Results of operations of the Group

NET REVENUE

In 2017, we generated net revenue of EUR 74.9 billion, which was 2.5 percent or EUR 1.9 billion up on the prior-year level. Our United States operating segment contributed to this positive trend with revenue growth of 5.9 percent: T-Mobile US’ successful Un-carrier initiatives and the success of the MetroPCS brand gave a strong boost to the number of new customers and thus also to service revenues. Terminal equipment revenues continued to rise, in part due to the stronger focus on offering terminal equipment under installment plans. In our German home market, there was a slight positive trend in revenue, with an increase of 0.7 percent compared with the prior year. This was partly due to a rise in mobile revenues and, primarily, growth in non-contract handset revenues. Increased IT and broadband revenues also had a positive impact on fixed-network revenue, although it was not sufficient to offset the overall decline in revenue in the fixed-network business. In the Europe operating segment, revenue also increased slightly by 1.2 percent compared with the prior year. Revenue development in our growth areas and an increase in terminal equipment revenue had a positive effect. By contrast, lower roaming charges in many countries and ongoing intense competition in the telecommunications footprint markets put further pressure on revenue. In the Systems Solutions operating segment, revenue decreased by 1.1 percent against the prior year. This decline was primarily attributable to the completion in 2016 of the set-up phase for the toll collection system in Belgium. Excluding this toll collection effect from the prior year, however, our telecommunications business posted revenue growth. By contrast, revenue from our traditional IT business continued to decrease due to the general downward trend in market prices and to a decline in order entry, especially at international level. Our strategic growth areas cloud, Internet of Things, and our new Telekom Security unit made a positive contribution. Revenue generated in our Group Development operating segment decreased by 3.6 percent in 2017 compared with the prior year, which was largely attributable to the revenue lost as a result of the sale of Strato as of March 31, 2017. By contrast, revenue growth at T-Mobile Netherlands had a positive impact.

Excluding the negative net exchange rate effects of EUR 0.6 billion – in particular from the translation of U.S. dollars into euros – and slightly negative effects of changes in the composition of the Group of EUR 0.1 billion – mainly from the sale of Strato – revenue even increased by EUR 2.6 billion or 3.6 percent. For detailed information on revenue development, please refer to the section “Development of business in the operating segments.”

Contribution of the segments to net revenue
millions of €
  2017 2016 Change Change % 2015
Net revenue 74,947 73,095 1.852 2.5 69,228
Germany a 21,931 21,774 157 0.7 22,185
United States 35,736 33,738 1.998 5.9 28,925
Europe a 11,589 11,454 135 1.2 11,674
Systems Solutions a 6,918 6,993 (75) (1.1) 6,837
Group Development a 2,263 2,347 (84) (3.6) 2,428
Group Headquarters & Group Services a 2,943 3,467 (524) (15.1) 3,355
Intersegment revenue (6,433) (6,678) 245 3.7 (6,176)
 
a Since January 1, 2017, we have reported on the Group Development operating segment and within the Group Headquarters & Group Services segment on the Board of Management department Technology and Innovation. Comparative figures have been adjusted retrospectively.

For more information on changes in the organizational structure, please refer to the section “Group organization,” and Note 31 “Segment reporting” in the notes to the consolidated financial statements.

At 47.7 percent, our United States operating segment again provided the largest contribution to net revenue of the Group. This was an increase of 1.5 percentage points compared with the prior year, due in particular to ongoing strong customer additions. By contrast, the contributions by our other operating segments and the Group Headquarters & Group Services segment decreased. The proportion of net revenue generated internationally continued to increase, from 66.3 percent to 67.2 percent.

For more information on net revenue, please refer to Note 31 “Segment reporting” in the notes to the consolidated financial statements.

EBITDA, ADJUSTED EBITDA

Excluding special factors, adjusted EBITDA increased year-on-year by EUR 0.8 billion or 3.8 percent to EUR 22.2 billion in 2017. This development was primarily driven by our United States operating segment, which recorded an increase in its adjusted EBITDA contribution of 8.8 percent, mainly as a result of the continued success of the Un-carrier initiatives. EBITDA adjusted for special factors also grew in our Germany operating segment by 2.8 percent compared with 2016, driven by efficiency enhancement measures while revenue increased slightly. Adjusted EBITDA declined due to higher market investments and revenue-driven cost increases at the B2B/ICT business customer unit in our Europe operating segment. Slight revenue growth and increased cost efficiency had an offsetting effect. Adjusted EBITDA in our Systems Solutions operating segment also recorded a downward trend; however, this was largely due to the non-recurring effect already mentioned from the prior year and the tense situation in the ICT market. In the Group Development operating segment, adjusted EBITDA declined mainly due to the forgone earnings following the sale of Strato. A positive trend at T-Mobile Netherlands had a contrasting effect. Adjusted for negative net exchange rate effects and slightly negative effects of changes in the composition of the Group of EUR 0.2 billion, adjusted EBITDA even increased by EUR 1.0 billion or 4.9 percent.

EBITDA increased by EUR 1.4 billion or 6.3 percent year-on-year to EUR 24.0 billion. Special factors were positive on balance, increasing by EUR 0.6 billion compared with 2016 to EUR 1.7 billion. These factors included a partial reversal of impairment losses on spectrum licenses at T-Mobile US, increasing the carrying amount by EUR 1.7 billion as of September 30, 2017. Other positive factors were income from divestitures in connection with the sale of Strato completed as of midnight, March 31, 2017 (EUR 0.5 billion), income from the sale of the remaining shares in Scout24 AG (EUR 0.2 billion), and income from a settlement agreement concluded with BT in July 2017 (EUR 0.2 billion). Special factors in connection with staff-related measures and non-staff-related restructuring expenses amounted to EUR 0.6 billion, EUR 1.1 billion lower than the expenses reported in the prior-year period. Special factors in the prior year included income of EUR 2.5 billion from the sale in early 2016 of our stake in the EE joint venture and income in the amount of EUR 0.5 billion from transactions for the exchange of spectrum licenses between T-Mobile US and two telecommunications companies. For detailed information on the development of EBITDA/adjusted EBITDA in our segments, please refer to the section “Development of business in the operating segments. For an overview of the development of special factors, please refer to the table "Consolidated income statement and effects of special factors.”

Contribution of the segments to adjusted Group EBITDA
  2017
millions of €
Proportion of
adjusted Group
EBITDA
 %
2016
millions of €
Proportion of
adjusted Group
EBITDA
 %
Change
millions of €
Change
 %
2015
millions of €
EBITDA (adjusted for special factors) in the Group 22,230 100.0 21,420 100.0 810 3.8 19,908
Germany a 8,468 38.1 8,237 38.5 231 2.8 8,273
United States 9,316 41.9 8,561 40.0 755 8.8 6,654
Europe a 3,749 16.9 3,866 18.0 (117) (3.0) 3,944
Systems Solutions a 509 2.3 530 2.5 (21) (4.0) 581
Group Development a 915 4.1 943 4.4 (28) (3.0) 1,050
Group Headquarters & Group Services a (716) (3.2) (670) (3.1) (46) (6.9) (554)
Reconciliation (11) (0.1) (47) (0.3) 36 76.6 (40)
 
a Since January 1, 2017, we have reported on the Group Development operating segment and within the Group Headquarters & Group Services segment on the Board of Management department Technology and Innovation. Comparative figures have been adjusted retrospectively.

For more information on changes in the organizational structure, please refer to the section “Group organization,” and Note 31 “Segment reporting” in the notes to the consolidated financial statements.

MARKETING EXPENSES

Marketing communication in our Group mainly takes the form of product and brand campaigns, such as Family Card, Stream On, Entertain, SmartHome, or of corporate campaigns such as our network build-out campaign. In 2017, marketing expenses amounted to EUR 2.4 billion, up slightly on the prior-year level of EUR 2.3 billion. The marketing expenses comprise expenses incurred through market research, market analysis, target market studies, determining marketing strategies, designing the marketing mix, and carrying out and managing marketing initiatives. They also include expenses arising from customer retention programs, market planning and segmentation, and product forecasts.

EBIT

Group EBIT stood at EUR 9.4 billion, up EUR 0.2 billion or 2.4 percent against the prior year. This increase is partly due to the effects described under EBITDA. A year-on-year increase in depreciation, amortization and impairment losses of EUR 1.2 billion reduced EBIT. EBIT was negatively impacted by the impairment losses recognized on goodwill in the Systems Solutions operating segment of EUR 1.2 billion and in the Europe operating segment in our national companies in Poland, Romania, and Albania of EUR 0.8 billion in total. Goodwill impairment losses of EUR 0.5 billion had been recognized in the prior year, mainly in the Netherlands cash-generating unit. In addition, impairment losses on property, plant, and equipment totaling EUR 0.1 billion were recognized (prior year: EUR 0.2 billion). Depreciation of property, plant and equipment and amortization of intangible assets were slightly lower than in the prior year. For further details, please refer to Note 22 “Depreciation, amortization and impairment losses” in the notes to the consolidated financial statements.

PROFIT BEFORE INCOME TAXES

Profit before income taxes increased from EUR 4.5 billion in the prior year to EUR 5.0 billion. This is due to the positive trend in EBIT, as well as to a year-on-year decrease in the loss from financial activities by EUR 0.2 billion to EUR 4.4 billion. As in the prior year, impairments of our financial stake in BT, which in 2017 totaled EUR 1.5 billion recognized in profit and loss, were one of the main factors affecting profit/loss from financial activities. These impairments comprise both the share price effect and the exchange rate effect. In 2016, the impairment amounted to EUR 2.2 billion. Negative remeasurement effects from the exercise and measurement of embedded derivatives at T-Mobile US – mainly relating to the early repayment of financial liabilities to third parties outside of the Group – increased the loss from financial activities. As in 2016, we received dividend payments amounting to EUR 0.2 billion from our financial stake in BT in the reporting year. The prior-year figure included a final dividend of EUR 0.2 billion received in connection with the sale of our stake in the former EE joint venture. Finance costs decreased by EUR 0.3 billion to EUR 2.2 billion.

NET PROFIT/LOSS

Net profit increased year-on-year by EUR 0.8 billion to EUR 3.5 billion. After recording a tax expense of EUR 1.4 billion in the prior year, in 2017 we recorded a tax benefit of EUR 0.6 billion, mainly attributable to the reduction in the U.S. federal tax rate from 35 percent to 21 percent, which resulted in a non-cash deferred tax benefit of EUR 2.7 billion at T-Mobile US. For further information, please refer to Note 26 “Income taxes” in the notes to the consolidated financial statements. Profit attributable to non-controlling interests increased compared with 2016 by EUR 1.7 billion to EUR 2.1 billion. Alongside positive business performance and the partial reversal of impairment losses on spectrum licenses acquired previously in the United States operating segment, the increase in profit attributable to non-controlling interests was driven in particular by the deferred tax benefit recognized. For further information on the development of our results of operations, please refer to the disclosures under “Notes to the consolidated income statement” in the notes to the consolidated financial statements.

The following table presents a reconciliation of EBITDA, EBIT, and net profit/loss to the respective figures adjusted for special factors.

Consolidated income statement and effects of special factors
millions of €
  EBITDA 2017 EBIT 2017 EBITDA 2016 EBIT 2016 EBITDA 2015 EBIT 2015
EBITDA/EBIT 23,969 9,383 22,544 9,164 18,388 7,028
Germany (306) (306) (910) (910) (545) (545)
Staff-related measures (219) (219) (854) (854) (402) (402)
Non-staff-related restructuring (26) (26) (38) (38) (112) (112)
Effects of deconsolidations, disposals and acquisitions 0 0 0 0 0 0
Other (61) (61) (18) (18) (31) (31)
United States 1,633 1,633 406 406 (425) (425)
Staff-related measures (7) (7) (11) (11) (50) (50)
Non-staff-related restructuring 0 0 0 0 0 0
Effects of deconsolidations, disposals and acquisitions (11) (11) 417 417 (382) (382)
Reversal of impairment losses on non-current assets 1,651 1,651
Impairment losses 0 0
Other 0 0 0 0 7 7
Europe (130) (995) (93) (277) (207) (250)
Staff-related measures (92) (92) (100) (100) (166) (166)
Non-staff-related restructuring (3) (3) (4) (4) (12) (12)
Effects of deconsolidations, disposals and acquisitions 18 18 25 25 33 33
Impairment losses (866) (184) (43)
Other (53) (52) (14) (14) (62) (62)
Systems Solutions (229) (1,477) (252) (276) (481) (548)
Staff-related measures (132) (132) (136) (136) (233) (233)
Non-staff-related restructuring (2) (2) (5) (5) (229) (229)
Effects of deconsolidations, disposals and acquisitions 0 0 0 0 (4) (4)
Impairment losses (1,242) 0 0
Other (94) (100) (111) (135) (15) (82)
Group development 893 893 2,547 2,132 556 556
Staff-related measures 1 1 (35) (35) (6) (6)
Non-staff-related restructuring (5) (5) (3) (3) (2) (2)
Effects of deconsolidations, disposals and acquisitions 708 708 2,585 2,585 580 580
Impairment losses (415) 0
Other 189 189 0 0 (16) (16)
Group Headquarters & Group Services (121) (121) (574) (574) (416) (432)
Staff-related measures (109) (109) (502) (502) (353) (353)
Non-staff-related restructuring (49) (49) (31) (31) (78) (78)
Effects of deconsolidations, disposals and acquisitions 63 63 (11) (11) (8) (8)
Impairment losses 0 0 0
Other (26) (26) (29) (29) 23 7
Group reconciliation 0 (1) (1) (1) (2) (1)
Staff-related measures 0 (1) 0 0 (1) (1)
Non-staff-related restructuring 0 0 0 0 0 1
Effects of deconsolidations, disposals and acquisitions 0 0 (1) (1) 1 1
Other 0 0 0 0 (2) (2)
Total special factors 1,740 (374) 1,124 501 (1,520) (1,645)
EBITDA/EBIT (adjusted for special factors) 22,230 9,757 21,420 8,663 19,908 8,673
Profit (loss) from financial activities (adjusted for special factors)   (2,895)   (2,323)   (2,233)
Profit (loss) before income taxes (adjusted for special factors)   6,863   6,340   6,440
Income taxes (adjusted for special factors)   949   (1,858)   (1,927)
Profit (loss) (adjusted for special factors)   7,812   4,482   4,513
Profit (loss) (adjusted for special factors) attributable to            
Owners of the parent (net profit (loss)) (adjusted for special factors)   6,039   4,114   4,113
Non-controlling interests (adjusted for special factors)   1,773   368   400