Telefonica Deutschland Holding AG
XETRA:O2D
Earnings Call Analysis
Q3-2023 Analysis
Telefonica Deutschland Holding AG
Telefonica Deutschland saw a 4.8% growth in revenue compared to the previous year, reflecting increased momentum in mobile service revenue and successful strategies such as the launch of a new automobile portfolio and 5G initiatives. Operating Income Before Depreciation and Amortization (OIBDA) also grew by 2.7%. This growth path indicates the company's robust business model and its adherence to its full-year '23 guidance.
The company has significantly engaged in ESG initiatives, achieving a record high employee satisfaction rating, and supporting social endeavours without compromising other ESG commitments. Despite the inflation and cost pressures impacting employees, the company has made one-off payments to employees. Telefonica Deutschland remains involved in network modernization and has taken initiatives to support customers in crisis areas.
With strong results and business momentum, Telefonica Deutschland remains on track to deliver on its upgraded full-year financial outlook. The company expects to continue in a rational and dynamic market environment for mobile and fixed services. A focus on high-value market segments is anticipated to drive profitability and the company targets meeting or slightly exceeding consensus for full-year '23 free cash flow after lease.
The company benefits from the robust macroeconomic environment in Germany, with indicators such as easing inflation and stable unemployment supporting continued growth and confidence in its strategic objectives.
Telefonica Deutschland is following a strategically structured accelerated growth and efficiency plan with three pillars aimed at growing market share, enhancing network quality for better customer experience, and improving agility and operational efficiencies. This framework supports the company in developing and pursuing new business opportunities, as well as optimizing network capacity deploy at commercial terms instead of remedy terms, accelerating business efficiencies and speeding up transformation.
The company reported strong growth in the third quarter with a 2.2% increase in revenue year-over-year and a significant gain in mobile service revenue by 3.4%. While handset sales slowed down by 2.1%, the revenue from fixed services continued to grow. There was a robust growth in the mobile postpaid sector with 396,000 net additions and a low churn rate, indicating the appeal of the O2 brand and enhanced network and service quality.
Fixed broadband showed healthy growth with net additions of 31,000 in the quarter, and an improved churn rate of 0.8%. The Average Revenue Per User (ARPU) for fixed broadband continued its upward trend, growing by 2.2% to EUR 25.60.
Telefonica Deutschland achieved an improved OIBDA growth of 3.6% to EUR 665 million, led by the improved mobile service revenue quality and operational efficiencies. The OIBDA margin expanded by 0.4 percentage points to 31.2% despite increases in operating expenses.
The personnel expenses increased by 12.7%, however, the company still expresses confidence in achieving strong growth across all key performance indicators including free cash flow, which showed an 11.0% year-over-year growth.
Having passed the peak of investments, Telefonica Deutschland is now seeing efficiencies in both operating expenses and capital expenditure, as most of the infrastructure has now been built. The management highlighted the successful infrastructure deal with ATC and the potential to leverage network capacity for growth, enabling the company to absorb the impact of the loss of a wholesale customer.
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Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Telefonica Deutschland Q3 2023 Results Conference Call. [Operator Instructions]I would not like to turn the conference over to Christian Kern, please go ahead.
Thank you, operator. Good morning, and thank you for joining us today.On behalf of our management team, it is my pleasure to welcome you to the Q3 '23 Results Call of Telefonica Deutschland.Before proceeding with the management presentation, we would like to inform you that the financial information contained in this document has been prepared under IFRS. As usual, this presentation may contain announcements that constitute forward-looking statements, which are no guarantees for future business performance and involve risks as well as uncertainties. Also, certain results may materially differ from those in these forward-looking statements due to several factors. We invite you to read the full disclaimer on the first slide of this presentation. Finally, the presentation is also available on our IR website.With me today are Telefonica Deutschland's CEO, Markus Haas; and CFO, Markus Rolle, who will take you through the presentation followed by a Q&A session.Markus, without any further ado, over to you now.
Thank you, Christian. Good morning, ladies and gentlemen, also from my side and warm welcome to our Q3 2023 results call. And thank you for taking the time to join us.Today, we are delighted to report another strong set of results and we are fully on track for the half year upgraded full-year '23 outlook. Telefonica Deutschland's strong business momentum is evident and is making excellent progress across the 3 strategic priorities. The focused execution of our strategic priorities is the main driver of our commercial and financial success. Telefonica Deutschland is leading the German market with more-for-more initiatives and continues to deliver its ambitious ESG agenda.Let me now highlight our strong set of 9 month results, which are demonstrating our ongoing strong business momentum. Revenues grew 4.8% year-over-year, underpinned by accelerated mobile service revenue momentum in combination with the successful launch of the company's more-for-more automobile portfolio and 5G mass market enablement. OIBDA posted strong 2.7% growth, supported by improved mobile service revenue quality on continued own brand momentum. And finally, CapEx to sales stood at normalized levels of 12.9%, while we continue to focus on natural quality. Overall, we have extended our growth path, our robust business model and are on track to deliver full-year '23 guidance.On my next slide, I will highlight our latest ESG initiatives. During these unprecedented times, social engagements have moved into center stage without reducing our commitment to other key areas of ESG. Telefonica Deutschland's employee satisfaction rating achieved an all-time high in the third quarter. The inflationary environment and cost pressures are also impacting our employees. Hence, we have made one-off payment to our employees to ease these cost of living pressures. We have made excellent progress with our network modernization to also accommodate the steady growth of mobile data.At the same time, we are continuously improving the green energy mix to support climate neutrality. In the event of crisis, telecommunication services became and have become even more critical. Hence, Telefonica Deutschland is providing telecommunication support to customers in such crisis areas so that they can say and stay easier in touch with families and friends. Further supporting Germany's digitalization agenda, Telefonica Deutschland has developed various safety and security guidelines, as well as education program focused on the young and elderly people.On my next slide, you see that on the back of our strong 9 month results and continued business momentum, we are fully on track to deliver at our half year results upgraded full-year outlook. Overall, Telefonica Deutschland expects a continuation of the rational yet dynamic market environment for both mobile and fixed. On this market backdrop, we remain focused on capturing high-value pools to drive profitable across our entire sales funnel. Hence, we are on target to meet or slightly exceed free cash flow after lease consensus for full-year '23 as published on our website.On my next slide, let me share with you the robust macro outlook for Germany, which further boosts our confidence in the business going forward. Telefonica Deutschland's single-country exposure to the overall robust German macro environment gives us further confidence to continue our growth path. Let me flex 3 key indicators. Easing inflation. Telefonica Deutschland continues to manage the inflationary environment well, while the latest predictions also indicate easing inflationary pressures.Stable unemployment. On the back of a stable outlook for the unemployment rate, expectations are little changed to the purchasing power with communication services remaining a top priority of the German consumer. And finally, GDP growth. Expectations for the German economic indicate a return to growth already next year.Now, I like to put this positive macro backdrop for Germany into context how it supports Telefonica Deutschland's strategic framework going forward. After the successful completion of our 3 years Investment-for-Growth program, Telefonica Deutschland is opening the next chapter of this success story. Telefonica Deutschland's management team has a proven execution track record and is now building on even more resilient business model based on its accelerated growth and efficiency plan. The company continues to pursue sustainable revenue and free cash flow growth, while choosing a different path to success.Our accelerated growth and efficiency plan provides a strategic framework based on 3 key pillars; grow market share by rebalancing the revenue mix; enhance network quality to further improve customer experience and accelerate our transformation to enable agility and efficiencies. This strategic framework allows Telefonica Deutschland to explore new strategic options such as develop new business and efficiency opportunities, utilize speed up network capacity, deploy at commercial terms rather than remedy terms, accelerate business efficiencies and speed up transformation and dynamically weigh strong business opportunities and radical efficiencies. The management team is fully committed to drive the continued growth story of Telefonica Deutschland and the company's can-do spirit has only strengthened while formulating the next chapter of the company's success story.To close, I'm sure you have already seen the intention of Telefonica SA, our major shareholder on the offer for the remaining shares in Telefonica Deutschland. In line with the formal process, we will assess the offer.Markus, now over to you to lead us through the Q3 highlights in more detail.
Thank you, Markus, and good morning, ladies and gentlemen. Also from me, a warm welcome, as always.It's now my pleasure to discuss our Q3 2023 results in more detail. Telefonica Deutschland has delivered again another quarter of robust growth, and we have underpinned our value-over-volume strategy. Revenue posted a solid growth of 2.2% year-over-year, coming in at EUR 2,131 million in the third quarter. This is driven by the ongoing mobile service revenue momentum.Mobile service revenues recorded a strong growth of 3.4% year-over-year to EUR 1,523 million. We see continued own brand momentum, and also a solid contribution from our partners. Handset sales slowed to minus 2.1% year-over-year to EUR 395 million. With the high-value smartphones still remaining very popular, why we see, as expected, following the record quarters, the overall customer demand for the O2 My Handy contract was somewhat softer, but fully in line with the German market trends. Fixed revenue grew by 1.8% year-over-year to EUR 208 million, with the fixed retail broadband revenues recording even stronger growth of 6.1% year-over-year in the third quarter.My next slide shows another quarter of Telefonica Deutschland's robust commercial traction in mobile and fixed. Mobile postpaid delivered 396,000 of net adds. This is driven by the continued high O2 brand momentum and the solid contribution of the partner brands. The O2 contract churn stood at a low rate of 1% in Q3 2023, reflecting the O2 brand appeal in combination with the enhanced network and service quality.O2 postpaid ARPU growth accelerated to 2% year-over-year in Q3. This is reflecting the demand for high-value tariffs, while we see, of course, partly an offsetting effect by the MTR reductions. The underlying O2 postpaid ARPU growth was even stronger at 2.6%. Fixed broadband net additions were 31,000 in this quarter. This is reflecting the success of Telefonica Deutschland's technology-agnostic O2 my Home tariff portfolio and also the low churn rates. The fixed churn rate improved by 0.3 percentage points year-over-year to 0.8% in the third quarter. Fixed broadband ARPU maintains its growth path, driven by the increasing share of high-value customers in the base and is up 2.2% to EUR 25.60.Let's move to OIBDA and free cash flow on my next slide. OIBDA growth improved to 3.6% year-over-year and stood at EUR 665 million. This is driven by the improved mobile service revenue quality based on the continued own brand momentum, which was partly offset by the anticipated and mentioned OpEx increases. OIBDA margin expanded 0.4 percentage points year-over-year to 31.2% in the third quarter.With regards to the Q3 cost development, it's worth highlighting the following. Supplies were minus 2.6% year-over-year, slightly lower at EUR 631 million in Q3, reflecting the positive effects from the MTR-cuts and the volume-related hardware cost of sales. Connectivity-related cost of sales and hardware cost of sales accounted for 39% and 58% of supplies. The personnel expenses were up 12.7% year-over-year to EUR 168 million in Q3, mainly reflecting the increase of base salaries because of the year-over-year general pay rise in full-year '22-'23, in combination with a slightly higher FTE base year-over-year, driven by insourcing of key capabilities to support transformation and growth ambitions. Other OpEx were slightly up 2.6% to EUR 688 million, mainly reflecting the commercial activity in the quarter, for example, for the O2 mobile portfolio, as well as the continued technology transformation. As expected, energy costs presented a small tailwind in Q3 2023.Turning to year-to-date free cash flow on the right side of the slide. Year-to-date CapEx of EUR 816 million was lower by 9.5% year-over-year, with a reduced CapEx to sales ratio of 12.9%. As a result, the operating cash flow, OIBDA minus CapEx, amounted to EUR 1.1 billion year-to-date. The lease payments for antenna sites and leased lines amounted to EUR 553 million year-to-date. Finally, the adjusted free cash flow after lease is EUR 223 million year-to-date with the usual back-end loaded profile.On my next slide, we provide some more details with regards to the free cash flow. Operating cash flow rose by 14.5% year-over-year to EUR 1,105 million in the first 9 months as a result of both, the strong operating and financial performance, as well as the CapEx normalization post the successful completion of the company's investment for growth program. Working capital movements of minus EUR 264 million year-to-date were on broadly similar levels as in the prior year. The main driver for the decrease are the CapEx payables of minus EUR 148 million and other working capital movement of minus EUR 117 million. Main drivers of the other working capital movements were an increase in prepayments of roughly EUR 50 million and inventories of EUR 10 million. Lease payments amounted to EUR 553 million year-to-date.As expected, the free cash flow after lease is well on track to meet the published company compiled consensus of around EUR 550 million for the full-year 2023. Consolidated net financial debt increased to EUR 3.5 billion, and the leverage ratio of 1.4x remains well below our self-defined upper limit of 2.5x. In October, Fitch affirmed Telefonica Deutschland's BBB-rating with a stable outlook. This rating is reflecting our solid position in the rational German telco market, well-invested networks, low leverage and also our conservative financial policy.Before we kick off the Q&A, let me summarize the key points of today's presentation. Overall, we achieved a good top line growth and remain highly committed to drive free cash flow growth and long-term shareholder value. We are focusing on strategy execution to drive profitable [Technical Difficulty] by leading more-for-more across our mobile portfolio, supporting our value-over-volume approach. We stick to our ambitious ESG roadmap to promote a sustainable digital future. On the back of the strong 9-month results and continued business momentum, we are fully on track to achieve our at half year upgraded full-year 2023 outlook. Telefonica Deutschland's next chapter to build an even more resilient business model based on its accelerated growth plan and efficiency plan is to come.Now, we look forward to your questions. Operator, please go ahead and start with the Q&A session.
[Operator Instructions] And the first question comes from Mathieu Robilliard from Barclays.
The first question I had was around the deal. I understand this is an offer that is being made by a subsidiary of Telefonica. What happens if investors don't bring the shares to the offer? Can you then squeeze them out, if, I mean, a minority does not bring them? Is there any particular mechanism we should be aware about how the offer works?I was also wondering if -- assuming that the offer is successful and you're taking out of the market, if that would have any implication in terms of how the tax asset carryforward that you have could be used more efficiently or less efficiently. And then on the operations themselves, very strong numbers. ARPU is up. Churn is down. How would you characterize today the competitive environment? And where do you think you're winning against the competitors?
Mathieu, it's Markus Haas speaking. Thank you for your questions. I think you will understand with the announcement of this morning, you will understand that all questions related to the voluntary offer would need to be related to Telefonica S.A. for all details to be asked. On your second question on the market, I think what we clearly see is in a very healthy and dynamic market. We've been able really to gain traction in the third quarter. Especially in the prepaid segment, we implemented more-for-more, followed by the postpaid implementation in the second quarter. You have seen that the strategy of growing in the market with value customers has worked out in the third quarter. And also in fixed, we have momentum. So, we have in all business lines, in all product lines, we've been able to deliver solid underlying growth in order to achieve our full-year targets.
The next question comes from Ulrich Rathe from Societe Generale.
You commented on wage inflation in 2023. Could you talk about what you expect to have to do with your wages, with your salaries in 2024 based on everything you know at this point?Second question is there's a lot of debate in Germany about the situation in fiber has come a little bit under pressure. There's a sort of a big debate between the [ old nets ] and Deutsche Telekom about strategic overbuild. Could you comment on Telefonica Deutschland views on this?And my last question is, is there any reason driven by the business -- by the way -- it's going, by the way, the leverage looks, the way the free cash flow outlook looks, any reason at all to cut the dividend based on the operations and financials of Telefonica Deutschland?
Good morning, Ulrich. It's again Markus Haas. I think, on the wages, we just increased wages on the beginning of September now, at least until next year. So let's see, in line with the inflation outlook for next year, that could clearly go below 3% for Germany. We will do, throughout the year, consider and go back to the workers' council. As you are aware, we are not unionized as a company. And the Management Board is making a proposal to the workers' council, and then this will be distributed. So from that perspective, we clearly watch the development and monitor the situation, especially on inflation very, very carefully and see what is the right level. Effectively, the one-off payment this year -- so this is a non-recurring commitment, the one-off payment, especially for the situation reflecting in 2023. And from today's perspective, we clearly see a different position with the inflation rates going down as I highlighted.With regards to fiber and Telefonica Deutschland is fully committed to its UGG investment. Also in the third quarter, we had another installment payment to UGG out of the EUR 100 million, a commitment that we have. We have now roughly spent 30% of the overall commitment. And so the remainder will be carried out in the coming years. With the rollout, we see very good rollout progress. So on that level, depending where you build and due to the rollout strategy, I believe, Germany, from our perspective, one of the most attractive fiber rollout countries because we are a follower country in fiber.We clearly benefit from the new methodologies, but we also see demand in the area that UGG is building, and we as an anchor customer are selling O2 fiber in these areas. We could clearly achieve a high market share, significantly higher than our average market share than we have in fixed. So from this perspective, due to the rollout strategy and the long-term commitment from us, but also the other shareholders in UGG, we remain very confident that it is going to be a very successful investment. And I think, finally, that has been the key ones on dividend. We reconfirmed the EUR 0.18 per share, as we've done on the 2nd of August for 2023 to be paid out in 2024. And we also reconfirmed free cash flow after lease, as I mentioned, in line or slightly above the consensus that's on our webpage.
I was really wondering whether the trends you're observing at this point -- I mean, you have talked about the outlook in 2024 to '26 sort of in broad terms already about your plans. Is there anything in these plans that would require a dividend cut in the medium term?
Well, I said in according with the execution of the plan that we will, on a yearly basis, reassess the situation. But as I said, we have a plan that brings us or continues to grow momentum on revenue and also free cash flow after lease is a plan that allows us to mitigate negative impacts from the wholesale P&L, so on that level that we want to remain on the growth track. And in line with the execution and the achievements of our milestones, we will clearly reassess on a yearly basis shareholder remuneration.
The next question comes from Joshua Mills from BNB Paribas Exane.
So on the first one. Rather than focus the questions about what Telefonica is saying on the deal, I wondered if you can answer a couple of points from your side. So firstly, will the Board and will management say whether they think that the offer is attractive? Does the Board need to give a recommendation for the offer. And if you're not in a position to do that today, could you give us a timeline on when we might expect an update from you on your views as Telefonica's equation on this offer?And secondly, I'd be interested to hear how you think Telefonica equation could be run differently as a private company rather than one which has a listing? And obviously, there's some detail in your presentation, I think in the Telefonica takeover offer, they also referred to investment levels. So do you think that within this target as a better network, we should be anticipating more CapEx spend as well?And then the final thing. I want to ask about is have you had any new conversations or any updates from either [ on the lines ] or United Internet on the wholesale deal, which you had in place, or any potential mergers in the future since we were last updated on this with your press release back in August?
Thanks, Josh, for your questions. I think, overall, Telefonica Deutschland has been able to outperform the market in the last three years on the back of equalized network quality. We gained market share. Also the Q3 results released this morning underpins again the underlying momentum and the success of our strategy and the implementation of that. So going forward, we clearly want to be a growing company. This is what we put in place, the accelerated growth and efficiency plan that allows us, at the same time, to maintain our growth momentum and grab additional efficiencies. And all in all, this will allow us to grow on all key KPIs going forward and absorbing the effect of the potential loss of [Technical Difficulty].There was an echo on the line. I hope you can hear me again, and make sure that everyone is on mute. And as said, we continue this growth momentum going forward. And with regards to the deal, as I mentioned earlier, I think this is a voluntary offer by Telefonica S.A., and all related deal questions should also be related to Telefonica, please.On the last question, I think we will build a growth momentum by tapping into all segments, leveraging all existing sales channels, existing partnerships. And all-in-all, together with the efficiency plan that is already in execution and fully underpinned for the next 3 years, we are very confident in order to continue the growth momentum in the set that I just mentioned.
I may want to come back on this question about the CapEx, because I think you have various at investor conferences and various channels communicated that the expected wholesale losses can be mitigated to around EUR 200 million on free cash flow by a combination of revenue growth in your retail business, but also a pullback in CapEx between EUR 100 million, EUR 150 million, say. Has any message that management has made on that basis in the past now being superseded by commentary in this presentation around future investment in the network or anything that comes from the Telefonica takeover?
I think we passed the investment peak into Telefonica Deutschland. And efficiencies, we clearly also see on the OpEx side, but clearly also on the CapEx side. So it's a combination. It's a combined pace under the accelerated growth and efficiency plan, but clearly, majority of the infrastructure has been built. We have gained or still in place to build-to-suit deal with ATC. And that also allows us to grow and catch up on coverage with our competition by leveraging the deal that has been signed. It's fully included in our 3-year case. So on that level, we have a significant buffer. And finally, we also have the opportunity to leverage now the freed-up network capacity and the growth related with that with own customers or partner customers in order to clearly utilize and absorb the impact of the loss of our wholesale customer. So on that front, we would not expect -- fully comfortable with the CapEx guidance that we have given this morning and would also see further efficiencies on the CapEx side in the next 3 years coming due to the points that I just mentioned.
And the next question comes from Stephane Beyazian from ODDO BHF.
Yes. Thank you. Two questions, or two or three, if I may. The first one, I just want to come back on your statements about the plan for growing the market share. What I want to understand is whether there is a step change in your strategy? Or is it just continuing the slow market share grab that you're already doing. So, I just want to sort of understand whether you're going to make commercial actions to go faster in terms of pricing or in terms of handset subsidies? Should we expect something around that in the future?And the second point about the discussion on the market share. Can you give us actually some data points of where you sort of calculate your market share if we exclude the partners and what -- where you think your potential is in terms of growing the market share?And finally, in terms of efficiencies, could you give us a little more data about what level of efficiencies do you think you should be able to achieve over the next couple of years.
Thank you for your questions. I think on the strategy, clearly, we want to grow our rural market share based on the equalized network quality. We are significantly growing in the B2B segment and want to accelerate here and clearly also with bundled customers. What comes on top is we do not have a fair share in all segments of the market. And by just maintaining or achieving net fair share, we still see that this is a very rational market. We also benefit from the rational market in Germany. But we do not need to get very aggressive in order to achieve our growth target that we have given by leveraging all market segments, all existing sales channels and all existing partnerships. So from that level, we are very confident that with the combination of efficiencies and the growth potential that we will be able to absorb the impact on the wholesale account completely and maintain the growth part.Market share growth is defined by the market model for the mobile service revenue for total Germany, where with the growth rate that we have shown in the last 3 years, we have been able to gain market share. And also this morning, we released again a 3.4% mobile service revenue market share for the third quarter year-over-year. So on that level, we remain on a growth level that's higher than the average market share growth of the German market that's between 1.5 percentage points and 2 percentage points depending on the analyst models.And finally, on your question on the efficiencies. It's a combination. I think we see clearly significant potential and efficiencies in CapEx side that are directly cash related, that do not need any restructuring or any additional investments to grab these efficiencies. Now, on the OpEx side, it's clearly the extensive usage of AI, the further digitalization of our customer base and the channels that we have also in that form, running clearly a lean organization. I think Telefonica Germany is today already lean compared to competition. But clearly, we want to go for the next level by facilitating a fully cloud-based infrastructure internally. So, we bring all our systems into the cloud, including the network that will allow us significantly reduce the running cost of our new infrastructure and the shut-off of legacy technology. So that's in a nutshell, the whole package that we are going to execute in the next 3 years. And that will allow us to grab the efficiencies on the one side, and they are fully underpinned and on the other side to underpin the growth path that will allow us to remain a growing company on revenue, EBITDA and free cash flow [ objectives ].
Ladies and gentlemen, this concludes today's Q&A session. And I hand back to Markus Haas for closing comments.
Thank you for joining this morning our Q3 call. You've seen Telefonica Deutschland has momentum. And from that perspective, we are fully committed to deliver our full-year 2023 guidance. It has been narrowed with the Q2 results. And from that level -- and we want to remain a growing company with our accelerated growth and efficiency plan that we structurally presented to you today and looking forward in order to develop the business and grow in the German market in a rational way.Thank you very much for joining this morning. Bye-bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.