Investment Thesis: I take the view that Deutsche Telekom has the potential for further upside given high ARPU for the U.S. postpaid market, but a decline in churn rate would also be favourable.
In a previous article back in September, I made the argument that Deutsche Telekom (OTCQX:DTEGY) can continue to see an upside from here on the basis of impressive growth in customer lifetime value.
Since then, the stock has ascended to a price of $22.99 at the time of writing:
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The purpose of this article is to assess whether Deutsche Telekom has the ability to see continued growth from here taking recent performance into consideration.
Performance
When looking at the most recent earnings results for Deutsche Telekom, we can see that when looking at Q1-Q3 performance year-on-year, net revenue has seen a 2.4% fall from that of last year, and adjusted earnings per share has seen an even steeper drop at 14%.
Deutsche Telekom Interim Group Report: Q3 2023
With regards to short-term liquidity, we can see that the quick ratio of Deutsche Telekom (calculated as total current assets less inventories all over total current liabilities) has increased from 0.81 to 0.92. While the ratio remains below 1 (which technically means that the company does not possess sufficient liquid assets to meet its current liabilities) – the fact that the ratio has seen growth is encouraging and represents an improvement in Deutsche Telekom’s short-term financial position.
| Sep 2022 | Sep 2023 | |
| Current assets | 42540 | 36260 |
| Inventories | 3154 | 2577 |
| Current liabilities | 48649 | 36479 |
| Quick ratio | 0.81 | 0.92 |
Source: Figures (in millions of € except the quick ratio) sourced from Deutsche Telekom Interim Group Report: Q3 2023. Quick ratio calculated by author.
Additionally, when looking at the ratio of non-current liabilities to total assets, we can see that the ratio has remained virtually constant over the past year:
| Sep 2022 | Sep 2023 | |
| Non-current financial liabilities | 105265 | 99495 |
| Total assets | 321357 | 302513 |
| Non-current liabilities to total assets ratio | 32.76% | 32.89% |
While Deutsche Telekom’s total assets has declined over the past year, this has also been the case for non-current financial liabilities – the fact that Deutsche Telekom has not had to increase its long-term liabilities to sustain growth is encouraging.
Customer Lifetime Value
In my previous article, I had made reference to the fact that customer lifetime value across the postpaid market (calculated per quarter as average revenue per user / churn) had seen significant growth in both the German and U.S. markets.
Moreover, I had also noted the fact that LTV was substantially higher in the U.S. market as compared to the German market – which was encouraging given the importance of growth in the U.S. market for the company as a whole.
Germany
Here is a breakdown of ARPU, churn (%), and LTV from Q1 2021 to the present for the German market.
| Quarter | Year | ARPU | Churn (%) | LTV |
| Q1 | 2021 | 20 | 0.8 | 2500 |
| Q2 | 2021 | 21 | 0.9 | 2333 |
| Q3 | 2021 | 21 | 0.9 | 2333 |
| Q4 | 2021 | 20 | 1 | 2000 |
| Q1 | 2022 | 20 | 1 | 2000 |
| Q2 | 2022 | 20 | 0.9 | 2222 |
| Q3 | 2022 | 21 | 1.3 | 1615 |
| Q4 | 2022 | 20 | 1.1 | 1818 |
| Q1 | 2023 | 20 | 1 | 2000 |
| Q2 | 2023 | 20 | 0.8 | 2500 |
| Q3 | 2023 | 20 | 0.8 | 2500 |
Source: ARPU and Churn (%) figures sourced from Deutsche Telekom Backup Q1 2022 to Q3 2023 Reports. LTV figures calculated by author.
For the German market, we can see that customer lifetime value came in at the same level as that of the previous quarter – and remains substantially higher than that of Q3 2022.
Heatmap generated by author using Python’s seaborn library.
United States
LTV for the United States market was also calculated in the same manner.
| Quarter | Year | ARPU | Churn (%) | LTV |
| Q1 | 2021 | 35 | 1.1 | 3182 |
| Q2 | 2021 | 35 | 1 | 3500 |
| Q3 | 2021 | 35 | 1.2 | 2917 |
| Q4 | 2021 | 36 | 1.3 | 2769 |
| Q1 | 2022 | 39 | 1.2 | 3250 |
| Q2 | 2022 | 43 | 1 | 4300 |
| Q3 | 2022 | 43 | 1.1 | 3909 |
| Q4 | 2022 | 43 | 1.2 | 3583 |
| Q1 | 2023 | 43 | 1.1 | 3909 |
| Q2 | 2023 | 43 | 1 | 4300 |
| Q3 | 2023 | 43 | 1.3 | 3308 |
Source: ARPU and Churn (%) figures sourced from Deutsche Telekom Backup Q1 2022 to Q3 2023 Reports. LTV figures calculated by author.
When visualising quarterly LTV for the United States using a heatmap, we can see that customer lifetime value for Q3 2023 has fallen substantially from that of the previous quarter and is also significantly lower than that of Q3 2022.
Heatmap generated by author using Python’s seaborn library.
While ARPU remained at a high of €43 in the most recent quarter – the decrease in LTV was due to a higher churn rate of 1.3% – compared to that of 1% in the previous quarter and 1.1% for Q3 2022.
My Perspective and Risks
As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the fact that we have seen churn rate grow across the United States market could be a potential concern.
On an ARPU basis, the United States market remains much more lucrative than that of the German market – and the strong growth that has been delivered by T-Mobile US (TMUS) has been responsible for a substantial portion of growth in revenues and earnings that the company has seen up until now, given that the company has benefited from a fast-growing customer base in the United States since the merger of T-Mobile with Sprint.
However, the higher churn rate may signal that growth in the U.S. market may slowly be plateauing, and customers may show a higher propensity to switch to competitors such as AT&T (T) or Verizon (VZ). The higher churn rate may be temporary and we may see customer lifetime value see growth in the following quarters once again. However, a further drop in this metric would be of concern, as it could potentially indicate that the ability of Deutsche Telekom to continue growing overall revenue across the U.S. market may be plateauing.
In addition, when looking at the stock’s five-year P/E ratio, we can see that the ratio has moved slightly higher off its five-year low, while earnings per share has descended substantially lower than the highs seen in 2022.
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From this standpoint, I take the view that the current price of $22.99 is an accurate representation of fair value for the stock and we would want to see a significant rebound in earnings growth to justify further upside.
Conclusion
To conclude, Deutsche Telekom has seen some pressure on churn across the U.S. postpaid market and we have also seen some pressure on revenue and earnings growth.
While I continue to take a long-term bullish view on Deutsche Telekom given that ARPU remains high for the U.S. postpaid market – I will be watching to see whether the company can reduce churn rates across this market once again and ultimately allow for a rebound in revenue and earnings growth.
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