Don't let the name fool you -- the U.S. is extremely important to Deutsche Telekom
Second-quarter results were a mixed bag. Revenue rose about 3%, with domestic revenue down nearly 2% and international revenue up more than 9%. Adjusted EBITDA ticked up by a bit more than 6%, and quarter-on-quarter free cash flow growth clocked in at better than 37%.
Once again, DT's mobile operations drove the company's growth. Revenue in this segment climbed by more than 8%, and adjusted EBITDA grew better than 16%. In dollar terms, revenue for the T-Mobile USA segment grew 31% and added nearly 1 million subscribers. Worldwide subscribers grew by 1.9 million for the period.
The company's other businesses, broadband/fixed line and business customers, performed less robustly. Although the company posted a 45% increase in broadband lines, overall revenue dropped 5%. In the business segment, revenue declined 2% and adjusted EBITDA fell by nearly 4%.
To put the performance of T-Mobile USA in context, overall revenue for the company would have been down a bit more than 1% for the quarter without this unit's contribution. Unfortunately, time is not Deutsche Telekom's friend at the moment.
Sooner or later, the company will have to make a hard choice on the U.S. business -- spend literally billions of dollars to upgrade its network, or sell. While the company could theoretically do nothing, sooner or later that decision would lead to losing customers to the likes of Verizon
That's a tough situation for DT management. How do you spend the billions of dollars to upgrade your primary growth driver without wrecking the balance sheet, diluting current shareholders, or slashing the dividend? But what do you do about growth if you don't find a way to make the upgrade happen?
Despite this problem, I don't think DT is doomed. I still believe that management will figure out a workable solution to its U.S. upgrade dilemma and continue to seek out new growth opportunities in Europe. This isn't going to be an earnings growth powerhouse, but it should continue to offer a respectable mix of income and slow price appreciation.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).