Telefonica Deutschland Holding AG
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Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining the Telefónica Deutschland Holding AG Q2 Preliminary Results 2018 Conference Call. Throughout today's recorded presentation, [Operator Instructions]. I would now like to turn the conference over to Ms. Veronika Bunk-Sanderson. Please go ahead.
Thank you, operator. Good morning, everybody, and welcome to our Second Quarter and First Half 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.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 the new accounting standard, while all historic information is based on IAS 18 accounting standards.As in Q1, the implementation of IFRS 15 has only a minor impact on the Telefónica Deutschland P&L in Q2.As usual, this 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 the Investor Relations section.Here with me today, I have our Chief Executive Officer, Markus Haas; and our Chief Financial Officer, Markus Rolle, who will take you through the presentation. Markus, please go ahead.
Good morning all, and thank you for joining us here today for our first half 2018 conference call.Telefónica Deutschland had an operational and financially strong second quarter with a range of initiatives and the resulting positive effects on our data, net debt and churn metrics.Data continues to grow with a 50% year-on-year growth rate, and we saw a further 15% year-on-year increase in LTE customers to 16.6 million by June 2018.Customers buy into mobile data freedom, which is now becoming a standard in the German mobile market. We have been driving this demand with further portfolio updates in Q2. Consequently, net adds show a positive trend in retail and partner segments. At the same time, churn is coming down, especially for the O2 brand, as a result of a consistent customer retention focus.Revenue continues to grow with the total revenue up 0.3% year-on-year and MSR growing 0.5% year-on-year in the first half as we continue to focus on stimulating data usage and managing our portfolio with a view to profitable growth and a fair market share across segments.As a result, our OIBDA is 6.1% higher year-on-year, also driven by synergy capture of EUR 65 million in the first half, mainly from the ongoing network consolidation.Strong OIBDA and efficient management of CapEx means that we have increased operating cash flow by almost 8% in the first half 2018, supporting our dividend commitment. Let us now look at the P&L trajectory on Slide #4.As you can see, we deliver what we promised. We are fully on track to achieve our full year 2018 outlook. Underlying mobile service revenue has been in positive territory for 3 quarters and is growing by 0.6% in Q2. Total revenue has weakened slightly in Q2, mainly as a result of the ongoing reduction in fixed revenue during the final stages of the wholesale transfer.We are, however, in line with our full year 2018 outlook of broadly stable year-on-year for total revenue, excluding negative regulatory effects.OIBDA has now been increasing for 15 consecutive quarters with a strong 6.8% year-on-year growth in Q2, driven by our focus on profitable operating momentum and significant OIBDA-relevant synergies of EUR 65 million from the network integration in the first half of 2018.We have, thus, already achieved over 80% of this year's OIBDA-relevant synergies in the first half of the year. As a result, we are more than in line with our full year 2018 outlook of flat to slightly positive for OIBDA, adjusted for exceptional and excluding negative regulatory effects. We are reiterating the existing OIBDA outlook range, as published in February 2018, to reflect our lesser synergy expectation in the second half of the year as well as to retain a degree of commercial flexibility.On Page 5 of the presentation, let us now recap what we said to achieve at our Capital Market Day in February and what has happened since then. Starting from the bottom, we have said that we are building the foundation with a superb customer experience and finalizing the network consolidation.We are voted #2 in Germany in the annual customer service test by Connect in Q1. And on the network consolidation, will be completed by the end of 2018, and we now consolidated with Q2 75% of the network. We are fully on track.In addition, we have just signed a mobile broadband declaration initiated by us with the German government and the other MNOs to jointly guarantee 99% network coverage, based on [ POP ], with LTE by year-end 2020 in exchange for favorable payment terms for the spectrum auction in early 2019. These coverage obligations are in line with our current rollout planning, while the extension of payment terms in line with the spectrum availability would be a clear upside for us. Details will need to be confirmed by the regulator at a later stage in this year.In terms of product and services, we launched a new DSL, O2 Free and Blau portfolio since the beginning of the year with a clear focus on data growth, ARPU up and fair market share in all segments. Customer satisfaction as well is improving. Meanwhile, we are pushing ahead with the refresh of our IT infrastructure and the first omnichannel initiatives to speed up time to market and product service flexibility on our way to becoming the mobile customer and digital champion in the German market.Let us now look at our product initiatives in more detail on Slide #6. As mentioned above, we relaunched our mobile and fixed propositions in the second quarter with a bundle of activities and new portfolio offers. Most importantly, on June 5, 2018, we relaunched our streamlined new O2 portfolio with free tariffs. We upgraded the O2 Free L from 20 to 30 gigabytes at EUR 40 on a monthly basis.Simultaneously, we introduced the O2 Free Boost option for an additional EUR 5 for our customers, that can double their high-speed data volume. Our most popular tariff is still the M, with the M boost providing 20 gigabytes for EUR 35 on a monthly basis.In addition, we added the O2 Connect option. With Connect, customers can add up to 10 mobile devices to the same tariff with 2 additional multi cards and 7 data-only cards. O2 Connect is well received from our customers and is an innovation. We are the only operator who's already capturing the benefits of IoT and more devices going forward.We also relaunched our O2 Free DSL portfolio in Q2 with higher download speeds and the suspension of throttling, which is also highly popular. Connect Magazine ranked our fixed net services good. We continue to believe in using our fixed portfolio to complement our mobile offering, primarily in the premium segment.In the non-premium segment, we refreshed our second brand, Blau portfolio, with higher data options on competitive levels. We consider this segment structurally healthy after the MVNO merger and aim for fair market share.Moving on to the status of our network consolidation on Slide #7, we have made significant progress since the Capital Markets Day. We have now completed, as I mentioned, 75% of the consolidation, which means that we have switched off over 10,000 sites out of a total planned 14,000 sites.At the same time, we have been rolling out LTE and adding capacity in consolidated areas. We are seeing major quality improvement in the cities, which are finalized. Among them, Munich, Stuttgart, Braunschweig, and so on.We also installed over 3,000 new LTE sites this year. Customers have download speeds in the new O2 LTE network of up to 225 megabits per second, and the average download speed is now close to 30 megabits per second per, giving customers an improved customer experience.We also continued to work on an improved voice quality, which, during the integration, suffered in places. As you can see, our efforts are starting to bear fruit. We are now pushing ahead with the finalization in the city consolidation as well as the extension of the consolidation into rural areas. And we'll give you a comprehensive update on our progress towards the end of the year.Moving on to our priorities for the second half-year of 2018. We have set ourselves clear targets on Slide #8. It is our top priority to finalize the network consolidation as explained above.Clearly, you will also see further initiatives in the retail space, as well, we will be bringing further innovation to the market with O2 Free.Last but not least, we are pushing ahead with the transformation where we are preparing the project pipeline for 2019 and beyond. Our initial focus must be the IT architecture refresh as well as the extension of our omnichannel capabilities with a view to reducing complexity and improving product and service flexibility quickly.We want to become more digital in terms of our interactions with customers at their speed. As I mentioned before, we are doing all the above and working on the engine while the plane is flying in the air, so to speak. It has been a rocky road at times, but the results are finally coming through. And as I said, we deliver what we promise.With this, I would like to hand over to my colleague, Markus Rolle, to present the Q2 results 2018. Markus, please go ahead.
Thank you, Markus, and good morning, ladies and gentlemen. I'm very happy to present to you a strong set of results for Q2 2018.We are fully on track for our full year 2018 financial outlook driven by the strong operational momentum we created with significantly higher mobile postpaid net adds at 300,330 (sic) [ 333,000 ] and very solid revenue trends. We sustained our focus on profitable growth and, as a result, we also refreshed our O2 Free portfolio with the O2 Boost and the O2 Connect, which further support our ARPU up strategy. We maintained a very solid partner performance in a rational market environment.Looking onto the fixed side. Our VDSL demand is strong with 86K of net adds, and a good thing to mention also here, the wholesale migration is mostly finished. We only have just 8,000 customers left to be migrated. That enabled us to deliver a strong OIBDA growth of 6.8% year-over-year, supported by front-end loading phasing of our synergies.We have already captured more than 80% of the expected incremental synergies for 2019 in the first half year, which is coming mainly from rollover effects from prior years. With that, we were able to enhance our margin further to 28.4% in the quarter, which is an up of plus 1.8 percentage points year-over-year due to our stringent focus on profitable growth.Operational cash flow grew by 7.1% year-over-year with additional support from incremental network synergies of EUR 10 million and our continued focus on efficient CapEx spend. The leverage is in line with the target after our dividend payment of EUR 773 million in May. Given the seasonal profile, we expect to return to lower rates by the end of the year. We reiterate our commitment to grow dividend for full year 2018, and we will give you a concrete proposal as we do always later in the year.Let's have a look into the revenue trends on Page 10. Just as a reminder upfront, we only see minor shifts between revenue lines from the implementation of IFRS 15 and the total effect for half year 1 only amounted to EUR 11 million top line. And our guidance-relevant like-for-like comparison, which is IAS 18, the underlying year-over-year performance is in line with the guidance with minus 0.3%, as in the prior quarter. This is mainly a result of the expected fixed revenue trends driven by the wholesale migration, which is almost completed but led to minus 11.8% year-over-year in this segment.The handset revenue continued to grow strongly with 8.5% year-over-year with a similar seasonal pattern as we have seen in the last year. Our underlying mobile service revenue year-over-year performance remains in positive territory with plus 0.2% year-over-year, also based on IAS 18 accounting for the third consecutive quarter in a row in positive territory.Under IFRS standards, MSR performance improved even more by plus 0.6% year-over-year. We can see that we captured the benefits from the successful ARPU up strategy with O2 Free and we expect further positive impact from the new O2 Free Boost and the O2 Connect as the M tariff remains the most attractive tariff with good demand for the boost roster. But it, of course, takes time until it flows through into the customer base as we still see partly offsetting effects by OTT trends and legacy based rotations.Our data KPIs on Page 11 remain strong with significant year-over-year and Q-over-Q growth as the customers adapt O2 Free tariffs with large data buckets.The average usage of an O2 LTE customer was up by 20% Q-over-Q to 3.4 gigabyte. Customers in the new O2 Free M tariff almost used the double, which is 6 gigabyte today. Overall, the traffic grew by more than 50% year-over-year to more than 150,000 terabytes.As also in the previous quarter, this is predominantly driven by music and video streaming and, of course, by a steady increase of our LTE customer base, which is up 15% year-over-year to 16.6 million accesses.Thanks to the portfolio initiatives that Markus had shown to you, our retention focus and the very solid partner performance, we saw a strong trading momentum in Q2. We had 333,000 postpaid net adds and maintained our focus on profitable growth. We see solid contribution from the partners in a rational market environment.Our annualized churn rate of O2 postpaid LTE customers is now below 15%, which is a major improvement Q-over-Q and year-over-year and confirms the progress of our initiatives around the network, the service and also the demand for new portfolios from the existing customer base.The ARPU-accretive effect of O2 Free are visible in the blended postpaid ARPU. The year-over-year decline is stabilizing despite all the headwinds from Roam Like at Home regulation and the mix effects in the base. The share of postpaid accesses is increasing to more than 50% of total base, which is an up of 4 percentage points year-over-year.The demand for prepaid is still influenced by the regulatory changes, but the net disconnections are also improving to only minus 148k of negative net adds. The prepaid ARPU continues to grow, both Q-over-Q and year-over-year.With regards to partner trading on Page 13, we remain in a very solid and rational environment. We are still receiving a high share of gross adds due to the focus on big bundle offers, particularly from the MBA MVNO. But the share of total postpaid gross adds is now slightly lower than in previous quarter with 58% due to the strong traction that we created also with our new tariff initiative in all segments.As promised and intensively discussed in the previous quarter, there is no issue with the revenue trends in partner. We are back to growth in both year-over-year and Q-over-Q performance. The share of the total postpaid revenue is also in line with our expectations, coming to 24% in Q2.We continue to see further revenue opportunities in the partner business from data growth, capacity upgrade as well as speed and technology-based price tiering.Our fixed business trend remain unchanged on Page 14. The revenue decline is mostly driven by the wholesale migration. This is now nearly finalized, we only have 8,000 customers remaining. We expect this effect to phase out over the next 12 months.Customer demand for VDSL remains strong at 86,000 net adds in the quarter, although we are not fully able to compensate the line losses in DSL at this moment of time. VDSL customer base is now at 1.3 million, which is roughly 2/3 of our total fixed retail base.Fixed retail ARPU and revenue trends are also nicely improving. ARPU is flat year-over-year at EUR 25 and the fixed retail revenue is also flat with minus 0.4% year-over-year, which is a major improvement versus the previous quarter.Fixed remains an important defensive pillar of our strategy. We continue to see ourselves well-positioned in the DSL market, also supported by the new offers that Markus mentioned to you we bring into the market. From our perspective, network ownership is not key to compete in a soft convergent market.Let's now take a look at our progress with the synergies on Page 15. Savings from the integrations are major driver of our OIBDA growth in Q2 and half year 1. Let me put that into context.We had mainly rollover effects from the initiatives, which we closed already in 2017, which is the FTE reduction, the [ shop ] footprint reduction, the customer base migration into one IT stack, plus some further incremental synergies from the network consolidation. That enabled us to deliver a very front-end loaded synergy phasing in 2018 where we had already delivered EUR 65 million or 80% of the total expected volume of EUR 80 million OIBDA-relevant synergies for the full year.CapEx savings are more linear. Here, we saw for the first half-year EUR 25 million, driven by the rollout of a single LTE network, and we target another EUR 25 million in the second half year.We confirm the total operating cash flow savings, which we targeted of around EUR 900 million because the only remaining project is the network integration and that shows steady progress, as Markus Haas has also envisaged to you. We expect to achieve 90% of the total operational cash flow target by year-end 2018, and the remainder of EUR 100 million to come in the next year, of which 60% will be on OIBDA level.OIBDA performance in half year 1, you can see on Page 16. We maintained a strong operational momentum with a focus on profitable growth. We captured successfully synergies of EUR 65 million, which is very front-loaded.Despite regulatory effects, which is mainly driven by Roam Like at Home, which totaled to EUR 31 million, we are confirming the expected full year effect of EUR 40 million to EUR 60 million, and we will, of course, closely monitor the usage pattern throughout especially the summer period. Restructuring costs came in with EUR 32 million, mainly driven by the network consolidation.With that, we are fully on track for our full year 2018 guidance. We saw strong growth of 3.7% year-over-year, excluding exceptional and regulatory effects. Under IFRS 15, underlying growth is even stronger at 6.1% year-over-year to EUR 927 million with 1.4 percentage point margin expansion to 26.1%. In absolute terms, we still see just minor IFRS effects totaling to EUR 15 million.Our cost lines are broadly stable, supplies are lower by minus 0.6% year-over-year, driven by slightly higher hardware cost due to the good hardware demand, but also lower connectivity-related cost to compensate for that. Personnel expenses are flat and also the other OpEx.In the overall picture, we are confirming our full year 2018 outlook of flat to slightly positive, as the majority of the synergies has been delivered in half year 1 as also expected.Our balance sheet on Page 17 remains solid with good free cash flow dynamics with a typical seasonal phasing driven by negative working capital movement at the beginning of the year.Seasonal prepayment for leased line and rental contracts for mobile sites have started unwinding in Q2, but continue to weigh negatively with EUR 112 million.The reduction in CapEx payable by EUR 87 million is driven by the final stages of our network consolidation. Restructuring effects impact working capital with EUR 24 million and accumulated cash out of our restructuring cost since the merger is approximately EUR 540 million.Other working capital movements include silent factoring transactions for handset receivables as well as a number of other recurring working capital movements, including a reduction in trade and other payables.With that, we maintained the financial flexibility after the dividend payment of EUR 773 million in May, and the leverage remains in line with the target of at/or below 1x the OIBDA, with the usual seasonal peak that we always see after the dividend payment.Net debt is at roughly EUR 1.8 billion, and we expect improvements by year-end, supported by our free cash flow dynamics. Operationally, adjusted leverage would be at approximately 2.7x the OIBDA using a multiplier, which Fitch also used for our last credit rating of 6.9.Let me sum up our strong set of results. We maintain the focus on profitable growth with our portfolio update in all segments, and that resulted in a really strong trading performance. We kept a solid partner performance in a rational market environment, and our underlying revenue trend confirm the success of the O2 Boost and the Connect as customers are adapting to higher data bundled and multiple devices.The commercial momentum and the stringent value focus, plus the synergy delivery, enabled us to drive significant OIBDA growth. Operational cash flow dynamics are strong, driven by the operational momentum and the efficient spend of CapEx. We confirm our full year 2018 guidance and dividend growth commitments for 2018 on the confidence in our free cash flow generation.With this, I would like to finish today's presentation and hand back to the operator to open the Q&A. Thank you.
[Operator Instructions] The first question is from the line of Ulrich Rathe from Jefferies.
Two questions. The first one is on the outlook for EBITDA growth in the second half. You're highlighting there is synergy support, but I was wondering whether -- and also some degree of commercial flexibility, I think. I was wondering whether there is a realistic scenario in your sort of planning that EBITDA could start to decline in the second half or whether the sort of lack of synergy support that would come through in the second half would still allow you in your planning to sort of establish EBITDA. That would be my first question. The second question is on the commercial strategy. You're sort of talking about the -- maintaining fair share in all segments, including no-frills. I mean, one could argue that it makes sense to actually give up a bit of share in no-frills just to avoid a price war there given that you have a very high operating leverage by one of your resellers. So I'm wondering, what makes you sort of think that maintaining share in no-frills and sort of doing that through a lot pricing is the right strategy?
Ulrich, thank you for your question. Let me take the first one with regard to the outlook. And you asked for the question, can we have negative EBITDA growth in the second half year. Under the current trend that we see, we do not expect to go negative in the upcoming quarters. We see strong operational momentum, and we see today also a rational market environment. So from that perspective from current trends, we do not expect that. However, we remain, thus, the flexibility to react, too, with the certain market movement and, thus, also confirmed our guidance.
For your second question, Ulrich. Telefónica Deutschland believes in an all-segment plane, also on own customer ownership, as presented on the Capital Market Day. And so far, we need to leverage all segments in order to have a healthy customer inflow. I don't see a price war. We act on competitive terms. Telefónica Deutschland is not a price leader in this segment.
The next question is from the line of Polo Tang from UBS.
Two questions. So first one is just on service revenue trends. If you look at your peers, they're probably seeing about 2% to 3% German mobile service revenue growth for Q2. So how optimistic are you that you can narrow the gap and see service revenue growth improve over the coming quarters and what are the main drivers for you to get there? The second question is really just about the competitive environment. So can you maybe just give us some color in terms of what you're seeing in terms of competitive dynamics in terms of the premium segment, but also no-frills? And if you look at your net adds number, it was very strong in the quarter with 333,000 postpaid net adds, but are you taking these net adds from a particular operator? So if you can maybe talk about that.
Polo, its Markus. Thank you for question. I think we are growing, this is always what we wanted to achieve. And I think you saw in my presentation, we have a consecutive growth story here, first. Secondly, we continue this trend, I think this is our clear target, and we are also pleased with the trends that we see contributing from all segments. So there's not a single segment or a single source. I think with the all segment player just mentioned, we fueled this growth coming from all segments. That said, we are growing, and we want to continue to grow.
And on the competitive environments, the net adds?
As said, I think we are pleased with the developments in all segments we have and we gained from all parts of the market. So I think there's not a single source at -- especially with the O2 Free tariffs, we are pleased that our new offers that we recently launched in June are really welcomed by customers. They really understand the Boost logic, also the ARPU up mechanisms that we have implemented in there. So I think this is a healthy source for future growth.
The next question is from the line from Mathieu Robilliard from Barclays.
So first, I had a question with regard to your network. So you indicate that around 75% of the network has been consolidated on Slide 7, and you highlight a number of cities where that has been released. What I was trying to understand is, when you say 75%, that -- that's a national average? And -- but how many cities or regions are fully consolidated because you give only 4 or 5 number of cities, which obviously doesn't represent 75% of the cities in Germany. Hopefully, that's clear. What I'm trying to understand, I guess, is are we on the verge of moving to 100% in a lot of cities over the next quarter? Basically, what is the sequence of improvement, city-by-city? And then the second one has to do with 5G spectrum auctions next year. So there's been some noise around maybe some obligations being attached to it, such as roaming, and I want to touch your thoughts on that process.
Thank you for your questions, Mathieu. On the first one, it is accelerating. While we are now in the final half year of consolidation, and every week we are going to release cities. So many of them are just close to being released, so it's absolutely fair, your observation. It is now accelerating. So every week, more cities will be released from the calendar, and because of that, because we work in parallel in many cities. So it's not sequentially, we work in parallel in order to get the maximum output on consolidation work. So you could expect an acceleration of released cities in the coming weeks and months. And on the 5G, I think we have a clear positioning. I think this is also what we discussed with the German government. Priority #1 in Germany has to be infrastructure investment in order to roll out and improve the coverage in Germany. And if Germany wants to be a leader in 5G, they have a choice, and the only choice is not to have heavy spectrum auctions and to empower us to invest. And secondly, also to have a framework that my investment is not devaluated with concessions. So from our perspective, we have a very clear view, there's no need for any national roaming or service provider obligations. By the way, also, the existing regulator has been very bold on the 4G spectrum in 2010, they have no service provider obligation. And what we just ask is to continue the current policy in order to force the investment into the German market. So we have a clear position, there's no need in order to enhance obligations on the spectrum because it has shown, if you enhance it, you will not achieve target #1, to be a leader in 5G.
The next question is from the line of Keval Khiroya from Deutsche Bank.
Two questions, please. So firstly, you obviously showed a significant improvement in the net adds performance, although I understand that's driven by wholesale and partner trends within that. To that point, could you perhaps give us a flavor as to just how much of an improvement you've seen in the retail business? Was the O2 brand stable or could you just give us some more color on that front? And secondly, you've launched a new O2 Blau proposition. Could you highlight -- you have talked about the competitive environment, could you just highlight particularly on the low end, whether you've seen much competitive response in that front or do you still think things have been relatively stable?
Good morning, Keval. Let me take the first question with regard to the good net add performance that we saw. What we can say to you is that we are clearly benefiting, of course, from all the initiatives on the retail side that we did and that we brought into the market with our O2 Free portfolio update, with Boost option and also complementing it with the Connect tariff. And in addition, then, also complementing our own portfolio at the lower end of the market. If you sort of say, of course, this is driving also our positive performance because we wanted to have many initiatives and I say that while maintaining also a very strong partner performance. You saw that we still had 58% of our gross adds in the partner segment. So also here, we still see a very strong performance in the partner segment, driven, of course, also by the MBA MVNO. So from our perspective, it's a balanced view that we have, and we are being on the positive track record, yes, especially in the retail segment, but also very solid partner performance.
On the second question. I think we have a competitive Blau portfolio, but we are not the market leader or price leader in that one. What we launched is a 3 gigabyte for EUR 10 at low speed -- lower speed with a 24-month contract duration and commitment. And then so far, that's the average. I think there are many postpaid offers in that market available but, clearly, it's an important price point, the EUR 10, but also the EUR 15, especially and also the EUR 20 price point. So what we can say is there's no cannibalization between the brands. I think this is very important, this is a clear stringent segment play that we are executing because the bigger data bundles, with the higher ARPUs, you get at EUR 30, this is a clear differentiation. And on that point, we made Blau competitive to the same level as the market, but we are not the price leader, and so far, we haven't seen any significant movement.
Next question is from the line of Georgios Ierodiaconou from Citi.
I have 2 questions, please. The first one is around the trend levels. I'm just trying to understand whether you were seeing inflated churn the last couple of years because of customers you migrated onto the O2 brand from different class brands in the past. And I understand, now it's been 2 years, so is it fair to assume that the effect is done? And the reduction we've seen in the churn now, is it indicative of what the O2 base had before? Or are you seeing any particular improvement in recent months? And then the second question is more on the regulatory framework. And I think, earlier, there was a question around the 5G auction. If you could give us an idea of what you expect the third and fourth stages of the consultation to bring about, particularly regarding the regional licenses? And also, if you could comment a bit on the co-investment framework and your views around the EWE [ tel ] and Deutsche Telekom co-investment arrangement, whether you are supportive or want some regulatory protections on that?
Georgios, thank you for your questions, and let me take the first one with regard to churn level. We are very proud that we were able to keep the churn levels on a stable level also with everything what we did after the integration, which is, of course, the network, which we discussed just in previous question, but is also the customized migration that you were mentioning, brand changes, et cetera. Of course, if you ask me, was that also a churn driver in the history, yes, it definitely was because, at the end of the day, we did not ask the customers to change their brand and also not for allowance for the merger. But that also shows that we have significant upside potential going forward. Once we have eliminated these factors, of course, we have very ambitious churn targets, which we have set ourselves at the Capital Markets Day, and eliminating these negative factors will also show steady improvement then on the churn side going forward.
Let me take the second question. It has been actually 2 questions. The one is on the spectrum, the other one is the fixed cooperation between Deutsche and EWE. We are in the middle of the process, and the regulators said that they want to publish the next set of guidelines by the end of September. And as you said, we have set as an industry a clear expectation to the regulator that we expect an investment-friendly environment. Otherwise, we will not be leading in 5G. So it's now really in their hands, and I think all arguments back and forth has been exchanged for the regulator. I think it's now decision time and time for leadership also on the government side in order to decide what do you want, do you want to lead in 5G, or do you want a complex market environment where nobody is really willing to invest. And I think we set the rules of the games very clear, it's now decision time, time for leadership. And on the regional licenses, we also have a clear position. I think it's a waste of spectrum. And I think we have the luxury in Germany to have 400 megahertz and 3.5 gigahertz. Other countries would kill if you would have that spectrum, that amount of spectrum. And I think to distribute it in the most best way that you can really achieve an upside in coverage and also especially on capacity in cities with that spectrum, so to release only to the MNOs should be a priority because regional licenses and the fragmentation of spectrum will never lead to an efficient use of this 100 megahertz that is currently under discussion. So we clearly expect and hope that the regulator also takes [indiscernible] that it's about efficient usage of spectrum and not fragmentation of spectrum where you get nothing at the end of the day, just smaller bits and pieces that do not add up to a nationwide strategy. But clearly, there's no decision so far. We push very hard as an industry. And I think that it's also an important signal to this matter at that point in time. And let's see what will happen until end of September. On the fixed cooperation you mentioned just briefly. I think it has just been filed. We understand the logic of combining infrastructure investment and risk-sharing approaches. We are currently analyzing the wholesale model of Deutsche Telekom and that goes side-by-side with that, and let's see how the proceeding will go. Overall, having cooperations in order to have the fiber challenge being fixed in Germany I think it's a good thing. We also believe in infrastructure cooperation and sharing opportunities, as we did on the mobile side [indiscernible] and we support such initiative.
[Operator Instructions] The next question is from the line of [ Christian Thungman ] from HSBC.
It's Christian. A couple questions. First one on the quarter, and if you've seen and realized any changes in the subscriber acquisition cost across different channels. And then you had very good net adds on the retail front, but also, it looks like the partner net adds were also pretty strong. And your success on the retail front, was it also driven by, let's say, more aggressive retention that you did in the quarter, or what's the reason for the lower churn, that would be interesting. And then maybe lastly, I know that [indiscernible] across various brands reacted to your Blau move recently. So has there been any trend shift for you, basically, in the last couple of weeks?
Good morning, Christian. Let me take the first question with regards to the change in acquisition cost. So what we currently see, I think we have to differentiate into volume versus value. On the value side, we do not see any significant changes. We feel comfortable with the level of investment that we do per capita in the different channels into the market. Of course, as the CFO, we are always trying to optimize on that one, this is the logic doing -- that you are doing. But of course, we see some volume effects from the activities that we have done now with the strong net adds that you were describing also before. So from a value perspective intact and robust market environment. From a volume perspective, this is, of course, the lever that comes into account when you do more net adds.
On churn, I think, clearly, with the finalization of the consolidation, we see room for improvement and potential in order to improve our churn. So -- and so far, going forward, what Markus already said. And I think we had a very good quarter on churn and you can clearly see step-by-step going to decrease our network churn and there hasn't been any additional investments besides the volume effects you always have. On the last question, market reaction, as said, we haven't seen new price points in the market. There are clearly all these promotions, a gigabit more here and there, and this is what we absolutely have seen. But the price point and the portfolios that we have seen more or less remain the same. As said, we have a competitive Blau portfolio, but we are by far not the price or market leader on pricing in that segment.
The next question is from the line of Jakob Bluestone from Crédit Suisse.
Two questions, please. Firstly, just on the synergy target. As you mentioned, you've achieved 80% of your target for the year. Can you maybe just remind us why you expect a much lower rate of synergy realization in the second half of the year? And then secondly, a more accounting question. Last quarter, there was only quite a small difference between your OIBDA growth under IFRS versus under IAS. Was this quarter the gap is much bigger, so it's about a 3% difference between your OIBDA growth under the 2 accounting standards? Can you maybe just help us understand a little bit why the gap is so much wider this quarter between IFRS and IAS?
Thank you, Jakob. I will take both questions. Let's start with the synergy target and the 80% that we have already achieved and why we expect only lower achievements, percentage-wise, in the second half year. So the effects that we saw in the first half year are mainly initiatives, flow-through of initiatives that we have already finalized in 2017, like the restructuring program, the shop reduction, but also the IT migration and consolidation that we did. And you see that this -- many of these initiatives were already finalized by mid of last year, and as a result, the synergy capture from a year-over-year perspective is then decreasing in the second half year. Despite, of course, we are still finalizing our network activities, but we still have 25% to go. And of course, the synergy capture will then mainly flow through in 2019, and that's why we still see incremental synergies from an OpEx perspective of EUR 60 million to reach our overall synergy target of EUR 900 million then in 2019. We expect all activities to be finalized by the end of this year, to be very clear. But, of course, you will then see flow-throughs into the next year. And with regards to your second question, the IAS and that of the IFRS difference, let me first of all say the differences are still minor to our overall P&L. So we do not talk about major disruptions to our P&L because we have, especially on the MSR side, already introduced our handy model earlier in 2009. But of course, what you see here is the logical effect of the things that we were discussing in a previous question, where we discussed about the commercial activity and the acquisition cost. And of course, the volume effect that you generate is causing the difference between the IAS and the IFRS accounting because, under IFRS 15, the acquisition costs are more deferred into the future than in IAS where you have to realize them upfront.
Next question is from the line of Jonathan Dann from RBC.
It's 2 questions. The first one, on the share of gross adds, on the 42% that's not partner, can you just remind us what the mix of sort of EUR 30 -- are they now -- are gross adds now predominately in contract at the EUR 30 retail price point? And then my second question is on the broadband business. I mean, it would seem that Vodafone is -- assuming they buy a cable and another cable business will use convergence to reduce churn, do you think, at some point, you guys will need to revamp growth in your broadband business?
It's Markus speaking. Thank you. On the first one, we can confirm that the majority of the O2 inflow is clearly higher deferred euro price point, but we're also pleased with the inflow coming from all segments. On the second one, on convergence. Clearly, you've seen that we've stabilized the fixed business, especially also the revenue line on the fixed own retail customer is very close to breakeven. And it's a clear target also to bring this business back to growth. And so far, we are also pleased with the combination that we are able. So we are able to offer competitive offers, especially if you combine mobile and fixed, we can match all the existing offers in the market. And clearly, with the huge customer base that we have, there's a clear opportunity also going forward for us in order to combine and utilize the cross- and up-sell mechanisms that we have with this huge mobile customer base.
The next question is from the line of James Ratzer from New Street Research.
Two questions, please. The first one is going back to one of the comments you made earlier about not expecting EBITDA trends to go negative in H2 despite the lower synergy capture that's expected in H2. So just be interested on understanding a little bit more about what's driving that specifically. I mean, is this because you're now expecting a further acceleration in service revenue trends in H2? Or is this because you're expecting to spend less on commercial costs in the second half? Just interested in getting a bit more color around that. And then secondly, I mean, looking forward again to the kind of 5G auction. Hutchison, in the U.K., has been talking more positively about using the 3.4 spectrum sort of fixed wireless broadband. I know it's something you've talked a little bit about in the past. I mean, can you give an update on your thinking around the commercial viability of using that spectrum for fixed wireless broadband if your thinking has evolved on that further?
Thank you, James. Let me take the first question with regard to the EBITDA development. Well, it's based on our operational trends that we see and the market environment that we're at. Of course, the EBITDA will be driven by the margin flow-throughs of the momentum being created. And, of course, also by a conscious cost management that we always apply to the whole of our business. And that makes us confident that we will not turn into negative territory despite lower synergy capture in the second half year.
On your second question. We are exploring in this quarter, especially the millimeter wavelength technology, not in 3.4, but in 26 gigahertz because we believe the service you could provide and the bandwidth you could provide to customers is much higher and is a more useful technology for the German market. So we are in the middle of exploring this technology with several trials and several windows. And as seen, this is not the only trials that happen currently in the world. It's a promising technology, but we first need to see that it's sustainable and delivers what it promises. So more updates will follow later.
Could I just ask kind of a quick couple of follow-ups on that? Firstly, Markus Rolle, on the cost side, is there any specific cost initiatives you're looking at in H2 that wasn't there in H1 to support numbers? And on the millimeter wave point, I mean, doesn't that require dense fixed-line infrastructure, though, to actually make that a viable service?
Let me just follow up on the second, first. Absolutely right, you need fiber in the street, but not to the home, and I think this is the challenge that you have in Germany, that there's no fiber-to-the-home because there's no business case. But in all the urban cities and the key urban cities, there is fiber available. From city carrier, from Deutsche Telekom, so there's a capillarity that you just have fiber in the street is there and you can choose just street lamps, for example, and use this technology. So clearly, once it comes to -- in order to bridge really the last mile, so digging to the building and then the in-house infrastructure, this technology helps. And this is the biggest part in order to provide 1 gigabit or more per second. That is also why competitors are currently looking at this technology and this is why it's so attractive because the most expensive part of the rollout could be bypassed because in every 100 meters in a city there is already from someone fiber that you could utilize.
And let me take the first one. So there is no specific big cost initiative that is coming in the second half year. But believe me, given a business of that size that we have, there is always cost optimization potential, and we have, of course, a long line of ideas, a long backlog of ideas, which we can further improve, which we can implement, and we do that as we speak as normal business. So no big initiatives, but continuous improvements.
The final question is from the line of [indiscernible] from Goldman Sachs.
It's Joshua Mills here from Goldman Sachs. So 2 questions from me. The first one is just given your comments around the second half and continued strength in operating momentum. I just wondered if you had seen anything or felt more comfortable in saying that [indiscernible] won't respond to some of the Blau moves maybe because of the MBA MVNO setup to give you that confidence because, in the past, it's always been the case that we have these periods where the market becomes a bit more rational, and it's often undermined by some of the smaller operators. So is that something that you can see in terms of the MVNO setup, which means that you don't think they can respond as aggressively as they have in the past? And then, secondly, at your Capital Markets Day this year, you gave out quite a few KPIs on digitalization and how you think that can be an opportunity going forward. Can you give any kind of data points to update us on how that process is going? And specifically, I'd be interested in how your distribution channels have shifted over time, i.e., are you using some of the mobile resellers, like FreeNet, MediaMarkt, et cetera, a bit less as you try and up-sell and cross-sell people through the mobile apps?
Josh, this is Markus speaking. Coming to your first question. I think, just to be clear, already mentioned, we are not aiming price leadership in this segment. There's enough space for price leaders at existing price points with promotions here and there, as we said. So we do not see a structural deficit in this segment, not at all, in a deceleration environment due to also the economics that go along with the current structures.
With regards to the Capital Market Day question and the KPIs that we are providing you with. First of all, we have already started initiatives. I think that is the most important thing, and we have already seen in the market, the first outcome of that which is our O2 Connect, which is really innovative, which is a USP in the German market where you can connect more and more handsets in a very easy manner. And of course, that will also drive, going forward, the KPIs that we have discussed at the Capital Market Day. However, the monitoring of these KPIs will stringently start in 2019 because we also start officially the program in 2019 once we have finalized the synergy capture in 2018. However, we already work below the surface and some things are already popping up above the surface.
I would like to turn the conference back over to Ms. Veronika Bunk-Sanderson for closing remarks. Please go ahead.
Thank you, operator. So thank you, everyone, for dialing in today and attending our results conference call. Please don't hesitate to get in touch with us if you have any follow-up questions, and have a great day, and goodbye.