Results of operations of the Group

Net revenue

In the first three quarters of 2020, we generated net revenue of EUR 73.4 billion, which was up 24.0 percent or EUR 14.2 billion year-on-year. In organic terms, i.e., assuming a comparable composition of the Group in the prior-year period and excluding exchange rate effects, revenue developed positively, with growth of EUR 0.8 billion or 1.2 percent. For a comparison on an organic basis, net revenue in the prior-year period was raised by EUR 13.7 billion to account for effects of changes in the composition of the Group – primarily from the acquisition of Sprint in the United States operating segment – and net exchange rate effects of EUR -0.4 billion were taken into account.

Our United States operating segment in particular contributed to the positive revenue trend with an increase of 48.6 percent. Adjusted for the acquisition of Sprint and exchange rate effects, revenue was up 1.9 percent against the prior-year level. Revenue in our home market of Germany was virtually on a par with the prior-year level, increasing by just 0.1 percent. This slight increase was mainly due to the positive trend in our fixed-network business on the back of revenue growth from broadband and wholesale products. The coronavirus pandemic had a negative impact on roaming, visitor, and terminal equipment revenues, and resulted in delays or postponements to current orders in B2B telecommunications business. In our Europe operating segment, revenue decreased by 1.9 percent, mainly due to exchange rate effects. In organic terms, revenue remained stable at the level of the prior-year period, despite the deterioration in economic conditions due to 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 roaming revenues as a result of travel restrictions, some of which are still in place, and in low-margin terminal equipment business. These negative effects have been partially offset by increases in higher-margin service revenues. Total revenue in our Systems Solutions operating segment decreased by 4.9 percent year-on-year, reflecting the coronavirus-induced decline of the IT market in Western Europe. 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 3.6 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 60.0 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 9.9 percentage points above the level in the prior-year period. In this connection, the proportion of net revenue generated internationally also increased significantly from 69.3 percent to 75.3 percent.

Adjusted EBITDA AL, EBITDA AL

Adjusted EBITDA AL increased year-on-year by EUR 7.4 billion or 39.4 percent to EUR 26.1 billion in the first three quarters of 2020. But even in organic terms, adjusted EBITDA AL increased by EUR 1.8 billion or 7.5 percent. For a comparison on an organic basis, adjusted EBITDA AL in the prior-year period was raised by EUR 5.7 billion to account for effects of changes in the composition of the Group and net exchange rate effects of EUR -0.1 billion were taken into account.

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 significantly, particularly on the back of higher service and terminal equipment revenues in connection with the acquisition of Sprint. In organic terms, adjusted EBITDA AL grew by 10.2 percent year-on-year. 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 slightly positive revenue trend, and improved cost efficiency with 1.8 percent higher adjusted EBITDA AL. Adjusted EBITDA AL in our Europe operating segment increased by 0.2 percent. Assuming constant exchange rates, this increase was as much as 2.1 percent. The main factor in this trend was savings in indirect costs. In our Systems Solutions operating segment, adjusted EBITDA AL declined by 1.7 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 of 8.0 percent 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 continued to post consistent growth on the back of rising volumes.

EBITDA AL increased by EUR 6.1 billion or 34.9 percent year-on-year to EUR 23.6 billion, with special factors changing from EUR ‑1.2 billion to EUR ‑2.4 billion. Expenses incurred in connection with staff-related measures increased by EUR 0.2 billion compared with the prior-year period to EUR 0.9 billion. In addition, expenses of EUR 1.1 billion were recorded as special factors under effects of deconsolidations, disposals, and acquisitions. These expenses were incurred in connection with the approval process for the business combination of T‑Mobile US and Sprint, with acquisition and integration costs, with restructuring costs to realize cost efficiencies from the business combination, and with a reduction in the useful life of leased network technology for cell sites. EUR 0.2 billion related to the derecognition of a 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. In the prior year, expenses of EUR 0.3 billion had been recorded as special factors in connection with gains/losses from deconsolidations, disposals, and acquisitions. In the Europe operating segment, the sale of the Romanian fixed-network business planned since October 2020 resulted in a reversal of impairment losses on property, plant and equipment of EUR 50 million recorded as a special factor in the course of the year. Other special factors affecting EBITDA AL amounted to EUR ‑0.5 billion and mainly relate to expenses incurred in the United States operating segment in the first half of 2020 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 7.7 billion to EUR 8.7 billion, up EUR 1.0 billion or 13.6 percent against the prior-year period. This increase is partly due to the effects described under adjusted EBITDA AL and EBITDA AL. At EUR 18.2 billion, depreciation and amortization were EUR 5.5 billion higher than in the prior-year period. This increase is mainly attributable to Sprint, which has been included since April 1, 2020. Impairment losses on non-current assets reduced EBIT by EUR 0.7 billion. A total of EUR 0.5 billion of this related to the Systems Solutions operating segment and the Group Headquarters & Group Services segment, and EUR 0.2 billion to the Europe operating segment.

For further information on the impairment losses recognized following ad hoc testing, please refer to the section “Selected notes to the consolidated statement of financial position” in the interim consolidated financial statements.

Profit before income taxes

Profit before income taxes decreased from EUR 6.2 billion in the prior year to EUR 5.5 billion, with loss from financial activities increasing by EUR 1.7 billion to EUR 3.2 billion. This increase is primarily due to a EUR 1.3 billion increase in finance costs to EUR 3.1 billion, mainly due to the financial liabilities recognized and the restructuring begun in connection with the acquisition of Sprint, and the related increase in financing, including the handling charges incurred for a briefly utilized bridge loan facility. Other financial income decreased by EUR 0.3 billion year-on-year to an expense of EUR 0.1 billion, due in part to an increase in interest expense from the measurement of provisions and liabilities as well as to lower gains/losses from financial instruments compared with the prior-year period, partly due to measurement effects in connection with derivatives.

Net profit, adjusted net profit

Net profit decreased year-on-year from EUR 3.2 billion to EUR 2.5 billion. Tax expense came to EUR 1.5 billion compared with EUR 1.7 billion in the prior-year period. Profit attributable to non-controlling interests increased from EUR 1.3 billion to EUR 1.6 billion, mainly in our United States operating segment. Excluding special factors, which had a negative overall effect of EUR 1.6 billion on net profit, adjusted net profit in the first three quarters of 2020 amounted to EUR 4.1 billion, up against the level in the prior-year period of EUR 3.9 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 September 30, 2020. This resulted in adjusted earnings per share of EUR 0.52, compared with EUR 0.68 in the first nine months of 2019. Adjusted earnings per share, adjusted for special factors affecting net profit, amounted to EUR 0.86 compared with EUR 0.83 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 8.1 percent compared with the end of 2019, mainly due to the integration of Sprint employees in the United States. The number of full-time equivalents increased by 49.7 percent as of September 30, 2020 compared to December 31, 2019 primarily 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 of 3.2 percent against year-end 2019. In our Europe operating segment, the headcount was down 5.8 percent compared with the end of the prior year, with staff levels decreasing in Hungary, Romania, and Greece in particular. The total headcount in our Systems Solutions operating segment was down 4.1 percent against year-end 2019, primarily as a result of efficiency enhancement measures. The headcount in Germany decreased by 3.8 percent and in our national companies by 10.5 percent. Nearshoring and offshoring activities resulted in a 1.8 percent increase in the headcount at our international production sites. In the Group Development operating segment, the 2.3 percent increase in the number of employees can be attributed to the insourcing of activities previously carried out externally to achieve cost savings at T‑Mobile Netherlands. The headcount in the Group Headquarters & Group Services segment was down 2.9 percent compared with the end of 2019, mainly due to ongoing staff restructuring at Vivento.