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Deutsche Telekom share price down, first-quarter earnings drop amid push for US growth

Deutsche Telekom reported a first-quarter drop in core profit on Thursday, despite a on-year rise in revenue, as a result of the company aggressive push into the US market, which helped it add more customers than its main competitors combined.

The former German phone monopoly reported that earnings before interest, tax, depreciation and amortization fell by 3.9% to 4.1 billion euros in the first quarter from 4.3 billion a year earlier. Net profit rose to 1.8 billion euros, largely due to the sale of a stake in an online advertising unit. Excluding the income from the sale, net profit fell by 24%.

The decline in profit was based on increased spending in the US aimed at attracting more customers from rivals via a promotion strategy, including cancellation fees for new subscribers. Deutsche Telekoms T-Mobile US business, in which it holds a 67% stake, added 1.3 million wireless postpaid customers in the quarter, exceeding the combined growth of its two biggest rivals – AT&T and Verizon Communications Inc.

Chief Executive Timotheus Höttges said, cited by the Wall Street Journal: “Our success story in the United States continues. The decision to invest boldly in this market was right on the mark. We are glad to have achieved an increase in subscribers in the region, and that is slowly spilling into revenue. We just have to convert this into earnings now.”

The subscriber base growth in both its home market and in the US helped Deutsche Telekom achieve an 8% jump in sales to 14.9 billion euros in the first quarter. In Germany the company added 551 000 new subscribers.

The German telecoms group expects its 2014 EBITDA to remain stable at 17.6 billion euros, with free cash flow amounting to around 4.2 billion euros. However, some analysts saw those aims as overly ambitious.

Adjusted EBITDA in Germany, the groups domestic market, fell by 1.1% to 2.23 billion euros from 2.26 billion a year earlier, while adjusted EBITDA in the Europe operating segment slid 6.4%.

Meanwhile, T-Mobile recently had talks with the third-largest US mobile carrier, SoftBanks Sprint, about a possible merger between the two companies, which would enable them to better compete with the two leaders on the US market. An alleged sale of its US business would allow Deutsche Telekom to focus on its more profitable European operations. However, regulatory disapproval is very likely after US regulators rejected a merger between AT&T and T-Mobile in 2011, citing a reduction in the number of carriers might drive prices up.

T-Mobile Chief Executive John Legere recently said such a deal will make T-Mobile a stronger competitor. His view was backed by Timotheus Höttges who said on Thursday that a strong third player will be favorable for the US market, but regulators didnt seem to want to see the number of competitors reduced.

Deutsche Telekom AG fell by 0.76% to 12.37 euros by 13:18 GMT in Frankfurt, marking a one-year change of +29.41%. The company is valued at 55.46 billion euros. According to the Financial Times, the 32 analysts offering 12 month price targets for Deutsche Telekom AG have a median target of 12.00 euros, with a high estimate of 15.00 euros and a low estimate of 8.20 euros. The median estimate represents a -3.69% decrease from the last price of 12.46 euros.

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