Expectations for the operating segments
In our Germany operating segment, we continue to work on our comprehensive transformation program: We want to continue driving forward the IP migration, reduce the complexity of products and processes, use new technologies, and increase the use of automation. In this context, it is important to us that the transformation process is customer-friendly while also being technologically efficient. Our aim is to secure our market position as the leading integrated telecommunications provider in Germany by providing innovative and competitive products and services. In mid-2017, we pooled our customer and technical service so as to offer the best customer experience with the best service.
In the fixed network, we want to offer the best customer experience with fiber-optic products. We are paving the way for this with our integrated network strategy. We are building an IP-based network with high transmission bandwidths so that, in the future, we can offer our customers competitive high-speed lines, e.g., by migrating our VDSL network to vectoring technology. In addition, we are investing heavily to offer greater coverage and even higher speeds in rural areas as well. We are using innovative products for this purpose – like our hybrid router, which combines the bandwidths of fixed-network and mobile communications, thus enabling much higher transmission speeds. 9 Furthermore, we are working towards further partnerships to provide even more customers with high bit-rate Internet access.
In 2014, we were the first provider in Germany to market a comprehensive and integrated fixed-network/mobile (FMC) product: MagentaEins. We have gradually added new products to this range, such as an FMC offering specifically for our business customers. When designing our products, we pay particular attention to high quality and a simple rate plan structure. In addition, our multiple-brand strategy in mobile communications allows us to address the entire customer spectrum – from smart shoppers through to premium customers. The new Magenta Business program addresses business customers.
We want to secure an ever-larger share of the growing TV market by stepping up marketing activities in the housing sector with a focus on entertainment and content offers. To this end, we are investing in our IPTV platform and winning new customers with attractive content and services.
We want to remain the market leader in Germany in terms of revenue in both mobile communications and the fixed network and extend our market lead in service revenues. As our customers’ demand for bandwidth is constantly growing, we intend to continue investing extensively in broadband networks, innovative products, and customer service. Our success in this area has proven us right: Our broadband revenues are constantly growing and customer satisfaction levels, too, are on a positive trajectory. We now want to cement these two trends, with “progress through digitalization” being one of the drivers of this positive development in customer satisfaction. One example of this is the further development of mobile services (e.g., Magenta apps) for customers.
Overall, revenue in our Germany operating segment should stabilize in 2018 – despite intense competition and the strong impact of regulation on our core business. In addition, we expect broadband and TV revenues as well as the number of IP offerings to rise, as well as further growth in business with business customers. The positive trend in IT and cloud business is set to continue. We want to continue expanding our fiber-optic services, both by means of business models with wholesale products (such as the contingent model) and through further partnerships, e.g., in the housing sector. In addition, we are working with our partners to expand offers such as SmartHome or content and security services for our customers.
We expect growth initiatives in Germany to generate revenue growth and offset the volume-driven decline in revenue from traditional fixed-network business. We want to continue consolidating our position as market leader in mobile and fixed-network communications. Thanks to the outstanding quality of our network and the progress being made in fiber-optic roll-out, we anticipate greater demand for mobile and broadband products as well as growth in the number of broadband, TV, IP, high-speed, and hybrid lines. We would like to continue offering best customer experience with integrated services (e.g., MagentaEins), digital products, and service experiences. Our IT and technical service revenues should help feed this trend. In addition, we want to make advances with the smart home business and offer further M2M and security services. We expect growth in cloud services to continue. Wholesale sales volumes should continue to develop very positively thanks to strong demand for our contingent model. The revenue trend is only expected to be stable year-on-year due to the transition to the IFRS 15 accounting standard in 2018.
We expect adjusted EBITDA to increase year-on-year for the next two years in our Germany operating segment. In 2018, we expect adjusted EBITDA of around EUR 8.6 billion and a steady improvement in our margin. Growing revenues as well as savings in indirect costs – primarily from a reduction in redundancies and from increased productivity – will be the main factors in this trend. We forecast an adjusted EBITDA margin of some 39 percent in both 2018 and 2019.
Our course is set for innovation and growth: While we will continue to promote investments in new technologies with even greater intensity in the future, we are reducing investments in legacy systems. The focus of our capital expenditures in the coming years will thus fall on our network infrastructure and our mobile network (e.g., FTTC, super vectoring, FTTH, 4x4 MIMO, 5G). At the same time, we want to further build out our fiber-optic network and close gaps in the network in rural areas. One focus here is business parks and we are driving forward the FTTH build-out accordingly. We want to continue this roll-out efficiently and participate in development programs. We expect our investments in new technologies (cash capex) to remain stable at a high level for the next two years.
In 2018, T-Mobile US will continue to execute on its Un-carrier promise to deliver the best value experience in the U.S. wireless industry. Key elements of the Un-carrier promise include delivering distinctive value for consumers in all customer segments by eliminating customer pain points and providing excellent 4G/LTE services through a strong mid-band spectrum position supplemented by low-band spectrum in key metropolitan areas and a nationwide fourth-generation LTE network. Additionally, the Un-carrier initiatives focus on attracting and retaining a loyal customer base by offering devices when and how customers want them, and plans that are simple, affordable and without unnecessary restrictions to deliver the best value in wireless.
T-Mobile US expects continued increases in branded postpaid and branded prepay customers in 2018 and a further increase in 2019. However, competitive pressures and unforeseen changes in the wireless communications industry in the United States may significantly affect the expected ability to attract and retain branded postpaid and prepay customers.
T-Mobile US expects an increase in total revenues in U.S. dollars in 2018 and a further increase in 2019 as a result of continued customer growth momentum.
For 2018 and 2019, T-Mobile US expects a sustained increase – in U.S. dollars – in adjusted EBITDA. As a result of the significant growth in customers over the past year, revenue growth is expected to outpace increases in expense as T-Mobile US is able to take advantage of improved scale effects.
However, continued investment in the network and increased spending for marketing of the T-Mobile US brand will likely influence adjusted EBITDA. Competitive pressures may also significantly affect expected revenues and adjusted EBITDA in U.S. dollars. Exchange rate fluctuations may significantly affect revenues and adjusted EBITDA in euros in 2018 and 2019.
For the coming two years we have set ourselves the target of establishing seamless connectivity at home and on the go. We are thus focusing on convergent fixed-network and mobile products (FMC), on ICT solutions for business customers, and on digitalization.
On the road to becoming the leading European telecommunications provider, we need our already integrated national companies to further strengthen their market position. We want to systematically transform our mobile-centric companies into integrated enterprises. In the coming year, we will turn our national company in Austria into a strong convergent telecommunications provider through the agreed acquisition of the cable operator UPC Austria (subject to approval by the relevant competition authorities). Since the transaction was not yet closed as at the date of preparing the consolidated financial statements and the combined management report, the value contributions from the agreed acquisition in Austria are not included in our outlook.
In terms of the strategic growth area of FMC, our convergent product portfolios MagentaOne and MagentaOne Business provide strong offerings with which we can successfully help to shape developments in the European markets. On the one hand, we want to win new customers with our innovative portfolio, on the other hand, we want to offer our existing customers the full MagentaOne product range. We believe that, in this way, we can also increase household coverage in the markets of our Europe operating segment. The advance of digitalization helps with the seamless provision of a wide range of products and services. We support our business customers and consumers in Europe on their journey into the digital world. For example, we want to establish an app for consumers that will act as a central, online communications channel which will give our customers simple and seamless access to their products and services with us. We have already successfully marketed this app in a number of our national companies; in the short to medium term, we plan to introduce it in all of our national companies so as to offer our customers the best experience.
Another focus in the consumer area is the seamless enjoyment of TV and entertainment services, with a particular focus on high-quality and exclusive content. In the future, we will negotiate to acquire rights to broadcast soccer matches, such as the Champions League, or the rights to TV movies/series, as well as to relevant local content. We are also working in partnership with OTT players such as Netflix. We will continue to participate in the production of our own content and channels, as in Greece, for example, with the OTE History channel. In order to make TV content an even better experience for our customers, we have developed interactive services for the new TV platform in Croatia, among other things. We also want to offer customers of our mobile-only companies access to the broad spectrum of TV services. Overall, we expect to further increase our revenues from TV business over the next two years.
For business customers, we want to become the preferred partner for the digital transformation and a pioneer of innovation in industry over the coming years. We set the course for this in 2017. B2B/ICT revenues are also expected to see further growth. Above all, the core business in the area of small and medium-sized enterprises (SMEs) performed well, primarily thanks to our attractive product range of convergent solutions (fixed network, mobile communications, and cloud from a single source). We concluded contracts for ICT and cloud services with numerous corporate customers in the reporting year, thereby strengthening our market position. In order to derive additional benefit from this, we have not only pushed digitalization with SMEs, but are also focusing on supporting cities and municipalities in Europe on their path to becoming efficient smart cities, for instance, through fast, intelligent solutions in the areas of lighting, parking, and air quality. We have further decided, together with the countries of the Europe operating segment, to establish a competence center in Hungary to focus on the topic of smart cities.
Our state-of-the-art network infrastructure supports digitalization. With the aim of becoming the leading European telecommunications provider, we will continue to focus on technology leadership over the next two years: For example, we plan to take part in further spectrum auctions. Our investments in mobile communications are focused on two areas: expanding LTE reach and implementing LTE Advanced technology in order to increase network capacity. This will make transmission rates of over 300 Mbit/s possible. In 2017, we already covered 94 percent of the population on average in the countries of our Europe operating segment with LTE and are thus well on track: Ultimately, we aim to achieve network coverage of between 89 and 99 percent in our footprint countries in 2018. The next-generation mobile communications standard, 5G, is just around the corner with the first tests underway and pilot projects being readied for launch. We have already successfully launched Narrowband IoT as 5G technology in six national companies. One aim of our integrated network strategy is to make further advances in the fiber-optic roll-out. Our strategy in Greece has been to focus on fiber-optic roll-out up to the street cabinets using vectoring technology. In the other integrated companies, we have been investing in the FTTH roll-out for a number of years now, and plan to continue doing so in combination with vectoring. In addition, we will launch the FTTH roll-out in the Czech Republic in 2018.
In our Europe operating segment, we expect to win more customers over the next two years, mainly thanks to the good performance of our convergence brand MagentaOne. Consequently, we expect the number of TV and broadband lines to increase in 2018 and 2019. The number of mobile customers is also set to grow. We expect fixed-network voice telephony to be replaced more and more by mobile communications, hence we forecast a slight decline in fixed-network lines for 2018 and 2019.
Changes in legislation, for example regarding taxes and duties, and national austerity programs may have a negative impact on our revenue and earnings in the next two years. Changes in exchange rates could also affect our earnings on a euro basis.
Based on these assumptions and parameters, we expect revenue in our Europe operating segment to remain stable in 2018 on a comparable basis, i.e., based on the pro-forma figures for 2017; this is assuming constant exchange rates and based on assumptions about regulation, new market players, spectrum auctions, and unchanged organizational structure. 2019 should then see a return to moderate revenue growth.
Vigorous competition in the markets of our operating segment could potentially put pressure on our margins. To be ready for such an eventuality, we want to increase our productivity and exploit the benefits of digitalization, for instance by automating processes, with the aim of realizing cost-cutting potential. We expect adjusted EBITDA to increase year-on-year in 2018 to around EUR 3.8 billion, and to continue to increase slightly in 2019.
In order to expand our technology leadership, we continue to invest in our integrated networks and plan to maintain our high level of investment over the next year. As such, cash capex will remain stable against the prior year.
In line with our Group strategy, we want to offer our business customers secure ICT solutions and to be strong in the Internet of Things. To this end, we have divided our organization into four operational units: the IT Division and the TC Division, which are responsible for traditional IT and telecommunications services, the Digital Division with a clear focus on the new growth areas, such as digital transformation and the Internet of Things, and Telekom Security, with which we work towards becoming the European market leader for cyber security.
We are among the top providers in the European IT market. Our very high levels of customer satisfaction are a key element in maintaining this position in the long term and in taking us a step closer to our goal of also playing a leading role in digitalization.
Our market is undergoing a radical transformation: from traditional IT business with big deals to flexible cloud computing and digitalization. Following a decline in order entry in 2017, in addition to traditional IT services, systems integration, and outsourcing, we are now placing additional emphasis on platform business and scalability. Partnerships are a core element of our growth strategy. By building out our networks, we can offer international, integrated connectivity and shape the digital transformation of key industries with new business models – as new cloud services and our comprehensive cloud portfolio underscore. Together with our partners we have created a cloud ecosystem, which brings together state-of-the-art technical products from global market leaders and specialist providers on our energy-efficient platforms. We have also expanded our portfolio of dynamic services: Customers can book infrastructure, SAP applications and much more as needed and pay only for what they use. The corresponding services are made available from our high-security twin-core data centers, like the one in Magdeburg/Biere – one of the few data centers in the world from which competing cloud providers offer their services. Our innovative products for the Internet of Things, such as smart parking, also contribute to achieving our sustainability targets. 13 These measures address the changes in the market and we expect them to turn around our IT business.
We want to grow our telecommunications business, for example, by increasing our international reach with the support of the Next Generation Enterprise Network Alliance. On our way to becoming the leading European telecommunications provider, we are concentrating on customers in Germany and in selected Western European countries. The TC Division is gradually building up sales and expanding our offering with innovative services such as managed LAN, Unified Communications, and IP VPN. We also want to win over customers internationally with consistent offerings, new products, and competitive prices – and all-IP migration and cloud services offer the best opportunities to achieve this.
As the previous technology and development partner for toll collection business in Germany, we already have a strong competitive position. There are further opportunities for growth from existing European toll collection projects in Belgium and Austria and the planned launch of a Europe-wide toll collection system (Toll4Europe).
Overall, we forecast growth in order entry for the Systems Solutions operating segment in 2018 and a decline in revenue on account of the sharp decrease in order entry in 2017. Adjusted EBITDA is expected to amount to around EUR 0.4 billion. For 2019, we expect further year-on-year growth in order entry, revenue growth, and a slight increase in adjusted EBITDA. We expect cash capex to increase strongly in 2018 due to non-recurring effects from investment in infrastructure, in particular for Toll4Europe. These non-recurring effects will have a reverse effect in 2019 and thus result in a decrease.
For 2018, we expect revenue to decrease slightly in our Group Development operating segment due to the accounting change at T-Mobile Netherlands. By contrast, revenue should increase in 2019. Adjusted EBITDA is set to remain stable in 2018 at around EUR 0.9 billion; for 2019 we expect it to increase.
We will continue to deal with the intense competition in the Netherlands through our strategy, which should take effect in 2018, following the stabilization of EBITDA in 2017. The main elements of this strategy are a repositioning of the core brand T-Mobile, expansion of the products and services on offer through T-Mobile Thuis (fixed network) and efficient management of costs. Furthermore, the acquisition of Tele2 Netherlands agreed in December 2017 marked an important component of our long-term strategy. This business combination, which is still subject to approval by the merger control authorities, will create a sustainable provider of convergent offers combining fixed-network and mobile communications on the Dutch market, which will be better positioned to challenge the FMC duopoly of KPN and Vodafone-Ziggo. Since the transaction was not yet complete at the date of preparing the consolidated financial statements and the combined management report, the value contributions from the agreed acquisition in the Netherlands are not included in our outlook.
Network investments, which remain at a high level, will help to safeguard the strategy of T-Mobile Netherlands over the coming years. We expect investments at DFMG to grow in 2018 and 2019, mainly due to the further build out of cell sites in Germany.
GROUP HEADQUARTERS & GROUP SERVICES
We will resolutely continue our efficiency management measures at Group Headquarters & Group Services over the next two years by further optimizing our structures, in particular at Group Services, and continuing to focus on implementing our cost-cutting measures. This will lead to cost savings which will both help to improve our earnings and enable us to offer our services to the operating segments at lower cost.
Our Technology and Innovation Board department will again step up investments in technology development in Germany and in expanding centralized production platforms as part of the Pan-IP program in 2018 and 2019. This will impact on the cost structure in a number of ways: On the one hand, we expect IT operating costs to decrease; on the other, the establishment of the centralized production platforms will incur rising costs in the Technology and Innovation Board department. Overall, we expect the cost level to improve over the next two years as a result of additional cost-cutting programs.