NFON AG (NFN.F) Earnings Call Transcript & Summary

And welcome to NFON's Half Year 2025 Earnings Call. We appreciate you taking the time to join us. My name is Friederike Thyssen, VP, Investor Relations and Sustainability. And I will be your host for the session, which is being conducted in collaboration with NuWays. Today's presentation will be led by our CEO and CFO, Patrik Heider, who will walk you through the operational, strategic and our financial developments of the first half year of 2025. As usual, we published our interim financial statement and full Investor Relations presentation earlier this morning on our website. The presentation will be structured as follows: business highlights, financials, guidance, Q&A session. Please note that questions can only be asked live during the Q&A session at the end of the presentation. [Operator Instructions] Thank you for your understanding, and thank you in advance for your contribution. And with that, I will hand over to Patrik to begin the presentation. Over to you.

Yes. Thank you very much, Friederike. Also from my side, a warm welcome to the earnings call H1 2025. After a year of focusing mainly on platform stability, we returned back on delivering product innovations. Our customers already benefit from NIA, our AI featured and phone intelligence assistant as well as from unlimited voicemail transcription. Additionally, we finally enhanced full security features with single sign-on and multifactor authentication and optimized web app and CarPlay support. These features are live and in daily use today, and we are building on that momentum. In the pipeline for the next release are full call transcription and summaries, automatic action item creation, integration with desk phones and further AI features for conferencing. This road map reflects our clear intent to continuously embed intelligence into our core product, making communications smarter, faster and easier. We also launched this month something that customers and partners have longed for, namely our new modular licensing model designed from the ground are based on partner and market feedback. It simplifies quoting and billing through self-services, improves transparency for customers and enable target cross- and up-selling. Customers can freely mix packages such as S, M, L and XL per extension, adapting on different roles and needs and locations, while partners benefit from a clearer value story and shorter sales cycles. Finally, with Nexus, we are introducing currently a modern partner program with a structured growth-oriented framework. It includes role-based and performance-based levels from advanced to enterprise, giving traditional telco-partners and AI or solution-focused partners a clear growth paths and tangible benefits. We have received excellent feedback from the community for those developments. Once special piece of feedback comes straight to the point, now we can do the new business again with NFON. Let's turn to the key financial figures for H1 2025. In the first half year of 2025, we achieved solid top line growth and an improvement in profitability. Total revenue increased by 3.9% to EUR 44.2 million and adjusted EBITDA rose by 3.4% to EUR 5.7 million compared to the same period last year. This EBITDA improvement shows that we can enhance profitability while continuing to invest into strategic priorities such as AI and product innovation, partner enablement and sales effectiveness. At the same time, we recognized that the pace of growth in our core business has been slower than anticipated. But let's now turn to the breakdown of our financial development to take a closer look at the figures in the upcoming slides. Looking at our revenue development in the first half of 2025, we achieved total revenue growth of 3.9% year-on-year, reaching EUR 44.2 million. Recurring revenues increased by 2.9% to EUR 41.3 million and remain the backbone of our business, accounting for over 93% of total revenue. In our core business, recurring revenue was up by 1%, showing resilience despite selective customer investment. At the same time, total revenue in the cloud telephony core segment declined slightly by 0.7%, reflecting the combination of more cautious investment climate in our markets, lower hardware sales and reduced voice minute usage. Nonrecurring revenue rose by 19.9% to EUR 2.9 million, mainly driven by botario's project business, which accounts for nearly half of botario's total revenue. The strategic expansion of our AI portfolio has already delivered results in the first year after the acquisition. The significant increase in nonrecurring revenue reflects the successful rollout of new solutions and service offerings, particularly the growing adoption of AI-based automation tools with our existing partner network, which is generating additional sales momentum and clearly demonstrates the tangible growth contribution from our AI-driven portfolio expansion. Our seat base declined by 1.1% compared to H1 2024 to 657,584 as the normal churn over the first half year could not be fully compensated by new customer acquisitions. Nevertheless, churn levels remain stable which underlines the resilience of our installed base in a competitive market environment. Finally, our blended ARPU held steady at EUR 9.90, which is the result of target price adjustments implemented in 2022, 2024, and again in the second quarter of 2025 for selected products and customer cohorts. These actions have helped offset inflation-driven cost increases and maintained ARPU levels above last year's first half despite lower voice minute usage. Overall, H1 showed stable recurring revenues and initial gross contribution from strategic initiatives, providing a solid base for pursuing further opportunities in the coming periods. Our gross margin improved further in the first half year of 2025, reaching 86.1% compared to 84.5% in H1 2024. This increase was driven by the continued growth of high-margin recurring revenue, lower hardware sales and a strong contribution from botario's AI-driven project business, which requires significantly fewer external resources and, therefore, delivers a high scalable margin contribution. Cost of material decreased by 6.7% to EUR 6.2 million, reflecting the ongoing decline in hardware demand, a trend also visible in nonrecurring revenue. As a result, our material cost ratio dropped to 13.9% from 15.6% last year. Let's turn to the personnel expenses. In the first half of 2025, total personnel expenses came in at EUR 19.1 million compared to EUR 17.5 million in the same period last year. The increase was mainly driven by the integration of botario, targeted hires to strengthen our AI capabilities and other strategic priorities. Wages and salaries rose to EUR 15.4 million, up from EUR 13.8 million, reflecting a 5.1% increase in the average headcount of 412 employees and more importantly, our focus on building capabilities in the areas that matter most for our long-term growth. We also had one-off effects of EUR 0.7 million, primarily related to the reorganization of top management, the harmonization of our system landscape and our employee stock option program. On an adjusted basis, personnel expenses totaled EUR 18.4 million, resulting in a personnel expense ratio of 41.6%, slightly above the 40.9% recorded a year ago. As already discussed in Q1, this reflects our continued investment in strategic areas. Looking ahead, we expect this ratio to gradually decline as we stabilize the workforce and make even better use of the resources we have in place. Turning to our profitability. Our adjusted EBITDA remained solid. In the first half year of 2025, EBITDA reached EUR 4.9 million, almost matching last year's level of EUR 5 million. On an adjusted basis, EBITDA came in at EUR 5.7 million, slightly above the EUR 5.5 million recorded in H1 2024. EBIT remained stable at EUR 1.1 million, while our consolidated net result improved to EUR 0.73 million compared to EUR 0.54 million last year. What's important here is that we achieved the stability in profitability despite the softer revenue dynamic in parts of our core business and a generally cautious investment climate. The result reflects both the quality of recurring revenue and our ability to manage cost effectively even as we continue to invest in strategic initiatives to capture future growth. Let's turn to our cash flow, which reflects both our operating performance and our commitment to strategic investments. Operating cash flow came in at EUR 2.5 million compared to EUR 3.7 million in the first half of last year. This decline was mainly due to a reporting date related reduction in trade payables. Free cash flow decreased to EUR 0.7 million versus EUR 2 million a year ago. The main driver here was our continued investment into growth, EUR 1.5 million in intangible assets, primarily for product development, EUR 0.3 million in property, plant and equipment, mainly into IT infrastructure and hardware and EUR 1.9 million for the first earn-out payment from the botario acquisition. Financing cash flow stood at EUR 1 million, slightly below last year, EUR 0.8 million, driven mainly by lease liability repayments. As a result, cash and cash equivalents at the end of June were EUR 10.7 million, giving us the financial flexibility to continue executing our strategy. After a first half year with solid earnings, but lower-than-expected revenue in parts of our core business, it's important to take a step back and look to the broader environment and also what we have delivered to position NFON for sustainable growth in the future. Macroeconomic volatility remains. Inflation, geopolitical uncertainty and cautious IT budgets, particularly among the SMEs continue to influence on demand and delay investment decisions. Decision-making cycles are still extended, especially for communication infrastructure upgrades and emerging technologies such as artificial intelligence. Many companies are still in the process of evaluating how AI can be integrated into their business models. This adds complexity to investment planning, but it also opens up a window for clear differentiation. At the same time, stricter regulation is turning into a structural tailwind. Demand for secure GDPR-compliant solutions is rising across Europe and the debate around data sovereignty is gaining momentum. This is an area where NFON has a strong credible position as an independent European provider with infrastructure, development and hosting based entirely in Europe. We have acted early, leveraging our existing strengths and continuously implementing measures to address these challenges and capture opportunities. The initiatives we launched in the first half year fit directly into this approach, such as AI essentials, the Nexus partner program and our modular licensing model as introduced in the beginning of this presentation today. Beyond that, we continue to build on these foundations, accelerated AI-powered innovations, expanding partner enablement and automation, optimizing pricing and cost structure and driving customer-focused execution to reduce churn and increase renewal rates. As we can already see that this approach is starting to have an impact as momentum in new business has begun to recover, giving us additional confidence as we execute on our priorities for the second half of the year. However, the combination of the current market conditions, extended decision-making cycles and the softer-than-expected revenue development in parts of our core business means that we will be adjusting our guidance for 2025. Let's turn to the next and last slide to look at these changes in detail. While our strategic direction remains unchanged, the combination of a softer-than-expected revenue trends in parts of our core business, extended decision-making cycles and selective delays in realizing individual growth drivers has led us to adjust our 2025 guidance. We now expect total revenue to grow in the range of 3% to 5% compared to the original guidance of 8% to 10%. This reflects a more cautious investment climate in some markets and the fact that parts of available market potential in H1 could be not yet fully captured. At the same time, we are seeing positive momentum returning to a new business, supporting by initiatives such as AI essentials, the Nexus partner program and our modular licensing model. On profitability, we anticipate adjusted EBITDA in the range of EUR 12.5 million to EUR 14 million, slightly below the previous forecast, EUR 13.5 million to EUR 15.5 million, while maintaining our strict cost discipline and focusing on operational efficiency. Looking ahead to 2027, our midterm targets remain intact. Thank you very much for your interest. I'm now opening up for your questions.

Yes, thank you very much, Patrik, for the presentation and for more detailed insights. We will now open the line for questions. [Operator Instructions] Now looking forward to the first questions, Knut Woller.

Yes. Actually, a couple, and I will do them one by one. Patrik, when we look at the cash flow target, I know it's not part of your official guidance. However, you have given an indication where you expect the cash flow to be in 2025. Can you update us whether the reduced EBITDA target has an impact on your cash flow target?

Yes, I can do that. Let me do this. Obviously, the lower revenue we are guiding, obviously, has also an impact on the cash flow part, and we are now guiding operational cash flow is in the range of EUR 8 million to EUR 10 million, free cash flow in the range of EUR 4.5 million to EUR 6.5 million and the total cash flow in the range of EUR 0.5 million to EUR 1.5 million.

The last one was EUR 0.5 million to EUR 1.5 million?

Yes, exactly.

Okay. And the other questions, Patrik, you confirmed your midterm targets despite the weaker momentum in 2025. Can you give us some reasons for the optimism you have to confirm the targets? And should we expect NFON already to return to seat growth in 2026?

Yes, of course. The first 2 quarters, that means first half year of 2025, we obviously did not go back to the growth and the gain in the seats we needed to have in order to achieve the guidance. And in the SaaS business, you know that you are always running behind if you're not going to achieve the first H1 target what you need to have. This is why we lost actually 2 quarters. July was the first month where we return back to our original seats forecast. And this is a good signal. And with the initiatives we are planning for second half year, we are positive and also for 2026 in the outlook, what we have in product innovations in the product portfolio, what events we are driving which gives us the optimism that we do not need to change 2026 and 2027 guidance. So in fact, the calendar year for 2025, this is not going to be achieved 8% to 10%. This is why we left the guidance. But for the further outlook, we remain positive.

Okay. And if I remember correctly, you mentioned in the Q1 call that you plan to introduce a price hike in May. Can you give us an update here to which extent this helped the growth momentum? When should we expect a more pronounced tailwind for growth from the price hike in 2025?

Yes, the price hike was implemented in May. And here, we had around about EUR 250,000 to EUR 300,000 impact in euros. And obviously, we are also planning this one for next year and regular, as we also indicated that we want to do different things in pricing as well as we now install the pricing area also within NFON. And giving all the AI features, we are running in the product on the product side, we're definitely positive to have a much stronger pricing power as well in the future, but it obviously helped us also to keep the growth in H1 2025. And this is the positive side. If it was implemented in May, it also helps us for second half year.

And maybe just a final one, Patrik. From an outside perspective, it looks like you're doing what you can do in such an environment. You're focusing on profitability, you're protecting your cash flow. Still, I think the lag that's currently missing to the equity story is the acceleration of growth, which, of course, is only partly in your hands, particularly looking at the SME focus you have and the currently tough macro environment. From an outside perspective, what data points would you advise to focus on to track that growth should accelerate at some point in time?

I definitely -- I was always very open and transparent that not only the market environment, but also our own homework was the reason why we did not accelerate the growth as we should have done in the last couple of years. So we were below market growth, which is in the traditional cloud PBX UCaaS area, a 5% to 7% area growth, what I would name. Bringing us to a double-digit growth, what we need to have also for the upcoming periods in 2026 and 2027, obviously, this AI momentum is helping us. The AI market is boosting what you can already see in our portfolio, seeing botario growing year-on-year at the moment, actually 70%, 7-0 percent, which obviously also gives you an indication that this is helping us when we also increased the size of this AI business within NFON. Still, it's on a small size, but it's growing very strong. And this momentum is obviously everyone is looking at that. You also saw a bigger acquisition into the German AI market from a U.S. player and you see a lot of M&A targets going around. And obviously, we made it very early. We integrate this one into our product portfolio. And here, we really gained momentum. In NFON, for the first half year, the whole growth is obviously coming from the AI side. And this is what I would take a look. So we need to see how we're going to integrate that one into our traditional core business, and we did already. And this is what I can give you as a response. So 5% to 7% in the traditional core business, but much stronger in the AI business.

Next one in line, John Karidis.

It's John Karidis here from Deutsche Bank. So the first question is looking back to the first half of 2025, it would be really valuable if you could give us a few sentences about your assessment of the competitiveness of your main rivals. So Gamma, of course, but also any other changes in the competitor behavior in the first half would be very useful, please.

Of course.

And then just my second and final question is, looking forward, specifically to the first -- to the second half of 2025 and specifically in Germany, do you expect to -- on a net basis to lose seats again in the second half? And if not, why not, please?

Yes, of course. First of all, thank you for the question, John. And the first one is the competitive environment. The first message is it didn't change at all. So the main competitors we are seeing in all 3 brands of the Gamma, Universum Global, I would say, that is Gamma directly, that's Placetel and also STARFACE. And as you know, Gamma bought Placetel and also STARFACE. And we do see that they are -- in most of the, let's say, tenders we are in competition with them. There is also, let's say, a price war in the traditional core business in cloud PBX. We don't want to go into. One thing which definitely helps us to differentiate ourselves compared to other solution is our AI capabilities, which are definitely stronger than any other in the German market. And this is really helping us for H2 as well in order to stabilize our core business. And that led me to your second question. No, we are not planning. And this is why I also indicated in July, we first time achieved our forecasted seats growth again. We need to be much stronger in core business again and gaining growth in seats in core business. There won't be an equity story and a successful NFON in the future without core business, and the other way around the same to AI. So we need to go and accelerate the seats again. We're doing so in H2 2025, and we will continue in 2026. And why? Definitely, the main focus we still have in Germany. 80% of our revenues are still in Germany. There is huge potential still in Germany. We are discussing, still 80% of the seats are going to transfer to cloud business. There's also the switch-off of ISDN and all that stuff, which is definitely -- this is why Gamma also, as an indicator for you, invested into the German market. The German market is one of the most interesting European market when it comes to potential. Given the investment environment we are in at the moment, everybody is searching and everyone is interested in order to invest into something because of their top line issues. So this is why I remain positive for the German market, especially because potential is high.

Patrik, if I could -- sorry, just a clarification on the first one. If the competitiveness hasn't changed in the first half, so the sort of natural, I think, conclusion of that is that when Gamma stands up to talk about their interims, we should expect them to have lost seats as well year-on-year the same way that NFON has. Is that what you're communicating?

I mean, I hope you understand that I'm a representative of NFON and I can't talk to Gamma. And I don't know when they're going to announce, I think, in a couple of days. But I let it to you to listen to their announcements. I just can comment on the NFON environment.

Right. No, I totally understand that, Patrik. But I just want to sort of -- if I may test a little bit the point that you said that there hasn't been a change in competitiveness at all in the first half, right, so that's why I was making that comment.

Yes, absolutely. And what I always communicated in one of the last calls as well and always open on every conference that there's always a side from the market perspective but also on an own side. And NFON had the last 2 or 3 years, lost 2 or 3 years in order to get it really where we should have been. I was always open and transparent and honest about that. We were not as innovative as we should have been. We were not as stable as we were used to be. So this is why we had last year the focus investments into platform stability and my colleague, Andreas Wesselmann did a great job to ensure that again. Since 1 year, we had no incident at all again. Last year, there was a year where we had a couple of incidents. And in an indirect business, where you indirectly have 99% running indirect, you need to have the trust of your partners. And we don't have those partners exclusive on our side. And this is why we regained now those partner community to our side. And this is why also, it was a kind of our own homework to accelerate growth again. I don't want to push everything on the markets only. But now we are in a complete different shape in 1 year, and the market environment is not playing for us. But those are the things we need to strengthen and the own homework we have executed already and now we are looking forward positively to also get an improvement in the markets.