United Internet AG

XETRA:UTDI

Earnings Call Analysis

United Internet Reports Growth Amid Investments

United Internet saw customer contracts grow by 730,000 to 28.2 million, with revenue up by 4.7% at EUR 4.589 billion, while EBITDA rose by 5.5% when adjusted for 5G network rollout investments. EBIT and EPS fell by 4.1% and from EUR 1.59 to EUR 1.23, respectively, due to increased depreciation, amortization, and interest rates. With investments in fiber-optic and mobile networks, CapEx soared to EUR 503 million, leading to a negative free cash flow of EUR 14.1 million. The company confirms its full-year revenue guidance at approximately EUR 6.2 billion and expects operating EBITDA to be slightly above last year's, despite projected CapEx of around EUR 800 million.

Growing Customer Base and Revenues Amidst Investment-Powered EBITDA

United Internet made notable strides in the first nine months of 2023, expanding its customer contracts by 730,000 to reach 28.2 million in total. Revenue growth followed suit, with a 4.7% increase to EUR 4.589 billion, signaling a strong customer acquisition and retention strategy. While EBITDA saw a modest 1% increase to EUR 995 million, substantial investments of nearly EUR 50 million in 5G network expansion slightly overshadowed this growth. Still, when these investments are accounted for, an adjusted EBITDA growth rate of 5.5% reflects a robust underlying financial performance.

Earnings and Profitability Dynamics

A nuanced look at profitability reveals that, due to investments in infrastructure, earnings before interest and taxes (EBIT) faced a 4.1% decrease, landing at approximately EUR 600 million. This drop was accompanied by an EPS slide from EUR 1.59 to EUR 1.23. These decreases are predominately the result of aggressive expansion efforts, specifically in the fiber-optic network through 1&1 Versatel and the 1&1 mobile network, with the promise of offsetting these increased costs through gradual savings starting in 2024.

Segment-Specific Analysis - Consumer Access

In the Consumer Access segment, United Internet bolstered its contracts by 330,000 to 16.11 million, largely thanks to 420,000 additional mobile internet contracts. This success translated into a 2.8% revenue increase in this segment, totaling EUR 3.032 billion. Furthermore, service revenues have picked up the pace by 3.7% year-over-year in Q3, leading the company to maintain a confident forecast of 2% growth for the full year. But not all was rosy: EBITDA in this area dipped by 6.9% to EUR 511 million, a result of elevated costs from the 1&1 mobile network rollout offsetting gains in the existing business.

Rising Sales in Business Access and Applications

The Business Access segment experienced a healthy 3.6% sales bump to EUR 430 million, with a remarkable 4% growth in Q3 alone. EBITDA in this segment also climbed by 5.3% to EUR 118 million, with a stellar 10% year-on-year growth in Q3. The segment's own fiber-optic network expansion notably contributed to these performance metrics. In parallel, the Business Applications segment saw contract increases by 260,000 to a total of 9.3 million, and revenue ascended by 11% to EUR 1.059 billion.

Financial Health Indicators

Examining United Internet's financial footing, the company's net liabilities to banks rose by 7.5% to EUR 2.273 billion, a slight but manageable uptick. Stability was maintained in the equity ratio, providing an assurance of balance between debt levels and shareholders' equity. Capital expenditures surged to EUR 500 million as a direct consequence of substantial network rollout efforts. This resulted in a tight free cash flow of EUR -14.1 million after considering leasing, signaling an investment-heavy phase for the company.

Forward-Looking Outlook

As United Internet looks ahead, it reiterates its full-year guidance with anticipated revenues nudging upwards to approximately EUR 6.2 billion. The projected operating EBITDA is hopeful to register just above the previous year's levels, even when accounting for a hefty EUR 120 million allocated to the 1&1 mobile network build-out. This outlook is grounded in the company's current year performance and strategic investments, pointing to a consistent growth trajectory despite the necessary upfront costs of expansion.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the United Internet Third Quarter 2023 Webcast and Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Dominic Grossman. Please go ahead.

[Dominic Grossman, executive]

Good morning, everybody, and welcome to our Q3 and 9 months 2023 Analyst and Investor Conference Call. My name is Dominic Grossman. I'm responsible for Investor Relations. And here with me today, I have our CFO, Ralf Hartings. [ Briefing ] of the procedure. Ralf will first take you through our presentation with the business development in Q3 and will also give you an outlook for the rest of the year. And afterwards, we are happy to answer your questions. So far from my side. Ralf, stage is yours. Please go ahead.

[Ralf Hartings, executive]

Thank you, Dominic, and also a warm welcome to our webcast on our 9 months figures 2023. Let's get into our numbers. On Slide 2, we have summarized our major KPIs for you. Our customer contracts increased by 730,000 to 28.2 million in the first 9 months of 2023. Our revenue increased by 4.7% to EUR 4.589 billion. EBITDA increased by 1% to EUR 969 million (sic) [ 995 million ]. However, it is important to note here that we've invested almost EUR 50 million more in the rollout of our 5G mobile network. Adjusted for these effects on earnings, comparable EBITDA increased by 5.5%.

Our EBIT declined by 4.1% to around EUR 600 million. In addition to the explained negative effects on earnings, this was due to higher depreciation and amortization as a result of investments in the rollout of our fiber-optic network at 1&1 Versatel and the rollout of our 1&1 mobile network. This increase in depreciation and amortization is to be offset by gradually increasing cost savings from 2024 onwards. EPS decreased from EUR 1.59 to EUR 1.23. This was due to our reduced EBIT and the lowered equity results from our minorities as well as the increase in interest rates in general.

I will continue on Page 3. Let's now turn to our segments, starting with Consumer Access. In this segment, we increased our contract portfolio by a total of 330,000 contracts to 16.11 million year-to-date. Mobile Internet contracts increased by 420,000 to 12.1 million, while broadband lines declined by 90,000 to just over 4 million. Revenue in the Consumer Access segment increased by 2.8% to EUR 3.032 billion. This growth was attributable to the increase in hardware sales, other revenues, which rose by 8.7% to EUR 612.9 million.

In line with what we've told you, service revenues picked up to 3.7% year-over-year in Q3. For the first 9 months, we've achieved an increase of 1.3%. So we are still confident to reach a 2% growth for the full year 2023. EBITDA in the Consumer Access segment decreased by 6.9% to EUR 511 million. An increase in EBITDA in the existing core business was more than offset by higher costs for the rollout of the 1&1 mobile network as the breakout on the next slide shows. The Access subsegment increased its EBITDA by 1.6% to EUR 585 million, while costs for the rollout of the mobile network, 1&1 mobile network subsegment rose by nearly EUR 50 million in absolute terms.

On Page 8, let's take a look at the Business Access segment. We were able to increase sales here by 3.6% to EUR 430 million, and our growth rate in Q3 was already somewhat stronger with 4%. EBITDA in the segment increased by 5.3% to EUR 118 million. The high-quality expansion of our own fiber-optics had a positive effect on EBITDA development as expected despite the startup losses from the new 5G business area at 1&1 Versatel. This development is reflected especially on a quarterly basis, where we can now report growth of around 10% year-on-year in Q3. We also benefited from this in our EBITDA margin, which rose to 28.6% and still has further potential throughout our own fiber rollout in the future.

Let us now turn to the Consumer Applications segment. On Page 11. Accounts in the Consumer Applications segment decreased by 400,000 from December 31, 2022 to 42.55 million due to seasonal factors. The decline resulted from a 540,000 decrease in free accounts, while pay accounts, i.e., paid contracts increased by 140,000 contracts to 2.78 million. The number of mobile users increased by 200,000 in the first 9 months of 2023, while accounts with cloud storage continued to grow by 400,000.

on Page 12, we are looking at revenues in this segment. We've increased sales there by 1.8% to EUR 215 million in the first 9 months. And in line with what we have told you at the half year figures, revenue grew by almost 8% in Q3, with strong focus on paid users as well as a slight recovery in the advertising market. We expect this momentum to continue for the rest of the year. Our EBITDA increased by 5% to EUR 73.8 million. On a quarterly basis, this trend is similar to revenue, but with an even higher magnitude, both the price increase in premium mail as well as the increased number of paid subscribers, delivering an 18.6% year-over-year growth rate in Q3.

In the Business Applications segment, we've increased our contract portfolio by 260,000 contracts to 9.3 million. The increase came equally from operations in Germany and abroad. Revenue in this segment increased by 11% to EUR 1.059 billion and with a growth rate in Q3 at 1.8%. The increase resulted from strong customer growth, successful cross and upselling and strong growth in the aftermarket business. EBITDA in the Business Applications segment, on the other hand, increased by 12.1% compared to the previous year to EUR 294 million and even stronger in Q3 year-over-year at 13.2%. The operating EBITDA margin rose accordingly from 27.5% to 27.7%.

Right. Let's go to Page 17. So much for our segments. Here, we have summarized the most important KPIs for the group once again and edit a few more. We've already talked about revenue and EBITDA. Our CapEx increased from EUR 349 million to EUR 503 million due to investments in our fiber-optic network and 1&1 Versatel and the rollout of the 1&1 mobile network. Free cash flow, more on this later, amounted to a negative EUR 14.1 million, primarily driven by our investments, previous year, minus EUR 16.3 million, including a phasing effect from 2021 of EUR 97.2 million.

Our net liabilities to banks increased slightly by 7.5% to EUR 2.273 billion. Our equity ratio was broadly stable. On Page 18, let's have a look at our bridge from EBITDA to free cash flow. As you can see, the largest item here are the sharp increase in CapEx of EUR 500 million as a result of the investments in the rollout. Then in addition, the contingent payment of EUR 276.5 million followed by taxes of EUR 183.6 million, including working capital of EUR 41.7 million. This results in free cash flow of EUR 70.4 million, respectively, minus EUR 14.1 million after leasing.

Finally, a brief word on the outlook on Page 20. We fully confirm our guidance for the fiscal year and continue to expect an increase in revenue to approximately EUR 6.2 billion, prior year EUR 5.915 billion. Operating EBITDA is now expected to be slightly above prior year's levels. Keeping in mind, this figure includes approximately EUR 120 million for the build-out of the 1&1 mobile communications network, an increase of almost EUR 70 million year-over-year. CapEx, excluding any M&A transaction is expected to increase to around EUR 800 million, in particular as a result of the network rollout and the expansion of the fiber-optic network to connect mobile communication antennas and supply additional business parks. So much from our side, and we are now available for any questions you may have. Thank you.

[Operator]

[Operator Instructions] And now we're going to take our first question, and it comes from the line of Joshua Mills from BNP Paribas Exane.

[Joshua Mills, analyst]

Hopefully, you can hear me. My question was regarding the portfolio structure of United Internet Group. So we've seen in the last week, Telefónica Group buy out the minorities at Telefónica Deutschland at quite a significant premium. Their reasoning for doing that was, firstly, to simplify the business structure, avoid dividend leakage and then also to compensate investors for the fact that the business is now entering a prolonged period of uncertainty with limited guidance on the impact of wholesale revenues and so forth.

Given that we haven't had any clear guidance from either United Internet or [ 1&1 ] on the economics of the network rollout build yet, and this may still take some time. Do you see any advantage for United Internet in buying out the 1&1 minorities today at a premium? And if so, would this not result in a simpler group structure going forward, which is something management has commented on in the past.

[Ralf Hartings, executive]

Thank you, Joshua. So I guess I will not comment on what Telefónica is doing with their subsidiaries or whatever. Look, with regards to United Internet, we are where we are. I think we've said before, we are looking at structure and things consistently throughout. However, at this point in time, we are very focused on our network rollout and build and to make this a big success for our customers as well as for us, as for Germany. And therefore, to be seen, I guess, what's going to happen in the future. Okay.

[Joshua Mills, analyst]

Yes. I guess maybe to ask in a slightly different way. What do you think the advantage of having [ 1&1 ] listed today is from a group perspective?

[Ralf Hartings, executive]

Look, I guess you're probably well aware of how the structure of today happened, right, because of the merger with Drillisch and everything. So I guess, it is what it is at this point in time. And again, we're going to look into what we will do in the future about that, okay? So that's pretty much what I'd like to comment to you.

[Operator]

And the next question comes from the line of Polo Tang from UBS.

[Polo Tang, analyst]

Just a few different ones. It was asked several times in the 1&1 call, but I don't think there was really a clear answer given. So I'm going to try again. But obviously, there was a big step-up in terms of service revenue trends at 1&1. Price rises were mentioned, but could you give any sense in terms of what the quantum of the price rises were in terms of mobile and broadband? Second question is just really in terms of the CapEx profile for Versatel. So can you give any comment in terms of how we should think about the trajectory of the profile? Is 2023 a peak year in terms of Versatel CapEx? Or can we expect more of the same in terms of 2024? And my final question is about Tele Columbus. Can you clarify how much funding you think it needs? And would you be willing to inject more capital into the business?

[Ralf Hartings, executive]

Polo. Thanks for the questions. Look, I mean you've just said, I guess, on the previous call, our CEO of 1&1 present. And I guess whatever he's comment is the only comment that I can just reiterate, we do not think would make a lot of value add here. So yes, I'm not going to go into a greater level of detail as you can probably understand. With regards to Versatel and CapEx requirements, look, I mean, we've got EUR 800 million this year, and we haven't yet issued any guidance for the following years. But I mean sitting here thinking about the next 2 years, it's probably going to be peak years for us, I guess, similar, maybe a bit higher. But then again, we haven't made the business plans completely fleshed out yet. So to be seen, okay? And with regards to Tele Columbus, I guess that's a question you need to ask to Tele Columbus on what their capital requirement is or not. And I'm, again, not commenting here on that. Sorry, okay.

[Operator]

Excuse me, Polo, do you have any further questions?

[Polo Tang, analyst]

Well, I just have a follow-up in terms of Tele Columbus, I appreciate that you're not going to comment on their funding situation, but in principle, as one of the major shareholders. Are you willing to inject more capital into the business? Because I think in terms of the most recent capital raise, it was the main shareholder that was doing it. So I'm just trying to understand your position going forward with Tele Columbus.

[Ralf Hartings, executive]

Yes. Look, I mean, we are joint shareholders, we are a minority and we are having discussions with our co-shareholder with regards to how and what's best. Obviously, we have a lot of capital expenditure our own ahead, and we'll just need to see how it all fits together, and then we'll make up our mind on that.

[Operator]

We're going to take our next question. And it comes from line of Nizla Naizer from Deutsche Bank.

[Fathima-Nizla Naizer, analyst]

I hope you can hear me. My question is on the leverage levels at United. Could you give us some color on what you think the optimal leverage level is given a rising interest rate environment? And would you look at some portfolio restructuring with that in mind, how do you view your stake in IONOS, for example, or even there was news around the Consumer Applications business potentially being interesting for some external parties. Like is that still something you all would consider if the opportunity arises, some color around how you view the portfolio overall would be great.

And my second question is on Consumer Applications. I mean there was a nice acceleration in Q3 better than we expected. How much of that was due to a better display advertising market? Or was it also helped by price increases that you were doing, maybe a breakdown of how that growth was driven would be great? And could you remind us again of the Consumer Applications revenue, how much of that is driven by subscription revenue versus sort of more transactional display advertising revenue, a breakdown would be great.

[Ralf Hartings, executive]

Right. So let me take them one by one. Leverage. Yes, I mean, look, we are very comfortable, I guess, where the leverage is today. We are easily investment grade, and we clearly anticipate to stay well in kind of investment-grade leverage even throughout the peak funding for our network built out over the coming years. And then we were -- and then we are going to delever the company, obviously, afterwards again. But yes, I guess that's kind of what we envision.

So and then on the Consumer Applications business, look, I mean, if somebody approaches us in any -- for any of our entities, we are obliged even to look into it, and that's what we will obviously do. And that is not changing and will kind of always be the case. So if somebody thinks it's great and can do much more with it, why not? We will look into it then if that situation arises. And then you said on Q3 on the Consumer Applications business, it's been -- yes, it's been a good movement. Not a lot has been attributable yet to the -- as I've said, it's a slight recovery in the advertising market that we have seen. But the majority is really from 2 things, which is, one, we've increased prices for all existing pay users with very, very limited impact on churn. So we are very pleased about that development.

And in addition, we have simplified, I guess, customers' journey to even on the app to easily subscribe for the service, which is also showing us some really good success commercially. And therefore, we were able to gain in addition to having put up the prices, 140,000 customers so that's all really good. And I think then there was a last, it was a little bit around the distribution. I mean, guys, is it roughly 1/3 guys? I'm just looking at it. It's roughly 1/3, I guess, coming from the subscription revenues by now. Maybe just shy -- just a little bit shy of 1/3 is the right number. Okay?

[Operator]

Now we're going to take our next question. Just give us a moment. And the next question comes from the line of Usman Ghazi from Berenberg.

[Usman Ghazi, analyst]

I've got 3 questions. The first one was on IONOS. I mean the company, obviously, it's doing pretty well. However, in the average daily traded volume on the stock is now less than EUR 1 million. So I'm just interested in how you're thinking about potentially improving liquidity in the stock because it seems to be kind of a wasted opportunity given the discount to GoDaddy just keeps getting wider whereas the operating performance is obviously trending better and more resilient. Some thoughts on that would be appreciated.

The second question was just around consumer applications. So the price increase was very substantial, right, around 20%, but we've only seen -- I mean we've seen a marginal improvement in the revenue trend. I'm just wondering if the benefit of the price increase has come through into the numbers already? Or this is going to come through with the lag before. And then kind of the final question, I guess it's a bit of a more medium-term question. Given that you're constructing the 5G network on a fairly distributed basis, it seems to me that there is -- there could be a substantial kind of opportunity in private networks for 1&1 and that would obviously be relevant for Versatel rather than 1&1. So any kind of thoughts you might have on that front would be interesting.

[Ralf Hartings, executive]

Usman. So IONOS, yes, I mean it is as it is, I guess, what I can say and is, yes, it's -- we were not necessarily super happy about the way it is, but we're also not super unhappy about it. It is -- I mean, as again, it is what it is. We made the decision. We've done the IPO and as a result, there is currently very limited liquidity. How that is going to evolve in the future is really to be seen. I can't comment on that today, unfortunately.

[Usman Ghazi, analyst]

I mean is it a priority? Or is it just you're happy with just the way things are? Or I mean, is it something that you guys are actively looking at?

[Ralf Hartings, executive]

Look, I mean, our priority is clearly the network build out, which is the biggest project for the group. And obviously, that's a very big one, a very essential one for 1&1 Versatel as well as for 1&1 itself. So that's clearly a priority in the group. With regards to the price increases, and you are right, they have been quite substantial. Well, we're just seeing them coming through now. So we will see more of that, obviously, on a year-on-year basis. And yes, we've pretty much increased now every single customer in pretty much all tariffs. And yes, we will still see the benefit of that over the next 3 quarters comfortably, I would say. So stay tuned, I guess.

And then you were asking about -- I'm not sure if I fully get because in the private network opportunity also what exactly do you mean? I mean, there's one big benefit, obviously, as we are building out this great big fiber network in Germany, which is really nicely distributed. There's plenty, plenty of opportunities to connect very near net end business parks, which is high ARPU and good returns. So there, we will be very opportunistic, and that's clearly one of the big investment areas we are doing in 1&1 Versatel in addition to connecting our own network. But maybe can you specify a bit more what you mean with like private network? Do you mean like company networks to be private, managed through Versatel or what exactly is your point, please?

[Usman Ghazi, analyst]

So I guess we have factories that want to get automated or latency-sensitive services that need to be provided to hospitals or what have you, which needs mobile networks to be constructed or actually is distributed. So the computing to be very close to the end customer, not in centralized data centers as typical mobile networks are constructed so I guess it seems like the way you were constructing the 1&1 kind of 5G network would be ideally suited to those kind of services in the future?

[Ralf Hartings, executive]

Yes, sure. I mean that's a great opportunity for us, as you've explained, I guess, perfectly yourself already because, I mean, that's what 1&1 Versatel does, right? They operate networks. I mean, that's what they're really good at. And therefore, clearly, this opens up more opportunities not to do it also for others because, again, all these fiber in the ground belongs to 1&1 Versatel, all these data centers, these edge data centers, far-edge all belong to 1&1 Versatel and 1&1 is just putting a few service in and running their run access network. So therefore, clearly, we will leverage that opportunity every day.

[Operator]

[Operator Instructions] Now we're going to take our next question. And it comes from line of Adam Fox-Rumley from HSBC.

[Adam Rumley, analyst]

I've got 2 quick ones, please. So because we get separate operational color from [ 1&1 ] and IONOS so I wanted to ask an operational one on Versatel, please. Are there any challenges to building out the fiber network at all at the moment? Mr. Dommermuth was saying that most of the 500 cell sites that he's now leasing still need to be connected. So I was wondering if you could talk about the kind of phasing and the other kind of mechanics of that build-out as things stand? And then the second question was just whether or not you could comment a little bit more on the phasing of the cost savings from 2024 that are referenced in both your release and that [ 1&1 ] to offset the increased depreciation that you've begun to see.

[Ralf Hartings, executive]

Adam, right. So look, I mean, I'm the group CFO. I'm not the operational Versatel person. Obviously, building out in Germany, fiber is nothing that's unusual that's happening everywhere. And we've got plenty of subcontractors and people that we are working with. So again, as Mr. Dommermuth said, they just have to be connected, which is a bit of effort and the teams are working hard every day to connect more and more, and that's just really what's going on. So Yes, I mean, it's their job to do this, and it will take some time to connect all of them.

Some are quicker, some a bit slower. I mean, I guess that's what it is. And with regard to the cost savings, again, I think Mr. Dommermuth spoke about that we are going to firstly migrate certain types of customers over. And obviously, the more we are migrating over, the more we are able to generate the savings. So that is a gradual process, which is going to grow in time. And again, I think you said 1.5 years to 2 years, we will have migrated all customers. So by then, we will see clearly a very significant cost savings or, let me say, cost internalization compared to what we've said before. And again, as the footprint of our network grows and grows and grows, the less we have to pay to others in order to supply the services to our customers. So that's pretty much it at this point.

[Operator]

[Operator Instructions] Dear speaker, there are no further questions. I would now like to hand the conference over to Dominic Grossman for any closing remarks.

[Dominic Grossman, executive]

Yes. Thank you, operator, and thank you, everyone, for attending our call today and all your questions. Please don't hesitate to contact us for any follow-up questions. We wish you a nice day, a lovely weekend. Stay safe and goodbye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.