Earnings Call - DEUTSCHE TELEKOM AG

Explicit Guidance:

• FY2026 (full year): Guidance updated for purified EBITDA; ex-US business expected to exceed target of €15.4 billion (driven by favorable FX rates), achieving "little more" than the initial target. Group-level result per share (RPS) guidance remains at €2.20 for FY2026.
• FY2027 (full year): Dividend guidance set at €1.10 per share, subject to final approval; projected to be paid in 2027. Share buyback program capped at €2 billion for the coming year. Total shareholder return (dividend + buyback) targeted at approximately €7 billion (roughly 6% yield).
• RPS Growth Targets: FY2027 RPS guidance set at €2.50 (up from €2.20 in FY2026). Management expects "two-digit" growth in result per share for FY2027, continuing the trajectory set in the Capital Market Day 2024 goals for the 2023–2027 period.
• Dividend Policy: Commitment to maintain annual dividend payments, targeting a payout ratio of 40–60% of clean-up RPS (historically averaging 50%).
• T-Mobile USA (FY2026/2027): Expected to acquire 1 million postpaid accounts for the full year following 2025 record performance. Glass-fiber joint ventures in the US expected to transition from initial results-reducing phases to earnings-positive over time.

Business-Segment Outlook:

• Germany (Mobile/Fixed):
  • Mobile: "Unchangeably strong" growth trajectory; 282,000 new mobile customers in Q3.
  • Fixed Broadband: Returned to positive broadband customer growth (11,000 new customers in Q3); 190,000 new glass-fiber connections in Q3 (record), representing ~20% YoY growth.
  • Strategy: Aim to reach 25 million accessible households in Germany by 2030; long-term goal to connect 2/3 to 3/4 of all 45 million German housing units. No hard minimum connection rate thresholds, but prioritizing based on economic calculations.
  • Service Sales: Service revenue grew 1.9% in the quarter; expected to outpace EBITDA growth.
• T-Mobile USA:
  • Customer Growth: Slight deceleration in postpaid account gains in Q3 compared to 2025, but full-year expectation remains at 1 million new accounts.
  • M&A Integration: US Cellular acquisition (closed August) expected to deliver $1.2 billion in synergies over two years; implementation costs ($2.6 billion) initially impacting results and FCF.
  • Joint Ventures: Two glass-fiber JVs in the US operational; initial phase involves investment, shifting to profit generation as expansion continues.
• Europe:
  • Performance: Organic EBITDA growth of 4% in first nine months. Poland identified as a key growth driver this quarter; Greece and Czech Republic stable; Austria facing temporary headwinds.
  • Network: Best mobile network coverage in Europe according to UKLA; 90% surface coverage for 5G in Germany.
• T-Systems:
  • Order Book: Order entry trending higher, expected to exceed previous year's levels.
  • Sales: Service sales growth of 4% in first nine months; purified EBITDA growth of 8%.
• AI & New Tech:
  • Revenue: AI-related sales in ex-US business expected to generate ~€250 million in FY2026.
  • Strategy: Continued investment in sovereign AI, cybersecurity, and AI computing centers (e.g., Munich/Nvidia partnership). AI deployment viewed as customer experience enhancer rather than headcount reduction driver.
  • Emerging Devices: Smart glasses anticipated to become popular ecosystem products; expected to eventually support independent mobile connections (SIM cards), though currently primarily Wi-Fi/Bluetooth dependent.

Market and Competitive Outlook:

• Competition: T-Mobile USA faces increased aggression following Verizon's ownership change and new market entrant strategies; Deutsche Telekom maintaining defensive pricing and network leadership.
• Satellite Competition: Acknowledges SpaceX/Elon Musk's potential entry into US mobile markets as a "relevant development" but views it as high-cost and time-consuming. In Europe, satellite addition is deemed "relatively unimportant" due to already high terrestrial coverage (90% 5G surface coverage in Germany).
• Market Dynamics: US market competition "sharpened" in Q3 due to competitor aggression; Germany market described as "not easy" but Telekom has achieved 40 consecutive quarters of organic EBITDA growth.
• Pricing: Continued focus on "unlimited" tariffs in Germany as a strength; DSL retention in non-fiber areas to avoid additional effort while pushing fiber migration.

Macro / Industry Outlook:

• Interest Rates/FX: Net debt levels (currently ~2.6x purified EBITDA, limit 2.75x) influenced by recent interest rate increases and FX fluctuations; debt development remains "manageable" and linked to positive result growth.
• Regulation/Policy: No specific new regulatory changes anticipated beyond standard spectrum auction cycles. Dividend tax treatment expected to remain "gross for net" (tax-free) for the current and following year.
• US Spectrum: "Large spectrum auction" expected next year in the USA; company intends to participate and maintain strong financial positioning.
• Energy/ESG: Energy consumption continues to decline despite higher data volumes; expanded services in sustainability and AI.

Strategic Initiatives:

• Shareholder Returns: Total return of ~€7 billion planned (€1.10 dividend + €2B buyback). Buyback strategy flexible, aiming to purchase shares at low volatility points (potentially up to €3.5B depending on share price), contrasting with fixed dividend commitments.
• Network Expansion: Continued indefinite glass-fiber expansion in Germany; record 190k Q3 new connections.
• M&A/Investments: Full integration of US Cellular acquisition ongoing; glass-fiber JVs in US scaling up.
• Leadership: Current Chairman Tim Höttges contract valid until end of 2028; expected to announce successor in prior year (regulatory transition).

Risks and Headwinds to Outlook:

• Share Price Volatility: Recent stock price fluctuations attributed to external news (SpaceX satellite competition), US market competition (Verizon), and FX impacts.
• Capital Expenditure: Future cash flow requirements impacted by US Cellular acquisition costs ($2.6B implementation), spectrum auctions, and ongoing glass-fiber expansion.
• Competitive Threats: Potential entry of non-terrestrial networks (SpaceX) in the US could pressure pricing or market share, though management deems full competitiveness unlikely.
• Exchange Rates: Favorable FX rates boosted ex-US EBITDA guidance; currency fluctuations remain a variable for debt and result figures.
• Execution Risk: Synergy realization from US Cellular acquisition depends on successful integration; glass-fiber JVs require time to shift from loss-making to profit-generating.

Management Tone on the Future:

• Confidence Level: High confidence in achieving FY2026 goals and Capital Market Day 2024 goals for 2027. Describes business development as "very steady."
• Strategic Clarity: Emphasizes "defending network leadership" and "investing in the future" rather than reacting to speculation (e.g., T-Mobile USA/Deutsche Telekom merger rumors rejected).
• Flexibility: Highlights the strategic advantage of the buyback program (€2B) over dividend for flexibility regarding cash flow imbalances or market conditions.
• Execution Focus: Points to 10 years (40 quarters) of consistent organic EBITDA growth in Germany as proof of resilience against macro shocks (pandemic, war, market shifts).

Miscellaneous:

• Post Office Health Insurance: Deutsche Telekom clarifies no supervisory control or duty regarding the Post Office health insurance company (13,000 members, €3B deficit); confirms no specific intervention planned.
• M&A Speculation: No comment on potential merger between Deutsche Telekom and T-Mobile USA, citing speculative nature of press reports.
• Analyst Consensus: Current market consensus aligns with management's view of steady, two-digit profit growth for the next few years.