Proximus PLC (PROX) Earnings Call Transcript & Summary

Hello, and welcome to the Proximus Q2, 2023 Conference Call. Please note that this call is being recorded. [Operator Instructions] I will now hand you over to your host, Nancy Goossens, Investor Relations lead to begin today's conference. Thank you.

Thank you, and thank you for joining us. We keep our usual format, so we start this webcast by an introduction by the CEO, Guillaume Boutin, using the presentation that we have published on the website this morning. After that, we will turn to your questions. And for the Q&A, we are joined by the CFO, Mark Reid; the Residential segment lead, Jim Casteele; the Business segment lead, Anne-Sophie Lotgering; and the CEO of BICS, Matteo Gatta. They will be taking your questions in a moment, but first, Guillaume will take you through the highlights of today. Guillaume, please go ahead.

Thank you, Nancy, and welcome to this webcast. Over the next 10 to 15 minutes, I will follow this agenda, and we'll start with some highlights for the quarter, the highlights of Q2. First of all, the second quarter marks a really strong commercial success. We are winning in a slow-growing market across all main products but especially on mobile postpaid, closing an excellent quarter. Financially, we sustained our strong revenue growth for the group, up by 4%, with both our domestic and International segments contributing to this achievement. And similar to the previous quarter, we are still coping with inflationary impacts, leading to a decrease of 3.7% of the group EBITDA, in line with our expectations. We're now 6 months in our bold2025 strategy, and we have achieved major steps forward for both our Domestic and International segments, and let me zoom in on this part. As you know, for domestic segment, a key factor in our strategy is the rollout of Belgium's [ GB ] network. And as you can see on that slide on the quarterly updated chart, we have been further expanding our fiber works. And thanks to good progress, we have reached in June a critical footprint with 1 out of 4 premises in Belgium being passed with our fiber technology. The fiber machine is going full speed in no less than [ 115 ] Belgium cities and municipalities, bringing Begum inhabitants the best technology available to allow the fiber technology being made available across the country even faster including the low-dense zones. I remain convinced that there is a need for an effective and rational fiber collaboration and co-investment framework. End June, nearly 1.5 million homes were passed with fiber. On top of this, Fiberglass and Unifiber have to funnel of fiber industry of over 3,000 -- 300,000 homes, which will boost the fiber homes passed as soon as the PUPS are activated. Our network drilling rate is also nicely progressing, reaching 25% at the end of June. This proves the traction of fiber continues to be strong and the success of our product superiority strategy. In terms of active customers on fiber, we have been growing our base with 34,000 over the past 3 months, a year-on-year increase by nearly 50%. This brings the total now to 322,000 active customers. The success of fiber is also reflected in the migration rate, which has further improved to 70%, 12 months after commercial launch. And we continue to improve our fiber offer. We once again have stamped our fiber mark on the Belgium market by making the 10 gigabit technology available in all fiber zones and by including it in our residential parks. Our 3 fiber offers on the market with speed tiering ensure also the further monetization of our investments. For B2B unit, we continue to execute on transformation to become the full-service technology solution leaders in the Benelux. As we elaborated in CMD, B2B is at a crossroad of 2 markets, the telco market on one side and the IT market on the other side. The boundaries between these 2 are increasingly bearing with trends such as optimization. To fully embrace this development, we repositioned our enterprise brand with the launch of Proximus NXT. It stands for us helping our enterprise customers to embrace the next-gen technologies cybersecurity, cloud, advanced workplaces, AI and the new ecosystem of partners that we continue to build. The biggest news of this quarter was related to international activities. Last week, Monday, we announced, we announced this agreement to acquire majority stake in Route Mobile. As a reminder, the key drivers of the deal are the following. It will allow the Proximus Group to gain significant scale as Route Mobile and Telesign will be holding a solid top 3 position in the global CPS market. Route Mobile operates globally with a nice regional complementarity with Telesign with Route Mobile having especially a strong position in its home market, India. This is combined with a strong complementarity in product offerings. Thirdly, the potential revenue and cost synergies are super high, estimated to deliver at least EUR 90 million of annual EBITDA synergies post closing of the transaction. Combining the 2 entities, which also allow us to improve the EBITDA margin to best-in-class peer level of 13% to 15%. And for more information, I invite you to have a look at a separate presentation published on the Proximus website. Having covered the strategic part, let's move to the financial and operational results of the second quarter. And we'll start with our Domestic segment. And as you can see on the chart, we delivered a strong commercial momentum over the past 3 months across all our main product groups. Looking at the first half of the year, it's clear that we are winning in the market with over 50% of the organic residential growth in the postpaid and fixed Internet markets. This demonstrates we can rapidly adapt to changes with our new mobile postpaid portfolio launched in May, clearly not missing its effect. In addition, having reached now a critical fiber footprint, we successfully launched a broad advertising campaign, "you got the fiber", which supported our Internet customer growth, showcasing the unmatchable superiority of the fiber technology. Zooming in on our residential unit. The sustained good commercial performance, further supported by price indexations resulted in another strong revenue quarter, with both total and services revenues up by 4.2%. The residential customer services revenue benefited from a strong increase in ARPU, up year-on-year by 4.7%, reflecting the effect of price indexations and the ongoing move from customers to convergent offers. With fiber alongside of first-class mobile network, we enjoy product superiority in the market, which greatly supports our value management. Price indexations clearly support the ARPC growth yet have only limited impact on churn levels. The customer trends even improved, all translating into the revenue uplift by over 4% for the residential units. Our business unit closed also a strong quarter with revenue up plus 2.9%. We are particularly pleased with the business services revenue, which continued its positive trend in the second quarter, in line with our strategy. Revenue from products and especially IT equipment posted a solid increase. This, while we are gradually returning to business as usual situation for IT equipment installations. The positive trending of the business services revenue was the result of a continued growth in revenue from Internet services with a 6.6% increase in ARPU and a rather stable customer base. Moreover, for the IT services, we also achieved a 6.6% growth compared to the previous year, resulting from growing revenue in cloud, security, smart mobility and smart networks. This was partly offset by legacy fixed voice for which the revenue still erodes yet the decline is stabilizing. And finally, our wholesale unit, for which the year-on-year revenue declined by EUR 3 million is the result of the ongoing interconnect headwinds with, however, no meaningful margin impact. Services revenue was up by 6.9%. This brings me to the total domestic revenue for which we achieved a 4.2% growth for the second quarter, with services revenue growing by 2.8% year-over-year. Turning down to the domestic operating expenses in line with our expectations. We still faced significant inflationary cost effects on wages, electricity and other exposed cost lines. Moreover, the strong commercial momentum also drives some customer-related OpEx. And thanks to our ongoing cost efficiency program, we couldn't part offset this, overall resulting in our OpEx being up by 8.8% for Q2. This brings me to the total domestic EBITDA, which was down by minus 3.5%, with a higher cost in part offset by the increase in direct margin, in line with our expectations. Turning to the International segment. For the second quarter, BICS posted revenues down by 1.1%, which reflects USD currency headwinds and the side that BICS is returning to usual business trending post and exceptional 2022. Nonetheless, BICS cost services achieved robust revenue growth up by 8.1%, driven by strong mobility volumes. I'm delighted to confirm the solid commercial momentum with Telesign, delivering robust sales bookings and continuing to post double-digit revenue growth. Moreover, the value of its customer base continues to progress with a net revenue retention rate at a very healthy 117%. Communication and Digital Identity services continue to grow with the Digital Identity segment benefiting from the expansion of the Telesign customer base outside the United States. The EBITDA reflects Telesign's significant investments into growth ambitions. These have now reached the peak and the increase in operating cost is therefore expected to moderate going forward. This brings me to the group results. And this slide sums it up for the second quarter with a strong group revenue increase, leading to a 2.1% growth in direct margin. The group EBITDA was down by minus 3.7% with mainly the Domestic segment impacted by the inflation-driven cost increase. This brings me to the -- sorry, I was a bit too fast. And for the CapEx, we remain well on track for our full year projection of around EUR 1.3 billion. Over the first half of 2023, we invested EUR 612 million. And as illustrated on the chart, the fiber-related investments accounting for 29% of the total with our own fiber builds coming down from its peak in 2022. CapEx needs to connect and activate our fiber customers on the other hand increased. Moreover, the mobile network consolidation led by n Mwingz is ongoing with CapEx incurring following the pace of the mobile site consolidation. It brings me to the free cash flow over the first half of the year. And as shown on the graph, besides EBITDA effect, the main driver of the lower free cash flow is tax-related partly offset by lower business working capital needs. And looking at the remaining part of the year, we expect the adjusted free cash flow to return to positive ground supported by our underlying business trends and the sale of our headquarters. The free cash flow move as well as the dividend payment in April is reflected in our net financial position, all in all, in line with our projections for the year. To conclude, we are very pleased on where we stand 6 months in the year and reconfirm our guidance. And regarding the revenue growth for the domestic segment, we expect, however, to land in the upper end of the given range, this mainly following higher-than-expected revenue from terminals and IT hardware. The other guidance metrics, as shown on the slide, remains unchanged. With this, I have covered my introduction, so we can now turn to your questions.

[Operator Instructions] The first question comes from the line of Nicolas Cote-Colisson from HSBC.

I've got 3 questions. First, Guillaume, you're calling for fiber collaboration and co-investment framework for the first time officially, I mean, in a press release. So now what are the next step? Can you update us on the workflow with the BIPT? And what would, in an ideal world for Proximus, the design of such a framework? Second, on BICS and Telesign. Can you please tell us a bit more about the GDPRN case? Because I can appreciate there's a lot of legal constraints on what you can say now. But there is this NOYB complaint that could be -- or could have some serious consequences. So any information around that would be great. And very last one on Telesign. I'd like to better understand why the gross margin is still going down? What is happening in terms of product mix there? I understand the company will transform dramatically within the Indian deal at some point. But I'm just curious to better understand the real value of your CPaaS business beyond the headline revenue, if it makes sense?

First on the -- sorry, I'll start with your question on fiber. I guess for me, it was important to say in the name of the industry that an investment-friendly and collaborative framework has to be put in place. And again, here, to go even further and to even more accelerate the fiber rollout for the country. As you know, this is in the interest of everyone, citizen operators and also for the competitors of the country. So that's why it's important for me to state that more officially in the name of the industry. And in terms of of time line of the current work that has been performed by BIPT, I think we expect them to complete their analysis by the end of the year, beginning of next year and to see then -- to be able to then to start consultative discussion with them. And again, what is a good framework and an investment credit framework. I think we have probably to reflect on what are the areas where you need to compete on infrastructure, what are the areas where you need to co-invest or to co-build that fiber network. But as we know, if we want to go fast and if we want to cover 100% of the country, the technology, some form of collaboration, some form of co-investment will be needed. And we are calling for that investment friendly and collaborative approach for the rollout of that needed technology for the country. So we'll -- I think this is -- next steps are that BIPT analysis to be finalized and for us to also be proactive in terms of what would be the different scenarios where we can bring that framework or put in place a framework that is, as I said, needed to go fast and to cover 100% of the country. On the second question on NYOB. Mark, do you want to take that one?

Yes. So Nicolas, so on NYOB, clearly, there's -- we're under legal guidance on that. But as we've kind of said to the market, we are cooperating with the inquiries. And at this point, we see no -- we believe that we have been compliant and we will continue to follow discourse with the appropriate bodies on that requirement. We do not see any risk to the business at that point. And therefore, again, we have made no provisions or anything and that sort of from a financial perspective. So that's about as much as we can say at this point. So hopefully, that helps you in some way. On the overall Telesign, question on margin, I think you got to look at it a little bit on -- it's primarily CPaaS margin that is moving a little bit. There are some foreign exchange headwinds there. There's some mix of countries and mix of customers that is playing a little bit on the CPaaS business. The direct -- the DI margin continues to be strong and the mix of that business continues to move in the right direction. Given I'm saying that the bookings we are very, very pleased with in terms of that. But CPaaS still is a major part of the overall margin mix. And again, we continue to see the value of that business going forward. And clearly, with the Route Mobile acquisition, we see a very bright future of those 2 businesses together.

Okay. Got it. And maybe just a follow-up, I get your point about the revenue that it will eventually slow down on the revenue growth. So how should we see for the next couple of quarters, the contribution in terms of direct margin from Telesign because should we think about a stable margin? Or should we think about kind of a stable view point?

Nicolas. no, no, no. I mean, look, I think we've got guidance out there on international direct margin. As I said, I think we've come off of a nice first half with the business to continue to deliver as we want them to deliver. That momentum follows from a booking perspective and net revenue retention KPIs forward into the second half. So I think from a Telesign perspective, I think we're on course. I think BICS, again, the summer is very important from a mobility perspective. We'll have better visibility of that by the time we come out of Q3, but certainly, early July numbers are proving well. So at this point, from an international perspective, not the way we kind of want to look at it, our guidance is where we think it should be.

The next question comes from the line of David Vagman from ING.

First, a quick one on the strong commercial momentum in Q2, in particular, in mobile. So could you explain in more detail the dynamics when you're looking at your own brands and also in terms of region? And how much of that momentum can you carry forward in Q3? Then on the fiber rollout, it seems like the JVs started the rollout in a much, much slower fashion than what they were supposed to do when I'm looking at the CMD targets. Is this strictly for technical reasons? Or is there a bit of a conscious choice, let's say, a decision from you and your JV partners to slow things in order to wait for the BIPT to take a decision referring here on the -- to the regulatory framework? And then on this rollout, any financial impact to expect? So let's say, on termination CapEx or lower [ voltage ] cost, slower commercial momentum? Then finally, third question, on BICS and Telesign, it seems you've become so quite active in terms of transaction. And I'm also referring to recent press report about a possible acquisition by BICS. Should we expect more deals going forward a bit, let's say, bolt-on or frequent deals or some transformative one, certainly one more? Do you see the need for more transactions, that's a bit my point here for BICS and Telesign strategically? And could this then lead to the need for a possible change in capital structure at BICS, let's say, to finance this external growth?

David, Jim from the Residential segment. So on your first question, I think, indeed, we are very happy with the excellent results that we had on mobile postpaid for the quarter and even on the full semester when you look at it. I think at the end of the first quarter, we updated our Mobile Vikings portfolio than in July, we also launched our new Proximus portfolio, and we also upgraded the mobile specs in our conversion Flex offers, which allowed us to address the competitiveness issues that we had over the last months. And you have clearly seen the result of that on our numbers. And also, the joint offer market continues to perform very well. So I think on all the dynamics, we have the right offers in place. Now what does that mean for the future? Of course, it's always difficult to predict how the future is going to look like. We have, as of August, our back-to-school campaigns that are going to start, but we are convinced that we have the right offers in the market to continue on the traction that we've been having over the last 2 quarters. And then looking at the different brands, I'm really happy to see that the results of Q2 an S1 are driven by the 3 different brands in their respective segments. .

And at the end of the day, in telco when you have more spectrum, better fixed technology, you win. And that's all the good work of Jim, but also the fact that we now have a product superiority strategy that is starting to be visible by everyone, and that's also helping the commercial momentum. On fiber, I think we are quite happy with the level of progress we have made in the what we call fiber industry, known as HPP, where we are delivering the plugs on -- according to plan. We are a little bit behind in terms of finding customer connections, which is a delay, not because of technical reasons, it's more because it's not that easy to scale rapidly that last-mile delivery of fiber connections. But it will be -- we'll catch up over time. So I don't see that as a issue when you are in a 10-year investment program to have a few quarters of a delay in the last mile. I think this is not something that is very it too much, and we will catch up over time. On...

On the financial impact, I think, David, again, in terms of where we are on the fiber build and rollout, I think we put all the assumptions at the Capital Markets Day plan. And as Guillaume said, we're maybe a quarter odd in terms of phasing, but there's nothing material the inflationary impact we're in. So there's nothing significantly material in terms of change of financial impact of this at this point.

On question on the M&A activity, I think we are not commenting rumors on the market, obviously. But as I said also previously, what was important for us was to gain scale at the CPaaS level because CPaaS -- it's a scale business, global business. You need to make sure that you have the right size in order to cope in the -- with the leaders of the market. Now we will become after the close of the deal, one of the leader of the market and the focus is really to close that deal and to extract the growth and the synergies that are significant in that transaction. That's really the focus. And I think -- and I stated quite clearly so last time we discussed that Route Mobile Proximus transaction. Focus now is to close the transaction. Focus is to continue to win the market, to continue to have a very, very good commercial momentum in Belgium. Third priority is to be fully prepared for Digi when Digi will be arriving in the market probably next year. And of course, to make sure that we can have an investment-friendly framework for fiber. For Belgium, I think this is my number 1 priority. And the 4 items I just mentioned are the focus of the company as we speak.

And a very quick follow-up on the fiber rollout. Wouldn't it make sense to slow things a little bit in order just to wait what the regulator is up to basically maybe change core -- change what will impact. You have discussion with your partner about doing this? Or you're just like executing the plan and yes...

I think it's twofold. We are executing the plan. And I said it several times over publicly, we are open to create that investment funded framework proactively, so that we can have a consolidated discussions with all stakeholders. I think for that, we need some more weeks, some more months because all the conditions are not yet there because all the deals are not closed at our partners. So we need to finalize all those elements before being able to start constructive discussion. But I think there is alignment of interest on all fronts for the country, for our customers, for the competitive of the industry, for all existing operators to create that's -- that investment-friendly framework that will make that investment that needs to be done, a very good one for everyone. So that's where we are. Difficult for me to say more, but I think this is, as I said, is a focus for me, for my team for the next month.

The next question comes from the line of Roshan Ranjit from Deutsche Bank.

I've got 3, please. poking on the business side, your growth rate slowed a touch this quarter. Could you just run us through any of the trends driving that some comments from your peers have suggested that they are pushing a bit harder in B2B, particularly on the large corporate side. So are you seeing a bit more pressure on that front? Second question is just to get an update on the asset sales, which you highlighted at the CMD. I think you guided to EUR 400 million over 3 years. We know the well-flagged HQ sale will impact Q4 just under EUR 150 million. Is there a change there? There was obviously a story yesterday around data centers. So anything you could say there would be good, please. And finally, just on CapEx. I appreciate there is volatility quarter-to-quarter. But when I look at the implied CapEx per home this quarter, it's a significant decrease, and that's on the pure build rather than the connection costs, which I know you said is stepping up. So are you seeing any kind of efficiencies here on the lower CapEx per home, which you can apply for the full year and we could see some upside to that CapEx number?

So I will start with your first question, and Roshan. It's Anne-Sophie Lotgering here from the Business unit. So I would say the most quick explanation I can give you on why the growth rate seems to be slowing down. That's mainly because the products are lower on a high comparable base. So as you know, we had to catch up the supply chain issues a year ago, and that catch-up was very, very active already back in quarter -- Q2 of last year. And what we see now is that product delivery is actually normalizing. And therefore, that's the major reason why you see the slower growth rate quarter-over-quarter. What I would like to emphasize, however, is that our services revenue and more specifically, our IT services revenue growth is much higher than in previous quarters, driven by our strategic areas of growth such as cloud security, smart mobility and smart networking. So if you take our managed services and more specifically, our recurring services on our strategic areas, we see that those are actually growing nicely quarter-over-quarter, whereby our products revenue, which is one-shot, is actually decreasing because of the volatility disappearing also slowly. So I hope that answers your question.

Roshan, let me take the asset sale one and I'll touch on the CapEx one as well. On the asset sale, you're right on Capital Markets Day, we talked about a EUR 400 million asset disposal. We continue to work on that across a range of what we term noncore assets. And I think data centers would be in that classified -- classifications. So -- but at this point, we have no -- nothing to say further than that. As you'd expect, given our -- and that's what we're working on various views across the business. In terms of the CapEx, again, I think we're always -- we stand back, we're continually looking at operational efficiencies in our home passed build. And that's something we see quarter in, quarter out, clearly helping us mitigate the inflation as we've said before. In terms of the current quarter, I think it's more likely to be a mix of delivery and range of the homes. So I wouldn't read into anything on homes passed going forward cost.

The next question comes from the line of Joshua Miles from BNP Paribas Exane.