Build it and they will come.
The same philosophy that led a fictional guy to build a fictional baseball diamond in an equally fictional cornfield (Kevin Costner in Field of Dreams) seems to be working pretty well for German communications giant Deutsche Telekom
Fueled in part by subscriber growth and better operating efficiencies, DT is starting to show investors some economic benefits after major capital equipment buildups over the past years.
Results for the fourth quarter and full-year were solid, if not scintillating. Supported by a 12% increase in net mobile subscriber additions and a 49% increase in European broadband customers, DT managed to post decent revenue growth for 2004. On an "apples-to-apples" (or "apfel-zu-apfel") basis, revenue grew about 4%, though the company also claimed 5.8% "organic" growth on a pro forma basis.
Growth was also good below the top line, as pro forma EBITDA (that's earnings before interest, taxes, depreciation, and amortization) grew 7%, and adjusted net income grew to 2.2 billion euros (about $2.8 billion) from just 200 million euros a year ago.
Putting aside all of this "adjusted" and "pro forma" junk, free cash flow grew almost 23% over the prior year, coming in 10.2 billion euros (about $13.2 billion). The company managed to pay down roughly one-quarter of its debt and announced an $0.81 per share dividend.
Looking ahead, DT will continue to focus on garnering growth from its cellular, broadband, and business customer segments. DT-owned T-Mobile is the fourth-largest cell phone player in the U.S., and it managed to add more than 4 million new subscribers for the year, while maintaining stable average revenue per user.
The company is also having success in growing its European broadband business and expanding its operations into Eastern Europe. Although revenue from Eastern Europe hasn't yet caught up to market share, DT's leading position in several countries (including Hungary, Poland, and Croatia, just to name a few), should reap rewards in the coming years. Again, build it and they will come.
While telecommunications businesses do generate considerable cash flow, they also have the obligation to stay up-to-date with equipment and service offerings. In order to grow the business (and remain competitive), DT expects to hike its capital expenditures by more than 25% for 2005.
Although this will have the effect of depressing free cash flow in the short term (the company is forecasting about a 25% decline in FCF for 2005), it's a necessary part of maintaining business momentum. What's more, as the company continues to pay down debt, more cash will eventually come available for distribution to shareholders (through dividends or share buybacks).
Investors considering DT need to appreciate it for what it is -- a large, low-to-moderate growth business that should throw off solid piles of cash flow for years to come. It isn't, and never will be, a rock 'em, sock 'em growth superstar. In other words, if you want German pyrotechnics, check out the rock band Rammstein. If you want a solid income producer, check out Deutsche Telecom.
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Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned, though he does own several Rammstein CDs. What can he say? Fire is cool.