GFT Technologies SE

XETRA:GFT

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Hailey, your Chorus Call operator. Welcome and thank you for joining today's conference call on the quarterly statement as of the 31st of March 2020, 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 to our quarterly statement Q1 call of 2020. The presentation is online on the website. And on top, we are sharing the webcast live, so there should be many ways to follow the presentation. It's a bit strange today. Usually, this room is a bit more full where I'm sitting, right? But people are sitting at home, working from home. Therefore, the conference room in our GFT office is a bit empty right now. Let's go directly to Slide #2. GFT meets revenue expectations in the first quarter of 2020 is the headline. We have seen dynamic growth with our non-top-2 clients in the first quarter of 22%. That's very good news. The total revenue is up by 6% to EUR 112 million, of which 5% are purely organic. Fourth bullet point is diversification strategy, it's fully on track. So the insurance business is now at 13%. It was roughly 11% for the full year last year. Our cloud business is growing strongly and now reaches roughly 8% of our total revenue. Adjusted EBITDA is down a bit, we will come back to that because it is also related somewhat to IFRS 16. So all the way up to here, I would have said, this was exactly the start we wanted into the first quarter of a very good year 2020. Well, and then for sure, all the COVID changes came, and we started adapting. So the next bullet point shows the dividend will be only EUR 0.20 per share. We have been paying out EUR 0.30 over the last years. But now with the COVID crisis in the back of our minds, we have reduced into the classic bandwidth we're using of 20% to 50%, the payout ratio, which at EUR 0.20 per share would be 39%. The outlook 2020 is still suspended due to the COVID-19 pandemic. Our medium-term outlook, which is more a qualitative statement, we do see that digitization trend is continuing. Positioning of GFT in the new technologies will pay off, maybe not in 2020, but in the years to come. We believe in that. Let's go to Slide #3. We have seen strong growth in the cloud business. As I already said, roughly now standing for 8% of total revenues. Last year, it was roughly 5%. And you see on the left side that for the full year, we nearly want to double the cloud business from EUR 27 million to roughly EUR 50 million. And the cloud experts, which is the other graphic, we want to double as well. Trained cloud experts should go to 1,000. We have won, this is back to the bullet points, the award Google Cloud 2019 EMEA Breakthrough Partner of the Year. We have strategic partnerships with all 3 large cloud vendors, Amazon, Google and Microsoft. And we have an example of a successful implementation of an AWS infrastructure for the Mox Bank in Hong Kong, which is a subsidiary of the Standard Chartered Group. Moving forward, Slide #4, the key figures. Now the revenue stood at EUR 112.5 million, 6% up, as already said. If we discount the in-GmbH, which we have acquired in January 2020, the organic growth would have been -- is 5%. EBITDA adjusted is down 7%, mainly due to higher personnel costs and operating expenses and somewhat influenced by IFRS 16, as we will see better on the next slide. On EBIT level, it's already only 7% behind previous year, which is more the operational gap to the first quarter of 2019. EBT stands at exactly EUR 3 million, which is 5% below previous year's numbers. Let's move forward, Slide #5, revenue and EBITDA adjusted by quarters. We do see that the first quarter revenue is nearly as high as Q4. We didn't exceed like we did a year ago, where Q1 was above Q4 of '18, but we had a good start. And therefore, we're proud of the Q1 numbers so far. It was above what we had planned for ourselves. Looking at the EBITDA on the right side, to be precise the EBITDA adjusted. And we do see that the IFRS 16 effects were bigger in the first quarter of '19 versus '20. There was one exceptional topic in Q1. We have ended a contract in one of our Polish offices in Q1, and the new contract will only start in Q2. So there's a timing gap, which also has an influence on IFRS 16. So that is the main driver for the IFRS 16 gap between this year's Q1 versus previous year Q1. Moving forward, Slide #6, revenue by segment. Let's go segment by segment, Americas, U.K. and APAC. We do see a total growth of 5%, of which 7% are organic. There was no M&A. And FX had a negative impact of minus 2%. Main growth markets were Brazil, Mexico, Canada and Asia. And the FX is mainly related, well, in the end, it's nearly all those markets. Brazil currency, Mexico currency and Canadian currency weakened versus the euro. Therefore, the local currency growth was even higher than the 5%, but the FX hindered us to show more. But this was a good development in Americas and U.K. In Continental Europe, we see a growth of 8%, of which 3% are nonorganic, coming from M&A when we acquired in-GmbH, which I already talked about a second ago. Let's go one level deeper. On Slide #7, we see the same number. But again, differentiated between our top 2 clients. And for all those who don't remember, top 2 in GFT is Deutsche Bank and Barclays, although currently mainly consisting of Deutsche Bank, Barclays being a very small customer in 2019 and 2020. Looking at the total group in the table, we see the top 2 clients have declined by 26% to EUR 25.5 million, while all other clients have increased by 22%. So this was pretty much as we had planned. We always said we want to grow the other clients by more than 20% this year, and we have done it in the first quarter. We have reduced our client concentration risk on a group level to 23% for the top 2 clients, coming down from 33% a year ago. And now let's focus on the segments and on the other clients' development. Looking at Americas, U.K. and APAC, all other clients grew by 23%. And again, as I said, this is mainly coming from Brazil, Mexico, Canada, while in U.K. and U.S., it was a bit, bit slower. And the biggest client increases, I will tell you when we go to the client slide. Coming for Continental Europe, here, we also had strong growth with other clients of 22%. Biggest driver here was our market, France, followed by Germany. Germany, outside Deutsche Bank, had a positive development. And also in our other markets, Italy and Spain, we saw positive growth rates. Let's move forward to profitability on Slide #8, which is EBITDA adjusted, EBITDA and EBT by segment. And we do see -- but now let's start with a comment. GFT is a highly integrated company. And we work nearshore from some locations, from some business segments, for other business segments. Therefore, the margins per business segment, they give a trend but not the single truth. Because if we deliver from Poland, which is part of Continental Europe into the U.K., we share the margin in some respect. Part of the margin is then in Continental Europe, part is in the U.K. That's why we usually focus on the group margin. But the segments give a trend. And we do see that Americas and U.K. has been improving versus previous year on EBITDA adjusted level, mainly because of positive earning trends coming from Brazil and Asia. Going to Continental Europe, we do see a decline. First of all, this IFRS 16 effect in Poland is in here. And at the same time, we had some capacity underutilization. And the biggest impact was a delayed restructuring in our German market. We wanted to do that restructuring in Q4 of last year, which did not work out because of Works Council issues we had, and it will only now happen in Q2 of this year. And therefore, we do have a slight burden on the Continental European numbers. Let's move forward, Slide #9, and give the revenue breakdown by countries. And we do see our biggest markets, that's pretty much unchanged, Spain, U.K., Italy, Germany. But now #5 is Brazil. And Brazil is on track of being a EUR 50 million per year revenue company inside GFT, while the big growth rate of 55%, of course, is supporting this. Other big growth rates already indicated on the slides before is in Canada, 16%; Mexico, 27%; and in Hong Kong, more than 100%. Other markets that have a big Deutsche Bank block, which is the U.K., the U.S. and Germany, they are hindered in showing total growth. They are still growing with the other clients outside Deutsche Bank, but including Deutsche, it is moderate. Moving forward, Slide #10 gives the biggest clients in Q2 versus -- in Q1, sorry, versus Q1 of the previous year, and we have 6 new entries on the capital markets side, and these are now all ordered by columns. So it's not the size. Cetip is the first new client coming from Brazil, also owning the Bovespa Stock Market in Brazil, is now on our client list. On retail banking, we have 3 new names. Banco Votorantim, which is a Brazilian institution; Banco Original also from Brazil; and Standard Chartered from Hong Kong. And in insurance, Desjardins, which is a big Canadian insurance company and bank, made it to our top list. And on the very right, TRUMPF, a German laser producer, our biggest client in the industrial client group made it to the top 30 list as well. Looking at the bottom right, we do see that insurance has improved to 13%. This was 10% to 11% last year. And therefore, financial services came back a bit. Moving forward, going to Slide #11, the profit and loss statement. Not much to add here. What you do see is that our overall efficiency on purchased services and personnel expenses has not improved, even has reduced a bit in efficiency, which is mainly related to higher sales expenses. We always said we're going to do because we want to go into 2020, and we want to go for revenue growth. We, therefore, spent more on people, especially on sales and business development, and we have the delayed restructuring in Germany. These were the main effects that made our efficiency reduced somewhat. The other number I would like to highlight here is on income taxes. We have a tax rate of 24% right now. It was lower last year. But remember, last year, the overall full year tax rate was 20% operational and 7% other effects, so 27% in total for '19. We expected in '20 to be between 20% and 24%. Going forward, Slide #12, cash flow analysis. We do see that the numbers on the very left and the very right of the graphic, EUR 58 million of net cash at the beginning of this quarter and EUR 52 million minus at the end of the quarter show that we have a positive cash inflow in the first quarter. This is showing the trend we had over the last years. We don't have our highest cash position anymore at the end of the year, but it is somewhere in mid-February, maybe even March. Therefore, Q1 is now the best cutoff date when it comes to our net cash position in the group. Why is that? Well, a lot of clients are paying us explicitly after the new year. This has changed over time. And we have to adapt. Looking at the operating cash flow of the first quarter, we see EUR 15 million, which is above previous year's numbers, mainly because of a lower working capital. Overall investments, let me highlight investments. We spent EUR 7 million, of which nearly EUR 6 million was cash out for the acquired in-GmbH in Germany, the company that we acquired at the beginning of this year adding to our industrial software portfolio. Let me highlight that on financing, we don't have any issues at GFT. You see our net cash position is quite stable, and it will continue to be. We see our clients paying us in time as before. So there was no COVID hiccups when it comes to liquidity at GFT. Important to highlight that. Coming to Slide #13. The balance sheet. While we do see the positive evolvement on working capital, reduced the total balance sheet size, but overall, inside just a bit of movement, not much, nothing to really comment on, only if you have questions later on. Which brings me to Slide #14, employees by country. And we do see that with 5,460 employees, we had the highest number of employees ever at GFT at the end of the quarter. We were prepared for really strong growth in the year 2020. And of course, we started hiring these people in Q4, and they came on board throughout Q1. And now with the COVID crisis in front of us, we have to manage the situation. But where does the current growth come from? You do see that the markets, Brazil, Mexico and Poland were the main growth markets when it comes to employee numbers. We see a slight decline in Spain and Canada compared to Q4 2019, and we had a utilization rate in Q1 of 89%, which was pretty much the same number as last year. But you remember, when we talked last year, we were not satisfied with the utilization number. We had some underutilization because of very strong cutoffs from Deutsche Bank coming very short term. And therefore, it was a highlighted underutilization, and we discussed it. And now we were not able to improve. And the main driver is the delayed restructuring in Germany, I was already referring to, and very, very first minor COVID impacts in the last weeks of March, which brings me to the outlook, Slide #15. So let me sum up. We had a good start into 2020. Q1 was in line, even above our own plans. Only minor impacts of COVID-19 pandemic so far. The only negative in Q1, which could have pushed, especially, the EBITDA higher, was this delayed restructuring in Germany. Our services to clients are intact. We are 100% working from home, no disruption of service. That's very important to us. And the digitization trend is ongoing. We see dynamic development of cloud applications, with a bit of reduced speed due to COVID-19. And our broad international client base, I was mentioning Brazil growing, Mexico growing, is a stabilizing factor. Coming to revenues, the momentum of the sector and client diversification is unchanged. Although our industry sector, so industrial clients is somewhat more exposed to COVID-19 than banks and insurance clients. And now let me be a bit more precise. What do we see as an outlook because we don't really give a guidance right now. Q2 was in line, as we said. In our initial guidance, we then expected Q2 to continue the growth momentum and exceed Q1. That was our initial plan with our initial guidance. But due to COVID-19, this is no longer realistic. And we expect the revenue of Q2 to be more or less in line with what we have seen in Q2 last year. The biggest question mark remains on Q3 of this year as sales activities related to that quarter need to happen in the first half of the year, which is heavily burdened by everybody adapting to the COVID-19 situation. And everybody meaning ourselves, our clients and our partners. The final impact on Q3 revenues is still hard to predict, and we will need some more weeks to get a better feeling for it. From today's perspective, what we see right now, the third quarter should be more or less on a similar level as in 2019. For Q4, we anticipate a recovery from the reduced sales activities we experienced during the months of March, April, May. And the market is steadily adapting to this, let's call it, new normal, including COVID-19. And we believe that client interaction from now onwards will benefit from this new normal. Under these assumptions, we see the potential for Q4 to reach a similar level of revenue as in last year. When we come to earnings, in the last months of '19 and in Q1 '20, I think I already mentioned it, we did what we promised. We focused on growth. Meaning, we strengthened our sales and business development activities, while hiring and building the team for the foreseen growth in revenues. Earnings in Q1, therefore, were in line with our expectations. We have -- if we have not had that restructuring in Germany, we would have exceeded our own expectations. Q2 onwards, our earnings will be burdened by a lower-than-planned utilization. I already talked about the complexity of building pipeline under COVID-19 restrictions, which then leads to missing revenues, which then leads to people not working on billable projects. And this is what we call lower-than-expected utilization. Of course, we are using all measures to mitigate those effects, like reducing external suppliers, we're somewhat extending our restructuring measures. And of course, where possible, we're applying for governmental support for, if you translate it, reduced work time or in Germany, Kurzarbeit, which exists. There are similar models now being started in Spain and other markets, and it also exists in Italy. All in all, concerning earnings, we currently cannot give a detailed guidance for 2020. We will see earnings below previous year, for sure. But at the same time, we don't have a serious issue. The main COVID-19 effects on earnings will become visible in Q2 and Q3, while we expect Q4 to already show improvement. Our main goal is to manage 2020 in the best way possible, while being prepared for growth fueled by ongoing digitization in 2021. Like in the other tough market times we have seen before, we will balance cost containment in the current year and preserving the teams and skills for the future in the best interest of our company, clients, employees and shareholders. That's it for the presentation. You know the backup includes all the financials. So you can dig into that maybe later, and I'm ready to take questions.

[Operator]

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

[Unknown Analyst]

It's [indiscernible]. You've already explained on your expected development -- on the expected development in terms of revenues for the next few quarters. So my question related to this picture. How much does it actually take to win new projects? Or how long does it take to win new projects? Is it a couple of weeks or a couple of quarters? I'm just asking to get a better sense of -- to what your real visibility is for the next few quarters. And then also related to this question is my question, to what extent customers are willing to accept, let's say, pitches via video conferencing, et cetera? Or do those require a physical presence? And the second question is related to the employee number decline in Spain? Is it triggered by major customers? Or what is the background here?

[Jochen Ruetz]

All right. Let me start with the last one. Employees in Spain is triggered by less nearshore demand for Deutsche -- from Deutsche Bank in U.K. and Germany. That's the main driver. Spain itself is growing, but it's the nearshore demand from Deutsche Bank. So it's a fall out from the reducing top 2 clients. On pipeline building and how does sales work, well, of course, now, [indiscernible], I could answer this more extensively. We are doing our very best. We have clients. Our teams are ready for online selling in any shape or form. Not every client is. And not every client situation is suited for this. So if you pitch for something brand-new and you've never met, it's harder than if you know the people. And video, telco is just extending your client relationship you already have. So it's very diverse. And this is kind of the problem. If you want to grow the new clients, which we wanted in 2020, all the growth we have been predicting, of course, was supported also by new clients in new technologies. And that's the part where the visibility is tougher to have. Usually, these take 3 to 6 months, right, to materialize, some client relationships even longer. But in the new tech stuff, it can go quite fast. However, client interaction with somebody you have not met before is not easy. At the same time, our partners are supporting. They have the same issues, and the clients want to go for digital. So first of all, they want to go for digital, but they don't like the digital sales pitch. You have to take it somehow, right? You can't have both. Either you invest and then you take the digital sales pitch, if you don't let our people into your offices or you don't invest. And we have a blurred and a big broad picture of all of this. And that makes it very hard to predict the revenues. And currently, the visibility we have, I think I've given it quite precisely as good as I can at the moment is coming, of course, from existing clients a lot. But we also see from our partner base incoming leads, despite COVID-19, with new clients. So both is there, both is not easy to do. What is positive, we have 100% service delivered to our clients during the first month of COVID-19. We can prove this to our clients. We are proving this. And this is also something that is an asset and clients say, hey, that's good. Not everybody can show that. Not every company has been able to bring people home and get the services, keep the services up all of the time. So that is the value proposition in itself. And as everybody is now getting used to it, this might all take a bit longer, maybe that value proposition will have even more value in the weeks to come. But we will need to see. So for more precise numbers, we still need a couple of more weeks, maybe 2, 3 more months. Hopefully, then we have a better picture of where the year is going. I hope I answered as good as possible. More questions, please.

[Operator]

The next question is from Knud Hinkel of Pareto Securities.

[Knud Hinkel, Analyst]

The first 2 would be on reconciling the guidance you gave at the end of 2019 with that what we see today. First of all, I think the developments with other clients is exactly as you have guided, but the development with top 2 clients is much -- or is better, is definitely better, significantly better. So you still guide for minus 33% for the full year given the good numbers we've seen in Q1. That would be my first question. Second question, you guided for adjustments of around EUR 2 million, so at the EBITDA level. So after the first quarter, we saw EUR 1.1 million. So is it still valid for the full year to -- that you expect EUR 2 million of adjustments? That's my second question. My third question is on personnel costs. Personnel costs are up 11%. So that is pretty much in line with the buildup of personnel, looking at headcount. But on the other hand, you mentioned that there was currency weakness regarding Brazil, Mexico, Canada. And that is exactly where you've been build up personnel. So I would have expected a little less increase of personnel costs. Maybe you can elaborate on that one? And my last question is just seeking a reminder, taxes have not been mentioned in your presentation. Could remind me why tax rate is up quarter-on-quarter that significantly?

[Jochen Ruetz]

Yes. Guidance, well, the initial guidance indeed included roughly 30% less with the top 2, and that is more or less still valid. Seeing that Deutsche so far in Q1 was exactly spot on where we wanted them to be. Now of course, what will they do? Measures will be taken due to COVID-19 in the coming months, it's always hard to predict, and Deutsche has been saving budgets in the past. Therefore, we stick to that number. And the big question mark is the growth with all other clients. And that is the reason why we are not giving a guidance on the revenue level because we do not know how successful we can be in growth with the other clients to compensate. I was trying to give a bit of an indication on where we see the quarters. And therefore, yes, there is still growth with other clients, right? It will not stall. EBITDA adjustments, I can't fully remember, EUR 2 million. The main adjustment last year was we had EUR 4 million of restructuring costs. We said we will only have EUR 2.5 million this year, which now is no longer true. We'll now rather see EUR 4 million of adjustments also in 2020. When it comes to the effects coming from underutilization, which last year roughly stood for EUR 1.5 million that we called exceptional on the underutilization side, this is the big question mark for 2020. Where exactly is the underutilization going to be in Q2 and Q3, where the revenues are not coming in the same amount as we had predicted? So that's a big question mark. And currently, sorry, I can't give that number. That's why we don't have an EBITDA guidance in the market. Personnel costs, yes, you're right. With Brazil growing, it should be lower. But remember, we had this hiccup in Germany where we have too many people on board that we had expected not to be on board. They were really not utilized. So this was offset by some high-cost resources on the northern part of the earth. And therefore, in the end, it led to those plus 11%. Other issue, and we will see that mainly in Q2 and Q3 now. And I think other companies will report on this as well is holiday accruals because you have to send people on holiday, which is not easy in times where there's no way to go on holidays. So there are a lot of -- suddenly, there are balance sheet items, which pop up, which usually you did not have to manage because they were just managing themselves. Now you have to manage holiday accruals. And last but not least, taxes. Well, as I said, I think Q1 last year was somewhat low on the tax rate side. Rather look at the full year effect, which was, again, 20% operational and 7% coming from our periodic effects or IFRS. And therefore, this is what we see for the full year of 2020 as well. So don't compare too much Q1 versus Q1, rather look at the full year. And this year, I think the Q1 is already well reflecting what we expect for the full year. Does that help? More questions.

[Operator]

[Operator Instructions] And there are no more questions at this time. I hand back to Jochen Ruetz for closing comments.

[Jochen Ruetz]

Well, okay, that was a fast one, Q1. In the eye of the storm, right? Q1 went as we wanted. We liked it a lot going in. We were really optimistic going into 2020, and this COVID set us back somewhat. We see our business case well intact, maybe not for 2020, but for ongoing times. Digitization is a trend, while now are the guys who are work -- who support working from home are benefiting, but we believe that clients now see the needs on their end when it comes to digitalization, even better than they did in the past. So hopefully, 2021, the trend will go on, maybe stronger than before. I'm looking forward to maybe seeing or seeing some of you in our annual meeting, which will be online as well somewhere mid-June. And then we have the Q2 numbers coming up in August. If you have any more questions, please feel free to send us an e-mail on the numbers of today. As always, we are happy to support. Thanks for attending today, and bye-bye.