Ladies and gentlemen, welcome, and thank you for joining the IONOS Group SE publication of the Q2 2024 Results conference call and video webcast. Throughout today's recorded presentation, all participants have been listen only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may click the Q&A button on the left side of the C-M eeting screen and then raise your hand. If you are connected via phone, please press star followed by one on your telephone keypad. For operator assistance, please press star and key zero. If you would like to. Now, I would like to turn the conference over to Stefan Gramkow. Please go ahead, sir. Mr. Gramkow, your line is open. You may start with your presentation.
Hello, and good morning, everybody. I would like to welcome you to the Analyst and Investor call of IONOS on the Q2 2024 results. Thank you for joining. My name is Stefan Gramkow, and I'm responsible for investor relations at IONOS. Let's have a look at the agenda for today's call. Achim Weiss, CEO of IONOS, and Britta Schmidt, CFO, will walk you through the operational development and the business in the first half of 2024, and the financial details of the second quarter. We also want to take a look at the guidance and our expectations going forward. Achim and Britta will then be happy to answer any questions. Achim, unfortunately, had to dial in from Berlin today because his transport was canceled, so we have a slightly different setup. Nevertheless, let's get into it. Achim, the floor is yours.
Thank you very much, Stefan. Good morning, ladies and gentlemen, and welcome to our Q2 2024 webcast. I'm Achim Weiss, CEO of IONOS, and it's a pleasure to have you with us today as we dive into the performance of the first half year and operational trends. As a reminder, IONOS stands as the leading digitalization partner for European small, medium business and a reliable cloud enabler. I want to emphasize our strong business pillars that underpin our success. The foundation is our web presence and productivity business, excluding aftermarket, which is the largest pillar, contributing EUR 509 million or around 70% in revenues in the first half of 2024. The sector has once again demonstrated impressive resilience and consistent growth over the first half of this year, boasting robust underlying margins and outstanding cash conversion.
Through a subscription-based revenue model, we address all digitalization requirements for small and medium businesses, including solopreneurs. We are the market leader in Europe and have a significant presence in North America as well. Moving to the center of the page, let us have a look at our cloud solution business. Around 11% of revenues in the first half of the year stem from our cloud business. Here, IONOS is steadily gaining recognition as a trusted cloud partner for small and medium businesses. Our recent success in this area, winning the German federal government as our customer, demonstrates the progress we have made in this field. This accomplishment further strengthens our belief that we are on the right path. Currently, being self-sustaining, we anticipate this business area to contribute positively to our EBITDA in the near future.
Additionally, we have our aftermarket business, which is about buying, selling, and parking domains. This area accounts for roughly 19% of revenues in the first half year. While revenues in our core business developed as planned in the first six months, revenues in the low margin aftermarket business fell short of expectations due to temporary phasing effects in connection with the new product launch. We will talk about the detailed development in a minute. Let's now have a look at the performance of the first half year, 2024. We've successfully increased our revenue by 6.1%, which was driven by successful cross and upselling, the ability to adjust prices, as well as winning new customers.
IONOS's platform model and substantial economies of scale, combined with robust growth, have led to consistently high levels of profitability in the company, and our business is already generating a very healthy, adjusted EBITDA margin of 29%. Compared to the first half year, 2023, the number of customers increased by 180,000 customers to now 6.28 million. Even in difficult economic times and the general uncertainties which we also experienced again on the stock market at the beginning of this week, the IONOS business model is extremely robust and predictable, and our mission-critical products, backed by the dedicated support of our personal consultants, have helped us to develop and maintain a very loyal and stable customer base. Furthermore, we have been able to increase the ARPU, the average revenue per customer, by around 8%.
Let's have a closer look at the operational performance and the drivers on page six. If you look at customer growth in recent years, we have not only been able to continuously expand our customer base, but have actually accelerated customer growth. To be fair, customer growth of 20,000 customers in the second quarter was slightly below or lower than in the previous year. This was partially due to the various major events such as the European election, the US elections, and other major events like the European Football Championships, since the focus was temporarily on other topics. On the other hand, we faced our brand flights accordingly with the focus on the second quarter.... Please be aware that brand marketing investments, of course, do not have an immediate impact on customer growth.
That said, we do anticipate stronger customer growth in the second half of the year. Our approach to pricing has always been measured with a keen focus on maintaining a balance between attracting new customers, ensuring competitive positioning, achieving customer satisfaction, and minimizing churn. The current economic landscape has provided some leeway in our pricing strategy, allowing us to explore modest adjustments. Our strong brand presence and the pivotal role our products play in our customers' digital transformation journey, have cultivated a high level of customer loyalty. This, in turn, has led to an increased openness among our, among our customers, towards price adjustments, placing us in a favorable position to leverage our pricing power. In response, we already initiated a careful refinement for our pricing model starting in Q3 2023.
This gradual process is guided by clear principles, aimed at preserving customer satisfaction and keeping impact on churn low. However, we have temporarily experienced a slightly higher churn rate during the first half year. As we can already see, this effect is vanishing. We anticipate the churn rate to revert to last year's level during the remainder of the year. Looking at the last 12 months, our annual churn rate was around 14%, which is fully aligned with our expectations. Please keep in mind, the implementation of our new pricing structure, applicable to both new and existing customers in web presence and productivity, is designed with a long-term perspective. For existing customers, price adjustments will take effect upon contract renewal, resulting in a phased impact on revenue.
At the same time, we have been able to further increase the average revenue per customer, which is additionally driven by our enhanced cross and upselling strategies. This achievement underscores our ability to deliver value and deepen customer engagement through our innovative product offerings. The expansion of our cloud solution business additionally fosters ARPU growth, as average ARPUs in the area of cloud are generally much higher. It is fair to mention that ARPU in the second quarter was slightly lower than in the previous quarter. This is a seasonal effect, as we typically have many domains renewal in the first quarter, for which revenue for 12 months has to be recognized upon renewal. In the first half of 2023, this effect was overlaid by side effects, related to different promotional campaigns, but similar effects can be also seen in 2022.
For the second half year, we expect good customer growth and a further increase in ARPU. Let's explore how AI is enhancing our business. We distinguish between customer-facing AI features and products, and the internal use of AI to enhance various aspects of our business operations and to lower cost. Firstly, we are constantly enriching our products with AI to boost customer experience and enhance up and cross-selling opportunities. In the first half of this year, we, for example, added AI features to our marketing automation product line to support customers with onboarding, SEO optimization and more. In our last presentation, we highlighted the promising potential of AI model hosting across a wide range of use cases.
I'm excited to announce that we just launched our AI Model Hub last week, making us the first European cloud company to offer a true multimodal AI and retrieval augmented generation, with our additional vector database offerings to provide more contextually relevant results. Our solutions are hosted in our own data centers and fully comply with European data protection standards. Since the initial release of the AI-enhanced My Website production line, product line last year, we continuously upgraded and enriched features to further enhance customer experience. The AI powered My Website product helps customers create content that not only describes their business generically, but also showcases its uniqueness while supporting search engine optimization and design tasks. More sophisticated AI functionalities are exclusive to our higher tier plans, encouraging customer migration to these higher ARPU packages. AI lowers the barrier of creating a professional website.
Customers achieve great results faster, increasing activation rate, which in turn decreases churn. Customer feedback has been highly encouraging, with 64% of users opting for the AI-powered onboarding process over the traditional approach. The time to go live with the website has been reduced by about 25%, and activation rates have increased by 30% in the first week of the customer journey. In summary, integrating AI features into our MyWebsite offering has been a remarkable success, and we are committed to its continuous development and enhancement. 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.
Thanks, Achim, and good morning, and welcome as well from my side. Let us start with a look into our different business areas in more detail. The high-margin core web presence and productivity business, excluding aftermarket, grew by a very healthy 9.7% year-over-year in the second quarter, and 11.5% year-over-year in the first half year. As mentioned before, this is a result of sustained customer growth and successful expansion of our ARPU through a cross- and upsell, and the introduction of new pricing structures. Achim has already commented on the seasonality, where we typically have many domain renewals in the first quarter, driving revenues as they are recognized for the full 12 months according to IFRS.
Please keep in mind, this business area contributes extraordinary margins in the high 30s, and correspondingly high cash flows, paired with continuous growth in the high singles to low teens. Our cloud solution business, which remains the smallest, yet fastest growing area within our group, and operates self-sustained on an EBITDA basis, experienced a growth of 11.9% in Q2 2024. We remain confident in the ongoing expansion of our cloud solution business, and are enthusiastic about the future opportunity this holds. Looking ahead, we are dedicated to improving our product offerings and services to solidify our standing as a strong competitor in the market, which is clearly visible with the recent product launches, including our new AI inference product. For the first half of 2024, our revenue totaled EUR 81.1 million, marking a 12.8% increase year-over-year.
As you know, the Cloud Solutions business is made up of the private and Public Cloud, Bare Metal Cloud, and managed services. While growth in the Bare Metal Cloud and managed services area, in particular, is naturally moderate, growth in the Public Cloud area is the strongest. Our IONOS Cloud product, which is the most comparable product to other Public Cloud providers, grew around 25% at the same time, underpinning our ability to play a significant role in the European cloud provider universe. For the fiscal year 2024, we are confirming our outlook to achieve a revenue growth of 15%-17% in cloud solutions.
Our aftermarket business has grown tremendously in recent years, and with various measures, especially in the area of domain parking, such as the optimization of the parked pages, the higher quality of traffic, and the integration of professional partners, we have been able to raise revenue to a higher level. Nevertheless, sales in the aftermarket business dropped by 19.4% year-over-year in the first quarter of 2024, due to temporary effects in connection with the launch of the new RSOC product from Google. RSOC stands for Related Search on Content, as the market is currently in a transformative process. Although we have seen a good recovery in the second quarter, the decline in revenue has slowed down to 4% year-over-year, and we still expect to see a significant increase in revenues as the year progresses.
We decided to adjust our guidance for 2024 in July, as it was unlikely that the 2024 original revenue plan will be achieved. Based on our outlook for full year 2024, we expect aftermarket revenues at last year's level, which implies year-on-year growth in the low teens in the second half. From a profitability perspective, the aftermarket business generates lower margins, with LTM average EBITDA margins standing at around 15%. As a consequence, the lower revenue level of the aftermarket business negatively impacts our EBITDA by around EUR 5 million compared to previous year, which distorts our overall EBITDA performance. Considering the EBITDA guidance for the full year, we will be able to offset this effect from the first half year and maintain our profitability forecast.
Here's the combined statement: We are on the right track, with the aftermarket business showing signs of recovery, and the strong performance of the web presence and productivity and cloud solutions core businesses in the second quarter. Total revenues in Q2 2024 reached EUR 378.6 million, showing a growth of 6.7% year-over-year. Our core business, meaning web presence and productivity, excluding aftermarket and cloud solutions, grew very strongly at 9.6% compared to the previous year. Adjusted EBITDA for Q2 2024 reached EUR 112.2 million, with an adjusted EBITDA margin of 29.6%. This represents a slight decrease compared to Q2 2023, primarily due to different phasing of marketing expenses and temporarily higher costs for licenses for VMware.
As already flagged in the Q1 webcast, due to the various major, major sports events this year, such as the European Football Championship and the Olympics, the distribution of marketing investments over the quarters will be different than in the previous year, and more skewed towards the middle of the year. Leading to around EUR 10 million higher marketing expenses, mainly dedicated to brand in Q2 this year, compared to Q2 last year. At this point, let me reiterate that brand marketing investments do not have a direct impact on customer growth, but will rather pay off in the medium to long term.
In order to reduce the financial impact from the changing licensing model and related price increase for VMware virtualization software, we started certain mitigation measures, like, for example, the migration to our own IONOS cloud, which will show over time and nearly eliminate the impact in 2025. If adjusted for EUR 10.3 million higher marketing expenses, the adjusted EBITDA margin would have been 32.4%. The full potential EBITDA margin, eliminating the temporary higher VMware license cost, would stand at 33.7%. Looking at the half year on page 13, total revenues for the first six months reached EUR 751.6 million, showing a growth of 6.1% year-over-year. Excluding aftermarket, revenue growth is at 11.2% year-over-year.... adjusted EBITDA for the first six months is EUR 218 million.
Adjusting for the different phasing of the marketing expenses compared to the first half year, adjusted EBITDA of last year, adjusted EBITDA is EUR 226.9 million. This results in an adjusted EBITDA margin of 29% or 30.2%, adjusting for the different phasing of the marketing expenses. The full potential EBITDA margin, eliminating the temporary effect of higher VMware marketing co, license cost, would stand at 30.1%, compared to 28.3% margin in the previous year. This positive development can be attributed to higher gross margins, primarily driven by an improved product mix and the realization of economies of scale. Let's turn us to page 14, focusing on capital expenditure.
As you're well aware of, we benefit from having highly predictable maintenance CapEx requirements, supported by favorable server economics, economies of scale, and our advanced technological platform. This stable foundation allows us to effectively manage and plan for the ongoing maintenance and enhancement of our operation, ensuring reliable service for our customers. Our growth CapEx is directly tied to our future revenue and customer growth prospects, particularly in the area of cloud solutions and AI, providing a clear path to achieving returns on these investments. In H1 2024, our total CapEx represented 4.3% of total revenue. This is slightly lower compared to H1 last year, where total CapEx stood at 4.4% of total revenue. Maintenance CapEx for H1 was 0.7% of total revenue. Gross CapEx was EUR 26.8 million, or 3.6% of total revenue.
While you may observe the relatively low level on investment in maintenance, we actually benefit from efficiency gains, including a one-time effect driven by platform consolidation due to improved packing density of the servers utilized. Our expectations for total CapEx for the full year remain at approximately EUR 100 million, which represents around 6%-7% of total revenues. By maintaining a balanced approach to our CapEx allocation, we are still in an excellent position to take advantage of growth opportunities, improve our capabilities, and drive sustained and profitable revenue growth. Our leverage, our leverage and debt position is summarized on page 15. At the end of June 2024, we have successfully reduced our net debt to EUR 963 million. Our debt comprises an external bank loan and a shareholder loan from United Internet.
As you might remember, in December 2023, we partially refinanced the shareholder loan with an external bank loan. This strategic move allows us to secure more favorable terms and reduce our overall interest expenses. During the second quarter, we made a further repayment of EUR 100 million on the shareholder loan, which is reducing the annual interest rates to 5.16 from 5.3 in the first quarter 2024. Our leverage ratio, at the same time, improves to approximately 2.4x net debt to LTM adjusted EBITDA. By maintaining a disciplined approach to debt management and leveraging favorable refinancing opportunities, we are well positioned to continue reducing our leverage and improving our financial stability. This strategy aligns with our goal of achieving sustainable growth and delivering value to our stakeholders and shareholders.
By continuing to focus on reducing our net debt and managing our leverage, we aim to enhance our financial flexibility and support our long-term growth objectives. On page 16, you can see the reconciliation from adjusted EBITDA to free cash flow. Adjusted EBITDA for the first half of 2024 is EUR 218 million. We deduct adjustments totaling EUR 11 million, which mainly include a includes standalone costs and costs associated with the long-term incentive program to get to reported EBITDA. Next, we deduct the total CapEx of EUR 32 million and tax payments of EUR 20 million. We paid slightly less tax in the first half of the year due to phasing of payments, which should balance out as the year progresses. Adding back EUR 4 million for the long-term incentive programs, this results in a free cash flow before leasing of EUR 158 million.
After accounting EUR 7 million for leasing, the free cash flow after leasing stands at EUR 101 million. It is only fair to mention that last year's figures included a payout of almost EUR 40 million for the long-term incentive program after the IPO. Taking into account interest payments of EUR 14 million, which is comparatively low, as interest for the bank loan is to be paid half yearly, with the first payment due beginning of July, and the share buyback of EUR 30 million for the shares bought back until end of June, dedicated fully to serve long-term incentive programs. This all leads to a comparable free cash flow of around EUR 124 million for the first half of 2024, which compares to around EUR 44 million in the first six months of 2023.
By maintaining a disciplined approach to managing our cash flow, we ensure that we have the financial flexibility to support our strategic initiatives and drive sustainable growth. This structured approach to cash flow management allows us to effectively allocate resources and invest in opportunities that drive long-term value for our stakeholders. Let us come to our guidance. Our core business is performing as expected. We are effectively up- and cross-selling to existing customers, as in the previous periods. Brand perception is on the rise, and we are excited about the launch of the product enhancements and the new AI offerings, like the AI Model Hub. Additionally, the new pricing structures introduced in the third quarter of 2023 have bolstered our confidence in maintaining and improving our financial position.
Due to the temporary phasing effect associated with the market, market-driven product transition in the aftermarket business, and consequently, temporary lower sales, we have changed our outlook for currency-adjusted revenue growth in 2024 to 9%. For the web presence and productivity business, excluding aftermarket, we are targeting a growth rate of around 11%-12%, driven by the robust performance of our core web presence and productivity business. As mentioned earlier in the presentation, we expect aftermarket revenue at previous year level, which implies a strong recovery in the second half of the year. In the cloud solutions business, we expect sales growth to accelerate further, reaching 15%-17% in 2024. Our confidence in scaling growth opportunities in this sector is strong, supported by strong demand for cloud products from our customers.
We expect the adjusted EBITDA margin for the full year 2024 to be around 29%, up from 27.4% in 2023, resulting in an adjusted EBITDA of approximately EUR 450 million in 2024. Looking ahead, we anticipate the adjusted EBITDA margin will continue to improve further, reaching approximately 30% by 2025. Let me summarize the key highlights from today's presentation on page 18, that are essential to keep in mind. First and foremost, our business is built on a robust foundation, characterized by sustainability and resilience. The majority of our revenues are derived from recurring sources, ensuring a stable platform for consistent growth. Looking ahead, we have a clear understanding of our CapEx requirement for the upcoming years, supported by our well-funded asset base, which is including our flourishing cloud solutions business.
The expected slowdown in aftermarket growth, something we have anticipated, despite the temporarily lower revenue growth in the first half of the year, driven by the current market transformation, will lead to reduced dilution of the adjusted EBITDA margin going forward. Brand investment peaked last year and will remain at this level, in absolute terms. These investments are essential to support our revenue and margin expansions as we move forward. Many of the investments in our cloud solutions business, such as those for developing infrastructure-as-a-service features, have already been made, creating a significant opportunity for future growth and EBITDA contribution. Our product portfolio has been successfully redesigned to facilitate cross-selling and upselling opportunities and seamless expansion. Regarding AI integration, we are leveraging significant opportunities, both in our product suites and internal operations, promising a more efficient and enhanced customer experience.
Thanks to our high profile and growing reputation in the market, we are capturing an increased share of the market. Overall, we are well positioned for future growth. With this, I would like to hand back to the operator to open the webcast for any open questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may click the Q&A button on the left side of the C Meeting screen and then raise your hand. If you are connected via phone, please press star, followed by one on your telephone keypad. If you wish to remove yourself from the question queue, you may press star followed by two, or please press the Lower Your Hand button. Anyone with a question, click the Q&A and Raise Your Hand button at this time. The first question comes from George Webb, from Morgan Stanley. Please go ahead.
Hi, and morning, Achim and Britta. I've got two questions to start off, please. Firstly, just on the 2024 outlook, you've talked about your kind of continuing confidence that aftermarket will be back to growth again. I guess on the flip side, what you saw around domain parking in Q2, you know, it didn't bounce back as quickly as you maybe expected at the end of Q1. It is a bit of a lower visibility segment, and yes, there are still some, I guess, market unknowns. How confident are you that it can get back to that double-digit growth? And maybe what that meant in practical terms, that Q2 wasn't quite as strong in terms of the recovery as you might have expected? And then secondly, on 2025, 10% growth level, what's your thinking around pricing for the core web presence business?
As I guess, that those price increases you started in Q3 last year will start to fade as a growth contributor in the mix towards the end of this year, unless you lap them with new increases. So curious to hear what you're planning on that side of things. Thank you.
Perfect. Let me start to comment on the aftermarket business. So yes, you're right, we expected a stronger and steeper recovery for Q2. It came in a little bit later. Nevertheless, looking into the trading which we have seen in July, this is very promising. So we are back to low teens growth rate, which we obviously would need. And we seem looking at the quality of the revenue, it looks very sustainable going forward. So our outlook remains confident on aftermarket recovery. Still going through the transition in the products because this is not yet done or finished.
So there will be still transitions, but nevertheless, given the quality which we offer with our platform there, we believe that we can definitely keep the strong trajectory we are seeing now. In terms of price increases, as you know, we have been relatively reluctant in the past on price increases, or moderate, I would say. Nevertheless, given the good results we have seen in 2023, with adjusting to a higher level, this gives us more confident into price adjustments as well going forward. And we already stated that we will continue to do price adjustments, maybe not as aggressive as we've done in 2023, which was as well driven by macroeconomic tendencies, which we have seen, and where we could capitalize upon.
Maybe if I can add, you know, the brand investment we are doing is also partially for that reason. You know, with a strong brand, you can, you have more pricing power, and that's why, you know, that's one part of the idea of investing in the brand much more than we did in the previous years. So we can do more price adjustments in the future. And yeah.
That's helpful. I guess, at a super high level, when we think about the outlook into 2025, it feels to me like the mix should be, you know, cloud probably accelerating on the back of the German contracts. The core may be a touch slower, depending on what you want to do on the price increases. Then, hopefully, I'm guessing now with that outlook in aftermarket, that that can, that can be positive growth next year. Is that the right kind of shape you're thinking about across the group?
Yeah. Without saying too much, because we haven't given out the detailed guidance on, on revenues for 2025, but I think that's in the right direction.
Great. Thank you.
The next question comes from Daria Sipos from JP Morgan. Please go ahead.
Hi, thank you for taking my question. I had a question on the cloud solutions business, please. So, in H1, you're tracking at around 13% year-on-year growth, and the full year, guidance is for 15%-17%. So I was just wondering if you can give us some more color around what would drive the acceleration, that would be implied for the second half, please?
Yeah. So first of all, sure, we expect the ITZ Bund case or the German government, federal government, to come in later this year. We see good signs there. Additionally, we expect. We do have some other contracts in the pipeline which make us, which makes us confidence that we can reach the 15%-17%. Additionally, for sure, we do see some drivers in private cloud. We offer a replacement product for VMware, which as well will be able to drive, or we are confident that it can drive revenue in the second half.
And then we just released seven new large features in first of August for the cloud, for example. So that will add new customer, and open up more use cases. And we started with the Model Hub, you know, really big thing, I believe, because AI will be part of every SaaS software at some part. You know, basically, every SaaS software can somewhere, profit from some AI enhancement. And I think that's, you know, we are the back end. We are the cloud providers doing all these things for the SaaS providers. And so with our new, Model Hub, where we have dozens of or a dozen of different models and constantly increasing the number of different models we offer, and we have also multimodal. So different models is something else, but multimodal is something else again.
So multimodal means one model can actually do multiple things. And so we're the first one doing this. So I think in total, we have a lot of new products just released that will help drive cloud revenues, not just for the rest of this year, but also for the future.
Thank you. That's very helpful.
The next question comes from Stephane Beyazian from Oddo. Please go ahead.
Yes, thank you. I've got two, if that's possible. The first one is around customer grading. I'm trying to understand the underlying, you know, beside the price hike, although I understand that, you know, there is also some relation between the two. But basically, can you help us understand, you know, what is the split of customer between the basic plan, the middle plan, and the top plan? Because I think that's, in most markets, the way you've set up your product range. And, you know, how fast is the migration and how much of that is impacting the output versus the price hike? And my second question is regarding churn and the competitive environment.
Is it also possible that, you know, part of the churn is not also linked to the price hikes, but perhaps, you know, to more competition in some markets? You know, any color on that would be interesting. Thank you.
... Yeah, let me start with churn. First of all, let me mention, yes, we have seen slightly higher churn, as Achim has mentioned. Looking into the details, we presumably think this is driven or the data indicates that it's driven by price adjustments mainly, not driven by higher competition in the market. And keep in mind, it's in line with our expectations. If you look into customer net growth, which was a little bit slower in Q2, obviously, this is driven by temporary lower inflow overall, as we mentioned, driven by the sports events, et cetera, and the different phasing which we have seen in marketing investments. So therefore, we expect that this will change in Q3 and going forward.
And we do see, by the way, good ARPU from new customers joining us, which is higher than last year. If you look into the customer base and the different tariffs, it's pretty hard to put it in one, in a very condensed sentence, as we have a lot of product ranges, and not all of them are set up in the same way. But the intro package is usually the smaller and the middle package, and then we are upselling them into the higher tariffs. And that's actually done. So this is the concept behind it, yeah? We want to get customers in at the lower or middle package, and then we are selling them up with additional features which we deem them to help them to run their business.
Therefore, we see an uptake over time going to the different tariffs.
Yeah, and if Britta talks about churn and price increase, I think you're talking about the group who is not giving up on the business, which is traditionally the largest part of the churn, is people giving up on their business.
Yeah, sure.
Yeah, exactly. Just to make it clear. And so from the remaining, from the other part, from the smaller part of churn, yeah, we see, of course, some people leaving because of the price, but we also gain a lot of customers from other players because of their pricing. And so, yeah.
Just a final one. When I'm looking at the ARPU expectations for the remaining of the year, would it be fair to say that Q4, where we can see a much higher ARPU jump versus Q3, is very much seasonal rather than potentially price actions driven?
Yeah, I think if you look into the ARPU evolution, which, we showed earlier in the presentation, you see that we have slightly fluctuating ARPUs, driven by several effects, like, more domains coming up for renewal in the first quarter, some promotional campaigns kicking in, like in 2023. So, what I would look at is the continuous expansion of ARPU going forward, where we see as well a good development.
Okay, thank you.
Welcome.
The next question comes from Andrew Ross, from Barclays. Please go ahead.
Great. Good morning, everyone. I've got a bigger picture, one on aftermarket and on, and on RSOC. Can you just remind us as to when you think the transition is gonna be complete? And also, your latest thinking about the impact it would have on the market in the mid to long term, when you think about monetizing that part of your business, and, and give us some confidence as to what underpins assumptions as to why aftermarket grows in the medium term. Thanks.
Maybe I'll start with RSOC. I mean, when is it finished? There's no due date. There's no hard due date where everybody had to transition. It's an additional contract. It's not substituting the AFD, the old or the current contract most customers are on, or most partners are on. It's called AFD, sorry, in English. And it continues to run. So it's an additional contract, RSOC, additional model, how to place marketing and how to, you know, create your pages, where you do the parking of the domains and these kinds of things. So, it's up to the customers, it's up to the partners to learn about the new contract, about the new possibilities with RSOC and implement their stuff, and then they will transition piece by piece.
So we had it in the first and second quarter, we had a bunch of customers starting with that. And now it's stabilized, like we showed, but there's no hard due date, so it can take a longer time. But I don't think we see that revenue dip again, you know, because the bulk is already not migrated, but has additional RSOC pages up now.
Yeah, I can only second that. I think the market has now understand what's going on there, and that there is an additional product in the market. Customers and partners will continuously transition towards that, but as Achim mentioned, AFD will continue. And RSOC offers a lot of possibilities in terms of monetizing additionally to AFD. And we think that we should see more RSOC revenues coming in by the end of Q4 or in Q4.
... Thanks. So, what percentage of customers actually have migrated at this point? And I guess, what gives you confidence we won't see another blip like we have in the first half in 2025 or 2026, if there's a kind of another wave of migration still to come through?
So most of our partners are already testing RSOC and are on RSOC. I think it takes a little bit of time in order to get it customized and understand how the mechanics really work and how the monetization of that product works for the partners. But most of our partners, and I cannot talk to their customers, but they are already testing it. So they are, in addition, going on to RSOC, so to say.
Again, it's not a migration, you know, it's not migrating, going away from AFD to RSOC, it's additional. So they, you know, and then they split the traffic and say, "Okay, some of my traffic are still better monetized on AFD, some is better monetized on RSOC," and that will continue for a while. So I think, like we just said, most of them are now acquainted to the new model, and it works differently. You have to optimize it differently.
So that, you know, that took some time to get that right for the partners, because, you know, in AFD, there's tens of years now, not tens of years, but many years of optimization on how the model works, how the pages need to look like, you know, how to attract the customers, how to get the click rate, how to get the conversion. And that needs to be now learned for the RSOC here, because the pages are very different. It's not just a small parking page anymore, it's a full-blown, you can have a complete portal of some subject on the RSOC. So it gives a lot of additional possibilities, but also needs a lot of more now learning or relearning on how to optimize these things.
And that was some of what we have seen in the first one and two quarters. And then again, it's not the dip in the aftermarket was not just about the RSOC contract, it was also because the marketing or the market advertisement market was a little slower in the first two months, two quarters, and that also attributes a little bit to what we have seen. And now we are back, like Greta said, we are back, and we are confident that we continue with the growth rates we just said.
Cool. That's very helpful. Thank you.
Thanks, Andrew.
The next question comes from Ben Castillo Bernaus from BNP Paribas. Please go ahead.
Good morning. Yeah, thanks for taking my questions. A couple from me, please. Firstly, on net customer ads, obviously slowing a little bit in Q2. Just curious, how did that compare with your expectations? And are you baking in a re-acceleration in those net ads back above 20,000 a quarter in Q3 and Q4? And what can you tell us about the ARPU of the cohorts of customers who joined you last year, and their uptake of those higher price tier plans this year as they renew? Thanks.
Yeah. I think, let me comment on the net adds, and I think we've given some indications already throughout the presentation. So yes, we have seen a slide. I wouldn't say a slowdown, but lower customer net adds, driven as we mentioned by the several sport events, et cetera, different phasing of the market of the brand investment. So we capitalized, in terms of brand investment, on those sport events. This should have a positive impact going forward, not directly, as mentioned before, but a little bit, timing is a little bit delayed, driven by the nature of the investment. But for sure, we expect Q3 and Q4 to be higher than the Q2 net adds. So we are really confident in this one, and already see good signs here.
And then on ARPU, so overall, I think we see a very good development of ARPU of our existing customer base, and that includes customers coming in over the last years. And just for example, if we look onto our MyW ebsite Now, so the AI-driven website builder, we have seen a significant ARPU increase on the existing customer base, and as well, a very good uptake in ARPU from new services. So, customers taking up new features or new customers, which is as well, very promising and helping to grow our ARPU going forward.
And if I can add, if we always talk about phasing marketing, what does it actually mean? In the end, for example, if you look at brand, you know, and with all these sports event and stuff in the center or in the second and third quarter, it's more wise to spend the brand marketing differently than in the first and the third quarter, fourth quarter, what we usually do, because in normal years, these are the strongest quarters, right? So the most people are watching TV. But now with all these events and sports and it makes a lot more sense to have that spread. So instead of 2 flights, which we usually do a year, in the first and the fourth quarter, we did 3 this year.
We spread the brand marketing money across first, second, and fourth quarter now. So we really get all the attraction, people watching TV for the different events, so we get them on our advertisement. So that makes a lot of sense. So that's why we have obviously these phasings, where we always talk about phasings. And then contrary to that, you know, if you spend performance marketing money, people, if you, if you watch a tennis game, you're most likely not buying a web hosting package at the same time. So, you know, it's rather smarter to have this, you know, basically what we have is a pronounced seasonal effect through these events. Yeah, so we always have these seasonal effects. And now this year is a little more, much more pronounced through the events happening.
And so that's why we adjust, you know, we adjust, the brand marketing, because now it makes sense to go into the times where people are on TV. But on the performance marketing, we're really a little more slower on this, you know, spend less money and save the money for the quarters which make more sense. And so that's what you see here, is basically a pronounced seasonal effect. And so we're not we're not at all worried that we come back to the normal numbers, going forward, and we'll see much higher growth in the next quarters.
That's really helpful. Thank you. Can I just squeeze in one more just on the CapEx, just really on the maintenance CapEx? That was, you said, a one-off in there in H1 that was quite low.
Mm-hmm.
Should that return back to normal, sort of, percentage of revenues in H2?
Yeah, it should come back to normal. So one-off doesn't mean it's down and then going up higher, but it's a one-time, relatively slow as we worked on the density of the packaging. But it will go back to normal over time.
Understood. Thank you.
The next question comes from Nizla Naizer from Deutsche Bank. Please go ahead.
Great. I hope you can hear me. I have two questions. The first is on, could you remind us about your resilience to macro shocks? Because with all the talk around the US economy and a potential recession, and you mentioning that you'd like the net adds to increase in Q3 and Q4, sort of, how confident are you in going after new customers in markets like the US? Or would you then look at other markets that are growing faster to sort of find the growth? Some color there would be great. And second, very interesting to see the release that you published on your AI Model Hub. Could you take us through maybe the incremental revenue that you expect to cloud solutions on the back of this product?
What the take-up has been like, and are you better positioned to offer this to your SMB customers versus any other player in the market? What's your sort of competitive edge in this sort of product? Would be great. Thank you.
Okay. Let me start on the resilience part, and maybe Achim takes over the AI model hub. It's a more technical question. So if we look into overall, in the resilience of our customer base, it continues to be super resilient. Of course, we do see customers churning out as businesses go bust. This hasn't peaked or anything. This is just, like, normally, flowing and continuing to be there. It's part... As Achim mentioned before, this is the major churn reason we are seeing, but we do not see any data which is concerning us here.
If we look into the different geos, obviously, and of course, we are following a portfolio approach, and we'll always invest the marketing money into the regions where we do see the best ROI, so the best CLTV over CAC. And this is why, actually, it does make sense that we are not only in Europe, but as well in the US, so that we can work on the different things going on in those economies, so to say now.
Yeah. And for the model hub, why we are in a better position? I think there, there's a lot of reasons. First, the model hub itself. So what it is, again, it's we offer a lot of different AI models. There's language models, there's text-to-speech models, there's speech-to-text models, there is computer vision, there is you know, graphical, you know, generative AIs for videos and pictures and what you have. And there's a you know, that's the constant thing going on. I mean, you see the development every other week, there's another model coming out, there's another breakthrough or smaller breakthrough happening in one field. And so we're completely agnostic. We can use all these models. We can also license models.
I think at some point, companies will also very specialized models will be licensed. So we can license them and make them workable for our customers. And what does that mean? I think we have the advantage because we have the best cloud. And, you know, an AI engine by itself, what do you wanna do with that? You know, if you're a user, yes, you can go to the window and ask some, you know, ChatGPT and put in your question, but as a SaaS company, you want to integrate that AI into your product. And since we have then... We have the best cloud, you always need something else, but the AI model.
You need the storage, you need the CPUs, you need the web page, you need everything that makes your product run, and AI is just one part of the product, usually. And so since we already have the best cloud, and now we're the most flexible one, and broadest set of AI models, the combination, I think, is just, you know, the winning strategy here. We can basically help all small-medium companies, whatever software they're using, whatever SaaS software they're building, we have basically the right tools for them. Yeah, and that's also hosted in Europe, so they don't have - that's a big, big worries of many of the European companies and customers is, you know, I send my data into the U.S., and if it's a stupid question from someone, that's fine.
But if you wanna, you know, do your analytics of your company, you know, most secret data, you, you not necessarily wanna send it somewhere, which is not in the legal jurisdiction of your... And that's very helpful for us as well, of course. And so I think in the combination, we are really well positioned. From the revenue side, for this year, we didn't put anything into the into our guidance or into our numbers, because we never... You know, when the year started, we did our budget, we never knew when do we get the hardware, when is the software ready, how it will be adopted by customers?
This year basically is building the product, learning, improving, and next year we'll see how much we can put into the budget for it.
Thank you. Very helpful.
The next question comes from Usman Ghazi, from Berenberg. Please go ahead.
... Hi, everyone. I hope you can hear me. I've got a few questions, please. Just going to the cloud business, where you mentioned that the public cloud even grew by 25% in H1. And the weakness you're seeing is more in the bare metal managed services. I mean, I'm just making an assumption here. You know, if the split is 50/50 between cloud and the other stuff, in the public cloud and the other stuff, then that means that, you know, H1 growth of 11.9%, if public cloud is up 25, then the other stuff was either flat or slightly down.
And, you know, so getting the growth rate to accelerate, is it that you expect the public cloud to continue growing at the current levels and improve growth in bare metal and managed services? Or do you expect, you know, public cloud to accelerate further and the other stuff to stay where it is? So just any indication around, you know, how you're thinking about the mix between in the cloud business would be helpful. On the AI inferencing that you've launched, I was just, you know, interested, the, you know, your pricing is based on a token approach rather than a, you know, where some of your peers have gone and are billing by hour per type of hardware, underlying hardware that is being used.
So just interested in, you know, you know, your decision to go with a token-based pricing model. And finally, just on the cloud business as well. So both Microsoft and OVH have both cited that, look, the European market in public cloud is just, you know, they're finding it weaker because of macro, whereas the US seems to be picking up, you know, helped obviously by all this training workload. So, you know, I was just wondering how you see it. And if there is macro weakness in public cloud in Europe, then, you know, are you seeing it at all, or does that help you because you've got prices that are lower? Thank you.
Maybe I start from back to the first question. Well, let's start with the model itself first. You know, I had questions, why is the token and pricing and stuff? So the model hub right now is based on you have, you know, APIs in your integrated model, and you can have a very low volume, you can have a very high volume of questions, you know? And so basically, for the token model, basically means, you know, for each request you have, you have to pay something. And there's other products. If you wanna get a full card, you know, if you have so much workload that you really can afford, I mean, look at H100 card, for example, it's like EUR 30 thousand, one GPU card.
So a lot of companies don't need that. You know, they have a few requests an hour or maybe a few hundred requests an hour, and so a single card for them would be huge, way, way too much. But we will have these products as well for larger companies who need that performance, need so many requests. And we will have a bunch of different things, like the GPU thing itself, very basically naked GPUs. We already have that. And then we will add some things like GPUs on Kubernetes. So you get basically shared, a part of a CPU or GPU, sorry, a part of GPU in a Kubernetes cluster, for example. So these are also products coming. And so that the customer can really choose what is the best model for him.
High power, high everything, and he wants to have the full, complete control, he wants to build his own or implement his own model, you go with the hardware-based GPU offerings. If you have a very high load and you want to have really a separate instance, you can have the shared CPU instance and do whatever you want with that for yourself. And if you really have, you know, rather be flexible in different models, if you have, you know, lower volumes, you're pretty happy with the API approach, and you pay by the call. This is something OpenAI, for example, offers as well. You know, you can pay there by the API call, and it's in the end, you know, so basically the token, and so different things.
How do we see the cloud market itself, recession and so on? Of course, it's hard to predict, but right now, we don't see too much of an impact of economics in total. I think the lack of digitalization in Europe is even larger than in the US. So I think, you know, picking up on the most necessary things is still happening, even if the economy is a little harder, because in the end, you save money by the cloud. Yes, it's an initial, maybe small investment to migrate your software, but in the end, you save. And I think especially, and we've seen this in the past, especially if economies got hard, we actually see a good business because then people turn to more digitalization and use the potential of it.
Being on a standard web page, yeah, including domains and e-commerce, you know, it's much easier to sell, much cheaper to sell over the internet than with your sales force out there, you know, feet on the street. And so we always saw that in the past, and if economies turn bad, you know, we actually had a push in the business, and I think it would be the same thing for the cloud business as well. Yeah, and then maybe, Britta, about the numbers.
Yep. Yep, sure. Absolutely. I was during my speech, I referred to IONOS Cloud, which is the product which is the most comparable to other providers out there. And this is growing by 25%, so above market. That's roughly 30% of the overall cloud solutions business. And if you then look into the remainder, private cloud, high single digits, roughly, and the MSP business is actually dragging a little bit down because it's growing in the low single digits.
... So our focus is obviously on, on driving our IONOS cloud product and other private cloud products like VPS and Bare Metal, which offer good growth rate. We offer managed services as some of our customers do need it, and it's a good add-on. But this is not the driver of the business going forward.
Yeah. We actually have partners for that. So we, we do have a small MSP business because we kind of inherited it when we bought Strato. There's a company called Cronon, which is doing only MSP, and it's fine because we always have some special cases. But but tenants, you know, and we, we have partners like Bechtle and, and all the large system integrators, and these are on, on the... You know, on one hand, they have MSP business. You know, they do build software, they do migrations for customers, and that's our partners. That's a very different business scales by people and so on and so forth. So we keep that with our partners.
It's much more efficient and much more the scale is much better for us than if we would try to build it out of the small nucleus we have, you know, make a huge MSP business and be competitors to our partners. That's not what we want. And so that, to answer your question, MSP, yes, a small business, not much growing, necessary for some special customers, so, to get them onboarded. But, the, you know, today, kind of, dilutes our growth margin. But the most important part is the public cloud, the 25% what I mentioned, and we can even get better. You know, I just said we released a bunch of new features for that part of the cloud and so on.
I see that as the most important part, and that's actually well within what we want it to be.
Got it. Thank you. And just maybe a small follow-up, you know, could you give any color on the ITZ Bund contract? I mean, I guess we've had a few more months of, you know, monitoring how the take-up is going to be. So any color on that would be helpful.
But it said, yeah, they committed now. I mean, first, they have to be won the contract. So that means, okay, they're now working with us, and then it was up to them to start, you know, when they start doing, you know, migrating workloads and when we build the different clusters. And now we actually setting up. One is already, and I think two more are already ordered for very late in the year. So the revenue of these two new orders will probably not hit this year, but they will hit next year. So, and the first one is actually in testing right now. So that the hardware is built and the software is implemented and so on.
I think, out of my head, I think we're in the final phase of getting this first cluster up and running.
All right. Thank you.
Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Stefan Gramkow for any closing remarks.
Yeah, thank you, operator, and thank you everyone for attending our today's call. Please don't hesitate to get in touch for any follow-up questions, and have a nice day. Stay safe and goodbye.
Thank you very much.
Bye-bye. Thank you.
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