Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Telefónica Deutschland Q3 2023 Results Conference Call. Throughout today's recorded presentation, all participants will be in a 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 click the Raise Your Hand button. If you are connected via phone, please press Star followed by one on your telephone keypad. For operator assistance, please press 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. 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 Q3 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's 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 warm welcome to our Q3 2023 results call, and thank you for taking the time to join us. Today, we are delighted to report another strong set of results, and we are fully on track for the at half year upgraded full year 2023 outlook. Telefónica Deutschland's strong business momentum is evident and is making excellent progress across the three strategic priorities. The focused execution of our strategic priorities is the main driver of our commercial and financial success. Telefónica Deutschland is leading the German market with More for More initiatives and continues to deliver its ambitious ESG agenda. Let me now highlight our strong set of nine-month results, which are demonstrating our ongoing strong business momentum.
Revenues grew 4.8% year over year, underpinned by accelerated mobile service revenue momentum in combination with the successful launch of the company's More for More O2 Mobile portfolio and 5G mass market enablement. OIBDA posted strong 2.7% growth, supported by improved mobile service revenue quality on continued own brand momentum. And finally, CapEx for sales stood at normalized levels of 12.9%, while we continue to focus on network quality. Overall, we have extended our growth path, our, our robust business model, and are fully on track to deliver full year 2023 guidance. On my next slide, I will highlight our latest ESG initiatives. During these unprecedented times, social engagement has moved into center stage without reducing our commitment to other key areas of ESG. Telefónica Deutschland employee satisfaction rating achieved an all-time high in the third quarter.
The inflationary environment and cost pressures are also impacting our employees. Hence, we have made a one-off payment to 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 improving the green energy mix to support climate neutrality. In the event of crisis, telecommunication services became and have become even more critical, and Telefónica Deutschland is providing telecommunication support to customers in such crisis areas so that they can say and stay easier in touch with families and friends. Further supporting Germany's digitalization agenda, Telefónica Deutschland has developed various safety and security guidelines, as well as education program focused on the young and elderly people.
On my next slide, you see that on the back of our strong nine month results and continued business momentum, we are fully on track to deliver on our half-year results upgraded full-year outlook. Overall, Telefónica Deutschland expects a continuation of the rational yet dynamic market environment for both mobile and fixed. On this market backdrop, we remain focused on capturing high-value pools to drive profitable growth across our entire sales funnel. Hence, we are on target to meet or slightly exceed free cash flow after lease consensus for full-year 2023, as published on our website. On my next slide, let me share with you the robust macro outlook for Germany, which further boosts our confidence in the B2B business going forward. Telefónica Deutschland's single country exposure to the overall robust German macro environment gives us further confidence to continue our growth path.
Let me flag three key indicators. Easing inflation. Telefónica Deutschland continues to manage the inflationary environment well, while the latest predictions also indicate easing inflationary pressures. Stable unemployment. On the back of a stable outlook for the unemployment rate, expectations are little change to the purchasing power, with communication services remaining a top priority of the German consumer.... And finally, GDP growth. Expectations for the German economy indicate a return to growth already next year. Now, I'd like to put this positive macro backdrop for Germany into context, how it supports Telefónica Deutschland's strategic framework going forward. After the successful completion of our three-year Investment for Growth program, Telefónica Deutschland is opening the next chapter of its success story. Telefónica Deutschland's management team has a proven execution track record, and is now building on even more resilient business model based on its accelerated growth and efficiency plan.
The company continues to pursue sustainable revenue and free cash flow growth, while choosing a different path to success. Our accelerated growth and efficiency plan provides a strategic framework based on three key pillars: grow market share by rebalancing the revenue mix, enhance network quality to further improve customer experience, and accelerate our transformation to enable agility 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, deploy them at commercial terms rather than accelerate business efficiencies and speed up transformation, and dynamically weigh strong business opportunities and radical efficiencies. The management 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.
To close, I'm sure you have already seen the intention of Telefónica S.A., our major shareholder, on the offer for the remaining shares in Telefónica Deutschland. In line with the formal process, we will assess the offer. Markus, now over to you to lead us through the Q3 highlights in more detail.
Thank you, Markus, and good morning, ladies and gentlemen. Also from me, a warm welcome as always. It's now my pleasure to discuss our Q3 2023 results in more detail. Telefónica Deutschland has delivered again another quarter of robust growth, and we have underpinned our value over volume strategy. Revenue posted a solid growth of 2.2% year-over-year, coming in at EUR 2,131 million in the third quarter. This is driven by the ongoing mobile service revenue momentum. Mobile service revenues recorded a strong growth of 3.4% year-over-year to EUR 1,523 million. We see continued own brand momentum and also a solid contribution from our partners.
Handset sales slowed to -2.1% year-over-year to EUR 395 million, with the high-value smartphones still remaining very popular, while we see, as expected, following the record quarters, the overall customer demand for the O2 My Handy contracts was somewhat softer, but fully in line with the German market trends. Fixed revenue grew by 1.8% year-over-year to EUR 208 million, with the fixed retail broadband revenues recording even stronger growth of 6.1% year-over-year in the third quarter. My next slide shows another quarter of Telefónica Deutschland's robust commercial traction in mobile and fixed. Mobile postpaid delivered 396K of net adds. This is driven by the continued high O2 brand momentum and the solid contribution of the partner brands.
The O2 contract churn stood at a low rate of 1% in Q3 2023, reflecting the O2 brand appeal in combination with an enhanced network and service quality. O2 postpaid ARPU growth accelerated to 2% year-over-year in Q3. This is reflecting the demand for high-value tariffs, while we see, of course, partly an offsetting effect by the MTR reductions. The underlying O2 postpaid ARPU growth was even stronger at 2.6%. Fixed broadband net additions were 31K in this quarter. This is reflecting the success of Telefónica Deutschland's technology-agnostic O2 My Home tariff portfolio, and also the low churn rates. The fixed churn rates improved by 0.3 percentage points year-over-year to 0.8% in the third quarter.
Fixed broadband ARPU maintains its growth path, driven by the increasing share of higher-value customers in the base, and is up 2.2% to EUR 25.60. Let's move to OIBDA and free cash flow on my next slide. OIBDA growth improved to 3.6% year-over-year and stood at EUR 665 million. This is driven by the improved mobile service revenue quality based on the continued own brand momentum, which was partly offset by the anticipated and mentioned OpEx increases. OIBDA margin expanded 0.4 percentage points year-over-year to 31.2% in the third quarter. With regards to the Q3 cost development, it's worth highlighting the following: Supplies were, with -2.6% year-over-year, slightly lower at EUR 631 million in Q3, reflecting the positive effects from the MTR cuts and the volume-related hardware cost of sales....
Connectivity related cost of sales and hardware cost of sales accounted for 39% and 58% of supplies. Personnel expenses were up 12.7% year-over-year to EUR 168 million in Q3, mainly reflecting the increase of base salaries because of the year-over-year general pay rise in full year 2022, 2023, in combination with a slightly higher FTE base year-over-year, driven by in-sourcing of key capabilities to support transformation and growth ambitions. Other OpEx were slightly up 2.6% to EUR 688 million, mainly reflecting the commercial activity in the quarter, for example, for the O2 Mobile portfolio, as well as the continued technology transformation. As expected, energy costs presented a small tailwind in Q3 2023. Turning to year-to-date, free cash flow on the right side of the slide.
Year-to-date CapEx of EUR 860 million was lower by 9.5% year-over-year, with a reduced CapEx to sales ratio of 12.9%. As a result, the operating cash flow, OIBDA minus CapEx, amounted to EUR 1.1 billion year-to-date. The lease payments for antenna sites and lease lines amounted to EUR 553 million year-to-date. Finally, the adjusted free cash flow after lease is EUR 223 million year-to-date, with the usual back-end loaded profile. On my next slide, we provide some more details with regards to the free cash flow. Operating cash flow rose by 14.5% year-over-year to EUR 1,105 million in the first nine months, as a result of both the strong operating and financial performance, as well as the CapEx normalization post the successful completion of the company's investment for growth program.
Working capital movements of EUR -264 million year-to-date were on broadly similar levels as in the prior year. The main driver for the decrease are the CapEx payables of EUR -148 million, and other working capital movement of EUR -117 million. Main drivers of the other working capital movements were an increase in prepayments of roughly EUR 50 million and inventories of EUR 10 million. These payments amounted to EUR 553 million year-to-date. As expected, the free cash flow after lease is well on track to meet the published company compiled consensus of around EUR 550 million for the full year 2023. Consolidated net financial debt increased to EUR 3.5 billion, and the leverage ratio of 1.4x remains well below our self-defined upper limit of 2.5x .
In October, Fitch affirmed Telefónica Deutschland's triple B rating with a stable outlook. This rating is reflecting our solid position in the rational German telco market, well-invested networks, low leverage, and also our conservative financial policy. Before we kick off the Q&A, let me summarize the key points of today's presentation. Overall, we achieved a good top-line growth and remain highly committed to drive free cash flow growth and long-term shareholder value. We are focusing on strategy execution to drive profitable by leading More for More across our mobile portfolio, supporting our value over volume approach. We stick to our ambitious ESG roadmap to promote a sustainable digital future. On the back of the strong nine-month results and continued business momentum, we are fully on track to achieve our at half year upgraded full year 2023 outlook.
Telefónica Deutschland's next chapter, to build an even more resilient business model based on its accelerated growth plan and efficiency plan, is to come. Now, we look forward to your questions. Operator, please go ahead and start with the Q&A session.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may click the Q&A button on the left side of your screen and then click the Raise Your Hand button. If you are connected via phone, please press star followed by one on your telephone keypad. If you wish to remove yourself from the question queue, you may press star followed by two or please press the Lower Your Hand button. Anyone who has a question may click the Q&A and Raise Your Hand button or press star followed by one at this time. Please limit yourself to two questions per participant. One moment for the first question, please. The first question comes from Mathieu Robillard from Barclays. Please go ahead.
Yes, good morning, and thank you for the presentation. The first question I had was around the deal. I understand this is an offer that is being made by a subsidiary of Telefónica. What happens if investors don't bring the shares to the offer? Can you then squeeze them out if, I mean, a minority does not bring them? Is there any particular mechanism we should be aware about how the offer works? I was also wondering if, assuming that the offer is successful and you're taking out of the market, if that would have any implication in terms of how the tax asset carry forward that you have could be used more efficiently or less efficiently?
And then on the operations themselves, very strong numbers, ARPU is up, churn is down. How would you characterize today the competitive environment, and where do you think you're winning against the competitors? Thank you.
Good morning, everyone, Markus Haas speaking. Thank you for your questions. I think you will understand with the announcement of this morning, you will understand that all questions related to the voluntary offer will or would need to be related to Telefónica S.A. for all details to be asked. On your second question on the market, I think what we clearly see is in a very healthy and dynamic market, we've been able really to gain traction in the third quarter, especially in the prepaid segment, we implemented More for More, followed by the postpaid implementation. In the second quarter, we have seen that the strategy of growing in the market with value customers has worked out in the third quarter, and also on fixed, we have momentum.
We have on all business lines, in all product lines, we've been able to deliver solid underlying growth, in order to achieve our full year targets.
Thank you.
The next question comes from Ulrich Ratte from Société Générale. Please go ahead.
Thank you. You commented on wage inflation in 2023. Could you talk about what you expect to have to do with your wages, with your salaries in 2024, based on everything you know at this point? Second question is, there's a lot of debate in Germany about the situation, and fiber has come a little bit under pressure. There's a sort of a big debate between the altnet s and Deutsche Telekom about strategic overbuild. Could you comment on Telefónica Deutschland's sort of views on this?
My last question is, is there any reason, driven by the business, by the way it's going, by the way the leverage looks, the way the free cash flow outlook looks, any reason at all to cut the dividend based on the operations and financials of Telefónica Deutschland? Thank you.
Good morning, Ulrich, Ulrich. It's again, Markus Haas. I think on the wages, we just increased wages on the beginning of September now, at least until next year. So let's be in line with the inflation outlook for next year. That could clearly go below 3% for Germany. We will tune throughout the year and consider and then go back to the Workers' Council. As you are aware, we are not unionized as a company, so the management board is making a proposal to the Workers' Council, and then this will be distributed. So from that perspective, we clearly watch the development and monitor the situation, especially on inflation, very, very carefully, and see what is the right level.
Especially the one-off payment this year, so this is a non-recurring commitment, the one-off payment, especially for the situation reflecting in 2023. From today's perspective, we clearly see a different position with the inflation rates going down as I highlighted. With regards to fiber, Telefónica Deutschland is fully committed to its UGG investment. Also, in the third quarter, we had another installment payment to UGG out of the EUR 100 million commitment that we have. We have now roughly spent 30% of the overall commitment, and so the remainder will be carried out in the coming years with the rollout. We see very good rollout progress.
So on that level, depending where you build and due to the rollout strategy, I believe Germany, from our perspective, one of the most attractive fiber rollout countries, because we are a follower country in fiber. We clearly benefit from new methodologies, but we also see demand in the areas that UGG is building, and we, as an anchor customer, are selling O2 fiber. In these areas, we could clearly achieve a high market share, significantly higher than our average market share that, than we have in fixed. So from this perspective, due to the rollout strategy and the long-term commitment from us, but also the other shareholders in UGG, we remain very confident that it is going to be a very successful investment. And I think finally, that has been the key ones.
On dividend, we reconfirm the EUR 0.18 per share, as we've done on the second of August for 2023 to be paid out in 2024. We also reconfirmed free cash flow after lease, as I mentioned, in line or slightly above the consensus that's on our webpage.
Thank you. I was really wondering whether the trends you're observing at this point, I mean, you have talked about the outlook in 2024-2026, sort of in broad terms already, about your plans. Is there anything in these plans that would require a dividend cut in the medium term?
Well, as said, and according with the execution of the plan, we will, on a yearly basis, reassess the situation. But as said, we have a plan that brings us or continues to grow momentum on revenue out and also free cash flow after lease, with a plan that allows us to mitigate, negative impacts from the wholesale P&L. So on that level, we want to remain on the growth track. And in line with the execution and achievement of our milestones, we will clearly reassess on a yearly basis, shareholder remuneration.
Thank you very much.
The next question comes from Joshua Mills from BNP Paribas Exane. Please go ahead.
Hi, guys. Thanks for taking the questions. So on the first one, rather than focus the questions about what Telefónica is saying on the deal, I wondered if you could answer a couple of points from your side. So firstly, will the board and will management, you know, say whether they think the offer is attractive? Does the board need to give a recommendation for the offer? And if you're not in a position to do that today, could you give us a timeline on when we might expect an update from you on your views of Telefónica's position on the offer? And secondly, I'd be interested to hear how you think Telefónica Deutschland could be run differently as a private company, rather than one which has a listing. And obviously, there's some detail in your presentation.
I think in the Telefónica takeover offer, they also refer to investment levels. So do you think that, you know, within this target of a better network, we should be anticipating more CapEx spend as well? And then the final thing I want to ask about is, have you had any new conversations or any updates from United Internet on the wholesale deal which you had in place, or any potential mergers in the future since we were last updated on this with your press release back in August? Thank you.
Thanks, Joshua, for your questions. I think overall, Telefónica Deutschland has been able to outperform the market in the last three years on the back of equalized network quality. We gained market share, also the Q3 results released this morning underpinned again the underlying momentum and the success of our strategy and the implementation of that. So going forward, we clearly want to be a growing company. This is why we put in place the accelerated growth and efficiency plan, that allows us on the same time, to maintain our growth momentum and grab additional efficiencies. And all in all, this will allow us to grow on all key KPIs going forward and absorbing the effects of the potential loss of our wholesale. There was an echo on the line. I hope you can hear me again. That shows everyone is on mute.
As said, we continue this growth momentum going forward. With regards to the deal, as I mentioned earlier, I think this is a voluntary offer by Telefónica S.A., and all related deal questions should also be related to Telefónica, please. On the last question, I think we will build the growth momentum by tapping into all segments, leveraging all existing sales channels, existing partnerships. All in all, together with the efficiency plan that is already in execution and fully underpinned for the next three years, we are very confident in order to continue the growth momentum, in the set that I just mentioned.
Thanks. I'm just—I mean, I want to come back on this question about the CapEx, because I think you have at various investor conferences and various, you know, channels communicated that the expected wholesale losses can be mitigated to around EUR 200 million on free cash flow, by a combination of revenue growth on your retail business, but also a pullback in CapEx between EUR 100 million and EUR 150 million, say. Has any message that management's made on that basis in the past now been superseded by commentary in this presentation, around future investment in the network or anything that comes from the Telefónica takeover? Thank you.
I think we passed the investment peak into Telefónica Deutschland, and efficiencies, we clearly also see on the OpEx side, but clearly also on the CapEx side. So it's a combination, the combined case under the accelerated growth and efficiency plan. Actually, the majority of the infrastructure has been built. We have gained or still in place, the build-to-suit deal with ATC. It also allows us to grow and catch up on coverage with our competition by leveraging the deal that has been signed. It's fully included in our three-year case. So on that level, we have significant buffer.
And finally, we also have the opportunity to leverage now the freed up network capacity and the growth related with that, with own customers or partner customers, in order to clearly utilize and absorb the impact of the loss of a wholesale customer. So on that front, we would not expect, you know, feel feel fully comfortable with the CapEx guidance that we have given this morning, and would also see further efficiencies on the CapEx side in the next three years, coming due to the points that I just mentioned.
Great. Thank you.
The next question comes from Stéphane Beyazian from ODDO BHF. Please go ahead.
Yes, thank you. Two questions or two or three, if I may. The first one, I just want to come back on, on your statement about, the plan for, growing the market share. What I want to understand is, whether there is a step change in, in your strategy, or is just continuing the slow market share grab that, that you're already doing. So I just want to sort of understand whether you're gonna make commercial actions to, to go faster, in terms of pricings or in terms of, headset subsidies. Should we expect something around that in, in, in the future? And the second point about, you know, the discussion on the market share.
Can you give us actually some data points of where you sort of calculate your market share, if we exclude the partners, and what—where you think your potential is in terms of growing the market share? And finally, in terms of efficiencies, could you give us a little more, you know, data about, you know, what level of efficiencies do you think you should be able to achieve over the next couple of years? Thank you.
... Thank you for your questions. I think on the, on the strategy, clearly, we want to grow our rural market share based on the utilized network quality. We are significantly growing in the B2B segment and want to accelerate here, and clearly also with bundles customers. What comes on top is, we do not have a fair share in all segments of the market, and by just maintaining or achieving that fair share, we still see that it's a very rational market. We also benefit from the rational market in Germany, but, we do not need to get very aggressive in order to achieve our growth target that we have given, leveraging all market segments, all existing sales channels and all existing partnerships.
So from that level, we are very confident that with the combination of efficiencies and the growth potential, that we will be able to absorb the impact on the wholesale account completely and maintain the growth path. Market share growth is definitely near, but the market model for the mobile service revenue for total Germany, where with the growth rate that we have shown in the last three years, we have been able to gain market share. And also this morning, we released again a 3.4% mobile service revenue market share for the third quarter year-over-year. From that level, we remain on a growth level that's higher than the average market share growth of the German market. That's between 1.5 and 2 percentage points, depending on the analyst model you choose.
Finally, on your question on efficiencies, it's a combination. I think we see clearly significant potentials and efficiencies in CapEx side that are directly cash related, that do not need any restructuring or any additional investments to grab these efficiencies. And on the OpEx side, it's clearly the extensive usage of AI, the server digitalization of our customer base, and the channels that we have. Also, on that front, running clearly a lean organization. I think Telefónica Germany is today already lean compared to, to competition, but clearly we want to go for the next level by facilitating a fully cloud-based infrastructure internally. So we bring all our systems into the cloud, including the network, that will allow us to significantly reduce the running costs of our new infrastructure and the shut off of legacy technology.
That's in a nutshell, the whole package that we are going to execute in the next three years. That will allow us to grab the efficiencies on the one side, and they are fully underpinned. On the other side, to underpin the growth path that will allow us to remain a growing company on revenue, EBITDA, and free cash flow after this. Thank you. Closing comments.
Ladies and gentlemen, this concludes today's Q&A session, and I hand back to Markus Haas for closing comments.
Thank you for joining this morning, our Q3 call. You've seen Telefónica Deutschland has momentum, and from that perspective, we are fully committed to deliver our full year 2023 guidance that has been narrowed with the Q2 results. From that level, and we want to remain a growing company with our accelerated growth and efficiency plan that we structurally presented to you today, and looking forward, in order to develop the business and grow in the German market in a rational way. Thank you very much for joining this morning. Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect. Thank you for joining and have a pleasant day. Goodbye.