freenet AG
XETRA:FNTN
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freenet AG
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Good morning, ladies and gentlemen, and welcome to the freenet AG conference call regarding the results of the second quarter 2019. [Operator Instructions] Let me now turn the floor over to your host, Mr. Vilanek.
Hello, everybody. I was informed that the webcast is not up yet, but will come in a couple of minutes, and I'm sure that all of you have had access to our general website and all the presentation. Anyway, let me maybe start with kind of an opening statement. I think we ran through a very interesting, noisy and future determining quarter. We have seen the frequency auction in Germany with an outcome, which is obviously familiar to all of you, where we think it will widen competition and bring more dynamic to the market. We have seen Telefónica to be the [ remedy ] partner of Vodafone in Germany on cable, which will also change some of the dynamics in the convergence products. We have seen a ban of an important hardware player. There's new regulations, specifically international calls becoming live, and we have seen a launch of new IPTV product, [ joint ] from O2, which gathered a lot of awareness. So I think that was definitely one of the more exciting quarters. Naturally, freenet was a part of it? Or did we [ excel ] it? We generally feel that there's a clear direction to more competition, not necessarily in terms of pricing, but in the need for differentiation. We have signals from all the 3, respectively, 4 network operators to be keen on liaising with freenet, a fact that finally, LTE is up and running on all networks with all [ our tariffs ] is a clear signal, and we also commit ourselves to transfer our entire customer base to 4G before end of 2020. We have launched a digital breakthrough product, and I'll talk about the functionality in a second, freenet FUNK. We see early indicators of the international call changes and Ingo Arnold will refer to that in a minute. We have seen an improvement in the total customer net add performance versus the Q1, still a negative one on pure postpaid, but we would include FUNK as a signal and say, we are almost there. And I can also disclose today that month of July closed with a net add number bigger than 10,000. So I think all the measurements that we have conducted over the 6 -- first 6 months led to the strong improvement back again in July. And on the TV side, we are very happy that Samsung is now preinstalling waipu.tv on all delivered new devices, and we have also started the sales partnerships with Telefónica. So I think, overall, this was a -- yes, as I said, interesting, from our point of view, challenging. But for the future, very positive second quarter. Having said that, I'd like to summarize the corresponding numbers, the revenues grew to EUR 1.389 billion, EBITDA up to EUR 215.5 million very much in line with our full year projection. Same for free cash flow amounting to EUR 126.7 million and a growth on the subscriber base. On the next page, Page 4. If you have downloaded the presentation, there is a chart on the subscriber base. Let me go through that. We started by the end of first quarter with 8.168 million. The pure regular postpaid still was down 27,000, which is about 7,000 better than the previous quarter. The major downside, the major losses were on the telecom network, which kind of corresponds to the reporting that we have seen from Telefónica and from DT, so far. So that was the problematic case, which is a result of combination of tariffs, commissions and competitive environment. We have decided to separate freenet FUNK. It is a very specific solution on the edge of postpaid and prepaid, I would allow that statement, and this is why in our corporate news, we did not include the numbers. But here, I think it's fair to say that those -- we had plus 20,000 active users by the 30th of June, which we consider postpaid, and they are obviously on the Telefónica network. So if I balance those 2, we are only down 7,500. As I've just mentioned, July, we are up by 10,000 -- more than 10,000 in net adds. freenet TV also had a good quarter, gaining in the subs, in the RGUs, plus 17,000, waipu.tv, plus 45,000, which is doubling basically the numbers from the previous year. So overall, the gain was over 50,000 new subscribers, which we think supports our overall strategy to be focusing on subscribers, no matter what the real product is. And certainly, it's worth spending a second on the challenges on the mobile market, Page #5, I think it's obvious there's a fully saturated market. There is some regulation coming in. There is -- was the Huawei ban, which led to headwinds for Samsung and a more difficult quarter for MediaMarktSaturn and ours because Samsung used to be a really strong partner that also sponsored this partnership with additional funds. What did we do? Well, the one thing is that we are trying to further broaden our sales corporations. We have won new -- we have won 1 or 2 new channels, will not have a huge impact, but still it's important to broaden the sales force, the LTE portfolio is now fully available on any network. freenet FUNK to me is not so much a [ tariff ] revolution. freenet FUNK is the sole product in Germany, which you -- where you can you download the app, in the app you register. There is no reason or no need to show your passport, your ID, your credit details, et cetera, et cetera. So all -- by pressing a button, instantly let you know whether you are accepted as a customer. And instantly, you can then choose where you want to be shipped -- where you want the sim card to be shipped. 86% of those people ask for a shipment via envelope, which is a safe and fast and cheap way to get the product. When the end consumer gets the product within the app, he or she takes a picture of the OCR code and the product is active. So I think to me, more important than the tariff as such is the functionality, which within the current and the next quarter, we will extend to many more of our products and very important is the impact. Those people do not interact via telephone, e-mail or alike, but through WhatsApp and within the app. So customer care, customer interaction and transaction is all fully digital and much, much cheaper. So I think to give you a flavor. It took us 12 months to set it up. The front end is not really the challenge. The challenge is to have the entire back end restructured to meet the customer needs. And aside from the tariffs, the customer satisfaction based on our research is outstanding compared to any other of our products. We are working in parallel on a number of new churn initiatives again, heavily on the digitization end of customer journey, which also leads to an improvement there. And still, we follow the route of doing proper acquisition mix only, [ if we make a ] margin and not [ glimpsing ] on the pure market share or the pure volume. On Page 6, there is an overview about our activities on the TV. And upper-end side, the registered customers, let me just there do one clarification because there was a press release. On joint, they have already 4 million users. Well, users and registered customers is a big difference. Registered customers means that we have full detail of the customers, we can fully interact. We have the entire chain of GDPR allowance, et cetera, et cetera. It's very different from counting unique users. They said they might be very inflationary. So we're still doing well. On the registered side, even better. I think on the subscriber side, as you can see, during the quarter, we have gained 46,000 new paying customers, which is a run rate higher than 15,000 a month, I am positive that we will continue to have a run rate above 10,000 definitely till the end of the year. I've seen the July numbers. It looked good, even though July is always a difficult month as well as August due to summer holidays, et cetera, et cetera. But I feel -- I mean first of all, the guidance, obviously, on the volume is almost done yet. I see -- I see this is not a new guidance, but I'm sure you will ask the question. I'm foreseeing anywhere between 430 and 450 million for the full year, it might be even better, depending a little bit on some new innovations, which we cannot disclose, but will hit the market with a repeat bang in the month of October, late October, early November. On the freenet TV subscribers, RGU definition compared to cable. We've also gained some new customers, which is, I think, a very positive signal and contradicts some of the predictions and projections that we have heard of. Certainly, on the TV side, next Page #7, waipu is our main focus of innovation. We have, again, listed some of the initiatives, I will not read them to you. Most important for me is that we are -- we have talked to IP as well as 7.1 on a number of programmatic booking initiatives. We've done a couple of tests, which look very promising. Technology is far better than HbbTV and the fact that we can fully address the customer individually because of the registration and the GDPR-compliant registration enables a type of programmatic booking, [ which is standing ] . And this is also supported by the major channels. There will be foreign language channels, ethnic channels coming up. That's where I believe that their market will be astonished on what we have prepared, but it's -- we have signed all contracts, but we are yet in the phase of the technical implementation. So this was a quick and hopefully, condensed summary of our qualitative view on the first half year. And specifically on the second quarter, and this is why I'm handing over to Ingo Arnold now for the quantitative details.
Good morning, from my side. I start on Page 8, where you can see the financials on a group level. What you see here is that the development in the first half was very stable and also in the second quarter. So even with the challenges, what Christoph described before, it was possible to publish this very stable view. So we are proud of what we reached already. And I think we work on the second half now to confirm what we saw in the first half of the year. Looking into the revenues, it is EUR 2.8 million higher in the first half '19 than in the first half '18. So very stable all in. What we saw is that we had some negative effect because we sold the analogue radio business in '18. And so therefore, some of the revenues are missing. On the other side, we have some additional hardware revenues, especially in the mobile area, which compensate this loss. So all in, a stable revenue. On the gross profit, respectively, EBITDA side again, we tried to be very transparent to you because there were some special effects in the first half of '19, which changed the figures a little bit and made the view on -- a clear view, a little bit difficult. Therefore, especially if you look into the EBITDA, on Page 8, what you see here, if we leave out the IFRS 16 effect, the regulatory effect from the roaming and the effects from the missing analogue radio business, then you can see that in the second quarter of '19, it's a very stable result, what we published EUR 100.2 million in comparison to EUR 100.4 million in '18. So all in, a very stable picture. If we move to the mobile segment on Page 9. We have a slightly different picture because here, we see that the revenues were increasing, especially in the second quarter because of the low-margin hardware revenues, which I already mentioned. But what is even more important for me is that high-margin service revenues on a half year basis increased by something like EUR 2 million. In the gross -- on the gross profit side, what you see here, again, without the extraordinary effect, it's very stable picture in the second half, because EUR 171.7 million in '18 compared with the same amount in the second quarter '19. So very stable here. In the first quarter, the deviation was a little bit more positive here. Why do we see this difference because in the second quarter, we already started some initiatives in improving our gross add situation, where we had some out payments and some costs. And what Christoph already said is that we saw the first fruit of this interaction already in July. In the EBITDA, comparable picture, very stable, EUR 89 million in the second quarter '18 compared to EUR 80.7 million (sic) [ EUR 88.7 million ] in the second quarter '19. So we saw these regulatory effects from the roaming. But I think this is something, which has to be separated because this has nothing to do with the quality of our business model. I think if we leave it out, and it makes a lot of sense to leave it out, you see that the business model is still intact, and we are still generating very comparable margins than in the past. Moving to Page 10 to the KPIs. Christoph already described the picture on the postpaid customers. In the postpaid ARPU, again, without hardware, we generated in the second quarter, an ARPU of 18.80%, which is exactly the same ARPU what we showed in the first quarter, so very stable. In the digital lifestyle segment, the revenues were slightly increasing in the second quarter of '19, all in, the digital lifestyle revenues were stable. So we are focusing at the moment to increase the profitability of this part of our business. And we have some small additions here in profitability. So we are very happy with the business, even if it's not growing as it did in the years before. On the TV and media side, Page 11. Here, I think we have to leave out the effects from the analogue radio divestments because otherwise, you could not get a clear picture that without the loss of these revenues, it would be stable, and this is the same for the gross profit and for the EBITDA. If we look into the EBITDA, what we see here is that in the second quarter '18, we generated EUR 17 million of EBITDA. And in the second quarter of '19, we generated EUR 17.4 million. So a slight improvement. What we see here is stabilization of the results what we have. And I think as we are on the KPI side here, we are also on the financial side, very happy with what we generated. Looking into depth of these TV figures on Page 12. What we see here is that we have slightly different pictures in the [ several parts ] in the media broadcast, the dominating effect is the loss of the radio, the analogue radio business. So we see some downgradings in the gross profit. But on a EBITDA level, they are partly compensated. So in the B2C in the second quarter, it's nearly 0 results. What we show here. In the first quarter, it was minus 2.5%. Now aggregated, it's minus 3.2%. So in the second quarter, it was minus 0.7%, so nearly 0, and we are improving it further on. On the B2B side, we have here a negative EBITDA of EUR 5.6 million, but EUR 5 million of these EUR 5.6 million is only analogue radio business. And I think I will follow-up on this on the next page, how it would work on during the rest of the year. EXARING, it's improving, not only on the side of the customers it is also improving in terms of EBITDA and gross profit. So we have an additional EBITDA of EUR 1.1 million in the first half of '19. So with the number of customers, I think this is not surprising, also the profits are increasing here. Even more on the gross profit side because we invested some money into marketing, and we still try to improve the business here.On Page 13, I would like to [ stop ] on some headwinds that we see -- that we already saw during the first half of the year and some of them will persist during the rest of the year. From the analogue radio business, it was ongoing in the first half of '18. Therefore, we had to show some negative effect in the first half of '19, but in the rest of the year, this will be nearly 0. So all what has to be expected on the negative side is already part of the results. From international calls and roaming. Here, we will have some negative effect in the second half of the year. We already announced it in the first quarter. So it should not be surprising for all of you, but we think it is only fair to make it here, clear and transparent that there will be additional negative effects in the rest of the year from this regulatory changes of something like EUR 10 million in third and fourth quarter. And coming to the free cash flow. So let me start from the end of it. We generated a free cash flow in the first half of the year, which is EUR 126.7 million, which is nearly on the higher end of the range, what we forecasted. So the range was EUR 110 million to EUR 130 million, what we forecasted and what we guided for the first half. So I think we were happy with lower CapEx and lower tax payments. But to be very clear here, especially from the tax payment front, it's just a question when the authorities here in Germany will send out their payment instructions. We have not received them yet, but there will -- definitely, there will be a catch-up effect in tax payments during the rest of the year. But on the other hand, if you look into the change in networking capital. So we were not aggressive here in [ touching ] our partners out there to pay their invoices. So definitely, the minus 50.8% is nothing what you could double for the rest of the year. No, it's the other way around. There will be possibilities to reduce it. So from today's point of view. Yes, we are very, very safe in our free cash flow forecast and to reach the full year free cash flow, what we guided. On the financial KPI side on Page 15. Yes, definitely, if we look into the equity ratio, it's lower than it was 1 year before. It's 25.3% now, which was 29.5% 1 year ago. But this is, as you know, mainly technical because of the IFRS 16, the balance sheet figure is higher, and therefore, it's only technical, and we are on a good field, with 25%. On the leverage, it increased now to 4.8. So it is even higher than after the first quarter, but this is based on the dividend payment, what we did during the second quarter, and this figure will improve step by step during the year. If we put into consideration the market values of the equity investments, what we have on the balance sheet, it would only be 2.8. But -- and this is something what we told you also before. We have a target of 3.5 compared to the 4.8 what we see today. So we will try further on to reduce the net debt ratio, and we see some possibilities here to do so. And we will do this in the rest of the year, but we stay with a stable dividend policy on the other side. So this is from my side, a comparison of -- a summary of what we had on the financial side. So I would open the floor for your questions now.
[Operator Instructions] And the first question for today comes from Ulrich Rathe, who's calling from Jefferies.
So just 3 questions to start with -- if it's all right. The first one is regarding the outlook for the customer intake. I note that you reiterated the guidance for postpaid customers to moderately increase. Just to confirm, this exactly does not include the FUNK product I think? Could you please confirm that? And also, what would be the levers to get this around. So you have quite a bit of a catch-up now to do after the first half? Mr. Vilanek, you sort of mentioned that you're not really [ staring ] at customers. So just trying to get a bit of color on this turn that we meet in the second quarter? And how convinced you are, you can make it and how important it is to actually deliver that? Second question is around the FUNK product. Could you give us a sense of what the loyalty of the customers is? What the recurring is? I mean, you're saying you have 20,000 active customers. Is that essentially, is a net result of a big flow in of people who are trying it out and then a big flow out of people who are ultimately then moving on? Or is this really sort of a product that really carves out a stable customer base? And then my last question, with the TV Media business, you have in the past commented on the impact of the analogue radio disposal, but that disclosure has now changed. So in the past, you seem to have sort of disclosed the impact slightly differently. I'm not partly sure where that is versus expected because you're now excluding also the recurring impact that you previously had, together with the one-offs, but I'm not entirely sure why the disclosure between the first quarter -- what you showed in the first quarter and now what you're showing in the second quarter presentation has changed for -- on the operating business.
Yes. Thank you for your questions. First one, yes, we reconfirm the postpaid guidance, as you described it. Second one on what is the effect well, it's the [ famous tons ] of details giving a bit of a different mix, redoing some of the campaigning on the online side as well on the retail side. We've been -- we had a good first half year in principle with retail and the third-party distribution. We had a weaker one than the previous year with MSH, which was not, therefore, that I was referring to the specific activity last year with Samsung. So we see some recovery there. We see some investment on all sides, meaning a bit more effort, a bit more details. We have also, at the beginning of the year, introduced category management, which also seems to impact now. So I think it's a couple of measurements and the fact that we have done better in June, already than, I mean, the last month of the second quarter was -- midway, stronger than the previous ones. July is even better. So that makes me believe that those measurements, obviously hit the market and address the needs of the market. This is why I'm absolutely positive and optimistic about the -- reaching the original target back again. On FUNK, well, I mean the number that we have displayed, the 20,000 is the first indicator. We've done not even 5, 6 weeks of promotions, and then we have actually stopped any promotion in order to have more data. We felt that it is fair, necessary and transparent to show you that number of 20,000, which is at the end of the quarter, the very day since it's daily -- it's a product that is daily countable. We only showed the 20,000. We had -- that's about half of the ones or less than half of the customers that we have registered, and have ordered the SIM card. We have also gone through the typical experience of such a product that there is a number of a couple of hundred users that obviously don't use it for the smartphones, but use it for professional testing or WiFi services. We have shut them down 2 weeks ago, which was possible according to our terms and conditions. So I think we had a first wave of the extreme users. I'm happy to share with you without disclosing the person as such that we had an apprentice of Deutsche Telekom, and he was doing speed testing with our SIM card and generated more than 50 gigs a day. That we -- that this was not the purpose of the product is very clear. So we had to clean those out. We don't do promotions right now. We do a proper analysis. I am 50% sure that we will continue to [ brought ] that tariff as in that [ version ] . Yes. I don't think that this is going to be hundreds of thousands. I think my personal feeling is that by the end of the year, it will be maybe 40,000 or so. But as I said, to us, it's important to breakthrough with our entire IT architecture, activation transformation handling. So in that sense, it's important. But it is difficult -- it's a difficult -- it's also for us a difficult animal to report on because daily to really get a look at the POS function, we need to understand what the POS means. Is it that people go on holiday and come back? Is it that they use it only for the weekends? And so on and so forth. So it's too early to give a detailed disclosure. It's an interesting source of data information for ourselves.
Then you had a question, Ulrich, about how we show the effect from the analogue radio business. I would not say it is a change. What we did is we made it a little bit more concrete and tried to make it easier to understand for you because in the last quarter, we just said, yes, there was an amount of effects from missing the operational results. And this quarter, we made it clear and put a figure on it, on the effect. This is the only thing that we did. And yes, you are correct. And it shows that you are deep in the figures because, for example, now what we show in the second quarter of '18 is an effect of EUR 7.7 million from the sale -- or from the analogue radio business and from the sale, it is only EUR 7.3 million. And from the business what is missing is EUR 0.4 million. So we just try to be more transparent here. And hopefully, it worked.
The next question comes from Christian Fangmann, who's calling from HSBC.
I have a couple. First one is a bit more high level. I saw an article yesterday in a Swiss newspaper, basically, I don't think that you're back in discussions with Sunrise. So I would be interested in kind of your view on the current situation. I mean you probably also have seen the UPC results. No material improvements on the pensioners' side, at least. I mean I think it's pretty material if you could actually divest your stake or reach -- or come to a solution where you can delever maybe, so an update on the current situation, whatever you can say here, would be helpful for us. And then I have 2 more on the operations. One is on actually your mobile business. When I listened to Telefónica Deutschland, they mentioned on the call that they plan to work more with other partners rather than with [ by itself ]. So what's your view? Is there more opportunity to do more business together? And then lastly, you mentioned the Samsung sponsorship with MediaMarkt, can you maybe explain that in more detail? So what happened last year? And what is missing this year? Or what can we expect in terms of the second half?
Okay. Firstly, on Sunrise, I could talk hours on that topic, but I would prefer to not to do that. We are in a review phase of the UPC results. On the one hand, we are in close talks with Sunrise management on how things are going, whether we agree on our assessment on the results, et cetera, et cetera. So this will take place another week or 2. And I think we will then make up our minds, as we said, that we think that the data points with the second quarter will be the relevant ones. But it's -- we are maybe 10 days or 2 weeks too early. On the Telefónica, well, I think we are one of the partners where they want to do more. We have -- after certainly a period of more friction and discussions, we have come together, again very constructive move. Constructive also means that, I mean, on the one hand side, they work with us, they become a waipu sales partner. On the other side, they don't really like the freenet FUNK product for good reasons from their standpoint, I'm absolutely fine with it. But on the FUNK product, given the nature of the product, for them, the risk is over-usage. For us, the risk is that we have a fixed purchase model and a daily plan. So I mean, suddenly, we sit together and say, well, we're both not happy about the -- first, about proportion of customers, and then we discussed on how we could change that. Whether we are also discussing with this -- them on the cable side, on convergence products or -- to my personal comment is we are certainly one of the partners they want to do more, and we are happy to do so. And on the Samsung tariff, well, the nature of the business for any telco, whether MNO or MVNO service provider, is you're procuring hardware. You are adding a tariff plan. You are calculating a commission, and you're handing the commission to whatever part that is. It could be retail -- it could be our retail. It could be our online team. It could be our franchise team, whatever. So -- and then the Samsung headquarter for unknown reasons says the Germans should sell more hardware, and they take some of their marketing budgets and put it as what they call typically either marketing fund or tariff support. Tariff support is a support which is specifically connected to a certain group of tariffs, where they also believe that [ loyalty ] on Samsung devices is impacted. And this is a procedure which is very natural and very common. But it's either seasonal or depends on GfK market shares, et cetera, et cetera. Last year, in the second quarter, Samsung was very keen on making the market in Germany and spent a significant amount of tariff support per active-rated user. And this is -- makes it more attractive to us. It pushes profitability for us. But in that specific case, specifically also for MSH, this year Samsung said they are not ready to spend it because of the fact that [ who or why ] was from the market. They sold -- they won market share without spending money. We think that the -- in the second half, we expect that there will be a more balanced situation, and the imbalance of first half year 2018 is gone. This is what happened.
Next up, we have Polo Tang, who's calling from UBS.
I actually have 3 questions. The first one is can you remind us what percentage of your base is on 4G? And what is the risk that you see higher churn as you migrate your entire base over to 4G by 2020. The second question is really just about competitive dynamics in terms of the German mobile market. Can you maybe just expand in terms of what you're seeing currently? And then also, you said you're adding 10 -- or you have added 10,000 postpaid subscribers in July. But what is different in the market? What are you doing differently versus the prior quarter that's driving this improvement? And my third question is really just about German broadband because I think you just mentioned just now that you were in talks with Telefónica Deutschland over a cable convergence product. So how do you think about take-up of convergence in the German market? And would you consider reselling a VDSL broadband product from either Telefónica Deutschland or Deutsche Telekom.
In the first one, I have to say that I don't have a concrete number on the 4G uptake because it's a mix of hardware and tariff plan and a little bit also the question of what is it. Is it 4G in terms of speed or in terms of technology? But I'd say -- and this is more a rough estimate than a detailed number, which we will certainly research for you. I think it's probably more in the 30s, 30s percentages than more -- we don't think that there will be any churn out of this. We believe it's the opposite, and many customers will not even realize. We do not have to inform them if we upgrade them. We double check whether their device is capable, then we just switch technology. There's no need for SIM card changes. The competitive environment is, well, I think the -- a little bit, the rules are set, finally, Deutsche Telekom will remain on the quality strategy, converged products, fiber, they will -- they are cooperating on the fiber side. Tim Höttges has made clear that he is [ ready ] to location sharing, site sharing, but only in the areas where he is weak as well. He will not give away the advantages that they have currently. So I think their proposition is clear. At the same time, they still have a big bunch of high ARPU customers. And obviously, part of them are leaving right now, which impacts their service revenues as well as their net development in postpaid. So they have certainly, we think that they have, and this is outside in, we think that they have a challenge to charge the premium prices at the level that they have on some legacy products. Vodafone will be busy in the -- in bringing together Unity and Kabel -- former Kabel Deutschland as well as the [ remedy ] . And so I think they will be happy with us reselling also part of their converged products, and the same goes for Telefónica. We've indicated in the past that we are still doing a lot of DSL, VDSL, broadband access sales for actually United Internet and Vodafone right now. We think we could do it for any of those. And given that all the 4 are offering it finally at the same scale, we think that we can take benefit from the arbitrage, again, more than we did in the past because we have had one lead partner, United, and the second partner, Vodafone. Well, what did we improve in July? I think I said it before, maybe it was the second quarter last year was specifically strong, and now we are on a normal scale again. And certainly, the fact that we have LTE on all products right now, I think it did not impact so much the acceptance from the end consumer, but it gives -- it has made some of our sales rep silent that complained about it. So I think the mood in the company, the mood on the sales front has improved. And as I said, just on the competition question, we are ready to do -- to talk about broadband. We're ready to talk about bundles. We are ready to talk about combined products where we have a part in commission and a part in service provisioning. And we -- from the first round of talks to the operators, they all seemed keen on it because they still believe in the huge sales platform that we can provide.
The next question we have comes from Martin Jungfleisch, who's calling from Kepler Cheuvreux.
I have 2. The first one is on TV and media. Could you provide some color where do you think you are in terms of marketing spending in waipu.tv? So should we expect more in the second half and 2020? Or are you fine with these current levels? And then can you also comment if we should model a slight ARPU or EBITDA margin dilution coming from the O2 sales partnership with waipu.tv? And then the other question I have is on mobile net adds again. You obviously expect an acceleration in the second half in terms of postpaid net adds. I was trying to understand if this -- if the subscriber losses in H1 was more of a structural issue or a temporary issue. So would you say that the lower net add somewhat related to lower store traffic and the move to online? And is it increased retention measures by the operators or whether temporary hardware cycle related? Maybe you can also provide some color on churn rates and the development of gross adds in postpaid in the first half.
Yes, thanks for your question. First one, no need to change the marketing spending assumptions. We had a bit more in the first quarter than in the second, but there was a -- I mean it's not really relevant numbers. We're talking about small million number. So -- and this will be at the same level during the second year. We have learned that spending -- or performance-based spend is much better than brand-based. And we are improving our performance-based advertising specifically on social media day by day. So no need to remodel same for the O2 sales cooperation. This will not -- I think it's not worth looking at it from a margin perspective. We have a sales cooperation, which basically gives them the same margin as a dealer with the exception that they mainly sell in their own stores and in their own customer base. So I think, from our end, profitability of those customers after the first 2 months of looking at it is the same as the regular ones. And coming back to the net as well, as we said, I mean the first quarter, we pushed back a little bit on some heavy campaigns. We saw that -- disclosed that in first quarter, the part of the online sales on -- third-party online sales were too aggressive. We have overstretched there [ and controlling ] , figure out that we will not make money with any of those customers. We have turned that back. Well, then you switch off 1 or 2 partners, then you're negative. Then you'll sit down with those guys again and say like what can we change. Discount must be lower than the original one. And so you try to move up again. And then you -- at a certain point, those 2 curves of how much do you have to spend and how much do you earn go better. So I think this is like small -- it's millimeter work on getting back to profitability on the entire customer base, on the entire gross add base. Historically, we do not disclose gross adds and net adds because it would be fully transparent then to our dear competitors and partners because any of the 3 network operators know their own numbers on their network with us. And if we would disclose any of those, they could -- [ would conclude ] . I tell you that it was -- the net add development was more driven by the gross adds than by the churn. I think that the customer base seems stable, but we had problems [ or ] need to improve the gross add side.
The next question comes from Wolfgang Specht calling from Bankhaus Lampe.
Three questions from my side, the first one on free FUNK again. You mentioned similar ARPUs to your postpaid customers. Can you give us an idea how gross profit or EBITDA of these customers is? Is it also similar? Then on waipu.tv, can you give us an idea how many of your customers are still in the discounted phase or even in the free trial phase and how churn is developing in this product group? The third one is on M&A. Are you still looking for active M&A options? Or do you see any [ disinvestments ] aside of a potential sale of your Sunrise stake?
Well, on the first one on FUNK, the overall profitability is the same -- or that's at least where we aim for. I would -- I mean this is what we meant when we said like the acquisition costs should be extremely low because promotion is low, it's self-service, et cetera, et cetera. So with an even lower gross margin, we would have the same profit -- net margin on the product. That is -- that was the vision, the plan. The gross margin in absolute terms is lower because those customers can choose any of -- to start, to pause or stop any day. So obviously, if somebody would only be active 2 days a month and pays 1 40, and we have a purchasing model which is different from that, then these customers have a very low or even negative gross margin. So the mix overall, gross margin is lower, but profitability is positive. That's as far as we know. But as I said before, we do need to fine tune. We need to figure out who are the ones that pause, and 50% pause is too much for our profitability. And super high usage is not acceptable with the network operators. So balance is not there yet. On waipu, we have reduced the number of -- we have -- historically, we had a lot of 3-month free trials, and we have learned that there is a couple of thousand customers that continuously go into free trials, then cancel the product and start -- restart again. So this is why we stopped the 3-month free trial and replaced it by a 1-month, which improved conversion, certainly also impacted part of the acquisition. But of the 330,000, I would say, right now, it's less than 10% in the free trial period. And since this -- so the number is constantly going down, and conversion is improving. On the M&A side, well, I would say, more likely [ than ] to do active M&A and spend money is a disinvestment. We think that the balance sheet is stretched. Even though we feel comfortable with the given assets that we have on [ there ] CECONOMY as well as Sunrise, but we certainly also see that it's stretched. And before we do something significant, we would rebalance on the invested side and the capital allocation side.
Next up, we have Simon Bentlage, who's calling from Hauck & Aufhäuser.
The first one would be on your gross adds ARPU. I think in the first quarter, you claimed that the gross adds ARPU is about EUR 1 higher due to your focus on those more valuable customers. Is that something that is still valid? And the second question would be on your CECONOMY investment. I think you always said that this is a strategic investment for you. Has there been any incentives or any cooperations with CECONOMY that are actively already benefiting for you?
Well, on the first one, straight answer, it's still valid. Gross adds remain to be on a somewhat higher level. On CECONOMY, I mean CECONOMY has published their restructuring plan only recently. They will come up with the Q2 numbers, I think, in a week from now. They are certainly in a turnaround phase in terms of headcount, staff cost allocations, readdressing part of their challenges, which I think they do with great prudence, great performance, very good speed. So we're very comfortable with it. But we also have to accept that under these circumstances, we do not get in with a lot of new ideas implemented. But we have a strong voice in the strategy development, where we also try to make the potential cooperations more visible to the senior management, and this is fully intact and fully in line with what we've expected.
The next question comes from Jonas Blum, who's calling from Warburg Research.
Just 2 quick ones from my side. So first of all, you stated in your report that you see Drillisch business model transformation, there's an opportunity for you because it might increase competition. And so I was just curious like if you could give us any impression of how will that positively impact your business or what kind of revenue stream you see coming from this participant. And then the second question to you, you just stated that you see possibilities to reduce your net debt ratio. Could you just give us some more color here on what kind of possibilities do you have in mind until year-end?
Well, on the first one, I mean, obviously, even though it's early stage, United Internet really will have a need to fill their network. And we believe that they will be very interested in successfully working with us as well. So for us, it's the return to a fourth network operator. And we remember E-Plus, as a fourth player, did add potential for us. That's the first one. The second one is that based on the statements that we hear and the knowledge on the [ remedy ] in full detail, we also know that there will be some tough decisions to be taken in the relationship of United Internet and Telefónica. And I think either of them will be in need of more customers and more sales broadness. So here we are, the remainder of an industry which is basically a monopoly with us. That's why we think it's positive.
On the net debt ratio, I think it is obvious that -- and we have discussed very often in the past, the biggest chance to reduce it is to reduce our stake in Sunrise. This is something -- it is a financial investment. We have not decided yet. But I think, midterm or long term, we still see strength this year. On the other hand, we have some businesses [ where ] some subsidiaries, which are very intensive in terms of working capital. So also here, there could be chances if we divest out of, for example, hardware business where the margins are very low, it could be possible to reduce receivables and inventories. And so I think we have to optimize our cash structure. And there, we still see some opportunities. And I think this is the way to reduce the net debt ratio step by step.
The next question we have comes from Ulrich Rathe calling from Jefferies.
The first one is on Media-Saturn, you highlighted several things, and the first one was sort of a different approach of Samsung, then you also sort of talked about their restructuring and turnaround measures. Just in terms of the impacts on your business, maybe difficult to separate from the Samsung issue, but is there any impact of Media-Saturn's operational issues on your operating momentum in your shops, in their -- in their shops. So do you see lower footfall affecting your volumes? Or is this really just the Samsung question? And then the second question is I think you've sort of in the past been a bit cautious on this, but is there any way to sort of give an indication to what extent the sort of financial [ corporations ] affect the TV numbers that you're reporting today in any way, share performance, in terms of volumes or revenue or whatever you might be willing to talk about? And then my last one would be -- I think it has been more or less answered indirectly, but if you're willing to sort of do this directly. No matter what happens with regards to Sunrise and UPC, would you consider participating in the rights issue? Can you simply rule out today that no matter what happens, you will not participate in any rights issue, full stop?
Okay. In the first one, I mean, the day-to-day business -- and I cannot comment on the MSH performance. There will be a call next week, and they will then explain how the performance was. The fact is that over the last 25 years, they did -- the bigger proportion of activities on the shop floor of Media-Saturn was always done by ourselves or by -- in the partnership with promotional agencies, freelance partners. So in that sense, we are independent from the changes that they do at the headquarter or they do on the category management. We always had a -- or for the last 6 years, we had a centralized procurement with them and a centralized management. So in a sense, I can -- I'm not -- specifically, we are not impacted, but I do not want to derive -- you to derive that other people might be impacted. It's very important because I want to make sure that we adhere on the right disclosure. So no, it's not. I think it's -- the majority of the impact was -- is that the hardware industry is willing to support [ there ] or not. The second one on the Telefónica scene. Telefónica is nothing as per the sales channel, and we will not disclose a breakdown of sales in the sales channel. The fact is that Telefónica is doing it only in their own customer base. So far, they have not started to sell it into their broadband base. They have done a first round of little campaigns. They told me qualitatively that they're extremely happy about the product, that the feedback is extremely positive, and we are happy to have gained that channel. On the Sunrise question, well, let's put it -- I would simply say, our obligation toward our shareholders is to maximize the value on our shares. And that as of today, any optionality from selling the shares at a reasonable price, of continuing the relationship as a shareholder, is still open. The one thing that I would exclude, that we would take additional money in the rights issue, [ tail swallowing ] , part selling to be a bit more liquid in the rights issue. That's for me more technique, financial engineering, but we will not take on -- we will not spend extra money, not additional funds.
Thank you. There are no further questions for today.
And then thanks for everybody. Thanks for joining and bearing with us for this 1.25 hour. We wish you all, well, good remainder of the summer, and for those of you that will still go on holidays, have a good holiday. Thanks. Thank you.