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Edited Transcript of TEL.OL earnings conference call or presentation 30-Apr-19 7:00am GMT

Q1 2019 Telenor ASA Earnings Call

Fornebu May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Telenor ASA earnings conference call or presentation Tuesday, April 30, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jørgen C. Arentz Rostrup

Telenor ASA - Executive VP & CFO

* Marianne Moe

Telenor ASA - Head of IR

* Sigve Brekke

Telenor ASA - President & CEO

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Conference Call Participants

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* Frank Maaø

DNB Markets, Research Division - Analyst

* Henriette Trondsen

Arctic Securities AS, Research Division - Research Analyst

* Henrik Herbst

Crédit Suisse AG, Research Division - Research Analyst

* Henrik Mawby

Nordea Markets, Research Division - Senior Analyst

* Nick Lyall

Societe Generale Cross Asset Research - Equity Analyst

* Peter-Kurt Nielsen

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

* Roman Arbuzov

JP Morgan Chase & Co, Research Division - Analyst

* Terence Mun-Sion Tsui

Morgan Stanley, Research Division - VP

* Ulrich Rathe

Jefferies LLC, Research Division - Senior European Telecommunications Analyst

* Usman Ghazi

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Marianne Moe, Telenor ASA - Head of IR [1]

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Good morning and welcome to the presentation of Telnor Group's Results for the First Quarter 2019. My name is Marianne Moe. I'm head of Investor Relations and I have the pleasure of guiding you through the session here today. The results will as usual be presented by our group CEO, Sigve Brekke; and group CFO, Jorgen Rostrup.

I hope you all have the presentation material available. And as usual after the session here in the auditorium, which is expected to take about 1 hour, there will also be a separate media session for media present here at Fornebu. That session will take place in the lounge in the fourth floor. [Adcoms] will take you through that session later on.

Then without much further ado, I leave the floor to Sigve for the results, highlights of the first quarter. Please, Sigve.

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Sigve Brekke, Telenor ASA - President & CEO [2]

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Thank you, Marianne Moe, and a very good morning to all of you to a beautiful spring day in Norway. In 2017, we said that we want to launch a strategy to modernize Telenor. And the Q1 results is a continuation of exactly of that. And you see in the first quarter that we have a steady performance in line with what we have planned for. Among the highlights in the quarter, I'm pleased to see a 2% subscriber and traffic growth in Norway and a 20% growth in fiber revenues also in Norway. In emerging Asia, Pakistan, Bangladesh and Myanmar, we see improvement across all our markets as data of the month continues with our customers. We see an impressive double digit growth, revenue growth in Bangladesh and Pakistan. And I'm also very pleased to see more than 1 million new subscribers in the quarter in Myanmar. And we also see now signs of revenue stabilization in our Myanmar operation.

In developed Asia, Thailand and Malaysia, the prepaid segment has been under pressure in this quarter. But we are continuing to modernize this to our operations as well to migrate prepaid customers into data-driven postpaid packages. Thailand is still impacted by transition we have seen now since last year from concession to licenses. But our network is catching up. We now have more than 15,000 base stations on air on our 2.3 megahertz spectrum. And we see that our network is now getting more competitive with our competitors, and the Net Promoter Score is showing that day by day.

The financial performance for the quarter. It's coming in, as I said, in accordance with our expectations. And it also consistent with the guiding we gave you for the full year in the last quarter. We see a flat subscriber and traffic growth, where growth in the mobile and fiber revenues are being offset by the client in the legacy -- in the fixed legacy revenues. But if we exclude Thailand, as you can see on the left hand side of this slide, the S&T revenues grew with 1.4%. Our efficiency program continues now for the third year. We started with that in 2017, took down the OpEx with 3% in '17, took down another 3% -- more than 3% in '18, and we continue with this.

This quarter, we reduced OpEx with 1%. And the efficiency is now really becoming a [via work] with Telenor -- in Telenor. The EBITDA declined 3%, but this is explained by Thailand. About half of that, it's revenues, and the other half is the rental fees we pay in Thailand to TOT on the spectrum rental. I remember that we started to pay that in April last year. So from second quarter onwards, we will then have included this also on the year-to-year comparison. If we exclude Thailand, you will see that our organic revenue grew more than 2% in this quarter. And again it's in line with the guidance, full year guidance we gave you in the last quarter.

Let me spend a little bit time on our Norwegian operation. I'm very satisfied with how the Norwegian operation is now developing. The first quarter is showing a steady progress on our efficiency, but also on our revenue renewal agenda. The S&T revenues as well as the EBITDA margin is stable, despite continued fixed reduction in the fixed legacy revenues. The growth in effectives that we have initiated, they are paying off. And it's resulting in a 2% ARPU growth, both in mobile, but also on the fixed -- now on the high speed fixed broadband. And if we exclude the impact of a lower termination fees, the mobile ARPU actually increased 3%.

The mindset that we have for our Norwegian operation is that it should be possible to continue to grow ARPU in this market on the back of having the best network and on the back of continue to launch innovative services. We have spoken before about the way we digitalize our customer journeys. This is now continuing in Norway and we are using the customer insight we get to drive personalization, to be more accurate in our market spend and also in our channel development. We also use customer insight to continue to do upselling to larger data packages.

Let me give you a couple of examples on how we are driving volume with the customer insight. 2 million customers are now using our common ID solution in Norway. With this, we can simplify the uptake and use of our own services, but also the partner services that our customers are using. And we see now that our customers more and more are using several services. And the ID login solution is then simplifying and making that more seamless for our customers. 160,000 customers are now active user of our family product. A family product is basically combine the entire family into 1 service, so that you can track the family calendar. But even more important, that we can add partners.

And we see now significant interest from partners. Like for example, Norwegian football club, Norwegian soccer association to integrate their services into this product. And the third example, is less than 2 month ago, we launched what we call Yng Goodies, which is a service for our younger segment. And again, we have bundling services here together with partners to be able to drive ARPU. I can also mention the position in our take on digitalizing the healthcare in Norway. And we are working together with local governments to provide people with health solutions digitally, so that they can stay home longer.

And we also see a potential for starting to sell managed security services. Sorry. Yes. In Norway, we also see that the -- if I had just for the business transferred from group function into Norway, the OpEx decreased by 2%. This is driven by reduction over all main cost areas, being personnel, sales, marketing and operation. And again, when we digitalized the customer journeys, we can reduce the money in the call center as for an example. We're also implementing a new project via working more agile to make bolt-on IT project and product development more efficient.

As we communicated last quarter, we are modernizing our infrastructure with the commissioning of the cover network. This is to build a future-proof fast speed quality network for our customers. I'm quite proud that innovation management team took the challenge to sunset the copper network much faster than originally planned. And as we talked about in the last quarter, our aim is then to sunset this within the coming 4 years, and then to have migrated customers over to mobile and fiber solutions. And currently, the management is, if we can use that word, speed dating with local authorities to plan for how this is going to work and to make sure that we are -- the timing of decommissioning and introduction of replacement products are coming at the same time.

This is a slide I showed you in the last quarter. It was a slide describing our 2019 priorities. It was a slide that talked about the way we are modernizing Telenor as we have talked about the last 2 years. Also talking about the way we are continuing to drive utilization of the core business, and how we are simplifying and making ourselves more efficient. In this slide, you also see that we are focusing on new growth areas, such as B2B business across our portfolio, not only in Scandinavia, and also how to return to growth in Myanmar and in Thailand.

So how are we -- I've messed up this end. How are we then trending in accordance with the priorities I explained to you? I'm pleased to see that we have made good progress on this priorities in the first quarter. In Myanmar, the competition remain tough. But the management is now executing on a strategy. And our strategy is to build the widest distribution, have competitive data network, have innovative product and services, and not least, we invest on cost. And this is paying off. As I mentioned, we are now back on the very healthy subscriber growth. And we added more than 1 million new subscribers in the quarter itself. And this is the strongest subscriber addition since the second quarter in 2016. In addition, we also see subscription and traffic growth is now showing healthy sign of stabilization.

At the headquarter, up in the right corner, we are trying to make ourselves more efficient in all areas implementing new ways of working. We have launched in this quarter an initiative to modernize the headquarter functions, to make sure that the headquarter services are in line with what the business units needs and how to drive value in both business units. And this initiative is expected to result in an OpEx saving of approximately NOK 500 million, whereby NOK 300 million affect this year and another NOK 200 million next year.

In Norway, we added a 11,000 fiber connection in this quarter, and they are now on our track to target 60,000 new fiber connections within this year. This is 50% more than what we were able to do in 2018 and as you have heard us talking about now in several quarters, our aim to speed up the rollout of fiber. This resulted then in a 20% fiber growth of revenues in this quarter. We have also launched now 5G pilot in 5 places in Norway to test out a bolt-on network but also use cases. And at the same time, we are maintaining the world's fastest network position.

And although -- down in the left corner, although still small in financial terms, we have launched IoT services in Bangladesh and Pakistan, taking learnings from Norway. This is then to support the ambition to offer advanced services and strengthen our B2B position also in Asia. We have done, over the last couple of years, constantly and step by step executed on our strategic agenda. We are focusing on modernization and value creation within 2 core markets in Asia and in South East Asia and in the Nordics. And the recent announcement where we announced that we would like to acquire 54% stake in the Finnish operator DNA fits well into that strategy. DNA is a strong player in a very attractive growth market and will complement our existing operations in the Nordic region. We expect to close this transaction during the third quarter.

With this, I'm handing over to Jorgen.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [3]

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Thank you, Sigve. Good morning, everybody. What all we do now is about modernizing Telenor, whether it is the customer journey, whether it is the way the way we work and the upskilling of people, whether it is the corporate structures or infrastructure and network. And this will continue regardless. For growth -- and these are the 3 pillars that we have used since Capital Market Day 2017, and we thought it was good to use that once again and put context into it.

For growth, we see that mobile subscription and traffic revenues increased by 1% in the quarter or 2.5% excluding DTAC. The fiber revenues in Norway grew by 20% year-on-year. And then we see subscription growth coming in with 2.3 million new subscribers, of which 1.2 million in Myanmar. The development in Myanmar is therefore solid in the quarter and we are sure it will be supportive for revenue development going forward.

The continuous focus on efficiency is yielding positive results, and the OpEx reduction is 1% if you adjust for FX. Towards the quarter, we launched a new initiative or the second initiative I should say addressing corporate function cost base. The first was done in 2017. Now we feel ready and we feel the development has continued. Our way of work has continued. Our portfolio and simplification work has delivered. And now we are ready for step 2.

It is another way to simplify the way we work, to serve the business units better and also to realize the cost ambition of 1% to 3% reduction in 2019 and in 2020. As Sigve said, we believe the annual full rate reduction in cost will be approximately NOK 500 million, of which NOK 300 million should be reached already in 2019. In addition, we are now in the progress of improving the operational model for tower infrastructure in Norway. And we evaluate right now to combine 3 infrastructure operations here, aiming to improve efficiency related to how we operate these towers. This is obviously also related to all the work we do on our total power -- tower portfolio globally.

Then the third pillar in our effort is the simplification dimension. In the quarter, we have continued to sell-down the VEON shares and we have now reduced our position to below 10% in this company. We will completely go out of VEON over time. In addition, our financial service company in Myanmar, Wave Money, has entered into new joint venture agreements which will further develop that company with partners. And we have also closed finally the sale of the bank we owned in Serbia in this quarter. Going forward, we are also then going to review a full or partial divestment of our real estate portfolio in Norway as a natural part of the modernization of the group.

We are continuing to face challenges in Thailand, but at the same time, we are pleased to see the development in Myanmar returning to subscriber growth there. And then as Sigve said, keep in mind that we still have until September before we have analyzed the effect of the price regulations in Myanmar, but these increased subscriber base will hopefully be able to offset some of the price effects in the period in between. If we dive a little bit into these numbers, we have a NOK 0.6 billion total revenue increase in the quarter, which is 2% compared to last year. This is fully explained how our -- by our favorable foreign exchange movements in relation to the Norwegian krona.

We see subs and traffic revenue increased by 1.4%, excluding Thailand, which is fully in line with our revenue guidance and expectation. If we include the Thailand, the subscription and traffic revenues remains stable as Sigve showed you. During the quarter, we see this strong subs and traffic development in Bangladesh with 14% and in Pakistan with 15%. And we are very pleased to see around 20% growth in fiber revenues in Norway coming off their intensive capital investment over the last couple of years. And then the group's growth rate in total is then under pressure somewhat from developed Asia from fixed legacy natural enough and also from Myanmar still.

Thailand, 5% reduction in customer base year-on-year and with a flattish ARPU level in the quarter. Subs and traffic is down some 6%. DTAC situation remains broadly the same as in fourth quarter. And we continue to focus on retaining these high level valuable customers. Fixed legacy declined preliminary -- primarily, sorry, in Norway, continues along the same lines basically as previous trends pulling down the group's total growth by almost 1 percentage point in the quarter.

So in other words, revenues continue to be somewhat under pressure from developed Asia, Myanmar and fixed legacy services. We are very pleased to see the solid momentum in Bangladesh and Pakistan, strong fiber revenue growth and robust performance on the mobile side in the Nordics in the quarter. Efficiency improvements continue. We have said it every quarter since 2017, it continues to be one of our priorities. It is very exciting. I can tell you to work on this as well as growing and developing the company on the top line.

In Q1, we see a OpEx reduction of NOK 111 million or 1% on an FX adjusted basis. As you can see on the right hand of the slide, this is primarily a result on a net basis of efficiency improvements within corporate functions from continuous simplification effort and structural changes across staff units. It is high value changes. It is very valuable for the group to achieve these results. It means that we are modernizing the group also from the top. And it means that we are providing better and quicker services and support for our business units. We also have overall lower cost in Sweden, in addition to the regulatory cost savings that we had talked about before in Thailand.

We see that we are able to reduce several elements. We are reducing continuously now salary and personnel cost, operation and maintenance cost is influenced and also other OpEx which are those regulatory cost savings Thailand. Then these improvements in the quarter is partly offset by higher energy cost for 2 reason. One is the larger network in both Thailand and Bangladesh. And the second is the devaluation of currency in Pakistan and Myanmar, which has led to increased fuel prices in local currency. So we know that OpEx development will vary from quarter to quarter. We continue this strong effort in order to reach 1% to 3% reduction towards 2020, and we still believe there is significant efficiency potential left in the group.

If you took a look at EBITDA development, we have a 2% growth this quarter excluding Thailand, again well aligned with our financial guiding of 1% to 3% for the year. It's based on some of the same factors that we had talked about, continuous momentum in Bangladesh, Pakistan, improved performance in other units are the key elements lifting this quarter's performance. And then it's partly offset by lower EBITDA in the Myanmar after their fourth operator entered this market last June and their price regulation changed from September.

In addition, increased prepaid competition in Malaysia in the quarter is putting pressure on both revenues and EBITDA. The negative EBITDA performance in Thailand, as Sigve said, 50-50 explained by TOT lease costs, which came as a compensation for investments and then reduced subs and traffic revenues from a challenged market position. If we include Thailand, we have a negative EBITDA growth in the quarter of 3.5%.

The net income to Telenor's equity holders this quarter ended at NOK 3.9 billion. This is NOK 1.1 billion below last year, primarily due to decrease in net financials in the quarter. This decrease is driven by higher net currency gains and also a gain on financial derivatives related to the VEON convertible bond in the first quarter last year. The decrease this quarter was also then partly offset by lower depreciations in Thailand following the end of their concession module as we have communicated before.

If you're looking at free cash flow, it was NOK 2.5 billion on level with last year. However, this quarter possibly impacted by the VEON shares of NOK 1.8 billion, partly offset by negative effects from deconsolidation of Telenor Banka and also of Wave Money in Myanmar of NOK 0.9 billion. Underlying free cash flow before these effects was therefore NOK 1.5 billion, a decrease of NOK 1.1 billion, partly due to higher income taxes, net interest paid and also slightly higher investments in Q4 '18 versus Q4 '17, therefore paid a little bit more of those CapEx programs in this quarter compared to last year.

Net debt-to-EBITDA this quarter remained approximately at the same level as previous quarter at 0.9x EBITDA. And then going forward, we will have some elements which will, all other things kept equal, lift this ratio by 0.8. Half of that, little bit more than 0.4x EBITDA, will come from ordinary dividend and share buybacks, and the other half will come from hopefully getting confirmed next week that we can buy 54% of DNA approximately 0.4 effect on the ratio.

I need to take you through an IFRS 16 course that is necessary in order to be complete in our reporting. And my chief accountant insist, and I'm happy to do so [talking]. As of 1st January 2019, the new accounting standard IFRS 16 has been implemented. This standard relates as we know to how we should treat lease agreements. We will have then for 2019 dual reporting both the new standard IFRS 16, but also the previous standards that we have been reported on is kept and maintained. This is in order to be able to give you granular and precise and good management discussions based on old accounting standard because we are not able to produce full set for '18 on the new one. This is according to the recommended practice for how to implement the standard in the same way as we did with the IFRS 15 change last year.

Under this standard, there is no longer a difference between operating lease and financial lease. Previously, as we know, operating lease was booked on a running basis on the operating expense line in the P&L with no corresponding liability on the balance sheet. So it was a P&L exercise. Under the new standard, operating lease will be treated in the same way as financial lease and you have therefore balance sheet lease liability and then costs move from operating expenditures to depreciation and to financial items.

For Telenor, the majority of our operating lease in our portfolio is related to tower rentals, and as we have also given prognoses for or estimate for, the liability increased by around NOK 25 billion, NOK 26 billion with IFRS 16 as stated also in the annual report. The effect from changes to the P&L is visible from this table here. EBITDA increased with NOK 1.2 billion in Q1, net income slightly negative. You will find lot more information in the quarter report including a [note 1]. And this is basically as we explained, we thought it would be very little net income effect. Thank you for listening.

Outlook for 2019 then is maintained. For the group, excluding the Thai operation, the performance in Q1 has been very aligned with our expectations and we are quite pleased with their total performance. We maintain our guidance therefore on an organic subscription and traffic revenue growth of 0% to 2%, and organic EBITDA growth of 1% to 3% both excluding DTAC. We also maintain CapEx excluding licenses and spectrum is in the range of NOK 16 billion to NOK 17 billion, this including DTAC. And then I believe the DTAC will hold sort of our Capital Markets Day light in June. It's the 4th of June. And they will then guide for the year, and that means that we obviously will guide with DTAC from second quarter onwards. Thanks for listening.

Let's move to Q&A.

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Questions and Answers

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Marianne Moe, Telenor ASA - Head of IR [1]

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Thank you, Jorgen. And we will have Sigve on the stage as well. So as usual, we will start the Q&A session with taking questions from the audience present here at Fornebu.

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Frank Maaø, DNB Markets, Research Division - Analyst [2]

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My name is Frank Maao of DNB. So the EBITDA guidance will face fairly significant headwinds in the third quarter due to the reversals in Pakistan and global services last year. Do you expect the group function's efficiency program to be key in countering those Q3 headwinds or tough comps? And could you give some more details as to what that program will consist of the group function's efficiency program?

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Sigve Brekke, Telenor ASA - President & CEO [3]

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Yes. We can give a little bit. We are -- we have defined how the new organization is going to look and what principles we are going to work on and how we are going to develop it further. And this has some consequences. Some activities will be reduced or changed, something will be stopped, and some people will leave Telenor. So it's a people reduction is an activity reduction. It's a scope of activity change. And going forward now is a critical period in that activity and in that project, also with challenging discussions in finding the top set of solutions.

After summer, we plan to be working in the new setup, which means that apart -- from a financial point of view, I assume that's your key interest, that a significant part of the anticipated savings for this year, the NOK 300 million, will be then reduced in the second half. Some has already obviously been taken down. So it's a gradual process. Some of the activity will be phased out only at the end of the year. So there is a mix, but it's a fair part of this is it's a fairly full half year effect of 2019.

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Marianne Moe, Telenor ASA - Head of IR [4]

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Any further questions from the audience here at Fornebu? If no further questions here, we can then open up for questions from the conference call participants.

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Operator [5]

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There is -- I will now give Peter Nielsen from ABG.

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Peter-Kurt Nielsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [6]

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Two questions, please. Firstly, could you comment a bit on how you view the competitive environment in the Norwegian market at the moment? Obviously, there has been some structural changes since last year. It does seem to have been some increased competition on the B2B market, while FMC sort of seems to be still very modest talked about in Norway. If you could comment on how you see the environment having developed, please? And also just secondly, when do you expect you will be able to give us more detail on the decommissioning of the network in Norway, please?

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Sigve Brekke, Telenor ASA - President & CEO [7]

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Yes. Yes, Peter. It's quite a funny because we get this question every quarter about the competitive intensity in Norway. And I will say that the Norwegian market is competitive, has been competitive and will be competitive. So I don't really see any change. We have that competition from Telia both on the consumer segment and also on the business segment. And we shall also see the eyes but also the MVNOs being very competitive. So I wouldn't say that there is any change in the competitive landscape in Norway.

On the fixed mobile conversion, I talked a little bit about in my intro on the way we bundle services. We bundle services in a family package. We bundled also third-party services into some of the products that we had. But there is no discounting game in the way we bundle, and I don't expect that to happen in Norwegian market going forward either. It's more bundling for the benefits of the consumers.

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Peter-Kurt Nielsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [8]

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So at this point, Sigve, you do not seem to have noticed an increased competition in B2B pricing et cetera?

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Sigve Brekke, Telenor ASA - President & CEO [9]

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No, that has been competitive all along, saw with Telia now acquiring or strengthening their B2B position. It will enable Telia also to have a more integrated way of offering services to the B2B segment. So I don't foresee this being -- the competitive landscape being very different. It has been competitive and it will remain being so. What we are focusing on, it's not -- it's also to go into some of our customers being on the public sector or on the corporate sector with more integrated solutions. So that's where our IoT play comes in. We have worked together with the government, local governments on digital health solutions, as I explained, but we also working together with the larger clients on more integrated services, even though the SMEs we are now offering cloud-based services. So the competition is kind of moving into more value-added type of services and more integrated type of service offerings.

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Peter-Kurt Nielsen, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [10]

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And the decommissioning, please?

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Sigve Brekke, Telenor ASA - President & CEO [11]

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Yes, sorry, that one. Yes, we will -- as we said in the last quarter, we will then come with more clarity on that in probably in the second quarter call. And the Norwegian team is now working on bolt, as I said, how to face or how to tie the decommissioning with also offering new type of services, but also looking at the financials of that. So in some month, we will come with more clarity on that.

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Operator [12]

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And the next caller will be Henriette Trondsen from Arctic Securities.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [13]

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Henriette Trondsen, Arctic. On Sweden first. Sweden have slightly weaker than expected revenue growth due to the B2B segments. Telia and Tele2 also highlight the competition in this segment in their Q1 results. So how do you see competition going forward here? And second question on the DNA acquisition. Did you ever evaluate the potential return of the DNA acquisition against on increasing share buybacks or dividend? And if yes, so did you look at these options?

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Sigve Brekke, Telenor ASA - President & CEO [14]

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Yes, Henriette. I think what I tried to explain also in my intro here and what Jorgen also explained when we had the conference call, when they announced the DNA. This in -- it's in the midst of our strategy. We have said all along that we would like to strengthen our own portfolio in Scandinavia now being Nordics, and then acquiring a company like DNA very well-run company in the growth markets, one of the few really growth markets left in Europe. We think what it's value creative. And we also talked about their way we are going to create some synergies there using our sourcing muscle or scale, but also on the B2B side. So of course, that was the discussion when we made that decision in the board.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [15]

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Can I?

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Sigve Brekke, Telenor ASA - President & CEO [16]

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Yes.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [17]

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I obviously fully agree. The DNA deal, we view it as slightly accretive from day 1. We also view it to be an exciting growth case that will give us several opportunities going forward. We have also and you will see being cautious and tight on synergy effects if you compare it to other deal of the last year. So we are very positive to the DNA deal. And then obviously, we have evaluated up against alternatives. We definitely share the view that the buying back share is value accretive. It's somewhat static. And even a CFO view that you cannot shrink to greatness. So we need to find a balance. We will continue to award the shareholders directly and we will continue to do move structurally which is awarding the few -- the shareholder in the future.

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Sigve Brekke, Telenor ASA - President & CEO [18]

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On your Swedish question, now when we have seen the Q1 results both from Telia, from Tele2 and from Hutch, we actually took a slight market share in the first quarter for the first time in a quite a long time. So relatively we are doing quite well in the Swedish market. But you are right. The B2B competition in Sweden is heating up. And we are now trying to take some of the learnings we have from the B2B segment in Norway including what I talked about on the integrated services or the IoT services into Sweden to see if we can be adding value in our B2B offerings.

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Operator [19]

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Next question will be from Usman Ghazi from Berenberg.

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Usman Ghazi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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I've got 2 questions please. Firstly, on these services that you're selling through partners in Norway. Just wanted to ask if you were accounting for the partner services on a gross or net basis in the ARPU? I mean gross being that you would book the entire fee and then there would be an expense for the partner in the OpEx and net obviously being that there's a net -- just a net effect is included in the ARPU. That was first question. The second question was just on these claims in Bangladesh, which look fairly worrying given the size. I was just wondering if you could give any -- your view on potential settlement, et cetera, regarding those.

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Sigve Brekke, Telenor ASA - President & CEO [21]

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We need to think about your first question. So let me answer your second question. Yes, you are right. We have an audit claim against us in Bangladesh. This is not new. This is something that we have known about for quite some time. We are absolutely disputing that claim. We think that neither the audit itself nor the content in the audit, it's right. So we have been quite clear on this and we will continue to dispute that. We expect then this to be solved in a dialogue or in the court system. So -- and it's partly industry issue also. Part of this is also claims that the competitors are having. I assume it is the answer is gross in revenues and cost. But Marianne, do you want to comment on it?

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Marianne Moe, Telenor ASA - Head of IR [22]

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That's also my understanding. So when -- if we're talking services like insurance, secure ID, et cetera, we have a revenue element and then we have a cost associated to that. So it's booked in revenue and cost lines correspondingly.

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Operator [23]

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Our next question comes from Henrik Herbst from Credit Suisse.

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Henrik Herbst, Crédit Suisse AG, Research Division - Research Analyst [24]

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I guess this question I got -- yes, is sort of tying into Usman's question. I mean you're now growing service revenues in Norway, but your EBITDA is still shrinking. I guess part of it is the cost allocation, the changing cost allocation beginning of last year, we've allocated central cost out to Norway. So can you maybe talk a little bit about the, what EBITDA -- if you would have reported positive EBITDA growth ex- (inaudible)? And then also on the -- if you can give any color on the margin on those partner revenues that has been most of us asking about. Then also I didn't really understand your points on the tower. So you're looking to about consolidating tower portfolios in Norway or, sorry, I didn't get that point.

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Sigve Brekke, Telenor ASA - President & CEO [25]

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Yes. So on towers. What we said last quarter was that we are going through now the complete tower portfolio that we have in the company. This is to have a review of it, how do we operate it today and what do we want to do going forward. We also made a point at that time that we have very different models fit for markets, fit for local markets in our portfolio. So we don't have one way of handling our towers and operating our towers by choice because the market is already different, and we are basically today -- within all kind of setups, we have towers that we are only using ourselves. We have towers that we are sharing. We are in tower JVs. We are borrowing space on other's towers. You have every model within our portfolio. We have a review of that and will discuss that with you and make decisions as we go along. You should expect an industrial type of development on this. We think that tower is an important part of our Telco business and of our total infrastructure.

That being said in Norway, we have for various reasons, also historic reasons, 3 individual or 3 separate operational environments and companies on the tower side. A natural next step we believe is to emerge or bundle those environments together into one environment on the tower side in Norway. It is not decided yet. But I just wanted to make a comment of it so that you can know where we are because also we will start to have those discussions and take those decisions internally now. And it's good to share it.

On your Norway issue. Yes, we as I said, if you adjust for the transfer of the costs from group to Norway and you have an OpEx reduction in Norway for this quarter as well. And yes, we are going to continue with our digitalization journey in Norway, digitalizing the core business being customer part of it or being the IT or infrastructure part of it. So the efficiency focus in Norway is going to continue. At the same time, we are happy to see now that we have a 2% S&T growth in Norway. So I don't want to commit more on the margins going forward. When it comes to the partner services, I don't have any details on that either, but you could follow up with Marianne or I on later. But take 2 examples.

One example of the family package I talked about. In the family package, we are working together with the Soccer Association of Norway where we basically are integrated the soccer practice into the family calendar. So there is a one-stop calendar for all the family members, also then taking in the soccer practice in the calendar. It's not a paid service, but it still enable us to then get families to join their family package and with that get family members to join Telenor and also of course a churn reduction. Another example is on the Yng Goodies where we are offering a VG+, also their biggest newspaper in Norway, their subscription services into that offerings, again to give goodies or extra benefits to the customers that are enjoying that service. So those type of service offerings we are using to drive ARPU, but also to reduce churn.

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Marianne Moe, Telenor ASA - Head of IR [26]

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Yes. One just to add to that. When it comes to additional services on top of the connectivity in Norway, we don't have the absolute revenue numbers to share with you. But it actually contributes positively to the ARPU this quarter with the NOK 3. So on the other hand, we have a lower top up revenues of NOK 4. So it's a different effects. By the way, I am also being a bit corrected on the previous questions on how we book revenues. There is -- when it comes to the insurance services in the SWAP program, that's booked net. For others, I believe the comment was still correct.

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Operator [27]

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I will now give you Ulrich Rathe from Jefferies.

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [28]

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So my first question is on these comment on the real estate portfolio in Norway. Could you -- I understand this is a work in progress, so you probably won't to sort of then talk what exactly you're going to do. But in terms of just giving us a sense of the scale of this, what is the value you have and where is this going?

Second question is on Pakistan has a comment that the network taxes are now likely to be reinstated. The telecom's tax is now likely to be reinstated. Can you comment whether there's a scenario where they come out better or indeed worse than they were before they were removed? And the last question is on the sort of this reallocation of central cost to Norway. Could you comment a bit on the rationale for doing this? That will be interesting.

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Sigve Brekke, Telenor ASA - President & CEO [29]

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For doing what? The last question, for doing?

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [30]

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For moving the central cost into Norway partially…

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Sigve Brekke, Telenor ASA - President & CEO [31]

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Okay. For the Pakistan, you want to do, start with Pakistan?

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [32]

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Yes, I can do Pakistan. Now those -- the new tax regulation is very similar to the ones that we used to have that was removed. So this is something we have anticipated. And we hope or plan to pass on most of these taxes to the consumers, but it's yet a little bit too early to say what type of effect that will have on the growth that we have now seen in this quarter.

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Sigve Brekke, Telenor ASA - President & CEO [33]

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Let me take the allocation first and let's start one notch up. We have talked several quarters about the fact that the savings for the business units needs also to be seen in light of the fact that they have taken on board more costs from the central unit over time and in particular in 2018. This is related to both a better distribution of cost following new principals. It's tax related in a positive way. Make sure that where the service is consumed is actually participating in taking that cost. And it is also, as I have said a couple of times, a good discipline in it that the users are paying for it because then they can participate in the discussion of whether they want to service or not. So it's a good also discipline in everything we do.

When it comes to the particularities in Norway, this is partly the reason then and it's also another reason for Norway. We have just at times looked at the granular level, small units, small things we are carrying out. Is it a group activity to be taken care of or is this something that should be in Norway? We are sitting next door to each other. And these movements back and forth, when we take decisions, we'll also have -- we shift cost from one place to the other. So the key element is the first one, we have systematically moved out more cost to let the user pay while the corpus center at the same time has been more increasingly efficient, and that's why you see such a large change in the cost base on group. It's these 2 effects together and you shouldn't underestimate the value of putting them together.

Then real estate. No, we are not going to say very much more actually. We have in Norwegian context a large real estate portfolio, I think it's fair to say. But it can be small in a global context, but in a Norwegian context, it's large. We have less use of that today than we had previously. And this is also related to both a shift in technology and a shift in way of work and how we operate regional units and so on and so forth. So this goes a little bit in hand in hand also with the copper development, and also somewhat actually with the tower discussions that we're carrying out in Norway. These things are somewhat related, and we are now evaluating partly or full exit out of this portfolio. We will of course come back with more information when we make our decisions.

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Operator [34]

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The next caller will be Roman Arbuzov from JPMorgan.

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Roman Arbuzov, JP Morgan Chase & Co, Research Division - Analyst [35]

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I had 2 questions please. The first one is on Malaysia. You have mentioned increased competition in prepaid, but I was wondering if you could elaborate a little bit on the trends in the market in terms of who is driving the competition and whether you're responding and what are the prospects for a turnaround late in the year? That would be very helpful. And then secondly, you've mentioned 5G used cases in Norway and the pilot rollouts as well. I was wondering if you could just give us some examples of those use cases and also just talk us through if you've reached any initial conclusions perhaps on 5G monetization.

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Sigve Brekke, Telenor ASA - President & CEO [36]

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Yes. Let me take Malaysia first. I think U Mobile, the smallest operator, is the most aggressive one driving the unlimited data offers on prepaid and that has impacted the entire industry. However, we see now that more and more prepaid customers are getting out of that tactical price sensitive segment and migrating into postpaid. So we are continuing then to build our -- the postpaid base. That's partly a distribution game. That's partly a brand game, but it's also offering more type of postpaid services. So we are doing quite well on postpaid. The first quarter was tougher on prepaid than we expected. However, we are still guiding that the year-on-year revenue growth should be flattish or stable. So we expect then that the coming 3 quarters, you will see a better performance also in prepaid. So it's the unlimited data and it is especially on the migrant segment in Malaysia.

On 5G, I think the most important use case right now is actually to test out 5G as a placement product for fiber of the fixed mobile product. We're testing that on several places, both we're actually doing that in 4G as well. We are also testing it out with autonomous ferry in Trondheim. It's to see if 5G can be operated there. We are testing it out with the fish farm also up in Trondheim. We are testing it out with the medical sector, the emergency services. It's still too early to say which one of this type of tests will be done possible to monetize. We need some more for month on that. And I think that we want to continue not to run these 3 pilots that we have until the end of the year, and then see how this can be taken into commercial offer during 2020.

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Marianne Moe, Telenor ASA - Head of IR [37]

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I believe we still have 3 to 4 callers waiting in the line. May I ask you to limit yourself to 1 question and maybe 1 follow-up please?

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Operator [38]

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We have Terence Tsui from Morgan Stanley.

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Terence Mun-Sion Tsui, Morgan Stanley, Research Division - VP [39]

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I had a question on the VEON slowdown. Maybe you can just spend a few moments recapping the details of the exchangeable bond please. I'm just interested because you obviously own some shares in VEON to help cover the exchangeable bond.

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [40]

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Yes. We have the option to repay the bond which is due in September either by cash or by VEON shares. And then there are certain thresholds for the value of those shares in such a payback, in such a transaction where Telenor within a certain threshold will sit with a gain, so to say, and a bondholder outside these thresholds will sit with an upside or be compensated. All these was detailed out when we launched it and the information is available. I don't want to speculate on what we are doing related to this. We will come back to that when we are ready.

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Operator [41]

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We have Nick Lyall from Societe Generale.

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Nick Lyall, Societe Generale Cross Asset Research - Equity Analyst [42]

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It's Nick with Soc Gen. Could I just ask one on Thailand please, guys? I mean the numbers still seem very, very weak in DTAC. There's no sign of an improvement in subs and the ARPU is slipping faster now. So what makes you confident you can still reach gross for the full year given the first quarter looks very poor?

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Sigve Brekke, Telenor ASA - President & CEO [43]

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Well, I wouldn't say that the numbers looks very, very weak. They are not as we expected. And it takes time to build up the new network. And remember that we have been through a tremendous network transition, migrating the network into new type of spectrums. However, we now see that that's catching up and it's giving a good competitive network offers for the customers that are now starting to use especially our 2.3 megahertz spectrum. We have never said that the year-on-year will return to positive. But during the second half, we should return to positive growth in Thailand.

We see now that the customers that are now living in areas where we have upgraded the network with a 15,000 base stations, we have one 2.3, are not staying with us. And we see that we are able to continue also to migrate prepaid customers into postpaid customers, the same thing we have been doing the last year. So I will say that we are not giving more guidings on this. And as Jorgen said, there will be a Capital Markets Day for DTAC in June. But the overall target we have here is to return to growth during the second half when our network then it's on a competitive level.

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Operator [44]

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We'll take the next question from Henrik Mawby from Nordea.

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Henrik Mawby, Nordea Markets, Research Division - Senior Analyst [45]

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Coming to Sweden, trends are looking pretty weak there and ARPU dropped around 2%, 3% in local currency in both postpaid and prepaid. You are highlighting the pressure in B2B as big factor explaining this. But how did B2C develop in the quarter and can you please elaborate on how you view the competitive environment in B2C Sweden? And secondly, on that note, you have been showing fairly strong subscriber trends in the past 3 quarters in postpaid, but how much of that is machine to machine?

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Sigve Brekke, Telenor ASA - President & CEO [46]

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No, it's not a lot of machine to machine, if that was your question. It's real consumers. As I said, the Swedish market is competitive. I think we are doing fairly well on the consumer segment. And as I also said, we are taking -- slightly taking some market share there. It's on the business side that we now are facing competitor -- competition and so is the rest of the industry as well. Yes. So I think we have not put in plans -- put plans in action to be competitive on especially the consumer segment, but yes, repeating myself on the business segment also trying to add more value added services and avoid only being competing on price.

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Operator [47]

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We'll take the last question from Usman Ghazi from Berenberg.

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Usman Ghazi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [48]

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Just on Malaysia, I just wanted to clarify that when I look at the Digi presentation, it seems to me that the bulk of the revenue loss, so this 5% subscription and traffic revenue loss, is coming from an IFRS 15 accounting effect where Digi moved to leasing handsets rather than subsidizing and that is causing an unwind in the mobile ARPU. I mean the impact of the prepaid competition seems to be much less by at around 1.8% revenue decline, so similar to Q4 last year. But this removal of the handset ARPU and the service revenues, that's what's causing the bulk of the impact. At least that's from Digi's presentation. So I just want to understand when Telenor is presenting the service revenue decline at 5% to 6%, I mean is it putting the accounting effect in the service revenues or am I missing something?

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Jørgen C. Arentz Rostrup, Telenor ASA - Executive VP & CFO [49]

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Well, there is an accounting effect as well, but we need to come back to you there. I don't believe this is -- the bulk is the accounting effect. I think there is a significant increased effect from the prepaid subs and traffic in itself. And that is the -- it's not bulk. I will not put a characteristic on it, but it's a significant effect from that. And that is a larger effect from that in this quarter and we expect that to be different in the following quarter. So we expect this combined with continued uptick in the postpaid to bring us to flat development year-on-year at the year-end. So year-on-year we believe will be flat.

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Marianne Moe, Telenor ASA - Head of IR [50]

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Okay. And that was the final caller today. And it also ends the session here. Thank you very much for attending this presentation. And for those of you who didn't get through or had follow-ups -- I believe we got through with all questions. But if you have any follow-ups, please don't hesitate to contact Investor Relations.

For media present here at Fornebu, as I said at the beginning of the session, there will now be an opportunity to ask questions to Sigve and Jorgen I believe and also Petter-Borre, Head of Norway. And my colleagues in [comps] will take you to the room where that session will take place, the fourth floor. Thank you all.