Bechtle AG

XETRA:BC8

Earnings Call Transcript 2021-Q1

[Thomas Olemotz, CEO & Chairman of The Executive Board]

[Audio Gap] here at Bechtle AG. I am very happy indeed to see that you are interested in our company. And as was the case, last year or rather in March, we are happy to welcome our international guests. And this conference is being translated simultaneously into English. And in the Q&A session, you can ask your questions, both in English and in German. So a warm welcome to everybody. Over the past weekend, temperatures here in Germany finally reached the levels we expect from the month of May. Spring is in full swing now and at Bechtle, we like to be ahead of our time. So we already reached our all-time highs for all KPIs as early as March 31. I'm sure you will have read our reports from earlier this morning. My presentation is divided into 4 major parts. As usual, we are going to start with business development, and we're going to speak about the key financials of the first quarter of 2021. And then, of course, we are going to take a look at our share price development, and we are on a good track long-term view. Then in the section concerned with our highlights, we look at the most important strategic and qualitative nonfinancial results that I would like to speak about. And finally, we're going to close by giving you an outlook on the current financial year, 2021, speaking about the fundamentals and our targets this year. But first of all, let us start with our business development. The first quarter of 2021 continued to be dominated by the COVID pandemic. But just like in the previous 2 quarters, we found the Bechtle business model to be robust and not just reliable. It facilitates profitable growth even in a difficult environment. This becomes obvious when we look at the first chart, revenue for the group and the operating business segments. In Q1, we experienced excellent top line growth of 11.4% or 10.4% in organic terms. The segmental view also shows a positive trend that is similar growth dynamics in both segments. The IT system health and managed services segment continues to be our growth engine with growth of 22.4%, the system health companies abroad did particularly well. But IT e-commerce too experienced significant growth at 8.5%. Our German operations, in particular, showed strong growth at 19.8%. So the trend in our trading companies continues to develop in the right direction since Q3 of 2020, the only way it has been up. Let us now take a look at revenue trends in the different regions. As you can see in the chart, in Germany, revenues grow at a rate of 12.4%, driven by consistently high demand from our public sector clients. The positive trend becomes even clearer when we consider our companies abroad, even clearer than by looking at the operating business segments. At 9.8%, we experienced almost double-digit revenue growth here, and our French colleagues, in particular, made an important contribution to this success story. And just to remind you, we are measuring up to Q1 2020, a very successful quarter for both segments and all regions. We hardly saw any impact of the pandemic at the time. And against this backdrop, our recent growth rates seem all the more impressive. Let us now turn to the profit side, at segment level and take a closer look at our EBIT development. In the IT System House and Managed Services segment, we were able to grow our EBIT by 26.4% in the period under review. The margin increased by 40 basis points to 4.2%. In this segment, the cost savings realized in the previous quarters had a stronger impact. In addition, the share of services continued to rise. In the IT e-commerce segment, EBIT grew by 4.6%, with a slightly reduced margin of 3.9%. The reason for this was an above-average increase of cost of materials. The main impact here came from risk provisioning measures implemented in Q1, aiming to mitigate global supply shortages of IT manufacturers. At 4.1%, the group EBIT margin was clearly above the level of the previous year. When interpreting these figures, we must, however, take into account that the first quarter of 2021 was the last to experience the positive year-on-year effect of COVID-related cost savings. We'll conclude the financial review by looking at operating cash flow, which continues to be very positive. In Q1, operating cash flow was at EUR 20.6 million. And thus, as you can see in the slide, on par with the high level achieved last year. 2 factors were decisive in this respect. When it came to reducing accounts receivable, we not only repeated the previous year's success, but even outperformed it. This can be considered a remarkable success of our working capital management efforts, in particular. What is more, we were able to reduce the outflow of funds from inventory buildup. In the previous year, one reason why inventories have been so high, had been the high number of returns in March 2020, caused by a frequent lack of staff in our customers' incoming goods departments at the beginning of the pandemic. We already reported on this fact in earlier meetings. Free cash flow increased from EUR 7.8 million to EUR 11.8 million and thus by more than 50%. The important message is our cash flow and working capital improvements will have a long-term effect. Let us now look at our headcount. At March 31, 2021, 12,306 people worked for Bechtle, which equals a year-on-year increase of 4.6 or 538 heads. Thus, the increase in staff numbers is noticeable, but quite moderate, which is certainly appropriate in such uncertain times. What these numbers don't tell you is that we have also focused on training and upskilling measures for our existing staff. We invested heavily in their skills, especially during the time of the pandemic in order to be optimally prepared for any future challenges in the IT world. Now let us take a look at the performance of our Bechtle share. During the first quarter of 2021, at the stock exchanges, possibly in the hope for a quicker end of the coronavirus pandemic, it was especially those securities that had performed particularly well in 2020 that came under pressure. This mainly concerned the tech industry in general and, of course, Bechtle in particular. And so in February, our share price same as most other tech securities came under pressure in the context of the so-called industry rotation. From March onwards, however, the share price already began stabilizing, showing only a slight downward trend. The current share price, of course, to put this in positive terms has some room on the upside as they like to say. The median for the share price according to our analysts is at EUR 185. And that's a figure, which, given the strong start of the year, is not leaving us feeling uncomfortable. Let us now as usual, turn to what we consider nonfinancial special developments that occurred during the first quarter, ladies and gentlemen. The year is still young. And yet, there have already been a number of strategic or operative highlights that I would like to mention here. From our point of view, these were the most important topics. Let's begin by taking a look at our cloud activities. In February, we stepped up our partnership with Amazon Web Services by embarking on a strategic partnership. The idea behind this is to support customers in implementing individual cloud strategies and in developing highly agile IT solutions. Specifically, customers will benefit from a comprehensive service offering and an extensive scope of cloud projects as well as from a fast migration to the Amazon Web Services platform. This is a multiyear agreement, which covers all of Germany, Austria and Switzerland and is primarily geared towards small and medium-sized companies and public sector clients. The next highlight concerns an area of particularly great importance, IT security. For some time now, Bechtle AG has been successfully qualified as an APT response service provider and APT here stands for advanced persistent threat, that means that we successfully support the operators of so-called critical infrastructure and defending against and overcoming advanced persistent threat attacks. Since the end of March, the German Federal Office for Information Security has included Bechtle in their public list of certified security service providers. Thus, we are now 1 of just 15 companies in total to be included in that list. The next item concerns an aspect of great importance to us, business with public sector clients and also the connection to cloud business. Bechtle has been awarded 9 lots in the European tender of the so-called Open Cloud for research environments project. This is a framework agreement that runs until 2024, and it helps facilitate access to commercial cloud services for researchers and research institutions. And this offer has been available since January. It's being offered by a national research and education network. Bechtle serves as a framework agreement partner and as such, provides a highly scalable infrastructure as a service offering by IONOS Cloud and Microsoft Azure as well as related cloud services. The framework agreements concluded with Bechtle provide universities and research facilities, not only in Germany, Austria and Switzerland, but also in the Benelux countries, Spain, Great Britain and Ireland with access to modern and secure cloud services. Now to conclude, let me mention another development that, to be quite honest, was quite unexpected, but at the same time, very positive. It was unexpected because while we have spent years consistently investing in our brand, we had not been measuring just how successful we were in doing this. Kantar and international marketing consulting firm has done this now. And on March 11, they published their annual ranking of the most valuable German brands. With an estimated brand value of almost USD 1.6 billion, Bechtle has not only made it onto this ranking for the first time, but having achieved position 37, Bechtle was also named the best newcomer. In all modesty, for an exclusively B2B brand such as Bechtle, this is remarkable. And at the same time, it is indicative of the quality of our branding. And with that, ladies and gentlemen, we already come to the outlook. On March 19, we published our forecast for the financial year. Not all that much time has passed since then. So on the one hand, you won't be surprised to hear that today, we can confirm that forecast. On the other hand, I am, of course, aware that the figures for the first quarter are very strong and that they might possibly have justified an increase of our guidance. But at this point in time, fairly early in the year, we decided against this for the following reasons. It is true that in the first quarter, Bechtle has managed to cope fairly well with the delivery difficulties in the IT industry. However, this issue can be expected to stay with us for quite some time and thus continues to represent a major uncertainty for the entire IT industry. Furthermore, last year, it was from this time of the year onwards that we had already been seeing similarly positive effects on our cost structures due to the coronavirus, which means that starting from the second quarter, it will be these high figures that we'll be comparing against. Now these pronounced delivery bottlenecks that we have mentioned repeatedly also continue to materialize. By now, there's talk that these problems could stay with us through the end of the year and even beyond. And at this point, allow me to mention an interesting interview that Michael Dell gave to today's handles plot, amongst other things, they address this very issue. By way of our response to the situation, we have been increasing our stock levels in order to ensure availability for as long as possible. Plus we have close ties to OEMs and distributors, which in this situation has proven to be of particular value. Nevertheless, this does, of course, continue to entail certain risks for the coming quarters. Ladies and gentlemen, all in all, despite the uncertainties that I have mentioned, thanks to our great success in this first quarter, we have been given additional strength, and we continue to view the current -- fiscal year in an optimistic glide. So much for now, and thank you for your attention. I look forward to any questions you might have.

[Operator]

[Operator Instructions] So the first question is from Baader Bank, Knut Woller.

[Knut Woller, Analyst]

Congratulations on the good start into the year, despite the problems mentioned. I have 3 questions. The first question, Dr. Olemotz, concerning the shortage of some components that you mentioned. So it might -- may come as a surprise to see the good start into the year. It might also have been driven by the fact that the manufacturers themselves had high stock levels already in order to counter that risk from their side. Do you have any indications as to whether these stock levels can be maintained in order to counter any supply shortages? The second question, cost effects that might be running out and that were already included in Q2. If I'm not mistaken, the service business in Q2 2020 was a little weaker. I believe that as we can see now, there is going to be some easing of the measures, the COVID measures because incidence levels are going down. And this should boost the service level and thus, your margin. So I shouldn't worry about the margin for Q2. Do you share this view? Third question, just recently, Dynacons in India, that was one topic, if I'm not mistaken, you had a revenue goal of EUR 100 million mentioned at the time. Can you update us on this?

[Thomas Olemotz, CEO & Chairman of The Executive Board]

Thank you, Woller, for your questions. I will answer them in the sequence that you asked them. First question on the current shortage situation in the area of components. And by the way, here, we're not just talking about chips. This is something that you can read in the press, of course, but also panels and displays to an increasing extent. So there are various components that are needed for the products in the end and that we are a little worried about right now. Of course, you are right. At first glance, the strong growth numbers of Q1 don't seem to fit this picture. And there are various explanations for that. One major explanation is one that I already mentioned in my remarks, it is also because we managed our own stock levels well. And that meant that in the big projects, we maintained our opportunities of delivering in time to your question. Of course, we are tracking the numbers on a daily basis. And also, of course, weekly. And so it may seem to be a contradiction, but my answer is we were able to manage the situation quite well so far. The second point of course, the strong market situation that we built for ourselves in the markets helped us along in those markets where we're active. We have excellent relationships with our distributors who have a particular function in the industry and also, of course, relationships with the manufacturers. Every week, we talk to CEOs of the big manufacturers, Board level members about the current situation. And that, of course, has helped us to handle the situation well. It doesn't necessarily mean that we're becoming more popular amongst our competitors so because, of course, we are in a very solid initial situation, so to speak, but it also, of course, means that, so far, we've been able to deliver our products to our clients in time. So why are the numbers that good? Why are not -- they not weaker due to supply shortages? Well, answer. First of all, our own inventory management. And then secondly, good stock levels at our distributors level. And then also our good relationships at management level concerning our relations with the big OEMs. You are right, Mr. Woller, by saying that in Q2 of the previous year, we saw some weaknesses in the service area. And the reason for that was that in Q2, many on-site services needed to be switched over to remote structures. So all of that has happened meanwhile, and that is also the reason why the system house segment in this past first quarter developed so well looking at the profit side because we really managed to handle the situation by replacing on-site services by remote offerings. And that, of course, helps us along in this difficult situation, where it is still difficult to access some of the customer sites due to the pandemic. And this should also mean, by the way, that Q2 will see good utilization ratios on the service side, and that should support our margin. Third point, development of GITA. Yes, we added another partner. And let me just stress at this point that this global alliance has one major goal. And the goal is that our core business in Europe is supported by this offering. It is not in the first place about making a top line contribution to our group growth. And we are far away from the EUR 100 million that you mentioned and that we indeed did mention at one point. And in this cooperation, we find that we are using our cooperation partners abroad, mostly, and that means that these sales do not come under our balance sheet. And that gives us an advantage. And we believe it is important to have network of high-performing partners around the world in order to support our core business in the future with our existing customers. It's not so much about generating sales revenues. And you need to understand the press article in that sense.

[Operator]

Next question, Martin Jungfleisch.

[Martin Jungfleisch, Junior Equity Research Analyst]

Congratulation on the good results. I have 3 questions. First question concerns the risk provisioning that you've mentioned in the previous year-on-year first quarter, EUR 6 million of provisions were made. And the EBIT of e-commerce in Q1 was lower than your sales revenues growth. Now what is the influence of these risk provisions on e-commerce in Q1? That's the first question. Second question, concerning the capacity utilization of your employees. The current capacity utilization shows that in the past 12 months, your headcount growth was behind -- lagging behind your revenue growth. So does this mean that there is still a lack of utilization, so that there is room to grow here? And for how long will the situation continue? That's the second question. And then one question about the mix. Can you tell us about the demand in the public sector and the private sector in Q1? And can you tell us whether we see more demand from industry clients meanwhile?

[Thomas Olemotz, CEO & Chairman of The Executive Board]

First of all, regarding the risk provisions. These EUR 6 million, Mr. Jungfleisch are the right figure, absolutely. And just let's recall, it's been a year after all. But that was about basically was that for possible defaults, we wanted to be prepared. So basically, this was just adding things up because there is no such thing as collective impairments under German GAAP. So we assume that the creditworthiness level of our customers would be going down by 1. And basically, that's what we try to determine, and it's been unchanged. We have not yet adapted this. In the first quarter now, in addition, what we've done is that we put in risk provisions that are closely linked to the issue of the shortage that we just talked about when Mr. Woller asked his question. So what we looked at just from the mechanics of it, was the major framework agreements and in how many of these we had penalty provisions. Irrespective of the fact that so far, we are not paying any significant penalties. We did try to put a figure on this risk and reserves or provisions, let me put it that way. We tried to make available for this threatening risk. And this type of risk provisioning is documented in the increased material expenses, which also explains why the margin and e-commerce came under more pressure. And the effect of this is about EUR 4 million, just to give you a figure. In other words, in our statements, both the issue of possible payment defaults post COVID, let me put it that way. Think about the insolvency protection regulations, which will be retracted or no longer apply. But also the topic of possible penalties that might be imposed in connection with the difficulties in deliveries. So we made provisions for such anticipated losses. And in the last quarter, this put pressure on the earnings and in the ongoing quarter, even though these are 2 separate topics, really that are being addressed, this has an impact and is giving us an added degree of security. So if any of these risks should materialize, and let me repeat, at this point in time, there are no indications that this might happen in the short term. But even if it did in terms of earnings, it would not hit us unprepared. And just to ensure that I communicated this properly, these are effects that we have in both segments, these provisions. In e-commerce, it's more visible. Because in the system house segment, we could set this off to a degree with the cost savings. In system -- in the system house segment, people are traveling more. They're more out on the road. So these savings that we have and the use of cars, et cetera, we do not have an e-commerce, which is why this negative impact due to the provisions is more visible in the e-commerce segment than it is in the system house segment, but it's been posted centrally. In other words, both segments are affected by this. And we have an additional element compensate for this. We have a good utilization in the service and in the system house segment. As I -- and I already mentioned this. And that is why in the e-commerce segment, as Mr. Link has said, this effect is more visible, more apparent than it is in the system house segment, but it's completely correct. In fact, it does affect both segments really. As for your question, Mr. Jungfleisch regarding the workload of employees, to which extent they're working, of course, the number of employees grew not as much, but it's above the previous year's level. But once the top line growth gets kicked off again, also regarding the mix between consulting services and traditional infrastructure business, then in terms of employee and head count will also have to have more growth again, not only in order to increase the degree of efficiency that is also switching over remote services towards collaboration platforms that can be used with our customers. At this point in time, the increases of efficiency are so tangible though, as such that even though the number of employees has not grown as much as the top line, the top line growth in service -- in the service segment can still be measured quite well. And that's also reflected after all in the margin that has gone up significantly, especially in the system house segment. As for your third question, the structural matters, the public sector versus the industrial sector. In the first quarter, is the structure that we had seen towards the end of last year have continued to solidify as it were. Or put it in other terms, figures are still unchanged. The public sector client share in group revenue is still at about 38%. In Germany, and that's because we're stronger in that segment there, even stronger that is -- it is still at 40%. And these are figures that you are already familiar with from financial year 2020. So from a positive point of view and structural point of view, demand from public science -- public sector client continues to remain high at an unchanged level. Putting it in negative terms because that's also what you were touching on with your question. It is certainly true that in the industrial sector, we are not seeing as much momentum as there was prior to the pandemic. And that explains the weaker top line growth compared to previous years, if less growth or weak growth is something that we even want to talk about, given the figures that we're talking about. But compared to growth rates in the past that were at 20% and more, of course, we are below those figures.

[Operator]

[Operator Instructions] The next question is posed by Andreas Wolf, Warburg Research.

[Andreas Wolf, Research Analyst]

Andreas Wolf speaking, Warburg Research. I'd also like to congratulate you on the good start of the year. I have a short question, which is related to the service business. And also to the increased efficiency that you could bring about, thanks to remote services. Do you see a paradigm change taking place on the client side? And will that make it possible to provide more services remotely, which is also something that customer could possibly benefit from. If so, that could also have an impact on profitability expectations in that segment.

[Thomas Olemotz, CEO & Chairman of The Executive Board]

Answer. Well, from a strategic point of view, that's a very interesting question, Mr. Wolf, and a very good question. Thank you for that. Now providing an answer to that question, however, is not an easy feat at this point in time. Let me try and provide a cautious answer. I'm certain that when we report on the second and third quarter, we will see some of these trends having solidified and then I'll be bolder in making such statements. But what I'm assuming and what I'm seeing currently, what I'm observing is something that we've discussed before repeatedly, especially in connection with the implementation of collaboration platforms, that is the way in which all of us work together currently in our respective organizations, but also in how we deal with our clients. I believe we can assume that the time after -- well, I don't like to use the term new work. I don't think that's entirely accurate. But I think it is fair to say that the time after the coronavirus when it comes to cooperation within organizations and with clients will be different from what it was prior to the pandemic. I think it is fair to say that we'll make more use of digital possibilities, we'll make greater use of collaborative forms of cooperation, which will work on electronic platforms. And yes, Mr. Wolf, I also do assume, in fact, that this will impact Bechtle's service business. After all, our clients, and we ourselves are currently experiencing that, in fact, this is about a specific service and services, and these services do not necessarily have to be provided on-premise. But they can also be provided remotely, and these are efficiency gains, that not only we at Bechtle can tap into, but our clients also. You can respond more quickly. You don't have any delays. Order processing is easier for our clients as well. And also something else that should not be forgotten is that at this point in time, people are increasingly noticing that it is still possible to uphold and maintain SLAs. So in other words, our clients do place trust in the new service structure. And for that reason, I do not believe that by the end of the pandemic, whenever that will happen, we'll go back to what was before in the previous levels. It is my assumption that this mix between remote and this is something that will be shifted. And the remote part will be benefiting. We'll get greater, not such that we'll only be offering things remotely. In many respects, that's not possible. It depends on the service and the question, but I believe the share of remote will continue to increase in a sustainable fashion.

[Operator]

[Operator Instructions] And next question, Holger Schmidt, Metzler.

[Holger Schmidt, Research Analyst]

I have 2 questions. First question relates to the cloud business. Can you give us an update here on the number of clients? And then last year, we had a high number of trials, what was the trend here? What was the conversion rate like? How many of these were turned into clients? And the second question is mostly about the start into the current quarter, what may have changed compared to Q1? Or is it that the strong trend from Q1 simply continues in Q2?

[Thomas Olemotz, CEO & Chairman of The Executive Board]

Well, thank you, Mr. Schmidt. On the situation in the cloud environment, you already mentioned the most important ratios. Let's just take a look at them. Increase of number of clients year-on-year, 60% from 2,100 clients that we had on our platform in 2020 to almost 3,400 in Q1 of 2021. And we did even better in the number of seats. On our platform, it grew above average, what is important, of course, in order to achieve the economies of scale, we're looking for growth of approximately 70%. In Q1, on the cutoff date, we had around 712,000 seats on our platform. So disproportionate rise compared to the number of clients. And that is a good thing, of course. And this is why it doesn't come as a surprise that the number of contracts, we also are looking at, grew by roughly 70%, 11,200 cloud contracts were signed with our clients. And that meant that year-on-year sales revenues almost doubled, not quite, but almost doubled, going up to over EUR 16 million. And that means we can be confident that we will maybe achieve EUR 100 million in terms of sales revenues this year. It's going to be a tough race. We already see EUR 90 million materializing. And the question of whether we make the EUR 100 million will depend on Q3 and Q4 in particular, because the decision needs to be taken then whether we will be able to hit this mark or not. The trend of trial seats? Well, the trial seats, we are reporting on throughout the year, and we did that last year as well, show us that 319 new contracts were signed. So in percent, if you break that down on client level, it means that roughly 37% of the trial customers actually became clients, 61,000 seats all in all. So the conversion have not been quite as high as we would have liked. But we know Mr. Schmidt, these are the kinds of experiences we first have to have because this was the first time last year that we offered that high number of trials and this is why we are quite satisfied with the result, even if it is a little lower than what we had expected. From a market perspective, it is good that the number of seats outgrew the number of clients, economies of scale. That's the buzzword here. I've already mentioned it. So an important structural development in this context. Now I will start into Q2. We have valid numbers for April meanwhile, and I can confirm that the very good trend we saw in Q1 continued throughout the month of April, at least. So let me put it like that in diplomatic terms. We don't report monthly numbers, but the numbers of April basically confirm all the comments I gave you earlier, relating to the good development in Q1.

[Operator]

There are no further questions, and I hand back over to Dr. Thomas Olemotz.

[Thomas Olemotz, CEO & Chairman of The Executive Board]

Thank you very much. Thank you. Ladies and gentlemen, for your questions. As usual, I enjoyed talking to you, and I believe we can say but the start into the year was a very good one. And judging from our discussion, you will have seen that we stuck with our tradition, not just as far as the conservative guidance is concerned, but also our conservative accounting in general, and when you consider the information I just gave you, namely, relating to the good start into Q2, I believe we have reason enough to be confident for a good development of Bechtle in the future. So thank you very much. Once again, I hope that we're going to meet again in person soon.

[Operator]

Thank you, ladies and gentlemen. [Statements in English on this transcript were spoken by an interpreter present on the live call.]