United Internet AG (UTDI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to our Investors and Analysts Conference. Ralph Dommermuth and Martin Mildner will first take you through the figures of 2020 and the highlights and give you an outlook of the fiscal year 2021. After the presentation, the Board will be available to answer your questions. So let's start with the presentation. I'll give the floor to Mr. Dommermuth.

Yes. Good morning, good evening, good afternoon, ladies and gentlemen. Mr. Mildner and I agreed that I will present the company development and give you a forecast of the next year and then Mr. Mildner will drill down to the financial figures 2020. Let me start with the company development. Most of you know the chart. We have a couple of segments that we are active in. In the access area, we address consumers and business customers, in applications as well. In the middle, the square of our assets, nearly 10,000 employees. 3,000 of those in the management development and data centers. We are strong in sales. We operate over 5 million accounts with data centers in Germany and the U.S.A. We have a powerful network structure, with 50,000 kilometers of fiber network. And up to 30% of the Telefónica mobile network capacity with the agreement from 2014. We sell our products and provide our service for a couple of brands in the access area. Our strongest brand is 1&1 for the consumers and a couple of discount brands. Besides this, in the business segment, we are active with 1&1 Versatel. In the application customer, our consumer brands are GMX, WEB.DE, mail.com. And the marketing of the -- and advertising is done by United Internet Media. In the business range, our main application is IONOS. Besides that, we have a couple of brands, nationally and internationally, from acquisitions over the past years. Also, you see some minorities. We work in Open-Xchange, rankingCoach, Tele Columbus, Uberall and AWIN. Let me start with the access business. And first of all, I'll look at the consumer applications. We operate -- we are the biggest landline operators with 4.3 million broadband connections. We offer VDSLs and fiber-to-the-home complete packages, which we buy as complete packages as 1&1 1&1 Drillisch or 1&1 Versatel. We add voice, IPTV and other value-added service. And the last mile is covered by Deutsche Telekom and City Carrier. We operate at good connected lines, good line qualities, we could win the connect test in 2020, just as in 2017 and 2015. We have been awarded best service provider. In the mobile segment, we had 10.5 million customers. We have the broadest coverage. Main brand is 1&1, and we have co-branding with GMX and WEB.DE and discount brands. I have just mentioned that we get network capacities from Telefónica. We are a remedy partner here, and we can use up to 30% of the Telefónica network. And additionally, we have a wholesale contract with Vodafone. The customer contracts in the consumer access have been increased by 500,000 last year to 13.83 million (sic) [ 14.83 million ] customers. The growth came from mobile Internet business. In the broadband business, we had a loss of 30,000 customers, and we end up with 4.31 million. The turnover grew by 3.1%. And if we extract the service turnover from this, it was EUR 3.020 billion plus of -- 2.6%, and this has a drop of EUR 24.1 million, which were due to the coronavirus pandemic. We had a lot of -- drop of turnover because people did not travel as much. If we factor this out, we would have a growth in turnover of 3.7%. In the EBITDA, EUR 601.2 million. That's a minus of 12.4%. EUR 34.5 million result from an excessive Telefónica invoice. This is going to be income on off-period in 2021 after the negations are closed. We have minus EUR 25.2 million due to the corona pandemic. We had a sum of EUR 13.9 million cost of the build of the G5 (sic) [ 5G ] network. That was only EUR 5.7 million in the year before. We had EUR 13.7 million from regulation effects that was concerning fees and SMS fees, text message fees which took effect here. We had EUR 1.1 million from integration projects. Before, that was EUR 3.2 million. The EBITDA margin is at 16%. It used to be at 18.8% in the year before. If we adjust this, we would be at EUR 689.5 million compared to EUR 695 million in the year before. Concerning business access. We operate one of the largest German fiber optic networks. We have plug-and-play solutions for medium-sized companies. The net is 50,904 kilometers long. We are present in 215 (sic) [ 250 ] cities, including 19 of the 25 largest cities. Altogether, we have 19,836 directly connected sites in our networks. Often, we have several customers there because usually these are commercial sites with offices and also public authorities. The turnover revenues in the access grew by 3.5% to EUR 393 million (sic) [ EUR 493.3 million ]. We have to consider that in 2019, we had services that we offered for 1&1 Drillisch. That's when the customers were sold, respectively. EUR 3.8 million positive effect from the coronavirus pandemic are in these figures because we have more phone calls and more commercial customers do not have phone calls as flat rate, but pay for minute. That's why we have this positive effect here. If we adjust this, we had the core business, B2B, wholesale and other carriers, a growth of 6.5% and 5.7% without considering the positive pandemic effect from the additional telephone calls made. The EBITDA has improved by 1.8% to EUR 149.8 million. Here, we have to consider the EUR 5 million from 2019 is services that are not rendered that we did render in 2019. If you want to compare this, EUR 1.6 million effect on the increased telephony turnover. The EBITDA margin is roughly stable at 30.9%. And the adjusted view here, 5.3% EBITDA growth in the core business, B2B and wholesale. Or if we factor out the pandemic effect, we would have 4.2%. Looking at the applications business. Here, we differentiate between consumer applications and business applications. Starting with the consumer applications. For a couple of years, we have been developing e-mail rights to a central communication and information and identity management solution, as you can see here in the graphic that we offer additional communication and organization solutions between -- besides e-mail, that we have cloud solution, that we have online office and that we offer legally secure communication and identity management. On the next page, you see our market situation in Germany. We are one of the leading suppliers of consumer applications with 33.3 million (sic) [ 34.3 million ] active accounts in Germany. That accounts for more than 50% of the private e-mails. Here, you see the different segments in the chart that we are active in and the situation here. We mainly differentiate by being a German provider offering excellent data protection and data security. And the advertising marketing is done by United Internet Media, as I have mentioned before. Altogether, we have 41.77 million consumer accounts. So that is about 7.4 more accounts outside of Germany. This is a growth of 1,920,000 compared to 2019. 1.81 million was the free accounts, which ended up at 39.4 million. 110,000 additional accounts in the paid accounts. 26.7 million of our customers use our mobile apps or respectively, our browser solution, 20.7 million of our customers use our cloud storage. And here, we see a nice growth as well above these areas. The turnover we have grown by 1.9% to EUR 251.8 million. Here, we differentiate the core business with the pay account and portal marketing with a high margin, a plus of 2.1% here. And in the low-margin third party marketing, we have a drop of 10%, only EUR 4.5 million, and our strategic goal here is not to extend this business any further. In the EBITDA, we see EUR 100.7 million, a drop of 2.8% compared to 2019. The EBITDA margin here at 31.4% compared to the year before. The business applications, we develop from a web host to an e-business solutions provider. You see the different applications that we offer here. Beside email domain and storage space for the homepages of our customers, we also offer cloud infrastructure solutions. We have a good position in the market in Europe. We are the leading provider in Europe. We are active in 17 countries in Germany, Spain, Poland and Austria. We are #1. In France and U.K., we are the second largest provider. We have a broad product portfolio. We develop our own products and operate them in powerful data centers. We have about 10 data centers in Europe and in the U.S.A. with about 90,000 computers there. In the last year, we've seen a nice growth in the customer contracts. We look at 8.45 million now, which is a plus of 300,000, split 50-50 inside in domestic and international growth: 4.39 million abroad and 4.06 million domestic accounts. The turnover in the business applications has grown by 6.3% (sic) [ 6.5% ] to EUR 948.6 million. We want to hit the EUR 1 billion mark this year. That's our target here in the segment. This is due to new customers to increase up- and cross-selling and high growth in the cloud infrastructure business and domain parking. The EBITDA has grown a bit more here by 7.2% to EUR 328.3 million. Here, we have to know that this has a little less marketing expenses. They were at EUR 79 million. And now they are EUR 90 million now here in 2019. We had the rebranding with 1&1 Internet to IONOS. Now EBITDA margin slightly improved to 34.6%. On the next, group, we can see an overview of the major KPIs of the group. Altogether, 910,000 customer growth. We have 25.65 million contracts altogether. The EBITDA has dropped by 15.7% to EUR 1.089 billion (sic) [ 1.0489 billion ], and the EBIT has dropped also. Where is that drop resulting from? We had a couple of effects on the earnings in 2020, which we didn't have in 2019. One is -- the biggest one, that's EUR 129 million of the derecognition for the unused VDSL contingents from 1&1 Drillisch, which has a new contract with Versatel and Versatel with Telekom. And in the context of this new contract, the contingents of the VDSL have not been used, and this is not going to be carried on in the future. But as we have made down payments, these EUR 129 million were gone. We had EUR 33.4 million (sic) [ EUR 34.4 million ] of excessive Telefónica billing. We do expect this to return after closing the roaming agreement in the second quarter off-period in 2021. The coronavirus crisis has hit us with EUR 27.2 million. EUR 13.9 million for the buildup of the G5 (sic) [ 5G ] network. In 2019, this was only EUR 5.7 million. We have EUR 13.7 million from regulation of TAL fees of landlines and regulation of text messaging costs in the EU. And EUR 1.1 million of integration costs, which were at EUR 3.2 million in the year before. If we adjust these figures, we get to a comparable growth of 1.3% in the EBITDA and the EBIT of 2.1%. So what's going to come up? What are we planning for the next year? In 2021, we want to have a growth of EUR 5.5 billion in the revenues. The EBITDA is going to be EUR 1.22 billion. Included in this EBITDA are EUR 25 million effect from the coronavirus pandemic that we are planning this year. So less turnover in the international roaming. And also in these figures, we integrated EUR 30 million start-up costs for the 5G net, more than 2020. A product and sales office (sic) [ offensive ] in IONOS costing EUR 40 million, which we want to spend on the cloud business and further internationalization. Not included in the EBITDA are the EUR 34.4 million that we want to account for as off-period because they are not 2021. They are non-periodic. And so EUR 5.5 million -- EUR 5.5 billion turnover, EUR 1.22 billion EBITDA after the investment. That's the plan that we are having for the new year. Thank you for following me so far. And now I'll hand over to Mr. Mildner, who will drill down in the details.

Well, thank you very much, Mr. Dommermuth, and welcome again. And thank you for participating. I'm on Slide 30 now. And this is the various figures again that Mr. Dommermuth presented already. It's a summary of those. I just wanted to speak about the EBITDA. Mr. Dommermuth said earlier that the minus 15.7% change compared to the previous year was due to special effects. And it's really compared -- it's really plus 2.4% if you adjust for this. I would just like to point out our financial and status report where you can see those adjustments. On the free cash flow side, this is reflected, of course, if you start with the EBITDA 2020 at EUR 1.0489 billion. You can see that EUR 129.9 million from derecognition of VDSL contingents from Telekom have had a positive impact, but has no impact on the free cash flow because this was not cash effective. This derecognition -- and because this was done much earlier and therefore, it was cash neutral. And this is why it increases this cash flow bridge by EUR 130 million. On the tax side, the situation is similar. We have EUR 240 million of taxes and interest, most of which is due to tax payments, but they do not take into consideration this EUR 130 million derecognition. And on the balance sheet, you can see that we expect EUR 80 million tax refunds, but they were paid on the cash flow side, of course, to start with, and then we'll receive it, get back from the tax authorities this year. On the CapEx side, you can see EUR 282 million of investments, which focus on 2 areas, largely: first of all, the Versatel equipment, active and passive equipment, pipes, conduits, et cetera; and then network capacity structures for the business on the one-on-one side. Then you can also see the prolongation payments for the MBA MVNO contracts of EUR 165 million, which we had already done. They are now recognized, of course, as a negative asset. So they are reflected on the cash side, of course, but they are not reflected on the profit and loss statement. Working capital, at minus EUR 7.3 million, is relatively low. So that we go to free cash flow before leasing of EUR 483.8 million. If we also deduct the leasing cost of EUR 107.2 million, we arrive at a free cash flow after leasing of EUR 376.6 million. If you compare that with last year, we had EUR 469 million. And if you -- this includes the special effects, of course. And if we take -- adjust for that, then we have a better situation compared to last year. On Slide 32, you can see our group balance sheet according to IFRS. You know that, normally, there is a distinction between short- and long-term liabilities. And to make it easier to read, we composed -- we compiled short- and long-term liabilities. Let me start with the property, plant and equipment and intangible assets. Here, we have a change to EUR 3.4694 billion compared to EUR 3.328 billion last year. This is largely due to the extension of the MBA MVNO contract recognition of these expenses, at the same time, we have contracting depreciation effects. The goodwill has remained pretty much unchanged. What's interesting are the financial assets. We had 2 important issues to deal with last year, first, that affected financial assets. First of all, our participation in associated companies. We have Tele Columbus that, together with Morgan Stanley, we decided to accompany the takeover bid by Morgan Stanley and to include Tele Columbus into BidCo. So technically, it's removed from financial assets, and it moves down to assets held for sale. At first glance, this is unusual. But it's due to the fact that we first sell the shares to BidCo and then they need to be classified as assets held for sale and therefore be removed from financial assets, and then they're reflected later on as, the second and last position here -- item here, as assets held for sale at EUR 124 million. That corresponds to a share -- price per share of EUR 3.25, which was Morgan Stanley's bid. Then we had a second transaction last year, the sale of the Afilias shares in the U.S. Afilias is a participation in the IONOS group of just under 10%, or it was, which had been reflected in the other financial assets. And now due to the sale at the end of the year, it was derecognized. It's important to understand that as this was a participation of less than 10%, we decided that under IFRS we can only reflect this by our equity. With IFRS, you have to decide whether you want to show it as equity or in your profit and loss statement at the time of the investment. So the proceeds from the sale are not shown in the profits, but not only in our equity. This company was sold for a little less than USD 100 million. We believe that this was an overall value of just under EUR 1 billion, and we profited with EUR 74 million here. But as there were third-party involvement as well with Pincus on the United Internet side, we had a profit of EUR 49.1 million from this sale. And that's only reflected in the equity, as I said. Now let me move to accounts receivable, nearly unchanged as well as the contract assets. For inventories and deferred expenses, the derecognition for unused VDSL contingents from the dissolution of the Telekom contract of EUR 29.9 million has an effect. So that has a direct impact on the inventories and deferred expenses. In terms of income tax lines and other assets, there are 2 items that we need to take into consideration here because at first glance, a reduction from EUR 600.6 million to EUR 444.6 million are surprising. But that is due to 2 components. One being -- sorry, I slipped into the wrong line here. We have an increase of EUR 93.8 million in to EUR 179.7 million due to 2 factors. First of all, the claim for a refund against the tax authorities in the context of the derecognition of the VDSL contingents worth EUR 37 million and a re-recognition of derivatives worth EUR 47 million. Then that takes you to the assets held for sale. That's what I mentioned earlier, the Tele Columbus participation at -- to the tune of EUR 3.25 per share. The cash and cash equivalents, a little bit higher than last year as per the balance sheet date, but that was largely due to the fact that, as for the 31st of December, we got the payment from the Afilias share sale. On the asset side, we have an increase in equity. The equity ratio increased by 2.6 percentage points to 53.2%, which is largely due to the fact that our own shares -- 11 million units were called back. Then our liabilities to banks were significantly decreased to EUR 1.4661 billion compared to EUR 1.7384 billion. Then the reason being that we were able to reduce our net debt by EUR 1.3348 billion, this is due to the balance sheet date 31st of December. The trade accounts payable are nearly unchanged. The same goes for contract liabilities concern -- and the accrued taxes deferred liabilities with the other accrued liabilities and other liabilities. We have a slight increase due new long-term leases, particularly for office buildings. I think that allows me to give the floor back. So much concerning the presentation. Thank you very much. We give the floor back to the operator for instructions on the question-and-answer session.

[Operator Instructions] We have received the first question from Ulrich Rathe.

Well, I have 2 questions. The first one being, I think in February, you indicated that you want to increase the IONOS margin in order to accelerate your growth. Can you give us a target corridor? We have the guidance 2021 now, but what's the target corridor with a midterm perspective for the growth rate at IONOS? Then the second question, Versatel. The market expectations are a bit weak there. My understanding is that you want to reduce your project business a bit in order to have less seasonality. If that is the case, could you explain how many millions by -- how many millions you want to reduce the project business in the third quarter compared to last year? So how big would this effect or the contribution of this part of the reorganization of the Versatel business?

Well, at Versatel, we took a strategic decision to do as few IRUs as possible. IRUs are long-term contracts where you anticipate the revenue, but then further down the line over the next subsequent few years, you don't have any revenue anymore. So we didn't do any IRUs anymore for the second quarter. And that is our strategy for the future. If our contract partners don't insist on it, we don't want to do this. We want to have recurring business that generate revenue on a monthly basis. Well, concerning your first question regarding IONOS. What happens is that we said in our ad hoc statement that we will invest an extra EUR 40 million into future perspectives, innovation, particularly in the cloud business and the internationalization of our business. We also gave you some guidance that we target a turnover of EUR 1 billion at IONOS for the first time. Now why do we do this? The reason is, of course, that compared to our peer groups, we have 2 core KPIs that we keep comparing. First of all, revenue growth. And secondly, it's the question of the EBITDA margin. And if we take a look at both of them, we can see that the revenue growth with the competition is slightly ahead of ours. And that at the same time, our margin is much higher than that of all our competitors. So that we decided in preparation of the IPO, we want to focus a bit more on growth to have comparable growth targets or comparable growth as our competitors, but at the same time, maintain high margins even though they will be a bit depressed, of course, by investing EUR 40 million now. But that is what we got feedback from the market. The market seems to perceive that as perfect strategy, and I think that this is what we're going to do.

May I ask an additional question? How much turnover do you generate with IRUs, just to get an idea of what the effect will be of discontinuing this?

In 2019, EUR 4.5 million.

The next question is from Martin Jungfleisch.

I have 2 questions. One, concerning business asset applications. Should the growth in '21 rather be generated by upselling or by new customers? And about the -- if you could detail on the M&A plans, or is this not going to be bigger since the IPOs? And the second question is concerning Versatel. Could you give us a detail on the project business and the performance there and what the expectation for 2021 is and the CapEx level that you are expecting also with respect to the increasing optical fiber network need by the extension plan there?

Yes. We are just consulting on the answer, not an easy question. Concerning Versatel, we see a growth at the level that we've been seeing in 2021. What we need to take into account is that we are going to reduce the IRUs. But if you've calculate this, you'll see the service turnover with continued growth. The business is going in 2021 as it was going in 2020.

I'll answer the IONOS question. The first, I think, concern, where do we see the growth in upselling or a new customer business? Of course, a new customer business is the focus for us, but upselling is an integral part of the strategy of IONOS to sell products. So I don't want to exclude either one, but of course, we hope that especially by the investing into cloud business is to gain new customers, which is something that we could already see appearing last year. And I think the growth figures in the new customer business were good. With respect to the question of the M&A plans, mergers and acquisitions, I think we could do something there. I don't want to exclude this, but we have done a small transaction with WE24 (sic) [ WE22 ], which we published, which is only going to reflect in the figures this year. But this is additional acquisitions in order to extend the product range and not big acquisitions in the hosting section. For example, here, we are open -- if things appear, we do take a look into them. But the M&A plans for the time being are on the product side in order to position ourselves better there, which was the WE22 question, and how do I get a modular system for creating the website building and how can we integrate this into our portfolio.

Okay. And going back to the CapEx question, perhaps?

Yes, sorry. Well, maybe that was concerning Versatel. Was it?

Yes, yes. The CapEx level 2021 for Versatel with respect to optical fibers, the CapEx of Versatel in '21, will you see at about '20 but without extending -- without the extension for 1&1 Drillisch?

I cannot comment on that figure at the moment. In the third quarter, we want to kick this off. And this is why that's not going to play a major role this year yet.

Before we come to the questions from the English room [Operator Instructions] There are no further questions in the German room. So please give us a second to switch to the the English room. The next question we've received is from James [indiscernible] Research.

I have 2 questions, please. First one was just regarding your wholesale access options on the fixed line side. I mean you've recently signed the new FTTP deal with Deutsche Telekom, but was wondering to what extent you were open to signing contracts with some of the other fiber players in Germany, I think in particular, people like inexio, Deutsche Glasfaser. So any thoughts on that would be helpful. And then secondly, within your cloud business, just generally across the applications business, would love to hear how you think you might be able to benefit from the European recovery fund over the next 2 to 3 years.

We have no plans to participate in the European recovery plan at this stage. And concerning the wholesale options, my understanding of your question was whether we are interested in purchasing FTTH from other carriers. We do that even today with M-net, NetCologne, wilhelm.tel, [ AIRCOM ], [ ENGIE ], et cetera. At Deutsche Glasfaser, we're not doing that yet, but we have cooperation with 1&1 -- between 1&1 Versatel and Deutsche Glasfaser. And I can imagine that in the midterm, 1&1 would also enter into a cooperation with Deutsche Glasfaser.

[Operator Instructions] And we've received another question. It is from Usman Ghazi of Berenberg.

I just got a question on business applications. We saw a good kind of pick-up in the growth in Q4. Apologies if you've addressed this already, but I think I missed it in terms of what do you think has driven the growth ARPU, which I calculated around 7% for the business applications part of the business. And just related to that, I mean, what kind of growth levels do you think are suitable for an IPO of this business? Just trying to understand the investments that you've framed for this year. How should we measure you on whether you have succeeded or you have deployed those funds successfully or not?

Well, this year, we anticipate a foreign exchange adjusted growth of 7%. We'd like to increase that before the IPO.

And could you just give us an indication of what would be kind of an acceptable level of growth for yourselves in order to IPO this business? And how comfortable are you that the money that have been allocated, the branding investments, et cetera, that you've allocated for this year will be enough to get to that kind of growth that you expect?

Yes. Well, I do think that the current growth level is okay. It has been very consistent. It's based on subscriptions-only, our business model is. And I think that a 7% growth is very good because it is sustainable. We are planning to take different initiatives this year. We would like to grow fast in the cloud infrastructure. We are growing fast already, but on a low base. We would like to accelerate that. We would also like to develop new countries in Western Europe, but we're talking of small figures to start with because it's a subscription business, which will grow cumulatively over the years. I can't give you any exact forecast now because we have to analyze how individual steps pan out. Some of them will be successful, which we will reinforce and others will not work, and we'll discontinue those after a certain test phase. So our target is to accelerate the growth and to continue the 7% growth that we have to increase it as well.

Thank you. There are no further questions. I would like to come back to you.

Well, thank you very much for your participation and your questions. If you have any further questions to ask, then please contact Dominic Grossman, my colleague, or myself, and stay healthy. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]