q120106k.htm
 
 

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
 
 
Form 6-K
 
 
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the month of May 2010
 
 
Commission file number 001-14540
 
Deutsche Telekom AG
 
(Translation of Registrant’s Name into English)
 
Friedrich-Ebert-Allee 140,
53113 Bonn,
Germany
 
(Address of Principal Executive Offices)
 
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F x            Form 40-F o
 
 
 
Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
 
Yes x            No o
 
This report is deemed submitted and not filed pursuant to the rules and regulations of the Securities and Exchange Commission.

 
 
 

Defined Terms and Contact Information
 
The term “Report” refers to this Report on Form 6-K for the three-month period ended March 31, 2010. Deutsche Telekom AG is a stock corporation organized under the laws of the Federal Republic of Germany. As used in this Report, unless the context otherwise requires, the term “Deutsche Telekom” refers to Deutsche Telekom AG and the terms “we,” “us,” “our,” “Group” and “the Company” refer to Deutsche Telekom and, as applicable, Deutsche Telekom and its direct and indirect subsidiaries as a group. Our registered office is at Friedrich-Ebert-Allee 140, 53113 Bonn, Germany, telephone number +49-228-181-0. Our agent for service of process in the United States is Deutsche Telekom, Inc., 14 Wall Street, Suite 6B, New York, NY 10005.
 
Forward-Looking Statements
 
This Report contains forward-looking statements that reflect the current views of our management with respect to future events and results, including statements contained under “Outlook” as well as dividend guidance and other information relating to expectations or targets for revenue or other performance measures. Forward-looking statements generally are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “aims,” “plans,” “will,” “will continue,” “seeks,” “targets,” “goals,” “outlook”, “should” and similar expressions. Forward-looking statements are based on current plans, estimates and projections, and therefore you should not place too much reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement in light of new information or future events. Forward-looking statements involve inherent risks and uncertainties, most of which are difficult to predict and are generally beyond our control. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among other factors: the development of demand for our fixed and mobile telecommunications services, particularly for new, higher value service offerings; changes in general economic and business conditions, including the significant economic decline currently underway in the markets in which we and our subsidiaries and associated companies operate; ongoing instability and volatility in worldwide financial markets; competitive forces, including pricing pressures, technological changes and alternative routing developments; regulatory actions and the outcome of disputes in which the Company is involved or may become involved; the pace and cost of the rollout of new services, which may be affected by the ability of suppliers to deliver equipment and other circumstances beyond our control; public concerns over health risks putatively associated with wireless frequency transmissions; risks associated with integrating our acquisitions; the development of asset values in Germany and elsewhere; the progress of our debt reduction and liquidity improvement initiatives; the development of our cost control and efficiency enhancement initiatives, including the areas of procurement and personnel reductions; risks and uncertainties relating to benefits anticipated from our international expansion, particularly in the United States; the progress of our domestic and international investments, joint ventures and alliances; our ability to gain or retain market share in the face of competition; our ability to secure and retain the licenses needed to offer services; the effects of price reduction measures and our customer acquisition and retention initiatives; the availability, term and deployment of capital, particularly in view of our debt refinancing needs; actions of the rating agencies and the impact of regulatory and competitive developments on our capital outlays; the progress of our workforce adjustment initiatives and outcome of labor negotiations; changes in currency exchange rates and interest rates; and the reorganization of our fixed-line and mobile operations in Germany. Additionally, we periodically assess our goodwill and other long-term intangibles and tangible assets for indications of impairment by monitoring, among other things, changes in competitive conditions, expectations of growth in the industry, and changes in market and other factors, any of which could result in a risk of additional impairment charges. If these or other risks and uncertainties (including those described in “Forward-Looking Statements,” “Item 3. Key Information – Risk Factors” and elsewhere in our most recent Annual Report on Form 20-F for the year ended December 31, 2009 filed with the U.S. Securities and Exchange Commission) materialize, or if the assumptions underlying any of these statements prove incorrect, our actual results may be materially different from those expressed or implied by such statements. World Wide Web addresses contained in this Report are for explanatory purposes only and they (and the content contained therein) do not form a part of, and are not incorporated by reference into, this Report.
 
Currencies and Exchange Rates
 
Unless otherwise indicated, all amounts in this Report have been expressed in euros. As used in this document, “euro,” “EUR” or “€” means the single unified currency that was introduced in the Federal Republic of Germany (the “Federal Republic”) and ten other participating Member States of the European Union on January 1, 1999. “U.S. dollar,” “USD” or “$” means the lawful currency of the United States. “Pound sterling” means the lawful currency of the United Kingdom. Amounts appearing in this Report that have been translated into euros from other currencies were translated in accordance with the principles described in the notes to the audited consolidated financial statements contained in our Annual Report on Form 20-F for the year ended December 31, 2009.

 
-1-
 

 
Deutsche Telekom at a glance.
 
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Revenue and earnings
                        
Net revenue
     15,812       15,902       (0.6 )     64,602  
    Domestic
     6,739       6,943       (2.9 )     28,033  
    International
     9,073       8,959       1.3       36,569  
    Proportion generated internationally
(%)
     57.4       56.3               56,6  
Profit from operations
     2,029       244    
n.a.
       6,012  
Net profit (loss)
     767       (1,124 )  
n.a.
       353  
Earnings per share basic/diluted
(€)
     0.18       (0.26 )  
n.a.
       0,08  
                                 
Statement of financial position
                                  
Total assets
     130,803       133,764       (2.2 )     127,774  
Shareholders’ equity
       44,279       45,158       (1.9 )     41 937  
Cash capex
     (1,934 )     (2,611 )     25.9       (9,202 )
                                 
Cash flows
                                
Net cash from operating activities
     3,271       2,966       10.3       15,795  
Net cash used in investing activities
     (1,793 )     (1,509 )     (18.8 )     (8,649 )
Net cash used in financing activities
     (899 )     (387 )  
n.a.
       (5,123 )
                                 
 
 
Number of employees at the reporting date.
 
   
Mar. 31, 2010
    
Dec. 31, 2009
    
Change
Mar. 31, 2010/
Dec. 31, 2009
%
    
Mar. 31, 2009
    
Change
Mar. 31, 2010/
Mar. 31, 2009
%
  
Deutsche Telekom Group
     258,240       259,920       (0.6 )     260,798       (1.0 )
    Non-civil servants
     229,299       230,732       (0.6 )     228,928       0.2  
    Civil servants (domestic)
     28,941       29,188       (0.8 )     31,870       (9.2 )
 
 
Number of fixed-network and mobile customers.
 
   
Mar. 31, 2010
    
Dec. 31, 2009
    
Change
Mar. 31, 2010/
Dec. 31, 2009
%
    
Mar. 31, 2009
    
Change
Mar. 31, 2010/
Mar. 31, 2009
%
  
Fixed-network lines
(millions)
     37.5       38.2       (1.8 )     40.3       (6.9 )
Retail broadband lines
(millions)
     15.4       15.0       2.7       14.2       8.5  
Mobile customers
(millions)
     150.2       151.7       (1.0 )     148.5       1.1  
 
 
 
 
 

 
-2-
 

To our shareholders.
 
Developments in the Group.
 
Net revenue of the Group decreased slightly by 0.6 percent year-on-year in the first quarter of 2010 to EUR 15.8 billion.
 
The proportion of net revenue generated internationally increased from 56.3 percent to 57.4 percent. Domestic net revenue was EUR 6.7 billion in the first quarter of 2010, EUR 0.2 billion lower than in the first quarter of 2009. International net revenue increased year-on-year by EUR 0.1 billion to EUR 9.1 billion.
 
Net profit increased by EUR 1.9 billion in the first quarter of 2010 to EUR 0.8 billion.
 
Earnings per share increased in the first quarter of 2010 by EUR 0.44 to EUR 0.18 compared with the prior-year quarter.
 
 
 

 
-3-
 

Corporate governance.
 
The Supervisory Board and Board of Management of Deutsche Telekom AG declared on January 5, 2010 that, in the period since submission of the most recent declaration of conformity pursuant to § 161 of the German Stock Corporation Act on August 28, 2009, Deutsche Telekom AG has complied with the recommendations of the Government Commission of the German Corporate Governance Code, published by the Federal Ministry of Justice on August 5, 2009 in the official section of the electronic Federal Gazette (elektronischer Bundesanzeiger), without exception.
 
The Supervisory Board and Board of Management of Deutsche Telekom AG declared further on January 5, 2010 that Deutsche Telekom AG complies with the recommendations of the Government Commission of the German Corporate Governance Code, published by the Federal Ministry of Justice in the official section of the electronic Federal Gazette (elektronischer Bundesanzeiger) on August 5, 2009, without exception.
 

 
-4-
 

Highlights in the first quarter of 2010.
 
Development of the Group’s strategy.
 
Group strategy developed further by Board of Management. As part of its new Fix – Transform – Innovate strategy, Deutsche Telekom is aiming to refocus its business and focuses on revenue in growth areas by investing in intelligent networks with IT services and in Internet and network services. For further explanations on the new strategy, please refer to the section “Group strategy.”
 
Shareholder remuneration policy for the 2010 to 2012 financial years announced.
 
Shareholder remuneration policy for the 2010 to 2012 financial years approved. The Board of Management and Supervisory Board of Deutsche Telekom expect continued sound balance sheet figures and free cash flow in the current and subsequent two financial years on the basis of mid-term planning, including the investments required to expand business. The Board of Management and Supervisory Board of Deutsche Telekom therefore decided to pursue a shareholder remuneration policy for the 2010 through 2012 financial years that will involve an annual dividend of at least EUR 0.70 per share and the buy-back of shares with the remaining amount up to an unchanged total of around EUR 3.4 billion. This policy is subject to the requisite unappropriated net income being posted in the single-entity financial statements of Deutsche Telekom AG for the financial year in question and the ability to form the necessary reserves for the share buy-back. It is also contingent upon the executive bodies adopting resolutions to this effect taking account of the Company’s situation at the time.
 
One Company.
 
Official launch of Telekom Deutschland GmbH. The spin-off of T-Home into T-Mobile Deutschland GmbH became effective upon entry in the commercial register on March 30, 2010, and with it the merger of German fixed-network and mobile operations within a single entity. At the same time, T-Mobile Deutschland GmbH was renamed Telekom Deutschland GmbH – a step which also became effective upon entry in the commercial register on March 30, 2010. By combining its domestic operations, Deutsche Telekom aims to increase its competitiveness relative to other globally structured telecommunications companies that offer integrated fixed-network and mobile solutions.
 
Corporate transactions.
 
STRATO fully consolidated for the first time. Deutsche Telekom fully consolidated STRATO AG and STRATO Rechenzentrum AG (STRATO) as of January 1, 2010. The transaction will make Deutsche Telekom a leading provider of Web hosting products, especially for consumers and small business customers in the German market.
 
European Commission approves T-Mobile UK and Orange UK merger. The European Commission has approved the merger between Deutsche Telekom’s and France Télécom’s UK mobile operations, thus paving the way for the integration of the two companies.
 
Deutsche Telekom takes over ClickandBuy. Deutsche Telekom has acquired the remaining shares in the Internet payment service provider Firstgate. Via its venture capital company, T-Venture, Deutsche Telekom has held shares in Firstgate, best known for the ClickandBuy brand, since 2006. The agreement was signed on March 23, 2010 and took economic effect on April 1, 2010. The supervisory bodies of the companies concerned and the United Kingdom’s Financial Services Authority have already approved the transaction.
 
Employees.
 
Deutsche Telekom is the first DAX 30 company to introduce a women’s quota for management positions. In March 2010, Deutsche Telekom became the first DAX 30 company to introduce a women’s quota for upper and middle management positions. By 2015, 30 percent of these positions across the Group are to be filled by women. In addition to broadening its talent pool, Deutsche Telekom is also expecting to add value to the Company in the long term thanks to greater diversity at management level.
 
2010 collective bargaining successfully concluded through arbitration. On February 26, 2010, the negotiating parties reached an agreement in the arbitration proceedings governing the 2010 collective bargaining for employees of T-Systems entities. The wage settlement is valid for 24 months. Following two months without adjustments, salaries for pay-scale employees will increase on a straight-line basis by 2.5 percent from March 1, 2010. A further two percent increase will take effect from February 1, 2011. This contract runs until December 31, 2011.
 

 
-5-
 

 
Investments in network upgrade and new devices in the United States.
 
T-Mobile USA to rollout the fastest 3G wireless network with HSPA+ in the United States. T-Mobile USA unveiled plans to upgrade its national high-speed 3G service to the High Speed Packet Access Plus (HSPA+) technology, which will deliver customers data speeds faster than the current 3G network technology. By the end of 2010, T-Mobile expects to have HSPA+ deployed across its 3G footprint, covering more than 100 metropolitan areas and 185 million people. As of the end of the first quarter of 2010, T-Mobile USA had already launched HSPA+ service in Philadelphia, New York, New Jersey, Long Island, and the Western suburbs of Washington, D.C. T-Mobile USA now offers fifteen 3G-capable converged devices to their customers, including the T-Mobile myTouch 3G, Motorola Cliq XT and Blackberry® Bold 9700. Additionally, T-Mobile USA is leveraging its nationwide 3G network through new devices such as the HTC HD2, the Dell Inspiron Mini 10 netbook, and the T-Mobile webConnect Rocket USB data stick. The HTC HD2 features a comprehensive mobile entertainment experience, offering the largest touch screen on a smartphone in the United States and comes ready with access to eBooks, movies, television programs and more. The Dell Inspiron Mini 10 is T-Mobile USA’s first netbook and features built-in access to T-Mobile’s 3G wireless broadband service and Wi-Fi capability. The T-Mobile webConnect Rocket USB data stick provides customers with seamless connectivity to the Internet via Wi-Fi or T-Mobile USA’s 3G wireless network and is the first HSPA+ device from a national U.S. wireless carrier.
 
New products/Connected life and work.
 
Germany LAN. Deutsche Telekom has launched an innovative all-inclusive package for connected work involving a broadband connection and Web-based applications for voice and data communication via fixed-network and mobile channels. An integrated communication center makes connected work at the office and on the go simple and convenient. Customers have total control over their costs with numerous inclusive services for a fixed monthly charge.
 
T-Systems demonstrates new solutions for a connected working environment. T-Systems and Continental presented an open, flexible and future-proof infotainment concept at CeBIT 2010 that runs on the AutoLinQ communications network. This enables vehicles to be connected to cell phones, home PCs and entertainment systems, online databases and diverse app-like, Internet-based value-added services anytime and any place via a mobile connection.
 
Deutsche Telekom manages cell phone payment for SPIEGEL and BILDmobil. Deutsche Telekom is managing the distribution and billing for the new high-value paid content section of SPIEGEL magazine and for the BILDmobil portal. In future, SPIEGEL will also be distributed via the t-online.de portal, giving its 17 million-plus users fast and convenient access to the e-magazine. Deutsche Telekom’s around 39 million mobile customers can now access the new regional services on BILDmobil using any Internet-enabled cell phone.
 
Customer service/awards.
 
TÜV seal of approval for customer service. Deutsche Telekom has received the TÜV (Technical Inspection Association) seal of approval for excellent telephone customer service for the third time running. The independent testers surveyed customers who had used Deutsche Telekom’s service hotlines shortly beforehand. The findings were exceedingly positive. Almost 89 percent of those surveyed rated the hotline staff as “highly competent” or “competent.” Around 94 percent of callers said that the agents had been particularly friendly.
 
Musicload again gets top marks from consumer organization Stiftung Warentest. Of a total of nine online music providers tested, Musicload, Germany’s best-known download portal, has received top marks from Stiftung Warentest with an overall rating of 2.6. In the current issue (4/2010) of “test” magazine, the independent testing institute was particularly impressed by the convenient search functions, easy payment options, and the treatment of sensitive customer data.
 
T-Mobile USA earns highest rank for wireless retail sales satisfaction. During the first quarter of 2010, T-Mobile USA was ranked highest in wireless retail sales satisfaction by J.D. Power and Associates. Winning this award continues to demonstrate T-Mobile USA’s commitment to delivering an industry-leading retail experience, this is the eighth such top ranking from J.D. Power and Associates in the Wireless Retail Sales Satisfaction Study’s past 11 volumes, dating back to 2004.
 
Awards for T-Mobile products, services and networks in the Europe operating segment. Polska Telefonia Cyfrowa (PTC)’s Era brand came top in the Mobile Operator category for the second time in a row in a service quality survey carried out by an independent portal in Poland in 2009.
 
German technology magazine CHIP awarded Deutsche Telekom the “CHIP AWARD for the innovation of the year” with special praise from the editors for the Group’s strong commitment to LTE (Long Term Evolution), a potential technology for the next generation of mobile communications. In 2009 Deutsche Telekom successfully staged the world’s first large-scale trial using the LTE standard in Austria with T-Mobile Austria. By carrying out this pilot trial, Deutsche Telekom made an essential contribution to the rapid further development of this technology.
 

 
-6-
 

 
T-Systems closes new deals and retains major customers.
 
T-Systems introduces digital police radio. T-Systems is helping ten German federal states set up and operate flexible solutions drawn from the “digital radio toolbox,” an anti-interception solution for the entire transmission path. Ten federal states – among them Hesse, North Rhine-Westphalia, Rhineland Palatinate, Saarland and Thuringia – are receiving extensive support from T-Systems. The Deutsche Telekom subsidiary has developed a flexible range of digital police radio solutions and services to provide and operate the security networks that connect up the base stations in the federal states. On request, T-Systems also supports the federal states in setting up and operating the control centers which monitor network operation and perform other functions as required. For example, they manage the users, provide applications, enable remote maintenance, and store data from the different systems in a central database.
 
DLR awards contract to T-Systems. The German Aerospace Center (Deutsches Luft- und Raumfahrtzentrum – DLR) will continue to source all of its basic IT services from T-Systems over the next five years plus one optional year. T-Systems had previously won the Europe-wide invitation to tender. T-Systems will develop, set up, operate and support DLR’s workstations, communication infrastructure and application systems and provide consulting services. The portfolio includes everything from telephones, standardized and highly specialized IT workstations through to supercomputers and grid computing.
 
Deutsche Post DHL outsources further IT functions in Germany to T-Systems. Deutsche Post DHL and T-Systems have agreed to step up their collaboration: The existing contracts covering the provision of data center, infrastructure and network services in addition to the operation of desktop services have been extended ahead of schedule by a further five years to 2014. At the same time, the world’s leading mail and logistics services group reached agreement on other services with T-Systems. The contract is part of a global initiative launched by Deutsche Post DHL to achieve efficiency gains in IT and telecommunications services.
 
SBB and T-Systems set to continue cooperation. Swiss Federal Railways (SBB) intends to continue its strategic partnership with T-Systems and will not be exercising its early termination option. Existing agreements regarding IT services, dating back to 2005, have been revised and will run until the end of 2015, with some services continuing until 2018. SBB has been using T-Systems’ infrastructure services for more than 10 years.
 
T-Systems sets up new pan-European telecommunications network for TUI Travel. The London-based group TUI Travel has commissioned T-Systems, Deutsche Telekom’s corporate customers arm, to set up and operate a Europe-wide telecommunications network linking its corporate sites in seven countries. For the next five years, T-Systems will take responsibility for all telephone, data and mobile communications services for TUI Travel’s traditional travel operations (its Mainstream business unit). With this new integrated network, the world’s leading travel group intends to exploit further synergies and reduce its costs significantly.
 

 
-7-
 

Regulatory situation.
 
On March 26, 2010, in its second partial ruling on eleven applications for injunction by competitors, the Federal Network Agency fixed the charges for access to Deutsche Telekom’s multi-functional street cabinet and cable ducts. The use of a module slot in the multi-functional street cabinets will cost EUR 113.94 per month, to be divided equally among the number of street cabinet users (including Deutsche Telekom). Competitors will have to pay EUR 0.12 per month per meter (excluding administrative expenses) to use one of Deutsche Telekom’s cable ducts. Deutsche Telekom duly filed suits against these rulings.
 

 
-8-
 

Group strategy.
 
 
Fix – Transform – Innovate. Deutsche Telekom’s new strategy.
 
Deutsche Telekom’s long-term goal is to become a market leader for connected life and work. On this path, the Group intends to refocus its business in the coming years with investments in intelligent networks and with IT, Internet and network services. The new Fix – Transform – Innovate strategy will enable Deutsche Telekom to broaden its revenue mix by focusing on new pockets of growth in addition to its traditional access business in fixed-network and mobile communications. The aim of this strategic approach is to expand the activities of Deutsche Telekom across the entire value chain and position the Company as an open partner for consumers and business customers.
 
The five new strategic action areas in the Group strategy specifically focus on the challenges and opportunities in the market and will safeguard Deutsche Telekom’s successful positioning in the long term:
 
    Improve the performance of mobile-centric assets.
 
    Leverage One Company in integrated assets.
 
    Build networks and processes for the gigabit society.
 
    Connected life across all screens.
 
    Connected work with unique ICT solutions.
 
The Group has defined five growth areas in line with these action areas: mobile Internet, the connected home, proprietary Internet services, systems solutions, intelligent network solutions for energy, healthcare, media and the connected car. Overall, revenue is to be almost doubled in these areas from EUR 15 billion today to around EUR 29 billion in 2015. The Group has again set itself ambitious targets. By the year 2012, costs are to be cut by a further EUR 4.2 billion in the second phase of the Save for Service program, the return on capital employed (ROCE) throughout the Group is to be increased by at least 150 basis points and free cash flow is to be increased compared with the 2010 level.
 
Improve the performance of mobile-centric assets.
 
In countries like the United States, the United Kingdom, Austria, the Netherlands, the Czech Republic, and Poland, in which Deutsche Telekom’s presence primarily centers around mobile communications services, the Company is planning to enhance its performance and invest in next-generation technologies, develop innovative services, and expand its portfolio of mobile devices. In the United States, T-Mobile USA is pushing ahead with its network upgrade initiative to cover a population of around 185 million with high-speed HSPA+ technology by the end of 2010. It also aims to double the number of 3G smartphones to approximately 8 million. In the United Kingdom, the Group intends to make the joint venture between T-Mobile UK and Orange UK a success story. With an aggregate customer base of around 29.4 million, the joint venture will be the leader in the UK mobile communications market. Market leadership in Poland and the Czech Republic will be consolidated and the strong position in the Netherlands and Austria further strengthened to challenge established operators.
 
Leverage One Company in integrated assets.
 
The new strategy will also systematically continue the approach taken under the One Company project of integrating fixed-network and mobile communications. In Germany and Europe this will stabilize revenues, improve service levels, and leverage synergies from integration in marketing, distribution, and service. Cross-selling opportunities will open up additional revenue potential. New innovative services and rate plans will further differentiate Deutsche Telekom from the competition. Through the Media Center, for example, customers already have access 24/7 to their music, photos, and other media content on their PCs, TVs, and smartphones. LIGA Total!, the Group’s soccer league service in Germany, can likewise be watched on various screens at home or on the move. By offering this service, Deutsche Telekom intends to play a more active role as an integrated provider of convergent products from a single source.
 
 

 
-9-
 

 
Build networks and processes for the gigabit society.
 
Deutsche Telekom is forecasting a rapid increase in global data volumes in the coming years. This growth will be driven by numerous applications including Web videos and social media for consumers as well as cloud computing and services such as teleconferences for business customers. Deutsche Telekom’s aim is therefore to continue to transform its operations – to increase its efficiency on the one hand and satisfy the growing demand for larger bandwidth on the other. Among the issues are fiber roll-out and the HSPA+ and LTE push, convergence and adaptability of the networks on the basis of an all-IP concept, increased flexibility and speed in the IT factory through systematic standardization and, last but not least, ongoing expansion of key enabling skills in wholesale services and retail products. Deutsche Telekom’s capital expenditure will remain at the prior-year level to drive this transformation ahead and to increase efficiency. In Germany alone, the Company plans to invest around EUR 10 billion in infrastructure in the next three years.
 
Connected life across all screens.
 
Another strategic goal is the provision of innovative, non-device-specific mobile services on TVs and PCs, and on other screens and devices that will enter the market in the future. The mobile Internet is thought to offer the best growth opportunities in this context. Deutsche Telekom intends to develop and market its own centralized offerings, for example innovative communication solutions based on users’ personal network-based address books. The Company is also positioning itself as a pioneer for digital content, offering targeted, personalized linking and distribution of media content. By making specific purchases such as the acquisition of the remaining shares in Firstgate (ClickandBuy), Deutsche Telekom is positioning itself as a leading provider of online payment solutions and expanding its portfolio in the high-growth Internet business. A further topic being pushed is ‘connected home.’ Entertain and Home Gateway will become hubs for media, entertainment, and home automation. Deutsche Telekom’s activities in this area aim to further strengthen its position in the European TV business and make it the market leader in Germany’s pay TV market. Besides its own services and solutions, Deutsche Telekom is entering into selected cooperative ventures elsewhere and is positioning itself long-term as a strategic partner to the key players in other sectors, e.g., as an exclusive online content partner or for the marketing of innovative terminal equipment such as Apple’s iPhone.
 
Connected work with unique ICT solutions.
 
Deutsche Telekom provides customized ICT solutions for business customers and draws on the services of T-Systems in the ongoing standardization of its internal IT solutions. The reorganization at T-Systems will continue to lift its profitability to industry level. T-Systems intends to increase external revenues from IT services, focusing on strong growth outside Germany. There are plans to launch innovative offerings in the field of secure B2B cloud services and further reinforce T-Systems’ quality lead. Using its global infrastructure of data centers and networks, T-Systems offers multinational corporations and public-sector institutions unique expertise and an increasingly appealing product portfolio due to the service partnership with SAP. Under the Global Services Partner program, T-Systems will make SAP services available worldwide and develop mobile SAP applications.
 
On the back of its new strategic approach, Deutsche Telekom is also positioning itself as an open partner for other sectors with the aim of exploiting opportunities for growth in ICT solutions for energy, healthcare, media distribution, and the connected car. At CeBIT 2010, Continental and T-Systems agreed to develop an open, flexible and future proof infotainment concept that will use mobile communications to connect vehicles with cell phones, home PCs and entertainment systems and diverse Internet-based value-added services – anywhere and any time. At E-world 2010, Deutsche Telekom also showcased an end-to-end solution for the energy market – smart metering & home management – which will allow power, gas, and water consumption data to be read, processed, and presented automatically.
 

 
-10-
 

Development of business in the Group.
 
 
Net revenue.
 
In the first quarter of 2010, Deutsche Telekom generated net revenue of EUR 15.8 billion, a slight decrease compared with the first three months of 2009. This trend was influenced by positive effects from changes in the composition of the Group of EUR 0.5 billion and negative exchange rate effects of EUR 0.1 billion. Adjusted for these two factors, revenue in the first quarter was down EUR 0.5 billion or 3.3 percent compared with the first three months of the prior year. The effect of changes in the composition of the Group were mainly attributable to the fact that the Hellenic Telecommunications Organization S.A. (OTE/OTE group) has only been fully consolidated since February 2009 and was therefore not included in revenue for the entire first quarter of 2009. The exchange rate effects were primarily the result of the translation of U.S. dollars to euros.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Net revenue
     15,812       15,902       (90 )     (0.6 )     64,602  
Germany
     6,189       6,331       (142 )     (2.2 )     25,423  
United States
     3,814       4,137       (323 )     (7.8 )     15,471  
Europe
     2,412       2,436       (24 )     (1.0 )     10,034  
Southern and Eastern Europe
     2,387       1,964       423       21.5       9,685  
Systems Solutions
     2,131       2,106       25       1.2       8,798  
Group Headquarters & Shared Services
     565       618       (53 )     (8.6 )     2,410  
Intersegment revenue
     (1,686 )     (1,690 )     4       0.2       (7,219 )
                                         
 
Revenue in Deutsche Telekom’s operating segments developed as follows:
 
The Germany operating segment recorded a revenue decrease of 2.2 percent in the first quarter of 2010 compared with the first three months of the prior year. The 4.1 percent decrease in fixed-network revenue was only partially offset by a 2.5-percent improvement in mobile revenue. The revenue decrease in the fixed-network business was primarily attributable to continuing line losses resulting from intensified competition, the increased sales of complete packages (telephony and Internet) with a flat-rate component, and falling usage-related charges. Revenue from non-voice (data and messaging) services contributed to revenue growth in mobile communications. The more restrictive regulatory environment, however, had a negative effect on the development of revenue.
 
The decline in revenue of EUR 0.3 billion or 7.8 percent in the United States operating segment compared with the first quarter of 2009 was primarily the result of negative exchange rate effects. Adjusted for these effects of EUR 0.2 billion, the decline would have been much lower at EUR 0.1 billion or 2.2 percent. The main reason for the revenue decline was lower voice revenue due to the loss of contract customers.
 
Revenue in the Europe operating segment remained virtually on a par with the prior-year period. Adjusted for exchange rate effects of EUR 0.1 billion mainly from the translation of Polish zlotys, revenue in this operating segment decreased by EUR 0.1 billion or 4.6 percent compared with the first quarter of 2009, primarily as a result of lower service revenues in all mobile companies. Higher revenues generated at International Carrier Sales and Solutions (ICSS) coupled with an increase in handset revenues partly compensated for these negative effects.
 
Revenue in the Southern and Eastern Europe operating segment increased EUR 0.5 billion due to the effects of changes in the composition of the Group. Excluding these and exchange rate effects, revenue decreased by EUR 0.1 billion or 5.5 percent compared with the first quarter of 2009. The strained economic situation and continuing intense competitive pressure in both mobile communications and the traditional fixed network negatively affected revenue. Taxation of mobile revenue in Croatia and Greece also had a negative impact. Broadband growth in all countries did not make up for the decline in revenue in the traditional fixed-network area.
 
Revenue generated in the Systems Solutions operating segment in the first quarter of 2010 remained on a par with the first three months of 2009. Effects from changes in the composition of the Group and exchange rate effects had only an immaterial impact on this operating segment. While revenue in Germany declined, international revenue increased. The decrease in Germany was attributable to both the postponement or cancelation of projects in the systems integration business and the price trend in IT and telecommunications. The falling price trend in IT business was partially offset by new contracts. Growth in international business continued as a result of the large number of contracts with corporate customers.
 

 
-11-
 
 
Contribution of the operating segments to net revenue (after elimination of revenue between segments).
                                           
   
Q1
2010
 
millions of €
    
Proportion of net revenue of the Group
%
    
Q1
2009
 
millions of €
    
Proportion of net revenue of the Group
%
    
Change
 
 
millions of €
    
Change
 
 
%
    
FY
2009
millions of
€
  
Net revenue
     15,812       100.0       15,902       100.0       (90 )     (0.6 )     64,602  
Germany
     5,804       36.7       5,969       37.5       (165 )     (2.8 )     23,813  
United States
     3,810       24.1       4,133       26.0       (323 )     (7.8 )     15,457  
Europe
     2,264       14.3       2,307       14.5       (43 )     (1.9 )     9,486  
Southern and Eastern Europe
     2,349       14.9       1,929       12.1       420       21.8       9,510  
Systems Solutions
     1,532       9.7       1,496       9.4       36       2.4       6,083  
Group Headquarters & Shared Services
     53       0.3       68       0.5       (15 )     (22.1 )     253  
                                                         
 
With 36.7 percent, the Germany operating segment provided the largest contribution to the net revenue of the Group. The Southern and Eastern Europe operating segment’s share of net revenue increased to 14.9 percent compared with the first three months of 2009. This was primarily due to the full consolidation of the OTE group for the whole quarter, in contrast to the first quarter of 2009, when the OTE group was not included in the consolidated financial statements until February. The contributions of the other operating segments to net revenue remained almost constant.
 
Breakdown of revenue by regions.
The proportion of net revenue generated internationally increased by 1.1 percentage points year-on-year to 57.4 percent in the first quarter of 2010, primarily due to changes in the composition of the Group. In contrast to the prior-year period, the OTE group was consolidated for the full three months of the first quarter of 2010. In the first quarter of 2009, the OTE group was not included in the consolidated financial statements until February.
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Net revenue
     15,812       15,902       (90 )     (0.6 )     64,602  
    Domestic
     6,739       6,943       (204 )     (2.9 )     28,033  
    International
     9,073       8,959       114       1.3       36,569  
Proportion generated internationally
(%)
     57.4       56.3                       56.6  
    Europe (excluding Germany)
     5,074       4,684       390       8.3       20,573  
    North America
     3,837       4,148       (311 )     (7.5 )     15,527  
    Other
     162       127       35       27.6       469  
                                         
 
Cost of sales.
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Cost of sales
     (9,025 )     (8,906 )     (119 )     (1.3 )     (36,259 )
                                         
Despite the decrease in revenue, the cost of sales increased by EUR 0.1 billion compared with the first quarter of 2009, partly as a result of the write-off of receivables from the German Main Customs Office for 2005 to 2009 and partly due to the inclusion of the OTE group in the consolidated group. In the first quarter of 2009, the cost of sales included part of the costs taken over by the Hellenic Republic for a voluntary early retirement program.
 
Selling expenses.
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Selling expenses
     (3,655 )     (3,996 )     341       8.5       (15,863 )
                                         
The Group’s selling expenses decreased compared with the first quarter of 2009, mainly as a consequence of lower customer acquisition and retention costs. While the first quarter of 2009 was marked by highly aggressive sales activities, which incurred correspondingly high customer investment costs, the market approach for the current year was less focused on the first quarter, which was reflected in lower costs.
 
General and administrative expenses.
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
General and administrative expenses
     (1,222 )     (1,136 )     (86 )     (7.6 )     (4,653 )
                                         
The main cause of the increase in general and administrative expenses compared with the first three months of 2009 was the inclusion of the OTE group in the consolidated Group.

 
-12-
 

 
Other operating income/expenses.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Other operating income
     307       387       (80 )     (20.7 )     1,504  
Other operating expenses
     (188 )     (2,007 )     1,819       90.6       (3,319 )
                                         
Other operating income decreased by EUR 0.1 billion compared with the first quarter of 2009, which was mainly due to a specific effect in the prior year. In the first quarter of 2009, this item included income from the reclassification of real estate from assets held for sale to non-current assets.
 
The significant year-on-year decrease in other operating expenses was also mainly attributable to an effect in the first quarter of 2009 when an expense of EUR 1.8 billion was recorded for the impairment of goodwill relating to the cash-generating unit T-Mobile UK.
 
 
Profit from operations.
 
Profit from operations in Deutsche Telekom’s operating segments developed as follows:
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Profit (loss) from operations of the Group
     2,029       244       1,785    
n.a.
       6,012  
Germany
     1,171       1,325       (154 )     (11.6 )     5,062  
United States
     544       530       14       2.6       2,233  
Europe
     375       (1,786 )     2,161    
n.a.
       (905 )
Southern and Eastern Europe
     304       504       (200 )     (39.7 )     1,037  
Systems Solutions
     18       11       7       63.6       (11 )
Group Headquarters & Shared Services
     (365 )     (309 )     (56 )     (18.1 )     (1,249 )
Reconciliation
     (18 )     (31 )     13       41.9       (155 )
                                         
 
 
Profit from operations of the Deutsche Telekom Group increased significantly by EUR 1.8 billion year-on-year to EUR 2.0 billion in the first quarter of 2010. This increase was also attributable to the lower year-on-year level of depreciation, amortization and impairment losses in the first quarter of 2010. The decrease in depreciation of technical equipment and machinery was mainly attributable to the discontinuation of depreciation and amortization of assets at T-Mobile UK which, in contrast to the first quarter of 2009, were classified as held for sale and are therefore no longer depreciated or amortized. In the first quarter of 2009 an impairment loss of EUR 1.8 billion was recorded on the goodwill of the cash-generating unit T-Mobile UK in the Europe operating segment.
 
In the Germany operating segment, profit from operations decreased year-on-year by EUR 0.2 billion to EUR 1.2 billion in the first quarter of 2010. Expenses of EUR 0.1 billion from the write-off of receivables from the German Main Customs Office for the years 2005 to 2009 attributed to this decrease.
 
Profit from operations in the USA operating segment grew year-on-year by 2.6 percent. In spite of lower revenues  being offset by lower operating costs, including lower commissions expense related to fewer customer additions in the first quarter of 2010.
 
Profit from operations in the Southern and Eastern Europe operating segment declined year-on-year. This was primarily the result of a one-time positive effect in the first quarter of 2009 mainly due to income from the reversal of provisions through the Hellenic Republic’s contribution to the costs of the voluntary severance program in the OTE group.
 

 
-13-
 
 
Profit/loss from financial activities.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Profit (loss) from financial activities
     (715 )     (742 )     27       3.6       (3,357 )
    Finance costs
     (597 )     (632 )     35       5.5       (2,555 )
    Interest income
     140       100       40       40.0       341  
    Interest expense
     (737 )     (732 )     (5 )     (0.7 )     (2,896 )
    Share of profit (loss) of associates and joint
    ventures accounted for using the equity method
     3       5       (2 )     (40.0 )     24  
Other financial income (expense)
     (121 )     (115 )     (6 )     (5.2 )     (826 )
                                         
The Group’s loss from financial activities in the first quarter of 2010 was at the level of the first three months of 2009.
 
 
Personnel.
 
                               
      Q1 2010       Q1 2009    
Change
 
    
Change
 
%
    
FY
2009
  
Average number of employees
     259,033       249,325       9,708       3.9       257,601  
    Domestic
     128,197       131,409       (3,212 )     (2.4 )     130,477  
    International
     130,836       117,916       12,920       11.0       127,124  
                                         
    Non-civil servants
     230,073       217,316       12,757       5.9       226,460  
    Civil servants (domestic)
     28,960       32,009       (3,049 )     (9.5 )     31,141  
                                         
Trainees and student interns
     9,474       10,263       (789 )     (7.7 )     9,805  
                                         
Personnel costs
(millions of €)
     (3,706 )     (3,310 )     (396 )     (12.0 )     (14,333 )
                                         
The average number of employees increased by 3.9 percent compared with the first quarter of 2009, mainly as a result of changes in the composition of the Group. The OTE group has only been fully consolidated since February 2009 and was therefore not included for the entire first quarter of 2009.
 
In addition, the employees taken over by the Systems Solutions operating segment as part of major new deals and the increase in offshore activities also increased the average headcount.
 
These factors also resulted in the increase of EUR 0.4 billion in personnel costs compared with the first quarter of 2009. Additionally, personnel costs in the first quarter of 2009 were reduced by a EUR 0.2 billion contribution by the Hellenic Republic to the costs of a voluntary early retirement program.
 
 

 
-14-
 
 
 
Depreciation, amortization and impairment losses.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Amortization and impairment of intangible assets
     (806 )     (2,591 )     1,785       68.9       (5,657 )
    Of which: mobile communications licenses
     (187 )     (242 )     55       22.7       (905 )
    Of which: goodwill
     -       (1,803 )     1,803    
n.a.
       (2,345 )
Depreciation and impairment of property, plant and equipment
     (1,855 )     (2,107 )     252       12.0       (8,237 )
Total depreciation, amortization and impairment losses
     (2,661 )     (4,698 )     2,037       43.4       (13,894 )
                                         
Depreciation, amortization and impairment losses decreased by EUR 2.0 billion compared with the first quarter of 2009. This was due in particular to an impairment loss of EUR 1.8 billion on the goodwill of the cash-generating unit T-Mobile UK recognized in the first three months of 2009, and a year-on-year decrease in depreciation of technical equipment and machinery. The decrease in depreciation of technical equipment and machinery was mainly attributable to the discontinuation of depreciation and amortization of assets at T-Mobile UK which, in contrast to the first quarter of 2009, were classified as held for sale and are therefore no longer depreciated or amortized.
 
 
Profit/loss before income taxes.
 
Profit before income taxes for the first quarter of 2010 increased by EUR 1.8 billion to EUR 1.3 billion in line with profit from operations. At EUR 0.7 billion, the Group’s loss from financial activities remained at the same level as in the first three months of 2009.
 
 
Income taxes.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Income taxes
     (449 )     (426 )     (23 )     (5.4 )     (1,782 )
                                         
Despite significantly higher profit/loss before income taxes, income tax expense increased slightly compared with the first quarter of 2009. Income tax expense in the first quarter of 2009 was comparatively high as a result of goodwill impairment losses not being considered for tax purposes.
 
 
Net profit.
 
Deutsche Telekom recorded an increase in net profit of EUR 1.9 billion to EUR 0.8 billion in the first quarter of 2010, primarily due to the aforementioned effects.
 

 
-15-
 

Liquidity and Capital Resources.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Net cash from operating activities
     3,271       2,966       305       10.3       15,795  
Net cash used in investing activities
     (1,793 )     (1,509 )     (284 )     (18.8 )     (8,649 )
Net cash used in financing activities
     (899 )     (387 )     (512 )  
n.a.
       (5,123 )
Effect of exchange rate changes on cash and cash equivalents
     52       17       35    
n.a.
       58  
Changes in cash and cash equivalents associated with assets and disposal groups held for sale
     (100 )     -       (100 )  
n.a.
       (85 )
Net increase (decrease) in cash and cash equivalents
     531       1,087       (556 )     (51.1 )     1,996  
Cash and cash equivalents, at the beginning of the period
     5,022       3,026       1,996 )     66.0       3,026  
Cash and cash equivalents, at the end of the period
     5,553       4,113       1,440       35.0       5,022  
 
 
Net cash from operating activities.
 
Net cash from operating activities amounted to EUR 3.3 billion in the first quarter of 2010, an increase of EUR 0.3 billion over the prior-year quarter. Several factors, some of which offset each other, contributed to this improvement. Net payments resulting from the canceling of interest rate swaps decreased by EUR 0.1 billion due to the non-recurrence of one-time effects from the prior-year quarter. This was offset by the improved year-on-year change in provisions of EUR 0.4 billion, as a result of increased additions to provisions for employee expenses while the utilization of provisions for dealers’ commissions and for reimbursements were lower in the first quarter of 2010.
 
The net change in assets and liabilities carried as working capital improved by EUR 0.1 billion, which is attributable to various factors, some of which offset each other.
 
 
Net cash used in investing activities.
 
Net cash used in investing activities totaled EUR 1.8 billion as compared with EUR 1.5 billion in the same period of the previous year. This development was the result of the following factors, some of which offset each other. On the one hand there was the addition of the funds of the OTE group amounting to EUR 1.6 billion as part of the first-time full consolidation of OTE from February 2009 and, on the other hand, there was no corresponding item in the first quarter of 2009 comparable with the outflows for investments relating to the acquisition of STRATO of EUR 0.3 billion in the first quarter of 2010. In an offsetting effect, cash outflows for intangible assets and property, plant and equipment, however, decreased by EUR 0.7 billion, primarily as a result of the postponement of projects in Germany partly due to weather conditions and lower cash outflows in the United States in the first quarter of 2010. In addition, net cash outflows from the change in current financial assets improved by EUR 0.8 billion. While cash outflows of EUR 0.4 billion were recorded in the prior-year period primarily for short-term cash deposits and the deposit of collateral for hedging transactions, in the reporting period there was mainly the return of cash collateral deposited for the acquisition of STRATO totaling EUR 0.3 billion.
 
Net cash used in financing activities.
 
Net cash used in financing activities amounted to EUR 0.9 billion in the first quarter of 2010, compared with EUR 0.4 billion in the prior-year quarter.
 
This change was mostly attributable to EUR 1.5 billion lower year-on-year net proceeds from the issue of non-current financial liabilities. On the other hand, net repayments of current financial liabilities decreased by EUR 0.9 billion, and there was no equivalent in the reporting period for the advance dividend of EUR 0.1 billion paid by Hrvatske telekomunikacije in the first quarter of 2009.
 
Capital expenditures and investments.
 
The following table provides information concerning capital expenditures and investments in subsidiaries, associated companies and related companies, as well as proceeds from the sale of non-current assets and investments.
Q1 2010 
millions of €
    
Q1 2009
millions of €
    
FY 2009 millions of €
  
Capital expenditures
     1,934       2,611       9,202  
Investments in subsidiaries and non-current financial assets
     356       80       1,183  
Proceeds from disposal of non-current assets and investments
     (121 )     (107 )     (591 )
Other
     (376 )     (1,075 )     (1,145 )
Net cash used for investing activities
     1,793       1,509       8,649  
 
 
-16-
 
Total financial liabilities.
 
The following table summarizes our total financial liabilities as of March 31, 2010 and 2009, and December 31, 2009:
 
                               
   
Mar. 31,
2010
 
millions of €
    
Dec. 31,
2009
 
millions of €
    
Change
Mar. 31, 2010/
Dec. 31, 2009
%
    
Mar. 31,
2009
 
millions of €
    
Change
Mar. 31, 2010/
Mar. 31, 2009
%
  
Bonds
     38,722       38,508       0.6       39,659       (2.4 )
Liabilities to banks
     4,559       4,718       (3.4 )     4,670       (2.4 )
Liabilities to non-banks from promissory notes
     1,124       1,057       6.3       1,036       8.5  
Derivative financial liabilities
     786       979       (19.7 )     811       (3.1 )
Lease liabilities
     1,899       1,909       (0.5 )     1,987       (4.4 )
Other financial liabilities
     3,850       4,020       (4.2 )     4,949       (22.2 )
Total
     50,940       51,191       (0.5 )     53,112       (4.1 )
                                         
Total financial liabilities decreased as of March 31, 2010, as compared with December 31, 2009, primarily as a result of redemptions of EUR 1.3 billion and the offsetting effect of EUR 0.7 billion by the issuance of Medium Term Notes in the first quarter 2010.
 
 
-17-
 
Segment reporting.
 
The following tables give an overall summary of Deutsche Telekom’s operating segments and Group Headquarters & Shared Services for the first quarters of 2010 and 2009 as well as for the full 2009 financial year.
 
For details on the development of operations in the operating segments and at Group Headquarters & Shared Services, please refer to the section “Development of business in the operating segments” in this report.
 
 
Segment information in the quarters.
 
  Q1 2010 Q1 2009    
Net revenue
 
millions
of €
    
Inter-
segment revenue
millions
of €
    
Total revenue
 
millions
of €
    
Profit (loss) from operations
millions
of €
    
Depreciation and
amortization
 
millions
of €
    
Impair-ment
losses
millions
of €
    
Segment
assets
 
millions
of €
    
Investments accounted for using the equity method
millions
of €
  
Germany
       5,804       385       6,189       1,171       (1,014 )     0       34,010       24  
          5,969       362       6,331       1,325       (1,016 )     0       50,868       18  
United States
       3,810       4       3,814       544       (463 )     (1 )     37,941       20  
          4,133       4       4,137       530       (531 )     0       38,804       16  
Europe
       2,264       148       2,412       375       (285 )     0       22,325       0  
          2,307       129       2,436       (1,786 )     (444 )     (1,803 )     21,143       11  
Southern and
Eastern Europe
       2,349       38       2,387       304       (571 )     (2 )     24,852       52  
          1,929       35       1,964       504       (470 )     (6 )     26,695       51  
Systems Solutions
       1,532       599       2,131       18       (150 )     0       8,651       56  
          1,496       610       2,106       11       (177 )     0       8,992       50  
Group Headquarters &
Shared Services
       53       512       565       (365 )     (167 )     (21 )     111,046       0  
    68       550       618       (309 )     (156 )     (103 )     118,343       0  
Total
       15,812       1,686       17,498       2,047       (2,650 )     (24 )     238,825       152  
          15,902       1,690       17,592       275       (2,794 )     (1,912 )     264,845       146  
Reconciliation
       -       (1,686 )     (1,686 )     (18 )     12       1       (108,022 )     -  
          -       (1,690 )     (1,690 )     (31 )     8       0       (131,081 )     -  
Group
       15,812       -       15,812       2,029       (2,638 )     (23 )     130,803       152  
          15,902       -       15,902       244       (2,786 )     (1,912 )     133,764       146  
                                                                     
 
 
Segment information for the 2009 financial year.
 
FY
2009
  
Net revenue
 
millions
of €
    
Inter-segment revenue
millions
of €
    
Total revenue
 
millions
of €
    
Profit (loss) from operations
millions
of €
    
Depreciation and amortization
 
millions
of €
    
Impair-ment losses
millions
of €
    
Segment
assets
 
millions
of €
    
Investments accounted for using the equity method
millions
of €
  
Germany
     23,813       1,610       25,423       5,062       (4,189 )     (7 )     52,002       23  
United States
     15,457       14       15,471       2,233       (2,025 )     (3 )     36,087       18  
Europe
     9,486       548       10,034       (905 )     (1,561 )     (1,850 )     21,668       0  
Southern and Eastern Europe
     9,510       175       9,685       1,037       (2,211 )     (536 )     25,120       52  
Systems Solutions
     6,083       2,715       8,798       (11 )     (718 )     (3 )     8,872       54  
Group Headquarters & Shared Services
     253       2,157       2,410       (1,249 )     (660 )     (173 )     120,162       0  
Total
     64,602       7,219       71,821       6,167       (11,364 )     (2,572 )     263,911       147  
Reconciliation
     -       (7,219 )     (7,219 )     (155 )     41       1       (136,137 )     -  
Group
     64,602       -       64,602       6,012       (11,323 )     (2,571 )     127,774       147  
                                                                 
 
 
 
 

 
-18-
 

Development of business in the operating segments.
 
 
Germany.
 
 
Customer development.
 
                               
   
Mar. 31,
2010
 
millions
    
Dec. 31,
2009
 
millions
    
Change
Mar. 31, 2010/
Dec. 31, 2009
%
    
Mar. 31,
2009
 
millions
    
Change
Mar. 31, 2010/
Mar. 31, 2009
%
  
Fixed network
                              
Fixed-network lines
     25.8       26.2       (1.5 )     27.7       (6.9 )
Retail broadband lines
     11.7       11.5       1.7       11.0       6.4  
Wholesale bundled lines
     1.5       1.6       (6.3 )     2.2       (31.8 )
Unbundled local loop lines (ULLs)
     9.2       9.1       1.1       8.6       7.0  
Wholesale unbundled lines
     0.7       0.6       16.7       0.3    
n.a.
  
                                         
Mobile communications
                                        
Mobile customersa
     38.5       39.1       (1.5 )     39.0       (1.3 )
                                         
 
a
As a result of the change in the terms of contract, prepay contracts no longer end automatically, but run for an unlimited duration and can be terminated by the customer at any time and by Telekom Deutschland GmbH with one month’s notice. Telekom Deutschland GmbH reserves the right to make use of this right of termination and to deactivate cards in the system.
 
 
Business in Germany progressed despite the challenging economic environment, regulatory requirements, and more intense competition. Since 2007, Deutsche Telekom’s broadband market share has remained stable at 46 percent. Deutsche Telekom further extended its market leadership in service revenues in the mobile communications sector and focused on value-driven growth.
 
Fixed network. As growth on the broadband market in Germany became more restrained, the number of retail lines increased by 0.2 million compared with the end of 2009 to a total of 11.7 million. The number of Entertain products connected increased again in the first quarter of 2010. With 0.9 million Entertain products connected and 1.2 million lines sold as of March 31, 2010, the positive development continued.
 
Fixed-network line losses totaled 0.4 million in the first quarter of 2010, down slightly compared with the end of 2009. These line losses are mainly attributable to customers switching to alternative telecommunications carriers, cable companies, and mobile operators.
 
The number of unbundled local loop lines (ULLs) increased slightly compared with the end of 2009 to 9.2 million. The number of unbundled wholesale lines rose slightly by 0.1 million compared with the end of 2009 to 0.7 million. The increase in both ULLs and unbundled wholesale lines resulted in a slight decrease in bundled wholesale lines of 0.1 million compared with the end of 2009.
 
Mobile communications. Compared with the end of 2009, the number of mobile customers decreased by 0.6 million in the first quarter of 2010 to 38.5 million. While the number of contract customers increased by 0.1 million to 17.3 million, the number of prepay customers declined by 0.7 million to 21.2 million. One of the main causes was the deregistration of inactive prepay customers. The share of contract customers increased by around one percentage point to 45 percent of the customer base, encouraged by attractive smartphones like the Apple iPhone and a rise in the proportion of customers with integrated flat-rate plans for telephony and data usage.
 
 

 
-19-
 

 
Development of operations.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Total revenue
     6,189       6,331       (142 )     (2.2 )     25,423  
Fixed network
     4,530       4,724       (194 )     (4.1 )     18,736  
Mobile communications
     2,000       1,952       48       2.5       8,109  
                                         
Profit from operations
     1,171       1,325       (154 )     (11.6 )     5,062  
                                         
Depreciation, amortization and impairment losses
     (1,014 )     (1,016 )     2       0.2       (4,196 )
                                         
Cash capex
     (651 )     (800 )     149       18.6       (3,158 )
                                         
Number of employees (average)
     80,729       86,086       (5,357 )     (6.2 )     84,584  
Fixed network
     74,893       80,075       (5,182 )     (6.5 )     78,507  
Mobile communications
     5,836       6,011       (175 )     (2.9 )     6,077  
                                         
The contributions of the Fixed Network and Mobile Communications sub-segments generally show the unconsolidated view, and do not take consolidation effects at operating segment level into consideration.
 
 
Total revenue.
 
Total revenue in the Germany operating segment decreased in the first quarter of 2010 by 2.2 percent year-on-year to EUR 6.2 billion, a less pronounced decline than in the full 2009 financial year (3.7 percent). This revenue decrease was mainly caused by the continuing losses of fixed-network lines due to competition and by regulatory pricing measures in fixed-network and mobile communications.
 
Fixed network. Revenue in the first quarter of 2010 decreased by 4.1 percent year-on-year to EUR 4.5 billion. The continuing line losses resulting from increased competition and falling usage-related charges were the main factors leading to the decline in revenue. Growth in the volume of unbundled local loop lines and the migration to premium complete packages (e.g., those including TV components), had a positive effect but only partially compensated for the decline in revenue.
 
Mobile communications. In the first quarter of 2010, total revenue from mobile operations increased by EUR 48 million or 2.5 percent to EUR 2.0 billion, largely due to year-on-year increases in service revenues to EUR 1.8 billion driven by a continued improvement in non-voice revenues by 3.3 percent. The more restrictive regulatory environment had an offsetting effect on revenue. This was driven in particular by lower mobile termination charges from April 1, 2009, the EU roaming regulation effective since July 1, 2009, and the expiry of the national roaming agreements with O2 and others at the end of 2009.

 
-20-
 

 
Profit from operations.
 
Profit from operations in the Germany operating segment decreased year-on-year by EUR 0.2 billion to EUR 1.2 billion in the first quarter of 2010, mainly due to the decrease in revenue in the traditional fixed-network business that was only partially offset by growth in the mobile business. In the fixed network, increased expenditure for personnel costs and legal risks had a negative effect in the first quarter of 2010 billion, mainly comprising a write-off of receivables from the German Main Customs Office for 2005 to 2009.  In mobile communications, profit from operations increased primarily due to the positive revenue trend and lower general and administrative expenses.
 
Cash capex.
 
Cash capex in the first quarter of 2010 was EUR 0.1 billion lower than in the first quarter of 2009. The high level of investment activity at the end of 2008 resulted in disproportionately high cash capex in the first quarter of 2009. Additions to non-current assets in the Germany operating segment remained at the prior-year level, partially as a result of weather conditions, and consisted mainly of fixed-network technology.
 
Personnel.
 
Average headcount decreased by 6.2 percent compared with the first quarter of 2009 to 80,729 as a result of the workforce reduction mainly in fixed-network operations in spite of new hires and the first-time consolidation of STRATO as of January 1, 2010.
 

 
-21-
 
 
United States.
 
Customer development.
                               
   
Mar. 31,
2010
 
millions
    
Dec. 31,
2009
 
millions
    
Change
Mar. 31, 2010/
Dec. 31, 2009
%
    
Mar. 31,
2009
 
millions
    
Change
Mar. 31, 2010/
Mar. 31, 2009
%
  
United States
                              
Mobile customers
     33.7       33.8       (0.3 )     33.2       1.5  
                                         
 
At March 31, 2010, the United States operating segment (T-Mobile USA) had 33.7 million customers, a net decrease in customers of 77,000 in the first quarter of 2010, compared to 415,000 net customers added in the first quarter of 2009 and 371,000 in the fourth quarter of 2009. In the first quarter of 2010, net contract customers (including connected devices) declined by 118,000 compared to 160,000 net contract customer additions in the first quarter of 2009. Net prepay customer additions were 41,000 in the first quarter of 2010 compared to 255,000 net prepay customer additions in the first quarter of 2009. The decrease in net customers in the first quarter of 2010 was related primarily to lower branded (wireless customers excluding MVNO and connected devices) customer additions caused by continued competitive intensity and a slowdown in U.S. wireless industry growth. This decrease in branded customer additions during the first quarter of 2010 was partially offset by wholesale (MVNO and connected devices) customer additions. Holiday season sales contributed to higher customer additions in the fourth quarter of 2009 compared to the first quarter of 2010.
 
T-Mobile USA’s blended churn rate was steady at 3.1 percent per month in the first quarter of 2010 and the first quarter of 2009. Contract customer churn slightly decreased in the first quarter of 2010 to 2.2 percent from 2.3 percent in the first quarter of 2009.
 
Development of operations.
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Total revenue
     3,814       4,137       (323 )     (7.8 )     15,471  
                                         
Profit from operations
     544       530       14       2.6       2,233  
Depreciation, amortization and impairment losses
     (464 )     (531 )     67       12.6       (2,028 )
                                         
Cash capex
     (481 )     (865 )     384       44.4       (2,666 )
                                         
Number of employees (average)
     38,663       37,720       943       2.5       38,231  
                                         
 
Total revenue.
Revenue from the United States operating segment (T-Mobile USA) decreased by 7.8 percent year-on-year to EUR 3.8 billion in the first quarter of 2010, primarily as a result of currency fluctuations. In U.S. dollars revenues of the operating segment decreased by 2.2 percent year-on-year. The main factor driving the decrease in revenue in local currency was a fall in voice access revenues related to net losses of branded customers (wireless customers excluding MVNO and connected devices). Additionally, contract average revenue per user (ARPU) decreased year-on-year due primarily to a change in the customer mix towards lower ARPU customers, such as connected devices. Lower voice usage revenues related to customers converting to unlimited rate plans were offset by higher data revenues from customers adopting 3G data plans. The number of 3G-capable converged device users increased considerably from 1.5 million at the end of the first quarter of 2009 to 5.2 million at the end of the first quarter of 2010.
 
Profit from operations .
 
Profit from operations grew year-on-year by 2.6 percent. Lower revenues were offset by lower operating costs, including lower commissions expense related to fewer customer additions in the first quarter of 2010.
 
Cash capex.
 
Cash capex decreased year-on-year from EUR 0.9 billion to EUR 0.5 billion in the first quarter of 2010. The primary reason for lower capex relates to the aggressive build-out of the national UMTS/HSDPA (3G) network in the first quarter of 2009. The 3G national network now covers 208 million people as of the end of the first quarter of 2010. In 2010, network capex spend will be driven by continued network investment, coverage expansion, and the upgrade to HSPA+. By the end of 2010, T-Mobile USA expects to have HSPA+ technology deployed across its 3G footprint with coverage of more than 185 million people.
 
Personnel.
The average number of employees rose year-on-year related to retail distribution growth, but was partially offset by fewer customer support employees driven by lower customer care call volumes.
 

 
-22-
 

 
Europe.
 
 
Customer development.
 
                               
   
Mar. 31,
2010
 
millions
    
Dec. 31,
2009
 
millions
    
Change
Mar. 31, 2010/
Dec. 31, 2009
%
    
Mar. 31,
2009
 
millions
    
Change
Mar. 31, 2010/
Mar. 31, 2009
%
  
Europea
     44.0       44.2       (0.5 )     44.0       0.0  
Of which: T-Mobile UKa
     17.2       17.2       0.0       16.7       3.0  
Of which: T-Mobile NL
     4.4       4.6       (4.3 )     5.2       (15.4 )
Of which: PTC
     13.4       13.5       (0.7 )     13.3       0.8  
Of which: T-Mobile CZ
     5.4       5.5       (1.8 )     5.4       0.0  
Of which: T-Mobile Austria
     3.6       3.4       5.9       3.4       5.9  
                                         
 
a
Including Virgin Mobile customers: March 31, 2010: 4.2 million; December 31, 2009: 4.3 million; March 31, 2009: 4.6 million.
 
 
The customer base in the Europe operating segment stabilized in the first quarter of 2010, reaching 44.0 million customers overall by March 31, 2010 despite intense competition in the individual countries.
 
The changes in the total customer base since the end of 2009 were largely attributable to the prepay segment. At T-Mobile CZ, PTC and T-Mobile Netherlands, the number of prepay customers decreased by 0.5 million in total as a result of the focus on the high-value contract customer business and the increased deregistration of inactive prepay customers in the Netherlands. At T-Mobile UK, the number of customers stabilized at 17.2 million. Compared with the end of 2009, T-Mobile UK compensated for the decrease in Virgin customers with its own prepay additions as of March 31, 2010. Virgin customers are assigned to the prepay segment at T-Mobile UK. In Austria, the total number of customers increased compared with the end of 2009, primarily as a result of a new rule for deregistering prepay customers who used its secondary brand, tele.ring. Until December 31, 2009, tele.ring’s prepay customers used to be deregistered from the customer base after a period of inactivity of 90 days. Effective January 1, 2010, the period of inactivity was extended to 180 days, bringing it in line with the deregistration rule for prepay customers of the T-Mobile Austria brand. As a result tele.ring customers are now included in the customer base for longer.
 
The contract customer base showed a positive trend in the first quarter of 2010. All companies in the Europe operating segment further expanded their contract customer bases. Poland, the Netherlands and the Czech Republic in particular reported sound growth with a total of around 0.2 million net additions. Since the end of 2009 the percentage of contract customers in the total customer base (including Virgin) in the Europe segment has increased by 0.5 percentage points to 41.5 percent.
 
This sound development in the number of contract customers is due to the focused customer acquisition strategy that offers premium contract customers calling plans with minute buckets, flat-rate plans, and new hardware in conjunction with a fixed-term contract. In addition, innovative mobile Internet services on high-performance cell phones – introduced as part of the connected life and work strategy – successfully attracted new groups of customers. The ongoing successful marketing of Android-based smartphones and the Apple iPhone also further expanded the contract customer base.
 
 

 
-23-
 

 
Development of operations.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Total revenue
     2,412       2,436       (24 )     (1.0 )     10,034  
Of which: T-Mobile UK
     783       836       (53 )     (6.3 )     3,390  
Of which: T-Mobile NL
     442       444       (2 )     (0.5 )     1,807  
Of which: PTC
     441       416       25       6.0       1,757  
Of which: T-Mobile CZ
     279       275       4       1.5       1,191  
Of which: T-Mobile A
     248       267       (19 )     (7.1 )     1,038  
Of which: Othera
     233       216       17       7.9       909  
Profit (loss) from operations
     375       (1,786 )     2,161    
n.a.
       (905 )
                                         
Depreciation, amortization and impairment losses
     (285 )     (2,247 )     1,962       87.3       (3,411 )
                                         
Cash capex
     (205 )     (368 )     163       44.3       (879 )
                                         
Number of employees (average)
     17,594       18,277       (683 )     (3.7 )     18,105  
                                         
a
Other: primarily International Carrier Sales and Services (ICSS).
 
 
Total revenue.
 
Total revenue in the Europe operating segment decreased by EUR 24 million or 1.0 percent year-on-year, mainly due to lower service revenues in all mobile companies with the exception of T-Mobile Netherlands. The negative effects of the decline in service revenues were partially offset by positive exchange rate effects from the Polish zloty, the pound sterling and the Czech koruna, higher revenue at International Carrier Sales and Solutions (ICSS), and higher handset revenues.
 
The year-on-year decrease in service revenues was primarily attributable to cuts in mobile termination charges imposed by the regulatory authorities in all countries. Prices in the five countries of the Europe operating segment fell by almost 40 percent year-on-year on average. Furthermore, the economic situation, which is only slowly easing, and intense competitive pressure, especially at T-Mobile UK, PTC, and T-Mobile Austria, resulted in decreases in revenue from voice telephony. However, by increasing the percentage of contract customers in the total customer base compared with the prior-year period, T-Mobile Netherlands generated a positive revenue effect that largely offset regulation-induced reductions in revenues and decreases in roaming revenues.
 
Revenues from non-voice services developed positively, rising year-on-year in the first quarter at all mobile companies in the Europe segment, except at T-Mobile CZ, partially offsetting the decrease in revenue from voice telephony.
 
Higher handset revenues, especially from T-Mobile Netherlands, and an increase in fixed-network revenue from T-Mobile CZ as a result of the acquisition of České Radiokomunikace in December 2009, mitigated the negative effects of the decrease in service revenues in the Europe segment.
 
 
 

 
-24-
 

 
Profit (loss) from operations.
 
Profit (loss) from operations in the Europe operating segment increased by EUR 2.2 billion year-on-year, since the figure for the prior-year quarter included an impairment loss of EUR 1.8 billion recognized on the goodwill of the cash-generating unit T-Mobile UK. The increase in profit from operations was partially caused by lower customer acquisition and retention costs, especially at T-Mobile UK, PTC and T-Mobile Netherlands. In addition, lower service revenues were offset by savings in IT, sales and customer support. Lower depreciation, amortization and impairment losses, especially at T-Mobile CZ, T-Mobile Austria and at T-Mobile UK due to the classification of the UK entity as held for sale, also had a positive impact on profit (loss) from operations.
 
Cash capex.
 
Cash capex in the Europe operating segment decreased by EUR 0.2 billion year-on-year in the first quarter of 2010 as a result of lower capital expenditures in the United Kingdom, the Netherlands, Poland and Austria. The decrease was partially offset by higher investments in the Czech Republic, primarily in the technology area for the roll-out of the 3G network.
 
Personnel.
 
In the first quarter of the current financial year average headcount in the Europe operating segment decreased by 683 compared with the same period in 2009. Headcount changes varied from company to company. The largest year-on-year decrease in the total number of employees was reported at T-Mobile UK. The workforce was resized under performance management initiatives at the call centers and in the shops, which also reduced the average number of employees in the first quarter of 2010 compared with the prior-year period.
 
 

 
-25-
 

 
Southern and Eastern Europe.
 
 
Customer development.
 
                                 
     
Mar. 31,
2010
 
millions
    
Dec. 31,
2009
 
millions
    
Change
Mar. 31, 2010/
Dec. 31, 2009
%
    
Mar. 31,
2009
 
millions
    
Change
Mar. 31, 2010/
Mar. 31, 2009
%
  
Southern and Eastern Europe
Fixed-network lines
     11.7       11.9       (1.7 )     12.6       (7.1 )
Retail broadband lines
     3.7       3.5       5.7       3.2       15.6  
Wholesale bundled lines
     0.2       0.2       0.0       0.3       (33.3 )
ULLs
     1.2       1.1       9.1       0.8       50.0  
Mobile customers
     34.0       34.6       (1.7 )     32.3       5.3  
Hungary
Fixed-network lines
     1.8       1.8       0.0       2.0       (10.0 )
Broadband lines
     0.8       0.8       0.0       0.8       0.0  
Mobile customers
     5.1       5.1       0.0       5.3       (3.8 )
Croatia
Fixed-network lines
     1.5       1.5       0.0       1.5       0.0  
Broadband lines
     0.6       0.6       0.0       0.5       20.0  
Mobile customers
     2.8       2.9       (3.4 )     2.8       0.0  
Slovakia
Fixed-network lines
     1.1       1.1       0.0       1.1       0.0  
Broadband lines
     0.4       0.4       0.0       0.4       0.0  
Mobile customers
     2.4       2.4       0.0       2.3       4.3  
Greece
Fixed-network lines
     4.1       4.2       (2.4 )     4.5       (8.9 )
Broadband lines
     1.1       1.1       0.0       1.0       10.0  
Mobile customers
     8.8       9.2       (4.3 )     8.4       4.8  
Romania
Fixed-network lines
     2.7       2.8       (3.6 )     3.0       (10.0 )
Broadband lines
     0.8       0.8       0.0       0.7       14.3  
Mobile customers
     7.2       7.3       (1.4 )     6.1       18.0  
Other
Fixed-network lines
     0.5       0.5       0.0       0.6       (16.7 )
Broadband lines
     0.2       0.2       0.0       0.1       100.0  
Mobile customers
     7.7       7.7       0.0       7.3       5.5  
                                           
Total.
 
The Southern and Eastern Europe operating segment posted a decrease in the number of customers at mobile companies and an increase in broadband lines, while numbers of fixed-network lines continued to fall compared with year-end 2009.
 
Fixed network. The broadband market in Southern and Eastern Europe continued to grow in the first quarter of 2010 compared with the end of the prior year. With a total of 3.9 million broadband lines including bundled and unbundled wholesale lines, the operating segment recorded an increase of 0.1 million lines compared with the end of the prior year. The 0.2 million line losses in the fixed network were slightly below the level at the end of 2009. Growth in the broadband market was also driven by the ongoing success in the marketing of IPTV, with the number of IPTV customers almost doubling within one year.
 
Mobile communications. In the first quarter of 2010, the mobile communications market in the Southern and Eastern Europe operating segment declined compared with the end of 2009 in several countries, reflecting macroeconomic trends and new registration requirements for prepay products in some countries. All mobile communications companies, however, contributed to the increase in contract customer numbers in absolute terms. The percentage of contract customers in the total customer base increased slightly in all countries except Slovakia.
 
 

 
-26-
 
 
Development of operations.
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Total revenue
     2,387       1,964       423       21.5       9,685  
Of which: Hungary
     402       391       11       2.8       1,682  
Of which: Croatia
     267       278       (11 )     (4.0 )     1,161  
Of which: Slovakia
     230       244       (14 )     (5.7 )     974  
Of which: Greece
     997       655       342       52.2       3,899  
Of which: Romania
     291       204       87       42.6       1,104  
Of which: Othera
     229       206       23       11.2       976  
                                         
Profit from operations
     304       504       (200 )     (39.7 )     1,037  
                                         
Depreciation, amortization and impairment losses
     (573 )     (476 )     (97 )     (20.4 )     (2,747 )
                                         
Cash capex
     (363 )     (380 )     17       4.5       (1,610 )
                                         
Number of employees (average)
     52,531       43,348       9,183       21.2       51,172  
                                         
The contributions of the national companies generally correspond to their respective unconsolidated financial statements and do not take consolidation effects at the operating segment level into consideration.
 
a
Other: national companies of Albania, Bulgaria, the F.Y.R.O. Macedonia and Montenegro.
 
Total revenue.
 
Total. Total revenue in the Southern and Eastern Europe operating segment increased year-on-year by EUR 0.4 billion in the first quarter of 2010, largely due to changes in the composition of the Group, as the OTE group has only been fully consolidated since February 2009 and was therefore not included in revenue for the entire first quarter of 2009.
 
Revenue decreased by EUR 0.1 billion, despite a positive exchange rate effect from the translation of Hungarian forints to euros. The strained economic situation and continuing intense competition in both mobile communications and the traditional fixed network negatively affected revenue. In addition, tax burdens had a negative impact on mobile communications revenue in Croatia. Broadband growth in all countries did not make up for the decline in revenue in the traditional fixed-network area.
 
Hungary. The decline in revenue related to both mobile communications and fixed-network business due to the difficult economic situation. In addition, revenue was impacted by the reduction in mobile termination charges in January 2010. The weak development of operations was more than offset by the positive trend of the Hungarian forint against the euro compared with the same period in the prior year.
 
Croatia. The Croatian operations underwent a downward trend because of the slight weakness of the Croatian kuna and the overall economic situation. Mobile communications was more affected than the fixed network, partly because of the tax on mobile services set at 6 percent of revenue that was introduced in August 2009.
 
Slovakia. Compared with the same period in 2009, revenue from fixed-network business was stable due to positive broadband development and the successful marketing of IPTV and satellite TV, whereas mobile revenue decreased, mainly due to the reduction in mobile termination charges in mid-2009 and strong competition.

The fact that the OTE group was not fully consolidated until February 2009 is the main reason for the positive revenue trend in Greece, Romania, Bulgaria and Albania. By contrast, there were declines in operations in all other countries, with the exception of mobile communications in Greece.
 
Greece. The decline in fixed-network revenue is mainly due to the weaker traditional fixed-network business, which was not entirely offset by the positive development in broadband and wholesale.
 
Romania. The Romanian telecommunications market is characterized by a difficult economic situation and highly intense price competition.
 
Profit from operations.
 
Profit from operations decreased by EUR 0.2 billion in the first quarter of 2010. The decline in profit from operations was mainly driven by a positive effect in the first quarter of 2009 of EUR 0.2 billion from the Hellenic Republic’s contribution to the costs of a voluntary early retirement program, which did not occur during the first quarter of 2010.  In addition, the decrease in revenue in Croatia and Slovakia was not fully offset by cost savings.
 
Cash capex.
 
Cash capex in the Southern and Eastern Europe operating segment was slightly below the prior-year level despite the changes in the composition of the Group. In response to the weaker market situation, investment activities were restrained.
 
Personnel.
 
The average number of employees in the Southern and Eastern Europe operating segment increased due to the first-time full consolidation of OTE in early February 2009. The increase was partially offset by the successful implementation of downsizing programs as part of efficiency enhancement measures in almost all countries.
 

 
-27-
 

 
Systems Solutions.
 
 
Selected KPIs.
 
                               
   
Mar. 31, 2010
    
Dec. 31, 2009
    
Change
Mar. 31, 2010/
Dec. 31, 2009
%
    
Mar. 31, 2009
    
Change
Mar. 31, 2010/
Mar. 31, 2009
%
  
New orders
(millions of €)
     2,156       9,305    
n.a.
       2,010       7.3  
Computing & Desktop Services
                                      
Number of servers managed and serviced (units)
     49,153       47,092       4.4       53,536       (8.2 )
Number of workstations managed and serviced (millions)
     1.85       1.86       (0.5 )     1.50       23.3  
Systems Integration
                                        
Hours billed
(millions)
     2.4       9.6    
n.a.
       2.6       (7.7 )
Utilization rate
(%)
     82.5       81.3       1.2 p     80.6       1.9 p
                                         
 
Development of business.
 
In the first quarter of 2010 the Systems Solutions operating segment (T-Systems) secured some strategically significant new deals in the ICT business customer market. As a result, new orders increased by 7.3 percent year-on-year despite the ongoing effects of the general financial and economic crisis. Significant new deals were closed with the German Aerospace Center (DLR), Deutsche Post DHL, Swiss Federal Railways (SBB) and the travel group TUI. All of these contracts have terms of five years or more, with some generating revenue well into the triple-digit millions, thus creating the basis for the coming years. The deals underline T-Systems’ ability to provide ICT services worldwide.
 
The number of servers managed and serviced decreased further compared with the first quarter of 2009, as a result of the consolidation of systems taken over from customers and of the growing trend toward dynamic computing. By contrast, the number of workstations managed and serviced increased significantly year-on-year, mainly due to new orders. Some Systems Integration customers, on the other hand, had to cancel or postpone projects due to the general economic crisis and for this reason have been slow to place new orders. This resulted in fewer hours billed and a decrease in revenue year-on-year. Systems Integration partially offset this trend by a higher utilization rate.
 
 
Development of operations.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Total revenue
     2,131       2,106       25       1.2       8,798  
                                         
Profit (loss) from operations
     18       11       7       63.6       (11 )
                                         
Depreciation, amortization and impairment losses
     (150 )     (177 )     27       15.3       (721 )
                                         
Cash capex
     (148 )     (161 )     13       8.1       (681 )
                                         
Number of employees (average)
     47,446       44,449       2,997       6.7       45,328  
                                         
 
 

 
-28-
 

 
Total revenue.
 
Total revenue generated by the Systems Solutions operating segment in the first quarter of 2010 amounted to EUR 2.1 billion, a year-on-year increase of 1.2 percent. The positive development of international business, as a result of several contracts concluded with corporate customers last year, continued in the reporting period, recording a substantial increase of 5.7 percent. Revenue in Germany remained almost unchanged. The new contracts partially offset the decline in domestic revenue caused by the postponement or cancelation of projects and the price trend in IT and telecommunications.
 
Revenue generated with the Deutsche Telekom Group amounted to EUR 0.6 billion in the first quarter of 2010, a decrease of 1.8 percent year-on-year. T-Systems’ business as a service provider for Deutsche Telekom was impacted by IT cost-cutting projects in the Deutsche Telekom Group. T-Systems standardizes and improves the IT environment for the Group, making a major contribution to the Save for Service program.
 
 
Net revenue.
 
Business with customers outside the Deutsche Telekom Group expanded. The operating segment generated revenue of EUR 1.5 billion, an increase of 2.4 percent compared with the first quarter of 2009. This positive trend is mainly attributable to the Computing & Desktop Services unit, where, as in the public sector, new business with German and international corporate customers resulted in revenue growth.
 
 
Profit (loss) from operations.
 
Profit (loss) from operations increased compared with the first quarter of 2009, mainly as a result of lower depreciation and amortization due to the extension of the economic useful lives of some non-current assets.
 
Cash capex.
 
At EUR 0.1 billion, cash capex in the reporting period decreased substantially year-on-year. The fact that the efficiency enhancement measures, such as the increasing standardization of platforms, are taking effect also impact cash capex.
 
 
Personnel.
 
The average headcount in the operating segment increased by 2,997 to 47,446, an increase of 6.7 percent. The average number of employees in Germany fell by 745 or 2.9 percent to 25,078 in the first quarter of 2010 as a result of staff restructuring measures. This decrease is also a result of offshoring at Computing & Desktop Services. Average headcount abroad rose by 3,742, an increase of 20.1 percent, primarily due to the fact that employees were taken over under the terms of large-scale contracts and the increase in offshore activities.
 
 

 
-29-
 

 
Group Headquarters & Shared Services.
 
Group Headquarters & Shared Services performs strategic and cross-segment management functions for the Deutsche Telekom Group and is responsible for operating activities that are not directly related to the core business of the operating segments.
 
In the first quarter of 2010, Vivento, Deutsche Telekom’s personnel service provider, continued to secure additional external employment opportunities for civil servants and employees, predominantly in the public sector, while maintaining its long-term placement management system to support staff restructuring in the Group. In addition, Vivento offers Group employees employment opportunities at Vivento Customer Services GmbH.
 
The workforce at Vivento totaled around 9,700 employees at March 31, 2010. These included around 4,200 employees who were deployed externally, mainly in the public sector, for example at the Federal Employment Agency. Another 2,700 or so people were employed within the Group, especially in call centers, and around 2,800 employees were placed in Vivento’s operational and strategic units or continued to be managed by Vivento. Vivento took on a total of around 500 employees from the Group in the first three months of the 2010 financial year, while around 400 employees left Vivento in the reporting period to pursue new employment opportunities.
 
 
 
Development of operations.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Total revenue
     565       618       (53 )     (8.6 )     2,410  
                                         
Loss from operations
     (365 )     (309 )     (56 )     (18.1 )     (1,249 )
                                         
Depreciation, amortization and impairment losses
     (188 )     (259 )     71       27.4       (833 )
                                         
Cash capex
     (109 )     (98 )     (11 )     (11.2 )     (449 )
                                         
Number of employees (average)
     22,070       19,445       2,625       13.5       20,181  
Of which: Viventoa
     9,700       8,400       1,300       15.5       9,600  
                                         
 
a
Number of employees at the reporting date, including Vivento’s own staff and management; figures rounded.
 
 
Total revenue.
 
Total revenue generated at Group Headquarters & Shared Services decreased slightly year-on-year, primarily due to the volume-driven decline in revenues from call center services at Vivento. Additionally, DeTeFleet Services GmbH recorded lower revenues, mainly as a result of lower proceeds from vehicle sales.
 
Loss from operations.
 
Loss from operations increased by EUR 56 million compared with the prior-year period mainly due to income recorded in the previous year from the reclassification of real estate from assets held for sale to non-current assets. Higher headcount and lower revenue at Vivento also had a negative impact. The aforementioned negative factors were partially offset by lower depreciation, amortization, and impairment losses.
 
Personnel.
 
The average number of employees in the reporting period was 22,070. The increase of 2,625 employees was primarily attributable to the headcount increase at Vivento and staff employed at the units integrated into Group Headquarters & Shared Services as part of the Group-wide realignment of the management structure.
 

 
-30-
 

Risks and opportunities.
 
 
Rate ruling by the Federal Network Agency.
 
The Federal Network Agency and the EU Commission are currently looking into the regulatory treatment of future (broadband) networks and products at different levels. Future regulatory decisions provide opportunities and entail risks that have a significant impact on the decisions on whether or not to invest in optical fiber-based access networks and in broadband roll-out. The Federal Administrative Court’s ruling dated January 27, 2010 lifted the regulatory order on access to multi-functional street cabinets, cable ducts, and dark fiber with legally binding effect insofar as it concerned access to dark fiber. On March 26, 2010, the Federal Network Agency set the rates for access to multi-functional street cabinets and cable ducts at a much lower level than those requested by Deutsche Telekom. The Federal Network Agency may once again require access to be granted to dark fiber with the next regulatory order on ULL (expected in late 2010 or early 2011).
 
Toll Collect.
 
Deutsche Telekom AG and Daimler Financial Services AG each hold a 45-percent stake in both the consortium (Toll Collect GbR) and the joint venture company (Toll Collect GmbH) (together Toll Collect), while Cofiroute holds the remaining 10-percent stake in each. On August 2, 2005, the Federal Republic of Germany initiated arbitration proceedings against Deutsche Telekom AG, Daimler Financial Services AG and Toll Collect GbR. The defendants have applied to reject the arbitrator appointed by the Federal Republic on the grounds of bias. The challenge was rejected by the Berlin Administrative court on February 11, 2010. Legal action has been taken against this decision. For further details, please refer to Deutsche Telekom’s 2009 Annual Report.
 
Lawsuit filed by Vivendi SA (Seattle, United States).
 
On October 23, 2006, Vivendi filed a lawsuit against Deutsche Telekom AG, T-Mobile USA, Inc., T-Mobile International AG, T-Mobile Deutschland GmbH and others with the U.S. District Court in Seattle, Washington, claiming that the defendants had colluded illegally to cause Vivendi to lose its alleged interest in PTC. The lawsuit is based on the Racketeer Influenced and Corrupt Organizations (RICO) Act. The court dismissed the action on June 5, 2008. Vivendi lodged an appeal and reduced its compensation claim from around USD 7.5 billion to around USD 2.5 billion. On November 2, 2009, the court of appeal dismissed the appeal, too. The ruling is now legally effective, blocking Vivendi from lodging an appeal with the U.S. Supreme Court.
 
National crisis in Greece.
 
The rescue package currently being put together by the EU reduces the risk of insolvency for Greece but also involves tough measures in terms of fiscal policy and government spending. Past experience has shown that the telecommunications industry is mid-field when it comes to the time lag and sensitivity to economic crises. The possibility cannot be ruled out, therefore, that the changes in consumer behavior that accompany such steps by the state may impact the demand for telecommunications services and thus result in revenue losses at OTE. In addition, the company may incur increased expenditures due to the tax reform. The ratings and CDS level of OTE’s core banks have deteriorated significantly. This in turn increases the default risk for the remaining investments with Greek banks.
 
 
For additional explanations regarding the risk and opportunity situation, please refer to the other risks and opportunities identified in the Annual Report on Form 20-F.
 
 

 
-31-
 

Events after the reporting period (March 31, 2010).
 
Merger of T-Mobile UK and Orange UK completed.
 
On April 1, 2010, as announced on September 8, 2009 and having received all necessary approvals, Deutsche Telekom and France Télécom announced the successful completion of their merger and the establishment of the new joint venture in the United Kingdom.
 
 
Merger of the Europe and Southern and Eastern Europe operating segments effective April 1, 2010.
 
The Europe and Southern and Eastern Europe operating segments were merged effective April 1, 2010. The newly formed operating segment, headed by Guido Kerkhoff, is referred to as Europe.
 
 
Purchase of the remaining shares in Firstgate (ClickandBuy).
 
Deutsche Telekom acquired the remaining shares in the Internet payment service provider Firstgate with economic effect as of April 1, 2010.
 
 
Frequency auction by the Federal Network Agency.
 
Since April 12, 2010, the Federal Network Agency has been auctioning spectrum in the 800 MHz, 1.8 GHz, 2 GHz, and 2.6 GHz bands for wireless network access for offering telecommunications services. T-Mobile Deutschland GmbH and three other companies participated in the auction.
 
On May 20, 2010, Deutsche Telekom announced it has successfully bid in Germany's largest frequency auction to date and secured total spectrum of 95 MHz. This latest development will push ahead the mobile network expansion and provide customers with even better broadband coverage. These capacities are required primarily as a result of significantly rising demand for mobile Internet. In total, Deutsche Telekom has invested around EUR 1.3 billion in the new frequency ranges.
 
 
Deutsche Telekom plans to delist from the New York and Tokyo stock exchanges.
 
Deutsche Telekom is planning to delist its American Depositary Shares (ADS) from the New York Stock Exchange (NYSE) and its shares from the Tokyo Stock Exchange. The company will also deregister and therefore discontinue its reporting obligations to the U.S. Securities and Exchange Commission. The Board of Management took the decision at its meeting on April 20, 2010.
 
 
Tax law amendments passed in Greece.
 
The Greek government passed amendments to tax law at the end of April. Among other consequences, these amendments may also have an effect on corporate taxation, thus possibly increasing the tax burden for the Group.
 
 
Collaboration agreed between Deutsche Telekom and ABB.
 
In future, Deutsche Telekom and ABB will be working together on the energy supply market. T-Systems, the Company’s corporate customer arm, and the Swiss-based power and automation technologies group will jointly develop solutions for intelligent power networks from 2010.
 
 
Chief Technology and Innovation Officer (CTIO) appointed.
 
At its meeting on May 2, 2010, the Supervisory Board appointed Edward Kozel as a new member of Deutsche Telekom’s Board of Management effective May 3, 2010. As Board member and Chief Technology and Innovation Officer (CTIO) he will take over the responsibilities of Hamid Akhavan, who left Deutsche Telekom in February of this year, with the exception of the mobile communications subsidiaries in the United Kingdom, the Netherlands, Austria, Poland and the Czech Republic, for which Guido Kerkhoff has been responsible since April 1, 2010. The title CTIO and the corresponding name of his board department emphasize the importance of innovation and technology for implementing the Fix – Transform – Innovate strategy.
 
 

 
-32-
 

The statements in this section reflect our current views. Our expectations of business developments are based on the opportunities and risks that arise as the year progresses as a result of market conditions and the competitive environment. For more information on existing opportunities and risks, please also refer to the disclosures in the Annual Report on Form 20-F as of December 31, 2009.
 
Our expectations for the Group. 1
 
We will focus our investment activities in 2010 and 2011 on safeguarding our competitiveness and future viability, particularly in our home market, Germany. At the same time, we aim to maintain stable credit ratings to facilitate access to the debt capital market. In February 2010 our Board of Management and Supervisory Board decided to pursue a shareholder remuneration policy for the 2010 through 2012 financial years consisting of the payment of an annual dividend of at least EUR 0.70 per share and the buy-back of shares with the remaining amount up to an unchanged total shareholder remuneration of around EUR 3.4 billion.2
 
We previously stated in our annual report on Form 20-F that, based on current market conditions, for 2010 we expected to generate profit from operations of approximately EUR 8 billion, with scheduled depreciation and amortization of approximately EUR 12 billion. We also stated that we expected cash flow from operating activities of approximately EUR 15.3 billion in 2010. In addition, we stated that we expected capital expenditure to increase slightly year-on-year in 2010 to around EUR 9.1 billion (excluding any spectrum investment). Each of these expectations was based on the assumption that our UK subsidiary T-Mobile UK, which was to be merged to create a 50:50 joint venture following approval by the relevant authorities, would continue to be fully consolidated through at least the end of 2010.
 
Following the establishment of the joint venture with effect from April 1, 2010, we will account for our investment in it using the equity method of accounting which will affect the expectations described above in various ways. Following the change to the equity method of accounting, we will no longer report capital expenditures for the business and we will no longer show the assets and liabilities of T-Mobile UK in our consolidated statement of financial position. Instead we will report our share of the net assets of the joint venture in the consolidated statement of financial position under investments accounted for using the equity method. In addition, we will cease reporting revenue, operating expenses (including depreciation and amortization) and profit from operations. Rather, we will report our share of the net profit of the joint venture as part of our profit (loss) from financial activities. Similarly, the revenues and operating costs from T-Mobile UK will no longer directly affect cash flow from operating activities. Instead, dividends paid by the joint venture will be recognized as cash flows from operating activities.
 
As a result of the changes described above and the effects arising out of the derecognition of the net assets of T-Mobile UK and the initial recognition of the joint venture, we currently expect profit from operations for 2010 to be approximately EUR 0.2 to 0.3 billion less and scheduled depreciation and amortization for 2010 to be approximately EUR 0.5 billion less than the amounts previously indicated on the basis of the assumption that T-Mobile UK would be fully consolidated for the full year. In addition, our capital expenditures are expected to be approximately EUR 0.1 billion less than previously indicated. Taking into consideration the agreed advance dividend from the joint venture, we do not expect a significant impact on cash flow from operating activities.
 
We intend to continue to realize international economies of scale and synergies through appropriate acquisitions in our footprint markets and through joint ventures. We have, however, no plans at present for major acquisitions or expansion into emerging markets.
 
As of March 31, 2010 our committed bilateral credit lines combined with our short-term cash deposits amounted to EUR 19.1 billion. By the end of April 2010, we had issued notes in a total amount of nominal EUR 1.3 billion in the debt capital market during 2010. Depending on the market environment, we may take advantage of favorable conditions for additional capital markets debt issuances in 2010.
 
1 This Outlook discussion contains forward-looking statements that reflect management’s current views with respect to future events. Words such as “expect,” “anticipate,” “believe,” “intend,” “may,” “could,” “estimate,” “aim,” “goal,” “plan,” “project,” “should,” “will,” “seek,” “outlook” or similar expressions generally identify forward-looking statements. These forward-looking statements include statements with regard to the expected development of revenue, earnings, profits from operations, depreciation and amortization, cash flows and personnel-related measures. You should consider forward-looking statements with caution. They are subject to risks and uncertainties, most of which are difficult to predict and are often beyond our control. The risks and uncertainties include those described in the sections “Forward-Looking Statements” and “Risk Factors” of this Annual Report. Please read those sections when considering this Outlook discussion. Among the factors that might influence our ability to achieve our objectives are the progress of our workforce reduction initiative and other cost-saving measures, and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions and business combinations, and our network upgrade and expansion initiatives. In addition, stronger than expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on our costs and revenue development. Further, the economic downturn in our markets, and changes in interest and currency exchange rates, may also have an impact on our business development and the availability of financing on favorable conditions. Changes in our expectations regarding recoverable amounts of assets, including expectations concerning future cash flows, may lead to impairments of assets, which may materially affect our results at the group and operating segment levels.  If these or other risks and uncertainties materialize, or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by forward-looking statements. We can offer no assurance that our estimates or expectations will be achieved. We do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.
2 This policy is subject to the requisite unappropriated net income being posted in the single-entity financial statements of Deutsche Telekom AG for the financial year in question and the ability to establish the necessary reserves for the share buy-back. It is also contingent upon the executive bodies adopting resolutions to this effect taking account of the Company’s situation at the time.
 
 
-33-
Our expectations for the operating segments.
 
Germany.
As growth in the broadband market slows, we expect to continue to record a high percentage of net additions. An important objective will also be to develop the mass market with Entertain products. The operating segment expects the growth of recent periods to continue. In the Germany operating segment, we expect the decline in our revenue to decelerate and profit from operations to decline slightly in 2010.
 
United States.
In 2010, T-Mobile USA is focusing on attracting and retaining a loyal customer base with a particular emphasis on efforts to reduce churn. Results are expected to be positively impacted primarily by growth in non-voice services and a continued focus on cost saving initiatives, offset by market driven declines in voice revenues per customer and net losses of branded customers.
 
At our USA operating segment, revenue and profit from operations in local currency are expected to be slightly lower in 2010 in an increasingly mature U.S. market. While the level of the U.S. dollar currently has a positive impact on revenue and profit from operations as reported in euros, the competitive pressure remains unchanged. Future effects on revenue and profit from operations could, however, be significant.
 
Europe.
In the Europe operating segment, we will continue to concentrate our efforts on the roll-out of the mobile Internet, offering innovative data and content services, as well as on new intelligent mobile handsets at attractive prices.
 
We are facing a continued challenging macroeconomic situation and ongoing intense competition in the Europe operating segment. In addition, regulatory measures and exchange rate fluctuations may have a negative effect on revenue and earnings in individual countries when translated to euros. Costcutting initiatives are scheduled to partially offset this effect.
 
As previously reported, we expected revenue in the Europe operating segment to be broadly stable and profit from operations, which was significantly reduced by goodwill impairments in 2009, to increase before considering changes in the composition of the operating segment (in particular assuming that the T-Mobile UK joint venture would not be consummated in 2010). As mentioned above, the joint venture was established with effect from April 1, 2010. As a result, we expect the Europe segment’s revenue and profit from operations in 2010 to be lower than in the prior year.
 
Southern and Eastern Europe.
We expect revenue, which will be positively affected by the inclusion of the OTE group for a full year, and profit from operations, which was significantly reduced by goodwill impairments in 2009, to increase in the Southern and Eastern Europe segment in 2010. We expect the continuing difficult macroeconomic situation and ongoing intense competition to adversely affect profit from operations in 2010. Regulatory measures, legislative changes and exchange rate fluctuations in the individual countries as well as recently imposed or increased mobile communications taxes may have an additional adverse effect.
 
Systems Solutions.
T-Systems’ cost-cutting measures showed encouraging effects in the past year and will be continued. We expect revenue to be stable and profit from operations at the operating segment Systems Solutions to improve slightly in 2010 in view of the measures described, although uncertainty resulting from the unsettled economic environment remains.
 
 

 
-34-
 

Interim consolidated financial statements.
 
Consolidated statement of financial position.
 
                               
   
Mar. 31, 2010
millions of €
    
Dec. 31, 2009
millions of €
    
Change
millions of €
    
Change
%
    
Mar. 31, 2009
millions of €
  
Assets
                              
Current assets
     24,616       23,012       1,604       7.0       18,741  
Cash and cash equivalents
     5,553       5,022       531       10.6       4,113  
Trade and other receivables
     6,832       6,757       75       1.1       8,139  
Current recoverable income taxes
     253       144       109       75.7       177  
Other financial assets
     1,758       2,001       (243 )     (12.1 )     1,809  
Inventories
     1,213       1,174       39       3.3       1,543  
Non-current assets and disposal groups held for sale
     6,776       6,527       249       3.8       530  
Other assets
     2,231       1,387       844       60.9       2,430  
Non-current assets
     106,187       104,762       1,425       1.4       115,023  
Intangible assets
     53,413       51,705       1,708       3.3       57,808  
Property, plant and equipment
     45,361       45,468       (107 )     (0.2 )     48,231  
Investments accounted for using the equity method
     152       147       5       3.4       146  
Other financial assets
     1,621       1,739       (118 )     (6.8 )     2,078  
Deferred tax assets
     5,194       5,162       32       0.6       6,150  
Other assets
     446       541       (95 )     (17.6 )     610  
Total assets
     130,803       127,774       3,029       2.4       133,764  
                                         
Liabilities and shareholders’ equity
                                        
Current liabilities
     25,691       24,794       897       3.6       25,279  
Financial liabilities
     9,960       9,391       569       6.1       9,827  
Trade and other payables
     5,856       6,304       (448 )     (7.1 )     7,155  
Income tax liabilities
     635       511       124       24.3       469  
Other provisions
     3,455       3,369       86       2.6       3,491  
Liabilities directly associated with non-current assets and disposal groups held for sale
     1,456       1,423       33       2.3       22  
Other liabilities
     4,329       3,796       533       14.0       4,315  
Non-current liabilities
     60,833       61,043       (210 )     (0.3 )     63,327  
Financial liabilities
     40,980       41,800       (820 )     (2.0 )     43,285  
Provisions for pensions and other employee benefits
     6,371       6,179       192       3.1       5,831  
Other provisions
     2,050       2,161       (111 )     (5.1 )     2,855  
Deferred tax liabilities
     7,636       7,153       483       6.8       7,893  
Other liabilities
     3,796       3,750       46       1.2       3,463  
Liabilities
     86,524       85,837       687       0.8       88,606  
                                         
Shareholders’ equity
     44,279       41,937       2,342       5.6       45,158  
Issued capital
     11,165       11,165       -       -       11,165  
Capital reserves
     51,531       51,530       1       0.0       51,526  
Retained earnings including carryforwards
     (20,710 )     (20,951 )     241       1.2       (17,255 )
Total other comprehensive income
     (2,058 )     (3,576 )     1,518       42.4       (5,232 )
Total other comprehensive income directly associated with non-current assets and disposal groups held for sale
     (2,151 )     (2,162 )     11       0.5       -  
Net profit (loss)
     767       353       414    
n.a.
       (1,124 )
Treasury shares
     (5 )     (5 )     -       -       (5 )
Issued capital and reserves attributable to owners of the parent
     38,539       36,354       2,185       6.0       39,075  
Non-controlling interests
     5,740       5,583       157       2.8       6,083  
Total liabilities and shareholders’ equity
     130,803       127,774       3,029       2.4       133,764  
                                         
 
 

 
-35-
 

Consolidated income statement.
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Net revenue
     15,812       15,902       (90 )     (0.6 )     64,602  
Cost of sales
     (9,025 )     (8,906 )     (119 )     (1.3 )     (36,259 )
Gross profit
     6,787       6,996       (209 )     (3.0 )     28,343  
Selling expenses
     (3,655 )     (3,996 )     341       8.5       (15,863 )
General and administrative expenses
     (1,222 )     (1,136 )     (86 )     (7.6 )     (4,653 )
Other operating income
     307       387       (80 )     (20.7 )     1,504  
Other operating expenses
     (188 )     (2,007 )     1,819       90.6       (3,319 )
Profit from operations
     2,029       244       1,785    
n.a.
       6,012  
Finance costs
     (597 )     (632 )     35       5.5       (2,555 )
Interest income
     140       100       40       40.0       341  
Interest expense
     (737 )     (732 )     (5 )     (0.7 )     (2,896 )
Share of profit (loss) of associates and joint ventures accounted for using the equity method
     3       5       (2 )     (40.0 )     24  
Other financial income (expense)
     (121 )     (115 )     (6 )     (5.2 )     (826 )
Profit (loss) from financial activities
     (715 )     (742 )     27       3.6       (3,357 )
Profit (loss) before income taxes
     1,314       (498 )     1,812    
n.a.
       2,655  
Income taxes
     (449 )     (426 )     (23 )     (5.4 )     (1,782 )
Profit (loss)
     865       (924 )     1,789    
n.a.
       873  
                                         
Profit (loss) attributable to
     865       (924 )     1,789    
n.a.
       873  
Owners of the parent (net profit (loss))
     767       (1,124 )     1,891    
n.a.
       353  
Non-controlling interests
     98       200       (102 )     (51.0 )     520  
                                         
 
Earnings per share.
 
                           
      Q1 2010       Q1 2009    
Change
 
  
Change
 
%
  
FY
2009
  
Earnings per share
                              
Basic/diluted
(€)
     0.18       (0.26 )     0.44  
n.a.
     0.08  
                                     
 
 
 
 

 
-36-
 

Consolidated statement of comprehensive income.
 
                         
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
FY
2009
millions of €
  
Profit (loss)
     865       (924 )     1,789       873  
Actuarial gains and losses on defined benefit pension plans
     (190 )     0       (190 )     (461 )
Revaluation due to business combinations
     0       (33 )     33       (38 )
Exchange differences on translating foreign operations
     1,628       172       1,456       (211 )
Available-for-sale financial assets
                                
Recognition of other comprehensive income
in income statement
     0       0       -       0  
Change in other comprehensive income (not recognized in income statement)
     (6 )     (3 )     (3 )     (4 )
Fair value measurement of hedging instruments
                                
Recognition of other comprehensive income in income statement
     (1 )     61       (62 )     8  
Change in other comprehensive income
(not recognized in income statement)
     (7 )     (75 )     68       (56 )
Other income and expense recognized directly in equity
     0       11       (11 )     11  
Income taxes relating to components of other comprehensive income
     65       3       62       138  
Other comprehensive income
     1,489       136       1,353       (613 )
Total comprehensive income
     2,354       (788 )     3,142       260  
                                 
Total comprehensive income attributable to
     2,354       (788 )     3,142       260  
Owners of the parent
     2,184       (922 )     3,106       (261 )
Non-controlling interests
     170       134       36       521  
                                 
 

 
-37-
 

Consolidated statement of changes in equity.
 
   
 
Issued capital and reserves attributable to owners of the parent
 
Equity contributed
Consolidated shareholders' equity generated
Total other comprehensive income
 
Issued capital
Capital reserves
Retained earnings incl. carryforwards
Net profit (loss)
Translation of foreign operations
Revaluation surplus
Available-for-sale financial assets
 
millions of €
millions of €
millions of €
millions of €
millions of €
millions of €
millions of €
Balance at January 1, 2009
11,165
51,526
(18,761)
1,483
(6,356)
202
3
Changes in the composition of the Group
              
Unappropriated profit (loss) carried forward
    
1,483
(1,483)
      
Dividends
              
Profit (loss)
      
(1,124)
      
Other comprehensive income
        
237
(33)
(2)
Transfer to retained earnings
    
23
    
(23)
  
Balance at March 31, 2009
11,165
51,526
(17,255)
(1,124)
(6,119)
146
1
               
Balance at January 1, 2010
11,165
51,530
(20,951)
353
(6,577)
118
(3)
Changes in the composition of the Group
              
Unappropriated profit (loss) carried forward
    
353
(353)
      
Dividends
              
Proceeds from the exercise of stock options
  
1
          
Profit (loss)
      
767
      
Other comprehensive income
    
(131)
  
1,555
  
(3)
Transfer to retained earnings
    
19
    
(19)
  
Balance at March 31, 2010
11,165
51,531
(20,710)
767
(5,022)
99
(6)
               
 
Issued capital and reserves attributable to owners of the parent
             
       
Total
Non-
controlling interests
 
 
Total shareholders’ equity
 
Total other comprehensive income
 
Treasury shares
 
Cash flow hedges
 
Other comprehensive income
Taxes
 
millions of €
millions of €
millions of €
millions of €
millions of €
millions of €
millions of €
Balance at January 1, 2009
1,085
(11)
(334)
(5)
39,997
3,115
43,112
Changes in the composition of the Group
        
0
2,907
2,907
Unappropriated profit (loss) carried forward
        
0
  
0
Dividends
        
0
(73)
(73)
Profit (loss)
        
(1,124)
200
(924)
Other comprehensive income
(14)
11
3
  
202
(66)
136
Transfer to retained earnings
        
0
  
0
Balance at March 31, 2009
1,071
0
(331)
(5)
39,075
6,083
45,158
               
Balance at January 1, 2010
1,037
0
(313)
(5)
36,354
5,583
41,937
Changes in the composition of the Group
        
0
(13)
(13)
Unappropriated profit (loss) carried forward
        
0
  
0
Dividends
        
0
  
0
Proceeds from the exercise of stock options
        
1
  
1
Profit (loss)
        
767
98
865
Other comprehensive income
(8)
  
4
  
1,417
72
1,489
Transfer to retained earnings
        
0
  
0
Balance at March 31, 2010
1,029
0
(309)
(5)
38,539
5,740
44,279
               

 
-38-
 

Consolidated statement of cash flows.
 
                   
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
FY
2009
millions of €
  
Profit (loss)
     865       (924 )     873  
Depreciation, amortization and impairment losses
     2,661       4,698       13,894  
Income tax expense (benefit)
     449       426       1,782  
Interest income and interest expenses
     597       632       2,555  
Other financial (income) expense
     121       115       826  
Share of (profit) loss of associates and joint ventures accounted for using the equity method
     (3 )     (5 )     (24 )
(Profit) loss on the disposal of fully consolidated subsidiaries
     -       (17 )     (26 )
Other non-cash transactions
     82       (83 )     (230 )
(Gain) loss from the disposal of intangible assets and property, plant and equipment
     20       18       51  
Change in assets carried as working capital
     (629 )     (292 )     1,936  
Change in provisions
     (13 )     (377 )     (891 )
Change in other liabilities carried as working capital
     (15 )     (472 )     (1,818 )
Income taxes received (paid)
     (245 )     (288 )     (928 )
Dividends received
     1       0       29  
Net payments from entering into or canceling interest rate swaps
     27       165       242  
Cash generated from operations
     3,918       3,596       18,271  
Interest paid
     (888 )     (1,001 )     (3,456 )
Interest received
     241       371       980  
Net cash from operating activities
     3,271       2,966       15,795  
Cash outflows for investments in
                        
Intangible assets
     (280 )     (283 )     (1,598 )
Property, plant and equipment
     (1,654 )     (2,328 )     (7,604 )
Non-current financial assets
     (73 )     (80 )     (176 )
Investments in fully consolidated subsidiaries and business units
     (283 )     0       (1,007 )
Proceeds from disposal of
                        
Intangible assets
     1       2       7  
Property, plant and equipment
     101       59       369  
Non-current financial assets
     16       18       99  
Investments in fully consolidated subsidiaries and business units
     3       28       116  
Net change in short-term investments and marketable securities and receivables
     374       (390 )     (320 )
Net change in cash and cash equivalents due to the first-time full consolidation of OTE
     -       1,558       1,558  
Other
     2       (93 )     (93 )
Net cash used in investing activities
     (1,793 )     (1,509 )     (8,649 )
Proceeds from issue of current financial liabilities
     247       310       3,318  
Repayment of current financial liabilities
     (1,777 )     (2,735 )     (9,314 )
Proceeds from issue of non-current financial liabilities
     755       2,236       5,379  
Repayment of non-current financial liabilities
     (88 )     (95 )     (93 )
Dividend payments
     (1 )     (72 )     (4,287 )
Proceeds from the exercise of stock options
     0       0       2  
Repayment of lease liabilities
     (35 )     (31 )     (128 )
Net cash used in financing activities
     (899 )     (387 )     (5,123 )
Effect of exchange rate changes on cash and cash equivalents
     52       17       58  
Changes in cash and cash equivalents associated with assets and disposal groups held for sale
     (100 )     -       (85 )
Net increase (decrease) in cash and cash equivalents
     531       1,087       1,996  
Cash and cash equivalents, at the beginning of the period
     5,022       3,026       3,026  
Cash and cash equivalents, at the end of the period
     5,553       4,113       5,022  
                         
 
 

 
-39-
 

Selected explanatory notes.
 
 
Accounting policies.
 
The interim consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRSs), as issued by the International Accounting Standards Board (IASB). All IFRSs issued by the IASB, effective at the time of preparing the consolidated financial statements and applied by Deutsche Telekom, have been adopted for use in the European Union (EU) by the European Commission. The consolidated financial statements of Deutsche Telekom thus also comply with IFRS as adopted by the EU. The interim consolidated financial statements for the period ended March 31, 2010 are in compliance with International Accounting Standard (IAS) 34. As permitted by IAS 34, it has been decided to publish a condensed version compared to the consolidated financial statements at December 31, 2009.
 
 
Statement of compliance.
 
In the opinion of the Board of Management, the quarterly financial report includes all standard adjustments to be applied on an ongoing basis that are required to give a true and fair view of the results of operations, financial position and cash flows of the Group. Please refer to the notes to the consolidated financial statements as of December 31, 2009 for the accounting policies applied for the Group’s financial reporting.
 
Initial application of standards, interpretations and amendments to standards and interpretations in the reporting period.
 
In January 2008, the IASB issued the revised standards IFRS 3 “Business Combinations” and IAS 27 “Consolidated and Separate Financial Statements.” The standards are the result of the second phase of the project undertaken jointly with the Financial Accounting Standards Board (FASB) to reform the accounting for business combinations. The revised IFRS 3 and IAS 27 were endorsed by the European Union in June 2009. Deutsche Telekom has applied the revised standards prospectively since January 1, 2010 to transactions and business combinations. The figures for prior-year periods have not been adjusted.
 
The main changes that the revised IFRS 3 will make to the existing requirements are described below:
 
 
The revised IFRS 3 gives the option of measuring non-controlling interests either at fair value or at the proportionate share of the net identifiable assets. This option can be exercised for each business combination individually.
 
 
In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at the date the acquirer obtains control. Goodwill shall then be determined as the difference between the remeasured carrying amount plus consideration transferred for the acquisition of the new shares, minus net assets acquired.
 
 
Contingent consideration shall be measured at fair value at the acquisition date and classified either as equity, or as asset or liability at the acquisition date. Agreed contingent consideration shall be recognized subsequently in accordance with the classification determined at the acquisition date.
 
 
Acquisition-related costs incurred in connection with business combinations shall be recognized as expenses.
 
 
For changes in contingent considerations classified as liabilities at the acquisition date, goodwill cannot be remeasured subsequently.
 

 
-40-
 

 
According to the revised IFRS 3, effects from the settlement of relationships existing prior to the business combination shall not be part of the exchange for the acquiree.
 
 
In contrast to the previous version of IFRS 3, the revised standard governs the recognition and measurement of rights that were granted to another entity prior to the business combination and which are now reacquired as part of the business combination (reacquired rights).
 
 
The main changes that the revised IAS 27 will make to the existing requirements are described below:
 
 
Changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control shall only be accounted for within equity.
 
 
If a parent loses control of a subsidiary, it shall derecognize the consolidated assets and liabilities. The new requirement is that any investment retained in the former subsidiary shall be recognized at fair value at the date when control is lost; any differences resulting from this shall be recognized in profit or loss.
 
 
When losses attributed to the non-controlling interests exceed the non-controlling interests in the subsidiary’s equity, these losses shall be allocated to the non-controlling interests even if this results in a deficit balance.
 
In July 2008, the IASB issued an amendment to IAS 39 “Financial Instruments: Recognition and Measurement.” The European Union endorsed the amendment to IAS 39 in September 2009. The amendment on eligible hedged items specifies that an entity may designate an option as a hedge of changes in the cash flows or fair value of a hedged item above or below a specified price or other variable. Deutsche Telekom has applied the amendment to IAS 39 since January 1, 2010. The provisions are to be applied retrospectively. The amendment did not have a material impact on the presentation of Deutsche Telekom’s results of operations, financial position or cash flows.
 
In November 2008, the IFRIC issued IFRIC 17 “Distribution of Non-Cash Assets to Owners.” The European Union endorsed IFRIC 17 in November 2009. The interpretation provides guidance on the recognition and measurement of liabilities arising from dividends paid in the form of assets other than cash (e.g., property, plant and equipment) and clarifies how any difference between the carrying amount of the assets distributed and the fair value of the dividend paid should be accounted for. Deutsche Telekom has applied IFRIC 17 since January 1, 2010. The adoption of IFRIC 17 did not have a material impact on the presentation of Deutsche Telekom’s results of operations, financial position or cash flows.
 
In April 2009, the IASB issued “Improvements to IFRSs” – a collection of necessary, but non-urgent, amendments to existing IFRSs. This is the second pronouncement published as part of the Annual Improvements Project and contains amendments to twelve existing standards and interpretations. The European Union endorsed the amendments in March 2010. Deutsche Telekom has applied the amendments since January 1, 2010. The amendments did not have a material impact on the presentation of Deutsche Telekom’s results of operations, financial position or cash flows.
 
In June 2009, the IASB issued amendments to IFRS 2 “Share-based Payment.” The European Union endorsed these amendments in March 2010. These amendments clarify the accounting for group-settled share-based payment transactions. In these arrangements, the subsidiary receives goods or services from employees or suppliers, but its parent or another entity in the group must pay those suppliers. An entity that receives goods or services in a share-based payment arrangement must account for those goods or services no matter which entity in the group settles the transaction, and no matter whether the transaction is settled in shares or cash. The IASB additionally clarified that in IFRS 2 a ‘group’ has the same meaning as in IAS 27 “Consolidated and Separate Financial Statements.” The amendments to IFRS 2 also incorporate guidance previously included in IFRIC 8 “Scope of IFRS 2” and IFRIC 11 “IFRS 2 – Group and Treasury Share Transactions.” As a result, the IASB has withdrawn IFRIC 8 and IFRIC 11. Deutsche Telekom has applied the amendment to IFRS 2 since January 1, 2010. The amendments did not have a material impact on the presentation of Deutsche Telekom’s results of operations, financial position or cash flows.

 
-41-
 

 
 
Business combinations.
 
 
The acquisition of STRATO.
 
On November 19, 2009, Deutsche Telekom signed an agreement with Freenet AG to take over 100 percent of the shares in the Web hosting provider STRATO AG and STRATO Rechenzentrum AG (hereinafter referred to as STRATO). Deutsche Telekom obtained control of STRATO as of January 1, 2010.
 
The STRATO group, the second largest Web hosting provider in Germany and Europe, has a high level of expertise and technological skills in this market. In addition to its German core market, the STRATO group also operates in Spain, the Netherlands, France, the United Kingdom and Italy.
 
The business combination with STRATO resulted in the recognition of goodwill of EUR 184 million, determined on the basis of a preliminary purchase price allocation as follows:
 
       
   
millions of €
  
Purchase price paid for 100 % of the shares
     291  
Fair value of assets and liabilities
     (152 )
Deferred tax liabilities
     45  
Goodwill
     184  
         
This goodwill primarily arises from synergies the combination of the entities is expected to generate.
 
The fair values of STRATO’s acquired assets, liabilities and contingent liabilities recognized at the acquisition date and their carrying amounts immediately prior to the business combination are presented in the following table:
 
   
Fair value at the acquisition date
 
 
millions of €
    
Carrying amounts immediately prior to the business combination
 
millions of €
  
Assets
     397       73  
Current assets
     54       54  
Cash and cash equivalents
     25       25  
Trade and other receivables
     3       3  
Other assets
     26       26  
                 
Non-current assets
     343       19  
Intangible assets
     324       1  
Of which: goodwill
     184       0  
Property, plant and equipment
     14       14  
Other assets
     5       4  
                 
Liabilities
     106       66  
Current liabilities
     60       64  
Trade and other payables
     37       37  
Other liabilities
     23       27  
                 
Non-current liabilities
     46       2  
Deferred tax liabilities
     45       0  
Other liabilities
     1       2  
                 
The fair values of the assets, liabilities and contingent liabilities were determined on the basis of observable market prices. If it was not possible to identify market prices, income-oriented approaches or cost-oriented procedures were used to measure the acquired assets and liabilities.
 
Net revenue increased by EUR 22 million as a result of the acquisition of STRATO. Net profit for the current period includes a net profit at STRATO of EUR 2 million.
 

 
-42-
 

 
Acquisition of a stake in Firstgate (ClickandBuy).
 
On March 23, 2010, Deutsche Telekom signed an agreement with the current shareholders for the acquisition of the remaining shares in the Internet payment service provider Firstgate. Deutsche Telekom obtained control of the entity as of April 1, 2010 and, as a result, fully consolidated it for the first time as of that date. Via its venture capital company, T-Venture, Deutsche Telekom has held 20.2 percent of the shares in Firstgate, best known for the ClickandBuy brand, since 2006. The purchase price for the remaining 79.8 percent of the shares in Firstgate is expected to be EUR 87 million.
 
 
 
Changes in the composition of the Group.
 
Deutsche Telekom acquired and disposed of entities in the current and prior financial year. This imposes certain limits on the comparability of the interim consolidated financial statements and the disclosures under segment reporting. This primarily relates to OTE, which was fully consolidated in the Southern and Eastern Europe operating segment for the first time as of February 6, 2009. STRATO was fully consolidated in the Germany operating segment as of January 1, 2010. The following table shows the effect of changes in the composition of the Group on the consolidated income statement and segment reporting for the first quarter of 2010.
 
                                                 
   
Germany
 
 
millions
of €
    
United States
 
millions
of €
    
Europe
 
 
millions
of €
    
Southern and Eastern Europe
 
millions
of €
    
Systems Solutions
 
millions
of €
    
Group
Headquarters &
Shared Services
millions
of €
    
Reconciliation
 
 
millions
of €
    
Total
 
 
millions
of €
  
Net revenue
     22       -       -       493       -       -       (2 )     513  
Cost of sales
     (8 )     -       -       (300 )     -       -       2       (306 )
Gross profit (loss)
     14       -       -       193       -       -       0       207  
Selling expenses
     (6 )     -       -       (105 )     -       -       -       (111 )
General and administrative expenses
     (6 )     -       -       (39 )     -       -       -       (45 )
Other operating income
     -       -       -       8       -       -       -       8  
Other operating expenses
     -       -       -       (7 )     -       -       -       (7 )
Profit (loss) from operations
     2       -       -       50       -       -       -       52  
Finance costs
     -       -       -       (24 )     -       -       -       (24 )
Share of profit (loss) of associates and joint ventures accounted for using the equity method
     -       -       -       -       -       -       -       -  
Other financial income (expense)
     -       -       -       -       -       -       (4 )     (4 )
Profit (loss) from
financial activities
     -       -       -       (24 )     -       -       (4 )     (28 )
Profit (loss) before income taxes
     2       -       -       26       -       -       (4 )     24  
Income taxes
     -       -       -       (11 )     -       -       1       (10 )
Profit (loss)
     2       -       -       15       -       -       (3 )     14  
                                                                 
 
 
 
 

 
-43-
 

 
 
Selected notes to the consolidated statement of financial position.
 
 
Cash and cash equivalents.
 
Cash and cash equivalents increased from EUR 5.0 billion to EUR 5.6 billion as of March 31, 2010.
 
Detailed information can be found in the consolidated statement of cash flows.
 
Non-current assets and disposal groups held for sale.
 
As of March 31, 2010, current assets recognized in the consolidated statement of financial position included EUR 6.8 billion in non-current assets and disposal groups held for sale as well as directly associated liabilities of EUR 1.5 billion. The following table sets out the major classes of assets and liabilities classified as held for sale:
 
 
Major classes of assets and liabilities classified as held for sale.
 
                   
   
T-Mobile UK
 
Europe operating segment
 
millions of €
    
Other
 
 
 
 
millions of €
    
Mar. 31, 2010
 
 
 
 
millions of €
  
Current assets
     667       -       667  
Trade and other receivables
     280       -       280  
Other current assets
     387       -       387  
Non-current assets
     6,022       87       6,109  
Intangible assets
     3,833       -       3,833  
Property, plant and equipment
     1,664       86       1,750  
Other non-current assets
     525       1       526  
Non-current assets and disposal groups held for sale
     6,689       87       6,776  
                         
Current liabilities
     761       -       761  
Trade and other payables
     501       -       501  
Other current liabilities
     260       -       260  
Non-current liabilities
     695       -       695  
Liabilities directly associated with non-current assets and
disposal groups held for sale
     1,456       -       1,456  
                         
 
 
T-Mobile UK.
 
On November 5, 2009, Deutsche Telekom AG and France Télécom S.A. signed an agreement on the combination of T-Mobile UK and Orange UK in a joint venture in which the two companies will hold 50 percent each. After completion of the transaction, Deutsche Telekom AG will account for its share in the joint venture using the equity method. In addition to the assets and liabilities shown in the table above, EUR -2.2 billion (translation of foreign operations) of the total other comprehensive income reported as of March 31, 2010 is attributable to T-Mobile UK. This amount recognized as other comprehensive income directly in equity reflects the cumulative effects from the currency translation of assets and liabilities at T-Mobile UK since acquisition. At the date of disposal of the assets and liabilities and the first-time recognition of T-Mobile UK as an investment accounted for using the equity method at the same point in time, the amount is recognized in profit or loss. The transaction received the approval of the competition authorities on March 1, 2010, and was subsequently closed – and the joint venture established – effective April 1, 2010.
 
 

 
-44-
 

 
Intangible assets and property, plant and equipment.
 
                               
   
Mar. 31, 2010
millions of €
    
Dec. 31, 2009
millions of €
    
Change
millions of €
    
Change
%
    
Mar. 31, 2009
millions of €
  
Intangible assets
     53,413       51,705       1,708       3.3       57,808  
Of which: UMTS licenses
     6,505       6,637       (132 )     (2.0 )     10,109  
Of which: U.S. mobile communications licenses
     18,306       17,115       1,191       7.0       18,491  
Of which: goodwill
     20,952       20,334       618       3.0       21,216  
Property, plant and equipment
     45,361       45,468       (107 )     (0.2 )     48,231  
                                         
 
 
The increase of 3.3 percent in the carrying amount of intangible assets as of March 31, 2010 is largely attributable to exchange rate effects totaling EUR 1.8 billion; for instance, the effects from the translation of U.S. dollars into euros had an impact of EUR 1.2 billion on U.S. mobile communications licenses.
 
 
Additions to assets.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Additions to assets
     1,636       4,428       (2,792 )     (63.1 )     11,467  
Intangible assets
     290       2,697       (2,407 )     (89.2 )     4,091  
Property, plant and equipment
     1,346       1,731       (385 )     (22.2 )     7,376  
                                         
 
 
In line with the Group’s investments, additions to assets decreased significantly in the first quarter of 2010 by EUR 2.8 billion compared with the first three months of the prior year. The high level of additions to intangible assets in the first quarter of 2009 was largely attributable to the first-time full consolidation of the OTE group and the resulting recognition of goodwill in the amount of EUR 2.4 billion.
 
Financial liabilities.
 
The table below shows the composition and maturity structure of financial liabilities as of March 31, 2010.
 
                               
   
Mar. 31, 2010
 
 
millions of €
    
Due
≤1 year
 
millions of €
    
Due
>1 years
≤3 years
millions of €
    
Due
>3 years
≤5 years
millions of €
    
Due
> 5 years
 
millions of €
  
Bonds and other securitized liabilities
     38,722       5,196       8,866       9,854       14,806  
Liabilities to banks
     4,559       870       1,295       1,706       688  
Lease liabilities
     1,899       139       231       228       1,301  
Liabilities to non-banks from promissory notes
     1,124       -       10       167       947  
Other interest-bearing liabilities
     425       98       124       78       125  
Other non-interest-bearing liabilities
     3,425       3,409       11       1       4  
Derivative financial liabilities
     786       248       177       245       116  
                                         
Financial liabilities
     50,940       9,960       10,714       12,279       17,987  
                                         
 
 

 
-45-
 

 
 
Selected notes to the consolidated income statement.
 
 
Net revenue.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Net revenue
     15,812       15,902       (90 )     (0.6 )     64,602  
                                         
 
For details of changes in net revenue, please refer to the section “Development of business in the Group” in this  report.
 
Cost of sales.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Cost of sales
     (9,025 )     (8,906 )     (119 )     (1.3 )     (36,259 )
                                         
Despite the decrease in revenue, the cost of sales increased by EUR 0.1 billion compared with the first quarter of 2009, partly as a result of the write-off of receivables from the German Main Customs Office for 2005 to 2009 and partly due to the inclusion of the OTE group in the consolidated group. In the first quarter of 2009, the cost of sales included part of the costs taken over by the Hellenic Republic for a voluntary early retirement program.
 
Selling expenses.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Selling expenses
     (3,655 )     (3,996 )     341       8.5       (15,863 )
                                         
The Group’s selling expenses decreased compared with the first quarter of 2009, mainly as a consequence of lower customer acquisition and retention costs. While the first quarter of 2009 was marked by highly aggressive sales activities, which incurred correspondingly high customer investment costs, the market approach for the current year was less focused on the first quarter, which was reflected in lower costs.
 
General and administrative expenses.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
General and administrative expenses
     (1,222 )     (1,136 )     (86 )     (7.6 )     (4,653 )
                                         
The main cause of the increase in general and administrative expenses compared with the first three months of 2009 was the inclusion of the OTE group in the consolidated Group.
 

 
-46-
 

 
Other operating income/expenses.
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Other operating income
     307       387       (80 )     (20.7 )     1,504  
Other operating expenses
     (188 )     (2,007 )     1,819       90.6       (3,319 )
                                         
Other operating income decreased by EUR 0.1 billion compared with the first quarter of 2009, which was mainly due to a specific effect in the prior year. In the first quarter of 2009, this item included income from the reclassification of real estate from assets held for sale to non-current assets.
 
The significant year-on-year decrease in other operating expenses was also mainly attributable to an effect in the first quarter of 2009 when an expense of EUR 1.8 billion was recorded for the impairment of goodwill relating to the cash-generating unit T-Mobile UK.
 
 
Profit/loss from financial activities.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Profit (loss) from financial activities
     (715 )     (742 )     27       3.6       (3,357 )
Finance costs
     (597 )     (632 )     35       5.5       (2,555 )
Interest income
     140       100       40       40.0       341  
Interest expense
     (737 )     (732 )     (5 )     (0.7 )     (2,896 )
Share of profit (loss) of associates and joint ventures accounted for using the equity method
     3       5       (2 )     (40.0 )     24  
Other financial income (expense)
     (121 )     (115 )     (6 )     (5.2 )     (826 )
                                         
The Group’s loss from financial activities in the first quarter of 2010 was at the level of the first three months of 2009.
 
Income taxes.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Income taxes
     (449 )     (426 )     (23 )     (5.4 )     (1,782 )
                                         
Despite significantly higher profit/loss before income taxes, income tax expense increased slightly compared with the first quarter of 2009. Income tax expense in the first quarter of 2009 was comparatively high as a result of goodwill impairment losses not to be considered for tax purposes.
 
 
 

 
-47-
 

 
 
Other disclosures.
 
 
Personnel.
 
                               
      Q1 2010       Q1 2009    
Change
 
    
Change
 
%
    
FY
2009
  
Average number of employees
     259,033       249,325       9,708       3.9       257,601  
Domestic
     128,197       131,409       (3,212 )     (2.4 )     130,477  
International
     130,836       117,916       12,920       11.0       127,124  
                                         
Non-civil servants
     230,073       217,316       12,757       5.9       226,460  
Civil servants (domestic)
     28,960       32,009       (3,049 )     (9.5 )     31,141  
                                         
Trainees and student interns
     9,474       10,263       (789 )     (7.7 )     9,805  
                                         
Personnel costs
(millions of €)
     (3,706 )     (3,310 )     (396 )     (12.0 )     (14,333 )
                                         
The average number of employees increased by 3.9 percent compared with the first quarter of 2009, mainly as a result of changes in the composition of the Group. The OTE group has only been fully consolidated since February 2009 and was therefore not included for the entire first quarter of 2009.
 
In addition, the employees taken over by the Systems Solutions operating segment as part of major new deals and the increase in offshore activities also increased the average headcount.
 
These factors also resulted in the increase of EUR 0.4 billion in personnel costs compared with the first quarter of 2009. Additionally, personnel costs in the first quarter of 2009 included a EUR 0.2 billion contribution by the Hellenic Republic to the costs of a voluntary early retirement program.
 
Depreciation, amortization and impairment losses.
 
                               
   
Q1
2010
millions of €
    
Q1
2009
millions of €
    
Change
 
millions of €
    
Change
 
%
    
FY
2009
millions of €
  
Amortization and impairment of intangible assets
     (806 )     (2,591 )     1,785       68.9       (5,657 )
Of which: mobile communications licenses
     (187 )     (242 )     55       22.7       (905 )
Of which: goodwill
     -       (1,803 )     1,803    
n.a.
       (2,345 )
Depreciation and impairment of property, plant and equipment
     (1,855 )     (2,107 )     252       12.0       (8,237 )
Total depreciation, amortization and impairment losses
     (2,661 )     (4,698 )     2,037       43.4       (13,894 )
                                         
Depreciation, amortization and impairment losses decreased by EUR 2.0 billion compared with the first quarter of 2009. This was due in particular to an impairment loss of EUR 1.8 billion on the goodwill of the cash-generating unit T-Mobile UK recognized in the first three months of 2009, and a year-on-year decrease in depreciation of technical equipment and machinery. The decrease in depreciation of technical equipment and machinery was mainly attributable to the discontinuation of depreciation and amortization of assets at T-Mobile UK which, in contrast to the first quarter of 2009, were classified as held for sale and are therefore no longer depreciated or amortized.
 
 
 
 

 
-48-
 

 
 
Contingencies.
 
There were no significant changes at March 31, 2010 to the contingencies reported in the 2009 consolidated financial statements, with the exception of the following matter.
 
The Greek government has taken a Ministerial Decision calling upon OTE to bear a maximum of EUR 0.3 billion of the extra burden put on the public pension fund by voluntary redundancy programs at OTE. Deutsche Telekom believes that the Ministry’s demand is unsubstantiated and intends to appeal the Ministerial Decision.
 
 
 
Selected notes to the consolidated cash flow statement.
 
 
Net cash from operating activities.
 
Net cash from operating activities amounted to EUR 3.3 billion in the first quarter of 2010, an increase of EUR 0.3 billion over the prior-year quarter. Several factors, some of which offset each other, contributed to this improvement. Group EBITDA was EUR 0.3 billion lower year-on-year in the first three months of 2010; this was partially offset by effects of other non-cash transactions amounting to EUR 0.2 billion. In addition, net payments resulting from the canceling of interest rate swaps decreased by EUR 0.1 billion due to the non-recurrence of one-time effects from the prior-year quarter. This was offset by the improved year-on-year change in provisions of EUR 0.4 billion, as a result of increased additions to provisions for employee expenses while the utilization of provisions for dealers’ commissions and for reimbursements were lower in the first quarter of 2010.
 
The net change in assets and liabilities carried as working capital improved by EUR 0.1 billion, which is attributable to various factors, some of which offset each other.
 
 
Net cash used in investing activities.
 
Net cash used in investing activities totaled EUR 1.8 billion as compared with EUR 1.5 billion in the same period of the previous year. This development was the result of the following factors, some of which offset each other. On the one hand there was the addition of the funds of the OTE group amounting to EUR 1.6 billion as part of the first-time full consolidation of OTE from February 2009 and, on the other hand, there was no corresponding item in the first quarter of 2009 comparable with the outflows for investments relating to the acquisition of STRATO of EUR 0.3 billion in the first quarter of 2010. In an offsetting effect, cash outflows for intangible assets and property, plant and equipment, however, decreased by EUR 0.7 billion, primarily as a result of the postponement of projects in Germany partly due to weather conditions and lower cash outflows in the United States in the first quarter of 2010. In addition, net cash outflows from the change in current financial assets improved by EUR 0.8 billion. While cash outflows of EUR 0.4 billion were recorded in the prior-year period primarily for short-term cash deposits and the deposit of collateral for hedging transactions, in the reporting period there was mainly the return of cash collateral deposited for the acquisition of STRATO totaling EUR 0.3 billion.
 
Net cash used in financing activities.
 
Net cash used in financing activities amounted to EUR 0.9 billion in the first quarter of 2010, compared with EUR 0.4 billion in the prior-year quarter.
 
This change was mostly attributable to EUR 1.5 billion lower year-on-year net proceeds from the issue of non-current financial liabilities. On the other hand, net repayments of current financial liabilities decreased by EUR 0.9 billion, and there was no equivalent in the reporting period for the advance dividend of EUR 0.1 billion paid by Hrvatske telekomunikacije in the first quarter of 2009.
 
 
 
 
 

 
-49-
 

 
 
Segment reporting.
 
The following tables give an overall summary of Deutsche Telekom’s operating segments and Group Headquarters & Shared Services for the first quarters of 2010 and 2009 as well as for the full 2009 financial year.
 
For details on the development of operations in the operating segments and at Group Headquarters & Shared Services, please refer to the section “Development of business in the operating segments” in this report.
 
 
 
Segment information in the quarters.
 
  Q1 2010 Q1 2009    
Net revenue
 
millions
of €
    
Inter-
segment revenue
millions
of €
    
Total revenue
 
millions
of €
    
Profit (loss) from operations
millions
of €
    
Depreciation and
amortization
 
millions
of €
    
Impairment
losses
millions
of €
    
Segment
assets
 
millions
of €
    
Investments accounted for using the equity method
millions
of €
  
Germany
       5,804       385       6,189       1,171       (1,014 )     0       34,010       24  
          5,969       362       6,331       1,325       (1,016 )     0       50,868       18  
United States
       3,810       4       3,814       544       (463 )     (1 )     37,941       20  
          4,133       4       4,137       530       (531 )     0       38,804       16  
Europe
       2,264       148       2,412       375       (285 )     0       22,325       0  
          2,307       129       2,436       (1,786 )     (444 )     (1,803 )     21,143       11  
Southern and
Eastern Europe
       2,349       38       2,387       304       (571 )     (2 )     24,852       52  
          1,929       35       1,964       504       (470 )     (6 )     26,695       51  
Systems Solutions
       1,532       599       2,131       18       (150 )     0       8,651       56  
          1,496       610       2,106       11       (177 )     0       8,992       50  
Group Headquarters &
Shared Services
       53       512       565       (365 )     (167 )     (21 )     111,046       0  
    68       550       618       (309 )     (156 )     (103 )     118,343       0  
Total
       15,812       1,686       17,498       2,047       (2,650 )     (24 )     238,825       152  
          15,902       1,690       17,592       275       (2,794 )     (1,912 )     264,845       146  
Reconciliation
       -       (1,686 )     (1,686 )     (18 )     12       1       (108,022 )     -  
          -       (1,690 )     (1,690 )     (31 )     8       0       (131,081 )     -  
Group
       15,812       -       15,812       2,029       (2,638 )     (23 )     130,803       152  
          15,902       -       15,902       244       (2,786 )     (1,912 )     133,764       146  
                                                                     
 
 
 
Segment information for the 2009 financial year.
 
FY
2009
  
Net revenue
 
millions
of €
    
Inter-segment revenue
millions
of €
    
Total revenue
 
millions
of €
    
Profit (loss) from operations
millions
of €
    
Depreciation and amortization
 
millions
of €
    
Impairment losses
millions
of €
    
Segment
assets
 
millions
of €
    
Investments accounted for using the equity method
millions
of €
  
Germany
     23,813       1,610       25,423       5,062       (4,189 )     (7 )     52,002       23  
United States
     15,457       14       15,471       2,233       (2,025 )     (3 )     36,087       18  
Europe
     9,486       548       10,034       (905 )     (1,561 )     (1,850 )     21,668       0  
Southern and Eastern Europe
     9,510       175       9,685       1,037       (2,211 )     (536 )     25,120       52  
Systems Solutions
     6,083       2,715       8,798       (11 )     (718 )     (3 )     8,872       54  
Group Headquarters & Shared Services
     253       2,157       2,410       (1,249 )     (660 )     (173 )     120,162       0  
Total
     64,602       7,219       71,821       6,167       (11,364 )     (2,572 )     263,911       147  
Reconciliation
     -       (7,219 )     (7,219 )     (155 )     41       1       (136,137 )     -  
Group
     64,602       -       64,602       6,012       (11,323 )     (2,571 )     127,774       147  
                                                                 
 
 

 
-50-
 

 
 
Executive bodies.
 
Changes in the composition of the Board of Management.
 
On January 29, 2010, the Supervisory Board of Deutsche Telekom approved the proposal by the Board of Management to reassign Hamid Akhavan’s responsibilities on a temporary basis. Board of Management members Guido Kerkhoff and Reinhard Clemens have assumed Hamid Akhavan’s responsibilities in an acting capacity. Guido Kerkhoff assumed temporary responsibility for the Europe operating segment (United Kingdom, Netherlands, Austria, Poland and Czech Republic) and International Sales & Service effective February 15, 2010. Reinhard Clemens, also in an acting capacity, assumed Group-wide responsibility for the remaining units of the Chief Operating Officer (COO), such as Products & Innovation, Technology, IT and Procurement effective the same date.
 
On February 24, 2010, the Supervisory Board of Deutsche Telekom approved the proposal by the Board of Management to extend Guido Kerkhoff’s area of responsibility on a long-term basis. Since April 1, 2010, Guido Kerkhoff has been responsible for the Europe operating segment in addition to the Southern and Eastern Europe operating segment. The previous Chief Operating Officer (COO) Board of Management department has been adjusted accordingly. The two operating segments were merged effective April 1, 2010 and will continue operations in future as the Europe operating segment.
 
At its meeting on May 2, 2010, the Supervisory Board appointed Edward Kozel as a new member of Deutsche Telekom’s Board of Management effective May 3, 2010. As Board member and Chief Technology and Innovation Officer (CTIO) he will take over the responsibilities of Hamid Akhavan, who left Deutsche Telekom in February of this year, with the exception of the mobile communications subsidiaries in the United Kingdom, the Netherlands, Austria, Poland and the Czech Republic, for which Guido Kerkhoff has been responsible since April 1, 2010.
 
 
Changes in the composition of the Supervisory Board.
 
Prof. Dr. Wolfgang Reitzle and Prof. Dr. Wulf von Schimmelmann stepped down from the Supervisory Board effective midnight on December 31, 2009 and Dr. Wulf H. Bernotat and Prof. h.c. (CHN), Dr.-Ing. E.h. Dr. Ulrich Middelmann were appointed to the Supervisory Board by court order effective January 1, 2010.
 
Josef Falbisoner resigned his seat on the Supervisory Board effective at the end of the shareholders’ meeting on May 3, 2010, and Sibylle Spoo was appointed to the Supervisory Board by court order effective May 4, 2010.
 
 
 
Events after the reporting period (March 31, 2010).
 
For information on events after the reporting period, please refer to the “Events after the reporting period” section in this report.
 

 
-51-
 

SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
DEUTSCHE TELEKOM AG
 
By:/s/ Dr. Guillaume Maisondieu
 
Name: Dr. Guillaume Maisondieu
Title: Chief Accounting Officer
 
Date: May 27, 2010