Elisa Oyj (ELISA) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Elisa's Second Quarter 2020 Conference Call. I'm Vesa Sahivirta, Head of Investor Relations. And here is a very familiar team with me, CEO Veli-Matti Mattila and CFO Jari Kinnunen. We start this call with a presentation followed by Q&A. Veli-Matti will go through the Q2 report or the highlights, and Jari will then focus more on financials. I think we are ready to start, so I give word to Veli-Matti, please.

Thank you, Vesa. And welcome, on my behalf, as well to Elisa's interim report review for the second quarter 2020. We had another good quarter. Going forward, we had steady development continuing, our revenues growing by 2%. And comparable EBITDA was up by 3%. Mobile service revenue was at the same level as last year, on the same quarter. And of course, the substantial decrease in the roaming revenue that was due to COVID-19 travel restrictions impacted on mobile service revenue. If we hadn't had these restrictions on traveling, the mobile service revenue would have been approximately on the Q1 level. Postpaid churn decreased to 16.4%, especially due to the fact that the people have been less visiting the shops of ours and competitors. That has, of course, had an impact on the churn. We had postpaid mobile subscriptions base growing by 26,000, and fixed broadband customer base increased by 1,000. We continued to roll out our 5G services. Now we are more -- in more than 30 cities in Finland. And under our 5G networks coverage, results already more than 1 million Finns. So 5G is going forward in Finland very well. The revenue was growing based on the Polystar acquisition, for the most, but also the equipment sales and revenues in Estonia was growing. Like said, roaming had -- roaming revenue decline had impact on mobile service revenues, but the 4G and 5G upselling continues very well. And we have done also some product changes. Our continuous improvement with providing productivity and profitability improvements, of course, contributes to our EBITDA improvement, and also our revenue growth has contribution to that. In regards to the competition, it seems that the campaigning continues and the competition remains keen in both in the consumer and corporate segments. If we look at the segments separately. Consumer side is growing -- has had a growth of revenues 1% and EBITDA growing by 6%. In the corporate side, we had revenue growing by 3%, but EBITDA was down, minus 3%. The decline in roaming revenues was impacting more on the corporate side than in the consumer side. We continue to focus on 3 areas on our strategy. We see a lot of potential to improve our results in each of these 3 focus areas. And the upselling continues. Now we see the smartphone development and penetration continue to grow. So we have 86% of the customers now using a smartphone, of which 98% are 4G and 5G capable. So the amount of customers having a smartphone is increasing in our base step by step. We have also now 74% of the voice subscriptions in 4G speeds, at least, but we also see that the amount of customers in the lowest-speed tier in the 4G is going down, meaning that and proving that the upselling in the -- is working in 4G domain as well as now when we are getting customers more and more to 5G. The proportion of data bundles also continues to grow. So the change of the business model from consumption-based to fixed-fee subscriptions is continuing also step by step. And we see, of course, a good demand for the unlimited data bundles, where we now have a very good roaming opportunity for customers in the domestic prices in the EU and EEA countries. In 5G, Elisa is leading the way. We have launched in 31 cities, and we have also made capacity expansions in several areas in the capital area of Helsinki. And we have also provided widest selection of 5G devices, lately Samsung Galaxy A51 and Motorola products as well, and we continue to introduce new devices. And of course, the development is favorable, that we are getting less and less expensive devices, meaning that the large audiences become more interested in 5G services while they are able to get the devices with the price level that is suitable for them. Later this year, especially in the fourth quarter, we start to see really already, let's say, mass market price level devices. The data usage year-on-year growth was 40% in second quarter. And we have very well being able to meet the capacity demands and increased demands without any extensive CapEx increases and so forth both in Finland and Estonia. And of course, we are driving sustainability with different innovations. For example, we have the first liquid cooling 5G base station in the world introduced. And we also told that we have a target to be carbon neutral at the end of 2020, i.e., this year, being the first operator doing that in Nordic countries. In the digital services, there's a lot of activity. In the domestic services side, our Elisa Viihde IPTV service, the Viihde Aitio, the streaming part of our Elisa Viihde IPTV, and Viaplay Films & Series combined now the offering in Finland. We have the bundle available since June 30. And the new Elisa Viihde Viaplay streaming and video service, combined service, is -- with a -- one kind of a solution is available in the fourth quarter. This cooperation really makes us to offer the widest selection of domestic and Nordic original content but also very good selection of international movies, classic series and so forth in Finland. We also made, as a first telco in the Nordic countries, and -- the introduction of Amazon Prime Video with the selection -- a wide selection of 4K content to our Elisa Viihde Premium service; and meaning that, together with the other streaming services like Netflix and HBO, we have really a widest selection of content from our IPTV platform. We have also been very innovative to provide solutions in regards to the corona COVID-19 situation. We have helped Helsinki University Hospital with a near-real-time COVID-19 situation awareness view. And also we have used our people's movement data from our mobile network, anonymous data, for -- to help Helsinki University Hospital track and predict the spread of coronavirus. So we have basically been able to utilize the -- our smart factory management capabilities, together with our mobile network information, to help the biggest hospital chain in Finland to be better managing the COVID-19 situation. We also have been introducing this to other hospitals in Finland as well as to cities with their COVID-19 management situations. And we also launched natural Finnish language automatic recognition service for digital customer service solutions. And it is a very competitive AI solution in terms of Finnish language recognition based on the wide, wide amount of spoken data of Finnish language that we have based on our different services. In the international digital services area, we have made also very good progress; again a very solid quarter for Polystar with double-digit year-on-year growth, especially driven by the increased demand for analytics solutions especially in the video analytics side. And Videra also continues to make good progress, especially now when people are returning to offices. Videra's competitiveness really plays out to combine different kind of devices from different vendors. And also we provided the Microsoft Teams gateway, which have been in demand very well by several customers. And finally, about our outlook and guidance. Clearly, the current COVID-19 situation, it will slow down the economic growth in Finland and creates still uncertainty for the macroeconomic development. Competition in the Finnish market, telecommunications market, remains [ keen ]. Our guidance is unchanged for 2020. Revenue will be at the same level or slightly higher than in 2019, and our comparable EBITDA will be at the same level or slightly higher than in 2019. Our CapEx will be maximum 12% of revenues. And now I'd like to give the word to Jari. You can continue, please.

Thank you. I'll start with profit and loss statement briefly. Revenue in Q2 was growing 2%. And we had several impacts from COVID, as mentioned by Veli-Matti earlier. Roaming was one of those where we had negative impacts, also in pay TV and sport contents. As there was no sports content available, there was negative impact to revenues. All in all, interconnection and visitor roaming, which is one part of the roaming, was flat. Growth of EUR 5 million in equipment sales in both segments coming from different equipment sales, routers, PCs, TVs and so on. Service revenues excluding interconnection and roaming and equipment sales in corporate segment was up EUR 5 million. Polystar acquisition and Polystar first consolidation impact was EUR 7 million. Mobile service revenue was negative in corporate segment, very much impacted by this negative impact coming from roaming. In consumer segment, service revenue was flat. Mobile service revenue was growing even though roaming had some negative impacts. Domestic digital services, slightly negative and fixed -- traditional fixed telephone declining. Earnings-wise, EBITDA improvement was 2.9%. We did cost efficiency measures. Also, some expenses like on traveling expenses were down from last year as well as some sales-related expenses, as a result of lower churn. EBIT increased by 4.2%, and EBIT margin was up to 21.9%. EPS growth was 5.6%. In Estonia, both revenue and EBITDA continued to grow. Revenue growth was 2.1% in different areas, equipments sales, fixed and mobile services. EBITDA was improving 8% as a result of productivity improvement measures. Mobile postpaid base continued to grow Q2 by 3,100. Prepaid subscriptions went down 8,900. And churn was coming down from Q1 to 8.8%. CapEx. Total CapEx in Q2 was EUR 75 million. Operative CapEx excluding license and IFRS 16 impacts was EUR 65 million, up EUR 10 million from last year and normal quarterly variations making the difference for this quarter. Consumer segment, EUR 49 million; corporate segment, EUR 26 million. And main CapEx areas were 5G and 4G capacity and coverage increases, other network and IT investments. Also in total CapEx figure, EUR 7 million of 26 gigahertz 5G license is included in Q2. Payment of this EUR 7 million happens in 5-year annual installments. Cash flow. Reported cash flow was EUR 83 million. And comparable cash flow, EUR 85 million, which is down from last year, which was EUR 102 million last year; positive impact from higher EBITDA and 2 main negative impacts. One relates to less-positive net working capital change due to higher inventories. We were preparing for possible supply chain interruptions, and that was impacting to inventories. And the second impact, from CapEx, as just said. This quarter had higher CapEx. Cash conversion continues to be high, 61% from EBITDA. Then balance sheet and capital structure. Net debt-to-EBITDA was 2x, in line with the 1.5x to 2x target range; and equity ratio 35.9%. Return ratios continued at good level, return on investments 17.1% and return on equity 29.1%. Regarding financing, we did extension, 1-year extension, regarding committed revolving credit facility of EUR 130 million from June '21, extension to June '22. And cash -- or liquidity situation remained strong end of Q2. Cash and unused committed credit lines were EUR 374 million. And now I would give the word to Vesa, please.

Okay. Thank you, Jari. And now we move on to Q&A part. And we ask, first, question from the conference call lines, please.

[Operator Instructions] Our first question is from Andrew Lee from Goldman Sachs.

I had a couple of questions. First, on revenue trends, kind of trying to get a sense of the revenue trends on an underlying basis or ex the COVID impact. Have you seen any real change to those trends in Finland, stripping out the roaming impacts and any other COVID impacts you've had, versus last quarter? And have you seen any intensification in competitive pressure in the last quarter? And then second question was on B2B risk. You've clearly got higher B2B and SME exposure than most of your peers, at least in terms of revenues. How concerned should we be on this, as far as you can see? And what are the key metrics you're monitoring to check on B2B revenue risk?

All right, thank you. In terms of the revenue trends, basically there's not so much change on the underlying trends, except the COVID -- a few COVID kind of impacts. Our upselling of mobile speeds continues in 4G and also in 5G. We also contribute to customers with the fixed broadband. There has been quite much demand now for further speeds and capacity by customers who have been doing a lot of working from home and also otherwise a need for communications, but also in the digital services we see clearly a good demand for more content, especially the Finnish and Nordic content, and so forth. But then as we have detailed, the COVID impacts, negative impacts, to revenues come from the travel restrictions impacting the roaming quite strongly actually. And of course, when the sports has been on break, the -- some of the pay TV revenues have not come in due to the sports being on break. Also there are some small revenue streams that have got impact from the COVID, but overall the revenues and the revenue development has been like before. Then about the competitive pressure, we haven't seen so much change on competitive situation since first quarter. It has been fierce. The -- of course, the exception has been that the traffic to the shops has been lower. It has, of course, now come back quite much. We are almost to the same level for the visitors in our shops than pre COVID, so there is, of course, possibility for a bit more shop-based competition to come forward. We'll see, but otherwise we have had quite keen competition like we have earlier had. There's no big change on that in the second quarter in both segments, consumer and B2B side. Then in terms of expectations in regards to B2B side, of course, we -- for the first, we have a bit different dynamics when it comes to small and medium-sized customers and entrepreneurs and larger customers. We have a bit less representation in those verticals where the corona has hit most, hotels and restaurants, but of course, the uncertainty for the second half exists there. There is, of course, negative impacts to many export companies, for example, in Finland. And we will hear a bit more about the views that companies are presenting in their second quarter results, but of course, we have our scenarios done for what kind of impacts they might have. The GDP development in Finland overall is around 7% minus now. We expect maybe a bit more decline for this year in our kind of basic plans, but it is, of course, very much a question that how much savings programs the companies might do. We haven't seen that much yet an impact on us on that, but of course, we follow up very much about the layoffs, how much layoffs companies might do. We have this temporary layoff kind of regulation in Finland. We follow that, the -- of course, the consumer data from the credit card utilization; and so forth. We do follow many indicators, and based on that, of course, we can anticipate what kind of developments there is. For second quarter, we didn't see that much of negative pressure in the B2B segment for the business. And also -- but like I said, the second half is something which where the uncertainty exists. And of course, there is some pressure, but from the past kind of crises, we know that communication services are in demand anyhow. There might be some reduction in the demand based on layoffs. That's exactly what we follow up but also now when everybody understands that there will be life after COVID. And important thing is to digitalize further the business. We have a lot of different solutions that have been on demand and we have innovated, like we explained in the -- in our report. So there will be also positives and opportunities based on the COVID, maybe more than without COVID, in the digital transformation of companies.

And our next question is from Terence Tsui from Morgan Stanley.

Just picking up on the comments around mobile service revenue trends. You mentioned some of the headwinds being less Finns traveling abroad. I'm just wondering. When you think about -- you talked about the shape of the recovery and thinking that telecoms are going to become more important in the future. What sort of pace of recovery do you think you'll see? Are you expecting another couple of quarters of sluggishness? Or do you think actually the rebound could be quite quick in, say, Q3 and Q4? And then secondly, I just had broader questions around equipment vendors in Finland. I'm sure you saw the announcement yesterday by the U.K. government. Maybe you can just update us what the Finnish authorities are thinking about the use of Chinese equipment vendors.

Okay, thank you for the question. In terms of the MSR, like I said earlier, the -- without travel restrictions impacting to roaming revenues, we would have had a Q1-level MSR. What kind of development is going forward, it really depends on the travel restrictions, how they will be taken out and how people start to move again. And like also we went through, it is -- it has more impact in the corporate side than in the consumer side. And then it remains to be seen how the travel will come back again. And there is, of course, uncertainty that everybody understand. And we have, of course, our own, let's say, scenarios of that, but there is an uncertainty that we cannot kind of put any kind of number in front ourselves. Of course, some point in time, we will see more traveling and roaming revenues to come back, but we are not giving any guidance when that might happen. Saying that: The underlying selling of speeds and also our capability to make product changes exist exactly like before COVID. In regards to the equipment vendors, we also have a new legislation in Finland going on. Our government is proposing legislation, overall many different things. And in regards to the equipment vendors, there is a part that relates to the national security. And there is, of course, a -- it is based on already a previous legislation in Finland we have had meaning and saying that, if we have devices in our network that are causing problems and troubles, they have to be taken out, very clearly stated, which has not existed in, hardly any other country's telecom regulation. We have had that. And now it is kind of further developed for this new regulation in Finland that, if there's something that is creating risks for national security, the devices need to be taken out from the network. So that's the definition. There is, of course, no vendor mentioned or any country of origin of the vendor mentioned. It is about the national security, and it is then up to the Finnish kind of -- Finnish authorities to define which they see in the critical parts of the network which this means. So in the critical parts of the network, today, we use only Ericsson and Nokia, which are kind of felt as domestic players in the Nordic countries. In the radio part, which is not a critical part of the network, we, of course, use other vendors as well.

And our next question is from Sami Sarkamies from Nordea.

I have a couple of questions regarding segments, starting from the consumer segment. EBITDA was quite a bit stronger than expected. I assume this related to lower marketing spend and customer acquisition costs during Q2. Can you elaborate on how you will be able to keep the current low level? Or is it so that, now once consumers start to move again, also the sort of marketing spending will normalize?

Okay, well, our marketing spend has not been so much lower. It's about the customer acquisition cost in terms of the sales side because the volumes have been a bit lower. Of course, if the volumes, sales volumes, will go up, then the cost side will go up, but the underlying development in overall, with unique Elisa way to improve productivity, with our continuous improvement, that is the main driver how we drive the development of profitability at Elisa. And that continues without any problems. And we do see a lot of potential in consumer -- for consumer business as well as for the corporate business to improve our productivity in any -- many areas in terms of the automization but also by utilizing improved processes and less -- reducing waste and so forth. So that is an area where there continuously exists a great potential we execute going forward.

And then [Audio Gap] again continuing on the corporate segment. On that side, EBITDA was quite a bit below expectations on [ use ]. Was it driven by business mix with higher share of -- and lower service sales? Or were there some extra costs in Q2?

Like I said, one of the main drivers was really the reduction in roaming which impacted more to the corporate segment and its profitability. There's nothing special in the corporate side other than that. Also, the continuous improvement in customer satisfaction as well as the productivity continues in the corporate side. Of course, the quarters are a bit different. Going forward, there are some variations, but overall the development is kind of promising in the corporate side as well.

That's very helpful. And then I have one more question to Jari. I think you said that Polystar revenues were EUR 7 million in Q2. Can you also disclose the EBITDA or EBIT figure for Q2?

To be exact: EUR 7 million was the change, annual change, from last year. EBITDA impact was in the range of [ 1.5 ].

On top of what you booked a year ago.

Yes.

[Operator Instructions] Our next question is from Peter Kurt Nielsen from ABG Sundal Collier.

Just a couple, please. Firstly, do you anticipate that the roaming impact in Q3 will be similar as we've seen in Q2, i.e., sort of close to a minus 2% on service revenues? And then just could you elaborate a bit on your 5G rollout? What's the time frame? You're at 30 cities now. When do you expect to sort of complete that? And are you seeing any positive indications as of yet, or is it still too early? And then just a quick one, finishing off, please. Any comments on the agreement you signed recently with NENT on your IPTV business? Any -- do you see this as a positive driver for this business, which was already doing reasonably well?

Thank you, Peter Kurt. In terms of the roaming, we, of course, have uncertainty which relates to the traveling starting back again. In our views and plans, we see that and we have taken into account that the roaming will be quite much down in third quarter and fourth quarter, but we -- of course, knowing that, we have reiterated our outlook. But in terms of the roaming revenues, our anticipation, what we have in our plans, is quite much the same, but it may be different because we are -- we don't have the crystal ball for when the travel will come back. 5G, yes, we continue the build-out of 5G network. It's not going to be ready this year even if we continue quite actively, but we have already now a good coverage. More than 20% of Finns are under our 5G coverage, and the experiences have been very good. The first movers of the customers have taken the service really well. And of course, the important driver are the devices, the handsets being more affordable for the mass market, which we will see in the -- especially in the fourth quarter this year. And we see higher ARPU with the 5G customers than 4G customers, so there clearly is potential to improve the revenues, mobile service revenues, by upselling customers to 5G as we go forward. When the momentum really starts to take place remains to be seen, but it looks promising. In terms of the IPTV and our cooperation with the NENT and Viaplay. It is, of course, planned to provide growth, further growth, for our good portfolio of video services in IPTV. And the early indications that we've noticed, the customers have taken really well the combined offering. And it is a situation where we provide more value to the customer and we can charge also a bit more.

And our next question is from Panu Laitinmäki from Danske Bank.

I wanted to ask about mobile churn, 2 questions basically. Firstly, do you expect the mobile churn to increase again when people kind of return to the physical stores to look for the under-the-counter offers? And then secondly, can you give any indication on the profitability impact of changes in churn? Like what does 1 percentage point of churn mean to your EBITDA? Or could you give any indication of the subscriber -- acquisition cost per subscriber?

Okay. In terms of the churn forecast, we are not giving any forecast for the churn. What we know, that the people have been visiting now shops again more. We are almost on the level where we were before. Whether the churn will tick up based on that remains to be seen. We are prepared for any kind of scenario, if you will. In terms of the profitability impact on churn reduction, we have not disclosed any numbers, but of course, it has positive impact to the profitability if the churn is down. But like said, we have many other drivers to improve profitability as well.

And our next question is from Adam Fox-Rumley from HSBC.

I have 2 questions, please. Your release, firstly, highlights a government proposal from June on changing the maximum contract length to 12 months from 24 and also capping some business number charges. You mentioned in the statement that there's some financial impact expected on Elisa. And apologies if I've missed it earlier in the call, but are you able to provide any kind of indication of the levels of that kind of impact? And then secondly, just coming back to the combination of Elisa Viihde with Viaplay and other services. From a strategic perspective, does that say something about the standalone viability of that product? Was there a challenge there? Are -- is there a growing influence from outside brands like Netflix and others? Or was it just more advantageous to both parties to be a bigger player in the space?

All right, thank you. In terms of these regulatory changes, we base our strategy very much on customer satisfaction and understanding the customer value, and that's why we are very happy that this reduction of kind of contracts from 24 to 12 -- and especially the clear demands for informing the customers that customer would easily know how long contracts they have and how many months they may have left. We are not building our business on falling customers and kind of making them to stay sticky with us even if they are willing to know and understand their contracts' lengths. So this regulation is really making it easier for customers to understand, and then customers can choose based on their experience that -- which provider they take. So this is good. Financial impacts of that, we believe that it will be positive going forward gradually, but it's, of course, not an event that at once makes a difference but for the long term. And I believe that it is really good for the consumers to have kind of capabilities better to choose there and be knowledgeable the service provider contract lengths. And we are not trying to fool the customers. We are driving for customer satisfaction. In terms of the other change, I ask Jari to respond to that small change that exists for these business number chargings. And finally, about your question about this Viaplay. It is, of course, a move and one step in Elisa's clear strategy in terms of IPTV and content provision. We have our quite long -- quite some time ago, kind of played strategy that we are working on and executing. And this is a very -- a good one step forward how we provide the widest selection of content to our customers in Finland, especially having a focus in Finnish and Nordic original contents but having also a very wide variety of other contents available from one single, very easy-to-use service, Elisa Viihde. It really has nothing to do about standalone or not standalone viability. It is based on our strategy that we are executing. And as you may have noticed, we also have Estonian original content, so we really provide -- we are the kind of a very strong provider of local content. And that's the kind of competitive advantage we have in addition to very wide selection of other contents. But Jari, please, you can respond...

Yes. Relating to business number changes, it's still a proposal at the whole act. And it will be, if coming into force as proposed, starting from December '22. And of course, we will prepare ourselves if the proposal goes through as proposed; for example, doing product changes which will mitigate the direct negative impacts. So we expect not any major financial impact as a result of this change if it goes as proposed.

And our next question is from Siyi He from Citigroup.