freenet AG (FNTN) Earnings Call Transcript

Welcome to the freenet AG Conference Call on the Q3 2026 results. The conference is being recorded. [Operator Instructions]. I will now hand over to Robin Harries, the CEO of freenet AG.

Good morning, everyone, and thank you for joining us today. Let me start with the key message for the first 9 months of 2026. Freenet continues to execute well, and we are delivering against the priorities we set ourselves. We are growing our customer base in both Mobile and IPTV. Our cash generation remains strong, and we have made important strategic progress during the quarter. And importantly, our 9-month performance fully supports our guidance for the full year. Let me highlight 5 things from the first 9 months. First, customer growth remained strong, both Mobile and IPTV with each over 100,000 net adds year-on-year. Second, waipu.tv continued to increase to the contribution with around 20% year-over-year. Third, our cash generation remained a key strength of freenet. Cash conversion is above 60%, translating our operating performance into attractive cash flow. And fourth, we have taken 2 important strategic decisions: we acquired the remaining 25% of waipu.tv; and we have signed a term sheet with Telefonica on improved commercial key terms. The key issues between us have been resolved, and we are now working on finalizing the contract. And fifth, our strong balance sheet and the proceeds from the CECONOMY stake allow us to combine strategic investment with shareholder returns, including the announced share buyback of up to EUR 75 million. So overall, I believe we are entering the final quarter of '26 from a strong position. Let me turn to Mobile. Value-over-volume strategy is working. Organic postpaid net adds increased 41,000 in Q3 '26. At the same time, postpaid service revenue increased 1.1% to EUR 480 million. What is encouraging is that ARPU was stable sequentially, and we could even see front book prices went up again. So this is, I think, a good sign and healthy for the market. And when we look at our reselling business, this is also stable. And overall, our objective is not to maximize gross adds. The objective is to maximize the long-term value of our customer base. And I think we see here a very, very healthy postpaid net add growth while postpaid service revenues grow as well. So overall, this looks very healthy. There are a few reasons why we are very confident about Mobile. First, we have a very strong multi-brand mobile proposition. Recent tests have shown the strength of our mobile customer proposition and strong ratings across freenet, HIGH mobile, [indiscernible] klarmobil. Second, front book prices at freenet continued to improve. That's a good sign. This is our strategy. So we see that value-over-volume works. Our -- second, customer base has potential. We optimize our product offering that improves better bundle. We have a more sophisticated churn management than 1 year before and increasingly AI-driven upselling and customer interaction. But the most important development since our last call is our agreement with Telefonica Deutschland. So we have successfully agreed and signed a term sheet on a new long-term partnership on improved commercial terms. This was obviously important negotiation for us. The key commercial issues have now been resolved, and we believe the agreed framework creates long-term value for both Telefonica and freenet. We are now working together on the final contract. It is also worth remembering that freenet continues to have close relationship with all 3 German mobile network operators that remains a unique strategic position in the German market. And -- so we are very happy about the position that we have. So yes, our ambition in Mobile remains clear. We want to grow our customer base. We want to improve the quality of growth. And yes, we are -- we use our AI-first approach and all of that goes into the right direction. Let me move to IPTV. Yes, we -- with waipu, we added another 39,000 net adds. This is also a very solid growth. We are #2 in the German IPTV market. Our offer "Perfect Plus" was named best-in-test for the third time within just a few months. So very strong results. Our customers are happy. The ratings are great. It's -- we believe it's really a very, very strong product. And this is also the result of the independent tests. Yes, when we look at the advertising market, there we saw it was a little bit softer, yes. So since the middle of the year, weaker macroeconomics has affected revenues. But ad impressions remain broadly stable year-over-year, and we continue to win new partners, new agencies. So we still believe this is an opportunity that we believe it will go up again. So overall, we are very happy about the business here and the development. So this brings me to another very important strategic decision. So we acquired the remaining 25% in waipu. Yes, so the initial purchase price was EUR 76 million. It's fully funded from the sale of our CECONOMY stake. The implied company valuation is EUR 300 million, and we have a performance-based part of this year with a maximum further EUR 50 million. So I think it's -- for the shareholders of freenet it's very good, yes. So we will have full growth participation, simplified ownership and yes, it brings more flexibility to us and makes things much easier. Yes. So to sum up, our customer base is growing. Our core Mobile business is resilient. waipu.tv continues to scale. We've achieved an important breakthrough in our long-term partnership with Telefonica and our cash generation remains strong. Against this backdrop, we confirm our full year '26 guidance and remain confident in the strategic and financial direction of freenet. With that, let me hand over to Ingo, who will take us through the financial performance in more detail.

Yes. Thank you, Robin. Good morning, everybody, from my side. Yes, I think it definitely was a very good quarter for freenet. We solved a lot of, let me say, issues that we had to solve. And so, yes, even more successful than expected at the beginning. So we are very happy about it. Looking into the figures. Also here, we see -- we still see the strong increase in revenues. We see a decrease compared to last year in gross profit and EBITDA, but this is more than explained from the negative effect from the Telefonica agreement what we do have and what we discussed several times during the year and which does have a negative effect of EUR 32 million up to now. Very, very positive development of the free cash flow. I will come to it back later on. Moving to the revenues. Yes. Mobile definitely is dominated by the mobilezone integration. So it is not organical, but unorganical. But if you look into the organical figures, it is also very positive. Robin also already mentioned that the service revenue could be increased again in the third quarter. And all in, we see it is a stable service revenue, but slightly increasing. And as you know, this is one of the most important figures. So the decrease in ARPU could be overcompensated by the growth of the customer base here. Moving to IPTV. Also here, we separated some of the special effects what we had. If we just look into the normalized figures, again, we see an increase in the third quarter. And all in, it's a development what we expected. Robin was already referring to the lower advertising revenues. Yes, it was a disappointment, but it is not driven by the company or by the business model. Business model is working quite fine. But this is from the macroeconomic, what we could not change here. But all in, very positive also in the IPTV segment. And this translates also in the revenues of the group. Maybe in Other/Holding, normally, we do not comment that much on this, but we had a special effect last year here in Other/Holding in the revenues. There was an effect from the sale of IP addresses. You may remember on this. And therefore, there is a decrease in the revenue. Without this special effect, it would be also stable here. Moving to the gross profit. Very stable in Mobile again, this is what we saw during the whole year, even an increase in the third quarter. So very positive. I think there is the contribution from mobilezone, which is here for -- I think for the first time overcompensating the effect from the MNO agreement, from the -- and from the lose of the WiFi business here. So I think fully -- I'm fully happy with the development in Mobile gross profit. IPTV, yes, here again, we see a slight increase in the gross profit in the third quarter which would be much higher if we would not have the negative effect from advertising. We normalized here the effect of this media barter, I think we have discussed in depth already in the second quarter. But all in here, yes, it's an increase in gross profit. And for the whole group, as mentioned at the beginning, yes, for the 9 months, there's a decrease, but this decrease in gross profit is driven only by the agreement with Telefonica what we do have for the year. Moving to the adjusted EBITDA. I think, again, we -- if you look into the figures for the quarter, it's again the same reason that we decreased the EBITDA here in the quarter. If we would not have shown the Telefonica effect, then it would be stable and the same on the 9-month period, and we normalize it here in the boxes. If we review the special effects, then it is a totally stable gross profit EBITDA what we see during the year. IPTV, still growing. If you see the normalized effect for the 9-month period, the EUR 30.9 million versus the EUR 24.5 million, then we still have an increase of 26%. So it is growing. It's quite fine here. So I think no surprises from our side, slight disappointment about advertising. But all in, a very good quarter for freenet. Moving to the cash flow, which is even better than what we showed before. I think if we look all in, it's better than last year. It's -- Yes, it's even better than we expected before looking into the chapters, change in working capital. Yes, we EUR 3.3 million better than last year, but we are on a similar level. So what I do expect for the full year, I think at the beginning, we guided something like EUR 40 million for the working capital. I would guide something like EUR 40 million to EUR 50 million now because there are still some unsecurity about how we can -- how the sales work during the Christmas business and in the Cyber weeks. So there is a slight insecurity in change in net working capital. But from today's point of view, from a conservative view, I would expect something between EUR 40 million and EUR 50 million in taxes. I think it's much stronger than we expected. At the beginning of the year, we had not to pay that high taxes that we expected. It has to do with the tax authorities. So we are still waiting on some prepayments which were expected and which were not necessary during the year. So definitely up to the end of the year, the tax figure will be below EUR 40 million. From today's point of view, CapEx, more or less in line with what we expected from the beginning of the year. We invested slightly more than last year. But for the full year, I still do expect something like EUR 45 million, lease payments without any surprises EUR 44 million up to now. Up to the end of the year, it will be the announced EUR 60 million. Interest, yes, definitely higher. We invested into the mobilezone deal at the beginning of the year or at the end of last year. So therefore, we high -- have high -- we have a higher leverage than we had last year. So the volume of our financing is higher. And on the other side, interest rates are higher. So therefore, there will be effects during the fourth quarter, but not unexpected. Moving to our guidance. I think Robin already mentioned that we confirm the guidance today. It is -- to make it clear here, and you also see it in the headline of this page, we have a term sheet with Telefonica now, and it's a very detailed term sheet what we do have. But this is not good enough to put it into consideration here on the guidance page. I think we have -- it is necessary to sign the contract. We are very optimistic here, but it is not good enough to put it in the guidance. We expect positive -- definitely a positive effect already in '26, but it's not possible to incorporate here in the guidance. So what can I say to the guidance? We confirm it. But I think to -- also to quote the obvious things, in EBITDA, we will be at the lower end of the guidance. And in the free cash flow, we will see the upper end of the guidance. This is what I do expect from today's point of view, and it is obvious when you look through the figures. So there are still uncertainties up to the end of the year, but this is our today's view. So therefore, I close with my comments to the charts. Therefore, I would ask the operator now to start the Q&A, please.

[Operator Instructions]. So the first question is by Dhruva Shah from UBS.

It's actually Polo Tang at UBS. Apologies if this has been addressed, but I missed the start of the call. So I have 2 questions. The first one is just on waipu.tv. Can you comment on the valuation implied by your minority buyout? So the EV is EUR 300 million. So that actually implies less than 3x EV EBITDA for 2028 if you meet your midterm guidance. So was there a reason for the low price? Or is there a risk to your midterm guidance? Second question is really, can you comment about competitive dynamics in the German mobile market and what is happening in terms of front book pricing?

Thanks for your question. I will answer both of them first and regarding the valuation of waipu. So I think one of our strengths here at freenet is that we are a strong dealmakers. So for us, obvious, it's a good deal. And we were strong shareholders before that year with 75%. So we had a quite good position. And in the end, I think we were a very good option, alternative and there's no risk related. If you look at the valuation, I think it's a good deal for all parties. But overall, I think we are very happy about the outcome and the price that we paid. To the second question regarding the competition in the market, yes, I think it's still the same dynamics what we saw at the beginning of the year. So competition is disciplined. We see that front book prices go up slightly. We experienced this last quarter again. And if we look at the overall ARPU, it's also stable compared to the previous quarter and then, yes, competitors are disciplined. So overall, market, I would say, looks healthy and things are moving into the right direction.