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Dan Bieler, IDC Consulting Director: Profit warning from Deutsche Telekom, the economic crisis is catching up

April 2009 by Dan Bieler, IDC Consulting Director

Deutsche Telekom issued a profit warning and lowered its guidance on EBITDA. The revised full-year guidance comes days ahead of the official publication of its financial results for 1Q09 on 7 May. Deutsche Telekom’s share price fell to its lowest level since October 2002.

Deutsche Telekom points to strong currency fluctuations in several of its key markets, in particular in the UK and Poland, as a key reason for the revision. Still, it is surprising that such a significant downward correction is made well after the respective currencies devalued against the Euro, and after the guidance of 27th February when these currency movements had already taken place. We interpret this as a sign that the operating environment for Deutsche Telekom has actually further deteriorated since February, in particular outside its domestic market. Deutsche Telekom’s revenues have been impacted by a decline in international mobile roaming charges, as a result of reduced travel. This issue was particularly noticeable in the US, the UK and Poland. It has also become more expensive for Deutsche Telekom to attract and retain customers, because of tougher competition.

Deutsche Telekom is reactiing to these developments by reducing its cost base. This is a perfectly rational decision and we would not expect otherwise. But Deutsche Telekom should not ignore the opportunity that the economic crisis offers. It has the chance to react in a counter-cyclical manner, in selective areas, to differentiate itself more from the competition. One example might be to invest in seamless mobile broadband handover between cellular and wifi, to leverage its leadership in German fixed broadband, and its ownership of wifi hotspot networks.

A big risk we see for Deutsche Telekom is that the announced integration of its fixed and mobile division will slow down. Management might focus more on cost cutting opportunities than issues such as innovative converged offerings (which we know key competitors will bring to market in the coming months), attractive and selective M&A opportunities and driving a cultural change amongst its employees. As tempting as it might be to "fix the old engine once more", we believe that Deutsche Telekom risks losing time during the necessary transition process towards an IP-based communications business.

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