Earnings in the mobile communications industry have been falling for years.
freenet, however, continually delivers stable results, most recently even increa-sing its revenues again. What’s the secret behind this positive performance?
It’s not so much a secret as a bundle of cor-rect strategic decisions. And then we put them into practice with the utmost determi-nation. It is indeed true that average revenue per customer (ARPU) has been declining for years in traditional mobile communications.
We responded proactively to this.
By doing what?
First, we began focusing—at an early stage—
on high-value contract relationships, which deliver better earnings, in our customer acquisition and customer base management. At the same time, we are constantly working on making our internal processes, services and sales even more efficient. We are also developing a new, dynamic growth segment in the form of Digital Lifestyle products and services. And finally, we made some smart acquisitions in the past few years.
How is this reflected in the current figures?
Even though we didn’t launch or start selling key Digital Lifestyle products such as our own md Cloud, our SmartHome box for mobile heating control, the md Music Flat and the GameFlat Flat in our shops until sometime last year, they have already generated tens of millions in revenues.
A very encouraging start!
Especially since freenet, as a service provider, doesn’t incur any major development costs for innovative Digital Lifestyle products.
That’s right. Essentially, we keep scanning the market for interesting, innovative products. If they meet our criteria, we turn them into attractive packages for the customer—in conjunction with expert advice and comprehensive services. However, in the case of the mobilcom-debitel Cloud and home automation solutions in particular, we also helped to shape the value chain ourselves—
thereby further increasing their margins for us.
To our shareholders
To our shareholders: Interviews with the Executive Board 32
Talking about more efficient processes.
In the financial year before that, freenet’s initiatives and projects in this area focused especially on services and offers in the shops.
What were the main areas of focus in 2013?
Most recently there was more of a focus on customer ser-vice. On the one hand, we again upgraded the technology and features of our training centre in Erfurt, which was already one of the most state-of-the-art in the European telecommunications industry. This means we can better train and coach our employees in matters of consultation, service and sales.
On the other hand, the launch of our Balance project was another key focus in 2013. Its aim is to manage the con-cerns of the customer in a more flexible, convenient and efficient way: Whether the service is contacted by tele-phone, email, fax or letter, customers should be routed as quickly as possible to the employee who is best trained and prepared to deal with their request. To achieve this, customer concerns and the skills of our service staff are matched, or brought into balance, by an intelligent rou-ting strategy. In the medium term, we are working towards a single, central processing system that eliminates the boundaries between the different departments, e. g. call centres or writing teams, that treats customers’ concerns as a single process with the fastest and best possible solu-tion as its goal.
Customers will be pleased!
I’m assuming so. In any case the goal is to significantly improve customer satisfaction. We are seeing sustained growth in Customer Ownership, our most valuable custo-mer segment—even though the German market is more than saturated. Our systematic efforts to provide com-prehensive customer service clearly contribute to this: a satisfied customer doesn’t switch, especially since we give them the full range of choices when a new contract is pen-ding—the attractive rates of mobilcom-debitel and our dis-count subsidiaries and the original tariffs of network ope-rators at a discount.
To our shareholders To our shareholders: Interviews with the Executive Board 33
What’s next—this year and after that?
First of all, there is “integration work” to be done, as in 2013. Early last year, we had taken over the online retailer MOTION TM and GRAVIS, the leading German retail chain for Apple products.
In the months that followed we supplemented or merged the GRAVIS product range with the product lines of our shops.
At the end of the year, the agreement to purchase Jesta Digital Group added an exciting new task: With around 300 employees at its offices in Berlin and Los Angeles, the Jesta Digital Group is a globally leading provider of leading-edge digital entertainment formats and of services for their users. Jesta’s products expand our strategic portfolio of mobile Digital Lifestyle applica-tions, increase their reach, and simultaneously open up new national and international customer groups for the freenet Group’s offerings.
All while maintaining freenet AG’s sound, conservative financial strategy.
Exactly! Basically, we are restricting our potential interest to reasonably priced companies whose acquisition makes strategic sense and usually has a direct positive impact on freenet AG’s EBITDA and free cash flow. The Jesta acquisition takes place within the parameters of our financial policy:
the underlying EBITDA multiple for the Jesta Digital transaction is below the current stock mar-ket EBITDA multiple for the freenet AG group. The purchase also reduces our dependence on the traditional, ARPU-driven mobile communications business and strengthens our Digital Lifestyle revenue contributions in a practically ideal way.
What else is on your growth agenda?
Besides the growth impetus created by acquisitions, we will also continue to develop organically over the next two to three years—especially by strengthening our stationary sales. For instance, our current 553 shops operated under the main mobilcom-debitel brand are mostly focused in major German cities. Now we are increasingly moving into smaller towns of 30,000 inhabitants and upwards, and will increase the number of mobilcom-debitel shops to 750 in the medium term. We are paying for this from our current investment budget of 20 million euros a year, fed from our free cash flow.
So the recent syndicated loan to refinance freenet AG’s business activities has a different background!
Yes. For several years now we’ve been working on systematically reducing the Group’s debt and diversifying its financing. Since 2011, the latter has rested on two large, fixed-interest pillars—a multi-year bank loan including a credit line, and a bond. Then at the turn of the year 2012/13, a promissory note with a volume of 120 million euros was added. The capital measure concluded in December 2013 allows us to prematurely repay the current credit line of initially 240 million euros, which comes due in 2014. The newly agreed credit line allows for a total of 300 million euros to be drawn down, which then largely ensures the repayment of the 400 million euro bond that expires in 2016.
To our shareholders
To our shareholders: Interviews with the Executive Board 34
That’s a pretty solid financial foundation for achieving your other goals.
Absolutely. Besides, we have a healthy equity ratio of currently 50.0 percent, and our net debt, which was dramatically reduced over the past few years, is now at 427.2 million euros and there-fore continues to be at the lower end of our target corridor—while the debt ratio is 1.2.
And the targets for 2014 remain unchanged?
Yes. With revenue expected to increase again, we are striving to increase EBITDA for the current year to 365 million euros. And as before, we want our shareholders to participate appropriately in the company’s success. That is why we set a bandwidth of 50 to 75 percent of free cash flow in our dividend policy, which we want to distribute as an annual dividend. We did so in the past financial year, and we don’t plan to change that.
To our shareholders To our shareholders: Interviews with the Executive Board 35
Stephan Esch: