antoine paradoyl- exane bnp paribas- lte financial market perspective
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EquitiesEquities
LTE – Why rush?A financial market perspective
19 May 2010
Antoine Pradayrol +44 207 039 9489
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LTE – Why rush?A financial market perspective
� What are the financial markets telling us?
� Investors fear that operators’ cash-flows will decline significantly
� Mobile internet growth leads to traffic explosion…
� Our forecast: data traffic x32 between 2009 and 2015
� …but it does not mean that LTE is around the corner
� Our model shows that in core scenario, HSPA+ is sufficient & cheaper than LTE
� Fixed-line offload should help a lot
� Hence LTE is not needed before 2013
� However, we see large national differences
� Conclusion: we forecast only a very mild cash-flow decline
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1. What are the financial markets telling us?Operators underperform the market
120
130
140
150
160
60
70
80
90
100
110
Mar
07
May 0
7
Jul 07
Sep 0
7
Nov 0
7
Jan 0
8
Mar
08
May 0
8
Jul 08
Sep 0
8
Nov 0
8
Jan 0
9
Mar
09
May 0
9
Jul 09
Sep 0
9
Nov 0
9
Jan 1
0
Mar
10
Stoxx Telecom, relative to Stoxx Stoxx Telecom
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1. What are the financial markets telling us?Investors see a negative combination
� Declining revenues: in H2 09, European service revenues -3% yoy
� Voice traffic slowing to +3% yoy due to market maturity combined with economic recession (impact on B2B & roaming)
� Average price per minute -11% yoy due to regulation (MTR) and competition
(1%)
1%
3%
Contributions to service revenue growth
regulation (MTR) and competition
� Fears of large capex increase
� Traffic congestion at AT&T & O2 UK
� AT&T mobile capex +30% in 2010
� Sweden moving early to LTE (2010)
� Are the juicy dividends sustainable?
� Main sector attraction: 5-8% yields
(7%)
(5%)
(3%)
Q1
07
Q2
07
Q3
07
Q4
07
Q1
08
Q2
08
Q3
08
Q4
08
Q1
09
Q2
09
Q3
09
Q4
09
Voice SMS Non-SMS data
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3%
4%
5%
� In our recent Exane BNP Paris-Arthur D. Little report Mobile internet:
blessing or curse?, we forecast 0% revenue CAGR over 2009-2015e, a significant improvement from -3% in H2 09
MTR drag to
Mobile internet
acceleration
Mobile broadband
growth
2. Expecting huge traffic growthMobile data: key to stabilise revenues
(6%)
(5%)
(4%)
(3%)
(2%)
(1%)
0%
1%
2%
3%
2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e
MTR Voice ex MTR SMS Mobile internet Mobile broadband Legacy data
MTR drag to
remain
strong in
2010-2011
GDP drag to
ease
progressively
Pressure
from
mobile
VoIPSMS & legacy data to
turn negative
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2. Expecting huge traffic growthMobile internet / smartphones
� 1) Smartphone penetration acceleration
� 20-25% of handsets sold in 2009, 30-
40% in 2010-2011e, then >50%
� More nice devices in 2010: non-
exclusive iPhone, Android-based…
� Consumers pull, operators push
� 2) Strong usage to help ARPU uplift
� Users are using data for real, hence are
ready to pay for a data bundle
� We expect EUR8 in 2015e
� Large upside in the “data bundle
attachment rate” (90% at US operators vs.
50-60% in Europe)� Consumers pull, operators push
0%
10%
20%
30%
40%
50%
60%
70%
2008 2009 2010e 2011e 2012e 2013e 2014e 2015e
Penetration of customer base (%) % of smartphone handsets sold
Smartphone penetration estimates
50-60% in Europe)
0
5
10
15
20
25
30
35
40
45
50
Smartphone iPhone
EU
R/m
on
th
Current incremental ARPU
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� Dongle penetration is growing
� 5% today, 25% in 2015e
� Mass-market in AT, SWE, FIN, PT
� Penetration today >10% thanks to very low prices & laptop subsidies
� Substitution: >25% of BB market40%
60%
80%
100%
Co
mp
lem
en
t
Su
bs
titu
tio
n
Companies’ feedback on substitution potential
2. Expecting huge traffic growthMobile broadband / dongles
� Substitution: >25% of BB market
� Future growth: mainly as complement to fixed broadband
� Experience of some substitutive markets: poor profitability
� Often cheaper, but inferior to fixed broadband (lower speed, shared capacity, poor indoor coverage, no triple-play)
� Offers moving to prepaid and fixed-mobile bundles in most countries
(100%)
(80%)
(60%)
(40%)
(20%)
0%
20%
BE
NL
SW
I
FR
UK
SP
EU
ITA
GE
R
PO
R
AT
SW
E
Co
mp
lem
en
t
Su
bs
titu
tio
n
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2. Expecting huge traffic growthWe model x32 over 2009-2015e
� Growth in penetration x Growth in traffic per device
� Today, dongles = 18% of data-hungry devices but ~80% of traffic today in Europe
� Traffic per smartphone to grow: more apps, richer content (video), network effect
� Core scenario: traffic per device of 2GByte/month in 2015e, with 1GB for smartphones and 5GB for dongles
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Smartphone iPhone Dongle
GB
yte
per
mo
nth
Spain Switzerland France Average
Nordics* Portugal Austria
Feedback on traffic per user (AUPU)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e
Mobile internet Mobile broadband
Mobile data traffic forecasts (PBytes)
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3. HSPA+ versus LTEOur capacity capex model
� Proprietary model to estimate the incremental capacity capex
� Calculating the cost of carrying mobile
data traffic in a large European city
� Key variables: AUPU, technology
� Capex output integrates 1) additional
carriers, 2) HSPA upgrades, 3) when
Cumulative capacity capex/sales
6%
8%
10%
Ca
pa
city c
ap
ex /
to
tal sa
les
carriers, 2) HSPA upgrades, 3) when
necessary cell splitting and network
densification, 4) the related backhaul
� HSPA R6 is not sufficient
� Capex/sales of 4% in core scenario
and very sensitive to AUPU growth
� HSPA+ is up to 5x more cost-effective
� Capex/sales of 1% in core scenario
0%
2%
4%
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
2015e AUPU (Gbyte/month)
Ca
pa
city c
ap
ex /
to
tal sa
les
HSPA R6 HSPA+ 2x2
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2.5
3.0
3.5
4.0
4.5
Incre
me
nta
l co
st
pe
r G
byte
(E
UR
)
Capacity cost per GByte*
� LTE has long term benefits…
� Faster theoretical speeds
� Lower latency
� Higher spectral efficiency
� …but overriding issues…
� Spectrum not yet awarded in most
3. HSPA+ versus LTEHSPA+ cheaper than LTE in core scenario
0.0
0.5
1.0
1.5
2.0
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
2015e AUPU (Gbyte/month)
Incre
me
nta
l co
st
pe
r G
byte
(E
UR
)
HSPA R6 HSPA+ 2x2 LTE 2x2 @10MHz LTE 2x2 @20MHz
� Spectrum not yet awarded in most
countries
� Handset availability and costs
� …and capacity cost benefits are uncertain
� LTE leads to upfront costs, not HSPA+
� Model shows cost per GByte higher
with LTE than HSPA+ as long as
AUPU < 3.5GByte/month
� Conclusion: in core scenario, LTE not needed before 2013
* Amortisation of incremental capacity capex + remuneration of invested capital + associated opex (estimated as 20% of invested capital)
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� Many operators plan to actively offload traffic to fixed-line
� 40% of mobile traffic at home
� WiFi generally, some have launched
femtocells
� A very significant capex benefit
3. HSPA+ versus LTEFixed-line offload a key tool
Impact of AUPU and share of traffic offload on 2015e OpFCF
(5%)
0%
5%
10%
15%
20
15e
OpF
CF
ve
rsus 2
00
9 (
%)
� 30% offload � +4% on OpFCF
� Every operator can do it, but fixed-mobile integration a growing trend
� Vodafone UK femtocell: mobile-only
player, offload on any fixed broadband line
� However integrated players seem to be at
an advantage, commercially (cross selling,
4-play) – as shown by good ADSL sales of
Bouygues Tel., O2 UK, Vod. Italy...
� We expect more mobile operators to
develop fixed broadband arms
(40%)
(35%)
(30%)
(25%)
(20%)
(15%)
(10%)
(5%)
0.5 1.0 1.5 2.0 3.0 4.0 5.0
2015e AUPU (GByte/month)
20
15e
OpF
CF
ve
rsus 2
00
9 (
%)
0% 15% 30% 45%
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� Feedback from European operators we’ve met
� Many share our questions regarding the cost effectiveness of LTE
� They are confident in their ability to handle traffic growth with HSPA+ and with the
help of fixed-line offload
� Operators outside the Nordics do not commit to a time-line for massive LTE rollout
3. HSPA+ versus LTEMost operators share our view
Operators’ stance on LTE rollout
Operator / Country* Date Comments
NTT DoCoMo 2010 But not before having ensured the interoperability of LTE services with other operators around the world TeliaSonera 2010 Currently rolling out LTE in the main cities of Sweden and Norway. Nationwide rollout when CPEs available Telenor 2010 Rolling out LTE together with Tele2. Has promised 99% coverage of Swedish population by 2013 Op1 2010 60% pop coverage by end 2012 Op2 2010 Most of 2010–2011 capex will be in LTE Vodafone 2012? No official date communicated Telefonica O2 2011-2012+ Limited metro area deployments in 2011, not moving to wide scale rollout until 2012 or later France Telecom 2011-2013 Rollout starting in 2011, real growth not before 2013 Op3 2013-2014 - Op4 2015 No major investment before 2015 Op5 Undecided LTE is not a priority, still very far away Op6 Undecided No perspective of deployment for LTE Op7 Undecided No plan to invest in LTE anytime soon Op8 Undecided Transition to LTE will take longer than expected Op9 Undecided Will depend on spectrum and handset availability Op10 Undecided Priority for the next 18 months is 3G network sharing/consolidation Op11 Undecided LTE is a big question mark
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10%
11%
12%
13%
14%
15%
16%
Tota
l o
pe
rato
r ca
pe
x/s
ale
s
Capex/sales with HSPA+
� Sensitivity to traffic scenario
� Core scenario capex/sales 12% in 2015e
� Doubling AUPU would lead to 16% under
HSPA+ and would justify early LTE rollout
� Hence uncertainty remains high
3. HSPA+ versus LTELarge sensitivity and national differences
9%
2007 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e
0.5GB 1GB 2GB 3GB 4GB
� Traffic intensity: markets show significant differences
� AT & SWE: high due to dongles (high penetration and high AUPU), justifying early LTE rollout in SWE
� AT&T (US): high due to smartphone penetration x2 Europe and AUPU x2-3, justifying capex uplift in 2010 and preparation for early LTE rollout
� Other European countries: much lower, no significant capacity issue foreseen
Traffic intensity index
0.00
0.05
0.10
0.15
0.20
0.25
0.30
AT SWE ATT UK ITA FR GER NL BE SP
Mobile broadband Mobile internet
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4. Our humble conclusion
� We remain relatively cautious…
� OpFCF to decline mildly (2009-2015e CAGR -1.6%)
� ROCE to decline progressively (2009: 22%; 2015e: 17%)
Euro-mobile Capex & OpFCF outlook
(2%)
0%
2%
4%
6%
� …but clearly more positive than most investors as we believe that:
� 1) Revenues can stabilise
� 2) Capex fears are overdone
� 3) Hence dividends are solid
(10%)
(8%)
(6%)
(4%)
(2%)
2007 2008 2009 2010e 2011e 2012e
Service revenue EBITDA Capex EBITDA-Capex
Equities
Thank you!
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