Deutsche Telekom AG (DT) Wednesday swung to a first-quarter net profit despite slightly lower sales and a continued weak performance from its closely-watched U.S. operations.

Analysts said that Germany's incumbent telecom provider posted a relatively stable start to the year, benefiting from a strong performance in the German mobile market. At 1252 GMT Deutsche Telekom shares were trading up 2.7% at EUR9.06 ahead of a 1.9% rise in the DAX.

But concerns remain over the performance of T-Mobile USA and the effect of the sovereign debt crisis on Hellenic Telecommunications Organization SA (OTE), in which Deutsche Telekom has a 30% stake.

Deutsche Telekom Chief Executive Rene Obermann didn't rule out that the sovereign debt crisis could affect OTE mid-term, but OTE's Chairman and Chief Executive Panagis Vourloumis was more drastic, saying Wednesday that "an increase in disconnections and a slowdown in telecoms spending is likely." OTE reported a 76% drop in first quarter net profit due to weak sales and higher taxes.

T-Mobile USA also posted a weak performance. It lost 77,000 subscribers on a net basis in the first quarter, level with the subscriber loss in the third quarter last year. Revenue declined by 2.2% in dollar terms to $5.28 billion. In euros, the sales decline was even worse, slumping 7.8%. Still, the adjusted Ebitda margin improved by 0.8 percentage points to 26.4% in the period.

Chief Executive Officer Rene Obermann said in a conference call that the U.S. performance is "not satisfying", but said T-Mobile USA is still "a cash cow." Obermann also said he hopes for a tailwind from an economic recovery as the U.S. business has a strong exposure to consumers rather than business customers.

Obermann declined to comment on speculation Deutsche Telekom is in talks with U.S. hedge fund Harbinger Capital about a possible alliance with its T-Mobile USA unit which would give it access to Harbinger Capital's planned 4G network.

But Obermann did say that collaborations in building up new networks make sense due to the large investment required.

Deutsche Telekom "did not do too badly in its first quarter overall, but the U.S. is showing continued problems," said Gartner research director Katja Ruud.

Group net profit for the quarter ended March 31 was EUR767 million after a net loss of EUR1.12 billion a year ago, when the company's bottom line was weighed down by a EUR1.8 billion impairment charge on the goodwill of its U.K operations. T-Mobile, its U.K. mobile operation, is now part of Everything Everywhere, a joint venture with France Telecom's (FTE) Orange.

Deutsche Telekom did not revise its 2010 outlook but adjusted it for the deconsolidation of its U.K. operations. It now expects full year adjusted Ebitda to be EUR400 million to EUR500 million below the previous guidance of around EUR20 billion, and free cash flow to remain EUR6.2 billion.

First-quarter group sales declined 0.6% to EUR15.81 billion. But closely-watched adjusted earnings before interest, tax, depreciation and amortization, or Ebitda, the company's preferred measure of operating performance, rose 1.6 % to EUR4.89 billion.

In particular German mobile operations performed well with service revenue up 3.3%.

Peer Royal KPN NV's (KPN.AE) posted a 0.7% decline in service revenue, Telefonica SA's (TEF) and Vodafone PLC (VOD) are yet to report.

Company website: www.telekom.com

-By Archibald Preuschat, Dow Jones Newswires; +49 211 13872 18; archibald.preuschat@dowjones.com

(Alkman Granitsas in Athens contributed to this article.)
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