Deutsche Telekom AG - The 2009 financial year

The key performance indicators (KPIs) for operational management are revenue, EBIT, EBITDA, free cash flow, and the return on capital employed (ROCE). The development of Deutsche Telekom’s revenue is essential to ensuring its success and programs to improve the top line are a fundamental building block of the Company’s future. EBITDA corresponds to EBIT (profit/loss from operations) before deprecia- tion, amortization and impairment losses. The Group uses the development of EBIT and EBITDA to measure its short-term operational performance and the success of its individual operations. The Group also uses the EBIT and EBITDA margins to show how these indicators develop in relation to revenue. These relative indicators make it possible to compare the earnings performance of profit-oriented units of different sizes. The goal is to reach or exceed competitors’ EBIT or EBITDA margins. Deutsche Telekom defines free cash flow as net cash from operating activ- ities less net cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment. It is the key measure used by providers of debt capital and equity as stakeholders in Deutsche Telekom. Free cash flow is indicative both of the Company’s potential for further development, such as the generation of organic and inorganic growth, and of its ability to pay a dividend and repay debt. A centralized free cash flow management unit set up in the 2009 financial year is responsible for transparency, steering, forecasting, and measuring performance. Centralized reporting and decentralized steering instruments were put in place and working capital projects carried out in 2009. These steps are the foundation for effective free cash flow management that will continue in the future. The focus is on additional steps to optimize working capital, further develop planning and forecasting instruments, and refine the steering process. ROCE is the main benchmark for focusing all operational measures on superior value. It represents the result a company has achieved in relation to the assets employed in achieving that result. ROCE is calculated using the ratio of profit from operations after depreciation, amortization and impairment losses, and the ratio of taxes (i.e., net operating profit after taxes, or NOPAT) to the average value of the assets tied up for this purpose in the course of the year (i.e., net operating assets, or NOA). Deutsche Telekom’s goal is to achieve or exceed the return targets imposed on it by providers of debt capital and equity on the basis of capital market require- ments and thus to generate value. Deutsche Telekom measures return targets using the weighted average cost of capital (WACC). A stable rating, the Company’s gearing, and its relative debt are the relevant factors for fulfilling the requirements of debt capital providers and ensuring financial stability. Relative debt is the ratio of net debt to adjusted EBITDA, while gearing is the ratio of net debt to equity. Deutsche Telekom has set itself a target of between 2 and 2.5 for its relative debt and between 0.8 and 1.2 for its gearing. The Group’s financial stability is also safeguarded by constantly maintaining a liquidity reserve (unused credit lines and cash deposits) that ensures the Group can repay its debts for at least the next 24 months. The financial stability targets were reached in the 2009 financial year:* Relative debt (net debt/adj. EBITDA) 2 – 2.5x Equity ratio (%) 25 – 30 Gearing 0.8 – 1.2 * For the calculation of these KPIs, please refer to the section on “Development of business in the Group.” 65Group management report Group strategy and Group management