Good morning, everyone, and welcome to Tele2's third quarter 2015 conference call. Speaking is Louise Tjeder, and with me I have our President and Chief Executive Officer, Allison Kirkby, and our Interim Group Chief Financial Officer, James Maclaurin. As you know, we're also sending this presentation live over our webpage, tele2.com. Welcome to you that joined us via the web. After the formal presentation, there will be a chance to ask questions, either over the phone or via the web. Please be kind and keep it to one question each so that everyone has the possibility to get through. With that said, I hand over to you, Allison.
Good morning, everyone, and thank you for all dialing in this morning. As I said in the press release, it's a great honor to have been appointed CEO of Tele2, and to lead the company in the next stage of its journey of data monetization, enabled via innovation in technology, service, pricing, and cost control. Today's results are a reflection of this focus with positive fundamentals in our key established markets and positive momentum in our investment markets. Moving to page two. Key highlights of the quarter are as follows. First, customers continue to be attracted to our network, our products and our services, with strong net intake of 333,000 and end user service revenue up 5% across the group. Data hungry customers are also showing willing to trade up, as evidenced by our continued momentum in Sweden, Tele2 Residential, as too.
Our networks are also increasingly ready for those data hungry customers that we love, with Netherlands and Baltics now at 90% population coverage, and Sweden on track towards the 90% geographic coverage that we're aiming for. Our challenger spirit that is driving more efficiency and more productivity across the group is very much on track, and Kazakhstan is a great example of when customer momentum comes, we have a scalable and profitable business. Finally, as I said, I'm very proud to be Tele2's fifth CEO and happy that in the last month we've made significant changes to our ways of working within the company to realize more customer focus in our operating companies and to enable successful execution of the Challenger Program. Well, moving on to page three, our mantra continues to be data monetization.
Top line development remains strong at 5%, although with data growth at 70%, it would be good to see a stronger pass through to the bottom line. Obviously, we have some headwinds at the moment with the investment we are putting into the Netherlands, and we also had a one-off in Lithuania this time last year. If you exclude both of those two impacts, underlying mobile EBITDA was actually up almost 5% and bang in line with our end user service revenue growth. Page four just shows it is another mid-single digit growth quarter despite a tough comparison and very much in line with our guidance. We're very much delivering not only in line with our guidance, but in line with our own expectations from a top-line perspective. How does that look across the different markets?
In our established mobile markets of Sweden and Baltics, we are seeing a positive development. Sweden at 1% is obviously slower than the same period last year when it was growing at over 5%. As I'll show you later, the fundamentals in Sweden remain strong. Baltics are growing between 5%-8% and showing very good momentum, Croatia is still showing positive progress despite us still being in the midst of the network swap that will only start to benefit us in 2016. In terms of our investment markets of Kazakhstan and Netherlands, that is where we are seeing stronger underlying momentum, we are very well positioned for further growth. Data usage continues to grow exponentially across all our markets, this also provides a platform for further monetization. Let's get into each market. First, importantly, Sweden.
You see the headlines here are fairly flattish at net sales and an EBITDA on the quarter. Underlying this, there is good positive fundamentals. Year to date, we should not forget that the Swedish business is up 6% year-over-year. In terms of the detail, it's been a positive mobile quarter despite the strong comps that we had last year, with mobile delivering its best EBITDA and highest ever mobile end user service revenue. Mobile margin also hit 34%. Comviq continued to grow, as did Tele2 Residential, it was only B2B that was down, mainly due to increased competition in the SME segment. However, large enterprise continued to show positive momentum with a long list of big names signing up.
From an M2M perspective, although admittedly this is not Swedish, this is a global signing, we have just signed a wide frame agreement with Vattenfall Group, the third biggest utility company in Europe, for all of their Internet of Things solutions in all of their subsidiaries. As Rami, our head of M2M, likes to remind me, we connect everything from electricity meters to wind power stations. Let's just look at the fundamentals in Sweden now. As I said earlier that despite a slowing of the top line growth from last year, the fundamentals do remain strong and are providing a good platform for further growth. I'm confident for these three reasons. First, our dual brand strategy is playing out well, with increasing customers on both brands and net intake very strong, up 84,000 in the quarter.
Secondly, we continue to see increasing ARPU on Tele2, up 5% and in line with the mid-single digit development that we explained to all of you when we announced Big Bucket. Third, we are seeing strong prepaid to postpaid transition on Comviq, which is absolutely fundamental to ensure that as prepaid goes into decline, that we transition those customers into higher ARPU customers in postpaid. Additionally, on top of those three fundamentals, we are seeing top-ups in line with last year, we are seeing trade-ups in Tele2 Consumer continue to be in line with our plan. In summary, the data monetization journey in Sweden is on track for both Tele2 and Comviq brands, especially in the consumer segment. Moving on to the Baltics. We are seeing good consumer reaction to our network and the data bundles that we launched earlier this year.
You see here strong end user service revenues and equipment sales are driving a 7% growth. If you exclude the one-off from last year, it is actually 9%. This is even before we start to commercialize and advertise our 4G and Value Champion services. After a number of tough years in the Baltics, I am very proud of the momentum that we are now seeing across all three of these markets and their challenger attitude, especially when it comes to cost control, and it is something that we are certainly ensuring is leveraged within our Challenger Program. Sweden and the Baltics, just as a reminder, throws off just under SEK 3 billion of cash to us as a group and has done so over a number of years.
In fact, it is these businesses that have enabled us to invest significantly in our growth and investment markets of Netherlands and Kazakhstan and still allow us to continue to pay a progressive dividend. That is why it is so important that the fundamentals in these business remain strong and that they still have platforms for future growth, which hopefully you will see in these results. Moving on to our investment markets. First one, Netherlands. As you know, our strategy is to move away from aggressive SIM-only deals and focus on higher value 4G-ready customers. That strategy is starting to pay off with good mobile end user service revenue of 13% and good ARPU development.
Mobile margins are obviously impacted by MVNO costs and MNO rollouts, but it has been the challenges in the fixed business that have continued to impact our results as consumers demand greater speeds, and we do not currently have the ability to offer them that. The important thing is that we have secured the platform from which to grow in the form of VULA. This will allow us to offer a much faster service to a much greater number of customers, and we expect to see the first results of this during 2016. The most positive news is that having now reached a population coverage of 90%, and given the strong recent performance results of independent tests, we have decided to launch ahead of plan, and we will now launch before Christmas.
Thanks to some tremendous work by the Tele2 team, both in Netherlands and at Group, our network is ready. We are handset ready. We have more than 50% of our customers on 4G handsets, with almost half of these already VoLTE enabled. We are customer ready as we are proving that higher ARPU customers are starting to be attracted to our network. As I said, we will bring forward our launch into Q4, and we will launch before Christmas. Our first retail store will open in December, and we plan to put considerable investment into marketing and distribution to relaunch the Tele2 brand to the Dutch consumer. This will require incremental investment not previously within our guidance of between SEK 100 million-SEK 200 million, and we expect this level of incremental investment to continue in each quarter in 2016. Finally, moving on to our other investment market, Kazakhstan.
Demand for data and Tele2 continues to be very strong with customer net intake up 166,000 in the quarter, data usage up more than 200% and increased incoming traffic. This top-line momentum is finally driving some scale benefits, leading to a SEK 50 million EBITDA and a 10% margin in the quarter. We're really proud of our local Kazakh team for pulling this off in what is a very tough environment. Kazakhstan is one of the lowest price markets on the planet at SEK 0.25 per gig, 12 times less than Russia and 40 times less than Sweden. As I look at it, there is lots of opportunity for data monetization in that market. We are therefore monitoring the pricing environment very carefully. On that point, I'm going to pass over to James now, who will take you over the financials.
Good morning. Thank you, Allison. I'm the new interim CFO as of 1st of October. I'll take you through the financials now. There's been continuing FX volatility in some of our markets. On an FX-adjusted basis on slide 13, net sales were 2% growth quarter-on-quarter, and -6% against the -5% on the chart. FX continues to be a concern for us EBITDA growth is tracking behind revenue growth, particularly in the Netherlands, where our fixed business is declining, as Allison just said. We're expanding considerable investment in our 4G launch. That is one of the key elements to our [6%] EBITDA growth profile. Slide 14. On this slide, mobile end user service revenue growth continues to be driven by Kazakhstan, which at 28% is fairly stellar. Holland at 10% and Sweden at 1.2% on an FX adjusted basis.
In Sweden, market-driven prepaid decline continues with strong development of postpaid stock, which we expect will translate into improving usage growth in the Comviq segment. ASPU uplifts are quite strong. Excuse me, sorry. ASPU uplifts were strong across all segments and with the exception of the enterprise segment, where the SME sector in particular was a bit hit by price competition. On a quarter-on-quarter basis, ASPUs in Netherlands are showing a healthy increase, in fact, of 10%. That's Q2 to Q3 as opposed to year-on-year, which was driven by improving penetration, in particular, VoLTE penetration, as Allison has mentioned. Over the page, slide 15. Year-on-year EBITDA decline in the quarter, as you can see, is driven by activities in Holland, mainly concerning launch preparedness. Expansion costs, subscriber acquisition costs, in particular, spend has been ramped up a bit over the past few quarters.
Despite heavy pricing pressures in Kazakhstan due to Kcell, particularly from Q2 onwards, our EBITDA grew substantially, not quite tracking revenue growth, but nevertheless, a strong performance on profitability growth in that market. On a year-to-date basis on slide 16, EBITDA growth across all markets is quite strong. Obviously, Holland, where you can see the SEK 320 reduction in EBITDA is driven by declining fixed business and higher expansion costs especially, but also network OpEx related to the 4G launch. Excellent year-to-date EBITDA growth in Sweden driven by the revenue growth I previously mentioned as consumers trade up on data. The trade up in Comviq is starting to happen. We're still at the pre to post conversion stage in the evolution of that brand. Slide 17, CapEx. We've got 8% CapEx growth which is actually on a quarterly basis.
The year-on-year comparison is actually rest of world, which is mainly Croatia, and that's the network swap from one legacy supplier to a new supplier. That's all part of our readiness in terms of getting our network up to speed in Croatia. Slide 18, cash flow. As you can see, there's a big chunk of working capital movement. That's a delta between deltas, essentially. It's the change in working capital across the quarters year-on-year, which is actually mainly driven by the settlement of a historic dispute in Holland. Also there's the impact of the decoupling of handsets from subsidies in Sweden included in that as well. Slide 19. Our debt position remains in a healthy position with us tracking during the year well below 2x.
The outlook in terms of 2016, we're planning to hold to that 2x with a possible spike in Q2 around the time of when we pay the dividend. Our plan is to remain firmly in investment-grade territory during the course of 2016. Moving on to the Challenger Program, Slide 22. It's good progress to be reported there. I think we're developing traction internally in the business. What we're planning on doing is driving ever deeper, line by line, so that no stone will remain unturned. I think the Challenger Program is all about process re-engineering and simplification, and also systems rationalization. The shared service outsourcing activity is facilitated by this simplification process, which will drive costs down. Slide 23, we're on track to hit our SEK 1 billion savings targets by 2018.
Our investment, reflecting our activity on the Challenger Program, is in line with expectations during the course of 2015. The message on the Challenger Program is that we're driving deeper. We've announced our new operating model, and we expect to hit our savings targets by 2018. That covers our slides all the way through to 25 now. On to Slide 26. The updated financial guidance is basically unchanged, with the exception of EBITDA. All KPIs, some financial guidance are the same. EBITDA is down to 5.6-5.8 range, which reflects the pulling forward of our Dutch launch. We're expecting to launch in the next two months in Holland, and this change simply reflects that. As Allison said earlier, we'd expect to be tracking higher spend on Holland, especially on expansion costs over the next couple of quarters.
The main message on this one is that we're ready to launch, and it will take place shortly. At that juncture, oh, actually, one other comment on guidance, which is that, as mentioned on leverage, we will be holding, as I said, to less than 2 with a possible spike in Q2. That's the only other thing that we should mention on guidance. At that juncture, I'll pass back to Allison to conclude.
Thank you, James. In summary, our priorities were clear this quarter, and they are very clear going forward. We are focused on driving data monetization across all our markets. We are focused on driving cost and process reengineering via the Challenger Program, and we are very excited about the prospect of launching the first 4G-only MNO in the world in the Netherlands before Christmas. Finally, despite the accelerated investments in the Netherlands, we remain committed to our dividend policy and the further creation of shareholder value, as we absolutely remain confident in our ability to successfully execute on our Way2Win strategy. On that note, I am going to hand over to Louise.
Yes.
For Q&A.
This concludes our formal presentation for the third quarter results. We now open up for questions. Operator, could we have the first question, please?
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press the 01 on your telephone keypad. If you wish to withdraw that question, you may do so by pressing the 02 to cancel. There'll be a brief pause while questions are being registered. As another reminder, if you do wish to ask a question, please press the 01 on your telephone keypad. There'll be a further pause while questions are being registered. If there appear to be no questions, I'll return the conference to you.
Yeah. For any questions, there seems to be some kind of complication here, so if you could ask your questions via the web instead.
Where are the questions?
Hello.
Hello, operator.
Sorry, yes. There are still no audio questions on the line at the moment, but as a reminder, if you do want to ask a question, press zero one. Okay.
We don't have questions.
We're going to do the Q&A session via the web or via SMS. All analysts, you have both mine and also Louise's phone. Please send questions through SMS or to either me or Louise or via the web, tele2.com, and we will ask the questions to James and Allison.
Yes. We will start with the first question now. Could you please be more specific on what you expect to be the net effect from higher launch costs and cost synergies in the Netherlands next year? If it's adding SEK 100 million-SEK 200 million to the current run rate of SEK 90 million of losses to overestimating the loss, which will be around SEK 800 million to SEK 1.1 million.
The SEK 100 million-SEK 200 million per quarter is very much focused on year-on-year additional expansion costs to support the marketing, distribution, and handset subsidy implications of launching in the Netherlands. At the same time, our underlying OpEx base will, of course, also be increasing because the business is growing. You will see in 2016 also increased MVNO costs and increased fixed production costs because our network is still being rolled out.
Yes. Next question is, how much of the EBITDA improvement in the quarter in Kazakhstan is related to an increase in incoming calls? Is this sustainable?
The increase in incoming calls is a good chunk of the year-on-year progress. As I said on the call, we are also getting good scale benefits from the increased momentum on the top line.
Okay. The next question comes from Johanna Ahlqvist at SEB. I think it's a question that I guess everyone is wondering about today, is when the Dutch operations from Netherlands will break even after this early launch that we're having in Q4. What do you say on that, Allison?
We've always said break even would be within the next two to three years. It certainly won't be in 2016. We'll be moving towards break even during the course of 2017.
Do we have any further questions, Louise?
Yep. For the Netherlands, you report around 30% VoLTE penetration. How much of this group of customers can actually use VoLTE?
Today, nobody can use VoLTE because VoLTE has not been switched on in our network. We're aiming for the network to be VoLTE ready during the first quarter of 2016, but not right at the beginning of the quarter.
Okay, very good. The next question come from Erik Pers at Danske Bank. He is wondering about working cap development or working capital movement within 2015 and 2016. I don't know, James, if you'd like to have a stab, even though you're still in your 100 days of work.
Yeah. I'm assuming you're talking about the big block shown on the chart, which as I said, is mainly to do with the settlement of a very historic dispute, which was around power with another operator in the Netherlands. That was settled in Q2, Q3. It's just driven a substantial shift in working capital movement. The working capital movement number is a delta on a delta. It's basically showing the change in the change in working capital. There's also some movements coming out of Sweden as well, around handset financing in particular. Hopefully that answers your question.
Yes. Thank you, James. It's hard with the follow-ups on the questions. Erik, if you would like to please send me yet another SMS, I will ask a follow-up question to James on that one. The next one comes from Ulrich Rathe from Jefferies. He is asking that Swedish mobile service revenue acceleration to 1.3% is, of course, welcome, but still below historical momentum, also below what actually one of our competitors, Telia, posted, which was higher than that, 5%. What is our view on that growth rate in Sweden? Is this the new normal rate, or we will see a movement going forward in any direction when it comes to service revenue growth in the Swedish business? What do you say about that, Allison?
Thanks for the question, Ulrich. I believe Telia posted around 2% for Swedish mobile, but they include operator revenues in their figure. If you include operator revenues in our figure, we were at 2.2% in the quarter. That being said, we focus much more because of high roaming. Obviously, Sweden had a lot of visitors during the third quarter that both we and Telia benefited from. Underlying mobile end-user service revenue is what we focus on. I agree, as I said, we would obviously like to see higher growth than 1% in Sweden. That's why we are focused very much on the fundamentals to provide a platform for growth in the future. The fundamentals are strong. Net intake is positive. Net intake was not positive throughout last year. Net intake is positive this year. We are seeing continued mid-single digit ARPU development in Tele2.
We are seeing good prepaid to postpaid transition in Comviq. We are seeing continued growth in Comviq. Our objective is to get Sweden end-user service revenue momentum back up to more like a 3% range rather than 1% range that it's at today. We're still very happy that the fundamentals for that growth are there. Unlikely to see it turning from 1% until we're into next year. We are comping a period where Comviq pricing had already moved down to take advantage of our dual-brand strategy.
Our additional question on the web. Swedish mobile margins expanded year-on-year by 90 basis points. Considering the top Q3 2014, was there any deferred spend in Q3 2015?
No, there was no deferred spend. The big driver of the underlying progress in mobile was the removal of subsidies from Tele2, which was worth around SEK 40 million in the quarter, and which is what we've been benefiting from throughout this year. Some of that was invested back into marketing in the quarter. As you recall, last year, we had a very low marketing spend quarter in anticipation of the Tele2.0 launch. There was no deferred spend in Q3.
Very good. Thank you, Allison. We have a couple of further questions here coming in via SMS and also through the web. Just to remind you, as our telco conference is not working properly, you can SMS either me or Louise Tjeder on the phone, or post questions on tele2.com. My phone number, if anyone has forgotten that one, is +46 702 734879. The next one comes as a follow-up from Johanna Ahlqvist at SEB, and that is around the losses in the Dutch operations and how that will be distributed over the course of 2016. We have indicated similar investment costs as we're going to have in Q4 2015 to be the same over the course of 2016. Still, is this front-loaded or back-end loaded, or is it some linear consequence throughout 2016, would you say, Allison?
We've not given 2016 guidance yet, and we're certainly not giving guidance by quarter. It will very much depend on how quickly customers become attracted to our offer and in the ramp-up of our distribution. At this stage, I would be assuming it's fairly spread equally throughout the year so that we build momentum throughout the year.
Yes, just as a follow-up question on that one, the spread that we are talking about when it comes to cost, is that dependent on the success of the business, so to speak, if it's going to be upper end or lower end of the business, or how should the analyst community view that?
In terms of the
Investment cost that we have indicated. That's cost for the fourth quarter that will continue and remain during 2016. The range that we are discussing, is that something that will be dependent on the success of how successful we are in the Dutch business?
No, it will also depend on as we start seeing what different levers are having the biggest impact on customer acquisition. We will be playing around with those levers throughout the year. Sometimes the investment will be very much focused on the brand marketing. Some of it will be driving commissions in the indirect channels. Some of it will be very focused on handset subsidies. I wouldn't say it will be determined on whether we're successful or not. We're just giving you a wide range because we want to have as much flexibility as possible to invest against all of the levers.
Thanks very much, Allison. Operator, even though we have issues with our telco call, could you please repeat the instructions for asking questions over the phone?
Okay. If you would like to ask a question, please press the 01 on your telephone keypad.
Thanks very much, operator. We have another question from the web, Louise.
Yes. Question follows: when you bought the spectrum three years ago, you thought Dutch prices were very high. ARPU are now 25% lower than three years ago. Do you still feel Dutch pricing is too high, or is it more a case of customers not getting enough with their bundles?
It's a bit of both. Pricing, if you look in the Netherlands, the average price per gig to the consumer is still significantly higher than most other European markets, despite, admittedly, there's been some movement since the beginning of this year. You're right, some of it is the amount of data that you get in the bundle, but it's also relatively the pricing in the Netherlands is still higher than other markets that we've looked at.
Yep. We have a further question on the web. It's from Thomas Heath, Handelsbanken. Your dividend is clearly not covered in 2016, perhaps not in 2017 either. Will you lower your DPS?
As I said on the call, we remain committed to our progressive dividend policy. As James reiterated and we said in our press release considering the incremental investments in 2016, we expect our leverage to nudge above the upper end of our range. The range is one and a half to two. We expect that to spike up, particularly during the second quarter, but likely throughout 2016, so that we can still invest behind the Netherlands and still pay our progressive dividend out.
Next question on the web is how large share of customer base in Netherlands are prepaid. Could you give some flavor on adding postpaid subscribers and losing prepaid subscribers this quarter? This question comes from Stefan Gauffin, Nordea.
Yes. You'll have noted that there was no subscriber growth in the Netherlands this quarter. That has been a very conscious decision that we have taken to remove some of the very cheap SIM-only deals that were out there in the market. We've seen high churn in our prepaid business. We've seen good positive momentum in postpaid. I would expect that at launch, we will see a further shift away from prepaid and into postpaid in our Dutch business.
Very good. Operator, have we had any success with getting any questions through the telephone?
Unfortunately, we still have no audio questions on the telephone.
I see. We still have a little bit of a tech, well, a fairly reasonable technical snag on the phone. We are getting questions via SMS and web, please continue to ask your questions that way. The next question comes from Nick, a Scottish fellow. He's worked for SocGen. He's wondering a little bit about what kind of a running cost do we have for our MVNO today? For running costs that we incurred with the Dutch MVNO this quarter, what rough idea of how much incremental cost do you expect to book for the new network in 2016? That would be about launch cost then. As a last question from him is, what sort of margin should we expect for fixed within the VULA agreement, which is virtual unbundling local access with incumbent in the Netherlands?
I think-
Would you like to have a try on that one, Allison?
I'll do the first couple and then maybe James can do the fixed question.
Yes.
On the MVNO, the quarterly costs are around SEK 150 million per quarter, just under EUR 15 million per quarter. We expect that to spike up a bit in the early part of 2016 as we have more customers on our network. We won't be quite at 100% coverage. Obviously, not all of our customers will have VoLTE-enabled phones. In terms of our fixed production cost next year, the cost of our own network, that should also continue to increase next year as we're still rolling out the network, to the tune of around SEK 100 million, roughly. That's a very rough number, Nick, and we're not yet giving guidance for 2016.
Thank you very much, Allison. Then on VULA, James, what do we have there? What can we share?
On the fixed side, the gross margin, so VULA, is around 50%-60%, and it is slightly down in the quarter.
Thanks, James. Louise, do we have another question on the web?
Yes. From Tim Taylor from [Inaudible] further on the VULA contract, how would your strategy be affected by an acceleration to convergent bundles in that market, especially if we see more fixed mobile M&A? Do you need greater scale in mobile to have consolidation to compete against larger fixed mobile bundle operators?
Obviously, we have a strategy to fix fixed, which is VULA, to give us more access to higher speed connectivity, so that we can compete in the fixed end of the bundle. Our mobile launch will give us the ability to compete in the mobile side of the bundle. We today have a converged offer already in the Netherlands. It will become an improved offer as we move forward, thanks to VULA and thanks to the 4G launch. We are well-placed to compete with those quad play offers that are in the market. From an M&A point of view, that makes no difference to us really, because we were always embarking on an organic and fixed and mobile strategy as we launched the network.
Okay. I have another question. This one comes from Andreas Joelsson at DNB. He is wondering about the development in the Swedish business-to-business market and the SME segment. As Tele2 said yesterday, they are seeing some progress within specific segments. Do we agree on that picture, or do you have a different view when it comes to the development in SME versus large enterprise?
Yeah, as I said in the presentation, we have seen some competitive pressure in the SME segment, which has driven our B2B business down 2% in the quarter. However, we remain happy with the progress that we are getting in the large enterprise segment and continue to sign up new big accounts. Yes, competition has increased from both a pricing and a sales commission point of view in that SME segment.
Thank you, Allison. Any more questions from the web?
We have a question from Christopher Dixon at ABG. He is asking on Sweden, how much did Tele2 Consumer lose at the expense of Comviq?
Tele2 was very stable again in the quarter. Underlying ASPU was up. Year-over-year, we have lower customer numbers, which we explained last year. Those customers, we have stabilized the customer numbers, and we're slightly growing in Tele2 Residential now. There has been no uptick in the average switching that we see between Comviq and Tele2. That has been fairly stable for a number of quarters now. We're not seeing any losses to say that Tele2 is losing out to Comviq.
Thank you, Allison. We take the next question from the web. It's from Andrew Lee, Goldman Sachs. It's regarding Kazakhstan. If you could give more color about the competitive retaliation you saw in Q2. Do you think we have seen the full impact of that in Q2, or will we see more of an impact in Q3?
You didn't see the full impact of that in Q2 because that really ramped up during the quarter. However, what we have seen since the end of the quarter is Kcell reducing some of the off-net minutes in their bundles. We've seen a slight improvement in the competitive situation in the last two weeks, although the perception still with the Kazakh consumer at the moment is that the Kcell deal is totally unlimited. As I said, early signs that there has been a little bit of pulling back from Kcell in the last two weeks.
Yeah. We have further on Kazakhstan questions on the web, and that is referring to what TeliaSonera talked about, the views on the interconnect in Kazakhstan this quarter, and that they had taken corrective measures. How sustainable is your interconnect development this quarter in Kazakhstan? This question comes from Stefan Gauffin, Nordea.
Yeah. Obviously, the incoming bonus that we put in place in defense of the situation that Kcell launched earlier in the summer, has had a benefit in the quarter. And it is difficult to see how that will evolve because it will really depend how Kcell dials back its promotions in the market going forward. So at this stage, we have seen no tail off yet.
Very good. Thanks, Allison. The next one is a follow-up question from Erik Lindholm-Röjestål. He is asking for some clarification. What is included in the term investments into the Dutch operations? We are talking about that one when clarifying our mission to launch early in Q4 this year. What do we include?
Incremental marketing, distribution, and expansion costs.
Right.
The SEK 100-SEK 200 is very much focused on those costs only. There will obviously be further underlying OpEx increases as well behind continued expansion of the network. We are only at 90% today. As we ramp up more customers on our network, and not everybody is yet on 4G VoLTE-enabled phones, there will be a short-term increase in MVNO revenues going to T-Mobile in next year as well.
Building on that answer then, we have actually a follow-up from Ulrich Rathe again from Jefferies. He is wondering a little bit about what we include in the term pulled forward launch in the Netherlands. What will be our focus as we are launching early in the Netherlands? Is it migrating own subs first to the new network, or is it a question around new subs, so to speak? He is asking, can we migrate existing MVNO subs to own network without touching the customer, so to speak? Do we need to send out new SIM cards and so on to the customer to be able to move them? Would you like to start, and I can build on that as well?
Yeah. The reason we are saying pull forward, Ulrich, is because we had always planned to launch in Q1. This was investment that we had never planned in the fourth quarter. It is a real pull forward. We have already been focused on transitioning our existing base, and we have made very good progress there. We have been very much focused on those customers that are 4G ready, i.e., they had 4G handsets. That transition is almost complete. Very much the focus on this quarter and going into next year will be attracting new customers onto our network and still trying to get those existing customers that are either SIM-only or 3G onto our 4G network. Now, since the focus was really on attracting new, it will therefore require new SIM cards.
Thank you, Allison. We continue with a question on the web from Terence Hui, Morgan Stanley. It is on Swedish Mobile. You mentioned top-ups being in line with last year. Are you surprised with this result given the increase in data allowance? How much higher are the gross margins on top-ups, please?
No. Our whole dual brand strategy and the development that we're seeing across Tele2 and Comviq is very much in line with what we expected. What you're seeing is you're getting good top-up development in both Tele2 and Comviq, and it's good to see that top-up revenue is still there. No, it's all very much in line with plan.
Yeah. We have one question from Roman Arbuzov, UBS. When can Comviq start growing ARPU?
Good question, Roman. I'd like to see that too. Thomas is always looking at how do we ensure that we protect the Comviq brand in the transition from prepaid to postpaid, because it's such a significant business to us. It's all about getting the pricing right to encourage that transition and not suddenly lose the prepaid business to others in the marketplace who continue to be very competitive in that space. That being said, Thomas is always looking at price innovation and is continuing to do so, either in the form of straight pricing up or in the form of new bundles. We're now seeing the average Comviq user in postpaid is consuming just over two gigs. There's a perfect opportunity to start trading them up now because they are growing very nicely, not consuming as much as Tele2, but still penetration is growing there.
There is a trade-up opportunity in Comviq. There is a price-up opportunity in Comviq. We're always looking at what are the right bundles for that segment to ensure that we manage the prepaid to postpaid transition well.
Thank you, Allison.
As you know, of all the areas that I see ARPU opportunity, it is probably in that Comviq area, but we just need to do it in a very cautious way.
Okay, we'll continue with a question from Elena Svirsky at Carnegie. How much of your 20% market share do you expect to capture during 2016?
Elena, we are forecasting a very steady progression towards 20%, and we're not going to be giving out any specific guidance on what we're setting out to achieve in 2016.
Thank you, Allison. Here comes another question from Henrik Herbst this time from Credit Suisse. He's wondering a little bit about the Netherlands, of course, as this is the big news today, and wanted to elaborate a little bit on how we look upon distribution, on how we plan our distribution in the Dutch market. More online, third party, or rolling out an extensive own network with mono-brand stores. Is there anything we can share on that matter?
In the short term, it's very much focused on online and indirect, and we will build up a retail presence during the course of the next couple of years. We won't rush into building up that retail presence. We will measure the success we're getting online and via indirect channels before rushing into having stores dramatically across all of the country. The ramp-up of the retail stores will start already in December when we open our first store.
Very good.
Okay, we'll continue with Netherlands, and if you could clarify indoor coverage population, as well as geographic coverage.
Indoor is just under the 70% at this point in time.
We have a follow-up question from Andreas Johansson from DNB as well, and he's wondering about Apple and Apple contract in Netherlands. Is that something we will have at launch?
It's all a work in progress and on track.
We're going to keep you a little bit on your toes there, Andreas, when it comes to Apple.
Just on that.
Sure
We don't need to have an Apple contract at launch to be able to sell Apple phones to our customers because the Apple contract is in the indirect channels. Even if we don't have it at launch, our customers will be able to access Apple phones.
I also actually have a follow-up question from Lena Österberg from Carnegie. She's wondering a little bit about our Q4 guidance for Dutch mobile implies EBITDA losses of some SEK 300 million. Is this a reasonable run rate per quarter into 2016?
We're not giving full guidance for 2016 yet. Yes, it's going to be fairly hefty losses in 2016 for mobile. That's why we're giving the guidance of up to SEK 200 million per quarter in expansion costs.
Thank you very much, Allison. Do we have any more questions from the web, Louise?
Yes, we do. How does Tele2-
SEK 200-SEK 300 is a good estimate, Lena, per quarter for next year.
Further on Netherlands, how does Tele2 expect to handle the existing low base with regards to the focus of 4G and VoLTE handsets?
Well, we're already above the 50%, and half of those are VoLTE enabled. VoLTE will only be switched on during the first quarter. Another reason for the accelerated launch is the sooner we can launch, the sooner we can start to get more 4G VoLTE-enabled handsets into the customer base. All new customers will be very much focused on attracting 4G VoLTE-enabled smartphones. Then we'll continue to try and manage our existing base that are on 3G or SIM-only. Our real focus is on bringing in new customers on 4G now.
Thank you, Allison. We continue with questions on the web. This is a question: with the iPhone 6s launching into Q4, do you see risk of additional churn on the Tele2 brand, risk of value attrition as Tele2 customers trade to Comviq?
No. We have a very strong fourth quarter marketing plan planned. The new iPhone 6s so far hasn't been quite as successful as previous iPhone launches. The Tele2 Sweden team have a very strong pre-Christmas campaign starting that will benefit, and be good for both our Tele2 customers and potential customers and Comviq.
I have actually a follow-up question from Henrik Herbst from Credit Suisse. He's wondering a little bit about some of the stats that we historically have been giving around uptake of above five gigabyte bundles in Sweden. We said 28% in the second quarter 2015. He's wondering if we can give an update on that for the third quarter of 2015.
It is still around the same level. We are still getting about 30% above 5 GB in the take-up. The number of customers on our Big Buckets are increasing and in line with plans.
We will continue with questions on the web. We have one from Thomas Heath, Handelsbanken, on Kazakhstan. Will EBITDA in Kazakhstan fall in Q1 when MTRs are cut, or can you offset this with growth?
Well, MTR cuts should benefit EBITDA in Q1, unless competition decide to take all of those MTR cuts into further price cuts. Unfortunately, that's what happened this year. The MTR cuts that should've been worth around SEK 50 million, ended up going into pricing. We are hoping that they can flow through to the bottom line rather than be reinvested in pricing. As I said on the call, with pricing already at SEK 0.25 per GB in Kazakhstan, it would be crazy if those MTR cuts did go into pricing, because then we really would be out of the planet in terms of the level of pricing in Kazakhstan.
Further on Kazakhstan, what do you expect to pay for the LTE spectrum in Kazakhstan? Can you say anything about that?
The information coming out of the regulator is changing all the time. It's not quite clear whether it will happen early in 2016 or not. We are monitoring the situation. We also don't feel the need to rush into 4G at this stage in Kazakhstan. We have a very good 3G network that delivers very good speeds to the population. As you know, we didn't rush into 4G in some of our other developing markets. Baltics and Croatia are good examples. We're assessing what we would be prepared to pay at the time that we feel the market is ready for 4G.
We have a question from the web regarding Sweden, and that is: what percentage of your base is now on the new pricing models with unsubsidized handsets? Allison.
About 20% of the total customer base in Sweden.
Thank you. We have another question on the web, and that is regarding Internet of Things initiative. Tele2 has been announcing a lot of Internet of Things initiatives. How big do you think Internet of Things can be for Tele2 on a three-year view? How are you delivering European-wide solutions in this area?
Lars, since you're now in charge of new growth and M2M is your baby, why don't you take that question? They're probably bored of listening to my Scottish tilt.
Exactly. No, thanks very much for that. First, I have to start by saying I'm very excited about being responsible, together with Rami and Ingrid, who's running the business for Tele2. I think we have quite some high ambitions. We haven't given any specific details on what this will mean, but of course, we view this as a business that could have some significance for Tele2 overall. It should be able to be a standalone business unit that should be able to match our smaller countries as such. Without revealing exactly what we are planning for this space, we have high expectations, and we believe this could be a reasonably large standalone business as well.
Thank you, Lars. We continue with questions on the web. Can you explain why Dutch MNO cost in 2016 will be increasing when you add new customers to your own mobile network? Do you still expect to carry a lot of voice over to T-Mobile networks? Allison, we already talked about this, but maybe you could clarify further.
Yeah. We will still have, what, 5%-10% of the geographic coverage not yet met when we launch. VoLTE will ramp up during the course of the year. As we get more customers on our network, there will still be offload to T-Mobile until we have 100% indoor and outdoor coverage and 100% 4G VoLTE-enabled handsets. It's factually more customers, and whilst we don't have 100% of everything, there will still be, in the first half of the year, increasing costs to T-Mobile or increasing revenues to T-Mobile. That should start to decline as we move towards the end of the year and into 2017.
Thank you, Allison. Additional question on the web, Sweden. Margin in Sweden is clearly better than expected in Q3, but CEO comments directly indicate this will be offset in Q4 as consensus margin for 2015 is said to be reasonable before Q3. Can we forecast a higher EBITDA margin for Sweden 2016 than in 2015?
Okay. Well, we haven't given guidance for 2016 yet. Q3 is always the highest EBITDA and therefore margin in the year due to seasonality. If you look back last year as well, we were already at 33% margin, but then it went down to 27% in Q4. Now, I'm not expecting the same decline in Q4 this year, but Q3 is always the highest. What's most important is that you're seeing good, steady, sustainable progression of our underlying margin in Sweden, and we expect that to continue in 2016.
Okay, Allison, thank you. I think we soon will wrap up this. We will still do some additional questions. This is from the web. What are Tele2 competitive advantages in the Netherlands?
A fantastic network, and independent tests, even before it is complete, is proving that the quality is very high. That fantastic network is significantly more cost efficient than anybody else's network because we have no legacy. That will allow us, therefore, to offer great value to our customers. Third, we intend to reinvent the brand, and make it disruptive, and rebellious, relative to the other three players that have been in the market for a number of years.
Okay. Thank you very much. With that, we conclude this third quarter results presentation and Q&A session. Thank you all for joining and apologize for the technical problems. We will release our fourth quarter results 28th of January. With that, thanks and bye.
Thank you all.
Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your-