Deutsche Telekom warning rattles its European rivals

Deutsche Telekom, the owner of the mobile phone company T-Mobile, shocked the telecoms market yesterday with a major profits warning that sent shares in rival companies across Europe sharply lower.

The warning knocked 10 per cent off the share price of the German incumbent telecoms provider, its largest fall in four years. It followed similar profit alerts from France Telecom and Swisscom over recent weeks.

Shares in France Telecom, Swisscom and Telecom Italia suffered declines as a result of the German giant's warning while some UK telecoms companies also slipped. Vodafone shares fell 3.9 per cent to 112p, while BT dropped 2.4 per cent to 243.5p.

Deutsche Telekom lowered its earnings target by €1bn (£675m) this year and €1.5bn next year. It also reduced its revenue guidance by €600m this year to €62.1bn and pointed to subdued growth in top-line during 2007. It will look to reduce costs and regain market share through aggressive pricing. The company is suffering a significant decline in its core fixed-line voice business as more of its customers turn to mobile services that offer cheap calls within the home.

JP Morgan cut its rating on Vodafone to "underweight" from "neutral" in the wake of Deutsche Telekom's warning. It argued that the bad news "should prompt the next round of cuts to consensus Vodafone estimates". Vodafone has struggled in Germany over the past year as a result of ferocious competition and regulatory action. The prospect of T-Mobile reducing prices aggressively to regain market share raised concerns that Vodafone may need to react accordingly during the second half.

BT, on the other hand, has already reduced its dependence on voice services by investing in broadband internet growth and IT services. First-quarter results released last month showed BT's revenue had risen and profit growth had strengthened in contrast to its European peers.

Despite the gloom at its parent company, T-Mobile produced a strong performance in the UK during the second quarter. The mobile operator added 748,000 net new customers, the vast majority being contract customers. T-Mobile had a UK subscriber base of 16.7 million at the end of the period, 3.6 million of which were contract users.

Revenue in the period increased 7.9 per cent to £1.5bn after a surge in spending during the second quarter. The company is focused on reducing the number of low-value, pre-pay customers on its book in preference to high-spending contract customers who are willing to sign 18-month contracts.

T-Mobile UK's managing director, Jim Hyde, said that over the second half, the company expects to continue to increase its contract customer base while growing revenue and raising its margin profile. It will also add more shops to its 181-strong retail chain, and expects to have 300 stores by the end of 2007.