United Internet AG

XETRA:UTDI

Earnings Call Transcript 2019-Q1

[Dominic Grossman, Senior Investor Relations Manager]

Ladies and gentlemen, a very warm welcome from Montabaur. We are pleased that you are able to join our analyst/investor call regarding our Q1 figures 2019. This is Dominic Grossman from Investor Relations. I'm here with my colleagues, Frank Krause, our CFO; and Stephan Gramkow. We would like to start directly with the presentation. Therefore, we have prepared some slides, which we hope you will find in front of you via webcast or which you can download from our website via the Investor Relations section. After Frank's explanations, we will have some Q&A session as usual. That's all from my side and turning the call to Frank, who will provide a walk through the numbers.

[Frank Krause, CFO & Member of the Management Board]

Thank you, Dominic. Welcome to our analyst and investor webcast for Q1 2019. I'm delighted to share with you our Q1 results. First of all, I would like to give you an overview about our key KPIs as reported. We achieved in Q1 revenues of EUR 1.286 billion, which means a reported increase of 1.2% compared to last year's figures. Q1 revenue growth was impacted by a few topics, which are worthwhile to mention in order to understand the underlying figures and growth better. For example, smartphone sales has been lower than expected, and there have been topics in consumer applications, like the planned reduction in advertising space, which will have just an impact in Q1 2019 as we kicked off the strategic initiative in April last year. EBITDA is close to EUR 300 million in Q1 2019. And on top of the topics I touched already on the revenue, the expected result of the arbitration proceeding in regard to wholesale prices with one of our wholesale partners is still not reflected as the binding decision is delayed due to the ongoing 5G auction and is expected within after a few months of the end of the 5G spectrum auction. I will walk you through in more details to better understand the underlying growth when we talk in detail about the segments. You can also see on this slide the impact of IFRS 16 in EBITDA and the impairment charges for Tele Columbus.Excluding the impairment impact, EPS increased by 9.5%. And finally, we are confirming our full year guidance on this slide. Now let's have a look at the business divisions, and we will start with the Consumer Access segment. On Page 4, you can see we could increase our consumer contracts in Consumer Access by 180,000 in Q1 2019, out of which, mobile is 170,000 and broadband connections increased by 10,000. I think a very good start compared to what I have seen so far from competitors, and we even expect a better Q1 -- Q2 growth as you already have heard in the Drillisch call. In total, we have now a consumer base -- a customer base of 9.4 million contracts in mobile and 4.4 million in fixed. Page 5 shows the revenue development and the split in service revenue and hardware revenues. As expected, service revenues increased by 3.5%. And taking into account the effect of the changed capacity split with focus on mobile contract base on the Telefónica network, you know we are offering a 12-month discount there, which will disappear over time, we are -- the adjusted service revenue growth is even higher and it is 4.8%. Reported EBITDA is impacted by one-off integration cost of EUR 2.1 million and additional cost of EUR 17.5 million from a time-limited adjustment mechanism of a wholesale contract expressed at the end of 2018. However, as we mentioned already several times, the corresponding wholesale prices are currently subject of arbitration proceedings. In the course of which, there will be a binding decision on the amount of a prominent price adjustment within a few months of the end of the 5G spectrum auction. We expect this expert decision to result in lower wholesale prices. Talking that -- taking that into account, the adjusted EBITDA growth is close to 10%. In the Business Access segment, we have seen again a positive development on the core business areas, which are B2B and wholesale, finally reflecting an 8.4% year-over-year revenue growth in Q1 2019. In line with the positive revenue development, also EBITDA is growing nicely. Including a positive impact from IFRS 16 of EUR 60 million in Q1, 1x1 Versatel achieved an EBITDA of EUR 35.6 million (sic) [ EUR 35.7 million ], which reflects an EBITDA margin of 30%. Even without the IFRS 16 effect, EBITDA is growing by 64% year-over-year. Now we are looking at the business division applications. Let's first look at the Business Application segment, where we have seen 30,000 net additions in customer contracts in Q1 2019, altogether now reaching more than 8 million customer contracts, equally splitted into domestic and abroad. Revenues are growing by 5.2%, which is in line with last year's like-for-like development, which was also around 5%. As discussed with you before and planned, we have increased our marketing spendings in Business Applications by EUR 14.6 million compared to Q1 last year, out of which EUR 7 million are one-off in light of the rebranding. Despite the increase in marketing spendings and the one-offs from our rebranding, our EBITDA margin is around 34%. If we adjust for the IFRS 16 effect and the increase in marketing expenses, the EBITDA growth is 6.3%. Now coming to Consumer Applications, our portal business. We have seen again a strong increase in our free accounts by 340,000. In total, we are now managing 39.25 million active consumer accounts. Looking at revenues in the Consumer Applications segment. We will from now on split revenues in pay accounts/portal marketing and in third-party inventory, which is a lower-margin business, also with lower focus for the future. In our core business, which is pay accounts and portal marketing, we have seen for the last time in Q1 2019 the negative impact of the strategic initiative of reducing advertising space as we kicked this initiative off in April 2018 so it was still included in Q1 2018 figures. This is also the main reason to explain the EBITDA development on Slide 15. We still believe that the transition to more data-driven business models is the right strategic move, and it is already reflected in the positive NPS development. We also mentioned here how the adjusted EBITDA looks like. It is EUR 25.4 million instead of EUR 21.4 million as reported. Looking at the summary of the key financial KPIs on Page 16. I would like to highlight that we could reduce our net debt by EUR 74 million in Q1 2019 and that the free cash flow increased significantly compared to Q1 2018 when we explained that the new way of selling handsets will have a onetime uplift in working capital where we now reached a steady state. Closing with what I stated already in my opening remarks, we are confirming our full year guidance for 2019. So this has been my last slide. And now I'm happy -- or also with my colleagues from Investor Relations, we are happy to answer your questions.

[Dominic Grossman, Senior Investor Relations Manager]

Frank, many thanks for the explanations. Now we will start with the Q&A session. The first question, please?

[Operator]

The first question is from Ulrich Rathe of Jefferies.

[Ulrich Rathe, Senior European Telecommunications Analyst]

My first question is on the Applications Business. You made several comments in the factories about one-off-ish type effect or inorganic effect there. I was just wondering whether you're willing to shed a bit of light on how this progresses in the rest of the year. Which one of the inorganic effects are actually one-off-ish in nature, which ones aren't? I understand -- in particular, I'd be interested in comments on the rebranding cost, whether that has any spillover into the second quarter or the rest of the year; the extra marketing cost that you're highlighting in the first quarter; and the issue of the reduction of the advertising space, how that sort of will unfold. So that would be my first question. The second one is Drillisch obviously sort of adapted its guidance -- its top line guidance by focusing very much on the service revenues, highlighting that the device sales were softer in the quarter. Why did that not come through in your guidance? Is that because the handset revenues sort of all wash out at the larger level of the United Internet group revenues? Or is there any other sort of offsetting items where your revenue are developing stronger so you feel you can absorb it at the group level, that particular effect?

[Frank Krause, CFO & Member of the Management Board]

Okay. Thank you, Ulrich, for your questions. Maybe I start first with applications. We have in Consumer Applications -- and we -- last year, we kicked off this strategic initiative to reduce our advertising space in order to gain trust and to increase NPS. And as we have kicked off that initiative from April onwards in 2018, in the year-over-year comparison, you will just see a negative impact in the first quarter 2019 because it has been already excluded from the first -- from the second quarter 2018 onwards, and that is why it should not generate any further variation. And the other thing is there is third-party inventory, which is a very low-margin business and we are not so much focusing on, which is lower than what we've seen there last year. And I think that is something you will also see in the next quarters. So if you come to Business Applications, many of you in our road show meetings, when they looked at our numbers and they compared us with GoDaddy, they said, "Guys, at some point of time, you need to start to do more in marketing and to spend more." And we always said, yes, but let's do it step by step. Let's first do the rebranding, and then after that, we would like to increase also our marketing spendings and we will reinvest some of the money what we gained from our cost initiatives, platform consolidation and all of that. And that is what we started now. The rebranding happened in the fourth quarter 2018, and that is why I think it is important to mention that despite the increase in the marketing spending, our EBITDA margin is still on 34% level. But we thought it might be interesting for you to split and say, okay, what is really an increase in marketing spending and what is one-off in light of the rebranding, which will just go on for a while, and then that is something which would stop. And then, Ulrich, your last question was Drillisch has concretized their guidance on service -- focusing more on service revenue, and you said why that is not also seen in the United Internet guidance. Of course, we still think that we can overall achieve what we have forecasted and guided. And for example, we have seen -- we have some strong results in Versatel. So overall, we still believe that we can meet our 4% guidance.

[Operator]

The next question is from Martin Jungfleisch of Kepler Cheuvreux.

[Martin Jungfleisch, Junior Equity Research Analyst]

Two for me. The first one is on Business Access. Can you explain what has driven the solid performance in the first quarter? Was this sort of driven by wholesale or the project business? And can you also comment which bucket has higher margins and where you would expect more growth -- or where you would expect the most growth would come from? And then the second question is on Business Applications. Net adds were also a bit stronger than expected. Should we expect this run rate for the full year? And also you just commented already on the impacts of the platform integration. Is this now almost complete? Or should we also expect some impacts in second and third quarter? And also relating to your target margin in this business, you mentioned that just EUR 7 million of the EUR 14.6 million were one-off expenses. So should we expect a higher level of marketing spend going forward? And do you think that 40% EBITDA margins, which I think were mentioned a while back, are still likely?

[Frank Krause, CFO & Member of the Management Board]

Okay. Mr. Jungfleisch, thank you very much. So in Business Access, it comes from both areas, so it is wholesale and B2B. And Versatel also plays an important role for the United Internet group. For example, it's also the provider for Drillisch for the Layer 2 product, and all of that is working quite well. But as I said, it is also coming from B2B and wholesale, and we are quite happy with that. In Business Applications, first of all, you know we are preparing for an IPO at some point of time. And for that, we said, okay, we need to do our homework, which is also -- we said there are a lot of -- have been a lot of cost initiatives in the past, as you said, platform consolidation, which will also have an impact on our numbers 2019. That is why I always stated that EBITDA is growing faster than revenue. But we want to reinvest some of that money also in marketing spendings while still keeping the EBITDA margin on a good level. And to be honest, I think it is not important if it is 1 or 2 percentage points up or down. It is still, as you have seen in Q1, clearly above 30%. It is 34% and -- at the end. And that is what all of you know better than I, is if you prepare for an IPO, I think it is more important that revenue growth is in the higher single-digit area than the EBITDA margin is 1 or 2 percentage points higher, but we still want to keep it on a very high level. In regard of net adds, I think, yes, we have seen 30,000 net adds in Q1. I would be a little bit cautious with that because there's some seasonality on products and insurance cycles. So I think you cannot focus simply at 30,000 now for the full year. But for sure, over time, that is what we want to achieve, and that is why we have done the rebranding. We want that revenue is growing from upselling our existing customer base and from acquiring new customers.

[Operator]

The next question is from Steve Malcolm of Redburn.

[Stephen Paul Malcolm, Research Analyst]

Sorry, I missed most of the Drillisch call, so I apologize. I know this is a call -- a question probably for that call, but I just wanted to ask -- I had a couple of questions on the EUR 17 million that you've referred as sort of one-off of pricing step-up on the wholesale deal because I'm a little confused. I mean if you look at the Telefónica Deutschland disclosure, they basically told us that their wholesale revenues slowed this quarter. And if we strip out the EUR 17 million that you're claiming was an extra payment, there would have been almost no growth in Telefónica Deutschland's wholesale payments. So can you just clarify that? Do you think that your sort of overall outpayments should have been broadly flat year-on-year if you strip out the EUR 17 million? And maybe can you also just explain why Telefónica Deutschland seemed so adamant or why it's guiding on no change to the MBA and you seem to be guiding on quite a material change to the MBA, where this sort of huge difference in opinion stems from?

[Frank Krause, CFO & Member of the Management Board]

Okay. Thank you very much. First of all, it's quite hard to comment on Telefónica numbers. I think we have been very open and very clear with the EUR 17.5 million. And we have been also very clear that we said, however, the corresponding wholesale prices are currently subject of arbitration proceedings and there will be a binding decision on the type and amount of the permanent price adjustment within a few months of the end of the 5G spectrum auction. And we as United Internet and I think also Drillisch expect the expert decision to result in lower wholesale prices with a retroactive effect. And I also want to be very clear in saying what we see is, at the end, declining end-customer prices. And declining end-customer prices will also lead to declining wholesale cost. So I think that is quite obvious. And consequently and luckily, that is also reflected in the contract. There are clear mechanisms in the contract to assure that, and I think that is why we feel really, really confident with that. And...

[Stephen Paul Malcolm, Research Analyst]

Sorry, do you think your wholesale costs should be broadly flat year-on-year in Q1 with the new agreement? So you're able to grow your revenues to keep your wholesale costs flat and increase your gross margin. Is that what you're telling us?

[Frank Krause, CFO & Member of the Management Board]

Yes. That is what also in the call before -- André Driesen said in the Drillisch call. We are now transitioning a lot of customers from Vodafone to the Telefónica network because that is our headline offer. And customers are using this headline offer, and that comes with a discount in the first 12 months. That was a little bit the explanation. Well, we said, okay, we have seen 3.5% service revenue growth in the first quarter in Drillisch, but which is underlying more, 4.8%. Of course, over time, the discount will disappear. But also answering your question, that is the reason why we are -- why that is good for us and why we are doing it because the lower -- or the wholesale cost -- or the saving in wholesale cost is higher than what we give in discounts. Otherwise, we would not do that. And that it is why it is beneficial for us, and that is the why the customers come with higher margin, yes.

[Operator]

The next question is from Simon Bentlage of Hauck & Aufhäuser.

[Simon Bentlage, Analyst]

Just again on the Business Applications segment and the rebranding. So are we going to see this EUR 7 million one-offs for the rebranding also in the quarters to come? That's my first question. The second one is on the potential deal that Tele Columbus might do regarding the sale of their fiber assets. Is that something that might be interesting for United Internet to participate in? And what do you think of it in general?

[Frank Krause, CFO & Member of the Management Board]

Okay. Thank you very much for your question. First question was will we see more of the one-off marketing spendings in regard of the rebranding. I don't want to comment on the amount, but obviously there will be some more because whoever did before rebranding, and I think, that is the way. And we have also in our press release, I think we said that over time -- we started as 1&1 IONOS, and over time, that will become IONOS. So I think that is the path we have to go, and I think that has to be accomplished over time with some one-off rebranding marketing spendings. Your second question in regard of Tele Columbus, I would like to answer and say yes, we also have seen the talk here, and we know, I think, exactly what you know from what is public. So I cannot comment on it in more detail. The only thing what I can say is, and you know if you know United Internet and you have looked at our company over the last year, we are always thinking in options. So let's have a look at it and then let's understand better what it really means and if it might create an optionality for us.

[Operator]

The next question is from Christian Fangmann of HSBC.

[Christian Fangmann, Analyst of Telecoms]

Christian from HSBC. I have actually 2 questions. One was actually again on the marketing spend in the B2B application. Just to be clear that I understood it correctly, so there will also be incremental marketing spend given what you mentioned earlier that the idea and the strategy is, going forward, to actually look a bit less on the margin, unlike what you did in '18, and a bit more on -- spending a bit more marketing money to create some top line growth. Is that kind of the new idea here? And can you maybe quantify what you expect going forward here in terms of marketing spend -- incremental marketing spend for the rest of the year at least to give us a feel? And then, secondly, I have a question on IFRS 16. When it comes to the Versatel business, I think at the full year results, you were guiding for EUR 50 million of total IFRS 16 impact for the whole group. So is what we saw in Q4 for Versatel kind of the run rate that we should also assume for the remainder of the year on a quarterly basis? Or is that artificially high in Q1?

[Frank Krause, CFO & Member of the Management Board]

Okay. Thank you. First of all, Business Applications and what does it mean here for -- what can you expect in regard of the marketing spendings, and is that the new idea, I think that was your question. No, that is not a new idea. It is more that we always said our headline is profitable growth. And I think we are in a good position to reinvest money what we -- from all our saving initiatives, to fuel a little bit the machine. And that is what we want to do, but that is also not cast in stone. We will look at it, and we will just do it if has an impact. But obviously, if you want to drive top line and you want to drive customer growth, you have to invest and you need to do that carefully. And that is what we are doing. We are pre- and post calculating all initiatives, and we are just doing if it makes sense. In regard of IFRS 16, you have seen in the first quarter a little bit more than EUR 20 million. And so I would say that is not the normal run rate. It might have been a little bit higher and it comes down over time. But also to be very open, it might be a little bit higher at the end than EUR 50 million, but it comes down over time.

[Operator]

The next question is from Maurice Patrick from Barclays.

[Maurice Graham Patrick, Managing Director]

It's Maurice here. So a couple of questions, please. Just curious for your thoughts on the implications of Telefónica's wholesale deal with Vodafone, should the Vodafone Limited deal go through. It looks like Vodafone believes that it can have an exclusive deal with Telefónica. So guess your thoughts in terms of do you think that is acceptable and your views on the implications of that going forward. And just secondly, I mean, Tele Columbus has talked about splitting their network, selling it maybe to -- for funds. Obviously, it'd be clean. I guess your thoughts in terms of that, why the industry theme or if you'd be interested in either parts of it.

[Frank Krause, CFO & Member of the Management Board]

Patrick, thank you very much. So first of all -- and I think we commented also on the Telefónica, Vodafone announcement, that we said -- and I think also André Driesen said that in the Drillisch call before. I think that is just an offer of Vodafone to the EU regulatory in order to fulfill the remedies or the asked remedies. We always said and that is still our claim is -- that we think they have to open the cable network for wholesale for everyone and also not with limited speed. It should be with the same speed what they are offering because otherwise, that will not help to increase competition. And I think that is what the regulatory authorities want to achieve. In regard of Tele Columbus, I can just repeat what I said before, that we just know what we have seen in the talk and what is so far public. And first of all, I would like to understand a little bit better what they are really talking about to understand if that is an optionality for us or not.

[Operator]

The next question is from Usman Ghazi of Berenberg.

[Usman Ghazi, Analyst]

I just have one, please. Again, on this wholesale cable deal between Telefónica and Vodafone, Vodafone said that this was a competitive process, so I was just wondering if 1&1 was involved in that process or not.

[Frank Krause, CFO & Member of the Management Board]

Usman, thank you for your question. Also very clear, we take it really seriously that you are not allowed here to negotiate anything during the 5G process, and that is what we've done. It seems that others are treating that differently, but we take it really seriously.

[Operator]

[Operator Instructions] The next question is from Nizla Naizer of Deutsche Bank.

[Fathima-Nizla Naizer]

I just -- I guess I just have one final one on the outlook for 2019 and your unchanged EBITDA guidance. It is implied that you do expect to step up over the next 3 quarters to reach that target. So could you please maybe give us an overview of how you feel the year will progress in order to reach that target? And what gives you the confidence at this point that the guidance would be reached?

[Frank Krause, CFO & Member of the Management Board]

Thank you for your question. I think you're absolutely right. We still stick to what we have forecasted in EBITDA, which is 8% year-over-year on IFRS 15 and 12% on IFRS 16. And as you said, I think we are expecting progress in a lot of areas. And also I think, the mentioned here process and -- arbitration proceeding process will have an impact, and that is what we clearly mentioned when we came out with that guidance. And that is even if it is in a conservative way, but that is included.

[Operator]

The next question is a follow-up of Ulrich Rathe from Jefferies.

[Ulrich Rathe, Senior European Telecommunications Analyst]

I'd like to explore the question a bit. What happens when the independent expert rules on the wholesale price adjustment? I mean the history of this I suppose is that this process has dragged on already a lot longer than, I think, you expected, right. Because I think, originally, sort of as I understand it, you hoped for this to be already done and dusted and booked in the full year 2018. So the fact that it's sort of dragging on now beyond the auction, I'm wondering what is the level of legal safety you have, that once the expert rules, that there will not be another challenge kicking the can down the road with appeal to a higher authority? So I'm trying to get at how final is the final decision in this scenario. And what protections do you ultimately have that this sort of -- that this doesn't sort of go on for longer and longer?

[Frank Krause, CFO & Member of the Management Board]

I think we are quite convinced with that and -- that this had reached now a status where there is a defined end, and that is what has also been said in the meeting before. There is just a few months after we can start again talking about it, and we have also very key opinion and view on that it is a final and binding decision.

[Ulrich Rathe, Senior European Telecommunications Analyst]

Well, I mean -- okay. That's your view, but I mean Telefónica management has said publicly, right, that they challenge the idea that this is a final binding one. They said whatever is decided in this process can be challenged otherwise later. So I was just trying to get at the question of where the next step might be. Is that in court? Or is that in Brussels? Or where could that be if someone really plays hardball?

[Frank Krause, CFO & Member of the Management Board]

I'm not commenting on what Telefónica is saying. I just can tell you what is our view and what is also our clear legal position on that. And that is that we said okay, whatever will be the outcome is the final and binding decision, and that is the only thing I can tell you today.

[Operator]

The next question is from Wolfgang Specht of Bankhaus Lampe.

[Wolfgang Specht, Analyst]

Once again on the wholesale conditions. If I recall it right, you have, from time to time, this repricing options, call it. So has that already been -- let's say looking at current trial going already on since end of 2017, have you already started a new one? And if so, is the same arbitrage court relevant? Or can the EU commission call out a different court?

[Frank Krause, CFO & Member of the Management Board]

Wolfgang, thank you for your question. It is -- we are not making it public if there is already another process. But you are right, in principle, you will have, several times a year, the possibility to do that. And if it is so, then it is always following the same procedure. So I think that is very clear how it has to work then. And maybe the first one is a little bit more difficult.

[Operator]

There are no further questions. I hand back to the speakers.

[Dominic Grossman, Senior Investor Relations Manager]

Thank you very much for all your questions and attending our presentation. If there are any follow-up questions, please don't hesitate to contact Stephan or myself. So thank you. We wish you a nice day, and bye-bye.