QBeyond AG

XETRA:QBY

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon, ladies and gentlemen, and welcome to QSC's conference call regarding the company's first quarter results for 2019. [Operator Instructions] Let me now give the floor to Mr. Stefan Baustert.

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

Yes. Thank you, and good afternoon, ladies and gentlemen, to all the listeners. I would like to welcome you to today's QSC conference call on Q1 2019 financial results.In Q1 this year, we have seen an accelerated growth in Cloud activities. The Cloud revenues grew by 49% to EUR 10.6 million. That is a 37% increase versus prior quarter. The double-digit revenue growth in the Cloud and Consulting segments were offset by declines in the TC and Outsourcing business as expected.Overall, the key figures developed largely as expected: revenues of EUR 87.4 million; EBITDA of EUR 15.9 million that includes, for the first time, IFRS 16 effects; and a free cash flow of minus EUR 4.7 million.As you know, on May 6, 2019, QSC concluded a contract regarding the sale of Plusnet for 20 -- for EUR 229 million equity value. The Plusnet deal marks the kickoff for faster implementation of QSC's growth strategy, and details will be given at the Analyst and Investor Conference on May 27 in Cologne.I come to Page 4. Q1 2019 is impacted by first-time application of IFRS 16, which has major effects and you will see this following the presentation. IFRS 16 requires disclosure of finance lease and rental agreements in the balance sheet. As of January 1 this year, QSC capitalized right-of-use assets of EUR 106 million, mainly for subscriber lease line contracts; other network-related lease contracts like colocation area, dark fiber and so on; and office space lease contracts. First-time application has led to a significant increase in EBITDA, corresponding higher depreciation, higher interest expenses and balance sheet extension.As you can see on Page 5, the presentation of the P&L Q1 '18 versus Q1 '19. The revenues declined by EUR 6.7 million due to lower cost of revenues. The gross profit was increased by EUR 8.3 million. Sales and marketing expenses were EUR 1.2 million up. And general and admin expenses were EUR 0.4 million up. That includes onetime effect for the Plusnet deal of EUR 0.6 million.So EBITDA increased by EUR 6.7 million, and this was offset finally by higher depreciation, and we ended up at an EBIT of EUR 1.3 million, which is EUR 1.1 million below last year's quarter. Then we had an extraordinary effect in the financial results of EUR 1 million. This is also directly related to IFRS 16. So the net income was minus EUR 0.3 million. Without IFRS 16, it would have been slightly positive.On the next page, we have propose you a closer look at the depreciation and the financial expenses. As you can see on the bar chart on the left side depreciation. The ordinary depreciation rate would have fallen down from EUR 6.8 million to EUR 6.1 million. However, based on IFRS 16, it has been increased by another EUR 8.5 million to EUR 14.6 million. Same is true for financial expenses. While the financial expenses directly related to our promissory note and fin loan last year was EUR 1.1 million, it would have been decreased to EUR 0.9 million, but it increased to EUR 1.9 million by a EUR 1 million effect of IFRS 16.On the next page, you will see the effects on the balance sheet. We have seen a strong balance sheet extension. Higher percentage of long-term assets and debts and the equity ratio, which has been -- by roughly 31.2% end of last year, it came down to EUR 23.7 million. So huge effects on asset and liability side of the balance sheet just related to IFRS 16, but I guess, this is nothing new for you in these days. Quite a number of companies will have this effect. Going to CapEx on Page 8. We increased CapEx versus last year from EUR 2.9 million to EUR 4.3 million. We invested basically in customer projects, in technology and intangible assets. And the CapEx that is figured here excludes any IFRS 16 effects for it's directly comparable to the prior year. If you come to free cash flow, Q1 development of free cash flow is typically influenced by prepayments for the full year. In addition to this, we had 3 other effects coming to the negative or contributing to the negative development of the free cash flow, which is lower earnings, higher CapEx and also quite a normalization in working capital. The Cloud -- if you come to the segments, we'll start with Cloud. We have seen here, that's pretty positive for us, accelerated growth. We come from EUR 7.1 million, went up by 49% to EUR 10.6 million in the first quarter, and despite investments in people, technology, sales, marketing activities and so on, it could increase at least slightly the segment contribution from EUR 0.5 million to EUR 0.7 million without IFRS 16, and to EUR 1.2 million including IFRS 16 effects.Outsourcing, here we have seen in the last year, as you may remember, the continuous restructuring efforts, and these restructuring efforts led to the fact that despite a drop in revenues from EUR 23.7 million to EUR 18.9 million. So there is only EUR 5 million. We could increase the segment contribution from 2.6% to 3.2%. And then addition, of course, we have this IFRS 16 effect, which finally ended up in the segment contribution of EUR 5.6 million. Here we could drop the number of employees by roughly 70 to 80 people. And we are continuing to optimize the structure of Outsourcing, and we will continuously reduce headcount here in line with the drop of revenue.Next one is Consulting. After quite a number of years of stable Consulting revenues, especially a very stable SAP revenue, we achieved to increase SAP by EUR 1 million in the first quarter. So that's where we are proud of, that finally we could show that by hiring people, getting new people on board and, of course, also going into the marketing and sales activities, we could increase this by more than 10%.Strengthening the workforce as well as drawing on external consultants impacted, nevertheless, the segment contribution negatively. We see this as an effect that may continue into the second quarter but which can easily be turned into profitability whenever we decide, let's say, to flatten a little bit in the growth.Telecommunications, as the last segment, we see normalization in reseller business in the first quarter. The revenues came down from EUR 53.4 million to EUR 46.9 million. But a very well-known picture, the business to business is flat, while the business to business to consumer is coming down. And the effect of this we can also see in the segment contribution, which is slightly down from EUR 10.3 million to EUR 9.4 million or including IFRS 16 effect to EUR 14.5 million. So also here we have no surprises in the development of the segment. So overall, we can say the business performance is in line with our forecast. We also see growth in the 2 areas, which are very important for us, which is the area of Cloud and the area of Consultancy. The continued reduction in revenues in Outsourcing will continue. We are steadily moving customers from Outsourcing into Cloud technology, and also the new customers we have received are more or less Cloud customers.So what we can see is revenues actually are still in line with our guidance of more than EUR 350 million for the year, EBITDA of more than EUR 65 million for the year and the free cash flow should be positive.Of course, all this is still true, but at the same time it's not true anymore because based on the sale of our largest activities -- telecommunication, everything will change until the end of the year, and the new forecast will be published as soon as the transition-related effects can be assessed with a reasonable certainty. We are doing this, and in the near future we will come up with this information.Yes. That's it for the moment. Thank you very much for listening, and feel free to ask questions now.

[Operator]

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

[Wolfgang Specht, Analyst]

Four questions, if you have the time, for my side. First on your EBITDA development. Is it right to assume that the 15-figure ex IFRS 16 would have been EUR 6.1 million? Second question regarding the Cloud contribution, it looks little bit weak from my perspective. Do you expect any recovery here the course of the year or probably if the top line growth rates come down a little bit? Third one is regarding the cost structure post the sale of Plusnet. Can you give us an idea how that is developing? So how much of your current cost structure is leading QSC? And the last question would be on the use of excess cash that you should have following the Plusnet transaction. We can read in the print that you want to strengthen Cloud business and also you have to return some of your debt, but is there a big cushion for some extra cash for your shareholder?

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

Yes. Thank you very much for the questions. I cannot confirm the figures that you have told us. The EBITDA is definitely higher.

[Wolfgang Specht, Analyst]

The comparable figure towards Q1 '18?

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

Yes. Okay. Cloud contribution, yes, you're right, the Cloud contribution development was not as good as we have seen it over the last couple of years. But this includes onetime effects that we have seen in the first quarter. And this is not only the onetime effects that we have written down, this EUR 600,000 for the Plusnet transaction, but we had also onetime effects. What can we see, what can we expect for the upcoming three quarters this year, we expect, and that's what we have written, that the revenue in Cloud will continue to be strong and grow. And our target is still the EUR 50 million that we have written in the last year as figure that we are looking for until the end of the year.The cost structure, I cannot tell you. I mean this is the effect of the deconsolidation, and we are in the middle of deconsolidation. Plusnet and everything which belongs to the Plusnet Group from our consolidated balance sheet. And only if we have done this properly, and we have a good feeling of what we can tell you as new guidance, we can come up with this figure. So it's -- I'm sorry, but this is too early. Otherwise, we would have published that already so far.Use of excess cash. There's -- we have not decided anything on it, but definitely we will strengthen our core business for the future, which is basically Cloud business and IoT.

[Operator]

At the moment, there seem to be no further questions. [Operator Instructions] And we have one question coming from Patrick Schmidt, Warburg Research.

[Patrick Schmidt, Analyst]

Two from my side. So maybe you could give us an indication, maybe on the revenue side about the Plusnet. So am I right to assume that, obviously, not only the telco segment is impacted but also some revenues will be in Outsourcing and also Cloud? So could you give us an indication whether, I don't know, EUR 200 million or EUR 230 million, is that the right ballpark? And second question about the net cash you will receive. You stated this equity value. Should we assume any kind of cash being involved in the Plusnet structure? And would you have to pay some taxes on it? So what would be the net cash position you would receive?

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

Yes. Thank you for the question, Mr. Schmidt. Definitely, the telecommunication side that we have sold, so Plusnet plus subsidiaries, has revenues of above EUR 200 million. This will be more concrete on the Investors Day, the day on the 27th of May, when we present you the details not only of the figures but, of course, where are we heading for, what is the vision and what is the strategy of the company. Definitely, there is cash involved. So we have sold Plusnet, including a certain cash number on a net cash position. Yes, on a net cash position. That's true. All this will be presented and discussed on the 27th. So I would like to give you 1 or 2 pieces because this is really complex, and we have signed on the evening of the 6th of May, but definitely we did not expect that we will finalize everything until that day. The discussions and negotiations were long-lasting and we were surprised. I think everybody was surprised that we were -- and so fast and so far we need some time to do all this accounting work to be precise and do not have to do some corrections later on.

[Operator]

[Operator Instructions] Mr. Baustert, there are no further questions from the audience.

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

Yes. Okay then. Thank you very much, ladies and gentlemen, for attending the meeting. And we hope to see some or most of you on the 27th May in Cologne. Thank you.