Telefonica Deutschland Holding AG
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Ladies and gentlemen, thank you, for standing by. I'm Murdo, your conference call operator. Welcome, and thank you, for joining Telefónica Deutschland Holding AG Q1 2019 Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Veronika Bunk-Sanderson, Director Communications and Investor Relations. Please go ahead.
Thank you, operator. Good morning, everyone, and welcome to Telefónica Deutschland's first quarter 2019 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. If not indicated otherwise, all financial information provided in this presentation are based on IFRS 15 and IAS 17 accounting standards, respectively. We also provide IFRS 16 metrics in the CFO section where relevant.As usual, this presentation may contain announcements that constitute forward-looking statements, which are not guarantees of 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 the IR section.Here with me today are our Chief Executive Officer, Markus Haas; and our Chief Financial Officer, Markus Rolle, who will take you through the presentation now. Markus, please, go ahead.
Good morning all, and thank you for joining us here for our Q1 2019 conference call. Telefónica Deutschland had a strong trading start into the year 2019 with 306,000 postpaid net adds in Q1 on the back of successful portfolio initiatives. In addition to various campaigns, we launched DSL supervectoring tariffs as well as our new O2 TV service, which we expect to help increase customer loyalty and revenues.Our LTE customer base is up 20%, again, to over 19 million customers. LTE penetration is nearing the 50% with plenty of potential. Data growth is up 53% to 193,000 terabytes of traffic on our network in Q1.Our total revenues are growing by 1.3% year-on-year and including regulatory effects, we are growing 0.7% on the back of solid mobile service revenue trends and strong handset revenue growth. Mobile service revenue is up 0.3% year-on-year with market momentum and up-selling efforts bearing fruit.Our profitability growth of 1% year-on-year reflects our investment efforts into transformation and market performance. We expect the effects of these efforts to become visible in the second half of 2019 and reiterate our full year guidance. The investment focus is also visible in our CapEx phasing with our strong future driving the pace of the LTE rollout to improve our network here in Germany and meet our network coverage obligations.After completing the network consolidation at year-end 2018, we are now in an optimal position to invest and grow. In this way, we also reiterate confidence in our free cash flow generation ability and our intention to continue to pay a high dividend in relation to free cash flow going forward. As per usual, we will give more clarity on the dividend in the second half of 2019.Taking a closer look at the sequential P&L trends on Slide #4. You can see that we are seeing solid trends across the board.Q1 revenue, excluding negative regulatory effects, already mentioned, up 1.3% versus 0.4% in Q1 last year, showing a significant improvement in trends despite the usual seasonality, driven mainly by the continued strong demand for handsets across segments.Q1 MSR ex reg is growing again to 0.3% on the back of strong trading activity and retention management. We see continued solid performance in the consumer and partner segments. Our Q1 guidance OIBDA is up 1% on an underlying basis, driven by rollover synergies and early transformation gains of approximately EUR 25 million in total, but also reflecting the above-mentioned transformation and market invest.Under IFRS 16, OIBDA was up almost 30% year-on-year on the back of capitalization of lease cost, increasing our OIBDA margin to 29.5%.CapEx is up 38% versus the prior year, which reflects our investment focus into our network in the first quarter. We are on track to achieve our full year guidance across all metrics. Our CFO, Markus Rolle, will give you a more detailed view in the financial metrics later onwards.Now let us turn the topic to our network infrastructure and the product portfolio on the next pages. We started into our 4G network consolidation with the vision to build the biggest and most network in Germany, based on already having the best 3G network. And we have now reached approximately 90% LTE coverage in Germany.We are building 5G readiness by pushing fiber connectivity in the backhaul now at approximately 25% and building partnerships with other infrastructure players. With the spectrum auctions still ongoing, we cannot unfortunately comment on our plans for potential customer-facing 5G rollout in Germany, but it's clearly the next topic on our agenda.Let me also reiterate that Telefónica Deutschland is not concerned about the potential fourth urban network in the German market. Should we see such a fourth urban network in the market, we can only reiterate, we see no impact in the short and midterm on Telefónica Deutschland. And on the long term, we will have more flexibility of urban capacity to utilize and leverage this with our existing other partners and with our high ARPU product portfolio and our own brands.Moreover, we see great a potential to collaborate on a mobile network sharing with existing MNOs in the German market after the auction, in order to carry out the rollout obligations that we have especially in rural area. There's openness on Telefónica Deutschland's sites in order to convey such network sharing in order to gain additional efficiencies. Also, as you saw on Tuesday, we have significantly enhanced our existing infrastructure portfolio by signing an agreement to access Vodafone's cable network in addition to our long-term wholesale contract that we have with Deutsche Telekom. We are thus significantly expanding our nationwide fixed network offering with attractive products beyond the currently available VDSL SuperVectoring products of up to 250 Mbit per second. In the future, we will be able to supply up to 24 million cable households in Germany with attractive O2 fixed network products at even higher speeds. After a long journey, we've all in place to become an all-around infrastructure player in order to serve and utilize all existing technologies for the benefit of our customers, to fulfill our vision to become the mobile customer and digital champion in Germany.Let us move on, on more KPIs on the network side. As regards to our ongoing LTE expansion, we have again bid over 2,000 new LTE sites in the first quarter, edging closer to our 10,000-site target for 2019. We have a combined 3G and 4G coverage of approximately 95%, which is very relevant in the country where roughly 40% of data traffic is still on 3G. As already mentioned, we carry the most mobile data traffic in the country. And as regard to the discussions currently ongoing on the coverage obligations, we are confident to meet the coverage obligations as they have been set before the auction rules in 2015.Clearly, we are in continuous talks with the regulator and will, on a monthly and quarterly basis in touch with the regulator, continue to fulfill what we have promised.In the end, we supply 45 million German customers with mobile connectivity on the basis of our own infrastructure. We understand this responsibility, we have proven execution ability and are already looking to the future with our participation in the next spectrum auction taking place as we speak. And let's not forget, this business has shown that it has extraordinary execution capabilities by integrating 2 networks. It was, just as a reminder, the biggest and the fastest mobile integration outside China that we have executed in the last 4 years in order to consolidate the biggest European mobile network here in Germany. On the commercial side, on Slide #7. During the integration years, we executed the integration of our brand portfolio and have placed great emphasis on improving the brand perception of our core brand O2.After the integration, we have also returned to customer service excellence as lately confirmed with the German Stevie Awards, for the management and the team of the year in customer service. Also we have improved our network experience, thus significantly reducing network churn in the last quarters. At 1.3 percentage on a monthly basis, our O2 churn management came through solid results in the Q1 this year.The investment of the last years has paid off. We now have a highly competitive innovative portfolio landscape across segments with Blau and O2. And we do not consider ourself price leader but offer our customers value for money.And we continue to innovate every quarter and monetize these portfolio updates. In March, for example, we added the SuperVectoring tariffs to our DSL portfolios offering top speeds to our fixed and converged customer base. In April, we introduced the O2 cloud with unlimited storage and now in May, we offered O2 TV, an IPTV product over the top with -- which will enable our customers to watch live TV at anytime from anywhere. I'm proud to say with the addition of cable we will soon be a one-stop shop for our customers, offering all services and infrastructures in the German market. All these initiatives, in a nutshell, we execute in order to have the most satisfied customer base in the market and increase willingness to pay for additional services reflecting higher ARPUs going forward.Not only the commercial activities also the transformation enables customer satisfaction. If we'll have a look in our Digital4Growth program, which we originally introduced to you in February 2018, in our Capital Markets Day, we confirm our expectation that this program will generate EUR 600 million in gross OIBDA gains over the next 4 years.As part of our 4-year transformation program, Digital4Growth, we placed our customers' needs and the user experience in digital age at the center of all our activities. Our clear focus lies on making use of innovative new technologies to design simpler, faster and better processes. The program foresees both revenue and margin generating gains as well as further efficiency gains. The first half year of this year is focused on driving back-office improvements to facilitate faster portfolio adjustments and churn analytics to drive revenue-related gains. On the efficiency side, we are working on customer service efficiency and IT process optimization. Altogether, we expect to generate approximately EUR 40 million of transformation gains in 2019, of which we brought home EUR 5 million already in the first quarter, we have an expected ramp up in the second half.We will execute transformation with the investment envelope, which our full year guidance always, partly OpEx, partly CapEx expecting a majority of the transformation gains become OIBDA relevant.With this, I would like to hand over to Markus Rolle to take you through the Q financial results in more detail. Markus?
Thank you, Markus. And good morning, ladies and gentlemen. I'm very happy to present our Q1 2019 results in more details.We had a strong direct trading start into the year. We reached 306,000 of mobile postpaid net adds driven by our sustained demand for O2 Free. Our partner business reflects the strong data growth as well as the 4G focus and the result in migration trends.In fixed, again, we saw a strong demand for VDSL with plus 65,000 of net adds. Our revenue trends remained very solid and had reported turns plus 0.7% year-over-year, with a strong demand for handset and a very solid MSR development. More details later on.On OIBDA. OIBDA in Q1 reflects transformation and market invest as well as incremental rollover synergies of approximately EUR 20 million and EUR 5 million of transformation benefits. Implementation of the IFRS 16 standard as per the 1st of January, significantly improves our comparability of our business with other telcos.Our underlying OIBDA rose by 29.4% year-over-year as per IFRS 16, with an OIBDA margin of 29.5%, which is an up of 6.4 percentage points.According to IAS 17, our underlying guidance relevant OIBDA grew 1% year-over-year with a stable margin of 23%. Our CapEx is front-loaded in 2019, as a result of the ongoing LTE rollout. And thus, our CapEx over sales ratio in Q1 was 14.2%, including incremental synergies of approximately EUR 15 million.Our leverage under IAS 17 is at 0.6x, that's well in line with our self-defined target, also here some more details later on.Moving to the details of our top line performance on Page 10. First of all, we see no effects from IFRS 16 here and just as a reminder, we now fully record on IFRS 15 basis, which we introduced in the last year.Excluding regulatory effects of EUR 11 million, mainly from the MTR cut, our underlying revenue increased by plus 1.3% year-over-year. Handset revenues grew strongly plus 12.6% year-over-year, benefiting from strong customer demand for high-value smartphones. But more importantly, our underlying MSR trends remained solid with 0.3% growth year-over-year.The O2 portfolio shows visible ARPU accretive effects for new connectors, while there are still left over drags from legacy-based rotation and renewed cycles of the customers affected by the customer service and network issues during the integration period. Fixed revenues fell by minus 8.6% mainly reflected the planned dismantling of our legacy infrastructure. And the fixed retail revenue was slightly down with minus 3.9%, mainly due to a higher share of bundles in the customer base.Let's look at the data KPIs on Page 11. Data usage continues to grow with a CAGR of 50% driven by our large data packet portfolios and the continued adoption of LTE. Across the base, LTE penetration grew 8 percentage points year-over-year, 46% of our overall access base is now on LTE, which is 19.3 million accesses, which is an up of 19.6% year-over-year. And postpaid LTE penetration already stands at 60% and the monthly usage continues to show sustainable growth driven by customers adapting to streaming services. The average monthly usage of an O2 LTE customer climbs to 4.2 gigabytes and the customers in the most popular O2 Free M tariff even used approximately 7.4 gigabytes.Taking a closer look to our mobile trading performance on Slide 12. Prepaid trends remained unchanged. We are posting minus 211,000 net disconnections due to the lower demand as a result of the ID check legislation in 2017 and a general market trend towards postpaid. But in contrary, the ARPU is increasing by plus 3.3% year-over-year. In postpaid, we have seen a strong trading quarter with 306,000 net adds, driven by our clear investment focus driving the O2 brand.We see continuous improvement of churn metrics as a result of our retention focus on the base. You can see here that we are successfully moving through the renewal cycle of legacy customers affected by the NT and service crisis, and we can convince our customers to stay with us. Our O2 consumer postpaid churn improved by 0.2 percentage points year-over-year and the annualized churn rate is at 16% in Q1.Postpaid ARPU reflects MTR cuts and the before mentioned remaining legacy base effects. But also ARPU accretive effects from the new customers in the O2 Free portfolio.As you can see on the next slide, partner trading continued to be strong. 4G focus remains the major driver of partner trading, which contributed 60% to the gross adds in Q1, helped by the customer migrations to our network. Partner revenue growth was in line with the expectations driven by the dynamics of the MBA MVNO. Data growth is now the predominant driver as opposed to previously growth of both data usage on our network and the glide path development. Partner revenue is also of course somewhat affected by the MTR cuts. We expect continued partner revenue growth from the data growth trajectory going forward. Turning to Page 14 to our fixed business. Fixed retail trading posted another quarter of solid net add growth driven by sustained demand for VDSL, helped also by the launch of supervectoring in early March.VDSL posted plus 65,000 of net adds in Q1, bringing the VDSL base up 21% year-over-year to 1.5 million. And more than 70% of the fixed retail base is already on VDSL. The total fixed retail customer base at the end of March was 2.1 million, which is also up 3.1% year-over-year. On fixed retail and ARPU and revenue, the higher bundle share in the base is offsetting the positive contributions from VDSL.Turning to OIBDA performance on Page 15. Major drivers of OIBDA in Q1 is of course the transformation in market interest to position the O2 brand post the completion of our network integration.Half year 1 is investment-heavy with results expected to become visible in the second half year. In addition, OIBDA reflects both remaining rollover effects from the network synergies approximately EUR 20 million and transformation benefit approximately EUR 5 million. The transformation benefits are ARPU up initiatives in the O2 consumer portfolio and IT cost savings. Before the implementation of IFRS 16, OIBDA excluding restructuring cost, mainly from network and regulatory effects, mainly from roaming, was up 1% year-over-year to EUR 412 million, with a stable margin of 23%. As our business is characterized by a significant number of operating lease cost, the implementation of IFRS 16 adds additional transparency and makes our P&L more comparable to those of other telcos. Within the cost lines as per IFRS 16, supplies were down minus 3% -- 3.3% year-over-year, with a higher hardware cost of sales year-over-year in line with strong demand for handset. While connectivity-related cost of sales were lower year-over-year, as lower MTR costs compensated higher wholesale costs for outbound roaming. Personnel expense adjusted for restructuring were minus 1.1% lower year-over-year as the savings from the employee restructuring outweighed inflation-related salary increases.Other OpEx decreased by 13.7% year-over-year, driven by the IFRS 16 impacts on operating leases.OpEx including restructuring cost of EUR 10 million and commercial cost and noncommercial cost made up 65% and 33%, respectively.Under IFRS 16 accounting standards, underlying OIBDA margin, expanded to 29.5% and underlying OIBDA grew by almost 30% to EUR 528 million.Moving to free cash flow on Slide 16. Free cash flow dynamics in Q1 reflect the implementation of IFRS 16. Under IFRS 16, these lease payments are capitalized and free cash flow amounted to EUR 247 million in Q1 compared to EUR 50 million in prior year under IAS 17. Working capital also reflects these prepayments at the beginning of each year and we're positive in the amount of EUR 20 million, driven by incidental lease cost of low value on short-term leases and other prepayments which came in total to minus EUR 35 million.A reduction in restructuring provisions of minus EUR 5 million and other working capital movements included signing factoring transactions for handset receivables with a gross amount of EUR 159 million and further working capital movements such as the reduction in trade and other payables and inventories.Our normalized for the usual prepayments for leases at the beginning of each year with a total amount of EUR 257 million. Our free cash flow dynamics would show the typical seasonal phasing across the year.The cumulative cash flow from restructuring is now amounting to EUR 600 million. Under IAS 17, net debt came into EUR 1.094 billion with the leverage of 0.6x which is well in line with our self-defined target of a maximum of 1x.Net debt under IFRS 16 amounted to EUR 3.659 billion as of 31st March 2019. However, the balance sheet items within the net financial debt affected by IFRS 16 are still subject to change with the bandwidth of plus/minus 5%. Taking into account this range and the rolling 12-month OIBDA estimation under IFRS 16, the leverage ratio would be approximately 1x to 1.1x higher than the 0.6x under IAS 17.As already indicated in our last call, we will review our self-defined leverage target over the course of the year 2019 to reflect IFRS 16 and to allow to utilize our full financial flexibility with regards to the upcoming 5G investment, while of course maintaining our BBB investment-grade rating.On Page 17, let me give you a brief overview on our maturity profile and our financing mix. Our maturity profile is very balanced over the next year and this is a mix of different instruments including bonds, promissory notes and undrawn credit facilities. In April, we have successfully paid EUR 360 million promissory note loans that significantly exceeded the original target of EUR 150 million due to very high demand. The tranche featured a fix as well as a variable rate and maturity levels of 5, 7 and 10 years.The issuance further improved our financing profile, the investor base and the proceeds shall be used for general company purposes including refinancing. With a very solid liquidity position of nearly EUR 2.8 billion, including undrawn RCS, we see ourselves very well prepared for the investments needs of the future.Let me sum up our Q1 results. We had a strong trading start into the year while we were focusing on the kick start of our transformation activities. Data usage KPIs continue to be very strong and revenue trends reflect the high demand for handset as well as solid MSR trends. OIBDA performance is driven by transformation and market invest into the O2 brand while the implementation of IFRS 16 enhances the comparability within the sector.Under IAS 17, free cash flow dynamics show the usual seasonality and the leverage remains well in line with our targets. Our solid balance sheet, the liquidity position and the ability to generate free cash flow, support our dividend commitment.With this, I would like to finish today's presentation and hand back to the operator to open the line for Q&A. Thank you.
[Operator Instructions] The first question comes from the line of Mathieu Robilliard with Barclays.
First, I had a question about a comment you made twice during this presentation which is that you expect better trends in H2 based on the result of the investments you're doing in H1. If I recall correctly, in the past you've always said that obviously the objective is to return to MTR growth. But you were never precise in terms of when that could happen. Is this what you're suggesting now that by H2 we should see better MSR trends? So that's the first question. And the second question had to do with the deal you announced with Vodafone. My understanding is that at this stage it is a commercial agreement so the price is based on negotiation. Are you still waiting? Do you see approval in terms of the prices that you guys agreed on? Or is it now set in stone?
Good morning, Mathieu. Markus here. With regards to the second half year question that you have, of course we are currently on a good way. We see a good trajectory. You have seen our physical trading performance which is very strong in Q1, and with that, I can confirm the guidance that we have given going forward.
The second question on the deal we signed with Vodafone is a commercial deal. As always, under commercial deals, they are confidential. We're very pleased that we could agree with Vodafone a long-term agreement allowing Telefónica Deutschland having full access to the cable network. And so far it's a commercial real, and it's subject to the final approval of the transaction Vodafone is carrying out with Liberty Global.
The next question comes from the line of Ulrich Rathe with Jefferies.
Two questions from my side, please. First one would be you highlighted the market invest in the first quarter. Could you sort of provide a bit more color on how much it's stepped up? I think from Slide 15 it looked as if the step-up year-on-year of the market investment was maybe EUR 10 million to EUR 15 million? And how do you -- if that's correct, how do you think about that for the remainder of the year? Is it that you're front-loading this, and then when you see the benefits coming through in the second half, you would step it down again? Or do you envisage higher market invest at this levels throughout the year? Second question is on the partner share, it nudged down a bit now compared to the sort of spike in the fourth quarter. Would you consider a 40%-60% split that you now have, is that sort of a normal one for you? Would your ambition be to have a slightly higher owned share and a slightly lower partner share over time? Really relating to the 4Q situation, changing now to the 1Q situation, is this sort of the normal one? Or would you look to sort of change this further?
With regards to the market invest, your calculations are not wrong. We continue, and that is what we always said, to invest into the market to bring ourselves into the ability to grow in line with the market. So also for the upcoming quarters, we depend on the market activity as we have done so before. And our clear target is always to gain the fair share from the value that is available in the market.
On your second question, there is no magic formula. Clearly it's our own target to grow with our own brands. This is priority one for us. And secondly, the partner shares also affected by, for example, migrations from other networks. So it's not always trading related what's happening there. So and so far no magic formula. We want to grow with our own customers and our own brands. And depending on seasonality, commercial deals with partners and also migration effects that the share could vary as we have seen over the last quarters.
The next question comes from the line of Specht with Bankhaus Lampe.
Two questions from my side. The first one is on working capital management. Do you expect the factoring volume in 2019 to go up over 2018 or is this rather not a relevant fact? Second one is on the deal with Vodafone. Do you expect this to be somewhat exclusive? Is there option for other players in the market to follow a similar path?
Let me take the first question, Wolfgang, with regards to the working capital question. As we have been before we do the factoring on an opportunistic basis, and that is -- the only reason for doing that, as you know, is to synchronize the cash flow intakes that we have from our customers and the outtakes that we have for handset. So from that perspective, here we depend on the customer demand going forward. And we have seen a strong trajectory of handset growth in the first quarter. But of course, that doesn't necessarily give an indication about the development will be in the next quarter.
On your second question, Vodafone and Telefónica Deutschland agreed on a long-term deal that significantly strengthens competition, and we are pleased that we have been able to find a long-term partnership deal. And we take it from there. I think the deal is subject to approval by the European Commission of the overall transition. But this is a commercial deal that we agreed, and I think nothing to add. So we believe that this is a strong deal that will also help Vodafone in order to gain approval by the European Commission.
The next question comes from the line of Georgios Ierodiaconou with Citi.
I have 2. The first one is just a follow-up on this cable agreement, and I know you cannot talk about details of the agreement itself. But if you can share with us a bit more broadly from your perspective, what does this give you? Is it more something to accelerate your growth in fixed? Or is it something to give you better margins long term? And if you could perhaps comment on this within the context of the last couple of quarters with your fixed line KPIs improving. I'd be interested to understand if that's more of a vision to become a bigger player in fixed over time? And then my second question, and it's not really that much a question. It's more of a clarification. Going through some of the details of your financials, there is an improvement in churn, and the gross adds are improved on the retail side. But we're yet to see a material improvement in mobile services revenue. And I appreciate there's a slowdown in partner revenue this quarter. But what I'm trying to understand is, is there improvement in churn because there is lower natural churn? Or is there improvement in churn because you're doing more aggressive retention efforts? So is it more ARPU-dilutive efforts to reduce churn, is what I mean, or will there be a better outlook in the coming quarters?
Thank you for the questions. First of all, why have we signed a deal with Vodafone? I think this is value accretive for Telefónica Deutschland, first. I think we have now the possibility to cross- and upsell high-speed broadband with the most dense fixed coverage, so combining the Deutsche Telekom coverage and the future Vodafone coverage altogether. So it will be possible to make nearly every customer we have under the O2 brand a high-speed broadband offer. I think this is a strong value proposition that we're going to have that we're able to leverage all infrastructures in Germany on the mobiles at 4G, in the future, 5G. And on the fixed side, all available infrastructure. So we are at possible to leverage all these infrastructures. And clearly, we also want to grow in the fixed business. And you have seen a strong commercial momentum in the first quarter also followed for a good full year performance in 2018. And clearly there is appetite in our customer -- mobile customer base because we have -- nearly every building and every home, we have an O2 SIM card, and we can leverage now with the fixed access that we're going to gain and cover demand in fixed broadband on a technology-neutral basis.
Let me take your second question, Georgios. With regard to the trends that we see on the gross add side which are positive and also then the trend on the other side which is also positive. I can confirm that maintaining our customer base is of the highest focus within our customer base. And that also means -- and we have indicated that already in the last calls, that we are currently going through the renewal cycle of customers which were before affected by the network integration and also by the call center topics that we had and discussed lengthily. And for those customers, we always have the choice. We said that. And very often the choice for us makes sense to maintain these customers with pricing effort and to increase our retention offers because we know that these customers will pay their bill. We know their behavior. We know what the cross and upsell potential is going forward. And therefore, the business case very often makes sense for us. So yes, I can confirm that part of the positive churn effect is also driven by the clear retention focus that we have in our customer base.
The next question comes from the line of Frederic Boulan with Bank of America.
Two questions. First of all, if you can quantify a bit the -- your previous comment on pricing and trading. You have pretty aggressive offers on your core brands, 6 months free. If you can explain a little bit the rationale for that, and broader dynamics you see in terms of pricing competition in the mobile market. And then secondly just on this Vodafone agreement, if you could share with us a little bit, if this is something that you see as additional to the churn deal you have on -- with Deutsche Tel. Or is it something you think will become the main technology solution for you, and in particular, if you can share any cost to implement that, so in particular switching costs or installation costs?
Fred, Markus speaking. Markus Haas. On the pricing, I think we are not the price leader in the market. I think with the consolidated networks, we clearly want to give new customers the ability to test our network and to benefit and enjoy the hard work that we've done in order to provide great LTE coverage and also great LTE product. So insofar 6 months of free is a normal promotional cycle we have seen in the markets before, and I'm sure we will also see in the future. So nothing to worry about. Telefónica is not the price leader. Clearly, there's always promotional activities, and clearly we now want to leverage our network. And it was important to show strong commercial momentum because we also reiterated clearly our full year guidance. And so far, we're on a good way in order to achieve this, and there's nothing to worry from our perspective. On the second question is, I think we come from the customer. And we would like to give our customers the full choice of broadband technologies in different speeds. And in so far this gives us the full range of fixed portfolio. Also, later on in the 5G world, you could also add in some areas fixed wireless access. So I think we are coming -- want to give choice to customer, and that has driven us here. This is clearly an additional technology we will add to our portfolio, but clearly a 24 million household coverage in theory that we would add to the existing VDSL coverage that we have agreed with Deutsche Telekom brings us exactly in the position to give customers choice.
The next question comes from the line of Jakob Bluestone with Crédit Suisse.
Couple of questions as well. Firstly, just to follow-up again on the Vodafone cable agreement. Just to be clear, is the plan to actively migrate your existing fixed line base across? Or is it really just targeting new customers? And maybe again, just if you can just help us understand the switching costs. I mean is it just giving people a new setup box, which I guess is EUR 100 or EUR 200? Or is there something else involved in migrating people across? That was the first question. And then just secondly, on your mobile tariffs, can you maybe comment a little bit on the sort of competitor response that you've seen? I think you saw maybe a little bit more promotional activity and some tariff changes at some of your sort of major high-end competitors. Do you think that's something which might negatively impact your net adds as a result of this sort of competitor response? Or do you sort of take it a bit in your stride?
So to first question, there's clearly also additional coverage that we see or additional high-speed broadband coverage available for the footprint that we would add to Deutsche Telekom. That's not a forced migration plan that we would force customers. This is about choice for customer, as I said before. And clearly, if there are benefits in order to do that or customers wish to use a different product or to combine this with other technologies, we would clearly do that. So today, we have nearly 2.5 million fixed customers, and we're growing as we have seen in the first quarter. So it's about choice. And clearly, if customers want to switch or test new technologies, will we clearly make this available. On the market question, on reaction. From our perspective, what we've seen -- we always have seen different seasonal activities also to year-end closing of certain players in the market. So we have different year-end closing, as you're aware. From that perspective -- and we've been able to show strong momentum also in the first quarter of 2019 and we also see momentum going forward. So we haven't seen any rational answers to our offers in the market out there. And clearly there are promotions for 4, 5, 6 weeks, as you're all aware. And this is -- it's not only the SIM-only price. I think it's also important to see what is the overall bundle prices including hardware in order to compare different offers in the market. So we haven't seen any rational reaction.
The next question comes from the line of Christian Fangmann with HSBC.
I have a couple of questions. First one on CapEx. Q1 was higher than expected. I guess you mentioned front loading of certain costs. But generally, you have still a lot to do in terms of LTE upgrades this year. Does this imply, this Q1 number, that we may end up towards the top end of your guidance range of 13% to 14% of revenue? My other question would be if you maybe could quantify the -- let's say the extra investments that you made for the digital transformation stuff that you mentioned. So you mentioned you had EUR 5 million growth savings at the EBITDA level. But what kind of extra cost did impact the Q1 financials? Maybe would be helpful to at least give us a bit of feel of what impacted the OpEx. And then in terms of your comment earlier during the presentation regarding mobile network sharing. I see you mentioned that you're open to partner with other players post auction. Would that also include Drillisch? Or is it mainly on the existing kind of MNOs that you referred to? And then maybe lastly on the cable wholesale deal. I know it's a hot topic so -- and many questions have been asked. But I think generally again asking on the margins. Is it generally for you accretive to switch from the DT model over to cable? Or how can we look at the margin trends on that one going forward?
That were a lot of questions. I will start with the CapEx question. So I think the CapEx development is actually good news because you see that our machine is now up and running, and we go full speed ahead in order to improve our customer experience. Visible also by more than 2,000 LTE sites that we implemented. We feel comfortable with the guidance that we have given of 13% to 14% CapEx over sales ratio, and we expect to come in with the guidance that we have given. The extra invest into transformation, that was your second question. We are quantifying the benefits. However, we do not explicitly quantify the extra invest that we're doing. And let's be also very honest, the transformational activities become more and more business as usual for us. So now that we have finalized the integrational activities our people focus on transformational activities. And to exactly carve them out of our overall OpEx or CapEx development is nearly not possible. We show you the different moving parts in our presentation, as I've shown you. And there you can see as a result, also our commercial and transformational effect, and that is at the end of the day the indication that you can use also for investment profiles going forward.
On your sharing question, clearly we would like to share especially in rural areas. And if you want to share something, you need to find a partner who can share something. So from that perspective, we are clearly looking towards sharing, as I also mentioned in my presentation, with the existing partners. Because in urban areas, we already have a very high-sharing quota. So that's not the issue. It's about the additional rollout obligations that would sit with the established mobile network operators in Germany in order to improve and gain efficiencies. On your last question from the flexibility of the content and model, I think I already answered the question. This is in the -- we are coming from the customer. The customer has the choice, so we'll be -- there is no forcing or changing of models. So I think with the growth that we have shown and also the natural churn we have, we have enough flexibility to utilize both models.
The next question comes from the line of Keval Khiroya with Deutsche Bank.
You mentioned that on the O2 M tariffs the average data us is now 7 gig. Within that base, are you now seeing many more customers taking advantage of the boost options? And also, with the current tariff structure, is there an opportunity to now think more about -- more -- for more price increases if it's only 10 gig allowance on the M tariff? Or are you happy with the current portfolio? And obviously, these things are commercially sensitive.
Thank you for your question. I think what we clearly gradually see is -- especially the boost option, so just doubling the volume for EUR 5 more. This is what we introduced last year. This is extremely successful from our perspective. And that is clearly an upsell path. And then there's already the next EUR 5 trends at EUR 40. And so I think the upsell path is the EUR 5 tranche, which I think works quite nicely from our perspective. So insofar, the more-for-more is already included in the current portfolio, and it's for us the executionability to push customers into the boost when selling. I think this is currently the recipe that we execute.
The next question comes from the line of Andrew Lee with Goldman Sachs.
I had a question -- a follow-up question on the network sharing and then another question on the wholesale deal. On the mobile network sharing, you mentioned your focus will be on rural areas. Just wondering if you can give us some more color on the scope of the incremental network sharing. How many of your towers are suitable for incremental network sharing? What's the scale and size of the opportunity there? And then secondly just on the wholesale deal. Correct me if I'm wrong but it looks like that cable wholesale deal has a speed cap of about 300 megabits per second at the moment. Is that something you can negotiate on? And any thoughts on that would be very useful.
On the upcoming sharing opportunities that we see, I think you're all aware of this industry obligations that have been set out on the one side. And clearly, also we raised now for the 700 megahertz frequencies being allocated to the operators. These are the frequencies we already auctioned 3 years -- or 4 years ago actually now. And it's also to build a nationwide 5G layer. It's a great opportunity, one no one has invested so far to really build a nationwide 5G network amongst the existing players in order to leverage 5G. So these are the key opportunities that we see. On sharing quotas, I think this is -- you can see that we already use a lot of towers together, but clearly it's about also the technology that you wouldn't use. So I'm not only about -- talking about passive sharing, I also talk about the active sharing. It is an opportunity that's currently an untapped opportunity that we see in front of us. On the deal with Vodafone, I think as I said it's a long-term partnership. We also, from our perspective, see this is as future-proof. And I think there's nothing more to add on that. I think let's now wait once this deal is going to be approved, so the overall M&A transaction. And there's nothing more to add from our side. It's a long-term partnership, and we clearly see elements of future-proofness in there.
The next question comes from the line of Thibault De Coincy with MainFirst.
My first question is on your deal with Vodafone. How long would it take for you to launch cable services? And is there a significant upfront investment to be made? And my second question is on 5G. I understand the auction is not over yet, but when you could launch 5G services? And what business case do you see for 5G in Germany? I would be especially interested to know whether you think German operators can charge a premium for 5G, keeping in mind that 4G penetration is still relatively low in Germany. Or do you see 5G more as a way to increase current capacity? And if I can add a very last quick question on O2 TV. How will you account for these revenues? I'm wondering if you will recover in your revenues on these margin you make, which seem to be small.
Good. On the implementation of Vodafone, clearly, at first we need -- it still needs to be approved. And from our perspective, I think it's more an IT investment that we would need to do in order to empower our IT systems and get the interfaces between the 2 companies be set up. We're quite confident that it could be done within a few months. So let's first have the deal done and then we would sit down and start the implementation. On the 5G, we have a plan, and currently it's difficult to share because we're still in an auction. And so far, our [ towers that stand that close ], we clearly we want to play a strong role in the B2B area and we also see first insights on the consumer side. We see handset availability. So many ingredients are coming together, but the detailed plans we would clearly share after the auction.
With regards to the accounting of 5G services, of course, that is heavily depending on the business models and the use cases that we implement. So once we are ending the auction and we will enlight our plans with regards to 5G, we will explain you the use case and accordingly then also how we treat that, in which revenue category, et cetera. So we will enlight that once we do that on a use case basis going forward. Thank you.
Sorry, my question was on the accounting of O2 TV, the product you just launched.
Yes. I think there's a partnering concept. And from that perspective, I think we've seen -- we charge EUR 5 to EUR 10. I think we have different packages launched on that one. And clearly with all of them, we earn money. It's a sharing concept that we have. But clearly we also see clearly benefits from higher data usage. That's clearly one of the key motivations from our side. And also present to our customers a real great TV product that is possible to use on all screens. So it is a revenue-accretive product and also we make a margin out of it.
Next question comes from the line of Steve Malcolm with Redburn.
I got it 3 questions. First, just on the statement you made on the partner revenue moving to a more data-driven profile rather than the glide path. Can you just sort of spell out like exactly what that means? I guess is that in terms of variability, those revenues going forward in growth, and the message you're trying to send out on the partner revenues moving towards this sort of more sort of data-driven profile? Second, just coming back to the Vod deal, I'm slightly concerned that you're talking about your sort of products that customers like. At the end of the day, products -- customers like speed and reliability. I'm just curious as to sort of your initial thoughts as to how you present sort of unified national product mix to your customers across 2 different networks, 2 different speeds. Any -- I know its early days, but any thoughts you've got on that and how you put together compelling package for customers to avoid huge confusion on the underlying infrastructures which customers typically don't really care about would be quite helpful. And then just finally on spectrum. I know you can't say a great deal on the auction, but as things stand, you look like you're losing about 50 megahertz of 2.1. Can you maybe just help us understand how much of that spectrum is currently lit and what your plans would be to migrate traffic away from that spectrum over time as you potentially lose -- I know the second block doesn't expire until 2026, but that would be quite helpful.
Let me take your first question, Steve, with regard to the partner revenue and let me just once again remind you on the mechanics of the MBA MVNO that we have in place. So in the past, we always had 2 growth engine. The first growth engine was the glide path that we were pursuing to the 20% commitment. And also, of course, the 20%, sort of say varying with the potential network growth that we're having. Going forward, we all know that the 20% will be reached in 2019. And with that, we have 1 growth engine left. But let me say it's also one thing which is for sure is that the 20% are now assured independent from the utilization of the network. And as we see constantly CAGR of 50% data growth in our networks, of course, also the 20% will increase going forward. And on top of that, here we are dependent on the choices that the bitstream MVNO does itself. There is also the additional opportunity that bitstream MVNO asked us for additional percentage points, up to 30% of our network capacity going forward.
With your second question, I think you exactly hit the point. It's not about technologies for customers, it's about providing the best speed and customer experience in a certain building or region or whatever. And with the deal, we have the ability technology agnostic to play out this and to offer the customer for his stationary needs the best technology available. And I think this is, at the essence, what we do. We'll clearly share commercial proposition once it's ready, and then we can also elaborate more in detail. I think after being 20 years in this industry, I think you can be sure on your third question that we have a very forward-looking and future-proof spectrum strategy. And so far, it's difficult for me to comment while we're still in an auction, but you can be sure that we have a very forward-looking and clear spectrum strategy.
The last question comes from the line of Ben Rickett from New Street Research.
Two very quick questions, again on the Vodafone deal. Firstly, I mean are you now supportive of the Vodafone/Unity merger? And secondly, you mentioned your fixed wireless access plans in the 28 gigahertz. I'm slightly surprised you're still talking about this given the Vodafone deal. I was just wondering whether there's anything change to your fixed wireless access plans as a result of the deal.
Okay. Starting with your first questions. I think I always said that this deal cannot be approved without remedies, and especially the remedy we're talking about we were able to negotiate with Vodafone a deal. So from our perspective, we believe that this deal that we've signed creates competition in Germany. It enforces a third nationwide player to create competition. And in so far -- and that was a key requirement Telefónica Deutschland had. We cannot have a deal without remedies. So insofar, we clearly support the deal that we've signed with Vodafone and fully stand behind this deal going forward. Secondly, on fixed wireless access, this is a technology that allows you in order to cover certain needs of customers for business, but also for consumer. But with the deal we signed, we have now more flexibility to invest because I have now a choice already on the fixed side and if this technology takes off and allows us to maybe provide FTTH speeds or even higher speeds, higher speeds than cable, it's still an alternative but not on the short term. So I think we have now more flexibility and now -- and can now evaluate this technology and also take the learnings from other markets. But it's still a technology that we will have an eye on going forward because you know that currently the FTTH penetration in Germany is still massively lagging behind other European markets.
At this time, no further questions will be taken. Mrs. Veronika Bunk-Sanderson, I'll turn the call back to you for any closing remarks. Thank you.
Thank you, operator, and thank you, everyone, for attending our results conference call today. As usual, please don't hesitate to get in touch with us if you have any follow-up questions, and I wish you a good day. Take care.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for calling. Have a nice day.