Cancom SE

XETRA:COK

Earnings Call Transcript 2019-Q3

[Sebastian Bucher, Manager of Investor Relations]

Good afternoon, everybody. Thanks for joining us to our earnings call on the Q3 results of the financial year 2019. My name is Sebastian Bucher, Manager, Investor Relations at CANCOM. And with me, as usual, our CEO, Mr. Thomas Volk; and our CFO, Mr. Thomas Stark. They will be available for questions after the presentation. As usual, please be aware of our legal disclaimer that we always put in front of our presentation. And now without further ado, I will hand over the floor to Thomas Volk.

[Thomas Volk;CEO]

Good afternoon, everyone. Today, I am pleased to announce that I think we delivered a very strong Q3, confirming our guidance for the year and deriving from what we set out the Q2 to become the very strong quarter for our service business. We have had, as you know, in Q2, an extraordinary growth in our IT solutions business with winning several new customers, indicating that this will be the basis for our services business in the future. And I think when you look at other results of Q3, which we'll present, now you'll see that approach and that strategy is working very well for us. In addition, in Q3, as promised, we have signed now a partnership agreement for our AHP partner in the United States for North America, a company called ExactlyIT. ExactlyIT is a managed service provider which is focused on business-critical application around SAP -- managing SAP in the public cloud as well as managing security in Microsoft projects in North America in the cloud as well as on-premise. And they are now starting to win a lot of new customers. They have a good pipeline of new customers, where AHP definitely helps them to manage the hybrid IT requirements of the customers. Hence, we spent in Q3 training the people and signing them now up as a part of North America. According press release will follow on this in the next couple of days, but we can announce here that everything is signed, and we are ready to go. Additionally, after the end of the reporting period, it's important to note that we acquired Novosco in the U.K., actually in Belfast in Northern Ireland. And the Novosco acquisition is a very complementary acquisition to our strength in the United Kingdom. They will definitely enrich our managed services capability, and they will expand the footprint for us in the U.K. And in addition with them, we will be able now to enter also the Irish market. Novosco is now a CANCOM company, which will be completely integrated with our CANCOM U.K. operation. Acquiring Novosco showed that they have over 300 customers, and we only overlap in 5 customers. So there's really additional business with additional access to accounts. And what we have clearly identified is that Novosco's strength in managed services are really complementing our strengths we have for our customers in the United Kingdom, offering us now to bring the broader portfolio to the 300 accounts of Novosco or bringing the managed services strength of Novosco to CANCOM. Novosco is a company of about GBP 55 million revenue, with an EBITDA margin of 17%. So obviously, they have a lot of managed services in there. And most notably, Novosco is #1 in customer satisfaction around United Kingdom managed services market. Their Net Promoter Score at 75, 76, and is going up. So they are definitely an addition to us which help us also to improve our customer experience throughout United Kingdom, all of North America. With this transaction, we'll have a cash outflow of around GBP 70 million this quarter, and we will, at the same time, as you know, have some cash inflow due to the sale of our building. We had also more recognitions this quarter as well. As we have announced, we have been recognized as the best system partner in all of Europe by Canalys because we achieved the Candefero prize to be #1 in Europe. We were #1 in the world with Cisco. So we are, again, being recognized for all the growth and efforts we have, not just by reselling products, but also actually by the fact that we bring all the value CANCOM has in the services space to customers. Which then also, you might recognize again, as you can see on this slide by ISG, the external market research company and analysts, who, again, saw us as one of the leading providers in the mid-market for managed services in Germany as well as for hosting in the mid-market. I think we are always #1 or #2 in our core areas, and it's our goal to remain there and maybe we can continue to be -- and have that as differentiator in our business. Now why do I mention this? Well, this is really what the transformation of CANCOM is about. It's about bringing us more and more into customer relationships, where we have long-term contracts with customers providing managed services and cloud services to these customers, where we are establishing ourselves as the key vendor to more and more customers, and where we gain more trust over time. So I think Q3 was really the proof point that we are able to turn the business in that direction and grow significantly in those areas. While the organic growth -- while the growth in Q3 was at 8%, which is certainly lower than we had the year before, obviously, we didn't have much inorganic growth because we didn't have much -- we didn't have any acquisition. Our EBITDA -- our profitability grew 18%. So that led us to a record margin of 9.1%. I think that also shows that our business is capable even in an area where we don't have the large growth capable of producing a lot of profits, and there's a lot of stability in our customer relationships. And there's a lot of opportunity for us to actually grow our services and our relationships in the future based on our accomplishments, the trust we have in the market, the position we have in the market. Hence, we will feel very comfortable that our guidance we gave, that we will achieve about -- achieve 10% EBITDA margin in the few years to come, that this is a very realistic goal we have ahead of us. So the business transformation of our customers is actually showing that with them moving more and more into digital projects where they use IT in the form of consumption is driving also into our way, and that's where we see the further growth opportunity for the future. If we then look into the different segments, obviously, the Cloud Solutions segment continues to grow very healthy. It's always about 20%. We didn't have any inorganic growth this quarter, or hardly any inorganic growth. So organically, we continue to grow about 15%. And our margin is now slowly, but surely, growing to an overall margin of closer to 30%. Remember, last year, we were at the margin around 25%. This year, we continue to grow now -- last quarter, 26 -- close to 26%. Now we are 27%. So as we indicated, this business, despite of its growth, will continue also to slowly move up in the margin space. And we'll get closer to what we indicated to provide a 30% margin over time. In the IT Solutions segment, obviously, we had last quarter a huge growth of 45%, which was driven by a lot of large product yields. Now as we indicated, CANCOM focuses its efforts around these product yields also to provide the services so that we actually can get the profitability out of these deals, and that happened this quarter. We definitely have had a lot of projects where we have implemented the services, where we worked a lot with consulting. So that doesn't show that much on the bottom line, but the overall EBITDA margin is now back at 5.6% compared to 4.7% in Q2. So again, we have been able to turn the profitability with our services there, and make sure that the customers we've won use our services going forward. Obviously, the growth is somewhat limited by the service resources we have in that space. So that's why we have invested last quarter into the new subsidiary in Košice, which was we're there earlier this week for the official inauguration of that office. And we have now already hired 50 people in that office, which will help us to drive service business forward faster as well as -- with the acquisition of Novosco, we now have also a service hub in Belfast, where we have access to a lot of very talented resources at a very affordable price, and that will help also to get access to service resources and skills faster, which, obviously, are the limiter in terms of growing the service business overall. So we need the people, and that's what we're investing in to make happen. Overall, I must say, our focus in Q3 on our managed service business has been paying off very well. If you look at the growth quarter-over-quarter, we had 7.5% growth quarter-over-quarter. That's EUR 11 million, the highest growth we ever had in recurring revenue. And year-over-year, that means that we grew year-over-year, now 25%, on annual recurring revenue. Obviously, all of this being organic because there was no acquisition since September last year. So all this growth is pure organic growth, which, I think, is actually an outstanding number in the market. That relates then also to the profitability of the segment. As we know, the Cloud segment started to become more profitable about 1 year ago versus the IT Solutions segment. And as we see, that trend continues. The Cloud Solutions segment performs better and better. And now this quarter, this -- so far this year, we are now EUR 8 million ahead in Cloud Solutions versus the IT Solutions segment profitability, which I perceive to be the trend we indicated and the part beyond perceived to be showing that we will move into a higher profitable business going -- overall going in the future. With that, let me turn over to Tom to talk more about the cash flow and some financial KPIs.

[Thomas Stark, CFO & Member of Management Board]

Yes. Thank you, Thomas. So my name is Tom Stark, and I'm CFO of CANCOM. Looking forward today to providing you with some additional information on financial KPIs. And just using the same format as ever, cash flow, working capital, CapEx, tax, G&A, and today, in the third quarter, some special effects that are worth mentioning. So let's start with the operating cash flow that we have shown in the third quarter. So on this slide, you can see fiscal year 2019 compared to 2018 and the goal that we have. And you're pretty much aware, we are still ahead of the previous year. Nevertheless, we have some impacts that have influenced the operating cash flow. And this is directly connected with what Tom has already said about. While we have some backlog, some -- significant backlog that you can be pretty easily aware of, by looking at, for instance, the inventories that have the highest value that we have ever shown so far. So actually, the good news is we have a healthy backlog. The things that we have identified to achieve in the fourth quarter are basically things that are done and have to be co-presented some effects that we have in place. So we have staging processes to do and to cope with. And it's not just about shipping. So this means we have additional services to be sold and to have a good outlook for the fourth quarter in order to get the things done, and we are pretty much aware of what to do and what are the next steps to achieve. In terms of the forecast, in regards to the operating cash flow, we are confident in achieving the 20% plus goal that we have announced at the early stage this year. We think we have a very good prospect for the fourth quarter. We have very interesting projects ongoing, the time, or more money than usually at the end of the third quarter. But on the contrary, we have a good backlog for the fourth quarter, meaning, we are visibly seeing that we think we have a good fourth quarter in terms of cash inflow. Directly connected to the operating cash flow is the operating working capital ratio. We communicated a goal of 0% to 2%. And if you compare the third quarter with previous year's third quarter, we are better off -- we have a better starting point than last year. And I think -- and this -- with regards to this KPI, we will be capable of achieving the goal as well. So we are very confident in reaching the goals due to the fact that we have still some place to grow to invoice to the customer. Secondly, let's focus on -- let's have a look at the CapEx. CapEx-to-sales ratio has ended up with a 1.8%. We have outlined to you, as a financial community, the goal of having spendings of less than 2% of sales in 2019, so we are very well on track. And if you compare the development, there are 2 things worth mentioning. First of all, we had a significant investment in the third quarter in U.K. We have invested EUR 1.1 million to the new headquarter for the U.K. entities. And given that now we have an additional company that we acquired, Novosco, we have a meaningful site in U.K., we have the capabilities of now setting up and implementing shared services, so meaningful things that justify the investment, which has not been planned and is already included in the EUR 6.9 million. Secondly, we have opened Košice. And in the third quarter, we had the spendings for well, implementing and setting up the support center that will significantly contribute to the lack of resources that we will have in place now, and we had an investment of EUR 0.4 million. So in total, EUR 1.5 million in the third quarter that are already included. Overall, I think we're well on track, and we're very confident in achieving the goal. Next slide, you're already familiar with. We want to show you -- or I want to point out, what is the operational performance and what are the operational performance capabilities of CANCOM. So I will not go through all of the figures that are on there, but I would like to focus on one thing, just looking at the group and the adjustment that has been done there. If you compare the third quarter 2018 with an EBITDA adjusted of EUR 29.5 million, we had an adjustment of EUR 2.8 million, comprising of well, M&A costs, investment in strategic transformation and equity-based remuneration. So in 2019, in this year's quarter, we have reduced or a net debt adjustment of EUR 1.3 million, and I would like to focus on this topic to explain you why we have chosen the netting of those things. So we still have a EUR 2.9 million of M&A costs. Equity-based remuneration was EUR 0.5 million. But we had the sale of the -- selling transaction of the real estate in Jettingen-Sheppach, so this is the previous headquarter, where we have the service factory. We have chosen to, well, just set free the money that is tied within this real estate. And well, clearly, we would like to use the money for M&A transactions. I think we have a good sense of the market. I think we have a good funnel of potential opportunity, and was meaningful to use the money for M&A transactions, and just simply set it free. So we set free EUR 26 million, and the results that we have achieved by, well, selling it above book value was EUR 1.6 million as a one-off profit. So both things, I think, should be netted in order to show the real operational performance, and that's the goal of us, to show you what are the capabilities and what's the potential of CANCOM for the future. And that's the reason why we have an EBITDA adjusted of EUR 34.8 million in the third quarter. What -- the amortization topic is slightly difficult, honestly speaking. So the slide has not changed as of 30th of September 2019, compared with the 30th of June 2019. And we have not done any M&A transaction within this period. But nevertheless, we have done a very significant and major investment with the -- well, first consolidation date, 1st of October with Novosco. So Novosco will contribute to the fourth quarter for the whole quarter, starting with October 1. So that's the first thing to know. Secondly, let me give you an assumption about what the PPA will be. First of all, the amortization is noncash. So it will not impact any cash outflows. Secondly, well, the good thing is we have this Novosco managed service provider with very long-term contracts, just started at the beginning of the duration end of the service provisioning for the customers. That means, clearly, we will have, well, quite some impact in terms of contribution to or acknowledgment of amortization in the future. So the good thing is a very long-term relationship with customers, high visibility of the customers of Novosco. And clearly, just following the outline that we have on our M&A strategy. The process of the purchase price allocation is still ongoing. So I think it's not meaningful to provide you with any more detailed data. We will come back to this at the end of the fiscal year 2019. Secondly, depreciation. You have seen the depreciation in the first 9 months, accounting for EUR 24 million in total. That means we are well on track as well. We have communicated a bandwidth of EUR 33 million to EUR 35 million. Well, stand-alone, so without any Novosco impact, we are even below that and already acknowledging the investments in U.K. and costs which have not been planned. So last but not least, if we -- I would like to mention too, well, special effects that we have with regards to the tax rate, and well, the net income, as we have shown. So we have commented on the tax rate already in the previous call when we had a positive tax reimbursement from the state that reduced our tax ratio to 25.9% in 2019, and we still can confirm we will end up 2019 with a tax rate that will be in between 27% and 28%, so significantly lower than usual. Additionally, in the third quarter, we show a net income increase of 77%. So net income increased from EUR 10.8 million in 2018 to EUR 19.1 million in 2019. So why that -- we had a significant effect in deposition -- well, discontinued operations. We have been capable of ending a several year ongoing litigation via the settlement as of end of September, and we had a positive impact of EUR 1.8 million that contributed to the net income directly. So let me point out one thing. I think we're very happy to have finished this topic. But this was a litigation was triggered by the disposal of an entity. So it was not in relation with any operational responsibility that we have, and it was not in relation with any M&A transaction. And this might be meaningful to highlight or point out. Well, if we look at the situation, we have never had a litigation case ongoing, showing that we really are -- have the right competencies to deal with the customer services and so on. And we -- this is something that I think might be worth mentioning. So overall, we have a net income growth of 48.3% in 2019. And again, just following the second quarter, we had a special effect that's worth mentioning, and that is what I wanted to end the presentation about the KPIs with. So that's the point where I would like to hand back to Thomas for the overall view.

[Thomas Volk;CEO]

Well, this is also an update on our 9-month performance to see where we are in fiscal year '19, and where we will end up, right? So obviously, we had had a very strong growth in the first half of the top line, and now a very strong growth in the third quarter in the EBITDA. Year-to-date, we are still growing 22%, considering that we have, besides the 7 months of OCSL and no inorganic growth, we grew organically 16.3% year-to-date and our profit grew 13.7% year-to-date organically, which, obviously, stands out and is one of the best performance that CANCOM has shown so far. With Q3 now at 9.1%, we are back on track with our EBITDA margin. We are at 8%, again, at this point of the year. And now that leads us to really look forward what's going to happen, right? We believe with what we see today and with the order intake we have today, the customer demand for digitization is going on, right? As we have seen, we also had quite a strong order -- strong orders in the months of Q3. And as I highlighted, a lot of these orders are associated with services. So we feel now, going forward in Q4, with adding more and more people in the services space, that we can work on that backlog; that we can, therefore, show the growth at the top line as expected. And we also feel that with the continued demand we have seen so far quarter-to-date that we are on track to actually confirm our raised targets for the year in all areas. So we feel very confident that we are on track here to finish 2019 as expected. What we said at the beginning of the year, we saw very significant growth in all areas, and obviously, a tremendous growth in annual recurring revenue organically as well as with Novosco before we add another EUR 20 million ARR in Q4. So you can see that we will have a very strong finish there as well, and we are well on track to enter 2020 with a strong customer base and long-term contracts in the managed services area and a strong momentum in the overall business. So with that, I would like to finish the presentation.