NFON AG (NFN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to today's conference call regarding the Analysts and Investors conference of NFON. [Operator Instructions] Let me now turn the floor over to Sabina Pruser. Please go ahead.

Good morning, also from my side, and thank you, Mr. Cooper. Ladies and gentlemen, a very warm welcome to our call. My name is Sabina Pruser. I'm the Head of Investor Relations. Joining me today are Hans Szymanski, our CEO and CFO; Jan-Peter Koopmann, our CTO; and César Flores, our CSO. Hans will present the results for the first half of 2020. The presentation will last about 20 minutes. As always, there will be an opportunity to discuss your questions afterwards. With that, let me turn over the floor to Hans, please.

Thank you, Sabina. Dear, ladies and gentlemen, good morning, and thank you for joining us on our half year earnings conference call. Before we go into the details of the first half year of the year, I would like to give you an overall assessment of our development and on the further prospects in these special times. The first half of the year, NFON continued to make very good use of the momentum of the increasing digitalization in business communications. This general trend has received an additional push since the beginning of March through increased home office activity, and I'm sure that we all made this experience. This has resulted in additional demand for our cloud-based solutions and a surge in voice minutes. Although we see that the use of voice minutes is starting to normalize again, the attitude in the business world towards flexible cloud solutions has changed significantly. We cannot yet completely read this trend in the general market development. Nevertheless, a good practical experience with flexible and robust telephony and teleconferencing from the cloud is convincing more and more decision-makers in businesses and is also providing additional momentum in the market for cloud telephony. The field is, as the saying goes set. Of course, we don't know exactly what the future will look like in these extraordinary times, and we also noticed that customers are, in some cases, postponing their investment decisions. But we strongly believe that an increase in the number of seats provides a very good foundation for '22 and beyond. The overall development of the first half of the year, particularly reflected in our significantly increased recurring revenues and the development of our EBITDA, once again, underlying a very big potential of our business model, not only in 2020, but also for the coming years. We gained, and we are very happy about that. We gained new and large customers in the first half of 2020, and we also have taken a significant step forward in the development of new and important functionality. We have also decided to set up a new development location in Portugal, more precise in Lisbon. All of these are very important milestones for the further positive development of NFON towards the #1 for cloud telephony in Europe. For us, this is clearly a good -- a very good opportunity and also the mandate to continue to stick to our growth strategy very consistently. There is a huge market, and NFON has an excellent product portfolio, and basing on that, we are constantly reviewing our options to maintain or even to accelerate our growth rate as planned. And that brings me, now, to our half year figures, which I'm very pleased to explain in more detail now. Let me please start with our vision and mission statement. And this is nothing new, you know that we want to dominate the European cloud telephony market by delivering freedom of business communications. Why do we think that we can achieve that? Well, first of all, as I mentioned before, we have a very strong product portfolio with very robust solutions. These solutions, by the way, work everywhere at any time, in any location. It is location independent. It can be the full office or it can be home office, it can be during your holiday, wherever the customers need the solutions, it works everywhere. And with these solutions, our customers achieve a high cost efficiency, and additionally, we guarantee the highest reliability and flexibility for our customers. These are the reasons why we are convinced that NFON will dominate the European cloud telephony market. Talking about markets, there are a lot of opportunities for NFON in this cloud telephony market. Not only due to the increasing digitalization that I mentioned before, but also because there is more and more -- a higher acceptance for SaaS delivery models. At the same time, we are seeing a change in the technical infrastructure from the carriers moving from ISDN to the All-IP world. And, additionally, the way we work keeps changing, the key word here is the home office. These are all very good reasons because -- why we see a very big market full of opportunities for NFON. Let us now focus on the key figures. We see a lot of opportunities for growth in a challenging environment, and this is exactly what the figures reflect. We have seen a recurring revenue growth of 28% year-on-year. The total revenue growth is about 24.5% year-on-year. The share of recurring revenues in total revenue is over 87.6%, and we have seen an increase of seats by 21%, also year-on-year. But we not only accelerated the growth, we also completed important milestones in the last quarters that I would like to summarize. During the year '18, we launched our new core product very successfully, our new core product, Cloudya. In the beginning of '19, we successfully acquired Deutsche Telefon Standard and immediately started with the integration of DTS. Also in '19, we founded new subsidiaries in Italy and in France, and we expanded our R&D capacities at the end of the year with the takeover of Onwerk but also this year, with the new R&D center in Portugal, the beginning of the new R&D center in Portugal. And last not least, we have now more than 2,700 partners and more than 40,000 customers in -- within NFON. Let us have a look at the financial results and focus on the business model. NFON has a strong business model coming from a unique combination of massive growth on the one side, as we reported plus 28% recurring revenue, and this recurring revenue is a very sustainable foundation. The portion of recurring revenues is about 88%, coming from seats and the ARPU, driven by license fees for extension by airtime and also driven by premium solutions. And on the other side, we have the nonrecurring revenues. These are the lower margin revenues with a ratio of 12%, driven by an activation fee that we ask our customers to pay when they -- the first time sign for our solutions and products. Nonrecurring revenues are also driven by hardware and partly also by professional services. Let's have a look on the seat base. The seats are the main driver for NFON business, and the seat growth is in line with our expectations. The increase of total number of seats is about 21% in comparison with the half year 2019. If you look at the period from beginning 2018, with 250,000 seats, and now half year 2020, with almost 500,000 seats, we have almost doubled up the seats in these 2.5 years period. We see also a positive development in the ARPU. We have an ARPU of EUR 9.83 in comparison with EUR 9.64 at the end of last year. And the influence factors for the ARPU are on the other side -- on the one side, the seats, of course, but also the airtime. We have seen, for instance, in the airtime in March, a huge increase. By the way, normalizing again now, but a huge increase in March due to the lockdown and the move to home office from many, many customers from NFON. And additionally -- that's what I mean by the unique combination of the business model, additionally, we continue to have a very low gross churn rate of less than 0.5% per month, and this shows the high-quality of our product and solutions and services, and this is also the guarantee for the future recurring revenues and the reliability of the business model. And we have also additional premium solutions that we offer our customers, and these premium solutions have higher ARPU, so that we can expect an upside potential for the ARPU development here in the medium term. Meaning, the more we are able to sell premium solutions, the better it would be the influence for the ARPU. We have seen an outstanding performance, realizing the momentum in the first half year 2020. The recurring revenues half year 2020 grow by 28% and compared with the same period of the previous year. Nonrecurring revenues grew by 4.3%, and we have a cumulative effect quarter-by-quarter, as expected, due to the continuously growing number of -- growing total number of seats. We have gained new big customers and projects in the half year 2020. For instance, a big insurance company, to give you an example, and this has, of course, a positive consequence also in the revenue development. And we have a high share of recurring revenues, almost 88% due to the strong and sustainable growing customer base. With the -- additionally, an increase in gross margin, which proves the potential for sustainable profitability. We have a gross margin now of 79.1%, in comparison with 77.1% in the first half year 2019. And again, if we want to make the comparison about a 2.5-year period, gross margin increased from 73% to now more than 79%. The high gross margin continues to show a constantly positive development, of course, also driven by a high proportion of recurring revenues. Recurring revenues are the high-margin revenues in comparison with the lower margin nonrecurring revenues. Very important for our business are also the personnel expenses. The highly professional, motivated and committed employees are the basis for the further growth of the NFON Group. Personnel expenses, as reported, amount to EUR 14.3 million in comparison with EUR 12.0 million in the first half year 2019. We have had smaller adjustments of EUR 0.5 million for retention bonus and stock options. So that -- the increase of the adjusted personnel expenses is about 20.4%, including the effect of the acquisition of Deutsche Telefon Standard. The adjusted personnel expenses amount to EUR 13.8 million due to the increase in workforce by 14.4%. So we continue to increase the workforce, and we have now around about 400 employees, in an average of 400 employees, compared with an average of approximately 350 employees that we have seen in the first half year 2019. So additionally, 50 new people. And by the way, we continued also to increase the staff also during the first half year of 2020. Marketing activities will be increased to use opportunities. The marketing expenses of EUR 3.2 million are significantly below the prior year costs. In the prior year, we have seen EUR 3.9 million, now EUR 3.2 million. And this has, of course, to do with -- mainly with the COVID-19 effects, the lockdown effects, so that -- we decided to reduce -- slightly reduce the marketing spending in the first half year 2020. The general marketing activities, to give you some examples, are focused on a change from direct to indirect marketing, which focus towards the channel activities, are also focus on performance channels, in direct communications and so on. And we focus especially also on partner activations in all markets, especially in the younger markets, where we have to -- still have to develop the markets. We expect marketing expenses for the full year 2020 to be on the same level as 2019. So approximately about EUR 9 million. Again, that's the expectation for 2020. So that means that we will accelerate it in the second half of the year, and we have started with that, we will accelerate the marketing activities in the second half of 2020, significantly. The development of the adjusted other operating expenses shows also the scalability of our business. We have adjusted other operating expenses about EUR 4.1 million in comparison with EUR 4.6 million that we have reported in the first half year 2019. So also a decrease in the costs here. And if you look at the sales commissions, you can see that we have increased the sales commissions from EUR 3.0 million to EUR 4.0 million, so an increase by EUR 1 million or 33%. And this is, of course, connected in relation to the revenue. Why do we have less adjusted other operating expenses? Well, it is also a consequence of the -- partly a consequence of the lockdown. We have less costs for traveling costs as everyone in this world, I suppose, and this is an additional push for the scalability of the NFON business. A clear positive picture is also a strong improvement in the EBITDA and in the adjusted EBITDA that reflects, again, the outstanding performance of the recurring revenues. We have an EBITDA of EUR 0.8 million in the first half year 2020, in comparison with minus EUR 3.8 million in the first half year 2019. And if we look at the smaller adjustments that we have, as I mentioned for retention bonus and stock options, these adjustments amount to EUR 0.5 million. We see that we have achieved an adjusted EBITDA of plus EUR 1.4 million in comparison with minus EUR 2.7 million in the same period of the last year. So the adjusted EBITDA plus EUR 1.4 million and this is, by the way, an improvement of more than EUR 4 million in the 12 months. Why? Well, because we have seen a significant seat growth. We have seen a 28% growth on the recurring revenues. We gained new big customers and new projects. We had lower personnel expenses, lower other operating expenses, marketing expenses, traveling expenses, et cetera. And this leads to the very clear positive picture and a positive EBITDA of adjusted EUR 1.4 million. Let us now have a look on the outlook of 2020. Here, we confirm the positive guidance, taking corona effect into account. So we expect a significant growth of our customer base between 20% and 24%. We expect also the recurring revenue growth rate for 2020 to be between 22% and 26%, not taking into account, by the way, potential further acquisitions, and we expect also the resulting recurring revenue ratio in 2020 to be between 80% and 85%. So we confirm the guidance. NFON maintains the dynamic growth path. I would now like to summarize the key investment highlights. As I commented before, there is a huge addressable market there, being disrupted by a shift to cloud PBX solutions. Only approximately 15% of the telephony market is in the cloud. So there is 80% to 85% to go, a huge market for NFON. NFON is the only true Pan-European cloud PBX company very well positioned to become the dominant European player. And why we think that we can become the dominant European player? I explained a few minutes ago. We are now present in 15 countries. We are offering a very robust and a very reliable solutions to our customer base. We have a unique combination of massive growth on the one side and sustainable recurring revenue on the other side. We have seen more than 28% growth, and at the same time, we have seen a low gross churn rate of less than 0.5% per month. We are German engineering. We know what data protection means, we are GDPR compliant. We have a proven track record of scalable growth, and we have also a proven growth strategy, basing on our 5 pillar strategy, which allow us to grow further in the future. Let me now end this presentation by summarizing our development. NFON is very well on track. Thank you very much for your attention, and we are now open for your questions.

[Operator Instructions] And the first question comes from Knut Woller from Baader Bank.

Actually, 3 questions. The first one on the regional trend. We have seen in H1, very good growth in the German market, whereas growth was a bit behind in the other markets. So can you provide an update here? And to understand your comments regarding the increasing marketing spend in H2 correctly that this target is mainly to accelerate the growth then also in -- outside of Germany? Then secondly, on your pipeline, you cited some large deals that you signed in H1, one with a large insurance company, which, of course, helps you to grow the number of seats. Can we get an update regarding your pipeline and also potential large deals in the pipeline for the second half? And then again, lastly, a question on competition. We have seen RingCentral announcing a couple of partnerships now in the -- since 2019, one with Avaya, one with Atos, and recently, one with Alcatel-Lucent. Do you see any impact of that, that the legacy PBX players partner with a cloud competitor to basically monetize still their installed base? Is partnering something -- also with legacy players, something you think about? Do you see that changing your growth prospects or not, since RingCentral is focusing more on the high end of the market? That's it.

Thank you very much, Knut. I would like to hand over to my colleague, César, please.

Good morning, everybody. César, speaking. Thank you very much for the question, Knut. Regarding the regional trends, indeed you are commenting rightly that some markets are experiencing a higher dynamic than other ones, especially the German-speaking countries are seeing a high uplift on all the numbers. I can also comment that, in other countries that have been affected stronger than Germany by COVID, obviously, this development has not been as dynamic as in Germany, but still dynamic. And we are still seeing a strong growth in the other regions as well. Again, not as strong as in Germany, which was not hit as hard by all the lockdowns rules that have been defined. Regarding your second question on the large deals. So indeed, we have been able to close a few deals in the insurance sector as well as in the retail space in the first half of the year, and the pipeline regarding such deals is there for the second half of the year as well. Regarding the third question, the impact regarding the partnerships of RingCentral with Avaya, Atos and other ones, has not yet been felt by us. We don't know how that will appear in the future. But so far, we have seen no effect of that on our business. Please remember that we -- our sweet spot is really in the small, medium-sized enterprise, which is not, let's say, the core segment of the companies that RingCentral is partnering with.

César. Just one follow-up. Do you also think about partnering with legacy players to basically get an accelerated access to some markets and here especially, in the -- in your market segments, which differs from RingCentral. Would that -- is that an option for you?

It's not only an option. It's already a reality. Maybe -- I don't know how well everybody is aware of the fact that we have strong partnerships with other legacy players that are very well positioned in the small and medium enterprise business. If you look on our website, many of the name, be it Gigaset, Snom, Yealink or Panasonic and so forth.

The next question comes from Alina Koehler from Hauck & Aufhäuser.

I just have a few questions regarding the big customer wins. How large are these in terms of seats? And are they already installed yet? And then I also had a question on ARPU. Since it's decreased quarter-over-quarter, is this due to that already -- the increase in airtime is already leveling off due to home office trend now being like slightly reversed or is this just [ slowly ] due to the increasing share of wholesale partners -- revenues through a wholesale partner?

Yes. Alina, I will answer the second question, the ARPU question and then hand over to Cesar again. For the first question, so the development on the ARPU is a -- slightly decrease over the last period, and this has exactly to do with the second reason that you mentioned, we have very good success in the development of the business with wholesale partners. Wholesale partners very often are selling their own airtime, so they don't need our airtime that we offer. We are happy about this development. But of course, wholesale partners have less and generate less ARPU than the rest of our customers. And this is the reason. And indeed, you are also right, we have seen -- mainly in March and partly also in April, we have seen a peak, an increase in the airtime due to the very big lockdown all over the -- our customers and the economy, and this has partly also positively influenced the ARPU. The further ARPU development will depend, on the one side, on the success with the wholesale partners. And again, we are happy about this development. But also -- and you know, that's for sure, on the development on the additional premium solutions that we offer because these premium solutions, for instance, voice recording, contact center, et cetera, these premium solutions have a significant higher ARPU than the telephony solutions. And that's -- these are the main drivers and the main factors that have influenced here. And for the other question, I would like to hand over to César, please.

Thank you very much, Alina, for the question. The customer -- the big customer wins that we have seen in the first half year are not yet fully reflected in the numbers for 2 reasons. First of all, we did not win all of these big customers in January. So in the course of the second half -- sorry, in the course of the first half of the year, which means it's not fully reflected in this period. And the second is that not all of the big wins have been activated in full. There's a rollout happening with some of these, which takes time until it's then fully activated and, therefore, reflected in the numbers.

Okay. And how big are these customers in terms of seats?

A few thousands. [ We did not publish ] the full number, sorry.

Okay. But it's in a similar range in [indiscernible], I believe?

Yes.

Okay. And also I have a follow-up question on my question regarding ARPU. Could you give us an indication of how large the revenue share through wholesale partners is right now? And then also how are premium solutions developing right now?

Well, premium solutions are developing well. The ratio of the wholesale partner revenue, that is something that we do not publish Alina. Thank you for that question. But I would like to ask for your understanding that this -- we consider this as an important business secret. So we are not able to disclose that for the public but the -- we are really happy with the development here.

The next question comes from Stephane Beyazian from MainFirst.

One question, if I can, on EBITDA for the full year. Every year, I think, it has been the good surprise in the first half. But obviously, it's also related to the COVID situation. So I'm just wondering, how confident are you that you will be spending much more in second half? What I'm trying to understand here is how much it depends also on the COVID-19 situation or not? Or you're confident that you will be making the spending, and therefore, we might be returning to sort of a more negative EBITDA level because you will be looking for accelerated growth? So that's my, sort of, first question to understand the link with COVID in this one. And perhaps a second question in terms of products and innovation. I'm just wondering if there's anything you could say about future products that you could be releasing that could help the ARPU, for instance, targeting new industries with specific products. Anything you could say around this would be helpful. And if I may, last question. You mentioned that there are 15% of companies of the market that is in the cloud. I was just wondering if it's possible to have some sort of update for the German market. I know it's difficult to have timely update because it's a fragmented market, and you rely also on experts and doing studies. And -- but it'd be interesting if you have anything you could share with us on how fast the German market is sort of taking up cloud telephony?

Thank you, Stephane. I will answer the question with the EBITDA, and I will then hand over to my colleague, Jan-Peter Koopmann, for the innovation and the future of our product portfolio. And the last question about the cloud update for the German market, I will then hand over to César. So let me start with the EBITDA. You said that's a good surprise. And I say we like to surprise you in this way. So thank you very much for that. Indeed, as I commented, the EBITDA development shows a clear positive picture. And this has partly to do with COVID but also to do with big projects, big customers, good seat development, good recurring revenues development. So if we look at the full year, and that's your question, the main question that you have behind it, what we can say is that we will strongly continue to put growth as the first priority for our development. Profitability is the second priority, not the first one. So we expect to accelerate the spending in marketing activities, as I mentioned. And the more we are able to attract new customers to our technical infrastructure, the better it is for the profitability. But short term, we will focus on the growth as our 5 pillar strategy show, we will continue this past this growth path and consider growth as a clear first and most important priority. For the second question concerning the innovation, I would like to hand over to my colleague, Jan-Peter, please.

Thank you, Hans. Stephane, thank you for your questions. Hans already mentioned our 5 pillar strategy, and that is basically also a very good answer to your question. So in terms of innovation, what are we going to see in the next months and next year to come? We are going to focus or continue to focus on enhancing our product with UC capabilities. So you will see new video features, new collaboration features coming into our product. And one thing that we are going to concentrate quite a bit on in 2021, we already started this process, is further enhancing the capabilities of integration of our product into basically everything that is out there. So there are going to be more CTI features, and we are actively pursuing integrating our system into iPaaS systems, which would allow you, at a further stage, to include our system into your own offerings into your own CRM systems and so on and so on. Not all of that is going to be there in the beginning of 2021, but we are actively looking at this. This is a bit the answer to are we looking into special vertical solutions. We are currently not pursuing any specific target markets. What we are doing with this integration is basically opening up our solution for all kinds of businesses and all kinds of integrations. However, due to the nature of our product and what we can offer to our customers, we are naturally very interesting for, for example, retailers or insurances, and you have seen quite some success this year already, as mentioned before. So that is definitely a way that we are going to pursue further. I hope this answers your question, and I give it back, Hans.

And I give back to César.

Oh, I'm sorry.

That feels a bit like ping pong on here right now.

Yes. Call it ping pong.

Stephane, your question related to the penetration of a cloud telephony in Germany. And according to external studies as at the end of 2019 penetration in Germany, was at 6% and growing to 19% until 2024. So that's the cloud telephony market penetration that we see for Germany.

Ladies and gentlemen, at the moment, there seem to be no further questions. [Operator Instructions] And we have a next question from Gustav Froberg from Berenberg.

I have a couple of short ones. Just firstly on your recurring revenue guidance for the full year. I was wondering if you could talk us through how you're thinking about the second half and what some of the drivers might be for your recurring revenue growth in the second half versus the first half. Then I was wondering if you could tell us a little bit more about the growth initiatives that you're putting in place for the second half. Are you expecting this to influence growth in H2 already? Or do you think that this will be an influencing factor for 2021? And then finally, just a question on M&A as well. Could you maybe tell us a little bit about what you're thinking in terms of M&A? Are you still thinking about doing any acquisitions in the second half? Or are you happy developing on an organic basis for the time being?

Thank you very much, Gustav. I was wondering if you are in the conference and would put some questions. So thank you for that. Otherwise, I would be a little bit disappointed, if not. I will start and answer the first question regarding the recurring revenue and the third question regarding M&A and would like then to hand over to César again about the growth activities for the second half year. So the recurring revenue in the second half. We have seen recurring revenue about 28% in this first half. There is a small special effect due to the 2 months of the year 2020 in comparison with the year before due to the acquisition of Deutsche DTS, of Deutsche Telephone Standard. So that -- the full year effect for the recurring revenues should be, as we commented, between 22% and 26%. This may be a little bit conservative, but to be very open, we prefer to be a little bit conservative and, if possible, then to surprise positively than the other way around. So that's the reason why we confirmed the guidance that we have had, and we all know that there are uncertainties that remain in the market regarding the economical situation in Europe and also in the especially challenging -- in the southern part of Europe. So that's the reason why we confirm the guidance, knowing that we have had a 28% increase in the first half year. So we can be very confident to achieve the guidance for the recurring revenue and with an outcome between 22% and 26%. Let me also answer your third question looking at M&A activities. You know that the inorganic growth is integral part of our 5 pillar strategy. It is the fifth pillar. We will continue to grow also inorganically. So we are constantly with a small department that we have created for this proposal. We are constantly searching the market and having talks and discussions with potential targets to find out if there is something that would fit to NFON. And this is not only a question of price and of products, you know that, this is also a question of does the team fit to our culture. And we prefer to take some time here to be cautious here to be very sure then that the potential target fits them to all of our needs, culture, price, product portfolio, technical infrastructure and so on and so on. So I cannot tell you if we will do that in the second half year. What I can tell you is that it is a continuing part of our strategy, and that we will, for sure, do further acquisitions in the future. And with that, I would like to hand over for your second question to César again, please.

Thank you very much, Gustav, for your question regarding the growth initiatives in the second half of the year. Let me start by picking up what Hans said before on the marketing side. There will be an increase in spend -- strong increase in spend on the marketing side in the second half of the year, reflecting our ambition to grow further. As you are probably well aware of, marketing spend does not only have an immediate effect in the respective period you spend it, but also a bit after it. As one example, I would like to highlight the fact that we spent a lot of our marketing dollars to get new partners on board, and that materializes, obviously, slightly later. That brings me to a big second initiative on our side, which is the strong focus on the channel side. We clearly are further developing our overall partner landscape even broader. And we have seen already a broadening of our partner landscape, given all the Microsoft partners that have now joined our partner program, and we will further enhance all our partners as we have done in previous times, but growing our partner base beyond the 2,700 that you have seen in the figures before. It's also worthwhile mentioning that since we have now a strong usage of softphones highlighting the usage of our solution as a home -- ideal home office solution, teleworking, freelancer platform is a fantastic opportunity for us to create that message out in the market that it's great to use NFON in COVID times. So obviously, COVID, especially in our segment, small and medium enterprise market is still something that needs to be covered with the telephony solution. And they need a solution for all the home office workers, and that's where we come in, and we will still continue to write this way, which has an immediate effect in 2020. And again, the longer, let's say, impact of the initiative in the second half of this year on the channel side will be felt more in '21.

[Operator Instructions]

Well, ladies and gentlemen, may you have any further questions or need 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. We wish you a nice further day, stay healthy and until next time.

Thank you. Bye-bye.

Thank you, bye-bye.

Bye-bye.