Results of operations of the Group

Net revenue

In the first quarter of 2020, we generated net revenue of EUR 19.9 billion, which was up EUR 0.5 billion or 2.3 percent year-on-year. Even adjusted for positive net exchange rate effects of EUR 0.3 billion – mainly from the translation of U.S. dollars into euros – revenue increased by EUR 0.2 billion or 1.1 percent.

Our United States operating segment contributed to the positive revenue trend with an increase of 3.7 percent. Adjusted for exchange rate effects, revenue was up 0.7 percent against the prior-year period, due on the one hand to higher service revenues from the rise in the average branded customer base, contrasted with lower average revenue per branded postpaid customer and declines in terminal equipment revenue on account of falling demand from social distancing rules and store closures as a consequence of the coronavirus pandemic. Revenue in our home market of Germany increased slightly on the prior-year level by 0.9 percent, due in particular to the strong performance in mobile business, which benefited from higher service and terminal equipment revenues, and higher IT and broadband revenues from fixed-network business. In our Europe operating segment too, revenue was up marginally by 0.4 percent year-on-year; adjusted for exchange rate effects and for the sale of Telekom Albania in May 2019, it increased by 2.0 percent. The fixed-network business is increasingly consistent as a driver of growth, with increased revenues from broadband and TV business. Mobile revenues also increased compared with the prior-year period. The positive development in higher-margin service revenues more than offset the decline in the lower-margin terminal equipment business. Total revenue in our Systems Solutions operating segment was at the same level as in the prior year. The upward revenue trend in our growth areas, in particular public cloud and security, was sufficient to offset the declines in traditional IT operations and in telecommunications business. Revenue in our Group Development operating segment increased by 3.8 percent year-on-year thanks to the operational growth of our two subsidiaries, T‑Mobile Netherlands and DFMG.

For further information on revenue development in our segments, please refer to the section “Development of business in the operating segments.”

Contribution of the segments to net revenue^a

%

^a For further information on net revenue, please refer to the section “Segment reporting” in the interim consolidated financial statements.

Breakdown of revenue by region

%

At 50.9 percent, our United States operating segment again provided the largest contribution to net revenue of the Group and was up 0.6 percentage points above the level in the prior-year period. The proportion of net revenue generated internationally increased from 69.0 percent to 69.7 percent.

EBITDA AL, adjusted EBITDA AL

Excluding special factors, adjusted EBITDA AL increased year-on-year by EUR 0.6 billion or 10.2 percent to EUR 6.5 billion in the first quarter of 2020. This increase was attributable to positive net exchange rate effects of EUR 0.1 billion. Excluding these effects, adjusted EBITDA AL increased by EUR 0.5 billion or 9.0 percent. All operating segments made a positive contribution to this development: Adjusted EBITDA AL of our United States operating segment increased by 18.0 percent, particularly on the back of higher service revenues. These increases were partially offset by expenses associated with new and modified leases due to network expansion and the launch of our 5G network, higher employee-related costs, higher legal-related expenses, and higher bad debt expense primarily due to the estimated macro-economic impacts of the coronavirus pandemic. Our Germany operating segment contributed to this result thanks to a positive revenue trend, and improved cost efficiency with 2.7 percent higher adjusted EBITDA AL. Adjusted EBITDA AL in our Europe operating segment increased by 1.9 percent. Assuming constant exchange rates and adjusted for the sale of Telekom Albania, this increase was as much as 3.4 percent. In particular, the positive revenue effects resulted in a higher net margin. Savings in indirect costs, primarily thanks to lower personnel costs, had an increasing effect on earnings. In our Systems Solutions operating segment, the positive trend in our growth areas public cloud, digital solutions, SAP, and IoT contributed to an increase in adjusted EBITDA AL of 8.7 percent. The increase in adjusted EBITDA AL in our Group Development operating segment was driven by revenue growth, synergies from the acquisition of Tele2 Netherlands, and efficient management of costs in the Netherlands. The GD Towers business also continues to post consistent growth on the back of rising volumes.

EBITDA AL increased by EUR 0.4 billion or 7.7 percent year-on-year to EUR 5.9 billion, with special factors changing from EUR -0.4 billion to EUR -0.6 billion. Expenses incurred in connection with staff-related measures were up slightly by EUR 0.3 billion on the prior-year period. In addition, as in the prior-year period, expenses of EUR 0.1 billion incurred in connection with the approval process for the business combination of T‑Mobile US and Sprint were recorded as special factors. In connection with the coronavirus pandemic, expenses of EUR 0.1 billion were classified as special factors in the United States operating segment in the first quarter of 2020, primarily due to supplemental employee-related expenses, commissions in indirect sales, and cleaning-related expenses.

For further information on the development of (adjusted) EBITDA AL in our segments, please refer to the section “Development of business in the operating segments.”

A reconciliation of the definition of EBITDA with the new “after leases” indicator (EBITDA AL) can be found in the following table:

EBIT

Group EBIT increased from EUR 2.3 billion to EUR 2.5 billion, up 11.2 percent against the prior-year period. This increase is mainly due to the effects described under EBITDA AL. At EUR 4.4 billion, depreciation, amortization and impairment losses were EUR 0.2 billion higher than in the prior-year period, due to the consistently high level of investment over the last few years.

Profit before income taxes

Profit before income taxes decreased from EUR 1.9 billion in the prior year to EUR 1.5 billion, with loss from financial activities increasing by EUR 0.6 billion to EUR 1.0 billion. While finance costs and the share of profit/loss of associates and joint ventures accounted for using the equity method were more or less at the same level as in the prior-year quarter, other financial expense increased by EUR 0.5 billion, due in particular to negative measurement effects from embedded derivatives at T‑Mobile US.

Net profit, adjusted net profit

Net profit remained stable compared with the prior-year period at EUR 0.9 billion. Tax expense in the first quarter of 2020 was EUR 0.5 billion, as in the prior-year period. Profit attributable to non-controlling interests decreased from EUR 0.4 billion to EUR 0.2 billion, mainly in our United States operating segment. Excluding special factors, which had a negative overall effect of EUR 0.4 billion on net profit, adjusted net profit in the first quarter of 2020 amounted to EUR 1.3 billion, up EUR 0.1 billion against the prior-year period.

For further information on tax expense, please refer to the section “Income taxes” in the interim consolidated financial statements.

The following table presents a reconciliation of net profit to net profit adjusted for special factors:

Earnings per share, adjusted earnings per share

Earnings per share is calculated as net profit divided by the adjusted weighted average number of ordinary shares outstanding, which totaled 4,743 million as of March 31, 2020, resulting in adjusted earnings per share of EUR 0.19, the same as in the first quarter of 2019. Adjusted earnings per share amounted to EUR 0.27 compared with EUR 0.25 in the prior-year period.

Special factors

The following table presents a reconciliation of EBITDA AL, EBIT, and net profit/loss to the respective figures adjusted for special factors:

Employees

The Group’s headcount decreased by 1.9 percent compared with the end of 2019. In our Germany operating segment, the total number of employees decreased by 1.0 percent compared with the end of 2019 as a result of efficiency enhancement measures and the take-up of socially responsible instruments in connection with the staff restructuring. The total number of employees in our United States operating segment decreased by 4.2 percent compared with December 31, 2019, primarily due to seasonal effects. In our Europe operating segment, the headcount was down 2.9 percent compared with the end of the prior year, with staff levels decreasing in Hungary and Croatia in particular. The total headcount in our Systems Solutions operating segment was down 0.4 percent against year-end 2019, primarily as a result of efficiency enhancement measures. In the Group Development operating segment, the 2.6 percent increase in the number of employees can be attributed to the Netherlands on account of the insourcing of external activities to achieve cost savings. The headcount in the Group Headquarters & Group Services segment was down 0.8 percent compared with the end of 2019, mainly due to ongoing staff restructuring at Vivento.