Deutsche Telekom core profit growth to halve as U.S. motor slows

Timotheus Hoettges, Chief Executive Officer of Germany's telecommunications giant Deutsche Telekom AG attends the company's annual news conference in Bonn, Germany, March 2, 2017. REUTERS/Wolfgang Rattay
People pass by a T-Mobile store in the Brooklyn borough of New York June 4, 2015. REUTERS/Brendan McDermid
Timotheus Hoettges, Chief Executive Officer of Germany's telecommunications giant Deutsche Telekom AG attends the company's annual news conference in Bonn, Germany, March 2, 2017. REUTERS/Wolfgang Rattay

By Georgina Prodhan

BONN, Germany (Reuters) - Deutsche Telekom forecast its core profit growth would halve this year as earnings engine T-Mobile US slows, strengthening the case for a U.S. mobile merger that Deutsche Telekom has long desired.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) are expected to rise by just under 4 percent to around 22.2 billion euros ($23.4 billion) in 2017, below the average estimate of 22.7 billion in a Reuters poll.

T-Mobile US, where Deutsche Telekom has been reaping the rewards of 20 billion euros in investments over the past three years, is expected to see its adjusted EBITDA growth rate slow to 7 percent this year from 29 percent in 2016, the German group said on Thursday.

Shares in Deutsche Telekom, Europe's biggest telecoms operator by revenue and market value, were down 1.6 percent at the bottom of a flat German DAX <.GDAXI> by 1211 GMT.

"The full-year 2017 outlook for adjusted EBITDA looks disappointing," a Frankfurt-based trader said.

Chief Executive Tim Hoettges reaffirmed that Deutsche Telekom was keen to participate in consolidation in the U.S. market. T-Mobile US has in the past tried to merge with AT&T and with Sprint .

"Are we rather seller or buyer? It always depends on the quality of the possibilities - I don't prejudge. We do everything from the point of view of value creation," he told a news conference.

T-Mobile US, once the smallest U.S. player, overtook Sprint to become number three behind Verizon in 2015 thanks to a mix of marketing, creative customer contracts and network quality improvements.

Meantime, Deutsche Telekom has returned to growth in the mature German market, its current investment focus, where it competes with Telefonica Deutschland , Vodafone , and a host of smaller mobile and cable providers.

'COMPLICATED'

Deutsche Telekom is making the most of its large fixed and mobile networks as well as TV content deals to sell bundled packages that are more expensive than single services and tend to keep customers more loyal.

Adjusted EBITDA in Germany rose 3 percent in the fourth quarter and 0.1 percent over the year to 8.8 billion euros. Group EBITDA growth was driven once again by T-Mobile US, which reported results two weeks ago.

Mobile service revenues in Germany slipped 0.3 percent in the quarter, compared with a 2.8 percent decline at Telefonica and no change at Vodafone.

Sales and profit fell in the rest of Europe as Deutsche Telekom spent aggressively on marketing amid tough competition in countries such as Austria, the Netherlands and Poland.

Ailing IT services unit T-Systems reported a 21 percent drop in adjusted EBITDA as it set aside provisions of about 100 million euros for two legacy outsourcing contracts.

"It's complicated," wrote Jefferies analyst Ulrich Rathe, who rates Deutsche Telekom "underperform". "Germany is on track in 4Q but T-Systems and Europe miss EBITDA by a margin."

Deutsche Telekom also said its sales should rise by an unspecified amount this year and free cash flow should increase by 12 percent, with a corresponding dividend hike.

Last year's free cash flow rose 9 percent, allowing Deutsche Telekom to raise its dividend by the same percentage to 0.60 euros per share.

Deutsche Telekom was pushed to a net loss of 2.12 billion euros in the fourth quarter by a 2.2 billion-euro writedown of its 12 percent stake in Britain's BT , whose shares were hit by the UK's vote to leave the European Union last year.

The German operator expects a further writedown after the first quarter, during which BT uncovered an accounting scandal at its Italian operations that wiped another 8 billion pounds ($9.8 billion) off its value.

Hoettges said he nonetheless wanted to keep the stake as BT's strong UK market position across fixed line, mobile and media fitted with Deutsche Telekom's own strategy.

(Editing by Maria Sheahan, Alexander Smith and Susan Thomas)

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