TPG Telecom Limited (YST1.F) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us for our 2025 half year results call. I'm Paul Hutton from TPG Investor Relations. To begin, I would like to acknowledge the traditional custodians of country throughout Australia and the lands on which we and our communities live, work and connect. We pay our respects to their elders, past and present. Our presenters today are CEO and Managing Director; Inaki Berroeta; and our CFO, John Boniciolli. The rest of the executive leadership team are also present for the Q&A session. I'll now hand over to Inaki.

Thanks, Paul, and good morning to everybody listening. Our strong 2025 first half results reflects gain in our mobile market share, disciplined cost control and growing cash flow momentum. It also coincides with 2 transformational events for our company. Firstly, the doubling of our mobile network following the activation of our regional network expansion in late January. And secondly, the completion of the sale of our EGW fixed and fiber asset and subsequent announcement of our capital management plans. Looking at the highlights of the period in more detail, I will start with our trading performance. We increased our mobile subscriber base by 100,000, gaining share from competitors despite a fall in incoming international arrivals. Customers have responded strongly to the significantly increased mobile coverage for all our brands. We have gained market share in both metropolitan and regional centers with domestic growth in postpaid coming at the expense of our competitors. We are also seeing very strong growth from our digital-first subscription brands, TPG and Felix.. This drove service revenue growth in the period, helping to largely offset the initial costs associated with the regional network expansion and increased EBITDA. Meanwhile, NPAT was up very strongly in the period. Improving cash flow momentum has been a key part of the TPG story for some time now and will continue to build over coming years. On a pro forma basis, operating free cash flow was up 35% on lower CapEx and improved working capital management, while free cash flow was up $152 million. The Board has today declared an interim dividend of $0.09 per share, consistent with our intention to pay an annual dividend of $0.18 per share in 2025. We then intend to increase dividends over time in line with sustainable growth in profits and cash flow. We announced earlier this month our plan to return $3 billion in cash to shareholders and increase minority ownership of the company by allowing minority shareholders to reinvest their part of the cash in new TPG shares. We have now, in the last few days, repaid and canceled $1.7 billion of bank borrowings. Before we move on, I would like to address the iiNet cyber incident we announced last week. We are very sorry this occurred and are taking ongoing steps to support any customers who were affected by this incident. The unauthorized access appears to have been contained to the iiNet order management system, which is used to create and track orders for new services. That system contains e-mail addresses for some customers and landline phone numbers, contact names and residential addresses for a much smaller group of customers. No driver's license numbers, ID documentation details or bank account details were accessed as a result of the incident. While investigation are ongoing, it appears that the number of impacted active e-mail addresses is going to be significantly lower than the 280,000 we estimated last week. Nonetheless, we unreservedly apologize to any iiNet customers impacted by this. I'll now turn to Slide 6, covering our key financial metrics, noting we are taking here on a statutory continuing operations basis unless we state otherwise. This was a strong result on the back of a great mobile trading performance and a stronger discipline in the way we are managing cash cost expenditure. We saw a 2.2% increase in service revenue, led by mobile, but also with modest growth in fixed. Gross margin was up 0.8%, including the increased cost for the regional sharing agreement and 2.8%, excluding this cost. This highlights the efficiencies the team has been working hard to create in the recent years. Our efforts to contain growth in operating expenses have resulted in an increase in OpEx of just 0.6%, well below inflation. This is worth noting, especially in a period of increased marketing investment. Statutory EBITDA was up 1%, including MOCN and cost of $26 million and significant increase in marketing spend. On the pro forma guidance basis for EBITDA, EBITDA was $686 million, as we disclosed earlier this month. The strong increase in NPAT included improved operating performance, lower financing costs and a small one-off tax benefit. Return on invested capital was up 80 basis points to 6.2%. I would now like to talk more about our mobile trading performance on Slide 7. We launched our expanded regional network at the end of January and more than doubled the size of our mobile network coverage. We have significantly narrowed the mobile coverage gap that existed for decades and consumers have responded well to this step change, which is a truly once-in-a-generation event. The subscriber growth largely offset the impact to gross margin on an additional $26 million of costs paid under the regional network sharing arrangements since the launch. When it comes to mobile customer growth, we have outpaced our competitors, adding 100,000 subscribers and growing share in the half. The growth has come despite much lower international student arrivals and ongoing intense competition in the market. Now turning to ARPU. On aggregate, this was up $0.33 on the prior corresponding period, albeit $0.65 lower than the second half of last year. This reflects extensive promotional activity following the launch of the regional network expansion. This was, of course, the right approach. We only have one chance to relaunch our mobile network, and this activity was definitely a factor in us being the only MNO to report subscription growth in its premium brand in the period. We did increase postpaid prices by a modest amount across some services in July this year. This will flow through in the second half of the year, so we would expect the full year ARPU trend to be positive even if subscriber growth may moderate a little. In any case, in both ARPU and subscriptions, it is important to look at the trend. Over the last 3 years, our postpaid ARPU is up 14.5% to $48.51, while our total ARPU is up 7.8% over the same period. Slide 8 covers our mobile subscriber momentum in more detail. This chart demonstrates how our cumulative growth through the years has outpaced the average of the past 2 years despite a slow start from the reduction in international students. Since the launch of our regional network expansion, net additions have been in excess of 100,000 and ahead of our internal projections. We are on track for continued growth in the second half, although timing of our price increase in July may have some moderating impact as just noted. International student arrivals is a significant driver of subscription for TPG Telecom and particularly the Vodafone brand, which punches above its weight in this market, largely due to recognition and trust. Looking further ahead, we expect customers to continue to respond positively to our larger network, our refreshed brands and our improving digital proposition. Pleasingly, the government has also announced a revitalized student visit program for 2026, which bodes well for TPG Telecom and the Vodafone mobile business. Slide 9 describes how the market talks about mobile subscribers, something we believe needs recalibrating. The common definition is a throwback to the early 2000s when people had a 2-year lock-in contract called postpaid or they went to a supermarket and recharge their service as they needed on a prepaid basis. As you all know, there are no lock-in contracts anymore, and the market has evolved into 3 distinct offerings. Firstly, there is the premium market. In our case, we call that postpaid. These are customers who want multiple ways to interact and value things like international roaming, add-ons and live music access via our partnerships with Live Nation. These customers typically have a longer tenure often because they are purchasing a handset on a payment plan. While the cost to service these customers is higher, ARPU is also higher, and we generate a good margin. Next, we have the digital-first subscription brands, in our case, primarily TPG and Felix. We have historically classified this as prepaid because the customer pays for the service ahead of receiving it. While these customers pay upfront, they behave much like postpaid customers. You can almost think of this as the Netflix subscribers of the telco world. Each month, they pay upfront for their mobile service in what can be considered a set and forget manner given the essential service that mobile provides. This is why some competitors classify these kind of customers as postpaid. These products are attractive for customers because they are simple, digital and offer a great product at a great price. That's why we are seeing the most growth in these brands. This digital-first subscription represents good business for us as they are efficient to run and nimble in the market, meaning ARPU can be lower, but we still generate attractive margins. And finally, we have traditional prepaid. This is a value-seeking part of the segment that can be lower margin or have lower tenure, but is still an important part of any telco portfolio. As you can see on the slide, 15,000 of our 100,000 subscriber growth in the half was from traditional postpaid and 55,000 was from the digital first subscription brands. This is a very high portion of customers' growth coming from recurring customers in a period when our 2 competitors were unable to grow share with the equivalent brands. Turning to Slide 10 now. Fixed service revenue increased just under 1% in the period, while gross margin was a little less, reflecting the ongoing impact of NBN input costs. The NBN market remains very challenging with intense competition from telco and non-telco entrants impacting subscriber numbers for larger incumbents. We have seen some mitigation following the recent refresh of our TPG brand in late April with promotions leading to improved subscription in May and June. Fixed wireless continues to grow and now represents 14% of total fixed subscribers. We remain the #1 player in this market, and we'll continue to optimize our offering, which delivers very attractive margins. We also grew retail subscriptions in the Vision Network, which is now owned by Vocus. We have always sold the Vision broadband service under the TPG and iiNet brands, but now we also sell it under the Vodafone brand. Fixed ARPU increased $0.83 or 3.3% in the period, reflecting growth in fixed wireless and NBN plan refreshes. Fixed remains very important to us as a product offering and is a big part of our DNA as a company. There is very clear benefit of convergence of fixed and mobile customers, and our recent system investment will increasingly enable us to target that opportunity. Slide 11 covers a market-leading product development in fixed, which we launched last week. Vodafone is now offering next-generation WiFi 7 modems, the first major telco in Australia to do so, delivering speeds 4x faster than the previous technology as well as a strong performance across multiple devices, which can be seamlessly combined with the mesh units to extend your home network even further. As NBN speed boost starts to take effect in September, the release of this kit will play an important role in ensuring customers can get the superfast speeds they are paying for in every corner of their home. We are confident this offering will help attract and retain customers and offset some of the marketplace dynamics we discussed in the previous slide. Being first to market with this technology will help to be a key differentiator for users in the high-speed market, particularly in the upcoming NBN 500 space. The 4 pillars of this slide remain the foundation of our company's strategy. Customers are at the center of everything we do. And sadly, for many circumstances such as financial stress, domestic and family violence, disability or systemic exclusion can make it harder to access telco services and stay connected. To address this, we have developed our customer well-being strategy, a 3-year road map to ensure all our customers, especially those in vulnerable circumstances, have fair and reliable access to essential connectivity. In the first half of 2025, we have focused on increasing our sales governance across all sales channels to ensure agents are offering products and services that meet customers' individual needs. beginning work on a First Nations customer support strategy to ensure we are taking culturally appropriate actions to support our First Nations customers, establishing new reporting and clearer data insights to better understand the experiences of customers affected by domestic and family violence, which has led to 5 key improvements to enhance support pathways. This is an ongoing journey as we continue to build on a customer-first strategy. Doing the right thing for our customers is not just the right thing to do. It is also intrinsically linked to improving returns for shareholders and will always come first for our company. My final slide before I hand over to John reviews our progress relative to our strategic priorities and the metrics we shared with you in February. I'm pleased with the efforts of the team so far. And halfway through the year, we have already achieved or are strongly on track for all our targets. Highlights today include 75% reduction in the number of consumer plans in the market over the last 12 months. Digital sales also continued to grow and are now around 19% of sales for the Vodafone and TPG brands. In the second half of this year, we will be launching a new user interface and new Vodafone app, which will help drive further digitization of sales and make us an easier telco to deal with for new and existing customers. I look forward to updating you in more detail with our full year results. John will now discuss our first half financials in more detail.

Thanks, Inaki, and good morning to everyone on the call. Before I get into the detail, I want to be clear, we have explained the basis of today's reported. Unless we say otherwise, the numbers we are talking about today are for statutory continuing operations prepared on a AASB 5 basis per our financial statements. That means both the 2025 half year results and the 2024 comparative period do not include the EDW fixed business or fiber assets that we have sold to focus, where we think it will be helpful, we have also shown the result on a pro forma basis. That means we have shown the impact of the new commercial arrangements with Vocus as if they had been in place for the whole period. Those impacts are, firstly, the introduction of the transmission and wholesale fiber access agreement, which we call the TAWFA for short. Secondly, any changes in how much you pay for residential broadband access under the wholesale broadband agreement for Vision Network, noting we have always had the wholesale input costs for vision in our consumer business, and these costs remain in continued operations. Thirdly, some minor payments from Vocus to TPG for property tenancy. Turning now to Slide 15 and the income statement summary, where we have provided both the statutory result and the pro forma comparison. As Inaki has covered, service revenue growth was 2.2% led by mobile. I want to go into more detail on our disciplined cost performance in the period. The cost of telecommunications services increased 4.9%, as expected because we had $26 million of new costs in the period related to the regional network sharing arrangements with Optus. A reminder, we expect these costs to be very comfortably exceeded by mobile services revenue growth, including new revenue as we grow market share from a larger mobile customer network base over time. Including these costs, gross margin was up 0.8% in the period. On a pro forma basis, cost of telecommunication services would be $29 million higher, reflecting the component of the TAWFA that we don't account as a lease. Of course, we expect to more than offset these costs through lower OpEx and CapEx over time. And as we have emphasized these costs are non-biometric, that means costs do not increase as we grow customer numbers, data volumes or market share, translating to the same kind of operating leverage we would have if we still owned the assets. For short, we call that ownership economics. Now turning to indirect costs or operating expenditure. I will have a more detailed slide on this in a moment. But to summarize, I'm pleased with the discipline the business has shown over the last 12 months. We told you our aim was to keep expenses in line with or below inflation this year. So restraining them to a growth of $2 million or just 0.6% growth is a solid outcome, particularly when you consider the incremental marketing spend. We expect to maintain this discipline throughout the second half. We've also been very clear that we expect to hold OpEx growth broadly flat in nominal terms through to 2029 by removing a cumulative $100 million of real cost. EBITDA was up 1% on a statutory basis or 1.1% excluding material one-off at $618 million. On the basis we have given guidance for this year, which is the pro forma basis, EBITDA would be $786 million. This compares to the first half 2024 pro forma equivalent of $779 million or growth of 0.9%. Depreciation and amortization expense was flat in the period as expected, while net financing costs were lower, reflecting lower market interest rates. As you can see in the pro forma column, there would have been a further $45 million impact of lease accounting of the offer through depreciation and interest. There was an income tax benefit of $8 million in the period, reflecting the recognition of previously unrecognized tax losses, partially offset by tax on the current period profit. Net profit after tax was $32 million in the period, up materially. Turning to Slide 16 and our cash flow summary for the period, where we are again providing both a continuing operations view and a pro forma view. Operating free cash flow was 23.6% higher at $246 million, reflecting a positive movement in working capital and lower CapEx. The positive working capital movement most reflects much lower impact from the unwind of our legacy handset receivables financing arrangement. Lower cash CapEx reflects lower additions as we have passed the peak years of investment to deliver the 5G mobile network upgrade and modernization of our IT systems. This page shows the aggregate cash impact of new commercial arrangements on the pro forma basis would be $75 million across EBITDA and lease costs. Free cash flow to equity was $152 million higher at $103 million, mostly due to nonrecurrence of the spectrum payment within the corresponding period. It seems counterintuitive to see cash borrowing cross higher here when accounting interest costs were down in the period. That is because of the timing of interest payments related to the repayment and cancellation of facilities associated with the refinancing of debt facilities in June. The impact will reverse in the second half when borrowing costs will, of course, be lower in any case because of the debt repayment, a tighter pricing outcome on our recent refinancing and the 3 interest rate cuts this year to date. I will now cover operating expenses in more detail on Slide 17. In this case, excluding material one-offs. On that basis, total operating expense for the first half of 2025 was $504 million, an increase of 0.4%. This is ahead of our target to limit OpEx growth to inflation growth this year and closer to our objective of keeping operating expense broadly flat over coming years in nominal terms. There has been strong and disciplined focus across the business to achieve this result, in particular, as we increased marketing spend to support the regional network expansion and brand refreshes. Technology expense of $126 million was up just $2 million. This reflected lower network maintenance and support costs, which included a direct benefit of the regional network sharing arrangement, which all but offset the impact of higher electricity costs from increased consumption as we expand the 5G network and from higher market prices. Employee benefit expense of $174 million were down $13 million, reflecting the outsourcing of the Manila support center in February last year as well as lower overall employee numbers. The Manila costs are reported in other operating expenses, which at $204 million were up $13 million. This also included the increase and very impactful increase in our marketing investment in the period. I expect you have noticed the increased brand presence and refreshed messaging for Vodafone TPG and Felix in the period. our new customers certainly have. To reiterate, I said in February, we expected OpEx to be flat in real terms for the full year. That is no greater than the rate of inflation. This performance is consistent with our commitment to the $100 million cost reduction out to FY '29, which assumes we can offset inflation if it is within the RBA's target range of 2% to 3%. Slide 18 shows the composition of our EBITDA growth in the period as well as the pro forma adjustment. I have already covered the drivers of the 1% increase in statutory EBITDA to $813 million. As the slide shows, to get to our guidance basis EBITDA of $786 million for the period, we adjust $2 million of material one-offs and $29 million of pro forma costs. On a like-for-like basis, with the first half of FY '24, this translates to an increasing guidance basis pro forma EBITDA of 0.9% from $779 million in the first half of FY '24. We define the $2 million here as material on the basis that our expectation for the full year is an amount of more than $5 million. These costs primarily relate to capital management activities. Slide 19 covers CapEx and D&A. Trends here have stabilized significantly now we have passed the peak of our network and IT investments. Cash CapEx, excluding spectrum payments, was $473 million in the period, down $37 million -- this reflected a significant skew to the first half as we foreshowed in February and implies second half cash CapEx of about $317 million to get to our full year guidance figure of $790 million. That guidance includes approximately $20 million of investments to develop ground station infrastructure to support a low earth orbit satellite project, supporting our efforts to improve our coverage for Australians in remote areas. We'll also invest a little more in IT system for the EGW mobile business post the separation related to the Vocus transaction. We are currently targeting CapEx of about $750 million in FY '26, with the target range dropping to between $550 million and $650 million from FY '27. Total depreciation amortization expense was roughly flat between half year 2024 and half year 2025. On a pro forma basis, we see an additional $16 million of depreciation expense related to the new TAWFA right-of-use asset. I expect depreciation amortization in the second half to be fairly comparable to the first half on a pro forma basis. For me, the next 2 slides on cash outlook and leverage reduction might be the most important in today's pack. Starting on the left of Slide 20, we highlight the constraint on historical cash flow that we have now overcome. Following the VHA TPG merger, it became apparent that significant investment was needed in systems in addition to the investment in the 5G upgrade, including the costly and timely exercise of replacing banned Huawei equipment. We went through a period of heightened CapEx and at the same time, took the decision to unwind a legacy handset receivables program, which was much too expensive. This impacted working capital movements for 3 years, and at the same time, as we were impacted by higher borrowing costs on the merger debt, which had not been hedged. As we move into 2024, these headwinds start to abate, and we saw a material uplift in free cash flow. Now we're in 2025, we have some free cash flow tailwinds including $102 million lower CapEx on a pro forma basis, $125 million lower unwind from the legacy handsets arrangement and $128 million less spectrum payments. That totals more than $350 million of additional free cash flow, albeit somewhat offset by the commencement of cash tax payments in the year. Looking ahead, we project further free cash flow growth with confidence as we grow earnings, further lower CapEx, flattening of the recent growth in leases costs and lower bank servicing costs. Of course, cash tax will go up as we move past utilization of historical revenue losses and profit growth, but the net outlook is very positive. Now turning to financial leverage reduction on Slide 21. This week, we canceled $1.7 billion in bank loans, reflecting the first stage of the debt repayment component of our capital management plan. We have never lacked for headroom relative to our borrowing covenants as the chart on the left of this slide shows. Post the repayment, bank debt is just over 1.5x EBITDA and this will fall further by the end of the year when we use the proceeds of our reinvestment plan to pay down more debt. More fundamentally, our strong cash flow outlook means we expect to revert over the next 2 years as profit grows, and we pay borrowings down -- we are already very comfortably within the parameters of an investment-grade BBB rating and rating agencies can see that we will soon be well with the BBB flat range. Slide 22 shows more detail about our borrowings and interest costs. In the first half of 2025, bank financing costs of $122 million were lower than the prior year as expected reflecting easy market interest rates following the RBA's decision to reduce the cash rate twice in the first half. We're also showing here what interest costs would have been on a pro forma basis as if we had the levels of bank borrowings we now have for the whole period. This illustrates how lower bank financing costs will remain a driver of performance into the second half. That's because we now have $1.7 billion less debt and the RBA has cut rates further, and we secured very tight pricing on our recent refinancing. Lease interest cost of $59 million were also lower than in the first half of FY '24, but would be $87 million on a pro forma basis due to the offer. The right-hand side shows our debt stack. In June, we completed a successful refinancing of our 2026 maturities extending $2.1 billion of borrowings to mature in 2027 and 2028 at tighter margins. Having made significant cancellations this month, we now have no maturities until 2027, and we expect to pay down further facilities later this year with the reinvestment plan proceeds. In any case, over the next 12 to 18 months, we will be focused on extending the tenor and further reducing the concentration of our remaining debt. With that, I will now hand back to Inaki.

Thanks, John. I will close by recapping our capital management intentions and our fiscal year '25 guidance as well as the longer-term investment proposition for TPG. Let's look at the key elements of our August 5 announcement for our capital management and liquidity plan. We look at how we could reward all shareholders, strengthen our financial position and increase minority shareholder ownership. We assess all the options available and more and work with our board to understand the preferences of our strategic shareholders. The capital reduction of up to $3 billion is equal for all shareholders and translates to a cash distribution of $1.61 per share. The targeted debt repayment of up to $2.4 billion combined the $1.7 billion of loan cancellations we completed in August as well as the targeted proceeds from the reimbursement plan. Our confidence in our growth trajectory, especially our very healthy cash flow outlook, means we do not need to reduce dividends despite selling part of our business. We are targeting a 2025 dividend of $0.18 per share, the same as and intend to increase dividends in line with sustainable growth in profit and cash flow over time. We will consider the timing and extent to which we will resume franked dividends in the future once we begin generating banking credits again. Now turning to the reinvestment plan in more detail. This element of capital management plan is novel and complex. So it takes some explanation. The reinvestment plan is designed to give minority shareholders the ability to buy more shares in the company and increase the free flow. Its primary purpose is to drive an increase in minority ownership by enabling minority shareholders to reinvest their capital reduction proceeds in new TPG shares at a discount. This will offset the impact on our free float market capitalization of the capital reduction and increase the proportion of the company owned by minorities. Our strategic shareholders all recognize the importance of increasing minority ownership to drive trading liquidity. So they are willing to be diluted by not participating. To be very clear, this is a program to increase the free float with debt reduction as a byproduct as we have more than enough organic cash flow to fund our growth. We will undertake the reinvestment plan after the AGM. The exact mechanism of conducting our offer is still being finalized, but in effect, minority shareholders will have the option to receive their cash distribution, receive new shares or receive a combination of both. Minority shareholders will also be able to subscribe for more shares if they choose via an oversubscription facility applying to any sort for at the same discount as their initial allocation. Then and only then if there remains a shortfall, will shares be offered to new investors, but there is no guarantee any discount will be applied in this case. Final pricing terms, including the price against which the discount will be calculated and applied will be determined closer to the time of execution at the discretion of the TPG board. Slide 26 restates our 2025 guidance as released on fifth August. On a pro forma basis, we expect EBITDA to be between $1.605 billion and $1.655 billion, which is up 2% on 2024 at the midpoint. To reiterate, the pro forma basis is not the same as the AASB 5 basis on which we are reporting statutory results. Statutory EBITDA will be approximately higher than pro forma as it will only include new commercial arrangements with focus from this month. Transaction and separation costs related to the Vocus deal are in discontinued operations. but guidance is otherwise exclusive of material one-off impacts. As always, it is subject to no material change in operating conditions. Forecast CapEx, we are guiding $790 million on a pro forma basis. This is the previous guidance of $900 million less expenditure related to discontinued operations, plus some additional projects, as John has covered. My final slide covers our long-term value proposition. TPG is a competitive low-cost telco challenger committed to simplicity, value and a better customer experience. Following an extended period of transformation, there are 5 key elements. Firstly, in an uncertain and volatile macroeconomic environment, we are exclusively domestic focused and operating in a low-risk essential services industry. This competitive market increasingly favors the lean customer-centric players who can be nimble in responding to customer needs. We are Australia's genuine mobile challenger, the largest player in fixed wireless and the second largest in home Internet. We have a strong stable or refreshed brands competing on modernized systems and an opportunity to expand into a larger-than-ever addressable market. Added to that is our transformed capital structure and balance sheet a scalable cost proposition, strong cash flow outlook and consistent returns from a simplified dividend policy. TPG is entering an exciting dynamic era, and we have great confidence in our ability to realize our potential and grow value for shareholders over the coming years. With that, I would like to thank you for your time and open the call for questions.

[Operator Instructions] Our first question comes from Eric Choi at Barrenjoey.

I know you guys have preannounced so I'm just going to ask questions on the incremental pieces of new info we got today. So one on mobile subs, one on the digital first ARPUs and maybe one on broader industry. Paul, all at once or one by one?

All at once will to be good.

Okay. First one. So on your mobile net adds, if we get the rule out like they were 20,000 to 30,000 in July, and you said it was slow, but even if the remaining 5 months only matched that 1 month of July, it could imply you do 40,000 to 60,000 net adds in the second half? And is that a reasonable estimate? And I asked because industry net adds have slowed to 200,000 per half, which means if you did 40,000 to 60,000, you'd be taking 25% share of market net adds even after you lifted your prices. The second question, just eyeballing the prices of Felix, TPG and on the website. It looks like the rough ARPUs might be in the high 20s. So can we confirm that, and can we also confirm that Felix hasn't put up prices since September '23 and TPG mobile not since August '24. The point is, it looks like digital first prices or price increases have lagged postpaid. So in theory, you could ARPU growth for these digital-first subs be higher going forward than your broader postpaid. And then just a third question. I know it's not you guys, but Optus put out some slides today, it's showing that across the mobile industry, MNOs are lifting pricing, but the Tier 2s aren't so much. and this is becoming a problem because the Tier 2s are growing in market share. So my question for Inaki and James is do you think the further MNO price repair can continue without the Tier 2 lifting prices first, and if not then -- and I know MVNOs are small for you guys, but how difficult is it for you guys to kind of move up pricing in your wholesale agreements?

Thank you very much, Eric. Look, I'll start with the first question you had on the second half. Our view is -- I mean, we don't give any guidance on customer numbers. Second half, we are optimistic around the momentum that we have this year. I would say that our expectation is that it will be more moderate or moderate the performance that we see on the first half, but you need to see where we go, but that's our expectation is probably to be lower than the first half, but it's still a good half for us in the year. Your Second question around the Tier 2 ARPUs, you make an assumption that of the high 20s, I would be more comfortable telling you that it's probably a mid-20s segment for us. The reality for our different brands is that we are overall quite consistent in terms of ARPU trajectory. So if you look into how our tools have evolved over the years, we see that. So despite the different price moves, promotional times I think that we are quite consistent in what we are doing. And all of this goes on the back of our proposition to the customer, which is we are giving our customers a lot more for a little bit more, and this is a proposition that customers are accepting well, and they are able to see the value and they are happy to help us to grow those ARPUs on the back of that incremental value. The -- and then you asked me about the price changes. I believe you are correct. So I think that last time we did something on PPE was probably on the Q3 last year, and I think that Felix was sometime in '23. So that is correct. And we, of course, do not say what we're going to do in the future around pricing. Your third question. I mean the other thing that I wanted to say around the Tier 2 and because everything is a bit mixed now postpaid, prepaid, Tier 2 MVNOs, we are looking at the market probably in a different way. Our wholesale agreements are quite small. We don't really represent much in the wholesale mobile market at this point, you will have to ask questions related to that more through our competitors, which are much more present on that strategy. But in terms of the different propositions, we have premium brand, which is Vodafone, full service, probably costly channels, but higher ARPUs, good margin. And then a lot of our growth is coming also from digital perhaps, which are less ARPU, but at the same time, they are using much more simpler channels. And for that reason, we are quite satisfied with the margin contribution of this price. And I think there is a blend that works well in this market and it's a plan that we're going to continue betting on. Your third question I answered already is the agreements with MVNOs, we don't disclose that, but also if you really think about it, it's not really a market where we are very pleasant yet.

Thanks, Eric. Our next question comes from Entcho Raykovski from Evans & Partners.

So my -- so I'll ask all the mine together as well. My first question is also on Slide 9, where you've talked about the split between the mid-tier digital brands and also traditional prepaid. I know Inaki, you alluded to there being a margin intial between those 2 tiers. So in addition to the difference in ARPU. Can you perhaps talk to what is the -- what's the margin differential and how much of a benefit it is to get incremental subs in that mid-tier of the digital tier. Then my second question is around the -- I know you spoke about it earlier in the month, but the additional CapEx you're spending to support the LEOsat opportunity. I guess longer term, how do you see the potential monetization is this perhaps a service that you can charge for? Is it going to be bundled into the base product? And specifically then in addition to the CapEx, what are the costs likely to be associated with that service given that you obviously need to use third parties to provide? And then the final question on fixed. Given you've seen the subscriber declines in the first half but then ample is looking reasonably good. Are you comfortable with that trend going forward? I'm just conscious that we've now had detail of some of the small operators or the challenger brands are clearly winning share in the NBN resale market as shown by the reporting over the past week. So is TPG comfortable with that sort of dynamic and focus on profitability? Or do you think that comes upon at which you need to return to a subscribe trajectory?

Thank you, Entcho. Look, the question -- I mean, we don't disclose the different APUs on these brands. The thing that is important to note is the differential in terms of physical channel associated to premium brands and a full digital own channel on the digital brands is really what makes the margin of these products so attractive. So I think that for that reason, I said that as much as you will see that are a bit smaller from the point of view of the contribution, we are very satisfied with these brands, especially TPG and Felix, which during the first half have performed really well. On the LEOsat question, I mean, this is probably the abilities of LEOsat in mobile in terms of timing, they have been a bit bold. I think that satellite fixed connectivity is a reality, probably mobile satellite connectivity is something that definitely will be a reality, but maybe not as soon as some people are saying. Nevertheless, it's an area where we are going to be and where we want to be because it really allows something that will be very important for our business, which is to offer 100% geographical coverage in the country. And this is a market where geographical coverage has been a differentiator. Now a lot less. And in a few years, it will not be a differentiator at all. And I think that that's what this technology brings us, and that's why we are so interested. The investment that we are doing this year that we will most likely be doing this year, we hinted a bit what we would do when we talk about the guidance on CapEx. It is related to the investment that we will do initially on the terrestrial part of the network, of course, because you are linking to a third-party satellite network. There is still quite a lot of uncertainty around how this will go forward. There are different ways of doing this, different arrangements. And also, we are working as well with government to see how we link this as well to some of the obligations that might be introduced around the universal mobile coverage. So all this, I think, is a bit uncertain in terms of quantity and timing. But I can tell you that the investment that we would do on what is required to have LEOsat service is orders of magnitude smaller than what the terrestrial network uses. So we are not talking here about a massive rollout. We're really talking here about the terrestrial part of the infrastructure that is required to offer good service in the full country. And how this will be monetized, again, this is more of commercial strategy around what will be the different options. And I think that, that goes similar to many other things that we offer. It could be done in different ways, and we will definitely not disclose that until we launch it in the market. On the fixed question, I think that, again, on this, we've been quite consistent. Also, we have been very clear that we were looking at fixed line profitability. The market is highly competitive. We do see a number of offers in the market that probably are challenging from a point of view of sustainability, and we'll see where all ends up. I think our strategy is we are the second player in the market. It is a very important part of our business, and it will continue to be a very important part of our business. We are very excited around the changes that will come with the speed boost on NBN in September. We have very good performance on Fiber Connect. So even though -- we launched the product over a year later than our competitors. We are the second player in the market on fiber connect. And we have now introduced a very important part of the service, which is the modem that is able to allow our customers to enjoy those speeds with the right equipment. So we're really betting on that on higher speeds, better service, keeping good margins on the fixed business with the combination of NBN and fixed wireless and vision. And then we will play in the market as it fits. But yes, I think we've been quite consistent, and we think that we -- looking at what our TPE refresh brand is doing in the last months, it looks like our trajectory is improving versus the numbers that you are seeing there. So we think that we are in a good track.

Thanks, Entcho. Our next question comes from Liam Robertson at Jarden.

Three from me as well. Just first one on mobile and then maybe 2 on the fixed consumer business. So maybe first on mobile, just follow-on from Eric's comments on the digital brands around having not lifted prices for the likes of Felix for a while. I think in your presence Inaki, you sort of described those customers is looking for great product at great price. I mean to that effect, just given you haven't pushed price, do you think you've got a good handle on how sensitive those customers might be to any subsequent price changes? And then my second 2 questions. I mean, firstly, just on iron. I know there's probably not much you can say, but are you able just to talk to the cyber incident and the impact on subscriber numbers across that brand and just whether you've been able to return churn to normal levels? And then the last question, apologies, is a bit of a long one, but just on the consumer fixed business, I mean I appreciate the fourth quarter was another tough quarter in terms of subscriber losses. If I look ahead though, we've got the NBN accelerate rate program next month. I mean, I know you've launched that new modem, which if I cast my mind back to the '24 result, that was obviously one of your key concerns, so well down there. But simplistically, I guess what I'm trying to understand is if you think you're going to be a net beneficiary of the changes being proposed next month? Or do you think there'll be a headwind? So I mean, maybe if I elaborate on that a little bit? I think you've got 40% of your NBN customers on 50 megabits per second today. So in theory, if you can get a number of those customers to upgrade to what will ultimately be 500, then there probably should be ARPU benefits associated with that. conversely, though, and I know you touched on Fiber Connect before, but it looks like you've got roughly 35% of your base on some of those legacy tech types. And so those customers will be unable to access the higher speed tiers -- that's obviously been a happy hunting ground for the Challenger brand. So just to understand if you think that program will be a headwind or benefit moving forward.

Thank you. Thank you very much. Look, I think that -- again, we don't talk about future pricing that we will have on Felix or any of other brands. And it is true that Felix we haven't changed a lot of our pricing proposition since. At the same time, I can tell you that the dynamic in Felix around ARPU has been quite strong. And it's been quite strong because customers on the back of what is being offered at the different price points have been upgrading their plans over time and therefore, the performance that we are getting on ARPU and Felix, which is very good, has been linked much more to that than to any price movement in the market. So it doesn't mean that everything you need to do is through pricing. I think that we are here trying to, like I said, provide a proposition to the customer where we give them more value in exchange of a little bit more return and how you get there, there are different avenues and for a product like Felix without having done any change on pricing, we have a pretty good ARPU performance. . On the iiNet, I mean, first, the first thing is that we take these things very serially, and we -- and we certainly apologize to our customers for it. we went very quickly into the market with very clear indications of what had happened, I mean who was affected but also was not affected to make it clear as possible to customers very early. We conducted many, many customers in iiNet, more than have the customer base was contacted again, with those 2, the ones that were affected and the ones that are not. What I can tell you is that we continue to do forensic analysis on the event. I can also tell you that the number of e-mails that were affected is materially different -- materially smaller than the initial number that we gave, but we really wanted to go to these customers as soon as possible. But after the analysis that we are ongoing caring is a lot smaller we believe that the still boost the increase of fiber is a benefit. We see it as something that allows us to give better products to customers. At the same time, we increased ARPU. We do have, like you said, several opportunities in our customer base around that speed boost, but also we're doing very well on the new customer performance on Fiber Connect according to the numbers that NBN published, and that's something that we will continue to do. And a lot of the things that we are doing on our digital channels but also on the equipment that we are providing to customers goes on the back of making sure that we are going to be performing well on the high-speed home broadband connectivity.

Thanks, Liam. Our next question is from Nick Basile from CLSA.

Just 2 questions for me. Could I just get you to clarify some of the commentary with respect to FY '25 cost base and the impact of $100 million cost-out target sort of over the more medium term? And then a second question, just on the digital mobile subscription business. Can you talk to the link between, I guess, growth in that subscriber base and your ability to manage, I guess, the overall cost base below inflation and how that might evolve as you add more subscribers there?

Okay. So John here. Thanks for the questions, Nick. On the $100 million cost out to '29. What we've said is over a 4-year period, we would expect to remain in and targeting for that sort of level of cost out simply to offset a rate of inflation within that cost base. And on the basis of that inflation rate is within the RBA's target of 2% to 3%, we would broadly have operating cost flattish in nominal terms. And we've said that comes largely with as we continue to simplify the business and the benefits of that, including face the vacant transaction.

Yes. Nick, on the second one, I think related to digital. And I think we explained this a lot when we talk about our transformation program. So we're trying to achieve 2 things. One is higher reach to customers, offer a better digital experience, looking at channels that are growing very quickly, but also it's a matter of efficiency. So at the end of the day, the cost to serve through digital channels versus the cost to serve of traditional channels is materially different. And that, obviously, as you grow the volumes of customers that are choosing that channel their preferred choice, it helps us get more efficient. And that's definitely something that contributes to your first question. And then related to the different agreements that we have entered on our infrastructure. John also mentioned that in the opening speech, we're looking at ownership economics. We are working with our own infrastructure in mobile, and then we are working with infrastructure agreements that still provides us the ability to maintain the ownership economics where we can couple the growth in volumes of data but also a number of customers from those costs. So from that perspective, I think the combination of those 2 things is what is going to allow us to continue being the most efficient telco in the market. And I think that that's really our aim.

Thanks, Nick. Our next caller is Bob Chen from JPMorgan.

John, just a few questions for me. I mean, firstly, a follow-on to that July performance in mobile subscriber additions. In terms of the composition of that performance, is that roughly similar to what we've seen in the first half with digital subscriptions are sort of still taking a lead there? And then just on the sort of 3 categories there, when you're talking to attractive margins from that digital subscription brands, is that sort of on an EBITDA margin basis, is that segment additive or dilutive compared to your sort of postpaid business? And then maybe just a final one around where you guys are thinking of investing to sort of improve user experience and really drive engagement with your customers to deliver growth? Like what are you sort of coming to market with? I know you spoke a little bit about the new Vodafone app, but what are you sort of targeting on the investment side?

Look, in terms of the composition, I would expect and we expect a similar level of mix as we have seen in the first half. It is something that you need to consider is the -- usually the effect in the second half of the iPhone launch. So that may have a bit of an effect. But in principle, I would say that we will keep similar type of plan. The margin is at the EBITDA level, and they are -- I think that's the way we -- we see, I don't know, John, if you want to add more on...

Yes, I think at mentioned it earlier, whilst the premium postpaid has a higher ARPU, it does have -- because it's like what I call a full service retail care handset experience, it does come with high cost to acquire and serve the subscription mid-tier, whilst it does have a slightly lower ARPU, it comes with a much lower cost to serve Why? It's digital primarily, actually disproportionately, and that comes with a lower cost to acquire, and it also comes with a lower cost to serve. So we look at both of those segments as good profit segments for those reasons that I just outlined.