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Edited Transcript of TNET.BR earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q3 2019 Telenet Group Holding NV Earnings Call

Mechelen Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Telenet Group Holding NV earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erik Van den Enden

Telenet Group Holding NV - CFO

* John C. Porter

Telenet Group Holding NV - CEO, MD & Director

* Rob Goyens

Telenet Group Holding NV - VP of Treasury, IR & Structured Finance

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Conference Call Participants

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* David Vagman

ING Groep N.V., Research Division - Research Analyst

* Emmanuel Carlier

Kempen & Co. N.V., Research Division - Research Analyst

* Michael Bishop

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Nicolas Cote-Colisson

HSBC, Research Division - Head of European Telecoms Equity Product, Telecoms, Media and Technology

* Paul Sidney

Crédit Suisse AG, Research Division - Research Analyst

* Roshan Vijay Ranjit

Deutsche Bank AG, Research Division - Research Analyst

* Ruben Devos

KBC Securities NV, Research Division - Senior Financial Analyst

* Stefaan Genoe

Banque Degroof Petercam S.A., Research Division - Head of Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Telenet conference call. Let me introduce John Porter, CEO; Erik Van den Enden, CFO; and Rob Goyens, VP, Treasury, Investor Relations and Structured Finance. Sir, please go ahead.

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Rob Goyens, Telenet Group Holding NV - VP of Treasury, IR & Structured Finance [2]

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Good afternoon, everyone. My name is Rob Goyens, Head of Treasury and Investor Relations at Telenet. I would like to welcome all of you to our Q3 2019 earnings webcast and conference call.

I trust you've all been able to have a look at this morning's earnings release. The release and the presentation for this call can be found in the Results section of our Investor website. As usual, we will start with John Porter, our CEO, who will walk you through some of the main strategic and operational highlights of the third quarter. Next, our CFO, Erik Van den Enden, will guide you through our quarterly financial results. And afterwards, we will open it up for Q&A.

Before we start, however, I would like to remind you that certain statements in this earnings presentation are forward-looking statements. These may include statements regarding the intent, belief or current expectations associated with the evolution of a number of variables that may influence the future growth of our business. For more details on these factors, please refer to the safe harbor disclaimer at the beginning of our presentation.

With that, let me now hand over to John.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [3]

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Thanks, Rob. Hi, everybody. It's John here. First, let me give you a quick refresh on our strategy and strategic pillars, which we outlined at our 2018 Capital Markets Day.

It's built out of 4 cornerstones, and I will highlight some of them today to illustrate how we are effectively executing on our strategy.

The first pillar refers to our continued focus on leading in terms of providing superior connectivity and platforms. I'm very proud that Telenet has recently reconfirmed its position as the fastest ISP in the Belgian market, with our new GIGA-Internet offer for the whole of Flanders and Brussels, offering data download speeds of 1 gigabit per second. We also announced the gradual rollout of the EuroDocsis 3.1 modem, the newest available standard. And finally, we rolled out over 100,000 new EOS set-top boxes offering the best enriched entertainment experience.

In the third quarter, we revamped our Internet portfolio, boosting both upstream and downstream speeds across our various tiers, including our lowest tier basic Internet product. At a sharp price point of EUR 28 including VAT, this proposition still represents one of the most attractive stand-alone broadband offers in the market today. We also introduced the new speed boost option, allowing customers to subscribe to the 1 gigabit per second product for an additional EUR 15 per month. Sales have been given a significant boost.

We have continued to be the innovation leader in B2B and are able to defend our strong position in this segment. We launched a complete portfolio called KLIK at the end of September, with a unique concept for the Belgian market. Telenet business is taking a major step in improving the personal service to all of its customers. Self-employed persons and small businesses, who have a question or problem can contact the Telenet business customer service 24/7, and a personal expert will follow the customer request from A to Z until the customer confirms this question is answered or problem is solved. The first results are very promising as Internet sales have increased by 20% since the launch of this new campaign. On top of that, we have received excellent customer feedback as our care NPS has increased by 23 points, thanks to our new highly personalized service approach.

On the residential side, we've been very active in deploying further our ecosystem approach. We expanded the WIGO family with WIGO S and WIGO home, underpinning our shift in strategy to target new identified customer segments. And more recently, we launched a smaller FMC bundle of the existing YUGO offer called YUGO S, with the same logic of addressing more digital savvy segments. Thanks to WIGO S, we were able to increase our monthly mobile cross-sell run rate by almost 20% compared to the same period last year. On a more tactical level, the launch of our student promotion for 1P, unlimited broadband at 300 megabits per second for just EUR 25 per month was absolutely unbeatable and able to boost our sales significantly. As a result, we succeeded in further increasing the ARPU per customer relationship by 4% year-on-year to EUR 57 for the first 9 months of 2019.

Finally, we just launched a fully new look and feel of our BASE brand, which is performing as well as it has since we acquired the company 4 years ago. Despite a somewhat softer operational performance in Q3 due to seasonality and temporarily higher churn due to the August rate adjustment, our core fixed mobile converged product lines, again, showed continued uptick. In Q3, we added 40,400 net FMC net adds to a total of 508,200 FMC customers, which was up 35% year-on-year, representing our best performance since Q3 2017. As a result of the continued success of our FMC bundles, we recorded yet again strong growth of our mobile postpaid customer base, adding another 42,800 customers, outperforming once again our competitors.

At Telenet, sustainability is an integral part of the company's long-term strategy and business vision. I'm therefore delighted that we have been rewarded for the seventh time as sector leader in the Dow Jones Sustainability Index in the category Global Media Sector. In that respect, we launched our brand-new #TelenetGO concept. Various initiatives are bundled under this umbrella, all of which have the same goal, ensuring that people get the best out of their technology, while at the same time, handling their screens smartly.

So with that, let me now give the floor to Erik for a deep dive into our financial and operational results.

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Erik Van den Enden, Telenet Group Holding NV - CFO [4]

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Thanks, John, and welcome, everyone, to our third quarter earnings call. Generally, we're quite pleased with the strong financial results that we achieved in the third quarter, despite the anticipated loss of the MEDIALAAN MVNO contract, which adversely impacted the full quarter. As you can see on the next slide, we achieved revenue of EUR 1.9 billion for the first 9 months of 2019. This represents an increase of 1% compared to the same period of last year, which is mainly driven by the inorganic acquisition impacts of both Nextel and De Vijver Media, as detailed in our earnings release. On a rebased basis, our top line decreased by 1.4% year-to-date, as broadly stable cable subscription revenue was more than offset by; firstly, lower wholesale revenue from the loss of the MEDIALAAN MVNO contract. Secondly, lower interconnect revenues due to the lower fixed termination rates and declining SMS volumes; and thirdly, lower usage related revenue from mobile telephony. Relative to the 2 previous quarters, the trend in our rebased revenue worsened in the third quarter, which was entirely driven by the aforementioned MVNO contract loss, resulting in revenue of EUR 649 million or minus 2% year-on-year on a rebased basis. Having said this, we are happy to see that, if you were to exclude the negative impact of the MVNO contract loss, our revenue would have been essentially flat, both within the third quarter and on a year-to-date basis.

Looking at our cost base on the next slide. Our operating expenses for the third quarter improved by just over 3% year-on-year on a rebased basis. This was predominantly driven by; firstly, EUR 6.6 million lower direct costs as higher programming costs at De Vijver Media and higher costs related to the sales of handsets were more than offset by significantly lower interconnection costs. Secondly, a 16% decline in our other indirect expenses, reflecting our continued focus on operating leverage and tight cost control. And thirdly, a 5% reduction in our staff-related expenses, which reflected a lower average headcount as compared to the same period of last year.

Let's now have a look at our adjusted EBITDA. On a reported basis, our adjusted EBITDA for the first 9 months of '19 increased over 3% year-on-year to just over EUR 1 billion, including the Nextel and De Vijver Media acquisition impacts and the application of the new IFRS 16 lease accounting standard as of the beginning of the year. On a rebased basis, our year-to-date adjusted EBITDA modestly contracted by 1% versus the same period last year. And as was the case for revenue, also year-to-date adjusted EBITDA would have essentially been flat if you were to exclude the impact of the MVNO contract loss.

In the third quarter of 2019, we delivered adjusted EBITDA of nearly EUR 360 million. This represents a 1% decrease year-on-year on a rebased basis, which marked an improvement versus the minus 2% we showed in Q2, despite the fact that the loss of the MVNO contract impacted us for the full 3 months of the quarter. Through tight cost control and our continued focus on generating positive operating leverage, we succeeded in expanding our underlying adjusted EBITDA by 150 basis points compared to last year. It now stands at just over 55% on a rebased basis. As per our full year guidance, we expect a more negative adjusted EBITDA trend in Q4 due to seasonally higher programming costs at De Vijver Media and a tougher comparison base relative to a strong fourth quarter last year.

Moving on to capital expenditure. We've succeeded in substantially reducing our investment in density as compared to last year. Our accrued CapEx reached EUR 428 million for the first 9 months of '19 and reflected the recognition of the U.K. Premier League broadcasting rights, which we successfully renewed for another 3 seasons in the first quarter. Excluding this impact and also excluding the recognition of the 2G mobile spectrum license extension in the third quarter of 2018, our accrued capital expenditures decreased double digits year-on-year, equivalent to around 21% of revenue in the period.

In the third quarter of 2019, our accrued capital expenditure was EUR 131 million, equivalent to around 20% of revenue. And as you can see in the right-hand pie chart, around 60% of our accrued CapEx for the first 9 months of 2019 were scalable and subscriber-growth related. As usual, we will continue to closely monitor our capital expenditures in order to make sure that they drive incremental returns.

Let's now zoom in into operating free cash flow, a key metric to measure operational performance and which we define as adjusted EBITDA minus accrued capital expenditures, excluding the recognition of football broadcasting rights and mobile spectrum licenses.

For the first 9 months of 2019, our operating free cash flow reached EUR 627 million, which was up a robust 16% year-on-year. Our operating free cash flow in the third quarter 2019 reached EUR 229 million, representing a strong 17% increase compared to the same period of last year. Our adjusted free cash flow reached EUR 270 million over the first 9 months of 2019, including EUR 63 million in the third quarter. This represented a 19% decrease versus the prior year period due to a couple of factors. Firstly, a EUR 56 million higher cash taxes paid. Secondly, EUR 53 million higher cash interest expenses due to higher indebtedness versus last year. And thirdly, EUR 41 million lower contribution from our vendor financing program. With that, we continue to be very well on track to deliver on our full year guidance.

Moving on to the next slide. We continue to enjoy a solid and healthy financial profile, characterized by strong liquidity and a well spread debt maturity profile. In July 2019, we redeemed 20% of our senior secured fixed rate notes due in July 2027, bearing a coupon of 4.875%. An aggregate amount of EUR 109 million was repaid, which included a EUR 3.2 million make whole premium, this repayment for the first voluntary redemption of 10% in March 2018 and was partially financed through available cash on the balance sheet and a temporary drawdown on our revolving credit facilities. Excluding the short-term debt commitments under our vendor financing program, we face no debt amortization at all prior to August 2026, with a weighted average maturity of 7.7 years and a weighted average cost of debt of around 3.6%. At the end of the third quarter, we had full access to EUR 505 million of undrawn commitments under our revolving credit facilities, which can be used for general corporate purposes and is a further add on to our liquidity profile. On top of that, our cash balance reached over EUR 82 million at the end of September, providing for a very robust liquidity profile.

Moving on to the next slide. In October 2019, we successfully issued and priced 2 term loans, the first one amounting to $220 million. And the second one, amounting to EUR 175 million. Telenet used the net proceeds of these issuances to early redeem, in full, the EUR 371 million outstanding principal amounts under the 4.875% senior secured fixed rate notes due in July 2027. Through this transaction, we expect to generate incremental cash interest savings of approximately EUR 10 million per annum as of next year and until the maturity date. In parallel, we incurred a onetime redemption costs in October 2019, which was settled through available cash on the balance sheet.

Moving on to leverage. Our net total leverage improved from 4.3x at the end of the second quarter to 4.0x at the end of the third quarter. The anticipated improvement in our net total leverage ratio was essentially driven by 2 factors. Firstly, lower gross debt outstanding following the aforementioned partial notes redemption in July; and secondly, robust consolidated annualized EBITDA performance in the third quarter.

And before opening up for Q&A, I would like to come back on our medium-term and 2019 financial outlook. And I will also update you on this morning's shareholder remuneration announcement. As you will remember, we presented our ambition to deliver sustainable profitable growth over the next 3 years at our Capital Markets Day in December of last year. Over the 2018 to 2021 period, we target a rebased operating free cash flow CAGR of 6.5% to 8%. This target excludes the recognition of football broadcasting rights, mobile spectrum licenses and also the impact of IFRS 16 on our accrued capital expenditures. Now being 3 quarters into that journey, we remain very well on track to deliver on these targets.

Having delivered a solid financial performance over the first 9 months of 2019, we feel comfortable to raise our rebased revenue outlook for the full year from around minus 2.5% to around minus 2% year-on-year. All other financial metrics remain unchanged for the full year. As per our earlier guidance, we expect a more negative adjusted EBITDA trend in Q4, due to seasonally higher programming costs at De Vijver Media and a tougher comparison base relative to a strong Q4 last year.

In 2018 and 2019, we consistently delivered on our anticipated shareholder remuneration time line. Having returned to the midpoint of our net total leverage framework, the Board of Directors has approved gross intermediate dividend of EUR 63.2 million, equivalent to EUR 0.57 per share. We intend to pay the intermediate dividend early December, pending shareholder approval, using available cash on our balance sheet. In addition, the Board will assess the final dividend in February of next year in conjunction with the release of our full year 2019 results to be paid in May next year, again, pending shareholder approval. The Board has also agreed to cancel nearly 1.2 million treasury shares. Both transactions are subject to shareholder approval and in light thereof, we will convene a general shareholders meeting on the 4th of December.

On the next slide, you can find more details on both the intermediate dividend and the partial share cancellation. Pending shareholder approval on December 4, we intend to pay the intermediate dividend on December 9, with the Telenet shares trading ex dividend as of December 5.

And with that, let me now hand back to the operator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michael Bishop from Goldman Sachs.

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Michael Bishop, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Just a couple of questions from me, please. Firstly, you reported pretty solid KPIs, as you highlighted in the presentation. So I was just wondering whether you're actually seeing any impact from the slightly higher competition and the Love Duo launch or whether your propositions are just holding up very well against that. Secondly, you're pushing B2B a lot harder, and you mentioned that, that had a 20% increase in the broadband intake. And could you just give us a bit more color on how you see the B2B opportunity progressing and what the opportunity is there, perhaps, sort of near and medium-term? And then thirdly, just on the dividend, I was wondering if you had any formula that you're using for the interim dividend and whether we should extrapolate to the full year dividend, given you've still got a bit of a wide range in terms of free cash flow payout.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [3]

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On the commercial issues, I think, as we've mentioned in the overview, we have increased the segmentation of our FMC bundles and targeting now not just families, but households with 2 SIMs, households with 1 SIM, households with more focus on television and households focused on less television. It's been our intention all along from a competitive standpoint to cover as many segments and they go deeper into segmentation this year. I'm pretty confident that between the WIGO ecosystem and the YUGO ecosystem, that we have a lot of bases covered. But one other thing we did in the quarter, which I felt was very strong was, to dial up our -- the visibility and the access to a more a la carte approach. So a good example of that is -- was the very strong offer on our stand-alone broadband, targeting more heavily the student community, but something that was promoted across our entire footprint, which was -- which is 300 megabits per second on the back of our 1 gig launch and speed boost, 300 megabits per second for EUR 25 a month. So we feel that we compete very strongly with most of the offers that are in the market, whether it's Love Duo or epic combos or these types of things. We've always felt like we need to get out there first and claim the high ground in the different segments. And then, I believe, in the quarter, we've successfully done that again. So even on the back of a rate increase, where we saw probably the least amount of volatility in our customer base that we've seen on the back of any rate increase that I've been associated with. So just sort of 1.5 points of annualized churn tick up in August, but came back very quickly.

So I mean, the commentary from our competitors is that it's early days for their dual products and stand-alone products and stuff like that. So too early to judge. But from what we're seeing, our offers are successful. And in the B2B environment, you really have to divide the B2B world into between the SOHO market, where we have -- we're pushing 50% market share, very strong. We've underpinned that in the period with KLIK, as we described. That's had a very positive effect. That's something that's very valuable to the SOHO market, which is, we call -- I call it affectionally, Service as a Service. And we think that's really going to underpin more growth in the SOHO business for us, which has been kind of flat but -- on a volume basis, but rising in terms of ARPU. And then, we also have the LE and SME market, which is getting a lot of attention right now with the integration of Nextel, launches of new services like IoT and some high-volume SIM connections with certain Nextel products. That business is going to cause our B2B revenues in that sector to be a little bit more choppy, because saw -- the ICT world is much more revenue associated with integrations and, call it, we'll work for food. I mean, we're just getting paid for a lower margin to deliver these ICT services. Now there are still substantial amount of subscription. And we're very optimistic about the directional performance of that business, but it will be a bit choppier. And in this quarter, we had less activity in that sector than we've had in the previous quarter and probably we'll have in next quarter. So that's that B2B story.

And Erik, you want to add on dividend?

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Erik Van den Enden, Telenet Group Holding NV - CFO [4]

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I think, first of all, on the dividends, I think we're very happy that we're able to start this journey and that we can do what we said last year. You will probably remember that we said that announcing first intermediate dividend was subject to us coming back to the mid-point of the range, around 4.0x. Of course, we had big shareholder disbursements last year and also in the first part of this year, EUR 600 million of the extraordinary dividend, EUR 300 million share buyback. So again, very happy to see that despite almost paying EUR 1,900 billion, we were able to deliver very, very quickly. So we're in a very good position now to have this first announcement. It is, of course, the start of a journey with the desire and the ambition to really now go to recurrent dividend streams. And this one is, of course, to be seen as the first part of the dividend that we will be paying over the 2019 cash flow. Note that the guidance on the cash flow is relatively tight, it's between EUR 380 million and EUR 400 million. We also reconfirmed that guidance today. So that will be the basis for the 50% to the 70% dividend payout. And of course, the final dividend will be announced in February when we publish our full year results. We can't be too prescriptive now on the formula in the sense that, of course, it is still, first of all, subject to Board approval and shareholder approval. And we have taken this first step now with the final dividend to come early next year. And the payment will be done in May, but it will be fully consistent with what we said before. So all in, you can count anywhere between 50% and 70% of the range.

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Operator [5]

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The next question comes from Paul Sidney from Crédit Suisse.

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Paul Sidney, Crédit Suisse AG, Research Division - Research Analyst [6]

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I'll just give 3 questions as well, please, if I can, hopefully, quite quick. Just firstly, on the revenue guidance, you obviously tightened it up a bit, saying that your top line has held up better than you expected at the beginning of the year. I was just wondering if you could give us a bit more information around that, about what has gone a bit better in terms of the revenue picture over the year? And secondly, just on the sort of fourth entrant 5G debate. We've observed recent comments from the Belgian Telecom Minister being pretty critical of the mobile operators. I just wanted to ask you whether you thought that this risk of a fourth entrant in the Belgian mobile market was still a risk, it just seems to never go away. And just lastly, building on your comments on the previous question. Do you think with different products coming to the market and, in particular, different customer behavior, different methods of watching video, do you think we should be looking at your subscriber base, both mobile and fixed, more as a whole to sort of judge your success when looking at the KPIs rather than just perhaps looking at the TV number as sort of a gauge for your overall customer numbers?

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Erik Van den Enden, Telenet Group Holding NV - CFO [7]

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Yes. Paul, Let me take the first question on the revenue. So I mean, indeed to your point, I think we -- I mean, the revenues are better-than-expected, year-to-date minus 1.4%. And as already mentioned in the deck, if you take out the MEDIALAAN effect and kind of wholesale effects, essentially flat. I think that, that comes from a couple of factors. I think, first of all, if you look at the underlying subscription revenue, I think that has been strong. In the sense that we have been able to put pricing very effectively. That, of course, is always a bit of a question, but I think, first of all, we have been able to price at inflation, and we've seen that the churn, which is always, of course, goes up a little bit, this year is very benign. So I think we are comfortable and happy on that front, which, again, plays through into the fourth quarter as well, which is the reason that we have been able to kind of improve the full year guidance. Secondly, also on the wholesale front, we had the conversion from light to full MVNO a little bit later with the wholesale players, which also gave us kind of a temporary one-off improvement. And then lastly, there's, of course, also the handset sales, which is always for all of the players a bit of a volatile element. And of course, we've had quarters where that was below expectation, but I think also, more recently, we're seeing a bit of upside from that front. So you should take it all together. It's indeed, a pretty solid performance year-to-date and also for the fourth quarter. We feel confident enough to improve the guidance from minus 2.5% to 2%.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [8]

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Yes, and Paul, I'm going to take your last question first because it is my favorite subject, which is, the way we think about our business, and the -- our customer value proposition and how we go to market. The days of using either TV or broadband as a proxy for the health of our business are well behind us. Our strategy has been, since we launched WIGO, to really move post product, as I call it, and to really have a more data-centric, platform-agnostic relationship with the consumer or, in fact, with the small business to provide an end-to-end user experience, where they see value in the overall price that we charge them. This, of course, means that the consumer trends and the -- being driven by technology, which are resulting in a value diminution of fixed line and to some extent television are really becoming less and less relevant. I think the most important thing to look at is on a net basis, you can see, we're more or less breakeven on broadband, and we are seeing cord shaving on television and fixed line. But if you -- the real underlying proxy for value is the fact that the overall customer relationships are fairly stable to growing, and the ARPU is increasing. So to have 4% ARPU in that environment is very strong. Where are -- so our underlying subscription relationship, the revenue is growing quite nicely. And the Q component of the relationship is fairly stable. So where we have the headwinds, of course, is in usage and out-of-bundle fees, which has come down dramatically over the last 4 years, along with the -- driven by consumer behavior and regulatory headwinds. But that will flatten out over time. And as an overall percentage, it is flattening out now that it's almost down to single digits in terms of our overall revenue as a percentage.

So yes, it's a long answer to your question, but we do need to think about the business in a different way. Of course, everything gets down to P times Q, and that is quite healthy, even though there is a shift between the way people not only use but value the products in their bundle.

Then your second question about the fourth entrant in 5G. I guess, there's a lot of things that our ministers and their infinite wisdom talk about. This fourth entrant thing has been going on forever. I think you got to look at more to sort of the global scene on fourth entrants, which is not particularly healthy. You're seeing a lot more 4 to 3s than you're seeing new fourth entrants. It's the -- I think the devil's in the details and where we left off with the government there were some, I wouldn't say, hurdles, but there was quite a commitment necessary from a potential fourth entrant. It was EUR 200 million or EUR 300 million before you would get to even step 1 of being able to negotiate a roaming agreement, et cetera. So I think there are -- even if the government believed that the fourth entrant will create more competition, two things have changed. One, the global market for fourth entrants sucks. Secondly, we haven't been standing still over the last few years. We now have not just several MVNOs competing with us, but we also have unlimited offers. We also have cheap and cheerful offers. We also have flanker brands, and there's not a lot of headroom for the fourth operator. 5G is just a question of when the spectrum auction will happen, probably 2021. Of course, we'll all be involved. And hopefully, between now and then, we can start to develop a more cogent business case for 5G in Belgium. It's not something we're feeling a lot of pressure or need to do today.

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Operator [9]

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The next question comes from Emmanuel Carlier from Kempen.

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Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [10]

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Three Questions. First of all, on your growth profile. So sales and EBITDA on an underlying base is flattish. I think it's a good performance. But how do you expect mid- to long-term to accelerate sales and EBITDA? So if you can just explain a bit the drivers. Secondly, on VodafoneZiggo. So if I compare the operating free cash flow margin of VodafoneZiggo with Telenet, there is a very big gap. I'm just wondering what that means, if the business would get combined. In other words, do you see a lot of synergies. And where do you see them? And then thirdly, a quick one on the mobile ARPU. So it's still down quite a lot. I know it's related to discounts and out of bundle. I'm just wondering if you could disclose how much of the ARPU still relates to out of bundle revenue.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [11]

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I'll take the first one, while Erik noodles over the other 2 questions that you have. So mid- to long-term growth in sales and EBITDA. As we continue to get a higher percentage of our customers into bundles, we do think that pricing power returns to mobile and into the bundle more generally. We have had a fair bit of success there. So clearly, we think there's upside in price, and I think we've proved it through the increase of ARPU that we've enjoyed so far this year. And that's not on the back of just raising the prices for the same stuff. It's about offering a wider range of services, a broader range of prices, but also improving the value for our customers in a number of ways that -- and services that it's still early days for. We have a very aggressive smart home platform here where we're developing flagship services, which will start to come on stream in the fourth quarter and into next year. We have a quite successful IoT platform, narrowband IoT platform, across the whole country. So it's not just getting customers to pay more for the same services. It's about getting them to opt-in for more interesting services. On a net basis, in terms of EBITDA, we still think we have opportunities on the cost side. We're moving our operating model to scaled Agile. We think that's going to make us faster to market. It's going to make us more sharp in terms of the products and services that we offer to our customers. It's coupled with a dramatic digital transformation and simplification process, which means we will do more with less systems, and we're paying less license fees and less maintenance, et cetera. So there are a lot of levers to pull. We think we've got a lot of runway ahead of us that we're quite excited about the future. You want to do the VodafoneZiggo and ARPU question?

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Erik Van den Enden, Telenet Group Holding NV - CFO [12]

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Yes, I think we talked about the logic of the combination or the rationale for that already in previous call, and I don't think many things have moved in the meantime. So -- I mean, of course, we don't have access to their data and the markets are different. So I will not really specifically comment on their margins. I think in terms of rationale for synergies, I think the classical places where you look for synergies, I guess, would also pertain to potential combination here, which means, of course, SG&A, I think exchange of best practices. I think we've been fairly successful on the B2B side, especially on the SOHO, so that is something that I think is definitely a best practice that we have and that could be levered. And then thirdly, I think if you think in terms of product development and other CapEx, of course, the more scale you have, the more efficient it becomes. And again, of course, these are all pretty generic buckets. And again, it's difficult to see from the outside in, but we do think that there is a logic for that. But again, nothing really happened over the quarter that is kind of new information on that front.

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Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [13]

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And then the mobile ARPU question?

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Erik Van den Enden, Telenet Group Holding NV - CFO [14]

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Yes. So of course, the mobile ARPU, I think, first of all, has been pretty stable. I mean, that -- of course, we've been converting, as most players in the market do, from prepaid into postpaid. Having said that, of course, you see different trends between subscription revenue and out-of-bundle revenue, where the subscription, of course, benefits from the price increases that we have done as part of the overall strategy. Out of bundle, of course, continues to decline strongly. That is a headwind that we still continue to see. And I think, broadly, I mean, it's a little bit, 80% subscription revenue, kind of 20% variable revenue. I think that is broadly the line that we see that.

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Emmanuel Carlier, Kempen & Co. N.V., Research Division - Research Analyst [15]

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And is that the more important driver of the ARPU drop versus the discount you apply on the converged offers?

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Erik Van den Enden, Telenet Group Holding NV - CFO [16]

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Yes. Definitely.

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Operator [17]

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The next question comes from Nicolas Cote-Colisson from HSBC.

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Nicolas Cote-Colisson, HSBC, Research Division - Head of European Telecoms Equity Product, Telecoms, Media and Technology [18]

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Two questions, please. The first one is on the CapEx. I understand the big picture that it will go down next year. But can you tell us a bit more about network growth, but also maintenance-related CapEx growth, now that you have the GIGA network in place? And also, how we should see DOCSIS 3.1-related CapEx in 2020. And my second question is regarding Nethys and VOO. Do you still see some possibility to step in? Or do you think the transaction is now closed? And if it is closed, what do you think about the risks that could emerge from a market dynamic point of view.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [19]

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On the CapEx, there's a lot of sort of competing factors. We have -- the 1-gig network is a denser network. So it does require a lot more hands-on, but on the other hand, all the active equipment in the network is new. So we should have a net positive effect on the maintenance side. And of course, we're not building a lot of new plant here, it's been sort of steady year-on-year, and the plants that we are building new is fiber-to-the-home. So -- but it's not a big number in the total scheme of things. So pretty stable on that front. And the fact that our large programs of the XXL, 1 gig and then the radar network are reduced.

On the DOCSIS 3.1, that -- because we have a very performant fixed network operating on 3.0, where we're getting between 500 and 700 megabits per second on a 3.0 modem, at the point of presence, we are not feeling as much pressure to move to the 3.1. The benefits of 3.1 really accrue to us as a network operator because it's much more efficient use of spectrum. But we don't need it to provide a superior user experience. We've got a lot of runway on the 3.0. So we're not going to see a lot of CapEx against migration to 3.1. We have very few legacy pre-3.0 modems left in the network. So that's the CapEx question.

Yes. Well, look, we -- it's impossible -- I've given up prognosticating anything about VOO. So I -- the only thing I know is what you know because you can read it in the paper. I don't think the game is over by any stretch of the imagination, but we'll see. Nothing surprises me anymore. I think whether that presents -- if Providence was able to close the deal with even at least Nethys in the near term, does that present a threat? I'd like to think we could make it an opportunity, so I don't see it as a particular threat. I mean, I've heard people mention, okay, well, okay, those guys will be the fourth operator and this and that. But I don't know that the capital return -- the return on capital profile fits private equity to be a fourth entrant at this stage in the evolution of the mobile world. That means, you've got to invest in 5G, it means you got to invest in new spectrum, it means you've got to compete with well-established operators, MNOs and MVNOs. I wouldn't take that on, that's for sure. So I'm not getting overly stressed about that either.

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Erik Van den Enden, Telenet Group Holding NV - CFO [20]

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Maybe just adding on to that. I think, again, of course, we don't have all the information, but I think we're very convinced that what we can offer, not only in terms of price but also in terms of investments and other criteria, I think, is significantly superior versus what Providence offers. Secondly, I think it's very clear that the whole process was flawed. So it was not a legitimate process. And I think we kind of look forward and hope that there will be a legitimate process in which we will definitely compete and take it from there.

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Operator [21]

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The next question comes from Roshan Ranjit from Deutsche Bank.

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [22]

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Great. Three, hopefully, quick ones from me. Just firstly, on your KPIs. Now, I think it's been more flat the elevated churn from the price increase. But looking into Q4, should we expect to return to residential broadband net adds growth. I think you had previously cited some installation backlog, so should we see that unwind in Q4? Secondly, you flagged the higher content costs from De Vijver Media. I think that margin is running at around 26%, 27% EBITDA margin? Or where should we think about that into Q4? And looking ahead to 2020, what is the kind of normalized margin for that business? And lastly, just on your free cash guidance. I think the guidance for the full year implies a bit of an acceleration in Q4 for the free cash. Can you just run through some of those moving parts? I think, previously, you said from a working cap perspective for the full year, we should think about a neutral balance. Anything you could add there?

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [23]

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Sure. I'll just answer the first one real quickly. The short answer is, yes. I mean, the trend has been in the 3 months in the quarter to return to positive growth as we got a little into the backlog. That was a function of the fact that we just keep -- we've had very successful campaigns in the last 60 days of the quarter. So yes, we definitely are anticipating returning to positive in broadband. On the De Vijver, the higher content. I mean, the content is not going to be higher year-on-year. But because of the nature of the broadcasting industry, which is very different from the cable industry, it's just that the profile of when -- how the programming is amortized changes from quarter to quarter. And this happens -- if you get the launch of the new season, you just have a higher content amort profile. And then De Vijver margins, do you want to take that one?

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Erik Van den Enden, Telenet Group Holding NV - CFO [24]

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What was the question?

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [25]

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The question is -- what it -- I guess, the margins we expect to be sort of flat to growing year-on-year.

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Erik Van den Enden, Telenet Group Holding NV - CFO [26]

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No, I think the margins are pretty stable. I mean, to John's point, there is very strong seasonality, especially on the probing, I think you have to -- in terms of programming costs, kind of, around 40% comes in the fourth quarter alone. But -- so it's a very seasonal business. Of course, we are -- we'll always be working to expand margins as we do across the business, but that should be relatively stable.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [27]

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And yes, on the cash movements in the fourth quarter that are going to contribute to us achieving guidance?

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Erik Van den Enden, Telenet Group Holding NV - CFO [28]

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No. So Roshan, I must confess I did not hear all of -- can you maybe just repeat the question on free cash?

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Roshan Vijay Ranjit, Deutsche Bank AG, Research Division - Research Analyst [29]

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Yes, no, sure. To reach the full year guidance, it implies quite a great acceleration in Q4. So I just want to run through some of the moving parts there. I think previously, you had said for working cap for the full year, we should think about a neutral balance. So is that still the case?

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Erik Van den Enden, Telenet Group Holding NV - CFO [30]

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Yes, so that's a good question indeed. Q3 was a little bit softer in terms of working capital, but it is entirely really kind of one-off in seasonality. So for the full year, that's absolutely right. I mean, we are very confident on reaching the full year guidance. Q3 was indeed quite outspoken. That really has to do with the fact that we had some -- actually, 1 or 2 contracts achieved a little bit between the quarters, Q2 and Q3, which saw the payments fell more in Q3? And then also just a couple of very technical things in terms of prepayment of the Premier League contracts that also -- actually, we're sitting in vendor financing last year, and that's not the case anymore this year. So again, a bit technical and really one-off. But that within the fourth quarter is going to fade out. So all in all, indeed, we do see kind of a smooth pattern for the full year in terms of working capital and feel confident on getting to the guidance. But indeed, if you look Q3 on a stand-alone basis, it is a little bit atypical.

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Operator [31]

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The next question comes from David Vagman from ING.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [32]

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So I've got a couple of questions. The first one is on the guidance. When thinking about the sales guidance, what has been holding you back, let's say, from increasing the other guidance, given that you've increased a bit the sales guidance? That's my first question. And then maybe to come back on VOO. And indeed, I think, John, that you've expressed yourselves and impressed about the VOO opportunity. Can you comment a bit about the transaction price. I have seen a few numbers being mentioned in certain interviews, if you can come back on that? And then maybe last point on, let's say, the commercial momentum in Brussels. What has been happening in Q3 compared to the start of the year? And especially given that some -- I think some discount has expired that you were offering to your Brussels customers.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [33]

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Okay. Do you want to answer the first one, Erik?

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Erik Van den Enden, Telenet Group Holding NV - CFO [34]

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Yes, I'll answer the first one. So in terms of the full year guidance, indeed, we improved on the top line, not on the EBITDA. A couple of reasons there. I think we already talked quite extensively on Q4 being a tough quarter in terms of programming costs, so not only there is seasonality in terms of programming costs for Q4 for De Vijver Media, it's always going to be much more intense. But also there, there's a little bit of a shift between Q3 and Q4, where Q3 was a little bit more benign, and we're catching up on Q4. That's the first element. Secondly, as we also already mentioned in the press release, it's -- we had a strong performance in Q4. So that presents a little bit of a tougher comp. But let's also not forget that when we set the guidance at the beginning of this year, we had not yet fully acquired DVM. So the minus 1% to the minus 2% was really set on a kind of perimeter that excluded the DVM. Then, of course, as of the 3rd of June, we have fully consolidated DVM. And again, there is a little bit more outspoken performance this year versus the full year guidance, so that has a small technical effect as well, which leaves us to kind of keep the guidance for EBITDA and the rest of the other metrics where it is.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [35]

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On the VOO opportunity and the price, yes, we did speak publicly about the indicative offer, subject to due diligence and subject to having more than a cursory knowledge of what that business is, of EUR 1 billion to EUR 1.3 billion, excluding the Brutélé component. So based on -- we have no visibility of what Providence's offer was. But based on anecdotal information, we're pretty confident that, that bid is our bid or our indicative bid is superior. Also, there's no lack of flexibility in the indicative proposal that we made. We made a lot of alternative models in terms of share of ownership, in terms of also guarantees on employment, which has been some public commentary that they were willing to take a cheaper offer from Providence because they were willing to make employment guarantees, but we were also willing to do that, the same way we did 10 years ago in [Jacabo]. So it's a model that we're very familiar with. We've done it before, and we know -- it's a business, obviously, that we know extremely well. So we are confident in our pricing strategy and the fact that we feel that we can derive, obviously, more synergies than a PE bid, gives us confidence that we would certainly be superior.

On Brussels, yes, you're correct to point out that the offers that we made in Q1 that essentially turned down -- turned around and righted the ship in Brussels are now expiring. We're working hard to retain those customers. And the retention of those customers is going reasonably well. What we're seeing is, obviously, some downgrading and some cord shaving because our offer was, no matter what you take, we had a flat price. So we are seeing churn tick up because that was a super offer that we had there before. The fact of the matter is, is that city churn, whether it's Brussels or Ghent or Antwerp or Mechelen, intercity churn is higher by a fair bit than our sort of suburban Flanders areas. And that's just something that we're going to have to contend with for some time. We have -- once again, our segmentation of strategies will start to pay off in Brussels. We need to have targeted sales channels and product solutions that, for example, appeal to the -- much more to the youth market, that also appeal to the North African market, that also -- these are challenges that we have faced in a minor way in our other cities, but we're facing in a major way in Brussels. But I say the net-net result is, we're reasonably stable, SOHO is growing -- reasonably stable on the consumer end, SOHO is growing, it's a point in time, and we'll continue to do better and better in Brussels.

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David Vagman, ING Groep N.V., Research Division - Research Analyst [36]

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And maybe just a very quick follow-up on the VOO price. When you were discussing -- talking about the EUR 1 billion to EUR 1.3 billion offer, that was excluding or including the network? Or that's basically why you gave the range?

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [37]

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That includes everything. That's an enterprise value. So that's end-to-end. But if it was to be -- we also said, yes, we're willing to buy 51% or we're willing to -- we're willing to do a Netco-Servco model. We basically said, look, just talk to us, we'll do whatever you want. And we were never able to engage. It was pretty clear that, that whole process was structured to keep us out and keep price tension out of the discussions with them.

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Operator [38]

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The next question comes from Ruben Devos from KBC Securities.

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Ruben Devos, KBC Securities NV, Research Division - Senior Financial Analyst [39]

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I've got 2 questions left. The first one relates to TADAAM. I think in the press release, you surely touched upon TADAAM, a new service that has gone live early September, I believe. I was curious whether you could share some of the early feedback you've been getting from customers? Also, it seems that the offer is still in beta testing. So it would be great to hear your thoughts on this new technology that you're introducing? And basically what your ambitions are at this stage? And then secondly, just looking at the other revenues line, I'm a bit unsure how we should model that business line going forward? I mean, it also comprises De Vijver Media next to the wholesale business, fixed and mobile, interconnection, handset sales, reminder fees and so on. So I mean, I've got some idea of how these various activities could trend going forward, but it would be helpful if you could give a rough sense of the size of the various components and maybe whether you're exploring the idea to give more granularity on the other revenues line.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [40]

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Okay. I'll take TADAAM, and let the guys decipher the other revenue line for you. So the TADAAM, it is a beta test. We have several thousand units out in the market where we have certainly get growing in confidence about the technological integrity of the offer. It's self installed. It's online-only for the billing. Typically, customers register a credit card, so it's very low touch. It's a product that we can use in other ways, where, for example, on a temporary basis, if people are moving or if we have an installation backlog and people aren't satisfied with waiting, we could get a TADAAM unit to them very quickly and put them in business. So people going on holiday, people using it in -- on the coast. So there's a lot of applications. And that's what we're learning about now. And of course, in the south, we have customers in the Mons region as well. So that's what we're learning about now, where are the segments where it's most attractive. The other thing is, of course, its scalability. So we know that -- I think everybody would concur that it's not a mass market product, but it will scale up to a certain level depending on the -- which tower site it's associated with. So we'll have to see where -- how scalable it actually is. I mean, I think the average fixed line TV customer uses like 300 gigs or something like that. So it's an important learning that we're getting there. And then the other thing is that it's kind of a -- it's a pre-5G initiative as well. Obviously, in the 5G world, fixed, mobile substitution becomes more viable. So we -- both from a competitive standpoint, but in a defensive standpoint as well, we want to come out of the box with a good product when 5G comes along. So that's the TADAAM story.

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Erik Van den Enden, Telenet Group Holding NV - CFO [41]

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So on the other revenues, Ruben, you're right. Of course, it is a bit of mixture of different elements. And there are things that are a little bit more stable there in terms of wholesale revenues, both regulated and commercial ones. I guess, this is probably a little easier to kind of modeling and predict. There's also things that, indeed, are very volatile. Interconnect revenues are very volatile. The same goes for the handset sales. I would say that the things that are typically more volatile are the ones that also have typically lower EBITDA contributions. Hence, of course, interconnect and handset sales have very low margin. So there is some volatility of this line on the top line, it is less so on the EBITDA. And I guess that's one of your guy's jobs as well to predict that. If we knew it exactly, we would be able to say exactly where we land with the fourth quarter. So that's difficult to do, but hopefully, that helps a little bit.

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Operator [42]

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The next question comes from Stefaan Genoe from Degroof Petercam.

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Stefaan Genoe, Banque Degroof Petercam S.A., Research Division - Head of Equity Research [43]

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Two follow-up questions. One on the increased segmentation you were talking about. Yourself and Proximus have reacted to the Duo offer from Orange Belgium with the Epic and YUGO offers, which both of them still include TV offer. We've seen in the Netherlands an announcement yesterday or before yesterday by T-Mobile for a EUR 50 Internet-only and mobile data only. Do you see an opportunity for this segment that, say, EUR 40, EUR 50 levels for no-frills broadband and mobile data-only offer. I think also, for example, mobile bankings have been -- has indicated to be interested in this market. That's the first question. And second, with the 1-gigabit launch that you've announced in the business segment, do you believe you could make an additional push in the business segment, thanks to this more stable increased speed offer?

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [44]

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Yes. First of all, I have to wildly object to your description of us reacting to the Love Duo because we've been out leading the market in terms of both the offers without set-top boxes without a direct connection to the television set and 2P and a la carte offers for some time now. Now we have in reaction to a more aggressive market in that space dialed it up to some degree and customized and productized it better, but we have been out in the market. And once again, I think we were out there first in front of -- well ahead of the Love Duo. But the -- I think the 2P and the 1P markets were a lot more attractive a year ago when it looked like 2 competitors that -- that to the incumbent Proximus and to ourselves that we were just focused on the 4P and the 3P market, which was never actually true. I mean, we have 0.25 million 1P customers in video. We have about 175,000 1P customers in broadband. I mean, it's not a market that we haven't been playing in for quite some time. I do think it's a growing market. It's one of the fastest-growing markets. So it's a market that needs to be served, but it is definitely not a mass market at this time. Certainly, our experience would say that television is still quite relevant. That's why in the YUGO environment, even though we're not supplying the customer with a direct connection to the TV set or giving them a user interface, that they can use through their mobile or through their tablet device, and they can flick it up onto their TV using Google Chrome or Apple or an Apple Box. So TV is -- I think the big learning there is that TV is still a lot more relevant than people think it is. In terms of the 1-gig offer, we -- that's an offer that -- it's not just to the B2B market. It's also available, obviously, to the consumer market as well in the context of speed boost. I think what makes 1 gig more interesting and more exciting in the B2B market is our entrance into more ICT services, more vertical services and more cloud-based services that can really leverage that kind of capacity. The SOHO B2B market is really classic, really needs reliability because they're using [APOS] terminals in there, and they just need to be connected to their customers. And they don't have a huge demand for super high speed. But once again, just like the -- in the consumer market with YUGO, it is a growing market, a very fast-growing market, and we think we're obviously very well positioned there. But it's still very much a niche and SOHO is, to some extent, is Internet-only. It's not a mass market.

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Operator [45]

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We have no other questions. Mr. Goyens, back to you for the conclusion.

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Rob Goyens, Telenet Group Holding NV - VP of Treasury, IR & Structured Finance [46]

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All right. Thank you, operator, and thank you, ladies and gentlemen, for having attended this call. A replay of the call, but also the transcript, will be made available on our Investor Relations website pretty soon. Would there be any follow-ups after this extensive Q&A session, Bart and I will be available for any follow-up in the next couple of days. And finally, we look forward to seeing you during one of our Investor Relations roadshows and conferences. You can find all the details on our IR calendar on the website. So thank you for joining and bye.

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John C. Porter, Telenet Group Holding NV - CEO, MD & Director [47]

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Thank you.

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Operator [48]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.