IONOS Group SE (IOS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the IONOS Group SE Half Year 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Stephan Gramkow. Please go ahead.

Hello, and good morning, everybody. I would like to welcome you to the analyst and investor call of IONOS on the results of Q2 and the first 6 months 2023. Thank you for joining. My name is Stephan Gramkow and I'm responsible for Investor Relations at IONOS. Let's have a look at our agenda for today's call. Achim Weiss, CEO of IONOS, will give you an update on the business and the development and achievements of the first 6 months 2023. Britta Schmidt, CFO of IONOS, will then walk you through the financial details and highlights of the second quarter and the first half of 2023. We will then have a brief look at our Climate Strategy 2030, which we have just announced a couple of days ago and give you an outlook for the second half. We will also talk about the current projects and milestones as well as the topic AI. Achim and Britta will then be happy to answer any open questions. I would now like to hand over to Achim. The floor is yours.

Thank you, Stephan. Good morning, ladies and gentlemen, and welcome to our Q2 webcast. I'm Achim Weiss, the CEO of IONOS. It's great to have you with us today as we delve into our performance during the first half of 2023 and take a look at our operational trends. We've got quite a bit to cover, so let's get started. IONOS is the clear #1 European SMB digitalization partner and trusted cloud enabler. Let me start to highlight our four strong business pillars, which serve as the foundation of our success. The basis of our presence and productivity, which is the largest pillar contributing EUR 457 million in revenues in the first 6 months of 2023. This business segment demonstrates remarkable resilience and steady growth with high underlying margins and exceptional cash conversion. A subscription-based revenue model, we cater to all digitalization needs of small, medium businesses, including solopreneurs. We're the leading provider in Europe and have a sizable business in North America as well. Moving to the center of the page. We have our second pillar in our Web Presence & Productivity area with our fast-growing aftermarket business which is the buying, selling and parking of domains. This area contributed another additional EUR 157 million in revenues. However, as the exceptional high growth of the last quarter is coming down to a market level as anticipated, the dilutional effect on our EBITDA margin is already easing off. 10% of our revenues stem from our Cloud Solutions business. Here, IONOS is progressively establishing itself as a trusted cloud partner for small and medium businesses. Although it is our most recent business venture, it is already self-sustaining, meaning it covers all its initial Starboard investments and operational costs. We anticipate this business area to contribute positively to our EBITDA in the near future. Lastly, IONOS is a very strong brand that supports us across all sales channels as well as in retaining our large customer base. Our continuous investment in our brand with our focus markets have led to a significant increase in brand awareness in these markets, as already shared during last earning calls. This encourages us, of course, to continue with these initiatives as planned. In the past, we've been fairly cautious with price adjustments. However, we are constantly reassessing our pricing strategy, particularly in light of the current economic landscape which offers some flexibility in terms of pricing. It's about striking the right balance, recognizing the potential growth for price adjustments while also remaining mindful of the impact on customer acquisition and satisfaction. Now let's take a moment to review our performance after first 6 months of this year. We've successfully expanded our revenues to EUR 709 million across all business units, making a substantial growth of 12.5% year-over-year. Our EBITDA followed suit with a solid increase of 10.7% and which aligns perfectly with our initial projections. Britta will delve into the details of this shortly. Let's have a look at our primary revenue growth catalysts, net customer growth and average revenue per customer. As already mentioned in our Q1 webcast, we've made a promising start into 2023, which continued in the second quarter. The reliability of our mission-critical products, backed by the dedicated support of our personal consultants have helped us to develop and maintain a very loyal customer base. We've kept our churn rates remarkably low, around 13% annually or approximately 1% monthly. Moreover, we have been able to add many new customers, resulting in a strong net customer growth of 105,000 customers in the first half of 2023, outperforming growth we achieved in the same period last year. On the right-hand side, you can see that our ARPU increased by a very healthy 4.4% to EUR 14.6 per month despite a strong increase in customers. Please keep in mind that with new customers usually benefit from starting discount, so diluting the ARPU in the first 6 to 12 months. The growth of 4.4%, therefore, supports our continued and improved up in cross-selling ability. The expansion of our Cloud Solution business additionally fosters ARPU growth as average ARPUs are generally much higher. Of all these numbers demonstrate the successful execution of our business strategy, underpinning our predictable growth in revenue and profitability. In a constant evolving hosting market, maintaining a robust and recognized brand is crucial to our further success. Of course, alongside offering the right area of products and services. And even strong IONOS brand supports us in many ways, notably increasing organic customer inflow, reducing customer acquisition costs across performance marketing channels and enhancing retention rates just to name the most important ones. In the first 6 months, EUR 25 million were allocated to brand campaigns, up from EUR 19 million last year. At the same time, we spend correspondingly less on performance marketing things so that our marketing expenses overall are at the same level as last year. Investing in a brand is a long-term strategy and requires patience and persistence. It is, therefore, very encouraging that we are already seeing great success in increased brand awareness today. I trust that most of you are familiar with our brand campaign featuring Aunt Helga in the U.K. We have launched at the end of 2021. Since then, our aided brand awareness in the U.K. has already jumped from 18 to 33 just as one example. Due to the high importance of our brand building and the positive results we are observing, we will continue to push the marketing of IONOS Brand the biggest chunk still to come in the next couple of months. However, brand marketing spend will stay at this year's level, which will just mechanically result in a decrease of marketing spending as a percentage of revenue, subsequently increasing our EBITDA margin going forward. At this point, I would like to hand over to Britta to walk us through the financial details.

Thank you, Achim, and welcome also from my side. Let me start with an overview of the different revenue lines on Page 7. We are showing both the half year view and the Q2 as everyone is usually a bit more interested in the last quarter, let me focus on this. Our largest business area, Web Presence & Productivity grew by 11.9% year-over-year, supported by growth in the aftermarket business, which added a little more than 4 percentage points in the second quarter. Excluding the aftermarket business, Web Presence & Productivity grew by a very healthy 7.7% year-over-year despite a small headwind from FX. Excluding currency effects, Web Presence & Productivity, excluding aftermarket grew by 8.1%. As anticipated and previously highlighted during the Q1 earnings call, we are pleased to reaffirm the growth acceleration during the year driven by continuous increase in service inventory through successful cross and upselling initiatives along with price adjustments, which have notably taken effect during the second quarter. These factors when compared to the same period last year have significantly contributed to accelerating our revenue growth in the Web Presence & Productivity, excluding aftermarket. As a result, in the first half of this year, we reported a year-over-year growth of 5.8% in the Web Presence & Productivity revenues, excluding aftermarket. This is a testament to the positive momentum we are experiencing. As we move forward, we maintain a high level of confidence in our ability to achieve our annual target of 5% to 7% growth in the full year for Web Presence & Productivity, excluding aftermarket. This success is a result of our dedicated efforts and commitment to providing valuable solutions and services to our customers, and we will look forward to continuing this trend of sustainable growth. Our Cloud Solutions business, which is still the smallest business in our group grew by 12.2% in Q2, although this falls below our initial guidance range of 16% to 20%, it is important to note that this result was influenced by a one-off project with the large customers in the first 6 months of last year, making this year's comparison more challenging. However, when we exclude the contribution from this project and the impact of FX headwinds, our Cloud Solutions achieved a robust growth rate of 16% in the first half of 2023. Looking ahead, we expect this one-off effect to fade out in the upcoming quarters, allowing for a cleaner and more accurate comparison of growth rates year-over-year. We are optimistic about the continuous growth of our Cloud Solutions business and are excited about the opportunities it presents for expansion in the future. Moving forward, we are committed to enhancing our product offerings and services. Our dedication to enhance the offering, especially in the area of PaaS, Platform-as-a-Service and SaaS, Software-as-a-Service will further establish our position as a competitive player in the industry. FX was a small tailwind in the first quarter but turned into a 0.7 percentage point headwind in the second quarter or a negative 0.5 percentage point on revenues, excluding aftermarket. The FX effect in the first 6 months was minor due to these opposing effects in Q1 and Q2. Let us now have a look at the development of our profitability on Page 8. In the second quarter, we invested EUR 11 million less into marketing compared to the previous year due to different phasing of our marketing and brand campaigns. Our focus this year has been on maximizing the impact of our campaigns in Q1 and Q4, capitalizing on the high demand periods. Furthermore, we are observing favorable market conditions presenting us with opportunities to leverage the high demand last quarter and further strengthen our brand presence and market position. The different phasing explains the relatively high adjusted EBITDA margin in the second quarter. Adjusting for this effect, the comparable adjusted EBITDA margin would have been 29.2%. As mentioned before, our focus remains on profitable growth and the allocation of our marketing spend between the channels, which means we will continue to focus on valuable customer growth measured by CLTV over CAC, both for marketing, including brand and excluding brand. By carefully managing our marketing investments along this KPI and capitalizing on the favorable market conditions we aim to achieve optimal results and drive sustainable growth across our business. The adjusted EBITDA and adjusted EBITDA margin currently still reflect the structural impact stemming from the significant revenue growth contributed by the aftermarket business, where we typically charge a commission lower to the rest of the business. However, we are pleased that as the aftermarket growth rate is moderating to a more typical level, the dilutional effect is indeed decreasing as expected. Specifically for the second quarter, the dilution effect was around 0.4 percentage points. As we progress further, we anticipate this trend to continue resulting in a more balanced contribution to overall financial performance. We remain confident in our ability to navigate these dynamics and we continue to focus on optimizing our operational efficiency while ensuring sustained growth across all our revenue lines. On Page 9, we are presenting the half year numbers. As Achim has previously mentioned, the adjusted EBITDA margin shows a slight decline compared to the previous year due to the just mentioned dilutional effect resulting from the growth in the aftermarket business during 2023, which amounted to 0.7 percentage points. However, it is essential to note that if we were to exclude this dilutional impact, the adjusted EBITDA margin would have increased. This positive change can be attributed to higher gross margins, primarily driven by an improved product mix and the realization of economies of scale. Let us turn to Page 10, focusing on capital expenditure. As you know, we have the advantage of having a highly predictable maintenance CapEx requirement which are bolstered by favorable server economics, economies of scale and our state-of-the-art technology platform. This stable foundation allows us to effectively manage and plan for the ongoing maintenance and improvement of our operations, ensuring reliable services for our customers. On the other hand, our growth CapEx is directly linked to future revenue and customer growth prospects, particular in the Cloud Solutions segment, providing a well-defined path to achieving payback on these investments. Maintenance CapEx remains low with 2% of revenues. Growth CapEx is well below previous year driven by phasing effects of deliveries. Just to give you an idea, we have around EUR 20 million of outstanding deliveries. Based on our projections, we maintain the expectation that our total CapEx for the full year will be approximately EUR 100 million, which represents around 7% of total revenues. This takes into account the anticipated fulfillment of outstanding deliveries. Additionally, we are confident that cloud solutions revenue will gain momentum and accelerate aligning with our full year target. By maintaining a balanced approach to our CapEx allocation, we are well positioned to capitalize on growth opportunities, enhance our capabilities and drive sustained and profitable revenue growth. On Page 11, we present an overview of our leverage and debt position. Our debt consists of a shareholder loan from United Internet, featuring a fixed interest rate of 6.75%. It is essential to note that this loan does not include any covenants or payback penalties which provides us with a favorable and highly predictable financing structure. Moreover, the shareholder loan is set to mature in mid-December 2026. Given the current market conditions, we believe that the conditions of this shareholder loan are quite attractive, offering us a solid and secure financing arrangement with minimal financing risk. As of the end of the first half year, we have successfully reduced our net debt to EUR 1.14 billion, which translates into a net debt to adjusted EBITDA ratio of 3.1x. This reduction in net debt includes a pay down of EUR 30 million of debt during the first quarter, showcasing our commitment to prudent financial management. Additionally, we are pleased to share that we have made another debt pay down of EUR 30 million in July, further reducing our debt in line with our expectations. On Page 12, you can see the reconciliation from adjusted EBITDA to free cash flow. I would like to mention we have introduced a revised presentation of cash flows to enhance the reconciliation from adjusted EBITDA to free cash flow, aiming for better consistency between the 2 metrics. To achieve this, we have made adjustments to the cash flow statement. Specifically, we have moved the cash outflows for interest from operating activities to cash flows from financing activities. This change aligns with the fact that interest expense is not included in EBITDA, ensuring improved coherence between the two measures. Furthermore, we have eliminated the interest portion of repayment of lease liabilities from operating activities. As a result, the entire outflow of interest payments is now consolidated in a single line providing a more streamlined view of interest-related cash flows. By making these adjustments, we have refined the reconciliation, creating a more transparent and accurate depiction of free cash flow in relation to adjusted EBITDA. Those modifications shall contribute to a clearer understanding of our financial performance. We believe this change is beneficial in assessing our cash flow generation and financial health. And let me now summarize the key components of our cash flow. CapEx, as already mentioned, CapEx for the period amounted to EUR 31 million. Tax payments were slightly higher compared to the first quarter only due to different phasing of payments. Long-term incentive program payout as one-off payment of EUR 40 million was made for the long-term incentive program, which was due after the IPO. This represents a one-off event and has been accounted for accordingly. IPO costs, the costs associated with the IPO were charged to the selling shareholders. But partial payments have not been made yet. As these are as well considered one-off payments, they are not adjusted in the cash flow calculation. Other working capital showed a slightly negative impact primarily driven by accrued expenses from the last year being paid in the first half of this year. This effect is expected to reverse over the course of the year. Taking lease payments into account, the free cash flow after leasing for the first half year amounted to EUR 92 million. To make this figure comparable to Q1 number and include all interest payments adjusting for the one-off payment out of the long-term incentive program, the adjusted comparable free cash flow would be EUR 58 million. We have not adjusted for the outstanding payment of the IPO cost as we would consider this as one-off payments. As Stephan already mentioned, on 25th July of this year, we announced our Climate Strategy for 2030. This marks a significant step forward in our commitment to environmental sustainability at IONOS and as it outlines our long-term plan for data center and office targets, building on our existing efforts to reduce our carbon footprint and promote renewable energy usage. The most important targets of our Climate Strategy 2030 are as follows: data center carbon emissions, we are determined to reduce the carbon emissions of our data centers by an impressive 55% from 2019 levels by the year 2030. To achieve this, we will implement various measures, including a transition from diesel to biofuel power generators wherever possible, promoting cleaner and more sustainable energy sources. Renewable electricity sourcing, we remain committed to sourcing 100% renewable electricity in the long term. Furthermore, we aim to achieve an impressive target of 50% of our own data centers with on-site generation of renewable energy, such as photovoltaics. This reflects our dedication to integrating clean energy solutions into our operations. Value chain carbon emissions, our environmental responsibility extends beyond our direct operation. As part of our Climate Strategy 2030, we have committed to reducing carbon emission across our value chain. To take the first step in this direction, we will engage 90% of our key TechOps suppliers to set supplier climate targets, encouraging a broader shift towards sustainable practices. Renewable electricity in global offices. Recognizing the impact of our offices on the environment, we are determined to achieve 100% renewable electricity usage in our global offices. This target is set to increase from approximately 66% at the end of previous year, reinforcing our commitment to renewable energy adoption throughout all of our organization. We are confident that this strategy will contribute to a more sustainable and environmentally responsible future for IONOS and the communities we are in. To conclude with the financial part of this call on Page 14, we would like to reiterate and confirm our outlook for this year. Overall, we are targeting a total revenue growth of approximately 10% on a constant currency basis. For the Web Presence & Productivity revenues, including aftermarket we are aiming for a growth rate of 8% to 10%. We expect our Web Presence & Productivity, excluding aftermarket, to continue to accelerate throughout the year as the impact of our growth investments come through and price adjustments kicking in as already observed in Q2 this year. Our expectation for aftermarket growth is around 20%. Moving on to Cloud Solutions, we assume that revenue growth should also be well into double digits and expect revenue growth of 16% to 20% year-over-year. While we continue to see robust demand from our small, medium customer base. We acknowledge that the market for larger cloud customers present challenges with ongoing delays in the decision-making process. Nevertheless, we are confident in the strength of our offerings and our ability to capture growth opportunities in this space. Overall, we are optimistic about the future and remain committed to driving sustained growth. We expect the adjusted EBITDA margin to grow slightly higher than revenue growth, resulting in a margin above 27%. The first half year results have already surpassed these expectations with the margin standing at an impressive 28.3%. However, it's essential to keep in mind that we plan to make performance and brand marketing investments in the high-demand fourth quarter, which will lead to a slight decrease in the margin for the full year. Looking further ahead, in the midterm, we remain focused on achieving adjusted EBITDA margin above 30%. The half year results, as presented, indicate that we are on the right track to reach this target. Lastly, based on the increase in our adjusted EBITDA and our fundamentally strong cash conversion, we are confident that our net debt will decrease from 3.5x adjusted EBITDA at the end of 2022 to below 3x. We are really confident to continue our growth journey, underpinned by our best-in-class financial profile, combining growth with profitability and cash generation. At this point, I want to hand back to Achim to talk about some of our projects and milestones.

Thank you very much, very good numbers. Our major project and milestone [ road map ] unsurprisingly remained mostly unchanged. We will continue to work on the expansion of our Internet Factory to benefit from operating leverage across the group and allow all brands to benefit from the top-of-the-line products for their respective markets. Looking at Cloud Solutions. Infrastructure layer -- Infrastructure-as-a-Service layer is pretty feature-complete,and we are changing our efforts into enhancing the Platform-as-a-Service layer. Our goal is to enrich our current offerings continuously with more features and options. Our dedication to our successful Wordpress strategy remains unchanged. We will continue to add more plug-ins and features to the present suite to make sure that our customers have access to an ever-expanding range of tools and capabilities. AI is crucial focus area for us, and we are excited about the progress we've made in this field. So let's have a closer look at AI on Page 16. We have classified AI into 3 distinct areas that we are actively developing. Firstly, we're enhancing our product suites with AI features to directly benefit our customers. Our AI-driven tax generator from MyWebsite, for example, simplifies content creation, a common challenge for many. Additionally, our AI-backed newsletter tool enables SMBs to effectively engage with customers through e-mail marketing regardless of the experience or writing skills, please expect further innovative features really throughout the year. Secondly, we are continuously enhancing our customer-facing products with AI capabilities to improve up and cross-selling as well as customer interaction. The first example of this is our new AI-based domain search at our brand United domains, which helps customers find the most suitable domain for their needs. Lastly, we are leveraging AI as internal tools to enhance various aspects of our business operations. These tools support content creation, fraud detection, security and even financial modeling. We have already introduced GitHub Copilot, an AI tool for product development coding to further boost our efficiency and productivity. We are very committed to pushing the [ Banners of ] AI technology to improve our products and services continuously, our dedicated -- dedication to innovation will remain at the forefront of our efforts as we strive to provide the best possible experience for our customers. To give you an idea of the use of AI on our product side, we have prepared a short video on the AI power text generator for the MyWebsite product, which has been live since May already. [Presentation]

Yes, I'll let the magic do its thing. All right. Let me summarize the key highlights from today's presentation on Page 18 that are essential to keep in mind. First and foremost, our business is built on a strong foundation marked by sustainability and resilience. The majority of our revenues come from recurring sources, providing a stable platform for consistent growth. Moreover, we just proved that predictability of our business model with 6 months 2023 results being fully in line with what we have guided for. Looking ahead, we have a clear vision of our CapEx requirements for the upcoming years. Thanks to the well-funded asset base we have in place with, which also includes our thriving Cloud Solution business. The slowdown of the aftermarket growth is fully anticipated and will dilute the adjusted EBITDA margin less in the future. In terms of brand investments, we expect them to reach their peak in 2023 and remain at this level. These investments will pay a crucial role in supporting our revenue and margin expansion as we progress forward. A lot of the investments into the Cloud Solutions business have been made already, like investments for building up Infrastructure-as-a-Service features, creating a great opportunity for future growth and EBITDA contribution. Our product portfolio has been successfully redesigned for cross and upselling opportunities and seamless expansion in terms of AI integration, we are capitalizing on significant opportunities, both in our product suite and internal operations, promising a more efficient and improved customer experience. In conclusion, I am pleased to state that IONOS is well positioned for future growth. The strategic decisions we have made, coupled with the unwavering commitment of our team will undoubtedly drive success and create value for all our stakeholders. Overall, I'm very well -- we are very well positioned for future growth. I think the next position is Q&A.

[Operator Instructions] And the first question comes from the line of George Webb from Morgan Stanley.

I'll kick off with 3 questions please. Firstly, on the Web Presence business, ex-aftermarket, nice to see quite that material acceleration in growth there, but I know you're confident in Q1. Can you help break that down between how much of the growth came from pricing uplifts versus cross and upsell? Secondly, a broader question for WP&P. We saw in Q2 that Google announced they were looking to exit their domain registration business, despite really having fully north of last year. Squarespace looking to buy that often. Interested if you have any thoughts on that development and an update on the competitive environment more broadly? And then thirdly, on AI, do you see any of these AI features as predominantly enhancing existing offerings that all users will be able to access? Or do you anticipate some of these elements or future elements can be priced separately and therefore be incremental revenue?

Will you start with the last one? AI...

I can start with AI and domain business. So I think AI, if we can price it separately like just Microsoft did, they just announced that they will charge -- I think it was at $30 a year for AI options to the mainline products. I think that might be possible for some of the products, but I think it will also be integrated in others just to the same price. It's just a technical development, which we see over the years and everything improves. And in many times, surprised not just a economy change. Like looking at the website builder, I don't see that website building products will be 3x surprise in any time soon just because of AI. Everybody is working on it. I think we are at the forefront. I haven't seen a lot of competitors actually releasing something new online. And since May. We're working on a completely new version of the website builder for this year. Just to release a little bit surprised. I'm not sure if that's feasible to charge a lot more because it's pretty much common technology already today and will be much more in the future. So that for different products like we're offering AI in our AI infrastructure in the cloud, of course, that has a price tag to it. Now we are working on offering different language models, which you can use as a service. There's a lot of companies around they need language models, maybe even cheaper than ChatGPT-4, for example, and especially like with harder data protection requirements. And so these are, of course, products which we will add to our infrastructure service or platform service in the cloud, and of course, they will have a price to it. So the domain business of Google was sold, yes, to Squarespace and unfortunately, it was not a public process as far as we know. What does it show? It shows that Google is much more concentrated now on their core stuff than in interfering with our business and trying to register domains or starting with website, pages and builders and all these things. I think we can clearly see have different things on their mind and hosting is not theirs. They never have been very successful with it. So now they basically gave up or outsourced it to Squarespace in that case. So I think it's a positive sign. We are showing that we are a contender, which is to take serious and Google just gave up on being a domain register.

Yes. And then for the first question, Web Presence grows ex aftermarket, driven by price increases or cross and upselling. So I think it's 3 reasons and I order them by order of magnitude. So the first one would be cross and upsell definitely, which drives the acceleration going forward. The second one to keep in mind is the customer inflow which we have seen in 2022 and where we now see the renewals and the starting discounts running off. So customers getting higher ARPU, and that's definitely adding in addition to the acceleration and to the revenue growth. And then the latter and by far smallest part is price increases, which are now kicking in.

And the next question comes from the line of Stéphane Beyazian from ODDO BHF.

Can you hear me? Can you hear me? Sorry there's a lot of people on the line. Can you hear me?

Yes.

Okay. One question on cloud. I mean the growth remains below market growth despite your significant efforts. Do you see any sense together for this with another market player in order to get more critical scale and commercial traction? Second question on growth. Can you give more color on what geographies are making most commercial traction currently? And finally, just a question for the future. Do you expect to have so much seasonality in EBITDA every year in the future? Or is this a special year? And why do you think it is so crucial in web hosting to invest into the Christmas season?

Okay. Yes, let me start with the first question around the Cloud Solutions business, Cloud Solutions revenues growth being below market growth. I think you need to keep in mind that the Cloud Solution business comes from the different components we have in this revenue line. First of all, we have the classic cloud in there. So the enterprise cloud, which is growing in line with market. So at rate above 20%, well above 20%. And then we do have Managed Services in there. So we have a couple of managed service providers within the group. For example, Kronan, one of our subsidiaries and the growth rate in Managed Services is usually lower than it is in the Cloud Solutions business. So the product mix is driving the lower market growth, which -- the growth, which seems to be lower than market, but it isn't if you look into the details. In terms of Geos where we do grow, and I believe this is for Cloud Solutions. So we see very good growth. So we are present with our Cloud Solutions business in Spain, France, U.K., Germany and the U.S. mainly. We do see very good growth in -- especially in the U.K. We do see healthy growth in Germany and the U.S. as well. Spain is a bit reluctant currently given the economic situation. And France is very at the beginning, but it's growing very healthy. And in terms of EBITDA seasonality, this is largely driven by marketing investments, and I would not rule out that we do see volatility as well in future as we will adjust to the market conditions and will react to the market and the market conditions, which we see. As I mentioned before, we use CLTV over CAC for steering our marketing spend across different geographies, across different channels, et cetera. So there will always be a little bit of volatility in the marketing spending as we adjust to the market to drive the best results.

Maybe I can add. I think for 20 years now, it's proven that the last and first quarter are the strongest for customer inflow because I think that's the wintertime is mostly in the markets where we are -- is kind of the part of the year where small and medium businesses turn to their digitalization needs rather than in the summertime. So -- but like Britta said, we are always adjusting the different marketing channels according to local situations and so on and so forth. But yes, it will be a seasonality and will stay seasonal. Maybe not for the growth for the cloud, like Britta said already, I think we could add that the fastest-growing part of our different cloud businesses, which we have is the IONOS Cloud. So the kind of public cloud comparably AWS, Azure and Google. And there we are full in line with their growth. We are better than AWS, for example, we're just power with Google, a little below Microsoft for what we see for the rest of this year. So there's nothing to -- there's no slowdown or anything.

The next question comes from the line of Toby Ogg from JPMorgan.

Yes. Just one on the Cloud Solutions business. Outside of the more difficult comp there, Britta, could you just give us a sense for how the demand trends have evolved Q2 relative to Q1? And then whether you would expect any acceleration on an underlying basis, so excluding the tougher comp into the second half and what would drive that?

Yes. So as I mentioned before, we still see very strong demand from our SMB customer base. Obviously, those are smaller customers. So we need to get in more. The ARPU is significantly lower than for the larger customers. However, we do see this trend continuing very well. We do have as well a couple of opportunities in our pipeline for larger customers. However, we see those deals being a little bit delayed as they are a little bit resistent in driving their digitalization or they move into cloud. Nevertheless, we think there should be a pickup throughout the last 2 quarters as we believe we have an offering in place for all of them, which help them as well to drive their business. And we do see that our opportunity pipeline is picking up over the last weeks. And comparing Q2 to Q1, I think we have seen a slight increase in opportunities in customer reach, but still not there where we want it to be. But we are confident for the remainder of the year.

The next question comes from the line of Nizla Naizer from Deutsche Bank.

My first question is on the marketing phasing. You mentioned in Q2, there was EUR 11 million less marketing versus Q2 last year. Should we understand that is EUR 11 million would be now spent in Q4 incrementally or would it not be of that magnitude? And despite the lower marketing, you are still able to do quite nice net additions. So does this mean that if the marketing accelerates in Q4 growth could be better than the 10% even when you get to that point? Some color there would be great on how marketing would be phasing. Secondly, on AI in the cloud business, Achim, you mentioned that there might be incremental demand from customers who want AI computation power, maybe using your cloud. Has that become really meaningful over the last few months? Would that change how you think about your own growth CapEx? Some color there would be great.

Yes, I can start. So on the marketing spending, so we still expect to spend all our marketing. So it should mostly be spent end of Q3, beginning of Q4. In terms of why we haven't spent it this already now is, first of all, as I said, the last quarters are usually the ones with a high demand, especially Q4, beginning of Q4, not during Christmas, obviously. And then we as well see and I mentioned it throughout the call is very favorable market conditions and where we want to capitalize again as well during the last quarters. So in terms of growth, as you know, so we still see a very good trajectory in adding new customers as well during the remaining 2 quarters of the year and that will not directly translate into revenue growth for this year as we usually have the discount period of 6 to 12 months. However, it may definitely makes us confident for the trajectory of next year. as we have seen in Q2 this year. Customers which we gained the year before will start to add to revenue growth at one point in time.

Yes. AI, we do have actually customers already asking for products. So there's use cases already there. They want to have a European-based AI inference cloud. And so it's a clear picture for us what to do and with language models to offer and so on and so forth. But I think I need to make clear that we are not into the business of training huge new LLM models or something, which takes EUR 50 million of hardware and energy and so on and so forth. Our target group is small, medium businesses. They don't tend to build AIs for EUR 50 million. They tend to use stuff which is around -- and every day, there's more different models coming along, being in the open source, a lot of them are open source or being licensable. And usually what they do is take one of these models and maybe enhance it with some learning sessions on their special data set they have. And which takes just a fraction, a small fraction of what it takes to train the full model. It's just not economic at all for small, medium companies to do that. So -- and that's our target group. So what we do, we offer the models which customers can use through API like you would do with ChatGPT right now. But we're not going to train ChatGPT. We're not going to train these large languages. So the CapEx requirements are fairly low compared to training a model. And so I don't see that we have now a huge, huge new CapEx around ahead of us and you can run a model even on a small computer these days. Run time is very different to training. So of course, we have some GPU clusters and servers for a little more advanced use cases, but that's a small part of where we believe our AI cloud business will end up in the future for small, medium businesses.

And now we have the next question comes from the line of Usman Ghazi from Joh. Berenberg.

I've got 2 questions, please. First one is on the cloud business again. I see that you're offering Bare Metal GPU servers, I think in Germany and France at the moment. Would you look to expand this offering more aggressively across the footprint? And what considerations would you have in doing this, please? The second question was just on the potential for IONOS to make acquisitions in this space to enhance capabilities, I mean I'm thinking specifically of DigitalOcean's purchase of Paperspace, if there are any capabilities at Paperspace, for example, that you feel IONOS doesn't have or can make an acquisition to expand your market opportunity faster? That would be great.

Yes, first question. So for the GPUs and GPU server, we have, of course, we keep having this product line and enhance it, and there's new models coming out, and we expand this to all the data centers and all our or at least to all our footprints to all our markets. I think that the larger part of the business in the future will not be selling a single -- single-server or 5 different GPU service something. I think the part is the managed AI kind of approach like in the cloud where I even say. I have an infrastructure service providing cloud AI services. And customer gets a well-maintained API. We maintain the models, we maintain the performance. You pay-as-you-go, these kind of models, just like cloud-native models. And there are some special use cases. That's why we have these GPU clusters or single server. Some customers really want to change some things on their own and so on. I think the large part of the market will -- for our target group, again, small medium businesses will be, hey, I need an API to do whatever it takes to speech. I need to API to generate pictures, to generate text to recognition of voice and so on and so forth. And this is -- and they just want to use this as an API and consume it rather than starting to think of how I train or improve models or invent new models of the AI setups and so on and so forth. So yes, we will have these servers, and we'll continue that as long as there is demand. Of course, we will provide that. And the larger business will be in the future as a Cloud Service. The second question I couldn't hear very well...

It was any acquisitions...

Acquisitions. Yes, I hear that a little bit. So we have a bit of some problem here. So acquisitions. Yes, of course, if there's good targets, I don't have something in the ring on and making right now, to be honest, but like we are with all acquisitions, not just product for AI, but products in general or even housing companies. So that's our overall strategy. If there's good targets, we can opportunistically look at them and might be interested in buying them. But that's not a -- we don't see ourselves now in the desperate situation to buy some AI companies because if you look at all these models mostly our open source are readily available. And that's why we come up this year, and it's not like in next year or something. This year, we will add infrastructure services in the cloud with different, not just one. different AI engines. I mean we have a large development team and we are -- it's a main focus of us now, AI because it can foster so many products that we offer, and we are a developer. So I'm hiring 10 people from some place or probably not worth it because we have our own engineering teams doing the same thing. So look at our road maps or our press releases when we have the new products ready, you will see that there's a lot of AI stuff coming along.

Now we're going to take our next question [indiscernible] from Goldman Sachs.

Two quickly for me. Your customer intake remains very strong. So could you maybe talk about what elements of your offerings are resonating most of the customers? Or is this all just a function of greater brand awareness in your view? Secondly, we've talked extensively about AI and the product innovation cycle appears to be very fast. Are you constrained in any way from an internal engineering perspective that could lead to greater levels of investment going forward? Or do you have significant spec capacity be good to understand where you are from an internal perspective?

Let me start with the first question on customer inflow. So we see good demand throughout all of our products. No specific cluster, which resonates very well or some of which doesn't resonate. I think why do we see good customer inflow? I think, first of all, yes, the brand investment has good first impact, definitely, you have seen and Achim presented at the brand awareness, which has increased. So this helps as well then first of all, for organic customer inflow coming directly through the brand. But in addition, it helps, obviously, on performance marketing. But then in addition, we have enhanced our performance marketing over the last couple of years, and are now in a position to see those good results really kicking in. So I think it's a combination of all of what we've done in the past through performance marketing optimization, but as well brand investment, definitely. And maybe to inform the AI.

So for internal use, I don't see that we are restricted in any ways really. I mean, it's a new technology of course, and people have to learn it, technically all will people have to use it. And that's clear, but -- it's with every new framework, with every new language, with every new generation of something network or what you have. So there's always a learning curve. There's always something you to the experiment a little bit in test and so on. But in the end, it's actually freeing up resources. And we see this already using the copilot, we have 10% to 30% improvement or inefficiency in speed of programming in less errors, less QA efforts and so on and so forth. So in the end, using the AI to its full extent, right now already frees up a lot of resources. And I think we're just in the beginning of that phase. In a year from now, AI will be even much better in programming some -- or supporting you in programming things, you -- all the nitty gritty small details of the program of the Glue Code, what we call it Glue Code will be done automatically. So you can concentrate on the meat on the inner parts of the new algorithm or whatever you have to do. So in that term, I don't see a constraint. I see actually an improvement in throughput and efficiency.

There are no further questions. I would now like to hand the over to Stephan Gramkow for closing remarks.

Yes. Thank you, operator, and thank you, everyone, for attending our today's call. Please don't hesitate to get in touch for any follow-up questions. Have a nice -- stay safe, and goodbye.

That does concludes our conference for today. Thank you for your participation. You may now all disconnect.