1&1:Quarterly Results/2024 Q3

Return to: Discussions | Earnings Season | 1&1:Quarterly Results/2024 Q2 |1&1:Quarterly Results/2024 Q1 | 1&1:Quarterly Results/2023 Q4 | 1&1: Quarterly Results/2023 Q3 |1&1:Quarterly Results/2023 Q2 |1&1:Quarterly Results | 1&1

Earnings Call Summary

Links: Q3 2024 Webcast Call

Network buildout

• CFO Markus Huhn said the 4 core data centres are now operational (min 4:46).
• Huhn said 24 decentralized edge data centres but 22 of them are now complete.
• Huhn pointed out that they saying a saving potential of 10% to 30% on electricity cost compared to conventional network following a start of the network in the first month (min 6:10).
• Huhn said they had 1,781 antenna stations at the end of Q3 (Q2: 1,249). 741 of these are connected with fiber (min 10:30).
• 1&1 is betting on the judgment of the Cologne court to help ease their 25% coverage by 2025 burden. "But at the end of the day, it will depends what will happen after the judgment of the Cologne Court...The question is, do we have an obligation out of this auction, which has ruled illegitimate," Huhn said (min 32.02).
• Huhn pointed out that the 25% coverage obligation by 2025 is a very ambitious target (min 32.05).
• Huhn said approximately 500 to 550 antenna sites are active (min 39;00).
• Huhn said they need 6,000 to 6,500 activated sites to reach the 25% coverage (min 58:00).

Customer migration

• Huhn said they are currently doing 10,000 migrations (existing customer) per day, increasing to 30,000 to 50,000 migrations in the coming weeks (min 6:50).
• Huhn said they expect to migrate around 700,000 customers in Q4 (as estimated by an analyst) (min 39:19).
• Huhn said they have to finalize the migration by the end of 2025. He still thinks that's still possible. He pointed out that if they are back to the 30,000 to 50,000 run-rate, they would fulfill migrations by November 2025 (min 52:09).

Results in Q3

• Huhn said EBITDA was influenced by lower savings for national roaming because of the reduced customer migrations (min 3:08).
• Huhnn said customer contracts in Q3 were impacted by the network outage at the end of May, an impact out of the migration process and the aggressive competition that has continued into Q3 (min 3:08).

Outlook

• Huhn said EBITDA in Q4 will be driven by the net growth in subscriber numbers in the last year and their focus on worthy and good contracts (min 22:25). They also expect EBITDA in Q4 to be boosted by the savings on the marketing budget and other positions (min 32:55).
• They see that they are able to generate higher number of net ads in Q4 (min 23:00).
• Though they are seeing aggressive competition, they believe in a positive development of net ads in 2025 due to changes in their campaigns (min 23:22).
• Huhn said they expect free cash flow next year to increase due to reduced payment to Deutsche Telecom and reduced cash Capex compared to 2024 (min 26:50).
• Huhn said they are still looking for a partner that they can sign a sale and lease deal for the passive infrastructure. He pointed out that if they don't find the partner, then the headwind of EUR 100 to EUR 150 million guided in August will impact cash Capex in 2025 (min 35:00).
• Huhn said they expect to have a higher number of savings out of the national roaming in Q4. However, due to more antennas will be an headwind. They also expect compensate partners for damages out of the network outage.
• Huhn said the compensation due to the partners is included in the guidance but if they are not able to find a solution with the partners, there is a risk to the guidance. (min 57:57).
• Huhn said the startup cost in 2025 is likely to be in the range that they see in the consensus (min 36:50).

Compensation for delayed migrations

• Huhn said they expect to receive compensation from partners for damages out of the network outage (min 7:00). "We still believe in compensation for the damages that we have out of the network outage. And the biggest damage out of the network outage is that we had to reduce the migrations. That's something that we are currently in dialogue and in negotiations with our partners to find a solution for this compensation," Huhnn said (min 36:00).

• Huhn said he cannot disclose the amount of compensation as a result of the network outage at the moment since they are in dialogue with the partners (min 38:30).
• Huhn agreed with an analyst Usman Ghazi of Berenberg who asked whether they want the supplier to pay for the deficit in the planned migrations. "Your understanding is correct. We are talking about the damage in 2024. And of course the delay in migrations will also have an impact in 2025. And this is also part of our negotiations. So the gap will be going to be smaller and smaller compared with our initial plan. But from this point back to the period where we had to decide to reduce the migrations, there is a gap and damage on our side, and that's something that we are discussing with our partners," he said (min 44:00).
• Huhn said the possibility of compensation from the partners is bigger than 50% otherwise they won't have taken it into account in their guidance (min 47:21).
• Huhn pointed out that they are making progress with the negotiations and that they are optimistic they will achieve a positive outcome (min 47:52).
• Huhn said in Q2 they thought that they will come up with a faster solution (by Q3) with the partners regarding the delayed migration. He said they also didn't expect migration to last for five months (min 50:40).
• Huhn didn't mentioned the partners they are in discussion with, only referred to the big partners. "And with all of these big partners, we are negotiating to find a solution for compensation for these damages," he said. (min 56.11).

Low-ban spectrum

• Huhn said BNetzA is awaiting the full-judgement of the Cologne court that ruled that the 2019 auction was illegal before making a decision. He doesn't expect a decision until 2025 (min 9:00).
• Huhn pointed out that the plan initiated by BNetzA is technically feasible.

Offers and competition

• Huhn said they have added their unlimited tariffs on their shops (in Q4) but didn't start with any big campaigns yet. They plan to start big campaigns on it in Q1 (min 44:50).
• Huhn said the Vodafone NRA allows them to offer such unlimited offers while the Telefonica NRA doesn't (min 46.10).
• Huhn pointed out that the most aggressive player is Telefonica Deutschland. He doesn't think the offers from Telefonica makes sense, hence he thinks they will go back from these next year. "We would expect that they will go back from this aggressive line, maybe somewhere between the current situation and that what we've seen earlier," he said (min 52:55).

Management Guidance and Analysts Estimates

Management guidance

Key Items	2024	Y/Y Growth
Service Revenue	€3.33 billion	3%
EBITDA	€686 million	4.93%
EBITDA 1&1 Mobile Network Segment	-€174 million	31.42%
Access Segment Revenue	€860 million	9%
Cash Capex	€460 million	55.62%
Network:
Antenna sites	3,000

Analysts Estimates

Key Items	Q3 2024	Y/Y Growth	2024	Y/Y Growth
Revenue	€1,044.9 million	0.6%	€4,131.8 million	0.86%
Service revenue	€848.0 million	1.6%	€3,329.7 million	2.67%
EBITDA Access	€208.7 million	8.6%	€854.0 million	8.62%
EBITDA 1&1 Mobile Network Segment	€-37.0 million	12.1%	€-175.0 million	-32.20%
EPS	€0.43	1.2%
Access Contracts	16.38 million	1.7%	16.43 million
Mobile Internet contracts	12.40 million	2.5%	12.47 million
Broadband contracts	3.98 million	-0.7%	3.97 million
Capex (Cash-Capex)			€-457.3 million
Free Cash Flow			€-208.1 million
Net adds Y/Y
Access	273,000		173,667
Mobile	303,000		215,000
Broadband	-30,000		-40,000

Analysts Opinions

1&1 likely to report weak numbers in Q3

• Buy, €19.50: Analyst Keval Khiroya of Deutsche Bank said 1&1 is likely to report weak numbers for Q3.
• Buy, €25->€23.50: Analyst Simon Stippig of Warburg Research said their estimates for 1&1's results are lower than the consensus estimates.

1&1 likely to increase the pace of network construction

• Buy, €20.50->21.60: UBS analyst, Polo Tang is positive that 1&1 will increase the pace of mobile network construction sooner than later. This will significantly increase the amount of free cash flow.

There was increase in advertising intensity in Q3

• Analyst Akhil Dattani of JP Morgan pointed out that recently there was an increase in advertising intensity among German telecom companies.

Competitor Expectations and Results

Telefonica Deutschland

• Q3 2024 Revenue fell 2.6% y/y to 2.1 billion euros.
• Service revenue fell 1.8% to 1.5 billion euros.
• Telefonica Deutschland blamed the decline in these two metrics to regulatory effects i.e "halving of mobile termination fees" and "change of business model" with 1&1. Excluding regulatory effects, revenue would have declined 0.5% while service revenue would have fell 0.4%.
• O2 noted that there is currently tough competition at the rock-bottom offers.