Swisscom AG (SCMN) Earnings Call Transcript

Now I would like to hand over to Louis for the Q&A. Louis?

Urs, Mario and Alberto for the presentation. Now it's time for the Q&A session. As previously indicated, Dirk Wierzbitzki and Urs Lehner are also joining and supporting in case of any specific question on the Swiss business. Some remarks to people being registered for the Q&A and/or raising questions. [Operator Instructions] Thank you. Now let's open the Q&A session for the second part of today's meeting, with the first question coming from Polo Tang, UBS.

It's Polo Tang at UBS. I just have 3 different questions. Actually, before I start, I would like to say best wishes to Mario Rossi on his retirement. In terms of the 3 questions I had. First one is just really about trying to understand what you're assuming in terms of COVID-19 impacts as you look forward into 2021 in terms of what are you assuming in terms of your guidance? For example, what are you budgeting in terms of any recovery, if at all, in terms of roaming? And in particular, what are you assuming in terms of any potential impact in terms of SME revenues? Are you factoring in any significant step-up in terms of bankruptcies, foreclosures? So that's the first one in terms of COVID-19. The second question is really just about the competitive landscape. In terms of Sunrise, have you seen any change in their behavior since the merger with UPC? And then also in terms of Salt, we've obviously got this new Gigabox fixed wireless access product. So how has that changed competitive dynamics? And what's your sense in terms of the take-up? And my third question is really just in terms of -- for Alberto, in terms of the Italian mobile market. So Iliad seems to be attempting to raise prices in the low end of the market. But what is Alberto's sense in terms of the competitive dynamics here? Are we past the worst?

Thank you very much, Polo. I think the first question on guidance and consideration of the COVID is for Mario. And if Urs Lehner also wants something because of the SME then fine. Second one is for Urs. And the third one, as you, Polo, already indicated for Alberto.

Okay. I take the first one on the guidance and the COVID-19 impact. In 2019, I would say, on the roaming business, we had an impact in 2 quarters -- during 2 quarters, and our budget has the same assumption that we will see low travel intensity in Q1 and Q2 and then a slight recovery Q3 and 4. In terms of bankruptcies, we monitor that on a weekly basis, the inflow on payments, both in Italy and in Switzerland. And so far, there was no impact. And so we have not included any impact from bankruptcies and so on in the guidance for '21. Maybe one remark, I think I was -- there was some misunderstanding when I explained the guidance. So the reduction of the indirect costs are approximately CHF 100 million. I think some people understood CHF 300 million. It's CHF 100 million.

Good. Then on the second question on competition in Switzerland. Have the competitive dynamic changed? I don't see a change in this dynamic in Switzerland. We have still a very promotion-oriented market. Sunrise and UPC are behaving in a separate way. Both of them are doing, let's say, aggressive promotions. And I would say even -- or Sunrise is even the more -- is more aggressive on the market or even a bit more than in Q3 or Q4. So no change on this. On Salt, the launch of this fixed wireless access product, I think we can't compare Italy, what Alberto explained, and Switzerland. In Switzerland, the landscape is another one. We have very high ultra-broadband penetration with strong performing networks, also in rural areas. So the advantage of a fixed wireless network in Switzerland is smaller than in Italy, where you have really gray areas or even white areas. So it will be interesting what is happening with the take-up of this fixed wireless access product in Switzerland. I don't think that this will be a game changer.

Okay. Then if I take the third question, maybe also a quick comment on dynamics on bad debt in Italy 2020. We didn't experience any impact from COVID. So also in 2021, we do expect that we'll have the same neutrality, I would say. For the question on mobile, yes, there are -- it seems that also Iliad is increasing prices. The outlook there, I think, is quite good, in general, for the market, specifically for us, which means that we -- with our offer, we will be even more competitive in the future, and we have -- we will have even more opportunities to grow. But overall, we do share the same view that in the mobile market in the future there will be more stability.

Thank you very much. Next question comes from Georgios, Citi.

I've got a couple. The first one is around fiber regulation. You had some news about a month ago that the competition authority wanted to make some changes. Do you mind just running us through what the debate is and maybe the timing of key decisions that could be made on this? My second question is on Italy. Alberto, when you are going through the wholesale business, as you mentioned, as you are a key partner for anyone who wants to enter as a wireline provider. Obviously, we all know one that may be launching soon. So if you could kind of provide your high level thinking between the wholesale opportunity versus a return on risk from that. And then finally, I wanted to also thank Mario for all the help he's provided us over the years. I think he's been a great professional. And I just wanted to mention, I don't think there's been many CFOs in the last 8 years in telcos that can move on and say they've never cut a dividend or issued a CapEx warning. So congratulations on that record.

Thanks, Georgios. [Foreign Language].

Thank you, Georgios. I think -- and the third point was not a question. That was more a complement. So the first question on fiber regulation is for Urs. And then the second question is for Alberto.

Okay. This fiber regulation from Competition Commission -- they ask for this layer one product from the central office. And they also made pre -- they also ask for not for precondition measures, so that means that we are not able to sell products in the new footprint up to now, up to now. And now that we claimed against it. And I think in the next weeks, we will get a decision on it. That means if we have a relief there, we can continue to sell in the new footprint, only the new -- it only hurts the new footprint -- is this request from the commission -- from the Competition Commission. So in the next weeks, I hope that we will have clarity there. I hope that we can continue to sell in the new footprint. And then it will take time. It's hard to say. They will investigate on this competition play. It's hard to say. I think we have now to wait what the court will decide on these precautionary measures. And this will be in the next weeks. The impact -- maybe the impact today is -- it's very limited on the business as it is today because we are rolling -- it's only on the new footprint where we have this obligation.

Okay. Then I take the second question. Actually, when I was talking about wholesale and newcomers, we didn't have in mind a specific name. Iliad is clearly one candidate, but also for us, Sky will be a very important client. We just announced a couple of weeks ago our agreement. Thanks to our network, Sky will be able to cover 1,500 cities in Italy. So we have substantially increased the footprint. I think -- but for us, at the end of the day, yes, there could be some impact on our retail business. But at the end of the day, they will be offset through the wholesale margins. So it's -- at the end of the day is not a game changer. Iliad clearly could be an opportunity. We will see in the future. I think that we are already very well-kept in the wireline. We will continue to be the leader in the fourth quarter. We have been at least a very -- we had a very good performances. We do believe that also we will continue to have performances in the future. But yes, the wholesale business is a good offsetter in case. Thanks.

Thank you, Alberto. Next question comes from Jakob Bluestone.

If I can also echo the comments from the other -- from the previous -- about Mario, who's been a terrific CFO. So many thanks for all your patience and time over the years. I had a couple of questions for Mario, and one for Urs. Firstly, you mentioned earlier that you've had quite high uptake of second and third brands on the postpaid mobile side. I think it was about 18% of the base. Very little uptake on the wireline side, where I think it was only 4%, where on your no-frills brands in wireline, I was hoping you could maybe expand a little bit. Do you think that's something that will change? Why is it so low? I guess, most importantly, I mean, we've seen a significant amount of dilution on the mobile from the migration to these second and third brands. Do you see a risk that we see a similar headwind on your fixed line ARPU? And then 2 other questions, slightly shorter. Just on the CapEx side, your Fiber to the Home coverage went from 30% to 32%. You spent about EUR 0.5 billion on -- CHF 0.5 billion on CapEx. Your guidance for 2021 suggests quite a big step-up in the pace of deployment. So I think it's going -- increasing by about 7 percentage points to 39. But yet, there's only a very modest increase in CapEx. So can you maybe just help us understand what are some of the offsets? So will you be spending less on given what it looks like a fairly significant acceleration in FTTH deployment? And then just finally, just on free cash flow. Maybe it's a little bit unfair asking about future items on free cash flow. But as you mentioned, you had very strong net working capital and you also had very low tax. Can you maybe just give a little bit of guidance on those items for 2021, just given how big the boost to free cash flow from those 2 things were?

Thank you, Jakob. I think the first question on second and third brand is for Urs or alternatively Dirk. I mean, up to you. Second question on CapEx, probably Mario. And the last question definitely for Mario.

I would say, Dirk take the first one on this second and third brand penetration of broadband.

Yes. Certainly, I can do that. I really believe, let's say, the reason is that -- I mean I should say that we entered the market a little bit later there compared to mobile because you were making the comparison towards mobile. We were first this mobile and only later this broadband there. And we are pursuing the strategy that we call defend and attack. I mean, obviously, we want to defend the value on the own brand offer, yet participate in the market also, particularly in the price-sensitive segments with an equal share. And so we might see certain developments that we have seen in mobile also kicking in on the broadband side, certainly. We will review our pricing and promotion strategies there to gain a fair traction within the price-sensitive market.

And Jakob, on the CapEx. So you must be aware that the FTTS rollout was going on in 2020 and will also go on in '21, but in '21 at a lower level. And so part of the FTTS CapEx will be replaced by FTTH CapEx. That's the reason why despite the higher penetration of FTTH, the CapEx don't increase more. Then on the free cash flow, on the net working capital in the future, you can always have a swing of CHF 50 million because that's just a cash in. You cannot control in the last months. So there is no -- in the future, there is no structural positive or negative impact on free cash flow. That's just seasonal fluctuations. And yes, we had relatively low tax payments in 2020. I would assume cash out for taxes in the magnitude of CHF 350 million, CHF 3-5-0 million per year at this net income level.

Thank you. Next question comes from Ulrich Rathe, Jefferies.

I have 3 questions, please. The first one is on the wholesale revenues in Switzerland. Obviously, you are about to lose wholesale revenues there from -- well, from Sunrise and presumably also UPC. But what is baked into there for 2021? And how does that phase out? The second question is on the -- sort of the overall net effect of the cost cuts versus the revenues. You are saying somewhere in the annual report that you expect the revenue decline in '21 not to be fully offset by cost cuts and an EBITDA drag for that reason in 2021. That -- obviously, there was a slight effect of that thought also in 2020, but a very small one, like CHF 19 million or so. Is it a similar dynamic in terms of the -- what you expect for the 2 trends separately? Or is there a bigger shift in 2021 in your plans currently? And my last question would be on the fourth quarter. There was an EBITDA boost from the indirect cost outside of workforce cost, really trending very differently in the fourth quarter than the third quarter. And the one item, Mario, that you mentioned there in your presentation was the bonus payment last year. So does this mean that -- this was really everything, right? Does this mean the fourth quarter 2020, the nonworkforce cost, indirect cost, that was a normal quarter for next year? Or were there any supportive items, unusual items in the fourth quarter 2020 that produced this big, big trend shift there?

Thank you, Ulrich. I think the first question is either for Urs, financial impact Mario. Thereafter net cost, Mario, and the last one, probably, again, Mario.

So I will take the first one and then Mario can take the 2 other ones. Otherwise, he's too busy. The first question on the wholesale impact, which is affected by this merged Sunrise UPC. So what is clear, we will lose the MVNO, the mobile revenues from UPC. I think this will be in the first half of this year or middle of this year. So the impact will be CHF 15 million to CHF 20 million from this mobile revenue side, MVNO contract. Then we will lose some broadband business, wholesale business from Sunrise. And it will be in the region of CHF 20 million this year. That's a bit our forecast. And then next year, CHF 30 million -- maybe CHF 30 million. But then you have to take in account that they will also remain as a wholesale customer. Broadband, in areas where they don't have a network, I think they will rely on our network also in the future. But our overall impact in this year may be in the region of CHF 40 million -- CHF 30 million to CHF 40 million.

Yes. We mentioned in the guidance that the negative MVNO impact, which will come short-term, is CHF 15 million to CHF 20 million. That's what Urs mentioned in the guidance, '21. On the EBITDA guidance for -- and that's not Swisscom Switzerland, but Swisscom without Fastweb. So we mentioned that the guidance will be CHF 3.4 billion. That compares to CHF 3.45 billion in 2020 reported. And you're right. We have this service revenue decline of around CHF 250 million to CHF 300 million. Part of it will be compensated by the cost savings of CHF 100 million. Then we have additional margin -- contribution margin for the B2B -- from the B2B segment. And -- but the overall -- so we will see a decline or we expect a decline of EBITDA in '21 in the Swiss business, if you do this math. And on the indirect costs of -- yes, in Q4, I mentioned 2 elements, 2 seasonal effects in 2019. That's the higher marketing expenses last year of CHF 10 million and the higher costs for B2B customer projects. And I would say these were the only extraordinary items in Q4. But again, as CFO, I don't look at quote. For me, it's important, is it recurring or not? And if I look at the last 4 years, that's really the proof that we are able to reduce the cost base. And at the last 4 years, we are able to reduce the indirect costs by over CHF 400 million. And you can do the calculations in 2020. They were net CHF 129 million. So we have always some seasonality in the quarter.

Just a follow-up, just to clarify 1 question there. So in the fourth quarter of 2020, there was nothing that you would consider extra or out of the usual?

No, no.

Thank you. Next question is coming from Fred Boulan, Bank of America.

Congratulations from my side. A couple of questions, please. The first one just to -- sorry to come back on Q4. So I understood all the comments related to 2019. Just interested in the bridge you show Slide 58 around the plus CHF 40 million impact you have in wholesale, IT & network and maybe you spend a bit of time on this. And where you see that going? Secondly, a follow-up on the ARPU question and the pricing question. So your postpaid ARPU trends remain pretty difficult, were down about 9% in Q4 from CHF 56 last year to CHF 51. Can you explain a little bit what is in there is COVID? Is this decoupling? Is it underlying mix? And where do you see that trend going in the coming years? In particular, is there another option to charge for higher speed, higher 5G speeds in your key offers? What kind of traction are you seeing on this? And then lastly, if you can give us an update on the difficulties you were experiencing initially on the 5G rollout, the pushbacks against the deployment in Switzerland.

Thank you, Fred, for your questions. I think the first question on the wholesale Page# 58 goes to Mario. Second question on ARPU dynamics and trend might be a question for Dirk. Or alternatively, if Urs can add. And then the last question, 5G rollout and complexity, for Urs.

On the wholesale on Page 58, in this segment, wholesale is not the only -- the wholesale business, but also IT and network. And there is the EBITDA impact. So this point 3 on Page 58 includes the higher revenue -- the impact of the higher revenue we had in wholesale in Q4, I mentioned in my presentation, the CHF 30 million coming from broadband connectivity services and some high revenue on infrastructure services. And then in this CHF 40 million are also included savings, cost reductions in the network and IT division. They are mainly coming from the IT elements. So you have both impact coming from revenue and coming from costs.

Thank you, Mario. And perhaps next question, postpaid volume development, Dirk?

I think that there's several sources to the ARPU trends that you see. I mean, obviously, there's -- particularly for last year, some COVID-based stuff in that, particularly on the international roaming side. We talked about it. There is ARPU dilution from promotional activities on our own brand, where, increasingly, you see discounts for the first 6 to 12 months of whatever, half rate tariffs or so. And then there is the shift from the first brand, so the Swisscom brand to second and third brand and we reflected upon that. We see subsequent consequences of lower ARPUs. And then there's a little bit of, let's say, RGU mix in the base where certain movements from, let's say, historical tariffs, I would call them. People optimize themselves for like newer channels and so forth. Although that I would dare to say is probably the smallest part. To your question, will the trend continue? Yes, we see a downwards trend. That's basically triggered by stiff competition there. You see that from second and third brands in the marketplace. You have like an anchor price of CHF 30, even a little bit less in the recent weeks for a national flat, so that is like flat voice and flat data. And we don't see any, let's say, relaxation on that. So clearly, the strategy remains to get the best value out from the own brands and then selectively aggressive, particularly on the second and third brands. But in the consequence, the -- a bit of the trends that you have been watching will probably continue.

Thank you, Dirk. And...

I need to add on it. A good chart to explain it is on Slide 56. Mario already showed it. I think that shows quite good dynamic. So the erosion on fixed voice, I think, this will be in a region where it is. Fixed mobile converged will maybe slightly going down because of penetration. RGU mix will remain or yes, this will remain. And droving that -- a bit of this is actually COVID-impacted. But in 2021, we will have still a rolling impact. In '22, I hope it will be away. So that shows a bit what Dirk explained. The major impact is through this RGU mix. Then on the second -- on the third question, 5G rollout. So yes, we are facing a kind of blockage. We are blocked on building out new antennas. That's a bit regionally. In some regions, we have much bigger programs than in other ones. And normally, if you go more on the French side, it's more difficult. In the German side, it's less difficult. And in the Italian side, it's becoming more difficult. So in the Romanic area, it's more difficult to roll out the networks than in the German areas. I think it has a lot to do with communication, with trust. We have a debate, which is driven by emotional minority in Switzerland. And that's why it is important that the government is also communicating and explaining that we have a more fact-oriented communication in Switzerland, and I think situation will become better in the second half of this year. It takes now some time. I hope that it will become better and that we can accelerate rolling out these networks. But it will stay difficult because you don't build an antenna without opposition. That will remain.

Thank you, Urs. Perhaps, Fred, to give you some idea. The CHF 4 decline year-over-year on ARPU, half of it, CHF 2, is RGU mix. CHF 1 is roaming. Thereof 2/3 is coming from COVID and CHF 1 is to give you an idea is fixed mobile convergence for the discount. And as everyone explained, convergence is coming down, but RGU mix is definitely remaining. Okay. Thank you very much. Next question comes from Simon Coles, Barclays.

Sort of aggregating some of the questions you've had already. You talked about CHF 250 million to CHF 300 million service revenue impact in 2021. When you're saying RGU mix is probably similar in 2021 and FM convergence gets a bit smaller. Were you including the wholesale impacts from, say, Sunrise and UPC in that CHF 250 million, CHF 300 million number? Or is there something else we need to be aware because, presumably, fixed voice lines is pretty much disappearing and roaming is only 1 quarter, like you said? So could you clarify that? That would be great. And then just another question on smart homes. You obviously highlighted that we've had some good traction. Do you see that as sort of the next step after convergence? And is that a way that you think you can continue to increase average revenue per household, which is the metric, I think, we've talked about in the past?

Thank you, Simon. Second question about smart life, smart home is definitely for Dirk. And the first question, I think, is for Mario. So we start with smart home, smart living. Dirk?

Yes. Look, the business now is mostly a, let's say, accessory or device business with the associated margins there as we don't yet have, let's say, any service package with the recurring monthly fee. We are looking into it. And particularly, that will also then be enriched with, let's say, for instance, in the security space, you can think of certain services that make customers pay a recurring fee for surveillance solutions and alarming solutions and these kind of things. We are looking into that. We have not yet made a decision. Right now, it's more let's say, offering that security and convenience into the customers' homes, actually a trend that has been enforced by COVID. People are more at home and looking how they kind of upgrade and pimp up their home for connectivity, but also for convenience and so on and so forth. So it's mostly right now like an accessory or device business with the associated margins there. And also then obviously, there is a benefit, as everybody knows. The more products and services a household has, even if not paid on top, the more -- let's say, the more loyal and less susceptible to competing offer is the customers. So it's really also about loyalty, customer happiness and a great service. And whether we can monetize it from a recurring monthly fee perspective, I think the future will show.

And on the service revenue side, so the decline of CHF 250 million to CHF 300 million, there is included our assumption that we'll see quite heavy promotions in the B2C segment. So that's clear. These promotions will be going on. That's also what we saw in January. We included some expected pressure in B2B, especially in the SME segment because there, we have high market shares and high ARPUs. And the CHF 15 million to CHF 20 million decline on -- because of the service revenue of the merger of Sunrise, UPC is not included in the service revenue. We guided separately for it. So the MVNO revenues, the wholesale revenue are not included in service revenue. And as we mentioned, we expect there an impact from the MVNO business because they can move the customers from our network to the ex-Sunrise network on fixed line. On broadband connectivity, we don't think that we'll see a material impact already in '21.

Okay. So wholesales will include it. But if we think RGU mix is flat and price pressure in B2B is similar, like you've given in slide 56. You also said the other impacts are probably smaller. It sort of doesn't quite get to CHF 250 million. Or is that just rounding, and there's nothing around that?

No it's -- nobody has a crystal ball. Our assumption is CHF 250 million to CHF 300 million. We think that the promotion pressure will remain. We will have some pressure on the SME segment. There, we have high ARPUs. So we think that that's, let's say, a reasonable amount included in the guidance.