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

Good afternoon, ladies and gentlemen, and welcome to the CANCOM SE Earnings Call for the Results of the Fourth Quarter of 2023 and the full year. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to Lars Dannenberg. Please go ahead.

Yes. Thank you, and also welcome from my side. I'm Lars, I'm heading the IR department here at CANCOM, and I'm sitting here with our CEO, Rüdiger Rath; and our CFO, Tom Stark, and we would like to start the earnings call right now with Rudiger.

Thank you, Lars. Ladies and gentlemen, welcome to our earnings call for the fiscal year 2023 of CANCOM SE. I'm very pleased about your interest. With me is our CFO, Thomas Stark. I'd like to start my presentation that for CANCOM, the year 2023 was an interesting year, and we are optimistic about the business development in the year 2024. The content of the presentation is structured is used in 5 main chapters. We start with the significant events, go over to the financial results, give updates about KBC and ESG, go over to the outlook 2024, and then we have time for Q&A. Let's go straight to the main events of the year 2023. In the past financial year, we were particularly successful in implementing our acquisition strategy. Obviously, the main event was the acquisition of KBC. And now with over 5,600 employees and EUR 1.5 billion of revenues in total, the CANCOM Group has transformed significantly in the last year. The acquisition creates a new truly European full service IT player with a strong base in the DACH region and strengthen existing markets, especially Austria and Switzerland. Also, lots of expertise and development and strong security expertise from CANCOM Austria, from CANCOM Germany, workplace expertise from CANCOM Germany or CANCOM Austria comps. Lastly, we got new expertise on the Board. A new colleague, Jochen Borenich, the Austrianian perspective and brings a new focus on the sales organization. Quickly on the main developments. The market was tough in Germany in 2023. Discussions about federal budget allocations, especially in the second half of the year had an effect on SMB customers also the small and medium sized. The EBITDA grew by 10.4%, driven by both our acquisitions we did in the fiscal year 2023. Our operating cash flow improved significantly. Inventories are down and our working capital is declining, but more on the later from Tom. For the full year, we saw revenue growth through M&A and a decline organically. Frankly, we are not worried about the organic decline in revenue because it is only on the half year that is driven by the development we saw in 2023. For services, the trend is still very much intact. Services at CANCOM are growing for the full year organically and inorganically. To make it more clear, if you look at the split of hardware versus services, we see hardware down 7.3% in the segment Germany for the full year. Revenue from services is up to 6.2% which is above the market growth for IT services in Germany in the last year, which was roughly 5.1%. That means that in our strategically important service businesses we have seen good growth in a tough environment. Hardware is more volatile and our client base react quicker to weak economic development than the base of some of our peers where customers tend to be larger enterprise and big public contracts. That's why you also see such a significant increase of our gross profit. It is the services organically, we grew 2% at the gross profit level. After our significant acquisition of the KBC Group, we formed the segments, Germany and International. Okay. Let's touch briefly on our segment Germany. I already commented on a lot of the main drivers. Clearly, the market development was below our expectations for the full year. The discussions and uncertainty about federal budget helps most the small- and medium-sized public customers, district concerts, administrations below federal and state level, smaller education and health clients. Weak economic development continued as well uncertainty also hurts SMB, the so-called middle [ stand ]. They are pushing their renewal cycles and delay investments. However, the weak infrastructure businesses is clearly a temporary development, which was worse in Q3 of 2023. Q4 showed some improvement on the infrastructure side already. H1 2024 will still be somewhat slow. We expect momentum to pick up in the second half of the year. The demand in 2024 will be driven by the increasing IT requirements, especially in the client business due to Windows 11 are generated AI. And there is also the beginning of the COVID replacement cycles. I commented a lot on hardware where in 2023, a lot of pain came through. Let's also highlight what was good. The services demand has been strong throughout the full year. Services run on more long-term contracts and provide stability in terms of revenues and earnings. Our portfolio in the cybersecurity, IoT, cloud, modern workplace and [ AI ] areas is strong. Demand for professional services like support has also been good. The segment International is clearly dominated by CANCOM Austria. For the full year, CANCOM Austria contributed the CANCOM Austria Group contributed with an EBITDA margin of 8.1%, which is exceptional. The business performed really strong due to catch-up effects in the second half of 2023. Just quickly on the organic development, we are running against very strong comps from 2022. We have one major EU projects in the segment, eu-LISA project in 2022. All right, let's drive into the financial KPIs, but this, I hand over to Tom.

Thank you Rudiger. My name is Tom Stark CFO of CANCOM. And I'm happy to share the next minutes with you providing you with some more insights on the financial KPIs. The first slide to show you is nice to show actually a nice headline operating cash flow improvement materializes. And it shows the development that we have seen in the last 12 quarters. We ended up the fiscal year 2023 with a positive cash flow of EUR 94.6 million, compared to a negative cash flow last year of minus EUR 553.5 million (sic) [ EUR 53.6 million ]. So a very significant improvement. Where did it come from actually? Accounts receivable contributed more than EUR 60 million to the development. The reduction of inventories contributed with about EUR 10 million to the development, whereas account payables decreased and we had a negative impact this year. In total, we ended up with said EUR 94.6 million. If you look at the fourth quarter and compared with what we forecasted in our third quarter's earnings call, we provided you with a bandwidth of EUR 70 million to EUR 110 million. And as we can see, EUR 104.6 million is at the upper end of the bandwidth that we have provided. Nevertheless, let's take a look at the 3-year development on this slide. We can easily see that we have 2 outstanding years on this slide or exceptional years on this slide. Meaning that in 2022, we were, for the first time affected by supply chain issues, we had to handle them for a number of quarters and we are still to come back with some upside potential regarding the operating cash flow. Finally, taking a look at the net cash position that's just corresponding to the operating cash flow. We ended up the year with a EUR 222.5 million of cash and cash equivalents, while in the definition on this page, deducting current liabilities to credit institutions of about EUR 9 million, net cash flows EUR 213.1 million. Operating working capital improved. However, that's the reason why we are talking about tailwinds for the year to come. We have ended up the working capital ratio compared to the revenues of the last 12 months with 11.3%. And as you can see on the slide, this is not what we intend to end up. We have a bandwidth in the corridor of 0% to 2%, where we used to be for several years in a row and we have already taken a look at the development in the last years in the cash flow statement, we can see that we have still -- or we are still suffering from the situation. So the clear goal is to end up with a low single number digits by the end of the year and to have further improvements on the operating working capital side. For the cash flow and for your models, the operating cash flow, we expect to be better than the cash flow that we have seen this year. So it should exceed by all means, this year's results, and it should exceed triple-digit numbers for more than EUR 100 million of operating cash flow. Going on with CapEx, we ended up the year quite on target for the full year 2023, the final number, again, in relation to the last 12 months revenues ended up with a 1.7% number. You can see the development third quarter of '23 and fourth quarter of '23 have been affected by about EUR 2 million per quarter of CapEx contributed from the KBC and given that, our total number of 25.8% for the fiscal year 2023 is well in range and well in what we have as an expectation for the organization. And the good news and further good news are, we think we have overcome the major investments of the past. We all know that we have talked about spending and CapEx on the migration of our IT systems, the platforms and then the renewal of our data centers. And I think we think that we have overcome this, and that's why we are happy to disclose a new target range for CapEx revenue which is a 1.0% to 1.4% going forward. We also, as the last comment on this slide, I assume and are sure that this is a sustainable number going forward for all your models. PPA-based amortizations and EPS effects, if you compare this with the recent slide, there is a significant change. And clearly, the driver for the change is the PPA or are the PPAs of KBC and DextraData. The PPA effect on our amortization in 2024 will be EUR 11.8 million. What has changed and how -- what is the split in between? Change has a contribution of KBC about 6.6 per year in fiscal year 2024 and about 3.5 per year of the acquisition of DextraData. The customer base in this segment Germany will be written off for about 5 years and the customer base for the KBC will be amortized for about 10 years. That means the segments are affected differently. And to just give you the split of the EUR 11.8 million, the segment Germany will be EUR 5.6 million, whereas the segment Austria will be EUR 6.2 million. Effect on EPS, we can see on the slide as well facts that just lead me straight to one of the effects on earnings per share and to our share buyback status slide. You can see on this slide the latest inter-modification status as of March 25, 2024. We have our share buyback program still ongoing. We have already bought about 9.63% of the shares. We are entitled in this given share buyback program to buy about 9.9% of shares, and that means that the current pace, the share buyback program will end in calendar week 14. What does it mean in total? We have used a volume totaling EUR 98 million that is in -- has to be assigned to this share buyback program. If you -- we look at the share buyback program. In total, we have spent in the years 2022 and 2023 in the first quarter of '24 and EUR 216 million on share buybacks. The thing important to note is that we have already canceled 5.2% of the shares in December 2024. That means that our number of shares is already -- has already taken into account the cancellation of 2.185 million shares and equity at the end of the year is 36.686. Compared to the net profit, by the way, the payout ratio of the net profit of the organization is 36.9. That means the payout ratio will be about 100%. We have not changed the dividend as we are really following in the goal to have a sustainable and straightforward dividend ratio or dividend development. The final number will just be given at the Annual General Meeting. We will talk about this later and depends on the actual number of shares. Also, it's highly likely that all of the shares will be -- or the share buyback program will be finished by the end of calendar week 14. Equity is at 724.5 million. It's a 46.8% compared to 53% in the previous year. Finally, the financial calendar 2024, what's next to come, we will talk about the nonfinancial group report on April 30. You can find the data for the interim statements of the year 2024 as well as for the half year report and in some more in detail insights in the development of 2023 will be provided on the Annual General Meeting in Munich on June 5. At an analyst conference, we have only listed one that is mandatory. It's the analyst conference of the German Equity Forum. We would be happy to meet you there in person, and please feel free to take a look at our website where we have disclosed more venues where we are in presence with you. And with that said, I would like to hand over back to Rudiger again.

Many thanks. As we did in the previous year's calls, we will give -- now give you a quick update on the KBC acquisition and ESG. The integration of CANCOM Austria. We already said that the annual report was one important step for both companies. We would like to show you briefly what we are working on this year. We have defined 3 focus areas, purchasing, finance and IT/digitalization. In each of these areas, we have either already made meaningful progress. But there are still things we are working on. As our general strategy is always fully integrate our businesses and our acquisitions, we will work hard this year on the next chapter to unify and standardize across both companies and use our new position to negotiate with our suppliers. There are additional growth streams in which we already have aligned significant parts of our portfolio, and we are looking at the infrastructure environment on a country-by-country basis. And of course, our people. Our people and processes is one major area we are working on. And it's important to me personally that all employees feel welcome and that we share the CANCOM values. We focus on a growth culture in which we enable the success of our customers through the success of our employees at CANCOM. On the ESG ratings, we have had a stable year. At the moment, we are observing closely what happens in the regulatory environment and preparing our first ESRS report in 2025. We are also working on integrating our new colleagues of CANCOM Austria and our nonfinancial reporting structures. The results you will be able to see in the nonfinancial report, which we published on April 30. Ladies and gentlemen, I'd like to come to the outlook 2024. And we announced that this morning, and we decided to give a balanced forecast reflects that H1 2024 could be another slow 6 months for infrastructure. The snapshot of the iconic development of the year 2023 is not a statement about the future of the IT market and CANCOM. Digitalization will continue to be a key driver for the development and economic success of our customers. With the general breakthrough of generative AI applications, a new market moving topics has been added to the gen topics of recent years, in which we can provide our customers with the best possible support with our holistic expertise in the AI orchestrator. CANCOM is already very well positioned in the field of AI and has developed a broad portfolio from analyzing business processes and AI solutions for specific customer requirements to consulting on AI architecture and the necessary high-performance infrastructure. While generative AI applications are already part of everyday life and are increasingly gaining a foothold in companies thanks to CANCOM's offering. The threat situation in the area of cybersecurity is also changing. The use of artificial intelligence in the cost of cyber attacks means that securing existing IT infrastructures will continue to be paramount importance of the future. We already have a strong offering in the field of IT security including our CANCOM Cyber Defense Center and will continue to grow in this market. As you can see, the CANCOM Group is active with innovative offering in a highly dynamic market that continues to offer outstanding growth opportunities. For 2024, the signs continue to point to growth for CANCOM Group. Our confidence for the future is based on the unbroken trend toward digitization, the potential of new technologies and our customers increasing need to invest to drive their digitization in order to keep the existing IT infrastructure up-to-date, secure and efficient. With focus, we show, we feel comfortable with the full year in which we think presents a fair and balanced outlook on how the year is going to look like. Many thanks.