freenet AG (OTCPK:FRTAF) Q2 2022 Earnings Conference Call August 12, 2022 4:00 AM ET
Company Participants
Christoph Vilanek – Chief Executive Officer
Ingo Arnold – Chief Financial Officer
Conference Call Participants
Joshua Mills – BNP Paribas Exane
Yemi Falana – Goldman Sachs
Polo Tang – UBS
Martin Hammerschmidt – Citi
Titus Krahn – Bank of America
Adam Fox-Rumley – HSBC
Christoph Vilanek
Thanks to all of you that joined today’s presentation on our half year results. As you all have seen in the document. And also in our press release, we are very encouraged from the past six months and even from the preliminary results of July, which we obviously know and this is why we have adjusted our guidance. I’m sure that Ingo will give way more details and also discuss some of the questions that we have already collected.
We have had a good second quarter. We are in — even though its summer and it’s hot, we are running really well. But today, the major topic is the second quarter and this is why I’m going to — the performance chart, you can see that during the quarter we have increased the total subscriber base by 57,000 and we have year-on-year a very positive customer intake of more than 187,000. So I think the moderate growth that we have predicted is very well continuing even though in freenet TV we are losing a couple of customers, but I think that was included in our projections anyway and we deliver on our internal plans and on our promise.
On the EBITDA side, we have closed the first six months with $241 million. Well if you add last year’s performance of the second half of the year of $224 million, we are on $465 million yet. As I said, Ingo will give some more details, but let me state at the beginning that we feel very comfortable we will be on the upper end also of the new spend of EBITDA.
On the free cash flow side, also a very good performance with $124 million during the first six months and there is — was an exceptional effect in the second half of the year. Last year, which will be explained and we’ll explain and give background on why we have not adjusted the free cash flow guidance.
On the next page, the breakdown of the subscribers. You can see that on postpaid, on FUNK, FLEX and waipu we have gained and won additional customers. In the postpaid we exceeded the 7,200,000 here. The FUNK, FLEX, the purely app-based tariff plans are growing even faster, with plus 36%. We are not exceptionally investing on marketing here. It’s more that it grows organically through word of mouth and to positive feedbacks of the individual customers.
In the TV segment, if you want to call it like that, the B2C area. The total net adds is plus 72,000 driven by the waiputhek, which already did 820,000 — exceeded 820,000 by end of June. I’ve seen yesterday July numbers compared to previous year, even the summer looks really nice. So I think we gained trajectory and pace, once again through word of mouth and the overall dynamics.
Whereas in freenet TV we have on an annual basis, we’ve lost about 12%. We are now moving into price changes and expect a couple of more release there — releases there. But I’ve got to be there, talk about it in a second.
Some additional information and illustration of the performance on the next page, on the mobile net adds. I think very important is that, you have seen the press release, obviously, we have renewed our five-year contract with MediaMarktSaturn in Germany.
It’s another five years till 2027, still with the existing exclusivities. The performance in — specifically in June and July is constantly improving. Some of you might have seen the announcement and the documentation yesterday from CECONOMY, services and solutions is their part where they can really grow and they can even outperformed previous years.
We are a major contributor. We’re very happy to work with these guys in a super constructive way, also with the new management team on our field and on our segment there. So this works really well.
And the second big thing in that quarter was that, we have completed the brand transformation into freenet. Not 100% of the shops are already redesigned on — to freenet because of some supply issues, but any information going to the customers, our websites, the entire stationary, et cetera, et cetera, it’s all handed over.
There are a couple of initial problems caused by the changes of our websites and the keywords in SEA and SEO, but we feel that everything worked really well and the fact that we will now measure again the captive channel performance where you can see it.
In Q2, it was the same as in first half year last year — sorry. It was 71%, so it’s like the level of pre-COVID level, which means that it went down a little bit online, a bit lower than — retail is a bit stronger, than it was before, but we’re very happy to state that overall captive performance is still — the vast majority we control the churnings, we improved the churnings constantly. It will be interesting to see, whether the new branding will have an impact there. Maybe I can illustrate that the prompted brand awareness is on 84%. It’s already yet higher than on mobilcom-debitel during the entire lifetime.
The other thing that we have silently launched end of June was our first freenet Internet service. The logic here, I think from an innovation perspective, it’s two elements — three elements to it. One is, these can be activated and ordered only by apps, so similar to freenet FUNK and FLEX. That’s the first thing.
The second thing, it’s a monthly subscription. So it’s a very liberal, very open system. We see that the subscribers are a bit hesitant on long-term commitments. But when they go for an open commitment like this one, the lifetime is almost the same. So, I think we’ve — we match here the tight guys that we see overall. Same goes for some of the other subscription models we do with hardware these days. That works really well.
And the third element is that, even though now it’s an LTE-based product, the offer we do at the end of the day is €29.99 and this will be the price, no matter whether this is Internet, whether this is copper-based, whether this is coaxial — cable-based or this is fiber-based. So the approach to the end consumer is this is what you pay and we take care of the best back-end technology and access technology for you.
Have a quick look at waipu. There is I guess four things, which are important to mention. Overall performance is much better than previous year. We have noted it here plus 97,000 — almost 98,000 versus plus 72,000. So there is — the good growth is dynamically increasing.
We have had a deal with Deutsche Glasfaser. Deutsche Glasfaser — most of you will know them, they are Microtrenching Company for fiber connectivity. They connected more than two million houses. They currently have a six-digit number of TV subscribers. We will replace and exchange the existing platform completely. They outsource the entire TV services to us. We will start to do that physically at the turn of the year. So the first subscribers will then get branded packaging, but — from Glasfaser, but well inside they will find our dongle and our remote control and will then seamlessly switch to our services.
The third one is that Roku, which is a hardware manufacturer and also component manufacturer from the US. We have signed on their — upon their request, a partnership agreement and we will be on any Roku device preinstalled from Q4 of this year. And we keep expanding our channel portfolio.
As you can see on the right-hand side, we have now 188 channels, the RTL pay-TV channels are now also on the platform and we outperform in terms of value for money, any of our competitors. The model that we see with Deutsche Glasfaser is one that we believe, we can strategically expand. We are in talks to a lot of the local fiber providers, whether they are federally owned or a city-owned to replace their existing technology. This is something which will not go overnight, because those people obviously have built up their own TV units over the years.
At the same time, they understand that, with the fight around top end content, you need to scale up and need to be part of a bigger group, but I think that is something that step by step is now understood in the market and we might take a big benefit out of this. This is why we are highly optimistic. I think, we will definitely exceed the 900,000 subscribers anywhere in Q4 and some optimistic people say we get even close to 950,000 by the end of the year.
So on Media Broadcast, three different dimensions in the business. Meanwhile, freenet TV, I’ve already said that and you are aware of the price increase that’s going to happen for new customers by the first of September and for the existing customer base by the first of December. So, the EBITDA impact will only happen next year. By doing it like that we hope that we can cope with churn.
By the way, by the end of the year, we will also have a hybrid platform with waipu. So that waipu can deliver to the end consumers a dongle, which understands three technologies; cable, terrestrial, as well as IP. And this will be then the starting point for us to not cannibalize ourselves but to kind of like deliver services, IP services from waipu even within — even into the freenet TV customer base. And this will allow the same for any cable partner that we can, obviously, hopefully convinced about that step during the next year.
Media Broadcast. We’re happy that we delivered the first 5G campus solution. We always said that we want to do that on B2B. We have a couple of customers yet, but they are typically in our — in the media sector so we’re very happy that we have now have do the first operation in a third-party it’s called Innovationspark so it’s a center of high-tech companies in north of Germany.
And last but not least, the third sector DAB+, the radio we have — there is a quarterly measurement of the so-called listeners per hour or an average hour we have grown second quarter in a row in absolute terms the fastest in Germany. We’re now at 229,000 and with the other partners that we have under control or under contract we can deliver 660,000 business per hour.
For you as a reference, the biggest private channel in Germany is [Indiscernible], they have about 800,000. So we are close to head-on-head with the single biggest one and we are very optimistic that over the next 12 months that we will be the biggest single partner for the industry.
So before I hand over to Ingo maybe a bit the outlook on — to the second quarter. In general, we think that the consumer — there is an uncertainty. There is inflation worries et cetera, et cetera. But history shows that our kind of business is rather resilient to these developments. Yes. We are also under pressure with our workers’ council on increasing wages, and we also have done our exercise in estimating impact of electricity gas fuel et cetera, et cetera.
We have incorporated that already in our early planning 2023. The impact this year will be minor or let’s say we have anticipated it to a certain extent. For next year, I think the total is anywhere, the total theoretical cost increase is about €10 million in energy. It’s about €10 million in personnel. At the same time we — knowing that we will do a lot of measurements to reduce the absolute numbers, we have enough time, we have a so-called crisis team working on these topics.
On mobile pure certainly, we anticipate even higher SIM-only proportion that is on the one hand side the result of limited hydro supply. And second on the slowdown in hardware innovation. S22 is doing really well these days. But we also know that the type of innovation cycle is getting longer and longer. So SIM-only is growing, which is from our perspective not a bad thing, and we expect the net add number in the similar area as last year Q3 and Q4.
On TV and Media, I already said I think we will continue to grow beyond the 900,000 anywhere between 900,000, 950,000 I guess, will be the end result. And Media Broadcast is even though there is no impact of the price increase this year and we see the churn on the freenet TV B2C area, we still believe that there is an increase in EBITDA of up to 5% versus last year.
So all that together gives you hopefully a qualitative background why we are optimistic and why we are happy to increase the guidance and are very sure that we will go — we will deliver once again on what we promise.
Well, then thanks for the time being for listening and I hand over to Ingo.
Ingo Arnold
Okay. Good morning everybody from my side. I start with the group financials on page 11. I think it’s easy for me as a CFO here to comment these results, because in all dimensions it looks very, very positive what I can show you today. So in terms of revenues, quarter-by-quarter a very slight increase. This is something what we see here on the other side and this is I think more important where we gain revenues is in the more profitable parts of the business and where we lose revenues is in the less profitable part of the business. So, therefore, I’m definitely fine with the stable revenue figures.
On a gross profit side, again a very strong quarter because we could increase the gross profit by 4% quarter-by-quarter to €218.6 million and this leads to an EBITDA which is 8.3% above the EBITDA of the second quarter last year. I think if you compare the EBITDAs between the first half of 2021 and the first half of 2022, it is very important to put into consideration that last year, we get some thoughts from this short time work where we had long closing times of our shops in 2021 in the first half and there we get something like €11 million from the government. This year, we had a shorter period and so we only got €1 million. So there is a negative effect of €10 million, but this is compensated on the one side with the restructuring program what we already started in 2021. And therefore, with a lower number of FTE what we have on the payroll now.
Moving to the mobile business. It is resilient again and still very resilient. What is important if we look into the revenues and you see the split here, it is important that it is still possible for us to increase the service revenues which are the most important part of the revenue what we generate here. And this leads to the positive effect in gross profit. So all in, only a stable revenue line, but the bottom line is quite well with the increase on the one hand in the gross profit and with the increase in the EBITDA on the other side. And I think this is a mix which makes me happy — it is not only cost driven here. I think we have done our homework. So we do a very tight cost management. This is correct, but it is not only cost management, it is also gross profit and so operational performance, which is quite well in the mobile segment.
If we move to the mobile KPIs, I think the customer figures already discussed by Christoph. The ARPU is stable in comparison to last year. And if we look into this digital lifestyle revenues, I’m not 100% happy with what we see here. But definitely, we are catching up here because we could increase it from €45 million in the first quarter of the digital lifestyle revenues to €48.2 million. And this is nearly on the same level as last year. I think with the situation what we have out there with the supply chain issues, but we also have — it is difficult to grow anything here in the digital lifestyle environment. But I’m very happy that we are on a comparable level in the second quarter to last year.
Moving to the TV and Media figures. The revenues are increasing based on the increasing number of customers at waipu. And the gross profit also increasing on the one hand, again by the increasing number of customers at waipu, but also driven by the Media Broadcast B2B business and Christoph already was talking about the digital radio. And this is helping here to increase the gross profit in Media Broadcast.
On an EBITDA level, freenet TV even with the decreasing number of customers a very stable result. Here, we still see the effect of earlier price increases and the next increase is already on the street and we will see the effects in 2023. In B2B Media Broadcast, a bigger effect here. And this is because we have this very tight cost management in Media Broadcast and we see the results here. In waipu.tv, the effect in the EBITDA is smaller than the effect in the gross profit because especially in the first quarter of 2022, we did some marketing campaigns. And so I think it was reasonable to invest it into the business. But therefore, the effect on the EBITDA line is not as big as on the gross profit line. But I think we want to grow here. And therefore, we would also be happy if it would be possible to invest more into the waipu business to increase the customer base further.
Moving to the free cash flow. Starting I think the all-in figure is quite well. Looking into the working capital, you see an effect which is worse than in 2021 because now we see minus €35 million. But you have to put into consideration that during the year, we reduced the number of — we reduced the figure of factoring from €60 million at the end of 2021 to €50 million now. So, therefore, you have a negative effect in the working capital of €10 million.
We could do more in factoring, but we use the situation of very good cash in to reduce the figure of factoring — would be possible to increase it again. But actually we do not plan to increase it again, but it is something like a reserve for what we do have.
Tax payments similar to last year. CapEx I think what we already announced at the beginning of the year here a higher CapEx figure in 2022. On the one hand, mostly driven by the renovation of our headquarters in Büdelsdorf. Therefore here €4.9 million of the CapEx is based on this renovation. It is a one-off effect this year, which will cost up to something like €15 million. But this is something what we had already in our plan maybe on a slightly lower level, but it was not surprising to us.
Leases, similar to last year and the interest payments strongly lower than last year because our net debt figure does not change that much but our gross debt was reduced and therefore, we could realize here in interest payments a much lower figure. So, all-in the €124 million.
Moving to page 16, what we saw in the last month was that a lot of people discussed if it could have a negative effect for us that the interest rate has been increased and maybe will increase further. And therefore, we put this chart in the deck here which shows that most of our debt is fixed or the interest rate is fixed. Therefore the risk is only is reduced to something like €180 million of variable debt.
And — but here you also have to net it or to hedge it or, however, you would call it, with the cash flow or the cash that we have on the bank. So, I think all in the risk here is below €50 million. And so it is not the interest risk. It is only the debt amount which is at risk. So, even with increasing interest rates the effect will be very, very low and not relevant for our results.
On page 17, I show the guidance and the guidance upgrade. So, what we decided here is on current forecast what we did that we could increase the EBITDA guidance by €10 million to a range of €460 million to €480 million. Here maybe this could be a question. Is it without release of any bad debt provisions for something like this? This is not necessary to increase it.
And why is the range that big? It is not that big because we have so many uncertainties inside freenet. It is more because we see the uncertainties around us and so it’s a more of macro economical range. What we defined here — from our view here and Christoph already did it, we definitely expect an EBITDA above €470 million and so therefore call it conservative or not, but I think we are in very uncertain times and therefore I think a range even in half as we already see more than half of the year in our books this looks necessary.
Then the free cash flow guidance which we left unchanged. Here I saw some comments yesterday evening and this morning. What is important without the cost decision on return debit notes what you have seen some weeks ago, I think with the first quarter results we already published it and we have to pay something like €12 million.
This is not relevant for the EBITDA because we already had a provision here for some years, but what was unclear was the timing of the payment because sometimes it takes years with the court and therefore, we have not put it into our guidance because we have not expected to get a decision from the court already in 2022. But it happened, and we are not unhappy that it happens, because it is better to close these things. And so on the one hand, we do not see an EBITDA effect. Therefore, it was possible to increase the guidance. But on the free cash flow level, there will be a negative effect in the second half of €12 million, and therefore it was not possible to increase the free cash flow guidance now. But from operations, the effect in the free cash flow is as good as the effect in the EBITDA. That’s it from my side.
So therefore, I hand it back to the operator, and ask him to start the question period.
Question-and-Answer Session
Operator
Today’s first question is coming from Joshua Mills calling from BNB Paribas Exane. Please go ahead.
Joshua Mills
Hi, guys. Hopefully, you can hear me. Please let me know, if you can’t. The first question I had was just regarding the mobile business, and whether you’ve seen any impact in terms of Deutsche Telekom family plans. General comments on competitive intensity in the market would be helpful. And particularly, I think Deutsche has been open about the fact, they’ve looked to raise prices. Is that something you think you could do as well? And then the second question, just on the TV media business. You talked in the report about the fact that, it’s exceeded internal expectations.
EBITDA growth is still very strong. It’s quite a difficult business to forecast from the outside given all the moving parts. Would you be able to give us a steer maybe on how you see the Media and TV EBITDA developing next year? And break that down between the waipu segment via broadcast et cetera too? Thank you.
Christoph Vilanek
Yeah. Hi, Josh, thanks for the questions. Yeah, I saw the DT comment, as well yesterday. I mean, we have – and I compare these statements that Tim made yesterday ongoing more direct with the reality that we face talking to Srini Gopalan, and his team in Germany. The way, we interpreted it, he says, I will not push further for a third-party dealership. I will focus on a DT-owned and DT franchisees, as well as online. You’re well aware that they still work a lot with Aronics [ph] with experts and some of the others.
It also indicates to me, or it’s a proof of concept, I mean, I said, we have renewed the direct exclusivity contract with MediaMarktSaturn. There were talks last year, between the two parties and there was even a test last summer. I think, we’ve even disclosed that that, there was a direct test of Deutsche Telekom in MediaMarktSaturn. The test did not deliver on their internal expectations. And they said that, we should exclusively continue also from their standpoint. So the fact is that, we do not see any changes. It’s more the opposite that, they encourage us to cover the third-party dealership, and to have them with full focus on their owned distribution.
On the TEF/D comment on price increases, I would love it was the case. And you can be assured that, if we see any potential to increase the prices we will definitely do so. I think, there is currently a ceiling on endless or unlimited data. There is a ceiling, which we all keep the €30 plan. And you’re also well aware that changes to the existing customer base always cause the right of immediate termination by the end consumer.
So I don’t think that, you can – we can change or we can raise prices in the customer base unfortunately. But in new customer acquisition in hardware et cetera, et cetera, we are also increasing prices. Realistically, if you look at the turnover of the customer base in the German market, if this is 120 million SIM cards, and if you assume that maybe 10 million are exchanged on an annual or maybe 20 million on an annual basis, even an increase of 5% will only impact the entire base by 1%. So my answer is, if there’s an opportunity, we’ll take – we will take it. But I do not expect a measurable impact, within a period of 12 months to 18 months.
On the TV, yes, well, I take this as a positive complement that you say, it’s a bit unpredictable, because it’s a dynamic market. It’s the same for us. And I think we are not in a position today, to fully share our expectations for next year on the segment, but we take it as a reminder for our Q3 session in December that we will give you a deeper insight.
As I said on waipu, I expect anywhere beyond 900,000 maybe close to 950,000 will all depend on like the last – the end of the year raised. There’s a couple of innovations and new content that, we will also announce in December. And we should be able to accelerate there. Next year, we expect that, we have TV start with the transfer of the Deutsche Glasfaser customers, and a couple of others. So there will be, if you want to call it an organic infusion of maybe 250,000 during the first half of the year which comes on top to the organic growth. So I think there is a strong dynamic, but it’s too early to predict. But as I said, I take this as a special task to deliver more details with the December call.
Joshua Mills
Right. Thank you very much.
Operator
Thank you, sir. We’ll now go to Yemi Falana calling from Goldman Sachs. Please go ahead.
Yemi Falana
Good morning, guys. Thanks for taking my question. Maybe firstly on the TV business. How do you think about the evolution of the cost base in that segment as you balance cost rationalization measures, investments for growth at Waipu and then potential price rises in churn management in freenet TV?
And secondly on free cash flow, correct me if I’m wrong, but if we just think about the effects in free cash flow that won’t recur next year, I get to just over €25 million related to the court ruling and CapEx at the headquarters. So is 10% plus free cash flow growth for next year the starting point to build off depending on kind of EBITDA growth delivery into 2023? Thank you.
Christoph Vilanek
Yes. On the first one, on any of our TV activities we pay content on a variable basis per active customer, per active and paying customer. So the gross margin remains the same with scale. The things that lose in terms of share of cost is fixed cost personnel.
In waipu currently we run the show with 60, 64 people. And I guess, if we had — we just did an exercise if we had — if we would double the subscribers we think that we need about 10 people more. So I think there is a big scale effect.
And the other ones the other scaling effect will be marketing because at a certain stage with a certain size and current recognition I think you can slow down a bit. We are certainly planning to spend more money on above the line next year. We think there is — the race is out for 2024 [indiscernible] and privilege dropouts and I think we need to prepare.
I think we are in a quite privileged position there. Deutsche Telekom is moving their IP platform to Comcast, which is causing a lot of friction and difficulties not because they’re doing a bad job but it’s — I mean you take over a big legacy Comcast is a global player they have a number of customers.
I think in a way they are blocked. And if I look at the growth rate I think we had this quarter a couple of — around 20,000. If you see their sheer size and compare it to us then I think you really immediately realized that we are — we can much more focus on growing the customer base and we are not that busy with technology. So on the cost base as I said the biggest chunk is variable cost on content and everything else scales to a great extent.
On freenet TV I think we have now 745,000. I think our internal projection is that we’re going to lose through the price increase maybe a 5%, 6% until the end of the year that would be — would lead to a fact that we are still beyond the 700,000 at the turn of the year. I guess that is kind of our internal expectations.
You never know. I’m pushing personally very, very hard on this hybrid platform that I’ve mentioned in the — during my statement. I think that will help because we want these customers when they leave they typically leave to IP 50% leaves to IP and we are not in full control whether they change to the local fiber provider the Deutsche Telekom, Giga, Satu or any other. So I think we take our typical market share, but we cannot make — we’ll or — cannot really take a benefit out of the fact that we are currently the provider on terrestrial. Anything on free cash flow, Ingo?
Ingo Arnold
Yes. Yes. I think, Yemi your calculation definitely is reasonable. Even we have one-off this year. We do not have these one-off next year. There should be an increase of 10%. So it’s an easy calculation. But we have not — or we just started the budgeting process here for next year and I have not discussed with the operational people if there is any need for additional CapEx next year. I do not know now. And I do not have any idea what this could be at the moment to be quite frank here. So it is possible that there will be an increase, but I think we have to wait and see a little bit.
On the other hand and I already discussed it during my presentation. In the last 18 months, we heavily decreased the figure — the factoring figure which is not part of the balance sheet. And I think here also at the moment, we have €50 million in factoring. And so, if there is some room in the free cash flow next year, maybe and it’s not yet decided, but maybe I used part of the additional free cash flow at least part of it, to reduce the factoring figure further, but we have not yet decided. But your calculation, definitely is correct.
Yemi Falana
Thanks. And maybe one quick follow-up. It seems like you’re trying to push harder with waipu.tv, how much will supply constraints be a limiting factor on your ability to invest in growth. I know you flagged it through the second half of this year. Do you expect kind of full normalization into next year, or do you think that’s going to continue to be a limiter, on the growth from here? Thank you.
Christoph Vilanek
Yes. Thanks for the question. It’s a good one, actually. So the first thing, we did now is we found out that the — one of the constraints was that we had a certain generation of WiFi chips. We have upgraded it, because the supply on the later one which is $2 per unit more, is better. Currently, we could or we can order with a three months’ notice period we get about 50,000 units, which means that we are we have now done the full order for the migration of the existing customer base with Deutsche Glasfaser.
We expect at the turn of the year to have a significant stock and then distributed during Q1. And we are more or less on a daily basis, recalculating the forecast. As I said, currently we have a three-month period, which looks reasonable. And compared to other businesses, it’s rather fast but we cannot really determine whether this this holds. We have also from the suppliers, we had some indicators are mentioning, that if we increase early orders that we would be in a privileged position. But it’s a moving target. But I do not expect a slowdown from that, because we are preparing.
Yemi Falana
Thanks for taking my questions.
Operator
Thanks so much, sir. We’ll now go to Polo Tang calling from UBS. Please go ahead.
Polo Tang
Yes. Hi, there. Thanks for taking the questions. I have two. The first one, is really just the comment to your guidance. If you look at the midpoint in terms of your EBITDA guidance, it implies that your EBITDA growth will slow from plus 8% in the first half to something like around about plus 2% in the second half. So are you being conservative, given the macro environment, or are there factors to explain the slowdown in terms of EBITDA growth? And my second question, was really just could you maybe just talk through the competitive environment in mobile in terms of, what you’re seeing currently? Thank you.
Christoph Vilanek
Well, on the first one, I think if you have listened well to Ingo and myself, you both said that we see it more on the upper end of the new spread. So I’m expecting the — at this moment, we are expecting EBITDA being beyond the €470 million line, which would immediately imply that there is a growth maybe not the same. And if it’s the same growth, we are more on the upper end. We don’t think it’s uncertainty, in a sense of unmanageable unforeseeable circumstances. I think it’s just a matter of mentality and tradition in this house, that we love to slightly over deliver instead of rolling back in December and explaining that things have changed, for whatever reason, I don’t know German angst led to the fact, that we have a shutdown of all the retail in November and December.
And this happened, yes, it can. And then we will still be beyond €470 million. And if everything is perfectly well then, I think your — your question is valid, why should we not have same trajectory in the second half of the year than the first one. But maybe it’s a mentality, that we prefer.
On the competitive environment Well, I mean I already commented a little bit on Telefonica. I think we’re doing a great job overall — to be honest I think affected [indiscernible] was already leaving is certainly a little damage to them because, he is the father of a lot of these improvements. Even if it was not concerned it seems to go back to Deutsche Telekom. So I think that you can argue, whether this is — has a negative effect on TEF and positive on DT, I don’t know.
But as I said he did a lot of changes, and made a great job there. Still we have to — we have to appreciate that the TEF/D network is much better now, in connect test et cetera you can see that. And I think they are in full control of what they’re doing and the growth tells us, that they’re doing a good job. Vodafone [indiscernible] is only starting on first of September in his active role. They have changed a lot of individuals in the management team, which is an indicator on the one hand side that we want to change something, but also that they need to change something on the TV side.
They’re losing customers well, which is obvious to me because there’s new technology out there. And since they have — aside from satellite, they had 40% market share. I mean fact that they lose a little bit is clear and satellite is not reporting on their performance. So, I guess it’s just a technology shift. I expect from the new team that they will — and that this was the early conversation show us they will start to rationalize a little bit more their business.
But I think they have a challenging 12 to 18 months where they will be a bit passive compared to the others because they need to sort out their things. And DT is doing really well. I think different to the past is that — we’re doing well in Germany but they are not taking this as granted and they are not starting to overspend based on success. I think that is the difference from the way Srini Gopalan is managing the company and some of his predecessors. I think he has a brilliant idea on what’s possible and where to put the money and how to push it and not overspend.
And 1&1 we see them in two fields. The observations is two fields on the very low super discount. They’re still aggressive. I think that’s not where they make money. I think that is just want to take in customers in order to migrate them later on to their own network and to fill it. But with €299 and €399 per month you cannot really make a margin.
And on the reality 1&1 first the other ones are the Drillisch ones. On the real, 1&1 offers they — we saw them increasing the prices. So on the big 10 gig, 18-gig unlimited — I mean their unlimited is 40% more expensive than ours on the same network. I think they are busy with building the network. They are — they are preparing the launch of their 5G — own 5G offer.
I haven’t spoken to Ralph Dommermuth recently in order to understand when exactly the launch date will be, but everything that I hear is that, they’re working hard. And we have flagged that we would be ready to start with them as soon as they have the availability of the SIM cards and their network. So, I think you could say, overall there’s no big changes, rather stable environment and I’m expecting this to remain the fact for the next 12 months. Thanks.
Polo Tang
Thank you very much.
Operator
We’ll now move on to Mr. Martin Hammerschmidt calling from Citi. Please go ahead sir.
Martin Hammerschmidt
Hello and thank you for taking my question. I have three please. The first one is on the use of excess cash. I think previously you mentioned that your first priority is to invest it into customer growth and especially on waipu. Now that waipu is growing nicely and getting more traction brand recognition etcetera and you mentioned that maybe marketing spend can in fact come down a little bit. I was wondering what are sort of your current thoughts on possibly new share buyback program or other forms of shareholder remuneration?
And then second one is sticking with waipu. I mean you said you take the homework for the EBITDA to give us a bit more color on that. Could you share with us though what the current EBITDA contribution of an average waipu.tv customer is? And should that margin increase or sort of be a bit diluted, given that you will have more customers coming from Deutsche Glasfaser?
And the last question is on the freenet Internet launch to lease €29.99 per month. In terms of profitability profile is that changing depending on the technology — or is that sort of stable? And if you could maybe provide us with some of the first data points in terms of customers et cetera and NPS? Thank you very much
Ingo Arnold
Maybe I start with the question on the excess cash. I think it is better I can only repeat what we already said during the last quarter and yes and you are totally correct. It is our first idea to invest the cash flow into the business. And — we ask the management of waipu to invest whatever is possible to grow the base. This is something what they do at the moment. And this is something what you saw in the figures, that the increase of the EBITDA was not as high as the increase in the gross profit.
So, we did some investments into marketing and so on. But up to now, the investments are not that big and we are looking for chances to find ways to invest it reasonable in the growth because this is — it is not only to invest it, it should make some sense to invest it and this is what we are looking for.
And so, it is still the answer that first idea to use the 20% of the free cash flow which are not paid as a dividend to invest it into the business. And we are talking around the company and wherever we see good investment possibilities we will do so.
Second, there is still the M&A side where we are discussing projects. I think there is nothing hot at the moment, but this is something what we do for years and in all time. But up to now, there is nothing to invest. So, I think we have to — after the year then we can see what happened and what ideas we had and what ideas we will have. And then we can decide if there is other possibility to invest the 20% if we have not used that.
And there is a possibility to invest them into reducing the number of factoring. There is the possibility to reduce the number of net debt. And yes, there is also the possibility to do a share buyback, but I think it is not on the list at the moment, and I do not expect anything to happen here during this year. But, I think first of all we have to generate the cash flow, and then we will discuss what will be possible with the additional 20%.
Christoph Vilanek
And maybe I would like to add on a daily basis, with the situation on capital markets, on PE markets and on DC markets on valuations of tech companies. I mean obviously, there is more opportunity. So, I would love to have a bit more cash on balance sheet. Also, in order to signal the market that we would have the immediate firepower to do small things here and there. I’m not claiming that there is something, as Ingo mentioned, there’s nothing reality today but we see that the offers we get and some of the opportunities get more attractive, because of a more rational valuation environment than we saw in the past.
On the other question, the way I understood your question was, what is the impact of different business models in the TV, IPTV market? Well, I mean for sure, the biggest gross margin is generated if we fully own the customers, if we acquire the customer and we manage the customer, which is the vast majority of today, and I think it will remain the majority. The margin is a bit less with, for example, Telefonica working with our product, we get — need the payers — well, we hand over the content cost and then we get an additional margin for the service. And on a monthly OpEx or gross margin level, this is less attractive but we do not do investments in tax or subsidies and so on — so forth.
So I think on a, let’s say 20 months basis, it’s somewhat the same. And if the customer lifetime is way longer then these customers are less contributive than our own ones, but I think the mix is fair. At this day and — the structure that we have chosen with Deutsche Glasfaser is the same. And they do the billing, they pay for the — implicitly they pay for content, also for content price increases, if necessary. And then, we get the margin for the service and the handling, CRM, et cetera, et cetera.
There’s a couple of things which we do not share with this B2B2C partners, for example, revenues generated out of advertising, and if I add them, I mean you can add them on both ends. But I think still the gross margin we do with third party is highly attractive and it’s — if you want to say so, it’s the price for scale, but it’s still an attractive margin, which is attractive two-digit. You will understand that I will not disclose the details, because then some of the partners might take the opportunity to call us.
Ingo Arnold
And question current contracts.
Christoph Vilanek
But it’s — both is very attractive, and the focus is on — we always want to keep the majority of the subscribers on our own — fully-owned billing and CRM path.
Martin Hammerschmidt
Thank you. And on the Internet possibility profile of the various technologies?
Christoph Vilanek
Yes. Yes. Sorry. Yes the answer is you’re right. They are different. It was a long discussion internally whether we should differentiate prices or potentially differentiate prices by access technology, but we think it is the uniqueness of the product that we don’t do it. And we have done an average of all the — and in anticipation of future split. And we said that with €29.99 we will have an attractive margin on any technology.
From today’s perspective, I would say the most attractive would be the ordinary capital [ph] and the mobile. But you never know what the wholesale prices on fiber will going to be in two year’s time, I think there is also changes yet to be seen.
Martin Hammerschmidt
Great. Thank you very much.
Operator
Thank you sir. We’ll now go to Titus Krahn calling from Bank of America. Please go ahead.
Titus Krahn
Good morning everyone, and thanks for taking my questions. I got just a couple partly follow-ups if I may. The first one is just coming back on your broadband offer in the €30 price point, which is valid across all technologies.
Just trying to understand a bit better, what kind of speed does that imply? Does it mean the speed you reach for each of the product is pretty much the same even with fiber cable and DSL?
Second question also a follow-up on the working capital and the reduction of factoring, which could kind of even continue in the next year depending on the cash availability. Why did you really focus on this right now? Do you think there is an impact from higher interest rates on you targeting to reduce the factoring going ahead?
And maybe if I may just a third quick question on your partnership with CECONOMY. You already talked about a generally positive outlook for services and solutions within the business. But on the other side the operator quite recently reduced its for your guidance citing weaker demand in the DACH region, as a region I just wondered, do you see a similar impact on your business in the MediaMarktSaturn stores with let’s say lower footfall, or do you see the mobile business quite insulated compared to other parts of the MediaMarktSaturn stores?
Christoph Vilanek
Yeah. On the first one, €29.99, today it’s a 100 Mbit, but the throughput or the capacity will depend on the technology. And I mean if you can — if you really can deliver a constant 100 Mbit we all know that this is highly sufficient for private use. But as I said, I mean if this would be a fiber-to-the-home then we would adapt it and we would maybe give it to 250 or 500 of Mbit or whatever is available. But I mean given the price point, the variable in the procurement will be the speed. So I think it’s — you rightly pointed that out.
And on CECONOMY, I mean they are suffering like any other in entertainment technology TV. I mean, you all have access to GFK numbers. I mean, TV is down I think by 30%. White goods are down, because they have been replaced for the past 18 months in German households. So I think this — yes this is where they suffer and this is where we don’t generate the necessary volume and margin. It’s — the footfall is coming down, but the conversion is higher. So you see that people on purpose go there and purchase the tickets, the tickets per visit are increasing.
In total I mean in our business we do not see any impact. People do not go these days to MediaMarkt. They did not do it for the last couple of years. They did not go in and then suddenly realize that they might want to have a mobile contract and guess what they also take a hardware. That’s not how things work. People go there they see an offer, they do the research and they realize that MediaMarkt is doing a good offer and this is when they get up and go to the shop.
So I’m not — we are not seeing an impact from the other end and we are not expecting anything from the future. Maybe the opposite some of the new formats such as the Lighthouse, which I think the first one will be opened in Berlin in September. I mean, these locations are attractive for us. We think that they will — they might even perform a bit better, because there is more and more — there is a bit more footfall but even those people will not go there or like in the museum or for entertainment but for shopping. So yeah, I think the answer is the damage from the market is on TV and entertainment, and white goods are not in our business.
Ingo is going to comment on the factory.
Ingo Arnold
Yeah. I think as we — as you know we already started to reduce the factoring at the end of 2020. That time we had more than €100 million in factoring. So we reduced it dramatically and to be quite open. When we started, we were not aware of the situation that there will be an increase in interest rates. So I think definitely what we all time said is we would like to optimize our balance sheet. Now you can argue that factoring is not part of the balance sheet, but all-in it’s part of our financials and we try to reduce the risks what we do have in our financials, and therefore we decided to reduce the factoring. And one risk of high factoring position definitely is an increase in interest rates, but this would — it was not that we foresee this development. But yes we wanted to reduce risk. And this is something what could be also reasonable in the future but we have not yet decided so reduced it and this is the situation today.
Titus Krahn
Thank you very much.
Operator
Thank you, sir. We’ll now move to Adam Fox-Rumley calling from HSBC. Please go ahead.
Adam Fox-Rumley
Thanks very much. I have three questions briefly quickly too. I wondered, if we could talk about the relative gross margin of the FUNK and FLEX tariffs and whether it’s worth pushing those a little harder. From Ingo’s mobile slide it looks pretty positive to me. So I just wondered if there are any trade-offs for doing — against doing that?
Secondly, I had a question on the phasing of the customer growth with the Deutsche Glasfaser transition. I think you’ve said, 250,000 or so in the first six months of next year. So perhaps you could just confirm that. And then, I can ask if there are any commitments from the Glasfaser side to you, to then try and cross-sell into the remainder of their base. And I’ll leave at that. Thank you.
Christoph Vilanek
Yeah. On your Glasfaser question, what I said and thanks for double checking. I said that, I’m expecting 250,000 I would call it an organic net adds next year for waipu. And inorganic would be people that are already using a service with anybody else and will be switched.
So one of this role model would be Deutsche Glasfaser customer who is currently at home consuming TV, access through a set top box and we will straightforward replace the set top box and tell the customer, just please change the hardware and continue the service.
The 250,000 that I’ve mentioned, this is not all Deutsche Glasfaser. I think Deutsche Glasfaser has never really disclosed the exact number of the existing TV subscribers. This is why I need to continue, because we have agreed on confidentiality, but I said it’s a six-digit number.
So this is how it works. And consumer has it. We sent our hardware or — the provider in that case Deutsche Glasfaser is sending it that “Hey guys, new technology, please replace it. If you want to return the old one you can return it to me. We will raise it for you.” And overnight it will become our customers. This is how it works.
Ingo Arnold
And maybe concerning — I don’t know, you got your question right Adam, but to talk about the gross margin, yes you are definitely right that. In mobile, as we change the structure of the revenues, as we increase the part of the service revenues in our revenues so we see stable mobile revenues, but we optimize the structure, because we have more profitable revenues here now.
Therefore, we could increase the quality of the revenues. And therefore we could increase the gross profit. So I think this is the follow-up of the structural changes. But I’m not 100% sure if this was the question.
Adam Fox-Rumley
Thanks Ingo. I was wondering about the, FUNK and FLEX tariffs in particular. I mean, I know they’re not a large portion of the volume but it looks like they’re contributing a fair amount of gross margin, if I read your slide right.
Ingo Arnold
Yes. No. You got it okay. Yeah, definitely the profitable — and we do not have any acquisition costs there the profitability is relatively high. And yes, but the share is small because the number of customers is small, but we are trying to increase it further. But definitely the profitability is high even with the attractive pricing structure what we offer here.
Christoph Vilanek
Yeah. But in a sense, I think that the delicate balance. As soon as we start investing over investing into advertising or acquisition costs, then the profitability is on the same level as the SIM-only. So that’s kind of the decision making, you see an attractive gross margin. You’re saying well why don’t we do more of those? Well, if we do more of those, we need to spend money. And then, to whatever level the gross margin is eaten up.
Adam Fox-Rumley
Yeah. And the last one…
Ingo Arnold
Yes. If we take 5% like-for-like it’s a typical SIM-only margin. And then, all depends at the end of the day on how much we spend by acquisition and that’s the best.
Adam Fox-Rumley
Could I just ask one follow-up on the hybrid platform that you’re thinking about for the freenet TV to the waipu.tv platform. I mean, seems like a really interesting challenge to see how many of those customers you can keep. So have we done any work looking into that base, which I assume is fairly high inertia versus a more tech-savvy kind of waipu.tv basis. Do you think there is a good overlap there?
Christoph Vilanek
Well, what we keep doing is that we are – we do normal research like what people do and you’re always careful on your existing customer base because you don’t want to wake them up and push them away. So the biggest source of information is those ones that cancel the contract or don’t renew it. And we ask them what are you doing in the future? About one-third of those people say “Well I going to continue using it but I – I’m not happy to pay for private channels because my usage of private channels is minor.”
And if they change technology then 50% goes to IP and they tell us they go to IP. That’s the fascinating thing. So what you said are the less technology driven or tech-savvies. It’s interesting that they really say “I’m moving to IP, I’m switching to IP.” And the other ones that switch technology is basically because they move their flat, moving into a flat where satellite or cable is already available. And then it makes no sense for them to basically double the price by using a technology, which they have already included in their lease or in the price of the flat. So it definitely seems to be attractive.
The idea that we have is if – let’s take those two groups. The one that is switching to IP, where we make them switch or enjoyed IP access prior to the switch by giving them a hybrid platform. And on top, if they would have that platform and they would move into another flat where a cable was available they could still use the same technology the same dongle. They would just plug the cable connector into our dongle instead of straightforward to the TV set. So that is the idea behind it.
So that silently people consume our IP services. And whenever they change or switch they realize “Oh my God something is gone. Where is it going?” And then they realize okay well that’s the IP thing which is integrated. We haven’t tested this yet yes. But I mean to me it sounds reasonable and the technology is almost ready. So I would not at all predict the impact because it’s too early but the – I think the logic of the product is compelling.
Adam Fox-Rumley
Very interesting. Thank you.
Operator
Thank you, sir. Ladies and gentlemen, as we have no further questions, I’d like to turn the call back over to Mr. Christoph Vilanek for any additional or closing remarks. Thank you.
Christoph Vilanek
Well, thanks to everybody. Thanks for your interesting questions. Thanks also for the preparation that our internal team did. I think that’s a very good way to handle this. Some of you asked the questions the night before and in the morning. It gives us a bit more prep time but it also gives us additional indications on where your interests are and where your doubts, hopes and worries are. So thanks for this very cooperation style and constructive style to work together. Thanks to Tim and his team for the preparation and thanks for your time. Goodbye.
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