Deutsche Telekom’s European division continues to improve, within limitations

Deutsche Telekom’s (DT) Europe segment was given another slap on the back by Group leadership in recognition of its ongoing, slow-motion revival, built on increased commercial aggression and “radical simplification” plans instituted by regional Chief Executive (CEO) Srini Gopalan.

Speaking during DT’s results presentation for the year to 31 December 2019 (FY19), Group CEO Timotheus Höttges said Gopalan and his team were doing a “terrific job” in converting the challenged division — acknowledged as “one of our problem children” — into a “real gem”. “I’m very happy”, he added.

The Group’s accompanying FY19 Annual Report disclosed that Gopalan — brought in from Bharti Airtel at the start of 2017, to add some spice to harmonisation of the operator’s disparate regional telco network (Deutsche Telekomwatch, #54) — has been handed a four‑year extension to his contract, taking his mandate up to 31 December 2024.

(Modest) targets hit with room to spare

The segment’s headline FY19 numbers were boosted by a strong end to the year.

• Collectively, the Europe NatCos delivered a 3%‑rise in net revenue in Q4 FY19, to €3.2bn — feeding into a 2.4%‑growth rate over the course of FY19. This cemented the division’s long-awaited return to forward gear on sales, achieved in FY17 and continued in FY18 — as well as comfortably surpassing the 1%‑compound annual growth target it has been mandated to deliver in the Group’s current strategic cycle, from FY17 to FY21 (Deutsche Telekomwatch, #71, #74, and #81).
• On an “adjusted” basis, earnings before interest, taxation, depreciation, and amortisation were up 5% in both Q4 and FY19. Again, this was well ahead of the Group’s target (1%–2% across FY17–FY21).
• At NatCo level, the forward momentum was relatively consistent. Hrvatski Telekom was the only country unit to see revenue step back in Q4 FY19, seeing a minor 0.4%‑decrease.

Job not done yet

It did not appear, however, that the segment’s progress has yet prompted Höttges to change his mind about the attractiveness of Europe as an investment destination.

The CEO’s scepticism towards the European macro picture has risen over the course of the regional economic slump, and as regulatory frustrations have pervaded — and FY19 saw DT lower Europe capital expenditure (capex) by a further 3.3%. This came against a small rise (+2.6%) in Germany and huge jump in the USA (+36.6%, in euro terms). Although the other segments’ spend was boosted by outsized, 5G-focused spectrum rights acquisition, this is not unconnected to the weaknesses of the European macro environment where regional and national authorities have — as feared — made painfully slow progress in freeing up 5G licences for purchase (Deutsche Telekomwatch, passim).

Nor is a mind‑set shift imminent. Excluding spectrum investment, the Europe division’s capex is projected to remain stable in FY20 and see a slight decrease in FY21, in line with guidance laid out at DT’s May 2018 Capital Markets Day (Deutsche Telekomwatch, #74). The Group also continues to increasingly project itself as “Trans-Atlantic”, overriding the “Leading European Telco” mission stressed during the early years of Höttges’ leadership.