Deutsche Telekom affirms growth strategy

CEO Ricke: Deutsche Telekom is and will remain Europe’s No. 1 - Strategy geared towards growth and value enhancement - Proposed dividend of EUR 0.72 for 2005 - Outlook for 2006 confirmed

May 3, 2006, Deutsche Telekom will make every effort in the short and medium-term to maintain and expand its leading position. “We are Europe’s No. 1 and are determined to remain so,” CEO Kai-Uwe Ricke emphasized at the shareholders’ meeting in Cologne on Wednesday. He went on to explain that the Group is pursuing a clear strategy and facing up to major challenges, in particular the competitive and price pressure that is being relentlessly ratcheted up and rapid technological change. The Board of Management and Supervisory Board proposed to the shareholder’s meeting to pay a dividend of EUR 0.72, representing a 16 percent increase over the previous year, and raising the total dividend from EUR 2.6 billion for 2004 to EUR 3.0 billion.

Reflecting on the 2005 financial year - the best year in Deutsche Telekom’s history in financial terms - the CEO referred to Group revenue, which rose 3.9 percent to EUR 59.6 billion. Adjusted EBITDA grew by 5.7 percent to EUR 20.7 billion. Improved earnings s also fed through into adjusted net profit that increased by 26.7 percent to EUR 4.7 billion. Reported net profit including all special factors was EUR 5.6 billion, way in excess of a threefold increase year-on-year. Net debt was reduced by 3.2 percent to EUR 38.6 billion, further reducing the Group’s debt in the process.

Once again, the encouraging results in the Mobile Communications business area were largely attributable to T-Mobile USA. In the full year 2005, the number of customers rose by a record 4.4 million to 21.7 million. Adjusted EBITDA, however, illustrates that such rapid growth has not been at the expense of profitability. Adjusted EBITDA rose by 59.5 percent - to USD 4.1 billion.

T-Mobile USA is currently preparing to participate in the auction for mobile communications frequencies in the USA, for which the U.S. telecommunications regulatory authority, FCC, has imposed strict rules on all communication from participants. Against this background, Ricke asked for understanding that Deutsche Telekom would not be able to make any statements on the possible purchase price for additional spectrum until the auction is complete. According to the rules, any communication from a participant during the auction will be examined to determine whether it might be construed as an attempt to send signals to other auction participants through published material and thus influence the course of the auction.

Outlook for 2006
For the current year, the Deutsche Telekom group expects, as is already known, net revenue to be between EUR 62.1 billon and 62.7 billion, and adjusted EBITDA between EUR 20.2 billon and 20.7 billion. In the interests of achieving growth and enhancing value by investing massively in defending and winning back market shares and revenues, the Group will accept a one-time cut of around EUR 1.2 billion in adjusted EBITDA in the current financial year. For 2007, revenue is forecast somewhere between EUR 65.2 and EUR 66.2 billion, and Deutsche Telekom expects adjusted EBITDA to come in somewhere in the region between EUR 21.7 and EUR 22.2 billion. This represents an increase of up to EUR 1.5 billion compared with 2005. “And naturally we want to pay an attractive dividend as part of the aforementioned dividend policy and do our utmost to help bring about a sustained increase in the share price,” Mr. Ricke said.

Staff restructuring
According to Ricke, a high dividend and the staff restructuring effort are very difficult to reconcile for many people. “The dividend is dictated by the rules of business administration and the capital market - and a healthy development of earnings ultimately makes the Company as a whole secure for its employees,” the CEO emphasized. The staff restructuring measures will serve two distinct purposes: on the one hand, there will be around 6,000 new hires in new business segments and fields that are highly customer- and service-centric, such as the T-Punkt stores. On the other hand, 32,000 employees are to leave the Group, including 7,000 employees whose jobs will be outplaced from Vivento on a permanent basis. The job reduction takes place mostly in areas that are directly affected by the rapid pace of technological progress. “In view of the heavy competitive pressure we are facing, any technical opportunities that improve efficiency must be resolutely used,” Ricke said. As agreed with the trade unions, there will be no compulsory redundancies in the Deutsche Telekom AG before 2008. Job cuts will be made through voluntary arrangements, such as old-age part-time work or redundancy payments, for which Deutsche Telekom has put together a package of measures costing EUR 3.3 billion.

Share price performance
Mr. Ricke discussed the poor performance of the T-Share despite the Group’s sound operational performance. “That is the apparent contradiction that disappoints us all.” Ricke went on to say that, “If you take a look at the Dow Jones Europe STOXX Telecommunications Index, however, i.e. the index that includes all the European telecommunications companies, you soon realize that share prices in the telecommunications sector overall have been noticeably weaker than in most other sectors.” With reference to the investment of financial investor Blackstone, the CEO stressed: “For me, such a move is clear testimony to the trust placed in Deutsche Telekom’s strength and strategy, particularly when a company like Blackstone, whose patent strategy has essentially been to acquire majority stakes, acquired a 4.5 percent stake in Deutsche Telekom.”

Strategy
Deutsche Telekom has laid the foundations for profitable growth over the past two phases with the successful debt reduction program launched in 2002 and the structural realignment of the Company started in 2004. “In 2006, we are now moving into the phase of growth and value enhancement, a phase we will tackle actively,” Ricke announced, presenting the three core areas of the strategy:

1. Organic growth of the Group;
2. Portfolio development, essentially the inorganic growth of the Group; and
3. Financial strategy.

For the current financial year, the Board of Management has consolidated the Excellence Program launched in 2005, which comprises growth initiatives for the strategic business areas and measures designed to promote the intelligent integration of the Deutsche Telekom Group, along with a package of measures aimed at cultural change as the Company shifts to becoming a customer-oriented service provider, into a 10-point program.

10-point program
The first four measures aim to defend the core business of the Broadband/Fixed Network and Mobile Communications strategic business areas in the consumer market while opening up new markets. Strategic pricing measures will be implemented in fixed-network business. The mass market is also to be tapped into for innovative broadband products and services, including the already implemented DSL portfolio, ADSL2+ and VDSL, along with the associated T-Online services like next-generation TV and video services. A key element for these products and services is the rollout of the new high-speed fiber-optic network with transmission rates of up to Mbit/s. In the mobile communications area, T-Mobile is set to reach a leading position in terms of mobile broadband and superb network quality with compeling prices and simple price structures. Mobile data services will also be expanded resolutely.

Further points in the program relate to the business customer market, i.e. T-Systems, with the aim of further expanding telecommunications core business both with small and medium-sized enterprises and with key accounts. In addition, integrated telecommunications and IT solutions are aimed at generating sustained growth in the business customer segment, taking account of two major future trends: E-Health and E-Government.

The last four measures are geared to intelligent integration. Specifically, this involves further increasing revenue, reducing costs and promoting cultural change. Revenue development is to be pushed, for example, by leveraging the trend towards convergence. This includes T-Mobile’s T-Mobile@home offering and the Broadband/Fixed Network business area’s dual phone solution, T-One.

In the consumer segment, the focus is on value-added services based on an integrated multimedia IP platform, which will meet the challenges of the new IP environment. The Company strives to serve all the customers’ information and communications needs along the lines of a “digital lifestyle” in the future.

The second Group-wide measure is aimed at promoting revenue growth with the creation of a customer database that is intended to be rolled out once T-Online has been integrated.

Cost efficiency is another key area in the Company’s initiatives for more intelligent integration, aiming, for example, to further reduce internal IT costs. The radical changes associated with the new IP network will also drive down costs by as much as 30 percent over the long term.

The aim of the cultural change is to develop a service culture that is consistently embraced and perceived. Market studies have shown that customer satisfaction keeps on improving steadily and constantly - whether in terms of customer service, T-Punkt stores or hotlines. The first customer promises contributed to this improvement, and Ricke has now released the second set of promises. For example, the customer has the option of having all products bought from Deutsche Telekom installed in his or her home and T-Punkt stores offer delivery free of charge within two days.

Portfolio development
The European countries in which Deutsche Telekom already operates, along with North America, are the markets where the Group intends to strengthen its market position. The Company aims to be the market leader measured in terms of share of market revenue. Size does matter, because it enables economies of scale to be leveraged. “We intend to play an active role in the European consolidation process,” Ricke emphasized. But Deutsche Telekom will only go ahead with acquisitions if they enhance shareholder value. “The return on capital of an investment is the criterion we apply when it comes to strategic portfolio management decisions.”

Financial strategy
The overriding aim of the Company’s financial strategy is to increase shareholder value and practice an attractive dividend policy. In so doing, the Company aims to keep financial ratios within defined ranges that make strategic and commercial sense. For instance, the ratio of net debt to EBITDA should be between 2 and 3. Interest coverage was set at greater than 6 and gearing - in other words the ratio of shareholders’ equity to debt capital - between 0.8 and 1. In terms of the equity ratio, the Company set a figure of between 25 percent and 35 percent. The liquidity reserve is planned to be 40 percent, the rating is expected to be in the region of A-.

According to Ricke, Deutsche Telekom will continue to work hard to maintain and improve its sound performance - in the Company’s interests and, naturally, in the shareholders’ and staff’s interests. “After all, Germany needs a strong Deutsche Telekom if it is to maintain a leading role among the industrialized nations in the information age,” Ricke went on to say. “We are determined to ensure the Company holds on to that role by also playing our part.”

For more information relating to the 2006 shareholders’ meeting including the agena, related documents to the ITEMs on the agenda, counter-motions and more, click here: www.telekom3.de/en-p/inve/14-s/home/cc-startseite.html

Contact Information

Michael Lange

Vice President International Communications

Deutsche Telekom

Contact via E-mail