United Internet AG

XETRA:UTDI

Earnings Call Transcript 2018-Q3

[Stephan Gramkow, Investor Relations Officer]

Good morning, everybody, and welcome to our 9 Months 2018 Results Conference Call. My name is Stephan Gramkow from Investor Relations, and here with me today is our CFO, Frank Krause; and my colleague, Dominic Grossman. Frank Krause will first take you through the presentation, and we are happy to answer any questions afterwards. So Frank, please go ahead.

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

Good morning, everyone. I would like to welcome you to our 9 months analyst and investor call. First of all, I will give you an overview about our reported figures. Let me start with the development of our customer contract.After 9 months, the total customer base reached 23.65 million contracts. That means 1,010,000 customers more than end of 2017. Organic growth is 760,000 customers and 250,000 customers have been added from the acquisition of World4You in Q3 2018. I will explain the organic growth after -- later in more detail.We have seen in reported figures a sales increase of 26.8% to EUR 3.8 billion and an EBITDA growth of 27.8% to EUR 875 million. The EBIT growth of 14% includes the increase in depreciations from purchase price allocations, mainly after the Drillisch transaction.In light of the Tele Columbus share price development, we have seen uncash (sic) [ noncash ] impairment charge of EUR 216 million in Q3 with an impact of -- on EPS of EUR 1.08. Based on 9 months figures and on our expectations for Q4, we have confirmed our 2018 full year guidance.On Slide 3, you can see how the reported revenue and EBITDA growth looks like on a pro forma basis, which means including Strato and Drillisch in 2017 9 months figures. Pro forma growth for revenue and EBITDA is slightly above 10%. The IFRS impact in revenues shows that our handset approach of selling smartphones is working as expected.Now let's have a more detailed view on our segment. I will start with Consumer Access, which is 1&1 Drillisch. On Page 5, you can see that we could increase our customer contract in the first 9 months by 690,000, out of which 630,000 belong to mobile and 60,000 to DSL, VDSL. That means we have gained in Q3 another 220,000 contracts in Consumer Access. We had a good start into Q4 with 85,000 mobile customers in October. Taking into account the seasonality due to our handset sales and expected DSL growth, we are well on track.On Slide 6, you can see, following the same logic as explained for United Internet in total, how sales developed in the first 9 months on reported and on pro forma figures. Reported growth is 31.7% and pro forma growth, including Drillisch, also for the first 9 months in 2017 is 11.1%. Please bear in mind that the mass-market business of Versatel has been reallocated as of May 2017 to Consumer Access, which means in the first 4 months 2017, it is still included in Versatel, which explains the growth rate in Business Access. Just looking at the business -- at the B2B and wholesale line in Versatel, we have seen a double-digit growth for the first 9 months.On EBITDA, the story is more or less the same for Access. Reported growth is 33.3% and pro forma growth is 8%. Business Access is, again, impacted by the fact that the mass market in 2017 was still included for the first 4 months in Versatel. Again, just looking at the B2B and wholesale business, Versatel is doing well with an improving trend on EBITDA margins quarter-by-quarter.On Slide 8, you can see the EBIT development for the first 9 months, with 12.4% growth rate. The reason for the deviating growth compared to EBITDA are depreciations for purchase price allocations, mainly for the Drillisch transaction.Now let's move to Applications and start with Business Applications customer contracts on Slide 10. In total, customer contracts increased by 310,000, 60,000 organically and 250,000 from the acquisition of World4You in Q3, the leading hosting company in Austria we have acquired just a few weeks ago.In Consumer Applications, we have seen, again, an increase of more than 1 million free accounts for the last 12 months, out of which, due to normal seasonal effects, 500,000 have been gained in the last 9 months. Q4 is always a very strong quarter.In Applications sales, we see a reported growth of 10.5% and a pro forma growth, which includes also Strato for the first 9 months in 2017 of 6%. The growth rate in Consumer Applications is impacted by the deliberate decision to reduce advertising space in Consumer Applications in order to prepare best for the big data future, as explained and stated as part of our guidance.An even better picture is seen on Slide 13 for EBITDA. Reported growth is 15.7% and pro forma growth is 12.4%. We have seen a very strong EBITDA margin for Business Applications with 37.6%, also impacted by lower marketing spendings in light of the rebranding which just has been announced end of October.Nothing special to mention on EBIT. The lower growth rate compared to EBITDA is, again, impacted by depreciations for purchase price allocations from the Strato deal.In our last roadshow meetings, we have already talked about the big data opportunity for Consumer Applications. It is called netID. And it is a new open standard for user identification, tracking and targeting founded as a counterpart to the single sign-on standards of Google and Facebook. Already 60 companies joined the foundation so far. Some of them are shown on the slide here on Page 15. The rollout has been started a few days ago, and if you need more information, we also have a video available. Just get in contact with our Investor Relation guys.As I have mentioned before, end of October, we have announced the new brand of our hosting division. It's called 1&1 IONOS. We loaded the new brand with some promises, out of which the personal consultant is a very strong one, and the first tests have already shown positive impacts on NPS as expected.On Slide 17, you will find, again, similar to our half year announcement, further informations in order to understand the pro forma figures better. It means you will find the IFRS 15 impact, the status of our one-offs as announced at the beginning of the year and the impact of the deliberate decision to reduce the advertising space on our portals.Finally, I would like to sum up the key KPIs as of 30th of September 2018. Over the last 12 months, we have seen an increase in customer contract of 1.28 million, out of which 250,000 belong to the acquisition of World4You, which means we have gained a bit more than 1 million customer contracts organically over the last 12 months. Net debt is EUR 1.9 billion and represents a leverage of 1.7, which is also impacted by the acquisition of World4You in Q3. After EUR 85 million free cash flow in the first half 2018, we are still on track with now EUR 182 million free cash flow for the first 9 months.And finally, you'll find on Page 20 our unchanged guidance for the fiscal year 2018.So that was our presentation part for 2018 for the first 9 months, and now I'm happy to answer your questions.

[Operator]

First question we received is from Ulrich Rathe, Jefferies.

[Ulrich Rathe, Senior European Telecommunications Analyst]

I have 3, please. The first one is on the Applications margin. You highlighted that you probably held back a bit in the run-up to the rebranding. So presumably, the fourth quarter will be hit by some rebranding costs. Could you talk about the sort of quarter-on-quarter outlook? What is a normal margin given the way the business is currently running? Second question would be on the fiber talks with Deutsche Telekom. I think Deutsche Telekom's management on their Q3 call sort of said that these talks are at a standstill. Can you confirm that? Do you still have hopes that you would come to an agreement with Deutsche Telekom on co-investment opportunities? And my last question is with regards to the continuing discussion in Germany on the spectrum auction. It seems that there's a lot of pressure to actually increase rollout requirements and presumably that means that sort of any impetus to sort of give national roaming is going down. What is your view on the mobile case in view of where the discussion is -- your mobile investment case in view of where the auction discussion currently is?

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

Okay. Thank you very much, Ulrich. First to your question in regard of Applications EBITDA margin, I think we have seen now constantly an improvement, and I would say the average we have seen over the last time was 36%. This time it is 37.6%. And that is why I mentioned it is also impacted by that we have been a little bit -- that we have done a little bit less marketing spendings in summer in light of the rebranding. And as I always said, I -- we are the most profitable [ hoster ] in the world, and we will keep that margin level on a good strength, which means in the future, we will reinvest some of the cost savings. We will still gain from what we initiated during last year, and that will be reinvested. But the idea is to keep it on a very good level. And I'm not talking about 1 or 2 percentage points up and down. I would say 35% or 35% to 36%, 37%. That is the range which we target, and then it depends on initiatives. Your question in regard of where we are with the fiber talks and you asked if we still have the hope, yes, we always have hope. And I would say, for the time being, everybody is focusing on 5G. And for that, I think we will see no progress until 5G has been decided. But I would not say that the talks stopped, but I think it is just a normal priority. Everybody is now focusing on 5G. And your question on 5G, I think we are now in the final lobbying round. Everybody is looking what will come out. Every day you see new rumors. And for that, I would say we still -- we'll wait what will be the final outcome on the 26th of November when the rules will be set and more or less clear, and maybe we will see some of that already before. But for the time being, our position is unchanged.

[Operator]

The next question we received is from Joshua Mills, Goldman Sachs.

[Joshua Andrew Mills, Equity Analyst]

Two questions for me. The first just on Tele Columbus and your relationship with the company, having resigned your board seats. Could you just give us a bit of background behind that decision and also your broader thinking strategically as to how this asset could fit into your portfolio? Quite interested to see whether you think that -- whether owning Tele Columbus and that cable infrastructure could be a viable alternative to rolling out fiber in Germany at the cost of USD 1,000, USD 1,500 per home. And then the second question on the B2B application segment where you've seen pretty strong growth in the quarter. I just wanted to double-check there's no one-off acquisitions or other items that we should be aware of. And if not, which parts of the B2B applications business are really driving that improvement of 12% on the EBITDA line?

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

Yes. First question on Tele Columbus, and also I think you asked about my resignation. First of all, as you know, a supervisory board membership is obviously a personal engagement. But let me answer it in a way saying you know that we have on United Internet level just 2 more -- board members. And so whatever we discuss in the competition space in the telco space overall, I get very so conflicted. So we thought having 2 seats out of 8, it might be the same for us just to get in contact with the management and to discuss topics. And that has been the main reason for the resignation, to have easier discussions also here on our board level. And then you asked about Applications and what has been the reason for the increase on EBITDA and is it also impacted by M&A activities? As you know, we bought World4You in Q3, and it is consolidated from 1st of August, but that is a very tiny impact. And who's doing really well is, for example, is home.pl, our Polish subsidiary and also Strato is contributing quite well. And that is where the EBITDA increase is mainly coming from.

[Joshua Andrew Mills, Equity Analyst]

Can I just ask a follow up on the Tele Columbus position? So it sounds like you've still got an active ongoing relationship with the management teams despite having -- you stepped down from the board, as we'd expect given your shareholding. But what kind of strategic priorities are you laying out and do you think that management need to focus on now given the share price performance and some of the operational issues which the company's had in the last couple of months? I'm just ask -- I'm trying to understand whether there's anything that you, as -- with a history as a strong fixed-line operator, would be doing differently there?

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

Well, it is still a strategic investment, yes. And also, in light of what might be the outcome of the Vodafone-Liberty deal, I think we are quite happy to have a stake in Tele Columbus. And I would say I think the new management is doing well, yes. They know what to do. I think they a little bit over forecasted what is to do in regard of integrating Pepcom and PrimaCom. So that takes a little bit longer. But I think they have now much more clarity on KPIs. Also the financing is clear. So I think the new management team is doing well, and they know what to do.

[Operator]

Next question we received is from Christian Fangmann, HSBC.

[Christian Fangmann, Analyst of Telecoms]

It's Christian, HSBC. I have a few questions. First of all, on the Applications business, I may have missed that because I was kicked out of the line. On the World4You contribution, what is the impact actually that we have seen in Q3 on the total? And then moving to Versatel, I saw a comment in the road map 2018, sort of Page 20, that the expansion is organically but also through acquisitions. So are you anticipating smaller acquisitions around city carriers? Or what is the goal there? And then lastly, also on Versatel Layer 2 migrations, I think you're stating there that you are at 500 out of close to 900 BNGs now. What about the phasing throughout 2019? That would be good to know to model it accordingly.

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

Okay. So first of all, your question what has been the impact in Q3 from World4You, so that is quite tiny, yes. So that was less than EUR 1 million on EBITDA. And your question on Versatel, yes, it's -- we -- your question on Versatel in regard of will there be some acquisitions, yes, we are always looking to extend our fiber network. And you have seen we extended it to 46,000 kilometers, so by another 4,000 kilometers over the last 12 months. So whenever an opportunity comes up from city carriers or from power suppliers, we look at it. And if it is a good fit to our network, then we are doing it. But these are always, I would say, very, very tiny investments. On Layer 2, I think that is really a good story. We have already 1.9 million VDSL customers, out of which we have 1.2 million on Layer 2. And we always stated that Layer 2 is a cost advantage for us between EUR 1.50 and EUR 2 on a monthly basis per customer. So that is something what we want to force and what we are doing. And the question was what is -- what should we model for end of 2018. We always said we want to build out 500 BNGs out of 897 BNGs. And then I think that will go on also in 2019, and maybe at the beginning of next year we will come with a more detailed plan on that.

[Operator]

Next question we received is from Frederic Boulan, Bank of America.

[Frederic Emile Alfred Boulan, Senior Analyst]

Just to follow up on the previous discussion around spectrum. In August, you provided pretty good framework on how you're assessing 5G auctions. So if you could go through that a little bit and in particular, your ability to use potential spectrum when you would acquire together with the existing MBA is actually possible from a technical and contractual perspective, or you would need a completely brand-new roaming deal?

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

I think there are a lot of topics what -- how we approach that and what we are asking for and lobbying. I think the most prominent ones are this national roaming, what we are talking about, and to have clear rules on that and having a referee. Your question in regard of -- with the MBA MVNO contract, that is not clear for me. Can you make that a little bit clearer?

[Frederic Emile Alfred Boulan, Senior Analyst]

The question is would you, for instance, acquire spectrum in that auction and use this alongside your current MBA contract? Can you actually use it together? Or it's actually not technically or legally possible?

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

Yes, I think there's nothing what -- we can use it [ in return ], yes. That is my understanding.

[Operator]

Next question we received is from Josh Hallett, Redburn.

[Josh Hallett, Research Analyst]

First one just on Drillisch, and I'm just wondering why do you need to keep that as a separately listed asset. Why not as part of the minorities? And then my next question, I think previously you said mobile CapEx, if you build a network, would be at Drillisch, whereas any fixed CapEx would be at United Internet. Is that still the messaging? And then finally, I just wanted to get more clarity on what was discussed on the Drillisch call in terms of price adjustments in Q4 that should boost the EBITDA. Is that a one-off impact from the MBA MVNO? Is there a structural change in the contract? What's going on there? If you could explain that a bit more, that would be great.

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

Your first question is why do we keep Drillisch still as a listed company and separate it, I think that has been part of the deal, yes, and that has been also clearly defined in the business combination agreement. And I think there's no need to change it for the time being. Then your second question was if you go along the route on 5G and on fiber, where would the CapEx finally sit? Yes, I think that is for the time being at least the thinking. It would be -- 5G would be done in Drillisch. But as you know, we are not talking about CapEx. We always said we will do it if we would follow that route, which is still not clear. We would do it via a vendor financing model, which means as a managed service fee. Of course, if you talk to the network suppliers, all of them offer a build, run and maintain optionality. And so that is somehow similar to what we have today under the MBA MVNO contract or what we pay for wholesale fees, which is also somehow a substitute for CapEx. And your last question was on -- what was it? Can you repeat that, sorry?

[Josh Hallett, Research Analyst]

Yes, absolutely. It was on the Drillisch's messaging is that the EBITDA guidance for the Drillisch [ server ] should be EUR 750 million because they -- yes.

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

Yes, as we stated also in the report that we said that the price adjustment negotiations with an advanced service provider that have been in progress for several months will be concluded in the near future. So that means we expect that, that will be completed for the financial statement 2018. And for that, your question was also will it just be a one-off? No. It will not just be a one-off. It is, for sure, it is for 2018, but then it is also then setting a little bit the scene for going onwards.

[Josh Hallett, Research Analyst]

So just to be clear, when you said for 2018, does that mean it's like a full year effect on 2018 payments that are booked entirely in Q4? Is that how we should think about it?

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

At least -- as we said, it is a process which is for several months already in progress. So that means it is for longer period, yes.

[Operator]

We received a question from Ulrich Rathe, Jefferies.

[Ulrich Rathe, Senior European Telecommunications Analyst]

I have a question on the sort of the way the handset business is developing. So you entered the year with idea to sort of shift the whole focus more towards bundling a contract with devices with incremental investments, of course. First of all, is that unfolding according to plan, that aspect of it, the sort of the ability to actually sell contract in bundles with devices? And maybe sort of give us an outlook in 2019. Is there a case to actually accelerate this further in 2019 because it is so successful? Or would you rather say, well, they're falling according to expectations and there's no need to sort of push it any further in '19?

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

When we were talking about it at the beginning of the year, yes, the idea was we said we want to extend that, and the idea was to sell also handsets to segments where we haven't done it before. Before the transaction, Drillisch was 98% a SIM-only business. So we wanted to sell it also to low-frills segment, but we also thought it might be better with the new approach also in retaining customers also on the 1&1 side. And overall, I can say, all of that is working well. And it might also seem -- we have talked at the beginning of the year about the IFRS impact -- IFRS 15 impact. We are expecting, and you see in the numbers which are now in the report, that we are totally on track, which also underpins that the handset business is doing as expected.

[Ulrich Rathe, Senior European Telecommunications Analyst]

So if that's a success in your view, is there a case to push this harder -- even harder in 2019? Or are you now at the sort of activity level where you'd say that that's more or less a steady state for where Drillisch and United currently are?

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

Well, I think there's constantly a progress, and I think that is more or less the level also we assume for 2019.

[Operator]

[Operator Instructions] We received the next question from Joshua Mills, Goldman Sachs.

[Joshua Andrew Mills, Equity Analyst]

So just coming back on this question I'm sure you've been asked a few times, but if we get to the end of this month and it's very clear from the 5G proposals that those can be no national roaming offered, at that point in time, is it fair to say that you're not going to build your own mobile network in any form? Or is there any other scenario in which you could consider building a 5G network or building your own infrastructure? I'm just trying to make sure we know at what point in time the visibility on your network strategy will become clearer.

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

Joshua, as we discussed, I think it makes no sense to discuss it between the lines. I think we all need to see what will be the final outcome and what is really the final decision on national roaming. I think there has been now hundreds of options how it could look like. Let's have a look on how it will be finally look like, and then we will come back with a decision.

[Operator]

Next question we received is from Wolfgang Specht, Bankhaus Lampe.Okay, the questioner has hang up. There are no further question until now. I hand back to the speakers.

[Stephan Gramkow, Investor Relations Officer]

Thank you, operator, and thank you, everyone, for attending our call today. Please do not hesitate to get in contact to us if there are any follow-up questions. So have a nice day. Take care, and goodbye.