Asseco South Eastern Europe S.A. (ASE) Earnings Call Transcript & Summary

Okay. Good afternoon. So welcome on presentation about Q3 results of ASE, which were published yesterday. So let's traditionally go first to highlights what -- and I will comment in a few words what happened in Q3. Most of comments will be specifically about Q3 only. So during Q3, we decided to book significant noncash write-offs and revenue reversals related to India and Emirates. It impacted the operating profit, noncash, but operating profit minus EUR 7.5 million. And obviously, it affected also Payment business unit. The reason for this is underperformance of operations. We already mentioned this after Q2 that we see some challenges and issues. But in a moment, I will explain what exactly we have written off. When we exclude those one-off non-cash bookings, current business, current operations delivered solid EBIT growth year-over-year for Q3 only, it is 21% above 2024. Nevertheless, in payment, we have a slowdown, and it is driven by 3 major areas. First is slowdown in Enterprise eCommerce business in Turkey. We already mentioned to you after Q2 that one of our clients, enterprise clients switched the majority of transactions to his own payment gateway, in-house payment gateway. And it also started during Q3 to happen for another big client who -- it's not to the same extent, but he started to switch transactions insource. And this directly hits revenues and impacts operating profit. After excluding one-offs, those write-offs I mentioned in India and Dubai, we have a weak performance and drop year-over-year. Last year, results generated contributed positively. And this year, we have a negative impact, which results in a decrease in payment. And only in Q3, I'm not talking now about year-to-date figures, but in Q3, deliveries of POSs and ATMs, they were lower than previous year. But if we look accumulated, revenues are there, but we have pressure on margins, especially in POS-related services and on deliveries, which are done in Western Europe. From positives, for payment, it was a stronger quarter for direct-to-merchant clients like ECR and IPD. Here we have revenues growth, more I will show in a moment. Significant improvement we realized in dedicated solutions. EBIT is significantly higher, and this is thanks -- mostly thanks to deliveries of our own proprietary solutions and targeted to utilities, mostly in this area. And it was another good, in fact, very good quarter for banking, especially for Core and Channels business lines, thanks to own services, which we delivered. And this was the best quarter for banking for the last few years. For cash, year-over-year cash flow improved significantly. I would say, it is back on track after 2024 issues we had. And the conversion of EBITDA to operating cash flow on last 12 months view is really on a good level. And traditionally, we show some numbers about transactions, how many transactions we process in eCommerce, IPD and processing. Processing and IPD it looks good. For IPD, even very good. So growth year-over-year. We have slowdown in eCommerce, which is due to Turkey, yes. So those 2 banks which switched part one, in fact, majority of transactions to in-house solutions, it affected this year-over-year value. On other markets, for other clients, we see some growth, but it cannot compensate those drops. Okay. So let's move to results. This slide, those of you who participated in previous calls or looked at our presentation probably know pretty well. This shows numbers as they were reported in financial statements. So 2 first columns exactly what is there. And then another 2 is after excluding effect of IAS 29 bookings, so hyperinflation. And those numbers show a slight drop on revenues and pretty big drop on operating profit, almost 30% year-over-year. But this drop, as I already mentioned, was generated by those write-offs and reversals. So if we look at them, we have revenue reversal in India, which relates to accrued but not invoiced revenues to merchants. And due to situation of those clients, the entity is not able to invoice those revenues as they will not be collected. So we decided to reverse those revenues. Then we have some write-off of assets, EUR 1.7 million on operating level and additional EUR 1.4 million in financial activity. This is what was put through financial activity is write-off of deposits, which were frozen by enforcement director in India. And in operating profit, we have some write-off of some receivables plus blocked cash. And then we have more accounting things like on consolidation level, this I mean. So write-off of assets, which we have recognized during allocation of purchase price. So we recognized on that time 2, let's say, families of software, one for payouts and second for payment gateway. And the one for payouts we decided to cover with other ones and write-off to 0 as we don't see perspective for now to recover this value. And the last column is effect of goodwill write-off and reversal of earn-out for majority stake, which we -- looking at results, we don't expect to pay. Taking all those adjustments, one-off, I will underwrite noncash one-offs, adjusted figures are in this, let's say, second section of the slide. And we can see here that on adjusted level, we have increase of revenues by 2% with some change in structure. You will see this on later slides. We have drop in POS and ATM on deliveries, so third parties. And also in dedicated solutions, we have a change of structure of drop in advanced infrastructure, so lower deliveries of third-party solutions and increase in own solutions. On operating profit, 21% growth year-over-year, so pretty good. And on net profit, it is less only 1%. What is the reason for this gap between 2 levels? It's mainly due to effect of restatement of contingent considerations and put, mostly put liabilities other -- of course, other than India and Dubai. So this year, our liability resulting from put of minority shareholder of Dwelt in Bosnia. The valuation of this liability increased by EUR 2.8 million. And this is related directly with better performance in Q3 and expected better performance for next quarters. You will see this in a moment on slides by geographies, how big improvement in Bosnia we have. Additionally, last year, we had positive effect of revaluation of put options for BSTS and [indiscernible] which we don't have this year. So those 2 things in total is around EUR 5 million lower result or bigger costs. This was partially compensated by 2 items. One, interest. On interest, we have a better -- higher balance, positive EUR 200,000. And previous year, we had EUR 1 million of costs related with dividends declared for non-controlling interest, which did not happen this year. To remind some of the entities are consolidated using present ownership method. And in this case, when this method is applied, dividends paid to minorities went in P&L of group. And as for taxes, actually it is positive, we have taxes lower by EUR 600,000 comparing to 2024 Q3. Two main reasons. One is tax benefits on R&D, which we accounted in Spain. We submitted, of course, documentation to utilize them and lower tax on intra-group dividends. Those which we collected during third quarter, they were not covered by withholding tax or local taxes. And effectively, we don't have this in P&L. For P&L figures, I will not go into details. The same picture, similar year-over-year differences. So no need to comment. Let's move to business lines, how this looks. So in Payten, we have drop of revenues year-over-year by EUR 3.3 million and drop of operating result. But a few words about revenues first. So as I already mentioned, in ATM and POS, we have lower deliveries. And this is visible here. So on ATMs, we have dropped 3.4%. But when we look at year-to-date data, we have growth. And similarly with POS, but the difference is in POS margin on deliveries, especially in Western Europe, is shrinking. Then for e-com and processing dropped by EUR 1 million, which is a mixture of 3 items. Slowdown in Turkey, I already commented transactions switched to in-house solutions by 2 banks. Significant drop in Dubai and India. Last year, in Dubai, we had some implementation projects to enterprises, to banks. And in India, we did have revenues to some merchants, but those for whom we later had to reverse revenues. And in India, currently dropped to very low result, and we are rebuilding it again almost from scratch. Those things were compensated by increases in some other geographies. So net effect is dropped by EUR 1 million. And ECRs and IPD, I already mentioned that it's a pretty good quarter for those lines and growth EUR 1.8 million year-over-year, mostly in Southeastern Europe, Croatia, Serbia, but in lower stay also Western Europe and Central Europe, specifically Romania. As for operating profit, as you see, more or less half of result was generated by e-com in processing and ECRs and we have drop of result in e-com in processing. It relates to Turkey, India and Middle East. So exactly the same geographies where we have drop of revenues. In ATM, we have drop of operating profit a bit due to those deliveries. So EUR 3.4 million lower revenues also decreased margin and also weaker performance of independent ATM network money, especially in Albania. And in POS, also a small drop of EBIT, EUR 300,000 mostly related to lower deliveries. Overall, coming back, EUR 2.7 million lower result in payment, of course, excluding one-offs. And then let's move to asset part. So banking, I already mentioned a spectacular quarter for banking, almost EUR 4 million higher revenues year-over-year and result higher by EUR 2 million, reaching more than EUR 5 million. So the best quarter since, I think, 5 years. And this is delivered mostly by Serbia, Macedonia and in a bit lower part by Romania. And it's thanks to Core Solutions and Channel Solutions. And Dedicated Solutions only EUR 1.3 million increase of revenues, but we have this change of structure. So decrease of third-party revenues and increase of own revenues, so cost business line, where we have big operating leverage on this and result is transferring to operating profit as you can see, because we did have already resources available, and now we utilize them effectively on projects. So the base was not, let's say, ambitious and it was not easy to beat, but the increase is pretty nice, and it allowed us to reach this EUR 18.3 million operating profit. As for the geographies, a few words. The biggest growth we have in Southeastern Europe, this is the strongest region, EUR 4.7 million higher operating profit, mostly Bosnia. So I already indicated this that this is related to this and valuation of put option. Also good Macedonia, thanks to our banking and Central Europe, also thanks to banking. A bit of slowdown in Western Europe, but if we look a bit more into detail, we have growing eCommerce here and ECRs, but slowdown in traditional POS-related services, a part due to drop in deliveries and also those which happened there with lower profitability than previously. And 3 geographies, let's say, problematic ones. So Turkey already said a few words. So we have drop of revenues due to transactions which were switched to in-house solutions, and this is transferred to operating profit. Previous 2 years, we had a perfect example of positive operating leverage when transactions were growing, we could easily generate higher results. And now with dropping one, it affects operating profit quite much. Okay. We initiated here process of cost optimization. We work on how to adjust to new reality, but we need a moment to see results of those actions. And India and Dubai, I already mentioned that business shrunk significantly. As you see, EUR 200,000 revenues only in both geographies. So this results in operating loss this year and even bigger drop year-over-year because last year India and Dubai contributed around EUR 0.5 million positive together. Okay. So this is about Q3. And moving to year-to-date figures. I will not go too much into details because picture is pretty similar. When we look at total year-to-date figures before one-off adjustment, we have growth of revenue by 7%, drop of EBIT by 4% and net profit by 15%. And again, here, we have effect of those restatements on revaluation of put liabilities and contingent considerations. We have from Q1 one-off of loss generated on sale of Moven and the differences on taxes, which were in -- on year-to-date numbers, they are higher than in previous year. Looking at adjusted numbers, asset write-offs, PPA and goodwill adjustments for one-offs are exactly the same. The first one, revenue reversal is different. It's EUR 1.6 million, not EUR 4.1 million. And this is because the difference, so EUR 2.5 million was reversal of revenues recognized in Q1, Q2 this year, yes. So on year-to-date figures, it has no impact. When we look at adjusted numbers, 7% top line growth and 10% on operating profit. So we have operational growth on current business. Net profit minus 9% and due to those reasons, which I mentioned a moment ago. When we switch to results by operating segments, again, pretty similar picture, yes. So we have growing banking and dedicated solutions. In banking, H1 was slightly positive with small growth. Now we've added a spectacular Q3. It looks very good. So accumulated EUR 2.4 million operating result growth on Core Banking and solutions and Channels mostly, as I mentioned. And Dedicated Solutions here on accumulating data, we have on revenue even drop year-over-year due to third parties, again and increase in on and EUR 6 million higher result reaching more than EUR 4 million. So it looks good this Q3 was really strong and contributed to accumulated numbers. And Payten, last one. So on year-to-date figures, we have growth in revenues in payment, this I already highlighted before. And as you see, this growth is in all lines despite challenges we have, especially in eCommerce Processing, where we have this drop in Turkey, India and Dubai. Still, it contributed to the growth of overall Payten. When we talk about operating profit, in POS, we see this pressure, especially in Western Europe on margins, and we have drop of operating results. ATMs, we have drop on profitability of independent ATM deployment. We can say it is the same, like 1:1 as in Q3 as most of results for this network is done during Q3. So here, we have a drop of around EUR 1 million, growing ECRs and IPD and big drop, most of the total drop of result is in eComm and Processing. Why Turkey and India and Dubai? So let's look at how it looks by geographies. Again, very similar. So strong Southern Europe with growing Bosnia, but also growth for Croatia, which was not the case only for Q3. Macedonia, the same trend, so growing on accumulative data and Central Europe as well. Western Europe, you see here this drop of result by EUR 1.3 million, and this is related with POS and shrinking margins, what I already indicated a few times. And then the biggest drops year-over-year we have in Turkey due to the reason I already mentioned and also India and Dubai. So this is about results. Now a few words about cash flow. I already mentioned that we are satisfied with cash flow. It looks good. So operating cash flow for 3 quarters is almost EUR 39 million, which is significantly better than previous year. Okay. Last year was bad. We were struggling. So it looks we are back on track. When we look at last 12 months figures, EUR 74 million operating profit more than in '23. So looks good. When we calculate conversion of EBITDA to operating cash flow, but EBITDA, not the reported one, but adjusted for one-offs, the higher one, conversion is 93%, what seems to be very good. We had a lot of investments, mostly in infrastructure for outsourcing and on networks. Last 12 months, we invested EUR 15 million. This is mostly for POSs and ATMs. For existing contracts, those which we signed a few years ago, 5, 7, 9, on which we reached the space of renewing the fleet and replacing with modern devices. So as you see, comparing '23, '24, we had big investments. Now '25, we also have them big. What is lower? Our spending investments in M&A, we have significant drop. We bought only 2 small entities during this year so far. And as for other outflows like regular CapEx, it is pretty stable and nothing surprising here. When we look at liquidity situation, cash, EUR 53 million. This is a drop year-over-year, but we need to remember about those dividends. Okay. We had operating cash flow positive EUR 40 million, but we paid dividend to asset shareholders, but also to non-controlling interest of subsidiaries. It's like EUR 21 million roughly. CapEx, EUR 15 million only this -- no, EUR 15 million total year-to-date M&A expenditures and servicing of debt. So this consumed some part of cash. Other positions like short-term debt, short-term leases, dividends, nothing spectacular here. It's pretty flat. We have huge increase in short-term M&A liabilities, valuation of contingent considerations plus put options, mostly puts currently. And it's not that we have some new ones, simply those which were previously presented as long term, they are now falling into this 1-year gap and the biggest amounts or biggest options in this amount are related to Dwelt, BSTS, Necomplus, and [Eastern Pine]. This majority of this value with some other small. As for operating capital, I don't think there is much to comment. Okay. This is what we managed to do, what we were like, let's say, expecting and highlighting on previous calls is that we want to decrease a bit inventory, and we managed. Okay. So this is it. And as for outlook for Q4 and the end of the year, backlogs look good. So we have a 20% increase of backlog on whole asset for Q4. For asset, parts of banking dedicated is 36% and lower for payment [indiscernible]. Probably if you remember previous year or last 2 years, it was rather opposite situation. We had more dynamic backlogs in Payten. Now it's changed. Quite a big impact on this is coming from Turkey and the switch of transaction, which we mentioned. And in the asset part, we have increased, which is mostly from the Dedicated Solutions. Okay. Banking is growing as well, but the majority of growth is dedicated. Okay. So this is about results. Do you have any questions?

[Operator Instructions] As for this India and Dubai, so like answering one of questions we did have on our morning call in Polish. On level of entities, we don't have any more big exposure in assets. Most of things are already written off. Of course, some assets are, but not a major one. We have still exposure on group level, but on noncash items, yes, like we have around EUR 6.8 million goodwill, which is still on our balance sheet and not written off. And we have EUR 1.8 million of recognized PPA, another software payment gateway. Based on impairment tests, which we prepared, we still see potential to recover this value. So for now, it is left on balance sheet. And of course, we have this challenge to rebuild the business and to get new clients to first cover operating losses. As you saw in Q3, it was minus EUR 900,000. Okay? I expect Q4, it will be lower, but we need to catch this to get new clients. For sure, what we changed in the approach is that we are now very strict in revenue recognition in India for merchant business. We don't allow any literally any recognitions which are not invoiced to the client, and we have implemented very strict policy for writing off merchant receivables. This mostly relates to India, but for Dubai as well if we have this type. So after 90 days, such merchant receivable is fully written off, if not collected. Monica, Charles want to ask a question, I think. Could you help?

It's possible.

Great. Just a follow-up on -- I don't -- really don't totally understand exactly what happened in Dubai and Turkey. Are we talking about the same -- is this the same thing as the [indiscernible] issue? And what was it, which is aggressive accounting? Was it more than that? Was it fraud?

Okay. So let me do one by one. So first take, what happened? We have like 4 or 5 major clients in this enterprise -- direct enterprise part of payment gateway in Turkey. So our clients are big banks in Turkey for whom we process transactions. And 2 of those banks decided to build their own payment gateway solution in-house. It's not that they switch to competition. They simply built in-house solution and switched transactions from us to their internal payment gateway. So we lost transactions which were processed by us, and we lost our commission, which we earn on each transaction processed. Is it clear?

Yes. That sounds like standard operational problems. It doesn't sound as write-offs?

Yes, we don't treat this as write-off. This explains operational drop of results in Turkey. So here, we are not adjusting anything. Just explanation why Turkey is lower. So if we look here, we have this drop on Turkey, this is due to this. Okay. And now India and Dubai. So in India, we have different issue, which is also trust related. So as you remember, like previous quarters, I think since Q4 results, we were always mentioning collection of receivables is an issue. We are looking at this. We are worried, and we apply our policy, standard policies and we did it. But what we have figured out that -- and this somehow [touched] trust in the manager and the seller, they run the business, which was very aggressive. So not direct clients of India operations, but indirect clients of clients were in -- were high-risk merchants. And on India level, there is increased pressure on government level for limit to ban such things. And our clients fall in problems because they were hit by doing business in those areas, yes. They had -- they fall in problems and our India companies are not able to invoice those revenues to them. They were accrued only. So they were now reversed. So this is what happened. So we don't have business with them anymore. And we try to rebuild. We rebuild sales organization, hired new sales and try to get new merchants from those non-high-risk sectors and step-by-step rebuild this. But as you see in Q3 numbers, starting point is very low. And so this is about revenue drop. And for write-offs, yes, there was some -- again, it's like related with clients and there was some control and they blocked the funds. Our managers says they should be recovered, but it's already a few months and they were not recovered. So we prefer to be on safe side and write them off. Based on information we gather through different sources, it can take years to recover them, yes. So we don't see such an asset as having value. So we want to be conservative and we include write-offs.

Okay. And is this the same thing that happened in Dubai?

In Dubai, not. In Dubai, because in Dubai, majority of business is enterprise business, yes. And currently, we are struggling with lack of projects. There is no projects at all or very minor. So this is the main problem. And there is a problem, which we mentioned already a few times, collection of old projects from 2024 and end of '23, where we have open receivables. All those things which are still not collected are covered with write-offs currently. And okay, we push them to collect. So if it will happen, if we manage to collect, it will have positive impact.

Got it. Okay. So this sounds like this will be lapping issues for next quarter as well. Is that right?

Okay. I expect next quarter to have operating loss on this, hope lower than in Q3, this excluding one-offs. But I hope there will be no one. But okay, I already like disclosed what is still exposure on goodwill and PPA. So if there will be some thunderstorm scenario or something goes even worse, then we have still this exposure, yes. But for now, our best judgment is it will not happen. So we still left those assets.

Okay. That's helpful. And then maybe one more on a more positive note. The growth in free cash flow is really impressive. Can you talk a little bit about where that's coming from and whether that's a conscious new effort to improve cash generation or if that's maybe just a seasonal kind of thing that just happened by chance?

Always this mixture, let's be fair, yes. There is seasonality, there is lag and there is also this constant pressure on cash, which we implemented on reviewing exposures on projects and pushing for invoicing, closing them. Also, we have -- we released EUR 10 million from inventories. So trying to keep more under control, buying upfront POSs and ATMs because it's mostly this part, yes, POS and ATM mostly. We always need to have some stock. It's necessary in this business. But yes, last year, it was a bit too much. We have a few projects where we are currently in delivery with recognitions done, but not invoicing. I hope some of them will be closed and invoiced until end of the year. So Q4 should be good as well, I hope.

Great. Yes, it's great to see. I've got plenty of other questions, but I'll hop in the queue and let others ask.

Any other question? We have something on chat, I think constellation will this result in any changes, particularly the management compensation? We are not aware about any changes right now. Of course, we know about the constellation and that it was closed, they have its corporation agreement with Adam Góral Foundation. But for now, we are not aware of any specific changes and impact on management compensation model. Key points raised during morning presentation in Polish. Okay. So let's say about India, Dubai, I shared. Okay, about Turkey, how we want to address Turkey and this drop. So short term, like very short term, we are not able to match this, but we take 2 actions or 2 areas of actions. So on top of this Enterprise business, which was so far the biggest in Turkey, we have also direct-to-merchant business in Turkey running 2 models. One under financial institution license, another without license. And we want to -- both are growing, and we want to push it even more to grow. And so to grow with bigger amount, but of lower clients, smaller clients. So to have this bigger let's say, to have lower exposure on one big client. So this is one area. And second, we will -- we already started. We are working on cost optimization in Turkey, but effects of this cannot be expected in Q4. It will take a few months to shrink the team and adjust to lower volume of transactions. So this is it. What else was asked for me to recall to? Okay. Growth of backlog in Dedicated Solutions. Can we expect this to continue next year? So growth, yes. But the percentage-wise, it will be difficult because the base is growing. So we see projects for next year. This should generate some recurring revenues of maintenance once projects are completed, but we can not expect the same percentage dynamics as this year, yes. As for profitability, so Q3, it looked already nice. So it is here, you see it was 12% year-to-date is 5%. So we see still some area for improvement of profitability and performance in dedicated, but we don't see area to reach levels as banking. These are different type of softwares, very often offered to public where we have price pressure. So there is place for improvement from the 5%, which we have, but not to the -- it is from this file but not to the level of banking. Okay. So this -- what else, how can I help? Any other question? Okay. We have a question. What do you expect to be your main growth driver of Banking Solutions in next year? Cost efficiency. Talking about operating profit, we really want to put bigger focus on efficiency and cost of teams. So we see here some potential for improvement. As for projects top line, rather, we don't see big projects, big huge Core Banking implementations as we did have in 2023, '24. And this I don't think can happen, but small projects, different smaller models, yes. So but we see here area for cost optimization. And we also initiated works in this area. We put this as a part of budgeting exercise, which was initiated recently, but we need a moment to complete this. And increasing sales in 1, 2 years. Next year, I think we still have place in dedicated solutions to grow banking, some increase, but nothing major. And with payment, okay, starting point for India Dubai is very low, but we don't build much on this. We will push, but let's see. In payment, we see potential for growth in those direct-to-merchant lines. So ECRs, IPD and e-com. And this is where we want to really to focus and try to add additional value-added services to our existing clients, so to utilize this clients base we have with adding additional service. We are intensively working now on this and hope that some pilots will start soon in some new geographies. So this is like on existing cost base, adding additional services, what should be quite effective in terms of profitability of this additional service. So yes, for this traditional POS and ATM business, here, we don't see like some big place for growth. But also we do not expect some huge drops, yes. Okay, pressures on margins is there, but we want to also look at costs and try to address this somehow. So in overall, I like to summarize in dedicated solutions and direct to merchant lines in payment. These are those areas where we see the biggest price positive banking growing, but not very big growth. Okay. Anything else? If not, then I invite you to one-on-one direct contacts. We are now after a closed period. Another close period will start. I don't know exactly when, but usually around 20th January. So we have pretty much time to talk in the next 2 months. So whenever you have questions, you can reach Monica, Piotr, myself, and we'll be happy to have a one-on-one call and or meeting if you will be in Warsaw. We have one more question. What do you expect to be the most transformative trend for the banking solutions? Tough one, honestly. But I think still all what is related to digitalization of relation with clients. This is where we see -- so this is what is presented in our case in Channels business line. And this is the place where we see place for like replacing with new modern solutions. We've embedded some AI functionalities which we -- for which we have competence in our group, and we try to combine this and sell together, new CRM, for example, for banks. Good. So thank you a lot. One more time, if you have questions, please reach us. We'll be happy to meet and talk. And thank you for joining. Bye.