FINANCIALLY STRUGGLING CHALLENGE THIS YEAR FOR
German teleco turns to software veteran with proven track record as it falls
The effort to strike a deal for T-Mobile US has drawn attention away from another Deutsche Telekom unit that needs fixing more urgently: its money-draining computer-services business.
With a T-Mobile US deal now on hold, the German giant can focus on reviving the T-Systems tech division that is struggling to compete with more agile cloud start-ups and multinational giants. That job will fall to Adel Al Saleh, an American software veteran with a track record of turning around troubled businesses, who takes over as the unit’s chief executive.
The effort is crucial because this division gives Deutsche Telekom access to large multinational clients it can sell other services to, yet it has been the company’s problem child for years. Some of the unit’s contracts have proven loss-making, and it has come under pressure as IT services are increasingly moving into the clouds of Amazon.com and Google, where they are available at a lower cost.
“These IT services units – from T-Systems to that of BT Group and Orange – all have the same problem: where they operate in a country where they don’t have a network, the margins are poor,” said Jonathan Dann, an analyst at RBC Capital Markets. “The new T-Systems CEO must focus on more profitable contracts and avoid those in countries where they have no network. And find a way to add value beyond just reselling cloud offers from the likes of Amazon.”
The stiff competition has hurt margins and stifled growth at T-Systems, which has accumulated operating losses of more than €1.8 billion (Dh7.92bn) since 2012. Deutsche Telekom chief executive Tim Hoettges wants to see the start of a turnaround this year after having to write down €1.2bn of goodwill at the unit last quarter on declining orders.
Mr Hoettges has said internally that he does not want to rule out anything for T-Systems, including more personnel cuts or the sale of problematic businesses, according to a person familiar with his thinking. Small acquisitions to strengthen promising ventures, such as cybersecurity, are also possible, the person said, declining to be named because the discussions are internal.
Mr Al Saleh, who spent the first two decades of his career at International Business Machines, wants to push more cost cuts at T-Systems, partly by increasing the offshore share of the business, the person said.
Deutsche Telekom declined to comment on potential cost cuts or acquisitions. T-Systems is “undergoing a comprehensive transformation into a leading digital service provider” and can improve in many areas, the company said. Mr Al Saleh’s past successes include reviving NIS, a UK company specialising in human resources software. He was brought in as chief executive in 2011 by owner KKR and went on to streamline the company’s portfolio, update
its strategy and cut costs. He also restructured the business’s debt and brought in Goldman Sachs Group as an investor in 2016.
“Adel has a proven record of turning businesses around,” Mr Hoettges said in October, when the new unit chief was named. Mr Hoettges has previously voiced his impatience with T-Systems, saying at Deutsche Telekom’s shareholder meeting in May that he is annoyed the unit “ruined” the company’s 2016 result.
Selling unprofitable parts of T-Systems is one way to cut costs, yet finding a buyer will not be easy as many of the division’s employees can’t be easily fired because they retained the civil-servant status of the former state-owned monopoly. Deutsche Telekom considered selling the outsourcing business of T-Systems’ IT division, which services computer systems for corporate clients, people familiar with the situation said. So far, no sale has materialised.
There is room for some optimism. T-Systems is creating new growth in areas such as cybersecurity, its cloud business and Internet of Things-related services, chief financial officer Thomas Dannenfeldt said. Deutsche Telekom cooperates with Huawei Technologies for its IoT offerings and has won clients including shipping company Deutsche Afrika-Linien, which tracks its containers to ensure they arrive undamaged.
T-Systems also built a cyberdefence centre that helps corporate
The T-Systems CEO must focus on more profitable contracts and avoid those in countries where they have no network JONATHAN DANN RBC Capital Markets analyst
clients such as gas company Linde fend off attacks and developed products including an app that alerts users if someone is trying to hack their mobile phone.
A healthy performance at T-Systems is key for a carrier the size of Deutsche Telekom, which seeks to benefit from industries digitising their factories in Germany and abroad, said Erhan Gurses, an analyst at Bloomberg Intelligence.
“The new CEO’s main challenge is to put the unit back to a sustained growth trajectory with improvement in profitability,” Mr Gurses said. “This may mean further pain ahead before things start to improve as the segment needs to reduce its reliance on traditional IT projects and invest to gain better traction in high growth areas including IoT, cloud and security.”