Swisscom AG

SIX:SCMN

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the second quarter results 2018 presented by Urs Schaeppi, Mario Rossi and Louis Schmid. Louis, the floor is yours.

[Louis Schmid, Head of Investor Relations]

Good morning, ladies and gentlemen, and welcome to Swisscom's Q2 results presentation. My name is Louis Schmid, Head of IR. And with me is our CEO, Urs Schaeppi; and Mario Rossi, our Chief Financial Officer. The first part of today's analyst investor presentation hosted by our CEO consists of 3 chapters: first, a quick overview of the highlights, operational performance and financial results of Q2 and the first 6 months; second, an update on our activities performance in Switzerland; and finally, some explanations on our [ Fastweb's ] results for the first 6 months. In the second part, Mario runs you through the financials and the confirmed full year guidance. With that, I would like to hand over to Urs to start his part of the presentation. Urs?

[Urs Schaeppi, CEO, Head of Swisscom]

Good morning, ladies and gentlemen. I would like to start with a short overview of the highlights of the first half year. So financially and operationally, we had a solid first half year, and we confirm our guidance. On the financial side, you can see that we are on track with our forecast, also Fastweb has appealing performance. The EBITDA went up by 5% year-on-year. We had success in Switzerland with our converged offer, inOne. Interesting to see that we are really able to even decrease the churn in a competitive market to 5% with inOne. And we will have the spectrum auction in January 2019. On cost control side, we are on track, we could decrease our cost by CHF 56 million in the first half year. And also, TV is developing well. We are gaining market share in TV. Some remarks to the B2B business. In the solutions business, we had some headwinds, mainly in the banking segment due to price erosion and some projects, but this business is always a bit volatile. And if I look also to the order intake in the banking segment, I'm positive. So overall, our outlook remains positive to the solution business in the B2B market. So overall, we confirm our guidance for 2018.If you turn to Slide 5, you can see our operational performance. In a saturated market, Swisscom is able to protect the market position, and our strategy is clearly value management strategy. This you can see later. We are able to maintain ARPU stable. We have low churn figures. And that's the main pillar of our strategy. In Italy, we could grow mobile. You see 120,000 net adds in Q1 and now 95,000 in Q2. And also in broadband, in Italy, we had some growth.If you go to Slide 6, some remarks to our financial key figures. On the revenue side, we have a reported EBITDA -- reported revenue, which went up by CHF 115 million. On like-for-like comparison, the CHF 27 million. Mario will explain it later a bit deeper. The main dynamic is a bit lower revenue in Switzerland, mainly driven by the service revenue in Swisscom Switzerland and Fastweb's higher revenue.On the EBITDA side, we had one-offs exceptionals. So the EBITDA reported went down by CHF 117 million. On a like-for-like base, we have -- or we have a stable EBITDA, the minus 13. So stable EBITDA. The main impact -- the main one-offs are the IFRS 15 with an impact of CHF 33 million and then the litigation in Italy from last year, which has an impact of CHF 102 million.If you look on the EBITDA waterfall in Switzerland, you see that the EBITDA in Switzerland went down by CHF 51 million. The main effect on it is reduction of the voice line, the structural effect in the market, which has an impact of CHF 35 million. Then the converged discount with CHF 44 million, some price pressure in B2B with CHF 25 million, and then the positive impact of the indirect costs, where we could save CHF 56 million. So overall, stable EBITDA on a comparable base, and the result is fully in line with our guidance.If you go to Slide 8, you see that the Swiss market is saturated, 130% penetration mobile, 102% in broadband and 118% in TV. Therefore -- or this shows why we have a focus on the value strategy.On Slide 9, our management priorities. I don't want to go deeper in it. They are stable, network quality, penetrating the potential of [indiscernible] product inOne, the bundled product. And then also, cost will remain an important pillar of our priorities in the next months.If you go on Slide 10, you see that we are upgrading our network to maintain our technology leadership. On the left side of the chart, the coverage development on ultra-broadband in Switzerland. So we are upgrading our networks. And actually, we have 30% of Switzerland, which has a bandwidth above 200 megabits per second and 59% above 80 megabits per second. Now this will increase in '21, as you can see on the chart, to 90% or so -- 75%. But also, on mobile, we are upgrading our networks to make them faster, 4G+, speeds up to 1 giga. We have today a population coverage of 4G, which is 99%, and 4G+, which is above 80%. Network quality remains important, very important for Swisscom.If you go on Slide 11, some remarks to the spectrum auction on 5G, which will be held in January 2019. On the left side of the chart, you see what kind of spectrum we have today -- Swisscom has today. So currently, Swisscom owns 255 megahertz, and this is total part of the spectrum of 44%. And on the right side of the chart, you see which kind of spectrum will be available in 2019 and important is what are the caps in the spectrum auction. And Swisscom is -- has a maximum allocation of 235 megahertz, which would be 49%. So Swisscom remains confident that we can deliver a good customer experience with this auction, which will come in January. If you go on Slide 12. Only one remark. Swisscom continues on the multi-brand portfolio for high end. For value customer, we have the Swisscom portfolio with inOne. For smart shoppers we have the product brand, Wingo. For [ urban ] discounts and budget and for lower discounts, SimplyMobile. So we have a broad and segmented portfolio to address the market. Important to say the majority of the Swiss market goes for quality before price.On Slide 13, you see the -- some figures to inOne. Total revenue-generating units in inOne are 3.75 million subscribers -- subscriptions. We have a penetration on mobile, inOne Mobile, of 43%. So you see the increase of Q1 to Q2. And you see also that we are able to increase the penetration from inOne to 48% on broadband. It's -- that's our strategy. We'll have the higher customer loyalty, lower churn figures and higher Net Promoter Score. So it shows that this strategy works.On the bottom of the chart, you see the development on the ARPU. So in mobile, we are able to up-sell. On wireline, we are in the region of 0 impact on ARPU. And then we have the converged discount, which is fully in line with what we guided.On Slide 14, quite a busy chart, but it shows good what is our dynamic in the service revenue in the retail market. Wireless, on the left side, you see that we have approximately stable wireless ARPU. The ARPU -- revenues to ARPU in the middle of the chart is from 34 -- from 43 to 41. And this is -- the main impact here is the mix because we are migrating more and more prepaid to postpaid, so there is a small dilution in the ARPU. But overall, a solid wireless business. And you see also the part of customers, which are already in fixed mobile bundles.In the middle, you see that we have a stable ARPU in wireline, which I think is a good performance in the market where we are. Stable ARPU of CHF 41. And on the left side of -- on the right side of the Chart, you see that we are able to grow with our bundled offers, so we have a revenue increase of CHF 100 million. We are able to get a higher ARPU in the bundled offers from 131 to 136. So our strategy to bundling works. And today, we have a bundled share, which is in the region of 60%.On Slide 15, some remarks to our enterprise business. So overall, we are able to have a stable or slightly increasing subscription base in mobile, 1.27 million subscription in mobile, which is 10,000 more than in previous years, so stable. In the voice part, we see that the subscription are going down. This is driven by IP substitution, All IP effect. So this is a structural part, what we have also -- have also in the retail market. But overall, the service revenue are quite stable if you compare them to previous year even in a market where we have a lot of price competition. So this shows that we are performing well on the service revenue side.Some remarks to the solutions revenue. In Q2, it was CHF 252 million, so slightly below the previous year. The main element of it is price pressure and project volatility, this is always the case. As I mentioned before, we remain positive for the solution business in the B2B market because the digitalization is going forward. Cloud is becoming more important. We have growth in the cloud business. We are growing in security. So overall, we remain positive for the solutions revenues. On Slide 16, you see a bit more in detail what is behind the solutions revenue. So it's a quite heterogenous project portfolio, where we have workplace solutions, digital solutions but also cloud and security. On Slide 17, some remarks to our cost reduction. So we are well on track to reach our cost savings of CHF 100 million. How we do it? We do it through efficient operation, process optimization, All IP product portfolio streamlining. These are elements. Digital transformation is also a pillar, an important pillar, virtualization of our infrastructure, shift to online using artificial intelligence to optimize processes. And then also, smart investing to increase our CapEx efficiency and rollout efficiency. These are the main pillars, and you see that we are on track with our cost savings.Some words to Fastweb on Slide 19. The Italian market is moving more in a converged market. You see that the fixed mobile converged offers are increasing in Q1. They were at 25%. You see also that the willingness of customers to go for FMC offers is increasing, and this is at 64%. That shows that also convergence is important for Fastweb. And what we see is that, in a converged offer, the stickiness is approximately 30% higher. So what is the response of Fastweb in such a market? The priority of Fastweb is to leveraging the existing assets and to become more convergent. So what we will use is our strong footprint in the ultra-broadband market, fixed market. So our fiber backhauling our street cabinets and having smart deployment of 5G in large mainly -- and very focused in [ margin ]. It's not our ambition to become a fifth mobile operator in Italy, but smarter deployments. And it will be self-financed by Fastweb.On Page 21 some remarks to the Tiscali transaction, which we announced several weeks ago. So the main idea of this transaction is to get access to the spectrum, which we can use for 5G. So this 40 megahertz in the 3.5 gigahertz band. We will get the ability to become -- to strengthening our mobile proposition, but it will be a very selective deployment.On Page 22, the performance on the consumer segment. So we have a resilient performance in a tough market. Broadband customer base went up by 4%, the ultra-broadband customer base, and this is important because we have on this customer base lower churns and also a better ARPU. It went up by 30%. Mobile customer base went up by 45%. And so therefore, you can also see that we have actually a converged penetration of 27%, which will reduce also our churn benefit.On Page 23, to the corporate performance. The corporate segment is important for Fastweb. We are the clear #2 in Italy. We have a market share of 40%. And on the right side of the chart, you can see some KPIs in the B2B market. So order book is increasing and also the revenues. And we have a very solid and decent Net Promoter Score in the B2B market. Financially, on Page 24, and on a comparable base, you can see that our revenue went up by 10%. The EBITDA on a comparable base up by 5%. So a solid performance, fully in line with our guidance. Now I would like to hand over to Mario for some more details to the financial figures. Mario?

[Mario Rossi]

Thank you, and good morning also from my side. As Urs mentioned, the closing as per June 30 in line with our expectation. And I would like to start on Page 26 and to give you some details on the revenues. So revenues went up by 2%, but we have to take out the exception. The main exception is the positive impact from the stronger euro. If you take that out, we have a like-for-like increase to CHF 27 million. Let's say the flat evolution of the top line. And the same story as in Q1. The increased revenue of Fastweb compensates for the decrease of the revenues of the Swiss business. In Switzerland, in the residential segment, we saw a decrease of the service revenue by CHF 95 million in the first half. And the main element of this decrease are the following: decrease of voice access lines with an impact of CHF 35 million; converged discount impact of CHF 44 million; roaming of CHF 9 million. These are the main effects for the decrease. On the other side, we saw some uplift on the hardware revenues. The mix of sold handsets goes more and more towards high-end devices, but that has practically no impact on margin or EBITDA. In the enterprise segment, service revenue went by down by CHF 29 million in the first half. As Urs mentioned, price pressure in mobile and structural changes due to the All IP migration to fixed line business. The solutions business had a kind of different dynamic in Q2 after an increase of CHF 7 million in Q1 before a decrease of CHF 19 million in Q2, which is coming mainly from the banking vertical Urs explained before for the reasons. I expect, for Q3 and Q4, in the overall solutions business, again, revenues in the area of Q2, meaning CHF 250 million per quarter. In the wholesale segment, we saw an increase of CHF 12 million. Here, we benefit from higher volumes from broadband connectivity. In Fastweb, we have an increase of 9.5% of the external revenues, and there all 3 segments contribute to the increase: consumer segment CHF 50 million; the enterprise segment still strong position. We are right to maintain the strong position, an increase of CHF 27 million. And also the wholesale business increased the revenues by CHF 11 million.The overall [indiscernible] on the OpEx of the Swiss business. Acquisition retention costs went down by CHF 28 million. There are 2 main effects. We have less subsidized [ implement rules ], CHF 11 million impact and less subsidized TV boxes, CHF 14 million. Then we saw lower out payments. There we have lower rates for outbound roaming, an impact of CHF 6 million, and lower out payments for termination because of lower NTR tariffs of CHF 5 million with no impact on the margin. Then we have lower indirect costs. Urs explained that we are well on track with our cost programs. The main benefits we see on the personnel costs. Lower expenses of CHF 32 million [indiscernible] in the workforce, and marketing and IT costs are the other elements of the cost reductions. We had higher costs for goods and services. It's mostly revenue-driven, with a limited impact on the margin. Around CHF 40 million comes from the retail segment and CHF 18 million from the enterprise segment.On the next slide, the EBITDA breakdown by segment. Here, again we have to [ clear ] for extraordinary items reported. We had a decline of CHF 117 million. Then we have to take out litigation, EUR 95 million or CHF 102 million; the impact of IFRS 15 of CHF 33 million. On the other side, we benefit from stronger euro by CHF 28 million, like-for-like, we see this CHF 13 million increase. Also here I would say stable evolution of the EBITDA.The Swiss business decreased on a comparable basis by CHF 51 million. Here, on the retail segment, the EBITDA margin went down by CHF 68 million or 4.7%. As you saw before, service revenue went down by CHF 95 million. So part of it, we were able to compensate for with the cost reduction. Here, we see strong benefits with our -- on the cost side in the call centers and in field force we have less number of calls and in the field force less intervention that's due to digitization, the All IP migration, which we are starting to benefit from the All IP migration and also from a very stable network. Enterprise segment went down by CHF 25 million. The year before, the decline of the service revenue of CHF 29 million. So again, half of it we were able to compensate with the cost reduction. And in the wholesale IT and network division, this includes also the [ AGCOM ] function. We have on the one hand side we have higher connectivity services. On the other side, we have lower indirect costs. We were able to reduce quite number of [indiscernible].In Fastweb, the increase of CHF 17 million is mainly driven by higher number of revenue-generating units. And you have to take into consideration that, in the prior year, in the first half positive impact from a change of regulated [ fixed ] rate prices.On Page 29, there's nothing special below the EBITDA. Net interest are at the low level of CHF 70 million per quarter, no financing activities. Maturity profile, et cetera you can find on Page 53. For the details on the financing side, tax rate is normalized 20.8% after the high tax rate we saw last year. And that brings me to the CapEx. Also, here, we have no surprises -- quite stable CapEx compared to prior year. One remark for Switzerland, the CHF 711 million at the prior year level, here the fiber rollout accelerated. We invest in the first half CHF 227 million, after having only invested CHF 100 million in Q1. So that means we could accelerate our rollout speed and we think at the year-end we will end at around CHF 0.5 billion. Fastweb in local currency was 1.7% higher than 2017, and this increase is driven by B2B customer CapEx. Next slide, the operating free cash flow. Here only one remark. We had an increase of working capital in the first half 2018, mainly as a result of the prepayments and lower trade payables. That's nothing special, I expect that to be flattening out over the full year. That brings me to the underlying EBITDA trends and the guidance. The EBITDA, the underlying EBITDA trends for Swiss business we guided for, you can find on Page 33. These are indicative effects for the full year. You see how we performed in the first half. Overall, for all these 5 effects, we are confident that the net effects will be at or around minus CHF 100 million for the full 12 months in 2018. And having said that, that, of course, we can confirm the guidance, which is stable revenue development of CHF 11.6 billion and EBITDA of CHF 4.2 billion and CapEx of CHF 2.4 billion, bringing us to a free cash flow proxy of CHF 1.8 billion. And with that, I hand over to the operator.

[Operator]

[Operator Instructions] We already have some questions. I will start with Frederic Boulan from the Bank of America.

[Frederic Emile Alfred Boulan, Senior Analyst]

I have 2. First of all, on Fastweb, if you could come back a little bit on the revenue trajectory, which has been very solid. The EBITDA was up very modestly with a substantial increase in cost, same as Q1. So firstly, what's driving this? Was revenue weaker or some pretty weaker [ premium ] leverage? And secondly, what do you expect for H2? I think if I look at your guidance of CHF 700 million for the year, it implies almost 10% EBITDA growth in H2. So what's going to drive that improvements in the second half?

[Urs Schaeppi, CEO, Head of Swisscom]

Could you take the question?

[Mario Rossi]

On the first half, there are different elements on the cost side. So we have -- on the first half, we have higher subscriber activation costs coming from the mobile business. Secondly, we have different mix in the B2B segment a bit more hardware revenue with low margin. I would say that are the main effects. The other cost elements, let's say, like network costs, indirect costs are more or less stable. And on the full-year guidance, we expect an increase of EBITDA between 5% and 8%. That depends, again, also on revenue mix in B2B and cost -- acquisition cost. This depending on the market dynamics, I would say, big increase between 5% and 8%, more on the side of 8%.

[Frederic Emile Alfred Boulan, Senior Analyst]

So anything specifically that you think will improve sequentially in the second half? I mean, are you going to see less of the pressure you mentioned for H1 in terms of [ SEC ]? What's going to drive that substantial acceleration in the second half?

[Mario Rossi]

We have 3 segments. It depends on the mix on the segments. The wholesale segment has quite high margin, and there, we see some business coming also in the second half from the [indiscernible] segment.

[Operator]

Then I have the next question from Saroop Purewal from the company Redburn.

[Saroop Purewal, Research Analyst]

I just want to ask a question on your CapEx. So could you provide us with kind of an outline or profile for the next 2 or 3 years considering spectrum coming up in '19 and your 5G plans? And then secondly, I have a question on Salt. It seems quite clear that the RGUs weren't really affected by that Salt launch. Have you seen anything subsequently and are you seeing anything at the moment in your numbers?

[Urs Schaeppi, CEO, Head of Swisscom]

I will take the question to the Salt, and Mario will take the question to the CapEx. To Salt, actually, if you look to our figures, you can see that we don't feel an impact from the launch of Salt. So we have a churn in our wireline business, which is below previous year. We have a very good momentum on inOne, so we don't feel a negative impact on the launch of Salt. So it shows that still a big part of the Swiss market is looking for quality for integrated offers, and we certainly have a good differentiation in our product portfolio, also through our TV platforms, we also remain confident for the second half of the year that we will have a good performance in the wireline market. Mario?

[Mario Rossi]

And on the CapEx side [indiscernible] CapEx we see in 2018 CapEx of around CHF 1.6 billion. And the main element -- the maintenance CapEx going into the infrastructure, around CHF 0.5 billion. As I mentioned, in fiber to the street [indiscernible], fiber to the home less so [indiscernible] of CHF 0.5 billion. And then in Mobile, between CHF 250 million and CHF 300 million. And the rest are project-driven, customer-driven. And I would say for the next 2, 3 years, we see the same CapEx envelope of around CHF 1.6 billion. Maybe some change in the composition of the overall amount. But we are confident that the overall we can also do the necessary investment for 5G. Maybe you see one year CHF 30 million more, one year CHF 30 million less, but the overall development will be the same for the next 2, 3 years. And on spectrum, which as Urs mentioned we'll take part in January, we of course give no details, no guidance.

[Operator]

Then I have the next question from Joshua Mills from Goldman Sachs.

[Joshua Andrew Mills, Equity Analyst]

I just wanted to ask a couple on one on retail, on B2B. On the retail side, so I think, as previously mentioned, the net adds haven't come down that much in the second quarter. And we look at Liberty numbers last week and see they were quite weak. So I just wondered, from your perspective, where you have lost subscribers, whether that's been more to Sunrise or Salt over the last quarter and what kind of profitability ratios you are seeing going forward as well. And then secondly, on B2B, the service revenue sort of [indiscernible] improved actually sequentially in the second quarter, notwithstanding the decline in solutions business, which is lower margin. So what is happening in B2B? Have you won any bigger contracts? Are you seeing an improved outlook on the enterprise segment? Or does it still remain quite competitive as Sunrise has recently spoken about having won some contracts?

[Urs Schaeppi, CEO, Head of Swisscom]

On the retail market, so as I mentioned before, we have lower churn figures than previous years. So we don't actually have a feel of additional dynamic on the churn side. And if you look to our -- to the whole market, the market is totally saturated. And my feeling is a bit on the market that other players are suffering more from Salt than Swisscom. And we feel more in the fiber to the home turf that maybe our net adds are small-ly, small-ly lower in fiber to the home turf because of the dynamic of Salt. But overall, we have a very good dynamic in inOne and on the churn side. So as I mentioned before, I remain confident for the second half of this year. For the B2B market, so as I explained it on the chart before, if you look to the B2B market, 15 to the service revenue, you can see that we have stable subscription base. That means Swisscom is able to protect the market position in the B2B market so our competitors are not gaining overall market share. And we have some price pressure, but we see on a comparable base that from Q1 '17 to Q2 '17 to Q2 '18 that the revenue went down by CHF 5 million. So there is not -- it's not -- there's not a big impact on it. And therefore, the main question in the B2B market is driven by project renegotiation, which has also price impact. So the segment will remain competitive as it was already before. But Swisscom has a very large and broad product portfolio, where we are differentiated, where we can deliver solution, which is important for this segment. So overall, long term, I remain positive for this enterprise segment that we can protect our market position using the digitalization.

[Joshua Andrew Mills, Equity Analyst]

So can I just come back on the first question? I guess, my point is we were all very focused on what Salt's doing in the market in terms of price competition. But there's been quite a few promotions recently from Sunrise, particularly around fixed as well. So from your perspective, has Sunrise become more competitive in retail over the last 3 months? Or is it broadly unchanged?

[Urs Schaeppi, CEO, Head of Swisscom]

No. Unchanged. I would say unchanged.

[Operator]

Then I have a next question from Jakob Bluestone from Credit Suisse.

[Jakob Bluestone, Research Analyst]

I've got 2 questions, please. Firstly on Italy. When you talked with the Tiscali acquisition about moving more into fixed wireless access, and I was wondering could you maybe comment a little bit on the sort of CapEx outlook for that business as well? Do you think over time that you might start to increase CapEx again a bit more in Italy? And then secondly, just on Swiss fixed line. And apologies for coming back to Salt again. I mean, obviously, you mentioned that your churn fell year-on-year. Can you maybe sort of comment a little bit on what were some of the things that drove that? Were there any below-the-line promotions? Were there bigger retention offers? Were there any sort of particular actions you took to deliver that churn reduction that you can share with us?

[Urs Schaeppi, CEO, Head of Swisscom]

Okay. I'll take the question on Salt, and Mario will take the question on mobile Tiscali and CapEx in Italy. The churn, actually, the main reason why we could decrease our churn in Switzerland is driven to our product portfolio, quality on networks and quality in the customer service. So this brings higher customer loyalty. On the promotion side, we at Swisscom we don't do so much promotion as our competitors are doing. And also, we don't have big retention programs. Our strategy is to deliver superior quality and attractive product portfolio, and that's the best way to protect the customer base, bringing more value, giving more value to our customers -- Mario...

[Mario Rossi]

On Tiscali, as we mentioned, the priority is to leverage on the existing asset base we have in Italy. Just to remind you, we have 45,000 kilometers of fiber assets. We connect [ 1,050 ] -- we have 22,000 street cabinets. And to that, we added this 40 megahertz [indiscernible] 3.5 gigahertz. And as Urs mentioned, it's not our target to become a nationwide mobile provider. So it will be combination with own network incentives, and with partnering with other telecoms and we expect that the overall CapEx in Fastweb will remain more or less flat, then we can absorb, some additional CapEx in this envelope.

[Operator]

Then I have a next question from Julio Arciniegas from RBC.

[Julio Arciniegas, Analyst]

Looking at the fixed mobile net adds of inOne in the last 16 months, Q2 had been the quarter with the lowest net adds. So is the company pushing less the fixed mobile convergent bundles, or what is behind this acceleration?

[Urs Schaeppi, CEO, Head of Swisscom]

Now if you look to the penetration of inOne, it's always going up. So that's clear in the beginning, you have a faster uptake on the product, but then it's becoming more and more saturated. And today, on inOne, we have in the first half year [ 550,000 ].

[Mario Rossi]

The fixed mobile convergence is -- midyear is 33%. And the end of Q1 was 31%. And 12 months ago, it was 24%. You see the FM convergence is increasing, but we have no -- let's say, we did not stop to push for convergence. That was mentioned, you have this take-up is the usually strong at the beginning. You still feel that you're able to grow that FM converged customer that [ we lost ] had been -- [indiscernible] been happening in the second half.

[Urs Schaeppi, CEO, Head of Swisscom]

The penetration broadband went up from 42 to 48, but shows it continued.

[Julio Arciniegas, Analyst]

Yes, yes. If I -- my follow-up on that, the company has roughly 4.6 million prospective subscribers, but less than 1 million, but they are actually fixed mobile convergent. So from your answer, we should expect that basically the company is already like -- arriving like to their limit of convergence?

[Urs Schaeppi, CEO, Head of Swisscom]

No. It will continue. You can see we are increasing the converged amount of customers quarter by quarter. Julio, perhaps to add there. I mean, the 4.6 million prospects that includes also the enterprise segment. So the inOne product is only available for retail segment, the residential and SME customers. The different number, so it's 3.3679 million prospects. That's not the 4.6 million.

[Julio Arciniegas, Analyst]

Okay. Yes, so it's over the 3.3 million. So roughly less than 33% penetration currently. And if I may follow up in another question, regarding Italy and the Tiscali deal. Can you give us some color on the conditions in which Tiscali can access Fastweb network, so Swisscom has a contract of CHF 40 million with Tiscali for the next 4, 5 years. But this contract has a limit of subscribers that actually Tiscali can include in your network? Or for example, does Tiscali has to pay a recurring fee per subscriber? Just to have some color what to expect, for example, from [indiscernible] revenues in Italy?

[Urs Schaeppi, CEO, Head of Swisscom]

Good. We will have -- we have a deal with Tiscali, where we buy some assets from them and where they get wholesale access to our networks. So that's the main idea, so on the other side, this will not have a huge impact on the wholesale revenue of FastWeb at the end, but it will certainly have a slightly positive impact.

[Mario Rossi]

The contract value of this wholesale service is public, et cetera, CHF 40 million, as Urs mentioned, not material. And please consider it. We cannot give any more details because transaction is not yet closed.

[Operator]

Then I have the next question from Mr. Matthijs Van Leijenhorst from Kepler Cheuvreux.

[Matthijs Van Leijenhorst, Analyst]

Matthijs Van Leijenhorst from Kepler Cheuvreux. A lot of questions have been answered. I have one remaining question on Italy. How should we look at this strategic positioning of Fastweb, especially regarding its broadband rollout? Because obviously, we have the possible unbundling of Telecom Italia's network, you have a JV with Telecom Italia. We have Open Fiber. How should I look at this for the coming years and especially at your CapEx envelope?

[Urs Schaeppi, CEO, Head of Swisscom]

Good. As Mario already mentioned before, the CapEx in Italy will stay in a region, where we are once they're going up a bit and then going down a bit, but we will not have a big change in the CapEx envelope in Italy. Our strategy is to have a known footprint in Italy. So we have already a good footprint, but we are also use wholesale products from competitors. So overall, there will be no big change in the CapEx.

[Operator]

Then I have the next question from James Ratzer from New Street Research.

[James Edmund Ratzer, Europe Team Head & Analyst]

I have 2 questions, please. The first one, I mean, in the Swiss market, [indiscernible] one of the standout figures from this quarter was the strength of your bundled ARPU, which was up 6% year-on-year to CHF 136. I was wondering if you can just talk a little bit more about how you see that developing going into the second half and specifically what's driven that uptick in Q2? Because I think that was only flat year-on-year in Q1. Are you now seeing less discounting going on within the market? Just interested to kind of discuss that a little bit further. And then secondly, in Italy, can you give us an update please on progress and your happiness with the Flash Fiber JV with Telecom Italia? Are you still happy to persist with that or do you have any interest in also developing business with [ NL ] Open Fiber? And on the fixed wireless access product, can you talk a little bit about where geographically you're going to launch that? Doesn't that actually overlap and compete directly with your own fixed proposition? So do you plan to roll that out in more rural areas?

[Urs Schaeppi, CEO, Head of Swisscom]

I will take the question on Fastweb, and Mario then the ARPU question in Switzerland. On Flash Fiber, so the intention of Flash Fiber is to using synergies between our existing infrastructure. We have already in Italy and upgrading them to fiber to the home. So therefore, we are happy with the partnership in Flash Fiber. This is still a valid partnership. On a possible partnership with [ NL ], so [ NL ] could also be supplier for Fastweb in the areas where we don't have our own networks, so we are open to partner or to using products from them. This could also be a chance for Fastweb in rural areas. And the main idea of the deal with Tiscali is not fixed wireless access, the main idea of this is [indiscernible] with Tiscali is to get -- to extend our mobile proposition in cities, in areas where we have also our own footprint in the broadband business. Mario, on the ARPU.

[Mario Rossi]

[indiscernible] fixed mobile bundle ARPU, which stands in Q2 at CHF 136. I don't expect a further increase in Q3 and Q4. I think, at the beginning, you have all the optimizers, which are coming to the new bundle. You still have the impact from Q2 2017 at the level of CHF 128. Now I think we're able to bring the customers to these bundles. They are upgrading their mobile subscription and also take some higher bandwidth, but I don't expect for the next few quarters there are further increase. This is quite a considerable level at CHF 136 for a bundle.

[James Edmund Ratzer, Europe Team Head & Analyst]

Does that change in Q2 specifically kind of your ability to now be less promotional, if you actually think kind of Salt is having less of an impact than you thought in the market?

[Mario Rossi]

It's impact [indiscernible] it's a good [indiscernible] at the sales front. They are able to convince the customers to go to higher speeds and to take [indiscernible] mobile subscription. I think that's the main impact. And it was mentioned several times in Q2. We really didn't see any impact from Salt both on fixed and mobile.

[Operator]

Then I have the next question from Nicholas Prys-Owen from UBS.

[Nicholas Prys-Owen]

I have a couple of questions, if I may. The first one is on cost savings from All IP migration. You mentioned that we'd start to see that benefit delivered in Q2. I'm just wondering if we still expect it to be around CHF 20 billion of benefit in 2018. And I was wondering if you could give any more color on the form of these savings, that actually helps me understand how much is going to come through lower labor expense and how much is going to come through other costs line. And then secondly, you derived around CHF 16 billion of benefit from lower marketing and advertising in the quarter. I'm just wondering if this is just the timing effect. Or if you should comment on the sustainability of this in H2 and if we should extrapolate the accelerated cost structures through the remaining quarters. And then just finally as a quick follow-up on churn. In 2016, you showed a chart that fixed churn in your corporate base is around 4x lower than your double-play base. You've been selling in one now for around -- or in one converged territory now for over a year. I wonder if you could update us on your fixed churn dynamics on your corporate base and perhaps give us an idea of what your corporate churn is.

[Urs Schaeppi, CEO, Head of Swisscom]

Would -- Mario will take the question with the costs. I will come to the churn topic. So we don't disclose churn figures on different products, but what I can tell you is that we have low churn figures stable or slightly lower than previous year. And it shows actually that a customer, which is in a quadruple-play offer, has a lower churn than a single-play customer. So that's actually each market is a bit the same in those -- in Switzerland, that's the case that's why we are driving our inOne offers we're in a saturated market. In a saturated market, it's important to look on ARPU, on churn figures and on the market share on the service revenue and not only on the subscription and the revenue-generating unit. Mario, costs?

[Mario Rossi]

On costs, we mentioned first half, we had cost reduction of CHF 56 million. They are coming -- CHF 32 million from personnel and CHF 4 million from external workforce, [indiscernible] the capacity costs that means around 70% of the CHF 50 million-plus coming from capacity costs. The rest comes from other cost elements like marketing, IT, et cetera. And I expect more or less the same composition also for the second half, but we don't manage our costs and the cost elements on a quarterly basis. So if it's necessary to do more marketing in Q3 due to market conditions, then we do it, but we stick to our overall cost savings targets of around CHF 100 million per year. We manage the cost base more on a year-over-year basis than on a Q-over-Q basis.

[Operator]

Then I have one last question, a question from Georgios Ierodiaconou from Citibank.

[Georgios Ierodiaconou, Director]

Just a follow-up on earlier questions on 5G in Italy. I wanted to make sure I understand when you are talking about rolling out in the cities, is it mainly in business parks in order to support your B2B business or is it more of a broader consumer product you think could be -- there could be demand for on a 5G basis and with that if you don't mind clarifying since the [indiscernible] launch. You didn't react on price, but you did increase some of the data allowance in your products. Do you have enough protections in your contract with Telecom Italia to make sure that you still deliver a small margin on mobile? Or is that a risk we now start to see maybe negative margin on mobile over time? And my second question is on the inOne plans. I think, on Page 13, you showed that they are less dilutive now than they were initially. Based on what we've seen with infinity a few years ago, at what point do you expect it to stop being dilutive, and perhaps even be accretive because of more up-selling? And is it something that we're getting close to now or something we'll have to wait for a few years before we see that?

[Urs Schaeppi, CEO, Head of Swisscom]

On this -- or maybe Mario can take the inOne question. I will have -- give some answers to Italy. Our main target in Italy with 5G is to be able to have converged offers for our broadband customers. So we have a MVNO contract today in Italy, which enables us to have a margin on it. So we are doing a margin on mobile in Italy, not a high one, but we are doing one. And with 5G, we'll be able to have an improvement of our margin base and also the flexibility to offer products, mobile products in Italy. The aim is to also offload to have an offload in [indiscernible] and to be stronger in the mobile parts. More details I don't want to give. It's too early. And on inOne...

[Mario Rossi]

InOne dynamic. I think you cannot compare the inOne product with infinity. So inOne is converged product [indiscernible] will always have a discount. And that we will also see in the future. As we mentioned the peak impact of the convergence is in 2018, which is guided CHF 80 million. That will come down because we have less and less converged customers. You will not see a positive impact from the inOne. We were able to minimize the negative impact we saw at the beginning with negative impact from wireline. It's more or less 0 right now or slightly positive. We still have the positive impact from wireless [ out ]. The discount from converged customers still remain in place. That [indiscernible].

[Georgios Ierodiaconou, Director]

Okay. Could I ask a follow-up on mobile in Italy? Are you starting to also convert some of the B2B customers to mobile offers? Would you give us some color as to what's the need in consumer and B2B and what is your priority in the next couple of years?

[Urs Schaeppi, CEO, Head of Swisscom]

The main priority in Italy today is to focus ourselves on the mass market. And long term, midterm, if we have a more decent mobile portfolio, we certainly also get opportunities in the B2B market.

[Operator]

Okay. This was the last question. There are no more questions in the queue.

[Louis Schmid, Head of Investor Relations]

Okay. Thank you, operator. And with that, I would like to conclude today's conference call. If you should have any further questions, please don't hesitate to contact us on the IR team. Speak to you soon. Have a great day, thank you.

[Operator]

The conference recording has been stopped. Dear participants, your conference call has come to an end.