Telefonica Deutschland Holding AG
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Good morning, everyone, and welcome to Telefonica Deutschland First Quarter 2018 Preliminary Results Conference Call. Before proceeding with the presentation, we would like to inform you that the financial information contained in this document has been prepared under International Financial Reporting Standards, i.e. we have implemented IFRS 15 accounting standards as of the 1st of January 2018. Unless otherwise indicated, all financial information in this presentation is based on this new accounting standard for Q1 2018 while all historic information is based on reported figures as per IAS 18 accounting standards. The implementation of IFRS 15, however, only has minor impact on the Telefonica Deutschland P&L and details about this will be given in this presentation.The presentation may contain announcements that constitute forward-looking statements, which are not guarantees for future performance and involve risks and uncertainties. Also, certain results may differ materially from those in the forward-looking statements as a result of a variety of factors. We invite you to read the complete disclaimer included in the first page of this presentation, which you will also find on our website in theInvestor Relations section. Today with me, I have our Chief Executive Officer, Markus Haas; and our Chief Financial Officer, Markus Rolle. Markus, please go ahead.
Good morning all and thank you for joining our first quarter conference call in 2018. I'm excited to present to you today a solid set of results fully in line with our full year guidance. The German market has now fully embraced mobile data usage and German consumers demand successfully more data. With our packet portfolio O2 Free, we helped drive this trend and we continued to benefit from this. Data usage is up another 46% year-on-year and we now have over 16 million LTE subscribers. Mobile service revenue is up plus 0.4% in Q1 despite the quarter being rational from a trading perspective. Total revenue was also up the same percentage year-on-year benefiting from revised handset dynamics. Respectable OIBDA growth of 5.4% reflects our focus on value, efficient marketing as well as another EUR 35 million in synergies in the first quarter mainly from our network.Last, but not least, our strong OIBDA together with an extremely effective use of CapEx resulted in operating cash flow growth of 8.7% year-on-year.With the AGM this year on 17th of May, just around the corner, we are reiterating our dividend proposal of EUR 0.26 per share as well as our dividend guidance of dividend growth over the 3 years, 2016 including this year 2018. If we move on on Slide #4, taking a closer look at our P&L. I wanted to show you how consistently we have improved over the last quarters both in underlying and reported terms. Revenue took a significant hit in 2017 as a result of regulatory effects as we all know, but we have since clawed our way back and are now almost in positive territory in reported terms. The same goes for mobile service revenue where we showed sequential improvement quarter-by-quarter throughout 2017 and remained in positive territory on an underlying basis all during the first quarter 2018.As I mentioned before, Q1 was a relatively quiet quarter in the market with a clear focus on value over growth from our side. Our guidance OIBDA is up 5.4% based on the new IFRS 15 accounting and 4.5% based on IAS 18 in the first quarter, clearly more in line with our outlook 2018. We continue to drive OIBDA with a consistent focus on profitable growth successfully generating another EUR 35 million in synergies, mostly from site decommissioning in the network. We have now dealt with the majority of integration in used operational topics. The remaining topic, the network, is well underway. And also on the customer service side, we have been qualified as the second best customer service in the German market in the Connect Q1 test. In fact we have now fixed customer service and the high quality response rate makes us very proud of our employees. We are intensely proud of this major achievement that we have done only within 1 year.If we move on on Slide #5, let us now revisit the German data opportunity. We launched our new O2 Free tariff in the autumn of 2017 and trends now clearly show that customers are buying into data usage in a big way. As we said at the Capital Market Day in February, over 60% of new customers now take the M tariff with an average net ARPU of EUR 25, significantly ahead of our average postpaid retail ARPU. Customers in the M tariff also [ ready use ] over 6 gigabytes on a monthly basis. We drive this trend by bundling selected high value handset options such as for example the Samsung Galaxy into these tariffs and by layering added value services such as streaming with Sky. Our competitors have emulated this approach in different ways, most recently by offering unlimited propositions at high-end prices. We believe, however, that our core customer group is mass market and thus feel that we are still optimally positioned to drive ARPU with our current go-to-market strategy.Having said that, we will continue to review and develop our existing portfolios across all brands to ensure a competitive positioning in the market. In the summer we will also launch our O2 hub, which will enable our customers to access any number of devices through 1 central application including activation and deactivation. I will not give you too many spoilers today, but we are convinced that this will improve our customers' experience significantly and gradually open the door to exponential mobile data usage. It also underpins the innovative spirit of our company. Focusing on 2 operational topics on Slide #6. As I mentioned earlier, we are also well underway with fixing the basics and building credibility with our customers in service and network to become Germany's Mobile Customer & Digital Champion. In its annual service test 2018, the Connect Magazine awarded us the grade good, missing very good by -- only by inches.We were only 8 markets behind the leader compared to 86 last year. We managed to beat the competition to take victory in the category Quality of Service. Reachability and waiting time were also much improved versus last year, sales care is helping us here. Our very own chatbot Lisa already consistent with use with over 60% of asked questions by herself without any agent interactions. We will continue to target a high quality of service in the future while offering our customers digital touch points where they choose a digital route. As presented in February, our consistent omnichannel experience is a key lever for our digital transformation. Next up on our list of operational priorities, however, is finalizing the network integration. We have now already switched off over 9,000 sites with another 5,000 until year-end. All of this we are now executing and are focused and beat efficiency and quality as you can see from our reported CapEx.Meanwhile, we also continue to innovate. On the occasion of the Mobile World Congress in Barcelona, we extended our tech city partnership with Huawei. With Nokia, we are building a joint technology lab focused on the development of customer relevant technologies targeting 5G field tests in Berlin. We are also testing narrowband IoT in cooperation with Munich Airport as part of smart energy projects. As you can see, there is lots going on. We are fixing the basics and at the same time making sure that we are not left behind in the technological race. We are building the most modern network in Germany. We are convinced that we can shortly add network to customer service as a concern of the past. Having a look in more detail to the Digital4Growth program that we presented on our Capital Market Day in February. As you all know, the integration was only the beginning. We are now also running full steam ahead with regards to our digital transformation.As a reminder, I have here summarized for you the key KPIs we decided to use to track our progress towards becoming Germany's Mobile Customer & Digital Champion. While we will see the first OIBDA gains from the transformation program in 2019, we are nevertheless already progressing with some ***part 1*** *** part 2 *** already progressing with some of the initiatives outlined to you in February. We are making our business simpler by driving the O2 app penetration as of year-end 2017 at 20% to 80%. We are becoming faster by pushing sales in self-assisted channels only 15% as of year-end 2017 with a target of 25%. And we are pushing customer service automation with our share of eCare events of 65% per year in 2017 and a goal of 80%. Over the year 2018, we will start reporting against these KPIs to give you an idea of the progress we are achieving. We will also provide you with a more detailed plan of initiatives to give you more color going forward.Our transformation team is now set up with the team lead as a direct report to me ensuring that the initiatives are integrated with a few talent interdependencies and the fast possible -- positive outcome for our customers. With this preview, I'm now proud and will hand over to Markus Rolle, our CFO, for more details on the financials. Markus, please go ahead.
Thank you, Markus, and good morning also from me. It's my pleasure to present to you our first quarter 2018 results that show solid operational trends and strong OIBDA growth with continued margin expansion. We are fully on track for the 2018 financial outlook as presented 2 months ago. In a dynamic market, we have maintained solid operational momentum with a clear focus on value. The O2 Free portfolio continues to successfully feed customer demand for big data while partner trading benefited from the focus on 4G offers. As a result, we saw 157,000 mobile postpaid net adds while prepaid dynamics remained unchanged on the back of the regulatory changes introduced last summer. In our fixed business, the demand for high-speed VDSL remained very strong with 92,000 net adds in Q1 while the planned phaseout of wholesale DSL business continues in line with expectations.Revenue trends continue to improve and excluding a regulatory drag of EUR 11 million in the quarter, we returned to underlying growth of plus 0.4%. MSR remains the biggest driver of revenue. It came in at minus 0.4% year-over-year in reported terms on the back of the continued regulatory headwinds. And I'm particularly pleased that underlying MSR trends remained positive at plus 0.4% year-over-year as it reflects the tailwind from O2 Free as well as the remaining headwinds from OTT trends and the ongoing legacy base rotation. Underlying OIBDA growth in the first quarter of the year was strong at 5.4% year-over-year with a solid margin expansion of 1.1 percentage points to 23.8%. This is as a result of a, the successful synergy capture with additional in-year savings of EUR 35 million, mainly rollover effects from FTE restructuring, network consolidation and the optimization of our shop footprint; and b, our value-focused marketing approach.Regulatory effects on OIBDA level amounted to EUR 14 million and also we booked further restructuring provisions of EUR 14 million. Nonetheless, reported OIBDA remained stable year-over-year. And last, but not least, we saw an efficient quarter for CapEx with incremental CapEx synergies of EUR 15 million, basically from the rollout of a single LTE network. Leverage remains low at 0.6x EBITDA at the end of March and is again well in line with the target of at or below 1x. Before proceeding, let me give you some more details on the implementation of IFRS 15. As you can see on Slide 9, the impact from the new accounting standard on our P&L are negligible. In effect there are only minor shifts of EUR 2 million to EUR 3 million between different revenue lines for Telefonica Deutschland. This is because we already took a simplified fair value approach to revenue allocation since the introduction of the O2 My Handy model back in 2009.As a result, the IFRS effects are in our case limited to the effects of the tax circuit deferrals mostly without the handset component. At OIBDA level, the catch-up effect from prior-year's tax charge, which are now allocated across the contract period, is largely offset by the impact from deferring current commercial cost investments into the future. The catch-up effect of roughly EUR 420 million, which is recognized in equity in the amount of EUR 270 million, mainly due to the effect of a change in deferred tax liabilities. Let me show you on the next page how this translates into the year-over-year performance of the individual revenue lines. As I said before, underlying revenue returned to growth on the back of sustained MSR trends and strong demand for handsets. Even in the guidance relevant like-for-like comparison under IAS 18 accounting standards, revenue broke the zero line and was up plus 0.2% year-over-year.This is very much in line with our broadly stable full year guidance. The negative regulatory drag on MSR amounted to EUR 11 million and was basically mostly roam like at home. As a reminder, we are expecting a total of EUR 30 million to EUR 50 million of negative regulatory impact for the full year, predominantly in the first half of the year. MSR continued to see accretive effects from O2 Free as the M tariff still is the most popular in the portfolio as Markus has explained to you earlier. At the same time, headwinds such as OTT trends and legacy base rotation continued to partly offset this effect. Nonetheless, MSR remained positive year-over-year and based on IAS 18, MSR is also positive at plus 0.3% year-over-year. In line with the German market, we continue to see stronger demand for high-value handset. As such, the positive year-over-year trend for handset revenue further improved to plus 10.8% year-over-year.Our fixed revenue fell 10.7% year-over-year, which is mainly related to the ongoing migration of wholesale customers, which should be finalized towards the year-end. Fixed revenue, however, benefited from strong VDSL demand in our retail business. Let us now turn to the data dynamics that are driving the positive revenue trends. On Slide 11, you can see how larger data buckets are successfully fueling data growth amongst our customers. Our data KPIs remain strong. We continue to see significant growth year-over-year and QoverQ as customer adapt to larger data buckets in the new O2 Free portfolio. Music and video streaming are unchanged as key drivers of data growth. Similar to the prior quarter, total traffic was again up by almost 50% year-over-year with more than 125 terabytes of data terminated in our networks. Also our LTE customer base continued to grow in an increasingly saturated market, it was up plus 15% year-over-year to more than 60 million accesses.The data usage of our O2 postpaid LTE customers remained seasonally flat QoverQ and close to 3 gigabyte in Q1, which is still an impressive 56% year-over-year growth. Usage of customers in the most popular tariff, the O2 Free M, show almost double usage at close to 6 gigabyte. On Slide 12, let's have a look into the steady trading trends we are generating in a dynamic competitive environment. Again we took a conscious value-over-volume focus in the first quarter of 2018, but nevertheless saw solid market momentum both in our own retail business on the back of the O2 Free and in the partner business. The latter is driven by a 4G focus, which is resulting in a rising share of profit. We welcome this development as it reflects the dynamics of the MBA MVNO after the MVNO merger. Churn rates remained low with an annualized churn rate of approximately 18% in our O2 postpaid customer base.Here we saw both QoverQ and year-over-year improvement, which is in line with our expectations. Particularly, network churn remains at low levels and confirms our progress in service and network. Meanwhile total postpaid churn was slightly up QoverQ and year-over-year driven by partner brands. Blended ARPU trends continue to reflect regulatory headwinds as well as legacy base rotation effects. In our prepaid business, we are seeing lower demand as a result of the regulatory changes introduced last summer. Both the roam like at home regulation and the prepaid ID check continue to weigh on the overall prepaid dynamics. Prepaid *** part 2 *** *** part 3*** check continue to weigh on the overall prepaid dynamics. Prepaid ARPU QoverQ and year-over-year increases is basically as a result of the base correction in the final quarter of last year, which was however neutral on prepaid MSR. Moving to the next slide to have a closer look to the segment contribution. Partner trading clearly benefits from the focus on 4G offers on the Telefonica Deutschland network.As a result, we are receiving a higher gross add share from partners and particularly under the MBA MVNO contract. As such, total partner share of gross adds saw a further uptick to 61% in the first quarter of the year. Let me emphasize that the reasons for this are very different from the uptick in pricing competition, which brought partner gross add momentum in 2016. We now see a much more benign competitive environment and a clear focus on profitable growth in the segment, which we value. The effects of the MBA MVNO can also be seen in partner postpaid MSR, which is temporary not growing as a result of the contract dynamics in the consolidated MVNO environment. Another reason for this development is our focus on value with ongoing optimization of low margin service providers. Nevertheless, we see future revenue growth opportunities in wholesale from data growth, capacity upgrades and speed and technology based price theory.On Slide 14, we show all relevant KPIs for the fixed business. The planned shutdown of our legacy ULL infrastructures continue to drive wholesale customer migration, which should be finished over the next few months. As per the end of March, we only had a remaining base of fixed wholesale accesses of 63,000. As a result of this migration, the negative contribution of the wholesale fixed business to the overall fixed performance increases to more than 10%. In our own retail business, we continue to see very good traction for high speed VDSL with 92,000 net adds in Q1 bringing the VDSL base to more than 1.2 million accesses at the end of March. Not only does VDSL drive fixed retail trading, it also ensures stable year-over-year ARPUs for fixed broadband at around EUR 25. All in all, trading momentum was solid in a dynamic yet rational environment and we will continue to invest in the market with a value-based approach and a clear focus on data monetization by driving usage amongst our customers.Moving to synergy capture on slide 15 as a reminder. At year-end 2017, we had already delivered roughly 75% of our upgrade total operational cash flow target of EUR 900 million as the major integration projects such as the FTE restructuring, the optimization of our shop footprint and the customer base migration to 1 IT stack already had been completed by then. As such, the EUR 35 million in incremental savings at OIBDA level in Q1 are from rollover effects from these initiatives, particularly the leaver program as well as further network synergies. Our remaining core project, network integration, is making solid progress and brings significant quality improvements for our customers. It's our clear ambition to largely finalize network consolidation by the end of the year. As such, we confirm the total savings target of EUR 80 million in revenues and OpEx related synergies, which front loaded throughout the year 2018 as a result of rollover effects.We are aiming to also bring another EUR 50 million of synergies at CapEx level, of which we saw EUR 15 million in the first quarter. Both will bring us to 90% of total savings by year-end 2018. Turning to OIBDA performance on Slide 16. As a result of the successful synergy capture and our value-based marketing approach, we have delivered strong underlying OIBDA growth of 5.4% year-over-year in the first quarter of the year to EUR 422 million, fully on track for our full year guidance 2018 guidance of flat to slightly positive year-over-year growth for OIBDA. Looking to the cost lines. Exceptional effect amounted to EUR 14 million in the first quarter and were mainly restructuring costs related to our network consolidation program. Supplies were broadly stable year-over-year at plus 0.4% and are reflecting the higher cost of supplies for hardware while connectivity related costs came in slightly lower year-over-year.The roam like at home regime weighed on wholesale growth, which come in higher year-over-year due to the usage elasticity effects. Altogether, regulatory effects were EUR 14 million in Q1. Personnel expenses reflect the successful execution of the leaver program offset by the inflation related salary adjustment with effect of 1st January 2018. Excluding restructuring costs in the first quarter of last year, personnel costs were up 2.4% year-over-year. Other OpEx were plus 0.6% higher year-over-year and include the before mentioned restructuring expenses. Excluding exceptional, we further grew our OIBDA margin by 1.1 percentage points year-over-year to 23.8% in the first quarter. Turning to page 17, you will see that we continue to have a strong balance sheet and financial flexibility. Free cash flow came in at EUR 15 million with working capital movements and adjustments of a negative EUR 184 million.This was primarily driven by seasonal prepayments for lease plan and rental contract for mobile sites of EUR 185 million as well as CapEx resources and restructuring. Other recurring working capital movement include the positive effect from silent factoring transactions, partly offset by a reduction in payables. To date, the accumulated cash-out for restructuring amounts to EUR 510 million. Net debt was broadly stable at EUR 1,085,000,000 with an unchanged low leverage of 0.6x, which is well below the stated target of at or below 1x OIBDA. I'm proud to inform you that Fitch just recently has confirmed our credit rating of BBB with a positive outlook. And last, but not least, a reminder. Operating lease adjusted leverage would be at 2.2x if using a multiplier of 7 similar to what Fitch does. Summing up, we have reported another quarter of solid results and all KPIs set to achieve the full year target.Most importantly, we have seen solid revenue trends with positive trajectory in all revenue lines and particularly MSR performance remained positive year-over-year. Trading momentum in postpaid is strong and O2 Free portfolio continues to drive ARPU up as customers are adopting big data bundles. Partner contribution was supported by an ongoing focus on 4G offers. We have delivered another quarter of strong OIBDA growth that was supported by successful synergy capture and cost discipline on the back of our value approach to the market. Our operational cash flow dynamics remain solid and we reiterate our dividend commitment and intend to suggest a dividend of EUR 0.26 to the AGM taking place on the 17th of May.With this, I would like to finish today's presentation and hand back to the operator to open the Q&A line. Thank you very much for your attention
(Operator Instructions] And the first question is from the line of Mathieu Robilliard with Barclays.
I have 2 questions, please. The first one with regards to the partner revenues trend. So, you're sure that they are down 3% and I wanted to understand if the right reading was that possibly some of the revenues coming from partners that are not in the MBA MVNO deal are declining and that's really what is explaining this minus 3% because it's hard to reconcile with the fact that the partner brands are having more and more gross adds. So, that's the first question. And the second question had to do with your network integration progress and how you see that impacting churn. As you highlighted, churn is stable on your core brand. Is it fair to assume that churn should start to come down throughout the year as the network integration finalizes? Thank you.
It's Markus speaking. I will take the second and Markus will go for the first. On the network part, clearly it's the target to improve churn quarter by quarter and clearly with the ongoing network consolidation, we see progress here. Clearly we are still in the process. As I said, we still have to take out around 5,000 network elements, but we are well underway and it is our clear target to reduce churn year-over-year every quarter.
Let me come then to your first question about the partner revenue trends. So well, actually Mathieu, there are 2 reasons for that one. The first one is the ongoing optimization of our partner landscape where we optimize service provider structures with different partners as we have already announced also at the Capital Market Day, which drives down the revenue trend. And the second effect that you have is of course the effect of the MVNO consolidation that we see because there is of course capacity being filled on the Bitstream MVNO contract currently in line with our expectations. So from a trend perspective, we do not worry about the dip that we see. On the long term, as I stated before, we see also on the wholesale side significant growth opportunities.
Next question is from the line of Polo Tang with UBS.
I've got 2 questions. The first really is just about clarification in terms of phasing of costs and cost savings because in terms of cost savings, you had EUR 35 million of OpEx synergies in Q1 and you're actually guiding for EUR 80 million for the full year. Therefore, is your full year guidance for synergies potentially conservative and could there be upside risk? Also in terms of the cost, can you remind us if Q1 saw any transformation investment and could you give us some quantum if there has been any investment? That's the first question. Second question is really just about Drillisch because we obviously had some comments from Drillisch about them doing more on handset financing, but have you seen any signs of them being more aggressive in the market either over Q1 or Q2 as a result? I think you alluded to the competitive dynamics in the market being a bit more benign, but could you just comment about Drillisch and also what you're seeing in terms of competitive dynamics in the broader German mobile market? Thanks.
I will take the first one and the other Markus, the second one. With regards to the EUR 35 million synergies in Q1 and the full year guidance of EUR 80 million, we have a front loading synergy capture as a result of the rollover effects from the activities that we had in previous year. And as we have stated, we would see now also gradually network consolidation effects kicking in into this year. The Q1 performance is in line from the phasing perspective with our expectations and we feel comfortable with the full year guidance that we have given. And there was 1b question with regard to the investments of transformation. Currently, we have not seen significant investments into transformation in the Q1 OpEx performance. Over to you, Markus.
On your second question, hardware bundles still play a role in order to gain first SIM customers or more quality of customers. We started at also the low end of the market last year with the Blau brand and we now see that the market is following us in certain segments also to bundle at the second or the discount brands with low-end devices. So, these are bundles roughly between EUR 20, EUR 25, including a device and an on-net [ flip ]. So, this has also expanded no more into this segment. It's not a boring trend from our side because clearly there's also demand in order to gain more customers that come also then hopefully with a better churn profile. So I think if we just look back from our perspective on the first quarter, in line with our expectation so no surprises.
And can you maybe just comment in terms of the market dynamics in terms of what you're seeing generally not specifically in terms of frills, but just in terms of maybe the mid-market and then the higher end of the market? Thanks.
I think 2 key messages. First is there is a higher willingness to pay for mobile data. This trend continues and I think this is the most important model of data monetization that we have. So, the acceptance by consumers to leverage and to pay more for big mobile data bundles is intact. We started this journey as you know with our birthday promotion last May and this trend is now more -- for a year more or less in the market, especially with mobile data without limitations. We do not limit our mobile packages. We have no zero rating so we have a pure mobile data stream and customers value the freedom we give to them. And so far this trend is intact and you have also seen it in my presentation and Markus one with a EUR 25 ARPU compared to the average ARPUs we have seen in the past, a very healthy trend. And the second one is that at the high end that I also mentioned that we see first fully unlimited offers at very, very premium price points and where we see clearly the mass market with higher ARPUs is still coming with big data bundles and we would need to see how we evolve this trend in order to monetize higher data demand. And there are different strategies in the market. Everybody's testing and experiencing, but the overall trend we see of ARPU up is still intact for Q1. And I think this is the good news for the German market.
Next question is from the line of Joshua Mills with Goldman Sachs.
Just a quick follow-up from me on the partner revenue. So I guess it's difficult to say -- to tell how much of this minus 3% is coming from the fact that the old united subscribers are paying a bit less versus the fact that you're using some of the third parties like Freenet less as well. But I just wondered should we expect this share of -- this absolute level of partner revenue to continue to decline throughout this year? And is there a point at which you think you'll begin to see these partner revenues grow again perhaps when traditional begin to actually fill the glide path in 2019? Thank you.
Let me follow up on that one. So first of all, let me just remind us as the dynamics that we still have. Of course we have many different partners and we have in particularly the Bitstream MVNO and also the former E-Plus 1&1 contract in place, which are of course the major contributors from a postpaid perspective. And here we see the dynamics that we have just talked about. Of course we see currently especially on the Bitstream MVNO capacity being filled up by the partners as expected, in line with our expectations. From a general other development of course, we are trying to optimize always our margin situation with the long term of service providers. I cannot disclose you now details of the different contracts, but we are currently on that optimization path. We will expect to go back also to revenue growth here and what you said is right. There is of course the unchanged opportunity of the Bitstream MVNO contract once the glide path is reached and the capacity is exceeded. We have to of course wait the strategies and also the disclosures of 1&1 and Drillisch to get better insights on their strategy going forward to see how the dynamics will evolve for us in the future.
Just to be very clear. When you gave your guidance for slight underlying MSR growth for Telefonica Deutschland for this year, have you assumed that partner revenues continue to decline every quarter or have you assumed that at some point during the course of this year, they stabilize and grow again as it glides of. So it's just because when we try to think about modeling this company, we probably do it on two basis. Firstly, how much revenue you're making from your MVNO customers, but also what's happening in your own brands and I just want to understand when you think you will be able to stabilize this partner revenue?
So from our perspective, what is happening in Q1 did not come unexpected and was reflected in the guidance we have given. That is also why we have reiterated our guidance. And well, the current -- the real moment of stabilization depends on the partner performance as discussed before. I cannot give you a concrete guidance in which quarter that will happen. There are too many variables that play into the overall equation. So from that perspective, nothing unexpected in line with what we have guided and therefore from our perspective, no big thing that we are negative this quarter.
And the next question is from the line of Thibault De Coincy with Raymond James.
2 questions from me. First, in light of recent comments from [inaudible] and with this big election coming, how serious do you think is the risk of 1&1 really exercising its option to become a fourth MNO? And then second, your OIBDA was up 5% excluding regulation in Q1 versus your guidance of flat to slightly positive for the year. So I guess we should expect that your regulation in the next quarters -- I was wondering if you give us more colors on the phasing we should expect for OIBDA trends? Thanks.
Markus speaking. I think what we clearly observe is becoming a fourth MNO and Telefonica has started this journey 20 years ago, is heavy investment you would need to carry out. So far, we haven't seen big investments from United Internet into the market and also in infrastructure. We currently have shutdown 14,000 sites and because we believe in scale and also the MNO game is a scale game so from our perspective, we will not comment on potential plans of competitors. But from our perspective, the move that we have done with the merger between Telefonica and E-Plus was the right one because being sub-scale with a mobile network is not a sustainable strategy. So, this is a scale game. This is why the [ O2 Free ] consolidation in Germany was a necessary move in order to have free networks that are scalable, that are also able to carry their investments that are necessary going forward into full 4G coverage and also upcoming opportunities in 5G. I think we wouldn't comment more on that one from our perspective.
With regards to our OIBDA performance, I think we consistently said that we want to grow with the market and if we see market opportunities, we will take them; but we also said that we focus on value and not so much on volume. And if we have a quiet quarter from a customers' perspective as we have seen in Q1, we do not overspend into that market. As a usual topic, we are periodically reviewing our OIBDA guidance that we have given. We have reiterated that guidance and we feel comfortable with the guidance that we have given also in respect of the Q1 performance that we have shown.
Next question is from the line of Josh Hallett with Redburnhad.
So I was just looking at the wholesale revenues estimate you generated just over EUR 800 million postpaid wholesale revenue in 2017. Could you give us a rough -- like an incredibly rough idea of how much of that is coming from 1&1 trade issues; is it 50%, 80% 10%? Any kind of wild range should be -- it would be useful for us. And then my second question was just on the E-Plus contract actually. Do you think that contract is still going to be use -- be in use in 2025 or do you think it just ends in 2025 or even before that? Thank you.
Josh, let me take the first question with regards to the wholesale revenue. Unfortunately, I cannot disclose you the details of certain partner revenues and not even a rough indication as we are also talking about listed companies here. But I would really like to refer you afterwards to our IR Department to discuss with you the details of the models and assumptions that we have here. Sorry, I cannot tell you anything more in detail here right now. Over to Markus for the second.
The E-Plus contract comes with the right and with obligations as we always said and the contract is in full play. So it comes with the right to use it, but also with the application to fulfill certain obligations under this contract -- hard financial obligations. So, my answer is yes.
Okay. And just to follow up, would you like to tell us if your wholesale revenues from 1&1 are actually growing?
We cannot comment on that on one, I think you understand. This is a free-listed company game and so insofar we wouldn't comment on potential trends of other listed companies who also haven't disclosed their Q1 numbers so far I think. I hope you understand that we shouldn't do this.
Next question is from the line of Keval Khiroya with Deutsche Bank.
I just wanted to go back to your comments on seeking value rather than volume this quarter. Can you give a bit more detail on how commercial costs compared to maybe 1 year ago and also how we should think about phasing for the rest of the year on commercial costs? Thank you.
You can see that basically the dynamics on page 16 of the presentation that I have given and the blue line or the blue column in the lower graph indicates you what the level of commercial and other costs were and you can see that in the previous year, the cost increase that we saw in the blue line was higher than what we have reported now in Q1. I hope that gives you already an indication of the development and also versus previous quarter Q4, you see an improvement here in the course of the last quarter. And last, but not the least, maybe I comment also a little bit on IFRS 15 because we have no questions here on that one. On the commercial cost band also, that is not affected here significantly because we have 2 compensating effect. On the one hand, the catch-up effect coming into our P&L and then of course the deferreds of the new adds that we are doing. So if we assume steady number of quantities and also prices being paid, you have an indication that the effect is nearly zero from IFRS.
And then should we expect these commercial costs to continue to go down or do you think we should expect that to maybe be less good than when compared to Q1? Thank you.
Well, that depends on the market conditions. We always said we wanted to grow with the market, in line with the market. If we see market opportunities to grow with good values, we will take them and that then also determines the level of spend that we have in the respective quarter. So we carefully monitor the market on a daily basis and if we see opportunities, we will catch them because the target that we have given ourselves at the Capital Market Day to grow in line with the market is intact and that is our target.
Next question is from the line of James Ratzer with New Street Research.
2 questions, please. So, the first one is just around fixed mobile convergence in Germany. I mean for us it seems like if we believe the press, we might be only a few days away from Vodafone announcing they could look to buy Liberty's assets in Germany. So first question that will be if that were to happen, what would be your regulatory response on that proposed transaction? And secondly, I mean if that does imply a great push towards fixed mobile convergence in Germany over time, how do you think you need to shift your proposition be able to match that? And then the second question please just kind of regarding your own brand customers and it looks like the own brand gross adds continue to come down year-on-year. How should we think about the phasing for that going forward? Is that something you think can return to growth? And I mean as a follow-up to the last question, does that imply commercial costs will need to grow quite substantially to return the own brand customer base to growth? Thank you.
On the first one, I think we will not speculate if the deal happened or might not happen, let's see. But we also have been clear, it cannot be in the interest of competition and consumer interest to have a monopoly on cable content distribution and a duopoly in fixed infrastructure in Germany. So, that can't be the competitive result of that. So, we will carefully look and also expect that regulators will have a very deep look and analysis of such a potential transaction and then we would need to see if this is possible to do. I think you also know in the past such a transaction was not -- was blocked and if so, under which potential conditions it could be approved. And so it's the hypothesis from the -- hypothesis so let's first see if there's a deal and then let's see what regulators will see. We clearly expect a very deep analysis because creating a monopoly and a duopoly at the same point in time clearly needs further elaboration. On fixed mobile convergence, I think we still see that the market is flattish so we haven't seen an increase in mobile and fixed households also in the last quarter due to our market knowledge. So far the German market is still very flattish and key reason is there's no -- no one has in Germany any exclusive content. So, I think there's also no reason to buy a converged product in Germany other than big discounts because we do not see here, due to the broad free TV offers that we have and everyone has access to the Sky offer, any reason to buy one of these packages offered by competition. So far, we need to watch this carefully and also see the dynamics; but the German market is very special compared to other markets in Europe especially on this topic. On own customer, so we are on a trend and so I think as we said, we are pleased with the result of the O2 Free and the effect the O2 Free portfolio has on the German market and we will continue to push our own customer offers into the market under the O2 brand and also the Blau brand. So the trends, we are pleased with the trends that we see here.
On that last point, I mean why do you think that your own brand customers do continue to decline?
Well, we don't comment on this one as you know. There's no segment reporting. I think it's also a question of value. I think we now go really for value customers as we also said and that there is not an unlimited customer base available at the EUR 25 ARPU segment. So far, the balance is the right one, it's about first SIMs for real customers and not only physical so customers who really have usage. And secondly, it's also about the right value mix that we see here. So, you still see many cards in the market and physical has been reported with zero usage on it. So, I think this is a very important point. We really look for real customers with real ARPUs and real usage.
I just wanted to add on that one. And of course the clear focus that we have is developing our customer base. We have the biggest owned customer base in the German market, as we have announced that also in the Capital Market Day. And there's also a huge opportunity with the rising data needs in the German market and rising penetration of handsets to develop ARPU accretive measures and that is of course also the clear focus that we have in combination with the optimization of the churn profiles that we are currently seeing once we have also the positive effects of the network consolidation felt by our customers.
Next question is from the line of Frederic Boulan with Bank of America Merrill Lynch.
A couple of questions. Firstly, I just want to touch and follow up a bit on previous questions on what's happening in your -- in the O2D brand. So if you look at reported ARPU, we're down 4.6% in Q1. We see you had an impact from the dilution of the growing business on the partner side, but can you comment a little bit on the ARPU growth dynamic in your retail business whether the ARPU is growing or not there? And how do we look to reconcile this with your strong message around 60% of customers coming with a much higher ARPU level? And secondly, to follow up on the questions on infrastructure. There's a lot of debate right now on the future of fiber deployments in Germany. Do you have any appetite to move a step closer to investing in infrastructure, for instance taking part in a joint fiber effort or you want to stick to your pure wholesale strategy on the fixed line side? Thank you.
Fred, let me take the first question with regards to the ARPU development that we saw. So of course we are still facing significant regulatory effects with minus EUR 11 million as we have stated, which also play of course into the ARPU equation, which were in line with our expectations but front loaded through the year because of the regulatory effects of roaming only annualizing by the mid of this year. And if we talk about the customer base development, we see also in the figures that we have released here some positive results, which is for example the churn of O2 which improved to 1.5% in this quarter, which is a clear indication that we are rightly on track with the measures that we have discussed. And of course as ARPU doesn't develop overnight; we all know the metrics. It will take some time as we -- and then we will also see it in the overall ARPU development.
On the second one, I think we now need to see what happens. Clearly we have a long-term lasting contract with Deutsche Telekom that gives us access to VDSL and also supervectoring as you know and we also see a huge uptake on the VDSL product with the numbers that we reported today. Also our own retail fixed revenue is going back to growth. So, I think this is a healthy trend that we see here. And there are clearly opportunities. There is a clear opportunity seeing what happens on the cable side, as mentioned earlier. And secondly, there's also opportunities coming from other technologies that we see in other markets and coming from fixed wireless access that need to be explored. So far, currently we still cannot see the huge investment into FTTH in Germany especially to the cost situation, the regulatory situation, but also the missing demand from consumers and higher willingness to pay. But this is still seen and very slow developments on very local level from city carriers who deploy fiber, but still a high level of fragmentation and not a nationwide FTTH plan that we have seen in other European market. So far we are well-positioned with the access that we have today and then we would need to see which different opportunities we see on top of the current access -- fixed access strategy we have.
The next question will be from the line of Akhil Dattani with J.P. Morgan.
2 questions, please. Firstly, just on your broader strategy around growing in line with the market. I guess just wanted to ask a couple of things about that, please firstly. You've talked about the improving revenue performance you're seeing and the upsell you're seeing on high data plans, but the service revenue growth you're seeing in Germany today is still quite a bit below peers, which is close to 1.5% to 2%. So I just wondered if you could help us understand what you think drives an improvement towards where the market's growing? And I guess linked to that, to try and understand when we think about the monetization of data, is it primarily about customers taking a larger data plan or should we also start to think about more for more pricing like we've seen in prior years in Germany starting to feature so I guess both for yourselves and for the market, do you think that continues? And then a second one, just a really quick clarification. You've commented on Q1 regulatory effect to being EUR 11 million. The guidance for the full year is EUR 30 million to EUR 50 million, you said it's very much H1 weighted. So I guess I'm struggling a little bit to understand how it could come toward the high end of that range. So, just keen to understand should we really assume it's very bottom end of the range or are there any other factors we should think about? Thanks.
I think after this quarter we will know what is the real market growth on mobile service revenue after IFRS 15. So I think we waited very long for that moment, let's see. I think we published today that it's nearly neutral with the numbers Markus Rolle presented to you and I think let's now wait. What is the actual real mobile service revenue stripping out all hardware effects that we have seen being reported in the past. On data monetization, clearly there are always ARPU up opportunities and we clearly carefully evaluate them, what could be the next step on data monetization. So far, we see trends in the market of fostering higher ARPU customers by creative offers on mobile data. So, we will also further elaborate opportunities of ARPU up for sure. On the phasing question, over to you, Markus.
Akhil, that is -- the regulatory guidance that you were discussing and why we feel comfortable is driven mainly by the effect that we are expecting of course in Q2, a seasonal peak of regulatory effects because more of our customers will be abroad because we have mostly consumer-centric customers. So, more of our customers will be abroad than in Q1 and that is why we expect here from a phasing perspective Q2 to peak also versus the Q1 performance. And we feel comfortable with the full year performance because we also discussed that before, we will have still some flowthroughs of regulatory effect also in Q3 and Q4 driven by the fact that we had the opportunities to remain customers in the existing bundles. It's not only euros included, but for example U.S. And part of these customers will still migrate out of these portfolios, which will also lead then of course to some regulatory effects from roam like at home in the second half year. All in all, we feel very comfortable with the guidance that we have given and with the revenue performance we have seen in Q1.
Next question is from the line of Jonathan Dann with RBC.
I was hoping to take the questions away from Slide 17 or Slide 12. So my one is if I understand rightly, you're basically upgrading city by city to the sort of integrated 4G network. And so my first question is do you have some comparative examples of for example city A, B and C, you're seeing the customer growth -- the branded customers return to growth or stability in a city that you fully upgraded or some performance measurement versus one that's yet to be upgraded? And then if as part of that, you could just give us a rough idea of the mix like what proportion of Germany is upgraded now versus yet to be upgraded? And then my second question is on Slide 7, you've highlighted 3 things that you report on, but I guess they look like they're related to the app. So I guess it would seem to me as an analyst that things like gross adds, share of the SME markets might be more important KPI or IoT revenue than 3 things that look very similar to the app statistics?
I think we can share with you the first insights here. So I think especially for cities like Stuttgart or Boizenburg I think we finalized the network and clearly we took on some network tests and clearly see that we are -- that the expectation from us but especially from our customers and experience on the build network is really good. So, we see it very low compliant level. We see high satisfaction and also really good customer feedback. So far we see this kicking in as expected and I think this is really good news and this is what we will finalize by the end of year. On the KPI question on Slide number 7, what we see here is clearly this is the status that we have achieved by the end of 2017 and it's the baseline not a starting point for all these KPIs. We will now constantly improve towards the target date that we have given until 2022.
Will you report on all 12 of them or just the 3 that are highlighted?
It depends also where we make progress. So step by step we clearly want to fill the cluster, but we will not have quarterly reporting on all of them.
Okay. So where it says -- sorry to be painful, where it says O2 app penetration greater than 80%, that's the target isn't it rather than Q1 '18 achievement?
Yes.
Next question is from the line of Christian Fangmann with HSBC.
It's Christian here. A few questions, most have been answered. But I had a question on the postpaid net adds, which were down in Q1 year-over-year so I want to have a bit more color on that. I mean your churn looked really good so it must have been lower gross adds. Anything you can share regarding your marketing efforts, your sales efforts? Are you willing or not willing to pursue big investments in gross adds and also how is the sales channels -- how are the sales channels developing? So is there more digital sales? So, a bit of color around that and this related [ subscription ] costs that would be helpful? Thank you.
I think overall we still have a very healthy mix of our sales channel that we elaborate. Let's not forget Telefonica Deutschland has access to nearly all sales channels in the German market; online, offline, but also direct and indirect; and it's clearly a strength and it also gives us opportunities in order to drive profitable growth and invest where we see the opportunity in which channel is coming across. So, I think clearly it's a full channel play that we have and clearly with the target to increase certain online channels, also all online channels going forward, adopting consumer behavior because finally the customer decides where he buys. And so insofar, I think we are very well positioned and also to the transition in certain channels how we expect it.
And with regard to the postpaid net adds performance that we had in Q1, we always stated that and we are willing to invest into growth opportunities once we see them. We have seen a quiet quarter from the customer perspective in Q1 and that is why we have slightly lower net adds than in the previous quarter, but we are not at all concerned about the development that we see. You have seen in recent quarters always a mix between 150,000 and 200,000 of net adds peaking. So what we see here as Q1 performance is normal seasonality and I can reassure that we are willing to invest in order to bring ourself in line with the market growth that we have for now.
Okay. So, that means that you generally see Q1 was a relatively quiet quarter across the board and not just for you specifically?
Yes, we have to wait of course for the releases of the competitors. We do not have them. We did not see value opportunities beyond what we have shown here in our figures and we do not over-invest into the market and that is why our performance is as we have reported then. We have to wait and see what our competitors will also report.
In the interest of time, we only take 1 final question. Our team will follow up with all remaining questions. Ulrich Rathe from Jefferies.
The first one is sort of a more substantial one. You sort of mentioned the introduction of fairly high priced unlimited offers from Deutsche Telecom and Vodafone, but they also sort of changed something in that, they made LTE available in [inaudible]. I was just wondering what your interpretation of that is. I suppose so fairly high priced sort of offer, but it brings something that in the past they've used to sort of differentiate their premium brands from everything else and they're sort of letting that leak into the [inaudible] area. So I was just wondering what you're seeing there in terms of impact and also what you're expecting? And my second one is really more a clarification. Amongst your partner brands, if you have a customer being moved from let's say the E-Plus contract to the MBA MVNO contract , do you count this as a gross add in your accounting when you give us the sort of 61% of gross add number and the underlying numbers will be gross adds of the partners. I was just wondering do you count sort of moves between these contracts actually as gross adds. If I can maybe just put another -- just sneak in a clarification. Quite a number of questions earlier referred to revenue uplift as the utilization on the MBA MVNO goes up. I was just wondering to what extent that is actually true because my understanding is most of the revenues associated with the MBA MVNO simply depend on the glide path and not -- specifically not so much on the utilization? Thank you.
Clearly the market is going towards 4G. I think we had 4G enablement from the beginning, you clearly see a speed theory on 4G so you have higher and lower speeds and also monetization on different peak levels in the market. And I think this is also happening with the offers you mentioned. So, we do not expect discontinuity of these steps. It's just clearly 4G networks are there and clearly also optimization in networks and that you shift more traffic from 3G to 4G also is a more efficient technology. So, I think it's a logical step from our perspective. On the detailed questions on the MBA, let's see how far we can answer them. Clearly if a customer from the E-Plus contract moves to an MBA, it's counted as a gross add because on 1 account and 1 entity we have, the contract is terminated and then reactivated on the MBA. And on the utilization, I think nothing has changed. So, I think we are still on the glide path to the 20% and this is being filled up. So in so far we expect this by the end of this year as we always said, after 3.5 years there's an obligation to take to 20% of the MBA.
And let me add on that one. As Markus has stated already previously, but I think it's important to remind ourselves, we have still 2 contracts in place and that also limits the room to maneuver to do certain migrations, et cetera because we have 2 existing contracts in place, 1 with 1&1 from former E-Plus [ clients ] and the Bitstream MVNO contract with Drillisch.
At this time, no further questions will be taken. Mrs. Veronika Bunk-Sanderson, I turn the call back over to you for closing comments.
Thank you, operator. And thank you, everyone, for attending our Q1 results conference call today. If your questions have not been taken on the call, please don't hesitate to get in touch with us or we will reach out to you to make sure everything will be answered. And I hope to see you in London for our Analyst Meeting. Thank you. Have a great day and goodbye.