United Internet AG (UTDI) Earnings Call Transcript & Summary

Ladies and gentlemen, dear guests. Welcome to the Analyst and Investor Conference of United Internet. It's my pleasure to welcome you here on site at the Sofitel in Frankfurt. And of course, I'd also like to extend a warm welcome to our guests on the webcast. I'd like to present today's agenda to you. First of all, Ralph Dommermuth will present the company development of the first half year to you and give you an outlook on the second half of the year. Afterwards, Ralf Hartings will present the financial figures to you in detail. After our presentation, you will as always have the opportunity to raise questions during a Q&A session. That would be it for me. And now I'd like to hand over to Mr. Dommermuth, the floor is yours.

Thank you, Mr. Grossman. Welcome, ladies and gentlemen. Hello. Welcome to our United Internet Analyst Conference in the first half of the year. I will present the company development to you and give you an outlook on the rest of the year. Afterwards, my colleague, Mr. Hartings, will present the financial results of the first half year to you. All right. Many of you know our company. We differentiate between internet access and applications. And we divide both into customer or consumer access and applications and business access and applications. Our assets are 11,000 employees, a network in Germany with a length of 64,500 kilometers of fiber network, a mobile network and more than 100,000 servers in Europe and the U.S. We sell our products through a variety of different brands. Our main brand, our primary brand is 1&1. We also have many discount brands coming from Drillisch in Business Access. So our B2B business, we have 1&1 Versatel. Applications, we sell them through GMX, WEB.DE, mail.com. And in business, we have IONOS. our primary brand and a couple of sub-brands that we gained through purchases throughout years. We are also partnering and have some minority shareholdings. Let's start with our Consumer and Business Access in the first half of the year. We have 3.99 million broadband customers, mainly VDSL and fiber glass. Complete packages, including voice and TV. They are sold or produced by 1&1 Versatel using the transport network. The last mile usually comes through Deutsche Telekom or City Carriers. In mobile networks, we have 12.36 million mobile customers. We have the first Open RAN in Europe, and we're currently in the process of migrating existing customers that used to be in wholesale contracts. Overall, in the first half of the year, we were able to gain 90,000 new customers, 110,000 new mobile internet contracts, and we had a small decline of 20,000 customers in our broadband lines in the first half of the year. Revenue increased by 1.1%. What's specifically important is our service revenue growth of 3.8%. That's where we make our money because it's a strong margin. Other revenues are declining. Those are revenues that we do, especially through smartphones that we give out to our customers often for EUR 0 and that are then being repaid through usage of our contracts. So it was a regulatory effect through our mobile termination fees that reduce our revenue if we deducted this, our revenue -- service revenue would be at 4.4% growth. EBITDA in Consumer Access declined by 7.2% to EUR 326.6 million. This includes the expenses for the expansion of the mobile network, which amounted to EUR 111 million, and the margin is at 16.2%. Consumer network is in 1&1 is an AG solicit company that is divided into two subsegments, operating business. So the Internet access. Here, we had an increase of 11.4% EBITDA to EUR 437.6 million, and we were able to increase our EBITDA margin to 21.7%. I think this is a strong figure that is way above the usual figures in the German telecommunications market. The second segment in 1&1 is the 1&1 mobile network, which is currently being constructed and expanded. Here, we invested a lot. We have a large team. But of course, in the beginning, we don't have a lot of usage. Therefore, we have a loss of EUR 111 million start-up cost. There are $14.3 million out-of-period expenses that have reached us from previous years. Business Access, those are addressed by 1&1 versatile, also German authorities. Versatel operates a large fiber uptake networks that reaches 350 German cities, including the 25 largest cities. We currently have 26,781 sites that are directly connected to this network. Revenue for Business Access has been increasing by 4.6% to EUR 283.2 million. That's a nice growth. The EBITDA has increased by 1.9% to EUR 78.7 million. This result includes start-up costs for two new business areas at 1&1 Versatel. One is the expansion of 5G, the connection of the antennas for 1&1 where we connect via glass fiber, and this is repaid through 1&1 leases. And secondly, the expansion of commercial areas. We're bringing glass fiber into commercial areas and then gain new customers in these commercial areas to amortize this expense. If we leave these two new business areas out of it, the growth would have been 6.9% EBITDA growth. I think that's a nice number in this business area. Let's continue with applications. Consumer applications, we have GMX, WEB.DE and mail.com. We're developing from an e-mail provider to a complete provider for personal communication. In our first half of the year or in the first half of the year, we had 41.66 million consumers. That's 1.07 million less than in the previous year. Here, you can see a comparison not with the first half of the year, but at the end of 2023, 31st of December, we have seasonal fluctuations in our customer numbers. We always see them, but we also have higher security requirements, and therefore, some accounts have been excluded that were used for SPAM, for example, that we didn't want to service. 38.75 million free accounts that we're servicing through advertisement. We also have 2.91 million pay accounts that pay for our services. That's 110,000 more than by the end of last year. In this segment, we were able to increase revenue by 13.6% to EUR 144.4 million. EBITDA increased even further by 16.4% to EUR 53.9 million. Those are numbers that we're very happy with. EBITDA margin is now at 37.3% and we'll not be able to increase this significantly. We said it at the beginning of the year and also within the scope of our last conference, we are seeing good growth this year, but we want to use this for staff ramp-up and for new applications. This is due to happen in the second half of the year. So you will see revenue growth in the second half of the year, but we will practically have no EBITDA growth, depending on the costs because we will invest this profitability into further growth. Finally, business applications. IONOS is also a listed company. It is a digitalization partner for freelancers and small and medium-sized enterprises and cloud enabler. It operates in 15 European countries as well as in the U.S., Canada and Mexico, so North America. We have a broad product portfolio and we're servicing 9.52 million customer contracts, 4.91 million abroad and 4.61 million in Germany. So we had a growth overall of 130,000 contracts. Revenue has increased by 6.1% due to customer growth, due to better up-end cross-selling, but we also have a counter effect. Our aftermarket revenues have not increased in the first half of the year. They have decreased by EUR 18.8 million. That's due to phasing effects connected to a new product launch. Aftermarket is not our core business. We're also doing it on the side because it's simply a result of having a lot of connections to the main owners, but it's a low-margin business. If we deduct it and if we only focus on our core business, so on our applications, we would have had a growth -- a revenue growth of 11.2%. EBITDA increased by 7.9%, could have been more, but we had some marketing expenses, EUR 8.9 million more in the first half of the year than in the first half of the previous year. We have a lower EBITDA in our aftermarket business. Like I said, we have a decrease in revenue. If we deducted this, we would have had in our core business. So without our aftermarket business, we would have had an EBITDA growth of 12.1%. Maybe just one more thing on the aftermarket business. Management expects that in the second half of the year, we'll see growth in our aftermarket business. And we see already in July that this is starting. We surpassed the previous year. So I think this phasing is now taking effect. The new product is taking effect. So I think we will see a nice development in the second half of the year. See an overview here on the overall company, 330,000 new customer contracts amounting to 28.78 million contracts, EBITDA, 1% less. EBIT due to the depreciations and investments decreased by 14.7% amounting to EUR 347.4 million. EBITDA includes a start-up cost for the mobile network that I mentioned earlier. They're EUR 70 million higher than in the previous year. If you deducted this, you'd see that the EBITDA increased by 9%. So if you take this investment out of it, the EBITDA grew by 9% in the overall group. On top of that, included in the EBIT, depreciation on investments. They increased due to the ramp-up of mobile services in our mobile network, because we're making more investments into our mobile network. And then in our EPS, we have a lower equity result due to Tele Columbus. And we have higher interest rates, and these higher interest rates have an impact on our financial results. What's next this year... Last week, we adjusted our forecast revenues no longer at EUR 6.5 billion, but EUR 6.4 billion because in Consumer Access, we have lower revenues, and that is due to hardware. So it is a low-margin business, but revenues, nevertheless, and also lower aftermarket revenues for business applications, again, low-margin business, but revenues nevertheless. And that leads to slightly lower EBITDA, EUR 1.38 billion or excluding the out-of-period expenses, it would be at EUR 1.39 billion. We used to expect EUR 1.42 billion, which is still significantly above the previous year where the figure was at EUR 1.3 billion. EBITDA, slightly lower margin because of consumer access, hardware and business applications with the aftermarket business, but also slightly lower EBITDA because of lower service revenues with 1&1, which is the consequence of the mobile network failure and also the out-of-period expenses. Cash CapEx, 15% to 25% above the previous year's figure we used to assume 10% to 20%, and that is due to the higher inventory of network components that were previously stocked by expansion partners. So that's a phasing effect. We do need these components this year and next year, but we are taking them into our inventories this year. Okay. That's it from my side, on the business development and the forecast. And with that, I would handover to Mr. Hartings, who would give you the details on the first half of the year.

Yes. Thank you, Mr. Dommermuth. And a warm welcome also from me to the presentation of our figures for the first half of the year 2024. I'm going to present the most important KPIs on a group level. So the contract figures and the P&L figures, we can skip them. We have only listed them for you in order to be complete, but Mr. Dommermuth has already given you a very comprehensive overview. So let's move on to the cash flow. Despite the lower group EBITDA, cash flow from operating activities rose from EUR 512.6 million in the previous year to EUR 557.9 million in the first half of the year 2024. Net cash provided by operating activities was reduced from EUR 237.2 million to EUR 175.1 million. This was due to the reduction of trade liabilities. That's a phasing effect from the fourth quarter of 2023 amounting to EUR 104.3 million. Cash flow from investing activities improved from EUR 300.5 million to EUR 280.9 million. And that is based on lower CapEx of EUR 284.3 million in the previous year. It was EUR 301.3 million. Cash flow from financing activities increased depending on higher borrowing from EUR 74.8 million in 2023 to EUR 115.4 million. Let's have a look at the next slide in order to dive into the cash flow in detail. So the free cash flow bridge, the basis for it is the EBITDA, EUR 661.6 million. And then you can see the highest items when coming to the free cash flow. So first of all, CapEx, EUR 281 million that is due to the investments in the expansion of the mobile and optic fiber networks. Contingent payment to Deutsche Telekom EUR 263 million and taxes EUR 156 million. Phasing effects amounted to EUR 104.3 million from the fourth quarter of 2023 and working capital of EUR 36.6 million. So overall, we arrived at a free cash flow of EUR 105.8 million or rather minus EUR 185.8 million after EUR 80 million in leasing. Now let's look at the balance sheet. The balance sheet total increased from EUR 11.246 million by EUR 280 million to EUR 11.527 billion. Main drivers on the asset side were the increase in property, plant and equipment and intangible assets, EUR 250 million roughly. And that's a consequence of investments and also the increase in inventories and deferred expenses, as a consequence of increased leasings and also the services by other providers, telecom contingency contracts. We had lower financial investments and also the impairment of EUR 170.5 million in this context and also the worst proportionate result of Tele Columbus. On the liability side, equity decreased by EUR 102 million roughly. And we can see that from the group income of the first half year and dividend payments and liabilities towards credit institutions increased by EUR 370 million. Equity ratio, 2.3 percentage points lower to 47.3%. Net liabilities amounted to EUR 2.794 billion. Okay. And that brings me to the end of my part, and we're happy to receive your questions.

Yes. Okay. Let's come back to the presentation. We will start with the Q&A. And please wait for the microphone if you want to ask a question. Tell us your name and your company and then ask away. So feel free to go. Karsten Oblinger in the first row here.

Yes, Karsten Oblinger of DZ Bank. So one question on the topic that keeps popping up the group structure going forward. Last year, there were some speculations about -- well, distributing the shares in IONOS or selling the consumer applications? Are there any new ideas, new conclusions on this? That's my first question. And second one, looking at the share price. And looking at value creation for shareholders. Well, I think a share buyback program might be a good idea. What's your take on that?

Okay. So you have mentioned there were rumors, some discussions with regards to the shares on IONOS. Well, it was discussed here in the room, right? Well, there was a question on it. And we clearly stated that we don't have any plans for this, and it hasn't changed. Share buyback, Yes, I agree. So that's, of course, something that immediately comes to your mind when looking at the situation. But we have to be mindful. We have to keep the headroom in our credit lines in mind. And I think the headroom amounts to around EUR 500 million, which we are keeping. So that's more than we need, but we do want to keep this headroom really. So I'm not going to say we're never going to do it. It's always a question of weighing pros and cons. And also, overall -- the overall debt ratio plays a role. Today, we're in a situation where we believe that next year, we will not have to purchase frequencies. So there won't be any auction next year. But you can only be 100% certain once the federal network agency has published their conditions. So if we increased our debt ratio and then we would be informed about an auction, we would no longer have any firepower. So that is something we are trying to weigh against each other, maintaining headroom and maintaining debt low. So it's usually 2.5 points EBITDA. But once we realize that we do need funds for an auction, then actually, it would be blocking us. But yes, you're, of course, right stating that at this price, you would actually need to think about the share buyback. So once we know that there won't be an auction, then we will think about that. Thank you.

Paul [indiscernible] of MPBM. A follow-up question on the share buyback. You have around 10% of your own shares. So before you think about the share buyback program, what will happen to those shares actually.

Nothing will happen. So our company has already bought back a lot of shares. 252 million shares is what we have circulating in the top situation. And now we are standing at 172.8 once we deduct our own share. So 80 million have been bought back already. And we also keep a part of the shares we buy back as treasury shares. They are not entitled to dividends and don't come with votes. So it's as if they didn't exist really. But they allow us to have programs for employees. We can pay them in cash or in shares, and we could implement a capital increase. Tomorrow, if -- without having new shares admitted, if the situation demands for it. So it's not very likely for it to happen. But as it doesn't cost us any money to keep these shares and it doesn't cause shareholders any money, we keep those shares as treasury shares. I mean, we can, of course, remove them via a simple Board decision. But if tomorrow, we're in a situation where we need these shares, we would have to create them. So that's why we stick to them. They don't have any impact on the dividend, on voting rights, et cetera. So it doesn't at have any impact on shareholders.

Of course, all of that is true. But maybe that's also the reason why you don't set up a new share buyback program.

Well, last year, we had a share buyback program, and we signed a paper in the Board to purchase those shares and then the notification was sent to the market. So there's nothing keeping us from it.

Okay. Next topic would be consumer applications. You mentioned that the overall expectation is more than EUR 100 million EBITDA. I think that's unchanged. But you also made some remarks on it on investments to be made. And I would be interested in the medium-term outlook. So where do you see potential here?

Well, I can't present you with a medium-term planning for the Consumer Applications business. But I can tell you that it's going really well. You can see that looking at the revenue figures. We still have a couple of ideas in order to make the product better and more modern. But first of all, we need a couple of millions for new employees, which we are spending now. And yes, EBITDA, I think it will be beyond EUR 100 million this year and something else that might be interesting is that in consumer applications, it's not only EBITDA but also EBIT and EBT, which is more or less the same. So as we are leasing our service, we are not capital bound. So the service can be seen in the P&L. We are also renting the offices, the office space, and that's why it's really capital light. So EUR 100 million, that's the profit for this year. And hopefully, it will be more going forward. But I can't really tell you what the plans are. Because, of course, if we don't manage to deliver on it, then it would really limit us. But there is potential.

Okay. What about the eSIM usage? Any update on this?

We want to introduce it in the fourth quarter. The portals for eSIMs are distribution channels. We do recognize that. And many customers use applications on the mobile phone. I think it's beyond 20 million, right, 25 million. You have 24 million, 25 million customers use the app, and we want to integrate an eSIM function in the app and you will be able to activate the ESM in the app by pushing a button. We do think there are business opportunities here. Because the app is already in place, so you don't have to download it from the App Store. You will be able to do it just by pushing a button. Select a fee, and then you will be able to activate it immediately. Now on the technical aspects, of course, there are still some discussions to be had. But I think in the fourth quarter, we will have a well-working solution.

Okay. Next question, artificial intelligence based on your portfolio. Where do you think there are opportunities that might have a financial impact? Or where do you see risks with regard to individual business areas?

Well, as of today, we mainly see opportunities, and that really applies to all of our business. Let me try to give you some examples. On the one hand, saving costs or increasing productivity. If someone works as an editor in our online department, they can do 5 as many articles as they used to write in the past. So productivity increases enormously. We looking at chatbots. We do have chatbots, which use artificial intelligence. At some point, they hand on the request to an agent. But first of all, customers talk to a chatbot, not to the agent, and that saves costs. And I think it's not a secret. We have thousands of call centers, external ones, internal ones depending on the level of support. And first of all, AI will be able to answer e-mails fully. Nowadays, they're doing it partially. And at some point, they will be able to generate language as well, and that will reduce costs. So there are different areas where AI will really allow us to save money. These were only a couple of examples. And there are areas where we can increase our business using AI. IONOS, for example, if you want to build a website. The website builder is already AI enabled. You can just enter a couple of key words, and it will create your website, which is very comfortable for customers. Of course, they can then adjust the website, but they have something to start with, and that will be improved more and more over the next couple of years. Well, again, IONOS. They have an AI model hub. Here, you can book AI solutions in the cloud. And that is one of the main focus points we have in our cloud strategy. So AI solutions, which are usually open source solutions with a guaranteed quality and with updates will be made available as cloud applications. And this is additional potential for revenue really. So on the one hand, we will become more efficient just as other companies. And on the other hand, we also see additional business. So I don't really see a downside for us. Maybe I'm overseeing something, but I didn't see it.

You will probably have made the calculations already in savings you can make. Do you want to share it with us.

No, I haven't made the calculations really. I haven't done that. that, of course, it's clear it will be in the 3-digit millions, I believe, if you think it all through. So it will be a considerable amount.

And last question from my side. Cash flow, CapEx on United Internet Group level, we already received the information on 1&1 level. So what's the update on Versatel because I think that would be worth mentioning. And free cash flow development, maybe Mr. Hartings, you can say something about the full year expectations and CapEx, free cash flow over the next 2 years. Thank you.

So CapEx guidance for the group. We had mentioned that 15% to 25% more. So that's what we're calculating with. Free cash, yes. So the ballpark will be just as we did it this first half of the year. And for the next year, the CapEx profile based on 1&1 should go slightly down. That's our current expectation by what amount? Well, we haven't published that yet. But we will definitely look at it. So 1&1 total EUR 600, [indiscernible], EUR 360 million without passive infrastructure. So maybe I can -- yes, I think I already mentioned that and Versatel also on a similar level as this year. So yes, those are the plans for it.

Okay. So free cash flow next year will be positive then? Or will it again be a year of transition?

Yes, it is still a transition year because we need investments.

Thank you. Camilio Azzouz on the phone from Amber Capital. My first question is for Mr. Dommermuth. So you acquired a lot of shares in 2021 at EUR 35 per share. The current level is obviously very attractive versus these previous purchases. So on a personal capacities there, anything that's preventing you from adding to your position? That's my first question. My second question is, obviously, you have a looming negotiation on the leasing for the low-band spectrum, which could allow you to save a number around EUR 1 billion. Should you achieve to save such a number? What would be the use of proceeds you would think of at the level of United Internet and in terms of capital allocation? And then my last point, apologies it might be the translation, but it would be very helpful if Mr. Hartings can clarify exactly the 1&1 CapEx for next year. I'm not sure I got the exact number. Thank you.

If I understood you correctly. You said that for the low-band spectrum, if we don't buy it, we have a CapEx saving. Is that -- did I understand that correctly?

I believe the saving would be quite sizable on your budget if you don't have to go through auction.

Yes.

And so what would be the use of proceeds if you get that massive balance sheet flexibility?

I can't tell you that today. As I said, with a leverage of Factor II, we feel quite comfortable. If we don't have any auction and there any special opportunities, then it might make sense to increase our leverage. But if there are no special opportunities, I would start to deleverage. But we don't have any specific plan to say even if we don't have an auction next year, then we already know where we'll allocate the nonexisting money, so to say. Where will allocate this additional money. There is no plan for that. And then you said that as well, '21, 2022, you bought stocks at EUR 35. That's right. That was quite a good deal considering today. But you asked me if we would add further stocks to that, I would like to leave this unanswered. Because this is a private question that has nothing to do with United Internet. I don't want to limit myself. And on the other hand, I don't want to give way to raise any rumors for things that I'm not going to do anyway. So that's why I'd like to leave it unanswered. Then the question for CapEx at 1&1 because there maybe were some issues with the translation. I'll say it again. In 2024, CapEx guidance of 1&1 is EUR 460 million. In 2025, CapEx will be EUR 360 million without passive infrastructure. And if we weren't able to find a partner, the range is EUR 100 million to EUR 150 million for potential passive infrastructure. On top. Are there any further questions?

I do have another question. So the economy is quite challenging at the moment. Also, if you follow the daily news, what's your current perspective? Also looking at your business, will you remain resilient? Or do you see any implications looming?

You're right. It's not looking very well. Our main market is Germany. With IONOS, we have a lot of business abroad, but still the core of the business is in Germany. What's negative about our business with our subscription model is that we cannot double it quickly. But it still remains stable because even if there is no economic growth, our customers will still need a smartphone, will still need an Internet connection and will also need to communicate via e-mail. That's why we're optimistic that we won't be affected. If we look back, we've never struggled even in years that were economically challenging. Yes, of course, we've had some issues in marketing our portals and platforms, but generally speaking, we may be talking about EUR 5 million less, but I don't want to use that as an excuse if our business struggled. I'm not going to tell you. It was because of the general economic situation if our business segment is struggling. That's why we're quite optimistic. Are there any further questions?

Mr. Karsten Oblinger again. I have a follow-up question in regard to 1&1 mainly. You're a pioneer with the network expansion, some things didn't go according to plan, well, okay, that's not up to you, but I'd like to look at the other changes in the mobile network segment, what was most surprising to you?

I don't really remember what surprised me 3 years ago, but I can tell you what surprises me now. That's the aggression in pricing that we've been seeing since last year, November, December, specifically in the discount segment. Maybe you saw the Telefonica numbers. You see that they have a nice contract growth, but if you look at their service revenue, there hasn't been any major changes. And that means that the quality of customers and the mix have -- the quality of the customers has decreased. So I have new customers, new contracts with a lower margin. I think there's a similar development at Vodafone. There has been a decline of customer contracts and the decline of service revenue. That did surprise me. When it started last year, I'd say towards the end of the year, we thought while there was the Cyber week, for example, everyone's providing great discounts during the Cyber week. But we saw prices where we said we're not going to go along with this anymore. And the same goes for this year. We're seeing prices that Vodafone offers through sub-brands or Telefonica offers through sub-brands or that they give to Aldi or freenet? Where I say, from my perspective, that's unwarranted aggression. In our margin development, you can also see up to now that we have 3.8% more service revenue at 1&1 and 11% more EBITDA. So our customers have become more valuable. Our development is going in the opposite direction. And we just have to see how long we can keep up this development. How long can we grow more in our margin than in our service revenue or customer contract figures? Or do we, at some point, have to react to this general development in the market? Of course, we have some ideas and of course, we always try to protect our existing customers to not jeopardize our existing customers just to gain a couple of new customers. But we need to put a lot of thought into all of this. But it was surprising to me because I don't see any benefit. What does it benefit Telefonica to have a couple of thousand more customers if I don't have a higher service revenue at the end of it. That would be the mystery, a recent mystery that I'm dealing with, but I don't remember what was surprising to me 2, 3 years ago. For example, Telefonica is providing 100 Mbit of speed to Aldi. So far they always limited to the 50 Mbit. And the market set in the discount area, okay, then I only have 50 Mbit and the 300 or 500 Mbit limited to the value or the premium customer. And now everyone is down to 300 Mbit at 5G. Its down to regulation that's coming -- going to come soon. But why do I turn 50 Mbit into 100 Mbit? There is no benefit. Apart from that, everyone in the market will do 100 Mbit tomorrow, and that makes it even less attractive to buy value or premium product. So I don't understand that. I simply don't get it, but that's what competition is like. If they are more aggressive than well or if they offer better offers. And of course, it's better for the consumers, even though they won't earn more in the end. Thank you. All right. I don't see any further questions at the moment. Then I'd like to thank you for your attention and your questions. Feel free to stay for a cup of coffee. I'd like to conclude the conference. Have a safe trip home. Stay safe. Thank you. Goodbye. [Statements in English on this transcript were spoken by an interpreter present on the live call.]