freenet AG

XETRA:FNTN

Earnings Call Transcript 2023-Q2

[Operator]

Hello, ladies and gentlemen. Welcome to the Conference Call First HY 2023. At this time, all participants have been placed on a listen-only mode. The floor will be opened for questions following the presentation.

Let me now turn the floor over to your host, Christoph Vilanek.

[Christoph Vilanek, Chief Executive Officer]

Good morning, everybody. Thanks for joining today's call. Happy to talk about the first half year, answer your questions. I'm sure we're going to spend a little time on latest news on the move of United Internet, but let me first go through our numbers.

We start on page four. As you can see, we are well on track, I would say, even a bit beyond the original plan for the first six months. The subscriber base year-on-year has grown by 4.7%, revenue is up as well, a little lower than we originally thought due to some hardware -- lower hardware sales specifically in GRAVIS. EBITDA up by the half of the year on 250 -- almost EUR255 million. Obviously, this is beyond the half line of the year. We expect some more expenses in the second half, but I can already indicate, we see the outcome for the year at the very upper end of the range of the guidance. So I think the EUR500 million is more or less ticked off by now and free cash flow is also growing by 5.5% equally to the EBITDA.

If we go on next page, page number five, you can see the breakdown of the customer base, the contract customer base, total base is 9.285 million subscribers. I think we're doing really well there. As you can see that indicate was -- indicated in the last couple of months the net adds on TV are higher than the one on mobile. That's actually what we have expected for the year and on the TV side, as you can see on the lower end of the page, left hand side freenet TV is still losing customers, but it's outperformed by the growth on IPTV, which is exactly according to the original strategy in the TV area that we have announced and are continuously explaining.

If we go one step deeper into the mobile on the next page, you can see mobile growth on postpaids, as well as on the app-based tariff plans, we show them here because they are equally treated in-house as the postpaids. It's -- both are doing well. We have second quarter net adds were 37,000. You might remember that for the full-year, we have said it's going to be anywhere between 100 and 150. We are now close to 100,000. We are still expecting positive net adds during the third and the fourth quarter, but a bit lower than with the headwind that we had in the first quarter, but we will definitely beat the 100 to 150. We will be in that range by the end of the year. So we're doing really well. We're very happy about it.

I think it results from a couple of things. One is we are seeing an increasing share of SIM-only also in retail. That is a phenomenon that we relate to the fact that there is no innovation on hardware, neither on Samsung or on Apple side. Also the equipment is longer lasting than it was in the past. So more and more customers skip, I would say, skip around of hardware and might come back with the next renewal for another one. The smart pricing, so our pricing scheme, specifically on renewal, which is on an individual base is bringing a higher number of renewals. So if we compare internally gross adds and renewal, renewal has been stronger than gross adds for the last couple of years already, but it's still step-wise increasing and our renewal rate is doing really well.

Another qualitative statement here, we have our service hotline calls and service hotline contact is going down as a result of significant measures in the area of standardization and optimization, specifically in complicated procedures such as number portability or number porting. The new process that we have setup is self-administrative by the end consumer in a digital way. This is significantly reducing the number of contacts and specifically reducing number of contacts that are negative contacts because of a frustration on the side of the customers. This also saves a bit of money, but more important is that it generates better scores on net promoter score, service promoter score.

And last but not least, we have initiated already in January an internal group on artificial intelligence applications. I personally lead that group. It's about 40 people across the entire company. We are searching and working on applications, entire -- the entire long -- the entire value chain, value creation and up now there are -- right now there are about 10 projects up and running. And they will even improve not only customer care, but many other procedures within the company. By the way, any employee in our company has access to ChatGPT and some other applications. So we really enforce them to trial and error within the necessary data protection limits.

Next page, has already announced a quick view on the TV side. You can see that freenet TV, the churn is slowing down, which we consider a positive signal. We don't think yet that we have kind of like the longtail bottom, but we're doing better than we did in the past year. More importantly, waipu.tv has 100,000 new net adds in the second quarter, so strongest quarter so far in history of waipu.tv. We have had -- in the first quarter, we have 80,000. I think I just recently did a benchmark, I mean, Deutsche Telekom with Magenta did 50,000. We're doing 80,000. I'm curious what they do right now. But we're very happy and feel confirmed on our strategy and our strengths on sales with that performance.

For the rest of the year, I personally would assume that we will add another 200,000 net adds. The third quarter will be a little lower, but the fourth quarter then will be super strong. I deducted from the campaigns that we are preparing and planning. We will continue to work with the testimonial Dieter Bohlen and that really paid back. Brand recognition is doing well, according to the measurement, the meta measures that we have. So everything is really positive there and we have a lot of talks with potential inorganic partners or partners that are doing fiber on the local level. So really, really strong result on waipu and I'm very happy with the performance.

On next page, we have included a bit of a statement on the -- I think it's called in English ancillary costs, a privilege that is going away next year. There is about 12 million households and that is on cable today. That is a big proportion that is yet convinced that they are planning to switch to IPTV. We cannot guesstimate on how long it's going to take, but likelihood of switching to IP is growing. So we are preparing for that phase. We'll do -- we'll spend more money this year -- next year on above the line brand marketing, et cetera, et cetera. We are addressing our own customer base, making them aware of their potential switch from July next year. So we expect this to help waipu grow even faster than this year.

So I'm already at the end of my part with an outlook. I think the second-half of the year, we're working on all ends. And I've mentioned it before with a lot of applications with the help of AI on improvement of service quality, I think we have never been weak, but we see an opportunity to be even better. We are preparing a full alignment of our own channels, meaning online and retail, our own shops, as well as franchise most likely from 1st January on all offers will be equal. No difference between on and offline. We think that is a good proposal and a good proposition. And towards the end consumer, we're preparing all details. Right now, we started training with our sales staff. So in an ideal world, from January we have more assortment for the end consumer, more time for the end consumer, and more service and hopefully more satisfaction for the end consumer.

Freenet Internet, we will increase the prices right now. Our price tests show that it will not slow down, take up rates which are right now around 2,000 a month which we have already indicated, I think, in the last call. We are adopting the Magenta next which is the family plans. That is a freenet next right now in a staging phase and we will do that with Deutsche Telekom, but also with Vodafone and we are talking to a couple of fiber infrastructure suppliers. It is quite obvious that they don't have a mobile offer.

And we're talking to them whether we do combined offers not only with waipu, but also with mobile. I mean the real big ones are Deutsche Telekom, Vodafone, they do it themselves. Also Ark, which is the one of Telefonica, but there's a lot of others. And they have understood that to have a competitive offer, they need services such as mobile and TV aside of their IP access.

And on the waipu side, already mentioned a product campaign and we are starting by the end of the year with, I would call it, self or the preparation of self-cannibalization with our hybrid stick, delivering IPTV as well as terrestrial signal. So this is the outlook. Let me sum up from my side. I think we're extremely happy about the first half year. We're very confident that we're going to continue like that. We are happy that we did not have any problems on either of the KPIs and operationally the company is running really perfectly well.

Having said that, I'd like to hand over to Ingo for a deep dive into the numbers.

[Ingo Arnold, Chief Financial Officer]

Thank you, Christoph. Good morning, everybody. I start on age 10 with the overview of the group financials. I think Christoph already mentioned, I think, both of us, we are very happy with these figures. And if you look a little bit deeper inside the figures, you see that the good performance is driven by the operational performance in both segments and not by saving any costs, which I would say is makes it even more clearer how sustainable these results are what we do see.

I move directly to the mobile segment. I think here, we see a continuing of the trends, what we saw in the first quarter. Yes, definitely the hardware sales are -- in revenue terms are lower. We -- I think we are not nervous about it, because the profitability in this part of the business is relatively low. So we do not lose any gross profit or EBITDA here. We only lose the revenue.

On the other side, we are more than happy that the service revenue where we generate much higher gross profit is increasing even further, compared to the quarter -- the second quarter '22. So I think also here from a revenue side, positive signals, which are also confirmed if you look into the gross profit.

I think what you do see here is now that we have something like -- found something like a level here with EUR172 million of gross profit. It is confirmed again in this second quarter now which is much, much higher than in the second quarter ‘22. So -- and if you look into the EBITDA, you see that the advantage is slightly lower, compared to the gross profit development. This is based especially on an inflation one-off compensation bonus, what we paid to our employees. It is with a group effect of EUR2 million. This is something of a negative effect, but I think this shows that we do really find it important not only to talk about ESG, but also to do things here in the social arena.

Moving to some KPIs from the mobile segments. Very, very strong development in the digital lifestyle revenues. Yes, definitely lower than in the fourth quarter '22 and in the first quarter '23, but this is a normal pattern because it is all around Christmas business where it is also much easier to sell digital lifestyle services, but the EUR53 million what we generated in the second quarter '23 is even an increase of 10%, compared to the second quarter of '22. So also here, very, very strong signal what we sent.

Looking into the ARPU, yes, there is a slow increase if you compare it with the second quarter '22. It is not the structural effect. It is more based on the situation that more people are traveling. All in, I would still say that the ARPU is stable, and we are very happy about this.

Moving to the TV and Media segment. Strong development here. If we compare the first half of this year with the first half of last year, there's an increase of 12 million -- of 12%, EUR70 million in revenues here. And this is mainly driven by the strong customer growth in the IPTV segment in waipu.tv, and this translates into a very strong increase of gross profit in waipu.tv by EUR9 million.

On a gross profit level, this is lower if we watch the EBITDA because here, waipu.tv was only increased by EUR3.2 million. This is based on additional marketing investments what we did during the year to increase or to accelerate the customer growth here. In freenet TV, slight increases even with decreasing base because we see the effects of the price increase what we did at the end of last year, and in the B2B business of media broadcast, stable development.

Moving to the free cash flow to the EBITDA to free cash flow conversion is still very high. We see a change in net working capital of EUR41.9 million. This is affected by a further reduction of factoring by EUR20 million in the first half of '23. Then if you see the tax payments, it is slightly lower than last year, but this is more or less a phasing effect. At the end of the year, I still expect to see something like EUR30 million of tax payments. CapEx EUR25 million in the first half of the year is what we spent and this is driven on the one hand by the digital radio business, on the other hand by the waipu.tv platform where you -- where we modernized some things and put the platform on the next level.

In leases, a stable development in interest, also relatively stable. What we do see here is that as for everybody, interest rates are increasing, but on the other height, we -- on the other side, we decreased the volume of the outstanding debt and therefore a stable development in interest payments. And all in, we see a very strong free cash flow of EUR131.5 million. Compared to last year, it is an increase of EUR7 million, but I think you have to put into consideration that last year, we received a dividend from Ceconomy of EUR5.5 million. So if you put this into consideration, the free cash flow development is even stronger and is comparable to the development of the EBITDA.

Moving to Page 15. Here, you see the -- on the one hand, you see the maturity structure of our debt. After the dividend -- or to pay the dividend in May, we used the revolver of EUR50 million of the EUR300 million outstanding revolver. It is already repaid in July. And this year, we do only have to repay another promissory note of EUR35 million. So there is the possibility that we do a refinancing in autumn, but there is no obligation because our cash situation is that good. I think we will follow the market and then we will decide what timing we will use to refinance because definitely up to the end of '24 and then with the maturities in 2025, we have to do some refinancings. Equity ratio, leverage, I think all not only under control, but very healthy.

Moving to the guidance. And here, also from my side, I can only confirm what Christoph already said. From my point of view, I would say today that I do expect the full year results at the upper end of the guidance in both terms, free cash flow and EBITDA. And I do even expect it with the inflationary effects, what we see and I do even confirm it if we do additional investments into the TV business, especially at IPTV. So I think a strong confirmation of also, and I think from my point of view, a good guidance for the second half and how we do see the business today.

And having said this, I would like to finish and hand over to the operator again to start with Q&A.

[Operator]

Ladies and gentlemen, many thanks for your attention. [Operator Instructions] Tang Polo, you can state your question now.

[Tang Polo, UBS]

Good morning. Thank you for taking the questions. Just three quick questions. First one is, can you give your thoughts on the 1&1 national roaming agreement with Vodafone? And what do you think this means for both the German market and freenet?

Second question is, can you talk through what you're seeing in terms of competitive dynamics in the Germany market. So specifically, could you comment on what you've seen with Vodafone and their use of third-party channels at Q1, I think you flagged that they were spending less, but I'm just curious as to whether this has reversed in Q2 and Q3?

And the third question is really just coming back to the basic cable TV opportunity that you flagged. I'm just curious in terms of how quickly you think the benefit or the upside could feed through into waipu numbers. So could we see a benefit already in terms of the end of 2023? Or are we talking about something more medium term? Thank you.

[Christoph Vilanek, Chief Executive Officer]

Yes. Thank you. First of all, I have to say that I think we were surprised about the press release the day before yesterday on IONOS & IONOS signing a deal with Vodafone, surprised for two reasons: A, I thought this would happen later in the year; and B, I was not expecting Vodafone to cut a deal. I was expecting Telefonica to find an agreement. So congratulations to [Ralph Dommermuth] (ph) obviously done -- is a good move for him. I think it took benefit from the fact that Vodafone new management, a lot of pressure on all ends. And the guesswork says that this led to obviously more attractive offer than the one that Telefonica has given him.

I think on the Telefonica side, I mean, they have two years still be paid for the commitment. They would prepare themselves for a future. They can better plan their own network capacity. It will reduce OpEx and CapEx on their end. And I think it's a positive for us because the importance of freenet as their partner is increasing and there might be broader opportunities than we had in the past because of them depending very much or also looking very much on what IONOS & IONOS starts in terms of conditions, in terms of capacity needs, in terms of tariff plans. So for us, a positive one on Telefonica. I think for Telefonica, yes, there will be a financial impact, but they have two years to compensate. I think the first reaction of Markus Haas when I spoke to him was a positive one. He said that relax, we have enough time to prepare.

For Vodafone, I think it's a move. It's -- but I think it's a short -- it's only a short-term gain. They have not proven to be so successful in building out their network, et cetera, et cetera. So I think that it gives additional pressure to them. And we have seen that their backbone IT, et cetera, et cetera, is -- was quite weak because it was underserved for a couple of years. So I think it will be a challenge for them to satisfy short-term the needs that IONOS & IONOS will do. And that leads me to the conclusion that migration will not only happen over the period to the end of 2025.

Our relationship to Vodafone, I think it's not really affected. Yes, they will have a couple of million more customers on their network sooner or later. But at the same time, they also need to protect their own customer base also within our business relationship. They don't want us to move their customers to Telefonica, which would be an obvious arbitrage now. So I think it's also from that end, we are not expecting a change in the relationship and DT is not affected.

Overall, I would not see what some of the comments were yesterday that the market will now go down in pricing, et cetera, et cetera. I don't think so. I think it's more likely a more rational behavior. My personal belief is that at the end of the day, IONOS & IONOS and Vodafone are building one in the same network. So there will be legally two, but in fact, they will co-ally in building the networks and sharing part of the frequencies. Any other step would be totally irrational and waste of money, as I think they're going to join the effort in a sense.

On the competition and regulatory side, I think the move proves even more that the regulator should create a tighter regime, because, in fact, to me, it looks more like we have three parties instead of four. And once again, we need to protect competition in Germany it's not only freenet, but as I mentioned before, give access to others such as fiber companies, et cetera, et cetera, gives them the access in a more regulated way than we have it today. We are protected through the fact that we have 7.5 million customers, et cetera, et cetera, but access to 5G, access to all the technologies for third-party should be enforced and enabled by the Bundesnetzagentur.

On the current situation in the market, yes, we have seen Vodafone specifically in the first calendar quarter to take out commissions and provisions. We have seen them change the gears again in Q2. We are not yet on the level that they spent before, but I would say it's a -- money has come back, let me put that way. So we are fine. But our acquisition mix across the networks has shifted Vodafone for a long -- I think the last three years was slightly ahead of the others. I think now telecom is the stronger network in our base in terms of new customer acquisition. But we're not talking about 20% or 30% shift. We're talking about a couple of percentage points because at the end of the day, we serve the customer what they want.

Third question on cable TV, I think the awareness of the fact that the privilege -- the ancillary cost privilege is going away, is increasing. Any alternative providers of TV signals enforce this and make it public. But again, it's only in July then customers need to cancel their existing contracts. It's going to take a little while till they understand it. The rule is going away by July. So in summer, people are on holidays. We have seen yesterday that the German football will not be a trigger either this year or next year. So I expect the people kind of wake up on the opportunity to switch only in the third quarter -- end of third quarter, fourth quarter next year. So we expect the real impact -- relevant impact only in 2025.

There will be an uptake in 2024. And I think the fact that we are getting faster and accelerate the growth right now is already an early indicator that the potential is there. Those people come typically from cable or satellite because we need to have -- had signal before. So the answer is, it's going to move the market, but the significant changes from my point of view will only be end of 2024 and then the real impact on customer base, EBITDA, et cetera, on -- in waipu is only 2025.

But up until then, I think we will find a couple of other partners on the fiber infrastructure side with -- doing better and better in own acquisition. We have started now to sell the product in MediaMarktSaturn. We have done testing in 40 markets -- 40 of their shops. We now by end of October, we will expand this to full size all 440. We see a good learning curve there. We see that end consumers understand that there is an alternative and that they need to switch to take privilege of all the benefits of IPTV. So all in all, a good development. And I think the extra pace will then come next -- end of next year.

[Tang Polo, UBS]

It’s very clear. Thank you.

[Operator]

So Martin Hammerschmidt, please state your question.

[Martin Hammerschmidt, Citi]

Hey and thanks for taking my questions. And I also have three, please. And the first one is on sort of waipu.tv. I think on the CMD in terms when you soft guided for EBITDA in 2023 to be EUR10 million to EUR15 million, so it was in the first quarter. Now so you invested quite a lot in marketing to get ready for the changes in the Nebenkostenprivileg. Then is that EUR10 million to EUR15 million still valid for this year? Or do you see opportunities to invest more into growth and then basically with the benefit just a bit later? And then coming back to the 2025 guidance that you gave from the CMD, if we have everything that the picture that we have now, do you think that guidance is now too low given sort of the strong net adds that we see and also the new blast for the customers?

Then my second question is, you've talked about new partnerships for waipu.tv on the last call. And I was wondering is there anything in the pipeline in terms of signing up? I think you mentioned it just now sort of city carriers and basically cross-sell your TV product into their customer base. And maybe then the last question is, could you split the waipu.tv net adds between sort of organic and what came from Deutsche Glasfaser? Thank you.

[Christoph Vilanek, Chief Executive Officer]

Okay. Yes, thanks for the questions. First one, I think the EUR10 million to EUR15 million EBITDA is still valid in the sense of, unless we do invest more in above-the-line and acquisition, because we expect -- so far, we expensed the acquisition cost immediately, so that has an impact. And the fact that I said till the end of the year, we anticipate plus 200,000. Obviously, acquisition costs are higher than in the original plan and the same goes for ATL. So I think we're going to end up more in the range of five to 10 at the end of the day.

So there is an extra, if you want to call it, an extra -- I wouldn't call it investment, an extra expense of EUR10 million in approximately in RTL and [Indiscernible] that were not in the budget, but we feel comfortable now to spend it because I think in the past, we were a bit reluctant to do so because we -- all the test showed that extra money is not giving extra customers, and this is changing now.

And as I said, for example, the offer that we will do in November with MediaMarkt will be with the subsidized hardware and these things obviously cost money. So from the EUR10 million to EUR15 million, I would think it's going to be more EUR5 million to EUR10 million. But given the overall performance, I think that also indicates why we are not lifting guidance for this year yet because we expect there a bit more spending than we did in the first-half year.

By the way, the same thing, we will increase our minimum wage in the company by 1st of October, and that is also impacting second quarter or the fourth quarter, second-half of the year are different to the first-half. So there is a couple of changes that will then have an impact, obviously, also on this side. But with a good first-half of the year, we feel very comfortable to do so.

The second question -- the second leg was guidance, EUR520 million for 2025. And I think there's no reason to change it right now because we said we're going to be above EUR520 million. And that's definitely still valid. I think it will depend very much on whether we are still in a high investment mode on IPTV or whether we start to kind of flatten it out as we do in mobile. I think that will be the determinator finally on the result.

But no doubt, the EUR520 million is definitely not an ambitious target and target anymore given the fact that this year, we're going to be beyond EUR500 million or the five will be the first now -- the first digit. So I think you're totally right, but it's not yet at the stage to change the guidance as such. But I can only repeat myself. I think Ingo and myself will hopefully agree that it is not an ambitious target anymore. It's more ticked off self-explanatory easy to do. So we will go beyond that.

On the pipeline of partners, I think the pipeline is the same as the one that I was talking about in May. What we learned is that any of those potential partners are really slow moving. I think that is more a feeling than a quantitative statement. There is a lot of frustration on fiber expansion in Germany, a lot of talking, a lot of money, but it's only theoretically money, capacity on building construction companies is still low, any of the people that we have in the company that have ordered fiber, they're all waiting for years from signing a contract to the actual delivery. And this is also happening when we talk to these companies and say, yes, we'd love to do with you, but we cannot even tell you exactly how many new customers we will connect in the next couple of months.

On Deutsche Glasfaser, we are halfway through on what they have on active TV customers. So we have about 40,000. We expect for the rest of the year minimum the same number. That is, we were starting now in August with a special program for their customers. We also give them marketing funds to Deutsche Glasfaser to enlarge or widen their promotional activities. So far, they have done it in a very serious way, very cost sensitive, and we are now pushing harder because what we see is the customers that hook up with us from Deutsche Glasfaser will become active, they're good customers, they're paying. They are upgrading their packages to higher packages very, very soon. So we feel comfortable to give them an incentive of bringing customers on board.

[Martin Hammerschmidt, Citi]

Understood. And if I can just ask one more question as a clarification question. The new deal between 1&1 and Vodafone, you will still be able to resell the 1&1 contracts when the network and comes on.

[Christoph Vilanek, Chief Executive Officer]

Thanks for the question. It's even better because in the old contract, subservice providing on the pure MVNO customers. On the national roaming customers was legal issue between IONOS & IONOS and Telefonica. So it was not yet confirmed that we could do so. And given this old contract with Telefonica, I'm sure that IONOS & IONOS will make sure that in the new one with Vodafone this clause will not be there again. So I think that has improved our opportunity, instead speed up the opportunity to resell IONOS & IONOS.

[Martin Hammerschmidt, Citi]

Perfect. Thank you very much. Appreciate it.

[Operator]

Your next question comes from Ulrich Rathe.

[Ulrich Rathe, Societe Generale]

Yes, thanks very much. Three questions from me as well, please. The first is on the overhead costs, which I would call anything between gross profit and EBITDA. So that figure is up 10% year-on-year in the second quarter. Ingo, I think you mentioned this one-off employee payment, but there's other costs rising as well in there. So we'd be interested what the outlook for employee costs for the year and overall, this sort of cost inflation is in your thinking. And one element of that, if I may, is that the loss allowance, I think you're highlighting the port loss allowance is stable year-on-year, which is obviously a good thing, but it's still higher than the first quarter. So is there anything in there that's this worthy of discussion?

Second question is on GRAVIS. You're highlighting that it has very low margin, but there must be some fixed costs in there. So could you sort of explain what the operating leverage at GRAVIS is given that it is really -- seems to really suffer on the revenue front. So not entirely sure how to say it in either way because there's very limited disclosure. But I mean these are shops and the releases. And so it can't just be 0 margin, no matter what the revenues are. They are interested to see give -- get some idea.

The last question is a bigger picture question. I mean, there is a degree of sort of market discussion that I'm sure you're aware of about a potential share buyback, if only to mitigating rising taxes after 2025. I think you discussed that in the past a tax issue. How should we think about potential share buybacks? Is that essentially now off the table because you need to refine a bit of debt, as you mentioned, if not in 2023, it is coming. And you feel like do the refi for us before you even think about that? Or is there sort of a debate to be had about capital returns to shareholders at some point?

[Ingo Arnold, Chief Financial Officer]

Ulrich, concerning the overhead costs, I think it is even better than we expected at the beginning of the year from my point of view. On the one hand, you were discussing the HR costs. And Christoph already added something about the minimum wage where we will do something in the fourth quarter, which will increase the personnel cost further. But if you look into the personnel costs, we already discussed it when we discussed about our guidance in Feb. We put something like EUR10 million in the guidance for additional personnel costs of the year. And this is something in this range is something what I would confirm today.

I think we are still on these levels. I think the negative of the information is that we are still some stuff is missing. So some positions are open here. So we have some gaps. But I think this is the balance at the moment. We see increasing wages, but on the other side, we see some -- still a difficulty to find experts for different jobs here. But I think at the end of the day, and this is the balance where we do have every year. But I would say something like EUR10 million for the year.

On the cost side, on the SG&A side, I think we already mentioned in one of the calls that we renewed the contract with Capita who is doing our customer care. And I think all in, the contract has not changed and the conditions have not changed, so we are fine with it. But there was a different structure before. So now we pay average cost over the years and this leads to an increase of SG&A of something like EUR5 million in the first-half year. And so this is a negative effect, what we do see in our SG&A costs, but this was also part of our budget at the beginning of the year because we closed the contract at the end of last year.

About bad debt, I would still say from today's point of view, all in, the bad debt for the year will be something like EUR20 million. It could also be something between EUR18 million and EUR23 million but it is something around EUR20 million. This is what we see. So it is definitely much lower than before the COVID crisis, but it is higher as it was during the crisis. But it is still on a low level. And the provisions what we built, I think, at the end of '21 are still in place. So we have not changed it. So bad debt is on a -- I think, on a reasonable level now.

Then your question about GRAVIS, yes, I think in the past, we have not published any detailed figures, and I do not want to change it today. But yes, it is compared to the more than 500 shops what we do have in retail, we do only have 40 GRAVIS stores. So the rental cost situation, et cetera, is not that important. And even if we talk about decreasing revenues, it is a good revenue what we generate there, and there is no risk on this side. Your bigger picture, I do not see a direct link. If I understood you correct, there was a link between the tax issue and the share buyback for us or for myself, I can say we do not see this direct link.

I think share buyback, we have the allowance from the AGM to do share buyback. We are -- and this is something what I can only continue to say and repeat. We are focusing on the business. We would like to invest it into the business. I would not say share buyback will not be possible. But up to now, we have not decided to do so. And we are still thinking about investing into the business. Let's wait and see what happens with the IPTV, what happens with 2024 and with the opportunities, what we do have there. So it is not out of the world to do share buyback. Do we -- can you expect it that it happens in the third quarter? No, definitely not. I think from time to time, we discussed it here only on a Board level, but it's nothing decided there.

With the tax issue, yes, we only have a minimum taxation still at the moment. Things will change starting in 2025, 2026. And -- but there will be still a lower taxation up to the end of 2028. And after 2028, there will -- we will have to pay the full tax rate. And yes, we have to be prepared for this. But anyway, we have to pay it then. But this has no link to share buyback. We do not have to prepare anything. I think it is part in our long-term plans what we do have and I think we try to optimize our free cash flow. And therefore, I think that even the full tax payment won't be any problem for us.

[Ulrich Rathe, Societe Generale]

Great. Thank you, very much for these answers.

[Ingo Arnold, Chief Financial Officer]

Okay.

[Operator]

So the next is Joshua Mills. Please take your question, Joshua.

[Joshua Mills, BNP Paribas Exane]

HI, guys. And thanks for the question. I'll just stick to 2. The first is, is there any scenario in which you would consider looking at even a partial MVNO deal with Telefonica Deutschland? Obviously they're going to be left with a lot of excess capacity when [Indiscernible] the network. Is that something you would ever consider? And if you did do that, do you think that it would be possible to maintain the kind of relationships you have with your other MSP partners is the first question.

And then the second question is just around the advertising spend in TV. So I think you're kind of characterizing this as a quite flexible line item that you can move in and out of. But my question is in order to kind of maintain an organic net add run rate of, say, 50,000 to 100,000 waipu [across the] (ph) quarter, why shouldn't we think about the advertising spend is more structural? Why would the spend not be higher going forward? Or do you see this as a kind of one-off push in the next 12 months to try and capture the window of opportunity around enabling costs and trigger rate changes? Thanks very much.

[Christoph Vilanek, Chief Executive Officer]

Yes. Thanks, Josh, for your questions. The easy answer would be a double yes. Yes, we consider -- yes, [Technical Difficulty] going away. I think this is a period where people need to have a higher awareness and we would also believe that with a certain level of customers, you can bring ATL cost to stabilize ATL cost on a more normal level because then you have high enough brand recognition, word of mouth, impact of partnerships, a broader distribution, et cetera, et cetera. So I think that -- I hope this answers the ATL question.

And again, on Telefonica, yes, you're right. They are -- there's a phase-out of capacity. And certainly, my -- and our first reaction was whether there is -- whether this is worth talking to them and we signaled to Telefonica that we should include such ideas in our regular conversations that we do anyway. And I think there is no impact on the relationship to DT and Vodafone because at the end of the day, they are not interested in what kind of business model and contractual structure we run with other operators. But they want to make -- they want to secure their fair share within our base and they have a chance to do so if they give us favorable conditions.

[Joshua Mills, BNP Paribas Exane]

So how would that -- can I talk in following up, how would that work in practice? Would you be looking at a kind of combination of reselling hefty product that you currently do and then maybe taking some mobile capacity to sell freenet bundled contracts? And what do you see as the advantage of having an MD&A model versus a reseller model because I think in the past, you've always highlighted that being an MSP…

[Christoph Vilanek, Chief Executive Officer]

Well, I think in -- well, but in reality and actually, it makes no difference for us. It's just a matter of financial engineering. In our current model, it's not about the fill rate. In our current model, we run more or less very plannable margins on an individual SIM card. And in an MVNO capacity model, you would -- you're working against a fill rate. And profitability has a lot to do, whether you get close to the fill rate or not. I think it's a difference in the way you plan your business. It's different in a way to steer network share within our portfolio. But technically, it's the same. It's just a difference in, let's say, in accounting, planning and in the mechanism of generating profit.

[Joshua Mills, BNP Paribas Exane]

And so I'm going to be annoying enough and ask a quick clarification. So if that's the case, could you do the same thing with Vodafone? And then finally, I think in the past, you've kind of indicated that your sales split is something like 40% DT, 40% Vodafone, 20% TEF Deutsche. Is that broadly still the case today? Thanks.

[Christoph Vilanek, Chief Executive Officer]

Well, in general, any of these models are possible with any of the operators. We have today a different model with Telefonica than we have with Vodafone and DT. There we have a model which is more the old service provider that they give us a commission on acquisition cost and renewal costs and the lower, let's say, anti-margin whereas with Telefonica, we have a pure margin model. That with the old rules not having IFRS where we expensed the acquisition cost over 24 months, this had a high impact on our way to do customer acquisition because high subsidized handsets historically only went to DT and Vodafone because we needed to fund them.

Given the IFRS rules, these models are financially for us more or less the same. So -- but in general, we have always asked also DT and Vodafone to move into other models. But so far, those conversations always led to the fact that the transition phase is a difficulty. This is why we still stick to the old model with them. I need to illustrate that if you -- if we change the model, they have more is that they have paid for a customer as a commission and we will move this customer then in the new model so that they are afraid that kind of they paid twice.

So the transfer from the old into the new model is the real challenge. And this is -- yes, why so far, we have not been able to change the model. At the end of the day, if we look bottom line and I think Ingo and his team do that calculation more or less on every single customer, both models are the same in terms of gross margin for us. We're looking for more favorable conditions and whatever they look like, we would always take them. I think that has been our proposition and it's going to be in the future.

[Joshua Mills, BNP Paribas Exane]

Great. Thanks a lot.

[Christoph Vilanek, Chief Executive Officer]

Yes.

[Operator]

Okay, thank you. So the next will be Titus Krahn.

[Titus Krahn, Bank of America]

Yes, thanks a lot for taking my question for, all the very helpful explanation on the call already. So I just have a few other follow-up type questions. Maybe first, just on your potential future relationship to 1&1, which could sell through you. Maybe when would you know definitely that they can actually use you as a sales channel? When can us -- do you have that discussion with 1&1 and when would you expect that to actually impact your financials and your subscribers? How large is that opportunity? Maybe you can add on to this a little bit.

And then also as a second follow-up just on the potential changes in mobile regulation and the potential regulated access to 5G. Could you maybe remind us of the timeline and what your most likely outcome is out of the process given that I think we see politicians actually now backing such a proposal now much more than they did in the past? And maybe as a third very quick question just on the minimum salary increase, which you mentioned. Could you maybe just quantify how much that impact could be probably in Q4 this year or on an annualized basis?

[Christoph Vilanek, Chief Executive Officer]

Yes. I mean, I'll start with the first one. Well, I can't tell because as we saw in the press release, they have not started -- they are starting to go into the details and they want to finish before 1st of October next year, if I remember correctly. And from 1st of January, they will run their own network, if you want to call it like that. So I guess, the national roaming will start in an ideal world very, very soon. And I would expect that we -- that soon -- as they have sold it out, that stuff, they will also talk to us about reselling. I think it with -- the financial impact will be zero, because neither will the market grow nor will we have other customers than today. The difference will be that while we could also take the ones that want IONOS & IONOS, but the ones that want IONOS & IONOS today are the ones that want Vodafone. So I don't see that the network -- the pure network of IONOS & IONOS will make the difference at least for the next 24 months. So we will certainly resell their product because it's our proposition to have all the networks. But this is not an extra at least as I see it as of today.

Second one on BNetzA. Well, if we would know, we would let you know. They have no -- they kept telling us that they want to set up the rules and the timing before the end of the year. But I can say more than publicly available, because anything else is under non-disclosure agreement with them. So there is a strong feeling that it will go for an auction. There's a strong feeling that this will happen next year, but nothing is confirmed. And as you rightly pointed out, the politicians are more aware of the pressure on them creating competition. It would be easy for -- or I'm sure that the operators will now say while you can see that IONOS & IONOS was able to agree with Vodafone. So there is no need for regulation. It's their argument. We would say we are going down to three parties. So I think you need to do a regulation. I think these are the two ends. And both parties will try to lobby for their point of view.

So in the last one, we have today a minimum wage, which is 27,800 and we will move this to 30,000. This is about 700 people in the company that are immediately impacted because their salary today is typically lower because all of them have a variable income. But it's about 700, I would say, that will be impacted, not every month, but a couple of months a year, depending on, for example, people in the shops that have a low performance month or so when they drop, then they drop below that minimum wage. I think the impact, Ingo, an annual basis is 6 million, is that right?

[Ingo Arnold, Chief Financial Officer]

Yes. Yes, it definitely is a maximum, I would say. So for the fourth quarter, maybe 500,000, 600,000, something like that.

[Titus Krahn, Bank of America]

Okay, helpful. Thanks a lot. And I think on the 1&1 relationship, the question was more, but I think you answered it while I was on -- I mean you're definitely in a stronger position if you have four parties to negotiate with rather than three, if you don't see it in those numbers.

[Christoph Vilanek, Chief Executive Officer]

Yes. That's definitely right. So I mean this is what I said before. I mean if they -- if IONOS & IONOS is going into the market and is trying to sell with us, Vodafone will be under pressure to give us good better conditions or to compete with the offer of IONOS & IONOS, because for the end consumer perception might be that is very much the same network.

[Titus Krahn, Bank of America]

Perfect, thanks so much.

[Operator]

Thanks a lot. The next question comes from Adam Fox-Rumley.

[Adam Fox-Rumley, HSBC]

Thank you very much for all your answers so far. I just wanted to think a little bit more about the source of waipu.tv subscribers. You've obviously got 7.5 million subs. So I wonder practically how much cross-selling is there today of waipu into that mobile base? And how does that work, if it does?

And then kind of secondly or a sub-question. Have you done any interrogation of that base about those who are already taking -- who currently take cable TV, so turning your addressable market slide more from the market into your existing customers? Thank you.

[Christoph Vilanek, Chief Executive Officer]

Yes, thanks for the question., Adam. My first answer would be we have about 40 million households in Germany and 130 million SIM cards. So the first rule is divided by three, then you have household penetration. So that would lead that we are anywhere between 2.0 and 2.5 million households. Second is that the TV access is still something that the same as Internet access. Typically, the male head of a family is deciding. So -- and if you take that, again, then you can see that the cross-selling is not 7 million, but it's maybe 1 million potentially, we do that. And we will not disclose that, but a relevant part of our today's subscribers on waipu are mobile or freenet mobile customers. It's a significant part, but it's -- yes, it's significant. You also know that a product is also resold from Telefonica, uses the same logic.

And the final answer is, if you look at Deutsche Telekom, knowing that they have, whatever, 40 million fixed networks and so many million Internet access, and they have in the first quarter only achieved 50,000 net adds on TV. This is an indicator that the cross-selling is not that easy. People have a very tight relationship to their current remote control. There needs to be any triggering event where they say, okay, now I'm changing. It might be a new TV set.

It might be that they move from one place to the other. It might be that their digital set-top box needs to be replaced or has a default whatever. And when distributing event is happening, then people are rethinking. We keep constantly informing our customers, we keep demonstrating waipu in our shops. But it is still not TV signal is nothing that is a conscious act. It's there. It's either cable or it's a satellite, and it needs a triggering event.

[Adam Fox-Rumley, HSBC]

Could I just ask a second, which is, is there any tension whatsoever between the fact you've got this freenet brand, which is now everywhere. Now you phased out, overcome, doubletail and the waipu brand itself. I mean have you ever considered thinking that it should be freenet TV rather than waipu.tv or is there too much now invested in?

[Christoph Vilanek, Chief Executive Officer]

Yes. You're putting the finger into the wound. It was -- I mean, history was that we were a 50% shareholder. And the other 50% shareholder thought that if this was -- if the waipu.tv product would be so tightly related to freenet, they would never have a chance to access for an exit because the brand was too strongly connected to us. So at that early stage, we have accepted that rule. And now we have invested five or six years into a different brand.

If I could turn back time, well then, certainly I would put it under the freenet brand. But it would also limit other things. I mean the fact that Telefonica is now selling waipu, I don't think that they would ever sell freenet TV because they would say it's too strong of a brand and too closely connected to us. So there is advantages and disadvantages and we came to the conclusion that it's not the time to turn it back.

[Adam Fox-Rumley, HSBC]

Really interesting. Thank you very much.

[Operator]

Many thanks. So Yemi Falana, please state your question.

[Yemi Falana, Goldman Sachs]

Good morning. Thanks for taking my questions. It could incredibly helpful. Clearly, a strong set of numbers, but it'd be great to understand how you're thinking about some potential downside risks into the second half of the year. So could you maybe talk about how family plans are impacting the market, Vodafone and Deutsche Telekom have talked a lot about that in recent quarters? Obviously, they're helpful.

[Christoph Vilanek, Chief Executive Officer]

I think it might sound strange, but I don't see a downside risk except for things that will impact the world or the country and will also impact us, but I don't see out of the business. The family plans, I think what the family plans absorb is the customers that today still have a prepaid with a discounter such as ID or [Indiscernible], et cetera, et cetera. This is what we have learned from Deutsche Telekom. They told us that they can see it from number portability that what the original source is. They have also learned that a relevant proportion, I'm not in a position to disclose what they told us, but the relevant proportion is cannibalization from Congstar in their own base. Not so -- not everything is incremental.

What we see right now with us is exactly the same. We're getting a couple of customers that move in from any discounts prepaid SIM cards that they had in the past. And the offer is attractive and it's good, but it's -- it also has its limitations. Not everybody wants his parents to see the number statements. Not everybody wants the detailed consumption being watched by typically parents. So it is an additional thing and it works well, but it is not changing the market.

[Yemi Falana, Goldman Sachs]

Thanks very much.

[Operator]

Thank you, so please, Simon Stippig, please state your question.

[Simon Stippig, Warburg Research]

Good morning, team. And lots of questions already asked. I have two or three questions. One is, again, going back to the free cash flow usage, you're paying 80% of the dividend, 20% is left. Maybe you can speak about the prioritization of the capital allocation in that regard? Second question and that is tied into the first question. In regard to refinancing, 2024, you have a variable promissory note loan. I think it's EUR140 million. Could you speak about any margin you would expect and maybe also if you're already in negotiation for refinancing.

And then one maybe in regard to freenet TV, you know, declined, that's very positive, slowed down to -- and is there a particular explanation for that, especially on the background of previous quarters were always range between 25,000 and 30,000? Thank you very much.

[Ingo Arnold, Chief Financial Officer]

Yes. Simon, thanks for your questions. I think capital allocation, not that much new to say. You already mentioned that 80% of the free cash flow will be paid out as a dividend. And as the free cash flow is increasing, everybody can expect from today's point of view also an increasing dividend. So I think this is a good part of the capital allocation for all of the shareholders with the 20%. And I think we already talked around share buyback before. But still, it is our wish to invest it into the business. This is the top priority, and then we will see what happens. We think we pay a very high dividend.

From today's point of view, I do not see an additional or higher dividend. I think the dividend yield is fine. So I do not expect any changes there. And you with your questions already built the link to the financing and to the outstanding promissory notes. I think basically, our leverage is already very low. So we do not have to reduce our debt. But yes, it is more favorable than in the past because today, we pay higher interest rates than in the past. So -- but I think it is not -- definitely not our top priority to reduce debt.

The refinancing situation, yes, the margins have changed. So three, four years ago, in the promissory notes, we had to pay margins of something like 120 to 150 points. At the moment, we have to pay some -- we would have to pay something between 180 and 200. It's something what I would expect from today's point of view and if we follow the market day by day. So there would be a margin increase of something like 50 -- let me say, 50 to 80 points. So it will not change the world. But yes, it is more expensive. And this is also a question of timing and phasing when we will start to refinance. So maybe it's a peak now, nobody knows. But I think we have to decide and we follow it. We have not yet decided when a refinancing will take place. But in the interest rates, what we paid and from the cash flow, what we published today, you see that up to now, the effect was very small. And so I do not expect big effects in the following quarters.

Your question about freenet TV, yes, it was a very good second quarter, and this could lead to a statement that we see the floor, but I would like to say you have to be careful because as we started the service in summer some years ago, we and a lot of people still using vouchers, which have a 12-month termination. So in the third quarter, a lot of vouchers will be due. And some of the customers already buy new vouchers in the second quarter, even if they do not have to buy them.

So the second quarter also in the past years was a little -- looks a little bit better than the average of the yearly quarters. So I would be happy to see a floor, but what I would expect from today's point of view, it's a lower figure in the third quarter. So I think we still look for a floor, but we do not see it. But all in the dimension, if we compare it with, let me say, in '22, the dimension is a little bit lower. But I think I would not -- I do not have the best news what you could maybe have expected after the smaller decrease in the second quarter.

[Simon Stippig, Warburg Research]

Great. Thank you.

[Operator]

Many thanks, Simon. Now the last question comes from Usman Ghazi.

[Usman Ghazi, Berenberg]

Hi, gentlemen. I just want to make sure you can hear me first. Is that okay?

[Ingo Arnold, Chief Financial Officer]

Yes, perfect.

[Usman Ghazi, Berenberg]

Okay, great. I've got a few questions, please. Clarification questions first and then the real questions. Do you have some comments made around waipu doing the 80,000 net adds in Q2 on an organic basis, but then there's also been some mention that Deutsche Glasfaser has done 40. So I just want to kind of clarify what the real kind of organic run rate out of the 100,000 waipu was in Q2. And then on the second-half, guy -- second half kind of commentary that you expect waipu to be doing 200,000. Does that include the Deutsche Glasfaser contribution? Or is that just pure kind of retail momentum? So that was kind of the first clarification question.

And then Christoph, I think you also kind of mentioned that, look, the 2025 CMD guide of over EUR520 million is not ambitious because you expect you will be doing something with EUR5 million already in 2023. I just want to -- maybe I misheard that, but I just want to make sure that was or was not said in one of the responses to the earlier question. So those are the two kind of first clarification questions, please.

The other kind of questions I have, firstly, is on your comments regarding that you're exploring, perhaps doing something different with Telefonica Deutschland post this 1&1 news. And the question is that I mean if I look at how freenet is operated in the market, it's obviously been a very delicate balance of maintaining all relationships, DT, Vodafone being your primary partners, O2D being relatively new. And you've always been very careful to not kind of put -- to not kind of cannibalize the network operators themselves, right? Because what we've seen with 1&1 is that they've been much more ambitious with their mobile ambitions, ended up cannibalizing the operators that then led to an acrimonious relationship, that then led to them wanting to build their own network to be free of this situation.

So it seems to me that -- I mean, any move that you make now to potentially move to any kind of MVNO model with the Telefonica Deutschland could upset that delicate balance that you've created and that has been to the benefit of freenet shareholders and all of that in terms of visibility on margins and planning and everything. So can you kind of just perhaps give us some reassurance that these options that you are exploring with Telefonica Deutschland, while it makes sense to do so because you have an opportunity are not being done with a view to becoming suddenly very ambitious in mobile from a market share perspective and potentially upsetting the Apple cart with your -- with DT and Vodafone which I think you still are your main kind of -- your customers are primarily on those two networks. So yes, there's a bit of a long-winded question. Apologies for that, but I think it's important for the market to understand how you're thinking about this? Thank you.

[Christoph Vilanek, Chief Executive Officer]

Yes. Usman, thanks and thanks also for the last one. Simple on -- yes, in the second quarter, we had 40,000 Deutsche Glasfaser and we think we're going to have another 40,000 until the end of the year. I would not call it an organic, I would say, it's just a sales channel and we need to build up on the sales channel. But your 40 has been in there and 40 yet to come. Second, on the EUR520 million, well, what can I say? It's, in fact, so that we see EUR500 million or EUR499 million or EUR502 million for this year. And there's EUR18 million to go and we don't think that, well, if we would -- if we look at the track record of the past three years and our development on TV and overall in the company, it's likely that we will raise next year our range. And it's likely that we're getting closer and closer to the EUR520 million full stop. I think you rightly understood. We are not here to say we will change that EUR520 million number right now. But the good thing of the EUR520 million was that we said we're going to be beyond. And we just reconfirmed that we're definitely beyond.

And on the third one on Telefonica, first of all, we are not exploring. The question was, if now IONOS & IONOS is going away, in brackets, it's happening by the end of 2025, yes, then capacity in the Telefonica network will be available and Telefonica might want or might consider or might anywhere in the next couple of months think about replacing this with a different business model working with us. We are not exploring the whole thing happened 36 hours ago. And the question was, is -- conceptionally, is this opening an opportunity?

And I can -- I was not in a position 20 minutes ago to say, no, definitely not. We're not going into it. I'm just saying, yes, there is an opportunity to talk but there is one determination that any person involved has in this company. We live from what you call a delicate balance. We live from the balance, we live from an arbitrage, we live from an internal competition among the partners.

And if Telefonica says, we offer you a different business model, and we will then consider this given our commitments to the others, given our long-term commitments and long-term incentive plans with the two other networks and also seeing that there is a force player coming up, which we might also do service provisioning with, we would -- these are all elements that we would take into the evaluation of a potential change in the business model.

But we are not saying or stating or putting just on the wall. We are now going for 25% of their capacity. This means that 50% of our customers need to be migrated and we -- I expect now 10 minutes after this call, a strange ring in my cell phone from Srini Gopalan telling me whether I'm crazy. No, it's not. We are continuing our business model. We are not changing our business model. We are just -- I cannot deny that these things change things and might lead to a different version of the conversations of Telefonica now.

[Usman Ghazi, Berenberg]

Great. That’s really helpful. Thank you very much.

[Christoph Vilanek, Chief Executive Officer]

Thanks for the question.

[Operator]

Many thanks for all the questions. So now let me hand back over Christoph Vilanek, please, for some closing remarks.

[Christoph Vilanek, Chief Executive Officer]

Yes. Well, thanks, guys, for your patience. Thanks for a lot of question. It was interesting conversation. Also, thanks for the second round of questions for clarification, I think that's important. I hope we don't end with any misunderstanding. If so or if anybody wants a deeper insight, please, like always, feel free to call Tim and his team or Ingo or myself. Other than that, I wish you a nice weekend.