UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of March 2006

 

DEUTSCHE TELEKOM AG

(Translation of registrant’s name into English)

 

Friedrich-Ebert-Allee 140

53113 Bonn

Germany

(Address of principal executive offices)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F ý  Form 40-F o

 

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes o   No ý

 

This report is deemed submitted and not filed pursuant to the rules and regulations of the Securities and Exchange Commission.

 

 



 

Setting the pace for excellence.

The 2005 financial year.

 

 



 

Selected financial data of the Deutsche Telekom Group.

 

Financial data of the Group

 

billions of €

 

Change compared
to prior year (%)(a)

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Revenue and earnings

 

 

 

 

 

 

 

 

 

Net revenue

 

3.9

 

59.6

 

57.3

 

55.6

 

of which: domestic (%)

 

(3.2

)

57.4

 

60.6

 

61.8

 

of which: international (%)

 

3.2

 

42.6

 

39.4

 

38.2

 

Profit from operations (EBIT)

 

21.7

 

7.6

 

6.3

 

8.3

 

Net profit

 

n.a.

 

5.6

 

1.6

 

2.1

 

Net profit (adjusted for special factors)

 

26.7

 

4.7

 

3.7

 

2.4

 

 

 

 

 

 

 

 

 

 

 

EBITDA(a), (b), (c)

 

3.7

 

20.1

 

19.4

 

18.6

 

EBITDA (adjusted for special factors)(a), (b), (c)

 

5.7

 

20.7

 

19.6

 

18.5

 

EBITDA margin (adjusted for special factors) (%)(a)

 

0.6

 

34.8

 

34.2

 

33.3

 

 

 

 

 

 

 

 

 

 

 

Balance sheet

 

 

 

 

 

 

 

 

 

Total assets

 

2.1

 

127.9

 

125.3

 

136.1

 

Shareholders’ equity

 

8.3

 

49.6

 

45.8

 

43.7

 

Equity ratio (%)(a), (d)

 

1.9

 

36.4

 

34.5

 

32.1

 

Financial liabilities (in accordance with consolidated balance sheet)

 

(8.6

)

46.7

 

51.1

 

64.1

 

Net debt (a), (c)

 

(3.2

)

38.6

 

39.9

 

51.1

 

Additions to intangible assets (including goodwill) and property, plant and equipment

 

68.7

 

11.1

 

6.6

 

7.6

 

 

 

 

 

 

 

 

 

 

 

Cash flows

 

 

 

 

 

 

 

 

 

Net cash from operating activities

 

(10.3

)

15.0

 

16.7

 

15.1

 

Cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment (in accordance with cash flow statement)(c)

 

(11.8

)

(7.2

(e)

(6.4

)

(6.4

)

Free cash flow (before dividend payments)(a),(c)

 

(24.1

)

7.8

(e)

10.3

 

8.7

 

Free cash flow as a percentage of revenue(a)

 

(4.8

)

13.1

(e)

18.0

 

15.6

 

Net cash used in investing activities

 

n.a.

 

(10.1

)

(4.5

)

(2.3

)

Net cash used in financing activities

 

37.6

 

(8.0

)

(12.9

)

(5.8

)

 

 

 

 

 

 

 

 

 

 

Employees

 

 

 

 

 

 

 

 

 

Average number of employees (full-time equivalents, without trainees/student interns) (thousands)

 

(1.4

)

244

 

248

 

251

 

Revenue per employee (thousands of €)(a)

 

5.4

 

244.3

 

231.7

 

221.3

 

 

 

 

 

 

 

 

 

 

 

T-Share – key figures

 

 

 

 

 

 

 

 

 

Earnings per share/ADS (basic and diluted) in accordance with IFRS (€)(f)

 

n.a.

 

1.31

 

0.39

 

0.50

 

Weighted average number of ordinary shares outstanding (basic) (millions)(f),(g)

 

0.3

 

4,335

 

4,323

 

4,302

 

Weighted average number of ordinary shares outstanding (diluted) (millions)(f),(g)

 

0.2

 

4,338

 

4,328

 

4,307

 

 

 

 

 

 

 

 

 

 

 

Dividend per share/ADS (€)

 

16.1

 

0.72

(h)

0.62

 

0.00

 

Dividend yield (%)(i)

 

1.4

 

5.1

 

3.7

 

 

Total dividend (billions of €)

 

16.2

 

3.0

(h)

2.6

 

 

Number of ordinary shares carrying dividend rights (millions)(j)

 

0.0

 

4,173

(k)

4,171

 

4,167

 

 

 

 

 

 

 

 

 

 

 

Total number of ordinary shares at the reporting date (millions)(l)

 

0.0

 

4,198

 

4,198

 

4,198

 

 


(a)          Calculated on the basis of millions for the purpose of greater precision. Changes to percentages expressed as percentage points.

(b)         Deutsche Telekom defines EBITDA as profit/loss from operations before depreciation, amortization and impairment losses.

(c)          EBITDA, EBITDA adjusted for special factors, net debt, and free cash flow are non-GAAP figures not governed by the International Financial Reporting Standards (IFRS) or U.S. Generally Accepted Accounting Principles (U.S. GAAP). They should not be viewed in isolation as an alternative to profit or loss from operations, net profit or loss, net cash from operating activities, the debt reported in the consolidated balance sheet, or other Deutsche Telekom key performance indicators presented in accordance with IFRS or U.S. GAAP. For detailed information and calculations, please refer to the “Development of business” section of the Group management report in this Annual Report.

(d)         Based on shareholders’ equity excluding amounts earmarked for dividend payment, which are treated as short-term debt.

(e)          Before payments for the acquisition of network infrastructure and licenses in the United States totaling EUR 2.1 billion.

(f)            Calculation of basic and diluted earnings per share in accordance with IFRS as specified in IAS 33, “Earnings per share.” The share/ADS ratio is 1:1.

(g)         Less treasury shares held by Deutsche Telekom AG.

(h)         Subject to approval by the shareholders’ meeting. For more detailed explanations, please refer to the “Development of business” section of the Group management report in this Annual Report or to the information on the proposal for appropration of net income of Deutsche Telekom AG in the notes to the consolidated financial statements.

(i)             (Proposed) dividend per share divided by the Xetra closing price of the T-Share at the reporting date or on the last trading day of the respective financial year.

(j)             Less treasury shares held by Deutsche Telekom AG and those shares that, as part of the issue of new shares in the course of the acquisition of VoiceStream/Powertel, are held in trust for later issue and later trading as registered shares and/or American depositary shares (ADSs).

(k)          Balance at the reporting date.

(l)             Including treasury shares held by Deutsche Telekom AG.

 

II



 

The strategic business areas of the Deutsche Telekom Group.

 

Broadband/Fixed Network

 

Consistent development of the promising broadband business. The Broadband/Fixed Network strategic business area consists of T-Com and T-Online. It provides consumers and very small business customers with state-of-the art fixed-network infrastructures, broadband Internet access, and up-to-date multimedia services. T-Com was successful in increasing its T-DSL customer base while T-Online succeeded in positioning itself on the market as a full-service DSL provider. The Excellence Program’s Re-Invent initiative pushes innovativeness, promotes service orientation and opens up new dimensions in performance to make the business area fit to face future challenges.

 

Mobile Communications

 

On a clear course for success with efficiency in both the national and international arenas. T-Mobile International, Deutsche Telekom’s mobile communications arm, increased its customer base and revenue significantly in the 2005 financial year. Long-term efficiency and growth programs launched as part of the Save for Growth initiative continue to drive the company forwards in a difficult market. Thanks to expansion of the mobile broadband network and improvements in customer service, the company once again improved its customer loyalty rating. In addition, T-Mobile is rigorously pushing evolution of innovative application areas and has set its sights on attaining clear leadership in mobile broadband services.

 

Business Customers

 

Strong positioning in highly competitive markets. T-Systems has a successful track record of serving Deutsche Telekom’s business customers, and providing them with customized solutions that combine telecommunications and information technologies. In the 2005 financial year, the company increased its EBIT and stabilized revenue. With Focus on Growth, T-Systems launched its program for profitable growth and thus set itself clear goals in the business customer market. Customer projects for multinational corporations and SMEs make the company fit for future tasks.

 

Group Headquarters & Shared Services

 

Facilitating cooperation along the lines of an intelligently integrated group of companies. The various units at Group Headquarters and Shared Services are the drivers of profitability and cost-effectiveness at Deutsche Telekom. The segment performs strategic management functions across the business areas – tasks that are vitally important in an integrated group. The Shared Services unit comprises in particular Vivento, Real Estate Services, and DeTeFleetServices GmbH – the full-service provider of fleet management and mobility services. Its key functions also include managing the Group-wide Excellence Program that brings together all the projects important to the Deutsche Telekom Group.

 


(a)          Calculated on the basis of millions for the purpose of greater precision. Changes to percentages expressed as percentage points.

(b)         Deutsche Telekom defines EBITDA as profit/loss from operations before depreciation, amortization and impairment losses.

(c)          EBITDA, EBITDA adjusted for special factors, net debt, and free cash flow are non-GAAP figures not governed by the International Financial Reporting Standards (IFRS) or U.S. Generally Accepted Accounting Principles (U.S. GAAP). They should not be viewed in isolation as an alternative to profit or loss from operations, net profit or loss, net cash from operating activities, the debt reported in the consolidated balance sheet, or other Deutsche Telekom key performance indicators presented in accordance with IFRS or U.S. GAAP. For detailed information and calculations, please refer to the “Development of business” section of the Group management report in this Annual Report.

(d)         Cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment (in accordance with the cash flow statement).

 

III



 

billions of €

 

Change compared to prior year (%)(a)

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

(3.6

)

26.0

 

27.0

 

28.3

 

EBIT (profit from operations)

 

(7.4

)

5.1

 

5.5

 

5.6

 

Depreciation, amortization and impairment losses

 

8.3

 

(4.1

)

(4.4

)

(4.7

)

EBITDA(b),(c)

 

(7.8

)

9.2

 

9.9

 

10.3

 

Special factors affecting EBITDA(c)

 

 

 

(0.7

)

(0.3

)

(0.1

)

EBITDA (adjusted for special factors)(b),(c)

 

(3.1

)

9.9

 

10.2

 

10.4

 

EBITDA margin (adjusted for special factors) (%)(a),(b),(c)

 

0.3

 

37.9

 

37.6

 

36.7

 

Cash capex(d)

 

(16.9

)

(2.5

)

(2.1

)

(2.1

)

Average number of employees (full-time equivalents, without trainees/student interns)

 

(2.1

)

112,872

 

115,292

 

128,065

 

 

 

 

 

 

 

 

 

 

 

billions of €

 

Change compared to prior year (%)(a)

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

11.0

 

29.4

 

26.5

 

24.3

 

EBIT (profit from operations)

 

97.2

 

3.0

 

1.5

 

3.4

 

Depreciation, amortization and impairment losses

 

3.6

 

(6.7

)

(7.0

)

(3.8

)

EBITDA(b),(c)

 

14.6

 

9.7

 

8.5

 

7.2

 

Special factors affecting EBITDA(c)

 

 

 

(0.1

)

0.1

 

 

EBITDA (adjusted for special factors)(b),(c)

 

16.3

 

9.8

 

8.4

 

7.2

 

EBITDA margin (adjusted for special factors) (%)(a),(b),(c)

 

1.5

 

33.2

 

31.7

 

29.6

 

Cash capex(d)

 

(82.0

)

(5.6

)

(3.1

)

(3.3

)

Average number of employees (full-time equivalents, without trainees/student interns)

 

4.3

 

49,479

 

47,417

 

44,899

 

 

 

 

 

 

 

 

 

 

 

billions of €

 

Change compared to prior year (%)(a)

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

(0.9

)

12.9

 

13.0

 

12.9

 

EBIT (profit from operations)

 

(26.2

)

0.4

 

0.5

 

0.4

 

Depreciation, amortization and impairment losses

 

6.2

 

(0.9

)

(1.0

)

(1.1

)

EBITDA(b),(c)

 

(13.5

)

1.3

 

1.5

 

1.5

 

Special factors affecting EBITDA(c)

 

 

 

(0.3

)

(0.1

)

0.0

 

EBITDA (adjusted for special factors)(b),(c)

 

(2.7

)

1.6

 

1.6

 

1.5

 

EBITDA margin (adjusted for special factors) (%)(a),(b),(c)

 

(0.3

)

12.3

 

12.6

 

11.5

 

Cash capex(d)

 

(2.4

)

(0.8

)

(0.8

)

(0.7

)

Average number of employees (full-time equivalents, without trainees/student interns)

 

(0.5

)

51,744

 

51,978

 

54,390

 

 

 

 

 

 

 

 

 

 

 

billions of €

 

Change compared to prior year (%)(a)

 

2005

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

(0.6

)

3.5

 

3.5

 

3.3

 

EBIT (loss from operations)

 

41.7

 

(0.8

)

(1.4

)

(1.2

)

Depreciation, amortization and impairment losses

 

(4.9

)

(0.9

)

(0.9

)

(0.8

)

EBITDA(b),(c)

 

n.a.

 

0.1

 

(0.5

)

(0.4

)

Special factors affecting EBITDA(c)

 

 

 

0.4

 

(0.0

)

0.1

 

EBITDA (adjusted for special factors)(b),(c)

 

38.9

 

(0.3

)

(0.5

)

(0.5

)

EBITDA margin (adjusted for special factors) (%)(a),(b),(c)

 

5.9

 

(9.6

)

(15.5

)

(15.4

)

Cash capex(d)

 

12.0

 

(0.5

)

(0.5

)

(0.5

)

Average number of employees (full-time equivalents, without trainees/student interns)

 

(8.9

)

29,931

 

32,872

 

23,909

 

 

Net revenue by strategic business area(a)

 

 

Net revenue by geographic region(a)

 

 

IV



 

Setting the pace for excellence.

 

Our industry is changing at breathtaking speed. The permanent evolution of technology will continue to influence our lives, making things easier: In the near future, multi-functional services and devices – combined with a new dimension of speed – will permit the flexible integration of all facets of communication and information into everyday life.

 

We want to bring the benefits of this development to as many people as possible, as quickly as possible. That is why we’re speeding up for excellence, setting the pace. The key is that each of our customers is free to choose. We offer them enormous choice. We maximize their independence of time and place. Business or leisure time, action or relaxation – it’s all a matter of

personal choice.

 

It is toward this goal that we make targeted investments – committed to developing innovative products, attractive calling plans, and comprehensive services. Yet, however great the necessity, this will not be an easy route. It will demand our full commitment.

 

Deutsche Telekom’s Excellence Program for the years 2005 to 2007 requires discipline, creating and sustaining momentum across all parts of the business – on a Group level, in each of the strategic business areas, and for each and every one of us. We have a very clear goal: to set the pace for excellence.

 



 

 

 

To our shareholders

 

 

 

II

 

Selected financial data of the Deutsche Telekom Group

III/IV

 

The strategic business areas of the Deutsche Telekom Group

8

 

Letter to our shareholders

12

 

The Board of Management

14

 

Supervisory Board’s report

19

 

The Supervisory Board

20

 

Corporate governance

 

 

 

 

 

Strategic business areas

 

 

 

28

 

Broadband/Fixed Network

35

 

Mobile Communications

41

 

Business Customers

45

 

Group Headquarters & Shared Services

 

 

 

54

 

The T-Share

 

 

 

 

 

Group management report

 

 

 

62

 

Deutsche Telekom Group management report

65

 

Group organization

68

 

Group strategy and Group management

70

 

The economic environment

73

 

Development of business in 2005

83

 

Research and development

85

 

Employees

89

 

Sustainability and environmental protection

90

 

Risk and opportunity management

96

 

Highlights after December 31, 2005

97

 

Outlook

 

 

 

 

 

Consolidated financial statements

 

 

 

104

 

Income statement

105

 

Balance sheet

106

 

Cash flow statement

108

 

Statement of changes in shareholders’ equity

110

 

Notes to the consolidated financial statements

200

 

Auditors’ report

 

 

 

 

 

Further information

 

 

 

202

 

Supervisory board seats held by the members of the Board of Management

203

 

Other supervisory board seats held by the members of the Supervisory Board

205

 

Index

206

 

Glossary

209

 

Contacts/Financial calendar

V/VI

 

Deutsche Telekom worldwide

VII

 

Key data of the Deutsche Telekom Group

 



 

 



 

 



 

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Dear shareholders,

 

The 2005 financial year yielded positive results for Deutsche Telekom. It was also a year in which we set the course for managing future challenges. All major performance indicators are within their ambitious target ranges. We are delighted to have fulfilled our promises once again.

 

Growth and value enhancement: In 2005 we continued to see more profitable, purely organic growth. Against the background of increasingly fierce competition, these positive developments demonstrate our strong performance and competitive power. We are well prepared thanks to our clear growth and value enhancement strategy, and we will continue to pursue that strategy with determination. That is exactly what we have been dedicating ourselves to, while focusing on attaining our long-term objectives. We are currently subjecting the Group to a rigorous exercise program that was deliberately launched in a phase of financial stability, as it will prepare us for the enormous challenges of tomorrow’s markets in an increasingly intense competitive environment.

 

8



 

We will create the organizational structures we need to make the transition from a technology to a service company. Above all, we will create organizational structures that will help us achieve our primary goal – to effectively position ourselves as the leading service provider in the multimedia market. Technological change is progressing at breakneck speed and changing all the parameters of our industry. We need to be actively involved in shaping these changes while making every effort to leverage the resulting opportunities. Over the next few years Deutsche Telekom will be making the transition from a technology group to a provider of multimedia services. Our success in the markets of tomorrow will depend on what service packages we offer our customers, and whether our offerings succeed in permanently attracting these customers to Deutsche Telekom.

 

We have reached our financial targets for 2005. Net revenue increased year-on-year by 3.9 percent from EUR 57.3 billion to EUR 59.6 billion, while adjusted EBITDA rose by as much as 5.7 percent to EUR 20.7 billion. This increase is one of the primary signs of profitable growth in the reporting year. The stability of the Group’s financial targets is also borne out by our strong profit after income taxes, which grew to EUR 6 billion (adjusted: EUR 5.1 billion) from EUR 2 billion (adjusted: EUR 4.1 billion) in the prior year. We continued to reduce our debt, with net debt dropping by 3.2 percent to EUR 38,6 billion.

 

Mobile communications continues to drive growth. T-Mobile is still developing positively, despite considerably rougher competition also in the mobile communication markets. This strategic business area was and will remain the Group’s growth driver. In 2005 the number of mobile customers in the fully consolidated companies rose by almost 12 percent to 86.6 million at year-end. Revenue rose by 11 percent to a total of EUR 29.4 billion over EUR 26.5 billion in the prior year. Adjusted EBITDA saw an above-average increase of 16.3 percent to EUR 9.8 billion, while the adjusted EBITDA margin increased from 31.7 percent in the prior year to 33.2 percent in 2005.

 

The encouraging results in this business segment are largely attributable to T-Mobile USA. This is confirmed by an exceptional rise in customer figures, up 4.4 million to 21.7 million, and by the strong development of the EBITDA margin which rose by more than 5 percentage points year-on-year to 27.7 percent.

 

Our regionally structured Save for Growth program began to bear fruit in Europe. Despite fierce competition, T-Mobile UK’s adjusted EBITDA margin leveled out at around 31 percent, while T-Mobile Deutschland saw a slight rise in its adjusted EBITDA margin to 41.8 percent. These successful figures confirm that we correctly identified the direction the European mobile communications market would take when we set up the Save for Growth program in late 2004. At an early stage we began to concentrate on generating high-quality growth while proactively lowering our operating expenses.

 

Earnings power of Broadband/Fixed Network sustained despite heavy competitive pressure. Developments in the Broadband/Fixed Network business area are marked by unbroken heavy competitive and price pressure. Nevertheless we succeeded in keeping profit from operations in line with expectations. Revenue in this segment dropped by 3.6 percent from EUR 27 billion in 2004 to EUR 26 billion in 2005. By comparison, adjusted EBITDA declined to a somewhat lesser extent, down 3.1 percent to EUR 9.9 billion, confirming our impressive flexibility. At 37.9 percent, the adjusted EBITDA margin recorded a rise of 0.3 percentage points year-on-year.

 

In the 2005 reporting year, we set up the Re-Invent growth initiative to prepare Broadband/Fixed Network for future challenges. We have readily accepted the challenges presented by the competitive environment and responded with targeted measures. Above all, we succeeded in expanding the DSL access line business, a primary source of growth and customer loyalty. In our core business, telephony, we managed to stabilize our market share in the call minutes segment, for instance with the exceptionally successful “Wünsch Dir Was” (make a wish) calling plan, while expanding our customer base and enhancing the customer retention rate. A major contributor toward the successful positioning of the Broadband/Fixed Network segment was T-Online, whose share in the DSL rate business grew over the course of the year.

 

9



 

After the completion of the merger agreement between T-Online and Deutsche Telekom and the associated approval of T-Online’s ordinary shareholders’ meeting in 2005, despite pending lawsuits filed by a number of T-Online shareholders against that resolution, in February 2006 the Frankfurt/Main Higher Regional Court, as the court of second instance, paved the way for the entry of the merger into the commercial register. While we warmly welcome the court’s decision, it is not yet final and legally binding. Under the provisions of the merger agreement, the merger cannot be entered into the commercial register and thus become effective, once a legally binding release ruling has been issued, until after this year’s shareholders’ meetings of T-Online and Deutsche Telekom.

 

Development of the Business Customers strategic business area remains stable despite major pressure on margins. The Business Customers segment also developed as expected. Revenue dropped slightly by 0.9 percent to EUR 12.9 billion. While adjusted EBITDA decreased by 2.7 percent, the adjusted EBITDA margin remained largely stable at 12.3 percent. The Business Customers segment, which operates under the T-Systems brand, stabilized its business despite continued pressure on margins and dynamic structural changes in its market environment. In 2005, T-Systems generated a 3 percent increase in new orders to a volume of EUR 13.6 billion.  This development clearly reflects the success of the Focus on Growth program, which is enabling T-Systems to further strengthen its customer relationships and open up new growth potential for itself.

 

Growth and value enhancement – investing in our future viability. We can look back on a very successful financial year. Yet, while our 2005 results are the successful outcome of our past efforts and demonstrate our strong capabilities, they are not the benchmark against which we can measure the challenges ahead. Competition will become increasingly fierce in all markets. In other words, now is the time we need to prepare the Group for upcoming challenges.

 

We are convinced that to position the Group effectively as a market leader, we need a long-term perspective and a focused investment strategy. Despite the resulting impact on EBITDA, we intend to invest around EUR 1.2 billion in creating a platform for organic revenue growth in 2006. We plan to intensify marketing new products, strengthen our sales activities, and introduce new and innovative rates. We are confident that our decision to accept lower earnings in 2006 is an important contribution toward positioning Deutsche Telekom effectively as a market leader – and in turn will help to increase job security.

 

The 2006 financial year marks the beginning of a new age in our corporate development – the age of growth and value enhancement. We will have to step up our efforts to convince customers of the quality and value of our products and services. We at Deutsche Telekom both have to and want to stay ahead of the dynamic developments in our industry and participate actively in shaping the markets of the future.

 

Setting the pace for excellence. On the basis of the Excellence Program, we are implementing the strategic measures that we defined in a streamlined 10-point agenda for 2006 and 2007. This program helps us to realign all relevant structures and processes in the Group in order to demonstrate excellence before our customers. This will create the right framework for more efficiency and in turn, lead to growth and value enhancement. Our activities fall into three categories:

 

1. Demonstrating our power as innovators. We will actively market innovations in the form of new products, calling plans and services. Crucial to selling these innovations is the new, super-fast fiber-optic network for Germany which we have already started to build. In line with demand and provided certain conditions are met, around 50 German cities will be linked up to the new network by 2007. We are convinced that the fiber-optic network will provide the basis for a large number of new products and services. An important aspect of this scenario is what we call triple play – an innovative mix of telephony, Internet and TV/video services. We are determined to give top priority to this market. Other areas of emphasis include the marketing of innovative convergence products with fixed-network and mobile components, and mobile communications products that use ever wider transmission bandwidths – a major source of innovation potential.

 

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2. Enhancing quality and strengthening the customer focus. The second priority in this scenario is to continue improving the quality of our products and services as perceived by our customers. Activities are already well underway and to date have produced positive results. One good example is the promises we made to our customers in 2005, which will be extended in 2006 due to the positive feedback we received. Our promises are also quality benchmarks for both our customers and ourselves. Another item high up on the 2006 agenda is an improvement in our service orientation that is clearly visible to our customers. We intend to create a new service culture in which the activities of all employees, and ultimately of the entire Company, are aligned with what our customers want, rather than with what is technically possible.

 

3. Necessary and indispensable: staff restructuring measures. The third priority area is to increase our efficiency and in this context, the necessary and indispensable staff restructuring measures in the Group which we are forced to implement in the face of competitive and regulatory pressures and technological developments. Ultimately, there is no alternative but to pursue strict cost management in order to maintain the economic framework the Group needs to remain competitive in the long term. To achieve this, besides the right products, calling plans, services, and a hands-on service culture, we need competitive cost structures so we can respond adequately to falling prices in our markets.

 

The staff reduction and restructuring program is a step that was taken by the Board of Management only after all facts and alternatives had been explored. We are aware of the major responsibility we carry, and therefore wish to act in the best interests of the Company and the employees who are affected by these measures. That is why, as a matter of course, this program will be completed in as socially responsible a manner as possible, as have other measures in the past. A total of EUR 3.3 billion has been set aside for this purpose. We will work together with the trade unions to find what we hope will be a constructive solution.

 

Regulatory environment must enable equal opportunities and future viability. Besides the measures we are implementing to enhance our Group’s competitiveness and future viability, the regulatory framework in which we operate in Germany, still one of our very important markets, plays a major role. We support a fair approach to regulation that provides equal opportunities for all market players. However, investments and innovations should be neither obstructed nor penalized. Players planning to invest several billions in new products and markets must be allowed to shape their own future!

 

A safe, successful future for our Company. Once again, we would like to let our shareholders benefit from Deutsche Telekom’s good performance in 2005 and intend to propose to the next shareholders’ meeting to pay a dividend of EUR 0.72 per share carrying dividend rights for the 2005 financial year. To my great regret, our successful operating results have not yet started to lift the price of the T-Share. However, we will continue dedicating our entire energy to leading Deutsche Telekom into a bright future – in the interests of our customers and employees, and in the interests of our shareholders. Thank you for the confidence you have placed in us in the past reporting year.

 

Bonn, March 2006

 

Sincerely,

 

 

/s/ Kai-Uwe Ricke

 

Kai-Uwe Ricke

Chairman of the Board of Management

 

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The Board of Management of Deutsche Telekom AG in 2005/2006.

 

Kai-Uwe Ricke. Chairman of the Board of Management of Deutsche Telekom AG. Born in 1961. Kai-Uwe Ricke was appointed Chairman of the Board of Management of Deutsche Telekom AG effective from November 15, 2002. Following an apprenticeship at a bank and studies at the Schloss Reichartshausen European Business School, he started his career as assistant to the board of Bertelsmann AG in Gütersloh. He then took up the position as head of sales and marketing of its subsidiary Scandinavian Music Club AG in Malmö, Sweden. Between 1990 and June 1995, Kai-Uwe Ricke was managing director of Talkline Verwaltungsgesellschaft mbH and of Talkline PS Phone Service GmbH, both located in Elmshorn. From July 1995 to December1997, he was chairman and managing director of Talkline GmbH. In January 1998, he took over as Chairman of the Managing Board of DeTeMobil Deutsche Telekom Mobilnet GmbH. In February 2000, he was appointed Chairman of the Board of Management of the newly founded
T-Mobile International AG. In May 2001, he was appointed to the Board of Management of Deutsche Telekom. Before taking over as Chairman, he was responsible for Deutsche Telekom’s mobile communications and online business as Chief Operating Officer (CCO).

 

Dr. Karl-Gerhard Eick. Board member responsible for Finance, Deputy Chairman of the Board of Management. Born in 1954. He studied business administration in Augsburg, where he earned his doctorate in 1982. Until 1988, he worked in various positions at BMW AG in Munich, most recently as head of controlling in the department of the chairman of the board of management. From 1989 to 1991, Dr. Eick was responsible for controlling at WMF AG in Geislingen, and then took over the controlling, planning and IT unit at the Carl Zeiss group in Oberkochen (until 1993). From 1993 to 1998, Dr. Eick was chief financial officer at Gehe AG in Stuttgart, which is part of the Haniel group. In 1999, he moved to the group’s strategic management holding company, Franz Haniel & Cie GmbH in Duisburg, and as member of the managing board assumed responsibility for controlling, business administration and IT. Since January 2000, he has been Member of the Deutsche Telekom Board of Management responsible for Finance.

 

Dr. Heinz Klinkhammer. Board member responsible for Human Resources. Born in 1946. He studied law and business administration, and received his legal doctorate in 1977 at Freie Universität Berlin. He began his career at the Institute for German and European Labor, Social and Economic Law in Berlin, and then moved on to be a labor court judge in Krefeld and Oberhausen. Between 1979 and 1990, Dr. Klinkhammer worked at the Ministry for Labor, Health and Social Affairs of the regional state of North-Rhine/Westphalia in various management functions, ultimately as the head of Central Matters. In 1991 he was appointed Arbeitsdirektor (Director of Industrial Relations) at the Krupp Mannesmann GmbH Iron and Steel Works. From April 1992, he performed the same function as member of the board of management of Mannesmann Röhrenwerke AG. In February 1996, the Supervisory Board of Deutsche Telekom AG appointed Dr. Klinkhammer as Member of the Board of Management responsible for Human Resources and Arbeitsdirektor (Director of Industrial Relations). He is also in charge of Group Organization.

 

René Obermann. Board member responsible for Mobile Communications. Born in 1963. After training to become an industrial business administrator at BMW AG in Munich, René Obermann established the trading company ABC Telekom based in Münster in 1986. He was managing partner of the successor company Hutchison Mobilfunk GmbH from 1991 and chairman of the managing board from 1994 to 1998. He was also chairman of the former German Association of Mobile Communication Service Providers (VAM) in 1995 and 1996. From April 1998 to March 2000, René Obermann was Managing Director of T-Mobile Deutschland responsible for Sales, and then assumed the position of Chairman of the Managing Board (until March 2002). From June 2001 to December 2002, he was Member of the Board of Management of T-Mobile International AG, responsible for European Operations and Group Synergies. René Obermann has been Member of the Deutsche Telekom Board of Management responsible for T-Mobile since November 2002, and was also appointed Chairman of the Board of Management of T-Mobile International AG in December 2002. He heads the Mobile Communications strategic business area.

 

Lothar Pauly. Board member responsible for Business Customers. Born in 1959. A trained industrial business administrator, he studied business management in Munich and joined Siemens AG after completing his studies. Lothar Pauly worked in different management areas at Siemens, including communications engineering and security electronics, circuit board technology and telecommunications technology. He has also worked abroad, in Indonesia and Eastern Europe. Mr. Pauly joined the company from Siemens AG where he was most recently Chief Executive Officer (CEO) of the company’s Communications division. He has been a member of the Board of Management of the Deutsche Telekom Group since October 2005, where, as the Board member for
T-Systems, he is in charge of the Business Customers strategic business area. At the same time, Lothar Pauly is also CEO of Deutsche Telekom’s subsidiary, T-Systems, and is thus responsible for the Business Services and Enterprise Services business units.

 

Walter Raizner. Board member responsible for Broadband/Fixed Network. Born in 1954. Following studies in economics and business informatics, Walter Raizner initially worked for Nixdorf before joining IBM Deutschland in 1984. After holding a number of positions in sales, marketing and general management in Germany and the UK, he moved to the company’s Corporate Headquarters in the United States, where he took over as Vice President, Marketing and Strategy, IBM Technology Group with overall responsibility for the fields of marketing,business line management for OEM sales, business operations and strategy. In December 1999, Walter Raizner joined the Storage Systems Group where he was General Manager of the Storage Products Division in Somers, Connecticut (U.S.), with responsibility for IBM’s worldwide storage business. In January 2003, he took over as chairman of the management of IBM Deutschland. As Member of Deutsche Telekom’s Group Board of Management, Walter Raizner is responsible for the Broadband/Fixed Network strategic business area.

 

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Supervisory Board’s report to the 2006 shareholders’ meeting.

 

The 2005 financial year was a successful year for Deutsche Telekom AG and saw a continued improvement in the Group’s profitable growth. The Company also succeeded in continuing to reduce its debts. The Supervisory Board intensively pursued its responsibilities of overseeing and advising the Board of Management in the management of business activities in compliance with statutory requirements.

 

Supervisory Board activities in the 2005 financial year. As a legal requirement, the Board of Management regularly informed the Supervisory Board in written and oral form about management planning, business developments, and individual transactions of major importance to the Company and its principal subsidiaries and associates. The Supervisory Board also reviewed the current situation of the Company at regular intervals. Decisions of strategic importance were submitted to the Supervisory Board for review and approval. In particular, business development was discussed in all of the Supervisory Board meetings. Furthermore, the Chairman of the Supervisory Board was informed by the Board of Management, and especially its Chairman, about results of business activities and significant events as part of their continuous dialog.

 

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In addition to regular reports, the following issues were discussed and reviewed in greater detail by the Supervisory Board:

 

             The continued development of the strategy of the Group and its strategic business units;

 

             The progress of the merger of T-Online International AG into Deutsche Telekom AG;

 

             The status of major projects in the Deutsche Telekom Group, particularly developments regarding the Toll Collect and the Federal Employment Agency project (were Deutsche Telekom employees help with the introduction of restructured benefits for the long-term unemployed);

 

             Development of the regulatory and competitive environment;

 

             Corporate governance, particularly with a view to the recommendations and suggestions as outlined in the German Corporate Governance Code and as required by U.S. law (Sarbanes Oxley Act);

 

             The development of the Group’s subsidiaries and associates, especially T-Mobile USA, including the development of the network infrastructure and competitive environment in the United States, as well as the development of the Polish mobile communications subsidiary PTC;

 

             Results of the impairment tests according to FAS 141, 142 that must be carried out in regular intervals under the American accounting standards (U.S. GAAP), and review of the accounting method used for intangible assets in accordance with German GAAP;

 

    Development of staff requirements and workforce levels in the Deutsche Telekom Group;

 

    Changes in the Group’s portfolio of shareholdings, specifically the acquisition of Austrian provider tele.ring.

 

Organization of the Supervisory Board’s activities. To increase the efficiency of its work, and taking into consideration the specific requirements made of the Supervisory Board of Deutsche Telekom AG, the Supervisory Board established the following committees (which all have equal representation of shareholders’ and employees’ interests):

 

The General Committee is responsible for the preparation of the meetings and major decisions of the Supervisory Board as well as for all matters relating to the individual members of the Board of Management. Its members are Dr. Thomas Mirow (with effect from February 3, 2006), Volker Halsch (up to and including January 16, 2006), Franz Treml, Wilhelm Wegner, and Dr. Klaus Zumwinkel (committee chairman).

 

The Finance Committee deals with complex corporate activities in the areas of finance and business management, which are assigned to it by the Chairman of the Supervisory Board or the Supervisory Board as a whole for review and advice. The members of the Finance Committee are Dr. Hubertus von Grünberg (with effect from February 3, 2006), Volker Halsch (up to and including January 16, 2006), Dr. Klaus G. Schlede (committee chairman), Wolfgang Schmitt, Franz Treml, Bernhard Walter, and Wilhelm Wegner.

 

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The Audit Committee deals with issues relating to accounting and risk management, the requisite independence of auditors, the awarding of the audit contract, the stipulation of the main focuses of the audit and the agreement on fees as well as, within the scope of mandatory German law, with all tasks assigned to the Audit Committee under existing U.S. law for listed companies headquartered outside the United States of America. The members of the Audit Committee are Dr. Hubertus von Grünberg (with effect from February 3, 2006), Volker Halsch (up to and including January 16, 2006), Dr. Klaus G. Schlede (committee chairman), Wolfgang Schmitt, Franz Treml, Bernhard Walter, and Wilhelm Wegner.

 

The Staff Committee deals with personnel matters of Deutsche Telekom AG, in particular the Company’s staff structure and human resources development and planning. The members of the committee are Dr. Dieter Hundt, Franz Treml (committee chairman), Wilhelm Wegner, and Dr. Klaus Zumwinkel.

 

A Joint General and Audit Committee had been set up back in 2004 to handle the Supervisory Board’s oversight responsibilities in connection with the Toll Collect project and the Federal Employment Agency project. Its members were Dr. Hubertus von Grünberg, Dr. Klaus G. Schlede, Wolfgang Schmitt, Franz Treml, Wilhelm Wegner, and Dr. Klaus Zumwinkel (committee chairman). This committee was dissolved following the successful launch of the toll collection system late in January 2005. Since then reporting on both projects has been retransferred to the plenary of the Supervisory Board.

 

The Mediation Committee required pursuant to § 27 (3) of the German Codetermination Act performs the duties incumbent on it under the law. Its members are Dr. Dieter Hundt, Franz Treml, Wilhelm Wegner, and Dr. Klaus Zumwinkel (committee chairman).

 

The chairman of each committee regularly informed the Supervisory Board of the content and results of committee meetings.

 

Meetings of the Supervisory Board. In the 2005 financial year, the Supervisory Board held four regular meetings and one extraordinary meeting. Furthermore, the Supervisory Board met for an in-depth conference with the Board of Management in order to discuss the Group’s strategic alignment. The General Committee of the Supervisory Board met eleven times during the reporting year, thus supporting the Supervisory Board’s activities. The Audit Committee held five, and the Finance Committee two meetings in the 2005 financial year. The Supervisory Board’s Staff Committee met twice. The Joint General and Audit Committee was convened once for its last meeting. The Mediation Committee did not meet in 2005. There are no events subject to reporting with regard to the frequency of the Board members’ participation in Supervisory Board meetings.

 

Conflicts of interest. In order to avoid any conflict of interests, Mr. Halsch – state secretary in the German Ministry of Finance – and Mr. Walter – who at the same time is a member of the Supervisory Board of Daimler Chrysler AG, a consortium partner in the Toll Collect project – were not members of the joint General and Audit Committee handling the Toll Collect project.

 

Corporate governance. The Supervisory Board and Board of Management are aware that good corporate governance in the interests of the Company’s shareholders and capital markets is an essential precondition for corporate success. The German Corporate Governance Code and a number of relevant provisions under U.S. law have therefore been integrated in the Company’s statutes. In December 2005, the Board of Management and Supervisory Board issued the Declaration of Compliance with the Corporate Governance Code as amended. In addition, the Company’s corporate governance policy is also being presented in a separate chapter of this Annual Report.

 

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Changes in the composition of the Board of Management. On September 3, 2005, the Supervisory Board appointed Lothar Pauly as a member of the Company’s Board of Management with effect from October 1, 2005. Mr. Pauly is in charge of the Business Customers strategic business area (T-Systems). He is the successor to Konrad F. Reiss who passed away unexpectedly on April 6, 2005. The Company owes much gratitude to Mr. Reiss, who made a highly significant contribution to the Deutsche Telekom Group. His name will always be honorably remembered.

 

Changes in the composition of the Supervisory Board.

Shareholders’ representatives: Dr. Wendelin Wiedeking resigned from the Supervisory Board with effect from February 9, 2005. He was replaced by Prof. Dr.-Ing. Wolfgang Reitzle who was appointed to the Supervisory Board by order of court in accordance with § 104 (1) of the German Stock Corporation Act (AktG) with effect from February 10, 2005. His appointment by court order was confirmed through a by-election at the shareholders’ meeting on April 26, 2005.

 

With effect from midnight on January 16, 2006, Volker Halsch resigned his seat on the Supervisory Board. He was replaced by Dr. Thomas Mirow who was appointed to the Supervisory Board by order of court in accordance with § 104 (1) of the German Stock Corporation Act with effect from January 17, 2006. In accordance with the recommendation in item 5.4.3, sentence 2 of the German Corporate Governance Code, the appointment by court order of Dr. Mirow should be confirmed through a by-election at the 2006 shareholders’ meeting.

 

Employees’ representatives: There were no changes amongst the members of the Supervisory Board representing employees during the 2005 financial year.

 

The Supervisory Board would like to thank the former members of the board for the effort they committed to the good of the Company over many years.

 

Review of annual financial statements of the parent company and consolidated financial statements for the 2005 financial year. The annual financial statements, the consolidated financial statements, the management report of Deutsche Telekom AG and the Deutsche Telekom Group, and the Board of Management’s proposal for appropriation of net income, which were all prepared and duly submitted by the Board of Management, together with the appropriate auditors’ reports were presented to all members of the Supervisory Board. The Supervisory Board reviewed the documents submitted to it.

 

The audit firms, PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (Frankfurt/Main) and Ernst & Young AG Wirtschaftsprüfungsgesellschaft (Stuttgart), audited the annual financial statements of Deutsche Telekom AG, the consolidated financial statements, and the management report of Deutsche Telekom AG and the Deutsche Telekom Group as of December 31, 2005, together with the bookkeeping system, in accordance with statutory provisions, and issued unrestricted audit certificates. In addition, the auditors reported personally on the above issues, as well as the U.S. financial statements prepared in accordance with
20-F, during the Supervisory Board meeting held on March 1, 2006 and the preparatory meeting of the Audit Committee on February 28, 2006.

 

During its March meeting, the Supervisory Board was also informed about the results of the audit and raised no objections. In compliance with § 171 of the German Stock Corporation Act, the Supervisory Board examined the annual financial statements of the parent company and the consolidated financial statements of the Deutsche Telekom Group, the management report of Deutsche Telekom AG and the Deutsche Telekom Group, the proposal on appropriation of net income, and the risk report, and approved the annual financial statements of the parent company and the consolidated financial statements. The annual financial statements are thereby approved. The Supervisory Board agrees to the Board of Management’s proposal on the appropriation of net income.

 

17



 

PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft and Ernst & Young AG Wirtschaftsprüfungsgesellschaft also audited the report disclosing relations with affiliated companies (Dependent Company Report) that was prepared by the Board of Management in compliance with § 312 of the German Stock Corporation Act. The auditors reported on the results of their audit and issued the following audit certificate:

 

“Based on the results of our statutory audit and our judgment we confirm that:

1.   the actual information included in the report is correct;

2.   the Company’s compensation with respect to the legal transactions listed in the report was not inappropriately high.”

 

The Supervisory Board examined the Board of Management’s report disclosing relations with affiliated companies. It did not raise any objections to the Board of Management’s final statement contained in the report or to the results of the audits conducted by PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft and Ernst & Young AG Wirtschaftsprüfungsgesellschaft.

 

The Supervisory Board would like to thank the members of the Board of Management and all the men and women who work for Deutsche Telekom for their dedicated commitment in the 2005 financial year.

 

 

Bonn, March 1, 2006

The Supervisory Board

 

 

/s/ Klaus Zumwinkel

 

Dr. Klaus Zumwinkel

Chairman

 

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Members of the Supervisory Board of Deutsche Telekom AG in 2005.

 

 

Dr. Klaus Zumwinkel. Member of the Supervisory Board since March 7, 2003. Chairman of the Supervisory Board since March 14, 2003. Chairman of the Board of Management of Deutsche Post AG, Bonn.

 

Franz Treml. Member of the Supervisory Board since July 8, 2003. Deputy Chairman of the Supervisory Board since August 21, 2003. Deputy Chairman of ver.di trade union, Berlin.

 

Monika Brandl. Member of the Supervisory Board since November 6, 2002. Member of the Central Works Council at Deutsche Telekom AG, Bonn.

 

Josef Falbisoner. Member of the Supervisory Board since October 2, 1997. Head of ver.di District of Bavaria, Munich.

 

Dr. Hubertus von Grünberg. Member of the Supervisory Board since May 25, 2000. Member of the Supervisory Board at Continental Aktiengesellschaft, Hanover, et al.

 

Volker Halsch. Member of the Supervisory Board from October 1, 2004 to January 16, 2006. State Secretary, Federal Ministry of Finance, Berlin.

 

Lothar Holzwarth. Member of the Supervisory Board since November 6, 2002. Chairman of the Central Works Council at
T-Systems Business Services GmbH, Bonn.

 

Dr. sc. techn. Dieter Hundt. Member of the Supervisory Board since January 1, 1995. Managing Shareholder of Allgaier Werke GmbH, Uhingen, and President of the Confederation of German Employers’ Associations (BDA), Berlin.

 

Waltraud Litzenberger. Member of the Supervisory Board since June 1, 1999. Member of the Works Council at Deutsche Telekom AG, Technical Customer Service Branch Office, Central District, Mainz.

 

Michael Löffler. Member of the Supervisory Board since January 1, 1995. Member of the Works Council at Deutsche Telekom AG, Technical Infrastructure Branch Office, Central/Eastern District, Dresden.

 

Dr. Thomas Mirow. Member of the Supervisory Board since January 17, 2006. State Secretary, Federal Ministry of Finance, Berlin.

 

Hans W. Reich. Member of the Supervisory Board since May 27, 1999. Chairman of the Board of Managing Directors, KfW Bankengruppe, Frankfurt/Main.

 

Prof. Dr.-Ing. Wolfgang Reitzle. Member of the Supervisory Board since February 10, 2005. Chairman of the Executive Board of Linde AG, Wiesbaden.

 

Dr. jur. Hans-Jürgen Schinzler. Member of the Supervisory Board since May 20, 2003. Chairman of the Supervisory Board of Münchener Rückversicherungs-Gesellschaft AG, Munich.

 

Dr. Klaus G. Schlede. Member of the Supervisory Board since May 20, 2003. Member of the Supervisory Board of Deutsche Lufthansa AG, Cologne.

 

Wolfgang Schmitt. Member of the Supervisory Board since October 2, 1997. Head of Liaison Office, T-Com Headquarters, Bonn.

 

Michael Sommer. Member of the Supervisory Board since April 15, 2000. Chairman of the German Trade Union Federation (DGB), Berlin.

 

Ursula Steinke. Member of the Supervisory Board since January 1, 1995. Expert consultant to the Works Council.

 

Prof. Dr. h.c. Dieter Stolte. Member of the Supervisory Board since January 1, 1995. Former Director General of ZDF (Zweites Deutsches Fernsehen), Mainz.

 

Bernhard Walter. Member of the Supervisory Board since May 27, 1999. Former Chairman of the Board of Managing Directors at Dresdner Bank AG, Frankfurt/Main.

 

Wilhelm Wegner. Member of the Supervisory Board since July 1, 1996. Chairman of the Central Works Council at Deutsche Telekom AG, Bonn.

 

Dr. Wendelin Wiedeking. Member of the Supervisory Board from May 20, 2003 to February 9, 2005. Chairman of the Board of Management of Dr.-Ing. h.c. F. Porsche AG, Stuttgart.

 

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Corporate governance.

 

Sound, systematic corporate governance is particularly important for an international group such as Deutsche Telekom with its numerous subsidiaries and associated companies. Therefore, the Company complies not only with German national regulations (such as the Corporate Governance Code), but also with international standards as applicable to companies listed on international stock exchanges such as the New York Stock Exchange. The regulations of the United States, including the Sarbanes Oxley Act which also applies to Deutsche Telekom, are of particular relevance in this context. The Supervisory Board and the Board of Management are convinced that sound corporate governance, taking company and industry-specific issues into account, is an important building block for the future success of Deutsche Telekom. Accordingly, responsibility for compliance with the principles of sound corporate governance is vested in senior management.

 

In accordance with item 3.10 of the German Corporate Governance Code, Deutsche Telekom reports on its corporate governance activities as follows:

 

In the 2005 financial year, the Board of Management and Supervisory Board once again carefully examined the corporate governance of Deutsche Telekom AG and the Deutsche Telekom Group as well as the content of the Corporate Governance Code. During the reporting period, Deutsche Telekom AG fulfilled all of the Code’s recommendations.

 

The Supervisory Board and Board of Management of Deutsche Telekom AG therefore released the following Declaration of Conformity with the German Corporate Governance Code on December 12, 2005:

 

Declaration of Conformity pursuant to § 161 of the German Stock Corporation Act

 

I. The Supervisory Board and Board of Management of Deutsche Telekom AG hereby declare that, in the period since submission of last year’s declaration of conformity pursuant to § 161 of the German Stock Corporation Act on December 16, 2004, Deutsche Telekom AG has complied with the recommendations of the Government Commission for a German Corporate Governance Code announced by the Federal Ministry of Justice on July 4, 2003 in the official section of the electronic Federal Gazette (Bundesanzeiger), without exception.

 

II. The Supervisory Board and Board of Management of Deutsche Telekom AG hereby declare further that Deutsche Telekom AG has complied with the recommendations of the Government Commission for a German Corporate Governance Code, published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette (Bundesanzeiger) on July 20, 2005, without exception.”

 

This Declaration of Conformity can be found on the Deutsche Telekom website (www.deutschetelekom.com) via the following path: Investor Relations/Corporate Governance/Declaration of Conformity.

 

Deutsche Telekom AG and its shareholders. Deutsche Telekom AG has around three million shareholders worldwide. Due to the wide distribution of shares, the Company makes every effort to keep its shareholders up to date on company developments. To enable a continuous flow of information, the Company created the T-Share forum (Forum T-Aktie) which gives shareholders news on current developments and events on a regular basis. Furthermore, the Deutsche Telekom AG website www.deutschetelekom.com contains extensive information for retail and institutional investors. The company newsletter, which appears at regular intervals, is another source of useful information for shareholders. The German-language newsletter can be ordered online at the site indicated above (German site only).

 

Non-classified company information is published on the Deutsche Telekom website in German and English.

 

Deutsche Telekom AG shareholders exercise their voting rights at the shareholders’ meeting either by casting votes themselves or by having their votes cast by a proxy of their choice or by an official proxy voter from the Company. Deutsche Telekom AG was one of the first German companies to offer its shareholders the option of participating in the shareholders’ meeting and casting votes over the Internet. The Company provides proxy voters who are empowered to receive changes to the shareholder’s vote via e-mail even during the shareholders’ meeting.

 

Cooperation between the Supervisory Board and the Board of Management. The Board of Management and the Supervisory Board are in regular contact. The Supervisory Board of Deutsche Telekom AG holds four regular meetings a year. In 2005 there was also one extraordinary meeting and an in-depth conference on the strategic alignment of the Deutsche Telekom Group. The Board of Management keeps the Supervisory Board fully informed of all relevant business developments, plans, and potential risk as well as of any deviations from original business plans. The Board of Management regularly submits written reports that enable the Supervisory Board members to carry out their supervisory tasks efficiently. The reporting obligations of the Board of Management have been specified by the Supervisory Board beyond statutory requirements. The work of the Board of Management and the Supervisory Board is specified in Rules of Procedure. The Chairman of the Board of Management regularly exchanges information with the Chairman of the Supervisory Board.

 

Composition of the Board of Management. Board of Management responsibilities are distributed to six Board departments: In addition to the departments with centralized management responsibilities that are concentrated in the Board departments of the Chairman of the Board, the Board member responsible for Finance and Controlling, and the Board member responsible for Human Resources, there are three departments for the new strategic business areas of Broadband/Fixed Network (T-Com), Mobile Communications (T-Mobile), and Business Customers (T-Systems). As a rule, members of the Board of Management should not be older than 62 years of age.

 

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Composition of the Supervisory Board. The Supervisory Board of Deutsche Telekom AG consists of twenty members, specifically ten representatives of the shareholders and ten of the employees. The Supervisory Board members representing the shareholders are elected by simple majority at the shareholders’ meeting. The Board members representing employees are elected by the employees according to the provisions of the German Codetermination Act. The terms of office of the individual members of the Supervisory Board end on different dates. This makes it possible to adjust the composition of the Supervisory Board of Deutsche Telekom AG to respond rapidly to changes in requirements. For details about replacements of Supervisory Board members during the reporting period, please refer to the Supervisory Board’s report to the 2006 shareholders’ meeting on pages 14–18 of this Annual Report. After having given due consideration to the matter, the Supervisory Board has come to the conclusion that this body has a sufficient number of independent members.

 

Tasks assigned to the Supervisory Board. The Supervisory Board advises the Board of Management in issues concerning the governing of the Company and supervises and reviews its activities. The Supervisory Board is directly involved in all decisions of strategic importance to the Company. The work of the Supervisory Board is specified in Rules of Procedure. To clarify the reporting requirements on the part of the Board of Management, the Supervisory Board has defined a catalogue of transactions subject to approval. This catalogue forms an integral part of the Rules of Procedure for the Supervisory Board and the Board of Management, respectively.

 

In order to perform its tasks more effectively, the Supervisory Board has formed various committees: the Mediation Committee as required under § 27 (3) of the German Codetermination Act, the General Committee whose primary task is to deal with and prepare personnel matters at Board of Management level for final decision by the general assembly of the Supervisory Board, the Staff Committee to advise the Board of Management on personnel questions not connected with the Board of Management, the Finance Committee to deal with complex financial issues and with budgets, and an Audit Committee that performs the tasks of an audit committee in accordance with the German Corporate Governance Code as well as, within the scope of mandatory German law, the tasks of an audit committee under U.S. law, and deals with annual financial statements before they are discussed by the full Supervisory Board. The chairman of the Audit Committee, Dr. Schlede, is particularly knowledgeable and experienced in the area of accounting principles and internal control procedures. The Joint General and Audit Committee established in May 2004 has now been dissolved following the successful launch of the toll collection system late in January 2005. Details can be found in the Supervisory Board’s report to the 2006 shareholders’ meeting on pages 14–18 of this Annual Report.

 

The Supervisory Board has set an age limit according to which, as a rule, no person shall be proposed at the shareholders’ meeting for election to the Supervisory Board if, during the term of office for which he or she is to be elected, that person would become 72 years of age. To the extent permitted by law, the Supervisory Board makes use of modern communication media to expedite its work and accelerate the decision-making process in the interests of the Company.

 

The chairperson of the Supervisory Board coordinates the work of the Supervisory Board and presides over its meetings. Over and above his/her organizational duties in the Supervisory Board, the chairperson of the Supervisory Board maintains regular contact with the chairperson of the Board of Management and with the Board of Management as a whole, in order to stay informed about the Company’s strategy, business developments, and risk management policy, and to discuss these with the Board of Management. In this context, the chairperson of the Board of Management advises the chairperson of the Supervisory Board of all events that are significant to the situation, development, and governance of the Company.

 

Avoiding conflicts of interest. Board of Management members and Supervisory Board members are obliged to immediately disclose any conflicts of interest to the Supervisory Board. Any functions assumed by members of the Board of Management that are not covered by the Board of Management mandate are subject to approval by the General Committee of the Supervisory Board. Instances in which actual conflicts of interest involving Supervisory Board members have occurred are dealt with in the Supervisory Board’s report to the 2006 shareholders’ meeting (pages 14–18). In addition to the regulation laid out in § 15a of the German Securities Trading Act (Wertpapierhandelsgesetz), the Company has issued Guidelines on Insider Trading which regulate trading of Deutsche Telekom Group securities by Board members, executive officers and employees, and ensure the necessary degree of transparency. Deutsche Telekom AG publishes details of any transactions subject to reporting obligations on the Internet at www.deutschetelekom.com under: Investor Relations/Corporate Governance/Directors’ dealings.

 

Pursuant to § 15a of the German Securities Trading Act, the Company was informed in 2005 that Mr. Wolfgang Schmitt, member of the Supervisory Board, had purchased 1,000 Deutsche Telekom AG shares at a price of EUR 15.70 on March 9, 2005.

 

Board of Management and Supervisory Board members do not own any Deutsche Telekom AG shares or related financial instruments that are subject to reporting obligations under the Corporate Governance Code.

 

Compensation of the Board of Management and the Supervisory Board. Under the terms of their service contracts, the members of the Group Board of Management are entitled to fixed and variable, performance-related compensation components. The compensation of the members of the Board of Management is in line with market levels.

 

21



 

Performance-related compensation is determined on the basis of the targets agreed between the Supervisory Board General Committee and the members of the Board of Management, and the level of target achievement as determined by the General Committee at the end of the financial year.

 

In addition, the General Committee of the Supervisory Board may decide that the Board of Management should be granted variable compensation components linked to the long-term performance of the Company. These long-term incentives depend on the achievement of defined performance targets.

 

The basic principles of the compensation system and details of the long-term incentive components containing risk elements can be found on the Deutsche Telekom website www.deutschetelekom.com via the following path: Investor Relations/Corporate Governance/Incentive plans and in this Annual Report on page 196 et seq. The compensation of the members of the Board of Management for the 2005 financial year is reported individually in the notes to the consolidated financial statements in this Annual Report on pages 196–197.

 

The compensation of the members of the Supervisory Board is in line with the recommendations of the German Corporate Governance Code. In addition to fixed compensation, the members of the Supervisory Board receive performance-related compensation based on the development of net profit per share. Performance-related compensation also includes variable components linked to the long-term performance of the Company. Special functions such as that of chairperson or deputy chairperson of the Supervisory Board and chairperson or member of its committees are taken into account in the remuneration system.

 

The compensation of the members of the Supervisory Board is reported individually in the notes to the consolidated financial statements in this Annual Report on pages 197–198, broken down according to the various components.

 

Securities-oriented incentive systems. A securities-oriented incentive system introduced in 2004 for members of the Board of Management and other Company executives was continued in the reporting year. In addition, there are still claims under the Stock Option Plan that was established as of 2001. The options issued under this program can still be exercised as soon as the requirements have been met. Since 2002, stock options have no longer been issued for members of the Board of Management. It was decided in 2003 to refrain entirely from issuing any further share options, and the Stock Option Plan was discontinued in 2004 following a shareholders’ meeting resolution. The stock options issued in 2000 under the pervious Stock Option Plan were forfeited in the course of 2005 without compensation.

 

For detailed information, please refer to the notes on the consolidated financial statements in this Annual Report (note on “Stock-based compensation plans”, page 179 et seq. and note on “Compensation of the Board of Management and the Supervisory Board” on page 196 et seq.).

 

Risk management. Appropriate management of risks arising in connection with the Company’s business activities is of vital importance to the Board of Management and the Supervisory Board. Both the Board of Management and the Supervisory Board receive regular reports from the Risk Management department of the Company concerning current risks and their development. The risk management system in place at Deutsche Telekom AG is evaluated by the external auditors and is constantly being expanded and improved. Details on the topic of risk and opportunity management can be found in the appropriate chapter of this Annual Report.

 

Accounting and audit of financial statements. An agreement has been reached with the company auditors that the chairperson of the Supervisory Board/the Audit Committee shall be advised immediately of any issues uncovered during the audit that might give rise to statements of exclusion or reservation in the auditors’ report, unless these issues can be resolved forthwith. Moreover it has been agreed that the auditors shall immediately report any findings and issues which emerge during the audit and which have a direct bearing upon the tasks of the Supervisory Board. In addition, the auditing firms undertake to inform the Supervisory Board or make a note in their report of any facts discovered during the audit which might indicate a discrepancy in the Declaration of Conformity with the German Corporate Governance Code submitted by the Board of Management and Supervisory Board.

 

22



 

Strategic business areas

 

28

Broadband/Fixed Network

35

Mobile Communications

41

Business Customers

45

Group Headquarters & Shared Services

 



 

 



 

 



 

Quick transfer. Surprise those you love while web’n’walk is the Internet in your pocket – for

 

 



 

keeping up the pace at the office.
relaxed decision-makers.

 

 



 

Broadband/Fixed Network. Consistent development of the promising broadband business.

 

 

T-Com: Number of DSL lines including wholesale (resale) business up 2.4 million to 8.5 million // New dimensions in high-speed Internet communication // Consistent use of new technology for broadband communication // New calling plans stabilize the telephony business //

T-Online: Successful positioning as a full-service DSL provider // T- Online’s international expansion strategy shows successes in customer acquisition and revenue growth

 

Broadband/Fixed Network: Development of operations

 

 

 

2005

 

2004

 

Change

 

 

 

 

 

millions

 

millions

 

millions

 

Change

 

 

 

of €

 

of €

 

of €

 

%

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

26,035

 

27,012

 

(977

)

(3.6

)

T-Com(a)

 

24,695

 

25,603

 

(908

)

(3.5

)

T-Online(a)

 

2,088

 

2,012

 

76

 

3.8

 

EBIT(b)(profit from operations)

 

5,142

 

5,551

 

(409

)

(7.4

)

EBIT margin (%)

 

19.8

 

20.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA(c)

 

9,176

 

9,950

 

(774

)

(7.8

)

Special factors affecting EBITDA(c)

 

(683

)

(220

)

(463

)

n.a.

 

Adjusted EBITDA(c)

 

9,859

 

10,170

 

(311

)

(3.1

)

T-Com(a)

 

9,628

 

9,720

 

(92

)

(0.9

)

T-Online(a)

 

324

 

464

 

(140

)

(30.2

)

Adjusted EBITDA margin(c) (%)

 

37.9

 

37.6

 

 

 

 

 

T-Com(a)

 

39.0

 

38.0

 

 

 

 

 

T-Online(a)

 

15.5

 

23.1

 

 

 

 

 

Cash capex(d)

 

(2,481

)

(2,122

)

(359

)

(16.9

)

 

 

 

 

 

 

 

 

 

 

Number of employees(e)

 

112,872

 

115,292

 

(2,420

)

(2.1

)

T-Com

 

109,643

 

112,329

 

(2,686

)

(2.4

)

T-Online

 

3,229

 

2,963

 

266

 

9.0

 

 


(a)   T-Com’s prior-year results were adjusted according to the Group’s realignment into three strategic business areas and according to IFRS. T-Online’s prior-year results have been adjusted in line with the transition to IFRS.

(b)   EBIT is profit/loss from operations as shown in the income statement.

(c)   Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to the “Development of business” section in the Group management report.

(d)   Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement and excluding certain intercompany transfers.

(e)   Average number of employees.

 

The buoyant growth in broadband communication is one of the dominant trends in the global telecommunications market. The broadband business is built around high-powered networks, fast connections to the Internet, attractive multimedia services that systematically use the transmission capacity of the networks and lines, as well as services to customers. The Broadband/Fixed Network strategic business area, which comprises the T-Com and T-Online units, provides customers with state-of-the-art fixed-network infrastructures, broadband Internet access, customer-oriented multimedia services based on attractive online content, and support services. In 2005 this strategic business area was instrumental in driving the development of the German and European broadband markets. End customers were not the only beneficiaries of this business area’s activities; they were also of use to other telecommunications companies which rely on T-Com’s wholesale products to provide their own broadband services. In addition to focusing on the ground-breaking broadband business, Broadband/Fixed Network concentrated on fostering customer relationships in its strategic core business of voice communication. One of its strategies for this was to design new calling plans.

 

T-Com: Strong DSL growth. The dynamic growth in broadband lines based on DSL technology continued in 2005. New services and products offered by the Broadband/Fixed Network business area, falling prices on the ISP market, and packages offered by competitors further accelerated broadband growth.

 

The number of DSL lines in operation in Germany rose from 5.8 million to 7.9 million during the reporting period.

 

T-Com is participating in the growth of the broadband market, particularly through DSL resale to third parties and by marketing high-bit-rate unbundled subscriber lines. T-Com activated over 1.3 million new resale lines for third parties in 2005.

 

28



 

It should be noted in the context of the revenue development for DSL retail lines marketed by T-Com that the focus of marketing activities by Broadband/Fixed Network since January 31, 2005 has been on T-Online DSL package offers, i.e., a DSL line in connection with the Internet service provider (ISP) component. Revenue growth in T-Com’s broadband business is therefore mainly visible in the wholesale segment, which provides the upstream services for T-Online and third parties.

 

T-Com’s subsidiaries in Hungary, Croatia, and Slovakia also saw their broadband communication business expand. T-Hrvatski Telekom and Slovak Telecom each had more than 100,000 broadband lines in operation at the end of 2005. Attractive broadband offers accelerated growth in the fourth quarter with 48,000 new broadband customers in Hungary, 30,000 net additions in Croatia, and 24,000 net additions in Slovakia.

 

T-Com’s total number of broadband lines in operation in Germany and Eastern Europe rose from 6.1 million at the end of 2004 to 8.5 million at the end of 2005. This represents an increase of around 40 percent.

 

Faster T-DSL lines. Broadband/Fixed Network drove growth in the broadband market with a plethora of customer-oriented offerings. After repositioning the T-DSL line in April 2004 with three versions as part of its 1-2-3 strategy, T-Com started marketing another, even faster version of the line on July 1: T-DSL 6000 enables customers to perform high-volume operations, such as sending and receiving photos over the Internet, at a comfortable speed. The crucial aspect for customers: T-Com offers T-DSL 6000 at the same price as the previous T-DSL 3000 line – i.e., double the speed for the same price.

 

High speed Internet access – paving the way for the future of broadband. At the time it started marketing its new offering, T-Com gave the go-ahead for the testing of DSL technologies that make even higher transmission rates possible. The first pilot customers in Hanover have been able to use bandwidths of up to 16 megabits per second since July 2005. Since September other customers in Hamburg have been piloting bandwidths of up to 16 megabits per second on the basis of ADSL2+ technology and customers in Stuttgart have been trialing bandwidths of up to 25 megabits per second on the basis of VDSL technology.

 

Broadband/Fixed Network: Subscriber figures*

 

millions

 

2005

 

2004

 

Change

 

 

 

 

 

 

 

 

 

Broadband

 

 

 

 

 

 

 

Broadband lines (in operation)

 

8.5

 

6.1

 

2.4

 

DSL (Germany)(a)

 

7.9

 

5.8

 

2.1

 

of which: resale(b)

 

1.6

 

0.2

 

1.4

 

DSL (Central and Eastern Europe – CEE)(c)

 

0.5

 

0.3

 

0.2

 

 

 

 

 

 

 

 

 

Number of subscribers to broadband rates (Germany and Western Europe)(d)

 

5.1

 

3.6

 

1.5

 

of which: Germany

 

4.5

 

3.2

 

1.3

 

 

 

 

 

 

 

 

 

Narrowband(e)

 

 

 

 

 

 

 

Narrowband lines (total)

 

41.2

 

42.8

 

(1.6

)

Germany(f)

 

35.2

 

36.8

 

(1.6

)

Standard analog lines

 

25.5

 

26.4

 

(0.9

)

ISDN lines

 

9.8

 

10.4

 

(0.6

)

Central and Eastern Europe (CEE)

 

6.0

 

6.1

 

(0.1

)

Magyar Telekom(g)

 

3.2

 

3.2

 

0.0

 

Slovak Telecom

 

1.2

 

1.2

 

0.0

 

T-Hrvatski Telekom(h)

 

1.7

 

1.7

 

0.0

 

 

 

 

 

 

 

 

 

Number of subscribers to calling plans (Germany)(i)

 

13.8

 

12.0

 

1.8

 

 

 

 

 

 

 

 

 

Number of subscribers to narrowband rates (Germany and Western Europe)(d)

 

4.2

 

5.2

 

(1.0

)

of which: Germany

 

4.1

 

5.0

 

(0.9

)

 

 

 

 

 

 

 

 

Internet customers with a billing relationship (Germany and Western Europe)(d),(j)

 

14.0

 

13.5

 

0.5

 

 

 

 

 

 

 

 

 

Broadband/narrowband PAYG(k)< 30 days (Germany and Western Europe)(d)

 

0.6

 

0.9

 

(0.3

)

 


(a)   Since January 31, 2005, broadband lines based on DSL technology for consumers have been marketed by T-Online. Broadband lines excluding lines for internal use. Prior-year comparatives have been adjusted.

(b)   Definition of resale: Sale of broadband lines based on DSL technology to alternative providers outside the Deutsche Telekom Group.

(c)   Central and Eastern Europe includes the fixed-network business of Magyar Telekom (incl. MakTel and, from the second quarter of 2005, Telekom Montenegro), Slovak Telecom, and T-Hrvatski Telekom.

(d)   Customers with a billing relationship. Western Europe includes: Ya.com and T-Online France.

(e)   The number of narrowband lines rather than channels has been reported since the first quarter of 2005. Prior-year comparatives have been adjusted.

(f)    Telephone lines excluding lines for internal use and public telecommunications, including wholesale services. Prior-year comparatives have been adjusted.

(g)   Subscriber-line figures are recorded including Magyar Telekom’s subsidiaries MakTel and Telekom Montenegro. Prior-year comparatives have not been adjusted. The rebranding of MATÁV as Magyar Telekom took place at the beginning of May 2005.

(h)   Brand name as of 2004; legal name of the company: HT-Hrvatske telekomunikacije d.d.

(i)    Without business customer calling plans, including the new “Wünsch Dir Was” (make a wish) calling plans and customers that have not yet migrated to the new calling plans.

(j)    Total calculated on the basis of customers (broadband and narrowband rates) with a billing relationship and PAYG < 30 days and PAYG > 30 days.

(k)   PAYG: Pay as you go.

*      The total was calculated on the basis of precise figures and rounded to millions.

 

29



 

Broadband lines (in operation)

 

 

The findings of the pilot projects are being incorporated into an ambitious project that T-Com announced in September 2005 – to connect 50 large towns and cities in Germany to a high-speed network by the end of 2007. T-Com plans to provide transmission rates for Internet communication of up to 50 megabits per second over this new network. The project will enable T-Com as an innovation leader to give a further substantial boost to the development of the broadband market and Germany as a center for telecommunications. The plans for the high-speed network initially envisage the expansion of the network in ten towns and cities by mid-2006. It will enable T-Com to offer triple-play applications that combine voice and data communication with interactive media use over a single line.

 

All of T-Com’s subsidiaries in Central and Eastern Europe also invested in the expansion of their broadband infrastructures so that they can offer their customers attractive triple-play services in the future.

 

Consistent expansion of the broadband infrastructure. At the end of 2005, around 91 percent of Germany had DSL coverage, which means that more than nine of every ten T-Com customers have the option of using a DSL line for their Internet connection. Throughout Germany, DSL is available over T-DSL via satellite. To provide the benefits of broadband communication to a greater number of customers, T-Com also explored additional technical possibilities in 2005 with the goal of expanding the required network infrastructure.

 

Outdoor DSLAM (Digital Subscribers Line Access Multiplexer) technology, for example, which was used for the first time in 2005, enables T-DSL lines to be provided to customers in regions which in the past could not be supplied with broadband technology for technical reasons.

 

Since the end of June 2005, T-Com has been piloting WiMAX (Worldwide Interoperability for Microwave Access) technology in two areas in the vicinity of Bonn. This technology gives customers wireless access to the broadband network. The pilot projects, which are scheduled to run until the end of March 2006, will show whether the wireless technology meets T-Com’s quality and service standards for broadband lines.

 

One key pillar of T-Com’s and the Deutsche Telekom Group’s broadband strategy is WLAN (Wireless Local Area Network) technology. By the end of 2005, T-Com had concluded over 5,600 contracts for HotSpots in Germany. At these public WLAN locations operated by T-Com and T-Mobile in airports, train stations, hotels, restaurants, and cafés, customers with the necessary equipment for their notebooks or PDAs (personal digital assistants) have wireless broadband access to the Internet.

 

WLAN technology can also be used for wireless computer connections to the DSL line at home or in the office. An increasing number of T-Com customers are opting for this convenient form of Internet communication.

 

Tangible innovations – broadband applications in the T-Com House.

T-Com’s high-speed DSL lines provide the basis for innovative applications in multimedia communication. Since March 1, 2005, this business unit has been demonstrating the potential applications of broadband communication for customers in the T-Com House in Berlin. Here, forward-looking application scenarios are showcased in the environment of a “normal family home.” These applications include a family whiteboard in the entrance area on which the members of the family of the T-Com House can leave messages for the others in the form of texts, video clips, SMS or MMS messages. All of the broadband applications are controlled using a personal digital assistant. In the T-Com House the broadband line can be used to download films, television programs, and online games on the multifunctional screens installed in different rooms. In 2005, the applications in the T-Com House were extremely well received by visitors and the media. Due to the considerable interest shown, the high-tech T-Com House (which was originally supposed to
close at the end of 2005) will now remain open until July 9, 2006. For more information on the T-Com House, please go to
www.t-com-haus.de.

 

30



 

Clear innovation strategy. The development of the broadband offering and the network infrastructures for high-speed Internet communication, as well as the innovative applications in the T-Com House show that T-Com has taken a forward-looking, innovative approach in its national and international markets. These markets will be dominated by integrated applications for telecommunications, information technology, consumer electronics, household systems, and security technology. In 2005, T-Com took a vital step forward in the fulfillment of its innovation strategy by creating the new Innovations and Terminal Equipment board department as of October 1, 2005. One important element of this T-Com board department is the newly established Berlin-based Innovationsgesellschaft. This wholly owned T-Com subsidiary has been tasked with developing new services in the field of voice communication, innovative applications, and new terminal equipment. The company’s goal is to further increase the pace of innovation at T-Com.

 

“Wünsch Dir Was” calling plan to increase customer acceptance in the telephony business. To successfully position itself on the narrowband market, which is fiercely contested in the area of traditional fixed-network telephony, T-Com introduced a new, much simpler calling plan for consumers on March 1, 2005. T-Com is satisfying the needs of different customer groups for low-cost, convenient telephony with the Call Plus, Call Time, XXL, and XXL Freetime rates. The “Wünsch Dir Was” (make a wish) calling plan provides substantial price reductions in the City rate and for long-distance calls. They can also be combined with other calling plans. The XXL Local calling plan is a genuine flat rate for making calls to T-Com lines with the same area code. Customers using the new XXL Fulltime flat rate can make calls to T-Com’s domestic fixed network from anywhere in Germany at any time of the day or night.

 

The “Wünsch Dir Was” calling plan greatly helped to stabilize the decline in T-Com’s market share for calls to T-Com’s own lines during the reporting year as a result of the intense competition. By the end of 2005, over 12.1 million customers in Germany had opted for one of the new calling plans.

 

In Germany, T-Com recorded a sharp decline in the number of narrowband lines – ISDN and analog – of 4.1 percent to 35.2 million.

 

T-Com plans to further stabilize its core business and cement its customer relationships with new rates and products that are tailored to its customers’ needs. For this purpose it will focus on convergence products and bundled products. On December 1, 2005, for example, T-Com lowered its prices for calls from fixed lines to the national mobile network by up to 44 percent with its
fixed-to-mobile calling plan (“Festnetz zu Mobil”). Together with T-Mobile this business unit
introduced the Local/Local calling plan in ten towns in October 2005. This combined offer of XXL Local from T-Com and Relax Local from T-Mobile gives customers the benefit of a double flat rate when making calls in the local area network.

 

Re-Invent – a pillar of the Deutsche Telekom Group’s Excellence Program. T-Com’s Re-Invent program enables the business unit to play its part in Deutsche Telekom’s Excellence Program. The three strategic elements of Re-Invent are “Innovation and growth,” “Quality and efficiency,” and “Customer focus.” For this purpose, T-Com has identified and launched a series of short-term and medium-term campaigns.

 

One of the cornerstones of this program is innovativeness. T-Com is planning to invest heavily in a new high-speed network with a bandwidth of up to 50 megabits per second, for example. The broadband campaign is being pushed further toward triple play. This entails Internet access with DSL, communication services, and entertainment services or TV services. Apart from broadband, innovations will be focused more and more on issues such as the convergence between the fixed-line and the mobile network. Besides the launch of the T-Box (single answering service for calls to the fixed-line number and the mobile number), T-Com has also announced the upcoming introduction of a convergent product in the form of a DualPhone solution which uses both WLAN and GSM technology.

 

A far-reaching quality campaign was launched as part of the “Quality and efficiency” drive. In the South West region, for example, possible methods were tested to optimize processes for better customer care and more efficient operations. On successful completion of these trials, the improvements in the processes will be gradually introduced in all T-Com regions. One of the crucial steps in
T-Com’s plan was the creation of the T-Com Quality and Processes board department as of July 1, 2005. In this department T-Com is systematically working on redesigning and streamlining its processes to increase the quality perceived by customers. Another important element of the Re-Invent program is the Simplicity project. Designed to increase efficiency, this
project entails some 350 measures aimed at scaling back the product portfolio and streamlining sales and technology processes, for example. It also involves cutting back T-Com’s workforce by approximately 20,000. This reduction will be offset in part by the creation of up to 3,000 new jobs in the T-Punkt offices and around 5,000 positions as part of the planned roll-out of the new high-speed network.

 

31



 

Adjusted EBITDA margin up year-on-year despite revenue decline. At EUR 24.7 billion, T-Com’s total revenue in the 2005 financial year declined by 3.5 percent year-on-year. This decline can be principally attributed to lower call revenues. A decrease in price and volumes as well as the transfer of parts of the value chain to the Business Customers segment also had a negative impact on revenue. Successful marketing of broadband lines based on DSL technology, both in retail and especially in wholesale, as well as the volume-driven growth of subscriber lines, was only able to partly compensate for this downturn.

 

At EUR 2.5 billion, revenue from fixed-network business in Central and Eastern Europe remained almost constant at prior-year levels. While in Croatia revenue in local currency largely stabilized, the decrease in the revenue from Magyar Telekom’s and Slovak Telecom’s traditional fixed-network business due to currency effects was unable to be offset in full by the growth in broadband communications.

 

In the 2005 financial year, T-Com generated adjusted EBITDA of EUR 9.6 billion. In light of the decrease in revenues, adjusted EBITDA remained almost constant, down EUR 92 million or 0.9 percent. The adjusted EBITDA margin increased from 38.0 percent in 2004 to 39.0 percent in 2005. This effect reflects a number of positive factors, including savings from revenue-related costs, such as telecommunications services, raw materials and supplies, and merchandise, as well as improvements in other operating income.
T-Com achieved further cost reductions in particular for rentals and through improved procurement conditions in the area of logistics, reduced prices for billing services and process improvements in the field of IT. These savings were partially offset, however, by the allocation of costs previously reported under Group Headquarters & Shared Services to Broadband/Fixed Network (based on actual cost generation), increased advertising expenses related to the broadband campaign, maintenance costs, and higher litigation and auditing expenses. In Germany T-Com recorded adjusted EBITDA of EUR 8.6 billion. This represents an adjusted EBITDA margin of 38.9 percent, an increase of 1.1 percentage points compared with 2004. At EUR 1.0 billion, adjusted EBITDA of the subsidiaries in Central and Eastern Europe was slightly higher than the prior-year figure. The adjusted EBITDA margin in 2005 amounted to
40.0 percent. Positive effects in this respect included workforce reduction, the improvement of cost structures, and the outsourcing of non-core business activities. Besides other factors, increased expenses for the broadband marketing campaign had an offsetting effect.

 

Planned merger with T-Online. The dominant trend in the telecommunications business is the convergence of the markets for voice, Internet and media services. To be able to offer customers fully integrated products and genuine triple-play services from a single source in the future, Deutsche Telekom and T-Online intend to merge T-Online with Deutsche Telekom. However, the legal basis for this is not yet in place, which is why T-Com and T-Online have been operating as separate units in the market up to now.

 

T-Online: growth course in a strongly competitive environment. Competition gained significant momentum in the rapidly growing broadband market in 2005. In addition to Internet service providers, local loop operators using their own network infrastructure and increasingly cable network operators and mobile carriers are also battling for customers in the broadband market. T-Online International AG continued its growth course in this market environment. By positioning itself as a DSL full-service provider and enhancing the DSL rate options to meet market needs, T-Online succeeded in securing a share of market growth and further increasing the number of DSL rate customers.

 

T-Online: Internet customers with a billing relationship

 

 

32



 

Given the increasing spread of broadband access, T-Online plans to further expand its product portfolio in the form of combined products and thus link fast Internet access with attractive communications and digital entertainment services. T-Online will continue implementing this triple-play strategy in 2005. In addition to introducing DSL telephony, the focus here will also be on further expanding the availability of high-quality digital entertainment content. T-Online Vision offers attractive multimedia content via the video on demand (VoD) service which T-Online was able to expand by gaining additional Hollywood studios as cooperation partners.

 

Strong growth in DSL rate customers. Overall, the T-Online International AG group recorded 1.5 million new DSL rate customers in 2005. This represents an increase of 41.9 percent over the previous year. T-Online used targeted pricing measures and attractive broadband products to attract an additional 276,000 DSL rate customers in the Rest of Europe segment. This positive development is founded on the effects from T-Online’s internationalization strategy focusing on the growth markets in France and Spain.

 

T-Online’s positive corporate development is also reflected in its key performance indicators: Compared to the prior year, T-Online’s net revenue in 2005 increased by EUR 0.1 billion to approximately EUR 2.1 billion. T-Online thus boosted total revenue by
3.8 percent. The Germany segment contributed the largest share of revenue with some EUR 1.8 billion. Revenue in the Rest of Europe segment rose by 24.2 percent, reflecting the positive result of the expansion strategy in France and Spain. Profit after income taxes was approximately EUR 0.2 billion at the end of the reporting period. EBITDA had reached some EUR 0.3 billion.

 

Successful positioning as a DSL full-service provider. T-Online is pursuing three key strategic initiatives to sustainably position itself in the dynamic broadband market. Significant steps were already taken in 2005 to realize these initiatives: DSL full-service marketing; focusing on a triple-play strategy with combined products consisting of Internet access, entertainment, and communications services; as well as expanding T-Online’s international market position.

 

T-Online has been marketing the DSL line together with Internet access and hardware components since February 2005; T-Online obtains the DSL line by way of a resale from T-Com. The success of the DSL full-service packages offered as well as market-based enhancement of the DSL rate options were material drivers in expanding the broadband customer base. Other factors included the attractive features of the DSL flat-rate service: Since the beginning of November 2005, T-Online has been offering a uniform DSL flat rate for all available T-DSL bandwidths up to and including T-DSL 6000 at a monthly charge of EUR 9.95.

 

Implementation of the triple-play strategy continued. While further enhancing the DSL rate options in the 2005 financial year,
T-Online also accelerated implementation of the groundwork for the future triple-play strategy. The company expanded the possible uses of broadband lines and created new growth potential in the broadband market. One building block for future triple-play products is DSL telephony, which T-Online presented at CeBIT 2005 with its DSL telephony product and continually expanded during the course of the year.

 

Since November 2005, T-Online customers have been able to make unlimited calls in all T-DSL bandwidths into the German fixed network, as well as to all users of T-Online DSL telephony from EUR 9.95 a month; if the “on net” software telephone is used, a video component can also be added, if desired. T-Online is thus creating an attractive added value, and not just for customers in Germany. By using international access, T-Online customers can also easily use the Internet telephony service in foreign countries.

 

Upgrade of the DSL line to a home entertainment channel. In addition, T-Online launched an increasing range of high-quality, multimedia entertainment content in 2005. In addition to cooperating with leading hardware manufacturers, T-Online brought its first own media receiver on the market at the 2005 IFA trade fair in order to offer users convenient access to the wide range of entertainment products. With this media receiver, broadband users can directly access T-Online Vision products via their television screen. By expanding the digital experience, T-Online is adding significant momentum to the increased demand for broadband content. This is also reflected in the number of users. With 100,000 bookings per month, T-Online is one of the leading providers of video on demand in Germany. T-Online offers a continually growing number of movies (currently more than 1,200), including Hollywood blockbusters, documentaries, and comedy series, as well as productions from ProSiebenSat.1 Media AG, with whom
T-Online has been cooperating since March 2005. The renowned Warner Bros. International Television Distribution Studios and Paramount Pictures Corporation were added to the range of U.S. cooperation partners since 2005.

 

33



 

T-Online also further expanded its role as a digital content provider in the growing market for legal music downloads in 2005.
T-Online’s distribution platform, Musicload, has been a success story since its launch in 2003 and makes a substantial contribution to the overall success of the online music business. Musicload offers around 800,000 songs and exclusive specials in cooperation with all major record companies and independent labels. With the Mobile Jukebox, launched jointly with T-Mobile, songs can be downloaded not just from a PC but also while on the move via mobile phone, and thus can be played almost anywhere at any time. Musicload had more than 15.5 million downloads at the end of 2005 – almost four times as many as in 2004. In December 2005, Musicload was the winner in a test of the 12 most important providers of commercial music downloads with a German website by Stiftung Warentest, the German consumer testing organization.

 

Gamesload launched in the PC gaming market. T-Online launched Gamesload in August 2005, the third largest purchase platform for digital entertainment content after video on demand and Musicload. Customers can download games from the online shop and additionaltitles are available on demand as part of a monthly subscription. Gamesload’s special feature: Users can try out numerous current titles and classic games for a limited period before purchasing. Chargeable downloads are easily paid for via the user’s telephone bill. Gamesload’s well-known cooperation partners include CDV, Kochmedia, Eidos, Ubisoft, Vivendi, and ZuxxeZ. Gamesload already convinced gamers and the trade press shortly after its introduction: In a comparison test by the PC Games magazine (11/05), Gamesload from T-Online came out the winner among a total of seven legal game download providers.

 

Successful continuation of the brand strategy with Electronic-Scout24. T-Online introduced an additional promising e-commerce player in the 2005 financial year. The company is expanding its brand strategy with the launch of the ElectronicScout24 online marketplace and is positioning itself in the fast growing consumer electronicssector. The focus of this trading platform is on consumer electronics and telecommunications products as well as computers and householddevices. Buyers and sellers enjoy substantial advantages – from comprehensive search and sort functions to favorable sales fees and through to ElectronicScout24’s taking over payment processing as well as quality and credit checks. By tapping business options via pinpointed customer targeting, T-Online is continuing its strategy of further expanding its position in the growing e-commerce sector. With Scout24, T-Online already has a group of online marketplaces, which offer industry-specific services in seven categories and are present in ten countries.

 

International expansion strategy. T-Online posted above-average growth in its DSL customers base in 2005, not only in Germany, but also in the growth markets of France and Spain. To secure a sustained share of the dynamic market growth, T-Online is making targeted investments in the construction and roll-out of a state-of-the-art network infrastructure in France and Spain. The two subsidiaries Club Internet and Ya.com were re-aligned in 2005 to pursue the triple-play strategy.

 

In France, T-Online is currently establishing a completely IP-based network with high bandwidth based on ADSL2+. A further upgrade to the VDSL2 standard is planned. Establishment of the network is proceeding rapidly after the conclusion of a contract for the use of optical fiber capacities with a renowned provider.

 

Network expansion in Spain is also on schedule. By acquiring the network operator, Albura, T-Online gained access to the second largest network in Spain, which is to cover about 60 percent of the DSL demand by 2006.

 

34



 

Mobile Communications. Save for Growth efficiency program keeps company on growth course.

 

Most successful year in the company’s history despite a difficult market // Profitable growth thanks to innovative products and low rates // web’n’walk gives customers direct mobile access to the open Internet // Consistent drive to expand mobile broadband services // Goal: market leader in terms of customer service

 

During 2005, the international mobile communications business was dominated by fierce competition and strong dynamics. At the same time, market trends such as the substitution of fixed-network telephony by mobile voice services, and emerging markets offer new opportunities for growth in mobile Internet and data communications. T-Mobile is the first and only mobile operator so far to focus its activities rigorously on developing fast access to the free Internet for users on the move. The objective is to write further chapters in the success story of the T-Mobile group in the coming years.

 

Success in a difficult environment. The 2005 financial year was the strongest year to date in T-Mobile International’s history. Deutsche Telekom’s mobile communications arm increased its customer base in the majority shareholdings from 77.4 million to 86.6 million. Consolidated revenue in the T-Mobile group rose from EUR 26.5 billion to EUR 29.4 billion. All companies successfully upped or stabilized their average revenue per user (ARPU). In 2005, the T-Mobile group increased adjusted EBITDA by 16 percent to EUR 9.8 billion. These results reflect the success of the company’s Save for Growth efficiency program. As a response to changing conditions in Western Europe’s mobile communications markets, T-Mobile had set itself the target of saving EUR 1 billion by the end of 2006, a major slice of which was, or is being, reinvested in low-rate calling plans and innovative products.

 

The positive business result is highly satisfactory against the backdrop of intensified price competition. The number of providers flooding the market with low-price offers continues to rise. Apart from prices, one of T-Mobile’s key differentiating features is its service. The company’s target is therefore to become the most highly regarded service company in the mobile sector. The strategic cornerstones of this objective are top performance and smooth and efficient internal processes (operational excellence) throughout the company, strict customer centricity and a superior network experience for customers.

 

Mobile Communications: Development of operations

 

 

 

2005

 

2004

 

Change

 

 

 

 

 

millions

 

millions

 

millions

 

Change

 

 

 

of €

 

of €

 

of €

 

%

 

 

 

 

 

 

 

 

 

 

 

Total revenue(a)

 

29,452

 

26,527

 

2,925

 

11.0

 

of which: T-Mobile Deutschland

 

8,621

 

8,745

 

(124

)

(1.4

)

of which: T-Mobile USA

 

11,887

 

9,278

 

2,609

 

28.1

 

of which: T-Mobile UK

 

4,153

 

4,344

 

(191

)

(4.4

)

of which: T-Mobile Hungary

 

1,078

 

1,040

 

38

 

3.7

 

of which: T-Mobile Netherlands

 

1,064

 

1,046

 

18

 

1.7

 

of which: T-Mobile Czech Republic

 

938

 

827

 

111

 

13.4

 

of which: T-Mobile Austria

 

885

 

882

 

3

 

0.3

 

of which: T-Mobile Croatia

 

512

 

436

 

76

 

17.4

 

of which: T-Mobile Slovensko(b)

 

378

 

 

n.a.

 

n.a.

 

of which: Other(c)

 

174

 

135

 

38

 

28.7

 

 

 

 

 

 

 

 

 

 

 

EBIT (profit from operations)

 

3,005

 

1,524

 

1,481

 

97.2

 

EBIT margin (%)

 

10.2

 

5.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA(d)

 

9,701

 

8,467

 

1,234

 

14.6

 

Special factors affecting EBITDA(d)

 

(71

)

68

 

(139

)

n.a.

 

Adjusted EBITDA(d)

 

9,772

 

8,399

 

1,373

 

16.3

 

Adjusted EBITDA margin(d) (%)

 

33.2

 

31.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash capex(e)

 

(5,603

)

(3,078

)

(2,525

)

(82.0

)

 

 

 

 

 

 

 

 

 

 

Number of employees(f)

 

49,479

 

47,417

 

2,062

 

4.3

 

 

The Mobile Communications strategic business area includes all activities of the fully consolidated mobile communications companies in Germany, the United Kingdom, the United States, the Czech Republic, Austria, the Netherlands, Hungary, Croatia, Slovakia, Macedonia, and Montenegro, as well as minority investments accounted for using the equity method in Poland and, until the end of September 2005, in Russia.

 


(a)          The amounts stated for the national companies correspond to their respective unconsolidated financial statements (single-entity financial statements adjusted for uniform group accountingpolicies and reporting currency) without taking into consideration consolidation effects at the level of the strategic business area.

(b)         Fully consolidated as of the first quarter of 2005.

(c)          “Other” includes the revenues generated by MobiMak (Macedonia) and MONET (Montenegro). MONET is fully consolidated as of the second quarter of 2005.

(d)         Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to the “Development of business” section in the Group management report.

(e)          Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement.

(f)            Average number of employees.

 

35



 

Mobile Communications: Customer figures*

 

millions

 

2005

 

2004

 

Change

 

 

 

 

 

 

 

 

 

Mobile customers of fully consolidated subsidiaries

 

86.6

 

77.4

 

9.2

 

T-Mobile Deutschland

 

29.5

 

27.5

 

2.0

 

T-Mobile USA

 

21.7

 

17.3

 

4.4

 

T-Mobile UK(a)

 

17.2

 

15.7

 

1.5

 

T-Mobile Netherlands

 

2.3

 

2.3

 

0.0

 

T-Mobile Austria

 

2.1

 

2.0

 

0.1

 

T-Mobile Czech Republic

 

4.6

 

4.4

 

0.2

 

T-Mobile Hungary

 

4.2

 

4.0

 

0.2

 

T-Mobile Slovensko(b)

 

2.0

 

1.9

 

0.1

 

T-Mobile Hrvatska

 

1.9

 

1.5

 

0.4

 

Other (Macedonia and Montenegro)(c)

 

1.1

 

0.8

 

0.3

 

 


(a)          Including Virgin Mobile.

(b)         Customers were included for the first time in the fourth quarter of 2004; rebranding of EuroTel Bratislava as T-Mobile Slovensko at the beginning of May 2005.

(c)          “Other” includes MobiMak (Macedonia) and MONET (Montenegro). MONET included for the first time in the second quarter of 2005.

*                 The total was calculated on the basis of precise figures and rounded to millions.

 

Mobile Communications: Mobile customers of fully consolidated subsidiaries (organic growth)

 

 

Save for Growth targets exceeded for 2005. As part of its Save for Growth initiative, T-Mobile will achieve annual savings of EUR 1 billion with a suite of efficiency enhancement measures by the end of 2006. Most of this will stem from reductions in handset subsidies in the prepaid business, better procurement terms and a streamlined product portfolio.

 

This centralized program is being implemented in the company’s majority-owned subsidiaries in Germany, the United Kingdom, Austria,the Netherlands, and the Czech Republic. Most of the amount saved will be reinvested in potential growth areas. The three main building blocks for growth under the terms of Save for Growth are

 

             transparent and affordable mobile calling plans,

             further development of the mobile Internet for leisure and office use, and

             expansion of seamlessly integrated networks.

 

In the reporting year, T-Mobile achieved savings of around EUR 600 million from the Save for Growth activities scheduled for 2005. Savings in the area of human resources accounted for 10 percent of the cost reductions. They are the result of not filling posts that become vacant and of staff reduction while avoiding compulsory redundancies.

 

Minute-based packages: rate campaigns for contract customers fuel growth. T-Mobile again received a huge response from attractive calling plans offered to its contract customers. The number of customers with fixed-term contracts rose in the mobile communications sector by 5.2 million to 42.4 million. This translates into a share of over 57 percent in total customer growth. Along with strong growth in the United States, the figure also reflects the successful new business with Relax rates in Western Europe. The number of customers for these minute-based rate packages almost tripled on the previous year, and reached approximately 6 million by the end of 2005.

 

New offers and major price reductions: success in toughening prepaid competition. T-Mobile was quick to recognize the new trend in offers from low-cost vendors. It invested the savings achieved in Save for Growth to launch an effective response to the intensified price competition in the shape of price cuts and new offers in the prepaid business. One example is the Xtra Click&Go rate, where a call minute within the T-Mobile Deutschland network costs a mere EUR 0.05. With this offer, T-Mobile was the first mobile carrier in Germany to market a call rate under its own brand exclusively on the Internet. Rather than launch a cheap brand, T-Mobile chose to enter into sales partnerships with prepaid providers who do not have their own mobile communications networks.

 

36



 

Mobile Internet as an opportunity for growth. Along with transparent and attractive voice rates, expanding the mobile Internet is one of the central growth initiatives for the T-Mobile group. The company plans to take the success story that was Internet on the fixed-network and continue it with mobile communications. By offering web’n’walk to consumers and Office in your Pocket to business customers in the year under review, T-Mobile started marketing harmonized product and service packages for Internet usage on the move and mobile data exchange. Its key products include MDA devices, BlackBerry handhelds, the Sidekick and equipment for mobile data transfer on laptops. T-Mobile reached a top position for sales of these products in Europe in the 2005 financial year. All in all, the company sold a total of 600,000 devices providing access to the open Internet in the reporting year. It also continued its successful marketing of the BlackBerry and Sidekick devices in the United States: By the end of the year, T-Mobile USA was serving just under 1.1 million customers with innovative data services. Alongside cutting-edge devices, key components of web’n’walk and Office in your Pocket are low-rate calling plans with inclusive minutes for mobile data usage: More than 100,000 customers in Western Europe have already signed up for the attractive rates of the data option. Throughout the T-Mobile group, revenue generated with the new data services, i.e., excluding conventional text message revenue, rose year-on-year by 43 percent to approximately EUR 900 million.

 

T-Mobile was the first operator in Europe to offer direct mobile access to the world wide web. Thanks to web’n’walk, T-Mobile Deutschland was the first mobile operator in Europe to put the open Internet onto mobile phones in July 2005. Unlike other mobile online services that offer restricted content only, web’n’walk provides direct access to the entire world wide web, in the same way as on home PCs. In the course of the year, the T-Mobile companies in Austria, the United Kingdom and the Netherlands launched their own web’n’walk offers. T-Mobile plans to extend its mobile Internet service to the Czech Republic in 2006. To ensure that the mobile Internet is easy to use right from the start, T-Mobile International signed a partnership with Google, the world wide web’s leading search engine provider. T-Mobile aims to win 1 million customers for web’n’walk in Europe by the end of 2007.

 

Mobile Communications: Percentage of fixed-term contract customers in Europe

 

%

 

2005

 

2004

 

 

 

 

 

 

 

Mobile Communications segment(a)

 

49.0

 

48.0

 

T-Mobile Deutschland

 

48.4

 

49.1

 

T-Mobile UK(a)

 

20.0

 

19.1

 

T-Mobile Netherlands

 

52.7

 

46.6

 

T-Mobile Austria

 

50.1

 

48.2

 

T-Mobile Czech Republic

 

27.8

 

25.3

 

T-Mobile Hungary

 

31.6

 

28.9

 

T-Mobile Croatia

 

21.9

 

19.6

 

T-Mobile Slovensko

 

38.9

 

33.8

 

Other (Macedonia and Montenegro(b))

 

15.6

 

15.6

 

 


(a)          Including Virgin Mobile.

(b)         Organic development is shown by stating prior-year figures of newly consolidated entities accordingly. T-Mobile Slovensko (formerly EuroTel Bratislava) has been consolidated since 2004. The Montenegrian majority holding has been consolidated since the 2005 financial year.

 

Unique partnership with Robbie Williams drives business with multimedia services. In addition to its web’n’walk launch, T-Mobile also greatly expanded its mobile multimedia services portfolio in 2005. One area it focused on is music. To promote these offers, T-Mobile agreed on an 18-month partnership with top pop star Robbie Williams in summer 2005. The partnership covers exclusive music offers for mobile platforms, including transmission of concerts via UMTS, exclusive first releases of titles as downloads, and handsets with preinstalled Robbie Williams content. T-Mobile will also present the star’s 2006 European tour, supporting it with an international advertising campaign. This is the first cooperation of its kind between a musician and a mobile carrier that extends over such a long period and covers such a broad range of activities.

 

The second focus is on mobile TV. T-Mobile currently offers mobile TV products on eight channels, for example in the areas of sports, news and entertainment.

 

Office in your Pocket – office on the road for business customers. Under its Office in your Pocket slogan, T-Mobile markets a broad range of innovative products and services for business customers. These give users convenient mobile access to their e-mails, Internet and applications in the corporate network. On the basis of fast, reliable and secure mobile connections, businesspeople can use their MDA pocket PCs and data transmission solutions with notebook or laptop just as efficiently and flexibly on the road as in the office. During the reporting period, T-Mobile presented MDA Pro, a mini laptop that offers not only GPRS and WLAN functions but is also the first

 

37



 

pocket PC to deliver UMTS capability. With a market share of some 40 percent in Europe, T-Mobile is the clear market leader in mobile communications devices on the Windows Mobile platform. In September 2005, T-Mobile was the first operator in Germany to prepare the ground for even faster data transmission of up to 1.8 megabits per second as of spring 2006 with an HSDPA-enabled (High Speed Downlink Packet Access) laptop data card.

 

Sustained improvement in customer service boosts customer retention. T-Mobile’s goal is to offer the best service in the industry. Long-term optimization of the service it provides is therefore the group’s contribution to Deutsche Telekom’s Excellence Program. As examples of its improved service, T-Mobile Deutschland guarantees to activate SIM cards within one hour of contract signing and to provide replacement handsets while mobile phones are being repaired.

 

To ensure that consumers receive an even more efficient service, they have been regrouped on the basis of the monthly revenue they generate. This makes it possible for trained service staff to give customers even better support and advice to match their individual communications needs. This model has already been put into practice at T-Mobile Czech Republic and T-Mobile Hungary, and is set for roll-out across Europe in 2006.

 

Expanding the integrated network platform creates the basis for seamless mobile communications. The GPRS (General Packet Radio Service), UMTS/HSDPA and WLAN (Wireless Local Area Network) mobile technologies form the basis for the broad range of data services from T-Mobile. A systematic bundling of these three network platforms enables T-Mobile to offer its customers “seamless” mobility. T-Mobile also continues to invest large sums in the quality of its existing GSM networks (Global System for Mobile Communications).

 

Mobile broadband opens up new dimensions in data transmission. In the 2005 financial year, T-Mobile continued to roll out and improve the UMTS network at a fast pace, laying the focus in Germany and Austria on upgrading the UMTS sites with HSDPA technology. During the first roll-out phase, T-Mobile will use this technology to increase the bandwidth for data transmission in the UMTS network from its current maximum 384 kilobits to 1.8 megabits per second. This will bring mobile data transmission up to speeds comparable to those achieved with DSL in the fixed network. In the future, T-Mobile plans to increase this figure to a rate of up to 7.2 megabits per second, thereby also providing top-quality broadband communication for mobile Internet access. The first pilot projects that T-Mobile launched with key accounts in 2005 confirm the high performance and reliability of the HSDPA technology. The official launch of the HSDPA network is scheduled for spring 2006.

 

With the TDD (Time Division Duplex) modulation procedure and FLASH-OFDM (Orthogonal Frequency Division Multiplex) network technology, T-Mobile opted for two other innovative broadband technologies that allow transmission rates comparable with DSL in the fixed network. T-Mobile has already introduced these technologies in the Czech Republic and Slovakia, where the fixed-network broadband offering is extremely limited.

 

Further improvement to public WLAN offer. T-Mobile again markedly expanded its HotSpot offer in 2005. The public local wireless networks based on WLAN technology give customers access to mobile broadband data connections. T-Mobile is the only mobile operator to offer WLAN services throughout Europe and the United States. Including the HotSpots that can be accessed on the basis of roaming contracts, the company now has just under 20,000 locations, 6,000 of them in Germany alone. A truly groundbreaking step is the cooperation agreement signed with Deutsche Bahn (German railway); under this agreement, T-Mobile Deutschland will provide a growing number of train stations and trains with mobile Internet access. In 2005, the volume of minutes utilized at HotSpots in Western Europe more than tripled to over 150 million minutes.

 

Impressive overall result confirms the most successful year in T-Mobile’s history. Gauged against ambitious targets for the individual national companies, business development in the T-Mobile group was highly satisfactory. Another factor impacting the business result was the sale of the minority interest in Russia’s mobile operator MTS in September 2005.

 

T-Mobile USA. The U.S. subsidiary expanded its customer base during the reporting period by 4.4 million or 25 percent and thus reported more net additions than ever before within one year. At year-end,T-Mobile USA served 21.7 million customers, thus clearly exceeding the vital 20 million mark. T-Mobile USA grew revenue by 28 percent to EUR 11.9 billion; adjusted EBITDA rose by
60 percent to EUR 3.3 billion. Thus the U.S. subsidiary again lived up to expectations in its role as the engine of growth in the international T-Mobile group. The network acquired from Cingular in California and Nevada was successfully integrated into the
T-Mobile USA infrastructure. Last year, the company also purchased additional mobile spectrum in the big U.S.cities. T-Mobile USA put the EDGE network for mobile data traffic

 

38



 

into operation in the third quarter of 2005. EDGE (Enhanced Data Rates for GSM Evolution) allows considerably higher data transmission rates than GPRS. T-Mobile USA received a total of five awards in 2005 from renowned market research institute
J.D. Power to mark its efforts to expand and improve the quality of the network and its customer service.

 

T-Mobile Deutschland. In 2005, T-Mobile Deutschland again successfully maintained its leading market position. Despite toughening competition, T-Mobile Deutschland was able to win approx. 2.1 million new customers in the course of the year, over 800,000 of them contract-based. The total number of customers rose to over 29.5 million at year-end. Again it was the Relax rates that were highly successful: During the year, customer figures for these rates more than doubled to reach almost 2.7 million. Thanks to the Save for Growth program, T-Mobile Deutschland was well prepared to face stiffening competition and used the scope it had gained to lower prices and attract more customers. The cost of acquiring one customer dropped by almost 7 percent as against the previous year, reflecting the success of the Save for Growth program. While total revenue was down slightly to EUR 8.6 billion due first and foremost to a decline in retail terminal sales, service revenue increased by more than 1 percent to EUR 7.8 billion despite the reduction in termination charges required by the regulator. Adjusted EBITDA remained stable compared with the previous year at EUR
3.6 billion.

 

T-Mobile UK. The UK subsidiary held its ground in what continues to be a tough competitive and regulatory environment. The takeover offers from Telefónica for O2 and from NTL for Virgin Mobile are clear proof that the UK mobile communications market is still in a state of flux. The UK subsidiary succeeded in expanding its customer base from 15.7 to 17.2 million (including Virgin Mobile). Of these, 1 million customers now subscribe to the successful U-Fix (contract customers) and Mates rates (prepaid customers), which did not come to market until half way through 2005. In the fourth quarter alone, the company succeeded in winning just under 60 percent of all new customers, clear indication of the turnaround and the successful implementation of Save for Growth in the United Kingdom.

 

T-Mobile Netherlands. The Dutch subsidiary stabilized its customer base at 2.3 million. Revenue rose to EUR 1.1 billion,
EUR 18 million up on the prior year. In December, T-Mobile Netherlands was the first mobile operator in the Netherlands to be granted a quality certificate for customer service by ITO (Stichting Instituut voor Telecom Organisatie).

 

T-Mobile Austria. With the complete acquisition of tele.ring Telekom Service GmbH by T-Mobile Austria at the end of 2005, Deutsche Telekom consolidated its position in the highly competitive Austrian market. The takeover is still subject to approval by the EU Commission. Together, T-Mobile Austria and tele.ring serve more than 3 million customers. This equates to a market share of around 38 percent. In addition to strengthening its position in the market and boosting its revenue, Deutsche Telekom also expects to improve its EBITDA margin. In a toughly contested market, T-Mobile Austria managed to raise its revenue modestly in 2005 from EUR 882 million to EUR 885 million.

 

T-Mobile Czech Republic. The Czech subsidiary expanded its customer base by 6 percent to 4.6 million in 2005. Revenue rose by
13 percent to EUR 938 million. Since the Czech Republic still trails behind in fixed-network broadband, T-Mobile Czech Republic pushed ahead with the roll-out of the UMTS and EDGE networks in the year under review. In October, the company launched the Czech Republic’s first UMTS service in Prague. A key feature is its use of the TDD (Time Division Duplex) modulation technique, which caters for bandwidths of up to almost one megabit per second. Today, 50 percent of the population can be reached using the EDGE transmission technology.

 

T-Mobile Hungary. The Hungarian subsidiary also intensified its activities to expand the broadband network in 2005; by the end of the year, over 15 percent of the population were covered by UMTS. EDGE transmission technology is now available to 60 percent of the country’s inhabitants. During the last financial year, T-Mobile Hungary grew its customer base by 160,000 to 4.2 million. Revenue rose by 4 percent to EUR 1.1 billion.

 

T-Mobile Croatia. In the 2005 financial year, the Croatian company recorded 370,000 net additions, bringing its customer base to
1.9 million. With revenue up EUR 76 million on the previous year, the company achieved a considerable 17 percent increase to
EUR 512 million.

 

39



 

T-Mobile Slovensko. In spring 2005, the former EuroTel became the ninth member of T-Mobile’s brand family. Only a few months later, a survey of managers of the Rhodos association on Slovakia’s most effective brand image put T-Mobile Slovensko in top position in the telecommunications category. The change in Slovakia is the final step in the rebranding campaign for T-Mobile’s majority shareholdings. T-Mobile Slovensko was the first operator in Europe to implement a commercial broadband service based on the FLASH-OFDM (Orthogonal Frequency Division Multiplex) network technology from Flarion Technologies. This technology enables mobile data transmission with a bandwidth of up to one megabit per second. It is available in certain areas of the capital Bratislava as well as in 19 other cities in Slovakia. In 2005, T-Mobile Slovensko succeeded in passing the 2 million customer mark for the first time, upping its total revenue from EUR 332 million to 378 million.

 

Outlook: Consistent further development of its service culture. T-Mobile’s goal is to maintain its successful course in Europe and the United States. T-Mobile USA continues to be the company’s growth engine, driving expansion of network capacities and acquiring additional mobile licenses to safeguard growth in the medium term. In Europe, T-Mobile expects to improve its market share in terms of revenue despite massive price pressure – and to do so largely through increased customer usage.

 

Again in 2006, T-Mobile will make every effort to expand data services such as web’n’walk and thereby to exploit the growth opportunities offered by the mobile Internet. To mark the 2006 FIFA World Cup™, T-Mobile will offer its customers a broad array of multimedia information and entertainment services, including live transmissions of matches to the mobile phone. The company plans to use this key sports event to direct even more attention to the opportunities offered by mobile data communications. New offers such as T-Mobile@home will be an added incentive for customers to intensify use of theirmobile phone.

 

40



 

Business Customers. Strong positioning in highly competitive markets.

 

EBIT up while revenues remain almost unchanged // Multinational customers: Higher revenues in spite of fierce competition // Large and medium-sized customers: Expansion of the information technology business // Focus on Growth: Clear objectives in the business customer market // Future-oriented customer projects at multinational corporations and medium-sized companies

 

Increased competition in a global economy is forcing companies to speed up their response to changes: Individual locations are becoming hubs for international production networks. Uniform business processes are laying the foundations for new business models and faster production cycles. Public-sector organizations want and need to provide better service to citizens and companies alike. Neither the state nor the private sector can afford to do without information and communications technology (ICT) to achieve their goals any longer. As a result, business customers are working more closely with experts.

 

To provide its services, T-Systems taps the potential generated by combining telecommunications with information technology (IT): Deutsche Telekom’s Business Customers segment links customers’ production centers throughout Germany and worldwide – using fixed-network and mobile communications solutions as required. T-Systems bundles computer capacity for its customers in its large data centers worldwide. Starting with ICT infrastructure packages, T-Systems also develops, installs, and runs industry solutions for business customers, in some cases taking charge of end-to-end business processes such as securities settlement, payroll accounting, and billing of telecommunications services.

 

Successful brand positioning for Deutsche Telekom’s business customers. T-Systems has been responsible for all of Deutsche Telekom’s business customers since January 2005. These companies have varying requirements as regards ICT services, depending on their size. The larger the customer, the more complex its needs and the more individual the solutions. Medium-sized companies, on the other hand, tend to have a greater need for standard products. This is why there are separate portfolios of solutions for the two customer segments and specific approaches to acquiring and caring for customers.

 

Correspondingly, T-Systems is divided into two business units: Enterprise Services provides services to approximately 60 multinational corporations and large public-sector organizations, while Business Services supports 160,000 or so large and medium-sized business customers.

 

Business Customers: Development of operations

 

 

 

2005

 

2004

 

Change

 

 

 

 

 

millions

 

millions

 

millions

 

Change

 

 

 

of €

 

of €

 

of €

 

%

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

12,850

 

12,962

 

(112

)

(0.9

)

EBIT (profit from operations)

 

409

 

554

 

(145

)

(26.2

)

Adjusted EBIT

 

699

 

675

 

24

 

3.6

 

Adjusted EBIT margin (%)

 

5.4

 

5.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA(a)

 

1,305

 

1,509

 

(204

)

(13.5

)

Special factors affecting EBITDA(a)

 

(281

)

(121

)

(160

)

n.a.

 

Adjusted EBITDA(a)

 

1,586

 

1,630

 

(44

)

(2.7

)

Adjusted EBITDA margin(a) (%)

 

12.3

 

12.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash capex(b)

 

(775

)

(757

)

(18

)

(2.4

)

 

 

 

 

 

 

 

 

 

 

Number of employees(c)

 

51,744

 

51,978

 

(234

)

(0.5

)

 


(a)          Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to the “Development of business” section in the Group management report.

(b)         Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement.

(c)          Average number of employees.

 

T-Systems is practically the only provider in the market that offers business customers a complete range of ICT solutions and services. The company not only sets up and manages complex ICT infrastructures and process-related applications; if required, it also takes charge of customers’ business processes from start to finish in the form of outsourcing projects – billing and payroll accounting being two examples.

 

On the basis of its extensive solutions and industry expertise, T-Systems successfully established the Business Customers segment of the Deutsche Telekom Group in 2005. The company employed around 52,000 staff at the end of the year. T-Systems has operations all around the world. Apart from Germany, its activities are focused on the Western European countries France, Spain, Italy, the United Kingdom, Austria, Switzerland, Belgium, and the Netherlands.

 

41



 

Business Customers: Key performance indicators

 

millions

 

2005

 

2004

 

Change

 

 

 

 

 

 

 

 

 

New orders

 

13,618

 

13,265

 

353

 

Enterprise Services

 

 

 

 

 

 

 

Systems Integration

 

 

 

 

 

 

 

Hours billed (millions)

 

11.5

 

11.7

 

(0.2

)

Utilization rate (%)(a)

 

79.1

 

77.8

 

1.3

 

Computing & Desktop Services

 

 

 

 

 

 

 

Processor performance (MIPS)(b)

 

123,386

 

130,786

 

(7,400

)

Number of servers managed and serviced

 

38,392

 

35,418

 

2 974

 

Number of workstations managed and serviced

 

1,345,635

 

1,219,589

 

126,046

 

Proportion of support activities, Germany (%)

 

64.3

 

60.6

 

3.7

 

Proportion of retail, Germany (%)

 

35.7

 

39.4

 

(3.7

)

Business Services (millions of €)

 

 

 

 

 

 

 

Voice revenue

 

1,848

 

1,933

 

(85

)

Data revenue (legacy/IP)

 

2,346

 

2,593

 

(247

)

IT revenue

 

405

 

314

 

91

 

 


(a)          Ratio of average number of hours billed to maximum possible hours billed per period.

(b)         Million instructions per second.

 

T-Systems Enterprise Services – expansion of key account business. In 2005 T-Systems further expanded its business with the approximately 60 multinational corporations and large public-sector institutions. By providing solutions and services for T-Systems’ key accounts, the Enterprise Services business unit generated revenues of EUR 8.4 billion, a year-on-year increase of 1.5 percent. This increase was achieved in a fiercely contested market also characterized by falling prices, especially for telecommunications services.

 

T-Systems Business Services – growth in information technology business with medium-sized customers. The decrease in Business Services revenues is partly due to the continued decline in prices for telecommunications services. By contrast, the information technology business grew by 29 percent to EUR 405 million.

 

Encouraging development of EBIT while revenues almost unchanged. At EUR 12.9 billion, T-Systems’ total revenue in 2005 was very close to the prior-year level. Data center services and computer workstation support made a substantial contribution to the positive development of revenues in the Enterprise Services business unit. Business Services boosted its revenues with hosting solutions for large and medium-sized customers. This enabled the unit to partly offset the decline in its network services business resulting from continued price and competitive pressure. In 2005 T-Systems posted adjusted EBITDA of approximately EUR
1.6 billion, a decrease of 2.7 percent compared with 2004. Adjusted EBITDA at Enterprise Services increased by 5.2 percent. Adjusted EBITDA from the Business Services unit, on the other hand, decreased by 30 percent. This is attributable in particular to strategic pricing measures aimed at acquiring telecommunications customers. T-Systems’ EBITDA amounted to EUR 1.3 billion in 2005, down 13.5 percent year-on-year. In contrast,profit before income taxes grew by 85 percent in the reporting year, mainly as a result of improved financial income.

 

Launch of Focus on Growth program for profitable growth. The Focus on Growth program is beginning to bear fruit, the first results being an expansion of the business with corporations and large public-sector organizations as well as booming IT business with large and medium-sized customers. T-Systems launched this strategic three year program in 2005 under the umbrella of Deutsche Telekom’s Excellence Program. The goal of the project is to further optimize customer care, thereby tapping new potential for growth.

 

Multinational corporations and large public-sector organizations are already working closely with T-Systems in the IT area and ordering anincreasing number of telecommunications services. These customers are assigned fixed sales and service teams that are specialized in specific sectors: Finance, Manufacturing, Public, Telecommunications, Media & Utilities, and Services.

 

As part of the Focus on Growth program, T-Systems is driving forward the marketing of ICT outsourcing in this customer segment. Thule, one of the world’s leading manufacturers of load carriers for cars, decided in 2005 to outsource its worldwide information and communications services to T-Systems. The outsourcing agreement will support Thule’s expansion strategy in the global market. One of the ways the Swedish company intends to achieve its goal of becoming the world leader in its sector is by using the sophisticated ICT solutions that T-Systems provides to its clients.

 

42



 

In December 2005, the logistics giant DHL’s German operation commissioned T-Systems to operate and modernize its entire information and network technology. This contract involves the servicing of around 8,000 workstations, almost 500 servers, as well as some 50 central applications at DHL. T-Systems is optimizing DHL’s information technology, thereby substantially reducing costs for its customer. In addition to this, T-Systems operates all local and international networks as a service provider for DHL. The 300 or so DHL locations within Germany are integrated into a single state-of-the-art data network.

 

Strategic Focus on Growth program bears fruit. The DHL contract is one example of the so-called “big deals” that T-Systems is pursuing in the ICT market. Apart from the high volume involved, contracts of this size signify a long-term partnership between the customer and T-Systems. In 2005, tour operator Thomas Cook UK & Ireland signed a five-year contract with T-Systems for the provision of communications services. T-Systems will modernize and operate its customer’s telecommunications systems in the United Kingdom and Ireland. Last year, T-Systems was once again awarded the contract to provide information and communications technology services to the government of Catalonia in Spain. This contract expires in 2009.

 

In October 2005, the IT service providers of the Sparkassen-Finanzgruppe (group of savings banks, Landesbanken, and associated companies) extended their contract with T-Systems for the operation of the data networks for the around 460 savings banks in Germany. This group is the largest provider of financial services in the Federal Republic of Germany. The contract has a term of three years and is worth hundreds of millions of euros.

 

The aircraft manufacturer Airbus commissioned T-Systems in 2005 to implement an electronic filing system developed by the DeutscheTelekom subsidiary worldwide within three years. This solution enables storage of documents that are required to be archived in a digital form, acceptable for auditing purposes. More than 15,000 users worldwide will be connected to the electronic archive. The Airbus contract is one more service in the whole range that T-Systems provides to the leading aircraft manufacturer.
T-Systems services over 42,000 computer workstations at Airbus and operates the company’s international computing center.

 

The main emphasis of Focus on Growth for business with large and medium-sized customers is on maintaining and gradually increasing T-Systems’ share of the telecommunications services market. Since August 2005, for example, T-Systems has provided a solution (Octopus EP) that connects the fixed network with conventional mobile communications. Customers in the small and medium-sized enterprise (SME) segment are already using this product for their external sales forces. The WAZ Media Group, one of Germany’s largest publishing houses, engaged T-Systems in 2005 to operate its telephone, mobile, and data network for 140 locations. The data network integrates WAZ’s administrative sites and editorial offices. The value of this four-year contract for ICT services is in the double-digit millions of euros.

 

SME customers are contracting T-Systems to expand their traditional telecommunications business to include IT services. Accordingly, the company offers smaller companies in particular the opportunity to rent IT services online. In 2005, the proportion of revenues in the Business Services unit generated with IT amounted to almost 9 percent, compared with approximately 75 percent at
T-Systems Enterprise Services. The objective of Focus on Growth is to continue to increase T-Systems’ revenues from the IT services it provides to large and medium-sized companies.

 

Offerings for business customers optimized. One of the main aims of the Focus on Growth program is to optimize T-Systems’ portfolio of products and services. In 2005, for example, T-Systems investedin expanding its capacity for business process outsourcing so that it could take over and run business processes for its customers from start to finish. In May 2005, the company took over operation of the IT service provider ALLDATA from the insurance group ARAG. This enabled T-Systems to expand its strategic business area with services for the finance and insurance sectors. In 2004, T-Systems had already acquired the Austrian software vendor SDS, which offers standard software for securities trading, and in November 2004 it integrated this software company into a joint venture with the financial services and consulting company Trinkaus & Burkhardt.

 

METRO Group, the world’s third-largest trading group, relies on a T-Systems solution for backtracking foods as prescribed by European law. In June 2005 METRO and T-Systems signed an agreement on a central system for backtracking eggs. This system creates a transparent supply chain for the food industry throughout all stages of the value chain.

 

43



 

T-Systems is driving forward its business with IP (Internet protocol) solutions for large and medium-sized customers. In March 2005 the service provider started the migration of the REWE group’s data network to IP technology. The broadband network connects 5,000 outlets of the travel agencies, specialized chain stores, and hypermarkets of the REWE trading group with the central data center in Cologne.

 

Improved efficiency. With its Focus on Growth program, T-Systems is continuously working on improving the efficiency of its processes and systems. Capacity utilization in the Systems Integration unit rose by 1.3 percentage points in 2005. At the same time, production costs at T-Systems’ data centers, represented in the cost per MIPS (million instructions per second), decreased by
5.7 percent. The number of IT workstations managed by the Computing & Desktop Services area rose by 10.3 percent.

 

Outlook: Growth program being systematically driven forward. Focus on Growth will enable T-Systems to create the prerequisites for becoming the leader in the ICT market and leveraging the growth potential in a particularly effective way. The company is systematically driving forward this strategic program in 2006. Through business process outsourcing, for example, it hopes to grow by up to 20 percent. It also aims to significantly boost its revenues from the IT solutions it provides to medium-sized and large business customers. In this market segment, T-Systems has set itself a revenue target of up to EUR 700 million for 2006.

 

With Focus on Growth, T-Systems also plans to further optimize its operating processes as well as its IT and telecommunications platforms. By improving its efficiency, the company hopes to save as much as EUR 600 million by 2007.

 

As part of a Group-wide workforce reduction program at Deutsche Telekom, T-Systems is planning to cut around 5,500 jobs in Germany over the next three years. This will eliminate surplus capacity and lower production costs, ensuring that T-Systems remains efficient and internationally competitive.

 

There will nevertheless be new appointments and investment in new business to develop and expand T-Systems’ industry and consulting expertise. The purchase of the international IT service provider gedas, for instance, (subject to approval by the anti-trust authorities) underscores T-Systems’ customer- and market-oriented internationalization strategy. The planned takeover of the Volkswagen (VW) subsidiary in 2006 will reinforce T-Systems’ market position as a provider of services to the automotive industry at strategic international locations. The IT company gedas enjoys a strong position in Spain,France, and the United Kingdom, for example. It is also present in important locations of the automotive industry in Latin America and China. Acquiring gedas will enable T-Systems to enhance its solutions and services for customers in this sector. The acquisition will also involvethe signing of a framework agreement by T-Systems and gedas with auto manufacturer VW for the provision of IT services valued at EUR 2.5 billion over a seven-year period. This focused approach will be the driving force behind growth in Deutsche Telekom’s Business Customers segment in 2006.

 

One year into the satellite-based toll collection project, T-Systems as a “key supplier” considers it a success. The ICT provider successfully operated Toll Collect GmbH’s entire ICT infrastructure. Toll collection was not suspended for a single day. The toll system has therefore passed the test with flying colors.

 

T-Systems has established a new subsidiary, Satellic Traffic Management GmbH (Satellic). The company handles all activities related to the set-up and operation of satellite-based (GPS, Galileo) electronic toll systems. As a worldwide technology leader and toll systems service provider, Satellic will drive the technological development and international roll-out of the toll model successfully implemented in Germany.

 

Another project of strategic importance for T-Systems is the 2006 FIFA World Cup™. The Deutsche Telekom subsidiary is responsible for the transmission of the World Cup television signals in cinema quality. T-Systems is installing journalists’ media workstations in all twelve World Cup stadiums. In Stuttgart and Nuremberg, traffic guidance systems developed by T-Systems will help visitors to find parking spaces. The company will use electronic access systems to manage the floods of visitors into the Dortmund and Frankfurt arenas and will also ensure security before, during, and after the matches. The city of Hamburg plans to equip the police and fire departments with TETRA (TErrestrial Trunked RAdio), a digital radio service, for the World Cup. This contract was awarded to a consortium with Motorola and Rohde & Schwarz under the management of T-Systems.

 

44



 

Group Headquarters & Shared Services.

Further increase in efficiency.

 

Newly founded PASM ensures pooling of purchasing volume in energy sector // Further streamlining and optimization of the real estate and shareholdings portfolio // Vivento continues to expand business lines // New Vivento projects successfully set up

 

Group Headquarters & Shared Services undertakes strategic and Group-wide management functions for Deutsche Telekom. A key part of this function relates to managing the Group-wide Excellence Program that brings together all the projects important to the Deutsche Telekom Group. Close cooperation between business areas along the lines of an intelligently integrated telecommunications group helps reinforce the focus on customer needs as well as leveraging potential synergies and improving efficiency. Group Headquarters & Shared Services also undertakes operational tasks that do not form part of the business areas’ core business. The Shared Services unit includes in particular Real Estate Services, DeTeFleetServices GmbH – the full-service provider of fleet management and mobility services – and Vivento. The former shared service Billing & Collection has been part of the Business Customers strategic business area since January 1, 2005.

 

PASM optimizes energy procurement. Real Estate Services brings together Deutsche Telekom’s real estate business. It is responsible for managing and servicing Deutsche Telekom AG’s real estate assets, primarily in Germany. The highly varied tasks of this unit range from administration, facilities management and leasing through to optimizing the portfolio and closing sales deals. Within the Deutsche Telekom Group, these tasks are the responsibility of Deutsche Telekom Immobilien und Services GmbH
(DeTe Immobilien), GMG Generalmietgesellschaft mbH (GMG), and Sireo Real Estate Asset Management GmbH (Sireo). In addition, DFMG Deutsche Funkturm GmbH is responsible for operating and marketing more than 24,000 locations for antenna supports such as radio towers, masts and rooftops.

 

At the beginning of 2005 the new PASM Power and Air Condition Solution Management GmbH & Co. KG (PASM), a wholly-owned subsidiary of Deutsche Telekom AG, was added to Real Estate Services. PASM is the central point of contact within Deutsche Telekom for energy-based products used to operate telecommunications systems reliably. PASM is also responsible for procuring, provisioning and delivering power, including the associated support services. Purchasing benefits and potential savings for the Group are derived in particular from pooling purchasing volume for equipment as well as procuring electricity via international platforms on the wholesale markets.

 

Group Headquarters & Shared Services: Development of operations

 

 

 

2005

 

2004

 

Change

 

 

 

 

 

millions

 

millions

 

millions

 

Change

 

 

 

of €

 

of €

 

of €

 

%

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

3,505

 

3,526

 

(21

)

(0.6

)

EBIT (loss from operations)

 

(840

)

(1,441

)

601

 

41.7

 

EBIT margin (%)

 

(24.0

)

(40.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA(a)

 

88

 

(556

)

644

 

n.a.

 

Special factors affecting EBITDA(a)

 

423

 

(8

)

431

 

n.a.

 

Adjusted EBITDA(a)

 

(335

)

(548

)

213

 

38.9

 

Adjusted EBITDA margin (%)(a)

 

(9.6

)

(15.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash capex(b)

 

(456

)

(518

)

62

 

12.0

 

 

 

 

 

 

 

 

 

 

 

Number of employees(c)

 

29,931

 

32,872

 

(2,941

)

(8.9

)

of which: at Vivento(d)

 

15,300

 

19,000

 

(3,700

)

(19.5

)

 


(a)          Deutsche Telekom defines EBITDA as profit/loss from operations excluding depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA, adjusted EBITDA, and the adjusted EBITDA margin, please refer to the “Development of business” section in the Group management report.

(b)         Investments in property, plant and equipment, and intangible assets (excluding goodwill) as shown in the cash flow statement.

(c)          Average number of employees.

(d)         Number of employees at the balance sheet date, including Vivento’s own staff and management. Figures rounded.

 

Since the first quarter of 2005, the real estate group has its first representation outside Germany: DeTeImmobilien Hungary Szolgáltató ZRt. This joint-venture company of DeTe Immobilien and a local partner provides facility management services for Magyar Telekom and also offers these services to other companies in the Hungarian market. As a result of consistently safeguarding existing business and acquiring new contracts, the company has posted some extremely positive results in 2005.

 

45



 

 


(a)          Group Headquarters primarily includes subsidiaries such as: Deutsche Telekom International Finance B.V., Deutsche Telekom Holding B.V., T-Venture Holding GmbH.

(b)         Real Estate Services = Deutsche Telekom Immobilien und Service GmbH, DFMG Deutsche Funkturm GmbH, GMG Generalmietgesellschaft mbH, Sireo Real Estate Asset Management GmbH, PASM Power and Air Condition Solution Management GmbH & Co. KG, and DeTe Immobilien Hungary Szolgáltató ZRt.

(c)          Including Vivento Customer Services GmbH (VCS) and Vivento Technical Services GmbH (VTS).

(d)         Primarily: DeTeAssekuranz – Deutsche Telekom Assekuranzvermittlungsgesellschaft mbH, Deutsche Telekom Training GmbH, Fachhochschule Leipzig, Human Resources Management, Accounting & Controlling.

(e)          The former shared service unit Billing & Collection has been integrated into the Business Customers strategic business area since the beginning of 2005.

 

Streamlining the real estate portfolio gathers momentum. Streamlining the real estate portfolio remained a key issue for the business segment in 2005. Sireo, responsible for managing the Company’s building assets, focused on selling off real estate that is no longer needed for business operations and cutting back on rented floor space. A total of 370 sales deals were closed during the financial year, involving some 370,000 square meters (almost 4 million square feet) of rental space and around 1.6 million square meters (17.2 million square feet) of land. Cash inflows from the disposal of real estate totaled approximately EUR 0.2 billion in 2005, with part of this amount arising from contracts concluded in previous years. In a bid to cut costs, 2006 will also see a great deal of work being done on specifically optimizing the real estate portfolio, in addition to continued streamlining. On January 1, 2006, Deutsche Telekom AG reduced its stake in Sireo from 51 percent to 25.1 percent subject to approval from the antitrust authorities. The previous minority shareholder Corpus Immobiliengruppe (Cologne) increased its stake from 24.5 percent to 50.4 percent. Under the responsibility of the new CREM (CorporateReal Estate Management) unit, Sireo will continue to manage the real estate portfolio as a Deutsche Telekom AG service provider.

 

DeTeFleetServices promotes environmental compatibility and efficiency of the Deutsche Telekom fleet. DeTeFleetServices GmbH (DeTeFleetServices) is one of the largest fleet operators in Germany with around 42,000 vehicles. Cost-effectiveness and environmental compatibility are equally important to the Deutsche Telekom mobility service provider in order to promote sustainable development. In 2005 DeTeFleetServices pushed forward with the gradual conversion of its entire fleet to diesel vehicles fitted with particulate filters. With over 400 natural gas vehicles, Deutsche Telekom already has the largest natural gas-powered company vehicle fleet in Germany at present. The Federal Ministry for the Environment singled out the company’s commitment to environmentally friendly transport systems, and operations that save resources by awarding the company the partner logo as part of its “Last Mile” project. This commitment is also reflected in a DeTeFleetServices pilot project aimed at trialing the use of fuel cells. The medium-term aim is to increase the proportion of vehicles using alternative drive technologies to up to 10 percent of the entire fleet.

 

Vivento consistently adds more jobs. Vivento can again look back on a successful financial year. Thanks to the successful interplay of the strategic functions – driving external workforce reduction, filling internal positions with Vivento employees, migrating staff to the Vivento business lines, and encouraging internal projects – approximately 6,100 employees left Vivento during 2005. Vivento’s main goal is to reduce the Group’s workforce in the long term and to provide civil servants and salaried employees with new, lasting prospects both inside and outside the Group. Approximately 18,900 employees have found jobs outside Vivento since its formation. In the 2005 financial year, Vivento took over a total of approximately 2,400 employees from the Deutsche Telekom Group. This increased the number of transferred staff to some 34,200 since Vivento was established. Vivento had a workforce of around 15,300 at December 31, 2005, including 700 own employees/members of management, some 7,200 staff working in one of the Vivento business lines – i.e., at Vivento Technical Services GmbH (VTS) or in the call center business of Vivento Customer Services GmbH (VCS) and at the former Customer Branch Office for Special Tasks - and around 7,300 transferees. Approximately 4,700 of these transferees were engaged on a contract or temporary basis. The employment rate remained high throughout 2005. Of the around 14,500 employees (excluding Vivento’s own staff and management) at the end of the year, some 83 percent were in employment or training.

 

46



 

Vivento business lines post positive results. In the 2005 financial year, Vivento created new job opportunities on the back of further expansion of the business lines and implementation of projects. VCS, represented at 18 locations in Germany in 2005, has managed to position itself successfully in the marketplace with call center services and increased its headcount to some 2,800 by the end of 2005. In addition, there were some 400 staff on a contract or temporary basis. VTS also managed to further expand its operating activities. As a technical service provider for fixed and mobile networks, VTS serves both the internal and external market. Since its launch in 2004, VTS expanded its headcount to some 1,800 by the end of 2005. As at December 31, 2005, around 500 contract or temporary staff were also employed at VTS.

 

New employment projects successfully set up. In addition to expanding the business lines, Vivento pushed forward with implementing a range of in-house projects in 2005. These include the Security project that saw Vivento staff taking over reception and security services at Deutsche Telekom locations throughout Germany. Since March 2005 the project has been assigned to Group Security in organizational terms; some 530 jobs had been filled by Vivento staff by the end of 2005. The plan for 2006 is to introduce in-house staff at all Deutsche Telekom facilities, with the Company’s own staff in reception and security positions.

 

The new Telekom Direkt project had a positive impact on employment levels during 2005. Under the motto “Deutsche Telekom comes to the customer,” Vivento set up a service-oriented direct sales channel: Telekom Direkt (Deutsche Telekom Direkt Sales and Consulting) supports T-Com, T-Online and T-Mobile with the value-based development of customer relationships. The Telekom Direkt teams comprising Vivento staff advise customers at home or at work about top products in the business areas as well as special offers. At the end of 2005 Telekom Direkt already employed some 160 staff.

 

Following the Business Finder competition in 2004, Vivento launched two new employment projects in 2005: Digital Services from Vivento and Vertixx. Digital Services from Vivento offers services for corporate and business customers, including automated invoicing, digitization of incoming mail, and digitization and filing of records and invoices. Vertixx provides the full range of services relating to online sales for companies with used goods, stock, or residual items that have been written off. Now that they have started operations, both projects offer good employment prospects for Vivento transferees.

 

In 2006 Vivento intends to push forward with creating new job opportunities outside and inside the Group. This includes in particular further expansion of the business lines and development of new projects. Cooperation activities with government agencies and other public employers represent another key area; close cooperation already exists with the Federal Employment Agency (restructured benefits for the long-term unemployed). This cooperation has seen Vivento develop new employment prospects for civil servants in particular. As part of the staff restructuring measures within the Group some 7,000 employees will leave Vivento over the next three years as a result of spinning off the business lines.

 

Disposal of Intelsat helps reduce debt. To support the Group’s efficiency campaign, Group Headquarters & Shared Services continued to dispose of non-strategic minority investments in 2005. Deutsche Telekom generated cash inflows of approximately EUR 0.1 billion by disposing of its share in the satellite operator Intelsat.

 

Trust capital of the Deutsche Telekom Foundation increased. Deutsche Telekom AG is playing its part in promoting education, research and technology in the fields of mathematics, natural sciences and technology with the Deutsche Telekom Foundation, set up at the start of 2004. Since the Group believes these topics will become more important in future for Germany, Deutsche Telekom AG has increased the capital of the non-profitmaking Deutsche Telekom Foundation from EUR 50 million to EUR 100 million. This makes the foundation one of the largest corporate foundations in Germany. Thanks to this financial backing, the foundation is in an even better position than ever to sustainably implement the projects it comes up with from within its own ranks. In 2005 the key areas Early Promotion, High School, University and Innovation were identified as the focus for Deutsche Telekom Foundation activities. Within these futureoriented key areas, the Foundation promotes projects and cooperation with day nurseries, elementary and high schools, universities, technical colleges and many other institutions from the world of education, science and research.

 

47



 

Total revenue fell slightly year-on-year. The total revenue of Group Headquarters & Shared Services decreased slightly year-on-year in 2005. This is attributable to the decline in revenue generated in Real Estate Services – mainly because of the lower volumes of orders being placed by customers as a result of the conversion to new market-based lease models with the strategic business areas. By contrast, the successful results from DeTeFleetServices and Vivento call center and VTS business lines had a positive impact on total revenue.

 

Vivento contributes to improved EBITDA. Adjusted EBITDA improved significantly compared with the previous year. This is mainly due to Vivento’s smaller workforce as compared to 2004. Higher income from contract or temporary work arrangements at Vivento also had a positive impact. In addition, the costs of trainees and social security expenses for civil servants are allocated based on actual cost generation and therefore no longer impact costs at Group Headquarters. These costs had been reported under Headquarters’ costs until the end of the previous year. The positive effects contrast, however, with a slight increase in expenditure for Headquarters’ marketing and IT projects. Real Estate Services also posted a decrease in EBITDA compared with the previous year. This is attributable to a decrease in revenue.

 

Restructured funding of PBeaKK has a positive effect on earnings. Unadjusted EBITDA improved significantly year-on-year due to the positive impact of special factors. The special factors affecting EBITDA totaled approximately EUR 423 million in 2005. These were essentially affected by the reversal of provisions as a result of reducing our future liabilities relating to the annual deficit compensation for the Civil Service Health Insurance Fund (Postbeamtenkrankenkasse – PBeaKK). The basis for this is the German Federal Posts and Telecommunications Agency Reorganization Act (Gesetz zur Reorganisation der Bundesanstalt für Post und Telekommunikation Deutsche Bundespost) which came into effect on December 1, 2005 and which, among other things, lays down a new governance and financing structure for the PBeaKK. The ensuing positive EBITDA effect totaled approximately EUR 0.8 billion. Other special factors that boosted earnings included income from insurance refunds and the transfer payments to Vivento. Countering these effects, the expenditure for voluntaryredundancy payments made and voluntary redundancy provisions for the staff restructuring measures planned within the Group, as well as expenditure for other personnel-related measures totaling approximately EUR 0.3 billion impacted on EBITDA. The expenditure for increasing the foundation capital of the Deutsche Telekom Foundation totaling EUR 50 million is also included. Special factors totaled EUR –8 million in 2004, made up essentially of voluntary redundancy payments and transfer payments.

 

EBIT increased by EUR 601 million year-on-year. This is attributable to an improvement in EBITDA that contrasts with a slight increase in depreciation, amortization and impairment losses.

 

The average number of employees during the reporting period was 29,931. This further decline from the prior-year figure is primarily attributable to the successful business activities of Vivento and the associated workforce reductions.

 

48



 

54           The T-Share

 



 

 



 

 



 

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communicate via fixed and mobile networks, with a single

 

 



 

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The T-Share. Setbacks during a difficult trading year.

 

Major European telecommunications providers experience markdowns // Strong performance of the DAX and international indexes // Proposed dividend of EUR 0.72 per share up on previous year

 

T-Share information

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Xetra closing prices (€)

 

 

 

 

 

Share price at Dec. 31

 

14.08

 

16.65

 

Year high

 

16.84

 

16.78

 

Year low

 

13.80

 

13.14

 

 

 

 

 

 

 

Trading volume (number of shares)

 

 

 

 

 

German exchanges (billions)

 

6.0

 

5.3

 

New York Stock Exchange (ADRs) (millions)

 

154

 

149

 

Tokyo Stock Exchange (millions)

 

1.9

 

1.1

 

 

 

 

 

 

 

Market capitalization at Dec. 31 (billions of €)

 

59.1

 

69.9

 

 

 

 

 

 

 

Weighting of the T-Share in major stock indexes at Dec. 31

 

 

 

 

 

DAX 30 (%)

 

6.4

 

9.2

 

Dow Jones Euro STOXX 50© (%)

 

2.0

 

2.7

 

 

 

 

 

 

 

T-Share – key figures

 

 

 

 

 

Earnings per share (basic and diluted) (€)

 

1.31

 

0.39

 

Proposed dividend (€)

 

0.72

 

0.62

 

Number of shares issued (millions)

 

4,198.08

 

4,197.85

 

 

Capital markets environment. Throughout 2005, international stock indexes were in a bullish mood, which was particularly pronounced in the European markets. The weaker euro, combined with a rising number of mergers and acquisitions, had a positive impact on market performance. Accordingly, the DAX showed strong momentum during the course of the year, breaking the       5,000-point level on September 9 for the first time in 2005. From November onwards, the German blue-chip index remained above this level. The DAX hit its annual high on December 29, reaching 5,459 index points, to close the year 2005 at a level of 5,408 – an annual performance of 26.9 percent.

 

Development of international indexes. With an increase of 20.5 percent, the performance of the Dow Jones Euro STOXX 50© was also positive in 2005. Reflecting the emerging recovery in domestic demand, the Japanese stock market outperformed most of its peers: The Nikkei 225 index was up 39.9 percent year-on-year, while the Dow Jones Industrial Average remained virtually unchanged, down 0.1 percent. The U.S. index was burdened by the U.S. Federal Reserve’s interest rate hikes, as well as by high oil prices, which were partly due to the hurricanes in August 2005.

 

T-Share performance. The T-Share closed the year at EUR 14.08, down 15.7 percent from the beginning of 2005. Looking at the Dow Jones Europe STOXX Telecommunications© index clearly shows, however, that the entire telecoms sector suffered a weaker year overall, both compared to previous years and to most other sectors. The major European telecom providers with a high         fixed-network share in particular experienced significant markdowns, as the entire sector faced increasingly fierce competition in the operating business, with a massive erosion in prices. Moreover, investor uncertainty triggered by unexpected takeovers in the telecommunications sector burdened market sentiment, with the Dow Jones Europe STOXX Telecommunications © index suffering a decline. The Telecom index lost 2.5 percent during 2005. The T-Share hit its high of EUR 16.84 in January and still recorded prices above EUR 16.00 in July/August. Although the capital market responded positively to the planned staff restructuring and the strong third-quarter results published in November, the T-Share could not maintain these levels and lost ground during the fourth quarter, hitting a low for the year of EUR 13.80 on December 20.

 

54



 

T-Share as compared to DAX, DJ Euro STOXX 50© and DJ Europe STOXX Telecommunications©

 

 

T-Share as compared to other telecommunications companies

 

 

Dividend. The Board of Management and Supervisory Board of Deutsche Telekom AG resolved to propose to this year’s shareholders’ meeting, to be held on May 3, 2006, the distribution of a dividend of EUR 0.72 per share for the 2005 financial year. Total dividends paid will thus rise from EUR 2.6 billion to EUR 3.0 billion.

 

55



 

Shareholder structure

 

at December 31, 2005

 


* Total free float based on precise figures (December 2005).

 

Geographical distribution of free float*

 

at December 31, 2005

 


* Total free float based on precise figures (December 2005).

 

Shareholder structure. The shareholder structure of Deutsche Telekom changed during the 2005 financial year: On July 18, 2005, KfW Bankengruppe (the former Kreditanstalt für Wiederaufbau) acquired shares of Deutsche Telekom held by the Federal Republic within the scope of a further holding arrangement. As a result of the transaction, covering 7.3 percent of Deutsche Telekom’s share capital (approximately 307.8 million shares), KfW Bankengruppe’s stake in Deutsche Telekom increased to 22.1 percent. Accordingly, the Federal Republic’s shareholding was reduced to 15.4 percent. Free float increased slightly to 62.5 percent at the end of 2005 as a number of shareholders exercised their option rights.

 

Investor relations. Deutsche Telekom continued and further intensified the comprehensive communication with its target groups, comprising institutional investors, retail investors and financial analysts. In the course of seven roadshows comprising some 260 individual and group sessions throughout Europe, Asia and North America, Deutsche Telekom’s senior management personally presented the Group’s realignment toward three strategic business areas, as well as the Group’s financial situation and its quarterly and annual results. To explain the changeover of the Group’s accounting system from German GAAP to IFRS, Deutsche Telekom conducted a special roadshow targeted at analysts and investors. These roadshows were held in Frankfurt, London and New York. Further activities to actively maintain an intensive dialog with the capital markets included the CeBIT Investors’ Day in Hanover; analysts’ conferences at Deutsche Telekom’s headquarters; and the participation in a total of 15 international investor conferences in 2005.

 

Online services for shareholders have been further improved: Upon request, Deutsche Telekom shareholders already had the option of receiving notifications regarding the shareholders’ meeting by e-mail during the reporting year. In addition, shareholders can now use the online dialog to set up their own personal profiles. As before, they may order tickets for admission to the shareholders’ meeting, using their personal access password; in addition, shareholders not attending in person can now appoint a proxy or issue instructions while the annual meeting is in progress, up until shortly before votes are cast. Deutsche Telekom leverages the Internet dialog to continuously expand electronic communications with its shareholders. The “direkt” newsletter for retail investors, reporting on the Group’s financial statements and most recent quarterly results, is available for download from the IR website (German-language section only, at: “Service Privatanleger”). It also covers major developments and Group strategy, and contains special offers for subscribers to the T-Share Forum (Forum T-Aktie – FTA). The free newsletter, which is published on a quarterly basis, is sent out in a printed version upon request.

 

Many shareholders and other persons interested in the T-Share took advantage of the broad range of opportunities to enter into dialog with Company representatives through the various communication channels offered by the T-Share Forum (FTA). The FTA call center team, which handled around 64,000 requests in 2005, is available weekdays from 8 a.m. to 6 p.m., via toll-free number 0800 3302100 (fax 0800 3301100) or by e-mail on Forum-TAktie@telekom.de, to answer any questions from retail investors relating to Deutsche Telekom.

 

56



 

 

 

Group management report

 

 

 

62

 

Deutsche Telekom Group management report

65

 

Group organization

68

 

Group strategy and Group management

70

 

The economic environment

73

 

Development of business in 2005

83

 

Research and development

85

 

Employees

89

 

Sustainability and environmental protection

90

 

Risk and opportunity management

96

 

Highlights after December 31, 2005

97

 

Outlook

 



 

 



 

 



 

 

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Deutsche Telekom Group management report.

 

Net revenue rose by 3.9 percent to EUR 59.6 billion year-on-year, in the fourth quarter of 2005 by as much as 5.4 percent to EUR 15.5 billion // Group EBITDA adjusted for special factors increased by 5.7 percent to EUR 20.7 billion; in the fourth quarter of 2005, by as much as 10.4 percent to EUR 5.2 billion. Unadjusted EBITDA rose by 3.7 percent to EUR 20.1 billion // Profit after income taxes increased from EUR 2.0 billion to EUR 6.0 billion; adjusted for special factors, this item rose from EUR 4.1 billion to EUR 5.1 billion // Free cash flow before dividend payments and the acquisition of network infrastructure and licenses in the United States decreased from EUR 10.3 billion to EUR 7.8 billion // Substantial improvement in the Group’s financial ratios: equity ratio increased two percentage points to around 39 percent; net debt further reduced to EUR 38.6 billion // All major rating agencies raised their long-term rating to single A, with a “stable” outlook // Proposed dividend of EUR 0.72 per share highest in the history of the Company

 

Strong DSL growth continues: number of broadband lines in Germany and abroad, including DSL resale, increased by 2.4 million to 8.5 million // Number of mobile customers rose by a further 9.0 million to 86.6 million customers // Business Customers strategic business area wins additional major contracts, lifting the level of orders received by 3 percent to EUR 13.6 billion

 

The Group’s profitable growth continues.  Despite increasingly intense competition, the 2005 financial year was extremely successful for Deutsche Telekom. The Group achieved its goal of continuing to grow profitably, and concluded its strategic realignment toward the three business areas Broadband/Fixed Network, Mobile Communications, and Business Customers. This was thanks in part to the Excellence Program that was launched at the start of 2005. This is a three-year Group-wide program supplemented by business area-specific growth programs.

 

In 2005, Deutsche Telekom’s net revenue rose by EUR 2.3 billion compared with the previous year to EUR 59.6 billion. This corresponds to an increase of 3.9 percent, the main contribution to which was made by mobile communications.

 

Group EBITDA rose by approximately EUR 0.7 billion or 3.7 percent to EUR 20.1 billion in 2005; adjusted for negative special factors totaling EUR 0.6 billion, Group EBITDA actually climbed to EUR 20.7 billion. This represents an increase of EUR 1.1 billion or 5.7 percent. Apart from revenue growth, this development is primarily the result of improved cost structures.

 

Profit after income taxes increased year-on-year by EUR 4.0 billion to around EUR 6.0 billion. In addition to EBITDA, the main factors contributing to this positive development were a decrease in depreciation, amortization and impairment losses, the lower loss from financial activities and reduced income taxes. Adjusted for special factors, profit after income taxes rose by EUR 1.0 billion to EUR 5.1 billion.

 

The free cash flow before dividend payments and the acquisition of network infrastructure and licenses in the United States decreased from EUR 10.3 billion to EUR 7.8 billion on account of factors such as higher tax payments.

 

Deutsche Telekom also improved the financial ratios in the Group. At 0.8, the “gearing” indicator, the ratio of net debt to equity, is at a historical low, one of the reasons why Deutsche Telekom’s rating was increased in 2005.

 

On the basis of the very encouraging development in the 2005 financial year, the Board of Management is proposing to pay a dividend of EUR 0.72 for each share carrying dividend rights so that the Company’s shareholders can participate in its success. This is the highest dividend ever paid in the history of the Company.

 

2005 is the first financial year for which Deutsche Telekom has prepared its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). The 2005 consolidated financial statements also include the 2004 and 2003 comparative financial statements. Material effects on the financial position and results of operations as a consequence of the transition from German GAAP to IFRS are shown in the reconciliation in the notes to the consolidated financial statements under “Transition to IFRS.”

 

Strong DSL growth in the Broadband/Fixed Network strategic business area.  In the 2005 financial year, the continued development of the broadband market despite tough competition remained the main driver of business development in the Broadband/Fixed Network strategic business area, which consists of the T-Com and T-Online units. In 2005, Broadband/Fixed Network once again increased the number of broadband customers – both in terms of lines and calling plans – as a result of its successful marketing strategy.

 

62



 

The number of broadband lines in Germany and abroad increased by around 40 percent to 8.5 million.

 

At the end of 2005, T-Com had approximately 7.9 million DSL lines in operation in Germany including resale DSL lines marketed by Wholesale, i.e., DSL products sold by other providers outside the Deutsche Telekom Group. This represents an increase of 2.1 million DSL lines. All in all, competition in broadband intensified significantly, due for example to increased competition on the Internet service provider (ISP) market and the increased presence of other European telecommunications companies and local loop operators on the German broadband market. In the 2005 financial year, T-Com benefited from overall market growth in its third-party DSL resale activities and the marketing of high bit rate unbundled subscriber lines in particular. A total of 1.3 million resale lines were provided to competitors, attributable to trends such as the further migration from retail to resale customers.

 

The fixed network subsidiaries in Eastern Europe were particularly successful in marketing broadband lines. The number of DSL lines in Hungary, Croatia, and Slovakia doubled year-on-year to a total of 541,000, with both T-Hrvatski Telekom and Slovak Telecom passing the mark of 100,000 broadband lines by the end of the year.

 

Increased bandwidths are a key requirement to benefit from the positive development of the broadband market. Since July 1, 2005, for example, T-Com has been providing DSL lines with transmission rates of up to 6 Mbit/s. A further component of T-Com’s broadband strategy is WLAN (Wireless Local Area Network), a technology for wireless data transmission. By the end of the year, T-Com was operating more than 5,600 public HotSpots.

 

In the narrowband sector, T-Com recorded a further decrease in the number of lines in Germany. The number of narrowband lines in Germany and abroad fell by 3.7 percent to 41.2 million in the course of the year, with a higher percentage decline in ISDN lines than in analog lines.

 

In Germany, the number of narrowband lines decreased by 4.1 percent as against the prior period to 35.2 million. This was due to customer churn in favor of competitors, especially local loop operators, and in part to fixed-mobile substitution effects. At 9.8 million, the total number of T-ISDN lines decreased by a disproportionately high 6.1 percent as against the previous year. This trend can be attributed in part to the discontinuation of the price advantage of combining T-DSL with T-ISDN as compared with T-DSL combined with a T-Net line. The growing saturation of the market and the new integrated voice and Internet products offered by competitors also had a negative impact.

 

Key financial figures for the Deutsche Telekom Group

 

billions of €

 

2005

 

2004

 

2003

 

Net revenue

 

59.6

 

57.3

 

55.6

 

of which: international revenue

 

25.4

 

22.6

 

21.2

 

 

 

 

 

 

 

 

 

EBITDA(a)

 

20.1

 

19.4

 

18.6

 

 

 

 

 

 

 

 

 

EBITDA (adjusted for special factors)(a)

 

20.7

 

19.6

 

18.5

 

 

 

 

 

 

 

 

 

Profit after income taxes

 

6.0

 

2.0

 

2.5

 

 

 

 

 

 

 

 

 

Profit after income taxes (adjusted for special factors)(a)

 

5.1

 

4.1

 

2.9

 

 

 

 

 

 

 

 

 

Net profit

 

5.6

 

1.6

 

2.1

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

49.6

 

45.8

 

43.7

 

 

 

 

 

 

 

 

 

Net debt(b)

 

38.6

 

39.9

 

51.1

 

 

 

 

 

 

 

 

 

Free cash flow (before dividend payments)(c)

 

7.8

(d)

10.3

 

8.7

 

 

 

 

 

 

 

 

 

Employees (annual average)

 

244,026

 

247,559

 

251,263

 

 


(a)          Deutsche Telekom defines EBITDA as profit/loss from operations before depreciation, amortization and impairment losses. For a detailed explanation of the special factors affecting EBITDA and adjusted EBITDA, as well as special factors affecting profit/loss and the adjusted profit/loss after income taxes, please refer to the “Development of business in 2005” section.

(b)         The “net debt” indicator is used by senior operating decision-makers at Deutsche Telekom to manage and control debt. Although many of Deutsche Telekom’s competitors use this measure, its definition may vary from one company to another, however. For detailed information, please refer to the “Development of business in 2005” section.

(c)          Deutsche Telekom is of the opinion that the “free cash flow (before dividend payments)” is used by investors as a measure to assess the Group’s net cash from operating activities after deduction of cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment, in particular with regard to subsidiaries, associates and joint ventures, and the repayment of liabilities. “Free cash flow (before dividend payments)” should not be used to determine the financial position of the Group. There is only limited comparability between Deutsche Telekom’s definition of free cash flow and methods of calculating this measure and similarly designated measures and disclosures of other companies. For detailed information, please refer to the “Development of business in 2005” section.

(d)         Free cash flow (before dividend payments and the acquisition of network infrastructure and licenses in the United States). For detailed information, please refer to the “Development of business in 2005” section.

 

63



 

The volume of call minutes generated by end customers continued to decline. This is mainly attributable to the reduction in the number of lines operated by T-Com as a result of leased subscriber lines and to competitors rolling out their own infrastructure. In addition, call-by-call and preselection are contributing to the negative trend in call minutes. A positive effect was the launch of the “Wünsch Dir Was” (make a wish) calling plan(1) in March 2005, which allowed T-Com to further stabilize its call minutes market share(2). In comparison with the prior year, the number of calling plans sold by T-Com rose by over 14 percent to 13.8 million, enabling T-Com to achieve a penetration rate(3) of 39 percent. This increase was driven by the new XXL Fulltime and “Fixed-to-mobile” calling plans introduced in the fourth quarter of 2005.

 

The wholesale business (including resale) was characterized by price adjustments for wholesale products with Internet service providers and reductions in the prices charged to competitors for key wholesale products due to regulatory requirements. Volume-related growth was recorded in both unbundled subscriber lines (number as of December 31, 2005: 3.3 million) and DSL resale lines (number as of December 31, 2005: 1.6 million), as well as interconnection calls and lines. In its business with international network operators (International Carrier Sales & Solutions business) T-Com focused on high-margin services.

 

Since January 31, 2005 the focus in Broadband/Fixed Network has been on marketing T-Online’s DSL full-service packages. By marketing these packages – which comprise a DSL line, Internet access, and hardware components – throughout Germany, T-Online expanded its DSL rate customer base in 2005 by 41.9 percent to approximately 5.1 million. The company further expanded its DSL rate portfolio midway through the year. T-Online also increased the appeal of its DSL telephony offering in the voice over IP business by making this service independent of a PC through the WLAN and DSL telephony routers it has been offering since September 2005. By broadening its DSL telephony offering in this way, T-Online is accelerating the development of attractive services that are tailor-made for DSL lines.

 

T-Online also successfully further strengthened its foothold on the Western European broadband market with attractive packages: For example, the number of rate customers in France and Spain with a DSL rate plan increased by 77 percent. In addition, T-Online has laid the groundwork for the establishment of its own, fully IP-based network in France and Spain. This allows the company to offer customers Internet access, entertainment and broadband communication services with high bandwidth and the requisite quality. T-Online’s own networks are also providing the foundation in these two markets for the planned triple-play offerings with a TV component.

 

One prerequisite for benefiting from the positive development of the broadband market is the ongoing expansion of online content. In 2005, T-Online launched Gamesload, its third digital sales platform for entertainment content on the Internet after successful offers such as video on demand and Musicload.

 

Another important factor for the successful development of the broadband market is the merger of T-Online International AG into Deutsche Telekom AG. In the event of any delay in this merger, planned synergies cannot be leveraged. For example, it will not be possible to optimally meet the growing demand on the market for a portfolio with fully integrated products, consisting in particular of fixed-network telephony and Internet, potentially supplemented by media content (triple play). This situation, coupled with the multiple contractual relationships and contacts, makes it more difficult to attract and retain customers.

 

Mobile Communications remains the key growth driver.  In 2005, the Mobile Communications business area was the Group’s key growth driver. The T-Mobile group substantially increased both its revenue and its subscriber base.

 

T-Mobile USA was again the most successful T-Mobile company with 4.4 million net additions. This meant that, during the course of the year, the number of T-Mobile USA customers exceeded 20 million. All in all, T-Mobile USA had a customer base of 21.7 million at year-end. In 2005, T-Mobile Deutschland recorded 2.1 million net additions, increasing its customer base to a total of 29.5 million. This was driven in particular by its focused subscriber acquisition strategy: For example, one success story was the marketing of calling plans with packages of inclusive minutes (Relax calling plans). In the United Kingdom, T-Mobile UK (including Virgin Mobile) recorded around 1.4 million net additions. Customer numbers at T-Mobile Czech Republic and T-Mobile Netherlands developed satisfactorily in 2005, and in Austria they increased slightly despite intense competition. Cumulatively, the major Eastern European mobile communication companies in Hungary, Slovakia, Croatia, and Macedonia recorded appreciable growth of 0.8 million to a total of 9.0 million mobile customers. The Montenegrin subsidiary MONET, which was consolidated for the first time in the 2005 financial year, reported around 0.2 million mobile customers by the end of the year.

 

Furthermore, T-Mobile Austria entered into an agreement in the fourth quarter with Western Wireless International Austria Corporation, Little Rock, United States, to acquire full control of the Austrian mobile communications operator tele.ring Telekom Service GmbH, Vienna. This transaction is subject to approval by the Austrian telecommunications regulator and the European Commission.

 


(1)          Since March 1, 2005 T-Com has been offering a highly simplified calling plan portfolio with four rate variants (Call Plus, Call Time, XXL and XXL Freetime) and two optional calling plans (XXL Local und CountrySelect) that can be added to these variants. Since March 1, 2005, the following service features have been included as standard with all lines with Call Plus, Call Time, XXL or XXL Freetime: calling line identification, call waiting, call completion on busy, consultation call, switching between lines, three-way conferencing, call forwarding and calling line identification restriction. In the case of Call Plus/T-Net, however, the service has only included the T-Net Box since August 1, 2005. Furthermore, exact to-the-minute billing is now available for all calling plans that are currently offered, including those for City calls.

(2)          Ratio of call minutes realized on T-Com’s own lines to the total number of minutes in T-Com’s network.

(3)          Ratio of calling plans to the total number of narrowband lines.

 

64



 

Business Customers strategic business area increases the level of new orders despite difficult market environment. The Business Customers strategic business area, under the T-Systems brand name, stabilized its business despite continued pressure on margins and dynamic structural changes in its market environment. In 2005, T-Systems increased its level of new orders by 3 percent to EUR 13.6 billion. This business development clearly reflects the success of the Focus on Growth program, which is enabling T-Systems to further strengthen its customer relationships and tap new growth potential.

 

As a result, T-Systems Enterprise Services was able to gain new key accounts on the back of large-scale contracts, including the logistics company DHL, the tour operator Thomas Cook, and the IT service providers for the Sparkasse financial group. As well as the significant volumes involved, transactions of this size are characterized by the establishment of a long-term partnership between the customer and T-Systems. Successful expansion was also recorded in the business process outsourcing area, in which T-Systems takes over entire business processes from the customer and provides end-to-end support.

 

In the Business Services unit, the strategic focus centered around the reacquisition and expansion of market share in the area of telecommunications services for large and medium-sized enterprises. The unit is also working on expanding its IT services. Significant growth was recorded in the unit’s IT business, compensating for the downturn in voice and network services.

 

At the end of 2005, T-Systems entered into an agreement with Volkswagen AG to buy its global IT arm g