Swisscom AG

SIX:SCMN

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Welcome to the 2022 Q3 Results Conference Call hosted by Christoph Aeschlimann, Eugen Stermetz and Louis Schmid.

Louis, the floor is yours.

[Louis Schmid, executive]

Good morning, ladies and gentlemen, and welcome to Swisscom's Q3 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. As usual, our CEO will start the presentation with the first 2 chapters. Chapter 1, a quick overview with the highlights, the operation and financial performances of our Q3. Then in Chapter 2, an update on our network activities, B2C and B2B operations and financial results in Switzerland before discussing Fastweb's Q3 results operationally and financially. In the second part of the presentation Eugen will run you through Chapter 3, the Q3 financials including the guidance for the full year 2022.

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

[Christoph Aeschlimann, executive]

Thank you, Louis, and welcome also from my side to this presentation. I will directly move to Slide 4 of the slide deck. We had a solid underlying EBITDA in Q3 and 9 months into the year we stand with plus CHF 17 million underlying EBITDA evolution over the year until now. We were able to win many tests again in the third quarter. We have the best shop, best online app and the best broadband in Switzerland, which is a very pleasing result. Interesting or I would say very nice evolution with B2C with a stable revenue in the last quarter on the service revenue side and also B2B service revenue decline has been reduced substantially and overcompensated by our growth on the IT solution side. On the FTT rollout side I will come later on the next slide about the COMCO standings and will go more deeply into our fiber rollout target. Fastweb is growing nicely in the last quarter as well both on revenue and EBITDA.

And we have adjusted our revenue outlook due to the currency CHF o-Swiss franc to CHF 11.1 billion, but with a stable outlook on EBITDA. I will now move to Slide 5 where you can see the Q3 market performance. We have a very nice evolution on the postpaid side with an accelerated net adds of plus 48,000. Broadband was roughly stable in the last quarter and also TV slight decline. But we focus on the broadband and TV side more on the value strategy and we've reduced promotional activities and accept a slight decline in the user base. The FM substitution continues on the fixed voice side, but has slowed down in the past quarter, which we will see how it evolves over the next quarters now. Wholesale has been stable in the past quarter and performed quite nicely. On the Fastweb side, we have our 3 growth engines which performed very nicely. More on that in the section on Fastweb later on.

The biggest, let's say, progress we did on the mobile side was plus 132,000 net adds mostly coming from the B2C segment. We also did great progress on the wholesale side with 32,000 new lines. And on the broadband, we have a slight decline because we focus on a value strategy also in the Italian market and want to sustain our ARPUs and accept this decline on the broadband base, which is largely overcompensated by the growth on the wholesale side. On Slide 6, you see the Q3 financial performance. We have a net revenue in the last quarter of CHF 2.7 billion, which is 1% lower than Q3 '21 and a total revenue of CHF 8.2 billion, which is also slightly lower by 1.4%. On the EBITDA side, we stand at CHF 1.15 billion for the past quarter, which is stable compared to last year and CHF 3.341 billion on the 9-month standing, which is slightly lower than previous year. On the right-hand side, you can see the Q3 EBITDA bridge where you can see the underlying performance of the Swiss and Fastweb business.

Both Switzerland and Fastweb have a growing EBITDA contribution, which was then compensated by some exceptionals and other EBITDA changes in the group in other companies, ending at CHF 1.15 million EBITDA for Q3. On the net income side we are at CHF 429 million for Q3, which is lower by 12%. On a comparable basis without all the exceptionals, we are at minus 7%. The exceptionals I think related in the net income, Eugen can go into more details on this, but it's mainly related to FX impact and higher depreciation and only CHF 5 million come from the underlying business. Now I move on to Slide 8 moving to the standing of the FTTH rollout and the COMCO investigation. So the process with the COMCO is still ongoing, but we expect now a significant share of point-to-point topology and we unfortunately will not expect a decision until the year-end as we have previously communicated. So now we expect a decision earliest in '23, maybe in -- hopefully in Q1, but it might take still longer.

And for this reason and in the interest of our customers, we have decided to change our rollout predominantly to a point-to-point architecture because we do not want to build additional lines which cannot be used by our customers, which is not in the interest of them and neither of Swisscom. However, we will keep CapEx levels stable at the previously announced level of CHF 500 million to CHF 600 million and adjust the rollout speed accordingly in relation to the new or increased cost linked to point-to-point and we now have a new rollout target or coverage target of 50% to 55% in 2025 and we have announced a long-term ambition of 70% to 80% coverage for 2030. So also noteworthy is the discussions with Salt already ongoing to adapt the existing point-to-multipoint contract to a point-to-point contract so that Salt can also take advantage of the newly built turf in the future.

On Slide 9, you can see a recap of the B2C strong commercial performance. As you remember, in Q2 we launched the new blue portfolio. We are very happy with the performance of the new portfolio in the market. We have a good sales momentum. We have CHF 4.5 million RGUs in the new blue portfolio per end of Q3. We have record low churn rates at the moment. And we have also been able to reduce promotions under the Swisscom brand and mostly Wingo is also performing very strongly in the market, which led to the overall very excellent result on the B2C side. On Slide 10, you see the standing of where we are in the shop renovation. So we decided a couple of -- over last year that we will renovate all our shops in Switzerland with the new concept. By the end of the year, we will have renovated 50% of the shop base. There are different zones now with more for service and advice and welcome section. The shops perform very nicely.

We see that we have higher average sales in the new shops and we will continue to roll out over the coming 2 years and were also able to win the connect shop test this year with the newly built shops. Also in the online channel, we are making great progress. We have won the connect app test. We're #1 in Switzerland, but also #1 in CHF ope with 979 points, which was very pleasing result for us and I think a proof of our strong position to serve our customers not only in the physical space, but also in the digital channel. Our latest NPS study has also showed that we have made progress on the NPS side and have now quite a substantial lead over our competitors in the market. This leads me to Slide 11 where you can see the overview of the B2C operational results so I will first talk about wireless and then about wireline. So on the wireless side, we now have 3.2 million RGUs. So we have a growing RGU base mainly driven by the second and third brand growth and the blue penetration of 44%.

And as you can see, we have again been able to reduce the churn rate and ARPUs are slightly lower on the postpaid side due to the brand shift between the Swisscom main brand and the second and third brands. On the wireline side, we have a slightly different picture. So RGU base is stable slightly decreasing, but churn rates are also lower in Q3 than in previous quarters. And on this side, we have been able to increase ARPU slightly, which then compensates the minor loss on the RGU side. Moving to B2B on Slide 12. You can see that we have been able to not stop, but slow down the service revenue decline. On the B2B side we have minus CHF 7 million if you compare quarter over quarter with a revenue of CHF 399 million in Q3, which is an excellent result. And at the same time on the IT solution business side, we have been able to grow CHF 14 million in revenue and now stand at CHF 288 million revenues in Q3, which is a 5% growth in this section and overcompensates the service decline on the telco side.

So on the Slide 13, you can see where we stand on operational excellence and cost savings. We have made some progress in Q3 and as we have announced in the last earnings call in Q2 where we said that most of the savings will come in Q4. This you can see again the same picture on this slide today. Due to seasonality and the launch of blue with higher marketing cost, the cost savings we made progress but not completely on a linear fashion, but we are completely in line with our plan. All the initiatives are on track and we confirm that we will achieve the CHF 100 million cost savings by end of Q3 because it is important to us to execute these cost savings initiatives in a way not to match perfectly each quarter, but actually so that they create the biggest impact that we achieve the overall yearly results. And on that side, I would say we are on track for the full year ambition.

Now on Slide 14 you can see the overall Swisscom Switzerland financial results. We had CHF 2.05 billion revenues in Q3 and flat revenue 9 months into the year with CHF 6.152 million. On the EBITDA side we achieved CHF 917 million of EBITDA, which is a 4% growth quarter-over-quarter and standing at CHF 2.665 billion on the 9 month end of Q3. So overall, we are very pleased with the evolution of Switzerland in this year 2022. I will now move to Fastweb. As I mentioned previously, Fastweb has 3 growth engines, which you can see on this slide. First on the top right corner is the wholesale business where we have been able to win many new customers or new players, which are entering the Italian market with wholesale lines from Fastweb. This has led to a 76% RGU growth and also a nice revenue increase on that side. Then we have the B2C business where the main growth engine is the mobile business, which is growing nicely.

We are actually the second best performer in the market behind Iliad, which shows that the Fastweb offer is compelling for customers and we are continuously growing our customer base. The third growth engine is the enterprise business where we are growing in all segments both in wireline, wireless and also on the IT solution side where we have been able to win many new customers in all of those segments in the past quarter. We have a slight decline on wireline consumer, which we accept because we focus on actually a value strategy keeping ARPUs as stable as possible and not entering into the crazy price war in the Italian market. On Page 16, you can see the consumer performance and what I just mentioned before. So we have a slight decrease on the RGU side -- in RGUs on the fixed business with a 3% decrease, but which is largely overcompensated by the growth on the mobile side where you can see we have a 27% growth in the RGU base nearly reaching 3 million subscriptions by end of Q3.

What is also encouraging is that the ultra-broadband subscriptions are continuously rising and we were able now to increase it to 85% UBB penetration. You can also see on the bottom right side that the FMC penetration in the broadband base is continuously improving and we achieved a 4% increase on FMC penetration. Now on Page 17, a quick word about enterprise and wholesale performance. So enterprise is performing very nicely with a 3.5% growth bringing us to CHF 239 million. They have been able to win many new customers especially on the mobile side and this also shows us that our ambitions to grow in mobile on the enterprise side are completely valid and we are able to win customers and we will continue to execute this strategy in the coming quarters.

As I mentioned on the wholesale side, we have signed several new customers in the past month and were able to substantially increase both the number of lines, which you can see at the bottom right with 76% growth in the connected lines and a 31% growth in revenues bringing us to CHF 80 million revenues in the last quarter in the wholesale business, which shows us that we can compensate the loss we have on the B2C broadband side. We are compensating this with the growth on the wholesale side and this strategy is working out quite nicely. So overall on last slide on Slide 18, the Fastweb financial results. You can see that Fastweb has generated CHF 603 million revenues in the past quarter, which is a 5% growth in Q3 bringing us to CHF 1.8 billion on the yearly with a growth of 3%. Also on the EBITDA, we were able to make progress plus 3% in the past quarter and plus 4% until the 9 months with CHF 628 million of revenue, which we are very happy with. Looking at the evolution of the market in general in Italy, I think Fastweb we can say is performing excellent and way above the peers in the market.

With this, I hand over to Eugen now for the financial results.

[Eugen Stermetz, executive]

Thank you, Christoph. And good morning, everybody, also from my side. Happy to walk you through the numbers as usual. Particular pleasure today as this is overall a very solid set of results as you have already seen. I'll start on Page 20 as usual with group revenue. First, group revenue was down by CHF 118 million year-over-year. Obviously there is a huge FX effect of minus CHF 146 million due to the strong Swiss franc or rather weak CHF o, however you want to see this. So with that out of the way, underlying business grew by CHF 28 million with Swisscom Switzerland basically flat and Fastweb growing with CHF 50 million. If we look at the individual segments within Swisscom Switzerland. B2C was down CHF 19 million in the first 9 months. The overall picture has been pretty stable over the quarters. Very little service revenue decline or actually almost flat and each quarter some negative contribution from various other revenue categories.

In the first 2 quarters, it was lower on hardware sales and now in the third quarter, it's a lower contribution from other revenues. But all in all, very stable and the big news obviously the very benign service revenue decline or even increase in the third quarter as we shall see on the later pages. B2B revenue up by CHF 55 million as it was during the whole year. A mix of service revenue down, but a very nice increase in revenues from IT services or IT solutions and the third quarter was no exception in that respect. So wholesale revenues first 9 months down by CHF 37 million, but the last quarter -- sorry, the third quarter basically flat with minus CHF 2 million. So the effect we see here is what you all know, the second half of the loss of the MVNO agreement with UPC. This effect is now behind us and so we should enter more stable territory on the wholesale side going forward.

Then on to Fastweb; CHF 50 million plus in the first 9 months, plus 2.7%. Very robust third quarter with revenue growth of CHF 31 million in the third quarter. This was due to a very small increase in consumer so consumer is more or less flat as you know, but strong growth in the enterprise segment with plus CHF 9 million and in particular strong growth in the wholesale segment driven very much by the increase of UBB lines, as Christoph already mentioned, and also an increase in CHF o revenues in that quarter. So we are very pleased with Fastweb's third quarter. Then finally, in other we have a minus CHF 24 million, which is basically due to the deconsolidation of a small subsidiary at the end of last year. So on to Page 21 where we look at the revenue evolution in Switzerland, plus CHF 2 million all in all Swisscom Switzerland. If you look at the individual component, obviously what stands out is service revenue decline not so much for the fact that it's declining, but for the fact the decline is so small.

So we had minus CHF 46 million in the first 9 months, almost all of which coming out of the B2B segment, B2C just down by CHF 1 million in the first 9 months so actually flat. Compensating for that, solutions revenue up CHF 56 million, about half of which is organic and half of which is non-organic. The third quarter we see normal contribution similar to the first 2 quarters. Hardware sales up CHF 25 million. That's actually a mix of B2B up and B2C down, quite similar to what we saw in the previous quarters. Wholesale minus CHF 37 million, we already talked about. And then other revenue was over the first 9 months basically flat, but with some variation over the quarters. We had in the first half of the year an increase in cinema revenue due to the end of COVID restrictions and now in the third quarter we have a decrease compared to previous year due to handset insurance commission kickbacks that were pretty big in the third quarter last year and not as big this year.

But all in all flat contribution from other revenues, which is the plus 2% or flat revenues all in all. Probably more interesting top right the usual picture, quarterly evolution of service revenue. So you can see in the third quarter we actually had a plus of CHF 5 million in B2C service revenue, which is obviously very positive and it's probably the first time in years that we see a positive figure in that line. Also B2B service revenue declined with minus CHF 7 million, quite small. So I guess the obvious question that you're going to ask is this going to last? Before I answer that question, let's dive into the individual effects and then I'll get back to this question. If you look down at bottom right of the page, B2C plus CHF 5 million. So in wireless we have the usual mix, a positive impact on revenue from increased postpaid subscribers in particular due to second and third brands and then the mirror image on the ARPU side, the ARPU dilution out of this very same development. And these 2 effects balance out quite nicely.

Most interesting part is what is not on this slide in this quarter and these 9 months. What is not on there is what we had in last year, an increase in fixed mobile convergence discounts so this does not have a negative impact anymore as it has in the past. We also have no impact from a worsening of the promotional environment. Make no mistake, promotions are still out there and price competition is pretty stiff, but it's not worse than it was before. So we have no negative effect any more from this certainly not in the third quarter so B2C wireless is actually stable. On the wireline front, we have the usual structural effect of voiceline losses minus CHF 5 million. But overcompensating for that even plus CHF 9 million is an increase in ARPU, something we haven't had in a while. Some of the reasons are upselling of sports packages content and also selective reductions in discounts and various fees. So all in all a bit higher average prices than in the same quarter last year.

Just 1 word on wireless on the B2C side. There is an element of roaming in there in the third quarter. So roaming was up compared to last year obviously because travel increased significantly after the COVID years and that contributed to the ARPU effect. On the B2B side, it's a bit the usual picture with 1 exception and that's also the ARPU in wireless. We would expect a decline here. As you know our previous or most recent numbers, we typically have price decreases when agreements, contracts with customers are being renegotiated. We have a flat number here also for the first time in a while, but this is actually also due to roaming. So roaming had a positive impact also on the B2B wireless in the third quarter, which takes me back to the question is it going to last? I would say all in all what we should expect is if you look at the Q2 and Q3 numbers, Q2 minus CHF 19 million and Q3 minus CHF 2 million, probably half of the difference between the 2 is due to roaming.

So a normalized figure for Q3 if we strip out roaming would be probably smaller double-digit number. So looking forward I would say on the B2C side expecting a flat number is reasonable, but on the B2B side we would certainly expect further pressure and revenue pressure to remain. I move on to Page 22, EBITDA. So all in all EBITDA down by CHF 124 million. But a long list of post exceptionals, most of which you already know from the first 2 quarters. So the only news here is a CHF 30 million effect compared to previous year where we booked a provision last year and the currency effect obviously, which was pretty strong in the third quarter given the development of the Swiss franc-euro exchange rate. Leaving exceptionals aside, underlying EBITDA is strong with plus CHF 17 million in the group, CHF 19 million from Swisscom Switzerland, CHF 28 million from Fastweb and minus CHF 30 million in other operating segments.

I walk you briefly through Swisscom Switzerland. On the B2C side, B2C was up with plus CHF 8 million EBITDA. It's the mix that we saw over the whole year. Service revenue essentially flat, lower subscriber acquisition cost and then in each individual quarter, there was one or the other, let's call it, special effects. So in the first quarter, we had high cost savings compared to previous years and the positive cinema effect. In the second quarter, we had higher marketing expense which led to the minus CHF 7 million in the second quarter in connection with the blue launch. And now in the third quarter, we have the lower other revenue line. But all in all obviously we see service revenue that is flat, you shouldn't expect much different than a flat or slightly increasing EBITDA line on B2C. B2B also flat basically with minus CHF 3 million. The only maybe exception here is the third quarter with plus CHF 12 million. This is due to an increased profitability in the solutions business so lower costs this quarter in the solution business and increased profitability.

On to wholesale. Wholesale minus CHF 10 million. That's essentially a net effect of the effect of the MVNO loss and an improvement in other access services. The roaming spread is jumping around a little bit over the quarter and obscuring the picture, but the net effect is in the end over the first 9 months loss of MVNO and an improvement in other access services. Infrastructure and support functions up CHF 24 million. That's basically our cost savings that accumulate over the year. A 0 in the third quarter due to seasonal accruals, but nothing special here. Fastweb obviously very positive, CHF 28 million plus over the first 9 months. That's a plus 4.3%. Also in the third quarter CHF 7 million up despite a regulatory contribution that was in third quarter of last year. This plus in EBITDA is thanks to strong revenue growth that we talked about and about flat OpEx compared to the previous year. If you look ahead towards the end of the year, that leads to a Fastweb EBITDA growth that we expect in the area of 4% to 5%.

At the outset of the year, we talked about 5%. Energy costs became a little bit bigger than we expected by then. But all in all very solid contribution that we expect here 4% to 5% year-over-year for the full year. And finally, in the other segments, we had a minus of CHF 30 million, which is mainly due to lower EBITDA contribution from cablex in intercompany business and also higher pension accrual costs compared to the previous year. I'll move on to EBITDA Swisscom on Page 23. Not much news here in the quarter. Subscriber acquisition costs were lower than previous year, something that you know already. Our payments were lower in the previous year so not much news here either. Cost of goods services were higher, in line with the higher hardware revenue from the B2B segment. Most importantly, indirect cost savings plus CHF 37 million over the first 9 quarters (sic) [ months ].

Christoph already pointed out that we are fully on track to the CHF 100 million by the end of the year and obviously cost in the solution business grew as revenue grew there as well. In the third quarter, you see there is only a minor growth in costs and this explains the improved profitability that I talked about when I spoke about EBITDA. On to capital expenditure on Page 24. So all in all, we are on track to our full year guidance of CHF 2.3 billion. A bit behind on wireless and fiber. Wireless we made very good progress, as Christoph already explained, but maybe not as much progress as we would wish to. We still have a bit of a backlog of building permissions on 5G sites and fiber, we are a bit behind due to the COMCO investigation. On the other hand, we have higher investments that were planned for backbone transport and infrastructure and IT. So all in all we are on track to the guidance.

Free cash flow on Page 25, we're down CHF 196 million compared to previous year. Now this is obviously driven by the operating free cash flow proxy, which is down minus CHF 113 million, but this includes all the exceptionals. So this is reported numbers obviously without the exceptionals. This number will be up so that's the major driver. We have a small decline out of change in networking capital minus CHF 78 million versus previous years, but this has completely normalized. Some of you might remember in the second quarter we had a much higher number here. I already mentioned back then we have 1 structural effect that is not going to go away for the rest of the year, but all the other things should balance out and we already see that right now. And then we have 2 balancing factors. One is pension, positive effect from pension plus CHF 63 million. We are back to normal here. This year nothing special and we paid somewhat higher taxes than in the previous year, which is just a phasing issue.

On to net income on Page 26. Net income in the first 9 months is down by CHF 322 million, which sounds like a very big number, but we need to look at the details. If we start from EBIT, EBIT is just down by CHF 83 million, again reported numbers including the exceptionals. And then obviously this high decline in net income is driven by the extraordinary financial result last year that we talked about already at length in the previous quarter so that I'm not going to comment any longer. That's minus CHF 185 million. And then we had a positive effect on tax expense last year in the third quarter that we already highlighted last year with CHF 57 million impact so that makes up the big number. If you strip out all of this that I talked about, net income is actually up in the first 9 months. So that finally takes me to Page 27, the guidance. First of all, and Christoph already mentioned it, we adjust the revenue guidance from previously CHF 11.1 billion to CHF 11.2 billion to about CHF 11.1 billion.

The only reason for that is the weaker CHF o compared to the Swiss franc and the translation of the Fastweb revenue into Swiss francs. No other reason for that. We confirm the EBITDA guidance of about CHF 4.4 billion compared to the previous quarter. There are 2 obvious effects to take into account. One is that service revenue is again stronger than we originally expected and the other one is the declining CHF o-Swiss franc exchange rate, which gives us a hit on the translation of the Fastweb EBITDA into the group results in Swiss francs and the overall result of these 2 effects is a net 0. So we stick to the EBITDA guidance of CHF 4.4 billion. And we also confirm the CapEx guidance of CHF 2.3 billion, which finally takes me to the final maybe most important point. If we reach these objectives by the end of the year and we are confident we will, we confirm our plan to pay out a dividend of CHF 22 per share early next year.

And with that, I hand back to the operator.

[Operator]

[Operator Instructions]

[Polo Tang, analyst]

It's Polo Tang from UBS. I just have a few quick questions. The first one is just on Swiss service revenues. Can I clarify what you think the normal annual run rate will be? So previously, you talked about minus CHF 200 million, then you narrowed it to minus CHF 100 million to CHF 150 million decline last quarter. So are we now talking about an annual run rate of maybe minus CHF 50 million for service revenues going forward.

Second question is really just about Swiss EBITDA. If you adjust for the one-off PayTV fine in Q2, then the Swiss business has actually seen positive underlying EBITDA growth in the past 3 quarters. So if your Swiss service revenues are nearly stable, you've got growth in IT Solutions and continued cost savings. Is there any reason why Swiss EBITDA growth cannot continue to be positive going forward? And my final question is really just about Salt, because they've changed their terms and conditions to include the option of CPI-linked price increases. So I was just interested in terms of what your opinion was on this move? And do you think that this is something that Swiss consumers would be willing to accept?

[Eugen Stermetz, executive]

Polo, this is Eugen. So I'll take the first question on service revenue run rate. I think you're right. If you look at the numbers of the most recent quarters, it is -- it has become clearer at least we do hope so that an expected service revenue decline for the near future should be much lower than what we saw in the last 2 years or so, where we had rates, as you mentioned, of maybe 200 -- minus CHF 200 million or so per year. What it will be exactly and what we do expect exactly for the year 2023? We will explain in the full year conference in February. But you're obviously right, we are -- as we stand right now, we are far from the minus CHF 200 million that we had in the past and that we originally expected for this year.

Maybe I hand over to Christoph for the CPI-linked question on Salt, and then I'll finally deal with the EBITDA question.

[Christoph Aeschlimann, executive]

This is Christoph. Just some thoughts regarding to CPI-linked pricing of Salt. Obviously, we are also observing this move and analyzing it at the moment. Regarding to inflation, I think we can say that our first ambition is actually to not allow inflation on our cost base to basically try to push away everything that we can to not increase our cost base, then we will try to compensate the inflated cost first and then the last resort would be increase consumer prices, which we are also investigating at the moment what is possible and how we -- sort of what we possible moves. But it will be our last resort, I would say, and not my preferred option moving forward. But obviously, it's an interesting move of Salt, which opens us new possibilities also on our side, and we will see how we will execute this in the next year.

[Eugen Stermetz, executive]

Finally, your second question on EBITDA evolution in Swisscom Switzerland looking forward. I mean, obviously, I wouldn't like to go into too much forecasting here, but we all know the factors driving EBITDA evolution in Swisscom Switzerland. This is a service revenue decline, which we talked about and it's cost savings and the net balance of those 2. Now obviously, we continue to work very hard on the -- improving the efficiency of our business. So the cost savings part of the equation will stay with us.

Secondly, the service revenue decline, as we just discussed, at least for the moment, it's much more benign than it was in the past. So this balance has evolved over time. But now there is a third element to this balance, which Christoph just talked about, which is inflation. And this will enter into the equation when you think about EBITDA, Swisscom Switzerland evolution going forward. And it will be the balance of those 3 that will determine whether indeed, EBITDA of Swisscom Switzerland can be kept flat going forward or will decrease or will increase. And once we have finally made up our minds on that for '23, we will talk about it beginning of February of next year.

[Georgios Ierodiaconou, analyst]

It's Georgios from Citi. I have a couple of questions. The first one is on the fiber announcement this morning. Maybe a couple of parts on that question. The first one is, if you don't mind giving us your rationale behind making this announcement. I know you may need to wait another 6 or 9 months before the final decision. But do you feel that by going ahead with a point-to-point upgrade, maybe you're reducing your leverage in the negotiations with COMCO or is that perhaps an acknowledgment that it may not go your way.

The second one is just to understand the topography of this 400,000 customers that you want to connect. Is it the case that there are more add-on and therefore, you already expected that point-to-point was likely to be the final outcome of the process? And then a first element just on this clarification on that slide, the 70% to 80% ambition for 2030 is that regardless of outcome of this consultation, because I guess the more rural the areas, the cost clearly gets in its point-to-point or is it 70% to 80%, assuming there is some compromise?

And then my second question is just a very quick one. On Page 16, when you are showing a decline in broadband subscribers. I'm curious if you could give us an idea of whether the small decline you have in broadband subscribers is in the very rural areas where there's no ultra-broadband option or whether it's in the areas where you have other competing operators like Salt and others, where there is a limited market share?

[Christoph Aeschlimann, executive]

Okay. So I can. Hi, George, this is Christoph speaking. So just maybe some thoughts about the rationale of our fiber decision. So we are now 20 months into the dealings with COMCO and we expect at least another, let's say, 6 months until we have a decision. And we have built up so many fiber lines by the time now that we cannot use that we came to the conclusion that we need to change the construction model in the interest of our customers and in the interest of the business so that we stop continuously adding 100,000 lines per quarter, which are actually not usable by customers. And it also takes us quite some time to change the rollout machine from multipoint to point-to-point. So the reason behind this is sort of a lengthy dealings of the COMCO, difficult to predict end.

And also, in the past 20 months, we actually suggested many compromised versions, which were all rejected in the discussions and the market test that the COMCO did. So we now expect actually, in any case, a substantial obligation to build point-to-point lines. So this also brought us to the conclusion that changing to point-to-point is actually a future-proof decision. No matter what the COMCO will decide because quite a big point-to-point amount is expected now in this, like legal procedure.

Regarding to the 400,000, they are spread out over Switzerland. So they are sometimes urban, sometimes less urban, but they are definitively in areas where we expect that we have to build point-to-point in the future. And this is also the reason why we are switching to point-to-point. And the 70% to 80% 2030 ambition is regardless of how we need to build. And -- but I think the important message on that side is that we will keep the CapEx stable, and we will not start to increase CapEx to achieve this ambition. And we will continuously, let's say, monitor what is going on in the market, business evolution, price evolution, other contract changes and then we will continuously adapt so that we can protect our business and EBITDA and free cash flow evolution of the company.

[Eugen Stermetz, executive]

I can take the final question on Page 16. I assume you talked about the broadband subscriber evolution of Fastweb, the minus 3%. Obviously, the minus 3% is a net figure. So behind that net figure is on the one hand, churn of customers and on the other hand, process of new customers. Obviously, I can't tell you exactly how much of these are in rural areas or more urban areas. But overall, our UBB percentage of our customer base is increasing significantly. So by definition, the share of pure copper reselling goes down and FTTS share goes up or FTTH share goes up. And so it's probably safe to assume that the copper lines are in more rural areas and the share of these customers as a percentage of the total goes down.

[Georgios Ierodiaconou, analyst]

So Eugen, I made a mistake with the slide, I was referring to Slide 5 on the broadband side, year-to-date, there is a decline in Switzerland. So I was curious whether -- I know the last quarter was positive. But given you are about to form a deal with Salt, I was curious whether -- where you saw in the past decline in broadband customers, whether it was in the areas where Salt was already present. And therefore, as you expand the coverage of your competitor, that could become a problem, sorry, I just referenced the wrong slide.

[Eugen Stermetz, executive]

Yes. Maybe independent from the specific numbers on Page 5. Obviously, Salt was in the past, successful to increase their share from a small -- very small base in the FTTH turf. And so if salt gets access to an expanded FTTH turf, we do expect them to gain some share there. The question is obviously, how much of that is at our expense and at competitor's expense, so this will balance out over time and we don't know yet. But yes, in the past, they have been successful to gain share in the FTTH turf.

[Yemi Falana, analyst]

This is Yemi Falana from Goldman. Congratulations on the strong performance in the quarter. Just one question for me on the CapEx side. As I understand it, the rollout you've now committed to is about 30% more expensive on a unit cost basis. So what do you view as the implications on CapEx, given it seems that your coverage ambitions are now 30% lower. Is it fair to say that your kind of near-term CapEx and free cash flow outlook is unchanged, but there's about CHF 1 billion worth of incremental investment versus what would have been the case in a point-to-multipoint world? Just trying to understand the moving parts on long-term investment needs.

[Eugen Stermetz, executive]

Okay. So this is Eugen speaking. I'll take the question on the CapEx outlook. I'm not going into too many comparisons of what would have been if we had built, et cetera, et cetera. But you are perfectly right in assuming that our CapEx envelope in the new setup for the fiber rollout, you can expect it to be stable in the range of CHF 500 million to CHF 600 million over the next 3 years. And this was obviously an important consideration in us planning the rollout under the new circumstances. And as you mentioned correctly, since on average, an individual point-to-point line is more expensive than an individual point-to-multipoint line for the same CapEx envelope you get a lower number of excess lines.

[Joshua Mills, analyst]

It's Josh Mills here at BNP Paribas Exane. A couple of questions. The first one, I just want to come back on the CapEx point. So could you just help us understand what the CapEx envelope within your 2022 budget is? And I'm trying to use this to work out what the implications for 2022 could be? How does your current CapEx spend compare to the CHF 500 million to CHF 600 million range you're talking about in the future?

And then on the second point, I just wanted to discuss energy cost headwinds. It's something that's coming up a lot across the sector. I believe you're quite well hedged in Switzerland, but less so in Fastweb in Italy. Could you just give us some indication of what kind of energy cost headwinds you should be expecting for 2023 and 2024 and also your hedge position in both Switzerland and Italy as well?

[Eugen Stermetz, executive]

Sure. Okay. So first on the CapEx, and I'll talk about fiber rollout CapEx envelope only because you know the overall CapEx envelope of CHF 2.3 billion. So for this year, on the fiber rollout, we expect about CHF 500 million. And for the next 3 years, between CHF 500 million and CHF 600 million and the CHF 500 million to CHF 600 million are in essence, a mix of 2 things. One is rolling out the point-to-point turf, as we explained. And the second smaller component is retrofitting the existing 400,000 point-to-multipoint lines, which actually means digging up the streets and building the feeders to hook up the [ palm ] tree to the center and to the central office, so CHF 500 million this year about, and in the next 3 years, between CHF 500 million and CHF 600 million is a rough figure. And obviously, on the exact number, we'll talk about it in February.

Then secondly, on energy cost headwinds, a very, very good question. It's obviously something that kept us busy this year. As you point out correctly, on the Swiss side, we are very well hedged and long-term hedged all the same. We do have in '22 versus '21, a small impact on energy costs on the Swiss side. I talked about a single-digit number already at the beginning of the year, and this is what it is. We basically bought almost all of our needs for the year already a year in advance. And given where the energy prices are right now and given the degree to which we already bought for next year, this number will increase again next year. It will all be reflected in our guidance, but it's probably not going to move the needle in any meaningful way.

On the Fastweb side, we are not hedged to the extent that we are hedged in Switzerland. And this is also why we have increased energy costs on the Fastweb side. This year compared to '21, it's a small double-digit number. The upshot of not being hedged is that you are also flexible when prices go down. So for next year, it's too early to tell where we will end up exactly on the Fastweb side, but it's not unpassable to assume that there will neither be much upside, nor much downside compared to this year's figure. So this is where we stand. But obviously, a part of the energy, in particular on the Fastweb side, still needs to be acquired. So it depends a bit on the prices going forward.

[Joshua Mills, analyst]

Yes. And just coming back on 2 things. On the energy point. So you're sure the energy cost will be going up for next year, if you've been buying in the market for 2022 in spot prices are higher than they were at the start of the year. Are there any offsetting factors you could point to in Fastweb to say why the double-digit million headwind shouldn't repeat or even be higher in 2023?

And then secondly, on the fiber CapEx, I think in the full year presentation slides, you gave best and worst case scenario, which made it look like the CapEx required for point-to-multipoint versus point-to-point was quite binary. So in that case, should we assume if you go fully down the point-to-point routes and you're currently at CHF 500 million of CapEx, it's maybe CHF 100 million higher next year? Or is it still feasible it could come within that range of CHF 500 million to CHF 600 million?

[Eugen Stermetz, executive]

No, it will be within that range. And yes, we gave best case and worst case scenario at the beginning of the year to have a boundary around the range of potential outcomes, but we also always stress that the truth will be somewhere in between. And I confirm that we are talking about the range and it will be within that range. So that's clear.

On energy costs, in Fastweb from '22 to '23, it really all depends on prices. Obviously, prices still go higher, we will have a negative impact year-over-year from '22 to '23. But if prices stay where they are or go down, even as we have some indications right now, they might be flat or even go down. It all depends on this evolution.

[Luigi Minerva, analyst]

Yes. It's Luigi Minerva from HSBC. 2 questions. The first one is on the reorganization announcement or sentence in your press release. So you mentioned that there is going to be a Group strategy and development unit that will be responsible for identifying new growth areas in Switzerland and abroad. I was intrigued by the broad part. And I'm wondering if you can elaborate and if that may involve also acquisitions outside Switzerland?

And the second question is on your dividend policy, which is obviously very core to the equity story and the investment case. And can you just remind us how do you think -- how you think about your dividend policy? And under what circumstances the dividend may grow from here?

[Christoph Aeschlimann, executive]

Luigi, it's Christoph. So I'm happy to take the first question on the reorganization. Basically we bundle together activities which are already present in the Group. So we decided to merge, what we call, previously digital business units where we have venturing innovation, all the start-up management together with our strategy Group into a, let's say, a new Group that is focused on, one, the Group strategy; and second, executing growth options. So we will -- in the coming months forward, we will go into more details and formalize the growth strategy and the themes we will look at in the IT space.

And -- but it is important that I think we make progress on that side. And we're already active in certain areas like cybersecurity, like digital trust, and in some of these areas, there might be opportunities to also grow outside of Italy or Switzerland. But it is too early to make any announcement around these topics. But I think for the Group, it is important to continue its shift in transformation to more IT solutions business also going forward.

[Eugen Stermetz, executive]

Maybe on the second question, Luigi, our dividend policy in long-standing is well known and is unchanged. So we are committed to pay out a higher share of our free cash flow as a dividend. So it all depends on free cash flow evolution and rest assured that we are doing everything to keep free cash -- even make it grow and that's it. There is no news with regard to dividend policy to talk about other than that.

[Maurice Patrick, analyst]

It's Maurice from Barclays. Starting with sort of a big picture question on -- reserving you to covering Swisscom again. But on Italy and 5G, in the slides, you talk about having 3.5 million homes passed with 5G FWA, which is a significant step up in the third quarter. Can you check just exactly what that covered you, I think some of it is being delivered -- being rolled out by yourselves, I think some with partners. Just your sort of thoughts in terms of what's been driving that growth and how we should think about the evolution of the coverage? And just sort of more linked to it, just I mean, intrigued to your levels of excitement about FWA as a sort of product in the Italian market where you think long-term penetration of customers could go to?

[Christoph Aeschlimann, executive]

So we are -- we continue to build out the 5G FWA footprint in -- together with Linkem, and we will continue to build out the coverage in the coming months. And we will -- I think it's an important technology, especially in the areas where there is no FTTH coverage in Italy, which is still quite substantial, where you have bad broadband connectivity. So in the future, we will focus on these areas, where there is real customer value through FWA. And we will see how the customer base evolves now in the coming quarters ahead of us.

[Maurice Patrick, analyst]

So it's mainly -- it's predominantly through the 5G FWA?

[Christoph Aeschlimann, executive]

Well, I would say in the past, we built it also in other areas, in urban areas, but more we will focus on more of the rural areas.

[Maurice Patrick, analyst]

And is it all being built by yourselves? I thought you had a partnership with -- I think it was Linkem, what you -- earlier you were partnering with, but wondering how much has been done with you, rather than partners?

[Christoph Aeschlimann, executive]

See, we have a partnership with Linkem there.

[Maurice Patrick, analyst]

Okay. So is the build of CHF 0.8 million, is that mainly you or mainly Linkem?

[Christoph Aeschlimann, executive]

Just to be clear, both parties or both partners build out their own network, and then we share it for the service. So this is the essence of the partnership.

[Jakob Bluestone, analyst]

It's Jakob Bluestone here from Credit Suisse. 2 questions. One, given the stronger service revenues that you reported, was there reason for not changing the CHF 3.5 billion guidance for Switzerland for this year? Is it just because it's so late in the year? Or is there something else? And then just secondly, can you maybe just explain what is the relevance of the COMCO dispute at this point? I mean if you did actually win it, whenever it finally concludes, would something change in your targets? Or I mean how should we sort of think about that case? Does it matter anymore after the decision you've made today?

[Christoph Aeschlimann, executive]

So I'm happy to answer the second question, the COMCO dispute. So after the announcement of today, I would expect quite a little impact on any COMCO decision. Anyway, the next step would be to COMCO to pronounce itself. And then we will see what they want us to build and we would, let's say, analyze if we take up legal action. And running through all instances on the legal side would take us probably a couple of years until we have a final verdict from the legal side. So for the coming years or at least the 3 years moving forward, the impact of a COMCO decision is now quite negligible compared to our announcement we made today.

[Eugen Stermetz, executive]

And on the guidance question, so the focus is obviously on the overall guidance of CHF 4.4 billion for the Group. Just to see what has changed since the second quarter. Not so much actually. What has changed is the service revenue outlook, already in the second quarter, we talked about 100 million to 150 million miles, much closer to CHF 100 million, probably. That was the wording, if I remember it correctly. We now talk about -- if you look at the minus CHF 46 million for the first 3 quarters and the normalized rate for the fourth quarter, we talked about maybe minus CHF 60 million or so. So that's a difference to what we talked about in the second quarter of about CHF 40 million. And on the overall Group level, that nets out with the currency effect from the translational path and that's why we ended up at CHF 4.4 billion. So we didn't change the supplying for Switzerland due to those CHF 40 million plus/minus change that we had since Q2.

[Klara Zabrocka;JPMorgan Chase & Co, Research Division;Financial Analyst, analyst]

This is Klara from JPMorgan. I just had 2 questions. One is on Italy. So you said that the wireline market in Italy remains competitive, but we also saw some price moves that Italia increasing its fiber prices. So just wondering what you're seeing there? And what do you think of the pricing rules? Is it more rational compared to the past? And then the second question is just on the CHF 100 million telco savings target. So what will drive that about CHF 60 million savings in the last quarter, given that you are quite confident? Yes.

[Christoph Aeschlimann, executive]

Okay. Klara, it's Christoph. I will take the first question. So you're completely right. There have been some encouraging price moves in the Italian market, and we see that some of the players are behaving more rationally than before. We will see how this plays out in the coming quarters, but we also still have new entrants coming into the market. So we have other brands that start or are thinking about wireline offers. So we are a bit, let's say, cautious about how the pricing levels evolve over the -- in the future. But indeed, these price increases that we have seen are, let's say, encouraging moves. And at least, it is not becoming worse, which I think is already also a good thing.

[Eugen Stermetz, executive]

On your CHF 100 million savings target questions, there is -- yes, you're right. It requires a substantial improvement in the fourth quarter year-over-year in order to achieve the CHF 100 million target, but this was exactly planned like that. There are 2 or 3 elements to that imbalance over the quarters over the year. One is simply the savings profile of the individual savings programs that we have that do not kick-in in a linear fashion over the year.

The other one is we had in the previous year in the fourth quarter, very high marketing expense in connection with Black Friday promotions, et cetera, et cetera. And the phasing of these expenses were completely different this year with the launch of the blue portfolio, which concentrated a lot of the marketing spend in the second quarter as opposed to the fourth quarter. And then there's a third element, which is the typical volatility of various accruals over the course of the year. And all of this explains the somewhat highest distribution over the year. But as Christoph pointed out, we are fully confident that we'll make that number as we did in the past.

[Operator]

So we come to the last question.

[Stephen Malcolm, analyst]

It's Steve from Redburn. Apologies, we got some background noise, I'm in a station at the moment. 2 questions, one on the Fastweb and one on Swisscom, if that's okay? I take the point on loss of wholesale revenues, but I think they grew 30% in Q3 versus 3% in the first half of the year. So can you just clarify whether there are any large IRU sales and one-offs in that growth you reported? And then just coming back to Swiss costs, going through the indirect cost breakout, and it looks like you booked almost nothing for allowances on receivables and contract assets, I think just CHF 2 million, so it's about [indiscernible] months here. So maybe just help us understand why the reduction in accrual is so great in the third quarter and what we should expect on bad debt accruals in the fourth quarter?

[Christoph Aeschlimann, executive]

Okay. So first on Fastweb, Steve, and then I will ask you to repeat your second question, because I simply didn't hear it. On the first question, Fastweb, yes indeed, in the third quarter, there is a significant euro components in the growth of wholesale revenues. However, the biggest component is still the growth in B2Bs So you're right, but you are right, there is a more bumpy element to the revenue mix in Q3, which explains the strong growth. And then, sorry, I think we didn't hear the second question on Switzerland.

[Stephen Malcolm, analyst]

Sorry, just looking at our indirect cost breakdown between Q3 and Q2 and the allowance for receivables and contract assets, I think you only booked about CHF 2 million in the third quarter versus, I think, CHF 17 million last year. I'm just curious as to why the -- which I guess that's your bad debt provision basically, but I'm curious if it was so far down this year versus last, given, let's say, sorry, what looks like sort of economic deterioration, but maybe you're not seeing it. So just any sort of help on how we think about your bad debt provisioning and why it was so low in the third quarter?

[Christoph Aeschlimann, executive]

Okay. Now we got the question, but we don't have the answer. So we need to get back to you on that. Okay, Louis is happy to give it.

[Louis Schmid, executive]

Right.

[Stephen Malcolm, analyst]

Okay, thank you.

[Louis Schmid, executive]

Thank you, Steve, and thank you to everybody. With that, we 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 you soon, and have a nice day. Thank you. Bye-bye.

[Christoph Aeschlimann, executive]

Thank you. Bye.