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

Welcome, ladies and gentlemen. We welcome you to our analyst and investors call on the closing of the first half of the year. Our Board is going to present to you the results and the outlook for 2021 and address the recent events. And after that, we will be available to answer your questions. So now I'd like to hand over to the Board.

Welcome, ladies and gentlemen. This is Ralph Dommermuth speaking. I would like to give you the presentation of our report, and then Mr. Huhn will present -- will add to my presentation with the financials. I want to start with the company development. We have 2 focus points: broadband connections and mobile phone contracts. In the broadband, we are the largest DSL provider with 4.28 million customers. We offer fiber -- VDSL and fiber-to-the-home complete packages. We offer good network qualities. We regularly win the landline contest, usually first or second place, alternative with German telecom. In the mobile business, we have concentrated on use of the mobile Internet with 10.83 million mobile service contracts. We cover a broad market with our premium brand, 1&1, and the GMX co-brands and WEB.DE and some discount brands from the Drillisch acquisition like yourfone or smartmobil. Our customers are very content with us. We regularly win the customer satisfaction contests and are now -- and I think you all know, are on the way to add our value chains and build up a powerful 5G network. Until our own network is up and running, we will use capacities from Telefónica and Vodafone with our MBA MVNO contract with Telefónica or our respective contract with Vodafone. In the first half of the year, we had a good number of customers coming in, 280,000 contracts new, 310,000 in mobile Internet and minus 30,000, a little drop in the broadband lines. In the first quarter, the contracts were stable. In the second quarter, we saw this drop back in the landline contracts. We still have a valuable customer portfolio generating valuable contracts, and these 30,000 contracts are due to a lack of demand in the market. In general, we are now going to increase our efforts in order to stabilize the customer contract figures in the second half of the year. In the revenue, we could increase by -- grow by 2.6x -- 2.6%, up to EUR 1.9 billion. The service revenue has increased in -- by 3%. And the other revenue, which does not render big margins, especially smartphones or tablets, routers and so on, are passed on to the customers and are then recompensated by the minimum contract times, that's a growth of 1.2%, adding up to EUR 3.8 million so all together. Our EBITDA has increased. If we look at it by segments, in the Access segment, which is where we do our normal contract business, an EBITDA of EUR 309.4 million (sic) [ EUR 390.4 million ], including EUR 39 million off-period. If we reduce these, then we get to an operative EBITDA of EUR 351 million, which corresponds to a growth of 4.7%. Our segment, 5G, shows the initial costs for the network setup. These in the first half added to EUR 14.9 million, and that was within budget for the whole year. We have planned EUR 30 million as an initial budget for the buildup of the network. And that takes us to the status of our network. We -- in 2019, we acquired the frequencies. We rented some frequencies from Telefónica. And in May this year, we closed a national roaming agreement with Telefónica as well. On the basis of this fundamental setup, we could now close a general contractor -- contract with Rakuten to build up the network. We are still building up the contracts with tower companies to provide the locations, and we are now doing these negotiations to close the contract. In parallel, 1&1 Versatel, our sister company, built up the fiber optic network so that the company is now able to cope with our demand and connect us. The start of the network buildup will be in the last quarter 2021. We want to build a so-called OpenRAN, the first one in Germany, and you see here the benefits that we see in this. The traditional architectures say that you either have 1 supplier or 2 or more, that they split up certain regions. OpenRAN allows to work more suppliers in the same footprint by defined interfaces exchange as possible, so 10 antennas from vendor A and 10 from vendor B could be used or if want to have that even more of a different vendor. So by the definition of the interfaces, all that will be compatible. And it will be operated on standard hardware. And the standard hardware will operate the network software. This constellation allows us to create more competition within the vendors and lower total cost of ownership, and it gives us a quicker time to market. And that is what we expect to see in the future is also more innovation as we use standard hardware, open software. The software is virtualized, operating in our computer centers or in public clouds. And of course, that leaves us free to combine different hardware and software components. All of this is to generate more innovations. And at the same time, we will keep an eye to orchestrate the network clearly and smoothly and automate standard work tasks as far as possible. At the bottom, you see the so-called lock-in effect if you have the traditional approach to networks, it means if you join up with one provider, you have to stick with that provider for a long time, and you are dependent on him. And while in the OpenRAN, we can work with a number of different suppliers at the same time. And depending on the conditions or the best innovations that they provide, we can focus more or less on one or the other, integrating them more into our network so that we are independent of the road map of individual suppliers. On the next page, you see the combination -- the comparison of the traditional architecture to OpenRAN architecture. You've seen this. And now at the top, we see that we want to build in 390 cities. That's the figure to cover 80 -- 50% of the households. That's the schedule. That's what we have to do from the auction of the frequencies that we have to cover 50% of the households. The antennas are set up in 390 cities, combined with 550 city POPs. And these will be edged down to 24 edge computer centers, which are then connected to 4 central core data centers. And as you see, our networks with so-called standard hardware, as you know it, from any computer center. The antenna itself is quite slim. It's got a very little footprint. It has no base cabinet to it in the -- with the computers in it. But the computer capacity is rendered in the decentralized computer centers. And that allows us to pool resources and allows us to create redundancies. And it makes the whole approach more efficient. In the decentralized data centers, standard application computers can be used, which run cloud applications, which are then more -- with reduced latency times due to their short distance to the antenna. That allows us to operate real-time applications. Because if you don't have the application right close to the antenna, data have a transfer time due to the 100- or 1,000-kilometer distance to the computation center for processing and then the way back. So even in fast fiber optic networks, that creates latency times. Also, due to the little footprint of our antennas, we are more quick to set them up. And as the antenna requires less maintenance work and the maintenance of the processors and software updates and so on, it's done centrally in the far edge data centers. Yesterday, we published our partnership with Rakuten to build up the network. Rakuten is going to do the planning and the buildup of the active network equipment. So they are not going to take care for the antennas, which passive part is with us. Fiber optics and antennas aren't our responsibility, but the active components will be replenished. And Rakuten will be accountable for them. We think that this gives us an optimum partnership because in our corporate group, we have a lot of know-how, for example, to operate telecommunication networks. We have been doing this many years with the landlines to operate net -- data centers. We've got over 60 million accounts that we operate in the group. And for cloud applications that we have programmed a lot of them ourselves, we have a lot of know-how as well. But we have no specific know-how on virtualized OpenRAN. Rakuten built up the first OpenRAN virtual network in Japan, starting the network a year ago, and they have a lot of lessons learned. And we want to participate from that. It's going to be a 4G- and 5G-supported network. Our antenna locations will only be connected to glass fiber optic connected sites. That's important for our architecture because we want to send broadband data to the antennas and to the data centers where we do the data processing. The software will, as I said, run on standard computers. It's fully virtualized. It could also be done by containerizing in public clouds, and that allows us to update the software at any time. And by that, we will be maximum flexibility, giving us maximum cost efficiency in case of extensions or retrofits. As I said, we expect this network to be highly flexible. Of course, we're going to start with a certain set of manufacturers. But then we'll have to see how things develop, whether we will stick with these manufacturers or add -- come in -- have new ones coming in. That will depend on the pricing and the innovations that we'll see in the future. So far, as an overview for the first half of the year and as a status report on the activities on our own 5G network. And then I'd like to hand over to my colleague, Mr. Huhn, for the detailed financials.

[Interpreted] Well, good afternoon again. I would like to start with our earnings for the first half of 2021. Mr. Dommermuth had spoken about the revenue already. You can see the sales growth for the first half of the year at 2.6%. The cost of sales has decreased by 2.1% to EUR 1.313 billion. The gross profits from turnover have significantly increased to EUR 616 million. They include impairment losses from receivables and contract assets by -- of EUR 34 million. The gross result is then at EUR 577 million, which is an increase of 7%. The cost of distribution has increased by EUR 21 million -- to EUR 21 million. This includes our BVB sponsoring and our investment for the first half of the year for marketing in our brand. The administration costs at EUR 59.6 million have also significantly increased over last year. This also encompasses the 5G -- the initial 5G expenses, which are responsible with more than EUR 9 million. So that only -- a small share comes from administrative costs. The other operating income and expenses have slightly decreased compared to last year from EUR 12.1 million to EUR 8.7 million. In the first half of last year, we had EUR 3 million positive effect from depreciation. This did not repeat. We also had a decrease of impairment losses from receivables and cross -- contract assets from EUR 35.9 million to EUR 34.4 million, which is due to better payment discipline by our customers. The profit loss from operating activities was EUR 296.3 million. That's an increase of op profit of 16.6%. That also includes out-of-period expenses. If we eliminate that, we would have a plus of 1.1% compared to last year. If I deduct the expenses for 5G, it would mean an increase of 4.7% from the operating business. The financial results at minus EUR 0.2 million is exactly at last year's level. So that takes us to a profit before taxes of EUR 296.1 million, tax expense of EUR 88.9 million and a consolidated result of EUR 207.2 million compared to EUR 184.7 million last year. On the next slide, you can see the balance sheet sum, which increased by EUR 284 million to EUR 6.974 billion. Most of the increase comes from short-term assets, which have increased by EUR 203 million. This was largely due to the investment of liquid assets with United Internet and the increase of contract assets by EUR 40 million. Liquid assets have slightly increased to EUR 6.4 million from EUR 4.4 million, and long-term assets have increased by EUR 78.4 million to EUR 5.215 billion. This includes deferred taxes, but there are also depreciation on immaterial assets to the tune of EUR 70 million, which means that we have a net result of EUR 78 million. On the liabilities side, the short-term liabilities have increased to EUR 666 million, largely by the establishment of liabilities from deliveries and services. Long-term liabilities has slightly decreased to EUR 1.254 million, and equity has increased to EUR 5.53 billion (sic) [ EUR 5.053 billion ]. You -- we have EUR 8.8 million dividend that we paid out. On the next slide, you can see the cash flow for the first half of the year with investments of EUR 185.8 million, just below last year's value, composed of EUR 283.5 million of cash flow from operating activities. But also, there's EUR 35 million from contract assets plus EUR 81.3 million from the establishment of change in receivables and liabilities, then an increase in income tax of EUR 10 million and a change in trade/other receivables of EUR 16.9 million. Against this is EUR 175 million change in accrued expenses in the context of a once-off payment in 2021 from the contingent contract for FTTH and VDSL concluded in February and another additional EUR 4 million decrease of inventories, which leads to the sum total of EUR 185.8 million mentioned earlier. The cash flow from investment activities was at EUR 168.4 million, EUR 8.1 million from CapEx and EUR 160 million from the investment of free cash with United Internet mentioned earlier. The cash flow from financing activities of minus EUR 15.3 million results from the dividend disbursement of EUR 8.8 million and the repayment of lease liabilities of EUR 6.5 million. So that we have a free cash flow bottom line of EUR 177.6 million, which is very close to last year's value. Next slide shows the bridge from EBITDA to free cash flow. You can see on the one hand, the EBITDA, the operating EBITDA of EUR 336 million, adds the EUR 39.4 million of out-of-period income, which leads to the EBITDA mentioned earlier of EUR 375.5 million. Against this, we have the establishment of the contract assets of EUR 35.2 million, the buildup of accrued expenses of EUR 175.5 million. The increase of receivables and liabilities of related companies increases the position by EUR 81.3 million. The sum total of other working capital is EUR 11.4 million. And then we have a negative position of taxes, minus 49% -- EUR 49 million; CapEx, minus EUR 8.1 million. So that takes us to the free cash flow of EUR 177.6 million. I'd like to give the floor to Mr. Dommermuth for the forecast.

[Interpreted] Thank you, Mr. Huhn . I think we had a very good first half of the year. We have proceeded in developing the 5G setup, and we expect the second half of the year to go well as well. Concrete, we want to generate EUR 3.1 billion service revenue. Our EBITDA should end up with EUR 6.7 million (sic) [ EUR 670 million ]. That's a bit more. Up to now, we expected EUR 650 million. In the results, we still included about EUR 30 million for the buildup of the 5G network. So that means that our Access segment is going to generate EUR 7 million; and the 5G segment, minus EUR 30 million. Not included in these figures are the positive effect of the retroactive price adjustment from the MBA MVNO as it is off-period. And that takes us to the end of our presentation already. As we already mentioned, we have good expectation. We think we can continue our success story, and we are looking forward to the discussion with you and your questions.

[Interpreted] [Operator Instructions] We have a first question from Ulrich Rathe.

[Interpreted] I have 2 questions. The first question, looking at the landline customers where you see a little drop, I have to say, Mr. Dommermuth, that you are hopeful to keep that stable in the second half of the year. Can you express or explain where you take that hope from? Do you have additional marketing budget? Are you going to be more active on the market? Or do you think that the market is simply going to recover in the second half of the year? The second question is the announcement of Rakuten, where the commercial constitution were not given. Probably, you're going to want to disclose this. The Japanese press said that the deal is EUR 2 billion over 10 years, so EUR 200 million per year. That would be about the budget that you talked about a couple of years ago already when all of that started. So could you perhaps detail this content, whether Rakuten is coming in with capital as well or whether they are simply just a service provider, which has been engaged here also with a question with respect to the figures that we can take from the press?

[Interpreted] Thank you, Mr. Rathe. Let me start with the landline customers. In the second half of the year, we are going to increase our marketing budget for DSL. We have taken this in the planning. Apart from that, our prognosis -- our forecast would have been better still, but we have a headline which is increasing the value of our contracts. And we do that in mobile and in landline segments, for example, by shorter promotion times. And that is working well, and we want to carry on with this. So this is why we don't want to lose any margins in the contract to stimulate the business and then rather invest into marketing and sales. Concerning Rakuten, I cannot tell you anything about the commercial conditions as these cannot be disclosed. I can't remember of us having planned EUR 200 million for the network operations per year because the network operation for us is going to be more expensive than that because besides the depreciation on the hardware, we are going to have electricity. We are going to have teams. We are going to have rents for the site, depreciations on frequencies and so on. With Rakuten, we are talking about a part of this overall concept, which we are covering with them, and these are the active components. And Rakuten is not a capital provider here, but the active components are transferred to our own ownership as soon as we have accepted and paid them. And in that respect, Rakuten is a service provider. But as a general contractor, they are responsible for the success of the system, being accountable for punctual delivery and for it to provide the promised characteristics. And as I've said, I think that we have a very good match with them here. It's a long-term partnership. Of course, we have to see how that's going to turn out. It is going to have difficulties, as everything in life has. But we are optimistic, and we think the corporate culture that we found there. And the speed of operation is a good match. And we are looking forward to that cooperation.

[Interpreted] The next question is from Jonas Blum, Warburg Research.

[Interpreted] I would have 2 questions concerning the vendors and then extending the buildup of the network. First of all, Mr. Dommermuth, there was rumors on -- that Tillman has an equity statement to come in. Maybe you could take this context to explain how the CapEx profile on 1&1 is going to be viewed. And just to clarify, Rakuten -- you said Rakuten would take over the active equipment, which would mean the buildup of the CapEx would stay with you. And another question on the interview that you gave yesterday in the Handelsblatt, which was on the buildup speed. You said that internally, you have a very ambitious plan. Although you can't share it in details, but the 50% POP coverage, you said that will take about 1,000 sites. Linear is going to be 2,000 for 2 years, so that's going to be a lot faster than 2020 to cover that 20% coverage.

[Interpreted] Well, yes, thank you, Mr. Blum. We are negotiating with different of tower companies, and I can't comment on the status of the negotiations there. I can't comment on the press yet. We want to address a good mix here because on one hand, we would like to use sites that are already there, which can be quickly and at low cost -- we used to fix new antennas, but that's not going to be enough. We're not going to be able to cover all 12,000 sites that we need from existing sites. So we're going to have -- build new sites, and this is where we are still negotiating on the right mix and the right conditions. As far as the CapEx profile is concerned, our aim is to have the antenna carriers to be provided by the tower company, that we do not have a CapEx, that the fiber optic connection is provided by 1&1 Versatel, renting them to us so that we have no CapEx there either. And the CapEx will only be generated by the hardware, the antennas and the software and anything on the active equipment. And that is the CapEx profile as we see it. And if we are proceeding with the tower companies and there's going to be a clearer picture, we will be able to inform you. On the expenses of the implementation of our business model, we are moving from a renting company to an ownership company. So that will give us a disciplined cost structure because we're going to have depreciation on CapEx. We're going to have operation costs. And on the counterbalance, we will save on rent, on respective costs. And we will be able to present that to you and show you what amount of money we'll have to spend altogether and how that is going to share out over the curve of time so that you'll have an understanding for that. But that is going to be a next step. On the buildup speed, that's something I cannot comment on because as I said, I do not know how many tower companies -- or how many towers are there in the mix and how many have to be built new. The more existing ones we can use, the faster we will be. And the faster we -- the more we have to build, our partner will take longer to build them and come up with new antenna towers. We have regulatory requirements. We have to build up 1,000 sites until 2022 and 50% by the end of 2030. So that is what we still think that we are able to cope with. Maybe we're going to be a bit faster, but that is something I do not want to comment on today. We'd have to close the contract for that. We have to start and get going, and we also see if it all goes as planned. But as you have mentioned rightly, we have ambitious plans. And I do think that -- at least that's our approach, that we'll be able to build the network faster than the others have done so in Germany in the past.

[Interpreted] The next question is from Martin Hammerschmidt from Citi.

[Interpreted] I have 2 questions as well. The first one referring to the EBITDA, you said EUR 236 million. You have reached 50% for the first time. Can you tell me what will be the components for the second half of the year? And then you have the service revenue but also a COVID effect, and then you also have the -- some other costs increasing and the higher commercial components. So there are different components that you need to consider. The second question concerning Rakuten again, they had suffered a delay in the development of their network. Now do you see a risk that this might be a bit delayed in your case and make slower progress than anticipated?

[Interpreted] Well, thank you very much, Mr. Hammerschmidt. I'll start with the second question, and Mr. Huhn will then speak about the EBITDA components. It's correct that right now, we have a chip shortage, but we have plans where we are not expecting the antennas to be delivered over the next few months. But right now, we have planning and preparatory work to do, acquisition work to do, establishment of antenna carriers. And then the construction speed will accelerate. So I believe that there will be needing the chips when the shortage will be overcome. That's what we expect.

[Interpreted] Well then, concerning your question concerning the EBITDA guidance or the developments over the next half of the year. The EBITDA in the second half of the year will be about EUR 2 million short of the EBITDA in the first half of the year. That's due to higher marketing expenditure we're anticipating for the next half of the year, also for the VDSL area to achieve a stable contract situation again. So if you look at the gross margin and the cost of acquisition of customers or minus that cost of acquisition, minus the marketing budget, that takes us to the EUR 329 million that we're anticipating for the second half of the year.

Our first question comes from Polo Tang from UBS.

It's Polo Tang from UBS. Just a few different ones. My first one is really just about service revenues because they grew by 4% in Q2, but your guidance implies that you're expecting a slowdown to around about 3% in the second half. So can you maybe talk about kind of what drove the growth in Q2? Was there any benefit from a recovery in roaming revenues? And are there any reasons why service revenue growth should slow in Q3, Q4? Or are you potentially just being conservative? The second question is really just some more color in terms of competitive dynamics because you had a very good performance in terms of mobile net adds, but the trends in broadband were a bit weaker. So can you maybe just talk about what you're seeing in both the mobile and the broadband markets? And my third question and final question is really just to come back to the mobile network build because the BNetzA has outlined a range of scenarios for the allocation of 800-megahertz spectrum. So what's your expectation for how that 800-megahertz spectrum auction -- sorry, that spectrum will be awarded? If 1&1 does not acquire 800-megahertz spectrum, how does this impact your build to 50% of the population by 2030? Would you need more than 12,000 sites? Or would you need fewer sites? Any comments on that would be appreciated.

[Interpreted] Well, thank you very much for the questions. Concerning service revenue in the second quarter, we had a stronger increase compared to the first quarter. That's due to the fact that in the first quarter, there were very low revenues with international roaming. They went nearly -- it ended nearly to 0. We saw some recovery in the second half of the year, which had a positive benefit on the IPO. And in the second quarter, we also see our activities to increase the value of our customers. That, of course, is reflected in the IPO -- service IPO. Now concerning quarters 3 and 4, the situation as we see it now is that international roaming revenue will stabilize. We still see, for instance, for non-EU areas, no activity. That's where we make most of this revenue. And so we see this service revenue forecast of 3% with EUR 3.1 billion. So we do see some positive effects due to the customer value initiative IPO, that is positive. But for the second half of the year, we still see risks in terms of international roaming, which is why we stick to the plus 3%, so the EUR 3.1 billion for this year. Now in terms of development -- customer developments in the first half of the year, first of all, in terms of the competitive environment, we believe that it is quite stable. The portfolios of the competitors, there were no price changes with the competitors. As in the previous quarters, we see promotional campaign-driven activities. Vodafone had a lot of rebates, but I think that our contract increase in the second quarter gave us a pretty good result that we're quite happy with. In terms of landlines, the competitor situation hasn't changed either or the pricing position hasn't changed. We have a very high value -- very high-value customers. So the churn -- the situation is very stable. What we've seen is a decrease in demand, which means that we generated less net assets. And that is something that we see with the competitors as well. And with the measures planned for the second half of the year to counteract this, we are quite optimistic that in the second half of the year, we will get back to a stable contract situation. And concerning the 800-megahertz frequencies, I have to say the following -- make the following comments. They will be reauctioned as for the 1st of January 2022 and will -- there's still a debate on whether there will be an auction or whether they will be allocated in other ways, maybe with certain terms and conditions attached. We expect it to be an auction that there will be no agreement on the -- among the market participants, and we'll certainly participate in this auction because these 800 megawatts (sic) [ megahertz ] frequencies are very important for us. They are the ones that we still need to roll this out across the country, and that is what we need for linkages. With our frequencies, we can penetrate into the homes to a few meters, but we cannot penetrate into basements, for instance. And that is what we want to achieve because those are areas where we have to purchase roaming capacities. And roaming is much more expensive than our own production, and it limits our competitive position. This is why we would like to be able to make our own offering at the -- in the low-band area. And that is why it's so important for us. Our plan B would be if the frequencies become far too expensive, our option would be to continue roaming and then hope for the best at the next frequency allocation at the beginning of 2034, where we are speaking of 700 megawatts (sic) [ megahertz ], where we have a wider frequency band. We could reposition ourselves, but that would mean we would have the disadvantage that up until then, we would have to purchase national roaming capacities. And we'd like to avoid this.

The next question is by Andrew Lee, Goldman Sachs.

I just had a couple of follow-up questions on the mobile network build. And I understand that you're going to be giving more detail in a few weeks, hopefully. But just in terms of the responsibilities for running the network, so can I just clarify that the fiber backhaul and all the core network will be organized by 1&1 Versatel? So no kind of backhaul requirements outside of what your own broader company will provide? Secondly, all the active equipment is going to be managed by Rakuten, even ones you've taken ownership of the active assets, which I think you were mentioning. And thirdly, in terms of the towers, the existing towers provided by the towercos, who negotiates that? Is that Rakuten or you? And for the existing towers you will be using, can I just -- I'm not sure if you said -- it's been unclear, but whether that will be 1 or 2 towercos that will be providing you with your -- with the existing towers you end up using. Any sort of color around those delineations of responsibility will be really helpful.

[Interpreted] 1&1 Versatel will deliver all fiber optic lines that we need and provide the data centers. But in the data centers, they will provide power supply, air conditioning, emergency power supply. The computers themselves belong to 1&1, 1&1, and that since they are rent, they are -- they rent from 1&1 Versatel. The active equipment is on the accountability of Rakuten. It will always belong to 1&1, but Rakuten together with us will do the selection. And they will be responsible with their own employees or service providers to build up the components in order to deliver the needed or the agreed KPIs. The negotiations with the towercos are done by ourselves. And with respect to the existing towers, we expect to have one partner who will give their towers to us and one partner we will have to build new towers with. But that is open to change yet.

The next question is by James Ratzer, New Street Research.

Mr. Dommermuth, I've got 2 questions, please. So the first one was just coming back to the CapEx that's covered by Rakuten and Versatel. I mean, it sounds like quite a lot of the kind of costs essentially will be incurred either through Versatel or through Rakuten. So I was wondering what percentage of the total network build will actually be covered through these 2 parties? What's actually left then within 1&1 that isn't covered, please, by these 2 parties? And so what percentage of the network build might that be? And then the second question was just, please, regarding your comment about actually now building out some new towers in addition to renting on existing tower sites. Why are you considering building out new sites at this stage? Is this because you find there actually might not be the space on some of these existing rooftop towers? Or you're not happy with the site locations that either American Tower or Vantage might be able to offer?

[Interpreted] Yes. Let me start with the CapEx question. Rakuten will take -- will not take over any CapEx for us. All active hardware is always in our ownership immediately and has to be paid for by us and is activated by us. It's different with 1&1 Versatel. 1&1 Versatel operate fiber optic network, renting out the lines. So the CapEx for the new build of new fiber optic lines or the elaboration of existing lines, improvement of the existing lines is carried on by 1&1 Versatel in the context of their normal business. As far as the antennas are concerned or the carriers, we -- of course, we want to build as little new -- as few new towers as possible because existing towers are easier to access and provide higher planning reliability. But the situation is that existing carriers do not provide enough space to -- for us to add antennas or due to the radiation requirements, it is not allowed to build additional antennas or to place additional antennas on these carriers. This is why we have to build up some new sites and -- while we will be able, of course, to use some of the existing towers.

So can I please just follow up to ask on the cost you are paying to Rakuten, which -- so the Japanese press has reported as being around EUR 200 million a year. Will that cost to Rakuten include any costs for RAN equipment? Or is that separate and on top of the fee that you would pay to Rakuten?

[Interpreted] I can't comment on the value indicated by the press, whether it's EUR 2 billion overall and how it breaks down over the 10 years. That is part of our confidentiality agreement. All I can tell you is that for the service provided by Rakuten, we will pay about EUR 200 million per year. We have a combined agreement. And in this combined agreement, what is covered is hardware, software and services. This is always all broken down in detail, but the service part is not EUR 200 million a year.

Our next question is by Amelia Danjoux from Morgan Stanley.

It's just a couple of quick ones on the network rollout, if that's okay. So I know that you said that 1&1 Versatel are taking responsibility for the fiber to the antenna. I was just wondering if you could give us data around what the current fiber to the antenna availability is in Germany. And is that something that needs to be implemented for you to have a good coverage for your network? Or is that something that is largely already in place? And secondly, it was just on the vendors for OpenRAN. So obviously, as a concept, it's great that you -- it's sort of standardized hardware and different vendors can work together. But from a vendor perspective, how is equipment availability? And are vendors ready for OpenRAN? Or is that something that still needs to be developed?

[Interpreted] Right. In Germany, the situation is as follows. Between the various MVNOs, there are different ratios of fiber optic connections. Deutsche Telekom has, as far as I know, already connected a lot of their towers to the fiber glass -- fiber optic network. Telefónica has made progress as well, but they haven't connected all of their towers yet. But I can't give you a detailed overview there. You'll have to ask the other suppliers. Our aim is to connect every single one of our towers to the fiber optic network. Even for reasons about technology that is necessary, we need to have fast connections with appropriate bandwidth. Now concerning the OpenRAN question, if I understood it right, then we have a number of suppliers already who specialize in this. Both in terms of the antennas, we have a choice of different vendors. For software, it depends on what part of the software you're looking at, whether you're speaking about the core system, the distribution units. In the core system, we want to rely on Mavenir mostly from the U.S. And with the antennas, we're planning to go with NEC, by and large. And the hardware and the data centers, that's standard hardware. As I said, we will probably have different vendors here, depending on which is the best price/benefit ratio in the various segments.

The next question is by David Bluestone, Credit Suisse.

It's Jakob Bluestone actually from Credit Suisse. So I have 2 questions on the -- Hello?

[Foreign Language]

Can you hear me? Hello?

[Foreign Language]

Can you hear us? I'm just going to go ahead. So I have 2 questions on the Rakuten agreement. The first question is just, can you maybe just sort of explain a little bit what are some of the service level agreements and reassurances that you have regarding the contracts? You're obviously using a newish technology. Inevitably, there will be some issues. What are some of the guarantees you've got from Rakuten that it will work? And if it doesn't work, can you get compensation? Or are you ultimately the ones who carry the risk whether it works or not? The second point was just a clarification. Is the entire Rakuten contract going to be booked as CapEx? Or will some of it be booked as OpEx?

[Interpreted] Well, concerning -- the second question was CapEx versus OpEx, we will have 2 parts. The infrastructure will be CapEx, but the operational aspects will be OpEx, of course. Concerning the question of what percentage is CapEx and what is OpEx, I'll have to ask you to bear with us until we get to all the details. And concerning the KPIs, we have a lot of schedules going with this agreement. There are 16 technical schedules describing numerous KPIs that we strive to achieve in order to make sure that the network provides good customer experience. And some of these KPIs are also underpinned with guarantees, and there will be compensatory repayments if Rakuten fails to meet these milestones. But I think that is standard for a general contractor. The general contractor has a markup, a margin. So the customer has to be sure that the overall system is delivered as ordered because otherwise, we wouldn't need a general contractor. We could do it ourselves.

If I can just ask a quick follow-up. I guess a similar question on the first question on the OpEx versus CapEx for the Versatel part of the payment, will that be similar? Or is that all booked as OpEx because you're leasing a backhaul?

[Interpreted] Versatel, from our point of view, is going to be OpEx because this is rent that we pay for the fiber optic connections.

The next question is by Usman Ghazi, Berenberg.

I've got a few questions, please, so please bear with me. The first question is on your guidance for EBITDA. At the -- when you did -- when you determined the guidance at the beginning of the year, you had indicated that the branding budget this year would be going up from EUR 10 million to EUR 30 million, so the EUR 20 million fees that was budgeted for this year. Can you confirm if that budget is unchanged or whether there's any changes in that budget that has -- that is the source of the EBITDA upgrade or not? So that was the first question. The second question was just coming back to the Rakuten agreement. I just wanted to confirm, Mr. Dommermuth, your comments when you said that the EUR 200 million per annum roughly that has been indicated, that will -- I mean, that includes the hardware and the software components of the contract, that the EUR 200 million is not just for, let's say, the provision of the core network. And then my kind of final question was that in broad terms, is it right to think that the -- within the -- as we move to network build, there will be OpEx that is related to the 1&1 Versatel fiber and video calling. There will be OpEx related to the towerco co-locations and BTS. And on the CapEx side, it is primarily the Rakuten agreement which covers the hardware and the software part of the RAN. Is that a right way of thinking about this?

[Interpreted] Yes. Please let me start with the second question. Maybe I have not made myself very clear. I didn't confirm EUR 200 million of annual costs. My perspective -- the view was that this EUR 200 million, if they were to be paid for services. And in that respect, I said, I can tell you that the services will not cost EUR 200 million per year. With that, I don't want to say how much we pay for the services nor what the overall package is. I just wanted to comment that the service alone is not going to be EUR 200 million per year, but that is going to be a substantially lower contract. I just wanted to comment to make that clear. I would like to answer the third question concerning where is the CapEx. That is, of course, in the antennas and the active infrastructure, which is part of the contract with Rakuten. Of course, in the software as well, that is involved here because that is capitalized as well. The other 2 packages are the fiber optic connections provided by 1&1 Versatel. That is going to be a rental cost for us as well as the passive infrastructure, which will be rented from the telcos. And that is also being seen as a rental cost or rental costs. Coming back to the first question, with respect to guidance, as I had just mentioned before, it is the case that the guidance -- or the reasons to increase the guidance was mainly triggered by the operative performance over the first half of the year. The improvement that we see by optimizing our tariff offers, our better tariff splits, that will lead us to take the service turnover and the revenue to see an improvement there. But in a sudden view, it will not be as clear because in the international roaming section, we have negative revenue effects but which do not affect the results because we have a very low margin there. The marketing budget is unchanged in the context of the communication of the guidance in March. We have mentioned that we are going to invest more into marketing to foster the 1&1 brand. This is a budget that is still going to be adhered to. It's not a reason for increasing the guidance. On the contrary, in the second half of the year, we are going to invest more money into marketing in order to force more contracts in the second half of the year.

Our next question is by Adam Fox-Rumley of HSBC.

My first one, please, was when you consider the service-level agreements that Rakuten has committed to, is it possible to compare those to the terms of what you're experiencing with the national roaming agreement at Telefónica Deutschland at present? And then my second question is on broadband, where I just wanted your perspective on whether you thought speed was becoming a more important criteria in the way that, that product is being sold in Germany at the moment.

[Interpreted] With Rakuten, we have a different situation than we have it with Telefónica and national roaming. In our cooperation with Rakuten, we described the characteristics that we want our own network to have. In our cooperation with Telefónica, Telefónica makes the services available as they make them available to their customers. Telefónica, within the context of their commitments, in the context of the merger agreement between E-Plus and Telefónica, they have to treat this in a nondiscriminatory way. So in other words, they have to give us exactly what they give their customers, no more and no less. Whereas with Rakuten, we can define precisely what bandwidth we require, which latencies we accept, how calls need to be handled, how handovers will be handled. So hundreds of KPIs have been defined here, and that is not the case with Telefónica, where we simply get what Telefónica provides to their customers. And if it's good, then we're lucky. And if it's bad, then we're out of luck basically. Concerning the second question, speed plays an increasing role in Germany as well. And this is why it is important for us that our 5G network have gigabit speeds from the scratch. We're building antennas that will always have this speed. And in the broadband business, it's important for us that we can access FTTH connections, where we use the regional networks owned by the city operators. We also made an agreement with Telekom recently so that we can use the regional networks of Telekom once they have switched to FTTH or if FTTH is being rolled out. So we expect to be well positioned for the next few years when the demand for speed will increase.

Our next question is by Joshua Mills of Exane.

I just wanted to come back on the EBITDA guidance raise. Obviously, you're talking about better operational performance, no change to marketing budget. Given that this is the first full quarter where we've had results post the national roaming deal taking effect, I'd like to know whether your view on the network economics and your MVNO economics have changed during that time and whether any of EBITDA guidance uplift for this year is coming from the expectation of lower wholesale fees being paid to Telefónica Deutschland.

[Interpreted] Well, as I said earlier, the reason is due to the adjustment of the guidance based on a modified split of tariffs of different offers, the modifications of the MVNO situation, what happened as we anticipated. In terms of capacity, we are where we were in Q2. So that's part of the reason for the increase that we see in the second half of the year and also in the guidance. So that's not one of the reasons. It's just driven by the operating business.

[Interpreted] Our next question is from Ulrich Rathe.

[Interpreted] I'd like to come back to the technology. There was questions on this already. If we look at other network operators about OpenRAN, they answer that the integration is the main problem, not the technology as such. You don't need to integrate so you can go ahead, but you have an interface with existing networks. Handover to Telefónica Deutschland, handovers are always a problem. Telefónica did Telekom national roaming with difficulties 15 years ago. So where do you take the confidence that you will be able to handle this critical handover interface with RAN technology? Is there a proof of principles? Is that initial point that you have drilled down in detail? Or is that pending, that the performance of the technology is not quite clear there yet?

[Interpreted] Well, I have the benefit, Mr. Rathe, that I'm not the technical professional, so I can be quite carefree looking at this world here. We have defined handover with Telefónica. And as to my knowledge, there is a standard for this, which we, of course, have to adhere to. I myself don't see this as so complex because we maintain the of Telefónica so that in our cells, we know which Telefónica cells are around us. And as soon as our mobile connection gets low, we switch over to the neighbor cell of Telefónica. And this handover is not OpenRAN-specific as to my view, but I can't give you more technical detail on that. But I'm happy to or Mr. Keil, whoever, will be happy to provide you contact with our subject matter experts to explain what we do and the standards that we have agreed on. Thank you.

[Interpreted] So there's no more questions at the moment. I'll hand over the back -- hand over to Mr. Keil.

[Interpreted] Okay. So that leads me to thank you for the attention and your questions, and I'm looking forward to the discussions that may emerge from this, with the call from our United Internet. I would like to wish you all the best. Stay healthy, stay well also on behalf of the management. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]