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T-Mobile NL sacrifices margin for market share in Q3

Monday 14 November 2016 | 17:09 CET | Market Commentary

T-Mobile Netherlands showed an improved performance in the third quarter. The operator posted strong growth in postpaid and the drop in sales was less than in previous quarters. The margin is still well below 30 percent, a structural decline compared to its historic performance. CEO Martin Knauer told Telecompaper that the company is "regaining momentum".

But what's the underlying picture look like? We look at three areas: customer growth, revenues and the margin.

Customer growth

Growth in postpaid, with 54,000 net additions, was notably good. Tele2 added 59,000 mobile customers in Q3 (post- and prepaid), and KPN gained 59,000 postpaid users (36,000 in consumer, 23,000 in business). Based on these numbers and the saturation in the mobile market, it's likely Vodafone will report customer losses for the period, similar to its performance in recent quarters. 

The question is whether that's really so bad. Tele2 especially is very aggressive at the moment in trying to win new customers. This is putting pressure on the sector's profitability. This is understandable for Tele2 as it's still in an expansion phase in the mobile market and trying to achieve scale on its own network. Vodafone appears to be trying to avoid getting snared up in the market race to the bottom and opting instead to maintain its healthy margin, which is at around 34 percent.

Revenues

T-Mobile provides two different splits of its revenues. If we put the two together, it appears equipment sales (handsets, etc) grew by 15 percent to EUR 62 million. That means sales growth is coming largely from phones and not services. 

The revenue split in 1) services + 'other' (EUR 232 + 100 mln) and 2) consumer + enterprise + 'other' (EUR 232 + 62 + 38 mln) helps identify the growth contributors (NB: the two 'other' components are made up of different elements, and the fact that consumer and service revenue are the same amount is only coincidence).

  1. The drop in service revenues is only slightly less than in previous quarters, at -9.7 percent compared to -11 percent in the two previous quarters. The growth is apparently coming from 'other' (e.g. handsets, wholesale: EUR 100 mln). If we assume that wholesale is unlikely to be showing spectacular growth as Tele2 migrates traffic to its own network, then it must be handsets driving the growth. This is hardly a core activity. The 'other' revenues rose by 12.4 percent in the period.
  2. Looking at the consumer-business revenue split, it becomes clear here also that handsets are the source of growth. In this split they are not in 'other' but divided over the two main components, helping both show a smaller drop in revenues. The business segment managed even to stop the drop in revenues. In this split, 'other' revenues (e.g. wholesale: EUR 38 mln) rose by 8.6 percent. 
   Q3 2015  Q3 2016  growth yoy (%)
 Total revenues (EUR mln)  346 332  -4.0 
 Services (EUR mln)  257 232  -9.7 
 Other 1 (EUR mln)  89  100 +12.4 
 Consumer (EUR mln)  249 232  -6.8 
 Business (EUR mln)  62  62 0.0 
 Other 2 (EUR mln)  35  38 +8.6 
 Other 1 - Other 2 = handsets (EUR mln) 54 62 +14.8 

Margin

T-Mobile called its current EBITDA margin of around 27 percent robust and healthy. However, it is well below its historical best, which approached 40 percent. The management appears OK with investing more in marketing, propositions and promotions. To partly cover these costs, the organisation needs to be more efficient ('lean' and 'agile'), meaning cost savings in other areas.

It's not totally clear why T-Mobile is sacrificing its margin for market share. It may be choosing volume over price right now. A bigger market share also means a bigger customer base that can be sold more products (cross-/upselling), including soon fixed services after completion of the Vodafone Thuis takeover. However, it could be a case of window dressing in order to prepare the company for an eventual sale. 



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