Tele2 NL: the long path to its own networks

Wednesday 22 April 2015 | 13:18 CET | Background

Tele2 Netherlands had a weak first quarter. Price pressure, limited gains in mobile, losses in broadband and telephony customers and the costs of its wholesale agreement and network construction all put pressure on results. Revenue was flat (+0.2%), and EBITDA nearly halved (-48%). Free cash flow was again negative (-EUR 28 million) due to investments in the LTE network. Cash flow has deteriorated from a positive EUR 150 million in 2011 and EUR 132 million in 2012 to negative results of EUR 96 million in 2013 (including licence costs) and EUR 77 million in 2014. 

The operator added only 21,000 mobile customers in the quarter, and mobile ARPU continued to fall. Annual growth in customers and higher MTA and handset revenues helped keep mobile revenue growth at 20 percent. On the fixed market, the drop in customers resumed, and revenues fell by 7.3 percent. Fixed telephony, once a cash cow, is contracting quickly. Revenues fell by 26 percent, the fifth consecutive quarter with a drop of over 20 percent. Tele2 has just 69,000 fixed lines remaining, versus three times that in early 2011.

Scaling down wholesale

Tele2 saw an opportunity to break open the market for mobile data, but prices have since declined. Customers are also migrating to cheaper options (SIM-only, sub-brands, MVNOs). This is making it increasingly difficult for the company to take market share. In the quarterly report, Tele2 noted "higher national roaming costs due to rapidly growing data consumption. (...) as we still have a large dependency on our MVNO relationship, the success of mobile data is temporarily increasing our operational expenditures, which is having a negative EBITDA impact". These are the wholesale fees it pays to T-Mobile for access to its mobile network. Tele2 has only recently started migrating customers to its own LTE network.

Tele2 also noted problems on the fixed market: "... our operational performance was impacted by a larger dependency on off net products. Hence, we are exploring ways to offer our customers faster speed and improved services in the future. (...) EBITDA contribution declined compared to same quarter last year, due to higher churn and more off-net traffic". This suggests it may be preparing a new attack on the broadband market, possibly by shifting its focus to FTTH. Unbundling would mean more control over services, but also investments. This will put further pressure on results in the near term.

In mobile, the cost structure is improving thanks to the switch from Full MVNO to MNO (own network). On the fixed market, the migration is from reseller to 'Full FVNO' - a fixed-line virtual network operator with its own backbone and equipment.

Margin target of 35%

Would Tele2 consider leaving the Dutch market and selling its activities? This appears unlikely. The auction rules allowed Tele2 to acquire a relatively cheap 4G licence, and exiting the market now would Tele2's entire business model in question - just at the moment when Tele2 Sweden is entering a new phase (Tele2.0) and the rest of the group is moving towards its long-term vision. Start-up losses are part of the cost of building your own network. In the past, the group targeted an EBITDA margin of at least 35 percent for mobile activities with their own network. At the moment, the result is -19 percent. It looks certain it will take a few more years to get there. 

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