Updated from 9:31 a.m. EST

Lumbering

Deutsche Telekom

(DT) - Get Report

looked west for answers Thursday after losing more money in a quarter than any other company in German history.

The partially state-owned enterprise logged a net loss of 20.6 billion euros in the third quarter because of huge declines in the value of wireless licenses and acquired businesses, including the wireless network it owns in the U.S.

But in a surprising show of faith, the company promoted Kai-Uwe Ricke, who served as the head of the company's global wireless operations, to be its next chief executive. Ricke was part of the team that supported the $30 billion acquisition of Voicestream last year, a move that eventually led to the ouster of its DT CEO Ron Sommer.

"It's a bit ironic," said Sanford C. Bernstein wireless services analyst Alex Trofimoff.

Soon Parted

According to industry figures, European wireless carriers have collectively spent over $130 billion on pricey spectrum licenses over the past three years. But the services, which let subscribers send and receive email, sound and pictures, have yet to significantly boost the bottom line.

Despite rumors of a sale, new CEO Ricke said T-Mobile USA won't be sold simply to pare down the company's 64 billion euros of debt. "We don't want to be, and will not be, the No. 6 player in the U.S. in the long term," Ricke told investors in a strategy meeting.

"We will consider business combination opportunities, not as a debt reduction measure, but as an opportunity to recognize the inherent value of T-Mobile USA," Ricke said.

Go West

Deutsche Telekom's faith in its wireless operations overall and U.S. wireless specifically has some basis, however, particularly in comparison with its other operations. Nearly 40% of the global wireless operation's customer additions came from the American unit alone. It added 869,000 net additional subscribers in the U.S, compared to 2.2 million across the globe. (Deutsche Telekom owns wireless operations in the U.K., Germany, Austria, the Czech Republic, Russia, Poland and the Netherlands.)

The mix of its U.S. subscribers is also superior. About 84% of its U.S. subscribers are locked in contracts, compared with 68% on a global basis. Contract customers are less likely to leave the service and generally spend more money on the network than prepaid subscribers, who are generally credit-strapped.

Moreover, despite a debilitating price war in the U.S. wireless sector, T-Mobile USA has managed to maintain average revenue per user at $51, largely flat compared to last year. It's important to note, however, that T-Mobile's churn rate, or the pace at which customers left the service, shot up to 4.6% -- on the high-end of industry norms. T-Mobile lost about 190,000 prepaid customers in the quarter.

Still, it's hard to ignore the fact that the lion's share of writedowns is associated with Deutsche Telekom's acquisition of Voicestream, which is now T-Mobile USA, and the expensive wireless licenses fee the purchase incurred.

Staggered

DT's staggering third-quarter loss was caused primarily by the slumping fortunes of its wireless unit and 22 billion euros of write-downs -- nearly 10 billion of which were related to U.S. licenses.

Excluding charges, the company reported a third-quarter loss of 1.1 billion, compared with 1.5 billion a year ago.

DT said it ended the quarter with 64 billion euros of debt, down from 66.7 billion in July. The company said it hopes to have the level at 49.5 billion at the end of next year. To reach those figures, it plans to severely cut costs across the board and continue to divest nonstrategic properties including cable and real estate.

Ricke told investors the company is fully financed through 2004, with liquidity reserves of 19.4 billion euros. The company also plans to reduce full-year 2002 capital spending to 8.5 billion euros, from nearly 10 billion last year.

Deutsche Telekom expects to be free-cash-flow positive, before expenses and interest, some time in 2004.