Deutsche Telekom : 2024 1st quarter Transcript

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EDITED TRANSCRIPT

DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

EVENT DATE/TIME: MAY 16, 2024 / 12:00PM GMT

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Christian P. Illek Deutsche Telekom AG - CFO & Member of Management Board

Hannes Wittig Deutsche Telekom AG - Head of IR

Timotheus Hottges Deutsche Telekom AG - Chairman of Management Board & CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Adam M. Fox-Rumley HSBC, Research Division - Analyst of Global Telecoms, Media and Technology Research Andrei Dragolici Kepler Cheuvreux, Research Division - Equity Research Analyst

Andrew J. Lee Goldman Sachs Group, Inc., Research Division - Equity Analyst

David Antony Wright BofA Securities, Research Division - Head of Developed EMEA European Telecoms Equity Research and Director Georgios Ierodiaconou Citigroup Inc., Research Division - Director

James Edmund Ratzer New Street Research LLP - Europe Team Head of Communications Services & Analyst

Joshua Andrew Mills BNP Paribas Exane, Research Division - Research Analyst

Ottavio Adorisio Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst

Polo Tang UBS Investment Bank, Research Division - MD & Head of Telecom Research

Robert James Grindle Deutsche Bank AG, Research Division - Research Analyst

Stephen Paul Malcolm Redburn (Europe) Limited, Research Division - Partner of Communications Research

Usman Ghazi Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

P R E S E N T A T I O N

Hannes Wittig - Deutsche Telekom AG - Head of IR

Good afternoon, and welcome to Deutsche Telekom's Q1 2024 Conference Call. As you can see with me today are our CEO, Tim Hottges; and our CFO, Christian Illek. As usual, Tim will go through a few highlights followed by Christian, who will talk through the quarter in more detail. After this, we have time for Q&A. Before I hand over to Tim, please pay attention to our usual disclaimer, which you'll find in the presentation. And please also note that this conference call will be recorded and uploaded to the Internet.

And now it's my pleasure to hand over to Tim.

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

Yes. Thank you, Hannes, and welcome, everybody, to the first quarter 2024. And if you have seen it, it was a very good start into the year, very predictable and reliable numbers from all the businesses we're having. We are very happy on the track of our stated targets. Our first quarter financial results are very consistent with the multiyear trends that we showed. And that was well at the 4% service revenue growth, a 7% organic EBITDA AL growth and a 15% growth in adjusted earnings per share. So I really like that.

T-Mobile was able to raise its full year guidance, and we are reflecting this in our group guidance today. T-Mobile announced the creation of a fiber joint venture with EQT, which targets 3.5 million households in the U.S. by 2028 and T-Mobile receives the necessary approvals for the Mint transaction and finally received the 2.5 gigahertz spectrum from the Auction 108. The German regulator made a proposal on the spectrum extension, which is now being consulted upon. So I think everything is working in direction which we were foreseen, and we are coming along very happily with these topics.

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

Let's take a closer look at our financials on Page 5. First all segments are contributing to our growth. Second, organic growth, service revenues grew up by 4.1% in the first quarter, which is even a bit faster than last year's growth of 3.6%. Organic ex-U.S. service revenues grew by 3.6% in Q1, again, marking acceleration. And as mentioned, organic group growth EBITDA AL increased by 6.9% in Q1, which is the same as it was 1 year ago. The foundation of our growth is our network leadership. In the last quarter, we passed another 500 million additional European homes with FTTH and now reached 17.5 million. This is up 3.6 million year-over-year. And in Germany, we now pass 8.2 million homes with fiber and Europe 9.3 million.

In the U.S., our 5G leadership is confirmed by all tests. And in Europe, our 5G coverage stands at 68%. And in German mobile, our network leadership remains beyond any doubt. Our strong customer growth continues, both in the U.S. and in Europe. T-Mobile added nearly as many postpaid customers as last year. Over in Europe, we managed an acceleration in mobile net adds and TV net adds also accelerated, but the broadband net adds were slower than last year. Christian will talk about that one later on in a bit more detail.

Moving on to ESG. Despite strong growth in data usage, we further reduced our energy consumption for the group. We recently became the first telco in the world to use large-scale battery storage systems for renewable energies. And our latest campaigns against hate speech received further acclaim. At the Capital Markets Day, we will provide you with a more detailed update on our sustainability ambitions.

With this, let me move to our guidance update. With the Q1 results, T-Mobile has narrowed its guidance range, accounting a midpoint EUR 50 million increase for EBITDA AL and free cash flow. Today, we are reflecting this in our group guidance. We remain comfortable with our ex U.S. guidance for EBITDA AL and free cash flow, which remains unchanged. Our overall group guidance for '24 also remains unchanged.

And with that, I'll hand it over to Christian for a deeper dive into the quarter.

Christian P. Illek - Deutsche Telekom AG - CFO & Member of Management Board

Thanks, Tim, and hello from my side. As usual, I'm going to start with T-Mobile U.S. and let me start with service revenues, which were growing at 3.5%, which is very similar to the last 2 quarters. The core EBITDA growth remained very strong at 8%. But actually, now forced ranking came in second after our European segment, which grew at 8.1%, which you're going to see later on. Total revenues are still impacted by lower equipment revenues. So this is going to be a pattern which we also expect for the future.

T-Mobile's customer growth is super strong. The postpaid phone growth was basically on the level of last year and is absolutely industry-leading. The high-speed Internet customers came down by more than 100,000, but that was guided because we have ended our promotional activities on HSI. With its Q1 results, T-Mobile also raised its customer guidance by EUR 150,000 to EUR 5.2 million to EUR 5.6 million.

Moving on to Germany. Organic revenue growth was plus 2.6%. Organic EBITDA growth was at a stable 3%, very consistent with the previous quarters. So we are all well on track in the German segment with regard to what we want to achieve for the full year guidance this year. Total serving revenues were consistent with last year's performance and the mix, mobile was very strong at 3.4% year-over-year, and that was driven by customer growth as well as by upselling. The fixed service revenue grew by 1.2% year-over-year, which was at the lower end of the range and it's very much due to phasing in public sector projects. So we expect a stronger performance for the remainder of the year.

As you can see on Page #15, broadband revenue growth remained strong at 4.2%, and that is driven by both ARPA growth as well as volume growth. Wholesale access revenues growth is slightly weaker sequentially and but remained in a positive territory. We also expect positive wholesale access revenue growth for the remainder of the year.

Page 16. Our broadband customer performance was slower this quarter. To be honest, nobody is happy about this. It is not surprising because so we said it also in the last quarter there was a very weak competitive performance, and we're seeing that competitors are moving in a better territory. You've seen that with 1&1. You also see it with Vodafone. And if you basically add all numbers up, we're still above the long-term target of 40%, but it's below what we have achieved in the previous quarters, and we're working to reverse that trend.

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

We're also seeing an impact on the increased focus on FTTH because you know that there is a lagging effect between signing to a contract and getting the access line on FTTH. As mentioned, on FTTH, we have an increase of 93,000 customers, and we expect this acceleration to continue. So if you compare '23 versus '24 and '23, we had 300,000 FTTH customers signing up to that service. We expect in the vicinity of 450,000 in '24.

Also on the TV net adds, we improved. We have 73,000 new IPTV customers. And on top of that, we have 53 over-the-top TV customers. So in total, it's 126. We have now 4.4 million IPTV customers and 350 on top, 350 OTT customers on TV. We're also pleased to announce a partnership with the Association of German real estate managers, which help us to support our services in promoting their services, and that is a very nice complement to the partnership, which we grafted last year with the housing association organization, JDW. Our mobile commercials remain strong. As you can see, we had 280,000 net adds. This is very much consistent with last year. And I think if you add all the numbers up, it's more than 50% of the total market net adds in the first quarter.

With that, I move to our European segment, which is actually the star in Q1. The organic revenue growth reached 5.7% on a year-on-year basis, and it was very much supported by service revenue growth. In Greece, we had a benefit from a contract which was related to the European recovery program. The organic EBITDA growth was 8.1%, as I said early on, slightly higher than the U.S. But note that the EBITDA growth is very much driven by net margin growth, but also we had a tailwind from lower energy costs, which actually led to that results.

And I wouldn't extrapolate this into the outer quarters because we're not sure whether this basically maintains on this level. And you know that in '23, the performance of the European segments when it comes to EBITDA growth was continuously growing, as you can see on the chart. Our customer growth in the European segment remains strong, very strong 80% growth in mobile, solid numbers on broadband, TV net adds were about the same. And we had a reduction on the converged customers, but it's very much related to a change in Slovakia and how to count those customers and they are now being treated as mobile-only customers, and therefore, we had to deduct our installed base for 100,000.

Moving over to T-Systems. What you see here, we had a pretty good start in the year. We're growing revenues on a reported level by almost 5%. You see there's a slight increase in order entry. But to be clear, order entry is going to be the main challenge also for the remainder of the year. And we have an okay EBITDA growth on a year-on-year basis, on an organic basis 1.5%. So that basically concludes my operational review, and let's look at the group financials.

What I said earlier on, our reported financials were impacted by, obviously, the Tower transaction, which we conducted and by FX. The headline revenue growth was negatively impacted by handset revenues, which came in lower relative to last year and was very much driven by the U.S. On the organic service revenue, actually, our growth is higher than what's been reported. It's 4.1% versus 2.9%. And the reported net profit was growing by around 15%. This is a rounding issue. The precise number is following on the next page.

Turning a look at the free cash flow. On the next page, you see that the free cash flow was growing by a good EUR 100 million or 3.6% year-over-year. That was driven by an increase in cash flow from operations, a reduction of CapEx, very much driven by the U.S. The U.S. came down year-over-year by EUR 400 million, whereas the ex U.S. is predominantly Germany, was higher relatively to '23 by EUR 300 million, but this will basically face adequately into our guidance over the course of the year. Our adjusted net profit was up by 14% on an annual basis on year-on-year basis. And the good thing is it was very much driven by adjusted EBITDA. So everything is pretty much coming from the operational business.

Moving to our leverage. Despite some headwinds, which you can see on that chart, that's the net debt ex lease chart of USD 2 billion coming from the U.S. dollar. You see only an increase of USD 0.7 billion on a quarterly basis end of Q4 up until end of Q1 and that leads very much to a very stable leverage of 2.3, ex leases or 2.81, including leases. So therefore, I'm going to complete my review and hand it over to Tim.

Q U E S T I O N S A N D A N S W E R S

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

Thank you. Let's go to the Q&A. Okay. So with that, we'll start the Q&A. And if you'd like to ask . (Operator Instructions) And I think the first question we have is from Adam Fox-Rumley at HSBC. Adam.

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

Adam M. Fox-Rumley - HSBC, Research Division - Analyst of Global Telecoms, Media and Technology Research

I'd like to ask you, please, for your thoughts on BNetzA's recent consultation document on spectrum. Can you explain what you think is required of you when it comes to making an offer, if at all [timed lines]? And can you also put your mobile network coverage plans into context of what the regulator is asking for by 2030?

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

Okay. Thank you. First, we welcome the proposal for the spectrum extension, even if it's only 4 or 5 years at this stage. However, the inclusion of an area coverage of 99.5% with 50 megabit per second appears misguided. This is, I think, we don't know which kind of numbers the (inaudible) is referring to. The initial aim should be to achieve as much coverage as possible for German consumers. And you know that 30% of Germany is forest and 6.5% natural reserves and it's already very hard for us to get access or to get sites in this. And we do not have an understanding at how this should be implemented. Independent from the additional money which is required. It is as well very difficult to get approval for these areas. So I think with regard to spectrum handed over to Eins&Eins at all, I do not see why this is happening. I do not see that he needs that spectrum.

The company has so far only connected 227 sites instead of 1,000 sites that were required by end of 2022. There is no reason to reward this misconduct at the expense of others that have invested in coverage and have invested to the benefit of our consumers here in Germany. So therefore, we will do everything here on our side to defend our position on this low-band spectrum. It's very clear because our customers are using it and our leadership, both on capacity and speed is as well based on this low-band spectrum, which is part of the whole story, which we are named.

So I would say, in some. First, positive note, extension is coming. Second, I think the area coverage is something we have now to use the next weeks where we have this consultation phase to understand better what they mean and how this can be achieved because the (inaudible) made that statement that we're already almost there. I don't get that.

For us, we see ourselves at 91% area coverage and not 99.5% and that is additional money needed if we would have to fulfill this target. But let's going to this consultation phase, which is 6 weeks from now. I think again, as a metric benefit to Eins&Eins, I do not see any kind of reason, nor I understand the background of this. So let's see where that is coming from, and we will do everything to defend our position.

Hannes Wittig - Deutsche Telekom AG - Head of IR

And next, we have a question from George Ierodiaconou at Citi please.

Georgios Ierodiaconou - Citigroup Inc., Research Division - Director

So my first question is around the KPIs in Germany. And for broadband, I think Christian, you made a comment that you're not happy with the performance, and that's going to improve in the coming quarters. Is it an operational issue? Is there a fiber backlog or something that you are fixing or is it a commercial issue like you need to be a bit more active in the market. And on the commercial side, if you can also update us around the TV side, I guess the next 6 to 8 weeks, could be quite critical on the KPIs there?

And then my second question is, again, on the next 6 to 8 weeks, hopefully, and it's around the union negotiation. As you know, it's been a major issue since the start of the year. We read a lot of different things from our side, and it will be great to get your perspective as to whether you think you're closing in on an agreement with the unions?

Christian P. Illek - Deutsche Telekom AG - CFO & Member of Management Board

Let me start with the commercial performance. I think it's a mixture of 3 things: First, competitors are performing better. And we said in Q4, it was a particularly weak quarter, especially from Vodafone. And you see that there are losses have been reduced and also 1&1 has improved its game

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

coming from negative net adds to basically zero net adds. So we're seeing some competitive also the Allnets are grabbing some of those broadband customers. The second one is we're seeing that the market is maturing to a certain degree. And we have to figure out whether there is a sustainable slower market growth in the market. We don't have the final answer right now, but we're seeing that the market is maturing. And the third one is there are some operational issues, which we did in Q1, which we have to basically -- which we figured and which we will reverse in Q2. So I'm hopeful that whether it's going to be Q2 or the near-term future after Q2 that we're going to reverse those trends. But bear in mind, our net add market share is still around 50%.

On TV, look, first of all, we're happy with the 126,000 TV customers if you combine IPTV and OTT, but if you add up all those numbers also, if you add up the Freenet numbers, obviously, that doesn't explain the TV losses, which you've seen on the cable operator side. So what we're not clear about yet how is cable cord cutting is happening in the German market. This is the one piece which is unknown to us. And the second piece is to what degree Vodafone is actually converting TV-only customers into triple-play customers so that they basically combine this in their broadband numbers. I think these are the 2 unknowns for us, but at least strong hypothesis that both of those effects happen and impact the market.

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

So with regard to the negotiations with the unions, look, we have now 3 rounds. We are in the fourth round with our partners here in Germany. This is a tough environment. We had some agreements in other industries, which were very high. We always have to reflect our industry. We always have to reflect the current structure of our salaries already. And we have to consider as well the competitiveness of our market. The negotiations started in March. We had until now 9 days of strike within the company. It had an impact less on the service side more on the delivery side when it comes to FTTH connectivity and outdoor services, so in principle under control. We made an offer and which was a EUR 2,000 one-off payment and an average increase in the base salary of 7.1% through mid '27.

This consists of a 4.2% increase from January '25, plus an additional EUR 150 from October '25. So it's quite a complex offer, which we made, and it's over 27 months. Now we now increase this a little bit from 4.2% to 5.2% in principle. The unions, again, rejected this offer and the negotiations will continue. So that's where we currently stand. While we are sitting here, the parties are discussing it. Look, we remain comfortable that we find a solution with them in a fair basis. To my expectation, it should be soon because every argument was now exchanged from the 2 sides. And we remain comfortable as well that the final agreement will fit into the financial guidance, which we reiterated today.

Hannes Wittig - Deutsche Telekom AG - Head of IR

With that, we are moving to Josh Mills at Exane Paribas, please.

Joshua Andrew Mills - BNP Paribas Exane, Research Division - Research Analyst

Two questions from my side. The first which is going to be on the mobile trends in Germany. And if I look at your numbers, it doesn't look like you've seen any real pressure from the family plan push by telephone connection in Vodafone, but keen to hear your thoughts on how you think that may be impacting the markets and whether you are considering a tariff refresh or any moves on your side to further strengthen your position?

And then the second question was just on the broader European business, ex Germany. Maybe a simplicity way of looking at this, but when I bring up Charts 18 and 19, net adds are slightly lighter, but we're still seeing an acceleration in organic revenue and EBITDA growth. So are you putting through price increases in some of these markets? And maybe if you could give a bit of color around how those alliancing, how you're actually communicating its customers would be helpful.

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

I'll start with the first one. Look, German market has been intensively promotional in the recent months. And I think this was catalyzed by some really aggressive moves from Telefonica Deutschland since mid-January. You know the campaign which they do 1 for 2 or whatever the name of

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

the campaign is. Telefonica Deutschland essentially reversed its early '22 price increases on a promotional basis and they have extended this promotion until the beginning of July. And there have been some promotional responses in the market as well.

That said, as you can see again in our Q1 results, our commercial and financial problems remains consistently strong, both in absolute and in relative terms, and you mentioned that. And look, why is that? The answer is, first, the market is quite segmented, and these conflicts are taking place outside of, let's say, our sweet spot of the market. Second, this undisputed network leadership, which we have achieved here in the German environment is the best protection against churn. And on top of that, the family plans are highly appreciated from the customer base so this is supporting our growth as well.

So to be honest, I think if we would only differentiate by price, it would be more difficult. But with our brand, with our positioning on the network side, and with the innovative officer which we currently have in the market, it looks quite encouraging how we are succeeding in this market. I still think that there is a lot of upselling opportunity in this market. There is a big market for no frills, which our offer is looking for. There's a lot of, let's say, prepaid mark which we want to bring into the Magenta brand, and therefore, are not so irritated by the battle which is between Eins&Eins, Vodafone and Telefonica going on these days. They should do their (expletive).

Christian P. Illek - Deutsche Telekom AG - CFO & Member of Management Board

So let me answer the question on the European segment. Let me flesh out the 3 most important items. First is still solid volume growth despite the fact that broadband has come down, we saw a significant impact and growth in mobile. The second one, obviously, price increases, which have been conducted in many markets in the European segment are coming through and obviously leading to an increased net margin. And the third one is we have slightly better energy costs relative to last year and that helps us that's accounting for about 2 points of the EBITDA growth. Obviously, it's hard to predict how it's playing out.

But again, as I said early on, don't replicate this or continue this in the next 3 quarters. There is a baseline effect coming from '23, and we don't know to what extent this will carry through, but it will be a very good result on EBITDA, what we're seeing right now internally.

Hannes Wittig - Deutsche Telekom AG - Head of IR

And it's also a portfolio performance. So it's many countries contributing. It's quite spread. One country is pacing a little bit faster. Others are maybe pacing a bit slower at any given point in time but broadly, if you add it all up, it's a very solid performance. We very much expect it to continue very strongly as well.

So with that, we move on to the next question from -- and that's from Polo Tang at UBS.

Polo Tang - UBS Investment Bank, Research Division - MD & Head of Telecom Research

I have 2. So the first one is just a follow-up on competitive dynamics in Germany. So have you seen any changes in terms of how Vodafone is behaving post the change of management of Vodafone Germany? My second question is just on your German fiber rollout. How easy is it for Deutsche Telekom to access MDUs and housing associations in order to upgrade your existing network to FTTH.

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

Polo, I think I answered the first question on the competitive dynamics in Germany with regard to the mobile space. I think Telefonica was quite aggressive or is quite aggressive with the promotions these days very visible on this one. Vodafone, to be honest, that the normal reactions. But.

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

Christian P. Illek - Deutsche Telekom AG - CFO & Member of Management Board

No, I think Polo, what you highlighted in your research which is increased upfront discount, I would consider this a normal promotional measure. And also, I think -- I know that is a common practice in price comparisons to focus on the first 24 months, but I think that is a bit misleading because you have to look at the rate plan overall. And most broadband customers don't leave after 2 years, right? So these are promotional structures that change and vary, but we don't see a fundamental directional change from anyone the German broadband market. And in mobile, I think it's not Vodafone that is driving it right now.

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

We have seen from Vodafone 200 gigabyte on top of the GigaMobil, M&L. We have seen family cards with a discount. We have seen 200 gig for additional young segment, and we have seen the unlimited for all, which is to family cards, unlimited data on all cards of the whole duration of the contract, which was there, but they were limited to a period of time to attract the market was not something which was new. So that is what we say it's promotional. But from a Vodafone angle, I would say they are positioning themselves with the new management now and Telefonica, I read the way that they are doing everything to take customers away from Eins&Eins to keep them in their grid.

So that is how we read it here. But as you can see, both on the service revenue side, we were growing by more than 3.4% and as well from the customer net add number, we were quite strong. And industrial-wise, Congstar was very strong as well. So it is not that -- it looks like this whole movement were taking place in another market. But we are well positioned.

Christian P. Illek - Deutsche Telekom AG - CFO & Member of Management Board

On the fiber rollout question, Polo, 2 answers. Let me start with the privately owned MDUs. Obviously, that's the process bottleneck to get the onerous approval to actually connect to the house. And that is an industry challenge. That's not a telecom challenge, everyone facing the same challenge. On the housing association, I think what we have now basically done is we have entered agreements with 4.6 million German homes. And the retirement of the rental privilege will also allow us to get access to the in-house cabling in whatever direction, whether it's being built by the owner or whether that's been built by us.

So therefore, I think it's super important that we agreed on this GDW frame contract because it helps especially the more smaller housing associations to craft a contract with us because they're not as well equipped as Vonovia or something like this. So this is -- you know that we're basically addressing all market segments. So the GDW contract will help us the retirement of the rental privilege will help us. And again, we are covering already 4.6 million German homes with agreements to get access for fiber.

Hannes Wittig - Deutsche Telekom AG - Head of IR

So we are working on it. And as mentioned before, connecting fiber takes longer, has longer lead times, and that also impacts to some extent, the broadband performance on the margin. So Robert Grindle is next at Deutsche Bank. Thanks, Polo. Robert, can we have your question. I think you are on the audio link.

Robert, can you hear us? Have you unmuted yourself?

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

The bad coverage from BT on the Golf course.

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

Hannes Wittig - Deutsche Telekom AG - Head of IR

It's more the basement. Robert. So maybe we take Andrei Dragolici at Kepler instead also on audio.

Andrei Dragolici - Kepler Cheuvreux, Research Division - Equity Research Analyst

On Germany in CapEx, you had a higher CapEx in Q1. I was wondering is it purely phasing? Or is it more expensive to build? Do you see some headwinds from pricing there. You mentioned a slight increase in CapEx in 2024. How should we estimate the following quarters during the year? And also in the U.S., since you're moving a bit into fiber, do you see the market going more towards convergence in the midterm? And are you trying to position yourself on that segment?

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

I'm starting with the U.S. and with the convergence question here. And look, if you look to Europe, if you look to the world, every market is different when it comes to catching up on the convergence game here. And therefore, the quote for the U.S. market for this big market is out. So it's too early to say either or. We believe there is an upside for us, a revenue upside for us, and the profitability upside for us because we have seen that with our distribution, with our brand, we can attract the customer segments in the broadband market.

And we're doing this already in the high-speed Internet, and we do that already with some of the partners here. And therefore, we are now testing whether we can do this as well with fiber from Lumos over the next years. And looking to the business case, market build-out costs are almost the same like in Germany, but the ARPA is significantly higher. And therefore, the profitability of this whole thing looks quite attractive using our infrastructure and using, let's say, the distribution network and other things which we have already.

Now is this now getting a full fledged fixed mobile converged market, I don't know. To be honest, let's see, let's test it out, where we are going. Lumos is aiming for 3.5 million houses prospectively. Yes. Your next question might be, is that the first of a few transactions? If the business and the deal is good, yes, I would be open to consider, but it's too early to say when and who might be the next target. There are a lot of opportunities in this environment, which we are looking into this one.

So therefore, this is a growth optionality for us. And I said earlier already, it is not must-have that we own the infrastructure because we have no infrastructure yet, and we're looking to a partner who is co-investing with us in the infrastructure. And we are then the preferred or partially exclusive distribution network for this product. It helps us to keep our growth engine running.

Christian P. Illek - Deutsche Telekom AG - CFO & Member of Management Board

So on the question on CapEx, let me -- first of all, and you see it on Page 29, where you have the comparison on ex U.S. free cash flow where we have an increase of CapEx by EUR 200 million. This is very much due to front-loading and phasing, and it will wash out over the course of the year. By the way, same holds true for the working capital figure. So we're sticking to our EUR 3.5 billion guidance.

But I think what we have to acknowledge is there is inflation impact. And I think the biggest impact will come in the future on contracts which we have concluded on at the peak of the inflation and where the build-out is happening in the future. So I think there's something which we have to do on our side to increase the efficiency, to basically increase the shallow digging share, to have a process improvement within our build-out, to create competition among the different build-out areas to counter fight this inflation effect. But the outlook for the following quarter is that at the peak of the inflation impact hasn't hit us yet, it's yet to come.

Hannes Wittig - Deutsche Telekom AG - Head of IR

That said, our guidance for the German CapEx and the guidance for the German CapEx is a slight increase this year, and that is unchanged. So the first quarter number should surely not be multiplied by 4. It is a phasing effect relative to the full year expectation.

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MAY 16, 2024 / 12:00PM, DTEGn.DE - Q1 2024 Deutsche Telekom AG Earnings Call

So the next question is from Steve Malcolm at Redburn. Steve?

Stephen Paul Malcolm - Redburn (Europe) Limited, Research Division - Partner of Communications Research

And Tim, I enjoyed your views on what Vodafone and Telefonica Deutschland should do. A couple of questions on Germany. I want to come back to Adam's question on the sort of the [BNA] proposals. Would you rather have an auction then comply with the proposals that BNA has come out with so far and kind of force 1&1 to put its hand in its pocket and invest in spectrum and go against you.

And then secondly, just coming back to the comments that Christian made on sort of broadband net adds. I'm a little bit confused. I mean you're doing 50% share of net adds. Do you think you can do better than that? And what are the moving parts to taking that number up? Because I presume that the competitors are going to remain maybe operating better than they were last year, what are the operational improvements you can make? And if growth is just lower, why do you think growth is going to improve from this point? We've seen BT talking about a shrinking broadband market today in the U.K. So just sort of extra color on where you can kind of get back to from the number you printed in Q1 would be great?

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

Okay. Let me start with the broadband question. First of all, historically, we had a higher net add share than 50%. And we said it very clearly also in the Q4 figures, and we are trying to basically improve our performance and I'm not saying we're getting to the same levels as in the previous quarters, but I think we want to improve our net add share. What we can influence since what I mentioned is, obviously, the natural growth in the broadband market.

And I think we have to figure out whether we see a kind of a slower growth in the overall market, which will also impact our net adds on an absolute basis. But there were also some operational issues, which I will not basically be transparent about in Q1, which we can revert and therefore, we're hopeful that we are basically improving our performance on broadband.

Hannes Wittig - Deutsche Telekom AG - Head of IR

Just maybe to add just before you start, Tim, we said 50% share of net adds. So at 39,000, we think the market is about 80,000 this quarter is not very different from the run rate last year, right? So we're just saying the market is fairly mature. We are not talking about a declining broadband market or anything like that in Germany.

Timotheus Hottges - Deutsche Telekom AG - Chairman of Management Board & CEO

I think the one who is building the network will gain the customers as well and defining the share of net adds. So we are building quite consistently and moving on. So I see opportunities for us here. Now going to your second part of the question. Look, the discussion about going into an auction at that point in time, I think it is now less of the way forward. I think it is more the way forward now to make a proper consultation of that paper and find a pragmatic approach towards the aim of the political leadership behind this plan.

I would expect that they amend some of the targets. I expect that we find a solution in this discussion about how the 2.5 megahertz of low-band spectrum is going to be handled. And I expect the build-out of the area coverage is something which should be realistically adjusted here and then not expecting an auction. That is my expectation or my forecast going forward.

That said, we always have to look whether the price we are paying for the extension is still appropriate compared to an auction. And as I mentioned, it looks like quite expensive now. Rights, which we have to pay over this time, plus the build-out obligations, plus somebody has to give up spectrum, plus-plus that doesn't look that far at that point in time, but it's too early to call it a deal. Let's negotiate that within the next weeks until I think end of June and mid of July, and then we can give you a clearer perspective.

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