BERLIN -- Deutsche Telekom( DT) Tuesday reported that profits surged as Europe's second-largest telephone operator held what amounted to a corporate yard sale in the first three quarters of the year.
Including extraordinary items, net profit in the latest nine months jumped more than six times to 8.4 billion euros ($7.06 billion), as the former state-run German monopolist sold off stakes in two regional cable operations as well as its holdings in corporate communications unit
and Italian mobile operator
. DT also floated its Internet arm
But adjusting DT's numbers for those one-time items, net profit actually fell to 740 million euros from 1.25 billion euros a year earlier. Sales rose nearly 15%, to 29.3 billion euros. While those figures were largely in line with analysts' expectations, they highlight the ongoing challenges facing Telekom as it tries to move from a creaky state-supported dinosaur to a global telecommunications contender. In New York, DT shares were unchanged at $37.25 at midafternoon.
Adjusted net profit got squeezed as the scrap for customers in Telekom's home market continued to intensify. Besides having to splash out to win over new mobile users, DT is still losing more and more of its fixed-line business to more agile competitors. Smaller domestic margins have always been a major reason for DT's big push to internationalize its business. But as the extraordinary items partly show, Telekom's international strategy has taken almost as many steps back as forward recently.
DT had to sell its stakes in both Global One and Wind after upsetting partner
when Telekom tried in vain to merge with rival
last year. Whereas Wind went on to win a third-generation UMTS (Universal Mobile Telecommunications System) wireless license in the Italian auction earlier this month, Deutsche Telekom decided weeks ago to not even contest the key market. Telekom is also likely to end up without a French UMTS license as well, leaving gaping holes in what DT Chairman Ron Sommer had hoped would be a pan-European 3G footprint.
But even when Telekom managed to get 3G licenses in both the German and U.K. auctions, the costs of the licenses proved to be so high that investors began giving DT's shares the cold shoulder. Although all European telecom operators have seen their share prices pressured by UMTS costs, Telekom's share has been more than halved since the British auction. Deutsche Telekom's stock set a high for the year in March at just over 100 euros per share. Tuesday, DT shares were flat at 44 euros.
"Telekom's operating profit is going to be pressured for the next couple of years as it continues to restructure itself," says Markus Glockenmeier, an equity strategist for
Delbrueck Asset Management
in Frankfurt. Delbrueck owns DT and rates the stock buy. He also notes extraordinary items will distort Telekom's figures moving forward, as the telco unloads further regional cable units and likely floats of its wireless unit
Telekom partly blamed UMTS expenses for causing the company's debt to balloon to 62.1 billion euros at the end of the third quarter from 38.5 billion euros at the beginning of the year. Concerns over the company's debt load is likely to keep DT's shares from rebounding too quickly, but they at least appear to have stabilized at a level high enough not to jeopardize Telekom's takeover of U.S. mobile operator
Although the VoiceStream deal is seen as a good strategic move for DT, the price tag for the company is widely considered far too high. Originally valued at $50 billion, the deal is now worth roughly $10 billion less as a result of Telekom's sagging share price. That's riled VoiceStream shareholders, naturally.
Making the leap to America could present real opportunities for Telekom, since VoiceStream is poised to become the only U.S. nationwide GSM (Global System for Mobile Communications) provider. Although not widely used in the U.S., GSM is the dominant wireless standard in Europe, offering DT the prospect of recognizing sizable savings while remaining active in its two most important markets.
Plus, now that the last major UMTS auction is over and Telekom's shares got so horribly punished over the summer, much of the stock's downside potential has likely already been shaken out. "If you look a little longer term there's potential to see 80 euros, perhaps," says Delbrueck's Glockenmeier. While that's still considerably lower than levels seen just last spring, it's probably a price DT's Sommer could live with.