2023-09-25 11:43:47 ET
Summary
- Deutsche Telekom has the potential for continued growth based on customer lifetime value.
- Customer lifetime value has seen significant growth in both the German and U.S. markets, indicating further upside potential.
- I take a bullish view on Deutsche Telekom.
Investment Thesis: I take the view that Deutsche Telekom ( DTEGY ) can continue to see an upside from here on the basis of impressive growth in customer lifetime value.
In a previous article back in June 2022, I made the argument that Deutsche Telekom's continued growth in ARPU and market share could lead to further upside in Deutsche Telekom's stock.
Since then, the stock has ascended to a price of $21.82 at the time of writing:
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 while we saw a slight decline in net revenue on a quarterly and half-year basis, earnings per share continued to see growth of 6.9% on a quarterly basis from that of the same quarter last year.
Deutsche Telekom: Interim Group Report H1 2023
While adjusted earnings per share saw a decline of 22.4% over this period, this was due to special factors - namely the GD Towers business entity being recognized as a discontinued entity from Q3 2022 until its sale in February 2023.
When looking at the breakdown of revenue by geography for Q2 2023, the United States shows the highest share of revenue, with Germany being the second-largest market.
Country | Sales (in € millions) | Share (%) |
Germany | 6150 | 23.12% |
United States | 17555 | 65.99% |
Europe | 2899 | 10.90% |
Source: Figures sourced from Deutsche Telekom Q2 2023 Interim Report. Share (%) calculated by author.
With that being said, we did see a decline of 4.8% in net revenue for the United States, with growth of 1.9% and 6.2% for Germany and Europe respectively from Q2 2022.
I had previously made the argument that future growth potential for Deutsche Telekom will be significantly dependent on the U.S. market - not simply due to higher market share, but also due to the fact that average revenue per user had been dropping in Germany while concurrently seeing an increase in the United States.
Customer Lifetime Value
To analyze this in more detail, I decided to calculate customer lifetime value for Deutsche Telekom across the contract/postpaid segment for both Germany and the United States. Customer lifetime value represents the lifetime revenue that Deutsche Telekom can expect from an average customer and is calculated as ARPU (average revenue per user)/churn.
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 | 2500.00 |
Q2 | 2021 | 21 | 0.9 | 2333.33 |
Q3 | 2021 | 21 | 0.9 | 2333.33 |
Q4 | 2021 | 20 | 1 | 2000.00 |
Q1 | 2022 | 20 | 1 | 2000.00 |
Q2 | 2022 | 20 | 0.9 | 2222.22 |
Q3 | 2022 | 21 | 1.3 | 1615.38 |
Q4 | 2022 | 20 | 1.1 | 1818.18 |
Q1 | 2023 | 20 | 1 | 2000.00 |
Q2 | 2023 | 20 | 0.8 | 2500.00 |
Source: ARPU and Churn (%) figures sourced from Deutsche Telekom Backup Q2 2023 Report. LTV figures calculated by author.
Visualized using a heatmap, we can see that customer lifetime value has seen significant growth from that of the same quarter last year, and has seen a recovery from lower-than-average LTV figures for Q3 and Q4 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. We can see that LTV figures for this market are substantially higher than that of the German market.
Quarter | Year | ARPU | Churn (%) | LTV |
Q1 | 2021 | 35 | 1.1 | 3181.82 |
Q2 | 2021 | 35 | 1 | 3500.00 |
Q3 | 2021 | 35 | 1.2 | 2916.67 |
Q4 | 2021 | 36 | 1.3 | 2769.23 |
Q1 | 2022 | 39 | 1.2 | 3250.00 |
Q2 | 2022 | 43 | 1 | 4300.00 |
Q3 | 2022 | 43 | 1.1 | 3909.09 |
Q4 | 2022 | 43 | 1.2 | 3583.33 |
Q1 | 2023 | 43 | 1.1 | 3909.09 |
Q2 | 2023 | 43 | 1 | 4300.00 |
Source: ARPU and Churn (%) figures sourced from Deutsche Telekom Backup Q2 2023 Report. LTV figures calculated by author.
Moreover, in spite of the fact that we saw a slight drop in net revenue for the United States this year - customer lifetime value across the postpaid market continued to remain robust.
Heatmap generated by author using Python's seaborn library.
From this standpoint, I take the view that Deutsche Telekom has the potential to see further upside going forward - on the basis that customer lifetime value has continued to grow across both the German and U.S. markets.
Risks and Looking Forward
With Deutsche Telekom owning a majority stake in T-Mobile ( TMUS ), the company has benefited from a fast-growing customer base in the United States since the merger of T-Mobile with Sprint.
The company saw an addition of 760,000 postpaid phone customers in Q2, which marks the company's best performance across this segment in eight years. This is no doubt encouraging. However, there still remains the risk that as customer growth starts to plateau following the initial influx - we might start to see upward pressure on churn rates if a lesser number of customers choose to switch from leading rivals such as AT&T ( T ) and Verizon ( VZ ).
While T-Mobile's growth has been impressive, AT&T still remains the leader in terms of market share - with AT&T having coverage across 55% of the United States as compared to 35% for T-Mobile. It might become increasingly harder for T-Mobile to lure customers from AT&T in this regard, and should this push churn rates upward - then we might see downward pressure on customer lifetime value.
Conclusion
To conclude, Deutsche Telekom has continued to see strong growth in customer lifetime value across the German and U.S. markets. In spite of competition in the U.S. market - the company has continued to perform strongly.
For this reason, I take a bullish view on Deutsche Telekom.
For further details see:
Deutsche Telekom: Growth In Customer Lifetime Value Encouraging