Columbus A/S (COLUM) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the annual report 2019 conference call. [Operator Instructions] I must advise you that this conference is being recorded today. And I would now like to hand the conference over to your first speaker, Mr. Thomas Honoré. Thank you. Please go ahead.

Thank you very much. We will start the presentation today by looking at the highlights of 2019. And due to the extraordinary situation related to the COVID-19 virus, we will cover the impact related to this in our presentation today. Hans Henrik will then cover the income statement for 2019. Then we will present our financial value drivers and the geographical and business segments. Afterwards, we will cover our expectations for 2020 and also update our long-term guidance. And finally, we will open up for a Q&A session. Let's go to Slide 5 to begin the presentation. In 2019, revenue and EBITDA were in line with expectations. We delivered an organic growth of 4%, amounting to DKK 1.932 billion, which was driven by growth in recurring revenue, where especially Cloud and Columbus Care delivered strong growth. Recurring revenue now constitutes 24% of total revenue, which is a satisfactory level. EBITDA increased by 39%, amounting to DKK 238 million. Including the IFRS 16 effect of DKK 41 million, the growth was 15%, amounting to DKK 197 million in EBITDA. The services business grew 4% organically. In general, we saw good progress across Columbus' business units, where the majority of our business units delivered growth, especially our M3, Columbus Care and Commerce in Sweden stood out with double-digit growth. The first 2 months of 2020 continued the progress from 2019 with overall revenue growth and we, therefore, had a good start of 2020. However, in February, reality changed with the outbreak of the coronavirus. We started seeing customers holding back investments due to a temporary protection or sales decrease, or even shut down of production. Due to this scenario, we expect to see a substantial short-term negative impact on customer demand, which has already started to materialize in some of our markets. Our U.S. business had a difficult year in 2019. In Q3, a turnaround process were initiated with our new CEO, Chris Alagna on board. The market focus in the turnaround plan is to accelerate the transition of customers' business applications to cloud business applications. With the turnaround plan, we assured that both revenue and EBITDA should pick up during 2020. We realized in the beginning of March that the assumed turnaround will be longer than initially assumed, escalated by the corona situation. As a result of the delay in the turnaround, the carrying value of the recognized goodwill related to U.S. is impaired by DKK 90 million. The write-down had a negative impact in the profit after tax, which amounted to DKK 21 million. We foresee a challenging first half of 2020 due to the uncertainty caused by the coronavirus. However, we are fully focused on adapting our business and commercial activities to the changing situation while maintaining our ability to service our customers in the best way possible. Next slide, please. I will now cover the impact of the COVID-19. Due to the current market uncertainty caused by the coronavirus, we expect a negative impact on our business and financial performance in the coming quarters. In order to address the short-term uncertainty, we have initiated a Business Continuity Plan to mitigate risk, keep our business in good health, and at the same time, having full attention on the well-being of employees and customers during this challenging period. Columbus has broad experience serving our customers digitally. We are able to deliver digitally from early engagement discussions to project initiation, implementation and application management. We are currently in close dialogue with our customers to help them continue their operations during this period. Columbus has a strong financial position to withstand a period with turbulence. The group balance sheet amounts to DKK 1.7 billion and the equity is DKK 668 million. We are fully focused on adapting our business and commercial activities to the changing situation while maintaining our ability to service our customers in the best way possible. I will now hand over the conference to Hans Henrik who will cover the income statement for 2019.

Thank you, Thomas. As Thomas said, we had an organic growth of 4%, which is without the SAP business and the Columbus Latvia that we divested in 2018. The reported growth is therefore 3%, which amount to DKK 1.9 billion. EBITDA rose by 39% to DKK 238 million. And isolated for the IFRS 16 effect, EBITDA grew by 15%. And the EBITDA is also positively affected by other operating income and negatively affected by a provision for cost to complete a customer engagement. Revenue and EBITDA is in line with our expectations. Depreciation and amortization increased by 180% to DKK 179 million and is primarily affected by this write-down of goodwill in the U.S. and also the IFRS 16 impact. Financial income is declining by 96% due to an extraordinary currency income we had in Q1 2018, and financial expenses increased by 92% due to the interest element of the IFRS 16 and due to amortization of contingent liabilities. Due to the write-down of goodwill in the U.S., the net result is not in line with our expectations. So now let's go to Slide 8, where Thomas will take you through our financial value drivers.

Thank you, Hans Henrik. I will now present the financial value drivers and see how we performed in 2019. Our services business is showing positive progress with 4% organic growth. Reported growth is 3% cost in choosing DKK 1.5 million -- billion. The improvement is mainly driven by the increase in Columbus Care services and a general progress in the services business, where especially the business areas M3 and Columbus Care showed strong progress. Within customer work, chargeable hours showed a decrease of 2 percentage points from 54% to 52%. The development is primarily caused by people growth in Sweden of more than 90 people, new people as well as young professional program that both influence the chargeable hours negatively as they are not 100% productive from day 1. We saw good activity in both our traditional ERP business as well as increased demand for our offerings within cloud software and services. In general, we saw good progress in the services business in 2019, and we consider the result to be satisfactory and in line with expectations. Next slide, please. And I'm now at Slide 10. Columbus Software is back to growth. In 2019, our software business grew by 15%. We saw a significant growth in cloud software, which grew with 54%, a very strong progress. The main driver is at cloud conversion where existing and new customers move their core applications to the evergreen cloud environment. Columbus Software licenses increased by 31%, which is mainly driven by a large software deal in Q4 2019. Subscription declined by 4% due to the cloud conversion, as mentioned earlier. Let's move to the recurring revenue slide on Slide 11. Recurring revenue increased by 9%, increasing from 23% to 24% of Columbus' total revenue. The progress is mainly driven by a strong growth in Columbus Care contract, which grew by 24% as well as an increase in total cloud revenue of 50%. We consider the result to be satisfactory. This was the reporting on our financial value drives. I will now hand back the presentation to Hans Henrik who will present our geographical and business segments.

So thank you, and I will start by taking you through Western Europe. Revenue here grew by 7%, driven by all business units in Western Europe delivering a satisfactory growth. Expect U.K. having a flat revenue development year-over-year in Q4. Isolated Western Europe grew by 22%. Revenue -- recurring revenue grew by 1% and corresponds to 19% of total revenue. EBITDA increased by 31% to DKK 147 million, and adjusted for the IFRS 16, it increased by 9%. As mentioned under the walk-through of the income statement, our results are impacted by an adjustment of continuing consideration and provision for cost to complete a customer engagement. So thanks to our teams in Western Europe. Next slide. So now to Eastern Europe on Slide 14. In Eastern Europe, revenue increased by 9%, and the growth is driven by all entities in this segment. Columbus Russia grew by 13%, primarily driven by increase in the service business. And Lithuania grew by 11% and Estonia grew by 5%. EBITDA rose by 17%, primarily due to IFRS 16 effect. Thanks to our team in Baltics. Now to North America. Our U.S. business had, as said earlier, a difficult year in 2019. In Q3, a turnaround process was initiated with our new CEO, Chris Alagna. As stated earlier, the U.S. business turnaround is taking longer than expected, and with the corona, the situation has escalated in March this year. As a result of this delay in the turnaround, our carrying value of recognized goodwill related to the U.S. business was impaired by DKK 90 million. This write-down will have a negative effect of the profit after tax, as mentioned. We believe that we are now on the right path, and we expect to see progress based on the turnaround initiatives during 2020, thanks to our team in the U.S. Columbus Software business on Slide 16. Columbus Software grew by 15% in 2019, where Columbus Cloud revenue grew by 57%. The main driver in the cloud conversion were existing, but especially new customers increasingly moved their core applications to the evergreen cloud environments. Within our software portfolio, the main driver is our horizontal software portfolio, such as Business Integration solutions, RapidValue and Security and Compliance Studio. In Q4 2019, our software business entered into a software agreement with a nondisclosure customers to sell a license of 2 specific software products. The agreement resulted in a recognized revenue of DKK 22 million in Q4. Columbus continues to report, support and maintain the customer solutions. We also keep the rights to sell further license to our customers. We are satisfied with development in our software business, thanks to our software team. And I'll now hand back the conference to Thomas who will take you through our view on the guidance.

Thank you, Hans Henrik. As stated earlier, the first 2 months of 2020 showed a general growth in our business with financial performance in line with our expectations. Now reality has changed radically. And due to the current market uncertainty caused by the coronavirus, we expect a negative impact on our business and financial performance in the coming quarters. Given the rapid day-to-day development in our main markets, we are currently unable to accurately assess the magnitude of the impact, including the duration of the contraction. We, therefore, are not able to give an accurate guidance for 2020 as well as our long-term guidance until we have a better insight into the impact of our business. In addition, given the current uncertainty, we have decided to suspend the dividend payment to ensure the strongest possible liquidity position in the company. As the situation normalizes, we will come back with further information on short-term and long-term guidance. This completes the presentation for today, and we are now open for questions and answers. And operator, if you could please open up for questions.

[Operator Instructions] And your first question comes from the line of André.

Just to start off with few question on the corona. As the first one, can you maybe describe something on what you're seeing, what the effect is? I mean is it -- you said that it's lower investments from your clients, but do you also see an effect in terms of lower project activity and maybe also utilization? Or what do you see?

Yes. So thank you for the question. It's a very good question. And we actually see all different kind of scenarios right now. We see some of our Commerce customers asking for more work and a increase of scope. That's obvious because they are selling all their products and services online, and therefore, they need to increase the capacity of the solution which is available online. We also see customers postponing due to risk that they are concerned about their own business. And we also see customers who are stopping. We have a big customer in one of our countries who are producing chickens. And actually, we have done a very good project with them. They're ready to go into full-scale test of production environment, but they have to focus all their production on finishing -- all their efforts on finishing the production and producing chickens to the market. So therefore, they're scaling down the project. So we see all different kind of scenarios. We also see customers and countries where we haven't seen any impact at all. But the overall trend is declining. And we can see on our day-to-day production, we follow our production every day. It means how many hours are actually being produced by our team every day. We have that insight in our data warehouse. And we can see from week 11 to week 12, the production declined about 9%. So that would be a -- in terms of number of hours, our production declined by 9%. Whether that is the same going forward, it's very difficult to predict because we don't know whether it was just a short-term reaction or it will be more permanent situation. We also see customers who have plenty of room to invest, and therefore, they are intensifying their investments. But right now, what we can say is a decline of 9% in production.

Okay. And then maybe another one. Just had a few in terms of this situation. You mentioned that the effect was different in different geographies. Can you say something about where the worst effect is currently in terms of geographical split?

Well, that's too early to say.

Okay. And in terms of your ability maybe to cut down cost, can you give any flavor on what the ability is? And if you have any concrete plans currently in terms of layoffs.

So we are executing a plan which we call Business Continuity Plan, and that has -- that plan has 19 different topics that we are executing across the business. And that is everything about keeping a close focus on our customers, reaching out to them and being proactive. It also has to do with keeping our employees healthy and safe and always making sure that we reach out and we engage with our employees. When you look at cost, we have already now announced a postponement of all salary increases for our company globally. We have also announced that the top management and Board will reduce salaries with 30%, and we are also considering layoffs. However, it's too early to say. We do expect that there will be some layoffs, but it's, one, dependent on the situation going forward because our production is our people. So laying off people also means that we are damaging our production environment. So we are very cautious with that. At the same time, we realize that it is our biggest cost, and we're doing everything we can to reduce that cost with other means, such as voluntary vacation, sabbaticals, forced vacation, part-time work and also following up on the different options that different governments are giving around the world, quite different options actually. And also we're following up with those and any investigation in how we could use this to lower salary costs. But for the time being, it's a very clear message that top management and Board have reduced salaries with 30%.

Yes, yes, yes, that makes sense. And then my next one, in terms of this increase you have seen in the Commerce business during maybe the first quarter mostly, I mean is that very substantial already? Can you say anything about that?

No, that's too early to say. I can say that our performance in January and February and also expect first half of March was exactly in line with our expectation for the year and with substantial revenue growth, not only in the Commerce business but also in some of our other businesses.

Okay. And then in terms of your client portfolio, I mean I understand you have a big exposure to retail. I mean is there any risk we need to be aware of here that you see in terms of your portfolio right now?

No, this risk is not related to retail because most of the retailers we have are online retailers. We don't have a lot of old-fashioned, brick and mortar retailers. We have some, but most of them are more related to the wholesale and to -- related to e-commerce customers. Of course, we have more than 5,000 customers in the business. And we have -- before we reach out to them and before we understand what the situation is at the accumulated level, it's difficult to assess. But I will say that the risk is not associated to one industry.

Okay, okay. And then the last one in terms of corona. Just looking at your receivables, they seem still to be quite high. Is there any risk here in addition we need to be aware of? And is there [indiscernible]?

So it's -- to follow-up on receivables, it's one of the components in our Business Continuity Plan. This is what we always do. But now, we're going to a tighter governance on that. So it's part of following up. And I will now hand over the question to Hans Henrik who will just cover on the specific situation on accounts receivable.

Yes, okay. So with the receivables, you can see by the end of 2019, as of that date, there are nothing unusual and we have the provisions we need and it's sort of, yes, I should say, business as usual. And the reason why it is -- you can say it became higher after we acquired iStone is because they have a number of large customers where payment terms are a little longer than normal. But that's normal cost of business. Then coming to any additional risk, I think with the world we may be facing, I think it's needless to say that there may be a few defaults out there and, of course, we can be exposed to that reality as well. And therefore, we are monitoring this extremely closely. And there has been very few customers already reaching out, and if we can discuss and find a solution in terms of payments. So I think this is -- we are in the same reality as every other business with -- in this corona environment. But we have -- as Thomas mentioned, this is part of sort of something that we will monitor much closer than we normally do.

Okay. And then my next question in terms of the Norwegian project. I mean I read in the note, too, that, actually, it seems that it's going somewhat better during Q4. Can you give some more flavor on what is going on, on that project?

Yes. So in Q3, we announced -- or we sort of -- we had a thorough walk-through of the project and the governance around the project. And since we have sort of strengthened the whole governance and delivery and management around this project, we have been able to sort of follow this plan quite closely. And if I can say, it's sort of a win-win because we also experienced that we have a much better collaboration in this regards, and there is -- how can I say? A joint focus in focusing this or in completing this project within the agreed time lines. So it's a definite much healthier situation than it was earlier.

Okay. Okay, that's great. And then in terms of the U.S. business, just to be entirely sure, is the reason why the turnaround will be delayed, is that only due to corona? Or is there also other matters affecting?

So we did not perform as expected in 2019, and that is causing us to make a write-down of the goodwill. However, the situation with COVID is worsening that situation. And so that's also an explanation for the write-down. So it's both.

Okay. But then, I mean looking at -- I mean what's not related to corona then. Can you tell some more about what's going on or has been going on during Q4 in the U.S. business?

Yes. So a lot of great things has been going on in the U.S. business. We are updating the team, the leadership team, and we're bringing some strong people, and we see an improvement in processes. We also saw a significant increase in pipeline, sales pipeline for the U.S. However, we did not see the conversion as we would have had expected. So it is a pipeline conversion issue. It's not because we have lost the cases. They are still in process. But we see an extended sales process which is causing this lower turnaround.

Okay. Okay. And then -- sorry for the many questions.

Fine. Fine.

But there is a few things. But then in terms of these -- the utilization rate, I mean I understand that it's primarily due to intake of these 90 employees. But just to be entirely sure, these 90 employees in Sweden hired, was that in Q4?

No, that was all of 2019. But many of them were hired in the second half of '19. And therefore, they are not productive and -- in terms of invoicing. They will be productive in Q1 and going forward.

Okay. All right. And then just -- and then in terms of your acquisition, you're right that it will not give a big financial effect in 2020. But I mean there was some revenue in that business when you acquired it. So just to be sure, will you have no revenue effect on that in 2020?

No. We are relating to our investment communication policy where we said that we do not do any specific announcement unless it is minus 10% -- minus or plus 10% of revenue and EBITDA. So you can assume it does not have more than 10% impact.

Okay. All right. And then...

But of course, we are carrying the revenue...

[indiscernible]

Yes, yes. We are carrying the revenue, and we're also integrating the business into Columbus and that we are saving overhead cost. So it has a positive impact on our result, or at least it had a positive result on our year before the corona crisis. But because it's a good acquisition and we have made a very good integration, we're already operating as one company working together. So we -- it was actually a very positive small acquisition we did in the beginning of the year.

Okay. And then only two more questions. Just to be sure, I couldn't find it in your report. I mean do you have the total number of employees end of Q4?

Yes, it's 1,999. And it is like -- it is in one of the notes. I can't recall what note it is.

No, no. But that's fine. I mean I just -- I probably just overlooked it. And then the last one, I mean this big software deal. Just to understand, is there any future potential risk also? I see it's a license deal. So there won't come any more revenue from it in 2020, is that correctly understood?

Yes. There will be some services associated with it, but there will be no further license.

There are no further question at this time. Please continue.

Okay. So unless we have any further question, maybe for you, André, maybe you have a few questions in your back pocket that you want to pose? Or else, we will close the call. That's not the case. So operator, let's close the call for today.

Thank you. That does conclude our conference for today. Thank you all for participating. You may now disconnect.

Thank you.