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Good day, and welcome to the 1&1 Drillisch AG First Quarter 2021 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Oliver Keil. Please go ahead, sir.
Thank you, operator, and warm welcome to everybody out there. I make it brief and short, and welcome you to our Q1 conference call and hand over directly to Markus, my CFO. At the end of the presentation, as always, we have enough time to discuss your questions. And thank you very much so far.
Good morning to all together on the call. This is Markus Huhn speaking, CFO of 1&1 Drillisch AG. I would like to give you, with the following presentation, an overview about the Q1 performance as well as on the financial results. I would like to start on Slide #4. There you can see the number of contracts as of end of March 2021 with 14.97 million contracts, there of 10.66 million mobile Internet contracts and 4.31 million broadband lines. In Q1, we have increased the customer base for about 150,000 new mobile Internet contracts, the broadband lines are still on the same level as of end of last year. So in summary, we would say a solid start in the year 2021.On Slide #5, you can see the revenue in Q1 2021 with EUR 973.7 million. We have increased the total revenue about 3.5% in the first quarter. Service revenue was 1.9%, and other revenue was 9.7%.The Q1 service revenue was affected by lower roaming revenue compared with the year before because the lockdown in 2020 started mid -- respectively, end of March in last year, so the adjusted growth rate before the coronavirus pandemic is approximately 3%.On the next slide, #6, you will find the EBITDA by segment. In the Access segment, we have realized EUR 209.5 million in the first quarter. Within this amount, we have a positive impact of EUR 34.4 million because of a reduction of the cost of sales due to the application of the wholesale prices based on Telefónica's improved offer for national roaming. The EUR 34.4 million for the period from July to December 2020. Without this impact, the operating EBITDA was EUR 175.1 million, which is a plus of 5% or EUR 8.3 million compared with the EUR 166.8 million in Q1 2020.The EBITDA for the segment 5G was minus EUR 7.2 million in Q1 2021 and the year before, minus EUR 2.8 million. The negative EBITDA is driven by the initial activities to prepare the roll out for our 5G mobile network. On the next Slide, #7, we have summarized the activities around the 5G network rollout. In the first quarter, we had a big focus on negotiating the national roaming agreement with Telefónica Deutschland and to step into further negotiations with vendors for network equipment. All negotiations are still ongoing. But I would like to underline that the offer for national roaming from Telefónica Deutschland is binding for both parties and has to be transferred into initial roaming agreement. On Slide #8, you will find the P&L for the first quarter. I've already commented the revenues. So I would like to step into the line cost of sales. There, we see a reduction from EUR 668.1 million in 2020 to EUR 651.5 million in 2021. The reason for the reduction are already mentioned, EUR 34.4 million, for applying the reduced prices out of the Telefónica offer.Without this impact, the cost of sales would increase to EUR 685.9 million in the first quarter, which is a plus of 2.7% compared with the year before. We've raised the gross profit from EUR 272.6 million, to EUR 322.2 million. Without the aforementioned EUR 34.4 million, gross profit in Q1 2021 would be EUR 287.8 million or a plus of 5.6%. Sales and distribution costs increased from EUR 106.5 million to EUR 114.3 million, mainly driven by spendings for the sponsorship of Borussia Dortmund which started in July 2020. The costs for administration are showing a significant growth from EUR 25.3 million to EUR 31.5 million, which is a result of higher spendings in 5G activities in Q1 2021, with the already mentioned EUR 7.2 million compared with the EUR 2.8 million in Q1 2020.The other operating income and expenses are with plus EUR 4.1 million, more or less on the same level as in Q1 2020. Impairment losses from -- or dropped from EUR 19 million in 2020 to EUR 17.9 million in 2021. Financial results are on the same level as the year before. Tax expenses are following the profit before taxes, which increased from EUR 126.2 million to EUR 162.4 million.On the next slide, you see the balance sheet. So the balance sheet in total increased from EUR 6.6903 billion end of last year to EUR 6.8348 billion as of end of the first quarter 2021. The increase in assets of EUR 144.5 million is driven by 2 circumstances. The first is EUR 92 million of higher cash, which has been invested at United Internet and the second one is an increase in the other payments receivable of EUR 52.5 million. The short-term liabilities increased from EUR 574.5 million up to EUR 608.3 million. And the equity increased because of the positive result of Q1 2021. Let us come to the cash flow on Slide #10. The net inflow from operating activities was EUR 101.2 million, it's close to the EUR 105 million in the first quarter 2020. The cash flow from investment activities was minus EUR 95.8 million, below the EUR 123.6 million in 2020 because of lower investments at United Internet. Cash from financing activities increased from EUR 3.5 million in 2020 to EUR 4.1 million in 2021. And the free cash flow is in Q1 2021 with EUR 97.6 million, very close to the EUR 97.5 million in the first quarter 2020.On Slide #11, we have the EBITDA bridge, which shows the development from the EBITDA in Q1 2021 to the free cash flow in Q1 2021. First of all, the EUR 34.4 million reduction of cost of sales because of using the prices of the national roaming offer for the period July 2020 to December 2020, then the minus EUR 33 million because of increase of the contract assets and liabilities. We have a positive impact of EUR 5.5 million because of changes in the other working capital, then EUR 32 million spending for taxes. We have increased inventories in the amount of EUR 7.1 million, and we've spent EUR 3.6 million for CapEx. So we come to the EUR 97.6 million free cash flow in the first quarter. Now we come to the forecast, 2021. We would like to confirm the outlook for 2021 with EUR 3.1 billion service revenue, approximately EUR 650 million EBITDA. In this forecast is included EUR 30 million initial costs for 5G network rollout or preparing the network rollout. And on top of it, we see the already mentioned EUR 34.4 million positive effect out of the adjustments of the prices within the MBA MVNO wholesale services. Yes, many thanks for your attention so far. Now I would like to hand over to Oliver.
Thank you, Markus. Operator, we can now start the Q&A as usual, and happy to take the questions.
[Operator Instructions] And we can now take our first question from Polo Tang from UBS.
Can I just come back to the MBA MVNO contract terms, specifically the new contract terms? If you look at the wholesale mobile cost per subscriber in the contract, is this growing over time given rising data usage or do you expect wholesale mobile cost per subscriber to be stable given falling unit prices? And then potentially, just so that we've kind of got the right baseline, can you remind us roughly what your mobile wholesale costs were for 2020? And then maybe a final question is really, could you maybe just give us an update in terms of what you're seeing in terms of competitive dynamics for both the German mobile market, but also the German broadband market?
Yes. Thanks for your questions. Regarding your first question, with the offer prices from Telefónica Deutschland, we are quite sure that the costs per customer will be stable, on the same level. So of course, we see increase in the data usage, but with the decreasing costs per gigabit within the next 5 years, we think that we can compensate the data usage so the costs per customer will be -- stay on the same level.Regarding your question, what did we pay in 2020 to Telefónica Deutschland. We can't communicate this number. Please have understanding for this. And regarding the competition in the first quarter, what we see on the -- what we saw on the market is that we have a quite comparable situation to the second half year and last year. So it's quite stable. Of course, we see some special offers in the market, but no big changes in the portfolio.
But can I just follow-up on the answer to the first question? Because if you're mobile wholesale -- if your mobile kind of wholesale cost per subscriber are going to be stable going forward, what's the benefit of building your own mobile network? Is it not just better to just stick with this new MBA MVNO?
Sorry, I understood your question for the costs per customer, so the costs per customer will be stable on the same level, but we see a reduction in the total amount that we have to pay to Telefónica Deutschland because with establishing or rollout of own 5G network, we will produce more and more traffic with our own 5G network, and we will reduce that what we purchase from Telefónica Deutschland. So in total, we see a reduction.
But then if your unit costs per subscriber not going up, what is the pressure to build? Because I can understand why there's a pressure to build if you have rising kind of costs per subscriber, but you just outlined that the cost will be flat, which is very encouraging? But -- so I'm just trying to understand the incentive to kind of build. I'm not really sure whether the incentives are the same if your costs are flat going forward per subscriber?
That's what we see for the next 5 years. The question is what will happen after the 5 years? So there, it can be a risk that we will have increased costs per customer. So we do not plan a 5G network for the next 5 years. So we are planning it for the next 20 years. And please have understanding for -- that we would like to communicate all these details later after we have finalized the negotiations for the 5G network equipment. And if we will -- and when we will come up with the details to the 5G case, then we can give better transparency about these questions.
We can now take our next question from Joshua Mills from Exane.
A couple from me. The first is just on the broadband subscribers. So these have been flat to slightly down for a while now, even though it looks like you've been delivering on the mobile growth. Do you have any plans in place to try and reaccelerate that broadband growth? And in particular, does kind of the new signing of different continued models and fiber access terms with each allow you to maybe be more price aggressive? And that's the first question. And then the second question is just with regards to the phasing of EBITDA this year. Now I know your EBITDA could be quite lumpy given the payment for MBA MVNO terms, et cetera, but if I just take out the EUR 34 million one-off and think about the EUR 106 million as a run rate, you're actually doing quite well this year, and it looks like the guidance is more than achievable. So what is the reason for the guidance not changing? Do you anticipate more costs later in the year? And if so, is that just 5G preparation? Or is there something in the -- in the national roaming deal, I should say, that means costs might go up?
So in the mobile business, we are quite satisfied with the net growth in the first quarter. And we also see a good growth for the rest of the year. Regarding the broadband lines, we -- yes, we will not be more aggressive in our pricing because we see the risk cannibalization in the customer base. So here is our target to keep the customer value on the same level. And we are quite sure that we can keep the number of contracts are more or less on the same level, but we will not be too aggressive in that product line. Regarding the EBITDA for the first quarter, we -- and your question regarding the next quarters. So in the past, we had a pricing mechanism. So in the first 5 years of the MBA MVNO contract, where we had a price decrease every month. And within a year, the prices for gigabit were decreasing. In the new international roaming offer, we have a fixed price per year. That means that we will not have a price reduction within the next month. And we see the next month, the data usage increase and that's the reason why the quarters or the EBITDA for the certain -- or several quarters are more or less on the same level. And further effect is that we will spend a bit more marketing budget in the second half year. So that's the reason for the strong EBITDA in the first quarter and the situation that we will have EBITDA on the same level for the next quarters.
Understood. So in principle, all else equal, under this new arrangement, your EBITDA should actually be front-end loaded each year on the basis of what you're saying around the prices being stable throughout 2021?
No. It's not front-loaded. It's just the effect that we -- as I tried to explain that we have a fixed price for the whole year. And next year -- we will have a price reduction again for the next year. But within the quarter, we have the situation that we have to pay the same amount per gigabit, and against that, we will see a usage increase in this year. That's the reason why the EBITDA will not increase as we have seen it in the past, if we compare the several quarters of a year. And as I mentioned before the -- further reason is that spendings in marketing in the second half year are a bit higher than that what we spent in the first half year.
We can now take our next question from Jonas Blum from Warburg Research.
Yes. I got 3, please. Firstly, around your adjusted gross profit improvement, which also looks quite encouraging. Just wondering if the improvement is basically just driven through your improved mobile wholesale capacity or is it also part of the FTTH yield that is already supporting this trend? Secondly, around the updated telecommunication law in Germany. Just wondering what your thoughts are given that the current government might move away in its thinking around the future frequency auctions? And do you also see potential upside from the rising Green Party in Germany in terms of future network sharing in Germany? And just thirdly around your rebranding efforts. Should we also anticipate sort of a change in terms of your commercial strategy? Or is it basically just a stat in terms of consolidation?
Regarding your first question to the increase of the gross profit, it's coming out of the mobile Internet business. The terms and conditions out of the FTTH contract are starting on April 2021. But there will -- we will not see a big change compared with the quarters before. So the profitability in the broadband lines will be on the same level as in the first quarter. So the increase in the gross profit is mainly driven out of the mobile Internet business. To your third question, rebranding 1&1 will not lead to any changes in our approach regarding marketing or branding or, yes, prices, it's just to make a very clear that we have a clear branding strategy. And that's the reason for that, but it will not lead to any changes. Regarding your question to the auction or the future auction and changes in the German laws regarding telecommunication. The -- regarding the auction, we -- yes, of course, we have a lot of discussions at the moment, but we do not have a clear picture on what will definitely happen in the future regarding the auction. So yes, we are not able to comment at -- for -- right now.
[Operator Instructions] We can now take our next question from Ulrich Rathe from Jefferies.
I have 3 questions, please. The first one is, could you comment on the progress of the talks to finalize the national roaming agreement? Are there any hiccups in these talks or is this all unfolding? And then what exactly is the subject of the talks at this point? What exactly still needs to be settled? The second question is, you had strong net adds in mobile in the first quarter. But I noticed that the service revenue growth has slowed ever so slightly compared to the fourth quarter growth. So in terms of sort of how the growth is progressing, is this more coming from the mobile business or from the fixed business? And can you comment on the reasons? And then my last question is a clarification to Polo's. When you talk about the cost per subscriber being about stable, you're specifically talking about the cost of subscribers on the Telefónica network. That comment was meant to be a sort of a blended cost per subscriber as the network unfolds and your -- the kind of -- let's say, there's a scenario where the Telefónica cost per subscriber rises, but the offloading to the own network sort of takes down the cost, so the blended cost is stable. Just wondering which of the 2 scenarios you were referring to there?
Thanks for your questions. Regarding the status to national roaming agreement. So we have good discussions, but it's a lot of stuff that we have to negotiate in the agreement. We are on a good way, and we are quite sure that we can finalize the national roaming agreement in the near future within the month May, and we do not see any big issues. It's just a lot of work which has to done. That's the reason that we didn't finalize the national roaming agreement until now. Regarding the service revenue in the first quarter. The service revenue in the broadband business increased because of higher ARPUs in the customer base. But the main impact in the increase of service revenues came out of the mobile Internet business because of the additional net growth. And it is -- as I tried to explain earlier in the presentation, we have, in the first quarter, a negative impact because of the coronavirus pandemic because in the first quarter in 2021, we didn't generate any -- lot of roaming service revenues. And in the year before in 2020, the lockdown started in March or mid of March. And in the month, January and February, we had a much higher roaming revenues. And if we would have roaming revenues comparable to the first quarter in 2020, then we would have a growth rate of approximately 3% in the service revenues in the first quarter. So it's a little bit blended out of the coronavirus pandemic. Regarding your first -- your third question regarding the costs per subscriber. That's not blended with Telefónica and our own network. It's just the costs, if we would generate a whole traffic via Telefónica Deutschland. So if we start to roll out our net and produce the traffic via our own net, then, of course, the cost per subscriber will decrease.
That's very helpful. Can I just follow-up on your second answer, please? I was talking about the year-on-year effect. So the roaming drag was there in fourth quarter as well. And in the fourth quarter, your service revenue grew by 2.6%. And in the first quarter, they're growing by 1.9%. So there is a small slowdown despite the fact that you're now annualizing the roaming drag for 1 month at least. So I was just wondering what's the reason for the slowdown of the year-on-year growth?
One reason is we had -- in the fourth quarter and last year, we had a strong increase in the customer contracts. But in the fourth quarter, it was driven by cyber day, cyber actions with very aggressive offers. So the ARPUs out of Q4 of the net adds were not on a level as we see in a normal quarter. That is maybe one reason for a bit, yes, weaker increase in the service revenues compared with the net adds.But in Q1, we are satisfied with that what we see in net adds in the premium brands. So ARPU situation -- or we see the ARPU situation rather stable and optimistic for the first quarter as well as for the second quarter.
We now take our next question from Maurice Patrick from Barclays.
Just if I can go back to Josh's question around the phasing of EBITDA, I guess, more on gross profit. Just to understand, so you used to get declining pricing on a monthly basis. Now it's flat for the year. Given your 5.6% increase in gross profit in the first quarter, would -- in the absence of price increases, we would normally expect that will fade during the year. So the moving parts would be the higher data usage throughout the year, but the same price per unit. So you would normally see a fading of the amount of success, all things being equal, not looking for sort of a forward-looking state as such, but is that -- is the thinking behind that right?
Maurice, few parts of your question were not -- we could not hear them. Can you please repeat the question in total, sorry.
Yes, sure. I'll try again, sorry. So the 5.6% gross profit growth in the first quarter excluding the one-off, given your statement around the pricing said to be flat for the year, the wholesale pricing said to be flat for the year, should one, therefore, interpret that normally, that would mean that gross profit growth should fade, be lower growth for the year as the unit price is the same, but the volumes are going up. Is that the right way of thinking about it, all things being equal?
Yes, of course. What will happen to the growth rate and the gross profit will decline a little bit within the next quarters compared with the year before. So I do not have the figure right now, what do we expect exactly for the full year. But we will have a little decline within the year because of increasing data usage and having the same price for the whole year.
Great. And just on the EUR 7.2 million of 5G spend so far, is that mainly just planning and consulting activities?
It is mainly consulting activities and internal organization. There is nothing included for rollout or I don't know, antenna, something like that. It's just preparation.
We can now take our next question from Jakob Bluestone from Crédit Suisse.
I'll keep it to 1 question, please. And I was just hoping to get a little bit more color around the commercial momentum of the business. I don't know if you can comment on what sort of evolution you're seeing in things like Net Promoter Score, brand mix, the shifting between tiers. I think you mentioned some online promotions earlier being a bit of a drag on ARPU. So just sort of interested in anything you can share on. Are you seeing any changes or -- in the commercial momentum more broadly?
Thanks for your questions. Yes, regarding Net Promoter Score and customer satisfaction, we are very satisfied. We got good results out of connect test that we have mentioned it in our Q1 report. Regarding ARPU, I mentioned it earlier, we are with our ARPUs on a same -- on a stable level. So in the broadband lines, we see an increase due to the fact that customers are moving from ADSL to VDSL contracts. And in the mobile Internet business due to the fact that customers are asking for more and more data, we see also an increase in the ARPUs as well as in the discount segment, also in the premium segment due to the fact that the growth in the discount segment is higher than the net adds or the growth in the premium segment. In total, we are more or less on the same level. But within the both segments, we see an increase. So Net Promoter Scores also on a stable level, churn rates are also on the same level as in last year. So I would say, from a customer base perspective, all things are in a, yes, very stable situation.
If I can just ask 1 follow-up? Where are your ARPUs actually currently, just sort of roughly? I know you don't publish it quarterly, but I think in the past, you've indicated that we're around the mid-teens for mobile. Is that still kind of roughly where we should think of them?
We didn't disclose the ARPU use in our key figure table. But we can come back to you later with the details to that.
And let me add -- Jakob, let me add. ARPU and other KPIs, we are discussing internally for the purpose of potential CMD, whether it's in August or in the third quarter, to make sure that there is an increase in transparency to our case. But in the past, we argued ARPUs unchanged accordingly in the assumptions. So there is no detailed knowledge we can discuss whether it is 11 or 14 or 25 or 28, pardon me.
And our next question comes from James Ratzer from New Street Research.
Yes. So Markus, I have 2 questions, please. So the first 1 was just around your cost of goods sold, which I think you said was up around 2.9% year-on-year, excluding the one-off. Are you able to give any split, please, in terms of the growth rates on your mobile cost of goods sold versus your fixed cost of goods sold, would just be interested in the relative growth rates between the 2? And secondly, with regards to the 5G network builds, you disclosed EUR 30 million of costs for this year. I think that's all going to go through EBITDA. Do you have any indication for this year on how much will be spent at the CapEx level on 5G? And is it still your expectation to give more detailed outlook on the business plan at the time of the Q2 results?
Thanks for your questions. Regarding the cost of good, we do not have the details available. But within the cost of sales, we have, of course, also additional spendings in the first quarter because of strong growth in the hardware business. That's one bigger impact. But please have understanding that we can not disclose all the details of the cost of sales. Regarding your question to 5G, the EUR 30 million are costs for the preparation. As I mentioned earlier, costs or CapEx for rollout in this year is not included. We will come up in the third quarter with the details to this. So it will be a result out of the current negotiations, where we also are talking about a rollout plan for the second half year. And in -- within the Q3, we will come up with the details to this. At the moment, we -- yes, we can't communicate these figures.
So to crosscheck, when you say, Markus, Q3, do you mean August as in when you release the Q2 results, which will be in Q3 or with the Q3 results, which would then be in Q4?
This is definitely our plan. But the -- we have to spend a lot of effort in the running negotiations for -- negotiate the necessary agreements with the vendors for the network equipment, but it is still the plan to communicate it together with the half year figures.
And our next question comes from Yemi Falana from Goldman Sachs.
My question is focused on service revenues. Is it fair to say that the -- just under 2% service revenue growth you saw in the first quarter can be a low watermark of thoughts, that is that your service revenue growth improved through the year, so you hit that EUR 3.1 billion guidance, I know it's rounded guidance, which gives you some flexibility. But do you hit that EUR 3.1 billion guidance with improving ARPU through the year on an absolute basis, i.e., as the roaming headwinds fade, and the fixed pricing, as you mentioned, you're not being too aggressive on, do you have a kind of better ARPU outlook than you saw in the first quarter through the year?
Yes. We have confirmed our outlook for 2021. So we definitely see this increase in the service revenue in the first quarter. As I mentioned, we had a negative impact because of the coronavirus pandemic. But with the second quarter, we have a situation where second quarter 2021 is comparable with decision in the second quarter 2020. We see some positive impacts out of the customer base. So yes, as we mentioned earlier, we confirmed the outlook and are quite sure that we will see this service revenue increase that we have mentioned earlier.
And our next question comes from Usman Ghazi from Berenberg.
I've got a few questions, please. The first question was just on this EUR 34.4 million, the retroactive rebate from Telefónica. I see that it didn't benefit the cash flows this quarter. When would you expect that payment to hit the cash flows, please? The second question was, just going back to the mobile trends, the net additions, I think at least at these kind of levels are impressive, given, obviously, your subscriber base is bigger so the churn that you're generating on the base should be higher. So I would expect that net adds would moderate rather than stay at these 140, 150 kind of levels per quarter. So could you perhaps indicate what is happening here? Is your churn on the base coming down, or your gross adds going up in order to sustain these -- the net adds at this kind of level on a quarter-on-quarter basis?And then my final question was just on the mix of the subscriber trends between the 1&1 brand and the kind of Drillisch brands. Could you perhaps give an indication of the 140,000 that you've got in Q1? What the rough -- is it half and half between 1&1 and the other brands? Or is it more skewed to the other brands?
Yes. Thanks for your questions, Usman. To the EUR 34.4 million, the cash inflow that will come into the second quarter. So in the first quarter, it is included in the position that I've commented in the balance sheet. Payments receivable or the increase in the payments receivables, so the cash in will be in the second quarter. Regarding the trends in the mobile Internet business, what we see is the net adds or the net sales are more or less on the same level as we have seen in the first quarter. Churn is a bit lower and stable on a low level. And in average, we would see, for each quarter, around the 140,000 net adds. But of course, we see a seasonal development. So Q2 will be a little bit weaker and Q3 and Q4 are much stronger quarters. But in summary, for each quarter, something around 140,000 are definitely realistic. And regarding the mix in net adds between the 1&1 brand and the discount brands, yes, please have understanding that we don't want to communicate these details. But as I mentioned earlier, there is definitely a bigger part coming out of the discount business.
Can I just perhaps ask a clarification to an earlier answer that you made? I think -- did you say that the ARPU on the individual brands is actually stable, but because of the higher growth in the no-frills segment that's -- the mix is driving the ARPU a little bit lower. But within the brands itself, the ARPU you see stable to up trend. Is that correct?
Within the brands, it is stable. So we see, in the discount segment, stable ARPU level. We do not see a declining ARPU in the discount segment.
There are no further questions at this time. I would now like to turn the call back to the host for any additional or closing remarks.
Thank you, operator. Thank you all for your questions. And as always, we are ready to take upcoming questions in the afternoon or in the coming days. And thank you for your time, for your interest and stay healthy, until later. Bye-bye.
Thank you. That concludes today's conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.