EUR 850.00 For Business Accounts Only

Morningstar | Deutsche Telekom Report Mixed 2Q Revenue, With Weak Revenue but Strong Margins; Shares Undervalued

Deutsche Telekom reported mixed second-quarter results, with weak revenue growth but strong EBITDA margins. We anticipate that these items will basically offset each other when we update our model, and we expect to maintain our EUR 17 local share fair value estimate. Our no-moat rating is unchanged. The shares remain slightly undervalued. The firm reported that revenue fell 2.7% year over year, though the majority of this was from the euro weakening against the U.S. dollar. Organically, revenue increased 1.3%, but even this was below our full-year projection of 2.3%.

In the U.S., its largest market, T-Mobile continues to take more than 50% of new postpaid phone customers and increased its service revenue by 6.1%. Please see our Aug. 1 T-Mobile note for more information on the U.S. unit. In Germany, its home market, reported revenue declined 0.9%. However, service revenue, which is the largest and most stable segment, grew only 2.9%. The German market was a little slow in moving to converged services, but it is now well under way. The firm ended the quarter with 3.9 million MagentaEINS customers (its converged product), which includes 45% of its mobile contract customers. DT is also enhancing the speed of its broadband service and now has 74% of its customers on either fiber-to-the-home or vectoring, which generally allows speeds of 100 Mb/second or higher. This has enhanced DT’s competitive position versus the cable-TV providers. We expect convergence and fiber enhancements to enable a return to revenue growth in Germany.

Convergence is also becoming more important in the rest of Europe, where convergent products jumped 48.3% to 2.7 million, which led to 1.3% revenue growth. We expect this strategy to continue to deliver revenue gains. DT is doing a better job of cutting costs than we expected and generated an EBITDA margin of 32.3% in the quarter versus our full-year projection of 30.3%. However, the fourth quarter historically generates much lower margins.

On the systems solutions side, the division landed a big contract from Sparda Group that pushed its order entry up 42.2%, which should help for the next year, but we remain negative on the division as a whole as its scale is limited versus other operators, such as AT&T, BT Group, Orange, and Verizon.