Digi Communications N.V. (DIGI) Earnings Call Transcript & Summary

Good afternoon, everybody. Sorry for the microphone. I get to be with you today and to walk you through the progress of our operations in Spain today. Another excellent quarter of growth for us in Spain as we continue to -- the fast expansion of the SMART footprint and the accelerated growth of most fixed and mobile services. The speed of deployment of the FTTH network continues to be high. In the second quarter of 2026, we rolled out 621,000 homes passed, 1.2 million in the year. reaching a total of 14.8 million tonnes faster. We cover now with the smart footprint, half of total addressable market in Spain, and our goal is to continue to deploy and to reach a total footprint of 10 million to 15 million [indiscernible] not later than 2030, when we will cover in the rate of 75% of the total addressable market. As you know, the deployment of the FTTH network in Spain in a vertically integrated model with our own employees is the key of our success in Spain. The solution of deployment allowed us to roll out and to operate on a daily basis very good quality networks to deploy a future-proof network with the best available technology in the market, GPON services. We cover now 95% of the network with this technology leading in the market in this sense. And based on the economies of scale, synergies and cost efficiencies, we managed to extract, we achieved a strategic competitive cost advantage, both for CapEx and OpEx on the smart footprint. For example, by June 2026 for the EUR 14.2 million comes the smart footprint with this turnover all historical average cost of deployment of EUR 50.8 per compass less than half of the historical cost of our competitors in Spain for [indiscernible]. On the bottom part of the slide, you can see how the constant evolution of the penetration rate of the smart footprint reached the 16.7 points of percentage level by the end of the last quarter. Its growth means that we are growing the customer base even faster than we are deploying the network. So more accelerated growth in this sense. On the top of the slide, you can better interpret this blended average penetration rate by the individual penetration rates of each of the cohorts of the network depending on the year when they were built. Our Smart footprint conversion commercial offer is very competitive and generate constant growth in all cohorts, including the initial ones, the blue line and the red line, 2019 and 2020 cohorts, which reached level of penetration of 28% and 26% as of newer cohorts benefit from higher take-up and faster ramp-up compared to these initial cohorts if initial cohort started with 3% or 1% in the first year, newer now start to see or even 7% in 2025. And lastly, SOTA network deliveries continues to be ahead of the initial plan with more than 5.7 Compass already delivered and the remaining two 75,000 homes passed will be developed during this year until December. We still remaining EUR 120 million cash of inflows from SOTA that will be received during the next 2 quarters, mostly by December 2026. Now continuing on the next slide. We can appreciate how these outstanding results in terms of deployment reflecting in our accelerated gross momentum in Spain, consolidating the 2025 best year of net growth trend, both for fixed and mobile services. We are the market leader in terms of net gain since 2022 both for fixed and mobile services. For fixed broadband, we reached a total of 2.9 million customers with a record growth of 317,000 net adds in the first half of the year. 100% of the net growth since 2022 comes from smart footprint. And the smart fixed broadband customer base reached 2.5 million customers with an outstanding growth of 35% year-on-year. Benefiting also from the higher demand with the launch of more competitive products for this footprint back in October 2024, which is reflected also in the gradual decrease as new customers joining Big are subscribing products with lower pricing. These excellent results led us to become officially the selfie broadband operator in Spain by June this year. an impressive achievement taking into account we launched our services starting from [indiscernible] back in 2018 and other growth is completely organic. We raised a market share of 1.5% with a remarkable increase of 2.8 points of market share during the last 12 months. This increase is achieved only by the network in Smart footprint, covering still only half of Spain, meaning that in the smart footprint area, we are growing the market share at a much higher pace than 2.8 points of market share per year. This reinforces our determination to continue to expand the smart footprint to a 21 million [indiscernible] and replicate in other areas of pain the commercial success of the existing cohort. For mobile services, we reached a total of 7.8 million mobile lines with a net gain in the quarter of 246,000 mobile lines, driven by growth in postpaid of more than 282,000 mobile lines is 90% of the net gain are convergent underlining once more the strength of the dissolvement offer as customers are subscribing all the services with us. With this, let's turn to the next slide, where we reflect the constant growth of the revenues for the last 5 quarters, which is a mixed result of the accelerated customer base growth and ARPU dilution. On the bottom part of the slide, we are sharing with you the gross margin evolution for the fixed broadband for the last 5 quarters, which gradually improves due to strong operational leverage, expansion of the smart footprint and the increase of its penetration rate. On the mobile side, the margin evolution for the past 5 quarters is determined by a couple of moving parts. Customers starting with first of July last year, as you remember, the new model of mobile cost, the M&A economic, as we call it, started to apply, improving significantly our margins starting with Q3 2025. in Q4 2025, the margin decreased as the effect of the latest commercial offer update from September. And lastly, in first quarter of this year, a step-up of EUR 4 million in per quarter compared to previous quarter of fixed costs related to the expansion of the mobile network decreased the [indiscernible]. Most of the transition of the MNO economic model is well advanced and Q2 2026 gross margin reflects for mobile telephony in a stable picture now of the change of the model from MGNO to MNO. And now continuing to the next slide, we analyze the evolution of the adjusted EBITDA ex operating leases for the last 5 quarters, which translates the effect of both fixed broadband and mobile gross margin evolution with no more moving parts during the quarter, we achieved in Q2 2026 and adjusted EBITDA ex operating leases of EUR 53.5 million with an outstanding growth of 49% compared to Q2 last year and 5.7% compared to Q1 this year. Adjusted EBITDA margin grew as well to 20.4% trend that we expect to continue for the next quarters. Based on these excellent results, we are reconfirming our guidance for 2026 for all -- for Spain for all of its components, revenues, EBITDA margin and total CapEx solutions. All in all, I would say, an excellent quarter of growth for Digi Spain with accelerated growth of the customer base, confirming our strategy for continuous growth for the years to come based on 3 factors: the expansion of the smart footprint up to 21 million homes passed, a predictable growth of the customer base on this footprint towards the 25% penetration levels that we already have seen in the initial cohorts. And together with a significant operating leverage potential, leading to improve profitability with levels of adjusted EBITDA margin above 30% of revenues shared with the market through our midterm guidance for space. Now back to you, Serghei.

Thank you very much, Marius. Thank you very much both for the presentation, but also thank you very much for these outstanding results. Yes, just quickly, our gross debt as of June 2026 was almost EUR 2.1 billion. Net debt was EUR 2.050 Well, EUR 25 billion around it. If we adjust the debt position with the cash that was -- the net IPO proceeds Basically, the net debt pro forma net debt is below EUR 1.8 billion at EUR 1.79 billion. And this is also reflected in the in the leverage ratios that you see on the right-hand side of the slides. So ranging from 326 growth as of end of June 320 net and of course, less than 2.8x to 79x pro forma with the IPO proceeds. So IPO was, of course, helpful from this point of view as it has immediately readjusted our leverage and our financial position. And yes, once again, one more reason for us to be very happy about the outcome and the result of this transaction. I think these -- maybe just a few words to wrap up the midyear and the presentation, we think continuation of our efforts is the keyword, both in this slide, but also what we focus. We continue to improve the quality of the mobile networks and mobile services in Romania we continue to roll out services to new customers as we speak. We also marginally continue expanding the fixed networks and investments into the fixed networks. Spain, is -- will be the main focus in our group in terms of CapEx expansion and spending but also with the highest and the most visible results in terms of customer additions and also revenue growth for a good number of quarters to come. And of course, last but not least, the new markets, we are still early on. There's still lots of work for us to do in Portugal, Belgium and U.K. But we are, I think, on a good track significantly better in Portugal in comparison to Belgium and U.K. where we're still early on. But all these markets will certainly reach the necessary maturity in the coming years and will certainly be comparable to our rational core markets, historical markets. All in all, we are very happy about our operations, our activity, and we will just continue executing the strategy as we did so far. Before I finish our presentation before we open the questions, just a small admin announcement. On September 15, we will host our General Meeting of Shareholders discussing two items: Appointment of [ Simon AstaBrocito ] as Non-Executive Director of the company. Currently, we have a 6% board in our Dutch holding company. Simon will be the seventh member of the Board. And we will also want to finalize the appointment of Deloitte as group auditors as Group odor for the coming years. I hope you, the shareholders that are present on this call can attend and can vote on these topics. So thank you very much, and we now open the panel for Q&A. And yes, we'd like to -- yes, we will start answering the questions.

The first question comes from [ Yuri Gupon ]. What is happening in Belgium? There's still no CEO. There's been EUR 82 million loan to the joint venture. The growth rate is stagnating at around 9%. Have you [indiscernible] the difficulties in the rollout of Belgium. Well, I think the question is maybe a bit emotional. But certainly, I will address all address. First, we have a CEO in Belgium. His name is Valentino [indiscernible] which is also member of Digi Group Board, Vice President of Digi Group Board. And he has been the CEO of our operations in Belgium since day 1 there are absolutely no changes. Of course, you referred to departure of the run from his position of General Manager in Belgium. Indeed, this happened a few weeks ago. I think it was a personal decision of Heron, and we are grateful to him to have been colleagues with us in the last 3 years, 2 or 3 years to be I'm not sure to be exact. But I think it was a personal decision. So there's a little to comment, but no disruption in terms of management. we have continuous management in Belgium and no changes here. In terms of growth, you are right. And I think we've been very open about this, Belgium is the youngest of the markets that we operate in, except for U.K. and Belgium is certainly demanding longer time to roll out both fixed and mobile networks and this determines the speed of growth. Having said this, we are committed to continue to invest and all bid, it's a very controlled pace trying not to lose resources and being efficient. So yes, we don't expect huge changes, significant changes in the coming periods, but we will continue our growth, and we will continue building out of the network. Because this is the way to develop a telecom operator at least the way that we control. But thank you very much for the question. Question from [ Alina Sando ]. Could you provide some color on the expected revenue phasing of the SRI framework agreement over the 4-year period and on the EBITDA conversion, given the mix of hardware, software and subcontracted services. Well, thank you for the question. We do not expect this contract to bring any significant I don't know profit or EBITDA that was not the reason for us to participate in this procedure. It's a complex setup involving both installation of significant hardware platform. but also involving development of complex software platforms. And I think, yes, the revenues will be consumed by expenses as we go on. So but having said this, we do not expect our results to be significantly impacted by this contract. The next question comes from [indiscernible], what total group CapEx and adjusted EBITDA do you expect to generate in 2026. Yes. So I did mention that CapEx for the first 6 months was between EUR 345 million and EUR 350 million. In our previous calls, we mentioned that CapEx is expected to be around EUR 720 million, maybe slightly above. I think we are keeping this guidance. So EUR 720 million to eventually a maximum of EUR 750 million by the end of the year but the intention is not to spend EUR 150 million. The extendation is rather to manage CapEx to be closer to EUR 720 million. In terms of EBITDA, there have been good growth so far in terms of EBITDA in the range of 20% in the first 6 months. And we do expect to continue this trend going forward. So all in all, the EBITDA growth for the group should be in the area of 20%, and this is driven by the improvement of profitability in Spain, as Marius has mentioned. This is also driven by certain marginal improvements of profitability in Romania. This is also driven by tight control on costs and improvement or improvement of the loss position in Portugal. So all in all, these are the explanations. And second question from [indiscernible], do you plan to increase your stake in Belgian segment? Do you plan to start consolidating it fully at some point in time? Well, we are running a joint venture with our partners at times so far, no changes or no plan changes in terms of either consolidation in terms of acquisition of shares nor accounting-wise. So far no changes. What margin do you expect on the cybersecurity contract worth EUR 196 million. Well, too early to say. We are not budgeting or planning margin or we're not guiding the market with extraordinary results from this contract, as I tried to explain previously. So we see this as business as usual. The question from [indiscernible], when do you expect EBITDA breakeven in Portugal and the other segment? Well, Too early to say. Of course, we wish EBITDA breakeven to come rather sooner than later. It's difficult to say how soon. But we should see important signs of improvement also in 2027, although not necessarily breakeven -- and probably, we will be in a better position to show the exact breakeven next year. A question from [indiscernible] based on the financial report, it appears that the pay TV sector is the one in which Dig is growing the least in Portugal from reading some user forums, it appears that many consider digital TV up to be the least attractive in terms of user experience compared to those of competing operators with digital navigation, non-video club and no access to recording series streaming at streaming. Even [indiscernible] under ETV up is considered much more advanced than DigiTVs. In addition, some channels with higher viewership in Portugal are still missing such as [indiscernible] which are available on Novo. For the user, Novo experience superior to digits, both in terms of the undrawn book and not -- and the functionalities of the Android TV and in terms of the available channels. What does Digi plan to do to ensure that Novo customers don't feel that switch. Well, thank you very much for this extensive feedback. We're certainly taking this into account. And I'm sure our colleagues on the ground are fully aware of this. And we will certainly do our best to both expand the TV offering, but also the functionalities of 1 rate up, but also to keep -- to preserve the novel features that we have there. So thank you very much for the feedback. What does Digi plan to do to ensure that not customers don't -- I think I'm just reading the end of the question just again. So yes, I'll skip. Thank you very much. A question from Russell Waller. How important is the new [indiscernible] access regulation in Belgium as part of the Proximus joint venture approval will reduce the cost to roll if yes, to work as per home pass and by what percent, please? Well, any regulatory intervention is very important. We are now assessing the impact of this on our business but I think it's somewhat early to tell. And so far, we are still building our network. So yes, once again, not too much to report on at the moment. Question from Daniel Mandru from July, you indicated that Romanian prices have been aligned to euro. How should we think about revenue and EBITDA growth in Romania in the second half and what does the euro pricing change? And does the euro pricing change materially reduce the fixed exposure that affected the H1 results. Yes. Well, thank you very much for the question. I think it's an important one. It's -- and we did not stress this during the presentation. It's true in June, we have announced conversion of all -- most, if not all, of our pricing, pricing tariffs in Romania from local currency from room to euro. It helps us insulate operating results, mostly revenues from foreign currency fluctuations. It does not insulate our balance sheet from a foreign currency fluctuation because our functional currency is the local currency, which Romania is the Romanian a but our presentation currency is euro, but still presentation is affected by the functional currency. Having said this, I think our -- overall, our financial structure is much better and robust, and that was the intention to, again, to become more insulated from the day-to-day fluctuations because while the functional currency depends and is sensitive to the currency fluctuation. Still the cash flow is not affected because we -- our revenues will be generated in euros and our ability to meet our OpEx expenses but also to pay our maturities, financial maturities in euro is enhanced. So it's a complex dynamic. I hope my answer helps you understand this. But yes, as an immediate effect, there will be an improvement in EBITDA margin, as I mentioned, a couple of questions before. Second question from Daniela. Having reached the #1 position in Romanian mobile by subscribers, how much runway is left for the growth. Do you still see meaningful scope for market share gains? Or should we expect subscriber growth to moderate from here? Well, again, thank you very much for engaging so much. And also during the presentation, yes, I think at this moment, the 3 operators, us Orange, Vodafone, we are more or less equal with us being slightly ahead. You can say we have more or less equal chances I think the market is open. So each operator roughly has [indiscernible] on set, I mean, this is a very general setup. And as you can appreciate, there's still 2 sales of the market to grow and I hope you will see the smile on my face. So yes Well, thank you very much for the question. And question number 3, for Portugal, how should we think about the loss for year 2026 now. And do you expect the pace of improvement achieved in Q2 to accelerate in [indiscernible] in the second half. Well, yes, we want to continue marginal improvement in profitability in Portugal, of course, coming from new sales as new customers are bringing margin to the bid business. and from trying to contain the costs as much as we can. And yes, that's our focus. So yes, we do expect further improvement in the second half of the year as well. A few more questions from Daniela. So next one, equity accounted losses reached EUR 18 million in the first half for 2026. Should the Q2 run rate of around 9 million extrapolated to the second to the second half of the year, or do you expect losses to peak and begin declining before year-end? What should investors assume for the full year contribution from Belgium. Well, I think look, it's a complex question. We will try just to -- we'll try -- we'll try to -- Well, let us just address it generally because it's very complicated to speak from yes, in a very precise manner. But overall, we expect higher profit from Romania. We expect higher profit from Spain. We expect less losses from Portugal and we expect constant result from Belgium. So this is roughly the picture or the very high-level picture. And all in all, this should improve profitability, and this should put us into black from red in the second half of the year. So look, I think the question was very general and my answer is also general, but I think you see the trend. Next question. Should investors treat the first half FX loss is largely nonrecurring, given the move towards euro-linked pricing in Romania. And what would be a reasonable run rate for the net finance costs in the second half. I think we -- so I think the extent we have covered it in the first question that we answered [indiscernible]. So maybe we just move on. Question number 6, could you clarify the remaining P&L so the contribution for 2026. You recognized EUR 15 million of [indiscernible] related other income in first quarter -- in first half what should we expect to be organized throughout the P&L in the first -- in the second half. I think -- so I think this is all detailed in the prospectus that our Spanish colleagues have published and also in the information they have been leasing to the market. But I'll ask Marius to comment briefly. Marius, if you can.

So cash-wise, we still have to collect EUR 120 million from -- so during quarter in quarter 4. We account for this amount, a sale of inventories and part of it is already recognized in the past as it was part of the sale of fixed assets at net present value. So most of this amount will be recognized and again, and part of it will be recognized just as a cash in. So the difference between the result and the interest or the net present value of this amount. But most of it will be recognized again on the P&L as well. No, apologies. Part of it was already recognized in the past. So the initial part for the 4.4 million homes that were sold during September 2024. And for the rest, it will be gentle P&L. So cash is EUR 120 million, and part of it on the P&L. And as Serghei mentioned, I think very well very detailed, described on how would it be accounted for in the prospectus.

Thank you, Marius. Another question from Sekaly. Do you expect any further capital raises leveraging the listed Spanish assets to fund expansion in U.K., Belgium, Portugal, Italy. Well, the simple answer is no. And -- but the full answer is, of course, much more complex. While we are -- we have listed -- we have given to our Spanish colleagues the necessary flexibility to access both the capital markets and the debt markets and to be able to raise equity and to raise debt whenever needed. However, the intention -- and yes, we more or less benefited from the IPO, let's say, roughly half and half, both Australian colleagues, so primary issuance and read through secondary issuance. However, going forward, there's no intention to leverage to use Spanish stock for development of other group operations. We will use the Spanish resources, including the Spanish shares only to fund and only to expand the Spanish operations. Having said this, yes, we will monitor the market. And yes, we'll see if any opportunities if there are opportunities to offer more shares or to issue bonds or to do any other financings in the future. But once again, we do not expect this to finance other operations of the group, just [indiscernible]. Another question from Russell Waller. Are you still rolling out fiber in Portugal? How many homes passed will we get by the year-end, please? Now this well, we are owning fiber in Portugal. But these are marginal , these are all -- these are small areas for now. We are concentrating more on Novo areas to be able to migrate Novo customers to fiber network. So meaningfully, there will be no significant changes in the coverage in the near future. Question from is Miriam. Two questions regarding Portugal. Why is ARPU falling Well, I think -- so we have improved the pricing of certain mobile packages that we offer to our customers. And they have -- we believe that this is the correct offering for the market. And we wanted to make sure that all our customers benefit from the right pricing. So very marginal decline comes from there. But I think the bigger move is really the migration of Novo customers from lower prices to digi prices. So this is the explanation in the ARPU decline, nothing else. Having said this, there are no other expectations to change pricing, certainly not to increase but also not to decrease. A second question from is Me announced that it has already finished the modernization of the [indiscernible] with only 3 stations left in the red line. DoD clients already have access to communications in Lisbon Metro. Yes, the answer is we are present in the entire -- in the whole Lisbon metro, just like [indiscernible]. So no difference between Digi and mill both digital and as customers benefit from the SIM services in the list [indiscernible]. So a question from [indiscernible] sorry, from [indiscernible], excuse me, from [indiscernible], what other CapEx do you expect to spend in U.K.? What are your targets in this market regarding the coverage? Do you plan to become a mobile network operator in U.K. to focus on FTTH rollout and only MVNO. Well, I think it's impossible to become a mobile network operator in U.K. at this stage. Given that all frequencies are operated by the incumbents. So the only strategic option is only to operate and in operation. our options are open. And yes, we are -- we will consider both fixed and MVNO opportunities going in the future. Having said this is too early to mention the total project -- the total project volume or the total spending intention. And also, having said this, our for U.K. remains limited that's probably 5% of total CapEx, 5% or less of the total CapEx spend for the group for now. So we are developing our network. We are developing operations there. But we are doing small steps just to maintain both financial discipline and rationale. So, so far so good. We are out of questions for now. we will wait on the line and if there will be more questions, we'll certainly cover. So thank you very much. I think we have covered all the questions. Thank you all for being with us on this call. Once again, thank you very much. We are very grateful to you being part of our story and sharing with you these outstanding results. And yes, we'll will speak mid-November, discussing our third quarter results with you all. And in the meantime, we'll see some of you at our General Meeting of Shareholders on September 15. Thank you very much, and see you all. Bye.