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Morningstar | Deutsche Telekom Reported Solid 4Q Results With Slightly Higher Revenue and EBITDA Than Expected

Deutsche Telekom reported solid fourth-quarter results, which pushed its full-year results slightly ahead of our projections. However, we already expected a strong 2019, so our projections are in line with management’s 2019 guidance. Thus, we don’t anticipate any significant changes to our EUR 17 per local share fair value estimate. Our no-moat rating remains intact, and we believe the shares are slightly undervalued.

The firm reported revenue growth of  5.7% year over year in the fourth quarter, which pushed its full-year revenue up 0.9% versus our estimate of 0.8%. The fourth quarter benefited from the full quarter of owning UPC Austria. 2019 will benefit from the full year of UPC Austria and from owning Tele2 Netherlands, whose acquisition closed on Jan. 2, 2019. The bigger improvement was on the margin side, where it generated an adjusted EBITDA margin of 30.8% for the year versus our projection of 30.4%. However, management’s guidance for 2019 is EUR 23.9 billion was spot on with our existing estimate.

In its core market of Germany, revenue fell 1.1% for the year as pricing declined. Importantly, it continues to grow its subscriber bases, particularly its MagentaEINS, or converged customers, which grew 17.5% to 4.3 million. While Germany has been slower at taking up convergence versus some European countries, such as Spain, Portugal, and France, it is gaining speed and is ahead of the U.K. and Italy. We expect the movement to convergence will allow Germany to return to revenue growth in 2019.

The U.S., which is now its largest region, continues to perform very well. It continues to attract the majority of net new mobile subscribers in the U.S. However, the impact of the U.S. business was reduced in 2018 due to currency movements. In dollar terms, the business increased its revenue 6.8%, but in euro terms it only grew 2.2%. For more on the U.S. business, please see our T Mobile U.S. note dated Feb. 7.

The big surprise for us was the systems solutions business, which grew 1.3% in the quarter, sufficient to generate positive revenue growth for the whole year, versus our projection of a decline. Even better, the segment’s orders jumped in the fourth quarter, leading to a 29.3% improvement year over year in its backlog. This is a segment where we’ll need to increase our revenue projections. However, the division generates low EBITDA margins. Its EBITDA fell 15.7% during the year leading to an EBITDA margin of just 7.8%. Thus, while we will likely increase our revenue growth rate, it likely won’t have much impact on EBITDA.