United Internet AG (UTDI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Montabaur. We hope you are all doing well, and we are happy to welcome you to our webcast on the first half of 2021. I am Dominic Grossman from Investor Relations. Today, we are meeting here our Board, Martin Mildner and Ralph Dommermuth; and my colleague, Stephan Gramkow. We are happy to start with the presentation. For this, Mr. Dommermuth will give you the operative development of the first half of the year and present an outlook on the second half of 2021. After that, we will have a detailed view on the financial figures by Mr. Mildner, and after that, you'll have opportunity to ask your question in the context of a Q&A session. So I'd like to hand over to Mr. Dommermuth. Please go ahead.

Welcome, ladies and gentlemen, to our half year conference. I would like to present the corporate development and give you an outlook on 2021. And my colleague, Mr. Mildner, will give you the details on the results. I'd like to start with our business areas. We have the access area and the applications business. And in this, we have a consumer access and the business areas. Our center of our activities are our assets. We have a very good team with about 10,000 employees, 3,200 of them in product management, development and in the data centers. We generate about 5 million contracts per year. Every day, we have about 50,000 registrations for our free services. We operate 66 million accounts in 17 countries, operating 90,000 servers in Europe and the USA. In Germany, we have a powerful fiber optic network, and we have access to up to 30% of the Telefónica mobile network capacities. Our products are offered through a number of brands. We address consumers with the excess products, mainly 1&1 and discount brands from the Drillisch takeover. In the business section, we address our customers with 1&1 Versatel. The application business is consumer-wise driven by GMX and WEB.DE and mail.com. United Internet Media markets our services. In the B2B area, our main brand is IONOS. And besides that, we have smaller brands from takeovers, STRATO in Germany, World4You in Austria, Arsys in Spain, Fasthosts in England or home.pl in Poland or in Germany, united-domains, Sedo, InterNetX and WE22. We have some minority shares in companies we cooperate with. You see that lower section of the graphic Open-Xchange, rankingCoach, Tele Columbus, Uberall and AWIN are the companies here. Let me look at the operative business and start with the consumer access. 1&1 is largest alternative DSL provider with 4.82 million broadband connections. We mainly offer VDSL and fiber-to-the-home complete packages. We have a good network quality. Regularly we win the landline contest. This year, we were in the second place, Telekom took first place this year, but this is quite interchanging usually. In the mobile area, we are the leading MVNO, with 10.83 million mobile contracts. We have a broad market coverage with 1&1 GMX and WEB.DE as cobrands and discount brands from the Drillisch as we have here, yourfone or smartmobile. We have good customer satisfaction. We wish we win the customer satisfaction contracts as this year, not only in the operative business, we build up our own 5G network. I will come to that in detail in a minute. Until now, we have an MBA MVNO contract with Telefónica and with Vodafone. And that means that the Vodafone will provide -- take these services as long as we cannot provide them ourselves. The customer contracts in the consumer access areas have developed well. We could add 280,000 contracts up to 15.11 million, 310,000 of these from mobile Internet. In the broadband connections, we have a little drop of minus 30,000 customers. This is mainly from the first -- second quarter. And the second quarter seems to be stable, and we expect that for the near future. On the turnover side, on the revenue side, we could add EUR 2.6 million (sic) [2.6%] to EUR 1.916 billion, including 3% service turnover, which is a growth figure here. And in the other turnover, we make our money and the other turnover, mainly this is hardware business, for example, smartphones, tablets, [indiscernible] routers that we give to our customers free of charge and revenue through the contract we're giving us low margin. The turnover increased in the section by 1.1% to EUR 374.5 million. Looking at the consumer access. Overall, the EBITDA has increased by 13.6% to EUR 376.4 million, including an off-period effect of EUR 39.4 million from a price adjustment. If that effect has taken off, the operative EBITDA has increased by 1.7% to EUR 337.0 million according to a margin of 17.6%. The Consumer Access segment operates our contracts that we have today provides services from Telefónica, 1&1 Versatel if it is broadband, landline and builds up the 5G network. If we look at this in the drill down, we see that the access EBITDA without the off-period effect in the first half of the year grew by 4.5% to EUR 351.9 million and the EBITDA major margin increased to 18.4% in that. In the 5G segment, we have run up costs, mainly for consulting and lawyers and the build up of our team. These added up to EUR 14.9 million and after EUR 5.6 million in the year before. So we see here that on the operator side, with 4.5% have grown stronger than in the revenue turnover -- turnover revenue. Looking at the business access here, with 1&1 Versatel, we operate the fiber optic network of 51,721 access points in 250 cities, 4 companies and large companies. And besides that, we have handover points through the city networks or regional networks of the Deutsche Telekom. Altogether, there's 20,791 direct sites of companies or transfer points -- handover points. The turnover of 1&1 Versatel has increased by 7% to EUR 258.4 million. The result has increased by 5.6% with the EBITDA of EUR 79.1 million with a one-off payment due to a telecom contract for fiber-to-the-home VDSL services. We buy the regional. We use the regional, rent the regional networks from telecom. If we take that one-off effect of the EBITDA has grown as the turnover has. Okay. I got my Coke down too fast, sorry for that coughing. Looking at the applications business. In the consumer applications, we are developing from retail service to a central management company. Besides the e-mail services, we offer communication organization services, online office services, cloud storage and services by the e-mail. We have a good market situation, especially in Germany, where we cover over 50% of the private e-mail services. We have 34.6 million accounts here. And in the other segments where we are in the e-mail [indiscernible], we are legal mails, cloud storage we're #2. In range -- content range, we are #1. And in identification, we are in place 3. This year, we could take this business to increase the number of accounts by 350,000 to 42.12 million. 39.69 million are free accounts. Advertising, finance and 2.3 million are payment accounts. Good increase is the mobile use by our clients and apps or our web interface by 300,000 to 27 million active users, and the cloud storage has increased by 0.5 million to 21.2 million. This is accompanied by the growth in revenue by 12.1% to EUR 143.2 million (sic) [EUR 134.2 million]. EBITDA has increased even more by 19.4% to EUR 56.1 million, corresponding to an EBITDA margin of 41.8%. Besides the consumer applications, we have the business applications. Here, we are IONOS developing [indiscernible] poster domains and storage for website, too, and e-business solution provider. Here, we see different tools that we offer and our customers -- that make our customers successful in the Internet. We have a good market position. We are a leading supplier in Europe. We are active in 17 countries in Europe, but also in North America. We have a broad range of products. We develop our products ourselves, mainly or in close cooperation with development partners and operate them in our own data centers. The customer contracts in the segment of business application have increased by 180,000 to 8.63 million. That turnover has increased by over 9.1% to EUR 514.4 million. That results from the customer [indiscernible] growth, but also by [ forced ] cross and upselling and from a strong growth in Sedo, which is a domain parking platform. With 9.1%, the EBITDA has dropped by 2.7% to EUR 163 million were due to our sales offensive in the cloud area, internationalization of the IONOS business. At the beginning of the year, we have presented investments of EUR 40 million, now we want to do now EUR 16.4. 40% of that have been spent in the first half of the year. And that, of course, dropped the margin -- the EBITDA margin at 31.7%. And here, you see an overview of our major KPIs. We could win 520,000 contracts with 26.7 million contracts. Has increased by 4.4%. EBITDA by 8.5%, without -- the EBIT has grown by 14.7% without the off-period effect by 4.4%. It's important to note that these KPIs also have the initial cost for the bill of the 5G network, which was EUR 14.9 million, which is EUR 10 million more than in the year before with EUR 5.6 million and the EUR 16.4 million for the IONOS products, sales offensive were also included in these figures. We are doing well. We had a good first half of the year, and we want to carry on with that. In the second half, we expect that in the second half, we will do better than planned before, and we want to increase our forecast for that. We see that to -- at EUR 5.6 billion from EUR 5.5 billion now -- billion, sorry. The EBITDA is going to end up at EUR 1.25 billion, EUR 30 million above our existing processes. Included in this are the EUR 30 million start-up costs of the 5G mobile net and EUR 40 million for the IONOS product sales offensive. Not included is the positive EBITDA effect from the off-period price adjustment in the MBA MVNO contract, that will be on top, but that has nothing to do with our operative business. All right. Thank you and hand over to Mr. Mildner.

Well, thank you very much. Ladies and gentlemen, my name is Martin Mildner, and I'm the CFO. And I'll give you an overview of the key figures as per the 30th of July of 2021 of the United Internet Group. Mr. Dommermuth has given you some figures already. So I will go over it. We could increase the customer contracts to by 970,000 to 17 million. We have increased our free accounts to EUR 39 million by EUR 1.18 million. We heard the figures about the EUR 39.4 million extraordinary results, which really comes from 2020. Then our EPS has increased to EUR 1.26. And if you deduct the EUR 39.4 million, then the operative EPS, earnings per share, is EUR 1.15. If you take the operating EPS, as we normally calculate it, before fixed assets, we have an EPS of EUR 1.35, which is an increase of nearly 10% over last year. If we look at the EBITDA, the cash bridge as per 30th of June, we have an operative EBITDA of EUR 633.8 million, excluding the EUR 39.4 million. Our CapEx, which refers to Versatel and IONOS investments of EUR 126 million. And then in Q2, a contingent payment to Deutsche Telekom of EUR 216 million. The working capital has increased by EUR 60 million roundabout, so that our free cash flow according to IFRS 16 is at EUR 2.5 million. And if you deduct the liabilities of EUR 57 million, we have a free cash of EUR 157.5 million. Last year, we're at EUR 211 million. We have to take into consideration that this EUR 215 million can generate contingent payment spread over several years. So they are slightly modified here. If we take a look at the balance sheet. On the asset side, we have an overview. We can see the short-term and long-term figures. So for the half -- first half of the year, it looks a bit different, but we've consolidated it here. For the long-term assets and fixed assets, I would say, [ EUR 3.4 million ] to EUR 1 billion. For the goodwill -- for the equity, we've seen an increase of EUR 30 million. The biggest change on the asset side is certainly the financial assets where we have -- if you cast your minds back as per 21st of December, we had Tele Columbus as an asset held for sale in our balance sheet and by the takeover by Morgan Stanley Infrastructure Partners. Now that the takeover has been finalized, this moved to financial assets at EUR 345.9 million, increasing this value to EUR 444.5 million, particularly by the financial assets from Columbus. So we held 29.9%, and we add this to our financial assets. That's EUR 123 million, then that 29.9%, that's an increase of 40%, which is round about EUR 30 million. And then we have a 49% in the capital increase of EUR 475 million. This means that our financial value of Columbus of EUR 340 million, roundabout. Also, there's small 2 minority participations with rankingCoach has been increased. And maybe you've read with Bregal, we have an additional investor. We participated in this investment round, and it was used for an acquisition in the U.S. so that the overall participations have changed again. Most positions -- most other positions are largely unchanged. Liabilities, deliveries and services were at EUR 39.8 million. Contract assets have increased our assets to EUR 8.11 million (sic) [EUR 811 million]with the deferred expenses, we see an increase by -- to EUR 645 million, which is largely due to the contingent payments to Deutsche Telekom AG mentioned earlier, then the other financials, the other positions of the asset side are largely unchanged as I said earlier. By the end of the year, we held a Tele Columbus share in our assets for held for sale, and that went to 0 because this has been shifted to financial assets now after the successful merger, the overall balance sheet sum has increased by EUR 4 million. Let's talk about the liabilities side of the balance sheet. The largest share -- changes in equity and our liabilities vis-a-vis financial institutions, that's due to 3 different topics. First of all, the equity ratio has decreased by EUR 3.8% to 49.4%. It has reduced to [ EUR 4.54 billion ]. As in 2019, we purchased some shares of [indiscernible] AG via the stock exchange for EUR 81 million. We also, in preparing the IPO for IONOS, we repurchased 8.43% of IONOS. So we now have our share of 66.67%, increasing it with the purchase price of EUR 310 million, we also had to pay out the dividend after the General Annual Meeting. All of these expenditures meant that the equity has been reduced. At the same time, for IONOS and [indiscernible] you have to see that both companies are fully consolidated so that the increase of the share in both companies is not reflected in the equity because the full consolidation had already been achieved. And therefore, the increase in the shares is only reflected in the equity because the capital reserves have been reduced. But on the bottom line of the balance sheet, the minority shareholdings have also been reduced and more of the group results are held by the shareholders. Also in terms of liabilities vis-a-vis banks, you can see that they have increased from EUR 1.466 billion to EUR 1.74 million. And this is also due to the transactions I just mentioned that we purchased shares in IONOS and [indiscernible]this led to credit liabilities. What isn't shown in liabilities vis-a-vis banks, but you will see it in our semi-annual report under changes after the balance sheet day, we issued a bond of EUR 750 million, which has several time periods with a fixed rate interest of 0.79%. I think that's been a very successful bond. If you look at the liabilities on the side, they are largely unchanged. So I'm done with my report, and we can proceed to the questions and answers. Well, thank you very much so much on our presentation. We can then start with the question-and-answer round.

[Operator Instructions] The first question comes from Jim Ratzer from.

I have a question on the business applications and then one on Versatel. Now business applications, the revenue growth has accelerated. That was your objective. Can you tell us how much of it is nonorganic? I think there were a total of 22 acquisitions, and I don't know what their contribution was. And then were the sales growth has accelerated, at the same time, you had less customer growth, growth of customer acquisition than in previous quarters. I think you'd anticipated an increase of the speed here for this year. So how come it slowed down a bit? Is that due to the quarter of phasing? Or what's the reason here? And then for Versatel, I would like to ask telecom is talking about lower revenues after these contingent agreements. How is that reflected in your books? Do you see that additional direct costs? Or will this be distributed? I'm not quite sure how you reflect this in accounting terms, whether this is reflected in -- whether these telecom effects are shown?

Can you please repeat your second question concerning business applications?

Sorry. It's about the customers. The increase of number of customers, I think it was only 7,000. That is lower than the last few quarters on average. And here, again, you were anticipating a speed up and acceleration of the speed. And what's the reason for this is do you have a different mix? Is it due to the quarter. What's the reason for it?

Well, Mr. Ratzer, let me start with 1&1 Versatel. Well, I don't know what telecom says on its revenue news and how they calculate that. But our purchase volume with telecom is not decreasing and the prices have not been improved either. So I can't say that we have any benefits here.

Well, Mr. Ratzer, let me try to answer the first 2 questions concerning IONOS. The first question was whether the revenue increase is partially due to inorganic growth. We only purchased V2, which has a very limited revenue because it's active in development. It's more an add-on. So the question needs to be answered that it's more than 99% organic growth. The other question concerning low increase of number of comers, 7,000 as opposed to 10,000, I think. And you have to see that the first quarter, and you can see that over the years, is always the strongest quarter for customer growth, and that is something we had anticipated.

The next question comes from Martin Jungfleisch.

Yes, I have 2 questions. First, a question on guidance. The new guidance, If you take the EUR 20 million from Drillisch out, you have, of course, a lower revenue from the other businesses, that has a very low margin at the end of the day. So the question is, what does this disproportionately low EBITDA, what effect does it have? Are you conservative on this side? And the second question is concerning IONOS or business applications. Can you tell us something about the churn levels of the customers? Whether the customers that you've won in quarter 1 and 2 of last year, whether they're sticky, whether it's still with you? That's the second question.

Right. Now concerning the churn, we have an unchanged situation with IONOS. The customers that we win mostly stay with us, and we have no extraordinary cancellations concerning guidance. You have to see that we always put approximately in front of it a circa, in front of the figures, and we don't calculate it to the third digit to the right of the decimal point. So the EBITDA and the businesses beyond [indiscernible] are not developing worse than usually. It's due to rounding effects and the business otherwise has the same quality as you know it from the past.

The next question is Jonas Blum, Warburg Research.

I have 2 questions on 1&1 Versatel. Maybe you could give us a bit of an outlook on the growth perspective, 1&1 [ relation ], mobile sites, organic growth, what you see the profile there? And what is the backhaul, what's the additional potential? And the second question, maybe -- do you think about generating additional [ infra ] stores from July 1?

Well, we see an organic growth of about 10% at the moment. I think, that is what we see in our current performance capacity. And if you ask me what the next year is going to be like with the concrete business plan here, I would say it is going to be similar. It's important here to see that step-by-step the 5G back roll business is going to come in. But I can't tell you now what that is going to make up because we are negotiating the intercompany deal between and 1&1 Versatel and [indiscernible]. And there, the conditions are still under negotiation because Versatel has to make their margin and [indiscernible] as a wholesale customer. So you can have my whole 5G traffic, and they want to have good terms. So the discussions are still ongoing, and I can't tell you what the effect of that is going to be. But when it's done, it's going to be a step-by-step growing some because the Versatel is going to be rewarded for each fiber optic line that they provide. It's going to be on first and we've got the 50% of the households over 12,000 antenna connections, and they provide the decentralized data centers and the core data centers. And in the beginning, it's going to be 1 or 2 and then it's going to be 150, so that's going to be growing step by step. But it's important to note that Versatel generates a substantial turnover by that and a substantial profit because Versatel has additional work from this and has additional CapEx from this and that has to be compensated. And you asked an interesting question with the momentum and infrastructure of the investors, we do note infrastructures, investors wanting to talk to us saying, should we talk about Versatel? Do you want to sell a share of that, we would like to pay it well, we see an advantage here to grow faster by additional invest, and we would like to support you in that. And we -- I think we all know that infrastructure is very highly evaluated at the moment. And Versatel is an interesting asset as it is a federal transport network that we are ready, exist in many cities, different network tightnesses. But that we are, in all cases, quite in a good position to draw that net even tighter and connect more homes to that. And here, we are focusing on business applications, while we do not directly connect private customers to the fiber optic, but use telecom last mile for that with the regional network to provide VDSL or FTTH. But we see scenarios where we could say, okay, let's enforce it and take the -- not only connect business customers but also private customers along the lines that we are building. That, of course, gives us a good opportunity, but we have to invest CapEx, wait a few years for the return because in the private customer is not going to be as fast as with the -- with the business customer. But there are all cases for all of that. And I don't want to say that -- [indiscernible] that we exclude this, and I don't want to say it's the top of the list either, but we have heard about it. We thought about it and we're going to think about it strategically in the next months, whether that will be an additional value and how that could be done.

And maybe I could add another question with respect to Versatel. Does it play a role, the tower company that you're using for Versatel wholesale or fiberization that could be done for other MNOs? Or is that not part of the agenda?

That is not part of the agenda. We are working for other MNOs in 1&1 Versatel because we have antennas as well with the traffic through our network. But in the selection of the tower company, that does not play a role because that's done by 1&1 and that is self-optimized by 1&1. And I think it will be additional complexity, if we say we'll look for a tower company that also serves others and the other company has not enough fiber optics yet, and we could then rather monitorize it better. If we do it ourselves, that would make sense, but it would increased complexity in the negotiations. Additionally, this negotiation is held by 1&1. And 1&1 looks at its own business here. And this is why we'll be going too far saying that we look at the side effects that one could take up on here. So that is not the case at the moment.

There are no further questions in the German room. So we'll start with the English questions now, give us a moment for the first question, please. [Operator Instructions] And our first question comes from Nizia Naizer, Deutsche Bank.

Great. I have 3 questions, if I may, and they're all related to business applications. The first one is on the increasing share you've taken in iron ore, you based it to 75%. Could you just give us a bit more color there. With payment to Warburg Pincus, is it fair to assume that the valuation at which the shares were acquired was around EUR 3.7 billion. This is me calculating EUR 310 million and you bought 8.5% or so. Just some color as to why and if my calculations are right, would be great? My second question on business applications, growth has accelerated. Are there certain products that your customers are particularly liking that helped that growth? Could this accelerate even further in the second half? Some color there would be great. And the third is, could you kind of remind us what you are investing in when it comes to business applications? And if it is on new products, for example, how has the response been by your customers? Some color there would be great.

I'll do it in German. So concerning the first question, a little bit more background on the repurchase or the purchase of the 8.44%, it's true. I had said that we spent EUR 310 million on that, and it's easy to calculate what that means in terms of overall value, then 8.44% to 100% value. That means EUR 3.46 billion. And if you add the debt of EUR 1.3 billion, you have around about a company goodwill of EUR 5 billion. That was the first question. The second question was the growth in the second half of the year of IONOS. We expect the growth in the second half to remain stable to be the same as in the first half of the year. And if I understood the third question correctly, please correct me if I misunderstood, which products will we invest into? In March of this year, we had announced an additional EUR 40 million of investments in 2 areas. First of all, in the field of cloud business, which is growing nicely, much stronger also because it is smaller than the core business. And the second area for investment is the internationalization. So different markets in their development. So that was, I think, the answer to your questions.

Great. And just on the first question, if you could give us more color as to why you did decide to take a higher stake now, was there any rationale there? Some color would be great.

Yes. Yes, of course, I can. We had said in several road shows and analyst conferences and in our announcements that we are planning an IPO for IONOS over the next couple of years. I think it's important to underscore that we, as United Internet, strongly believe in IONOS and that we said several times that we would like to keep a stake in IONOS. And if you take a look at the IPO, we believe that a pre-float of about 25%, round about, is the right amount. And in order to reserve all options for an IPO with this long-term investment, it was just consistent for us to say, okay, we would like to increase our share to 75.1% so that we can then ensure how the IPO will transpire.