IONOS Group SE

XETRA:IOS

Earnings Call Analysis

Robust Revenue and EBITDA Growth Amid Expansion

The company witnessed an impressive 11% year-over-year revenue increase to EUR 1,059 million, complemented by an 11.1% rise in adjusted EBITDA, indicating sound financial health. The customer base expanded significantly by 170,000, while the churn remained low at around 13% annually. Although the adjusted EBITDA margin stood firm at 28.9%, similar to the previous year, it included an impact from the high-growth aftermarket business. Investments in branding peaked in 2023, expected to bolster future revenue and margin growth. With a redesigned product portfolio optimized for cross and upselling, and strong investments in AI and cloud solutions, the company is strategically positioned for robust growth, while carefully monitoring customer reactions to new pricing strategies.

Strengthening Position in PaaS and SaaS

The company is dedicated to enhancing its offerings, notably in the Platform as a Service (PaaS) and Software as a Service (SaaS) domains, to cement itself as a competitive player within the industry. This move aligns with the broader industry trend toward cloud-powered business solutions and could potentially contribute to long-term revenue growth.

Capital Expenditure and Financing Structure

By maintaining stable maintenance capital expenditures (CapEx) at 2.4% of revenues and reducing full-year growth CapEx expectations from EUR 100 million to EUR 90-100 million, the company adjusts its investment in line with revenue and customer growth. Additionally, with a favorable shareholder loan featuring a fixed interest rate and no covenants or penalties, the company holds a secure and predictable financing position with reduced net debt to adjusted EBITDA ratio of 2.9x.

Optimizing Free Cash Flow

Through a new presentation of cash flows, the company aims for improved coherence between adjusted EBITDA and free cash flow, which should assist in providing investors with a clearer understanding of financial performance. Adjusted free cash flow for the first nine months stands at EUR 117 million, after considering one-time payouts and interest payments.

Guidance and Growth Targets

The company reaffirms its confidence in achieving a total revenue growth of approximately 10% on a constant currency basis, with a target growth rate of around 11% for the Web Presence & Productivity revenues. Despite challenges in signing large cloud customer contracts, leading to missed revenue goals, the company expects aftermarket growth to hit 20-25%. In terms of profitability, efforts to hold marketing spend steady will increase the EBITDA margin, targeting an adjusted EBITDA margin above 30% and a net debt to adjusted EBITDA of below 3x.

AI Advancements and Customer Engagement

AI integration across product suites has shown positive early results, with customer feedback indicating a preference for AI features. The newly launched AI website builder is part of a strategic move to enhance customer experience and stimulate higher-value plan conversions, contributing to the broader goal of leveraging technology for growth and efficiency.

Marketing Strategy and Customer Acquisition

Understanding that newly acquired customers typically receive a 6 to 12-month discount, the company expects the financial impact of these customers to start reflecting in the next year's top line growth. This strategic approach to acquisition aims to create long-term value despite short-term muted effects on revenue.

Midterm Outlook and Debt Repayment Plans

Aiming for at least a 20% mid-term growth, the company expresses confidence while remaining cautious with it being too early to provide specifics for 2024. They indicate a high-margin focus on AI features and anticipate at least the same level of debt repayment in 2024 as in 2023, potentially higher depending on financial results.

Market Dynamics and Cloud Solutions Growth

The company sees a balanced growth between acquiring new customers and increased consumption by existing ones in the cloud services sector, translating into a 16% growth in Q3. Despite delays in project sign-offs pushing expected growth into the next year, they remain confident in the long-term potential for their cloud solutions segment.

Earnings Call Transcript 2023-Q3

[Operator]

Good day and thank you for standing by Welcome to the IONOS Group SE Q3 2023 conference call. [Operator Instructions] Please be advised that today's conference is being recorded. I will now like to hand the conference over to our speaker today, Stephan Gramkow. Please go ahead.

[Stephan Gramkow, executive]

Hello and good morning, everybody. I would like to welcome you to the analyst and investor call of IONOS on the results of Q3 and the first 9 months 2023. Thank you for joining. My name is Stephan Gramkow and I'm responsible for Investor Relations at IONOS. Let's have a look at our agenda for today's call. Britta Schmidt, CFO of IONOS will give you an update on the business and the development and achievements of the first 9 months and will then walk you through the financial details and highlights of the third quarter and the first 9 months of 2023. We will also talk about the current projects and milestones as well as an update on AI. Britta will then be happy to answer any open questions.I would now like to hand over to Britta. The floor is yours.

[Britta Schmidt, executive]

Thank you, Stephan. Good morning, ladies and gentlemen, and welcome to our Q3 webcast. I'm Britta Schmidt, CFO of IONOS. And it's great to have you with us today as we delve into our performance during the first 9 months of 2023 and take a look at our operational trends. To remind you, IONOS is the clear #1 European SMB digitalization partner and trusted cloud enabler.Let me start to highlight our four strong business pillars, which serve as the foundation of our success. The base is our Web Presence & Productivity business, excluding aftermarket, which is the largest pillar, contributing EUR 686 million in revenues in the first 9 months of 2023. This business segment also showed remarkable resilience and steady growth throughout the first 9 months of this year with high underlying margins and exceptional cash conversion. In a subscription-based revenue model, we cater to all digitalization needs of SMBs, including solar printers. We are the leading provider in Europe and have a sizable business in North America as well.Moving to the center of the page, we have our second pillar within our Web Presence & Productivity area with our fast-growing aftermarket business, which is the buying, selling and parking of domains. This area contributed an additional EUR 229 million in revenues. However, as the exceptional high growth of the last quarters is coming down to market level as anticipated, the dilutional effect of this lower margin business on our EBITDA margin is already easing off. Around 10% of our revenues stem from our Cloud Solutions business. Here, IONOS is progressively establishing itself as a trusted partner for small and medium businesses. Although this is our most recent business venture, it is already self-sustaining. We anticipate this revenue to contribute positively to our EBITDA in the near future.Lastly, IONOS has a very strong brand that supports us across all sales channels as well in retaining our large customer base. Our continuous investment in our brand within our focus markets have led to significant increases in brand awareness in these markets, as already shared during the last earnings call. This encourages us, of course, to continue with this initiative as planned. In the past, we have been fairly cautious with price adjustments.However, we have been constantly reassessing our pricing strategy, particularly in light of the current economic landscape, which offers some flexibility in terms of pricing. It's all about striking the right balance, recognizing the potential growth from price adjustments while also remaining mindful of the impact on customer acquisition and satisfaction due to our stronger-than-ever brand, innovative products that are at the heart of our customers' digitalization, resulting in high customer loyalty, increasing acceptance of price adjustments in the market and the proven resilience of our target group, we are in a very strong position.As a result, we have decided to begin adjusting our pricing strategy in Q3. We will take this step by step with clear guidelines in place to avoid disappointing our customers. We will actively manage the process, monitor the results closely and provide an update on any upside to our midterm guidance as soon as it's appropriate.Now let's take a moment to review our performance for the first 9 months of this year. We've successfully expanded our revenues to around EUR 1,059 million across all business units, marking a substantial growth of 11% year-over-year. Our adjusted EBITDA followed suit with a solid increase of 11.1%, which is slightly ahead of our planning. I will talk about the implications of this when we come to the outlook.Let's have a look at our primary revenue growth catalysts, net customer growth and average revenue per user. As already mentioned in our Q2 webcast, we've made a promising start into 2023, which continued in the third quarter. The reliability of our mission-critical products, backed by the dedicated support of our personal consultants have helped us to develop and maintain a very loyal customer base.We've kept our churn rates remarkably low, around 13% annually or approximately 1% monthly. Moreover, we have been able to add many new customers, resulting in a strong net customer growth of 170,000 customers year-over-year or 130,000 customers in the first 9 months 2023, which compares to 70,000 customers in the same period last year. On the right-hand side, you can see that our ARPU increased by a very healthy 4.6% to EUR 14.6 per month.Despite a strong increase in customers. Please keep in mind that new customers usually benefit from starting discounts, so diluting the ARPU in the first 6 to 12 months. The growth of 4.6%, therefore, supports our continued and improved up and cross-selling ability. The expansion of our Cloud Solution business additionally fosters ARPU growth as average ARPUs are generally much higher. Overall, those numbers demonstrate the successful execution of our business strategy, underpinning our predictable growth in revenue and profitability.Let us have a look at the development of our profitability on Page 5. Revenues increased by 8.1% in the third quarter, while adjusted EBITDA increased by 11.8%. Marketing investments were comparable to last year, which indicates that the effects of less dilution from the aftermarket business, lower marketing investments as a percentage of revenue and economies of scale, which have been described multiple times in the past are just mechanically resulting in an increase of the EBITDA margin.The strong performance in the third quarter is resulting in a very strong first 9 months, as you can see on Page 6. Revenues are growing at 11% and adjusted EBITDA is growing at 11.1%. Adjusted EBITDA margin is at 28.9%, which is at the same level as last year. As previously mentioned, this includes the dilutional effect resulting from the exceptional growth in the aftermarket business during 2023, which amounted to 0.5 percentage points. Therefore, it's essential to note that if we were to exclude this impact, the adjusted EBITDA margin would have increased. This positive change can be attributed to higher gross margins, primarily driven by an improved product mix and the realization of economies of scale, which I have mentioned earlier.In the first 9 months, EUR 35 million were allocated to brand campaigns, up from EUR 27 million last year. At the same time, we spent correspondingly less on performance marketing so that our marketing expenses overall are at the same level as last year. For the full year 2023, we expect brand investment of around EUR 65 million. Originally, we expected EUR 65 million to EUR 70 million, but are, of course, optimizing that flexibility with performance marketing, adjusting to the performance of the different channels.Our focus remains on profitable growth and the allocation of our marketing spend between the channels, which means we will continue to focus on valuable customer growth measured by CLTV over CAC. By carefully managing our marketing investments along this KPI and capitalizing on the favorable market conditions, we aim to achieve optimal results and drive sustainable growth across our business.Let me start with an overview of the different revenue lines on Page 7. We are showing both the 9-month view and Q3. As everyone is usually a bit more interested in the last quarter, let me focus on this. Our largest business area, Web Presence & Productivity grew 8.4% year-over-year, supported by growth in the aftermarket business. Excluding the aftermarket business, Web Presence & Productivity grew by a very healthy 6.7% year-over-year despite a headwind from FX.Excluding currency FX, Web Presence & Productivity, excluding aftermarkets, grew by 7.5%. Our Cloud Solutions business, which is still the smallest business in our group grew by 14.6% in Q3, which is an acceleration compared to the first two quarters. But this was anticipated and the growth in the first half year was influenced by one-off project with a large customer in the first 6 months of last year, making this year's comparison more challenging.Excluding the impact of currency headwinds or currency exchange headwinds, our Cloud Solutions business achieved a robust growth rate of 16.3% in the third quarter. We are optimistic about the continued growth of our Cloud Solutions business and are excited about the opportunities it presents for expansion in future. Moving forward, we are committed to enhancing our product offerings and services. Our dedication to enhance the offering, especially in the area of PaaS and SaaS will further establish our position as a competitive player in the industry.Let's turn to Page 8 focusing on capital expenditure. As you know, we have the advantage of having highly predictable maintenance CapEx requirements, which are bolstered by favorable server economics, economies of scale and our state-of-the-art technology platform. This stable foundation allows us to effectively manage and plan for the ongoing maintenance and improving of our operations, ensuring reliable service for our customers. On the other hand, our growth CapEx is directly linked to our future revenue and customer growth prospects, particularly in the Cloud Solutions segment, providing a well-defined path to achieving payback on these investments.Maintenance CapEx remains low with 2.4% of revenues. Growth CapEx is well below previous year, driven by phasing effects of deliveries. We have around EUR 20 million of outstanding deliveries. Based on that, we are slightly reducing our expectations for total CapEx for the full year from EUR 100 million to around EUR 90 million to EUR 100 million, which represents around 6% to 7% of our total revenues. This takes into account the anticipated fulfillment of outstanding deliveries.Additionally, we are confident that Cloud Solutions' revenue will gain momentum and accelerate aligning with our CapEx target. 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 9. Our debt consists of a shareholder loan from United Internet, featuring a fixed interest rate of 6.75%. It is essential to note that this loan does not include any covenants or payback penalties, which provides us with a favorable and highly predictable financing structure. Moreover, the shareholder loan is set to mature in mid-December 2026. Given the current market conditions, we believe that the conditions of the shareholder loan are quite attractive, offering a solid and secure financing arrangement with minimal financing risk.As of the end of 9 months 2023, we have successfully reduced our net debt to EUR 1.9 billion, which translates to a net debt to adjusted EBITDA ratio of 2.9x. This reduction in net debt includes a paydown of EUR 30 million of debt in Q3, and we have already paid back another EUR 35 million in October, further reducing our debt in line with our expectations and underpinning our commitment to prudent financial management.On Page 10, you can see the reconciliation from adjusted EBITDA to free cash flow. I would like to remind you that we have implemented a new presentation of cash flows to improve the reconciliation from adjusted EBITDA to free cash flow with the half year results, with the goal of achieving greater consistency between those two metrics. We have moved the cash outflows for interest from operating activities to cash flows from financing activities. This change aligns with the fact that interest expense is not included in EBITDA, ensuring improved coherence between those measures.Furthermore, we have eliminated the interest portion of repayments of lease liabilities from operating activities. As a result, the entire outflow of interest payments is now consolidated in a single line, providing a more streamlined view of interest-related cash flows. We refined the reconciliation to create a more transparent depiction of free cash flow in relation to adjusted EBITDA. This change will help you to understand our financial performance and cash flow generation.Let me now summarize the key components. As already mentioned, CapEx for the period amounted to EUR 52 million. Tax payments as well amounted to EUR 52 million. Long-term incentive program payout, a one-off payment of EUR 14 million was made for the long-term incentive program, which was due after the IPO. This represents a one-off event and has been accounted for accordingly. IPO cost, the cost associated with the IPO were charged to the selling shareholders, except for a small amount of EUR 2 million, this has already been paid.Other working capital showed a slightly negative impact. This effect is expected to reverse over the course of the year and has already eased compared to the first 6 months of 2023. Taking lease payments into account the free cash flow after leasing for the first 9 months amounted to EUR 174 million. To make this figure comparable and include all interest payments adjusting for the one-off payout of the long-term incentive program, the adjusted comparable free cash flow would be EUR 117 million.Against the backdrop of the strong performance in the first 9 months, we are able to firm up our outlook for this year. We are still targeting a total revenue growth of approximately 10% on a constant currency basis. For the Web Presence & Productivity revenues, including aftermarkets, we are now aiming for a growth rate of around 11%, increasing from 8% to 10%. We expect our Web Presence & Productivity business, excluding aftermarket to continue to accelerate throughout the year as the impact of our growth investments come through and price adjustments done in 2022 will fully be kicking in.As anticipated and previously highlighted during the last earnings call, we are pleased to reaffirm the growth acceleration during the year, driven by continuous increase in service inventory through successful cross and up-selling initiatives, along with price adjustments made in 2022, both of this has notably been taken effect. Based on the growth acceleration we have achieved in the first 9 months, we are now expecting our Web Presence & Productivity business, excluding aftermarket, to grow by around 6% to 7% in full year 2023, excluding currency FX. Our expectation for aftermarket growth, excluding currency FX, is around 20% to 25%.While we continue to see robust demand from our SMB customer base, we acknowledge that the market for larger cloud customers has challenges with ongoing delays in the decision-making process. This has resulted in projected contracts being concluded later, which at some point means that we will not be able to compensate for the missing revenue to achieve our revenue target of 16% to 20%. To get this right, there is no change in our confidence to capture growth opportunities in this space, and we remain committed to driving sustained growth as laid out in our midterm guidance.For the full year 2023, we expect Cloud Solutions revenue to grow around 14% to 15%. The 9 months results have surpassed our margin expectation with the adjusted EBITDA margin standing at an impressive 28.9%. Therefore, we are able to increase our outlook and now expect the adjusted EBITDA to grow by around 13%, increasing from 10%, resulting in a margin target of around 27.5% compared to at least 27%, which we were expecting before. However, it is essential to keep in mind that we plan to make performance and brand marketing investments in the high-demand fourth quarter, which will lead to a lower EBITDA margin in Q4. Investing in any brand is a long-term strategy that requires patience and persistence. It is therefore very encouraging that we are already seeing great success and increased brand awareness today.Let me reconfirm brand marketing in future will stay at this year's level, which will just mechanically result in a decrease of marketing spend as a percentage of revenue, subsequently increasing our EBITDA margin moving forward. In the midterm, we remain focused on achieving an adjusted EBITDA margin above 30%.Lastly, based on the strong growth and profitability as well as our fundamental strong cash conversion, we are targeting a net debt to adjusted EBITDA of below 3x compared to 3.5x adjusted EBITDA at the end of 2022. We are really confident to continue our growth journey, underpinned by our best-in-class financial profile, combining growth with profitability and cash generation.We have classified AI into 3 distinct areas that we are actively developing. Firstly, we are enhancing our product suites with AI features to directly benefit our customers. Our AI-driven text generator for MyWebsite simplifies content creation and our AI-backed newsletter tool enables SMBs to effectively engage with their customers through e-mail marketing regardless of their experience of writing skills. In September, we launched our new AI website builder, which enables SMBs to create a full website using AI and comes with additional AI features to further improve the web presence. I will present this really cool product in a minute.Secondly, we are continuously enhancing our customer-facing products with AI capabilities to improve up and cross-selling as well as customer interaction. The first example is our new AI-based domain search at our brand, United Domains, which helps customers to find the most suitable domain for their needs. Lastly, we are leveraging AI as internal tools to enhance various aspects of our business operation. These tools support content creation, fraud detection, security and even financial modeling. We have already introduced GitHub copilot and an AI tool for product development and coding and various other AI tools to further boost our efficiency and productivity. We are very committed to pushing the boundaries of AI technology to improve our products and services continuously.Our dedication to innovation will remain at the forefront of our efforts as we strive to provide the best possible experience for our customers. Our enhanced MyWebsite product with AI assistant provides a comprehensive and unique AI-powered solution that allows our customers to create a website in seconds to give you a sense of this fascinating product, which we released in September, we've created a video that I'd like to show you now.[Presentation]Cool. On Page 16, I would like to show you how we offer the new features. The AI website builder is already included in the start of tariff as AI lowers the first hurdle for our customers, which is not to start with a blank sheet of paper and we all know this. The obstacle is very high for many customers. The more advanced AI features are only included in the higher plans and should help to convert even more customers to the higher value plans in the medium term. The product has only been live for a few weeks, so it's a bit too early for details, but customer feedback has been really good, and the majority of customers already use AI compared to classic templates. We can already see as well that the quality of the website created has improved.For example, the quality of the content is better with fewer standard traces and therefore, more unique. Also, the time the customers need to publish a website has decreased by around 30%, which is exactly what we are trying to achieve. With the enhancement of the MyWebsite product, we have also increased the prices for all plans by around EUR 3. The new prices apply to both new and existing customers, whereby the new pricing for existing customers will need some time to roll into the base as it only applies with the next contract renewal. The AI features are not only great tools for our customers but also increase the value of our customers.All right. Let me summarize the key highlights from today's presentation on Page 15 that are essential to keep in mind. First and foremost, our business is built on a strong foundation, marked by sustainability and resilience. The majority of our revenues comes from recurring sources, providing a stable platform for consistent growth. Moreover, we just proved the predictability of our business model with 9 months results being fully in line with what we guided for. Looking ahead, we have a clear vision of our CapEx requirements for the upcoming years, thanks to the well-funded asset base we have in place, which also includes our thriving cloud solution business. The slowdown of the aftermarket growth is fully anticipated and will dilute the adjusted EBITDA margin less in the future.In terms of brand investments, we expect them to reach their peak in 2023 and remain at this level. These investments will play a crucial role in supporting our revenue and margin expansion as we progress forward. A lot of the investments into the cloud solutions business have been made already, like investments for building up infrastructure-as-a-service features, creating a great opportunity for future growth and EBITDA contribution. Our product portfolio has been successfully redesigned for cross and upselling opportunities and seamless expansion.In terms of AI integration, we are capitalizing on significant opportunities both in our product and internal operations, promising a more efficient and improved customer experience. The strategic decisions we have made, coupled with the unwavering commitment of our team will undoubtedly drive success and create value for all our stakeholders. Overall, we are very well positioned for future growth.Thank you very much. I'm now happy to take your questions.

[Operator]

[Operator Instructions] We will now take the first question, it's coming from the line of George Webb from Morgan Stanley.

[George Webb, analyst]

Got a few questions to start with, please. Firstly, you talked perhaps a little bit about the systematic review of pricing that you started in Q3. Can you add a little bit more detail on what that might entail for the work you're doing in that review? Secondly, on the top line guidance for the year, the full year guidance on the Web Presence & Productivity segment, even at that upgraded 11% number could imply a fairly sharp growth deceleration in Q4, which is something we're already modeling. But I guess a large part of that has to be driven by deceleration in aftermarket growth in Q4. Is that just a factor of comparable? Or is there anything seasonal or specific to Q4 we should be aware of? And then lastly, with regards to the AI website build enhancements. Can you give any color to date on what proportion of your customer base is using the website builder?

[Britta Schmidt, executive]

George, I had a little bit problems understanding you are now turning up the volume. Could you please repeat the first two questions?

[George Webb, analyst]

Yes. So first one was, you mentioned kind of systematic review of pricing that started in Q3. Can you add a bit more detail on what that might entail or the work you're doing in the review? And then the second question was on the top line guide for the year, the Web Presence & Productivity guidance of around 11% would imply a deceleration in Q4, probably has to be largely driven by aftermarket. So wondering if that's a comparable effect or if there's anything seasonal or specific to Q4 we should be thinking about?

[Britta Schmidt, executive]

So let me start with the first one. So in terms of price increases, we are carefully looking product line by product line and more or less customer cohort by customer cohort and will drive it from there. So I already mentioned the adjustment which we made in our website builder. So this is how we tackle it product line by product line. I hope this helps to understand a little bit more.In terms of top line guidance for the full year, yes, the deceleration is largely driven by aftermarket. And then I think you had a question on how many customers are already using website builder. To be honest, I don't know from the top of my heart, we've started just a couple of weeks ago so we are still monitoring the process. We do see good uptake rates, but nothing which already changed anything in our expectations, if that helps.And maybe coming back to the deceleration. If you look into aftermarket in Q4 2022, that was a really strong growth. So the growth in Q4 this year will be driven by this high comp slower.

[Operator]

Next question is from the line of Andrew Lee from Goldman Sachs.

[Andrew Lee, analyst]

I just had some more questions around the price rises, new plans and thinking behind them. So it's useful the detail you've given on Slide 14. Just had two questions. Firstly, what was the thinking behind introducing what is quite a meaningful price rise across the customer base? What gave you the confidence that you could do that? And then second question was, could you just talk through the churn impacts you've seen so far and how that is currently driving your thinking on the ability to do further price rises?

[Britta Schmidt, executive]

As I pointed out, I think our brand is stronger than ever. And especially with the website builder, I think we have a very unique product. I'm not aware of any other of our competitors offering such a comprehensive product suite in order to build a website powered by AI. And we have tested a bit along and saw really good uptake rates. And with the value, so it's not like we are not doing a flat price increase, but obviously, offering more value to our customer. So this really gave us confidence in doing so. And keep in mind, this is only one of our products, which we are offering.And in terms of churn, and this is what I said we will take that step by step. So we will look how the customers react how this is going through. At the moment, the churn is effectively below our expectations. So it's really going down well. But for sure, we are monitoring this very closely. And this is why we are not in the position at the moment to give you any update on the impact on our midterm guidance.

[Andrew Lee, analyst]

Can I just have a follow-up question, please. What is the phasing of the price rises then if you are doing over a protracted time period? When do you expect to have completed those 3 year price rises across that product customer base?

[Britta Schmidt, executive]

So they are already live now, but for existing customers they will run through the contract period. So they will only be effective as soon as the new contract period kicks in, so which should take, on average, 12 months to run through.

[Operator]

We will now take the next question from the line of Ben Rickett from New Street Research.

[Ben Rickett, analyst]

I had 2 questions. Firstly, just to try and understand the impact of your extraordinary marketing expense. So in Q2 and Q3, you've pulled back that spend a lot. And in fact, your top line sort of web hosting revenue growth has been pretty strong. So it would be interesting to understand what the dynamic is there. When you spend more on the marketing spend, but how do you see that seeding through into your results?And then second question, I know in the past, you've done a lot of M&A transactions. I was just wondering what you think currently is the scope from a leverage perspective to do further M&A transactions and what you're sort of seeing exceeding in terms of valuations for the company at the moment?

[Britta Schmidt, executive]

Let me comment on marketing spend first. I think it's important to understand that new customers, if we acquire them through whichever marketing channel, usually have a 6 to 12 month discount. So the impact of a new customer for the top line or for the top line growth is relatively muted between the first 6 to 12 months. So the impact is only kicking in if the starting discounts are running out. So every customer which we acquire now will have an impact in next year's top line results. So that's the nature of our business.But obviously, with good market conditions, so a little bit of competitive easing in the market. We are capitalizing on this both with our brand campaigns continuing to be broadcasted and as well our performance marketing adjusting towards, as I said, CLTV over CAC.And then in terms of, on M&A. So we always stated we are not in the game of consolidating the market in terms of the smaller players, which are out there in the market. We believe given our stronger-than-ever brand and our very good performance, which we are currently delivering as you have seen with the Q3 results, we can actually outperform those smaller players on the market. And this is what we actually see at the moment. So we are not focusing on small M&A transactions. If there's any larger M&A transaction, which we know is all opportunistic, we would definitely look at it.I think from a leverage perspective, we are delevering. And we are totally in our target of delivering roughly 0.5 turn a year. So I think at one point in time, our leverage will as well give us enough flexibility to be to be ready if needed.

[Ben Rickett, analyst]

And what level of leverage would that be where you'd feel more comfortable to do M&A?

[Britta Schmidt, executive]

That's a good question. I think it's pretty much depending as well on the market. But maybe if we come more towards two or so.

[Operator]

We will now take the next question -- from the line of Stephane Beyazian from ODDO BHF.

[Stéphane Beyazian, analyst]

Yes. I've got three. The first one is on aftermarket. The revenues are still down quarter-on-quarter. And to be honest, I'm not super familiar with the seasonality in this business. And I think we're all modeling some growth in 2024, 2025. So any color you could have on when you think that the revenues or whether the revenues will continue to grow or touching a sort of plateau in that business that would be, I think, quite interesting.The second one is on cloud. You're adjusting your guidance there and also the CapEx for this year looks to be a little bit perhaps lower than what you initially expected. So I'm just wondering whether this is just a reflection of perhaps the slower momentum that you're having or a market slowdown or perhaps you also proactively willing to slow down your expectation and your ambitions in cloud?And the third one, just a follow-up on the pricing. Can you comment a little bit on what the pricing move you are seeing with competition and whether you think we should perhaps factor a little bit of churn in our Q4 customer addition or whether you think that all the marketing spending you're doing will offset perhaps any churn you could be seeing on your base?

[Britta Schmidt, executive]

Let me start with aftermarket first. I think we always guided that the exceptional growth of aftermarket, which we have seen in the last months and years will be going down towards market growth which is in the high single, low doubles. And this is a progression. So it's not falling off the cliff, but this is a progression. We are still expecting growth in aftermarket for 2024 in line with that guidance.If we look into CapEx, and as well, Cloud Solutions revenue. So we are not proactively slowing down the business. We strongly believe in the opportunity the cloud solutions market is offering, but we do see and have to acknowledge that larger cloud customers are a bit hesitant in their decision-making. And in terms of CapEx which is related partially to cloud solutions. That's one result of the slowdown in revenue a little bit, which we are seeing there. And then it's a phasing issue and some shift in delivery times, etcetera.And then for the last one, in terms of churn, as I said, so we do see some effects on churn and as well inflow from price adjustments. However, below our expectations and relatively moderate. So we are really confident that we will not see an uptake in our churn rate going forward.

[Operator]

We will now take the next question from the line of Usman Ghazi from Berenberg.

[Usman Ghazi, analyst]

I've got three questions, please. On the price increases, I mean, are they coming in the web presence business, in cloud or across the board? And also, are we talking about CPI kind of linked type of price increases? Or is this more than CPI? And my second question was on the cloud business. So up until the 9 months, the growth has been around 16% if I look at it on an ex-FX kind of basis. So the guidance downgrade for 14% to 15% for the full year implies that Q4 is going to be around 10% or something. I mean does this just reflect a big contract you were expecting that's going to feed out into next year. So this is just a timing issue? Or would you expect the Q4 run rate for the cloud business to then persist through into 2024.

[Britta Schmidt, executive]

Let me start with price increase and the link to CPI. For sure, we had some increases or inflation. And we all know that across the board stuff increased. And of course, this implies as well to some of our products like energy, et cetera. And you know that we have been relatively reluctant in the past to pass this on to our customers, whereas some of our competitors have been really pushing and just introduced flat price increases of 10% to 20%, sometimes through all products, whereas we thought let's see how the economic backdrop is developing. And let's work on offering more value as well to our customers and then looking into adjusting the prices.And then looking into the Q4 for Cloud Solutions. As I said, yes, we do see larger cloud customers being relatively reluctant and slow in decision-making. So yes, we did expect some more of those contracts or customers coming in or projects coming in, which we believe are shifted into 2024 now. So this is one of the reasons why we are slightly slower in this year's expectation.

[Operator]

We will now take the next question from the line of Nizla Naizer from Deutsche Bank.

[Fathima-Nizla Naizer, analyst]

I have 3 questions from my end as well. The first is on pricing of the new AI-driven products going forward, what would be sort of the incremental drop through to EBITDA in the sense what's the cost to INS to provide these sort of AI linked products because I'm sure you have your AI partners that you're paying as well. So some color on maybe the underlying economics of your cost versus the revenue that you could potentially generate would be great. The second is on the shareholder loan. So you've paid another $35 million in October. Would there be plans to sort of pay more over the rest of the 2023 year? Or would this then again be okay, what could you do in 2024 in terms of paying it down and lowering the leverage. Some color there would be great.And my last question is on cloud. So there seems to be, like you said, the delay with these large projects going into 2024. Are you still sort of comfortable with the 20% type of growth that cloud is expected to do over the midterm? So could 2024 go back to a 20% type of growth year? Is it too early to tell? Or is it fair to assume maybe more mid-teens again before an acceleration beyond 2024? So some color there would be great.

[Britta Schmidt, executive]

So in terms of the AI feature, this is actually a pretty high margin product. So the incremental cost, which we have for providing this feature are relatively low. And as I said, it's a pretty high-margin product. And then looking into the shareholder loan, as I pointed out, we still intend to spend on marketing because it's a high demand quarter in Q4. So there might not be another repayment in 2023. But obviously, if there's excess cash, we will repay, but this is currently not planned.And then in looking into 2024. So we expect at least the same level of repayment that we have in 2023. And depending on the results, it should be much more than that. And then in terms of cloud solutions, we are really confident about the midterm growth of 20%. For 2024, it's a bit too early to tell.

[Operator]

We will now take the next question from the line of Emily Johnson from Barclays.

[Emily Johnson, analyst]

My first question is, can you comment on the underlying health of SMB creation and reductions in Germany and the U.K.? And you're clearly growing active customers overall, but I'm interested in any color you have on what the underlying market is doing in terms of the volume of SMBs and where you think you're gaining share? My second question is on the 16% growth in cloud in Q3. How much of that is like-for-like revenue growth with existing customers versus signing new contracts?And then my last question is on marketing spend. Can you remind us what the competitive landscape is like in Europe in previous quarters you spoke about tax coming down and not helping the absolute amount that you needed to spend on marketing. It sounds like you're now referring to shifting the mix of performance versus brand marketing. So can you just confirm whether this is a continuation of previous trends of lower tax leading to lower absolute performance marketing spending or whether there's any change in strategy there?

[Britta Schmidt, executive]

Let me start with the first question. So in terms of marketing spending, we are always adjusting to the market conditions. And if we see performance marketing being really very efficient and effective, we will try to put a little bit more in there, depending as well on incoming revenues, etc. But I wouldn't say we are, in general, shifting away from brand towards performance. We are really committed in driving our brand awareness. But still, I think what we always said in the past that the market is easing down a bit in terms of competition when it comes to marketing, that still holds true at the moment as well. And we are now running into the very high demand fourth quarter. So we are still expecting that we can lower our CAC.And then in terms of SMB and the economic backdrop for SMBs. So we do not recognize a strong trend of SMBs going out of the market or belly up. We do see a move back towards pre-COVID levels, but nothing which really worries us. So we would still expect that the SMB market, so the number of SMBs is growing as we have seen in economic downturns in the past. So usually, you see an uptake in SMBs. This market is really resilient. So for the 16% growth in cloud, I think it's a good mix between new customers and as well them taking more, so it's a good mix of new customers, but as well our existing customers consuming more. So it's a good balance between both.

[Operator]

Next question from the line of Usman Ghazi from Berenberg.

[Usman Ghazi, analyst]

Two follow-ups, please. Could you please give some qualitative commentary around the revenue growth you're seeing by country. So because I remember that a quarter or two ago, we specifically called out Spain and Poland as markets that we're seeing subdued trends. One, because of COVID normalization, the other because of the warranty claim. Just broader kind of commentary around the strongest/weakest markets would be interesting.And then just on the AI slide, I guess most of the features you've rolled out a radiant web presence, right? I mean, could you perhaps talk about what you're looking at in terms of rolling out AI features in the Cloud segment?

[Britta Schmidt, executive]

So I think the commentary around Poland still holds true. So it wasn't a one-time effect, but we see them continuing to come back to a good growth rate. And we do see as well that Germany is growing relatively well and our business in the Netherlands, which is relatively small, and it's plateaued, which is present in the Netherlands, but it's growing very well. Everything else is more or less in the same ballpark, and we will continue to and we expect basically all countries to grow more or less the same. And then in terms of your second question, could you please repeat, Usman?

[Usman Ghazi, analyst]

So the AI features that you've rolled out so far seem to be primarily focused on the Web Presence segment. And I'm just wondering if you could maybe elaborate on what you're doing on the cloud side in terms of rolling out AI?

[Britta Schmidt, executive]

Yes. You are absolutely right. In terms of features for AI. We are focusing on Web Presence & Productivity because we believe at the moment, this is where the SMBs can benefit the most from those features like building the website, etc. And then we will then continue to look into the product roadmap as well for Cloud Solutions.

[Operator]

We will now take the next question from the line of Daria-Ioana Sipos from JPMorgan.

[Daria-Ioana Sipos, analyst]

Just on the Web Presence & Productivity aftermarket segment, you saw 7.5% growth, excluding FX in the quarter. Could you give us a sense for how things progress through the quarter month-over-month? How are the September rates looking versus July and August? And then just thinking about some of the trends you've been seeing in October and November, how have these looked in relation to developments towards the end of the Q3?

[Britta Schmidt, executive]

So I think overall, the Web Presence & Productivity business has not that much seasonality in terms of month over month. You should see it continuously growing. I think there is one exception, and this is relating to the domains business, which is usually a bit stronger in the first half. But other than that, I wouldn't see a lot of seasonality in the Web Presence & Productivity business.

[Operator]

I would like to turn the conference back to Stephan Gramkow for closing remarks.

[Stephan Gramkow, executive]

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

[Britta Schmidt, executive]

Thanks, everybody, for joining.

[Operator]

That concludes the conference for today. Thank you for participating. You may now disconnect.