Form 6-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


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 August 2007

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  ¨

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  ¨            No  x

This report is deemed submitted and not filed pursuant to the rules and regulations of the Securities and Exchange Commission.

 



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Deutsche Telekom First half of 2007 1

 

LOGO


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Deutsche Telekom First half of 2007  2


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Deutsche Telekom First half of 2007  3

 

Deutsche Telekom at a glance.

At a glance

 

     Second quarter of 2007     First half of 2007  
    

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Net revenue

   15,575     15,130     2.9     31,028     29,972     3.5     61,347  

Domestic

   7,624     8,139     (6.3 )   15,417     16,347     (5.7 )   32,460  

International

   7,951     6,991     13.7     15,611     13,625     14.6     28,887  

EBIT (Profit from operations)

   2,043     2,085     (2.0 )   3,838     4,403     (12.8 )   5,287  

Special factors affecting EBITa

   (89 )   (68 )   (30.9 )   (228 )   (160 )   (42.5 )   (3,156 )

Adjusted EBITa

   2,132     2,153     (1.0 )   4,066     4,563     (10.9 )   8,443  

Adjusted EBIT margina (%)

   13.7     14.2       13.1     15.2       13.8  

Profit (loss) from financial activitiesb

   (782 )   (752 )   (4.0 )   (1,531 )   (1,302 )   (17.6 )   (2,683 )

Profit before income taxesb

   1,261     1,333     (5.4 )   2,307     3,101     (25.6 )   2,604  

Depreciation, amortization and impairment losses

   (2,770 )   (2,664 )   (4.0 )   (5,518 )   (5,234 )   (5.4 )   (11,034 )

EBITDAc

   4,813     4,749     1.3     9,356     9,637     (2.9 )   16,321  

Special factors affecting EBITDAa,c

   (89 )   (68 )   (30.9 )   (228 )   (150 )   (52.0 )   (3,113 )

Adjusted EBITDAa,c

   4,902     4,817     1.8     9,584     9,787     (2.1 )   19,434  

Adjusted EBITDA margina,c (%)

   31.5     31.8       30.9     32.7       31.7  

Net profitb

   608     1,018     (40.3 )   1,067     2,108     (49.4 )   3,165  

Special factorsa

   34     (44 )   n.a.     (70 )   72     n.a.     (685 )

Adjusted net profita,b

   574     1,062     (46.0 )   1,137     2,036     (44.2 )   3,850  

Earnings per share/ADSb,d, basic/diluted (€)

   0.14     0.24     (41.7 )   0.25     0.49     (49.0 )   0.74  

Cash capexe

   (1,584 )   (1,925 )   17.7     (3,607 )   (3,969 )   9.1     (11,806 )

Net cash from operating activitiesf

   3,150     2,898     8.7     5,215     5,695     (8.4 )   14,222  

Free cash flow (before dividend payments)g

   1,751     1,118     56.6     2,271     2,162     5.0     2,983  

Equity ratiob,h (%)

   —       —         37.9     36.9       35.8  

Net debti

   —       —         40,357     38,819     4.0     39,555  
     June 30,
2007
    Mar. 31,
2007
    Change
June 30, 2007/
Mar. 31, 2007
%
    Dec. 31,
2006
    Change
June 30,
2007/ Dec.
31, 2006 %
    June 30,
2006
    Change
June 30, 2007/
June 30, 2006
%
 

Number of employees at balance sheet date

              

Deutsche Telekom Group

   242,703     247,125     (1.8 )   248,800     (2.5 )   249,991     (2.9 )

Non-civil servants

   204,108     207,163     (1.5 )   208,420     (2.1 )   207,073     (1.4 )

Civil servants

   38,595     39,962     (3.4 )   40,380     (4.4 )   42,918     (10.1 )

Number of fixed-network and mobile customers

              

Narrowband linesj (millions)

   37.7     38.3     (1.6 )   39.0     (3.3 )   40.1     (6.0 )

Broadband linesk (millions)

   13.0     12.4     4.8     11.5     13.0     9.8     32.7  

Mobile customersl (millions)

   111.8     109.2     2.4     106.4     5.1     101.1     10.6  

a For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, the adjusted EBITDA margin as well as special factors affecting profit or loss and the adjusted net profit, please refer to “Reconciliation of pro forma figures,” page 74 et seq.
b Prior-year figures have been adjusted due to adoption of IAS 19.93A.
c Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses.
d One ADS (American Depositary Share) corresponds to one ordinary share of Deutsche Telekom AG.
e Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement. In the first half of 2007 these include investments totaling EUR 112 million for parts of Centrica PLC taken over by T-Systems UK as part of an asset deal.
f Current finance lease receivables were previously reported in net cash from operating activities. From January 1, 2007, they are reported in net cash from/used in investing activities. Prior-year figures have been adjusted accordingly.


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Deutsche Telekom First half of 2007  4

 

g Since the beginning of the 2007 financial year, Deutsche Telekom has defined free cash flow as cash generated from operations less interest paid and net cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment. Prior-year figures have been adjusted accordingly. For the calculation of free cash flow, please refer to “Reconciliation of pro forma figures,” page 78.
h Based on shareholders’ equity excluding amounts earmarked for dividend payments, which are treated as current liabilities.
i For detailed information, please refer to “Reconciliation of pro forma figures,” page 79.
j Lines in operation. Telephone lines excluding internal use and public telecommunications, including wholesale services.
k Broadband lines in operation, including Germany, Eastern and Western Europe.
l Number of customers of the fully consolidated mobile communications companies of the Mobile Communications strategic business area.


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Deutsche Telekom First half of 2007  5

 

The business areas of the Deutsche Telekom Group.

Mobile Communications.

The Mobile Communications strategic business area combines all activities of T-Mobile International. All of T-Mobile’s national companies offer consumers and business customers a comprehensive portfolio of mobile voice and data services, supplemented by corresponding hardware and terminal devices. They also sell services to resellers and companies that buy network services and market them independently to third parties (MVNOs). T-Mobile has underpinned its position as one of the mobile industry’s leading service providers with customer growth of 10.7 million customers compared with the prior-year quarter. This growth is based not only on the further modernization of the T-Mobile network, but also on products and services that give users the convenience they want together with a simplified rate structure.

 

     Q2
2007a
millions
of €
   Q2
2006a
millions
of €

Total revenue

   8,650    7,856

T-Mobile Deutschland

   2,009    2,060

T-Mobile USA

   3,545    3,340

T-Mobile UK

   1,178    1,122

Adjusted EBITDA

   2,750    2,363

T-Mobile Deutschland

   741    810

T-Mobile USA

   1,029    952

T-Mobile UK

   276    170

Adjusted EBITDA margin (%)

   31.8    30.1

Number of employees (average)

   61,402    52,603

Mobile customers (millions)

   111.8    101.1

a For a detailed explanation of the calculations and definitions of the various amounts, please refer to page 25 et seq.

Broadband/Fixed Network.

In its Broadband/Fixed Network strategic business area, Deutsche Telekom offers consumers and small business customers state-of-the-art network infrastructure for tradition-nal fixed-network services, broadband Internet access, and innovative multimedia services. This strategic business area’s customers also include national and international carriers, resellers, and the other strategic business areas of the Deutsche Telekom Group. With 13 million DSL lines at the end of the second quarter of 2007, the strategic business area has consolidated its leading position in the broadband market. Overall, the number of broadband customers rose by 3.1 million compared with the prior-year quarter. Due to competition, the number of narrowband lines dropped to 37.7 million.

 

     Q2
2007a
millions
of €
  

Q2

2006a
millions
of €

Total revenue

   5,655    6,106

Domestic

   4,948    5,445

International

   722    661

Adjusted EBITDA

   1,905    2,240

Adjusted EBITDA margin (%)

   33.7    36.7

Number of employees (average)

   99,185    108,196

Broadband lines (millions)

   13.0    9.8

Narrowband lines (millions)

   37.7    40.1

a For a detailed explanation of the calculations and definitions of the various amounts, please refer to page 28 et seq.


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Deutsche Telekom First half of 2007  6

 

Business Customers.

The Business Customers strategic business area offers products and solutions along the entire information and communications technology value chain. Through its two business units T-Systems Enterprise Services and T-Systems Business Services, the strategic business area supports around 130 multinational corporations, as well as large public authorities and around 160,000 small, medium-sized, and large enterprises as business customers of the Deutsche Telekom Group. T-Systems recorded a further decrease in revenue in the second quarter of 2007 due to continuously growing price pressure.

 

     Q2
2007a
millions
of €
   Q2
2006a
millions
of €

Total revenue

   2,962    3,208

Enterprise Services

   1,992    2,119

Business Services

   970    1,089

Adjusted EBITDA

   280    340

Adjusted EBITDA margin (%)

   9.5    10.6

Number of employees (average)

   56,218    57,802

New ordersb

   2,658    3,948

a For a detailed explanation of the calculations and definitions of the various amounts, please refer to page 34 et seq.
b Includes contracts with both internal and external customers.

Group Headquarters & Shared Services.

Group Headquarters & Shared Services performs strategic and cross-divisional management functions for the Deutsche Telekom Group and is responsible for operating activities that are not directly related to the core business of the Group. The main elements of the Shared Services unit are Real Estate Services, DeTeFleetServices GmbH and Vivento. Since the beginning of 2007, Group Headquarters & Shared Services has also included the shared services and headquarters functions of Magyar Telekom. Vivento further expanded its business activities in the second quarter of 2007 and thus made a significant contribution to the 8.1 percent year-on-year increase in revenue.

 

     Q2
2007a
millions
of €
    Q2
2006a
millions
of €
 

Total revenue

   988     914  

Adjusted EBITDA

   (21 )   (94 )

Adjusted EBITDA margin (%)

   (2.1 )   (10.3 )

Number of employees (average)

   27,241     30,793  

of which: Viventob (at balance sheet date)

   11,100     14,800  

a For a detailed explanation of the calculations and definitions of the various amounts, please refer to page 37 et seq.
b Figures rounded.


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Deutsche Telekom First half of 2007  7

 

Contents.

 

To our shareholders  

•       Developments in the Group

  9

•       T-Share price performance

  11

•       Corporate governance

  14
Half-year financial report  

•       Interim Group management report

  15

•      Highlights

  15

•      Overall economic situation/industry situation

  18

•      Group strategy

  20

•      Group

  22

•      Strategic business areas

  27

•      Risks and opportunities

  43

•      Outlook

  44

•       Interim consolidated financial statements

  49

•      Consolidated income statement

  49

•      Consolidated balance sheet

  50

•      Consolidated cash flow statement

  51

•      Statement of recognized income and expense

  54

•      Selected explanatory notes

  55

•       Responsibility statement

  74

•       Review report by the auditors

  75
Further information  

•       Reconciliation of pro forma figures

  77

•       Investor Relations calendar

  83

•       Glossary

  84

•       Disclaimer

  88


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Deutsche Telekom First half of 2007  8


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Deutsche Telekom First half of 2007  9

 

Developments in the Group.

 

 

Net revenue increased by 3.5 percent from EUR 30.0 billion in the first half of 2006 to EUR 31.0 billion.

 

 

Heavy price pressure and strong competition caused domestic revenue to decrease 5.7 percent year-on-year from EUR 16.3 billion to EUR 15.4 billion. By contrast, international revenue rose 14.6 percent from EUR 13.6 billion to EUR 15.6 billion.

 

 

Adjusted for special factors, Group EBITDA1 in the first six months of 2007 declined year-on-year by 2.1 percent from EUR 9.8 billion to EUR 9.6 billion. Group EBITDA decreased by 2.9 percent from EUR 9.6 billion to EUR 9.4 billion.

 

 

Adjusted EBITDA of subsidiaries based in Germany decreased by 15.9 percent from EUR 6.2 billion to EUR 5.2 billion. Adjusted EBITDA of subsidiaries based outside Germany increased 21.8 percent from EUR 3.6 billion to EUR 4.4 billion.

 

 

Net profit adjusted for special factors1 was EUR 1.1 billion, compared with EUR 2.0 billion in the first half of 2006. Net profit for the period was EUR 1.1 billion, compared with EUR 2.1 billion in the first six months of 2006.

 

 

Free cash flow2 before payment of dividends was EUR 2.3 billion, compared to EUR 2.2 billion in the first half of 2006.

 

 

Net debt3 rose by EUR 0.8 billion compared with the end of 2006 from EUR 39.6 billion to EUR 40.4 billion.

Continuation of the trends in the strategic business areas in the first half of 2007:

 

 

The number of mobile customers rose by 5.4 million compared with the end of 2006 to a total of 111.8 million.

 

 

The number of narrowband lines operated by the Broadband/Fixed Network strategic business area declined by 1.3 million to 37.7 million at June 30, 2007. The number of broadband lines rose by 1.5 million compared with the end of 2006 to a total of 13.0 million.

 

 

The order volume in the Business Customers strategic business area totaled EUR 6.8 billion in the first half of 2007.


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Deutsche Telekom First half of 2007  10

 

1 For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, the adjusted EBITDA margin and special factors affecting net profit/loss after income taxes and the adjusted net profit, please refer to “Reconciliation of pro forma figures,” page 74 et seq.
2 Since the beginning of the 2007 financial year, Deutsche Telekom has defined free cash flow as cash generated from operations less interest paid and net cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment. Prior-year figures have been adjusted. For calculation and more detailed explanation of the changed definition of free cash flow, please refer to “Reconciliation of pro forma figures,” page 78.
3 For detailed information, please refer to “Reconciliation of pro forma figures,” page 79.


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Deutsche Telekom First half of 2007  11

 

T-Share price performance.

Performance of the T-Share Jan. 2 – June 30, 2007

LOGO

 

     June 30,
2007
   June 30,
2006
   Dec. 31,
2006

Xetra closing prices (€)

        

Exchange price at the balance sheet date

   13.69    12.58    13.84

High (during the preceding quarter)

   14.35    14.49    13.95

Low (during the preceding quarter)

   12.49    12.25    12.44

Weighting of the T-Share in major stock indexes

        

DAX 30 (%)

   4.7    6.1    5.6

Dow Jones Europe STOXX Telecommunications© (%)

   9.3    9.8    9.9

Market capitalization (billions of €)

   59.7    52.3    60.4

Shares issued (millions)

   4,361.19    4,423.82    4,361.12

Capital markets environment.

The leading international stock exchanges ended the first half of 2007 with a strong gain. Higher corporate profits due to a stable global economy and an unparalleled number of takeovers and mergers sent the markets to record highs. Corrections on the Asian markets and negative indicators from the U.S. real estate market did not have a substantial impact on this positive trend in the first half of 2007. A high level of liquidity remained the major force driving the global rally.

The DAX outperformed most of the other indexes, with a gain of 20 percent. Year-on-year, the first half of 2007 was the best since the turn of the millennium. Although it did not set any records, the DAX did reach 8,132 points on June 20, 2007, just four points below its all-time high in 2000.

Development of international indexes.

Among the major international indexes, the DAX was clearly the strongest, climbing 20 percent so far this year. The Dow Jones gained 7.7 percent and the Nasdaq technology index rose 7.8 percent in the same period. In London, the FTSE 100 moved up 6.2 percent and Japan’s Nikkei closed with an increase of 5.3 percent.


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Deutsche Telekom First half of 2007  12

 

T-Share performance.

The mood in the telecommunications industry improved markedly in the second quarter of 2007. Generally positive first-quarter results from telecoms were welcomed with a sense of relief. In a sometimes very volatile market environment, the sector benefited from its defensive qualities and comparatively high dividend yields. The Dow Jones Europe STOXX Telecommunications© index picked up 8.9 percent in the second quarter of 2007. The gain for the first six months of the year was 6.3 percent. The DAX share price index, which takes into account dividend markdowns and the payment of any bonuses, improved by 12.7 percent in the second quarter of 2007. The Deutsche Telekom share increased 10.6 percent in the second quarter of 2007, offsetting its first-quarter decline. At the end of the half-year, the price was unchanged from the start of the year.

 

 

April: In April 2007, the Deutsche Telekom share price improved 8.1 percent in very light trading. From mid-month, Telekom Service and the imminent labor dispute became the focus of T-Share trading. Various market rumors temporarily hampered the T-Share’s performance.

 

 

May: The Deutsche Telekom share’s ex-dividend day was May 4, 2007, so the share traded at a discount of 5.4 percent off the previous day’s close. Due to the expected positive quarterly figures, the share nevertheless recovered nearly 1 percent to close the day at EUR 12.74. On May 10, 2007, Deutsche Telekom’s first-quarter figures were generally well received and the share opened trading at EUR 12.77, up 0.9 percent on the previous day’s closing price. The mood in the market was restrained, however, by the announcement of industrial action by the service industry trade union ver.di. For the month as a whole, the share price improved 3 percent.

 

 

June: In June 2007, two topics dominated trading of the T-Share. The first weeks of the month were shaped in part by speculation about the possible sale of T-Mobile USA. Although Deutsche Telekom’s management ruled out any such transaction, trading remained influenced by rumors. By contrast, the labor dispute on Telekom Service and the associated industrial action weighed on the share price. The T-Share closed June 2007 at EUR 13.69, with a loss of 0.7 percent.

Performance of the T-Share vs. the DAX and the Dow Jones Europe STOXX Telecommunications© indexes Jan. 2 – June 30, 2007

LOGO


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Deutsche Telekom First half of 2007  13

 

Performance of the T-Share vs. European competitors Jan. 2 – June 30, 2007

LOGO


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Deutsche Telekom First half of 2007  14

 

Corporate governance.

In the most recent Declaration of Conformity pursuant to § 161 of the German Stock Corporation Act released on December 11, 2006, the Board of Management and Supervisory Board of Deutsche Telekom AG declared that Deutsche Telekom AG had complied without exception with the recommendations of the Government Commission for a German Corporate Governance Code published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette (Bundesanzeiger) on July 24, 2006. The full text of the Declaration of Conformity can be found on the Deutsche Telekom website (www.telekom.com) under Investor Relations in the Corporate Governance section.

Deutsche Telekom AG shares are listed as American Depositary Shares (ADSs) on the New York Stock Exchange (NYSE). As a result, Deutsche Telekom is subject to the NYSE listing rules as well as to U.S. capital market legislation, in particular the Sarbanes-Oxley Act of 2002 and associated regulations of the Securities and Exchange Commission (SEC) for listed foreign entities. A general summary of the main differences between German corporate governance rules and those of the NYSE that apply to companies listed on the NYSE is included in Deutsche Telekom’s Annual Report on Form 20-F for the 2006 financial year, which is available on the Deutsche Telekom website (www.telekom.com) under Investor Relations in the Publications section. This summary of the differences between the German rules and those of the NYSE can also be found on the Deutsche Telekom website (www.telekom.com) under Investor Relations in the Corporate Governance section.


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Deutsche Telekom First half of 2007  15

 

Interim Group management report.

Highlights.

Events in the second quarter of 2007.

Group

Collective bargaining on Telekom Service concluded.

 

 

Deutsche Telekom has clear objectives in bundling its German service units across the Group in the three service companies Deutsche Telekom Kundenservice GmbH, Deutsche Telekom Technischer Service GmbH and Deutsche Telekom Netzproduktion GmbH: to secure the jobs of around 50,000 employees in the long term by offering first-class service at competitive costs. In the first quarter of 2007, Deutsche Telekom AG started collective negotiations with the unions on the details of the terms of employment. Following intensive negotiations, which also saw large-scale industrial action, the delegations reached a compromise in June 2007. The legal separation of the Telekom Service units by July 1, 2007 was implemented as planned.

The key points of the collective agreement are the extension of the working week from 34 to 38 hours without a salary increase, more flexible working hours, and the socially responsible adjustment of salaries including increased performance-related elements. The salaries of Telekom Service employees are being cut by 6.5 percent to a more competitive level, cushioned step-by-step in a socially responsible manner over a period of 42 months. Conditions for taking on junior staff from Deutsche Telekom’s own apprenticeship programs in particular were agreed as part of an “employment bridge,” making it possible to hire over 4,000 new employees. Starting salaries will be between EUR 20,400 and EUR 23,500 per annum. In return, Deutsche Telekom AG will not sell its majority holdings in the service companies before the end of 2010. Compulsory redundancies in the service companies are also ruled out until the end of 2012.

Also negotiated for employees of Deutsche Telekom AG was an extension of the collective wage agreement that expired on July 31, 2007 until December 31, 2008, without a collectively agreed wage increase. In return, the agreement to avoid compulsory redundancies that expires on December 31, 2008 was extended by one year until December 31, 2009.

Staff restructuring continues.

 

 

The staff restructuring program in Germany is continuing and again many employees accepted the packages offered to assist the socially responsible adjustment of staff levels. Through voluntary staff reduction programs, natural attrition and deconsolidation around 20,400 employees have left the Group since the beginning of 2006, around 8,200 of them in the first six months of 2007. These include the 1,200 employees who moved to another company in 2007 when the Vivento Customer Services units were deconsolidated.

French anti-trust authorities approve sale of T-Online France to Neuf Cegetel.

 

 

Deutsche Telekom has sold its French Internet company T-Online France S.A.S. to Neuf Cegetel. T-Online France was previously shown in the Broadband/Fixed Network strategic business area. Neuf Cegetel has acquired the Deutsche Telekom subsidiary, which operates in France under the Club Internet brand. The transaction closed with the approval of the French anti-trust authorities, enabling the sale to be concluded in the first half of 2007. The sale forms part of the “Focus, fix and grow” strategy launched on March 1, 2007.


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Deutsche Telekom First half of 2007  16

 

Long-term rating.

 

 

On May 17, 2007, the rating agency Fitch changed its outlook for Deutsche Telekom’s long-term A- rating from stable to negative. Growing competition in Germany was given as the reason. The long-term ratings with Standard & Poor’s and Moody’s remained unchanged in the reporting period at A- (outlook: negative) and A3 (outlook: stable), respectively.

Mobile Communications

Next HSDPA phase kicked off in Germany.

 

 

June 19, 2007 marked the kick-off on Berlin’s Kurfürstendamm of the expansion of the existing HSDPA network. T-Mobile currently offers HSDPA throughout its entire UMTS network with bandwidths of up to 3.6 Mbit/s. However, since the kick-off date in June 2007, the HSDPA network has been systematically upgraded to double the bandwidth to 7.2 Mbit/s. HSDPA 7.2 is already available at a number of major public transport hubs across Germany, including airports, Deutsche Bahn lounges, and trade fair sites.

T-Mobile USA launches T-Mobile HotSpot@home.

 

 

T-Mobile USA is the first wireless carrier in the United States to launch a combined WLAN/ mobile communications service. Customers in the United States can now place mobile calls via wireless LAN as well as the standard GSM/ GPRS/EDGE network. Cell phones connect to the WLAN via a HotSpot either at home or at one of T-Mobile’s approximately 8,500 HotSpots across the United States. Calls are transferred seamlessly between T-Mobile USA’s network and the respective WLAN. In the United States in particular, an increasing number of consumers are doing without a fixed-network line and are using their mobile phones as their only phone. In the past the only obstacles had been insufficient network coverage in the United States, especially in consumers’ homes, and the cost of additional minute buckets. T-Mobile HotSpot@home now offers excellent network quality with WLAN at home, plus unlimited calling.

Broadband/ Fixed Network

T-Home brand launched.

 

 

The new T-Home brand was launched on May 18, 2007, superseding the T-Com brand. With the new umbrella brand, all consumer packages for the home will henceforth be offered under a single brand name. In addition, the triple-play packages – comprising voice communication, Internet access, and IPTV – will be marketed under the Entertain brand name.

Business Customers

T-Systems to build and operate high-performance data network for Airbus in Asia.

 

 

T-Systems and Airbus continue to expand their international cooperation in Asia. The aircraft manufacturer will start building its first A320 final assembly line in China in 2008. As a strategic ICT partner, T-Systems has been commissioned to set up a reliable network infrastructure for the increasing data traffic in Asia and operate it initially for three years. The existing communication networks at over 20 locations in China, Japan, and Singapore do not have the scale to accommodate the growing international data traffic in the Asia region. T-Systems therefore plans to consolidate Airbus’ internal data traffic, communication with suppliers, and network access for maintenance work at the airports on a single high-performance platform. T-Systems will also link the aircraft manufacturer’s main Asian hub in Beijing to Airbus headquarters in Toulouse via a 155 Mbit/s connection.

Bosch relies on T-Systems in Asia.

 

 

Bosch’s national company in Singapore has commissioned T-Systems to connect over 200 sites in the Asia-Pacific region via a high-performance network. In addition, T-Systems will provide ICT services on site from its local data centers. The aim is to provide all of its locations in the Asia-Pacific region with IT services from Singapore. T-Systems will set up a new network architecture with standardized network services and systems for more than 200 sites. This also includes a high-capacity connection between the data centers in America and Europe.


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Deutsche Telekom First half of 2007  17


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Deutsche Telekom First half of 2007  18

 

Overall economic situation/ industry situation.

Global economic development

The global economy continued to show strong growth in the first half of 2007. A further expansion of the economic upswing in emerging and developing economies more than offset the slowdown in general economic output growth in the industrialized countries. In June 2007, the Kiel Institute for the World Economy raised its forecast for global economic growth for 2007 from 4.7 to 4.8 percent. The monetary policies of the major industrialized and emerging economies’ central banks had only a moderately slowing effect on the economy. The surge in industrial output worldwide in the first half of 2007 resulted in a sharp rise in raw materials prices but consumer price inflation remained moderate.

Within the European Union, output growth remained strong and stable in the first half of 2007, with real gross domestic product (GDP) climbing by an annualized 2.4 percent. The expansion was largely driven by rising demand for capital goods, while private consumption declined only slightly. The unemployment rate within the euro zone dropped to 7.0 percent in the first half of 2007, its lowest level since 1980. At nearly 2 percent, euro zone inflation stayed within the range tolerated by the European Central Bank for price stability. However, the core rate of inflation is experiencing an upward trend in the euro zone. In response to this trend, the European Central Bank raised the key interest rate by 25 basis points at its regular meeting on June 6, 2007.

Economic recovery in Germany slowed slightly in the first half of 2007. In particular, growth in private consumption slowed a little in the first half of 2007 after experiencing strong growth before the value-added tax increase that took effect on January 1, 2007. Nevertheless, rising demand for capital goods again boosted aggregate capacity utilization in Germany. The economic trend was positive overall. This was also reflected on the labor market, with unemployment dropping to 8.8 percent in June 2007.

Gross domestic product (GDP) in the United States developed better than expected at the end of the first half of 2007. The rate of GDP growth continued to decline in the first quarter of 2007 relative to prior quarters; however, the U.S. Department of Commerce estimates that the U.S. economy grew by 3.5 percent in the second quarter of 2007. The real estate and mortgage markets continue to pose a threat to growth. The U.S. Federal Reserve left the key interest rate unchanged in the first half of 2007 since the country’s core rate of inflation is also showing no signs of slowing.

Outlook

Moderate economic expansion is expected for the industrialized nations for the rest of 2007. Economic conditions remain favorable. The increase in short-term interest rates was moderate compared with earlier rate cycles, so that capital expenditures can still be financed at favorable rates. The future sharp increase in income and output expected for emerging and developing economies will benefit demand for capital goods and high-quality consumer goods from industrialized countries. If interest rates change in the United States over the course of the year, this could have a positive effect on capital spending and the growth outlook there.

However, the latest surveys conducted by the Center for European Economic Research (Zentrum für Europäische Wirtschaftsforschung – ZEW) reflect looming risks to the global economy. The July survey of the ZEW’s economic indicators suggests that the boom cycle is losing steam, primarily due to rising oil prices, a weak U.S. dollar (USD), and the uncertainty in the U.S. real estate and mortgage markets.

Telecommunications market

In the second quarter of 2007, the price index for telecommunications services published by the German Federal Statistical Office registered another slight increase of 1.8 percent in prices for fixed-line telephone services year-on-year. Consumer prices for mobile calling were down 2.3 percent compared to the same period last year. Prices for Internet access declined 5.7 percent year-on-year.


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Deutsche Telekom First half of 2007  19

 

Regulation in Germany

In its market analysis and regulatory order concerning access to the unbundled local loop of June 27, 2007, the Federal Network Agency required Deutsche Telekom AG to continue to provide access. All existing requirements to grant competitors access to the unbundled local loop on non-discriminatory terms and at rates based on the costs of efficient service provision and approved in advance by the Federal Network Agency remain in place.

In addition, Deutsche Telekom AG will be required to open its cable ducts to competitors between the main distribution frames and cable distributors. Only if access to the cable ducts is not possible for technical or capacity reasons will Deutsche Telekom AG be required to allow other companies access to available fiber optics lines. In addition, the Federal Network Agency clearly stated that Deutsche Telekom AG must also allow access upon request to new multi-function cabinets, thus enabling competitors to install their own DSLAMs. Services provided pursuant to these new requirements are also subject to prior approval of rates. Deutsche Telekom AG has filed a complaint against these additional requirements.

EU regulation

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

The Commission’s communication concerning the 2006 Review shows that it is no longer aiming to reduce sector-specific regulation and seeking its transition into general competition law, but instead intends to introduce additional regulatory remedies and extend authority at the EU level. The first draft of the revised directives is expected in fall 2007, and transposition into national law is unlikely before 2010.

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. On the other hand, the Commission is proposing to extend regulation to additional wholesale markets for mobile communications. After adoption by the EU Commission, the Markets Recommendation is expected to come into force in late fall 2007.

The new EU Regulation on international roaming came into effect on June 30, 2007. It sets a ceiling on mobile charges for roaming calls in the EU, which has resulted in a fall in consumer and wholesale charges and therefore has a negative effect on T-Mobile revenue. The Regulation also imposes detailed obligations to keep consumers informed that go beyond the information that has usually been provided to date, such as a welcome text message, and that will result in additional costs. The Regulation is applicable with immediate effect without measures to implement it at national level. T-Mobile was the first network operator in Germany to introduce the Eurotariff as required by the Regulation with its Weltweit calling plan, which was introduced on July 1, 2007.


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Deutsche Telekom First half of 2007  20

 

Group strategy.

More than ever before, Deutsche Telekom’s market and competitive environment presents huge challenges for the Group. For this reason, Deutsche Telekom’s strategy has the following four aims:

 

 

Safeguard competitiveness in Germany and Eastern Europe.

 

 

Grow abroad with mobile communications.

 

 

Mobilize the Internet and the Web 2.0 trend.

 

 

Expand network-centric ICT services with partnerships.

Safeguarding competitiveness

Deutsche Telekom continues to experience strong market pressure in its domestic market in particular. Customer losses in the traditional fixed-network business are continuing. At the same time, however, the number of new DSL and mobile customers is rising. This means that the measures introduced to safeguard competitiveness are having an effect. The goal is to achieve growth in the promising broadband market with products and services for fixed-network and mobile communications as well as innovative services. T-Mobile gained 428,000 additional contract customers in Germany between January and June 2007, a year-on-year increase of around 62 percent. 945,000 DSL lines were sold directly to the Company’s own customers in the first half of 2007. These positive figures contrast with line losses in the traditional fixed-network business, where Deutsche Telekom lost an additional 1.1 million lines.

This demonstrates the need to consistently continue the reforms that the Company has already begun, which include both cost-cutting measures and the product portfolio. Deutsche Telekom aims to reduce costs by between EUR 4.2 billion and EUR 4.7 billion by 2010 with the Save for Service program. Initial mobile communications and DSL products were introduced this summer under a second brand Congstar, which is aimed in particular at younger customer segments where Deutsche Telekom sees potential for recovering lost ground.

Deutsche Telekom is continuing to invest in upgrading the network infrastructure for IPTV and bundled products in Germany. It plans to equip 50 cities with VDSL and connect them to the platform by 2008. This year, Deutsche Telekom will also offer IPTV and triple play based on ADSL2+ in a total of 750 cities. This will allow around 17 million households to use these innovative products and access attractive content in the form of TV channels and movies. At the same time, upgrading the existing network infrastructure to IP technology is contributing to the increase in productivity.

T-Mobile Deutschland will continue building on its leading position with new community services and an enhanced mobile web’n’walk Internet service. The fast HSDPA network with bandwidths of up to 7.2 Mbit/s, together with powerful terminal equipment and attractive data prices, are the growth engines for mobile broadband. Personalized communication in social networks is being actively promoted as the principal value driver. By introducing offers such as MyFaves – a hit in the United States – and the innovative chat service Super SMS, Deutsche Telekom will implement concrete service packages for its customers this year.

Since the beginning of the year, Deutsche Telekom has further expanded its sales network and opened 89 new Deutsche Telekom shops. However, more professional customer service is also essential for the Company to reach its goal of attaining service leadership, which is one reason why three dedicated service companies were founded. Deutsche Telekom reached a collective agreement with the trade union that safeguards the jobs of around 50,000 employees within the Group in the long term and makes new recruitment possible. The result of the collective negotiations puts Deutsche Telekom within the target range for its savings program.


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Deutsche Telekom First half of 2007  21

 

Growing abroad with mobile communications

Deutsche Telekom intends to continue to grow outside of Germany, primarily in the mobile communications business. With net additions of 1.8 million customers in the first half of this year compared with 1.6 million in the first half of 2006, the key growth engine is T-Mobile USA, where the majority of customer growth within the Group took place. In the United Kingdom, a net increase of approximately 178,000 new contract customers was recorded. Overall, T-Mobile acquired approximately 2.5 million new contract customers at its companies outside of Germany. The total number of international customers rose to 77.4 million. In addition, Deutsche Telekom is not ruling out acquisitions in the mobile area as part of its growth strategy. This relates both to markets where Deutsche Telekom is already present and to the possibility of activities outside the Company’s current footprint.

Mobilizing the Internet and the Web 2.0 trend

The mega-trends in the industry are mobile Internet access, Web 2.0, where users play an active role in influencing and shaping Internet content, and personal and social networking between users. Deutsche Telekom wants to participate in these trends. With web’n’walk, Deutsche Telekom is already providing its customers with mobile Internet access and implementing new business models such as mobile advertising. Mobile blogging and other forms of personal and social networking will also be made available everywhere via mobile communications. To achieve its goal, Deutsche Telekom is developing and operating products and services for communities and is integrating recommendations into the search function on its portal, for example, so that users can bring each other’s attention to relevant information and content.

In addition, Deutsche Telekom is looking toward partnerships with other providers to integrate popular Internet services and toward investing and entrepreneurial involvement in relevant products and concepts. T-Online Venture Fund, for instance, invested in Jajah, a new Internet telephony company, in May this year. Jajah offers market and synergy potential for Deutsche Telekom in the mobile communications and fixed-network area, and especially in online social networking.

Expanding network-centric ICT services

Intense competition and price pressure continued to weigh on the Business Customers strategic business area. Nevertheless, T-Systems succeeded in keeping its level of new orders stable in the first half of 2007, only 0.8 percent below the prior-year figure. The contract with the British company Centrica was a major contributing factor.

While margins in the telecommunications sector for business customers are shrinking, the information technology (IT) market is growing. The increasing convergence of IT and telecommunications in particular is producing a new growth area: network-centric ICT (information and communication technology) services, in which T-Systems aims to play a leading role. Deutsche Telekom is taking a long-term approach to this strategy. In order to increase economies of scale and broaden its international presence in the IT area, possible strategic partnerships are being investigated.


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Deutsche Telekom First half of 2007  22

 

Group.

Net revenue

Deutsche Telekom again recorded revenue growth in the first half of 2007. Net revenue in the first six months of 2007 rose to a total of EUR 31.0 billion. This represents an increase of EUR 1.1 billion, or 3.5 percent over the prior-year period. Customer growth in the mobile communications business, especially at T-Mobile USA, remains the main factor underlying this favorable revenue trend. Changes to the consolidated group, principally the consolidation of PTC, tele.ring and gedas for the first time in the course of the 2006 financial year, had a positive effect on revenue in the amount of EUR 1.2 billion. Exchange rate effects – especially relative to the U.S. dollar – had a negative effect on net revenue of approximately EUR 0.4 billion.

The Mobile Communications strategic business area increased its revenue year-on-year by a total of 10.5 percent in the first half of 2007. Compared with the same quarter in the previous year, revenue grew by 10.1 percent in the second quarter of 2007. The full consolidation of PTC as of November 1, 2006 and tele.ring as of May 1, 2006 had a positive effect. Increasing customer numbers in the United States remained the main driver of growth.

The revenue generated by the Broadband/Fixed Network strategic business area declined year-on-year. This was primarily due to a further decline in call revenues resulting from line losses and pricing effects from the higher penetration of calling plans. Volume growth in the broadband market was not able to offset the drop in prices for Internet access.

Revenue in the Business Customers strategic business area also declined year-on-year. Due to continued massive price pressure and fierce competition for voice and data services, revenues declined in the area of Telecommunications Services for multinational business customers in particular, as well as in the Business Services area. The full consolidation of gedas as of March 31, 2006 had a positive effect on revenue in the Business Customers strategic business area in the first half of 2007 as compared with the same period in the previous year.

 

     Second quarter of 2007     First half of 2007  
    

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Net revenue

   15,453     15,575     15,130     2.9     31,028     29,972     3.5     61,347  

Mobile Communicationsa

   8,400     8,650     7,856     10.1     17,050     15,431     10.5     32,040  

Broadband/Fixed Networka,b

   5,832     5,655     6,106     (7.4 )   11,487     12,231     (6.1 )   24,515  

Business Customersa,b

   2,906     2,962     3,208     (7.7 )   5,868     6,271     (6.4 )   12,869  

Group Headquarters & Shared Servicesa,b

   952     988     914     8.1     1,940     1,806     7.4     3,758  

Intersegment revenuec

   (2,637 )   (2,680 )   (2,954 )   9.3     (5,317 )   (5,767 )   7.8     (11,835 )

a Total revenue (including revenue between strategic business areas).
b Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the business areas Business Customers and Group Headquarters & Shared Services. In previous periods these results were reported under Broadband/Fixed Network. Prior-year figures have been adjusted accordingly.
c Elimination of revenue between strategic business areas.


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Deutsche Telekom First half of 2007  23

 

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

 

    

H1

2007
millions of €

   Proportion
of net
revenue
of the
Group %
  

H1

2006
millions of €

   Proportion
of net
revenue
of the
Group %
   Change
millions of €
    Change %    

FY

2006
millions of €

Net revenue

   31,028    100.0    29,972    100.0    1,056     3.5     61,347

Mobile Communications

   16,718    53.9    15,082    50.3    1,636     10.8     31,308

Broadband/Fixed Networka

   9,697    31.3    10,167    33.9    (470 )   (4.6 )   20,366

Business Customersa

   4,422    14.2    4,553    15.2    (131 )   (2.9 )   9,301

Group Headquarters & Shared Servicesa

   191    0.6    170    0.6    21     12.4     372

a Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the business areas Business Customers and Group Headquarters & Shared Services. In previous periods these results were reported under Broadband/Fixed Network. Prior-year figures have been adjusted accordingly.

At 53.9 percent, the Mobile Communications area provided the largest contribution to the net revenue of the Group. The percentages of net revenue generated by the Broadband/Fixed Network and Business Customers strategic business areas were 31.3 percent and 14.2 percent respectively, lower than in the previous year.

Net revenue generated outside Germany

The proportion of revenue generated outside Germany in the first half of 2007 rose by 4.8 percentage points year-on-year to a total of 50.3 percent. This represents an increase of EUR 2.0 billion to EUR 15.6 billion. A similar trend can also be seen in the quarterly comparison, with an increase of EUR 1.0 billion to EUR 8.0 billion. This is attributable, in particular, to the first-time consolidation of PTC and tele.ring as well as the positive development of revenue at T-Mobile USA. Domestic revenue declined on both a six-month and a quarterly basis.

 

     Second quarter of 2007     First half of 2007
    

Q1

2007
millions of €

  

Q2

2007
millions of €

  

Q2

2006
millions of €

   Change %    

H1

2007
millions of €

  

H1

2006
millions of €

   Change %    

FY

2006
millions of €

Net revenue

   15,453    15,575    15,130    2.9     31,028    29,972    3.5     61,347

Domestic

   7,793    7,624    8,139    (6.3 )   15,417    16,347    (5.7 )   32,460

International

   7,660    7,951    6,991    13.7     15,611    13,625    14.6     28,887

Proportion generated internationally (%)

   49.6    51.0    46.2      50.3    45.5      47.1

Europe (excluding Germany)

   4,099    4,279    3,560    20.2     8,378    6,794    23.3     14,823

North America

   3,475    3,564    3,356    6.2     7,039    6,688    5.2     13,700

Other

   86    108    75    44.0     194    143    35.7     364

EBIT

EBIT decreased by EUR 0.6 billion year-on-year to EUR 3.8 billion. While EBIT generated by the Mobile Communications business area increased, results declined in the Broadband/Fixed Network and Business Customers business areas and at Group Headquarters & Shared Services.

 

     Second quarter of 2007     First half of 2007  
    

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

EBITa in the Group

   1,795     2,043     2,085     (2.0 )   3,838     4,403     (12.8 )   5,287  

Mobile Communications

   1,066     1,297     1,083     19.8     2,363     2,138     10.5     4,504  

Broadband/Fixed Networkb

   976     929     1,268     (26.7 )   1,905     2,538     (24.9 )   3,356  

Business Customersb

   44     34     48     (29.2 )   78     160     (51.3 )   (835 )

Group Headquarters & Shared Servicesb

   (250 )   (215 )   (294 )   26.9     (465 )   (412 )   (12.9 )   (2,138 )

Reconciliation

   (41 )   (2 )   (20 )   90.0     (43 )   (21 )   n.a.     400  


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Deutsche Telekom First half of 2007  24

 


a EBIT is profit/loss from operations as shown in the income statement.
b Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the business areas Business Customers and Group Headquarters & Shared Services. In previous periods these results were reported under Broadband/Fixed Network. Prior-year figures have been adjusted accordingly.

Profit/loss before income taxes

At EUR 2.3 billion, profit before income taxes for the first half of 2007 declined by EUR 0.8 billion year-on-year. In addition to the fact that the increase in cost of sales exceeded revenue growth, this was largely due to higher expenses for commissions, as well as expenses related to the sale of call center locations. Another factor was the increase in net financial expense, which, in the previous year, included income of approximately EUR 0.2 billion from the disposal of Celcom. However, the gain on the disposal of T-Online France in the second quarter of 2007 as well as additional real estate sales had a positive effect on profit before income taxes.

Net profit

Net profit for the first half of 2007 totaled approximately EUR 1.1 billion, a decline of EUR 1.0 billion compared with the first half of 2006. This change is mainly attributable to the aforementioned factors. Special factors totaling EUR 0.1 billion net had a negative effect on net profit, whereas special factors in the prior year had a positive net effect of EUR 0.1 billion.

EBITDA

EBITDA was around EUR 9.4 billion in the first half of 2007, this corresponds to a decrease of EUR 0.3 billion or 2.9 percent compared with the same period in 2006. The increase in EBITDA in the Mobile Communications business area was not able to fully offset the decrease in EBITDA in the Broadband/Fixed Network and Business Customers business areas as well as at Group Headquarters & Shared Services.

Adjusted EBITDA

Special factors had a negative net impact of EUR 228 million on EBITDA in the first six months of 2007. These factors consisted mainly of provisions for compensation payments in connection with changes to the collective agreements for the Telekom Service companies. One-time expenses were also incurred in the Group Headquarters & Shared Services area in connection with the sale of call center locations. These expenses were partially offset by factors such as the gain on the disposal of T-Online France. Special factors amounting to a net total of EUR 150 million had negatively affected EBITDA in the first half of 2006. These relate mainly to expenses resulting from voluntary redundancy and severance payments and restructuring costs, and from customer acquisition costs.

Adjusted for these special factors, EBITDA in the first half of 2007 was EUR 9.6 billion, which represents a decrease of EUR 0.2 billion. The decline in adjusted EBITDA is predominantly due to lower revenues in the Broadband/Fixed Network business area, especially in the fixed-network business, as well as to higher customer acquisition costs in the broadband sector in particular. This combined impact on adjusted EBITDA was partially offset by cost-cutting measures. In the Business Customers business area, continued competition and price pressures, along with smaller margins, had a negative effect on adjusted EBITDA.

 

     Second quarter of 2007     First half of 2007  
    

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Adjusted EBITDAa

   4,682     4,902     4,817     1.8     9,584     9,787     (2.1 )   19,434  

Mobile Communications

   2,539     2,750     2,363     16.4     5,289     4,643     13.9     9,902  

Broadband/Fixed Networkb

   1,870     1,905     2,240     (15.0 )   3,775     4,518     (16.4 )   8,748  

Business Customersb

   261     280     340     (17.6 )   541     697     (22.4 )   1,291  

Group Headquarters & Shared Servicesb

   67     (21 )   (94 )   77.7     46     (27 )   n.a.     (461 )

Reconciliation

   (55 )   (12 )   (32 )   62.5     (67 )   (44 )   (52.3 )   (46 )

a Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to “Reconciliation of pro forma figures,” page 74 et seq.
b Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the business areas Business Customers and Group Headquarters & Shared Services. In previous periods these results were reported under Broadband/Fixed Network. Prior-year figures have been adjusted accordingly.


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Deutsche Telekom First half of 2007  25

 

Free cash flow

The Group recorded free cash flow of EUR 2.3 billion in the first half of 2007. This represents an increase of EUR 0.1 billion year-on-year. Positive effects resulted primarily from lower payments for investments in intangible assets and property, plant and equipment, as well as lower tax payments. The primary drivers of the decrease were the reduction in profit from operations as well as payments in connection with staff-related measures, such as voluntary redundancy and early retirement.

 

    Second quarter of 2007     First half of 2007  
   

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Cash generated from operationsa

  2,543     4,073     3,813     6.8     6,616     7,119     (7.1 )   16,981  

Interest received (paid)

  (478 )   (923 )   (915 )   (0.9 )   (1,401 )   (1,424 )   1.6     (2,759 )

Net cash from operating activitiesa

  2,065     3,150     2,898     8.7     5,215     5,695     (8.4 )   14,222  

Cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment

  (2,023 )   (1,584 )   (1,925 )   17.7     (3,607 )   (3,969 )   9.1     (11,806 )

Free cash flow before proceeds from disposal of intangible assets (excluding goodwill) and property, plant and equipmenta

  42     1,566     973     60.9     1,608     1,726     (6.8 )   2,416  

Proceeds from disposal of intangible assets (excluding goodwill) and property, plant and equipment

  357     185     145     27.6     542     436     24.3     567  

Adjustmentb

  121     —       —       —       121     —       n.a.     —    

Free cash flow before dividend paymentsc

  520     1,751     1,118     56.6     2,271     2,162     5.0     2,983  

a Current finance lease receivables were previously reported in net cash from operating activities. From January 1, 2007, they are reported in net cash from/used in investing activities. Prior-year figures have been adjusted accordingly.
b Cash outflows totaling EUR 121 million for parts of Centrica PLC taken over by T-Systems UK as part of an asset deal.
c Since the beginning of the 2007 financial year, Deutsche Telekom has defined free cash flow as cash generated from operations less interest paid and net cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment. Prior-year figures have been adjusted accordingly. For calculation and more detailed definition of free cash flow, please refer to “Reconciliation of pro forma figures,” page 78.


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Deutsche Telekom First half of 2007  26

 

Net debt

Net debt increased year-on-year from EUR 39.6 billion at the end of 2006 to EUR 40.4 billion. In the first half of 2007, net debt was affected mainly by the payment of dividends in the amount of EUR 3.5 billion. This was partially offset by the cash inflow from the sale of T-Online France and the positive free cash flow.

 

     June 30, 2007
millions of €
   Mar. 31, 2007
millions of €
   Change
June 30, 2007/
Mar. 31, 2007
%
    Dec. 31, 2006
millions of €
   Change
June 30, 2007/
Dec. 31, 2006
%
    June 30, 2006
millions of €
   Change
June 30, 2007/
June 30, 2006
%
 

Bonds

   35,013    36,176    (3.2 )   36,288    (3.5 )   38,587    (9.3 )

Liabilities to banks

   3,371    3,009    12.0     2,348    43.6     2,365    42.5  

Liabilities to non-banks from promissory notes

   669    680    (1.6 )   680    (1.6 )   635    5.4  

Liabilities from derivatives

   712    571    24.7     562    26.7     571    24.7  

Lease liabilities

   2,200    2,236    (1.6 )   2,293    (4.1 )   2,301    (4.4 )

Liabilities arising from ABS transactions

   1,148    1,216    (5.6 )   1,139    0.8     1,213    (5.4 )

Other financial liabilities

   407    425    (4.2 )   377    8.0     102    n.a.  

Gross debt

   43,520    44,313    (1.8 )   43,687    (0.4 )   45,774    (4.9 )

Cash and cash equivalents

   2,146    3,983    (46.1 )   2,765    (22.4 )   5,667    (62.1 )

Available-for-sale/held-for-trading financial assets

   75    94    (20.2 )   122    (38.5 )   105    (28.6 )

Derivatives

   213    350    (39.1 )   359    (40.7 )   406    (47.5 )

Other financial assets

   729    796    (8.4 )   886    (17.7 )   777    (6.2 )

Net debta

   40,357    39,090    3.2     39,555    2.0     38,819    4.0  

a For detailed information and calculations, please refer to “Reconciliation of pro forma figures,” page 79.


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Deutsche Telekom First half of 2007  27

 

Strategic business areas.

Mobile Communications.

Mobile Communications: Customer development and selected KPIs

 

     June 30, 2007
millions
   Mar. 31, 2007
millions
   Change
June 30, 2007/
Mar. 31, 2007
%
   Dec. 31, 2006
millions
   Change
June 30, 2007/
Dec. 31, 2006
%
    June 30, 2006
millions
   Change
June 30, 2007/
June 30, 2006
%

Mobile customers (total)a

   111.8    109.2    2.4    106.4    5.1     101.1    10.6

T-Mobile Deutschlandb

   34.3    33.0    3.9    31.4    9.2     30.4    12.8

T-Mobile USA

   26.9    26.0    3.5    25.0    7.6     23.3    15.5

T-Mobile UKc

   16.8    16.7    0.6    16.9    (0.6 )   16.7    0.6

PTCa (Poland)

   12.5    12.4    0.8    12.2    2.5     10.9    14.7

T-Mobile NL

   2.6    2.6    0.0    2.6    0.0     2.4    8.3

T-Mobile Austriaa (A)

   3.1    3.1    0.0    3.2    (3.1 )   3.1    0.0

T-Mobile CZ (Czech Republic)

   5.1    5.1    0.0    5.0    2.0     4.7    8.5

T-Mobile Hungary

   4.5    4.5    0.0    4.4    2.3     4.3    4.7

T-Mobile Croatia

   2.2    2.2    0.0    2.2    0.0     2.0    10.0

T-Mobile Slovensko (Slovakia)

   2.2    2.2    0.0    2.2    0.0     2.0    10.0

Otherd

   1.4    1.3    7.7    1.3    7.7     1.1    27.3

a One mobile communications 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. Organic customer growth is reported for better comparability: tele.ring and PTC customers were also included in the historic customer base.
b As a result of court proceedings against competitors, T-Mobile Deutschland changed its deactivation policy at the beginning of 2007 in favor of its prepaid customers. These customers can now use their prepaid credit longer than before. Accordingly, in the first half of 2007 far fewer customers were deactivated. Most of the reported increase in customer numbers in the first half of 2007 is due to this change. Approximately 400,000 prepaid customers resulted from the use of pre-activated prepaid cards in the context of special customer acquisition measures in the first quarter of 2007. Historical figures were not adjusted.
c Including Virgin Mobile.
d “Other” includes T-Mobile Macedonia and T-Mobile Crna Gora (Montenegro).

Customer growth in the Mobile Communications business area was sustained in the second quarter of 2007. The total number of T-Mobile customers rose by 2.6 million compared with the first quarter of 2007, with all national companies contributing to this development. T-Mobile Deutschland and T-Mobile USA posted the highest increases: around 900,000 net additions in the United States and 1.3 million in Germany – here, primarily due to a change in the legal situation where prepaid customers can now use their credit for a longer period of time and thus continue to be recorded as customers. The number of contract customers grew by 1.4 million, further improving the proportion of customers with fixed-term contracts in relation to the total customer base.

Compared with the prior-year quarter, overall customer growth once again reached 10.6 percent. Several national companies contributed to this trend, thanks to double-digit customer growth.

ARPU4 showed disparate trends in the second quarter of 2007. Measured in local currency, all national companies except for T-Mobile Deutschland and T-Mobile Austria posted higher ARPU than in the first quarter of 2007. ARPU in Germany remained stable at EUR 18, while in Austria it fell slightly again from EUR 31 to EUR 30. Due to the further weakening of the dollar, ARPU at T-Mobile USA decreased from EUR 39 to EUR 38. On a dollar basis, however, it rose from USD 51 to USD 52.


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Deutsche Telekom First half of 2007  28

 

4 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.


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Deutsche Telekom First half of 2007  29

 

Mobile Communications: Development of operations

 

    Second quarter of 2007     First half of 2007  
   

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Total revenuea

  8,400     8,650     7,856     10.1     17,050     15,431     10.5     32,040  

of which: T-Mobile Deutschland

  1,951     2,009     2,060     (2.5 )   3,960     4,064     (2.6 )   8,215  

of which: T-Mobile USA

  3,468     3,545     3,340     6.1     7,013     6,694     4.8     13,628  

of which: T-Mobile UK

  1,165     1,178     1,122     5.0     2,343     2,154     8.8     4,494  

of which: PTCb

  446     486     n.a.     n.a.     932     n.a.     n.a.     305  

of which: T-Mobile NL

  288     301     282     6.7     589     553     6.5     1,138  

of which: T-Mobile Ac

  310     295     285     3.5     605     502     20.5     1,149  

of which: T-Mobile CZ

  265     282     259     8.9     547     499     9.6     1,043  

of which: T-Mobile Hungary

  265     278     260     6.9     543     517     5.0     1,050  

of which: T-Mobile Croatia

  123     144     138     4.3     267     254     5.1     556  

of which: T-Mobile Slovensko

  118     127     104     22.1     245     204     20.1     429  

of which: Otherd

  49     60     48     25.0     109     90     21.1     198  

EBIT (profit from operations)

  1,066     1,297     1,083     19.8     2,363     2,138     10.5     4,504  

EBIT margin (%)

  12.7     15.0     13.8       13.9     13.9       14,1  

Depreciation, amortization and impairment losses

  (1,455 )   (1,444 )   (1,280 )   (12.8 )   (2,899 )   (2,505 )   (15.7 )   (5,358 )

EBITDAe

  2,521     2,741     2,363     16.0     5,262     4,643     13.3     9,862  

Special factors affecting EBITDAe

  (18 )   (9 )   0     n.a.     (27 )   0     n.a.     (40 )

Adjusted EBITDAe

  2,539     2,750     2,363     16.4     5,289     4,643     13.9     9,902  

of which: T-Mobile Deutschland

  700     741     810     (8.5 )   1,441     1,600     (9.9 )   3,303  

of which: T-Mobile USA

  935     1,029     952     8.1     1,964     1,869     5.1     3,747  

of which: T-Mobile UK

  224     276     170     62.4     500     336     48.8     978  

of which: PTCb

  147     168     n.a.     n.a.     315     n.a.     n.a.     89  

of which: T-Mobile NL

  61     73     26     n.a.     134     47     n.a.     189  

of which: T-Mobile Ac

  112     81     78     3.8     193     137     40.9     331  

of which: T-Mobile CZ

  128     129     115     12.2     257     223     15.2     450  

of which: T-Mobile Hungary

  110     120     100     20.0     230     203     13.3     422  

of which: T-Mobile Croatia

  51     67     62     8.1     118     109     8.3     237  

of which: T-Mobile Slovensko

  58     57     49     16.3     115     100     15.0     173  

of which: Otherd

  24     30     25     20.0     54     47     14.9     105  

Adjusted EBITDA margine (%)

  30.2     31.8     30.1       31.0     30.1       30.9  

Cash capexf

  (915 )   (822 )   (840 )   2.1     (1,737 )   (1,932 )   10.1     (7,247 )

Number of employeesg

  60,614     61,402     52,603     16.7     61,008     52,057     17.2     54,124  

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 Fully consolidated as of November 1, 2006.
c Including first-time consolidation of tele.ring from May 2006.
d Other includes revenues and EBITDA generated by T-Mobile Macedonia and T-Mobile Crna Gora (Montenegro).
e Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to “Reconciliation of pro forma figures,” page 74 et seq.
f Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement.
g Average number of employees.


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Deutsche Telekom First half of 2007  30

 

Mobile Communications: Total revenue

In the first six months of 2007, T-Mobile increased its revenue by over 10 percent to EUR 17.1 billion, the largest contribution of EUR 0.9 billion being made by the first-time inclusion of the Polish company PTC. All national companies again posted higher revenue with the exception of T-Mobile Deutschland, which was impacted by persistent fierce price competition in Germany. Even the increased customer base did not offset the consequences of this price pressure. Revenue at T-Mobile USA continued to grow particularly positively. Measured in euros, however, revenue only grew by a single-digit percentage due to the weak U.S. dollar. Total revenue in this business area in the second quarter of 2007 also rose by 10 percent year-on-year.

Mobile Communications: EBITDA, adjusted EBITDA

Adjusted EBITDA in the Mobile Communications strategic business area increased by EUR 0.6 billion or 13.9 percent year-on-year in the first half of 2007. In the second quarter of 2007, adjusted EBITDA increased by EUR 0.4 billion or over 16 percent to EUR 2.8 billion. As in the case of revenue, the first-time inclusion of PTC contributed to the increase in EBITDA, as did all national companies except for T-Mobile Deutschland. T-Mobile Deutschland reported a decline in EBITDA as a consequence of intense competition. By contrast, T-Mobile UK increased adjusted EBITDA by more than EUR 0.1 billion. The national companies in the Netherlands, the Czech Republic, Hungary, and Slovakia also recorded double-digit growth rates. T-Mobile USA contributed over EUR 1 billion to adjusted EBITDA within one quarter for the first time. The adjusted EBITDA margin for the mobile communications segment rose by 1.7 percentage points year-on-year to 31.8 percent in the second quarter of 2007.

Mobile Communications: EBIT

EBIT (profit from operations) increased by EUR 0.2 billion in the first half of 2007. The main factors contributing to this positive development were the continued growth of T-Mobile USA and the improvement in T-Mobile UK’s margins. This was partly offset by the lower revenue and narrower margins at T-Mobile Deutschland.

Mobile Communications: Personnel

The average number of employees in the Mobile Communications strategic business area rose slightly quarter-on-quarter as a result of the sustained growth in the United States. In comparison with the prior-year period, the first-time inclusion of PTC also increased the number of employees.


Table of Contents

Deutsche Telekom First half of 2007  31


Table of Contents

Deutsche Telekom First half of 2007  32

 

Broadband/Fixed Network.

Broadband/ Fixed Network: Customer development and selected KPIs

 

     June 30, 2007
millions
   Mar. 31, 2007
millions
  

Change
June 30,
2007/

Mar. 31, 2007
%

    Dec. 31, 2006
millions
   Change
June 30,
2007/
Dec. 31, 2006
%
    June 30,
2006
millions
  

Change
June 30,
2007/

June 30, 2006
%

 

Broadband

                  

Lines (total)a,b,c

   13.0    12.4    4.8     11.5    13.0     9.8    32.7  

of which: retail

   9.3    8.8    5.7     8.1    14.8     7.1    31.0  

Domesticd

   11.5    11.1    3.6     10.3    11.7     9.0    27.8  

of which: retail

   8.0    7.6    5.3     7.1    12.7     6.4    25.0  

Internationalb,c,e

   1.4    1.3    7.7     1.2    16.7     0.9    55.6  

of which: Magyar Telekomf

   0.7    0.7    0     0.6    16.7     0.5    40.0  

of which: Slovak Telekom

   0.2    0.2    0     0.2    0     0.1    100.0  

of which: T-Hrvatski Telekom

   0.3    0.3    0     0.2    50.0     0.2    50.0  

Broadband rates (total)c,g

   9.0    8.4    7.1     7.5    20.0     6.0    50.0  

of which: domestic

   7.5    7.0    7.1     6.3    19.0     5.1    47.1  

Narrowband

                  

Lines (total)a,h

   37.7    38.3    (1.6 )   39.0    (3.3 )   40.1    (6.0 )

Domestic

   32.1    32.6    (1.5 )   33.2    (3.3 )   34.2    (6.1 )

Standard analog lines

   23.3    23.7    (1.7 )   24.2    (3.7 )   24.9    (6.4 )

ISDN lines

   8.8    8.9    (1.1 )   9.0    (2.2 )   9.4    (6.4 )

International (Eastern Europe only)f

   5.6    5.7    (1.8 )   5.8    (3.4 )   5.8    (3.4 )

Narrowband rates (total)c,g

   2.7    3.1    (12.9 )   3.1    (12.9 )   3.8    (28.9 )

Wholesale/resale

                  

DSL resalei

   3.7    3.6    2.8     3.4    8.8     2.7    37.0  

of which: domestic

   3.5    3.4    2.9     3.2    9.4     2.5    40.0  

Unbundled local loop linesj

   5.5    5.1    7.8     4.7    17.0     4.0    37.5  

Table includes broadband lines (Germany, Eastern Europe, and Western Europe excluding T-Online France). The total was calculated on the basis of precise figures and rounded to millions. Percentages calculated on the basis of figures shown.

 

a Lines in operation.
b Total of retail and resale.
c T-Online France was deconsolidated at the end of the first half of 2007, accounting for a reduction of 356,000 broadband lines, 644,000 broadband rates and 46,000 narrowband rates as of the end of the second quarter of 2007. Its customer figures are therefore no longer reported; prior-year figures have been adjusted accordingly.
d Broadband lines excluding lines for internal use.
e Includes customers with broadband lines on proprietary network.
f Subscriber-line figures are recorded including Magyar Telekom’s subsidiary MakTel and Crnogorski Telekom (formerly Telekom Montenegro).
g 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 Ya.com.
h Telephone lines excluding internal use and public telecommunications, including wholesale services.
i Definition of resale: Sale of broadband lines based on DSL technology to alternative providers outside the Deutsche Telekom Group. Resale: Included in total number of broadband lines.
j Unbundled local loop lines in Germany only: Deutsche Telekom wholesale service that can be leased by other telecommunications operators without upstream technical equipment in order to offer their own customers a telephone or DSL line.


Table of Contents

Deutsche Telekom First half of 2007  33

 

The Broadband/Fixed Network strategic business area profited substantially from continuing growth in both the national and international broadband markets in the second quarter of 2007. It increased the total number of broadband lines by 3.1 million year-on-year to 13.0 million by systematically marketing complete voice and Internet communication packages. In Germany the number of lines rose by 2.6 million to 11.5 million, with the business area recording an additional 373,000 broadband lines in the retail business in the second quarter. Due to seasonal factors, this growth is lower than in the very successful first quarter of 2007. But at 358,000 additional broadband lines, however, it is higher than the increase in the second quarter of 2006, when complete packages had not yet been introduced.

The performance of the German DSL resale business in the second quarter of 2007 was below the prior quarter. Overall, the number of DSL resale lines rose by 75,000 to 3.5 million. This primarily reflects a shift in customer demand toward complete packages. Demand for unbundled local loop lines also benefited from this change, with the number growing by 330,000 to a total of 5.5 million in the second quarter of 2007.

In May 2007, the Broadband/Fixed Network strategic business area launched its new T-Home brand throughout Germany. As part of this brand strategy, the complete packages were priced more attractively on June 4, 2007, enhanced in specific areas, and combined with longer contract terms. Overall, the number of existing customers with complete packages increased to 7.4 million, up by around 1.7 million on the previous quarter. At more than 70 percent, products and services combining voice and Internet communication (Call & Surf) account for the largest proportion of customers opting for complete packages. The successful sale of higher-quality and more attractively priced products in the broadband business increased the number of German broadband rate customers by a total of 2.4 million to 7.5 million compared with the first half of 2006.

The broadband business also continues to be successful outside Germany. The total number of DSL lines including resale rose by 589,000 compared with the first half of 2006 to 1.4 million. This represents year-on-year growth of 55.6 percent. In Eastern Europe, the number of broadband lines including resale grew by 418,000 year-on-year to 1.2 million in the first half of 2007. In Western Europe, the number of DSL lines in Deutsche Telekom’s own networks was 270,000 for the same period, up by 171,000. The deconsolidation of T-Online France caused a decrease in the number of broadband lines and rates, and narrowband rates.

As expected, the number of narrowband lines continued to decline in the second quarter. In Germany, this decrease was largely due to customer churn in favor of fixed-network competitors. Line losses are primarily the result of customers ordering their first broadband lines. Additional factors are the migration of customers to cable network operators and, increasingly, fixed-mobile substitution. The total number of fixed-network lines in Germany decreased by 516,000 in the second quarter of 2007 to 32.1 million. The loss of narrowband lines was 72,000 lower than in the prior quarter.

The development of call minutes saw contrasting trends in the second quarter of 2007. As in previous quarters, customer retention for all call types in Deutsche Telekom’s own network improved as a result of the successful marketing of calling plans. This is reflected in the increase of 7.1 percentage points in minutes loyalty5 compared with the first half of 2006 to 72.5 percent – at the expense of call-by-call and preselection. The absolute number of call minutes in the Broadband/Fixed Network strategic business area’s network is nevertheless continuing its steep downward trend due to further line losses and growing substitution by mobile communications and VoIP.


5 Broadband/Fixed Network’s own market share based on the overall traffic generated in the PSTN network of the business area.


Table of Contents

Deutsche Telekom First half of 2007  34

 

Broadband/ Fixed Network: Development of operations

 

    Second quarter of 2007     First half of 2007  
   

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Total revenue

  5,832     5,655     6,106     (7.4 )   11,487     12,231     (6.1 )   24,515  

Domestic

  5,146     4,948     5,445     (9.1 )   10,094     10,909     (7.5 )   21,835  

of which: network communications

  2,631     2,556     2,838     (9.9 )   5,187     5,723     (9.4 )   11,240  

of which: wholesale services

  1,156     1,085     1,089     (0.4 )   2,241     2,117     5.9     4,302  

of which: IP/Internet

  632     590     714     (17.4 )   1,222     1,454     (16.0 )   3,000  

of which: data communications

  289     287     324     (11.4 )   576     642     (10.3 )   1,258  

of which: value-added services

  229     205     224     (8.5 )   434     457     (5.0 )   945  

of which: terminal equipment

  76     92     82     12.2     168     156     7.7     333  

International

  698     722     661     9.2     1,420     1,322     7.4     2,680  

EBIT (profit from operations)

  976     929     1,268     (26.7 )   1,905     2,538     (24.9 )   3,356  

EBIT margin (%)

  16.7     16.4     20.8       16.6     20.8       13.7  

Depreciation, amortization and impairment losses

  (908 )   (926 )   (966 )   4.1     (1,834 )   (1,928 )   4.9     (3,839 )

EBITDAa

  1,884     1,855     2,234     (17.0 )   3,739     4,466     (16.3 )   7,195  

Special factors affecting EBITDAa

  14     (50 )   (6 )   n.a.     (36 )   (52 )   30.8     (1,553 )

Adjusted EBITDAa

  1,870     1,905     2,240     (15.0 )   3,775     4,518     (16.4 )   8,748  

Domestic

  1,658     1,656     2,028     (18.3 )   3,314     4,080     (18.8 )   7,903  

International

  214     249     212     17.5     463     438     5.7     845  

Adjusted EBITDA margina (%)

  32.1     33.7     36.7       32.9     36.9       35.7  

Domestic (%)

  32.2     33.5     37.2       32.8     37.4       36.2  

International (%)

  30.7     34.5     32.1       32.6     33.1       31.5  

Cash capexb

  (722 )   (534 )   (773 )   30.9     (1,256 )   (1,491 )   15.8     (3,250 )

Number of employeesc

  100,590     99,185     108,196     (8.3 )   99,888     108,294     (7.8 )   107,006  

Domestic

  81,409     80,411     87,118     (7.7 )   80,910     87,222     (7.2 )   86,315  

International

  19,181     18,774     21,078     (10.9 )   18,978     21,072     (9.9 )   20,691  

Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the business areas Business Customers and Group Headquarters & Shared Services. In previous periods these results were reported under Broadband/Fixed Network. Prior-year figures have been adjusted accordingly.

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 house. 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.

 

a Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to “Reconciliation of pro forma figures,” page 74 et seq.
b Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement.
c Average number of employees.


Table of Contents

Deutsche Telekom First half of 2007  35

 

Broadband/ Fixed Network: Total revenue

Total revenue amounted to EUR 11.5 billion in the first half of 2007. The strategic business area thus recorded a decline of EUR 0.7 billion or 6.1 percent year-on-year. This was mainly attributable to line losses, a decrease in call revenues (both of these in the network communications revenue group), and lower revenue from IP/Internet services.

In Germany, revenue decreased by 7.5 percent or EUR 0.8 billion in the first half of 2007 to EUR 10.1 billion. This was due in particular to lower call revenues and narrowband line losses. Other factors included a decline in interconnection services, price erosion in the broadband market and decreased use of wholesale services by Business Customers. Despite heavy price reductions, the revenue shortfall was partly offset by volume growth in DSL resale and unbundled local loop lines.

Outside Germany, revenue rose by EUR 0.1 billion or 7.4 percent to EUR 1.4 billion. Dynamic broadband growth in the Eastern European subsidiaries in Hungary and Slovakia partly offset the decline in the traditional fixed-network business. Coupled with positive exchange rate effects, revenue rose by 3.2 percent to EUR 1.2 billion. The subsidiaries in Spain and France reported strong growth in broadband lines, boosting revenue by around 37.5 percent to over EUR 0.2 billion.

Broadband/ Fixed Network: Total revenue, domestic

Network communications revenue fell in the face of strong competition by EUR 0.5 billion or 9.4 percent year-on-year to EUR 5.2 billion. Narrowband access revenue remained almost stable at prior-year level, due above all to the successful intensified marketing of calling plans as a component of access line products to increase customer retention. However, calling plans have a negative impact on call revenues as a result of lower average minute prices. This trend is also due to a decline in call minutes as a result of continued line losses. In particular, the provision of lines by other telecommunications operators, the marketing of telephone and broadband lines by cable network operators, and fixed-mobile substitution have a clear impact here.

Wholesale services revenue rose by EUR 0.1 billion or 5.9 percent year-on-year to EUR 2.2 billion. This positive development is primarily attributable to the clear, volume-induced increase in revenue from DSL resale and unbundled local loop lines. Increased renting out of co-location space to competitors also had a positive effect in the first half of 2007. Price cuts imposed by the regulator on interconnection calls had a negative impact, however. These regulatory decisions included the decline in interconnection charges by an average of 10 percent as of June 1, 2006. Price cuts in DSL resale also negatively affected revenue.

Revenue from IP/Internet services decreased in the first half of 2007 by 16.0 percent year-on-year to EUR 1.2 billion. The decrease was driven by falling prices and the migration from narrowband rates to package offers. Volume growth in terms of DSL retail lines was unable to fully offset the price erosion, reflecting in particular the strong demand for flat rate products.

Revenue from data communications declined by 10.3 percent year-on-year to EUR 0.6 billion, primarily due to price cuts affecting products and services provided for other business areas and other carriers.

Value-added services revenue decreased by 5.0 percent compared with the first half of 2006 to EUR 0.4 billion. This was mainly attributable to a volume decline recorded by T-Vote Call.

Terminal equipment revenue increased by 7.7 percent to EUR 0.2 billion. This was due to the successful marketing of the new complete packages, which resulted in higher sales of WLAN routers – also in combination with PSTN devices. The continued decline in the rental business, on the other hand, affected revenue negatively.


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Deutsche Telekom First half of 2007  36

 

Broadband/ Fixed Network: Total revenue, international

At EUR 1.2 billion, revenue generated in Eastern Europe in the first half of 2007 was 3.2 percent up on the prior-year period. This generally positive trend was especially due to exchange rate effects. It was also supported by broadband growth. The traditional fixed-network business continues to be dominated by intense competition in all countries, especially from mobile communications. In addition, there is competition in the consumer business as a result of call- by-call, preselection, and cable providers.

Revenue in the Western European subsidiaries in Spain and France increased by 37.5 percent in the first half of 2007 to EUR 0.2 billion.

Broadband/ Fixed Network: Net revenue

In the first half of 2007, net revenue decreased by EUR 0.5 billion or 4.6 percent to EUR 9.7 billion year-on-year, i.e., the decrease in net revenue was less than the decline in total revenue.

Broadband/ Fixed Network: EBITDA, adjusted EBITDA

Adjusted EBITDA decreased by EUR 0.7 billion to EUR 3.8 billion in the reporting period, mainly due to the decline in revenue in Germany. The cost of expanding the broadband customer base also affected adjusted EBITDA, but was partially offset by efficiency gains and cost cuts.

In Germany, the Broadband/Fixed Network strategic business area recorded adjusted EBITDA of EUR 3.3 billion and an adjusted EBITDA margin of 32.8 percent. Compared with the prior-year period, adjusted EBITDA declined by EUR 0.8 billion, primarily as a result of the decline in revenues from the traditional fixed-network business. The strong demand for the new complete packages also caused a rise in customer acquisition and retention costs resulting from the migration of customers to the new rate plans. In addition to the expenses for the quality initiative, higher costs were incurred, for example, for merchandise as part of broadband customer acquisition. Positive effects resulted, for instance, from measures aimed at cutting rental costs, such as the termination of leases for office space and a more efficient use of existing space. A reduction in revenue-related costs such as telecommunications services and the improvement of IT systems also had a positive impact, as did lower personnel costs as part of workforce reduction measures.

Outside Germany, adjusted EBITDA increased by a total of 5.7 percent to EUR 0.5 billion in the first half of 2007. While adjusted EBITDA in Eastern Europe was up by 4.9 percent, it decreased by 1.4 percent in Western Europe due to marketing and sales measures as well as customer acquisition costs.

Broadband/ Fixed Network: EBIT

In the first half of 2007, EBIT (profit from operations) decreased by 24.9 percent year-on-year to EUR 1.9 billion, mainly due to the same effects as those affecting EBITDA. A decrease in depreciation, amortization, and impairment losses of 4.9 percent had an offsetting effect.

Broadband/ Fixed Network: Personnel

The workforce reduction program launched in 2006 used socially responsible measures to reduce the average number of staff in the Broadband/Fixed Network strategic business area. In the first half of 2007, the headcount fell by 7.8 percent year-on-year to a total of 99,888. In Germany, the workforce was reduced by 6,312 year-on-year to 80,910. Outside Germany, the average number of employees declined by 2,094. The Eastern European workforce decreased by 2,025 as a consequence of the successful improvement of performance processes and service outsourcing. The number of employees in Western Europe decreased by 69 year-on-year.


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Deutsche Telekom First half of 2007  37

 

Business Customers.

Business Customers: Selected KPIs

 

     June 30, 2007    Mar. 31, 2007   

Change
June 30,
2007/
Mar. 31,
2007

%

   Dec. 31,
2006
  

Change
June 30,
2007/
Dec. 31,
2006

%

    June 30,
2006
  

Change
June 30,
2007/

June 30,
2006

%

 

Enterprise Servicesa

                   

Computing & Desktop Services

                   

Number of servers managed and serviced (units)

   36,082    35,767    0.9    33,037    9.2     32,761    10.1  

Number of workstations managed and serviced (millions)

   1.43    1.34    6.7    1.36    5.1     1.36    5.1  

Systems Integrationb

                   

Hours billedc (millions)

   5.8    3.0    n.a.    10.9    n.a.     5.6    3.6  

Utilization rated (%)

   80.2    79.5    0.7p    80.4    (0.2 )p   79.8    0.4p  

Business Servicesa

                   

Voice revenuec (millions of €)

   780    384    n.a.    1,666    n.a.     848    (8.0 )

Data revenue (legacy/IP)c (millions of €)

   1,073    531    n.a.    2,475    n.a.     1,171    (8.4 )

IT revenuec (millions of €)

   246    109    n.a.    622    n.a.     308    (20.1 )

a Percentages calculated on the basis of figures shown.
b Domestic: excluding changes in the composition of the Group.
c Cumulative figures at the balance sheet date.
d Ratio of average number of hours billed to maximum possible hours billed per period.

Activities in the Business Customers strategic business area continued to be marked by fierce competition in the second quarter of 2007. This is reflected in the figures of both T-Systems Enterprise Services and T-Systems Business Services. As part of a systematic expansion of its international business, T-Systems succeeded in gaining new, high-volume orders, particularly from outside Germany. These did not offset developments in Germany, however, with the result that the volume of new orders was 0.8 percent lower in the first half of 2007 than in the prior-year period. Despite difficult market conditions, T-Systems was able to expand its Systems Integration operations and bill more hours. In the same period, Computing & Desktop Services increased the number of workstations managed and serviced outside the Deutsche Telekom Group. By contrast, the continued positive development of IP activities within Business Services did not offset the decline in data communication services.


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Deutsche Telekom First half of 2007  38

 

Business Customers: Development of operations

 

    Second quarter of 2007     First half of 2007  
   

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007

millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Total revenue

  2,906     2,962     3,208     (7.7 )   5,868     6,271     (6.4 )   12,869  

Enterprise Services

  1,941     1,992     2,119     (6.0 )   3,933     4,115     (4.4 )   8,533  

Business Services

  965     970     1,089     (10.9 )   1,935     2,156     (10.3 )   4,336  

EBITa (profit (loss) from operations)

  44     34     48     (29.2 )   78     160     (51.3 )   (835 )

Special factors affecting EBITa

  0     (24 )   (54 )   55.6     (24 )   (82 )   70.7     (1,180 )

Adjusted EBITa

  44     58     102     (43.1 )   102     242     (57.9 )   345  

Adjusted EBIT margina (%)

  1.5     2.0     3.2       1.7     3.9       2.7  

Depreciation, amortization and impairment losses

  (217 )   (222 )   (238 )   6.7     (439 )   (455 )   3.5     (946 )

EBITDAb

  261     256     286     (10.5 )   517     615     (15.9 )   111  

Special factors affecting EBITDAb

  0     (24 )   (54 )   55.6     (24 )   (82 )   70.7     (1,180 )

Adjusted EBITDAb

  261     280     340     (17.6 )   541     697     (22.4 )   1,291  

Adjusted EBITDA marginb (%)

  9.0     9.5     10.6       9.2     11.1       10.0  

Cash capexc

  (273 )   (149 )   (201 )   25.9     (422 )   (356 )   (18.5 )   (795 )

Number of employeesd

  56,776     56,218     57,802     (2.7 )   56,497     55,166     2.4     56,595  

Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the business areas Business Customers and Group Headquarters & Shared Services. In previous periods these results were reported under Broadband/Fixed Network. Prior-year figures have been adjusted accordingly.

 

a EBIT is profit/loss from operations as shown in the consolidated income statement. For a detailed explanation of the special factors affecting EBIT, adjusted EBIT, and the adjusted EBIT margin, please refer to “Reconciliation of pro forma figures,” page 76 et seq.
b Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to “Reconciliation of pro forma figures,” page 74 et seq.
c Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement. In the first half of 2007 these include outflows totaling EUR 112 million for parts of Centrica PLC taken over by T-Systems UK as part of an asset deal.
d Average number of employees.

Business Customers: Total revenue

In the first half of 2007, the Business Customers strategic business area generated total revenue of EUR 5.9 billion, a year-on-year decrease of 6.4 percent. The primary reasons are lower revenue from telecommunications services for both multinational business customers and customers in the Business Services unit. Lower revenues from PC workstation-related services within the Deutsche Telekom Group also resulted in revenue shortfalls in Computing & Desktop Services.

By contrast, the international business continued to perform positively. T-Systems generated 9.9 percent year-on-year revenue growth outside Germany in the first half of 2007. This growth is attributable in particular to the successful, systematic implementation of the business area’s internationalization strategy, as evidenced in the first half of 2007 by the influx of new orders from outside Germany. In Germany, revenues declined 9.9 percent, reflecting the continued erosion of prices.


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Deutsche Telekom First half of 2007  39

 

Business Customers: Net revenue

Business Customers generated revenue of EUR 4.4 billion in the first half of 2007 from business with customers outside the Deutsche Telekom Group, a decrease of 2.9 percent year-on-year. The 3.6 percent improvement in net revenue in Enterprise Services was not enough to fully offset the 10.7 percent decline in net revenue in Business Services.

The growth in net revenue at Enterprise Services was the main factor in the positive development at Systems Integration and, to a lesser extent, an improvement in the Computing & Desktop Services area, despite continued price pressure. However, it was not enough to offset the negative trend in telecommunications services for multinational business customers and customers of the Business Services unit. Growth in the IP segment failed to make up for the massive drop in prices for voice and data communications.

Business Customers: EBITDA, adjusted EBITDA

In the first half of 2007, the Business Customers area generated EBITDA of EUR 0.5 billion. This 15.9 percent year-on-year decrease is mainly attributable to continued high price and competitive pressure. Lower margins and sustained cost pressure among business customers also had a negative impact. Adjusted EBITDA also amounted to EUR 0.5 billion, a decline of 22.4 percent year-on-year.

Business Customers: EBIT, adjusted EBIT

In the first half of 2007, EBIT (profit from operations) was EUR 78 million, a decrease of 51.3 percent compared to the same period last year. This is primarily due to a decline in revenue. Adjusted EBIT amounts to EUR 102 million, which is 57.9 percent less than in the previous year.

For both EBIT and adjusted EBIT, the decline compared with the prior-year period slowed in the second quarter of 2007. This reflects the successful implementation of the various cost-cutting and efficiency enhancement programs.

Business Customers: Personnel

The average headcount within the Business Customers strategic business area increased slightly, by 2.4 percent, compared with the prior-year period. This growth is largely attributable to the inclusion of gedas since April 2006.


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Deutsche Telekom First half of 2007  40

 

Group Headquarters & Shared Services.

LOGO

 


a Real Estate Services = DeTeImmobilien, Deutsche Telekom Immobilien und Service GmbH, DFMG Deutsche Funkturm GmbH, GMG Generalmietgesellschaft mbH, PASM Power and Air Condition Solution Management GmbH & Co. KG, DeTe Immobilien-Hungary Szolgáltató z.R.t., and DeTeImmobilien-Slovakia s.r.o.
b Including Vivento Customer Services GmbH (VCS) and Vivento Technical Services GmbH (VTS).
c Primarily Deutsche Telekom International Finance B.V., T-Venture Holding GmbH, DeTe Assekuranz – Deutsche Telekom Assekuranzvermittlungsgesellschaft mbH, Deutsche Telekom Training GmbH, headquarters and shared services functions of Magyar Telekom as well as Fachhochschule Leipzig, Human Resources Management.

Group Headquarters & Shared Services performs strategic and cross-divisional management functions for the Group, as well as those operating activities that are not directly related to the core business of the units. The Shared Services unit mainly consists of Real Estate Services, whose activities include the management of Deutsche Telekom AG’s real estate portfolio in Germany; DeTeFleetServices GmbH, a full-service provider of fleet management and mobility services; and Vivento. Since the beginning of the 2007 financial year, Group Headquarters & Shared Services has also included the shared services and headquarters functions of Magyar Telekom. Until the end of 2006, these had been reported in the Broadband/Fixed Network strategic business area together with the activities on the Hungarian business customers market. The integration of Magyar Telekom’s business customer activities in Hungary into the Business Customers strategic business area also resulted in the reclassification of this company’s shared services and headquarters functions.

In the first half of 2007, Group Headquarters & Shared Services generated proceeds of around EUR 0.4 billion from the sale of additional real estate as part of its program to dispose of non-core assets. Moreover, Deutsche Telekom sold the remaining shares of Sireo Real Estate Asset Management GmbH to co-owner Corpus Immobiliengruppe GmbH & Co. KG with the approval of the German Federal Cartel Office.

Vivento continued its sale of business models in the first half of 2007 to support the reduction of personnel within the Group. As of April 1, 2007, Vivento sold Vivento Customer Services GmbH’s call centers in Suhl and Cottbus, transferring operations to walter ComCare. Another five Vivento Customer Services GmbH sites were transferred to the arvato group as of May 1, 2007, also by means of a transfer of operations. These were the call centers in Erfurt, Neubrandenburg, Potsdam, Rostock and Stuttgart. Altogether, some 1,200 employees moved to different employers under the transfers in the first half of 2007.


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Deutsche Telekom First half of 2007  41

 

Vivento Interim Services GmbH, a wholly owned subsidiary of Deutsche Telekom AG, has been successfully supporting the Group’s workforce restructuring for a year. To date, the company has only employed junior staff of Deutsche Telekom who were unable to find permanent employment after successfully completing their final examinations. By the end of June 2007, some 450 employees had been engaged throughout the Group under temporary contracts to fill short- term gaps that had resulted from the staff restructuring measures and could not be filled by transferees. In order to expand the successful model, Deutsche Telekom transferred Vivento Interim Services GmbH into a joint venture with Manpower at the end of June 2007, which then began operations in early July 2007. The transformation of Vivento Interim Services GmbH into a joint venture and its integration into the Manpower group has created a specialist for flexible personnel placement in the telecommunications industry.

Apart from the sale of business models, Vivento continues to focus on placing personnel and expanding its own employment options. The workforce at Vivento totaled approximately 11,100 employees at the end of the second quarter of 2007: around 600 are Vivento’s own staff and management, some 5,500 are employees of the Vivento business lines (of which around 3,600 are in the call center unit and around 1,900 at Vivento Technical Services GmbH), and approximately 5,000 are transferees. Of these, around 3,100 were engaged on a temporary basis at the reporting date. In the first half of 2007 around 3,600 staff left Vivento. This means that since its formation, some 26,900 employees have found new jobs outside Vivento. Vivento took on around 1,200 employees during the reporting period, bringing the total number of Deutsche Telekom staff transferred to Vivento since its formation to around 38,000. The employment rate remained high in the first half of 2007. During the reporting period, around 84 percent of the approximately 10,500 employees (excluding Vivento’s own staff and management) were in employment or undergoing training.

Group Headquarters & Shared Services: Development of operations

 

     Second quarter of 2007     First half of 2007  
    

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Total revenue

   952     988     914     8.1     1,940     1,806     7.4     3,758  

EBIT (loss from operations)

   (250 )   (215 )   (294 )   26.9     (465 )   (412 )   (12.9 )   (2,138 )

EBIT margin (%)

   (26.3 )   (21.8 )   (32.2 )     (24.0 )   (22.8 )     (56.9 )

Depreciation, amortization and impairment losses

   (182 )   (189 )   (197 )   4.1     (371 )   (375 )   1.1     (947 )

EBITDAa

   (68 )   (26 )   (97 )   73.2     (94 )   (37 )   n.a.     (1,191 )

Special factors affecting EBITDAa

   (135 )   (5 )   (3 )   (66.7 )   (140 )   (10 )   n.a.     (730 )

Adjusted EBITDAa

   67     (21 )   (94 )   77.7     46     (27 )   n.a.     (461 )

Adjusted EBITDA margina (%)

   7.0     (2.1 )   (10.3 )     2.4     (1.5 )     (12.3 )

Cash capexb

   (117 )   (82 )   (106 )   22.6     (199 )   (221 )   10.0     (508 )

Number of employeesc

   29,308     27,241     30,793     (11.5 )   28,275     30,892     (8.5 )   30,755  

of which: at Viventod

   13,500     11,100     14,800     (25.0 )   11,100     14,800     (25.0 )   13,500  

Since January 1, 2007, reporting of Magyar Telekom has included a further breakdown of results into the business areas Business Customers and Group Headquarters & Shared Services. In previous periods these results were reported under Broadband/Fixed Network. Prior-year figures have been adjusted accordingly.

 

a Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to “Reconciliation of pro forma figures,” page 74 et seq.
b Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement.
c Average number of employees.
d Number of employees at the balance sheet date, including Vivento’s own staff and management; figures rounded.


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Deutsche Telekom First half of 2007  42

 

Group Headquarters & Shared Services: Total revenue

Group Headquarters & Shared Services in the first six months of 2007 continued its positive revenue trend, with total revenue up 7.4 percent year-on-year. A key factor driving this trend was revenue growth at Vivento as a result of its expansion in the call center field and at Vivento Technical Services GmbH. Real estate operations also experienced a positive revenue trend, due in large part to increased revenue at Power and Air Condition Solution Management GmbH & Co. KG and Deutsche Funkturm GmbH. In addition, the real estate group had higher revenues from the strategic business areas for facility management services, particularly for co-location. Revenue from DeTeFleetServices GmbH’s fleet business also rose due to higher proceeds from vehicle sales as part of a regular replacement process and due to a higher average number of vehicles in the fleet. This continued positive trend was partially offset by reductions in rental charges for technical facilities and more efficient use of leased floor space by the strategic business areas.

Group Headquarters & Shared Services: EBITDA, adjusted EBITDA

Adjusted EBITDA improved substantially in the first half of 2007, benefiting in particular from revenue growth at Vivento as a result of productivity increases and from a reduced headcount at Vivento. In addition, expenses related to the transfer of Telekom Direkt from Vivento to the Broadband/Fixed Network strategic business area affected the prior-year period. As in the first quarter of 2007, higher proceeds from real estate sales and lower personnel costs due to headcount reductions in the real estate area also helped increase adjusted EBITDA. Income from the reversal of a provision in connection with the housing assistance program (Wohnungsfürsorge) effected the prior-year period, after arbitration proceedings between Deutsche Telekom AG and Deutsche Post AG were resolved. A decline in rental revenues, for which higher revenue in the low-margin facility management business failed to compensate, also had a negative effect on adjusted EBITDA. Special factors affecting EBITDA rose by EUR 130 million year-on-year. These mainly included expenses for the sale of further call center locations of Vivento Customer Services GmbH. In the prior-year period, the special factors were mainly expenses for severance payments and proceeds from transfer payments to Vivento.

Group Headquarters & Shared Services: EBIT

EBIT (profit/loss from operations) decreased by EUR 53 million compared with the prior-year period, primarily due to the same effects that influenced adjusted EBITDA and special factors affecting EBITDA.

Group Headquarters & Shared Services: Personnel

The average number of employees during the reporting period was 28,275, a reduction of 2,617 compared with the first half of 2006. This reflects in particular the ongoing headcount reduction at Vivento.


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Deutsche Telekom First half of 2007  43

 

Risks and opportunities.

This section provides an overview of important new aspects of risks and opportunities since the publication of Deutsche Telekom AG’s 2006 Annual Report.

Legal.

 

 

In the suit for damages filed by Dr. Harisch claiming he had paid excessive rates to Deutsche Telekom AG for subscriber data, the plaintiff has increased his claim by approximately EUR 283 million. The amount in dispute has thus risen to approximately EUR 612 million.

 

 

In the arbitration proceedings filed by the Federal Republic of Germany against Deutsche Telekom AG regarding, among other issues, disputes relating to the truck toll collection system, the six-month notice period for the Federal Republic’s contractual right of termination in the event of the final operating permit not being granted described in the Annual Report has expired. The right of termination can therefore no longer be exercised.

Deutsche Telekom intends to defend itself and pursue its claims resolutely in these court and arbitration proceedings.

For additional explanations regarding the risk and opportunity situation, please refer to the other risks and opportunities identified in the management report as of December 31, 2006, and the Annual Report on Form 20-F. Readers are also referred to the Disclaimer at the end of this report.


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Deutsche Telekom First half of 2007  44

 

Outlook.

Significant events after the balance sheet date (June 30, 2007).

Group

Deutsche Telekom makes offer for Orange NL.

 

 

Deutsche Telekom AG has submitted an offer to France Télécom to acquire its mobile and broadband operations in the Netherlands. The transaction requires the approval of the EU anti-trust authorities and the conclusion of the worker’s council consultation procedure. The acquisition of the Dutch mobile carrier is in line with Deutsche Telekom AG’s strategy to grow abroad with mobile communications.

Deutsche Telekom signs contract for the sale of T-Online Spain.

 

 

Deutsche Telekom AG has reached an agreement with France Télécom España S.A. for the sale of its Spanish Internet company T-Online Spain S.A.U. T-Online Spain S.A.U. has been shown in the Broadband/Fixed Network strategic business area. France Télécom España S.A. will acquire all shares of the Deutsche Telekom subsidiary, which provides Internet services under the Ya.Com brand in Spain. This sale forms part of the “Focus, fix and grow” strategy launched on March 1, 2007. The Spanish anti-trust authorities approved the sale on July 27, 2007.

2008 corporate tax reform – significant reduction in effective tax burden on German companies.

 

 

On July 6, 2007, the Bundesrat, the chamber representing the federal states, approved the Corporate Tax Reform Act 2008 that the German national parliament, the Bundestag, had already resolved on May 25, 2007. In particular, the 2008 corporate tax reform now passed reduces the corporate income tax rate from 25 percent to 15 percent effective January 1, 2008. This will lower the overall tax burden on profits generated in Germany by corporations like Deutsche Telekom from around 39 percent at present to approximately 30 percent. In the third quarter of 2007, the carrying amounts for domestic deferred tax assets and liabilities must be adjusted to take account of the new rate of taxation. This will result in a one-time deferred tax expense which, however, does not imply additional tax payments and attending negative liquidity and interest effects.

Second brand Congstar launched.

 

 

On July 17, 2007, Deutsche Telekom AG launched its second brand Congstar for wireless telephone and Internet services. The brand uses Deutsche Telekom’s networks as an independent company, which means it pays market prices for wholesale services provided by Deutsche Telekom AG like other market players. Congstar’s business model is centered on the less assistance-intensive sale of products via the Internet and call centers, and focuses on modular solutions for mobile and Internet services. A basic rate for both mobile and Internet packages can be enhanced to suit individual needs – by adding different flat rates for voice telephony or messaging, for example. One of the main ways Congstar differs from the brands of other providers is that there is no subscription fee and no minimum revenue requirement. There is also no minimum contract term. All products can be cancelled at the end of the month with two weeks’ notice.

Deutsche Telekom commits to climate protection.

 

 

Deutsche Telekom has signed the Caring for Climate statement together with some 100 other multinationals. The voluntary commitment to reducing CO2 emissions was officially presented at the Global Compact Leaders Summit 2007 in Geneva, to which UN Secretary-General Ban Ki-moon had invited companies on July 5 and 6, 2007. In addition to the reduction in CO2 emissions, the goals are to enhance energy efficiency and develop strategies to minimize the risks of climate change.


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Deutsche Telekom First half of 2007  45

 

Mobile Communications

T-Mobile cuts roaming prices in time for the start of the summer holiday period.

 

 

T-Mobile was the first mobile communications provider in Germany to comply with the EU Commission’s new roaming regulations ahead of the deadline. With T-Mobile Weltweit over 10 million customers have been benefiting from the new roaming rates since July 1, 2007. The T-Mobile Weltweit calling plan is available to both contract and prepaid customers and can be used in all networks within the EU, as well as in Croatia, Gibraltar, La Réunion, and the French Caribbean.

T-Mobile’s structure simplified.

 

 

On July 10, 2007, upon its entry in the commercial register, the reorganization of the T-Mobile parent company under corporate law took effect, simplifying the structure of the T-Mobile group removing one level. The new parent company of the T-Mobile group is T-Mobile International AG, which was already the home of the board of management of T-Mobile. Simplifying the legal structure of the T-Mobile group means that tax gains can be offset against tax losses or losses carried forward quicker than before, which will have a positive effect on liquidity and not have an effect on profit or loss in the second half of 2007.

T-Mobile USA honored again for customer care.

 

 

For the sixth time in succession, J.D. Power has honored T-Mobile USA as the wireless carrier with the best customer service. T-Mobile USA’s customer care score was significantly higher than that of the carrier ranked second. The semi-annual study carried out by the prominent U.S. market research institute is based on 10,500 interviews with contract customers who are asked to rate factors such as satisfaction with first contact resolution, short hold times, and also satisfaction with the automated response system.

Broadband/ Fixed Network

One-time charges for local loop, line sharing, and leased lines cut by the Federal Network Agency.

 

 

New, lower one-time charges that competitors will have to pay to Deutsche Telekom became effective on July 1, 2007. Deutsche Telekom AG will be allowed to demand a provisioning charge of EUR 36.19 for the local loop and a cancellation charge of EUR 5.21. Another set of changes applies to provisioning and cancellation fees as well as the monthly charge for joint access to the local loop, otherwise known as line sharing. From July 1, 2007, a monthly access charge of EUR 1.91 has been set for line sharing. The charge for the most common provisioning model, a new connection without work at the cable distributor or the end customer’s premises, will be EUR 60.82. The third set of charges that received new approval were the one-time provisioning charges and the monthly charges for carrier leased lines, which competitors need to complete their own networks. The charges in connection with the local loop and line sharing were approved until the end of June 2008, the charges for leased lines until the end of March 2008.

Business Customers

alphyra Group outsources all data centers and terminal operations to T-Systems.

 

 

The Irish-based alphyra Group is outsourcing the entire operation of its over 40,000 payment terminals in Germany to T-Systems. The contract runs over a term of ten years and, with a volume of around EUR 50 million, includes complete network infrastructure and data center services as well as logistics services for the terminals. alphyra’s goal is to standardize its ICT systems, generate synergy effects, and focus exclusively on its core business. One of alphyra’s lines of business is Top-Up, which enables customers to load prepaid credit onto their mobile phones at payzone terminals in chain stores. T-Systems will connect all of the terminals to the data center in Magdeburg via a standardized network platform.


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Deutsche Telekom First half of 2007  46

 

T-Systems runs core systems for SCHUFA.

 

 

T-Systems’ existing master agreement with SCHUFA Holding AG will be updated and extended by an operations agreement. The total volume will be EUR 70 million. T-Systems will take over the management and monitoring of business processes for the next seven years. A new IT platform will provide 99.9 percent availability of all data for 24/7 operation for the around 80 million inquiries made every year by the 4,500 or so contract customers such as banks, mail order and telecommunications companies.

Jet Aviation relies on T-Systems for its continuing expansion plans.

 

 

T-Systems has taken over the operation of Jet Aviation’s SAP infrastructure in Europe, North and South America as well as the Middle and Far East. Jet Aviation is one of the world’s leading business aviation companies and is based in Switzerland. T-Systems will provide the required computing power for all SAP applications for a period of five years, making the company one of the largest providers in this sector worldwide. In addition, T-Systems is responsible for the central resource center that handles technical questions from SAP users at Jet Aviation.


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Deutsche Telekom First half of 2007  47

 

Development of revenue and profits.6

Market expectations

The encouraging growth in Deutsche Telekom’s international markets continues unabated, particularly in the key markets of the United States and the United Kingdom. Deutsche Telekom’s domestic markets are still dominated by extremely intense competition and price erosion in the telecommunications market as a whole, both for consumer DSL and business voice telephony, and for mobile communications.

Consequences for corporate management

Deutsche Telekom is responding to the challenges of rapid technological change and strong competition in the telecommunications industry with specific measures to support the long-term sustainability of customer relationships and thus revenue and profit development. In particular, the sustainable improvement of the service culture in customer contact and investments in future product areas, as well as simplified price structures, will safeguard Deutsche Telekom’s customer relationships and revenues. Additional cost reductions, achieved with the help of increased rationalization investments, such as in new, more cost-efficient IP-based networks, will result in a corresponding development of profit and therefore support the long-term sustainability of cash flow. These measures assist Deutsche Telekom in its continuing goal of offering its shareholders an attractive dividend. The immense changes in Deutsche Telekom’s market environment – in particular the rapid technological change – are forcing it to adjust its workforce structure by cutting jobs in a socially responsible manner. The workforce reduction will be implemented using voluntary instruments such as partial retirement, severance and voluntary redundancy payments and early retirement.

General statement on business development in the Group

In view of the expected market situation in the individual business areas, Deutsche Telekom aims to again achieve positive results for the entire Group.

It is vital to the Group’s long-term success that it remain on a sound financial footing. This includes, for example, maintaining a net debt to adjusted EBITDA ratio of between 2 and 3, a liquidity reserve of at least 40 percent of net debt, and appropriate gearing (ratio of net debt to shareholders’ equity) of between 0.8 and 1.2.


6 Outlook contains forward-looking statements that reflect management’s current views with respect to future events. Words such as “assume,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “plan,” “project,” “should,” “want” and similar expressions identify forward-looking statements. These forward-looking statements include statements on the expected development of net revenues, adjusted EBITDA, liquidity reserves, gearing, and personnel numbers for 2007. Such statements are subject to risks and uncertainties, such as an economic downturn in Europe or North America, changes in exchange and interest rates, the outcome of disputes in which Deutsche Telekom is involved, and competitive and regulatory developments. Some uncertainties or other imponderabilities that might influence Deutsche Telekom’s ability to achieve its objectives are described in the “Forward Looking Statements” and “Risk factors” sections of the Annual Report on Form 20-F and in the Disclaimer at the end of this report. Should these or other uncertainties and imponderabilities materialize or the assumptions underlying any of these statements prove incorrect, the actual results may be materially different from those expressed or implied by such statements. Deutsche Telekom does not guarantee that its forward-looking statements will prove correct. The forward-looking statements presented here are based on the current structure of the Group, without regard to significant acquisitions, dispositions or business combinations Deutsche Telekom may choose to undertake. These statements are made with respect to conditions as of the date of this document’s publication. Without prejudice to existing obligations under capital market law, Deutsche Telekom does not intend or assume any obligation to update forward-looking statements.

Mobile Communications

T-Mobile expects mobile communications revenues to grow in 2007. Major drivers will be the expected further growth at T-Mobile USA and T-Mobile UK and the first-time consolidation of the Polish subsidiary PTC for a full financial year. In view of continuing pressure on prices and increased sales costs, the business area expects a slight year-on-year deterioration of EBITDA for European markets (excluding PTC) as a whole, which is likely to be more than offset by further increases in EBITDA in the United States and the full consolidation of PTC. Regulatory decisions and future trends in exchange rates for the U.S. dollar and sterling against the euro may affect T-Mobile’s revenues and profits in euros.


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Deutsche Telekom First half of 2007  48

 

Broadband/ Fixed Network

In the DSL business, the Broadband/Fixed Network business area will defend its market share and expects an increase in the number of broadband lines, also driven by strong market growth in this segment. Additionally, the business area wants to establish its triple-play products. A major element of this strategy will be the expansion of the high-speed infrastructure.

In 2007, the traditional fixed-network business will continue to be adversely affected by competition-induced loss of market share, fixed-mobile substitution, price cuts due to regulatory requirements, and market-related price erosion. This will be set against efficiency measures that have been implemented and in some cases already realized. Broadband/Fixed Network has launched a quality and service campaign in 2007 to safeguard and defend the core voice and access business. Preparations are also underway to migrate operations from the old PSTN to new IP-based technology in order to introduce innovative and competitive IP access.

Based on these assumptions, the Broadband/Fixed Network business area expects the downward earnings trend to continue in 2007.

Business Customers

The Business Services unit will focus on safeguarding its telecommunications business in a highly competitive market. The focus in the core telecommunications business (voice, data, IP) is on winning back customers. The Enterprise Services unit plans to expand its market share in the telecommunications business through integrated IT and telecommunications sales activities. In the IT business, growth is to be generated mainly by expanding the outsourcing business. The Business Customers area expects the ongoing intense pressure on prices and from competition to continue to have a decisive impact on revenues in 2007.

Group Headquarters & Shared Services

Earnings at Group Headquarters & Shared Services are influenced largely by Vivento (including the development of the business models and the realization of internal and external employment opportunities) and by continued staff restructuring in the Group.


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Deutsche Telekom First half of 2007  49

 

Interim consolidated financial statements.

Consolidated income statement.

 

     Second quarter of 2007     First half of 2007  
    

Q2

2007
millions of €

   

Q2

2006a
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006a
millions of €

    Change %    

FY

2006
millions of €

 

Net revenue

   15,575     15,130     2.9     31,028     29,972     3.5     61,347  
                                          

Cost of sales

   (8,590 )   (8,057 )   (6.6 )   (17,210 )   (15,878 )   (8.4 )   (34,755 )

Gross profit

   6,985     7,073     (1.2 )   13,818     14,094     (2.0 )   26,592  
                                          

Selling expenses

   (4,039 )   (4,014 )   (0.6 )   (8,012 )   (7,788 )   (2.9 )   (16,410 )

General and administrative expenses

   (1,163 )   (1,101 )   (5.6 )   (2,228 )   (2,178 )   (2.3 )   (5,264 )

Other operating income

   502     256     96.1     888     606     46.5     1,257  

Other operating expenses

   (242 )   (129 )   (87.6 )   (628 )   (331 )   (89.7 )   (888 )

Profit from operations

   2,043     2,085     (2.0 )   3,838     4,403     (12.8 )   5,287  
                                          

Finance costs

   (685 )   (602 )   (13.8 )   (1,343 )   (1,260 )   (6.6 )   (2,540 )

Interest income

   69     94     (26.6 )   116     167     (30.5 )   297  

Interest expense

   (754 )   (696 )   (8.3 )   (1,459 )   (1,427 )   (2.2 )   (2,837 )

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

   13     (49 )   n.a.     16     (17 )   n.a.     24  

Other financial income (expense)

   (110 )   (101 )   (8.9 )   (204 )   (25 )   n.a.     (167 )

Profit (loss) from financial activities

   (782 )   (752 )   (4.0 )   (1,531 )   (1,302 )   (17.6 )   (2,683 )
                                          

Profit before income taxes

   1,261     1,333     (5.4 )   2,307     3,101     (25.6 )   2,604  
                                          

Income taxes

   (519 )   (207 )   n.a.     (990 )   (777 )   (27.4 )   970  

Profit after income taxes

   742     1,126     (34.1 )   1,317     2,324     (43.3 )   3,574  
                                          

Profit (loss) attributable to minority interests

   134     108     24.1     250     216     15.7     409  

Net profit (profit (loss) attributable to equity holders of the parent)

   608     1,018     (40.3 )   1,067     2,108     (49.4 )   3,165  

Earnings per share

 

     Second quarter of 2007     First half of 2007
     Q2
2007
   Q2
2006a
   Change %     H1
2007
   H1
2006a
   Change %     FY
2006

Earnings per share/ADS

                  

Basic (€)

   0.14    0.24    (41.7 )   0.25    0.49    (49.0 )   0.74

Diluted (€)

   0.14    0.24    (41.7 )   0.25    0.49    (49.0 )   0.74

a Prior-year figures have been adjusted due to adoption of IAS 19.93A.


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Deutsche Telekom First half of 2007  50

 

Consolidated balance sheet.

 

      June 30,
2007
millions of €
    Dec. 31,
2006
millions of €
    Change
millions of €
    Change %     June 30,
2006a
millions of €
 

Assets

          

Current assets

   15,241     15,951     (710 )   (4.5 )   18,659  

Cash and cash equivalents

   2,146     2,765     (619 )   (22.4 )   5,667  

Trade and other receivables

   7,582     7,753     (171 )   (2.2 )   7,280  

Current recoverable income taxes

   442     643     (201 )   (31.3 )   489  

Other financial assets

   1,474     1,825     (351 )   (19.2 )   1,639  

Inventories

   1,138     1,129     9     0.8     1,289  

Non-current assets and disposal groups held for sale

   705     907     (202 )   (22.3 )   455  

Other assets

   1,754     929     825     88.8     1,840  

Non-current assets

   109,267     114,209     (4,942 )   (4.3 )   108,180  

Intangible assets

   56,255     58,014     (1,759 )   (3.0 )   51,961  

Property, plant and equipment

   43,961     45,869     (1,908 )   (4.2 )   45,821  

Investments accounted for using the equity method

   155     189     (34 )   (18.0 )   1,857  

Other financial assets

   624     657     (33 )   (5.0 )   633  

Deferred tax assets

   7,778     8,952     (1,174 )   (13.1 )   7,302  

Other assets

   494     528     (34 )   (6.4 )   606  
                              

Total assets

   124,508     130,160     (5,652 )   (4.3 )   126,839  
                              

Liabilities and shareholders’ equity

          

Current liabilities

   22,024     22,088     (64 )   (0.3 )   23,049  

Financial liabilities

   9,517     7,683     1,834     23.9     10,517  

Trade and other payables

   5,559     7,160     (1,601 )   (22.4 )   5,852  

Income tax liabilities

   533     536     (3 )   (0.6 )   855  

Provisions

   2,750     3,093     (343 )   (11.1 )   2,539  

Liabilities directly associated with non-current assets held for sale

   103     17     86     n.a.     13  

Other liabilities

   3,562     3,599     (37 )   (1.0 )   3,273  

Non-current liabilities

   55,272     58,402     (3,130 )   (5.4 )   55,417  

Financial liabilities

   36,106     38,799     (2,693 )   (6.9 )   37,166  

Provisions for pensions and other employee benefits

   6,199     6,167     32     0.5     6,305  

Other provisions

   2,921     3,174     (253 )   (8.0 )   1,865  

Deferred tax liabilities

   7,504     8,083     (579 )   (7.2 )   8,107  

Other liabilities

   2,542     2,179     363     16.7     1,974  

Liabilities

   77,296     80,490     (3,194 )   (4.0 )   78,466  

Shareholders’ equity

   47,212     49,670     (2,458 )   (4.9 )   48,373  

Issued capital

   11,164     11,164     —       —       11,325  

Capital reserves

   51,513     51,498     15     0.03     51,990  

Retained earnings including carryforwards

   (16,864 )   (16,977 )   113     0.7     (17,257 )

Other comprehensive income

   (2,770 )   (2,275 )   (495 )   (21.8 )   (2,636 )

Net profit

   1,067     3,165     (2,098 )   (66.3 )   2,108  

Treasury shares

   (5 )   (5 )   —       —       (5 )

Equity attributable to equity holders of the parent

   44,105     46,570     (2,465 )   (5.3 )   45,525  

Minority interests

   3,107     3,100     7     0.2     2,848  
                              

Total liabilities and shareholders’ equity

   124,508     130,160     (5,652 )   (4.3 )   126,839  
                              

a Prior-year figures have been adjusted due to adoption of IAS 19.93A.


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Consolidated cash flow statement.


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Deutsche Telekom First half of 2007  52

 

     Second quarter of 2007     First half of 2007  
    

Q2

2007
millions of €

   

Q2

2006a
millions of €

   

H1

2007
millions of €

   

H1

2006a
millions of €

   

FY

2006
millions of €

 

Profit after income taxes

   742     1,126     1,317     2,324     3,574  
                              

Depreciation, amortization and impairment losses

   2,770     2,664     5,518     5,234     11,034  

Income tax expense (benefit)

   519     207     990     777     (970 )

Interest income and interest expenses

   685     602     1,343     1,260     2,540  

Other financial (income) expense

   110     101     204     25     167  

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

   (13 )   49     (16 )   17     (24 )

Other non-cash transactions

   (229 )   27     (225 )   52     32  

Profit on the disposal of intangible assets and property, plant and equipment

   (31 )   (1 )   (143 )   (84 )   (72 )

Change in assets carried as working capital

   311     (70 )   (849 )   (875 )   (17 )

Change in provisions

   (195 )   (437 )   (192 )   (713 )   1,585  

Change in other liabilities carried as working capital

   (395 )   (191 )   (1,293 )   (428 )   353  

Income taxes received (paid)

   (204 )   (271 )   (47 )   (483 )   (1,248 )

Dividends received

   3     7     9     13     27  

Cash generated from operations

   4,073     3,813     6,616     7,119     16,981  

Interest paid

   (1,491 )   (1,410 )   (2,180 )   (2,111 )   (4,081 )

Interest received

   568     495     779     687     1,322  
                              

Net cash from operating activities

   3,150     2,898     5,215     5,695     14,222  
                              

Cash outflows for investments in

          

Intangible assets

   (241 )   (255 )   (440 )   (483 )   (4,628 )

Property, plant and equipment

   (1,343 )   (1,670 )   (3,167 )   (3,486 )   (7,178 )

Non-current financial assets

   (66 )   (384 )   (81 )   (499 )   (624 )

Investments in fully consolidated subsidiaries

   (7 )   (1,378 )   (2 )   (1,668 )   (2,265 )

Proceeds from disposal of

          

Intangible assets

   (2 )   32     21     32     35  

Property, plant and equipment

   187     113     521     404     532  

Non-current financial assets

   42     18     89     218     249  

Investments in fully consolidated subsidiaries and business units

   468     (26 )   468     (26 )   (21 )

Net change in short-term investments and marketable securities and receivables

   135     (223 )   262     (363 )   (348 )

Other

   (28 )   6     32     (57 )   (57 )
                              

Net cash used in investing activities

   (855 )   (3,767 )   (2,297 )   (5,928 )   (14,305 )
                              

Proceeds from issue of current financial liabilities

   15,372     176     20,117     350     3,817  

Repayment of current financial liabilities

   (16,102 )   (441 )   (21,304 )   (1,006 )   (9,163 )

Proceeds from issue of non-current financial liabilities

   48     1,753     1,296     5,070     7,871  

Repayment of non-current financial liabilities

   (36 )   (97 )   (57 )   (180 )   (492 )

Dividend payments

   (3,380 )   (3,012 )   (3,502 )   (3,076 )   (3,182 )

Share buy-back

   —       —       —       —       (709 )

Proceeds from the exercise of stock options

   5     3     11     7     16  

Repayment of lease liabilities

   (46 )   (72 )   (99 )   (128 )   (219 )
                              

Net cash from (used in) financing activities

   (4,139 )   (1,690 )   (3,538 )   1,037     (2,061 )
                              

Effect of exchange rate changes on cash and cash equivalents

   7     (117 )   1     (112 )   (66 )

Net increase (decrease) in cash and cash equivalents

   (1,837 )   (2,676 )   (619 )   692     (2,210 )

Cash and cash equivalents, at the beginning of the period

   3,983     8,343     2,765     4,975     4,975  

Cash and cash equivalents, at end of the period

   2,146     5,667     2,146     5,667     2,765  

The presentation of cash generated from operations has been changed to increase transparency and to disclose individual components. Net cash from operating activities is unchanged with the exception of the change in current finance lease receivables which will be classified as cash from investing activities from now on. Prior-year figures have been adjusted accordingly.

 

a Prior-year figures have been adjusted due to adoption of IAS 19.93A.


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Statement of recognized income and expense.

 

    

H1

2007
millions of €

   

H1

2006
millions of €

   

FY

2006
millions of €

 

Fair value measurement of available-for-sale securities

      

Change in other comprehensive income (not recognized in income statement)

   0     (3 )   3  

Recognition of other comprehensive income in income statement

   (1 )   (1 )   (1 )

Fair value measurement of hedging instruments

      

Change in other comprehensive income (not recognized in income statement)

   (9 )   264     385  

Recognition of other comprehensive income in income statement

   (2 )   (6 )   (8 )

Revaluation due to business combinations

   (87 )   (4 )   395  

Exchange differences on translation of foreign subsidiaries

   (394 )   (1,773 )   (1,747 )

Other income and expense recognized directly in equity

   75     4     80  

Actuarial gains and losses from defined benefit plans and other employee benefits

   0     (38 )   314  

Deferred taxes on items in other comprehensive income

   1     (84 )   (275 )
                  

Income and expense recognized directly in equity

   (417 )   (1,641 )   (854 )
                  

Profit after income taxes

   1,317     2,324     3,574  
                  

Recognized income and expense

   900     683     2,720  
                  

Minority interests

   256     178     517  

Equity attributable to equity holders of the parent

   644     505     2,203  


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Deutsche Telekom First half of 2007  55

 

Selected explanatory notes.

Accounting policies.

In accordance with § 37y of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) in conjunction with §37w No. 2 WpHG, Deutsche Telekom AG’s half-year financial statements comprise interim consolidated financial statements, an interim Group management report and a responsibility statement pursuant to § 297 (2) sentence 3 and § 315 (1) sentence 6 of the German Commercial Code (Handelsgesetzbuch – HGB). The interim consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) applicable to interim financial reporting as adopted by the EU, and the interim Group management report in accordance with the applicable provisions of the WpHG.

Statement of compliance

The interim consolidated financial statements for the period ended June 30, 2007 are in compliance with International Accounting Standard (IAS) 34. As permitted by IAS 34, it has been decided to publish a condensed version compared to the consolidated financial statements at December 31, 2006. All IFRSs issued by the International Accounting Standards Board (IASB), effective at the time of preparing this Interim Report and applied by Deutsche Telekom, have been adopted for use in the EU by the European Commission. As such, this Interim Report is, consequently, also in compliance with IFRS as published by the IASB.

In the opinion of the Board of Management, the reviewed half-year financial report includes all standard adjustments to be applied on an ongoing basis that are required to give a true and fair view of the net assets, financial position and results of operations of the Group. Please refer to the notes to the consolidated financial statements as of December 31, 2006 for the accounting policies applied for the Group’s financial reporting.

In 2006 Deutsche Telekom changed its policy in accounting for actuarial gains and losses in the context of defined benefit pensions plans. Previously actuarial gains and losses arising from experience-based adjustments and changes in actuarial assumptions have been recognized at the balance sheet date only to the extent that the net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceed the higher of 10 percent of the present value of the defined benefit obligation at this point in time (prior to the deduction of the plan assets) and 10 percent of the fair value of any plan assets at this point in time. In this case they have been amortized prospectively to profit or loss over the expected average remaining working life of the employees participating in the plan. From its consolidated financial statements as of December 31, 2006 onwards, Deutsche Telekom recognizes actuarial gains and losses in the period in which they occur outside profit or loss in retained earnings including carryforwards in accordance with IAS 19.93A. Deutsche Telekom has adjusted comparative amounts disclosed for the prior periods reported as if the new accounting policy had always been applied.


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Deutsche Telekom First half of 2007  56

 

Changes in the composition of the Group.

In the past year, Deutsche Telekom has acquired interests in various companies that were not yet, or only partially, included in the consolidated financial statements for the first six months of 2006. These were primarily the tele.ring group and PTC, which were fully consolidated from May 1, 2006 and November 1, 2006, respectively. In addition, the gedas group, which was acquired in the first quarter of 2006, has been fully consolidated from March 31, 2006.

Effect of changes in the composition of the Group on the consolidated income statement for the first half of 2007

 

     Mobile
Communications
millions of €
    Broadband/
Fixed Network
millions of €
    Business
Customers
millions of €
    Group
Headquarters
& Shared
Services
millions of €
    Total
millions of €
 

Net revenue

   1,057     5     144     (1 )   1,205  

Cost of sales

   (915 )   (1 )   (120 )   9     (1,027 )
                              

Gross profit (loss)

   142     4     24     8     178  
                              

Selling expenses

   (122 )   (4 )   (11 )   0     (137 )

General and administrative expenses

   (83 )   (2 )   (30 )   1     (114 )

Other operating income

   35     0     13     (5 )   43  

Other operating expenses

   (3 )   0     (10 )   12     (1 )
                              

Profit (loss) from operations

   (31 )   (2 )   (14 )   16     (31 )
                              

Finance costs

   (4 )   0     (1 )   0     (5 )

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

   (62 )   0     0     0     (62 )

Other financial income (expense)

   (2 )   0     0     (6 )   (8 )
                              

Profit (loss) from financial activities

   (68 )   0     (1 )   (6 )   (75 )
                              

Profit (loss) before income taxes

   (99 )   (2 )   (15 )   10     (106 )
                              

Income taxes

   3     (1 )   4     (8 )   (2 )
                              

Profit (loss) after income taxes

   (96 )   (3 )   (11 )   2     (108 )
                              

Profit (loss) attributable to minority interests

   0     0     0     (6 )   (6 )

Net profit (loss)

   (96 )   (3 )   (11 )   8     (102 )

Selected notes to the consolidated income statement.

Cost of sales

 

     Second quarter of 2007     First half of 2007  
    

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Cost of sales

   (8,590 )   (8,057 )   (6.6 )   (17,210 )   (15,878 )   (8.4 )   (34,755 )

The increase in the cost of sales is primarily a result of changes in the composition of the Group, the growth in the number of T-Mobile USA customers and the successful launch of the Flext rates by T-Mobile UK.


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Deutsche Telekom First half of 2007  57

 

Selling expenses

 

     Second quarter of 2007     First half of 2007  
    

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Selling expenses

   (4,039 )   (4,014 )   (0.6 )   (8,012 )   (7,788 )   (2.9 )   (16,410 )

In addition to the effects of changes in the composition of the Group, the increase in selling expenses is predominantly attributable to higher commissions paid by the Mobile Communications and Broadband/Fixed Network strategic business areas. The increase in commissions was due to a higher number of new contracts (Mobile Communications) and the successful introduction of complete packages (Broadband/Fixed Network).

Profit/loss from financial activities

 

     Second quarter of 2007     First half of 2007  
    

Q2

2007
millions of €

   

Q2

2006a
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006a
millions of €

    Change %    

FY

2006
millions of €

 

Profit (loss) from financial activities

   (782 )   (752 )   (4.0 )   (1,531 )   (1,302 )   (17.6 )   (2,683 )

Finance costs

   (685 )   (602 )   (13.8 )   (1,343 )   (1,260 )   (6.6 )   (2,540 )

Interest income

   69     94     (26.6 )   116     167     (30.5 )   297  

Interest expense

   (754 )   (696 )   (8.3 )   (1,459 )   (1,427 )   (2.2 )   (2,837 )

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

   13     (49 )   n.a.     16     (17 )   n.a.     24  

Other financial income (expense)

   (110 )   (101 )   (8.9 )   (204 )   (25 )   n.a.     (167 )

a Prior-year figures have been adjusted due to adoption of IAS 19.93A.

The increase in the loss from financial activities for the first half of 2007 compared to the first half of 2006 was primarily attributable to other financial expense.

In the first half of 2006, other financial expense included income from the sale of Celcom (EUR 196 million), whereas in the first half of 2007, gains of only EUR 18 million on the disposal of the remaining shares in Sireo were realized in other financial expense.

Income taxes

 

     Second quarter of 2007    First half of 2007
    

Q2

2007
millions of €

   

Q2

2006a
millions of €

    Change %   

H1

2007
millions of €

   

H1

2006a
millions of €

    Change %    

FY

2006
millions of €

Income taxes

   (519 )   (207 )   n.a.    (990 )   (777 )   (27.4 )   970

a Prior-year figures have been adjusted due to adoption of IAS 19.93A.

Income taxes increased year-on-year despite the decrease in profits before income taxes. This was mainly due to the one-time favorable effect on earnings caused by the reversal of a provision for income taxes in 2006.


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Deutsche Telekom First half of 2007  58

 

Other disclosures.

Executive bodies

The Supervisory Board of Deutsche Telekom appointed Mr. Thomas Sattelberger as the new Chief Human Resources Officer (CHRO) and Labor Director effective May 3, 2007. He succeeded Dr. Karl-Gerhard Eick, the Chief Financial Officer and Deputy Chairman of the Deutsche Telekom Board of Management, who took over as acting CHRO at the start of 2007 following the departure of Dr. Heinz Klinkhammer from the Board of Management at the end of 2006.

On May 3, 2007, the Deutsche Telekom AG shareholders’ meeting confirmed the appointment of the following shareholders’ representatives to the Supervisory Board:

Mr. Lawrence H. Guffey, London, Senior Managing Director, The Blackstone Group International Limited (Mr. Guffey’s election at the shareholders’ meeting confirmed his appointment as member of the Supervisory Board by the Bonn District Court).

Mr. Ulrich Hocker, Düsseldorf, Manager-in-Chief of the Deutsche Schutzvereinigung für Wertpapierbesitz e. V. (Mr. Hocker’s election at the shareholders’ meeting confirmed his appointment as member of the Supervisory Board by the Bonn District Court).

By order of the Bonn District Court of April 16, 2007, Ms. Sylvia Kühnast was appointed to the Supervisory Board as employees’ representative with effect from the end of the shareholders’ meeting. She succeeds Ms. Ursula Steinke, whose term in office expired at the end of the 2007 shareholders’ meeting.

Effective at the end of May 31, 2007, Mr. Lothar Pauly, Member of the Board of Management responsible for Business Customers and Production, left the Deutsche Telekom Board of Management. Dr. Karl-Gerhard Eick and Mr. Hamid Akhavan have temporarily taken over responsibility for Business Customers and Production on Deutsche Telekom’s Board of Management. Dr. Eick has assumed temporary responsibility for direct sales, business customers and billing while Mr. Akhavan has taken over temporary responsibility for technology, IT and processes as well as procurement and infrastructure.

Personnel

 

     Second quarter of 2007     First half of 2007  
    

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Personnel costs

   (3,536 )   (3,431 )   (3.1 )   (7,015 )   (6,870 )   (2.1 )   (16,542 )

The increase in personnel costs was primarily caused by staff-related measures (voluntary redundancy, severance and compensation payments) and changes in the composition of the Group.

The personnel cost ratio in the first half of 2007 was 22.6 percent of net revenue. This was an improvement of 0.3 percentage points over the prior-year period.


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Deutsche Telekom First half of 2007  59

 

Average number of employees

 

     Second quarter of 2007     First half of 2007
    

Q2

2007

  

Q2

2006

   Change %    

H1

2007

  

H1

2006

   Change %    

FY

2006

Deutsche Telekom Group

   244,046    249,394    (2.1 )   245,668    246,409    (0.3 )   248,480

Non-civil servants

   205,163    206,049    (0.4 )   206,135    202,626    1.7     205,511

Civil servants

   38,883    43,345    (10.3 )   39,533    43,783    (9.7 )   42,969

Trainees and student interns

   10,423    9,955    4.7     10,679    10,201    4.7     10,346

The reduction in the average number of employees was primarily caused by the sale of call centers and workforce restructuring in Germany and Eastern Europe. This trend was partially offset by an increase in headcount at T-Mobile USA as well as effects of changes in the composition of the Group.


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Deutsche Telekom First half of 2007  60

 

Number of employees at balance sheet date

 

     June 30,
2007
   Dec. 31,
2006
   Change     Change %     June 30,
2006

Deutsche Telekom Group

   242,703    248,800    (6,097 )   (2.5 )   249,991

Germany

   153,822    159,992    (6,170 )   (3.9 )   167,642

International

   88,881    88,808    73     0.1     82,349

Non-civil servants

   204,108    208,420    (4,312 )   (2.1 )   207,073

Civil servants

   38,595    40,380    (1,785 )   (4.4 )   42,918

Trainees and student interns

   9,490    11,840    (2,350 )   (19.8 )   9,017

The reduction in the number of employees at the reporting date was also caused by the sale of call centers and workforce reduction in Germany and Eastern Europe. There was, on the other hand, an increase in headcount at T-Mobile USA.

Depreciation, amortization and impairment losses

 

     Second quarter of 2007     First half of 2007  
    

Q2

2007
millions of €

   

Q2

2006
millions of €

    Change %    

H1

2007
millions of €

   

H1

2006
millions of €

    Change %    

FY

2006
millions of €

 

Amortization and impairment of intangible assets

   (797 )   (630 )   (26.5 )   (1,578 )   (1,247 )   (26.5 )   (2,840 )

of which: UMTS licenses

   (227 )   (222 )   (2.3 )   (455 )   (444 )   (2.5 )   (893 )

of which: U.S. mobile communications licenses

   —       —       —       (7 )   —       n.a.     (33 )

of which: goodwill

   —       —       —       —       (10 )   n.a.     (10 )

Depreciation and impairment of property, plant and equipment

   (1,973 )   (2,034 )   3.0     (3,940 )   (3,987 )   1.2     (8,194 )

Total depreciation, amortization and impairment losses

   (2,770 )   (2,664 )   (4.0 )   (5,518 )   (5,234 )   (5.4 )   (11,034 )

Higher depreciation, amortization and impairment losses were predominantly caused by increased amortization, in particular following the acquisition in 2006 of tele.ring and PTC by the Mobile Communications business area. The majority is attributable to amortization of the customer base and brand names.


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Deutsche Telekom First half of 2007  61

 

Earnings per share

Basic and diluted earnings per share are calculated in accordance with IAS 33 as follows:

 

     Second quarter of 2007     First half of 2007  
     Q2
2007
    Q2
2006
    H1
2007
    H1
2006
    FY
2006
 

Calculation of basic earnings per share

          

Net profita (millions of €)

   608     1,018     1,067     2,108     3,165  

Adjustment for the financing costs of the mandatory convertible bond (after taxes) (millions of €)

   —       13     —       38     38  

Adjusted net profit (basic)a (millions of €)

   608     1,031     1,067     2,146     3,203  

Number of ordinary shares issued (millions)

   4,361     4,273     4,361     4,236     4,309  

Treasury shares held by Deutsche Telekom AG (millions)

   (2 )   (2 )   (2 )   (2 )   (2 )

Shares reserved for outstanding options granted to T-Mobile USA and Powertel (millions)

   (21 )   (22 )   (21 )   (23 )   (22 )

Effect from the potential conversion of the mandatory convertible bond (millions)

   —       111     —       138     68  

Adjusted weighted average number of ordinary shares outstanding (basic) (millions)

   4,338     4,360     4,338     4,349     4,353  
                              

Basic earnings per share/ADSa (€)

   0.14     0.24     0.25     0.49     0.74  
                              

a Prior-year figures have been adjusted due to adoption of IAS 19.93A.

The calculation of basic earnings per share is based on the time-weighted total number of all ordinary shares outstanding. The number of ordinary shares issued already includes all shares newly issued in the reporting period in line with their respective time weighting.

 

     Second quarter of 2007    First half of 2007
     Q2
2007
   Q2
2006
   H1
2007
   H1
2006
   FY
2006

Calculation of diluted earnings per share

              

Adjusted net profit (basic)a (millions of €)

   608    1,031    1,067    2,146    3,203

Dilutive effects on profit from stock options (after taxes) (millions of €)

   —      —      —      —      —  

Net profit (diluted)a (millions of €)

   608    1,031    1,067    2,146    3,203

Adjusted weighted average number of ordinary shares outstanding (basic) (millions)

   4,338    4,360    4,338    4,349    4,353

Dilutive potential ordinary shares from stock options and warrants (millions)

   —      —      1    2    1

Weighted average number of ordinary shares outstanding (diluted) (millions)

   4,338    4,360    4,339    4,351    4,354
                        

Diluted earnings per share/ADSa (€)

   0.14    0.24    0.25    0.49    0.74
                        

a Prior-year figures have been adjusted due to adoption of IAS 19.93A.


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Deutsche Telekom First half of 2007  62

 

Selected notes to the consolidated balance sheet.

Cash and cash equivalents

In the reporting period, cash and cash equivalents decreased from EUR 2.8 billion to EUR 2.1 billion, due in part to the payment of dividends of EUR 3.5 billion in the second half of 2007. The reduction was to a large extent offset by free cash flow and proceeds from the sale of T-Online France.

Detailed information can be found in the consolidated cash flow statement.

Non-current assets held for sale and directly associated liabilities

Non-current assets held for sale and directly associated liabilities as of June 30, 2007 primarily relate to T-Online Spain to be disposed of in the Broadband/Fixed Network business area and Deutsche Telekom AG’s real estate portfolio. In addition, T-Online France was sold in the second quarter of 2007.

 

     T-Online
Spain
   Deutsche Telekom
AG real estate
portfolio
   Other    Total
     Broadband/
Fixed
Network
millions of €
   Group Headquarters
& Shared Services
millions of €
   millions
of €
   millions
of €

Current assets

   77    —      17    94

Cash and cash equivalents

   18    —      8    26

Trade and other receivables

   32