IONOS Group SE

XETRA:IOS

Q2-2025 Earnings Call

[Stephan Gramkow, executive]

Good morning, everyone, and welcome to the IONOS Analyst Investor Call for Q2 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. Here's what we will cover today. Achim Weiss, CEO of IONOS will start with the business update and strategic priorities. Next, Britta Schmidt, CFO of IONOS, will walk you through H1 and Q2 2025 financials. She will also cover our outlook for the full year. Achim and Britta will then be happy to answer any open questions after the presentation. I would now like to hand it over to Achim. The floor is yours.

[Achim Weiss, executive]

Thank you very much, Stephan. Good morning, ladies and gentlemen, and a warm welcome to our conference call. I'm Achim Weiss, CEO of IONOS, and I'm pleased to update you on our business and key topics. Our mission at IONOS is unchanged. We empower small and medium-sized businesses to succeed in the digital era. We strongly believe that every business, regardless of its size, should have access to the same technologies and expertise as large enterprises. We aim to close the digital gap by offering innovative, user-friendly and affordable digital solutions that help SMBs grow and compete efficiently.

The reliability of our mission-critical products, backed by the dedicated support of our personal consultants has helped us to develop and maintain a very loyal customer base. In the first half of this year, we successfully onboarded 150,000 new customers, increasing our total customer base to approximately 6.47 million. We increased our ARPU by around 4% compared to last year on the back of successful up and cross-selling as well as our regular price adjustments. Customer growth, high ARPU and strong adtech performance, which we will elaborate in detail later, led to revenue growth of around 19% in the first half year.

Furthermore, IONOS' platform model and substantial economies of scale, combined with robust growth have led to consistently higher levels of profitability for the company in which turn led to an adjusted EBITDA growth of around 23% in the first 6 months. Our core offerings supported by reliable and personalized customer care continue to drive customer loyalty. We successfully added 70,000 net new customers in the second quarter, bringing our total net additions to the first 6 months to 150,000, as already mentioned.

This represents a significant improvement compared to the 90,000 net additions in the first 6 months last year, underscoring the strong alignment between our product offerings and customer needs. Our average revenue per user continued to develop positively and robustly, driven by successful upselling and cross-selling initiatives as well as targeted price adjustments. Importantly, churn remained largely stable throughout the transition, underlining our -- both the strength of our customer relationship and our pricing power in the market.

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 cross and upselling. AI is currently integrated in most of our product lines with more features to come every quarter going forward. Our focus remains on hosting -- boosting efficiency, driving innovation and delivering measurable value to our customers. For small and medium business, in particular, our AI products provide access to advanced technology previously available only to large enterprises, always with a strong emphasis on full data privacy and compliance.

In 2024, we launched the AI Model Hub, a sovereign multimodal platform hosted in IOS Enterprise Cloud. Building on that, in April, we introduced IONOS GPT, an intuitive interface that empowers businesses to incorporate their internal documents, databases and content securely processed and stored in our European data centers. We launched IONOS GPT in Germany. Now we are preparing for a broader rollout across additional European markets. And we will also expand the range of function with further AI models, new features and enhanced personalization.

One of the most exciting developments in AI is the rise of intelligent virtual agents, which we believe will fundamentally transform how SMBs operate. Today, small- and medium-sized businesses spend only 50% to 60% of their time on core business activities. The rest is tied up in operational overhead, managing inquiries, handing appointments, running marketing tasks. With AI agents, we believe this number can rise to 80% or even 90%, freeing up valuable time for business owners to focus on what truly matters, their customer and growth.

AI agents bring a number of fundamental advantages to the table. The always available, never get sick, never forget and can work 24 hours a day, 7 days a week across multiple channels simultaneously. This makes them ideal for automating a repetitive time-consuming and low-value tasks across the business. We see 2 categories of agents playing a key role.

The first are general purpose agents that require a minimal setup. By scanning a website, online shop, FAQs or other digital content, they can start delivering value immediately. These agents can manage first level support, handle customer inquiries and provide product recommendations. We also support marketing tasks creating newsletters, helping with online as are generating and scheduling social media content. These use cases align closely with our existing products like website builder, e-mail marketing and online shops and offer fast time to value without complex integrations.

The second, even more powerful category includes deeply integrated agents that connect directly to back-end systems, CRMs, calendars, POS systems, databases or reservation tools. These agents can automate entire operational workflows. The restaurant could use them for booking and shift planning hires or doctors for scheduling our travel agency for handling requests and follow-ups. Today, SMB is typically by only 1 website, but they can deploy several agents across their business in the future. For example, 1 for customer support, 1 for scheduling and 1 for back office tasks like invoicing or HR.

This significantly expands addressable revenue per customer -- while traditional website products generate EUR 10 to EUR 20 in ARPU, virtual assistance are expected to start in the range of EUR 20 to EUR 50 per agent. Over time, the use of multiple task specific agents per customer opens up entirely new revenue layers for us. IONOS is uniquely positioned to lead both segments. We serve a large and loyal SMB customer base, have decades of experience building digital solutions offer excellent personal support and have the technical platform and development capacity to integrate AI deeply into all business workflows.

Our first agents are already in beta with general availability planned by the end of this year. At IONOS, we're not just adopting AI, we are shaping how AI delivers real measurable value for SMBs. Europe stands at the threshold of a transformative area shaped by evolving global political dynamics offering significant opportunities for the future growth of irons. -- the pursue of digital serenity, specifically independent from U.S. hyperscalers and full data control is becoming increasingly critical. This trend is set to significantly impact not only cloud solutions but also web presence in productivity, services across sectors, companies and organizations of all sizes.

We are seeing a significant increase in interest around digital serenity, practically in our cloud -- sorry, in cloud offerings. Destroying awareness spends across companies of all sizes, including public sector institutions. However, in the enterprise and public segment, sales cycles are -- tend to be long, typically ranging from 9 to 12 months. Cloud projects in these areas unique require detailed planning and then often implement in several phases. While this means revenue materialize over more gradually, the current level of interest provides a strong foundation for future growth.

In June, IONOS has together as our partner, Roti, submitted an expression of interest to the European Commission for participation in the Invest AI initiative. This program aims to establish up to 5 large-scale AIDA factories across Europe to meet the continent growing demand for sovereign high-performance AI infrastructure. Our proposal outlines the facility with an initial capacity of 50,000 GPUs, scaling to over 100,000 in the long term, is designed to support a large-scale AI workloads with a fully sovereign and sustainable ecosystem with high-efficiency cooling European data protection standards and deep integration with our cloud infrastructure.

It's important to note that this is currently an expression of interest only, the first nonbinding step in what will be a competitive multiphase selection process. The final rules for participation, including funding frameworks and procurement guidelines are still being worked depending on the quality and strategic fit of each proposal. This level of co-funding is an important signal, but we want to be clear. is over 3 decades of experience in mission-critical hosting and cloud infrastructure and a strong track we occur in Serenity, we believe IONOS is very well positioned to play a key role in this initiative.

That said, we see this project as a long-term opportunity, not a short-term risk. It aligns with our broader strategy of enabling Europe's digital serenity and supporting the next generation of AI innovation. But are is under the right conditions and with clear economic value. At this point, I would like to hand over to our CFO, Britta Schmidt, to talk about our financials before we start with Q&A session.

[Britta Schmidt, executive]

Thanks, Achim, and welcome as well from my side. As you know, with the full year 2024 results publication, we introduced a new segment reporting to enhance transparency and better reflect our operational structure. Firstly, Digital Solutions and Cloud, which includes Web Presence & Productivity and Cloud Solutions. This segment generated EUR 656 million revenue in H1 2025, accounting for approximately 73% of our total revenue.

The adjusted EBITDA margin in this segment is continuously strong, standing at 36.1% in the first half of this year. If we look at the 2 included business lines separately, we can see that our Web Presence & Productivity business generated EUR 544 million in revenue in the first half, accounting for approximately 61% of our total revenue. Our Cloud Solutions business generated EUR 90 million in revenue, accounting for around 10% of our total revenue. Our AdTech segment on the right side, generated EUR 239 million in revenue in H1 2025, accounting for approximately 27% of our total revenue with an adjusted EBITDA margin of 13.3%.

Overall, we are extremely happy with the first 6 months. Total revenues, as mentioned before, reached EUR 895 million, reflecting 19.1% year-on-year growth. Adjusted EBITDA came in at EUR 268.7 million, up 23.3% compared to the previous year, resulting in a 30% adjusted EBITDA margin compared to 29% in the first half year of '24, again, underlying the strong operational leverage of our business model. Marketing investments were slightly higher than last year as we are growing our business and continue to invest into brand building.

Adjusting for the marketing expenses to make it comparable, adjusted EBITDA would have been $281.3 million, growing 29% year-over-year. Looking at the second quarter, total revenues increased by 18.5% to $448.7 million. Adjusted EBITDA increased by 22.7% to $137.7 million, resulting in 30.7% adjusted EBITDA margin. Adding back the $8 million higher marketing expenses to make it comparable, adjusted EBITDA margin would have been 32.5%.

Let's take a closer look at the performance of our segments. The Digital Solutions and Cloud segments achieved EUR 326.4 million in revenue in the second quarter, making -- marking a 6.7% increase year-over-year or 7.1% excluding intercompany revenues. The adjusted EBITDA margin improved significantly to 38%, up 4.3 percentage points from Q2 in the last year. Our AdTech segment reported revenue of EUR 122.3 million, representing impressive growth of 68.3% year-over-year based on a weak prior year and supported by the positive development of the ongoing product transition. The EBITDA margin was at 11.1% compared to 12.8% in the previous year.

As previously emphasized, we anticipate temporarily lower margins as a result of the ongoing product transition. I will provide more detail on the ad tech dynamics shortly. Let me reiterate what Achim already briefly touched. In the first 6 months 2025, we added 150,000 net new customers, which is well above 90,000 net additions in the first 6 months last year. As outlined in previous webcast, we expect stronger customer growth in 2025 compared to prior years. The strong performance in Q1 with 80,000 new customers was not an outlier. In Q2, we added another 70,000 customers, continuing this positive momentum.

Demand for our products remains solid. Customer growth continues to have seasonal variations with slightly lower growth during the summer months and the strongest customer growth in the first and fourth quarter, but we expect customer growth overall at a higher level compared to last year. This positive development underscores the strength and appeal of our offerings as well as the successful execution of our strategic initiatives. At first glance, ARPU growth may seem modest. This is primarily driven by different phasing and scale of price adjustment initiatives following significant changes in our pricing structure kicked off in 2023 and rolling into 2024.

As you might remember from previous webcast, ARPU in the second quarter is typically slightly lower than in the first quarter. This is a seasonal effect as we typically have many domain renewals in the first quarter, where revenue for 12 months has to be recognized upon renewal. Additionally, revenue growth in our Cloud Solutions segment is slightly lower, which is also impacting ARPU as ARPU for cloud product is naturally higher than in Web Presence and Productivity.

In total, we are seeing ARPU and customer growth of approximately 4% each. This puts us firmly on track to meet our full year revenue growth target of 8%. Going forward, our pricing approach remains balanced and strategic, aiming to attract new customers, maintain competitive positioning, enhance customer satisfaction, but also implementing price adjustments where appropriate. Let's have a look into the performance of the different business lines within the Digital Solutions and Cloud segment. In the second quarter of '25, our web presence and productivity business grew by 7.4% year-over-year to EUR 270.5 million, driven by continued customer growth and higher ARPU compared to the previous year.

Excluding FX effects, which were negative in the second quarter, revenue growth is 7.9%. Our Cloud Solutions delivered revenue growth of 5.2% to EUR 45.1 million or 5.9% like-for-like, excluding FX effects. Let's have a deeper look into the cloud business. In Q2 2025, Cloud Solutions revenue reached, as mentioned before, EUR 45.1 million, representing a 5.2% year-over-year increase. The changing global political landscape presents significant opportunities for future growth at IONOS.

Nevertheless, as Achim already pointed out, we are seeing increasing customer demand, but the translation of higher demand into revenue growth needs time. Looking at individual product areas, public cloud grew by 10% in the second quarter. Revenue in this quarter does not include any material revenue contribution from the ITZbund project. As a reminder, the majority of revenue from ITZbund is recognized progressively aligned with the deployment of hardware blocks in the data centers.

We have finished setup and commissioning of our cloud in the ITZu-wn data centers, followed by an intensive test phase for the first hardware blocks. Technical sign-off has been granted, and we are now in real-life operations. We, therefore, anticipate meaningful revenue contribution from IZbund and an acceleration in growth in the second half of the year. Private cloud revenue grew by approximately 3%, while managed cloud increased by 4%. Our current focus is on driving customer adoption of our cloud solutions and to convert the high demand for data sovereign cloud products into growth, both supporting our long-term growth strategy.

In our AdTech segment, we've seen another strong quarter. After a very strong first quarter, revenue grew by 68% year-over-year in the second quarter based on an exceptionally weak prior year quarter and supported by the positive development of the ongoing product transition, where we have seen both products performing strongly. We are closely monitoring the impact of the ongoing product migration to RSOC. While we are confident that this transition will ultimately benefit our business, we are aware that it may lead to some short-term volatility.

In fact, we have seen very strong first 2 quarters in this year. However, it should not be forgotten that this is a new product for all market participants, and we expect that optimizations will be necessary in order to have a strong product in the long term, which in turn will result in a temporary decrease in revenue growth in the coming months. Nevertheless, we are encouraged by the better-than-expected performance in the first 6 months and by the ASO onboarding process, which is well underway. We are committed to driving this transition forward and are confident that it will have a positive impact on our AdTech business.

Turning to our capital expenditures on Slide 19. We can see that our total CapEx in the first half was EUR 23 million or 2.6% of our total revenue. This is a slight decrease from the previous year where our total CapEx was EUR 32 million or 4.3% of our total revenue. Breaking down our CapEx, we can see that our growth CapEx was EUR 19.6 million or 2.2% of total revenue, which is mainly from the expansion of our cloud solution capabilities. Our maintenance CapEx was EUR 3.4 million or 0.4% of our total revenue and remains low and predictable. CapEx was notably low in the first half of the year, primarily due to the phasing of investments throughout the year.

Looking ahead, we project total CapEx for the full year at around EUR 80 million. This is slightly below our internal initial target range of EUR 80 million to EUR 90 million or around 5% of expected revenue. This reflects disciplined investment to support innovation, growth and operational scalability. Let's now walk through our free cash flow for the first half of 2025. Starting with adjusted EBITDA of EUR 269 million, we deduct EUR 10 million in adjustments, which are mainly stand-alone and LTI-related costs to arrive at reported EBITDA. We then include EUR 23 million in CapEx, EUR 32 million in tax payments and payments in relation to the settlement of the long-term incentive program obligations.

The settlement was made net, which means that the obligations were settled with treasury shares after deduction of the individual taxation of the recipients, but the tax portion is then paid to the tax authorities by us. After including working capital, we reached a free cash flow before leasing of EUR 176 million. Subtracting EUR 8 million in lease payments gives us EUR 168 million in free cash flow after leasing, which is well above the EUR 151 million in the first half of '24. Further, we made EUR 27 million in interest payments and executed EUR 37 million in share buybacks.

After factoring in these items, comparable free cash flow for the quarter stands at approximately EUR 105 million. In the first 6 months of 2025, net debt was reduced to EUR 786 million. This includes both external bank debt and the shareholder loan from United Internet. In the second quarter, we repaid EUR 70 million, reducing the shareholder loan to just EUR 100 million, which we plan to further reduce over the coming quarters. Our net leverage ratio improved to 1.6x net debt to adjusted EBITDA compared to 2.4x a year ago.

The weighted average annual interest rate stands at 4.9%, which will go down further with the upcoming repayments of the shareholder loan. This improved debt profile supports financial stability and provides flexibility in the future. Looking into the outlook for '25. For our core business, Digital Solutions and Cloud, this is unchanged and revenues are expected to grow by around 8% with web presence and productivity growing at around 7% to 8% -- we now expect Cloud Solutions to grow by around 10% compared to around 15% to 17% before.

We remain confident about the midterm growth opportunities in cloud solutions and expect our public cloud to get around 20% growth over the next quarters. Adjusted EBITDA margin is still expected to be around 35%, up from 32.9% in 2024. Based on the better-than-expected business development in the AdTech segment in the first quarter as well as our ongoing cost control, we already specified our outlook for '25 in May and increased the expectation for revenue growth in the AdTech segment to around EUR 400 million compared to above the previous year's level before. In May, we already increased the outlook for the total adjusted EBITDA from EUR 510 million to EUR 520 million.

Due to the overall positive development and as mentioned, the continued cost discipline, we are now increasing our guidance again and expect adjusted EBITDA to grow by approximately 17% to around EUR 530 million. That concludes our presentation for today. Hopefully, we provided you with a comprehensive overview. We will continue to work hard for our customers, improve our products and services and strengthen our market position. With this, I would like to hand back to the operator to open the webcast for any open questions.[Operator Instructions]

Our first question comes from George Webb, Morgan Stanley.

[George Webb, analyst]

I've got a few questions, please. Firstly, just as we think about ad tech, could you give us an update on how far through the transition you are at the end of the third quarter? And maybe you won't be willing to give this, but if you could add any color on what you're seeing in terms of growth rates on the AFD side versus the RSOC side, that would be interesting. Secondly, on cloud, I mean, I guess what's driving the downtick there on your expectation for 2025? We wouldn't have expected, I guess, IT to have deliveries in Q2. So that doesn't look like the surprise.

But I guess that public cloud business, even in the mix growing at 10% is not strong compared to some of the regional players and certainly not the hyperscalers. So what's driving that downtick? And how do you think about your overall cloud growth rate? And then just lastly, on the revenue target for Digital Solutions and Cloud, you've kept that at 8% for the full year. with that cloud guidance reduced from 16% at the midpoint to 10%, I think that's about a 70 basis point headwind. Are you implicitly expecting a slightly stronger performance from the core business compared to previously? Or is that just rounded in that 8% number?

[Britta Schmidt, executive]

Let me maybe start with the AirTech business and Achim, you might take the cloud question. So transition from AFD to ROC is well underway. We saw ROC overtaking AFD in May. Pictures changed a little bit after that with more quality initiatives coming in from Google, which the market is currently tackling. So overall, as mentioned, we are still optimistic to see the EUR 400 million growth, largely driven by ROC compared to RFD, which was definitely stronger in the first half but it will not be very strong in the second half.

[Achim Weiss, executive]

Yes. Second question was about the cloud growth. First, again, the cloud segment or cloud business segment comprises a lot of different services. There's a public cloud, there's private cloud MSP services, there's VPS service, different things in there. A few of them are not strategic. We acquired them, for example, when we bought S, we acquired some MSP business with that. So this is not strategic, so it's not really growing much. We have now a much larger partner network for the cloud than trying to do it ourselves.

And the other reason -- and so the mix effect shows lower numbers than what is the most important part of the public sector, the public cloud growth. And the other thing is that we are, of course, we're pretty busy with really installing and getting the Iesabund project operational. which just happened basically a week ago with all the testing and final approval of the E to get this live. Now the first customers are on that platform. So it's kept us pretty busy. And that's why like Brega said, we expect now a faster growth again in the cloud segment for the rest of the year.

[Britta Schmidt, executive]

And answering then your second question, so we would see that presence and productivity being in line with expectations. But with the cloud solutions uptick, which we would see over the next quarters, that adds up to the rounded 8% revenue growth for the year.

[George Webb, analyst]

That's helpful. And maybe one last question, A. When we think about the AI Gigafactory initiative, and let's see how it pans out. But from the investor side and from the analyst side, how should we be thinking about the steps from here and the time line and headlines that we should be looking for?

[Achim Weiss, executive]

Yes. [indiscernible] on the time line, I think now there's a lot of commenting phase. So we are talking to a lot of politicians now in Germany, for example, and also in the EU because they're trying -- are they making up their mind how this program is going to be set up? Is it the PPP like probably prior partnership? Is it going to be some other sort? What are the requirements for funding and so on and so forth. So basically, every hour a week, we sent some paper and some statements of what we think the direction should be.

So I think that's continuing until the end of the year. That's at least the idea of the European government to say, okay, we'll figure this out until the end of the year, and then they will start with the real tender and then we need to see if we want to apply or not. So there's plenty of time for us to get prepared. I mean we are doing our business as usual. There's a lot -- I mentioned a lot of AI things coming along. So there's huge demand for AI capabilities. So it is in our plan in some ways anyhow. And if that project works out well and makes a lot of sense for us, we would take the 35% subsidized, why not? That's basically how we look at it.

[Operator]

Our next question comes from Toby Ogg,JPMorgan.

[Toby Ogg, analyst]

Perhaps just first one, just on the AI agents. So you mentioned the 10 to 20 sort of traditional ARPU. And then I think it was 20 to 50 ARPU that you mentioned with virtual assistance. Could you perhaps just sort of walk us through the mechanics of what the approximate buildup of that could look like for a customer if they were to, say, move from 10 to 20 ARPU today to 20 to 50 over time with agents? And just how you're thinking about the revenue model for AI agents?

Is this going to be a monthly subscription fee on top of, say, the baseline website builder? Or do you envisage any consumption-based revenue streams? And then just second question, just again on the AI gigafactories and your submission here. appreciate it's still early. You talked about up to 35% of CapEx being subsidized. Any sense around how the rest will be split, what the total spend could look like? And then sort of any early thoughts on how you plan to fund that?

[Achim Weiss, executive]

Okay. So with the AI first, I mean, it's a very early phase. The products will get released now, not just with our companies. But honestly, I mean, there's a lot of people working on it, I'm pretty sure. So the pricing in the market is not really set yet. That's our expectations. That's how we would start. Depending on the AI agent, a small kind of small agent doing just a very specific task might be cheaper than having one very powerful AI agent taking care of half of your business, of course. It will be very likely monthly subscription like everything else we do.

And it will be on top. It's just different separate products. We are enhancing our website builder product, for example, with AI capabilities all the time, and we have separate modules as well, which are on a monthly subscription. But AI agents are really separate category, new product lines coming along. There will be just much higher in ARPU and typically, companies can use more than one. In websites, you usually need one, e-mails, you need a lot, shop system, you need one.

But AI agents, the more we build, I think the more we'll find use cases or customers will find use cases to use the AIs. And compare a, let's say, EUR 50 a month AI agent taking a job is like a mini job for now, which is in Germany, for example, like $500 or $800. So the comparison is it's not completely not out of pocket. It's a huge saving for companies with all the advantages of 24/7,verSeq and so on and so forth, multi-language, multi-everything.

So I think a price of $50 for a virtual AI employee is really on the cheap side rather. But we will see how the market is developing. It's really everything is at the beginning. We see how the dynamics go, how we start offering what the adoption of the market is, what the competitors are doing. But for sure, everyone is now on the brink of having new product lines with additional revenue coming in.

So it's not subsidized and it's less packaged within other products. And then for the AI factory question, how you finance it, I mean, for such a huge AI factory in the full scale will run roughly $4 billion to $5 billion. That's, of course, a very, very substantial investment. So you have to deduct the 35% from the government. Then we have HOCHTIEF as a partner and HOCHTIEF is very specialized in building data centers and running data centers on behalf of others.

So it will probably take care of all the shell, which is EUR 1.5 billion by its own. And then the rest we will split in the consortium. We're not the only one. We have partners like CPTIF and others, and we'll see how we finance it. There's like infrastructure funds we could use. So in the end, we're not planning on having a huge amount of CapEx for this project. But the clear -- the financing strategy is not made up yet because we don't even know how the structure with the government should look like or could look like. So this is all work in progress. But I think it's pretty clear that we don't want to invest a huge amount of money. We build this up in a very sensible way.

[Britta Schmidt, executive]

Yes. Let me maybe add on this. As Achim already mentioned throughout the webcast, Obviously, we are looking into the business case now trying to get our heads around the economic model in discussions with the European Commission, et cetera, trying to understand how it will work out. Overall, I think we are -- in terms of that, if we just look at our deleveraging profile, so we do have a sensible amount of financing available if needed. As Achim mentioned as well before, it depends as well how many partners are in the consortium, et cetera. But we think we are well positioned, and we see a strong support from the banks we are working with.

[Operator]

Next question comes from Dhruv Shah.

[Dhruva Shah, analyst]

I have 3, if that's okay. First, just starting with cloud. So yes, cloud growth was muted again this quarter. I mean IT ZB revenues should boost that in Q2. But excluding that, in terms of the underlying growth, do you expect that to accelerate midterm? So you've talked a bit about digital sovereignty as a theme. But perhaps could you be a bit more granular and share some details on how you'll transform that thematic tailwind into more tangible financial growth, both for the top line and for profitability.

So that's on cloud. And second is on WEP&P, the core business. Customer acquisition was strong for another quarter, but ARPU growth slowed. In terms of the mid-single-digit price rises in that segment, how have they landed so far? Are you seeing any impact on NPS or volumes? And finally, the third question is a bit more broad in terms of financials, but the federal cabinet in Germany has recently approved 30% accelerated depreciation now through to the end of 2027. So just wondering if there are any early indications of whether the maintenance and cloud investments by IONOS are likely to qualify for this and what the potential uplift to earnings could be?

[Achim Weiss, executive]

Maybe let me start with the cloud. So yes, we do expect the growth in cloud. So first of all, the Intelet now is live, so they start using the cloud and cloud is consumption-based in the end. So that will drive the revenue -- and the other thing is, like I already said, the pipeline is filling because there's a lot of interest now. So people -- a lot of larger companies started talking to us about what could you offer? What's sovereigy in your case? And we can be -- I think we are more survey than everybody else in Europe because the full stack is developed by us. It's either open source or our own software.

Engineers are sitting here in Berlin. So this is more European, I think, than it gets or nothing that gets more European than what we do, let's phrase it that way. And so now it's kind of the discovery phase, large companies who are usually with the hyperscalers now look around and see, okay, these are alternatives, what can you offer? What other workloads we could transition. And now we're starting the sales cycle, in some case, means like testing something, looking if the system works well in our environment and so on and so forth.

So we expect these leads which are coming in right now to materialize over the next 9 to 12 months. which is typically a cycle where from thinking, doing the test, looking at the transition project, moving some workloads, starting to generate noteworthy revenue. And from a profitability, I think we're still keeping it roughly breakeven. That's what we did in the past. And I think right now is not the best time to -- or would be not the greatest time for trying to pull out a lot of margin because now it's developing. That market is now developing, and we should not underinvest. And I think the investment is what we earn, not more and not less. We don't cross-finance it heavily or anything. And I think that's the way to go forward.

[Britta Schmidt, executive]

Exactly. Let me comment on the web presence and productivity with the ARPU growth in Q2. I think there are several things to keep in mind. So first of all, as mentioned during the webcast, Q1 is usually extremely strong, whilst Q2, therefore, looks a bit odd. So let's keep that in mind. And obviously, just given how ARPU is calculated when a lot of new customers are coming in, which are usually on a lower ARPU as we have 6 to 12 months starting discounts and the ARPU of the customer is building up over time, that is partially diluting ARPU growth.

So I would more look into how ARPU is developing overall. And as I said, it's growing roughly 4% year-over-year, which we believe is strong. Price adjustment initiatives are still rolling in. So we would see them as well stronger going forward. So then in terms of NPS, yes, we do see a slight downtick in NPS, not unexpected. And we are confident to get it back to levels which we had before. And keep in mind, it's only very slow. But obviously, you will not avoid that some customers might be unhappy with NPS.

And this is reflected in the NPS. But it's not to an unexpected amount, and it's not like we do not get it back up. So we are still confident and around the churn levels as well, which are in line with expectations. So all fine, I would say. And could you please repeat your third question, please?

[Dhruva Shah, analyst]

Yes, of course. That's very, very helpful in terms of color. But the third is just on the accelerated depreciation in Germany, the 70% accelerated depreciation through to the end of 2027. So just wondering if you had any early indications of whether the CapEx at IONOS could qualify for that program and whether there's any rough indications of potential uplift to earnings as a result of this?

[Operator]

The next question comes from Sarah Roberts, Barclays.

[Sarah Roberts, analyst]

Just 3 from me, if that's okay. So firstly, just as a follow-up, your cloud guidance of 10% year-on-year growth implies a 2H growth rate of about 13%. Just want to understand how much of that is coming from the IT Z fund contract and how much of that is coming from kind of underlying growth -- underlying cloud drivers? And then as a follow-on, can you talk through what you're seeing in terms of cloud demand in your underlying kind of core SMB cohort? It seems that the enterprise growth drivers are pretty strong into the midterm from data sovereign.

But I think in the past, you've spoken about SMBs being a little bit more hesitant, particularly in light of the fact that macro is a bit uncertain. Is that still the case? Any color you can add here would be great. And secondly, my question is on the adjusted EBITDA upgrade about $530 million versus EUR 520 million previously. Just want to understand in a little bit more detail what are actually the main drivers of this coming through? Is it simply a factor of cloud expectations are lower and that comes with lower margins? So is this a mix effect?

Or is there kind of underlying cost improvements that we should be aware of? And then thirdly, there's been a bit of noise with the kind of rise of low and no-code AI web builders that have been rapidly gaining user base over recent months. Just wanted to understand whether you're seeing any changes in the competitive environment? And how are you thinking about the potential threat from these kind of new AI start-ups that are coming through over time?

[Britta Schmidt, executive]

Let me start with the cloud IT and the uptick over the next quarters. So a large portion will be driven by TSightBund. As we mentioned before, we do see a strong demand, especially as well from the SMBs. But let me phrase it that way. We are more cautious now into turning it into revenue as we see from the past that those projects can take longer. And even if those customers are locked in into cloud, it takes longer to develop the revenue over time, given their capabilities from smaller customer side in order to build up their own cloud. So that takes a little bit longer. But the -- especially on the smaller side of customers, we really see strong demand coming in. and see a lot of new customers joining us in Cloud Solutions. In terms of the adjusted EBITDA upgrade, this is mainly a driver of cost discipline where we do see a strong development driven by several initiatives, which we internally started. Obviously, as well the very strong development of EdTech in the first quarter at its bits, still being very profitable. So overall, it's more cost improvements rather than any -- and the operational leverage in the business, I would say, and we are growing well. So nothing unexpected, I would say, if you look into the business model and how strong it is from an operational leverage perspective. Last question, I think...

[Achim Weiss, executive]

Maybe also for the SMB and the cloud, I think we doubled the inflow per quarter from last year for small medium businesses. But of course, ARPU is lower and they need a little more help, but that's exactly what we are very good in compared to the hyperscalers. We have very much closer ties to small, medium businesses, better support levels for them and so on. So this is a valuable customer group now picking up substantially.

So for the AI, low code, no code, loggables and these kind of companies, actually, our big friends because a lot of the agents we're building, lots of the AI features we're building, we're using or we're partnering with smaller companies who have great ideas who have already started with the product. So we don't have to develop everything ourselves. So I don't see them as competition. Of course, they are in some ways, but they tend to line up with us. Why? Because we have a huge customer base. We have support, we have billing.

We have -- we can do mass market. We can do support millions of customers, and they have just a product idea. So from having a product idea and maybe a prototype on a technical side to come up to scale and have 6.5 million base customers to talk directly to and such a marketing machine and brand machine that we have, that's very appealing to them. So I'm very happy for all the small customers or small start-ups and smaller companies with good ideas coming to us.

And we -- I think we're working with like roughly 20 different companies together right now to see what are the products they offer and how we can integrate them in the next 6 to 12 months. And basically, every week, there's 1 more or 2 more. So we don't see them as a threat. We see them as as an enabler for us to be even faster with more agents and more AI features to come to the market sooner.

[Operator]

Our next question comes from Stéphane Beyazian from ODDO BHF.

[Stéphane Beyazian, analyst]

Yes. I've got a couple, if that's possible. Let me start with the AI gigafactories. First, if I understand well, you target the whole package across Europe. But would it be fair to assume that you could be only selected for one factory, for instance, at a cost of EUR 1 billion. Then you also mentioned that you need guarantees on long-term demand, but how could you be guaranteed that?

And also what makes you confident that you can be successful in AI cloud? I guess my question there is how close that business is to your current cloud solutions business? And I've got also another question on ad tech revenues. I was just wondering if you already see the signs of lower activity or if the visibility is so low in that division that actually you may end up surprised positively again as much as what you did in the first half.

[Achim Weiss, executive]

Okay. For the AI Gigafactory, the European Common wants to support 5 -- you're talking about 4 to 5, but I think it's going to be 5 different AI gigafactories. And each of these gigafactories is around EUR 4 billion to 5 billion. So this is a huge project across Europe. And I'm pretty sure there will be 1, maybe even 2 of these gigafactories in Germany. There will be, for sure, one in France. There probably will be one in Spain.

So that's what the idea of the European Common is to really booster or foster Europe and give some help for companies like us to establish a huge European AI cloud market. So we are applying only for one. We're not doing it across Europe. We only apply for one in Germany because we think that's the -- it's our strongest position here, our home turf. I know lots of politicians. So I think we are most suited to win the German pitch instead of trying to do it in Spain, where we also have companies and stuff.

But I think Germany is the most obvious ones for us. And you're talking about the sales guarantees. Of course, we don't get sales guarantees from the market, but we can get sales guarantees from public sector. And that's part of the initial idea of the EU to say, okay, we want to also -- we want to subsidize 35%, but we also want to guarantee a certain amount of workloads. But this is all part of the package being worked out right now to see, okay, how much will they take off the resources. For example, if you have 50,000 GPU cards, will there be a base customer or anchor customer for like 20,000 of these GPUs for 5 years.

So that would be nice because it's much easier to calculate on that level. And then it really fits very well in what we're doing because we are already selling AI cards, GPUs and services on top of these cards, especially on all with the new AI agents and all the products coming along, all of them need our cloud services and all of them need our AI services.

So it's basically that we would have anyways, we would not build these huge data centers at once if we wouldn't have the load, but we would gradually walk into it anyways. But now with the subsidize or the possible subsidize of the EU, it would make much more sense or it could make much more sense to now engage in this project. And that's why we're looking into it and find out what the requirements in the end are and if it's -- it's suitable for us.

[Britta Schmidt, executive]

Yes. And let me comment on the AdTech. So as I mentioned before, AFD is definitely on a lower trajectory by now with RSOC still being optimized from both sides, from the Google side, but as well from our side, from the market side, so the provider -- the platform providers. So there's a lot of optimizations in the products going on. So overall, as you have already seen on the slide, we expect revenues to be slower in the second half of the year than it was in the first half. I don't think we'll -- yes, that's the current outlook, what we are currently seeing in the market and how the AFD business is currently developing with a lot of, as mentioned, optimization ongoing in the ROC product.

[Operator]

Our next question comes from Gustav Froberg, Berenberg.

[Gustav Froberg, analyst]

Three short ones from me. Firstly, on the cloud as well. I mean, growth is slowing. You mentioned it a little bit that you are not thinking about cutting back CapEx, incremental OpEx, et cetera. But would you consider reinvesting it at higher ROI levels elsewhere or conversely doubling down to reaccelerate any growth?

I'd be curious to hear about CapEx and OpEx in cloud. Then on the data center strategy for cloud solutions more broadly, I'm just curious about an update on your footprint there and what the pipeline looks like in terms of your actual data centers for the next 12 to 24 months and whether or not we'll see any step changes in CapEx? And then last one on AI. Could you tell us a little bit more about the uptake of AI solutions that you have already rolled out to some of your products and how you see this trending? So what level of customer penetration should we expect for AI going forward?

[Britta Schmidt, executive]

So let me start, and Achim, please -- in terms of cloud solutions. So we think with investing what we earn, we are well positioned to drive the future growth as well covering the demand, which is now stronger than it was before. And as well, we believe in terms of data center capacity, we are well set up.

[Achim Weiss, executive]

Yes, I can take this. I mean we -- we operate like 32 different data centers right now and 11 of them are our own. We just built one in the U.K. 2 years ago, went operational, which still has lots of capacity. We built this in different steps. And for the cloud business and stuff, I think we are pretty fine for the next 2 to 3 years from the capacity management, there's nothing to expect like building a new huge data center or anything else. The AI project, the AI gigafactory project is different.

But from the natural way going forward, there's nothing to expect really. And then uptick in AI solutions, I mean, the whole AI agent thing is coming to market soon. So there is no value numbers right now. But for the core products where we also have AI integrated, we see, for example, in the website builder product, there's -- I don't know the number from my heart, but I think 60% of the customers are using the AI version already or you can have both ways. You can do it manually like in the old days, which are not so old, but then you can also do the AI, you can choose and you can switch between.

And we see like 60% already using the AI approach to create the website. But this is not an additional product. It's just an enhancement of the website building software we have. So it's a bit -- and then it's a lot of other projects where we have AI integrated. In many ways, it's part of the base feature and then something on top. So it's a bit difficult to come up, and I think we don't really report these numbers, how much of the revenue is already AI and try to split everything in all the product lines.

I think we are not -- it's pretty hard because it's integrated in most of our product lines, to be honest. So it's more or less seamlessly integrated. But from the usage, I can tell you, of course, I mean, I guess every one of yourself makes this experience using AI more and more every day, even if it's only ChatGPT for writing a text or something. But there's no way back. usage is increasing every month in all the different product lines, all the AI features.

First, because they're getting better, more feature-rich and the content is getting better, what the AI generates. So the quality is improving every quarter. And then people are getting more and more accused to using the AI support. So there's only way forward. It's only going to be more. And at some time, we might release separate numbers for AI usage or revenues, but we don't do this today.

[Operator]

Our next question comes from Nizla Naizer, Deutsche Bank.

[Unknown Analyst]

I have 2 questions from my end. The first is maybe a bit of a combined one related to the AI topic earlier. A, could you remind us what's the investment from INOS' end to deploy these agents? You mentioned that you're working with several partners. So is the potential revenue that you get from an incremental step-up of this revenue high margin or low margin compared to your typical WP&P margin? Some color there would be great.

And linked to that, maybe when you look at your leverage where it is, would you even consider inorganic opportunities where you acquire certain partners? How are you thinking about the future M&A strategy with this sort of opportunity in mind? That would be question one. And question two, 70,000 net adds in Q2 was a lot than we expected and quite impressive in our view. Where are these customers coming from? Are there certain geographies that are doing better than others? Like any color on maybe how the U.S. is also performing linked to that? And how should we think of growth in the next 2 quarters on the customer base, which I guess, is important for the long-term story?

[Achim Weiss, executive]

The AI costs and margins, I think the margins are going to be huge. Typically, the AI costs are low because it's only inference services. So training a large language model or training a big model is very compute-intensive. So it's very costly. But using the ready-made model with the rates already calculated, just to the inference. So running a query through that model is much cheaper and does not take a lot of CPU resources for a simple question or for a daily task. So we don't see that there is going to be a huge cost and more of the services.

And if you talk about EUR 20 to EUR 50 per agent, there will be a huge margin, much higher probability than everything we've seen so far in different product lines because that's hardly any cost associated with it. And so with the partners, you said inorganic opportunities, of course, there are. But we're not -- the first step is not like going out now and trying to buy a lot of small start-ups. The idea is partner with them, see what works, and then we can still do the next step. We can either -- we program the whole thing because we would have the capabilities. But we really want to find out what the market is expecting or accepting what are the use cases now, what are the adoption rate, what is the gate product, just product development right now still.

And once we are on a more clear road map, we can think of is there one of the partners which wants to sell HIselv we can acquire a stake. There's lots of opportunities. And especially if you're one of the high or the main partners of these start-ups, which is our intention, being one of the largest customers of them, we have tons of opportunities. That's what we did in the past as well in some cases. So yes, there is organic opportunities. And then the 70,000 customers, you want to answer, Britta?

[Britta Schmidt, executive]

Yes. So as we already mentioned throughout the webcast, the Q2 numbers haven't been an outlier. So we see continued strong customers joining us. But keep in mind, Q3 might be falling a little bit behind due to the seasonality, which we are usually seeing and then a stronger Q4. But overall, we aim to continue the growth, which we are currently seeing in customers. And I think then you asked around geographic split or something, if I'm not mistaken.

So we do see the U.S. being relatively strong, but as well Germany and the U.K. Currently, Southern Europe is a little bit behind. However, this is nothing which we haven't seen before. The countries fluctuate a little bit. We are investing our marketing spend based on an ROI, so CLTV over CAC. So countries might fluctuate how we -- where we do see the best ROI coming in. So overall, broadly, I would say, broadly in line, most of the countries with U.S. particularly strong and Germany and the U.K. as well for the first half.

[Operator]

Ladies and gentlemen, that was the last question, and this concludes our Q&A session. I would now like to turn the conference back over to Stephan Gramkow for the closing remarks.

[Stephan Gramkow, executive]

Yes. Thank you, operator, and thank you all for joining today's call. Please feel free to reach out with any follow-up questions you might have. Have a great day. Stay safe, and goodbye.