Antoine Paradoyl- Exane BNP Paribas- LTE Financial Market Perspective

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

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Thank you!

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