Form 6-K

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 November 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.

 



Deutsche Telekom First three quarters 2007  1

 

LOGO

 


Deutsche Telekom First three quarters 2007  2

 

Deutsche Telekom at a glance.

At a glance

 

     Third quarter of 2007     First three quarters of 2007  
     

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
   

Q1 - Q3

2006
millions of €

    Change %    

FY

2006
millions of €

 

Net revenue

   15,693     15,480     1.4     46,721     45,452     2.8     61,347  

Domestic

   7,609     8,386     (9.3 )   23,026     24,733     (6.9 )   32,460  

International

   8,084     7,094     14.0     23,695     20,719     14.4     28,887  

EBIT (profit from operations)

   1,911     1,989     (3.9 )   5,749     6,392     (10.1 )   5,287  

Special factors affecting EBITa

   (438 )   (358 )   (22.3 )   (666 )   (518 )   (28.6 )   (3,156 )

Adjusted EBITa

   2,349     2,347     0.1     6,415     6,910     (7.2 )   8,443  

Adjusted EBIT margina (%)

   15.0     15.2       13.7     15.2       13.8  

Profit (loss) from financial activitiesb

   (699 )   (701 )   0.3     (2,230 )   (2,003 )   (11.3 )   (2,683 )

Profit before income taxesb

   1,212     1,288     (5.9 )   3,519     4,389     (19.8 )   2,604  

Depreciation, amortization and impairment losses

   (3,009 )   (2,752 )   (9.3 )   (8,527 )   (7,986 )   (6.8 )   (11,034 )

EBITDAc

   4,920     4,741     3.8     14,276     14,378     (0.7 )   16,321  

Special factors affecting EBITDAa,c

   (212 )   (358 )   40.8     (440 )   (508 )   13.4     (3,113 )

Adjusted EBITDAa,c

   5,132     5,099     0.6     14,716     14,886     (1.1 )   19,434  

Adjusted EBITDA margina,c (%)

   32.7     32.9       31.5     32.8       31.7  

Net profitb

   259     1,955     (86.8 )   1,326     4,063     (67.4 )   3,165  

Special factorsa

   (799 )   965     n.a.     (869 )   1,037     n.a.     (685 )

Adjusted net profita,b

   1,058     990     6.9     2,195     3,026     (27.5 )   3,850  

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

   0.06     0.45     (86.7 )   0.31     0.94     (67.0 )   0.74  

Cash capexe

   (1,686 )   (1,950 )   13.5     (5,293 )   (5,919 )   10.6     (11,806 )

Net cash from operating activitiesf

   5,137     3,563     44.2     10,352     9,258     11.8     14,222  

Free cash flow (before dividend payments)g

   3,566     1,667     n.a.     5,837     3,829     52.4     2,983  

Equity ratiob,h (%)

   —       —         38.2     38.2       35.8  

Net debti

   —       —         36,502     38,269     (4.6 )   39,555  
      Sept. 30,
2007
    June 30,
2007
   

Change

Sept. 30, 2007/

June 30, 2007
%

    Dec. 31,
2006
    Change
Sept. 30, 2007/
Dec. 31, 2006 %
    Sept. 30,
2006
    Change
Sept. 30, 2007/
Sept. 30, 2006
%
 

Number of employees at balance sheet date

              

Deutsche Telekom Group

   241,589     242,703     (0.5 )   248,800     (2.9 )   250,483     (3.6 )

Non-civil servants

   204,419     204,108     0.2     208,420     (1.9 )   207,990     (1.7 )

Civil servants

   37,170     38,595     (3.7 )   40,380     (7.9 )   42,493     (12.5 )

Number of fixed-network and mobile customers

              

Narrowband linesj (millions)

   37.2     37.7     (1.3 )   39.0     (4.6 )   39.5     (5.8 )

Broadband linesk (millions)

   13.3     12.7     4.7     11.3     17.7     10.2     30.4  

Mobile customersl (millions)

   113.7     111.8     1.7     106.4     6.9     103.5     9.9  

a For a detailed explanation of the special factors affecting EBIT, adjusted EBIT, the adjusted EBIT margin, and 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 72 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 nine months 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. The prior-year comparatives have been adjusted accordingly.
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. The prior-year comparatives shown have been adjusted accordingly. For calculation and more detailed definition of free cash flow, please refer to “Reconciliation of pro forma figures,” page 76.


Deutsche Telekom First three quarters 2007  3

 

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 77.
j Lines in operation. Telephone lines excluding internal use and public telecommunications, including wholesale services.
k Broadband lines in operation, including Germany and Eastern Europe. The prior-year figures were adjusted to reflect the deconsolidation of T-Online France S.A.S. and T-Online Spain S.A.U.
l Number of customers of the fully consolidated mobile communications companies of the Mobile Communications strategic business area (including Virgin Mobile).


Deutsche Telekom First three quarters 2007  4

 

The business areas of the Deutsche Telekom Group.

Mobile Communications.

T-Mobile combines all mobile communications activities in the Group. T-Mobile International is one of the world’s leading mobile communications providers, with 113.7 million customers in Europe and the United States. All of T-Mobile’s national companies offer 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 10.2 million customers compared with the prior-year quarter. Further developments focus on mobile broadband services with innovative voice and data solutions that give users the convenience they want together with a simplified rate structure.

 

    

Q3

2007a
millions
of €

  

Q3

2006a
millions
of €

Total revenue

   8,875    8,169

T-Mobile Deutschland

   2,059    2,122

T-Mobile USA

   3,562    3,425

T-Mobile UK

   1,251    1,165

Adjusted EBITDA

   2,938    2,682

T-Mobile Deutschland

   777    893

T-Mobile USA

   1,028    963

T-Mobile UK

   365    326

Adjusted EBITDA margin (%)

   33.1    32.8

Number of employees (average)

   62,630    54,055

Mobile customers (millions)

   113.7    103.5

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 traditional fixed-network services, broadband Internet access, and innovative multimedia services. This strategic business area’s customers also include national and international network operators, resellers, and the other strategic business areas of the Deutsche Telekom Group. With 13.3 million DSL lines at the end of the third quarter of 2007 compared with 10.2 million in the prior-year period, the strategic business area has consolidated its leading position in the broadband market. Overall, the number of broadband customers rose by 3.0 million compared with the prior-year quarter. Due to competition, the number of narrowband lines dropped to 37.2 million.

 

    

Q3

2007a
millions
of €

  

Q3

2006a
millions
of €

Total revenue

   5,626    6,167

Domestic

   5,002    5,493

International

   632    674

Adjusted EBITDA

   1,968    2,233

Adjusted EBITDA margin (%)

   35.0    36.2

Number of employees (average)

   96,678    107,159

Broadband lines (millions)

   13.3    10.2

Narrowband lines (millions)

   37.2    39.5

a For a detailed explanation of the calculations and definitions of the various amounts, please refer to page 29 et seq.


Deutsche Telekom First three quarters 2007  5

 

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 third quarter of 2007 due to continuously growing price pressure.

 

    

Q3

2007a
millions
of €

  

Q3

2006a
millions
of €

Total revenue

   2,917    3,174

Enterprise Services

   1,950    2,103

Business Services

   967    1,071

Adjusted EBITDA

   291    321

Adjusted EBITDA margin (%)

   10.0    10.1

Number of employees (average)

   56,499    58,113

New ordersb

   2,348    2,739

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.

 

    

Q3

2007a
millions
of €

   

Q3

2006a
millions
of €

 

Total revenue

   966     960  

Adjusted EBITDA

   (37 )   (134 )

Adjusted EBITDA margin (%)

   (3.8 )   (14.0 )

Number of employees (average)

   25,961     30,907  

of which: Viventob (at balance sheet date)

   10,700     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.


Deutsche Telekom First three quarters 2007  6

 

Contents.

 

To our shareholders   

•         Developments in the Group

   7

•         T-Share price performance

   9

•         Corporate governance

   11
Interim financial report   

•         Interim Group management report

   12

•         Highlights

   12

•         Overall economic situation/industry situation

   15

•         Group strategy

   17

•         Development of business in the Group

   19

•         Development of business in the strategic business areas

   25

•         Risks and opportunities

   41

•         Outlook

   42

•         Interim consolidated financial statements

   47

•         Consolidated income statement

   47

•         Consolidated balance sheet

   48

•         Consolidated cash flow statement

   49

•         Statement of recognized income and expense

   51

•         Selected explanatory notes

   53

•         Review report by the auditors

   71
Further information   

•         Reconciliation of pro forma figures

   73

•         Investor Relations calendar

   79

•         Glossary

   80

•         Disclaimer

   83


Deutsche Telekom First three quarters 2007  7

 

Developments in the Group.

 

 

Net revenue increased by EUR 1.3 billion, or 2.8 percent, year-on-year to EUR 46.7 billion in the first nine months of 2007.

 

 

International revenue increased by 14.4 percent from EUR 20.7 billion in the first nine months of 2006 to EUR 23.7 billion in the same period of 2007. Domestic revenue fell by 6.9 percent year-on-year from EUR 24.7 billion to EUR 23.0 billion.

 

 

Group EBITDA adjusted for special factors1 declined by 1.1 percent from EUR 14.9 billion to EUR 14.7 billion. Group EBITDA decreased by 0.7 percent from EUR 14.4 billion to EUR 14.3 billion.

 

 

Adjusted EBITDA1 of subsidiaries based in Germany decreased by 12.7 percent from EUR 9.2 billion to EUR 8.0 billion; adjusted EBITDA1 of subsidiaries based outside Germany increased by 17.5 percent from EUR 5.7 billion to EUR 6.7 billion.

 

 

Net profit adjusted for special factors1 was EUR 2.2 billion, compared with EUR 3.0 billion in the first nine months of 2006. Net profit for the period decreased year-on-year from EUR 4.1 billion to EUR 1.3 billion.

 

 

Free cash flow2 before payment of dividends increased by 52.4 percent to EUR 5.8 billion compared with EUR 3.8 billion in the first nine months of 2006.

 

 

Net debt3 decreased by EUR 3.1 billion compared with the end of 2006 from EUR 39.6 billion to EUR 36.5 billion.

 

 

    

The trends in the strategic business areas continued in the first nine months of 2007:

 

 

The number of mobile customers rose by 6.9 percent compared with the end of 2006 from 106.4 million to a total of 113.7 million.

 

 

The number of broadband lines rose by 2.0 million compared with the end of 2006, reaching a total of 13.3 million. The number of narrowband lines operated by the Broadband/Fixed Network strategic business area declined by 1.8 million to 37.2 million at September 30, 2007.

 

 

The order volume in the Business Customers strategic business area totaled EUR 9.2 billion in the first nine months of 2007 compared with EUR 9.7 billion in the prior-year period.


Deutsche Telekom First three quarters 2007  8

 

1 For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and special factors affecting net profit/loss after income taxes and the adjusted net profit, please refer to “Reconciliation of pro forma figures,” page 72 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 76.
3 For detailed information, please refer to “Reconciliation of pro forma figures,” page 77.


Deutsche Telekom First three quarters 2007  9

 

T-Share price performance.

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

LOGO

 

     Sept. 30,
2007
   Sept. 30,
2006
   Dec. 31,
2006

Xetra closing prices (€)

        

Exchange price at the balance sheet date

   13.78    12.54    13.84

High (during the preceding quarter)

   13.96    12.70    13.95

Low (during the preceding quarter)

   12.48    10.84    12.44

Weighting of the T-Share in major stock indexes

        

DAX 30 (%)

   4.9    5.8    5.6

Dow Jones Europe STOXX Telecommunications© (%)

   8.9    10.3    9.9

Market capitalization (billions of €)

   60.1    55.4    60.4

Shares issued (millions)

   4,361.20    4,361.09    4,361.12

Capital markets environment.

After the international stock exchanges recorded solid growth in the first half of 2007 and several indexes hit historic highs at the beginning of July 2007, a massive global correction began in the middle of July. This was triggered by the problems on the U.S. subprime mortgage market that had been looming for some time. The consequences were not limited to the United States; it soon emerged that international banks were also affected. In mid-August 2007, the Nikkei recorded a weekly loss of 8.9 percent, for example – its largest since April 2000. Sentiment was also depressed by oil prices, which reached up to USD 78 per barrel. The situation on the European stock exchanges also deteriorated sharply due to the U.S. subprime crisis. The U.S. Federal Reserve supported the stock exchanges in mid-September 2007 by reducing the federal funds rate by 50 basis points. The market appeared to be settling slightly at the end of the third quarter of 2007, amid continued volatile trading.

Development of international indexes.

Despite the turbulence on the international financial markets, most key international stock exchange indexes closed the third quarter of 2007 with slight increases. The DAX has increased by 17.7 percent since the beginning of the year, while the Dow Jones Euro STOXX 50 was up 9.2 percent in the same period. The Dow Jones grew by 11.4 percent on a nine-month basis, and the Nasdaq technology exchange by 11.5 percent. The weakness in the banking sector was particularly evident in London, with the FTSE 100 up only 2.5 percent since the beginning of the year. In Japan, the already comparatively slender gains from the first half of 2007 melted away in the third quarter, leaving the Nikkei index down 3.3 percent since the beginning of the year.


Deutsche Telekom First three quarters 2007  10

 

T-Share performance.

The telecommunications sector successfully resisted the downturn on the international stock exchanges in the third quarter of 2007. In the third quarter of 2007, the European telcommuncations sector profited from the results of major providers that were well received by the market. Several investment banks upgraded the sector in the reporting period. The sector index, Dow Jones Europe STOXX Telecommunications©, recorded a gain of 4.5 percent in the third quarter of 2007 and has risen by 9.2 percent since the beginning of the year. The Deutsche Telekom share underperformed the sector in the reporting period. Despite increasing by 0.7 percent in the third quarter of 2007, the Company’s share price fell by 1.1 percent on a nine-month basis amid continued quiet trading.

 

 

July: The upward trend on the stock exchanges came to an abrupt end in mid-July 2007 when the crisis on the mortgage bonds financial markets began. Deutsche Telekom was unable to escape the downturn on the stock exchanges and closed the month down 7.7 percent.

 

 

August: Boosted by the publication of positive half-year results on August 9, 2007, the Deutsche Telekom share recouped its loss from the previous month and increased by 7.9 percent for the month.

 

 

September: Amid consistently quiet trading, the T-Share was up 1 percent at the end of the month and closed the third quarter of 2007 at EUR 13.78.

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

LOGO

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

LOGO


Deutsche Telekom First three quarters 2007  11

 

Corporate governance.

In the most recent Declaration of Conformity released on December 11, 2006 pursuant to § 161 of the German Stock Corporation Act, the Board of Management and Supervisory Board of Deutsche Telekom AG declared that Deutsche Telekom AG had complied 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, without exception. 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.


Deutsche Telekom First three quarters 2007  12

 

Interim Group management report.

Highlights.

Events in the third quarter of 2007.

Group

Acquisition of Orange Nederland.

 

 

Deutsche Telekom AG’s Group company T-Mobile Netherlands has concluded a contract with France Télécom for the acquisition of the Dutch telecommunications provider, Orange Nederland. The purchase price is approximately EUR 1.3 billion. The Works Council of Orange Nederland was informed and involved in the sale process as required by Dutch law. The European Commission has already approved the acquisition of Orange Nederland by Deutsche Telekom AG. The transaction was closed on October 1, 2007.

Agreement on the acquisition of SunCom Wireless.

 

 

Deutsche Telekom has concluded an agreement to take over the regional mobile communications carrier SunCom Wireless Holdings, Inc. through its wholly-owned subsidiary T-Mobile USA, Inc. Under the agreement, T-Mobile USA will acquire all of the shares in SunCom for a purchase price of USD 27.00 per share, and therefore a total purchase price of USD 1.6 billion – approx. EUR 1.2 billion. The total value of the transaction, including net debt of almost USD 0.8 billion, is USD 2.4 billion. The transaction, which is still subject to approval by governmental and regulatory authorities in the United States as well as SunCom’s shareholders, is expected to close in the first half of 2008. T-Mobile USA will be expanding its network in the southeastern United States and including Puerto Rico and the U.S. Virgin Islands, thereby expanding its footprint in the U.S. market.

Continuation of staff restructuring.

 

 

The Group is continuing to implement its staff restructuring program in Germany. Staff downsizing continues to be based on the utilization of existing staff-related measures. Some 23,000 employees have left the Group since the start of 2006 using socially considerate instruments, such as voluntary staff reduction programs, natural attrition and deconsolidation, with around 10,900 employees leaving in the first three quarters of 2007 alone. The staff restructuring, especially the sale of the Vivento business models, will be pushed ahead with.

4,000 trainees start their career at Deutsche Telekom.

 

 

Deutsche Telekom’s trainees started their first training year on September 1, 2007 in twelve different professions and study courses that combine theory with practice. The number of traineeships Deutsche Telekom would offer to young people in 2007 – 4,000 as in previous years – was already specified on March 16, 2007 as part of an agreement with the service industry trade union ver.di. A higher than average annual number of trainees (2.9 percent of the domestic workforce) has also been agreed for 2008 through 2010. Spread over three years, this adds up to a trainee ratio of almost 9 percent at Deutsche Telekom. With some 12,000 young people being under training each year, Deutsche Telekom Group is one of the largest providers of vocational training in Germany, sending an important signal to the labor market.


Deutsche Telekom First three quarters 2007  13

 

Deutsche Telekom achieves top sustainability ratings internationally.

 

 

Deutsche Telekom qualified for the Climate Disclosure Leadership Index as the world’s best telecommunications company. Deutsche Telekom achieved the top mark of AAA and 95 points, making it Germany’s best company and the world’s best telecommunications provider and putting it fourth in the overall ranking of all companies rated (http://www.cdproject.net/). Deutsche Telekom has now been represented on the Dow Jones Sustainability Index family for the ninth year running and recorded a clear improvement with 79 of a possible 100 points for 2007 compared with 73 points in 2006. The annual ratings assess companies in the Dow Jones World Index and the Dow Jones STOXX SM 600 Index on the basis of economic, environmental and social/societal criteria. Deutsche Telekom assumed the leading role and set the benchmarks in numerous areas.

Deutsche Telekom closed sale of T-Online Spain to France Télécom.

 

 

Deutsche Telekom AG reached an agreement with France Télécom España S.A. at the beginning of June 2007 for the sale of its Spanish Internet company T-Online Spain S.A.U. France Télécom España S.A. acquired all the shares of the Deutsche Telekom subsidiary that provided Internet services under the Ya.com brand in Spain. Spain’s antitrust authority approved the sale. The company was deconsolidated at the end of July 2007.

Deutsche Telekom launches new second brand.

 

 

In July 2007, Deutsche Telekom AG launched congstar, its second brand for wireless telephone and broadband 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. Low-cost basic offers for DSL and mobile communications can be flexibly enhanced with additional attractive options including different flat rates and DSL telephony. All products and calling plans can be combined, and can be cancelled at the end of the month with two weeks’ notice.

Mobile Communications

Exclusive distribution deal signed for marketing the iPhone.

 

 

T-Mobile is set to become the exclusive distributor of Apple’s revolutionary iPhone in Germany. The iPhone will be launched in Germany on November 9, 2007. It will be sold in conjunction with a T-Mobile contract in Deutsche Telekom shops and in the T-Mobile online shop. The iPhone combines three products in one – cell phone, iPod and Internet communications device. iPhone users in Germany will also have direct access to the very latest music offerings through the iTunes Wi-Fi Music Store.

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 any other wireless carrier. The six-monthly study conducted by the renowned U.S. market research institute is based on 10,500 interviews with contract customers.

Broadband/ Fixed Network

Computerbild test winner for customer service.

 

 

In September 2007, Deutsche Telekom received an overall “Good” rating for its hotline’s good availability and troubleshooting expertise as part of an extensive customer service test carried out by the German Computerbild magazine (19/2007 issue). Deutsche Telekom performed well during the 28-day test involving four test calls a day thanks to its free hotline number and well informed staff. In addition to availability, cost and time, the quality of information was the main criterion used for the overall rating.


Deutsche Telekom First three quarters 2007  14

 

Deutsche Telekom launches “fussball.de” mobile portal.

 

 

www.fussball.de is the official news and results service which the German soccer association, DFB, runs in cooperation with Deutsche Telekom. It is the only website to offer a complete listing of game schedules, results and tables of all 26,000 clubs affiliated with the DFB. Users have been able to view all game schedules via a cell phone or PDA since the end of August 2007. Mobile Enabling is the concept that allows web content to be programmed so it can be downloaded to handsets and PDAs, regardless of which device or wireless network the customer is using. The relevant data is generated from the existing Internet content and translated into standard mobile formats. Interactive Media CCSO GmbH, a wholly-owned subsidiary of Deutsche Telekom AG, holds the exclusive rights to marketing advertising space.

Business Customers

Jet Aviation realizes further expansion plans with T-Systems.

 

 

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 queries from SAP users at Jet Aviation.

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

 

 

The Irish-based alphyra Group is outsourcing the entire operation of its data center and terminals to T-Systems, including the operation of over 40,000 payment terminals in Germany. The contract includes complete network infrastructure and data center services as well as logistics services for the terminals. As part of this deal, for example, T-Systems will connect all the terminals owned by the alphyra business unit Top-Up to a data center via a uniform network platform. Mobile phone users can top up their credit using the networked payzone terminals.

One of the world’s largest MPLS networks rolled out.

 

 

As at September 30, 2007, some 800 credit cooperative institutions and agricultural credit cooperatives (Volks- und Raiffeisenbanken) in Germany and FIDUCIA IT AG, the largest IT service provider in the cooperative financial system, now have access to a high-availability, secure IP network infrastructure. With the new MPLS-based high-speed network in place, T-Systems now offers low-cost transmission of voice and data and the operation of service-oriented applications in a single network. Since July 2004, Deutsche Telekom’s business customer unit has been involved in migrating the network of the credit cooperative institutions and agricultural credit cooperatives to the MPLS platform and has helped develop the innovative, centralized VoIP solution for the institutions connected to the network.


Deutsche Telekom First three quarters 2007  15

 

Overall economic situation/ industry situation.

Global economic development

The strong global economic upswing continued in fall 2007, although turbulence on the financial markets caused by the U.S. real estate and financial crisis and the recent record-level oil prices and euro-dollar exchange rate increased the macroeconomic risks for the global economy.

Over the course of 2007, economic growth in industrialized countries recorded only a moderate increase in output. Economic expansion in the United States has been slowing for a year now, and growth rates have also weakened slightly in the eurozone and Japan. Important economic indicators, such as housing investment, capital expenditure on plant and equipment and private consumption, slipped in the United States, which suggests an increasing economic slowdown.

In September 2007, the U.S. Federal Reserve lowered its federal funds rate by 50 basis points against the background of turbulent financial markets and weaker economic indicators. At the beginning of the second half of 2007, investments and exports in the eurozone recorded only moderate growth. The appreciation of the euro also had a dampening effect. The German economy recorded robust growth. Private consumption gained new momentum and exports grew due to increased orders from outside Germany. The unemployment rate declined in September 2007 to 8.5 percent, the lowest in twelve years. Expansion in the emerging economies continued to pick up speed over the course of 2007. This was especially true for the Asian countries and in particular for China.

Risks

Turbulence on the financial markets caused by the real estate crisis in the United States resulted in the repricing of credit risks and a higher risk premium for assets. If the real estate crisis in the United States lasts longer than expected, negative effects on the global economy cannot be ruled out. The increasing number of private bankruptcies could not only put more pressure on real estate prices, but also lead to a significant decline in private consumption, willingness to invest and corporate profits. These recessionary signals from the U.S. economy would affect other economies, and rising oil prices and the all-time high euro-dollar exchange rate could strain the economies further. However, the past years have shown that the current pace of global growth can offset these recessionary risks.

Outlook

The Projektgruppe Gemeinschaftsdiagnose (joint report by a group of leading economic research institutes in Germany) forecasts a significant loss of momentum in the global economy in the coming months. The United States will experience a continued correction in the real estate market and a deceleration in private consumption. The strong euro will dampen economic growth in the eurozone, and expansion is also expected to slow in the United Kingdom and Japan.

Telecommunications market

A recent study by a leading industry association on the development of the telecommunications market in 2007 indicates a slight downturn in the market as a whole. Revenue from telecommunications services in Germany will amount to EUR 63.4 billion in 2007, which equates to a decline of 2.8 percent. Growth of call minutes in fixed network and mobile communications will not offset price erosion caused by competition. Approximately EUR 37 billion from the fixed-network market (a decrease of 3.6 percent year-on-year) and approximately EUR 26.4 billion from the mobile communications market (around 1.4 percent less than in the prior year) make up the segment’s total revenue of EUR 63.4 billion.

Regulation in Germany

On August 28, 2007, the Federal Network Agency (BNetzA) announced its initial partial decision on the IP bitstream access standard offer. As a result of this decision, Deutsche Telekom must offer bitstream access for SDSL lines and, starting April 1, 2008, stand-alone bitstream access. Deutsche Telekom submitted a corresponding standard offer on September 28, 2007. It is currently being assessed by the Federal Network Agency, which will probably reach a decision before the end of this year. An application for the pricing of IP bitstream access also has to be submitted.


Deutsche Telekom First three quarters 2007  16

 

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).

The Commission’s proposals published to date concerning the 2006 Review show that it is no longer considering a reduction in sector-specific regulation and its transition into general competition law, but instead intends to introduce additional regulatory remedies and extend authority at the EU level. An initial draft of the revised directives is to be published in November 2007. Adoption to national law is unlikely before 2010.

Although the draft of the revised Markets Recommendation (which prescribes which telecommunications markets may potentially be subjected to sector-specific regulation) provides for a reduction in the number of regulated markets, it effectively no longer includes only those markets that are already largely unregulated in many European countries. On the other hand, the Commission is proposing to extend regulation to new fiber-optic subscriber-line networks. After adoption by the EU Commission, the Markets Recommendation is expected to come into force before the end of this year.

The Austrian regulatory authority decided in 2005 that interconnection charges should be lowered gradually from November 2005, leading to a standard charge of EUR 6.79 for all providers by January 1, 2009. This decision was reversed by the Austrian Administrative Court in two rulings of February 2007 and April 2007. As a result of this decision, there was no legal basis for the procedure followed to date, meaning that the regulatory authority had to develop a new regulation. The regulatory authority published a draft of the new regulations in September 2007 which proposes a sliding scale for reducing charges. Beginning on January 1, 2009 at the latest, the standard interconnection charge for all providers will be EUR 5.72. The regulatory authority published the relevant decisions on October 15, 2007 following a national public consultation and Europe-wide coordination.


Deutsche Telekom First three quarters 2007  17

 

Group strategy.

Deutsche Telekom is tackling the sustained market and competitive challenges with its four-pronged strategy:

 

 

Safeguard competitiveness in Germany and Eastern Europe.

 

 

Grow abroad with mobile communications.

 

 

Mobilize the Internet and the Web 2.0 trend.

 

 

Roll-out network-centric ICT.

Safeguarding competitiveness

Deutsche Telekom has reinforced its position in the German market. There was considerable customer growth in Deutsche Telekom’s domestic mobile communications business and its broadband business. With a net increase of around 0.6 million new mobile communications contract customers in the first three quarters of 2007, Deutsche Telekom recorded an increase of 39.4 percent year-on-year. At the same time, approximately 1.4 million net DSL retail lines were gained, compared with only just under 0.2 million net additions in the prior-year period. Deutsche Telekom has thus managed to improve its results in the mobile communications and broadband businesses in three quarters in succession and to stem the loss of customers in the fixed-network area. Approximately 497,000 fixed network lines were lost in the third quarter of this year.

A key milestone in safeguarding competitiveness was achieved by spinning off the call center, technical customer ser-vice and technical infrastructure units into three independent service companies. Their aim is to improve service through focused management of their areas of responsibility and improvement of the respective cost structure, coupled with a reduction in outsourcing thanks to additional internal staff resources. In addition, Deutsche Telekom is bolstering customer proximity by consistently expanding its sales interface. A total of 720 Telekom shops were in business at the end of the third quarter of 2007 and a total of 134 new Telekom shops have been opened in 2007. Another important measure comes in the shape of the radical simplification of the brand structure in the residential customer business. All the products and services from the Broadband/Fixed Network strategic business area are now marketed under the T-Home brand. Together with the T-Mobile brand, there is now a clear differentiation between the “at home” and “on the move” products. In the meantime, Deutsche Telekom has also become a more attractive proposition for younger, price-sensitive customer segments thanks to the introduction of the second brand congstar and a highly flexible product portfolio. Fixed-network substitution continues apace in the mobile communications segment: with the number of T-Mobile@home customers increasing to around 1.85 million.

Growing abroad with mobile communications

The mobile communications business outside Germany remains the main growth engine. T-Mobile USA recorded 2.7 million net additions in the first three quarters of 2007. Overall, T-Mobile added some 4.2 million customers in all its foreign subsidiaries, bringing the total number of customers outside Germany to 79.2 million.

Inorganic growth represents a key pillar in Deutsche Telekom’s growth strategy. Through the acquisition of Orange Nederland, Deutsche Telekom will have some 4.8 million mobile customers in the Netherlands from October 2007, positioning itself as the strong No. 2 in the Dutch market. Deutsche Telekom is also planning to strengthen further its position in the United States. The acquisition of SunCom Wireless, a wireless provider operating in the southeastern United States and the Caribbean, is intended to increase Deutsche Telekom’s customer base and significantly expand mobile coverage. Once the transaction is complete, T-Mobile USA will be able to offer its services via its own network to around 259 million out of a total population of around 300 million.


Deutsche Telekom First three quarters 2007  18

 

Mobilizing the Internet and the Web 2.0 trend

Deutsche Telekom continues to promote the mobile use of the Internet and supports its customers’ personal, social and business networking with its products. The success of web’n’walk, which provides open Internet access from mobile devices, reflects the general industry trend toward increasing mobile data usage. The number of web’n’walk customers increased worldwide to 2.8 million by the end of the third quarter of 2007. Data revenue (excluding SMS text messages) accounts for around 5.5 percent of total mobile communications revenue – an increase of around 1.2 percentage points compared with the prior-year period. The launch of the Apple iPhone, available in Germany exclusively from T-Mobile, in November of this year will further boost the mobile Internet trend as the iPhone calling plans on offer will all include a data flat rate.

Deutsche Telekom sees a significant value driver for its business in the trend toward personalizing communications and the use of social networks. The innovative MyFaves service, for instance, addresses the growing customer need for easy-to-use personalized networks. More than 3.6 million customers in the United States have opted for the service, which has also been available from T-Mobile in Germany since October 2007. The successful web’n’walk service is also being developed further and will come with a range of additional functions later this year, providing even faster mobile access to e-mails and to all major websites and Internet services such as eBay, Windows Live, Google and Yahoo!.

In addition to the development of compelling proprietary offerings and solutions for Web 2.0, Deutsche Telekom is also pursuing entrepreneurial involvement and partnerships with other providers. In this context, the T-Online Venture Fund acquired a stake in Jajah in May this year, one of the most successful companies in the fledgling Internet telephony market. In addition, numerous new services have been integrated into the T-Online portal: including the likes of Wikipedia, Lycos IQ, Webnews, Mister Wong and moviepilot.de.

Roll-out of network-centric ICT services

T-Systems revenue from international business rose 8.3 percent to EUR 1.8 billion in the first three quarters of 2007, while revenue in Germany decreased 10.3 percent to EUR 7.0 billion. New orders amounted to EUR 9.2 billion, EUR 0.5 billion lower than in the previous year.

Deutsche Telekom offers its business customers solutions for their IT and telecommunications needs from a single source. Network-centric ICT (Information and Communication Technology) was established as the future focus of core activities for business with small, medium-sized and large enterprises. This area includes traditional network services and all network-based IT services. The next steps necessary to ensure successful implementation were also defined. The new strategic focus also means that in future T-Systems will seek to run certain businesses, such as systems integration, in cooperation with partner companies. The appointment of Mr. Reinhard Clemens to the Group Board of Management in December 2007 will enable Deutsche Telekom to further consolidate its position by drawing on the services of a renowned expert in international IT markets who will consistently drive forward the further development of T-Systems.


Deutsche Telekom First three quarters 2007  19

 

Development of business in the Group.

Net revenue

Deutsche Telekom generated revenue of EUR 46.7 billion in the first nine months of 2007. The Company thus continued its positive revenue development, recording growth of EUR 1.3 billion or 2.8 percent as compared with the first three quarters of 2006. Revenue growth was mainly driven by changes to the consolidated group amounting to EUR 1.6 billion, which related in particular to the first-time consolidation of PTC, gedas and tele.ring in the course of the 2006 financial year. Customer growth in the mobile communications business, primarily at T-Mobile USA, also contributed to the increase in revenue. Exchange rate effects totaling approximately EUR 0.6 billion – in particular from the translation of U.S. dollars – had a negative effect on net revenue. Net revenue rose by EUR 0.2 billion or 1.4 percent compared with the third quarter of 2006.

The Mobile Communications strategic business area increased its revenue by a total of 9.9 percent as compared with the first nine months of 2006. Compared with the same quarter in the previous year, revenue grew by 8.6 percent. This growth was mainly attributable to the full consolidation of PTC as of November 1, 2006 and tele.ring as of May 1, 2006. The successful business development in the United States continued to make the largest contribution to revenue.

Revenue in the Broadband/Fixed Network strategic business area decreased by 7.0 percent in comparison with the first nine months of 2006. This was primarily due to a further decline in call revenues resulting from line losses and pricing effects from the greater use of complete packages. 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 by 7.0 percent. Continued high price pressure and fierce competition for voice and data services reduced revenues primarily in the area of Telecommunications Services for multinational business customers and in the Business Services area. However, revenue increased due to changes to the consolidated group relating to the full consolidation of gedas as of March 31, 2006.

 

     Third quarter of 2007     First three quarters of 2007  
    

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %    

FY

2006
millions of €

 

Net revenue

   15,453     15,575     15,693     15,480     1.4     46,721     45,452     2.8     61,347  

Mobile Communicationsa

   8,400     8,650     8,875     8,169     8.6     25,925     23,600     9.9     32,040  

Broadband/ Fixed Networka,b

   5,832     5,655     5,626     6,167     (8.8 )   17,113     18,398     (7.0 )   24,515  

Business Customersa,b

   2,906     2,962     2,917     3,174     (8.1 )   8,785     9,445     (7.0 )   12,869  

Group Headquarters & Shared Servicesa,b

   952     988     966     960     0.6     2,906     2,766     5.1     3,758  

Intersegment revenuec

   (2,637 )   (2,680 )   (2,691 )   (2,990 )   10.0     (8,008 )   (8,757 )   8.6     (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.


Deutsche Telekom First three quarters 2007  20

 

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

 

     Q1 - Q3
2007
millions of €
  

Proportion
of net
revenue

of the

Group %

   Q1 - Q3
2006
millions of €
  

Proportion
of net
revenue

of the
Group %

   Change
millions of €
    Change %     FY 2006
millions of €

Net revenue

   46,721    100.0    45,452    100.0    1,269     2.8     61,347

Mobile Communications

   25,412    54.4    23,061    50.7    2,351     10.2     31,308

Broadband/Fixed Networka

   14,409    30.8    15,317    33.7    (908 )   (5.9 )   20,366

Business Customersa

   6,606    14.2    6,818    15.0    (212 )   (3.1 )   9,301

Group Headquarters & Shared Servicesa

   294    0.6    256    0.6    38     14.8     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 54.4 percent, the Mobile Communications strategic business area made the largest contribution to the net revenue of the Group. The proportions of net revenue generated by the Broadband/Fixed Network and Business Customers strategic business areas were lower than in the previous year, at 30.8 percent and 14.2 percent respectively.

Breakdown of revenue by regions

The proportion of revenue generated outside Germany in the first nine months of 2007 rose by 5.1 percentage points year-on-year to 50.7 percent. This represents growth of EUR 3.0 billion to EUR 23.7 billion. A similar trend can also be seen in the quarterly comparison, with an increase of EUR 1.0 billion to EUR 8.1 billion. This increase is mainly attributeable to the first-time consolidation of PTC and tele.ring as well as the positive development of revenue at T-Mobile USA. However, domestic revenue declined on both a nine-month and a quarterly basis.

 

     Third quarter of 2007     First three quarters of 2007
    

Q1

2007
millions of €

  

Q2

2007
millions of €

  

Q3

2007
millions of €

  

Q3

2006
millions of €

   Change %     Q1 - Q3
2007
millions of €
   Q1 - Q3
2006
millions of €
   Change %    

FY

2006
millions of €

Net revenue

   15,453    15,575    15,693    15,480    1.4     46,721    45,452    2.8     61,347

Domestic

   7,793    7,624    7,609    8,386    (9.3 )   23,026    24,733    (6.9 )   32,460

International

   7,660    7,951    8,084    7,094    14.0     23,695    20,719    14.4     28,887

Proportion generated internationally (%)

   49.6    51.0    51.5    45.8    —       50.7    45.6    —       47.1

Europe (excluding Germany)

   4,099    4,279    4,383    3,580    22.4     12,761    10,374    23.0     14,823

North America

   3,475    3,564    3,597    3,434    4.7     10,636    10,122    5.1     13,700

Other

   86    108    104    80    30.0     298    223    33.6     364

EBIT

EBIT of the Deutsche Telekom Group decreased by EUR 0.6 billion year-on-year to EUR 5.7 billion. While earnings in the Broadband/Fixed Network and Business Customers business areas declined, EBIT increased in the Mobile Communications business area and at Group Headquarters & Shared Services.


Deutsche Telekom First three quarters 2007  21

 

    Third quarter of 2007     First three quarters of 2007  
   

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %    

Q1 - Q3

2007
millions of €

    Q1 - Q3
2006
millions of €
    Change %    

FY

2006
millions of €

 

EBITa in the Group

  1,795     2,043     1,911     1,989     (3.9 )   5,749     6,392     (10.1 )   5,287  

Mobile Communications

  1,066     1,297     1,356     1,390     (2.4 )   3,719     3,528     5.4     4,504  

Broadband/Fixed Networkb

  976     929     947     1,143     (17.1 )   2,852     3,681     (22.5 )   3,356  

Business Customersb

  44     34     26     34     (23.5 )   104     194     (46.4 )   (835 )

Group Headquarters & Shared Servicesb

  (250 )   (215 )   (401 )   (584 )   31.3     (866 )   (996 )   13.1     (2,138 )

Reconciliation

  (41 )   (2 )   (17 )   6     n.a.     (60 )   (15 )   n.a.     400  

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

Profit before income taxes decreased year-on-year by EUR 0.9 billion in the first nine months of 2007. In addition to the cost of sales increasing at a faster rate than revenue, this was mainly due to higher selling expenses. One factor impacting profit before income taxes was the expenses incurred for 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 sale of Celcom. However, the gains on the disposal of T-Online France and T-Online Spain as well as real estate sales had a positive effect on profit before income taxes.

Net profit

Net profit for the first three quarters of 2007 decreased by EUR 2.7 billion year-on-year to EUR 1.3 billion. In addition to the aforementioned effects on profit before income taxes, this trend was attributable to the income taxes. While the Deutsche Telekom Group recorded an income tax benefit in the prior-year period, the tax expense in the first nine months of 2007 was EUR 1.8 billion. Net profit in the previous year was positively impacted in particular by an income tax benefit from the recognition of previously unrecognized deferred tax assets relating to tax loss carryforwards at T-Mobile USA and the reversal of income tax provisions. The decrease in the corporate income tax rate as part of the 2008 corporate tax reform in Germany resulted in a reduction in net profit in the third quarter of 2007 in the form of a one-time deferred tax expense.

EBITDA

In the first nine months of 2007, EBITDA decreased slightly by EUR 0.1 billion or 0.7 percent year-on-year to EUR 14.3 billion. The decrease in EBITDA in the Broadband/Fixed Network and Business Customers strategic business areas could not be fully offset by the increase in EBITDA in the Mobile Communications strategic business area and at Group Headquarters & Shared Services.

Adjusted EBITDA

The Group’s EBITDA was negatively affected by special factors having a net impact of EUR 440 million in the first three quarters of 2007. These mainly comprised expenses in connection with staff-related measures (voluntary redundancy, severance and compensation payments) and non staff-related restructuring measures. 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 offset primarily by the gains on the disposal of T-Online France and T-Online Spain. Special factors had a negative net impact of EUR 508 million on EBITDA in the prior-year period. These arose mainly from voluntary redundancy and severance payments and restructuring costs, as well as from one-time expenses relating to DSL campaigns.


Deutsche Telekom First three quarters 2007  22

 

Adjusted for these special factors, EBITDA amounted to EUR 14.7 billion in the first nine months of 2007, down by approximately EUR 0.2 billion year-on-year. This decline was primarily due to lower revenues in the Broadband/Fixed Network strategic business area, in particular in the fixed-network business. Customer acquisition costs also increased, in particular in the broadband sector. These effects were partially offset by cost-cutting measures. Adjusted EBITDA in the Business Customers strategic business area continued to be impacted by strong price and competitive pressure, as well as by lower margins.

 

     Third quarter of 2007     First three quarters of 2007  
    

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %    

FY

2006
millions of €

 

Adjusted EBITDAa

   4,682     4,902     5,132     5,099     0.6     14,716     14,886     (1.1 )   19,434  

Mobile Communications

   2,539     2,750     2,938     2,682     9.5     8,227     7,325     12.3     9,902  

Broadband/Fixed Networkb

   1,870     1,905     1,968     2,233     (11.9 )   5,743     6,751     (14.9 )   8,748  

Business Customersb

   261     280     291     321     (9.3 )   832     1,018     (18.3 )   1,291  

Group Headquarters & Shared Servicesb

   67     (21 )   (37 )   (134 )   72.4     9     (161 )   n.a.     (461 )

Reconciliation

   (55 )   (12 )   (28 )   (3 )   n.a.     (95 )   (47 )   n.a.     (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 72 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.


Deutsche Telekom First three quarters 2007  23

 

Free cash flow

At EUR 5.8 billion, free cash flow in the first nine months of 2007 increased by EUR 2.0 billion year-on-year. The increase is primarily attributable to tax refunds of EUR 0.4 billion as compared with tax payments of EUR 1.0 billion in the first nine months of 2006. Positive effects also resulted from lower payments for investments in intangible assets and property, plant and equipment which decreased by EUR 0.6 billion. The increase of EUR 0.2 billion in proceeds from the disposal of property, plant and equipment also made a positive contribution to free cash flow. This was partially offset by the year-on-year increase in payments for staff-related restructuring measures.

 

     Third quarter of 2007    First three quarters of 2007  
    

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %    Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %   

FY

2006
millions of €

 

Cash generated from operationsa

   2,543     4,073     5,620     4,325     29.9    12,236     11,444     6.9    16,981  

Interest received (paid)

   (478 )   (923 )   (483 )   (762 )   36.6    (1,884 )   (2,186 )   13.8    (2,759 )

Net cash from operating activitiesa

   2,065     3,150     5,137     3,563     44.2    10,352     9,258     11.8    14,222  

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

   (2,023 )   (1,584 )   (1,686 )   (1,950 )   13.5    (5,293 )   (5,919 )   10.6    (11,806 )

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

   42     1,566     3,451     1,613     n.a.    5,059     3,339     51.5    2,416  

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

   357     185     115     54     n.a.    657     490     34.1    567  

Adjustmentb

   121     —       —       —       —      121     —       n.a.    —    

Free cash flow before dividend paymentsc

   520     1,751     3,566     1,667     n.a.    5,837     3,829     52.4    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 76.


Deutsche Telekom First three quarters 2007  24

 

Net debt

Compared with the end of 2006, net debt decreased from EUR 39.6 billion to EUR 36.5 billion. This decline was driven primarily by the positive free cash flow and by cash inflows from the sale of T-Online France and T-Online Spain. The positive trend of net debt was impacted primarily by dividend payments.

 

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

Bonds

   33,079    35,013    (5.5 )   36,288    (8.8 )   34,674    (4.6 )

Liabilities to banks

   2,934    3,371    (13.0 )   2,348    25.0     3,188    (8.0 )

Liabilities to non-banks from promissory notes

   692    669    3.4     680    1.8     630    9.8  

Liabilities from derivatives

   896    712    25.8     562    59.4     504    77.8  

Lease liabilities

   2,161    2,200    (1.8 )   2,293    (5.8 )   2,274    (5.0 )

Liabilities arising from ABS transactions

   807    1,148    (29.7 )   1,139    (29.1 )   1,133    (28.8 )

Other financial liabilities

   401    407    (1.5 )   377    6.4     98    n.a.  

Gross debt

   40,970    43,520    (5.9 )   43,687    (6.2 )   42,501    (3.6 )

Cash and cash equivalents

   3,450    2,146    60.8     2,765    24.8     1,916    80.1  

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

   46    75    (38.7 )   122    (62.3 )   135    (65.9 )

Derivatives

   298    213    39.9     359    (17.0 )   403    (26.1 )

Other financial assets

   674    729    (7.5 )   886    (23.9 )   1,778    (62.1 )

Net debta

   36,502    40,357    (9.6 )   39,555    (7.7 )   38,269    (4.6 )

a For detailed information and calculations, please refer to “Reconciliation of pro forma figures,” page 72 et seq.


Deutsche Telekom First three quarters 2007  25

 

Development of business in the strategic business areas.

Mobile Communications.

Mobile Communications: Customer development and selected KPIs

 

     Sept. 30, 2007
millions
   June 30, 2007
millions
  

Change
Sept. 30, 2007/

June 30, 2007
%

   Dec. 31, 2006
millions
  

Change
Sept. 30, 2007/
Dec. 31, 2006

%

   Sept. 30, 2006
millions
  

Change
Sept. 30, 2007/
Sept. 30, 2006

%

Mobile customers (total)a

   113.7    111.8    1.7    106.4    6.9    103.5    9.9

T-Mobile Deutschlandb

   34.5    34.3    0.6    31.4    9.9    30.7    12.4

T-Mobile USA

   27.7    26.9    3.0    25.0    10.8    24.1    14.9

T-Mobile UKc

   17.0    16.8    1.2    16.9    0.6    16.7    1.8

PTCa (Poland)

   12.7    12.5    1.6    12.2    4.1    11.9    6.7

T-Mobile Netherlands (NL)

   2.6    2.6    0.0    2.6    0.0    2.5    4.0

T-Mobile Austriaa (A)

   3.2    3.1    3.2    3.2    0.0    3.2    0.0

T-Mobile CZ (Czech Republic)

   5.2    5.1    2.0    5.0    4.0    4.8    8.3

T-Mobile Hungary

   4.6    4.5    2.2    4.4    4.5    4.3    7.0

T-Mobile Croatia

   2.3    2.2    4.5    2.2    4.5    2.1    9.5

T-Mobile Slovensko (Slovakia)

   2.3    2.2    4.5    2.2    4.5    2.1    9.5

Otherd

   1.5    1.4    7.1    1.3    15.4    1.2    25.0

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 prepay customers. These customers can now use their prepaid credit longer than before. Accordingly, in the first two quarters 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 prepay customers resulted from the use of pre-activated prepaid cards in the context of special customer acquisition measures in the first quarter of 2007. Adjustments were made in the third quarter of 2007 for customers who did not become active following this customer acquisition drive. Historical figures were not adjusted.
c Including Virgin Mobile.
d “Other” includes T-Mobile Macedonia and T-Mobile Crna Gora (Montenegro).

The Mobile Communications strategic business area reported further customer growth in the third quarter of 2007. The total number of T-Mobile customers rose by 1.9 million in the reporting period, with the greatest contribution coming from T-Mobile USA. Compared with the previous quarter, the Eastern European subsidiaries and T-Mobile UK in particular further expanded their customer base. Customer growth at T-Mobile Deutschland slowed in the third quarter of 2007 compared with the previous quarter, mainly due to losses in the prepay area.

While ARPU4 in T-Mobile’s national companies showed disparate trends compared with the prior year, ARPU in the third quarter of 2007 rose slightly quarter-on-quarter. The national companies in Eastern Europe and T-Mobile UK in particular increased their monthly revenue per user. ARPU at T-Mobile Deutschland and T-Mobile Austria remained stable as against the second quarter of 2007. At T-Mobile USA, negative exchange rate effects impacted ARPU on a euro basis. On a dollar (USD) basis, T-Mobile USA was able to maintain ARPU at a constant level compared with the second quarter of 2007. Year-on-year, T-Mobile USA increased ARPU from USD 51 in the third quarter of 2006 to USD 52.


Deutsche Telekom First three quarters 2007  26

 

4 ARPU – average revenue per user – is used to measure monthly revenue from services per customer. ARPU is calculated as follows: revenue generated from services used by customers (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 in question. 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.


Deutsche Telekom First three quarters 2007  27

 

Mobile Communications: Development of operations

 

     Third quarter of 2007     First three quarters of 2007  
    

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %    

FY

2006
millions of €

 

Total revenuea

   8,400     8,650     8,875     8,169     8.6     25,925     23,600     9.9     32,040  

of which: T-Mobile Deutschland

   1,951     2,009     2,059     2,122     (3.0 )   6,019     6,186     (2.7 )   8,215  

T-Mobile USA

   3,468     3,545     3,562     3,425     4.0     10,575     10,119     4.5     13,628  

T-Mobile UK

   1,165     1,178     1,251     1,165     7.4     3,594     3,319     8.3     4,494  

PTCb

   446     486     506     n.a.     n.a.     1,438     n.a.     n.a.     305  

T-Mobile NL

   288     301     294     286     2.8     883     839     5.2     1,138  

T-Mobile Ac

   310     295     301     335     (10.1 )   906     837     8.2     1,149  

T-Mobile CZ

   265     282     299     262     14.1     846     761     11.2     1,043  

T-Mobile Hungary

   265     278     287     266     7.9     830     783     6.0     1,050  

T-Mobile Croatia

   123     144     177     176     0.6     444     430     3.3     556  

T-Mobile Slovensko

   118     127     133     109     22.0     378     313     20.8     429  

Otherd

   49     60     72     57     26.3     181     147     23.1     198  

EBIT (profit from operations)

   1,066     1,297     1,356     1,390     (2.4 )   3,719     3,528     5.4     4,504  

EBIT margin (%)

   12.7     15.0     15.3     17.0       14.3     14.9       14.1  

Depreciation, amortization and impairment losses

   (1,455 )   (1,444 )   (1,579 )   (1,287 )   (22.7 )   (4,478 )   (3,792 )   (18.1 )   (5,358 )

EBITDAe

   2,521     2,741     2,935     2,677     9.6     8,197     7,320     12.0     9,862  

Special factors affecting EBITDAe

   (18 )   (9 )   (3 )   (5 )   40.0     (30 )   (5 )   n.a.     (40 )

Adjusted EBITDAe

   2,539     2,750     2,938     2,682     9.5     8,227     7,325     12.3     9,902  

of which: T-Mobile Deutschland

   700     741     777     893     (13.0 )   2,218     2,493     (11.0 )   3,303  

T-Mobile USA

   935     1,029     1,028     963     6.7     2,992     2,832     5.6     3,747  

T-Mobile UK

   224     276     365     326     12.0     865     662     30.7     978  

PTCb

   147     168     177     n.a.     n.a.     492     n.a.     n.a.     89  

T-Mobile NL

   61     73     77     71     8.5     211     118     78.8     189  

T-Mobile Ac

   112     81     84     110     (23.6 )   277     247     12.1     331  

T-Mobile CZ

   128     129     132     116     13.8     389     339     14.7     450  

T-Mobile Hungary

   110     120     129     103     25.2     359     306     17.3     422  

T-Mobile Croatia

   51     67     88     87     1.1     206     196     5.1     237  

T-Mobile Slovensko

   58     57     53     41     29.3     168     141     19.1     173  

Otherd

   24     30     41     33     24.2     95     80     18.8     105  

Adjusted EBITDA margine (%)

   30.2     31.8     33.1     32.8       31.7     31.0       30.9  

Cash capexf

   (915 )   (822 )   (767 )   (840 )   8.7     (2,504 )   (2,772 )   9.7     (7,247 )

Number of employeesg

   60,614     61,402     62,630     54,055     15.9     61,549     52,723     16.7     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 72 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.


Deutsche Telekom First three quarters 2007  28

 

Mobile Communications: Total revenue

In the first nine months of 2007, the Mobile Communications strategic business area generated revenue growth of EUR 2.3 billion. Total revenue at the end of the reporting period amounted to EUR 25.9 billion, 9.9 percent more than in the prior-year period. This growth was mainly driven by the first-time consolidation of the Polish company PTC and the revenue increase at T-Mobile USA. The increase in operating revenue at T-Mobile USA was dampened considerably by the slide in the U.S. dollar, however.

T-Mobile Deutschland was the only national company that failed to increase its revenue. The decrease in revenue of 2.7 percent compared with the first nine months of 2006 is due to the persistent fierce price competition. The growth in T-Mobile Deutschland’s customer base was also unable to compensate for the revenue decline. T-Mobile Austria recorded a year-on-year revenue increase in the first nine months of 2007 due to the consolidation of tele.ring in 2007. In a comparison of the third quarters, T-Mobile Ausria recorded a decrease in revenue compared with 2006, mainly as a result of lower ARPU. The customer growth did not compensate for the decrease in ARPU.

Mobile Communications: EBITDA, adjusted EBITDA

Adjusted EBITDA in the Mobile Communications strategic business area increased by around EUR 0.9 billion or 12.3 percent year-on-year in the first nine months of 2007. This growth is principally attributable to the first-time consolidation of the Polish mobile carrier PTC in November 2006 which contributed around EUR 0.5 billion to EBITDA. The improved operating result of T-Mobile USA was for the most part eroded by the slump in the U.S. dollar exchange rate, which is why this company merely contributed around EUR 0.2 billion to the total EBITDA growth of the Mobile Communications business area, currency effects included.

The other companies, with the exception of T-Mobile Deutschland, also improved their earnings in the first nine months of 2007. The best performers were T-Mobile UK with an increase of around EUR 0.2 billion, the Eastern European companies with an increase of just under EUR 0.1 billion, and T-Mobile Netherlands, which also posted a EUR 0.1 billion rise in EBITDA. EBITDA at T-Mobile Deutschland decreased by around EUR 0.3 billion as a result of intense competition.

Mobile Communications: EBIT

EBIT (profit from operations) in the Mobile Communications business area increased by approximately EUR 0.2 billion year-on-year in the first nine months 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 partially offset by the lower revenue and narrower margins at T-Mobile Deutschland.

Mobile Communications: Cash capex

Cash capex at the Mobile Communications strategic business area declined year-on-year from EUR 2.8 billion to EUR 2.5 billion in the first nine months of 2007. This was primarily due to the decrease in capital expenditure in the United States equivalent to EUR 0.3 billion.

Mobile Communications: Personnel

The average number of employees in the Mobile Communications strategic business area rose quarter-on-quarter, mainly as a result of staff increases at T-Mobile Deutschland as well as at T-Mobile USA. In Germany, the restructuring of the sales organization within the Deutsche Telekom Group resulted in T-Mobile taking on sales staff from other business areas. At T-Mobile USA, the headcount increase was related to sustained customer growth and a systematic expansion of business. Compared with the previous year, the first-time consolidation of PTC also contributed to the overall growth in the number of employees.


Deutsche Telekom First three quarters 2007  29

 

Broadband/Fixed Network.

Broadband/ Fixed Network: Customer development and selected KPIs

 

     Sept. 30, 2007
millions
   June 30, 2007
millions
  

Change

Sept. 30,

2007/

June 30, 2007
%

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

Change
Sept. 30,
2007/
Sept. 30, 2006

%

 

Broadband

                  

Lines (total)a,b,c

   13.3    12.7    4.6     11.3    17.7     10.2    29.5  

of which: retail

   9.5    9.0    6.1     7.9    20.9     7.2    32.5  

Domesticd

   12.0    11.5    4.4     10.3    16.9     9.4    27.8  

of which: retail

   8.5    8.0    6.0     7.1    20.2     6.5    30.6  

Internationalb,c,e

   1.2    1.2    6.8     1.0    25.8     0.8    48.0  

of which: Magyar Telekome

   0.7    0.7    5.1     0.6    20.5     0.5    39.1  

of which: Slovak Telekom

   0.2    0.2    10.4     0.2    27.9     0.2    51.8  

of which: T-Hrvatski Telekom

   0.3    0.3    8.1     0.2    38.5     0.2    71.0  

Broadband rates (total)c,f

   9.3    8.6    8.2     7.1    30.8     6.1    51.7  

of which: domestic

   8.1    7.5    8.4     6.3    28.5     5.4    48.3  

Narrowband

                  

Lines (total)a,g

   37.2    37.7    (1.5 )   39.0    (4.6 )   39.5    (5.9 )

Domestic

   31.6    32.1    (1.5 )   33.2    (4.8 )   33.7    (6.2 )

Standard analog lines

   22.9    23.3    (1.8 )   24.2    (5.3 )   24.5    (6.6 )

ISDN lines

   8.7    8.8    (0.9 )   9.0    (3.7 )   9.2    (5.2 )

International (Eastern Europe only)e

   5.6    5.6    (1.1 )   5.8    (3.4 )   5.8    (3.9 )

Narrowband rates (total)c,f

   2.5    2.7    (7.6 )   3.1    (19.7 )   3.5    (27.9 )

Wholesale/resale

                  

DSL resaleh

   3.7    3.7    0.9     3.4    10.2     3.0    22.3  

of which: domestic

   3.5    3.5    0.7     3.2    9.7     2.9    21.6  

Unbundled local loop linesi

   5.9    5.5    7.4     4.7    26.2     4.3    36.2  

The tables include broadband lines in Germany and abroad (Eastern Europe). The prior-year figures were adjusted to reflect the deconsolidation of T-Online France S.A.S. and T-Online Spain S.A.U. The total was calculated on the basis of precise figures and rounded to millions. Percentages are calculated on the basis of precise figures.

 

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 and T-Online Spain at the end of July 2007. The customer figures of T-Online France and T-Online Spain are therefore no longer reported; prior-year figures have been adjusted accordingly. Western Europe is no longer reported separately as of the third quarter of 2007 due to the deconsolidation of T-Online France and T-Online Spain.
d Broadband lines excluding lines for internal use.
e Subscriber-line figures are recorded including Magyar Telekom’s subsidiary MakTel and Crnogorski Telekom (formerly Telekom Montenegro).
f Customers with a billing relationship include customers in Germany and outside Germany (Eastern Europe). Eastern Europe includes Magyar Telekom, T-Hrvatski Telekom, and Slovak Telekom.
g Telephone lines excluding internal use and public telecommunications, including wholesale services.
h 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.
i 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.


Deutsche Telekom First three quarters 2007  30

 

The strong growth trend of the broadband market continued in the third quarter of 2007 and actually accelerated compared with the second quarter of 2007. Year-on-year, the number of broadband lines increased by 3.0 million to 13.3 million. Of this number, 9.5 million were retail broadband lines, 2.3 million more than in the third quarter of 2006.

The number of domestic retail broadband lines increased by 480,000 in the third quarter of 2007 to reach 8.5 million.

Since September 18, 2006, the Broadband/Fixed Network business area has benefited from the systematic marketing of complete packages consisting of voice telephony, broadband Internet and TV entertainment on the domestic broadband market. Since then, the portfolio of products and rate plans has been systematically expanded, especially in the areas of single-play and double-play packages. Overall, the number of existing customers with complete packages increased to 9.0 million, up by approximately 1.5 million on the previous quarter. At almost 70 percent, products and services combining voice and Internet communication (Call & Surf) account for the largest proportion of customers opting for complete packages. Thanks to the progressive roll-out of the ADSL2+ and VDSL high-speed networks and the active marketing of the Entertain packages since the IFA International Consumer Electronics Exhibition, the number of Entertain customers increased to nearly 50,000 by the end of the reporting period.

With regard to the marketing of wholesale products, the Broadband/Fixed Network business area experienced declining demand in Germany for DSL resale products in new business in favor of unbundled local loop lines. The reason for this trend is the continued growth in customer demand for package offers comprising voice telephony and Internet access. The total number of DSL resale lines increased by 24,000 in the third quarter to reach 3.5 million. At the same time, the demand for unbundled local loop lines increased by 405,000 to reach a total of 5.9 million. This demonstrates that competitors are increasingly marketing their own complete package offers on the basis of unbundled local loop lines.

The broadband market also continued on a growth course outside Germany in the first nine months of 2007. With a total of 1.2 million broadband lines, including resale products, the business area achieved an increase of 405,000 or 48 percent year-on-year. The deconsolidation of T-Online France and T-Online Spain had a negative effect of around 0.6 million on the number of broadband lines.

Broadband/Fixed Network recorded a drop in the number of narrowband lines, as expected. Overall, the number of fixed-network lines in Germany decreased by 497,000 in the third quarter of 2007 to reach 31.6 million. However, the rate of losses slowed compared with the second quarter of 2007 and especially the first quarter of 2007. As in previous quarters, the overall decrease in the third quarter of 2007 was primarily due to customer churn in favor of fixed-network competitors. The smaller proportion of line losses was attributable to the migration of customers to cable network operators and mobile companies.


Deutsche Telekom First three quarters 2007  31

 

The development of call minutes saw contrasting trends in the third quarter of 2007. The continuing loss of Deutsche Telekom subscriber lines and the growing substitution by mobile communications and VoIP caused the absolute number of call minutes in the network of the Broadband/Fixed Network business area to fall 3.5 percent year-on-year. However, thanks to the successful marketing of complete packages for all call types (city, national, international, mobile), Broadband/Fixed Network managed to further increase its overall minutes loyalty5 by 8.7 percentage points to 74.9 percent.


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


Deutsche Telekom First three quarters 2007  32

 

Broadband/ Fixed Network: Development of operations

 

    Third quarter of 2007     First three quarters of 2007  
   

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q3

2007e
millions of €

   

Q3

2006d
millions of €

    Change %    

Q1 - Q3
2007e

millions of €

    Q1 - Q3
2006d
millions of €
    Change %    

FY

2006
millions of €

 

Total revenue

  5,832     5,655     5,626     6,167     (8.8 )   17,113     18,398     (7.0 )   24,515  

Domestic

  5,146     4,948     5,002     5,493     (8.9 )   15,096     16,402     (8.0 )   21,835  

of which: network communications

  2,631     2,556     2,561     2,801     (8.6 )   7,748     8,524     (9.1 )   11,240  

of which: wholesale services

  1,156     1,085     1,124     1,077     4.4     3,365     3,194     5.4     4,302  

of which: IP/Internet

  632     590     602     835     (27.9 )   1,824     2,289     (20.3 )   3,000  

of which: other fixed-network services

  627     619     626     689     (9.1 )   1,872     2,086     (10.3 )   2,837  

International

  698     722     632     674     (6.2 )   2,052     1,996     2.8     2,680  

EBIT (profit from operations)

  976     929     947     1,143     (17.1 )   2,852     3,681     (22.5 )   3,356  

EBIT margin (%)

  16.7     16.4     16.8     18.5       16.7     20.0       13.7  

Depreciation, amortization

and impairment losses

  (908 )   (926 )   (914 )   (923 )   1.0     (2,748 )   (2,851 )   3.6     (3,839 )

EBITDAa

  1,884     1,855     1,861     2,066     (9.9 )   5,600     6,532     (14.3 )   7,195  

Special factors affecting EBITDAa

  14     (50 )   (107 )   (167 )   35.9     (143 )   (219 )   34.7     (1,553 )

Adjusted EBITDAa

  1,870     1,905     1,968     2,233     (11.9 )   5,743     6,751     (14.9 )   8,748  

Domestic

  1,658     1,656     1,682     2,035     (17.3 )   4,996     6,115     (18.3 )   7,903  

International

  214     249     284     198     43.4     747     636     17.5     845  

Adjusted EBITDA margina (%)

  32.1     33.7     35.0     36.2       33.6     36.7       35.7  

Domestic (%)

  32.2     33.5     33.6     37.0       33.1     37.3       36.2  

International (%)

  30.7     34.5     44.9     29.4       36.4     31.9       31.5  

Cash capexb

  (722 )   (534 )   (629 )   (806 )   22.0     (1,885 )   (2,297 )   17.9     (3,250 )

Number of employeesc

  100,590     99,185     96,678     107,159     (9.8 )   98,818     107,915     (8.4 )   107,006  

Domestic

  81,409     80,411     79,334     86,368     (8.1 )   80,385     86,938     (7.5 )   86,315  

International

  19,181     18,774     17,344     20,791     (16.6 )   18,433     20,977     (12.1 )   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 as the 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 72 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 Changed customer retention periods in the network communications, wholesale, and IP/Internet revenue clusters had a positive effect of EUR 0.2 billion on revenue in the third quarter of 2006.
e Deconsolidation of T-Online France at the end of June 2007 and T-Online Spain at the end of July 2007.


Deutsche Telekom First three quarters 2007  33

 

Broadband/ Fixed Network: Total revenue

Total revenue in the first nine months of 2007 amounted to EUR 17.1 billion. The strategic business area thus recorded a decline of 7.0 percent year-on-year. This was mainly attributable to line losses, a decrease in call revenues (both of these in the network communications revenue cluster), and lower revenue from IP/Internet services. Domestic revenue declined by 8.0 percent to EUR 15.1 billion. Factors included the positive revenue effect of the change in customer retention periods in Germany amounting to EUR 0.2 billion in the third quarter of 2006 that did not occur in 2007. International revenue rose by 2.8 percent to EUR 2.1 billion. The decrease in the total revenue of the business area was influenced by the deconsolidation of T-Online France in June and T-Online Spain in July 2007.

Broadband/ Fixed Network: Total revenue, domestic

Overall, domestic revenue decreased by 8.0 percent year-on-year to EUR 15.1 billion. This decrease was due in particular to lower call revenues as a result of 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. The revenue shortfall could only partly be offset by volume growth in the fields of unbundled local loop lines and DSL resale.

In the network communications area, the intense competition caused revenues to fall by 9.1 percent year-on-year, to reach EUR 7.7 billion. Narrowband access revenue remained almost stable at prior-year level, due primarily to the intensified marketing of flat rates for voice service as a component of access line products. On the other hand, these flat-rate offers had the effect of reducing call revenues due to the decreasing proportion of separately billed minutes.

Revenue from wholesale services rose by 5.4 percent year-on-year to EUR 3.4 billion. This increase is primarily the result of higher revenues from DSL resale products, due to a higher sales volume, and from the leasing of unbundled local loop lines. Increased renting out of co-location space to competitors also had a positive effect in the first nine months of 2007. Price cuts imposed by the regulator on interconnection calls had a negative impact on revenue, however. These regulatory decisions included the reduction in interconnection charges by an average of 10.0 percent as of June 1, 2006. Price cuts in DSL resale in the second quarter of 2006 also negatively affected revenue.

Revenue from IP/Internet services decreased 20.3 percent year-on-year to EUR 1.8 billion. This decrease was caused primarily by considerable price erosion, but also by the migration of narrowband calling plans to the complete package offers. On the other hand, the IP/Internet segment recorded a considerable volume growth in terms of DSL retail lines that was, however, unable to offset the price erosion. The non-access business, including online advertising for instance, was also lower.

Other fixed-network services, consisting of data communications, value-added services and terminal equipment, amounted to EUR 1.9 billion – a EUR 0.2 billion decrease compared with the same period last year.

Broadband/ Fixed Network: Total revenue, international

Outside Germany, revenue rose by EUR 0.1 billion or 2.8 percent to EUR 2.1 billion due to positive exchange rate effects in Slovakia and Hungary. The total increase was partially offset by the deconsolidation of T-Online France in June and T-Online Spain in July 2007.

In the Eastern European subsidiaries in Croatia, Slovakia and Hungary, the losses experienced in the traditional fixed-network business were partially offset by the dynamic growth in broadband lines and increases in the wholesale business. Positive exchange rate effects in Hungary and Slovakia in particular increased revenue by 3.9 percent to EUR 1.8 billion.

Broadband/ Fixed Network: Net revenue

Compared with the first nine months of 2006, net revenue decreased by EUR 0.9 billion or 5.9 percent to EUR 14.4 billion, i.e., the decrease in net revenue was less than the decline in total revenue.


Deutsche Telekom First three quarters 2007  34

 

Broadband/ Fixed Network: EBITDA, adjusted EBITDA

Adjusted EBITDA decreased by EUR 1.0 billion to EUR 5.7 billion year-on-year, 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 5.0 billion. The decline was primarily a result of the decrease in revenues from the traditional fixed-network business. In addition to lower revenue-related costs such as termination charges, cost savings were achieved in the area of rental expenses, personnel and IT. The strong demand for the new complete packages caused a rise in customer acquisition and retention costs, however, as customers migrated to the new calling plans. Further cost increases related for example to expenses for merchandise in connection with the broadband customer acquisition drive and expenses for service improvements. The adjusted EBITDA margin of 33.1 percent was slightly better than the corresponding figure for the first half of 2007.

Outside Germany, adjusted EBITDA increased by EUR 0.1 billion to EUR 0.7 billion, largely due to growth in Eastern Europe. EBITDA in Eastern Europe rose 9.0 percent. As regards Western Europe, the deconsolidation of T-Online France and T-Online Spain was effected at the end of June and at the end of July 2007, respectively.

Broadband/ Fixed Network: EBIT

EBIT (profit from operations) decreased by 22.5 percent to EUR 2.9 billion year-on-year, principally as a result of the decline in EBITDA. A decrease in depreciation, amortization, and impairment losses of 3.6 percent had an offsetting effect.

Broadband/ Fixed Network: Cash capex

At EUR 1.9 billion, cash capex was EUR 0.4 billion lower year-on-year, mainly due to the lower level of VDSL expansion in 2007.

Broadband/ Fixed Network: Personnel

The workforce restructuring 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 nine months of 2007, the total number of employees declined by 8.4 percent compared with the same period last year to reach 98,818. At 80,385, the number of employees in Germany was down 6,553 year-on-year. Outside Germany, the average number of employees amounted to 18,433, a decrease of 2,544. In Eastern Europe, the outsourcing of services resulted in a decrease in the number of employees by 2,191. In Western Europe, the decrease of 353 in the total number of employees was due primarily to the deconsolidation of T-Online France and T-Online Spain.


Deutsche Telekom First three quarters 2007  35

 

Business Customers.

Business Customers: Selected KPIs

 

     Sept. 30, 2007    June 30, 2007   

Change

Sept. 30,
2007/

June 30,
2007

%

   Dec. 31,
2006
  

Change
Sept. 30,
2007/
Dec. 31,
2006

%

    Sept. 30,
2006
  

Change
Sept. 30,
2007/
Sept. 30,
2006

%

 

Enterprise Servicesa

                   

Computing & Desktop Services

                   

Number of servers managed and serviced (units)

   36,753    36,082    1.9    33,037    11.2     33,083    11.1  

Number of workstations managed and serviced(millions)

   1.45    1.43    1.4    1.36    6.6     1.36    6.6  

Systems Integrationb

                   

Hours billedc (millions)

   8.6    5.8    n.a.    10.9    n.a.     8.3    3.6  

Utilization rated (%)

   80.2    80.2    0.0p    80.4    (0.2 )p   79.9    0.3p  

Business Servicesa

                   

Voice revenuec (millions of €)

   1,154    780    n.a.    1,666    n.a.     1,252    (7.8 )

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

   1,568    1,073    n.a.    2,475    n.a.     1,801    (12.9 )

IT revenuec (millions of €)

   401    246    n.a.    622    n.a.     438    (8.4 )

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.

The business customers market for information and telecommunications technology (ICT) was again characterized by tough competition and intense price pressures in the third quarter of 2007. The volume of new orders received by T-Systems declined in the third quarter of 2007.

In August 2007, Deutsche Telekom redefined the future strategic orientation of T-Systems in the reporting period. By means of the new strategic focus, Deutsche Telekom made an unambiguous commitment to its business customer brand. In the future, T-Systems will offer its business customers network-centric ICT services. In addition to traditional network services for small, medium-sized and large companies, the core business will also comprise all network-based IT services, including computing center capacities and business applications like SAP. On the basis of the Deutsche Telekom network, T-Systems can offer these services in approximately 50 countries around the globe; by cooperating with partner companies, T-Systems can offer them in as many as 140 countries. Thus, T-Systems can serve internationally operating customers in all important economic regions of the world.

The new strategic focus also means that in future T-Systems will seek to run certain businesses, such as systems integration, in cooperation with partner companies. The goal of this measure is likewise to strengthen its international competitiveness. By working with suitable partners, T-Systems can offer its customers locally-based specialists in a larger number of countries. Furthermore, T-Systems can rely on additional offshore capacities.


Deutsche Telekom First three quarters 2007  36

 

Business Customers: Development of operations

 

    Third quarter of 2007     First three quarters of 2007  
   

Q1

2007
millions of €

   

Q2

2007
millions of €

   

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %    

FY

2006
millions of €

 

Total revenue

  2,906     2,962     2,917     3,174     (8.1 )   8,785     9,445     (7.0 )   12,869  

Enterprise Services

  1,941     1,992     1,950     2,103     (7.3 )   5,883     6,218     (5.4 )   8,533  

Business Services

  965     970     967     1,071     (9.7 )   2,902     3,227     (10.1 )   4,336  

EBITa (profit (loss) from operations)

  44     34     26     34     (23.5 )   104     194     (46.4 )   (835 )

Special factors affecting EBITa

  0     (24 )   (48 )   (61 )   21.3     (72 )   (143 )   49.7     (1,180 )

Adjusted EBITa

  44     58     74     95     (22.1 )   176     337     (47.8 )   345  

Adjusted EBIT margina (%)

  1.5     2.0     2.5     3.0       2.0     3.6       2.7  

Depreciation, amortization and impairment losses

  (217 )   (222 )   (217 )   (226 )   4.0     (656 )   (681 )   3.7     (946 )

EBITDAb

  261     256     243     260     (6.5 )   760     875     (13.1 )   111  

Special factors affecting EBITDAb

  0     (24 )   (48 )   (61 )   21.3     (72 )   (143 )   49.7     (1,180 )

Adjusted EBITDAb

  261     280     291     321     (9.3 )   832     1,018     (18.3 )   1,291  

Adjusted EBITDA marginb (%)

  9.0     9.5     10.0     10.1       9.5     10.8       10.0  

Cash capexc

  (273 )   (149 )   (201 )   (186 )   (8.1 )   (623 )   (542 )   (14.9 )   (795 )

Number of employeesd

  56,776     56,218     56,499     58,113     (2.8 )   56,498     56,148     0.6     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 74 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 72 et seq.
c Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement. In the first nine months 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

Total revenue of the Business Customers strategic business area for the first nine months of 2007 amounted to EUR 8.8 billion, a year-on-year decrease of 7.0 percent. One reason for this was lower revenues in the Telecommunications Services area from customers of the Business Services unit. Lower revenues from PC workstation-related services, in particular within the Deutsche Telekom Group, also resulted in revenue shortfalls in Computing & Desktop Services. Revenues generated with customers within the Deutsche Telekom Group also decreased in the Systems Integration unit in the reporting period.

By contrast, the international business continued to perform positively. T-Systems generated 8.3 percent year-on-year revenue growth outside Germany in the first nine months of 2007. This growth is attributable in particular to the successful, systematic implementation of the internationalization strategy. T-Systems won additional lucrative orders outside Germany in the first three quarters of 2007. In Germany, revenue declined by 10.3 percent, as a result of continuing price erosion in both the IT and the telecommunications business.


Deutsche Telekom First three quarters 2007  37

 

Business Customers: Net revenue

Business Customers generated revenue of EUR 6.6 billion in the first nine months of 2007 from business with customers outside the Deutsche Telekom Group, a decrease of 3.1 percent year-on-year. Net revenue generated by the Enterprise Services unit increased 3.1 percent. However, this increase was not sufficient to completely offset the 10.6-percent decrease in net revenue in the Business Services unit.

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

Business Customers: EBITDA, adjusted EBITDA

In the first nine months of 2007, the Business Customers strategic business area generated EBITDA of EUR 0.8 billion. This 13.1 percent year-on-year decrease is mainly attributable to continued price and competitive pressure. Nonetheless, T-Systems managed to slow the decline in EBITDA over the course of the year. This shows that T-Systems has successfully implemented its various cost savings and efficiency enhancement programs.

Adjusted EBITDA also amounted to EUR 0.8 billion, a decline of 18.3 percent year-on-year.

Business Customers: EBIT, adjusted EBIT

EBIT (profit/loss from operations) for the first nine months of 2007 amounted to EUR 0.1 billion, down by 46.4 percent compared with the prior-year period. The main reason for this decrease was the negative revenue trend. Adjusted EBIT amounted to EUR 0.2 billion, which is 47.8 percent less than in the previous year. For both EBIT and adjusted EBIT, the decline compared with the prior-year period slowed in the third quarter of 2007.

Business Customers: Cash capex

Cash capex increased by 14.9 percent year-on-year in the first nine months of 2007, mainly as a result of payments made for parts of Centrica PLC that were taken over by T-Systems UK as part of an asset deal in the first quarter of 2007.

Business Customers: Personnel

The average headcount within the Business Customers strategic business area increased slightly by 0.6 percent compared with the prior-year period. One reason was the integration of the employees of gedas, which has been consolidated since the end of March 2006. Another was the increased headcount abroad attributable to the internationalization strategy. In Germany, headcount was reduced owing to the previously announced staff restructuring measures.


Deutsche Telekom First three quarters 2007  38

 

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 DeTe Immobilien 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, shared services and headquarters 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 into the Business Customers strategic business area also resulted in the reclassification of this company’s shared services and headquarters functions.

In the reporting period, Group Headquarters & Shared Services continued to dispose of non-core assets and generated proceeds of around EUR 0.4 billion from the sale of additional real estate in the first nine months of 2007.

At Vivento, Deutsche Telekom’s personnel service provider, the spotlight in the first nine months of the 2007 financial year was on placement services as well as on improving and selling the business models. In October 2007, Deutsche Telekom and Nokia Siemens Networks signed a strategic partnership agreement, a major feature of which is the transfer of operations of Vivento Technical Services GmbH to a new Nokia Siemens Networks entity planned for the end of this year.


Deutsche Telekom First three quarters 2007  39

 

The workforce at Vivento totaled around 10,700 employees at the end of the reporting period. Of these, around 600 are Vivento’s own staff and management, some 5,400 are employees of the Vivento business lines (around 3,500 of whom are in the call center unit and around 1,900 are at Vivento Technical Services GmbH), and around 4,700 are transferees. Of these, around 3,200 were engaged on a temporary basis at the reporting date. Approximately 4,200 employees left Vivento in the first nine months of the 2007 financial year. This means that since its formation, some 27,500 employees have found new jobs outside Vivento. Vivento took on around 1,400 employees during the reporting period, bringing the total number of Deutsche Telekom staff transferred to Vivento since its formation to around 38,200. The employment rate remained high in the first nine months of 2007. During the reporting period, around 84 percent of the approximately 10,100 employees (excluding Vivento’s own staff and management) were in employment or undergoing training.

Group Headquarters & Shared Services: Development of operations

 

     Third quarter of 2007     First three quarters of 2007  
     Q1
2007
millions of €
    Q2
2007
millions of €
   

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %     FY 2006
millions of €
 

Total revenue

   952     988     966     960     0.6     2,906     2,766     5.1     3,758  

EBIT (loss from operations)

   (250 )   (215 )   (401 )   (584 )   31.3     (866 )   (996 )   13.1     (2,138 )

EBIT margin (%)

   (26.3 )   (21.8 )   (41.5 )   (60.8 )     (29.8 )   (36.0 )     (56.9 )

Depreciation, amortization and impairment losses

   (182 )   (189 )   (311 )   (327 )   4.9     (682 )   (702 )   2.8     (947 )

EBITDAa

   (68 )   (26 )   (90 )   (257 )   65.0     (184 )   (294 )   37.4     (1,191 )

Special factors affecting EBITDAa

   (135 )   (5 )   (53 )   (123 )   56.9     (193 )   (133 )   (45.1 )   (730 )

Adjusted EBITDAa

   67     (21 )   (37 )   (134 )   72.4     9     (161 )   n.a.     (461 )

Adjusted EBITDA margina (%)

   7.0     (2.1 )   (3.8 )   (14.0 )     0.3     (5.8 )     (12.3 )

Cash capexb

   (117 )   (82 )   (101 )   (151 )   33.1     (300 )   (372 )   19.4     (508 )

Number of employeesc

   29,308     27,241     25,961     30,907     (16.0 )   27,503     30,897     (11.0 )   30,755  

of which: at Viventod

   13,500     11,100     10,700     14,800     (27.7 )   10,700     14,800     (27.7 )   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 72 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.

Group Headquarters & Shared Services: Total revenue

Group Headquarters & Shared Services increased its revenue by 5.1 percent in the first nine months of 2007, thus continuing the positive revenue trend. This development was principally caused by revenue growth at Vivento as a result of the expansion of business with call centers and at Vivento Technical Services GmbH. Real estate operations generated a similarly positive revenue effect with increased revenue at Power and Air Condition Solution Management GmbH & Co. KG and Deutsche Funkturm GmbH. Revenue in the reporting period was also lifted by the higher revenues generated by the real estate group from facility management services, particularly for co-location provided for the strategic business areas. In addition, revenue from DeTeFleetServices GmbH’s fleet business rose, primarily due to higher proceeds from vehicle sales as part of the regular replacement process and due to a higher average number of vehicles in the fleet. This overall positive trend was partially offset by lower rents for technical facilities and more efficient use of leased floor space by the strategic business areas.


Deutsche Telekom First three quarters 2007  40

 

Group Headquarters & Shared Services: EBITDA, adjusted EBITDA

As in the second quarter of 2007, adjusted EBITDA in Group Headquarters & Shared Services improved substantially in the reporting period. EBITDA benefited in particular from the revenue growth and productivity increase at Vivento as well as a year-on-year reduction in headcount at Vivento. The non-recurrence of expenses related to the transfer of Telekom Direkt from Vivento to the Broadband/Fixed Network strategic business area that had affected the prior-year period impacted earnings positively, as did lower expenses for key marketing activities. The real estate area also posted an increase in adjusted EBITDA in the reporting period due to higher proceeds from real estate sales and a lower headcount year-on-year. The non-recurrence of income from the reversal of a provision in the prior-year period in connection with the resolved arbitration proceedings between Deutsche Telekom AG and Deutsche Post AG relating to the housing assistance program (Wohnungsfürsorge) partially offset this sustained positive trend. A decline in rental revenues, for which higher revenue in the low-margin facility management business failed to compensate, also had a negative effect. Special factors affecting EBITDA increased by EUR 60 million year-on-year. These mainly included expenses for the sale of further call center locations of Vivento Customer Services GmbH and expenses for staff-related measures. The prior-year period had been affected in particular by special factors from expenses for staff-related measures.

Group Headquarters & Shared Services: EBIT

The loss from operations (EBIT) decreased by EUR 130 million year-on-year in the first nine months of 2007. The improvement is 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 27,503, a reduction of 3,394 compared with the first nine months of 2006. This reflects in particular the ongoing headcount reduction at Vivento.


Deutsche Telekom First three quarters 2007  41

 

Risks and opportunities.

For explanations regarding the risk and opportunity situation, please refer to the risks and opportunities identified in the half-year report at June 30, 2007. Readers are also referred to the Disclaimer at the end of this report.


Deutsche Telekom First three quarters 2007  42

 

Outlook.

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

Group

Deutsche Telekom takes over Aareal Bank’s shares in ImmobilienScout24.

 

 

Deutsche Telekom AG has exercised its preemptive right through the Group subsidiary Scout24 Verwaltungs GmbH to purchase Aareal Bank’s shares in ImmobilienScout GmbH. Acquiring the shares as of October 24, 2007 will increase the interest in the leading German online real estate broker from the current 33.1 percent to 99.3 percent. The purchase price was EUR 357 million.

Strategic partnership between Nokia Siemens Networks and Deutsche Telekom AG.

 

 

The strategic partnership agreement signed between Nokia Siemens Networks and Deutsche Telekom AG in October 2007 provides for the transfer of operations of Vivento Technical Services GmbH, a business model of the internal personnel service provider Vivento, and at the same time marked the continuation of the staff restructuring program. The transfer of operations of Vivento Technical Services GmbH to Nokia Siemens Networks is planned for the end of this year. In addition to Nokia Siemens Networks taking over Vivento Technical Services, the agreement covers contracts governing managed services worth around EUR 300 million for the next five years and contracts covering a series of investments from several European T-Mobile national companies worth up to EUR 150 million. Further support from Deutsche Telekom should enable everything to run smoothly. Under the terms of the contract, Nokia Siemens Networks will become the preferred partner for forthcoming managed services.

Successful offering in Croatia.

 

 

T-Hrvatske telekomunikacije d.d. (T-HT), Deutsche Telekom’s Croatian majority interest, was successfully floated on October 9, 2007. On the first day of trading the share rose 58 percent at one point and, starting from an issue price of HRK 265 (EUR 36.17), reached a high of HRK 419 (EUR 57.20). The share closed at HRK 380 (EUR 51.87). The Croatian government sold 32.5 percent of its shares in T-HT through the offering, of which 25 percent went to Croatian retail investors and 7.5 percent to institutional investors.

Patent infringement claim by CIF Licensing LLC.

 

 

In October 2007, CIF Licensing LLC., New Jersey (United States), filed suit with the Düsseldorf Regional Court against Deutsche Telekom AG for damages totaling EUR 120 million, alleging that Deutsche Telekom is infringing on four of the plaintiff’s patents by using DSL technology, and filed for an injunction with regard to one patent. Deutsche Telekom intends to contest this proceeding vigorously.

Arbitration proceedings against Deutsche Telekom AG by Deutsche Post AG.

 

 

Arbitration proceedings initiated by Deutsche Post AG against Deutsche Telekom AG relating to an acquisition agreement for logistics sites were described in the 2006 Annual Report. Deutsche Post AG was seeking damages of approximately EUR 37 million as well as the determination of other unquantified damages, quantified at approximately EUR 68 million before the hearing. The parties agreed to a payment of EUR 3 million by Deutsche Telekom to Deutsche Post AG under the terms of an arbitral award, the agreed wording of which covers all claims for damages in this respect. The settlement became effective on October 11, 2007.


Deutsche Telekom First three quarters 2007  43

 

Mobile Communications

Industry leaders announce open platform for mobile devices.

 

 

A broad alliance of leading technology and mobile communications companies announced on November 5, 2007 that they will develop Android, the first truly open and comprehensive platform for mobile devices. T-Mobile, Google Inc., Qualcomm, Motorola and others have collaborated on the development of Android through the Open Handset Alliance, a multinational partnership of 34 technology and mobile industry leaders which aims to develop technologies that can significantly lower the cost of developing and distributing mobile devices and services. The Android platform is the first step in this direction – a fully integrated mobile “software stack” that consists of an operating system, middleware, user-friendly interface and applications. Customers should expect the first phones based on Android to be available in the second half of 2008.

T-Mobile’s MyFaves community service launched in Germany.

 

 

Following the successful market launch of MyFaves in the United States in 2006, T-Mobile also launched its community service in Germany in early October 2007. This innovative service allows customers to communicate with five family members or friends simply and cheaply for just 5 eurocents/minute – on any network – and, as such, meets the growing demand among customers for personalized communications within their social network. A photo or icon representing each of the five “Faves” is displayed on a personalized interface from which users can place voice calls or send SMS or MMS messages directly to these contacts.

Broadband/ Fixed Network

Slovak Telekom sells TBDS subsidiary.

 

 

Slovak Telekom sold TBDS (Tower Broadcasting & Data Services a.s.), its subsidiary operating in the broadcasting business area (formerly Rádiokomunikácie o.z. and RK Tower s.r.o.) to the TRI R a.s. consortium with effect from October 5, 2007. Deconsolidation was also effective on the same date.

Business Customers

Royal & SunAlliance signs IT outsourcing deal with T-Systems in the UK.

 

 

Royal & SunAlliance, one of the United Kingdom’s largest insurers, will outsource its IT and printing operations to T-Systems. The deal has a value of over EUR 130 million and an initial term of ten years. As part of the deal, T-Systems will take over two print facilities in Birkenhead and Easton; and 63 employees will be transferred to the service provider.

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 sustain long-term cash flow. 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. This will be implemented using voluntary instruments such as partial retirement, severance payments and early retirement.


Deutsche Telekom First three quarters 2007  44

 

General statement on business development in the Group

In view of the expected market situation in the individual business areas, Deutsche Telekom still aims to achieve positive results for the full 2007 financial year.

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.

In view of the sound balance sheet, its net profit and the free cash flow generated, Deutsche Telekom aims to continue offering its shareholders an attractive dividend in the future.


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 and earnings to grow in 2007. Major drivers will be the expected further growth at T-Mobile USA and T-Mobile UK. The first-time full consolidation of the Polish subsidiary PTC and tele.ring for a full financial year and the first-time consolidation of Orange Nederland in the fourth quarter of 2007 will also have a positive impact on growth. In view of sustained competition, the business area expects to record a decline in its revenue and EBITDA from the German market compared with the prior year. 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.

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. Broadband/Fixed Network intends to establish itself in the triple-play business with the active marketing of its Entertain complete packages. A major element of this strategy is 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 launched a quality and service campaign in 2007 to safeguard 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


Deutsche Telekom First three quarters 2007  45

 

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 will be determined primarily by the performance of Vivento and the continuation of the Group’s staff restructuring program.


Deutsche Telekom First three quarters 2007  46


Deutsche Telekom First three quarters 2007  47

 

Interim consolidated financial statements.

Consolidated income statement.

 

     Third quarter of 2007     First three quarters of 2007  
    

Q3

2007
millions of €

   

Q3

2006a
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006a
millions of €
    Change %     FY
2006
millions of €
 

Net revenue

   15,693     15,480     1.4     46,721     45,452     2.8     61,347  
                                          

Cost of sales

   (8,607 )   (8,371 )   (2.8 )   (25,817 )   (24,249 )   (6.5 )   (34,755 )

Gross profit

   7,086     7,109     (0.3 )   20,904     21,203     (1.4 )   26,592  
                                          

Selling expenses

   (4,064 )   (3,877 )   (4.8 )   (12,076 )   (11,665 )   (3.5 )   (16,410 )

General and administrative expenses

   (996 )   (1,169 )   14.8     (3,224 )   (3,347 )   3.7     (5,264 )

Other operating income

   362     256     41.4     1,250     862     45.0     1,257  

Other operating expenses

   (477 )   (330 )   (44.5 )   (1,105 )   (661 )   (67.2 )   (888 )

Profit from operations

   1,911     1,989     (3.9 )   5,749     6,392     (10.1 )   5,287  
                                          

Finance costs

   (606 )   (651 )   6.9     (1,949 )   (1,911 )   (2.0 )   (2,540 )

Interest income

   68     79     (13.9 )   184     246     (25.2 )   297  

Interest expense

   (674 )   (730 )   7.7     (2,133 )   (2,157 )   1.1     (2,837 )

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

   34     6     n.a.     50     (11 )   n.a.     24  

Other financial income (expense)

   (127 )   (56 )   n.a.     (331 )   (81 )   n.a.     (167 )

Profit (loss) from financial activities

   (699 )   (701 )   0.3     (2,230 )   (2,003 )   (11.3 )   (2,683 )
                                          

Profit before income taxes

   1,212     1,288     (5.9 )   3,519     4,389     (19.8 )   2,604  
                                          

Income taxes

   (778 )   787     n.a.     (1,768 )   10     n.a.     970  

Profit after income taxes

   434     2,075     (79.1 )   1,751     4,399     (60.2 )   3,574  
                                          

Profit (loss) attributable to minority interests

   175     120     45.8     425     336     26.5     409  

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

   259     1,955     (86.8 )   1,326     4,063     (67.4 )   3,165  

Earnings per share

 

     Third quarter of 2007     First three quarters of 2007
     Q3
2007
   Q3
2006a
   Change %     Q1 - Q3
2007
   Q1 - Q3
2006a
   Change %     FY
2006

Earnings per share/ADS

                  

Basic (€)

   0.06    0.45    (86.7 )   0.31    0.94    (67.0 )   0,74

Diluted (€)

   0.06    0.45    (86.7 )   0.31    0.94    (67.0 )   0,74

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


Deutsche Telekom First three quarters 2007  48

 

Consolidated balance sheet.

 

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

Assets

          

Current assets

   16,105     15,951     154     1.0     15,736  

Cash and cash equivalents

   3,450     2,765     685     24.8     1,916  

Trade and other receivables

   7,701     7,753     (52 )   (0.7 )   7,490  

Current recoverable income taxes

   234     643     (409 )   (63.6 )   624  

Other financial assets

   1,485     1,825     (340 )   (18.6 )   2,302  

Inventories

   1,149     1,129     20     1.8     1,239  

Non-current assets and disposal groups held for sale

   611     907     (296 )   (32.6 )   633  

Other assets

   1,475     929     546     58.8     1,532  

Non-current assets

   104,644     114,209     (9,565 )   (8.4 )   109,292  

Intangible assets

   54,300     58,014     (3,714 )   (6.4 )   52,058  

Property, plant and equipment

   42,621     45,869     (3,248 )   (7.1 )   45,320  

Investments accounted for using the equity method

   190     189     1     0.5     1,899  

Other financial assets

   634     657     (23 )   (3.5 )   1,146  

Deferred tax assets

   6,456     8,952     (2,496 )   (27.9 )   8,311  

Other assets

   443     528     (85 )   (16.1 )   558  
                              

Total assets

   120,749     130,160     (9,411 )   (7.2 )   125,028  
                              

Liabilities and shareholders’ equity

          

Current liabilities

   21,128     22,088     (960 )   (4.3 )   19,205  

Financial liabilities

   8,239     7,683     556     7.2     6,569  

Trade and other payables

   5,866     7,160     (1,294 )   (18.1 )   5,813  

Income tax liabilities

   567     536     31     5.8     630  

Provisions

   2,861     3,093     (232 )   (7.5 )   2,394  

Other liabilities

   3,595     3,616     (21 )   (0.6 )   3,799  

Non-current liabilities

   53,499     58,402     (4,903 )   (8.4 )   55,710  

Financial liabilities

   34,888     38,799     (3,911 )   (10.1 )   37,579  

Provisions for pensions and other employee benefits

   6,276     6,167     109     1.8     6,386  

Other provisions

   2,853     3,174     (321 )   (10.1 )   1,760  

Deferred tax liabilities

   6,941     8,083     (1,142 )   (14.1 )   8,112  

Other liabilities

   2,541     2,179     362     16.6     1,873  

Liabilities

   74,627     80,490     (5,863 )   (7.3 )   74,915  

Shareholders’ equity

   46,122     49,670     (3,548 )   (7.1 )   50,113  

Issued capital

   11,164     11,164     —       —       11,164  

Capital reserves

   51,515     51,498     17     0.03     51,489  

Retained earnings including carryforwards

   (16,917 )   (16,977 )   60     0.4     (17,266 )

Other comprehensive income

   (4,027 )   (2,275 )   (1,752 )   (77.0 )   (2,318 )

Net profit

   1,326     3,165     (1,839 )   (58.1 )   4,063  

Treasury shares

   (5 )   (5 )   —       —       (5 )

Equity attributable to equity holders of the parent

   43,056     46,570     (3,514 )   (7.5 )   47,127  

Minority interests

   3,066     3,100     (34 )   (1.1 )   2,986  
                              

Total liabilities and shareholders’ equity

   120,749     130,160     (9,411 )   (7.2 )   125,028  
                              

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


Deutsche Telekom First three quarters 2007  49

 

Consolidated cash flow statement.


Deutsche Telekom First three quarters 2007  50

 

     Third quarter of 2007     First three quarters of 2007  
    

Q3

2007
millions of €

   

Q3

2006a
millions of €

    Q1 - Q3
2007
millions of €
    Q1 - Q3
2006a
millions of €
   

FY

2006
millions of €

 

Profit after income taxes

   434     2,075     1,751     4,399     3,574  
                              

Depreciation, amortization and impairment losses

   3,009     2,752     8,527     7,986     11,034  

Income tax expense (benefit)

   778     (787 )   1,768     (10 )   (970 )

Interest income and interest expenses

   606     651     1,949     1,911     2,540  

Other financial (income) expense

   127     56     331     81     167  

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

   (34 )   (6 )   (50 )   11     (24 )

Profit on the disposal of fully consolidated subsidiaries

   (122 )   0     (331 )   0     0  

Other non-cash transactions

   22     (16 )   6     36     32  

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

   47     (10 )   (96 )   (94 )   (72 )

Change in assets carried as working capital

   (18 )   147     (867 )   (728 )   (17 )

Change in provisions

   288     161     96     (552 )   1,585  

Change in other liabilities carried as working capital

   74     (163 )   (1,219 )   (591 )   353  

Income taxes received (paid)

   403     (538 )   356     (1,021 )   (1,248 )

Dividends received

   6     3     15     16     27  

Cash generated from operations

   5,620     4,325     12,236     11,444     16,981  

Interest paid

   (816 )   (1,038 )   (2,996 )   (3,149 )   (4,081 )

Interest received

   333     276     1,112     963     1,322  
                              

Net cash from operating activities

   5,137     3,563     10,352     9,258     14,222  
                              

Cash outflows for investments in

          

Intangible assets

   (322 )   (322 )   (762 )   (805 )   (4,628 )

Property, plant and equipment

   (1,364 )   (1,628 )   (4,531 )   (5,114 )   (7,178 )

Non-current financial assets

   (13 )   (55 )   (94 )   (554 )   (624 )

Investments in fully consolidated subsidiaries

   (5 )   (48 )   (7 )   (1,716 )   (2,265 )

Proceeds from disposal of

          

Intangible assets

   8     (11 )   29     21     35  

Property, plant and equipment

   107     65     628     469     532  

Non-current financial assets

   4     10     93     228     249  

Investments in fully consolidated subsidiaries and business units

   317     0     785     (26 )   (21 )

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

   82     (1,051 )   344     (1,414 )   (348 )

Other

   15     0     47     (57 )   (57 )
                              

Net cash used in investing activities

   (1,171 )   (3,040 )   (3,468 )   (8,968 )   (14,305 )
                              

Proceeds from issue of current financial liabilities

   8,021     1,875     28,138     2,225     3,817  

Repayment of current financial liabilities

   (10,401 )   (5,712 )   (31,705 )   (6,718 )   (9,163 )

Proceeds from issue of non-current financial liabilities

   217     603     1,513     5,673     7,871  

Repayment of non-current financial liabilities

   (180 )   (191 )   (237 )   (371 )   (492 )

Dividend payments

   (217 )   (106 )   (3,719 )   (3,182 )   (3,182 )

Share buy-back

   —       (709 )   —       (709 )   (709 )

Proceeds from the exercise of stock options

   —       3     11     10     16  

Repayment of lease liabilities

   (45 )   (41 )   (144 )   (169 )   (219 )
                              

Net cash used in financing activities

   (2,605 )   (4,278 )   (6,143 )   (3,241 )   (2,061 )
                              

Effect of exchange rate changes on cash and cash
equivalents

   (57 )   4     (56 )   (108 )   (66 )

Net increase (decrease) in cash and cash equivalents

   1,304     (3,751 )   685     (3,059 )   (2,210 )

Cash and cash equivalents, at the beginning of the period

   2,146     5,667     2,765     4,975     4,975  

Cash and cash equivalents, at end of the period

   3,450     1,916     3,450     1,916     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.


Deutsche Telekom First three quarters 2007  51

 

Statement of recognized income and expense.

 

     Q1 - Q3
2007
millions of €
    Q1 - Q3
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)

   (77 )   242     385  

Recognition of other comprehensive income in income statement

   (5 )   (6 )   (8 )

Revaluation due to business combinations

   (137 )   (3 )   395  

Exchange differences on translation of foreign subsidiaries

   (1,659 )   (1,421 )   (1,747 )

Other income and expense recognized directly in equity

   120     5     80  

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

   0     (55 )   314  

Deferred taxes on items in other comprehensive income

   29     (72 )   (275 )
                  

Income and expense recognized directly in equity

   (1,730 )   (1,314 )   (854 )
                  

Profit after income taxes

   1,751     4,399     3,574  
                  

Recognized income and expense

   21     3,085     2,720  
                  

Minority interests

   428     316     517  

Equity attributable to equity holders of the parent

   (407 )   2,769     2,203  


Deutsche Telekom First three quarters 2007  52


Deutsche Telekom First three quarters 2007  53

 

Selected explanatory notes.

Accounting policies.

In accordance with § 37x (3) of the Securities Trading Act (Wertpapierhandelsgesetz – WpHG), Deutsche Telekom AG’s quarterly financial report comprises interim consolidated financial statements and an interim management report for the Group. 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. The interim management report for the Group was prepared in accordance with the applicable provisions of the WpHG.

Statement of compliance

The interim consolidated financial statements for the period ended September 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 also in compliance with IFRS as published by the IASB.

In the opinion of the Board of Management, the reviewed quarterly financial report includes all standard adjustments to be applied on an ongoing basis that are required to give a true and fair view of results of operations, financial position and cash flows 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 pension 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 net cumulative unrecognized actuarial gains and losses at the end of the previous reporting period exceeded the higher of 10 percent of the present value of the defined benefit obligation at this point in time (prior to the deduction of 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 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.


Deutsche Telekom First three quarters 2007  54

 

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 nine 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.

Furthermore, two companies assigned to the Broadband/Fixed Network strategic business area were sold and deconsolidated during the current reporting period, T-Online France effective June 30, 2007 and T-Online Spain effective July 31, 2007.

Effect of changes in the composition of the Group on the consolidated income statement for the first nine months 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

   1,553     (73 )   144     1     1,625  

Cost of sales

   (1,323 )   80     (120 )   (9 )   (1,372 )
                              

Gross profit (loss)

   230     7     24     (8 )   253  
                              

Selling expenses

   (182 )   32     (11 )   0     (161 )

General and administrative expenses

   (122 )   2     (30 )   (1 )   (151 )

Other operating income

   39     0     13     5     57  

Other operating expenses

   (3 )   0     (10 )   (12 )   (25 )
                              

Profit (loss) from operations

   (38 )   41     (14 )   (16 )   (27 )
                              

Finance costs

   (7 )   0     (1 )   0     (8 )

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

   (107 )   0     0     0     (107 )

Other financial income (expense)

   (2 )   0     0     6     4  
                              

Profit (loss) from financial activities

   (116 )   0     (1 )   6     (111 )
                              

Profit (loss) before income taxes

   (154 )   41     (15 )   (10 )   (138 )
                              

Income taxes

   3     132     4     8     147  
                              

Profit (loss) after income taxes

   (151 )   173     (11 )   (2 )   9  
                              

Profit (loss) attributable to minority interests

   0     0     0     6     6  

Net profit (loss)

   (151 )   173     (11 )   (8 )   3  

Selected notes to the consolidated income statement.

Cost of sales

 

     Third quarter of 2007     First three quarters of 2007  
    

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %    

FY

2006
millions of €

 

Cost of sales

   (8,607 )   (8,371 )   (2.8 )   (25,817 )   (24,249 )   (6.5 )   (34,755 )

Cost of sales rose by EUR 1.6 billion over the first nine months of the prior year. In addition to customer growth at T-Mobile UK and T-Mobile USA, changes in the composition of the Group were major drivers here.


Deutsche Telekom First three quarters 2007  55

 

Selling expenses

 

     Third quarter of 2007     First three quarters of 2007  
    

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %    

FY

2006
millions of €

 

Selling expenses

   (4,064 )   (3,877 )   (4.8 )   (12,076 )   (11,665 )   (3.5 )   (16,410 )

In addition to changes in the composition of the Group, the increase in selling expenses was mainly due to expenses incurred in connection with the marketing of complete packages in the Broadband/Fixed Network strategic business area.

General and administrative expenses

 

     Third quarter of 2007    First three quarters of 2007  
    

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %    Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %   

FY

2006
millions of €

 

General and administrative expenses

   (996 )   (1,169 )   14.8    (3,224 )   (3,347 )   3.7    (5,264 )

The year-on-year decrease in general and administrative expenses was attributable in particular to higher expenses in the prior year in connection with staff-related measures. Changes in the composition of the Group had an offsetting effect.

Profit/loss from financial activities

 

     Third quarter of 2007     First three quarters of 2007  
    

Q3

2007
millions of €

   

Q3

2006a
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006a
millions of €
    Change %    

FY

2006
millions of €

 

Profit (loss) from financial activities

   (699 )   (701 )   0.3     (2,230 )   (2,003 )   (11.3 )   (2,683 )

Finance costs

   (606 )   (651 )   6.9     (1,949 )   (1,911 )   (2.0 )   (2,540 )

Interest income

   68     79     (13.9 )   184     246     (25.2 )   297  

Interest expense

   (674 )   (730 )   7.7     (2,133 )   (2,157 )   1.1     (2,837 )

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

   34     6     n.a.     50     (11 )   n.a.     24  

Other financial income (expense)

   (127 )   (56 )   n.a.     (331 )   (81 )   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 compared with the first three quarters of 2006 was predominantly driven by other financial expense.

This included income from the sale of Celcom (EUR 196 million) in the prior year, whereas in the first three quarters of 2007, gains of only EUR 18 million on the disposal of the remaining shares in Sireo were realized.


Deutsche Telekom First three quarters 2007  56

 

Income taxes

 

     Third quarter of 2007    First three quarters of 2007
    

Q3

2007
millions of €

   

Q3

2006a
millions of €

   Change %    Q1 - Q3
2007
millions of €
    Q1 - Q3
2006a
millions of €
   Change %   

FY

2006
millions of €

Income taxes

   (778 )   787    n.a.    (1,768 )   10    n.a.    970

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

Income tax expense increased compared with the prior year to EUR 1.8 billion, despite lower profits before income taxes. The major reason for this increase was the fact that in the prior year, deferred tax assets relating to loss carryforwards were recognized that had not previously been recognized and provisions for income taxes were reversed, creating significant one-time favorable effects on income of EUR 1.3 billion and EUR 0.4 billion, respectively. Secondly, deferred tax assets and deferred tax liabilities were adjusted in the current period in response to changes in German tax rates (decrease in total tax burden on domestic profits from around 39 percent to around 30 percent as a result of the 2008 corporate tax reform) and to more detailed information about the effects of a corporate reorganization on the state tax burden in the United States. The positive effect on income amounting to approximately EUR 109 million from the United States was more than offset by the negative effect of approximately EUR 660 million resulting from tax rate cuts in Germany which, however, do not entail any additional tax payments and attending negative liquidity and interest effects.

Other disclosures.

Personnel

 

     Third quarter of 2007    First three quarters of 2007  
    

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %    Q1 – Q3
2007
millions of €
    Q1 – Q3
2006
millions of €
    Change %   

FY

2006
millions of €

 

Personnel costs

   (3,528 )   (3,679 )   4.1    (10,543 )   (10,549 )   0.1    (16,542 )

The slight decrease in personnel costs is attributable to continuing workforce restructuring. This was partially offset by higher expenditures for staff-related measures (voluntary redundancy, severance and compensation payments) and the effect of changes in the composition of the Group.

Average number of employees

 

     Third quarter of 2007     First three quarters of 2007
    

Q3

2007

  

Q3

2006

   Change %     Q1 - Q3
2007
   Q1 - Q3
2006
   Change %    

FY

2006

Deutsche Telekom Group

   241,768    250,234    (3.4 )   244,368    247,683    (1.3 )   248,480

Non-civil servants

   204,017    207,612    (1.7 )   205,429    204,287    0.6     205,511

Civil servants

   37,751    42,622    (11.4 )   38,939    43,396    (10.3 )   42,969

Trainees and student interns

   9,508    9,169    3.7     10,289    9,857    4.4     10,346

The reduction in the average number of employees was primarily caused by the sale of call centers and staff reduction 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.


Deutsche Telekom First three quarters 2007  57

 

Number of employees at balance sheet date

 

    

Sept. 30,

2007

  

Dec. 31,

2006

   Change     Change %    

Sept. 30,

2006

Deutsche Telekom Group

   241,589    248,800    (7,211 )   (2.9 )   250,483

Germany

   151,882    159,992    (8,110 )   (5.1 )   166,635

International

   89,707    88,808    899     1.0     83,848

Non-civil servants

   204,419    208,420    (4,001 )   (1.9 )   207,990

Civil servants

   37,170    40,380    (3,210 )   (7.9 )   42,493

Trainees and student interns

   11,941    11,840    101     0.9     11,827

The reduction in the number of employees as of the balance sheet date was also attributable to the sale of call centers and workforce reductions in Germany and Eastern Europe. This was offset, in particular, by an increase in headcount at T-Mobile USA.

Depreciation, amortization and impairment losses

 

     Third quarter of 2007     First three quarters of 2007  
    

Q3

2007
millions of €

   

Q3

2006
millions of €

    Change %     Q1 - Q3
2007
millions of €
    Q1 - Q3
2006
millions of €
    Change %    

FY

2006
millions of €

 

Amortization and impairment of intangible assets

   (953 )   (655 )   (45.5 )   (2,531 )   (1,902 )   (33.1 )   (2,840 )

of which: UMTS licenses

   (227 )   (223 )   (1.8 )   (682 )   (667 )   (2.2 )   (893 )

of which: U.S. mobile communications licenses

   (2 )   —       n.a.     (9 )   —       n.a.     (33 )

of which: goodwill

   (181 )   —       n.a.     (181 )   (10 )   n.a.     (10 )

Depreciation and impairment of property, plant and equipment

   (2,056 )   (2,097 )   2.0     (5,996 )   (6,084 )   1.4     (8,194 )

Total depreciation, amortization and impairment losses

   (3,009 )   (2,752 )   (9.3 )   (8,527 )   (7,986 )   (6.8 )   (11,034 )

The increase in depreciation, amortization and impairment losses was predominantly attributable to higher amortization of intangible assets following the acquisition, in 2006, of tele.ring and PTC in the Mobile Communications business area. This relates primarily to the amortization of the customer base and brand names totaling EUR 0.4 billion. In addition, goodwill at T-Mobile Netherlands (formerly Ben Nederland) was impaired by EUR 0.2 billion in the third quarter of 2007. This was not the result of an impairment test, but of the recognition of deferred tax assets for tax loss carryforwards that were acquired by the Group in connection with the acquisition of Ben Nederland, but were not considered to meet the criteria for recognition at the time. Since, based on an assessment of all available evidence, Deutsche Telekom determined that it had become probable that a part of the previously unrecognized loss carryforwards would be realizable in the near term and deferred taxes would have to be recognized correspondingly, it was required by IFRS 3.65 in conjuncttion with IAS 12.68, also taking the accounting interpretation IDW RS HFA 19 of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer – IDW) into account, that the carrying amount of goodwill be impaired accordingly.


Deutsche Telekom First three quarters 2007  58

 

Earnings per share

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

 

     Third quarter of 2007     First three quarters of 2007  
     Q3
2007
    Q3
2006
    Q1 - Q3
2007
    Q1 - Q3
2006
    FY
2006
 

Calculation of basic earnings per share

          

Net profita (millions of €)

   259     1,955     1,326     4,063     3,165  

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

   —       —       —       38     38  

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

   259     1,955     1,326     4,101     3,203  

Number of ordinary shares issued (millions)

   4,361     4,399     4,361     4,291     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)

   (20 )   (22 )   (20 )   (22 )   (22 )

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

   —       —       —       91     68  

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

   4,339     4,375     4,339