GFT Technologies SE

XETRA:GFT

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Yasmine, your Chorus Call operator. Welcome, and thank you, for joining today's conference call about the Q1 result 2018 of GFT Technologies SE. [Operator Instructions]I would now like to turn the conference over to Dr. Jochen Ruetz, CFO of GFT. Please go ahead.

[Jochen Ruetz]

Thank you very much. Good morning, ladies and gentlemen, and welcome to the Q1 call of GFT Technologies. I think there's a lot of reporting going on today. So let's jump right into the presentation, which I hope you have in front of you. Let's move to Slide #2. I'm going to start on the left side. Revenue overall for our first quarter was down 4% to roughly EUR 107 million. We had more FX effects on revenues than usual, which means, FX corrected, we would have shown stable revenues compared to Q1 last year. And I will go into the segments, on the later slides. EBITDA-wise, we were 1% up compared to 2017. Although, in last quarter -- comparing quarter, we had some extraordinary effects inside, which I will go into when we look at the segment results. EBT is up 2% to EUR 6.5 million, and employee number is stable compared to the end of 2017, and 2% down compared to a year ago, which feels like it's a long time ago for GFT. Going forward, Slide #3, looking at the results at a glance, the same, but only in numbers. Revenues, EUR 107 million, 4% down. EBITDA, EUR 10 million comparing to EUR 9.9 million, the number of Q1 last year. If we exclude the extraordinary items we had in 2017 first quarter, which was EUR 1 million of restructure cost and 250k for our Habber Tec earn out. The comparing number is a minus 10% for the EBITDA of this first quarter. The other earnings numbers you see, when we come to earnings per share was stable compared to the first quarter '17 at EUR 0.19 per share. Moving forward, Slide #4, which is more a comprehensive overview of the last quarter. Usually, here we go into the first -- the running quarter, but as always, the first quarter is the only quarter, so we look at the year-to-date numbers already on the slides before. We expect our numbers, especially the earnings numbers for '18, to be less volatile than last year. So if you compare the 2017 numbers to previous periods at GFT, it was a quite volatile year, and we hope '18 will be far less volatile than '17.Moving forward, Slide #5. Again, a slide, which usually focuses on the quarter at hand, but as it is the first quarter, we already jumped into most of the numbers. Maybe one more information, comparing this first quarter to '17. We had 3% less billable days in this first quarter, which usually is good for the profitability of the quarter. Let's move forward, and go into the segments. Revenue per segment on Slide #6. Looking at Americas & U.K., we see EUR 47.9 million, and we see a big FX impact on the right side, 7% reduction coming from FX. Main drivers, the dollar is down over the last 12 months by 15%, and we have relevant dollar revenues in New York City. And the Brazilian real is down 19% compared to 12 months ago. We have a bit of an effect on the euro to pound, but it's mainly dollars and Brazilian real. And therefore, we have a total reduction of 13%, comparing Q1 '18 to '17 for Americas & U.K. Looking at Continental Europe, well, of course, there we have nearly no FX impact on EBIT from Switzerland, and we're up 5% in revenues, which brings us, GFT Group-wise, to minus 3.7%, of which most comes of FX. Let's go one step deeper. You got used to our separated view on top 2 clients and other clients unchanged. Top 2 clients is defined as Deutsche Bank and Barclays, which Barclays was one of our top 2 clients -- or the top 2 clients, especially in investment banking last year. It will not be any more in '18, but for comparison reasons, we use the top 2 clients, and we show them here by segment. Americas & U.K., the top 2 clients, are down 22%. This is a number we have expected, and then, we see growth in all other clients of 2%, which of course, is offset partially by FX effect. Continental Europe, here we see the top 2 clients are up 11%. This was a positive surprise. We had expected, especially Deutsche Bank, retail banking in the regions outside of Germany, especially in Spain, saving budgets. But so far they've been spending nearly on the same level -- partially on a higher level in Germany on a higher level, than in 2017. So this was a positive surprise. Of course, the teams were then rerouted from other clients’ growth to top 2 clients growth, which means we were not able to grow in the other clients, Continental Europe, more than 2%. And this brings us, overall, group-wide, to top 2 clients 10% down and all other clients 2% up. Those 2% are offset by nearly 2.5% of FX effects, both real growth comparing in other clients, is more 4.5%. In a nutshell, the top 2 on the upside of our guidance in Q1, while the other clients are evolving a bit slower, but again, as usual, if your top 2 clients eat resources, it's harder to grow with the other clients at the same time. Moving forward, Slide #8, EBITDA and EBT per segment. Here we continued to show the boxes of 2017 hoping we don't have many boxes for '18 coming up, so far we had none. Last year, we had the restructure cost and the partial earnout accrual for Habber Tec included. That's what the box says. We do see a significant improvement on Americas & U.K. side, but let's mention that EUR 1.5 million are moved by adapted allocations on a group level from Continental Europe to Americas & U.K. So EUR 1.5 million comes from Continental Europe of the improvement, the rest is operational improvements there. When we come to Continental Europe, well they lost EUR 1.5 million for internal reallocation, and on top, our high profitability, we have especially in Spain, with many, many billing days in Q1 last year. We were not able to sustain in the first quarter '18 that is roughly EUR 1.5 million because of less billable days, and last but not least, we had the reduction in earnings and in revenues on our Swiss accounts. In Switzerland, we've been working and fighting with our Avaloq partner and customer throughout 2017. You know we had a lawsuit with that customer for a big project in Germany. We settled at the end of '17. We got paid at the beginning of '18. So we're all clear. But of course, the pipeline for the first half of 2018 was built throughout the second half of 2017, and there, the relationship to this company, to this partner, it was burdened, and therefore, we currently save, and we will see that in Q2 as well. Weaker revenues in Switzerland, and as usually those revenues have been highly profitable. We missed roughly 500k of EBITDA in the first quarter. Okay. This brings us to Slide #9. Revenue by countries. Not many changes, more the direction is as you already have seen on the segment slides. U.K. is down from 29% to 26% of our overall revenues, similar development in the U.S. Also, decline here mainly in the top 2 clients. On top, Spain growing, Germany growing nicely, and here it's partially Deutsche Bank, retail banking growth. We do see Brazil a bit weaker and you see the Swiss numbers 40% down compared to a year ago, this is what I was mentioning before. Other countries growth mainly comes from Mexico, and for the first time we have external revenues in Poland, where we deliver nearshore, but to a Polish entity of Commerzbank. Moving forward, Slide #10, currency distribution in the first quarter of '18. Well, on the cost side, we've become a bit more euro-based than before, which is logical because we have reduced our cost base in pounds and dollars somewhat in 2017. On the revenue side, we're still highly euro-based, but of course, we have a relevant share of pound. The FX risks that are in the system of GFT are mainly delivery from Poland and invoicing in pounds in London. That's one thing. We usually hedge that. On the other side, we have delivery from Brazil into New York City. So we built in real and we sell in dollars. Here so far this year, we have not hedged this position, which is, well, so far, looking back is always easy, was a good idea not to hedge so far, because the real has been weakening, week over week. Moving forward, Slide #11. Our top 30 clients in the first quarter, and as always the new clients on this list have a blue box around them. So we're -- on the capital market side, we see Schroders and Bloomberg, one in U.K. and one in U.S. And we see dwpbank, which is an institution mainly supporting the savings organizations in Germany when they use the capital markets, and where we are rebuilding their core banking. So it's a German capital markets client. We don't usually have so many of those. On retail banking, we added Raiffeisen from Switzerland and Scotiabank from Canada. And here besides Scotiabank there's a small mistake. Of course, KKR is not a retail bank. It should belong to the capital markets block on the top. So please just put an arrow next to it. All right. Let's move forward. Slide #12 our profit and loss statement. As always I will not go in too deep. You do see that we have increased our purchase services by 4% because we had quite a strong demand, a bit stronger-than-expected. We did not increase the team significantly in this time period, so we used more freelancers to support our clients. And the other big topic of 2017, or at least of the end of '17, was our tax rate, which was quite low. Now it stands at 24% in the first quarter, and we predict a more normalized tax rate for 2018 of 20% to 22% for the full year. Let's move forward, Slide #13. Showing the operating profit and especially the M&A effects, and when you look at Q1, there are no extraordinary effects at all, and it’s only amortization a EUR 1.4 million, which is a bit more than run rate because our small and Spanish acquisition, Mecemsa, has a higher amortization in the first half year, and it already lowers in the second half. That's why we believe the guidance is still mostly accurate, but it was a bit higher in the first quarter.Going forward, the balance sheet. Usually, I don't comment so much on the balance sheet. Maybe, I'll just inform you that we have implemented the new IFRS 15 rules. When you look at the balance sheet in detail, you will see that we have some new positions, which we have to show. But overall, it did not mean any major impact for GFT, especially not on the P&L. What else to say, at the end of March, we had quite good working capital position, and this brings me to Slide #15. And this good working capital position is reflected in the operating cash flow, while -- there are 2 impacts. First of all, we got the money from -- I mentioned the lawsuit with Avaloq. We got the money in January, which means roughly EUR 11 million on the operating cash flow are not belonging to the Q1 period, come from previous periods, are exceptional. But usually, in Q1 because the working capital is building up, we are in negative territory, and this time we would be without Avaloq close to 0, which is quite strong. Therefore, also, our net cash position at minus EUR 30 million, but you see on the very right of the graph. It's also a good working capital position at the moment, leading to a low net debt of only EUR 30 million. All right. Moving forward, Slide 16. Employees by country. Well, it's nearly the same number as at the end of 2017. You do see that we have a bit of reduction in Spain. We have a pickup in Poland. Currently our demand from U.K. mainly goes for Polish employees, and we do see strong and continuous growth in our Mexican organization, which when you look back 2 years ago, stood at 104 employees. It's now 186 and continues to grow. Last, but not least, the outlook on Slide 17 is completely unchanged. Of course, EUR 107 million times 4 would bring us to the upper side of our bandwidth. The revenue bandwidth we gave is EUR 400 million to EUR 420 million. But we all know that Deutsche Bank has been rediscussing their positioning, including management changes that we all have heard or read about throughout the first quarter. We believe them to be working on their budget in the second half, so probably Q2 is still a bit stronger. And then, the second half from the top 2 clients will be burdened with budget cuts. That's what we predict, but still we give the bandwidth. Therefore, the EUR 420 million would be the high, high side. We would probably believe it to be more in the middle, but we give a bandwidth because we will only know at the end of Q2 where this is really going in 2018. Growth in all other clients is picking up. Q1, you saw the numbers, was burdened by FX. Of course, currently, it continues, the dollar is reducing. This is not really helping our in euro shown growth with our other clients. However, here we predict an improvement in growth with those clients, but the question marks with our top 2 clients, they remain. And that's it, quite a fast run through with the Q1 numbers. As always, hoping to be quite efficient. Please, I'm ready to take your questions.

[Operator]

[Operator Instructions] The first question comes from the line of Andreas Wolf of Warburg Research.

[Andreas Wolf, Research Analyst]

A couple of questions from my side. So the first one is regarding the employees. So you've mentioned already, Mexico, has a good momentum with regarding -- with regard to the number of employees. I'm just wondering if the current U.S. administration might stop this trend. Do we see any initiatives from that side to stop deliveries from lower cost countries to the U.S.? And then, the second is, probably -- second one -- question 1B is related to Brazil. You had a sequential decline in the number of employees there? Maybe you could shed some light on the development there? I guess it's linked to the Mexican development, but it would be interesting to know what is behind this development. And then, I know I have asked this question before, but maybe you could update us on any news with regard to Deutsche? They had a management overhaul at the beginning of this year, if you already see any changes? I would assume nothing has changed for you yet, but maybe you could reaffirm this. And then, on retail banking, also related to Deutsche, that's my third question. Are there any special drivers of this demand? Or is it just general modernization of the IT of the retail banking.

[Jochen Ruetz]

All right. Yes, employees. Let's start with that. You mentioned Mexico first. Currently, for GFT, Mexico is purely a local market. Therefore we're not delivering into the [indiscernible] for Mexico as of now. Of course, this is an option for the future, but so far we are growing and working only in Mexico for Mexican, and usually, follow your client, Spanish-based Mexican customers. Therefore Mexico is not a problem. Brazil, you mentioned it. Yes, the employee number there is declining. Main driver is Deutsche Bank, in New York, who are reducing, and we are delivering a relevant part of that from Brazil. That's the bigger impact on the decline. Yes, we did not grow. We had a small reduction in team size in the first quarter because of the local business, but that was minor. The bigger impact is coming from our Deutsche Bank business in New York. And this leads to Deutsche Bank, right? It's kind of follows me wherever I go. But we do not have much more news than you. They are, not really -- we don't see them fully reshuffle everything like happened the last time, where we saw managers on all levels exchanged. We hope there's a bit more stability, but we, to be honest, do not know. The CIO has changed, right? Kim Hammonds has left and a new person was named. And usually that person is not our direct contact when it comes to projects, right? These are CIOs on their application levels. But the change has not led to any news on our side, the demand side so far was quite strong. Especially, on the retail banking and that was Germany, and this is the ongoing initiatives to digitalize the bank, and this is what we've been working and growing with in 2017 and this has continued in Q1. We are, of course, somewhat afraid that once the Postbank integration takes over the major part of the budgets, they will cut on digitalization, just because they will not spend on both. There's no strategic logic it's more a cost-saving logic then, but again, this is what we fear. There is not yet proof of that. So Deutsche is a bit in the fog, and we have to wait somewhat more until we really get news out of the bank. So far they are behaving as before, and we believe as we have predicted.

[Andreas Wolf, Research Analyst]

Okay. So you are also carrying out projects for Postbank, which have supported the development in this segment. Is this correct?

[Jochen Ruetz]

No. It's mainly from the Deutsche Bank side, retail banking so far, where their digital initiatives have taken place. We are working, but in a smaller piece for Postbank as well. And once the integration, which is still not fully defined how it will go, is defined, we see potential there. And if we would lose something in Digital, we would hope we would just win the same amount in the integration phase of Postbank.

[Operator]

The next question comes from the line of Dustin Mildner of equinet Bank AG.

[Dustin Mildner, Research Analyst]

It's basically related to the Q4 or the guidance you issued in Q4 or following the release of Q4 numbers. So obviously, the segments, the top 2 clients, and business outside the 2 clients developed kind of a bit different from what you expected. Deutsche Bank was not as bad as FIAT maybe, and -- but on the other side, if we look at declines outside Deutsche Bank business was a bit -- maybe a bit weaker than expected. Do you still stick to your outlook for the financial year 2018 for these 2 customer groups? And what do you expect going forward for the next quarters for these 2 customer groups?

[Jochen Ruetz]

Yes. We absolutely stick to the guidance and the bandwidth we've given. Please take into account that our guidance refers to the full year, while we are now only facing Q1. And as we said, we do see Deutsche -- especially after they issued their 2017 numbers, which was like mid-late January they went into this, oh my God, our cost base is not working mode again, which then, in the end, also led to the management change that we are all now seeing. And therefore, we saw this coming, and we knew it would be a stronger first half year for our top 2 clients and a weaker second half, while our other customers are continuously picking up business. And therefore, we will see the growth throughout 2018. While in Deutsche and Barclays, we could see a decline in the second half compared to the first half, and that's why it still works. Although, Q1 shows a different picture. It is the picture we have seen for Q1. Maybe, especially on the retail banking side from top 2, from Deutsche Bank, surprisingly strong. So far, we have been a bit more pessimistic here, which is good, but it doesn't change the overall picture. Therefore, yes, we stick to the bandwidth. And also, to the allocation of top 2 and other clients.

[Operator]

[Operator Instructions] And the next question comes from the line of Berenice Lacroix of Kepler Cheuvreux.

[Berenice Lacroix, Equity Research Analyst]

Just a question as we get to Spain. So last year, you reported a particularly strong fiscal year, with strong and tough comps for this year. So how do you see the outlook going forward? Do expect a ramp up in contracts with existing clients? Do you have new project in the pipeline for 2018? So could you shed some light on that? And the same question for the Americas & U.K. region, how do you see existing contracts to pick up this year? And what are the main drivers for the region at the moment.

[Jochen Ruetz]

Yes. Well -- yes, Spain so far is looking strong, but of course, growth is slowing down. We have seen strong growth in our now second largest customer called Banco Sabadell, in 2017, and when you look at our bubble or cake slide, I'm just searching, which is 9. We see that Spain is up 4%, but growth is reducing. And this still included a quite strong Deutsche Bank business, but we had the fear it would be weaker because as you remember, we talked about it last year, Deutsche Bank decided to sell Spain and Portugal, but then, obviously, didn't get the right prices. Did not sell the entities. Kept them. So they now have to continue investing, also into IT. But we were afraid they would reduce the budgets. And so far in Q1, this has not really happened. And this was supporting the Spanish business so far. We have been more pessimistic, but we've continued to be skeptical about Deutsche Bank's Spain business because the overall logic of them spending less is still valid. So Spain, this year, will not see a major pick up. And then, it will be hit a bit from the U.K. when the investment banking business there that is nearshore from Spain is reducing. However, it's still our biggest, and due to the size, most profitable entity, and it will stay. I hope I answered your question with that. I was not exactly sure.

[Berenice Lacroix, Equity Research Analyst]

Yes. Apparently you did.

[Jochen Ruetz]

On U.S. & U.K., the investment banking business. Well, it is continuing as we had said last year. Of course we have our 2 clients, Barclays, where we are now in quite a small position, so it's -- an also ran customer from 2018 forwards. And we have Deutsche with their very special, I would say, self-made and late mover in adapting cost problems. Besides that we do see growth with the other clients. So when you look at the client list, we have relevant -- continuous relevant growth with our HSBC customer. We win new clients that make it to our top 30 list, like Bloomberg or Schroders, and we have continuous improvement of our margins at the same time because we have moved more to nearshore, less onshore. But we had more utilization risks last year. Now we have a team size that we feel comfortable with where we already feel, in some areas, not consulting, but technology, so coding, that we have a shortage of people. So we are looking inside GFT, who would like to go to London to work onshore? And so we have obviously adapted to the right size, and now we're growing mainly nearshore. And therefore, we see this going forward as planned. Will we hit all target numbers for growth? Hey, we will see somewhere in Q3 if the growth we're predicting is really working out. But overall, we have a good track record at the moment, and the market is stable in itself. So it is, it has a significant demand side, and Poland is working as a nearshore location sales-wise and quality-wise, very good. Therefore, we are optimistic for U.S., U.K., take out the current disruptions we have, especially with Deutsche Bank.

[Operator]

There are no further questions at this time.

[Jochen Ruetz]

Let's just have another 10 seconds if someone's question pops up.

[Operator]

[Operator Instructions]

[Jochen Ruetz]

Doesn't seem to be the case. So I say thank you, very much for joining today. 30 minutes. Well, I'm quite glad I finally had another normal quarterly call, right, after the Q2, 3 and 4 calls last year. I'm happy to be back on a more normal track. Talk to you soon. The next quarterly numbers will be in August, which will be more interesting when it comes to looking forward. What will 2018 really be like? What's the bandwidth going to be? We're going to have more information then. If we meet in one of the conferences in the coming months, happy to do so. If not, have a good summer time, and see you soon. Bye-bye.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.