1&1 AG (1U1) Earnings Call Transcript & Summary

Thank you very much, operator. Good morning, everybody. This is Oliver Keil speaking. We are happy to have you here with us on the occasion of the H1 2020 result presentation. Mr. Dommermuth and -- our CEO; and Mr. Huhn, our CFO, will walk you through a presentation over the next few minutes. And after the presentation, the ball will be in your court during the extensive Q&A session. Thank you very much for your patience, and I'm sorry about the little delay at the beginning of our event. Mr. Dommermuth, over to you.

Ladies and gentlemen, welcome to our analyst conference shining a light on the business development of the first half year. I will cover the business development, before I hand over to my colleague, Mr. Huhn. First of all, I will inform you about what 1&1 Drillisch is actually doing. We offer broadband connections and mobile Internet access. We have a good market position in Germany. We are the largest alternative DSL provider behind Deutsche Telekom. We have an outstanding network quality in 2020. We once again fetched the renowned connect landline test. And another one [ Makoba ] company as an outstanding service. We produce our DSL product, buying advanced services from 1&1 Versatel. We rely on a so called Layer 2 infrastructure in doing so. The Versatel network is connected this way to the Telekom network. Next to that, we offer optic fiber connections, FTTH right to the homes. In order to do that, we use the last miles of city carrier partners. And we also have "an old business deal", ADSL. We speak about up to [indiscernible], there we buy advanced services from another network operator. However, this business is going down strongly so because our customers are more and more interested in broadband connections. Now on the mobile side, we are the largest MVNO in Germany with more than 10 million customers. We have a broad market coverage. We do not only rely on our 1&1 or 1&1 brand, but we also have a co-brand such as DNX and WEB.DE, and they're also our discount brands, starting from the Drillisch takeover, yourfone, smartmobil, among others. Our advanced services are aboard from Telefónica here where [indiscernible] subject to merger obligations, resulting from the merger of Telefónica and E-Plus, and we also get advanced services from Vodafone. In 2020, so far, we added 240,000 customer contracts to our portfolio. On the 30th of June, we had 10.24 million mobile internet contracts and 4.33 million broadband contracts. That's 10,000 less than the year or -- the end of the year. This business has some fluctuations give or take, 10,000 customers, but the business with mobile contract is growing solidly. Now revenue up 4.1%, up to EUR 1,881.2 million in the service revenue, which is important for us, increased by 3.1%. And if you adjust that for coronavirus effect, for example, lower international roaming revenues, then the business even grew by 3.4%. Other revenue, especially revenues with smartphones and tablets grew by 8.4%. However, this is not particularly noteworthy because it is a low-margin business. And our main KPI here is the service revenue. Now over to the EBITDA. EUR 329.6 million were generated, 3.2% less in -- than in the same period of the previous year. We are satisfied with this EBITDA, even though there is a decline. Now why is that so? This EBITDA includes some effects that are not directly related to our core business or our one-off effect. I will walk you through these effects now. We had EUR 5.6 million initial costs for the 5G wireless network preparations. As you know, we prepare the construction of our own network here. In the previous year, net figure was EUR 1.9 million. Now we had EUR 400,000, EUR 1.1 million off from integration project in the previous year, the figure was EUR 2.3 million. And the integration of the risk is more or less complete. The coronavirus pandemic led to lower revenues in international roaming. And it also led to a change user behavior in Germany. Our customers used the telephone services more often than before in the last few quarters. We had to buy that service from our advanced service provider. And some was EUR 10.2 million more but we had to pay. If the peak -- then if the peak hadn't existed, we have a regulation regarding the TAL subscriber line price increase in the first half of 2020 compared to 2019. That led to additional costs of EUR 8.2 million. And we had a higher costs to pay due to the regulation of text message costs on the EU side, this regulation took effect in 2019. In 2019, that cost was only EUR 1 million. If you adjust our EBITDA for these factors, then the EBITDA grows by 4%. Now also important for our result. The advanced services prices, I believe all of you know that we have a different opinion regarding our MBA contract compared to Telefónica. Since 2017, we have had price review. We are entitled to them by the contract. Fair market prices are required. And if you can't agree, then an expert decides within 3 months regarding what price is adequate. We haven't managed the 3 months so far. We had a first price review extending over 2 years. The expert opinion was not in our interest to be identified a series [ formal part ], and this is why we submitted an arbitration action. The expert opinion for that is currently running, has been running for 2 years as well, and we expect to conclude that in the fourth quarter this year. There are also price review proceedings going on that started in January 2020. We also had to file an arbitration action here because parties agreed whether an expert has to be brought in or not. And in July 2020, another review proceeding started. Well, we are in the pre-dispute phase here. And that pre-dispute phase will end soon. And if we don't agree. And I don't expect an agreement at this time, then we also have to bring in an expert. This is not good news, but these are the mechanisms as stipulated in the MBA contract. And our interest, of course, is to have short proceedings to complete them rather sooner than later. However, there are various legal questions that have to be clarified upfront. And then the expert themselves need some time, and this is why we are in a situation that means the proceedings take much longer than initially expected. And we can only win in these proceedings. The question is, will the prices go down? It's never about the question will the prices go up. As I have just said, we are currently investing towards the construction of our own 5G network. Last year, we got some frequencies. And in auction, we have rented or leased additional frequencies. Now we have a set of frequencies that allows us to build a powerful network. In the next step, we want to negotiate a national roaming, and we want to speak about infrastructure sharing if that is possible at all, then we will sign contracts with network suppliers. And in parallel to all of that, 1&1 Versatel will continue to expand the fiber optic network because the broadcasting stations will be connected to that network. As regards to the network provider negotiations, we're making good progress here. The fiber optic network of 1&1 Versatel is also developing properly. We're investing a lot of money here. However, we have got some problems, as you will be aware of. In the national roaming agreements, our initial plan was to be done on the 30th of September, 2019. However, these negotiations are still underway. We are right in the middle of these negotiations, and I hope that we can really finish them soon. But I can't promise anything today. This is the last major issue on our agenda here. As soon as the national roaming meeting have come to an end, we will start with the construction of the network. This is an overview slide for our essential KPIs. The number of customer contracts compared to the 30th of June 2019. Within one year, we have grown that figures by 650,000 to 14.5 million. The main chunk comes from the mobile Internet with 660,000 new contracts and the broadband business is more or less stable. Revenues went up 4.1%, 3.1%, the loss result from the service side. And if you adjust that for corona effect, then the like-for-like growth, was at 3.4%. EBITDA, minus 3.2% if you exclude special effects. And if you create a like-for-like EBITDA, EBITDA, as I have just presented, then the growth we'll see would be rather 4%. Earnings per share EUR 1 -- or EUR 1 to EUR 1.05, that means up 3.5% in the first half of 2020. Now I will hand over to Mr. Huhn, who will walk you through further details.

Hello, and good morning, everybody, on my part as well. I would like to start on Page 13 of the presentation, the earnings situation. You can see the revenue that Mr. Dommermuth talked about. In the first quarter, we've got revenues of EUR 1.881 million, an increase of 4.1%. Cost of sales increased to EUR 1,341.5 million, that is an increase of 6%. Gross profit of revenues was slightly below last year's value with EUR 539.7 million, which is a decrease of 7.2%. This was due to the regulation decisions and the coronavirus effect. If we eliminate those, cost of sales would have increased by 4%, and the gross profit would have increased by 4.1%, roughly to the revenue level. Distribution costs of $213.7 million were at the same level last year. Administration costs increased from EUR 42.9 million to EUR 48.1 million. The main effect here is, are the expenses due to the presentation of the 5G network expansion of EUR 3.7 million, which led to this increase. Before -- well, excluding 5G, the position increased by 3.5%. Other operating income and expenses of -- decreased from EUR 14.9 million to EUR 12.1 million mainly due to a reduction of revenues from margins. At the same time, the impairment losses from receivables of both the contract assets were achieved, which is linked. Here, the -- these reduced from EUR 37.6 million to EUR 35.9 million. The result of operating activities was EUR 254.1 million compared to EUR 261.1 million of last year. That is a decrease of 2.7%. If we were to adjust this result, and adjust this for regulation effect, for coronavirus effect, it would have been an increase of 6.7%. Financial results were at 0.2% in the first quarter of the year and the previous -- first half of the year. The previous half have been minus 5.1%. That was due to financing effect of 5G frequency auction, which had a special effect, an extra effect last year. The profit before taxes was EUR 253.9 million, a slight decrease compared to the first half of the previous year of EUR 256 million. Tax expenses, therefore, also decreased from EUR 77 million in the previous year to EUR 69.3 million this year. So the consolidated profit was slightly increased over last year, from EUR 178.9 million to EUR 184.7 million. On the next sheet, you see our balance sheet as part of 31st of -- 30th of June 2020. If you look at the balance sheet as of 30th of June of EUR 6.664 million. This is an increase over last year due to the short-term assets of EUR 290 million, which are composed as such, EUR 190 million increase due to investing free liquid funds at United Internet due to the existing cash management agreement. Contract assets have increased by EUR 17 million and inventories by some EUR 20 million. Liquid funds have decreased from EUR 31.5 million to EUR 5 million. Long-term assets have decreased from EUR 5.1 million to EUR 5.08 million so that the long-term asset position as compared to contract assets. On the liability side, we see that chart on liabilities have stayed more or less stable. EUR 545.3 million, long-term liabilities have slightly increased by EUR 20 million or say some EUR 30 million to EUR 1.302 billion. And equity has increased to EUR 4.817 billion due to the annual profit in the first half of the year. On the next page, Page 15, you see the cash flow. The net inflow of funds from operating activities came to EUR 197.7 million, a clear increase compared to the first half of the previous year, EUR 258 million cash flow from operating activities settled by EUR 22.3 million from the change in contract assets and contract liabilities. Increase in -- inventories increased by EUR 21.2 million and the change in receivables from -- and liabilities to related parties led to an increase -- a decrease of EUR 18.8 million. And we had a positive change of EUR 2 million of the change in trade receivables and payables. And this then leads us to the EUR 197.7 million. Cash flow from investment activity was at minus EUR 209.7 million. The main change is -- well, we've got EUR 18.5 million change in CapEx and a decrease of EUR 191 million investment of free cash at United Internet. Cash flow from financing activities was at minus EUR 14.5 million, which is comprised of EUR 8.8 million dividends paid and EUR 6.7 million repayment of financial liabilities. Leading to results for the first half of free cash flow of EUR 179.4 million compared to EUR 62.1 million in the previous year. On the next sheet, you see the EBITDA bridge to the first half for EBITDA to free cash flow. Starting with EBITDA of EUR 329.6 million, we now see a change in contract assets and liabilities, a decrease of EUR 22.3 million, a change in inventories with another decrease of EUR 21.2 million, another EUR 28.8 million decrease of other change -- other positions in working capital. Cash -- tax payment of EUR 59.4 million and CapEx, EUR 18.5 million. So this leads us to a free cash flow of EUR 179.4 million. If we compare quarters, the second quarter is slightly below the first quarter due to our business investments in higher inventories due to the ongoing campaign. And now I return the floor to Mr. Dommermuth for the outlook of 2020.

Thank you very much, Mr. Huhn. Ladies and gentlemen, this is already our last slide. With the forecast of 2020, 2 days ago, we have published a top notification saying that we want to add more than 500,000 new customers this year. The revenue is to develop like in the first half of the year, around 4%. Service revenue is expected to be 2% to 3% percent, now why 2% to 3% in July, August and September? The trouble period, we will have a lower international roaming turnover than in the second quarter, which was already lower. And we expect the third quarter to be even lower than that. And then at the end of the year, there will be another trouble period. Now EBITDA, we believe that we will end up on the same level as in the previous year. After the slight decline in the first half, we want to increase the EBITDA in the second half of the year. All in all, we plan to end up on the previous year's level. And of course, this forecast is obviously still subject to uncertainties to the ongoing effect of the coronavirus pandemic. There are quite a few imponderabilities in our forecast. But what you can see well here is that we have a stable business. It is a subscriber-driven business. It is based on broadband access, on mobile access. We have a product that everybody needs. People can't do without these products anymore. And we believe that we will also be able to post good figures even in these demanding times. Thank you very much for listening. And now over to you again, Keil.

Now Mr. Dommermuth, I give the floor to the operator to usher in the Q&A session. Some questions are already listed, and we will go through the questions one after the other.

[Operator Instructions] And the first question is from Ulrich Rathe of Jefferies.

I have actually 3 questions, and 2 are closely related. Regarding the infrastructure projects, it was delayed a bit, as you have said yourself. Now from your point of view -- now what are the serious deadlines here? Is the deadline that national roaming will not be available with Telefónica as from a certain moment in time? Is it the pre-rollout requirements that we're under licenses for? What else could be a hard line here? Second question that relates to that. Is it conceivable to have a national roaming contract with Telefónica? If you can't agree in the area of the price reviews, is it conceivable at all? That's my second question. And the third question, in the first quarter, your mobile customer intake was 150,000, 140,000 and -- but it's rather a bit on the weak side. Is it just a quarterly effect because of the uncertainties? Or do we have other influences such as a more aggressive competition? Could you please fill us in on what has happened here?

Thank you very much for your questions. I don't see any deadlines here regarding the initial roaming negotiations with Telefónica. Our contract assess, and that's not a secret. It's in the commitments. It's public. That MBA contract may be converted into a national roaming agreement. This is an option that we have. And in November 2018, we wanted to use that option -- and now this is August 2020. And what is correct is that, that takes much longer than we have ever expected. But there is no such thing as a deadline. Like, if Telefónica manages to have the negotiations going on at the end of this year or next year, then this obligation will not be existing anymore. I believe, that obligation is there until the negotiations have come to an end, unless one of the parties doesn't negotiate properly, then the negotiation will end anyway. Then you've asked a question about the obligation to expand. Yes, we have obligations, 1,000 antennas until the end of the year 2020, we have to manage that. And I still believe that this is feasible. Of course, if we don't get national roaming in the long term, then we have to think about how to handle the situation. And then we need to discuss that situation with the Federal Network Agency. Another question obvious was, can we sign a national roaming contract? Is it conceivable even if there are no agreements regarding the price reviews? This is conceivable, yes, because it a conversion of the existing contract. The MBA contract will then be continued as a national roaming agreement with the same conditions. This is what the agreement say. While the conditions that exist are applicable to the MBA to the MVNO business model and also for the natural roaming business model. And this is why the price reviews will continue. National roaming does not interrupt the price reviews. And the price reviews are all retracted and new prices -- well, if the price reviews says that the prices are no longer in line with the market then the new prices have to be granted to us retroactively. For example, price review 2 as from June 2018 then. Your first question was about the additions, whether the business is weaker than expected. In the first quarter, we had a growth of 110,000 contracts on the mobile side. Now in the second quarter, the growth is 140,000 contracts. And from my point of view, this is absolutely in line with our guidance. And I see that each with these figures. And the 500,000 contracts that we have forecast for this year, I think we will manage them well.

The next question, from HSBC.

I've got 3 questions as well, if I may. The first question relates to the EBITDA for the second half. What can we expect on the cost side here?

Let me give you an example. We have last mile cost that were a bit of a drag in the first half year that will decline. Then we've got the new sponsorship deal with Borussia Dortmund. Then we've got sales or distribution costs in the first half years they were flat. So we don't expect an increase here.

So a bit of a cost guidance would be helpful here for the second half year and also full year guidance. You said you expect the performance in line with the prior year. Does it really mean flat? Or could it also be minus 0.1%? Or could it also be a slightly positive result? You said there are a few uncertainties but does flat really mean flat? And the third question, connecting to the previous questions, national roaming, the negotiations are ongoing. And I believe that the [ double ] network agency was also brought in by your side. How has that developed? In what way do they support the negotiations? And otherwise, you have said you're ready to go regarding the network construction. Decisions has been made regarding the vendors possibly you can't announce anything here. But have decisions been taken already? That would also be helpful to know.

Let me get started with your last question. And Mr. Huhn will cover the first 2 questions. The national roaming negotiations are currently ongoing on the basis of their commitment with Telefónica, as I've said. The role of the umpire, the Federal Network Agency plays is based on the obligations in connection with the frequency conditions. The frequency conditions came with obligations that existing network operators telephones -- Vodafone and Telefónica, they were given the obligation to negotiate. And the conversion of the MBA agreement with Telefónica, well, they are based on the MBA agreement on not on the obligation to negotiate. We have a deadline, which we want to have clarity. And we have to wait and see whether it can be done with Telefónica until then. And then afterwards, we will turn to the Federal Network Agency and ask them to act as an umpire. Well, that will be a formal proceeding then and I can't tell you how long this formal proceedings will last. I believe, something like that has never happened before, but this is what the frequency conditions stipulate. If we can't agree, then we can turn to the umpire. And both goes for Telefónica, Vodafone and Telefónica is the frequency conditions are assured by the 3 providers that were expressed trials -- they were stopped. The normal claims are being managed. And I expect that the claims will be turned down as well. And now if we agreed with Telefónica regarding the conversion of the MBA agreement, then the Federal Network Agency will act as an umpire in this form of proceedings and how long that will take? That I don't know. Then you asked whether a decision has been made regarding a network provider? No. No such decision has been made yet. We have several quotes. Now we are aware of the cost, and we know how long everything will last, but we haven't signed any contracts yet. We want to take a look at the figures again, once we know that we've got the national roaming because the technology is constantly developing further. Production costs are going down. And it will be bad to sign a contract now and only start at a later moment in time at the "old costs". And based on the old technology, well, we have a clear road map, but we have to take a look at the details before we get started.

Okay. Then I will gladly answer the remaining 2 questions regarding the EBITDA and the cost side. The first question related to the development of the results and the costs in the second half of the year compared to the first half of the year. We believe that in the second half of the year, we will be on the level of the previous year or slightly above one effect comes from the additional customers and from the additional margin they generate. And then you have mentioned that sponsoring a deal that will come into effect in the second half of the year. More expenses here. That is true. But we also have some cost positions that will go down in the second half of the year. And that effect will be compensated for. So we are in a comfortable position here. The EBITDA guidance is on the level of the previous year. Then you asked for full year guidance, whether it's flat or whether it could be slightly more, slightly less, if I may put it this way. I believe the essential effect whether we've got slightly more or slightly less. Well, everything is closely related to how the COVID-19 pandemic develops, the assumption for the first half of the year. We are very good at EUR 10 million. That came in as a burden, so to speak, from the first half of the year. And that is -- was our expectation. And our expectation for the future is that we will be on a slightly higher level. But all in all, it's really difficult to say how the effects will materialize in the P&L. Because it's the holiday season, possibly, it's slightly more, but a bit slightly less. Everything will depend on the effects we will be confronted with in the next 2 quarters.

The next question comes from Wolfgang Specht of Bankhaus.

Well, the name was close enough. I've got a question regarding the DSL business and one question relating to the mobile side. In the past, we had situations in which the customer figure stagnated in this area, but you're never satisfied with stagnation on the DSL side. Now how is that situation to develop in the future? And relating to that, what about profitability. Is profitability going down because you had to buy more telephone minutes? Or do you have other effects that could make the DSL business a bit more profitable? On the mobile side, can you share some insights with us regarding the costs to acquire new customers?

No, Mr. Specht. The customer acquisition costs on the mobile side, they are on the level of the previous year. And you're absolutely right, with the customer growth on the DSL side, well, we cannot be satisfied with that because there is no growth in the current market environment. However, we believe if there is no option to significantly improve the product, we have to state that quite clearly. We have an outstanding voice platform. We have an outstanding IPTV platform in the cloud. We have an outstanding network quality, as was confirmed by the connect test. We have a very good service department. We have a very good EPS development. All the indicators are in the right direction. However, we are in a market that is growing slowly, generally, Vodafone with a cable offer, has got a superior product. And we are in a market in which we have to rely on advanced services from Telekom, even if we operate it, the transport network ourselves. But from the transition point, we are relying on Telekom to use the regional -- the local network. We have to buy advanced services. And of course, we want the cost to go down for these services, but I can't really plan for that. The world is as it is. Of course, we could lower prices, but we would have to lower prices clearly. So there is a true effect. We would not only reduce prices for new customers, but also for existing customers. Existing customers also change within our portfolio that we opted against doing something here. Now what could help us here in this business? What could boost the business? I believe a new technology could help, a fiber optic connections. As regards to fiber optic connections, we are no longer relying on Telekom. We buy fiber optic connections from the city network. I believe that development will go up over the next 3 years, more and more advanced services will not be bought from Telekom, but from alternative suppliers that work on a regional level. And I believe is that will help us to play a more active role in the market. At least as of today, we have quite reasonable advanced services costs. And we can also submit competitive offers because of that, also when compared to VDSL connections of Telekom and cable connections. So please bear with us, have some patience. We don't have to reduce profitability -- or we don't want to reduce the profitability here. And we really hope to benefit from a new technology and to generate more growth, thanks to that technology.

The next question is by -- okay. So the next question is by Martin Jungfleisch, Kepler.

I've got 2 questions. First of all, there was a second phase of margins as per 1st of July. So what about margin development? As far as I know, the price is fairly fixed. So how about the operating level regarding the amount of data in the market. So price reviews, are price reviews the only way to actually reduce prices in the market? And could you give us an input and insight into the flexibility of the data, the network capacity? And my second question is about fibers' revenues in the first half. It was that we had a increase of 3%. So could you give some more detail on this, on whether this is due to an increasingly negative mix effect due to the Vodafone effect? Or due to increasing revenue in the -- within the MBA contract?

Let me begin with your first question. And Mr. Huhn will go answer your second question on service revenues. So we've had the MBA contract, the second phase of the MBA contracts since the 1st of July. And if you read the commitments, you'll find that the second phase almost got prices for these second phase, which has to be negotiated and which are below some higher -- some threshold, some limit. And this is a phase that we're currently undergoing with Telefónica, even though 1st of July has already passed. We are not of the opinion that there is a price -- a price to say the same that can only be adjusted due to a price review, but this is all I can tell you about the ongoing negotiations.

Your second question was about the development of service revenues. Well, the effect that you mentioned and which we pointed out last year due to the migration of Vodafone customers certainly is in the fact that comes into place or comes into play. But secondly, we also have been able to keep our premium contracts stable and even increase the number of premium segment contracts, which is a result of our hardware bundled offers, basically due to our mix of products and plans and being able to keep our premium segment stable.

The next question is by [ Mr. Florian Ity ] of Bank of America.

I've got a question. Regarding network quality, your partner, Telefónica Germany, say they have improved their network quality over the past few years. And that this has led to increased customer satisfaction U.S. partners use the same network as Telefónica do. And so you should benefit of the same effect. So I wanted to know whether the current capital momentum and the current trend also is due to this improvement of network quality. And my second question is about the EBITDA. And the second year. You pointed out that there have been some factors, some cost factors, which had a positive impact or which was post out of positive impact in the second half. So I wanted to know whether you could give us some more detail on these factors and whether perhaps has to do with the new phase of the MBA agreement.

[ Mr. Ity ], let me start with a question on network quality, and then Mr. Huhn will speak about the EBITDA. So the network quality of Telefónica is actually, yes, it is improving. It's well known, publicly known that Telefónica wasn't -- didn't comply with its commitment to expand the net but they have now promised to improve, but they -- currently, they have been improving their network quality. We feel that with our customers, with our customer feedback. So yes, it is a benefit for our business as well. As -- well, the gap between Telefónica and Vodafone and Telekom is decreasing. So yes, this is going in the right direction.

Regarding your question on EBITDA. Well, on the expenses side, we've got effects from having to do with the development of usage and the existing pricing models. And in -- when communicating the guidance, we said that the pricing and conditioning model that we had in 2019 was contributed in 2020. And so we've got the same mechanic as in 2019, namely that we are -- we've got falling prices for gigabits. But otherwise, we don't have any effects from any ongoing negotiations, but we just -- we simply control same model as it was in 2019. And these effects then happen due to seasonal developments and the development of usage in customers.

That was the last German question. So the next questions are going to come from the English channel, and are going to be interpreted into German for you. The next question comes from Polo Tang from UBS.

I just have 3 questions. The first one is really just about the competitive environment. Can you talk through what you're seeing in terms of competitive dynamics in terms of both the fixed and the mobile markets? And I'm just curious in terms of whether there's been much change for Q3 compared to when there was locked down in Q2? The second question is really just about a fourth mobile network build. Can you remind us what your coverage obligations are and what the associated deadlines are? And can you remind us how quickly you can build cell sites? I think previously, you talked about building out something like 2,000, 3,000 cell sites per annum. Is this still your expectation? And the final question is really just around the timing of price review 2. Can you clarify when we can expect an update? I know that you said Q4 in the presentation, but I think investors were expecting something around about August, September. So I'm just trying to clarify if there has been a delay or whether we should be thinking about early Q4 or end of Q4?

Yes. Right. Let me begin with the competitive environment and the dynamism and the competitive environment. I believe that in Q3, we are seeing more of a change in the increase in contract numbers with Telekom and Vodafone and Telefónica, just because the -- those providers have a lower share on that. I mean we've got 100% online share in our business. And the other providers are more strongly focused on actual shops and locations, and they had less traffic in Q2. So they are increasing now so I believe that Telefónica, Vodafone and Telekom will have an increase in Q3, but that is just my gut feeling. I don't know what the actual figures will be at the end of the quarter. The competitive dynamism, I'd say, the prices are stable at the moment. I don't see any specific movement either up nor down. The coverage obligation, well, by the end of 2020 -- no wait, until the end of 2022 -- 2020 of this year. So until the end of 2022, we have -- we'll have built 1,000 mass. By the end of 2025, we'll have to have built 25% of households covered. And by the end of 2030, we'll have to have 50% of households covered. We assume that once we've reached our speed, our maintenance speed, will be able to rack 2,000 -- 3,000 mass a year. And the expansion is unfortunately delaying the pricing review 2. We actually had a timing of 3 months where the expert opinions had to have been delivered, but this is getting delayed. You have to consider that each party hands in paperwork and their own parties, expert opinions. And then there are replies to the petitions by the other party, then there are hearings with the experts, the experts and after before and after they are more opinions written and replied to the opinions written. So it's very comprehensive and it's time-consuming, which is why it takes a long time. And of course, it is our idea that it takes so long because we can only gain and benefit from this. Of course, we'd like price decreases sooner rather than later. But we don't have any impact -- and we don't have any influence on the length of the proceeding because we always have to wait on the opinions and the paperwork that the other party hands in and then the replies that we have to have. So we consider this is going to take a while now.

The next question comes from Joshua Mills from Exane.

Two questions from my side. One is something you've touched on a bit before, but it's just related to the second half 2020 EBITDA trends. So assuming that nothing increased from here with pricing reviews, how much clarity do you have on your MDA MVNO costs for the second half of this year? Is this a cost line which could still be higher or lower than your expectations? Is there any flexibility around that? Or is it fairly clear from your perspective that if nothing changes on price reviews, you know how much you'll pay for the third and fourth quarters? The second question is just related to your network build. So obviously, we've seen a bit more detail now around Vodafone's planned Tower IPO. I just wanted to understand whether the establishment of perhaps more independent tower operators within the German market has been a feature of your national roaming discussions. And whether the Vodafone Tower IPO has performed part of your negotiations in the last couple of months or whether those have been broadly unchanged?

Okay. Let me begin with the commercial operators. We don't have any influence, any impact on the national roaming, but the tower operators because we get our national eval from Telefónica or from Vodafone or Telekom. And so we don't have any influence on how they create, make their product, whether they share their infrastructure, whether the infrastructure belongs to them alone, that doesn't have any impact on our negotiations. But it does have an impact on our possibility to create our own network because that is a positive development in the German market over the past few months that we now have a number of powerful tower operators and that we can use existing locations. And this is part of our plans as well that we don't have to build every location ourselves, but wherever we already have the location where the locations have capacities, we can use the existing ones. And that will, of course, increase our speed, will reduce our costs. So this is a very positive development as far as we are concerned. Regarding the prices for the MBA MVNO contract for the second half, as I said earlier, in our guidance, we've got the pricing and condition model, the same one that we're using in 2019. That was just continuing it in 2020. The -- how the prices will turn out at the end of the day, will depend on negotiations that we're engaged in at the moment. So you must understand that I cannot give you any details at this point. This is our NDA but of course, we're doing everything in our power to get the best possible result that we possibly can.

The next question comes from James Ratzer from New Street Research.

Two questions, please. The first one was just regarding the macro economic situation in Germany. I mean GDP in the second quarter, it was down around 10%. I mean in the past, we have seen the challenge of brands actually have tended to fare quite well during times of macroeconomic weakness. So in particular, I was just interested in kind of the months of July and what you're seeing so far in August. I mean are you seeing evidence of increased net adds as customers are looking to spin down from some of the more expensive brands with Telekom or Vodafone or Telefónica? And then the second question, please, was just regarding your discussions with Telefónica around national roaming. I mean you've mentioned it's taking a bit longer than expected. I mean I was wondering, can you give us any more color on why it's taking longer? What's the specific sticking points you're finding in your discussion? And would you be willing to sign an agreement at a modest premium to an MBA agreement if it meant you could get an agreement now rather than having to then go through a whole regulatory review, which, as you said, you don't know how long that could take?

Yes. Let's begin with the macroeconomic situation. Currently, we see a stable growth, but we don't see stronger growth because more clients move away from Vodafone and Telefónica or Telekom to us than before than in earlier fronts. So stable business development, but no boost due to the fact that customers switch to lower-priced offers. This is not something that we see at the moment. National roaming, well, it's taking much longer than we had expected originally, the national roaming option we've taken in November 2018. It's now August 2020. And I cannot tell you anything about ongoing negotiations, of course, because they are under nondisclosure agreement. Well, it's clear we would like to end this, but national roaming is very important for us. The building up of the network will take some years -- several years. We don't have any frequencies in -- well, the capacity frequencies were auctioned off last year, which are good for cities, but we -- especially as regards to the rural areas, it will take many years that will be dependent on roaming, which is why it's extremely important for us, which is why we have to be very careful about cost development, especially in the next few years. And so -- well, it's an important negotiation just as I call it, it's the mother of all battles, as I like to call it, because it's the last thing we need in order to get started. And well, those who don't -- who aren't interested in having a fourth network in Germany wouldn't give this to us at all, or would like to give this to us as late as possible. I can understand that from their perspective. So these aren't easy negotiating partners. So I think we have to be patient. We have -- we are patient. We -- but there are internal red lines where we'd say, okay, now the negotiations have failed. We haven't gotten there yet. But what we'll have to wait and see how it develops.

The next question comes from Usman Ghazi from Berenberg.

I've got 3, please. The first question was, in the last quarter, you had hinted that you were waiting on the European Commission's opinion on your interpretation of the MBA contract [ August ], July. I just wanted to confirm if you had received an opinion and if that opinion was favorable or not to your position. The second question was related to -- is this whole -- around the EBITDA development in H2. And apologies for bringing this up again, but I just want to confirm the COVID-related impact, which has been around EUR 10 million, as you said, in H1. Is that expected to repeat or be higher in H2 because of -- some of us were under the impression that, that headwind would phase out in the second half of the year? And then my final question was just so I understand, is it right that until the negotiations of the MBA MVNO with Telefónica for the period after July are concluded, the prices that you will be paying Telefónica will be as a continuation of the business model like in 2019 -- like you said?

We're still waiting on the European Commission's opinion. I cannot tell you when we'll get it. We hope that we'll have a result soon, but we don't have any influence. We cannot influence when they're going to send it. We ask them to get it as soon as possible. We hope that the opinion of the European Commission will support our opinion on our position, but I cannot tell you because we don't have it yet. Regarding the effects from the coronavirus situation in the first half of the year or the second half of the year, we assume that the second half of the year or the effect in the second half will be at the effects of the first half, slightly above. It will depend a lot on the traveling behavior within the European Union and outside of the European Union. And currently, we see Germans traveling into -- within the European Union so that costs are at a higher level so we have lower savings here. While in non European, we don't get roaming revenues because people don't travel outside of the European Union. So this, therefore, the forecast is insecure. I cannot tell you with any great certainty, but we believe that it will be roughly at the same level of the first half of the year. Regarding the prices for the MBA MVNO, I can only tell you what I told you earlier, of course, our objective, our target is to maintain or to negotiate a comparable business model. But I cannot give you any details because, of course, it is under an NDA. And as Mr. Dommermuth noted earlier, our aim is to get the best possible conditions and the best possible prices for us. Because it is an extremely important contract for us. And therefore, we have to be patient in order to reach -- therefore, to achieve this negotiating objective of ours.

Sorry, can I just follow-up on the last remark. I guess what I'm trying to understand is that is it right that if the 2 parties are negotiating, as long as that negotiation has not been completed, the costs will -- that you will incur will be as per the assumption you have made in your guidance that there's a sliding scale on the cost per gigabit? And the reason for asking this is that in a scenario where you are not able to reach negotiations -- reach a settlement, let's say, I don't know, in the second half, can Telefónica suddenly start charging you a different wholesale price? Or can that not be the case until the negotiations are completed?

Our view of this is that currently, we don't have any agreement for prices for the second half of the year. We don't know what Telefónica is going to charge us because we don't have an invoice for July yet. But any price that is above what we see from the existing model, we would reduce. But practically speaking, we don't have any contractual basis for this. We assume it is like this, but we don't have a contractual basis.

The next question comes from Steve Martin (sic) [ Steve Malcolm ] from Redburn.

This is Steve Malcolm. Not, sadly, the American comedian, Steve Martin. Yes, I've got 3 questions as well. First of all, just on distribution, I guess, as an online player COVID sort of placed your strength, but it seems like all German operators had to pivot to online in the last quarter, unsurprisingly. Can you give us a sense of what your mix of direct and indirect is in the online arena? And how reliant you are on price comparison sites for customers? And whether you're seeing a sort of big uptick in the level of competition of customers coming through comparison sites, and that may put upward pressure on your cost of acquisition going forward. So that's question one. Question two, just on cash flow. Obviously, you had a major improvement in working capital in the first half or particularly the first quarter, but also in the second quarter versus last year. Apart from the MBA MVNO payment, any big working capital items we need to think about in the second half as we sort of model out our cash flow for the year? And then finally, just coming back to the interminable discussion on the MBA MVNO and roaming discussions that you're having. Any sort of guidance as to when you might call in the regulators or referee if you can't reach an agreement? Or should we pretty much still having this discussion in 2030 when you haven't come to an agreement?

Well, regarding the first question, the distribution figures of direct and indirect, the indirect channel is not very important for us. In the DSL area, we have perhaps a share of 10% of sales, which are indirect, which gives you the coronavirus situation was drastically reduced. But since this is not a high share of our business anyway, it was 10%. This didn't hit us very hard. And with regard to mobile, the interact shares even lowered from 3% to 4%. So basically, with regards to distribution, with regards to sales, we're not really hit that hard. But since we also have very high customer acquisition costs, due to the low volumes, we don't save a lot of money there either. And as Mr. Dommermuth said earlier, at the moment due to the coronavirus situation, we see our indirect -- our competitors in indirect are more solely hit in the indirect channel. And their numbers will now increase that the indirect channels in the locations [indiscernible] locations have opened again. Now the development in the second half of the year from operating business, we see roughly equal to the first half of this year. A comparable figure. We do have an effect like you mentioned earlier, namely the payment of the -- prolonging the MBA MVNO contract, which, of course, in the will be additional payment and expense in the second half or rather in Q3. Unfortunately, we didn't get the third question. Can you repeat the third question, please?

Yes, sorry. I was just wondering if you can give us any idea when -- at what point you might call in the regulator as a referee in the roaming discussions and whether we should still expect this discussion to be going on in 10 years' time when the sort of interest of the 2 sides makes it impossible to agree a deal?

Well, I think you have to make -- draw a distinction here on -- about the basis on which negotiations are made. We're currently negotiating with Telefónica on the basis of the commitments that Telefónica made. And the European Union basically is responsible, but put it differently, Telefónica is responsible for keeping the commitments and the European Union can impose sanctions. The European Commission is accompanying the negotiations. So we have a facilitator in place as it were. And in how far the EU will be able to exact an influence on Telefónica, I cannot tell you. I'm not present whenever the European Union talks to Telefónica alone and what pressure they are excising and whether they use any pressure or what arguments they use. But at the end of today, the European Union has been with these negotiations -- has been accompanying these negotiations from Day 1. There is a trustee that has been present and is present in the negotiations and there is feedback to and contact with the commission. The other subject with the arbiter -- the arbitration, that is about -- well, the Federal Grid Agency conditions say that there has to be the network. They're the -- the Federal Grid Agency is the arbiter, the negotiator, the facilitator. But currently, we're negotiating with Telefónica on transferring the MBA contract international loan agreement. And with the MBA contract continuing to be valid, which is why the European Union currently is the right contact person for us and for this case.

Sure. But I was talking more about the roaming discussions you're having with DC and Vodafone, whether there's any progress there and whether you're tempted to call in the regulators as a referee to try and make progress?

The negotiations with Vodafone and Telefónica -- sorry, with Vodafone and Telekom, the status of negotiations were shared with the Federal Grid Agency. The Federal Grid Agency can decide by itself when it wants to contact the individual negotiating parties. And it has to contact the negotiating parties and start a procedure when we ask for formal proceedings. But so far, we have not requested formal proceedings with the federal grid agency, we've only informed the Federal Grid Agency about the status it has.

There are no further questions, I will now hand back to Oliver Keil.

So unfortunately, we cannot take the next questions. We're out of time. Have a nice day. And this is Oliver Keil. I would like to thank you very much for your interest in our half year results. As always, we'll be available for you for e-mails, for telephone calls. So all the best to you. Stay safe, and until next time. [Statements in English on this transcript were spoken by an interpreter present on the live call.]