Deutsche Tele Ag Ads (DTEGY.PK)
December 06, 2012 11:00 am ET
René Obermann - Chairman of the Management Board and Chief Executive Officer
John J. Legere - Chief Executive Officer and President
Neville Ray - Chief Technology Officer
Disclaimer: This presentation contains forward-looking statements that reflect the current views of Deutsche Telekom management with respect to future events. These forward-looking statements include statements with regard to the expected development of revenue, earnings, profits from operations, depreciation and amortization, cash flows and personnel-related measures. You should consider them with caution. Such statements are subject to risks and uncertainties, most of which are difficult to predict and are generally beyond Deutsche Telekom's control.
Among the factors that might influence our ability to achieve our objectives are the progress of our workforce reduction initiative and other cost-saving measures and the impact of other significant strategic, labor or business initiatives, including acquisitions, dispositions and business combinations and our network upgrade and expansion initiatives. In addition, stronger-than-expected competition, technological change, legal proceedings and regulatory developments, among other factors, may have a material adverse effect on our costs and revenue development.
Further, the economic downturn in our markets and changes in interest in currency exchange rates may also have an impact on our business development and the availability of financing on favorable conditions. Changes to our expectations concerning future cash flows may lead to impairment write-downs of assets carried at historical cost, which may materially affect our results at the group and operating segment levels. If these or other risks and uncertainties materialize or if the assumptions underlying any of these statements prove incorrect, our actual performance may materially differ from the performance expressed or implied by forward-looking statements. We can offer no assurance that our estimates or expectations will be achieved. Without prejudice to existing obligations under capital market law, we do not assume any obligation to update forward-looking statements to take new information or future events into account or otherwise.
In addition to figures prepared in accordance with IFRS, Deutsche Telekom also presents non-GAAP financial performance measures, including, among others, EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, adjusted EBIT, adjusted net income, free cash flow, gross debt and net debt. These non-GAAP measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with IFRS. Non-GAAP financial performance measures are not subject to IFRS or any other Generally Accepted Accounting Principles. Other companies may define these terms in different ways.
Ladies and gentlemen, please take your seats. We'll start. Thank you. Ladies and gentlemen, please be aware of the regular disclaimer, as well as the additional Safe Harbor statement that we added due to the pending business combination of T-Mobile USA and MetroPCS. Thank you.
Ladies and gentlemen, please welcome your host, Stephan Eger.
Good evening and welcome, ladies and gentlemen, to our Capital Markets Day of Deutsche Telekom 2012, and thanks for all for coming. I know it wasn't quite easy. We had a couple of delays in trains and planes, et cetera. And also welcome to all the ones who are following us via webcast and streaming. And apologies that we do that event on, what we call in Germany, Saint Nicholas Day. You know this is a very important family day in Germany because that's the day when holy Saint Nicholas comes around and for the really nice kids, he brings along candy and for the naughty kids, he brings along a club. And you can imagine what he had in stake for me. When I was a little kid, it was always the latter one. I'm not quite sure whether it will be different today, to be honest.
So we'll be having a good set of presentations over the next 2 days, and I'll quickly run you through the agenda. We'll start today with Rene Obermann presenting the group strategy for the next 3 years; followed by John Legere, the new CEO of T-Mobile U.S. and part of the new management team of the combination of MetroPCS and Deutsche Telekom; and then thereafter, we have an evening event, where we actually show you past products who generate revenues at Deutsche Telekom and hopefully, we'll have a glass of wine together as well.
Tomorrow, we'll be have presentations of Claudia Namat, our now COO for the European and Technology business in our DT entity; followed by Niek Jan van Damme, our COO for the German business; and after a little coffee break, we'll have a presentation of my colleagues from T-Systems, Reinhard Clemens and Klaus Werner; and the wrap-up will be made by our CFO, Tim Höttges, will show you how it all fits into the financial envelope and the financial steering of Deutsche Telekom.
By the way, you will notice that all the presentations will have the same structure and the same look and feel. We'll do a review for the 2010 to 2012 area. We'll be quite blunt and honest, what we achieved and what we have not achieved. We'll then describe very quickly how we see the market trends in which we're operating before moving on to the group strategy 2013 to '15, the financial outlook. And finally, you set -- you'll find a set of ambition levels for 2015 for the crew, as well as for the single segments.
But now, without any further ado, let's move on. Let's get started with the Capital Markets Day, and let's welcome on stage my CEO, Mr. René Obermann.
Very welcome to all of you. I'm very happy that you made the way here and that you didn't get stuck in the traffic. I want to also welcome you on behalf of the entire management team of DT, the most wonderful management team you can imagine. They're all over there, and maybe you will briefly stand up and bow to your owners and say hello. That's my team. We hope you find these upcoming 1.5 days most informative and useful. I can tell you, we've put a lot of work into preparing for this. Sometimes, I felt there was no bigger purpose in life than to prepare for this day. But I sometimes also get reminded that there are customers out there. So we hope you find it useful and to take away key messages and like the story and thereafter, hopefully, buy our shares.
Without much preparation and without much ado, I would like to go straight into the key messages and I want to open my presentation with key points, 5 of them. Number one, if we look at the 2010 to 2012 period, we have achieved against most of our objectives, against the industry trend, and we will show you where and to what extent. Second, we are going to make significant additional investments into the German and into the United States market for good reasons, because we see new opportunities. Third, we finally have reached an agreement with Apple and we will launch Apple products in the United States in 2013. Fourth, overall, we see a chance to return to modest growth in 2014, driven by revenue stabilization in Germany, driven by a return to underlying growth in Europe in 2014 and driven by a return to growth in the United States. And fifth, as a result of significant investments and as a result of the introduction of the Apple products in 2013, this will lead to a lower free cash flow. And the dividends also will be lowered to a prudent and sustainable level. And as we delivered over the last 3 years against our promises, we intend to do so over the next 2 years and we will give you guidance for the dividend for the next 2 years.
The first part is what happened between 2010 and 2012. Back in 2010, if you recall the Investor Day, and I think it was in February, if I'm not mistaken, we -- or in March, we gave you a 3-year plan, strategically and financially, as to what we wanted to achieve. Overall, the strategy implementation, which we presented to you in 2010, is well on track. On top of that, the financial strategy and a 3-year dividend plan has been executed or we intend for the third year 2012 to continue to execute with our dividend for 2012 to be paid in 2013.
A couple of key achievements over the last 3 years. Just to recap briefly what happened, what we promised and what we delivered, 4 blocks: Fix, transform and innovate, plus how did we address the investor side. On the fix part, if you recall what happened, we had to fix our situation in the U.K. It was very difficult. We had to do something about the U.S. market and we had to work hard to keep our broadband market share in Germany and to improve our profitability, plus, we fixed the situation, the ownership situation, in Poland.
I will talk the U.S. -- about the U.S. in more detail, just briefly addressing the U.K. The asset developed into 50% of an outperforming market leader on track for further value generation. Strong contract growth and reduced contract churn, mobile service revenues x regulation are growing, LTE rollout plan ahead of competition, 33% POP coverage already in 2012 and well beyond 90% in 2014. So that's a very, very good story in the U.K. I think it's fair to say we fixed a big problem and turned it into a big opportunity.
Poland, we had a 10-year ownership dispute. We solved it. Ownership, 100% secured. Rebranding to T-Mobile, successfully executed in 2011, good story. Germany, personally, I find the German team does a very good job. We are defending ourselves against asymmetric regulation, against a strong cable competition very well. And not only that, we also increased our profitability. We did a great job on efficiency, defended our market share mostly and we improved our profitability margin by 4%, the most important market.
On the transform side, the biggest cultural revolution for this company was the amalgamation of the mobile and the fixed business. Nobody thought this would get done. We did it and we did it in the last 2.5, 3 years. One company was created in Germany and in 3 other major markets, and gradually, we are seeing cross-selling benefits, one-stop shopping experiences for our customers, churn reduction and so forth, and there is more to come.
On the cost side, we promised a significant efficiency improvement. We over delivered. We promised over 3 years, EUR 4.2 billion, we accomplished EUR 4.5 billion within 2 years, one year ahead of plan. And the third big block, also a massive structural reform for DT, we put together all IT resources under one roof and we established Telekom IT. Now, if you are familiar with the situation of most telcos, IT systems and legacy systems grew from the various parts of the organization, mobile and fixed, in different directions, a lot of redundant work and stuff going on. We've put it all together and the objective is not only to be better in delivery, but also to increase the efficiency significantly. The objective is to save EUR 1 billion IT spend by 2015.
On the innovation side, in Europe, we defined 4 corporate priorities: Machine-to-machine, cloud, rich communication suite and -- blackout, just a second, that happens -- mobile payment. So these 4 things are group-wide innovation projects where we intend to roll them out across our footprint, leverage the scale effects and become successful in those areas. The innovation priorities are defined, the growth areas are overall mostly on track, the biggest one being the mobile Internet opportunity, in which we believe since many years, for which we have made significant investments already and where we are the leader in quality, network performance and also in the market overall in Germany.
The partner program is also accelerating. We realize we cannot do everything ourselves, so we need to collaborate. We are a big electronic distribution engine for content and for services and therefore, our partnering program has increased, has got traction. And we've collected a number of Internet partner companies which we cooperate with, Lookout, for instance; Box, which we recently introduced at our Cloud Day; or many others, smaller and bigger ones. And our objective is to increase the number of partners and to leverage our distribution, our technology platforms and our marketing.
On the investor side, we promised something which we delivered. We promised a dividend level of $0.70 over 3 years and we delivered against that. The first 3-year shareholder remuneration and dividend commitment which we introduced back in 2010, we introduced ROCE as a steering mechanism for the group. We didn't accomplish all of what we had intended, but we introduced ROCE as a steering mechanism and we continue to do so. I think we had -- it's fair to say we had strict M&A discipline and very good execution over the last 3 years, and I will come to some of those deals in a minute. As a result, we accomplished a good relative total shareholder return and our valuation performance relative to our peers has been also beyond average.
In more detail, the U.S. situation, what happened over the last 12 months, 5 big steps. We were very busy. One, after the AT&T deal broke up, we received spectrum in a number of important markets. We received $3 billion in cash as break-up, and the second step was we made use of -- we invested into network modernization, a significant program. 37,000 sites will be modernized in 2012 and 2013, spectrum reallocation has largely happened already and we are upgrading our sites in the next 12 months. Verizon spectrum, we accomplished more spectrum, we achieved more spectrum with -- through a deal with Verizon, which enables us to build a more efficient network and to have a better LTE coverage. Then, most recently, we announced the tower transaction, $2.5 billion proceeds from that very transaction, which gives us the chance to maintain our operational flexibility and makes us more cash-rich. On the last block, the biggest one, MetroPCS. We announced it in October. It creates the leading value carrier in the United States. It delivers an NPV of synergies between $6 billion and $7 billion and it gives us an improved spectrum position. In many markets, 2x 20 megahertz for LTE. That is significant. That is -- makes us one of the leading carriers in this regard in the U.S.
However, these are all steps in the right direction, but we are also aware of the market reality and we think that over the next year is the market will need more consolidation. Through this combined entity, through this reverse merger into MetroPCS, we will be a listed company and it will give us more flexibility to participate in further consolidation moves. And we think these consolidation moves will be necessary given the need of scale, the spectrum reality in the market and other circumstances. So this is something we are aware of and we believe this will happen and we are open and we would not rule out any further moves.
This is the summary of the KPIs which we introduced to you or which we told you we would strive for back in 2010, some of them we have reached fully, some of them we have reached partially and some of them we have not accomplished.
First, what happened on the group Internet-based TV services. We're about -- we are serving about 5 million customers by now. The difference to 5.5 million mostly comes out of Germany. We are still growing and we are growing in Germany with Internet TV, but not yet to the rate which we had targeted. So we are at about 5 million but still growing and therefore, we consider that picture as yellow.
The group-wide mobile customers here, we wanted to get to 140 million. We deactivated over the last 1.5 years quite a number of inactive prepaid SIMs and this number excludes the number which we have accomplished, 132 million or so, excludes the U.K. So overall, yellow on track.
Group-wide fixed broadband retail, done; 17.5 million so far and on top, there is wholesale customers in fixed line. Revenues, more than EUR 6 billion mobile Internet revenues, EUR 6.4 billion this year, that's the forecast. So we are well on track to accomplish our 5-year objective to get it up to EUR 10 billion. However, we did not yet stabilize the German revenue. We still have a small decline in Germany. It's the trend in Europe and if we compare ourselves to our peer group, we're doing very well, but not yet fully stabilized our revenues in Germany.
Our Save for Service program, over the last 3 years, well on track, better than expected, EUR 1.8 billion net savings just in Germany and SEE markets. So EUR 4.2 billion overall, EUR 1.8 billion net savings just in Germany and other European markets.
Free cash flow, our objective was to slightly increase the 2010 level. That has not fully happened, only in 1 year. But grosso modo, we maintained it at around EUR 6 billion, so overall, strong free cash flow performance.
ROCE, our very ambitious objective, not accomplished. If we exclude the latest depreciation for the U.S., we would have only accomplished 0.5% or 50 basis points. That's not good enough. We keep it on the agenda for the next years. We have again set ourselves ROCE objectives, and Tim will talk about that in more detail.
Share renumeration, EUR 0.70 dividends paid in 2 years and the third year, we will recommend the same thing to our supervisory board and then to the AGM. So far, delivered, but the share buyback program was only delivered 1/3 out of 3 tranches. The reason is simple. We believe the money will be wisely spent and invested as opposed to now being used for share buybacks. And we believe that the second and third tranche would be invested into Germany and the U.S. will get better returns over time.
What happened as a result? Over the last 3 years, our shareholder returns are beyond average; worse in Vodafone, but better than other peer group. With a TSR since 2010 of 13.5% and a relative improved valuation to 4.7x EBITDA and a fairly stable 5-year CDS spread and ratings table, we compare ourselves favorably to most of our peers. So that was the result of a stakeholder-oriented approach. And I can already say, we intend to continue a stakeholder-oriented approach and also look at the shareholder side, but also at the debt side.
Markets and trends, what's the industry situation and how are we going about it in detail. The picture remains mixed. We have pressures, particularly coming from the economy. We do not think the European situation is resolved. We think Europe will continue to be under much economic pressure for the next couple of years. We're realistic about it, but we see the U.S. recovering. And so our portfolio in Germany and the U.S. is most important to us because Germany within Europe is a very strong market.
Overall, the market remains under price pressure, particularly in the traditional part of the business, but there are also new growth opportunities by the IP transformation, in particular, quality of service management, which will allow us for tiered pricing models, which will allow us for new business models; virtual PBX solutions; rich communication suite based on IP, here, we call it joyn; and more efficient networks, where we do run very aggressive IP transformation or all IP transformation programs, particularly in Eastern Europe, in Macedonia and Croatia as test markets.
Changing regulation, probably the most important topic to talk about tonight and tomorrow because that does trigger a new approach to investing into our key market in Germany and potentially, in other European markets as a consequence. Very, very important.
And growth markets, in particular, mobile Internet, intelligent networks, cloud-based services and so forth. I will only focus, instead of going through all these things, I will focus on 2 blocks: One, the regulatory environment; and b, the growth markets.
Neelie Kroes, in July, the commissioner, has made a revolutionary speech and announcement. She has said that she will want to change the regulatory framework in Europe because she and her team understands, and we had many conversations, she -- they understand that investment-friendly regulation will eventually lead to needed investments in our infrastructure. They also see Europe falling behind and they understand the reasons, and the reasons clearly are in regulation. She announced a regulatory framework to be stable until 2020. That's a revolution, 8-year planning horizon for the first time. Second, she said the profit pool, the existing profit pool, the unbundled local loop, should remain stable, no more price pressure on the unbundled local loop. So we have a more stable revenue source to generate enough cash to make these long-term investments with. Third, she said no more -- no cost regulation for optical fiber networks, for the next generation access networks, provided that there is, and I think we can all say there is, it's demonstratable, sufficient competition and nondiscrimination practices in the market which goes without saying. And fourth, next generation networks would include VDSL, fiber to the curb plus vectoring and this would also be supported by the European Union. They call it VULA, virtual unbundled local access, which is nothing but, we call it bit stream access. It's the virtual product for our competitors and it replaces the traditional unbundled local loop from the street cabinet to the household. So as opposed to sublocal loop unbundling, we would provide VULA, virtual unbundled local access, which we're happy to do on the basis of commercial negotiations with our potential customer competitors.
The most important point is that this regulatory framework, which I think is revolutionary, which I think is right, where Neelie Kroes really understood what this market needs, that this gets translated into national regulation as soon as possible. This is the precondition for us making additional investments into this market, and this should happen, hopefully, in the next couple of months in Germany and other European markets. It's our basis for investment plan.
If you look at the total market, you see the projections here are straightforward. Traditional telecommunications, in fixed and in wireless, including text messaging -- now imagine this, a few years ago, everybody was texting, now we call it traditional communication. This market moves fast. It's going down and we need to be realistic. It's going down by 3%. Mobile Internet in our markets, including the U.S., is going up from EUR 43 billion to about EUR 84 billion in our addressable markets. By far, the U.S. is the biggest chunk of that growth. Connected Home, primarily content services, but also additional services, security and whatever you name, falls under that category, triple play and more, is growing slightly by 3%.
On the ICT side, where T-Systems is a cloud pioneer since years and T-Systems is continuing to build its cloud capabilities, but we are also active in selling to the small and midsized companies, on the ICT side, the cloud is the most important part. Cloud services and virtualized IT grow from what it is today, about EUR 80 billion globally to about EUR 158 billion in those markets where we have -- where we are represented, whereas conventional ICT services are growing mildly only by 2%. So that's kind of the cosmos of the opportunities we're working in.
Our objectives for the next years are pretty much what they used to be a few years ago. We have some changes, but overall, we pursue this grid of numbers consequently. We said a few years ago to you we are striving for EUR 10 billion revenues in mobile Internet. And here I stand today and I say, we will achieve that number. We might even overachieve that number. The trajectory looks very good and to me, we've only scratched the surface of wireless Internet services. The cars get connected, cameras from Samsung now have a radio interface. You don't need much fantasy to imagine that the connectivity business in wireless Internet is growing like that. It's like an S-curve and the market has just taken off.
Connected Home, our objective is to get up to EUR 7 billion. Online consumer services, for instance, the Scout business, which you may be familiar with, or STRATO or any other of our portfolio, or our portal business even, our multimedia services, et cetera, all small flowers, but they're growing nicely and we intend to get it up to EUR 2 billion roughly.
T-Systems external goes up to EUR 7 billion and the intelligent network services, in particular, currently, we are successful in the health sector. That all together will go up to between EUR 800 million and EUR 1 billion. So we're more or less in line with what we said a few years ago. Our revenue mix as a result of that is forecast to become more towards these new growth areas, the revenue mix changes from what it was, 24% in 2010 to then up to 45% in 2015, coming out of these new areas of growth.
How do we go about it? It doesn't happen by itself. First of all, these are the objectives per segment. We are forecasting to stabilize our revenues in Germany in 2014. We will compete aggressively against not only the wireless players, but also the fixed line players. We are not leaving the turf to them. So far, in Germany, we've defended ourselves excellent. However, the challenges will grow and we need to do something about our network performance in order to remain competitive.
Europe, we are returning to underlying growth. There's a lot of headwind in Europe, economy, state budgets, extra taxes and so forth. And yet stripping these effects off, we believe we can return to underlying growth in 2014.
Reinvigorate growth in the U.S. based on network modernization, based on an aggressive marketing, a clear position on the value side, new distribution channels, B2B approach and the cooperation with Apple, we believe we can get back to growth. And you will hear John later on. I think our morale has increased after the AT&T deal. We are on the right track now to get back to growth.
On the digital business unit, where all the new activities, the small plans are accumulated, we can generate double-digit growth, albeit on a low start level. And on the T-Systems side, our objectives are: the market unit; the external business; profitable growth; improved profitability; decrease our cost structure, because in some cases we are too expensive currently, particularly in systems integration. And on the internal side, Telekom IT side, our objective is to deliver quality, defined quality at lower spend, very important part of our efficiency program.
How do we go about that? Very simple. We will compete aggressively, we will innovate with passion and we will transform with rigor. Compete, transform and innovate, that's the 3 building blocks. And we have 4 key blocks where we go. Seamless connectivity, which means we combine fixed and mobile technologies so our customers are always best connected. When you, as a customer, are with T-Mobile or with Telekom here in Germany, you can use our hotspots and we'll increase the number up to 18,000 in the next couple of years and you do that seamlessly. You can use the best LTE and HSPA network and you can use the best connectivity service also on the fixed line side. Seamless connectivity for the gigabit people, gigabit society.
More innovation, not only by ourselves with more agile methods, but also by cooperation with third parties, secure cloud solutions and best-in-class customer experience. That is one of the most important differentiators. As of today, in Germany, everybody knows this, Telekom are the best in customer service. A few years ago, none of you, none of our customers, none of the media would have ever thought that would be possible. Everybody was, pardon, criticizing us because of bad customer service. Now, everybody says our service is better. We are winning every test, every shift environ [ph] test, every turf report, everything. And that is very important to us because we cannot differentiate ourselves by being the cheapest. We have to differentiate ourselves by being the best experience, and we will not rest up until our lead is that big. And therefore, Germany is continuing with very consequent customer experience programs, eliminating the glitches and the problems which we still have because not always everything goes well.
Europe is doing the same thing. We work on the network modernization program in the U.S., as I said before, Apple partnership, integrated network strategy for Germany. These are the compete elements. The transform elements, all IP transformation, continued efficiency program, our target is EUR 2 billion or more. So far we only identified measures up to EUR 1.6 billion, we'll go beyond that. However, our track record in efficiency, I think, is credible. We've done a great job in the last couple of years in improving efficiency. We always overdelivered. Here's our -- so far our targets, we don't want to overpromise and underdeliver, and therefore we'll go for that again.
On the innovation side, I said it all before, intelligent networks in cloud and corporate innovation priorities: compete, transform and innovate. This is our -- the way how we go about it in the next couple of years.
The German strategy is very simple: full steam ahead on LTE. We are exclusive currently with this device on LTE in 1800 because we were aggressive in the auction on 1800 2 years ago, and we have rolled out an 1800 network in major German cities, Cologne and other cities. And therefore, currently, the iPhone on LTE 1800 works on our network exclusively. You cannot get it elsewhere. And that advantage hopefully remains for a while.
Now, number one, LTE rollout, boom, full-fledged. Fiber rollout, fiber-to-the-curb, again, based on this change in regulation, we will go for that. And we go up to 65% coverage in the next couple of years with an option to go even beyond that. But that does require some public co-funding because going beyond 60% or 65% is going to be quite expensive, and we hope to find from the connecting Europe facility to local corporation with municipalities and regions or even the state, some co-funding programs. They are needed.
On top of the FTTC program, we'll introduce vectoring. Vectoring gives us 100-megabit download. Okay, that's competitive. More importantly, vectoring gives us 4x better upload. Vectoring gives us up to 40 -- 40-megabit of upload. Why is that important? Cloud. The more people and the more companies and the more small companies go into the cloud, and they will, the more needed is the upload speed. Cable cannot compete. Cable can compete on the downloads, cable cannot compete on the upload. Cable cannot compete on customer service. Cable cannot compete in combination of the tariffs and the service bundles with wireless. So we will work on competitive differentiation against cable.
And lastly, we are working on something we call hybrid access. Hybrid access means that devices based on software can combine the wireless and the wireline/Wi-Fi speed. That is possible. But on the long run, we'd like to see routers to combine the 2 and then provide even better experience for our customers. Then you combine the characteristics of a wireless network, the speed, but peak speed with the capacity of a fixed-line network. So we're working on this. The introduction date is not yet clear, but we have it as one of our key objectives for the next 2 to 3 years. So that's our strategy for Germany. With that integrated network strategy, we will compete against cable successfully.
U.S. -- and John is much more qualified to talk about. He's only here since 2 months. It feels like he's here since 2 years. He's already deep in all matters. We are going for a quick rollout of LTE. First half in 2013, we'll cover up to 100 million POPs. The other half in 2013 we'll cover up to 200 million POPs. And more importantly, through the spectrum refarming, we're also increasing the availability of HSPA based on the PCS spectrum and that goes up to 200 million POPs by the end of 2013.
Now again, we've entered with Apple in a relationship. I cannot go into more details, I'm afraid, so you'll have to stick to -- you have to make your own assumptions. But the numbers in our free cash flow projections, the Apple introduction is fully baked-in, and the only thing I can say is I'm glad we finally got to an agreement. I'm glad we're going as fast as we can together with Apple to bring products to the market and offer a great customer experience, not a limited one, a great customer experience with our combined network. And our U.S. team is working very hard to bring the network performance to a superior level including LTE, and the financial guidance incorporates all those elements.
What's the outlook? Two things, one is Germany and the other one is the U.S. That's the focus. Everything else is more details. Today, we're doing EUR 8.3 billion of investments, next year we'll raise it up to EUR 9.8 billion. The biggest chunk next year is in the U.S. It's the -- it's largely impacted also by the PCS integration, the CapEx, and by the network modernization.
The year after, the U.S. CapEx normalizes to about $3 billion. But then, the German CapEx goes up. In 2013, going into the INS strategy, intelligent network strategy for Germany, integrated network strategy, means we are preparing, but there is quite a lead time. So the peak CapEx is coming in the years thereafter.
But the U.S., next year, will peak in its CapEx. As a result, higher CapEx of EUR 9.8 billion leads to lower cash flow of about EUR 5 billion next year. And then in 2015, we still are on a high CapEx level because of the German program, but our free cash flow is expected to be again on the level like this year, at EUR 6 billion roughly.
So how does it look like in a financial summary? We're addressing the equity side, we're addressing the debt side and we're addressing the value creation side by running the business in the right way. On the equity side, the dividends are forecast to be EUR 0.50 for 2013 and 2014. And in 2015, we will revisit them because we believe we have a very good case for 2015 again, yes. So the free cash flow will be lower for 1 or 2 years, but then in 2015, it will definitely go up significantly. The alternative, by the way is very attractive, is the dividend in-kind. So that is the shareholder side.
On the debt side, we continue to work on having undisputed excess to debt capital markets. Even though the rating agencies have moved their -- how do you call that, their criteria recently, we reflect that by saying our rating band is between A- and BBB. That gives us undisputed access to the debt capital market at decent rates. Our net debt to adjusted EBITDA is forecast to be between 2 and 2.5, the equity ratio between 25% and 35% and liquidity reserves recovering maturities of the coming 24 months.
Value creation, efficiency management remains an important element of our strategy going forward because we have to have flexibility also when economy turns bad. So we need to have resilience, and therefore we work very hard on the cost side, continue to work on this by about 2 billion, as I said, and we try to increase the ROCE to 5.5%, again, another attempt. You may be skeptical, but we are committed to do this.
Portfolio management, no big M&A, at least not -- no big M&A, not outside footprint, remain disciplined, strategic revenue of Scout in everything, everywhere. That's also an important message. We see what we do best to create value, and Scout performance has been great over the last years. Now we look at ways to maintain that great growth level, and therefore we look into these 2 -- particularly 2 -- these 2 assets and review the options.
Risk management, if you think about it, some of the parts, 85% of our portfolio are in low-risk countries from a value point of view, 85%. And that's I think fairly good in these days.
So that's the picture from a financial summary as I can explain it. Tim is much more precise and detailed, and he will give you more details tomorrow as my colleagues will on other topics. I just want to leave you with our guidance and that looks for next year between EUR 17.4 billion and EUR 18.4 billion, including PCS. It looks about EUR 5 billion free cash flow, excluding or including MetroPCS, doesn't change much. The dividend per share is at about EUR 0.50, including or excluding PCS, the same thing.
The mid-term ambition goes beyond that. We believe we can grow again in 2014. We also can grow again the adjusted EBITDA in 2014. We can provide a group free cash flow in 2015 of EUR 6 billion. We can improve the adjusted EPS to EUR 0.8 to -- the ROCE to 5.5%, and we will review the shareholder remuneration policy in 2015. And we only have visibility for 2 years, but we believe there's a great opportunity if we do the right thing now to stop the trend, to swim against the current a little bit because of the regulation changes and to get back to new growth if we do the right things. And we need to invest something now in order to get there.
So I hope you can understand the logic, I hope you find it appealing. But I think the most important game changer for next year is the U.S. And therefore, I brought somebody who's really only a few weeks with the company and already very deep in all those matters.
And I think I can seamlessly hand over to Stephan Eger. It's not him. All right, thank you very much.
Thanks, René, and sorry for the seamless handover, but the young charming ladies need some time to hand out the presentations. And that is going to be filled with some jokes from my side.
No, jokes aside, we are moving on now with the presentation of the U.S. management team. And you all know that we have laid out a combination in October of Deutsche Telekom with MetroPCS, a combination which we find is highly value generating and is really bringing us forward in the U.S. And therefore we decided to present to you, at least partially, the new combined management entity, and that is led by John Legere, the President and CEO of T-Mobile U.S.; Braxton Carter, the Vice Chairman, CFO of PCS; and Neville Ray, who all of you may know, the Chief Technology Officer of T-Mobile U.S.
And quite a few things have changed actually since 2010. You may remember the legendary appearance of our U.S. management team in 2010. What has actually changed is the CEO is far better looking and the CFO has no broken arm. So welcome on stage, John Legere; Braxton Carter; and Neville Ray.
John J. Legere
Okay, good evening I'm glad Dragos [ph] is in the front row here because we got together last week and he was in unanimous agreement with every aspect of my plan. And so he'll be certainly there cheering us on. I know there might have been 1 or 2 small disagreements we have, but it's great to see you. Just share with your neighbors how compelling this plan is.
Listen, I want to start as he just said, I'm the new Chief Executive Officer of T-Mobile U.S., and I've been here long enough to know a few things that certainly there has been a period of time here where you've been hearing, I'm sure, about the U.S. business and how it's going to change. And some of the messages you hear today may sound familiar, and I'm cognizant of that. But I'm going to try to be very specific about what's different, and I'm going to be very clear about some of the issues that we're working on. And I'm very certain that in the coming months you're going to see dramatic change in the business because most of the variables that are required are in place. There's no overhanging event like there was with the AT&T transaction. There's no major missing components like a network modernization program that needs to be done. And we're in the factor of executing a number of things, including a very, very exciting coming together.
With me on my left, Braxton Carter, who will be the CFO of NewCo and is now the CFO and Vice Chairman of MetroPCS. He'll be talking to you about the financials of the company.
We've been together since I started. As you have noticed, the week after I started was when we announced the transaction, and Braxton and I were together talking about NewCo and everything we've been doing since, subject to U.S. gun-jumping rules being honored, have been about NewCo. And I'm very happy and I think you'll see that the chemistry between us is such that we are a great partnership already.
Neville, over here on the right, you may or may not know that 2 weeks ago upstaged most of us in this room where FierceWireless Magazine announced the 25 most influential people in the U.S. wireless industry. I'll have you know that although I've been here for 2 months, I did not make it into the top 25 nor honorable mention. And well ahead even the Chairman of the FCC, which is probably not a good thing, #6 on that list and the only CTO was Neville. So if he's feeling any pressure, he'll have to show that.
Now I think your charts might be one out of sync with mine, but what I would like to do is talk to you first about the key messages of what we're going to talk about. A lot of these messages were covered by René, but I'll reinforce them. I want to start by telling you that I spent a tremendous amount of time thinking about several variables, including the Challenger strategy. Starting with the time that I was negotiating with Tim and René about taking this job, there were a number of critical things that I thought were important for the business that I saw eye-to-eye with them on, and frankly they've been enacted. And the Challenger strategy, you will hear me continue to use. It's the right template, the right pillars of the strategy. However, there's some tactics in it that were critically missing and are now very highly visible.
First of these, the MetroPCS merger accelerates this strategy. I'm going to lay out for you exactly where it fits and why it's a great enhancement to what we're trying to do.
On the network modernization, there was a message in there today that was a new point. And René amplified it, Neville is going to cover it. We have significantly accelerated our deployment of LTE. Now the original plans were to start the rollout of LTE midyear after we put the clearing of the 1900 band and putting HSPA 270 million POPs. We've now accelerated that deployment for a number of reasons, and by midyear we will have 100 million POPs already. And then by the end of the year, a really smoking network of 200 million, 225 million in the 3 key areas of 4G and LTE. And that's a big deal. The 2 x 10 megahertz in 90% of the top 25 markets and then at least 2 x 20. And this is something we're going to talk about because it's pinnacle to our overall strategy.
The Apple announcement I'll talk about next. It is completely in our financials. I'll talk a little bit about that. But what I'm really going to focus on today is the initiatives that we're undertaking around what I call becoming the un-carrier. And part of the Challenger strategy is to be different, to be bold. And I think we're going to attack a few age-old areas in 2013, and it's going to be a lot of fun and it's going to be quite different.
But let me talk a little bit more about this. This is very important. Now the good news is we've become an incredible sales machine of the other very competitive devices from Samsung, Windows models, et cetera. Now, what was missing? It's very clear, a certain number of customers wouldn't come to the store if we didn't have the iPhone. And that's not a matter that they will buy it. There was just a definite churn impact, not only on network but on the iPhone. And we worked very, very hard for a deal that made sense for us.
Now pointing out, the 2013 financials of this businesses do include the full impact of this rolling out in 2013. This deal is accretive in cash flow and EBITDA in 2014. And I'll actually go a little bit deeper on this because it's not intuitively obvious that the simultaneous execution of one of the other initiatives we're talking about, which is value plans -- when you do value plans at the same time that you roll out the iPhone, the EBITDA impact in 2013 is almost neutral, okay? Now this is very, very different from what's happened previously and well worth the strategic wait, I think, for the time that we waited. This is not a volume commitment the size of what Sprint agreed to or anything close to it.
And I can guarantee you, even though I can't talk about it, the -- when this device rolls out, it will be a dramatically different experience. And I can only tell you that of all the reports that have been written about what's going to happen when it comes out, they're all wrong. And unfortunately, I'm going to have to wait months to point out. But it is different, it is unique, and I'll try to cover bits and pieces of it as we go forward. And it's not because it's not exciting, it's certainly because we're not completely in control.
Okay, those are a couple of things. Now let's go back to the recap as René put in the outline. The recap of what was suggested, now clearly, the period of time that this company was waiting for the AT&T transaction to take place prohibited a lot of activity. There was significant impact on brands, significant impact on churns, significant impact on a number of other items. This was also a period of time where the iPhone impact had already been felt. But as you can see, even in that period, the contract data ARPU, smartphone penetration, even contract churn moved very well. And I show you here that the EBITDA margin shows that they were very good stewards of this business. So even in periods of soft revenue and therefore slightly lower free cash flow, the EBITDA margins still -- and if you take the first 3 quarters of 2012 as an example, were generating 29.5% EBITDA margins. And just as a frame of reference, Sprint, over that same period, is about 15.3%. So we've been good stewards of the business financially while we've been moving through. But we did miss several of the variables here.
Good news is a tremendous amount of, I would call it, table-setting took place in the Challenger strategy. And some of what's outlined here of what's already done. I won't go through it too much, but I'll just say on the amazing 4G services to go from where we were -- at one point with the largest 4G network, introducing the line of smartphones that we did, moving to 10 months now into what Neville's going to talk about in the network modernization, which is not only key for us, it's huge for the merger with MetroPCS. From a value leader standpoint, I'm going to go through and detail a first 2 or 3 of the things that we've done, and then I'm telling you, we're going to break some of the age-old images of what has annoyed customers, especially in the branded contract part of the business. But some of what we've done already has been very innovative in stage setting.
From a trusted brand standpoint, we've gone quite a bit of the way in unveiling a new store setup, expanded distribution, multisegment players. The MVNO strategy is working. The MetroPCS deal is a huge one. I will talk about that, and the B2B push has been going strongly.
From a Challenger business model, we've done a very good job, I believe, in what we've called reinvent, and we've set the stage for a huge amount of synergies coming up in this transaction.
So that's the look back at what's taking place, but more importantly, let's start going through quickly on market trends. You know this better than anybody, but I'll just reinforce that economically, right now -- this is separate from T-Mobile U.S., but economically, the United States is an attractive market to have an opportunity to invest in. I mean, GDP growth is growing at a significantly different rate, private consumption is growing at a different rate. U.S. mobile consumption and data consumption, for example, in the last 12-month period has gone from 568 million megabytes to 1.16 trillion. And statistics show that over the next 4 years, there's going to be a CAGR of mobile data growth of 66%. So the U.S. market is quite vibrant, and smartphone growth year-over-year is up about 50%. So it's a very positive market from a standpoint of playing in the wireless space if you can be successful.
Now also, subscribers, strangely enough, even in a market that is over 100% penetration, has growth and will continue to grow. And it shows that compared to Western Europe, it's about 4x. It's a 4% compound annual growth in connections. Now connections now is going to move also not only into devices but certainly iPads and eReaders and other devices. And what we're showing here as well is that it is kind of imbalanced in the growth rate between contract and no-contract. The no-contract space is significantly growing at a 10% compound annual rate, and we think we are uniquely positioned to play aggressively in that space, and I'll talk a bit more about how we've done so far in that piece of the business.
So let's start looking about how we reinvigorate the growth. This is a slightly cheaper, not as pretty version of the chart that René had because we're reinventing the business, so we need to cut cost. This is some of the things that have happened already. Now I will tell you without going through all of them, as René did, this is hugely important. So the 40,000 to 45,000 employees that I've got in the company now, I can tell you, were dejected. I mean, it was a period of uncertainty coming into the middle of last year. And that's a very difficult spot to be in.
The network that we're working through now is greatly enhanced by 6 megahertz of nationwide spectrum from AT&T. This network modernization effort, the Verizon swap with LTE-ready spectrum, as well as allowing better continuity of our spectrum, the tower transaction and the MetroPCS combination and the Apple partnership, that's all done. And I can tell you that it's got the employee base of the company jumping out of their chairs. So we've got a very excited, invigorated team which is hugely, hugely important.
Now let's go through the Challenger strategy components and the first piece of that around network, I'm going to turn to Neville to drive you through.
Thanks, John. Great to be here this afternoon with you and talk through what's a very exciting period of time for transforming the T-Mobile U.S. network. I'd sum it up by saying what a difference a year makes, and it's been a tremendous year of progress. The momentum and the accelerating momentum that John just talked about is really starting to kick into gear, and we look forward to a very, very exciting 2013.
Before I jump to the future, I do want to say a few words about the network that we have today. And we have a very strong and competitive network on the 4G side in the U.S. with a large footprint, as John mentioned, that was America's largest 4G network up until recently. The work that we've concluded over the last 2 to 3 years upgrading our 4G footprint with Ethernet backhaul, then the HSPA upgrades from 21 to 42 have delivered an extremely strong and very, very competitive experience in the U.S. market.
The chart here just depicts quickly for you an independent study that was run earlier this year, and it highlights and compares the performance of T-Mobile's HSPA+ 42 network against the LTE networks of Verizon and AT&T and the WiMAX network of Sprint. I would caveat that the WiMAX network of Sprint is about half the footprint of the T-Mobile U.S. 42 network. And you can see there that the speed comparisons on downlink show us in a very favorable light. Actually, across 1/3 of the markets that were tested we outperformed Verizon. And you can see some of those markets there, big markets such as New York and Chicago, where we outperformed with 42 HSPA+ the LTE version that Verizon has launched with.
So message is, we have a big and strong 4G network today. 225 million POPs and a very large number of markets, all of the major markets in the U.S. So we start from a position of strength as we look to modernize this network. There are really 3 -- I've talked to -- some of you have heard me talk at lengths about network modernization on multiple occasions, so forgive me if I repeat some brief history here. But there are 3 key pillars to the network modernization. The first is that we're upgrading our cell sites with state-of-the-art radio electronics. And what does this do? It really enhances the performance on coverage and capability of the network. So we're using TeleTOP electronics, we have the largest global deployment of antenna-integrated radios. So this is where the base station is now moving into the back of the antenna, delivering significant accelerants in terms of deployment, as well as the performance we secure with the TeleTOP electronics.
The second pillar, and both John and René have mentioned this, we are introducing HSPA service in the 1900 PCS band. That's where traditionally we have only run unsupported GSM services. We are now re-farming. We've completed the clearance of that spectrum, and we're now introducing at a rapid rate HSPA into that 1900 PCS spectrum.
The third pillar is LTE, and both John and René again have talked about our position as we move into 2013, and then the excitement that comes with the Metro combination on what we can do with LTE in the AWS band going forward.
René has already shown you this slide on the right-hand side here. Just to reiterate a couple of points here, the magenta block is the LTE footprint. And up until today, we've only talked about launching LTE services in the second half of 2013. We're now in a position today where we can talk about half of that 200 million POPs for the end of the year will be available for our customers by midyear. So we're making strong progress, accelerating rapidly through our deployment on the modernization and the key benefit there will be an early and aggressive launch of LTE services.
At the same time, we've been very busy this year introducing HSPA in the 1900 band. We'll close -- the chart shows in the light gray, 100 million POPs of HSPA 1900 coverage by the end of this year, and we're going to beat that number markedly too. Today, we're announcing to the market another 3 service areas on top of the 15 that we've already launched. They are in Atlanta, Minneapolis and Seattle on top of big markets such as Houston, Washington D.C., Baltimore, Miami. There's a long list of markets where we have already turned up 1900 HSPA service. And that list will be effectively complete across the major markets by the end of this year and continuing to grow in 2013.
So if you look at our ending year position, an extremely strong footprint already in place on HSPA+ 42 in the AWS band, supplemented by 200 million POPs now of LTE coverage and 200 million POPs of HSPA in 1900. So a very, very different story for T-Mobile, a huge difference year-on-year from where we were to where we will be at the end of this year and where we will be again at the end of '13.
The next slide just gives you a quick flavor and look at the performance that we're seeing off of some of the early markets that we've modernized. And it's important I think to reiterate, these early markets we are seeing great benefits come through from the work we're doing. The chart on the left outlines what happens. The first 2 blocks or sets of bars show the increased traffic that we're seeing in areas of the modernized network. This is net traffic, so just what we're seeing on modernized. We're normalizing, taking out any general increase in data traffic that we're seeing or voice traffic in those markets. And you can see through the improved coverage, we're seeing approximately 30% more data traffic come onto the network and about 10% more voice. And so the coverage benefits that we've talked about on this program are very real. We're very excited by the performance that we're seeing off of these TeleTOP electronics, and the numbers are showing us that we are going to see the benefits that we've planned and expected to see as part of this modernization effort.
Over on the right of that same chart, you see some of the improvements on blocked calls and dropped calls. Dropped call rates are great today. They're less than 1%, but you can see they will be improved by approximately 1/3. Adding those carriers in PCS 1900, significantly impacting any form of access challenge that customers have on the network. Our access is very good today, it's going to be even better as we continue to light up HSPA 1900.
Over on the right is our estimate of what will happen from a coverage improvement, especially on the in-building front as we complete modernization. And you can see based on the data we're seeing off the early markets, we forecast a 15% to 20% improvement in in-home coverage, which is a key area.
I'll accelerate quickly here, the MetroPCS transaction, hugely exciting. I think what I'd like to reiterate, many of you have seen this slide before, it's the headline. This is not about integrating a CDMA and a GSM base network. It's about migrating a metro customer base off of CDMA services and on to the NewCo network, as we call it, one that will provide significant footprint and performance in HSPA and in LTE.
If you look at the key enablers on the left-hand side, we have a lot of capacity. I've just talked about it coming online in the T-Mobile network to support that migration. The Metro customer base refreshes very frequently on the handsets up to about 60%. And so we can look at a very rapid migration of customers over to the NewCo network over a shortened period of time compared to what you might traditionally expect.
And on the right, what we look to see is completion of that migration by the middle of '15, at which point we will start to decommission and turn off the CDMA network. The great piece is both companies have the same vision of the future. Metro has been executing for a number of years now on an LTE strategy. I think just under 2 million, about 1.7 million of the Metro customers today are on LTE. We will be launching LTE services next year. And so there's a great synergy opportunity here afforded by both companies skating to where the puck is going.
Okay, the piece that really excites me as a techie guy is the spectrum position. And quickly here, the combination of MetroPCS and T-Mobile affords a very unique combination of spectrum assets in the AWS band. You heard John talk to the fact that we can move from a 2x10 spectrum position in LTE next year to in '14 and '15 a 2x20 spectrum position which will be very, very difficult for almost all of our competitors to match in the U.S. marketplace. Some just simply cannot get there in the timeframes that we are talking about. We're coming through with LTE in Release 10. It will be highly performing, we can double speeds. This network is going to pack a significant punch at a critical time in the U.S. marketplace, one that I think will be the envy of our competition.
The last slide for me before I hand back to John, there are some great assets within this Metro network that we look to leverage on a go-forward basis. And I'll highlight one. It's the DAS network. So there's a small tutorial on the left-hand side of the slide here about what a DAS is, Distributed Antenna System. But bottom line, Metro has done a tremendous job of building out spectrum density and reuse using DAS systems in key urban areas of the U.S. We will look to leverage that, upgrade those sections of the network to support more LTE and to support HSPA so that we can ensure that those Metro customers never miss a beat in terms of the experience and performance that they see from the NewCo network.
We will look to decommission about 10,000 of the macro sites that come along with the Metro network, about 1,000 we will keep, but the 10,000 decommissioned are a key driver of the synergy numbers that you heard John and René talk to earlier on.
With that, I'll hand back to you John.
John J. Legere
Okay. It's a tough audience, by the way. It's the most I've ever behaved in my life. Couple of things to capture as we move forward. One is all the growing pains of getting this huge modernization and transformation process going are done. It took a while to ramp up. It's at full speed. So we will hit those targets, and as we've said, accelerate them. This is fundamental to the change of this company. And as you know, the various qualities of network -- network performance was probably my biggest churn variable. And in the plans that we put forward, a big portion of the 70 basis point churn improvement that I'm expecting over time in the contract space is coming from network quality improvement. This also, as you can see, as we get this realm of HSPA and LTE capabilities, as devices over time find the ability to search for the highest quality network capability, we're going to have an incredibly superior experience because most of the other players may have one good quality network but fall back to an inferior capability whereas our spectrum of capability is going to be extremely exciting. And I think you'll hear us target very aggressively Sprint -- excuse me, we're not going to target Sprint. We find them easy from a network standpoint. We're going to very aggressively target AT&T, and I'll talk why, and significantly there are some huge perception changes that have already taken in the category called AT&T switchers.
Second point I want to make sure you capture is we've talked about the impact of the Apple deal. We've talked about the costs associated with the network transformation. And I talked also -- I inferred about the value plan impact to our financials. I want to make sure you understand that those are 100% baked in to what we're talking about in the MetroPCS NewCo. So there's no secondary adjustment that's needed. And as I'm talking now, recently when we were talking about NewCo, some of these variables we weren't able to share. And piece by piece, I think it's becoming hopefully clearer why we're so confident in some of the NewCo growth. Now this is the fun part for me. I'm going to talk about value leader and trusted brand together because this is fundamentally going to be the area where we innovate. We're going to innovate on a few things, innovate the value plans, which I'm going to talk to you about, because that changes things, amazingly affordable hero devices. We are going to get devices into the market, including this one, at a price that beats the rest of the industry. And we'll talk some about that. And we're going to talk about customer experience in a little bit different way than René did and this un-carrier brand. And stay with me for a second because you're all customers as well. And what we're finding as a challenger is right now, customers are really still pissed off at very unpredictable billing, very unclear pricing, restrictive and confusing upgrades and unfair treatment of loyal customers in this whole way that we sell them a phone and bury the costs into a long-term contract and tie them in. We think there is huge room for a challenger to change some of that in a way that the larger players will not be able to or will choose not to respond to.
So let me talk a little bit about a few of those. Now we've launched a few things that each by themself may not seem groundbreaking, but I'm going to start to pull them together for you. First, Value plans. Now a Value plan is in effect separating the device from the rate plan. What it means is, is that if a customer wants to come in and they're happy with their own device, they can walk in the door, bring their own device and use our network capabilities. Customers that want to come in and buy a device, they want it low upfront out-of-pocket cost. They can finance it. Very low upfront, we can provide equipment installment program, and it's a very low, very clear out-of-pocket price. And then an incredibly low rate plan that together are still much low than the out-of-pocket cost for the traditional contract businesses. Customers can upgrade at any time, and that's one of the variables that customers are going to really love. Now by the way, we've tested this, 80% of the activations in our stores right now are on Value plans. 12% to 15% are Bring Your Own Device. We have 1.7 million iPhones that have already come in to our business. So the "bring your own device," which is fully made come to life with the Value plan, is with trade-in options. Okay, so this is changing. This is a little bit more like the way an iPad is sold or the way you buy a television before you buy your cable TV and to customers, especially when we can keep the money out of your pocket lower, they're going to be able to see visibly and transparently what used to be most confusing. When you listen to customer calls, they really don't get that, that $99 phone wasn't really $99. That it's baked into being stuck for 2 years, and they want to upgrade whenever they want.
Now there's a couple of things -- and the other thing that we introduced was unlimited 4G. Real unlimited 4G. And I can tell you some of the new devices that are out there, customers are already pulling down 3 gigs of traffic and growing. So this is a big deal. These metered plans that used to sound nice at 2 are not nice. Young people really don't like it. So as the network quality goes up and the "bring your own device," good smartphones on a quality network, there's something big here we're going to talk about.
Now we are moving -- and this is news, we're moving 100% to Value plans in 2013. Not yet and what's the value proposition? Fair and simple pricing, low out-of-pocket expenses, equipment installation plan. You want to buy one of the top-of-the-line devices. You can come in based on credit capabilities. You may pay $99 for the most iconic device in the world, and then you may get 20 months worth of, call it, $15, $20 a month. So it's very cheap out-of-pocket, it's very low. At any point in time you want to come back and trade in that phone, we will give you residual value, let you trade-in the phone, stay on the contract services that you have. There's a lot of capability in it for us. We are able to refurbish those devices. We've we got a capability that we can do it lower. We can use those devices in a secondary capability instead of warranty products and we can actually make a margin on the whole EIP process that takes this capability to market.
Now a couple of statistics I'll just tell you as well. We also believe it's going to have significantly better churn. It's going to have a lower device subsidy obviously and overall value. So what we've seen so far is that there's a 2-month longer customer life for our customers that are Value plan versus Classic plan. And if you look at the ARPUs, we get about $58.90 ARPU on a Classic plan, about $43.90 for a Value plan. So there's definitely a lower price. Margins: 46, Classic; 33 on the Value plan. However, device margin, $200 to $250, which we do not have to eat. And what you end up having over a 24-month period or the customer life, 2 months longer customer life and a customer life value that is the difference between $550 on a Classic plan and $600 on a Value plan. Now this also, of course, will have in year one, a very positive EBITDA impact because of the recognition of the equipment revenue upfront.
So this is a big deal, and it's step one of the kind of things that we're going to do to disrupt the industry. And trust me, the way we will roll this out in the unshackling and the lack of being attached and the ability to constantly upgrade devices and to see exactly what you're being charged is going to be a big deal for customers and a big deal for brand and a tough one for people to respond to.
Let's keep moving. So best smartphones at lowest out-of-pocket prices. Now just a little bit of data for us so far. Smartphone sales, up Q3 about 28%. We've gone from 44% to 57% of our base in smartphones. By the way, average data usage on our smartphones is up 30%, and 77% of the units that we've sold in the U.S. are smartphones. So with this value plan and the push towards smartphones, this is a continuous -- if we believe cheaper smartphones, lower out-of-pocket costs, a very smoking fast network and flexibility is going to be the formula for success.
Now customer experience, we slipped a bit here. For about 9 years up until 2009, T-Mobile U.S. was the J.D. Power's #1 customer service experience company in the United States. We're not right now. In fact, we're third or fourth and usually fourth right now. But for some very specific reasons, one was the morale of the company, but secondly, certain things that we did to remove the authority and the accountability of the people in the customer service centers and some changes that we're making policy-wise to focus on allowing the best customer experience, investing in systems between the stores and the call centers, consistency of policies, et cetera, already in the past 2 months, we've seen a big surge in, what we call, voice of the customer. So I will tell you that my #1 focus as the CEO has been on care. I listen to an hour's worth of calls every day. I take all customer-related escalations personally and reply to them, and it's given me a bond with the service organization. And I can tell you that in the time required in the next 6 to 12 months, we will retain our leadership in the J.D. Power's assessment of top customer service and customer experience because it's extremely important to us.
A couple of statistics there, calls per customer to care, which is very important, are down 13%, dropped calls down 10%, handset exchanges down, and we'll continue to work these issues as well, resulting all of these things in this ongoing churn improvement. So the full range of onboarding, recontracting, smart rate plan migration, et cetera, has caused a year-over-year improvement and Q3 churn was down 30 basis points. What you can expect here from us is continued churn improvement. Now Q4 of 2011, churn was about 3%, that was the height of our competitive period. We are facing the iPhone in Q4, but we will significantly outperform last year's churn and continue a trend of being on this front. And if you look ahead, the plan is to finish 2013 under 2%, call it, 1.98%, and then in successive years, go down below 1.9%, below 1.8%, and by 2016, get down to 1.7%. And that's one of the biggest variables in our success in the contract side.
Now aggressively reestablishing a brand. If you've been in the U.S., you may have noticed a significant surge in our brand advertising. And in phase one, we focused very heavily on network coverage, network quality and, of course, the 4G, monthly 4G and unlimited 4G services. This has been on purpose. It's a fascinating change. So we're improving the network, but we're spending tremendous amounts of money telling people we've improved the network. And what's fascinating is for T-Mobile, the perception of the network was less than the network quality, which was lower than the acceptable level. Already, what we've seen is customer satisfaction on coverage up 10%, customer perception of network dependability up 12% and consideration is up 10%. Now that was Phase 1. Phase 2, you've seen a little of and that's the shift away from the nice girl advertising and the kind of nice guy to more edgy, more of a cool un-carrier -- and we're going to play with that aggressively, especially as we announce very innovative changes. So it's a little bit more memorable and cool. Phase 3, which will be compelling offerings and reasons to buy, and we've done trials with this. On the couple of days, the week before Thanksgiving, we put out an aggressive campaign, and store traffic was through the roof. We actually had almost a 70% year-over-year traffic increase on the Friday that we launched this. And so we can move the needle. We've got some things to do.
Here's a couple of numbers I want you to know though. We track AT&T switchers. These are customers of AT&Ts that are likely to switch. And we've had a perception of coverage up 15%, tech leadership up 20%, and affordability up 22%. So if you're an AT&T switcher right now, your perception of us on affordability is 56 versus 40 for AT&T. And on coverage, we believe the perception is 48 versus AT&T’s 40. So as I said, when we get this network capability, especially in the key cities, the 2x20, AT&T is very vulnerable to this coverage and quality, and the core of what we're going to play with here is you love your iPhone, you hate AT&T and we've got an intersection for you. And I want you to get used to that tone because that is the way we're going to play.
And I just put this next chart because -- and I'm not trying to be cute with you. This isn't a teasing, but as we get into the early spring, call it March, April, especially as we announce our deal closure with MetroPCS, we get ourselves positioned with various other variables and some of these other plans that go along with and possibly after the 100% Value plans, will be a launch of a very visible, significant, in-your-face campaign that attacks right into this space. So it's going to be a very, very fun period for us. And you can fill in the blanks. I would fill them in for you, but big campaign, new campaign. And if you think about 100% value, multiply x 3, 4 or 5 other things that I hope get customers to say, "I can't believe they did that." And that's going to be how we play this game.
I'm going to rush up here. Multi-segment player, couple of things that are very important here. One, no contract, just talking mostly about our business here before the unbelievable opportunity we have. By the way, we are the #1 player in the no-contract space. T-Mobile had 13.5% share of gross adds and put us in the #1 leadership position. We actually had 365,000 positive net adds in Q3, which as you saw was a big percentage of what the industry was. And for the year, we have 23% increase in subscribers, 38% and we're targeting 25% growth in 2013. The ARPU for us is about $27 and going to about $30. So this is a good business.
We'll talk about Metro in a second because the big deal for us is Metro is a highly successful player in this space with a $40 average revenue per user and a unique go-to-market approach, a very successful company, with only 105 million POPs covered. We now -- you saw the network capability that we have and on day one, MetroPCS customers are going to go onto that network. So their coverage expands, their customers can have international roaming, a much broader network and a wider range of handset choices, and we have is shown in our deal that we believe we can grow at that industry growth rate. And we've only shown in 2017 $300 million worth of incremental revenue from taking PCS to select additional markets: Seattle, Minneapolis, New Orleans. That, I believe, is a significant understatement of where we're going and the size of the potential opportunity. So there's a big possible upside as it relates to that piece of the business. MVNO, another piece of the business growing very well. It's growing about 10% compound annual. We got about 11% in subscribers, 15% in revenues. ARPUs here are $11 to $12. You have to be very careful with your cost and where you deploy these, and we're targeting 20% to 25% subscriber growth in '13.
Business side, very aggressive. 1,000 incremental sales people that we're well underway in adding, B2B presence in the retail. These are some of the customers. We grew 5% last year. We're going to grow about 8% to 10%. We have 5% share of a $65 billion market, 1% to 2% share growth is about $1.2 billion. We're looking to go to 7.5% share over the planning period. Noting some of the offers there, but I won't take you through, but this is a great opportunity for us. We get the question all the time, do you really think you compete with AT&T and Verizon on this? The answer is no, no desire to, small and medium, mid-sized customers that feel abandoned in very select areas with international requirements and only looking to go to, call it, 6% to 7% to 8% market share and do it in a way that they will have a very difficult time responding.
Challenger business model, we're very good managers of the profitability of the business. The Reinvent program at T-Mobile has delivered $900 million incremental in 2012. We will continue to reinvent. It looks like we pushed $300 million of that back into the business last year. Incremental reinvent for next year, $500 million then $350 million then $100 million. I think one of the things Braxton and I agree on, there's a lot more to do here.
In addition to the economies from the synergies of bringing the companies together and the network synergies which we're on top here, one of the things we're going to do as soon as we're able to is really look hard at this bottom box because T-Mobile woke up a big company. And there are going to be a lot of better ways, I think, and one of the things I've got a lot of experience in is finding costs. So stay tuned in that box. But there's an awful lot of business model enhancement that we can make.
With that, I'll turn it over and you'll get to ignore that one minute, we get a few extra ones. Braxton?
Thank you, John, I really appreciate it. It's a pleasure to be here. I'd first like to start by saying that we're very excited about the combination of T-Mobile U.S. and MetroPCS. It is undoubtedly going to create the preeminent multisegment value leader in the U.S. wireless market. We're very excited about that. $6 billion to $7 billion worth of synergies we think there is upside to that. And on the techie side, Neville was talking about the 20x20 LTE path. That is going to be absolutely critical in the future to maintaining a cost leadership. There's significant advantages of that configuration and we're very excited about what that's going to do for the combined company.
Now onto the 2013 guidance, I want to reiterate that this includes all of the initiatives that John and Neville have talked about in this presentation and most significantly includes the full impact of the Apple products that will be in the lineup during 2013. I also wanted to reiterate that 2014 on, the full impact of Apple will be accretive to EBITDA and to free cash flow. These are U.S. GAAP numbers on a pro forma basis for the combination of T-Mobile U.S. and MetroPCS. It includes all synergies and importantly in 2013 it includes the costs to achieve those synergies. Service revenues, $20.8 billion to $21 billion; EBITDA, $5.8 billion to $6 billion; EBITDA margin as a percent of service revenue will be 27% to 29%; cash CapEx will be $4.7 billion to $4.8 million. And remember, this is a year of investment. There is significant cost to achieve embedded in this 2013 CapEx guidance. Neville talked about upgrading the DAS systems, to support expanded LTE and HSPA+. This is a significant onetime investment that's included in 2013.
So 2013 being a year of investment, we are also investing in working capital. The impact will be an additional $300 million to $600 million. This is a net number. We're looking for multiple opportunities to increase our cash flows and reduce working capital needs. One very important initiative that T-Mobile USA has instituted is a program to change from billing in arrears to billing during the month the service is provided. We're very excited about that opportunity.
Ambition. These are the ambition numbers that we laid out when we announced the transaction in October. There are 5-year CAGRs. Revenue, 3% to 5%; we're highly confident that we can achieve this. And let's go through some of the aspects of that. First of all, contract. And as John talked about, 2013 will be a year of stabilization, given the significant investment in network modernization, given the introduction of Apple products, we are highly confident that we can achieve this objective over the 5-year period. EBITDA, 7% to 10%; increased scale, the Challenger strategy, driving cost out of the business and really running this business to create EBITDA and EBITDA margins and create shareholder value is what this is all about. Free cash flow will increase 15% to 20%, and we're looking at a targeted profitability level at the end of the 5-year period between 34% to 36%.
Going back to the growth story, we talked about the contract part of the business stabilizing in 2013. There's very, very modest growth projected for the remaining period. There is some growth but given the saturation in the market and given what John talked about, the growth opportunity really is in the no-contract space. The CAGRs that, that's projected to grow far outstrip what's happening in the contract area, and we believe really being the value leader that we can take increased share from the other players in the market's contract offerings. The non-contract offers will be 80% to 90% of the growth.
We will also have focused expansion of a MetroPCS brand. And this is where we've been very conservative. What's embedded in these numbers are expansion only to 6 to 7 million additional POPs. There's 3 markets in the U.S., major markets, that don't have a MetroPCS-type model deployed in them: Seattle, Minneapolis, New Orleans. We have included that, but we think the opportunity is much more significant. We think there's an opportunity to expand up to 100 million additional POPs. And what's exciting about this expansion is we're leveraging the T-Mobile assets that are already in place. So there's going to be a much different return profile, a very rapid path to EBITDA breakeven, and what we're looking at in a very short time period, 2 to 3 years, is EBITDA margins approaching 50%.
I want to spend a few minutes talking about where we stand on closure of the deal. We continue to expect closing in the first half of 2013. The regulatory process is going very well. The FCC, we are on track. We expect approval by the expiration of the FCC's self-imposed 180-day clock which is April 24, 2013. The DOJ, we did get a second request that was fully expected. This combination is highly pro-competitive. We don't expect any significant issues with the DOJ. CFIUS, the wonderful thing about our transaction is DT has already been fully through the process with their 100% ownership in T-Mobile U.S. This transaction actually decreases that ownership. We expect no issues there.
SEC, we filed the proxy on November 16. The SEC is in the process of reviewing that. What's unknown at this point is how long that review process is going to take. Once the proxy goes effective, which includes fully S-X compliant financials for MetroPCS, for T-Mobile USA and more importantly, the pro forma financials of the combined company with the purchase price adjustments, when that goes effective, there's a 20-day requirement in the state of Delaware where MetroPCS is incorporated, and that's 20 business days to give notification to the shareholders to hold a shareholder vote. So practically speaking, there are going to be about 30 days after that proxy goes effective. At this point, we anticipate best case being able to mail the proxy to the shareholders on the February time frame. It could go past March 1. It's just really an unknown at this point.
One of the things that I've been really impressed with is the compatibility of the cultures between T-Mobile USA and MetroPCS. And where this is highly evident is what's happening in the integration planning process which is going on. The teams are fully formed, they're very enthusiastic. By the middle of December, we're going to have high-level plans completed and we're well on the path of executing to the critical items that have been identified for day 1 of close.
So in summary, again, it's a pleasure to be here. I'd now like to turn it back over to John.
John J. Legere
And we're well over time. I'm not sure I like this process where you can't ask questions till tomorrow, but it was fun, this one time, I have to admit. If we could select who could ask questions and who couldn't, it would even be more fun.
Summary. Now, I won't read the points here, but there's some things that I just want you to take away. We are closing this deal, and we are way down the path. So in spite of what you read every day, this deal is closing, and we are way down the path on integrating these companies and understanding how to do it. So we're waiting for no one, and that's very exciting. We are going to launch Apple products, and we're going to do it in a very innovative way and very exciting. And trust me, when we do announce what we're going to deploy, it will clearly be better and more effective than any of the geniuses that have been writing in the last few days. It just makes it that much more fun when people speculate so wrong because there's going to be one of those retractions. The network deployment is happening. We are testing products on this new network and its smoking fast. I mean, when you start to see 45 megabit downloads and 25 uploads, and you see some of these capabilities and you know you're going to have them in an unchoked manner, it's very exciting. So that's got to happen.
This deployment of innovative services, this all value and then, trust me, we've got 3 or 4 more that are coming and then a customer service experience that matches it, the churn issues to network gone. But then a brand and an employee base that is the un-carrier with attitude and a fighting mechanism both in how we brand and how we sell and how we present ourselves will be a little bit like a David and Goliath, and it's going to be really, really fun because remember, for us to be highly successful, we need to integrate this company, and we need to gain a certain amount of share. And it will be really fun to see how they're going to respond when everything we're doing is going to be to cure big pain points that customers can't stand. And finally, we've got a full bag of weapons, no distractions, no missing devices, no inferior network, good leadership team. I think it's going to be a lot of fun. So I really appreciate your time today.
Thanks, guys. And you thought Robert Dawson [ph] was enthusiastic and upbeat. So I think that's quite a bit of a difference. Now, 2 sentences before we stop the official plan for today and the streaming, 2 points on the dividend. First of all, dividend policy, 2010 to 2012 is fully confirmed with the $0.70 for 2012. Obviously, as always, subject to the regulatory supervisory board approval and the AGM approval.
Secondly, on the dividend in kind, which we'll be offering from next year onwards, the shares will be not offered at a discount, first of all, and secondly, the default option is obviously cash.
Now we'll end the program for today. Thanks for the ones who joined us via Internet. We'll see you guys tomorrow morning at 9:00 with Claudia Nemat, Niek Jan and the team. Thanks a lot. And for ones -- for those of you in the room, some small logistics. We'll start now with the evening program and the young ladies will lead you out towards what we call T Gallery. Most of you know it already where we have the evening event. You know also that there's only one elevator going up there. And in order to have the queue a bit more fun for you, you'll have some sweeteners served in front of the elevator. Part of the evening program besides some nice food and drinks, et cetera, I'll come to that in a second when we're upstairs, is obviously also a bit of product and innovation. So Thomas Kiessling, who's our Chief Product and Innovation Officer at Deutsche Telekom, he'll show you basically some of our products which are online, which are live, which are generating revenues, and hopefully in a bit more kind of lively and entertaining manner. So see you upstairs in a second. Thank you.
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