Comeback Telco Telekom's U.S. Turnaround

Deutsche Telekom Chief Executive Timotheus Höttges has seen second-quarter sales and earnings soar, thanks in part to its U.S. mobile phone business under the leadership of its outspoken and unconventional boss, John Legere.
How can Timotheus Höttges not smile with numbers like these.

Deutsche Telekom chief executive Timotheus Höttges made no effort to hide his admiration for John Legere in February when he called the head of the company’s wireless unit, T-Mobile USA, a “f***ing legend“ in front of a group of equity analysts in Bonn.

Six months later, it appears Mr. Höttges wasn’t exaggerating: During that time, sales at T-Mobile USA rose in double digits, alone 14 percent in the second quarter,  and with 58.9 million customers, the mobile phone subsidiary overtook rival Sprint to become the third-largest wireless provider in the United States.

For the group, second-quarter sales rose more than 15 percent to €17.4 billion, or $19 billion, and adjusted net income soared by 70 percent to €1.1 billion.

“We're on a good path,” Mr. Höttges said.

 

A Strong Q2 for Telekom-01

 

Many at Deutsche Telekom’s headquarters in Bonn had strong doubts whether. Mr. Legere could turn around the U.S. unit. But Mr. Höttges, ignoring the critics, gave the extroverted American space to live up to his good reputation in the telecommunications industry.

“He allowed Legere to just do it,” said Paul Marsch, a financial communications analyst with Berenberg Bank. “That was brave of him.”

Mr. Legere managed the turnaround with new contracts, infrastructure investments and aggressive marketing. He also ensured that T-Mobile USA carried Apple’s popular iPhone.

With similar measures, Mr. Höttges hopes to put Telekom on a growth track in its core European markets as well.

The U.S. business is growing more valuable by the day. Wolfgang Bock, Boston Consulting Group

He sold the company’s stake in the British mobile provider, Everything Everywhere, to British Telecom in return for 12.5 percent of BT, and paid €900 million to acquire the remaining half of Slowak Telekom.

He has also restructured the troubled IT unit, T-Systems, whose business has begun to rebound, and has  streamlined decision-making across management teams, invested in networks and launched several new products.

His ultimate goal is to establish Telekom as Europe's largest communications service provider.

Shareholders apparently like what they see: DT’s stock has surged from around €11 to €17 over the past year.

 

John Legere takes credit for the T-Mobile USA turnaround.

 

Mr. Höttges' long-term plans for T-Mobile USA remain to be seen, however. At least three of his predecessors toyed with the idea of selling the unit, almost always when either business was down or big infrastructure investments, for instance, in new frequencies, were needed.

“The U.S. business is growing more valuable by the day,” said Wolfgang Bock, a partner at the Boston Consulting Group.

But to expand in Europe, Telekom will need money and that could come from the sale of the T-Mobile USA.

A potential buyer is U.S. cable operator Comcast, which could use a mobile service to add to its TV and Internet offerings.

American satellite operator Dish, which is also looking for a cellular offering, considered making a bid for T-Mobile USA earlier this year but its chief executive Charlie Ergens put this idea on ice earlier this week.

 

Comparing the Competition-01

 

T-Mobile USA won't come cheap, however. With business now up at U.S. operations, Mr. Höttges doesn't feel compeled to sell the unit at any price.

Telekom continues to invest in digitizing its German network, based on Internet technology. The plan is to have the entire network upgraded by 2018.

The operator is also plowing capital into broadband Internet, both fixed line and wireless, in rural areas. It is taking over 7,700 antennas from its rival Telefonica to improve network quality.

Mr. Höttges’ biggest challenge remains Telekom's European business. “We are working our way forward, bit by bit,” he said, pointing to the Slovak Telekom deal.

But the going has been tough. In the second quarter, sales at its European subsidiaries dipped by around 1 percent and Telekom will need to invest across the region in expanding LTE or 4G coverage, broadband coverage and winning customers with its TV offerings.

 

Video: Mr. Höttges has spoken often in the past about society’s need for advanced digital communications.

 

Ina Karabasz covers the telecom industry from Düsseldorf. To contact her: [email protected]