Cancom SE (COK.DE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the CANCOM SE Investor Relations Call. [Operator Instructions] Let me now turn the floor over to the manager of Investor Relations, Mr. Sebastian Bucher.

Welcome, everybody, to today's earnings call for the full year 2019 of the CANCOM Group. Hopefully, all of you have seen that we already reported the figures. And I would now start with handing over to Mr. Rudolf Hotter, our CEO, who will begin the presentation, followed by Thomas Stark, our CFO. And afterwards, your -- we are happy to take your questions. So without further ado, Rudy, please start.

Yes. Thank you, Sebastian. First of all, let me start with the first slide, significant events 2019. We had double-digit growth rates in revenues and EBITDA. Our annual recurring revenue grew by 41.3% and representing now about 12% of total group revenue. Another significant event, for sure, is capital increase in December 2019, enlarging our cash position for M&A activities. Year-end, it was about EUR 365 million. Cloud Solutions, we see very significant growth rates and shows strong demand for the CANCOM service portfolio. Cloud Solution delivers 18% more EBITDA than IT Solution segment, highlighting the successful transformation of CANCOM to something, what I would call, sustain holds 4.0. That means offering it as a concept, classic traditional IT Solution business and focus on offering the more profitable IT as a service, cloud managed service business to follow the megatrend Everything-as-a-Service. Acquisition of managed service specialist, Novosco, I think, a highlight, the rationale behind enriched managed service capabilities of the group, expand our footprint in the U.K. and enter Irish market. It fits perfect in our transformation strategy. They run, for example, the IT for Cambridge University Hospital Group with Epic software. And please the next slide. Novosco has revenues about GBP 55 million, EBITDA margin of 17%, and our cash payment in '19-2020, a total of EUR 70 million. It's about 8x EBITDA, far under our own EBITDA multiple. The next slide. Group double-digit growth remains intact. Revenues grew by 17.6%, organically 12.2%. The EBITDA adjusted grew by 14.7%; organically, 6.8%; EBITDA margin, slightly below fiscal year '18. I think it's especially the margin pressure in the IT Solution business, but we will see later on and I'll give some more details. Cloud Solutions, strong growth, 27.6%; organically, 20%. EBITDA, 28.4%; organically, 18.4%. EBITDA margin, slightly better, 27.3%; previous year, 27.1%. Our main drivers, continued investment of customers into the digital transformation. We've moved more and more from an IT growth to a consumption growth, paid work. Service portfolio enable us to capitalize on the current XaaS trend. We see tremendous growth of the XaaS business. We all know that 4 of the largest companies worldwide, service providers, Microsoft, AWS, Google, Alibaba, 2 of them reached more than a 1 trillion market capital. This is a new megatrend. Next slide, please. IT Solution, we see a significant growth, but margins are under pressure, 15.4% growth; organically, 10.5%. EBITDA side step, 2% growth; organic, minus 2.4%. EBITDA margin, 5%. It's below fiscal year '18, 5.7%. High growth in hardware and software sales, but lower margin. It's growing nicely, but sourcing conditions for hardware and software as well as back-end bonuses are under pressure. This affects our margin in the segment. Our goal is to -- is at least to remain on margin levels around 5% in future, but this year is a very challenging one. I think on the strategic transformation to, what I call system house 4.0, means more and more a cloud-managed service provider. We are doing very well. Our annual recurring revenues grow from EUR 130 million to EUR 183 million. It's a year-to-year growth of 41%; organically, 20 -- about 24%. And we see that 57% of the EBITDA adjusted is done by the Cloud Solution business. And this shows that we -- our progress in transformation to more and more IT as a service, we are doing very well. So for the financials, I want to hand over to Tom and then later. Thanks.

So thank you, Rudy. My name is Tom Stark, CFO of CANCOM, and I'm very pleased to provide you with some more detailed insights into CANCOM's financial performance of the fiscal year 2019. Basically, today, I would like to focus on 3 different things: first of all, the financial KPIs in just the order that all of the investors are used to; secondly, providing you with some information that is relevant for your models looking forward; and last but not least, I would like to comment on some one-off effects that we had in 2019 in order to appropriately assess the financial performance of the group. So the first KPI that I would like to focus on is the working capital ratio. It's the first KPI that shows that in 2019, we perfectly met our goals. With regards to the operating working capital, we almost even topped the goals set for 2019. The target that we have communicated to you actively was that we would like to have protection of working capital requirements, 0% to 2%. And basically, we ended the year 2019 with a ratio of exactly 0.0%. So no working capital required at the end of the year. Accounts receivables remain stable. Inventories grew slightly, and we even had to suffer from an effect that we had, EUR 13 million of goods shipped to us, not in inventory yet, but acknowledged and accounted for inventories as of the end of the year. And accounts payable, EUR 319 million compared to the EUR 271 million less to achievement of the goal for 2019 and ratio of 0.0%. Just in accordance with the operating working capital development that shows the great work of CANCOM, the operating cash flow. Following EUR 81.9 million cash flow in 2018, we achieved EUR 129.8 million cash flow in 2019. That means we even exceeded our expectations or the expectations that we have set to you as a financial community. The growth was 59%, and the fourth quarter contribution of the overall cash flow operating was EUR 122 million. So that shows that CANCOM is a highly cash-generating company. We ended up with a very strong cash position. Cash and cash equivalents ended up with approximately EUR 365 million. And given that we have only a single-digit million of loans, so bank liabilities, we have a net cash position at the end of the year of roughly EUR 358 million. So in combination with the balance sheet ratios, for the very first time, we topped EUR 1 billion in total assets. EUR 1.205 billion was the total of the balance sheet. We have an equity of EUR 577 million and, accordingly, a 48% equity ratio. We showed that we have a very strong performance in 2019. So the main statement with regards to this -- these KPIs is that we have a very strong balance sheet. We are prepared for any kind of crisis that might arise. We have the strongest balance sheet ever in CANCOM's history. We have the best cash flow ever in CANCOM's history and we have roughly no loan position that would reduce our net cash position. With regards to the positions looking forward, we still continue to have our goal of 0% to 2% operating working capital ratio, and the increase of the operating cash flow should be in line with the forecast that will be provided to you from Rudy at the end of the presentation. Looking at these strong financial positions, we decided, well, to -- with regard to dividend payments that we will pay a dividend just in line with the previous year. So we think that we will be capable of using the money that we have on the balance sheet. And last but not least, we think that the dividend payment is affordable for us and should beat the expectations of some of our shareholders, just in line with the expectations that we have raised with the EUR 365 million of cash position. The CapEx reduction is -- has ended up in 2019 just as planned. We have written down on this slide that the target for CapEx and sales ratio was met in 2019. Well, you can see on the slide a 2.1% CapEx to sales ratio, which is slightly above 2%, but we have to take into consideration that with the IFRS 15 reclassification, that means we had to show lower revenues in 2018 and 2019 accordingly. And given we would not have had this reduction, the CapEx ratio would have been quite stable below 2% at 1.9%. Looking forward, we think that the goal for 2020 should still be below 2%. So still some room for improvement and an ongoing track record with regards to the CapEx to sales ratio. The amortization from PPA. So this slide reflects the amortization from PPA only. Basically, what has changed to the slide that we have shown after the first quarter, the difference is that for the first time, we incorporated the Novosco PPA. So Novosco contributed significantly to the amortizations due to 2 effects. Basically, first of all, Novosco is dealing with managed services. So this is -- that means we have long-term contracts and, therefore, a high value that is assigned to order backlog and to customer base. So on the one hand, we have a high proportion of amortizations looking forward. But on the other side, we have a high visibility in the business, and we have a very stable business for this kind of business. So we are very satisfied with the Novosco acquisition, and the effects and impacts that you can see on the slide are calculated looking forward until 2023. We've also provided to you the split of the amortizations with regards to the segments. So in 2020, we had Cloud Solutions effect or impact with regards to the amortization of EUR 12.6 million, whereas we had an IT Solutions impact or effect resulted from PPA that totals EUR 4.8 million. Finally, looking at some major financial one-off effects in 2019. I think the very first thing that we have to talk about is while we had the first time audit of KPMG, so we had a change of auditor in place, and clearly, we had some impacts and effects that we had to show in the balance sheet and in the P&L accordingly. First of all, I think let's focus on the most important things that are interesting for you. We had a reclassification of 2018 in 2019 with regards to the revenue that we are allowed to show. So this is called principal or agent methodology. Basically, there are several different criteria that you have to assess in order to come to a conclusion, whether you are a principal or an agent. Difference, basically, is if you are the principal, then you're allowed to show the revenue in total. If you are an agent, you're only allowed to show the margin. So without any kind of revenue exceeding the margin. Basically, there are different criteria that are not always hinting in the same direction. So usually, if you have, for instance, 5 different criteria, like who is in charge of the performance obligation, who is at the risk of inventory, who has the price sovereignty, usually, you're not ending up with a 5 to 0 assessment, but, basically, 3 to 2 or whatever combination might be possible. And then it's an assumption on assessment of the overall situation, whether you're classified as a principal or agent. In 2018, we have come to the conclusion that we are principal and we have respectively shown the overall revenues. With the new auditor, we had a reclassification in place. Basically, that means we are now only showing the net margin. We are not showing the revenues anymore. So we're not the first company, but we have such an effect and an impact in place. I think we have communicated in the notes very much in detail. If you are more interested in this, please feel free to take a look at notes Chapter 7.3 and 7.2, where we have very intensely talked about this and explained what actually the case is. And if you are more interested in this, I think you will find any relevant information for this topic in our notes. Let me end up with 2 cases where we have been assessed as being a principal, whereas before we have been an agent. There we have an impact on the EBITDA of EUR 0.7 million, which means that we now show this EUR 0.7 million over a period of time, so in the next year and in 2022, basically. And this has been, from my point of view, the most important things that we had to show with regards to, well, the reclassification of revenues and the reassessment of IFRS 15 revenues. Let me end the topic with one thing that is important to know. I think we have deliberately chosen KPMG, 1 of the big 4 companies, as an auditor. We are very satisfied with this decision. I think we've met the expectations of you, as a financial community, to have in place 1 of the big 4 companies. And I think we have had -- and we have shown a very strong balance sheet. And we have now a state-of-the-art balance sheet and the financial statements that are in line with all of the things that you, as investors and analysts, have expected from us. Well, secondly, let's talk about some P&L effects that have been one-off effects and it can be assessed from your side. First of all, we had, according to the operational development of our U.S. subsidiary, HPM, a one-time impairment of goodwill of EUR 13.3 million. The trigger for this was basically the loss of some major customers and the difficulties in implementing managed services abroad. So it was -- showed out to be difficult to implement managed services in U.K. appropriately. And given that we have a corona scenario in place in the first quarter and not knowing what actually might be the development, we have decided, well, that the fair value of the organization would be simply 0. So we have done a written -- we've written off the total of the goodwill of the HPM acquisition in the U.S., and the total was 0.3. There's no goodwill left for this acquisition. Secondly, you might have become aware that the financial results, the other financial results income showed a plus EUR 4.8 million there as the other financial income that shows minus EUR 6.1 million. So this comes from the treatment of put call options agreements that we had in place for the Novosco transaction. This transaction turned out to be highly complex, and we had to identify some positions that had to be rolled over into a new organization basically with the intention that we wanted to have the right incentive model in place in U.K. for the Management Board over there. So the Management Board now is incentivized according to the overall U.K. results, which is something that we had liked to achieve. But on the other side, we had to change various existing put call options, and this led to a rollover effect and to a plus in financial -- other financial income and a minus in other financial expense. Basically, the element, the net effect was just EUR 1.3 million, and this is shown in the financial statements on -- in the financial statements. Some other effects, sale lease-back transaction of the logistics facility in Jettingen-Scheppach. We have tried well to set free cash that is tied into the balance sheet, into the essence of the balance sheet. So we have generated a EUR 26 million of cash inflow in the third quarter 2019. We have in the balance sheet, and this is something you might have become aware as well, another position that is held for sale. This is the facility that we have in Berlin and we have the intention to sell it. And then the CANCOM Group would be without any facility and would have changed any, well, asset in terms of facilities into cash. Two more effects that can be seen in the P&L. First of all, the discontinued operations. We have achieved in the third quarter and out-of-court settlement with a long-term lawsuit that we had in place, not related to performance obligations that we have to our customers but in relation with the M&A transactions. So a divestment that we have done in 2014 already. We had a positive impact of this effect of EUR 1.8 million in 2019, which is shown in the discontinued operations result. Last but not least, we had a tax benefit from the European Union decision. So the contribution on this part was EUR 1.7 million and it added to our improved tax rate. Let me end the slide with the tax rate for your models. I think you have been aware that the write-off of HPM has reduced the result of the period to EUR 36.6 million, and we ended up the year with a 31.0% tax rate. Without this effect, we would have had a tax rate of 26%, just in line with what we have communicated to you. And finally, looking forward, we think the 31.5% as a tax rate would be an appropriate measure for you in your models. So finally, taking a look at the financial calendar of CANCOM of 2020. First of all, we should take a look at the interim report as of 31st of March, so the first quarter. We have moved the date, which would already have happened next week, to 18th of June. Clearly, this is an effect of the move of the release of the financial statements to April 30. And after this interim report, we think we will be back on track, and we'll provide you with the financial data in line and just in accordance with what we have communicated as financial calendar of the year at the beginning of this calendar year. But one more thing or 2 more things to highlight. First of all, the Annual General Meeting will take place in Munich on June 30. This will be, for the first time, an online event. So we benefit from a recently passed law from the German government. We will provide you with the invitations shortly, and we will provide you with the procedures and the information regarding to these procedures as well. Last but not least, we usually provide you with information like the Capital Markets Day. We have postponed the Capital Markets Day due to the corona crisis. I think we will wait for the events of the second quarter and have catch-up potentially in the third quarter. But we still believe in -- well, the effectiveness and efficiency of this format of this event. So then we will be, again, in touch with you and -- but this is clearly an impact, the negative impact of the corona situation. But apart from that, I think we are regularly in contact, and please feel free to contact us in case of any kind of questions with regards to the development of CANCOM. And at this point, I would like to hand over back to Rudy for the forecast and for the finalization of the presentation.

Yes. Thank you, Tom. We have seen that CANCOM is basically debt-free and goes into 2020 with a substantial war chest. We are very well positioned to benefit from the trend towards digitalization and IT as a service. Let me give you some thoughts about the business. The cloud way of computing is the delivery architecture of the digital age. System House 4.0 offering, like I said, IT as a concept and IT as a service is the right answer to meet the market expectations and the market needs. We are the glue between the hyperscalers and the hardware vendor. And so we can be the service provider and system integrator to our customer -- customers. Hybrid cloud is the new normal trend to Everything-as-a-Service. We -- as I said, we moved from an IT-owned world to a consumption-based world. Today, especially for the customer, especially in the corona crisis, is to keep being in operation. Therefore, we need an IT architecture like our AHP to allow them to work secure any time, any place, any device any operating system and any network. They want to buy more and more IT as a service. So conclusion is I think we are in the right market. We have the right portfolio and we have the right strategy and the right people. So our forecast for the group, we see moderate growth in revenue, gross profit EBITDA and EBITDA. Corona effect, we will see for sure in Q2, Q1 only the last 2 March weeks. So we think that it's a balanced outlook to forecast a moderate growth. Cloud Solution, we see, like I said, significant growth in revenue, gross profit EBITDA and EBITDA. Significant growth in annual recurring compared to status of December 2019. IT Solutions, moderate growth in revenue, gross profit EBITDA and EBITDA. We see some -- in Q2, some supply chain problems and continuing margin pressure. Let me close this earnings call with an announcement for our future financial reporting. After 2 years of showing financial KPIs on an adjusted basis to give transparency about our special investments into the transformation of CANCOM, we have decided to switch back to a purely IFRS-based financial reporting. We think that it's now time to include transformation process into our regular cost base. Other adjusted special effects like M&A costs or equity-based payments on their own, not large enough to have significant effects. And so we decided to stop adjusting our KPIs completely. With this, I would like to open the floor for questions. Thank you.