IONOS Group SE

XETRA:IOS

Q1-2025 Earnings Call

[Operator]

Ladies and gentlemen, welcome to the IONOS Group SE Publication of the Q1 2025 Results Conference and Live Webcast. I am Myra, the Chorus Call operator. [Operator Instructions]

And the conference has been recorded. [Operator Instructions]

At this time, it's my pleasure to hand over to Stephan Gramkow. Please go ahead.

[Stephan Gramkow, executive]

Good morning, everyone, and welcome to our analyst investor call for Q1 2025. Thank you for taking the time to join us today. My name is Stephan Gramkow and I'm responsible for Investor Relations at IONOS.

Let me briefly walk you through today's agenda. Our CFO, Britta Schmidt, will present the operational and financial performance of IONOS for the first quarter. She will also outline our guidance and strategic outlook for the remainder of the year. Following her presentation, Britta will be available to answer your questions.

With that, I'd like to hand it over to Britta. The floor is yours.

[Britta Schmidt, executive]

Thank you, Stephan. Good morning, ladies and gentlemen. I'm Britta Schmidt, CFO of IONOS. And I'm pleased to welcome you to our Q1 2025 results webcast. Let's dive into our performance and key operational developments. To provide some context, let's begin with a quick recap of our full year 2024 KPIs.

We achieved EUR 1.56 billion in revenue and generated EUR 452 million in adjusted EBITDA with a 95% cash conversion rate. Approximately 80% of our revenue is subscription-based, ensuring stability and predictability. While the remaining 20% come from transactional services primarily domain aftermarket activities such as trading and parking of domains as well as advertising.

Our Net Promoter Score increased to 34 from 32 at year-end 2023. This reflects stabilization following our pricing changes introduced in the third quarter of last year, 2023. Importantly, we report a blended NPS figure combining post contact and online NPS, offering a more holistic view of customer satisfaction, unlike some other peers who report only the more favorable post contact metric.

Our marketing engine continues to perform strongly, with a CLTV over CAC ratio exceeding 15x and the customer acquisition payback period of just 12 months, we see strong ROI from our marketing investments. In 2024, we introduced a new segment report to enhance transparency and better reflect our operational structure.

Going forward, we will report 2 segments: Digital Solutions and Cloud, which includes Web Presence & Productivity and cloud solutions on the one hand, this segment generated EUR 330 million revenue in Q1 2025 accounting for approximately 74% of our total revenue.

The adjusted EBITDA margin in this segment is very strong, standing at 34.2%. If we look at the 2 included business lines separately, we can see that our Web Presence & Productivity business generated EUR 274 million in revenue in Q1 this year, accounting for approximately 62% of our total revenue.

Our Cloud Solutions business generated EUR 45 million in revenue, accounting for around 10% of our total revenue. The second segment, on the other hand, is our AdTech segment, which is a business line we formally called aftermarket. This segment generated EUR 117 million in revenue in Q1 2025, accounting for approximately 26% of our total revenue with an adjusted EBITDA margin of 15.6%. Group revenue for Q1 totaled EUR 446 million with adjusted EBITDA of EUR 131 million, yielding a 29.4% margin.

Artificial intelligence continues to boost internal efficiency and reduce operational costs while enhancing customer-facing features and creating new revenue opportunities through additional use cases and upselling. AI is currently integrated into 8 of 10 product lines with full integration planned by the end of this year.

Our primary focus is to optimize efficiency, foster innovation and enhance customer satisfaction through strategic AI implementation. As said before, AI integration is live across 8 of our 10 product lines, and we are on track for full rollout by year-end.

Our focus remains on the boost of efficiency, the driving of innovation and delivering measurable value to our customers. For SMBs, in particular, our AI initiatives provide access to advanced technology previously available only to larger enterprises, always with a strong emphasis on data privacy and compliance.

In July '24, we launched the AI Model Hub, a sovereign multimodal platform hosted in the IONOS Enterprise Cloud. This platform enables customers to integrate their proprietary data, improving the relevance and precision of AI-generated insights.

Building on that, in April, we introduced IONOS GPT, an intuitive interface that empowers businesses to incorporate their internal documents, databases and content. ALLDATA is securely stored in our European data centers and remains fully protected. A freemium model helps ease adoption and demonstrate clear operational benefits.

IONOS GPT is fully integrated with our AI Model Hub and will be supported by targeted onboarding and training. This initiative supports our long-term ambition to make enterprise-grade AI accessible, secure and beneficial for SMBs. Our core offerings supported by mission-critical reliability and personalized customer care continue to drive customer loyalty.

In Q1, '25, we added 80,000 net new customers bringing our total to approximately 6.4 million customers. This increase highlights the strong alignment between our product offerings and the needs of our customers. Our average revenue per user also showed a robust development.

If we exclude the initial -- if we exclude the initial revenue from ITZBund, our ARPU in Q1 would have been EUR 16.30, demonstrating a continuous and stable quarter-over-quarter increase. This growth can be attributed to the success of our upselling and cross-selling efforts as well as the ongoing implementation of our new pricing structure.

The limited increase in churn during this transition highlights the strength of our customer relationships and pricing power. Customer and ARPU growth are both contributing to our strong and sustainable revenue growth. We're extremely happy with the first quarter. Total revenues in Q1 this year reached EUR 446.3 million, reflecting 19.7% year-on-year growth.

Adjusted EBITDA came in at EUR 131 million, up 23.8% compared to the previous year, resulting in a 29.4% margin compared to 28.4% in the first quarter last year. Marketing investments were slightly higher than last year as we are growing our business, but marketing expenses as a percentage of sales decreased from 9.4% to 8.9% year-over-year.

Adjusting for the marketing expenses to make it comparable, adjusted EBITDA would have been EUR 135.6 million, growing 26.4% year-over-year. Let's take a closer look at the performance of our segments. The Digital Solutions and Cloud segment achieved EUR 329.6 million in revenue, marking a 7.3% increase year-over-year or 7.8%, excluding intercompany revenue.

The adjusted EBITDA margin improved significantly to 34.2%, up 3.8 percentage points from Q1 2024. Our AdTech segment reported revenue of EUR 116.7 million, representing an impressive growth of 77.7% year-over-year. Based on an exceptionally weak prior year quarter and supported by the positive development of the ongoing product transition. The EBITDA margin was at 15.6% compared to 19% in the previous year.

I will provide more detail on the AdTech dynamics shortly. Let's now have a look into the different -- into the performance of the different business lines within the Digital Solutions and Cloud segment. In the first quarter '25, our Web Presence & Productivity business grew by 7.9% year-over-year to EUR 273.7 million driven by continued customer growth, higher ARPU and the ongoing effects of our pricing strategy. Our Cloud Solutions business delivered revenue growth of 7.5% to EUR 45.2 million.

Let's have a deeper look into the cloud business. In Q1, this year, Cloud Solutions revenue reached as said before, EUR 45.2 million, representing a 7.5% year-over-year increase. The changing global political landscape presents significant opportunities for future growth at IONOS. One of the key trends shaping our industry is the rising importance of digital sovereignty, the needs for independent from independents from U.S. hyperscalers and full control of over data is becoming increasingly critical for both enterprises and public institutions.

The shift is already translating into growing demand for digital autonomy. However, the increased demand cannot be directly translated into higher sales as many inquiries are driven by migration processes on the customer side. We are strategically positioned to lead this development and to further strengthen our role as a leading provider of sovereign cloud and digital solutions in Europe.

Looking at the individual product areas. Public cloud grew by 12% in the first quarter. Revenue does not include any material revenue contribution from the ITZBund project. As a reminder, the majority of revenue from ITZBund bond is recognized progressively aligned with the deployment of hardware blocks in the data centers.

Since no new blocks were installed in Q1, the corresponding revenues have not yet materialized. We anticipate meaningful revenue contributions from ITZBund bond and an acceleration in growth over the coming quarters. Private cloud revenue grew by approximately 7%, while Managed Cloud increased by 3%. Also, the latter still has a dilutive effect on the overall cloud solutions growth rate, we are seeing positive momentum across the portfolio.

Our CASM focus is on driving customer adoption of our cloud solutions, which supports our long-term growth strategy. We believe digital sovereignty will remain a key market driver fueling sustained demand for our offerings in the quarters ahead. Now our AdTech segment, which comprises our aftermarket business, we've seen a significant increase in the first quarter. Revenue grew by 77.7% year-over-year based on an exceptionally weak prior year quarter and supported by the positive development of the ongoing product transition.

We are closely monitoring the impact of this product migration to RSOC. While we are confident this transition will ultimately benefit our business, we are aware that it may lead to some short-term volatility. In fact, we've seen a very strong first quarter in domain parking and early indications from the second quarter suggest that the migration is accelerating and is already affecting some of our customers and partners, which may result in a temporary decrease in revenue growth.

Nevertheless, we are encouraged by the better-than-expected performance in the first 3 months and by the RSOC onboarding process, which is well underway. This should support a smoother transition and revenue generation from AFD to RSOC over the course of the year. We are committed to driving this transition forward and are confident that it will have a positive impact of our AdTech business in the long term.

Turning to our capital expenditures on Slide 13, we can see that our total CapEx for the first quarter of this year was EUR 14.9 million or 3.3% of total revenue. This is a slight decrease from the previous year where our total CapEx was EUR 15.9 million or 4.3% of total revenue.

Breaking down our CapEx, we can see that our growth CapEx was EUR 13.5 million, or 3% of total revenue, which is from the continuous expansion for our Cloud Solutions capabilities. Our maintenance CapEx was EUR 1.4 million or 0.3% of our total revenue and remains low and predictable. However, CapEx was very low overall in the first quarter, which is due to the phasing of investments over the year.

Looking ahead, we still project total CapEx for the full year 2025 to be between EUR 80 million and EUR 90 million or around 5% of expected revenue. This reflects disciplined investment to support innovation, growth and operational scalability.

Let's walk through our free cash flow for the first quarter. Starting with adjusted EBITDA of EUR 131 million. We deduct EUR 6 million in adjustments, which are mainly stand-alone and LTI-related costs to arrive at reported EBITDA after accounting for EUR 15 million in CapEx and EUR 25 million in tax payments and adjusting for noncash LTI expenses and working capital, we reached a free cash flow before leasing of EUR 63 million. Subtracting EUR 4 million in lease payments gives us EUR 59 million in free cash flow after leasing, slightly down from EUR 66 million in Q1 '24.

Further, we made EUR 4 million in interest payment and executed EUR 32 million in share buybacks. After factoring in these items, comparable free cash flow for the quarter stands at approximately EUR 23 million. As of Q1 '25, net debt was reduced to EUR 842 million. This includes both external bank debt and the shareholder loan from United Internet, which we plan to further reduce over the coming quarters.

Our leverage ratio improved to 1.8x net debt to adjusted EBITDA compared to 2.5x a year ago. The weighted average annual interest rate stands at 5.03%, which will go down with the upcoming repayments of the shareholder loan. This improved debt profile supports financial stability and provides flexibility in the future. Based on the better-than-expected business development in the AdTech segment in the first 3 months, we have specified our outlook for this year and now expect revenue of around EUR 400 million in this segment compared to the outlook, which we gave with the full year figures in March, which was above the previous year level.

As we discussed earlier, the product migration to RSOC has started, but is ongoing, and we strongly believe that this transition to the new RSOC product will ultimately benefit our business. While we still expect a setback in our AFD-related revenues, we have seen a strong first quarter in domain parking and a good ramp up in RSOC revenue. We are confident to compensate via an accelerated customer migration to the new RSOC product, enabling us to still grow our revenues by resuming gradually.

The outlook for our core business, Digital Solutions and Cloud is unchanged and revenues are expected to grow by around 8% with Web Presence & Productivity growing at around 7% to 8% and Cloud Solutions growing at around 15% to 17%. Adjusted EBITDA margin is expected to be around 35%, up from 32.9% in 2024. Due to the positive development in the AdTech segment and continued cost discipline, adjusted EBITDA margin is now expected to grow by around 15% overall to around EUR 520 million compared to our EUR 510 million in our previous forecast.

With this, I would like to hand back to the operator to open the webcast for any open questions.

[Operator]

[Operator Instructions]

The first question comes from Nizla Naizer.

[Fathima-Nizla Naizer, analyst]

Sorry, can you hear me now?

[Operator]

Yes.

[Fathima-Nizla Naizer, analyst]

Okay. Excellent. Sorry about that. Two questions, Britta, from my end. The first is on the customer acquisitions that you reported in Q1, 80,000 that was a nice acceleration from Q4 last year. Can this level of customer acquisitions continue? Could you give us some color on maybe the phasing of that over the rest of the year?

What drives the acceleration? And has there been a change or improvement in your churn on the back of these few quarters of pricing ceases already been absorbed? Some color would be great. The second is also on your brand marketing that you stepped up a bit on a year-over-year basis in Q1 versus Q1 last year. What would the phasing of the investments be like over the rest of the year as well? Would it be similar to last year in terms of magnitude? Some color there would be great.

[Britta Schmidt, executive]

Yes. Let me maybe start with the latter. So the brand marketing. So as you know, phasing of brand marketing, especially last year was a bit different than we usually do it because of the different sports events, which happened last year, Olympics, et cetera, where we spend a little bit more brand marketing during the summer months, which is relatively unusual because yes, usually, people are weigh on summer and therefore, you do not get the eyeballs. So I would assume that this year, we are going back to the more normal phasing, which is brand marketing in the -- is stronger in the first quarter, a little bit into the second quarter and then again, end of the third quarter and the fourth quarter, obviously.

And then overall, we still expect EUR 65 million to EUR 70 million to be spent on brand marketing. So we always said this will be flat on an absolute amount. And we are fully sticking to this and still believe we do get enough coverage and eyeballs. So overall, in terms of customer acquisitions, yes, we are back to a stronger development in the first quarter.

Please keep in mind, Q1 is generally the strongest quarter as you -- if you look as well into the phasing, which we have seen over the previous years. Nevertheless, we expect strong growth also in the next quarters. And we already see relatively promising results in April. So the Q2 and Q3 should be a little bit lower as we have seen as well in the past years, but not as extreme as last year, for example, where, again, we had a very specific situation with all the sports events.

And therefore, yes, we invested into brand. However, brand takes longer. And therefore, we would see some of the benefits now and continue to see them over the year. In terms of churn, I guess, with the price increases now being absorbed by most of the customers, we do see churn going back to historical levels.

[Operator]

Next question comes from Ben Castillo-Bernaus from BNP Paribas.

[Ben Castillo-Bernaus, analyst]

Two for me, please. Firstly, just coming back to the OpEx trends for the year. It looked like in your core business, imaging revenues quite nicely, and OpEx was pretty much flat there. So just wondering how we should think about phasing for this year? Is it just the marketing spend we should consider is there any other sort of difference in the phasing of OpEx in the core business to consider for this year? And then second question, just around churn. So kind of coming back to historical levels stabilizing, which is encouraging. Where do here? Is there room to continue to improve that to be better than historical levels? Or do you see where you are right now as the sort of mid-term sustainable level of customer retention?

[Britta Schmidt, executive]

Yes. Let me comment on OpEx phasing. Yes, the main driver of phasing in our cost base is definitely marketing spend. We do not see the remainder of the OpEx trending when -- over the year, which means it stays relatively constant. We do not expect a significant increase over the next couple of years.

And actually, this is the result of economies of scale, cost discipline and the use of AI in our operations. So I think we have a very well-managed OpEx base, which provides us with a very strong foundation for the EBITDA guidance, which we just raised a little bit. And then in terms of churn, going below the historical levels. Of course, this is definitely our and we believe that there is more room for several initiatives.

So working closer on churn prevention all as well with the help of AI. So understanding the trigger points, helping the customers to use their products better, so to increase stickiness of the customer base. So there's obviously a lot to be done. However, would we see a significant decrease in churn, maybe not because the 13% we are at roughly is already a very, very low level. So we will constantly work on churn prevention, but I'm a little bit cautious to give a guidance that we will reach a 12% churn in one time. But nevertheless, we'll continue to work on it and let's see where we get.

[Operator]

Next question is from from Goldman Sachs.

[Unknown Analyst]

I have a couple of questions. Firstly, on AdTech. You've given us an idea of what we can expect for phasing this year. But do you expect continued volatility into 2026? And could you perhaps give us more color on what you expect in terms of medium- and longer-term strategy? And my second question is around price increases. You've previously said the price increases this year won't be as pronounced as last year. Is this still how you're thinking about pricing? And how do you see that playing out over the next year?

[Britta Schmidt, executive]

Yes. So in terms of price increases, yes, we always said '25 will be lower than the price increase, which we definitely -- which we have done in Q3 2023. And yes, we stick to this. So basically, we haven't done any significant price increase in '24 because the price increase of '23 still rolled through. It was relatively late in the year. which means this year, yes, we will be touching our pricing structure, and we are already underway in some of our products, but it will be significantly smaller scale than we have seen in 2023 or '24, if you can have that.

In terms of AdTech, I -- so -- and look, we currently still see the product migration from AFD to RSOC. It has accelerated over the last couple of weeks, I would say, which gives the indication that by 2026, we are more or less on a steady state development. Nevertheless, it's pretty much depending on how fast the ramp-up and the migration would go.

So if we look into this year, I would say Q2 will still be driven by relatively strong AFD revenues and RSOC still ramping up. Q3 might be a little bit lower, and then we would see because AFD might go a little bit stronger upwards and RSOC not get fully catching up. However, the constant ramp-up of RSOC and the promising onboarding of the new partners, which we are seeing here gives a clear indication that by 2026, we will be on a steady state business, which means more or less everything on RSOC, product migration done, which takes out a little bit of the volatility going forward. But nevertheless, it's an AdTech business, so it will always be more volatile than the remainder of the business, which is obviously a subscription-based business.

[Operator]

The next question comes from George Webb from Morgan Stanley.

[George Webb, analyst]

Congrats on the strong Q1. I've got a few questions, please. On AdTech, I mean, look, I guess you're one of the biggest players in that domain parking space. So when you look at the Q1, you had and you look at how you think about the full year, is this -- should we be reading this as just significant growth in the overall market? Or are you doing something specific that is allowing you to market share?

Secondly, on the AdTech margin, you continue to kind of talk about the potential upside from RSOC over the medium term. Q1, AdTech margin was 15.6%. As you think over the medium term, are you seeing -- and probably not right now, but are you expecting a higher steady-state EBITDA margin from that product? And then lastly, on the Cloud Solutions side, there was talk in the release around that spur demand from I guess, data sovereignty perspective, you mentioned that there's a bit of a lag before that hits revenue. But when you talk about current decline demand around cloud infrastructure, what sort of metrics -- is that sales inquiries? Or what sort of things are giving you confidence to believe that maybe as we go into 2026, that can be a little bit more meaningful on the revenue side?

[Britta Schmidt, executive]

Yes. Let me start with the AdTech part. So first of all, in terms of do we take market share? Or is the market growing stronger. I would say it's a mix. So I think, first of all, the old AFD or domain parking business had a peak in Q1, which is a little bit part of the product transition, which is currently going on. So the market was definitely growing stronger there as it did in the past.

But as well, I would think with our RSOC products being well underway in terms of development and how it can deliver value as well for our customers, we would as well be taking share of other players in the market and that's the stronger part of the mix from my perspective. So overall, yes, we remain confident that RSOC will as well deliver higher quality traffic to our partners, which is then as well an indication that overall, the market can be slightly larger than it is now with the relatively limited AfD product.

In terms of margin, yes, it's lower than it was in the past, and our ambition is to grow margin as well with the RSOC product. And we believe that RSOC, as I mentioned before, we can deliver higher value to our partners that we can raise margin going forward. And yes, I fully agree with your observation. Know that might not be now, but going forward, definitely, we -- our ambition is to go back to previous levels, which we had in the AdTech business, which is between 15% to 20%. I wouldn't -- as of now, I would not foresee margin growing stronger than the 20%.

[George Webb, analyst]

Sorry, just on the cloud side, to you talked about the at the moment.

[Britta Schmidt, executive]

So in the AdTech part. So yes, so what we're measuring there is sales inquiries. So -- and we do see more inquiries coming in, and we do see strong leads as well coming in. And if you take a look into the German media, we are currently running a cloud brand campaign, promoting the sovereignty of our cloud. This is definitely helping to drive sales inquiries. So yes, we are confident that going forward, this will drive revenue as well. However, as I said, it takes a couple of months before this really materializes.

[George Webb, analyst]

Got it. And if I could just throw one back on AdTech. I guess it's seen a pretty significant guidance change, at least on the revenue side compared to when we were talking at the fourth quarter. I mean what was your approach to that? Because if it goes to the circa 400 versus above, which I think some people would have expected to be a single-digit increase. When we think about the 400, is that still you erring on the side of caution. Is that -- I'm just kind of curious how you reached that number given the amount of uncertainties out there.

[Britta Schmidt, executive]

Look, so if you look into the first quarter and just do the math, you end up way above 400. We do not expect the trailing to continue as it is now. So with the migration to RSOC, we still expect a little bit of revenues being lower than they are at the moment. And as I said, we had a very strong run in the AfD revenues in Q1. So comparing it to where we've been in March, definitely the migration there and the transition they are just really kickstarted. And you remember the discussion around Google's announcement and Team Internet guidance or more or less very cautious outlook, where we've been above Team Internet, for example, already there. So more confident on what we can deliver. And we have seen that actually what we've done there takes its first fruits. But nevertheless, it's a product migration. It's not fully steerable by us. It still implies that our partners are migrating. Of course, we help them to migrate, but nevertheless, it takes part of the market, which is not us as well to follow the momentum. So therefore, I think the 400 is a solid guidance for now. But we will, of course, will closely monitor the development in the AdTech business.

[George Webb, analyst]

That's helpful. And I guess if I were to summarize as well what you've seen in April and May so far maybe takes out some of the downside risks on the AdTech number for the year, that's giving you some of the confidence as well.

[Britta Schmidt, executive]

Yes.

[Operator]

Next question comes from Sarah Roberts from Barclays.

[Sarah Roberts, analyst]

Just two for me, please. So firstly, one of your peers recently called out a worsening of SMB sentiment over recent months particularly given the volatility that we've seen post tariff announcement. Just curious as to whether this is something you're seeing at the moment and what your assumptions are for the kind of health of SMB confidence throughout '25? And secondly, on cloud, can you just remind us, based on what you can do at the moment, how should we expect the phasing of cloud revenues throughout 2025 to get to that 15% to 17% full year guidance?

[Britta Schmidt, executive]

So let me start with the SMB sentiment. So we do not -- so first of all, keep in mind, most of our customers are European SMBs. They will not be or will only to a very small part be affected by tariffs or tariff changes at least in their day-to-day business. This is what we currently see. And therefore, we actually do not see them -- do not see a worsening of the sentiment of the SMBs. Obviously, it was always a little bit volatile over the last couple of years, to be honest, because economies in Europe do not trail super well as we all know. However, SMBs are the foundation really of Europe's economies.

And what we see there is that they are actually doing quite well and much better than expected. And you can see that in the growth of our customer base. You can see that in our churn rates, et cetera. So all of this leads to our confidence around the business that we actually are able or that actually the resilience, which we always talked about in our business and the resilience of our customer base actually comes through here. So we do not see a worsening of SMB sentiment overall.

And by the way, keep in mind, with our ARPU of around EUR 16, that's actually the last thing you would cancel if you are an SMB and have the mission-critical products with us. And then overall, for cloud for the phasing, the phasing will kick in during the second half of the year. So we would see more revenue growth towards the end, so towards the second half, so Q3 and Q4, actually. I hope that helps.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Britta Schmidt for closing remarks.

[Britta Schmidt, executive]

Yes. I hand over to Stephan.

[Stephan Gramkow, executive]

Thank you, operator. Thank you, Britta. Thank you all for joining today's call. Please feel free to reach out for any follow-up questions. Have a great day, stay safe and goodbye.

[Britta Schmidt, executive]

Thanks very much. Bye-bye.