Nov. 5 (Bloomberg) -- Deutsche Telekom AG, Europe’s biggest phone company, posted a better-than-expected 7.2 percent gain in third-quarter profit, aided by cost cuts. It confirmed full-year targets, while saying it’s “cautious” about 2010.

Net income rose to 959 million euros ($1.42 billion) from 895 million euros a year earlier, the Bonn-based company said in a statement. Analysts had estimated a profit of 830 million euros, according to the average of four estimates compiled by Bloomberg. Sales rose 5.2 percent to 16.3 billion euros.

The company “delivered solid cost control and results,” said Michael Kovacocy, a Daiwa Securities analyst in London, who has a “hold” rating on the stock. “Their ability to insulate the top-line from macro-economic weakness via a mix of fixed and mobile activities has been a strength over the past year.”

Deutsche Telekom, like its European rivals Vodafone Group Plc and France Telecom SA, has been slashing costs to make up for falling demand for phone services amid the economic slump. Deutsche Telekom is merging its T-Mobile U.K. operations with France Telecom’s Orange and accelerating spending on network expansion for its T-Mobile USA operations to win back customers.

The group reiterated its full-year free cash-flow target of 7 billion euros and for earnings before interest, taxes, depreciation and amortization to decrease by 2 percent to 4 percent from 19.46 billion euros in 2008, excluding Hellenic Telecommunications Organization SA, the Greek unit consolidated fully in the group in February.

Cautious Outlook

Deutsche Telekom rose 2.3 percent, the most since Sept. 4, to close at 9.50 euros in Frankfurt trading. The stock has lost 12 percent this year.

While the company’s results so far make it “even more confident to reach our full-year 2009 guidance, there are a few developments at which we are looking very carefully and with caution when it comes to 2010,” Chief Executive Officer Rene Obermann said according to the text of a speech to be given at the results conference today.

Obermann alluded to the weakness in the U.S. dollar, “uncertain economic recovery” in major eastern European markets and the “unknown size and impact” of unemployment in Germany. “Because of these areas of uncertainty, we do not yet have good visibility into 2010,” he said.

U.S. Concerns

In the U.S., revenue fell by 2.3 percent in dollar terms in the third quarter. T-Mobile USA lost 77,000 customers in the third quarter.

“In the U.S., we are facing a challenging situation, not least because of the economic crisis, and are clearly not happy with the third-quarter results,” the CEO said.

As Deutsche Telekom increases spending in that market to lure back customers from bigger rivals Verizon Communications Inc. and AT&T Inc., there is a potential that U.S. operations will weigh on sales and on cash-generation, Daiwa’s Kovacocy said. “Deutsche Telekom’s primary top-line growth engine has stalled,” in the U.S., he said.

The company’s U.K. merger plan sparked speculation about possible changes also at its U.S. unit, which accounts for about a quarter of revenue. In October, Chief Financial Officer Timotheus Hoettges said the company is considering options in the U.S., including partnerships to get more wireless spectrum.

‘M&A Needed’

“Today’s results may also reinforce the view in some corners that M&A may be needed to stem the tide,” Kovacocy said.

Deutsche Telekom has spent about $3 billion so far this year to expand its high-speed third-generation network in the U.S. as customers increasingly use data-intensive smart phones. At the end of the third quarter, T-Mobile USA’s network covered 167 million people and is set to reach 200 million people by the end of the year, Deutsche Telekom said. The company wants the network to cover 220 million to 230 million people when completed, Obermann said at a press conference in Bonn today.

In the latest quarter, the group’s cash flow reached 5.1 billion euros. The company policy remains to pay out an “attractive” dividend, Deutsche Telekom spokesman Andreas Leigers said. In 2008, it paid a dividend of 78 cents a share or 48 percent of its free cash flow.

“The margin is strong and cash flow is encouraging,” said Guy Peddy, an analyst with Macquarie Capital Europe Ltd. in London. He has a neutral rating on the stock. “The results will firm up dividend expectations.”

Sales Rise

Sales including the Greek unit rose to 16.3 billion euros from 15.5 billion euros. Adjusted earnings before interest, taxes, depreciation and amortization rose 5.2 percent to 5.53 billion euros from 5.3 billion euros. Analysts forecast 16.3 billion euros in sales and adjusted Ebitda of 5.3 billion euros.

The dollar’s depreciation and other exchange-rate movements cut revenue by about 100 million euros in the third quarter from the second quarter, Leigers said. The euro climbed 4.1 percent against the dollar from a year earlier.

Deutsche Telekom added 500 million euros to its current cost-cutting program to a total of 5.4 billion euros since it was started in 2005. The company said it will unveil more cost measures when it releases results for 2009.

The next round of cost cuts at the company will address all of the group’s expenses, including those in international markets, CFO Hoettges said.

To contact the reporter on this story: Ragnhild Kjetland in Frankfurt rkjetland@bloomberg.net

Last Updated: November 5, 2009 12:00 EST