IONOS Group SE

XETRA:IOS

Earnings Call Analysis

IONOS Q2 2024: Revenue Growth and Strategic Shifts

IONOS saw total revenues in Q2 2024 rise to EUR 378.6 million, marking a 6.7% year-over-year increase. Core business revenue, excluding Aftermarket and Cloud Solutions, grew robustly at 9.6%. The adjusted EBITDA reached EUR 112.2 million with a margin of 29.6%, slightly affected by higher marketing costs. The Aftermarket segment, while recovering, faced lower revenue expectations due to temporary effects but is projected to grow in the low teens in H2. Looking ahead, IONOS adjusted its 2024 guidance to 9% currency-adjusted revenue growth, with Web Presence & Productivity expected to grow by 11%-12% and Cloud Solutions by 15%-17%.

Strong Revenue Growth Despite Economic Headwinds

In the first half of 2024, IONOS reported a revenue increase of 6.1%, reaching EUR 751.6 million. This growth was driven by successful upselling and cross-selling strategies, alongside a slight increase in customer pricing. Despite facing economic uncertainties and decreased customer growth in Q2, IONOS remains resilient, bolstered by a loyal customer base of 6.28 million, which reflects an increase of 180,000 customers compared to the previous year.

Strategic Pricing Adjustments and Customer Engagement

To enhance profitability and customer retention, IONOS has implemented measured pricing adjustments starting in Q3 2023, aimed at maintaining customer satisfaction while minimizing churn. The average revenue per user (ARPU) has grown by 8%, demonstrating the effectiveness of their strategy to deepen customer engagement through innovative offerings and price refinements. Despite a slight uptick in churn during the first half of the year, it is anticipated that rates will revert to previous levels as pricing adjustments are fully integrated.

Segment Performance and Future Outlook

The core Web Presence & Productivity segment recorded a robust 9.6% growth, boosted by recurring revenue streams, while Cloud Solutions experienced a growth of 25%. IONOS has adjusted its growth guidance for full-year 2024 down to 9%, with core business growth expected at 11% to 12%. The Aftermarket segment is anticipated to stabilize at last year's revenue levels, transitioning to recovery in the second half of the year.

Investments in Marketing and Product Development

IONOS has strategically shifted brand marketing investments towards the middle of the year, responding to major events that attract high viewer engagement. However, this shift has temporarily affected immediate customer growth. The investment in marketing is designed for long-term gains, which is expected to yield higher growth as the year progresses. Furthermore, the launch of new products, particularly in AI, is expected to drive additional revenue growth, especially within the Cloud Solutions business.

Financial Health and Capital Expenditure Strategies

The company maintains a solid financial position, with a free cash flow of EUR 151 million in H1 2024, significantly up from EUR 44 million in H1 2023. IONOS's capital expenditure forecast for the full year is around EUR 100 million, accounting for 6% to 7% of total revenue. IONOS's proactive approach to debt management saw net debt drop to EUR 963 million, with a leverage ratio of approximately 2.4x net debt to adjusted EBITDA, reinforcing financial stability and flexibility.

Long-Term Growth Trajectory and Innovations

Looking ahead, IONOS is well-positioned for sustained growth driven by innovations in AI technology and cloud solutions. The launch of the AI Model Hub exemplifies the company's commitment to advancing its service offerings, which is expected to attract new customers and enhance existing customer satisfaction. Management anticipates an improvement in adjusted EBITDA margins, projecting growth to reach 30% by 2025. Overall, IONOS's strategic investments and adaptive pricing strategies provide a solid foundation for continued growth amidst evolving market dynamics.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome, and thank you for joining the IONOS Group SE Publication of the Q2 Results 2024 Conference Call and Video Webcast. [Operator Instructions]

Now, I would like to turn the conference over to Stephan Gramkow. Please go ahead, sir.

[Stephan Gramkow, executive]

Hello, and good morning, everybody. I would like to welcome you to the analyst and investor call of IONOS on the Q2 2024 results. Thank you for joining. My name is Stephan Gramkow, and I'm responsible for Investor Relations at IONOS.

Let's have a look at the agenda for today's call. Achim Weiss, CEO of IONOS; and Britta Schmidt, CFO, will walk you through the operational development and the business in the first half 2024 and the financial details of the second quarter. We also want to take a look at the guidance and our expectations going forward. Achim and Britta will then be happy to answer any questions.

Achim unfortunately had to dial in from Berlin today because his transport was canceled, so we have a slightly different setup. Nevertheless, let's get into it. Achim, the floor is yours.

[Achim Weiss, executive]

Thank you very much, Stephan. Good morning, ladies and gentlemen, and welcome to our Q2 2024 webcast. I'm Achim Weiss, CEO of IONOS, and it's a pleasure to have you with us today as we dive into the performance of the first half year and operational trends.

As a reminder, IONOS stands as the leading digitalization partner for European small medium business and a reliable cloud enabler. I want to emphasize our strong business pillars that underpin our success. The [ Fiducian ] is our Web Presence & Productivity business, excluding Aftermarket, which is the largest pillar contributing EUR 509 million or around 70% in revenues in the first half of 2024.

The sector has once again demonstrated impressive [ resilience ] and consistent growth over the first half of this year, posting robust underlying margins and outstanding cash conversion. Through a subscription-based revenue model, we address all digitalization requirements for small and medium businesses, including solopreneurs. We are the market leader in Europe and have a significant presence in North America as well.

Moving to the [ center ] of the page, let's have -- let us have a look at our Cloud Solutions business. Around 11% of revenues in the first half of the year stemmed from our cloud business. Here, IONOS is steadily gaining recognition as a trusted cloud partner for small and medium businesses. Our recent success in this area winning the German Federal government as our customer demonstrates the progress we have made in this field. This accomplishment further strengthens our belief that we are on the right path. Currently, being self-sustaining, we anticipate this business area to contribute positively to our EBITDA in the near future.

Additionally, we have our Aftermarket business, which is about buying, selling and parking domains. This area accounts for roughly 19% of revenues in the first half year. While revenues in our core business developed as planned in the first 6 months, revenues in the low margin Aftermarket business fell short of expectations due to temporary phasing effects in connection with the new product launch. We will talk about the detailed development in a minute.

Let's now have a look at the performance of the first half year 2024. We've successfully increased our revenue by 6.1%, which was driven by successful cross and upselling, the ability to adjust prices as well as winning new customers. IONOS's platform model and substantial economies of scale, combined with robust growth have led to consistently high levels of profitability in the company, and our business is already generating a very healthy adjusted EBITDA margin of 29%. Compared to the first half year 2023, the number of customers increased by 180,000 customers to now 6.28 million.

Even in difficult economic times and the general uncertainties which we also experienced again on the stock market at the beginning of this week, IONOS business model is extremely robust and predictable and our mission-critical products backed by the dedicated support of our personal [ consultants ] have helped us to develop and maintain a very loyal and stable customer base. Furthermore, we have been able to increase the ARPU, the average revenue per customer by around 8%.

Let's have a closer look at the operational performance and the drivers on Page 6. If you look at customer growth in recent years, we have not only been able to continuously expand our customer base, but have actually accelerated customer growth. To be fair, customer growth of 20,000 customers in the second quarter were slightly below or lower than in the previous year. This was partially due to the various major events such as the European election, the U.S. elections and other major events like the European football championships, since the focus was temporarily on other topics.

On the other hand, we faced our brand [ flights ] accordingly with a focus on the second quarter. Please be aware that brand marketing investments, of course, do not have an immediate impact on customer growth. Said that, we do anticipate stronger customer growth in the second half of the year.

Our approach to pricing has obviously been measured with a keen focus on maintaining a balance between attracting new customers, ensuring competitive positioning, achieving customer satisfaction and minimizing churn. The current economic landscape has provided some leeway in our pricing strategy, allowing us to explore modest adjustments. Our strong brand presence and the pivotal role our products play in our customers' digital transformation journey have cultivated a high level of customer loyalty. This, in turn, has led to an increased openness among our customers towards price adjustments, placing us in a favorable position to leverage our pricing power.

In response, we already initiated a careful refinement of our pricing model starting in Q3 2023. This gradual process is guided by [ key ] principles aimed at preserving customer satisfaction and keeping impact on churn low. However, we have temporarily experienced a slightly higher churn rate during the first half year. As we can already see that this effect is vanishing, we anticipate the churn rate to revert to last year's level during the remainder of the year.

Looking at the last 12 months, our annual churn rate was around 14%, which is fully aligned with our expectations. Please keep in mind, the implementation of our new pricing structure applicable to both new and existing customers in Web Presence & Productivity is designed with a long-term perspective. For existing customers, price adjustments will take effect up on contract renewal resulting in a phased impact on revenue.

At the same time, we have been able to further increase the average revenue per customer, which is additionally driven by our enhanced cross and upselling strategies. This achievement underscores our ability to deliver value and deepen customer engagement through innovative product offerings. The expansion of our Cloud Solution business additionally fosters ARPU growth as average ARPUs in the area of cloud are generally much higher. It is fair to mention that ARPU in the second quarter was slightly lower than in the previous quarter.

This is a seasonal effect as we typically have many [ domains ] renewal in the first quarter, for which revenue for 12 months has to be recognized upon renewal. In the first half of 2023, this effect was overlaid by side effects related to different promotional campaigns, but similar effects can be also seen in 2022. For the second half year, we expect good customer growth and a further increase in ARPU.

Let's explore how AI is enhancing our business. We distinguish between customer-facing AI features and products and internal use of AI to enhance various aspects of our business operations and to lower cost. Firstly, we are constantly enriching our products with AI to boost customer experience and enhance up and cross-selling opportunities. In the first half of this year, we, for example, added AI features to our marketing automation product line to support customers with onboarding, [ SEO ] optimization and [ more ].

In our last presentation, we highlighted the promising potential of AI model hosting across a wide range of use cases. I'm excited to announce that we just launched our AI Model Hub last week, making us the first European cloud company to offer a true multimodal AI and retrieval augmented generation with our additional vector database offerings to provide more contextually relevant results. Our solutions are hosted in our own data centers and fully comply with the European data protection standards.

Since the initial release of the AI enhanced MyWebsite product line last year, we continuously upgraded and enriched features to further enhance customer experience. The AI-powered MyWebsite product helps customers create content that not only describes their business generically, but also showcases its uniqueness while supporting search engine optimization and design tasks, more sophisticated AI functionalities exclusive to our higher-tier plans, encouraging customer migration to these higher ARPU packages. AI lowers the barrier of creating a professional website. Customers achieved great results faster, increasing activation rates, which in turn decreases churn.

Customer feedback has been highly encouraging, with 64% of users opting for the AI-powered onboarding process over the traditional approach. The time to go live with the website has been reduced by about 25% and activation rates have increased by 30% in the first week of the customer journey. In summary, integrating AI features into our MyWebsite offering has been a remarkable success, and we are committed to its continuous development and enhancement.

At this point, I would like to hand over to our CFO, Britta Schmidt, to talk about our financials before we start with Q&A.

[Britta Schmidt, executive]

Thanks, Achim, and good morning, and welcome as well from my side. Let us start with a look into our different business areas in more detail. The high margin core Web Presence & Productivity business, excluding Aftermarket, grew by a very healthy 9.7% year-over-year in the second quarter and 11.5% year-over-year in the first half year. As mentioned before, this is a result of sustained customer growth and successful expansion of our ARPU through cross and upsell and the introduction of new pricing structures.

Achim has already commented on the seasonality where we typically have many domain renewals in the first quarter, driving revenues as they are recognized for the full 12 months according to IFRS. Please keep in mind, this business area contributes extraordinary margins in the high 30s and correspondingly high cash flows paired with continued growth in the high single to low teens.

Our Cloud Solutions business, which remains the smallest yet fastest growing area within our group and operates self-sustained on an EBITDA basis, experienced a growth of 11.9% in Q2 '24. We remain confident in the ongoing expansion of our Cloud Solutions business and are enthusiastic about the future opportunity [ it ] holds. Looking ahead, we are dedicated to improving our product offerings and services to solidify our standing as a strong competitor in the market, which is clearly visible with the recent product launches, including our new AI [ inference ] product.

For the first half of '24, our revenue totaled EUR 81.1 million, marking a 12.8% increase year-over-year. As you know, the Cloud Solutions business is made up of the private and public cloud, bare metal cloud and managed services. While growth in the bare metal cloud and managed services area, in particular, is naturally moderate, growth in the public cloud area is the strongest. Our IONOS cloud product, which is the most comparable product to other public cloud providers, grew around 25% at the same time, underpinning our ability to play a significant role in the European cloud provider universe. For the fiscal year 2024, we are confirming our outlook to achieve a revenue growth of 15% to 17% in Cloud Solutions.

Our Aftermarket business has grown tremendously in recent years and with various measures, especially in the area of domain parking, such as the optimization of the [ parked ] pages, the higher quality of traffic and the integration of professional partners, we have been able to raise revenue to a higher level.

Nevertheless, sales in the Aftermarket business dropped by 19.4% year-on-year in the first quarter of '24 due to temporary effects in connection with the launch of the new RSOC product from Google. RSOC stands for Related Search On Content as the market is currently in a transformative process. Although we have seen a good recovery in the second quarter, the decline in revenue has slowed down to 4% year-over-year, and we still expect to see a significant increase in revenues as the year progresses. We decided to adjust our guidance for 2024 in July as it was unlikely that the 2024 original revenue plan will be achieved.

Based on our outlook for full year 2024, we expect Aftermarket revenues at last year's level, which implies [indiscernible] [ growth ] in the low teens in the second half. From a profitability perspective, the Aftermarket business generates lower margins with LTM average EBITDA margin standing at around 15%.

As a consequence, the lower revenue level of the Aftermarket business negatively impacts our EBITDA by around EUR 5 million compared to previous year, which distorts our overall EBITDA performance. Considering the EBITDA guidance for the full year, we will be able to offset this effect from the first half year and maintain our profitability forecast.

And here's the combined statement. We are on the right track with the Aftermarket business showing signs of recovery and the strong performance of the Web Presence & Productivity and Cloud Solutions core businesses in the second quarter.

Total revenues in Q2 2024 reached EUR 378.6 million, showing a growth of 6.7% year-over-year. Our core business, meaning Web Presence & Productivity, excluding Aftermarket and Cloud Solutions grew very strongly at 9.6% compared to the previous year. Adjusted EBITDA for Q2 2024 reached EUR 112.2 million with an adjusted EBITDA margin of 29.6%. This represents a slight decrease compared to Q2 2023 primarily due to different phasing of marketing expenses and temporary higher cost for licenses for VMware.

As already flagged in the Q1 webcast, due to the various major sport events this year, such as the European football championship and the Olympics, the distribution of marketing investments over the quarters will be different than in the previous year and more skewed towards the middle of the year, leading to around EUR 10 million higher marketing expenses, mainly dedicated to brand in Q2 this year compared to Q2 last year. At this point, let me reiterate that brand marketing investments do not have a direct impact on customer growth, but will rather pay off in the medium to long-term.

In order to reduce the financial impact from the changing licensing model and related price increase for VMware, virtualization software, we started certain [ mitigation ] measures, like, for example, the migration to our own IONOS cloud, which will show over time and nearly eliminate the impact in 2025. If adjusted for EUR 10.3 million higher marketing expenses, the adjusted EBITDA margin would have been 32.4%. The full potential EBITDA margin eliminating the temporary higher VMware license cost would stand at 33.7%.

Looking at the half year on Page 13. Total revenues for the first 6 months reached EUR 751.6 million, showing a growth of 6.1% year-over-year. Excluding Aftermarket, revenue growth is at 11.2% year-over-year. Adjusted EBITDA for the first 6 months is EUR 218 million. Adjusting for the different phasing of the marketing expenses compared to the first half year, adjusted -- of last year, adjusted EBITDA is EUR 226.9 million. This results in an adjusted EBITDA margin of 29% or 30.2% adjusting for the different phasing of the marketing expenses.

The full potential EBITDA margin, eliminating the temporary effect of higher VMware marketing license cost would stand at 30.1% compared to 28.3% margin in the previous year. This positive development can be attributed to higher gross margins, primarily driven by an improved product mix and the realization of economies of scale.

Let's turn us to Page 14, focusing on capital expenditure. As you are well aware of, we benefit from having highly predictable maintenance CapEx requirements supported by favorable server economics, economies of scale and our advanced technological platform. This stable foundation allows us to effectively manage and plan for the ongoing maintenance and enhancement of our operations, ensuring reliable service for our customers. Our growth CapEx is directly tied to our future revenue and customer growth prospects, particularly in the area of Cloud Solutions and AI, providing a clear path to achieving returns on these investments.

In H1 2024, our total CapEx represented 4.3% of total revenue. This is slightly lower compared to H1 last year, where total CapEx stood at 4.4% of total revenue. Maintenance CapEx for H1 was 0.7% of total revenue. Gross CapEx was EUR 26.8 million or 3.6% of total revenue. While you may observe the relatively low level on investment in maintenance, we actually benefit from efficiency gains, including a onetime effect driven by platform consolidation due to improved packing density of the service utilized.

Our expectations for total CapEx for the full year remain at approximately EUR 100 million, which represents around 6% to 7% of total revenues. By maintaining a balanced approach to our CapEx allocation, we are still in an excellent position to take advantage of growth opportunities, improve our capabilities and drive sustained and profitable revenue growth.

Our leverage and debt position is summarized on Page 15. At the end of June 2024, we have successfully reduced our net debt to EUR 963 million. Our debt compromises an external bank loan and a shareholder loan from United Internet.

As you might remember, in December 2023, we partially refinanced the shareholder loan with an external bank loan. This strategic move allows us to secure more favorable terms and reduce our overall interest expenses. During the second quarter, we made a further repayment of EUR 100 million on the shareholder loan, which is reducing the annual interest rates to 5.16% from 5.3% in the first quarter 2024.

Our leverage ratio at the same time improves to approximately 2.4x net debt-to-LTM adjusted EBITDA. By maintaining a disciplined approach to debt management and leveraging favorable refinancing opportunities, we are well positioned to continue reducing our leverage and improving our financial stability. This strategy aligns with our goal of achieving sustainable growth and delivering value to our stakeholders and shareholders. By continuing to focus on reducing our net debt and managing our leverage, we aim to enhance our financial flexibility and support our long-term growth objectives.

On Page 16, you can see the reconciliation from adjusted EBITDA to free cash flow. Adjusted EBITDA for the first half of '24 million is EUR 218 million. We deduct adjustments totaling EUR 11 million, which mainly includes stand-alone costs and costs associated with the long-term incentive program to get to reported EBITDA. Next, we deduct the total CapEx of EUR 32 million and tax payments of EUR 20 million.

We paid slightly less tax in the first half of the year due to phasing of payments, which should balance out as the year progresses, adding back EUR 4 million for the long-term incentive programs. This results in a free cash flow before leasing of EUR 158 million. After accounting EUR 7 million for leasing, the free cash flow after leasing stands at [ EUR 151 million ].

It is only fair to mention that last year's figure included a payout of almost EUR 40 million for the long-term incentive program after the IPO. Taking into account interest payments of EUR 14 million, which is comparatively low as interest for the bank loan is to be paid half yearly, with the first payment due beginning of July and the share buyback of EUR 30 million for the shares bought back until end of June, dedicated fully to serve long-term incentive programs. This all leads to a comparable free cash flow of around EUR 124 million for the first half of '24, which compares to around EUR 44 million in the first 6 months of '23.

By maintaining a disciplined approach to managing our cash flow, we ensure that we have the financial flexibility to support our strategic initiatives and drive sustainable growth. This structured approach to cash flow management allows us to effectively allocate resources and invest in opportunities that drive long-term value for our stake and shareholders.

Let us come to our guidance. Our core business is performing as expected. We are effectively up and cross-selling to existing customers as in the previous period. [ WAN ] perception is on the rise, and we are excited about the launch of the product enhancements and the new AI offerings like the AI Model Hub. Additionally, the new pricing structures introduced in the third quarter of '23 have bolstered our confidence in maintaining and improving our financial position.

Due to the temporary phasing effect associated with the market-driven product transition in the Aftermarket business and consequently, temporary lower sales, we have changed our outlook for currency adjusted revenue growth in 2024 to 9%. For the Web Presence & Productivity business, excluding Aftermarket, we are targeting a growth rate of around 11% to 12%, driven by the robust performance of our core Web Presence & Productivity business. As mentioned earlier in the presentation, we expect Aftermarket revenue at previous year level, which implies a strong recovery in the second half of the year.

In the Cloud Solutions business, we expect sales growth to accelerate further, reaching 15% to 17% in '24. Our confidence in saving growth opportunities in this sector is strong, supported by strong demand for cloud products from our customers. We expect the adjusted EBITDA margin for the full year '24 to be around 29%, up from 27.4% in '23, resulting in an adjusted EBITDA of approximately EUR 450 million in 2024. Looking ahead, we anticipate the adjusted EBITDA margin will continue to improve further, reaching approximately 30% by 2025.

Let me summarize the key highlights from today's presentation on Page 18, that are essential to keep in mind. First and foremost, our business is built on a robust foundation characterized by sustainability and resilience. The majority of our revenues are derived from recurring sources, ensuring a stable platform for consistent growth.

Looking ahead, we have a clear understanding of our CapEx requirement for the upcoming years, supported by our well-funded asset base, which is including our flourishing Cloud Solutions business. The expected slowdown in Aftermarket growth, something we have anticipated despite the temporarily lower revenue growth in the first half of the year, driven by the current market transformation, will lead to reduced dilution of the adjusted EBITDA margin going forward.

Brand investment peaked last year and will remain at this level in absolute terms. These investments are essential to support our revenue and margin expansions as we move forward. Many of the investments in our Cloud Solutions business, such as those for developing Infrastructure-as-a-Service features have already been made, creating a significant opportunity for future growth and EBITDA contribution. Our product portfolio has been successfully redesigned to facilitate cross-selling and upselling opportunities and seamless expansion.

Regarding AI integration, we are leveraging significant opportunities, both in our product suite and internal operations, promising a more efficient and enhanced customer experience. Thanks to our high profile and growing reputation in the market, we are capturing an increased share of the market. Overall, we are well positioned for future growth.

With this, I would like to hand back to the operator to open the webcast for any open questions.

[Operator]

[Operator Instructions] The first question comes from George Webb from Morgan Stanley.

[George Webb, analyst]

I've got 2 questions to start off, please. Firstly, just on the 2024 outlook. You've talked about your kind of continuing confidence the Aftermarket will be back to growth again. I guess on the flip side, what we saw around domain park in Q2, it didn't bounce back as quickly as you maybe expected at the end of Q1. It is a bit of a lower visibility segment. And yes, there are still some, I guess, market unknowns. How confident are you that it can get back to that double-digit growth? And maybe what meant in practical terms that Q2 wasn't quite as strong in terms of the recovery, as you might have expected?

And then secondly, on 2025, 10% growth level, what's your thinking around pricing for the core Web Presence business? I guess those price increases you started in Q3 last year will start to fade as a growth contributor in the mix towards the end of this year, unless you lap them with new increases. So curious to hear what you're planning on that side of things?

[Britta Schmidt, executive]

Let me start to comment on the Aftermarket business. So yes, you're right, we expected a stronger and steeper recovery for Q2. It came in a little bit later. Nevertheless, looking into the trading, which we have seen in July, this is very promising. So we are back to low teens growth rate, which we obviously would need. And we seem -- looking at the quality of the revenue, it looks very sustainable going forward.

So our outlook remains confident on Aftermarket recovery. Still going through the transition in the products because this is not yet done or finished. So there will be still transitions. But nevertheless, given the quality which we offer with our platform there, we believe that we can definitely keep the strong trajectory we are seeing now.

In terms of price increases, as you know, we have been relatively reluctant in the past on price increases, or moderate, I would say. Nevertheless, given the good results we have seen in 2023 with adjusting to a higher level, this gives us more confidence into price adjustments as well going forward. And we already stated that we will continue to do price adjustments, maybe not as aggressive as we've done in 2023, which was as well driven by macroeconomic tendencies which we have seen and where we could capitalize upon.

[Achim Weiss, executive]

[indiscernible] Maybe if I might add, the brand investment we are doing is also partially for that reason -- it's a strong brand, you can -- you have more pricing power. And that's why that's one part of the idea of investing in the brand much more than we did in the previous years. So we can do more price adjustments in the future.

[George Webb, analyst]

That's helpful. And I guess, a super high level, when we think about that outlook into 2025, it feels to me that the mix should be cloud probably accelerating on the back of the German contracts. The core may be a touch slower, depending on what you want to do on the price increases. And then hopefully, I'm guessing now with our outlook on Aftermarket that, that can be positive growth next year. Is that the right kind of shape you're thinking about across the group?

[Britta Schmidt, executive]

Yes. Without saying too much because we haven't given out the detailed guidance on revenues for '25, but I think that's in the right direction.

[Operator]

The next question comes from Daria Sipos from JPMorgan.

[Daria-Ioana Sipos, analyst]

I had a question on the Cloud Solutions business, please. So in H1, you're tracking at around 13% year-on-year growth and the full year guidance is for 15% to 17%. So I was just wondering if you can give us some more color around what would drive the acceleration that would be implied for the second half, please?

[Britta Schmidt, executive]

Yes. So first of all, sure, we expect the [indiscernible] case, so the German government -- Federal government to come in later this year. We see good signs there. Additionally, we expect -- we do have some other contracts in the pipeline which makes us confident that we can reach the 15% to 17%. Additionally, for sure, we do see some drivers in private cloud. We offer a replacement product for VMware, which as well will be able to drive, or we are confident that it can drive revenue in the second half.

[Achim Weiss, executive]

And then we just released 7 new large features in the 1st of August for the cloud, for example. So that will add new customers and open up more use cases. And we started with the Model Hub, a really big thing, I believe, because AI will be part of every SaaS offer at some part. Basically, every SaaS software can somewhere profit from some AI enhancement. And I think that's -- we are the back [ end ], we are the cloud providers doing all these things for the SaaS providers.

And so with our new Model Hub, where we have dozens of -- or a dozen of different models and constantly increasing the number of different models we offer, and we have also multimodal. Different models is something else, but multimodal is something else again. So multimodal is modern model, [ it ] can actually do multiple things. And so we are the first one doing this. And so I think in total, we have a lot of new products just released that will help drive cloud revenues, not just for the rest of this year, but also for the future.

[Operator]

The next question comes from Stephane Beyazian from ODDO.

[Stéphane Beyazian, analyst]

Yes. I've got 2 if that's possible. The first one is around customer upgrading. I'm trying to understand the underlying besides the price hike, although I understand that there was also some relation between the 2. But particularly, can you help us understand what is the split of customer between the basic plan, the middle plan and the top plan? Because I think that in most markets, the way you've set up your product range, and how fast is the migration and how much of that is impacting the ARPU versus the price [ hike ]?

And my second question is regarding churn and the competitive environment. It is also possible that part of the churn is not also linked to the price hikes, but perhaps to more competition in some markets. Any color on that would be interesting.

[Britta Schmidt, executive]

Yes, let me start with churn. First of all, let me mention, yes, we have seen slightly higher churn, as Achim has mentioned. Looking into the details, we presumably think this is driven -- the data indicates that it's driven by price adjustments, mainly not driven by higher competition in the market.

And keep in mind, it's in line with our expectations. What we are -- if you look into customer net growth, which was a little bit slower in Q2, obviously, this is driven by temporary lower inflow overall, as we mentioned, driven by the sport events, et cetera, and the different phasing, which we have seen in marketing investments. So therefore, we expect that this will change in Q3 and going forward.

And we do see, by the way, a good ARPU in -- from new customers joining us, which is higher than last year. If you look into the customer base and the different tariffs, it's pretty hard to put it in one -- in a very condensed sentiment as we have a lot of product ranges and not all of them are set up in the same way. But the intro package is usually the smaller and the middle package, and then we are upselling them into the higher tariffs. And that's actually done -- so this is a concept behind it, yes. We want to get customers in at the lower or middle package, and then we are selling them up with additional features, which we deem them -- to help them to run their business. So therefore, we see an uptake over time going to the different tariffs.

[Achim Weiss, executive]

And if Britta talks about churn and price increase, I think you're talking about the group who is not giving up on the business, which is, traditionally the largest part of the churn is people giving up on your business.

[Britta Schmidt, executive]

Yes, sure.

[Achim Weiss, executive]

Yes, exactly. Just to make it clear. And so from the remaining -- from the other part, from the smaller part of churn, yes, we see, of course, some people leaving because of the price, but we also gain a lot of customers from other players because of their pricing. And so -- yes.

[Stéphane Beyazian, analyst]

And just a final one. When I'm looking at the ARPU expectations for the remaining of the year, would it be fair to say that Q4 where we can see a much higher -- not to jump versus Q3 is very much a seasonal rather than potentially price actions driven?

[Britta Schmidt, executive]

Yes. I think if you look into the ARPU evolution, which we showed earlier in the presentation, you see that we have slightly fluctuating ARPUs driven by several effects like more domains coming up for renewal in the first quarter, some promotional campaigns kicking in like in 2023. So I would -- what I would look at is the continuous expansion of ARPU going forward, where we see as well a good development.

[Operator]

The next question comes from Andrew Ross from Barclays.

[Andrew Ross, analyst]

I've got a bigger picture one on Aftermarket and on RSOC. Can you just remind us as to when you think the transition is going to be complete? And also your latest thinking about the impact it would have on the market in the mid- to long-term when you think about monetizing that part of your business and give us some confidence as to what underpins assumptions as to why Aftermarket grows in the medium-term?

[Achim Weiss, executive]

Maybe we'll start with RSOC. I mean, when is it finished, there's no due date. There's no hard due date where everybody had to transition. It's an additional contract. It's not substituting the [ AFD ], the old -- the current contract. Most customers are on -- or most partners are on, it's called [ AFD ] -- AFT, sorry, in English. And it continues to run. So it's an additional contract RSOC conditional model, how to place marketing and how to create your pages, where you do the parking of the domains and these kinds of things.

So it's up to the customers. It's up to the partners to do -- to learn about the new contract, about the new possibilities with RSOC and implement their staff, and then they will transition piece by piece. So we had -- in the first and second quarter, we had a bunch of customers starting with that. And now it's stabilized like we showed, but there's no hard due date. So it can take longer time. But I don't think we see that revenue again, because the [ bulk ] is already not migrated, but has additional RSOC pages up now.

[Britta Schmidt, executive]

Yes, I can only second that. I think the market has now understand what's going on there and that there is an additional product in the market. Customers and partners will continuously transition towards that. But as Achim mentioned, AFT will continue. And RSOC offers a lot of possibilities in terms of monetizing additionally to AFT. And we think that we should see more RSOC revenues coming in by the end of Q4 or in Q4.

[Andrew Ross, analyst]

So what percentage of customers actually have migrated at this point? And I guess, what gives you confidence that we won't see another blip like we have in the first half in '25 or '26, if there's kind of another wave of migration still to come through?

[Britta Schmidt, executive]

So most of our partners are already testing RSOC and are on RSOC. I think it takes a little bit of time in order to get it customized and understand how the mechanics really work and how the monetization of that product works for the partners. But most of our partners -- and I cannot talk to their customers, but they are already testing it. So it's -- they are in addition going on to RSOC, so to say.

[Achim Weiss, executive]

Again, it's not a migration. It's not migrating, going away from AFT to RSOC, it's additional. So they -- and then they split the traffic and say, okay, some of my traffic are still monetized on AFT, some is better monetized on RSOC, and that will continue for a while. So I think like we said, most of them are now acquainted to the new model, and it works differently. You have to optimize it differently.

So that took some time to get that right for the partners because in AFT, there's tens of years now -- not tens of years, but many years of optimization on how the model works, how the pages need to look like, how to attract the customers, how to get the click rate, how to get the conversion. And that needs to be now learned for the RSOC here because the pages are very different. It's not just a small parking page anymore. It's full blown. You can have a complete portal of some subject on the RSOC. So it gives a lot of additional possibilities, but also needs a lot of more now learning or relearning on how to optimize these things. And that was some of what we have seen in the first 2 quarters.

And then again, it's not -- the dip in Aftermarket was not just about the RSOC contract. It was also because the marketing -- or the market, advertising market was a little slower in the first 2 months -- quarters, and that also attributes a little bit to what we have seen. And now we are back -- like Britta said, we are back, and we're very confident that we continue with the growth rates we just said.

[Operator]

The next question comes from Ben Castillo-Bernaus from BNP Paribas.

[Ben Castillo-Bernaus, analyst]

A couple from me, please. Firstly, on net customer adds, obviously it's slowing a little bit in Q2. Just curious how does that compare with your expectations? And are you backing in a reacceleration in those net adds back above 20,000 a quarter in Q3 and Q4? And what can you tell us about the ARPU of the cohorts of customers who joined you last [ year ] and their uptake of those higher-priced tier plans this year as they renew?

[Britta Schmidt, executive]

Yes. I think let me comment on the net adds. And I think we've given some indications already throughout the presentation. So yes, we have seen a slide -- I wouldn't say a slowdown, but lower customer net adds, driven, as we mentioned by the several sport events, et cetera, different phasing of the market -- of the brand investment. So we capitalized in terms of brand investment on those 4 events. This should have a positive impact going forward. Not directly, as mentioned before, but a little bit -- timing is a little bit delayed, driven by the nature of the investment. But for sure, we expect Q3 and Q4 to be higher than the Q2 net adds. So we are really confident in this one and already see good signs here.

And then on ARPU. So overall, I think we see a very good development of ARPU of our existing customer base, and that includes customers coming in over the last years. And just for example, if we look on to our MyWebsite now, so the AI-driven website builder, we have seen a significant ARPU increase on the existing customer base and as well a very good uptake in ARPU from new services. So customers taking up new features or new customers, which is as well very promising and helping to grow our ARPU going forward.

[Achim Weiss, executive]

And if I can add, if we always talk about phasing marketing, what does it actually mean in the end. For example, if you look at brand, with all these sports events and stuff in the center or in the second and third quarter, it's more wise to spend the brand marketing differently than in the first and the third quarter -- fourth quarter, what we usually do, because in normal years, these are the strongest quarters, right? So you do -- the most people are watching TV. But now with all these events and sports, and -- it makes a lot of more sense to have that spread.

So instead of 2 [ slides ] which we usually do a year in the first and the fourth quarter, we did 3 this year. We spread the brand marketing money across first, second and fourth quarter now. So we really get all the traction, people watching TV for the different events, so we get them on our advertisement. So that makes a lot of sense. So that's why we have obviously these phasings where we obviously talk about phasings.

And then, contrary to that, if you spend performance marketing money, people -- if you watch a tennis game, you're most likely not buying a web hosting package at the same time. So it's rather smarter to have this -- basically, what we have is a pronounced seasonal effect through these events. So we obviously have these seasonal effects. And now this year, it's a little more -- much more pronounced through the events happening. And so that's why we adjust. We adjust the brand marketing because now it makes sense to go into the times where people are on TV.

But on the performance marketing, we're really a little more slower and just spend less money and save the money for the quarters, which makes more sense. And so that's what you see here is [ by ] -- basically a pronounced seasonal effect. And so we're not at all worried that we come back to the normal numbers going forward, and we'll see a much higher growth in the next quarters.

[Ben Castillo-Bernaus, analyst]

That's really helpful. Can I just squeeze in one more just on the CapEx -- on really on the maintenance CapEx, it was -- you said a one-off in there in H1 [ that ] being quite low. Should that return back to normal sort of percentage of revenues in H2?

[Britta Schmidt, executive]

Yes. It should come back to normal. So one-off doesn't mean it's down and then going up higher, but it's a onetime relatively slow as we worked on the density of the packaging, but it will go back to normal over time.

[Operator]

The next question comes from Nizla Naizer from Deutsche Bank.

[Fathima-Nizla Naizer, analyst]

I have 2 questions. The first is on, could you remind us about your resilience to macro shocks because with all the talk around the U.S. economy and a potential recession and you're mentioning that you'd like the net adds to increase in Q3 and Q4. Sort of how confident are you in going after new customers in markets like the U.S.? Or would you then look at other markets that are growing faster to sort of find the growth? Some color there would be great.

And second, very interesting to see the release that you published on your AI Model Hub. Could you take us through maybe the incremental revenue that you expect to Cloud Solutions on the back of this product, what the take-up has been like? And are you better positioned to offer this to your SMB customers versus any other player in the market? What's your sort of competitive edge in this sort of product? Would be great.

[Britta Schmidt, executive]

Let me start on the resilience part and maybe Achim takes over the AI Model Hub, [ so ] more technical question.

So if we look into -- overall in the resilience of our customer base, it continues to be super resilient. Of course, we do see customers churning out as businesses [ go bust ]. This hasn't peaked or anything. This is just like normally flowing and continuing to be there. As Achim mentioned before, this is a major churn reason we are seeing. But we do not see any data which is concerning us here. And if we look into the different deals, obviously, and of course, we are following a portfolio approach, and we'll always invest the marketing money into the regions where we do see the best ROI, so the best CLTV over [ CAC ]. And this is why actually it does make sense that we are not only in Europe, but as well in the U.S. so that we can work on the different things going on in those economies, so to say.

[Achim Weiss, executive]

And for the Model Hub, why we're better positioned. I think there's a lot of reasons. First, the Model Hub itself. So what it is, again, it's -- we offer a lot of different AI models. There's language models, there's text to speech model, there is speech to text models, there is a computer vision, there is graphical Generative AIs for videos and pictures and what you have. And that's a constant thing going on. I mean you see the development every week, there's another model coming out. There's another breakthrough or smaller breakthrough in -- happening in one field. And so we're completely agnostic. We can use all these models. We can also license models. I think at some point companies [ will ] also -- very specialized models will be licensed. So we can license them and make them workable for our customers.

And what does that mean? I think we have the advantage because we have the best cloud and an AI engine by itself, what do you want to do with that? If you're a user, yes, you can go to the window and ask some ChatGPT and put in your question. But as a SaaS company, you want to integrate that AI into your product. And since we have done -- we have the best cloud, you always need something else, but the AI model. You need the storage, you need the CPUs, you need a webpage, you need everything that makes your product run and the AI is just one part of the product usually.

And so since we already have the best cloud and now we are the most flexible one and broadest set of AI models, the combination, I think, is just the winning strategy here. We can basically help all small, medium companies, whatever software they're using, whatever SaaS software they are building, we have basically the right tools for them.

And that's also hosted in Europe. So they don't have -- that's -- big worries of many of the European companies and customers is, I send my data into the U.S. And if it's a stupid question from someone, that's fine. But if you want to do your -- analytics of your company, most secret data, you not necessarily want to send it somewhere which is not in the investigation of Europe. And that's very helpful for us as well, of course. And so I think in the combination, we are really well positioned.

From the revenue side, for this year, we didn't put anything into the -- into our guidance or into our numbers because we never -- when you started, we did our budget, we never knew when do we get the hardware, when is the software ready, how will it be adopted by customers. So this year basically is building the product, learning, improving and next year we'll see how much we can put into the budget for AI.

[Operator]

Your next question comes from Usman Ghazi from Berenberg.

[Usman Ghazi, analyst]

I've got a few questions, please. Just going to the cloud business, where you mentioned that the public cloud is -- you grew by 25% in H1 and the weakness you're seeing is more in the bare metal and managed services. I mean, I'm just making an assumption here. If the split is 50-50 between cloud and the other stuff -- in the public cloud and the other stuff, that means that H1 growth of 11.9%, if public cloud is up 25%, then the other stuff was either flat or slightly down?

And -- so getting the growth rate to accelerate, is it that you expect the public cloud to continue growing at the current levels and improved growth in bare metal and managed services? Or do you expect public cloud to accelerate further and the other stuff to stay where it is? So just any indication around how you're thinking about the mix in the cloud business would be helpful.

On the AI inferencing that you've launched, I was just interested that -- your pricing is based on a token approach rather than -- some of your peers have gone and are billing by hour per type of hardware -- underlying hardware that is being used. So just interested in your decision to go with a token-based pricing model?

And finally, just on the cloud business as well. So both Microsoft and OVH have both cited that with the European market in public cloud, is just -- they're finding it weaker because of macro, whereas the U.S. seems to be picking up helped, obviously, by all this training workload. So I was just wondering how you see it? And if there is macro weakness in public cloud in Europe, then are you seeing it at all? Or where does that help you because you've got prices that are [ lower ]?

[Achim Weiss, executive]

Maybe I'll start from back to the first question. [indiscernible] the service model it serves for us mix, [indiscernible] questions why it was the token and pricing and stuff. So the Model Hub right now is based on -- you have APIs integrated model, and you can have a very low volume, you can have a very high volume of questions. And so basically, the token on it basically means for each request you have, you have to pay something.

And there's other products. If you want to get a full card, if you have so much workload that you really can afford -- I mean, look at the [ H100 ] card for example, it's like EUR 30,000, 1 GPU card. So a lot of companies don't need that. They have a few requested hours or maybe a few hundred requests an hour. And so a single card for them would be huge, way too much.

But we will have these products as well for larger companies who need the performance, need so many requests. And we will have a bunch of different things, like the [ GPOs ] thing itself, very basically naked GPUs. We already have that. And then we will add some things like GPUs on Kubernetes. So you get basically shared a part of CPU -- or GPU, sorry, a part of a GPU in a Kubernetes cluster, for example. So these are also products coming. And so that the customer can really choose what is the best model for him. High-power, high everything and you want to have the full, complete control and wants to build his own or implement his own model, you go with the hardware-based GPU offerings.

If you have a very high load and you want to have really a separate instance, you can have the shared CPU instance and do whatever you want with that for yourself. And if you really have -- rather be flexible in different models, if you have lower volumes, you're pretty happy with the API approach and you pay by the [ call ]. And it is something OpenAI for example, offers as well. You can pay there by the API call in the end, so basically the total. And so different things.

How do we see the cloud market itself, recession and so on. Of course, it's hard to predict. But right now, we don't see too much of the impact of economics in total because I think the lack of digitalization in Europe is even larger than in U.S. So I think picking up on the most necessary things is still happening even if the economy is a little harder, because in the end, you save money by the cloud.

Yes, it's an initial maybe small investment to migrate your software, but in the end, you save. And I think especially -- and we've seen this in the past, especially if economies got hard, we actually see a good business because then people turn to more digitalization and use the potential of it.

Being it on a standard web page, yes, including domains and e-commerce, it's much easier to sell, much cheaper to sell over the internet than with your sales force out there [ feed ] on the street. And so we always saw that in the past and if economies turn bad, we actually had a push in the business. And I think it would be the same thing for the cloud business as well.

And then maybe, Britta, about the numbers?

[Britta Schmidt, executive]

Yes, sure. Absolutely. So I was -- during my speech, I referred to IONOS Cloud which is the product which is the most comparable to other providers out there, and this is growing by 25%, so above market. That's roughly 30% of the overall Cloud Solutions business. And if you then look into the remainder, private cloud, high singles roughly and the MSP business is actually dragging a little bit down because it's growing in the low single-digits. So our focus is, obviously, on driving our IONOS Cloud product and other private cloud products like VPS and bare metal, which offer good growth rate. We offer managed services as some of our customers do need it, and it's a good add-on, but this is not the driver of the business going forward.

[Achim Weiss, executive]

We actually have partners for that. So we do have a small MSP business because we kind of inherited it when we bought [indiscernible]. There was a company called [ Kronos ], which is doing only MSP. And it's fine because we obviously have some special cases. But [indiscernible] -- we have partners like basically in all the large system integrators. And these are on the -- on one hand, they have MSP business. They do build software, they do migrations for customers. And that's our partners.

That's a very different business case by people and so on and so forth. So we keep that with our partners, is much more efficient and much more -- the scale is much better for us than if we would try to build it out of the small nucleus we have, make a huge MSP business and be competitors to our partners. That's not what we want.

And so that -- to answer your question, MSP, yes, a small business, not much growing, necessary for some special customers to get them onboarded, but today kind of dilutes our gross margin. And -- but the most important part is the public cloud, the 25%, what I mentioned, and we can even get better. I just said we released a bunch of new features for that part of the cloud and so on. So I see that as the most important part, and that's actually well within what we want to be.

[Usman Ghazi, analyst]

Got it. And just maybe a small follow-up. Could you give any color on the IT bonds contract? I mean I guess you've had a few more months of monitoring how the take-up is going to be. So any color on that would be helpful.

[Achim Weiss, executive]

[indiscernible] they committed now. I mean, first [ is ] that we won a contract. And so that means, okay, they're now working with us and then it was up to them to start, when they start doing -- migrating workloads and when we build the different clusters. And now we're actually setting up. One is already -- and I think 2 more are already ordered for very late in the year. So the revenue of these 2 new orders will probably not hit this year, but it will hit next year. So -- and the first one is actually in testing right now, so that hardware is built and the software is implemented and so on. I think it's -- out of my head, I think we're in the final phase of getting this first cluster up and running.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Stephan Gramkow for any closing remarks.

[Stephan Gramkow, executive]

Yes. Thank you, operator, and thank you, everyone, for attending our today's call. Please don't hesitate to get in touch for any follow-up questions, and have a nice day. Stay safe, and goodbye.

[Achim Weiss, executive]

Thank you very much. Have a nice day.

[Britta Schmidt, executive]

Bye-bye. Thank you.

[Achim Weiss, executive]

Bye-bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.