Telenet wants to be number one but still has a long way to go

Wednesday 22 February 2017 | 16:08 CET | Market Commentary

Telenet reported revenues of EUR 629 million for the fourth quarter, an increase of 2.1 percent pro forma for the takeover of Base. Since Base has been consolidated (February 2016), Telenet's growth has been structurally lower. As recently as 2013 it was still showing double-digit growth and at the end of 2015 it was growing at 6 percent. For 2017 Telenet has forecast "stable" revenues, while cost savings will ensure continued growth in EBITDA and free cash flow. 

Telenet's ambition is to be the leading player in the Belgian market. For the moment, Proximus is still bigger, especially in mobile. With the planned ramp up in its network investment, Telenet is taking an important step towards its goal.


Mobile dampens growth

The slowdown in growth at Telenet is no surprise. Base has a number of structural problems: mainly competition and price pressure but also regulation, although the latter should start to relent from mid-2017 when the final cut to roaming charges takes effect. Telenet was also impacted by a writedown of EUR 31 million on its 50 percent stake in the TV company De Vijver Media. The writedown is equal to around half what Telenet paid for the stake and resulted in the operator's net result dropping to zero in Q4 2016.

Customer shift

Looking at the individual services, we see the areas of growth and contraction at Telenet. The company is undergoing a shift towards more high-value customers (digital, postpaid) and multiplays. 

  • Telenet is losing fixed customers, with a drop of 11,100 in Q4 to 2.018 million. The penetration rate ended 2016 at 67.5 percent.
  • TV customers are moving from analogue to digital. Of all the customers ending analogue services, Telenet is managing to keep only 15 percent as digital subscribers. In the past this conversion rate was much higher.
  • The number of customers taking premium entertainment (VOD and sport) is increasing.
  • Broadband and telephony are showing steady growth.
  • In mobile, the company is adding postpaid subscribers and losing prepaid users. Postpaid now accounts for 70.6 percent of the base.

ARPUs are developing as follows:

  • Fixed: still growing, to EUR 54.0 from EUR 51.2 a year ago.
  • Mobile: postpaid at EUR 24.1, up thanks to the Base takeover, but showing a small dip in recent quarters.
  • Multiplay: unclear what the ARPU is of a Wigo customer (quad-play, see below), but a plan starting at EUR 100 (2 SIMs) can only have a positive effect on ARPU (and churn).

Revenue stable, results up

In terms of costs, Telenet is saving where it can with the integration of Base. This is ending up more costly than first projected; at the Q1 2016 results Telenet raised the expected integration costs to EUR 300 million from EUR 240 million. At the same time, synergies are also expected to be higher, at EUR 220 million per year versus EUR 150 million.

This also means a number of targets oriented less towards sales and more on profit. As we noted earlier, revenue this year is expected flat, but Telenet still targets average annual EBITDA growth of 5-7 percent in the period 2015-2018. Growth was 5 percent in 2015 and 4 percent in 2016, so the rate needs to accelerate in the coming years. The capex target is put at 24 percent of revenue in 2017, compared to 23 percent previously; this year's outlook excludes any rights for football. Last year capex reached 26 percent of revenue. Free cash flow, as defined by Telenet, is expected to grow from EUR 266 million in 2016 to EUR 350-375 million in 2017.

Investment, takeovers, content, multiplay

Telenet has a number of irons in the fire when it comes to boosting its mobile business and growing also in fixed and multiplays. Its ambition is no less than "to be the leading converged connected entertainment and business solutions provider in Belgium".

  • De Grote Netwerf (announced in August 2014). A major expansion and upgrade of the cable network. Spectrum use will go from 600 MHz to 1 GHz. Cost: EUR 500 million, to be completed in 2022. Project Pulsar (July 2013) is already reducing the number of homes per node from 650 to less than 500. The network expansion will slow somewhat to 30,000 connections in 2017.
  • Upgrading 2,800 mobile base stations and adding another 1,000 (announced April 2016). This is aimed mainly at improving indoor coverage. Cost: EUR 250 million, to be completed in mid-2018.
  • Multiplays. The fixed-mobile offer Wigo was launched in June 2016 and reached 151,000 customers at the end of the year. The triple-play penetration (Whop and Whoppa) is at 53.0 percent. The number of services (RGUs) per household has risen to 2.27 from 2.23 a year ago.
  • Content. Telenet offers football and invests in local productions. It also has exclusive rights to HBO until 2018 and it's ordered sport documentaries for its VoD library.
  • Price increases. The most recent took effect in February 2017.
  • Wholesale. Telenet has Orange Belgium as a wholesale customer on its fixed network and it's also building its mobile business with a number of full MVNO agreements: Medialaan (JIM Mobile, Mobile Vikings) and Lycamobile (Lyca, Ortel). The impact on results is mixed. Telenet is losing a piece of high-value retail revenue (without external network costs) but is gaining customers with a high margin (which require no costs for sales and marketing).
  • SFR BeLux takeover. This still needs regulatory approval. Telenet has made no secret either of its interest in acquiring the last major French cable operator, Voo.

Telenet aims to knock Proximus from its top position in the Belgian market. The competition between the two dominant operators is leading to significant investments in networks and content. Price increases and expanding its footprint are also contributing to Telenet's growth. For the moment, Proximus is a good bit bigger, with quarterly revenues of around EUR 1.1 billion. Not only does Telenet lack a national fixed network, it also earns much less from mobile. These are its biggest problems, driving the major increase in investment. 

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