Telekom Deutschland: to add 2 million households to FTTH per year

Telekom DE build-out 2018 and future plans

• added 60k km fiber (total 500k)
• added 23k street cabinets (total 177.6k), to complete FTTC YE 2020
• total 100 business parks (45k businesses) with FTTO (100 Mb/s - 100 Gb/s)
• added 1,300 base stations (total 27k; coverage 99.8% pops and 97.6% area; LTE coverage 97.8% pops and 97% area; single-RAN)
• total FTTS penetration 80% of sites
• 5G test sites in Berlin (Schöneberg & Mitte; 2 Gb/s, 3 ms latency) and Hamburg port
• campus networks (LTE-based, with edge computing, AI) with Osram in Schwabmünchen and with RWTH Aachen University (planned)
• 26m HH have at least 100 Mb/s
• plans large-scale FTTH (2m HH/yr) and 5G
• target 3k business parks with FTTO by YE 2022

"Deutsche Telekom will have largely completed its FTTC (fiber to the curb) upgrade by the end of 2020. This will be followed by the large-scale buildout of FTTH (fiber to the home), in which Deutsche Telekom will equip up to two million households with FTTH every year."

Deutsche Telekom Capital Markets Days 2018 - Highlights

Deutsche Telekom Group

• Guidance 2017-21: uninterrupted growth for revenues (1-2%), adj. EBITDA (2-4%), FCF (10%), capex (excl US) flat (EUR 12.1b), all units contribute from 2019; dividend 2018 to track FCF (70 c/share over 2017), dividend to track adj. EPS from 2019 (EPS from EUR 1.00 in 2018 to 1.20 in 2021), minimum dividend 50c
• Not on track 2014-18: capex 2014-18 CAGR 1-2% (CAGR 2014-17 6%), opex 2014-18 down (2014-17: EUR 700m indirect costs down vs. target 1.8b)
• Plans indirect cost cutting (excl. US) from automation & digitalisation, EUR 1.5b by 2021 o/w half non-staff (real estate, legacy IT)
• o/w 750m Telekom DE, 400m Europe, 100m T-Systems, 200m GHS
• All-IP complete in Germany by 2019 (consumer) & 2020 (business), Greece 2019, etc.
• Staff reduction already implemented (incl. phased retirement)
• Focus
• Digitalisation: app (Mein Magenta)
• Portfolio simplification
• Automation (1500 bots)
• Data (analytics, AI)
• IT transformation (harmonised API layer)
• Real-time operations (IP/BNG, Access 4.0)

Telekom DE

• Behind on cash contribution target 2014-17 (2% vs 2.7%)
• Guidance: revenue growth >1% (MSR 2%, BB 3-4%), adj. EBITDA growth 2.0-2.5%, cash contribution growth 4-5%, capex flat (EUR 4.2b)
• Target SME revenues EUR 6.5b by 2021E (2017: 6.0)
• Indirect cost cutting: EUR 300m from automation, 250m from operational excellence, 200m from platform retirement.
• Drivers
• Convergence: MagentaEins (HH penetration Europe from 21% (2017) to 40% (2021))
• Multi-brand mobile: focus on premium brands; IoT, 5G
• Leverage fiber & TV investments: TV share 50% YE 2021; wholesale revenue CAGR 2017-21 2%, wholesale end-users CAGR 2017-21 1% to 12.3m, wholesale ARPA CAGR 2017-21 2% to EUR 13.5)
• Customer service: 24 hr problem solving from 66% (2017) to 80% (2021); TRI*M score to 64 by 2021E (2017: 59)
• Broadband 
• >50 Mb/s coverage 62% YE 2018E, 95% YE 2019
• High-speed (50-250 Mb/s) coverage 80% (95% incl. wholesale) YE 2019 (70% access to 100 Mb/s based on vectoring; super-vectoring from 18H2 for 105-250 Mb/s for 15m HH YE 2018, 28M HP by YE 2019)
• To launch FTTH 2018, ramp up to 2m HH/annum from 2021 (given the right regulatory conditions), possibly in co-investment)
• IRR target FTTH/B 7.5%
• Target market share 30% by 2021E
• Mobile: 27k sites (to add 2k/annum), 80% FTTS; mobile base stations to grow from 27k (2017) to 36k (2021) incl. small cells in urban areas, LTE population coverage from 94% (2017) to 98% (2019), 99% (2020)

Systems Solutions

• Outlook 2017-21: rev CAGR 1%, adj. EBITDA CAGR 5%, margin 8-10%, capex stable (EUR 400m)
• T-Systems to return to growth (based on IoT, cloud computing, security solutions), cash contribution break-even by 202E
• Cost savings >EUR 300m
• Transformation 2018-21
• Portfolio focus: 3 clusters
• Core: fixed & mobile
• Growth: ICT, IoT, security, road charging, digital solutions, public cloud managed services, SAP
• Classic IT: managed infra services & private cloud, SI
• Sales revitalisation
• Delivery integration
• Overhead reduction (8 to 5 management layers)

T-Mobile US

• Outlook 2018: postpaid net adds 2.6-3.3m, adj. EBITDA $11.4-11.8b, capex $4.9-5.3b 
• Focus
• Un-carrier
• Beyond smartphone: Music Freedom, BingeOn, Netflix On US, layer3 TV, 5G, IoT
• Simplicity & digitalisation 
• Cost savings >$1b over 3 yr 

Europe (GR, HU, HR, SK, MK, ME, PL, CZ, AT, RO, AL)

• Outlook 2017-21: revenue CAGR >1%, adj. EBITDA CAGR 1-2%, cash contribution CAGR 2-4%, capex stable (EUR 1.8b).
• Indirect cost reduction EUR 400m by 2021 (120m from operational efficiency, 50m from simplification, 90m from digital customer interaction, 100m from leaner structure (incl cross-border synergies)).
• FMC: HH penetration from 26% (2017) to >50% (2021), revenue CAGR 2017-21 25% to EUR 1.7b
• FMCC (cloud): penetration VSE/SMB 31% (2017) to >50% (2021), revenue CAGR 2017-21 10%
• FTTH/B 
• Coverage 17% (2017) to 30% (2021)
• FTTH/B capex
• FTTH/B capex EUR 100m (2017) to 300m (2021)
• HP additions 250k (2017) ramp up to 750k per annum (2021)
• BB revenues EUR 3.6b by 2021E (2017: 3.2b)
• Mobile base stations European subsidiaries from 41k (2017) to 47k (2021) incl. small cells (macro cells adds 1k/annum), LTE coverage 99% by 2021

Group Development (part of GHS)

• Outlook 2017-21: revenue CAGR 3%, adj. EBITDA CAGR 3-4%, cash contribution CAGR 3% (-4% incl. site-roll-out at Deutsche Funkturm), capex flat at EUR 300m (+17% incl. site-roll-out) 
• T-Mobile US: un-carrier 
• T-Mobile NL 
• "Still a long way to go" (SR & EBITDA)
• Unlimited mobile de-risked, based on capacity expansion
• Unique incentive scheme
• Cost cutting 30% of overhead FTE (non-customer-facing) (from early 2017)
• Initiated towers carve-out (stay at DT)
• "Dutch market needs LT-viable maverick"
• Deutsche Funkturm: creating European TowerCo by insourcing tower assets NL, AT, etc.
• DTCP (Venture Capital)
• BT stake

Technology & Innovation: 5G

• Mobile capacity/speed upgrade (i.e. a better 4G). Economic rationale: efficiency gain (opex).
• FWA to complement FTTH/FTTB in (sub)urban areas. Economic rationale: more cost-efficient & faster time-to-market than FTTH/FTTB (capex). Note: capex 30-50% lower, but FTTH/FTTB TCO better after 20 years (FWA higher opex).
• Selected new products/solutions (massive IoT or services based on extremely low latency). Economic rationale: new revenue streams (e.g. campus networks).

KPN Q4: FTTH to migrate to PON technology after 2018

Details from the main release

• Outlook 2018
• Adj EBITDA flat, capex 1.1b, FCF up (excl TEF DE div), div 12 c/share; Telefonica DE stake 8.6%
• IFRS 15
• recognition & measurement of revenues
• different timing of revenue recognition for handset transactions via direct & indirect channels, and a higher threshold probability in revenue related disputes
• revenues for handsets sold via direct channels are recognized in the P&L as nonservice revenues at date of the transaction, matching the associated handset costs. Revenues (nonservice) and fees (SAC) for handsets sold via indirect channels are no longer recognized in the P&L, but reported in the balance sheet. The threshold in revenue related disputes (variable consideration) is raised, meaning that revenues are only recognized when highly probable (>75%), up from >50% under IAS 18)
• impact (from 180101): adj rev -130m, adj EBITDA -100m, FCF unchanged, equity (at 170101) +285m
• Q&A
• RLAH more favorable than expected (wholesale costs, VR income, data usage grew multiple (>3x)), effect 2018 comparable (shorter yoy effect but expanded usage)
• Expects Business Market stabilisation in 1-3 yr
• 3.5 GHz band crucial for 5G
• Technology update
• Fiber reduces latency to 6 ms (DSL 14 ms, LTE 20-26 ms)
• FTTH reaches 2.3m HH, new build FTTH only, AON in 2018, thereafter migration to PON (not for existing lines), plans access on 3rd party FTTH
• Stepped up FTTO (after regulation ended)
• FTTS reaches 80%
• Bonded V Plus roll-out from 18Q2 (>400 Mb/s), cabinets suitable for VDSL & FTTH, local loop typically 150 meters
• Hybrid DSL/LTE has 1400 subs (Nijkerk trial), average download 6 to 73 Mb/s (note: DSL is needed for IPTV & fixed IP address, LTE for peaks & streaming)
• LTE-M nationwide by 18Q2
• Plans 4 5G pilots: urban, rural, transport & logistics, automotive ("4G connects people, 5G connects society")
• Plans VoWiFi
• Network integration
• Access
• 1. Combine (hybrid access): FTTC/FTTH & DSL/LTE
• 2. Massify (facilitate massive device comms)IoT over LoRa, LTE-M and 4G M2M
• 3. Verticalise (5G for verticals): eMBB (broadband), mMTC (massive), URLLC (latency)
• Core
• 4. Rationalise (simplification): all-IP
• 5. Virtualize (increase scalability, reduce time-to-market): NFV (generic cloud hardware, faster time-to-market) & SDN (smart routing)
• 6. Decentralise (content closer to consumer): CDN at 161 metro locations (for content caching, core-network offloading, improves experience), edge computing (for 5G, improves latency for automotive, e-health, smart industry)
• Simplification: phase 3 of simplification will follow (savings 1 & 2 relative to 2016: 570m EUR/yr)
• IT simplification: originally for 80k subs, invisible for customers, focus on a single My KPN app, focus on open source, added 150 developers in 2017 (total 30 nationalities), time-to-market (halved to 7 days) to be halved again