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Deutsche Telekom has loss on costs, client defections

Deutsche Telekom AG, Europe's largest telephone company, reported a fourth-quarter loss after taking costs to eliminate jobs and half a million traditional phone customers defected in Germany.

The net loss was €898 million ($1.19 billion), from a profit of €991 million a year earlier, the company said in a statement handed out at its headquarters in Bonn today. The company had been expected to report a profit of €721 million, according to analysts surveyed by Bloomberg News. Sales rose 2.4% to €15.9 billion. Rene Obermann, who became CEO in November, plans to cut costs by €2 billion in 2007 to counter a four-year slide in fixed-line revenue.
He slashed a profit forecast last month and will separate the customer service unit, affecting at least 45,000 jobs. Deutsche Telekom kept its dividend unchanged, missing some analysts' estimates. „There is severe price pressure at the fixed-line unit which is constantly losing narrowband connections,” said HVB Group analyst Thomas Friedrich in a phone interview. „Some people had hoped for a dividend surprise and that didn't came through.” He has a „hold” rating on the stock.
Deutsche Telekom proposes to pay a dividend of 72 cents a share, unchanged from a year earlier. The company had been expected to pay a dividend of 74 cents, according to data compiled by Bloomberg. The stock has risen 0.5% in the past year, lagging behind a 17% increase by the 24-member Bloomberg Europe Telecommunication Index. The shares fell as much as 6.5% on January 29, the day after Obermann lowered the 2007 forecasts.

Excluding one-time costs, mostly accounted for by unspecified charges related to the ongoing program to cut jobs, fourth-quarter net income fell 20% to €824 million from €1.02 billion a year earlier. The company last month cut its 2007 forecast for adjusted earnings, before interest, tax, depreciation and amortization by as much as 5.9% to €19 billion. Obermann blamed the cut on intensifying competition in Germany and the dollar's decline, which eroded US wireless revenue.
Obermann struggles to revive growth in the home market, where Vodafone Group Plc's Arcor unit and Telecom Italia SpA use discounts to win users. Two million traditional phone clients in Germany defected from Deutsche Telekom in 2006. Its market share for high-speed access lines dropped 10 percentage points to 50%, data from the phone regulator showed.

A week before his ouster in November, Ricke unveiled a four-year €5 billion cost-cut program aimed at lowering marketing expenses and making divisions share more resources. He also set a target of raising €3 billion over three years from asset sales. So-called „non-core” assets include the Internet units in France and Spain and real estate, analysts have said. In addition, Obermann has to complete cutting 32,000 German positions by the end of 2008.
Deutsche Telekom employs about 250,000 workers, a quarter more than France Telecom SA. Sales per worker were 8% less than at the French rival in 2006. Half of Deutsche Telekom employees in Germany are civil servants, who under laws are difficult to fire. In October, the company announced plans to move 45,000 workers to the T-Service customer-service unit and a call-center division this year and make them work longer hours for less pay. Unions oppose to the plan.
In the same month, Deutsche Telekom introduced the T-Home package that combines fixed-line, television and mobile-phone services to spur sales. Customer additions have trailed company expectations, jeopardizing a €3 billion spending plan on a fiber-optic network that carries the service. The network sparked a legal dispute between Germany's government and the European watchdog, which said the network hurts Deutsche Telekom's rivals.

Unlike Telefonica SA and Vodafone, Deutsche Telekom has refrained from making takeovers in new markets. Vodafone, the world's largest mobile-phone operator, this month agreed to buy control of India's Hutchison Essar Ltd. for $11.1 billion. Madrid-based Telefonica, the largest Spanish phone company, is also scheduled to report earnings today.
Obermann's predecessors had unsuccessfully tried to buy Telecom Italia SpA and smaller Dutch rival Royal KPN NV. Deutsche Telekom's most recent acquisition was Austria's Tele.Ring Telekom Service for €1.3 billion which was completed last year. (Bloomberg)