Europe

Customer development

For information on changes in the organizational structure, please refer to the section “Group organization” and Note 35 “Segment reporting” in the notes to the consolidated financial statements.

Total

The markets in our segment remained intensely competitive throughout the reporting year. We rose to the challenge in several ways, for instance by achieving substantial growth in 2018 of 49.9 percent in the number of FMC customers (fixed-mobile convergence), thanks in part to our convergent product portfolio, MagentaOne. The acquisition of UPC Austria as of July 31, 2018 in particular contributes to our aim of becoming an integrated provider of mobile and fixed-network products across our entire segment. We also concluded an agreement with Orange in July of this year that will enable us to offer comprehensive convergent services in Poland in the future, thanks to the shared use of Orange’s fiber-optic network. In addition to the agreement with Orange, T-Mobile Polska signed another wholesale FTTH agreement with network operator Nexera, covering more than 450 thousand further households to be connected by the end of 2020. Our broadband and TV operations are becoming consistent revenue drivers, not least thanks to the large-scale build-out of our network with state-of-the-art fiber-optic-based lines (FTTH, FTTB, and FTTC). As a result, the number of IP lines increased by 29.4 percent to 7.4 million as of December 31, 2018, primarily thanks to the migration from traditional PSTN lines to IP technology. Our mobile operations recorded growth overall, with increases in both the number of high-value contract customers and the number of prepay customers compared with the end of the prior year.

Mobile communications

The number of mobile customers totaled 50.5 million at the end of the reporting year, up by 3.5 percent or 1.7 million customers compared with the end of 2017. The number of contract customers continued to grow throughout the fourth quarter of 2018, bringing the total number of customers won in the reporting year to 1.2 million, an increase of 4.6 percent. These additions include the customer base of UPC Austria starting from the third quarter of 2018. Overall, our national companies reported positive trends in their customer base, especially in Poland, Romania, Hungary, Austria, and the Czech Republic. Contract customers accounted for 52.8 percent of the total customer base. Our customers benefited not only from our innovative services/rate plans, but also from greater coverage with fast mobile broadband – a result of our integrated network strategy. As of December 31, 2018, we already covered 97 percent of the population in the countries of our operating segment with LTE, reaching around 109 million people in total. Customer demand for high data volumes has risen sharply due to the explosion in data traffic driven by video streaming services, for example. The number of prepay customers grew by 2.2 percent or 518 thousand.

Fixed network

Our TV and entertainment services saw substantial growth of 13.9 percent as of December 31, 2018, driven primarily by the acquisition of UPC Austria. But even without this effect, customer growth would have stood at 3.2 percent, with our national companies in Hungary, the Czech Republic, and Slovakia accounting for the majority of these net customer additions. With both telecommunication providers and OTT players offering TV services in the countries of our segment, the TV market there is highly contested.

The number of broadband customers increased by 15.8 percent as of the end of the reporting year to 6.4 million, with the acquisition of UPC Austria accounting for the majority of these net customer additions. Without this effect, there would have been growth of 5.7 percent. In particular, the customer bases of our national companies in Greece, the Czech Republic, Hungary, and Slovakia saw growth, partly on the back of increased investment in innovative fiber-optic-based technologies. We continued to extend our fiber-optic coverage and, as of December 31, 2018, had reached 7.6 million households.

Consistent growth in IP-based lines as a percentage of all fixed-network lines confirms that we are making good progress: At the end of December 2018, this share amounted to 81.8 percent. The acquisition of UPC Austria increased the number of fixed-network lines in our Europe operating segment to 9.1 million overall, an increase of 7.5 percent. Without this effect, development would have remained stable.

FMC – fixed-mobile convergence

Our portfolio of convergent products, MagentaOne, remained highly popular with consumers across all of our integrated national companies. As of December 31, 2018, we had 3.3 million FMC customers; this corresponds to significant growth of 49.9 percent or 1.1 million net additions year-on-year. Our national companies in Greece and Hungary were the main drivers of this trend. We have also been increasingly successful in marketing our MagentaOne Business product to business customers.

Development of Operations

Total revenue

Our Europe operating segment generated total revenue of EUR 11.9 billion in the reporting year, a year-on-year increase of 2.6 percent. In organic terms, i.e., assuming constant exchange rates and adjusted for the inclusion of UPC Austria as of July 31, 2018, revenue increased slightly by 1.5 percent. The mandatory first-time application of the IFRS 15 accounting standard as of January 1, 2018 did not have a material effect on the development of revenues at segment level.

Our business customer operations made the biggest contribution to organic growth, driven mainly by the good development of ICT business in Hungary. Mobile revenue also increased year-on-year, with most of the countries in our operating segment contributing to this trend. Fixed-network revenue at segment level also increased slightly year-on-year in the core business, mainly due to the positive revenue effect from broadband and TV business, especially in Greece, Hungary, and Slovakia. These increases were offset by a decline in wholesale business. Intense competition on the telecommunications markets had a negative impact on our revenue in some countries of our operating segment.

Revenue from Consumers increased by 3.4 percent compared with the prior year, driven mainly by mobile business. Revenue from fixed-network business rose, too, on the back of the trend in TV and broadband operations driven by our innovative TV and program management activities as well as the continuous rollout of fiber-optic technology in most of our national companies. In addition to higher terminal equipment revenues, strong growth in the number of FMC customers had a positive impact on revenue. This offset declining voice telephony revenues.

Revenue from Business Customers, especially in ICT, grew again in 2018, increasing 3.7 percent year-on-year. Core business with fixed-network and mobile communications remained stable as a result of our convergent SME solutions (MagentaOne Business), which we sell on the markets. We generated double-digit percentage figures compared with the prior year with our corporate customers in key ICT/cloud computing business as well as in the innovative smart city/IoT fields. In terms of digitalization, in 2018 we showed our customers in countries including Hungary and Croatia new, simpler, and faster ways to manage their contracts with Deutsche Telekom, using self-service apps and portals.

Wholesale revenue declined year-on-year, driven largely by falling levels of minute volumes resulting from the substitution of voice telephony with messenger services as well as negative price effects.

Looking at the development by country, our national companies in Hungary, Greece, Slovakia, and Poland made the largest contributions to the organic development of revenue in the reporting year. This more than offset the decline in revenue in Romania in particular, which was attributable to lower fixed-network revenue from voice telephony in particular. A smaller customer base combined with lower prices also had a negative impact on broadband and TV business. B2B/ICT business customer operations made a positive revenue contribution. Mobile business remained stable compared with the prior-year level – the positive effect of the increase in customer numbers was offset by lower prices.

EBITDA, adjusted EBITDA

Our Europe operating segment generated adjusted EBITDA of EUR 3.9 billion in the reporting year, a year-on-year increase of 3.5 percent. In organic terms, i.e., assuming constant exchange rates and adjusted for the inclusion of UPC Austria, adjusted EBITDA increased by 1.8 percent. We thus ended 2018 posting year-on-year growth for four quarters in succession.

The positive trend in adjusted organic EBITDA was driven both by the growth in revenue and by savings made in indirect costs, especially in Romania, Croatia, the Czech Republic, and Greece – in the latter primarily as a result of lower personnel costs. By contrast, in terms of direct costs, market investments and costs relating to the B2B/ICT operations increased. In addition, regulatory effects, including the reduction in EU roaming charges, reduced adjusted EBITDA.

Looking at the development by country, the increase in adjusted organic EBITDA was largely attributable to the positive trends at our national companies in Greece, the Czech Republic, Hungary, and Austria. Contrasting developments were reported primarily at the national companies in Poland and Romania. In Romania, adjusted EBITDA was down 16.9 percent year-on-year, attributable on the one hand to the lower revenue contribution and on the other to higher direct costs resulting in part from higher market investments and regulation-induced higher roaming costs. The decline in adjusted EBITDA was partially offset by improved cost efficiency with regard to staff-related expenses.

Our EBITDA increased by 3.8 percent year-on-year to EUR 3.8 billion, due primarily to higher adjusted EBITDA. At EUR -122 million, special factors were EUR 8 million lower than in the prior year. In organic terms, EBITDA grew by 2.1 percent.

Development of operations in selected countries

Greece. In Greece, revenue stood at EUR 2.9 billion in the reporting year, up year-on-year by 1.5 percent. This was driven primarily by higher mobile revenue and consistently high fixed-network revenue. Broadband business posted particularly strong growth as a result of the marketing of fiber-optic and vectoring lines. The growth trend continued in our B2B/ICT business customer operations and wholesale business. Intense competitive pressure caused TV revenues to decline year-on-year. The FMC offering developed positively, with rising customer numbers and corresponding revenues.

In the reporting year, adjusted EBITDA in Greece increased substantially year-on-year by 4.0 percent to EUR 1.2 billion, driven largely by improved cost efficiency, especially with regard to personnel costs.

Hungary. In Hungary, revenue in the reporting year grew substantially by 4.5 percent compared with the prior year to EUR 1.9 billion. In organic terms, it increased by 7.8 percent. This growth was driven by rising mobile service revenues and by fixed-network business with sustained clear revenue growth in B2B/ICT business customer operations. Broadband and TV business also made a positive contribution to revenue. Our MagentaOne portfolio of FMC products is enjoying success among consumers and business customers alike, a trend that is underpinned by growing customer numbers and a corresponding rise in revenue. Both service revenues and terminal equipment business performed well, which was attributable to our high-speed, high-reach mobile network.

At EUR 547 million, adjusted EBITDA remained virtually at the prior-year level. Organically, adjusted EBITDA increased by 3.7 percent.

Austria. In Austria, we generated revenue of EUR 1,055 million in the reporting year, up 17.2 percent compared with the prior year. This increase is attributable to the effects of the acquisition of UPC Austria, which now allows us to offer fixed-network technology in addition to the mobile broadband internet services already being successfully marketed to our customers. In organic terms, i.e., adjusted for the inclusion of UPC Austria, revenue would remain on a par with the prior-year level.

The increase in revenue also impacted adjusted EBITDA, which increased by 29.7 percent year-on-year to EUR 345 million. Adjusted for the acquisition of UPC Austria, adjusted EBITDA would have been 3.3 percent higher year-on-year.

Poland. Revenue at our national company in Poland increased by 1.1 percent year-on-year to EUR 1.5 billion; in organic terms, it increased by 1.2 percent. This was mainly a result of higher revenue in B2B/ICT business following the integration of our Systems Solutions operations in the prior year. Mobile business remained on a par with the prior-year level; the positive effect of the increase in customer numbers was offset by a negative price effect. Fixed-network business posted a decline in wholesale revenue.

Adjusted EBITDA stood at EUR 390 million, down 6.9 percent year-on-year. In organic terms, adjusted EBITDA decreased by 6.7 percent. The positive revenue contribution was offset by higher direct costs – in particular higher interconnection costs and regulation-induced higher roaming costs. Indirect costs also reduced adjusted EBITDA marginally year-on-year as a result of higher personnel costs in connection with setting up new shops. Overall, the revenue trend, especially in the sale of terminal equipment and in fixed-network business, as well as a need for increased investment due to technological development and requirements, resulted in a lowering of revenue and earnings expectations in Poland.

EBIT

EBIT in our Europe operating segment increased significantly by 61.0 percent in the reporting year to EUR 744 million, driven by the positive development in EBITDA and a 4.6 percent reduction in depreciation, amortization and impairment losses. The cyclical impairment tests carried out at the year-end resulted in impairment losses recognized on goodwill totaling EUR 0.6 billion in Poland and Romania. In the prior year, impairment losses on goodwill and on property, plant and equipment had reduced EBIT by EUR 0.9 billion. Impairment losses amounting to EUR 35 million were recognized on property, plant and equipment and intangible assets in the reporting year in connection with the sale of the shares in Telekom Albania agreed in January 2019.

Cash capex

In 2018, our Europe operating segment reported cash capex of EUR 1.9 billion, putting it on a par with the prior-year level. Alongside subdued investments at individual national companies, our capital expenditures were focused primarily on building out our broadband and fiber-optic technology in the Czech Republic and Austria as part of our integrated network strategy. We acquired a small number of spectrum licenses in the reporting year, predominantly in Hungary.