CEO comment Q2 2022
“Our half year results show continued strong momentum as we deliver on our plan to create a Better Telia, even as the world around us is in flux. The core telco business delivered another strong quarter with 4.3% EBITDA growth, on the back of better next generation networks, better digital services and a revenue base increasingly detached from copper legacy as we continue to modernize our infrastructure. With digitalization accelerating at pace, and the need for more secure and reliable connectivity more crucial than ever, our essential role in society has never been clearer. Ensuring that our customers can stay connected, informed, entertained, and enabled spurs our purpose to Reinvent Better Connected Living every day.
Execution momentum continued across our strategic priorities during the quarter. In line with Inspiring customers we are leveraging our innovation and digital infrastructure in the Enterprise segment to lead the market in advanced 5G applications, including Enterprise Mobile Networks (EMNs) and enhanced security services. In the Consumer segment, Telia Sweden launched Trygghetspaketet, a best-in-class digital security package supporting families online, while in Norway evidence of our improved customer experience was recognized with our OneCall brand receiving awards both for the Most Satisfied Customers and for the Best Customer Service in two nation-wide customer surveys. And, we have strengthened our convergent content aggregator position with the launch of even more bundles, building on content from C More, HBO, Britbox, TV 2 and Viaplay, for both mobile and fixed streaming in Sweden and Norway.
Within our Connecting everyone priority we are proud of our leading role in 5G. Having accelerated our roll-out, we are now reaching 49% of the population in our footprint, led by Norway and Finland at 70%. Testament to our ability to be a trusted and innovative connectivity partner to the most discerning customers is our new contract with the Norwegian armed forces to collaborate around the development of tactical private 5G networks. In the growing market for EMNs we are proud to have been chosen by Posiva Oy In Eurajoki, Finland, to build a 5G private network for the first-of-its-kind nuclear waste disposal facility, enabling an advanced automation system and improved safety for employees, and by forestry company SCA to supply a dedicated network for its factory in Munksund, Sweden. Our strategy to crystallize infrastructure asset value also continues with the closing of the Swedish tower transaction in June, as planned.
Transforming to digital is about reinventing customer experience in an ever increasing digital world. We achieve this by building and scaling our “5 Ps”– Products, Processes, Platforms, People and Partners. We have now closed more than a third of both our legacy products and legacy IT systems, and close to half of our target product portfolio is produced on our common target platforms. Adding also continuous process improvement, we achieve not only structural cost savings but a smoother experience for our customers, resulting in fewer manual interactions. We see a decline in incoming contacts to our B2C contact centers in our three largest markets, with volumes in Sweden down almost 30%. In addition, we are transforming the channel mix, with 80% of all incoming contacts in Finland now going through digital channels.
Building the foundations to Deliver sustainably is vital in the current macro environment and I am pleased to see both revenue and EBITDA growth in the quarter, despite inflationary pressure and the higher content investments in TV and Media. Operational expenses continued to shrink, despite higher energy costs. Our energy portfolio is mostly hedged, however based on current energy prices and outlook we foresee an energy cost increase of around SEK 300 million for 2022. The transformation program is expected to reduce operational expenses by at least SEK 2 billion by 2023, although now excluding the impact from energy, which we expect to mitigate through a combination of both cost and pricing initiatives. Hence, our 2022 outlook and mid-term ambitions for service revenue, EBITDA and cash CAPEX are unchanged.
For longer term sustainability and cost resilience, we have entered into Power Purchase Agreements covering 75% of our network energy need in Denmark from solar, and 70% of all electricity need in Estonia from wind. And our balance sheet is in good shape with leverage at the low end of the 2.0x-2.5x target range, leaving ample room for the share buy-back program which started in June.
Telia Sweden delivered on its stated ambition to stay in growth territory with both fixed and mobile services contributing, not least through proactive pricing. Mobile revenue growth of 2.7% was ARPU-led, although the postpaid subscription base also increased by 32,000 this quarter. Broadband growth of 4.1% was also mainly ARPU-driven, while TV growth of 16% was driven equally by ARPU and a growing customer base. Headwinds from legacy continue at similar levels as before despite a shrinking base, but network modernization is progressing fast and 5G coverage doubled in the quarter, to a third of the population. The Enterprise segment has delivered several quarters of growth, and now grew in SME for the first time in a long time. We aim to continue this trend with our unique breadth of services, leveraging our unparalleled digital infrastructure with the capacity of Telia Cygate to meet our customer’s increasing demands for high-speed networks, cloud services and secure connectivity.
Turning around Telia Finland during 2022 remains of high priority and is materializing, step by step. An early focus in the transformation has been the key Consumer mobile segment which, building on a better network, improved brand perception, smarter pricing and better customer value, has consistently improved over several quarters and now grows subscription revenue by 3%. Looking ahead, we are increasingly moving customers to 5G to drive further customer value and ARPU in the coming quarters. Overall, service revenue in Finland was stable in Q2, while EBITDA grew by 5%, driven both by structural cost reductions and temporary savings.
Telia Norway again delivered strong service revenue growth in both mobile and broadband, by 8.9% and 8.1% respectively. EBITDA growth was more muted at 2%, due to higher content costs and lower equipment margins. The Enterprise segment continues to outperform the market, underpinned by a substantial improvement in NPS scores over the past year, and Telia won a framework contract with 34 municipalities in Western Norway, for both fixed and mobile services, winning on all of the three procurement criteria: coverage, price and solutions.
Our market leaders in Lithuania and Estonia built on previous strong results, growing service revenue by 7.5% and 4.7%, respectively. In a challenging macro-economic environment with very high inflation, both markets delivered strong revenue to EBITDA conversion, resulting in 9.0% growth in Lithuania and 4.6% in Estonia. Telia Denmark saw an even better profit trend with 9.5% EBITDA growth, driven in part by another good quarter for mobile, with a service revenue increase of 3.0%.
In TV and Media, advertising demand has now exceeded pre-pandemic levels with no signs of any macro-driven weakening to date. Digitalization of the advertising business is on track with 21% growth in digital ad revenue. The pay TV market continues to be fiercely competitive, in particular within the SVOD market, and the quarter was also affected by expected seasonal churn in sports. Telia, by virtue of being an aggregator, distributor, TV advertising leader, and operator of several OTT streaming services, all at the same time, is uniquely equipped in Sweden and Finland to meet these market challenges.
It has been decades since the world last saw the macro-economic conditions of today, with high-single digit inflation, and the telecom industry as we now know it did not exist at that time. Hence, operating in this environment will be a test for us. What also did not exist then, however, was the ubiquitous connectivity of today, and the critical role we play in keeping societies connected in a secure and reliable way. As we continue to invest in our digital infrastructure and advance our services, our trusted partner role and the value we can bring to our customers will only increase. I am confident that the combination of Telia’s people, values, unique assets, and our strategy to Reinvent Better, for all our stakeholders, will allow Telia to emerge from this period even stronger.“
President & CEO