Swisscom Ag Ittigen R/Shs

All participants' lines listen only. This conversation will be recorded.

Good morning, ladies and gentlemen. Welcome to the 2023 Q1 Results Conference Call hosted by Christoph Aschleman, Eugen Sternmetz, and Louis Schmid. Louis, the floor is yours.

Good morning, ladies and gentlemen, and welcome to Swisscom's Q1 23 results presentation. My name is Louis Schmidt, Head of Investor Relations, and with me are our CEO, Christoph Eschleman, and Eugen Stedmets, our Chief Financial Officer. Our CEO starts the presentation with Chapter 1 and a quick overview on the highlights, the operational and financial performances of the first quarter. Then in Chapter 2, Christoph presents the B2C and B2B operational results. an update on our network activities and the financial results in Switzerland before discussing FASTSTEPPS Q1 results operationally and financially. In the second part of today's results presentation, Eugen runs you through Chapter 3 with the first quarter financials, including the confirmation of our full year guidance. With that, I would like to hand over to Christoph to start his part. Christoph.

Thank you, Eugen, and welcome to the Q1 results call from my side. We are, I am very pleased with the results we have achieved in the first quarter with revenues and EPTR growth in the first quarter and also excellent results in Italy with the 39th consecutive quarter of growth with FastWeb and the appointment of a new CEO with Val Torena 1st of October. In Q1 was had many different highlights, which we will see throughout the presentation. I think the most noteworthy, probably, we won the best Connect hotline test. We again won the chip mobile test. And we were able to finalize the SALT access agreement in the fiber term. So all in all, a very pleasing first quarter, leading to solid financial results for end of March 2023. So moving to page number five, we have a quick look at the Q1 market performance. On the Swisscom Switzerland side, we can see that mobile continues the growth story on the post-paid side of 30,000 net ads or increased in RGU base. We have a slightly decreasing RGU base on the broadband and TV side. which is partly compensated by increasing RGU based on the wholesale side. Fixed voice is continuing the decline we've seen usually over the past years with less and less people using fixed line telephony at home. On the FAST website, we have very positive results. On the mobile side, we were the second best performer in the market and managed to increase our mobile base with 144,000 RGUs. bringing us to 3.2 million mobile subscriber or a 4% market share. You can also see the effects of our value strategy on the B2C wireline side with a slight loss of 21,000 on the broadband side, but largely overcompensated by the increase or growth on the wholesale side with 40,000 R2s, bringing our wholesale business to nearly 500,000 lines. Overall, I think a positive picture for FastWeb and Swisscom Switzerland. Moving to page number six, so we can see the financial impact of these market developments. We had stable revenue of 2.747 million and a growing EBITDA of 1 billion and 164 million. Mainly the growth is coming from Swisscom Switzerland. You can see on the right-hand side with 13 million increase in the first quarter, also an increase of 3 million by FastWeb. And then the big effect on the pension side that we talked about already in February due to IFRS accounting effects. And I think Eugen can detail this a bit more. And then a slightly negative currency impact bringing us to 1.164 billion Swiss francs EBITDA in the first quarter. Now I move to the business review, moving directly to page number eight. I'm also happy to say that we are continuing our management transition and the renewal of the executive committee. We had Gerd Niehage who started two months ago as our new CTIO and his onboarding is running very positively at the moment. And we are excited that Isa will join us in three weeks as the new corporate strategy and corporate development officer. And I think this shows that the continuous renewal of the EXCO is well managed and on the way. And also, I think you've probably seen in the last month, we appointed Walter Renner as the new FastWeb CEO starting 1st of October. Walter is a long-standing member of the FastWeb management. He knows the company very well. He's part of the current growth story and knows precisely what it takes to keep FastWeb on the growth track. And I'm convinced that he will successfully succeed Alberto as the next CEO in FastWeb and continue to positively develop our Italian subsidiary. Now on page number nine, you can see our business priorities on the group level. I think overall we can say that the priorities and the strategy are largely unchanged. Why is that so? Because it is a successful strategy. It creates positive financial results and returns. And so we continue on our proven and successful track. The main strategy or main focus on the B2C market, Switzerland B2C side is to maintain our market position. to maximize value creation and focus on a value strategy. We are super focused on improving even more the customer experience, investing in our brand to make sure that customers are happy and stay with Swisscom. On the B2B side, we are very much focused on retaining value on the telco business, slowing down the ARPU decrease, and so leading to or trying to slow down the decrease of the B2B service revenue. This is a main priority and at the same time continue to invest on the IT side to compensate the revenue loss by increase in our IT service business and expand our position as number one IT provider in Switzerland. On the network side, we continue our high investment strategy to make sure that our networks are the most reliable but most innovative and remain competitive both in coverage and quality speed to make sure that we continue to win all the required or relevant benchmark tests in mobile and on the wireline side. On the FAST website, we have a similar strategy, focusing on the value on the B2C side, continuing our growth in B2B, both in telco and IT segments, and continue our growth on the wholesale side, maximizing our investments we do on the infrastructure side and scaling up our 5G mobile business. Now, moving on to slide number 10, we can have a quick look at Swisscom Switzerland B2C. Next to many new product features we launched mainly on the main brand, but also on second brands, for example, 5G for Wingo customers or multi-device options. The most notable, I think, change is probably the successful implementation of the adjusted terms and conditions we announced in March, which include CPI-linked pricing optionality. And you have also seen probably yesterday the announcement of Sunrise with the new prices. So, I'm pretty sure that you will ask us some questions about this. But in anticipation of this, I think we can say that inflation obviously also concerns Swisscom mainly on the salary side and the energy cost side. And we are trying to compensate its inflation by cost reduction. But we are obviously also looking at this topic of price increases in several months. But no decision has been taken on the Swisscom side in this regard. What is also very pleasing on the B2C side is the service excellence that we are bringing to the next level. We were able to win the best connect test or best hotline in the connect test, bringing us to sort of the triple leadership, best app, best shop, and best hotline, demonstrating our service excellence that we want to achieve for our customer base in the B2C area. Now moving to page number 11. We can see a summary of the most important numbers. You can see on the wireless side, we have the growing RGU base with 3.288 million subscribers, stable ARPU on the blended side, but obviously the growing RGU base comes at a slight ARPU cost on the post-paid value side with a continued shift to the second and third brands, but the decline is slightly lower in Q1 this year than it was in the previous year. On the wire line side, we are roughly stable. Our geobase slightly lower on the TV side, mainly linked to a bit lower attachment rates on the second brand side. And you can see that we still have quite a low second and third brand share. But also on the wire line, the second brand share is now increasing, but not obviously still far away from the shares we have on the wire line side. What we see on the wire line side, in the market are very aggressive second brand promotions from our competitors and we are currently also next to inflation also looking at scaling back promotional activity on our second brand on our second and third brands especially also looking at lifetime promotions because lifetime is not really promotion anymore but in effect a new price point and we are thinking about how we could better deal with promotion on the wireline side rather than offering lifetime promotions on the second brand side. Now moving to page number 12, we have a look at the B2B side of the business. We have roughly a decline on the service revenue side by minus 12 million, which is completely in line with our guidance we gave in February this year. We continue to execute our value-oriented strategy. We keep the RQ base stable on the B2B side, but have an ongoing price pressure and a slightly decreasing ARPU. On the IT services side, we had a slight growth, which was not entirely in line with our expectations, mainly due to a lower project business on the IT services side, which was a bit sluggish with some of companies and customers hesitating due to the macroeconomic environment and some of the projects are slightly delayed, but we expect continued growth in the IT services side in the following quarters. On page 13, you can see the update on our network side. As I mentioned already, we won the chip test for the eighth time in a row, and we continue to heavily invest both on the mobile and the wireline side And I would say we are continuing as planned, now covering over 75% of the population with 5G+, over 43% with FTTH. And we are fully on track to reach our year-end targets and the 2025 targets. Maybe noteworthy also, in March, we announced the signing of the SALT deal, as we already talked about in the full year results in February. This has now been executed and implemented in the previous month, bringing us a nice new contract on the wholesale side. Overall, on page 14, you can see the Swisscom Switzerland financial results. Revenue slightly down by 12 million to 2.044 billion Swiss francs in the first quarter and EBITDA slightly up by 30 million to 943 million EBITDA. And I think Eugen will give us a bit more details later on in the financial sections also about the free cash flow. Now I'm moving on to the FastWeb site on page 15. As I mentioned before, I'm very pleased with the development of FastWeb in the first quarter. We had another quarter of growth, bringing us to 39 quarters of continued growth. I think most note work is we grew both in customer base, in revenues, and in EBITDA. We were the second best performer after Iliad on the mobile side with a 22% RGU growth in mobile, but also the enterprise and wholesale business performed very nicely with 6% top line growth on the enterprise side, both due to telco and IT business. and also the wholesale side delivered a very pleasing growth, offsetting our negative evolution on the B2C wireline development. If we look at it in a bit more detail on page 16, you can see the consumer numbers. So, we had a slightly decreasing RGU base on the broadband side, but the positive news is that we are currently executing price increase due to inflation, across our whole customer base in Italy. And so far, this works out very nicely with no increased churn on the broadband B2C side. On the mobile side, as I mentioned, we have a very nice growth of a 22% increase in RGU base, bringing us to over 3 million mobile subscribers as of end of first quarter, and also an increased FMC penetration rate with bringing us the benefit of higher ARPUs and lower churns. On page 17, you can see the details of the enterprise and wholesale business, which are our main drivers of top line growth. So enterprise grew by 6%, bringing us to 261 million in the quarter. So the first time over a quarter billion revenues in B2B. In the fast food side, many new enterprise contracts. You can see some of the new logos. We have one in the past quarters. But I think that we can say that the B2B business is performing very, very well in a difficult Italian market, and the management team is doing a great job. Also, on the wholesale side, we were able to increase revenues by 16%, mainly linked to the increase in wholesale lines. We managed to sign several new contracts over the past month, for example, with Sky and Wintrae. And we now profit from their market entry and the growth on the wireline side and can book the higher wholesale revenues to offset our declining RGU base on the B2C side. On page 18, you can see the aggregate financial results of FastWeb. I think what is especially noteworthy is that not only did we grow by $28 million in revenues, but we were able to grow in all segments, not only wholesale and enterprise, but also on the consumer side, we were able to grow the business by $4 million, mainly linked to the growth on the mobile side. This brought us an EPTR growth of $3 million, and I think we can confirm that this is in line with our full-year guidance, both on the top-line side, but also the EPTR guidance full-year is 2% to 3%. We are a bit at the lower end for the moment, but we are confident that we will achieve our EBITDA full year guidance on the Italian side of our business. This was it from my side, and now I hand over to Eugen for the financial stuff.

Okay, thanks Christoph. Good morning and welcome everybody also from my side. I think I could quickly summarize our Q1 financials with just four words. We are on track. Obviously, nonetheless, I'll be happy to give you some details and some color on the results. And I'll start, as usual, on page 20 with group revenue. Net of currency effect revenue was up underlying by plus 17 million, Swisscom Switzerland down by 12 million, and FastWebUp by 28 million. On the Swisscom Switzerland side, B2C, if we walk through the individual segments, B2C basically flat with plus 5 million. The individual component service revenue close to flat with minus 5 million. Hardware revenues and other revenues up a bit, so that all adds up to a flat B2C revenue. B2B revenue down, minus 18 million, service revenue down as expected, as Christoph already explained. Also, hardware revenue was down a bit with a very strong hardware revenue quarter in the previous year, so that makes for a negative year-over-year difference. Wholesale is flat, as expected. As you already heard, FastWeb up 28 million, 4.7%, so we had a very good quarter in Italy, which is in line with our full-year revenue guidance, maybe even even a bit better driven, as Christoph already explained, by growth in all segments, consumer, enterprise, and wholesale. And as usual, the strongest contribution came from the enterprise segment. Moving on to page 21, Swiss revenue components, starting with service revenue. B2C minus 5 million, B2B minus 12 million. So you may remember in the full year conference, We talked about the B2C service revenue outlook, and I said it's a flat service revenue is achievable, but not to be taken for granted. So, we are squarely in that category with the Q1 results, and also B2P minus 12 million is in line with the guidance we gave you in February. IT service revenue up by 2 million, so we had somewhat sluggish growth, sluggish quarter United Service revenues. There is no big single reason behind that. One of them is that the first quarter last year was particularly strong, and we do expect further growth from this segment, probably not as high as last year. You might remember that last year about half of the growth was from non-organic sources, so it's certainly a bit lower this year. Hardware and software down by 5 million. That's a mix of B2C up. We had some hardware availability issues last year. So hardware sales are a bit higher this year in B2C. B2B down by a bit because it was seasonally quite high last year. And we had other revenues plus 7 million. It's a couple of small items combined. One of them higher cinema revenues in the first quarter compared to last year. Top right, service revenue evolution over the last couple of quarters. So first of all, the development from Q3, Q4 last year into the first quarter of this year looks certainly worse than it is. First of all, it's very small numbers anyway we are talking about. And also, as I mentioned in the four-year conference, Q3 and Q4 last year were distorted somewhat to the upside due to an uptick in roaming we had in Q3 and Q4. So there is really not much of a change in the underlying dynamic and we expect as of today a similar picture for the rest of the year. I'm not going to talk about the drivers of service revenue on the bottom right because they are very much stable and look very much in line with what we had in the previous quarters. So I move on to page 22. Group APTR is up by 27 million. My big component here is the plus 24 million of our pension reconciliation. I highlighted this topic when I talked about the guidance at the full year conference. That's 24 million in the first quarter. It will add up over time for the full year to between 90 and 100 million for the full year. So it's important to really focus on the operating business. Swisscom Switzerland up 13 million and Fastweb up 3 million. On the Swiss side, B2C, basically again, basically flat, somewhat lower service revenue, but that was fully compensated by lower costs. B2B down 7 million, obviously driven by the lower costs. service revenue and somewhat compensated, but not fully, by lower OPEX, both direct and indirect. And in infrastructure and support functions, the plus 19 million are the reflection of the cost savings we had in the first quarter due to lower workforce expenses and lower costs for maintenance. FASTEP plus 3 million or plus 1.6%, so in line with our guidance, as Christoph already explained, Obviously, driven on the one hand by higher revenue, but we also had quite some higher direct costs as the mobile share of our consumer business goes up, our direct costs go up, and there was also price increase of the regulated Vula price per telecom Italia, which hit our direct costs. On the other hand, we could compensate parts of that with lower indirect costs from marketing and also a bit from energy. So I move on to page 23, Swiss EBITDA up 13 million. Not really much to mention here. We had somewhat higher SAC SRC expenses. That's also more related to the previous year where we had some hardware availability issues and couldn't do as much as we wanted. And obviously the most important point on this slide is the plus 27 million. In indirect costs, we had significantly lower indirect costs and quite a strong quarter when it comes to cost savings. It does include some seasonal items, to be fair, and it's important to note that the salary increase of 2.6% will only hit from April onwards, so that has not affected the first quarter. So I emphatically ask you not to multiply these plus 27 million by four when doing your forecast for the full year, but rather stick to our guidance in that regard. Moving on to page 24, CAPEX. CAPEX is plus 23 million, a bit higher than in the previous year, in particular in Switzerland, with plus 30 million. If you look at the individual components, wireless is essentially flat, fiber slightly lower due to the completion of the FTTS rollout. last year and we had a bit higher investments in our backbone and transfer infrastructure and in IT and others it's clear we just look at one quarter here so most of that is seasonal fluctuations and all in all we are fully on track to reach our full year guidance also here with regard to cutbacks. On to page 25 free cash flow bridge. So starting with free cash flow proxy at 546 million plus three compared to last year also stable. So stable is very much the theme of this quarter. The free cash flow itself was higher by 146 million compared to the previous year. That's due to higher income taxes paid in the previous year, which were a bit high in Q1-22 and a bit low in Q1-23. That's the main effect. But as I said, the most important point here is operating free cash flow proxy, which is flat compared to last year. Moving on to page 26, net income. Net income, again, flat, 442 million. That's minus five compared to the previous year. So the plus 27 from EBITDA do not fully translate into net income because the financial result was 30 million lower than last year, in the third quarter of last year. We had a pretty high financial result. This year is normal, so this is why the EBITDA plus 27 million do not fully translate into net income. Otherwise, nothing special here on this page. I move on to page the financing side. Q1 very much confirmed our strong balance sheet. So we did two refinancing at very attractive terms. Also our rating review meetings with Standard & Poor's and Moody's went very well and even resulted in an upgrade of one notch by Moody's. Moving on to page 28, given the results, obviously, we do confirm our guidance for the full year on revenue, EBITDA, and CapEx, and also, obviously, on the dividend. And with that, I hand back to the operator.

Thank you again. Ladies and gentlemen, to sign up for questions, please press star 14 on your keypad. I repeat, star 14. To withdraw your requests, press star 15. Thank you. We already have some requests. I will now open the lines one by one. Please introduce yourself and then ask your question. Thank you. First question coming.

Hi, it's Paulo Tang from UBS. I just have three different questions. The first one is just about Sunrise and their announcement of a 4 percent price increase in addition. They've also included the option of annual CPI increases in their contracts. Were you surprised by the move and how do you think this will impact the broader Swiss market? And in your earlier comments, you mentioned that Swisscom would consider price increases. But what are the key indicators that you're focused on that would make you more likely or less likely to increase pricing? Second question is really just about what you're seeing in terms of competitive dynamics in the Swiss market in Q1. And what have you seen thus far in Q2? If I look at your Swiss net ads, in terms of postpaid and broadband. They were slightly softer in Q1, so can you maybe talk through what happened and how we should think about those subscriber trends in the coming quarters? And the third question is really just about Italy. What's your view on the potential for consolidation in the Italian market, and would Swisscom be willing to participate? Thank you.

Okay. Thank you, Paolo. I'm going to take your questions in sequence. The first about the Sunrise announcement. I think, yes, we were to some extent surprised. We didn't expect this move at this timing. With regards to the impact on the industry, I would say it is too early to tell. We will see in the coming weeks and months now what the reaction will be of the market, the different participants. and how this will evolve over time. What is for sure, I think we can say it is probably not negative for the development of the market. And it is somewhat a change in, you know, after 20 years of declining prices, it's basically the first time that headline pricing prices have been increased. So we will see if this sort of is really a trend change now, or if it is a one time event. We could probably talk about it in a couple of months again when we have a better view on the picture. In terms of competitive dynamics, we can say that headline prices is one thing, but promotions is another thing. And on the promotional aggressiveness side, we see no change in our competitors' stance. They are as aggressive as ever. with promotions going sometimes even beyond 70% discount and in many cases for a lifetime, which is effectively not a promotion anymore, but sort of a new price point in the market, which somehow contradicts, let's say, the inflationary price move on the announced as a general move. So this is, I would say, the situation, very, very aggressive promotional activity. And the result was a bit softer numbers on our side and this is also why we are thinking about also removing or reducing promotional aggressiveness on our second brand because we definitely need to look into this topic to see how we can deal with promotions going forward because I mean 70% discount is not really sustainable and is not desirable as a market because it somehow affects the value perception of the product by the customers if you offer such a discount on a very long time basis. On the Italian side, situation pretty much unchanged, I would say, on our view of consolidation. I think we are happy with our involvement of FastWeb standalone, and we will continue our standalone path. But as we already discussed in the past, obviously there is a lot of value also in the consolidation. And we will look at any opportunity that can create value. But in the absence of concrete opportunities, I would say we continue our successful standalone path to continue to grow FastWeb along this year.

And could you just maybe comment on what would make you more likely or less likely to increase prices? What are the key indicators you're looking at?

Well, I think, you know, it's too, we don't really want to discuss this in public, but obviously one aspect is, you know, evolution of prices. I mean, as a sunrise, Swisscom is also confronted with rising energy costs, with rising wages. That's one thing. The question is how much can you offset this with cost savings? and when or what kind of actions are required on the pricing side. But we will see this a bit more in the, you know, we didn't take any decisions on that side, and we will see in the coming, in the future, how this evolves. Thanks.

Thank you, Paolo. Next question.

Good morning. I hope you can hear me. Storch was from City. Just a couple of questions on pricing. The first is for Laban, the previous question. Perhaps if I could ask it a bit differently, what we've seen in the first quarter and what you saw in slide five is the fact that you have a bit of a decline in retail, but a bit of growth in wholesale. And I'm guessing, especially as far as broadband is concerned, that could become a bit more extreme in the coming quarters with salt getting access to your network and so on. So I'm curious if you are willing perhaps to see the bid of market share in retail, if that's something you can live with in your efforts to improve pricing over time, or whether that's really the limit of losses you can take. Just curious to hear how you're thinking about that. And then there's other questions around pricing on business, which is less transparent as a market for us. If you don't mind just giving us an indication from what I can see in the first quarter, there is no real encouragement in terms of pricing, but whether what we are seeing in the consumer market from some of your competitors is also similar to what they're doing in B2B that has become a bit less promotional. Just curious to hear from you on that.

Thank you. Thank you, Georgios. So on the, I mean, on the B2, So regarding market share versus pricing and value orientation, I think we have a clear value-oriented strategy. And we are losing market share or slightly declining market shares in the past years. And I think overall, this strategy is successful protecting value at the expense of slightly declining market shares. This is our strategy and so far and we intend to keep this strategy as we believe it is a better strategy rather than trying to increasing RGU gains and decreasing the pricing. So we will most likely continue to see sort of a similar picture and then trying to offset let's say the broadband losses through wholesale increases as we are executing in Italy. And then on the B2B side, I would say, yes, there is a bit less transparency on the B2B pricing side. But I think we can say the promotional aggressiveness in the market is very high, even higher than on the B2C side. And this also leads to this continued decline of B2B service revenue that we guided on the full year basis with around minus $50 million.

If I could ask a follow-up, in the event that the wholesale run rate improves in the coming years or quarters to years, will that make you accept maybe slightly weaker retail trends in Switzerland or, you know, 50 million, let's say, 50,000 broadband losses a year is roughly where you want to limit any damage beyond that?

Well, I mean, we don't communicate any precise numbers where we see the limit. Obviously, in an ideal world, we would gain market share or keep it, let's say, stable. So we try to keep the loss as small as possible. And then on the wholesale side, it also depends a bit on what the competitors are doing and in which types of networks they are activating their customers. And then we will see how much growth we can generate on the wholesale side. But obviously, you know, a customer on the wholesale side is not as valuable as a customer on the B2C side. So let's say making sure the market share loss is as small as possible is still quite a high priority on our side.

Very clear. Thank you. Thank you, Georgios. Next question.

Thanks for the presentation and for taking my questions. Maybe firstly on Swiss service revenue growth trends, in the past you said flat service revenue growth in Switzerland was achievable but should not be taken for granted. When you reflect on competition in the first quarter, the headline price rises announced by Sunrise for later this year. and your own plans to reduce second brand promotional intensity, do you view that flat service revenue growth as more or less achievable than it was a quarter ago? And then secondly, on the sort of wholesale deal, maybe just taking a step back a bit, how are you thinking about the larger scale opportunity that that presents and how fast will that ramp up take? Cheers. Thank you.

So thank you for on the Swiss service revenue side. I think as Eugen mentioned, you know, the situation from our point of view is pretty much unchanged. It's still, you know, it's a lot of hard work to keep service revenue flat. And a lot needs to be done in every dimension on RGU base, but also on pricing side. You know, we discussed it in the past. We did some minor price changes on options or service fees. And we continue to work on topics like this to try to keep the service revenue flat. But it is, as we said, not to be taken for granted. And as we see in the first quarter, you know, when you hover around the zero line, you know, two, three million deviation suddenly looks like a big change. But I would say on the full year, we still, I would say we confirm that it is achievable. But depending on how the quarters go, also depending how the promotional activity continues in the market and obviously huge effect also on the P2C service revenue. The wholesale deal with SALT is a regular wholesale deal where we book revenues as the lines are ordered. So the revenue uptake pretty much depends on, let's say, the market success of SALT. But in any case, you know, we are talking about low single digit millions. So you shouldn't expect like a huge sort of hockey stick development in wholesale revenues, but more likely sort of a continued either flat or slightly continued growth in the wholesale.

Thank you. Does that answer your question? Thank you, sir. Next question.

Yeah, hi, it's Steve Malcolm from Redburn. Thanks for taking the question, guys. Thanks for the presentation. I just want to follow up on George's question quickly and ask a question on FastWeb as well, if I can. I know it's difficult to be precise on this, but looking at the Q1 KPIs, you lost 10,000 broadband lines. Your term was up in wireless and wireline by about 50 basis points in both, I think, which are kind of slightly worryingly than the case, I guess. When you think about the different aspects of your consumer strategy and whether or not you kind of pull promotional activity, Yeah, are those numbers kind of what you expected to see in Q1, that sort of accelerated broadband loss and churn increase? Or are those kind of a little bit worrying and part of the calculus for price rises and promotional decisions going forward? And then just moving on to FastWeb, the numbers look a bit odd. Your gross margin appeared to go down by about 500 basis points. I think your direct costs rose by about 20%. and your indirect cost seemed to fall by about 5% or 6%. So, the blend was a 6% cost increase, but the sort of was a bit unusual with the gross margin seeming to fall very sharply. Can you just help us understand what was going on in those cost lines in Q1? Thanks very much.

Yeah. Thank you. So, I'll take the first question, and then we'll answer the second question. So, I would say the increased churn in Q1 is very much linked to activity in Q4 last year. where we have seen very extensive promotions during the Black November. It was not really a Black November day or week, but more sort of a month or nearly a six-week period. And this led to, let's say, a slightly increased turn on our side in Q1. You know, after a two-month notice period, the lines are switched over in January and February.

Maybe on question number two, yes, indeed, it looks a bit odd in the first quarter. I tried to explain the main moving parts when I talked about FASB, maybe just once more and with slightly more detail. Obviously, we had the higher revenue, but on the cost side, we had significantly higher direct costs this quarter. which has to do with two or three things. One is the higher share of mobile customers. And obviously, on the mobile side, we have higher direct costs than on the wireline side. But also, on the wireline side, the regulated access fee for copper went up in Italy, and that hit the direct cost. And also, the rate of fiber customers, you know, customer base goes up and then somebody increases direct cost. Then there is the balancing factor, as you mentioned correctly, on the indirect cost side, we could reduce our costs. One element was marketing, another one was energy, so that gave you the complete set of numbers that you see. As mentioned, this is talking about one For the full year, we confirmed the guidance of 2% to 3% EBITDA growth faster.

Okay. Just on that gross profit, I mean, I'd say the revenue point, but I think your gross profit fell by about 3% or 4% in Q1. Is that something that we should extrapolate for the rest of the year? Were there any sort of particularly elevated direct costs that mean that the gross profit impact for the rest of the year will not be quite as sharp as it was in the first quarter?

Yes. I wouldn't extrapolate too much from one single quarter. You know, there are always cost items that are fluctuating around. I would rather stick to a full year guidance for the APTR than focusing too much on individual lines.

Okay. Thank you very much.

Thank you, Steve. Next question.

Yes, good morning. It's Luigi Mineva from HSBC. Thanks for taking my two questions. The first one is just going back to your optionality to apply inflation indexation. I just wanted to understand a bit better how that relates with your guidance. In your guidance, you probably assume some kind of price adjustments, even if not directly linked to indexation. So if you were to apply inflation indexation in the second half of the year, how much difference that would make compared to the assumptions you currently have in your guidance. And secondly, on Italy, just to explore in market consolidation from a different angle, wholesale has been very important for FastWeb. fiber footprint in the black areas that open fiber currently has was to become available on the market for acquisition. Would you be interested in acquiring extra fiber footprint, particularly in the black areas, the large cities? Thank you.

Okay, so maybe first on the CPI-linked question, Luigi. The clause we have put in our terms and conditions, they have as a starting point the first of June 2023 with the CPI-based index. So, in any case, this is not something we can apply for a price increase this year and would probably be a first optionality next year after sort of, you know, one full-year cycle of inflation if there is inflation next year. So this is something that has probably no impact on guidance or B2C revenues this year. It's more sort of something for the longer term. And on the Italy-Italian question, I mean, this probably largely depends also what happens with Rete Unica and, you know, all the consolidation or different net cost carve-outs and who is buying them, and should this happen, and should there be remedies attached to such a deal, we will obviously look at those remedies, and if there is a positive NPV and let's say a good strategic rationale for FastWeb to invest in such remedies, we will most certainly at least have a look at it and analyze it. That's quite clear. Thank you.

Thank you, Luigi. We have one request left. If any other participant would like to sign up for questions, please press star 14. Thank you. I'll take the next question now.

Hi, good morning. Thank you for taking the question. This is Nuno Vaz from Societe Generale. Three questions or three topics from my side. One is in the commercial side in Switzerland because you mentioned There you're planning to decrease promotional activity in the second brands, which I find a bit counterintuitive because you're saying the competition is increasing. In the past, you've been quite successful at offsetting this competition with sort of similar price aggression in these second brands. Do you think this will not have an impact on churn if you don't stay as competitive as before? And are you seeing this is the strongest price competition you've seen in recent times? And one thing on this is sunrise drop from 24 months discounts to 12 months. Has this not helped the commercial momentum as well? And just final commercially, what's the latest trends you've seen in the first months of second quarter? Then two quick questions, one on wholesale, because wholesale sort of turned around from last year. Last year you had declines in the number of lines, while now in this quarter you saw growth. I would be curious on what was driving the declines before and now what's driving the growth in number of lines and what's sort of the outlook there. And finally, just on cost savings, $27 million this quarter. You said a part of it was seasonal. So I was wondering how much of it is seasonal, roughly? And you had sort of guidance for $100 million of growth savings for the full year. Is this still in line? And how much have you achieved in Q1? Thank you. Okay.

So I just picked the third question on cost savings. So yes, the part is seasonal in the first quarter. I would like to repeat the guidance for the full year. So this is what I would stick to. It's 100 million in gross savings, as you just mentioned. This is confirmed. We also mentioned that we would have... counterbalancing factors due to inflationary pressure, in particular on salaries, which in the end will eat up about half of the $100 million of gross savings delivering, you know, roughly $50 million net over the full year. So that already gives you an indication of the further development over Q2, 3, and 4 up to the end of the year. So that would be on question number three.

Okay, so question, let's do them in the reverse order, question number two. Okay. On the wholesale side, you know, at the end, I mean, we have nearly, I would say, all market participants in Switzerland are wholesale customers of Switzerland. At the end, the growth is driven of the market success of our competitors, basically. And mainly also a big impact is obviously also Sunrise being the biggest actor in the, or after Swisscom, the biggest market participant, depending on sort of where they activate their lines on their own cable network on if they have more success on the fiber uptake. This influences also our numbers on the wholesale side to see if there is a growth or more sort of a flattish kind of development. So mostly it doesn't depend really on us, but on the other companies in the market. And then sort of the last on your first question, yes, Sunrise reduced promotional activity, but on the main brand from 24 to 12 months. I think on the second brand, Yellow, the promotional aggressiveness is the same as ever. And for me, I mean, you're right, to some extent, it's a bit contradictory to say, let's, Swisscom intends or thinks about reducing promotional aggressiveness on on the second brand. And yes, most likely, this would have sort of some kind of impact on on NetApp. But for me, it is more also a question as, as an industry leader, we need to think about, you know, what kind of signal are we sending to customers? If you discount a product by 70% for lifetime, I believe that this sends a very bad signal to customers in terms of value perception of the product and the long-term pricing impact it has in the overall market. This is the topic that I am predominantly thinking about.

Okay. We have one last question, then we will conclude the call.

Yes, hello, Andreas here from CKB in Dresden, Ohio. Everybody, thanks for taking my questions. I've got also a question on the price increases. I mean, how much is the price increase from Sunrise now a blueprint for you, given that they did it also on the second brands and How much can you back book being repriced going forward? That's the first question. And I have another one, please.

So, I mean, I can't really say something about the, you know, the sunrise move happened yesterday. So, I'm not sure that this is a blueprint for us. I think we will see in the future now what this means for the market. and what it means for Swisscom and how we proceed. So I don't want to talk too much or go too much into the details on potential pricing impact on the Swisscom side.

Okay, and on the back book, is it possible to change here as well, given that some contracts might be on the price related, so that it's going to be difficult to increase legally, I think?

Well, I mean, you can always, that's my understanding also of the Sunrise move is they increase front book and back book. And I mean, you can always increase prices on the back book, but you need to give the customer extraordinary termination, right? And then you can basically also increase prices on your back book.

But obviously, yes.

Yes. Okay. Do you hear me still?

Yes.

Okay. Okay. And then my last question on the 90 million pension reconciliation, is that also kind of a feature we see in 2024, driven basically by interest rates? So if they go up, it could be more in 2024 than this 90 million, or is it just a one-time effect here in 2023?

You know, you're right. It's driven by the interest rate development and their impact on the IFRS pension costs. What we see this year is the reflection of a significant step up in long-term interest rates in the previous year. I wouldn't expect, you know, I wouldn't expect such a significant move every year. But obviously, we can't give you an exact number for 2024 right now. This is the reflection of a very strong increase last year. And the change year over year hasn't been that strong for a while.

But the 90 as an assumption for next year would be valid right now?

No, no, no. The 90 is a year over year effect. So if the interest rate environment does not change, that everything else being equal would mean that the IFRS pension costs would remain flat and there would be no further year-over-year effect next year. So it doesn't give us an epithelium machine of 90 million per year, unfortunately. If you look at the presentation, you've got all the details on the topic in there.

Okay, great. Thanks a lot.

Thank you, Andreas, and thank you to all. And with that, I would like to conclude today's conference call. If you should have any further questions, please do not hesitate to contact us from the IR team. Thank you again and speak to you soon. Bye-bye. Thank you. Thank you.

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