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Deutsche Telekom U.S. customer exodus slows

05/10/2012 | 05:29am US/Eastern
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Deutsche Telekom (>> Deutsche Telekom AG) reported better-than-expected quarterly core earnings on Thursday as it lost fewer customers in the United States and signaled a stabilization in its European business.

Deutsche Telekom (>> Deutsche Telekom AG) reported better-than-expected quarterly core earnings on Thursday as it lost fewer customers in the United States and signaled a stabilization in its European business.

Deutsche Telekom had been struggling as its U.S. unit T-Mobile USA, which it tried to sell last year, hemorrhaged customers, while the European debt crisis hurt its business in that region.

"This was a very satisfying quarter for us," Deutsche Telekom Chief Executive Rene Obermann said in a statement.

"We have made significant progress in many areas."

First-quarter earnings before interest, tax, depreciation and amortization (EBITDA), excluding special items, were flat at 4.48 billion euros ($5.79 billion), at the top of analyst expectations of between 4.32 billion and 4.48 billion.

T-Mobile USA's operating income rose 7.2 percent to $1.3 billion. It lost 248,000 contract customers, fewer than the 802,000 contract customers it lost in the previous quarter and the 382,000 in the same quarter last year.

The Bonn-based group expects 2012 underlying earnings excluding special items to ease to around 18 billion euros from 18.7 billion last year. The average in a Reuters poll is 18.1 billion.

Deutsche Telekom shares were up 3.5 percent by 5 a.m. EDT, outperforming a 0.4 percent stronger sector index <.SXKP> and the German blue chip DAX <.GDAXI>, which gained 0.1 percent.

"Core operating profit came in in-line with expectation," said analyst Heino Ruland at Ruland Research. "Also it seems T-Mobile-USA did very well."

Deutsche Telekom signaled a stabilization in its European business, with positive revenue trends in Romania and Greece, but also noted that economic circumstances remained difficult.

That echoed remarks by Telekom Austria AG (>> Telekom Austria), which marginally beat market expectations.

UGLY BABY

Net profit dropped 50 percent to 238 million euros, missing a consensus forecast of 502 million euros, due to another impairment for the T-Mobile USA business and losses in the group's financial activities.

T-Mobile USA was a strong growth engine for Deutsche Telekom in its early days but is a rundown asset now.

Deutsche Telkom tried to sell the U.S. business to AT&T (>> AT&T Inc.) for $39 billion, but fierce regulatory opposition scuppered the deal, leaving Deutsche Telekom with a $6 billion breakup package.

Over the next two years, network investments at T-Mobile USA will increase by about $1.4 billion. Over time, T-Mobile USA will spend a total of $4 billion on upgrading its network for high-speed wireless services based on a technology known as Long Term Evolution (LTE).

On Wednesday, Bloomberg reported T-Mobile USA was discussing a merger with MetroPCS Communications Inc (>> MetroPCS Communications Inc).

The report sparked analysts at BernsteinResearch to say: "T-Mobile and MetroPCS: Oh my, what an ugly baby."

A German fund manager, who asked not to be named, said the deal would make sense in terms of spectrum pooling, and the two companies could realize some operating and capital expenditure synergies.

"However, it doesn't help T-Mobile USA in terms of its contract subscribers losses," he said.

CEO Obermann on Thursday declined to comment.

Deutsche Telekom shares have lost about 2 percent so far this year, slightly ahead of the STOXX Europe 600 Telecommunications index <.SXKP>, which has lost 4 percent.

Its shares trade at 12.4 times 12-month forward earnings, about 7 percent below its 10-year average, but above peers such as France Telecom (>> FRANCE TELECOM) and Vodafone Group (>> Vodafone Group plc), which trade at multiples of 8 and 10.5 respectively. ($1 = 0.7733 euros)

(Additional reporting by Myria Mildenberger; Editing by Helen Massy-Beresford)

By Harro Ten Wolde

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