Tele Columbus AG (TC1) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Tele Columbus AG regarding the presentation of the Q1 results for 2020. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Leonhard Bayer, Director of IR, who will lead you through this conference. Please go ahead.

Thanks, Glenn. Good morning, ladies and gentlemen. It's my pleasure to welcome you in the name of Tele Columbus' management team to today's conference call following the release of our first quarter results for fiscal year 2020, which ended on 31st of March 2020. This call is limited to 60 minutes. In case of any follow-up questions, Manuel and myself are happy and available to discuss today. I'm here today with Daniel Ritz, Chief Executive Officer; and Eike Walters, Chief Financial Officer. Now I would like to remind you that if any lenders or rating agencies are on the call right now that this is a public conference call in which only publicly available information will be discussed. I would therefore ask you to refrain from questions containing information not belonging to the public domain. This conference call is intended for capital market participants only and not for press representatives. If any journalists are on the line, we would highly appreciate it if you were leaving the conference call now. Press representatives are welcome to call my colleague, Sebastian Artymiak, to discuss any outstanding questions. In addition, I would like to draw your attention to the fact that everything we are saying on this conference call is under the EU-U.S. Privacy Shield reservation. Having said that, it is now my pleasure to hand over to you, Daniel. The floor is yours.

Thank you, Leo. Good morning, ladies and gentlemen. A warm welcome also from my side to our Q1 2020 results call. Can we please have the agenda slide?

Maybe, Daniel, if you just want to start, I think there seems to be a small time lag between the webcast.

All right. Let me just pull it up. Apologies for that. All right. So on the agenda slide, Slide #3. I'll start with key messages, followed by operational update and KPIs. I will hand over to Eike Walters for financial performance, and I'll be back for outlook and strategy update and then that's followed by Q&A. On Slide 4, the key messages for the first quarter 2020. We have grouped them into operational, financial and strategic. Happy to report that we had a solid start into the year. So far, no negative impact due to COVID-19. Also worth mentioning that we have the fourth consecutive quarter of positive Internet net adds, which I think is a good achievement. Internet & Telephony quarterly net adds are improving on a -- year-on-year on a like-for-like basis, which is also a good thing to report. CATV quarterly net adds are seasonally weak, which is always the case in Q1, but still, they are slightly better than Q1 '19 on a like-for-like basis, i.e. adjusted for the M&A transaction that was done in 2019. On financials, I'm happy to report that we are confirming our financial year 2020 guidance on all metrics, and we continue to monitor for the COVID-19 impact. So far, no negative impact, but we're very mindful of the possible repercussions of an economic recession, which might still hit the country and therefore, also our industry and us later in the year. Hopefully not, but we're mindful of that. Q1 revenues are flat year-on-year on a like-for-like basis, and B2B continues to grow double digit, which again is a very good achievement. Reported EBITDA is up 17% year-on-year in Q1. This is mainly almost entirely due to significantly lower nonrecurring costs, in line with our expectations. Q1 CapEx is down by 12% year-on-year and also, again, in line with our full year guidance. And therefore, also, we are very confident that we will achieve positive free cash flow for the full year 2020. On strategic key messages, we are progressing on the clarification of our future strategic directions. We have defined the key pillars of our future strategy. We'll give you a sneak preview of this at the end of this presentation. We don't need to be reminded. We're fully aware of our windows of opportunity for us to leverage our position and key asset and more is to come in the second half of 2020, as previously indicated. And more specifically, we'll give you a full update with our Q2 results due in August of this year. Moving on to operational update and KPIs on Page 6. So here, we show you the net add performance of Internet & Telephony RGUs quarter-by-quarter, as you're used to. We have restated, as I indicated, Q1 '19 net adds for impact of an M&A transaction that was done in the beginning of 2019 to demonstrate the improvement in underlying operational performance. Due to seasonality, Q1 is always our weakest quarter of the year, as I've already mentioned. Still, net outperformance of both Internet & Telephony improved year-on-year on a like-for-like basis, as you can see from the dotted lines indicating Q1 '19 and Q1 '20. And as already mentioned on Internet, it's worth pointing out that this is now our fourth consecutive quarter of organic RGU growth, which I would say is a good achievement. Moving on to Slide 7. Operational update and KPIs on quarterly gross add mix, which continues to improve. The format from the previous presentations, what is important here is that the relative share of the green bars in the stack bar is continuing to grow. We have more than 50% of our gross adds now choosing tariffs of 200 megabits per second or more, which is good in terms of ARPU for gross adds. Also, we are reporting quarterly gross adds now up by over 10% year-on-year, again, on a like-for-like basis, excluding M&A. And last but not least, about 80% of our new customers opt for 24 months tariffs, and therefore, higher bandwidth overcompensates the discounts that we're giving on these 24 months tariffs during the first 6 months. So also here, the arrows are pointing in the right direction. On Slide 8, same format, we show you the net add performance for linear TV and Premium TV RGUs, as we have shown you for Internet & Telephony before. We continue to see CATV RGU net churn. Again, mentioning Q1 is seasonally weak due to the housing industry cancellations, which has -- it was typically early in the first quarter, i.e., in January. Still, on a like-for-like basis, our -- we had 6,000 RGUs less net churn in Q1 2020 compared to Q1 '19. Of course, we're not happy about that, but relatively speaking, we're doing better or less bad on CATV net churn in the first quarter of 2020. Premium TV RGU net churn of 4,000 in Q1 2020. This is not a satisfactory performance, but still, again, we now have achieved less net churn than in Q1 '19. The reason here is very simple, our service offering in premium TV is simply not up to the mark and is in need of a refresh. Moving on to Page 9, where we see the ARPU development. Nothing special to report here. Basically, pretty much stable year-over-year -- sorry, stable year-over-year on TV and slightly up on Internet & Telephony. But nothing special to report. Roughly EUR 24 on Internet & Telephony and roughly a bit less than EUR 9 on TV. Moving on to Page 10, where we see the update on Touchpoint NPS. And we have decided here to color code it a bit because what we really want to see is NPS in positive territory, i.e., above the 0 line. And as you can see, we are now in green territory, we are above 0 line in field service, in shop sales and in e-commerce, and we're getting there in customer service. But as I stated in the headline here on this slide, there's still a lot of work to be done, but I'm happy to say that even during the COVID-19 lockdown, we have seen further improvement across the board in all the Touchpoint NPS. We have definitely been doing better on activation and fault-resolution process. We have a high responsiveness across all touch points, shorter hotline waiting times, but we have still quite a bit of work to do on service level, first call resolution, repeat faults, bandwidth and hardware issues. And to this end, we're establishing end-to-end responsibilities for customer journeys in the organization, so that we'll hopefully see more green lines pointing upward in the quarters to come. Lastly, on Page 11, on the operational update and KPIs. Our B2B segment continues to perform well. They continued to grow double digits, 17% year-over-year in Q1 2020 over Q1 2019. Gross margin -- contribution margin has also improved, not at the same rate, but still up about 11% year-over-year. This is due to a slightly changing revenue mix in the first quarter of 2020, where we have seen a bit more hardware sales with less contribution margin than the other segments which we serve in the first quarter of 2020. But overall, a very good performance of our B2B segment. With this, I'll hand over to Eike for our financial performance.

Thank you, Daniel, and also good morning from my side. Today, we provide you with a set of 4 revenue columns, as you can see on Page #13. On the left-hand side, we compare Q1 revenues on a reported basis, which includes construction work. So the EUR 5.5 million and the EUR 3.5 million. And on the right-hand side, we have displayed a like-for-like development, which excludes revenues from construction work. This is what we count as core revenues because this represents the usual business of a cable company. With this chart, we simplify the comparison to our full year guidance, where we have a difficult comparison base with the EUR 30 million construction revenues of 2019. So we want to make it easier for you to focus on our core business. You can see, on an underlying basis, we kept group revenues virtually flat at EUR 115 million. The recently seen segmental trends also continued in Q1 2020. That means structural pressure on TV and on top of the seasonal weakness of Q1 with the usual losses of housing association contracts. Positively to highlight is that we continued to grow the Internet & Telephony business, even though higher IP churn related to housing association losses prevented higher net adds and revenues in Q1. But we also see this as another strong quarter of 17% B2B growth. On Page #14, we give you a clearer breakdown of the core revenue development that we saw on the previous page. The key message is that our growth in Internet & Telephony as well as B2B was nearly able to overcompensate the losses experienced in the TV business. The TV losses are driven by predominantly individual customer losses, while the TV ARPU is more or less stable, as Daniel presented. Compared to the last year Q1, we have roughly 80,000 less cable TV customers in our base, which is, of course, part of the decrease of the TV revenue. As you have seen in the KPIs of Daniel's operational update, the Premium TV business has still limited impact to the numbers, meaning they are neither huge losses nor bigger net adds. On IP and phone revenues, we see further sequential growth, slowly but steady in this case. This quarter, we grew 3% year-on-year. This is the result of a couple of more RGU and talking about roughly 10,000 compared to Q1 last year as well as higher ARPUs driven by the price increase in spring 2019, but also higher bandwidth demand. Our attractive 5-year promotion is very helpful in that matter. Together with a strong B2B growth of 17% year-on-year, the core revenues remain stable. Now coming to the bottom line on Page #15. Here, we give you the bridge from Q1 2019 to Q1 2020 on reported EBITDA. I think this is a good slide to understand the dynamic and effects of the Q1 results better. With Q1, we are reporting a very strong EBITDA increase of almost 17%. This is a very good start into the year and underlines our ambition to be free cash flow positive within the year 2020. The chart shows that the major contributor to the increase in Q1 stems from the Q1 nonrecurring expenses, which are directly cash affective. The nonrecurring items amount to EUR 1.6 million, which means that we decreased the nonrecs by more than 80% compared to Q1 2019. The underlying [ operational pay performance ] was stable even though we experienced significant losses of TV revenues. The soft start in the network project season resulting in fewer own work capitalized has also a negative impact on the lower total output. So the losses of the total output were compensated by fewer direct costs in relation to lower revenues as well as lower marketing spending and other indirect costs. All in all, our Q1 EBITDA is laying the foundation for reaching our full year 2020 guidance. On Page #16, there's a new format, and the reason for that is that we would like to show you the improvements on the business also at the net income. As you can see, we reduced the losses from Q1 2019 to Q1 2020 by more than 50%, so from EUR 10 million to EUR 4.8 million negative. The major improvement comes directly from the EBITDA reported, and that means it had also beneficial impact on our cash position. Depreciations and amortizations are higher than last year in relation to retro perspective adjustment of activated construction work from the subledger onto the general ledger. That means an adjusted Q1 2019 net loss would have been even higher and the operational improvement in Q1 2020 would be higher as well. The increase in the other financial result is mainly due to the value adjustment of embedded derivatives in the amount of EUR 2.5 million. On Page #16, we provide you a new CapEx split today to foster better understanding of investment buckets. Instead of the former 3 categories, we show now 5 different buckets. So first one is network infrastructure, and then there's everything included relating to the network, so build-out cost, capacity projects and so on. Then we have the end customer-related CapEx, which includes commissions, CPEs, contract registration and in all cases, also for B2B. Then we have IT and operations. This is self-explained, of course, it's IT. And other is a small portion of offices, cars and some things which belongs to the internal of the company and own work capitalized in relation to our build-out projects, the network area. You see that we started with soft investments into the year 2020. EUR 30 million is total -- in total or almost 12% less than Q1 2019. The decrease is caused by the network project-related phasing effects and less internal project volumes. Roughly 50% of the investments in Q1 were network- and 25% sales-related. At this point, I'd like to make a comment regarding the Q1 2019 numbers. Just to remind you, we initially showed the ANTEC acquisition as CapEx in Q1 2019 but changed this approach when we paid the actual purchase price in Q3 of 2019. As we only acquired a 76% stake in ANTEC, we decided together with our auditors to reflect the majority purchase in our P&L as finance cost and not as CapEx. Unfortunately, this happened during the second quarter after we already reported Q1 2019 figure. Hence, you might have noticed today the lower comparable figure for Q1 2019. Now with EUR 34.2 million compared to EUR 41.8 million previously. But this matter was a matter of accounting, it did not change in any way the cash flow in relation to the transaction. But this just only in brackets for those guys who were looking for the EUR 41.8 million of Q1 2019. Overall, the EUR 20 million (sic) [ EUR 30 million ] CapEx in Q1 2020 gives us enough confidence that we're on track to meet our full year guidance with CapEx of EUR 140 million to EUR 150 million. We always said that a huge portion of our CapEx is on discretion and that we can steer our investments to manage our liquidity position actively. With that, let's move to the Slide #18, which is the leverage and liquidity table. As you can see, the revolving credit facility remains undrawn and hence fully available by the end of March and also today, as we report to you. At the end of March, we had a cash position of EUR 61 million available and whereof EUR 11 million are cash on hand and EUR 50 million in the RCF. This is roughly EUR 14 million more cash available than on December 31, what we also put into the table for a comparison. That means that we generated EUR 14 million of cash in one quarter. And another information, by mid of May, we had EUR 71 million available, so further EUR 10 million more than by the end of March. With a view towards the upcoming RCF maturity in January next year, I would like to state at this occasion that we are in ongoing discussions as around possible extension of our RCF together with our banks. We will inform the market publicly and proactively as soon as we have an agreement in place. And please let me assure you here, we are fully aware what the potential derating would imply for our credit investors, especially the CLO investors. So we take this issue very seriously and try to communicate something as soon as we can. So with that, I would like to hand over to Dan again.

Thank you, Eike. Okay. Now turning to outlook and strategy update on Page 20. As mentioned in my key messages at the beginning of this presentation, we're happy to confirm our full year 2020 guidance across all metrics. But we also said that we continue to monitor the possible COVID-19 impact in the coming weeks and months. We haven't seen anything material in the first quarter, but we are remaining watchful on this one. We will revisit our guidance with the Q2 results due in August, where we are also planning to give you a comprehensive strategy update. I would like to share with you, as promised at the beginning, a sneak preview of where our thinking is going and what we are working on, which you can actually see outlined on Slide 21. I had shared with you during our Q4 results of roughly 7 weeks ago, my take on Tele Columbus' key assets, which are a dense urban multi-dwelling unit footprint, an upside potential in terms of IP penetration and a large number of long-running concession agreements with the housing industry. We're now in the process of developing Tele Columbus' future strategy, which indeed leverages these 3 key assets and especially of the links between them. And that leads us to the following: the opportunity to capture brownfield fiber to the building and home overbuild with attractive cost to connect, again, due to the multi-dwelling unit footprint in urban areas, which is very attractive in terms of cost to connect; the opportunity to grow IP penetration, which today only stands at 21% across our footprint, through better retail, [ IRO ] and also thanks to the partners, which are included in our open access strategy, Telefónica being the first one; and last but not least, we believe that we'll be able to create the natural lock-in also with the housing associations with, one, a superior access infrastructure, thanks to fiber, and an ISP choice for tenants. We're happy if they take PŸUR, of course, but if they could prefer someone else, well, let them choose. And so we believe that this will be a very interesting value proposition to the housing associations' existing ones and new ones. We are, based on this very high-level outline, developing, as I said, the strategy and the detailed business plan, which, among other things, will also determine the amount of external funding required, because we've told you already last time that the strategic initiatives that we have in mind here, we'll not be able to fund from operational cash flow. And we're exploring a range of options to obtain the required funding to put in place, one, a sustainable capital structure going forward, plus also secondly, to fund the growth and the investments that we have, at a very high level, outlined here. And we will update you -- we will update the market with our Q2 results in August. This concludes our presentation. And I'll hand back to Leo. Thank you.

Thank you, Daniel. Yes. With this, we would like to open up for Q&A. And Glenn, maybe you can give some instructions, please.

[Operator Instructions] The first question we have is from the line of Lars Dueser from Deutsche Bank.

I'm Lars here from Deutsche Bank. I have 3 questions, if I may. First of all, on the CATV side, the bleeding seems to continue. So we had another 34,000 homes lost in Q1. I appreciate it's a seasonal high given the January cutoff date. But could you comment a bit more on the renewal risk for the remainder of the year by any chance? I mean as I -- if I remember correctly, that's up to 300,000 homes coming up for renewal every year. So clearly, this is a continued risk. And if we extrapolate the full year '19 pattern where you lost after Q1, call it, around 15,000 housing association contracts per quarter, which was Q2 to Q4, we would be in for another 80,000 homes lost for this year, which would eat up clearly most of the Internet and B2B growth. So I'm just really wondering now how is TC differentiating in front of housing associations versus the competition, namely Vodafone-Unitymedia, but also Deutsche Telekom and other local players?

Okay. Shall I -- you had 3 questions, should I reply to this question?

That would make sense. Yes. I follow-up with the other 2, if I may. Yes.

Sure. Okay. Look, so I mean, CATV is a structurally challenged market. Let's be very clear about this. So we expect also in the coming quarters of this year to see net churn in CATV. But of course, as we mentioned, Q1 is always the worst because that's where the housing industry cancellations hit us at the beginning of the year. Now as you may see on -- actually on Slide 8, sometimes we actually intentionally "lose" some of these housing association contracts because we see that they're not profitable. And for us, maximizing the footprint is not the priority, but actually having housing association contracts where we do make money. So we also continue to be viewing our portfolio in this regard. Now in terms of differentiation, look, so I mean the CATV product is not differentiated, right? It's linear TV, it's a basic TV offering, and therefore, I think it's very difficult to differentiate on this one. However, and this actually links also to our future strategy, we believe that housing associations, and we already see this actually in our ongoing business, but there's a very high appetite from housing associations to have a better infrastructure in place. So i.e., extend the fiber all the way to the building or of entry to the home. And this, coupled with open access, which is also part of our strategy, we believe that we'll see a better performance on housing association contracts, not in the immediate following quarters because we still need to work this out and put the funding in place, but we see a mid- to longer-term clear improvement in this regard.

Okay. That's very helpful. The second question then related to one of your last statements and your answer really. When you talk about the fact that more funding will be needed because it can't be covered by the operating cash flows of the business itself, can you give us a bit more detail what you are looking into? What are the alternatives? Do you look for infrastructure, financial partners who can then maybe finance parts of a fiber upgrade in certain footprints of housing associations? Any more color there would be really helpful.

Sure. Look, I anticipated the question. And I'll have to stay relatively generic, not because I want to avoid the question, but because we talk about this when it's time to talk about it. But generically speaking, the options are, one, which you just mentioned. Another one is to go back to the capital markets and raise funding from the capital markets. At this stage, we're looking at all options, and we'll tell you more about it when it's time to talk about it, which is in August of this year.

Very, very clear. And then last but not least, and I appreciate that might be not a very comforting question. But nevertheless, there is huge interest in the capital markets out there. Clearly, the quarter in Q1, but also parts of Q2 benefited from the IP back book price increase by roughly 5%, which you alluded to on the call as well. It was launched last year in spring. Now the consumer association in Brandenburg has basically sued you for not giving subscribers a special termination right and argues that it basically violates EU law, especially as the price increase didn't come with any improvement in service. I think you always have said, look, we are in line with our T&Cs. Can you nevertheless give an update there on this court case? And is there the risk that you might lose, and hence, there could be an uptick in churn because you would need to give your subscribers a special termination right in retrospect?

Yes. Look, so I wasn't there at the time when the price increase was done, but this is an ongoing court case, as you mentioned, and therefore, we prefer not to comment on this. I think it would not be appropriate. We'll tell you once we know.

The next question we have is from Titus Krahn from Barclays.

This is Titus. I have 3, if I may. The first one is on -- in the current crisis, kind of a large proportion has been working from home, which highlighted the importance of fast and reliable broadband connection. You already see a steady shift towards higher speed tariffs. But can you give us some more color on changes in customer demand and potential to upsell in the current situation, perhaps over the last 6 to 8 weeks, particularly? Secondly, on CapEx plans you're having. So in the first quarter, it was relatively low as expected. And would it be right to assume that in the second quarter, it's partly affected by COVID-19-related restrictions? Therefore, will be -- will CapEx be more 2H-weighted in 2020? And how impacted has the work of your engineers been so far? And last very short question just on your B2B segment. Have you experienced kind of higher demand for projects due to the working-from-home requirements? And on the other side, have you seen any impact from financial struggles of small and medium enterprises on payment extensions or working capital?

Okay. Thank you, Titus, for the questions. I'll take them one by one. So look, on B2B, as you can see on Page 7, it's a continuous process, right? So we didn't see an avalanche coming in of higher speed demands, but it's a continuous process, which you can see from Q1 '19, where we had roughly 40% of gross adds opting for 200 megs and above. Now we're 56% or 57% already, and we can expect that to continue. As you can see from the results that we have presented also on the KPIs, we have basically seen a development on IP as per expectations, both on gross adds, on churn and also on speeds. So I would say we haven't seen a positive impact of COVID that is very visible. But we also haven't seen a negative impact, which I think is in -- net-net is very good news. And we expect, therefore, the green bars to continue eating into the red and blue bars on Page 7 in the quarters to come, right? But I think if anything else, this has led to a clear understanding that stable broadband and high speeds are of importance. So I think we'll probably see the benefit from that maybe not next week, but in the quarters to come. On CapEx. So the COVID impact on CapEx has been very limited. Obviously, one of the things we monitor very carefully is what's happening on the housing association build-out projects. And we've had a few stops there. But compared to the total pipeline, it's negligible. So therefore, the fact that it's less in Q1 2020 than in Q1 2019 has nothing to do with COVID. It's simply the fact that the first quarter is always a bit light on CapEx, mostly due to weather, and therefore, we'll see picking it up during the coming quarters, and we expect it to be in line with our guidance, which is EUR 140 million to EUR 150 million for the full year. Therefore, if you do the simple math of multiplying EUR 30 million by 4, you're getting to EUR 120 million, I think that would be misleading. We expect to be within our CapEx guidance range of EUR 140 million to EUR 150 million. On B2B, yes, so our pipeline -- our project pipeline is very much intact. That's also why we've seen the growth that we have reported. We have -- we are very carefully monitoring what's happening on the pipeline of projects. We are very carefully monitoring also the outstanding receivables. And there, we are very happy to report, at least in our case, nothing has hit us in Q1. But as I said in the beginning, I have this hunch that a recession is coming, and we'll, therefore, very carefully continue to monitor that in the quarters to come. But so far, so good.

The next question we have is from James Ratzer from New Street Research.

Daniel, just kind of one question from me, please. On Deutsche Telekom's conference call, they were sounding very upbeat about their brand as an incumbent in this pandemic and potentially going into a recession that you just flagged, and we saw them take a record share of national net adds in Q1. And in your footprint area, are you seeing this come through? Any increased kind of competition or pressure from Deutsche Telekom?

No. Look, so far, not. Obviously, we take every competitor very seriously, not just Deutsche Telekom, but everyone else too. I think where -- we also looked at the net adds that you published, which obviously is nationwide, therefore, not comparable to us. I think what is clearly obvious is that nationwide, I think they're gaining share in TV, right? I think their IPTV app is gaining share. But look, I mean, we are small fry compared to Deutsche Telekom. And therefore, I think the competitive focus is probably on others rather than on us. But so far, no.

The next question we have is from the line of Wolfgang Specht from Bankhaus Lampe.

Yes, 2 add-on questions from my side. The first one, again on the COVID topic. You mentioned that you have seen very limited or no effects at all on COVID, so -- but you still leave a kind of back door open in your outlook. So what could change in the potential second wave, for example, in autumn to what you've seen in the last months that could impact your operational trends? And the second question is on the telecommunications law update, which we are waiting in the next weeks. Do your lawyers or lobbying guys see any changes that are important for you? For example, regarding the contractual situation with housing associations or the charging of basic cable fees to change with the update.

Okay. Thank you, Wolfgang. Look, so on COVID. I mean we're not leaving a back door open because we're timid. We're leave -- it's not really a back door, we just say we keep a very watchful eye on this and continue to monitor it very carefully as a management team. That's a personal belief that I have. I think the impact is probably, if at all, is going to be less from people getting sick again. It's, if at all, more from the potential recession, economic recession that we might see. If there were to be bankruptcies, if there were to be unemployment rates going up, hopefully not, but if that were to happen, it might actually hit our B2B business, which so far has been very, very stable. We don't have a better crystal ball than you have. We're just saying we remain watchful and mindful. I think that's all I would say at this stage on COVID. Now on the telecommunications law, look, so I mean, yes, we're hearing that the discussions are ongoing. Nothing has been decided so far. No draft legislation has been issued. And therefore, it's very difficult to comment on that specifically. We are of the opinion that tenants actually benefit from the negotiation power that housing associations have with providers like Tele Columbus in terms of negotiating a good competitive fee for linear TV. So therefore, we believe this is actually in the best interest, not just of Tele Columbus and other operators, but also of the tenants, but we'll see what comes. And if it were to change, we would assume that at the very least, there would be a significant grandfathering right here so that term contracts will not be affected. But that's speculation at this stage.

The next question we have is from Yemi Falana from Goldman Sachs.

Yemi Falana here from Goldman. So firstly, on network infrastructure, it'd be good to know if you have a distinct preference for wholesale access or network expansion when you get the appropriate financing. Any color here would be appreciated. And then secondly, on housing associations, have you noticed a pickup in competitive pricing from your housing association competitors? Yes. So any color there would be great.

Sure. Yemi, thank you for the questions. Look, so on the first one, on network expansion versus wholesale access. As we've outlined on Page 21, our focus is on our existing footprint, two-way upgraded, which is 2.4 million. And so therefore, I think with a 21% average IP penetration in our existing footprint, there's still a lot that one can do within the existing footprint before one has to go and extend footprint. I wouldn't exclude footprint expansion. But at this stage, the focus clearly is on monetizing our existing footprint of the current scenario, but also the -- more importantly, once we upgrade the fiber to the building and home with overbuild ourselves, I think there, wholesale access will be important component of future IP growth in addition to our retail growth. Now in housing associations, I mean there's always been a fairly competitive environment, right? So that's why you win some. Now you lose some. But I wouldn't say that we have seen an increase in competitiveness. There are some housing associations that look at price and only at price, but there are also others, and I'm happy to say that we have quite a lot of them, that are saying, well, price is one thing, but quality of service is another thing and your willingness as an operator to invest in improving the network infrastructure, i.e., bringing the fiber either to the building or to the home is increasingly important. And last but not least, while for others, housing association business is one of the business lines, for us, it is the business line. And we are, as I mentioned also in our Q4 call, very happy that we have very local presence and therefore, are close to our housing associations. And lastly, we have 200,000 concession agreements. So if you lose one, obviously that's not what we want, but it's not like we're going to have a big problem by losing one. We have many of them.

The next question is from Christian Fangmann from HSBC.

I have actually some questions on the consumer behavior. What are you seeing right now in Q2? I mean the current low-churn environment is typically helping the incumbent. So anything you can share with us, if anything changed? Also, your sales mix, obviously you've done, I think, in the past, a lot of door-to-door activity. How has your sales mix changed over time towards online? Are you seeing any changes there? And then if I understood Eike correctly earlier, one of the reasons of the relatively low Internet net adds in Q1 was related to the fact that we had a housing association disconnect with probably some Internet penetration also disconnecting. How big was the impact? And yes, are you expecting to regain a certain momentum over the next couple of quarters? I mean looking back a few years, your run rate has been between 10,000 and 15,000 Internet net adds. Is that still a realistic medium-term ambition? Or is that really out of question?

Okay. Thanks, Christian. So on the consumer behavior, look, the sales -- to start with the sales mix. Yes, it has changed. Let's see whether that's permanent or that will go back to what we had before. Since many of our retail point-of-sale shops and third parties were closed or partially closed at least, we saw a shift in gross adds or in sales to online and telesales. Now our shops -- all our shops, our 50 shops are open again since early May, and they are slowly picking up, but the footfall is not as much as yet as it used to be. Now let's see whether that's going to be permanent or whether that will come back over time. On Q2, we expect better performance on IP net adds than in Q1. And as we have said in the Q4 call already when we gave an outlook for the full year, our ambition is that we -- or the total of net adds on Internet over the 4 quarters in 2020 will be greater than in 2019. But we've also said that this takes time. And so, therefore, on your other question, on the 10,000 to 15,000 net adds, I think that's not impossible, but that's a mid- to longer-term goal, right? It's not going to happen overnight. But clearly, I think the -- again, if you look at the IP penetration that we have in our footprint, I mean, there is still a lot of ground to cover. So we're not disclosing specifically which IP Internet net churn is coming from individual -- so if it is due to housing association cancellations, but I can only say it's not material because otherwise, you would have seen a much more significant drop. And again, I remind you that on a like-for-like basis in Q1 2020, we're 3,000 net adds better than we were in Q1 '19, excluding M&A. So again, the trend here is our friend.

The next question we have is from [ Thomas Marina ] from Bain Capital Credit.

So on your RCF extension, could you provide a bit more color on the ongoing discussions with banks for the renewal? Have you seen any change in willingness to extend that RCF as a result of COVID? And also, could you provide an indication of maybe the time line for announcing anything on that?

Yes, and I suggest I take the question, and thank you, Thomas. So unfortunately, I can't and I don't want to say more than I said already. I'm just going to say that we take this point very seriously, that we are on ongoing negotiations. But on the business interest from both sides, from bank side and also from our perspective, I won't disclose more by today. But as said, we are in negotiations with them, and we hopefully can announce something in due course. But let me also remind you, I think only a prolongation of the RCF doesn't help the company and the leverage situation at all. I think it's really important what Daniel mentioned and elaborated on, that the strategic positioning and the strategic financing come in place, and this is something where we are working very hard on. And having said this, unfortunately, I can't answer your question and give you more details.

The next question we have is from Rosalind Dalton from Onex Credit.

Unfortunately, this is another RCF-related query. The consideration, I think, that we really have is I don't -- I think most of us don't have a huge issue with the actual liquidity position of the business, but more how it's being reviewed by the rating agencies and how quick they could be to react further in the event that the RCF extension isn't really committed to within a shorter time frame. Could you please discuss the conversations you're having with rating agencies and how you expect to prevent a further downgrade?

Rosa, unfortunately, it's the same as I said already in the answer before to Thomas. So it's the same with the rating agencies. You know that we are in discussions with the rating agencies and -- at least since December last year. And we also discussed it at the investor's meeting, S&P, and we are in ongoing discussions with them. I think they are flexible if we have something to communicate. But from -- with all respect also to their interest and to our, I won't communicate and tell you more about the process right now. But I think the relationship is still quite okay to all of them, and we'll do our homework internally and also are, yes, in close contact with the rating agencies.

Okay. Because I think you mentioned earlier that August to be a kind of potential time to understand what's actually going on with the RCF. And as I understand it, that would be a bit longer than the rating agencies would expect to hear some positive news on it. I mean it's just very important to us, so I'm just wondering how you're really thinking about this because August is obviously quite a way away now. Would it be that we should expect to hear something from you much sooner than that?

I think the time point you're referring to came from Daniel, and he said we will have a strategic update on our thoughts with the Q2 communication in August. I think that's what Daniel said. On the RCF, this is different, of course.

Okay. So we could expect to hear something much sooner?

I understand what you're trying to do. But sorry, I can't tell you more right now.

The next question we have is from Jan-Erik Schmidt from LOYS AG.

I'm just wondering about the average pricing on the Internet, because if we look at the gross adds, obviously we move to a much higher bandwidth and still the price is coming down. Is it just due to marketing that you can try to get customers into higher bandwidth contracts by discounting them? Or is there actually pricing pressure? Or what's the issue? And the second question would be on the TV side. Is IPTV any concern for you in a way that you might move into it? I mean if we look at waipu.tv from Freenet, they're actually experiencing significant growth levels on their customer base. Couldn't that be some kind of option for you guys as well?

Thank you, Jan-Erik. Okay. So I'll take the 2 questions. On ARPU, look, so I mean on Page 7, we show you the split of gross adds, right? Whereas the ARPU on Page 9 is for the entire base. And if you look at the number of gross adds we have on a quarter basis relative to the base, it's -- I mean, it's not that high yet, at least. We talked before about the ambition to have a higher share of gross and therefore also net adds. Therefore, the impact coming through on ARPU for the base does take time. And if you look at it year-over-year in Q1 '19 at EUR 23.9 to EUR 24.3 in Q1 2020. Meanwhile, it's not a huge uplift, but still there is. Now if you specifically asked what happened between Q4 '19 and Q1 2020 where it went down by, well, almost nothing, but EUR 0.1 or EUR 0.10, the reason for that is that in the past, we did have mostly bundles between Internet & Telephony. And nowadays, these bookings are made more individually. And so therefore, the ARPU, the telephony ARPU, which is going away from the churners, is higher than the telephony ARPU of the new joiners, right? And so therefore, you were -- if you were to split this, which we don't do, but if you were to split this, you would see an Internet ARPU uplift, which is greater than what you see here in the blended ARPU. Okay. Now on your second question on TV, look, I mean, at the end of the day, if you're a consumer, whether this is -- thing is called IPTV or something else, quite frankly, I think doesn't matter too much as long as it's a good offering, service offering. So therefore, the deficiencies we have are less on what the technology that we're using, but simply on the functionality, on the features in our Premium TV offering. And we know exactly what we need to do, but this will be part of the bigger strategic update, which we plan for Q2 results in August, so -- but we know what we need to do.

Okay. Because the pricing obviously for those IPTV contracts is much lower compared to the actual pricing that you have to charge not only for the cable access, but also obviously then for the TV package on top. So in total, you have like nearly 3x the pricing using the cable TV instead of using IPTV, which obviously could be used with those high bandwidth you offer.

Right. But also don't forget that a lot of our agreements are bulk. So therefore, you -- as a tenant, you're not paying for this directly. So you're not looking at your bill and saying, "Oh my god, I'm paying this much on linear TV plus, on top of that, also the Premium TV." For most of them, it's actually included in what they pay to the housing associations. But look, let's leave it at that for the moment. We know that we have some deficiencies in the feature set, and we'll revisit that and will be part of a bigger update in Q2.

The next question is from Lars Dueser from Deutsche Bank.

Yes. A follow-up really about the strategic financing update you want to give in August. Daniel, you said early on when I asked the question that this could be an infrastructure investor who helps you, for example, with an upgrade of the network, but it could be also the capital markets. When you say capital markets, is this equity? Or could that be even debt where you try to prime existing bondholders? Just to get a bit more color on that would be really helpful.

Yes. Look, so again, let's -- it's not really time to talk about it, but on your specific question, it's equity.

The next question we have is from Simone Mallardi from Principal Global Investor.

First of all, congratulations for the very good set of results, especially on free cash flow in Q1 and now the also free cash flow in Q2, as you mentioned, and for the very good liquidity. And I guess you have proved wrong all the negative on you, including the first caller here, the guy that asked the first question at the beginning. In terms of question, actually, I think Slide 21 shows that you have 15% of your homes that are already connected with fiber. Can you elaborate on what would be the upgrade that you are planning to? I mean how should we think in terms of the 15% evolution over time?

Okay. Well, first of all, thank you for the kind words. Appreciate it. Always good to hear. Look, so we can't say too much at this stage, right, because it's still early days. But one, the focus is on the existing footprint, right, because we have still a lot to do there. Secondly, we would look at this obviously in conjunction with the contract waterfall, right? Because if you invest significantly in upgrading your infrastructure in the housing association business, then you would want this to go with also prolongation of the contract. So I think this would go hand-in-hand. But therefore, by the -- that's one. And secondly, you can't overbuild 100,000 of homes connected in a year. That's physically not possible. So therefore, you should think of this as something which is stretched over a number of years, I guess, which is common with them. And yes, everybody does it like that.

Understood. I think, Daniel, you have used the word before, monetizing the infrastructure, which really give a clear indication of what is one of the most relevant option you have ahead of you. When we think about that, I think we are seeing transactions happening at very attractive multiple across Europe, including in Germany. I'm not asking here for a valuation, of course, of your network. But I just wanted to get your point on where you see that this matter should we value. I mean should we value in line with the transaction we have seen, should we value in that kind of range? Just to get your perspective would be very helpful.

Well, I think you're jumping the gun a little bit here, if I may say so. It's -- there are multiple options, as I said before. And it's really difficult to give you any indication here, because while all options are open, all options are open, right? And we will talk about it when we have something to say. Just maybe on monetizing. I need to be a bit more precise, and maybe I've misled you, and that I would definitely not want to do. Monetizing does not necessarily mean selling, monetizing means as in generating return on investment, right? So that's what I wanted to say here, the open-access strategy is important because, let's face it, Tele Columbus, if it's pure brand alone, is not strong enough to generate a material return on the investment that would come from a fiber overbuild, right? So that's what I meant by monetizing. I apologize if I have potentially misled you and others. Separate from that is a question of how you get to the actual funding. And therefore, there, what I mentioned is that, one, an investor coming in is one option. Capital raise is another option. There's not that many options, but we're exploring all of them in parallel.

Yes. No, understood. And also, thanks for clarifying the capital markets in your view was mainly equity and not what the guy said before was priming the exit in there, which I agree wouldn't make any sense, and that wouldn't be even allowed by the existing documentation, by the way. Good luck for the progress.

Thank you very much.

[Operator Instructions] The next question we have is from [ Itzik Vaughn from Sycamore ].

I had one question on the wholesale agreement. Just maybe if you could speak how the O2 contract is rolling out and whether you're looking at other partnerships potentially. Or right now still the focus remains on Telefónica?

Yes. So look, the prime focus, of course, is Telefónica. We have signed the agreement. The implementation process is ongoing. And so that's the primary focus. But of course, we're open for business for other wholesale partners, and I think we can be reasonably confident that Telefónica will not remain the only one.

Any time line around this?

On what specifically?

When you're saying you won't be the only one, you're saying, so I mean you're working with other partners.

Yes. Yes. So I mean, look, again, same philosophy. We'll talk about it when we have something to say. And therefore, until such time, we can't really give you any more specifics. But you should assume that we also have other conversations.

Is it in your mind, tied to the clarity -- getting clarity on the funding side of the -- strategically that you talked about in terms of striking new deals?

I mean you can't link the 2 time lines because they are independent processes. And so you can't really link them tightly. But of course, having more than 1 contract signed would be a good proof point, proving point for our strategy. That's what I would like to say on this one.

That is from Simon Bentlage from Hauck & Aufhäuser.

It's just a quick technical follow-up question on your D&A. Eike, maybe you can elaborate a bit on what your budget is for the year and if this high D&A will also return in the following quarters.

So thank you, Simon. I think -- or what I tried to work out is this is a one-off effect -- cost in last year 2019, and we don't see further impact in the next quarter. So it will be a huge number related to the investments we made in the past, but it won't increase significantly.

The final question we have is from Antonio Barranco from Blackrock.

So a follow-up, I guess, on the RCF. I just want to echo the point of my colleagues of how important is the rating for existing lenders that we have been quite supportive of the company through difficult times. It was not clear to me from the commentary of the CFO, whether he said that the RCF was linked or not linked to the strategic financing in August. And therefore, should we expect something before or after -- before or at the time of the strategic financing review in August? That's my first question. And the second question is, in terms of the strategic review in August, how much of a final growth is going to be, I guess, in the sense of going to be more of a theoretical analysis of this is the route that we want to follow or there's going to be a specific announcement or do you expect to be able to be in the position of having a specific announcement in terms of a relatively quick implementations of your strategic decisions?

Eike, do you take the first one, please?

Yes, of course. Thank you, Antonio. So I haven't said anything regarding a link between the strategic review and the RCF. The RCF is ongoing and current business also before the strategic review. It can have an impact, but it's -- from our perspective, it's something we need to do also for the existing business. So we are working on this, and it's not linked directly to the strategic review.

Thanks, Eike. Antonio, on your second question, look, we wouldn't bother you with a theoretical analysis. So you should expect something fairly substantial and concrete when we meet again in August.

Thank you. Ladies and gentlemen, that concludes the call for today. Thank you very much for joining. You may now disconnect your lines.

Thank you, everyone.