Cancom SE

XETRA:COK

Earnings Call Transcript 2019-Q1

[Sebastian Bucher, Manager of Investor Relations]

Welcome everybody. My name is Sebastian Bucher, Manager, Investor Relations of Cancom. Thanks for joining us on our earnings call today on the results of the first quarter 2019. The presentation will be held by our CEO, Mr. Volk; and our CFO, Mr. Stark. And afterwards, you have time to raise your questions.Let's start right away. As usual, as you know, with some of these notices here that you might all see now on your screens or in the PDF file. And after that, I'd like to hand over the floor to Thomas Volk.

[Thomas Volk;CEO]

Thank you very much. Good afternoon, everybody, and thanks for joining us on this call today, which, from our perspective, is a very exciting news call about our performance in the first quarter. Many of you have been attending our Capital Markets Day a few weeks ago, and I'm pleased to say the strategy we outlined there also shows that it drives the results as expected in our business. And we can look back at the first quarter, which despite of some worries in the economy and the macroeconomic environment, despite of that, that we were able to perform excellent in the first quarter.Our organic growth, which we show this quarter, shows that we are continuing to gain market share, especially in the German market but also in the U.K. And I think that's an indication that our strategy is working very well, and our sales execution is working very well at this point. And I think the point which I'm particularly excited about is the fact that now for several quarters, we were able to drive our business transformation forward, indicated by signing more and more contracts and bringing customers into service for long-term contracts, reflected in our annual recurring revenue number.And unlike other businesses, we are continuously able to do that while we, at the same time, are able to grow our top and bottom line significantly. So I think we have an excellent execution of our strategy here, and I'm very pleased to see that, that is reflected in the number.In the first quarter, we made a minor acquisition here in Germany, actually in a city called Aachen, with a small system house. It's a system house which has also some software development capabilities we're using in some projects, but that has strengthened our position in the western part of Germany as well as gives us access to some customers in Benelux from that perspective.The impact of the numbers is not so significant, especially since we only have finished acquisition in March. But it's a small-sized company in the 1 -- single-digit million range in revenue, but it will be very nice in complementing what we do with customers there. So that's why we invested in that.So that's -- as a summary also before we get into the details, all the figures which we are showing are based on the new IFRS standard, which we also applied last year. And therefore, all the figures are shown on a like-for-like basis last year and this year, and there are no changes in the 2019 numbers. So it is a simple like-for-like comparison, and there's no special effect in these numbers.Let's move on to the actual results. At the group level, we had a significant growth. I think we exceeded significant growth expectations there with over 20% overall growth. Organically, we grew over 12.5% to a revenue number of EUR 370 million in the first quarter of the year. This is outstanding. And if you look at all the quarters the company has so far, except for the fourth quarter last year, this has been the largest and biggest quarter that Cancom ever saw. Extremely pleased with this result.At the same time, we were also able to grow our EBITDA. Our adjusted EBITDA grew at 18.8%, of which 13.5% were organic. And our margin is at 7.5% right now in Q1, which we feel is indicating clearly our investments, our growth, but also our effect that we are achieving market share.We must say that both group segments, the IT Solutions and the cloud segment met the expectations. So this is a well-balanced business result. And what we are seeing is that in our market, despite of some slowdown in some industries, customers continued to invest into IT, especially into projects around transforming and automating the business into a more digital world. And therefore, we've seen both in Germany as well as in the U.K., where we see the Brexit as an issue, but we've seen both that Cancom is respected as a key partner for businesses to transform themselves for the future, irrespective of the economic environment, and especially also in some areas where people see slowdown, they know they have to act quickly to become more efficient and also build new business models to be ready for the future. So I think Cancom, as a partner, is well respected to help and to bring the right technologies to play.If we move to our Cloud Solutions segment, and I'm not going to detail describing it. I assume that you have the data also based on what we showed at the Capital Markets Day. But again, our growth there was close to 28% in this quarter. And organic -- also, the organic growth was at 16%, well above what we indicated. So overall, an excellent quarter from that perspective.Our EBITDA again was also growing fast on revenue at 32.1%. So we have now obviously the impact of the fixed recurring revenue being very profitable, showing that the margin and the profitability is going up in this segment efficiently.And the margin now is, in the first quarter, 25.9%. So I think we are able to maintain the margin at a very high level despite of the fact that we grow significantly, invest into winning new projects there. So the demand for our managed services remains high, and the demand for our software, AHP, continues to be on track. And also our acquisitions in the U.K., which -- also some of our managed services revenue are growing nicely. So overall, in all respects, a very successful quarter for our Cloud Solutions segment.In the IT Solutions segment, we obviously are facing a market where we see there is a lot of competitiveness. The market overall, obviously, has been not growing as much as it used to, if you look at the overall market numbers. However, we have been able to achieve a pretty significant growth, both organically and inorganically. And we have an overall growth of 18.6% to now over EUR 300 million this quarter. So we are very pleased with this, and this is something which also shows that we were able to win a lot of new projects, a lot of new customers. And therefore, we're able to establish ourselves in new accounts, which will build the basis for future business for us in terms of also bringing some of the Cloud Solutions to play.Now in this environment, obviously, the pressure on pricing is higher, so our EBITDA margin business growth is now at 4.7%, obviously something which is a little lower than last year. But as I said, winning these customers and these projects was priority #1. And once now we have this business accounts, we feel that we have now the ability to bring more high-value service into these customers, which help us to overall accelerate also the services growth as we have done in Q1.If you then look at what does this mean in terms of the transformation of the company as we were discussing it at the Capital Markets Day, we are well on track to move forward there. Our recurring revenue year-over-year grew 38%; organically, near -- 18% or nearly 20%. So both things worked very, very well.Quarter-over-quarter, we grew over 7%, and this is all organic from December to now because we didn't have any acquisition in there. So our organic growth has accelerated, and we feel that this is due to our focus on this, but also due to the ability to win new customers but also expand a lot of existing contracts, which shows that customers are very satisfied with us as the vendor of choice or the partner of choice.And as we indicated last year, this is the part of the business which has been exceeding in absolute numbers also the profitability of the IT Solutions segment last year. And as you see this year now, it is clear that we have a much higher profitability in the Cloud Solutions to over EUR 3 million more in absolute numbers versus IT Solutions. So the profitability of this and the growth of this business make us feel very comfortable going forward.With this, I would like to hand over to Tom to give you more updates on some of the financial numbers before I conclude the call later. Tom?

[Thomas Stark, CFO & Member of Management Board]

Yes. So thanks, Thomas, and welcome to the call for the quarterly results of Cancom. So just following the words of Thomas, I'll give you a brief overview of the financials; what we have, I think, communicated quite actively in the past; what the goals of the company are in terms of working capital goals and so on.So just a few slides to comment on this. First of all, let's look at the operating cash flow. I think with the reference to the Capital Markets Day, we have outlined a goal of improving the operating working capital year-over-year by a more than plus-20%. We have achieved a minus EUR 21.5 million versus 29.4% (sic) [ EUR 29.4 million ] in the previous year. So we traditionally have a first quarter where we have more money tied in the organization. However, given that we had one project that significantly tied money, which we won in the first quarter with roughly EUR 18 million, I think we are perfectly in line with the improvement, and we can confirm that we like and we are willing to and we think we will end the end of the year with a plus -- more than 20-plus improvement in terms of operating cash flow.Cash position at the end of the first quarter was EUR 105 million, so totaling net cash to EUR 98.9 million. And last but not least, the loans will vanish by the end of the year 2019, at least those that are in the balance sheet right now.Let's take a look at the results and the split of the results. So in the first quarter, we had investments just like we had in the previous years. So we have, first of all, and that's the most important thing to mention, we have overcome the topic of IFRS 16. I think all of you are quite familiar with this topic. We have been one of the first companies that had adopted the IFRS GAAP and procedures of the IFRS 16 application. And well, so we had to provide information additionally in the last year. By coming into 2019, we have overcome the situation. And now we can show you like-for-like figures first quarter '19 with first quarter '18 that all include IFRS 16. So this is reducing complexity and it's very helpful for you, I think, as investor base to really compare the figures with each other like-for-like.So we had, additionally, costs we have provided you on this slide, which will be presented on the website as well, the split in between the segments. So we had adjustments of EUR 2.6 million. The split of the segment can be seen in the slide. So basically, most of it was done in the Cloud Solutions segment, which means that we had, basically, the investments in staff. And so supporting the strategic transformation of the group, setting up and implementing a [ presence ] channel, and that was the basic or the most important part of the adjustments that we have done.We have a EUR 0.5 million equity-based payment. That means we have an option program in place in the Cancom SE, which we started in August, and EUR 0.5 million has been recognized for the first quarter of 2019. And last but not the least, the difference missing to EUR 2.6 million have been investments that have been incidental M&A costs that we have triggered in the other segment.Taking a look at the IFRS amortization effects. Well, Tom has already mentioned that we have done a smaller acquisition in the region West. And so adding up to EUR 3.5 million in terms of revenues. I think we have commented on them in the report. And it was done mainly to perfectly be supplementing the region West with a company full of people. We have paid EUR 1.8 million and have another EUR 0.6 million as an earn-out component, which is perfectly in line with our strategy in tying the management of the company midterm to the goals of the company and -- through alignment.So effect has been pretty much oversee-able. You can see that in 2019, amortization, which is basic, most of it ends up as a EUR 15.4 million of PPA amortizations and the split can be seen on the bottom part of the presentation, which is a split, EUR 9.9 million to EUR 5.5 million, referring to the segments. So basically, these are the most important things on the KPIs that we have in place. And with that word, I would like to hand forward to Thomas.

[Thomas Volk;CEO]

Thank you, Tom. And obviously, with this result, where -- we showed that we exceeded the significant growth planning we anticipated for this year. We are well positioned to confirm our 2019 forecast in all areas at the group level for everything, revenue, EBITDA and profitability.At the Cloud Solutions level, again, for the profitability and the growth in revenue as well as our recurring revenue, which -- with a growth of 38%, obviously, rose very significantly or even beyond that. And also, in the IT Solutions segment, we are very comfortable that our growth in all areas, including profitability, will continue. As you have seen also with the squeeze-out of Pironet, we have now been able to -- or we are able now to integrate those resources even more tightly into the overall Cancom family, which will make us more efficient there for our customers there.So we will have, there, improvement in efficiency, which also encourages us to reconfirm our statements in terms of where the growth -- that we meet our -- the growth expectations in this year despite of some of other economic concerns or macroeconomic concerns out there. We see that we are well on track. We see that we are well setup as a company, that we have the right strategy going forward in all countries, and that we execute very well. So we feel very comfortable with the guidance, which we have been giving at the beginning of the year. And I think Q1 is more than just a confirmation of that.So with that, thanks for listening, and then I would like to hand back to open up for questions.