No place like home for Deutsche Telekom - The T-Mobile operator is performing well in Germany but facing problems outside of its home market

Deutsche Telekom's Q2 2011 results published last week show an increasing reliance on its home market of Germany for revenue and profit, according to GSMA Intelligence analysis. The data shows that the German incumbent is performing well at home due to growth in fixed-line broadband, mobile Internet and smartphones - but faces a deteriorating situation elsewhere in Europe, and in the US where in it is the process of selling its ailing local unit (T-Mobile USA) to AT&T. On a regional basis, Germany now accounts for 60.5 percent of group net revenue (excluding the US).

Net profit for the quarter fell 26.7 percent to EUR348 million, which the firm blamed on a EUR300 million increase in "staff reorganisation" charges. Net revenue in the quarter decreased by 6.8 percent year-on-year to EUR14.5 billion, and adjusted EBITDA fell by 6.5 percent to EUR4.69 billion.

But despite problems elsewhere, Deutsche Telekom described the quarter as an "historic period" in its domestic market. This was due to the number of broadband lines overtaking the number of conventional telephone (PSTN) lines for the first time, while the fixed-line losses (295,000) were hailed as being at an "all time low" (the first time they had been below 300,000 since 2004). The operator also retained its 46 percent market share of the German retail broadband market.

In the mobile segment, the firm talked up growth in domestic mobile Internet revenue, which grew 30 percent year-on-year to EUR409 million, a performance linked mainly to higher smartphone penetration. Smartphones now account for more than 60 percent of all devices sold by T-Mobile Germany, a year-on-year increase of 30 percent. Total German mobile service revenue declined by 3.4 percent (to EUR1.7 billion) but the firm said that revenue would have remained at prior-year levels if the regulatory impact was excluded (it cited the decision to "drastically" cut mobile termination rates in Germany as a reason for the decline).

Although revenue declined at its Germany operating segment, the EBITDA margin at the unit lifted above 40 percent (up 1.4 percentage points from a year earlier), suggesting that cost-reduction efforts are beginning to have a positive effect.

Meanwhile, Deutsche Telekom's European operating segment includes 13 regional markets (excluding Germany), the three largest being Poland, Greece and Romania, which all struggled in Q2. The unit saw net revenue slump by 6 percent and earnings by 8 percent, which was blamed on the weak macroeconomic situation in markets such as Greece, and heightened competition. A positive return from markets such as Croatia and Hungary, where the EBITDA margin reached 45.4 percent and 43.9 percent, respectively, failed to compensate for revenue declines at the larger European markets. However, the European mobile customer base rose 3 percent from a year earlier, adding 212,000 new mobile subscribers (net) in the quarter, mainly in the Netherlands (+111,000) and Bulgaria (+101,000). Smartphones accounted for 46 percent of device sales at the unit, up from 21 percent a year ago.

Although the deal is still being scrutinised by US regulators, Deutsche Telekom "discontinued" its T-Mobile USA unit in the first quarter, in line with the terms of the unit's proposed merger with AT&T. While T-Mobile USA has been struggling for a few years it still accounted for almost a quarter of Deutsche Telekom's group revenue in Q2, despite sales declining 16.2 percent over the year. EBITDA dropped by over 20 percent, which the firm partly blamed on negative currency fluctuations. A bigger problem was T-Mobile USA's alarming decline in contract customers, losing almost 1 million over the year, and 281,000 (net) in Q2. The contract churn rate now stands at a high 2.4 percent. The contract losses were partially offset in Q2 by prepaid subscriber gains (up 231,000) on the back of unlimited prepaid offers and MVNOs.

Matt Ablott, Analyst, GSMA Intelligence:

Deutsche Telekom has done a good job protecting its market lead in Germany, while at the same time being able to trim costs. In mobile, the focus has been on increasing value rather than market share, resulting in increased data revenue and growing margins. In fixed-line, its broadband lead has been maintained despite stiff competition, notably from the country's cable players. Due to regulatory initiatives, mobile broadband is being rolled-out initially in rural areas in Germany and this has allowed the operator to balance its two units; in areas underserved by fixed-line broadband, it has been able to roll-out mobile broadband services (such as its HSPA/LTE-based 'Call & Surf Comfort' offering) without fear of cannibalising its fixed business. In urban areas, it is also ahead of the game, switching on its first commercial LTE network in Cologne in July. But Deutsche Telekom's presence outside of Germany is contracting; it spun-off its UK unit last year (to form the Everything Everywhere JV with Orange UK), and the struggling T-Mobile USA is also set to be disposed. And unlike European rivals such as Vodafone, France Telecom and Telefonica, Deutsche Telekom does not have any fast-growing Asia-Pacific, African or Latin American assets to fuel customer growth (Telefonica, for example, now has over 155 million mobile customers in Latin America). The fact that the firm's largest market outside of Germany will soon be Greece - where revenue declined 10.8 percent in 1H 2011 in a country engulfed in a financial crisis - underlines the problems faced by Deutsche Telekom away from home.

Deutsche Telekom (selected financial and operational data), Q2 2011
Source: GSMA Intelligence, company data