Telefonica Deutschland Holding AG
XETRA:O2D
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Ladies and gentleman, thank you for standing by. Amia, your Chorus Call operator. Welcome and thank you for joining Telefónica Deutschland Holding AG Q4 preliminary results 2017. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [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 fourth quarter 2017 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. 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 also find on our website in the IR section.Now here with me today are our Chief Executive Officer, Markus Haas; and our Chief Financial Officer, Markus Rolle. They will take you through the fourth quarter and full year 2017 results today and I would now like to turn over to Markus Haas. Markus, go ahead.[]C^Markus Haas^ Thank you, Veronica. Good morning, ladies and gentlemen. I have the pleasure this morning to present to you a very good set of results for Telefónica Deutschland in my first year of CEO of the business. In a dynamic environment, our 12 months results for 2017 are fully in line with expectations, both operationally and financially. And let me point out especially that underlying mobile service revenue finally returned to growth in the final quarter of the year.Let's start with the operations. In 2017 we set a new standard for the mobile freedom of our customers as the first operator to introduce large data packets in the German market. Large data packets are clearly fueling data growth. Customer in our new O2 Free portfolio are already using more than 7 gigabyte of data compared to just under 3 gigabyte for all O2 customers.Nevertheless, the latter increased an impressive almost 70% year-on-year. Our LTE customer base also continued to grow to almost 16 million in Q4 2017. The strong momentum from own and partner brands paid off in the final quarter of 2017. After a period of significant headwinds on mobile service revenue, underlying mobile service revenue trends broke the 0 line in Q4 posting 0.8% positive year-on-year growth. Full-year underlying mobile service revenue came in flat as expected.The negative impact from non-recurring regulatory effects was slightly less than expected at close to EUR 150 million with visitor roaming elasticity increasingly contributing to revenue growth. We were also in line with our guidance with regards to OIBDA in 2017 posting 2.6% of growth year-on-year. Our profitability increase reflects the successful capture of additional OIBDA-relevant integration synergies of approximately EUR 160 million for 2017. Related to the completion of the leaver program and further network consolidation. These will partly offset regulatory changes and market invest.We continued to use good operating cash flow momentum supported by a highly efficient use of CapEx. In 2017, we successfully laid the foundation for the future development of our company that will increasingly focus on the digital transformation of our business and capturing revenue opportunities beyond connectivity. In 2018, regulatory headwinds will continue to impact especially in the first half of the year. We are, therefore, excluding from our 2018 outlook at revenue [indiscernible].We are also moving from guiding mobile service revenue to guiding total revenue and expectation of the increasing relevance of device-based propositions, consumer IoT and cross- and up-selling mechanisms to our P&L. As such, we expect revenue declining regulatory effects to remain broadly stable year-on-year as our attractive market propositions will help us counteract remaining headwinds from mix shift, legacy base, and OTT effects.OIBDA adjusted for exceptional effects and excluding regulatory effects is expected to be flat to slightly positive in 2018 with remaining integration synergies balancing commercial and transformation investment necessary to partake in market growth opportunities in Germany. We will continue to use CapEx efficiently with a focus on the rollout and densification of the LTE network in 2018. In the light of our shift to revenue, we will also from now on guide CapEx to sales. Our CapEx-to-sales ratio is expected to come in at approximately 12% to 13% compared to 13.7% in 2017. Markus, our CFO, will take you through this outlook in more detail later on the call.If you move on, on Slide #4, let me reiterate the encouraging trends we have seen from mobile service revenue and OIBDA in 2017. On the back of strong commercial momentum driven by owned and partner brands, underlying mobile service revenue returned to growth in Q4, again posting 0.8 percentage year-on-year growth. We've also now seen 13 consecutive quarters of year-on-year OIBDA growth as a result of solid synergy delivery and execution. On accumulated basis, by the end of 2017, we have now already delivered 75%, or EUR 670 million of our total operating cash flow target of EUR 900 million. I'm pleased to say that we reported 2017 fully in line with our outlook on all metrics and would like to reiterate our intention to propose a dividend of EUR 0.26 per share to our AGM in May this year.Let me recap our integration achievements on the next slide as we are nearing the end of our merger journey. We have now finalized most of our integration projects, such as the leaver program with a total restructuring target of 1,600 FTE, the optimization of our physical shop footprint to under 1,200 shops, and optimization of our facility footprint. This was after already completing our brand consolidation and customer migration and the relaunch of the O2 brand. We successfully decommissioned the E-Plus IT stack and completed the integration-related internalization of the customer service by 2017 also.All these initiatives helped us to deliver the promised incremental savings on OIBDA and CapEx in a total amount of EUR 160 million in 2017. The total upgraded target of EUR 900 million in operating cash flow savings in 2019 remains unchanged. We are making good progress to finalize the last remaining core project in 2018, our network consolidation, as expected, [indiscernible] end of the year.Let me give you an update on Page #6 on our network development. While we are building Germany's largest and most modern network, by year-end 2017, we have already decommissioned around 8,000 sites and are now more than 50% through the consolidation process. LTE coverage has now increased to more than 80% and we continue to focus on roll-out and densification. In the fourth quarter independent tests with a focus on customer perception such as the Connect-"Netzwetter" and Computerbild again acknowledged the improved performance of the Telefónica Deutschland network. According to these tests, customers felt that the network had good bandwidth and excellent signal strength.Let me also reiterate 50% of all private consumers in Germany use the Telefónica Germany network on a daily basis. We are also the first network operator in Germany providing voice calls via LTE and WiFi for all customers of our own and partner brands at no additional cost. The services will be gradually implemented by the end of March of this year. We also enabled HD calls between 3G and fixed network for calls to competitor networks and vice versa.Finally, paving the way to 5G, we are working on a joint 5G Innovation Cluster with Nokia. Together we will drive the further development of 4G and 4.5G network solutions and technologies in our lab in Munich with focus on customer-relevant enhancement. This will be followed by a common pilot network, the so-called Early 5G Innovation Cluster currently planned for the capital city in Germany, Berlin.And finally, our customers in the German mobile environment will benefit from our planned cooperation with Vodafone. We announced this morning to accelerate the connection of mobile sites with fiber. Together we will set up a pilot to connect part of our respective mobile sites to each other's high-speed backhaul. As a result, even more customers will directly benefit from 4G high-speed data coverage. In a first step from July onwards, we will be starting connecting around 100 shared or colocated locations to our respective networks. Herewith, we are improving the network quality for our customers while taking a first joint step towards 5G and the option to scale this partnership even up.Let me now turn on Page 7 to our strategic vision for Telefónica Deutschland going forward. I would like to give you a teaser for our Capital Markets Day the upcoming Friday. Our vision is to become the mobile customer and digital champion in Germany by leveraging the growth opportunities from having the biggest own mobile customer base and delivering efficiencies by entering the next level of digitalization.In the last year since the company was formed, the focus was on building scale. It's now time to leverage the scale that we have achieved with the growth opportunities we see in the German market. In the past years we have integrated our legacy IT systems and built a lean organization, which enables us to execute in a fast and efficient manner. Having focused on integration activities in the last year, we are now rethinking customer centricity. We have now 43 million mobile subscribers and own more than 80% of these customers, meaning they have a Telefónica Deutschland contractual relationship. We consider our own customer base as the biggest effort for cross and upsell opportunities going forward.On our first Capital Market Day at Telefónica Deutschland on Friday, we will give you more visibility on how we intend to grow in this market and why we believe we are in an optimal and best position to do so in the coming years. For our customers, we want to become simpler, faster, and better. This may sound generic, but in the end it is not complicated. What we mean is that we aim to make customer interactions which are simpler and more intuitive across all channels. We want customers to enjoy real-time capabilities and logical end-to-end processes.Finally, our customers are entitled to an outstanding customer experience. We are building on our integration success to drive a digital transformation organized from a customer perspective. We also believe in the opportunities which will arise from the growth in advanced data analytics, big data, and the Internet of Things applications and want to capture market share in these new growth areas going forward.We are excited to share with you the full details of our vision 2022 and the transformation agenda during our Capital Market Day in London on Friday. If you have not registered yet, please do so quickly. We are looking forward to welcome you there.Ladies and gentleman, with this I would like to hand over to our CFO, Markus Rolle, who will lead you through the fourth quarter 2017 results in more details. Thank you very much. Over to you, Markus.
Thank you, Markus, and warm welcome also from me. It's my pleasure to present to you a strong set of Q4 results for 2017 that came in line with our outlook presented to the capital market.We have maintained solid operational momentum in a dynamic market, and particularly with our O2 Free new propositions and strong contributions from the partner business, while we have seen a more benign pricing environment at the lower end of the market with focus on 4G offers.The synergy capture remains on track. We have successfully delivered cumulative savings of EUR 670 million. As Markus said, the remaining activities of our network consolidations are ongoing in line with plan, while all other projects are by and large finalized.Adjusted for the regulatory drag, MSR trend further sequentially improved, and I'm very pleased to tell you that the underlying MSR finally returned to growth in Q4, up 0.8% year-over-year from minus 0.1% in Q3. Consequently, full-year underlying MSR was stable at minus 0.1% year-over-year. We are benefiting from good customer demand for O2 Free. Performance is further supported by the elasticity effect from visitor roaming, while some headwinds from mix shift and legacy base remains. In reported terms, MSR declined minus 1.2% year-over-year on the back of the continued regulatory headwinds, which totaled to EUR 28 million in Q4 and EUR 146 million in 2017.All-in-all, at the lower end of the expected range, as we give existing customers the choice to opt into the EU regulated tariff while all new tariffs of course include EU roaming for free. Q4 was another quarter with solid trading momentum in mobile. We registered 186,000 postpay net-adds on the back of the increasing demand for larger data bundles and supported by the strong contribution from the partner business that is shifting to 4G tariffs with big data buckets as well.The prepay business was negative at minus 1.9 million disconnections. This is mainly the result of a technical base adjustment of roughly 1.2 million SIM cards driven by the final harmonization of IT processes post our successful customer upgradation in 2016. This cleanup, however, is without impact on MSR because all of the cards being deactivated were not active anymore. In addition and in line with the German market trends, we continue to see weaker demand for prepaid due to the introduction of Roam Like Home that affects demand from European visitors and also due to the legitimation check introduced mid last year that requires a more complex registration process.In our fixed business, the demand for high-speed VDSL remained very strong with 89,000 net adds in Q4, while the planned phase out of wholesale DSL business continues in line with our expectations. We have seen a further quarter with solid OIBDA growth of plus 1.4% year-over-year in Q4 as we successfully deliver our integration synergies. In Q4, we achieved roughly EUR 45 million of incremental synergies at OIBDA level, both rollover effect and additional savings stemming mainly from FTE restructuring and network. These savings are partly offset by regulatory effect of EUR 10 million in Q4 and EUR 51 million in 2017.Also, we continue to invest in the market to benefit from growth opportunities presented by growing data usage. As a result, OIBDA margin continued to post year-over-year growth. We saw a margin enhancement of 0.8 percentage points to 26.2% in the fourth quarter. And last but not least, we posted another quarter with solid operating free cash flow. As Markus said earlier, we took a conscious approach to efficient CapEx spent and also delivered incremental CapEx synergies of roughly EUR 30 million in Q4 and EUR 18 million for the full year. This is basically coming from the rollout of a single LTE network.Operational cash flow was up 125% year-over-year. Leverage remains low at 0.6 times the EBITDA at the end of December and is again well in line with a target of at or below 1 and gives further support to our dividend commitment.Let's take a more detailed look to our trading momentum on Page 10. As I said before, we continue to see solid performance, both in our own retail business and in the partner business. The latter contributed 58% of postpay gross adds in Q4 despite a more benign pricing environment and sees clear benefits from our partners focusing on high-speed 4G offers after the [indiscernible] all consolidation in the German mobile market. Churn rates remained low and in line with the expectations as we are going through the hot phase of the network consolidation process. This is a clear proof point of our execution ability and the effectiveness of our quality-enhancing mechanisms.The planned shutdown of legacy ULL infrastructure continues to drive the wholesale customer migration. After another 110,000 of net disconnections, the remaining wholesale customer base is down to less than 190,000, and we expect to mostly complete the migration over the course of this year. High-speed VDSL continues to show strong traction with 89,000 of net adds Q4 bringing the VDSL base to 1.2 million accesses at the year-end, and leaving the overall retail DSL access base broadly stable year-over-year at 2.1 million accesses.On the next Slide 11, you can see how the larger data buckets are fueling data growth amongst our customers. Data KPIs remained strong. We continue to see significant growth year-over-year and Q-over-Q as customers change their usage behavior on the back of the successful introduction of larger data buckets. Music and video streaming are unchanged, the key drivers of data growth.Total traffic was up 50% year-over-year at similar growth rate as prior quarter, which was 49%, with more than 120 terabyte of data terminated in our network. Also, our LTE customer base continued to grow in an increasingly saturated market. It was up 31% year-over-year to almost 16 million accesses. The further uptick in data usage of our O2 postpaid LTE customers was clearly driven by the new O2 Free portfolio as customers with big data tariffs are now already using more than 6, 7 gigabyte per month. This compares with close to 3 gigabyte for all O2 postpaid LTE customers, which is still an impressive 68% year-over-year growth rate.On Slide 12, let me show you how our good operating momentum turned into solid top line results. As I said before, after several quarters with significant headwinds to MSR, we have finally broken the 0 line for underlying MSR and returned to growth posting plus 0.8% year-over-year in Q4 with attributed effects from O2 Free and supported by incoming roaming from European visitors.The negative regulatory effects came to EUR 18 million in Q4 only as the MTR cut already annualized and there was just a minor step-down on the glide path from EUR 0.011 to EUR 0.017 in December. In reported terms, MSR trends also further improved to minus 1.2% year-over-year in Q4. For the 12-month period, they include a downside of EUR 146 million or 3% of MSR year-over-year from regulation. This is a lower end of the original expectation as the adoption into EU regulated tariff is slightly lower than anticipated as we give customers the opt-in choice. Partner share of postpaid MSR was 23%. This is in line with our expectations and current trading trends. There was a stronger demand for handsets in the final quarter of the year, which was in line with overall German market trends. As a result, handset revenue increased by 4.4% year-over-year.Fixed revenues show an unchanged picture. The planned wholesale DSL migrations and the fading out of the related carrier voice business remain the main contributors to the year-over-year decline, whereas our own retail business is slightly improving on the back of continued strong demand for high-speed VDSL connections. Promotional activities for O2 DSL offers remain visible in the contribution to the year-over-year decline.Turning to OIBDA performance on Slide 13, despite our continued investment activities and the usage elasticity effects from Roam Like at Home, we have posted another quarter and year of solid OIBDA growth. OIBDA came in line with guidance. Adjusted for exceptional effects in the amount of EUR 55 million for the full year, OIBDA was high at 2.6% year-over-year and up 1.4% year-over-year in Q4. The good progress of our integration project, which except for the ongoing network consolidation are mostly completed, resulted in a successful synergy capture at the OIBDA level of EUR 160 million. This was partially offset by our continued investment focus for further growth and regulatory effect of EUR 51 million in 2017, down EUR 10 million in Q4, mainly driven by the roaming legislation.Looking through the cost lines, supplies were lower minus 4.5% year-over-year in 2017 mainly due to the mobile termination rate cut in December 2016. These savings were partly offset by higher costs related with the usage elasticity effect from outbound roaming of our customers. Adjusted for restructuring cost of EUR 44 million personnel cost reflected the successful execution of the leaver program, while including these restructuring costs they remain broadly stable at minus 0.6% year-over-year.Other OpEx were down 7.2% year-over-year in 2017 and are reflecting the benefits from integration synergies partly offset by investment activities. Executing exceptionals, we managed to further enhance our OIBDA margin by 1.3 percentage points year-over-year to 25.2% in 2017. On a reported basis, the year-over-year performance of OIBDA is of course impacted by the positive effects from the tower sales in 2016.We are pleased to have finished 2017 in line with the expectations on all KPIs and are now entering a new chapter in the history of Telefónica Deutschland in 2018. This is also reflected in a change of the guidance-relevant KPIs as you can see on Slide 14. In the midterm, we are expecting an increasing contribution from new business areas, in particular in the context of IoT and ADA, while MSR for the time being remains the biggest contributor to revenue. In order to better reflect the successes of these new business opportunities, we are switching to revenue for guidance purposes.For 2018, we are expecting revenues to remain broadly stable year-over-year, excluding a regulatory drag of between EUR 30 million to EUR 50 million, mainly driven by the Roam Like at Home regulations, which annualizes in June 2018. We expect OIBDA adjusted for exceptional effects and excluding a regular drag of roughly EUR 40 million to EUR 60 million to remain flat to slightly positive. In 2018, we will maintain our investment focus to partake in the data monetization opportunity that is now real in the German market as you can evidence by our strong data KPIs. We continue to depend on a market environment with regard to the level of commercial investments, while at the same time we expect to see early transformation-related cost. We aim to deliver incremental integration-related in-year savings of EUR 80 million at OIBDA level as we are mostly finishing the remaining integration project, the network consolidation by year-end.Our outlook for revenue and OIBDA doesn't reflect any changes with regards to the implementation of IFRS 15 as of the beginning of this year. We expect the impact on [indiscernible] Germany P&L to be rather immaterial for a variety of reasons. First, we have reported clean MSR versus handset revenue basically since the introduction of O2 My Handy model back in 2009. Secondly, assuming a steady state of business, the deferred [indiscernible] over the contract period is more or less neutral as the catch-up effect from existing contracts as of 1st of January 2018 is offset by new business generated.As I mentioned before, assuming a steady state of business, the effect on P&L are only small. Therefore, we will not provide historical pro forma but present 2018 financials on a quarterly basis under IFRS 15 accounting standards as well as reporting the old IAS 18 for comparability purposes.And finally CapEx, we will continue to use our CapEx envelope in a very efficient manner as we are focusing on the consolidation of our network and the rollout of a single LTE network. We are, however, introducing CapEx to sales as we think it's more meaningful indicator in terms of industry standard and comparability. For 2018, we expect the CapEx-to-sales ratio of between 12% and 13%. This includes additional synergy-related savings of approximately EUR 15 million. Our strong operational cash flow in 2017 supports our intention to propose a dividend of EUR 0.26 per share or a plus 4% year to the AGM in May. We remain confident in our free cash flow generation ability and continue to support a high payout ratio for dividend in relation to free cash flow.Turning to Page 15, you will see that we continue to have a strong balance sheet and financial flexibility. In 2017, we again saw the typical seasonal trajectory of free cash flow with Q4 as the strongest quarter of the year with regard to its contribution. Year-to-date we registered EUR 680 million free cash flow with restructuring cash out of roughly EUR 120 million throughout the year. Adjusted for smaller M&A activities, underlying free cash flow was EUR 709 million.The outflow of working capital of EUR 132 million is mainly due to the result of usual recurring working capital movements, mainly CapEx reverses and restructuring provisions. Other working capital movements were driven by factoring transactions, changes in trade receivables, and restructuring cash-out. To date the accumulated cash-out amounts to EUR 480 million. The increase in net debt to EUR 1.064 billion is mainly driven by the dividend payment in May 2017 and the final tranche for the 700 megahertz spectrum paid in July last year. Other changes in net debt are mainly related to changes in interest-bearing handset receivables.As a result, leverage remains low at 0.6x to EBITDA, which is well below the stated target of at or below 1. As a reminder, operating lease-adjusted leverage would be around 2.2x the EBITDA if we are using a multiplier of 7, which is similar to the logic that Fitch uses.Let me summarize. We have reported today a solid set of results for 2017 with all KPIs in line with our outlook presented. And particularly, we are back to underlying mobile service revenue growth in Q4 after a period of significant headwinds. Operational momentum in postpaid remained strong and the O2 Free portfolio delivers clear proof points for benefits of driving higher data usage with larger data bundles as an ARPU opportunity.We have consistently delivered OIBDA growth despite regulatory headwinds as we successfully completed most of our integration activities. Our outlook for 2018 is solid despite commercial and transformational invest. We expect broadly stable revenues ex-regs and flat to slight positive OIBDA ex-regs with a falling CapEx-to-sales ratio. Our free cash flow dynamics remain solid despite being impacted from the integration-related restructuring efforts, and we reiterate our dividend commitment and intend to suggest a dividend of EUR 0.26 to the AGM that is supposed to take place on May 17.With this, I'm finishing today's presentation and hand back to the operator to open the Q&A line. Thank you very much for your attention.
[Operator Instructions] And your first question is from the line of Polo Tang with UBS.
I just have 2 questions. The first question is really about service revenue growth and ARPU evolution for the direct subscriber base going forward. So can you confirm that the bulk of your direct gross adds are coming onboard with the M tariffs? If so, the subscribers have an ARPU of roundabout EUR 24 compared to EUR 20 per month for your direct postpaid base. So is there any reason why you can't see healthy service revenue growth over the coming years? Are there any offsetting drag factors to consider? The second question is really about network quality because if you look at recent surveys from CONNECT-TEST and ChipTest, they've showed a notable gap versus peers. So how confident are you that network quality can improve? And do you think you can narrow the gap with CapEx to sales of 12% to 13%?
It's Markus. The other Markus. First of all, as you know, there's no detailed segment splits, but we can confirm that the majority of the inflow volume comes in the M tariff on our own customer base. And [indiscernible] describe retail price minus VAT. On the network tests, I think, as I stated, the network "Netzwetter" and the consumer-driven tests confirm us that there is good mobile broadband coverage. And if you take the [ Lamborghini ] tests or some other tests that are really in the high end, it's very difficult to compare our network that's currently in consolidation where you work on thousands of sites every day to compare with a network that's not in consolidation. We know that we are in the middle of this process. We are going to build the most modern and biggest network in Germany. So it's not comparing apples with apples. We don't complain. It is what it is. We know that these tests happen on a yearly basis, but especially on the consumer-driven tests, the app-driven tests, and the crowd-sourcing tests, we get really good feedback. And I think that makes us confident also in the consolidated areas either by the customer feedback that we are absolutely on the right way and we will continue to finalize our network by the year-end. And so far, yes, there are always different tests out there, but from our perspective, the consumer-driven tests really give us confidence that we are on the right way.
And I just have 1 follow-up question, which is on your cooperation with Vodafone you mentioned that you're deploying fiber backhaul together, but the scope appears relatively modest near-term. But if you expand that cooperation, could this lead to significant CapEx savings and maybe even OpEx savings over time?
First of all, we have a significant amount of our mobile sites also up to 26,000 sites are shared sites with all operators. And a good proportion of that is clearly with Telefónica Deutschland and Vodafone. We are always open to extend our sharing opportunities, especially if we have already collocated sites. And it's actually a no-brainer to connect a collocated site with joint fiber access. Because you are faster, your time to market is much faster on that [ angle ]. And clearly there are always opportunities also going forward. We are now in the first stage of piloting going for the first 100 sites as we announced this morning. And if this pilot is successful, we clearly have a chance to scale this up.
And the next question is from the line of Keval Khiroya with Deutsche Bank.
One question please. And we've obviously seen a bit of a rise in commercial costs during 2017. Are you happy with the level of commercial costs you have now? What do you think we should also think about further commercial cost increases in 2018?
We are currently happy with the commercial costs and the level of investment we bring into the market. We have said that we are operating in a dynamic but rationale market. And we always adapt, of course, our commercial activities towards the competitors' move. Currently we are happy with the level of investments that we see.
And the next question is from the line of Joshua Mills with Goldman Sachs.
Two questions for me, both on guidance. So on revenue, obviously, we've moved now to a total revenue figure and away from service revenue number. If I look in 2017, you've been growing your handset volumes and your handset revenues by about 5%. And it sounds from management commentary that that is an area that you expect to grow even further going forward as you move towards maybe a bit more of a focus on wearables and Internet of Things. So my question is should we then anticipate that the underlying guidance here from mobile service revenue is kind of flat to maybe even slightly down. And are we making any EBITDA margin at the moment on these handsets and wearables, et cetera? The second question is just on the EBITDA element of the guidance. So compared to consensus, we were looking at a slight downgrade for 2018, which I think is partly because you're spending a bit more upfront to deliver these digitalization transformation savings. At what point in time do you think that those will actually be cash flow positive rather than just a kind of upfront costs?
From our side, so the revenue –– the question on revenue, of course, we will see and that is the outcome significantly above the current consensus level with our revenue trajectory, which is both driven by slight improvement in MSR but also on the handset revenue side. We will not give you a concrete guidance on the mobile service revenue as we intended to change our guidance metrics in order to also capture the further opportunities that we see arriving from advanced data analytics and IoT which will be growth drivers and growth engines beyond the MSR growth. We will discuss all the details around that at the Capital Market Day and the same applies to your second question where you asked on the EBITDA trajectory and when the investments will pay out. That is exactly why we have planned the Capital Market Day for Friday and there will discuss with you all the different levers, how we see our case, and what the phasing of the case will be. So I would really like you to stay patient until we discuss that on Friday.
Next question is from the line of Thibault De Coincy with Raymond James.
My first question relates to CapEx and this is a follow up on Polo's question. I understand that network integration has been a long road and should be completed by year-end, but are you happy with the current pace of improvement of your network quality and do you see room to accelerate I mean beyond the Vodafone partnership announced today? I am asking that in relation to your capital guidance, which is lower than we expected. How should we think going forward? Do you believe in 12% to 13% CapEx to sales is sustainable? And my second question relates to EBITDA, just to check if I remember well, previous management once mentioned a long-term EBITDA margin of 30% and do you stick to that? And if yes, how do you plan on achieving it?
On the first one, could we accelerate network consolidation and roll out, and is it a question of the CapEx envelope. No. From our perspective we have all assets in place that we need. We have more sites than we need actually, so we are dismantling as we said 14,000 sites. So the big part of work, building up [indiscernible], building new sites, all is part we don't need to do. Just consolidating this, logistical manual work, every day 3,000 engineers are in the field and building up, dismantling, installing new kits, integrating sites. So it's just a logistical work and for that we feel really confident and well prepared with the CapEx guidance we have given to date. So it is not a question of time. It's just manual handwork. As I said, we passed a 50% milestone last year and we are confident to finalize it this year in order to build the biggest and clearly the most modern mobile network in the German market.
I can only confirm that our guidance in terms of CapEx is sustainable as Markus said. And for our long-term OIBDA trajectory, I would also like to refer to the Capital Markets Day where we will explain to you the mid-term expectations for the company that we will see until 2022. So please let us discuss that at the Capital Markets Day on Friday.
And the next question is from the line of Georgios Ierodiaconou with Citi.
Actually, I've got 2 clarifications, firstly on mobile service revenue. You do mentioned the benefits from inbound roaming. I was wondering if you could give us a bit of an idea of how much of a boost that has been to underlying service revenue number. Then secondly, it's a question around the LTE base and the information you provide on Slide 18. And there's been a slowdown this quarter. I was wondering I mean there's a couple of ways of looking at this which could be a bit worrying: the first one is you seem to be adding more postpaid customers than LTE customers. I was trying to understand why would that be the case. It's kind of unique versus other players in Europe. And then secondly, given that your partners tend to have around 250,000 net adds a quarter, that will imply on a retail basis, you have a shrinking LTE base. Am I getting something wrong here or is there any temporary effects that may account for this very slow growth in LTE?
Let me start with your question on MSR and with regard to visitor roaming revenue. Of course, we have some contribution also from visitor roaming, but that by no means affects our good improvement in terms of underlying growth rates that we have shown over the last couple of quarters. So the growth rates remained intact also including visitor roaming.
Going back to your second question. I think for us it's not a surprise that after the successful merger between MVNOs in the German market, our inflow share or the line share is going out to our network. I think that is exactly what we expected so and so far and it doesn't mean a change in market behavior or whatever. It's just the available [indiscernible] differently distributed to the networks in the market. It's our reading that certain shift activity has already been started.
So you mean that a lot of the customers shifted from Vodafone are 3G customers. That's why the mix is a bit different. Am I understanding this correctly?
I cannot confirm that, but clearly we have mobile number portability data statistics on the one side and clearly on our network 4G is marketed very prominent on certain offers in the market. So there's a certain logic in the assumption you're taking.
Next question is from the line of Ulrich Rathe of Jefferies.
I am using my 2 questions for the following. First one is, when you quote these restructuring cash-out numbers, and I think you do it to enable us to sort of add it back to see the underlying free cash flow generation of a group. Is that actually a pre or post tax? I mean in as much these restructuring expenses have tax benefits probably in other period but I am just wondering how you treat the tax element of that when we try to add things back. Second question is on the O2 Free usage, the 7 gigabyte usage. To what extent do you think you are mopping up an over-proportionate share of the very high usage in the market here rather than actually driving underlying usage? If you see what I mean, this is a pretty unique product in this way from amongst the 3 major operators in the market. So I am just wondering to what extent you're getting really a selection effect here rather than an underlying growth effect. Do you have any stats on sort of before, after, or anything of that sort?
So let me start with your first question about the restructuring cash-out. We have spent –– roughly EUR 120 million in this year and accumulated EUR 500 million year-to-date roughly which is then coming close to the total amount of bigger EUR 600 million that we guided when we did the integration case. With regards to your tax questions, I would really like to follow that up in more details with you because I do not understand what you mean and what effects you could see for the future. So let us please follow up that with the IR team after the call.
On your second question, what makes us confident that this is not only a selective product or heavy users or doesn't drive overall customer satisfaction, I think the tariff scheme we launched in September is clearly more attracts existing customers with contract extensions upsell but also customers. And it's clearly the majority of the volume, as I also said earlier, is attracting new and the majority of these customers. And so far I think we clearly see a trend for mobile freedom in the German market that customers now after –– for years they were stuck between 1 gigabyte or 2 gigabyte packs, they now see the use cases because the content is there in Germany, the LTE network availability in underground and public transport available, so many small puzzle pieces came together that now really video usage is the key driver for this enlarged and increased mobile data usage, and we see it really throughout the customer base. And I think not only we see it, also the total market sees mobile data usage growth. So I think there's a trend. We are clearly at the forefront of this development. We stimulated this with O2 Free launch in October 2016 and the big data bundle in May and September last year. So and so far we're clearly at the forefront, as I said, but clearly this a mass market, and as I said mobile data explosion has started now and will never go backwards. We haven’t seen that in any market. It will even further accelerate. And as I said, the nicest part of mobile data usage increase and monetization we still have in front of us here in Germany.
The next question is from the line of Josh Hallett with Redburn.
And the first one is just on the regulatory effects on OIBDA. And I am a bit surprised to see that the drag drops from EUR 28 million in Q3 to EUR 10 million in Q4. So I was wondering if you could explain that big drag and why again you see then a jump up next year. So I'm just wondering why that Q4 drag from regulation was so low basically. And then my second question is just on prepaid trends. Underlying I see that you lost another 630,000 prepaid customers. Is that an issue or not?
So let me take your first question, Josh, with regards to regulatory effects. What you can see here is that the drag is lower in Q4 than in previous quarters. This is a pure seasonal effect that we see because there is less travel activity of our customers being abroad in Q4 where customers normally stay at home. That is why seasonality driven. This is quite low. We expect this regulatory effect to annualize then in the course of Q2 of this year following also here the normal seasonality that we are used to with the peak in Q3 when the summer holidays take place in Germany.
On prepaid I think it was the second quarter after the implementation of the [ ID check ] that we have seen in the German market and still customers need to get used to this process. So I think we improve step-by-step and this process gets more and more customer friendly, but it still was a big change after 20 years of no registration and with passport, now with passport. Secondly, also we did finally clean up and so far and we now need to see the adoption rate in Q1 in that we get more and more customers used to the new process. So clearly, that's an area where we work very hard.
Could I just follow up on the regulatory point? Should we expect regulatory drags to increase from EUR 10 million in Q4 to something more than that in Q1 and Q2 in that case?
So we have guided EUR 40 million to EUR 60 million for the full year and following the normal seasonality that we see, you will definitely see in Q3, I cannot give you now a concrete guidance for Q1 and Q2. But if you compare that with the regulatory effects we have seen in terms of EBITDA level, the seasonality should be similar to the one that you have seen in 2017.
Next question is from the line of Justin Funnell with Credit Suisse.
It's just a few follow-up questions please. Firstly on Slide 11, the slide showing LTE adoption. It is a quite surprising trend, and you got 22 million or so contract customers. So obvious why people would want to stay on a 3G phone. All the new phones being sold these days are LTE. I guess one thing you've done is offer unlimited usage on 3G in some of your plans. Is that actually what's going on here? People have decided to stay on 3G and does that raise some issues for you longer-term? You're going to have to do something to get them to migrate to 4G as you continue to evolve your network. Secondly on spectrum, it is obviously not finalized yet but the German government is considering quite a big auction obviously in the next 12 months or so for the 5G spectrum and the 3G spectrum together. Based on recent prices, you could easily be paying EUR 1 billion to EUR 2 billion for that which would take you through your 1x debt ceiling. What would happen to your dividend if that were to happen?
So let me start with the LTE phones and your question there. So we can see a very solid growth curve in terms of LTE phone migration, which is up 31% in a year-over-year comparison. That is somehow not to increasing to the level that we have seen in the past because we discussed that already that the cycles of maintaining a handset are longer and especially for the late adopters to those services, they still stay with their old feature phones and 3G phones. We do not see a correlation to our 3G unlimited flat with a throttle because this is just the backup function for high-speed 4G network and customers would -– most of those customers who have an 4G offer and big data bundles, of course, also have an LTE phone that is for sure because otherwise they cannot make use of the high-speed data bundle that they have bought. So we do not see a correlation between those 2. We are fine with the trend and we do not see any headwinds from seeing that penetration in our customer base in terms of LTE handsets.
On your question on spectrum, I think we are very early in the process now. We are now in the middle of a consultation [indiscernible] and also the proceeding. And we now would like to see the next steps. There is no change in our dividend policy on that front. I think also in 2015 there was a spectrum auction in Germany and we didn't change our dividend policy according to that. And it's also way too early to speculate about potential prices or whatever. I think we have a solid three-player market here in Germany. No new entrants have so far registered on that front so and so far and there is no reason to start any speculation right now.
Yeah. And to add on that, we are coming from a strong balance sheet with a very low leverage. And as Markus had said that we have always been able to do frequency auctions and get our fair share that we wanted to have. So from our perspective we are comfortable with the situation from everything what can come which we do not know at this moment of time as Markus has suggested.
Just to I mean draw you out a little bit more on the debt ceiling, the 1x net debt to EBITDA. I mean I guess that's not a hard ceiling. You are willing to go above that number. If you can see, you can sort of earn your way back to 1x over time. Is that the right way of thinking about it?
So we will, of course, review our net debt to EBITDA ratio in the course of the IFRS 16 adjustments that will come which will significantly change our profile due to the lease consideration and that is a continuous process that we always will do. And based them on this adjustment, we will come then also of maybe with an adjustment proposal in the course of the release of IFRS 16 effect.
And the next question is from the line of Wolfgang Specht, Bankhaus Lampe.
Two questions from my side. First one on factoring, I noticed that you increased silent factoring by around EUR 200 million in 2017. So building an elemental part of your free cash flow development, what can we expect from this year? Do you still have scope to increase it or should we rather assume a flattish development? And the second question on your dividend ambitions, are you planning to give us let's say a rollover for your ambitions with the Capital Markets Day because the current ambitions end this year?
So let us start with the factoring. So we use –– and that is always the case –– we use that opportunity strictly in order to equalize our cash flows. That can be in 1 year more or in 1 year less. That depends on the business development that we see and that is also why we do not give guidance for that one because for us it's normal cash and working capital management that we are doing. And with regard to your second question, we will discuss the mid-term expectations at the Capital Markets Day, and we will provide you with more colors on Friday about our expectation. So stay tuned for that meeting on Friday.
And the next question is from the line of James Ratzer with New Street Research.
Two questions, please. First one, also just coming back to the spectrum auction coming up please. I think one of the bands that is being proposed at the auction is this 3.5 gigahertz band. I'll be interested to get your thoughts conceptually on whether you think this band could be interesting as a fixed wireless alternative and giving you the route to actually go into the fixed line market again from a retail perspective to complement your current mobile offer. And secondly, just going back to the EBITDA guidance, I think you've given the guidance ex regulatory drag. If I also strip out the synergy uplift, it looks like your EBITDA would be down around 3% to 4% and you were down around 3.5% on that basis in 2017. So I mean as long as your own brand customer base remains in decline, do you think that underlying EBITDA trend actually can return to growth or do we have to see own brand customers return to growth, too, before we can see that underlying EBITDA return to growth as well ex synergy and ex regulation.
I will start with your spectrum question. Of course, I think Germany has a FTTH corridor of less than 2%. Germany is the least developed fiber-to-the-home country in Europe. And clearly due to high digging costs and complex wire, fixed wireless access is a key opportunity for the German market. We are a mobile operator. This is a technology we know. And we clearly watch very carefully what other mobile-centric operators are testing currently worldwide, and that drives into 26 gigahertz band. That's the band that we currently also use for microwave. And there is a 3.5 gigahertz opportunity that you mentioned. The spectrum was in the past allocated to WiMAX. That was a technology that did not work; let's also be honest. But 5G has the potential, and as I mentioned earlier in my presentation, the test environment we just created with Nokia exactly also focuses in this area, fixed wireless access in Germany, because clearly FTTH corridor of less than 2% for 1 gigabyte/second access is not sustainable for this country. So and so far, we clearly see opportunity. It's too early to talk about it. We first need to see that the technology really works. There have been many promises by old technologies: wireless, local loop, WiMAX, and other things, we need to have a really sustainable and reliable technology solution and this is currently what we experience. So these spectrum bands are attractive and fixed wireless access is an opportunity in Germany if we have a sustainable technology.
Let me take your second question then with regard to the EBIDTA guidance. So, first of all, we think it would be unfair to exclude synergies from our EBITDA contribution because it is an essential part of our EBITDA growth already over the last couple of years. And with regard to your questions, can we bring back the business to growth, that is exactly the reason why we are investing into the market and increase the commercial cost and the cost of last year. And that is exactly why we start investing also now in our transformation in order to have the next level for future growth, which we would present to you at the Capital Markets on Friday.
I mean do you think there is a potential to see own brand customers return to growth in 2018 or 2019?
Well, as you know we do not have a segment reporting and I think that's well-known, but clearly we work very hard in order to get that. Clearly that's [indiscernible].
And the next question is from the line of Jonathan Dann with RBC.
My question was on the network. I would have asked about own brand, but I guess everybody else nailed those questions. On the network, you said the ambition is to have the best network. Excuse my total ignorance, but you've got roughly 27,000 sites and roughly the same spectrum as everybody else. I mean is there a third lever that will allow you to have the best network? I understand it will be the most modern as you've revamped it most frequently.
Two points. First of all, I said we will have the biggest network that carries the most capacity voice minutes and data and this is what we already have today. And secondly, we're building the most modern network because we're replacing nearly all network elements that no one else is doing. So at the end of the day, I can drive capacity upgrade just by softer upgrades, and I think on capacity spectrum, we had a best-equipped [ M&O ] in Germany if you look at 2.1, 2.6. We beat competition by 50% of spectrum assets; first point. Second point, clearly due to the history of our network, we have the most dense network in urban and suburban areas because both companies built up their network on 1,800 megahertz in the old GSM days. So I have the most dense network, especially in the urban and suburban areas. We will have the best network because we can provide the best capacity. So what really matters for the customer is at the end of the day that we deliver what is the best network experience and the majority of our customers are by far in urban areas and the areas in the hotspot and the big cities in Germany. This is where we attract our [ traffic ] segment. So and so far, this is where it met us most. But at the end of the day we also look for nationwide coverage. This is also why we included 2G and 3G coverage. We have a blended mobile broadband coverage, 3G, 4G in total of 94%, nearly everywhere where it met us. So and so far, we need to look into the details more and look at a specific network grid and that clearly then also gets the answer.
On Friday, would you be able to share like sort of a Google Map, sort of, demonstrating that, because I think Vodafone talked about having 24,000 sites. I think a few years ago they said that in Greece they said 28,000, and I guess Deutsche Telekom just got 8,000 sites from you guys. So I guess on the telephone, it's very hard to conceptualize that with the same number of sites you have a more dense network unless [indiscernible] coverage.
Absolutely, no, I think we will try hard. And, clearly, historically I think you don't change your site location immediately because to build sites it's an investment, to get sites in urban areas it's not easy. So you can believe me, if you pull together two 1,800 and two 2.1 networks, if I had the most dense network, and this is also by designing the grid that we did in cities especially to take out only really the redundant sites and keep the ones that provide additional capacity and coverage. But we will try hard on Friday to give more color on that one.
In the interest of time, we have time for one more question from Frederic Boulan with Bank of America Merrill Lynch.
If you could elaborate more on the agreement with Vodafone, [indiscernible] on how the network will evolve in the next few years towards 5G. Could we see deeper collaboration beyond the fiber in the mobile sites? And then more broadly on your long-term network strategy, you've moved to very mobile-centric strategy again as we evolve towards 5G, do you think you have the right assets to compete against DT or Vodafone from a capacity and speed perspective?
Firstly, I think what we announced this morning is clearly that on collocated sites we're going to do a pilot on 100 sites in order to see if we can be faster, because everybody or everybody mobile network operator wants to increase the number of fiber-connected sites. I think we call this 5G readiness. Whenever 5G is ready, we will be ready with fiber-connected sites. So that's a clear business as usual topic we have. And clearly if you split and double your resources because you only have to connect half of your collocated sites, because the other half is being connected by your partner, then you clearly speed up and also generate savings. It's too early to talk about. We have now agreed on Phase 1, and once we have successfully concluded Phase 1 and then we will need to see how we continue to do so. We've now agreed on the pilot. This is what we now exactly want to do, but there is clearly it's a win-win situation at the end of the day, clearly to speed up and to bring more sites to fiber faster. On the mobile-centric question from our perspective, I think clearly all assets that we need especially in urban areas are available. So we have a variety of city carriers we have deployed fiber that allow us to connect and the fiber prices in Germany for connect mobile sites are decreasing significantly because a lot of smaller companies have invested into fiber. They have rolled out fiber rings and whatever and then they really want to get long-term deals with the mobile operators. So we also have competition in this area. I think it's good, but we're not worried that we're a mobile-centric game. So we're very confident to increase our sites to fiber share, mobile sites to fiber share on the back of available assets in the market.
At this time, no further questions will be taken. Ms. Veronika Bunk-Sanderson, I turn the call back over to you for closing remarks.
Thank you, operator. Thank you, everyone, for joining our Q4 2017 call. We hope to see you all on Friday at our Capital Markets Day, and as Markus said, please do register if you haven't already done so. We'll be looking forward to seeing you there. Have a great day. Goodbye.