Zon Optimus SGPS : 08-11-17 - NOS informs on 3Q17 Consolidated Results

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Table 1.

3Q17 / 3Q16

9M16

• Revenue growth of 3.2% in 3Q17 with Telco revenues accelerating to 3.8%;

• OPEX growing less than revenues, by 2.6% in 3Q17, supporting EBITDA growth of 4.1% yoy to 151.2 million euros;

• EBITDA - CAPEX growth of 24.3% yoy to 60.5 million euros, with YtD growth of 35.1% to 188 million euros, 16.2% of Revenues;

• FCF yoy increase of 9.6 million euros in 3Q17 and of 88 million euros in 9M17;

• Growth in all key operating metrics, with RGUs growing 4.7% yoy to 9.37 million services;

• Positive Pay TV net adds in 3Q17 of 2.4 thousand, despite impact to date of market-wide regulatory intervention on price-increase communication;

• Strong quarter for mobile net adds with 94.6 thousand new customers taking NOS services;

• Continued growth of convergent penetration to 47.3% of fixed base compared with 45.1% in 3Q16;

• Residential ARPU growth of 4.1% to 44.6 euros;

• Weaker quarter for cinema and audiovisuals due to fewer blockbuster movies and lower share of distribution.

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In 3Q17 NOS continued to see growth in all key operating metrics.

Convergence is a maturing trend with 47.3% of fixed subscribers already taking household communication and entertainment services in bundled offers. The most recent market share data reported by the regulator for the end of 2Q17 shows that NOS ranks #1 with a 40% market share of bundled packages.

ARPU growth is led by a combination of increased RGUs sold per account, increased proportion of higher value accounts in the customer mix and an improved pricing environment. In 3Q17, Residential ARPU increased by 4.1% yoy to 44.6 euros.

Pay TV subscriptions are the core measure of residential growth as the basis for upselling all other services. In 3Q17, NOS grew the level of pay TV subscriptions by 2.4 thousand resulting from a combination of an additional 5.5 thousand new fixed access customers and a decline in the satellite base of 3.1 thousand in the quarter. The net growth in the pay TV base in 3Q17 was achieved despite the impact to date of the market wide remedies imposed by the regulator regarding price increase communication procedures. In addition, DTH customers have been posting negative quarterly trends in net adds primarily due to the increasing coverage of NGN fixed networks in Portugal with the main operators expanding their respective footprints.

Penetration of fixed broadband and voice is still growing. By the end of 3Q17, NOS had 1.321 million fixed broadband and 1.753 million fixed voice subscribers, representing respectively 77.4% and 87.0% of the fixed access base.

On the B2B front NOS is focusing efforts primarily on capturing a greater share of wallet within existing large and medium corporate accounts and expanding sale of new business, namely by implementing IT and data management related services with full service solutions for the various subsegments. The operational model in B2B sub segments has been revisited to guarantee that NOS is present in the most margin relevant stages of the customer relationship, becoming a producer rather than a pure reseller of services where relevant. NOS is well positioned to capture value from innovative services developing technological solutions supported by leading network assets and service platforms and strong institutional partnerships when appropriate. Continuous and open product and service innovation and excellence in service delivery are the foundations upon which NOS differentiates itself in the market. In the smaller business segment where NOS has a comparatively larger market share than in the large Corporate space, the key priority is to defend revenue and margin potential and progressively capture natural share of gross adds. In 3Q17, NOS increased total B2B RGUs by 6.6 thousand with ARPU per RGU remaining stable at 15.7 euros.

Fixed and mobile traffic continues to grow exponentially, for NOS and for the market in general. Year to date, fixed and mobile data traffic has increased by 28% and 32% for NOS, clear indication of the increasing demands placed on the network.

To meet the challenges of continued growth in traffic and guarantee service quality, a number of major network development projects are currently underway across both the mobile and fixed infrastructure.

In 3Q17 NOS initiated a mobile network overhaul replacing all the active elements of the network with the latest generation of radio equipment, introducing Single RAN architecture to optimize spectrum utilization and network efficiency, increasing capacity by almost three times and enhancing coverage.

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The project will be implemented over the next 5 years, with the lion's share of the investment set to occur in 2018 and 2019.

On the fixed network front, by the end of 1Q18, NOS will have completed the Docsis 3.1 upgrade of its HFC network, allowing for provision of 1Gbps speeds across the entire footprint. At the time of this report almost 50% of the HFC footprint was already upgraded, enabling NOS to launch a premium 1Gbps quad play offer.

With the objective of extending fixed coverage further under economically viable terms and progressively increasing penetration of FttH, at the end of September, NOS reached an agreement with Vodafone Portugal to develop and share FttH infrastructure nationwide, enabling both operators to extend their commercial offers over the shared network as from the beginning of 2018. The agreement encompasses reciprocal sharing of dark fibre in around 2.6 million homes, with each operator sharing an equivalent value in terms of investment. The partnership also applies to mobile infrastructure, with a minimum of 200 mobile towers to be shared. With this agreement both companies retain the freedom to develop their respective commercial offers and technological solutions, whilst guaranteeing complete independence and confidentiality of customer relationship and information management.

By the end of 2018, NOS' next generation fixed network will cover 4.4 million homes, representing a more than 10% increase in addressable market and will be able to provide Gigabit services to 100% of its footprint with the upgrade to Docsis 3.1. NOS' coverage also includes wholesale acess to 280 thousand households from DST, a regional fibre operator. By the end of 2022, approximately 70% of NOS' fixed network will be covered with FttH.

A measure of NOS' successful track record in network expansion is that of the new households covered since 2014 average gross penetration now stands at 25%.

NOS is positioned as the leading entertainment and communications provider in Portugal. With its nationwide NGN network, the most advanced multi-device TV and video platform, "UMA" and access to the largest chain of movie theatres in Portugal, NOS boasts the most exciting entertainment and communications experience in the market. The starting level convergent package includes 176 channels over the UMA platform, 100 Mbps of broadband speed and unlimited broadband and voice traffic, 1 mobile SIM card with 500MB of data included for a 56.99 euro monthly fee plus access to the NOS on demand video library NPlay. Each new SIM card is charged at 11.90 euros and residential customers may go up to a limit of 4 cards. NOS' mobile data solution within converged bundles offers customers the ability to share the total monthly data allowance amongst all SIMs within the family account. At the top end of the range, reflecting a "more for more" approach, and leveraging the increased network capabilities with the Docsis 3.1 upgrade, for an additional 17 euros a month, broadband speeds increase to 1Gbps and the mobile data allowance per SIM increases to 10 GB per month. The UMA TV and online video interface is continuously evolving with new content and features targeting upsell to higher end packages at more premium pricing. During the last months, NOS launched a number of new features for the platform, one of the most significant of which being the inclusion of YouTube over the integrated UMA TV, computer and smartphone platforms.

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