NFON AG (NFN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the NFON AG conference call regarding the final financial statement 2019. [Operator Instructions] Let me now turn the floor over to your host, Sabina Prüser.

Thank you, Mr. Baca. Hello, ladies and gentlemen, and a very warm welcome to our call. Unusual times require inventive formats. So we welcome you today from Munich, Berlin and Mainz to the presentation of the financial report 2019. My name is Sabina, I am the Head of Investor Relations and calling from Berlin. Joining me today are Hans Szymanski, CEO and CFO, calling from Berlin; César Flores, CSO, calling from Munich; and Jan-Peter Koopmann, CTO calling from Mainz. Our format today will include the presentation of the results followed by a Q&A. With that, let me turn over the floor to Hans.

Good afternoon, ladies and gentlemen. Thank you very much, Sabina. My name is Hans Szymanski. I'm very pleased to present to you the financial statements for the year 2019 for the NFON Group. Let me please start with the -- our mission statement, and this is that we want to dominate the European cloud telephony market by delivering freedom of business communication. As you may know, we are today the dominant company in Germany for cloud telephony, and we want to become the dominant player in Europe. That's the clear mission statement for NFON. On the next slide, we see the KPI development for the year 2019. Looking back at the year 2019, we see a continued growth, and we see also for the NFON Group a good business development. Comparing the year 2018 with the adjusted guidance 2019 and with the final results, we see the following. The number of seats. We expected to increase our customer base between 39% and 41%, and we were able to increase the number of seats to almost 450,000 seats. This is an increase of 40%. We expected the recurring revenue to grow between 38% and 40%. And we have seen in the final results an increase of 39%. We expect this revenue growth rate in the range between 30% and 33%, and the final results show an increase of 33%, so we are here at the upper end of the range. And last not least, we expected the resulting recurring revenues in 2019 to be in the range between 80% and 85% of total revenues, and we increased the share of the recurring revenues up to 84%. This is also at the upper end of the range. Summarizing the year 2019, we see here a positive development, and this demonstrates the strength of the business model and the attractiveness of the NFON Group. Let us now have a look on the fundamental market trends in the business communication market. We see here mainly a higher acceptance for the SaaS delivery models, but we see also an increasing multichannel and multi-device communication. And not only yet now during the crisis, we see a clear trend to more home office working spaces. And last not least, we see that all carriers are moving from the ISDN infrastructure to the All-IP. Taking this into consideration, we can say that these market trends are tailwinds for NFON. The consequence is that the cloud telephony market is rapidly increasing, and we continue to look very confidently into the future. Let us now have a look on the next slide to the strategy of NFON and to answer the question how we want to become the #1 in Europe. We have a 5-pillar strategy, and I would like to explain to you these 5 pillars. First of all, we want to further increase the penetration and the adoption of our customer base. So we want to further develop the customer base. Number 2 and 3, we want to further develop our product portfolio. We want to add additional solutions. We want to develop open APIs and with that, to attract additional customers and to also increase our ARPU. Pillar #4 is that we want to expand regionally. We see that the European market is our target market, and we see potential year to increase in the most important economies in Europe. Last not least, we want to capitalize on the high market fragmentation. We want to be active part of this consolidation going on in the European market. So the fifth pillar is the pillar of the market consolidation. Let us now go to the next slide and have a closer look into the business highlights. Here, we see the milestones that we have completed in the year 2019. I commented shortly about the 84% of recurring revenues and the high stability of our business model. Looking at the milestones completed, as I have described, our strategy addresses the fundamental trends in our industry. We have seen a lot of important steps in the year 2019. We have achieved significant milestones in all 5 pillars of our strategy. We have expanded the customer base. We have increased the product and further developed the product portfolio. We have developed further markets, and we have done successful acquisitions. Of course, these strategic milestones are the basis for profiting from the trends and for a successful company development in the future. In this respect, we would like to take the opportunity to present these milestones achieved in the year 2019 in more detail. Let me start with the acquisition and the acquisition of the Deutsche Telefon Standard in the beginning of the year 2019. Why DTS? Why Deutsche Telefon Standard? Well, this DTS takeover fits perfectly into our overall strategy. With this merger, we have created an extensive cloud product portfolio that is currently unique in Europe. And with the product portfolio of Deutsche DTS, that's, in principle, the cloud telephony solutions and the SIP trunk solutions, we have completed also with NFON's existing product portfolio. This gives us another clear competitive advantage in the future market for cloud telephony. Against the background that I described in a few minutes before of the ongoing switch from the ISDN infrastructure to the All-IP infrastructure by all important European network operators, we offer our customers a smooth transition to the future-proof cloud PBX technology. At the same time, and we should not neglect that, we have broadened our customer base with the DTS acquisition by adding over 50,000 seats and over 35,000 SIP trunk channels. Additional sales channels have been opened for us. We have been able to expand also our partner network and our product portfolio with SIP trunk in Germany and in Europe. So the acquisition of DTS, one important milestone completed in 2019, was a very successful step for NFON, and we are very happy that we also can say that the integration of DTS is running very well. With this, I would like to hand over to César, to my colleague, to add some more color on the further milestones completed in the year 2019.

Thank you very much, Hans. César Flores speaking, CSO. We also completed further milestones, as Hans commented, regarding opening offices in Italy and France. Well, why did we do that? We have a clear mission, as stated before, and that is to become the #1 in Europe. And therefore, in order to be present in an overall extremely dynamic market, we also need to be absolutely present in big key markets as quickly as possible. We are already -- we were present in 13 markets at the beginning of 2019 and are now present in 15 European countries with very different numbers regarding the active users in the cloud communication market. So we have a total number of users of 4.2 million in U.K., for example, 1.8 million in Germany or France with 1.2 million. So these are the biggest markets overall in Europe regarding the number of potential users, the total addressable market, as we speak, according to external sources. Spain, with almost 1 million users, 0.9 million, to be precise; Italy with 0.4 million; and Austria with 0.3 million. That makes it very important for us to be present in these countries beyond our existing, let's say, main countries that we had before, namely Germany, obviously, Great Britain and Austria. We are also present, though, in other countries, as I already mentioned before, Croatia, Czech Republic, Hungary, Netherlands, Poland, Portugal, Romania, Switzerland and Slovenia. Maybe to focus a bit more on France. France is really growing massively at the moment, really fast, with a compound annual growth rate of 22% in the cloud communication market and is expected to have 3 to 4 million users in 5 years. That's why we need to be present in this fast-growing market and to show that we are the only true pan-European player in this space. In Italy, where we entered slightly before the French market, it's a very interesting market due to the very high-growth dynamic with over 34% expected growth according to external sources. In both markets, we have been able to build up a great team, a team focused around sales and service. And the clear focus that we have started with is to build the partner network to be able to sell and also to train and to support all the customers in the respective markets. We always will try to leverage the existing ecosystem in the market. As we are the only true pan-European provider, this gives us an excellent starting point for any company or customer who wants to work beyond just one country. Why is it so important to have this fast growth? At the moment, speed is all, and the market is growing massively. It's a very dynamic market. Hans already mentioned the switch of the carriers to the IP, All-IP network. We have to establish our clear market dominance as soon as possible. We have a very strong position, the #1 position in Germany, and we would like to have that position overall in Europe as well. We have increased our customer base from over 20,000 to 40,000 last year. And if you look at our very impressive growth rate in terms of number of seats as well, we have grown our number of extensions that are being actively used to 450,000 at the end of 2019. This growth really underlines the attractiveness of all our products, and it gives a lot of foundation, obviously, regarding our further growth, and these are all recurring revenues. These are recurring revenues, as we have said before, a very strong asset for us, and it's one of the great strengths of NFON regarding the business model. And in order to be able to do all of that, we will further expand marketing to increase our brand awareness, to create leads, to be present with our customers so that we are top of mind once they switch, to enhance further our vast partner network already beyond 2,500 partners that will require further marketing dollars and also to be present on all the relevant events around Europe. Please be aware, if you look into more detail of our marketing expenses that we have, obviously, marketing costs that come out of headquarters, so reflected in the AG, but also direct costs in our subsidiaries, where we have built up our own offices. So that's a bit regarding the important milestones in 2019 from the international sales perspective. And with that, I would like to hand over to Jan-Peter Koopmann, my colleague, on the product side.

Yes. Hello. This is Jan-Peter Koopmann speaking. I'm the CTO of NFON. Thank you very much, César. As you can see on this slide, we have successfully launched our new core product, Cloudya, back in 2017 and 2018. And we are constantly improving on this product on basically every point, not only stability, but functionality and especially in terms of mobile clients. On top of that, I would like to draw your attention to many noteworthy additions on our product, which took place, especially in 2019. And worth mentioning here are both the launch of our NCTI Pro product and our Nvoice for Teams product. Now with NCTI Pro, NFON addresses the core needs of large user groups and specialized work environments. With NCTI Pro, we complement our already existing NCTI portfolio with the premium and standard products. And with NCTI Pro, we are able to offer deeper business integration and much more advanced UC, unified communication, features. So with NCTI Pro, we're able to offer to our customers immediately UC features as video, chat, screen sharing, but also high, sophisticated mobile communication via native apps in iOS and Android. It's worth mentioning that NCTI Pro fully complements our core product, Cloudya, and we will obviously continue to develop in our Cloudya core product and as Hans mentioned in the second growth pillar, constantly enhance the functionality in our core product as well. The second very important step was the launch of Nvoice for Microsoft Teams. With Nvoice for Microsoft Teams, we are able to fully integrate a Team's installation. In that sense, that a Team's client on a PC or actually one of your mobile devices, can act as a full grown extension in an Nvoice PBX. With that, we are able to combine all the strengths of the unified communication platform teams, which as you might have seen, is constantly rising, especially now in these very difficult times, but is lacking a substantial -- substantially lacking PBX features, enterprise PBX functionality, which we -- with our Cloudya PBX, we are able to deliver. So the combination makes sense because you then have a combined offering of your well-known UC solution teams and all the PBX benefits of Cloudya. One more important thing to mention is the takeover of Onwerk. Onwerk is a company based in Mannheim. Why did we do this? It’s part of our fourth -- fifth pillar, the M&A acquisitions. Hans mentioned many times that this is very important for us, but not only to gain on seats and revenue, but also that this is a very interesting opportunity for us to also buy knowledge and manpower. Software architects and programmers are crucial to the expansion of our UCaaS product portfolio. As all of you are aware, the necessary people, the skilled programmers are currently very hard to find on the open labor market. So at the end of 2019, we were able to expand our own R&D capacities with a full stack development team from Onwerk GmbH in the areas of mobile, web front end and back-end as well as client server programming. What's very interesting for us is that Onwerk has an excellent network and close contact to the universities in the Rhine-Main/Rhine-Neckar region, very important for us in the long-term to also strengthen our R&D team. The R&D location in Mannheim also offers further potential to strengthen the NFON team and it is to be expanded in the future. Hans, with that, I believe I give the word back to you.

Thank you, Jan-Peter. Yes, and I will continue with keeping an eye on the M&A topic and answering the question, why is it important that we have M&A as a strategic pillar? We have seen last year that we have done a very successful acquisition of DTS. And also, as Jan-Peter mentioned, of Onwerk. As we commented, the European market for cloud telephony systems is highly fragmented, and the consequence of this is that there are several attractive targets in the market. So NFON wants to be active part of this consolidation. We want to be active part in this market. But of course, we are not alone here. The pace of consolidation is accelerating and investors have discovered the attractiveness of this market for themselves and are also increasing their acquisition activities so that we are competing here against others, investors, strategic investors, financial investors, et cetera. Of course, we are aware about this and we see the opportunity to significantly increase our growth rate once again through acquisitions. So it is a very important pillar in the strategy, the fifth pillar in the strategy of NFON. Let me come to one other important step and milestones completed 2019, and this is that we have won a new partner, AOC Capital -- we have done a capital increase through AOC that is the Active Ownership. And this is important for us because Active Ownership is a financially strong partner, who can support not only the global strategy from NFON, but also focusing on the M&A strategy on the fifth pillar. But of course, we are fully supported through AOC in the strategy of NFON. We have also to consider, of course, that AOC is not the only partner that we have. If we look back for the last 2 years, so our conclusion is that after almost 2 years on the capital market, this is a very positive development for NFON, and we are continuing our growth path, and we are also continuing to install our growth strategy. So that was, with a little bit more detail, the milestones completed. And let me now come to the financial statements for the year 2019. First of all, let's have a look on our business model resulting in a unique combination of, on the one hand, massive growth and on the other hand, a sustainable recurring revenue with a ratio of 84%. So what is part of the recurring revenues? Here, we have the license fees per extension that the customers pay to us every month, per month and extension. And we have also the airtime, the airtime used by our customers. This is part of the recurring revenues. And additionally, we have also premium solutions such as contact center, voice recording, et cetera. On the other hand, we have the nonrecurring revenues. This is 16% of our total turnover. And this comes and the main drivers here are the activation fee on the one side, this is a fee that we ask the customers to pay when they, the first time, sign for our products and services; and we have also one-offs and nonrecurring revenues, driven by the sales of hardware and partly also for professional services. Now let us now go to the next slide and have a closer look on the increase of the recurring revenues. You see that we have growth in the recurring -- in the total revenues, first of all, by 32.7%, up to EUR 57.1 million in comparison with EUR 43 million in the previous year. The Q4 2019, total revenues are at a growth rate of 32.9% compared with the quarter 4 in the year 2018. The nonrecurring revenues show a slight increase of 7.3%. And we have seen a significant increase of the recurring revenues as one of our key indicators by 38.9% compared with the year 2018. This high share of recurring revenues, 84% -- 84.1%, is a very solid foundation for the future growth of the company. Let us now have a look on the key indicator of the NFON Group on the development of the seats. So what we can see here is that we have had a strong growth in the year 2019, plus 40.2%, if we compare the 321,000 seats end of '18 with the 450,000 seats end of '19. And by the way, if we look at end of '17 with 253,000 seats and compare this with 2 years later with the end of '19, we see here an increase of almost 80%. So a very, very dynamic growth in the number of seats. And again, the seats are the main driver for sales and for the growth of NFON. At the same time, we have a very low gross churn rate of less than 1.5% per month, and this underlines the very attractive business model that we have and also shows that we have a very robust and a very reliable product. Looking at the ARPU, we see, as expected, a slight decrease of the total blended ARPU, and this is mainly 2 reasons. First of all, we have an increasing share of DTS products, the products from our acquisition, selling more in the mid-price segment and on the other side, we have also a very successful development in the business with our wholesale partners. So looking at the ARPU, we have also to consider that the additional products, the premium solutions that we have, this represent upside potential for the total blended ARPU development in the medium term. On the next slide, we see the development of the gross margin. And what we see here is that the gross margin is continuing increasing from almost 72% in the year '16 to now 76% in the year '19. So this emphasizes the scalability of the business model of the NFON Group. A very positive development here, looking at the gross margin also. So let us now jump to the next slide and have a look on the personnel expenses. We see that we have increased the personnel expenses as reported, which amounts to EUR 24.2 million in comparison with EUR 22.1 million. That's an increase of 9.8%, including here, of course, the workforce from the Deutsche Telefon Standard. We do adjustments on the personnel expenses for the stock option plan and the retention bonus and also for some one-offs. So the personnel costs according to IFRS regulations, relieved also by the capitalization of the development costs in the year 2019 by EUR 2.0 million. We have an increase in the adjusted personnel expenses by 35.5% compared with the year 2018. On the next slide, we see the development of the marketing activities. And we see a strong development, a strong increase in the marketing activities with the aim to gain new partners, customers and seats, of course. So the marketing expenses increases as planned by almost 66%, building a strong brand that will further drive sales and the growth of our partner network. We have now more than 2,500 partners across Europe. We have won several new partners in U.K., Italy, Spain, amongst others, of course, also in Germany and Austria. And we have now more than 40,000 customers across Europe using every day our cloud telephony system. As Jan-Peter commented, we have introduced also the products Nvoice for Microsoft Teams and NCTI Pro. And we are and we will continue to accelerate the marketing activities in the new subsidiaries, such as Italy, France, but as well, of course, as in U.K., Austria and Spain. Let us now have a closer look on the operating expenses. And here, we see that we also increased the operating -- the other operating expenses, mainly due to the regional expansion. The other operating expenses amount to EUR 26.8 million in total in comparison with EUR 18.9 million in the year before, and this is an increase of 41.8%. We adjust the other operating expenses by one-off expenses such as the acquisition of Deutsche Telefon Standard. And we do not include here the marketing costs that I reported a few minutes ago and the sales commission. So the marketing costs amount now to EUR 9.0 million. The sales commissions amount to EUR 6.7 million. If we consider this, we see that the increase of the adjusted other operating expenses from EUR 6.8 million in the year 2018 to EUR 10.3 million in the year 2019, that's an increase of 51.4% due to various reasons, amongst others, as I commented, the start with our subsidiaries and new companies in Italy, in France, but also due to the consolidation of DTS. We have to consider that IFRS 16 leads you to a lower OpEx of approximately EUR 1.4 million. Let's now have a look on the results, let's have a look on the EBITDA. We see that the EBITDA reflects the investments to execute our 5-pillar synergy, as we have described in detail a few minutes ago. So the EBITDA as reported amounts to approximately minus EUR 7.0 million. We have adjusted the EBITDA by some one-off effects such as stock options, retention bonus and IPO costs and also, the expenses related to the acquisition of DTS, so that the adjusted EBITDA or let's say, the total adjustments amount to EUR 1.9 million, and that we achieved a total EBITDA in the amount of minus EUR 5.1 million. This is in accordance with our strategy. We are increasing personnel costs, increasing marketing, increasing sales commissions, and we are strongly increasing also our growth path, as we have reported in the P&L figures. Before we come to our guidance, let me please give you some background on our view of the actual corona crisis. I think we all know that it's not NFON specific, but it's also valid for NFON, that the financial year 2020 has to be seen under special circumstances. We have the corona crisis, and we have evaluated what does that mean for our business. The forecast that I will present to you, the guidance that I will present to you does not yet fully take into account the effect of the spread of the corona crisis as these cannot yet be qualified and quantified. It would be incorrect to assume that there will be no impact in the business -- on the business development of the NFON AG. Both negative and positive effects are possible and is what we are expecting. We know that in principle, the business model of NFON has robustness to market fluctuations due to the high proportion of recurring revenues. But there are, of course, also potential downsides. Let me give you more details on the potential downside. Should there be a recession or a deep recession, combined with several bankruptcies or combined with a reduction of seats, this could nevertheless lead to a loss of sales for the NFON Group. In addition, it is to be expected that decisions by customers will be delayed and that new seats profits can -- could fall short of the expectations. This is the potential downside. These are the potential negative effects. So recession, bankruptcies, reduction of seats, postponements of investment decisions by our customers. But on the other side, we have a lot of potential upside also, a lot of potential positive effects. We have additional demand which may arise as customers increasingly switch to home offices, not only during the crisis, but also as a permanent effect. We expect a significant higher number of people working out of their home office. And we expect also existing customers shifting their activities to the home office and therefore, we see and we expect for the further future an increasing requesting not only for telephony, but also for traffic and for premium products, telephone conferences, et cetera. And we are also receiving demand from interested parties who do not have a solution and need a solution to be able to work from the home office. So although we have a low visibility, it would be incorrect to assume that there are no impact in our business. We see both. We see negative and positive effects for NFON. And with this, let me now guide you to the -- and give you more background looking at the guidance. And the guidance has to be seen under these special circumstances. And with that, we confirm our guidance that we have given during the preliminary figures. We expect a significant growth of our customer base between 20% and 24% in the year 2020. Looking at the recurring revenues growth, we expect the recurring revenue growth rate for 2020 between 22% and 26%, and we have also to consider that M&A and inorganic growth has not been taken into consideration for this guidance. And looking at the recurring revenue shares, we expect the resulting recurring revenue in 2020 to be between 80% and 85%. So this is the guidance for the NFON Group for the year 2020, taking into account the special circumstances from the corona crisis. Let me now give you, on my last slide, a summary of the key investments highlights for the NFON Group. First of all, there is a huge addressable market outside in the business communication. This market is being disrupted by a shift to cloud PBX solutions. Only almost 10%, 12% of the market in Continental Europe has been shifted to cloud PBX, almost 90% is still on the old world, on the on-premise PBX. And this is a high potential, a huge addressable market for NFON. NFON is the only true pan-European cloud PBX company. We are present, as César mentioned, in now 15 countries, and we are best positioned to become the European player. We have, as I've commented, a very strong business model resulting in a unique combination on a massive growth on the one side, and we have seen that in the year 2019, and a very sustainable, solid recurring revenue on the other side basing on a recurring revenue share of almost 85% in the year '19. Very important to mention also, we are state of the art German engineering. We know what data protection means, data security. We have the full operations in Germany and the full development also in Germany. We have, looking back, a proven track record of scalable growth, not only in the year '19, but also in the years before. And last not least, we have a proven growth strategy basing on our 5-pillar strategy, which is a very solid foundation for the future growth of the company and which is our way how to become the #1, not only in Germany, but also in Europe. So this is the presentation. Thank you very much for your attention. And we are now open for your questions.

[Operator Instructions] The first question comes from Gustav Froberg.

Can you hear me, okay?

Yes, Gustav.

Yes, we can.

Yes.

I just have one, actually. Just on your customers, I saw that you've grown -- so obviously, you've grown the number of seats to 450,000, but you've also grown the number of customers to 40,000 from 20,000. So I was wondering if you could help us understand a little bit better if you've grown such that your customer base is now with smaller companies? Or is it so that you have grown with large companies, but only a small portion of the large business is using NFON right now? And then as a sort of follow-up to that, I was also wondering what sort of potential is there to upsell or rather broaden NFON's reach within your existing customer base?

Okay. César speaking. Hello, Gustav. Hope you're well. Let me answer this question. It is related also to the acquisition of DTS. You know that we acquired their not only cloud PBX, but also SIP trunk, and thereby also the customers behind the SIP trunks. So therefore, the number of our customer base has increased, and that was reflected in that higher number of customers as well during 2019. So it's a combination that in the end, if I all put things together of organic growth, the acquisition of new customers through DTS and within DTS, not only the Cloud PBX, but also the SIP trunk customers behind them.

Then just as the follow-up then as well, what do you think, in your view, is the potential then to selling Cloudya to more of the, I guess, active seats within your 40,000 customer base, including then the SIP trunking seats and how you see that converting to cloud over time?

Yes. So first of all, we are in the midst of that sort of migration. So selling our mobile solution, our Cloudya platform to all of our customer base. We are running big campaigns in the background to do so. We are even doing, given corona as well the offering right now to switch in the midst of months to Cloudya to make the customer switch easier. The same applies to our SIP trunk business, a big campaign is running to migrate the customers from the SIP trunk to our cloud PBX products.

And let me give you some more details also on the idea what can be the conversion from SIP trunk to cloud and why should one do that. Just assume that there is a customer, maybe a little bit conservative customer, who still has an on-prem PBX in his office. And he still has, let's say, 3 years to depreciate this high investment that he has done, let's say, 5 years ago. So this customer with a 3-year depreciation period in its on-prem PBX, he may do not want to immediately change to the cloud, although we have in the cloud telephony several advantages, for instance, 50% cost savings, but given he has still not yet depreciated his on-prem PBX, he may want to stay with that. He can use the SIP trunk to come into the All-IP world, and this may go for another 3 years in this example. So what is he going to do after 3 years? So in the year, let's say, 2023, he again has to take the decision if he stays with the old on-prem PBX or even by the new one, taking all these advantages that this means for him, or if he then goes finally to the cloud telephony solutions. And by doing this, he will well remember the supplier that he has, the company that has given him 3 years long, very good service, very good support, and this was NFON. So the step then to decide to go to the cloud PBX and the step to go to NFON is a very small one. Here, we see a great potential of the SIP trunks that we have today in the customer base.

The next question comes from Knut Woller.

A couple, actually. The first one, just getting a better feeling on your comments regarding the potential headwinds that could arise on the back of COVID-19. Are these comments something like a certain conservativeness or caution that you factor that in? Or do you already see that customers are cutting back on seats or delaying payments currently? Then the second question regarding your pipeline. Can you give us some insight into your pipeline, how demand is shaping from existing customers that are now basically expanding their usage of NFON solutions on the back of COVID-19 since more people have to work remotely? And also regarding the new prospects, when you compare your pipe today with the pipe in the last year, can you give us some insight into new prospects, how that develops now year-over-year? And lastly, on the NCTI Pro. I would assume that there could be some tailwind for the adoption of this premium solution. Is that correct or not?

Yes, thank you very much, Knut, for your questions. Let me start with your first question. You asked if -- on the corona crisis, if we are seeing delayed payments, cutting -- customer cutting seats, et cetera, et cetera. No, we are not. Actually, we are not seeing that. My description that I've given here is for a potential downside. What we are seeing is an increase in the air traffic, by the way. So we see -- on the positive side, we see some positive effects, not only potential effects, but I think as all people are working from home office or a lot of people are working out of the home office, this is a logical consequence that we also see here an increasing in the air traffic, in the airtime. So this is something that we see. But as I commented before, the visibility is very low now. We know that we have some positive effects, but we also know or expect that we are running into a recession. We expect that there will be an increase in bankruptcies, et cetera, et cetera, as I commented before. So we see both negative and positive effects as a consequence for NFON, and we have actually a low visibility. And for the second question, I think I would like to hand over to Jan-Peter. Maybe you can answer the question or César?

I believe the third question was regarding NCTI Pro. Do I have that correctly in mind?

Exactly.

Then while we're talking, let me do the third one. César, maybe you take the second question then. So yes, indeed, obviously, with many people now seeing the benefits of having UC solutions available in home office and their installation as well, we would expect a potential tailwind, not only in Cloudya as our base product, but also in NCTI Pro. I believe that's specifically what you asked for, Knut. I believe -- well, we believe that this is going to be more a thing that we are going to see in the next weeks or months and not right now immediately because NCTI Pro is more professional installation, which companies would usually integrate in their solution in terms of a project. And as you can very well imagine, right now, with everyone being in the home office in an emergency situation, most of the customers, especially in the smaller segment, not necessarily have the power and the will to really go into technical projects right now. What we believe is that this is something that is going to be -- going to open up very many prospects for us. After the immediate crisis is over, people are coming back and companies are switching away from emergency solutions that they have implemented right now. So many people are using, for example, free solutions with their, well, benefits but also disadvantages. And we would expect that people are thinking about how to prepare for in the potential next emergency, which we all hope is never going to come. But after having experienced this, we believe that companies are going to be more willing to get into professional solutions, correct. I hope this answers your question.

Yes. It does.

Wonderful. There was a second question.

Related still to the COVID-19, if I remember correctly, Knut. So the demand that we see right now is from customers who so far not thought of installing or using our mobile solution. That is being requested actively, especially as we offer a low-bandwidth solution. Given that not everybody wants -- or can use video conferencing well, what we offer is a very, very easy-to-use way to communicate with its customers and partners or within the employees and setting up a telephone conference at ease, really by drag and drop via the mobile app solutions. That's something that gives us a real tailwind here, and that helps us to move forward with our existing customer base to move them towards Cloudya.

And new prospects, César. Do you also see that people that haven't used it so far are increasingly asking for it given that they need to have a solution that also helps to do the remote work?

Yes, correct. So we have new prospects requesting that as well. And then regarding the pipeline, we see there that before a strong increase in the demand from new customers towards that mobile solution.

One question comes from Stephane Beyazian.

Stephane from MainFirst. I'd like to ask 3, if I can. Could you quantify for us what is your exposure to the tourism industry and especially hotels, for instance? The second question related to personnel expenses. I was just wondering whether you're able to give some sort of indication where you are in terms of setting your European operation or, let's say, where we could see some stabilization in the personnel expenses. Obviously, you should be able to continue to grow over time. But I'm just trying to understand how much of a jump we still have to see or whether you've already quite went up with the new operations in Italy. My third question is regarding the U.K. operation. I can see there were a little bit more losses in 2019. I actually confirmed your second-most milestone market and you've increased a little bit the revenues in 2019. So I was just wondering whether you can make any comment on just sort of how you can grow profits in the U.K. operation.

Okay. I would like to answer question number one, which is related to hotels and restaurants. Yes, we have some customers, but it's not a stronghold of NFON in that segment. So that's something regarding -- where we don't see any sort of particular big area of losses as it's just a part of our overall customer base, but as much as other segments as well. And I have to admit that regarding U.K. question. Can you repeat that again, please?

Oh, yes. Unless I'm wrong, I think the losses increased in 2019 in the U.K. while the revenues actually also a little bit better. So I was just wondering whether you can make any comments regarding timing to be profitable in the U.K.

So regarding overall profitability, that's a question where we don't give a precise guidance. But let me give you a bit more background to the U.K. losses. We have increased our investment in U.K. as we see it as an extremely attractive market and particularly in marketing costs. We have seen a -- or we have invested much more than we did in the past. That we see that has always a bit of a retarded effect in revenues. And whilst we grew greatly in U.K. compared to the previous year, we will see a stronger effect of the marketing dollars that we spent last year in this year as well. So we invested more in U.K. is the short answer to your question, especially in marketing.

And Stephane, if I remember well, you also asked something -- looking at the development in the personnel costs. And yes, it is correct. We have seen an increase in the adjusted personnel expenses by 35.5%. So that's more or less in line with the increase in the sales turnover also, a little bit under the -- this ratio of the sales turnover. And it has to do with the fact that we have employed several people in the new companies, Italy and France, but also in the companies where we are strong today. So we expect mid- and long term, of course, that we also will see in the personnel cost development the scalability of our business model. But due to the fact that we have also significantly invested in today's workforce in year '19, that's the reason why we see this increase of around about 35%.

And so can you make any comment regarding 2020? Or can you today say that you're relatively staffed to the minimum now in your operation outside Germany?

Well, we do not guide the market looking at the personnel cost for the year 2020. But what I can tell you is that we have now the initial workforce that we need in these countries, let's say, in Italy and France, to stay with this new market entities that we have. We have initial -- the initial workforce that we need, we have them onboard. Of course, with a further development in the growth in these companies, we will also increase more staff. So that's not finished there. But as I said, in the medium term, we will see an underproportional development in the personnel costs, and we will see the scalability of our business model also in the personnel costs.

The next question comes from [ Thierry Fereiro ].

Just to follow up on the questions on the expenses. Just to understand how the growth is going to be financed. You had about EUR 13 million of negative free cash flow this year. So you have about EUR 19 million of debt and, of course, got a lot of cash. But how are you going to finance -- if we assume that you need to keep up this type of negative free cash flow for a couple of years, you need to finance that, and how are you going to finance that? What -- how do you see the balance sheet looking in the next couple of years?

Well, thank you very much for that question, [ Thierry ]. What we see is the following. We see that, as we commented, we have enough cash on the balance sheet. We have enough cash to finance the organic growth of the company. We have also, as you know, the fifth pillar of acquisitions of M&A. And here, what we say is if there would be an interesting M&A target and an interesting acquisition for us, we could come back to the market and ask for a capital increase to finance this target. This, of course, under the condition that this would be an attractive move for NFON, not only for the growth, but also for the product portfolio channels to the market, to new partners, et cetera, et cetera. So considering this, we say we are able to finance our organic growth and with an interesting target, we may need some additional financing for an organic growth.

Okay. So just on the free cash flow, then would you think that you passed the peak of free cash flow or investments? And then from now, and given that you said that expenses should not growing as quickly as they've been growing this year. So could we assume that the free cash flow, the negative free cash flow, say, would be less this year and next year than it was in 2019?

Well, as we do not guide the market on the cash, [ Thierry ], I can only tell you that what we are doing is we are driving the company and the group according to the potential that we see in the market. So the growth for us is the most important and the first priority. And this, of course, means that we will also further invest in this growth. This is in line with our strategy. This is in line with our IPO story, and this has to do with the opportunities in the market. If there are customers that we can grab with a proper marketing campaign and with the right people in sales, if there are customers that we can grab and put into our platform, we will do that. As many customers as we can, we will put in our platform. So growth will be and stay the first priority. Profitability is the second priority.

There is one follow-up question from Stephane Beyazian.

Yes. It's one follow-up to understand something in the market. We -- I'm just wondering, it's an open question, if you have a view on sort of some of the consumer-based apps -- can you hear me? I'm hearing some buzz on the line. Do you hear me?

We hear you, yes, consumer base, we heard.

Yes, some consumer-based apps that are doing quite well or at least we've heard recently, like Zoom or TeamViewer. And I was just wondering whether you are seeing them capturing a little bit of customers even if they don't have specifically -- they are not specifically a competitor to you, but capturing some customers, thanks to their approach on conferencing. And whether on your end, actually, you could have any idea of looking a little bit more on the sort of consumer market since you have the experience in the B2B market and the service is at quality levels.

Stephane, let me try to answer this question. César speaking. I'm not quite sure whether I fully understand your question, but I will try to reiterate and give a bit of an answer. So right now, and that's the clear strategy that NFON has had from the start. We are totally focused on B2B. So we are not looking at the individual consumer market. That's not our target as we are a cloud PBX solution provider. Regarding conferencing, though, we offer that, and it's a very easy solution to use for business purposes, which allows you to integrate, obviously, other parties at ease. But let me say and again reiterate, it's not at the moment designed to go after the consumer market though.

There are no further questions yet. [Operator Instructions] It seems there are no more questions, so I'll pass back to you.

Thank you. Ladies and gentlemen, may you have any further questions or need for more information following this conference call, please do not hesitate to contact me. For now, we would like to say goodbye. Thanks for attending our call today and wish you a nice day, and please stay healthy. Bye-bye.

Bye.

Thank you.