freenet AG (FNTN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Freenet conference call regarding the preliminary results of the fiscal year 2022. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Christoph Vilanek. Please go ahead.

Good morning. Thanks for the introduction. Good morning, everybody, ladies and gentlemen, to our today's conference. In ultra addition, we immediately start with our presentation. You've all seen the documentation that has been published yesterday night. -- but we will give you the opportunity to discuss some more detail. Going into it on the financial guidance level, you've seen that revenues have been stable. This is kind of our old way to look at the business. Within these revenues, there's still approximately EUR 300 million hardware revenues in there, which are not really contributing margin. But nevertheless, we are on a stable level. Even more important or very much more important is the development on the EBITDA. We have been very successfully increasing the EBITDA in both key segments of the business, I would say, across the board, even the small companies have done a great job there contribution to the overall picture is not significant, but it is a very good feeling that given the difficult circumstances the entire macroeconomic and microeconomic environment has given any company, we have been able to increase EBITDA by EUR 31 million or 7%. Overall, our return is now 18.7% after 17.4% in the previous year. I think that is a substantial increase and the guidance that Ingo will talk about later is reflecting that also for the starting year 2023. Free cash flow also went up by 15% to close to EUR 250 million. By definition, from an individual perspective, the operational KPIs are even more important because they show the substance and the resilience of the business. We are happy and that was really something that has a meaning also for the identification of all the 4,000 employees that we were crossing the EUR 9 million subscriber line. I'm trying to translate this for the staff that almost 11% of all Germans have paid subscription with Freenet. And I think that is something to be proud of. The total subs, but we're increasing by 260,000 or 2.9% to 9.9 million and 42,000 in postpaid a small increase, but a more significant one on TankanFlex. So overall, mobile net adds 120,000. And on the TV, things that we have seen and predicted is the fact that Waipu.TV is starting a steeper trajectory, whereas Freenet is going down, but also in the TV, the net adds amount 136,000. But given a bit of a deeper insight on mobile services, you have seen that over the past quarters of the year, we had plus 15% plus 25%, plus 29 and now plus 40,000 subscribers. So, there is a positive dynamic. And I think current trading in the first quarter of 2023 indicates that we are going on a similar level as Q3 and Q4 of the past year. What were the key things that have contributed to it, once I think the consolidation under the umbrella brand Freenet has eased internal processes has given the opportunity to exploit some synergies and some -- reduce some spending, the real positive effect will come in 2023, and that is part of the things that might overcompensate or at least compensate the one-off effects that have helped in 2023. The brand consideration, and that is the indicator for the migration of the brand has won 5 percentage points -- that is on the visibility side, the invisible piece because it is one by one for the individual consumers is that we are step-wise implementing the customer lifetime value concept, not only in renewals but also in new customer acquisition. It has a significant impact on the mix of SIM-only and subsidized handsets. I think Ingo once again, will give you a bit more insight on how the good mobile result has occurred, but that is one of the fundamental pillars on which we have created the better gross margin, more specific individual offers, creating more value on our side without the end consumer perceiving a price increase, but a better tariff. There's 2 things that we have also communicated during the year, we have prolonged exclusive contract with MediaMarktSaturn until 2027. And we have also now in January, finally signed the deal with Capita for another 7 years on our customer care. It gives us a solid planning framework and prohibits us from any surprises on that end. We are very happy about the cooperation and I think both companies were happy to sign the deal. The thing that we have launched in 2023 is our Freenet TV free Internet offer, the offer and we have told you that is basically limited to a to an app, people can hook up to the app, check whether what kind of connectivity and what kind of bandwidth we are able to provide seamlessly from the technology. There is one single price. And that also indicates that during the lifetime, we might be deciding that changing technology or access technology for the end consumer is an option for us. For 29.99, people get full access. We have started with the pure LTE that we are now doing from February, actually, the DSL on copper cable or copper line, we are in progress to add cable. And we have also agreed now with the first regional providers of fiber to do their services. So, I think it was a long process to access or reaccess the broadband business, but it certainly will contribute to our bottom line and also to the quarto offers of the company. No wonder we are very happy and proud on the team in Munich of Xing. These are the 68 individuals that have generated or created and it for and generate the traffic and the consumers by the turn of the year we had 970,000 subscribers. This is an increase of about EUR 250 million from previous year. We have also indicated on the chart that we have crossed the line of 1 million subscribers. And my guess work current trading for Q1 will be EUR 1 million 1.45 billion. And this is prior to any migration with Deutsche Glasfaser. Deutsche Glasfaser currently holds 100,000 active TV subscribers. We have agreed with them to migrate them straight to VipuTV due to management changes and a couple of technical questions. This has been postponed by the Deutsche Glasfaser. So this will kick in anywhere in Q2 or Q3, but it's just a postponement, but we expect 100,000 from them. And well, if you add that to the current development, my personal feeling is that this year, if all goes well, we should go beyond EUR 1.4 million towards EUR 1.5 million. And then some of you have already asked 2025 was it a critical size. Well, I have chosen that terminology because it's hard to actually predict a 3-year trajectory curve, but clinical sites means what is a number of subscribers where content providers are knocking the door are giving us the license. But you have all seen that Disney+ is already drawing back their pure exclusive subscription and giving their content to third party. So, I think if you have Germany around anywhere between -- well, I would say, EUR 2.5 million to EUR 3 million subscribers, then you're suddenly so important that none of the content providers will let you aside. So that is what we're aiming for, difficult to predict a clear date. But I think that should indicate that we are self-confident on a very positive development, thanks to excellent product and thanks to a super satisfied customer base. Some numbers on the lower end, I think they are for your modeling. On the next page, we give a little overview on the total TV and media. I already spoke about WaipuTV, freenet TV, we have increased the prices, subscribers go down, but EBITDA is stable on -- in Media Broadcast. I think everything that they have created over the past 18 months is now paying back very solid midterm perspective, a very stable EBITDA or EBITDA projection for the next 2, 3 years. So, we're very happy about that. The radio -- the owned radio business with our 5 radio channels on digital audio broadcast up and running, doing well. We're still in an investment phase. This is a 50-50 joint venture with another German media company. So, you won't see the results anyway in EBITDA, but in financial results, but I think it's worth mentioning that they will get -- will still have a negative contribution this year, but most likely turn into positive in 2024. Finally, on the past year, and then I give you a quick outlook. I think ESG or CSR has one in perception within not only the Board but also with the individual staff, we have said a number of calls, explicitly the green electricity and a couple of other things in our so-called company goals. The company have the same goals for any individual in the company. Obviously, the Executive Board is measured at 100% variable level on these company goals, but also every individual in the company is measured. We have put a green electricity into that. We will have most likely this year, things like individual participation in development education. I think these things have created a momentum and a positive attitude across the board. We are working hard on gender balance on nonexecutive. We are doing really well. And we are both Ingen myself, very happy that Nicole Engenhardt-Gille is our -- our Executive Board member for HR and I think the fact that finally, we have some -- lady on the board is a good segment to the entire company, but I can also say that on the second level, if I look at my direct reports, I have a 50-50 range. So, I think diversity is gaining momentum as well. What are our key ambitions, we want to decrease the CO2 emissions to 0 within the next 7 years. We need to work on increase on the increase of employer attractiveness, and we want to improve the learning culture and skills development given the fact of socio-demographics -- in Germany, for me, and I hope you will also follow that thought. These 3 sound like goals that are made for ESG. But in fact, they are all also paying back in returns, EBITDA and bottom line. And I think that is something that is -- we took a little while for us to make these things congruent so that they contribute to any interest of shareholders, dividend expectation internal measurement, but also on the pure ecological side. So, to finish that off, looking into 2023, I think there's the obvious developments that we have already mentioned in the -- looking back, I expect moderate growth in postpaid subscribers, I expect a strong development on Waipu -- and we will continue to lose on freenet TV. Let me give you one more hint for the TV side, we are -- we have a final product now a hybrid stick that can contribute or can make both technologies available to individual customers. The product is now in a testing phase and should be available from mid-summer, we will then start to actively cannibalize ourselves. I think it is a fact that we're losing Freenet TV customers to the market is something that is well, technology-driven and was expected from our side. Now the name of the game is to make sure that they stay within the group and switch to our technology. And I think the hybrid stick will be a good tool to secure that. Having said that, I'd like to hand over to Ingo and for the deep dive into the numbers.

Yes. Good morning, everybody, from my side. So, I start on Page 12 with the group view. I think based on all these positive operational developments what Christoph already described, I think it is not a surprise that in financials, we have seen a very, very strong year '22, from my point of view and especially a strong Q4. On the revenue side, already mentioned, it is a stable development we have. I think good news is that low margin revenues decreased and a high margin or better quality revenues increased. On the gross profit side, a very strong quarter, driven by mobile, definitely, but also in TV, there is an increase in the fourth quarter, but all in for the full year, a very strong development in gross profit. And I think this is the good part of the story that on both sides, we grow the EBITDA on the one side from increasing gross profit and on the other side, from decreasing SG&A. So, from my point of view, a very, very, very good development. I think we increased the guidance already during the year on an EBITDA level. And now we are even on the high end of the new guidance what we already changed during the year. So, I think it's a very good development on the group level. Moving to mobile. Yes. I think the story on revenues is the same. I think here, you do see that we do more SIM-only contracts in the business and, therefore, less hardware revenues, especially in the fourth quarter. But as already mentioned, and what you can see, if you look into the service revenues, the share of the service revenues increased further. And therefore, we are even with the development here of the revenues, we are happy because we focus on the bottom line. And as already mentioned from Christoph, we do not focus that much on the top line. On the gross profit side, there is a growth in '22 and the margin improved I think, yes, it looks relatively strong. What we see here was an increase of EUR 12 million. Maybe this is -- maybe I give you one insight in the contracts or in the targets what we do have, especially with the MNOs, but also with all partners. Some of the targets, you do not exactly know during the year if you do reach the target. And so, it is difficult to do an accounting during the year. And when you reach a lot of these targets in the fourth quarter, then the fourth quarter looks better than the whole year. And -- but what I think up to now, we do not have another possibility to show it. So, I would say it's definitely a one-off in the fourth quarter, but it is not extraordinary for the full year, what we show here. I think this is important to mention. We really showed a good performance during the year. And now this is the outcome out of this good performance that over in, there was an increase of the gross profit of 3.2%. Moving to the EBITDA here, I think what helps here is that the Q4 '21 was relatively low because there, we have built some provisions in the fourth quarter what we have not released yet, but what we -- which are still there, but there were not built new provisions in the fourth quarter '22. So, this explains the increase on the SG&A side. So, all in, from my point of view, a very, very stable picture in the mobile business. And so, we are a very good mood for 23 here. Moving to some KPIs. In the mobile business, customer base was already discussed. ARPU is stable. And therefore, I think, not surprising if there is an increase in customer base and a stable ARPU, then all in, you have an increase in the service revenues. What is really what was really successful and what makes me especially happy with the digital lifestyle development in the fourth quarter, because what we saw during the year was it was difficult to increase it quarter-by-quarter. And in the third quarter, there was the first small increase in digitalized to revenues. But then the fourth quarter was relatively strong now with an increase of EUR 8.4 million or 16% in the digital lifestyle revenues, and so we were especially happy about this development in the fourth quarter. Moving to TV and Media. On the revenue side here is an increase of the revenues by EUR 12.6 million in the fourth quarter. I think here, part of it is that we sold some waipu-sticks already to Deutsche Glasfaser, even as they have not started to use these sticks as described earlier, we already sold these sticks to Deutsche Glasfaser and therefore, we generated an additional extraordinary revenue here. But even without this revenue, there would be an increase because we -- I think it's logic that with more customers, we generate more revenues, and this is something what we do see here. Moving to the gross profit of the Waipu of the TV and Media segment, starting maybe with the freenet TV decreasing customers but stable gross profit because of the price increases, what we initiated during '22 in the B2B business of Media Broadcast. -- again, an increase on the gross profit side because of the digital radio business and in BaipuTV, a very, very strong increase of the gross profit during the year with the increase of customers here. Moving to the EBITDA again, in freenet TV, a slight increase because on the one hand, there was the price increase. On the other hand, there was a reduction in marketing costs. So, all in, there was an increase of the EBITDA in freenet TV, even with the decreasing number of customers. In the B2B business of Media Broadcast, there was an increase of EUR 9.8 million on a yearly basis. On the one hand, again, from the gross profit side, the digital radio effect. But on the other hand, we were very cost-optimized here and we reduced cost wherever it was possible. So, I think the whole team did a very good job here. In the WaipuTV, yes, maybe on the first look a little bit disappearing what we do see here with an increase of the EBITDA by only EUR 2 million on a yearly basis compared to the increase in the gross profit. But here was one special effect in the fourth quarter because the employees there, they do have some phantom stocks -- and because of the very, very good success, the value of these phantom stocks increased, and therefore, the EBITDA decreased by something like EUR 2.5 million. And what we also did during '22, and I think we discussed it very often. We increased the marketing costs at Waipu to accelerate the growth. And I think we see the acceleration. And in the long run, the profit would also increase. But basically, some additional marketing invest of something like EUR 3 million to EUR 4 million in '22 where necessary. So, if you would leave this out also the WaipuTV EBITDA development would be very, very strong. Moving to the free cash flow on Page 16. I think we reached the EUR 249 million -- at the end, there was a decrease in the working capital because I think what is normal is the payment to Media-Saturn, which is shown here for the exclusivity. On the other hand, there is again a reduction of factoring during '22. So, our outstanding factoring at the moment is only EUR 25 million. On handstands here. And as you may remember, some years ago, it was EUR 100 million. So, step by step, we could reduce the outstanding factoring. And at the end of the day, the factoring is off balance. But, but it is to make the balance sheet more healthy even if it is outside and to reduce the interest cost. So, I think explainable development in the net working capital. On the tech payment side, it's something like EUR 30 million. I think this is something what we used to have with the increasing profits, there will be an increase in tax payments in the following years. In CapEx, a little bit higher this year with the EUR 60 million, which was already anticipated during the year because we had the renovation of our headquarter building, and this was an investment of something like EUR 10 million in '22. So therefore, higher CapEx in '22 leases, I think, on a similar level than '21. Interest payments, definitely lower because the outstanding debt is lower, and so therefore, a lower interest figure. And then in '22, we received from CECONOMY a dividend of EUR 5.5 million. So all in, the EUR 249 million and as promised and as part of our financial policy, now I think we have to pay out 80% of the free cash flow, which is 1.68 million. And this is something what we will propose to the AGM in May, and we will wait and see what happens. Moving to the balance sheet on Page 17. In I think what is important to say here is all the figures are under control. It's a high equity ratio, a low leverage. The bank debt leverage is only 0.8%. And if you look into the future, may be important to know that we still have a revolving line with banks of EUR 300 million, which is not used. So, I think earlier or later, we will have to refinance part of the portfolio here. But with this revolving line in the back, I think this will -- I expect it to work fine. Moving now with an outlook to the guidance for 23 million I think the subscriber guidance was already described by Christoph. So therefore, I would like to focus on the financial guidance. Revenue still stable as discussed earlier, it is not our top focus, but we think this is something what we can promise here that would we will keep it stable. Much more important from my point of view is the EBITDA. So, we guide an EBITDA between EUR 480 million and EUR 500 million I think this is something like a milestone. I think EUR 500 million is the upper end of the guidance. But I cannot remember that we discussed such a high amount. And so, we are totally on the route to reach the 2025 ambition of what we published with an EBITDA of more than EUR 50 million -- EUR 520 million in 2025. On the free cash flow development, which is nearly comparable and definitely as we have not changed our financial policy...

It seems like we have lost the connection to the speakers. I will call them back immediately. Just the second, please.

Okay. So here we are again. Sorry for the interruption. I would -- I think I would not -- I do not know exactly when we stopped. I think if you have additional questions about the EBITDA to free cash flow bridge afterwards, we could answer them and also to the quarterly breakdown. But now I would hand over to the operator to start the Q&A...

So the first question is really just about competitive dynamics in the German mobile market. Can you comment on what you're seeing? And where is your view on the recent round of price prices that you've seen in the market? Second question is really just more detail in terms of the mobile business. So, you saw quite a sharp drop in handset sales in Q4. So, can you talk through whether there's been any recovery in handset sales in Q1 of this year? And are you seeing any signs of pressure in terms of the German consumer? And then just on mobile, earlier in the presentation, you mentioned that there was a release of provisions helped mobile EBITDA in Q4, but can you quantify what the impact of this was? And then my final question is really just about the guidance in terms of EBITDA. You've guided towards modest EBITDA growth for the full year. But can you talk about how we should think about the quarterly phasing of that growth? So specifically, I'm just trying to understand whether there will be any upfront costs in terms of migrating the Deutsche Glasfaser TV subscribers in Q2, Q3 that could have impact the profile in terms of EBITDA?

Yes. Thanks, Polo, for those questions. I think it's going to take them from my side. Additive dynamics, I think we have put one line in there. We see more and more rational behavior. I would say it's rather silent. I think all the market participants are trying to be, yes, rationale. If I go through one by one, Deutsche Telekom still focusing on their premium proposition. I think the offer they give to their premium Magenta and XL customers to add SIM cards that maybe family members have with discounters is a smart strategy on their end. I think you've all seen that what they call a group of family tariffs. We are adopting them. I think we're going to start test with -- in our customer base the next month. It's different for us because our share of these kind of tariff plans, high-end EUR 50-plus is smaller. But I think this is where they really do a fine job. I see Srinicopalan spending less on promotions. I think he redressed the company to be very careful on additional spending, keeping prices up. I think Telefonica, we have to say that Marcus -- has and his team has done a bill have done a brilliant job on the network as such, but also on the network perception, I think end consumers also and also business consumers appreciate that the Telefonica network in Germany has done at least in the big cities, a big substantial improvement and is on an eye to eye level with the other 2. And furthermore, I think they do a good job in rolling the dice very consequently no big changes. I think the cable launch is still a little late. And I think as far as we understand, they are really doing a big migrations, which will make them even stronger. But on the price side, and we see them on a daily basis in MediaMarktSaturn they are kind of like 5 meters away. They are not extending the offers significantly. So, on the, let's say, normal offerings or average ARPU business, they are very stable as well. These price increases that they have done are limited to prepaid offers. I was a bit surprised that the press and the capital markets was taking this so serious. If you really look into it, it's a very small segment and the increases. I think they were overdue prepaid, I have to say. The -- and I think the one that really has -- the biggest challenge is Vodafone. I think the new CEO, Philippe Rogue, is cleaning up the table. He's now 6 months on board. We have had a couple of good conversations with him. But we have also seen that for the first quarter, we have cut their commissions to us, but also to all their other partners, meaning their own shops, franchise and third-party dealers. Any of the sales channels, including ourselves, have taken that money out of the offers, which means that handsets might be a bit more expensive with them. So, we take this from the end consumer or we roll it over to the end consumer. We will see how long Vodafone will keep this policy. I emphasize that it's not hurting our bottom line, but it hurts our in-house share on Vodafone. So right now, we have, I think, generally versus the first months after 2 years that Vodafone was not the strongest network within our customer acquisition. So there is a change. Once again, I mean this is why we are happy to have 3 networks. It doesn't hurt so much, but it is looking at the market dynamics, I think it's a more relevant topic than the price raises on the prepaid side. So, your second question was on handset sales. I think Ingo and myself, we have -- and also the IR team has put a lot of emphasis. This is something which -- it's driven by one availability B mix of SIM-only and subsidy, we have seen little or no innovation on the hardware side as such. We are -- compared to the others, we have a lower apple in-house market share. So, if there is no innovation, no news, then hardware sales go down, -- and we are not particularly keen on it. This is also valid for Gavis. You know that we have that at 37 Apple stores, and we're doing a good EUR 250 million there. This is a business which we do opportunistically, but it is not an emphasis on our daily agenda. So, it's hard for me to give an outlook. I would say I would envision it for the coming -- for the 3 year for the running year on a stable level, but there might be exceptions if there are special offers. To give you a flavor, last year, Samsung said they would like to have -- they gave us a special offer for their S-23 and they would give any customer who would bring back an old handset, they would give EUR 100 free voucher to buy the very new one. So, these are activities that suddenly generate additional revenues, and we certainly do that and like to do that with our partner, Samsung, but it is not something that is substantial to the business. It is a -- well, a normal float within the plan and within their sales opportunities. While we have released a provision of EUR 6 million in -- this was an MNO extra, we have reached one of the top targets. And then we have -- we've gotten an extra from them. That was the exceptional item that we have been mentioning. -- on -- and the last question was on the potential migration of Deutsche Glasfaser. The investment that we do is a noninvestment because we sell the sticks to Deutsche Glasfaser, -- as Ingo mentioned, part of it was already sold because they were originally planning to exchange the hardware with their customers already in Q1. So -- but if this is going to happen, they will basically purchase the sticks from our side at cost. And so, it has no impact or a seasonality effect on EBITDA of Waipu.

And the next question comes from Martin Hammerschmidt. I have a couple as well, please. Coming back to the mobile EBITDA. I think you just mentioned sort of the EUR 6 million sort of provision release from an MNO. Could you sort of walk us through the rest of the growth component? I mean, previously, you mentioned obviously the customer growth. Some I don't know if bad debt if that has improved. So, could you maybe just help us dissect what was driving sort of a quite strong mobile EBITDA, please? And then sort of on WaipuTv the growth, do you think you can achieve the growth at the same investment levels. So should we expect so the overall TV EBITDA to decline in 2023, given to the fourth quarter had a bit of a weaker EBITDA but quite strong net. So, what -- how should we think about that trajectory going forward?

Okay. On the first one, I understand this -- I understand the question, but the answer is it's a breakdown if the individual contributions is going in too much detail. I think the effects are -- well, on the one hand side, is volume. So higher net add and a better higher subscriber base is contributing. This also effect if we do more transaction on own channels, then the fixed cost distribution on owned channels is getting wider. So that has an impact, so that does cost leases, et cetera, but also to ahead. it is the mix of SIM-only versus subsidized handsets or subsidized contracts is a significant impact. Maybe just one number on that. I mean, I think 3 years ago or 3 or 4 years ago, we did not sell a single SIM only in our own shops. We only did it online. In 2023, 70,000 new contracts in our own captive shops were SIM only. So that has an impact because initial -- it's not the initial, but x are lower. ARPU is a bit lower, but net value of those customers is better within the -- the first 24 months. So that is an impact or has an impact. Same goes for -- we have had with Media-Saturn from the hardware industry, we had good support. If we get good support, then we are able to sell a higher tariff plans in Media-Saturn because the extra that we get for hardware sales is then put into the end consumer price of the onetime down payment. And vice versa, we can increase the tariff plans a bit. The smart pricing thing helps specifically on existing customer base. We define the offer for in renewals on an individual level, not on a segment or group or target group level, but on an individual level. Well, and if you add a euro here or there, this adds up. If you just think about we are doing EUR 1.3 million renewals a year. So, if you add on 20%, you add an euro to then that is accumulating to a EUR 1 million contribution. So, I think it is -- and I was, I think, mentioning now 4 or 5 of the more important element, but it is just an outcome of a very deep analytical approach to optimizing value with a total of, I guess, 3, 4 dozen components. On wipes, no, we -- the EBITDA of Waipu and the TV segment will grow in 2023. As you rightly pointed out, it is also a result of acquisition cost. But once again, I mean, are expensed over the lifetime of the individual customers. So, the short-term seasonality effects that we have seen in the past is not that dramatic. The -- as I said on the previous question, with partnerships like Deutsche Glasfaser, we actually have no acquisition costs if we give them a revenue share in a kind of a wholesale model. That means that these customers come in at no individual costs because the expenses are hardware and this hardware is paid from Deutsche Glasfaser because either they give their existing customers a desktop set-top box or to give us our thick -- so for them, it's the same. And for us, it is a 0 outcome, but the net contribution per customer per month is a little lower. So, no impact from this side.

Great. If I just maybe ask the mobile EBITDA question in a bit different way. I mean that was very helpful on sort of in those for drivers. They seem to be all sustainable. If I now deduct the EUR 6 million provision from the EUR 110 million, then I -- and if I assume that most of those drivers are sustainable. Is it reasonable to assume that the mobile EBITDA going forward for quarter should be above EUR 100 million versus in the last 4 quarters, it was always like around 98%. Just to help us understand how to model it going forward.

Yes, I think -- Martin, I think that is -- it is reasonable. I think what you know and what all of you know is that the fourth quarter '21 was relatively weak. And I think this is also important to put into consideration, therefore, the Q4 '22 looks that good, but it has also to do with the results from Q4 '21. I think you just have to put this into consideration. But I think look into the future, I think what you said is reasonable, too.

The next question comes from Ulrich Rathe.

I have 3 questions, please. The first one is regarding the midterm outlook in November 2021, you laid out an EBITDA target, which seems to be very much -- you seem to be very much on track. But you also talked about free cash flow then. And that free cash flow target looks a little bit conservative now because your top end of the -- for this year's guidance is already above the target level. So now I would think you wouldn't want to change the midterm guidance in the Q&A of a conference call, but could you maybe discuss 2 things here. First, what has gone better than you thought in November 2021 in free cash flow? Is it simply EBITDA? Or is it working capital or other items in the free cash flow? And second, what factors could potentially weigh on cash conversion and the free cash flow progression from 2023 to 2025. That would be my first question. The second one is shorter. What exactly has been done to the LTIP? I'm not talking about the EXARING 1, but the LTIP change. And my third question is you mentioned that the refinancing could result in a higher interest level in the free cash flow bridge, 2023, interests have shown pretty much at the same level as 22%. So, is this simply not in the bridge as yet? And could this be an incremental sort of headwind for 2023? Or how to think about this comment about potentially our interest levels...

Maybe Ulrich, I'll start with the last one with the refinancing. I think what -- I think the net debt level is relatively stable. But on the other hand, the gross debt level is reduced. I think this is important because all time you have a negative effect between the interest what you get and what you pay. So, I think here, we optimize ourselves. With the refinancing, I think, as you know, I think the margin in the new -- in the refinancing, maybe the margin will increase by 0.3%. And points, something like this. So. the margin -- there will be an increase in the margin. But compared to the financings, which are outstanding, we have a much, much better balance sheet today. So, I think on the margin, the difference even in a harder environment will not change that much. And the level of interest of the Euribor at the end of the day, any way will be seen in all variable financings will end in our P&L. So, at the end of the day, I do not expect that big changes from the refinancing. And therefore, I do not expect that big changes in the interest payment, what we do have to do. On the Free cash flow guidance on the midterm guidance Yes, I definitely would say that the EUR 260 million, what we told you in November 21, it was a conservative one. But I think it's is much easier to predict the EBITDA than the free cash flow because I think you have so many changes also in your -- on your operational side. And we are not 100% sure today. And therefore, definitely, I would not change it. So, we -- for one example, a lot of tariffs, what we sell today has a cash back power in it. So we do not exactly know what happens with it. So therefore, I would be -- would stay on the conservative side today, even if I see that 260 million is already forecasted now for 2023. So definitely, I would not be too conservative today, but I think there are some angles, which are not open, but I would definitely say that in 2025, the free cash flow would be above EUR 260 million. This is something what I would say definitely, but I do not would to give you another figure today. I think maybe during the year, anyway, we have to think about the ambition 2025 again. And I think we will publish a -- will we renew it, and we definitely will not give you lower figures, but I think we have to discuss it again internally on a Board level during the year. Then maybe in November, I do not exactly know when, but then we will give you new figures here. But I think, yes, you are correct. And do I see risks on which side, I do see risks. I think not on the tax side, not on the CapEx side, not on the interest side, I think working capital is the question what happens here. And all of us, we cannot be 100% sure what happens and what mechanics in the business will change. I think these are the open points.

Yes. And on the LTIP, I mean, the term incentive program for the -- for the Executive Board is based on the older #4, which is the one that is now impacting the result. -- as a lever depending on the bottom line result of 2022. Since we have done really well in 2022, there was an adjustment needed. So, there was, yes, a lever. And the second one is it's based on phantom stocks. And when our share price is 2022 or 2023, it makes -- has an impact coming from '17 in 2029. So there needed to be adjustments.

Got it. Can I just -- so the understanding for that LTIP, not the accelerated one, is that it wasn't a change to the program. It was simply that under the terms of the program, you had the one-off effect in the fourth quarter we could share to book the sort of reaching the target.

And the next question comes from Usman Ghazi.

Hi, everyone. I hope you can hear me okay. I had a question on Waipu, please. So obviously, we've seen quite a significant pickup in the net adds momentum in Q4. Can you perhaps talk about what is going on in the market? Where are these -- I mean, are these customers that you're seeing? Are they cord-cutting? Or are they -- is there just more of an appetite to take OTT alongside more kind of legacy transmission technologies -- so any kind of flavor you can give on what is driving the additional growth, whether it be in the market or are you taking share? That would be interesting. My second question was I guess a bit of a more strategic question. If I look at the your comments on self-cannibalizing the DBBT business. I guess it makes sense given they're in the mobile network operators, they're lobbying for the 600 megahertz spectrum early. So can you perhaps talk about if the DBT business was to move over to, let's say 5G technology, or it's cannibalized early so that the spectrum can be freed up. What kind of impact do you see for yourself? I mean, do the economics improve relative to where we are today because you pay less in lease costs? Or do you get a compensation payment for early release of the 600 megahertz spectrum. Any kind of comments around that would be interesting.

Yes, Usman, thanks for your questions. On the first one, why would the momentum. First of all, what we see is that the conversion from free trials is better than in the past. That is no wonder because in 2020 and 2021, we gave 3 to 6 months free of charge. And the conversion was decent but not satisfying, and we have changed that to 1 single month. So that had a tip in the early 2022, but now we have found the right promotions, the right way to communicate it improved CRM. So, conversion from free trial is better. That is one element. The other one is that you're all aware that we're doing this or Telefonica is also selling our product. I think on Telefonica, we see step-by-step increasing number every other week, which just tells us that their organization is adapting it. It took a little while. We were honestly disappointed at the beginning, but they are like a big tank if they start running or you start moving, you can stop them. So, I think they're doing better. The third one is, in general, the perception of IPTV is gaining momentum because all the local fiber operators and providers are selling TV as well. So the perception in the population is, oh, you can get TV from a different angle. And I think also the fact that Disney+ Paramount+ and all the others have done a lot of advertising once again create a bigger -- well, it becomes more of a commodity to get the product over the Internet. And last but not least, I mean, we have just -- we have now a package of 180 HD channels. 60 of them are exclusive pay channels that we put into a package, which is super attractive. We have started the cooperation with [ Saturn ], I'm still hoping that sooner or later, we will get some of the other sports offers in Germany contracted. So I think once again, it's a mix of operational excellence, good content offer and a broader perception of the IP opportunity in the market. The obvious question and that goes already a little bit into the strategic direction. The obvious question that we have on me at a weekly basis with my operational meetings and on a monthly basis when Ingo and myself go for the business reviews is how can we accelerate this? How big is the opportunity? And how can we take benefit from the loss of this NIM cost relate next year and all the others. So, I think we're discussing more how can we accelerate. And we are also discussing on what impact would it have if we put significantly more money into the brand and the brand recognition, which is compared to[ VeigTelcom ]or Vodafone Giga still super small. So -- and then moving on to the T. Happy to answer this in that environment. I've given a statement 2 years ago once in the press and then suddenly, all the operators -- the TV operators came and said like, are you already bearing the TBT and I had to do significant number of interviews to change it back. Well, first of all, the spectrum is given to DBPT in Germany until 2030. The decision on whether this spectrum can be handed over to mobile operators is not a national decision, but a European decision. And as you know, in France and in Italy and in Poland, the terrestrial share is higher than in Germany. And there will -- it will not be possible to have a single decision on the spectrum just for Germany. And the respective global meeting to discuss the topic is in, I think the big one is in 2024. So as of today, I would expect no changes till 2030 on the spectrum side. Having said that, I like your idea, but I have to say that we had the idea ourselves. We were already moving on last year to review whether we could do a deal with the Puneet tour, basically handing it back and what compensation or what we would call a digital dividend we would get. This would definitely be lower than the EBITDA contribution that we get today from the business carriage fees plus and consumer. So, we are -- as of today, I would say, no -- definitely no changes to TBBT technology structure and deployment before 2028. I think if then a decision was made for 2030, then I think we will be ready to move on. If you move the whole thing to 5G, technology-wise, it is, I would say, handling, et cetera, is same cost. The difference would be that the operators would not pay carriage fees at this level because they would assume that 5G broadcast is much more a commodity and does not need individual technology covering the entire country. So the risk would be on the carriage fees, not in the subscription fees. On the self-cannibalization, I mean the idea is rather simple. We would offer a Freenet-TV customer, a waipuTV for free. And then we would basically watch whether they reach 1 of the 2 they use, they will be charged once. Our investment would be only the stick. And if the consumer pays 899 for 8 months, it doesn't mean anything to us, whether it's going into the one company or the other. So, it is basically a seamless access offer take TV from the Freenet group, and we care on which technology is the best for you. So that is the vision that we have. If we implement that, I think we can then, at a later stage, even if 2028 decision was made, we would then have no additional impact on revenues and on EBITDA. So that is hopefully an answer which outlines a little bit the optionalities.

And the next question comes from Titus Krahn.

Orientative comprehensive Q&A session as well. Just a couple of follow-up questions maybe from my side. First one, just because you already mentioned working capital and a little bit of a follow-up on your 2023 free cash flow bridge. I think most elements are actually quite -- just one question again on this working capital. To what extent do the EUR 50 million outflow includes a reduction in factoring and what would be left after that year, given you just have EUR 25 million left following that, would you expect maybe a lower level of working capital outlooks from 2024 onwards. Would that be a fair assumption? And then a quick one on your capital structure given that you talked about your quite healthy balance sheet and net debt. Just how would you weigh on the one side, maybe paying down some of the debt with the cash you have in the next couple of quarters versus potentially investing it in a share buyback as one option. And the last question, just on the broadband launch. I think I mean, has been quite recent, just pretty much a month going on even a bit less. But kind of can you give any numbers on traction you have so far on the DSL side. And also maybe I know it's quite a number of factors playing into this, but what is your own ambition in terms of subscribers to achieve with the BSL launch by the end of the year?

Titus, thanks a lot for your questions. I think from the working capital side, as you all may know, we have this special topic on the balance sheet that we have the liability versus media a turn of EUR 25 million a year, which is a liability based on the exclusivity right, what we do have there. And so, I think this is something we just said. So minus EUR 25 million in the working capital is the base for the caption of the yearly figure. And then in '23, it is the idea to reduce the factoring to 0. I think factoring is a little bit the mechanic we could do faster or slower. But I think definitely, it is the target to reduce it to 0. I think we will wait and see what happens during the year. But yes, I think these are the 2 components in '23. And I think then we have to see -- I already talked about operational changes. We do not know. And so, I would be careful here. I think, yes, basically a normal working capital without any changes in payment rules would mean it should only be minus 25%. But from today's point of view, I would be careful here would at minus EUR 50 million in the working capital also for the future. And yes, maybe call it a buffer, but I think we have to wait and see what happens. And I would feel much happier if I do have the buffer and then we will wait and see because 24 is far away from today's point of view, let's wait and see what happens. Then your question on the debt and on the reduction of debt, I think, yes, I think with the increasing interest rates, yes, I think there is -- if you compare it with other possibilities to use the capital, yes, it looks more attractive than before to reduce the debt further. On the other side, we still do have a slow interest amount what we do have to pay even with higher rates. And I think we have not -- I think we have to discuss capital allocation during the year. And yes, definitely, also, we will discuss the share buyback, but we have not decided yet. And I think we will wait and see what happens during the year, what cash is necessary for the business. And then I would say I would not say it is impossible that we decide to do a share buyback, but what I can definitely say today is that it is not decided. And I think we will start now into the year and then we will check it again.

On the Freenet Internet and DSL, I think we have to wait and see what happens here. We will just -- we will start during the quarter. And I think, Christoph, I would not lay out a figure today. I think let's wait and see. I think we saw that we -- from the reselling what we did in earlier times, I think there is a potential for us and there's an interest from the customers to buy it. But especially with the app, we have to see how it works. And so it's -- I think it is too early to give a concrete figure here. We still stick to the EUR 15 million to EUR 25 million of EBITDA in '25. But I think we have to say -- we have to see how fast this will work on...

Okay. The next question comes from Francesca Schild.

Great... And I've got 3 questions, please. Firstly, on the overachievement bonus received in the mobile segment, could you please just clarify a bit more what were the criteria for hitting the target? And where all operators are in these bonuses? Or was it just one specific operator. And for 2023, do you have any similar targets in place and can react another bonus payment if you hit them? That was the fire question. Second question, please. How many WaipuTV subscribers do you expect to add this year as a result of the Deutsche Glasfaser partnership? And thirdly, it looks like the run rate for 1Q '23, PTV is on track for more than 100,000 again. Is this correct? Or is the graphic on Slide 8 improvement addition from a Deutsche Glastral ready?

Yes. Thanks, Francesca. The first one on the bonus. And for obvious reasons, we cannot disclose the bonus in detail, but in more general terms. The current situation is that we get bonus agreements with Vodafone and Deutsche Telekom. There is a variety of bonuses or extra payments, I would call it. They are typically based on the total generated cost of goods. So, to illustrate that, we pay on an individual SIM card basis, money to the operators, depending on usage and tariff plans. And then we have an agreement that if we -- if this number goes beyond so and so then we get an extra 1% or 2% or 3% discount -- these numbers are made up. This is not concrete. It's just to illustrate. So that is the biggest share of bonus payments that we get. And the second one is typically that they might have individual plans or internal goals, for example, data usage on 5G or extending share of wallet within a household, there are incentive schemes in place. So -- and there is a lot of fantasy in many, many other things. So, we have seen a broad variety over the years. The -- for our internal and external purposes also for you on the modeling -- we have the level of the total bonus payment over the last, I would say, in 10 years was on a stable level, and that led to always the same kind of gross margin level that we have generated. And we are not expecting a deviation from that tradition in 2023. There was that one exceptional item because we have had one extra goal, and we were once or whether we would meet it. And that was kind of a lucky punch to be honest. I think we had a similar one in 2021 in Q4. That was a down payment on Deutsche Telekom, where we had that. So -- but I mean, for modeling and for internal planning purposes, we do always the same level no deviations. On Waipu, I said at the beginning that by the end of the year, I'm expecting a number between 1.4% and 1.5%. There is an initial approximately 100,000 current users on Deutsche Glasfaser on TV from their perspective, and we have not seen these customers, these numbers that they have given us, and we don't know what the usage is, and we don't know exactly what the consumption is. They -- the Deutsche Glasfaser team told us that these are the ones that they want to do a hard migration. So I would add to today's EUR 1 million something, 100,000 by the end of the year with this. And then if I add another 250 million that we have done this year, on EUR350 million, we are currently on -- by Q1, we will be on 1.040. So this adds up to EUR 1.4 billion. And I said in we are between EUR 1.2 billion and EUR 1.5 billion sounds reasonable to me. If I look at current trading, net adds in Waipu will be about 70,000 in Q1. And that fits to the other number because 4x the 70 million would be EUR 250 million to EUR 300 million, plus EUR 100 from Deutsche Glasfaser. This is why I'm ending with anywhere between 1.4% and 1.5%. And if there are opportunities for more, we'd love to take them, and we will not stop the team on winning customers...

And the next question comes from Adam Fox-Rumley...

I was going to ask a question about a change of approach on marketing in Waipu. But I think you basically said earlier that, that is still under consideration. So maybe I can ask instead whether or not the talks, whether or not there's anything you can say about the talks with other fiber providers, for instance, on bringing Waipu a platform to their networks? And then secondly, I just wanted to ask about the customer lifetime bane improvements to the systems and kind of conceptually, is that a continuous improvement approach to that? Or should we expect a kind of step change in the capability of that -- of your kind of back-end systems during the year that might more materially change the way that you move? Or is it just a kind of step-by-step iteration?

Yes, on the first one, we are talking to almost any of the fiber providers. Obviously, we're not talking to the Deutsche Telekom because they have their own products and the same goes for Vodafone because they still have their own products. But we're talking to Wilhelntel to MET to net colon to DNS and to a lot of the locals. We have also a framework agreement with Brake is the association of small operators. The -- this is now a deep look into human psychology. Typically, these companies have started and have identified the TV as part of their portfolio, then they have hired people to do TV. And now 3 years later, they realized that the TV as such with the small scale they run is not making money, but still there is -- they have dozens of people being busy with it. So, I mean, the real role model was Telefonica, they're never smart enough to do it from the beginning with us. But with all these companies, we are basically telling them, would you be ready to fire your internal people and to replace it by a third-party product? And what typically the CEOs do then, they walked into the TV units and say, "Can you please check what the differences are between our product and theirs. So, this is real life of B2B sales. We are asking the frog to dry out the pot and this takes time. So yes, but we are working on this and we have promising talks. But I'm not -- I mean, a, I'm not seeing big-size providers such as DGF aside of DGF and the second is it will take time. On the customer lifetime concept, I mean, once again, what we're trying to do is we came originally from kind of a one size fits all renewal. Then we changed the renewal offers based on tariff plans and customer behavior. Then the next phase was to include a projection on future data usage. And within the renewal, tell the customer, give you more for more, you should upgrade now to 2 gigabyte or 3 gigabyte or 5 gigabyte or whatever. And the next iteration is now to do that or not anymore on data usage and tariff plans, but on the individual usage, but also on the individual predicted readiness to pay so basically purchase power of the individual. And that leads to the fact that 2 individuals with same data usage and same tariff plans might on the renewal get a slightly different offer and the difference may vary from plus/minus 10% to 15%. And this is what's happening. It sounds easy. It's technically rather sophisticated because you need to make sure that all these offers are consistent across all channels so that the end consumer would not realize that if they go to the shop, they might get a different offer, then they get online, et cetera, or in the app or in the self-service part of our digital offering. So that is really what's happening. And by the nature of this, the first, I would say, in total, 4 years, it will take 4 years to have all our customers once migrated into the system. And then we will see how often we can raise the prices for the individual. Is that a onetime effect because market then their usage might not change or we don't see that the one -- we see the conversion suffering from trying to increase net down payments or hardware offers. So, I think it is a positive concept, and it will help us to increase gross margin. But I don't think we should not assume that this is something which you can continuously do on a 3% or 5% level. But it is an ongoing smooth slow penetration of the entire customer base with the model, helping us to create gross margin and to conserve current profitability on mobile business.

The next question goes to [ Sairam Sharon ].

Thanks for all the information so far on mobile profitability, but could we just revisit the moving parts again, please? So, I guess taking OpEx, there's the difference between EBITDA and gross profit, it looks to have declined about 8% year-on-year, and that follows a 27% reduction in Q4 2021. Now if we assume personnel expenses were fairly stable, which implies quite a large reduction in other OpEx. Could you sort of help explain what maybe drove that, please?

I see -- I think maybe you remember last year, when we did a -- when we built a provision in the Q4 '21. So, this has not been built in '22. I tried to explain it. And therefore, the SG&A looks -- are definitely lower, but it was a onetime effect in '21 and no onetime effects here in '22.

Okay. Understood. And can you just remind us set of how much exactly that provision was...

I think it was something like EUR 8 million, I mean like this... Okay. Perfect.

Okay. At the moment, there are no further questions. So let me hand back over to your host for some closing remarks.

Well, thanks to all of you. Thanks for the high interest in the call. Also, for 90 minutes in total. We appreciate your interest. We enjoyed the opportunity to explain, and we are happy for the performance and hope to see you and talk to you again. Thank you.