1&1:Quarterly Results/2024 Q4

Return to: Q4 2024 earnings results and discussions | Earnings Season | 1&1:Quarterly Results/2024 Q3 |1&1:Quarterly Results/2024 Q2 |1&1

Q4 2024 Earnings Call Summary

Q4 2024 1&1 Earnings Call Transcript | Q4 2024 1&1Webcast Call

Spectrum

CFO Sascha D'Avis said they have a lease for the Telefonica spectrum two times 2 MHz which was part of the merger release. This lease ends this year and the regulator has said it will be continued to be leased for another 5 years. Since they already have a contract, prolonging it should be easy. However, the national roaming negotiations were supposed to be fast as well but took two and half years. In general, he is optimistic that this process will be fast (Q&A).
D'Avis said negotiations for the low-band frequencies (700 MHz, 800 MHz, 900 MHz) will be tricky since the regulator said the incumbents will need to negotiate with 1&1 again. "Now it could be that in two weeks' time we get a good offer from them and that's it. However, my experience tells me that this is not what is going to happen," he said (Q&A).
D'Avis said the costs for the frequencies are clear and that's what they will pay. However, the incumbents are likely to come up with many reasons disputing the price. "Let's say we need 20% of the surface, then the frequency may cost EUR10 million per year, just to say a number, then we should pay EUR2 million that would be fair. But who knows what the process is going to be like? We have competitors who will come up with 1,000 reasons why this is not possible. Maybe there is a hospital right where these frequencies are, or a senior citizen's home, and the senior citizens will need the frequencies. And if they can provide them to them, then they will have a problem with the network and so on," he said (Q&A).
D'Avis signaled that they will continue to build their network even if they don't get the low-band spectrum. "In some negotiations in the past, they said, we only have 500,000 capacities left for our own customers. So there is there is nothing to share with you, and so we will continue to build our network," he said (Q&A).

Access contracts and customer migration

CEO Dommermuth said they would have like to see a different situation last year with regards to the customer contracts. They added 130,000 contracts, below 250,000 contracts they had guided.
Dommermuth said the reason for the weak guidance for the access contracts is due to the customer migration which is causing more churn than expected. "This year we are involved in a huge customer migration project at the moment we are actually migrating 50,000 customers per day from the Telefonica network that we have used on a wholesale basis. And we are now pulling these customers into our own network, and in the framework of this migration, we are actually losing more customers than would otherwise be the case," he said (Q&A).
Dommermuth said the churn results from the fact that the process is triggering cancelation from customers who had forgotten they had a contract with 1&1 and the fact that it's cumbersome i.e. only 4% of the customers have a dual sim and some customers have an incompatible phone. "It begins with as writing to customers who have an inactive contract or who always thought about canceling and have forgotten. And we are now actually reminding them that they still have this contract, and that we want to change it over and they now take that as a trigger point to cancel their subscription with us. " he said. "We basically take a second profile, and we can do that over the air basically and with the change of the telephone number we activate the second profile, but not every customer has a dual profile SIM card and only 4% people have a dual SIM card," he added. "But the process still doesn't work because they have a special type of mobile phone that they're using." (Q&A)
Dommermuth said in the first quarter, they expect 10,000-20,000 less customers. "In the first quarter, I see a slight lapse with mobile phone contracts, possibly 10,000 to 20,000 customers less, particularly as we are migrating so strongly and so many." (Q&A).
Dommermuth said towards the end of the year we should see growth in access contracts returning again since migration will drop as we move through the year. "Those migration efforts are going to be huge in the first and second quarter in the third quarter it will tail off and in the fourth quarter there'll be nothing that small remainder left then. So towards the end of the year you should be able to see more marked and more healthy growth again, at least that is the plan and our perspective." (Q&A)
Dommermuth said were it not for the migration headwind, we will be expecting 250k-300k net customer additions. He said this is the expectation for next year though it depends a bit on the level of competition. "If we weren't doing this huge migration, we'd be talking about 200, 000 to 300,000 of net growth. I think that is the right figure to bear in mind, and that's also what we're expecting duly. I think by 2026, obviously it depends upon the competition a bit, but that is an absolutely correct assumption. That is the order of magnitude that we're expecting." (Q&A)
Dommermuth said the customer migration is even going up to 80,000 since they want to complete it by the end of 2025 (Q&A).

Antenna sites

Dommermuth said the goal for 2022 was to have 1,000 active antenna sites.
Dommermuth said more than 1,000 masts are connected to far-edge data centers, meaning they are active. He said more than 5,000 more are in development.
D'Avis said they will not publish their antenna sites target for this year since if they fail to reach it, they will read about it in the newspapers and they don't want that. But he said they are improving from quarter to quarter (Q&A).
Dommermuth said they are doing 200-300 locations per quarter but they want that to be per day (Q&A).

CAPEX

D'Avis said the CAPEX this year will be driven by phasing in effect from 2024 and the network and capacity expansion. "In regard to your CapEx question, as our CapEx in 2024 was significantly below our guiding's due to phasing effects. And so for our plan 2025 we see the phasing effect of 2024 significantly that is getting to this year. And also investments for our capacity expansion until the end of the year. Then we have the network expansion that also has an impact in our CapEx. And our CapEx budget includes investments for our own build-up of new site by how many sites you plan to deploy or how many antennas you plan to deploy in 2025," he said. "There was one GAAP between booked CapEx and cash CapEx. So there's a phasing effect where you can really say that the payouts in 2025 will come. And on the other hand, there will be effects from 2025 going to 2026. And so you can really say that you will have the full EUR130 million as phasing effects for 2025 because some of that will be moved to 2026."(Q&A)
D'Avis said he can't remember having said they could save 100-150 million capex in 2025 by selling the passive infrastructure and that they haven't decided whether to sell. "And I cannot remember to have said something like that during the presentation. Now what we are spending per year will be much higher. So about EUR500 million I'd say in total for our own towers that we are going to build. And the question is whether we will keep them or sell them to a tower group. We have not decided on that yet," he said (Q&A).
D'Avis said they feel quite good with the EUR 450 million capex number. "So I think this is sufficient. There is enough room in this coffer of EUR450 million for our own construction too." (Q&A).

Earnings outlook

Dommermuth said earnings are on the right track.
Dommermuth said losses in the 1&1 segment will be the same this year as last year but will not be as high in the following years (Q&A).
D'Avis said there will also be savings from national roaming next year. "And then additional savings due to national roaming and others that will then have a positive effect on the EBITDA next year." (Q&A)
Dommermuth said "there are savings in the upfront input because of voiceover IP, because of national roaming". "If you look at the access business, well, you can see what we usually would have to buy. And then in the mobile telecommunications business we have our own production with voice over IP and then similar to the [MBNO] contract, you have the effects due to lower purchasing costs. And that compared to the costs we have in the mobile telecommunications business," he said (Q&A).
Dommermuth said the payment they are negotiating with the partner responsible for the network outage last year is not included in the guidance.
D'Avis said the decline in the gross profit is being driven by "network building activities" (Q&A)

Possibility of RAN sharing

D'Avis said they still want to reach 25% and 50% coverage. But if there are opportunities to use RAN sharing, they will take them up as long as conditions are right. He said there are no offers for RAN sharing at the moment (Q&A)
Dommermuth said he can't imagine abandoning the network buildout even if they were to use RAN sharing. "I'm not imagining that we are no longer building any locations or any towers or whatever because we have a ranch sharing partner and use their sites, but yes, it might be, but it might also snow in December. I don't actually see any reason to believe that right now." (Q&A)

Impact of Merz's government policies on 1&1

Dommermuth said he can't see how the policies will help 1&1. "So far I do not see any business we could get from that investment plan in regard to landlines and mobile telecommunications for mobile telecommunications, it would be easier if we had a license for new masts, and that would definitely help." (Q&A)
Dommermuth said the earlier they use the network the earlier it will be profitable. He said cash will improve in a few years but EBIT and EBITDA will see some delay. "We have the core data centers, once we have the far. Data centers as well, then we will only invest in the rollout of the antenna locations, the more we can lease, the better, the fewer CapEx we need, the more production we can have, and In a few years, we'll be able to see that on the cash site it's really working out. The EBITDA will see some more delay EBIT as well. But for cash in a few years, this should be done." (Q&A)

Capital Markets Day (CMD)

Dommermuth said they are not ready for the CMD yet since there's still uncertainty with the low-band frequencies. "I think that frequency topic is one that we're keeping an eye on because that could obviously make a difference depending upon from when we can use these frequencies and what the conditions will look like most precisely." (Q&A)
Dommermuth said the outlook is, however, getting better. "The image is in fact getting clearer. We know what the speed of expansion is. We see what the customer development looks like. We do know the cost factors incurred the image is getting ever clearer, and we know where we're going." (Q&A)

Dividend

In response to a question on why 1&1 didn't adjust its dividend policy yet United Internet did, Dommermuth said they want to have money for future frequency payments and unknown risks. "We've seen last year the risks in the network. I mean, we had an outage for three days last year which was huge. So all of that is not without risk. I mean, building the network isn't risk free. We don't know what the frequencies are going to cost," he said. "We'll we be able to maintain, keep our towers? Will we have to do a sale and lease back? How expensive will the next auction be? And I mean we really have to make sure that to be able to pay this money we would have to take out a loan, as 1&1 to then pay a dividend and build the network and finance the next bid for frequencies. And we thought that that wasn't the right way to be going." (Q&A)