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Deutsche Telekom Posts Profit, to Resume Dividend (Update8)

Aug. 14 (Bloomberg) -- Deutsche Telekom AG, Europe's largest phone company, had a second straight quarterly profit as costs fell, debt shrank and earnings improved at the mobile-phone unit. The company plans to resume paying a dividend for 2004.

Net income was 256 million euros ($290 million) in the second quarter, compared with a 2.08 billion-euro loss in the year-ago period, Chief Executive Officer Kai-Uwe Ricke said at a press conference in Bonn. Analysts expected on average a loss of 163.3 million euros, according to a Bloomberg survey.

Ricke, who ran the company's T-Mobile International AG global wireless business before he became CEO in November, is cutting more than 50,000 jobs through 2005 as sales fall at the main T-Com phone unit. Deutsche Telekom, which cut net debt to 53 billion euros in the quarter from 64.2 billion euros a year earlier, is also adding clients at the U.S. mobile-phone unit.

``Deutsche Telekom's numbers are showing improvements,'' helped by the performance in the U.S. wireless unit, said Bruno Lippens, who helps manage $12 billion at Robeco Groep in Rotterdam and holds the stock. A dividend ``seems somewhat early as they still have a big pile of debt.''

Deutsche Telekom said it plans to resume its dividend for 2004, which will be paid out in 2005. Ricke's predecessor Ron Sommer cut the 2001 dividend 40 percent to 37 cents a share as debt swelled. The 2002 dividend was dropped completely.

The company's shares rose as much as 1.4 percent to 13.78 euros, and traded at 13.77 euros as of 6:07 p.m. in Frankfurt.

Sales Rise

Sales rose 4.7 percent in the quarter to 13.59 billion euros. Adjusted earnings before interest, taxes, depreciation and amortization rose 16 percent to 4.6 billion euros from 3.98 billion in the second quarter last year.

The former German monopoly last year posted continental Europe's biggest loss of 24.6 billion euros after 21.4 billion euros of writedowns, mostly from the takeover of VoiceStream Wireless Corp., which is now called T-Mobile USA. As a result, it cut annual depreciation charges by more than 1 billion euros.

Ricke, 41, who returned the German company to a profit of 850 million euros in the first quarter after two years of losses, forecast a ``slight'' profit for the full-year as the company lowers debt further.

``We're working toward a black zero, nothing more, nothing less,'' Ricke told reporters in Bonn. ``We're not in acquisition mode. Our goal this year is to clean up the balance sheet.''

Chief Financial Officer Karl-Gerhard Eick said taxes will be 400 million euros to 500 million euros in the second half.

`More of the Same'

``Ricke just needs to do more of the same and that's enough for the investors,'' said Adrian Darley, who helps manage $14.7 billion at Gartmore Investment Management Ltd. ``He has certainly done what he said he would do.''

Darley said he was overweight in the stock at the beginning of the year and is now neutral because of the stock's 12 percent increase this year.

The stock has gained 32 percent in the past year, compared with a 40 percent gain in the Bloomberg Europe Telecommunications Service Index.

U.S. Target Raised

Bellevue, Washington-based T-Mobile USA is now expected to post full-year Ebitda of $1.5 billion, up from a previous forecast of $1 billion, the company said.

T-Mobile USA added 606,000 users in the second quarter, bringing the total to 11.4 million. The unit is using actress Catherine Zeta-Jones and lower prices than competitors Verizon Communications Inc. and Sprint Corp. to win customers.

The unit posted second-quarter Ebitda of 443 million euros compared with 176 million euros in the same quarter last year.

``T-Mobile looks good -- it's the main driver behind the profit,'' said Heike Pauls, an analyst at CAI Cheuvreux who rates the shares an ``underperform.'' ``The fixed net division T-Com didn't turn out as bad as expected.''

T-Mobile International's second-quarter Ebitda rose 29 percent to 1.74 billion euros from 1.35 billion euros in the year- earlier period. Sales at Deutsche Telekom's wireless business rose 21 percent to 5.23 billion euros.

Ebitda at Deutsche Telekom's T-Com was little changed at 2.55 billion euros from 2.56 billion in the second quarter last year as sales fell 6.9 percent to 6.12 billion euros from 6.58 billion. Deutsche Telekom, which said its market share has dropped since the local phone market was opened this year, plans 30,000 job reductions at T-Com alone to cut costs.

Cutting Debt

Deutsche Telekom's net debt fell in the quarter after Ricke sold a stake in Russian mobile-phone operator OAO Mobile Telesystems for about 500 million euros. He aims to cut debt to about 52 billion euros, or three times 2003 Ebitda, by year-end.

Ricke said today he will continue cutting debt after the 2003 targets are met to between two times and three times Ebitda, without giving a timeframe.

``We have a strong statement from the management that debt will fall continuously over the years -- for investors that's an important message,'' said Gartmore's Darley.

The company said the euro's gains against the dollar and the pound hurt revenue in the second quarter, as it reduced the value of sales in those currencies when repatriated.

At the same time, the strength of the euro against the dollar cuts the company's costs for servicing debt, as about 20 percent of its borrowings are denominated in the U.S. currency. The euro reached a high of $1.19 in May.

Currency View

Ricke said Deutsche Telecom expects the euro to trade at $1.13, in line with the current price.

The euro was on average 24 percent stronger than the dollar in the second quarter than in the same period last year.

Deutsche Telekom's 3.5 billion euros of 6.625 percent bonds due in 2011, rated BBB+ by Standard & Poor's, yielded 5.23 percent at 5:04 p.m. in London, or 1.23 percentage points more than German government debt of similar maturity.

The yield premium, or spread, which shows how risky investors perceive the bonds to be, has dropped from 2.8 percentage points in mid-January.

T-Online International AG, in which Deutsche Telekom owns 72 percent, said Tuesday Ebitda rose to 80 million euros in the second quarter from 1 million euros in the previous year. Deutsche Telekom reported 76 million euros in second-quarter adjusted Ebitda from its T-Online holding, up from 2 million euros in the same quarter last year. Sales reported for the T- Online holding rose to 402 million euros from 327 million.

The company's information-technology unit T-Systems posted second-quarter Ebitda or 337 million euros from 251 million. Sales at T-Systems rose to 1.75 billion euros from 1.71 billion. T-Systems had 3 billion euros in its order book, compared with 1 billion in the same period a year earlier.

Ricke said the company was able to transfer 7,400 employees into its Personnel Service Agency to cut jobs in the first half. The company plans to transfer 15,000 workers into the agency this year and eventually place them in new jobs inside and outside of Deutsche Telekom.

Last Updated: August 14, 2003 12:13 EDT

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