Ladies and gentlemen, welcome and thank you for joining the Q4 2023 Earnings Call. Throughout today's recorded presentation, all participants will be in the 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 your 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 the star key followed by zero on your telephone keypad or press the operator assistance button on the bottom left side of your screen. I would now like to turn the conference over to Christian Kern, Director of Investor Relations. Please go ahead.
Thank you, Operator. Good morning and thank you for joining us today. On behalf of our management team, it is my pleasure to welcome you to the full year 2023 results call of Telefónica Deutschland. Before proceeding with the management presentation, we would like to inform you that the financial information contained in this document has been prepared under IFRS. As usual, this presentation may contain announcements that constitute forward-looking statements which are no guarantees for future business performance and involve risks as well as uncertainties.
Also, certain results may materially differ from those in these forward-looking statements due to several factors. We invite you to read the full disclaimer on the first slide of this presentation. Finally, the presentation is also available on our IR website. With me today are Telefónica Deutschland CEO, Markus Haas, and CFO, Markus Rolle, who will take you through the presentation followed by a Q&A session. Markus, without any further ado, over to you now.
Thank you, Christian. Good morning, ladies and gentlemen, and welcome to our full year 2023 results call. Thank you for taking the time to join us. Today, we are delighted to report another strong set of full year results of Telefónica Deutschland. Throughout the year, Telefónica Deutschland consistently achieved growth across all segments driven by robust commercial traction and delivered sustained, healthy financial performance. Hence, the company successfully overachieved its full year 2023 outlook. Our focused execution of strategic priorities is the main driver of this commercial financial success. Let me share with you the key operational and financial highlights for the past financial year, which are demonstrating strong business momentum. Telefónica Deutschland has continued to gain market share in both mobile and fixed in a dynamic yet rational market, leveraging its value-over-volume strategy. The company won more than 1.3 million mobile postpaid net adds and 90,000 fixed net adds.
We have made further excellent progress with our 5G rollout and network modernization. 5G coverage reached 95% by year-end 2023 and again achieved a very good rating in the highly regarded Connect network test. While continued transformation remains a key factor to accelerate digitalization across all our business units, it also drives operational agility and efficiencies, contributing to our success. As a result, we are delighted to report revenue growth across all our segments. Total revenues grew by 4.7% year-over-year, driven by our growth engine. Mobile service revenues grew by 2.7% year-over-year. Fixed broadband service revenues were up 5.3% year-over-year. Handset sales reached another record level, growing more than 13% year-over-year. OIBDA posted strong growth of 3.1% year-over-year, reflecting commercial success and stringent cost management.
CapEx to sales stood at normalized levels of 13.2%, while we continue to focus on network quality. Overall, we have successfully extended our growth path by leveraging our robust business model and remained focused on gaining market share. My next slide highlights our leading ESG initiatives throughout the past year. During these unprecedented times, social engagement has moved into center stage without reducing our commitment to the other areas of ESG. Telefónica Deutschland's employee satisfaction rating improved even further, now at an all-time high. The inflationary environment and cost pressures are also impacting our employees. Hence, we have supported our employees to ease these cost-of-living pressures. We have made excellent progress with our network modernization to also accommodate the steady growth of mobile data. At the same time, we are continuously driving green energy efficiencies to support climate neutrality.
In the event of crisis, telecommunication services have become even more critical. Hence, Telefónica Deutschland is providing telecommunication support to customers in such crisis areas so that they can easier stay in touch with family and friends. Further supporting Germany's digitalization agenda, Telefónica has developed various safety and security guidelines as well as education programs which cover important areas such as artificial intelligence and cybermobbing. These important initiatives only further highlight our strong standing against hate and for an inclusive society. Over the next weeks, we will also publish our non-financial report where you'll find further details on the wide range of our sustainability activities. On my next slide, let me share with you the most recent macro outlook for Germany.
Telefónica Deutschland's single-country exposure to the overall solid German macro environment gives us further confidence to continue our growth path as it did last year when German economy slightly contracted. Let me flag healthy trends of two key economic indicators. First, easing inflation. Telefónica Deutschland continues to manage the inflationary environment well, with the latest forecast indicating easing inflationary pressures. GDP back to growth. Expectations for the German economy indicate a return to slight growth for 2024. This positive macro backdrop for Germany, including a broadly stable low unemployment rate, also supports Telefónica Deutschland's strategic framework going forward, which I will discuss with you on the next slide. Leveraging its proven track record for execution excellence, Telefónica Deutschland's management team is now fully engaged in building an even more resilient business model based on its accelerated growth and efficiency plan.
This plan is an integral part of Telefónica Group's GPS strategy, which stands for growth, profitability, and sustainability. As Telefónica Deutschland continues to pursue sustainable revenue and free cash flow growth, the strategic framework of our accelerated growth and efficiency plan is based on three key pillars: grow market share by rebalancing the revenue mix, further improve network quality to ensure strong network performance for customers, and finally, accelerate transformation to drive innovation and efficiencies. This strategic framework allows Telefónica Deutschland to explore new strategic options such as develop new business and efficiency opportunities, utilize freed-up network capacity now deployable at commercial terms rather than under remedies, accelerate business efficiencies, and speed up transformation, dynamically weigh strong business opportunities, and radical efficiencies.
The entire team is fully committed to drive the continued growth story of Telefónica Deutschland, and the company's can-do spirit has only strengthened while formulating the next chapter of the company's success story. Before handing over to Markus Rolle to take you through the Q4 performance in more detail, it is now my pleasure to share with you our confident full year 2024 growth outlook. This year, we anticipate to build the ongoing strong operational and financial growth momentum supported by our accelerated growth and efficiency plan. Based on current market dynamics, Telefónica Deutschland expects a robust pricing environment both in the premium and the discount segment.
We remain focused on capturing high-value pools to drive profitable growth across our entire sales funnel and expect for this financial year: first, revenues to grow slightly positive year-over-year. Second, EBITDA to grow low- to low mid-single-digit year-over-year. And finally, CapEx to sales ratio to be between 13%-14%. Markus, it's now over to you to lead us through the Q4 highlights of last year.
Thank you, Markus, and good morning, ladies and gentlemen, to all of you. It's now my pleasure to discuss our Q4 2023 results in more detail. Telefónica Deutschland has delivered another quarter of robust commercial traction in both mobile and fixed. Mobile postpaid recorded 284K net adds. This is driven by the continued O2 brand momentum and a solid contribution of our partner brands. The O2 postpaid churn confirmed a low rate of 1.1% on the back of the O2 brand appeal in combination with the enhanced network and service quality as well as the continued retention focus. The O2 postpaid ARPU growth of 1.9% year-over-year was similar to the prior quarter, reflecting the sustained customer demand for high-value tariffs and somewhat, of course, offset by the MTR reductions. The underlying O2 postpaid ARPU growth was even stronger at 2.5% year-over-year.
Fixed broadband recorded 13,000 net adds. This is reflecting the success of Telefónica Deutschland's technology-agnostic O2 My Home tariff portfolio and also low churn rates. Fixed churn improved by 0.2 percentage points year-over-year to 0.8%. Fixed broadband ARPU showed consistent growth driven by the steady increase of high-value customers in the base and is up 2.2% year-over-year to EUR 25.90. My next slides show another quarter of good top-line growth. Revenues posted a strong growth of 4.6% year-over-year to EUR 2,291,000,000 in Q4 2023. This is driven by the ongoing mobile service revenue momentum and another record quarter of hardware sales. Mobile service revenue were down -1% year-over-year to EUR 1,501,000,000 in Q4 2023, mainly as a result of a challenging year-over-year comparison due to a non-recurrent special factor in Q4 2020.
On an underlying base, MSR more than offset the negative impact from the MTR glide path, posting 0.7% year-over-year growth driven by the own brand momentum. However, underlying growth is still facing tough comps with a data-driven MSR boost related to the Football World Championship in Q4 2023 that resulted in total in 8.8% growth in Q4 2022. Consequently, our MSR momentum is fully intact. Handset sales recorded another quarter with record growth of 24.3% year-over-year to EUR 574 million. This is driven by the combination of the continued customer demand for high-value devices supported by the O2 My Handy model and increased customer demand for accessories. Fixed revenue growth accelerated to 3.7% year-over-year and came in with EUR 211 million, with fixed broadband revenues continuously reporting even stronger growths of 6.2% year-over-year. Let's move to OIBDA and free cash flow on my next slide.
OIBDA growth improved to 4.2% year-over-year and stood at EUR 695 million in Q4 2023. This is reflecting the commercial success and the stringent cost management to counter some inflationary pressures. OIBDA margin was broadly stable at 30.3% in the quarter. With regards to the Q4 cost development, it's worth highlighting the following: supplies were up at EUR 746 million in Q4 2023, with volume-related higher hardware cost of sales more than offsetting the positive effects from the MTR cuts. Connectivity-related cost of sales and hardware cost of sales account for 29% and 70% of the supplies. Personal expenses were up 2.9% year-over-year to EUR 176 million, mainly reflecting the higher base salaries on the back of the general pay rise in combination with a slightly higher FTE base.
Other OPEX were slightly down -2.3% year-over-year to EUR 705 million due to the reduced non-commercial cost supported by lower IT and maintenance costs, while technology transformation continued. Turning to the full-year free cash flow bridge on the right: CapEx was down -6.3% year-over-year to EUR 1,133 million, reflecting a reduced CapEx to sales ratio of 13.2%. As a result, operating cash flow rose by 11.7% year-over-year to EUR 1,468,000,000 in full year 2023 as a result of both strong operating and financial performance, and the before-mentioned CapEx normalization post the successful completion of the company's investment for growth program. Working capital movement improved to -EUR 55 million. The well-flagged trend of the strong reduction in CapEx payables continued. CapEx payables were -EUR 43 million in full year 2023 versus -EUR 169 million in full year 2022.
Operational working capital movements were -12 million driven by higher prepayments, which were largely offset by a combination of various operational working capital movements. Other cash items of -109 million are mainly driven by net interest payments and cash taxes. Cash taxes of -89 million are a combination of current taxes and the well-flagged remaining capital gain tax related to the sales transactions. The free cash flow improved by close to 20% to EUR 1,304,000,000 . Lease payments amounted to EUR 747 million for the full year 2023, including some prepayments for the full year 2024. Hence, the free cash flow after lease was up 23% in full year 2023 to EUR 557 million, covering more than our dividend proposal of EUR 0.18, which we will propose to the AGM.
Finally, consolidated net financial debt declined to EUR 3.2 billion, with a leverage ratio of 1.2x , which is well below our self-defined upper limit of 2.5x . In October 2023, Fitch affirmed Telefónica Deutschland's BBB rating with a stable outlook. This rating is reflecting our solid position in the rational German telco market, well-invested network, low leverage, and our conservative financial policy. Before we kick off the Q&A, let me summarize the key points of today's presentation. Overall, we achieved strong top-line growth, translating that into enhanced cash conversion in full year 2023. For the full year 2024, we are giving a confident outlook on the back of the continued strong business momentum and our accelerated growth and efficiency plan. At the same time, we remain focused on our ambitious ESG roadmap. Now, as always, we look forward to your questions. Operator, please go ahead with the Q&A.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. If anyone who wishes to ask a question may click the Q&A button on the left side of your 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 press the lower your hand button. Anyone who has a question may click Q&A and raise your hand or press star and one at this time. One moment for the first question, please. The first question comes from Matteo Robillard from Barclays. One second. I'm sorry. Matteo, your line is open now.
Hello. Good morning, and thank you for the presentation. I had a question on the service revenue trend in Q4. You did flag it, but there was a one-off in Q4 2022. You also mentioned MTR, but also stronger data ARPU in Q4 2022. If we think of a trend without all these elements, where do you think the MSR trend sits in Q4? Because it does seem, on the basis of what you said, that there's still a bit of a slowdown compared to Q3. So that's the first question. The second question was about your recent tariff announcement. You announced some new family plans, and you also have implemented some promotion on your O2 brands, which seems to suggest a slightly more aggressive commercial stance.
I wanted to understand if you could give a bit of more color into that and what was the rationale behind these moves. Are you changing your stance, or is it just a temporary initiative? And then lastly, on the leases, there's a big increase in the Q4, and you do mention that there's some level of prepayment compared to for 2024. If you could maybe give us what is a normalized lease payment that you expect in 2024, and after that would be helpful. Thank you.
Hi, Matteo. Good morning. Markus Rolle speaking, and let me take your questions one and three first and then hand over to Markus Haas. Service revenue, indeed, just as a reminder, I mentioned that also in my presentation, in Q4 last year, we had 8.8% of mobile service revenue growth. So if you now deduct all the topics that were mentioned, the one-offs and the non-recurrent factors, etc., we are definitely sitting from an underlying basis north of 2%, which is at least with the market growth that we expect for the full market. That is also reflected in the guidance that we have given for the full year 2024. With regards to the leases, yes, there had been some prepayments. I think the figure that you all had in the models before, which was around EUR 700 million, is reflecting the underlying basis.
There was a mid-double-digit amount of prepayments, which is, from my perspective, normal working capital management that we have done. You have seen it also with our strong free cash flow after lease that we have delivered. We have more than exceeded the expected dividend proposal that we have given. Then I hand over to Markus for the second question.
Thank you, Matteo, for your question. I think with regards to our family plans, I think as far as the next wave of bundling, we clearly see that we can drive significantly more profitable growth, especially couples in the market, with lower acquisition costs because you can sell two contracts with lower acquisition costs in total than if you only sell one or two standalone. So from that level, we are currently testing the waters, and we see clearly great demand for these offers. So we'll drive the next wave of revenue and also profitability growth to go more into the family segment because, as a consumer champion, there's a huge untapped potential on our side that will help us to clearly continue the growth path.
Thank you very much. In terms of some of the promotions you've introduced in your O2 brand, is there any specific reason, or can you give a bit of color on what motivated that move? Because that kind of reversed some of the price increases, at least temporarily, the price increases that you did in 2023.
Well, from our perspective, we clearly seen what are the sensitivities and what is clearly also the volume that you could drive with these promotional activities. From our perspective, we have been a rational player always in the market. What we clearly see is that with the dynamic trends we see, that we are clearly in a position now to clearly also drive some volume based on the promotional activities that are timely limited.
Thank you very much.
The next question comes from Keval Khiroya from Deutsche Bank U.K. Please go ahead.
Two questions, please. So firstly, just going back to the question on your family plan push, there is an advantage, as you say, if you're able to sell multiple SIM cards. But are you seeing any ARPU dilutive impacts from customers who may have more than one subscription in a family today but can now bundle? And secondly, when you reported the Q3s, it was quite early for you to have a view on how exactly you would compensate for the loss of the 1&1 traffic. Are you able to share any more thoughts on how we should think about 2025 and what steps you may have taken already so far to offset some of the 1&1 loss? Thank you.
Thank you. Let me start with your first question. What we clearly see, what you have seen, is with also the full year numbers 2023, I assume we are the only player with a growing mobile postpaid ARPU in its own customer base with roughly 2%. And we also continue that path because not all customers take this bundle benefit, first of all. And we're clearly also very strong in the EUR 30+ segment. So overall, taking the average O2 ARPU that you are aware and that you have in your models, we clearly believe at least stable to slightly growing ARPU also going forward. On your second question, I think we have given a growth guidance on revenue and profitability for 2024. All measures that we need for this year are locked in. And so we are very confident on this outlook.
We already work on the 2025 and the 2026 measures, where we are in very advanced talks in order to market the network capacity that will be gradually freed up, especially after June 2025. On that level, we are very confident also to continue, and as part of the accelerated growth and efficiency plan, also to market this network capacity to market conditions and not under regulated remedy terms. On that level, 2024, we believe is locked in on all the measures we need. On 2025 and 2026, we are in a very advanced stage also to market this capacity in the market.
Sorry, may I just follow up? You said you're at an advanced stage to reuse some of that freed-up capacity. Would you be able to comment at all whether you think retail is more of a tool to use that capacity or wholesale? Thank you.
It's retail-centric because, as part of the rebalancing of the revenue mix, leveraging own and existing channels and partners is clearly retail-centric from our perspective because, as part of the revamp of the revenue mix that we are going to implement now in order to build a more resilient and clearly significantly stronger Telefónica Deutschland business, it's retail-centric.
Thank you.
The next question comes from Ulrich Rathe from Société Générale. Please go ahead.
Yeah. Thank you. On the tariff revisions, a quick sort of follow-up. I mean, putting this into context with what you're saying about the market expectations, when you're saying you expect a robust pricing environment, I suppose that is signaling as well your intent, which you expressed quite clearly on the current promotions being only temporary. But there is, of course, the risk that there's sort of upset elsewhere in the market. So I was just wondering what your reasons are why you expect a robust pricing environment for the market beyond your own actions.
Second question is, you have not given any dividend outlook for 2024. I assume that is intentional. Could you comment on that? And the last one is sort of a follow-up to the last question. Could you comment at all about these conversations with Freenet? I think Freenet management has more or less openly said that there are talks with Telefónica. They also talked about their intent to, in particular, have a longer period of cooperation. Could you comment on those talks and what your view is on the boundaries, if you will? Thank you.
Thank you, Ulrich. On your first question, I think the Telefónica pricing, especially in the free portfolio and now in the mobile portfolio, has always been rational, and we always had promotions in different variations. This is the same what we do here. So from our perspective, I think the KPI that matters is ARPU on mobile postpaid. As I said, we have a growing ARPU now three years in a row in postpaid, where the rest of the market has a declining mobile postpaid ARPU. I will maybe first answer your third question. On wholesale partners, on that level, I think the fill-up of the volume is, as I said, retail-centric. We see high demand for this capacity from more than one player.
So on market levels, we are always open to sell this capacity into the market and clearly create valuable partnerships that clearly end up in a win-win. So on that level, there's not more to comment on that point. But we see very high demand for this capacity, mainly for 2025 because for 2024, we are already locked in. On your last question, I think, as published in the context of the acquisition, Telefónica S.A. intends to promote a revision of Telefónica Deutschland's dividend policy beyond the already confirmed full year 2023 dividend with the ambition to allow Telefónica Deutschland to focus on its commitment to continue delivering sustainable growth and efficiency. So at that point in time, there's no outlook for the 2024 dividend.
Thank you very much. The next question comes from James Ratzer from New Street Research. Please go ahead.
Yes. Good morning. Thank you very much, indeed, for taking the question. So two, please. So just kind of just specific one on the guidance. Are you able to give any commentary on what you're actually pricing in for the impact on 2024 numbers just from the 1&1 contract migration, please? And secondly, just love to hear your thoughts about what you're seeing actually in the B2B market. Vodafone were actually sounding quite upbeat about future growth to come in B2B and IoT specifically. So would really kind of value your comments on what you're seeing in the B2B market, how much growth that's providing for you at the moment and your outlook there. Thank you.
Hi, James. Good morning. Let me take the first question. As always, our outlook is an all-in outlook considering all the various factors that we have to take into account. The one that you asked specifically on is 1&1. We have, of course, taken into account their contractual commitments that they have towards us, also our 5G agreement that we have closed with them. We have also considered, of course, that gradual switch from the MVNO model into that national roaming model with the respective migrations that will take place. Just as a reminder, from that moment onwards, they will terminate themselves, both the national MTRs as also international roaming that has some effects on the revenue side, not so much on the EBITDA side. And that is all factored in here into the guidance that we have given.
On the B2B side, yes, it's true that the B2B market is growing faster than the consumer market. There's an opportunity for everybody in the market to grow there, especially taking into account IoT, cloud, SD-WAN. The market is growing nearly double-digit. We take a fair share of this growth now in order to catch up in the overall B2B segment. We have won really prominent accounts last year, and we are on the way and have a fully filled sales funnel also for 2024. It's clearly an area of growth in mobile, but especially also in the fixed and the digital services.
So in that market's years, I mean, I suppose last year, your overall mobile service revenue growth was around 3%. I mean, are you able to kind of split that out between what you're seeing in B2B versus consumer? I mean, is B2B closer to kind of 5%-6% and consumer kind of closer to 0%-1%?
If I do the breakdown per segment, yes, B2B is stronger, even stronger than the 6 you mentioned, but clearly from a significantly smaller starting base, of course. But yes, the growth is significantly higher than the B2C growth. But clearly, if you accounted for the size of the P&Ls, marginally off the 3% is still a smaller part.
Got it. Could you just remind us, sorry, then just for one more, just what percentage B2B is of your total at the moment?
It's still single-digit in the mobile service revenue.
Single-digit. Okay. Thank you so much.
The next question comes from Joshua Mills from BNP Paribas Exane. Please go ahead.
Hi, there. Thanks for taking the questions. The first one was just coming back on the tariff points. I guess it does feel like a bit of a shift in message from purely being focused on value to the comments you just made about volume. So the question is, could you give us an idea, maybe just directionally, of how Q4 postpaid net adds on your retail business compared versus the retail postpaid net add growth earlier in the year?
It does look like it's a bit slower, but I'm trying to understand whether the pricing move was prompted more by what you were seeing on the volume side already or by the fact that there was some disappointment that your competitors hadn't followed you on the price hikes earlier in 2023. And then the second question would just be around the broadband net adds. I think in the past, you've given some indication of what the net add growth has been like on cable versus the VDSL base. And then maybe also some commentary on fiber for home and UGG would be helpful just to get a sense of what infrastructure this growth is coming from and then also what that might mean for UGG going forward. Thanks.
Well, starting with your first question, I think we clearly see an opportunity while other players in the market are now moving more into the discount segment with their premium brands to really, on the back of a very good mobile network, to really gain high-value customers in the EUR 30 space. It's for us a good opportunity now and to grab that market. This is why we test the family plans, and we test the promotional activities to really achieve high-value ARPU customers. I think we are now in the position to get that. And there's a space now, as I said, while other premium brands now move into the discount space to really grab that part of the market.
On VDSL split and cable split, I think we were cable-centric in the fourth quarter, and the whole growth is nearly on a cable with a very good service experience for the cable customers that we buy as a wholesale product, as you know, from the market. And it's a very healthy inflow with extremely low churn on that level. And it's for us a very profitable business in order to fuel our fixed customer base to create more and more conversion customers.
Yeah. Sorry, coming back to the first question, I was more asking, can you give us direction or an indication of how your postpaid retail net add fared in Q4, say, versus the runway in the first three quarters of the year?
I think we had a similar momentum as in Q4 2022 in the mix, roughly. We had the normal mix. We haven't seen any deviation between the two quarters if you compare Q4 2022 to Q4 2023.
Okay. Thank you.
It seems there are no further questions at this time. I hand back to Markus Haas for closing comments.
Thank you very much for joining our Q4 and full year 2023 results call this morning. We are pleased to announce really a strong business that has momentum that goes with tailwinds into 2024. We feel confident with the guidance that we have given this morning that we will continue to grow profitable with a slightly reduced CapEx envelope. So on that level, all signs are for growth. The measures for 2024 are locked in. We already work on the measures for 2025 and 2026 in order to continue the growth part and be a valuable contributor to Telefónica's GPS strategy. Thank you very much.
Ladies and gentlemen, the conference is now concluded, and you may disconnect. Thank you for joining, and have a pleasant day. Goodbye.