My name is Meera Bhatia, and I have the pleasure of guiding you through today's presentation. Our CEO, Jon Fredrik Baksaas, and CFO, Richard Olav Aa, will give the update of the second quarter results. There will be, as usual, Q&A session directly after the presentation, first hear from the audience, and then later from our online and webcast participants. There will also be the opportunity to speak to both, Fredrik and Richard by me. They are present here. Fredrik, if I could ask you to come on stage?
I think I can take care of that. Okay, now that's better. Yep. Technical fault in my 53rd quarter. Thank you. Yeah, good morning also from me to this second quarter 2015 results from the Telenor Group. First of all, we move past the disclaimer, and we go to the group results. The second quarter results reflect the continuation of the performance that we had in first quarter. Reported revenues grew by 18%, whereas the organic revenue growth was 6%, and this was backed by continued very robust mobile service revenue growth and strong handset sales. EBITDA margin was stable at 35%, which is the same level as we have more or less in the first quarter.
The performance in Norway continues to be a very solid one and a strong one, and this is again backed by the mobile trends. Whereas in Thailand, we are in the midst of a turnaround, and we are not that much happy with the things that we do in Thailand right now. But we are in a turnaround, and I will come back to these issues later. Whereas neighboring countries, Myanmar, again shows a very strong growth and profitability at this very early stage in this project. In many of the other markets, we see encouraging underlying performance as we now are entering the second half of the year.
More importantly, based on the performance in this first half of the year and our expectations for the rest of the year, we maintain our financial outlook for 2015. Richard will cover this more in detail later. Moving to Norway. In Norway, we have a very strong mobile trend, and it continues. More than 50% of our customers now have 4G-enabled phones, and the median data consumption increased by 125% compared to the second quarter last year. This resulted in a 6% growth in mobile service revenues. We continue to invest heavily in our mobile network to give our customers the best data experience. We now have around 90% population coverage on 4G, and by the end of the year, we're targeting 95% population coverage.
We're also investing to expand the geographical coverage on 4G in order to give customers the same superior connectivity, not only where they live, but also where while on move. During the second quarter, we have taken our roaming prices further down and simplified the offerings. This makes it more attractive and easier for customers to use while you are abroad on mobile data. We also can note that during the two first weeks of July this year, we had almost the same number of customers using data abroad as we had in the whole of July last year. So I think we can say more or less that the bill shock phenomenon now is history for Norwegian customers. In the fixed segment, we're continuing to grow our high-speed internet customer base.
Whereas campaign offers this quarter has had a negative impact on the broadband ARPU. But with the very solid mobile service revenue trends and the continuous execution on the cost efficiency agenda, we now aim to deliver a flat EBITDA versus 2014 in Norway, despite the loss of the Tele2 roaming revenues, which are now with NetCom 100%. Taking then a look into the European operations. All in all, in all our other European operations, we show quite good execution on important strategic initiatives. In Sweden, we report stable mobile service revenues and strong device sales. More than 250,000 subscribers have this year been migrated from all tariffs to data-centric price plans. And this contributes to ARPU growth in the consumer postpaid segment in Sweden.
We've also seen a significant number of contract extensions in the consumer segment during the quarter, and the migration of the acquired fixed broadband and TV customers from Tele2 was also now completed. All these mentioned activities resulted in some short-term pressure on the margin, but should improve our performance in the coming quarters. Also, in Hungary, subscription and traffic revenues increased by 3% in local currencies. This is then also driven by a migration to data-centric bundles. The 4G network sharing with the Magyar Telekom gained traction during the quarter, whereas the EBITDA margin declined primarily due to handset sales, but also because of frequency, but because of taxes and regulation. And let me also mention before moving to Asian operations, that broadcast also has delivered stable performance in the second quarter.
But more importantly, Thor 7 is now in place and ready to start serving customers. As I said, I would come back to Thailand. This is our major concern this quarter. In Thailand, competition remains intense, and profitability continues to be under pressure. And this comes from a high level of subsidized smartphones sold in the prepaid segment, which is only partly offset by lower regulatory costs. During the quarter, this intense competition, together with the impact of the ongoing prepaid registration activities, led to a drop in gross adds and resulted in a net loss of 1.5 million subscribers. The deadline for the mandatory registration of the entire prepaid subscriber base is July 31st. We are on track with this process, and we have, now mid-July, registered more than 80% of the subscribers.
To improve the performance in Thailand, we're going through a turnaround, and this takes time. We are investing in data network to improve the high-quality 3G and 4G coverage, with an ambition of taking a leading position in urban areas. We are strengthening our sales and distribution through implementation of the cluster-based operating model, and the organization structure for this is in place, and reselection of distributors is going on as planned. But it takes time to train personnel and to streamline processes and to get full effect of this. Going forward, we see the need for more rationalized, pricing in, Thailand, together with a reduction in prepaid handset subsidies. We don't believe this is sustainable longer term. We expect prepaid handset subsidies to slow down in second half of this year, as we already see lower volumes and improve handsets margins in June, July.
In parallel to this, the process of ensuring continued access on to the investments made on the concessionary assets is continuing, and we believe they are on the right, on the right track. In this dialogue, we also seek to settle the outstanding disputes that we have with CAT. We then move to Myanmar. Again, this is quite amazing performance. We continue to deliver another strong quarter, and the growth is very strong, and it's profitable. We added as much as 3.1 million subscribers this quarter and closed by 9.5 million by end of June. And even more importantly, 55% of subscribers are already active data users. In July, we crossed the 10 million subscriber mark already, and we believe we are now at the mid-30s% by market share.
We expect this to give us a current SIM market share in the mid-30s, as I said. During the quarter, we continued to expand our network, and we have now more than 2,003 network sites on air, where we connect 213 townships, which is roughly two-thirds of all townships in the country. We're still early days in this market, of course. It will probably take its time before ARPU stabilize at some level. Normalized ARPU for the current quarter remains strong, although somewhat diluted by the rollout in suburban areas. As a result of strong growth in subscription and usage, the normalized EBITDA margins stood at 36% in the second quarter. This is helped by the enormous demand for mobile services.
But I must also say that it also reflects excellent executions of our strategy on the three pillars that we have in our strategy. So the Myanmar team and all our colleagues are doing a fantastic job.... Finally, on the back of these strong consumption trends, we have recently confirmed our interest in exercising our option to buy additional spectrum in the 2.1 gigahertz frequency band, which is included in the original license conditions. As for the other Asian operations, some brief comments. In Malaysia, subscription and traffic revenues grew by 2% on the back of Digi's continued ability to monetize on increasing data usage.
The migrant segment continues to be under price pressure, which together with some early and hopefully also temporary hiccups from the confusion around the implementation of the 6% GST on prepaid services, this has impacted the growth somewhat. But the EBITDA margin, year-on-year, remains stable. In Bangladesh, we added 1.1 million subscribers this quarter. We now see a gradual recovery from the challenging previous quarter in the country, where we see the daily service revenues are picking up again. Grameenphone is stimulating usage through competitive offers and strengthening its network superiority. We increased the 3G population coverage from 51%-59% during this quarter. In Pakistan, the biometric verification process was completed in May, and unverified subscribers were disconnected. After this exercise, the customer base stands at 31.6 million subscribers.
This biometric verification process, which has taken place in Pakistan, throughout this winter and spring, is actually unique in the mobile industry. And it places the industry phenomenally well when we think about the future of the customer ID, which we in the mobile industry call Mobile Connect. I think this is a feature that is important to follow going forward. But entering this third quarter, we now have a fully verified customer base in the country with higher quality than before, and we believe that this will become an industry asset. We estimate that the revenue growth, excluding the verification effect, would have been around 4%. Underlying consumption trends are encouraging, and financial services continue to contribute to top-line growth.
In India, we added 1.3 million subscribers to our expanded network. EBITDA for this quarter is positive, and we saw in March, as we saw it in March, after the termination rate cut. Coming to a close here, I want to end this presentation today by taking a touch on the Telenor strategy. This is solidly built on three pillars: Internet for All, Loved by Customers, and Efficient Operations. We developed this strategy some years ago, and we're executing accordingly, and the strategy stands firm. Efficient Operations, that is to deliver on cost efficiency programs and to utilize the scale through industrialization initiatives across the group. This is very important in order to maintain profitability and, at the same time, give room for service development, innovation, and investments.
Customers and users should stand to the very center of everything that we're doing. We work the Telenor Way, and our values will secure that we're able to deliver also relevance to our customers going forward. Most importantly of all, Internet for A ll, as we've expressed it, the impact for societies on establishing internet connectivity is very strong, and of course, an important growth driver for Telenor Group going forward. We've already invested significantly in data networks, and we will continue to do this. The appetite for data is seen across all markets and is rapidly growing. Monetizing on these investments and this strong growth is the number one concern. This also takes us deeper into digital services in order to stay relevant for customers and capture a larger share of the data growth in the future. The world goes digital. We enable it.
This is both a challenge, but also huge opportunities. With this report, I give the word to Richard Olav Aa, who will take us through the financials.
Thank you, Fredrik, and good morning from me to all of you. I'm also very proud to present a solid set of figures once again from the group. Starting with the revenues, like Fredrik said, we have 18% reported revenue growth, which is NOK 4.5 billion year-on-year. Of course, we are helped by the weak Norwegian kroner. That explains approximately 12 percentage points of the growth, but organically, we grow 6 percentage points. But most importantly, you see the breakdown on the right side of the chart. The main contributor to the growth is mobile service revenues. 3.7 percentage points of the growth comes from mobile service revenues.
We also see devices contributing strongly to the growth, 1.6 percentage points. Half of that comes from dtac, with strong handset sales this quarter, which also takes its toll on the margin, which I'll come back to. This slide we show every quarter, both internally in the Group executive management, to the board, and to the stock market. It's a very important slide to track. It shows the mobile subscription traffic revenue growth for the group. This is then only the mobile subscription traffic and the growth on that parameter. That represents approximately two-thirds of the revenues in the group. That's the revenue that is growing, and that's the revenue where we create the big margin. The trend is very clear.
Quarter by quarter, we're delivering 4%-6% organic mobile subscription traffic revenue growth. Also, this quarter, we come in at 5.8%, which shows the diversification and the strength of our portfolio. If you break down the growth by the various regions, we see Norway delivering another strong quarter on the mobile, 6% organic service revenue growth, and largely coming from ARPU growth on increased data consumption. The trends there are very strong. I'm also going to comment a little bit on the trends in the various regions into the second half now, so pay attention to this. It's important. Norway, the good trends in Norway are continuing. We see the data consumption, also see the roaming effect that Fredrik talked about. People want data connectivity, data services wherever they are.
When it comes to Asia, Asia is also up this quarter to 6% growth. That is largely contributed by Myanmar, while we're all aware that Thailand has its weaknesses. Going into the second half, we still see good growth momentum, of course, in Myanmar, but it's still early days, so there are uncertainties about the growth in the second half in Myanmar. In Thailand, we're building stone by stone, and one of the best stone builders we have in the group, Lars-Åke Norling, is now in Thailand, building stone by stone. And we're absolutely confident that we're doing the right steps, both on the network and the distribution in Thailand. But it still remains to be seen when we see the big effect coming out of this.
But be aware that Thailand has easier comparables in the second half. For the rest of the Asian operations, the reported growth this quarter is on the low side, but be aware that they have a special quarter in Pakistan with biometric verification where the underlying growth is close to 4%, and we adjust for the verification. We also have Digi, the tax effect, and also pressure on the IDD, while the underlying growth, where it matters on prepaid internet, is still very strong in Digi. India is reporting strong figures, strong subscriber growth in India.
So all in all, we expect the growth figures in Asia to pick up in the second half, based on what we now see towards the end of the second quarter and into the third quarter. I didn't mention Bangladesh, but there we see a steady improvement in revenues during the second quarter. When it comes to Europe, we see a slowdown in growth, close to 0% now. The main effect of the reduced growth is coming from Bulgaria, where we see intensified competition. But maybe more importantly, as Fredrik said, we see good underlying ARPU figures now in Sweden, coming from the migration and strong sales and contract extension. And also like to mention Hungary, that shows 3% underlying mobile service revenue growth and excludes the dramatic interconnect trend.
I would also say in Europe, we'll look at more encouraging trends, going into the second half. But all in all, a solid growth quarter, from the group, showing the strength of the diversified portfolio. Then to the EBITDA. We're reporting another quarter of NOK 10.6 billion in EBITDA, same level as last quarter, and we see the breakdown on the right-hand side. Main contribution comes from Asia, NOK 1.3 billion improvement. Currency are also helping us a lot on the EBITDA, but the main growth driver is still the improvement in Myanmar, and we also have good improvement in India, coming from lower interconnect rates, good cost controls, and strong subscriber uptake in India this quarter, delivering the first full quarter with positive EBITDA since launch in India.
dtac is on the weak side, down approximately NOK 300 million year on year, adjusted for currency, so there is a mixed bag in Asia. Europe, some pressure on the margin there coming from the fixed migration in Sweden after the Tele2 acquisition. That's going very well. We went through the post calculation on that the other week, and those three acquisitions we had done in Sweden on the fixed, they're coming in better than expected. This is the last part of the integration cost of those acquisitions we see here now. Norway, down. Very high market spend in Norway. We are compensating the Tele2 losses on the revenue side by strong mobile growth, but very high market spend both on mobile and fixed, this quarter takes the EBITDA down slightly in Norway.
I would like to comment on the EBITDA. We see the EBITDA margin is at 35%, which is two percentage points down compared to the same quarter last year. We have a lot of costs in this quarter, which are more of one-time nature. It's not booked as other item, but I would like to mention a few of them for your information. We have the biometric verification process in Pakistan, which approximately contributes 4-5 percentage points on the margin. That we're through, and we think we have executed that well compared to our competitors, and Pakistan should be strong going forward. We have the Tele2 integration cost in Sweden of approximately NOK 60 million, which we don't book as another item, but take it in the cost.
We have the very high market activities in Norway. And finally, we have the prepaid handset subsidies in Thailand that we will now cease in the second half. We still have inventory that we need to sell out, but that will come gradually towards the end. So if you add up all those three effects, sorry, those four effects, you can easily explain more than a percentage point drop in the margin. I think that's important to note in this quarter that we have some extra costs, which are all being informed of now. Then moving on to the CapEx. High CapEx spend this quarter, NOK 6.6 billion. That includes the satellite, Thor 7, that was paid in first quarter, but expensed now since we now transfer the risk and it's in operation.
Excluding that, we are at NOK 5.1 billion in CapEx, which is 17% CapEx to sale, which is still a high number for the group. We have the build-out in Myanmar, which is an extra NOK 600 million, as you see from the right-hand chart. And we have, in general, high CapEx in Asia. We are—Grameenphone is using NOK 400 million more to really take the data network position in Bangladesh. And we have the network build-out in Thailand on 3G and 4G, and we expect now by the end of the year, and the good work from dtac organization, to have a really strong 3G, 4G network built on the concessionary frequencies towards the end of the year.
That combined with the step by step we're now doing in the distribution, we expect a stronger Thailand going forward. That takes me to the cash flow. NOK 4 billion in cash flow this quarter, but bear in mind then that NOK 1.4 billion on the satellite. So excluding the satellite, we are at NOK 5.4 billion. We have a strong underlying improvement in the gross margin and the EBITDA of the group. We are now running around NOK 10.6 billion per quarter in EBITDA of the group. So we are well above NOK 40 billion in EBITDA, but we're spending CapEx on especially the data position in Asia, which we think will pay off in the years to come.
So this is fully in line with the plans we have communicated earlier. Nothing abnormal here. That takes me to the P&L. We're reporting a strong net income this quarter of NOK 3.6 billion and earnings per share of NOK 2.42. Some of the items maybe worth commenting on in the P&L, other items approximately NOK 150 million, mainly redundancy costs in Norway and Sweden. Depreciation is up approximately NOK 600 million, half of it's currencies, rest is Myanmar and increased depreciation in Thailand as we move towards the concession period. We see positive contribution from associates this quarter. That's been a while since we have, but VimpelCom has sold towers in Italy that gave a one-time effect on their P&L, and we're taking in our share of that.
Associates contributed NOK 450 million. Net financials, some currency losses, mainly on internal debt, so no cash effect, but a little higher net financials negative than normal, NOK 588 million. Taxes, 1.7 negative. Be aware that this is booked taxes. Paid taxes are significantly lower as we utilize our losses in India. The paid taxes this quarter is NOK 1 billion. Discontinued operation, this is Denmark, NOK 104+ million . But be aware that due to IFRS, we cannot depreciate neither intangibles nor fixed assets in Denmark anymore. So this is pre-depreciation in Denmark, including depreciation, Denmark has a small loss in Q2. On controlling interest, nothing abnormal there. Those are the minority positions in the three Asian-listed units.
Taking that down, we get to the net income of NOK 3.6 billion, which is a strong figure for the group. On the balance sheet, the debt stays fairly stable at around NOK 447 billion, which is 1.2 in net debt to EBITDA, which at the same level as we've been over the last quarters. We expect another dividend payment then of NOK 3.50 per share in the fourth quarter. Other than that, it's fairly normal explanations behind the change in net debt, so I will not go into detail on that now, but just state that the...
is more or less as expected, and we are stable compared to where we have been. Finally, to the guiding. Based upon the first half results, the strong first half results, and the way we now see the second half, with some stronger growth trends in parts of the European operations and part of the Asian operations, but still an uncertainty on Myanmar and Thailand being the two biggest uncertainties, we decided to maintain the guiding. The revenue growth is, of course, the most volatile part of the guiding due to the uncertainty in Thailand and Myanmar, but we feel confident that we will be within the guiding range. The margin we also have kept stable.
We have good control over cost, although we had a lot of extraordinary costs in the fourth quarter that I went through, on handsets, on sales and marketing activities in Norway, on the biometric verification in Pakistan, and integration in Sweden. We hope with good execution that we can be in the higher end of this range in the second half, but it's still early days. On the CapEx to sales, we are, when we adjust, normalize for the satellite, we are really in the midpoint on this range, and we have good control over CapEx in the second half, so the guiding there is quite straightforward.
So all in all, I think the first half results and the way we see the trends into the second half makes us quite confident that this guiding is the appropriate for the full year. So by that, I don't intend to go through the summary of Q2 again, because I think we covered that well in the two presentations, but it can serve as a useful backdrop. We keep it there for the Q&A, Meera. So by that, I hand it over to you again.
Thank you, Richard.
Yeah.
Fredrik, thank you. We are now opening up for the Q&A session. We'll start with questions from the audience, if there are any. Then-
If you'd like to ask a question over the telephone, please press star one.
In terms of Pakistan.
I think the mic is not working quite good.
Is it working now?
Yeah, now it is.
Excellent. Super. Chris Roth, DNB Markets. Just quickly on Pakistan, you mentioned both that there was growing underlying about 4% year-on-year. In the report, it says 1%. Is 4% the right number for us to sort of run by?
I think, the difference there is that the 4% is the total revenues, including financial services, and the 1% is the subscription and traffic revenues on the mobile.
Excellent. Thanks. And secondly, on Myanmar, it continues to surprise us positively, and obviously there's uncertainty there, as you point out. Just wondering, in terms of what kind of scope should we expect that it continues to ramp throughout the year? Right now you've done really well in terms of subscriber uptake. How should we expect that to develop over the next few quarters, in comparison to your ramping plan?
Well, that's a very good question, and one could say that are we able to capture three million customers in the coming two quarters, for example? I think we have to say that the go-to-market model in Myanmar has been working really well for us. But we also see that MPT is doing a very good job. So the industry is actually delivering what the government asked, namely distribution of mobile services in a rapid way, and it goes probably more rapidly than everyone expected. And even more interestingly, is that new customers are coming in using internet as actively as they do.
So, I think the prospects of for this is good, but remember also there is an election period towards the end of this year, which may give certain elements of of what shall I say? reluctance to what comes out of the elections as such. But we will continue to roll and meet the obligations on footprint coverage, and are obviously very positive where we stand now also for the autumn. But to be precise on it, it's difficult.
Thank you. Any further questions? There are two in the front row, if we start with the gentleman in the middle, maybe, and then... Thank you.
Håvard Nilsson for Carnegie. I was wondering how do you see marketing spend in Norway going into the second half when you compare it to last year and comparing to what you expect from Ice?
Again, a question which is difficult to be precise on, but we see how Ice has started, and obviously, that could be expected that they would more or less start as they have done. I think we will have to anticipate that activities in the marketplace will be more visible as we cross through the summer. However, if I judge what is out there in the media right now over the summer, it's quite hectic between many brands, I should say, which comes naturally for the holiday season in Norway. And with the weather, probably people are sitting more inside using their digital devices than being outside enjoying the sun, which is not there.
Thank you.
Thanks.
Was there a follow-up question or?
Yeah.
Yeah.
... in Thailand, are you continuing with unlimited data plans, although you said you would have some control mechanisms? Could you elaborate on the strategy behind that and why you're moving back?
Good question, really. We started on the postpaid to introduce the cheap pricing as we have done successfully, for example, in Norway. That is really going well for us in Thailand. The customers on these price plans, they are good customers, and I think the customers on this price plan are happy. They understand that you consume more, you pay more. But we see that our competitors, they have relaunched unlimited offerings in the market. So we also have a product now out in the market, which is not unlimited, because we're throttling down after a certain consumption, but the customer can still use at a much lower speed, and we hope that that can trigger an upsell.
But we don't have no firm stop on parts of our postpaid price plans in Thailand as a response to the competition.
Great. Thanks.
Thank you. There was a question from E24 at the-
Thanks. I also have a question about Thailand. You say you're gonna cut back on the subsidies towards the end of the year, and I'm wondering why you're so confident that you can do that while you're still losing revenue and customers so far this year that your competitors will not counter that and steal more customers from you?
To be 100% confident on that is difficult to be at this stage, and the battle about the future market shares in Thailand is on, no doubt about that. And we have, after the shortages that we felt that we had on the network side, second half last year, we've recovered from that position, but it takes time to get perception back in with customers. And right now, the go-to-market mechanism needs to tie better in with the rest of the value chain. But here we are in a challenging period, but we do see that the intensity on handset subsidies now in June, July, is a bit lower than what it was earlier. So let's see.
I'd also like to add that, we don't see any big appetite, for these subsidized, low-end smartphones. People are not queuing up for them anymore. We actually see a lot of customers that bought these low-end smartphones, they switch to higher-end, smartphones as the functionality, they require a higher functionality. So, we are not ordering more of these low-end smartphones now, for the second half. But like Fredrik is saying, more mid-term, long-term, what will happen on the competitive intensity in Thailand is more uncertain. But right now, these low-end smartphones campaigns, now we're just selling out the stock, and we're not ordering, new stock. So that makes us confident that that part of the margin pressure in Thailand, should ease in the, in the second half.
Thank you. If there are no further questions in the audience... No? Then we'll open up for the phone call participants, please.
The first question comes from Peter Nielsen from Kepler Cheuvreux. Please go ahead.
Thank you. A question on Sweden and one on Denmark, please, if I may. Firstly, on Sweden, you seem to have reignited momentum on the fiber side in Sweden. I was just wondering what's behind this. Is this mainly a conversion of internal DSL customers, or are you gaining new fiber customers in the market? And if so, what's behind this? Please, if you could elaborate a bit. Secondly, on Denmark, you continue to be fairly aggressive, high handset subsidies, new fixed broadband offers based on lower wholesale prices, and you're very competitive on the corporate side in Denmark. Are you happy with the return you're generating from these efforts in terms of new contracts? And if you could comment on the profitability of the new contracts you're generating. Thank you.
Let me then start in Denmark, and the Danish figures are not reported in the same detail as others. But I can say this much, that we are okay on how Telenor performs in Denmark, and it follows previous figures reported, more or less. So, I think we can say that we're quite okay on compared to previous on what we're doing in Denmark right now.
On the Swedish side, the customer numbers, we really like to take offline with the people that are interested because we are in the middle of integration, and we're switching from the cable subs of Tele2 over to Bredbandsbolaget. There are different customer definitions and so on. But in general, we're doing quite well on the fixed side in Sweden, but the actual breakdown on the customer numbers and the details there, it takes too long to go into full explanation here now. So that we can take offline for those who are interested.
Thank you, Richard. If we move on to the next question, please.
The next question comes from Ulrich Rathe from Jefferies. Please go ahead.
Yeah, thank you very much. I have two questions, one on Thailand, one on Myanmar. One on Thailand, the turnaround sort of ties into an earlier question. The turnaround that you're anticipating now for the second half of the year, of course, has an element here of steps that you are taking yourself. But as mentioned earlier, there is, of course, a competitive backdrop here. So I'm just wondering, if you take a step back and look at the plan, do you think or do you need a significant improvement in the competitive backdrop in order for your plan to work out? Or is the majority of the business plan, as you have it in your group guidance now in Thailand, essentially achievable?...
Just by the internal measures that you're taking, in terms of processes and the other things you described? That would be my first question. Second question is, in Myanmar, in earlier quarter, you said that, the margin would start to go down maybe when you start pushing into the rural areas, because there would be ARPU dilution. Could you sort of describe where you are with this, and on what time scale this push into the rural areas would happen, that would sort of make us probably look a bit more cautiously at the margin forecast in the near term? Thank you.
Let's start on Myanmar. We could say that we... 70% of the population in Myanmar is considered rural. However, the city definition is, in this sense, very local. And when we said that we are in 213 city-like communities, which is one third, that means that there is still 100+ left, of this kind of geography left. But then we really start rural after that. The first users from rural areas, experiences from other countries, Bangladesh in particular, is that the first users are actually heavy users. And then when penetration reach higher, you reach into more marginal customers.
So I think we might see that rural, the initial customers at the countryside will probably lift ARPU until you get a greater volume of customers there. So, but in any country, rural when it's penetrated has taken ARPU down. That has happened all over the place, so we have to, in a way, bear that in mind also for Myanmar. Thailand?
Thailand.
Are we dependent on others doing their stuff?
Yeah.
Well, in every game, you have to make sure that you're well-dressed yourself. So, the guiding here is more dependent on ourselves being okay on what we're doing. And for the time being, there is a lot of things to be done, in particular on the distribution and go-to-market activities, which we feel that is moving in the right direction, but has not reached the efficient level that we need in this competitive game in Thailand.
Thank you very much. Very clear. Thank you.
Next question, please.
The next question comes from Georgios Ierodiaconou from Citi. Please go ahead.
Hi, thank you for the questions. I have two, please. The first one is on the fixed line side in Norway. It appears to be a bit of a deterioration in trend, both in the retail revenues, but also in wholesale. I'd be interested to hear from you whether it's high margin wholesale revenues that are affected or low-margin one. But regarding retail also, we were hearing from some of your competitors that the market is benign, pricing is quite good. So I'm a bit surprised by the negative trend on the retail revenue side. I was wondering if you could give us a bit of a color on that. And my second question is on Thailand and more around the spectrum auction.
I think there was some news over the last couple of weeks regarding the process later in the year, and also the relationship with your concession partner and how that evolved. If you could comment on that? Thank you.
On wholesale, I think that's pretty easy to explain. The reduction in wholesale revenues in Telenor Norway is solely due to the fact that the Tele2 volume is now moved over to the main competitor after it was acquired by NetCom. So this is a pretty simple explanation. However, we are able to compensate the loss of that wholesale revenues on the retail side. And you mentioned that the retail side seemed a little bit weak. I would say on the contrary.
On the fixed side.
How was that related to the fixed?
Yes.
Okay, now that's that has an explanation to the fact that the campaign efforts throughout this quarter has been associated with some discounts that takes the ARPU on average down in this quarter. Then, on Thailand. The spectrum auction expected to come later this year. We haven't got the final date for that. It's not confirmed. Is there a likelihood that it will be postponed? Well, time will show. We anticipate that in the event of this auction coming through, we will of course participate in that. Spectrum is what we all need in order to move forward.
In this, in the process also then with CAT, where we're trying to sort out dispute with us and find an operating model to the concessionary assets in such a way that our business can move forward undisturbed.
Thank you. Next question, please.
The next question comes from San Dhillon from RBC
Hey, guys. Yeah, just, a couple of questions, if I may. Firstly, on Myanmar, could you just outline kind of how your strategy is different to that of your competitor, Ooredoo? Because they clearly aren't, having the same success, you are in the market. So that'd be good to understand. And secondly, on Norway, you mentioned a larger spend in 2Q. Is there any way you can quantify the increase in that spend, so we can have an idea of how much of that can come off in 2H, in order for you to hit your flat EBITDA target? Thank you.
In Myanmar, I think, the main difference is that we, the two of us choose a different way of utilizing, the spectrum that we got in the, in the auction last year. We have decided to move on both 2G and 3G, whereas their offerings have been, 2G, 3G only. Which, is of course, a kind of approach which, have different consequences when it comes to market response. In Norway, Richard?
I think if you look at the market spend compared to Q2 last year, it's up quite a bit. If you look at market spend compared to Q1 this last year, it's up a bit. So that can maybe give you an indication of those two data points on how extraordinary the second quarter on the market spend was.
Thank you.
Okay. Thanks, guys.
Next question, please.
The next question comes from Maurice Patrick from Barclays.
Yeah. Hi, guys, it's Maurice. So just on India, I mean, the growth slowing slightly, some of that, of course, termination rate led. But some of the other Indian telcos are talking about sort of strong data and their 3G products sort of driving data. You still don't have that. Do you see any sort of disadvantages in the current strategy? Do you see a need to change that at all? How's that going for you?
Of course, data is on industry players' lips in India, as it is in all other markets, ours as well. And we are giving an offer on 2G only, which is a data protocol, which is slow in the longer run. But for the customers that have their initial taste of data, it works, and we know that from all other markets. So we're actually broadening the market, but we're also educating the market for later and broader usage. So our position on this is that we don't have sufficient spectrum for a complete data offering down the line. It's okay now in 2016, 2017, maybe, but in the longer run, it needs to be complemented with spectrum that can offer better bandwidths.
It makes sense. Thank you.
Thank you, Patrick. Next question, please.
The next question comes from Nick Lyall, from Société Générale. Please go ahead.
Yeah, morning, it's Nick from Societe Generale. Can I just ask a couple of things? Back to the fixed business in Norway, I was a bit confused by the answer on why fixed was slow. It looked more like there was a bit of an ARPU problem on fixed, just basic fixed voice customers, and also the wholesale side of the fixed business weak as well. Was that linked to Tele2 in any way, where there was maybe more revenue than we thought was booked through the fixed business, like leased lines or backhaul or something? Could you explain that, please? And also, in Q2, the non-mobile, the other mobile revenues was very, very high in Norway, too. Is that just handsets, or is there maybe something I missed on handset timing?
And then secondly, on the cost side in Norway, your OpEx looks very solid this quarter. Does it include the latest wage demands of the unions? And finally, what are you thinking about spending into H2? I didn't quite get your point about Ice and maybe Get coming into the market. Do you anticipate in that guidance of flat EBITDA, that your OpEx is gonna be more sharply up on marketing campaigns you need to shift in H2 as well, please? Thank you.
Well, that was quite a number of questions, but when it comes to the wage settlement with unions, yes, it's included from the date it was applicable, first of April. So that was at least the one which is clear and simple answer. Should we take more clarification on the fixed side, Richard?
Yeah, no, fixed revenues in total is down 4%, and the main driver is, of course, still the fixed voice. That is declining due to the number of lost line. But it's really campaigns on the full range of high-speed internet access from VDSL to fiber, that's taking a toll on the output and driving down the revenues on the fixed broadband side. And when it comes to the guiding on the flat EBITDA for 2014, you must take into account that we, by that ambition, we compensate more than NOK 500 million in Tele2 wholesale revenues. So that is actually a quite good performance.
Obviously, we have uncertainty about the growth rates in the second half, and we also have uncertainty of how much market spend we need to do given the competitive situation. But taking that into account, we think we could achieve to compensate that fully. Also like to mention that on the mobile revenues, your questions on the wholesale, we have some other wholesale revenues and also quite healthy development of machine- to- machine. That's also helping to compensate on the wholesale part to Tele2.
Sorry, was that the reason why the non-mobile was so strong there? Was it, or was it just purely handsets? Was there a big push on certain handsets in the quarter?
No, no, no. The main, the main driver on mobile Norway, then, we have to clarify that very precise to you. The main driver on mobile Norway is ARPU growth on the consumers, based on a very strong increase in consumption. The median consumer increase, his consumption or her consumption with 125% year-over-year, resulting in a 6% ARPU growth, while the subscriber numbers on mobile are quite stable. And that results in 6% mobile service revenue growth in Norway. So that is the main driver. Everything else we talked on the mobile is fairly detailed, with exclusion of the wholesale to Tele2.
Great. Thank you.
Thank you, Richard, for clarifying this. Next question, please.
The next question comes from Roman Arbuzov from UBS.
Hello. Thank you for taking my questions. All of them are on Myanmar, actually. So firstly, on ARPU, you've mentioned a couple of times that the ARPU is getting diluted as you move into the suburban areas. But then could you just comment quickly, please, on the existing user ARPU? It was, how is that trending? Is it perhaps slightly down, or maybe it's actually going up because you're adding more sites into the big cities still? And then secondly, on costs, if we look at your sites on air, quarter-on-quarter, that's up roughly about 50%. And then if we look at your OpEx, that's expanding only modestly. So in terms of OpEx, can you sort of can you contain that from increasing going forward?
Do you have any sort of tips on how to best look at Myanmar costs? And then just finally, very quickly, in terms of the rollout, in terms of the 500-600 sites that you do in Myanmar per quarter, could you just tell us roughly, please, how much are you still adding into your existing townships where you're already present and sort of in the capital, Yangon, for example, and how much of that is going into new areas for expansion? Thank you.
Yeah. Now you're, you're pretty detailed on some things here, but, let's give it a try. The ARPU trends, I think you mentioned the factors yourself. There will, of course, be new customers also coming into, in the footprint that we all are already covered. Some of these customers, or the bulk of these customers, will probably be, lower ARPU, generators than, the existing customers when they get, to become customers in the first round. But this is what this industry is about, is to get everyone on board, to increase the network effect. So, the better penetration, the better impact in the society at large. So, and with where we have started on ARPU levels in, in Myanmar, I think this is very promising.
As to the cost side, of course, there will be more costs when you increase as rapidly as we do here. But we also improve the overall margin from Q1 to Q2, so there is a positive effect here as well. So, the scaling effect here is what we say is positive for the organization as such. And of course, we expect that to continue. That there will be competitive pressure here over and beyond what we see right now is also part of the future equation here. Customers in the cities that are still coming in, it's utterly important that we really manage to stay close to this in distribution and get to understand how this market moves. We've done this well in other markets in Asia.
We stumble a little bit in Thailand right now, but we will get these things right in that country as well. So there is a lot to offer. Myanmar goes digital, we're there to do it, and the potential is strong as we see it.
Thank you.
Next question, please.
The next question comes from Dominik Klarmann from HSBC.
Oh, yeah. Thank you. Just on potential outlook beyond 2015, just wondering how you think about CapEx beyond 2015. At the moment, how important is it to get this old famous NOK 28 billion operating cash flow target quickly, quickly? So what's your current thinking there? And then, is there any update on the fourth license in Myanmar at all? I've seen some press reports, but nothing concrete. Can you update us there? Thanks.
Let me take the last part first. The fourth license, we see the same press reports as you do. We've seen them for quite a period of time... and it's yet to be seen any activities on the ground around it.
On the CapEx side, this year is of course a very high CapEx year, both due to the satellite and the rollout in Myanmar. We don't expect to do a new satellite next year, and the CapEx in Myanmar will be lower next year. Other than that, we foresee that we also next year will have to maintain a quite high CapEx level in the other Asian operations to position our sales well for the data growth, but we wouldn't do any precise guiding on that now. But also make a note that that also is on a high level this year, in particular, the network improvements we're doing in Thailand is a record high level for us in Thailand this year.
In Norway?
In Norway, we are investing now on 4G, and that's really paying off. Like Fredrik said, we are targeting 95% population coverage by the end of the year. With geographical coverage, we are much lower, and we need to continue to build out geographically on 4G in Norway. And also, we see good opportunities on the fixed side going forward. I don't expect big changes either up or down in Norway, but that we will have to come back to, and I would say that is more in line with what Norway also put out yesterday in London on fixed and mobile.
Okay, thank you.
Next question, please.
The next question comes from James Britton from Nomura.
Well, thanks very much. Good morning. Question on Pakistan, please. Do you expect margins in this market to recover back to the 40% level pretty quickly, or will they now settle at a lower level following the SIM tax coming in? Thank you.
It would be good to get it back in the forties, of course. But we've also seen that taxes to the industry has been a constant topic. So it's our target to get it back in the forties. And the price tag for biometric verification will not be with us in the periods to come, so I think there should be possibilities. And the underlying economic activity in the country is quite good, so I hope that we can move in that direction.
Thank you. Next question, please.
The next question comes from Thomas Heath from Handelsbanken. Please go ahead.
Thank you. Thomas Heath here. Just two questions, if I may. Firstly, on more marketing costs and market activity in Norway, what would you say is the chief underlying driver there? Is it new entrants coming in or so what's your thinking there? And then secondly, on the satellite, I believe before you mentioned that it's part replacement but part new business. Should we expect any profits to accrue from this satellite launch going ahead? Thank you.
On the marketing spend in Norway, I think we have been quite active in front of the summer season, both on fixed and mobile. And the thinking has been to re-give the customers good reasons to use Telenor, and hopefully that will pay off in even better growth figures in the second half. On the satellite, I think when we planned the satellite back in 2009 and 2010, it was largely meant for broadcasting activities in CE. But as we now see data communication at sea exploding in demand, more and more of the capacity of Thor 7 will diverted to mobile communication capacity.
And this satellite will actually take a big part of the total capacity over the Atlantic and the North Sea and the Mediterranean on capacity. And we see strong demand for that capacity now. But we are in the testing phase, and we will start to sell in the fourth quarter.
Thank you.
That's very helpful. Thank you.
Three more questions. Next question, please.
Yes, the next question comes from Erik Peter Berglund, from Danske Bank.
Thank you. I have a couple questions. On India, you are seeing an afterdrop because of lower voice usage, you write in the report. Yeah, can you describe where you sort of stand on your product? How can you turn that around? What can you do? And what is the current price gap versus competition, and what's the trend in that? And also, how much time do you think you have to secure new spectrum in order to stay competitive in that market? You sort of indicated this current spectrum would be enough for 2016 and 2017, if I understood it correctly, but isn't that a too long timeframe, given you're already seeing some pressure, I think?
In India, the subscription system there based on price has been the foundation to which we go to market. The response on the customer numbers on that offering has been good. But we have also taken more or less now the fourth position in the circles in which we operate, which means that there are others that are below us on the list that engage in price competition. So we don't have the same price advantage, the price differential to our own service offering up against the ones that are below us on the list. So price differential is still significant for us up against the two to three leading players in our circles.
You're absolutely right that the speed of data adoption in the Indian market will gradually gives us more vulnerability on how we resolve the data offerings. We're exploring the idea of splitting our frequency base into one data part and one voice part, using 4G on existing spectrum, on a slice of that spectrum, which can be sort of a bridge into the future, but not sufficient in the long run.
Thank you. We have time for two more callers. Could I kindly ask you to limit yourself to one question? Next question, please.
The next question comes from Jakob Bluestone from Credit Suisse.
Hi, good morning. I've just got a follow-up just on the guidance, I guess, point of clarification. You cut guidance for Thailand, but obviously left it unchanged at the group level. Could you maybe just talk through which were the bits where you're a bit more bullish than you were three months ago in the other parts? Is it basically just you were positively surprised by the beat in Myanmar and perhaps a little bit more relaxed about the outlook for Norway after you saw Ice's tariffs? Thanks.
I think you are pointing to some of the key reasons. Yes, Thailand is weaker in Q2 than we would like it to be, and also, like you point out, dtac cut their own guidance. But we see a very strong development in Myanmar. Also, very strong sentiment on the mobile side in Norway. The growth rates there are continuing at a very strong pace, and that was more of an uncertainty a quarter ago. We see the execution in Sweden, one of our biggest operations, is really paying off, and we're growing the underlying ARPU. We see, like I said, the trends in Grameenphone now picking up again.
We are behind the biometric verification in Pakistan, which was a big uncertainty, which Pakistan have executed very well on, paving for better growth rate in Pakistan. So I think we have removed execution uncertainty in a lot of our operations during the second quarter. And of course, that has taken some costs and some toll on our EBITDA margin in the second quarter, but that also gives us strong confidence that our margin guidance is intact, despite that we are in the midst of the turnaround process in Thailand.
Thank you.
Time for one final question, please.
Final question comes from Andrew Lee from Goldman Sachs.
Yeah, good morning, everyone. I had just a kind of follow-up question around Norwegian Fixed. Firstly, on the broadband performance, I know you've explained it by increased promotional activity on your behalf. So I just wanted to clarify, if that there's a six-month promotion, should we see a reverse of that hit and a return to growth for Norwegian Fixed into Q4? And then just on the CapEx in Norway, you're saying it's neither gonna be materially up or down next year. But could you just give us an update on your ability to reduce CapEx and offering ultra-fast broadband through using other technologies other than fiber to the home? You know, your capital markets day, you mentioned vectoring. So I wondered if that's an opportunity to lower your CapEx bill going forward there. Thank you.
Yeah, good question. I think just one clarity, and it's been a question that's been been several touched upon on the wholesale revenue on the fixed. That's a reclassification from fixed to mobile of NOK 59 million. So you have to kind of look at that as a non-event. It's just a reclassification. There is not any reduction in fixed wholesale revenue, so you have a little bit reported lower on fixed and higher on mobile. So that, that should be just clear. So no drop in in fixed revenues on the wholesale. So the main point is what you're saying, is that the fixed revenues on broadband are down by the campaign activities both on VDSL, fiber, and and cable.
The main thing is that we are pushing quite good on the VDSL, which is a very efficient way to deliver high-speed broadband, where the CapEx is a lot, lot lower, and the customer experience, as Berit and her team explained to you all in London, is quite good these days by using some of the technology that you are mentioning. So we have good customer uptake in converting ADSL to VDSL, but we're using campaigns, three and six months periods, on that. When it comes to the TV and fiber and cable, we still expect good underlying ARPU trends in that space midterm, but we also have campaigns there now in the second quarter.
Thank you, Richard. That concludes the Q&A session for today. I will now hand over to Fredrik Baksaas for some closing remarks.
Yeah, since this is my final quarter, actually, after this little hiccup on the microphone when we started... Good to know that the microphone is still working. This is my 53rd quarter, actually. We did the count this morning. I think the first quarter was my second quarter, 2002 was my first quarter as CEO. But we also said that I've been associated with this since the group was incorporated in 1995, so we can add some quarters before there, maybe. But what I say is that we've tried to be long term.
We've tried to be over and beyond the first quarter horizon on what we're doing, and we have tried to build stone by stone and to develop the Telenor culture to become competitive and robust and sustainable. We've rebranded Telenor under this period, created this brand, which is now visible for 1.2 billion people on a daily basis, which is quite unique, with a starting point in Norway. We were ranked as the fourth most valuable brand in Scandinavia, for IKEA, Hennes & Mauritz, and Ericsson. So if you buy a little bit less from Ericsson in a couple of quarters to come, it may be an adjustment to that. Mr. Vestberg didn't like that comment, by the way. But having said that, we've tried to be long term.
We have moved into new countries, established presence, created values. We have great impact with modern communication services to societies in rapid development, and that's to the core of what we're doing. To bring everyone on board, we articulate that as Internet for All for the time being. Now it's Sigve Brekke and his team that is going to stand here for the coming quarters. I wish them very good luck. I'm very glad that there is a continued strategic base that will be taken into the next level here. The world goes digital. It's full of challenges, but also a lot of opportunities. And I'm sure that the Telenor culture will be both impactful in that and take positions and be visible in that.
So I wish them good luck, and I thank all of you for both support, patience, but also pushy comments up through all these 53 quarters. Thank you.
From my side, it has been a great pleasure working with you, and still is till August seventeenth. So, that concludes our session today, and, there will be room for some media interviews now. Thank you for attending.