Elisa Oyj

OMXH:ELISA

Earnings Call Transcript 2018-Q3

[Vesa Sahivirta]

Good morning, everyone, and welcome to Elisa's Third Quarter 2018 Conference Call and Analyst Meeting. My name is Vesa Sahivirta. I'm Head of Investor Relations. And here together with me is again a very familiar team CEO, Veli-Matti Mattila; and CFO, Jari Kinnunen as well as some audience and my colleagues. We start this meeting with a presentation, followed by Q&A. And in Q&A, we take first questions from the audience and then from the conference call lines.I think we are ready to start, so I give the word to Veli-Matti, please.

[Veli-Matti Johannes Mattila]

Thank you, Vesa. Good morning, everybody, and welcome to our third quarter interim report review. We had another record quarter again. Our revenues stayed at the same level despite the divestments we've done during the year. We had positive impacts to the revenues for mobile and digital service businesses. Our EBITDA grew 2% during the quarter. And the businesses, I'm really delighted that both domestic and international digital services businesses, they -- their development is progressing well. And as you know, we have more than 15% of our revenue streams coming from these new digital service businesses looking -- creating good opportunities for the future. And then when we look at the telco side, mobile service revenue was growing 1%. Postpaid voice churn is slightly coming down quarter-on-quarter, almost the same level as second quarter. However, very different from the third quarter 2017.We had 8,400 more postpaid customers coming in this quarter as well as 8,000 prepaid customers. And the fixed broadband was also growing by 2,000 customers.We opened the 5G network in Helsinki as well, and we have prepared 5G readiness in 5 Finnish cities, also in Estonia in Tallinn, and we are very well prepared to provide -- or we are providing the best speeds in those cities to customers as well as we are very well prepared for the 5G era starting next year. We also upgraded our guidance.In terms of the revenues, the revenue stayed at the same level. The organic growth -- comparable growth underlying is 1% to 2%, but we had some divestments impacting the revenues. Also, the development in Estonia is -- has been positive. In the mobile service revenue side, the continued price aggressiveness in the market has led the mobile service revenue to come to 1% level. We have done up-selling, and it is clear that the appetite for faster speeds exists by customers. They are interested for buying higher-speed subscriptions. There is also willingness to pay, but again the different kind of activity in terms of the aggressive pricing is taking some toll.EBITDA grew to EUR 169 million, and the EBITDA percentages for this quarter is 37.2. Of course, the continuous improvement with the increased revenue streams from mobile side especially are improving the margins. Our ARPU stayed at the same level as in the previous quarter.If we look at the business segments, our consumer business had almost same level of revenues, but the EBITDA was growing by 5%. Digital service businesses and the Estonia business, they are contributing positively. And the traditional way, the traditional voice, fixed voice business declining the revenue and EBITDA slightly.Corporate Customer side. The revenue was growing, but in terms of the EBITDA, we saw some decline of 4%. Mobile service revenues in the mobile side, they contributed positively, but the divested businesses have impacted to the revenue as well as to EBITDA, but also we had some directional fixed businesses impacting in the normal way to the business. Additionally, we have had some further investments in our digital service businesses in the corporate customers this quarter taking some impact.We continue to execute our strategy with 3 focus areas. And in all of these focus areas, we continue to see good potential. The improving performance based on the productivity and quality-driven improvements is really a cornerstone for Elisa Oyj to develop continuously the improved profitability. We also see potential with the digital service businesses both domestically, but also more and more internationally. And we see further potential in the broadband businesses, both in the fixed side, but especially in the mobile and with the 5G coming later on.The number of smartphones continuously increasing in our network. 81% penetration at the moment, slightly going up, creating further potential for data connectivity sales. 67% of our customer base at the moment has been turning to the fixed monthly fee-based subscriptions. And at the 4G speeds, we have 64% of the customers. So there is some 36% of customer base still even below the max 50 megabit per second speed, but we see already customers moving up from max 50 to the higher speed levels. Also, our premium subscriptions being very interesting to our customers. And later on, like I said, the 5G speeds seem to create another -- layers of speed to customers later on next year and following years. And depending on the competitive situation, we are getting more or less up-selling opportunities there.Also, I want to highlight the one assessment we've asked by an international organization. EFQM is the European Foundation for Quality Management. This is another example of Elisa's proven track record, how we, with the Elisa Oyj, develop our quality and our productivity. We got the EFQM 5-star recognition for excellence, and that has been created -- or the assessment has been made by an assessment of trained international EFQM assessors, looking very widely the different capabilities we have in Elisa, also at the business results and the track record of different results we have given. And the 5-star recognition is already demonstrating -- or the organization being able to demonstrate 5-star excellence level has already pretty good development. However, this is encouraging us to further continue Elisa Oyj to improve productivity. So we have a lot of excellent feedback from here how we can further develop our operations, being more high -- with higher-quality to our customers, but also creating the productivity and profitability improvements, as we have done earlier. But this is something which is very unique at Elisa, that we have this kind of development method for continuous improvement of profitability over the years.In our portfolio of digital service businesses, in the domestic side, our entertaining -- market-leading entertaining services, they are moving ahead very well. Customer numbers are increasing, and we also bought the rent or buy feature to the service. And also, we have -- during this quarter we are -- during the fall, we are providing new original drama series like Bullets and Arctic Circle to our customers. So this is the way Elisa is bringing more and more relevant content to our customers. Our cloud-based IT with a market-leading concept of connecting -- connectivity and IT service together to B2B customers, that is also being strengthened by an acquisition of Fenix Solutions to enlarge the capabilities to operate in this new domain. In the international service development, our Elisa Videra international videoconferencing business is moving ahead very well. We, for example, got the Polycom Reseller of the Year Award of our great cooperation with Polycom, for example, but we have, of course, the platform to be very vendor and device-agnostic, providing very good videoconferencing service to large complex international organizations. And the growth is moving well with Videra.Our Elisa Automate is also moving ahead. We launched another new service within Elisa Automate Domain, a virtual network operations center, which is currently piloted outside Finland with another operator. In our Elisa IoT side, we have several customers, international customers, using Elisa's Smart Factory solutions. And we also have been rolling out globally End2End Factory Cockpit application for Fortune 100 company. So these international service businesses have very good progress and interesting future opportunities, which we also are actively looking to fuel the growth by potential bolt-on acquisitions.Finally, about our outlook. The macro environment has slightly improved. We know that in Finland we have some long-term structural challenges still remaining, and our competitive situation has remained challenging. There is maybe a slight improvement in that front, remains to be seen in the fourth quarter, which has a lot of special days for campaigns and Christmas market and so forth. It remains to be seen if these indications of slightly improved market really hold in the fourth quarter. Anyway, Elisa is competitive. We are prepared for any kind of market conditions. So we upgraded our revenue to be slightly higher than last year, and comparable EBITDA will be slightly (sic) [ higher ] than last year. Maximum 12% of CapEx is also our guidance.And now Jari, you can continue, please.

[Jari Kinnunen, CFO & Member of Executive Board]

Thank you. Let's start with profit and loss items and developments. Revenue, EUR 454 million was same as a year ago. There was, however, divestments impacting and the effect of those divestments was, to the growth rate, it was minus 1%. So underlying organic growth was 1%. And the divestment -- divested businesses, they are both in corporate and consumer segments. Approximately 1/3 in consumer segment and 2/3 in corporate segment. Excluding equipment sales and interconnection and visitor roaming, consumer segment revenue was slightly down, minus EUR 2 million, impacted by those divestments and also a negative impact from traditional fixed services, positive contribution from mobile services. Corporate customer segment, excluding equipment sales and interconnection, was growing to EUR 2 million. Negative impact from divestments and fixed services and positive impact from mobile service revenue.EBITDA was growing 2%, EUR 169 million. And margin was clearly up from last year. It was 37.2, 0.8% points increase from a year ago.EBITDA growth was 1% to EUR 110 million. Earnings per share was same at EUR 0.53 as a year ago. Earnings-wise, it was best ever quarter in the history.Estonian business continued to develop well, and revenue was growing 5%, all organic growth. EBITDA growth was high at 12%. Both mobile and fixed services contributing to growth. Churn reduced to 9% from 9.5% in Q2. Mobile postpaid base was growing 4,600. Positive impact also coming to revenue and EBITDA from the acquisitions and synergies contributing to earnings EBITDA development. So synergy estimates are unchanged of between EUR 4 million and EUR 6 million in 2019 for Starman. And Santa Monica, between EUR 4 million and EUR 5 million in 2019.CapEx was in line with guidance at 11%, EUR 49 million against the EUR 58 million last year. Consumer segment, EUR 33 million. Corporate segment, EUR 16 million. Main CapEx items in 4G network capacity and coverage increases and other network and IT investments.Cash flow was very strong in Q3 and 3 -- comparable free cash flow, EUR 85 million, 20% or EUR 40 million growth from last year, driven by lower CapEx and higher EBITDA. Also, operative cash flow clearly higher, EUR 120 million against EUR 109 million last year. Comparable year-to-date free cash flow is EUR 224 million, which is 11% higher than year ago.Then capital structure and KPIs in line and within the targets. Net debt to EBITDA reduced slightly to 1.8 from 1.9 year ago, or against second quarter. Equity ratio was 40.4%. And good earnings development and efficient capital structure clearly contributing to return ratios, return on equity 90 -- 30.9% against 29.6% last year. And return on investments at 18.4%, clearly up from 16.9% last year.Now I will give back to Vesa, please.

[Vesa Sahivirta]

Thank you, Jari. And now we move on to Q&A and start from the audience. And first question, Sami, please.

[Sami Sarkamies, Senior Analyst of TMT]

Sami Sarkamies, Nordea Markets. I have 3 questions. Firstly, we'll start with the mobile trends. Even though we did these price increases in the beginning of June, you were not able to reverse the negative trends in the mobile service revenue growth or ARPU growth. Do you see any light at the end of the tunnel? Or should we assume that there's going to be further decline in growth rates going forward?

[Veli-Matti Johannes Mattila]

As we said in the second quarter that we are not at the moment giving any guidance ourselves in regards to the mobile service revenue growth. However, as we have said, there is a demand for higher speeds. It is obvious, including the forthcoming 5G speed levels, we see clearly interest, and we believe on the demand there continuing. We see willingness to pay for higher speed levels. In regards to the price-competitive situation and the price aggressiveness in the market, we saw maybe some light in the tunnel during the third quarter. It remains to be seen how it further develops. So it remains to be seen by the competitors' activities as well. Like I said, we are very positive on the opportunity for mobile service revenue growth being a very positive value driver in the future. We're also positive on our competitiveness improving. So it remains to be seen very much how the market is also kind of developing going forward.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. And then my second question would be on margins we saw in Q3. It was quite impressive that you did grow EBITDA by 3% even though there was no top line growth. Can you elaborate on some of the reasons for this? So I mean, was this a function of costs, or let's say revenue quality? And what have you done to sort of live in this kind of low-growth environment?

[Veli-Matti Johannes Mattila]

Well, as we have been talking for many quarters, we have a Elisa way to continuously improve our productivity now also appreciated by EFQM auditors -- assessment. That's the way Elisa continues to bring productivity up. And step by step also, that is contributing to the profitability. There is no magic bullet and no cost-cutting programs we are running. We are running continuous improvement all the areas in our operations.

[Sami Sarkamies, Senior Analyst of TMT]

Okay then. Finally, on the corporate segment, it was quite clear margin contraction in Q3. You were talking about higher spending for new service businesses, also the divestments. Will you be able to quantify the impact from those things?

[Veli-Matti Johannes Mattila]

Well, clearly, the positive trend was distracted by 2 main factors. One was the divestments also eating some EBITDA from corporate business, but also we had some smaller further investments in the digital service businesses taking -- creating another kind of negative impact to the positive EBITDA development otherwise.

[Artem Beletski, Analyst]

Artem Beletski from SEB. A couple of questions from my side. The first one regarding markets. So we have seen that telemarketing has been basically the banner which was in place in the past has been expiring last summer. Did this have any implication on, let's say, market competition density in Finland and so on? And when do we expect legislation to be changed once again? And the other question is really relating to these divestments. So we mentioned that it had 1% negative impact on sales. Did those have any implications on your margins in the quarter?

[Veli-Matti Johannes Mattila]

In regards to telemarketing legislation expiring or that -- expiring, we haven't seen any major changes due to that fact. How the legislation is maybe further developed remains to be seen. There is, of course, discussion on that. We'll see. In terms of the divestments, like I said, we have had divestments of our, so like app, small business. Also, we did some call center-type of outsourcing business divestments during the year. And they had, of course, in not only revenues, but they had EBITDA -- positive EBITDA contribution that has faded away. It has created some small improvement in terms of the EBITDA margin as well, but there are not any major changes.

[Artem Beletski, Analyst]

Okay. Maybe just one follow-up from my side. Just regarding 5G. So you got basically auction completed relating to 3.5 gigahertz spectrum. Could you maybe elaborate a bit what are your plans in terms of, let's say, rolling 5G on city levels? And where do we see sort of initial applications and business cases there?

[Veli-Matti Johannes Mattila]

Well, of course, the 5G is an evolving thing. So we don't know everything that we're going to do, and neither we are telling it so much in advance, of course. But we see overall the 5G a great opportunity. Clearly, we have -- well, with the pilots, we have done, as a foreigner in Finland in many of the cases, we have learned a lot of that business. We also have built 5G-ready networks, so we are very well prepared to get to the 5G era. Of course, like any time in these new generations, the devices, handsets are very vital when we get those. So the networks will be ready -- are ready for 5G ramp-up very well. So estimations are that next year in the second half we will get 5G smartphones to the market. Then, in the first half, we have some 5G routers. What we think at the moment, that initially the main value that customers are willing to pay comes from additional speed. Additional speed tiers which customers are hungry for. With that added capacity, meaning better customer experience also for those additional speed. We believe that there's a great opportunity to get higher prices from that. Later on, we start to see, of course, the IoT bringing different kind of 5G applications. Also, the network slicing will provide another type of business opportunities, but they are coming a bit later. So our view is that more speed is very good potential business starting sometime next year.

[Kimmo Stenvall, Analyst]

It's Kimmo Stenvall from OP Corporate Bank. I have 3 questions. First, getting back to the mobile service revenue. It was up like EUR 2 million year-on-year. Is it possible to quantify how much is that from the Estonia and how much is the Finnish growth of that revenue?

[Veli-Matti Johannes Mattila]

We have not really provided those numbers separately. We can consider later on to provide that, but we have had growth in Finland as well.

[Kimmo Stenvall, Analyst]

Okay. Thank you. Then on the CapEx level, it seems to come down very heavily in Q3. Is this something like that you have -- is the year going according to plan? Or is this some kind of pullback because of the mobile service revenue growth has been a little bit sluggish this year?

[Veli-Matti Johannes Mattila]

No. The CapEx has nothing to do with the mobile service revenue with these kind of small changes in either of these 2 parameters. It just happens to be the third quarter we made some -- less investments, and the max 12% is still valid for the full year.

[Kimmo Stenvall, Analyst]

Okay. Then the third question. On your competitor Telia, who is now handling the League TV rights in Finland, we know that the League started in September. And in end of Q3, there was no change in your broadband numbers whatsoever. But has there been any visible impact on October when the season has clearly started?

[Veli-Matti Johannes Mattila]

There are many reasons for competitiveness in terms of the fixed broadband or mobile broadband, and we are very well equipped with several competitiveness factors on our side. This -- ice hockey, of course, can be one thing. But in terms of our connectivity business, we haven't seen our competitiveness to be changed or to be different. So we have been -- not seeing any -- many impacts from that to the broadband business. Of course, now the content for ice hockey is sold by Telia and the market is a bit different, but that has not been a big issue for us.

[Matti Riikonen, Financial Analyst]

Matti Riikonen, Carnegie. A couple of questions. First of all, would you be able to quantify how much of the low-end subscription price increases in mobile have contributed to your mobile service revenue growth? And yes, basically, that's my first.

[Veli-Matti Johannes Mattila]

I'm sorry, but we are not giving details on the elements or the drivers of mobile service revenue growth based on the different subscription categories. I'm sorry.

[Matti Riikonen, Financial Analyst]

Sure. Then the next one. Are you -- you basically increased your subscriber base by a small couple of thousand in Finland. Are you basically happy with the performance there? And particularly, are you happy with the cost that you have taken to prevent churn from happening?

[Veli-Matti Johannes Mattila]

Well, we are never happy for our performance. We continuously see potential for improvement. But of course, comparing to the competitors, we see that we are competitive in a very good way, but we are never happy for our situation. We want to improve all the time continuously.

[Matti Riikonen, Financial Analyst]

But are you also happy with the costs? Because it seems that the mobile service revenue is negatively impacted by the churn-prevention measures, and we basically see that in all areas. So are you basically willing to defend your market share at any cost, like it now seems? Or is there certain limit where you basically are accepting the fact that some customers are worth losing?

[Veli-Matti Johannes Mattila]

Of course, there are different kind of customers. We totally understand, and we have understanding of the value of different kind of customers, if you will. And that's, of course, very much core competencies, but also very competitive information how we deal and what we think about that. But -- so there's not too much to talk about in more detail, but there's no change for our view for how we look at this business. We want to keep our market share, and we are defending it. Sometimes, we need to defend with pricing, but we have very good competitive factors how we defend our market position. And we've seen very well that we don't need to always go to the same campaign prices as what our competitors are doing in order to protect our market position. Sometimes, we need to. And now we have maybe seen a bit more aggressive campaignings during the past 1.5 years. So it's, of course, not optimum situation. So nobody can be happy that when you see that there's demand and willingness to pay, but then there is a lot of campaign pricing around. So that's, of course, never a satisfactory situation, but that's the market economy, and we are well prepared to play in the market economy.

[Matti Riikonen, Financial Analyst]

You mentioned a bit earlier that you see some light at the end of the tunnel. What is this view based on? What do you see in the marketplace that has changed compared to, for instance, Q2? And is there any -- has it been the same during the whole quarter? Have you seen some changes at the end of the quarter? And what is kind of triggering your view to say that there's some positive light at the end of the tunnel, as you said?

[Veli-Matti Johannes Mattila]

Well, overall, during the third quarter, we have seen -- we look at it overall of all the, let's say, events that we've seen by our competition. There is a bit more positive sum of activities versus Q2. There's not a very big difference in that. Third quarter has been including a lot of, let's say, aggressive moves, but there has been some positive, let's say, events as well. And the total sum of those, if you will, is a little bit better than it was in second quarter. But like I said, these quarters come and go. What's the long-term trend really? How it does -- will look like the fourth quarter? It's very much up to other players mostly in this market than ourselves. But like -- we repeat that we see great opportunity for, let's say, up-selling with higher prices to our customers.

[Matti Riikonen, Financial Analyst]

Did the competitive environment have any impact on your slightly raised guidance? Or was it just that you had already delivered as much in the first 9 months that it was about time to basically state the obvious that you are going to improve slightly, for instance, on top line and EBITDA? Or is there any kind of competitive element easing your way to say that, "Okay. Now we can relax a bit and say that we are going to improve slightly"?

[Veli-Matti Johannes Mattila]

Competitive situation is something that always needs to be taken into account when talking about the future. Now the visibility in the middle of October, what the rest of the year will be based on, let's say, potential scenarios for competitive activity for the rest of the year and then thinking what we've done during this year already, makes us to believe that we can clearly upgrade our guidance. And we are prepared to different scenarios, however, in the competitive landscape. But like I said, these factors, all of them, needs to be taken into account. And that's the strong wheel we have at the moment for the rest of the year.

[Matti Riikonen, Financial Analyst]

All right. Thank you. Then finally, regarding 5G. Do you think that you would need the 5G capacity to offload some of the pressure in your 4G network? So is it both a kind of network optimization and capacity utilization optimization factor? Or is it just a top-up sales factor for you?

[Veli-Matti Johannes Mattila]

Not in the very near future. We don't need 5G for that. We have a very competitive mobile network, very good speeds, competitive speeds. It's -- our customers are happy. We have capacity. We have also Elisa automated tools like our self-organized network tools and others how we very competitively optimize the mobile network so that we can get best bang for our CapEx. These same capabilities we are selling to other operators at the moment in Europe. So with 4G, we can live quite well for the time being. But of course, some point in the future, 5G would be needed. However, we say that the 5G is interesting in order to really bring another level of customer experience and speed. And we believe customers are willing to pay for that.

[Unknown Executive]

We'll take the first question from the conference call lines, please.

[Operator]

And the first question is from Simon Coles from Barclays.

[Simon Alexander Arulraj Coles, Research Analyst]

Sorry to go back to the competition, but I was just wondering on the promotional discounting, have you seen that reduce in 3Q? And are the promotional prices that you're seeing there above the ARPUs that you currently record? So can we be confident that you're going to continue to grow service revenues at least more than 1% or more? And then secondly, just a quick one on synergies. You've obviously done a number of deals in the last couple of years. How -- are we seeing any of the Starman and Santa Monica synergies come through in numbers yet?

[Veli-Matti Johannes Mattila]

All right. In regards to the promotional activities, of course, during the quarter, there is already a possibility to have quite a few of those. And in some of the activities, the price levels are lower. And in the others, they are higher. One can say that with the overall look at that, we can very well increase our mobile service revenue regardless of these promotional activities. But of course, we would be much better off if we would have a bit less of those campaign pricings. In terms of the synergies, I'll let Jari to give a bit light into that.

[Jari Kinnunen, CFO & Member of Executive Board]

Yes. Regarding Estonia on -- [ during our tests ] we estimate that half of the [ surenet ] is -- has a run rate what's end of the year, end of this year. And I wish I can talk in opportunities coming next year.

[Operator]

Next question is from Andrew Lee from Goldman Sachs.

[Andrew J. Lee, Equity Analyst]

3 questions from me. Just firstly on the margin. So we've seen an increasingly -- well, we've seen a positive trend this quarter. And there's obviously a few puts and takes in that, that are temporary and also it's a seasonally better quarter. But I wonder if you can just talk about the kind of underlying trends that you're seeing. Are you starting to get more confident in your ability to get close to that 37% midterm target? What are the key factors in that or swing factors in that, that will make you more and more confident there? And then secondly the -- just in terms of the questions on the promotional activity, there have been conflicts on Q3. I just wanted to check in on the run rate information activity so far this quarter. Are you seeing the run rate of competition in terms of promotional activity improve? Any color on that will be much appreciated.

[Veli-Matti Johannes Mattila]

All right. If I continue with this promotional activity, first, run rate, I don't know exactly what do you mean with the run rate. But like I said, overall, if we look at the total amount of competitive activity in the third quarter versus the second quarter, there was some improvement in indications for it in the third quarter. It remains to be seen how it continues, but there were some improvement even if the level of competitive activity was still higher than normal. In terms of the margin development, we are continuously improving the margin as well, but also the -- what the important thing, of course, is to bring EPS improvement in order to have good development for distribution. But the underlying trends to reach 37% EBITDA margin, of course, one is to have mobile service revenue growth rate to be positive -- contributing positively. Our continuous improvement, like we have repeated, that's a machine that just provides more and more efficiency and productivity and then productivity -- and profitability improvement. Also, these synergies that Jari was explaining, they are still kicking in. And also, the way we are driving our digital service businesses has become more and more profitable. So these are the underlying drivers.

[Operator]

Next question is from Terence Tsui from Morgan Stanley.

[Terence Mun-Sion Tsui]

I had a couple of questions, please. Just firstly on M&A. Just given the slowdown in the mobile service revenue growth that you've seen in 2018, just wondered what your appetite is for future M&A, whether you're willing to let go this or whether there are any opportunities in the pipeline? And then secondly, on up-selling. I just wondered if you could share with us any statistics that you have from customers now that are currently taking your 4G all-you-can-eat data plans. How many of those customers are you succeeding in up-selling to even faster data speeds?

[Veli-Matti Johannes Mattila]

Thank you very much. We have been very active in M&A, probably the most active Finnish telecom operator in the past 4 to 5 years. We have made approximately EUR 0.5 billion worth of acquisitions. So yes, our appetite for further acquisitions exists. But like we've said earlier, we're also very disciplined for acquisitions. We like to do only acquisitions that create shareholder value. We are not just going after acquisitions for acquisition's sake with very expensive prices based on some industry trend or something like that. Nevertheless, there are, of course, only a few additional opportunities, let's say, in the telco space in Finland and Estonia, for domestic telco consolidation, which we're, of course, very interested. Those are very few -- those opportunities, but of course, if those emerge, we are interested. Then in -- on our IT business side, domestically in Estonia, we, of course, we see continuously certain opportunities, whether they will be maturing for a good opportunity for us really to be executed then, remains to be seen. Also, these new digital service businesses internationally, in all of those areas, we are also very actively monitoring the situation. And as you know, our balance sheet and our track record for acquisition, we are also a very potential acquisition initiator, if you will, in those areas as well. So the areas for acquisitions is larger for us than just the telco space, which creates a certain higher level of profitability. Sometimes, these acquisitions do happen also in the future. In regards to the up-selling, that opportunity exists and exactly the way you asked. Even if we are getting customers to the lower -- lowest level of 4G speed, we have seen already hundreds of thousands of customers to move to higher speed levels than max 50. And we, of course, have this premium, where we have Nordic and Baltic unlimited, which is not provided by all the operators. That has been very interesting. And even the highest speed levels that we have been offering, they seem to interest. So we have clear view that when the customers are getting more mature with their usage of mobile data, more and more are willing to have just the higher and higher speeds. And 5G business, like discussed earlier, we believe that it will bring another customer experience level in terms of the speed, which is very good for applications like the really high-quality videos, 4K videos, augmented reality applications and those kind of things coming gradually and so forth. And just the pure essence of speed is appreciated by customers with the business model we are running.

[Operator]

Next question is from Panu Laitinmäki from Danske Bank.

[Panu Laitinmäki, Senior Analyst]

I have 2 questions with regard the mobile growth again. The first question is that how much do you think the change in the growth rate is structural and how much driven by the competition? I mean, the 4G penetration was up by more than 10 percentage points in the past year, but ARPU was almost unchanged. So could this be a reason why there seems to be more kind of competition at the subscription bucket shares? And then the second question is related to this comment on more light at the tunnel in terms of competition. My question related to that is that, how soon would the growth trends change if, for example, there wouldn't be any under the counter offers during Q4? So how much kind of headwind do you get from the subscriptions that you have sold at a lower price in the past? And how soon could it change?

[Veli-Matti Johannes Mattila]

Okay. In terms of the mobile service revenue growth, of course, there are different kind of drivers for mobile service revenue growth, whereas the competitive situation, of course, is -- and the price competition is a very important one. In terms of the structural change, that is continuously happening, but I'm not so worried about the thing that we have, 64% of customers in the lowest level of 4G. There are a lot of customers, like I said, hundreds of thousands of customers already have moved into the next layers of the speed, and there seems to be appetite for even further on. But of course, the competition, price competition, that is impacting in different ways as well to different kind of customer segments. So that's -- but never -- as a summary, the price competitiveness with the various campaigns we have is a very important factor, whether we can capitalize the good momentum for customers' demand for higher speeds overall. It's not the only one, but it's very important. In terms of the light at the tunnel, the visibility for improved market situation, of course, depends on how much the market is improving. I mean, if I have said that light in the tunnel doesn't mean a huge change yet, but there are indications of improvement. If the indications are right and we see more improvement, it takes maybe a quarter or 2 to see them more in the numbers, but it means that we need to see a bit more than light in the tunnel, if you will.

[Operator]

Next question is from Florian Henritzi from Bank of America.

[Florian Henritzi, Research Analyst]

I also have two. So first question is around your leverage. I think on consensus estimates you gradually fall below your leverage corridor in the coming years. And I was wondering if you could again remind us how you think about additional cash distributions in order to bring your leverage back into your target range? And also, which level within your 1.5 to 2x net debt-to-EBITDA corridor you view as a sensible level for the medium term? And second question would be around your return on capital. You have again the slide in your presentation showing the returns you produce, which look very attractive and probably well ahead of your cost of capital. But I was just wondering if you could explain how sustainable you think these returns are into the future and what do you think are the key underlying drivers as you look ahead?

[Veli-Matti Johannes Mattila]

All right. The leverage question, yes, we have not made any large acquisitions in the past 12 months or so, like we've done in the previous years, so it means that our improved result is gradually bringing our leverage below our target range, 1.5 to 2x. And in the situation where we are getting below, and we have no acquisitions -- if we have no acquisitions, of course, then the extra distribution comes into play in order to keep our leverage in the range of 1.5 to 2x. Where we are kind of willing to stay in that range? Maybe somewhere in the middle. We have no problem to go a bit beyond if we would have made some extra distribution. And then plus after that, we would see some acquisitions, which would be really maturing to be good. We can well go also intermediately to -- above 2. But of course, as important as it is to have this leverage capacity, important is also to have distributable equity. And we have no problem with the distributable equity to increase our distribution going forward. That's very important to know this as well. In terms of the return on capital question, I ask Jari to give you some light into that, please.

[Jari Kinnunen, CFO & Member of Executive Board]

Yes, of course, capital returns have been high already longer time. So it's not a onetime event. And we see that it's very important that we take full benefit out of the assets that we've been investing. And you did ask some of the key elements. And of course, earnings improving constantly, so of course, one thing, but another important thing and driver is strict capital allocation policies, and they relate to CapEx policies. So we've been doing 12% many years, which is, of course, a much lower percentage than industry average, which I believe is 16%, 17%. Another important driver is acquisition policies. And as Veli-Matti mentioned earlier, really focusing on value-creative acquisitions and really taking the benefit and returns out of those investments. I hope that was...

[Operator]

[Operator Instructions] Next question is from Roman Arbuzov from JPMorgan.

[Roman Arbuzov, Analyst]

The first questions are around again sort of the competitive environment and the mobile service revenue growth outlook, but from a more medium-term perspective. And I had another question on 5G, please. So in terms of the up-selling, you mentioned those 36% of customers which have not yet taken 4G services, but do you foresee yourselves going to 100%? Or presumably, you will stop some other -- a little way below that? So what's the ultimate penetration for 4G, do you think? Is it 90%? That would be helpful. That's one. The second thing is, in terms of the up-selling of the premium packages, right, that you're saying you're seeing good demand for, I was just wondering, do you see a similar kind of up-selling rate as you have been seeing in 3G to 4G migrations in the past? So if you look at 3G to 4G, you were typically transferring, I would guess, between kind of 8% to 15% of your total customer base per year from 3G to 4G. So when it comes to the premium up-selling, if you look at the initial evidence, do you think the run rate will be similar or higher or lower? So some color on that will be very helpful. And then just the final thing on competition. Following on from the second quarter discussions on the conference call, I guess, one of the key questions last quarter was, what was the impact from -- the negative impact from competition specifically in Q2? And what was the negative impact just from promotions over the previous quarters basically building up and kind of weighed in as we got deeper into the promotional territory? So kind of now versus negative momentum. So if you -- I don't know if it's possible to provide commentary on this quarter in similar vein, but are we now in a situation where kind of the current up-selling and the current competitive momentum is working and will get you to the growth rate that you will be satisfied with, but it's just the negative inertia from previous quarters that is weighing in. And once we pass that, just as a function of time, we will automatically be through to kind of a better territory? Or do you think the current environment still needs to improve for you to see -- to see growth?

[Veli-Matti Johannes Mattila]

Thank you very much for a very specific question. If I start from the first one, the competitive environment in the medium term and how we think about the up-selling and the premium up-selling rate and so forth, the fact is that we have been focusing in our marketing and sales efforts very much in the past, even past quarter -- but I mean -- past quarters, we have been focusing very much on up-selling customers from 3G, different speeds, 3G speeds to the first 4G speed. We have not put so much effort on having customers to push them and lure them to go further to our premium packages and other packages. Of course, we have done some marketing, but we're not focused on that. And even without focus on getting customers to move further, we have got good results. So it's a bit difficult to compare how well we can move ahead. But first, one can say that we think that when we have 81% smartphone penetration, and that is increasing. In 2 years' time, we are closer to 85%, 90% smartphone penetration, there's clearly the kind of target market for getting customers to move up with mobile data. So as we have said earlier, 80% to 85% of the customer base, we believe, for sure, we can get to at least 4G level and further on. But the appetite is increasing by the customers when they use a certain level of 4G or the lowest level, and they are then moving up. So we believe there is a great potential further on. And of course, our activity for marketing and sales also is changing accordingly sometime. So overall, I cannot really exactly answer to your question the way you presented it, but the truth is that there is more activity coming also in terms of the promotions. And I mean, really, the marketing and focus on getting customers to move from the lower-level 4G speeds to higher levels and even to further 5G, that will accelerate, of course, that kind of upgrades to happen. In terms of the competitive situation and how much the mobile service revenue growth has been impacted from the negative campaign -- or campaigns in the second quarter versus the earlier quarters, of course, it's not only one quarter that is defining the mobile service revenue growth and the mobile service revenue level for going quarter. So of course, the earlier quarters also have impact into that. And if the situation starts to -- like we've seen some light in the tunnel in the third quarter, if we see more of that kind of development, of course, there is a fast -- or better possibilities to see also positive development in the mobile service revenue growth.

[Roman Arbuzov, Analyst]

Okay. Can I just ask one more thing in 5G? So with the 3.5 rollout, do you see your network densifying? And do you actually see rolling out more sites and more base stations? Or do you think you'll use existing sites? That's kind of one specific thing. And then kind of more generally as well, when it comes to CapEx, you previously have reiterated that -- I think your track record on CapEx is basically super impressive in terms of how consistent it has been. And I think you have been hinting that you see no reason for this to change going forward. But if you listen to the equipment providers, they have some compelling data to show that operators generally have been spending much less money on radio equipment over the last few years compared to kind of the cycle average, let's say. So what gives you the confidence that you won't be spending more once 5G becomes more mainstream?

[Veli-Matti Johannes Mattila]

Well, it's important that you listen in a balanced way the operators and the equipment vendors so you get the full picture, I guess. But with that note, I would say there might be also differences how operators are investing. What we do, we try to invest on time so that we are not making kind of big rollout projects when we are like running for investing everything we can for certain technology and then we have a break and we can show lower investment numbers. We have continuous capacity investments and so forth. The technologies which we are investing with the 12% CapEx investment overall, that portfolio, of course, is continuously evolving and changing. And 5G will take more role in there in the coming years. But in terms of the network sites, we don't see any need to increase network sites for 5G. We have very dense networks in the biggest cities in Finland. We have a -- if not the world's most dense, we have very close to that. So we have already very good network in order to build also the 5G capacity without adding sites. If the situation for some -- after some -- quite a few years, goes really that we need to have base station in every light bulb in the city, then maybe we need to have a bit more sites. We are well prepared for that scenario also, but it's not going to be in the next coming few years we'll see that, except maybe some very, let's say, business or company or customer-specific areas, let's say, in the harbor, for example, where an additional investment of sites are really needed. Customers are willing to pay for that improvement, which will help them in automization or something with such a great value that there is a need for very, let's say, tight investments. But they are very, I would say, company-specific cases that clearly are B2B business. And I don't think 5G will really start from that in volumes. We have certainly -- for example, we have more than 50 B2B customers with whom we are testing 5G applications in different verticals. So we have a lot of testing going on. And we have certain, let's say, views how the development will go. And like I said earlier, we believe that just the faster speed will be the first kind of driver for 5G revenues and 5G deployment. It gives opportunity to get up-selling moving both in the consumer and B2B side. Later on, we will see a different kind of other 5G applications, hopefully, which may need then in, let's say, places like harbor or airport or shopping center to have very dense networks. Having a really dense network throughout a big city, I don't think for many years we will see those kind of, let's say, business cases.

[Roman Arbuzov, Analyst]

Can I just squeeze in one last one to Jari, please? Just looking at your Slide 11, which shows your operating leverage slides with growth rates starting from revenue to EPS, we're usually used to seeing a normal pyramid rather than an inverse one like this quarter. So when do you think we'll return to the normal operating leverage picture, please?

[Jari Kinnunen, CFO & Member of Executive Board]

Well, there was in comparison years somewhat lighter depreciation that mean -- means that the comparison year figure for EBIT is some -- slightly higher than normally. So that was sort of main reason for that.

[Roman Arbuzov, Analyst]

Is this going to come back on track quite quickly, you think?

[Jari Kinnunen, CFO & Member of Executive Board]

Yes.

[Operator]

And there are currently no further questions registered, so I'll hand the call back to the speakers. Please go ahead.

[Vesa Sahivirta]

Thank you. We have one more question from the audience, and that comes from Matti Riikonen, Carnegie, please.

[Matti Riikonen, Financial Analyst]

One more to go. Regarding your churn, I was just thinking, is it fully comparable to other quarters? I mean, you have earlier said that there are elements of churn that are not related to competition. There might be discontinued subscriptions in the low-end side or other technical factors. Would you say that this quarter was fully comparable with other quarters in that respect? That includes no kind of items affecting comparability, if you may?

[Veli-Matti Johannes Mattila]

Sure. Yes. It's almost fully comparable, yes.

[Vesa Sahivirta]

All right. Thank you. I think we have used well our time. And I'll say thank you for participating in this conference call. Thank you. Bye-bye.

[Veli-Matti Johannes Mattila]

Thank you very much.