Swisscom AG

SIX:SCMN

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the 2023 Q2 results conference call hosted by Christoph Aeschlimann, Eugen Stermetz and Louis Schmid.

Louis, the floor is yours.

[Louis Schmid, Head, IR]

Good morning, ladies and gentlemen, and welcome to Swisscom's Q2 results presentation. My name is Louis Schmid, Head of Investor Relations. And with me are our CEO, Christoph Aeschlimann; and Eugen Stermetz, our Chief Financial Officer.

Today's presentation consists of 3 chapters. Our CEO starts with chapter 1 and a quick overview on the highlights, the operation and financial performances of the second quarter. And in chapter 2, Christoph presents the B2C and B2B operation results, an update on our network activities and the financial results in Switzerland, before discussing Fastweb's Q2 results operationally and financially.

In the second part of today's results presentation, Eugen runs you through chapter 3 with the second quarter financials, including the confirmation of our full year guidance.

With that, I would like to hand over to Christoph to start his part. Christoph?

[Christoph Aeschlimann, CEO]

Thank you, Louis, and welcome also to this call from my side. Very happy and very pleased to present to you another successful quarter and successful first half year 2023 with a positive EBITDA development and our full year guidance reiterated.

On the telecommunication side in Switzerland, we continue to focus on value. Sorry, I'm on -- moved directly to Page 4 on the analyst presentation just for your information. So we continue to focus on value on the telecommunication revenue side, and the evolution is as anticipated. And we're also very pleased with the development of our IT business in Switzerland with a positive organic growth and the successful transaction of the purchase of the Axept company group.

We are also very pleased to be -- have received for the third time in a row the most sustainable Telco award, which highlights our large efforts we do in sustainability side. And we were also very pleased with the development of Fastweb in Italy with 40 quarters or 10 years of consecutive growth in number of customers, revenue and EBITDA. And a very pleasing second quarter. More about this later on in the presentation. And last but not least, we were also able to get an improved credit rating with our strong ratings confirmed.

Now moving on to Page #5 of the highlights of Q2 market performance. First a word about Swisscom Switzerland. I'm particularly happy about our performance on the postpaid side with 40,000 net adds, which is a strong quarter and improved over Q1, bringing us to 5.2 million subs on the postpaid market segment.

In broadband, TV and fixed voice, we can see similar but improving trends versus the previous quarter. So we still have net losses in broadband, TV and fixed voice, but it's on a slightly lower base than last quarter. But you can see that especially the TV and fixed market are kind of peaked and the market overall is in a declining mode.

On the wholesale side, we had a slight loss in second quarter after a growth in Q1, which has sort of 2 effects behind the slight decrease on the wholesale side. On the one side, we have many customers. We have a growing business on our wholesale segment. But you have one notable exception with the -- which is Sunrise, which has started to optimize its infrastructure and moving selectively customers from our network to their own cable network, which then creates a downward trend with a slight loss of 6,000 RGUs in Q2.

On the Fastweb side, we see the same trends as the previous quarter, with a strong growth on the mobile side, 112,000 net adds, which is the second best performance in the market in Q2 behind Iliad, and with slight losses on broadband due to our value strategy we pursue in Italy on the broadband consumer side, compensated by a growth of plus 34,000 on the wholesale side, bringing us to over 0.5 million wholesale lines in Italy. I'm pleased with this result, and it confirms that the strategy we are pursuing is on the right track.

Now on Page 6, you can see the Q2 financial performance. We landed with a revenue of CHF 2.7 billion in second quarter, bringing us to CHF 5.45 billion for the first half 2023, which is a slight decline, but roughly overall stable revenue development, mainly due to currency developments, the euro, Swiss franc. Whereas on the EBITDA side, we have a nice growth of CHF 1.1 billion EBITDA in Q2, bringing us to CHF 2.3 billion EBITDA for the first half year, which was a plus 5.1% year-on-year.

And what is especially pleasing is that both countries, Switzerland and Italy, have contributed to the EBITDA growth, as you can see on the right-hand side on the EBITDA bridge, where Swisscom Switzerland added -- or improved EBITDA by CHF 3 million and Fastweb by CHF 5 million. A slight decrease in the other segments. There's a softer contribution from other subsidiaries we have in Switzerland. And then the pension effect we already talked about in the previous quarter, which is due to change in interest rates, bringing us overall to the CHF 1.135 billion EBITDA in Q2 2023.

Now moving on to the business review. I will go to Slide #8 in the analyst presentation. We have a successful development of the Swisscom group thanks to consequent execution along our strategic objectives. As you will see in the further slides, we pursue 4 main strategic goals. The first one is investing heavily in NPS leadership in Switzerland, having happy customers and making sure they want to stay with Swisscom. We are very focused also on delivering further cost savings and increasing the efficiency of the group to maintain our EBITDA margin, especially in Switzerland, but also in Italy. We want to further grow our IT service revenue both in Switzerland and in Italy and overall achieve profitable further growth in Italy, which is very tough, let's say, ambition in the Italian market. But we focus on growth on the 5G mobile side, IT and wholesale, which then leads to the results you're seeing in this presentation.

Now let's have a detailed look at Switzerland on Page #9. As I mentioned before, we are focused very heavily on our NPS market leadership. In our latest surveys, we have landed at the NPS of 22, which is a all-time high, and with a substantial lead on all our competitors in Switzerland, actually an increasing lead on our competitors in Switzerland. I think this reconfirms me that our B2C strategic execution is right. We are focusing on products, on service, on shops and making sure that our customers are well served and pleased with what they get from Swisscom. Our main challenge is our price value perception. This is also one of the main reasons why we did not -- or why we decided to not increase prices overall despite inflation.

Next to excellent customer service at the hotline and the shops, we continually invest in our products. So we launched -- we improved our blue product portfolio offering. We launched new product options like the TV XL. We introduced a low-end mobile offering. We completely revamped the kids mobile product side and also some of the TV options like the Multiroom max option, which we introduced newly into the market. And I think this is key for our price value perception to keep a high-level of investment on our product side.

Then you can see on the right-hand side, churn is sort of at a good low level, in line with historic developments, slightly higher than the previous quarter, but still I would say at the excellent low levels in the 7% and 8.2%.

On Page 10, some highlights regarding our subs distribution. You can see that we were able to increase the blue penetration both in mobile and in broadband, with broadband at 80% and on the postpaid value side with close to 50% of our customers on the blue product portfolio. The FMC penetration is sort of reaching a plateau. We still have a slight increase on the broadband side, but on the postpaid value base, there is a slight decrease mainly due to the shift to second and third brands, which we don't count in the FMC penetration.

On the second and third brand, you can see that both in mobile and in broadband that the second brands are progressing with 30% market share of our second brands on the mobile side and 8% on the broadband side. Overall, this led to a satisfying RGU development with plus 144,000 RGUs on the mobile side, bringing us to 3.3 million mobile RGUs, with the slight decreases on broadband and TV with, respectively, 1.7 million and 1.48 million RGUs on the TV side.

On Page #11, you can see our actions we are undertaking to continuously optimize our ARPU levels with a very strong and clear focus on value strategy. You can see on the left side that ARPU levels remained nearly stable both on mobile and on wireline. On mobile, we had a slight decrease of minus CHF 1 on postpaid value due to the ongoing shift to the second brand from the main brand. But overall, ARPUs, especially on the wireline, have been stable or slightly increasing even on the blended side, which is a very pleasing result.

This was possible due to 2 or 3 main actions. The first one is we selectively tuned our offerings, introduced some higher fees on payment of invoices, for example, or setup fees. We have introduced the payment fee if you pay the bill in the shop. We de-activated our Simply Digital option or introduced new products at higher price rates. We also changed our promotional behavior. We are running less brands -- or less discounts on the main brand, less aggressive for less duration. We reduced gifting. And also continue to counter the promotional activities especially or mainly on the Wingo brand, but also there on a higher price level in recent time.

Maybe one thought about price promotions on the second brand level. We don't consider the level of aggressiveness on secondary brand sustainable, especially not what we've seen last Black Friday, neither in terms of pricing or duration. So also on the secondary brands, we are thinking about the promotion at higher price points and maybe also by the duration.

Looking at the Black -- or coming -- Black November month in the past, we've seen sort of promotions going the whole month and we don't think this is really sustainable and probably are thinking about reducing those durations to a week or even a Black day. What we're also focused on, obviously, is to continue to drive cross and upselling across our customer base, focusing heavily on the blue benefit, the convergence benefits, not only for families but households. We added the kids mobile in convergence to really drive more and more upselling and cross-selling in our -- across our customer base. That was it for B2C.

Now moving on to B2B on Page #12. In the B2B space, we have 2 different businesses. On the left-hand side, you can see the Telco service business is developing as anticipated. We had a decline of minus CHF 13 million on both wireline and wireless. This is in line with our guidance of minus CHF 50 million for B2B Telco service revenue for the full year.

Mainly the decrease in revenue was driven by pricing impacts, more promotions and lower ARPU. What is positive to note on the Telco side is that we are completely revamping our product portfolio. Last year, we introduced a new wireline portfolio. This quarter, we launched a new enterprise mobile portfolio, which is a completely new product portfolio for B2B, which is completely digitally enabled, also allowing us to drive further efficiency and cost gains in the future.

On the IT business side, we have an organic growth of plus CHF 7 million, bringing us to CHF 292 million revenues in the second quarter of 2023. Some of the projects are delayed with customer orders delayed and also difficulties in hiring enough talent in the market. But on the upside what is very pleasing is the purchase of Axept, which is a company which is focused on the ERP side, especially in the SME space. So this allows us to expand our footprint and strength in the SME IT space, and will enable us to do some more cross and upselling with Swisscom products in the future and strengthen our IT business overall.

Now on Page 13, you can see some of the highlights regarding our network rollout. On the wireless side, we were able to increase our 5G Plus coverage to 77%, which is plus 12% regarding -- or compared to 1 year ago, which is very pleasing. And we -- I think we make good progress in rolling out 5G Plus, which is a 3.5 gigahertz frequency across the country. And they're also making trials with power-saving features to reduce our electricity footprint.

On the wireline side, FTTH rollout is completely done and we are exclusively building out FTTH footprint at the moment. And we were able to increase the FTTH footprint from 39% to 44% end of June this year and confirming our 2025 target at 55%. And there is also actually an opportunity to maybe land above slightly the 55%, which is very pleasing and -- meaning that with the non-Swisscom footprint in Switzerland in 2025, Switzerland would be about 2/3 coverage by FTTH, which is an excellent news for the country.

On Page #14, you can see the Swisscom financials in Q2. We exactly -- this is no joke. It's exactly CHF 2 billion revenue, bringing us to CHF 4.044 billion revenue with CHF 913 million EDITDA. And I would say more details to the financial numbers will be provided by Eugen. So I will move directly to Page 15 with the highlights of Fastweb in Italy.

So Fastweb also had a successful second quarter. We have now 10 years of consecutive growth, where we were able to grow every quarter. Also second quarter we were able to win 115,000 RGUs overall for 4% more revenue and 2% underlying EBITDA, excluding the one-off with the regulatory fine due to the 4 weeks billing decision which was announced last week in Italy.

What is pleasing is that our consumer ultra broadband and mobile consumer base broadband is growing. Especially, mobile was at 20% year-on-year growth and second best performer in the market. Also notable is our enterprise performance in Italy with a strong plus 6% growth, thanks to both mobile connectivity, but especially also IT and security services.

And as mentioned previously, what is also pleasing in Italy is our wholesaled strategy. We're able to compensate the losses we have due to our value strategy on the B2C side with new lines we are booking on the wholesale side coming from Iliad, Enel, Sky or Virgin Fibra, moving our wholesale business to 432,000 lines at the end of the second quarter.

Now looking a bit more into the details on Page #16, Fastweb consumer business. So as mentioned before, broadband slightly decreasing to 2.6 million sub. We are really, I would say, one of the -- or the highest priced provider in the market really focused on defending ARPU and price to defend our margin. We've increased also AI-driven customer processes and many more investments we are doing on the product and service customer side.

The UBB penetration is going up as in the previous quarters. And on the mobile side, as mentioned previously, we have a very nice growth or outstanding growth of plus 538,000 subs over the year-on-year. What is also -- was really a good win was the Ookla. For the second time, we were awarded the fastest mobile Italian network by Ookla in Q2. You can see that FMC is continuing to progress in Italy. We were able to increase FMC penetration by 2.4% to 42% with very strong benefits both in ARPU and bringing churn down.

Now looking at the enterprise business on Page 17. As mentioned previously, we had a 6% growth on the enterprise business, bringing it to CHF 266 million in Q2 2023, and we were able to add many new customers maybe most notably IKEA, ENI and Boehringer. So we have a good handle of growth in all segments both in connectivity, security and mobile. And as outlined before, the wholesale business is also growing strongly with 6% from CHF 67 million to CHF 51 million revenues. We have a very strong growth online. And we had some other business on the wholesale side which was not renewed, but it had very low marginality, so the impact overall is actually quite negligible.

Now last slide, Page #20 -- 18, sorry, Fastweb financials. Overall, CHF 628 million revenues in Q2 2023, bringing us to a half year revenue of CHF 1.25 million, with all segments, wholesale, enterprise and consumer which are contributing to the growth, which is a very pleasing situation. And you have also a growing EBITDA. You have a reported EBITDA which was slightly declined by -- to CHF 210 million due to the 4 weeks billing regulatory provision. But the underlying operative EBITDA growing also by 2% to CHF 223 million or CHF 411 million for the first half year.

That was it from my side. I would now hand over to Eugen for the financial details.

[Eugen Stermetz, CFO]

Thank you, Christoph, and good morning everybody also from my side. I'll start, as usual, on Page 20 with group revenue. Overall, the revenue evolution in the second quarter was almost an exact replay of the first quarter. So if you look at the overall development, revenue is down by minus CHF 17 million, but that's obviously impacted by the strengthening Swiss franc, which is some 3% up compared to the euro compared to the previous first half of the year in 2022.

So if you look at the underlying numbers, revenue is up by CHF 30 million in the group. Switzerland down minus CHF 23 million and Fastweb up plus CHF 53 million. Both in Switzerland and in Fastweb, the quarterly numbers of Q2 almost the exact contribution as in Q1. So Switzerland Q2 minus CHF 11 million, Q1 minus CHF 12 million. Fastweb Q2 plus CHF 25 million, Q1 plus CHF 28 million. So overall, very much a picture of stability.

If we look at the individual segments, B2C slightly down with minus CHF 4 million. That's mainly driven by lower hardware sales, obviously, with very limited impact on margins. B2B is down by CHF 18 million. So that's a combination of lower service revenue and higher IT and hard and software revenues. In Q2, it's actually flat. So all the CHF 18 million come out of the first quarter, and this was very much driven by a strong hardware quarter in the first quarter 2022. So it was a tough comparator in the first quarter.

Wholesale is flat overall. It's a mix of wholesale services which are somewhat up, and a slight negative contribution from roaming and interconnection. So not much to say on infrastructure and support functions on revenue obviously.

So I'll move on to Fastweb. As we heard, plus CHF 53 million, plus 4.3% growth in the first half of the year driven by contributions both from enterprise and wholesale, and obviously, a more moderate contribution from consumer, where we show wrong -- sorry, grow strongly in the mobile segment, but face a somewhat sluggish wireline market. That's it on group revenue.

I'll move on to Page 21, Swiss revenue. Likewise, revenue in Switzerland is very much in line with the first quarter. So if you look at the left-hand graphic on the page here with the component of the revenue evolution in Switzerland, very much the usual picture, service revenue down by CHF 33 million, with B2C basically almost flat with minus CHF 8 million and B2B minus CHF 25 million. IT service revenue up by CHF 9 million, CHF 7 million of which are from the second quarter. So in the second quarter, we grew by 2%, which is lower than last year, but a bit better than in the first quarter of this year.

Please note that last year a significant share of the IT services revenue growth was driven by non-organic source, the prior acquisition of MTF Group. So you need to take this into account when comparing the numbers. Hard and software sales down by CHF 15 million, wholesale flat. As I already mentioned, we had a positive contribution of CHF 16 million plus from other revenues. It's a bunch of factors. The biggest one is cinema business picking up and IFRS 15 balances, which fluctuate around with our hardware promotions.

So on to service revenue evolution, top right. Actually, not much news, very much in line with Q1. B2C essentially flat with just minus CHF 3 million in the second quarter. Please note that we are talking about a baseline of about CHF 1 billion revenue per quarter to compare these year-over-year changes too. B2B, a more or less steady run rate of minus 3%. So everything in line with expectations, guidance and what we have seen in the first quarter.

Bottom right, individual components of service revenue evolution. You know all of them pretty well, so I'll just make a quick summary. On the B2C wireless side, our customer base is up thanks to higher postpaid customer base, mostly driven obviously by second and third brands at the expense of somewhat lower ARPU due to the different mix of first brand and second and third brand. B2C wireline, a structural effect on the customer base with fixed broadband losses. And the small losses on the broadband base showing up in that number as well. And then over to B2B, a gradual erosion of ARPU, in particular, in the corporate segment, which is mostly stable quarter-over-quarter.

So with that, I move on to Page 22, group EBITDA. Group EBITDA was up by CHF 112 million. Obviously, that's very much driven by our regulatory provisions that we booked in the second quarter of last year. This year, we just booked a net CHF 3 million of provisions. It includes the CHF 13 million in connection with 4 weeks billing for Fastweb that Christoph mentioned before.

So with that out of the way and also ignoring for the moment the pension reconciliation item that you know well, we can focus on the development of the underlying business, with Swisscom Switzerland up CHF 16 million and Fastweb up CHF 8 million EBITDA, that's a plus 2%.

Within Switzerland, B2C plus CHF 13 million, that's the flat service revenue combined with cost savings in that segment. B2B minus CHF 12 million, a combination of lower service revenue, as expected, compensated partly by growth from the IT business. Wholesale flat. Just one word on infrastructure and support functions. It's up by CHF 14 million. This is cost savings showing up, but there is quite a strong swing from the first quarter to the second quarter. Second quarter was down with minus CHF 5 million.

Now one factor driving this is the salary increases that kicked in on 1st of April, as explained previously. Obviously, that doesn't account for the full swing. We also had quite some seasonality and personnel expense accrual in the previous year, which explains the strong swing from the first to the second quarter.

Then on to Fastweb, as mentioned, plus CHF 8 million growth. We are quite happy about that. Plus 2% in line with guidance. That's driven by higher margin from the enterprise and from the wholesale segment, compensated by lower margin from the consumer segment, and obviously, also some cost savings, as you have seen, among others from advertising and from energy expense.

Finally, on the EBITDA bridge, minus CHF 25 million in the other operating segment, quite a big number for that segment. That's very much driven by a one-off provision we booked in connection with customer project. So it has a bit of a one-off connotation if you try to project that going forward.

I move on to Swiss EBITDA on Page 23. Really not much to say. The only thing I'd like to mention is on the indirect cost savings in Telco, where we now stand at CHF 40 million with plus CHF 13 million in Q2, and therefore, a bit of -- a bit ahead overall in terms of expectations. Q2 was lower than in Q1, given the higher salary costs kicking in the second quarter. As I mentioned -- and I always caution you against taking quarterly numbers here too seriously. But having said that, I think the CHF 13 million plus in the second quarter come reasonably close to what you can expect on average -- not on average, over the coming quarters. And that gives you an indication of where we are going to land by the end of the year.

I move on to Page 24. CapEx slightly up in the group driven by higher CapEx on Swisscom Switzerland. If you look at the individual component on the Swiss side of the business, right-hand of the page, I'd like to note just one thing. You see the fiber investment of CHF 193 million. That's actually a bit on the lower end as we transition from the point to -- multipoint rollout to the point-to-point rollout in the first quarter of the year. Expect this to pick up again in the second half of the year. We come close to the CHF 500 million to CHF 600 million range that we gave you for the fiberCapEx handed -- or it will probably be a bit below that range this year, which doesn't change the fact that the CHF 500 million to CHF 600 million still remain the relevant number to look at when you look at the years ahead.

I move on to Page 24, free cash flow bridge. Free cash flow was up CHK 169 million compared to prior year, almost entirely driven by a different phasing of tax payments. I'd like to make just one other comment on this page. If you look at the net working capital change at CHF 346 million, this looks like quite a sizable number. It's actually very similar to what we had last year, and it's reasonable to expect that most of this will revert over the course of the year.

The minus CHF 50 million that you see in the year-over-year bridge in change in defined benefit obligation with -- in connection to the pension expense, they are expected to grow to the minus CHF 90 million full year effect that you also have as a non-cash effect in EBITDA, and you'll see the balance here in the year-over-year numbers with obviously no year-over-year impact on free cash flow.

Moving on to Page 26, net income bridge. EBITDA was up by CHF 112 million, but that does not fully translate into net income year-over-year. Net income year-over-year CHF 64 million. On the way from the EBITDA to the net income, the only difference that is relevant is the lower financial result in the first half of this year compared to prior year. We had a particularly high financial result in the previous year as the financial result last year was impacted by mark-to-market of interest rate swaps. We didn't have this year. And so, the CHF 112 million EBITDA increase translates into a CHF 64 million plus on net income.

Finally, Page 27, guidance. Given this set of numbers, we obviously confirm the guidance for the year for revenue, EBITDA and CapEx. There is just 2 points I'd like to make. Point number 1, essential to the guidance this year, as you know, is the balance between service revenue decline and cost savings in the Swiss business, with some upsides and some risk on the side. And this balance between service revenue and cost savings is very much intact, even if service revenue looks a bit lower, and at the same time, cost savings look a bit higher than originally anticipated.

Now second point, the guidance is based on the euro-Swiss franc exchange rate of 1.0. So given where the Swiss franc is going at the moment, we are obviously trending towards the lower end of this range. In particular, on revenue, 1 basis point of exchange rate accounts for CHF 25 million exchange.

So finally, upon meeting these targets, we plan to propose again a dividend of CHF 22 per share.

And with that, I hand back to the operator.

[Operator]

[Operator Instructions] Let's first go to Polo Tang.

[Polo Tang, UBS]

It's Polo Tang from UBS. I just have 3 quick questions. Firstly, can you comment on the Swiss competitive dynamics in Q3? So have you seen any changes in the market post Sunrise increasing prices by 4% in July and Salt recently announcing 3% price rises in mobile? And were you surprised by the move by Salt?

Second question is just on cost savings. So your cost savings are running ahead of expectations in terms of the run rate, but is this because you're doing better on gross savings or because cost inflation is lower than expected?

And my third question is really just about Swiss EBITDA growth. So you're seeing underlying Swiss EBITDA growth amid stable revenues, whilst at the same time, realizing cost savings. But is there any reason why Swiss EBITDA cannot continue to grow as we look into 2024 and beyond? So won't -- so EBITDA growth actually accelerate because, for example, you flagged your intention to lower promotions even if you're not raising pricing. And you've also got easing cost inflation situation that leads to hard cost savings from 2024. Or are there any other moving parts to consider?

[Christoph Aeschlimann, CEO]

I'm happy to start with question #3. Obviously, we are not trying to give a guidance for 2024 or 2025 at this point in time. I would like to refer to what I said on the guidance. The main drivers for the Swiss business and Swiss EBITDA going forward is the balance of service revenue and cost savings, and it's most important focus to manage that balance. I wouldn't go any further. Obviously, there's always moving parts beside of that balance like wholesale and IT growth, et cetera. But we'll talk about when we get there next February.

On cost savings, a very good question. It's hard to pin down in detail, to be honest, what comes from reduced -- sorry, increased gross savings and reduced inflationary pressures. My best guess would be that most of it is from increased gross savings rather than reduced inflationary pressures. Because the inflationary pressures are pretty clear. It's a 2.6% salary increase. That was -- that came in exactly as expected. Energy costs we knew about. So it's -- if anything, it's more on the gross savings side than on reduction of inflationary impact.

[Eugen Stermetz, CFO]

Again -- and maybe on the Swiss competitive dynamics. We don't see a lot of changes. We see some -- or less promotional activities on the main brands. But despite price increases, the promotional activity, especially on second brands is as aggressive as ever both in price points and duration. And we expect this to stay pretty much the same now until the year-end. So you'll see how it develops. What I would say competitive dynamics are pretty much unchanged, even though competitors have slightly increased prices, because the market movements are mainly driven not by, let's say, regular list prices, but mostly by the promotional behavior of the second brands. And so, to see an improved dynamics, you would need to see an improved promotional behavior on second brand.

[Operator]

Next question.

[Unidentified Analyst]

It's [Yori Yoso] from Citi. The first one is a follow-up on Polo's question around pricing, and maybe from a slightly different perspective. You mentioned, Christoph, in your opening remarks the intention to be perhaps a bit less promotional going forward. How quickly can this better from -- let's say, pricing contribute to that service revenue performance? Or are you worried that the mix will still be skewed towards the second, third brands, and therefore, these effects cannot be as significant when it comes to the overall service revenue trends?

And then -- and perhaps on that, if you could also give us a bit of an indication of how quickly do people turn to refresh their offers in Switzerland, because I'm getting some go way beyond the 3-year contract period without ever refreshing their tariff transfer. I was curious to understand the dynamics of that.

And then the second question is around Fastweb. Perhaps one element which is quite disappointing is the acceleration of the retail broadband losses. So maybe if I can ask a question in 2 parts. The first one is, do you envisage that to stabilize or could it get worse? And then the second element is, how confident are you with the visibility you have on the wholesale and the business side that could mitigate even if the consumer element continues to get weaker?

[Christoph Aeschlimann, CEO]

Okay. Yes, I'll start with Fastweb. So it's completely right that the acceleration of the broadband loss is not particularly positive, and we are looking into this in great detail to see how we can stabilize the loss of the broadband lines on the B2C business. But it is a fact that the Italian market, especially on the broadband side, is very competitive, and the competition is further increasing with new market entrance like Enel, Sky or Iliad. So I expect probably similar trends in the coming quarters. And that is why it is so important that we focus on the wholesale side to be able to compensate at least the number of lines.

Obviously, a wholesale line is not generating the same amount of revenue as a B2C line, but that we are able to at least partly offset the loss we have on the B2C broadband side with an increase in wholesale. And on that side, we are very confident that we can continue our growth on the wholesale side because I think we have a competitive offering in the market. We have won many new customers. Or many of the new entrants are booking lines with Fastweb, which is very positive and then compensate at least part of this loss. And the other compensations come from growth in -- on the mobile side of B2C, which overall has led to the growth -- growing B2C segment revenue in Italy even in Q2 despite the losses we have on broadband.

Now on the promotional activities in the future and the impact on service revenue trends, it's a very hard question to answer. So we will try to be less promotional. We are at least thinking about further reducing promotions. But obviously, the impact on the service revenue trend overall then depends on how well we are able to maintain our RGU base being less promotional or how much RGU losses you're willing to accept to compensate for, let's say, higher price points. And this is -- this mix how it evolves exactly, it's very hard to predict and obviously depends on customer behavior in the next quarters. And we will see how it develops over time.

I don't know -- Eugen, do you want -- I missed a second. So...

[Eugen Stermetz, CFO]

So did I, so did I. So the instruction would be to repeat it. I'm sorry.

[Unidentified Analyst]

No, those are prepared questions actually. But if I could ask a follow-up on the service revenue side in Switzerland. Just curious why you would be less promotional if it doesn't really move the needle that much in terms of service revenue?

[Christoph Aeschlimann, CEO]

Well, I mean it will move the needle. Assuming we can keep the same RGU performance, it will obviously positively impact the service revenue over time. And we just believe that the promotional activities we've seen on second brands, especially in the third quarter last year -- or fourth quarter actually around the Black Friday month are not sustainable in the long run. So this is why we are looking into this. But the assumption -- let's say, positive impact on service revenue is assuming that you can maintain RGU performance, which then depends on the behavior of the other market participants.

[Operator]

We go to next question.

[Nuno Vaz, SocieteGenerale]

This is Nuno from SocieteGenerale. Just 3 questions from my side. First on the B2B side since there were quite a few questions on B2C already. We noticed this quarter that there's been a bit of a slip in terms of wireless versus wireline trends. It seems wireline was quite a bit weaker this quarter, while we've seen wireless sort of perform a little bit better and we've seen quite strong net adds on wireless. So I was wondering what's driving this net adds on B2B and also the weakness on wireline.

And then a question on the working capital because you mentioned a lot of prepayment of expenses. So I was wondering what exactly is driving this? And is it coming from Switzerland or from Fastweb? And where would we land in by year end? Would we expect to see another sort of minus CHF 60 million overall net working capital?

And the final question is just on this -- because we saw press reports recently that you might have received a final decision from COMCO on this point-to-point investigation topic. I don't know if you can say anything on this, but it would be interesting.

[Christoph Aeschlimann, CEO]

I can start with the working capital one. I didn't get the full question, but I think I got the end. So on net working capital, as I mentioned, I would not read too much into the quarterly numbers. Most of what we have seen in the first half of the year will revert back by the end of the year and will not have an impact on free cash flow for the full year. We had pretty much the same story in the previous year. There is very little in terms of structural effects on networking capital, and this is why we can say so with confidence.

There is 2 bigger elements in the year-over-year change. One of them I mentioned, that's the pension, the pension position. That is a non-cash increase in EBITDA and has a respective impact -- negative impact when it comes to going down to free cash flow in the end. And then at the end of the last year -- so if we look at the full year, at the end of the last year in Q4, we booked a CHF 75 million regulatory provision, which will give you a respective uplift in EBITDA year-over-year, which is non-cash and which will show up, obviously, as a negative net working capital effect in the full year. But all the rest will pretty much even out over the quarters. So that's on working capital.

Then it was COMCO, I believe. Yes. So on the COMCO side, we have received preliminary instructions from COMCO what they want to rule, like a preliminary ruling. We are currently analyzing the preliminary ruling. And according to the process, we can actually comment and request for changes or points which we are not in agreement. And then the COMCO will issue the final ruling probably just before Christmas or early 2024. And then this final ruling is actually what really counts. So at the moment, we cannot comment on anything, but we are continuing our FTTH rollout in point-to-point. So we don't expect major changes on the rollout side irrespective of the ruling.

And maybe the third or rather the first question on B2B service revenue and the relative contributions of wireless and wireline and RGU and ARPU over the previous year. I did mention that on Page 21, where we show the year-over-year changes in service revenue in B2B. There is indeed quite a marked effect, at least given that we are talking about low numbers anyway, on wireline ARPU with minus CHF 8 million.

Now what you need to know is behind the B2B numbers, there is actually 2 different segments. There is the SMEs, small, medium enterprise segment, and the corporate segment. The SME segment behaves pretty similar to the B2C segment both in annual evolution and also in tariffs in terms of many, many -- tens or hundreds of thousands of contracts. The corporate side is a much more chunky part of the business.

So year-over-year evolutions both in RGU and ARPU can be driven by changes in individual large accounts, so renegotiations of contracts with a large customer, either in terms of pricing or in terms of number of RGUs. And this very much impacts the year-over-year comparisons. So I would not read too much into the quarterly fluctuations on the B2B side because it's very much driven by large contracts being renegotiated. Obviously important is the overall trend, and that has been pretty steady, sorry, over the last couple of quarters.

[Operator]

The last question.

[Usman Ghazi, Berenberg]

This is Usman Ghazi from Berenberg. Just going back to the answer to the B2B question. I mean, I guess if I look at the Swiss service revenue trend, which is at this minus 1% level, which you had indicated post Q1 that, "Look, this is probably a reasonable level to be at given last year benefited from some roaming benefit in the revenues." However, that minus 1% -- I mean, consumer is stable, right? I mean, this is really being driven by B2B.

In B2B, you're saying that Q2 -- don't look at the Q2 performance because driven by some chunky corporate renegotiations. So I mean, if the B2B trend kind of improves over the next few quarters, is it possible that Swiss service revenues kind of come in at sub minus 1%? Or is that -- would that be too optimistic? And if so, why, please?

And then my second question was on Huawei. I know that Swisscom doesn't have a lot of exposure in mobile, but could you clarify if you have any exposure there on the fixed side? And what the latest is on the Huawei debate in Switzerland, please?

[Christoph Aeschlimann, CEO]

Okay. So on the B2B service revenue, I'll start with Q3 and Q4 in the service revenue evolution overall. So as you mentioned, Q3 and Q4 2022 was positively impacted by the final roaming rebound after the COVID years and some other factors. So back then already, I cautioned against taking this as the run rate going forward into 2023.

Now within 2023, I think the quarterly numbers we have seen in Q1 and Q2 are a reasonable estimate for what to expect for the rest of the year. At the beginning of the year, we talked about a minus CHF 50 million B2C plus B2B service revenue decline when we talked about our guidance. If you look at the numbers now of Q1 and Q2, it looks like that this number will be a bit higher because B2C is not exactly at 0, but slightly declining with minus 5% and minus 3% in the first and in the second quarter.

For B2B, I think the trend is stable. The -- I'm not saying necessarily that the quarterly evolution in B2B will change quarter-over-quarter. What I'm saying is the individual contribution, if you break it down into wireless and wireline and into RGU effect and ARPU effect, these things are very much driven by individual contracts being renegotiated. So I wouldn't take the composition within the B2B decline for granted, but the overall trend is certainly what we expect for the rest of the year.

Having said that, with slightly higher service revenue decline than the original CHF 50 million mentioned at the beginning of the year, are equally matched by our expectation that cost savings will also be a bit higher over the full year. So the basis of the guidance -- and that's why I mentioned it at the end, the fundamental basis of the guidance for this year is a balance between these 2 factors, and this balance is very much intact.

Okay. So regarding Huawei. So as you pointed out, we -- on the mobile side, we have nearly no Huawei equipment in use. It's mainly focused on the wireline side. We are very happy with Huawei as a supplier. It's good quality. They're delivering what we expect of them. We use the equipment predominantly on the FTTS side. So as we are now overbuilding the FTTS footprint of FTTH, we will continuously and then -- remove the copper infrastructure over time. This exposure will decline over time.

But at the moment, we are -- I mean we have a stable situation with them, and we are very happy with their performance. There is some ongoing discussion in Swiss parliament to forbid Huawei equipment in Switzerland. At the moment, it is stalled in the Senate. And we will see how this discussion goes over time now, what the decision will be of parliament. But in any case, we expect even -- should there be a ban, to have timelines over time, sort of grace period to actually deal with the situation properly. So at the moment, I'm not overly concerned with this topic.

[Usman Ghazi, Berenberg]

Could I just ask a follow-up on this? When you say stall -- the debate is stalled in the Senate, is there -- do you have an expectation of when and if any conclusion to this debate is going to take place?

[Christoph Aeschlimann, CEO]

Yes. So it was discussed in a subcommission of the Senate in the summer session, and they requested additional information to the government now. And we don't exactly know when this report of the government will come. But until the government has done -- or provided the report to the commission, the discussion is sort of paused in the Senate. It's hard to predict how much time this takes, but it probably will be at least a couple of quarters, I would expect.

[Louis Schmid, Head, IR]

Thank you. And with that, I would like to conclude today's conference call. If you should have any further questions, please do not hesitate to contact us from the IR team. Speak to you soon, and have a nice day.

[Christoph Aeschlimann, CEO]

Thank you very much.

[Eugen Stermetz, CFO]

Thank you. Bye, bye.