Good morning, and thank you for joining both of us for the Q1 update.
Hello, everyone.
Before we start with questions, I thought I'd make four points on the results that we went out with. First of all, we've executed in line with expectations for Q1, delivering another quarter of service revenue growth, both in Europe and Africa. Group service revenue was up 2.5%. European service revenue up 0.5%, and we saw an acceleration in business revenues up 1.7%. Particularly pleased with the UK business. It saw service revenues grow 6.5% and a double-digit performance in consumer. That was supported not only by price increases, but also the very strong commercial momentum that we have in the UK.
I think it really is a good demonstration of the value versus volume formula that we think is positive for the overall industry and supports healthy returns and good investment. Second, we made good initial progress towards stabilizing our commercial performance in Germany. Our contract mobile customer base was stable in Q1, and our broadband customer losses halved in the quarter. We're on track in terms of our customer journey and IT issues in terms of resolving them within Germany by the end of summer as planned, and we should see a further gradual recovery in our commercial performance. Third, we're not immune to the current macro situation, but our business is resilient, and with results in the quarter in line with our expectation, we are reiterating our guidance for the year as we set out in May. Fourth, our near-term portfolio priorities remain unchanged.
We continue to actively pursue opportunities for Vantage Towers and to strengthen our market positions across Europe. On that, we welcome your questions. If I can remind you all, please, can we stick to one question each so that everyone gets a turn? Thank you.
Thank you very much. Our first question today comes from Andrew Lee from Goldman Sachs. Andrew, please go ahead.
Yeah. Morning, Nick and Margherita. It was a question around Germany, where the key kind of investors debate, I guess, is at the moment. The question was just specifically how you're progressing with your actions to resolve those operational issues post the telecom law change, and specifically whether you can or when you can stabilize the broadband base and what that means for service revenues. If I may, just a broader question that everyone's debating, and in light of Telenet recently becoming yet another cable operator to accelerate its upgrade to a full fiber network, just if you could talk us through what the characteristics of your German cable business are that give you the confidence that cable can really compete versus fiber. Thank you.
Andrew, that was a multi-part single question. You've managed to cover a lot of topics within that. I'll let Margherita maybe talk to a bit around the outlook. Kind of on Telenet, I'll just be very short. I think you should look at cable executions on a market-by-market basis. There can't be a read- across because every market has very different circumstances. Telenet, as an example, had a very specific JV arrangement, and that JV partner had to basically agree to the path going forward. I think, therefore, it's not a complete read across to others. If I move across to Germany, and the progress we're making, first of all, let me start with the network then as you raise it. Very pleased with the progress we're making on the network.
I mean, we have been heavily investing and upgrading the network over, I would say, the last 18 months specifically. Now we have just gone below our targeted congestion levels across our footprint. We are confident that we can hold below those levels moving forward. So, we're pleased with what we've been doing on the network side. Actually this summer, we will be doubling the uplink capacity in, let's say, the heavier segments within the network, so even further enhancing the customer experience, and we will continue to do upgrade programs moving forward. I'd say specific to the challenges, the operational challenges we had, obviously, we had IT and the customer journeys, and we've made substantive progress there.
First of all, in terms of IT stability, our sort of front-end system stability, we're now achieving for the quarter 99.6%. We'd like to get to 99.7%. That's the goal for the coming quarter. Stability is no longer an issue for us. We've also been working on a Pareto basis, the key customer journeys, and made very good progress on the journeys that count, though there are more to do over the summer period. What I'd say is, finally, the backlog of IT tickets. This is, if you like, the changes we need to do to our IT system. We had a backlog. We have cleared 75% of that backlog and on track to do the remainder, 25% over the summer period.
I look back and say, "Look, you know, we worked hard. We're in line with our expectation." As an aggregate, if you like, as a result of all of those actions we're doing, we think we will have gradual progress on our broadband performance, and we will see ourselves stabilize during H2. I don't know, from a revenue or
From a service revenue perspective, you have seen the sequential slowdown that we have had in Q1 quarter on quarter. This is largely driven by the customer base dynamics, of course, and the decline we have seen, particularly in fixed broadband, because fixed broadband has been a key growth lever for Germany so far. In the near term, you should expect the service revenue to continue to slow in the coming quarter as a result of this dynamic. Now, there is always a lag in the flow-through from commercial performance into service revenue, and this will also be the case, I'd say, on the way up. As Nick mentioned, we've now stabilized the mobile base. We've halved the losses in the fixed broadband base, and we are heading towards stabilization there as well.
In time, this will also support the financials going forward.
Okay. Thank you.
Thank you very much. Our next question today comes from Emmett Kelly from Morgan Stanley. Emmett, please go ahead.
Yes. Good morning, everybody. Thank you for taking the question. So you recorded group service revenue growth of 2.5% in Q1. Can you maybe just talk a little bit, Margherita, about the puts and takes on the service revenue growth rate, for the next couple of quarters? If you could maybe just throw a reference into B2B or enterprise into the service revenue mix as well, given the warning we had from AT&T and Verizon in the States last week. Thank you.
Sure. As you have seen, we have continued to deliver good growth in both Europe and Africa, 2.5% for the group, 0.5% for Europe. Now, specifically for Europe, you should expect our growth to be a little bit more challenged in the next couple of quarters for the reasons I was just sharing with Andrew in terms of what the dynamics are in Germany at the moment, but also because we will, in the near term, have a bit of a drag from wholesale. We will lap the PosteMobile in Italy, exit Virgin Media O2 in the UK, so that will be a headwind. On the other end, we are expecting to get a good tailwind from the EU recovery funds in the second half, particularly in Spain. It is going to become material.
We also expect good growth to continue across the group with Africa re-accelerating. Now, you mentioned business, and you mentioned the comments that you heard elsewhere. It's, I think, important as we look to the midterm that we mention the macro environment around us because there is material uncertainty, inflation, war in Ukraine. Is this going to have an impact on consumption? I can say that as far as we are concerned, in Europe, we didn't have any signal so far of any optimization going on. If I think specifically about B2B, we have seen a good acceleration in our service revenue. We're not seeing any signals of any slowdown in the project work, which for example, could be a KPI indicative of that.
Of course, we will continue to monitor, and particularly as we look forward to the winter months, I think we will need to keep our eyes open to that. What I can say is that as far as our own performance is concerned, our execution at the moment is tracking well in line with our expectations, and you have seen that, we have reconfirmed the guidance for this fiscal year.
Super. Thank you very much.
Thank you.
I'm glad you made it through the tunnel.
One of the few.
Yeah.
Thank you very much, Emmett. Thank you. Our next question today comes from Polo Tang from UBS. Polo, please go ahead.
Morning, everybody. Just one question in terms of M&A. You've been very clear in terms of your desire to undertake M&A on towers and pursue in-market consolidation in Spain, UK, and Italy. However, with Orange formally announcing its merger with MásMóvil in Spain and Deutsche Telekom selling a controlling stake in towers to private equity, how do you see your options going forward, and can you give us your latest thoughts in terms of M&A and the portfolio?
Polo, I'd like to keep the discussion around M&A fairly high level because a lot is going on, you know, behind the scenes, and we're making good progress. If I was gonna sort of touch on the four areas, I would say, first of all, towers. We have had and continue to have extensive conversations with a number of players around towers. The objective is very clear, and I have shared with you before the fact that we want to partially monetize. We want to deconsolidate while staying in co-control, and we believe we can achieve that objective, and working hard on it as a priority area. I'd say secondly, Egypt, I would say has been a slightly longer process. You have to get two regulatory clearances.
One is the national regulator authority, and then the second one is the financial regulator authority. We are nearly at the phase of closing out the first, and then we will have to move to the second. That has been slightly protracted, but we are confident that we can close that out in the near term. I'd say the third area is in market consolidation. I really can't go into any details. We are active across the four markets that we said were a priority. Then finally, in terms of Germany, fiber JV, very strong appetite in the market for obvious reasons, I would say. We are just at the process in the coming weeks that we will go into a down selection to a smaller number of players to advance those conversations.
Clearly, we're working on all of these things, and we'll have more to share by the time we get to the November results.
Great. Thanks.
Thank you very much, Polo. Our next question today comes from Georgios Ierodiaconou from Citigroup. Georgios, please go ahead.
Yes. Good morning, and thank you for taking my question. I wanted to focus more on an update on OpEx and CapEx. I know the results are more about service revenues, but if you could share with us any thoughts. We are hearing from a lot of your peers around labor costs, energy costs, calculations changing, as we pass through the year. It would be great if we could get an update from you. If you don't mind, just a clarification on the answer you just gave, regarding Vantage. You mentioned partners. I just wanted to clarify whether that could include financial partners or whether you are still more focused on finding like-minded MNOs as your partners. Thank you.
Regarding partners for Vantage Towers, I mean, we're not restricting the list of partners that we engage with. Like-minded just means that we share the same vision and strategy for Vantage Towers and what the potential opportunity can be for organic growth and inorganic growth. But that's more what we meant by like-minded.
On costs and inflation, I would say two different sets of circumstances between the ones you mentioned, energy and wages. I'll start from the wage front because it's simpler. We have now gone through effectively the cycle for this fiscal year in Italy, Spain, UK, Germany. We will move to the next round for the following year in January. The situation is quite stable for us, and we can reconfirm what we said in May, which is low single-digit increases on this front. Energy is a completely different set of circumstances, and we see very high volatility in energy prices in the market. If I go back to where we were in May, I think you heard me say that we were at the time three-quarters hedged for this fiscal year, roughly 75%.
Even with that, we were forecasting a EUR 200 million year-on-year increase in energy OpEx. Well, fast-forward to today, two months on, prices have gone up again. Our hedging has progressed as well, so we are now 85% hedged. On the back of the geopolitical news flow, prices have continued to increase. If we were using the current spot prices, the year-on-year increase that was EUR 200 million two months ago is approaching now EUR 300 million for us. There is a substantial level of uncertainty surrounding the energy environment. Clearly, the key driver is the geopolitical news flow, as I mentioned, but also, what will the governments do about this? Will they take action as we have seen happening in Spain or not? Where will consumption go?
Will consumption decrease and ease on prices or not? I think it's very difficult for us to speculate on that. What I can maybe build on is what we are doing about it. We are clearly working on the hedges like everyone is. At the moment, we are hedged almost 40% also into FY 2024. The most important lever we have is to progress more long-term structural deals like PPAs, power purchase agreements. It's a much quieter market. It has not been as volatile, so we are working to expand on that front.
Very clear. Thank you.
Thank you very much, Georgios. Our next question today comes from Sam McHugh from Exane. Sam, please go ahead.
Good morning, guys. Just to follow up on that last question, actually, and I was trying to do the mental gymnastics, but I'm not awake enough this morning. For next year, so FY24, assuming energy prices were to remain as they are at spot prices, what is the step-up in energy costs for FY24 versus FY23? Thanks.
We're still a very long way away from FY24, Sam, so I think it's early to do sort of calculations on that basis. If I can, again, sort of go back to how we look at it. First of all, we have hedges and long-term contracts in place that are helping mitigate that, and we think there is a good opportunity to expand. We used to have only about 5%-10% of PPAs in our renewable portfolio, and clearly this can be expanded. If you look at the pricing in the PPA market, it's a fraction of what the forward curves are. Also beyond that, the uncertainty is just very significant on the elements I was calling out before, particularly around government intervention.
Also I would say you shouldn't consider this in isolation. I'd say if prices were to remain at the same level as they are today in the forward curves for FY24, I think we will have to see much bigger adjustments in the broader economy if we get there, and also for the industry. In that context, certainly pricing has also to be to become a key tool in that respect. There is still some way to go, and we need to see how the geopolitical environment evolves.
As you can see from the lighting, we are targeting a 15% reduction across any aspects of our business.
Yeah. Keep it to just one question that way as well. Reduce time on the conference call. Anyway, I was gonna ask on the 40% hedging now. Can you say what price the 40% is hedged at? Is that higher than the current prices? I don't know if it makes sense to give any detail on what's been locked in already.
Let me see. Yeah. Maybe the best way to describe it is more than half of that was already locked in before the Ukraine war.
Okay. Awesome.
We have a long-running base to count on. We are extending the structural ten-year deals, which are PPAs, which as you will have seen, are not anywhere near the multiples of historic highs that I think are what the forward curves indicate at the moment. By the way, as I said already in May, clearly there is a lot of uncertainty. At some point, this headwind will have to turn into a tailwind, and you see it in the forward curves, you see it in the PPA pricing. It's not going to last, let's say forever. There is uncertainty, clearly.
Awesome. Thank you very much.
Thank you very much, Sam. Our next question today comes from Robert Grindle from Deutsche Bank. Robert, please go ahead.
Good morning. Thank you. Nick, I'd like to pick up on your value versus volume point. I reckon the UK is seeing mobile service revenue per gigabyte falling by around 12% year-on-year, which is probably lower than the annual deflator of your unit CapEx, perhaps for the very first time. It feels like a big deal. Behind your comment, is it that you're optimistic you will see slowing mobile volumes but at a much better return economics as unit price deflation improves across the group? It's not just the UK that's seeing lower falls in unit revenues. Thanks.
I'm sure Margherita has some bullets, but you know, I sort of stand back and think this industry needs to improve returns. Governments want investment, and they want accelerated investment to be you know, globally competitive. With that mindset, I think that there's a view that when you look at the pressures coming from energy, we are not gonna recover that just by chasing customer volume. I mean, I think that would not be a productive path to better returns. Therefore, pricing has a part to play.
Now, of course, we can't really talk about pricing too much, but what we're saying is we need to be very proactive and, I think we need to be systematic and structured and sequence in at the right time, various actions, market by market, depending on the circumstances. There's two things that I think are really important from a structural perspective is, number one, you know, the market leader, if you like, the largest player in each market needs to play their part on driving a healthier sector. So what are they doing? Then I'd say secondly, it's very important that that there's front book discipline if you're gonna take pricing action. If we use the UK as an example, we led on the front book, both mobile and fixed.
Fixed stuck, so I'd say that basically everyone followed in the marketplace. Mobile, we have yet to see that movement on the front book. Now, of course, you know, there's time and urgency will be an increase in pressure for people to reconsider, but these are the things that need to be in place. The leader needs to play a role, and there needs to be front book discipline. I don't know if you wanna comment on other markets.
Yes.
and mechanisms.
Yes, exactly. I think. You know we are very engaged on this topic, and we have been for some time now. Different mechanisms and approaches in different markets. The UK model is now embedded in the contracts across five of our European markets, UK, Ireland, and three other cluster markets. Where it's been activated so far, it's landed well. I think it has established itself well. We are not progressing exactly on the same way across markets. If you move towards Southern Europe, in Italy and Spain at the moment, our focus is on simplification of our range of pricing plans and options. If I take Italy as an example, we may have mentioned this in the past.
We are currently midway through a migration of our full customer base in Italy from hundreds of legacy tariffs and options layered over the years to just five mobile plans. This is an ARPU accretive migration. We have already contacted almost 4 million customers there, and we are looking forward in the second half of the year to see the support from that in our results.
What I'd finally say, you know, just to the point of the UK, because everyone can get a little bit fixated on the percentage, we're talking GBP 1–GBP 2 price increase per month per customer. When you put in that contrast to what the inflation is in food or fast moving goods or fuel for your car or the energy bill for your I mean, put it in perspective. These are very small. We offer a huge value for money for consumers. Of course, we wanna give a good network experience, service experience, so we have to whip
Our next question today comes from James Ratzer from New Street. James, please go ahead.
Yes. Good morning, Nick and Margherita. Thank you for that. I'd actually love to pick up on that last question and exactly what you just finished off there with Nick, because, I mean, I hear you that the changes on overall consumer bills at the moment from meeting kind of inflationary targets are reasonably modest, absolute sums of money. But yet saying that, it seems that apart from in the UK, the industry as a whole is actually struggling to pass those relatively small euro per month increases through to consumers. I was wondering if we could just kind of drill into the front book pricing in a bit more detail. I mean, Margherita, you just mentioned some examples of contract simplification you're trying to do in Italy, but what else are you trying to do in, say, Germany and Spain?
In particular, what are you seeing from the competitors in those markets? Because I kind of get the feeling that it is still a struggle to push through front book price increases, potentially because of competitive pressures as well. It'd be interesting just if you could dig into that in a bit more detail, please.
Want to give a perspective on that, Marg?
Sure. As we were mentioning earlier, it really depends on circumstances. What I think is common to all of us at the moment is the impact of inflation on costs. As Nick was mentioning earlier, we cannot expect to recover that. Neither us nor our competitors can expect to recover that through volume growth. If these increases remain structural, which as I was saying earlier, remains to be seen, particularly as we're heading towards the winter, it's important that pricing becomes the tool. We cannot comment specifically on every market, but clearly we are closely following the competitive dynamics. As you know, they depend on the market. For example, in Spain, there have been some price increases put through recently.
We will keep our options open and on the review in each of those individual markets.
Yeah. James, if I was just building on some of Margherita's point, and I'm just sort of reflecting on the various conversations that we're having more sort of structurally, it's just, you know, you need to look at our high-value customers. I think they tend to be loyal, lower churn, more converged. I think there's an opportunity through base management, et cetera. Obviously the front book has to follow that. I think you're seeing a number of countries putting through price increases at their high end. You've got the value brands. I think the value brands to date have not been putting through price increases. However, everyone's gonna be under cost pressure, yeah, 'cause of energy and various other things. This might be the first year where you see those value brands having to respond.
Otherwise, they're gonna face severe margin squeeze, and a lot of these don't make a lot of money anyway, or could even be negative. I think suddenly there may be a reappraisal at the low end, just what they do. I think importantly for the sector, and something I've talked a lot to governments about, is we need to do this to improve returns. However, at the same time, we do an execution very much focused on the vulnerable. We have a whole series of special social tariffs that we are executing and making it very clear what we're doing in that area for governments. As part of that, people that are struggling with payments, we're not really seeing signs of that at the moment, but we anticipate when it comes to the winter, et cetera.
Setting up dedicated teams to help customers understand how they can reschedule the payments to us while maintaining service and connectivity. We wanna be proactive in that part of the social responsibility area, but that shouldn't sort of hold us back from doing more broad price actions, just like every other industry sector is doing.
On that, would you say relative to, say, three months ago when you last reported earnings, there's actually more receptivity within the industry to engaging on constructive pricing changes than we were back in May?
Well, James, don't make it sound like we're coordinating pricing across Europe, 'cause that definitely is not happening. Yeah. What I'd say, pricing is very difficult to talk about. All I'm saying is the pressure from energy is, I hear, starting to feed through to the industry to say, "Hold on a minute. We're not gonna make this up on customer volume. We've got to pull the price lever. Every other sector is doing it. Why are we not doing it?" I think there needs to be a response industry-wide. Okay, clear. Thank you.
Thank you very much, James. Our next question today comes from Jakob Bluestone from Credit Suisse. Jakob, please go ahead.
Hi. Good morning. Thanks for taking the question. I just wanted to get back to Germany, where you've flagged the improvement in net adds for both postpaid and for fixed. But the one net adds metric that seems to be getting worse in Germany is for convergent customers. A year ago, you were adding about 300,000 consumer convergent customers, and by now it's sort of, you know, small declines. Could you just help us understand what's going on there and is there sort of a shift in commercial strategy in Germany away from convergence? Thank you.
No, I think, Jakob, it's very mechanical. Think about it in the context of the telco low churn acceleration we have seen. For the last couple of quarters, fixed broadband net adds have been negative, so by definition, this influences the base for convergence. We were offsetting that until last quarter because we were running marketing campaigns specifically on convergence. This has paused in this particular quarter, hence why you have seen the numbers broadly flat. We continue to see a significant opportunity to grow convergence in Germany. As the fixed broadband base numbers will stabilize and then grow again, then you should expect to see this continuing to grow.
just why we paused it was just, we've been dealing with the customer journeys, IT, and prioritization within the business. We just said, "Hold on there. We'll just pause that while we work on some other things that are higher priority, and then we'll start again.
Very clear. Thank you.
Thank you very much, Jakob. Our next question today comes from Carl Murdock-Smith from Berenberg. Carl, please go ahead.
Morning.
Hello.
I wanted to follow up on James' question. Obviously, he was asking about receptivity in the market with regard to kind of operators. I wanted to kind of go back to the social contract, and I don't want to kind of steal too much thunder from September's briefing. But obviously, there's more political uncertainty and instability and change in leadership now across several markets than we've seen in recent years. As politicians are kind of balancing the long-term importance, as you're talking about, of need for investment with the near-term pain and potentially populist agenda of need to help control the cost of living crisis, how receptive are governments to conversations around the social contract now versus where they were, say, six months ago?
Also just to follow up on the Virgin MVNO revenues. At what rate should we expect those to fall off across the coming quarters? Thank you.
Well, I'll let Margherita deal with the second one. In terms of the social contract, what I'd say is that the pandemic created a tailwind of engagement. In other words, the intensity the governments deal with us, and I don't see that diminishing. Frankly, if I go into a market, governments wanna meet, they wanna talk about investment. Because in the end, let's not forget, okay, we've had the Ukraine war, but essentially the biggest thing they're trying to drive is the digital agenda, because they know that that's huge for economic growth of Europe moving forward. It stays very prominent in their mind about the long-term drive and investment that they need, and they wanna engage on that and what can they do.
Of course, the EU recovery funds has a big digital agenda component to it. All the markets have said what the programs are gonna be, and now they've got a very short period of time to execute through those programs. They're very engaged with us through that. I'd say secondly, you know, our response to the Ukraine has been excellent. I believe as a company, we've been recognized by Europe and many of the countries for the proactivity that we had in terms of supporting refugee camps, migrants, you know, just all of the problems and issues that have surfaced from Ukraine. Of course, we continue to support our partner in that market. What I'd say is that that in itself has just increased the conversation, adding security, resilience to the conversation. I'd say no, there's been no such
The one thing that we do need to make sure that they understand is all the things we are doing for the vulnerable in society and the ones, the comments I was making before. I think we've been very proactive in that, and we draw that to their attention as well. What I'd say is good, positive dialogue with governments. I think the sector has definitely moved into a different position of strategic importance, critical, and a sector that's leaned into supporting society and understands its societal role. No, I would say continue to be supportive.
On the Virgin MVNO, Carl, see it as neutral to the year-over-year growth of the UK in FY23. Over the full year, we expect the same identical contribution that we had last year on the basis of our timing of exit expectations. Clearly within the year it is front-end loaded to the first half, will become negative in the second half. In terms of how many tens of basis points that means, you can work it out of the other revenue line in the UK. That's the important driver there. But overall for the year, neutral.
That's great. Thank you very much.
Thank you very much, Carl. Our next question today comes from Jerry Dellis from Jefferies. Jerry, please go ahead.
Yes, good morning. Thank you for taking my question. When Deutsche Telekom announced the divestment of a stake in its tower asset to infrastructure investors, they were, of course, willing to give up control in return for some quite strong contractual protections. As you think about your own sort of opportunities around Vantage Towers, does co-control really still need to be a red line? And then on top of that, I'd be interested in whether the possibility that you might be willing to, for example, reframe elements of the MSA contracts in order to get a deal done.
perhaps if you could perhaps comment on whether you see this as being sort of an urgent situation to resolve, or whether really it's just still mostly important just to make the right decision and take whatever time that requires. Thank you.
I think my short answer to these because I mean we have obviously we're actively involved in discussions, so I don't really wanna go into too much detail. I wouldn't call it an urgent situation. What I call it is our top priority. There's a slight difference to that. We wanna get the best outcome for our shareholders, and that's what we're focused on in terms of value creation. Therefore, we'll look at variants, of course, to deliver the best outcome for our shareholders. What I'd say about co-control is, I don't think that us having co-control in the construct that we are discussing is inhibiting anything around value. So I think we have a strong interest by serious players.
Our objectives do not stand in the way of value from a transaction perspective. In terms of MSA, I mean, if there was a strong reaction to some of the clauses, of course, we'd sit down and discuss, and you have to go through the equation. We must remain competitive as a commercial business. We're not about maximizing the tower value at the expense of competitiveness of our commercial business. It's got to be a balance. You know? We think we pitch the MSA currently with that amount of balance. And bear in mind, you know, I was on Indus Towers board for about four years. We took a lot of advice from the American operators and other operators to see what the optimal MSA would be. It was a lot.
Long process to get to what we felt was the right MSA. So you know, we would challenge hard the need to change it, put it that way. Of course, we're always open.
Thank you.
Thank you very much, Jerry. We have time for one more question today, and that will come from David Wright from Bank of America Merrill Lynch. David, please go ahead.
David, we can't hear you.
There has to be one David. You are it.
There you go. In so many ways. Okay. Yes, thank you for squeezing me in. My question is, you mentioned the EU Recovery Fund as a supportive tailwind in H2, and I think you've identified Spain as notably beneficial. What I wanted to understand is, a lot of the opportunities with that also include you as an effective hub to resell products for some of the you know, the exposed sort of B2B clients, perhaps. Could we see a situation where we're driving service revenues up, but actually these are extremely low-margin revenues, so it drives the service revenue up, but we actually see the margins dilute a little? Is that the way we could be thinking about that dynamic in the second half? Thank you.
Yes. Not in any significant way, David. We have worked on our business cases very hard to make sure that we have the right margin from this product. I perfectly understand your angle, but actually we do quite a lot of work on behalf of our SME customers, because we are talking, if we talk about the Spanish plans of SME customers, we are doing quite a lot of work in aggregating and packaging the services and bringing them to the market from what could be small companies themselves that are effectively offering those services. From that perspective, we are getting what I would consider a good margin.
See it as in the 30% space for the current digital toolkit activities in Spain, which I think is good and was clearly a key focus at our end. Maybe not the same margin as pure, if you want, at EBITDA level, pure connectivity, but just at EBITDA level, different pressures on cash, but still quite good.
David, what I just built on, one of the things, we made a very conscious choice because you know, I agree with you. There's gonna be a range of these EU Recovery Fund projects, some of which may make no or little margin. We made a very conscious decision. We have a bandwidth as an organization, we're gonna get very focused on where there's good returns and where we can excel. We really focus down into three areas. SMEs, which we believe is good margin area, whether connectivity or digital services. Second was health, because these are big projects but have a lot of connectivity as part of them. The third was in public sector, where the connectivity was the main component we would build and someone else would do the fronting for the overall project.
We didn't wanna get into the complexity of some of those projects. We just wanted to be the connectivity provider.
We have really opted for overall CapEx-light.
Yeah
approach. Therefore good margin.
All right.
This is gonna be that translating good cash flow margins.
Yeah.
If I could follow up on that particular CapEx-light approach, one of the obvious drivers to improve the return on capital in Spain is to move to a more CapEx-light approach. I did notice the MásMóvil deal selling cable and cable investors, bit of a classic sort of telco infrastructure deal. You know, you didn't mention that, I guess, Nick, in your sort of portfolio summary, but is that the kind of deal that you guys could consider sort of a decapitalization of the network CapEx in Spain?
Yeah. We are actively looking at the fixed network and looking at options for that. If you look at the objectives that we're trying to achieve, first of all, you know, we wanna future-proof the network and access. Secondly, we wanna drive higher utilization, and third is we think there's an opportunity to create value for shareholders. We've started that process. We're going through with it. There are obvious players that we would be talking to, and then there are other players. It's a very interesting space, and it's definitely something that we will be able to update in November.
Okay. Thank you for the answers.
I think on that, look, thank you for joining us on the Q1 update. We look forward to engaging going forward and obviously see you in the November results. As you saw from our results, a very in line performance, in line with our expectation and, reiterating guidance for the year. Thank you. Have a great break for those that are taking it. Take care.
Thank you.