The floor is yours.
Good morning, ladies and gentlemen, and welcome to Swisscom's first half year results presentation 2017. My name is Louis Schmid, Head of IR, and with me are our CEO, Urs Schaeppi, and Mario Rossi, 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, some explanations on Swisscom Switzerland, and finally an update on Fastweb. In 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?
Good morning, ladies and gentlemen. We had a good, solid 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. If you look to the cloud business, the awareness of Swisscom is 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 inOne. 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. We are on track with our guidance. We made an upgrade on the EBITDA level because of exceptional out of Italy. 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. 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 Swisscom 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 a CHF 76 million reduced service revenue. This is mainly driven by roaming, by fixed line losses and some general price pressure. Enterprise revenues are stable, approximately stable. On the right side of the chart, you see the development of the EBITDA. Overall, EBITDA went up by CHF 33 million on a year-on-year basis to CHF 2.26 billion.
Swisscom Switzerland, there you see that the impact of roaming on EBITDA level is CHF 19 million, the impact of fixed voice line is CHF 39 million. Through cost savings, we were able to compensate the negative impact on the service revenue level. Growth in Italy by CHF 32 million. 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. We have now a network coverage of 4G+ networks, over 40%. 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, 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 see that we continue to increase our ultra-broadband footprint. At the end of Q2, we had 84% of our households which have a speed over 50 Mbps, a strong and good coverage. 3.7 million customers have access to a broadband network above 50 Mbps. Our target in 2020 is to have 85% on our ultra-broadband network with speeds above 100 Mbps. All-IP transformation is continuing, the amount of customers which are already migrated is 75%.
We are on track in the migration to the All-IP network and phase out of our TDM 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? 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 dynamics of our inOne products, but we are in line with our expectations. On the left side of the chart, you see that we have approximately 1 million customers which are our revenue-generating units, which are already in inOne.
This is a penetration in the region of 11% on our customer base. We have 582,000 customers or revenue-generating units in the fixed business and 342,000 mobile revenue-generating units in inOne. A good take-up, a good momentum also on the acquisition side. Interesting is to see to the ARPU development. The impact on the blended ARPU is negligible. 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 the expected right-grading . Therefore, according to our case, positive is certainly also to mention that our Net Promoter Score is higher with inOne than with our old triple-play offer Vivo. 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.
We expect to get even a more loyal customer base. On page 13, some information about our wireless performance. We have a stable momentum with postpaid and a positive momentum with bundles. The service revenue in the wireless business is stable. It shows that Swisscom is able to keep its strong position and its strong service revenue in the mobile market. We have stable blended ARPUs, and on Infinity, the decline in the ARPU of Infinity is through roaming and also dilution because we have more and more low-end customers on Infinity. 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 CHF 30 million from our CHF 667 million.
Decline on a year-on-year basis by CHF 30 million, 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 a subscription base, you can see that we have still some growth on TV, but on a lower level, that the B2B business, broadband business is approximately stable, and there's a substitution effect on the voice business. Same dynamic as in the previous quarter. On page 15, the converged performance in the retail business. Here you can see that the service revenue increased because of an increased bundle penetration, that the service revenue went up on a year-on-year basis by CHF 81 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, 24% of our postpaid subscription are in a fixed mobile bundle. Overall, the revenue-generating units in the bundling business went up by 782,000 revenue-generating units on a year-on-year basis. On 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, a stable service revenue, which is a good performance in a market where we have roaming effects, but also effects from a price competition. A stable condition on the telecommunication business. On mobile, we were on revenue-generating levels, 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 slight decrease on voice because of consolidation in the customer base. The solution business is also stable on a year-on-year basis. Q2 was better than Q1 and shows that the 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. We are on track according to our cost targets and our gross savings of CHF 75 million. 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. We were able to increase the footprint, as you can see 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 Fastweb went up by 7%. Over proportionally up went our customer base, our ultra-broadband customer base. That is important because there we have lower churn and higher 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 percentage points higher than a year ago. Good penetration in the direction of ultra-broadband. Page 20, the mobile performance. 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 the broadband customer base of Fastweb for EUR 9.95 with voice and data in it. We are performing well as you can see on page 21. A 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 subscriptions. Important is also the brand awareness. Fastweb was able to increase the brand awareness in the wireline and wireless market. Interesting is also to know 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. 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 as an example in the public sector went up by 28%. The financials of Fastweb on page 23. Growing revenue, growing EBITDA, and growing free cash flow. Revenue went up by 5%, EBITDA by 20%. If we take out the exceptionals in Fastweb, the EBITDA or the industrial EBITDA went up by 10%, despite higher commercial costs and advertising costs. The free cash flow is in the first half year, CHF 106 million. Now I would like to hand over to Mario for some more specific financial information. Mario?
Thank you. Good morning to everybody. Some additional information on the financials from my side. As we saw in the presentation of Urs, 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 CHF 60 million in the service revenue, CHF 31 million come from the voice line losses. We have CHF 8 million less activation fees on TV. We suffer from roaming. The roaming impact is about CHF 11 million. We have higher bundle discounts of CHF 9 million. The enterprise business, the service revenue is exactly the same decline as in Q1. CHF 9 million comes from mobile. That's the full impact comes there from roaming, and CHF 7 million from the wireline business.
After a weak start in the solution 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 CHF 16 million. There were 2 major effects. MTRs were reduced. That had an impact of CHF 29 million, with no impact on EBITDA. We have higher incoming roaming revenues of CHF 13 million. On Fastweb, very good performance in Q2 on revenue. Good business on retail and wholesale and flat business, flat development in the B2B area. I 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 CHF 42 million personnel expenses. We were able to reduce our FTE base by 456 FTEs in the first half of 2017. 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 amounts for CHF 30 million. We have less wireless retention costs of CHF 14 million in the first half. The reduction of outpayments and goods purchase, 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 segment.
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 had a revenue increase of CHF 32 million. That was not fully transformed to higher EBITDA. That had one reason. That's the good performance of the mobile business. We had there 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 CHF 51 million. There's different effects. We have the higher EBITDA, mainly coming from the exceptionals of Fastweb in the first half. We have lower depreciation because the PPA position of Fastweb is now fully amortized, and this amount is now reduced. We have, of course, lower net interest.
We still benefit from the low interest environment. In the first half of last year, we had the valuation of a swap, a long-term swap, which had in the prior year a negative impact of CHF 44 million. 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's due to a change in the way we do our rollout. We changed our method from a total traditional way to a total contract model. We will invest more or less CHF 600 million 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 an extraordinary payment to our pension plan of CHF 50 million in Q2.
That was agreed with the unions when we changed the plans in Q4 2016. We lowered the future benefits for our employees. On the financing side, on page 31, we had two transactions in Q2. We made domestic bonds, CHF 350 million at very favorable prices, 0.375% interest rate with a maturity of 10 years. We signed a loan with the European Investment Bank for the Fastweb network rollout, CHF 212 million, seven years. That will be drawn probably in September. The average interest rate still goes down. It's now at 1.7%. You see the two big maturities in 2017. One was repaid, the CHF 600 million at 3.75%. We will have the big refinancing in 2018. That brings me to the outlook. On an operational, industrial basis, the outlook will be unchanged.
We increased the outlook on EBITDA because of the extraordinary income from litigation at the Italian level of CHF 100 million. Brings us to revenue unchanged CHF 11.6 billion, EBITDA CHF 4.3 billion. As I mentioned, unchanged CapEx of CHF 2.4 billion. Back to Louis.
Back to the operator for handling the Q&A session. Thank you.
Ladies and gentlemen, if you would like to ask a question, please dial star 14 on your telephone keypad. At your turn, you will hear the announcement unmuted on your line. The first question comes from Simon Coles at Barclays.
Hi, guys. Thanks for taking the questions. 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? 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? On TV, I noticed it'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. To the overall competition in the second half year, I think it really will be on the same level as in the first half year. We will have certainly a promotion-oriented competition. There will be some competitors which will make some noise on the sport content. 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 sport content market from Swisscom is really a strong one. I don't think that there we will have a too big impact on inOne.
As explained, we are on track to what we expected. We have a better momentum in our mobile net acquisition. It's hard to say what is coming now from inOne and from other activities. Overall, we have a better momentum on the acquisition side in mobile. Also the penetration in household penetration is going up. You can see this also in our presentation. TV. Yeah, Mario. On the overall TV market, you have a slide in the backup 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. You see on page 46 that the growth is mostly coming from low-end products and from Swisscom TV Light. That's exactly also the dynamics when you look at the numbers of UPC.
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 SAC marketing in the mobile segment?
Yeah. In the mobile segment, there are a lot of different elements, but the majority of the subscriber acquisition retention costs are retention costs. That's only one explanation. What we see is a slightly, but really slightly higher amount of SIM-only products. It's also a bit seasonal.
Okay. That's great. Thank you very much.
We're going to Vikram Karnani from UBS.
Yeah, thank you. A couple of questions from my side. Firstly, in terms of cost-saving 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. 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 CHF 300 million as you still have, I recall, All-IP savings, which will kick in from 2018 onwards? 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 roughly one-third of the subscriber base which got migrated in terms of first year?
Do you expect that to be probably similar with inOne, considering that this is a fixed-line launch as well, and you probably would expect a bit of slower pickup with all the backlog position. Therefore, the right-grading impact could be felt a bit longer. Just want to understand in terms of migration and how should we anticipate the dynamics in terms of right-grading. Thank you.
Okay. I will take the inOne question, and Mario will take the cost question. inOne, the penetration or let's say the pickup in the market. I think it will go a bit slower than the migration which we had in the past on Infinity. There you have the triple-play offer. The market is a bit less speedy than in the mobile. I'm convinced that we will have a further increase of the penetration of inOne, but it will be a bit slower. 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.
On the cost side, all these actions, simplification, reduction of complexity, that's the basis for reducing the number of FTEs.
You cannot, let's say, put a number behind these different actions. That's the basis for reducing the number of FTEs. On the midterm target, we stick to our target of CHF 300 million. CHF 50 million we reduced last year, CHF 75 million this year, and in the next coming 3 years, CHF 60 million each. The All-IP cost or the All-IP impact will start to kick in, as you mentioned, in 2018. It's quite a low amount, and then will increase gradually until 2020.
That's helpful. Thank you, guys.
The next question comes from Georgios Ierodiaconou 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 Live, and any savings on content that you can reinvest on the price. My second question is around Fastweb. We haven't seen a similar improvement in revenue that Vodafone, Wind, and Telecom Italia reported from the 28-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.
Good. Mario will take the question on the 28-day billing cycle. I will come first to the pricing of TV or content. The overall pricing of TV, there we didn't make really changes. InOne, 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 content rights are going up and more competition on the market side. We have certainly some margin pressure on the content side. We have actually out in the market a promotion for content, for sport content, and it's running well.
Overall, I don't think that we will have major changes in the market because of the entire competition in the content of sports, because this is still a niche business in Switzerland, and I think it will remain a niche business. Mario?
On the four weeks billing at Fastweb, the impact on Q2 is not material because we started to implement the four weeks billing in four waves in Q2, and the complete migration to this billing cycle will be completed in August. We will see a real impact being visible in Q3 and Q4. 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. The impact on the second half should be around north of CHF 10 million or so. That's included in the guide.
Thank you.
The next question comes from James Ratzer from New Street Research.
Yes. Thank you very much indeed. Good morning. 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 is fairly flat year-over-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 28-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? 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%-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 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. I was just trying to understand the trends there in a bit more detail, please. Thank you.
Good. I will take the Fastweb question and Mario the guidance question. In the Italian market, what we actually see is a really aggressive promotion activity. Therefore, we face some pressure on the ARPU side in the Italian broadband business. That's why 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. Today, we see a lot of promotion activity.
I on the guidance. In the Swiss business, we had in first half less roaming of CHF 19 million. For the full year, we expect the impact of CHF 60 million. There you have a different dynamic in the second half. 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 Q3 and Q4 in 2016. There we see a slightly higher impact in the second half. On Fastweb, I would say this CHF 10 million impact of the four weeks billing, that's not enough to change the guidance. We feel now comfortable with this underlying unchanged guidance.
It would seem like it could. The thing though, even with the roaming drag you talk about, that's a marginal deterioration in H2 versus H1. It would suggest there's more chance you're going to slightly beat that number, isn't it, than miss it?
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 may be compensated by the worst performance of the fixed line business, the losses of fixed line.
Great. That's clear. Thank you.
We're moving on to Nick Delfas from Jefferies.
Hi. Thanks. It's Nick Delfas 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 deals you've signed and the launch of your Enterprise Connect product earlier in May. I was wondering if you'd be able to give us any color on how we should think about the virtualization opportunity for you, perhaps what quantum of savings you think NFV could deliver. Perhaps more specifically, in December, you included virtualization as one of the legs of your CHF 300 million program.
Do you think virtualization savings are fully encapsulated within the CHF 300 million number, or could there be significant savings beyond this, perhaps after 2020? Thanks.
Good. Virtualization on our infrastructure, there you have actually two dimensions. One is on your IT infrastructure. There, we will 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. You can't expect to have a big impact from cost-saving impact from this virtualization short-term. Mid- and long-term, there will be impact, positive impact on the cost. On the network side, yeah, that's clear. The network is going also in a more virtualized business model. What you have to know is also that through the densification of the network, through the upgrades of the network to ultra-broadband network, there are also costs which are going up.
Not all the savings which you can take out through virtualization will go one-to-one to a cost decrease because on the other side, you have a cost increase. That's a bit the general dynamic on virtualization.
Thank you.
Do we have time for more questions?
Mm-hmm. Yes.
Okay. We're going to Julio Arciniegas 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. Anyway, I'm wondering why just the trend hasn't changed. I would basically expect it, 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. The second question is also related to inOne and the discounts. Some of the 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.
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. Certainly, one reason of it is inOne. On the other side, the Swiss market is saturated and very promotion-oriented. Therefore, my message was always if Swisscom is able to keep, let's say, the customer base in mobile broadband approximately stable, we are doing a good job. The market is saturated. It is important to work on the customer base to keep the churn level low, to keep the ARPU stable, and that we achieve. You can see that the churn levels are very low and that we have stable ARPUs.
I think that the 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. 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 dynamics, but we are able to increase the revenue-generating units per household. This actually shows that we are able to increase our share of wallet. That's the message.
We have no more questions in the queue.
I think we conclude today's presentation. Thank you, operator, and thank you, everybody, for participation and interest. Have a nice day, and speak to you soon. Goodbye.