Deutsche Telekom faces challenges in US, Europe

Deutsche Telekom AG U.S. wireless unit T-Mobile USA showed Thursday it remains the company's problem child after the division suffered a steep loss in customers in the fourth quarter.
T-Mobile USA, which contributes roughly 20% of the telecom giant's operating profit, lost a net 802,000 contract customers in the three months ended Dec.

31, Deutsche Telekom said in its earnings release Thursday. It blamed the drop on the fact that the division doesn't have Apple Inc.'s popular iPhone on offer.

The decline was "even worse than feared," JP Morgan analyst Hannes Wittig said in a note to investors. LBBW analyst Stefan Borscheid anticipates further significant losses in 2012 and next year, linked to the absence of the iPhone in the unit's portfolio.
Shares of Deutsche Telekom were trading 2.9% lower at EUR8.71 at 1312 GMT, while the DAX benchmark index was 0.4% lower.

Deutsche Telekom had planned to sell T-Mobile USA to AT&T Inc., but had to bury the plan in December after opposition from regulators. The German company wanted to offload the unit as it wasn't willing to continue making hefty investments in a market where growth prospects have faded. Observers believe that Deutsche Telekom may still want to exit the U.S. some point.

The unit's adjusted Ebitda, which measures earnings before interest, taxes, depreciation, amortization and one-off items, fell 3.1% to $5.33 billion last year, and Deutsche Telekom forecasts a further decline this year to about $4.8 billion.

T-Mobile USA has seen declining customers numbers over quite some time. The unit had 24,797 million contract customers at the end of 2011, compared with 26,447 million a year earlier. It is the only U.S.
carrier not selling the iPhone, making it harder to win customers that sign up to contracts - a more lucrative sales formula for mobile operators - and so far also the only one that isn't building a super-fast fourth-generation mobile network on a technology called LTE.

This will change soon. Deutsche Telekom said Thursday it will invest an additional $1.4 billion over the next two years so as to launch LTE on its U.S. network in 2013 to cater for continued mobile
data growth. The company gave no indication that it would offer the iPhone anytime soon, and Deutsche Telekom Chief Executive Rene Obermann said T-Mobile would only be interested "if it makes economic sense."
The failure of the U.S. disposal was a major setback for Deutsche Telekom as it's facing challenges on several fronts.

The Bonn-based company is grappling with intense competition and tough economic conditions in Europe, where it has a large exposure to the troubled south-eastern part of the continent through its 40% stake in Greece's Hellenic Telecommunications Organization SA (HTO.AT), or OTE.

Deutsche Telekom's net loss in the final quarter of 2011 widened to EUR1.34 billion, from a loss of EUR514 million a year earlier. The figure includes several one-time items, including a cash payment of EUR2.3 billion from AT&T as compensation for the failed sale of T-Mobile USA, but also impairment writedowns of EUR2.3 billion and EUR800 million on the U.S. and European businesses, respectively.

The fourth-quarter impairment losses in the U.S. are linked to the declining customer contract base, as well as margin pressure at new contracts, Deutsche Telekom said.

Operating profit for Deutsche Telekom as a whole was EUR18.69 billion in the full year, down from EUR19.47 billion in 2010. The company forecasts a further drop to around EUR18 billion this year, saying the overall environment remains challenging.

"The outlook is somewhat disappointing," said Equinet analyst Adrian Pehl. The company's dividend policy, however, remains one positive factor, he said.
Deutsche Telekom is proposing a dividend of EUR0.70 a share for 2011, unchanged from a year ago, and the company is sticking to its commitment to pay out at least EUR0.70 per share for 2012.