freenet AG (FNTN.DE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the freenet AG conference call on the Q2 2025 and Half Year Results. [Operator Instructions] I will now hand over to Robin Harries, who is leading this earnings call for the first time as the new CEO of freenet AG.

Good morning, everyone. My name is Robin Harreis, and I'm honored to speak with you today as the new CEO of freenet. I joined this exciting company at the beginning of June, and it's been a dynamic and inspiring start. Prior to freenet, I served as CFO of Trivago, a NASDAQ-listed company. Before that, I was a board member at where I led marketing and sales for over 5 years. So I'm no stranger to this industry and it feels very familiar and energizing to be back. I would like to begin by sharing some of my impressions of freenet after these initial 2 months. What stands out immediately is the agility of the company. We have a strong competitive position in both mobile and TV supported by powerful and well-established sales infrastructure. We are proud to have nearly 500 retail stores, which allow us to maintain daily direct contact with our customers. In addition, we benefit from numerous strong partnerships and a broad market presence, which gives us an excellent position to market our offerings effectively and with impact. Technologically, freenet is well positioned. We're already leveraging AI in key areas like pricing, customer management and telesales and the corporate environment is dynamic and full of potential. The team is highly motivated and there are numerous opportunities to further develop the business. Actually, freenet is built on openness, the willingness to change a strong desire to grow and deliver I can feel a lot of entrepreneurial passion in the company, and I really like that. I can tell you that I met a lot of talented, motivated and hungry people. Financially, we are in a solid position with high cash generation and low leverage. Our guiding principles being customer-centric, demand-driven and AI first are more important than ever and will continue to shape our strategy moving forward. Looking ahead, we've defined several key focus areas for the future, and I see many opportunities. But first, we are committed to maintaining clear guard rates for change -- this includes our '25 guidance, our '28 ambition, shareholder remuneration and our financial policy, we stick to that. In Mobile, our goal is to keep growing. Brick and mortar, we remain a vital stage channel, but we're also changing our online approach. We are proving our user experience and conversion rate on our website. So far, we see a lot of potential here. For example, when it comes to page speed, our website at the moment, not fast enough. So for example, when you go to and want to order something, you see too slow loading times. And this is also -- this also affects our other websites. We are working on that. We will improve that. And when it comes to user experience, overall, the conversion rates on our online website are not good enough. So the market standard is higher, and we see huge potential here to further improve. We are preparing for performance -- performance-based brand marketing. So we are in the process of that, and we are working on improving our churn rates, especially through AI tools. It will take some time, but we are seeing nice potential down the road, we are strengthening our own marketing channels. We have just restructured our leadership team and the telco pillar -- and I'm truly excited to take the step into the future together with the hole management team I believe we made a fantastic team and working together have already been a real pleasure. I'm glad to be working alongside some of the most capable people in the industry. Related to TV, we are continuing to support strong B2C growth. We have strong products that customers like a lot. And we have amazing teams that will further strive for success. Also here, we see a lot of potential and for focus on it. Internally, we are fostering a cost-conscious culture that is focused on performance, experimentation and scalability. We are empowering our people to take ownership and make decisions. We've been building a flat organization structure with minimal bureaucracy, which supports it and gives us the agility to move fast. Our ambition is clear. We want to be the fastest player in the market. In the long run, this will only be possible with the help of AI. And AI is not only the future at the present at freenet, we are fully committed to becoming the flagship AI company in the telco industry -- this is one of our top strategic priorities, and I can already feel strong appetite for change and innovation across the organization. We are still at the very beginning of our AI journey, and it's too early to quantify the full impact -- but one thing is crystal clear, we see tremendous potential ahead. Now let's look at our performance in the first half of '25. Financially, we are fully on track, postpaid and TV service revenues are growing [indiscernible] contributing notably to EBITDA, and we also delivered strong quarterly free cash flow. On the customer side, growth is in line with expectations freenet TV is slowing its decline, continues to grow strong in several marketing channels at postpaid had a particularly strong second quarter. So here in mobile communications, we are seeing a nice development and accelerated growth in postpaid we added 130,000 postpaid customers in H1 '25 compared to just 25,000 in H1 '24. Q2 added around 80,000 postpaid. This growth reinforces our strong market position. However, we remain focused on profitability, not growth at any cost. Our next steps include scaling online challenges including scaling online channels, refocusing brand marketing on performance and continuing to reach this churn I talked about it earlier. For '25, our guidance for postpaid subscribers remain moderate growth. Turning to TV and Media. continues to show strong B2C development net adds were impacted by churn from the O2 TV base, but we expect roles to recover in the second half of the year. Our guidance remains unchanged. Freenet TV saw a churn of just 3,000 in Q2, which gives us hope that we are approaching a stable base. Our next steps include retention and upselling of TV customers from the '24 growth phase and a price increase for freenet TV. For '25, we still expect notable growth in TV subscribers and the noticeable decrease in freenet RGUs. With that, I'm happy to hand over to Ingo.

Thank you, Robin. So good morning, everybody, from my side. So I -- if you allow me, I would start with a few personal words because I think it was a very successful time what we had together with Christophe, now a new era starts here. And just to give you my first impressions after 2 months, I think, again, the organization freenet was very well coming, I think. And I think from the first day when Robin started here, he was something like part of the organization. And therefore, I'm thankful to all the people working here. And on the other side, I think, yes, it's life is faster than it was before, clearly. So we see some very fast changes here. I think we gained pace again, which was necessary for the company. We have different views now and a totally different drive. So yes, I'm very happy that the Supervisory Board decided here to appoint Robin as the CEO of the company. And I think we are already really a good team here. And so I'm very optimistic that the new era will be as successful as we were before. It will be different, but definitely good. After these words, I would like to start with an overview about the group results. I think I think everybody saw the share price this morning. So I think some of you or some of the investors are disappointed, but definitely from my point of view, I was not disappointed about the results I think we are totally on track to reach our guidance for the year. And we stick to what we promised and we will not change it. So if you look into the revenues, we see a slight increase only in the revenues. But on the other side -- and we are focusing on this every time this is based on higher margin revenues, we increased the higher margin revenues, and we decreased the lower margin revenues. And as a proof of concept, what you can see if you look into the gross profit, you see -- for the half year, there is an increase of gross profit by 3%. In the second quarter, there was an increase of 3%. So still the increase of gross profit is much higher than the increase of revenues and therefore, still the revenue development is important for us, but it is not as important as the margin what we generate -- and this is with 39.8%, still very high and higher than before. Looking into the EBITDA, the adjusted EBITDA, it is EUR 257.4 million up to June for '25. And yes, there is some work to do to reach the guidance definitely. But if you -- because if you multiply the results at the end of end of June, if you multiply it by 2, then you have only 550 , this is obvious. But I think we -- what we did in the first half of the year, we did a lot of marketing spending in mobile, so EUR 8 million more than last year. If we would just reduce it in the second half, then we are already in the guidance range. So therefore, I'm still optimistic that we will reach the guidance for the group. Moving to the mobile results. I think we stick here to what we published here in the earlier quarters. but we changed it a little bit on the next page because if you look into the revenues, yes, we see a slight decline of service revenues in the second quarter. for the first half, it is still growing. But I think it is misleading to follow these service revenues here because we focus our whole business on postpaid, on contract business. And what is here part of these figures is also the prepaid and the business. And there, we generate low sometimes negative margins. Therefore, we cleaned here a little bit up. So with the lower revenues, and this is what you can see. If we move to gross profit, the lower revenues does not translate into lower gross profit. The gross profit is quite fine. We see the increase of 2.4% in the gross profit. And what you also see is that we have a lower ARPU. And this -- the whole market does have a lower ARPU. You can compare it with all the others. But the difference here in our figures is even with the lower ARPU, it translates in a higher gross profit. So from my point of view, this is still a very healthy business, what we do have here, and therefore, I'm quite happy with these results. If we move to the EBITDA to the adjusted EBITDA, we see the slight decrease in the second quarter and also in the second -- in the first half of the year. But I would like to repeat what I said on the group level, this is nearly EUR 8 million, what we spend for brand marketing in the first half with no relation to gross adds what we did. So if we could reduce it in the second half then we would be back to see an increase here. So it is based on this football advertising. And so what we did. So I think we cannot stop it totally in the second half, but we will definitely reduce it. Moving to some KPIs from the mobile area. On the postpaid side, I think we -- it was a very, very successful quarter. So we could increase the number of postpaid subscribers by 77,000. If you compare it with the second quarter in '24, it's something like 11x or what we did 1 year ago. So I think, very successful in the second quarter. On the other side, and this is the negative, what you are -- where we have to -- what is obvious on the other side, you see the ARPU, which is decreasing. I think after -- in the call, after the first quarter, we were still a little bit more optimistic to generate a stable option during the year. I think there is some truth and there are some real figures. So therefore, I think to be open here and to be fair, this will not be possible to have a stable ARPU. Therefore, we changed the guidance. But we are optimistic to find a stabilization on these new levels here. And I think this is what we are working on during the year. Digital lifestyle, back on track. I think we had some problems with accessories in the first quarter. Now we are back on track. So the second quarter was quite fine, and therefore, we are happy. Moving to TV. Yes. On the revenue side, I think it is still maybe a little bit misleading that we mix the media broadcast, the antenna TV business and the IPTV business, waipu.tv, because therefore, you do not see the good development clearer from the waipu.tv. What we plan to do is with starting into the year we plan to separate it to make it more transparent for you. So during this year, we will still report both parts together, but I will give you some ins what is based on the waipu.tv on the IPTV development. So in the revenue area, you see an increase of 6.5%. And only from waipu, it is a revenue increase of 25%. I think this is important to know -- if you -- if we move to gross profit, here, we still have a margin of 60%, which remains as high as it was before. Moving to the adjusted EBITDA here, we do see an increase in the first half of the year by nearly 14%. If we would only watch into waipu.tv, there, it is an increase. There is an all-in EBITDA in the -- of EUR 15 million in the first half -- EUR 15 million higher than last year. So I think all in, very successful, still here, definitely, it will not be the big topic to reach the reach the guidance as we do focus also in IPTV more on profitable growth here. Moving to my last slide, which is the cash flow bridge. As usual, I do also give you some ideas of what I see up to the end of the year. Working capital, we see a need of working capital by nearly EUR 17 million. This is much lower than the figure what we saw last year. But I still stick to the guidance for the full year of EUR 45 million minus here from working capital because we have some provisions to be paid during second half of the year, and we are just in some discussions internally if we should do more hardware bundles, which would -- where we would need some working capital. So still EUR 45 million from working capital. On the other hand, in Texas, we guided for the full year minus EUR 50 million. At the moment, we have EUR 22 million, and we have 1 big effect which we expect to see in the third quarter. It is a tax statement what we post payment where we do have to pay for the year, years 2015 to 2018, it's value-added tax, what we have to pay here. It was already part of our guidance for the full year -- so therefore, we still stick -- maybe it is EUR 55 million at the end of the year instead of the EUR 50 million, what we guided in. But on the other side, at the moment, we only spent EUR 16.5 million. There is some phasing -- but typically, during the year, it is not possible to do all the projects, which are postponed. So therefore, definitely, I think last year, we -- for the full year, we had a CapEx of EUR 38 million. And so therefore, I think something around EUR 40 million looks possible for me. So I think we have even some room in our free cash flow guidance here. So I'm totally happy with what we have. And on the other side, we have the EUR 13 million what we expect from the sale of some IP addresses. So I think I'm very comfortable here. And therefore, I would hand back now to the operator to start the Q&A, please.

[Operator Instructions] And the first question is from of Bernstein.

So I have 4 quick questions, please, if that's all right. The 1 -- the first 1 would be, Robin, you're saying you're sticking to targets and midterm targets one of the midterm targets was for waipu to get to 3.5 million subscribers by 2028. So simply, mathematically, that would require a quarterly customer intake of 125,000 per quarter. Now given you have churn from O2D that we know that. But still, it's 0 now. would probably be fairly low in the second half. So how confident are you that you can rack up the IPO intake to that 125,000 per quarter? And what measures would you take to get there? And really related to this, why is it the right management decision to stick to this EUR 35 million EBITDA goal for waipu when the growth of subscribers has collapsed essentially right now? Second one is what exactly is holding back the mobile ARPU. Could you talk a little bit more whether that's mix or that retention offers you're giving sort of below the line of offers of discounted ARPUs for contract extension or anything else really. And my last question to Ingo. The gross margin is up and has been now also in the first quarter. But there is a little bit the suspicion that this is a one-off on the new wholesale deals. So this momentum that you have in the margin on relatively weak service revenue growth might just go away next year if it is just reflecting the new wholesale deals you've closed for this year. So could you comment on the dynamics behind that margin increase?

This is Robin. Thanks for your question. Related to your first question with the ambition of waipu. So regardless of customer development until we assume that waipu.tv's EBITDA contribution of EUR 100 million remains a valid benchmark. So we stick to this. In terms of the customers, Yes, we see at the moment, we see the churn of the O2 users. But in the other market channels, we see a strong growth. And so therefore, we are very confident about the outlook of why we believe that this is really a fantastic company, a great opportunity with a very strong team. So they -- they've built this from scratch, they deliver. And also, when you look at the product, it's really good the reviews are good. they outgrow the competition. So we are very happy about it and we're confident that we will reach our long-term EBITDA targets there. So the second question was, so why we believe that the EUR 35 million is good. So why shouldn't it be less? Or why shouldn't it be more? So I always think that it's always good to show both, on the 1 hand, to have a company that is growing strongly. That's performing on the other hand, also showing that you can own money. And for our business, it's important to earn money. So therefore, we believe that this is the right mixture and we are confident that we are on a good track here. Your second question was related to the ARPU development. When you look into the market, you can see that prices are going down, competition is tough everywhere in the market. I mean it's a pressure that all companies in the industry feel at the moment. So when we look at our own business, there are some components that influence it. On the one hand, we have our discount brands than we have. Our bundled business, if you see a shift in in mobile plans and bundled business. This also influences the ARPU. If you think about shifts between markets where you have, on the one hand, a brand where you have maybe more premium customers. On the other hand, you have brands that are where you have more price-sensitive customers as also influences this. At the moment, that's the way how we steer it I think when you look into the broader market, it's the development here is reasonable. We believe it will be stabilized. There's some things that you can do to influence it also to shift budget performance base between brands. So we are looking into it. We are doing this, but we feel quite comfortable at the moment. And I mean if you look at our subscriber growth, I think it's -- I mean, the market is tough to you see prices going down. But overall, we are still able to grow. We grew by 130,000 subscribers in the first half of the year and then we increased the revenue with it. So overall, the effect is still positive. And I already said that we see a lot of opportunities down the road, for example, improving our website, improving conversion rates and starting performance-based brand marketing. Again, in the past, there was also brand marketing, but I have a little bit different approach. So maybe not ago.So we -- in the past, we've been -- we did TV advertising 50 countries worldwide, at the same time. And we always did this where we're performance-based. So that means that we look at direct response, we produce platform where we were so that bring directly traffic to the website and traffic that converts into order and then we optimize on that like other companies optimize online marketing. So it's really performance-based. We want to start it again. We want to scale it with a clear target to get more orders and to increase our unaided brand awareness in the mid- to long term. So -- but then there are also other opportunities like reducing the churn. Also, when you look at our strongest brand at the moment, it's freenet. So in the past, we did marketing in the mobile segment for freenet. But actually, when you type in the broader free net you end up on a freenet DE, which is news and website portal. So it's not the website where we sell mobile phones. So there's also room for improvement. So there's a lot of stuff that we can do, so that will help us to further grow our subscribers, and there's a lot of room to -- or a lot of stuff that we can do to work on the ARPUs. So therefore, we are quite confident that.

And then the -- on this margin question, so there is a margin uplift this year and you're highlighting that the slow revenue growth is offset by strong gross margin growth. But is that not just a one-off on the new contracts.

We will back to the conference in Justin.

No, I just repeated the question because I couldn't hear anything. I think Ingo just about to answer that.

Yes. Okay. With your question about the gross margin, the first answer would be no, but definitely, the contract what we do have with the network help us to optimize our gross profit. This is clear. But the contracts that we do have has a long-running time from 5 to 10 years. So therefore, it's definitely not a one-off. . And so -- and it already started to help in '24, and it's just ongoing in '25 and in the following years.

And the next question is from Polo Tang, UBS.

Firstly, apologies, I missed the earlier part of the call. But in terms of my questions, can you talk through what you're seeing in terms of competitive dynamics in terms of both the mobile and the TV market. And then specifically, in terms of waipu.tv net adds and the lack of growth in -- could you quantify the headwind from the O2 cancellations? Was it still around the minus 50, minus 60,000 run rate. Was there anything exceptional to call out or unusual in terms of seasonality to call out for waipu.tv in Q2. And just to kind of follow up in terms of waipu.tv, prior commentary on net adds was for 300,000 net adds for 2025. So is this still achievable just given the lack of growth in Q2? And my final question is just kind of clarification in terms of the guidance. because for H1, your EBITDA growth was about flat. So to hit the guidance, you need quite a notable acceleration in terms of H2. So excluding one-off gains from IP sales full year guidance implies 3.5% to 7% EBITDA growth. So could you just basically talk through the main drivers that are kind of leading to this acceleration? And what are the risks? I know that you could have committed a lot about lower marketing costs in terms of mobile, but also implicitly waipu.tv, but can you reduce these costs in the second half, just given the competitive environment?

Yes. This is Robin. Thanks for your question. I will start with the competition in the mobile market. yes, there's competition. We see competition everywhere, like in all our marketing channels and also our competitive I think everybody at the moment has aggressive prices and is trying to get users. So there was a -- it's a dynamic market. So I think it has always been a competitive market at the moment, a lot of prefers true and it's challenging. However, I think we find answers to this. And if you look at the that we drew 130,000 subscribers in the first half of the year. I think that's impressive. I think there will be -- also, there will be more growth potential in the future. so far, we are working on several things. I mentioned this earlier, and it will take some time, but the market is difficult. Yes, but we are growing and we see a lot of room to further grow. And maybe you can elaborate on waipu.

Yes. I think the biggest problem we -- I think the competitive environment in TV has not changed that much. It is still Magenta, who is the biggest competitor what we do have here. And you may have seen their figures in the morning. They are also slightly lower compared to the other quarters. So -- but there are no big changes. I think in '24, there was some backwind from the leading cost in This helped definitely. So I think this push is not there in '25. But without the effect from Telefonica, we are still growing. So what we did in '24 was that we gain something like 60,000 to 70,000 gross adds with Telefonica. These gross adds are missing now definitely. Otherwise, we would show a good growth, not as big as last year, but a very, very good growth. So we are still fine. So no changes in the environment here. So it's not based on competition that we are worse. It is based on the loss of Telefonica. And I think up to the end of the year, we hope that we cleared this and then starting in 2016, it will be easier to follow the growth what we have here. Moving to your question about the guidance. This is -- you were correct in your intro. This is something what I already tried to explain during the -- during my presentation. You are correct. At the moment, we have something like EUR 257 million. If I double it for the whole year, linear, then it would be something like EUR 515 million. So this is below the guidance range. But on the 1 hand, we see the increase in customers. On the other hand, we will reduce the marketing spending Robin already described. that we will focus on performance marketing and that we spend less marketing on brand, because from the investments in brand marketing, and it's based in the naming. We do not see any performance. This is what happened during the first half of the year. So we cannot reduce it to 0 because we have some contracts here which are still in place, but we will definitely reduce it very strongly. So I think subscriber base on the 1 hand, less marketing spend, which does not have any influence on performance. And then we have some optimizations. And you also see that we have the restructuring on the board level and that we are reduced here our personnel costs starting on the 1st of September. So I think we have some -- we -- I think we will optimize ourselves during the second half. We have some positions here also on the cost side, what we can optimize. So all in, we still stick to the guidance. And even if you just double the result of half year, it is not that far away to reach the guidance range.

And the 300,000 net adds for waipu.tv for 2025?

I think there will be an increase of -- I think there will be what we say, a noticeable increase. I would expect from today's point of view 200,000 up to the end of the year. But because we expect a very strong fourth quarter, what we also saw in the other years. So I think the first quarter I just do not want to disappoint anybody here, but the summer quarter for TV is difficult every year. But yes, I think we could also be -- this is linked to the question from Luis before. I think we are very, very good on the EBITDA side at the moment, and our offers are less aggressive than last year. So it is also possible to be slightly more aggressive here -- but we were very, let me call it, conservative in the first half. So I think without any negative EBITDA effect, I think we could push it in the second half, and this would definitely happen. So I think something like 200,000 for the year still looks reasonable for.

And the next question comes from Josh Mills BNP Paribas Exane.

I had a couple, please. The first 1 on mobile. So you made the point that the market remains competitive, which I think all your competitors have done as well. on their conference call, Vodafone, you seem to be indicating they'll be willing to seed some share on the mobile front in order to encourage broader price rationality in the market. . And historically, one of the ways that operators have tried to signal that and to deliver that kind of dynamic is by using third-party operators such as ourselves less. So I'd just be interested to hear if there's been any change in the kind of volumes we are being offered by any of the MNOs or any of the commission terms, which you're using? And perhaps if they're now restricting some of the premium offers to their own channels and focusing more on the subfunds through you? That would be very helpful color. Secondly, it kind of goes back to what Alrik was asking at the start of this call. But could you give us a bit more clarity on, firstly, what the overall O2 sub number was within the initially? And how many are left? And then at what point do you expect the headwind from O2 sub-churn to be fully out of the base would be helpful for our modeling purposes. And finally, Robin, I think in your introductory side, you talked about a priority being to find platform users to replace the O2 brand. How advanced are you in those discussions say I'm not aware of any other big operator that group placed 2 on scale, but any detail you could give about alternatives would be great.

Yes. So Joshua, thanks for your questions. price rationality was the first question. And if the -- if I got it correct, if there is a push from the networks in the direct -- the shift to direct -- this is nothing what we can see. I think we are important for the networks as we were before. And I think even in situations where the competition is a little bit higher, this is also the experience what we have from earlier times is that they use us, especially if there is more there's more aggressive aggressivity in the market. So I think we have good partnerships with them. We have good contracts with them. We do not see that they are more aggressive in our direction or if anything has changed. So I think this is all fine. Price rationality I think what everybody is trying to do in the market is to avoid cannibalizing the base what we do have. So everybody is doing it with separate brands with -- and this is also us. And so still also the networks are using us because we are something like a separate brand for them. And so is it rational what we see there, some of the offers, definitely no. But I think the market all in is still rational, and especially, again, in the discount part of the market, it is less the rationale than in the, let me say, classic part of the market. Then you ask for more clarity about Telefonica and the O2 subs based on waipu, I think we I think I'm repeating it, I'm sorry about it, but we are not allowed to give the full figures. So the only thing what I can repeat now is that last year, in the first half of the year, we gained something like 130,000 customers under the O2 brand. And yes, as we do not have a partnership in this area now, we do not have these gross adds. This is -- I'm sorry about it, but this is the only figure that I can give you.

Yes. And this is Robin, to your third question, I'm not sure if I regard it, it would be great. Can you repeat it, please?