Results of operations of the Group

Net revenue

In the first half of 2020, we generated net revenue of EUR 47.0 billion, which was up EUR 7.8 billion or 20.0 percent year-on-year. Excluding the positive net effects of changes in the composition of the Group – primarily from the acquisition of Sprint in the United States operating segment – of EUR 7.2 billion and positive net exchange rate effects of EUR 0.5 billion – mainly from the translation of U.S. dollars into euros – revenue increased slightly by EUR 0.1 billion or 0.1 percent.

Our United States operating segment in particular contributed to the positive revenue trend with an increase of 39.9 percent. Adjusted for the acquisition of Sprint and exchange rate effects, revenue was at the same level as in the prior-year period. Revenue in our home market of Germany increased on the prior-year level by 1.0 percent, mainly due to the positive trend in our fixed-network business on the back of growth in broadband revenues, as well as to stable mobile revenues. The coronavirus pandemic had a negative impact on roaming and visitor revenue as well as terminal equipment revenue. Overall, however, these revenue losses were offset by growth in the fixed network. In our Europe operating segment, revenue decreased by 2.1 percent, mainly due to exchange rate effects. In organic terms, revenue remained stable at the prior-year level, despite the effects of the coronavirus pandemic. The fixed-network business performed well, recording increases in broadband and TV revenues. Revenues from mobile business decreased slightly, primarily driven by declines in terminal equipment business and roaming revenues as a result of the travel restrictions that had been imposed. These negative effects have been partially offset by increases in higher-margin service revenues. Total revenue in our Systems Solutions operating segment decreased by 1.8 percent year-on-year, reflecting the decline of the IT market in Western Europe driven by the coronavirus pandemic. The upward revenue trend in our growth areas public cloud and security was not sufficient to fully offset the declines in traditional IT and project business. The development of our growth area digital solutions was particularly affected by the impact of the coronavirus pandemic on the automotive industry. Total revenue in our Group Development operating segment increased by 4.4 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 58.4 percent, our United States operating segment provided by far the largest contribution to net revenue of the Group and thanks to the acquisition of Sprint was up 8.3 percentage points above the level in the prior-year period. In this connection, the proportion of net revenue generated internationally also increased significantly from 69.0 percent to 74.2 percent.

EBITDA AL, adjusted EBITDA AL

Excluding special factors, adjusted EBITDA AL increased year-on-year by EUR 4.2 billion or 34.0 percent to EUR 16.4 billion in the first half of 2020. It was affected by positive net effects of changes in the composition of the Group – primarily from the acquisition of Sprint – of EUR 2.7 billion and positive net exchange rate effects of EUR 0.2 billion – mainly from the translation of U.S. dollars into euros. But even excluding these effects, adjusted EBITDA AL increased by EUR 1.3 billion or 8.6 percent.

All segments, with the exception of the Systems Solutions operating segment, made a positive contribution to this development: Adjusted EBITDA AL of our United States operating segment increased by 70.5 percent, particularly on the back of higher service and terminal equipment revenues in connection with the acquisition of Sprint. These increases were offset by higher operating expenses, primarily in connection with the acquisition of Sprint. Our Germany operating segment contributed to this result thanks to a positive revenue trend, and improved cost efficiency with 2.8 percent higher adjusted EBITDA AL. Adjusted EBITDA AL in our Europe operating segment increased by 0.2 percent. Assuming constant exchange rates and adjusted for the sale of Telekom Albania, this increase was as much as 2.2 percent. The main factor in this trend was savings in indirect costs. In our Systems Solutions operating segment, adjusted EBITDA AL declined by 9.1 percent, driven mainly by the decrease in earnings in traditional IT and project business, partly due to the effects of the coronavirus pandemic. 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 at T‑Mobile Netherlands. The GD Towers business also continues to post consistent growth on the back of rising volumes.

EBITDA AL increased by EUR 3.3 billion or 29.3 percent year-on-year to EUR 14.5 billion, with special factors changing from EUR -1.0 billion to EUR -1.9 billion. Expenses incurred in connection with staff-related measures remained at the prior-year level of EUR 0.6 billion. In addition, expenses of EUR 0.8 billion were recorded as special factors under effects of deconsolidations, disposals and acquisitions. EUR 0.8 billion of these expenses were incurred in connection with the approval process for the business combination of T‑Mobile US and Sprint, and with acquisition and integration costs. In the prior year, EUR 0.3 billion was recorded as special factors in this connection. The majority of the expenses were incurred in the United States operating segment. In addition, EUR 0.2 billion relates to the derecognition of billing software for postpaid customers, which was still in development, in the United States operating segment. A transaction fee of EUR 0.3 billion received from SoftBank in return for support in the immediate sale by SoftBank of T‑Mobile US shares had an offsetting effect. Other special factors affecting EBITDA AL amounted to EUR -0.4 billion and mainly relate to expenses incurred in the United States operating segment in connection with the coronavirus pandemic.

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 4.6 billion to EUR 5.6 billion, up EUR 1.0 billion or 21.5 percent against the prior-year period. This growth is partly due to the effects described under EBITDA AL and adjusted EBITDA AL. At EUR 11.4 billion, depreciation and amortization were EUR 2.8 billion higher than in the prior-year period. This increase is mainly attributable to Sprint, which has been included since April 1, 2020.

Profit before income taxes

Profit before income taxes decreased from EUR 3.7 billion in the prior year to EUR 3.4 billion, with loss from financial activities increasing by EUR 1.3 billion to EUR 2.2 billion. This increase is primarily due to a EUR 0.8 billion increase in finance costs to EUR 2.0 billion, mainly due to the financial liabilities recognized in connection with the acquisition of Sprint and the restructuring begun in connection with this acquisition and related increase in financing, including the handling charges incurred for a briefly utilized bridge loan facility. Other financial income decreased by EUR 0.4 billion year-on-year to an expense of EUR 0.2 billion. This was mainly due to measurement effects in connection with derivatives.

Net profit, adjusted net profit

Net profit decreased year-on-year from EUR 1.8 billion to EUR 1.7 billion. Tax expense in the first half of 2020 was EUR 1.0 billion, as in the prior-year period. Profit attributable to non-controlling interests decreased by EUR 0.1 billion to EUR 0.7 billion, mainly in our United States operating segment. Excluding special factors, which had a negative overall effect of EUR 0.9 billion on net profit, adjusted net profit in the first half of 2020 amounted to EUR 2.6 billion, up slightly against the level in the prior-year period of EUR 2.5 billion.

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 June 30, 2020. This resulted in adjusted earnings per share of EUR 0.35, compared with EUR 0.39 in the first half of 2019. Adjusted earnings per share, adjusted for special factors affecting net profit, amounted to EUR 0.54 compared with EUR 0.53 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 increased by 8.9 percent compared with the end of 2019, mainly due to the integration of Sprint employees. In our Germany operating segment, employees continued to take up socially responsible instruments in connection with staff restructuring, such as dedicated or phased retirement, which resulted in a decrease in the headcount at our Germany operating segment of 2.8 percent against year-end 2019. The number of full-time equivalent employees increased by 49.7 percent at June 30, 2020 compared to December 31, 2019 primarily due to the integration of employees acquired in the Sprint merger. In our Europe operating segment, the headcount was down 5.0 percent compared with the end of the prior year, with staff levels decreasing in Hungary and Greece in particular. The total headcount in our Systems Solutions operating segment was down 1.9 percent against year-end 2019, primarily as a result of efficiency enhancement measures. The headcount in Germany decreased by 2.7 percent and in our national companies by 5.5 percent. Nearshoring and offshoring activities resulted in a 1.6 percent increase in the headcount at our international production sites. In the Group Development operating segment, the 1.5 percent increase in the number of employees can be attributed to the insourcing of external activities to achieve cost savings in the Netherlands. The headcount in the Group Headquarters & Group Services segment was down 1.4 percent compared with the end of 2019, mainly due to ongoing staff restructuring at Vivento.