Telefonica Deutschland Holding AG
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Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining Telefónica Deutschland Holding AG Q3 Preliminary Results 2018 Conference Call. [Operator Instructions] I would now like to turn the conference over to Mrs. Veronika Bunk-Sanderson. Please go ahead.
Thank you, operator. Good morning, everybody, and welcome to our third quarter and first 9 months 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 standard. We have implemented IFRS 15 accounting 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 standard. As per 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 IR 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 for our 9-month 2018 conference call. I'm very excited to present to you today our strong set of results after another successful quarter. We are driving data usage with a revamped O2 portfolio and continue to see 50% data growth year-over-year per quarter. The average data usage amongst our LTE customers has now reached almost 4 gigabytes. Underlying mobile service revenue trends are stable with 0.5 year-on-year growth year-to-date, supported by our successful ARPU-up strategy, which has helped us counteract headwinds from lower visitor roaming, continued legacy base effects in Q3. Most importantly, OIBDA continues strong with 6% year-on-year growth year-to-date, reflecting solid operational momentum and successful synergy execution. So successful, in fact, that we have already been able to generate EUR 90 million of OIBDA-relevant synergies year-to-date. We have pushed ahead with the network consolidation in Q3 to the extent that we expect to bring forward EUR 20 million of synergies from 2019 to 2018, thus achieving EUR 100 million OIBDA-relevant synergies in total in 2018 versus our original full year target of EUR 80 million. In consequence, we have decided to narrow OIBDA guidance range from 2018 from broadly stable to slightly positive to slightly positive. Moreover, we deliver what we promise, and we'll propose a dividend of 70 -- EUR 0.27 per share for the full year 2018 to the AGM 2019, which is equivalent to 3% increase or EUR 0.01 per share. On the next page, you will see the financial trends quarter-over-quarter. Taking a closer look at the sequential P&L trends, you can see that we are in line to achieve our outlook 2018. While total revenue trends are slightly softer in Q3 on the back of the well-known phaseout of our fixed copper business, while mobile service revenue trends are solid at 0.6. Hence, the trends are solid with a phasing typical for the seasonality into Q4. OIBDA came in strong in Q3 at 5.6%, driven mainly by additional network synergies, enabling us to narrow the guiding range, as mentioned before. We see a seasonal hike in CapEx in the third quarter, the result of us pushing ahead with the network consolidation and LTE rollout. The full year CapEx outlook is unaffected, and we continue to expect a CapEx sales ratio of 12 to 13, as per our full year guidance given in February. You can also see here that regulatory effects are gradually easing at revenue level, with the remaining impacts stemming mainly from the gradual shift away from traditional roaming packages amongst our customer base. Roaming elasticity effects remain visible at OIBDA level, but that was in our expectations. All in all, we are excited about the progress we are making and are currently in the process of preparing for the Christmas season.As mentioned on our Capital Market Day, in the upcoming quarters, we will continue to focus on becoming Germany's mobile customer and digital champion. We continue to see good traction with our data monetization strategy with over 3/4 of new customers taking the O2 Free M tariff and above. In addition, 1/4 of new customer now opt for the Boost option, doubling the data volume for an additional EUR 5 per month. Our solid operational momentum is reflected in a string of awards we received in the last 3 months, laying proof to our sustained focus on customer experience. A number of well-known German tech magazines recognized our comeback, our position as price value leader in the market as well as our range of digital services, including our successful apps. Most importantly, the widely read Connect magazine lauded our O2 service hotline in all our roam positions as network operator. The service app, in particular, gave us a 10 out of 10 rating, and we ranked -- placed #1 for sales and functionality. Given the development of the O2 app, we'll be at the focus and the core of our customer-centric approach going forward in order to lead the market. Having a look on our network, let us put on the foundation and the value proposition. We promised to complete the network consolidation by year-end 2018, and we are fulfilling our promise. We acquired our fourth mobile license in 1998. And in the 20th year of our network, we will reward our customers with the most modern and the biggest network ever been provided to Germany. There was never any doubt that the network integration was a significant challenge when we merged with E-Plus at the end of 2014. But we now have successfully come through. Approximately 85% of the network has been consolidated, with approximately 12,000 sites already dismantled. We have completed or are nearing consolidation in a significant number of cities across Germany, including Munich, Stuttgart, Cologne, Dortmund, Bremen and so on. At the same time, we have added approximately 5,000 additional LTE sites or 15,000 additional elements year-to-date to improve LTE coverage and capacity, and we'll continue to do so at this rate or faster in the next 2 years. Our LTE users now benefit from an average speed of 30 megabits per second in the consolidated areas. We're also now at approximately 85% LTE coverage in Germany with a combined 3G/4G coverage of approximately 94%. These are important milestones, especially in the context of the current base on the infrastructure deployment in the German public sphere.In this phase, we are not only focusing on the integration efforts, but already ensuring that our network is ready for the next generation challenge. You may have followed what has been discussed in intensive debate in the German public in the last month. We have made our position clear. We are willing to do what it takes to ensure 5G readiness for our customers, but we must do so in an economically viable fashion. In order to achieve our fiber backhaul targets, over 90% in urban and over 25% in rural areas, by 2022, we are partnering with Deutsche Telekom, Vodafone, next-generation networks and other fiber carriers and players in the German market. We are also currently running Fixed Wireless Access trials, thus piloting an alternative to classical fixed line in the home. Preliminary results show that speeds of almost 3 gigabits per second can be achieved via 26 and 28 gigahertz bands. The investments needed for building Fixed Wireless Access are clearly only a fraction of those needed for traditional networks, which is why we are considering this as a viable add-on opportunity. Any rollout will, in the end, depend on the stability for the technology and the availability of spectrum. Of course, we are also getting involved in the political debate about 5G and population coverage in the light of the first 5G spectrum auction coming up in early 2019. 3 MNOs signed up a declaration of an intention to committing increased nationwide coverage in return for favorable auction conditions.Let's have a brief look at the current state of play on the spectrum conditions that have been published. So far, we see favorable -- more favorable conditions, but there's still a way to go. So the first draft that the regulator published in September goes in the right direction. And on the other side, we still see room to improvement, especially when it comes to payment obligation. And clearly, additional coverage obligations, from our perspective, are not economically viable for infrastructure building. We're also seeing contrasts to other countries in Europe. No reason why the German auction see -- that we would see an outcome, as we've seen in Italy, because mainly entry bits available spectrum; secondly, block sizes. And the cut of block sizes is completely different. And insofar, there is much more spectrum available, as in Italy. So overall, we now wait for the next steps. The next steps is to be -- expect that the regulator publishes the final cornerstone paper on November 26. We do not expect major changes in this paper because from our perspective, we are already at the edge of economical feasible rollout obligations. And we also do not expect additional hurdles, additional hurdles being defined as national roaming obligations, legally binding service provider obligations or any other obligations. But this is a key decision for Germany, and we now need to see what the final outcome will be in order to drive this forward.Finally, we are now in the sixth year of actually a successful IPO in Germany as a listed business, all with a solid commitment to offering attractive shareholder return within our economic means. Returning to our operational and financial results, we have a clear value proposition for our shareholders in the form of paying out a high percentage of free cash flow as dividend. Our free cash flow trajectory year-to-date has been strong with a 12.3% increase year-on-year. We thus feel comfortable to confirm a dividend proposal of EUR 0.27 per share for the fiscal year 2018 to the AGM in May 2019, thus, honoring our dividend growth guidance over the 3 years, 2016 to 2018. With that, I would like to hand over to our CFO, Markus Rolle, who will take you through the Q3 results section of today's presentation. Markus, please go ahead.
Thank you, Markus, and good morning, ladies and gentlemen. I'm very happy to present to you another solid set of results for Q3 2018. On the mobile side, we continued with a good operational momentum in a rational market environment, which resulted in 233K of mobile postpaid net adds, predominantly driven by the new O2 Free portfolio, which is where we sit, and supports our ARPU-up strategy and, again, a very solid partner performance. On the fixed side, the wholesale migration is now completed, and we still see a very solid demand for VDSL with 59K of net adds. The revenue trends remain intact, and our underlying revenue is flat minus 0.4% year-over-year, excluding regulatory effects of EUR 13 million. Even more importantly, our underlying OIBDA growth was strong at 5.6% year-over-year and supported by the successful synergy capture with end-year savings of EUR 25 million in Q3, mainly coming from the network and the FTE restructuring. As a result of pushing ahead with the network consolidation, we are able to bring forward EUR 20 million of synergies from 2019 to 2018. Thus, we are aiming for EUR 100 million OIBDA-relevant synergies in 2018 in total versus the EUR 80 million, which we have originally expected. In the light of the synergy capture, we are thus narrowing our 2018 OIBDA outlook from flat to slightly positive to slightly positive. We see further margin enhancement, about 26.8% in the quarter, which is an up of 1.5 percentage points year-over-year due to the stringent focus on profitable growth. We are very pleased with the strong free cash flow of EUR 301 million year-to-date, which is an up of 12.3% and supports our ambition to propose a dividend of EUR 0.27 per share. Let's have a look into the details of the top line performance on Page 11. Just as a quick reminder, we only see minor top line effects per quarter from the implementation of IFRS 15. Year-to-date September, it was just EUR 18 million. On the guidance-relevant like-for-like comparison IAS 18 underlying revenue year-over-year performance is in line with the full year guidance at minus 0.8%, with fixed line offsetting the progress in MSR and on the handset side. Our underlying mobile service revenue trends maintained their positive trends at 0.6% year-over-year and flat, as per IAS 18, with the tailwinds from the O2 Free portfolio, which were partly offset by lower visitor roaming effects and legacy base mix shift effects. The demand for handset remains strong with a plus of 2.8% year-over-year despite the stock clearance activities we had in Q3 2017, which were a significant contributor to the 2017 performance. As in prior quarters and in line with our expectations, fixed line revenues declined at minus 10.6% year-over-year. The good news is the wholesale migration is now finalized, and the negative effects year-over-year on the revenue side was phased out over time. Our retail development reflects promotional activities and a higher share of bundle benefits in our customer base. On Page 12, the data KPIs confirmed steady growth in usage that is fueled by customers adopting to the new O2 Free tariff with large data buckets. Average monthly usage of O2 LTE customers is up 15% Q-over-Q to 3.9 gigabytes. And customers in the new O2 free M tariff even used 60% more data, which is more than 6 gigabytes. The LTE base is increasing to 17.2 million excesses, which is up 9% year-over-year. As a result, the total traffic showed steady growth rate of around 50% year-over-year mainly due to music and video streaming. And for the first time, we have more than 165,000 terabytes in Q3 in our network. And just a small anecdote, in the 2 weeks of the Oktoberfest, our customers used 60 terabytes of data every single hour. That is the total volume that was used within the 2 weeks in Oktoberfest back in 2010. You see how impressive the growth rates are in terms of data usage. On Page 13, we see the success of our recent portfolio update in a rational environment and the sustained low churn trends, driven by our clear retention focus. We saw postpaid very solid with 233K of net adds, as we maintained our focus on profitable growth in all segments. And so, again, a solid contribution from partners. The demand for prepaid is starting to stabilize after the annualization of the regulatory changes, but we still see net disconnections of 145K. But on the other side, we also see the ARPU improving as a positive counter-effect. Churn shows the usual seasonal pattern, but major year-over-year improvement of annualized churn rate in O2 postpaid, which is now at 16.4% versus 18% in Q3 last year. And that confirms the demand for our new portfolio, the successful retention measures and also the progress on the network and on the service side. ARPU-accretive effects of O2 Free are visible in the blended postpaid ARPU, as the year-over-year decline is stabilizing with 4.6%, similar that of the prior quarter, despite the headwinds that we see from Roam Like Home and the mix shift in our customer base. Partner trading remains solid in a rational market environment, as you can see on Page 14. With 57% of gross adds from partners, the share is similar as in Q2 and confirms the traction of our new retail tariff, while maintaining the momentum in the partner business. As such, the partner revenues continue to grow both year-over-year and Q-over-Q. And the share of total postpaid revenues in Q3 is at approximately 25%, which is fully in line with our expectations. We continue to see future revenue growth opportunities in the partner business from data growth, capacity upgrades as well as speed and technology-based tiering. As said before, we continue to see a decline in the fixed revenues shown on Slide 15. The good news, however, is the wholesale customer migration is really now completed, and the negative impact on the year-over-year performance will phase out over the next few quarters. However, on the fixed retail trend, we are slightly weaker this quarter at minus 2.4% year-over-year, which is a reflection of a number of promotional activities and the higher share of bundle benefits in the base. The VDSL net adds remained very solid at 59K in Q3 and overcompensated the line losses in DSL. We currently have 1.4 million VDSL customers, which is already more than 2/3 of our fixed retail customer base. On Slide 16, let's recap the stages of the synergy delivery as the major driver of our OIBDA growth in 2018. Mainly rollover effects from the initiatives closed in 2017, plus incremental synergies from the network consolidation, drive these effects. As Markus has mentioned before, we are making steady progress with the network consolidation and are in the final stage of completion. This is also to partly bring forward synergies from the network consolidation from 2019 into 2018, delivering already more than 90% of the full operational cash flow target by year-end. Thus, we are updating the incremental savings targeted at OIBDA level by EUR 20 million to EUR 100 million in 2018, out of which we already delivered EUR 90 million by the end of September. CapEx synergies of approximately EUR 35 million until September are driven by the rollout of a single LTE network. We are aiming to deliver another EUR 15 million in Q4. The total synergy target of EUR 900 million operational cash flow synergies by 2019 remains unchanged. As a remainder, we see EUR 80 million to come in the next year, of which 50% are OIBDA-relevant and 50% are CapEx-relevant.Let's turn to Page 17. Our OIBDA performance reflects both the just-mentioned contribution of the synergies and our operational momentum with a focus on profitable growth. In reported terms, OIBDA grew 2.8% year-over-year until September, despite restructuring costs of EUR 49 million, which are mainly related to the network consolidation and regulatory effects of EUR 48 million, which are mainly coming from the Roam Like Home regulation. We are confirming the expected full year effect for regulatory effects of EUR 40 million to EUR 60 million on the back of the usage elasticity effect. Year-to-date, September OIBDA, excluding exceptional and regulatory effects, was with a strong growth of 4% year-over-year under IAS 18. IFRS 15 effects remained low year-to-date, plus EUR 27 million at OIBDA level, as a result of the commercial activities. Underlying OIBDA growth under IFRS 15 was even stronger at plus 6% year-over-year at EUR 1,421,000,000, with a further 1.5 percentage points margin expansion to 26.3%. Let's have a look into the cost line. Supplies were minus 0%, lower year-over-year, with higher hardware cost of sales year-over-year, in line with the handset demand, while connectivity-related costs benefited from lower termination rates. The personnel expenses, adjusted for restructuring costs, were flat year-over-year as synergies outweighed the inflation-related salary increases. Other OpEx further benefit from integration synergies and were minus 1.1% lower year-over-year, including restructuring effects. Thus, on the back of the successful and slightly early synergy capture, we are narrowing the range for the full year 2018 OIBDA outlook from flat to slightly positive to slightly positive.Moving to Slide 18. Our balance sheet remains solid with good free cash flow dynamics. We are up 12.3% year-over-year to EUR 301 million, with a typical seasonal saving of working capital reaching its low point in Q3. CapEx payables by plus EUR 22 million is driven by the final stage of the network consolidation while we are pushing ahead with the LTE rollout. Seasonal prepayments for rents and lease lines and mobile sites further unwound in Q3, still weighing negatively with EUR 32 million. Restructuring FX impacted the working capital with EUR 27 million. We have now reached accumulated cash-out of EUR 560 million versus the total of EUR 700 million integration-related restructuring costs since the merger. Other working capital movements include silent factoring transactions for handset receivables as well as further working capital movements, such as reduction in trade and other payables. Supported by the free cash flow in Q3, our net debt reduced to EUR 1.6 billion, and we expect further improvements by year-end on the back of our typical free cash flow phasing. The leverage is at 0.6x EBITDA and remains in line with the target. If we would use a similar approach, as such as we're doing with a multiplayer of 6.9, our operational lease adjusted leverage would be around 2.4.Let me sum up our Q3 results 2018. After the recent portfolio updates, we have maintained solid commercial momentum with a clear focus on profitable growth. We sustained the revenue trend, driven by clear retention focus and low churn levels and our successful ARPU-up strategy despite the headwinds we see from lower visitor roaming and ongoing legacy base rotation. In a rational environment, the contribution for partners remains solid. Our commercial momentum, with a stringent focus on value, plus successful synergy capture delivery, drove significantly our OIBDA growth. Thus, we are narrowing our 2018 full year OIBDA outlook to slightly positive. Free cash flow dynamics benefited from solid operational momentum and CapEx efficiency despite the CapEx peak in Q3, which is just an end-year phasing. We remain confident in further free cash flow growth. Thus, we are aiming to propose a dividend of EUR 0.20 -- EUR 0.27 per share for the full year 2018 to the next AGM. With this, I would like to hand back to the operator and open the line for the Q&A. Thank you for listening.
[Operator Instructions] The first question is from the line of Keval Khiroya of Deutsche Bank.
Two questions, please. First, you've highlighted that your network integration has continued, and you are mostly complete. When it comes to next -- national connectors, are you confident of the strong improvement in your performance versus the other players? And then secondly, when it comes to 2019, you've obviously brought forward some of the synergies into 2018. Can you remind us? How should we think about the transformation gains and implementation costs for the Digital4Growth agenda in 2019?
Thank you, Keval, for your question. I'll start with the network one. We've clearly seen also in the end-year tests, and that we have made significant improvements on our network performance, especially on voice as well as on data. So we cannot predict what will be the outcome, but we clearly expect improvements on all network tests that will be carried out in the coming weeks. And insofar, we see -- we'll see progress going forward.
Keval, let me take the second question with regard to 2019 question. Of course, we will guide to 2019 in February, but I can already qualitatively guide you through the drivers. Of course, we will continue with our operational activities supporting the operational trends, and to also hear the effects of our ARPU-up strategy. We will see some additional regulatory effects, where we have predominantly an MTR cut from EUR 0.0107 to $0.096 with a low flow through to EBITDA. And as Markus has already mentioned before, we will gradually shift from our integrational activities through the transformational activities. On the integration side, we expect further synergies of EUR 40 million of OIBDA savings and EUR 40 million of CapEx synergies, and we will guide you more concretely on the transformational gains and costs when we guide the full year 2018.
The next question is from the line of Mathieu Robilliard of Barclays.
It's Mathieu Robilliard. I have 2 questions, please. First, with regard to the trajectory on MSR. So basically, network consolidation is progressing well, and you've highlighted some tests that recognize the quality improvement. I was wondering where we should see the benefit of that. And kind of when do you expect to see churn starting to come down as customers around your network are happy and don't want to move? Are you expecting to see growth of market share to go up? Is it MSR trends that should improve in the next coming quarters? Basically getting a sense of how to track the impact of the network progress on your financials. And then I had a second question with regards to retail versus wholesale trends. And obviously, we don't have all the elements. But if I look at some of your slide, where you indicate that the market share or rather the contribution of partners to the postpaid revenues has increased around 25%. And continuing the fact that MSR are flat, it does suggest that the retail postpaid trend in terms of revenues have deteriorated a little bit in Q3. I wanted to check if that was the correct analysis. And what was behind that?
Mathieu, it's Markus speaking. Thank you for your question. Mobile service revenue, I think stabilization was a priority. And I think we want to get back to full growth, and our target remains unchanged to grow in line with the market. We have seen a forensic, and we will continue in the coming quarters. And especially what you mentioned, there are underlying trends on the back of better networks, that we will see improved churn, clearly has -- let's not forget it's a huge customer base. So step-by-step, with every contract extension we have in the base, with every new customer, we adverse a new -- under the new portfolio with the Boost, as I mentioned, with the EUR 5 more per month and step-by-step recapture. But clearly, the target is to have revenue growth in line with the market. And quarter-by-quarter, we will get there.
Yes. And with regard to the wholesale versus retail mix effect and the 25% of the postpaid revenues we are mentioning, I can confirm with you that we are fully in line with our expectations. We have seen 0.6% of growth under IFRS metrics. And of course, for the overall development, you do not only have to take into account the postpaid development, but also the prepaid trend, the roaming trends, et cetera. And as Markus has said, step-by-step, we are bringing all of our segments into the direction of market growth. That is our clear target that we have set ourselves at the Capital Market Day and that we can confirm also today.
The next question is from the line of Sam McHugh of Exane.
Two questions, please, if I can. Second one, just a follow-up -- or sorry, first one as a follow-up to that last question. So you talked a lot about incoming customers on the M tariff and the Boost and your ARPU-up strategy. Then if we look at underlying MSR ex regulation and ex wholesale, it does look like it's declining. When should we really expect this to start growing? And what will get it growing? Is it just more of the same? Or is there anything else you need to do to kind of give the retail business a bit of a boost? Then second is just a clarification. On one of the slides, I think you talked about bundled discounts as a reason for weakness in fixed revenues. Can you just tell me how you account for discounts on bundle offers? Do they come out of the fixed revenues or the mobile revenues?
Thanks for your questions. On the first one, as Markus said, we want to bring all segments into growth, and I think we see now a recovery in prepaid. Let's not forget, I think we have negative prepaid net adds for the last 4 quarters due to the ID check and integration process that we had here. Secondly, I think step-by-step, as I said, all the initiatives that we currently carry out, more for more on our core brands. The competitor's portfolio we have under Blau, prepaid recovery, wholesale business developing as expected, as Markus said. I think, step-by-step, we get there. So we see in this huge customer base, let's not forget 45 million customers and the number of activities you can carry out for a quarter. If you do math on that one, you can clearly see that all trends are going in the right direction. And the underlying trends, as we said, are intact.
And let me give you some color on the fixed discount we are giving. Under IFRS 15, we are splitting the discount that we are giving into the different components that we are offering to the customers. So as such, we are allocating the bundle benefits to both, to the fixed line and to the mobile side.
The next question is from the line of Ulrich Rathe of Jefferies.
My first question would be the ex M to M postpaid intake sort of now in the second and third quarters. Since you started to sort of take a bit more share in the offer segment as to between 200 and 300, is this -- is it fair to say this is sort of the new normal for you? Or is this period really one where you're trying to send a signal to the market and you're expecting that momentum sort of to change again? Just wondering whether 200, 300 is the right number. The second one is, amongst those partner brands where you contribute to the end customer -- end customer intakes through commissions and things like that, I'm talking about models like service providers or these branches with supermarket. Are these sorts of activities being sort of affected by a budget shift towards Blau? Because, presumably, your marketing activities have a certain budget to it. And it seems that you're focusing them on Blau, and you have fantastic success there. I'm just wondering whether that's at the expense of after whatever you're spending on adding in the partner brands where you're actually involved in end customer intake.
Ulrich, so let me take your first question with regard to the intake we are doing on the postpaid side. So for us, and we have stated that also very clearly, it's not so much a number, 200 or 300K, which you mentioned, which is the new normal or which is relevant for us. For us, it is to gain a fair share in the respective value pools that we are seeing. And if we see more activities from churn, from penetration increases, et cetera, in certain segments, we will brief in trying to capture all our fair share. And if we see lower activities that we will also not overinvest into the market to increase the buffer fair share. So in total, we are targeting for our fair share, and we are depending here on the market availability.
On the second one, I think the strength of Telefónica Deutschland is that we have an all-channel, all-segment play. Telefónica Deutschland has access to all sales channels in the German markets, online and offline. So we do not see cannibalization that you were asking for if you would push Blau in certain channels more, if we would see then impacts in, for example, discount channels that you specifically mentioned. So I think steering these channels with the right offers and the right propositions, clearly, this is the art that we have to play for portfolio management in order to attract all channels and all segments.
The next question is from the line of Jakob Bluestone of CS.
I've got 2 questions, please. Firstly on the spectrum auction, Markus, I think you made a comment that you saw the coverage obligations as being at the edge of what was economically feasible. And I was just wondering if you could maybe elaborate a little bit more on that. Do you think you can meet those coverage obligations within your current CapEx envelope or do you think, over time, you need to spend a bit more? And then secondly, you also mentioned Fixed Wireless Access, where you're doing some trials, I think, in Hamburg. I was just wondering if you can maybe give a little bit more color on those trials. And sort of what do you think is the addressable markets? And how much would you essentially have to invest to, to be able to deliver that on a large-scale basis? So just any sort of thoughts or targets you might be able to provide on Fixed Wireless Access?
Thank you for your questions I think on coverage obligations, we currently have a 2G coverage that covers more than 99%. So we have the physical assets, so the sites we have in place, where we would piggyback on if we would go for 4G or even 5G. But so far, we have no 5G obligations, only a 4G obligation, and under the rules and conditions in the draft that we have. So overall, yes, we would be able to fulfill these conditions. On the trials, from our perspective, it is about the access you have to fiber industries. So the fiber that's already there. Our case clearly relies on that we are not digging for fiber. But although Germany has no FTTH, we have a lot of FTT or fiber industries from energy companies, city carriers and all others. That was also the reason why we could sign very favorable mobile backhaul use for Telefónica Deutschland in the last quarter. So to piggyback on these, and then leverage this technology in dense urban areas, I think, this is what we are currently testing. And clearly, this technology has great opportunities, but also shortcomings. So we need to test it under all circumstances that it is a robust technology. We are in the middle of the process. And clearly, once we have tested it and we would have a case, we would come back and happy to explain this in more detail. On midterm CapEx guidance, I'll hand over to Markus.
Jakob, yes, I can only confirm what Markus has said. So we have an existing grid, which we can leverage. And from that perspective, the expected investments are in line with the guidance that we have already given back at our Capital Markets Day in February, where we guided for CapEx of around EUR 1 billion. And we can leverage existing network grids. We see no further increases in terms of envelope.
The next question is from the line of Thibault De Coincy of Raymond James.
Two questions for me. It seems that one of the reasons that you're underperforming the German mobile market is that your competitors, and especially Deutsche Telekom, enjoyed good growth in B2B, where you have a smaller market share. So it would be nice if you could provide some color or some KPIs on how you are doing in B2B, if the revenues are growing, to what extent and so on. And coming back to the upcoming spectrum auction, if you could elaborate a bit more on the payment terms of deduction, and if you feel that there is a chance that the final version of the regulator could be more in line with your demands on this.
Yes, absolutely right. On B2B, Telefónica Deutschland is currently underrepresented. This is why with the finalization of the network, we see a clear sweet spot for us, especially in the SME segment. As announced on the Capital Markets Day, by 2022, we want to increase our gross add market share up to 33%. And this is a clear area that has -- especially for companies up to 200 -- with 250 employees is an area where we currently have more to our poly situation rather than a level playing field. And this is an area where we would like to enter, and this is clearly also part of our revenue guidance to grow in line with the market going forward. On the payment terms on 5G, on the option, we clearly expect, and this is one of our key parameters, that we see a pay-an-available concept that was also to be carried out for the 700 megahertz being auctioned in 2015. But this concept has already been used. And we want to piggyback also on that one in order to get the same terms and condition on that one. You could also be a little bit more aggressive. This is what we also push for, that you would then also go on a yearly payment that we've also seen in other European countries. So to really relax the cash flow situation even more. But for us, clearly, a pay-when-available concept for major parts of the spectrum is clearly the key demand that we see. And let's wait once we see the final auction rule, but I think everybody in the market is in interest of these conditions because it would clearly help in order to change or improve the infrastructure situation in Germany for all operators. So we see strong support, but we now need to wait for the final rules and regulations.
Just to comment on -- in B2B, are you -- can you say if you're growing in line with the market currently?
It's a smaller part of our business, as you can imagine. So insofar, on the back of network. Also, we are here stabilizing, and we have a clear intention to grow this business. But clearly, we're underrepresented here. So it's in our overall P&L, and so far not a major part. So, so far, we want to grow this business.
The next question is from the line of Georgios Ierodiaconou of Citi.
I've got 2 questions, please. The first one is just a follow-up from earlier questions around Fixed Wireless Access. I appreciate it's in early stages. At some point, however, you will have to make a decision whether to scale it up or not. And I just want to understand, in the event that you will go for a relatively broad coverage of certain cities with Fixed Wireless, how do you turn to treat that coverage? Is that going to be within the envelope you are looking at when it's there in your dividend? Or are you going to treat it as a one-off, separate, early-stage business that can fund itself late? And then the second question I have is an IT services company a few weeks ago had a small profit landing. And they highlighted that a German operator was behind -- part of that. So I wanted to ask if you are that German operator. And if that's the case, do you mind just explaining to us what savings you've seen so far, whether there are any savings coming in the next few quarters from this change?
So let's start with the first one. For example, with the mobile backhaul lease that we signed with Deutsche Telekom on the 5,000 sites, we can for free install the equipment. So that gives you the magnitude. I think we have the most sites we talked about an opportunistically rollout in urban and dense areas. So this is -- it would require investments if you have a strong business case, but it's not -- we're not talking about billions. So just to be very, very clear on that one. But first, what are the steps? We are going to test the technology, and then we can also -- while we build or use this technology on existing assets, we can deploy it whenever it's feasible in order to also generate very short paybacks. So insofar, step-by-step, it's not a huge investment that we foresee for this technology. I think you also have seen a hint that other operators are using this technology and has not come with massive CapEx deployment. On your second question, I'm very honest, I'm not aware. From our perspective, a clear no.
And Georgios, maybe I can add. Of course, we are always looking into the channel mix that we are generating. We are trying to optimize that for us in order to support our value of the growth, normal activities. And we have not done anything beyond the normal business as usual in the last couple of quarters. So also here from my side, a clear no to any speculations.
The next question is from the line of Josh Hallett of Redburn.
My first question's just on the roaming drags. I'm a little bit surprised that they haven't kind of declined in the second half this year. And I'm wondering, do you still think the roaming drags on revenues and EBITDA will be within the full year guidance? And then my second question was on wholesale revenues. And so over the last 3 quarters, you've gone from minus 3% to plus 5% to plus 9%. And if you can talk a bit about what's the driver behind that. Is it data growth? Is it something else that's technical and what we should expect going forward? And finally, I was just wondering if you could tell us why fixed retail revenues got worse in Q3 '18 after having several quarters of improvement.
Josh, let me take your questions. So first of all, the regulatory drags that we saw are in line with our expectations. And we also expect to come out for the full year in line with the guidance that we have given to you. Just as a reminder, we guided on the revenue side to EUR 30 million to EUR 50 million. Year-to-date, we are sitting at EUR 39 million. So here we are in line with the guidance. And in terms of EBITDA, we expected EUR 40 million to EUR 60 million. Today, year-to-date, we are at EUR 48 million. Also here, we are in line with the guidance that we have given. With regards to the wholesale growth, and your question about what is driving that. Is that voice? Is that data? I think it's the structure of the contracts that we are having, and especially there is one contract, the regulated contract that you also know, which is currently on the glide path to the 20% commitment. And as a result, we also see here on all the different revenue lines growing revenues. With regard to the fixed retail activities, I think here we had some promotional activities out there, which growth of a good momentum in terms of VDSL net adds. And also, we have a second effect. More customers take the advantage of the bundle benefits. So the portion of customers who buy, converge offers is increasing. And that is, of course, also putting some pressure here on the overall fixed retail business line that we have seen in Q3. Overall, our trends are intact. We are growing on the VDSL side. We are migrating our customers into the future proof contract step by step. And we are also, for the first time since some quarters, growing the retail customer base again. So we are very pleased with that development. And the promotional activities, et cetera, just go along with our expectations.
The next question is from the line of Frederic Boulan of BAML.
Two questions, please. So first of all, to come back on the spectrum auction, you talked about your demands. We've also seen quality on some other stakeholders, in particular government. Do you think their demands for higher coverage, for instance, and rural obligations could tilt the balance even further away from what you're trying to achieve? And to what degree can you combine forces with other MNOs to deliver territory coverage? And then secondly, sorry to come back to that question from before. But again, I was intrigued on what's happening on MSR despite good acceleration in the parts of the business. And can you just quantify a bit more precisely what are the negatives offsetting the O2 Free M traction and Boost? So what's happening to offset that? Can you shed a bit more color on this?
Thanks, Fred. On your first question, priority one is to get better coverage in Germany. And I think in the next elections, voters will not vote the party who had another expensive auction. I think it's about coverage, and the pressure on politicians is high. This is why we see the first time that the coverage discussion is overlapping all other discussions. This is why we also hear it on later payments. This is also why the auction has been delayed in order to get the right coverage obligations. So I think this is priority number one. But clearly, the government or the regulator also stated very clearly what is technically possible. And with 20 megahertz in coverage spectrum, you can only provide 100 mbit. It's not possible to do more, and to also extrapolate that the costs to go beyond existing rollout obligations. And so insofar, I think all the facts are on the table. So from my perspective, we expect a rational decision because if it's not rational, we will have years of legal battle against this decision. Because we cannot accept a decision that's economically not viable for us. And that will be the worst, that you end up now with a decision, then you have legal battle for years, and you will not solve the coverage situation in Germany. On second one, I think Telefónica Deutschland always has as a late entrant a high share of site-sharing. We will accelerate this. And we are happy to see that other MNOs are opening their whole portfolio of sites now in order to manage the challenge in rural areas. So this is absolutely the right way to continue to increase the level of site-sharing, mobile backhaul sharing, what we did with Deutsche Telekom. So all these kinds of things help us in order to deal with the challenge.
Fred, let me take your MSR question. So first of all, we are really pleased with the good operational performance that we see. Our more-for-more strategy works. We continue to see possibilities to upsell. And for example, we have already more than 25% taking the Boost option, and the share of the M tariff is very high. However, we all know that we have a big customer base, and we have a clear focus on retention. And that is also visible in the good results we achieved on the insurance side. And here we can say, for one part of the customer base that upsell mechanisms work also. But for other parts, we need to also offer attractive individual pricing, customize offers to the customers in order to maintain them. The second effect is some stalling in visitor roaming revenues. We saw big support from visitor roaming in the past couple of quarters, but we currently see that the operators moved also to other operators the visitor roaming revenues due to the fulfillment of targets. And the clear statement is our target remains unchanged. We see the operational churns. We continue them. And we go back to market growth, which is the target that we have set ourselves.
The next question is from the line of Joshua Mills of Goldman Sachs.
Just one for me. I'd be interested to hear your perspective on fiber-to-the-home co-investment schemes. I think since the last results, we've seen some headlines in the press and some press releases from Deutsche Telekom and United Internet talking about the possibility of co-investing in fiber. I wondered whether you would consider joining forces with DT in some areas to help with that and how you think that might be able to improve your fixed network economics in the longer term. And if so, do you have any idea of what kind of scale of fixed line investment you might consider over the next 5, 10 years, say?.
Thanks for your question, Josh. From our perspective, so far, we analyze these models very carefully. None of these models so far has really shown a reasonable return from our perspective because there's a challenge in Germany. It's not easy to dig and also to get speed and scale on the rollout. So far, we need to continue the debt Fixed Wireless Access, especially in urban areas, could be one opportunity to overcome these shortcomings. On our side, as you know, we have a long-term agreement with Deutsche Telekom on the back of the existing infrastructure that has been provided. And from there, we are now analyzing all options that we have, including especially the Fixed Wireless Access route that we already discussed on the call.
In the interest of time, we only take one final question. The IR team will follow up with all remaining questions. Christian Fangmann of HSBC, please go ahead with the final question.
The question, anxious to see -- I had -- most of my questions have been answered, but I have one question regarding free cash flow. I mean, you're guiding for a dividend of EUR 0.27. So that implies EUR 800 million for the year. Then year-to-date, you did something like EUR 300 million. So how confident are you to kind of back the dividend with your operating free cash flow? So is that fully covered? It would be good to see your [ year ] on that one.
Christian, yes, that's -- going to free cash flow. So first of all, we have seen already a very good trajectory until year-to-date in terms of free cash flow delivery. And that also let us remain confident that we have full coverage, excluding restructuring effects, as we always have that in the past. So from that perspective, we all know that we have a very back-end loaded free cash flow profile, and that we are confident on the delivery in Q4.
At this time, no further questions will be taken. Mrs. Veronika Bunk-Sanderson, I'd turn the call back over to you for closing remarks.
Thank you, operator, and thank you, everyone, for attending our results conference call today. As the operator already said, please don't hesitate to get in touch with us if you have any follow-up questions. I wish you a nice day. Take care.