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Wireless

Tele2 NL: handset sales can't mask the costs of growth

Thursday 5 February 2015 | 16:20 CET | Background

Tele2 Netherlands reported a strong recovery in sales in the fourth quarter. The decline was limited 0.2 percent to EUR 154 million, after three quarters of 5-8 percent lower sales. Mobile service revenues rose 9.7 percent, and handset sales jumped 43 percent after the operator switched to offering only 4G phones. Telephony revenues continued to fall sharply, down 29 percent, while the decline at the fixed activities was similar to the two previous quarters, at 4.5 percent.

Overall, the flat sales performance was due to the big increase in handset sales. At the same time, it set new records in other, not-so-positive areas, such as the erosion in fixed telephony, the costs for acquiring new mobile customers and the costs of rolling out its 4G network. ARPU and free cash flow also hit new low points. Tele2's growth on the mobile market is coming at a cost.

Mobile

Net mobile additions of 22,000 were lower than the 54,000 in the year-earlier period, but Tele2 has now had 13 consecutive quarters of growth. The mobile customer base totaled 813,000 at the end of 2014 (excluding M2M). Tele2's pressure on prices is clear from the falling ARPU, which has gone from a peak of EUR 18.38 in Q3 2013 to EUR 15.18 in the most recent quarter (calculated from service revenues).

The operator will start migrating customers to its own 4G network in March. At the same time it will implement a new CRM system from Siebel. The migration is partly a way for Tele2 to lower its costs. At its Capital Markets Day last year, it was disclosed that the migration to its own network will reduce the cost of goods sold by 85 percent. 4G is also positioned as a better network, without any price premium. Altogether, the migration process will not necessarily mean new prices or subscription plans.

Price reductions

We do expect that Tele2, in the course of 2015, will take the common step of increasing data allowances while leaving prices unchanged and introducing bigger plans at the high end of the portfolio. Its biggest plan at the moment offers 4GB, and Tele2 is very likely to introduce 10 or 20 GB. The question is whether these will cost less than the competition. Given Tele2's previous comments that prices are too high in the Dutch market and its work on building market share, it seems likely that Tele2 will come with a cheaper offer. Whether it can afford to lower prices is another question, given how much Tele2 is spending:

  • the subscriber acquisition costs pushed mobile EBITDA to a new low of negative EUR 8.4 million in the last quarter,
  • and the roll-out of 4G network led to a new record for capex as well, at EUR 48.6 million, excluding the costs of acquiring its spectrum licences in Q1 2013.

In terms of free cash flow (EBITDA minus capex), Tele2 has been in the red for five straight quarters, with a a total outflow of EUR 74 million, plus EUR 133 million for the licences. Free cash flow also hit a new low point in Q4 2014. Coindence or not, Tele2 group announced more relaxed leverage targets, of net debt at 1.5-2.0 times EBITDA instead of the earlier maximum 1.5. This can mean more room for dividends and also a faster drop in prices in the Netherlands.



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