Cancom SE

XETRA:COK

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the CANCOM SE Investor Relations Call. [Operator Instructions] Let me now turn the floor over to Mr. Bucher.

[Sebastian Bucher, Manager of Investor Relations]

Ladies and gentlemen, thanks for joining us today to our earnings call after the second quarter of the year 2020. My name is Sebastian Bucher, Manager, Investor Relations. And with me are our CEO, Mr. Rudi Hotter; and our CFO, Tom Stark, who will present the most significant events and figures of the first half of the current financial year. So without further ado, let's start right away, and I hand over the word to our CEO, Rudi Hotter.

[Rudolf Hotter, CEO & Member of Management Board]

Hello, everybody. Also from my side, a warm welcome to you and thanks for joining us in this call. We have a very special second quarter behind us. Overall, business performance in the first half of the year was, from our point of view, absolutely okay, with the worst recession we have ever seen in mind. Second quarter was especially affected as our consultants were not really able to visit clients. This led to lower service delivery, and this, especially in the IT Solutions segment, is the main source of our usually higher margin. But the corona crisis shows us as well that we are absolutely on the right path to push the managed service business. Our Cloud Solutions segment performed very well despite corona. The group revenue in the first half of 2020 grew by 8.2%. The organic growth rate was 3.8%. As I already said, growing in this environment is a success. The EBITDA was burdened by some special one-off items and structural topics. EBITDA came in with minus 14% and EBITDA margin dropped to 5.6%. This is, of course, not the level of profitability we want to see. But we, on the one hand, had an exceptional strong Q2 in 2019. But most of all, one of the factors here is the lower level of high-value service business. We see good chances that this is just an effect of the lockdown, and we might have this picking up in the second half of the year again. There is some uncertainty, but we are quite optimistic about this. A second factor were growth effects, especially overall staff costs. We have an increase of 12% here compared to 8% revenue growth, with a run-up setup for future growth and the current economic downturn was, of course, completely unexpected. And if then, especially the service revenue does not grow as expected, we have expensive specialists that you cannot fully utilize while, on the other hand, we have external freelancers already working as well. We already talked about this in the Q1 call in the first quarter. We strongly believe that it is better to keep the people and skills in the downturn and accept the lower profitability for a few months. Also, we still work on exchanging external staff with our own employees. But also here, we are optimistic to bring in enough orders again, make full use of our capacities and come back to higher profitability levels in the future. A third factor has been special effects. Executive Board change, preparation for potentially risky trade receivables and other onetime measures had negative effects on our earnings, but these are onetime topics. They will not be there in Q3 and Q4. As I already said, our Cloud Solutions segment performed very well even in times where we had 90% of our people working in home office. We were able to be fully operational here. This shows the advantages of remote services very well. The results of the Cloud segment make us feel very confident to proceed on our way to push the managed service business. The IT Solutions segment continued to grow. The rate was slower than in the first half of 2019. This is, on the one hand, the corona effect of the second quarter. On the other hand, we had a very strong first half of 2019 compared to 2018. We grew from '18 to '19 with nearly 44%. So again, we think revenue growth was okay overall. This segment was especially hit by the lack of service business. And together with the lower gross profit that we already talked about in Q1, the EBITDA came strongly under pressure. We are clearly not happy with this development. But we know what to do to get back on track, especially when we see the catch-up effects we expected. Group Q2 results, revenue. Revenue declining minus 8.6%; organically, 12.8%. EBITDA, minus 29.5%; organically, minus 40.3%. And the margin declined from 7% Q2 '19 to 5.4%. Measures against coronavirus drove up demand for managed services, but led to restrictions to on-prem service in the IT Solutions segment. One-off effect of EUR 2.6 million additional burdened the result in Q2. Our Cloud Solutions Q2 results. Revenue growth 20.1%; organically, 9.1%. The EBITDA, plus 11.2%; organically, no growth. EBITDA margin, 21.9% compared to Q2 2019, 23.7%. The main driver of strong overall growth, personnel costs and costs for freelancers influenced our organic EBITDA. IT Solutions Q2 results. Revenue declined 14.3% compared to previous year. Organically, minus 17.2%. EBITDA margin, 2.8% coming from 4.9%. And declining in EBITDA was minus 51%. Main driver is exceptionally strong prior year revenue growth. I mentioned Q2 was very strong last year. The coronavirus restriction led to drop in profitable on-prem service business. Looking ahead, we have good order intake and catch-up effects for the second half of 2020. So our back order, our orders and so we are confident that it's getting much better in the second half. Our transformation path is intact. Our annual recurring revenue organically grew by 16.6%; year-over-year, 30.1%. Cloud Solutions grew by 17.7 -- grew to EUR 7.7 million; Q2 2019, EUR 15.9 million. On this slide here, you can see that our annual recurring revenue is continuing to grow nicely. Our M&A strategy aims at supporting our transformation path to become #1 hybrid IT provider in Europe. Our latest acquisition of Novosco supports this, as you can see in the overall growth of the annual recurring revenue, but also organically, our push towards managed service business continues. I want now to hand over to Tom Stark, our CFO.

[Thomas Stark, CFO & Member of Management Board]

So thank you, Rudi. My name is Tom Stark, CFO of CANCOM. And welcome to our earnings call for the first half of 2020. Just as Rudi, I'm very pleased to have you in the call, and thanks for your interest. I will guide you through our standard financial KPIs, provide you with some information on special effects in P&L and balance sheet and, finally, I will give you a status on M&A activities. So let's start with the operating cash flow. Starting with the OCF, we faced an extraordinary quarter. The whole industry, and I assume roughly any industry, was unsure about their individual supply chains. So there were rumors about, well, there's a shortfall of products, and we have actually encountered a shortfall of product at the beginning of Q2. Therefore, we have, from my point of view, communicated very well that we will not take care on financial KPIs too significantly as it's more important to support the business and not to endanger a potential business in a pandemic with -- while managing financial KPIs too tightly. So the financial KPIs that we are presenting, they are not unexpected. There are no surprise. However, clearly, they are not intended to become a new normal. So we will come back and we will come back managing them tightly. And therefore, let me comment on some of the KPIs that you have seen and that you have encountered in the H1 financial statements. Operating cash flow in the second quarter, again, was negative. We had an increase of inventories, more than 50%. I think I've already commented on that it's more important to be available of products and of goods to support the business. But clearly, we are trying to re-manage this. And at this point, I can indicate to you, while we see no further shortfall risks for products in the market, we have started end of Q2 to well monitor inventories, to not order products and goods in order to keep the availability high. So we are back on managing inventories tightly, and this is a clear message and we expect an improvement in the third quarter. Secondly, the accounts receivable. We see an increase from EUR 274,000 to EUR 303,000. So there, we have to bear in mind 2 different aspects that are affecting this figure. First of all, please bear in mind, we had an outstanding Q1 with the highest revenue that we have ever generated in the history of CANCOM. We achieved a EUR 453 million of AR. So the thing that is happening now and that we are facing is that customers are paying later than usual. So we have an effect that is coming into Q2 and coming into the end of Q2 and that is adding to the AR development at that point of view. So we have done some measures. So we have increased the risk prevention for potential write-offs. At this point, let me comment, we have no significant write-off yet. We are not facing the risk of having this deferred. We've already commented on a tight risk management with regards to accounts receivables. So I think we have the right management in place, but we are pretty sure that we should have some risk prevention in place and that's added with the EUR 500,000 to the results in Q2. The question that was often asked from analysts is, well, are there customers asking for prolongations of payment terms? And just to give you an indication, yes, if we have a long-term relationship with customers, then clearly, we are assessing the situation, then we are working with the customers. The total number of customers at the moment where we have agreed on such prolongation of payment terms is less than 20. And the total volume that, well, is postponed is less than EUR 10 million, and they are all customers where we think, well, they will have sustainable revenues and we are pretty sure that there are no significant risk of write-offs. So this is something that was off mark and therefore I'd like to comment on this. Finally, the accounts payables. We have, compared with the previous year's quarter, a slight decrease. We have a significant decrease compared with the end of Q4 2019, where we simply had a lower -- so we have no significant change in supplier structure. We have no significant change in payment terms. We had the lower order volume triggered by, well, declining revenues, but there's no significant change on that. So this is something that should be commended as, clearly, we have a significant impact derived from accounts payables. With regards to Q3 and Q4 and the potential forecast for 2020, it's very difficult to provide you with a forecast. We discussed intensely whether to do this or not. The thing we are sure is we will have an improvement in Q3. We will have a significant improvement in Q4, clearly. And clearly, we will -- we are now back on track, and we are now managing the capital that is employed in the business tightly, just as we did it before the pandemic. Let's take a look at CapEx. Well, let's all remind us of, while we are a growth case, we intend to grow. We see the opportunities in the market and therefore we do see no need for, well, stop -- stopping spendings for growth. But with regards to this KPI, I think we're pretty well on track. So we have no need for reduction. We have a ratio of 2.1% in sales and with the forecast and with the look of -- at the overall year 2020. We see -- we expect to meet the target of, well, 2% or better, less than 2% of group revenue for the whole year. So no significant change in CapEx. If you're looking at the IFRS amortization from PPA, no change has occurred, and the slide is not intended to talk about the PPA or amortization effects. Clearly, this is just providing you for your models the split of -- between the segments and the forecast, what is going to happen, what is going to change with effects on EPS. But there are 3 things that should be commented at this slide. First of all, 1 P&L effect and 1 balance sheet effect. First of all, the P&L effect that is affecting EPS, and that is triggered or connected with purchase price allocations as well. You might have encountered that we have a positive result of EUR 4.6 million in other financial income. This is derived from a put option that was taken by one of the sellers of the U.K. entities. And while we have assessed a higher value for this, as usually, we have -- given if we have a growth case, we have assumed that the put opt will be triggered end of the -- end of the last year of the potential put period. It was in the first year, and there were private reasons for that, and there was an effect that now contributed with EUR 4.6 million to the other financial income. And clearly, it's impacted EPS as well. Secondly, you might have seen that we have a fluctuating goodwill in the balance sheet. That is derived from, well, we have entities that are very successful. They are in U.K., but really, if they have a position, then we have currency changes. And the currency changes, they are affecting the assessment of the goodwill. So there's no change in the evaluation of those entities. But if you see, the difference is only derived from currency changes and they have to be reflected in the balance sheet. Secondly, we have a tax rate of 27%, which is quite low. So we were satisfied with this. And that means we can provide you with an outlook for 2020. We will have a tax rate, it will be below 30%, clearly, as of end of the year, and this might be important for your models as well. Finally, PPAs are always derived from purchases of entities of companies. And that's the perfect point to hint for, well, what's the status of our M&A activities? So first of all, we are -- with regards to the funnel that we already are watching, that we are triggering, we are now getting gradually the results of those entities. We are waiting for, well, how will they withstand -- how is the business model withstanding the pandemic? And will it impact -- will it be impacted significantly, yes or no? Will it have an impact on potential purchase prices? So this is happening on an ongoing basis. And we are pretty much aware that the M&A targets that are, well, brought to us and that we have to assess, the number of them is increasing. So we have a clear revitalization of the M&A market. And clearly, we still have the attitude. We are going to take a look of those entities. We are pretty much aware that we have a new, well -- that we have an increase of an acceleration of M&A activities and -- but we are now watching tightly what might be targets that could fit to the overall construction of CANCOM that could contribute to the growth of CANCOM. So there's a revitalization, and we are pretty much aware that now we are coming back to normal in this business or in this part of the business as well. So at this point of view, I will hand over to Rudi to provide you with the forecast.

[Rudolf Hotter, CEO & Member of Management Board]

Yes. Our forecast 2020. Given normalization, it's confirmed from us, for the group forecast for the full year, moderate growth of revenues, gross profit, group EBITDA and EBITA; catch-up effects in all industries, especially opportunities and strong demand in health care and public sector. Our government business is very, very strong and especially health care and public sector is resilient in the corona crisis. So Cloud Solutions forecast, significant growth in revenue, gross profit, EBITDA and EBITA with higher growth rates than those in IT Solutions segment. Our annual recurring revenue is to rise very significantly. We are convinced that we will have a good second half year. IT Solutions. Moderate growth in revenue, gross profit, EBITDA and EBITA. At this point in time, we think it's absolutely possible to reach our full year target for revenue and EBITDA. When I look at our order situation, I feel optimistic for the second half of the year. To make a calculation, if we reach 10% EBITDA growth in the second half of 2020 compared to the second half of last year, we are basically on track for our EBITDA forecast. That is why we do not change our forecast. But as in the whole economy, the uncertainty remains much higher than usual.

[Sebastian Bucher, Manager of Investor Relations]

Yes. Then thanks a lot for your time and for your questions. And yes, we are looking forward to seeing you again in our call after the third quarter, at the latest. And so from our side, thanks a lot and stay healthy. And bye-bye.

[Rudolf Hotter, CEO & Member of Management Board]

Bye.