Earnings Call - DEUTSCHE TELEKOM AG

Financial Performance:

• Recorded a record quarter for Germany with 190,000 new fiber access connections (up 20% YoY).
• Germany broadband customer growth returned to positive territory with 11,000 new customers; mobile subscriber growth remained strong with 282,000 new customers.
• T-Mobile USA delivered 10% organic growth after IFRS for the first nine months; other segments (Germany, Europe, T-Systems) contributed growth with 4-5% organic increases.
• Full-year 2026 purified EBITDA expected to exceed guidance of €15.4 billion, driven by favorable exchange rates.
• Net financial debt remains within target corridor at approximately 2.6x purified EBITDA (limit: 2.75x), despite a slight increase due to exchange rates.
• Revenue growth driven by service sales (up 1.9% in Germany); full-year service sales growth of 4% expected.

Guidance and Future Outlook:

• Raised 2026 earnings per share (EPS) guidance to €2.20, reflecting a 10% increase; dividend guidance set at €1.10 (10% increase) for payment in 2027.
• Total shareholder return for 2027 proposed at ~€7 billion, comprising the €1.10 dividend and up to €2 billion in share buybacks (flexible amount based on market conditions).
• Confident in achieving 2026 targets and Capital Market Day 2024 goals for 2023-2027, projecting continued double-digit EPS growth.
• Maintains dividend payout policy of 40-60% of clean-up results per share, historically around 50%.
• Plans to participate in US spectrum auctions next year; expects significant fiber expansion in Germany to continue indefinitely with a goal of connecting 2/3 to 3/4 of the 45 million housing units.

Business Segments and Product Lines:

• Germany: Record fiber rollout (190k new accesses); forced migration of DSL customers to fiber where available; strong TV subscriber growth excluding non-connected units.
• T-Mobile USA: Closed acquisition of US Cellular for ~$4 billion (EBITDA <€1B, projected synergies €1.2B, implementation costs €2.6B over 2 years); launched two new fiber joint ventures expected to become profitable over time.
• T-Systems: Order entry growing; expected to finish the year with higher orders than the previous year despite some revenue recognition timing differences.
• AI & Innovation: Partnering with NVIDIA for AI computing; projected €250 million in AI-related sales for Ex-US business; exploring smart glasses as a future independent mobile data product.
• Subcontractors: Utilizing AI to monitor and control quality of subcontractors to ensure efficient network expansion.

Market and Competitive Landscape:

• Holds best mobile network coverage in Germany and Europe; best spectrum position in the USA.
• Competitor Threats: Monitors SpaceX potential entry into mobile infrastructure; notes Verizon's new aggressive market strategy under new ownership in the US; considers satellite competition less relevant in Europe due to existing high terrestrial coverage (90% 5G surface).
• Volatility: Acknowledges stock price volatility driven by US market competition fears and external news (SpaceX, Verizon); emphasizes 10 years of consecutive organic EBITDA growth in Germany despite market shocks.
• US Cellular Integration: Implementation phase ongoing; synergies being processed with initial impact on results and cash flow.

Risks and Challenges:

• Debt Management: Debt levels are relative to growing EBITDA; potential impact of rising interest rates and refinancing needs remains manageable.
• Competition: Aggressive pricing strategies by US competitors (Verizon) and potential infrastructure entry by SpaceX create uncertainty in the US market.
• Regulatory/Political: Response to scrutiny regarding T-Mobile US donations to political events (clarified as independent decisions by T-Mobile US).
• Investment Requirements: Need to balance high capital expenditure for fiber expansion and spectrum auctions with shareholder returns and debt targets.

Management Commentary and Tone:

• Tone: Confident and positive; management emphasizes steady, long-term execution and strong market positioning.
• Strategic Focus: Highlighted "AI Flywheel" strategy, aiming to save costs and drive sales via AI while improving customer experience.
• Leadership: Board succession for Chairman Tim Höttges (contract until end of 2028) expected to be managed via a regulated transition process.
• Customer Base: Committed to maintaining social compatibility in workforce adjustments while leveraging digitization for efficiency.

Analyst Questions and Answers:

• Dividend Tax: Assumed to remain tax-free for 2027; dependent on actual result development.
• Buyback Strategy: Flexible up to €2 billion to purchase shares at low prices; distinct from fixed dividend to allow balancing investment needs (e.g., spectrum auctions).
• SpaceX/Telecom: Satellite competition deemed less critical in Europe than the US; US entry considered costly and time-consuming for competitors.
• T-Mobile USA Merger: No news on potential integration of T-Mobile US and Deutsche Telekom; management declines speculation on M&A.
• AI Costs: AI adoption expected to optimize workforce and customer experience rather than drive blunt cost-cutting or headcount reductions like competitors.
• Post Office Health Insurance: Telekom confirms no supervisory duty over the external health insurance fund for post office employees.

Other Key Points:

• Network Leadership: Celebrated 40 consecutive quarters of organic EBITDA growth in Germany (10 years).
• Fiber Penetration: 26.4 million accessible households in Germany/Europe; aim to reach 25 million accessible homes by 2030.
• ESG: Continued reduction in energy consumption despite higher data volumes; expansion of sovereign AI and cybersecurity services.
• US Cellular Deal: Acquisition costs and synergies calculated to ensure high returns; joint venture structures for fiber in the US are currently in early revenue generation phases.
• Investor Day: AI Investor Day in October detailed ambitions for operational cost savings and sales growth through AI.