Swisscom AG

SIX:SCMN

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the first quarter results 2021 presented by Urs Schaeppi, Eugen Stermetz and Louis Schmid. Louis, the floor is yours.

[Louis Schmid, Head of Investor Relations]

Good morning, ladies and gentlemen. Welcome to Swisscom's Q1 presentation. My name is Louis Schmid, Head of Investor Relations. And with me are our CEO, Urs Schaeppi; and Eugen Stermetz, our Chief Financial Officer.The first part of today's analyst and investor presentation hosted by our CEO consists of 2 chapters: a quick overview with some highlights on our Q1 achievements, operational performance and financials; and an update on our network activities, B2C and B2B operations and financial results in Switzerland, on Fastweb strategic initiatives and Q1 results operationally and financially.In the second part of the presentation, Eugen runs you through chapter 3, the Q1 financials, implication from the new fiber partnership and the new guidance for the full year '21.With that, I would like to hand over to Urs to start his part. Urs?

[Urs Schaeppi, CEO, Head of Swisscom]

Good morning, ladies and gentlemen, and I welcome you to this Q1 results presentation, and I would like to start directly with our Slide 4, the key achievement in 2021. So financially, we have a strong good first quarter, operationally a solid one. And once more, we were able to win mobile tests, all the mobile tests in Q1 on CHIP and Ookla. So this shows our network leadership.We are also -- we have also a very solid and good performance in our B2B segment. So our solution business developed well, mainly cloud and security products. Also, in the retail market, a good momentum on our brand experience. And to the subscriber, a bit weaker with some exceptions that we'll come late to it. And then we announced today this fiber partnership with Salt, which I will give you extra more details.And on Fastweb, strong performance in Q1, also on the market performance side, where all segments performed well, mainly also in the B2B market and brand experience of Fastweb is increasing. And we have a strong brand in Italy.If you go on Slide 5, you see our market performance. So Switzerland, some extraordinary effects. And in Italy, we have revenue-generating growth. In Switzerland, you see that broadband is impacted by a phase out of a product. It's the Casa product, where we made a phase out. And therefore, we lose -- or lost 5,000 connections. And then also we have some spillover from the aggressive promotions of Q4. And the Valentine's day, it's always a bit the case in Q1 that the performance is weaker. And then there is certainly also a third effect, which leads to a bit weak net add performance in Q1 because we had the shutdown and the shops are important for the market performance of Swisscom.But overall, as expected, the broadband business and also the fixed voice business. On mobile, postpaid mobile, you see that underlying net adds are plus 17. There we have extraordinary effect of the phase out of 2G, which we have done in Q1, at the end of Q1. This has a bit -- slight negative impact on the net adds. And then you see slightly increasing net adds on wholesale.Fastweb, with a good momentum on mobile, 105,000 new subscription mobile and a growth of 18,000 broadband. So overall, a quarter like expected, with some extraordinary effects, as I explained.If you go on Slide 6, some key remarks to our financial performance. So we were able to have revenue growth of 2.5%, mainly driven by a bit better service revenue in Switzerland, but also solution business in Switzerland, the IT business and some more smartphone sales. And then on the EBITDA, on the right side of this chart, you see that the underlying performance of the EBITDA is plus CHF 9 million, so stable. That's a good performance if you look to the price erosion, which we have in Switzerland. So even then, we were able to compensate the service revenue decline through efficiency measures. So we had plus 7% on Swisscom Switzerland and plus CHF 10 million on Fastweb EBITDA growth. So overall, solid EBITDA and also a solid operating free cash flow, you see, it stands at CHF 509 million in the first quarter.If we go on Slide 8, very short, our priorities, they are as explained during the year result presentation of 2020. So investing in our infrastructure remains important to be leading on network quality. Defending our market position in Switzerland, who is and stay important. Then this commitment to operational excellence, where we have announced this target of plus more than CHF 100 million savings in this year. And then pushing Fastweb and increasing the free cash flow in Italy.On Slide 9, some remarks to our network initiatives. So on mobile, you see that we are able to continue to rollout the network in a challenging environment. We have today a coverage on 5G -- this 5G base version of 96%. So 96% population coverage end of Q1 and 26% of our sites are 5G+ enabled. That means these 3.5 gigahertz frequency sites. So you see that we were also able to increase the footprint. And we get some better -- I would say, some better environment for rolling out networks, still very challenging, still a lot of sites are blocked. But a bit more positive outlook on 5G rollout.On the fiber rollout, on the right side of the chart, you see the waves, how we ramp up our fiber network. So the first phase was a point-to-point approach to get 30% coverage in Switzerland, approximately. The second wave was Fiber to the Street to come fast in all the areas of Switzerland to get a bandwidth, a base bandwidth in the region of 200 to 500 megabits. And now we are in the third phase, where we are rolling out our network to 60% fiber to the home coverage in the architecture, fiber architecture points to multipoint.So some words to the COMCO investigation. So the investigation is still continuing. So we don't have really visibility how or when the end state will be. Swisscom appealed against the precautionary measures. And we are also -- are in a dialogue with the authority to convince them that we have a very effective competition in Switzerland. So it's too early to judge the impact. Important to say is that on the rollout, we continue to do our rollout. So we haven't stopped the rollout on the fiber to the home initiative.If you go on Slide 10, some words to our fiber approach. So we are an infrastructure player. That means we want to own network. We are not a whole buyer, but we are open to cooperate. And in this slide is also the partnership with Salt, which we announced this morning. We have always an open network approach. That means we give access to our competition on a nondiscriminatory base to our fiber networks.Important to say is that we are also open for other cooperation if they make sense for us. And this approach was successful in the past, where we have done some regional cooperation with utilities -- mainly with utilities and now the one with Salt.How is the partnership with Salt structured? You can see it on Page 11. So it's a long-term agreement with 2 investment components, the one on the feeder and the second one on the drop. On the feeder, Salt will co-invest in the feeder, and they will have [indiscernible] this right to use the fibers. That's the main idea on the dark fiber base. So it's the layer-1 product. And on the drop, they have also -- they are all also investing in the drop, where we have 4-fiber model, and they own their own fiber tree. So it's a layer-1 product on a point-to-multipoint architecture.Important to say is that Swisscom builds and owns the 5 networks, that our rollout ambition is unchanged. So the 60% in '25. And then on the guidance, there will be a slight adjustment. Eugen will explain it deeper in the next minutes. But what we can say is that, overall, this deal has a positive effect on EBITDA in the next year and then on the free cash flow.It's a financial leasing case, such as the financial leasing case under IFRS 16. So quite complex recognition of all the revenues and the figures, but Eugen will explain it.On Page 12, some remarks to our market dynamic in Switzerland. So unchanged situation, I would say, as in Q4. Important for us is differentiation. As we have done it in the past and defend our market share -- shares for this, we are well positioned. We have a multi-brand strategy with an attack and defense approach. And our second and third brands are the products in the more -- for the more price-sensitive customer segment.Operationally, the figures are as expected. And as I already explained with some extraordinary effects, phase out of products in broadband and phase out of 2G. But the outlook on the market looks good, so the momentum in the second quarter is certainly better than in the first quarter.On B2C, the operational results on Page 13, some remarks to the KPIs, first starting with wireline KPIs. You see that the ARPU, the blended ARPU on broadband is stable. So we have a stable ARPU, I think that's a good performance, at CHF 37. The bundled ARPU on wireline is even increased by CHF 2 at the CHF 86. And the churn is slightly higher because of these special effects, which I explained before.On wireless, postpaid ARPU is at CHF 54. So this is minus CHF 3, where CHF 2 is coming out of the revenue-generating mix. Eugen will explain it later. And CHF 1 is coming from fixed mobile converged rebates and roaming effects because we had also the lockdown in Q1 in Switzerland. So -- but overall, I think solid KPIs.On Page 14, on the B2B market, you see a good performance, solid performance in the B2B market. The service revenue trends are quietly -- are a bit better. So less erosion on service revenue in Q1. The customer base is solid, stable. So a stable customer base on a revenue-generating unit level. ARPU pressure is a bit lower. And there is a bit more traffic also because of the home office situation in Switzerland.The solution revenues, that mean the IT business revenues, you see that we have a good development, slightly increasing solution revenues with different dynamics, good momentum on cloud security and also SAP, the SAP business unit. A bit pressure on workplace and UCC, but that's more a seasonal effect.On Page 15, our cost achievements. So we are on track for this CHF 100 million-plus savings. You see in the first quarter, we had net savings of minus CHF 27 million. So we are on track to achieve our cost targets in '21.On the financial performance of Swisscom Switzerland on Page 16. So we have solid EBITDA. We have revenue, which is slightly increased by CHF 15 million, but with different effects, the service revenue, which went down by CHF 51 million. And the main effect here is the erosion in the mobile business with wireline business is quite stable. The price erosion, as explained, revenue-generating mix and some price effects in B2B and growing. This leads to this minus CHF 51 million service revenue. And on the other side, you see the areas where we were able to grow. EBITDA was up by CHF 7 million and operating free cash flow is approximately stable at CHF 487 million.On Page, 17, some remarks to Fastweb, so as to the network strategy and the commercial update. So on fiber, we have good momentum. And Fastweb showed once more that they are leading. We are the only player which offers more than 1 gigabit per second speed in the consumer market. And also on the 5G fixed wireless access project, we are in a pioneering role. We are the first provider, which will bring fixed wireless access or UBB services to rural areas. And there, we have very good performance figures of our fixed wireless access product. And we are now progressively rolling out this fixed wireless access network. On 5G, we are on track on the rollout.On Page 18, some remarks to the consumer performance of Fastweb. So in the fixed business, a solid momentum. Important to mention is the penetration of our UBB subscriber base. That's important because if we have a higher percentage which are on UBB, on ultra-broadband business, we have benefits. They are coming out of a higher ARPU and a lower churn. And you see that we were able to increase our penetration on UBB by 18%.On mobile, we have a good momentum, good subscriber growth and also a lower churn, so good momentum in mobile. On the ARPU side, important to mention that the performance of our fixed mobile converged offers, you see that we are able to have an uplift on the ARPU by 27%. And the churn is decreasing on a fixed mobile converged offer by to 47%. Net Promoter Score for this, we are proud. So we have a leading Net Promoter Score in the Italian market.On Page 19, some figures to the enterprise and wholesale market. Both segments developed well. So we have revenue growth in the region of 12%.Financially, and this -- on Page 20, Fastweb has good results. So we were able to have a growth on revenue by 7% and on EBITDA by 5%. And then also a positive operating free cash flow in the first quarter. So overall, we are on track with Fastweb.And now I would like to hand over to Eugen to explain the financial results.

[Eugen Stermetz, CFO & Member of Executive Board]

Thank you, Urs. Good morning, everybody, also from my side. We'll move on to Page 22, starting with group revenue. As Urs already mentioned, group revenue is up by CHF 66 million on an underlying basis, net of currency effects at plus CHF 53 million. Very nice growth once more from Fastweb with plus CHF 41 million, that's plus 7% growth also out of Fastweb, as Urs mentioned, driven by all 3 segments: consumer, enterprise and wholesale. But certainly, we have focus on the enterprise segment, which performed very well in this quarter. Swisscom Switzerland also up -- or slightly up CHF 15 million plus compared to last year.And we move on to Page 23 to dive into the CHF 15 million revenue dynamics. As usual, I'll start on the left-hand side, Urs mentioned it already. Service revenue, we had a service revenue decline of CHF 51 million overall, that's split into B2C and B2B. B2C, minus CHF 34 million; B2B, minus CHF 17 million. So in absolute terms, the larger contribution comes from the B2C segment. But in percentage terms, you can see that both segments had a decline in service revenue in the order of magnitude of 3.5%.Some compensating factors during the quarter. First, the well-known device decoupling effect, IFRS 15 reconciliation line plus CHF 24 million. This line will stay with us for another quarter, and then towards the end of the year will be gone. More operatingly, the solutions revenue, plus CHF 6 million, which is very positive.Moving on, hardware revenues, plus CHF 37 million. That was due mainly, as Urs explained, to smartphone sales during the quarter, obviously, associated with the respective cost of goods sold, which we are going to talk about in a second. So no margin impact or very little margin impact out of these CHF 37 million.We had some growth in Switzerland also from the wholesale division. We had growth in our access business and some mobile backhauling are the major drivers behind that growth. So all in all, taken together, plus CHF 15 million on revenue.Moving on to the right side, service revenue dynamics in Switzerland, the CHF 51 million. If you compare them to the service revenue declines of the last 4 or 5 quarters, you can see that this is on the lower end of the range over the last year. In our view, you should not read a trend into this. So we expect those CHF 51 million to remain also going forward on the lower end of what would be a typically run rate of service revenue decline, and we'll talk about our guidance towards the end of the presentation.The CHF 51 million certainly came in a little bit less -- or a little bit softer than I expected. You remember our service revenue guidance for the full year, which was between minus CHF 250 million and minus CHF 300 million. So this was certainly on the lower end of our expectations. And one driver behind that is that we had higher-than-expected metered revenues. And that was due to home office. As people stay at home, there is more traffic. And they are still in the B2B segment, but also in the B2C segment on the wireline and some metered revenues that got a little bit of a boost out of that effect.On the bottom right side, we break it down into wireline and wireless, and you can see what I just explained here in a little bit of more detail. Wireline only very slightly down with minus CHF 4 million service revenue decline. We would have expected this to be a little bit bigger, if it wasn't for the traffic effect that I mentioned. Wireline -- sorry, wireless with minus CHF 47 million, having the lion's share of the service revenue decline.In wireline, there is 1 usual suspect that you know, the fixed voice line loss. That was the same in this quarter, more or less the same as we had in the past. On price pressure in B2B and B2C in the wireline segment, a mixed picture and no clear downward trend as we had in the past, and this is exactly due to this traffic effect that I mentioned. So it's these 2 columns that would look differently if we hadn't had additional traffic due to home office.Major effects from wireless. As I mentioned, within wireless, you can see the biggest driver of service revenue decline comes out of the B2C wireless segment with minus CHF 23 million, what we call a change in RGU mix. It's basically price erosion bucket containing effects out of the intense promotions that are out there on the market. And what we call the brand shift of customers moving from the high-end brand to the no-frill brands within our portfolio.Fixed mobile convergence is going on. You know that effect. We had another quarter of roaming effects. The reason being that last year, the first quarter was not yet a COVID quarter or just the last 2 or 3 weeks or so of the first quarter of last year, COVID. So there was still travel going on in the first quarter of last year. There was not much travel out of Switzerland in the first quarter of this year. So in this quarter compared to last year, we still have a roaming effect. And on the B2B side, same here, roaming effect and the price pressure that we already mentioned.Moving on to EBITDA on Page 24. Underlying plus CHF 9 million, plus CHF 10 million from Fastweb, that's 5% growth year-over-year and consistent with past growth and certainly a very good result.Swisscom Switzerland, slightly up with CHF 7 million, and I'll talk you through the major components of the EBITDA evolution on Page 25. Starting to the left, we talked about the CHF 15 million plus in revenue. I'm not going to dive into that anymore. And moving on to direct costs, increased direct cost by CHF 35 million, half of it coming out of cost of goods, that's the hardware sales effect that we talked about in the revenue. So that's basically neutralizing the margin out of our increased hardware sales.We had higher or somewhat higher customer acquisition costs. So we mentioned this, the market is still very competitive. There are lots of promotions out there. We are not driving that game. But to some extent, we participate in that game, and we react and higher promotional activities drive SOC. And also in Q1 2020, we had lower additions than this year. So those are the main drivers behind SOC. And there were slightly higher outpayments driven by interconnection revenues, and it takes into effect on the roaming side, nothing too noteworthy.More importantly, indirect cost, Urs mentioned it, we are on track to our target of reducing indirect costs by CHF 100 million per year with indirect cost savings of CHF 27 million in the first quarter. You might have noted that there is only a very small effect out of workforce personnel expense. There is 2 or 3 reasons for that in the first quarter. One is we had extra workload in the customer care center due to the 2G phase out that Urs mentioned and the legacy product phase out on the wireline side that Urs also mentioned that, that impacts, obviously, personnel expense.And we quite simply had a seasonal effect of people not liking to go on vacations during a COVID first quarter. So we had higher vacation accruals, purely seasonal effects, which will level out over the rest of the year. And you will have noticed that, as in the past, our indirect cost savings are net of capitalized costs. Because obviously, some of our personnel is used for CapEx purposes, development purposes, which needs to be capitalized.Takeaway message, we are confident that we are on track to meet the CHF 100 million-plus target towards the end of the year.Moving on to Page 26. CapEx for the group at CHF 540 million, up by CHF 24 million, mostly by CHF 20 million more on the Fastweb side, which was driven by customer-driven CapEx and the 5G rollout on the CapEx side. On the Swisscom Switzerland side, to the right hand, you see our CapEx mix within Swisscom Switzerland. You can see a shift from our copper, back-bone, et cetera, bucket of CapEx to the fiber rollout. It's not as pronounced as it looks like here in the first quarter, that's more seasonal effect, but there is certainly, as we pointed out, in the full year presentation, there will be a shift from FTTS to FTTH during the year with the FTTH rollout gaining speed. Takeaway message, CapEx envelope, apart from the effect that we are going to talk about out of the Salt partnership [indiscernible], CapEx envelope is as expected and as communicated for the full year.I move on to Page 27, free cash flow bridge, just 2 brief words. Basically no working capital impact in Q1 2021. However, we had a big net working capital impact in 2020. So there is a year-over-year effect out of that. We just had some big prepayments in the first quarter of 2020. But the important message here is no big impact out of net working capital in the first quarter of this year. Secondly, you might have noted that we paid CHF 198 million in income taxes in the first quarter. That's a mere timing issue. We don't pay every year exactly the same point in time our income taxes, so please don't multiply this CHF 198 million by 4 to get to our full year tax payments. That's a phasing issue.I'll move on to Page 28, the net income bridge. Just 2 words here. First, you see that we had a pretty significant change in the financial result with CHF 252 million other financial result. Urs mentioned it at the beginning of the presentation, I believe, that is due to the swap of our FlashFiber stake in Italy into a 4.5% stake in FiberCop,, at which point we had to mark-to-market the valuation of our stake in the company in our books, and that gave CHF 169 million positive impact, and we had a one-off gain out of the sale of Belgacom International Carrier Services of CHF 38 million. So that's the lion's share of this exceptionally high financial result.Second comment on tax. You see the tax rate -- the calculated tax rate for this quarter is quite low. That is also due to the 2 transactions that I just mentioned that brought us gains in the books, but very little additional tax. So that results in a net income of CHF 638 million compared to CHF 394 million last year. This is the plus 62% that Urs mentioned at the beginning of the presentation.Now moving on to Page 29, financial implications from the partnership with Salt. Now obviously, you will understand that the exact terms of the deal are confidential, and we can't go into too much detail on the one hand. On the other hand, we obviously need to give you some reasonable guidance on the financial impact of the deal. And I will try to do my best not to confuse you too much and walk you through the mechanics of this transaction before we go to the guidance for the specific guidance for 2021.I'll start with the most important piece, and that's on the bottom right of the table with free cash flow. Urs mentioned it, the deal will be free cash flow accretive. It's a long-term partnership and it will have a long-term positive impact on free cash flow in the order of magnitude of a mid-double-digit number. So if you don't know anything else about this deal, this is what you should know. If you build it into your models, technically speaking, there is a long-term positive effect on free cash flow in the mid-double-digit order of magnitude. First thing to know.Second thing to know, we will have to account for this deal under IFRS 16 as a finance lease. And that leads to 2 distinct periods in the life of that agreement. The first period being the rollout period from 2021 to 2025 and the second period from '26 onward. During the rollout period, we will have a P&L effect out of that deal. Afterwards, from '26 onwards, there is no P&L effect. There is just a net working capital effect, and the free cash flow effect continues that I mentioned. Now -- already now and I'll try to repeat it later, we say here 2021 to 2025, but bear in mind 2021 is half a year. So what I'm going to explain now is the typical effect on a typically full year during the rollout. And we'll talk about the specific half year effect of that deal when I talk about the guidance on the next page.So let me walk you through step-by-step on the typically full year effects in the rollout period. First of all, we will book revenue in the wholesale segment, when and if we hand over the right-of-use on the feeders and on the drops to Salt over time. So we will book revenue as we hand over the feeder and the revenues represent according to IFRS 16 the present value of the future lease payments. And in a typical rollout year, this is a low 3-digit number. This is what we indicated with this process. I'll try to give you some flavor of it. It's low 3-digit number in a typically full rollout year.Second step, we will have to recognize direct costs in OpEx out of the transaction as we hand over these used assets and these direct costs primarily come out of our CapEx. So we have CapEx savings, which I'll talk about in a second. We've CapEx savings. And this relates to the assets that we build as we go through the rollout, but there is also a second piece in direct costs, which relates to the assets that are already there. And the feeders we talked about at the beginning of the presentation, the feeders are already there. And so the feeders will come out of -- will be reclassified out of fixed assets and booked into direct costs. So that's the second step. Taking the first step and the second step together, wholesale revenue and direct costs yields an EBITDA impact. And in the typical full year rollout year, this EBITDA impact is similar to the free cash flow impact in mid-double-digit number. So that's important to know.Next step, CapEx. I explained where the CapEx comes from. It comes from building out the drops that we will hand over to Salt, and this CapEx will be in a typically full rollout year will be a low 3-digit number, again. So we'll have a positive impact on CapEx and the combination of EBITDA and CapEx taken together will give a positive operating free cash flow proxy impact also a low 3-digit number.Now comes to [ trick ]. As we hand over the used assets, Salt will not pay immediately, but there are payment terms, there is a payment schedule attached to that agreement. And that means that the operating free cash flow doesn't go directly into the free cash flow, but there is a net working capital effect in between. And after deducting that net working capital effect, you end up at where I started, at the most important part of the whole equation, the positive long-term free cash flow impact in the mid-double-digit numbers.Now as I said, 2021 is not a full year. 2021 is not a full year. It's most probably half a year of this transaction as we start to rollout together with Salt this summer. And we will give you now the -- our update to the guidance for 2021, reflecting, among others, this agreement. And obviously, as we head next year into 2022, the full year effect of the deals that are now explained in complicated and somewhat opaque terms will be included in the guidance that we will present in February next year.So let's talk about the guidance on Page 30. We update the guidance and we update the guidance for 3 reasons. Number one, as you have seen, we had some tailwinds in Q1 performance. I tried to explain that we do not necessarily expect them to continue, but they are there. We saw them in the service revenue decline. That was a little bit lower than expected. And our updated guidance reflects: number one, the Q1 financial performance. Number two, we updated the Euro-Swiss franc exchange rate to the currently prevailing rate of 1.10. We had our original planning and original guidance with 1.07, so that's the second effect that goes into the update of the guidance. And finally, there is the third effect influencing the update of the guidance and that's the Salt transaction or to be more precise, the first half year of the Salt transaction between summer and end of this year. So that's the 3 effects.I'll now walk you through revenue, EBITDA and CapEx and how these 3 effects play into these 3 lines. First, revenue. We updated the guidance from CHF 11.1 billion to CHF 11.3 billion. And a little bit less than half of the change is due to the Salt transaction -- the first half year of the Salt transaction. With the other piece, the rest -- the -- a little bit more than half of the effect being due mainly to FX update and to a smaller amount out of the operating performance of Q1 that we took into the full year guidance. Step one, revenue.Step two, EBITDA. We updated the guidance from CHF 4.3 billion to CHF 4.3 billion to CHF 4.4 billion. So we give a range. The update is due to the 3 factors that I mentioned, roughly 1/3 each, operating performance, FX and the Salt transaction. Why do we give a range? Because there is still some uncertainty associated. Among others, the rollout speed, the starting point of the Salt deal. Obviously, some uncertainty still associated with the business. We are just at the end of the first quarter. This is the beginning of the year. So this is why we give a range.Finally, CapEx. We guided CHF 2.3 billion CapEx at the beginning of the year. We now guide in the updated guidance CHF 2.2 billion to CHF 2.3 billion, so reduced CapEx for the group. And this is mostly due to the effect from the Salt transaction to a half year effect from the Salt transaction that I mentioned.Taking everything together, no change to our guidance concerning dividend. Dividend guidance remains the same, always subject to our financial results being what we expect right now.And with that, I would hand over to the operator.

[Operator]

[Operator Instructions] So as first, we have Polo Tang, UBS.

[Polo Tang, MD & Head of Telecom Research]

I actually have 3 quick questions. The first one is really just about Sunrise-UPC. I mean what are you seeing in terms of competitive behavior? So are you seeing signs that they are maybe focusing on maximizing profitability? Or are they kind of more focused in terms of driving subscriber growth? So that's the first question.Second question is really just trying to understand COVID-19 impacts in a bit more detail on how that may or may not evolve through the year. So for example, how do you think about the SME segment and business customers? But I'm also curious in terms of how we should think about roaming revenues from here? But also in the presentation, you mentioned the uplift in metered revenues as people work from home. So is this here to stay in terms of these metered revenues? Or do you think that will kind of fade over time? So can you talk about kind of COVID-19 effects for this year and how you think about it?And my final question is just really about the sale of your stake in BICS. Can you remind us why you decided to sell it? And specifically, what is your view of the TeleSign business within BICS because, I mean, obviously, the multiple that you kind of got for BICS, I think it was around about 4x EBITDA. So kind of where you were quite cautious in terms of the outlook for BICS. So those would be my 3 questions.

[Urs Schaeppi, CEO, Head of Swisscom]

Thank you for the question. If I start with the Sunrise-UPC question, what will be the behavior in the market. So if I look to the behavior in the last quarters, they are very volume-driven, promotion-oriented. And I think this will not change in the next month. I think it will remain a promotion-oriented business. Long term -- mid or long term, it's quite hard to say. And maybe I'm the wrong one which you put this question. From a -- from the back book side, I think, to be too aggressive long-term on promotion is quite a risky game also for this Newco. But the next months, I think we will have same behavior as we have it today.On the COVID-19 impact, we see some positive impact on solution, digitalization, so is pushing through this home office. And that's why there is a bit more solution business. This traffic effect, which Eugen explained, I think they will flattening out in the next months when home office is also going down. There will be weak this effect in the next quarters. And roaming, also, we will have a certain relief on roaming, but big travels will be not made. That's our assumption in this year. Maybe more on the retail side than on the business side. We think that the roaming revenues will stay quite low also in this year, also in the third and fourth quarter. Maybe next year, we will get a better situation on it.Then why we sold our stakes in BICS? That has nothing to do with the performance of this company, though this company is well performing. The main reason is we have a minority stake in this company. And it's not a very liquid, actually, asset. And that's why we -- if we get the opportunity to sell it, it's not strategic, we sold it. So that's all behind it, but not because of performance of BICS. We stay a customer of BICS, and so we will have further cooperation with them.

[Polo Tang, MD & Head of Telecom Research]

And can I maybe just ask a clarification question about what you said on the second quarter because I think for B2C, you said you're more optimistic in terms of talking about improving trends in Q2 versus Q1. So can I clarify whether you were talking about subscriber trends or revenue trends or both?

[Urs Schaeppi, CEO, Head of Swisscom]

No. Subscriber trends. Q1 is always strongly impacted by the aggressive Q4 promotions. So Black Friday, Christmas promotions. And then also the lockdown, which we had in Switzerland, where Swisscom shops were closed, and this leads to a lower gross add performance. That's why we think that the performance in the next quarters will be a bit better.

[Operator]

Next question, Steve Malcolm, Redburn.

[Stephen Paul Malcolm, Research Analyst]

Yes. Can you hear me okay?

[Urs Schaeppi, CEO, Head of Swisscom]

Yes.

[Stephen Paul Malcolm, Research Analyst]

Okay. Sorry. Thanks for all the detail on the Salt transaction. I've got a couple of questions on that and then one on Fastweb. First of all, just -- can you just clarify that the transaction is not dependent on any outcome from the ComCom investigation? And do you expect this deal to help your negotiations with ComCom or the discussions around getting regulatory clearance?Secondly, the guidance you've given, I assume that doesn't bake in anything for the retail consequences of Salt coming in as a wholesale partner. Can you maybe give us a sense of how much market share Salt had in those new fiber areas? I assume it's very low because there is no fiber. And what your thinking is on the retail consequences of giving this wholesale deal to Salt?And then just a question on Fastweb. I mean your B2C growth in Fastweb is only around 2% now. All the growth is coming from enterprise and wholesale. I mean, do you think that Fastweb can grow mid-single digits if it's only growing B2C at 2%? And if not, how do you revive the growth in B2C to have your sort of midterm growth ambitions for Fastweb?

[Urs Schaeppi, CEO, Head of Swisscom]

On the first question, the Salt deal and this whole impact on the COMCO. So it's too early how they judge it. But if you ask me, this should actually help because we have a layer-1 with Salt. Now we have a layer-1 deal in the point to multipoint turf and that's exactly what COMCO is asking for. So we have a solution for it. It will lead to a good competition, to a healthy competition. So in my view, it should help to this investigation of the COMCO, but I can't tell you today. It's too early.And then on the guidance topic, or what will be the impact of Salt in the retail market, if they enter the retail market? What you have to assume is that they get a digital footprint. That's clear. But this footprint will not come from 1 day to the other. So that's incremental. We will ramp up our footprint from -- in the next years to 60% -- from something above 30% to 60% in the next 4 to 5 years. So it will be an incremental impact, but it will firmly bring competition in the retail market. We have the advantage that we will get to wholesale revenues. And to be sustainable in the retail market, it's not only the access which is important. We were successful in protecting our market share through this combination; networks, customer service and excellent products. And we have really a superior entertainment proposition. But that's why we think we will not suffer too much on the retail markets, but this will certainly have an impact. The question is who will lose these customers at the end. If so, this is competing on price.

[Stephen Paul Malcolm, Research Analyst]

The guidance does not bake in any assumptions around future retail market share loss. Purely -- the guidance you've given to us is purely the wholesale side of the equation.

[Urs Schaeppi, CEO, Head of Swisscom]

Yes. That's right. But the impact will be neglectable in 2021.

[Stephen Paul Malcolm, Research Analyst]

So clearly, it will be negligible this year. But going forward, you would assume in sort of doing this, but they're doing -- the starting point for the market share on the new fiber [ plan ] is very, very low because they haven't been marketing fiber because there isn't any there. Correct?

[Urs Schaeppi, CEO, Head of Swisscom]

Yes. It will take time. It will be a process. And then we have our strategy to defend our market share, as I explained it before. So there will be not -- in my view, there will be no big changes in the next -- compared to today in the next quarters.

[Stephen Paul Malcolm, Research Analyst]

No. I wouldn't expect much impact in Q2 and Q3. But [indiscernible].

[Urs Schaeppi, CEO, Head of Swisscom]

Sorry. There was the last question on Fastweb, the growth profile. So we will have -- we are optimistic to have a strong momentum on B2B and wholesale, that the B2C market will become more competitive also because of the market entry of Iliad in broadband. But on the other side, we have our strategy to defend our market share in the broadband business. And what you have to assume is that prices in Italy are on another level. It will -- let's say, the freedom to undercut the actual market prices in Italy is not so big as it was in the mobile market. And our strategy is to get a good momentum also with fixed converged offer in Italy with a superior product portfolio, with a very transparent product portfolio. So the market will be tough in B2C, but we are optimistic that we will have further growth path here also in B2C.

[Operator]

Next, we do have Jakob Bluestone, Credit Suisse.

[Jakob Bluestone, Research Analyst]

I had 3 questions, please, fairly short regarding the fiber partnership with Salt. The first question is, who actually makes the decision of where to build? Is it you or is it Salt? Or do you do it together? And I mean, just following on from Steve's question, you presumably have less retail market share to defend in cable areas, whereas, I guess, for Salt, it'd be a little bit more different, whether it's -- whether you're building in a cable area or not? So any color on who makes the decision on where to build?And the second question is, can you just clarify, do you pay per home passed -- sorry, does Salt pay you per home passed or per home connected? And what I can see, it looks like the feeder payment is homes passed. The drop might be home connected, in which case, presumably there would be some further growth in revenues as Salt connects customers over time. So if you can maybe just clarify that?And then just a final clarification. I think you mentioned that the wholesale revenue impact in a build year would be low triple-digit millions, so call it sort of CHF 100 million plus. But I think you also said that the impact in 2021 from Salt, roughly half of the CHF 200 million upgrade, so CHF 100 million was coming from Salt contributing essentially for 6 months. So can you maybe just clarify a little bit? I mean, it seems like both the CHF 100 million impact in the 6 months and full year effects. Maybe it's just to do with rounding or maybe I'm just misunderstanding. But can you just clarify around the revenue impact from Salt on your wholesale revenues?

[Urs Schaeppi, CEO, Head of Swisscom]

So I will take the first one on the decision, how we do the rollout. And Eugen will take the 2 other questions. On how do we construct this network? So Swisscom has the full ownership on the strategy, on the network strategy, on the rollout and also that's why we decide where we want to build and how we build the network. Certainly, we will also listen to Salt, what are their ambitions, but we control the network and we decide how we do it and where we do the rollout. And we do certainly the rollout on a competitive-driven approach, where we think that we get the best momentum.

[Eugen Stermetz, CFO & Member of Executive Board]

I'll try to answer the second question, if I got it correctly. So we deliver -- we will deliver the rights of use on the feeder to Salt as we rollout, okay? Secondly, we will deliver the drops to Salt as they need them, depending on their gain in market shares. I believe that was your question. If not, please follow-up. I think you used the terminology homes passed and homes connected, I think I got it. if I didn't, please...

[Jakob Bluestone, Research Analyst]

Okay. If I can just jump in on -- so it sounds like -- I mean, as for the second part for the drops, because that is something that comes over time as new drops are done, it sounds like there might still be some revenues even in 2026. It's just not immediately visible to day one, is that correct? There might still be a longer-term effect.

[Eugen Stermetz, CFO & Member of Executive Board]

No. We just -- if you just give us a second, then we'll try to answer it. Otherwise, we'll do it afterwards, okay. Just a second.

[Jakob Bluestone, Research Analyst]

Sure.

[Eugen Stermetz, CFO & Member of Executive Board]

Okay. Sorry, we just clarified that internally, yes, we deliver the [indiscernible] the drops also later on in the later years, 2026 plus. But we have to account for them as revenue in the first 5 years of rollout. Sorry for the time. We needed to clarify it with accounting.

[Jakob Bluestone, Research Analyst]

No, no. It's very clear.

[Urs Schaeppi, CEO, Head of Swisscom]

And then the impact on net revenue?

[Eugen Stermetz, CFO & Member of Executive Board]

Yes, net revenue. So I'll start from the guidance again, which is half a year, and then it will not be too difficult to work out the full year effect. So on the revenue guidance, we updated the guidance from CHF 11.1 billion to CHF 11.3 billion. And as said that a little bit less than half of the effect is due to the Salt deal. And that is a half year effect. So from that, you can work backwards to the full year effect, which I called a low 3-digit number.

[Urs Schaeppi, CEO, Head of Swisscom]

And what you have to assume is this is related to the network rollout. It depends on the network rollout, how we can construct the network. So It's not very easy to forecast.

[Operator]

Next, we do have Ulrich Rathe, Jefferies.

[Ulrich Rathe, Senior European Telecommunications Analyst]

Three quick questions, please. The first one is, did you have any benefit in the first quarter of lowering marketing or advertising costs because of the lockdown and you decided that maybe campaigns while the shops are closed aren't so useful. You didn't explicitly mention that. I was just wondering whether that is part of the overall financial profile in the first quarter.The question -- the second question is, so you mentioned that Salt pays -- you have sort of payment terms agreed with Salt. Could you give us sort of a general picture of how that payment profile looks? Is this front-loaded? Will there be higher payments during your rollout period? Or has it all been in the actual payment terms all flattened out, so that effectively, they pay as they get the customers. So from their economic situation, it's essentially a wholesale deal. And you're sort of absorbing that in these working capital shifts? That will be my second question.And the third question, please. When you talk about these free cash flow accretion numbers of the deal, coming back to an earlier question, is that -- and you sort of -- you're talking about that into 2025 and then beyond 2025. You sort of gave numbers to that. That excludes any retail effect? I just wanted to confirm that you haven't subtracted the potential retail impact when you were guiding for the free cash flow accretion.

[Eugen Stermetz, CFO & Member of Executive Board]

Okay. So I can take the question. So number one, yes, we had some seasonal effects in indirect costs. As I mentioned, we believe this will level out over the whole year, whether it's in MarCom or somewhere else, I would not dive into that. But on the quarter, you always have some seasonal effect.On the payment terms, we can't comment on the details of the agreement. There's certainly no full front-load. I explained that. If there was a full front-load, there would not have been a net working capital effect. But on the detailed payment schedule, I ask for your understanding that we can't give any details.On the third question, the free cash flow number does not account for any retail effect. So what we gave you is the impact of the deal.

[Ulrich Rathe, Senior European Telecommunications Analyst]

That's helpful. Can I just clarify your first answer? I understand the seasonal effect. The question was whether you have held back beyond the seasonal pattern in the first quarter because of the specific situation, like the shop closures, that's the question, not the usual sort of Q4 to Q1 pattern?

[Eugen Stermetz, CFO & Member of Executive Board]

We actually did a little bit less MarCom than originally intended, but it's not a huge effect that would impact in any significant way the financials of the quarter.

[Urs Schaeppi, CEO, Head of Swisscom]

Ulrich, it's not a big impact. So we made also big campaigns in March in the retail market. So there's really not a big impact from marketing communication and COVID.

[Operator]

Next question, Michael Bishop, Goldman Sachs.

[Michael Bishop, Equity Analyst]

Just 2 quick questions for me. Firstly, just picking up on Slide 11, where you've talked about clearly the CapEx impact of the Salt deal. But the slide also refers to, in combination with CapEx optimization. So I just wanted to ask, with the guidance change on the CapEx, how much of that is the Salt deal? And is there actually any underlying change to your CapEx or your assumptions around how -- or what price you can build out the Fiber to the Home expansion at?And then my second question was just around the improvement in the B2B service revenue trends. It looks like Salt and Sunrise both over the last couple of quarters have refreshed, particularly SME mobile offers, but you're reporting better trends. So you're just not really seeing any impact there? And what's the competitive landscape like in B2B mobile?

[Urs Schaeppi, CEO, Head of Swisscom]

Good. I will take the service revenue trend and Eugen the guidance on CapEx and costs.

[Eugen Stermetz, CFO & Member of Executive Board]

Okay. Okay. Sorry, I'll start with the first one. So no, there is no significant underlying change in our CapEx guidance. The effect that we talked about on the updated guidance is primarily due to the Salt transaction, and the [indiscernible] primarily stands that because also on CapEx, there is a small foreign exchange effect if you update the foreign exchange rate. But there is no change in guidance as to our normal CapEx envelope.

[Urs Schaeppi, CEO, Head of Swisscom]

And then on the service revenue trends, I think the best picture for it you get on Page 23. So -- and in the B2B market, you see that we have price pressure that's coming out of the corporate market and the SME market. So it's price driven, and we will have also these effects in the next quarter. So there is competition in the SME mobile market. But on the -- let's say, on the whole performance, market shares, we are quite stable. But we have price competition. And it will remain.

[Operator]

Next question is coming from George Ierodiaconou.

[Georgios Ierodiaconou, Director]

I just have a few quick follow-ups. The first one is around the question that was asked earlier about the regulatory review. Perhaps just to follow up on that, was there any other party apart from Salt that was requesting, let's say, point-to-point kind of option? If there are other interested parties in this kind of arrangement that you've announced today with Salt?The second one is on the deal itself, and apologies for this because I know you may have already given the numbers, but I was a bit confused between the annualized impact of this transaction when it ramps up versus what we are seeing this year. I just wanted to confirm some numbers, just to make sure I get this right. So in terms of the overall EBITDA and operating free cash flow proxy impact, is it fair to assume that when it ramps up, not in '21, but in the future years, this could potentially even be more than 3-digit on an annualized basis on EBITDA and probably more than double that when it comes to operating free cash flow? I just -- want to just get an idea of the magnitude.And then the final question I had is more around other implications for your wholesale business from this. Whether you are building in assumptions for doing something similar within your existing footprint of fiber, not just in the new builds with other players and whether this option could be available to that?

[Urs Schaeppi, CEO, Head of Swisscom]

Good. Eugen will take this impact question from the Salt deal. And maybe you can start with it, and then I will take the wholesale question and the regulatory question.

[Eugen Stermetz, CFO & Member of Executive Board]

Okay. So I will try to best simply repeat what I said, hopefully answering your question. So the comments I made on EBITDA, CapEx and operating free cash flow proxies were as follows: as I said, the EBITDA impact on the full year is in the mid-double-digit numbers comparable to the free cash flow impact. The CapEx impact is a low 3-digit number in a full year. And obviously, EBITDA and CapEx together give the operating free cash flow proxy effect. Did that help?

[Urs Schaeppi, CEO, Head of Swisscom]

So It's more a 2-digit impact than a 3-digit impact.

[Georgios Ierodiaconou, Director]

Clear. Clear.

[Urs Schaeppi, CEO, Head of Swisscom]

Good. And then on the regulatory point, do we have other companies who are interested in a deal like Salt. We certainly understand that I would or can't comment this. But Swisscom is open for partnerships, if they make sense for us. So these are commercial-driven partnerships. If they make sense for us, we are open for it. And for all the competitors who don't want to invest, we have very attractive wholesale offers. So we get this 3-layer offer. And we have, let's say, one of the strongest competitor in Switzerland. He used this 3-layer offer and he is very successful. And in the point-to-point turf, the investments are done. So we -- if we talk about further core investments or partnership, fiber partnerships, this would be in the region or in the footprint where we make the new rollout and certainly not in the existing one.

[Operator]

[Operator Instructions] Next, we do have Luigi Minerva, HSBC.

[Luigi Minerva, Senior Analyst]

Yes. I -- just on the Salt agreement again, I just wanted to get a sense of what's your view on how the economics for Salt change following this agreement as compared to a pure wholesale option. So I mean -- so essentially, my question is whether the agreement will give Salt more room, more scope to be more aggressive on the retail pricing. So yes, how the economics change compared to a pure wholesale solution for them?And the second question is about the CapEx outlook. And so I mean, the savings are a positive. But I'm wondering whether you considered if there is scope to reinvest the CapEx savings from the agreement into a larger FTTH deployment? I appreciate you are reiterating your guidance today of the 60%, but perhaps it makes sense to reinvest in a broader footprint?

[Urs Schaeppi, CEO, Head of Swisscom]

On the economics of Salt, I can't comment it. But the strategy of Salt is always a price-oriented one. On the other side, they get the capabilities to be a converged player to be competitive. So I can't give you insights to the economics. And I don't know the pricing strategy of Salt, but I think it will not become more aggressive than it is already today. So maybe this is what I can say.

[Luigi Minerva, Senior Analyst]

Perhaps I didn't say it properly. So I mean for Salt, will it be more expensive to pay the IRU as part of the agreement?

[Urs Schaeppi, CEO, Head of Swisscom]

I can't comment on this. We certainly understand it. And on the CapEx outlook, if we -- we can afford ourselves a bit higher CapEx, and we could reinvest then. That's clear. And our strategy is to make a fast rollout on Fiber to the Street. Bottlenecks are not only the CapEx. Bottlenecks are also the capabilities to do the rollout of such networks. And yes, that's a big story. But I'm not now here to give you a guidance for 2022 forward. But we want to have a fast rollout of Fiber to the Home that's maybe half of [indiscernible].

[Operator]

Next, Simon Coles, Barclays.

[Simon Alexander Arulraj Coles, Research Analyst]

Just quickly on the service revenue trend. We obviously had the guidance that the full year of CHF 250 million to CHF 300 million impact in the first quarter was only CHF 50 million. I'm just wondering why you don't think it stays at that sort of CHF 50 million range given [indiscernible] roaming headwinds, and you've obviously got a little bit of a boost from the RGU mix on the fixed side?

[Eugen Stermetz, CFO & Member of Executive Board]

Simon, I'll take this one. Yes, you're right. If you just multiply the minus CHF 51 million, you obviously don't end up at CHF 250 million to CHF 300 million. And I think in updating our guidance, we also acknowledge the fact that within that range of CHF 250 million to CHF 300 million, we are probably moving towards the lower end rather than the upper end. Still, we see not only -- as I mentioned when I discussed Page 23, we don't necessarily expect the trend to continue or the CHF 51 million to be the going run rate. There are components in the service revenue mix that could well worsen. We mentioned the headwinds from traffic revenues that are there right now, but that will be gone very soon. And we also talked about price pressure in the -- sorry, in the B2B segment that could well get worse over time. So we made a balanced assessment and put all of this into account, not just the Q1 numbers and came to the conclusion that we stick to the range. But I think you spotted it correctly. We are trending towards the lower end of the range as things stand right now.

[Operator]

Next, Steve Malcolm, Redburn.

[Stephen Paul Malcolm, Research Analyst]

Yes. Sorry guys, another couple of questions, if I could quickly. Just a quick one on capitalized costs, they rose quite sharply in Q1. I think they were up CHF 30 million year-on-year, which was a big component of EBITDA increase. Is that something we should expect for the full year through the year? Should we expect capitalized labor costs to rise every quarter to help EBITDA? And then just coming back to Salt, I just wanted to dig slightly deeper again. The dealer structure is in an IRU. I mean, can you give us a sense of how long that IRU lasts? Are we talking 15 to 20 years? So should we expect Salt to have to make further payments when the IRU period ends? And just for the sake of clarity, when the 5-year period is over, does Salt effectively have access to your network with no ongoing rental costs? How do the rental costs work beyond that? From what the press release, I guess, they're kind of 0. But it would be helpful to understand the obligations beyond 2026.

[Urs Schaeppi, CEO, Head of Swisscom]

So maybe on the Salt question, so we don't comment commercial details on this contract. And on the capital cost...

[Eugen Stermetz, CFO & Member of Executive Board]

On the capitalized expense, I think it was in the first quarter probably towards the higher end, as you saw. It's not only capitalized expense. It also includes other revenue, and we have a not very significant, but we had an effect in there, I think, from a sale of real estate or something like that. So it's towards the upper end of what we would expect for the coming quarters. That's correct.

[Stephen Paul Malcolm, Research Analyst]

Okay. So Q1 was abnormally large capitalized cost increase versus what we should expect for Q2 growth. Okay.

[Eugen Stermetz, CFO & Member of Executive Board]

That's what I was saying.

[Urs Schaeppi, CEO, Head of Swisscom]

Okay. Timing wise -- any last questions?

[Operator]

Last question? Well, George was in the pipeline, but he does withdraw his question. So no more questions. Back to you.

[Urs Schaeppi, CEO, Head of Swisscom]

Okay. Thank you. And with that, we would like to thank you and conclude today's conference call. Should you have any further questions, please do not hesitate to contact us. Speak to you soon. Have a great day. Thank you. Bye-bye.