Morning everyone and welcome to Elisa's Third Quarter twenty nineteen Conference Call and Analyst Meeting. I am Vesa Sahibiretta, Head of Investor Relations and here is a very familiar team with me, CEO, Velimat Di Marttil and CFO, Jari Kinunen as well as some audience. We start this meeting with a presentation followed by Q and A. And following normal practice, we take first questions from the audience and then from the conference call lines. I think we are ready to start, so I give word to Belimat.
Please.
Hello, everyone, and welcome to Elisa's third quarter twenty nineteen interim report review. We had another good quarter at Elisa, and we have executed according to the plan and according to the outlook that we told you earlier in the beginning of this year. Our revenue has been growing by 2%. EBITDA is up by 6%. Mobile service revenue growth 2.3%.
We also have churn almost on the same level, point 2% this quarter as it was previous quarter. We have increased postpaid mobile subscriptions by 18,500 and fixed broadband grew by 8,100. We have seen the early adopters and innovators embracing five gs. In Finland, we have already thousands of five gs customers. The revenue growth is contributed very much by Polystar acquisition, but also with the mobile service revenue growth as well as with the equipment sales.
EBITDA, of course, got improvement from the IFRS 16 change, but also our continuous improvement with the productivity creates efficiencies and profitability improvements. ARPU, of course, got impact from the regulator driven interconnection prices. We have also seen the campaigning and competitive landscape to remain pretty much on the same level as we saw in the second quarter. And if we look at the segments, first, the Consumer Customer segment revenue growth by 2% and EBITDA growing by 7%. And in the corporate side also, we got revenue to grow with 3% and EBITDA by 4%.
So both segments continuing growth in revenues as well as in profitability. We continue the execution of our strategy with three focus areas having and we see a lot of potential in every and each of the focus area to gain results to our shareholders and customers. The upselling works well and it continues. The number of smartphones, the real new type of smartphones, the penetration is continuously going up, being now 84% of the total phone base. Also, the number of four gs customers or higher speed customers is going up, now being 71%.
But also very important to notice is that the lowest speed of four gs, I. E, the 50 megabit per second speed level that is going down, meaning that the customers are moving up in the four gs domain, so from 50 and for the others to higher speed levels, so the speed based upselling continues continue to progress. Also, the proportion of customers in the fixed monthly fee data bundles is increasing now being 74% of all the subscriptions. And we, of course, see good demand for our great services providing not only Nordic and Baltic, but also internationally with our Vodafone partnership, great roaming prices. Five gs has started in Finland during this quarter.
Elisa has been able to provide both subscriptions and many, many devices. And the early adopters really have been eager to test and start to utilize in those four cities where we have had the coverage. Now we actually included a fifth city yesterday to the map. And we also have been first in the world with Swisscom to provide five gs roaming capability. We introduced 300 megabit per second five gs subscription for the as an introductory level for customers to move to five gs.
And we have a lot of customers also on B2B side to work with us to embrace and test and learn from the five gs opportunities, for example, the Port Of Helsinki as well as the city of Turku. We have also hosted the first five gs esports Arena event in the world and provided experiences with that business domain with five gs and provided five gs network for Tupaccon, the largest live YouTube event in The Nordics. And also, we continue to provide new five gs devices to our customers, for example, Samsung Galaxy 10. In the digital service businesses, with the domestic side, Elisa Vide, Elisa Entertainment, IPTV is providing new original content like the Shadow Lines, which is internationally recognized. It has had its premiere September.
We have also provided new functionalities and new features in Elisa Vide IPTV, which is growing. We have also engaged in eSports with Elisa Vide so that we provide eSports content to the Vide customers. In terms of the international digital services, Vidra continues to build its partner network to provide more coverage and more customer base. For example, we are the first globally certified Zoom system integrator now, and we are looking forward the cooperation to provide larger customers, global customers into TUM service together with our total solutions with rooms and everything. We also are a certified Microsoft Surface Hub reseller in Nordex Now.
Elisa Automate continues its path, for example, with cooperation with South Korean LGU plus We have signed a collaboration agreement to jointly develop automation for five gs networks. We also have ELSA Automates Virtual Network Operations Center has been nominated for the World Communications Award 2019 in the Innovation Award Operator category. So we have got recognition for our capabilities in automization. The Smart Factory management business line is also moving ahead, for example, complementing with its offering with new solutions, smart safety locking and smart supply chain solutions, which are very well received by our customers. And then come to the outlook and guidance.
We have upgraded our guidance for the rest of the year. We see that the positive development of macroeconomic environment is decelerating in Finland clearly. Competition remains challenging and our revenue will be at the same level or slightly higher than 2018. And we upgraded the EBITDA, comparable EBITDA will be slightly higher than 2018. CapEx will be maximum 12% of revenues.
And then we continue by Jarrod, please.
All right. Let's first look at profit and loss development. We continued exactly as we said beginning of the year that the second half will be better, also helped by accelerated productivity improvement measures, and it's visible in EBITDA development. Revenue changed EUR 11,000,000 or 2.4%. If you look different items inside that, and roaming was negative EUR 4,000,000.
MTR prices reduced last December. Equipment sales were up EUR 3,000,000. And of course, biggest contributor, Polestar acquisition. So we started to consolidate in June, and we had now three months full three months of Polestar and impact of EUR 8,000,000. Service revenues in Consumer segment were growing EUR 6,000,000.
Corporate segment was still slightly negative at €2,000,000 EBITDA growth €10,000,000 or almost 6%, which includes IFRS 16 impact approximately EUR 4,500,000.0. EBITDA margin improved to 38.4%. EBIT growth almost EUR 3,000,000, 2.5% at EUR 111,000,000. Net profit and EPS, same level as last year. We had in taxes one off type of booking of €3,000,000 which is an adjustment of deferred tax assets, which impacted asset €3,000,000 to net results in this quarter.
Estonian performance continued with strong development both in revenue and EBITDA. Revenue growth 6.7%, EBITDA growing 8.5% and very much same trends as in Finland, demand for data and demand for higher speeds contributing to growth. Also, made some small price adjustments, which had positive impact to revenue and EBITDA. Also, base continued to develop positively, postpaid 3200 and prepaid plus February. Churn was slightly higher than in Q2, but still pretty low at 8.3%.
CapEx continued in line with the guidance, which is 12% CapEx to sales at fifty six percent and €56,000,000 excluding IFRS 16 change, CapEx was 52,000,000 And main CapEx areas relate to four gs capacity and coverage increases as well as other network and IT investments. Cash flow also continued to develop positively, was €97,000,000 on a comparable basis, 98,000,000, which is 15% higher than a year ago. And year to date, comparable cash flow is up 19.6%. In Q3, positive contribution to cash flow growth coming from higher EBITDA, net working capital change, although that was negative, but was less negative than a year ago. IFRS 16 impact approximately €4,000,000 and negative impact through higher CapEx.
Cash conversion or operating cash flow conversion remain at high level 71%. And decent capital structure, of course, form a very good solid basis to continue with competitive distributions also in the future. Capital structure also well in targets. Net debt to EBITDA came down from Q2 and is now 1.9x, and we expect that to continue go down in Q4. Equity ratio was 37.6%, higher above target, which is 35%.
We did back €180,000,000 bond early this month. And after this repayment, interest expense will go down a bit more than €1,000,000 a quarter starting from Q4 onwards. And average interest or interest bearing debt is well below 1.5% after that payment. Return ratios remained at a good level. Return on equity, 27.7% and return on investment, 16.6.
And now I give word to Wessa, please.
Thank you, Jari. And now we move on Q and A part. And first question from the audience, Sami, please.
Thank you. Sami Zarkam, Nordea Markets. I have a couple of questions. Firstly, on mobile service revenue growth, it seems that you have slightly changed your approach here. It's currently more based on net adds than ARPU growth in both segments.
Is this a right observation? And have you seen any reactions from your competitors?
Well, the observation is right and wrong. Is right is that, of course, this quarter, we have gained some new net adds. But our focus is definitely on the upselling higher speeds and also making some price corrections in the base. And that's the basis for improving MSR and the target for us. We have certain quite large B2B deals in the past.
Some of them we lost, but we also have won. So they have also contributed very positively to the net add figure for this quarter.
Okay. And then continuing on mobile sales revenue growth. You did achieve some improvement in the growth rate during third quarter. Do you think it's realistic to assume that this positive development will continue also going forward?
We have a clear demand for higher speeds, willingness to pay. That continues, as we have said, quite some time. And that creates a positive momentum for even increasing MSR. On the other hand, then we have the price pressure and the intensified competitive landscape, which is kind of diminishing the opportunity to capitalize the great demand we see. For example, with five gs, we have experienced already with this quite short period of time that five gs is bringing additional value that we could capitalize with the higher MSR.
But of course, the price environment and the competitive environment is then having its impact.
Okay. Then I have a couple of questions on five gs. It seems that your rival Telia is planning fairly rapid rollouts in Finland. Should we expect them to take the lead in this market? Or are you planning similar rollouts also on your side?
Well, we are on the lead.
Okay. And then there was recently a memorandum published by European Union regarding five gs security. Did you see anything in there that would sort of impact the operators and their approach to sourcing from the different vendors?
Well, of course, it is a very important topic what European Union is addressing with this first survey and then the coming mitigation activities. And we, of course, we have been contributing to this risk analysis, and we are also taking part on finding the right mitigation opportunities. It is, of course, of great interest and a kind of in our genes to provide the security in the communication networks and services we provide to our customers. And that's why we have invested heavily on our network operations to automate and also the cybersecurity. In this report, particularly, there was no big surprises for itself.
And I think a very important observation is there that you kind of need to have multi vendor environment guarantee that you have alternatives and you have also capabilities to compare and also have some competition for the different vendors to be as cyber secure as possible and with the as high quality and service level as possible. So we fully support that focus on those issues, and we work with together with the guidelines that are coming.
Thanks. And then finally, a housekeeping question to Jari. Would you be able to disclose revenue EBITDA and EBIT numbers for Polystar in third quarter?
Yes. As said, revenue impact was €8,000,000 EBITDA impact was just below €1,000,000 and EBIT was neutral.
Okay, thanks.
No,
we don't have. So let's take a first question from conference call lines, please.
And our first question comes from the line of Andrew Lee at Goldman Sachs. Please go ahead. Your line is open.
Yes. Hi, everyone. Thanks for taking the question. I had two. One was just a follow-up to your upselling commentary that you've just made.
Do you see the same upselling opportunity and demand as you move into five gs world as you've seen in a four gs world? I do think that upselling tailwind will continue in the medium term? And then secondly, just on competition, you've mentioned kind of intense competition and one of your competitors has talked about an increase in that promotional activity recently. That doesn't seem to show in your revenue or your margin trends this quarter. I just wondered if you're seeing any real change in the competitive intensity in Finland at the moment.
Thank you.
All right. Thank you, Andrew. Yes, we see that moving towards five gs, there is an opportunity to continue the upselling and have a nice growth opportunity there going forward with more and more customers gradually moving to five gs. Definitely, five gs will bring not only speed, but also other performance improvements where we see opportunities to have customers to pay more. Then like I said earlier, on the other side then is the competitive landscape, how much pressure we get from the competitive landscape.
That's the kind of then the other thing influencing. But the demand is there. The willingness to pay clearly will be there for five gs as well. In terms of the competitive landscape, we had pretty similar intensity third quarter as we had in the second quarter. Maybe we didn't see any oversized pricing attacks during the quarter, but we saw quite much promotional activity now.
And but nevertheless, whatever the competitive landscape is, we can compete and be quite dynamic to respond and also be a bit proactive if needed. So overall, pretty much same intensity, but a bit different way this quarter.
Our
next question comes from the line of Maurice Patrick of Barclays.
It's Maurice here from Barclays. If I could ask a bit about Fixed Wireless Access, I believe you've launched you have a product a five gs product there in the market, and you've had a four gs one for some time. Tilly has also recently launched one. But how do you see the demand for these type of products? It's priced at a premium, I think, euros $45.50 a month, speeds of 500 megabits, gigabit speeds.
How do you see adoption and popularity of these products? All
right. To have wireless to substitute fixed broadband, we already have in four that development kind of continued. We have quite a few households in Finland that are already mobile only households. And of course, five gs will bring additional capability to kind of serve the maybe a bit underserved fixed broadband areas. Remains to be seen how the five gs really will impact with which base.
We have several testings going on with five gs, fixed wireless and remains to be seen what the impact really will be. But the first, let's say, reactions are pretty positive.
I mean just as a quick follow-up, could you give some indications of the kind of speeds, maybe usage some of your early uptake customers are finding on these five gs products?
Unfortunately, it's a bit too early to provide any stats regarding the amount of data moved in five gs and by the the speech by the customers. But we have in Turku, for example, we have more than one gigabit per second speeds that we have been providing and several hundreds megabits per second continuously. So the speed levels are approximately 10x higher than we can provide with four gs to customers.
Great. Thank you so much.
You're welcome.
Our next question comes from the line of Terence Hsu of Morgan Stanley. Please go ahead.
Thank you. I had a question around as a follow-up of the question earlier around CapEx and your equipment suppliers. Can you just remind us who are your equipment suppliers for your mobile network and which parts of the mobile network? I was also interested in the comments from the Finnish President recently and the use of Chinese vendors. I was just wondering what could be the implications for your CapEx if you had to change provider?
All
right. In terms of the CapEx, I didn't get your question, what was exactly the suppliers we have in our mobile network side is Nokia and Huawei for the radio and then we have Ericsson and the core. And very important thing is that we are operating our networks by ourselves with very automated, very good digital tools that we sell also to other operators. So we are not buying any managed service for our mobile network here. But your questions about did you have something specific for the CapEx?
Yes. And I was just wondering what the implications could be if you were not allowed to use Huawei going forward for your CapEx?
All right. We don't have any estimate in regards to that. Of course, it's important that we can have a multivendor environment going forward and also that we can have competitive equipments in place for our Finnish and Estonian customers so that they are not left back to the developments in the networks in the other parts of the world. That's very key for us to serve our customers well. You were referring to the comment of Finnish president.
Now I have to ask you which comment do you mean, really?
I was just reading around the meeting that you had with President Trump and discussions they had around the use of Chinese vendors and whether Finland will go down the path explored by The U. S. In prohibiting the use of certain providers.
Yes. Well, as far as I understood, our President communicated very clearly that Finland is following the EU first risk analysis and also the mitigation plan, and those are ongoing. So the mitigation plan, we don't know which kind of tools there are and proposed by EU. It will come later this year. Finland is, of course, following very well EU practices.
And so far, there has been no clear mention at all in regards to having any Huawei ban. U. S. Has the Huawei ban, and they, of course, would like to that to be exploited to other countries for their reasons. But Europe has also its own perspective.
And of course, it's always important to remember that basically for any equipment, we have to be a bit cynical that if there are any challenges with the equipment we buy. And the main way for us to take care of that we have cyber secure services to our customers is to operate ourselves and have capabilities to detect and react very quickly if something happens. And so far, with these vendors that I mentioned, we have had no problems on cyber or any kind of issues, and we have a very, very strong operational capability.
Okay. Thanks for the color.
You're welcome.
Our next question comes from the line of Roman Abrusov of JPMorgan. Please go ahead.
Good morning and thank you very much for taking the questions. I had two questions. The first one is on net income and operating leverage. So if I adjust the net income for the CHF 3,000,001 off in related to taxes, Yari, that you mentioned, and I also adjust the EBITDA for the IFRS impact, it still looks like your EPS growth is below your EBITDA growth. And that's been the case basically every quarter this year.
So I'm just wondering what's not working in terms of operating leverage. And yes, so that's question one. And question two is, if you look at the net income developments year to date, they've been perhaps somewhat less favorable than they have been in previous years, and we're looking at negative year on year net income year to date and most likely for the full year as well. So in light of this, I'm wondering how important is it for the company to maintain a growing dividend profile and whether you would consider using leverage essentially to maintain that growth path for the dividend, please? Thank you very much.
All right. Let me start by saying that I ask Jari to give you answer to this leverage first, and then we'll continue.
Of course, we have had a strong record many years with distributions, and we aim to continue with that. And as I did explain, cash flow has been growing. Net debt to EBITDA is within the target levels, and it will reduce in Q4 towards midrange of our target range. So there is no change in debt levels or net debt to EBITDA range to what it has been already longer time.
I'm sorry. Can I just add that? I was more talking about operating leverage. And I just the flow through of EBITDA growth into net income. And typically you would expect to see or historically what we're used to seeing from Elisa is a very nice flowing, kind of a pyramid, right?
So start with some top line and then larger EBITDA growth, larger EBIT growth and then larger net income growth, whereas it's kind of been the inverse of that in recent quarters. So I'm just wondering what's changed on that front.
Yes. Okay. If you're thinking about the whole year, we still, of course, we have one quarter to call. And like we said, beginning of the year that we have first part of the year or second half of the year, better development compared to first half of the year, and that is exactly that has been the case. So EBITDA change in Q1 was plus €2,000,000 In Q2, it was €7,000,000 And Q3, it was 10,000,000 And if you compare to in terms of operating leverage and the growth changes, you need to remember that now we have IFRS 16 change impacting in EBITDA level.
And that means that growth percentages, if you compare to the history, there's more weight in EBITDA change now this year compared to EBIT change, but that will change next year.
Okay.
Then to your question regarding the dividend. You know we have understood that the reliability is and the quality is appreciated by the market, and we have tried to execute with a very reliable way in the history and now. So we understand that it's appreciated by the market, and we will continue to do that. And our distribution policy is 80% to 100%. We have not been in the past years in 100% at all.
So with our distribution policy, we have room to kind of keep the good momentum with our distribution. And like Jari said, in regards to the leverage, we have one quarter to go for the year, and we have also dynamics that are improving the leverage going forward.
All right. Thank you so much.
You're welcome.
So sorry, can I just ask on the net adds in the fixed and TV? I forgot about that question. Why were they strong this quarter?
Well, the quarters are different. Sometimes, have some MDU deals, which are a bit larger to kind of land in certain quarters. And some quarters, there may be different situations. So net adds increase in the fixed broadband has come mostly from the MDU side.
Right. Thank you.
You're welcome. Our next question comes from the line of Panu Leitenmaki of Danske Bank Markets. Please go ahead.
Thank you. I just wanted to ask about the efficiency improvements that you have made. Earlier this year, you commented that you will be accelerating the efficiency improvements, and then second half would be a stronger part because of that, and that seems to have happened. But my question is really that could you explain what have you done? What was the magnitude of those actions?
And do we see some kind of extra impact in Q4 and in the coming quarters still from this?
All right. Like we have many times explained that our drive for improving efficiency is through continuous improvement in the kind of all around ELISA. So we have just focused and got some of the more important productivity improvements to kind of generate faster. We are not kind of disclosing so much about what's going on because there are so many different developments going on anyhow. But it is just a kind of result from already a longer period of time for the system that we have to improve continuously our productivity based on better quality to customers and that way improving the productivity.
We have, for example, brought many automization tools into place using machine learning, for example, for credit losses to predict credit losses better and that way to reduce the credit losses as just one minor examples and several others. So we utilize technology, but we also have the culture and kind of systematic capability to continuously improve. And for that matter, I can say that we are not at all a highest quality company or for the customers or with our operations. There's a lot of room to be better. And with the system and systematic way we improve, we know we can improve continuously in different parts of the operations.
All right. Thank you.
You're welcome.
Our next question comes from the line of Siyi He of Citigroup. Please go ahead.
Hi. Good morning. Thank you for taking the questions. I have two, please. The first one is on the pricing correction that you talked about in mobile.
I was wondering if you could give us an indication about how much correction headroom do you have? And compared to the previous years, what kind of would you what kind of magnitude of the price correction you have done this year compared to previously? And the second question is that Atelier today has decided to keep the CapEx envelope and talking about fiber rollout, potentially in Finland. And I was wondering if you can give us your updated thinking on your fixed infrastructure investment. Thank you very much.
All right. In regards to the pricing corrections and product changes, that's actually a pretty much continuous activity we have had during the past couple of years and also going forward that there are certain, let's say, cohorts of customers that customer segments, groups that have been left behind with maybe a bit too low prices somewhere. And then we have made price corrections also providing a bit improved service levels in a way or another. There's nothing quite specific for this year comparing to the previous year, neither comparing to the next year. In regards to Telia's fiber rollout, I cannot comment.
I don't know what they have said about that. But in regards to us, of course, fiber is something we have been pulling gradually during the years based on the demand we see in the market. And for many areas, five gs four gs and five later on will be a solution. But of course, even for mobile network, we need to have fiber. So we are quite extensive fiber investor.
In terms of how much we invest, we are not disclosing.
Thank you very much.
You're welcome. Our next question comes from the line of Peter Nielsen of ABG. Please go ahead.
Yes. Thank you very much. Two questions, please. Firstly, corporate market. Last quarter, really, Matthew, we discussed a lot on the corporate market in Finland, which was clearly under severe pricing pressures.
I was just wondering what you're seeing and how you feel you're fighting off the competition there. And I assume there has been no improvement. If I adjust for the Polystar acquisition, looks to me a couple of percent down on the corporate market, which perhaps is a bit worse than in the previous quarter. Could you talk a bit about how things are looking at the corporate side of things now and how you view the outlook sort of for potentially stabilization? And just a short one on the lease automata and the network operating management software you developed.
Are you seeing sort of demand for this? I think you are highlighting that you have sold to one customer. And can I ask what type of customers of yours are buying ELISA Automet, please, just out of interest? All
right. Thank you, Peter Koot. In regards to the corporate market, the pricing environment there is pretty much unchanged, quite heavy competition in different segments of B2B market, large customers, SME and entrepreneurs. We have our competitive capabilities to compete in those markets with pricing, but also with many other capabilities we have. So no change there for the pricing point of from the price competition point of view, but that's the environment we are ready to operate, and we can have a competitive offering there.
In terms of ELISA Automate, yes, there's a clear interest and demand. We have, as operators, quite long sales cycles to decide on this, but we have several prospects and in different stages. Which kind of customers are buying? They are basically we have kind of small and medium sized operators to be very interested, but we have also some very big operators quite interested in what we are doing because the fame of ELISA Automate has started to be spread around the world.
Our next question comes from the line of Henrik Herbst of Credit Suisse.
Firstly, I had a question around your churn, Finnish mobile voice churn, which is up about a percent year over year. If you could maybe explain that trend. I think in the past, you've had a bit of a headwind from loss of B2B contract and whether that's sort of the case this quarter as well. I think there's been tend to be pretty low ARPU subs. The other thing is on competition, both on fixed sorry, on B2B and consumer.
If we I think beginning with B2B, I think in the past, you've said there's been some concern. TL has been pushing a little bit harder, whether you've sort of seen that stabilize or competition you're still a bit concerned about competition in b to b? And then on consumer as well, I mean, you're saying that competition is quite intense, but at the same time, you've removed your 50 megabits smartphone bundle to maybe you still sell it below the line, it does seem like something you would do only if you were pretty confident with your with a competitive situation. So your thoughts on that would be appreciated.
Okay. Yes, regarding the churn year on year comparison, big changes really what you mentioned yourself about the B2B, quite heavy competitive situation earlier this year and before contributing to the numbers now during this year, and we see some increase in the churn due to that. Overall, in terms of the competition in consumer or B2B side, in general, I would say that there are not so big changes from Q2 to Q3. You can see that we can well execute with these market conditions, we are ready to even more competitive market situation if needed. We have many competitive capabilities to utilize.
To kind of elaborate more on the competitive dynamics, there are quite a few details. So I leave it here because otherwise, I may mislead to concentrate on something which is only a partial thing in the competitive landscape. But overall, no change since second quarter.
Okay. Thanks very much.
You're welcome.
Our next question comes from the line of Adam Foxromley of HSBC. Please go ahead.
Thank you very much for taking my question. I think this might be a bit of a follow-up to the previous one, but I was wondering if you could talk about the ARPU uplift you're getting from the transition from the four gs services above 50 megabits per second. I guess, given the competition levels in the market, would it be correct to assume with your retention offers, those price premiums might be falling a little bit? Thank you.
All right. Like we have said that the ARPU uplift and the mobile service revenue growth mostly comes from the from us upselling higher speeds and also from some product changes, price corrections. We have seen kind of the tension or pressure from price competition towards ARPU and MSR already quite some quarters. There are particularly no difference now. So the change already happened to this pressure earlier.
So in terms of mobile service revenue growth, we are not giving any guidance on the number, but we can say that year on year, we will make positive development going forward.
Okay. So the kind of rate of below the line price promotions is fairly unchanged at this point?
Pretty much
And there are no further questions at this time. Please go ahead, speakers.
Thank you very much to the conference call lines. Any further question from audience? No, we don't have. So thank you for participating in this conference call and meeting, and we say goodbye.
Thank you very
much.