2nd UPDATE: Deutsche Telekom Sees Ray Of Hope In The US

Deutsche Telekom AG (DTE.XE) Thursday flagged the first signs of recovery in its sluggish U.S. market and reiterated its full-year outlook but warned of continued tough economic conditions in south eastern Europe.

Deutsche Telekom gained contract subscribers in its closely-watched T-Mobile USA business for the first time in a year.

The U.S. operations are a key focus for investors who regularly question the company's long-term strategy there as it is the smallest of the four nationwide network providers behind AT&T Inc. (T), Verizon Wireless and Sprint Nextel Corp. (S).

T-Mobile USA has consistently underperformed its peers, leading to constant speculation Deutsche Telekom could divest or merge its operations in the U.S.

The number of new customers on contract--which are more valuable than prepaid customers as they generate higher revenue--was 106,000 compared with 56,000 in the year ago period but customer acquisition costs also rose to $330 from $270 a year ago. Its overall customer base stood at 33.6 million at the end of June.

T-Mobile USA's contract customer gain is still far behind that of Verizon, whose wireless arm gained 665,000 contract customers in the quarter to the end of June, while AT&T gained 496,000 contract customers in the same period.

Deutsche Telekom Chief Executive Rene Obermann said it's too early to declare a turnaround in the U.S. but that it is nonetheless a move in the right direction.

But as the U.S. starts to turn the corner, difficult economic conditions persist in south eastern Europe, the Bonn-based company said. Deutsche Telekom has been worst hit in Greece, where it has a 30% stake in Hellenic Telecommunications Organization SA (OTE), which Thursday swung to a net loss due to weak sales from a crisis-hit Greek economy and high extraordinary taxes imposed by the government. Deutsche Telekom is also suffering in Slovakia, where adjusted Ebitda dropped by 12.5%, and to a lesser extent in Croatia, where adjusted Ebitda was down 6.8%.

By contrast, the mature German home market which has struggled to grow in recent years showed almost stable sales and a 2.4% increase in adjusted Ebitda, driven by cost savings.

Overall Deutsche Telekom, Germany's incumbent telecom provider, posted second-quarter net profit of EUR475 million compared with EUR521 million a year earlier as it took a EUR200 million hit related to the deconsolidation of its U.K. operations. Deutsche Telekom's U.K. operations are now part of Everything Everywhere, a joint venture with France Telecom (FTE).

Total sales for the period declined 4.4% to EUR15.53 billion, but were up 0.9% adjusted for the effect of deconsolidating T-Mobile U.K., as the joint venture is now excluded from sales and operating profit.

Deutsche Telekom reiterated its 2010 view for free cash flow of around EUR6.2 billion in fiscal 2010 and adjusted Ebitda of around EUR19.5 billion.

Deutsche Telekom has a "very solid" second quarter under its belt, according to SES analyst Jochen Reichert. He highlighted the positive developments in new customer contracts in the US and Germany in particular noting a turnaround is apparent.

At 1145 GMT Deutsche Telekom's shares were flat at EUR10.50 compared to a 0.6% rise in Frankfurt's bluechip DAX index.

-By Archibald Preuschat, Dow Jones Newswires; [phone]; [e-mail]