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Edited Transcript of UTDI.DE earnings conference call or presentation 26-Mar-20 1:30pm GMT

Full Year 2019 United Internet AG Earnings Call

Montabaur Mar 27, 2020 (Thomson StreetEvents) -- Edited Transcript of United Internet AG earnings conference call or presentation Thursday, March 26, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Krause

United Internet AG - CFO & Member of the Management Board

* Ralph Dommermuth

United Internet AG - Founder, CEO & Member of the Management Board

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Conference Call Participants

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* Christian Fangmann

HSBC, Research Division - Analyst of Telecoms

* Florian Henritzi

BofA Merrill Lynch, Research Division - Research Analyst

* Jakob Bluestone

Crédit Suisse AG, Research Division - Research Analyst

* Jonas Blum

Warburg Research GmbH - Analyst

* Joshua Andrew Mills

Exane BNP Paribas, Research Division - Research Analyst

* Martin Jungfleisch

Kepler Cheuvreux, Research Division - Junior Equity Research Analyst

* Stephen Paul Malcolm

Redburn (Europe) Limited, Research Division - Research Analyst

* Ulrich Rathe

Jefferies LLC, Research Division - Senior European Telecommunications Analyst

* Wolfgang Specht

Bankhaus Lampe KG, Research Division - Analyst

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Presentation

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Ralph Dommermuth, United Internet AG - Founder, CEO & Member of the Management Board [1]

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[Interpreted] Ladies and gentlemen, welcome to today's conference regarding the annual financial statement for 2019. I would like to walk you through the corporate development. You're all familiar with our company. We differentiate between 2 segments: Internet Access, and on the other side, the Applications business. On the slide, you can see in the middle, in the square, our assets, our team, our high sales strength, our operational excellence with 62 million accounts in 12 countries. You can see the data centers that we operate and the network infrastructure that is available to us in Germany.

On the next slide, you can see our brands. They address our Internet Access customers in the consumer area. There, we got 1&1, our main brand, and we've got several discount brands on top, resulting from the Drillisch takeover. Then on the business side, we use the 1&1 Versatel branch to address our customers.

Regarding the Application business, GMX, WEB. DE and mail.com are our consumer brands. Advertising is marketed by United Internet Media. On the corporate customer side, including the posting in cloud solutions, our main brand is IONOS, IONOS by 1&1. We have renamed the company. This is the former 1&1 Internet SE. And then we have several other brands resulting from acquisitions: Arsys in Spain, Strato in Germany, Fasthosts in England and World4You in Austria. And on the right side, you see Sedo and InterNetX domains for Germany.

We have several partner companies with whom we cooperate hand in glove. In some instances, we have participations, and these participations are always qualified minorities. We hold more than 25% but below 50%. And we are also the largest shareholder of Tele Columbus.

Let us take a look at the operational business from 2019, and let me get started with the Access business. Consumer access-wise, we offer DSL connections. We are the largest alternative provider in Germany. We have a good network quality as is confirmed by the connected test in regular intervals.

Now the last mile. Usually, we use Telekom solutions there, and we combine the fiber optic transport network of our subsidiary, 1&1 Versatel, with the central points of Telekom and that gives us high added value for VDSL and vectoring. We also offer a fiber optic connection to our consumers. We do that in cooperation with city carriers. City carriers are connected via our open access interface. In this way, households supplied by the city carriers can also be covered by ourselves.

Now we have a business that is actually declining, the ADSL business. ADSL is a somewhat outdated technology. Up to 16 megabit is the speed. There, we are losing customers step-by-step. And this is also a technology that do not produce ourselves, but that we buy from other network operators. We only produce VDSL vectoring ourselves, and we also believe that this will be the technology of the future.

Next to the landline business. We also have a mobile business organization with around 10 million customers. We are the leading MVNO in Germany. We address the market through 1&1, which is our main brand. Then we have got partner brands, GMX, WEB. DE. And we've got discount brands that result from the takeover of the Drillisch Company.

We don't produce mobile services ourselves. We rather use the network of Telefónica as a remedy taker from the merge of Telefónica and E-Plus in 2014. That gave us access to 30% of network capacity from Telefónica Germany. And on top, we also have wholesale contract -- a wholesale contract with Vodafone.

On the next slide, you can see the development of the customer contracts. We had 790,000 mobile Internet contracts in 2019. The broadband connection contracts were stable, 4.34 million customers all in all.

Revenues up 1.3% to EUR 3.6475 billion. I need to mention that the high-margin service revenues, our core business grew by 3.1%. This is in line with our expectations. At the same time, the low-margin hardware business declined by 5.6%. The hardware is used by our company to sell a mobile contract. Smartphones are combined with the mobile contract, and there is a payback within 24 months. Meaning, we don't have a margin for the hardware. And this is why we're not really suffering a lot from that decline on the hardware side. It's fluctuating, and it always depends on how attractive the devices launched by the manufacturers. And it always also depends on how much we subsidize these handsets and what promotional activities we have.

Now let's take a look at EBITDA. There, the development is not satisfactory, minus 4.5%, down to EUR 686.6 million on the consumer access side. There are also some special factors involved that couldn't be planned for.

I want to walk you through the bullet points here. We had one-offs of EUR 3.2 million from the Drillisch integration in the previous year. That figure was EUR 25.1 million. So that figure is declining. Then we had EUR 5.7 million for the 5G network. Consultancy costs and people who are involved in planning had to be paid. And then for the very first time, there was an increase in the TAL charges. They are regulated regularly in the past, so the prices used to drop. And in '19, in the summer, the prices went up for the first time, and that was a negative effect of EUR 8.8 million on top.

Then there was also an EU regulation, minus EUR 5.6 million here. And we also had additional costs resulting from the loss of a rebate that was limited to the end of 2018. That agreement was not extended but rather was terminated, and that led to additional costs of EUR 83.1 million. We already reported these additional costs last year. And there is also an expert proceeding going on in this area. We initiated it in 2017. The expert's finding is that the price increase is okay, and we will take legal action against that because we believe there are methodological and calculation errors in that expert opinion. But for the time being, the situation is as it is, and this is why we had to live with EUR 83.1 million here. And we have also a positive effect of EUR 8.2 million due to the change to IFRS 16.

The last bullet, the arrow, is important. If you eliminate these factors, EBITDA would have been -- grown by 5.4%. That means our contract quality has improved, and this is also a significant KPI for us. When it comes to new customers and growing our revenues, we always have great store by a good margin.

Now let us take a look at the next business segment, the Business Access area. As I've already mentioned, we operate a fiber optic network. The length is 48,489 kilometers. We can cover 250 cities in Germany this way. And we have 17,145 directly connected locations there. We connect authorities and companies alike, organizations that need a high bandwidth. And we also connect central points of the telecom and city network. This is not an end customer business, but this is rather an advanced service that we provide for 1&1 Drillisch in the Business Access segment.

Over to the revenues for the Business Access side, up 2.3% last year to EUR 476.6 million. However, here, we have services included, as you can see in the illustration, services that were provided by 1&1 Versatel. This is our Business Access company. The services were rendered for 1&1 Drillisch for our consumer business. In 2017, the consumer business was reallocated to 1&1 Drillisch from Versatel, and services have to be rendered here. They were strongly declining last year from EUR 33.8 million to EUR 13.5 million. If you eliminate that and focus on Versatel's core business, then you would see a very positive development of 7.2% in both B2B and the wholesale business.

The EBITDA has developed even better at first glance. You see 102.8%. Of course, you have to adjust that figure because EUR 59.6 million result from the change over to IFRS 16. If you eliminate that, then the EBITDA change from -- change to EUR 87.6 million in 2019. This is up 20.7%, and this is a figure with which we are satisfied.

Now let us move over to the Applications side. I want to get started with the Consumer Applications. We developed ourselves from an e-mail service provider to a provider of communication information and identity management. We have various applications that we make available to our customers either free of charge or (inaudible) solutions.

On the next slide, you can see our market positions in Germany alone. We have 32.2 million active user accounts. And if you take a look at our market position in Germany, we're the market leader for private e-mails with a market share of roughly 50%. When it comes to secure e-mails, we are also the market leaders. We are #3 in the cloud storage area, quite interesting. And we also have a high reach for content. The articles in our portals -- when people want to use e-mail, they go to the portals, they also consume the articles and that content. And that means this content has long reach.

Now if you take a look at the contracts. We added 600,000 accounts to almost 40 million, 39.85 million to be precise, at the end of the year. 590,000 were free accounts, while 10,000 were added as pay accounts. Important KPIs for us is the mobile usage. The way our own clients are used, WEB. DE or mail.com, for example, we obviously want to reach out to our customers with our advertising messages. We have seen a nice growth here of 1.9 million contracts. When it comes to the cloud storage, we also have a good growth, roughly 900,000 contracts to 19.4 million all in all.

On the revenue side, we had a decline of 7%, down to EUR 255 million. Part of that was as planned. In 2018, we decided to reduce the amount of advertising space, and we wanted to rely on data-driven business models more. And in 2018, that led to a reduction of the revenue of EUR 17 million. And in '19, that advertising space reduction ran for 12 months. In '18, it was only a part of the year, and that means another EUR 8.4 million, and that means we have a negative of EUR 25.4 million here. We also have minus EUR 10.8 million from low-margin third-party marketing. Third-party marketing is something that we do in the sidelines, but we don't have a margin here. Now if you eliminate these effects, then the revenues remained more or less constant, which is not satisfactory, obviously.

Over to the EBITDA side, a decline of 8.2%. Of course, that decline was planned with the reduction of the advertising space. In 2019, EUR 8.4 million higher than in the previous year. And there were compensating effects, EUR 4.1 million of a positive effect from the IFRS 16 changeover. If you adjust it for the effects, and the EBITDA declined by 3.8%. We still have a high EBITDA margin, 40.6%. And in this business -- at least this is what the first quarter tells us. In this business, in 2020, we will see a reasonable growth again.

Let us move on to the Business Applications. Here, we developed ourselves from a web host offering storage to a solutions provider for the e-business industry. We provide tools that make companies successful online or that allow the collaboration between companies possibly based on e-mail.

Now let us take a look at our assets. With 8 million contracts, we're the leading European provider here. We are active in 12 European countries as well as in the North America. In Europe, we have a very good market position. We develop our products in-house to as large a degree as possible, and then we roll them out through our data centers.

Customer contracts, 8.15 million, up 90,000. We have a bit more than half of them abroad, 4.25 million.

The revenues, up 5.8% here. And in the first quarter of 2020, we will see a similar development in terms of the revenue development here. The revenues grew to EUR 890.6 million because of our customer growth and also because we manage to sell existing customers more products because we want to be a solution provider for the e-business industry.

EBITDA, up 5.4% here to EUR 306.2 million. Included herein increased marketing expenses. In 2019, we invested EUR 26.7 million more into marketing. One-offs amounted to EUR 19.2 million for our rebranding. 1&1 Internet SE was rebranded into IONOS. That's EUR 2.6 million more than in the previous year. In the previous year, there was the Strato integration, and there were one-offs resulting from the Strato integration amounting to EUR 16.6 million. There is a positive effect of EUR 13.7 million due to the IFRS 16 changeover. Now if you take a look at all of that, if you eliminate IFRS 16 and the increased marketing expenses, then EBITDA will have -- would have grown by 33.4% (sic) [4%].

Now these are our KPIS. As an overview, 890,000 contracts at the end of 2019. Revenue, up 1.8%. EBITDA, up 5.4%. However, we've got the IFRS 16 effect included here. If you eliminate that, then EBITDA would have decreased by 1.9%. The EBIT is on a constant level. Earnings per share went up because of special effects in 2018 and '19. You can see these special effects at the bottom of the slide. If you eliminate the special effects, then EPS would have improved by EUR 0.03 per share to EUR 1.99. Including in that calculation, we've got PPA depreciations under purchasing price allocations.

I will also give you a quick outlook for 2020. It's really short. You can only see a couple of words here on the slide. We assume that both the revenues and the EBITDA will remain at the previous year's level. We have demanding times ahead of ourselves, so we don't know how the year will develop at this time. But our business model is stable. We have a subscriber-based approach, to a large extent. You won't feel effect in the first quarter, I believe. You will not see that we're in the middle of a large crisis. And obviously, we also hope that you won't see the effect of that in the next quarter. But we can't promise anything. And this is why we can't come up with a forecast that we have to revise later on then. We decided to say that we will be at the previous year's level. Possibly, we will be a bit below the previous year's level, possibly a bit above that. And of course, we fight to make sure that we're above the previous year's level.

Now over to Mr. Krause, and he will walk you through the results in more detail.

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Frank Krause, United Internet AG - CFO & Member of the Management Board [2]

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[Interpreted] Thank you very much, Mr. Dommermuth. I'd also like to welcome you accordingly to this United Internet Analyst Conference. I would like to give you an overview of the main changes in the balance sheet.

Let me compare the figures at the end of 2018 to the opening balance sheet on the 1st of January 2019. Let's first look at the assets. A clear increase in property, plants and equipment is mainly due to the increasing after the 5G auction and intangible assets. Company value at a goodwill is mainly unchanged. The reduction in financial assets is mainly due to the sale of the Rocket shares that we still had held in December 2019. Accounts receivable of -- almost unchanged. The increase in contract assets is due to investments into the -- well, cost of gaining customers and customer loyalty -- cost of [binding] customer systems. We have a decrease in inventories and deferred expenses as well as income taxes and other assets, which is mostly due to tax claims and receivables from a wholesale partner. Cash and cash equivalents is due to a sale that was done in December 2019.

This brings me to the liability side of the balance sheet. Let's start with equity. EUR 4.6 billion is a very solid equity ratio of 50.8%. Bank liabilities, gross bank liabilities of EUR 1.738 billion is in line with -- in accordance with IFRS 15. Trade accounts payable in 2019, there was a decline after business-related increase in the second half of 2018 and now has reached normal levels again. Other liabilities, the increase that is seen there is due to the 5G frequencies and putting them on the balance sheet.

Finally, let's look at the group key figures for the year. The customer growth of 890,000 is due to customer access, 790,000 business applications, 90,000 consumer applications, 10,000 contracts. On the whole, a good customer growth of 890,000. And it's nice to see that in Consumer Applications, we see figures rising again.

Revenue and operating results per share is slightly increasing. We were able to reduce our net indebtedness due -- by EUR 260.3 million due to an excellent free cash flow.

This brings me to the end. Thank you very much for your attention, and we now come to your questions.

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Questions and Answers

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Operator [1]

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[Interpreted] The first question is Mr. Ulrich Rathe of Jefferies.

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [2]

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[Interpreted] I've got 2 questions. First of all, on the outlook that you've given, I know that times are uncertain, but could you tell us a little bit about the interval, possible scenarios that you're thinking about? Are we talking about 5% or 3%? Or what -- very roughly, what do you mean if you say roughly?

Secondly, Versatel. In the third quarter -- sorry, in the fourth quarter, revenue seems to have been fairly weak. Did you have lots of expenses? What were the effects that caused this rather weak fourth quarter?

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Unidentified Company Representative, [3]

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[Interpreted] Could you repeat the second question? I'm not quite sure. I know it was about Versatel, but what was it about?

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Ulrich Rathe, Jefferies LLC, Research Division - Senior European Telecommunications Analyst [4]

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[Interpreted] It was about the fourth quarter at Versatel, which lagged behind expectations. And I just wanted to know whether there were any special reasons for that, any specific effect that took place in this quarter to help us understand these results.

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Unidentified Company Representative, [5]

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[Interpreted] Well, if we say roughly at previous year's level, we say, well, today's level, plus/minus 3%. And with regard to Versatel, the fourth quarter -- you're right. Last year, the increase was stronger. That's usually project business uses that we've tried to [tie] to more steady revenues. So this is not a big surprise. And you see that the sales development is on a much more stable level where we had seasonal influences. So if we look at sales and revenue in our core business and wholesale, we've got a very nice development with 7.2%. Thank you very much.

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Operator [6]

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[Interpreted] The next question is Mr. Christian Fangmann of HSBC.

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Christian Fangmann, HSBC, Research Division - Analyst of Telecoms [7]

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[Interpreted] I've got a question on the guidance as well. It looks fairly conservative to me considering Versatel today. They've got the legacy business, which is only EUR 13 million now. I guess this is going to go

(technical difficulty)

for the underlying growth of 7%. And well, the project pipeline is fairly full. So there should be growth, shouldn't there, even if some projects or another isn't accomplished or isn't realized and new [comp] projects don't materialize? With IONOS, you've also grown 5% to 6% even if demand had a short-term dip, a short-term decline. So is the guidance extremely conservative? Or is that like even if Drillisch remains flat year-over-year, you could have growth?

I know that there's -- the times are uncertain. I'm trying to understand, are there any reasons or any indications for IONOS to have negative growth? I would like to understand the -- within the view of individual segments, what will remain positive and what will remain -- and what will go negative. This is interesting and important for us as regard to modeling.

And a question to Mr. Krause on free cash flow. We've had a one-off of EUR 165 million to Telefónica Germany for extending the contract. But what do you expect in principle with regard to free cash flow we've seen this year? Just a brief -- a broad range would help a lot.

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Frank Krause, United Internet AG - CFO & Member of the Management Board [8]

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[Interpreted] Let's start with the free cash flow question. Before any one-off effects, I see 2020 free cash flow about the same volume as we've seen in 2019. And let me add something on the guidance. You're absolutely right. With Versatel and with IONOS and 1&1 Drillisch and Mail Media, we see a good business. And this will be shown by the figures of the second quarter. In the first quarter, we had -- we're going to see good growth because the business is doing quite well.

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Ralph Dommermuth, United Internet AG - Founder, CEO & Member of the Management Board [9]

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Now our guidance is not about the first quarter but about this entire year. And as of today, we cannot know what the next month and -- weeks and months will bring. Just a few examples. With 1&1 Versatel, for instance, we've got clients who are now demanding, who now need more broadband bandwidth because they've got more people working from home and teleworking, accessing their servers, or they need new VPNs because they need VPN channels for their home office works, their teleworkers. And we've got more phone -- telephone minutes at the same time.

And at the same time, we've got clients, we have projects that we are working. They've simply put projects on hold that we were involved in where we won't have new business with them. And we are a bit concerned that we might have or will have clients who won't be able to pay -- will not pay us because, for instance, they run a hotel, which is closed down and doesn't have any business at all. So we hadn't -- we thought for a long time, how can we -- what can we put in the guidance? What percentage could we have for clients defaulting and receivables defaulting? We weren't able to make a decision, and I think you cannot say that today.

So let's say, okay, yes. We have a stable business. It will run more or less stably as it did previous -- I said plus/minus 3%. The good thing is that in the first quarter, of course, we're going to have a plus, which is good. So we have some head start, but we have no idea whatsoever what the next quarters will look like. And this can be seen in all our business. If you look at our portals, WEB. DE, they don't just have the subscriber business, but they also have advertising revenue, which is a 3-figure -- in the 3-digit millions. And you've got -- well, of the people who provide advertising, we've had a lot of cancellations, but we've also had a number of new contracts because we've got -- we see clients who want to increase the online business. So they're adding advertising. But we don't know how long this trend is going to last. Today it's looking good, but we cannot guarantee that it's going to continue all through the year. It might be in a few weeks or months that those who purchased advertising earlier, such as branding companies, won't do those in the year -- over the course of the year. Well, if the shops were open, the demand for online advertising who -- for those who have an online business, besides those who have an online business next to their shop business, they could reduce it. It's the similar thing with IONOS. We've got 4 million contacts in Germany. We've got 4 million contracts abroad as well in the United States, in the United Kingdom, Spain, France. These are strong countries. And we don't know. We have no idea how the small enterprise -- small and medium-sized enterprises will react and what will happen to them in the field. I mean in Germany, it's got those bailout programs and those bailout bills. So in Germany, it's looking quite good, but we don't know about the other countries. And in some of those countries, they have a frame of mindset that if I don't pay my credit card bill, if I don't pay my direct debit mandate, then this also cancels the contract. We don't know how many freelancers and small company owners would still be freelancers and all -- at the end of the summer, whether they will have taken employment or not. We've got opportunities. Many people in -- IONOS clients use the cloud because many people, they have website. So they get to the cloud because they need a good Google listing, Google search optimization or they're building up an electronic shop in order for them to be able to sell their goods online, which wasn't important before. So we do see an increased demand. However, we cannot say at this point whether this will even level off or even out or whether there will be a trend in one of the other direction, which is why we're careful with our guidance because we want to stay reliable and reasonable.

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Operator [10]

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[Interpreted] The next question is by Mr. Wolfgang Specht of Bankhaus Lampe.

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Wolfgang Specht, Bankhaus Lampe KG, Research Division - Analyst [11]

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[Interpreted] I've got 2 follow-up questions on my part. On Versatel, the question whether in this current situation, where a lot of the Versatel performance will be used by 1&1 Drillisch in building up the network. Could it make sense to switch the asset over into 1&1 Drillisch?

And secondly, with regard to Business Applications. Well, you -- have you -- you've been thinking about the possible IPO of the asset. Is this still -- can this -- is this still feasible at this point in time? Or do you have to shelf your plans entirely at this -- in this situation?

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Unidentified Company Representative, [12]

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[Interpreted] Thank you very much, Mr. Specht. We believe that -- well, we had a growth of 5.8% in Business Applications, and we do see an opportunity of increasing this growth, especially with regard to the cloud business. We're building up the cloud area. We acquired profit breaks last year. We're now expanding our sales teams. So we do see an option to increase our growth. So we do believe that an IPO is still valuable and still -- viable and valid, but not at this point. Of course, it's valid. We can go public, but we do need a market situation which allows us, and this is not the case today. So for now, we need to shelf this plan, but this is not to a detriment because we hadn't planned the IPO immediately anyway.

Secondly, you asked about the capacities of 1&1 Versatel. The capacities of 1&1 Versatel will not be -- are not the focus of 1&1 Drillisch. 1&1 Drillisch is a large customer for Versatel. But in the whole business of -- 1&1 Versatel's business is about 10%, and the rest of Versatel's business is in third parties. This is why we don't have any current concrete plans to switch and to merge 1&1 Versatel with 1&1 Drillisch. You should never say never. 1&1 Versatel used to be a subsidiary of 1&1 Telecommunication. And then when we did the switch, the Drillisch management deemed it important to not have Versatel in this joint company, which is why we took it out and we put it into United Internet. So Versatel was a subsidiary of 1&1 Telecommunication. There were good reasons for this. There are also good reasons for keeping it separate. At the moment, we don't have any plans to change this. Thank you very much.

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Operator [13]

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[Interpreted] The next question is by Mr. Martin Jungfleisch of Kepler Cheuvreux.

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Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [14]

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[Interpreted] My first question is about Access. Could you give us an overview of the performance of wholesale and B2B? Has there been an increased demand in wholesale? And you also said that the fiber optic network can also be used for your own network. Could you say something about the percentage of the possible background with your own fiber optics network or what is planned for this for the future?

And secondly, for B2B apps. What you -- what's the market environment -- for instance, we see increased TV advertising. What do you see -- what do you consider the development of the 1&1 IONOS brand to be? And do you think it made sense if you're looking back?

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Unidentified Company Representative, [15]

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[Interpreted] Right. I hope I understood all of this correctly. Let's start with Versatel. The Versatel business also includes and has included 4 years making available of fiber optic -- fiber optics access to radio towers. So they can attach their antennas through our fiber optics. We plan to offer this as a service in 1&1 Drillisch and in a large scale. Well, we would love to be their general provider so that 1&1 Versatel doing everything in this respect, the master builder for 1&1 Drillisch with regard to the network on the grid. If -- once the big cities will be expanded, they will be in the network of 1&1 Versatel. The more we enter rural districts, rural areas, we'll look up -- look for other carriers, city carriers or telecom as the others do and we'll have to -- the connections with them because it doesn't make sense to build the connections ourselves -- the connection points ourselves. We built a -- had a cooperation with the city carriers in the (inaudible). And we believe that with the (inaudible) and the reach that we have with 1&1 Versatel, we can cover our commitments to build household and do -- get broadband into households. We will be able to cover this and to do this. If we look at -- if we cooperate with all the (inaudible) member footprint, then we will be present in those cities in which we have to be present in order to get the 50% of range. We won't be in every antenna, but that's our business. We do this every day. Every day, we develop and we evolve thousands of points and connect them to the network, connect them to the grid. And we build the connections between the individual lines and our big lines, and the city providers do the same thing. And so I think we're in an excellent position, at least for the first 50%. We'll be able to use Versatel or rent fiber optics of the city networks, the city grids, to be able to connect the antenna.

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Operator [16]

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[Interpreted] We don't have any further questions in the German channel at the moment. Let's switch into the English channel and to get to the questions from the English channel. One moment, please.

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Unidentified Company Representative, [17]

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Sorry. One more thing. Sorry. Can I say something? Are we -- am I online?

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Unidentified Company Representative, [18]

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[Interpreted] Yes, of course.

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Unidentified Company Representative, [19]

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[Interpreted] Okay. Great. I want to make one comment. To answer the second question, I -- sorry, I didn't answer the second question. The rebranding of IONOS of whether we are satisfied with how the rebranding of IONOS went. We have made considerable progress, but we haven't managed to make IONOS more well or better known than 1&1. In hosting, we still see such. We see more searches for 1&1 than for IONOS, which is why we called -- we renamed the company IONOS by 1&1 because we want to tap into this brand potential. And we're not under time pressure here. We can keep this co-branding for as long as we need to. Until the brand -- the IONOS brand is -- has become even better known. We have made some progress. We haven't come the whole way yet.

All right. Can we switch to the English channel for the English questions now?

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Operator [20]

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Yes, of course. Okay. So now we come to the English questions.

So the first question is from Jakob Bluestone of Crédit Suisse.

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Jakob Bluestone, Crédit Suisse AG, Research Division - Research Analyst [21]

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Two questions, please. Firstly, could you maybe comment just when you look at your major sort of 4 segments, where do you think the uncertainty is highest? Where do you have the least visibility? And where do you have the most visibility? Just to sort of help us understand which segment has the sort of the greatest level of uncertainty around.

And then just secondly, on the Business Applications segment, could you maybe comment a little bit on what your expectations are around margins? That would be very helpful.

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Unidentified Company Representative, [22]

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[Interpreted] Okay. Let me get started with the -- in security in the various business areas. I believe they're evenly spread more or less. Currently, we don't see figures drop significantly, but we don't know what will happen, for example, in the fiber optic network area, for how long people will not buy or whether they will fail to pay or when it comes to high-quality cell phones. We can't say -- it's rather secure on one side, rather insecure on the other side. Well, the management of all 4 segments says today that they can live up to the plan if there is no major impact. And this is where we are right now. We can't give you a reasonable answer today. Well, the situation has culminated in Germany within just 1 week, so we can't really comment on that.

Now the business applications area and the margin. The margin situation in 2019 was reported as 34.4% EBITDA margin. If you eliminate the one-offs for rebranding, then it's 36% and a sales growth of 5.8%. And we always said the headline is profitable growth. And going forward, that is meant to stay like that. And for a considerable period of time, we have seen a nice EBITDA growth also compared to the revenue growth because we have already ticked off quite a few of our consolidation homework. The EBITDA margin in 2019 is more or less on the same level reported as in 2018, even though we have invested clearly more towards marketing. And these are orders of magnitude which we expect to happen also in the future. I don't speak about 1 or 2 percentage points up or down here. If we can invest towards growth, we will do that, for sure. However, we want to have the margin on an attractive level.

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Operator [23]

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So the next question is from Steve Malcolm of Redburn.

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Stephen Paul Malcolm, Redburn (Europe) Limited, Research Division - Research Analyst [24]

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I joined the call a little bit late, and I apologize if this has already been asked. But I just wanted to come back to free cash flow and the explanation you gave. I think you said that free cash flow, excluding one-offs, would be broadly flat year-on-year, you expected. I want to understand if one-offs include investments in the network and just when we might expect to get some greater clarity on when you start putting money into the ground or into steel and earthwork and stuff like that to start building the network because that, clearly, is the major uncertainty in our free cash flow forecast for the next 1, 2, 3 years.

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Unidentified Company Representative, [25]

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[Interpreted] Well, I will answer the first question on the free cash flow. Absolutely right. I said that if there are no major failures of payment in the second, third and fourth quarter, then the operating cash flow will be more or less on the same level as in 2019. That's absolutely correct.

Now on the 5G network. Currently, we are in the process of negotiating national roaming agreements. The plan was to complete these negotiations until the end of December 2019. Until the end of December 2019, we wanted to commission the network equipment providers. We couldn't live up to that, the time line. We can't say now when national roaming will happen. Negotiations are underway. But on the other side, we've got 3 network operators who are in no means in a rush. And this is why we don't know when we can finalize things. As we speak, we assume that this year, we will not be able to start construction because, first of all, we have to complete the national roaming agreements, then we have to commission the network equipment providers, then we have to do the planning. And then network equipment providers have to deliver, and only then can we use the material to build our network. And I assume that this will not happen within this year even if the roaming agreement is signed in the second quarter. And then in the third quarter, the network provider is commissioned to supply the material. Then the deliveries, the shipments and the installation will most likely not happen in the fourth quarter this year, but rather only in the beginning of 2021.

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Stephen Paul Malcolm, Redburn (Europe) Limited, Research Division - Research Analyst [26]

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Should we think about a full investment charge in 2021, do you think? Or are you still thinking that it might be in the back end of 2021 that you actually start building a network? I mean when should we start building in a relatively inverted, call it, normal CapEx program for your network build?

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Unidentified Company Representative, [27]

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[Interpreted] Well, I can't answer that question precisely. We assume that the network will be built step-by-step because of the shared capacities that you need, and that process will extend over several years. We assume that we have -- or that we can earn the required cash at 1&1 Drillisch or that we can get it financed. We don't need more equity. And we believe that we can build the network step-by-step over the course of the year. However, we don't have a precise construction and payment plan available because, first of all, we have to wait how the national roaming negotiations develop.

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Operator [28]

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The next question is from Joshua Mills of Exane.

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Joshua Andrew Mills, Exane BNP Paribas, Research Division - Research Analyst [29]

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The first one, I think you may have answered already, but I just wanted to double check. Could you remind us of your IPO plans and time line for the B2B Applications Business? Do you think that the current environment makes that more difficult? And are we thinking about a 2021 IPO of this? Or would you potentially want to delay that further to allow for more time integrating Strato?

The second question was on Tele Columbus. So Tele Columbus has actually signed a wholesale deal with Telefónica Deutschland for access to the cable network. I wondered whether 1&1 had similar plans to work with Tele Columbus as a wholesale partner and whether, as a shareholder of both companies, that could be something you would be able to facilitate.

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Unidentified Company Representative, [30]

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[Interpreted] On Tele Columbus, well, I can't comment on Tele Columbus today. Even if we negotiated with Tele Columbus, the negotiations would be covered by an NDA, and I can't comment on that question, unfortunately.

Now just your question regarding the IPO timing for the Business Applications segment. Well, as we have said earlier on, so far, we always responded that in 2021, we will think about it or later. Now we've got that current situation at hand, we have to wait and see how things develop. We have -- we need the operational capabilities for the IPO, and we need a proper IPO window to go ahead with that. But I believe we always said that it's not an issue in our agenda for this year, even though many people would have preferred to have the IPO earlier on. But for now, we have to wait how the current situation develops, and we have to focus on the development of the operational business, and then we have to wait and see.

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Joshua Andrew Mills, Exane BNP Paribas, Research Division - Research Analyst [31]

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Can I just ask one quick follow-up? Is there anything on the operational side which still needs to be done to integrate Strato to the business? Or have all of the major hurdles been overcome already?

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Frank Krause, United Internet AG - CFO & Member of the Management Board [32]

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[Interpreted] Yes. As Mr. Dommermuth has said, revenue growth, 5.8% in 2019, but we believe that there are huge growth fields, especially in the cloud segment. And we want to continue to develop the company by increasing the sales team, for example. We believe these are areas where it makes perfect sense to invest and to further develop the company on our path to the IPO.

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Operator [33]

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The next question is from Jonas Blum of Warburg Research.

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Jonas Blum, Warburg Research GmbH - Analyst [34]

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Just a follow up on Business Applications. Since you rode out the trademark of Strato in Q4, just wondering if this is some sort of indication that you might also focus a bit more on your notable customers in B2B hosting and if this is somehow contrary to past upselling measures of yours. And is there potential risk of cannibalization of your customer base? Or is it just you see that as a kicker on add-on for the business going forward?

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Unidentified Company Representative, [35]

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[Interpreted] Now Strato, you have mentioned that. You are absolutely right. There has been a change in the management team, and there's been discussions with the Supervisory Board, and the strategy was changed as a consequence. And we'd like to stick to the Strato brand because, especially in Germany, we have Strato positioned in a different segment, and I believe that is the right decision for now. And the Netherlands, Strato, and -- well, we will stick to the brand there, too.

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Operator [36]

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The next question is from Florian Henritzi of Bank of America.

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Florian Henritzi, BofA Merrill Lynch, Research Division - Research Analyst [37]

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I had 2. And the first one is on Versatel. I appreciate a lot of things going on, especially on the mobile side. But I was just wondering since in Germany, we still don't have a lot of fiber, and you are mainly concerned with the business customers at the moment, I was wondering what would be your appetite for a potential investment also in residential fiber. I think the valuation for this kind of infrastructure projects are very attractive as we have seen recently with the deal around DeutschlandSIM. So that would be my first question.

And then just secondly, on your, again, your stake in Tele Columbus. Just wanted to check with you again how you see that, if it's strategic to you, and what would be the factors for you to think about potentially increasing your stake or reducing your stake.

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Unidentified Company Representative, [38]

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[Interpreted] We are fine with that. We've got 29.9% at Tele Columbus. There has been a change in the CEO position. Dr. Ritz is in charge now. And we want, well, Tele Columbus to explain how they plan to do the business in the beginning -- in the future. Tele Columbus has got a high level of debt. And the question is, how can we capitalize on the opportunities the company has? And how can we free up some leeway despite the high amount of debt? We really look forward to get the answers from the new management. Basically, we want to keep the stake we've got, and we are very confident with what we've done here.

Now fiber optic cables, consumer areas, there, it's very attractive in Germany. However, this is a market in which we are not present currently. It's an expansion opportunity that we could use possibly. But for now, we have to focus on our core business. With 1&1 Versatel, we have taken over a company where we have reorganized quite a bit. We have eliminated the consumer business, and we have had several management changes. Then we picked up some speed in the core business, B2B and wholesale, as we have said earlier on. And now the 5G network is happening, the backbone of the 5G network. So the road map is pretty busy and full. But absolutely right. Fiber optic network for consumers is great in places where you don't have a cable TV or VDSL. Well, that is an attractive market need in Germany, where we are not active these days. We could go there. But at this time, we don't have any concrete plans here.

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Operator [39]

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There are no further questions in the English room, neither in the German room.

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Unidentified Company Representative, [40]

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[Interpreted] Okay. Then it's time for us to thank you for your participation and all of your questions. Please turn to either Dominic Grossman or myself should you have any questions. And well, stay healthy. Bye-bye.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]