Deutsche Telekom hit by profits warning

Deutsche Telekom shares tumbled more than 5 per cent in early trading on Monday after the former German state telecoms monopoly issued a profit warning for 2007, blaming sharper competition and unfavourable exchange rate movements for an expected fall in earnings of up to €1.2bn ($1.55bn).

The announcement on Sunday was the second profit warning in six months by struggling DT and raises concerns over the company’s performance this year, especially in the domestic market.

The expected fall in earnings also raises pressure on chief executive René Obermann, who took the helm last November. He told journalists that DT’s “environment remains difficult but we know what to do to get our German business under control”.

DT said it expected earnings before interest, tax, depreciation and amortisation of €19bn, down from a previous forecast of €19.7bn-€20.2bn. Group revenue for 2006 would be €61.3bn based on preliminary figures, compared with an earlier forecast of at least €61.5bn.

Mr Obermann confirmed that cost-saving plans – worth about €4.5bn by 2010, including controversial job cuts – remained on course. “Necessary structural reforms will continue,” he said, referring to staff reductions of 32,000 by 2008 and the outsourcing of a further 45,000 to lower-paying subsidiaries.

He would “in coming months conclude negotiations” on the job cuts with Verdi, Germany’s services union, DT said.

Kai-Uwe Ricke, Mr Obermann’s predecessor, was forced to step down last November due to his handling of the jobs issue and because of a profit warning last August.

Investors and analysts are waiting for a clear signal from Mr Obermann on his determination to implement fully the savings package. Karl-Gerhard Eick, chief finance officer, confirmed DT’s cost base would be cut by €2bn this year.

A person close to DT said Sunday’s announcement represented a “clearing of the decks” before more far-reaching steps. The chief executive would in March lay out his strategic plans for the company, DT said.

DT admitted it was still losing ground, losing a further 2.3m fixed-line customers in Germany last year. More positively, the number of broadband customers increased by 3.1m to 11.72m, and numbers of mobile customers also rose in both Europe and North America last year.

The US improvement was dampened by the “negative impact” of recent foreign exchange rate movements, DT said, shaving €200m off expected profits for 2007.

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