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Calling the shots - Timotheus Höttges CFO Deutsche Telecom


Deutsche Telekom CFO Timotheus Höttges tells us how one of the biggest players in telecommunications is finding new growth opportunities while facing downturn, competition and regulation




Timotheus Höttges
Timotheus Höttges
Times are tough for the telecommunications industry. The Eurozone crisis has hit most of the leading telecommunications firms hard, with many announcing falling profits from their European operations. Timotheus Höttges is very aware of the threat and has had to manage risk appropriately.

”The Eurozone crisis, uncertainties in international capital markets, greater regulation, intense competition, new market entrants and the immense speed of innovation within the industry require rigorous risk management,” says Höttges, seated in his office in Bonn, the old West German capital city.

“We permanently monitor the potential impact of risks on our operations, ranging from foreign exchange, inflation, debt capital markets and legal issues to regulatory measures and IT risks. We also simulate potential outcomes of the euro crisis. A sober assessment of all relevant risks is a sound basis for entrepreneurial action,” he says.

However, despite this somewhat gloomy backdrop, the CFO of one of Europe’s largest telecommunications firms — servicing 130 million mobile and 33 million fixed-line customers — is surprisingly upbeat.

The results from H1 2012 showed that Deutsche Telekom stabilized in the first six months, with revenue down only 0.9% compared with H1 2011 at €28.8b (US$36.1b). EBITDA remained consistent at €9.2b (US$11.6b) compared with the same period in 2011. A reduction in the company’s net debt from €43.3b (US$54.3b) in June 2011 to €41b (US$51.4b) after the first half of 2012 is also a cause for understated celebration from the CFO.

The company has also seen growth for its business in the US. T-Mobile USA, the subject of an unsuccessful merger attempt with AT&T in 2011, raised adjusted EBITDA in H1 2012 by 6.8% when compared with the same period in 2011.

Höttges believes that a focus on core markets, continued investment in innovation and maintaining financial stability have enabled the company to weather the storm.

“We have improved competitiveness and reduced costs,” he says. “On top of that, we have a balanced financial strategy. Measured by total shareholder return, Deutsche Telekom has been one of the top performers in the telecommunications sector over the last three years. This is primarily due to the reliability of our three-year commitment to all stakeholders — shareholders, debt holders, employees and entrepreneurs within the company.”

However, he is under no illusions about the challenges ahead. He says: “This industry is under a lot of pressure. There are serious levels of competitiveness and over-capacity. And huge investment is needed for modernization in certain areas — especially in the fixed-line space. We have to defend our leading market positions while radically reducing our cost base. And we need to do all of this in a regulatory environment that is cutting into our value.”

Yet, he also sees “huge opportunities for growth.” These come from what he calls the “new industries” — information and communications technology (ICT), cloud services and mobile data. “We need to seed for the Gigabit society today, if we want to reap a rich harvest tomorrow,” he says. “Our industry is schizophrenic. On the one hand, management needs to strictly cut costs and reduce staff to compete in our traditional telecommunication services. On the other hand, we need to invest heavily into new business areas.”

Strength at home

Deutsche Telekom is, by far, the largest telecommunications company in Germany. And while it already operates in 13 very diverse European economies, including Greece, Hungary and Poland, as well as the US, the CFO will not be following other big corporates in adventures into emerging markets.

“It was wise to focus on our strengths. For us, it makes no sense to try and grow in India or Africa,” Höttges says. “Our most important market is Germany. Here, we are leading in almost every category.”

The company invested more than €3.6b (US$4.5b) in Germany in the last year — a good proportion going into 4G LTE (long-term evolution, the fastest high-speed technology for wireless services). “By the end of 2012, all ‘white spots’ (areas currently uncovered) in Germany will be covered by 4G LTE.”

Stateside success

One country outside Europe where Deutsche Telekom is investing money is the US. After the failed merger with AT&T last year, Höttges reveals that the company will now look to grow the business.

“It is always right to continuously improve your operational business activities,” says Höttges, who does not rule out structural changes, “if they improve the business.”

As far as the merger with AT&T is concerned, the CFO has consigned the deal to history. “We believed that we had a ‘win-win’ deal for everyone,” he says. “Unfortunately, it wasn’t approved. We had to restart, which wasn’t easy. Our first and most important task has been to regain competitiveness in the US market. To that end, we have decided to modernize infrastructure toward 4G LTE.”

This modernization will involve an investment of more than US$4b. The company hopes that in the next two years, the whole US footprint will be covered by 4G LTE. In order to improve its position in the US market, Deutsche Telekom also agreed to swap certain wireless spectrum (which provides additional network coverage) from Verizon Wireless. The company envisages this deal helping T-Mobile rise from its current place as the fourth-largest US wireless company. T-Mobile USA is also embarking on a large cost-cutting program called Reinvent.

“This year, we have saved US$700m [in the US] but we are taking money from the cost base to reinvest in the marketplace and are gaining momentum,” says Höttges.

Evolve or die

As well as concentrating on core territories for growth, Höttges understands that the telecommunications industry needs to invest in the future. Fixed-line phones have been replaced by mobiles, which are themselves being usurped by smartphones — and, in terms of data, the world is now looking to the cloud.

There are three core areas into which Deutsche Telekom is investing — cloud services, mobile internet and new digital innovations. “We believe it is about creating an image of innovation and generating a future for the 230,000 people in our organization,” says the CFO.

Cloud computing services are on the rise. In Germany alone, market forecasts from Deutsche Telekom show an increase in expenditure on the cloud from €1.9b (US$2.4b) today to €10.7b (US$13.4b) in 2016. “There has been a huge uptake and we want to gain our portion,” says the CFO. “Many larger corporates are using our cloud services but we also want to bring them into the SME and consumer space.”

Deutsche Telekom will also be looking at investing in mobile internet. Investment will be concentrated in upgrading networks. “The internet is increasingly going mobile, so users will need higher bandwidth wherever they go. High-speed data networks, in which we have to invest on a continuous basis, are a prerequisite for this,” says Höttges.

The third part of Deutsche Telekom’s investment strategy is focusing on digital innovations such as the smart grid for energy supply. “In the past, energy supply was vertical — it went from power plant to distribution network to retailer and then to end user. In the future, systems could be more horizontal. There will be people who produce energy and then people who consume energy,” says Höttges. “So how could you steer that? In every single household, you have connection to telecoms — wireless or wired. This information via our network could be steered at any time and you could know exactly how much consumption you have.”

Höttges realizes that investing in an uncertain future is risky, but the firm cannot afford to stay static.

“If you do not invest in innovative ideas today, you will not be rewarded in terms of growth in new markets tomorrow,” he says. “We need to take risks. There will be ideas that we are pursuing which will die over time. But if we don’t try, we will stay in the classical access business that is declining.”

In order to achieve these investment goals, the CFO has implemented a strategy that combines innovative partnerships and financial prudence.

Collaborate to innovate

Competition and the speed of technological advance mean that standing alone is not an option in the telecommunications industry.

A clear example of the significance of collaboration is Deutsche Telekom’s joint venture (JV) with France Telecom in the UK, which has created Everything Everywhere. The JV, which was formed in 2010, has proved successful for both partners. Figures from Q2 this year show that Everything Everywhere climbed 3.4% in revenue year-on-year, more than double the growth in the final quarter of 2011. But why embark on what could have been a risky JV with a rival in the first place?

“We were in a difficult spot in the UK with T-Mobile and the same was true for France Telecom,” says Höttges. “We both felt a JV would be a good solution. It was questioned whether a German–French partnership could work. But, since the beginning, there has not been a single dispute. We are honest partners in the UK. We are increasing our market share while realizing synergies at the same time. Consistent execution requires all parties to pull in the same direction.”

So, does the progress made by Everything Everywhere mean that there will be more JVs in the future?

“If you are in a situation where you jointly win, then this builds trust among the partners. Consequently, there are other opportunities. We are, by far, the biggest buyer of hardware and handset equipment in Europe. That is why last year we started our procurement JV, named BUYIN, with a targeted annual run rate of €1.3b (US$1.6b) in combined savings,” says Höttges.

In July, Deutsche Telekom also went into partnership with Mastercard to produce products that enable consumers to use their mobiles as a secure payment method. Höttges realizes that using others’ expertise will be beneficial.

“We cannot invent new products alone,” he says. “Mobile internet services such as Skype and other applications make it possible to buy content under more attractive conditions. If we think we can bind customers to us in the long term with unfriendly price models, we’re wrong. Telecommunications companies should actively offer these kinds of products to their customers to prevent cannibalization.”

However, Deutsche Telekom is not just teaming up with large corporates such as France Telecom and Mastercard. It is also looking to new businesses that can help it advance. Recent deals have included a strategic partnership with mobile security firm Lookout.

“We need to invest in these businesses,” says Höttges. “This is the new world. These are agile players, growing at speeds you cannot imagine. We cannot build everything on our own in a vertical way, it’s a lateral world and therefore we have to be open.

“For example, in our strategic partnership with Lookout, we could not have created the security product on our own. Meanwhile, there are others who understand parts of the internet better or differently than we do, so we need to become exclusive partners with them.”

Saving for the future

Yet this investment and these partnerships can only thrive if there are solid financial foundations. And the CFO has been building them during his tenure at the company.

“If you want to invest more, you have to save for it,” says Höttges. “In our private lives, we seem to understand this. But in business, that doesn’t appear to be the case.” To that end, the company implemented the ‘Save4Service’ (S4S) program in 2006. Since then, S4S has seen more than €10b (US$12.6b) of cost savings across the business.

However, in terms of net savings, the figure is smaller. “Most of the money is reinvested into the business,” says Höttges. He believes that this reinvestment strategy is “good motivation for teams working on the projects. They are not just doing the job to improve short-term profitability; they are doing it to keep up long-term competitiveness.”

So in terms of S4S, where does the CFO see further capital optimization?

“Process standardization is the name of the game,” says Höttges. “To that end, Deutsche Telekom is looking at optimizing its Enterprise Resource Planning (ERP) systems. From hire to retire, from order to cash, from buy to scrap: we are trying to standardize nearly every process.”

Another area in which the CFO is looking to make savings is information technology (IT). “Outsourcing of IT is not rocket science. But integrating all different IT units while keeping the company up and running and reducing IT cost by €1b (US$1.3b) at the same time is creating complexity,” says Höttges. “Our company is dependent on IT and, therefore, a lot of savings are dependent on IT.”

This is easier said than done. How does he intend to make these savings? His answer is simple.

“The mistake I made as CFO in the past was that I gave IT more money to push standardization. However, the lesson I learnt is the more money you give IT, the more complex your IT gets. The best way to drive standardization is to cut back spending and limit resources. The lack of resources drives people into more standardization.”

Capital complexities

While the company has cut costs through the S4S program and is looking to invest €8—€9b (US$10b—US$11.3b) a year in the aforementioned projects, the CFO still needs to service a debt burden which stands at around €41b (US$51.4b). However, he feels that the debt is manageable as Deutsche Telekom is well covered with a broad range of instruments.

“There is absolutely no need for us to divest assets to raise the money as we have unrestricted access to capital markets,” he says. “The corridors for our balance sheet ratios are well known, they are accepted and they have not changed for many years — this makes us a predictable and trustworthy issuer of debt. Undisputed access to debt capital markets is a prerequisite for our company. Our additional liquidity reserves of a minimum 24 months being financed with no need to access capital markets remain untouched, despite the crisis. This helps us to ensure financing and reduces our refinancing cost.”

Deutsche Telekom enjoys favorable refinancing rates. An indication of this was shown when the company issued a US$2b bond offering in February 2012. A 5-year bond was set at a 2.25% coupon while a US$1b 30-year bond was issued with a 4.875% coupon.

“We are refinancing at a significantly lower cost than many governments,” says Höttges. “We don’t want additional debts and, in this environment, it may have been better to deleverage further. But, with the break-up fee from the AT&T deal, we reduced our debts by €2.2b (US$2.8b).”

When it comes to equity, Höttges is adamant that a stable, long-term strategy is vital for the investors.

“After 2008, short-term gain was not the play for us,” says Höttges. “We believe that being reliable is valuable and we have a clear stakeholder approach in equity and capital allocation.”

In 2010, the company committed to paying its shareholders a dividend of at least €0.70 (US$0.9) per share for the following three years. It has kept that promise.

“My role is to do what is right for all stakeholders. This means that we have to consider the needs of the debt capital market as well as the needs of our employees. And, of course, the company’s investment needs. Our shareholders need to be happy in our transformations,” says Höttges. “In the past few years, we have changed our shareholder base tremendously — 70% of our investors are now long-term value investors. The short-term activists are out. We have a sustainable long-term shareholder base.

“These people rely on us keeping our policy on dividends and on the debt side. We have a clear strategy toward capital allocation — a commitment for a certain dividend yield. Investors aren’t worried about their investments. It has worked out well for them and for us.“

Overruled

The CFO has financially stabilized the business through the current crisis. But, according to Höttges, one major hurdle stands in the way of effective investment in the European telecommunications market — and that is overregulation. He believes that politicians are taking away the incentives for investment.

“Europe lags behind in terms of digitalization due to regulation,” says Höttges. “After more than a decade of regulation, we now have intense price competition. In most markets, it is time to release the former incumbents from regulation and to introduce symmetrical competition rules for all players. At the same time, regulators should foster infrastructure competition and create incentives to invest into network infrastructure. In Germany alone, to build an entire fiber network to the home, the investment would be €60b—80b (US$75b—US$100b). But if you don’t know what a product’s price will be in two years, how can you invest?”

But there seems to be hope. “The recent change in the regulatory environment announced by Neelie Kroes, Vice President of the European Commission, sounds positive. We welcome this change. But, of course, we have to wait for the measures on the European and national level to implement this new regulatory policy,” says Höttges.

The CFO remains optimistic about Deutsche Telekom’s future and believes that the combination of efficiency and innovative thinking will reap rewards.

“Risk management, strict cost discipline and the courage to drive innovation have helped us get through the crisis,” says the CFO. “However, at the same time, we have told a solid story to our investors. And this helps them. It is reliable, maybe even boring. But, right now, boring has its value.”


The CFO
Timotheus Höttges
Age: 50
Appointed CFO at Deutsche Telekom: 2009
Educated: University of Cologne

Previous positions: Before becoming CFO, Timotheus Höttges was the group board of management member responsible for the company’s T-Home unit. He joined the company in 2000 as MD, finance and consulting, of T-Mobile Deutschland. Prior to this, he was a member of the extended management board responsible for controlling, corporate planning and mergers and acquisitions at VIAG Group in Munich. As project manager, he played a central role in the merger of VIAG and VEBA to form E.ON.

Interview realized by Ernst & Young and published in Capital Insights.
www.capitalinsights.info

Mardi 23 Octobre 2012
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