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LTE Why rush?

A financial market perspective


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19 May 2010 Antoine Pradayrol +44 207 039 9489

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LTE Why rush? A financial market perspective


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What are the financial markets telling us?


Investors fear that operators cash-flows will decline significantly

Mobile internet growth leads to traffic explosion


Our forecast: data traffic x32 between 2009 and 2015

but it does not mean that LTE is around the corner


Our model shows that in core scenario, HSPA+ is sufficient & cheaper than LTE Fixed-line offload should help a lot Hence LTE is not needed before 2013 However, we see large national differences

Conclusion: we forecast only a very mild cash-flow decline

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160 150 140 130 120 110 100 90 80 70 60 May 07

1. What are the financial markets telling us? Operators underperform the market
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May 08

May 09

Mar 07

Mar 08

Mar 09

Nov 08

Nov 09

Nov 07

Sep 07

Sep 08

Stoxx Telecom, relative to Stoxx

Stoxx Telecom

Sep 09

Mar 10

Jan 08

Jan 09

Jan 10

Jul 07

Jul 08

Jul 09

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1. What are the financial markets telling us? Investors see a negative combination
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Declining revenues: in H2 09, European service revenues -3% yoy


Voice traffic slowing to +3% yoy due to market maturity combined with economic recession (impact on B2B & roaming) Average price per minute -11% yoy due to regulation (MTR) and competition
3%

Contributions to service revenue growth

1%

(1%)

(3%)

Fears of large capex increase


Traffic congestion at AT&T & O2 UK AT&T mobile capex +30% in 2010 Sweden moving early to LTE (2010)

(5%)

(7%) Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 SMS Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09

Voice

Non-SMS data

Are the juicy dividends sustainable?


Main sector attraction: 5-8% yields

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2. Expecting huge traffic growth Mobile data: key to stabilise revenues


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In our recent Exane BNP Paris-Arthur D. Little report Mobile internet: blessing or curse?, we forecast 0% revenue CAGR over 2009-2015e, a significant improvement from -3% in H2 09
5%

MTR drag to remain strong in 2010-2011

4% 3% 2% 1% 0% (1%) (2%) (3%)

Mobile internet acceleration

Mobile broadband growth

GDP drag to ease progressively

(4%) (5%) (6%) 2007 MTR 2008 Voice ex MTR 2009 SMS 2010e 2011e

SMS & legacy data to turn negative


2012e 2013e 2014e 2015e Mobile internet Mobile broadband Legacy data

Pressure from mobile VoIP

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2. Expecting huge traffic growth Mobile internet / smartphones


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1) Smartphone penetration acceleration


20-25% of handsets sold in 2009, 3040% in 2010-2011e, then >50% More nice devices in 2010: nonexclusive iPhone, Android-based Consumers pull, operators push
Smartphone penetration estimates

2) Strong usage to help ARPU uplift


Users are using data for real, hence are ready to pay for a data bundle We expect EUR8 in 2015e Large upside in the data bundle attachment rate (90% at US operators vs. 50-60% in Europe)
Current incremental ARPU
50 45 40 35 EUR/month 30 25 20 15 10

70% 60% 50% 40% 30% 20% 10%

0% 2008 2009 2010e 2011e 2012e 2013e 2014e 2015e

0 Smartphone iPhone

Penetration of customer base (%)

% of smartphone handsets sold

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2. Expecting huge traffic growth Mobile broadband / dongles


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Dongle penetration is growing


5% today, 25% in 2015e
Companies feedback on substitution potential
100% 80%

Mass-market in AT, SWE, FIN, PT


Substitution

Penetration today >10% thanks to very low prices & laptop subsidies Substitution: >25% of BB market

60% 40% 20% 0%

Complement

Future growth: mainly as complement to fixed broadband


Experience of some substitutive markets: poor profitability Often cheaper, but inferior to fixed broadband (lower speed, shared capacity, poor indoor coverage, no triple-play) Offers moving to prepaid and fixedmobile bundles in most countries

(20%) (40%) (60%) (80%) (100%) BE SP ITA UK NL GER POR SWI EU FR AT SWE

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2. Expecting huge traffic growth We model x32 over 2009-2015e


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Growth in penetration x Growth in traffic per device


Today, dongles = 18% of data-hungry devices but ~80% of traffic today in Europe Traffic per smartphone to grow: more apps, richer content (video), network effect Core scenario: traffic per device of 2GByte/month in 2015e, with 1GB for smartphones and 5GB for dongles
Mobile data traffic forecasts (PBytes)
8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2007

Feedback on traffic per user (AUPU)


2.0 1.8 1.6 GByte per month 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0

2008

2009

2010e

2011e

2012e

2013e

2014e

2015e

Sm artphone Spain Nordics* Switzerland Portugal

iPhone France Austria

Dongle Average

Mobile internet

Mobile broadband

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3. HSPA+ versus LTE Our capacity capex model


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Proprietary model to estimate the incremental capacity capex


Calculating the cost of carrying mobile data traffic in a large European city Key variables: AUPU, technology Capex output integrates 1) additional carriers, 2) HSPA upgrades, 3) when necessary cell splitting and network densification, 4) the related backhaul
10%

Cumulative capacity capex/sales

Capacity capex / total sales

8%

6%

4%

2%

HSPA R6 is not sufficient


Capex/sales of 4% in core scenario and very sensitive to AUPU growth

0% 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2015e AUPU (Gbyte/month)
HSPA R6 HSPA+ 2x2

HSPA+ is up to 5x more costeffective


Capex/sales of 1% in core scenario

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3. HSPA+ versus LTE HSPA+ cheaper than LTE in core scenario


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LTE has long term benefits


Faster theoretical speeds Lower latency Higher spectral efficiency
Capacity cost per GByte*
4.5 Incremental cost per Gbyte (EUR) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 2015e AUPU (Gbyte/month) HSPA R6 HSPA+ 2x2 LTE 2x2 @10MHz LTE 2x2 @20MHz

but overriding issues


Spectrum not yet awarded in most countries Handset availability and costs

and capacity cost benefits are uncertain


LTE leads to upfront costs, not HSPA+ Model shows cost per GByte higher with LTE than HSPA+ as long as AUPU < 3.5GByte/month

* Amortisation of incremental capacity capex + remuneration of invested capital + associated opex (estimated as 20% of invested capital)

Conclusion: in core scenario, LTE not needed before 2013

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3. HSPA+ versus LTE Fixed-line offload a key tool


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Many operators plan to actively offload traffic to fixed-line


40% of mobile traffic at home WiFi generally, some have launched femtocells
15% 10% 2015e OpFCF versus 2009 (%) 5% 0% (5%) (10%) (15%) (20%) (25%) (30%) (35%) (40%) 0.5

Impact of AUPU and share of traffic offload on 2015e OpFCF

A very significant capex benefit


30% offload +4% on OpFCF

Every operator can do it, but fixedmobile integration a growing trend


Vodafone UK femtocell: mobile-only player, offload on any fixed broadband line However integrated players seem to be at an advantage, commercially (cross selling, 4-play) as shown by good ADSL sales of Bouygues Tel., O2 UK, Vod. Italy... We expect more mobile operators to develop fixed broadband arms

1.0

1.5

2.0

3.0

4.0

5.0

2015e AUPU (GByte/month)

0%

15%

30%

45%

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3. HSPA+ versus LTE Most operators share our view


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Feedback from European operators weve met


Many share our questions regarding the cost effectiveness of LTE They are confident in their ability to handle traffic growth with HSPA+ and with the help of fixed-line offload Operators outside the Nordics do not commit to a time-line for massive LTE rollout
Operators stance on LTE rollout
Operator / Country* NTT DoCoMo TeliaSonera Telenor Op1 Op2 Vodafone Telefonica O2 France Telecom Op3 Op4 Op5 Op6 Op7 Op8 Op9 Op10 Op11 Date 2010 2010 2010 2010 2010 2012? 2011-2012+ 2011-2013 2013-2014 2015 Undecided Undecided Undecided Undecided Undecided Undecided Undecided Comments But not before having ensured the interoperability of LTE services with other operators around the world Currently rolling out LTE in the main cities of Sweden and Norway. Nationwide rollout when CPEs available Rolling out LTE together with Tele2. Has promised 99% coverage of Swedish population by 2013 60% pop coverage by end 2012 Most of 20102011 capex will be in LTE No official date communicated Limited metro area deployments in 2011, not moving to wide scale rollout until 2012 or later Rollout starting in 2011, real growth not before 2013 No major investment before 2015 LTE is not a priority, still very far away No perspective of deployment for LTE No plan to invest in LTE anytime soon Transition to LTE will take longer than expected Will depend on spectrum and handset availability Priority for the next 18 months is 3G network sharing/consolidation LTE is a big question mark

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3. HSPA+ versus LTE Large sensitivity and national differences


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Capex/sales with HSPA+

Sensitivity to traffic scenario


Total operator capex/sales

16% 15% 14% 13% 12% 11% 10%

Core scenario capex/sales 12% in 2015e Doubling AUPU would lead to 16% under HSPA+ and would justify early LTE rollout Hence uncertainty remains high

Traffic intensity: markets show significant differences


AT & SWE: high due to dongles (high penetration and high AUPU), justifying early LTE rollout in SWE AT&T (US): high due to smartphone penetration x2 Europe and AUPU x2-3, justifying capex uplift in 2010 and preparation for early LTE rollout Other European countries: much lower, no significant capacity issue foreseen

9% 2007 0.5GB 2008 2009 1GB 2010e 2011e 2GB 2012e 2013e 3GB 2014e 2015e 4GB

Traffic intensity index


0.30 0.25

0.20

0.15

0.10

0.05

0.00 AT SWE ATT UK ITA FR GER NL Mobile internet BE SP

Mobile broadband

4. Our humble conclusion

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We remain relatively cautious


6%

Euro-mobile Capex & OpFCF outlook

OpFCF to decline mildly (2009-2015e CAGR -1.6%) ROCE to decline progressively (2009: 22%; 2015e: 17%)

4% 2% 0% (2%)

but clearly more positive than most investors as we believe that: 1) Revenues can stabilise 2) Capex fears are overdone 3) Hence dividends are solid

(4%) (6%) (8%) (10%) 2007 Service revenue 2008 2009 EBITDA 2010e Capex 2011e 2012e EBITDA-Capex

Thank you!

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