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).

7 Predictions for 2018 for the Dutch market: consolidation, newcomers and an IPO

1. T-Mobile NL/Tele2 NL a strong #3
This merger seems inevitable. What is more intriguing, is options for creating an even stronger challenger to the KPN/VodafoneZiggo 'duopoly'. Candidates include the M7 Group (Canal Digitaal, Online, Stipte, Fiber NL) and EQT's Dutch assets (Delta, CIF, Caiway).

2. VodafoneZiggo IPO
Greater independence from the 50/50 parent companies would instantly create value. Hundreds of millions of euros are extracted from the company every year.
Alternatively, either Vodafone or Liberty Global could buy out its fellow shareholder, but this seems unlikely. Both are actively trying to get rid of assets in countries where there is no overlap.

3. KPN creating PTT network
KPN will want to be part of a new wave of consolidation. Most multinationals are ruled out, for various reasons (Orange not looking to expand its footprint, Altice not in takeover mood currently, etc). Bloomberg recently suggested Proximus, TDC and Elisa could be partners. In fact, there could be many more in this league (Swisscom, Eir, Telenor).

4. KPN will start losing broadband market share
Leapfrogging is rather predictable. ADSL, Docsis 3.0, VDSL and next .... Docsis 3.1. Once VodafoneZiggo turns on Docsis 3.1, it may herald a new phase of growth. KPN's broadband market share will decline and at some point it may relaunch FTTH and do a number of small takeovers to regain share.

5. Eurofiber to bid in 5G auctions
Eurofiber is actively exploring value-creating innovation. It has an extensive fiber network, connecting anything (including bridges & traffic lights) outside the FTTH segment. A 5G network could be devised as wholesale-only. The company could consider bidding through a consortium with T-Mobile/Tele2.

6. Talpa Netwerk to bid for Eredivisie summaries
John de Mol, having sold part of his assets to ITV, has re-created a wide-ranging media company, Talpa Netwerk (TV, radio, streaming video & music, web, events). It appears as a no-brainer to buy the very valuable Eredivisie summaries for the SBS channels.

7. Subsidisation moving to high-value plans
Operators will start realising that subsidisation (handsets, mobile data, content) may reduce churn but destroys value by offering it to all subscriptions. Vodafone's Passes may be too expensive for the Dutch market, but the concept or providing benefits to high-value plans deserves to be copied.

Announcements to be expected for the Dutch market

What's up for 2014 in NL?

• KPN starts to roll out vectored VDSL from February 2014 to 2.1m HP. FTTH to roll out to 250k HP more to a total of almost 2m. There supposedly is a trial of LTE Broadcast and from April FON will be integrated. A new CFO will be appointed. E-Plus will be sold, Reggefiber will be consolidated and America Movil will probably sell its stake.
• Tele2 is rolling out its LTE network, but will probably launch in 2015. Plans are to unbundle FTTH, not with a time-frame. A new CEO will be appointed.
• Vodafone is also set to unbundle FTTH and appears to be closer than Tele2. It will appoint a new MD for Vodafone Business.
• T-Mobile will appoint a new CEO.
• UPC will launch the Horizon Phone app.
• Ziggo will probably launch a similar app. It remains to be seen what the next step in mobile will be.
• NPO will launch NPO Plus, a paid version (better quality, fewer ads) of its catch-up service.
• NPO, RTL and SBS will launch NLziet, bringing together their respective catch-up services (extended and non-free).

Spectrum holdings in the Netherlands create opportunties, but not for Tele2

Spectrum in the Netherlands has been auctioned off in 2010 and 2012, leading to the situation shown in the figure. A few things stand out:

• All holdings are roughly equal for the incumbents (KPN, Vodafone, T-Mobile).
• T-Mobile has a lot of unpaired spectrum, which could enable TD-LTE and DSL-replacement services.
• Tele2 has limited spectrum. This offers limited options for LTE-Advanced and Carrier Aggregation. And limited spectrum/capacity means limited options for a wholesale strategy.
• ZUM (Ziggo/UPC) only owns 2600-spectrum, which could be used to lower wholesale costs to Vodafone. Ziggo has an MVNO on Vodafone and focuses on WiFi. An alternative would be to focus on the 2600-spectrum, offload to WiFi as much as possible, roam on Vodafone (or T-Mobile or KPN) and cancel the MVNO.

Outlook 2014 for Dutch telecoms market

We have produced a number of articles looking ahead to 2014 for each of the majors on the Dutch telco market. Here are the main questions:

• KPN:
• who will be the new CFO?
• offer from America Movil: unlikely?
• what to do with EUR 5bn from selling E-Plus?
• consolidate the Belgian market and become the prime reseller?
• buy Ziggo and UPC NL to create a national open access infrastructure?
• Tele2 NL:
• what will a new CEO mean for Tele2?
• when will the LTE-network be activated? will it lead to pricing pressure?
• how can the downturn on the fixed market be stopped? when will it start unbundling FTTH?
• Ziggo:
• the new CEO (Obermann from DT): his arrival alone would imply either no deal with Liberty Global, or a guaranteed career for Obermann within LGI.
• expanding the mobile strategy: nomadic rather than a full MVNO?
• OTT-partnerships: unlikely?
• UPC NL:
• will the merger with Ziggo happen? or will a reversed deal take place: Ziggo acquires UPC?
• what can the company do on a standalone-basis to improve its performance? will it follow in Ziggo's footsteps regarding mobile and WiFi?
• will it launch the UPC Phone app?
• will it hold on to the Horizon box, or explore alternatives? (cloud-based solution, TiVo, RDK, Frog by Wyplay, ...)
• Vodafone NL:
• when will it start unbundling FTTH?
• takeovers on the business market?
• T-Mobile NL:
• a new CEO is due, after Thomas Berlemann was sacked.
• how disruptive will the mobile-only strategy be? attack the DSL-market? deploy TD-LTE? follow T-Mobile USA's uncarrier strategy?
• how dependent will it become on Tele2? (2G/3G MVNO income, 4G network sharing income; network sharing cost savings) will it explore more wholesale opportunities?

There are so many opportunities for operators to return to growth, but resources (euros, management time) are scarce. One would wish that the operators would be aggressive, opportunistic and on the offensive, rather than following a me-too strategy, avoid risk and be on the defensive, but that remains to be seen. Ultimately, this is a matter of short-term versus long-term vision.

AT&T buys T-Mobile USA: will the deal survive FCC scrutiny unscathed?

AT&T buys T-Mobile USA for $39bn, o/w $25bn in cash (may be raised by $4.2bn, as long as DT's stake is at least 5%) and $14bn in shares (for an 8% stake). The EUR equivalent is 28bn, of which EUR 13bn is for debt reduction (31%) and EUR 5bn for extra share buy-backs. The price implies a valuation of 7.1x adjusted 2010 EBITDA.

Deutsche Telekom further refers to its continued exposure to the US market and the attractive AT&T dividend. AT&T defends the deal by referring to the extra spectrum and the increased ability to blanket the US. They also refer to an 'impending spectrum exhaust'. And they are happy to report that T-Mobile USA will be 'part of a US-based company'. AT&T expects a synergy run-rate of >$3bn from 3 years after closing, total synergies will exceed the purchase price

Here are some first thoughts, some off of Twitter, for which a hat-tip to Dean, Keith and Brough:

• What will DT do with the proceeds, i.e. the remaining EUR 10bn (locked up in AT&T stock for 1 year after closing)?
• What does this imply for other markets, particularly those where DT offers mobile services only, such as the UK?
• If 4G/LTE was a dealbreaker for T-Mobile USA, what does this imply for other companies still undecided on their 4G roadmap, such as E-Plus (KPN) in Germany?
• Bad news for LightSquared, which is bound to lose a wholesale customer.
• What will Sprint do?
• How will the DoJ and FCC respond?
• AT&T may have to give up spectrum.
• If AT&T pulls this off, Verizon Wireless will be enabled to make further acquisitions as well. Which would be bad news for Vodafone: no long-awaited dividend re-installment.
• What would the break-up fee be? - UPDATE: $3bn + some spectrum + a roaming deal.
• Integration may lead to bad service for the next 12 months.
• Competion will be reduced, the market may develop oligopolistic traits.

Back on the grid: FTTH and OA

On my way back from Australia, I had a chance to read the Straits Times, which reported on the next stage (an RfP for the NetCo layer), of the Singapore Next Generation National Broadband Network plan. The leading front page story on that day, mind you. Justice finally to this eminently important issue.

This is what I found in my mailbox and around the net on FTTH:

• Algeria, neatly covered by Blues Brother Benoit. Another case of an emerging market leapfrogging ‘the west’.
• Singapore, which didn’t escape Brough’s attention. Very interesting, as it mirrors approaches seen in Amsterdam and Sweden: a network in 3 layers, and Singapore is adding structural separation.
• Amsterdam itself, finally approved by the EC (see Benoit’s coverage).
• Cisco announced a Reggefiber deal. Interesting wording in the press release: Deventer, Almere and ‘another city within the next few months’; ‘speeds of 100 Mb/s initially, and up to 1 Gb/s in the future’; ‘Reggefiber has plans to offer FTTH-based broadband services to the majority of residents in the Netherlands’; ‘Reggefiber has the ambition to make broadband available to everyone in The Netherlands’.
• Network build-out in Almere has now started. KPN and Reggefiber joined forces, which apparently extends to datacenters.
• More Dutch initiatives: BreedNet in North Holland and schools in Frisia (which successfully tapped Kabel Noord, a small MSO that I have learned to know as a frontrunner in cable country). Many MSOs still resist FTTH, apart from the well known Numericable, which is expanding.
• FTTH appears to be part of the FTTx plans of seven Greek towns, that contracted Ericsson.

‘FTTH’ is linked, via ‘natural monopoly’, to topics like ‘open access’, ‘wholesale’ and ‘sharing’. Still, not everyone is convinced, as can be read here (in relation to the Singapore plans). Still no Telco 2.0 points yet for Belgacom either.

But now, it is spreading to the mobile realm:

• Network sharing is gaining traction. No longer just Vodafone, but T-Mobile and 3G as well.
• E-Plus (the German subsidiary to Telco 2.0 champ KPN) is looking ahead to a time where all-IP implies commoditisation on one side and a quest for new revenue streams on the other side. Very interesting, as Apple, Google, Nokia et al seem to be planning along the same lines. KPN itself is taking the services-only path in Spain.

See also my updated FTTH database.

Wither Orange NL's broadband unit (2)

The balance seems to be tipping in favor of holding on to the former Wanadoo unit.

What is happening? Deutsche Telekom bought Orange NL to merge it with T-Mobile NL. However, Orange NL also operates an LLU unit (the former Wanadoo operations). So far, Deutsche Telekom appears to have either a PTT (eatern Europe) or a mobile-only strategy 'abroad' (even as Vodafone is entering the fixed-line business). I therefore assumed that the BB unit would be put up for sale.

Now Deutsche Telekom has spoken, in Barcelona. It aims to reduce its dependence on the domestic business by expanding abroad - in both mobile and ISP assets. The latter is really new to the strategy. (remember that Club Internet (France) and Ya.com (Spain) were sold). See also the recent Q3 report (page 17, under Group Strategy): "Grow abroad with mobile communications" (which, by the way, is repeated in the Barcelona presentation).

This addition to the strategy could have quite far reaching consequences, as T-Mobile operates (mobile-only) units in the UK, the USA, Poland, Austria, the Czech Republic and the Netherlands. Deutsche Telekom could be a major consolidating force, but it remains to be seen if the company truly pursues this strategy.

Whither Orange NL's broadband unit?

When France Telecom finally sold its Orange NL unit to T-Mobile NL, the focus was on the mobile unit. Deutsche Telekom will, over the next few months, decide what to do with the broadband unit (the former Wanadoo NL, an unbundler).

Here are the possible outcomes I envision:

• Hang on to it. T-Mobile could kick-off a major strategy shift, away from being a mobile pure-play and go the way of Orange and Vodafone. Not impossible, but highly unlikely, I believe.
• Sell it to KPN or Vodafone. That's a double no. KPN has reached the limits of its market share, and Vodafone has just launched a complicated resale arrangement with the former Tiscali NL (now part of KPN). Also, T-Mobile wouldn't want to strengthen a competitor!
• Sell it to another unbundler, i.e. Tele2 or Telecom Italia's bbned. Why not. In time, it could be a way for cooperation between T-Mobile and the buyer of the Orange BB unit. Also, Tele2 is selling lots of assets (Denmark, Portugal, Hungary, Italy, Spain, Austria), and in the meantime focuses on other regions (Scandinavia, Baltics, Russia). It will be interesting to see if Tele2 is really committed to the Netherlands, where consolidation is making the market a lot more attractive. Sort of the same goes for bbned. Or is Telecom Italia only readying the unit for a sale, by beefing it up first?
• Sell it to Reggefiber. Unlikely, since Reggefiber focuses on building infrastructure (FTTH), and it doesn't seem to have access to unlimited cash. However, the argument could be: add a service provider business and in due course migrate the customers to the Reggefiber network (where possible).
• Sell to a new entrant. A wild card. Maybe Telefonica is willing to do a relatively small deal, since it turned away from larger ones. Also, Belgacom could be a candidate (as I have hinted at before).

So, my order of likelihood would be:

1. Sell to Tele2 or bbned (TI).
2. Hang on to it.
3. Sell to a new entrant like Telefonica or Belgacom.
4. Sell to Vodafone, Reggefiber or KPN.