Cancom SE

XETRA:COK

Earnings Call Transcript 2019-Q2

[Sebastian Bucher, Manager of Investor Relations]

Dear, ladies and gentlemen, thanks for joining us to today's earnings call with the results of the half year and Q2 of 2019 of CANCOM Group. I'm joined by Mr. Thomas Volk, our CEO; and Mr. Thomas Stark, our CFO, who will be available for questions after the presentation. With a quick look to the legal notices that we always put in front of our presentation, I would immediately like to start and hand the floor over to Thomas Volk.

[Thomas Volk]

Thank you, Sebastian. Thank you for joining us on this call. This is Thomas Volk, CEO of CANCOM. And I would like to give you an update, together with Thomas Stark, on our second quarter results as well as on our first half results. And then based on that, on our outlook for the rest of the year. We are -- I must say, we are very proud to report that we had an extremely strong performance in the second quarter. The business performance, which we had in the second quarter and, therefore, also in the first half, obviously have beaten expectation actually, by far. And therefore, you will see at the end of the presentation that, that impacts our overall year -- yearly outlook and performance, which we will raise positively at the end of the presentation. In the second quarter, across the group, we had a very strong demand from all types of clients. We did not have one specific area which drove the performance. We did not have a few single deals, which drove the performance. We are glad to say that the performance across the whole company, across all geographies and across all business units have -- has been extremely strong based on the fact that we see that our customers, clients and targeted customers are continuing to invest into IT and into driving a digital transformation in the businesses, which drives IT spend. In the second quarter, we saw, in particular, a very strong gain -- market share gain, in the IT Solutions segment, which reflects our strength in terms of implementing IT technologies and reselling IT products to our customers. And while this might be surprising to many of us, it is a market trend which we can leverage at this point, which actually affects our overall performance, which was the transforming effort for the IT Solutions segment. Another highlight in the quarter has been that due to our increased demand and our fast growth in our Managed Service and Cloud Solutions business, it became obvious that we need to add quickly more technical and skilled resources, and we have been very happy to see that we found a great location in Košice in Slovakia, which has, for years now, established thousands of people skilled in managed services, help desk services, service desk services and skilled also in future technologies. And therefore, we were able to open a new location in June in Košice in Slovakia, which will help us to grow our business faster. Another highlight in the quarter was that after the successful squeeze out of the other shareholders impairment, we were able to transfer, last quarter, all remaining shares of the minority shareholders and we're able to complete the transaction and pay out all the remaining shareholders. So Pironet is now part -- integral part of our Managed Services GmbH as one element of the overall entity and is becoming integrated in all functions. Quickly on -- a note on the accounting side. All our figures which we are showing today include prior year results, which were already based on the new IFRS standards. And all figures are shown on a like-for-like basis. Note that we don't have any accounting standard changes in 2019 with respect to comparison to 2018. Let me, before I go into numbers, make a comment on our investment into Košice. Košice is really now, for us, a future platform, a future hub to allow us to grow our managed service capacities. We must admit that the growth of our managed services, the winning of the new contracts and the onboarding needs we have for many of these contracts were not easily to be satisfied by recruiting more people here in Germany. We must admit that here, we have had, obviously, such a high demand in the whole market that we need to find other solutions to manage our growth and to sustain our continued growth rate. Therefore, we chose Košice, Slovakia, which has been used or is still is used by many German-based companies already as a service hub. Now the difference is we are implementing at Košice for the reason of growth, not just cost savings. So for us, it's not a near-shoring exercise for us. It's really an exercise to add more resources to our capabilities and to allow us, enable us, to continue to grow our cloud-managed service segment at the rate we are right now. So we will start -- or we have started operations July 2019, and we already recruited over 25 people in that location, which will officially open this quarter. Another note, which is important is the fact that this quarter, we were again recognized for our investments we have done last year into our capabilities in the security services market. In the security services market, we see that the demand is increasing, that the need for capabilities of consulting, architecture and managing security environments in -- from different aspects for our customers in hybrid IT environment is growing. Therefore, we were successfully growing that business. And as you see, we are recognized here as now still #2, hopefully, soon #1, here in the German market as a provider of security managed services, which again, should just illustrate to you that our continued investment into augmenting our service portfolio and our service capabilities is actually paying off and it's allowing us to add new business streams to our -- to us and add new customers, in the new customers. Based on that, I wanted to basically give you a few highlights of the quarter. Based on that, let me get into the numbers of the quarter. And we obviously have preannounced already the result on the high level in terms of revenue growth as well as EBITDA growth. We had an extremely successful quarter organically. And inorganically, the revenue grew by 40%, organically by 31%. And that is obviously far beyond expectations. And obviously, something which we had preannounced because it showed that our business performance is actually stronger than we anticipated at the beginning of the year. Also indicates that despite of the market conditions and all the global macroeconomic concerns, we are hitting the nerve in the IT industry in terms of our capability, our strategy, which CANCOM put in place, providing the mix of the concept of IT Solutions, helping customers in their data center as well as helping customers in the cloud environment, especially bringing both together in a so-called hybrid IT environment shows that we have built unique capabilities helping customers to be successful in this environment, implementing new concepts and ideas, transforming their digital landscape and helping them to invest in the future. Our EBITDA grew at the same time at 23.7%. The adjusted EBITDA to EUR 31.3 million. Now that's obviously also, in absolute number, a great success. The organic growth, again, was 12.6% here in this area. I think we can all be very happy about that. And as you will see, the reason that the EBITDA rate didn't grow as fast as the top line growth has to do with the fact that the major growth in top line came out of the IT Solutions segment, which obviously has a lower margin than the Cloud Solutions segment. But nevertheless, if you look at the overall market we are operating in, in U.K., in Germany, Austria, and look at the average growth rates we have here in Germany and Austria being in our IT Solutions segment around 46%, our growth rate is outstanding, and we obviously are gaining a lot of market share at this point. Let us look into more detail into the quarter and reflect what happened in the Cloud Solutions area. In the Cloud Solutions area, we clearly saw the continued growth like we have had it for a long period now between 20% and 25%. EBITDA, again, grew faster than the revenue. And what we can see there is that we are on a strong path for the future. I think the ongoing transformation of customers to basically consume IT as a service is showing clearly that this is a trend which we can fulfill very successfully. Obviously, the revenue there in the Cloud Solutions segment, being based primarily on managed service projects with the -- with SLA behind it, means that we have to build up resources, knowledge and skills to manage these contracts. So obviously, there is some element in terms of what the utmost growth can be, but I think a growth of over 20%, we feel very comfortable that this is an excellent result and that we feel very comfortable that, going forward, we have enough visibility that with the new resource in Košice, we will continue on such a strong growth trajectory. The IT Solutions segment is, in this quarter, outstanding, I must say. We grew the segment by 44 -- over 44%, nearly 45%, organically over 35%. Now you will ask why did we grow so fast while at the same time, the EBITDA grew 25%, it grew slower. And so the margin, hence, fell below 5%. Well, what are we doing in this segment is clear. The customers out there are still spending in the -- into their IT infrastructure. And the customers are now looking for vendors who can help them to architect the IT infrastructure successfully, and at the same time help them to build the future so that they can move workloads into the cloud. Now in order to be able to be a trusted partner for them, we are now aggressively going into several of these IT infrastructure deals to win new deals, to win new customers, to establish ourselves as a supplier to them for their future cloud business. We have seen and learned in the past that customers who buy IT solutions from us are much more likely to buy cloud solutions from us in the future because they know us, they have -- they know our performance, they trust us. And therefore, I -- for them to basically have the confidence in us that we can run IT for them instead of them running it by themselves is -- the trust is much higher with customers who actually know us already through IT Solutions. Hence, we strategically decided that we are also going for some lower-margin deals, get into some new projects and some new environments and put ourselves into a strong position there. Especially in the health care sector, we see there's a lot of movement going on. There are a lot of changes. There will be a lot of move from on-premise data center into the cloud in the future. And we want to have a pole position there to satisfy that in the future. Other markets are retail. Strong growth is in the public sector. So these markets are markets, which will move forward and will invest into new technologies. In particular, what we see is they're investing a lot in hospitals, in retail stores, in communities, et cetera, in smaller compute environment, which we call edge computing, which then get linked to the cloud in the future. So we focus and invest a lot into edge computing, intelligent edge capabilities, where we want to be a leader so that we can actually drive not just our cloud business in the cloud data center, but that we can own the interface to their local entities managing IT also locally for this -- for the outlets of these customers. Big success there. Obviously, very competitive environment. The market, as I said, in Germany, in the IT Solutions segment is growing 46%. We grew over 35%. You can imagine that the growth, to a certain extent, may go -- may affect the margin. But overall, we feel very good about it because it's, again, a great basis for the future. And in absolute numbers, it still drove our EBITDA up by 25% year-over-year. So in absolute numbers, this is still a very good result. If you look at this in the context of our strategic transformation in terms of moving and growing the Cloud business faster than the IT Solutions business. So obviously, last quarter, it looked a little different in terms of absolute growth numbers. But if you actually look at and compare both businesses, the Cloud Solutions segment is still -- or has still been much more profitable than the IT Solutions segment also in percentage points. And again, the other metric which we use are our recurring revenue metric, which shows how much of actual SLA-based service contracts we have under service at the end of the quarter. Year-over-year, that grew 38%. And one thing which is to note is, this is also important for our outlook for the year. Since January, we grew that by EUR 60 million over EUR 130 million. So we are growing about 12.5%, and this is pure organic growth on a half year basis. So you can see if you multiply that onto the annual basis, we believe that we have a very strong base we are building here. And also, we see with the projects we won, that we will be very successful achieving an outstanding growth in this business for the rest of the year. With this in mind, I want to hand over to Tom Stark, our CFO, to give you some more background and detail on some of the financial KPIs.

[Thomas Stark, CFO & Member of Management Board]

So thank you, Thomas. This is Tom Stark speaking, CFO of CANCOM, and I'm very pleased to give you some insights into the financials, the KPIs of CANCOM. We usually use the same slide set in order to give you the comfort of making reference to the trajectory that we have given you as an outlook at the beginning of the year to verify whether we are pretty much in line or not. And so we are starting with the operating cash flow. So the slide that's in front of you pretty much shows that we have generated an operating cash flow of EUR 14.7 million in the second quarter. So both quarters, the first quarter of '19 compared with the first quarter of '18, the second quarter of '19 compared with the second quarter of '18 shows that we have been able to significantly improve the cash flow that we have generated. So we have good cash flows. And if we total the amount of the first half of 2019, we have generated or we have improved the cash flow by EUR 16 million. So given this and given the outlook that we have provided to you at the beginning of the year, basically at the Capital Markets Day in London, we are very confident in achieving our goals through the end of the year to increase the cash flow that we generate from the company significantly by more than 20%. And we are well on track in achieving this goal. So we ended the year at the first half of 2019 with a cash position of EUR 100.5 million. Some things that I have been asked from your part or from some of the investors that have been striking in the cash flow statement have been -- well, we had an effect in the financial activities cash flow, but we have owned the dividend payment last year of EUR 17.5 million by the end of the second quarter. So this year, we will show it in the third quarter at the Annual General Meeting has been pretty late, by the end of June. And last but not least, we have an improvement in investing cash flow, where we had a change of just EUR 12 million of fixed deposits that we have changed last year. And so this should be the 2 main effects that we had in the cash flow statements other than the operating cash flow. So well on track. Taking a look at the CapEx, the capital expenditures. Again, we have shown you, we have given you the slide to compare the CapEx that we have generated or that we have required in the previous years. We have communicated to you actively that we will have some one-offs that are done and that we have now the situation that we come back to grow the company steadily without any special investments, and this can be seen pretty clear on this slide. So the end of the first half of 2019, we ended up with a CapEx of EUR 13.8 million. And we can also see, and I think this was a question at the earnings call after the first quarter this year with a decrease in declining CapEx in the second quarter. So what's the outlook and the forecast? We think that we will have a stable situation and it's a sustainable trend for the capital expenditure that we have, so we think we will be in between EUR 5 million to EUR 6 million of CapEx expenses in the third and fourth quarter despite having some investments for Košice and for things to come. So we are very confident in achieving a goal and ratio CapEx to sales of in between 1.6% to 1.7%, which shows a significant improvement. Let's take a look at the EBITDA adjustments. Well, again, we try to provide you the best transparency on what have we actually achieved and what are the adjustments that we are done -- that we have done. So most of you are familiar with this topic. We are trying to transform CANCOM into a hybrid managed service provider and this is done with investments that will pay off. And I think Thomas has given you some insight in how this actually happens and how this pays off. And this, to some extent, generates costs that are not generating revenues from the very beginning. And this slide is intended to give you a clear guidance and the transparency on actually what has happened and what have we done. So let's first of all compare the adjustment of the group. So some effects have been, especially in the group. Last year, we had an adjustment of EUR 3.2 million, which included the M&A basically for Ocean that we have had to show in the second quarter. It did not show equity-based payments and this is the main difference for this year. The adjustments in the group 2019 has been EUR 2.8 million, and we have a EUR 0.5 million of equity payments that are included within the figure. So the incidental M&A costs, strategic transformation add up in the Cloud segment to a total of approximately EUR 2.1 million. And given this, I think all the things that we are investing in this business is paying off pretty well, and we see the group and the CANCOM Company in a good trajectory for the future. Let's take a look at the IFRS amortizations from PPA. So this slide has only changed slightly. So we have a very tiny adjustment in the 2019 figures. So instead of EUR 15.0 million, we are forecasting now EUR 16.0 million, which is basically derived from having preliminary purchase price allocation for a small entity that we have acquired in the first quarter. And additionally, from the Pironet transformation process, we will have a change of write-off periods, and this added up to EUR 0.6 million. Some of you asked for forecast on depreciation. So this is something that we can't answer easily. So we have less CapEx and ongoing and looking forward, but they have all the things that we have done already in the depreciation period. So we think we will end up by the end of the year with -- in between a EUR 33 million to a EUR 35 million of depreciation. Last but not least, and that's the slide where I would like to hand over to Thomas. We see here the development of the group for the first of the half -- first half of 2019. I -- we have seen a great performance in revenue. I would like to stress one thing that is still derived from, well, financial KPIs and important to mention before I hand over, we have a 21% growth rate of EBITDA, half-year-over-half-year. But if -- some of you have already been aware that we have an increase of net income of 56%. So significantly higher. And therefore, we have some tax impact that I would like to mention at the end of the presentation, at least on my part. So tax rate effectively in the first half of 2019 has been at 25.8%. We had some very good effects on tax that have been derived from previous years. So we had impact from previous acquisitions, and we could use and benefit from tax loss carryforwards that we have applied, and this will have significant impact on this year. So you have seen the impact in the second quarter. We expect, for the whole year of 2019, a tax rate of in between 28% to 29%. And we will additionally -- and this is good news, have an impact of roughly EUR 2 million of tax benefits in the cash flow statement in the third quarter. So this is something that should be illustrated when we talk about financial impacts that might be seen in the financial statements. And I think the things on -- or the comments on development of revenue and EBITDA is the perfect point to hand over back to Thomas.

[Thomas Volk]

Thank you, Tom. So as he -- Tom illustrated on this slide, we obviously have now, after the first half, had significant or very significant growth in all areas. Our revenue, our EBITA, our EBITDA, our Cloud Solutions segment, our revenue, our profitability there, the same also for the IT Solutions segment. We had a very strong first half from the AHP software point of view, which, as we said at the beginning of the year, accounted for about 25% of all of the Managed Service recurring revenue. It continues to outgrow that. So we are -- and we -- when we look at the pipeline, we see that we have some very good deals in the pipeline that we already win -- won deals we need to onboard. So we have seen that there is a good basis for the second half once we got started. We also, at this point, know that in the July environment, we have not seen whatever macroeconomic turmoil is out there. So we feel confident that today, we can actually raise all our KPIs and targets. So raising our targets means, at the group level, we now can forecast the revenue, the gross profit EBITDA and EBITA to grow from significant to very significant while we will continue to invest, like we did last year, into a few special things. Now Košice, obviously is something. We have some new areas where we want to invest in, in services, et cetera, building up new capabilities. So we will continue to do this because it's proven that it's paying off. So that's something which we will do at a similar level of last year, but we are confident that we will, as a group, actually be -- raise our targets in the revenue, gross profit, EBITDA and EBITA area. The same is true for Cloud Solutions. So the Cloud Solutions segment, again, we had significant growth there in revenue and EBITDA. We'll say -- we're clear, it will be very significant, it will actually grow. The rates will grow faster than the IT Solutions segment by the end of the year. We have a lot of visibility there, and we are very confident that the deals we won and the deals we're onboarding now and the deals in the pipeline will enable us to do that. And our recurring revenue, as you see, where we are at the midpoint of the year, we are absolutely sure that, that will rise very significantly by the end of the year. In the IT Solutions segment, and that's obviously a little bit of a surprise to all of us that we were able to grow much faster than last year, and we are on a big growth trajectory there. So we will also raise our targets there in all areas in revenue, gross profit, EBITDA and EBITA to very significant, which means that all the KPIs which we have put out there at the beginning of the year will actually be raised while at the same time, as Tom stated, our -- we are -- from our financial KPIs in terms of generating cash flow, managing our CapEx well on track. So we feel very confident that we will actually have a very successful 2019.