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 click the Raise Your Hand button. If you're connected via phone, please press star followed by one on your telephone. For operator assistance, please press star followed by zero on your telephone. Press the operator assistant button on the bottom left side on your screen. It's my pleasure. I would now like to turn the conference over to Mr. Christian Kern. 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 2022 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, involves 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 at 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. Also from my side, a very warm welcome to our full year 2022 results call. Today, we are delighted to present another strong set of results. Telefónica Deutschland successfully completed its three-year Investment for Growth program comfortably below the targeted CapEx envelope, making excellent progress on network modernization and 5G rollout. The company's 5G network is now covering more than 80% of the population, well ahead of plan. These well-recognized network quality improvements culminated in winning our very good network hat trick in the highly regarded Connect network test last year. Leveraging these achievements, we won close to 4 million mobile postpaid net additions and gained 1.4 percentage points in mobile service revenue market share over the course of the successful program.
This established Telefónica Deutschland as the clear number two mobile network operator in Germany with more than 33% mobile market share. Our focused strategy execution has been key to drive our commercial and financial success, leading to outperformance across our midterm guidance KPIs. We achieved more than 10% cumulative revenue growth is more than double the initial target of minimum 5% revenue growth. With regards to margin improvement, we increased our mobile gross margin by more than 1.5 percentage points. We achieved this outperformance comfortably within a smaller than initially targeted CapEx envelope. A key contributing factor to this midterm outperformance are our strong results for 2022 coming in ahead of full year outlook. Let me share with you our key financial highlights for the year 2022.
First, revenues continued their healthy growth path, increasing close to 6% year-over-year, driven by sustained mobile service revenue growth and a record year of handset sales. Second, OIBDA benefited from improved operational leverage, mainly in mobile on continued own brand momentum, growing more than 5% year-over-year. Third, CapEx to sales ratio had already peaked in full year 2021 and is with 14.7% in full year 2022, well on track to return to normalized levels this year. Overall, our business model is proving resilient despite a significant increase in inflation. Our cost controls are effective, and we continue to manage the inflationary impacts well. On my next slide, let me update you on the key building blocks of our strategy leading the way forward.
Our winning company strategy is based on strong company fundamentals and supported by our ongoing growth momentum. We are confident about a German macro picture which remains healthy, with the economy expected to grow slightly and continued low unemployment. In addition, we see an acceleration of digitalization efforts across most industry, with mobile operators acting as enablers of this trend. Telefónica is built on very robust fundamentals such as high network quality and strong customer as well as employee satisfaction. We are leading the market with our more-for-more pricing strategy while operating in an ongoing rational yet dynamic mobile market environment. In parallel, we are accelerating our digitalization transformation and are extending our ESG leadership by consistently driving forward our ambitious ESG agenda. All these strategic success factors are key inputs for the management team to execute its proven growth strategy based on three main initiatives.
First, drive mobile growth on the back of high network quality. Second, gain fair B2B market share by leveraging SME momentum through enhanced service offerings. Third, focus on smart bundling with strong customer satisfaction, driving an increasing share of addressable household wallet. My next slide highlights our latest networks achievements. We have made excellent progress with our network modernization and 5G rollout, just to mention a few. Awarded for the third consecutive time, a very good rating by connect in recognition of our network quality improvements. Achieved 5G pop coverage of more than 80%, well ahead of our initial target, while comfortably staying within an unchanged CapEx envelope due to rollout efficiencies. Delivered on the key regulatory obligations through network densification and increasing mobile speeds.
On the back of the ongoing strong demand for mobile data and mobile high speed availability, our network ambition is to reach 5G coverage of around 90% by the end of this year and nationwide latest by 2025. This is also a good opportunity to remind you on our energy savings program. We have launched a three-year energy savings program to keep energy consumption broadly flat with a target run rate of around 20% of gross energy savings by 2026. These energy savings program supports management ambition to keep energy costs in 2023 broadly stable year-over-year. Moving on to the next slide, we discuss our latest more-for-more initiatives. Our more-for-more pricing strategy, launched in Q4 2022, reflects the widely acknowledged improvement of our product, service and network quality, as well as extended ESG leadership.
In January this year, we announced further details on our More for More strategy, with the new O2 Mobile tariff portfolio being the key driver of our postpaid growth strategy. The new tariff portfolio is priced plus EUR 3 extra, which is an average around 10% above the current O2 Free portfolio. The tariffs offer larger data volumes, higher speeds, as well as the popular and innovative O2 Grow feature. For our Blau brand, More for More offers were already launched in February this year, combining higher data packages and speed at plus EUR 1 extra. We remain focused on capturing future growth opportunities across the entire sales funnel on the front book. As said before, we are planning further More for More price offerings across our portfolios and segments this year.
Turning to the next slide, we focus on our extended ESG leadership. We recently signed a second long-term PPA, sourcing additional energy from a German offshore wind park at favorable prices for 15 years, starting in 2025. In combination with our recent deflect long-term PPA, this further improves the quality of our green energy portfolio. In line with our hedging strategy, these two long-term PPAs in total secure more than two-thirds of our annual energy demand from 2025 onwards. Overall, Telefónica Deutschland extended its ESG leadership by driving forward its ambitious ESG agenda. We again achieved a low risk rating with Sustainalytics and are ranked top three in the global telco sector. According to Sustainalytics, the company's stock scored particularly well in the categories of product responsibility, human rights, and business ethics.
Telefónica Deutschland has also been included for the fourth consecutive year in the Bloomberg Gender-Equality Index. The company further improved its overall score with particular good results in the areas of disclosure, inclusive culture and equal pay. Moreover, Telefónica Deutschland remains committed to its climate protection goals. The company strives to reduce its CO2 emissions by 90% while neutralizing residual emissions latest by 2025 and taking concrete actions to be net CO2 neutral along its entire value chain by 2040. Social responsibility is also key for Telefónica Deutschland and our thoughts are with all people affected by the devastating earthquake in Turkey and Syria. As a direct support of the people, we have made all calls and messages for our customers from Germany to Turkey and Syria free of charge and enabled free roaming in Turkey until February 24th.
We have also initiated a fundraising campaign by O₂ Telefónica, in which we will double the donations made by our employees. We are supporting those colleagues who are also privately involved in relief efforts. I'm deeply impressed by the enormous willingness to help and support which we will see in all teams in our company. I'm proud to see how our employees are living social responsibility. Before handing over to Markus to take you through our strong Q4 performance in 2022 in more detail, let me highlight our confident full year growth outlook for this year. In 2023, we continue to build on our strong operational and financial growth momentum and the successful completion of the three-year Investment for Growth program. Based on current market dynamics, Telefónica Deutschland expects a robust pricing environment both in the premium and the discount segment in 2023.
Across its brand portfolio, Telefónica Deutschland is focusing on the implementation of a more-for-more strategy for the front book. This pricing strategy is reflecting our continuous investments in the successful improvement of product, service and network quality, as well as ESG leadership. Against this backdrop, we expect low single-digit percentage growth for both revenues and OIBDA, and CapEx to sales ratio to normalize at around 14%. So far, we have managed the impact of the inflationary environment well with our core business consistently delivering sustainedAnd we will continue the profitable growth path of our Telefónica Deutschland in 2023 again. We also reiterate our strong commitment to attractive shareholder remuneration by proposing a dividend of EUR 0.18 per share for 2022, in line with our minimum commitment until 2023. Markus, now over to you to take us through the Q4 highlights in more detail.
Thank you, Markus. Good morning, ladies and gentlemen. We are very pleased to have you here with us this morning. It's my pleasure to discuss in more detail another strong set of quarterly results with robust commercial traction and sustained financial momentum. The revenues continued their healthy growth path and were up 6.6% year-over-year to around EUR 2.2 billion in Q4. This is driven by the sustained mobile service revenue momentum and a record year for handsets. Excluding the non-recurrent special factors, the underlying growth rate was 5.3% year-over-year in Q4. Mobile service revenues posted a strong growth of 8.8% year-over-year to around EUR 1.5 billion in Q4.
The sustained mobile service revenue momentum was fueled by the commercial success of the O2 tariff portfolio and a solid contribution from partners. These factors more than compensated for the negative impact from the accelerated MDR glide path. Excluding the non-recurrent special factors, the underlying growth was 7% year-over-year in Q4. Handset sales grew 3.4% year-over-year to EUR 462 million on the continued demand for high-value handsets, while customers are increasingly opting for longer-term O2 My Handy contracts. Fixed revenues declined with -3.7% year-over-year to EUR 203 million, mainly as the termination rate cuts continued to weigh on the included international carrier business.
Fixed retail broadband revenue were facing tough comps on some late revenue recognition in Q4 2021, declining -2.3% year-over-year in Q4, while we continue our growth path in full year 2022, including ARPU growth in all consecutive quarters. The next slide shows that Telefónica Deutschland has also delivered another quarter of robust commercial traction in Q4 2022. Mobile postpaid maintained a very solid growth momentum, delivering over 260K net additions with a high O2 brand appeal in the market, driving the gross add momentum. The contribution from partner brands continued to be solid. Churn in the O2 brand stood at low rates of 1.2% in Q4, leveraging the network and the service quality.
The O2 postpaid ARPU marginally declined in Q4, mainly reflecting the accelerated MDR glide path and some enhanced focus on customer loyalty, while high-value tariffs remained very popular. The underlying O2 contract ARPU posted +0.4% year-over-year growth in Q4. At year-end, we executed a revenue-neutral technical customer base adjustment in prepayment of around 2.5 million inactive SIM cards. We expect this to reduce the volatility of the prepaid base as we have tightened the definitions. Fixed broadband customer base totaled 2.3 million accesses at year-end 2022, with net additions of 18K in Q4, reflecting the success of the O2 My Home tariff portfolio with high-speed cable and fiber connections driving the customer demand. That was also supported by the recent test results of the Connect Test magazine .
Worth mentioning, fixed mobile substitution also remained popular. The fixed churn is mainly reflecting legacy DSL net disconnection and was marginally up to 1% in Q4 2022. Fixed broadband ARPU grew 5.1% year-over-year to EUR 25.70 in Q4, benefiting from the increasing share of high-value customers in the base. Let's move to my next slide, which illustrates our steady OIBDA growth. OIBDA grew 6.8% year-over-year to EUR 667 million. The strong year-over-year performance benefited from the improved operational leverage, mainly in mobile, tight cost management, and some roaming support. In combination, these factors more than offset the anticipated increase of energy and personnel costs. Excluding the non-recurrent special factors, underlying growth was up 2.6% year-over-year in Q4.
OIBDA margin was flattish year-over-year in Q4, reflecting the strong growth of the, also this quarter, broadly margin-neutral hardware revenues. With regards to the cost lines, it's worth highlighting for Q2 that supplies increased by 2.8% year-over-year with the positive effects from the MDR cuts more than offset by the volume-related higher hardware cost of sales. Personnel expenses were up around 10% year-over-year, reflecting this quarter the partly overlapping salary reviews of full year 2021 and full year 2022, as well as some typical year-end entries, somewhat compensated by a year-over-year lower FTE base. Other OpEx were up 7.5% year-over-year, reflecting higher energy costs, technology transformation, and our commercial activity. With regards to energy costs, both the spot market and the forward prices have come down significantly.
Leveraging this positive development, we have expanded our hedging volume with the falling market prices. We have now hedged more than 50% of our energy demand for this year and continue to deploy our hedging strategy. In combination with our energy savings program, these initiatives support our ambition to keep energy costs in 2023 broadly stable year-over-year. On the right side of the slide, we show our Free Cash Flow with its typical annual seasonality. Free Cash Flow amounted to around EUR 1.1 billion in full year 2022, compared to underlying EUR 958 million last year. Lease payments, primarily for internal sites and lease lines, amounted to EUR 640 million in full year 2022. The Free Cash Flow after lease was at EUR 453 million for the full year.
Let me discuss the key drivers of our free cash flow profile in a bit more detail on my next slide. Operating cash flow was around EUR 1.3 billion in full year 2022, which is an up of 18.6% year-over-year in underlying terms, reflecting both the strong operational and financial performance, as well as also the lower CapEx year-over-year. Working capital movements were -EUR 141 million in full year 2022, mainly driven by a meaningful decrease in CapEx payables by -EUR 169 million, which is also reflecting the full year 2022 CapEx peak already being in Q3 in combination with payment terms of up to 180 days. This impact is expected to phase out after Q1 of this year.
We anticipate the corresponding annual working capital changes to be rather neutral once we have reached steady state in CapEx. Others of EUR -79 million reflect the non-working capital related cash out, consisting of net interest payments, our equity contributions for UGG, as well as cash tax being paid. As far as taxes are concerned, we have paid in Q4 around 50% of the assumed capital gain taxes for our recent infrastructure deals in full year 2020 and full year 2021. The remainder, including some spillover effects from prior years, will be paid this year once we have received the corresponding tax assessment letters. As expected, these payments totaled EUR 640 million, with the year-over-year increase mainly driven by the annualization of the second tranche of our recent tower deal.
As a result, the Free Cash Flow after lease amounted to just over EUR 450 million. Following the successful completion of our three-years Investment for Growth program, we are returning to normalized CapEx to sales levels. Alongside top-line growth and our resilient business model, this will further enhance the Free Cash Flow after lease generation, supporting the dividend coverage from 2023 onwards. Finally, consolidated net financial debt amounted to around EUR 3.2 billion, which is roughly flat year-over-year. Leverage ratio remains of 1.3 x, well below our self-defined upper limit of 2.5 x. This is reflecting our strong balance sheet and the financial flexibility. Fitch recently confirmed our BBB credit rating with a stable outlook. Worth to remind you that Telefónica Deutschland has only limited short-term refinancing needs, and all drawn facilities have been agreed at fixed rate.
Any potentially higher interest rate would only have an impact to the company over time. Before we kick off the Q&A, let me summarize the key points of today's presentation. As a management team, we remain highly committed to drive Free Cash Flow growth and long-term shareholder value on the back of our confident outlook for 2023. Our focused strategy execution has been a key driver to drive our commercial and financial success, resulting in outperformance of our committed targets. Our achieved high network quality in combination with a strong customer and employee satisfaction, is the foundation for delivering continuous strong go commercial momentum and pursuing our revenue and OIBDA growth path. We are focused on successfully executing our more-for-more strategy and the ambitious ESG roadmap. As usual, we look forward to your questions. Operator, please go ahead and start the Q&A.
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 on your screen and then click the raise your hand button. If you're connected via phone, please press star followed by one. 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 the Q&A and raise your button. Raise, sorry, raise your hand button or press star followed by one. We will kindly ask you to ask maximum two questions per participant. One moment for the first question, please. We have the first question from, excuse me about the pronunciation, Georgios Ierodiaconou from Citi. Your question, please.
Good morning, thanks for taking my question. The first one is actually on the KPIs.
which were a bit softer in the fourth quarter. I was wondering if there's any special reasons why the trend was slightly higher than that, perhaps a bit lower than previous quarters, and whether that at all affects the way you are thinking about more. From your opening statements, it doesn't appear to be the case, but I'm curious what gives you the confidence that you can proceed with these upward tariff changes despite maybe slightly softer commercial performance. My second question is more around OpEx. You had a very impressive service revenue number for the fourth quarter, but a lot less of that managed to filter through to EBITDA.
I was wondering if you could perhaps give us a bit of an indication as to the reasons why you haven't managed to have a good, let's say, translation of the revenue growth into EBITDA. You did mention energy as well as part of that, and I was wondering, more in the medium to long term, you did mention the PPAs that you signed, whether it would be possible to maybe disclose some of the terms so we get an idea of how energy costs could progress in the next two or four years. I appreciate there were two parts in the second question, I hope that's okay. Thank you.
Good morning, Georgios. On your first question, I think underlying trends in trading and churn are fully in line. We lost in the fourth quarter a low ARPU MNC customer with a five-digit SIM card number to a competitor, and that's the main reason why net adds look a little bit softer than the previous quarters. Underlying trading results are in line. We also see churn significantly reducing after the two regulatory effects. There's no concern on our side.
Georgios, let me take the second and third question in combination. First of all, why do we have slightly lower contribution of revenue growth into EBITDA than in previous quarters? You have mentioned one, we have had indeed still some headwinds in Q4 from, on the energy side that came in line with the expectations that we have mentioned with our Q3 results to you also. You remember that the prices were falling just from December onwards, and in October and November, price levels were still quite high. I described it already. We are pursuing our hedging strategy as we speak.
We have now more than 50% hedged for 2023, and we are leveraging the favorable terms which are out there. On the long run, I can confirm that the PPAs that we have closed are still below, significantly below, the current market prices that you see for the outer years. We have not only bought really green energy that Markus was mentioning, but we have also reached very favorable pricing levels going forward. They will start 2025 as we have suggested, and go for roughly two-thirds of the expected consumption in those years.
On top of that, you had also on the OpEx side, now coming back to the translation through in EBITDA question. We also had some additional labor cost increases temporarily because you remember, we have pre-point the salary increase in 2022 to September, whereas in the previous year, this has been executed in December. You have double increase here for that limited timeframe that you have to enter into account. We had some usual year-end entries for overtime, vacation, et cetera, which in some year are less pronounced, some years are more pronounced.
However, from an underlying perspective, that is the most important thing, we are performing significantly below the actual inflation rates that you see, we expect to continue also on that trend for full year 2023. The last topic in that area is we also had transformational efforts on the network and IT side in this quarter, sustaining our ability to serve the customers with superior services also in the future. Also this one, non-recurrent for the future. From an underlying perspective, we see still a very good traction in translating the mobile service revenue through in EBITDA.
If I could ask a follow-up on the PPAs. I mean, what we've seen in other markets is rates below EUR 100 MWh . Is that a fair assumption for what you guys have secured as well?
That's in the ballpark figures that you can estimate, yeah.
Thank you.
The next question comes from Paul Kratz from UBS. Your question please.
Well, hi. Thanks for taking questions. I have two. The first one is really just about guidance because you're guiding for low single digit revenue growth and low single digit EBITDA growth. Given that you saw 7% underlying mobile service revenue in Q4, can you talk through the headwinds that are causing the slowdown into Q3 into 2023 that's implied by your guidance? Alternatively, were there one-off factors that boosted the service revenue growth in Q4 outside of the one-off gain that you flagged in terms of partner revenues? My second question is based on spectrum. Can you give us your latest thoughts in terms of what you expect for the next spectrum allocation in 2024? Specifically, do you expect the 900 MHz band spectrum to replace the 800 MHz band?
When do you think we'll get the next update from the regulator on the issue? Thanks.
Paul, good morning. Let me take the first question. So, without the special factors that we have mentioned, we haven't seen any non-usual activities on the mobile service revenue side. We had the well-flagged headwinds from NPR and also still the support from a full year perspective on roaming that we were always mentioning. Of course, if you look into the overall revenue, we also had strong support from the handset side, which was a record year of sales. Broadly margin neutral as we always indicate. Apart from that, we have rather normal seasonalities in the underlying figures.
On spectrum, I think we handed in our submission to the regulator in time end of last year. The regulator is now analyzing. I think we brought, again, very strong arguments in favor of a full extension of the band. The regulator is now analyzing carefully all the arguments brought forward. Also, the impact on the market, if spectrum would be allocated in a different way, and what would be the impact for consumers, the negative impact, as that we brought and very strong arguments. We expect now more process information in Q2 and followed by a final decision about the allocation proceeding by the end of the year. The stock is still in discussion with the regulators, but clearly more beneficial for the overall market would clearly be a full extension of the spectrum in order to clearly provide even better network for consumers.
On that front, mid of the year process information, end of the year decision from our perspective.
Can I just ask a follow-up question, just coming back to the guidance. I know that you were clear in terms of saying that Q4, you know, was a broadly normal quarter in terms of seasonality. I mean, just to come back to the point that your exit rate from Q4 2022 was 7% underlying in terms of mobile service revenues, and you're guiding towards, you know, low single digit. Can you help explain the bridge in terms of why you get that deceleration?
Well, first of all, main driver for that is we are guiding not on service revenue, mobile service revenue, but on operating revenue. The main driver is that we do not expect similar growth rates on the handset revenues as we have seen it in previous year, because it was already a record year. We have extremely good traction. We still see traction also for this year, but you have a much higher starting point, of course. Simply from a year-over-year comps perspective, you have not the ability to continue on that growth rate.
Mobile service revenue, it was indeed a good quarter in Q4, we see traction from the net adds that we have done from the developments that we see. We should also take into account that next year we will have headwinds from the NPR cut that is coming. On the other side, our more-for-more initiatives, we said are based on the front book pricing and will just evolve over time. You will see some impact of that in 2023, but it will accelerate then in the years after.
Thanks.
The next question comes from Mathieu Robilliard from Barclays. Your question please.
Good morning, and thank you for the presentation. I have a question about pricing. if you could be a bit more color about, the pricing initiatives we've seen from the competitors on mobile and also, related to your, new pricing points. I realize it's a pretty substantial price increase on the front book, but at the same time, you are, going to, increase data allowances every year. I was wondering if you weren't concerned that could, cap, future data growth monetization because people will get naturally more data, and you won't be able to get, more ARPU out of that. That's the first question. The second one was around sorry, Free Cash Flow.
I think, Markus, I missed your exact comment from, on the contribution from WCR and CapEx payable in 2023. More broadly, I can see that consensus for free cash flow in 2023 is around EUR 530 million. I realize you don't guide on Free Cash Flow aL, but I was wondering if you could tell us if you felt comfortable with that number. Thank you.
Thank you, Mathieu. On the first question, I think the ARPU up story is fully intact, especially with the new portfolio. What we clearly see here is that the average ARPU, especially on the hero tariff with the EUR 33 gross, will further support our ARPU up story, especially on the O2 customer brand. On that level, we clearly see that there are still incentives, especially also with the unlimited tariffs that we have increased. Also with the next level of the EUR 38 price point, that has been former the 33, enough upsell potential also to get to the higher value customer. Overall, we move up the portfolio with a more-for-more strategy that's been announced in January and by 10%.
We clearly see with the incentive to monetize the EUR 3 on top now with the O2 Grow feature in the tariff, starting with EUR 33 in order to clearly also gain the lion's share of customers at this price point, that would clearly also then finally result in an ARPU up of the new customer base, but also for renewals. We will also offer this portfolio in our for all each renewal that we will do from April this year onwards. Step by step, by front book and renewals of the customer base, we also clearly boost or drive an additional ARPU booster in the customer base by renewals.
Mauthieu, let me take the second question. Indeed, we see an unwinding of the CapEx peak in Q3, which will normalize after Q1. From an overall perspective, we expect a strong increase of our Free Cash Flow, being delivered above the floor of the EUR 0.08 that we have sent for the dividend.
Thank you very much.
The next question comes from Pilar Vico from Credit Suisse. Please go ahead.
Hi. Good morning, and thank you for taking my questions. I have two on my side, please. The first one is on net working capital, which came significantly negative this year. How should we look at this figure in full year 2023? You said that the phase out is in Q1 2023, but that, does it actually disappears completely in 2023, or it takes a few years to normalize? The second is around UGG. There were some news earlier this week saying that there were some sort of rollout and customer service issues. Could you please let us know what exactly happened and if the plan is evolving properly or if there is any sort of problems there? Thank you very much.
Pilar, let me take the question. Yes, indeed, from a working capital perspective, we see that the CapEx peak has been in Q3 last year, and we will see an unwinding of the CapEx payments due to the favorable payment terms that we have until end of Q1. Then we are from that perspective, expecting, once we are in steady state, we expect also on a full year basis a neutral working capital position. That of course, always depends then on the quarterly phasing. I cannot give you then an exact number at this moment of time, but from a structural perspective, your assessment is right.
On UGG, Pilar, we are from our perspective, well on track. I think, we are gaining in the areas where UGG building as O2, a significantly higher market share than we have. We get up to 30% market share in the areas where UGG has built. Clearly, there's also competition now about the municipalities. You also have seen the Deutsche Telekom at some point in some areas is overbuilding. 95% of the areas are secured. In smaller areas that also raised, the awareness of the press, we clearly had some overbuild discussions. Overall, step by step, we have the normal rollout challenges that every FTTH player in Germany is facing. From that level, I think we are well underway.
We have secured the resources, we have secured the municipalities where we want to build, and we have a really healthy inflow of FTTH customers who want to join to fiber.
Thank you very much.
The next question comes from Yemi Falana from Goldman Sachs. Please go ahead.
Good morning, everyone. Thanks for taking my questions. Could I come back to a couple on the cost of growth from here? Firstly, just on the personnel side, even with the quarter where wages were rising, the 10% rise in personnel costs seemed somewhat more than you would expect, particularly given the falling FTE base. Could you cite the impact of those other factors that have affected the personnel expenses in the quarter? Can I just clarify that those don't recur at all, or is it that they will just recur at more lower kind of normalized levels from here? Secondly, just from a Free Cash Flow perspective into next year, clearly you're expecting working capital to improve, but I would have thought that tax spillover that you mentioned during your presentation isn't necessarily captured by consensus.
Is it fair to say that, the market needs to digest that into FY 2023, or should the working capital improvement more than offset that effect? Thank you.
Yemi, good morning. Let me take your questions on the personnel cost side. Indeed, I can confirm that more than half of that comes from non-recurrent effect, and they are really non-recurrent, and we will not see them back in the next quarters. Here we confirm again the lower increases versus the inflation rates that we currently see. From my perspective, the tax spill is just something normal that you see. We are here dependent on when we receive those letters being asked for payment. Of course, we do not pay in advance.
It's also a normal working capital position that we have. In fact, we are committed to strong increase of Free Cash Flow above the floor for the dividend in 2023.
Very helpful. Thank you.
The next question comes from Keval Khiroya from Deutsche Bank. Please go ahead.
Thanks for taking the questions. I've got two, please. Firstly, I just want to go back to the Q4 revenues because you saw a 3 percentage point improvement in the mobile service revenue growth, whilst it looks like your O2 post-paid RPU trend improved by 1 percentage point. Would you mind just explaining a little bit more about what drove that improvement? Is it because the mix of O2 within the base is improving or is there something else?
Secondly, would you mind talking about what level of growth you saw in partner revenues and how that compares to the prior quarter? How we should think about the contribution for 2023. Thank you so much. Let me take your question, Christian Fangmann. With regards to the service revenue momentum, I can again reconfirm by far the biggest contributions comes from our O2 brand, driven by the sustained commercial traction that we have. We are very pleased with the development that we have seen here. With regards to the partner revenues, we mentioned it, we had that special settlement. Therefore of course, in this particular quarter, the contribution was slightly higher.
On average, it remains in the mid to high 20s, that we have also seen, and that is also the direction of travel for the full year 2023. Thanks very much.
The next question comes from Joshua Mills from BNP. Please go ahead.
Hi, a couple for me, the first one is again on this revenue from the start point. Maybe another way of asking it, if we think about your retail mobile service revenue, excluding partner businesses, did they also accelerate by 3 percentage points in Q4 versus Q3? It seems quite unlikely that a revenue line that had been growing at 3%, 4% for the first nine months is really boosted by 3% organically when we take out special factors. I wonder if this is to do with the phasing of payments from 1&1 or other partner businesses. Maybe if you could just comment on the trajectory of your retail mobile service revenue through the course of the year, that'd be very helpful.
The second question is just coming back to Free Cash and net debt movement. You generated EUR 260 million in Free Cash Flow in the fourth quarter. Your net debt then is sort of falling by EUR 100 million. I think the difference is to do with spectrum payments. If you could confirm whether that's the case and also the format in which you do these annual installments and how they're accounted for, that'd be very helpful. Thank you.
Hi, Josh. Many thanks for your questions. On your first one, yes, we can confirm that in our own B2C, but also B2B revenues, accelerating in growth, especially with the positive trading below. From that level, we see that as I outlined our strategy with the two growth engines is really working, and that we clearly see healthy mobile service revenue growth in B2C but also in B2B. Josh, your second question on the free cash flow development. Indeed, the component of the license payments are not included as we have always stated in our free cash flow definition here.
Just to be clear, is that the reason why the change in financial debt for the fourth quarter is lower than we would have expected for free cash flow? Because there's some financing cash flow associated with spectrum, which is meaning the net debt reduction is lower.
I'm not sure if I fully understand this question, but maybe we can take that in more detail. We will explain it to you in more details with the IR team, afterwards. Okay, Josh?
Okay, thanks.
The next question comes from Jerry Dellis from Jefferies. Please go ahead.
Yes, good morning. Thank you for taking my questions. First question, just again coming back to the 2023 revenue guide. You know, you pointed out perhaps that handset revenue growth won't be quite as strong in the year ahead. You also talked about the MTR headwind, although I think the EUR 0.15 cut looks very similar to what you experienced in 2022. Is it fair to say that sort of underpinning the low single digit growth in total revenues, you are still expecting mobile service revenues to grow in line with the levels seen in Q4? If that's not the case, then perhaps you could sort of explain why in the context of the 10% price increase feeding through from April.
The second question is, in relation to that price increase, which I think was notified around the January 23rd , what's the sort of early experience in the customer channels? Are you seeing some sort of mitigating evidence of customers taking mitigating actions? Could we specifically expect churn to be perhaps higher in Q1? Thank you.
Thank you for your questions. On our level, it's a clear target and ambition to continue to grow mobile service revenue above the market, as we've done in the last two years. On that level, we clearly see momentum in all our P&Ls, and we clearly want to continue with the growth momentum that we have, seen on mobile service revenue growth, also in 2023. With our announcements, I think, clearly, it has been perceived overall as very attractive. We continue to be price value leader with the new portfolio, but clearly at a 10% higher price point. We clearly also incentivize our channels in order to be successful with the new portfolio assets. There's a clear sales strategy behind that cross channel.
An omni-channel online, offline, and all the other ones we will start in April. On that level, I think we prepared ourselves for this price book front book increase of the new O2 Mobile postpaid portfolio.
Just specifically, can we, should we expect churn to be higher in Q1 than it was in Q4?
No.
Great. Thank you.
The next question comes from James Ratzer from New Street Research. Please go ahead.
Yes. Good morning. Thank you. I have two questions, please. The first one, I think there's also been quite a few questions already on the sudden pickup we've had in Q4 service revenue growth, which I have to say I'm still a little bit confused by, given that the post-paid ARPU only improved by around 1 percentage point sequentially on your own brand. I just want to get back to how much of this is driven by partner revenues and has there been a substantial pickup from the Lebara contract that has helped to boost the Q4 revenue performance? Secondly, again, looking into the 2023 guidance, I mean, are you making any assumptions that in 2023 you're going to see any offload of traffic from 1&1 onto their own network?
Do you think that will only come in in 2024 at the earliest? Thank you.
James, let me take your questions. We have been pleased with the overall service revenue development in Q4. As we have stated before, we had some partner settlements, which we clearly flagged, which contributed also positively. With regards to your questions to Lebara, yes, the migration has been finalized, and we see Q3, Q4 developing in line with our expectations. There was, of course, some contribution also from Lebara in Q4 indeed.
Markus, are you able to say what the impact has been in Q3 and Q4 from Lebara, please?
Well, we indicated to you a full run rate of mid to high double-digit EUR million amount. As we have started with that in Q3 and Q4, with the commercial activities, you can imagine that you have rather a lower contribution than half of the total amount that I was mentioning before.
Your second question.
Thank you.
I think we've taken a very conservative view. We now need to wait when the fourth network will also start with mobile services. If it would be delayed, we would clearly see upsides.
Thank you. Markus, when you're saying you're being conservative, does that mean you are assuming some offload in your 2023 guidance?
I think we have taken the public news that are available, then multiplied them with the number of sites that might be available on the new network. That's our basis. We have taken a very conservative view, and anything that would be come later or whatever will generate enough sites.
Great. Thank you.
The next question comes from Adam Fox-Rumley from HSBC. Please go ahead.
Uh, thank you very much. Um, I have two quick ones as well, please. Um, I thought there was some interesting comments in the release related to, uh, some customers taking longer-term O2 Handy contracts. Um, and I wondered if you could give us an indication of how material that really is, because I, I guess it's a potentially interesting dynamic set against the, um, the repricing that we're going to see, um, as, uh, as new tariffs are adopted, uh, through the year. Uh, and then secondly, um, I just wondered if you could talk about your priorities for CapEx spend in twenty-twenty-three now that we've, um, moved beyond the investor growth, uh, phase. Thanks very much.
On your first question, I think the majority of our My Handy customers still sit on the 24-month installment plan. We clearly see also, as we've seen in the U.S. and other markets, a trend going more to 30, 36 and 48 months. There's a clear trend, especially with the high-value smartphones that we see. The USP in the market that allows us to differentiate until you make higher value smartphones also affordable for a higher number of customers. Clearly majority still sits on the 24 months installment plan. With regards to the CapEx deployment, indeed, we are coming now back to normalized levels, as we have guided for also.
If you look into compare that to the investment program, of course, our catch up plan for expanding the 4G coverage and 4G capacity in parallel with the 5G expansion has been ended successfully. We are now concentrating our investments in further expanding our 5G network and further increasing in line with the capacity needs the perception of our customers.
Thanks very much.
Ladies and gentlemen, at this time, no further questions will be taken, and I hand back to Markus Haas for closing comments.
Thanks very much for dialing in for our full year results call 2022. For 2023, Telefónica Deutschland will continue its successful course of profitable growth. We created momentum. We will continue momentum in 2023. The investment peak is behind us, so we now really leverage the great 4G and 5G networks that we have built and clearly will also deliver superb results this year, as set with profitable growth and significantly Free Cash Flow growth compared to 2022. Thank you very much for joining.