Ooma Inc

NYSE:OOMA

Good afternoon, ladies and gentlemen, and welcome to the CANCOM SE Earnings Call regarding the results of the third quarter of 2023. [Operator Instructions] Now I hand over to [ Lars Damon back ].

Thank you. And also welcome from my side. I'm heading the IR department here at CANCOM and with me as the CEO, Rudiger Rath and our CFO, Tom Stark, and we would like to start the earnings call now with Rudiger Rath.

Dear ladies and gentlemen, a very warm welcome also from my side. My name is Rudiger Rath, CEO, CANCOM and here with me, as mentioned, Tom Stark, our CFO.

Let's go straight in the presentation and start with the significant events of the third quarter. CANCOM group grows in a difficult economic environment, however, benefited due to the contribution of KBC Group. The total revenue growth benefited from KBC Group and Strong Services businesses.

However, the revenue trend of the first half year continued in Q3. The demand and e-commerce and workplace infrastructure was soft, which we always also see in the client businesses like laptops, desktops, from the major hardware partners we work with. The group EBITDA benefited also from KBC space continued to deliver a strong performance in the third quarter.

This is the main driver for the growth, up the EBITDA and as well, they generated an exceptional EBITDA margin. And you see that our deal rationale was right and we already started generating synergies. Focus was also on the operating cash flow, which improved significantly in Q3. This is a result of our stricter approach to the invoicing to cash process and the management of our inventories.

The top line growth is mainly driven by M&A. The group revenue was up in 9 months and has also mainly benefiting from the KBC contribution. The group EBITDA were slightly down. And it was compensated and this all you have on the right side, in a difficult environment in Germany. And you see that we have, as well that added the EUR 10 million of special effects we had in Q2. And that lease in total, we had to drop by 4.3% in the EBITDA and the EBITDA margin trend from 8.6% to 7.2%.

If we move over to the segment, the challenging overall market environment in Germany, and we saw a soft demand in the overall workplace infrastructure, like clients, displays and following the trend we see as our hardware partners, we work with and in the e-commerce market, where we normally sell to small and medium customers.

The total revenue shrink by 1.7%. And the EBITDA margin went down from 8.2% to 6.4% in the signal of Germany. We were as well the total EBITDA in the comparison occurs in the 9 months, you have to consider the EUR 10 million one-off effect, we had in Q2. The International segment for the first 9 months was highly impacted because the Q3 was dominated by the full quarter consideration of the KBC Group, and they delivered a very, very strong earnings performance.

As you can see, because we started in the comparison from a small segment in the last year, now considered -- under consideration of KBC, we saw an increase by above 100% in EBITDA and in revenue and saw the margin by 10.1% for first 9 months. As we saw this morning here in the quarter, the group Q3 figures, we saw an increase of 26% on the top line and the EBITDA by 21% and the EBITDA margin by 84%. That is as well simulated by the KBC Group, and we as CANCOM group benefited from the strong results KBC delivered in Q3. Like hand over to my colleague Stark.

Thank you, Rudiger. My name is Thomas Stark, CFO of CANCOM and it's a pleasure to have you on the call and will, as well as pleasure is to talk about the operating cash flow. I think you can see on this slide, pretty easily that we have materialized some of the expectations, that we have raised facing U.S. investor community. We have improved or we have shown operating cash flow of about EUR 70 million in the third quarter, ending up with a 9-month operating cash flow of minus EUR 9.9 million, after minus EUR 169.7 million in the 9-month period of '22.

So this is about half the way of the improvement that we promised to you, where does it come from actually. Accounts receivables have improved by EUR 55 million. And accounts payable has improved by about EUR 9 million. We still have potential inventories. So we have a deterioration of about EUR 18 million. That's where we think we will have a significant improvement potential for the fourth quarter.

And we have a contribution of about 10 million of KBC to the overall operating cash flow. That means this regards to the end of the year, we still think and strongly believe that the fourth quarter will be the best contribution in the whole year for the operating cash flow. So it should be somewhere in between EUR 70 million and plus EUR 100 million. That's what we expect as an assumption for the full year and which would be pretty much in line with the improvement that we have seen or that we see for the full year of 2023.

Some comments on the financing cash flow. The volume that we have bought in -- with regards to our share buyback program as of 30th of 2023, was EUR 33.7 million. And I will comment on the share buyback program on the slide to follow.

Let's focus on the CapEx, we are pretty well in line with the target. Target is below 2.0% for this year with, well, foreseen improvement for 2024. CapEx-to-sales ratio is about 1.7%. We've done some investments, that could be called preempted. EUR 1.6 million has been DC investments that are -- well, usually to be done only every few years in a data center, that has contributed to the EUR 8.5 million that we see in the third quarter of 2023.

For the fourth quarter, we expect a CapEx ratio or CapEx value of in between EUR 6 million and EUR 7 million. So the goal that we have stated as a goal for the year 2023 will be met for the full year that's easy to steer, and we are still then on track with what we are facing as a group for the CapEx.

PPA-based amortization, EPS effect. We have commented on this slide and this part of the financial KPIs in the last earnings call. I think you're pretty much aware that you are -- that we have acquired KBC, as of beginning of June 2023. We have, therefore, seen some kind of changes. They are all reflected in PPA effects on amortization, as well as the PPA effect on EPS.

Please take into account that the PPA is still preliminary. So it's still subject to audit and there are changes possible. However, no matter what the results might be, there will be no cash outflow effect. This is a noncash effect, but it's important for you and for your models.

For sure, in this fiscal year or in our annual report, we will have a final data on the PPA of KBC. The share buyback status for you, as of just this Monday, you see we are entitled until the 30th of June 2024, to buy up to about 10% of shares. We have used -- utilized volume until last Monday, EUR 44.5 million. That represents about 4.56% of the share capital.

And the numbers, as of 30th of September for you, an assessment of the cash situation of the income, I've already provided to you. The financial calendar shows, today for sure, is the date for the quarterly statement, and I am very pleased to invite you at the next potential meeting point, 28th and 29th of November. We will be on the Analyst Conference at the German Equity Forum in Frankfurt, and we would be pleased to meet you there in person, please take benefit from the situation to be in touch directly. We will be there myself and [ last time in tinfoil ], -- it would be great to get in touch directly to talk about the actual situation in more detail, if required. And with that said, I would like to hand over back to Rudiger.

Many thanks, Tom. I'd like to go further, and we had it as well in the last conference call, where my colleague [ Jorg ] mentioned more in detail regarding the deal ratio of the CANCOM business income and -- we like to give you more insights.

There are 3 key facts. It's a great acquisition. The operating performance is on track and the integration running scheduled. There are some further details, I'd like to share with you. We will start beginning of next year with the common branding, across the total group and you will see then CANCOM overall. Also, we have a strong alignment of the sales organizations in the go-to-market. We have common customer wins, where we share the good things we have to deliver and we can offer to our customers. And we see also that our market footprint getting stronger in the certain markets we are in.

We expect answer, the demand in the Q4 will improve for the fourth quarter, in particular in the hardware and software businesses. Therefore, we confirm the current forecast of the CANCOM Group and to expect the development you can see for the year as a whole. That means we keep our forecast, as we mentioned the last time.

Thank you, Rudiger. With that, we would like to hand back to the operator to start the Q&A session, please.

[Operator Instructions] as a question Yannik Siering from Stifel.

Good afternoon. Can you hear me?

Yes.

Okay. Great. So I would have 2 at this point. The first one is on your guidance. If I look at it, then I think the revenue midpoint an organic decline of around 5%, if we assume a similar KBC contribution, compared to Q3. Could you talk about the sequential improvement? And what are the main drivers here? And then also on the bottom line, so if we talk about EBITDA, then I think the margin should be similar to what we saw in Q3, so around 8.4% is that a level that we should also assume going forward?

And then the second one would be on cash flow. You already alluded to it. We see [ still ] an outflow on inventories, but an inflow from receivables. Could you provide some color here on working capital management and what were the main drivers? Are there still some moving parts from the KBC acquisition? I think in the last call, you talked about working on the payment terms with the vendors. Has that happened already, for example?

Yanik, we just talked about who is going to take the question and where will be just to the point that I will take it. So first of all, with regards to the forecast and what your assumption is for sure, we have an internal forecast, and we are, where we are, for sure, well in line with the every that we have in the forecast. A very simple calculation for the assessment of the revenue is year-to-date, we are at a point of EUR 1.02 billion the contribution of KBC per quarter is about EUR 140 million. The last year, we have ended with about EUR 367 million stand-alone. So KBC not included and then we end up without any growth at a set point of 15.17%. So that should be pretty well in line and even taking into account some kind of decline compared with last year, and you have to make well, we're aware last year, we still had well impact from the supply chain topics. We are still facing improvements. We talked about the cash flow and so on. But last year was still impacted from that point. And so given the overall scenario, all those topics mentioned, I think this provides you with some more color on whether this is difficult to achieve or not.

We, with a given situation, with a normalization of business and the fourth quarter impact, I see that this will be pretty much in line with our forecast actually. Secondly, you talked about the cash flow and what has actually happened in the third quarter. You directly address the topic of KBC payment terms. This is still some kind of improvement potential for next year actually. You can't change the payment terms that quickly. You have to go into negotiations with your suppliers and so on. So this is not affecting neither the third quarter of 2023 nor will it impact the fourth quarter of 2023. This is something that we are addressing actually and where we think we will see some impact in the year to come.

So that provides you with some clarity on this year and the expectations. We have seen the improvement. You talked about what do we personally see as a potential improvement factor. Clearly, this will be the inventories. We are -- we have -- well, today from this base point of view, we have moved all of the inventories from our old ERP system to a new ERP system, that ease is pretty much the management of the inventories. And we had some, well, major projects that were still on stock, as of end of third quarter 2023.

We will deliver them in the fourth quarter, and this will impact automatically the inventory. So that's why I'm so confident in well having some improvements with regards to inventories. The AR topic, first of all, is again easier to manage in 1 system, that's for sure. And secondly, while the normalization of the behavior of customers in our internal processes is still ongoing.

So again, some kind of potential. Overall, we think -- and you might have heard it pretty clearly for the fourth quarter, we will see from our expectation, the best cash inflow in the whole year. Meaning topping the 70 and being somewhere in between last year's third quarter and the 70.

The next question comes from Gustav Froberg from Berenberg.

I have 3 quick ones. First is on EBITDA. Were there any one-offs on the profitability side in third quarter, similar to what you had in Q2, maybe any spillover effects or so? Or is this kind of a clean EBITDA quarter, if you will, with the exception of KBC. Then a question on KBC margin stand-alone. They seem very strong as well. Should we this as a sustainable level of margins for KBC now? Or were there any KBC specific one-offs in the quarter? And if yes, can you quantify this?

And then final one is just on [ having ]. I think you talked a little bit about the improvement that you want to see in Q4. Q3 was organically weaker than Q2 and -- but can you maybe comment a little bit on the state of your end markets and give us a feeling for what is driving the sequential improvement and the uplift in Q4? Those are my questions [ Mani ].

Thanks for your question, Rudiger talking. We had in Q3, an amount of EUR 500,000 here on one of regarding restructuring. To the second point of the question, KBC margin was roughly 10%, but we expect that it will weaken and that we go turn midterm level between 7.5% and 8%.

And we, as well, see, first of all, that the demand recording in our order entries increasing compared to the quarters we had before. Therefore, as well, we keep our forecast outlook, as we expected, that we had the early signs that didn't want, especially in the infrastructure and software businesses is growing, which we saw not in the Q2 or the beginning of Q3 development.

Okay. Super. Just a quick follow-up there, just on end markets. So it's mainly client computing infrastructure and software that you're saying is driving? Or is there anything else?

we have any very strong service that is anyway there. But it's more or less everything what is workplace infrastructure.

Next at Tim Wunderlich from Hauck Aufhäuser.

Most have been passed an answer. One more I would like to understand is the cost savings that you expect to realize already in Q4. I mean you've done some restructuring, and I would expect some of the benefits to already become visible this year, maybe you can give a rough estimate. And then you just talked about -- I mean this has been discussed just now about the demand improvement, that you're seeing for Q4. I mean that is unexpected and very interesting. But I'm just wondering, when you talk about the order intake increasing, currently compared to the quarters before. I mean is that not the usual seasonality that Q4 is stronger than Q1, Q2 and Q3. So you would necessarily see order intake increase? Or is this beyond expectations, beyond the normal seasonality, what you're seeing currently in terms of order intake improvements?

Well, we again decided that we start to take the question. First of all, the demand and the order intake that you addressed that. Well, demand is still moderate, I would say, but we have seen a second quarter 2023 with impact on -- no, sorry, we've seen a Q3 with impact on Q3. And as the product that we are talking about, that are affected mostly the clients, they are very quickly will be delivered and so on. The demand that you're talking about actually is the usual seasonality is reflected in last year's and this year's comparison actually.

And this is what we actually do. We are comparing last year's order intake with this year's order intake and the opportunities just respectively, and to assess where are we going to end with regards to those products and those good space revenue. That's what we are doing. So let me talk about the normalization that we talk about, well, we have a visibility on what have you seen last year, whether we see this year? And I come back to Yanik's question facing the forecast and the revenue, I talked about what has been the measure of the benchmark last year, where are we today? And that should underline, why we are confident with our forecast actually. So it's a comparison, and that's what we are talking about and it gives clarity.

sorry, yes, let me jump in there quickly. I mean that is a like-for-like comparison, I'm sure without KBC. And most likely, we're not talking about order intake growth year-over-year, but we're talking an improvement in the decline compared to what you've seen in Q2, Q3. Is that fair to say?

We see a normalization whereas we have seen a reduction, you're right, in the third quarter, we are now pretty much in line, and there are -- well, generally speaking, we are in mid -- or at the beginning of November, so it's still some way to go. So please take this into account, when we're talking about order intake. But you're right, it's something that should be at or above the level of the last year.

Interesting. So it's fair to say that at least at this point in time, they are -- that we could assume that Q3 was the trough for you guys?

Well, that's very difficult, Tim, and I've already had the question several times today. We all know -- I said 1 -- or talked about 1 example. Yesterday, we had -- they will just is that they have reduced their forecast. And, but we have specific topics. We are playing for well, why are you developing differently from your peers and so on. We have a focus on some kind of goods, so this might not reflect the overall situation.

However, with regards to our own situation, you're right, with regard to do we think that we are already done. This is very difficult to [ reedit ]. I think no one in the market different situation and the potential risk of -- or level what we are talking about or recession that might be a threat or whatever, nobody will take something for granted.

And that's why it's difficult to assess and that should be the disclaimer to what I said to you with regards to the order intake.

Okay. And then regarding the incremental cost savings that you may benefit from in Q4?

Yes, I think I can refer to Rudiger. He talked about the EUR 500,000 that we have still -- the right time utilized -- spent the third quarter to rightsize the shape and to streamline the organization. So it's significantly less than we have seen in the second quarter.

Nevertheless, we are monitoring the situation [ to ] -- and no question. I think everybody has seen that we are willing to act in case it's required, and we will do so if required. And that's for sure. So I think it's the best to say about the cost savings question.

You mentioned regarding the benefits of the efficiency program we started this year, we see the major impact, we see in 2024. It's a very -- it's a smaller amount in 2023.

The next question comes from Florian Treisch from Kepler.

Yes. I have basically 2 left. So coming back around your confidence on Q4. So I got your point that maybe the first weeks of Q4 were better, but as you're implying as well. It's basically all about the end of your budget plus it will only come in coming weeks. Do you have any confidence in, let's say, the [ Babou ] being in line with last year, better than last year. Just looking at the current macro picture, I think it's fair to see that we can also end up with a weaker end of the year business.

The second part is question before around cost savings. If you just look at, let's say, number of employees, compared to your actual top line performance, I think it's kind of asking everybody isn't there a need for a major readjustment in particular on the CANCOM side for the coming months to come, i.e., really head count reduction to realign your business? Or are you really confident in, let's say, 10% plus next year? Because otherwise, I believe you can hardly keep your current number of [ employees ]. Are you planning anything here?

Many thanks, Rudiger talking. Coming to your first point of the question, confidence regarding Q4, I just can only repeat as Tom mentioned, we have the early signs regarding the expectation. We compare with former years, and we see as well due to the rents we had with our customers and the projects we won, and they are great projects, and that will show that we have the new confidence that Q4 numbers and our expectations.

And regarding the employees, clearly, we have to monitoring closely the commercial or market development and as well in relation to our operation performance. And we reserve to take further actions, as the development don't meet our expectations. However, bear in mind that the major benefits, we will gain of our efficiency profitability program, will be in 2024.

And on the numbers, you saw in the report, there is some reflection point as well regarding due to the acquisition of KBC, we are in area here where we have to put, I would say, some additional effort and resources in like cybersecurity, et cetera, where the strong demand on services or AI in services and infrastructure sizing. And on the other side, you have maybe a downside and because you see a weakening of the development of the market demand.

That means not to go to more in detail, but there will be, if necessary, clearly adjustments, and that is under consideration, if we see development in the budget basis for next year.

Okay. If I'm allowed, maybe just a quick follow-up. You mentioned -- or Tom actually mentioned, I think that there are some large [ elite ] inventory, which will translate into revenue in Q4, can you quantify that impact? Or is that just the marginal number?

Well, actually, the inventory topic, we got where there was 1 big deal in, which is about EUR 18 million. And the debt is that topic addressed and that we expect to materialize in the fourth quarter. That's great. And nevertheless, it will be still tough work in order to reduce inventories and to keep on -- well delivery in the fourth quarter. I think a very special topic to know for you is the most and the highest part or the biggest part of the intake will be December and November.

This is actually still ahead of us. So this is something you have to take into account. But nevertheless, with regards to inventories, cash flow management, I think we have shown there is confidence in the forecast and we still have room for even a potential in the revenue generation and hopefully, having after the [ question ] 3 times now, you have a good visibility of our understanding of our options and the potential in the fourth quarter.

And the next question comes from Martin Jungfleisch from BNP Paribas.

2 left, please. First one is on the employees. So just coming back on that topic. You've reduced the number by 150 in the quarter. Was this mainly driven by natural attrition? Or was this also coming to the restructuring program? And then maybe if you can share the attrition rate for voluntary attrition, over the last couple of quarters, has this increased?

And then also, the other question is on the performance of public and private sector. If you can disclose that and maybe what your expectations for the public sector performance, are if you want to go into Q4?

The next question comes from Andreas Wollf from Warburg Research.

Sorry. I think we have question from Mr. Jungfleisch

Sorry. So I'll open the line of Mr. Jungfleisch, I'm sorry for this.

No, we about to answer actually.

Regarding to the development of the private and public sector, clearly, we see a weaker demand in the private sector, especially in the small and medium customer set the public sectors to content on the requirement despite the digital pack complication regarding in the [ K-12 ] market, that means for here, how to get the money released, the government has also the consequence is that we have some vendors, OEMs, which we work with like maybe you saw in the press fleet to Siemens that they declared that they want to step out of the German market and the computing devices here, but we see that there is still in demand and we have some big tenders out, where we are replying and we are confident that they will support to our numbers in Q4.

Regarding the employees, the 150 reduction here that is mainly driven by the restructuring and efficiency program that as well, we have some normal attrition, but the attrition rate, we will, I think, release in Q1 come.

Yes. Okay. But has that increased a bit post the merger? Or is it on the same level for voluntary attrition?

With our by knowing here, we don't see an increase here due to the acquisition, why should they, because it's a great deal, everyone can benefit on. We are a strong company and we deliver confidence here, there shouldn't be a reason that employees leave the company due to the KBC acquisition.

If you're heading for whether we have lost any of the major players of [ Kantar ] Austria or KBC, then actually, the interesting thing is I think all the employees here see the benefits of the combined organizations we have shown you and might be some of you are interested in the rationale and the idea behind it. We've talked about it in detail at the end of the -- or in the earnings call of the second quarter.

So I think in place a pretty much understanding that we have created a major player in the [ DACH ] region and that they all can benefit from their complementary offerings in parts and of their combined offerings. So this is something that is slightly different to just asking about attrition. If you're focusing this is a clear answer. I think it's something everybody perceives as a good opportunity.

Andreas Wolf from Warburg Research.

I have one regarding KBC, what was the organic growth rate in the last quarter, if you could share that with us? And could you also provide some color on the type of projects that started at KBC, and the duration of those basically today have a duration of few years? Or is it basically a new revenue level at which KBC will operate at going forward? So that's the top line related question at KBC.

And then on the integration, will you also harmonized ERP systems with the existing systems that CANCOM -- Is it something that is on the agenda? Or is it not necessary to operate going forward?

Okay. We said I will answer the the KBC growth rate aggression, actually, we don't have the growth with a value right now at the moment, but I think it's pretty result be that you see they have KBC has developed just perfectly. We are focusing very much on security solutions. They have services at their core element, and if you take a look at the contribution of KBC with EUR 13.6 million of EBITDA in the third quarter, that underlines first of all, that we think the [ regational ] is great. And we have the consolidation point in June of 2023. That means we are not right now available with the Q3 '22 stand-alone KPC was.

However, it was the best quarter of KBC ever this is something that we can say, and it's a good thing to know.

And coming regarding the project that are in major projects and the cybersecurity environment as well in the network environment, at the projects where we say, KBC 1 are in the summertime and now going up here building the architecture studying the project program, delivering the infrastructure and going to running in the normal implementation mode.

That mean there is some projects, especially in the Health Care and as well in the public market. And we have some security operation centers, deals which KBC won and now you're regarding you have to build the use cases to get customers and longer lead time to start to make it operate up to running and now we see the benefit out of it.

Okay. And the integration, is it necessary to basically combine the 2 entities also at the [ Pelleve ]. How should we look at, I'm just asking against the background of your recent transition from Microsoft to ....

From clearly, we -- at a certain point, we want to benefit that the whole group benefit from the great systems we put in place. But first, we will start to finish overall all entities in Germany here, and then we go further to CANCOM Austria or KBC here that we then have the alignment because it's not only Austria as well, Romania and Czech, which we put under consideration.

Do not have further questions.

So thank you. Thank you all for participating in the call for Q3 of CANCOM here, and pleasure. Hopefully, with meet in Frankfurt next. Otherwise, let's speak and keep in touch. Thank you, everybody.

Thank you, and bye.