European Telecoms

The Digital Telco - a Big Data ‘re-rater’?

Industry Overview Equity | 04 September 2017

New opportunities for Telco in a Digital World Europe Telecommunications So far Telco has been the facilitator of the digital revolution. But telco too must adapt

as customer demands change, digital applications proliferate and new disruptive technologies and companies threaten traditional profits. However telco is well positioned to do so, in our view, thanks to its Big Data commodity. New processes, tools and techniques could see telco exploit Big Data to defend and upsell existing revenue streams, driving cost and capex efficiencies. Analysis suggests up to 30% value upside to Euro telco as a potential mid-term re-rating catalyst.

Big Data questionnaire indicates Euro Telco progress We asked questions of 13 Euro Telcos on the subject of Big Data. Responses indicate to David Wright >> Research Analyst us that progress could already be significant; the majority of telcos who answered our MLI (UK) +44 20 7995 6355 questions shifted over the past 12m from inconclusive projects to NPV +ve results. Most [email protected] focus at this stage is on Customer Care and Sales & Marketing. However there is still a Haim Israel >> long way to go with most projects still regional and not yet coordinated at Group level. Research Analyst Merrill Lynch (Israel) [email protected]

Boosting revenues through data growth and new avenues Frederic Boulan, CFA >> Digitalisation fuelled by Big Data analytics provides telco with a means to better offset Research Analyst MLI (UK) legacy revenue decline and upsell existing customer relationships, while exploring new [email protected]

growth opportunities. In B2C, demand for data ensuing from new digital platforms such Sunil P. Patel >> as TV, music, gaming and cloud should provide an ongoing opportunity for telco to Research Analyst MLI (UK) stabilise and potentially grow revenues, especially as legacy decline becomes less [email protected]

material. This conflicts with bundled connectivity however, where upselling discounts on Parin Shah, CFA >> mobile Sims etc. could mean lower revenues, but also lower churn. In B2B, opportunities Research Analyst MLI (UK) include managed service solutions, cloud, M2M and IoT to offset legacy pressure. Other parin.r[email protected]

drivers include Big Data analytics (US$203bn opportunity by 2020), Government (global Florian Henritzi >> spending on public cloud services and infrastructure is expected to reach $122.5 billion Research Analyst MLI (UK) in 2017), while smart cities is expected to be a US$ 1.3-1.6tn opportunity by 2020E. [email protected]

Mobile advertising is anticipated to be a USD 100bn opportunity globally by 2016. Digitalisation as a key source of efficiency Recent BofA Merrill Lynch Global Research Reports We believe digitalisation will be a key driver of cost reduction across a number of cost brackets, including (1) Customer care: using analytics and AI to better predict (and reduce) Title: Subtitle Primary Date churn, plus predictive fault detection to reduce call centre costs, (2) Distribution/commission Author Published savings from an increasingly on-line sales channel and digital provisioning, and (3) IT cost [email protected] Outlook H2/2018: David 31 August savings through transformation of IT infrastructure to a digital model with reduced engineer Conviction can return Wright 2017 costs, better capacity/load and fault management. Network virtualization enables telcos to Deconstructing more- David 01 September reduce their dependence on hardware and migrate services to the cloud. We see up to 10- for-more: mobile Wright 2017 15% value upside as potential laggards reduce IT costs to best-in-class levels, while misfiring / fixed better

commercial cost potential increases value upside to a 20-30% range, with further to go as organisations take digitalisation to a next level in the field of customer management, sales, network and IT. Stock by stock we find TDC is already efficient, while there is notable upside potential to Orange, TI and Vodafone.

>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. Unauthorized redistributionofthisreport isprohibited.Thisreport is intendedfor As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 44 to 45. Analyst Certification on page 43. 11783735

Timestamp: 03 September 2017 10:00PM EDT

Contents Conclusions 3 How much is it all worth? 5 Big Data fuelling the Digital Opportunity 6 The Digital Phenomenon 6 Big Data & the Digital Telco 7 Where is Euro telco today - Big Data questionnaire 10 Revenue Opportunity 16 B2C – protecting/growing revenues with bundling 16 B2B - gradually gaining traction 21 B2Government - still in early stages 25 Big Data analytics - external monetisation 27 Cost Opportunity 30 Digitalisation a key enabler of cost cutting 30 The benefit of lower churn: 1pp lower churn drives 2% EBITDA uplift 32 Benchmarking IT costs 33 Commercial costs: VOD and Telenor have most room to optimize 34 Online vs offline – a leaner distribution 35 Case Study – Vodafone cost evolution 35 All-IP: 1-2pp upside to long term margins 36 Capex / investment needs 38

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Conclusions Telcos undergoing (r)evolutionary change So far Telco has been the facilitator of the digital revolution. But telco too must adapt as customer demands change, digital applications proliferate and new disruptive technologies and companies threaten traditional profits. However telco is well positioned to do so, in our view, thanks to its Big Data commodity. New processes, tools and techniques could see telco exploit Big Data to defend and upsell existing revenue streams, driving cost and capex efficiencies.

The digitalisation of Telecommunications is a $2trillion opportunity (World Economic Forum)

Big Data re-rater? From Gigabytes to Terrabytes to Zettabytes to Brontobytes, the proliferation of digital applications in an increasingly on-line world means data growth is unrelenting. Thus the term Big Data is used to represent the sheer volume of information accrued. But just as Big Data is a challenge to manage through the ‘three Vs’ of volume, velocity and variety, so it is also an opportunity to know more than ever about the customer and their evolving needs.

Exhibit 1: Relentless data growth ahad

Source: Hewlett Packard

Here Telcos have a huge opportunity, we think, if only because they are the key enabler of data access and carrier of data itself. This confers multiple opportunities to empower their existing business model, defend against attackers and diversify into new areas.

BofAML questionnaire confirms Euro Telco is up and running What is encouraging from an investor perspective is that Euro telco is already up and running; we asked questions of 13 large cap Telcos with >E310bn market capital on the subject of Big Data, confirming that within 12 months projects have evolved from an inconclusive basis into more sustainably NPV value accretive. Telco’s initial focus on the Big Data opportunity lies, unsurprisingly in Sales & Marketing and Customer Care.

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Chart 1: Questionnaire - How would you describe the status of Big Data within your company?

Big data processes established pervasively across the group, deriving NPV +ve results Big data processes established across certain divisions/geographies, deriving NPV +ve results

Big data processes established, results inconclusive Today 12m ago Analysing projects and opportunities

No formal big data projects

0 1 2 3 4 5 6 7 8 9 10

Source: BofA Merrill Lynch Global Research

Telcos evolving Revenue/Opex models Digitalisation fuelled by Big Data analytics provides telco with a means to better offset legacy revenue decline and upsell existing customer relationships, while exploring new growth opportunities. Considering these:

• B2C: Demand for data ensuing from new digital platforms such as TV, music, gaming and cloud should provide an ongoing opportunity for telco to stabilse and potentially grow revenues, especially as legacy decline becomes less material. This conflicts with bundled connectivity however, where upselling discounts on mobile Sims etc. could mean lower revenues, but also lower churn.

• B2B: With the shift away from legacy services comes the opportunity to sell new managed service solutions, cloud, M2M and IoT.

Other potential drivers include:

• Big Data analytics: According to IDC, Big Data and business analytics globally is expected to reach US$203bn by 2020, growing at a CAGR of 11.7%. Telecom companies are expected to contribute significantly to this.

• B2G (Government): According to IDC, global spending on public cloud services and infrastructure is expected to reach $122.5 billion in 2017, 24.4% growth over 2016. Public cloud spending will reach $203.4 billion growing at a CAGR of 21.5% about seven times IT spending growth. Meanwhile based on our Thematic Investing team report (Thematic Investing: 21st Century Cities: Global Smart Cities Primer 02 March 2017), smart cities is expected to be a US$ 1.3-1.6tn opportunity by 2020E.

• Mobile advertising: According to eMarketer mobile advertising is anticipated to be a $100bn opportunity globally by 2016.

Perhaps the most transformational aspect of digitalisation and biggest potential driver of value creation is in the cost line.

• Customer care: using analytics and AI to better predict (and reduce) churn, plus predictive fault detection to reduce call centre costs;

• Distribution/commission savings from an increasingly on-line sales channel;

• Wider IT cost savings through transformation of IT infrastructure to a digital model with reduced engineer costs, better load and fault management.

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How much is it all worth? According to the World Economic Forum the digitalisation of Telecommunications is a US$2tn opportunity for the industry and society by 2025. More conservative estimates (Arthur D. Little) put global digitization at a >US$1tn opportunity by 2020. Of this, about US$480bn market is addressable by telcos, of which US$276bn is associated with B2B digital.

As a back of an envelope calculation.. Aggregate forecast 2017E revenue of global telcos under BofAML coverage is $1.71tn (107 companies in total, in 50 different countries, with a total market cap of $2.4tn). Even in a scenario where we assumno growth until 2025, we calculate that a $480bn incremental opportunity could represent a material 28% potential boost.

When addressing to the value that can be unlocked for the telco industry, Beijia Ma, in our thematic republished on 29th August Thematic Investing: Data Capital – Global Big Data and AI Primer 29 August 2017 writes:

“Digitalization could unlock US$2tn of cumulative value for the telco industry over the next decade (2016-25). Of this, US$127bn could be directly data-driven (source: DTI, WEF, Accenture, BofAML Global Research). Improved customer experience through personalization and digital customer service options could unlock nearly US$27bn in value. Customers are also likely to transition to digital and self-care service models, reducing service costs, which account for c.10% of total operating costs today.

This could generate around US$18bn in additional operating profits by 2025E. Machine learning and Big Data technologies also pave the way for networks that are self-aware, self-optimizing and self-healing, which can unlock c.US$100bn in value over the next 10Y. Data analytics also has major potential to reduce customer churn by improving their understanding of the link between customer behaviour and network usage. Autonomous networks could save US$46bn of customer acquisition costs and lost revenue as 68% of customers will not go back to their old telco provider once they have switched (source: DTI, WEF, Accenture)”

BofAML nearer-term Euro telco implications Considering various data points and commentary from company management, overlaid with cost benchmarking techniques, we see up to 10-15% value upside as laggards reduce IT costs to best-in-class levels, while commercial cost potential increase value upside to a 20-30% range, with likely further to go as organisations take digitalisation to a next level in the field of customer management, sales, network and IT. Stock by stock we find TDC is already efficient, while there is notable upside to Orange, TI and Vodafone.

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Big Data fuelling the Digital Opportunity So far Telco has been the facilitator of the digital revolution. But telco too must adapt as customer demands change, digital applications proliferate and new disruptive technologies and companies threaten traditional profits. However telco is well positioned to do so, in our view, thanks to its Big Data ‘commodity’. New processes, tools and techniques could see telcos exploit Big Data to defend and upsell existing revenue streams, driving cost efficiencies and leaner capex models.

We consider these alongside results from a BofAML proprietary questionnaire on Big Data analytics in the Euro telco space, concluding:

• Euro Telcos are bullish on the opportunity vs. OTT competition, however there is less conviction to diversify beyond traditional telco services;

• Resource levels are ramping;

• Projects are in place and NPV+ but still more regional than globally coordinated;

• Customer care and Sales & marketing are the areas of focus. The Digital Phenomenon

1 out of 2 businesses believe their traditional business model will be obsolete by 2020 (Source: Harvard Business Review)

The digital economy is having a profound impact on the way companies ‘do business’. According to a 2017 Harvard Business Review global survey, 80% of respondents’ expect their industry to be disrupted by digital trends, while around half expect their existing business model to become obsolete in just 3 years’ time. Expectations of disruption are also imminent; twenty-eight percent of respondents said their industry has already passed the digital inflection point, with another 56 percent saying that will happen by 2020.

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Exhibit 2: Disruption “very likely” for some industries Exhibit 3: Digital inflection point is imminent Percentage (%) indicating how likely it is that their industry will be disrupted by digital Percentage (%) indicating their industry has already reached its point of disruption or will within the next 3 years Communications/Media 67% Prior to 2010 4% Financial Services 62% Technology 54% Beyond 2020 Professional Services 51% 16% 2010-2016 Education 43% 24% Retail 41% Healthcare 36% Government 36% 2017-2020 56% Manufacturing 27%

0% 10% 20% 30% 40% 50% 60% 70%

Source: Harvard Business Review 2016 Source: Harvard Business Review 2016

Big Data & the Digital Telco The Harvard survey identifies the communications/media sectors as those with most potential disruption. But in itself disruption may not be a negative. The World Economic forum recently identified the digitalisation of telecommunications as having the potential to unlock $2 trillion of value for the industry (c. $1.2tr) and wider society (0.9) over the next decade.

The digitalisation of Telecommunications is a $2trillion opportunity (World Economic Forum)

Exhibit 4: Digital Telco key themes

Source: World Economic Forum 2017

Big Data – fuelling the transformation Underlying much of the revolution we find the ‘new oil’ powering and empowering digital strategies; data (with ‘Big Data’ as a more pervasive dataset). Here we find telco’s sitting on a treasure trove. Every single on-line interaction creates new data that provides some insight into user’s behaviour and or preferences. Even off-line users continue to generate data with interactive apps, location based services etc.

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Exhibit 5: What happens in an internet minute Exhibit 6: Big Data vocabulary “cheat sheet”:

Source: Visual Capitalist based on Lori Lewis,, Officially Chadd Source: Hewlett Packard

As a result, the rate of mobile network data traffic growth is increasing rapidly. It is estimated that by 2020, the number of smartphone subscriptions will have increased from today’s 2.7 billion to 6.1 billion, and the total amount of mobile traffic generated by smartphones will be five times that of today.

The big-data-driven telecom analytics market alone is expected to have a compound annual growth rate of nearly 50 percent – with annual revenues expected to reach USD 5.4 billion at the end of 2019. (Source: Ericsson)

The three Vs underlying Big Data analytics In the past, CSPs were prevented from benefiting from the value of Big Data on account of its sheer weight. The volume, velocity and variety – or the three Vs – of Big Data were simply overwhelming. These data-handling challenges have now largely been met by a variety of easily obtained tools, empower by high capacity data storage and ever increasing processing power.

This should enable CSPs to better understand what data to use, how to process, correlate and limit the data, and how to interpret and apply the resulting insights to different processes (relating to systems, operations, business, consumers and so on.

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Exhibit 7: Big data offers benefits across the entire telco value chain

Source: PwC 2016

Monetising Big Data The ability to increase the wider profit pool through Big Data analytics and process integration impacting revenues though opex and capex was analysed in a Mckinsey survey of telco operators. The survey in 2015 analysed 80/273 companies who claimed to have active analytics in place. Of these around half had >=2.5% impact on profits, around one third had negligible impact, with around 10% negatively impacted.

Exhibit 8: Impact of Big Data on companies’ profits

Source: McKinsey

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We consider potential revenue, cost and capex drivers of profitability within the digital telco, fuelled by data analytics. While we sub-divide there, none are mutually exclusive in reality (e.g. customer care can be a cost and revenue driver):

Revenues • A better understanding of the consumer should enable more tailored upsell mechanisms, with revenue protection from reduced churn.

• Digital services should enable better penetration of the business and enterprise market with the proliferation of cloud and managed networks.

• Beyond traditional services, Digitalisation could enable telcos to diversify into new revenue opportunities such as digital advertising.

• Finally, there is the potential to monetise the analytics themselves, selling insight packages.

Costs • Customer care: using analytics and AI to better predict (and reduce) churn, plus predictive fault detection to reduce call centre costs;

• Distribution/commission savings from an increasingly on-line sales channel;

• Wider IT cost savings through transformation of IT infrastructure to a digital model with reduced engineer costs, better load and fault management.

Capex • Telecom companies will be required to incur high capital expenditure to make their operations digitally compliant, and scalable;

• Digitalisation and the underlying boom in data usage should mean more and more capacity needs. Where is Euro telco today - Big Data questionnaire We issued a questionnaire to telecoms operators across Europe to ask about their approach to big data. Thirteen companies responded. Those responding Telecos were equivalent to >EUR 310bn market capital, including Telefonica, KPN, Deutsche Telekom. Our approach was top-down; to garner an understanding of responding company’s perspectives on the impact of Big Data, how it is developing across their organisation, its resource allocation, and where it could deliver real change. Concluding:

• Euro Telcos questioned are bullish on the opportunity vs. OTT competition, however there is less conviction to diversify beyond traditional telco services;

• Resource levels for these companies are ramping;

• Projects are in place and NPV+ but still more regional than globally coordinated;

• Customer care and Sales & marketing are the areas of focus for these companies.

Questionnaire results and interpretation Considering the 11 questions below, with our interpretation of the aggregate response:

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• How is the Big Data opportunity regarded in your company? Please rank statements from highest conviction 5 to lowest 1

Chart 2: Questionnaire - How is the Big Data opportunity regarded in your company?

An opportunity to extend telecoms into the internet space

A means to drive new avenues of growth

A means to drive efficiencies and improved profitability

An agent of competitive efficiency

A means to remain competitive

0 0.5 1 1.5 2 2.5 3 3.5 4

Source: BofA Merrill Lynch Global Research

There was no stand out high conviction response to this question, all are potential benefits but the opportunity is perhaps too nascent for any to really stand out just yet. However an interesting observation is that conviction was lower on the potential to move into the internet space, suggesting that Telco continues to see this as an opportunity within their existing business model, rather than anything that could see them diversify.

• How would you describe the status of Big Data within your company?

Chart 3: Questionnaire - How would you describe the status of Big Data within your company?

Big data processes established pervasively across the group, deriving NPV +ve results Big data processes established across certain divisions/geographies, deriving NPV +ve results

Big data processes established, results inconclusive Today 12m ago Analysing projects and opportunities

No formal big data projects

0 1 2 3 4 5 6 7 8 9 10

Source: BofA Merrill Lynch Global Research

What is clear here is the progress of Big Data initiatives across organisations, with the majority of operators deriving inconclusive results 12m ago, to more +NPV projects today. Curiously there is a spread emerging between operators who are analysing opportunities to outliers who have Group-wide Big Data processes in place.

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How many full time Big Data employees/scientists to you have, at YE 2016 and expected YE 2017?

Chart 4: Questionnaire - How many full time Big Data employees/scientists to you have?

500+

250-499 2017 2016 50-249

0-49

0 1 2 3 4 5 6 7 8

Source: BofA Merrill Lynch Global Research

There is a clear progression in resourcing over the past 12m with the majority of operators upscaling from <50 employees to 50-250 and a significant number above that. Once again we note the wide spread between operator resourcing.

• How is the Big Data opportunity represented in your company?

Chart 5: Questionnaire - How is the Big Data opportunity represented in your company?

A specific business unit spanning global operations

Coordinated regional teams

Standalone big data projects/teams operating under divisional/regional lines of business

0 1 2 3 4 5 6 7

Source: BofA Merrill Lynch Global Research

This response does indicate a fairly early state of play, with processes still more disparate than group wide. What strikes us here though is the spread from those at a regional level to those more group wide.

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• How would you weight your Big Data resource allocation today (out of 100%)

Chart 6: Questionnaire - How would you weight your Big Data resource allocation today?

Cyber security

Supply chain management

Network load optimisation

Competitive intelligence

Customer care

Sales & marketing

0 5 10 15 20 25 30 35 40

Source: BofA Merrill Lynch Global Research

Chart 7: Where do you expect the biggest structural change deriving Chart 8: Where do you expect the biggest financial contribution from Big from Big Data (ranked 5 most to 1 least)? Data (ranked 5 most to 1 least)?

Cyber security Cyber security

Supply chain management Supply chain management

Network load optimisation Network load optimisation

Competitive intelligence Competitive intelligence

Customer care Customer care

Sales & marketing Sales & marketing

0 1 2 3 4 5 6 0 1 2 3 4 5 6

Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research

These responses are broadly consistent with Sales & marketing and Customer care dominating telco’s Big Data focus, in terms of resource allocation versus where they expect to derive most structural and financial impact.

• Customer profiling: Which data could be most relevant to Big Data projects - within legal boundaries (out of 100%)

Chart 9: Questionnaire - Which data could be most relevant to Big Data projects?

Channel interaction (call centres/shops)

Data usage

Location data Future Today App and Content usage

Social media interaction

0 5 10 15 20 25 30 35

Source: BofA Merrill Lynch Global Research

There is reasonable progression in this response in terms of the penetration of Big Data analysis from wider location and usage metrics to more personal social media and app

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usage. I.e. starting at the macro level in terms of how much data you use and where, to what you are then using the data for.

• What do you consider to be the biggest obstacles to Big Data projects today (ranked 5 biggest to 1 smallest)?

Chart 10: Questionnaire - What do you consider to be the biggest obstacles to Big Data projects today?

Data privacy legislation

Data scientist resource

Data collection / cleaning

Budgetary restrictions

Corporate structure / divisional verticals

0 0.5 1 1.5 2 2.5 3 3.5 4

Source: BofA Merrill Lynch Global Research

There was no stand out response here, perhaps data mining is an intuitive winner given earlier stage of Big Data evolution that means there is more focus in initial data collection. An interesting observation is that budget is less of a headwind as management teams commit to wider digitalisation. Curiously we might have imagined data privacy having more of an impact.

• What key advantage do you perceive your organisation has vs OTT players with respect to customer facing Big Data efforts? (agree / disagree)

Chart 11: Questionnaire - What key advantage do you perceive your organisation has vs OTT players?

Telcos are at a disadvatange on customer facing Big Data vs OTT

Telcos have no meaningful advatange on customer facing Big Data vs OTT

Telcos have better partnerships that can help them analyse data vs OTT

Telcos are more able to use granular data sets on customers vs OTT

Telcos have a longer time series wrt data on customers vs OTT

Telcos have earlier data points on customers vs OTT

0 1 2 3 4 5 6 7 8 9 10

Disagree Agree

Source: BofA Merrill Lynch Global Research

This was an interesting response, telco in aggregate considering themselves earlier in the chain of Big Data analysis that OTT, and nor does telco see any major disadvantage to OTT

Specific telco Big Data projects We asked our participants to provide an example of Big Data at work:

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Table 1: Big Data project examples by operator BT Aggregated and anonymized location and demographic data is collected from mobile network and sold to advertisers to enable audience targeting. KPN Contract search and qualify resulted in significant extra leads and 10x more potential yet to achieve DT We can already observe several use cases that show how the application of Big Data generates value. For example, through the use of new and additional variables and data science methods, the churn of customers was predicted more quickly and reliably in many countries. In most cases, these data-driven innovation projects have already been transferred to the operative business. TI As internal monetization we pointed the attention on Marketing, Customer care and Multimedia dept. with two mainly scope: up selling proposition and churn reduction e.g. CRM enrichment, Content data behaviour, Collection of data from different caring channels. As external monetization that means usage of data with third parties we are mainly managing project with Insurance companies, smart retail application, credit card management, smart home collection data. MTS Use of Big Data to optimize retail locations vs customer location SWCM Mobility insights for the public sector; new revenue source TDC Location insight (paying customer pilots), Recommendation engines for Video-on-Demand, Propensity2Churn/Buy models, Next best offers, Online personalisation ORA Use case 1 : Improve satisfaction of Mobile customers experiencing network coverage issues at home (network marketing use case in France) Expected benefits : Reduce Orange mobile customers dissatisfaction and churn rate / optimize the 3G network and indoor coverage Means : identify customers with many drop calls ; contact them pro-actively by phone - ask for a score of the mobile network coverage at home - if the score is low, there are 3 options : supply a Fem-to-cell device or upgrade the nearby antenna(s) or push for a voice over WIFI usage. Use Case 2 : Designed by Orange Business Services, the solution called "Flux Vision" analyzes in real time more than 4 million pieces of traffic information per minute to translate them into statistical indicators on geographic area visits and population movements. Today, more than 70 businesses and communities rely on Flux Vision especially the Tourism industry as it provides detailed metrics on geographic area attendance rate for a given period and by population type: residents, tourists, sightseers (for a single day) or people in transit. With Flux Vision, tourism professionals can analyze attendance at festivals and sporting events such as the Route du Rhum and certain stages of the Tour de France. This solution has been used by the Bouches du Rhône region to consider the development of accesses to the Parc des Calanques. LBTY Data monetization through audience measurement - hundreds of million dollars in potential new revenue opportunity PROX First Big Data project ongoing is on location data, whereby we sell insights on visitors (origin & behaviour) - starting to generate traction TEF Internal usage (Big Data for TEF usage): Aura was announced in February (Mobile World Congress): The application of cognitive capabilities to its platforms will allow Telefónica’s customers to know, manage, and control their digital lives with the company, and discover new customer propositions. Telefónica becomes the first company in the industry to provide its customers the possibility of managing their relationship with the company based on cognitive intelligence. "Cognitive intelligence will allow us to understand our customers better, so they can then relate to us in a more natural and easy way, and generate a new relationship of trust with them based on transparency and the control of their data. We are pioneers in this relationship model. Never before have the users of telecommunications services been able to talk with the networks in real time. We’re expanding the relationship with our customers, seeking to increase their satisfaction, and opening new possibilities for them so that they can enrich their digital lives with us" (CEO).

External usage (Big Data for third parties): Luca Transit: Mobile Data to disrupt Transport, mobile data insights are bringing new value to decision-makers who are looking to innovate with their data collection strategies, optimizing their businesses and reducing ineffiencies in transport. London as an example, where over 2 million people move around the city every day. To provide insights on traffic, they need an agile and accurate dataset. After processing all of our mobile data using our Smart Steps technology, we can give a really good view of how people flow. We are also able to understand which mode of transport people are using, and which are the most common routes (by identifying points of interest such as work and home). We have now carried out more than 300 projects in over 10 different countries. We have engaged directly with the public sector, private companies and specialist transport consultancies, who have all benefited from our data. Example of this are Highways England and Transport for London. Source: BofA Merrill Lynch Global Research

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Revenue Opportunity Digitalisation fuelled by Big Data analytics provides telco with a means to better offset legacy revenue decline and upsell existing customer relationships, while exploring new growth opportunities. Considering these:

• B2C: Demand for data ensuing from new digital platforms such as TV, music, gaming and cloud should provide an ongoing opportunity for telco to stabilise and potentially grow revenues, especially as legacy decline becomes less material. This conflicts with bundled connectivity however, where upselling discounts on mobile Sims etc. could mean lower revenues, but also lower churn.

• B2B: With the shift away from legacy services comes the opportunity to sell new managed service solutions, cloud, M2M and IoT.

Other potential drivers include:

• Big Data analytics: According to IDC, Big Data and business analytics globally is expected to reach US$203bn by 2020, growing at a CAGR of 11.7%. Telecom companies are expected to contribute significantly to this.

• B2G (Government): According to IDC, global spending on public cloud services and infrastructure is expected to reach $122.5 billion in 2017, 24.4% growth over 2016. Public cloud spending will reach $203.4 billion growing at a CAGR of 21.5% about seven times of IT spending growth. Meanwhile based on our Thematic Investing team report (Thematic Investing: 21st Century Cities: Global Smart Cities Primer 02 March 2017), smart cities is expected to be a US$ 1.3-1.6tn opportunity by 2020E.

• Mobile advertising: According to eMarketer mobile advertising is anticipated to be USD 100bn opportunity globally by 2016.

Exhibit 9 Vodafone digital businesses

Source: May 2017 presentation B2C – protecting/growing revenues with bundling Telco revenues have struggled to grow in recent years with legacy services such as voice and text cannabilised by IP services such as Skype and WhatsApp, while there has been a further communication shift to social media platforms such as Facebook, Twitter et al.

However the subsequent demand for data from these new services has at least provided a means to offset traditional revenues through a bundled data service. In fact, recent analysis of European Telecoms service revenue growth suggests telco has managed over the past 18m to pass the inflection point where data revenue growth more than

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offsets legacy revenue decline, with more recent growth (just about) in positive territory.

Chart 12: Domestic revenue growth 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% Jun 14 Jun 15 Jun 16 Jun 17 Mar 14 Mar 15 Mar 16 Mar 17 Dec 14 Dec 15 Dec 16 Sep 14 Sep 15 Sep 16

Domestic revenue growth

Source: BofA Merrill Lynch Global Research

Bundling connectivity vs. bundling services It is important to differentiate these drivers. Bundling connectivity refers to convergent strategies whereby telcos upsell additional RGUs (Revenue Generating Units) into a multiplay package. Traditionally telco has evolved pure telephony into a dual play product with broadband, and evolved this into triple play through a TV service to quad play through mobile connectivity. A slide from KPN recently advertises this opportunity, considering a further step into convergent services through the connected home.

Exhibit 10: KPN: focus on Increased value per household

Source: KPN, 2016 CMD

But while there are potential intra-sector winners and losers from connectivity upsell, and we think convergent operators lead the way here, this is not necessarily net new revenues for the sector. Adding SIMs typically implies another operator losing SIMs in a fully penetrated market. In fact, evidence suggests convergent bundling has so far had limited top line success for even the most advanced operators given ongoing competitive pressures and the need to incentivise RGU upsell with discounts to the standalone product prices.

Consider the following chart that shows Telefonica’s Fusion quad play ARPU growth over time, initially impressive, but less so when compared to overall consumer revenues.

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Chart 13: TEF convergent ARPU growth vs. wider consumer growth Chart 14: Proximus x-play ARPU & churn, Q2 17

16.0% 14.6% 140.0 € 25.0% 14.0% 12.2% 116.5 € 11.1% 11.2% 120.0 € 12.0% 20.0% 19.3% 10.0% 100.0 € 8.0% 6.3% 77.2 € 15.0% 80.0 € 6.0% 4.7% 3.5% 58.6 € 4.0% 60.0 € 1.8% 10.5% 10.0% 1.2% 1.1% 8.9% 2.0% 0.9% 36.5 € 40.0 € 0.0% 5.0% -2.0% -0.4% 20.0 € Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 2.5% 0.0 € 0.0% Srevs Fusion ARPU 4 - Play 3 - Play 2 - Play 1 - Play

Source: BofA Merrill Lynch Global Research, Company Reports Source: BofA Merrill Lynch Global Research, Company Reports

Our view is that connectivity bundling benefits the telco more in reducing churn than driving absolute revenue improvement, per the Proximus data set. We analyse below the trade-off between negative impact from convergence bundles versus the uplift on ARPU.

Chart 15: Europe: 5 to 25% convergence discount vs individual product ARPU 3P + Mobile vs 4P by operator

200.00

160.00

€

120.00

80.00 Price per month month per Price 40.00

0.00 SOTP 4P SOTP 4P SOTP 4P SOTP 4P SOTP 4P SOTP 4P DT Orange KPN Proximus Switzerland TEF

Source: BofA Merrill Lynch Global Research

Balancing churn with price discounting The following analysis shows that for Telefonica, lifetime customer revenues under a convergent product are >10% higher than those under constituent parts (based on 1 Fusion sub being equal to a fixed line, broadband line and 1.6 average mobile contracts).

Table 2: TEF Fusion, customer revenue lifetime analysis, Em Standalone Fusion Discount ARPU, Eur 81.80 ARPU, Eur 71.8 -12.2% Annualised 982 Annualised 862

Churn 1.4% Churn 1.1% Customer life, yrs 6.0 Customer life, yrs 7.6

Lifetime Revs, Eur 5,843 Lifetime Revs, Eur 6,527

Premium 685 Premium % 12% Source: BofA Merrill Lynch Global Research

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With this in mind, running an alternative analysis to ‘solve’ the level of Fusion ARPU that would derive an equal customer lifetime implies a maximum price discount of 21%.

Table 3: TEF Fusion, maximum potential price discount to match improved Fusion churn Standalone Fusion Discount ARPU, Eur 81.80 ARPU, Eur 64.3 -21.4% Annualised 982 Annualised 771

Churn 1.4% Churn 1.1% Customer life, yrs 6.0 Customer life, yrs 7.6

Lifetime Revs, Eur 5,843 Lifetime Revs, Eur 5,843

Premium - Premium % 0% Source: BofA Merrill Lynch Global Research

Platform bundling is the bigger monetisation opportunity Where there is real organic growth is in the demand for data, with telcos benefitting from the digitalisation of wider industries and increasing OTT applications. Here Telcos can accelerate the progression through bundled services, i.e. as a platform aggregator.

The following report by Ericsson considers the growth of mobile data usage over time, concluding that Video, Social Media and Audio content should exhibit the most growth. In addition to this we consider the opportunity from gaming, while cloud services could stimulate demand for file sharing/storage.

Exhibit 11: Mobile traffic by application category (CAGR 2016-22 %) Exhibit 12: Mobile traffic by application category per month (Exabytes)

Source: Ericsson Mobility Report 2016 Source: Ericsson Mobility Report 2016

TV/Video already a core service TV/Video bundling is already well advanced in the Euro telco space. Nevertheless we expect this dynamic to continue to evolve as OTT and cloud based models proliferate. Here Telco has a significant opportunity thanks to an established telephony/broadband billing relationship that should facilitate upsell/bundling opportunities.

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Chart 16: TV penetration of broadband: significant untapped potential, H2 17 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% BT DT TEF Talk TDC KPN Elisa TLSN TNOR Orange Proximus Swisscom Source: BofA Merrill Lynch Global Research, Company Reports

Social networking The average person has five social media accounts and spends just under two hours browsing these networks every day according to the GWI. People access videos, share pictures and files. We believe telecom operators stand to gain from additional data usage as consumers continue to spend more time on these digital services.

Social media has wider implications for service providers:

• Customer care: platforms represent a potential channel to address customer issues and resolve them real-time. By deploying social media tools aimed at customer care, operators can offer self-services as well as render personalized marketing and sales.

• Product development: Analysing traffic and trends can provide insight into the development of in-house platforms for the operators.

• Targeted advertising: data collated by operators on consumer browsing behaviour on social network could potentially be monetised externally.

Music Streaming According to a Nielsen global music report, digital music in 2016 grew 17.7%. Streaming (+61% y/y) emerged as a key driver for digital music while downloads declined, we expect this trend to continue. Taking the example of Spotify, for a premium membership user (c320Kbps), playing music will lead to 2.4MB data usage per minutes = 115.2MB/hr. If played for 8 hours in a day at work, this can result in 1GB data usage. According to Turkcell, on a daily basis, 4.9 million songs are listened on Turkey’s music popular music application Fizy and 1.9 million are streamed per month.

Gaming revenue to benefit from the proliferation of digital platforms Online gaming is another internet based application which is expected to drive data usage. Data from Statista forecasts c.46% CAGR to 568 Petabytes of usage per month by 2020. If we look at the global gaming market, while growth levels are moderating for the sector as a whole, the digital advent is a major anchor of growth as users move to on the go platforms. Furthermore, with AR and VR making inroads in the gaming dynamics, we believe there is significant scope for growth in data consumption and hence monetization.

Our thematic investing team in their report looked at potential for telecom sector and assessed that introduction of AR platforms can meaningfully contribute to wireless data traffic and be a catalyst to increase usage in still-developing mobile data markets.

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Cloud service for consumers Beyond pure connectivity and access to new applications, Telco has an opportunity to offer cloud based services such as storage and backup.

Exhibit 13: Telecom presence in cloud infrastructure

Source: Ericsson

Telecom Italia launched TI cloud in 2013 that allowed ADSL and optic fiber subscribers to use 200GB of space on cloud to share and save their digital files. In 2014, Proximus launched a cloud storage offering for domestic fixed internet customers that allowed free storage of 10GB, 30GB storage capacity at a monthly charge of €2.95, and 200GB for €9.95/month. The service enabled consumers to access stored files on Proximus TV. B2B - gradually gaining traction For the Digital telco B2B/Enterprise represents a similar challenge to the B2C sector that is, offsetting the decline in legacy services with new digital services and data connectivity. However the digitalisation of wider industry verticals means numerous new opportunities for telco. In fact industry analysts observe a greater potential for growth in B2B than in B2C in coming years:

• Orange targets a 10pts increase of IT and integration services in OBS revenue mix between 2014 and 2020 and targets to “Be a leader in private and hybrid cloud services for multinational companies, and a world-class player in corporate security services for multinational companies and the leader in cyberdefense in France”

• KPN mains focus is to grow its share in IT where it estimates it had less than 5% market share in 2015. Services offered include Workspace, Cloud, Security, Virtualisation of services, IoT / M2M, Housing and Hosting.

• DT is targeting a 13% CAGR in IT growth areas, in Cloud, Security Solutions, Future workplace and Future TC. Its underlying assumption is that the European Cloud market will grow from €26bn in 2014 to €56bbn in 2018 (PAC, Gartner, IDC), while the size of the digital business should increase from €13bn to €32bn.

• Swisscom expects IT and Solutions growth to offset legacy. Machine to Machine starts to deliver significant top line contribution, revenues up 80% in 2015. Key opportunities include: digital portfolio: 1) new business model (smart manufacturing), business campus in Zurich, 50 workshops with boards of companies working on digital strategies), 2) customer experience (personalised and location based marketing via “beacons”) , 3) business processes (predictive maintenance), 4) new ways of working. Swisscom has launched digital outsourcing solutions for Banks.

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Exhibit 14: IT services and mobile Western Europe and North America

Source: IDC, Gartner, SNL Kagan, Bain Notes: Figures on left synthesizes revenue forecasts (actual number for 2014) for business (telco & IT) and consumer services (including TV) for Western Europe and North America; Figures on right shows revenue by components of business services, including mobile, fixed-line and IT services in Western Europe and North America

M2M and IoT, key technologies for the future Machine to Machine communications is a key enabler of the conceptual ‘Internet of Things’, and thus telcos are in pole positioned to provide connectivity. Globally M2M connections are expected to reach 3.3bn by 2021, from 780mn in 2016 and per the chart below are expected to drive more data growth than any other device.

Exhibit 15: Global mobile data traffic by device type (TB/month)

Source: Cisco VNI

In recent results KPN flagged a 55% increase in IoT connectivity but also an increase in market share.

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Exhibit 16: KPN : IoT platform launch, full solution drives value beyond connectivity

Source: KPN, 2016 CMD

Digital products and services for businesses, a growing market Telecom operators have an opportunity as other industries also move towards digitization and their needs shift away from traditional telecom and IT as services. While IT providers have been targeting this market, we see telecom operators well positioned to exploit this opportunity as a result of their edge to operate technological assets, a consumer interface through unified billing system; and their ability to offer vast local service due to high penetration levels.

While operators until now have played more of a role of dumb-pipe enabler, we believe digitization provides an opportunity to move beyond this and play larger role in th ealue chain of different industries. As mentioned above, consumers need for on the go services has made it imperative for companies across the sectors to develop digitally enhanced products and services. This is expected to create significant demand for ICT infrastructure and created avenues for additional revenue for operators.

Telecom operators have an edge over IT players through their wide exposure of fixed- line and wireless network are better positioned to integrate, deploy and offer these services. Operators through their billing relationship with customers already have an edge and a ready to go platform. As a result cost of experimenting and developing these services which smart device interface is expected to be relatively lower for telecom industry. Furthermore, operators already possess systems and capabilities to service customers throughout the life cycle.

The exhibit below enumerates various business activities that create potential for digitization in B2B markets. We do see telecom operators becoming more involved in this domain in matured markets (given they have current high exposure in these markets), emerging markets are transitioning more slowly.

Based on Arthur D little estimates, the global digitization opportunity is expected to be c. US$1,047 bn opportunity, of which about US$ 480bn market is addressable by telcos. Of the US$480bn, B2B digitization opportunity is expected to be US$ 276bn. Telecom operators are currently catering connectivity and computer software infrastructure which is c.20% of the market. We believe there is scope for operators to go beyond these services and exploit the market opportunity.

Nevertheless, we believe to address the remaining 80% of the market operators need to build up their capabilities as they would require deeper understanding of market. Additionally, they need to also acquire capabilities of a system integrator for developing customized client solutions.

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We believe operators across the markets are building their capabilities to address this opportunity through acquisition of hardware/software and IT companies. In addition, companies are also forming partnerships or entering in MOU to develop products and service catering this segment.

Matured market case studies of B2B digital • Verizon provides connectivity as well as system integration services for Mercedes connected service mbrace.

• Orange provides connectivity services for telehealth services of Sorin Group and helps in monitoring the health of patients implanted with cardiac management devices

• Telefonica provides connectivity as well as functionalities for smart grid for utility firm Eletrobras

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Cloud for enterprises, an integral service According to IDC, global spending on public cloud services and infrastructure is expected to reach $122.5 billion in 2017, 24.4% growth over 2016. Public cloud spending will reach $203.4 billion growing at a CAGR of 21.5% about seven times of IT spending growth.

Telecoms have a role to play with a) Software-as-a-service (Saas) b) Infrastructure-as-a- service (Iaas). Operator’s existence in the cloud computing value-chain as a provider for connectivity positions them well compared to other OTT web service providers to offer connectivity with hosted infrastructure. Cloud services offered by telecom to enterprises usually includes remote access to corporate software that facilitates quick implementation of IT solutions. Operators are also investing significantly in development of data centres which place them well to offer infrastructure based services.

Exhibit 17: Telecom presence in cloud infrastructure

Source: Ericsson

• Swisscom: launched their Application Cloud technology in 2015 working as a cloud Platform as a Service (PaaS), through cloud based product development. The Swisscom cloud offering also involves a highly automated enterprise cloud for corporate customers, a growing business that is helping to offset declines in other parts of the Enterprise business. Furthermore the Swisscom telco cloud allows for virtualisation of telco network functions. Swisscom also pushes its edge on data hosting in a secure Swiss environment and near the customer.

• BT: BT deploys a “Cloud of Clouds” strategy and is seeing growth from IT services within Business & Public Sector through a transition to the cloud. In Global Services, cloud-based platforms are being innovated on to deliver 3rd party SaaS solutions with BT providing IaaS integrating 3rd party clouds. BT is able to provide global reach and able to manage complex, multi-service environments for customers on a 24/7 basis. BT also plays within the Unified Communications space. B2Government - still in early stages A further opportunity for telecoms in the digital space is with the public sector. Across the globe countries have embarked on a digital agenda, and projects like smart cities, universal health programs, and public transport programs can offer different services in systems, processes and data. Apart from benefiting from the data usage in these projects, operators are expected to realise additional revenue streams through partnerships with government, municipalities and associated bodies.

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Exhibit 18: Enormous amounts of Big Data will be created by buildings, cars, and planes in Smart Cities

Source: Cisco 2016

Based on our Thematic Investing team report (Thematic Investing: 21st Century Cities: Global Smart Cities Primer 02 March 2017), smart cities is expected to be a US$ 1.3- 1.6tn opportunity by 2020E. We think operators through their fixed and wireless network as well as recent focus on Big Data analytics can emerge as a significant partner of local authorities in these big ticket projects. In smart cities, operators can extend their role beyond the traditional connectivity or infrastructure partner. With the investments in requisite infrastructure, telecom operators can offer managed service solutions for smart cities.

Exhibit 19: US$1.3-1.6tn global Smart Cities market (2020E)

Source: BofAML Global Research based on various sources

Case studies As can be observed in the following exhibit, operators across the developed markets are redefining their role in the smart city business opportunity expanding beyond their traditional connectivity and infrastructure, and focusing on acting as an enabler and exploring other verticals that can be tapped. Additionally, we feel operators association with the government is likely to play key role in award of smart cities contract. We see

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EEMEA operators also shifting their gears in same direction. Integrated operators are likely to play an active role due to their fixed and wireless infrastructure capabilities.

• Orange Business Services entered into a deal with MEEZA, a managed service provider to provide smart devices and applications for Msheireb Downtown Doha, smart city. Orange Business Services manages design of Central Command Centre of the smart city which controls operations like proper functioning of security cameras, access control of building, fire alarms, street lighting, automated waste collection, car parks and public announcements. Additionally it has also designed and operates various smart applications like wayfinding service, community services and online payments for general public and residents.

• In Russia, MegaFon is offering geospatial analytics service to municipal authorities and Moscow government. These services are used as part of city development program for better transport planning and effective planning of real-estate development in new territories. Big Data analytics - external monetisation So far we have focused more on the internal application of Big Data analytics. However the nature of telecoms data – spanning multiple demographics, with user usage and movement records represents a valuable data source to various industrial partners

Exhibit 20: Big data monetization

Source: Ericsson

A good example of this is the sale of consumer movement data during the day, potentially split by demographics such as age and gender. This can help companies plan marketing strategies, and or events on a more real time basis to appeal directly (and thus more effectively) to a target audience.

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Exhibit 21: Adastra Crowdspector Heat Map

Source: Adastra

Case studies According to IDC, Big Data and business analytics globally is expected to reach US$203bn by 2020, growing at a CAGR of 11.7%. Telecom companies are expected to contribute significantly to these growth levels as they move forward in monetization of Big Data analytics. Telecom operators in developed markets are already offering Big Data analytics services to business enterprise.

• Telefonica’s Dynamic Insights offers Big Data analytics services and it launched LUCA, a Big Data unit for corporate customers in October 2016. Proximus also offers Big Data analytics solutions to enterprises.

• In February 2017 Pelephone entered into agreement with Telefonica for co- operation on Big Data venture as a part of which they will develop and launch Pelelphone Smart Data Service. These services will offer data to public agencies and companies in transport, retail, planning and other sectors. The data provided will facilitate decision making in areas like project planning and execution, revenue improvement and expense reduction and. Pelephone is expected to invest NIS 5mn over next two years on this project.

• In 2016, STC picked Teradata Aster’s Big Data Analytics Appliance and Teradata Hadoop to collate and analyse customer data and behavioural insights to improve business performance. The company also plans to introduce additional applications in its Big Data analytics roll-out like fraud detection using social media data and analytics like comprehensive customer experience index, path-to-churn modelling, influencers' analysis and more.

Mobile advertising – a Big Data analytics application As an alternative to selling data and analytics, several telcos are leveraging their IP to diversify into the advertising market themselves. This represents a step change, and a potential move to ‘claw back’ some of the $100bn on-line marketplace that has underpinned the growth of giants such as Google and Facebook (eMarketer). Some examples:

• EM operator MegaFon’s acquisition of Mail.ru provides access to differentiated mix of services in the internet domain ranging from advertising, social networking to gaming. Internet advertising in Russia is expected to increase at a CAGR of c18% over 2016-2022, with the share in advertising reaching close to 60%. We believe

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MegaFon is expected to benefit from ongoing shift in advertising from offline to online in terms of growth in data usage. Furthermore, MegaFon can access the data related with usage patterns of consumer is expected to help in a) devising more targeted products and services b)enable contextual advertising c) provides opportunity for Big Data analytics and information related with consumer behaviour can be monetized by selling to companies in other sectors.

Chart 17: Advertising market (RUBbn) Chart 18: Platform-wise advertising market break-down 650.0 100% 16% 550.0 80% 38% 450.0 360.8 58% 350.0 60% 136.0 250.0 41.8 40% 50% 150.0 42% 131.0 150.8 183.6 20% 50.0 30%

-50.0 2011 2016 2017E 2018E 2019E 2020E 2021E 2022E 0% 2011 2016 2017E 2018E 2019E 2020E 2021E 2022E

Newspapers Magazines TV Radio Newspapers Magazines TV Radio Cinema/Indoor Outdoor Internet Cinema/Indoor Outdoor Internet Source: BofAML Global Research Source: BofAML Global Research

• In the European telecoms space Altice acquired Teads in March 2017. Teads is the No. 1 online video advertising marketplace in the world with an audience of more than 1.2 billion unique visitors including 720 million via mobile. As per Altice, Teads, founded in 2011, is the inventor of outstream video advertising and No. 1 video advertising marketplace in the world1. Publishers work with Teads to create brand new video inventory and manage their existing inventory, monetizing it through their own sales force, Teads sales force, or programmatic buying. Teads’ native video advertising solutions encompass a series of formats inserted deep into media content, like the inRead playing inside articles. It is changing the game within the video advertising market by creating unprecedented levels of premium inventory, which did not exist before. Brands and agencies can access this top-tier, premium inventory, available on the web and on mobile, through programmatic or managed services. Through its managed services capabilities, the Teads team execute on their clients behalf using its platform. Altice flagged it had built market leading data analytics capabilities enhanced by recent Audience Partners acquisition, a global and multi-local advertising sales organization, and now run a large international advertising business with revenue in excess of € 700 million per year.

• In the US Verizon acquired AOL in May 2015 for $3.8 billion. As per Verizon mgt.: “AOL is a leader in the digital content and advertising platform space. Verizon has been investing in emerging technology that taps into the market shift to digital content and advertising. AOL’s business model aligns with this approach, and we believe that its combination of owned and operated content properties plus a digital advertising platform enhances our ability to further develop future revenue streams”

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Cost Opportunity Telecom operators across the globe are struggling to maintain high EBITDA margins as legacy services such as voice and text are cannabilised by IP services such as Skype and WhatsApp, while there has been a further communication shift to social media platforms such as Facebook, Twitter et al. At the same time the cost of serving consumers has risen as the demand for reliable high speed data has evolved to a 24/7 phenomenon.

The onset of digitalisation brings new opportunities to address much of this, and for telcos to further streamline a cost base that was more attuned to legacy services rather than the shift to data.

Our approach is to benchmark various telco cost lines to best in class as each of the operators exploits new digital platforms and techniques to drive efficiencies.

Exhibit 22: TMT profit pool

Source: Accenture Digitalisation a key enabler of cost cutting Digitalisation is a key driver of cost reduction across a number of cost brackets, including:

• Customer care: using analytics and AI to better predict (and reduce) churn, plus predictive fault detection to reduce call centre costs;

• Distribution/commission savings from an increasingly on-line sales channel and digital provisioning

• Wider IT cost savings through transformation of IT infrastructure to a digital model with reduced engineer costs, better capacity/load and fault management. Network virtualization enabling telcos to reduce their dependence on hardware and migrate services to the cloud.

We flag a few examples of digitalisation – induced costs savings:

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Orange targets 50% of interactions in Europe via digital by 2018

Exhibit 23: Orange: Digitalization a key driver of cost efficiencies (H1 2017 results) program total gross savings yoy in H1

Source: Orange Q2 207 results presentation

KPN is looking to provide all services though a uniform digital layer: Exhibit 24: KPN: moving to a single digital layer

Source: KPN, 2016 CMD

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Telenor plans a reduction in sales and personnel costs underpinned by a significant increase in digital customer care

Exhibit 25: Telenor: Digitalization key enabler of cost reduction

Source: Telenor Q2 2017 results The benefit of lower churn: 1pp lower churn drives 2% EBITDA uplift per annum The use of big data to predict consumer behaviour and anticipate potential churn is a key source of upside for telcos, alongside the ability to offer tailor-made offers to customers to enhance customer lifetime value. In our questionnaire, four telcos explained big data was used as a tool to reduce churn:

• DT: through the use of new and additional variables and data science methods, the churn of customers was predicted more quickly and reliably in many countries.

• TI: as internal monetization we pointed the attention on Marketing, Customer care and Multimedia dept. with two mainly scope: up selling proposition and churn reduction e.g. CRM enrichment, Content data behaviour,

• TDC: Big data used to drive Propensity2Churn/Buy models, Next best offers, Online personalisation

• ORA: Improve satisfaction of Mobile customers experiencing network coverage issues at home, reduce dissatisfaction and churn

We conduct a scenario analysis and calculate that for a mobile only operator, an improvement in churn of 1 percentage point leads to a 50bp increase in EBITDA margin. This implies 2.0% / 3.3% EBITDA and OpFCF upside respectively. Similarly, we calculate the upside for a convergent fixed + mobile operator could be slightly higher on an absolute basis considering higher acquisition costs (fixed wholesale costs one-offs, CPE), but with usually higher EBITDA margins initially, the percentage upside is similar with 60bps margins upside driving 1.7% / 3.0% EBITDA and OpFCF upside respectively.

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Table 4: Scenario analysis: Mobile only: 1% lower churn = +2.0% EBITDA Table 5: Scenario analysis: Fixed + mobile: 1% lower churn = +1.7% / +3.3% OpFCF EBITDA / +3.0% OpFCF Churn 20.0% 19.0% 18.0% 17.0% 16.0% Churn 10.0% 9.0% 8.0% 7.0% 6.0% Customers BoP (k) 417 417 417 417 417 Customers BoP (k) 208 208 208 208 208 Subs loss -83 -79 -75 -71 -67 Subs loss -21 -19 -17 -15 -13 Net adds 20 20 20 20 20 Net adds 10 10 10 10 10 Gross adds 103 99 95 91 87 Gross adds 31 29 27 25 23 Customers EoP (k) 437 437 437 437 437 Customers EoP (k) 218 218 218 218 218

SAC per gross add 120.0 120.0 120.0 120.0 120.0 SAC per gross add 288.0 288.0 288.0 288.0 288.0 % of 12m ARPU 50.0% 50.0% 50.0% 50.0% 50.0% % of 12m ARPU 60.0% 60.0% 60.0% 60.0% 60.0% Cost (CU m) 12.4 11.9 11.4 10.9 10.4 Cost (CU m) 8.9 8.3 7.7 7.1 6.5

ARPU (CU) 20.0 20.0 20.0 20.0 20.0 ARPU (CU) 40.0 40.0 40.0 40.0 40.0 Revenues (CU m) 100.0 100.0 100.0 100.0 100.0 Revenues (CU m) 100.0 100.0 100.0 100.0 100.0

EBITDA (CU m) 25.0 25.5 26.0 26.5 27.0 EBITDA (CU m) 35.0 35.6 36.2 36.8 37.4 % margin 25.0% 25.5% 26.0% 26.5% 27.0% % margin 35.0% 35.6% 36.2% 36.8% 37.4% % upside 2.0% 4.0% 6.0% 8.0% % upside 1.7% 3.4% 5.1% 6.9%

Capex (CU m) 10.0 10.0 10.0 10.0 10.0 Capex (CU m) 15.0 15.0 15.0 15.0 15.0 % sales 10.0% 10.0% 10.0% 10.0% 10.0% % sales 15.0% 15.0% 15.0% 15.0% 15.0%

OpFCF (CU m) 15.0 15.5 16.0 16.5 17.0 OpFCF (CU m) 20.0 20.6 21.2 21.8 22.4 % margin 15.0% 15.5% 16.0% 16.5% 17.0% % margin 20.0% 20.6% 21.2% 21.8% 22.4% % upside 3.3% 6.7% 10.0% 13.3% % upside 3.0% 6.0% 9.0% 12.0% Source: BofA Merrill Lynch Global Research Source: BofA Merrill Lynch Global Research Assumptions 20k net adds, SAC 50% of 12m ARPU, ARPU 20 units, EBITDA margin 25%, capex / Assumptions 10k net adds, SAC 60% of 12m ARPU, ARPU 40 units, EBITDA margin 35%, capex / sales 10% sales 15%

Benchmarking IT costs Big data and digitalisation are only some of the many levers telcos have at their disposal to enhance IT efficiencies. Telecom operators around Europe provide different levels of granularity regarding the disclosure of different cost items. A number of them do not provide a detailed cost breakdown. We summarize common positions that relate to costs for network operation and IT and benchmark results below. For companies providing a sufficient level of disclosure, the average level of Network/IT opex is around 5.9% of sales (8.8% of opex). While Orange seems to offer the most upside, TDC and Telenor appear to operate most efficiently already.

Chart 19: Telenor and TDC : best-in class IT efficiency Network/IT costs as % of sales 8.0%

6.0%

4.0%

2.0%

0.0% Orange TI Telia Swisscom Telenor TDC Source: Company data, BofA Merrill Lynch Global Research estimates

Following this, we calculate the upside per share implied from a converge in cost efficiency where we assume every operator is able to achieve best-in-class Network/IT opex levels of around 5% of sales. For our calculation we multiply potential cost savings from reaching the opex target by a 7x sector average '17E EV/EBITDA multiple to arrive at the total value of cost savings. From here, we divided this by the current outstanding shares to arrive at a potential upside from streamlining network and IT operations per operator.

European Telecoms | 04 September 2017 33

Table 6: Scenario: Up to 17% and 10% upside potential for Orange and TI in bull case IT / network opex as % of Operator sales Potential savings (€m) Implied EV (€m) Per share (LC) Implied Upside Orange 7.3% 907 6,346 2.39 16.7% TI 6.4% 247 1,730 0.08 9.6% Telia 5.6% 41 285 0.63 1.7% Swisscom 5.5% 40 280 6.16 1.3% Telenor 5.3% 28 197 1.26 0.8% TDC 5.1% 0 0 0.00 0.0% Source: Company data, BofA Merrill Lynch Global Research estimates

In the case of Orange potential savings could result in c17% upside to the current share price while for TI the upside could amount to 9.5%. Further benefits for TDC and Telenor are limited with close to no upside reflecting the already efficient operations Commercial costs: VOD and Telenor seem to have most room to optimize Commercial spend varies greatly across operators. Companies for which there was a sufficient degree of disclosure displayed average commercial spending of 6.3% of sales (9.4% of total opex). While Vodafone (9.1% of sales) and Telenor (8.5% of sales) display a relatively high level of spending as a proportion of revenue, this drops down to around 6.7% at Orange and TI. At the low end, TDC and Swisscom are operating most efficiently with commercial spending at around 4% of revenue.

Chart 20: Commercial spending levels dispersed among operators with Vodafone most active 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Vodafone Telenor Orange TI Telia Swisscom TDC

Source: Company data, BofA Merrill Lynch Global Research estimates

When we calculate potential upside for each operator from reducing commercial spending to sector minimum levels (again applying a 7x EBITDA multiple to opex savings), Vodafone stands out with upside risk of 29%, while Orange could stand to gain 26% when lowering commercial expenses to sector minimum levels, on our estimates. TDC is again operating at the most efficient levels.

Table 7: Significant upside risk for Vodafone from driving commercial spending to best-in-class levels; potentially little upside for TDC/Telia/Swisscom Potential savings from reducing commercial spending to a level of 3.5%of sales. commercial cost Operator as a % of sales Potential savings (€m) Implied EV (€m) per share (LC) upside Vodafone 9.1% 2,664 18,648 63.80 29.1% Orange 6.9% 1,382 9,677 3.65 25.9% TI 6.5% 558 3,906 0.18 22.0% Telenor 8.5% 698 4,886 31.06 19.9% Telia 5.1% 140 980 2.17 5.8% Swisscom 4.5% 95 663 14.61 3.1% TDC 3.5% 0 0 0.00 0.0% Source: Company data, BofA Merrill Lynch Global Research estimates

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Online vs offline – a leaner distribution Physical distribution is a substantial component of telcos cost structure. Increasing sales through digital channels lowers the reliance on sales commissions and cost of physical distribution. Although telcos don’t tend to disclose retail distribution costs, anecdotal evidence suggest it accounts for a substantial portion of commercial costs.

Exhibit 26: Western Europe: digital customer care drives satisfaction

Source: McKinsey

Case Study – Vodafone cost evolution Assuming 10% reductions in Vodafone’s Customer and Technology cost base could derive a material improvement in margin, above 4 percentage points, with absolute EBITDA up 15%. Customer costs are clearly the most material to drive profitable change, but technology costs are also critical.

Table 8: Sensitivity – flexing commercial and IT costs Vodafone H1 2016/2017 cost base H1 16/17 sensitivity cost reduction Revenues 24,051 24,051

Direct 3,700 22% 3,700 Customer 7,000 41% 6,300 10% Technology 3,500 21% 3,150 10% Support 700 4% 700 Other 2,061 12% 2,061 Total opex 16,961 15,911

EBITDA 7,090 8,140 15% Margins 29.5% 33.8% 4.4% Source: BofA Merrill Lynch Global Research estimates, company report

European Telecoms | 04 September 2017 35

Chart 21: Customer costs the main lever in mobile cost base Vodafone H1 16/17 cost base: Support 5% Direct 25% Technology 23%

Customer 47% Source: BofA Merrill Lynch Global Research, company data All-IP: 1-2pp upside potential to long term margins Migration to All-IP is a key enabler of cost savings, firstly in the network, driving lower maintenance and energy costs, but also in service provisioning, with digital customer provisioning substantially reducing costs to deliver new services to customers. Capex benefits include a virtualized network architecture and enable faster deployment of services across multiple countries.

Although disclosure is limited, most telcos are progressing on their migration to All-IP, ultimately allowing a switch off of the legacy TDM network.

We illustrate the main deployments disclosed by operators below, with implied savings ranging from €10 per line per year at DT on the platform side (and almost €30 adding lower service costs), to €24 at Swisscom.

Table 9: All-IP progress: end of legacy approaching Cost savings run rate Number of fixed Saving per line Cost targets (€mn per year) access (k) per year (€) €1.2bn savings by 2020, c€700mn in Germany, of which 1/3 related to platform costs (all-IP: energy, costs to DT 200 19,786 10.1 vendors and maintenance) and 2/3 to service automation Swisscom 88 3,700 23.7 Migration achieved by YE2017, target savings CHF 100m by 2020 (20% 2018, 70% 2019) 100% migration to IP by 2019, €35m run rate opex savings from rationalizing and modernizing legacy network, KPN 60 3,684 16.3 in addition to €25m savings from integrating fixed and mobile backbones and moving towards single IP core Source: BofA Merrill Lynch Global Research estimates, company report

We then apply that logic to calculate the upside for the industry using DT’s cost per line reduction of c€10 per retail line as a benchmark. Savings would range between 1% and 3% of domestic EBITDA, as illustrated below.

36 European Telecoms | 04 September 2017

Chart 22: All-IP potential savings as % of domestic EBITDA Using DT’s c€10 implied cost saving per line, except for KPN and Swisscom where use company provided targets

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

Source: BofA Merrill Lynch Global Research estimates, company report

Exhibit 27: KPN: All-IP savings sources

Source: KPN, 2016 CMD

Exhibit 28: DT : All-IP migration at the core of DT’s savings

Source: DT CMD 2016

European Telecoms | 04 September 2017 37

Capex / investment needs Investment in technologies to ensure quality of services To meet this end, operators are modernizing their network and systems, simplifying existing structures as well as investing in the right set of skills and talent. Exploding video traffic is hitting networks at a time when there is also technological change – the migration to virtualised/cloud-based network architectures in carrier networks.

We see two technologies i.e. Software Defined Network (SDN) and Network Functions Virtualization (NFV) gaining significant traction. SDN and NFV provide ways to separate the control layer from the network hardware, allowing network administrators to configure a controller rather than each machine. NFV also allows for allocating capacity in real-time to areas that need it most and dynamically ensure quality of service. IoT will require networks to upgrade to these more intelligent and programmable architectures because they can scale more efficiently and react to growth or decline in demand immediately.

All large Telecom equipment vendors have solutions that address Carrier plans to migrate networks to service-oriented architectures. Carriers are looking to build networks with unified infrastructure supporting a long list of services, such as VPN, Security, CentralisedRAN, virtual cores/IMS/routing, deep packet inspection and many others – all deployed as Virtual Network Functions (dubbed VNFs).

IoT based technologies on the rise IoT can be segregated as short range and wide range IoT segments of which wide-area is expected to register significant increase going forward. As discussed above increase in these connected devices would require significant investment from service providers. Smart cities (a US$ 1.3-1.6tn opportunity by 2020E) is expected to increase connected devices as depicted in the chart believe.

Exhibit 29: Connected Things: installed base within smart cities (mn)

Source: Gartner December 2015

Operators can provide network connectivity and have an advantage over other ICT peers. As discussed above operators are already investing in software defined and virtual networks which positions them well to tackle security and performance in an IoT set-up. Additionally, telecom operators in deployment, maintenance and decommission of devices on their networks further places them well to play active role in the management of IoT devices during their installed life. Eyeing this opportunity operators are making investments in Narrowband IoT and Low Power Wide Area (LWPA) network, Sigfox, Semtech, Weightless or LTE-MTC technology to support devices that have long battery life lasting a year or more.

38 European Telecoms | 04 September 2017

At a high level, we see the rise in IoT increasing the demands of data centres and network nodes that sit at critical junctions as customers demand more throughput. For enterprises that use data centers, video conferencing, and cloud managed applications, this means more equipment upgrades with 10G ports. On the carrier and content delivery side, service providers and Web 2.0 companies increasingly will install 100G optical equipment to connect the data centres, core, and metro networks.

Developed Europe telecom operators are already investing in these technologies to tap IoT opportunity. In November 2016, Orange Belgium announced that it expects to launch two IoT technologies NB-IoT and LTE-M in 2017. With these technologies company expects to tests its LTE IoT network which would facilitate its commercial launch by the end of 2017. KPN also tested IoT technology that is based on 4G to operate at up to 1Mbps speed. The company’s network is expected to support thisLTE- M technology by the end of 2017. In Dec 2016, Vodafone Germany liased with Nokia and Telit for the development of Narrowband-IoT to tap the IoT opportunity.

Turk Telekom and Nokia signed a Memorandum of Understanding (MoU) to jointly develop 5G radio access network technology. As a part of MoU, both companies will collaborate on 5G test as well as IoT technologies that can be used in services associated with tracking, metering, smart cities, smart home and latency-sensitive applications

Network and asset sharing indicating preference for asset-light model As a technology driven sector, capex is imperative for telecom operators. But this as well is a function of how much incremental growth these investments can yield keeping in view the market growth stage, technology advancements and customer usage patterns. In EEMEA, markets are undergoing technological shifts with some are moving from 3G to 4G, while some taking baby steps towards 5G development.

Major assets held by telecom operators include active and passive infrastructure like a) Legacy infrastructure copper-fixed networks b) Next Generation Fiber c) Data centre d) Mobile towers e) Small cells. Each of these assets have their relevance keeping in view the operating advantage they provide over competition, but we are seeing infrastructure sharing growing between operators as they realize these assets bear huge operating and maintenance cost when weighed against the benefits they offer. Thus, operators across the globe are focusing on asset-light model in a bid to control operating expenses as well as reduce network related investments, while pricing manoeuvre is limited.

LTE sharing growing As we have discussed in past, with 5G development underway, we are expected to see increased sharing of infrastructure among operators as they focus their resources on the related R&D. Operators across markets are actively sharing their LTE networks across the regions in order to efficiently utilize the existing infrastructure. This allows operators to reduce cost associated with construction improves utilization and reduce time-line for launch of services. In 2016 VEON entered into arrangements with both MTS and MegaFon for LTE infrastructure to enhance its coverage. In Europe, Telenor and Telia have recently signed a deal to outsource their Danish mobile network to Nokia. Tele2 and Telenor in Sweden, who already share 2G/4G networks have announced in 2016 that they will build a common 5G network.

Fixed line, still treated as differentiated telecom asset On the contrary, we feel telecom operators still attach a lot of importance to their ownership of fibre optic network and we have seen limited sharing on this front. These fibre infrastructure investments require significant capex investments with long pay- back period and uncertain revenue that flow over long-run. As a result, operators tend to consider fibre network a significant competitive advantage.

European Telecoms | 04 September 2017 39

Tower sharing and sales and lease back gaining grounds Tower sharing is gaining traction as operators recognise an avenue to share expenses associated with maintaining these assets, as well as realize revenue streams and high profitability from colocation. In our note, we analysed economic feasibility of ownership of tower assets vs sales and lease back. We also captured potential benefits accruing to the operators in the event of spin-off of these structures, and listing gains and higher profitability if a tower JV is formed amongst all the players.

In Europe, the tower market has begun heating up after leveraged operators. Cellnex and Inwit remain the biggest telco tower players while Telefonica has created its tower / cable division Telxius. Bouygues has recently sold >4k sites to Cellnex (buy & build) in multiple tranches while Sunrise has also sold >2k sites, again to Cellnex. These liberated tower portfolios may help increase the scale of mobile infrastructure sharing in these markets between operators from current levels.

Chart 23: An example on potential savings in event of lease vs carrier build- American Tower Present value of carrier network build out alternatives over different time period (USD)

400,000 350,000 300,000 144,140 250,000 155,976 200,000 174,359

150,000 197,062

100,000 50,000 212,094 253,293 158,720 333,079 368,070 394,433 286,638

89,575 - 5 years 10 years 15 years 20 years

Carrier Build Tower Lease

Source: American Tower Company Presentation; BofA Merrill Lynch Global Research Note: Box indicates savings; Carrier build scenario assumption: USD 225,000 construction cost, USD 1,250 monthly operating expenses with 3% annual escalator, 9% Weighted Average Cost of Capital (WACC) Tower lease scenario assumption: USD 1,800 monthly lease with 3.5% annual escalator, 9% WACC

Data centre ownership equips well to deliver services to enterprises Data centres again are large real-estate infrastructure involving significant capex but yield lower profitability. Operators in the past emphasized on its ownership in order to better manage their IT, back-end technology and ensure superior connectivity. These data centres can additionally be utilized for generating additional revenue streams by supporting cloud architecture. Operators by using NFV are looking to build their cloud capabilities. SDN technology is being used to automate and control the existing platforms.

• Telefonica: TEF has a global datacentre footprint, present in Brazil, Argentina, Colombia, Peru, Chile, Ecuador, Mexico and Spain. All are connected via a high- bandwidth network. In particular, Telefonica’s Spanish datacentre comes with Tier IV Gold certification guaranteeing worldwide infrastructure availability, 1 of only 8 such datacentre globally.

• Deutsche Telekom: T-Systems has 53 data centres globally including Germany’s biggest data centre in Biere (22k sqm). DT has conducted work for e.g. Shell on a global basis, taking over data centres with 12k servers in the US, Netherlands, UK and other countries and migrating 80% of application onto its dynamic services platform.

40 European Telecoms | 04 September 2017

EEMEA telecom operators have been investing in data center expansion or development too:

• MTN opened a data centre in Nairobi, designed in accordance with Tier III standards. The facility caters small and medium sized enterprises, and provides cloud service.

• MegaFon operates 18 data centres across Russia constructed in accordance with international standards and offering uninterrupted service to corporates and residential consumers.

• TCELL unveiled Turkey’s largest data centre in Gebze, near Istanbul. With its new building, Turkcell aims to turn Istanbul into a regional hub of data, and serve global internet companies such as Google and Facebook as well as Turkish public and private sectors.

• Vodacom Business opened an energy-efficient data centre in Midrand, South Africa aimed at providing cloud services to enterprises. The facility is used to host cloud services as South African businesses increasingly move away from traditional on- site hosting to shared data center environments.

Right set of skills, a necessity in digital transformation Another key obstacle in front of telecom operators to realize digital transformation is lack of right skilled and knowledgeable workforce. With the focus now shifting towards software aspect of network differentiation, we believe organizations currently lack these capabilities in their employees. Additionally, digital transformation would require not only innovation, as well as adaptability to these changes. Thus, companies would focus on recruiting right skilled workforce, merging new and traditional workforce as well as emphasise on building industry expertise and foster adaptability to these cultural changes.

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Ticker Company Name BofAML Rating Price ALLVF Altice NV -A C-1-9 19.335 ALVVF Altice NV -B C-1-9 19.365 BZQIF Bezeq B-1-8 5.28 BOUYF Bouygues B-2-7 38.82 BT BT A-2-7 19.1 BTGOF BT A-2-7 288.45 XWHXF Cellnex B-3-7 18.66 DTEGF Deutsche Telekom B-2-7 15.18 DTEGY Deutsche Telekom B-2-7 18.09 XDNAF DNA A-1-7 15.29 EITOF Ei Towers C-3-7 49.96 ELMUF Elisa B-3-7 36.36 ILIAF Iliad B-1-7 221.7 XISWF Inwit C-1-7 5.65 KKPNF KPN B-1-7 2.955 LBTYA Liberty Global C-2-9 34 MFOYY MegaFon C-1-7 10.05 XCNTF MegaFon C-1-7 570.7 MBT MTS C-2-8 9.99 XKIFF MTS C-2-8 264.9 FNCTF Orange B-2-7 14.255 ORAN Orange B-2-7 17.01 MBSRF Orange Belgium C-2-9 20.1 HLTOF OTE C-1-7 10.55 XPHSF Play C-1-7 36.59 BGAOF Proximus B-3-8 29.415 XRWSF RAI Way C-3-7 4.642 ROSMF Rostelecom C-3-7 66.5 SCMWY Swisscom A-2-7 50.34 SWZCF Swisscom A-2-7 482 TLKTF TalkTalk C-3-8 200.7 TDCAF TDC B-1-8 37.17 TELDF TEFD C-3-7 4.546 XBTLF Tele Columbus C-1-9 9.54 TLTZF Tele2 AB B-3-8 92.6 TIAJF Telecom Italia -RSP C-1-9 0.6415 TI Telecom Italia SPA C-1-9 9.7 TIAOF Telecom Italia SPA C-1-9 0.795 TEF Telefonica SA B-1-7 10.77 TEFOF Telefonica SA B-1-7 9.056 TLGHF Telenet Group B-1-9 57.05 TELNF Telenor A-1-7 159.6 TELNY Telenor A-1-7 20.23 TLSNF Telia Company A-2-7 37.92 TRKNF Turk Telekom B-2-9 7.18 TKC Turkcell B-1-7 9.46 XOFTF Turkcell B-1-7 13.21 VEON VEON C-1-7 4.22 VOD Vodafone Group A-1-7 29.03 VODPF Vodafone Group A-1-7 219.5 Source: Bank of America Merrill Lynch Global Research. Priced at Market Close on 1 September 2017.

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Analyst Certification We, David Wright, Frederic Boulan, CFA, Haim Israel, Parin Shah, CFA and Sunil P. Patel, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Special Disclosures BofA Merrill Lynch is currently acting as Financial Advisor to Vodafone Group PLC and Vodafone India Ltd in connection with its proposed combination of Vodafone India and Idea Cellular Ltd, which was announced on 20 March, 2017. The proposed transaction is subject to approval by shareholders of Idea Cellular Ltd. This research report is not intended to (1) provide voting advice, (2) serve as an endorsement of the proposed transaction, or (3) result in the procurement, withholding or revocation of a proxy.

European Telecoms | 04 September 2017 43

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