Deutsche Telekom keeps to targets amid sobering markets

BONN, Germany Thu Aug 4, 2011 10:50am EDT

The sign of Deutsche Telekom headquarters is pictured in Bonn February 25, 2010. REUTERS/Ina Fassbender

The sign of Deutsche Telekom headquarters is pictured in Bonn February 25, 2010.

Credit: Reuters/Ina Fassbender

BONN, Germany (Reuters) - Deutsche Telekom (DTEGn.DE) is on track to meet its 2011 targets, it said, despite a poor performance in the United States, continued economic weakness in southeastern Europe and sluggish growth in Germany.

The Bonn-based group is in the throes of retrenching as a regional European player and awaits regulatory approval for the sale of its ailing U.S. business to AT&T (T.N) for 39 billion euros ($55.7 billion).

Once the sale is concluded -- expected in the first quarter of 2012 -- Deutsche Telekom's domestic operations in Germany will account for 54 percent of its business.

But sales in the last quarter fell slightly in Germany, Europe's biggest economy, and mobile service revenues slowed.

At the same time its biggest operation outside of Germany, its 40 percent stake in Greek telecom group OTE (OTEr.AT), has turned into a major headache.

Deutsche Telekom bought its first stake in the Greek operator in 2008, hoping to benefit from growth in Southeastern Europe but a year later was already forced to write down 1.8 billion euros on the investment.

Chief Financial Officer Timotheus Hoettges said he did not foresee another writedown at the moment but could also not rule out any future ones.

Chief Executive Rene Obermann questioned whether it made sense to invest further at all. The Greek government would like to sell its remaining stake in OTE, which surprised with a better than expected quarterly net profit.

CELEBRATIONS NOT IN ORDER

Obermann said while second-quarter results were no cause for celebration, he was confident the company would reach its goals.

Deutsche Telekom expects to generate 14.9 billion euros in core profit this year from its German and European operations and 4.2 billion from T-Mobile USA, with free cash flow of at least 6.5 billion.

But some analyst voiced their doubts.

"After the second-quarter numbers it has become even more clear that Deutsche Telekom will most likely not achieve its EBITDA (earnings before interest, tax, depreciation and amortization) guidance of 19.1 billion euros," DZ Bank analyst Joeri Sels said.

"We believe that Deutsche Telekom will heavily miss the U.S. guidance due to both currency effects and a poor operational performance."

Deutsche Telekom shares were up 2.8 percent at 10.54 euros by 1145 GMT, when the German blue-chip index DAX .GDAXI was up 0.2 percent.

Obermann remained positive saying that business at the company's European operations -- with the exception of Greece and Romania -- was improving.

"We are now also seeing light at the end of the tunnel in southeastern Europe," Obermann said.

PENSIONERS WEIGH ON NET PROFIT

Second-quarter group net profit dropped 26.7 percent to 348 million euros, mainly due to 600 million euros in one-off expenses for an early retirement plan in Germany, where sales fell 3.4 percent.

Deutsche Telekom like other European incumbents has been at pains to continuously reduce its bloated work force, many of whom are civil servants. It extended an early retirement program, which impacted its net profit.

Chief Executive Rene Obermann told Reuters Insider TV that the company would continue to work on reducing headcount but declined to elaborate.

Second-quarter EBITDA dropped 6.5 percent to 4.687 billion euros ($6.68 billion), while group sales were down 6.8 percent at 14.475 billion euros, slightly missing average estimates.

($1=0.700 euros)

(Editing by Greg Mahlich)

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