United Internet Faces Cost Pressures from 1&1 Network Expansion

Summary of the Article: United Internet & Ionos Performance

This article details the recent financial performance of United Internet and its subsidiary, Ionos. Here’s a breakdown of the key takeaways:

Ionos (Daughter Company – Internet Service Provider):

Strong Performance: Ionos is performing well, exceeding analyst expectations in sales and adjusted operational results. Record High Stock Price: Ionos shares rose over 6% to a record high,while United Internet shares initially dipped but later recovered. Optimistic Outlook: Ionos raised its 2025 EBITDA growth forecast to around 17% (to approximately €530 million), exceeding previous analyst estimates.
AI Focus: Investors are excited about Ionos’ potential in the AI space, especially its expression of interest in building an AI gigafactory with Hochtief.
Digital Solutions & Cloud Growth: Ionos expects continued sales growth of around 8% in its core Digital Solutions & Cloud segment in 2025, with an increased EBITDA margin of around 35%.
Adtech Division: The Adtech division is expected to maintain sales around €400 million for the year, with potential for advancement in the medium term due to product changes.

United Internet (Parent Company):

EBITDA Increase: United Internet increased its EBITDA by 2% in the first half of the year to €675.6 million, despite increased costs related to the 1&1 mobile radio network expansion.
Profit Dip: Profit per share adjusted for special effects decreased slightly from 61 cents to 59 cents due to network expansion costs and increased depreciation.
Turnover Growth: Group turnover increased by over 4% to €3.2 billion.
Full Year Forecast: United internet maintains its full-year revenue forecast of around €6.45 billion and EBITDA of around €1.35 billion.
* Analyst optimism: Bank LBBW raised the price target for United Internet shares from €22 to €28.

Overall: The article paints a positive picture,particularly for Ionos,highlighting its growth potential and investor confidence. While United Internet faces some cost pressures, it remains on track to meet its full-year targets. The focus on AI and cloud solutions is a key driver of optimism for both companies.

How might united Internet’s declining EBITDA margin impact its long-term investment strategy?

The Expanding 1&1 Network: A Deep Dive

United Internet, the parent company of 1&1, is currently navigating significant cost pressures stemming from its aspiring network expansion plans.This isn’t simply about adding more servers; it’s a basic shift in infrastructure, moving towards a fully self-controlled fiber optic network across Germany.This strategic move,while positioning 1&1 for long-term growth and independence,presents immediate financial challenges. The core of the issue revolves around the significant capital expenditure (CAPEX) required to build and maintain this new infrastructure, coupled with the ongoing operational expenses (OPEX).

Understanding the 1&1 Network Build-Out

For years, 1&1 relied heavily on Deutsche Telekom’s network for its DSL services. Recognizing the limitations and costs associated with this reliance, 1&1 embarked on a multi-billion Euro project to construct its own autonomous fiber network.This includes:

Fiber Optic Deployment: Laying thousands of kilometers of fiber optic cable, primarily targeting areas underserved by existing infrastructure.

Data Center Expansion: Building and equipping new, high-capacity data centers to house the necessary equipment.

Network Core Infrastructure: Investing in cutting-edge routing and switching technology to manage the increased network traffic.

Last-Mile Connectivity: Establishing connections directly to homes and businesses, bypassing the need for wholesale access from competitors.

This aggressive expansion aims to deliver faster, more reliable internet access to customers, and crucially, reduce 1&1’s dependence on external providers. Though, the speed of deployment and the associated costs are now under intense scrutiny.

Cost Pressures: A Breakdown

The financial strain on United Internet is multifaceted.Several key factors are contributing to the escalating costs:

1. Construction Costs: the price of materials (fiber optic cable, conduit, etc.) has fluctuated significantly in recent years, driven by global supply chain disruptions and increased demand. Labor costs, particularly skilled technicians, are also rising.
2. Permitting and Regulatory Hurdles: Obtaining the necessary permits to lay fiber optic cable can be a lengthy and expensive process, often involving complex negotiations with local authorities. Delays in permitting directly translate to increased costs.
3. Faster-Than-Expected Competition: While 1&1 aims to be a leader in fiber deployment, other providers, including Deutsche Telekom and Vodafone, are also accelerating thier own fiber rollouts, intensifying competition and perhaps impacting 1&1’s market share.
4. Inflationary Environment: The broader macroeconomic environment, characterized by high inflation, is impacting all aspects of the network build-out, from equipment purchases to energy consumption.
5. Increased Interest Rates: Financing such a large-scale project relies heavily on debt. Rising interest rates increase the cost of borrowing, further squeezing margins.

Impact on United Internet’s Financial Performance

These cost pressures are already visible in United Internet’s financial reports.While revenue continues to grow, profitability is being impacted. Analysts are closely monitoring key metrics such as:

EBITDA Margin: The company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margin has been declining, indicating that costs are rising faster than revenue.

CAPEX as a Percentage of Revenue: The proportion of revenue being reinvested in capital expenditures is significantly higher than ancient averages.

Free Cash Flow: Free cash flow generation is under pressure, limiting the company’s ability to invest in other growth opportunities or return capital to shareholders.

Customer Acquisition Cost (CAC): The cost of acquiring new customers is increasing as competition intensifies and marketing efforts need to be more aggressive.

Strategic Responses & Mitigation Efforts

United Internet is actively implementing strategies to mitigate these cost pressures. These include:

Optimizing Network design: Refining network architecture to reduce material usage and construction complexity.

Negotiating with Suppliers: Leveraging its purchasing power to secure more favorable pricing on materials and equipment.

Streamlining Permitting processes: Working closely with local authorities to expedite the permitting process.

Focusing on High-Value Areas: Prioritizing fiber deployment in areas with the highest potential for return on investment.

Exploring partnerships: Collaborating with other infrastructure providers to share costs and accelerate deployment.

Dynamic Pricing Strategies: Adjusting pricing