UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Form 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of November 2006

Commission file number 001-14540


Deutsche Telekom AG

(Translation of Registrant’s Name into English)

Friedrich-Ebert-Allee 140,
53113 Bonn,
Germany

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F x     Form 40-F o

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o     No x

This Report on Form 6-K is incorporated by reference into the registration statement on Form F-3, File No. 333-118932, and the registration statement on Form S-8, File No. 333-106591, and into each respective prospectus that forms a part of those registration statements.

 




 

Defined Terms and Contact Information

The term “Report” refers to this Report on Form 6-K for the nine-month period ended September 30, 2006. Deutsche Telekom AG is a stock corporation organized under the laws of the Federal Republic of Germany. As used in this Report, unless the context otherwise requires, the term “Deutsche Telekom” refers to Deutsche Telekom AG and the terms “we,” “us,” “our,” “Group” and “the Company” refer to Deutsche Telekom and, as applicable, Deutsche Telekom and its direct and indirect subsidiaries as a group. Our registered office is at Friedrich-Ebert-Allee 140, 53113 Bonn, Germany, telephone number +49-228-181-0. Our agent for service of process in the United States is Deutsche Telekom, Inc., 600 Lexington Avenue, New York, N.Y. 10022.

Forward-Looking Statements

This Report contains forward-looking statements that reflect the current views of our management with respect to future events. Forward-looking statements generally are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “aims,” “plans,” “will,” “will continue,” “seeks,” “targets,” “goals,” “outlook” and similar expressions. Forward-looking statements are based on current plans, estimates and projections, and therefore you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws (such as our obligations to file annual reports on Form 20-F and periodic and other reports on Form 6-K) and under other applicable laws. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among other factors: the development of demand for our fixed and mobile telecommunications services, particularly for new, higher value service offerings; competitive forces, including pricing pressures, technological changes and alternative routing developments; regulatory actions and the outcome of disputes in which the company is involved or may become involved; the pace and cost of the rollout of new services, such as UMTS, which may be affected by the ability of suppliers to deliver equipment and other circumstances beyond our control; public concerns over health risks putatively associated with wireless frequency transmissions; risks associated with integrating our acquisitions; the development of asset values in Germany and elsewhere, the progress of our debt reduction and liquidity improvement initiatives; the development of our cost control and efficiency enhancement initiatives, including in the areas of procurement optimization, personnel reductions and our Telekom 2010 strategy; risks and uncertainties relating to benefits anticipated from our international expansion, particularly in the United States; the progress of our domestic and international investments, joint ventures and alliances; our ability to gain or retain market share in the face of competition; our ability to secure and retain the licenses needed to offer services; the effects of price reduction measures and our customer acquisition and retention initiatives; the availability, term and deployment of capital, particularly in view of our debt refinancing needs, actions of the rating agencies and the impact of regulatory and competitive developments on our capital outlays; the progress of our workforce adjustment initiative described in this Report and changes in currency exchange rates and interest rates. Additionally, we periodically assess our goodwill for indications of impairment by monitoring, among other things, changes in competitive conditions, expectations of growth in the industry, and changes in market and other factors, any of which could result in a risk of additional impairment charges. If these or other risks and uncertainties (including those described in “Forward-Looking Statements,” “Item 3. Key Information — Risk Factors” and elsewhere in our most recent Annual Report on Form 20-F for the year ended December 31, 2005 filed with the U.S. Securities and Exchange Commission) materialize, or if the assumptions underlying any of these statements prove incorrect, our actual results may be materially different from those expressed or implied by such statements.

This Report also contains forward-looking statements that reflect the current views of management with respect to future market potential, such as the “Outlook” statements as well as our dividend outlook, and include generally any information that relates to expectations or targets for revenue or other performance measures. Among the factors to be considered in determining guidance for 2007 and beyond will be the costs of the Group’s workforce adjustment initiative, which we estimate will result in costs and charges totaling approximately EUR 3.3 billion, and the recently announced cost-cutting initiatives totaling in excess of EUR 4 billion over the next three years.

World Wide Web addresses contained in this Report are for explanatory purposes only and they (and the content contained therein) do not form a part of, and are not incorporated by reference into, this Report.




 

Exchange Rates

Unless otherwise indicated, all amounts in this Report have been expressed in euros.

As used in this document, “euro,” “EUR” or “€” means the single unified currency that was introduced in the Federal Republic of Germany (the “Federal Republic”) and ten other participating Member States of the European Union (E.U.) on January 1, 1999. “U.S. dollar,” “USD” or “$” means the lawful currency of the United States. As used in this document, the term “noon buying rate” refers to the rate of exchange for euros, expressed in U.S. dollars per euro, in the City of New York for cable transfers payable in foreign currencies as certified by the Federal Reserve Bank of New York for customs purposes, as required by Section 522 of the U.S. Tariff Act of 1930, as amended. Unless otherwise stated, conversions of euros into U.S. dollars have been made at the rate of EUR 1.00 to USD 1.2687, which was the noon buying rate on September 29, 2006.

Amounts appearing in this Report that have been translated into euros from other currencies were translated in accordance with the principles described in the notes to the audited consolidated financial statements contained in our Annual Report on Form 20-F for the year ended December 31, 2005.

International Finacial Reporting Standards (IFRS)

You should read the following discussion, which has been prepared in accordance with IFRS, as adopted by the European Union (E.U. GAAP), in conjunction with the annual consolidated financial statements, including the notes to those financial statements, contained in our Annual Report on Form 20-F for the year ended December 31, 2005 filed with the Securities and Exchange Commission. All IFRSs issued by the International Accounting Standards Board (IASB), effective at the time of preparing this Report and applied by the Deutsche Telekom, have been adopted for use in the E.U. by the European Commission; therefore, there are no differences and a reconciliation between E.U. GAAP and IFRS is not needed. Our consolidated financial statements comply with IFRS as published by the IASB. However, those financial statements have been prepared in accordance with the requirements of IFRS, which differ in certain significant respects from U.S. generally accepted accounting principles (U.S. GAAP). For a discussion of the principal differences between IFRS and U.S. GAAP as they relate to us, see “Reconciling Differences between IFRS and U.S. GAAP” and notes 48 and 49 to the consolidated financial statements contained in our Annual Report on Form 20-F for the year ended December 31, 2005.




 

DEUTSCHE TELEKOM AT A GLANCE

 

 

For the three months
ended September 30,

 

 

 

For the nine months
ended September 30,

 

 

 

For the
year
ended

 

 

 

2006

 

2005

 

Change
%

 

2006

 

2005

 

Change
%

 

December 31,
2005

 

 

 

(millions of €, except where indicated)

 

Net revenue

 

15,480

 

15,056

 

2.8

 

45,452

 

44,087

 

3.1

 

59,604

 

Domestic

 

8,386

 

8,397

 

(0.1

)

24,733

 

25,425

 

(2.7

)

34,183

 

International

 

7,094

 

6,659

 

6.5

 

20,719

 

18,662

 

11.0

 

25,421

 

Profit from operations

 

1,989

 

2,790

 

(28.7

)

6,392

 

7,649

 

(16.4

)

7,622

 

Profit/(loss) from financial activities

 

(718

)

384

 

n.m.

 

(2,058

)

(783

)

n.m.

 

(1,410

)

Profit before income taxes

 

1,271

 

3,174

 

(60.0

)

4,334

 

6,866

 

(36.9

)

6,212

 

Depreciation, amortization and impairment losses

 

(2,752

)

(2,590

)

(6.3

)

(7,986

)

(7,734

)

(3.3

)

(12,497

)

of property, plant and equipment

 

(2,097

)

(1,982

)

(5.8

)

(6,084

)

(5,889

)

(3.3

)

(8,070

)

of intangible assets

 

(655

)

(608

)

(7.7

)

(1,902

)

(1,845

)

(3.1

)

(4,427

)

Net profit

 

1,945

 

2,442

 

(20.4

)

4,029

 

4,595

 

(12.3

)

5,584

 

Earnings per share/ADS(a) basic and diluted (€)

 

0.44

 

0.57

 

(22.8

)

0.93

 

1.08

 

(13.9

)

1.31

 

Net cash from operating activities

 

3,553

 

4,267

 

(16.7

)

9,241

 

10,082

 

(8.3

)

14,998

 


       n.m.—not meaningful

Number of employees at balance sheet date

 

 

As of
September
30, 2006

 

As of
June
30, 2006

 

Change
September 30,
2006/
June 30, 2006
%

 

As of
December 31,
2005

 

Change
September 30,
2006/
December 31,
2005
%

 

As of
September 30,
2005

 

Change
September 30,
2006/
September 30,
2005
%

 

Deutsche

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telekom Group

 

250,483

 

249,991

 

0.2

 

243,695

 

2.8

 

243,418

 

2.9

 

Non-civil servants

 

207,990

 

207,073

 

0.4

 

197,741

 

5.2

 

197,118

 

5.5

 

Civil servants

 

42,493

 

42,918

 

(1.0

)

45,954

 

(7.5

)

46,300

 

(8.2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of fixed-network and mobile customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Telephone lines(b)(millions)

 

52.3

 

53.2

 

(1.7

)

54.8

 

(4.6

)

55.5

 

(5.8

)

Broadband lines(c)(millions)

 

10.6

 

10.0

 

6.0

 

8.6

 

23.3

 

7.8

 

35.9

 

Mobile customers(d)(millions)

 

91.6

 

90.2

 

1.6

 

87.6

 

4.6

 

84.1

 

8.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(a)             One ADS (American Depositary Share) corresponds in economic terms to one ordinary share of Deutsche Telekom AG.

(b)            Telephone lines of the Group (including ISDN channels), including for internal use.

(c)             Broadband lines in operation, including Germany, Eastern and Western Europe.

(d)            Number of customers of the fully consolidated mobile communications companies of the Mobile Communications strategic business area. For an explanation of the change in the method for counting mobile customers as of 2006, please refer to page [23] of this Report.




TELEKOM 2010

Our new strategy, Telekom 2010, is intended to create the necessary framework for becoming Europe’s leading telecommunications provider in terms of both revenue and earnings. Our strategic goal is: “We shape the information and telecommunications industry as Europe’s number one and the leading services company in the industry.”

The implementation of this new strategy involves seven areas of action. The program focuses on Germany, Europe and the United States — our core consumer markets — and on the international business customer segment. In addition, it will focus on the three major industry challenges: innovation, service, and efficiency.

Germany — Despite fierce competition and new business models developing in the market, the Group will defend its market leadership and leverage revenue-related synergies. Besides an attractive package consisting of fixed-network and mobile communications services with an improved level of service, the Group will launch new products and rates such as our triple play offering, Internet-based value-added services and mobile Internet. We are fully leveraging the convergence between fixed-line and mobile communications services and further developing our sales channels in order to fully exploit the potential of our customer base.

Europe — Revenue market shares will be sustainably expanded and the Group’s leading market position in Eastern Europe secured. In the European mobile communications markets, we will pursue a strategy focusing on fixed-network substitution and an extended product portfolio. Depending on the individual market situation, the customer base will be leveraged to enter broadband markets.

United States — T-Mobile USA’s revenue market shares will be maximized and the company will be developed into the Group’s largest business unit in the consumer market. The frequencies acquired in the recent spectrum auction in the United States will result in higher network capacity, allowing T-Mobile USA to add attractive 3G services to its portfolio.

Business customers — The aim is to defend the Group’s market position in Germany and become one of the top three ICT service providers in selected customer segments. T-Systems will focus more on defined sectors, including the automotive industry and the government and healthcare sector while offering a comprehensive portfolio of integrated and IP based IT and telecommunications services.

Innovation — As an innovation leader, we shape markets by focusing on the industry’s top fields of innovation: IPTV, mobile Internet, and ICT services. The potential for convergent products and solutions is being fully developed in conjunction with new business opportunities.

Service — Improving the quality of service is one of our primary objectives. By early 2008, at least 80 percent of all customer inquiries are to be resolved upon initial contact with our Group companies (first-done rate). To this end, existing measures, such as customer relationship management, will be systematically expanded. The Group will benefit from adopting T-Mobile USA’s successful service models, the introduction of new customer process models at T-Com, and an integrated customer database throughout all the business areas.

Efficiency — We will considerably reduce by 2010 our structural costs relating to production, IT, sales, marketing, and shared services.

·                                  Telekom 2010 is the successor to the “Excellence Program”, which brought together the Group’s core transformation activities. The success achieved under the Excellence Program is the foundation of Telekom 2010. For example:

·                                  In the third quarter of 2006, T-Com introduced its new 3x3 rate system, a collection of increasing levels of rate and service packages, and launched its triple-play service, “T-Home.”

·                                  T-Mobile’s calling plans, such as the “Max flat rate” and the “extended Relax rates” have enhanced our positive price image in the mobile communications area.

·                                  In August 2006, an integrated customer database was introduced that will help to improve the quality of service to customers and enable more effective cross-selling opportunities.




·                                  The foundation was prepared for a reduction in internal IT costs, and on the production side, the Next Generation Network was completed, which enables a group wide all-IP based production of our services.

·                                  The Group’s workforce restructuring program is continuing according to plan.

The Group’s management is being restructured concurrently with the launch of Telekom 2010. These changes in governance are intended to improve our customer service and process quality across our business units and to manage our cost base more effectively.




HIGHLIGHTS

Group

Vienna arbitration court strengthens Deutsche Telekom’s position with regard to Polska Telefonya Cyfrowa Sp.zo.o. (PTC)

On June 6, 2006, a court of arbitration in Vienna issued a final partial judgment stating that the exercise by T-Mobile Deutschland of a call option on Elektrim S.A.’s share of approximately 48 percent in PTC on February 15, 2005 was effective. Representatives of Deutsche Telekom have since taken over the positions of Chief Executive Officer and Chief Financial Officer of PTC. For more information regarding the development of this situation after September 30, 2006, please refer to the “Outlook”  and “Legal Proceedings Update” sections below.

Share buy-backs following merger with T-Online

On August 25, 2006, Deutsche Telekom AG completed the share buy-back program that was launched on August 14 2006. The program was announced in October 2004 and was intended to buy back from the market the T-Shares issued in the course of the merger of T-Online International AG into Deutsche Telekom AG in order to prevent an increase in the number of Deutsche Telekom shares subsequent to the merger. By August 25, 2006, a total of 62,730,182 shares with a proportionate amount of the share capital of EUR 160,589,265.92, i.e., approximately 1.4 percent of the share capital, had been repurchased at an average price of EUR 11.29 for a total consideration of EUR 708,334,785.39. There still remain proceedings pending with respect to the court review of the fairness of the exchange ratio, which was initiated by former T-Online shareholders in July 2006.

Long-term rating

On September 11, 2006, Standard & Poor’s changed its outlook for Deutsche Telekom AG’s long-term rating from stable to negative, citing higher than anticipated expenditure for the purchase of mobile communications licenses in the United States and the adjustment of the Company’s guidance for 2006 and 2007. The long-term ratings with Fitch and Moody’s remained unchanged in the reporting period at A- and A3, respectively. For additional information concerning the impact of rating agency actions on our financial obligations, see “Liquidity and Capital Resources — Capital Resources — Interest Step-Up Provisions and Credit Ratings” contained in our Annual Report on Form 20-F for the year ended December 31, 2005.

Medium-term note issue

In July 2006, we took advantage of the favorable market environment to issue a medium-term note of GBP 250 million. The seven-year bond was issued as part of the existing debt issuance program and successfully placed by the participating banks.

Staff restructuring continues

The Group is continuing to implement its staff restructuring program, with staff adjustments - 32,000 in total - to take place on a voluntary basis, e.g., through a redundancy payment scheme. The special redundancy payment program expired on August 31, 2006. The redundancy model with higher redundancy payments for T-Systems Enterprise Services and T-Systems Business Services expires on December 31, 2006.

Mobile Communications

End of Auction 66 in the United States

T-Mobile USA is ideally positioned to continue expanding its business. The company acquired a large amount of additional spectrum for data and voice services in the U.S. Auction 66. T-Mobile USA acquired a total of 120 licenses in various regional classes around the United States for a total of USD 4.2 billion, or around EUR 3.3 billion. The costs for T-Mobile USA in dollars per MHz of spectrum per person of population (POP) of USD 0.63 were considerably lower than in most of the previous frequency auctions in the United States and as such were at the lower end of analysts’ expectations at the beginning of the auction. T-Mobile USA more than doubled its frequency spectrum in the top 100 markets in the United States. The build-out of the 3G network is scheduled to commence in the fourth quarter of 2006 and completion is expected is expected in 2007 and 2008. T-Mobile USA anticipates costs of approximately EUR 2.1 billion for this project.

Broadband/Fixed Network

Entering the triple-play era

T-Com entered the triple-play era in the third quarter of 2006, introducing packages combining voice communication,




Internet access, and television via Internet (IPTV) in Germany, France, and Croatia. IPTV and related services are being implemented in Germany and France via a common platform developed by Microsoft. The new triple-play packages contain features such as time shift (time-delay) TV and an electronic program guide (EPG). In Hungary, Magyar Telekom will introduce a triple-play offer in the fourth quarter 2006, while Slovak Telekom is planning to launch a triple-play package in Slovakia at the end of 2006. Preparations for the launch of a triple-play product are also continuing in Spain.

Launch of the new “3x3 complete packages”

Following the successful merger of T-Online International AG into Deutsche Telekom AG, T-Com launched a fully integrated product portfolio on the market with its introduction of the new 3x3 complete packages. T-Com is systematically focusing its prices and product and service levels on what customers want — simple, attractive prices and, first-rate service, such as the complete installation of all hardware and software components at a fixed rate. T-Com has been offering customers new complete packages since mid-September 2006, each consisting of three different options for telephony and Internet communications. Within four weeks, one million customers had already ordered one of the new offers, the majority opting for one of the attractive packages bundling voice and Internet communications.

Launch of the innovative T-One product

T-One, the innovative convergence product launched at the beginning of August 2006, is T-Com’s first fixed-mobile convergence product and the first dual-phone service introduced throughout Germany that allows customers to use fixed-line and mobile telephony with a single handset. The advantages of the convergence solution are: one line, one telephone, one voicemail box, one bill. Thanks to the two different product options, T-One can be used with a traditional telephone line or as a DSL-based service. Both plans are enhanced by a mobile communications component allowing customers to use T-One also while on the move.

Regulatory order on IP bitstream access

On September 13, 2006, the Federal Network Agency issued a regulatory order obliging us to grant its competitors IP bitstream access, i.e., unbundled broadband access based on the Internet protocol, upon request. IP bitstream access enables competitors to offer access to the Internet, notably broadband access, to end users, and primarily targets the mass market. The order requires us to grant IP bitstream access on non-discriminatory terms and to submit its rates for such access services to the Federal Network Agency for advance approval, whereby the rates must be based on the costs of providing efficient services. We have been marketing such an IP bitstream offer since mid-2004 with the wholesale combination of DSL resale and T-DSL ZISP. We are required to submit a reference offer for IP bitstream access by mid-December 2006. In light of the recent order of the Federal Network Agency and pressures exerted by our competitors, it is possible that our IP bitstream access offer to our competitors may be expanded and thereby result in further erosion of our market share in this area.

Business Customers

T-Systems creates electronic procurement platform for Audi

T-Systems is integrating purchasing and finance processes for operating assets in a uniform online solution for the car manufacturer Audi AG. The existing IT systems will be merged to produce a single e-procurement solution and will be integrated into the company’s IT environment by 2008. The procurement of all production-supporting materials such as construction and IT services, and also the entire billing process, is to be effected via a single solution, enabling Audi to reduce its procurement volume and, consequently, its costs.

T-Systems establishes industrial company Tyrolit worldwide

T-Systems Austria is the international network partner of manufacturing company Tyrolit, which is part of the Swarovski Group. Tyrolit uses the corporate network of T-Systems to manage its global production processes and employs the Telekom Global Net for internal corporate communications. The Business Customers area will connect 14 international sales and production sites in Europe, the United States, and Thailand to the Tyrolit corporate network. Other international sites, such as Brazil, will follow. Tyrolit has signed a three-year contract for these services with T-Systems, covering the connection of international Tyrolit sites on four continents.

T-Systems sets up new IT system of the Madrid city tax authorities

T-Systems is responsible for the overall technical design and implementation of the new IT system of Madrid’s tax authorities. The new IT system will improve the service for citizens by simplifying and accelerating administrative processes. It will also increase productivity in the administrative areas by accelerating response times. Access to the tax management system will be fast, easy and convenient via telephone, Internet, or office application.




T-Systems operates nationwide IP communications network for DAK

The German health insurance company DAK will soon use a central, IP-based platform for voice and data communication. With the central multi-service platform developed by T-Systems, approximately 14,000 DAK employees at approximately 900 branches across the country will be able to use IP telephones in a virtual private network (VPN). The new platform will enable DAK to integrate telephony into its successful centrally operated data processing concept, implemented several years ago, to which all employees already have access. The contract with T-Systems will initially run for six years.

T-Systems to deliver and operate desktop systems for Airbus in Spain

Airbus has commissioned T-Systems to provide all necessary PC workstations and services as well as a service hotline for 2,300 users at its Spanish sites. Airbus’ goal is to create an internationally uniform and more cost-efficient desktop infrastructure. The three-year contract expands a cross-country framework agreement that has been in place since 2003 with Airbus sites in Germany, France, and the United Kingdom.

Telecommunications market

The strong price pressure caused by deregulation in the telecommunications sector is reflected once more in the July to September 2006 figures published by the Federal Statistical Office for the overall telecommunications services price index (fixed network, mobile communications, and Internet). From the perspective of private households, consumer prices for fixed network, mobile communications, and Internet telecommunication services in the third quarter of 2006 were an average of 3.4 percent lower than in the same quarter in 2005. On average, prices for mobile telephony services in particular were 11.3 percent lower in the third quarter of 2006 than in the previous year. Consumer prices for Internet use also declined by an average of 4.4 percent year-on-year.

Telecommunications Regulations

Telecommunications Act

The German Federal Cabinet adopted a draft amendment to the Telecommunications Act on May 17, 2006. The amendments relate primarily to the temporary exemption of new markets from market regulation, and to a range of provisions that extend consumer protection.

Concerning the proposed new markets rule, the E.U. Commission has threatened to take legal measures (i.e., a breach of the European Union Treaty) if the German Government adopts legislation exempting from regulation our high-speed fiber-optic network. The final outcome of the legislation will influence our decision to further invest into high-speed access networks, as this decision depends on both customer demand and the expected regulatory environment.

The provisions of the draft amendment referring to consumer protection indicate that in addition to the fixed-network, mobile communications will be subject to a higher level of consumer protection regulation going forward. Depending on the ultimate form of this amendment, it could entail considerable investment and revenue risks for the industry as a whole in Germany. We do not expect the amendment to the Telecommunications Act to come into force before early 2007.

Directives and recommendations

The fundamental principles of sector-specific regulation of the European telecommunications markets are set out in EU directives and other communications issued by the European Commission. The directives and recommendations adopted in 2002 are currently being reviewed (2006 Review). At the end of June 2006, the Commission published a communiqué on intended changes to the relevant directives and the draft of a new recommendation on the telecommunications submarkets to be regulated (Markets Recommendation).

The Commission’s communication concerning the 2006 Review shows that it is no longer pursuing its original goal of reducing sector-specific regulation and a transition to general competition law, but instead is now aiming to strengthen regulation, while at the same time substantially expanding the Commission’s powers. The latter intention is likely to meet with resistance from both national governments and regulators. The first draft of the revised directives is expected for the end of 2006, and transposition into national law is unlikely before 2008/2009.

Although the draft Markets Recommendation provides for a reduction in the number of regulated markets — in particular end-customer markets — it only effectively excludes those markets that are already largely unregulated in many countries. Additionally, the Commission is proposing to extend regulation to additional wholesale markets for mobile communications. The Markets Recommendation is expected to enter into force at the end of the year and will then be implemented by the individual Member States.

 




 

BUSINESS DEVELOPMENTS IN THE GROUP

Net revenue

Net revenue at the Deutsche Telekom Group increased to approximately EUR 45.5 billion in the first nine months of 2006. This represents an increase of EUR 1.4 billion or 3.1 percent compared with the same period of the previous year. The Group thus continued its positive revenue development. This increase was also impacted by consolidation effects (EUR 0.5 billion) and by the reversal of deferred revenue recognition relating to changed customer retention periods in the Broadband/Fixed Network strategic business area (EUR 0.2 billion). Exchange rate effects of approximately EUR 0.1 billion, especially from the translation of U.S. dollars (USD) to euros, also had a positive impact. The year-on-year increase in the third quarter of 2006 was EUR 0.4 billion, or 2.8 percent.

Once again, the primary factor driving revenue growth was the positive development in the Mobile Communications strategic business area, with T-Mobile USA remaining the main growth driver. Overall, Mobile Communications recorded 9.3 percent year-on-year revenue growth in the first nine months and 6.8 percent in the third quarter of 2006.

By contrast, the total revenue generated by the Broadband/Fixed Network strategic business area declined year-on-year. This was due primarily to the loss of narrowband lines, the decrease in call revenues, and the substantial decline in prices in the Internet access market. This decline could not be completely offset by the volume-related growth in DSL resale and in subscriber lines.

Revenue in the Business Customers strategic business area also declined. The continued intense level of price pressure in the Telecommunications and Computing & Desktop Services areas led to a decrease in revenue at the Enterprise Services unit in particular.

 

 

For the
three
months
ended
March 31,
2006

 

For the
three
months
ended
June 30,
2006

 

For the
three
months
ended
September 30,
2006

 

For the
three
months
ended
September 30,
2005

 

Change
%

 

For the
nine
months
ended
September 30,
2006

 

For the
nine
months
ended
September 30,
2005

 

Change
%

 

For the
twelve
months
ended
December 31,
2005

 

 

 

(millions of €, except where indicated)

 

Net revenue

 

14,842

 

15,130

 

15,480

 

15,056

 

2.8

 

45,452

 

44,087

 

3.1

 

59,604

 

Mobile Communications(a)

 

7,575

 

7,856

 

8,169

 

7,648

 

6.8

 

23,600

 

21,591

 

9.3

 

29,452

 

Broadband/Fixed Network(a)

 

6,156

 

6,146

 

6,196

 

6,469

 

(4.2

)

18,498

 

19,493

 

(5.1

)

26,035

 

Business Customers(a)

 

3,011

 

3,146

 

3,125

 

3,143

 

(0.6

)

9,282

 

9,468

 

(2.0

)

12,850

 

Group Headquarters & Shared Services(a)

 

871

 

894

 

942

 

867

 

8.7

 

2,707

 

2,603

 

4.0

 

3,505

 

Inter-segment revenue(b)

 

(2,771

)

(2,912

)

(2,952

)

(3,071

)

3.9

 

(8,635

)

(9,068

)

4.8

 

(12,238

)


(a)                 Total revenue (including revenue between strategic business areas).

(b)                Elimination of revenue between strategic business areas.




 

Contribution of the strategic business areas to net revenue (after elimination of revenue between strategic business areas)

 

 

For the
nine
months
ended
September 30,
2006

 

Proportion
of net
revenue of
the Group
%

 

For the
nine
months
ended
September 30,
2005

 

Proportion
of net
revenue of
the Group
%

 

Change
millions 
of €

 

Change
%

 

For the
twelve
months
ended
December 31,
2005

 

 

 

(millions of €, except where indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

45,452

 

100.0

 

44,087

 

100.0

 

1,365

 

3.1

 

59,604

 

Mobile Communications

 

23,061

 

50.7

 

20,902

 

47.4

 

2,159

 

10.3

 

28,531

 

Broadband/Fixed Network

 

15,488

 

34.1

 

16,278

 

36.9

 

(790

)

(4.9

)

21,731

 

Business Customers

 

6,658

 

14.7

 

6,707

 

15.2

 

(49

)

(0.7

)

9,058

 

Group Headquarters & Shared Services

 

245

 

0.5

 

200

 

0.5

 

45

 

22.5

 

284

 

 

The Mobile Communications strategic business area made the largest contribution to net revenue in the reporting period, with a share of 50.7 percent. The percentage of net revenue generated by the Broadband/Fixed Network and Business Customers strategic business areas was 34.1 percent and 14.7 percent respectively.

Net revenue generated outside Germany

The proportion of net revenue generated outside Germany continued to show a positive trend. In the first nine months of 2006, the proportion of net revenue generated internationally increased by approximately 3.3 percentage points year-on-year, to 45.6 percent. This encouraging growth is also reflected in the year-on-year comparison for the third quarter, which increased 1.6 percentage points. Compared with the third quarter of 2005, the Deutsche Telekom Group increased the share of revenue generated outside Germany by approximately EUR 0.4 billion in the third quarter of 2006 to approximately EUR 7.1 billion. This successful international growth is being driven primarily by the positive revenue development at T-Mobile USA and T-Mobile UK.

Domestic revenue continued to fall in a year-on-year comparison of the first nine months. In a year-on-year comparison of the third quarters, revenue remained almost unchanged.




 

 

 

For the
three
months
ended
March 31,
2006

 

For the
three
months
ended
June 30,
2006

 

For the
three
months
ended
September 30,
2006

 

For the
three
months
ended
September 30,
2005

 

Change
%

 

For the
nine
months
ended
September 30,
2006

 

For the
nine
months
ended
September 30,
2005

 

Change
%

 

For the
twelve
months
ended
December 31,
2005

 

 

 

(millions of €, except where indicated)

 

Net revenue

 

14,842

 

15,130

 

15,480

 

15,056

 

2.8

 

45,452

 

44,087

 

3.1

 

59,604

 

Domestic

 

8,208

 

8,139

 

8,386

 

8,397

 

(0.1

)

24,733

 

25,425

 

(2.7

)

34,183

 

International

 

6,634

 

6,991

 

7,094

 

6,659

 

6.5

 

20,719

 

18,662

 

11.0

 

25,421

 

Proportion generated internationally (%)

 

44.7

 

46.2

 

45.8

 

44.2

 

 

 

45.6

 

42.3

 

 

 

42.6

 

Europe (excluding Germany)

 

3,234

 

3,560

 

3,580

 

3,440

 

4.1

 

10,374

 

9,865

 

5.2

 

13,272

 

North America

 

3,332

 

3,356

 

3,434

 

3,128

 

9.8

 

10,122

 

8,572

 

18.1

 

11,858

 

Other

 

68

 

75

 

80

 

91

 

(12.1

)

223

 

225

 

(0.9

)

291

 

 

Cost of sales

 

 

 

For the three months
ended September 30,

 

Change

 

For the nine months
ended September 30,

 

Change

 

For the
twelve
months
ended
December 31,

 

 

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

 

 

Cost of sales(a)

 

(8,371

)

(7,697

)

(8.8

)

(24,249

)

(22,910

)

(5.8

)

(31,862

)


(a)             Figures are presented in brackets to conform to income statement expense line items. For the change in percent, increases in expenses are presented in brackets and decreases in expenses are presented without brackets.

In addition to higher levels of depreciation resulting from a higher level of property, plant and equipment, the increase in the cost of sales was due, especially, to customer growth in the Mobile Communications strategic business area. By contrast, cost of sales decreased overall in the Broadband/Fixed Network strategic business area.




Selling expenses

 

 

For the three months
ended September 30,

 

Change

 

For the nine months
ended September 30,

 

Change

 

For the
twelve
months
ended
December 31,

 

 

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

Selling expenses(a)

 

(3,877

)

(3,513

)

(10.4

)

(11,665

)

(10,459

)

(11.5

)

(14,683

)


(a)             Figures are presented in brackets to conform to income statement expense line items. For the change in percent, increases in expenses are presented in brackets and decreases in expenses are presented without brackets.

The increase in selling expenses is predominantly attributable to higher commission and marketing expenses in the Mobile Communications and Broadband/Fixed Network strategic business areas.

General and administrative expenses

 

 

For the three months
ended September 30,

 

Change

 

For the nine months
ended September 30,

 

Change

 

For the
twelve
months
ended
December 31,

 

 

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

General and administrative expenses(a)

 

(1,169

)

(1,022

)

(14.4

)

(3,347

)

(3,095

)

(8.1

)

(4,210

)


(a)             Figures are presented in brackets to conform to income statement expense line items. For the change in percent, increases in expenses are presented in brackets and decreases in expenses are presented without brackets.

The increase in general and administrative expenses relates primarily to Mobile Communications and Group Headquarters & Shared Services. In contrast, the Broadband/Fixed Network strategic business area recorded a decrease.

Personnel

 

 

For the three months
ended September 30,

 

Change

 

For the nine months
ended September 30,

 

Change

 

For the
twelve
months
ended
December 31,

 

 

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

Personnel costs(a)

 

(3,679

)

3,203

 

(14.9

)

(10,549

)

(9,912

)

(6.4

)

(14,254

)


(a)             Figures are presented in brackets to conform to income statement expense line items. For the change in percent, increases in expenses are presented in brackets and decreases in expenses are presented without brackets.

The increase in personnel costs is attributable, in particular, to the first-time consolidation of the gedas group in the Business Customers strategic business area, collectively agreed increases in wages and salaries, and increased staff levels and exchange rate effects, primarily at T-Mobile USA. In addition, provisions for voluntary redundancy payments were recognized in the third quarter of 2006 in the Broadband/Fixed Network strategic business area as well as at Group Headquarters & Shared Services, further increasing personnel costs.

The personnel cost ratio for the first three quarters of 2006 is 23.2 percent of revenue, representing a year-on-year increase of 0.7 percentage points.




Depreciation, amortization and impairment losses

 

 

For the three months
ended September 30,

 

Change

 

For the nine months
ended September 30,

 

Change

 

For the
twelve
months
ended
December 31,

 

 

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

Amortization and impairment of intangible assets

 

655

 

608

 

7.7

 

1,902

 

1,845

 

3.1

 

4,427

 

of which: UMTS licenses

 

223

 

215

 

3.7

 

667

 

643

 

3.7

 

864

 

of which: U.S. mobile communications licenses

 

 

 

 

 

23

 

n.m.

 

30

 

of which: goodwill

 

 

2

 

n.m.

 

10

 

2

 

n.m.

 

1,920

 

Depreciation and impairment of property, plant and equipment

 

2,097

 

1,982

 

5.8

 

6,084

 

5,889

 

3.3

 

8,070

 

Total depreciation, amortization and impairment losses

 

2,752

 

2,590

 

6.3

 

7,986

 

7,734

 

3.3

 

12,497

 


n.m.     — not meaningful

The increase in depreciation, amortization and impairment losses was largely the result of higher depreciation of technical equipment and machinery in connection with the commissioning of operating equipment as part of the network expansion at T-Mobile USA, which led to a higher depreciation base, as well as increased impairment losses on land and buildings.

Profit from operations

 

 

For the
three
months
ended
June 30,

 

For the three months
ended September 30,

 

Change

 

For the nine months
ended September 30,

 

Change

 

For the
twelve
months
ended
December 31,

 

 

 

2006

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

Profit from operations in the Group

 

2,085

 

1,989

 

2,790

 

(28.7

)

6,392

 

7,649

 

(16.4

)

7,622

 

Mobile Communications

 

1,083

 

1,390

 

1,540

 

(9.7

)

3,528

 

3,731

 

(5.4

)

3,005

 

Broadband/Fixed Network

 

1,254

 

1,132

 

1,401

 

(19.2

)

3,648

 

4,244

 

(14.0

)

5,142

 

Business Customers

 

37

 

27

 

198

 

(86.4

)

163

 

567

 

(71.3

)

409

 

Group Headquarters & Shared Services

 

(271

)

(565

)

(342

)

(65.2

)

(930

)

(841

)

(10.6

)

(840

)

Reconciliation

 

(18

)

5

 

(7

)

n.m.

 

(17

)

(52

)

67.3

 

(94

)


n.m.     — not meaningful

Profit from operations declined to approximately EUR 6.4 billion in the first nine months of 2006. The strategic business areas and Group Headquarters & Shared Services recorded a decrease in profit from operations.




Profit/(loss) from financial activities

 

 

For the three months
ended September 30,

 

Change

 

For the nine months
ended September 30,

 

Change

 

For the
twelve
months
ended
December 31,

 

 

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

Profit/(loss) from financial activities

 

(718

)

384

 

n.m.

 

(2,058

)

(783

)

n.m.

 

(1,410

)

Finance costs

 

(651

)

(674

)

3.4

 

(1,911

)

(1,845

)

(3.6

)

(2,401

)

Interest income

 

79

 

60

 

31.7

 

246

 

195

 

26.2

 

398

 

Interest expense

 

(730

)

(734

)

0.5

 

(2,157

)

(2,040

)

(5.7

)

(2,799

)

Share of profit (loss) of associates and joint ventures accounted for using the equity method

 

6

 

106

 

(94.3

)

(11

)

183

 

n.m.

 

214

 

Other financial income (expense)

 

(73

)

952

 

n.m.

 

(136

)

879

 

n.m.

 

777

 


n.m.     — not meaningful

The year-on-year change in profit/loss from financial activities for both the third quarter and the first three quarters of 2006 is primarily attributable to other financial income/expense. In the third quarter of 2005, this item included a profit of approximately EUR 1 billion on the sale of the shares in MTS. In the first three quarters of 2006, other financial income/expense included the profit from the sale of Celcom as well as currency translation effects.

The year-on-year increase in finance costs in the first three quarters of 2006 was due to a positive one-time effect in the second quarter of 2005 that resulted from an adjustment to the book value of financial liabilities to reflect the changes in the present value of the estimated future payments. The changes in estimated future payments were triggered by a downward adjustment in interest rates relating to these financial liabilities following an upgrade of the Company’s credit rating by rating agencies. Excluding the positive one-time effect in the first three quarters of 2005, the reduction in the average level of outstanding financial liabilities and the associated average interest rates during the first nine months of 2006, in comparison to the first nine months of 2005, had the effect of reducing interest expense.

The share of profit/loss of associates and joint ventures accounted for using the equity method declined year-on-year. The sale of our holdings of comdirect bank shares was recorded in the third quarter of 2005 with no corresponding sale in 2006.

Profit before income taxes

Profit before income taxes in the first nine months of 2006 amounted to approximately EUR 4.3 billion, compared with EUR 6.9 billion in the prior year. Higher selling expenses in the reporting period, resulting from increased commission and marketing expenses, were the primary factor contributing to the decline in profit from operations from EUR 7.6 billion to EUR 6.4 billion. Added to this was the increase in the loss from financial activities. In the prior year this loss had been reduced by the inclusion of a profit of approximately EUR 1 billion on the sale of the shares in MTS.




Income taxes

 

 

For the three months
ended September 30,

 

Change

 

For the nine months
ended September 30,

 

Change

 

For the
twelve
months
ended
December 31,

 

 

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

794

 

(595

)

n.m.

 

31

 

(1,892

)

n.m.

 

(196

)


n.m.     — not meaningful

In contrast to the first nine months of 2005, we recognized an income tax benefit in the first nine months of 2006. In addition to lower profits before income taxes, this was due in part to the fact that we agreed with the German tax authorities in the second quarter of 2006 on the application of a provision of trade tax law regarding certain capital losses incurred in previous years. As a result of this agreement, we were able to release a provision for income taxes. This increased net profit in the second quarter by approximately EUR 0.4 billion. In addition, we determined in the third quarter, based on an assessment of all available evidence, that it had become probable that EUR  1.3 billion of the previously unrecognized deferred tax assets at T-Mobile USA relating primarily to U.S. federal income tax net operating loss carryforwards was realizable in the near term. For purposes of this assessment, we reviewed forecasts in relation to actual results and expected trends in the industry. The realization of the previously unrecognized deferred tax assets provided for a corresponding income tax benefit. These effects were partially offset by the write off of deferred tax assets amounting to EUR 125 million due to developments in current operating income at two of our foreign subsidiaries.

Net profit

At approximately EUR 4.0 billion, net profit for the first three quarters of 2006 was down EUR 0.6 billion year-on-year, mainly as a result of the effects already described. Net profit was positively influenced by the change in income tax expenses, which fell by approximately EUR 1.9 billion year-on-year. This decrease was attributable in particular to the reversal of tax provisions and the recognition of previously unrecognized deferred tax assets relating to loss carryforwards at T-Mobile USA.

Net profit in the first nine months of 2006 was positively affected by an income tax benefit attributable to the realization of previously unrecognized deferred tax assets relating to loss carryforwards of approximately EUR 1.3 billion at T-Mobile USA and proceeds from the sale of Celcom in 2003 that were not received until the first quarter of 2006. Expenses for severance and voluntary redundancy payments and restructuring had an offsetting effect. Net profit in the prior-year period had been positively affected by the sale of the remaining stake in MTS.




 

STRATEGIC BUSINESS AREAS

Mobile Communications

The Mobile Communications strategic business area includes the activities of T-Mobile International AG & Co. KG. T-Mobile is represented in Germany, the United States, the United Kingdom, the Netherlands, Austria, the Czech Republic, Hungary, Slovakia, Croatia, Macedonia, Montenegro and Poland. All T-Mobile companies offer digital mobile voice and data services to consumers and business customers. T-Mobile also sells hardware and other terminal devices in connection with the services offered. In addition, T-Mobile services are sold to resellers and to companies that buy network services and market them independently to third parties (mobile virtual network operators, or MVNOs).

Broadband/Fixed Network

The Broadband/Fixed Network strategic business area offers consumers and small business customers state-of-the-art infrastructure for traditional fixed-network services, broadband Internet access, and multimedia services. Broadband/Fixed Network also does business with national and international network operators and with resellers (wholesale including resale), and provides upstream services for Deutsche Telekom’s other strategic business areas.

Following the merger of T-Online International AG into Deutsche Telekom AG, T-Online no longer reports as a separate unit, but is managed as a product brand. For reporting purposes, Broadband/Fixed Network is broken down into its domestic and international segments. The Scout24 group is reported in the domestic segment since its parent company has its registered office in Germany.

Business Customers

The Business Customers strategic business area offers its customers products and services from a single source along the entire information and communications technology (ICT) value chain. The Business Customers strategic business area is divided into two business units: T-Systems Enterprise Services, which supports approximately 60 multinational corporations and large public entities, and T-Systems Business Services, which serves approximately 160,000 small and medium-sized business customers. T-Systems, our business customer brand, is represented in over 20 countries through subsidiaries, primarily in Germany and Western Europe (France, Spain, Italy, the United Kingdom, Austria, Switzerland, Belgium, and the Netherlands).

 




 

Segment reporting

The following tables give an overall summary of our reporting segments for the full 2005 financial year, as well as for the third quarter and first nine months of both 2006 and 2005.

Segment information for the year ended December 31, 2005:

For the year ended
December 31, 2005

 

 

 

Net
revenue

 

Inter-
segment
revenue

 

Total
revenue

 

Profit (loss)
from
operations

 

Share of
profit (loss)
of equity-
accounted
investments

 

Depreciation
and
amortization

 

Impairment
losses

 

 

 

(millions of €)

 

Group

 

59,604

 

 

59,604

 

7,622

 

214

 

(10,291

)

(2,206

)

Mobile Communications

 

28,531

 

921

 

29,452

 

3,005

 

133

 

(4,745

)

(1,951

)

Broadband/Fixed Network

 

21,731

 

4,304

 

26,035

 

5,142

 

53

 

(4,026

)

(8

)

Business Customers

 

9,058

 

3,792

 

12,850

 

409

 

3

 

(885

)

(11

)

Group Headquarters & Shared Services

 

284

 

3,221

 

3,505

 

(840

)

(1

)

(695

)

(233

)

Reconciliation

 

 

(12,238

)

(12,238

)

(94

)

26

 

60

 

(3

)

Segment information for the three months ended September 30, 2006 and 2005:

For the three months ended
September 30, 2006

 

 

 

Net
revenue

 

Inter-
segment
revenue

 

Total
revenue

 

Profit (loss)
from
operations

 

Share of
profit (loss)
of equity-
accounted
investments

 

Depreciation
and
amortization

 

Impairment
losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended
September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of €)

 

Group

 

15,480

 

 

15,480

 

1,989

 

6

 

(2,598

)

(154

)

 

 

15,056

 

 

15,056

 

2,790

 

106

 

(2,540

)

(50

)

Mobile Communications

 

7,979

 

190

 

8,169

 

1,390

 

4

 

(1,288

)

1

 

 

 

7,409

 

239

 

7,648

 

1,540

 

41

 

(1,184

)

(1

)

Broadband/Fixed Network

 

5,196

 

1,000

 

6,196

 

1,132

 

3

 

(928

)

(2

)

 

 

5,400

 

1,069

 

6,469

 

1,401

 

65

 

(986

)

(2

)

Business Customers

 

2,219

 

906

 

3,125

 

27

 

(1

)

(223

)

0

 

 

 

2,178

 

965

 

3,143

 

198

 

0

 

(214

)

0

 

Group Headquarters &
Shared Services

 

86

 

856

 

942

 

(565

)

0

 

(171

)

(152

)

 

 

69

 

798

 

867

 

(342

)

0

 

(167

)

(46

)

Reconciliation

 

 

(2,952

)

(2,952

)

5

 

0

 

12

 

(1

)

 

 

 

(3,071

)

(3,071

)

(7

)

0

 

11

 

(1

)

Segment information for the nine months ended September 30, 2006 and 2005:

For the nine months ended
September 30, 2006

 

 

 

Net
revenue

 

Inter-
segment
revenue

 

Total
revenue

 

Profit (loss)
from
operations

 

Share of
profit
(loss) of
equity-
accounted
investments

 

Depreciation
and
amortization

 

Impairment
losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended
September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(millions of €)

 

 

Group

 

45,452

 

 

45,452

 

6,392

 

(11

)

(7,787

)

(199

)

 

 

44,087

 

 

44,087

 

7,649

 

183

 

(7,597

)

(137

)

Mobile Communications

 

23,061

 

539

 

23,600

 

3,528

 

70

 

(3,789

)

(3

)

 

 

20,902

 

689

 

21,591

 

3,731

 

106

 

(3,475

)

(26

)

Broadband/Fixed Network

 

15,488

 

3,010

 

18,498

 

3,648

 

11

 

(2,855

)

(16

)

 

 

16,278

 

3,215

 

19,493

 

4,244

 

74

 

(3,007

)

(3

)

Business Customers

 

6,658

 

2,624

 

9,282

 

163

 

(92

)

(670

)

(2

)

 

 

6,707

 

2,761

 

9,468

 

567

 

2

 

(654

)

0

 

Group Headquarters & Shared Services

 

245

 

2,462

 

2,707

 

(930

)

(1

)

(513

)

(177

)

 

 

200

 

2,403

 

2,603

 

(841

)

(1

)

(503

)

(106

)

Reconciliation

 

 

(8,635

)

(8,635

)

(17

)

1

 

40

 

(1

)

 

 

 

(9,068

)

(9,068

)

(52

)

2

 

42

 

(2

)

 




 

Mobile Communications

 

 

As of
March 31,
2006

 

As of
June 30,
2006

 

As of
September 30,
2006

 

Change
Sept. 30,
2006/
June 30,
2006
%

 

As of Sept
September 30,
2005

 

Change
Sept. 30,
2006/
Sept. 30,
2005
%

 

As of
December 31,
2005

 

 

 

(millions except where indicated)

 

 

 

 

 

 

 

Mobile customers (total)(a)

 

88.7

 

90.2

 

91.6

 

1.6

 

84.1

 

8.9

 

87.6

 

T-Mobile Deutschland(b)

 

30.2

 

30.4

 

30.7

 

1.0

 

28.7

 

7.0

 

29.5

 

T-Mobile USA

 

22.7

 

23.3

 

24.1

 

3.4

 

20.3

 

18.7

 

21.7

 

T-Mobile UK(c)

 

16.4

 

16.7

 

16.7

 

0.0

 

16.3

 

2.5

 

17.2

 

T-Mobile Netherlands

 

2.3

 

2.4

 

2.5

 

4.2

 

2.3

 

8.7

 

2.3

 

T-Mobile Austria(a)

 

3.1

 

3.1

 

3.2

 

3.2

 

3.0

 

6.7

 

3.1

 

T-Mobile CZ (Czech Republic)

 

4.6

 

4.7

 

4.8

 

2.1

 

4.6

 

4.3

 

4.6

 

T-Mobile Hungary

 

4.2

 

4.3

 

4.3

 

0.0

 

4.1

 

4.9

 

4.2

 

T-Mobile Croatia

 

2.0

 

2.0

 

2.1

 

5.0

 

1.7

 

23.5

 

1.9

 

T-Mobile Slovensko (Slovakia)

 

2.0

 

2.0

 

2.1

 

5.0

 

1.9

 

10.5

 

2.0

 

Other(d)

 

1.1

 

1.1

 

1.2

 

9.1

 

1.1

 

9.1

 

1.1

 


(a)             One mobile communications SIM card corresponds to one customer. The total was calculated on the basis of precise figures and rounded to millions. Percentages are calculated on the basis of figures shown.  tele.ring customers were also included in the historic customer base, although the shares were not acquired until the end of April 2006.

(b)            The change in customer base in Germany in the first quarter of 2006 as compared with year-end 2005 includes 284,000 net additions and 440,000 machine-to-machine (M2M) SIM cards. M2M SIM cards are used in automated communication between machines. M2M SIM cards have been counted as customers since the first quarter of 2006 in order to bring the reporting of T-Mobile Deutschland in line with that of the other T-Mobile companies. Prior-year comparatives have not been adjusted.

(c)             Including Virgin Mobile. Despite positive net new customer growth in the first quarter of 2006, the number of customers declined in the first quarter of 2006 compared with year-end 2005 due to a change in the reporting standard. For more information, refer to the Form 6-K filed with the SEC on May 17, 2006.

(d)            “Other” includes T-Mobile Macedonia (formerly MobiMak) and T-Mobile Montenegro (formerly MONET).

T-Mobile acquired approximately 1.4 million new customers in the third quarter of 2006. As in previous quarters, the majority of these new customers are fixed-term contract customers, who accounted for 89 percent of net additions.

T-Mobile USA contributed approximately 802,000 new customers, of which 773,000, or 96 percent, were fixed-term contract customers. ARPU declined from EUR 42 in the third quarter of 2005 to EUR 40 in the third quarter of 2006, due primarily to the weaker U.S. dollar. In terms of local currency, as compared with the prior year period, T-Mobile USA succeeded in raising ARPU slightly with fixed-term contract customers, while ARPU with prepaid customers decreased, and blended ARPU also decreased slightly.

T-Mobile Deutschland continued to successfully enlarge its customer base in the third quarter of 2006 with 236,000 new customers, of which 150,000 selected a fixed-term contract. At 1.7 percent per month, the churn rate remained level with that of the previous quarter. ARPU (EUR 21) also remained at the same level as in the second quarter.

 




 

Customer growth continued in the third quarter of 2006 in all T-Mobile companies, except T-Mobile UK, which reported 70,000 fewer customers. The decrease in customers at T-Mobile UK related primarily to prepaid customers. For the third quarter of 2006, T-Mobile UK’s ARPU increased EUR 2 to EUR 30 as compared to the second quarter of 2006.

 

 

For the three
months ended
September 30,
2006
Service
Revenue

 

For the three
months ended
September 30,
2006

 

For the three
months ended
September 30,
2006
Average number
of customers
(millions)

 

For the three
months ended
September 30,
2005
Service
Revenue

 

For the three
months ended
September 30,
2005

 

For the three
months ended
September 30,
2005
Average
number 
of customers
(millions)

 

 

 

millions of (€)

 

ARPU (€)

 

 

 

millions of (€)

 

ARPU (€)

 

 

 

Service revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

T-Mobile Deutschland

 

1,947

 

21

 

30.7

 

1,998

 

23

 

28.5

 

T-Mobile USA

 

2,842

 

40

 

24.1

 

2,479

 

42

 

19.8

 

T-Mobile UK(a)

 

1,060

 

30

 

16.7

 

917

 

29

 

16.3

 

T-Mobile Netherlands

 

273

 

38

 

2.5

 

252

 

37

 

2.3

 

T-Mobile Austria

 

315

 

34

 

3.2

 

215

 

36

 

2.0

 

T-Mobile CZ (Czech Republic)

 

252

 

18

 

4.8

 

220

 

16

 

4.5

 

T-Mobile Hungary

 

241

 

19

 

4.3

 

258

 

21

 

4.1

 

T-Mobile Croatia

 

167

 

27

 

2.1

 

150

 

29

 

1.7

 

T-Mobile Slovensko(b) (Slovakia)

 

102

 

17

 

2.1

 

91

 

16

 

1.9

 


(a)             Includes Virgin Mobile customers in “average number of customers,” but excludes Virgin Mobile customers and revenues there from for purposes of calculating the ARPU.

(b)            Fully consolidated as of the first quarter of 2005.

ARPU — average revenue per user — is used to measure monthly revenue from services per customer. ARPU is calculated as follows: revenue generated by customers for services (i.e., voice services, including incoming and outgoing calls, and data services) plus roaming revenue, monthly charges, and revenue from visitor roaming, divided by the average number of customers in the month. Revenue from services excludes the following: revenue from terminal equipment, revenue from customer activation, revenue from virtual network operators, and other revenue not generated directly by T-Mobile customers. Visitor roaming revenues are included in ARPU as of the first quarter of 2005. We believe this improves comparability with our competitors. Historical data was revised accordingly. ARPU is not uniformly defined and utilized by all companies in our industry group. Accordingly, such measures may not be comparable with similarly titled measures and disclosures by other companies.

 




 

Development of operations

 

 

For the
three
months
ended
March 30,

 

For the
three
months
ended
June 30,

 

For the three
months ended
September 30,

 

Change

 

For the nine
months ended
September 30

 

Change

 

For the
twelve
months
ended
December
31,

 

 

 

2006

 

2006

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

Total revenue(a)

 

7,575

 

7,856

 

8,169

 

7,648

 

6.8

 

23,600

 

21,591

 

9.3

 

29,452

 

of which: T-Mobile Deutschland

 

2,004

 

2,060

 

2,122

 

2,212

 

(4.1

)

6,186

 

6,414

 

(3.6

)

8,621

 

of which: T-Mobile USA

 

3,354

 

3,340

 

3,425

 

3,108

 

10.2

 

10,119

 

8,564

 

18.2

 

11,887

 

of which: T-Mobile UK

 

1,032

 

1,122

 

1,165

 

1,058

 

10.1

 

3,319

 

3,059

 

8.5

 

4,153

 

of which: T-Mobile Netherlands

 

271

 

282

 

286

 

264

 

8.3

 

839

 

787

 

6.6

 

1,064

 

of which: T-Mobile Austriab

 

217

 

285

 

335

 

230

 

45.7

 

837

 

665

 

25.9

 

885

 

of which: T-Mobile Czech Republic

 

240

 

259

 

262

 

239

 

9.6

 

761

 

685

 

11.1

 

938

 

of which: T-Mobile Hungary

 

257

 

260

 

266

 

285

 

(6.7

)

783

 

816

 

(4.0

)

1,090

 

of which: T-Mobile Croatia

 

116

 

138

 

176

 

157

 

12.1

 

430

 

387

 

11.1

 

512

 

of which: T-Mobile Slovensko

 

100

 

104

 

109

 

97

 

12.4

 

313

 

276

 

13.4

 

378

 

of which: Other(c)

 

42

 

48

 

57

 

53

 

7.5

 

147

 

129

 

14.0

 

174

 

Profit from operations

 

1,055

 

1,083

 

1,390

 

1,540

 

(9.7

)

3,528

 

3,731

 

(5.4

)

3,005

 

Profit from operations margin (%)

 

13.9

 

13.8

 

17.0

 

20.1

 

 

 

14.9

 

17.3

 

 

 

10.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and impairment losses

 

(1,225

)

(1,280

)

(1,287

)

(1,185

)

(8.6

)

(3,792

)

(3,501

)

(8.3

)

(6,696

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of employees(d)

 

51,511

 

52,603

 

54,055

 

49,101

 

10.1

 

52,723

 

49,095

 

7.4

 

49,479

 


(a)                 The amounts stated for the national companies correspond to their respective unconsolidated financial statements (single-entity financial statements adjusted for uniform group accounting policies and reporting currency) without taking into consideration consolidation effects at the level of the strategic business area.

(b)                Including the first-time consolidation of tele.ring from the end of April 2006.

(c)                 “Other” includes revenues generated by T-Mobile Macedonia (formerly MobiMak) and T-Mobile Montenegro (formerly MONET).
T-Mobile Montenegro has been fully consolidated since the second quarter of 2005.

(d)                Average number of employees.

Total revenue

In the first nine months of 2006, total revenue increased by EUR 2 billion, or 9.3 percent, due primarily to an increase of 18.2 percent at T-Mobile USA compared to the same period in 2005. In addition, revenues increased at T-Mobile UK, T-Mobile Czech Republic, T-Mobile Croatia and T-Mobile Slovensko. The increases in revenues were primarily the result of an increase in customers and voice and data usage. These positive developments were partially offset by a decrease in revenue from T-Mobile Deutschland and T-Mobile Hungary, due primarily to price decreases. As a result of the consolidation of  tele.ring in the second quarter of 2006, T-Mobile Austria’s revenue increased approximately 46 percent in the third quarter of 2006 compared with the same period in 2005.

Profit from operations

Profit from operations decreased by approximately EUR 0.2 billion to EUR 3.5 billion in the first nine months of 2006 as compared to the first nine months of 2005. Depreciation, amortization and impairment losses were increased by approximately EUR 0.3 billion, due primarily to the more extensive depreciation base.

 




 

Personnel

In the first nine months of 2006, the average number of employees in the Mobile Communications strategic business area increased by 3,628 year-on-year to 52,723. This was mainly attributable to the continued growth-related recruitment of new staff at T-Mobile USA. The European workforce increased by approximately 3.8 percent, primarily due to growth-related staff additions at T-Mobile UK and the first-time consolidation of tele.ring in Austria, offset in part, by decreases in the workforce at T-Mobile Deutschland. In Eastern Europe, the higher number of employees is due primarily to the first-time inclusion of T-Mobile Montenegro.




 

Broadband/Fixed Network

 

 

As of
September 30,
2006

 

As of
June 30,
2006

 

Change
September 30,
2006/June 30,
2006 %

 

As of
December 31,
2005

 

Change
September 30,
2006/
December 31,
2005 %

 

As of
September 30,
2005

 

Change
September 30,
2006/
September 30,
2005 %

 

 

 

(millions, except where indicated)

 

Broadband(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lines (total)(b)

 

10.6

 

10.0

 

6.0

 

8.6

 

23.3

 

7.8

 

35.9

 

Domestic(c)

 

9.4

 

9.0

 

4.4

 

7.9

 

19.0

 

7.3

 

28.8

 

of which: resale(d)

 

2.9

 

2.5

 

16.0

 

1.6

 

81.3

 

1.1

 

n.m.

 

International(e)

 

1.2

 

1.0

 

20.0

 

0.6

 

100.0

 

0.5

 

n.m.

 

Broadband rates (total)(f)

 

7.0

 

6.5

 

7.7

 

5.5

 

27.3

 

4.9

 

42.9

 

of which: domestic

 

5.4

 

5.1

 

5.9

 

4.5

 

20.0

 

4.0

 

35.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Narrowband(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lines (total)(b)

 

39.5

 

40.1

 

(1.5

)

41.2

 

(4.1

)

41.7

 

(5.3

)

Domestic(g)

 

33.7

 

34.2

 

(1.5

)

35.2

 

(4.3

)

35.6

 

(5.3

)

Standard analog lines

 

24.5

 

24.9

 

(1.6

)

25.5

 

(3.9

)

25.7

 

(4.7

)

ISDN lines

 

9.2

 

9.4

 

(2.1

)

9.8

 

(6.1

)

9.9

 

(7.1

)

International (Eastern Europe only)

 

5.8

 

5.8

 

0.0

 

6.0

 

(3.3

)

6.1

 

(4.9

)

Magyar Telekom(h)

 

3.0

 

3.0

 

0.0

 

3.2

 

(6.3

)

3.2

 

(6.3

)

Slovak Telekom

 

1.2

 

1.2

 

0.0

 

1.2

 

0.0

 

1.2

 

0.0

 

T-Hrvatski Telekom

 

1.6

 

1.6

 

0.0

 

1.7

 

(5.9

)

1.7

 

(5.9

)

Narrowband rates (total)(f)

 

3.6

 

3.8

 

(5.3

)

4.4

 

(18.2

)

4.7

 

(23.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Internet customers with a billing relationship (total)(f), (i),(j)

 

15.9

 

15.6

 

1.9

 

15.2

 

4.6

 

15.0

 

6.0

 


Table includes broadband and narrowband lines (Germany plus Eastern and Western Europe).

(a)              The total was calculated on the basis of precise figures and rounded to millions. Percentages calculated on the basis of figures shown.

(b)             Lines in operation.

(c)              Broadband lines excluding lines for internal use.

(d)             Definition of resale: sale of broadband lines based on DSL technology to alternative providers outside the Deutsche Telekom Group.

(e)              Includes customers with broadband lines on our own network.

(f)               Customers with a billing relationship include customers in Germany, Eastern and Western Europe. Eastern Europe includes Magyar Telekom, T-Hrvatski Telekom, and Slovak Telekom. Western Europe includes T-Online Spain (formerly “Ya.com”) and T-Online France (formerly “Club Internet”).

(g)              Telephone lines excluding internal use and public telecommunications, including wholesale services.

(h)             Subscriber-line figures, including Magyar Telekom’s subsidiary MakTel and CrnogorskiTelekom (formerly “Telekom Montenegro”).

(i)                Total calculated on the basis of customers (those customers with broadband or narrowband rate plans) in Germany, in Western and Eastern Europe (those customers with a billing relationship) and PAYG (pay as you go) customers.

(j)                Includes Iskon Internet d.d., which is consolidated through T-Hrvatski Telekom from June 1, 2006.

The growth of the broadband market is continuing. This led to an increase in both the number of broadband access lines and the number of broadband rate customers (i.e. customers with broadband rate plans). T-Com’s total number of broadband access lines increased by 611,000 to 10.6 million in the third quarter of 2006 as compared to the second quarter of 2006. In Germany, approximately 9.4 million broadband access lines provided by T-Com were in operation at the end of September 2006, up 439,000 from the second quarter of 2006. The main driver of broadband access growth in the third quarter of 2006 was once again the DSL resale business with the total number of DSL resale lines increasing by 358,000 to 2.9 million as compared to the second quarter of 2006.

 




Broadband rate customer growth also benefited from new service packages, including the new “3x3 complete packages” launched on September 18, 2006. T-Com is now offering integrated voice and Internet communication bundles for the first time, a market solution that competitors have been offering for some time and that significantly improves T-Com’s ability to obtain an increased share of the DSL market. The complete packages have been supplemented by the innovative “T-Home” IPTV service since October 2006, allowing T-Com to position itself as a full-service provider. In addition to a particularly attractive monthly flat rate, T-Com’s new complete packages provide comprehensive service tailored to customers’ needs—simple, uncomplicated entry into the world of broadband. However, since these packages were launched at the end of the third quarter of 2006, a significant impact on retail broadband rate figures was not evident as of September 30, 2006.

The broadband market also continues to increase in Eastern and Western Europe. The total number of broadband access lines increased in the third quarter of 2006 by 172,000. In Eastern Europe, the number of broadband access lines increased by 92,000 to 843,000 compared with the second quarter of 2006 due to continued increases in customer demand. T-Com initially introduced triple-play packages in Eastern Europe in the third quarter of 2006. In Western Europe, new services such as VoIP and the further expansion of proprietary infrastructure for triple-play packages helped to sustain the strong growth seen in the first six months of the year. The number of broadband access lines operated by Deutsche Telekom’s Western European subsidiaries on their own networks increased by 80,000 in the third quarter of 2006 to 342,000 as compared to the second quarter of 2006. Almost 1.2 million broadband access lines were in operation outside Germany at the end of September 2006, an increase of 172,000 compared with the end of June 2006.

The continued strong increase in  broadband rate customers  in the Broadband/Fixed Network business area continued in the third quarter of 2006. The total number of broadband rate customers increased by 486,000 to a total of 7.0 million as compared to the end of the second quarter of 2006. The number of broadband rate customers in Germany increased by 346,000 from  5.1 million in the second quarter of 2006 to 5.4 million in the third quarter of 2006. Compared with the same quarter in 2005, the broadband rate customers in Germany increased by 1.4 million to 5.4 million, or 35 percent in the third quarter of 2006. Outside Germany, Broadband/Fixed Network’s broadband rate customers increased by 140,000 in the third quarter of 2006 as compared to the second quarter of 2006. In Eastern Europe, DSL customers increased by 100,000 in the third quarter of 2006 as compared with the second quarter of 2006. In Western Europe, the broadband rate customer base increased by 40,000, or 5%, to 835,000 in the third quarter of 2006 as compared with the second quarter of 2006, and by 302,000, or 57%, as compared to the third quarter of 2005.

The number of narrowband lines continued to decrease in the third quarter. In Germany, this decrease is largely due to a loss of customers to fixed-network competitors, as well as to increasing substitution by mobile communications and, to a lesser extent, substitution by cable network operators who have further developed their networks to offer voice and broadband products. In Germany, the total number of fixed-network lines decreased by 538,000 in the third quarter of 2006 to 33.7 million, with a higher proportional decline in the number of T-ISDN lines to 9.2 million (approximately 8 percent) as compared with the second quarter of 2006 due, in part, to broadband customers switching from digital ISDN (marketed as T-ISDN) phone lines to analog phone lines (marketed as T-Net).

The development of call minutes experienced contrasting trends in the third quarter of 2006. As in previous quarters, T-Com continued to improve its customer retention—with a customer base of currently 15.9 million rate customers (rate plans including PSTN rate options from the new “3x3 complete packages” and VoIP flat rates)—for local, national, international and fixed-to-mobile calls by successfully marketing rate options. This is reflected by an increase in overall average customer minute loyalty (local, national, international and fixed-to-mobile) based on the overall traffic generated in the T-Com PSTN network over the past twelve months of 3.4 percentage points to a total of 66.2 percent at the end of the reporting period. T-Com has therefore managed to effectively compete in the calling market despite call-by-call and preselection offers by competitors. The absolute number of call minutes in T-Com’s network is nevertheless continuing its downward trend due to the continuing loss of lines and the growing substitution by mobile communications and, to a lesser extent, by VoIP, compared with the previous year.

 




 

Development of operations

 

 

For the three
months
ended
June 30,

 

For the three
months
ended
September 30,

 

Change

 

For the nine
months
ended
September 30,

 

Change

 

For the twelve
months
ended
December 31,

 

 

 

2006

 

2006

 

2005

 

%

 

2006

 

2005

 

%

 

2005

 

 

 

(millions of €, except where indicated)

 

Total revenue

 

6,146

 

6,196

 

6,469

 

(4.2

)

18,498

 

19,493

 

(5.1

)

26,035

 

Domestic

 

5,445

 

5,493

 

5,762

 

(4.7

)

16,402

 

17,429

 

(5.9

)

23,249

 

of which: network communications

 

2,838

 

2,801

 

3,050

 

(8.2

)

8,524

 

9,312

 

(8.5

)

12,349

 

of which: value-added services

 

224

 

227

 

271

 

(16.2

)

684

 

808

 

(15.3

)

1,069

 

of which: terminal equipment

 

82

 

76

 

116

 

(34.5

)

232

 

301

 

(22.9

)

425

 

of which: data communications

 

324

 

307

 

309

 

(0.6

)

949

 

929

 

2.2

 

1,226

 

of which: wholesale services

 

1,089

 

1,077

 

1,096

 

(1.7

)

3,194

 

3,239

 

(1.4

)

4,357

 

of which: IP/Internet(a)

 

714

 

835

 

739

 

13.0

 

2,289

 

2,250

 

1.7

 

2,994

 

International

 

701

 

703

 

707

 

(0.6

)

2,096

 

2,064

 

1.6

 

2,786

 

Profit from operations

 

1,254

 

1,132

 

1,401

 

(19.2

)

3,648

 

4,244

 

(14.0

)

5,142

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation, amortization and impairment losses

 

(972

)

(930

)

(988

)

5.9

 

(2,871

)

(3,010

)

4.6

 

(4,034

)

Number of employees(b)

 

110,028

 

109,114

 

112,893

 

(3.3

)

109,781

 

113,092

 

(2.9

)

112,872

 

Domestic(c)

 

87,118

 

86,368

 

88,740

 

(2.7

)

86,938

 

88,565

 

(1.8

)

88,578

 

International

 

22,910

 

22,746

 

24,153

 

(5.8

)

22,843

 

24,527

 

(6.9

)

24,294

 


(a)              Including the revenues previously generated by T-Online in Germany.

(b)              Average number of employees.

(c)              Due to the transfer of of the Telekom Direkt sales unit to T-Com, T-Com’s workforce increased by 224 employees. Prior year comparatives have not been adjusted.

Broadband/Fixed Network strategic business area’s total revenue decreased year-on-year by 5.1 percent for the first nine months of 2006 to EUR 18.5 billion as compared to the first nine months of 2005.  The decline in revenues was less than the 5.5 percent decrease in the first half of 2006 due to the change in customer retention periods. The customer retention periods for T-ISDN, T-Net and Resale and retail DSL customers in Germany have been shortened to more accurately reflect customer retention periods actually experienced, which resulted in an increase in revenues.

In Germany, total revenue decreased by 5.9 percent to EUR 16.4 billion in the first nine months of 2006 as compared with the first nine months of 2005. This decrease is mainly attributable to lower call revenues and a reduction in the number of narrowband lines, the price decrease in ISP rate plans, as well as to decreases in interconnection services. Revenue from the Business Customers strategic business area decreased due to lower volumes and prices. The decrease in total revenue in Germany was partly offset by volume growth in DSL resale and in leased subscriber lines.

Changed customer retention periods  in the network communications, wholesale, and IP/Internet revenue clusters resulted in higher revenue of EUR 0.2 billion in the third quarter of 2006 than would have been reported using the former customer retention period. This change in customer retention period results in faster recognition of deferred revenues.

Outside Germany, total revenue increased by 1.6 percent to approximately EUR 2.1 billion due to the continued expansion of the broadband business and also the first-time consolidation of companies in Western and Eastern Europe, while the traditional fixed-network services business decreased, due primarily to similar reasons as set forth for the domestic business.

For the first nine months of 2006, network communications revenue decreased by EUR 0.8 billion to EUR 8.5 billion as compared to the first nine months of 2005. This decrease is primarily due to a reduction in call revenues due to the loss of access lines and a price decrease in calling plans and to higher penetration of calling plans due to the effects of increasing mobile and, to a lesser extent, VOIP substitution. In addition, the reduction in termination charges for fixed-to-mobile connections was passed on to end-customers. This decrease is also due to the slight decline in access revenue, which is attributable to continued narrowband line losses as a result of intense competition. This decline was partially offset by increased marketing of rate options as a component of access line products, as well as, to the effects of the change in customer retention periods for T-Net and T-ISDN customers.

Total wholesale revenue for the first nine months of 2006 declined by 1.4 percent to EUR 3.2 billion compared with the first nine months of 2005, mainly due to a decrease in volume resulting from the increase in direct network interconnection between competitors. Price effects in particular also contributed to a revenue decline in the International Carrier Sales and Solutions (ICSS) business. This was compounded by price reductions imposed by the regulatory authorities (such as the 9.8 percent rate reduction for subscriber lines that took effect on April 1, 2005), and the lower prices for the DSL resale product in 2006.

There was also a decline in call-by-call and preselection minutes as a consequence of T-Com’s successful calling plan strategy. Revenues from wholesale originating services for Internet service providers were negatively impacted in particular by the migration from narrowband to broadband and by price cuts in the broadband sector. The decrease in wholesale revenues was partially offset by significant volume-driven growth in revenue from leased subscriber lines and Resale DSL.

 




Revenue in the IP/Internet area increased in the first nine months of the year by 1.7 percent year-on-year to EUR 2.3 billion, as a result of the change in customer retention periods. The increase in revenue also reflects the positive growth in the customer base and advertising and B2B revenues. Without the effect on revenues in the first nine months of 2006 from the change in customer retention periods for retail DSL, IP/Internet revenues would have decreased by approximately 3% as compared to the first nine months of 2005. This decrease without the effect of the change in customer retention periods was primarily due to the decline in prices for ISP subscription fees and the growing popularity of flat rates for Internet usage.

Revenue from data communications increased in the first nine months of 2006 by 2.2 percent to EUR 0.9 billion compared to the first nine months of 2005. This increase is mainly due to the reallocation of business customers with Telekom Designed Network (TDN) contracts from the Business Customers strategic business area to Broadband/Fixed Network.

The change in the billing model for the premium-rate services, (which use the 0190 and 0900 exchange) enable information and entertainment packages to be sold and billed automatically by telephone or via the internet, for which all revenue has been billed using a commission-based method since January 2006, reduced revenue from value-added services for the first nine months of 2006 by approximately 15.3 percent year-on-year to just under EUR 0.7 billion.

In the first nine months of 2006, revenues from terminal equipment declined by 22.9 percent year-on-year to just under EUR 0.2 billion due to the decrease in the rental business. This decrease was primarily the result of reduced demand for rentals of conventional telephones and communications systems, as well as a reduction in the selling prices of such equipment.

Revenue in the Western European subsidiaries in Spain and France increased in the first nine months of 2006 by over 47 percent to just under EUR 0.25 billion. This development is primarily attributable to strong subscriber growth. In Spain, the first-time consolidation in the third quarter of 2005 of the network infrastructure operator, Albura, also had a positive effect.

Despite broadband growth and the first-time consolidation of companies, revenue in Eastern Europe decreased by 2.5 percent to EUR 1.8 billion. This decrease was primarily due to lower revenue from the traditional fixed-line network businesses, which continued to be dominated by intense competition in all countries, especially from mobile communications. This decrease was also due to increased competition in the fixed-line consumer business from call-by-call, preselection, and cable providers. In Hungary, revenue was also impacted by a weak exchange rate.

Intersegment revenue in the first nine months of 2006 decreased by 6.4 percent to EUR 3.0 billion compared with the first nine months of 2005. This decrease is due to a reduction in revenue from business with the Business Customers strategic business area, which decreased due to lower volumes and prices.

Net revenue for the first nine months of 2006 decreased by 4.9 percent to EUR 15.5 billion compared with the first nine months of 2005. This decrease in net revenue was less than the decline in total revenue.

Profit from operations in the first nine months of 2006 decreased by 14 percent year-on-year to EUR 3.6 billion. This decrease in profit from operations is primarily due to the decreases in revenues described above. The decrease in profit from operations was partially offset by increased efficiency and cost-cutting measures primarily relating to improvements in IT systems and receivables management and by cost reduction and efficiency measures relating to leased office space. In Germany, billing and collection costs, legal and consulting costs, and maintenance costs also decreased. In addition, savings were achieved by cutting revenue related costs such as for the purchase of merchandise and telecommunications services. The transfer of Telekom Direkt from Group Headquarters & Shared Services to the management control of T-Com substantially optimized sales support at the customer interface, which also partially offset the decrease in profit from operations.

At 109,781, the average number of employees in the Broadband/Fixed Network strategic business area in the first nine months of 2006 was 2.9 percent lower than in the first nine months of 2005. In Germany, the workforce decreased by 1,627 employees year-on-year to 86,938.

Outside Germany, the number of employees decreased by 1,684. The Eastern European workforce decreased by 1,936 as a consequence of the optimization of performance processes in spite of increases resulting from acquisitions, while 252 new employees were hired in Western Europe.

 




 

Business Customers

 

 

 

 

As of
March 31,
2006

 

As of
June 30,
2006

 

As of
September
30, 2006

 

Change
September
30, 2006/
June 30,
2006 %

 

As of
September
30, 2005

 

Change
September
30, 2006/
September
30, 2005%

 

As of
December
31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Enterprise Services(a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Computing & Desktop Services