Good morning, ladies and gentlemen. Welcome to the Q2 2019 results presented by Urs Schaeppi, Mario Rossi, and Louis Schmid. Louis, the floor is yours.
Good morning, ladies and gentlemen, and welcome to Swisscom's Q2 results presentation. My name is Louis Schmid, Head of Investor Relations, and with me are our CEO, Urs Schaeppi, and CFO, Mario Rossi. The first part of today's analyst and investor presentation hosted by our CEO consists of two chapters. A quick overview of the highlights, operational performance, and financial results of Q2 and the first six months, and an update on our activities and performance in Switzerland and some explanations on Fastweb's network initiatives and first half-year results. In the second part of the presentation, Mario runs you through chapter three, the financials and unchanged full-year guidance. With that, I would like to hand over to Urs to start his part of the presentation. Urs?
Good morning, ladies and gentlemen. If you go to slide three, you can see our Q2 in a nutshell. We were able to close a strategic agreement with Wind Tre, and this will enable Fastweb to get a stronger position in the mobile market. In a cooperation agreement, we will roll out the 5G network. In the B2B business, we were able to strengthen our project portfolio also in the solution area. We could further develop our cloud offerings where we have also a growth. We strengthen our B2B business also through a small acquisition of a security specialist, which will enable us to have even stronger cybersecurity portfolio. This is acquisition of USP. On the cost side, we are well on track in the market with our new offer inOne mobile.
Only after four months, we have more than 570,000 subscribers. We have increasing penetration of six mobile converged offers, which reduces our churn and increases the customer loyalty. We are well on track with our inOne mobile product offers. The last remark to 5G. We were able to get the spectrum, as you already know, and we launched our 5G network in April. The ambition is to have a 90% coverage at the end of this year. We also get the award, Best 5G Network Development in Europe. Overall, on the operational side, a good performance. If you go on slide four, you see our market performance. I would say satisfying commercial results in a challenging market environment. In Switzerland, plus-minus stable, and in Italy, growing. You can see that the broadband net adds in Switzerland, they are minus 6,000.
Important to say is that 3,000 are coming out of the retail market, so it's stable to the first quarter and 3,000 from the B2B business. There, the main effects on B2B are not market share losses. The driver behind it is All IP migration and new products, more cloud-based products, which increases slightly the broadband connection in the B2B market. TV, we are growing. We are gaining market share and a bit less fixed voice losses. The substitution is slowing down also because All IP migration is in the retail market done. Then on postpaid, we see that we were able to grow. In Fastweb in Italy, we have a good momentum on mobile and on broadband. If you go to slide five, our financial performance. The underlying EBITDA went up by CHF 11 million. This you can see on the right part of the slide.
You see Switzerland, which has an EBITDA decline of CHF 30 million. We could compensate a lot of the revenue slowdown through better cost management, but not all. We have a decline of CHF 30 million in Switzerland, and Fastweb was growing with CHF 25 million. With others, this leads to this plus CHF 11 million underlying EBITDA growth. Also the outcome of the operating free cash flow, you can see on the bottom of the chart, where also the spectrum are included. Overall, on track to our guidance, and also we confirm our guidance. If you go on slide six, very short, what are our business priorities? Upgrading our infrastructure. There we are well on track in Switzerland and in Italy.
The second point, I would say that's actually the most challenging point, is stabilizing the top line in Switzerland through customer base management and some upselling. Important products there are our inOne Mobile portfolio, also the inOne home. Operational excellence remain important. We will deliver our ambition of more than CHF 100 million. Further to create growth in Italy with Fastweb in all segments. On page seven, you see our status on the network rollout side. On the left side of the chart, we see that today we have an ultra-broadband coverage of 68%. That means 68% of our customers have a speed above 80 megabits per second, this will go to 90% in the year 2021. Important also to have a look to this 200 megabit footprint which we have. The 200 megabit footprint will be at 75% in 2021.
You see also that we are on a faster run rate to ramp up this ultra-broadband network. Just one example, today we have 2,000 households per day which have an upgrade to ultra-broadband. On the right side of the chart, we see our strategy on 5G. We have a parallel rollout of 5G-wide and 5G+, so that we will have a 5G coverage of 90% at the end of this year. On 5G+, we are certainly challenged through pressure by getting some new sites in Switzerland if there are some counter pressure by the political environment. Even this, we think that we can get a good footprint at the end of this year. If you go to slide eight, some information about our B2C actions.
You see that we are able to remain our strong market shares and also doing a good job on the value creation. We were able to increase our fixed-mobile converged penetration, and we have now 1.27 to 8 million subscribers in inOne, and the churn of fixed-mobile converged customer is at 6%, on a low level, at 6%. With our new mobile offer, we are well on track. We are successful. As already mentioned, 570,000 customers on this product. Important to say is that 80% of this new inOne mobile subscription still have an installment plan for devices. Through this decoupling, we were able to save our subscriber acquisition and retention costs by CHF 80 million. Second and third brand are growing. Our strategy is an attack and defense strategy.
Today, we have 12% on our second and third brand, and approximately 50% of the net adds are on second and third brand. Overall, a good market performance. On wireless, this you can see on page nine. You see the performance of wireless. The net adds in wireless went slightly up. We have a penetration of inOne Mobile at approximately 60%, so it was strongly increased by 15 points year-to-year. You see also the market share on the left side of the chart of fixed mobile products. It's now in the region of 40% and increased by 4% on a year-on-year level. The churn rates are, let's say, even a bit lower than previous year, at 7.7%. On the upside, we have an ARPU of CHF 58 postpaid. You see that there we have a dilution in it.
There are three reasons for this dilution. The first one is the converged rebate of two CHF. We have savings on subscriber acquisition costs and high loyalty. It pays out, and it's according our business plan. You see some one CHF by brand shift. That means second, third brand, and this is one CHF. We have some right gradings of one CHF, and this leads to this -4 CHF ARPU. On page 10, some information to wireline. Overall, a good performance in TV. You see that the penetration in inOne broadband, above 60% are on this product, inOne broadband, and the fixed mobile converge share is at 43%. ARPUs are stable at CHF 41. You see also the churn rate is stable at 9.4%. Overall, a respectable performance in wireline.
On page 11, some remarks to our B2B business. Overall, we have a good win ratio in the B2B business, but we are facing with price competition, mainly also in the telecommunication area. The dynamics are actually unchanged to the previous quarter. We have on connectivity side this price pressure. We have some pressure on the revenues driven by All IP migration. This leads to this reduced ARPU on mobile to 27 CHF ARPU. Overall, from the customer base side, from the ARPUs, we see that they are approximately stable. Solution business overall, we are confident. We have different dynamics on cloud security. Digital solutions we are growing. In SAP workplace and UCC offers, we are facing with price competition. This is not a structural topic. This is more driven by some specific also customer projects where we have a contract renegotiation.
On page 12, cost achievements. You see that we are well on track to deliver our cost savings. In the first quarter, we were minus 31. In the second quarter, we have minus CHF 38 million in direct costs. We are well on track to our targets. In B2B, we made a small reorganization. We put together the SME market and the smaller corporate units together so that we can deliver more standardized service and getting more dynamic also in the go-to market. On page 13, the financial performance of Swisscom Switzerland. You see that our EBITDA, minus this lease line expense. With the IFRS 16 impact, went down by CHF 34 million. On the bottom, in the middle of the chart, you see the dynamics. As planned, the fixed voice had an impact of CHF 22 million. Fixed mobile converge rebate, CHF 33 million.
B2B, this price erosion, mainly in the connectivity area of CHF 68. Some positive effects on others and on indirect costs. This leads to this -CHF 34 million EBITDA AL in Switzerland. On Fastweb on page 14. We are successfully executing our strategy to becoming a more converged player. On wireline, we are upgrading our network to a broader own ultra-broadband footprint. Today, we have a footprint, ultra-broadband footprint initially of 30%. We are doing then on the other areas, wholesaling with Telecom Italia. In the future, we will have a higher own footprint to our strategy, also mainly driven by Fixed Wireless Access, so that we will have a footprint of 60% by 2024. The rest, we will have a wholesale office from Open Fiber and TIM.
On the bottom of the chart, you see that our ambition on mobile. Today, we have 4G roaming. In the future, we will have an own 5G network through the partnership with Wind Tre. There, the ambition is to have 90% coverage by 2026. On page 15, some more information about Wind Tre, as we already explained in the last call. It's a deal to enforce our proposition in the mobile market. It's a co-investment approach, but also we have some wholesale business in Open Fiber with Wind Tre. Overall, we will be able to have an MVNO-like cost structure. The whole deal will be free cash flow value accretive from 2020 onwards. The CapEx, that's important to say, they will stay in a region of EUR 600 million. It's all in our guidance, so there will be no change on the guidance. Page 16.
The consumer performance of Fastweb. You see that we have a good performance, 4% more broadband subscription, mobile 27% more subscription. You see also on this chart that we are able to have a high penetration of ultra-broadband customers. That's important because they have a higher ARPU and lower churn. On mobile, you see that we were able to decrease our churn by 28%. Also a good result. On the right side of the chart, you see that our fixed mobile converged penetration is increasing. We are now at 33%. The converged offers have a higher ARPU and a lower churn. There is certainly a good indication that we were able to increase fixed mobile converged offers by 6%. To slide 17, the B2B performance. A good performance in B2B. Revenues went up by 13%.
Also the wholesale business, if you take really the core wholesale business, you see that we have a growth of 5%. A good performance in B2B. On page 18, you see then the financial performance of Fastweb. A solid performance. EBITDA went up by 7%, and we have a positive operating free cash flow. I would like to hand over to Mario for more details on the financials.
Thank you, Urs. Also good morning from my side. I'll start on page 19, the revenue breakdown. Overall, we saw in Q2 some increased pressure on service revenues, which led to higher EBITDA decline in Q2 in Swiss business compared to Q1. However, this decline came without no surprise to us. As you saw, we had, I would say, an impressive performance on our cost management in the first half. A few remarks on retail. Service revenue went down by 3% or CHF 78 million. The main elements are fixed line loss CHF 22 million, impact from discounts because of fixed mobile convergence CHF 33 million, CHF 7 million from roaming. I would say this roaming decline is more or less over. The impact of the wireless ARPU pressure, which Urs mentioned, is in the first half around CHF 15 million.
Important in the retail business is in the section hardware and other. In other, we have a negative impact of CHF 56 million from the device decoupling because of the new mobile offer. It's the IFRS 15 impact. In Q1, it was CHF 14 million, we had a full effect in Q2 with CHF 42 million. That compensates these lower subscriber acquisition costs. On an EBITDA level, it's more or less neutral this year, and it will become positive next year. In the B2B segment, service revenue decline accelerated in Q2. CHF 34 million decline in Q2, coming CHF 18 million from wireline and CHF 16 million from wireless. Again, unchanged dynamics. Price pressure in the wireless area, ARPU down by around 10%, the All IP migration in the fixed line business. In the solution business, we had a better performance in Q2, mainly in banking.
Q2, we had an increase in trading. That was not anymore the case in Q2. In wholesale business, we saw the same trend as in Q1. CHF 22 million in the first half increase of wholesale revenue in the core business. CHF 7 million better inbound roaming revenues, and around CHF 10 million coming from the MNO contract with UPC. On Fastweb, an impressive 4% revenue growth, especially in the enterprise segment, growth of close to 14%. Revenues in consumer increased by 3.4%. Important in wholesale, the core business of wholesale increased. We have this decline on the low margin business. We expect these deliveries revenues to Flash Fiber. There is a decline of CHF 27 million. The core business in wholesale increased by CHF 4 million. On few remarks on the OpEx. Acquisition retention costs. These are CHF 84 million lower compared to 2018.
That's because of the new offering inOne mobile go. This compensates the negative impact of IFRS 15, which I mentioned before. On out-payment, on goods and purchased services, other and other, we have an increase of CHF 24 million in Q2. That's mainly because of higher costs for sports rights. On the indirect costs, is CHF 69 million. Further progress on workforce, CHF 34 million in the first half. That's internal workforce. External workforce, CHF 13 million cost savings. In the IT and other area, about CHF 20 million savings. We are confident that we'll deliver our at least CHF 100 million savings this year. Few remarks on page 21 on the EBITDA breakdown by segment. In the retail segment, we have this EBITDA decline of CHF 34 million. That means that over 40% of the service revenue decline was compensated with cost management in this segment.
I think that's impressive. Main part is coming from lower number of interventions on the networks. That means lower costs for field services. B2B EBITDA, cumulated EBITDA is down by 13.6%. Slight acceleration in Q2, we have 14.3%. The cost base for the high-margin telco business in Q2 is quite low in this segment. Therefore, it was not possible to compensate in the same magnitude as in the retail business. The contribution margin from the solution business is not high enough to compensate for the decline in service revenue. Wholesale IT network, we have a lower EBITDA contribution in Q2 than in Q1. CHF 21 million versus CHF 39 million. We have a softer contribution from incoming roaming, around CHF 5 million, and the lower cost savings in Q2 is seasonality. CHF 8 million in Q2 versus CHF 15 million in Q1.
As was mentioned, Fastweb, good growth momentum in local currency, a growth of 6.6%. On page 22, the bridge to net income. Two, three remarks. Net interest. The net interest expenses are only CHF 31 million for the first half. The average interest rate decreased to 0.85%. Around 70% of our debt portfolio is fixed, so we are quite safe on that side. The interest leasing, you see that separate items because of IFRS 16. A remark on the tax charge. Tax charge is in Q2, quite low. The tax charges of CHF 158 million include a positive non-cash. Non-cash impact of CHF 33 million. That's due to lower tax rates in some cantons because of the Swiss tax reform. The deferred tax liability has to be adjusted accordingly. We expect some additional cantons that will change their tax rate also in the second half.
In most cantons, public votes are necessary for that, and any impact will be booked after final decision in the second half. On CapEx, I think everything is going as planned. We have now included the so-mentioned CHF 196 million for the spectrum. The higher CapEx in Switzerland, because we had quite a low start last year in the FTTS rollout, so there's nothing special. On operating free cash flow, on page 24. The operating free cash flow is CHF 87 million below prior year. The reason is that we paid the spectrum in Q2. Without spectrum, we would see an increased operating free cash flow of around CHF 100 million compared to 2018. That's because of a better development of the net working capital. I don't think that we need to discuss our maturity profile. I mentioned the, let's say, the very favorable interest rate we enjoy. That brings me over to the guidance.
Guidance is unchanged on revenue around CHF 11.4 billion. EBITDA, we expect more than CHF 4.3 billion. CapEx, including the CHF 0.2 billion for spectrum, is also unchanged at CHF 2.5 billion. With that, I hand over to the operator for the Q&A session.
Okay, thank you very much. Ladies and gentlemen, if you would like to ask a question, please dial now star one four on your telephone keypad. Dial star one four for questions. We already have a few questions. I will open up the lines. The first one is from Simon Coles from Barclays.
Morning, guys. Simon from Barclays. Just a couple from me, please. On postpaid showed a bit of a slowdown this quarter. Obviously, there's some seasonality in there, but I would've thought the new inOne tariff that you launched earlier this year would've helped you maybe gain a bit more momentum there. If you could provide a little bit more color on what's happening in mobile competition, that would be great. On the drivers of the EBITDA, you very helpfully gave us some indication at the CMD back in February about how you expected that to develop. It looks like B2B is probably a little bit worse than expected, but the rest seems to be tracking in line. Could you just update us on that and how you think that's going to develop in 2H?
Linked to that, it looks like cost-cutting is actually running ahead of expectations. I was just wondering how much of that is you finding new areas to take out costs right now, and how much is maybe bringing forward some of the cost-cutting that you might have delivered next year. Thanks very much.
Well, I will take the first question on postpaid, the whole market dynamic, and then Mario on cost and B2B. On the dynamic in the mobile market, the whole market is totally driven by promotions. If our competitors don't act with aggressive promotions, I think not a lot will change. For us, if you look to the performance of inOne mobile, we are very happy with this performance. Our strategy is to increase the fixed to mobile converged penetration. Our strategy is not to get as much as possible low-end postpaid customer. That's why we push the migration to inOne mobile and then fixed mobile converged offers. With our second and third brands, we are active in the lower end of the market. It's not our ambition to be there too much aggressive.
Overall, I would say that the dynamic in mobile in the consumer market hasn't changed from Q1 to Q2. Overall, I'm happy with the performance which we have on mobile. You can also see the ARPU. The ARPU and churn rate went even down compared to previous years or to Q1, so we are happy with the postpaid performance. Mario.
Maybe on the drivers and the cost-cutting. Urs gave you the drivers for the first half on page 13. What's our expectation for the whole year? I would say on fixed voice lines, full-year impact of around CHF 40 million. Convergence impact, we'd expect around CHF 60 million. B2B before cost-cutting, say around CHF 100 million, slightly better performance in the second half. On the cost side, we expect more than CHF 100 million. We realized already CHF 68 million. The drivers behind the cost cut. We are in this cost program 2018 to 2020, that is said we reduced our indirect cost by CHF 300 million. There, as we mentioned several times, there are a couple of elements. I would say this year, we benefit from that the All IP migration in the mass market is over. That brings us less intervention, very stable network.
We also have a very stable TV platform. We see that in the customer satisfaction surveys. There is practically no breakdown and no downtime on the TV platform. That helps in the interventions. That's the first point in the residential market. On the network side, we benefit from automation, from robotics. These programs will go on, and we know that we also have to deliver in the coming years material cost-cutting.
Okay, great. It's not necessarily bringing anything forward. Everything's on track.
Okay. We have another question from Roman Arbuzov from JP Morgan.
Hello. Thank you very much for taking my questions. I had three questions as well, please. The first one is just digging in a little bit deeper into the lower end of the mobile market. You cite this interesting statistic that more than 50% of the net adds are coming on the postpaid are coming from the second and third brands. It's appreciated that you're not looking to stir things up too much, but I was wondering if you could give us a little bit more color on how temporary you think this development is. For example, is it, for example, driven by some offerings in Coop Mobile, and therefore you would expect the proportion of net adds from the second and third brands to decline, let's say, next quarter? Also, if you can give us maybe some sense of history.
What has it been historically, and are we going through some sort of a peak that would therefore subside? Or is this kind of structural? That's the first one. The second one was just on the soft broadband net adds for the second quarter running. You did mention last quarter that the spillover from the Christmas campaign. I was wondering if you can give us a little bit more color on the competitive environment there, and whether the campaigns remain quite intense. Thirdly, it's just a technical question. It's a question on one specific revenue line, which is within the retail segment, and it's other sales. It's below the service revenue line. It's other sales, and in the quarter, it was minus CHF 15 million, which is a very unusual number for this line, comparing it to the historics.
I was just wondering if you could give us an explanation of what happened there, please, and what to expect going forward. Thank you so much.
Could I take the first two questions and Mario then the last one. On the wireline mark. As you mentioned, we have a saturated mobile market in Switzerland. The dynamic or let's say the volatility in this market is mainly on the lower end of the market. Through promotions, through second and third brands. Actually, I call it normally like a washing machine. There is a lot of customers which are very price sensitive, and they switch from one to the other. That actually can you also see in our postpaid value segment. We have quite a stable situation in the postpaid value segment. On the lower end, there we are present with our second and third brands.
The percentage of second and third brands in the whole postpaid portfolio will slightly increase, because as I mentioned before, approximately 50% of the net adds are coming from second and third brands. Our strategy is to keep value, to increase the penetration fixed to mobile on value customer. There you see we are well on track. To the second question on the competitive dynamic and promotions. They are on the same level and aggressive level as in Q1. If I look to the promotions, they are normally the rate or let's say, the common sense of this promotion is 50% discount. If there are no promotions, I think there is no move in the market, and that's a bit the competitive dynamic which we have in the market. I don't know what will happen in the future. I think it's not too sustainable.
If you look what money some of our competitors are putting in promotions. I don't mention now which competitor, but you see hardware subsidies in the region of CHF 900-CHF 1,000 to get a broadband connection. That's a bit strange for me. That's the situation which we have. For us, it's important to execute on our strategy, converge strategy with our inOne portfolio.
Can you follow up on the first one? Sorry, at this stage. The 50% postpaid net adds or 50% of customers coming from second and third brands on the net adds. Is this an elevated number? Do you think it comes down or it's actually a normal number?
I think we have two effects. The one is certainly we had in Q1 and Q2, a higher momentum from mobile. That you are right. On the other side, because these promotions will continue, I think we will be in a region in the next months, which is comparable to the first half year. Maybe a bit lower than 50%, but it will not go down to 20%.
All right. Thank you very much. The third one, please.
On your technical question, the third one. That's coming from the so-mentioned IFRS 15 effect. We have a negative revenue number in Q1 2019 of CHF 14 million, and in Q2 of minus CHF 42 million. That's coming from the past. Whenever you had a new subscription, you had to book on the assets, the acquisition cost, and then distribute it over the contract period as a negative item on revenue. Because it stops now, with the new one, inOne mobile go, we stop this subsidy. You have this negative impact. It's not replaced with new contracts. You will have.
this line
Yeah
equipment sales, essentially. Is that the explanation?
Sorry?
This line relates to equipment sales, is this right?
No, it's other. It's really other. Say it's the technical dissolution of the asset which comes from the acquisition cost.
In the past.
I see.
We will see a similar number in Q3 and Q4 of around minus CHF 40 million - CHF 50 million.
That will last more or less until end of 2019, and then the whole thing is washed through.
All right. Thank you so much. That's very clear. Thank you.
We have another question from Ulrich Rathe from Jefferies.
Yeah, thanks very much. I have three questions as well, please. First one is, you highlighted the P&L tax impact of the tax reform. Would you be able to shed a bit of light on the eventual cash tax impact with or without the cantons that have to change the local tax system? If you could just comment on that a bit. Second one is, you said that the B2B broadband customer loss is because of All IP and cloud migration. Could you explain the commercial mechanics of that? Why exactly would a broadband line be lost because of an All IP migration? I'm not entirely sure what the connection is.
The third one would be, you sort of commented, I think, sort of between the lines, but if you're willing to take that on a bit more explicitly, the current improvement of the UPC KPIs that we have seen reported from Liberty Global, do you think this is a lasting trend change of one of your competitors, or is this a result of a fairly one-off-ish push at this point in time? Thank you.
Good. I will take question two and three, and Mario, the tax reform question. I start with question two, the dynamic B2B on broadband. As I mentioned it, we had a slight decline in the B2B connection of 3,000 subscription in Q2. There are at least two reasons: product portfolio and All IP. If you do an All IP migration, then a lot of companies are looking, "Oh, well, what kind of a broadband connection I have? Do I need it or not?" They do a kind of cleaning. They do a cleaning of the portfolio. That's one reason. The second reason is, if you go on cloud-based solution, you have another product portfolio, and depending to the customer, then you redesign a bit your network. Maybe you go from more from a MPLS network to another kind of more cloud-based product portfolio.
There are a lot of different elements. I think overall, because we are also through with at 75%-80% All IP migration in B2B, I think we will have a more stable dynamic on broadband driven by All IP. On this cloud dynamic, this will be a topic which continues, but this will be very slow because all this migration of network will take a lot of time. I think we can stay approximately stable in the broadband business. The main impact on B2B is, as Mario mentioned, that's the price level, the erosion of the prices which we have on our connectivity portfolio. On UPC, KPIs from UPC, I don't want to comment these KPIs, but my view is that the whole dynamic in the market was not really changed to Q1.
If I look to the dynamic which we have on TV in the whole market, there we noted the figures. I think there is not really a big change in the whole market from Q1 to Q2. On the tax issue, for the CHF 133 million are non-cash because we had to calculate deferred tax liabilities with new tax rates. Going forward, in 2020, depending on some votes in the second half, but I would expect that the tax rate for Swisscom group will come down from 21% to 19%. These two percentage points would be a direct cash impact. I would expect 19% going forward.
That's very helpful. Thank you for those answers.
Okay. We have another question from Michael Bishop from Goldman.
Yes, thanks. Good morning. Just two questions from me, please. Firstly, on B2B, you still sound confident that we should start to see a bit of an inflection in the trends in the second quarter, but you do sound equally quite cautious on B2B mobile. I was just wondering if you could recap and walk us through the improvement in trends through the second half of 2019 and into 2020. Secondly, switching to Italy. It's clear that you now believe that you have network economics, which I think is very clear from the deal with Wind Tre. I was just wondering how you envisage the network quality of Wind Tre potentially catching up with that of Vodafone and Telecom Italia in the market. Thanks very much.
Good. I take the second question on Italy, and Mario will take the B2B question on the dynamics of the different market area. In Italy, if you look to the benchmarks, if you look also to the neutral tests in the Italian market, in areas where Wind Tre makes the, let's say, the migration of the network or consolidates the network, that the quality of Wind Tre is a good one. We are confident that we will have strong networks with Wind and we'll be competitive. Mario?
On B2B, on service revenue, we expect slightly lower revenue decline in the second half. On solution business, we see positive momentum, let's say, in two areas. That's the cloud business. We see there growth. In Q1, we had a weak banking. That was because of expiring contracts in prior year. Also in the banking, we see in the second half a good momentum, and that makes us confident for the second half. The service revenue will remain under pressure. That we have to face that issue.
Thanks. That's great.
Okay. We have our last question from George Ierodiakonou from Citi.
Hi, everyone. Good morning, and thank you for taking my questions. Actually, most have been answered, but I just wanted to just go through the B2B side, just for our understanding. To get a better idea of how things could trend going into next year, is it possible to maybe give us an indication of how far around the repricing side you feel you're going through right now? What could be the incremental? You mentioned now the cloud services and some of the banking are clear. What could be the incremental other areas that you could use in 2020 to offset the pressures? Any color on that would be great. Thank you.
Maybe on a very high level, the dynamic you see in the connectivity space, totally with Mario, we will have pressure on the service revenue also in the future. Maybe we could have some hope on mobile, because the average ARPU in mobile is now on a level which is already low. Maybe if you also bundle in roaming, I think you have to calculate, otherwise you will have a loss. Maybe that the down dynamic on the wireline is low, but it will continue because the competition will continue and then you have to make contract renegotiation. On this solution side, we are overall positive that we can create some growth. You have to know, on the one side, if you go to a cloud solution, you get new business. On the other side, you are replacing some outsourcing business.
It's not a one-to-one net. We have a positive and negative impact. That's why we think that the solution business will not explode in the next month. We have a good dynamic, a positive dynamic, and we can differentiate ourselves strongly in this market where we have strong competition on the connectivity side. I think the mix of IT and connectivity, there we have a strong approach in B2B, but we will have challenging months also in the future in B2B.
I know this is a very simplistic way of asking the question, but from your contracts, would you say the majority have now been repriced, or do you still have some that-.
No, the-
Are we past the worst in a way, or?
In B2B, the mechanic is the same. Normally, connectivity contracts last for two or three years. That means you have this continuous renegotiation of the contract. Now the main question is, how strong the competition will be, how broad the competition will be on these different accounts? Yeah, that will show us the future. I think the price level in B2B is in Switzerland on a low level. There is not so much room to do aggressive pricing.
Promotions, if you want to earn money. That's a bit my bad impression.
Thank you.
Okay, we have another question from Ulrich Rathe from Jefferies.
Thanks for letting me on for a follow-up. Coming back to Roman's question on the negative revenue item, please feel free to delegate that to us for an offline conversation. Wanted to make sure I fully understand. Is this effect that you report there because you're reporting service revenue gross and then subtracting the IFRS 16 effect outside of sales revenues? Is that sort of the mechanics in your accounts? Obviously we're seeing the IFRS 16 transition everywhere, in most companies, it's essentially just a headwind on sales revenues for the well-understood known reasons. I'm wondering whether you might have a slightly different sort of way of booking that into the different line items, is that a complete misunderstanding? Thank you.
The service revenue was always without the impact of IFRS 16. That means we have to book now also the negative impact outside of service revenue. I think that gives you also a clearer picture on the output. In the backup on where we show the outputs, you have the full detail of the output, including for without IFRS 16 impact. I think we have now this transition here because we changed our offering, and as I mentioned, it will be washed through more or less by the end of this year.
Okay, I think I understand. Thank you for that clarification. Appreciate it.
Okay, we have no more questions.
All right. Thank you, operator, and thank you, everyone. With that, I would like to conclude today's conference call. If you should still have any further questions, please do not hesitate to contact us from the IR team. Speak to you soon and have a great day. Thank you.
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