Deutsche Telekom Outlines Growth Strategy, Plans More Cost Reductions

Deutsche Telekom has updated its financial targets at a Capital Markets Day in Bonn. The German operator targets revenue growth of 1-2 percent, adjusted EBITDA growth of 2-4 percent and free cash flow growth of 10 percent on average per year over the period 2017 to 2021. In addition, the company plans to to shift its dividend to growth based on adjusted EPS, rather than free cash flow from 2019.

The dividend for 2018 will still be based on free cash flow and is expected to grow to EUR 0.70 per share from EUR 0.65 per share last year. Starting in 2019, the dividend will track the development in adjusted earnings per share, which are expected to grow from around EUR 1.0 in 2018 to EUR 1.2 in 2021. A minimum dividend of 50 cents per share will continue to apply. Deutsche Telekom said it’s also considering a share buyback to add to shareholder remuneration.

The financial targets are the same as for the period 2014-2018. During that period, DT said it averaged 4 percent annual revenue growth in the first four years, 5 percent in adjusted EBITDA and 11 percent in free cash flow. The dividend rose an average 9 percent a year over the four years.

The new outlook does not include the planned merger of T-Mobile US with Sprint, which is not expected to close until 2019. Assuming the merger takes effect at the beginning of 2019, this would have a negative effect on adjusted earnings per share and group free cash flow through 2021-22. The other targets would not be impacted, the company said.

More cost cutting
Offsetting some of the extra costs for the Sprint merger, the group plans new automation and digitisation efforts to reduce indirect costs in Europe by another EUR 1.5 billion by 2021. In the previous five-year period, DT targeted EUR 1.8 billion in cost reductions, but achieved only about half of that as of the end of 2017. CEO Tim Hoettges said at a presentation that the company fell short of the target due to the migration to an all-IP network taking longer than planned, with still another 1-1.5 years to go before completed, and higher-than-expected costs for simplifying internal IT systems.

Around half the new amount of targeted savings will come from non-staff-related savings in areas such as real estate and legacy IT platforms, some of which will result from the migration to IP, due to be concluded for consumers in Germany by 2019. The majority of the planned staff reductions have already been implemented in social agreements, such as a phased retirement plan, which will take effect at the end of 2018, Telekom said.

Hoettges said the company “will continue to exhibit a growth profile that is unparalleled in our industry”. This will be supported by “continuing to invest heavily in infrastructure”, with capex outside the US to remain at the high level seen in 2017 and stable over the rest of the period. Investment will include a greater focus on FTTP outside Germany, with the share of capital expenditure allocated to FTTH planned to triple at the group’s European subsidiaries.

FTTH in Germany?
Telekom was more cautious on plans for fibre in Germany, saying “given the right regulatory conditions”, it could increase its roll-out of FTTH to up to 2 million households per year from 2021. Hoettges said the company is balancing political pressure to step up the fibre roll-out and ensuring the company earns a sufficient return on capital invested.

The company reiterated its target for 80 percent of German households to have access to speeds of at least 100 Mbps by the end of 2019, following the roll-out of VDSL vectoring. Super vectoring will start rolling out in the second half of 2018 and by the end of the year, some 15 million households should have access to speeds up to 250 Mbps. The company said it also plans to use wireless-to-the-home technologies to provide gigabit bandwidth to around a quarter of German homes and will look at taking up government subsidies for further broadband upgrades.

For the mobile network, Deutsche Telekom said it will increase the number of mobile base stations in Germany from 27,000 in 2017 to 36,000 in 2021. It will also deploy small cells to increase capacity in urban areas with heavy network traffic. The aim is to increase LTE network coverage in Germany from 94 percent of the population in 2017 to 98 percent in 2019. At the European subsidiaries, the number of base stations and small cells will grow to 47,000 by 2021, from 41,000 in 2017.

In Europe, the operator will also continue its MagentaOne strategy, offering convergent fixed and mobile bundles in order to lower churn and boost household revenues. The share of households in Europe using convergent plans is expected to grow from 21 percent in 2017 to around 40 percent in 2021. – Telecom Paper