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13 November 2019

DT cuts dividend because of high spectrum costs, highlighting 5G risks

To provide convincing justification for the near term 5G investment, operators need to deliver either cost reduction or a revenue increase to their investors (or preferably both). But in the early stages, many operators are falling down in at least one of these areas, and often both.

Very few operators are finding themselves able to charge a price premium for 5G, and even some who did, like the USA’s Verizon, have quickly had to remove it (technically Verizon still charges a premium, but it has effectively removed it with recent ‘special offers’ that may become permanent). The prospect of price wars even coming to the high-ARPU USA (see separate item) is causing significant nervousness among operators round the world.

And hopes that 5G could be rolled out relatively cheaply in the early phase, by extensive reuse of existing assets from 4G sites to the 4G core, are being scuppered by several factors. In an environment of price wars and saturated user bases, marketing costs are rising; many MNOs say they are having to bring forward investments in advanced MIMO antenna arrays to boost capacity and cell edge coverage in the main launch band, 3.5 GHz; and they are also facing high device bills.

And then there is the cost of spectrum, which has been rising in successive auctions in markets such as Italy (holding the European record for high price per MHz/POP so far) and Germany; and set to rise further in upcoming auctions in India, Taiwan and other countries where governments are setting high reserve prices or target revenues for the Treasury.

Deutsche Telekom saw its share price fall when it announced that it would cut dividends because of its high spending in the German 5G auction earlier this year. Although it did see growth in revenue and earnings across its whole business in the third quarter, its 5G-specific case was hit by these spectrum costs. It said it would reduce its dividend from €0.70 ($0.78) last year to €0.60 ($0.67) per share.

CEO Timotheus Höttges blamed this decision on “unexpectedly high costs for the mobile spectrum auction in Germany, partly as a result of the artificial spectrum “. DT has been fiercely critical of the regulator’s policy of earmarking 100 MHz of midband spectrum for industrial and local usage, including private networks, leaving less available for MNOs.

DT spent €2.2bn ($2.4bn) on new licenses, and its net debt has risen to €78.8bn ($87.3bn) as of the end of September, from €55.5bn ($61.5bn) a year earlier.

These dark shadows over the 5G model came despite a 4.8% year-on-year rise in sales across the group, to around €20bn ($22bn), and 5.4% growth in adjusted EBITDA to about €6.5bn ($7.2bn). Net profit was up 23%, to €1.4bn ($1.6bn), although only 7.5% on a like-for-like basis.

As always in recent times, the results were bolstered by strong performance from T-Mobile USA, which gained a net number of 1.7m subscribers in the third quarter, and saw its ARPU stabilize at about $46.2 per subscriber per month. Of course, if the firm’s acquisition of Sprint goes through, it will face new challenges in terms of ARPU, customer retention and cost, as well as new opportunities arising from improved scale and 5G spectrum position.

DT says it will spend €12.9bn ($14.3bn) in capital expenditure this year, up from a previous target of €12.7bn ($14.1bn), because of its efforts to expand 5G coverage more rapidly in the USA amid unexpectedly fierce competition in the first months of the new networks.

Outside the USA, there was also sales growth in Germany and at the central and eastern Europe unit, with strong performance from quad play bundles in these regions.

“Deutsche Telekom is really powering ahead,” said Timotheus Höttges, Deutsche Telekom’s CEO, in a statement accompanying the results. “Earnings increased in all areas of the group in the first nine months of this year, with some of that growth in the double digits. At the same time, we are investing record amounts.”