1&1:Quarterly Results/2023 Q2

Return to:1&1 Q2 2023 press release |1&1:Quarterly Results/2023 Q1| 1&1 |1&1 Q2 2023 earnings call transcript

Things to be checked

• State of 5G rollout.
• Comments on the expected low-band frequency auction.
• Comments on the fine expected to be imposed by BNetza for failuere to meet antenna sites obligations.
• Comments on national roaming on competitor's network.
• Comments on its contract with Vantage Towers(i.e BNetZa investigations on whether Vantage Towers is to be blamed for failure to meet its contract obligations).
• Revenue, EPS and number of contracts.
• National roaming agreement with Vodafone.

Results

Here is a summary of its Q2 2023 earnings results;

• Revenue declined by 0.4% y/y to € 972.1 million versus analysts estimate of € 986.6 million(+1.1% y/y).
• Service revenue was €795.7 million(+0.4% y/y) versus € 799.8 million expected by analysts.
• EPS was € 0.49 versus analyst estimate of € 0.46.
• There were 193 antenna sites at the end of June and 1&1 expects more than 500 antenna sites in Q3. They had guided for 400 antenna sites in Q3.
• For the full year, 1,000 antenna sites are expected, down from 1,200 previously projected.

  “The annual target of 1,200 antenna sites will probably be reached at the beginning of 2024 due to further delivery delays at our main supplier,” the report noted.

• Customer contracts were 15.96 million vs 15.97 estimate.
• Mobile contracts were 11.91 million vs 11.926 million estimate.
• Broadband contracts were 4.05 million vs 4.04 estimate.
• 1&1 confirmed its forecast for 2023.
• Despite the preliminary national agreement they signed with Vodafone yesterday, it seems they are not letting Vantage Towers off the hook yet.

  “If a penalty should be levied, we will accept our responsibility for the delay and also look into possible claims for damages against Vantage Towers,” the report said.

Earnings Call

Our summary of the earnings call can be found in our MindMap.

Below is a detailed summary of the earnings call;

Revenue, Access Contracts, Market Dynamics

• Have witnessed a decrease in the number of broadband lines for a number of quarters but they are confident that they can stop the decrease in the fourth quarter due to the fact that their old ADSL customers, where cancellation rate is high, can be migrated to the VDSL, which they can handle very well(MR).
• Forecast revenue to increase by 4% in the second half of the year, bringing service revenue growth to 2.2% in the full year(MR). Reasons being; they had less aggressive offers in the market in the first half of the year like competitors, implemented price change in the first half of the year that will have an impact in the second half and they expect a larger growth of participants in the second half(they expect 300,000-320,000 contracts)(Q&A).
• Consumers accepted the price increase and haven't seen them dispense with their products(Q&A).
• Network operators have shut off against service providers as of today; hence the need to examine competition(Q&A).
• Slower decrease in landline connections is expected in the second half.

5G Mobile Network

• Don't use any Chinese products, they only use products from Western producers or Far East(MR).
• Currently have two out of four core data centres and 22 out of 24 decentralized edge data centres(MR).
• 74 out of approximately 550 far-edge regional data centres are in place(MR).
• They now have 193 antenna cites, of which 40 are in operational(i.e connected to fibre optic network)(MR).
• National roaming with Telefonica is now in test phase with over 300 external customers(MR).
• Was successful in court against Deutsche Telecom; hence they can still say they are "building the most advanced 5G network in Europe" (MR).
• Wants the network to cost as much as they are transfering to Telefonica and as far as they can tell, this will work out(MR).
• Network operation costs(excluding antenna sites) will be finance by savings on voice and international roaming(MR).
• Antenna sites operation costs will be financed by savings on national roaming(MR).
• Spectrum costs will be financed by new business areas such as FWA, B2B tariffs(MR).
• Will take over 300 co-location sites this quarter and will make leases for another 200(MR).
• Plan to have 1,000 sites by the end of the year(MR).
• It takes a long time before fibre cable is in place until the antenna site has been placed(MR). A lead time of 9 to 12 months(Q&A).
• Want to achieve 3,000 sites next year(MR).
• Co-partner sites can lead to delays because they have a right to shift the site to another location if they determine that the old site is not geographically viable due to radiotion issues and so on(Q&A)
• In the next weeks and months they will start the third and fourth core data centre(MR).
• The distance between their antennas is small; hence they only need to equip 40-50% of their antennas with low-band frequency to achieve full-coverage(Q&A).
• Only the live antenna sites are counted when checking whether they have meet the obligations of the auction(Q&A).
• There is no distinction between owned antenna sites and leased sites when checking if they have meet their obligations(Q&A).
• Distribution between 4G and 5G customers is 50:50 (Q&A).
• They will migrate 50,000 customers per day but could also be 20,000-30,000 customers per day but nobody has ever tried to transfer such number of customers(Q&A).
• They will focus network sale activities in urban areas where they have a good coverage(Q&A).

National Roaming Agreement With Vodafone

• Contract implies a capacity model(percentage of Vodafone network) and not a price per gigabyte(MR).
• Capacity is being extended every year eg " if the network has a capacity of 100,000 gigabytes today then would be 1% equivalent. So if it has a growth rate of 30%, it would mean 1,300 gigabyte next year and so on " but price will remain the same(MR).
• Every few years the cost of Vodafone network will be analysed. If it has become 10% more expensive, they will pay 10% more(MR).
• The costs that they pay Vodafone is about the same costs they pay Telefonica but it's a better contract because there are no hidden costs and limitations. The new agreement will also be devoid of arbitrations and legal costs(MR).
• They need federal network agency approval for the MVNO model to work during the transition period(MR).
• Conditions for frequency allocation provides that transition can be MVNO if they are based on different technologies. But they are separating the network with its 4G and 5G network as well as Vodafone's and they are confident that they can argue their point well(MR).
• Their negotiation objective was not to optimize pricing structure but was mostly about contractual agreements because they can handle the current pricing quite well(Q&A).
• There is no obligations eg penalties owed to Telefonica for ending contract with them but they will have business with them until 2026 and even possibly beyond that(Q&A).
• They will still need to acquire low-band frequency since they cost the same amount of money as indoor roaming and they need to provide their users with unique selling proposition(Q&A).
• The calculation basis for the network include operation costs, new spectrum costs, energy costs, etc (Q&A).
• The costs in the MVNO agreement are identical with those in the national roaming with Telefonica; hence antenna sites will save national roaming and it also saves MVNO(Q&A).
• Migration of customers from one network to the other will be seamless and won't involve customer participation because the customet will be proved with dual sim cards(Q&A).
• 90% of customers have dual sim cards(Q&A).
• Vodafone network is a bit better than Telefonica network. It has catched up in the last few years(Q&A).

Vanatage Towers

• They will try to recover the full amount of damage caused by delays by Vantage Towers(Q&A).
• They want to negotiate compensation out of court(Q&A).
• They said that Vantage Towers is striving to achieve its goals. For instance, they have changed its shareholders and they want to honor that rather than destroy their relationship(Q&A).

Management Guidance and Analysts Expectations

Management Guidance

Key Items	2023	Y/Y Growth
New Customer Contracts	500,000	42.9%
Service Revenue	€3.23 billion	~2%
EBITDA	€655 million	-5.5%
Access Segment Revenue	€775 million	4%
1&1 Mobile Network start-up costs	€ - 120 million	129%
Cash Capex	€320 million	28%

Analysts Estimates

Key Items	Q2 2023	Y/Y Growth	2023	Y/Y Growth
Revenue	EUR 986.6 million	1.1%	EUR 4.051 billion	2.2%
Service revenue	EUR 799.8 million	0.9%	EUR 3.214 billion	1.2%
EPS	EUR 0.46	-16.1%
Access contracts	15.972 million	2.7%	16.224 million
Mobile internet customers	11.926 million	4.8%	12.124 million
Broadband customers	4.045 million	-3.0%	4.008 million
Capex (Cash-Capex)			EUR -318.6 million

	Consensus
Sell	1
Neutral	8
Buy	3