Good
morning, ladies and gentlemen, and welcome to Swisscom's First Half Year Results Presentation twenty seventeen. My name is Louis Schmid, Head of IR, and with me are our CEO, Urs Szeppe and Mario Rozzi, our Chief Financial Officer. The first part of today's analyst and investor presentation hosted by our CEO consists of three chapters: a quick overview of
the Q2 highlights, our market and financial performance then some explanations on Swisscom Switzerland and finally, an update on Fastweb. And the second part
of the presentation, Mario will run
you through the financials and the adjusted guidance for the full year. With that, I would like
to hand over to Urs to start his part of the presentation on Slide four. Urs? Yes. Good morning, ladies and gentlemen. We had a good solid second or first half year.
And if you go to Slide four, you can see that we were able to successfully defend our strong market position. Some highlights on the chart, you can see that we have a strong perception in the market. We are judged as the best mobile operator. We showed that we are the technology leader in different areas on the fixed networks, but also on the mobile network. And also if you look to the cloud business, the awareness of Swisscom is to be a strong to have a strong position in the cloud business.
This is important for the future, certainly also for our B2B business unit. The market performance is good. We have a good solid market performance. We launched successfully our quadruple play product in one. And we have a stable customer base with the same dynamic as in the quarters before.
Fastweb has accelerating momentum in mobile. We were able to increase our customer base net adds in Q2 by 117,000 net adds. Financial performance is solid. You can see it and we are on track with our guidance. We made an upgrade on the EBITDA level because of exceptional out of Italy.
But overall, we are on track with our guidance. If you go on Slide five, you see our market performance. Easily said stable revenue generating base in Switzerland, growing revenue generating base in Italy. Broadband approximately stable in Switzerland. TV slightly up in Switzerland.
Substitution elements in the fixed voice business, we have a decline of 159,000 voice subscriptions. The majority of them leave the market. They don't turn to our competitors. They leave the market. And let's say, a stable or slightly positive momentum on postpaid.
Fastweb growing base in broadband and mobile as you can see it on the right side of the chart. If you go to Slide six, some information to the financials. The net revenue has two major elements in it dynamics in it in Switzerland. We have a declining revenue. The majority of it compared on a year on year basis is coming out the service revenue.
We have EUR 76,000,000 reduced service revenue. And this is mainly driven by roaming, by fixed line losses and some general price pressure. Enterprise revenues are stable, approximately stable. And on right side of the chart, see the development of the EBITDA. Overall, EBITDA went up by CHF 33,000,000 on a year on year basis to CHF 2,260,000,000.00.
From Switzerland, there you see that the impact of roaming on EBITDA level is CHF 19,000,000 and the impact of fixed voice line is €39,000,000 Through cost savings, we were able to compensate the impact the negative impact on the service revenue level. Growth in Italy by €32,000,000 Some more information on Slide eight to Swisscom Switzerland. You can see that we have a distinguished strong value proposition with different pillars, which differentiate us in the market. On the infrastructure level, we are investing in the upgrade of our networks. Have now coverage and network coverage of 40 plus networks over 40%.
So that's a high coverage also compared with other countries. We have an excellent customer service, which we see in our Net Promoter Score. We are ranked as one of the most innovative companies in Switzerland, and we are well positioned in the cloud business. On the product area, we have certainly a decent product portfolio converged in and broad product portfolio in the B2B market and in the retail market. Brand awareness, that's important.
We are the most trusted telecom brand in Switzerland. On Slide nine, some information to our investments in Switzerland in the wireline networks. You will see that we continue to increase our ultra broadband footprint. At the end of Q2, we had 84% of our households, which have speed over 50 megabits per second, so a strong and good coverage. 3,700,000 customers have access to a broadband network above 50 megabits per second.
Our target in 2020 is to have 85% on our ultra broadband network with speeds above 100 megabits per second. All IP transformation is continuing and the amount of customers which are already migrated is 75%. So we are on track in the migration to the All IP network and phase out of our GTM network. Slide 10, some information about our new product inOne, the new price plans which we launched in April. This product has benefit for our customers as you can see it on the chart, but also for our investors.
Page 11, only some information what was the response of our customers, so overall promising response for our customers. This is an attractive converged offer with an approach more for more. On Page 12, the first result. It's still early to give a deep insight on the dynamic of our IN ONE products, but we are in line with our expectations. On the left side of the chart, you see that we have approximately 1,000,000 customers, which are or revenue generating units, which are already one.
This is a penetration in the region of 11% on our customer base. And we have 582,000 customers or revenue generating units in the fixed business and 342,000 mobile revenue generating units in InOne. So a good take up, a good momentum also on the acquisition side. And interesting is to see to the ARPU development. So the impact on the blended ARPU is neglectable.
What we see is actually that we have a light ARPU uplift on mobile and in InOne Home, so that's in the wireline business, we have to expect the right grading. So therefore, according to our case, Positive is certainly also to mention that our Net Promoter Score is higher within one than with our old triple play offer we won. And this will lead certainly also to more loyal customer base and also to a low churn level. We don't have a churn problem. The churn level is low.
But we expect to get even a more loyal customer base. On Page 13, some information about our wireless performance. So we have a stable momentum with postpaid and a positive momentum with bundles. The revenue the service revenue in the wireless business is stable. So it shows that Swisscom is able to keep a strong position and a strong service revenue in the mobile market.
We have a stable blended ARPUs. And on Infinity, the decline in the ARPU of Infinity is through roaming and also dilution because we have more and low end customers on Infinity. But stable ARPU, stable service revenue, that's the main message of this chart. On Page 14, the wireline performance in the retail business. Here we have a service revenue, which declined by EUR30 million so EUR $667,000,000 decline on a year on year basis by EUR 30,000,000.
And this is actually due to the voice line decline. The ARPU overall is also stable and also the revenue per household is stable at CHF 88. On the subscription base, you can see that we have still some growth on TV, but on a lower level. That the B2B business is broadband business is approximately stable. And this substitution effect on the voice business.
So same dynamic as in the previous quarter. On Page 15, the converged performance in the retail business. Also here you can see that the service revenue increased because of an increased bundled penetration that the service revenue went up on a year on year basis by EUR81 million. We have in the middle of the chart, the fixed mobile penetration, you see that 29% of our households are in a fixed mobile bundle and 24% of our postpaid subscription are in a fixed mobile bundle. So overall, the revenue generating units in the bundling business went up by 782,000 revenue generating units on a year on year basis.
Page 16, some information to our enterprise business. You can see if you look to the revenue distribution that approximately 50% of the revenue in the enterprise unit is coming out of the telecom business and approximately 50% is from the solution business, more IT related business. The telecommunication business, there we had a stable, let's say, stable service revenue, which is a good performance in a market where we have roaming effect, but also effect from a price competition. So stable condition on the telecommunication business. On mobile, we were on a revenue generating level even able to slightly increase our revenue generating units, the B2B the broadband business.
That means the enterprise network, there we have stable revenue generating units and we have a slightly decrease on voice because of consolidation in the customer base. The solution business is also stable on a year on year base. Q2 was better than Q1 and shows that mid long term solution business can be a growth dimension in the B2B market. Page 17 shows you our ambition and our actions on the cost level. So we are on track according to our cost targets and our gross savings of 75,000,000, there we are on track.
On Page 19, some words to Fastweb, to the wireline performance of Fastweb. We continue to increase our ultra broadband coverage. So we were able to increase the footprint as you can see it in the chart on the right side. Interesting is to see the development or the evolution of our customer base, ultra broadband customer base. The whole customer base of faster went up by 7%.
And over proportionally up when our customer base, our ultra broadband customer base, that's important. It's important because there we have lower churn and ROI ARPU and therefore a much better customer lifetime value. The penetration of the ultra broadband customers in the total customer base of Fastweb went up to 38%. So that's 6% points higher than in than a year ago. So good penetration in the direction of ultra broadband.
Page 20, the mobile performance. So as you know it in May, we launched a new strong mobile proposition, which you can see on the lower part of this chart. The best seller is Mobile Freedom. It's a product for our customer base, for broadband customer base of Fastweb for 9.95 with voice and data in it. And we are performing well as you can see on Page 21.
So we have strong commercial performance in mobile. We increased our customer base on a year on year level by 45%. The net adds in Q2 went up by 117,000 mobile subscription. And important is also the brand awareness. So Vaster was able to increase the brand awareness in the wireline and wireless market.
Interesting is also to note that 80% of the SIMs which were sold went to the broadband customer base of Fastweb, and that's exactly the intention to get a more loyal customer base in broadband. Page 22 gives you some flavor on our performance in the corporate market. So we have a good momentum in the corporate market, a good order intake, good performance in the corporate market. The order intake on a year on year basis, an example, in the public sector went up by 28%. The financials are fast on Page 23, growing revenue, growing EBITDA and growing free cash flow.
Revenue went up by 5%. EBITDA by 2020. If we take out the exceptionals from exceptionals in Fastweb, the EBITDA or the industrial EBITDA was up by 10% despite higher commercial costs and advertising costs. So the free cash flow is in the first half year EUR106 million. Now I would like to hand over to Mario for some more specific financial information.
Mario?
Thank you, and good morning to everybody. Some additional information on the financials from my side. As you saw in the presentation of Ulf, we had unchanged dynamics in Q2 in the Swiss business compared to Q1 more or less. On Page 25, if you look at the retail business, we had exactly the same pressure on the service revenue in Q2 compared to Q1. This reduction of €60,000,000 in the service revenue, 31,000,000 comes from voice line losses, and we have €8,000,000 less activation fees on TV.
We suffer from roaming. The roaming impact is about €11,000,000 And then we have higher bundle discounts of 9,000,000 The Enterprise business, the service revenue is exactly the same decline as in Q1. 9,000,000 comes from mobile, that's the full impact comes there from roaming and €7,000,000 from the wireline business. After a weak start in the Solutions business in Q1, we were able to change trends in Q2. You see that the better performance that comes mainly from a good performance of the banking business in Q2 where we had some delays in Q1.
The wholesale business in the wholesale business, revenues went down by €16,000,000 There were two major effects. MTR's were reduced, that has an impact of €29,000,000 with no impact on EBITDA. And then we have higher incoming roaming revenues of €13,000,000 On Fastweb, very good performance in Q2 on revenue, good business on retail and wholesale and flat business flat development in the B2B area. Think in these times of pressure on the top line, it's important that we manage our OpEx in the Swiss business. As was explained, we are well on track to reduce our indirect costs.
You see the development there on the right hand side. Personnel went down by €42,000,000 personnel expenses. We are able to reduce our FTE base by four fifty six FTEs in the first half of twenty seventeen. We have some less activated costs that comes along with lower CapEx dynamics in
the first half in Switzerland.
On the left hand side, you see the development of the direct costs. SOC, we have higher costs related to the fixed line business, subsidized TV boxes and routers that amounted for CHF30 million. And then we have less wider less retention costs of CHF40 million in the first half. The reduction of outpayments and goods purchased goods purchased, I think, comes along with the development of the top line of the revenue.
There's practically no impact on EBITDA.
On the next page, EBITDA breakdown by segments. So on an adjusted basis, we were able to keep the EBITDA flat in the first half compared to prior year. I think we saw the main impact in the Swiss business. On Fastweb, Fastweb had a revenue increase of €32,000,000 That was not fully transformed to higher EBITDA. That is one reason, that's the good performance of the mobile business.
We had higher subscriber acquisition costs and higher advertising costs. Page 28, net income. Net income increased compared to the prior year in the first half by €51,000,000 with different effects over the higher EBITDA, mainly coming from the exception of the Fastweb in the first half. And we have lower depreciation because the PPA position of Fastweb is now fully amortized, and this amount is now reduced. Then we have, of course, lower net interest.
We still benefit from the low interest environment. And in the first half of last year, we had the valuation of swap, a long term swap, which had in the prior year a negative impact of €44,000,000 On CapEx, for the full year, our guidance will be unchanged despite the lower CapEx we had in the first half. We have in Switzerland some delays on our investment activities, mainly in the FTTH rollout that comes that's due to a change in the way we do our rollout. We changed our method from a traditional way to a total contract model. We will invest more or less €600,000,000,000 as expected in fiber rollout in 2017.
Full year outlook will be unchanged. There's nothing special on operating free cash flow despite one element. We had extraordinary payment to our pension plan of €50,000,000 in Q2 that was agreed with the unions when we have changed the plans in Q4 twenty sixteen below the future benefits for our employees. On the financing side on Page 31, we had two transactions in Q2. We made domestic bonds, $350,000,000 at very favorable prices, 3.7% interest rate with a maturity of 10%.
And then we signed a loan with the European Investment Bank for the fast rate network rollout, euros $240,000,000, seven years, and that will be drawn probably in September. The average interest rate goes down, still goes down, now at 1.7%. And you see the two big maturities in 2017. One was repaid, the €600,000,000 at 3.75%. And then we will have the big refinancing in 2018.
That brings me to the outlook. On an operational Industrial basis, the outlook will be unchanged, and then we increased the outlook on EBITDA because of the extraordinary income from litigation at the Italian level of €100,000,000 So brings us to revenue, unchanged €11,600,000,000 EBITDA €4,300,000,000 As I mentioned, unchanged CapEx of €2,400,000,000 And back to Louis. Or back to the
operator for handling the Q and A session. Thank you.
The first question comes from Simon Cowles
Hi, guys. Thanks for taking the questions. So I guess the first one is on competition. We've seen a number of competitors revamp their tariffs and also one has been very vocal about the sports content they've acquired. How have you seen competition playing out in 2Q and so far in 3Q?
And then tied to that, with your InOne, I remember when you launched the tariffs, you talked a lot about how there's a number of mobile customers in Swisscom broadband houses, so you should be able to increase your average revenue per household. How has that developed? And is that in line with your expectations? Then on TV, I noticed there's been a big driver of bundling over the last few years, but there was a bit of a slowdown this quarter. Is this just approaching saturation in your base with the TV product?
Thank you.
Good. So the overall competition in the second half year, I think it really will be in the same on the same level as in the first half year. You have certainly a promotion oriented competition. There will be some competitors will which will make some noise on the sport content. But I'm convinced that this will have not really a big impact on our broadband or fixed business because the sport content is still a relatively small market in Switzerland.
And the whole content proposition in the sports content market from Swisscom is really a strong one. So we have the most appealing content portfolio, sports content portfolio. And from the price level, we will be we will adjust our we will have the right moves on the pricing side to be competitive in the sport content market. So I don't think that there we will have a too big impact on N1. As I explained, are on track to what we expected.
And we have a better momentum in our mobile net acquisition. And it's hard to say what is coming now from IN1 and from other activities. But overall, we have a better momentum on the acquisition side in mobile. And also the penetration in household penetration is going up. You can see this also in our presentation.
TV. Mario, on the overall TV market, you have a slide in the back half on Page 46. There, you see that we are now in a situation where the market is saturated. The TV development is in line with our expectations. But you see on Page 46 that the growth is mostly coming from low end products from Swisscom TV Lite.
That's exactly also the dynamics when you look at the number of UPC. So we are in a phase of a saturated market.
That's very clear. Thank you. Just one quick follow-up. You said that mobile acquisition of InOne has been better than expected. Is that what's led to the lower second marketing in the mobile segment?
Yes. In the mobile segment, there are a lot of different elements. The majority of the subscriber acquisition retention costs are retention costs. So that's only one explanation. Then what we see is a slightly but really slightly higher amount of SIM only product, but it's also a bit seasonal.
Okay, that's great. Thank you very much.
We're going to Vikram Karnani from UBS.
Yes, thank you. A couple of questions from my side. Firstly, in terms of cost savings drivers, you highlight in your presentation increase in standardization and simplification. I was wondering if you could elaborate that a bit more and how significant are these items? And on the back of the progress that you've made so far, can we expect any increase in your long term savings target that you laid out of €300,000,000 as you still have, I recall, All IP savings, which will kick in from 2018 onwards?
And secondly, coming back in terms of InOne proposition, do you see the pace of migration similar to what you had seen previously with your Infinity proposition, for example, which I recall had like roughly one third of the subscriber base that got migrated in terms of first year? And do you expect that to be broadly similar with InOne considering that this is a fixed line launch as well and you probably would expect a bit of slower pickup with the order back to backlog position and therefore the ride grading impact could be felt a bit longer. So just want to understand in terms of migration and how should we anticipate the dynamics in terms of ride grading? Thank you.
Okay. I will take the IN1 question and Mario will take the cost question. To IN1, that the penetration or let's say the pickup in the market. So I think it will goes a bit slower than the migration which we had in the past on Infinity Because there you have the triple playoff, the market is a bit less speedy than in the mobile. So I'm convinced that we will have a further increase of the penetration of IN1, but it will be a bit slower.
And the right grading effect is always the same. In the beginning, you have the highest right grading effect and then they are a bit coming down. That's for Infinity and for InOne.
Then on the cost side, all these actions, simplification, reduction of complexity, that's the basis for reducing the number of FTEs. But you cannot, let's say, put the number behind these different actions. But that's the basis for reducing the number of FTEs. And on the midterm target, so we stick to our target of 300,000,000 €50,000,000 we reduced last year, 75,000,000 this year and in the next coming three years EUR 60,000,000 each. And the All IP cost or the All IP impact will start to kick in, as you mentioned, in 2018 with quite a low amount and then will increase gradually until 2020.
That's helpful. Thank you, guys.
The next question comes from Georgios Yerodakounou from Citi.
Hi, thank you for taking the questions. I have two, please. The first one is on your comment earlier around the TV pricing potentially getting a bit more aggressive from your side in the second half of the year. I was wondering if you can give us an indication of how much you may be saving from losing some of this ice hockey line and any savings on content that you can reinvest on the price? And then my second question is around Fastweb.
We haven't seen a similar improvement in revenue that VodafoneWin and Telecom Italia reported from the twenty eight day billing move. Is it possible to give us an idea of how much of a benefit you had already in the second quarter? How much you would expect to have in the second half when you get the full impact coming through? Thanks.
Mario will take the question on the twenty eighth day billing cycle and I will come first to the pricing of TV or content. So the overall pricing of TV, there we didn't make really changes. So one, the TV pricing is approximately stable. Where we have dynamic is on the content market. There we are faced with more competition.
The dynamic is that the cost of buying concentrates are going up and more competition on the market side. So we have certainly some price pressure on the margin pressure on the content side. And we have actually out in the market promotion for content, for sport content, it's running well. So overall, I don't think that we have we will have major changes in the market because of the tire competition in the constant of Ford because this is a niche business, still a niche business in Switzerland. And I think it will remain a niche business.
Mario? And on the four billing, it's fast. So the impact from Q2 is not material because we started to transform to implement the four weeks billing in four ways in Q2. And the complete migration to this billing cycle will be completed in August. So we will see a real impact being visible in Q2 Q3 and Q4.
And don't forget, it's only on 50% of the revenues because the other 50% comes from the B2B business and the wholesale business. There is no impact. And the impact on the second half should be around north of €10,000,000 That's included in the guidance.
The next question comes from James Ratzer from New Street Research.
I had two questions, please. The first one is just going back to your guidance. You've left the underlying guidance effectively unchanged at this stage yet. I mean the EBITDA trends you're seeing in Switzerland at the moment fairly flat year on year. You're suggesting you see the competitive environment in H2 similar to H1.
The trends in Fastweb look pretty good. You just talked about a further uplift to come with the move to twenty eight day billing in August. I'm just trying to understand what you see getting worse in H2. Why have you not actually slightly increased the underlying guidance? And then the second question I had was just actually a follow on from that question about Fastweb.
I was just trying to understand your consumer revenue trends in Fastweb at the moment up around 4% to 5% in terms of revenues, yet you're seeing kind of 7% broadband customer growth. You're seeing migration up to ultra broadband. You're now seeing more wireless revenues. I was just trying to understand why actually the consumer revenue trends today in Fastweb aren't actually better than they are to imply underlying dilution in the existing ARPU of the base. So was just trying to understand the trends there in a bit more detail, please.
Thank you.
Good. I will take the faster question and Mario, guidance question. In the Italian market, what we actually see is really aggressive promotion activity. And this and therefore, we face some pressure on the ARPU side in the Italian broadband business. And that's why the growth is not the growth of the customer base is not going one to one to the revenue development.
That's a bit the main dynamic we have in the Italian market. The Italian market is very fast. This can change from one quarter to the other. But today, see a lot of promotion activity.
And the guidance, in order to serve the space business, we had in first half less roaming of €19,000,000 For the full year, we expect the impact of €50,000,000 So there you have a different dynamic in the second half. And also on the fixed voice lines, we had slightly higher number in Q2 compared to Q1. That's because we lost a lot of lines in Q2 and Q3 and Q4 in 2016. Where we see a slightly higher impact in the second half. And on the past, I would say, €10,000,000 impact of the four weeks building, so that's not enough to change the guidance.
So we feel now comfortable with this underlying unchanged guidance.
So it seems like I mean it could I mean the things though even with the roaming drag you talked about, I mean that's a marginal deterioration in H2 versus H1. I mean, it would suggest there's kind of more chance you're going to slightly beat that number, isn't it? Don't miss it.
But on the other side, you see that compared to the original guidance, as I mentioned, a higher impact on fixed line losses. I would say the better performance on roaming will be compensated by the world's performance of the fixed line basis, the losses of fixed line.
Great. That's clear. Thank you.
We're moving on to Nicolas Trefwen from Jefferies.
Hi, thanks. It's Nick Lissen from Jefferies. I just wanted to ask a follow-up question on the cost savings asked earlier, specifically around network virtualization and what cost savings it might be able to deliver.
A number of industry players have
begun to talk about how virtualization could be a bit of a game changer in terms of reducing network OpEx. You seem like you're relatively advanced in this arena given the vendor deal that you've signed and the launch of your Enterprise Connect product earlier in May. So I was wondering if you could able to give us any color on how we should think about the virtualization opportunity for you. Perhaps what quantum savings you think NFV could deliver? And perhaps more specifically, in December, you included virtualization as one of the legs of your €300,000,000 program.
So do you think virtualization savings are fully encapsulated within the €300,000,000 number? Or could there be significant savings beyond this perhaps after 2020? Thanks.
Good. Virtualization on our infrastructure, there you have actually two dimensions. The one is on your IT infrastructure. There we go in cloud with our own IT infrastructure. We are on the way to it.
But that's always a long way because you have to migrate all your applications to the cloud and this takes a long time. So you can't expect to have a big impact from cost saving impact from this virtualization short term. But mid and long term, there will be impact positive impact on the cost. And on the network side, yes, that's clear. The network is going also in a more virtualized business model.
But what you have to know is also that through the identification of the network, through the upgrades of the network to ultra broadband network, there are also costs which are going up. So not all the savings that you can take out through virtualization will go one to one to a cost decrease, but then because on the other side, you have cost increase. That's a bit the general dynamic on the utilization.
Thank you.
Do we have time for more questions?
Yes.
Okay. We're going to Julio Archimiegas from RBC.
Yes. Hello. Thank you for taking my question. Looking net adds of wireless and broadband subscribers, I do see that as you mentioned at the beginning of the call, the trend is very similar to previous quarter. But anyway, I'm wondering why does the trend hasn't changed?
Would basically expect that having in mind that you are offering discounts with the new bundles. Why the trend hasn't really changed? I don't see any take up change with the new convergent offer. And the second question is also related to InOne and the discounts. Some other discounts in some of the bundles, they are quite high above 20%, but you mentioned that you expect or you are seeing stable ARPU.
Can you give us some color of your strategy, selling strategy? Are you seeing a lot of inbound calls from customers or you perceive that customers, they don't really call and you are being proactive trying to upsell customers into higher prices? Thank you very much.
So the dynamic on our postpaid customer base or postpaid net adds is better than in Q1. If you go in details and also in the mix of postpaid acquisition, you can see that we have a better dynamic there. And certainly, one reason of it is in one. But on the other side, the Swiss market is saturated and very promotional yet. And therefore, my message was always if Swisscom is able to keep the let's say, the customer base in mobile broadband approximately stable, we are doing a good job.
So the margin is saturated. And it's to work on the customer base to keep the churn level low, to keep the ARPU stable, and that we achieve. And you can see that the churn levels are very low and that we have stable ARPUs. I think that there's a positive momentum, which you can see also on the service revenue development. I think we have to look much more to service revenues market shares than just to subscription market shares because it's a difference if you have an inOne customer with an ARPU of CHF 90 or a low end customer with CHF 20.
So this on the net adds, on the discounts of inOne, you see in our presentation that we are on the way to increase our share of wallet in the customer base. It's a bit too early to really show the whole dynamic, but we are able to increase the revenue generating units per household. And this actually shows that we are able increase our share of wallet. That's the message.
Okay. We have no more questions in the queue.
Okay. Then I think we conclude today's presentation. Thank you, operator, and thank you everybody for participating and interest. Have a nice day and speak to you soon. Goodbye.