Highlights in the second quarter of 2018
2018 CAPITAL MARKETS DAY
We announced our new medium-term strategy and financial outlook at the Capital Markets Day in Bonn in May 2018. Through 2021 we expect growth to remain at the same consistently high level as forecast at our Capital Markets Day in 2015: Revenue is set to continue growing at a rate of 1 to 2 percent a year, adjusted EBITDA at a rate of 2 to 4 percent, and free cash flow at a rate of around 10 percent. We expect that all business units will contribute to earnings growth at the Group from 2019 onwards. Convergent products and services for consumers and business customers are at the core of our strategy. Our capital expenditure is to remain at a high level and will center on the ongoing build-out of broadband networks and upgrading to the LTE and 5G standards. Starting in 2019, the dividend will track the development in adjusted earnings per share. For 2018, we continue to expect a figure of around EUR 1.00 per share as announced at the Capital Markets Day in 2015 and expect this to rise to around EUR 1.20 per share through 2021.
AGREED BUSINESS COMBINATION OF T-MOBILE US AND SPRINT
Together with their respective majority shareholders Deutsche Telekom AG and Softbank K.K., T-Mobile US and Sprint Corp. concluded a binding agreement in April 2018 to combine their companies. The larger T-Mobile US is expected to achieve cost and capital expenditure synergies with a net present value of around USD 43 billion (after integration costs). Around USD 15 billion has been budgeted for integration costs. The business combination is expected to make a positive contribution to adjusted earnings per share at the Deutsche Telekom Group after the first three years. The new company will have a total customer base of some 127 million. Under the agreement, T-Mobile US will acquire all of the shares in Sprint. On completion of the transaction, Deutsche Telekom will hold around 42 percent of T-Mobile US’ shares and Softbank around 27 percent, while the free float will account for about 31 percent. This distribution of the T-Mobile US shares, along with clear corporate governance rules, means that Deutsche Telekom will continue to be able to include T-Mobile US as a subsidiary in its consolidated financial statements. The agreement is subject to the necessary approvals by the responsible authorities, by T-Mobile US’ and Sprint’s shareholders, and other closing conditions.
In the second quarter of 2018, Deutsche Telekom International Finance B.V. issued euro bonds with a total volume of EUR 2.9 billion and U.S. dollar bonds with a total value of USD 1.75 billion (EUR 1.4 billion). In April 2018, T-Mobile US repaid senior notes – for nominal amounts of USD 1.75 billion (EUR 1.4 billion) and USD 0.6 billion (EUR 0.5 billion) – before the due date.
SETTLEMENT IN THE TOLL COLLECT ARBITRATION PROCEEDINGS
Together with Daimler Financial Services AG we reached an agreement with the Federal Republic of Germany to end the toll collection arbitration proceedings. This agreement puts an end to a lengthy legal dispute regarding the implementation of heavy truck road tolls in Germany. The agreed settlement amount of around EUR 3.2 billion includes services previously provided to the Federal Republic of Germany. Daimler Financial Services AG and Deutsche Telekom have both agreed to make final payments of EUR 550 million each.
T-MOBILE US SHARE BUY-BACK PROGRAM
In April 2018, T-Mobile US’ Board of Directors authorized an increase in the total share buy-back program to up to USD 9.0 billion, consisting of the USD 1.5 billion in repurchases already executed and for up to an additional USD 7.5 billion of T-Mobile US common stock until the end of 2020. The additional buy-back authorization is contingent upon the termination of the business combination agreement with Sprint.
INVESTMENTS IN NETWORKS
Fiber-optic rollout progresses apace. Internet at the speed of light for the Port of Hamburg, the Burgenlandkreis region, and the towns of Bautzen and Lüneburg – a whole host of large-scale fiber-optic projects in urban and rural areas alike have been given the green light. A comprehensive project to digitalize Stuttgart and five neighboring districts has been approved: This alone will bring gigabit connections to some 90 percent of the 1.38 million households and to all of the around 140,000 company sites and businesses covered by the project. The nationwide build-out of FTTH is gathering speed. The number of households provided with new end-to-end fiber-optic lines (FTTH/FTTB) is set to increase steadily through 2021 to around two million per year. Given the right regulatory conditions, optical fiber will then be rolled out to some two million households a year from 2021 onwards. Meanwhile, we have also entered the third phase of our program to roll out fiber-optic infrastructure to business parks across Germany, which will benefit some 49,000 enterprises.
Supervectoring. The rollout of supervectoring, which will offer download speeds of 250 Mbit/s, is about to start. Eight million households will benefit immediately, a figure that will rise to 15 million by the end of 2018. We plan to have upgraded 95 percent of our 100 Mbit/s households to up to 250 Mbit/s by the end of 2019. Vectoring has already brought speeds of up to 100 Mbit/s (at least 50 Mbit/s) to over five million more households since the start of 2018; for the first time ever, it has also been possible to deploy vectoring technology in former development areas.
Foundation laid for 5G rollout in Germany. Europe’s first 5G antennas, which fully support the communications standard of the future, have been transmitting data under real-life conditions via our network in Berlin. These antennas are based entirely on the future 5G standard for the 5G New Radio (5G NR) mobile communications component. Currently, we are building an entire 5G cluster in the heart of Berlin. At the beginning of this year, Deutsche Telekom, Intel, and Huawei provided the world’s first demonstration of 5G NR interoperability, proving that technical components of different vendors and one carrier can interact properly on the basis of the new 5G standard.
First European NB-IoT roaming tests concluded. In June 2018 we announced that, together with the Vodafone Group, we had successfully concluded the first international roaming tests in Europe using licensed Narrowband IoT technology. This service is designed to ensure seamless coverage and service continuity for millions of connections over low-power wide-area networks. The success of these tests marks a major milestone in the development of a stable roaming environment for mobile IoT networks.
New cell sites in operation. We also continue to drive the build-out of mobile networks in metropolitan and rural areas alike, with almost 300 new cell sites across Germany going into operation in June 2018 alone. We have increased the network density, modernized it, and filled in gaps. Coverage with our LTE network increased by 0.2 percentage points to reach 94.4 percent of the population. This percentage is set to increase to 98 percent by 2019. The expansion of LTE infrastructure lays important foundations for the future 5G network.
INNOVATIONS AND PARTNERSHIPS
Digitalization reaches all areas of healthcare. Hospital beds that independently communicate their whereabouts, ultrasound scanners that indicate when they are due for inspection, patient support using telemedicine services, and mobile apps: The digital revolution is dramatically changing the healthcare sector and poses a complex challenge to everyone involved. Telekom Healthcare Solutions provides IT solutions that help users successfully take on the new tasks that digitalization brings. conhIT, the world's leading trade fair for healthcare IT, took place in Berlin in April 2018. Under the motto "Set for a digital future" (Digital auf Zukunft programmiert), T-Systems showcased its latest innovations, which include a tracking system to localize medical equipment and a secure platform for digital collaboration.
“Shape the digital now.” This was our slogan at Hannover Messe 2018, where we presented our modular solutions for industry. The focus was on practical and concrete implementation options for production planning, manufacturing, and logistics. Visitors were able to see products and services relating to cloud computing, the Internet of Things, connectivity, and security, and experience new trends such as digital twins, blockchains, and artificial intelligence. We also showcased the new PLM Cloud service, a cloud-based product lifecycle management (PLM) solution that was launched at the start of the year. Companies can use the PLM Cloud to transform what is probably their most important process, i.e., the development of new products from initial design through to test simulation, bring that process into the digital age, and thus accelerate their approach to innovation.
Public cloud – strategic partnerships. T-Systems and Microsoft are entering into a strategic partnership that will focus on promoting public cloud services in four key areas: SAP applications, managed services on Microsoft Azure and Microsoft 365, digital solutions using artificial intelligence and mixed reality, and IoT. SAP certified the Open Telekom Cloud in time for Hannover Messe 2018, thus guaranteeing the performance of SAP HANA in the public cloud and enabling the solution to be integrated seamlessly into SAP support processes. The additional service in the public cloud means companies can complement their IT landscape with SAP applications flexibly and easily by self-service and receive appropriate support where needed.
CORPORATE CUSTOMER DEALS
T-Systems wins major contract with the Sparda group. The group of Sparda-Banks has signed a seven-year outsourcing contract with T-Systems for an amount in the mid-three-digit million euro range. We will take over the entire IT infrastructure of Sparda-Datenverarbeitung eG (SDV-IT), the Sparda-Banks group’s central IT service provider, and migrate all mainframes and server landscapes to the high-security data centers at T-Systems. This traditional IT outsourcing contract is one of the biggest deals seen on the market in recent months.
Brandenburg’s government administration to get high-speed network. Brandenburg has placed a major telecommunications order in the high two-digit million euro range with T-Systems. We will provide the infrastructure and components for telephony and the wide-area network of the state’s administration. In future, sites will get connection speeds of up to 10 Gbit/s using up to ten times more bandwidth than before. Brandenburg intends to have the network certified by the German Federal Office for Information Security (BSI).
Full-service Internet of Things bundles. Our new full-service bundles offer customers a quick and easy way to get started in the Internet of Things. The bundles contain everything a complete solution needs: hardware, mobile connectivity, cloud storage, and a user-friendly web portal. Standardized and reliable platforms – like our Cloud of Things IoT platform, which we operate in conjunction with Software AG – allow customers to deploy these IoT solutions quickly and easily as needed, no labor-intensive and costly installation required. The first complete bundles to be launched are Asset Tracking and Industrial Machine Monitoring. In May 2018, Hrvatski Telekom became the first provider in Croatia to make NB-IoT services available commercially.
The illustration below shows the main awards received in the second quarter of 2018. For details on more awards, please go to www.telekom.com/media.