Hellenic Telecommunications Organization SA

ATHEX:HTO

Earnings Call Analysis

Solid Growth Driven by Fiber and TV Investments

In Q2 2024, OTE Group's revenue grew by 7%, driven by a strong performance in Greece where revenues climbed high single digits, supported by mobile, TV, ICT, and wholesale sectors. EBITDA rose 1.5% in Greece but overall remained flat due to challenges in Romania. The company added 38,000 Fiber-to-the-Home (FTTH) subscribers, achieving a record and increasing the base to 324,000, while fixed revenues and pay TV customer base also saw growth. Confirming a full-year CapEx forecast of 610-620 million euros and free cash flow target at 470 million euros, OTE emphasized its strategic focus on expanding digital infrastructure to drive future growth.

Introduction and Leadership Changes

The latest earnings call from OTE Group was noteworthy, particularly due to the return of Kostas Nebis as the CEO. Nebis, formerly the CEO of Croatian Telekom, outlined his vision for long-term sustainable growth and emphasized the importance of leveraging the company's investments in fiber, mobile networks, and pay TV. His focus is clear: accelerate the monetization of these investments and position OTE as a leader in the market.

Wholesale Fiber-to-the-Home Deal

A significant development discussed was the wholesale agreement for Fiber-to-the-Home (FTTH) infrastructure. This agreement, approved by both the European Commission and the local regulator, offers discounted wholesale prices up to 28% off the regulated price, contingent on volume commitments. This strategy is expected to maximize the utilization of FTTH infrastructure and accelerate the migration of customers from copper to fiber, benefiting from government-provided FTTH vouchers. By Q4, the government is anticipated to kick in EUR 200 per customer for in-building installations, which will further expedite the transition.

Collaboration with Vodafone and Nova

Nebis highlighted a collaborative effort with both Vodafone and Nova, aiming to make FTTH service more accessible and affordable. This arrangement should significantly increase the adoption rate of FTTH, aiding Greece in hitting its national digitization targets. The agreements will also provide a financial boost through higher infrastructure utilization, ensuring better returns on their investments.

Pay TV Market Breakthrough

Another pivotal moment in the call was the announcement of a content-sharing agreement with Nova. This innovative deal aims to revitalize the stagnant pay TV market by allowing cross-broadcasting of sports channels. Consumers will now be able to access a full sports package for an additional EUR 2-3 on their current subscription, a substantial reduction from the previous EUR 50-60 monthly cost. Nebis anticipates this will curb piracy and increase legitimate subscriptions, subsequently raising VAT and TV tax revenues.

Focus on Mobile Growth

In the mobile segment, OTE continues to lead with its 'more-for-more' strategy, emphasizing 5G coverage, service quality, and customer experience. The company plans to maintain its leadership by consistently offering superior network and service quality. This approach has yielded positive results as reflected in their quarterly numbers, showcasing robust performance and market leadership.

Financial Highlights

CFO Babis Mazarakis reported on the financials, indicating that OTE's strategic initiatives are starting to bear fruit. The company's focus on strategic investments and market collaborations are foundational to its future growth, promising stronger financial performance in upcoming quarters.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining the OTE conference call and live webcast to present and discuss the second quarter and 6 months 2024 financial results. All participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session. [Operator instructions]. At this time, I would like to turn the conference over to Mr. Konstantinos Nebis, CEO of the Group; Mr. Babis Mazarakis, Chief Financial Officer; Mr. Panayiotis Gabrielides, Chief Marketing Officer, Consumer segment, OTE Group; and Mr. Evrikos Sarsentis, Head of IR and M&A. Mr. Nebis, you may proceed.

[Kostas Nebis, executive]

So, good morning, and warm welcome to our 2024 second quarter results call. As you might know, I have rejoined the OTE Group effectively as of the 1st of July. Having said that, I'm very familiar with OTE having spent a decade in various roles and in my tenure as Chief Commercial Officer for the Consumer segment, a position held from 2016 to 2019. For the past, slightly more than 5 years, I was the CEO of Croatian Telekom, a leading publicly traded Croatian operator and a sister company of OTE within the Deutsche Telekom Group. As I took all my responsibilities in OTE after the end of the second quarter, I would like Babis, our CFO, go over the operating and financial highlights of the period. Instead, today, I would like to spend the next few minutes to provide you with a very early outline of how I can save my new role in the group.



First and foremost, I'm extremely honored and proud to have the opportunity to oversee the next chapter in OTE's history. Together with my team, our task is to build on the existing competitive edge and brand power to nurture and develop long-term sustainable growth. On this road, our first 3 growth levers are factors that you are very well familiar with. We will pursue the significant investments OTE has been making in the past years in fiber, mobile networks and pay TV but our priority will be to accelerate the monetization of these investments. The initiatives we have announced in the past few weeks, including the fiber wholesale volume discount and pay TV content setting are representative of the directions we want to take. In fiber-to-the-home, the upcoming gigabit voucher should accelerate FTTH take-up and penetration in Greece, while the wholesale agreement on volume discounts should enable us to significantly improve the utilization of our infrastructure on a wholesale basis.



In the pay TV market, our cross-supply agreement with Nova will be instrumental in combating piracy and growing the whole market, as well as increasing tax revenues for the Greek state. This initiative serve common characteristics. They are key enablers for the development of the market in its entirety, not just for OTE, while also supporting the digitization of the country, which is critical for the society as a whole. And room for growth in these areas remain significant as Greece still lags behind many of its European peers in terms of fiber and pay TV as a percentage of broadband customers penetration.



As for mobile, our third growth lever, the numbers we are reporting today clearly show that we remain on the right track and that our more-for-more strategy is paying off. We will continue to lead the market in 5G coverage, in service quality, and in customer experience excellence. Recent Ookla and Umlaut awards attached to the superiority of our mobile network in the Greek market. Our fourth growth lever is the significant ICT pipeline we enjoy as a premier system integrator and digitization pioneer in the Greek market, driving the digitization while building long-term relationships with key public and private actors and sectors.



Fifth, we will accelerate the transformation of our operating and production model, leveraging on simplification, automation and digitization of the way we interact with our customers, as well as the way we build, run and operate our business internally. Physical channels lowered reductions, digitization of sales and service, NT and IT cloud transformation and automation, as well as legacy retirement will be critical enablers of a far more efficient operating model.



When all is said and done, our vision for the next stage in OTE's journey is to make it one of the best performing digital players in Europe, elevating Greece to the forefront of digitization in Europe, empowering and connecting our customers to enjoy better lives while fostering and inspiring for a place for our people to thrive. We have built and continue building incredibly solid foundations, and the market still provides us with lots of headroom to grow. As in most metrics, Greek penetration of advanced digital technologies remain below the level prevailing in comparable economies. We intend to take advantage of these opportunities. I believe that a far more competitive and regulatory playing field will make it possible for all parties to benefit. I'm looking forward to elaborating on our vision with you in the coming months as we fine-tune our strategic priorities and as we identify the right initiatives to deliver on our ambitions, full of optimism about what lies ahead of us. I have no doubt that OTE is today ideally positioned to continue creating value for its customers, for its shareholders and for the Greek economy and society as a whole in the coming years. And with that, I will pass on the mic to Babis for an overview of the second quarter financial performance.

[Charalampos Mazarakis, executive]

Thank you, Kosta. The key characteristic of this second quarter is that it was not a replication of the first. In Greece, revenues were once again up, high single digit on strong mobile TV, ICT and wholesale, and EBITDA was up 1.5%, in line with the Q1 increase. In Romania, top line and profitability were once again impacted by cuts in mobile termination rates and a generally challenging competitive landscape. All told, group revenues were up 7% due to the solid performance in Greece. Group adjusted EBITDA after leases was unchanged year-on-year as the resilient showing in Greece was offset by a negative contribution from Romania. As in the first quarter, Greek revenues from retail fixed services were stable compared to the year earlier level. Also, in line with earlier periods, the continuing good performance in TV and broadband was offset by the anticipated downturn in legacy voice. The TV uptrend should gain further momentum with the recent sport content pro-supply agreement that Kosta discussed.



Similarly, broadband should also accelerate next year supported by the coupon subsidizing connections of at least 250 mega bps at up to EUR 200 over 2 years. In Q2, we added 38,000 subscribers to our FTTH service, a new record, bringing the total base to 324,000. This represents a self-increase 68% from a half year level in 2023. OTE accounts for over 75% of the FTTH infrastructure in Greece. Our lead in rollout was maintained as we passed another 86,000 homes during the quarter, reaching nearly 1.5 million and well inside of our year-end 1.8 million target. FTTH utilization rate reached 24% of homes passed, up 5 points in a year. We are pleased with this performance which we view as a testament to our superiority of our solutions in terms of technology and customer services but also as one of our spare heads driving growth in coming periods.



Our total pay TV customer base was stable in the quarter, but up more than 6% year-on-year, with revenue up 7%. In addition to the cross-supply agreement, which should benefit the whole market, we expect the start of the UEFA Champions League, as well as other major Greek and international sports events to support subscriptions in the second half of this year.



Other fixed revenues rose nearly 30% in the quarter. ICT revenues continued to progress at the fast clip, up 33%, thanks to sustained demand for public and private actors for our network, IT and cloud computing services. The backlog for the second half of the year is solid, and we expect double-digit growth in this area to continue throughout the year. Wholesale revenues were up by over 12%. As in earlier periods, the increase largely reflects higher international transit. Higher-margin domestic wholesale revenues were lower as competitors increasingly rely on their own infrastructure. Recent approval of volume discounts in the FTTH should enable OTE to defend this revenue stream going forward.



Turning now to Greek Mobile, where we achieved the third consecutive quarter of significant increases in service revenues, up nearly 4%, entirely due to ARPU revenues, while visitor revenues were flat. Our more-for-more strategy relying on our super network is continuing to drive revenue growth, driving migration from prepaid to postpaid, but prepaid ARPU and revenues were also higher, propelled once again by the higher top-up values passed earlier this year that offer incremental value subscribers. We expect service revenues to continue growing at about 3% for the balance of the year. The success of our more-for-more offers and the reliability of our 5G network are also evidenced by the sharp increase in data usage, which reached 13.2 gigabytes per user per month, a year-on-year increase of nearly 28%.



I can no longer state that our 5G population coverage continued to improve since now we are very close to 100%. But what I am still saying is that we continue to climb in customer satisfaction and the recognition by outside organizations and that this should further improve as we rollout the next-generation 5G stand-alone technology. So, all in all, our Greek fit and mobile operations continue to deliver a very robust top line, and we expect this performance to be upheld in the coming quarters.



Total operating expenses, excluding depreciation and amortization and one-offs in Greece, we are up nearly 12%, growing faster than the top line once again due to the makeup of our revenue mix in the quarter. Either connection and ICT-related costs were up sharply. Conversely, structural costs remained under control, with personnel expenses down 5% in the quarter, reflecting our continuing efficiency programs. Adjusted EBITDA after leases in Greece amounted to EUR 327 million, up 1.5%, in line with the Q1 increase. As a result, EBITDA margin stood at 38.6% and remained elevated. Conditions in Romania were once again terms and revenues from our mobile operations were down 4%. Mobile service revenues declined 17% on further cuts in mobile termination rate and harsh competitive conditions. Operations in Romania were also impacted by the state tax on revenues of approximately EUR 1.3 million introduced in 2024. As a result, Romania's EBITDA was basically flat, 0 in the quarter.



Turning to the rest of the group P&L. Net financial expenses were down 16% year-on-year. As you know, our financial debt is particularly low, with no significant refinancing required in the next 2 years. Moving now to cash flow. Adjusted CapEx at EUR 156 million was down 6% in the quarter, mainly reflecting dynamic differences versus last year. We are confirming our EUR 610 million to EUR 620 million full year CapEx forecast, primarily related to the ongoing rollout of OTE's FTTH infrastructure in Greece. Free cash flow after leases was EUR 121 million, down 16% from the second quarter of last year as key parameters related to voluntary retirement schemes, which took place in the first half of 2024 versus the second half of last year. In addition, working capital needs were affected timely by the strong increase in ICT revenues. Nevertheless, we are confirming our EUR 470 million free cash flow target for the full year.



And finally, we are also confirming our 2024 shareholder remuneration guidance with a total envelope of EUR 150 million or 95% of the generated free cash flow. The cash dividend portion of this has already been paid out while we are about halfway into our EUR 153 million sale buyback program for the year. To conclude, the quarter and first half have been largely in line with our expectations and forecast and provide us with a solid platform to deliver on our full year targets and commitments. Now with Kostas and our other colleagues on the table, we are ready to take your questions. Operator?

[Operator]

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator instructions]. The first question is from the line of Patrick Maurice with Barclays.

[Maurice Patrick, analyst]

Thanks for the presentations. If I could pick up a couple of questions, please, more on the strategic side. The first one on the wholesale fiber to the home, the second one on the Nova deal. So, the first question on the fiber-to-the-home. You talk about the volume discounts being applied and getting EC permission for that. If you could provide some more clarity on that. I'm assuming the point is that to accelerate uptake from your key partners, Vodafone and Wind in your -- on your network and you on their network because it requires some discount for them to generate that. But I'd be curious to understand a bit more color in terms of how you got the EC to approve that? I always thought fiber will be a nondiscriminatory basis. So how you managed to do that? And if you could quantify the impact of the growth, that would be helpful.



The second question on the Nova deal. Just for the benefit really of myself and those who are not living in Greece, you've obviously announced the cooperation deal you talked about it combating piracy. Maybe just help us understand a bit more about what is about this deal that should reduce competition and impact private piracy?

[Kostas Nebis, executive]

Thank you, Patrick. This is Kosta speaking. Let me start with the first one around the FTTH wholesale agreement. This is an agreement that, as you mentioned, has been already approved by the European Commission as well as the local regulator recently, and we are in the final stages of formalizing the agreements with the 2 interested parties, namely Vodafone and United Group's Nova . What we have provided is discounted wholesale prices up to almost 28% at the maximum versus the nominal regulated price, subject, of course, to certain volume commitments.



We believe that this agreement will have multiple effects. First of all, it will ensure that all 3 operators will maximize the utilization of the FTTH infrastructure. But also, that means that the operators will have the incentive to migrate customers to FTTH, accelerating effectively the FTTH take-up. I would like to add that in addition to this agreement and in combination with the government provided FTTH coupons, both for in-building installation as well as the EUR 200 per customer demand expected to kick in some time in Q4 this year, we believe will benefit the subscriber moving faster from copper to the gigabit infrastructure. And of course, at the same time, contributing into the realization of the national digitization targets, needless to say, that also this secures the monetization of infrastructure going forward. This is on the wholesale deal.



Moving on to the content selling agreement. This, Patrick, I would call, is a major breakthrough in the Greek market that will unlock growth in the pay TV market after years of stagnation or, I would call it, anemic growth. For me, it is a paradigm shift and an indication of my focus on how to grow the market with everybody benefiting out of it, operators, consumers, the society and the governmental budget as we will be shifting effectively piratic users to legitimate solutions and contributing to VAT and TV taxes. In effect, what is going to happen, we will be showing Nova Sport channels, and Nova will be broadcasting our sports channels. So effectively, subscribers for a few extra euro to EUR 3 per month on top of what they currently pay for our pay TV subscription will be able to watch all the full sports menu. Just to give you a bit of an idea, before that, Greeks would have to pay EUR 50 to EUR 60 per month. So, it's a huge step down, I would say, far more affordable from a pricing perspective for them. Hence, we believe that they will have less incentive to stay on the piratic solutions, and we will be moving progressively these customers into the legitimate pay TV solutions. This is one lever of growth, I would say, the most important one. And the second one for sure is the slightly higher ARPU by topping up the current monthly access fees by EUR 2 to EUR 3 per month that will help us boost our revenues.

[Maurice Patrick, analyst]

That's very clear. Just one very small follow-up, please. Just on the wholesale deal. You talked about a 28% discount. Is the nominal rate public? I mean, can you share what that is and how that compares to the current [ULL] rate?

[Kostas Nebis, executive]

As I said, this discount is a volume-based discount here. Discount based on some specific volumes. And as I said, the maximum discount that one would get by hitting the maximum volume is up to 28% versus the regulated prices.

[Maurice Patrick, analyst]

So what is the regulated price for FTTP? Sorry for my argument.

[Kostas Nebis, executive]

It's around 12% to -- EUR 12 to EUR 13 subject to the particular product -- fiber product that you are buying.

[Operator]

The next question is from the line of Karidis John n with Deutsche Bank.

[John Karidis, analyst]

Thanks very much. Good afternoon. Good luck, Mr. Nebis. I'd like to ask 2 questions, please. One, just going back to the FTTH wholesale agreement. How would you describe the level of interest from Vodafone in this? And separately from Nova, are they sort of equally interested, do you reckon? And then, secondly, the sort of elephant in the room a little bit, I guess. Have you heard anything from the Romanian authorities about your latest attempt to try and dispose of that asset there? And how -- could you sort of describe your level of confidence of finally being able to put this issue to bed sooner rather than later?

[Kostas Nebis, executive]

Thanks for the question, John. As far as the first one is concerned, the appetite has been strong on both sides, both Vodafone and Nova. As far as Vodafone is concerned, I believe that probably this week or latest next week, we will be signing the agreement, Nova would expect a few more weeks, but I would expect both to come on board. As far as the Romanian question, I would ask Babis to take it.

[Charalampos Mazarakis, executive]

Regarding the sales process, it continues. It's in the hands of the Romanian authorities for approval. Obviously, this approval hasn't come yet, but we expect that in the next couple of months, we will have developments. And also, I can confirm that our interest to, as you said, to put it in the bed is continuing to be very strong, and this is what we are fighting for.

[John Karidis, analyst]

And sorry, may I ask, are the signals that you're getting back from the authorities positive? Are you getting any feedback on this issue?

[Charalampos Mazarakis, executive]

Well, this process is a continuous process of mainly the buyers of handling in terms of getting the questions and asking the questions. The fact that it is actively communicating with the authorities means that the process is running, and it's going, as I said, to give some signals in the next couple of months.

[Operator]

The next question comes from the line of Soni Ajay with JPMorgan.

[Ajay Soni, analyst]

Soni from JPMorgan. I just wanted to understand the benefit from the fiber coupon and FTTH wholesale discount for next year, your retail fixed services have been flat in H1. So, how should we expect that to continue for 2024? And then with the coupon and the wholesale discount coming through, should we expect a significant step up into 2025? And then my second question is just around the new -- or the potentially new PPC network. I understand there were some tests that have been ongoing within that network. So how -- do you have an update on those tests? And how do you view their build rate may be impacting your wholesale revenues?

[Kostas Nebis, executive]

Sorry. Okay. So, if I got you right, the first question is around the coupons, correct?

[Ajay Soni, analyst]

That's right. Yes.

[Kostas Nebis, executive]

Okay. So, the expectation coming from the coupons -- first of all, we're talking about 2 different coupons. One is the end building cabling coupon and the second one, which I would say is the most important one is the demand coupon, which is coming in towards the end of this year. It's EUR 200 to subsidize customers, a combination of connecting the customer but also monthly access fee, which for sure will allow us to go more aggressively after migrating customers and also increasing our ARPU by its migration, moving into the fiber-to-the-home speed. So, these coupons are offered beyond a certain speed threshold. So, we expect that the majority of the customer will be moving to 300 megabpS-plus. So, this is the whole story about the coupons.



On the second question with regards to PPC, if I got you right, I mean, they are rolling out that network. We don't have much to comment. They have not yet commercially launched any services. We understand that they are preparing themselves for that sometime towards the end of the year. But at the same time, I have to say that we have been focusing more on securing the wholesale agreements with the other 2 providers, which are more or less there. So, we will be -- they will be using our fiber infrastructure for their customers vis-a-vis their volume discounts and we'll be using their infrastructure, meaning Vodafone and United.

[Ajay Soni, analyst]

Okay. And then just a quick follow-up on the first one. So, your retail fixed has been kind of like that in H1. So, you've got this fiber coupon coming through. So, would you expect the growth to kind of step up in 2025?

[Kostas Nebis, executive]

Yes. The answer is clearly yes. This is our expectation. I mean, our fixed revenues have been stagnant throughout 2024 coming out of an even more challenging in 2023. There are a number of reasons behind this performance. To a certain extent, 2023 was also affected by the previous COVID-inflated years, which normalized during 2023, 2024 is fairly stable. We are optimistic that looking forward as a combination of both the coupons, first of all, but also the wholesale agreements, which will shift a lot of focus towards FTTH, will help us ramp up the numbers. I don't expect something material in the next 1 or 2 quarters. But as we move into 2025, and we build up the customer base, this is what we believe will translate into a better fixed service revenue performance outlook. This also adding up the TV content selling, which will allow the legal pay TV market growth will consist -- will bring together, I would say, a good momentum into our fixed service revenues, including voice broadband and TV all together.

[Operator]

The next question is from the line of Osenchugova Anna with Goldman Sachs.

[Anna Osenchugova, analyst]

I have 2. The first one will be on competition. Could you give us an update or color on competitive intensity you're seeing now in mobile and fixed? And the -- given the recent news that one of your key competitors might be sold, has these developments impacted the competitive intensity of the market already? And the second one will be on CapEx. What's your base expectation for CapEx for the next year? I guess, you previously expected around EUR 16 million -- 600 million, sorry. And in the longer-term disturbance, how do you see group CapEx evolving over the next couple of years? And what are the key moving parts there?

[Kostas Nebis, executive]

Thank you for the questions. So as far as the competitive environment is concerned, we have not seen the competitive environment intensifying further. I mean, the market is a competitive market like more, I would say, most of the European markets, but nothing which is, I don't know, depending which will make us worried. Now, with regards to the sales process, nothing to comment, we don't have any inside information. So, let's see what is going to happen in the process. As far as the CapEx is concerned, I think that my predecessor, as well as Babis have been clear on this one. We are in a heavy from a CapEx investment period, focusing on rolling out FTTH, which for us is a strategic importance and it is critical that we completed as soon as possible. So, the next 3 years, I don't expect that we will deviate from what we have been spending in this year, so slightly less than EUR 600 million, and which will allow us to complete the bulk of our FTTH rollout by the end of 2027, I would say.

[Operator]

[Operator instructions] The next question is from the line of Memisoglu Osman with Ambrosia Capital.

[Osman Memisoglu, analyst]

Just on the clarification on the wholesale agreement. So, if I heard Babis right, with these agreements, we should see an end to the decline in the high-margin bit in the third quarter and fourth quarter? That's my first question. And then on the cost side, you had another VS program. Just trying to see strategically how you're thinking about VS going forward for the rest of the year and the next couple of years? If you could give us any color there?

[Kostas Nebis, executive]

Okay. Let me take the first one on the wholesale revenue. This is Kosta speaking. So, what we said is that -- what we have been already projecting is that our wholesale revenues will be impacted over time. We're projecting a specific trajectory. What we have seen now following the new wholesale agreement is a new momentum with all operators, including our wholesalers, being incentivized to use our infrastructure. So, this is what I wanted to say. As far as the costs are concerned, I will hand over to Babis to take this one.

[Charalampos Mazarakis, executive]

Regarding the [Indiscernible], which is the main basically, let's say, for realizing the part of our efficiencies is something that we expect to continue also in the next couple of years with this visibility. Since as Kosta alluded to also, there is a continuation of the rationalization and optimization, transformation process of the company. So, therefore, this tool will be there also in the next years to support the implementation.

[Operator]

[Operator instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

[Kostas Nebis, executive]

So thank you. And together with my colleagues, I would like to thank you all for your attention, questions and for your interest in OTE. I'm looking forward to pursuing our dialogue and meeting some of you even in person in the coming quarters. I will close by saying that building on the evident strength s of the group, I'm absolutely committed to the development and success of OTE. In the meantime, we will get together again for our third quarter results in early November. Take care, and have a nice day.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.