Deutsche Telekom AG (DTE) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. Good morning to those in the U.S. Just to introduce myself, for those that don't know me, I'm Andrew Lee. I head up the telco team at Goldman. But more importantly, I'd love -- it gives us great pleasure to introduce Tim Höttges, CEO of Deutsche Telekom. Tim, thanks for joining us.

Andrew, good to see you.

And I'd like to thank Hannes for providing the fire for our fireside chat. Thank you, Hannes.

Yes.

So we've got 40 minutes, which isn't a great deal of time. And I know there's lots of topics you'd like to talk about. We're going to go through the German operations, infrastructure and CapEx, the U.S. So we're going to try and touch everything that matters. But I was just going to start off with an opener on growth. We had your 2018 Capital Markets Day where you've guided to and focused on growth. And that's quite exciting for a telco to be focused on that. There's also some skepticism about your ability to deliver on it. But it looks like in Europe, and particularly in the U.S., you are generating growth and that seems to be driving some positive outlook for returns. How confident are you in the execution of delivery of what looks to be technically being growth in returns over the next 3 years or so?

You have seen us, and we have guided Capital Markets Day. And we have guided 1% to 2% growth on this one, and we overperformed the growth over all the years. And 2% to 3% growth, which you've seen from our side, I'm very confident that we deliver on the -- our Capital Markets targets, which we have said. We will anyhow give you an update about the prospects for the next years to come in 2021. So we are planning a Capital Markets Day to give you the insights where we see further growth coming. Now going to the segments. And look, I'm very proud about what our organization has delivered over the last years. I -- it's not only the U.S. coming with growth, we have a very sound level of growth in all the divisions. I'll come to T-Systems in a second, but Europe is growing, both on revenue and on EBITDA. Same is true for Germany. And the U.S. is anyhow our rock star on the growth perspective. I have a CAGR of growth which is beyond 5% for the upcoming years in my prospects. So there's nothing which is stressing my targets, which I have in mind. And if you look to the first half year 2020, this COVID crisis affected all the carriers, mainly on the mobile side. But looking what happened to Deutsche Telekom, we were outperforming all our competitors by at least more than 2 to 3 percent points. And most of them were negative. We are the only one being positive, including Germany and Europe. So therefore, I think this was very strong. And that shows the DNA of our organization. COVID-19 affected the -- in the telco business the mobile services, and we were able to compensate with the fixed line business. So to sum it up, I would call it resilience for convergence. So the more converged the businesses were, the more resilient our growth performance and that is interesting. You see that with the competitors as well. In mobile-only businesses in Europe, they were suffering from less roaming opportunities and others. That's not the case with us. We've already compensated on the fixed line side. And what is the -- what is maybe our concern with regard to COVID-19, it's T-Systems. On the T-Systems side, which is the main distributor, IT services, IT outsourcing services, big changes, they are affected by the industries like automotive and others, and we saw that the order entry and the revenue was not coming with the expectations, and that is immediately then affecting as well our profitability. Now it's not a big thing from a total equity value of this company, which is now creating EUR 135 billion of turnover, but it's something which we are focusing on to get this back on track very soon.

Yes. Thanks, Tim. That was a really helpful overview. And you kind of also took away most of my COVID questions, which is good because we can move on. I just had one -- just one quick follow-up question on the conjoined COVID and particularly on T-Systems, which was, how do you kind of -- how do you get your first glimpse at the potential threats from a recessionary environment on T-Systems, i.e., on the large corporates, maybe holding back large project sign-offs or on the SME side? What's giving you reassurance that 2021 isn't problematic from that front?

Look, the first thing is we do not have any negative impact on the SME or on the small enterprises. It's not that they are not able to pay anymore their connectivity or whatsoever. These guys are moving on. I think there are a lot of these companies being stretched from the situation. But nevertheless, connectivity is not the part where they are challenged already. So if they're coming to us, we have a very kind of fair way of dealing with them. So we have a lot of experience with this. We had this with the subprime customers in the U.S. one day. We had it in the 2008 crisis, remember that one. We had it in Greece as an incumbent during the Greece crisis. So we know how to manage the situation with customers, especially with business customers through this crisis without losing them and even creating a higher loyalty at the end of the day. And we have policies in place that we can mitigate stress if it's coming. But so far, so good. We don't see something. What we see on the big enterprise area is that they are just holding back investments. I think it's not automatic that this company is already in very big trouble, but they are hesitant to do big new digitization efforts. So maybe this is just a delay. In some areas, there's a restructuring, like our automotive industry sector is totally transforming where we have to settle ourselves in a different way, but this is what we see. Now on the other side, COVID-19 for us, and that's my assessment, first, there are no winners in this crisis. Even telcos are not winners. But there are ones who are created and some who can create the crisis. And from us and for me, it's clearly something where we are able to create something. We have created employee satisfaction, which is more than 10 percent points up. It's the highest valuation we ever had. 92% of our people say, "Deutsche Telekom manages crisis perfectly for me as an employee at the company." We have the highest Net Promoter Scores in TRIMs ever seen in the history of Deutsche Telekom. It went up by points. We were never expecting that this is possible. So the way how we dealt so far with our customers looks like we did the right answers, and we did a lot of stuff. And even societal reputation in Germany went up big time. I do not want to talk about one of the awards, which are coming out very soon as a most recognized company in this crisis, but you'll see it. But I can tell you the Corona app, which was built by Deutsche Telekom together with SAP, which is used 18 million times. This is more than all the European countries together. This is well recognized. We had 2.1 billion views on articles in this regard, always with the connotation of Deutsche Telekom. This helped our reputation as a digitizer in this COVID times as well. So I should not say it, but I think we managed very well through that situation as a team here, and we've gained something out of it so far.

Okay. That's -- it's a great segue into my key question if we open up into looking at your German operations. You delivered a really strong 2Q, particularly on fixed line, which is where I wanted to focus. And I just wanted to understand what's driving that fixed line growth and KPI improvement? And where do you think we're seeing a structural acceleration here, pointing to your NPS comments, et cetera, earlier?

Look, I don't want to come across too positive, guys. You know that is -- look, I'm in good -- we are in good shape. We feel strong. We have great numbers. This team is very tied together. So in Germany, we are very proud about what Germany did in this -- in the first half of the year. And honestly, maybe we're lucky in a lot of areas as well. Look, IP migration came to an end. So automatically, less complaints. We have less costs and we could invest some of the costs, and we have a better EBITDA, boom, first glance. Second thing, for whatever reason we decided at one point in time not to go to fiber to the home directly, we said we go for vectoring and super vectoring up to 250 megabit. We said, first, we have to cover all the people with reasonable bandwidth, and then we go into the fiber-to-the-home deployment. And suddenly, COVID-19 came and 90% of the Germans have a connectivity, which is enabling them for any kind of digital services, video services, everything. So people recognize that we can do everything what is needed, having -- doing your work from the home office and, by the way, in a reliable quality. In most of the areas, we witnessed that the cable companies, Vodafone is not offering reliable bandwidth, which we do because our vectoring and super vectoring is a guaranteed bandwidth. It's not a shared medium. And that's why we're gaining market share. We have the highest market share, I don't know now since years, but more than 50% net adds in this quarter on our retail brand. So we regained market share from Vodafone in the cable landscape. So not only that we were able to serve our customers and reduce the churn, on top of that, we gained new customers, which made us the growth on the fixed line side. We had a good quarter on TV. Our TV product was rated not even very good or they're good. It was rated from the press and from the most -- the highest magazine here, highest regarded magazine as [indiscernible]. I do not even know what that is. It's outstanding. So we have the best product in the market on our TV and content services, which is a real aggregator where Netflix, all the services are included and which is bringing a very good offer plus Disney+, which was an exclusive service, which only Deutsche Telekom is able to deliver on top of that. So -- and then we have the B2B area. And on the B2B area, we have now focused our business with the restructuring of our TC business. So far, we don't see the benefit, but Andrew I make you a commitment. Next year, you will even see in this area beyond our 3% growth, which we have shown already because even this area, we were never better positioned as we are today. So even this area is delivering big time on our growth. So you find me very confident about, let's say, the development in Germany. Now putting a little bit of water into the wine, we have to improve our cost base. We have to improve the free cash flow because through generating more free cash flow in this facility to have money, which we then can reinvest into fiber build-out because the fiber build-out is the only area where I would say, we haven't made our homework up today from a perspective. This is, let's say, the area, and I'm confident that Srini Gopalan, who is the new Head of Germany, he will make a big difference as he has made in Europe already.

Okay. So you're in danger of ticking off almost all the topics I want to talk about. That sounded...

I'm sorry.

I'm pretty sustainable. But it's right. We've got some detailed questions on those. Just -- I really want to go on to fiber and also the digital efficiencies side of things that you mentioned. But just before we do, just around the competitive environment. We've basically seen Vodafone enter into this cross-selling opportunity, given the acquisition of more cable. And so I just wanted your sense on the competitive environment you're facing in Germany. And has there been any meaningful shift in the traction that you see that Vodafone or O2 have been getting?

Look, I think we are trying to focus on the service quality. We are trying to focus on bandwidth. We are trying to focus on our brand and our per brand perception. And we are not focusing on the cheap, quick sale on High Street. That's not our focus. It never was, and we will stick to our agenda. We have the lowest line losses since I'm with the company, and I celebrated my 20 years' anniversary on the 1st of September. So therefore, it's...

Hannes has got the cards, clearly.

Yes. So here we go. Now Vodafone was trying to challenge us with the EUR 40 offers for 2 months in February and March. And you see, it was not resonating with the customers. The price is not the issue for the customer. It is important. It's an element of it, but the reliability of the service. The service quality of getting it in your home, the quality of the services on my fixed line infrastructure being a TV and the way how you are dealing with your customers on a constant way going forward, increasing your prices and having surprises in this one, this is something which I think we are managing in a better way than Vodafone of today. And O2, they are not present in the fixed line market. I think they're trying to attack us on the mobile market, but they have a s***** mobile network. And that's why we have this big advantage on less churn in these areas. We have the lowest churn in the industry. And by the way, same in the U.S. and other markets, that's one of our paradigms, which we are driving. So look, I see every here and there offers from the market. If somebody believes it's only a price issue, I think this will not -- at least not what the German customers resonate. That's my belief and I might be wrong. But so far, it went pretty well.

Okay. So you mentioned fiber, your super vectoring strategy, we'd argue, paid off pretty nicely given the capacity you've been able to deliver customers. But look, we did notice you appear to have a greater focus on fiber or you mentioned the word fiber more on your second quarter call. And so I just wondered if you could give us maybe an update on your ambitions, say, in terms of household coverage. Or any updates on how you're thinking about fiber now would be really helpful.

Look, Germany is now up to 90% super vectoring. Germany's IP migration is finalized, almost finished. So we are done with this thing. A lot of money went into this one. Now we see the benefits, by the way, on the IP migration, the improved service quality, the lowest -- lack of complaints and the impact on the cost side. And the money which is now available is something which we are using to reinvest into fiber and 5G, by the way. We should talk about 5G as well because I'm very proud about Germany in 5G. But coming to fiber, so now the problem with fiber is it's not just a money issue and we always stress that. It's an issue about, let's say, the economics of fiber. It's a question about, let's say, the subsidization and whether it's working. It's a question about the approvals, which you need from the municipalities. It's a question about the magnitude of processing you can handle as a company. And we are scaling this up. We call it the gigabit fiber factory within -- or the fiber factory within our company. And what we have done is we have doubled the amount of fiber to the homes already this year. We will have something in the vicinity of 600,000. Next year, we will double again. So we won even more than 1.2 million households. And our perspective and that is Srini's task as a new Managing Director for the German entity is that we are going beyond 2 million households on an annual basis very, very soon. We're investing into the white spot areas where we have high subsidization. There's billions of money available and we are using this because we are the only one in these rural areas being present, and we are going in certain areas. That is one of the tasks which Srini is now addressing very smartly where we can regain momentum towards our competition, in areas where the market is -- the elasticity is very high and the areas where we can generate a high utilization for our infrastructure. So this is the approach which we are driving, a much better factory of driving it. And by this, we will be -- very soon, we will be -- as well on the fiber side, being the leader in the German environment. We have to do something. Nevertheless, we need as well support. So it's not that we just do it on our own, we will do our homework and trying to do the best. But there are areas as well from the regulatory side where we are working intensively with the bonus nets, again, with the government, which will help us, again, to catch up to the European member states here because Germany is lagging behind, as you know.