Good day, and thank you for standing by. Welcome to the United Internet third quarter 2023 webcast and conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you need to press star one one on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Dominic Großmann. Please go ahead.
Good morning, everybody, and welcome to our Q3 and nine months 2023 analyst and investor conference call. My name is Dominic Großmann. I'm responsible for investor relations, and here with me today, I have our CFO, Ralf Hartings. Briefly, the procedure: Ralf will first take you through our presentation with the business development in Q3, and will also give you an outlook for the rest of the year, and afterwards, we are happy to answer your questions. So far from my side, Ralf, the stage is yours. Please go ahead.
Thank you, Dominic, and also a warm welcome to our webcast on our nine months figures 2023. Let's get into our numbers. On slide 2, we have summarized our major KPIs for you. Our customer contracts increased by 730,000 to 28.2 million in the first nine months of 2023. Our revenue increased by 4.7% to EUR 4.589 billion. EBITDA increased by 1% to EUR 969 million. However, it is important to note here that we've invested almost EUR 50 million more in the rollout of our 5G mobile network. Adjusted for these effects on earnings, comparable EBITDA increased by 5.5%. Our EBIT declined by 4.1% to around EUR 600 million.
In addition to the explained negative effects on earnings, this was due to higher depreciation and amortization as a result of investments in the rollout of our fiber optic network at 1&1 Versatel and the rollout of our 1&1 mobile network. This increase in depreciation and amortization is to be offset by gradually increasing cost savings from 2024 onwards. EPS decreased from EUR 1.59 to EUR 1.23. This was due to our reduced EBIT and the lower equity results from our minorities, as well as the increase in interest rates in general. I will continue on Page 3. Let's now turn to our segments, starting with Consumer Access. In this segment, we increased our contract portfolio by a total of 330,000 contracts to 16.11 million year- to- date.
Mobile internet contracts increased by 420,000 to 12.1 million, while broadband lines declined by 90,000 to just over 4 million. Revenue in the Consumer Access segment increased by 2.8% to EUR 3.032 billion. This growth was attributable to the increase in hardware sales, other revenues, which rose by 8.7% to EUR 612.9 million. In line with what we've told you, service revenues picked up to 3.7% year-over-year in Q3. For the first nine months, we've achieved an increase of 1.3%, so we are still confident to reach a 2% growth for the full year 2023. EBITDA in the Consumer Access segment decreased by 6.9% to EUR 511 million.
An increase in EBITDA in the existing core business was more than offset by higher costs for the rollout of the 1&1 mobile network, as the breakout on the next slide shows. The access sub-segment increased its EBITDA by 1.6% to EUR 585 million, while costs for the rollout of the mobile network, 1&1 Mobile Network sub-segment, rose by nearly EUR 50 million in absolute terms. On Page 8, let's take a look at the Business Access segment. We were able to increase sales here by 3.6% to EUR 430 million, and our growth rate in Q3 was already somewhat stronger, with 4%. EBITDA in the segment increased by 5.3% to EUR 118 million.
The high quality expansion of our own fiber optics had a positive effect on EBITDA development as expected, despite the startup losses from the new 5G business area at 1&1 Versatel. This development is reflected especially on a quarterly basis, where we can now report growth of around 10% year-on-year in Q3. We also benefited from this in our EBITDA margin, which rose to 28.6% and still has further potential throughout our own fiber rollout in the future. Let us now turn to the Consumer Applications segment. On Page 11, accounts in the Consumer Application segments decreased by 400,000 from December 31st, 2022 to 42.55 million due to seasonal factors.
The decline resulted from a 540,000 decrease in free accounts, while pay accounts, i.e., paid contracts, increased by 140,000 contracts to 2.78 million. The number of mobile users increased by 200,000 in the first nine months of 2023, while accounts with cloud storage continued to grow by 400,000. On Page 12, we are looking at revenues in this segment. We've increased sales here by 1.8% to EUR 215 million in the first nine months. In line with what we have told you at the half-year figures, revenue grew by almost 8% in Q3, with strong focus on paid users, as well as a slight recovery in the advertising market. We expect this momentum to continue for the rest of the year.
Our EBITDA increased by 5% to EUR 73.8 million. On a quarterly basis, this trend is similar to revenue, but with an even higher magnitude. Both the price increase in pay mail, as well as the increased number of paid subscribers, delivering an 18.6% year-over-year growth rate in Q3. In the Business Application segment, we've increased our contract portfolio by 260,000 contracts to 9.3 million. The increase came equally from operations in Germany and abroad. Revenue in the segment increased by 11% to EUR 1.059 billion, and with a growth rate in Q3 at 1.8%. The increase resulted from strong customer growth, successful cross and upselling, and strong growth in the aftermarket business.
EBITDA, in the Business Application segment on the other hand, increased by 12.1% compared to the previous year, to EUR 294 million, and even stronger in Q3, year-over-year at 13.2%. The operating EBITDA margin rose accordingly from 27.5% to 27.7%. Right, let's go to Page 17. So much for our segments. Here we have summarized the most important KPIs for the group once again and added a few more. We've already talked about revenue and EBITDA. Our CapEx increased from EUR 349 million to EUR 503 million, due to investments in our fiber optic network and 1&1 Versatel, and the rollout of the 1&1 mobile network.
Free cash flow, more on this later, amounted to negative EUR 14.1 million, primarily driven by our investments previous year, minus EUR 16.3 million, including a phasing effect from 2021 of EUR 97.2 million. Our net liabilities to banks increased slightly by 7.5% to EUR 2.273 billion. Our equity ratio was broadly stable. On Page 18, let's have a look at our bridge from EBITDA to free cash flow. As you can see, the largest item here are the sharp increase in CapEx of EUR 500 million as a result of the investments and the rollout. Then, in addition, the contingent payment of EUR 276.5 million, followed by taxes of EUR 183.6 million, including working capital of EUR 41.7 million.
This results in free cash flow of EUR 70.4 million, respectively, minus EUR 14.1 million after leasing. Finally, a brief word on the outlook on Page 20. We fully confirm our guidance for the fiscal year and continue to expect an increase in revenue to approximately EUR 6.2 billion, prior year, EUR 5.915 billion. Operating EBITDA is now expected to be slightly above prior years' levels. Keeping in mind, this figure includes approximately EUR 120 million for the build-out of the 1&1 mobile communications network, an increase of almost EUR 70 million year-over-year. CapEx, excluding any M&A transaction, is expected to increase to around EUR 800 million, in particular, as a result of the network rollout and the expansion of the fiber optic network to connect mobile communication antennas and supply additional business parks.
So much from our side, and we are now available for any questions you may have. Thank you.
Thank you, dear participants. As a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. This will take a few moments. Now we're going to take our first question, and it comes from the line of Joshua Mills from BNP Paribas Exane. Your line is open. Please ask your question.
Hi there. Hopefully, you can hear me. My question was regarding the portfolio structure of United Internet Group. So we've seen in the last week, Telefónica Group buy out the minorities at Telefónica Deutschland at quite a significant premium. Their reasoning for doing that was firstly, to simplify the business structure, avoid dividend leakage, and then also to compensate investors for the fact that the business is now entering a prolonged period of uncertainty, with limited guidance on the impact of wholesale revenues and so forth. Given that we haven't had any clear guidance from either United Internet or IONOS on the economics of the network rollout build yet, and this may still take some time, do you see any advantage for United Internet in buying out the 1&1 minorities today at a premium?
If so, would this not result in a simpler group structure going forward, which is something management has commented on in the past? Thank you.
Hi. Hi, Joshua. So I'm, I, I guess I will not comment on what Telefónica is doing, with their, subsidiaries or whatever. Look, with regards to United Internet, we are where we are. I think we've said before, we are, you know, we are looking at, at structure, and things, consistently throughout. However, at this point in time, we are very focused on our network rollout and build and, you know, to make this a big success for our customers as well as, you know, for us and for Germany. And therefore, you know, to be seen, I guess, what, what's gonna happen in the future. Okay?
Yeah, I, I guess maybe to ask in a slightly different way: what do you think the advantage of having IONOS listed today is from a group perspective?
Look, I guess you're probably well aware of, you know, how the structure of today happened, right? Because of the merger with Drillisch and everything. So I guess it is what it is at this point in time, and again, we're gonna look into, you know, what we will do in the future about that, okay? So that's pretty much what I'd like to comment here.
Thanks.
Thank you. Now we're going to take our next question. Just give us a moment. The next question comes to line of Polo Tang from UBS. Your line is open. Please ask your question.
Hi. Thanks for taking the questions. There's just a few different ones. It was asked several times in the 1&1 call, but I don't think there was really a clear answer given, so I'm gonna try again. But, obviously, there was a big step up in terms of service revenue trends, at 1&1. Price rises were mentioned, but could you give any sense in terms of what the quantum of the price rises were, in terms of mobile and broadband? Second question is just really in terms of the CapEx profile for Versatel. So can you give any comment in terms of how we should think about the trajectory of the profile? Is 2023 a peak year in terms of Versatel CapEx, or can we expect more of the same in terms of 2024?
My final question is about Tele Columbus. Can you clarify how much funding you think it needs, and would you be willing to inject more capital into the business? Thanks.
Hi, Polo. Thanks for the questions. Look, I mean, you've just said, I guess on the previous call, our CEO of 1&1 at present, and, you know, I guess whatever his comment is the only comment that I can just reiterate, which I don't think would make, you know, a lot of value add here. So, yeah, I'm not gonna go into a greater level of detail, as you can probably understand. With regards to Versatel and CapEx requirements, look, I mean, we've got EUR 800 million this year, and we haven't yet issued any guidance for the following years. But, I mean, sitting here thinking about the next two years, you know, it's probably gonna be peak years for us, at, I guess, similar, maybe a bit higher.
But then again, we haven't made the business plans completely fleshed out yet, so, to be seen, okay? And with regards to Tele Columbus, I guess that's a question you need to ask Tele Columbus, on what their capital requirement is or not. And, I'm again not commenting here on that. Sorry. Okay? Cheers.
Excuse me, Polo, do you have any further questions?
Yeah. Well, I just have a follow-up in terms of Tele Columbus. I appreciate that you're not gonna comment on their funding situation, but in principle, as one of the major shareholders, are you willing to inject more capital into the business? Because I think in terms of the most recent capital raise, it was, you know, the main shareholder that was doing it. So I'm just trying to understand your, your, your position going forward on Tele Columbus.
Yeah, look, I mean, we are, you know, joint shareholders, we are minority, and we are having discussions with our co-shareholder with regards to, you know, how and what's best. Obviously, we have, you know, a lot of capital expenditure of our own ahead, and we'll just need to see how it all fits together, and then we'll, you know, we'll make up our mind on that. Thank you.
Okay, thanks.
Thank you. Now we're going to take our next question, and it comes from line of Nizla Naizer from Deutsche Bank. Your line is open. Please ask the question.
Thank you. I hope you can hear me. My question is on the leverage levels at United. Could you give us some color on what you think the optimal leverage level is, given a rising interest rate environment? And would you look at some portfolio restructuring with that in mind? How do you view your stake in IONOS, for example, or even, you know, there was news around the Consumer Applications business potentially being interesting for some external parties. Like, is that still something you all would consider if the opportunity arises? Some color around how you view the portfolio overall would be great. And my second question is on Consumer Applications. I mean, there was a nice acceleration in Q3 better than we expected.
How much of that was due to a better display advertising market, or was it also helped by price increases that you were doing? Maybe a breakdown of how that growth was driven would be great. And could you remind us again, of the Consumer Applications revenue, how much of that is driven by subscription revenue versus sort of more transactional display advertising revenue? A breakdown would be great. Thank you.
Right. So let me take them one by one. Leverage. Yeah, I mean, look, you know, obviously we are very comfortable, I guess, where the leverage is today. We are easily investment grade, and we clearly anticipate to stay well in kind of investment grade leverage, even throughout the peak funding, you know, for our network build out over the, you know, coming years. And then we will, and then we are going to delever the company obviously afterwards again. But yeah, I guess that's kind of what we envision. So, and then on the Consumer Applications business: Look, I mean, if somebody approaches us in any, for any of our entities, you know, we are obliged even to look into it, and that's what we will obviously do.
And that is not changing, and will kind of always be the case. So if somebody thinks it's great and can do much more with it, why not? We will look into it then, if that situation arises. And then, you said on Q3, on the Consumer Applications business, it's been a good movement. Not a lot has been attributable yet to the... As I've said, it's a slight recovery in the advertising market that we have seen, but the majority is really from two things, which is, one, we've increased prices for all existing pay users with, you know, very, very limited impact on churn. So we are very pleased about that development.
In addition, we have simplified, I guess, customers' journey to even on the app, you know, to easily subscribe for the service, which is also showing us some really good success commercially. And therefore, we were able to gain, in addition to having put up the prices, 140,000 customers. So, that's all really really good. And I think then there was a last one, which was a little bit around the distribution. I mean, gosh, is it roughly a third, guys? I'm just looking. It's roughly a third, I guess, coming from the coming from the subscription revenues by now. Maybe just shy, just a little bit shy of, of, you know, a third is, is the right, is the number. Okay?
Great. Thank you.
Thank you. Now we're going to take our next question. Just give us a moment. The next question comes from the line of Usman Ghazi from Berenberg. Your line is open. Please ask your question.
Hi. Thank you for the opportunity. I've got three questions. The first one was on IONOS. I mean, you know, the company, obviously, it's doing pretty well. However, you know, the average daily traded volume on the stock is now less than EUR 1 million. So, I'm just interested in, you know, how you're thinking about potentially improving liquidity in the stock, 'cause it seems to be a kind of a wasted opportunity, given the discount to GoDaddy just keeps getting wider, whereas the, you know, the operating performance is obviously, you know, trending better and more resilient. So any thoughts on that would be appreciated. The second question was just around Consumer Applications.
So the price increase was very substantial, right? Around 20%. But, you know, we've only seen, I mean, we've seen a marginal improvement on the revenue trend. I'm just wondering if, if the benefit of the price increase, has come through into the numbers already or, this is gonna come through the lag, before. And then, and then kind of the, the final question is, I guess it's more, it's a bit of a more medium-term question.
You know, given that, you know, you're constructing the 5G network on a fairly distributed basis, you know, it seems to me that there could be a substantial kind of opportunity in private networks for 1&1, you know, and that would obviously be relevant for Versatel rather than 1&1. So, you know, any kind of thoughts you might have on that front would be interesting. Thank you.
Yeah, hi, Usman. So IONOS, yeah, I mean, it is, as it is, I guess what I can say and, is, yeah, it's. We are not necessarily super happy about the way it is, but we're also not super unhappy about it. It is, I mean, as again, it is what it is. We've made the decision, we've done the IPO, and as a result, there is currently very limited liquidity. How that is going to evolve in the future is really to be seen. I can't comment on that, today, unfortunately.
I mean, I just, I mean, is it a priority or is it just you're happy with just the way things are? Or, I mean, is it something that you guys are actively looking at?
No, look, I mean, our priority is clearly the network build-out, which is the biggest project for the group. And, you know, obviously, that's a very big one and very essential one for 1&1 Versatel, as well as, you know, for 1&1 itself. So, that's clearly a priority in the group. With regards to the price increases, and you are right, they have been quite substantial. Well, we're just seeing them coming through now, so we will, you know, we will see more of that, obviously, on a year-on-year basis. And, yeah, we've pretty much increased now every single customer in pretty much all tariffs. And yeah, we will still see the benefit of that over the next three quarters comfortably, I would say.
Stay tuned, I guess. Then you were asking about, I'm not sure if I fully get it, guys, in the private network opportunity or so. What exactly do you mean? I mean, there's one big benefit, obviously, as we are building out this great big fiber network in Germany, which is really nicely distributed. There's plenty of opportunities to connect very near net and business parks, which, you know, is, you know, high ARPU and, you know, good returns. So there we will be very opportunistic, and that's clearly one of the big investment areas we are doing in 1&1 Versatel, in addition to connecting our own network. But maybe, can you specify a bit more what you mean with, like, private network? Do you mean, like, company networks to be private, managed through Versatel?
Or what exactly is your point, please?
So, I mean, I, so, so I guess we have factories that want to get automated or, you know, latency-sensitive services that need to be provided to hospitals or what have you, which needs, you know, mobile networks to be constructed or actually distributed. So the computing to be very close to the end customer, not in centralized data centers, as typical mobile networks are constructed. So, you know, it just seems like the way you were constructing the 1&1 kind of 5G network would be ideally suited to those kind of, you know, services in the future.
Yeah, sure. I mean, that's a great opportunity for us, as you've explained, I guess, perfectly yourself already, because, I mean, that's, that's what 1&1 Versatel does, right? They, they operate networks. I mean, that's what they, they're really good at, and therefore, clearly this opens up more opportunities, you know, to do it also for others. Because, again, all these fiber in the ground belongs to 1&1 Versatel. All these data centers, these edge data centers, far edge, all belong to 1&1 Versatel, and 1&1 is just, you know, putting a few servers in and running their RAN access network. So, so therefore, clearly we will leverage that opportunity every day.
Great. Thank you.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Now we're going to take our next question, and it comes from the line of Adam Fox-Rumley from HSBC. Your line is open. Please ask your question.
Hello. Thanks very much. I've got two quick ones, please. So, because we get separate operational color for 1&1 from 1&1 Mail and IONOS, I wanted to ask an operational one on Versatel, please. Are there any challenges to building out the fiber network at all at the moment? Mr. Dommermuth was saying that most of the 500 cell sites that he's now leasing still need to be connected. So I was wondering if you could talk about the kind of phasing and the, yeah, the kind of mechanics of that build-out as things stand.
Then the second question was just whether or not you could comment a little bit more on the phasing of the cost savings from 2024 that are referenced in, in both your release and that of 1&1, to offset the increased depreciation that you've begun to see. Thanks.
Hi, Adam. Right. So look, I mean, I'm the group CFO here. I'm not the operational Versatel person. Obviously, building out in Germany, fiber is not nothing that's unusual. That's happening everywhere, and we've got plenty of subcontractors and people that we are working with. So, again, I get... As Mr. Dommermuth said, they just have to be connected, which is a bit of, you know, effort, and the teams are working hard every day to connect more and more, and that's just really what's going on. So, yeah, I mean, they-- It's their job to do this, and it'll take some time to connect all of them. Some are quicker, some are a bit slower. I mean, guess that's what it is.
With regards to the cost savings, again, I think Mr. Dommermuth spoke about that we are going to firstly migrate, you know, certain types of customers over, and obviously, the more we are migrating over, the more we are able to generate the savings. So that is a gradual process which is going to, you know, grow in time. And again, I think he said 1.5-2 years, we will have migrated all customers. So by then we will see clearly a very significant cost savings, or let me say, cost internalization compared to what we've had before. And again, as the footprint of our mobile network grows and grows and grows, the less we have to pay to others in order to supply the services to our customers. So that's pretty much it at this point.
Okay?
Thanks, Ralf.
Thank you. Dear participants, just a last reminder, if you wish to ask a question, please press star one one on your telephone keypad. The speakers are out of further questions. I would now like to hand the conference over to Dominic Großmann for any closing remarks.
Yeah, thank you, operator, and thank you, everyone, for attending our call today and all your questions. Please don't hesitate to contact us for any follow-up questions. We wish you a nice day, a lovely weekend, stay safe, and goodbye.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.