekom is set to merge T-Mobile UK with France Telecom’s (FTE) British subsidiary Orange UK under a 50-50 joint venture.
 
The combined entity would dethrone Spanish telecom giant Telefonica’s (TEF) UK unit O2 UK as the largest wireless operator in the UK with a roughly 37% market share. The merger is expected to be approved by the European Commission in the near term.
 
Southern and Eastern Europe
 
The segment reported revenues of €2.6 billion (US$3.8 billion) for the quarter, reflecting an increase from €1.15 billion (US$1.7 billion) reported a year ago. This growth was fuelled by the inclusion of the OTE group. At the end of 2009, the segment served 34.6 million (up 9.5%) mobile customers and 3.5 million (up 18.7%) retail broadband connections.
 
Systems Solutions (T-Systems)
 
Revenues for the segment declined 8.1% year-over-year to €2.4 billion (US$3.5 billion). Telecommunications revenue decreased 9.3% year-over-year to €917 million (US$1.4 billion), while computing and desktop services revenue declined 7.2% to €1.05 billion (US$1.6 billion). New order bookings at T-Systems improved 15.3% year-over-year in the quarter.
 
Dividend
 
The company has proposed a dividend of €0.78 (US$1.06) per share for 2009 which has remained unchanged in the last two years. Moreover, it plans to pay at least €0.70 (95 cents) per share as dividend between 2010 and 2012. Deutsche Telekom targets to return roughly €3.4 billion (US$5 billion) per year to shareholders in the form of dividend and share repurchases through 2012.
 
Outlook
 
Given the economic volatility across its key markets, Deutsche Telekom has released a cautious outlook for 2010, expecting an adjusted EBITDA of €20 billion (US$29.5 billion), a decline from €20.7 billion (US$30.6 billion) achieved in 2009. Projected free cash flow for 2010 is €6.2 billion (U$9.2 billion), including OTE’s contribution, compared to €7 billion (US$10.3 billion) registered in 2009.
 
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