FRTAY - freenet AG (FRTAF) Q3 2022 Earnings Call Transcript

freenet AG (FRTAF)

Q3 2022 Earnings Conference Call

November 4, 2022 5:00 AM ET

Company Participants

Christoph Vilanek - Chief Executive Officer

Ingo Arnold - Chief Financial Officer

Conference Call Participants

Polo Tang - UBS Group AG

Martin Hammerschmidt - Citigroup Inc.

Francesca Schild - Exane BNP Paribas

Titus Krahn - Bank of America Merrill Lynch

Usman Ghazi - Berenberg Bank

Adam Fox-Rumley - HSBC

Yemi Falana - Goldman Sachs

Presentation

Operator

Good day, and welcome to today’s freenet AG Third Quarter 2022 conference call. Today’s conference is being recorded. At this time, I’d like to hand the call over to Christoph Vilanek, CEO. Please go ahead, sir.

Christoph Vilanek

Yeah, thanks to the operator, and thanks to all of you for joining this Friday morning here, to our today’s results call. You’ve all received the document yesterday night and we all display them in parallel. I think you’ve seen overall Q3 results are really, really nice. We are on the upper end of our intended performance. We’re doing really well across over, and we’ll give you a couple of more details.

Most importantly, for the sustainability of the business model and the growth in result, is the development in the subscriber base. Year-on-year, we have plus 226,000 subscribers across the 2 segments. EBITDA is now €362 million. If you would just add the performance of Q4 2021, we would cross the €470 million line this is why we stated that we will be in the upper half of the current guidance with a 9-month growth of €22.4 million in EBITDA and also free cash flow is doing accordingly much better.

The good thing is that 50% of the net add growth comes from the TV segment, if we look at the year-on-year basis. We are more and more in a position that TV is not only in the chasing business, but becomes a real strong growth driver at the one hand, but also in terms of volume becomes a more significant piece of freenet. This is what we always intended. This is the plan and we made no secret out of the fact that we believe that mid-term our IPTV activity is the growth driver for the future.

As I said, overall plus €226 million on a quarterly basis during the third quarter, we have gained 625,000 net adds split into positive postpaid, positive FUNK and FLEX, positive waipu and the negative of freenet TV, which is according to what we have predicted and also what we have planned in our books. waipu.tv was growing by 203,000 over the last 12 months, where our freenet TV lost 102,000, so overall growth of plus 101,000 subscribers in the TV access business.

Going one step further on the next page on the mobile subs, as we said the positive development there as well, I think, overall the third quarter showed the resilience of the business model. Also, I can say that across all channels, we saw a good performance, meaning MediaMarktSaturn is doing very well in the third quarter, after a period of intermediate lockdowns and shortage in supply. They have proven that sooner supply specifically with [some service] [ph] there. They are up and running. We think, overall, the worries about Media-Saturn are not applicable. They’re doing perfectly well and they’re improving also their backend systems, logistics, et cetera, so that we foresee a good future there.

On the ARPU side, we would consider this as a stable development with the typically small changes that are either seasonal or depend on the mix of tariff plans as well as subsidized postpaid contracts or SIM-only postpaid contracts. The one important number that we watch very consequently is how many of those transactions and transaction is always new customer acquisition as well as renewal.

How many of those are in our captive channels? So under our full control of the entire customer journey, this ratio was in Q3 at 70%, which is the level that we intend to have. The split is a good one. And, we see specifically in the renewals that this is even higher, and which brings us additional cost margin, because we do not pay as much commission to third-party, when we do renewals as we do on the new customer acquisition.

On Page 7, we have – the team has put out a nice graph, which I think illustrates very well, the development of waipu.tv now up around 872,000 subscribers. And I can indicate that re-crossing the next line of 900 within these days. I think, we have predicted for the full year, anything across 920 or a bit more, we are absolutely on track there. The mechanics on CRM, the mechanics on content marketing on the mainly web-based acquisition is working really well.

Stacks [ph] are still on a reasonably low level on as same as our spendings for above the line marketing. We will be ready to spend more, but the team tells us that they still work on a very marginal optimization, which I think is in favor of our bottom line results. And the fact that we have been able to grow plus 51,000 in the quarter shows that we are not under spending. But we have a good balance of growing as well as taking care about cash flow and EBITDA.

In this positive development on waipu leads to a positive net add number, as I said before. In the segment, we were always very transparent that DVB-T2 is in terms of subscriber slight slowly decreasing business lost about 30,000 in the quarter, which is the equivalent of 4% of the subscriber base over the year. It’s just above 12%. This is what we have expected, partially this will be compensated from a margin perspective with the price increase for vouchers from September and then from December, mainly on direct debit customers, full effect will only hit in 2023 and will compensate the loss in subscribers.

In parallel, Media Broadcast B2B business is doing really nicely. So overall Media Broadcast is delivering a very constant flat line of revenues and of margin, and also the outlook of the next 2 or 3 years, which we have only seen this week from the management team is very promising, even though the development on the private end.

So for the fourth quarter, we are in the middle, where we are already – yeah, we are just not yet in the middle, but close to the middle of the quarter. Some general remarks energy cost, yes, we envision some increases next year, but more in the one-digit-million range. Personnel costs are overall stable according to our plan, we have done a higher increase or to the individual than we did last year, but that was already in the budget. We have also informed the personnel this week that for the lower wage groups, we will give an extra payment in December that is already also reflected in the numbers.

We think we need to support our people and show corporate responsibility towards the staff. And we also have a question that we have had a couple of times this year was whether we see more bad debt. It is still on a reasonable good level. So all our own research and all public domain research tells us that the telco and streaming are not suffering from the inflation slash from the lower realized income.

I think, the fact is in Germany that spending in restaurants, and then entertainment is significantly going down, so people are spending more time at home. And this is when they use our services. So, I think, we have – well, I – if I would be trying to impress you, I would say we have chosen the right field. But we are happy to be in the right field, I think that is the more fair statement.

On mobile, we do not see significant changes in the competitive environment. There is no real aggressive move. We have seen Vodafone coming out last week with a couple of short-term promotions, but that did not affect the market. In reality and on mobile, we don’t see any specific changes to the existing portfolio across all the four competitors. So we expect development in the order of magnitude same size of Q3, so for the second half, a total of plus 75. The DSL launch is a bit delayed due to IT capacity, no big change to the numbers overall. I think up and running then in January, will be give us a bit more time for preparations.

On waipu.tv, we have disclosed, we have told you last quarter that we have scientist deal with Deutsche Glasfaser. Deutsche Glasfaser is now planning for the conversion or the migration of the first 80,000 subscribers that is currently run with certain set-top boxes. Those will be replaced during the year, January and February. They also start to market our original waipu.tv project – a product into their customer base. And they have last week repeated that they intend to have 6 million connected homes by the end of 2027. So if we assume for this 5-year period, if we assume that we get at least a 25% to 30% share within that base. They were talking about 2 to 3 million subscribers mid-term, which I think is a good outlook.

We have also agreed with Roku to be on all their devices that they put now out in the German market that integration was actually paid by Roku. They have done their homework, and the first devices are now delivered into a German retail. And we are still expecting from January to get live football from the zone into waipu, which will then pay TV channels within the normal EPG. I think that is a great opportunity, because we will also learn how we can monetize short-term opportunities, individual games, but also monthly subscriptions with them. And, as I said, Media Broadcast in a good way.

So overall, I’m really confident that we’re doing well. There are – here and there, obviously, also some push backs. But overall we can overcompensate them and show, I think, very satisfying growth. And Ingo will give you some more financial details on this development.

Ingo Arnold

Yeah, good morning, everybody from my side. I think starting with the group financials on Page 10. I can only confirm what Christoph already summarized, I think, it’s a very promising situation. What we see here? We see very strong revenues. We see strong gross profit. We see strong EBITDA. And so, what we see is that the business is very resilient to the macroeconomic environment. And, I think, what makes me happy is that we grow in both segments on the one hand, in TV and in mobile; and on the other hand, we grow on a gross profit base, and in addition, we are still very sensitive on the cost side. So, I think, in all dimensions it looks quite well.

Moving to the mobile business. Turning to the revenues. I think again a slight increase in the service revenue postpaid. What I also want to mention even if we do not focus on the revenues of no-frills and prepaid. In addition, here we see an increase of these revenues. So they are not in focus, but definitely we earn some money with this business tool, and we are happy to increase the service revenues here. What you also do see is that we increase the share of the hardware business again here. They said only a low profitability. But, all in, it helped to increase the revenue in the third quarter.

Gross profit, I already commented, it’s fine. On the cost side, bad debt is still on a very low level, and all provisions are unreleased. So they are still in the books and, therefore, I do also foresee no big effect on the bad debt front, even if the environment would change towards.

Turning the page to the KPIs. Strong growth on customer base already discussed from Christoph, stable ARPU. On the digital lifestyle side, where we had some difficulties with regulation in the first half of the year; we have the first quarter now where we see an increase of revenues quarter-to-quarter. So, hopefully, it will be possible to transmit the positive development into the fourth quarter now.

On the media side, Page 13. Here also, revenues are increasing based on the increase of customers in the IPTV business. On the gross profit side, I think, let me start with the freenet TV side, what we do see on the freenet TV level is, we still see a stable growth, gross profit, and a slightly increase in EBITDA. So I would say this confirms that it is possible for us to compensate the loss of customers with the increases of pricing, so all in from my point of view, also a very positive picture here.

In the B2B business, where we do a lot of this digital radio business, it was also possible to increase the gross profit. The effect on the EBITDA is even bigger in the B2B business, as we were very cost conscious here. And this definitely helped to increase the EBITDA here.

On the waipu.tv side, a very strong development of the gross profit based on the growth in customers. On the other side, slower growth on the EBITDA side, I think, we already mentioned in the last call that we increase the marketing expenses here. I think, it is – it makes a lot of sense to invest here the money what we do have at the moment to increase the customer base. And we already saw the positive effects in the customer base on this investment.

Free cash flow on Page 14, I think no big surprises. Definitely from my point of view, it will be possible to reach the upper end of the guidance range. This is something what we already see, something like €60 million of free cash flow in the fourth quarter, I think, would not be a surprise. I think we have to wait and see. There are still some investments outstanding. Therefore, it’s a little bit of question how the CapEx will develop in the last quarter.

But at the end of the day, if you have a delay in investments, it is difficult to invest money in the quarter, then if you have not done during the year. So, I think, the CapEx will be slightly lower than we originally forecasted. But, all in, I would say very strong free cash flow; we could reduce the factoring figure further to €35 million, so all in a very positive picture.

Moving to the balance sheet ratios. I think, I can only repeat what I did in – what I told you in the other quarters, very healthy picture, something what we see here, even with the depreciation of the brand value. We have an equity ratio of nearly 40%. The leverage including leases is 1.8. And the only thing that leverage is only 1.1. So it’s a very positive picture. I think if you look into the maturities out of our financings. I think, during 2022 and 2023, definitely there’s no obligation to refinance anything.

In 2024, it is possible to use the revolving facility what we do have of €300 million to bridge the necessity to do financing. But, I think, we are not in a hurry here to refinance, so we can choose a good window. And, I think, first timing of first part may be at the end of 2023. But, I think, we have to wait how the markets developed. We are not in a stress here. And, yeah, I think we have the time, and definitely we have enough time to find a good window here to refinance. What is necessary to refinance.

Which is not in the deck this time, but I would like to mention is that we still stay to our – stick to our promise to pay out 80% of the free cash flow as a dividend, and I think that by definition, you see increasing free cash flows, therefore, you can expect increased dividends, I think this is very obvious. I think, we were asked by some investors in the last weeks. If there would be a problem in the ability to pay the dividend as we do have the depreciation in the brand.

Here, I would like to clarify, because the ability to pay a dividend is based on local gap; and in local gap, we do not have the depreciation of the brand. And, therefore, from my point of view, no problems in the ability to pay the dividend, what we plan to pay.

On Page 16, it’s just to show the guidance. Again, I think, what is important as we do not have any change in the figures. There is definitely a head plan, where we forecast that it will be possible to reach the upper half of the guidance in EBITDA and free cash flow. Some of you already interpreted it as an increase of the guidance, yeah, definitely not totally wrong. And, I think, we are good on track here to reach it.

So, all in, also from the financial side, a very positive picture after the third quarter, and a very positive forecast for the end of the year, and also for the upcoming years.

Therefore, I finish here, and I hand back to the operator, I would ask you to start the Q&A.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] Now, first question comes from Polo Tang from UBS. Please go ahead.

Polo Tang

Yeah. Hi, good morning. Thanks for taking the questions. I have two. So the first question is on Slide 6, where you outlined the proportion of gross adds coming from captive channels versus non-captive channels. But if I look at the 9-month charts issues a step down in the percentage from 76% last year to 71% this year. So can you talk about what’s causing the decline and what you expect for the longer-term trend?

My second question is really just about some color in terms of 2023. So you’ve obviously outlined a number of headwinds for next year in terms of energy and wage inflation. However, despite these headwinds, do you think you can still grow EBITDA in 2023? Thanks.

Christoph Vilanek

Yes, I was trying to explain on the captive channels that we think the 70% ratio is the one that we think is a good one and a healthy one. The run down from last year is basically the change from lockdowns specifically in MediaMarkt and in free dealership. There we had more online, we had more captive, which means more customer care, more outbound and inbound telemarketing, and more owned online. This is the change of 70% that we showed in the Q3 is kind of our internal target, and that’s met. I would expect the coming seasons to be around the 70% plus/minus. On a quarterly basis, there’s also a bit volatility on what the mix of renewals and new customer acquisition.

On the EBITDA, but I think the fact that we have higher customer base at the end of the year that we do at the beginning of the year. And our outlook on energy increases inflation cost, personnel cost, et cetera, et cetera. I would suggest that you definitely will be growing in EBITDA. I think it’s too early to stay the range, but we will definitely grow the EBITDA next year.

Ingo Arnold

And, I think, may I add that we are fully on track to reach the mid-term targets, what we presented last year with more than €520 million in 2025. So I would say we are slightly ahead of the plan at the end of 2022, and therefore, we have some room. But, I think, this energy cost topic is less expensive than we stated in the call at the end of Q2, because we all know now that the government is supporting auto companies. So, I do only expect small headwinds from the energy cost side below €5 million definitely.

And on the personnel side, and maybe there will be a further increase of 3% to 5%. But, I think, definitely also from my side, I can only confirm that we are just in a budgeting process. But I would also expect an increasing EBITDA.

Polo Tang

Thanks.

Operator

Thank you. The next question comes from Martin Hammerschmidt from Citi. Please go ahead.

Martin Hammerschmidt

Yeah, thanks for taking my question. The first one is, as we approaching the end, can you give us an update of sort of way you see contract negotiations with MNOs are going? Have you sort of seen a change in the attitude and some of the price demand for your services lower demand? Or if you can just give us an update on how things are going?

And then on the Media Broadcast side, you indicated to the 3% to 5% EBITDA growth for this year. If I think about sort of various building blocks, we have a price increase coming soon. And, I think, we also have a bit more growth in the B2B part. And so just now you were talking about the flat line development, can you maybe sort of elaborate a little bit on what you mean with flat line, if I think about all those growth drivers? As I was under the impression so that you can grow EBITDA slightly in Media Broadcast in next year? Thank you.

Christoph Vilanek

Yeah, thank you very much. If I may say the Hammer, yeah, if you are mentioned in the Citi – in the daily Citi update. Well, I guess – thanks for the topic. I actually missed it a bit in my presentation. During this quarter, I think there were 2 main things which are important with the network operators: one was that we found finally an agreement with Deutsche Telekom, let’s call it a multi-year agreement with a common sense on what the goals and targets are? What potentially incentives are?

This is unusual, because in the past, it was always on an annual basis, which it was reducing our way or our ability to do planning and to do really a change in acquisition mix. So that is very positive relationship to the current DT Chairman, the management is really exceptional compared to the past. So great success for our colleague Rickman from Platen, but we all enjoy that and having longer lasting or midterm binding agreements now with all the 3 operators is something that we haven’t had before.

We’ve also met the new Chairman and CEO of Vodafone, and the signaling was clearly that he’s happy with the relationship. He thinks that we should not only continue, but also intensify, he is fully supportive to us having access to his cable network, we also spoke to whatever the plan in Fiber Corporation, that if this is really a product and still far away from it, but he will always want to include us there in the marketing and sales area. So I haven’t thought so little about network operators than I did the last 6, 8 weeks, no worries at all really good relationships, a good balance of understanding, and – yeah, and also good understanding of the mutual dependencies, but also the mutual opportunities.

On the Media Broadcast, maybe you kind of listened to the fine to the to the single individual words, you said, a little growth, single little growth is going to be there in EBITDA, we’ll be talking about 1%, 2% a year, which I would call a stable line, because a million is easily eaten up by a little hit back or a little delay in some contract or in some service deliveries, et cetera, et cetera. So it’s not contradicting – it was not contradicting the fact that, yes, it is going.

I mean, if we see a positive momentum there, we still have to acknowledge that 40% of the staffing is beyond 50 years old days still these people have been with Deutsche Telekom. They are compared to our average salary, better paid wages are high. There is an agreement is value on regular increases. And this is also demanding the management on some gross margin increases. So, yes, there is a slight growth, but it is not something which is worth mentioning with the big picture.

Martin Hammerschmidt

Thank you. Yeah, the nickname is starting to stick. If I can have a follow-up question, the multi-year agreement, is that sort of under similar conditions that the annual agreements are always sort of the margin profile a bit worse, because it’s sort of longer-term agreement. How should we think about it?

Christoph Vilanek

Well, I mean – yeah, I can obviously not disclose the details. But the character of annual agreements is, if I put it in, let’s say, hash [ph] words, the annual agreement from a network operator side is driven by the – I thought that they could steer in very much detail what we’re doing. So – and I’m going 10 years back in history to said you are supposed to sell, so and so many tariffs with this, and so and so many new customers with 1 gigabyte and we want to not to include flat rates or minutes, and so on and so forth. And they gave us tons of monthly, quarterly and annual incentives and sanctions on the mix that was – that’s the philosophy, or it was obviously philosophy behind the short-term agreements.

Whereas in the mid- or long-term, I would call it mid-term, if it’s crossing the maybe 2 or 3 years, it’s like where do we want to be in 3 years? What is our cost of goods or what is – what we – what their net income, if they take our payment on cost of goods minus their investment in bonuses and supportive payments on commissions. So, they say we want to grow with you, we want to grow our gross margin with you. What can you contribute? And what do we need as a support and then we agree on kind of like a split on the overall growth. So, the character is or the philosophy behind this – the sentiment behind the contract is extremely different.

And if we do the percentage lines, then maybe they are more or less the same, but we are not under pressure of meeting quarterly results to make the overall margin, but we can compensate over a quarter we can also delay something. So, I think, it’s a matter of or it’s a signal of mutual trust. And the willing to work together on midterm plans. And it also includes commitment from the operator side to give us access on all the technologies and new ideas that they have.

Martin Hammerschmidt

Very clear. Thank you very much.

Operator

Francesca Schild from BNP Exane Paribas. Please go ahead.

Francesca Schild

Thanks very much. I’ve just got two questions and a clarification of sorts, right? So firstly, on contested environment in mobile, I know you’ve already touched on it, and your net adds remained strong. Maybe could you just elaborate a bit more what you’re seeing in terms of the environment? Secondly, on fixed line broadband, can you just give us an update on your plans for product offering here? And then thirdly, as I said, it was more of a clarification on the line capacity briefly. Can you just talk us through the net add opportunity at why to TV next year? So how many subscribers do you expect to move across, yeah, perhaps you could just give us clarify on that? Thank you.

Christoph Vilanek

Yeah, thank you. For sure, I can. Well, I think competitive environment, it’s kind of repetitive statement. I think everybody is cooling down a bit, and everybody is understood that. It’s not worth doing significant discounts, because it’s a very short-term – has a very short-term impact. So, I think, overall, what we’re seeing, why are we all doing well, because we move prepaid customers into postpaid customers. This is why everybody chose the net growth. And what we want to clearly see is that that may be it will consider the sole difference, or the sole changes over the past 2, 3 years is that online business is more stable, everybody accepted that also online, you cannot push grow significantly, because it becomes really expensive. I mean, you’re paying them more for search engines, you’re paying more for display adds, you’re paying more for social. So, I think, there’s more often, yeah, rational view on the online channel maybe that is also triggering overall a softer promotion environment.

And then, Deutsche Telekom, they’re playing on full scale on there, [quite operated of] [ph] so fully integrated. Vodafone is trying to do that, but they are a bit behind because of their missing IPTV offering and the kind of like situation with cable being not super competitive now with new technologies, and on the one hand to get the fiber coaxial coming in at the same time that DOCSIS upgrades are not working so well. This is, I think, what we saw the last few quarters on fixed line access in Vodafone.

On the second question, the proposition of our freenet internet is and we’re starting right now with mobile fixed asset only, and we will add fixed line asset access in Q1. And then, during the year of 2023, we will also integrate cable and on a local scale we will also cooperate with some of the fiber coaxial.

Operator

Thank you. We will now move to our next question from Titus Krahn…

Francesca Schild

And did you just…

Operator

Yeah. Please go ahead.

Francesca Schild

Did you see this come back quickly on the waipu.tv clarifications? Thanks very much for the other answers.

Operator

Pardon the interruption. We experienced a momentary interruption into this call. We lost to speaker line. One moment please.

Francesca Schild

Hello. So I’m not sure, if you can hear me?

Operator

Yes, we can hear you, madam. We just lost the speaker line. One moment please, we’re going to reconnect the speaker line. Please stand by. Please continue to stand by. We’re trying to reestablish the speaker line. Okay, we have a speaker is back with us. So we may proceed.

Christoph Vilanek

Okay, sorry. So I don’t know, when I broke up. So repeat the statement on freenet internet, freenet internet is meant to be access, what is the English word, immune, so it, we – the end consumer will download the app, they will tell us where they live, what they need, and then we will decide on the access technology, whether it’s fixed line, whether it’s copper, whether it’s cable or meter mode. When it’s fiber, right now, it’s fixed mobile only. But in the course of the coming year, we will add the normal DSL line in VDSL, and then we will add cable. The price will always be the same. And that is the promise to the end consumer, don’t worry about the access, we will take care.

And even in the case where we feel that you would need to have changed from one to the other technology. As the end consumer you will not recognize, it’s always the same price. That is divisionary, the division and the philosophy right now, it’s limited. But as I said, in 2023, we will have minimum two, but most likely three extra technologies in parallel.

On waipu.tv slash your question on Deutsche Glasfaser, as far as we know Deutsche Glasfaser has about 2 million households that this service access today out of those close to 100,000 have also a TV service we started Glasfaser. This is based on old technology obsession with set-top boxes. And these, I think, it’s 84,000 customers will now get a replacement of their old set-top boxes with our waipu access dongle, and waipu remote control.

They will be informed that they pay the same price as before where they have a much better service, much better product. And they can extend the product with the service of waipu. It is not a Deutsche Glasfaser powered by waipu product. It’s a straightforward waipu product. So first step is be migrate these 80 something 1,000. In parallel, any new customer acquisition that Deutsche Glasfaser will contain or will tell the people that they have a fabulous TV product.

And the third wave will be that they do the same marketing in CRM into the existent customer base. So I think that Deutsche Glasfaser for during the course of the next year will have – well, definitely more than 100,000, anywhere between 100,000 to 300,000 subscribers of waipu, or we will generate up to 300,000 subscribers. It’s actually hard to tell they have a great marketing team, that daily conference calls how to make best effort, nobody has really done big scale migrations on this.

This is why I’m still a bit reluctant on a more precise statement on the volume, but I’ve seen the packages, I’ve seen the promotions, I’ve seen the letters that are supposed to send. They will start in the first 2 weeks of January with smaller text sizes in order to immediately optimize, but they are very keen on it and they see it as a real competitive advantage compared to any other existing fiber providers.

We are talking to many other fiber providers in parallel, and we for sure hope that this role, this DGF deal becomes a role model and a good example for the others and that also they might be attracted for our service.

Francesca Schild

Great. Thanks very much.

Christoph Vilanek

Thank you.

Operator

And we will now move to our next question from Titus Krahn from Bank of America.

Titus Krahn

Hi, good morning, guys. Thanks very much for taking my question. I have just 3 short ones, perhaps, just following up on the previous ones. Maybe first on waipu.tv, given that you kind of growing very nicely now, probably ahead of initial expectations, and I mean, you’re just statement – your statement just now have implied maybe even 400,000 or more net adds in the next year. And I just wondered, when would you kind of think you’re able to give an updated medium-term update on the outlook for net adds in the segment?

And second question, just on your loss of balances, which I think provided the roughly €10 million EBITDA boost this quarter again? How should we think about them going forward? Do you think you know about kind of at the right level, I know that you pretty confident on bad debt and the German consumer at the moment?

And maybe the third quick one, just also following up on the fixed broadband or generally broadband, I thought, which you have launched already in the fixed wireless access? How is it trading right now? How many net adds do you roughly see per month, a quarter and generally a new medium-term guidance? How many net adds until 2025? Have you actually calculated or assumed, when look ahead? Thank you very much.

Christoph Vilanek

Well, thank you. I mean, on the first one of the waipu numbers, I think, it will definitely be in a much better position by the end of Q1, because we have done experienced not only DGF, but also one of the smaller migrations. And we will come out with, I think, a more detailed plan and also midterm outlook. Most reasonably, with the Q1 results, the latest are with the preliminary results, early March, I think that is fair. The 400,000 that you have just mentioned, they are not worrying me, I think that is definitely the ambition I would have from today. But I would not want you to consider it as already indicated. But, I think, that the logic that you are the equation that you have opened up, it’s very much in line with, what I would say.

On the broadband, we’re currently talking for run rate, which is still below 10,000 a month. And once again, we need to wait for the fixed line product, which will be launched in January, so that we can really test the full proposition of the product. And, I think, it’s the same here with the preliminary results, early March, we will be in a much better shape to give you also an outlook for the full year. And on that I head over to Ingo.

Ingo Arnold

Yeah. The bad debt, we have a lot of early indicators we follow. And so, what we see is that definitely there is an increasing development in the bad debt for the next month. But we do not see a real hard change, a big change. This is nothing where we foresee at the moment. I think it’s still a question all the households will develop. And so, it’s a little bit – it’s questionable, how it will develop, but what we definitely can say is, we build some provisions in the past. So even if it would develop worse than we expect, there would be the provision to compensate it. So from my point of view, I do not see any EBITDA risks from the bad debt at the moment.

Titus Krahn

Everything very clear. Looking forward to the results.

Operator

Thank you. We will now move to our next question from Usman Ghazi from Berenberg. Please go ahead.

Usman Ghazi

Hello, gentlemen, thank you for the opportunity. I’ve got a few questions please, just a couple of housekeeping questions. First, Ingo, just want to clarify when you say that you don’t have any obligation to refinance. I mean, are you just saying that look, I mean, the earlier refinancing is May 2023, so you have time? Or is it that there are some options within the promissory notes that mean that you can just roll the debt over rather than refinance in 2023, just want to clarify that?

The other question was on waipu. I think in your conversations with investors, you’ve been highlighting that internally you’re discussing whether there’s an opportunity to spend a bit more in marketing in 2023, to boost the growth at waipu. But, today, it seems like you are at least the operational guides in waipu, don’t see a need for this. Can I just clarify that that is the case? And just how that correlates with your outlook for EBITDA, because obviously, if you decide to spend some exceptional marketing for waipu and EBITDA growth next year might not materialize? So just how those two comments would tie together would be helpful?

And then the final question was just on the dividend. This year’s free cash flow, obviously, has been at least the reported free cash flow is being impacted by several one-off factors, including, obviously, the CapEx and the settlement with the government, and then your decision to use the additional headroom to pay off the factoring liability quite significantly? So, I mean, remember, when you think about the dividend payments of 80% out of free cash flow? Are you minded to pay it out of the report free cash flow? Or would you say that look that’s a bit unfair to shareholders, because the recorded free cash flow is being impacted by the few exceptions plus our decision to pay-off the backend liability cost, actually, we should look at a more of an underlying level of cash flow to determine the 80% payout? Thank you.

Ingo Arnold

So, hi, Usman, maybe I start with your first question. I think, definitely, we have an obligation to repay, but we do not have an obligation to refinance, because we have cash on the balance sheet and we have the revolving facility line. So debt, it has to be repaid. And on the dividend and the free cash flow question, yeah, I think we have some one-off this year, you are totally correct. And all what I can forecast at the moment is that we pay out 80% of the free cash flow. This is what we promised. I do not expect any change in it.

And, definitely, if we would not have one-off next year, then you can forecast an increase in dividend. I think it is early now, because we have not budgeted the following years. We have to see what special effects could happen. And therefore, I think, yeah, basically, I would also expect with increasing EBITDA is what we forecasted with increasing free cash flows, what we forecasted. I think, I would also forecasted increasing dividend, I do not see any reason at the moment to change our financial policy.

Christoph Vilanek

I mean, if I may add there, I think that is ultimately what we are, we always – I miss this, and we also – we have a financial policy given the overall interest environment, the fact that the equity markets are changing from interest rates, et cetera, et cetera. For sure, I can assure you that we will also discuss the best location of free cash flow. But as Ingo said, that would include if we would change anything there, then it would mean that we change our financial policy and I think this is nothing at this stage, and there’s nothing that we can decide or do overnight. We need to see what the first quarter brings and also how other companies act upon the changes.

Finally on the waipu question. I think you’re very well listened to all the comments. I was trying to say, well, during the budgeting process right now, we include 2 or 3 scenarios for waipu. One is a scenario, where we spend more in order to – into fast in growth. But we would try to do it during the first half of the year, in order A to take as much as often from the revenues and margins, also in the calendar year. That is one scenario. So you push hard during, specifically, second quarter, spend more. But your payback is – the majority of the payback would already be within the calendar year of 2023.

And the other scenario is more the one that is currently management they’re addicted to is that we have a continuous flow. We never overspend. And we stick to a specific ratio of subscriber acquisition costs and payback time. But most of the good thing about those two scenarios is that for the overall budget and the EBITDA outlook in 2023. The impact will be very minor, specifically, also because acquisition costs are expended over the lifetime period. So, I think, this enables us to do various scenarios – to think about various scenarios. But that also indicates that we will not significantly increase above the line spendings, but [support that] [ph] and then be allocated this subscriber acquisition costs. So it’s not a contradicting idea, but it’s a scenario thinking to optimize.

Usman Ghazi

Thank you very much.

Operator

Thank you. Our next question comes from Adam Fox-Rumley from HSBC. Please go ahead.

Adam Fox-Rumley

Thank you very much. I have two quick ones, I think, please. The first one is a little bit of a follow-up to Usman. And just thinking about the CapEx budget this year, thinking about the HQ upgrade are in that number, I think, Ingo mentioned, you might struggle to spend all the money that you’ve previously been thinking about. So I was just wondering as we look into 2023, whether there are big projects like that or the same projects that carry on that we should just make sure we think about – when thinking about next year’s free cash flow?

And then, secondly, given the scale of the opportunity that you’re talking about here with waipu and the big customer numbers that potentially are up for the graph. I guess, I thought, it was just worth revisiting whether or not there were any variable costs to be aware of if the base were to grow to the degree that you were talking about there. I mean, thinking about things like I don’t know server capacity or material cost items that aren’t necessarily just sales and marketing or staff costs to think about it?

Christoph Vilanek

Well, the first one is on the CapEx, I mean, we have reality is simple things that we had to change 500 stores with the outside street side flex. But we couldn’t get hold of the material because, well, there is shortage on bit [ph] metal frames. And, I think, that is what we were seeing all over the place. We were trying to expand parts of the DVB – DAB coverage, we could not do it this year, because order charge was not able to deliver the chipsets respectively, the server capacities and the servers as such.

So, I mean, these things are shifting, I guess, that is the case for any company in the world. So even if we put them suddenly get delivered everything in January, we expect the same – in next year, the same delays, there is no reason to believe that this is a sudden change. So, I think, CapEx is going to be at the same level as next year, no big changes. There is no exceptional project. There is no exceptional product. It’s just an ongoing, the ongoing refurbishment, ongoing maintenance and the ongoing investment in self developed software pieces and installations. So, I would – if I was modeling it, I would just keep it on a similar level. Ingo?

Ingo Arnold

I think the only thing what you have to deduct is the renovation of renovation of the office, of the building where we had this year. So, I think, we should see the CapEx again on a normal life level. But we definitely is correct, we had some phasing or postponement effect. But we have not finished here. But, definitely, I do also not see the big special events in 2023, which should lead to a lower CapEx.

Christoph Vilanek

Yeah. And the second question was on whether there are positive or negative scaling effects or fixed costs terms, if we have a significant higher growth in waipu? No, it’s not. We have 68 people, whether we have 1 million customers or 1.5 that there’s been no impact, because it’s a software-based service. The big variable costs are the delivery, but that including the server, but that stays – while its variable stays the same. You have neither positive nor negative scaling effect. And the biggest chunk of cost is a cost per subscriber or content cost per subscriber, and DAB [ph] as well. There are some scale effects on personnel, by definition. Nothing that you could – we don’t need an extra datacenter. We don’t need totally more infrastructure. It may well be that if we would now go. Well, if I will compare today’s business with a 3 or 4 million subscriber business then there is CapEx included. And they would also be a question whether the equipment if we sell set-top boxes, or we equip the end consumer free of charge for set-top boxes that would end in the CapEx.

But once again, I mean, these devices are €25. So even if you would take the €100,000, you’re still talking about a number of €2.5 million, which I think in the overall CapEx is manageable. This is why I think you can assume more or less a mid-term on a similar level.

Adam Fox-Rumley

Great. Thank you very much.

Operator

[Operator Instructions] Our next question comes from Yemi Falana from Goldman Sachs.

Yemi Falana

Good morning, everyone. Thanks for taking my questions, and congratulations on the quarter. I think one of the underlying messages that came out of today’s results was the very strong customer growth that we’ve seen across the various businesses. It would be really interesting to get your perspective on the postpaid net add trends and just ultimately, where those customers have come from? What you view the sustainable kind of net add trajectory and the share take opportunity here as really interested to know if you think the value segment is potentially expanding in recent quarters? Is there any color that would be super helpful?

Secondly, on the waipu.tv side, you’ve laid out some clear levers to better customer growth going forward, whether that’s Deutsche Glasfaser partnership or otherwise, kind of how should we think about that kind of in terms of your customer ambitions on a 1-year view? Clearly, the kind of longer term opportunities there and adoption in the market is rising, but kind of what’s the kind of base case it for next year would be super helpful?

And then maybe finally, are there any kind of puts and takes around the EBITDA profile into next year? So you laid out the two cases from the waipu.tv management team in terms of investment in the growth opportunity that you see longer term? In that second case scenario, what would the outlook be from an EBITDA perspective? And do you think, kind of broadly speaking that would need to be any kind of consensus revisions on that basis? Thank you.

Christoph Vilanek

Yeah, thanks for those questions. I think, postpaid net adds, I would expect next year on similar level than this year. As I pointed out, I guess it’s basically it’s coming out of the form of prepaid segment. I mean, we don’t increase the population in Germany and since all the operators and service providers, all the 5 players in the market, kind of report gross or at least flat numbers. So it comes out of prepaid. It comes out of double and triple usage. It comes out of additional devices that individuals take. So I would expect for next year, similar to this year, as I said. On the EBITDA, I think it is – I can just confirm our ambition is and the first indicators on the budget show that that the entire management team not only the two of us, but the entire executives agree that at a level of 2% to 3% growth is a minimum of our ambition. And it shows the strength of the business and the underlying aspects of growth and customer base et cetera, et cetera, support that.

So no matter whether we do more or less growth in the waipu in this organic method. Then I would expect that next year’s EBITDA will be higher than this year. No matter what this year is €470 million, €475 million or €478 million, or whatever, that is definitely happening, whether the step up from one year to the other is maybe a bit lower. But as Ingo said, I mean, we are ahead of the curve for the 5-year guidance. So, but we would not allow ourselves to have a drop in EBITDA next year or the year after in the current setup. That is something that we’ve promised, that is something that motivates all the individual, and that is also the sentiment in the company. I think even that, let’s say, the normal people out there in the shops, they feel that an annual growth is something that shows success, it’s confirming that the effort and create energy and motivation, and we will continue to do so.

And on the EBITDA – on the waipu customer base, I said to one of the previous questions, I think an equation giving us 300,000 or 400,000 net adds next year is something that, while very much fits my first view. But we will be way more concrete in March next year, because we then for the first time have done the exercise of migrating customers from one place to the other. And we had the effect of this decade Deutsche Glasfaser announcement was suddenly some of the other players showed up and started to talk to us.

And hopefully crossing then in Q1, the 1 million subscribers is also changing the public notion in within the industry. And we were the ones that Netflix approach. We were the ones that Roku approached. So, I think, I expect that a certain stage kind of on the end consumer word of mouth effect, but also in the industry kind of a notion of this is a reasonable partner and there is local city networks like NetCologne, like M-net, they do their own TV services right now, there isn’t dozen of those.

Are they ready to change their internal supplier plans within the next two quarters? No, they’re not. But they are now aware that there is a player that is doing much better than any other. And whether this will be a show number effect on the subscriber numbers already next year or a little later. For this, it’s too early to say. But once again, I promise to give him a way more detail in March.

Yemi Falana

Thank you very much. I look forward to your presentation in March.

Operator

Thank you. There are no further questions in the queue. I’d like to hand the call back over to our speakers for any additional or closing remarks.

Christoph Vilanek

Well, guys, thanks for your intense interviewing us. Thanks for my internal team to prepare this quarterly results so well. I hope to speak to all to you soon. And thanks for joining and have a nice weekend.

Operator

This concludes today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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freenet AG (FRTAF) Q3 2022 Earnings Call Transcript