Expectations for the operating segments
Below, we explain the market expectations and the expectations for the financial and non-financial performance indicators of our operating segments. We assume a comparable consolidated group and constant exchange rates for the development of our performance indicators.
We presented more information on the expected development of the operating segments at our Capital Markets Day in May 2021.
Following the sale of T‑Mobile Netherlands as of March 31, 2022 and 51.0 % of the shares in GD Towers as of February 1, 2023, our Group Development operating segment no longer makes a significant contribution to the expectations of the Group’s significant performance indicators. For this reason our forecast does not provide a separate presentation of the figures for this segment or a corresponding explanation.
Following the increase in revenue in the German market for telecommunications services in the reporting year, the industry association Bitkom forecast further revenue growth in 2023, albeit at a slower pace. Despite disrupted supply chains due to the war in Ukraine and the persistent inflation that is encumbering economic development, demand for mobile and fixed-network-based communications remains high. Declines in revenue due to ongoing intense price competition, negative regulatory effects from reduced mobile termination rates, and the decline in traditional fixed-network telephony will be more than offset by still growing demand for mobile data volumes and faster connectivity in the consumer and business customer area. In the German mobile market, revenues are expected to increase by 3.1 % and service revenues by 1.9 % in 2023 (source: Analysys Mason). In the Germany fixed-network business including television, the number of broadband lines will continue to rise; revenues are expected to grow by 1.2 % (source: Analysys Mason).
Innovative, attractive rate plans and supplementary services – such as TV and streaming options, and smart-home services – are becoming increasingly important for our competitive position with consumers, while cloud services, security applications, and solutions for Industry 4.0 are gaining in significance with business customers. We set ourselves apart from other providers with technology leadership and our broad range of products and services. At our Sustainability Day in October 2022, we confirmed our priorities for climate neutrality, circular economy, diversity, and digital participation, as well as good corporate governance.
The mobile communications market in Germany is currently dominated by three providers, each with its own network infrastructure, deploying 4G/LTE and 5G technology to ensure that the majority of the population has access to mobile internet. In 2019, Drillisch Netz AG, a subsidiary of United Internet AG, acquired mobile spectrum and began to set up a fourth mobile network. At the end of 2022, three mobile sites were put into operation. As the build-out continues, infrastructure competition is expected to increase. Furthermore, competition from mobile providers without their own network infrastructure is also likely to increase further.
In mobile communications, we lead the market for network coverage – in terms of speed and customer experience: in its annual mobile network test, Connect magazine named Deutsche Telekom the clear winner, awarding the rating “outstanding” for the first time. As of the end of 2022, 94.8 % of the population in Germany were covered by Deutsche Telekom’s 5G network. With the continued build-out, we want to further improve our network quality. To this end, we will increase network density and capacity further in both rural areas and in cities.
The market for fixed-network broadband hosts a large number of players with differing infrastructures – from national through to regional providers. We are assuming that competition from cable network operators will remain intense and that the number of providers who have their own fiber-optic networks will increase.
In the fixed network, we want to provide fiber-optic-based products to more and more customers. Our Germany-wide IP-based network achieves high transmission bandwidths of up to one gigabit per second. In order to always offer our customers competitive high-speed lines, we increasingly invest in digital infrastructure. We accelerated our FTTH rollout in the reporting year and now enable 5.4 million households to directly connect to our fiber-optic network. Our build-out will benefit both people in towns and cities and those in rural areas. We are set to maintain our rapid FTTH build-out pace over the coming years by building out on our own, but also through partnerships, with the addition of 2.5 to 3 million households per year. Our goal is to roll out fiber-optic lines to more than 10 million households and companies by the end of 2024. We will use a wide range of partnership models to increase the utilization rate of our broadband infrastructure by our own retail business as well as through partnerships with wholesale providers in broadband marketing.
The German TV market is saturated at around 38.8 million TV households (source: Statista). Nevertheless, we want to grow our TV customer base further, by providing a wide variety of entertainment “from a single source.” In order to offer our customers the best possible user experience, we are also engaging in partnerships, for example with RTL+, Disney+, Netflix, Prime Video, Sky/WOW, DAZN, and AppleTV+. In this way, MagentaTV combines multiple entertainment worlds in one. We broadcast all matches of the 2022 FIFA Soccer World Cup in Qatar exclusively and in UHD, including pre- and post-match coverage.
Our goal is to continue expanding our position as the leading integrated telecommunications provider in the German market by providing innovative and competitive products and services. To this end, we aim to further reduce the complexity of our products and processes through automation and digitalization initiatives. We want to deliver the best customer experience with perfect service. To this end, we invest systematically in our networks and the brand experience. We improve the service and shopping experience through our digital channels by creating more opportunities to offer customized and contextualized products and services. For our business customers, we position ourselves as the preferred partner for digitalization. We offer integrated portfolios for both small and large business customers as well as multinational corporations. From fixed network and mobile communications through to IT, we offer one-stop integrated solutions professionally and fast to provide our customers with optimum, sustainable support in a digital world.
We want to remain the market leader in Germany in terms of revenue over the coming years and extend our lead through rising service revenues. We are responding to our customers’ constantly growing demand for bandwidth and will continue to invest extensively in broadband networks, digital transformation, and outstanding customer service. In our broadband business, revenues are constantly growing and customer satisfaction levels rising, and we want to continue this growth trend again in 2023. We will improve customer satisfaction by actively evolving our mobile services (e.g., MeinMagenta app) and ensuring seamless service across all channels (e.g., web, hotline, shop). We want turn our customers into fans and reward our existing customers in our new loyalty program Magenta Moments with exclusive Deutsche Telekom advantages, through services from our own portfolio, but also through partner deals and exclusive events.
In our Germany operating segment, we expect slight revenue growth in 2023 and a further increase in revenue in 2024. Our value drivers are growing mobile and broadband revenues (a result of the increased attractiveness of our own mobile brand), rising numbers of customers with high-speed lines, and B2B revenue growth, for example, thanks to the positive trend in IT and cloud business. We want to continue expanding our fiber-optic services, both by means of business models with wholesale products and through further partnerships.
Thanks to our excellent network quality and the progress we are making with fiber-optic build-out, we expect to see a further increase in 2023 and 2024 in the number of mobile customers as well as slight growth in our broadband lines, fueled by demand for TV and high-speed products. Our initiatives to digitalize IT solutions business for our business customers will continue to increase revenues from IT and cloud services, and from M2M/IoT business. In wholesale business, we expect sales volumes to fall overall, mainly due to the fact that our wholesale customers are migrating their retail customers to alternative cable and fiber-optic-based infrastructure. We nevertheless expect demand to remain high as a result of our partnerships with wholesale providers.
In each of the next two years, we expect to post year-on-year increases in earnings in our Germany operating segment. For 2023, we expect adjusted EBITDA AL to increase to around EUR 10.2 billion, driven in particular by high-value revenue growth and a simultaneous reduction in indirect costs, mainly through digitalization and automation. Our adjusted EBITDA AL is expected to rise further in 2024. We are forecasting a stable adjusted EBITDA AL margin for 2023 and 2024.
Our course is set for innovation and growth: While we will continue to consistently promote investments in new technologies with great intensity in the future, we will wind down legacy systems, cutting costs in the process. Over the coming years, we will focus our investments on building out a forward-looking fixed-network and mobile infrastructure (e.g., FTTH and 5G). Our aim here will be to close gaps in the network in rural areas and provide urban centers with the high bandwidth they require. We want to continue this rollout efficiently and, to this end, are participating in funding programs. We expect our capital expenditure (cash capex before spectrum investment) to increase slightly year-on-year in both 2023 and 2024.
The overall U.S. ICT continued its posts-2020 upward swing in 2022. Growth continued in nearly all ICT sectors, including IT equipment and services, and total telecom infrastructure and services. Mobile voice and data services showed strong increase over 2021 levels, and total market growth, as well as individual sector growth, is expected at a steady clip through 2026 and after, depending on specific projections. (Sources: Mordor Intelligence, GSMA)
According to GSMA overall mobile revenues are expected to increase annually with continued subscriber growth, data consumption increases, and growth in the device market. Plan rates remain competitive. Cable can present an even greater competitive threat if they are able to leverage further its mid-band spectrum won in 2021 and 2022. For example, the Federal Communications Commission announced in January 2022, DISH spent over 7 billion US‑$ in the 3.45 band auction, winning 1,232 licenses in total.
Leading industry associations such as GSMA expect the U.S. to continue to lead global migration to 5G. The U.S. is in the midst of its second wave of 5G buildout and adoption. Further mid-band deployment has supported more robust 5G experiences, with 5G adoption continuing to grow in 2022. Fixed Wireless Access for home and enterprise has become the primary tech behind fixed broadband growth. 5G is also growing in the enterprise segment with wireless WAN to branch office locations and to serve ultra-mobile professions. By 2028, around 420 million 5G subs (for all North America) are expected, accounting for over 90 % of mobile subscriptions. GSMA expects over half of all mobile connections running on 5G networks by 2025, and Ericsson forecasts 90 % by 2027. T‑Mobile US expanded its 5G network leadership, by reaching 325 million people, utilizing the 600 MHz spectrum holdings it acquired in April 2017. (Source: Ericsson Mobility Report)
Following the completion of the merger with Sprint, T‑Mobile US hit the ground running with its profitable growth initiatives, carrying great momentum into 2023. T‑Mobile US continues to focus on creating shareholder value and providing an unmatched combination of best network and value experience in the U.S. wireless industry. Key elements of the company’s focus include consistently and profitably outgrowing the competition, unlocking the value of synergies faster and bigger than anticipated and making the necessary investments to position the company for long term success. T‑Mobile US customer growth initiatives center on attracting and retaining a loyal customer base by providing plans that are simple, affordable and without unnecessary restrictions to deliver the best value in wireless. T‑Mobile US further extends this winning formula by combining this best value proposition in the market with its leading 5G network experience.
T‑Mobile US expects continued strong subscriber growth in 2023 through further expansion in underpenetrated growth vectors, such as smaller markets and rural areas, enterprise and high-speed internet, which helped fuel industry leading growth over the last few years while allowing T‑Mobile US to deliver industry-best financial results. However, competitive pressures and unforeseen changes in the macroenvironment in the U.S. may affect the expected ability to attract and retain branded postpaid and prepay customers.
T‑Mobile US expects a slight increase in total revenues in U.S. dollars in 2023 and an increase in 2024 driven by increasing service revenue growth primarily from postpaid account and ARPA growth offset by lower revenues in the wholesale base. Total revenues are expected to increase, albeit, at a slower pace than service revenues as 5G device upgrade rates slow resulting in decreases in installment device financing and lower lease revenues from a declining lease base.
For 2023 T‑Mobile US expects adjusted EBITDA AL of 28.4 billion US‑$, and a strong increase in 2024. Adjusted EBITDA AL will be impacted by the continued transition from handset leasing to equipment installment plans for remaining Sprint customers, which is expected to be completed by the end of 2023. Revenue growth is expected to outpace increases in expense as T‑Mobile US focuses on delivering customer growth and merger synergies driven by operating cost efficiencies and site decommissioning following its Sprint customer migration and network integration. However, investments to further unlock growth vectors, such as smaller markets and rural areas and enterprise, may impact adjusted EBITDA AL. Adjusted Core EBITDA AL, i.e., adjusted EBITDA AL excluding revenues from handset leasing, is expected to increase strongly in 2023 and 2024.
Excluding expenditures relating to spectrum, T‑Mobile US reached peak levels of cash capex in 2022 from its accelerated network integration and the rapid pace of its 5G network deployment. The company expects a strong decrease in cash capex in 2023, reflecting greater capital efficiencies from its 5G network build and then a further slight decrease in 2024.
The economic development of the countries of our Europe operating segment deteriorated significantly in the reporting year due to the war in Ukraine and the associated macroeconomic impact, after a clear recovery had been observed at the end of 2021. Europe’s heavy dependency on Russian energy resulted in sharp increases in commodity prices. As well as the general uncertainty on the markets, which mostly has a negative effect on the economy, economic outlooks are also coming under pressure from the current high rates of inflation in the EU. This renewed economic uncertainty could have a negative impact on household and business expenditure for telecommunications services and thus reduce in particular revenues from business customers, roaming, and the prepaid segment. The European Commission expects a further sharp rise in consumer prices in 2023. This trend is not expected to let up until the following year.
Analysys Mason forecasts slight total revenue growth for telecommunications services of 0.5 % for the countries of our Europe operating segment for 2023; for 2024 growth will also be rather modest. Customer demand for a fast and reliable broadband connection is expected to lead to growth in broadband revenues of around 2 % in the coming two years. The trend towards increased data usage will continue, especially in households that have not previously had sufficiently fast broadband lines. Demand has also grown as a result of the trend towards working from home induced by the coronavirus pandemic, which potentially will not noticeably decline in the future. On top of this, the fiber-optic build-out is being accelerated. In most Central and Eastern European countries, there is still the possibility of increasing broadband network coverage. Additional regulatory-induced measures will likely further boost investments in network infrastructure. This growth is being bolstered by the growing number of companies offering convergent products. According to Analysys Mason, TV revenues will increase in traditional pay TV business by around 1 % in both 2023 and 2024. Mobile revenues will increase by just under 1 % in 2023 and 2024 according to the Analysys Mason forecast.
We aspire to continue developing into Europe’s Leading Digital Telco in the coming years. We stated this aim at the 2021 Capital Markets Day and we continue to confirm it. All national companies in the Europe operating segment except for Romania are integrated providers of telecommunications services, have high brand recognition levels, and are very significant players in their respective home markets. The national companies support each other by sharing training and knowledge, especially when it comes to the challenges arising from digitalization and cloudification. In order to further strengthen our competitiveness, we are working in partnership with other companies, in Austria and the Czech Republic for example, to drive forward the network build-out.
We firmly believe that we can only generate long-term and sustainable growth if we put our customers at the heart of everything we do. In the consumer segment, we want, for example, to create the best customer experience by offering our FMC product portfolio to customers across all national companies in a segment-specific way. With MagentaOne, we integrated fixed-network and mobile services with which we successfully shape developments on the European markets. Over the next few years, we will further develop these convergent product bundles to address specific target groups. Our TV business remains key to the success of FMC. That is why, going forward, we will continue negotiations, depending on local market conditions, to acquire (co-)exclusive rights to broadcast national and international sports events, such as soccer leagues, or the rights to TV movies/series. In addition, we will work with local and international OTT services, such as Netflix, Voyo, or RTL+, to enable our customers to enjoy entertainment across all devices, depending on the offers available in each market.
Digital interaction with our customers is a key factor in meeting customer needs in a more personalized and efficient way, and positioning products and innovative services on the market more quickly. Our service app – a digital interaction tool – is already used by more than two thirds of our customers. It helps us monetize our product portfolio through up- and cross-selling, and bring down costs by reducing service cases through self-service and preventive maintenance. We offer another possibility for interaction, for example, through our digital retail platform, OneShop, which is already in use in four countries. In customer interactions – whether digital or in person – we want to ensure that we can offer customers the best customer experience. Thus, we believe we can achieve first place in customer satisfaction rankings of telecommunications companies in the respective countries by 2024, as measured by the TRI*M index which is based on empirical research.
We are able to do all this because we use our network infrastructure intelligently based on different technologies. With our fast fiber-optic networks and the accelerated rollout of 5G, we are playing our part in the digital transformation and we want to serve private households, business customers, and municipalities with our fully integrated products. In all our footprint countries, we will gradually re-use the technology that is currently still used for 3G and refarm the released spectrum to increase LTE and 5G capacity. The build-out of fiber-optic technology also progresses further. By 2024, we will add around 2 million more households, increasing fiber-optic coverage from the current level of 8.1 million households (32.0 % coverage) to a level of 40 % network coverage. We plan to increase the number of connected households to over 3 million and thus to achieve a utilization rate of 33 % by 2024.
In the B2B area, the ever more complex requirements of digitalization are putting pressure on companies and the public sector to act. Here we will combine digital offers, innovations beyond the core offering, the engagement platform, and other business models. These also include modern digital infrastructure, cloud and data storage solutions with automatic back-up functions, and software-defined network functions through partners such as Cisco, Viptela, Versa, or Fortinet. The issue of security is one of our focus areas. In a number of markets, we have already secured data traffic for business customers in our mobile and fixed networks, on a fully-automated basis, without any installations on the customers’ side. We will continue to build out these functions, constantly expand our portfolio for all company sizes, and optimize our advisory approach with expert teams.
In our Europe operating segment, we expect a positive trend in both consumer and business customer numbers in the next two years, primarily thanks to the stronger focus on the convergence brand MagentaOne. We expect the number of mobile customers to grow in 2023 and to increase slightly in 2024. We expect the number of fixed-network lines to remain stable in both years. We expect the number of broadband customers to grow in both 2023 and 2024. For TV customers, we forecast an increase for 2023 and again for 2024.
We expect revenues for our Europe operating segment to increase in 2023 and to increase slightly in 2024 – measured on a comparable basis, i.e., at constant exchange rates and market conditions, and given an unchanged organizational structure – despite pressure resulting from decisions by regulatory authorities, such as the supplementary telecommunications tax imposed in Hungary, and the further reduction in mobile termination rates. Likewise we expect service revenues to increase in 2023 and to increase slightly in 2024.
We assume that prices on the energy market will remain at a high level for the time being. On top of this comes higher inflation in the countries of our segment, which could increase pressure in future collective bargaining rounds with employee representatives regarding the adjustment of salaries. In addition, highly intense competition in the markets of our operating segment could potentially put pressure on our margins. In order to be prepared for such a trend, we realize cost-cutting potential and intend to increase our productivity and exploit the benefits of digitalization, for instance by automating processes. Accordingly, we expect adjusted EBITDA AL to remain stable at EUR 4.0 billion in 2023 and to increase in 2024.
To maintain our technology leadership, we continue to invest in our integrated networks and plan to maintain the high overall level of investments over the next few years. We expect a stable trend for cash capex (before spectrum investment) in 2023 and 2024.
Overall, growth in the IT market is expected to remain stable over the coming years, while cost pressure and intense competition are likely to persist. Digitalization will accelerate further in many areas. For this reason, we expect demand for advisory services and solutions in the areas of cloud services and digitalization of business processes, as well as IT security (cyber security) and sustainability to increase further.
The market for IT services is expected to continue growing over the coming years. At the same time, this market is undergoing a radical transformation, e.g., due to ongoing standardization and automation, demand for smart services, and the changes being wrought by cloud services in outsourcing business. Further challenges have arisen in the shape of digitalization and the growing importance of cybersecurity. Traditional IT business will continue to decline, while advisory, cloud services, and cybersecurity may achieve double-digit growth rates. In view of all this, our plan is to continue investing increasingly in growth markets – especially in digitalization (e.g., EDGE, artificial intelligence (AI), and blockchain), multi- and hybrid cloud services, and cybersecurity.
Part of our Group strategy is the ambition to be a leading partner for business productivity. We give our customers help and guidance in implementing digital business models with our offerings for advisory, cloud services, and digitalization solutions, including data sovereignty and security, as well as through our strategic partnerships.
Under the program to transform our systems solutions business, we realigned our organization and workflows on a portfolio basis, thereby creating the basis for business transparency and dedicated portfolio management and strategy. We are continuing to drive forward expansion of the growth business (e.g., public cloud, sovereign cloud, cloud migration, big data, and data intelligence) while at the same time stabilizing and making further cost savings in established IT business (e.g., infrastructure solutions), with the aim of bringing about a significant shift in the revenue mix towards our growth areas.
In terms of revenue and market share, we are among the top providers in the European IT market and are market leader in Germany. Our very high levels of customer satisfaction – with a TRI*M score of 96 – are a core element in maintaining this position in the long term as well as in playing a leading role in digitalization.
Overall, for the Systems Solutions operating segment we are forecasting a stable year-on-year trend in order entry for 2023 and moderate year-on-year growth for 2024. Revenue is expected to trend stably in 2023 and to increase slightly in 2024. Revenue primarily comprises service revenue. The trend in service revenue thus essentially mirrors that of total revenue. Adjusted EBITDA AL is expected to increase in 2023, reaching around EUR 0.3 billion. We expect adjusted EBITDA AL to increase again in 2024. We expect cash capex (before spectrum investment) to remain stable in 2023 and 2024.
Group Headquarters & Group Services
At Group Headquarters & Group Services, we will stay focused over the next two years on our ongoing efficiency enhancement measures, with which we are further optimizing our structures, especially within Group Services. We will also continue to focus on implementing our cost-cutting measures. This will primarily involve reallocating human resources, bundling standardized processes for the Group, and enhancing the value of our real estate portfolio by means of innovative space and workplace concepts. In the course of further optimizing office space and capacities in the Group, we use existing technical solutions that make it easier for our employees to organize their own place of work flexibly between home or the office. As these cost cutting measures will put us in a position to offer our services more cost-effectively, the operating segments stand to benefit from them as well. Our focus on a sustainable future is reflected in our decision to extend the useful life of our vehicle fleet and to convert the procurement of all new company vehicles to e-mobility.
In the coming years, too, our Board of Management department Technology and Innovation will drive not only the development of innovative technologies, products, and services, but also IT standardization and the ongoing establishment of centralized production platforms. Major areas of capital expenditure in the years 2023 and 2024 will include technology development, the implementation of our IT strategy, and security. We expect this to reduce overheads, mainly driven by IT operating costs, the ongoing standardization of IT infrastructure and platforms – mainly through cloudification, automation, and retiring – and by standardizing IT interfaces.
In the long term, these savings will help the Group finance its innovation endeavors. We are focusing on innovation topics such as network slicing, Open Radio Access Network (O-RAN), applications based on the 5G mobile communications standard, vertical cloud production for the Group’s own network, evolution of a proprietary smart system for the voice control of Deutsche Telekom products and services, and introduction of a uniform operating system for routers marketed by the Group. Technological innovations will serve to safeguard the network and technology leadership of our Germany and Europe operating segments in the long term and to evolve the campus networks, which are designed to improve the integrated automation of our international industrial customers’ production processes. Ultimately, every one of our investment projects revolves around enhancing the customer experience.