Swisscom AG

SIX:SCMN

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the Q1 2022 results conference call presented by Urs Schaeppi, Eugen Stermetz and Louis Schmid. Louis, the floor is yours.

[Louis Schmid, executive]

Thank you, and also good morning from my side. My name is Louis Schmid, Head of Investor Relations. And with me are our CEO, Urs Schaeppi; and Eugen Stermetz, our Chief Financial Officer. As usual, our CEO kicked off. Worth mentioning that it is Urs Schaeppi's 36th results presentation and also his last Swisscom CEO before Christoph Aeschlimann is taking over from June.

The CEO part consists of 2 chapters: Chapter 1, a quick overview with some highlights on our Q1 achievements, operational and financial performance and a short update on the macroeconomic situation; Chapter 2, an update on our network activities, B2C and B2B operations and financial results in Switzerland and Fastweb's initiatives and Q1 results operationally and financially. In the second part of the presentation, Eugen runs you through Chapter 3. The Q1 financials, including confirming our guidance for the full year '22.

With that, I would like to hand over to our CEO to start his part. Urs?

[Urs Schaeppi, executive]

Yes. Good morning, ladies and gentlemen, and I would like to start with some highlights. So overall, we had a very strong or strong Q1 and a lot of good things happened. So if you look to our financial results, so we have a strong financial results. We have an increasing EBITDA margin and also Switzerland was above previous year, not only faster. So strong financial results, the first point.

Then -- well, so in the market, we were successful. We had a good performance on B2C. We have a growing solution business in the B2B market. We announced a new portfolio or a new offering of climate-neutral subscriptions. So we were the first provider with CO2-neutral subscriptions. We won several mobile tests, CHIP or as an example with the best 5G network. We were able to close or extend the access deal, the wholesale deal with UPC Sunrise and we are continuing to invest in our fiber networks.

Still open is the investigation with COMCO. We are in deep discussion with them, and I will come later to it. So overall, we are on track and also on track to achieve our guidance for 2022.

If you go to Slide 5, then you see our market performance. So a very simple set in Switzerland, we have stable net adds on wireline in the wireline business, approximately stable and growing net adds in mobile, postpaid and also on wholesale. So overall, in a tough market, a good market momentum. And you will see later that also on the churn side, we have strong figures. So even declining figures on churn.

On -- for Fastweb, on the right side of the chart, you see that -- you see our value strategy, actually. So we have slightly negative net adds on broadband, so this is the result of our value strategy. But overall, the fixed subscription went up. If you take wholesale and broadband or retail, overall, we had plus 38,000 net adds. And you see the strong momentum on mobile. So our strategy is to push mobile to stabilize the broadband business in Italy and protecting the ARPU on the broadband business. And this strategy works out in the first quarter. So good market performance overall.

If you go to Slide 6, you see our financials, improved EBITDA margin underlying. On the right top side of the chart, you can see that we were able to increase our EBITDA by CHF 23 million. And it's important to mention that CHF 14 million is coming out of Switzerland and CHF 6 million from Fastweb. The overall net revenue is slightly down because of some smaller impact. So again I will come later to it. But the net income is, on a comparable basis, without the special effect exceptional of last year in Italy, where we have this FiberCop -- adjustment, the booking impact and then the sales of Belgacom of our auto company in Belgacom. It had a special effect. And that's why the reported net income went down. But on a comparable basis, it went up by 3.3%. So overall, strong financials with a good momentum in Switzerland and growing momentum in Italy.

On Slide 7, some remarks to our macro-economic environment. You know it's better than what is happening in this world. But at the end, there are 3 impacts on our industry. The first one is -- are the energy prices. Second is hardware availability and then the inflation is a general concern. But in Switzerland, it is important to mention that inflation is at approximately 2%, so still on a lower level. And so the impact of inflation in 2022, we have a limited exposure. So the salaries in Switzerland, but not driven by inflation went up by 0.9%. And so there is no big impact from inflation in this year.

On the hardware availability, so far manageable. So we have some bottlenecks on smartphones, on routes, but also network components, but overall limited impact on 2022.

A bit the same on energy costs. We have overall approximately CHF 120 million energy costs. This is Switzerland and Italy. And we have limited exposure -- really limited exposure in 2022. We have a hedging strategy for this cost. And what is overall midterm, that's another question. But important to know is that we have a lot of efficiency projects to save energy, and this will certainly have a positive impact. On the other side, if energy costs are increasing strongly in the next years, we will have also growing energy costs, that's for sure. But the important all these macroeconomic effects in 2022, they are limited.

Going to the business review on Slide 9, I would like to start with our priorities for this year. So first priority -- or priority the first 1 of the 5 priorities is market share -- defend the market share in Switzerland and to expand the market share in Italy. To defend the market share in Switzerland, we have a price-oriented strategy, we have a strategy with differentiation. You know it with multi-brands, with, let's say, more value in our offers, so differentiating ourselves in the competition, and this strategy is working and is unchanged also in this year.

If we go to the second topic, that's the digital momentum. So we are convinced that we can use digitalization to improve the customer experience, to improve our process, to save costs in our company, and that's why we have a bunch of different digital initiatives to push digitalization in Swisscom.

Third point -- third priority. We are committed to execute on this efficiency measures, we call late. We are on track to achieve our goals.

Fourth priority is to find solution with the regulator and the politics to get a good environment. And the fifth point, which is important, is the transformation to transform the organization in this more digital world. This on the priorities.

On Page 10, some remarks to our infrastructure strategy or where we are with our infrastructure projects in Switzerland. So we are investing in our networks for the next generation networks. On fiber, we are expanding the network. It's impressive to see what footprint we already have in these ultra-broadband networks. We have a footprint of 33% with speed, with marketable speed of 1 to 10 gigabit per second.

And the second important point is to mention that we have 74% of the network of Swisscom has a bandwidth above 200 megabits per second. That shows that already today we have a strong ultra broadband network, which gives us a good base to compete in this market.

On mobile, we are progressing to roll out the 5G plus. We have -- that means 5G plus is the -- 5G network with 3.5 frequencies, so the fast 5G network. So we have 64% coverage in Switzerland. And it's impressive to see that the coverage with 5G overall also with dynamic spectrum sharing is at 99%. So we have a very strong network in Switzerland, which is also ranked as the best 5G network.

On the COMCO investigation, some remarks to where we are in the talks with COMCO. So the investigation on point-to-multi-point, fiber rollout is still a pending, but we are in an intensive and positive discussion with COMCO to find an agreement. So the outcome is yet not clear, and it's still difficult to predict. And in the last presentation in full year results, we made an outline deep dive what kind of scenarios could come. So the worst case where we have to switch on a temporary base to point-to-point which would reduce our footprint in 25% to 50% or the best case where we can continue to roll out points to multi-points where we would have a footprint of 60% in '25.

So the solution at the end, it's difficult to predict, but maybe it will be in the middle of these 2 scenarios. It's important to mention that we are continuing to invest in the network. So we have stopped the rollout on 5G on fiber. We do it in a way that we could, if needed, ramp up to point-to-point. We do the rollout in a point-to-multi-point technology. And the costs -- the cost would be very limited because we could reduce the investments we have made. So the message here is we are continuing to doing the rollout in the networks, but we can't market the new footprint, which we are building out. We needed first solution with COMCO to market then the new footprint. The market impact -- but the market impact is limited, so on because we have today a performing network with this more than 200 megabit footprint of 74%.

So what is the, let's say, the forecast to find a solution with COMCO? Difficult to say. Decision, we hope that we will have decisions in the next months, but probably not in Q2.

Some words on this slide on the access deal with Sunrise UPC. So we were able to renew the contract of -- successfully renewed the access agreement with Sunrise UPC, and this will give Sunrise the possibility to get access to our broadband network in whole Switzerland. Important to mention, it is an access deal. It is not a private partnership. It's a wholesale deal, a contractual wholesale deal. And just to say, we don't disclose further topics on this contract because it's confidential. We certainly understand it. But overall, for Swisscom, that's a good deal. It's attractive for Swisscom to have such an agreement.

On Slide 11, some remarks to our B2C business. So you see that the market is still promotional intensive but maybe a bit lower than in the previous quarter. So a bit less promotion activities in the Swiss market. You see what we are doing. So we have a new strong value propositions around the whole entertainment business, which actually has a good impact in the market and where we are successful. With our whole product portfolio blue, we are successful in the market.

On mobile -- on our own brand, we are pushing a fixed mobile converged offers which is working good. And also our second brand, our promotion to Wingo is working well. So overall, we have a good operational momentum in Switzerland, low churn figures and also robust ARPU. Strong performance of the B2B unit in this first quarter, or I can come later to it.

You see on Page 12, some figures to our revenue-generating units and churn figures. So overall, the wireline business is stable. The churn figures are lower. That's impressive if you see that we have still a lot of promotion activities, so lower churn figures on broadband. And the ARPUs are stable on wireline. So also, a good message here on the ARPU side.

In the wireline -- wireless business, so growing RGUs in the wireless business and also the second brand, third brand had a growth. So we all know that at 24%. Churn pictures are also lower. And on a low level, you see a fixed mobile converged turn levels at 7.7%, strong figures on the churn side. And also on the ARPU side, we see that we have approximately stable ARPUs on mobile.

On the right side of the chart, some remarks to our fixed mobile converged penetration. Here, important to say we are in the region of 45% to 40%. The slightly decline in it has some reasons how we report these figures. So with a growing second and third party share in our portfolio. So there is a bit less -- they are more, let's say, single-play-oriented customers. So that's why there is a slight decline. And here in this area only in one of only converged in-line offers are calculated. So that means if we would look only to our own brand, the fixed mobile converged penetration would be much higher. So that's a bit the message of this chart on the right side.

On Page 13, some remarks to our new product portfolio in the B2C market. So in the next days, we will announce a new product portfolio, which is more for the digital native customers, which, let's say, under the slope in a better, easier, more attractive will be launched. It's -- and that's important to know, it's an offer which is a bit, let's say, summarized more for the same. So it's not a price initiative. It's more a value-driven approach.

And we already -- always made in the past move development on our product portfolio, B2C. As an example, in 2006, we launched our Swiss from TV. That was a big wave. Now we are on a market share of 30% in 2012. We launched the new of Infinity, which was one of the first flat rate product with a speed differentiation in the mobile market, a very successful product. In 2017, we launched our converged in one offer, which was the most successful ever launch products in Switzerland.

In 2020, we improved or extended our entertainment proposition, which is very successful, the blue entertainment proposition. And now in '22, we are coming with this more digitalized approach for a market which is turning more and more in the digital direction. So I don't want to give more details on it, but just a small input that we will launch a value-oriented product portfolio in the next days. This will happen that's important to note, no impact on our guidance in '22.

If you go on Slide 14, some remarks to the B2B business. So overall, stable or robust revenue generating units in the telco business, but still an ARPU pressure on the telecommunication business and the very nice developing solution business where we can show growth. So you see that our solution business went up by 8.8%, so growing.

And on the telecommunications side, wireless ARPU, you see that we are now an ARPU of CHF 29. So this shows the pressure we still have in the telecommunications business. But we are able to defend our market shares in telecommunication business.

On Page 15, operational excellence. So we are on track to deliver what we announced. So we saved telecom-related costs in the first quarter of CHF 22 million. We forecasted something in the region of CHF 100 million. So we are on a good way to achieve it that it's important to note that no quarter will have exactly the same figure. It's a bit volatility in it because of the different measures, which will be executed not only -- not quarter-by-quarter in the same way. So overall, we are on track on operational excellence.

To the financial results on Swisscom Switzerland on Page 16. So you see that the service revenue went down by minus CHF 25 million. So we have less erosion on our service revenue. And we have a good performance there from the B2C business. In the B2C business, the service revenue went down by CHF 4 million. So you see that we were approximately stable in the B2B -- B2C business. And the major reduction of the service revenue is coming out of the B2B business because of this ARPU pressure. But strongly below the last year, the run rate on the service revenue, we can come later to it.

You see also that the solutions business went up by -- for the IT business went up by CHF 24 million. This leads to an overall increase of the EBITDA in Switzerland by CHF 14 million, which is a good and strong result. And you see also that the operating free cash flow proxy is above previous year CHF 23 million above previous year.

Some remarks on Page 17 on Fastweb. So a successful execution of our strategic priorities. So in consumer, we have no fixed price war. So we are able to preserve the value on our broadband business. And we are successful in the counter attack on mobile and wholesale. So you see there's the different figures of Fastweb. So good momentum on the revenue-generating unit base of Fastweb. So mobile went up by 170,000 -- 177,000. And the whole fixed revenue generating units, that means retail and wholesale, went up by 38,000 subscriptions.

On broadband, we are able to reach an ultra broadband customer base of 3.2 million, so plus 9%. This shows also our value-oriented approach in the go-to-market in Italy. Enterprise is performing strong. So order intake is good, strong order intake, and we were also able to win a lot of nice tenders as an example, the cybersecurity environment.

On sustainability, Fastweb is strong positioned. And we have also ambitious goals to be carbon neutral in 2025. So overall, good performance in Italy.

On Page 18, you see a bit more details on it. You see revenue-generating units. You see also the strong growing mobile business. You see that we were able to reduce our churn, which is a strong result in this very competitive Italian market. And on the right side of this chart 18, you see that fixed mobile converged penetration has a positive impact, positive impact on the ARPU, but also on the churn. So it shows that this strategy is working well and the penetration is increasing by 4 percentage points on a year-on-year basis.

Page 19, some additional remarks to wholesale and enterprise. So we have growing business there, and the growth is confirmed. So the enterprise revenue went up by 4%, and wholesale revenues went up by 9%. And even if you take the core business of wholesale, you see that the growth was even bigger. So we have a good momentum on wholesale.

On Page 20, the financial results of Fastweb. So EBITDA went up by 3.4% and we are on track to achieve our guidance by 5 -- for 5% on the EBITDA guidance. Growing revenue, you see where it is coming from on the right -- on the left side of the chart. In the middle, you see the EBITDA development and the operating free cash flow. So overall, we are on track to deliver our guidance of Fastweb.

Now I would like to hand over to Eugen for the financial results. Eugen?

[Eugen Stermetz, executive]

Thank you, Urs, and good morning, everybody, also from my side. I'm happy to walk you through the numbers, in particular, since it's -- as Urs mentioned, quite a solid set of results for the first quarter of this year. I'll start on Page 22, with group revenue.

Group revenue was down by CHF 35 million overall, but net of currency effects, group revenue was essentially flat with minus CHF 1 million. Fastweb with plus CHF 15 million or 2.4% and Swisscom Switzerland, basically flat with minus CHF 10 million.

Let's take a quick look at the individual segments. B2C revenue overall, minus CHF 7 million, very positive element and Urs was mentioned it already. Service revenue decline was just minus CHF 4 million. We'll get to that in a second. Hardware sales were down a bit, minus CHF 15 million, mostly driven by hardware available issues and also somewhat softer promotional activities in market, both by our competitors and by ourselves. Obviously, this has little-to-no margin impact and the revenues in the B2C segment were up, no worries. This is nothing or very little to do with IFRS 15 as in the past. But in this quarter, it has to do with increased revenues from our cinema division, which was basically closed down last year due to the COVID restrictions and now it's back to business.

On B2B, revenue increase of CHF 20 million year-over-year, which is very positive, 2 quite different components behind that. On the one hand, service revenue declined more or less in line with the most recent quarters with minus CHF 21 million. And on the other hand, which is very nice and positive solid growth from the Solutions business with plus CHF 24 million, CHF 14 million of which was organic. So even on a comparative basis, we have very nice growth in that segment, obviously, with a somewhat different margin profile than the telecom business. And also, contrary to the B2C business and B2B hardware sales were up. This is mostly related to 1 or 2 very large projects that we are running for our customers with high hardware share in that.

Then on wholesale, minus CHF 25 million. There is the expected structural effect in there from the tail end of the loss of the MVNO agreement with Sunrise that you all -- or with UPC rather that you all know about. And then there is a more volatile element in there. We had lower inbound roaming revenues, minus CHF 14 million, but there is a balancing component to that in our payment expenses. So there is very little EBITDA impact out of this and this tends to explain from time to time, these roaming effects tend to level out over time anyway because this is the way the contracts are structured.

Then finally, on revenue Fastweb, up CHF 15 million, very solid result again from the Enterprise division with plus CHF 10 million. Also positive effects from the wholesale segment, in particular due to an increased number of UBB lines that we sell to our competitors who was already alluded to the positive balance we get out of, on the one hand, a difficult time on the retail side in consumer wirelines and at the same time, very positive impacts on the wholesale side since we are providing reliance to some of the competitors that are taking market share.

Growth in Fastweb was plus 2.4%. Urs has mentioned it already. As you know, this is somewhat short of our full year target, but we're still confident that we will reach the full year guidance.

On to Page 23. Revenue evolution in the Swiss business. I'll start on the left hand with the bridge year-over-year and its individual components service revenue, minus CHF 25 million, with the bulk coming from the B2B division, B2C basically flat.

Solutions business growing and nicely compensating the loss in the B2B business, plus CHF 24 million are all in all, flat but with different dynamics behind from B2C and B2B. As I explained, B2C down due to hardware, availability issues, B2B up some large projects all in all, very different impact and obviously very little bottom line impact.

Wholesale revenue is down minus CHF 25 million for the reason I explained and other revenues up also for the reasons I explained in particular, the cinema business, which gives minus CHF 10 million year-over-year, all in all on the Swiss side.

Top right, service revenue evolution over the quarters with minus CHF 25 million. We have certainly a rather small service revenue decline in this quarter, which is obviously very positive, very much driven by B2C with minus CHF 4 million only. So if you look at the bottom right, you see the individual effects within B2C and B2B, wireline, wireless and which part of it is RGU-driven and which part of this is ARPU-driven. So if we take a look at wireline, B2C first with plus CHF 1 million, very small increase compared to last year. On the RGU side, you see the usual effect of voice line losses. There is not more than that. And on the ARPU side, you can see that we even had a positive effect on revenues out of ARPU development in B2C wireline, which is a result of the lower promotional activities in the market in the first quarter and also a result of some successful upselling of content packages that Urs already mentioned previously.

On the wireless side, the usual picture of the positive impact out of added RGUs or added subscribers in our second and third brands on the one hand. And on the other hand, balancing this out, the brand shift effect, which is basically an ARPU to due to the fact that second and third brands have lower ARPUs than the products on the Swisscom brand. Apart from the brand shift effect in the ARPU, there's very little this quarter actually. So there is a very far effect on fixed mobile convergence. Urs talked about it before. This was much bigger in the past. And there is also basically no impact year-over-year from promotional activities, a very small one. So it's really the balance of added customers on second and third brands and the value effect on ARPU of the same effect that you see here in the picture and on B2B, bottom right, it's basically business as usual comparable to the previous quarters.

Now all in all, this obviously shows that there is certainly some upside to what we provided at the full year guidance, minus CHF 200 million for service revenue in Switzerland. But it's still early days. We're in the first quarter. We don't know how the competitive environment will evolve over the rest of the year. So we remain a bit cautious here. And as you will see, we will confirm our overall EBITDA guidance for the year.

Now with that on to EBITDA, Page 24. EBITDA Group was up by CHF 13 million. Net of currency effects, plus CHF 23 million, with CHF 6 million or 3.4% plus coming out of Fastweb, which is in line with the revenue growth. Swisscom Switzerland, also up by CHF 14 million, which is obviously something that we are quite happy about.

If we quickly run through the individual segments, B2C, up by CHF 17 million on the back of, as we explained, almost are service revenues, increased other revenues and there was also a reduction in subscriber acquisition costs, which is due to a bit lower competitive intensity on the one hand, but also on the other hand, some hardware issues, which are not major as Urs explained, but still hardware availability. As you certainly also hear from others is most what it's used -- most what it used to be. Another component in the B2C performance is the improvement in the indirect cost base, which we obviously track very clear.

B2B minus CHF 7 million, it's the other way around, despite an increase in revenue, minus the EBITDA, the explanation is simple. The revenue that drops out service revenues, high margins, the compensating revenue that comes in from IT services is much lower margin. And so we have a net negative effect of minus CHF 7 million.

In the wholesale segment, minus CHF 8 million, that's basically the EBITDA impact of the UPC MVNO loss, as I explained before, the whole roaming effects have no meaningful impact on the EBITDA.

In the Infrastructure and the Board function segment is up by CHF 12 million. which basically means that costs are down by that amount. So we have lower personnel expense compared to the same quarter in the last year.

On to EBITDA in Switzerland on Page 25, by P&L line items. So overall, as we talk plus CHF 14 million. I'm not talking about revenue anymore with minus CHF 10 million. Subscriber acquisition costs a bit lower, a positive effect of CHF 10 million, but a bit of a mixed bag, as I explained. Our payments lower by CHF 14 million. That's a compensating number to the inbound roaming revenue figure. So no bottom line impact and cost of goods and services purchased CHF 11 million higher. That's mainly due to the higher hardware revenue on the B2C side.

More importantly, on indirect costs, we are well on track to our full year target of plus CHF 100 million out of the telco costs. As we explained already last time, we are now separating out the cost base of the solution business and of the telco business because obviously, it makes no sense to set out an absolute cost target on a growing solution business. That would not be sensible. So there is a minus CHF 11 million. So higher cost in the solutions business, but reduced costs in the telco business in line with our full year targets.

I add my usual word of caution and Urs already stated as well. These numbers do not come in a linear fashion quarter-over-quarter. So we expect a bit of a bumpy ride over the year. But what counts in the end is the full year number, and we are very positive we will hit our target here, and we have a very good track record in easing the full year target, and we are positive for this year as well.

Page 26, CapEx, not too much to report on this one. Overall group CapEx is CHF 522 million, slightly down compared to previous year in Switzerland and in Fastweb. However, in Fastweb, this is more due to the currency effect in local currency. CapEx In Fastweb was slightly up due to the wireless rollout, but we are talking about plus 1.9% here in the quarterly number. So nothing material. There was a bit of a shift in the composition of CapEx on the Swiss side that you see on the right-hand side. So we had lower CapEx for the fiber roll-up. This has nothing to do with the whole COMCO situation. It was explained before that we are -- that we continue to build out -- we continue the fiber rollout in point-to-multi-point architecture. So the drop compared to last year comes from the fact that the FTTS rollout is now reaching its tail end, so our overall fiber CapEx in principle comes down due to the end of the overlap of FTTS and FTTH.

On the other hand, the general infrastructure spend, bottom right, CHF 113 million went up more than 20% compared to last year. This is due to 2 effects, one being that we are building a new backbone in Switzerland and the other one that a lot of new homes are being built in Switzerland, and we connect them to our network. And so we have some construction work going on to achieve that.

Page 27, free cash flow, not too much to report. If we started operating free cash flow proxy, but CHF 34 million. That's simply the combination of our overachievement on the EBITDA side compared to last year and somewhat lower CapEx that I explained. The only number to explain on this page is the net working capital impact of minus CHF 264 million. It has 2 components, one that will stick with us for the rest of the year and the other one that in the end will balance out. The first one that will stick with us is due to a settlement payment that we paid this year, which is related to a regulatory dispute that we settled last year. It was already provisioned for last year. So there was no EBITDA impact last year. There is no EBITDA impact this year, but the payment is out, and this will stay for the remainder of the year.

The rest of this position is simply due to prepayments that we made -- pretty significant prepayments that we made in the first quarter of this year for services that will be provided over the full year, such as licenses, maintenance payments, et cetera. So this will -- is typically for net working capital balance out over time.

Page 28, net income bridge. Very good net income figure with CHF 447 million net income. The only thing of note has already mentioned it, is the comparison to last year. We have CHF 11 million below last year, but this has nothing to do with the performance this year. It has all to do with the fact that in Q1 2021, we have extraordinary effects out of the FiberCop transaction and the sales of BICS. So if you strip out these 2 effects, net income actually is growing as you would expect, given the growing operating numbers.

Just one word on Page 29. As you all know, we might find ourselves at a sea change in the macroeconomic environment with the potential for sustained increases in interest rates, which I would like to draw your attention to the fact that we are very well prepared for such a scenario, with 88% of our sales portfolio being in fixed interest rates and a very long maturity of our debt portfolio. So any sustained increase in interest rate would take a very long time to work itself into our P&L.

Finally and shortly on Page 13 on guidance, we confirm our guidance for the full year, CHF 11.1 billion to CHF 11.2 billion revenue, CHF 4.4 billion EBITDA, CHF 2.3 billion CapEx, CHF 22 per share of dividend. As I said, certainly a bit of an upside on the Swiss service revenue side. But on the other hand, it's a bit of uncertainty in general terms from geopolitical situation and also in Italy on the full impact of entry and of energy costs, et cetera. So we remain on the cautious side. It's early days. It's just the third quarter and we confirm our guidance.

With that, I hand back to the operator.

[Operator]

[Operator Instructions] We have the first question coming from Ulrich Rathe from Jefferies.

[Ulrich Rathe, analyst]

I'd like 2 questions, please. One is just a clarification. Maybe the clarification. First, the MFT benefit, the inorganic benefit, you said this quite explicitly for revenues, but you didn't for EBITDA. Could you just give us some indication what the inorganic benefit of the acquisition is in the first quarter?

And then more substantially, the service revenues in B2C, you highlighted several times went rather well in the first quarter. But as I look at the comparables throughout 2021, they seem to be getting tougher from the second quarter onwards. So I was just wondering how you see that unfolding through the year. You mentioned service revenue upside to the initial guidance of CHF 200 million down. On that, I wanted to ask, do you think there is a possibility that this would ultimately be offset by higher costs, whatever upside there might be to the CHF 200 million? Or do you think, if really service revenues do go better, that would drop through to EBITDA?

[Eugen Stermetz, executive]

Maybe on the first one. So the EBITDA impact in the first quarter is small single-digit number. So that's why we didn't separate it out, at least, I believe, we don't have it on the slide.

On the second question, no, we don't expect an upside from service revenue to be automatically be balanced somewhat by higher costs. These items are quite separate. So if there is an upside from service revenue, there is an upside. But as you mentioned, and as we saw last year, the evolution over the full year can be quite different than what we see in the first quarter. And it entirely depends on the competitive situation in Q2 to Q4. As you saw, we are in the process of launching a new portfolio. Our competitors might do so as well. So we'll need to see how this plays out. So that's why we remain on the cautious side.

[Urs Schaeppi, executive]

But maybe one additional mark to this new product portfolio, it's not a price move what we're doing. It's more a value-oriented approach, just to give you some guidance that we don't want to eat up the margin.

[Eugen Stermetz, executive]

And maybe one more word on the cost side. Although there is no relation the service revenue, obviously, there is one item that this year is particularly volatile, and you hear them from -- hear this from everybody, I'm sure, and this is energy expense. We certainly have a very low exposure to that figure this year, but it's still existent. So this might be a bit of an uncertain item in particular on the Italian side for the rest of the year.

[Operator]

Next question, Polo Tang from UBS, London.

[Polo Tang, analyst]

Firstly, I just want to say Urs best wishes for your retirement. Separately, I've got 2 questions. The first one is, really, can you talk about what you're seeing with competitive dynamics in the Swiss market because for Q1, your Swiss net adds were relatively soft. So can you maybe just talk about what you're seeing from some of the competitors where you're more focused on value rather than volume? And then how do you think about the volume side through the rest of the year? I mean, last year, you saw some growth. Do you think you can do that again? Or do you expect a stable or maybe even declining trends of talk about competitive dynamics?

Second question is really just about IT Solutions. You saw very strong growth in the quarter, plus 8.8%. I think it was clear that there was some M&A benefit but underlying, you still saw good growth. So how should we think about IT solutions over the coming quarters? And how much visibility do you have on the future pipeline?

[Urs Schaeppi, executive]

To the competitive dynamic in Switzerland, what we see is a bit less promotion aggressivity on the value brands. On the -- let's say, on the low-end brand, second and third brands, there is still -- I would say, it's a bit unchanged. So it's a question -- the main question will be how competitive or how price aggressive Sunrise UPC will act in the future. And that's hard to touch. If I look at what -- how they behaved in the last month, they had a rather rational approach.

From our side, our strategy is working well. We have our second and third brands to be active in the price-sensitive market. And on the Swisscom brand, we have a value strategy where we are able to defend our business and our ARPUs. And the main strategy of us is to bring more value in our product portfolios of Swisscom -- on the Swisscom brand. So this we will do with the launch of the new product portfolio.

I announced before, we are investing in -- also in our entertainment proposition, blue, where we give much more value and, let's say, not only value but our value to our customers, to differentiators in the competition. So overall, I would say the competitive dynamic stay a bit like it was maybe with some hope that the promotion aggressivity will calm a bit down. But that's a bit too early to say. We have to look to it.

On the solution business, yes, the good momentum, not only by M&A. So this MTF acquisition, we talked before, has 1 -- is 1 part of it, but we have organic growth in the solutions business. And this organic growth is coming out from -- mainly from cloud and security, and this will continue. So we will -- we are optimistic that we can continue to grow in our solutions business.

[Operator]

Next question, Joshua Mills, BNP Paribas.

[Joshua Mills, analyst]

I suppose a couple from me. The first is you're very clear on the call, but there's not that much visibility around the discussions. But could you maybe just give us some insight into what the sticking points are? Is it more around the logistical elements of the network rollout or the financial terms? And I think at the full year results, you gave some comments around the potential swing in what 2023 CapEx could look like depending on a best or worst case outcome. So could you just give us an update on how your thoughts are there? I guess base case for now would be that the CapEx was pretty much stable year-on-year in 2023?

And then the second question would just be on Italy. So Urs already indicated they'll be entering the B2B landscape later this year. I think they've been advertising for some roles in that market as well. So perhaps if you could give us some comments on how the enterprise segment is developing in the Italian market given that it's one that you can grow in to me.

[Urs Schaeppi, executive]

Well, I will take the question on Itay and Eugen, net working CapEx?

[Eugen Stermetz, executive]

Yes. No, as you pointed out, in the full results presentation, we gave this best case and worst-case scenario and walk you through the impact also on our fiber CapEx envelope, where we said that in the worst case, our CapEx envelop -- fiber CapEx envelope in Switzerland in the years to come would be slightly up compared to this year and last year compared to the start of and in the best case, it would even be slightly down.

As it was pointed out, from today's point of view, the final solution that we hope to find will be somewhere in between these 2 scenarios. So yes, I can confirm. If we end up between those 2 scenarios, you talk about the Fiberoptics envelope that is quite similar to this year, but it could be slightly up or slightly down depending on where we compromise with COMCO if we eventually reach.

[Urs Schaeppi, executive]

Good. Then on Italy. So our B2B business is growing very well, and we are convinced that we can continue to grow even if competition would increase. We are very strong positioned in this B2B market on broadband, but now also on IT solutions business, we are -- we have more capabilities and are more competitive. So we are optimistic for our B2B business in Italy, even if there are some other competitive dynamics. We have a strong track record. We have a lot of capabilities there and a good reputation.

[Joshua Mills, analyst]

And then sorry, just maybe one follow-up. I think the other metric you provided on that best and worst case scenario was coverage. So worst case 50%, best case 60%. Is your expectation that you land in between those 2 figures as well under this compromised solution? Or is there an opportunity to maybe get towards the higher end of the 60% coverage target?

[Urs Schaeppi, executive]

Yes. I think -- we don't know the solution yet. That's why it's hard to forecast. But I think important for you to know is that short term, this footprint is not too important for Swisscom because we are competitive in the market also with our hybrid fiber networks. So this is more a long-term perspective and then there we have the ability then to do our rollout. So the impact is neglectable on our commercial performance, short term.

[Operator]

Let's take the next question, Yemi Falana, Goldman Sachs.

[Yemi Falana, analyst]

Sorry to take it back to COMCO, but given uncertainty remains there, I think in the past, you've spoken about a time where you would cease discussions and just pursue a point-to-point rollout. Is that still the case? Or are you more confident now? And if it is still the case, when would that kind of trigger point be? Is it kind of the second or third quarter this year where if there's not a resolution, you'll just pursue the point-to-point rollout, for example?

And then secondly, just on the Sunrise UPC wholesale agreement, I think you laid out in the presentation that it's across all access technologies. But could you give maybe some qualitative indicators if you can't give financial ones around anything around kind of increased scope of the wholesale agreement and/or kind of positive, negative revisions in terms of the actual kind of unit cost or unit economics related to the wholesale arrangement?

[Urs Schaeppi, executive]

So on COMCO, we are in deep discussion with COMCO. It's -- I would not like to do a forecast now when we have a solution with them because, yes, otherwise, I'm not the master of this process. But just from the -- from what Eugen said, we have a worst case and the best case as we explained it during the first full year results. And the highest likelihood is that it will be something between. But all of this will be digestible for Swisscom. So I think the biggest impact from this COMCO, let's say, dispute we have today is that we can't count market our footprint in the new fiber to the home areas. But because we have a strong hybrid fiber network, we don't get, let's say, a negative impact on our commercial performance, but we are less differentiated. I would say that maybe the most important point. And that's why we are also in a deep discussion with COMCO to find the solution. But I don't know when we will have the solution. I don't want to do a forecast, but I think it will be not in Q2.

Then on this access agreements, access deal with Sunrise, so we don't disclose the details of this agreement. It's the commercial agreement with Sunrise UPC. But what I can say is that they get the access to our broadband network. So if we are ramping up fiber to the home, they will also have access to fiber to the home. So that's what I can say about this.

[Operator]

Next question, Mandeep Singh, Redburn London.

[Mandeep Singh, analyst]

I have a couple of questions, please. One is on Italy. Obviously, there's been some potential moves towards consolidation in the Italian market, which didn't really come to anything. But I'd be interested to hear your thoughts on how you think the Italian market will play out? Do you think consolidation is quite likely? And if consolidation was to take place, do you feel that Fastweb has a role to play in that?

[Urs Schaeppi, executive]

So consolidation in Italy in this business is a topic. So always talked about consolidation in Italy. The interest of the players in Italy are quite different. So that's why there is not so much dynamic in consolidation. Our view to the Italian market is a pragmatic one. So we can create value also on a stand-alone base. We showed in the past that Fastweb is able to increase the value. But we will have open eyes and open ears to this market. So we have a pragmatic view, but also we are also strong on a stand-alone base. So that's a bit what I can say. And the second message is really the interest of the different players are quite different. So it's maybe not straightforward at all.

[Mandeep Singh, analyst]

Could perhaps follow up?

[Urs Schaeppi, executive]

And yes, we are committed to Italy. So we are not on the way to exit it.

[Mandeep Singh, analyst]

So maybe I could just follow up. If hypothetically, there was a transaction between either Iliad and Vodafone or Iliad and Wind and there was some kind of remedy would Fastweb be interested in taking up that remedy and becoming a more comprehensive infrastructure-based player across fixed and mobile?

[Urs Schaeppi, executive]

Yes. Sure. If they would be remedies on the market, we will certainly have a look to it. That's clear.

[Operator]

[Technical Difficulty Instructions] Please hold, I have a little technical problem to open the next line. Thank you for waiting. Thank you for waiting.

Nawar Cristini from Morgan Stanley for next question, please.

[Nawar Cristini, analyst]

I have some follow-up on the UPC Sunrise agreement. I know you said you cannot comment certain aspects, but hopefully we can get some color on other aspects. So firstly, when the UPC Sunrise was announced. The expectation was that the wholesale of us that are both on the mobile side and the fixed side will be declining, but perhaps with a different reason. So we saw the MVNO wholesale revenues coming down. Could you comment a little bit the direction of evolution of the wholesale revenues on the fixed side, please?

And going from here, following this agreement, are you able to comment the direction or the trajectory of those wholesalers, are we looking at growth sort of most the same, et cetera, if you are able to give us some color here, it will be quite helpful.

And related to that, this contracts, either wholesale agreement, which is quite different from what we have signed which you hold and which you don't hold on the IO side, you see a scope for you guys to move this agreement probably medium or long term to also coinvestment with or others. Any color on this will be handful.

[Urs Schaeppi, executive]

So on -- actually, your question is going around the -- our fiber strategy, how we build networks in Switzerland. I would touch it like this. We -- our strategy to roll out fiber networks is we are open for cooperation, but it does make sense for us. And we have plans to roll out the site to the home footprint as we showed in the full year results. So our first target is to reach now this 60% until 2025, and we are open for cooperation. And it must make sense for us.

[Eugen Stermetz, executive]

Maybe on the first part of the question on the revenue dynamics, yes, you're right. The mobile side of the business with UPC Sunrise went out pretty quickly as was expected, as was announced by UPS Sunrise the merchant as we already included in our guidance last year and this year. And the expectation at the announcement of the deal was that on the fixed side, the erosion of the mutual business would be much more subdued. And I would say that our current -- the deal that we commented on today confirmed that trend that is the fixed side is much more stable and much more long term than the mobile side MVNO.

[Operator]

Next question coming from Georgios Ierodiaconou from Citi.

[Georgios Ierodiaconou, analyst]

I had a couple around Italy and one is operational and it's around the mobile posted this quarter. I'm just curious as to what has driven the acceleration and if there's anything going on in the B2B side or whether this is on B2C accelerating?

The second question is around wholesale. And obviously, next couple of years, there is a lot of tailwinds to your wholesale business. But I'm curious on the discussions around the single network, what your views are about the impact it could have in terms of the wholesale business medium term and therefore, your position on any potential combination there?

And then my second question is a bit of a follow-up and some of the ones that were asked earlier, and I appreciate you've already made comments around the fact that the market remains relatively competitive. But we've seen churn levels fall, even though probably last year, there was still some benefits to churn from partial log balance stuff. And I'm just curious as to what has driven this in the market why all of a sudden are we seeing slightly better top line and also lower churn. I'm just curious if there's anything specific on your side that's driving this or whether it's a broader market effect?

[Urs Schaeppi, executive]

I would take the market question of Switzerland and Eugen, can you start with Italy?

[Eugen Stermetz, executive]

Yes. So if I understood the question correctly on mobile net debt. So we believe our robust performance on mobile net debts in Italy was due to our strategy to play essentially a value game on the wireline side and be pretty aggressive on the wireless side. And this seems to pay off pretty nicely also in competition with Iliad.

There is -- if I understood the second part of the question correctly, there is rather little effect from B2B wireless in there. So it's really mostly driven by B2C and the drivers I explained. On the single network, this is a very long story, all in all, we basically expect a neutral impact on the Fastweb business. We don't think it will make a lot of difference. And even if it comes, it's a long way out anyway. So we don't expect anything of this to materialize in the short term.

[Urs Schaeppi, executive]

On Switzerland and the lower churn figures, that's the result also of our strategy. So we have a very differentiated product portfolio. We are investing in our network to have superior networks. We are investing in our product portfolio, which customers like, customer service, market reputation brand. And this is the result at the end which leads to a loyal customer base. And then with our second and third brands, we are active in the more price-sensitive segment. And overall, this strategy leads to this better market performance. And then maybe there is -- I would say these are the internal factors. And then maybe a second, but that's more a kind of speculation -- the second factor could be that the market in Switzerland, so that they really price-sensitive or promotion-oriented segment in Switzerland. Now it's coming in a more saturated phase, but that's a kind of speculation we should look to it in the first month.

[Georgios Ierodiaconou, analyst]

Pretty clear. Best of luck, Urs. Now that Swisscom is no longer sponsoring the ski team, there's no conflict of interest in giving it a go, so best of luck with that.

[Urs Schaeppi, executive]

Exactly, but we will do a great sponsoring in [indiscernible] which address also Switzerland. Thank you.

[Operator]

Let's take next question, Luigi Minerva, HSBC.

[Luigi Minerva, analyst]

Yes. My 2 questions. The first is on Italy, and I was wondering about the negative broadband net adds, who -- where do you think your customers are going? And if particularly you're seeing an impact from the Iliad fixed line broadband launch?

And the second question is more about capital allocation. And obviously, the dividend is a pillar of your equity store, it's super important. And you continue to run a prudent balance sheet. I was wondering under what conditions do you see the dividend growing in the future? And what could be the trigger?

[Urs Schaeppi, executive]

On our negative -- slightly negative net adds in Q1 in Italy, that's actually the result of what Eugen explained in a good way. Our strategy during this market entry and very aggressive price moves of our competitors was a value approach. So keeping our customer -- or let's say, don't touch the price moving up the customer on ultra broadband and attacking the market with attractive fixed mobile converged offers and, let's say, an offensive mobile offer and that leads to a good performance, overall performance of this B2C business.

The major -- your question was, where are the major customers going in Italy today, if I look to the whole market in Italy, so the best momentum today has sky, but that's clear. They have no customer up to now, they are upselling their customer base. They have the best momentum. And overall, we have a positive net debt on our broadband network, if you take B2C and wholesale together. The impact of Iliad on fast-track is limited, very limited. But it's all a bit too early to judge this whole dynamic. Then on our dividend policy, we have a dividend policy where we are a reliable dividend payer. And at the end, it's all a question about of our free cash flow. And you see we have a relatively stable business, overall relatively stable free cash flows and service revenues will not explode. CapEx will not explode. So at the end, I think we feel ourselves comfortable with CHF 22.

[Operator]

Okay. Next question, Andreas Müller, and then we should have the next one. Can we take both or...

[Urs Schaeppi, executive]

Yes, it's fine.

[Operator]

Okay. So Andreas Müller is the next.

[Andreas Mueller, analyst]

Yes. Congratulations as to Urs to all the work you have done and also all the best for your future endeavors. And then my first question also on the COMCO compromise, which might be kind of have a high likelihood would. Can you talk a bit in what sense it will be a compromise, is that the technical compromise, is it color, maybe unbundling or is it going to be more on, say, market segments, geographic market segments? Can you elaborate on that? And then I was wondering in B2B Swiss business, how much or how the service revenue decline, if there is some kind of horizon that it can stabilize also getting better as in the B2C side?

[Urs Schaeppi, executive]

So then, unfortunately, I can't give you too much flavor on this COMCO discussions. I think, yes, Switzerland has an interest that we find a solution in a fast way. So I think that's the message I can give. We have an interest to find a solution, I think and also Switzerland has an interest to find a solution. And it's too early, but we -- I think what we can -- we can give you the framework and the framework we described in the -- during the first year -- during the full year results, it is best case, worse care. So it will be something in the middle. But I can't give you more -- or I would not like to give you more details because I don't know them.

And on B2B, the development of the service revenue. The service revenue in B2B is driven by 2 elements. The first one is competition. And this compensation we feel mainly in the wireless market, where our competitors try to gain market share. And this competition will remain. So we shouldn't think that pressure on mobile will decline in the next quarter. So we will have continuing pressure there. But with a good overall strategy, we will be able to manage this ARPU pressure, but it will remain.

And the second element, which actually gives pressure on the B2B telco business is driven by technology. So we have different technology. We have substitution. So overall, the pressure on service revenue will be there, but maybe it's going slightly down. But it's too early to say that because the prices in the B2B market are already today on a very low level. And if you compare our prices in the B2B market to other countries, you can see that Switzerland has low prices in the B2B market. So the space to go down is not too much and mainly that's the positive message to the telco business in Switzerland. And we are able to defend market share. We are able to have a stable ARPU and that shows also that we have a robust strategy.

[Operator]

The last question Nuno Gontardo Vaz, Societe Generale.

[Nuno Gontardo Vaz, analyst]

At this point, I just have a quick one. It was regarding your prepaid net adds, which on this quarter, it's the second quarter where they've been quite some negative and they've been offsetting what is the positive net adds on postpaid. Could you just give us maybe a little bit more color of what's going on with the prepaid net adds, why they are declining? And what sort of strategies are you trying to implement to possibly reverse this or to -- is it simply down to pricing? I'm guessing so, but could you give us a little bit more color.

[Urs Schaeppi, executive]

So the prepaid business in Switzerland or for Swisscom is a very small business today. It was a big one, but today, it's a very small business. We have good postpaid offers. We have second and third brand offers on the level of CHF 20. So the prepaid business is very low, and our strategy is to migrate prepaid customers to postpaid. So you shouldn't look too much to prepaid business in Switzerland.

[Louis Schmid, executive]

And thank you to everyone, and a special thank you to Urs for his last results presentation. And with that, I would like to conclude today's meeting. If you should have further questions, do not hesitate to contact us from the IR team. Speak to you soon. Have a great and sunny day. Bye-bye.

[Operator]

Dear participant, your conference call has come to an end. Thank you for attending. Goodbye.