Swisscom AG

SIX:SCMN

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the First Quarter Results 2018 presented by Urs Schaeppi, Mario Rossi and Louis Schmid. Louis, the floor is yours.

[Louis Schmid, Head of Investor Relations]

Good morning, ladies and gentleman, and welcome to Swisscom's first quarter results presentation 2018. My name is Louis Schmid, Hear of Investor Relations, and with me are our CEO, Urs Schaeppi; and Mario Rossi, our Chief Financial Officer.The first part of today's analysts and investors presentation hosted by our CEO consists of three chapters: first, a quick overview of the highlights, operational performance, and financial results for first three months; second, an update on our Swiss priorities, operational and financial performance in Switzerland; and third, some explanations on our FatWeb's first quarter results 2018. In the second part of today's presentation, Mario runs you through the financials and the unchanged financial full year guidance.This said, I would like to hand over to Urs to start his part of the presentation. Urs.

[Urs Schaeppi, CEO, Head of Swisscom]

Yes. Good morning, ladies and gentlemen. I would like to start with some highlights of Q1. So our financials are, as expected, solid figures. On the quality side, we also delivered – we won several tests on the network sides but also on the customer service side. FastWeb had a strong performance. And also in Switzerland with our bundled offer inOne, we are well on track and the penetration is strongly increasing on inOne. On the cost side, we are on track. We are able to reduce our costs, and we have a good revenue-generating momentum in the broadband or in the TV area. So overall we confirm our guidance 2018.If you go to Slide 5, you can see our operational performance. So we have satisfying revenue-generating unit trends in Switzerland and growing dynamics in Italy. On broadband in Switzerland, you see that we were able to grow by 11,000 on TV, by 25,000 on mobile on the value area, good, solid. We think that we keep our market shares in mobile. And in the fixed voice area, you see the structural trends as in previous quarters. But this change will certainly go down a bit in the future because the whole All IP migration is mainly done. On FastWeb, good momentum on broadband and 120,000 net adds on mobile.If you go on Slide 6, you see the financials, the key financials. So the net revenue increased by CHF 54 million. So in Switzerland, the trend is slightly negative with CHF 39 million, and FastWeb with a growing business of CHF 45 million. Then we have some foreign exchange effects under the exceptionals. But overall plus CHF 45 million.On the EBITDA, we have minus CHF 15 million compared to the previous year. And also the same dynamics as on the revenue side, Switzerland minus CHF 27 million and FastWeb plus CHF 10 million. Interesting is to see the dynamic in Switzerland so that the main decline on year-on-year changes on this EBITDA are coming from fixed voice lines, which is minus CHF 18 million and from converged discounts we have minus CHF 21 million. We were able to compensate a part of this with better indirect costs, so a plus CHF 23 million through cost reduction, which is effect in this minus CHF 27 million. So the dynamics are as anticipated, and so now especially marked to the financial figures.If you go on Slide 8, you see that we are able to perform in the market. I think it's important to show once more this slide, and you can see that over the last years, Swisscom was able to compete in the market and to maintain the market share on a high and stable level. So we have stable market shares in mobile or broadband and increasing market shares in TV. So our [ theater ] is clear to go to a customer base management with a clear value focus in a saturated and quality-oriented market like Switzerland. That's the strategy for Swisscom.On Page 9 you see our operational priorities in Switzerland for 2018. Important is to perform on the network side. That's why we're also investing in our networks heavily. Increasing the penetration of inOne is important. This will give us a better market performance. I will come later to it. Driving innovation to differentiate ourselves in the market is an important priority. And then thirdly also to use the opportunities in the B2B market where with digitalization we get new opportunities. And fifth priority, that's our cost ambition. We have to deliver on our cost side.On Page 10, some remarks to our network upgrades. On the wireline network, you see our ambition. We want to have in 2021 a coverage in the ultra-broadband network with speeds above 200 megabits per second of 75% and above 80 megabits per second, the coverage will be above 90%. Today we are at 57% for 80 megabits and for 200 megabits at 29%. So the investments are going in the area of building fast the coverage of ultra-broadband networks.On mobile, we are also investing. You see our leading position in 4G but also 4.5G, and you see our good results in different tests, but that's not the whole world. I think the main message here is the Net Promoter Score on the network is actually the guiding KPIs for our network strategy, and there we are in a very strong position.If you go on Slide 11, you see that 5G -- you see the potential for 5G. 5G has several opportunities or really increased capabilities, which will bring us new opportunities in the connectivity area. That's why Swisscom wants to invest early in this field. We will start to do activities at the end of this year, and we expect the first 5G phones in the beginning of 2019.On Page 12, some remarks to our brand of inOne. So you can see that we have actually at the end of Q1, 3.27 million RGUs in our inOne offering, and the penetration is increasingly strongly. So we have a penetration in mobile of 37% and on broadband 42%. So these figures are increasing and that's important because we can push the share of wallet, and we can reduce the churn. And also as you see on the bottom of this slide, the dynamics, there are 2 dynamics. You see that we have on wireless a positive ARPU effect if you migrate customers to inOne. You see that the impact which we had in the beginning on wireline, which was negative on the ARPU, is actually decreasing, so we are coming in a region of 0 on the ARPU impact on wireline and then we have the converged discount, but overall a very positive dynamic with inOne.On Page 13, some remarks to our wireless performance. So we were able to grow on a year-on-year base by 75,000 postpaid customers. 75% of the postpaid customers are on flat products or on Infinity of inOne, and 31% of the postpaid customer base is in bundled. So you see also the dynamics to flat tariffs and to more converged offers. ARPU, the blended ARPU is stable, and then you see also that we have a good solid ARPU in Infinity and inOne. Overall, the service revenue in mobile is slightly decreasing by CHF 18 million and this is mainly because of the converged benefits.If you go on Slide 14, the wireline performance, actually a same dynamic as in previous quarter, growing business on TV plus 55,000 TV customers, broadband net adds plus 38,000, and then the structural effects in our voice business. Important there to say -- to mention in the middle of this chart is that you can see that the penetration -- the household penetration of the revenue-generating unit is increasing. We are today at 2.2 revenue generating units per household. And the ARPU is stable.On Page 15, the converged performance, though the revenue is growing with CHF 91 million, we have increasing penetration. 1/3 of our households and postpaid customers are in bundled, so that shows that there is a successful migration in this bundled business. And we see also that the revenue generating units are nicely growing for our churned converged offers.On Page 16, some examples of innovation, which we introduced in the market. So we improved our price competitive online-only offer Wingo. We adjusted the price. Quadruple play price is at CHF 99, so there we have a competitive offer also in the lower end price segment. And also on our TV offer, we have several nice innovations, which will further push up the sales of TV.On Page 17, some remarks to our enterprise business. Important to mention that the service revenue is slightly with CHF 19 million under pressure. That's mainly price dynamics in the mobile and some let's say migration effects driven by All IP in the voice area, but overall slightly pressure on the service revenue and an increasing solution revenue. And the solution revenue in the B2B business today is higher than the service revenue. That shows actually also the transformation in the B2B business.On Page 18, only 1 example that digitalization is an opportunity for the B2B business, 1 of it is the IoT business where our ambition is to be the IoT ecosystem players in Switzerland, and there we are on a good path to attain this ambition.Page 19 gives you some flavor to our cost focus. So we are on track to achieve our target of CHF 100 million cost savings through a bundled initiative of simplicity, digitalization, project efficiency. And you see on the left side of the chart some detailed figures to it.On FastWeb, Page 21, so the wireline performance of FastWeb business is good, solid. We have an increased customer base of 3% on broadband, 2.48 million subscribers. Important is to say that we have an over proportional growth. On ultra-broadband, the growth there is 26%. That's important to mention because on ultra-broadband we have a higher ARPU and a lower churn. And you see also that 56% of the new customers in Q1 are on an NGN network. Business is also running well. The business performance as well increased order book 65% on corporate and 25% on wholesale, so we have a strong enterprise performance in Italy.On Page 22, the mobile performance of FastWeb, so we are on the right track to build a more converged customer base. We increased our customer base by 55%, and penetration of mobile and wireline offers, in FastWeb of bundled offers is today at 25%. Also this is important to mention because in such converged office, we have 5% lower churn.On Page 23, some remarks to our commercial proposition. We launched #nientecomeprima. That's a all-in, all-inclusive offer with a very transparent pricing. There we have the good performance, and we get a lot of trust from our customers. We also are on a good track with our partnership with Eni for joint energy and telco bundle.Then on Page 24, our financials of FastWeb saw a growing revenue of 9% EBITDA on a comparable base. It's growing by 5%. So we are on track with FastWeb to reach our target of 2018.Now I would like to hand over to Mario for some financials. Mario?

[Mario Rossi]

Thank you. And also good morning from my side. I can give you some additional information on the financials and I'll start on Slide 26 with revenue. So we reported higher revenues of 1.9% year-over-year. There we have 2 exceptional items on the top line: one is currency effect, positive of CHF 47 million, and a negative impact are coming from the accounting of IFRS15 of CHF 4 million. So on a comparable basis, we have let's say a flattish top line development.A few remarks on the different segments. In the Swiss business, the retail customers service revenue went down by CHF 55 million, or 4.1% with the following main effect: decrease of voice access line CHF 18 million, converged discounts inOne CHF 21 million, roaming CHF 4 million, a low effect because of the low seasonality in Q1, and then we have CHF 9 million onetime customer fidelity effects that's due to an operational interruption of a platform.On the enterprise segment, yes, a decrease of -- a flattish developments. Revenues of CHF 611 million. On service revenue, we have expected decline of CHF 7 million on wireless because of an ongoing price pressure, CHF 9 million from the wireline business. There are some structural changes due to All IP migration of the customers take this opportunity to optimize their telecommunication installation and also CHF 2 million from this customer fidelity effect. On the other side, you're able to grow solution business. It's CHF 70 million. There we have in all the optical and also the cloud business, a very good performance in Q1. On FastWeb, we have an increase of CHF 45 million, since there we can grow revenues in all segments, consumer segments by 10%, enterprise segments by 7%, and also slight increase on wholesale.On the next slide, a few words on the cost side, first on acquisition and retention costs. They went down by CHF 16 million. There we have CHF 5 million less subsidized internet routers and CHF 10 million impact of less subsidized TV boxes. That's due to less All IP migration. All IP migration is more or less done in the residential market, so we have less costs for subsidized routers. And the higher costs for goods and services, point number 3, is directly driven by revenue. There is no margin impact. Then as was mentioned before on the indirect costs, we are on track to deliver the CHF 100 million. We have realized CHF 23 million in the first quarter coming from personnel costs CHF 17 million savings, external workforce costs CHF 3 million, and some other cost savings additional CHF 3 million.EBITDA by segments on Page 21. Also here we have the exceptionals. Forex exceptional is CHF 30 million positive and on IFRS we have a negative impact on IFRS15 of CHF 20 million, CHF 9 million comes from Swisscom Switzerland and CHF 11 million from FastWeb. This effect will flatten out over the year. For the full year, we expect around CHF 50 million as guided. In February, there we expect 50% for the Swiss business and 50% for the Italian business.In Switzerland on a comparable basis, the EBITDA decreased by CHF 27 million. In the retail segments, EBITDA went down by CHF 4.7 million, [indiscernible] decline of service revenue by CHF 55 million and we were able to partly compensate that decline mainly with reduced cost in the call centers and in field services. We had material lower amount of service requests in Q1 in our call centers.Enterprise customers we lost 5 million to more or less flattish developments. We saw the price pressure in the telco segment and the All IP impacts, and we were able to partly compensate that by higher contribution from the solution business.In FastWeb, increase of CHF 10 million. The increase is primarily revenue driven, more revenue generating units and we have in Q1 still the impact of the 4 weeks billing of CHF 60 million. Then we have to mention in the prior year we had a positive impact of CHF 9 million from regulatory benefits Then in Q1 2018, we have higher SACs, subscriber acquisition costs, mainly because of the strong performance in the mobile business around CHF 9 million.On the next slide below EBITDA, only 2 remarks, on depreciation, they are higher compared to the prior year. 60% of decrease is exchange rate driven and the other 50% are coming from higher depreciation in the Swiss business. The second remark is related to the tax expense. As you might remember in Q1 2017, we had some high extraordinary tax charges. The tax rate was at 25%. And this year we had a normal tax rate of around 20%. That brings us to a slight increase of net income.On CapEx on the next slide, CapEx were 30% lower in Switzerland, [indiscernible] CHF 311 million. There are 2 comments, in our fiber, in our rollout program, we invested in Q1 CHF 100 million. As expected, that's also in line with prior year and we expect for the full year again around CHF 500 million. That's in the same magnitude as in 2017. And then we have in Q1 some less custom-driven CapEx less project cost of that season driven, we stick to our unchanged guidance of Swiss CapEx of CHF 1.6 billion, of course, without any potential CapEx [indiscernible].In Fastweb, in local currency, of EUR 159 million. We are on prior year levels. Saving in the IT area were compensated by customer-driven CapEx as was mentioned. A good performance in the B2B segments and bring some additional CapEx.On the next slide, nothing special on the operating free cash flow. It's lower than last year because of changes in net working capital. We had a very strong development in Q4 2017, and now we have [indiscernible] Q1, but nothing special. That is also flattened out over the year. And on the financing side, we have to refinance is for us quite large bond of CHF 1.385 billion which is due in September. We started this debt in Q1, which is a Swiss bond beginning of the year CHF 150 million, has very favorable conditions. And in April we concluded on Eurobonds for EUR 500 million with an attractive component and the maturity in 2026. The average cost of debt stands at 1.5%. The duration is 4.6 years, and we are well protected about any potential interest rate decrease, 86% of our debt portfolio is fixed.Coming to the last 2 slides on Page 31, you see the main effects of the Swiss business which we also guided for. And you see the left hand side the year-over-year change in Q1 and the expected full year change. And we can confirm that more or less it's expected, and we think that fixed line loss for the full year will be CHF 60 million, outbound roaming CHF 20 million, discount on convergence CHF 80 million, and in the B2B segments, overall CHF 40 million. 50% of that will compensate with the confirmed indirect cost savings.And that brings me to the guidance. As was mentioned at the very beginning, we can confirm the guidance for the Swisscom Group revenue at CHF 11.6 billion, EBITDA CHF 4.2 billion, and CapEx CHF 2.4 billion. And of course, we can confirm the dividends of CHF 22 which we will propose to the AGM next year.And with that, I hand over to the operator for the Q&A session.

[Operator]

[Operator Instructions] I will open up the first line, just a second. It's from Julio Arciniegas.

[Julio Arciniegas, Analyst]

I know that it's early, but can you give us some color of the first impact of Salt fixed line services. Have you seen more, for instance, more discounts being asked by customers and what do you think that will be the impact from basically this launch from Salt? And my other question is regarding inOne and Infinity. I see that mobile net adds have grown less than previous quarter. Can you give us some color on why the strength? Is the company pushing less fixed-mobile convergence bundle? What should we expect from basically the net adds from convergence going forward?

[Urs Schaeppi, CEO, Head of Swisscom]

I'm taking the first part of the question on Salt and then Mario will give some information on this Infinity question. Salt is actually -- is an offer of Salt that's an aggressive one, but the offer of Salt if you look to this offer, it's in the fiber footprint and the total let's say an attractive offer but also an offer which will not [ cater to ] the whole TV market in value. So from our side, we are confident that we can compete with inOne because inOne has a lot of flexibility in it to tell the different customer needs. There we have an attractive offer with strong TV products. And on the really very price sensitive segments, we have second and third brands where we can be competitive. Up to now, we don't see actually an impact on our market dynamics of broadband. So our net adds, our bundled offers are running very well. Also after the launch of Salt, we don't see an increased churn. So this may be too early to evaluate in detail, but we will continue our strategy and we will not act now on the pricing side.

[Mario Rossi]

And on the mobile postpaid performance, first of all, you see on Page 5, you see that Q1 was in '16, '17 relatively weak. That's kind of seasonality and then on the on the performance of inOne on Page 12, you see that performance in the first quarter of the RGUs inOne on fixed mobile bundles was satisfying. We were able to increase the base of 243,000 RGUs. And important thing is inOne in the postpaid customers is about protecting value and you can see that on Page 13, Q1 '18, Infinity/inOne ARPU compared to Q4 ARPU is stable and then on Page 15 you see a stable development of the average revenue per bundle. So it's more important about protecting the value of the customer base in the saturated markets and running after each and every low price SIM cards. That's our strategy.

[Urs Schaeppi, CEO, Head of Swisscom]

I think maybe to add [indiscernible] some more remarks to what Mario said. The performance in mobile is actually a good one. If you see our churn figures, if you look to our ARPU development, we are in a solid situation. If I also look to the KPIs of in-porting/out-porting, I would say we are in a good shape in Q1. And for the future, it's much more important to look on the revenue market shares then on subscriber market shares because you have so different kinds of SIM cards in this market, you have SIM cards with an ARPU of CHF 90 and then SIM cards with CHF 2 or CHF 3 and we shouldn't compare such SIM cards.

[Julio Arciniegas, Analyst]

Okay. If I might follow up. So you set up, for example, inOne is a product that actually is very competitive. So you feel more confident even [indiscernible] has launched, okay. But for example, if I see that Slide 12, I see that inOne wireless ARPU is positive. The fixed is negative to barely flat. But actually, the converged rebates of the inOne is the one that basically brings erosion. Do you believe that maybe you would have to push farther the convergence side of inOne considering more competition in the market?

[Urs Schaeppi, CEO, Head of Swisscom]

No, we don't see it. Actually, there's always some in the beginning you have a lot of optimize and then is the penetration is increasing. We are able to decrease the ARPU impacts and so the converged rebates will decline in the future.

[Operator]

The next one is from Ierodiaconou, Georgios. I will open up the line.

[Georgios Ierodiaconou, Director]

I've got 2. The first one is around FastWeb and migration back to monthly billing. I believe you probably started the process in the last couple of weeks. I just wanted to know whether with the migrations to monthly, you fully offset around 8.5% benefit from the 28-day migration or is it just part of it. And also linked to that, I believe AGCOM is also trying to take their operators to court in order for you to reimburse for the months. You are on 28 days. If you would give us an indication of what you expect, when should we hear about this and what you expect the outcome to be? And then my second question is around spectrum and 5G. If you could give us an update of where we are in the spectrum auction process, whether your demands or requests are being satisfied by the regulator, and perhaps a comment as to how quickly we should expect 5G to be relevant for you?

[Urs Schaeppi, CEO, Head of Swisscom]

I will take the question on 5G spectrum and Mario the question for 4 weeks billing of FastWeb. To the spectrum, we think that we will have an auction at the end of this year for the spectrum. There we are still in a consultation phase. Our operators give feedbacks to the format. But I think at the end we will have, let's say, a fair auction in the Swiss market where everybody can get his amount of spectrum. For Swisscom, it is important that we can gain a spectrum amount which is in the area of our market share. And we will certainly lobbying for days that we could get a decent amount of this spectrum. And then our 5G plan. So our ambition is to enter early with 5G in the market. The first handsets [indiscernible] will be in the market in 2019. We have certainly some challenges in the Swiss market with our radiation loss. It will be not so easy to build 5G, but nevertheless, we want to enter early in the 5G market. Mario on FastWeb.

[Mario Rossi]

On the monthly billing, we started to revert to monthly billing in April. And we offer stable prices coupled with higher value for customer service [indiscernible] the product news. And we think that we can compensate this price decrease. On the AGCOM issue, I think that's an ongoing problem for now, which we should not comment in detail, but from our point of view, I think [indiscernible] that there is no legal ground that the operators can be forced to reimburse these, let's say, benefits to the customer base. So it's an ongoing procedure now.

[Georgios Ierodiaconou, Director]

Could I ask a follow-up on the 5G answer earlier? With emission limitations that you have, is it fair to assume that for 5G you will need new sites? Or are there any ways to circumvent and use existing sites but maybe differently in order to get around the problem?

[Urs Schaeppi, CEO, Head of Swisscom]

No, we need additional sites. That's for sure. But also without this emission issue, we would need additional sites long term. The main impact of this emission issue, in fact, it will take longer to build out a network and that the full potential will be difficult to gain [ in fixed line ]. But there is discussion in the parliament now. I think the last word is not said. So there will be that dynamic, and I hope that we will get a better fed framework for building out 5G in the future.

[Operator]

There is a next question from Frederic Boulan.

[Frederic Emile Alfred Boulan, Senior Analyst]

So it's Fred Boulan from the Bank of America Merrill Lynch. Couple of questions, first of all on the All IP side. So you're saying you're getting towards the end of that process. If you could comment a little bit on the benefits you're saying from a cost perspective but also on in terms of service delivery, what it brings to you. Secondly on IoT, you mentioned offerings. Can you talk a bit more about the value chain, where you think you can position yourself beyond connectivity and where you see the business opportunity in the medium to long term? And then thirdly, a question on the FastWeb, if you can come back a little bit on expectations here, we saw a slowdown in top line from H2 levels. EBITDA as well was up around 5% versus 9% to 10% levels in H2. So where can we see that business going forward in 2018?

[Urs Schaeppi, CEO, Head of Swisscom]

So I will take the question on IoT and Mario then the question on ARPU.

[Mario Rossi]

All IP.

[Urs Schaeppi, CEO, Head of Swisscom]

All IP and then the --

[Mario Rossi]

Yes.

[Urs Schaeppi, CEO, Head of Swisscom]

And FastWeb, so FastWeb -- on IoT, IoT is a very fragmented business. Our strategy is to have different networks, let's say a low-power network for specific applications and then the normal 4G or 5G network for other the IoT applications. And let's say, the main value for the IoT business for an operator like Swisscom is on the connectivity side. So more SIM cards and then there you have very different applications. If you have a smart card as an example on IoT, they have a higher ARPU, much higher ARPU. And if you take a Tesla, the consumption of a Tesla is quite high. And if you take smart meter, the ARPU is quite low. So that's a very fragmented business and the values coming out of the connectivity businesses and [indiscernible] more SIM cards. So it will be not -- IoT will be not the really the biggest business of 5G, but it will be a part of 5G. And then on All IP, so the main benefits on All IP are actually on the customer service side because we can serve the customers with lower costs and then we can shut down the network, all TV and networks. And the financial impact of this is actually what we said that will be a long term this CHF 100 million. It is part of this CHF 100 million program in '18, '19, '20 I think was, as I mentioned, encouraging in Q1 a result that these number of calls, service requests are coming down in the direct residential segments. And if you see that they will have more impact and it's clear, then they will just now talk. But I think that is a bit too early. Right now it's satisfactory. And on FastWeb, I would say on the top line this year revenue increased in 2018 about 7% to 8% and EBITDA as we guided, we expect an EBITDA of around EUR 700 million that we can confirm after Q1.

[Operator]

There is another question from James Ratzer.

[James Edmund Ratzer, Europe Team Head & Analyst]

I had 2 questions, please. The first one was just regarding your overall service revenue trends that you're seeing in Switzerland, which are currently running down around 4% year-on-year. I mean that trend has been gradually deteriorating over the last year or two. We've now got Salt coming into the market. I mean here you said that it hasn't had much impact so far, but what do you think needs to happen over the next say 12 to 24 months for that trend to get better? I mean do you think it can get better from here? And what would be the key drivers for that? And the second question just going back to the questions we've had on FastWeb and the EUR 700 million EBITDA guidance. I mean on the run rate you've just delivered in Q1, we'd be looking at a run rate nearly or kind of near EUR 600 million or below. So could you just run through specifically what you think is going to get better in the next 3 quarters? Is this most cost reduction or do you actually think revenues from here will accelerate? And if so, what's going to be the key driver of that? It seems to me this billing change back to monthly could actually have a further drag on revenue growth.

[Urs Schaeppi, CEO, Head of Swisscom]

Okay. I will take the service revenue question of Switzerland and then Mario EBITDA of FastWeb. The service revenue actually in Switzerland, so 2018 is certainly a dynamic year because we have still this erosion of the fixed voice business, which is also a bit driven by All IP. And then also the converged discounts, but as the penetration is actually going up, this effect of that the converged discount is actually declining. And important for us is to perform on quality and on the customer experience side. And then we are able to keep our ARPUs and you can see that the ARPUs actually in our business are in a solid situation. And also the market shares are in a solid situations. I think that the impact on service revenue in 2018 is certainly a big one than we can expect in the future. And then it's important for us to work on the cost side because in a saturated market with promotional activities, we have to work on our cost side. And there you're on track. Mario, on FastWeb.

[Mario Rossi]

And on the FastWeb, the allotment for the remaining three quarters, overall I would say, if you look at different segments, consumer revenue will develop more or less as in Q1, and on enterprise you have traditionally in Q1, you have relatively low revenues. You can also look at prior year numbers there were low in Q1, so we will have stronger performance in the remaining 9 months. And as was mentioned, we have very good order book there. And also on the wholesale business, the second half will be stronger than the first half in 2018. And the cost side will be more or less same evolution as in Q1 and [indiscernible] seasonality on revenue which is expected CHF 700 million [indiscernible].

[James Edmund Ratzer, Europe Team Head & Analyst]

What should drive that better wholesale performance specifically in the second half and-

[Urs Schaeppi, CEO, Head of Swisscom]

The wholesale business is part of it. It's a seasonal business. It depends on contracts you conclude. And we know from the funnel more or less when this will realize in revenues. Part of it is ongoing on wholesale and part of it is project ready.

[Operator]

There is another question from Simon Coles.

[Simon Alexander Arulraj Coles, Research Analyst]

First one is on cost cutting. Clearly you've been doing a great job over the years and you upgraded your cost cutting at full year '17 results. I was just wondering what lessons have been learned from, say, digitalization, All IP migration, and how that's going. Is there potentially service growth upside in the future? Secondly, on FastWeb, a solid development again. You said just over 50% of your adds were on ultra-broadband. What's the ARPU obviously you're seeing from these sorts of customers and how many of those customers are on your own network versus say the JV with TI?

[Urs Schaeppi, CEO, Head of Swisscom]

Okay. On the cost side, actually if we work on the cost side, this is a bouquet of a lot of different action. So it is simplification of the product portfolio of the processes. With the digitalization and artificial intelligence, we are able to automate more processes. I think that's the thing you have to do constantly, and then we are able to increase our efficiency. And then you have certainly also project like All IP where we can phase out old infrastructure but also where you have lower cost to serve because the processes are getting much more efficient. And we have to continually work on the cost side and domain learning is actually, you need to create a program and you need also a culture of the organization has to become -- has to have a culture which also works on efficiency. Now to FastWeb ARPU.

[Mario Rossi]

The consumer [indiscernible] that is around EUR 12 and in Q1 it was 1 EUR lower than in Q1 2017. That's something to do with promotions we had in 2017, more or less stable ARPU. It's also because of migrating more and more customers to our [indiscernible] that brings a more stable ARPU in this area.

[Operator]

Okay. There is another question from Joshua Mills.

[Joshua Andrew Mills, Equity Analyst]

This is Joshua Mills from Goldman Sachs. Just a couple of questions for me, please. In the past, you have given us disclosure on what percentage of your net adds are coming from the Swisscom brand versus the Wingo brands. I wondered if you could give us an update on that or even just give us directionally an indication as to whether or not the shift of where your net adds are coming from has changed. Plus, what percentage of your current broadband base is on Wingo rather than Swisscom? And then secondly in the context of recent headlines around the potential joint venture between Liberty Global and Sunrise, I'd be interested in your views of market consolidation more broadly, where you see the opportunities and the downside risks. And specific to that, just within your wholesale revenue line, can you give an indication as to how much of that line roughly is coming from your wholesale business with Sunrise at the moment?

[Urs Schaeppi, CEO, Head of Swisscom]

On the net add mix, actually let's say the net adds on the Wingo, they are still on a low level and actually that shows also that we have a stable business on our Swisscom performance and also the churn figures on our Swisscom mobile customer base is solid. So Wingo is still on a low level. And the second and third brand which we have also -- and which is performing well. This brand is performing well, and on Swisscom we are, let's say, overall a slight, slight increase on Swisscom, but demand dynamic is coming out of the second and third brand and not Wingo. The whole subscription base of the second and third brand is more or less unchanged, still below 10%, and more than 90% is on our Swisscom brand. But it's still important we have the second and third brand to defend the low end. And I think it's also important on this topic to see where the blend starts. So I think this gives you also a good indication how the price dynamic in whole portfolio is and this blended ARPU is stable. On the JV or on possible consolidation in Switzerland, what could be the impact of Swisscom. There could be a lot of different consolidations. Switzerland, it's important at the end what will be the strategy of this new consolidation company. And if this company has a rational quality oriented strategy, I think this will have a positive impact on the Swiss market overall. It will even stabilize the Swiss market. For Swisscom, we are big enough and have the capability to compete also in a consolidated situation, and the wholesale revenues of FastWeb, we certainly don't disclose them.

[Joshua Andrew Mills, Equity Analyst]

And sorry, just to come back on that first question around the sub-brands. Just so [indiscernible]. So you're saying currently less than 10% of your broadband base are on the sub-brands, be it M-Budget or Wingo, but the majority of your net adds are coming from those brands.

[Urs Schaeppi, CEO, Head of Swisscom]

I think there was a misunderstanding on postpaid, on mobile postpaid less than 10%. On broadband, it's close to 100% is on the Swisscom brands [indiscernible] from our side.

[Joshua Andrew Mills, Equity Analyst]

And on the net adds going forward, you're saying that -- you're are seeing some small increases in the Swisscom main brand, but the majority of the net adds we see on Slide 5 are coming from Wingo and M-Budget.

[Urs Schaeppi, CEO, Head of Swisscom]

You're talking from broadband -- mobile or broadband?

[Joshua Andrew Mills, Equity Analyst]

Both.

[Urs Schaeppi, CEO, Head of Swisscom]

Okay. On mobile, we can say the main part of the net adds are coming from second and the third brands, being Wingo and M-Budget in Q1. On broadband, it's close to 100% the part of Swisscom brands. And that's why we are also not so nervous about the Salt offering. We have a competitive offer in the market, which is actually on a level of Salt plan and we don't see too much dynamic. And I don't see a dynamic of Salt up to now in the market. But it's too early to say. We have to watch to it. We don't underestimate it. So we will protect our customer base.

[Operator]

Okay. There is another question from Usman Ghazi.

[Usman Ghazi, Analyst of Telecom]

I've got 2 questions, please. The first one is on mobile postpaid churn. I see that you are now disclosing the numbers. And specifically on the mobile postpaid value churn, it seems like the residential churn is quite stable at 7.7% versus 7.4% last year, so very low. But the overall blended churn across retail and enterprise has gone up. It's low but it's gone up to 8.5% in Q1 versus 7.2% in Q1 last year. So it's suggesting that enterprise kind of churn has picked up. Has there been a contract that you lost in Q1 or something or if you could just give us an idea of what is driving that? The second question was just on the spectrum auction again. I mean, if you do not get the concession from the regulator, would this impact your kind of 5G planning, or do you have kind of some kind of a backstop on meeting 5G needs even if you don't get spectrum in accordance with your market share?

[Urs Schaeppi, CEO, Head of Swisscom]

On the churn of mobile postpaid. So we have a good and low churn figures overall on mobile. And also if I look to our net porting, so the porting balance, in-porting, out-porting, I don't see actually a change in the market there compared to previous years. So it's a stable situation. What you mentioned is right, we have a loss of 1 enterprise customer in Q1 in the enterprise unit and that's a one-off, but overall the performance of win and losses in the enterprise market is a good one for Swisscom. So we are losing customers, we are gaining customers. Sunrise is acting very, very aggressive only on price. In this enterprise market, I don't know if this will be a sustainable strategy, but that's not my shoes. But that's what we have -- that's actually what the case is impacting what you mentioned. I said the loss, the 1 loss of a customer in the enterprise market.

[Mario Rossi]

Spectrum.

[Urs Schaeppi, CEO, Head of Swisscom]

Spectrum. On Spectrum, if the auction will not take place this year, the rollout of 5G will be very difficult one because we need frequencies for it. That's clear. You can't do a good 5G rollout without spectrum in the environment which we have in Switzerland. So that's why we are asking for an auction for this year, otherwise Swisscom will be a laggard, or Switzerland will be a laggard in this 5G technology. And I think that will be not the intention of the regulator.

[Usman Ghazi, Analyst of Telecom]

Sorry, I meant that I mean you are asking for a spectrum, the opportunity to compete in the auction and buy enough spectrum such that it matches your subscriber share. I mean if the regulator doesn't meet that request, you know I'm just wondering how it would impact -- I mean would it impact the 5G deployment plan or do you have sufficient capacity?

[Urs Schaeppi, CEO, Head of Swisscom]

It would make it much more complicated to roll out the 5G. If you don't have frequency, you can't do a good rollout of 5G. But it's too early to speculate. It's too early to speculate. I think the regulator must make a fair auction for all competitors where they can get for a reasonable price some spectrum to roll out it and it's too early to speculate. But for everybody, if you don't have spectrum, 5G will be difficult.

[Usman Ghazi, Analyst of Telecom]

Can I maybe sneak in another question? As the consultation stands today, I mean are there any coverage obligations on this spectrum or not?

[Urs Schaeppi, CEO, Head of Swisscom]

Yes. You know it's not defined, really the condition of the auctions are not defined. They are now in the last consultation phase, and then we'll know it. It's too early to speculate about this package.

[Operator]

Okay. There is another question from Luigi Minerva.

[Luigi Minerva, Senior Analyst]

The first one is looking at Fastweb. This new a energy telco bundle. I was wondering if you can tell us a bit the rationale behind it and whether it can be seen as a pilot for Switzerland, for example. And more generally, still on this point, I was wondering whether bundling telco with services, which increased prices by inflation every year, effectively would leave the burden of the discount increasingly always on the telco side. So more generally, the risk from that approach commercially. And then moving onto Switzerland, on the electromagnetic emissions legislation, can you remind us what is the outlook for a change in terms of timing and procedures? And maybe if you have an indication of how a change in the legislation may affect the CapEx profile in the next few years?

[Urs Schaeppi, CEO, Head of Swisscom]

So on this bundled energy, telco bundle in Italy with Eni that's actual distribution partnership. So you can put more distribution channel. So we don't see there effects on ARPU and so on. It's a selling. It's a distribution channel. And the Switzerland structure I think wouldn't work because the market conditions are totally different in Switzerland. On this emissions topic, so there is now a process in Switzerland that they try to improve the measurement method for this emission. And this would give us a relief to build the network. It's too early to say when this will be happening, but this will be not in the next 2 months. So this will take time. So I think it's too early to give a forecast on this. And then on the CapEx actually, our more CapEx we would need to do a 5G network if we don't get this [indiscernible] relief on the emission. This depends on the take up of the data growth in the 5G networks and then it's too early to say it, but we are confident that we can build the -- that we can make a rollout of 5G in an overall CapEx envelope in the region of today.

[Luigi Minerva, Senior Analyst]

So just to clarify on the first question. So on Slide 23, when you indicate the discount, so isn't that like a discount to the ARPU basically?

[Urs Schaeppi, CEO, Head of Swisscom]

Yes. But you know these are also at the end new customers. So you are able to grow and it depends on your bundle, and it's already you have discounted [indiscernible] actually as the ambition to have the same ARPU to make an upselling. So you can sell high products. That's not -- you can't give it one-to-one to whole ARPU because there are different elements in it.

[Operator]

Okay. There is one last question from Luis Prota.

[Luis Prota, Executive Director]

Luis Prota from Morgan Stanley. The question is on the discount in your convergent package inOne. Your inOne mobile subscribers are currently like 27% of your postpaid base, but at the current run rate, you're going to be well above 50% by year-end '18. So the question is out of this new mobile lines getting into inOne, how many or what's the percentage of those which are second and third line, and therefore getting a CHF 20 discount? And from what level we should expect, what level of penetration of mobile within inOne we should expect the discount to start trending towards the CHF 40?

[Urs Schaeppi, CEO, Head of Swisscom]

I think you have to look on Page 12. There are a lot of different factors in it. So what you can see is that we are able to upsell a customer which is going in a bundle in the region of CHF 6, so we have an upsell on mobile. But then we have a converged discount. And it depends now how skillful we are overall, and then if we migrate, we can even get an upsell on it. There are different elements. You can't just take the converged rebate and say that this will reflect in the whole converged discounts. There are a lot of different dynamics. That's why Chart 12 is actually the one that will be showing the dynamic.

[Luis Prota, Executive Director]

Am I right thinking that when a Number 3 or Number 4 mobile line is getting into the bundle, it's going to be more difficult to upsell? I guess that those are low-end lines, probably kids or --

[Urs Schaeppi, CEO, Head of Swisscom]

No, that must not be the case because a lot of second and third SIM cards are normally the SIM cards of children. And in this, they gave a -- if you can make an upsell for more speed, more data volume [indiscernible] mobile offering. And then there is another effect also on it, the churn figures are also lower. So I think you can't just take the ARPU at the end. You have also to take the netback dynamic and the churn dynamic.

[Operator]

Okay. There is another question from Usman Ghazi.

[Usman Ghazi, Analyst of Telecom]

I just wanted to ask just on this point of upselling. Is it possible for you to share what kind of average speed the customer base is on today just for us to get an understanding for what the upsell opportunity is in the inOne/Infinity base just because the ARPUs seemed fairly high, so it would be good to get a bit more detail on how you see the upselling opportunity from here. And the second is a bit more broader question. Given Swisscom is one of the few incumbents that have said that they are actively going to deploy 5G, what do you see in the residential market, I mean do you see 5G as an opportunity to differentiate yourself? And if so, with what kind of applications did you think this would be facilitated?

[Urs Schaeppi, CEO, Head of Swisscom]

On upselling, to upsell a customer, there is not only speed important or relevant. So if you look to our product offers, you'll see that it's not only speed differentiated to upsell. It's a kind of bundle of speed, then some contents maybe in the TV area, or some roaming volume. So that's a mix of bundles, which is more attractive for the customers and that's why I think we have a lot of arguments to upselling. And then the second question was on-

[Usman Ghazi, Analyst of Telecom]

5G.

[Urs Schaeppi, CEO, Head of Swisscom]

On 5G, is 5G ready, what is the advantage for the customers. On 5G, you can differentiate yourself on the network side. That's 1 advantage for an established operator. The second thing is that you can make ultra-broadband offers on mobile. I think this will be the major application. But in the B2B market, you can do a lot of nice applications because you can do slice networks. So you can do Industry 4.0 applications for companies. So I think 5G has also a potential in the B2B market in more vertical solutions. So that's one of the advantage of 5G. And then as always, if you have more speed, lower latency, there will be more application in the market. The smartphone wouldn't be in the market without 3G. There wouldn't have been the innovation of smartphones and applications. So we will have the same dynamic and then the penetration of the SIM cards [indiscernible]. The main question is how rational and skillful is our business to monetize this 5G investment. I think that should be the opportunity for our industry to monetize this investment.Okay, with that question number 10, I would like to conclude today's conference call. Thank you for your participation. If you have any further questions, please do not hesitate to contact us from the IR team. Speak to you soon. Have a great day. Thank you.