Deutsche Telekom Halts Profit Decline on U.S. Subsidy Cut

Deutsche Telekom AG (DTE), Germany’s largest phone company, reported second-quarter profit that beat analysts’ estimates as lower handset subsidies in the U.S. and a stronger dollar helped offset declining sales in Europe.

Earnings before interest, taxes, depreciation and amortization and some items climbed 0.2 percent to 4.7 billion euros ($5.8 billion), compared with the 4.58 billion-euro average of 10 analyst estimates compiled by Bloomberg. Profit on that basis at T-Mobile USA surged 19 percent in euro terms and margins in Germany also rose, the company said today.

While the U.S. business almost completely accounted for Bonn-based Deutsche Telekom’s profit gain, it has so far failed to contain an exodus of subscribers following a botched sale of the unit to AT&T Inc. (T) last year. Chief Executive Officer Rene Obermann said today he plans to increase spending in the U.S. and Germany, a sign that profitability in the company’s two most important markets may not hold up in the second half.

“There’s cause for optimism about the U.S. going forward,” said Jacques Abramowicz, an analyst at Silvia Quandt & Cie. in Frankfurt who has a neutral rating on the shares. “If you consider the economic problems that we’re having in Europe, Deutsche Telekom is holding up much, much better than all the other guys.”

The former German monopoly confirmed its full-year forecasts as well as a pledge to pay a dividend of at least 70 cents for 2012. Telefonica SA (TEF) and Royal KPN NV (KPN) slashed their payouts in the past quarter to conserve cash.

T-Mobile USA

Faltering demand in European markets has pushed down shares of the region’s phone companies, which were the worst performers in the Stoxx Europe 600 Index (SXXP) this year through yesterday. Deutsche Telekom has climbed 5.9 percent this year, while the Bloomberg Europe Telecommunication Services Index was little changed.

The shares fell 2.9 percent to 9.12 euros at 10:41 a.m. on the Frankfurt exchange, after rising as much as 1.1 percent.

T-Mobile USA lost 557,000 contract customers, more than losses of 346,200 predicted by analysts. Still, adjusted Ebitda at the division increased 5.7 percent in U.S. dollars. In euros, the measure surged 19 percent to 1.06 billion euros. Handset subsidy costs dropped 38 percent to $310 million in the quarter, when market leaders AT&T Inc. and Verizon Wireless also made customers pay more for phone upgrades.

Net Income

The fourth-largest U.S. wireless carrier has lost 2.76 million contract customers, or more than 10 percent of its subscriber base, in the past 8 quarters. With 33.2 million users, T-Mobile USA is positioning itself as a more affordable alternative to Verizon, AT&T and Sprint Nextel (S) Corp.

Former Starbucks Corp. (SBUX) executive Jim Alling has been running T-Mobile on an interim basis since Philipp Humm left as CEO in June to join Vodafone Group Plc. (VOD)

The unit faces higher costs on network spending and marketing in the second half of the year, Bank of America Merrill Lynch analysts including Emmet Kelly wrote in a note.

Deutsche Telekom’s second-quarter net income was 614 million euros, compared with the 607 million-euro average estimate by analysts. Sales slipped 0.7 percent to 14.38 billion euros, lower than the average estimate of 14.43 billion euros. The second-quarter increase in adjusted Ebitda followed a decline of 0.1 percent in the preceding three months.

Greece, Netherlands

Revenue in Germany slipped 3.1 percent in the quarter, while sales in the rest of Europe dropped 5.9 percent. Deutsche Telekom sells mobile-phone services in countries including the U.K., Netherlands and Austria. It also owns a stake in Hellenic Telecommunications Organization SA (HTO) in Greece.

Regulatory changes are poised to affect revenue. The European Union said last month it won’t cut the prices Internet network owners charge for access to copper lines, a move that will prop up sales at former fixed-line monopolies such as Deutsche Telekom. On the other hand, regulators are moving toward eliminating fees that wireless carriers levy on travelers.

Falling valuations of European telecommunications operators has in the past quarter attracted investors including Carlos Slim’s America Movil SAB, which acquired shares in KPN and Telekom Austria AG. (TKA)

KPN, the biggest Dutch phone company, last month cut its 2012 dividend by 61 percent after reporting shrinking demand in its home market. Telefonica of Spain, Europe’s largest telecommunications operator, canceled its dividend and share buyback to conserve cash for repaying debt.

Investors in German phone stocks will have one more choice if a plan by Telefonica to hold an initial public offering of its German unit proceeds in the final quarter of this year.

Deutsche Telekom is “developing well compared to its industry peers,” Obermann said on a conference call. “That even gives us room to invest more in the wireless market in Germany, but also in the U.S.”

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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