Cancom SE

XETRA:COK

Earnings Call Transcript 2022-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the CANCOM Earnings Call on the Second Quarter 2022. [Operator Instructions]

Now I hand over to Sebastian Bucher.

[Sebastian Bucher, executive]

Dear ladies and gentlemen, welcome to CANCOM's Earnings Call on the Second Quarter of 2022. With me is Thomas Stark, our CFO, who will present some of the key figures and main facts of the most recent developments. And so without further ado, Thomas, please start the presentation.

[Thomas Stark, executive]

Thank you, Sebastian, and welcome to everybody to today's earnings call. As usual, it's a pleasure for me to guide you through the events of the second quarter and even some subsequent events that we have seen to give you up to date and to present you the latest information about CANCOM. My name is Tom Stark, CFO of CANCOM, and I'm happy to spend the next well, 30 minutes to an hour with you. Let's just take a look at the significant events that we have seen in the second quarter. Basically, let's just highlight the key takeaways of today's presentation. I will comment on them in more detail to each topic on the individual slides. Group revenue was the previous year's level, basically affected by supply chain bottlenecks and effects from public sector business. Cloud Solutions showed a dynamic growth in revenue and EBITDA. We have seen a continued growth of the ARR and that gives a positive outlook for the next 12 months basically.

IT Solutions, we have seen a strong impact from supply chain shortages and from public sector business. We have nevertheless no slowdown of the overall demand. We have, in the contrary, the backlog at a new record level. In the market, we see clear signs of an improved availability of several IT components since June. We can further see a normalization of orders from the public sector that started just as expected end of June. For the detailed information, let's start with the subsequent event today.

You might be aware, we have seen after 17 years as CANCOM Board member and there of 2 years and half as CEO, Rudi Hotter, resigning as CEO at his own request. The Supervisory Board accepted this in a common agreement and appointed Rudiger Rath as new CEO for CANCOM from first of November. Rudi will stay in his current role until end of October and will actively assure a smooth transition to Rudiger Rath. We deliberately as often asked, mentioned that no severance payments had to be agreed to underline this personal step-out [ Rudi ] and alignment with the step with the Board. Rudiger is member of the Board since October [ '21 ]. He is a well-known manager in the IT industry, has a deep and profound knowledge of the IT market. And on top, I think he is a manager with a great technical understanding. Personally, I think this is a great solution for CANCOM and already being CEO for some time at CANCOM, perfectly contributed to his understanding of the CANCOM. Second, information about M&A. We did an acquisition, a company called S&L located close to Frankfurt, Mulheim-Karlich actually, a small town where we have no spot yet, actually, we have a white spot there. And it was 3 -- or the S&L group consists of 3 different entities.

There are about 100 employees active in the group and their offerings are basically system integration services with a focus on security and compliance offering, a very complementary customer base, which is great. So the match showed, well, there are roughly no common customers. And we can see a high proportion of services to the margin profile is high. Revenue recognition in 2021 was about EUR 15 million with around 12% EBITDA margin. From our perspective, this is a perfect fit from a regional perspective, as well as from combining the offerings of both companies. S&L should benefit from CANCOM's portfolio quickly and hopefully, we'll be able to address new services and solutions to the existing customer base. As the rationale of the acquisitions, wins and increase of the gross profit and profitability should clearly be on the growth side. IFRS EBITDA 2021 was about EUR 1.8 million. The purchase price was EUR 10 million as a fixed price. Well, this would reflect an EBITDA margin of about 5.5%. Additionally, 50% of EBITDA over the next 3 years as an earn-out component has been agreed to simply assure just as always, alignment of growth. Some news on from the market research institutes, the information service Group, [ IG ], which is a leading IT market research institute, analyzed the offerings of more than 300 of the most important and best specialized IT providers in Germany.

In this highly competitive environment, CANCOM was rewarded 2x being a leader for next gen private and hybrid cloud data center services, one of the core aspects of our strategy. Managers services for the market has [indiscernible] boosting for the mid-market. [indiscernible] perfectly underline our strength and our strong position in the IT market and they absolutely acknowledge CANCOM's great managed portfolio for our target group determine mid-market. In the same research, another discipline in the highly attractive security market, we have strengthened our position as innovative provider of security services. And for the fourth time, in a row, we became leader in various disciplines regarding cybersecurity services. CANCOM got awarded 2 leadership positions for technical security services, which reflects our project-based expertise and managed security services, which reflects our As a Service-based expertise. So in both worlds and both delivery options, we show a very strong competitive position. Particularly convincing to ISG was our offering regarding CANCOM's security operations center, also called SOC and our cybersecurity As a Service offerings.

So we can see in this highly growing and market. And in this discipline, we have great competencies to convince our customers to be the partner of choice.

With regards to our share -- its not the last position, I was just wondering, but we have one more topic to talk about. We have just gathered the information about our share buyback program. You might all be aware that we have done exercised our share buyback program in the first half of 2022. We have stopped it for technical reasons before the Annual General Meeting, and we got an entitlement for a new program to be just able to act. You can see on the slide, we have therefore paid EUR 161.4 million. That's the total volume of the share buyback program that we have done and we bought about [ 3.2 ] million of shares. As a subsequent event in July on 18th of July, we have canceled or announced the cancellation of those shares. Well, with clear effects, clearly, this increases the earnings per share and the dividend per share due to a reduced number of shares that we can see going forward. The numbers of shares outstanding after the cancellation of our own shares is 35.371 million about. Finally, as things that happened in order -- before we come to the financial KPIs, we have decided to sell our U.S. business. This is just in line with our strategic focus on the DACH region, Germany and Switzerland and Austria.

The impact will be minor. Revenues of 2021 were about EUR 18.5 million, and EBITDA contribution was not significant. Consequently, we have classified the business as held for sale, and this will be discontinued operations going forward. I'm pretty much aware that you all have your financial models as this just slightly, however, it does changes all of the financial KPIs we have provided to you at last slide of this presentation, the data of 2021 and 2022 on a comparable basis. And of course, you will additionally find this present as a download on the website to simply update your models with this impact. Let's head for the financial results of the second quarter. Group showed revenue of EUR 298.8 million. They reached about the same level as we have seen in Q2 2021. But 2 topics to explain in more detail. First, supply chain and backlog. Given that we had indicated in our last earnings call, our expectation to still be affected significantly in the second quarter from supply chain shortages, some comments on getting the supply chain right. Despite of restrictions, we are obviously able to deliver on customer signs. The line of 1.6% shows the dimension that we are facing, so it can be handled.

However, it nevertheless affects the business. As of end of June, we are facing again a new record level of all the backlogs and to provide you with some more details on this, backlog topped even the end of year 2021 level by almost 20%. We are just talking about the project-based one-off business that accounts for backlog and is now at a level of about 1/4 of revenues. Second, public sector. Clearly, the lack of orders from the public sector have been tremendous. The revenue reduction we see is triggered to more than 100% from public sector restrictions. Industry sectors were growing. However, less than the effects that we have seen from the public sector. EBITDA was triggered by exactly the same level of gross profit that we have generated compared to the previous year's second quarter. However, clearly, we have an increased cost base as we have planned for growth that we are still expecting going forward. IT Solutions is the segment where we basically have a more profound impact for -- due to the reasons that we've talked about. First of all, public sector demand, most often trades industry demand from an As a Service perspective, that means the impact of this can be seen predominantly in the IT Solutions and as a concept segment. That's why that we see a heavy impact from both supply chain and public sector demand.

Where are we now? The funds for the public sector from the government have not been reduced. The formal processes to access these farms were done by end of June. The demand is still high. So we have seen a reignition of the demand and have to handle plenty of RFPs, so that the term for request for proposals at the moment. That's basically what we expected. It has not yet materialized in the second quarter as well, the processes will take time. However, just as expected, demand is coming back. And now formally the authorities are entitled to act. This respective development has not yet contributed to second quarter revenues. We expect this to have an impact in the third quarter and to a majority in the fourth quarter. With regards to supply chain, the situation is not yet done. However, lead times got reduced. So we assume a further positive development on this going forward. Due to the high level of recurring revenues, traditionally, the As a Service business is less affected than the project based as a concept business. First of all, we have seen in Q2 '21, a low comparable level. Actually, EUR 55 million was the quarter with the lowest revenues generated in the cloud segment, just to get the things right, average of the non-COVID quarters was [ 62 ].

So we have seen growth rates where we come from. In contrast to the first quarter, we have no major one-offs like in the first quarter, we have a broad development, a lot of smaller contracts have been won, and we have seen upselling of existing customers basically. Secondly, the growth was mainly triggered by hardware sales that have had an impact on the margin profile, and that's why we see a decreased margin level compared with last year's second quarter. Consequently, our [ ARR ] kept on growing year-over-year. We have seen a growth rate of 24% year-over-year, 3.9% quarter-over-quarter. Thus development is just fully in line with our internal targets. This is corresponding with the status as of the end of the quarter contracted. Just to give you an idea. So that does not mean that you are actually for the full quarter, contributing to revenues and profitability. Let's come to the financial performance indicators of the second quarter. Operating cash flow. Well, the situation basically remains unchanged. Some comments on this. We have clearly a high working capital requirement at the moment. We have a negative cash flow that is, well, to some extent, unusual and to some extent, outstanding. Inventories were up to EUR 120 million, a comparable usual level with the given revenues that we're generating would be about EUR 60 million less.

So that should be a quantification of the effects that we have seen. And in the cash flow statement, you can see a EUR 23 million negative impact from the inventories. We've already talked about this in detail. We are investing the money to keep availability high, to have products that we can sell on behalf of our customers. And of course, we have the effect that we -- and for given projects you need different categories, product categories at the same time. If one of them is missing, then you will not be able to deliver the whole project and that actually affects your inventories significantly. We can see basically the same behavior with all peers. They all have the same topic, but I think we already commented on this as this should be a means to grow in the market faster than others that cannot afford having such inventories and assuring availability to generate business. We have seen ARRs, accounts receivables arising from EUR 326 million to EUR 370 million, so another negative impact. This is basically triggered by a great June. We have seen June -- the -- by far best month of the quarter, keeping the highest proportion of revenues of the second quarter. And therefore, clearly, we see a higher-than-usual level of [ IRR ] at the end of the quarter.

Nevertheless, there are no issues with write-offs, and we have no impact from any things that might affect the validity of the ARRs in place. If it's improved slightly, and in total, we can see an effect of minus EUR 49.8 million of working capital in the second quarter. Again, we are facing uncertainties what is going to happen. I think I've commented on this in the fourth quarter already. Clearly, the fourth quarter will be a positive and the best positive cash inflow that we are facing and depending on the extent of the improvement of the supply chain that we see and depending on what can we actually deliver in the third and also fourth quarter, there should be a significant improvement, however, difficult to quantify due to the circumstances that we are facing. CapEx is above plan. Nevertheless, we've communicated to you that the first half will be affected by some more investments to go. Second half should be lower than the first half of 2022. And basically, and it's the most important impact, the SAP [ spending ] for the new ERP system should come to well, not an end but should be significantly reduced in the second half of 2022. So the expectation is a reduction in the second half of 2022.

PPA is just for your information, we expect a minor effect to be quantified in the Q3 earnings call from S&L. So the purchase price allocation has not yet been done, but we are talking about a surplus, topping the equity about EUR 10 million, and this will be a split about, usually 50% and goodwill 50% should be a PPA effect that could be stretched over 3 to 4 years. That's basically what we expect. We will provide you with detailed data in the third quarter earnings call. The last slide regarding the financials. Just as promised and already indicated at the beginning and please find in close the financial statements without a U.S. business. So you can easily update or hopefully, you can easily update your models and please do not hesitate to get in touch with Sebastian Bucher of [indiscernible] in case of any questions. Forecast. We have revised our forecast in the -- at the end of the first quarter. I think everybody has seen -- we seem to be pretty in line with what the as expected from us in the second quarter according to directions that we have seen now. We have, at the moment, in consistent points of use and therefore, a very difficult starting position to assess the situation. We will explain to you our assumptions. And let me add where we see markets talking about threats, interest rates, inflation war, potential recession and so on.

We have on top seen, and that's something that I've read in German Handelsblatt, as of third of August, the -- as we have the highest number of both adjusted forecasts to higher as well as to a lower level. So it's a very difficult situation. Despite of the market -- but we see, we see a high demand and no impact on investment behavior yet from our customers in the IT market. All the peers, by the way, obviously, are facing the same demand. They all comment the same way and the demand for digitization is still high. And assessing the demand, the high level of backlogs overcoming the supply chain issues gradually and especially reigniting the public business with funds unchanged and still in place and the demand in place gives us the understanding of our unchanged forecast for the full year 2022. Finally, we see the majority of the effects in the fourth quarter as even when they are starting the processes, they will take some time, at least for the public sector drivers that are expected to push the business in the second half of 2022. Some final comments on the financial calendar. We have just 2 points in there. First of all, interim statement of the third quarter will be on 10th of November and analyst conference, just a mandatory thing for us.

That's why we commented this on -- at the equity -- German Equity Forum in Frankfurt. We were asked about what to do with regards to Capital Markets Day. We decided, well, we had last year at Capital Markets Day in November. Nevertheless, this was an unusual point of time. As usually, you do this at the beginning of the year, and to give an outlook and talk about our strategy for the year to come. You are talking about the forecast and so on. This was just down because of the COVID situation. So we would like to come back to a regular term that would be after the disclosure of the financial statements of 2022 and having on board the new CEO, Rudiger Rath. And as you might have seen, already some new board members that have been announced or indicated to be announced going forward. So that's the information for you. It would be great to have you joining this conference. And with this said, I'm looking -- I'm handing over back to Sebastian and looking forward to your questions.