QBeyond AG

XETRA:QBY

Earnings Call Transcript 2018-Q1

[Operator]

The conference is now being recorded. Good afternoon, ladies and gentlemen, and welcome to QSC's Conference Call regarding the First Quarter Results 2018. [Operator Instructions]Let me now hand the floor over to Mr. Jürgen Hermann.

[Jürgen Hermann, CEO & Member of Management Board]

Yes. Thank you very much, and good afternoon to everybody out of a very sunny Cologne here. My name is Jürgen Hermann, I'm the CEO, and with me as usual, Stefan Baustert, our CFO; and Arne Thull, our Head of Investor Relations.QSC grew 6% compared to Q1 last year, and very short term, this is a good message. Main drivers were our telco business and Cloud. However, we had a good order entry in all segments, telco, SAP, Outsourcing, which is more driven by prolongation of contracts and Cloud as well. And I'm happy that in the Cloud area, we can see order entries in the PEC, in the IoT as well as in MultiCloud environment.You had read some press releases concerning Creditreform, SportScheck, Stadtwerke Ludwigsburg, [indiscernible], NetCologne, but I can tell you there were several more, which were not published. And I think maybe some used to come until end of Q2.So overall, we expect revenues at the upper end of our given guidance. And more with the numbers, I would like to hand over to Stefan.

[Stefan A. Baustert, CFO & Member of Management Board]

Yes. Thank you, Jürgen. Also, ladies and gentlemen, welcome to QSC first quarter results conference call from my side.You have got the presentation and I would like to start with Page 3. The first quarter showed, as Jürgen said, revenue increased by 6% overall, basically driven by telecommunication revenues up by 16% and Cloud revenues up by 37%. Besides the increase in revenue, QSC could gain several new contracts as well as contract prolongations. And so far, we see the start in 2018 pretty positive.Profitability developed as expected. EBITDA came to EUR 9.2 million and net profit increased by 50% to EUR 0.9 million. From today's standpoint, we expect revenues for fiscal 2018 at the upper end of the communicated range of EUR 345 million to EUR 355 million.As you can see on Page 4, the revenues grew for the third consecutive quarter and reached plus of 6% year-over-year.On the next page, we have explained a little bit the development of the revenue growth in telecommunication. The telecommunication revenues with resellers, we have a major revenue driver not only for Q1 2018 but also for Q4 2017. This is a result of increased demand for the termination of international voice traffic. Also being a lower-margin business, we, nevertheless, realized positive gross margin and will continue also in the upcoming months, which is business most probably not at this high level, but definitely at the higher level than we have seen in the past.If you come to the Communication slides. With the top line double-digit growth of 16%, we can realize the following: telecommunication reseller business benefiting from favorable market environment and highly efficient next-generation networks, telecommunication corporate business has won several Stadtwerke as customers. And we have a higher visibility even before the planned spin-off attracts new customers.The new organizational structure, in combination with a revitalization of marketing and sales activities in this area, leads to much more positive view in the future. And so far, the slight minus in segment contribution is a good investment in upcoming business, as you can see from EUR 11 million to EUR 10.3 million to segment contribution.If you come to Cloud, its ongoing higher revenue growth, also the Cloud segment contributed positively to year-over-year growth. The fundamental contribution to this growth comes from the Pure Enterprise Cloud. The IoT business, in general, has generated a lot of interest and activities for customers to evaluate their share of potential digitization of machine-to-machine connectivity. Higher recurring revenues with cloud services led in so far to a 37% increase year-over-year. Strong interest in IoT solutions, like as an example Munich Airport for example, which is now testing the EnergyCam. Despite investments in future, the segment contribution could increase to a positive EUR 0.5 million.Outsourcing business suffered year-over-year. The latest revenue development is mainly influenced by 2 factors: Step-by-step migration of existing customers to Pure Enterprise Cloud, and termination of 1 contract in Q3 2017. In the meantime, we have revitalized sales activities and have also, again, focused on costs. Beyond that, the ongoing organizational restructuring has an effect on the segment contribution. So overall, we can say Outsourcing, as you know, is a decreasing business. Nevertheless, we will focus here on costs again, and we will do our utmost to maintain our customers that are on board or that in combination with a revitalization of the activities.Last but not least, Consulting. The margin rose to 20% in Q1 2018, so Consulting is back on track. Revenues were higher than in Q3 and Q4 2017, even if they are lower than Q1 last year. The early focus of SAP HANA is paying off and the optimization of staff utilization is leading to strong increase in this segment margin that you can see here. So we are pretty positive not only for SAP in general, but also for SAP/4HANA, which actually sees a strong demand in the markets.So we can say overall, profitability developed as expected. EBITDA was EUR 1.3 million below last year's first quarter, nevertheless, was above Q3 and Q4 and more or less in line with the first 3 quarters of last year. EBIT came down slightly, and net profit rose EUR 0.3 million to almost EUR 1 million in the first quarter, basically driven by lower amortization and depreciation costs.So if you have a brief view on the overview of our P&L, you can see plus EUR 5.4 million in the revenues. The minus of EUR 2 million in gross profit is dedicated to the change of the revenue mix after we have seen a strong increase in revenues for resellers in telecommunication and a strong drop by margin in the Outsourcing business.Sales and marketing expenses were at the level of last year, and general and admin expenses came down by another EUR 0.9 million. So as already said, EBITDA was down by EUR 1.3 million to a strong EUR 9.2 million in the first quarter; and the net profit, plus EUR 0.3 million.So if we have some look at other financial figures, we have seen again, a moderate CapEx in Q1 2018. The completion of initial investment in cloud services has definitely positive effects on our CapEx. So ongoing investments and modernization of infrastructure and data services as well as customer projects are the major drivers of CapEx in Q1 2018.Free cash flow seems in comparison to last year, weak. But if you look at last year and the years before or prior to that, you can realize that we were traditionally with a slight minus in the first quarter, which is usually influenced by high prepayments, and that's also true for this year. Additionally, we had severance payments for employees as well as for 2 former board members, which all came to cash out in the first quarter, this year.So that leads us to the forecast 2018. The revenues tend to be at the higher end of what we have announced. EBITDA is somewhere between EUR 35 million and EUR 40 million. The free cash flow above EUR 10 million. So we stay with the guidance that we have given in March of this year.Thank you for your attendance, and we are now open and willing to answer your questions. Thank you.

[Operator]

[Operator Instructions] And the first question comes from Wolfgang Specht, Bankhaus Lampe.

[Wolfgang Specht, Analyst]

2 questions from my side, so first one on free cash flow. Can you give us some more idea on how much the redundancy payments caused pressure on free cash flow in the first quarter? And the second question is regarding the Outsourcing segment. Can you give us an idea why the cost of revenues are above 2016 Q1 levels?

[Stefan A. Baustert, CFO & Member of Management Board]

2016, Wolfgang, or 2017?

[Wolfgang Specht, Analyst]

Q1 '17, sorry.

[Stefan A. Baustert, CFO & Member of Management Board]

The first question is easy to answer. We have roughly EUR 3 million severance payments costs in the first quarter, which extraordinary burned our P&L. And the outsourcing costs came down basically at the level of, if you see, we have lost 4 million from EUR 27 million -- 3 million from EUR 27 million to EUR 23.73 million revenues. And we had high reduction in segment contribution basically because we have lost one major customer in Q3 last year, in combination that we did not adjust the headcount costs in 2017, something we have now changed again. So starting in Q1 with some accruals and effecting and realizing in the second, third and fourth quarters this year, we should see continuous reduction in costs, and then so far an alignment -- stronger alignment to the revenue development that we have seen in 2017.

[Operator]

The next question comes from Patrick Schmidt, Warburg Research.

[Patrick Schmidt, Analyst]

The first one is regarding the wholesale business in your Telecommunications segment. You already stated that you expect some slowdown, again. Can you maybe give us some detail where this dynamic growth is coming from and why you're expecting to slow down again slightly? And my second question would be on your cost position, especially, sales and marketing. You mentioned some revitalization expectations regarding that cost position. And why, for example, was this cost position in the Consulting segment that low this year? And can we expect the EUR 6 million you reported as the run rate for the rest of the year?

[Stefan A. Baustert, CFO & Member of Management Board]

EUR 6 million?

[Jürgen Hermann, CEO & Member of Management Board]

SG&A in total.

[Stefan A. Baustert, CFO & Member of Management Board]

Oh, the SG&A. The first question refers definitely to international traffic termination that was strongly demanded in Q4 and Q1 this year -- Q4 last year, Q1 this year. As you know, we had major organizational changes in the last year -- by the end of last year. And the development to telecommunication into a more separate unit has led to the fact that telecommunication was able to rebound their activities. That means, they offered their traffic to much more international traffic activities, and that's what we have benefited from. We don't know yet at the moment if that will slowdown, but it's, let's say, it's something which will happen on a pretty high level. But nevertheless, it could come down a little bit just because of the market in general slows down a little bit. It has proven that this business is low margin, but nevertheless, we have positive gross margin on it. And so far, we will not artificially cut it down, but we will continue with this business. The cost of sales and marketing also related to telecommunication has increased a little bit, also relating to the organizational change, we have hired and are still hiring people for the sales process, because we see opportunities in the market that could not be gathered in last year and the year before, because we have brought our sales team down. And then so far, of course, we see some additional costs on this side, but definitely, this pays in for the future. So cost of sales and marketing at the level of last year, I guess it could stay at this level, but it could also go a little bit up because of what I've just said.

[Operator]

The next question comes from Abraham Cavoosi, ODDO BHF.

[Abraham Cavoosi-Kaleno]

I have 2 questions, one regarding telecommunication and the other one Cloud segment. We have seen that revenues in telco business increased but the segment contribution decreased. Would you please give us more information how much of this reduction is related to resellers business? And how much is related to the new cost centers from other segments? That would be the first question. And the second question is also the same but for Cloud segment. Can you give us more information about the segment reduction contribution, I mean the segment contribution margin reduction in Cloud segment Q-on-Q?

[Stefan A. Baustert, CFO & Member of Management Board]

As I said -- thank you for the question. As I've said already, the development of revenue versus contribution in telecommunication is a result of a strong increase of low margin reseller business, especially in the international traffic environment. And that, in combination with additional marketing and sales costs versus Q1 last year. Last year, we have the, let's say, view on continuous reduction in sales activities and marketing activities versus this year, where we see that with the, let's say, increase in these cost areas and the increase of our sales activities and sales team, we see much more opportunities in the markets than we had seen at last year, at the same time. So this looks -- I know it looks a little bit strange, but it's the effect of these 2 areas. And it shows on the other side how much -- how strong the B2B business in telecommunication influences the contribution. For Cloud, the development of Q1 this year versus Q1 last year, we have similar situation. We have a strong development in Cloud -- in some Cloud activities with a focus on Pure Enterprise Cloud. And this of course has led to the fact that we came from a minus EUR 0.5 million into a plus EUR 0.5 million.

[Abraham Cavoosi-Kaleno]

But again, do we have a strong effect from the spin-off of Cloud communication -- TC segment into this reduction of margin in TC? I mean, do we see some cost centers from other segments into TC segment?

[Stefan A. Baustert, CFO & Member of Management Board]

No, no. We have not changed anything in our reporting structure.

[Operator]

At the moment, there seem to be no further questions. [Operator Instructions] There are no further questions from the audience.

[Jürgen Hermann, CEO & Member of Management Board]

Yes, ladies and gentlemen. If there are no further questions, let me thank you for your attendance and for your questions. And we hope to talk to you again at Q2 results. Thank you very much and good afternoon.

[Operator]

The conference is no longer being recorded.