NFON AG (NFN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to today's conference call regarding the preliminary results of 2020 of NFON AG. [Operator Instructions] Let me now turn the floor over to your host, Sabina Prüser. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and a very warm welcome also from my side to our call. My name is Sabina Prüser, I'm the Head of Investor Relations. Joining me today are Klaus Von Rottkay, our new CEO; Jan-Peter Koopmann, our CTO; and Petra Boss, our CFO. Klaus will present the preliminary results 2020 and the outlook for 2021 in a presentation. The presentation will last about 20 minutes. As always, there will be the opportunity to discuss your questions afterwards. But now with that, I turn over the floor to Klaus. Please, Klaus.

Thank you very much. Good morning. So it's my privilege to discuss the preliminary results of 2020 with you today. And maybe let's start where the -- what the company is about with the company mission, which is basically to lead the European cloud telephony market by really delivering freedom of business communication. That is something, I think, is not only a noble purpose but something that's absolutely relevant to where the market is and how much potential there is, which is also the reason why I joined NFON a little bit more than 3 months ago. And when we look at the market, Page 6, we see that there is a fundamental opportunity ahead. And I think that's why I wanted to point out that the opportunity has not only -- is not only as big as it used to be but it's greater than it has been, and especially also the pandemic has reinforced some of these trends. So while right now, 75% of employees worldwide consider flexible working to be normal, this is something that has really taken -- gotten a boost. And I think one of the important things to point out when you go to the -- look at the second column, that only about half of the companies, which is still a very significant number, want to implement remote working on a permanent basis. This is substantially lower than the number of employees who would like to do that. So that means that many, many companies, a, have the need for remote working; and b, there is an overlap of companies that have employees abroad but still have some employees that need to come to the office, and they have this heterogeneity of working environment which is something -- some complexity that NFON can really help and a lot of software companies cannot do that. And for that, it's really important to go down to the fundamentals of their communication setup, which is basically great news for NFON's customers because this is something we can really help them with. That number, I think, is known in terms of 84% of medium companies use telephony to contact their customers. It's 80% for small companies. So exactly in the core market where NFON is present, telephony is still the core communication channel. And while many large organizations basically use everything in terms of collaboration and communication, some smaller companies may be using that for interacting with customers or partners but less so internally because, in the past, they were just not used to it because maybe they have fewer sites, maybe just 1 office. But nowadays, working reality is just fundamentally different, and they will interact also with people working somewhere else. So the complexity of the overall market has increased. And again, this is something where technology can help and especially NFON's technology. So with a short view to the market, let's jump back to Page 4, where I'd give you a little insight on where we actually landed for 2020. Basically, the top line is that we landed within our guidance. Number of seats grew by 17% to about 525,000 now, and recurring revenue increased by 24%, which is right in the middle of our guidance, and the recurring revenue share was in the upper 1/3 of the guidance with 88%. I think the significance of these numbers is that this happened in 2020 where we all know business hasn't always been smooth, especially in the last 3 quarters of the year, so I think these are quite remarkable results on this end. Maybe let's go to Page 7 and look a little bit at the development of NFON in the past because I want to stress the milestone of reaching the 0.5 million seats during 2020 especially, just 3 years back, we were at 0.25 million, and we more than doubled the seats within these 3 years, which is a significant milestone. And combined with the large recurring revenue share we have, this is basically the fundamental growth of the business model we have in place and which enables us to look positively in the future for innovation and further growth that is to come. And this is considering our strong network of about 2,700 partners and additional technological capability, which we are expanding with, after having opened our R&D center in Lisbon at the end of last year. And this is actually putting us in a really good position to think high positively, which is also reflected by how analysts see us. If we look at the Frost Radar from summer 2020, on the European cloud telephony and UCaaS market, NFON placed in the upper right quadrant for high growth and high innovation together with a few other prominent market leaders. And we think this is putting us in the right position and thus earning us the right to do more of the same on this side. So let's look a little bit under the hood of the figures of 2020. And maybe because it's such a -- central to our business model, let me explain the revenues again, how they split up. We came out at EUR 68 million total revenues and 88% of recurring revenues, which is basically, on a high level, the number of seats we've sold plus the average revenue per seat, which is mostly the license fee -- the recurring license fee plus airtime, both for cloud PBX and premium solutions we sell; and the nonrecurring revenues, which not only consists of hardware but also activation fees for new seats which, for example, are substantially higher also for premium solutions, which also sometimes require professional services. So what I'm saying, this is -- nonrecurring is not at all bad, but the recurring number, obviously, is incisive because it sets the trajectory for future growth. And like, whatever we can do in terms of new seat growth, obviously, then comes on top. And whatever is onetime, we will have to repeat. And whatever is recurring, then it is something we obviously work on retaining these customers and making them more satisfied and committed customers and thus also giving us the opportunity for later upsell. When we look at the ARPU development in 2020, we see that we even slightly increased ARPU a little bit. That is due to the fact that actually call minutes increased quite a bit when people started to work more remotely after Q2 of 2020, which is also something that we expect might characterize the H1 of this year as still many of companies in the regions we operate work on a remote basis, with it not being absolutely clear when and how much this trend may reverse this year. Okay, a brief look at the next page, a brief look at development of recurring and nonrecurring revenues. As you see, strong growth of recurring revenues helped a little bit through an acquisition of DTS, like, still 2 months of those helped boost the 2020 numbers a little bit, but the rest was organic. But the nonrecurring revenue is somewhat lower than '19. There, obviously, were a little less hardware revenues as some customers might not have done the same investments as in the previous years or in terms of new installations across all industries. Obviously, some industries were hit or still having been hit a little bit more by the pandemic than others. So I think this is some of the signs you see which we are optimistic that this trend will actually reverse this year. When we look at the profitability, then we see that our EBITDA turned out to be quite positive in 2020, which basically proves that our business model can be very profitable if we want to. Obviously, we would have loved to invest a little bit more to accelerate growth of this year last year, but it simply wasn't a good time to invest in all the markets, for example, marketing, while the countries were somewhat in a pandemic paralysis. And many of our partners actually either had to let people go or work remotely and had trouble contacting as many customers. So I think the channel was just in a little bit of a slowdown mode which, in turn, made us be a little bit more conservative on spending of marketing and, in the beginning of the crisis, even on hiring some people, which is something that the mood has completely reversed. We are, and the management, absolutely convinced that we'll come out of this pandemic soon, whenever that might be. So the light at the end of the tunnel is shining bright, and we've decided to invest massively in 2021 to come out at full speed when all of our customers are ready to engage with us again, as many of them already are. So I think some of these positive EBITDA effects to 2020, we have to basically catch up in this year and reinvest in marketing and doubling down on some investments, which I will point out in a couple of minutes. What does it mean in terms of numbers that we expect for this year? As I said, like, since new business growth slowed down a little bit in the latter half of 2020 and possibly in the beginning of 2021, we expect the overall growth rate for '21 to be between 15% and 17% which, in turn, means, like, a steep growth of about up to 89,000 additional seats in '21. The recurring revenue growth, we are guiding, on an organic only basis, between 14% and 16%. And the share of recurring revenues will be in the order of 85%, so in the same order as last year, but we are a little bit more confident on new seat activations and also increasing premium solution sales, so it might be a little bit lower. But in that case, that would, in our opinion, be a good sign. So this is where we'll see the market going. Obviously, the uncertainty of guiding might be a little higher in the current situation as we are. But this is basically what we consider a realistic estimate, and we are obviously hopeful that some of the developments in the market might actually be a little better than we can see them now. And what are we doing for that to be prepared if that should happen? I'd like to discuss it maybe on the last slide and then take your questions. As we have learned, there's still plenty of potential for companies to derive more value from digitalization. And if anything, what has made it clear, it was -- has been the pandemic crisis. So I think this trend has been, long term, fundamentally strengthened. We have a leading technology platform to help customers derive those benefits, and we continue to evolve the platform further. We have a great setup across Europe where we can play a significant role in more mature markets and have rapid growth in markets where we are still a little bit newer and fundamentally exceed market growth in these areas. And by doing -- and to do so, we actually are betting on, like, 4 things. Like, one and most important one, we are heavily investing in product development. It's very important. We have a strong road map, which we're going to deliver for the next year or 2, but we want to be ready to load the additional innovation and the next additional growth into our road map and, therefore, recruiting technicians, be it developers, be it product managers, be it operational -- operations, quality assurance engineers, so a lot of technical staff to continue to build the foundation for future growth, we will do that across our existing sites, including our R&D center in Portugal. And we even keep our eyes open for additional technology that we might want to incorporate. We need to -- all of this will be super important for the long-term healthy growth of NFON, but it will not really hit the '21 top line because when we hire developers, they need to get ready to start developing products. So all of -- most of their contributions, I would say, will be seen rather in 2022, and maybe only in H2 of that year, but still important to make this -- set this direction now. What we do to influence more immediate growth opportunities, obviously, is to double down on our partner channel. We are investing in our partner channel. We want to attract new partners at an accelerated speed, and we want to make the existing partners even more successful and prosperous, working with NFON and helping to distribute the NFON solutions into the market. We need to invest more heavily into marketing to support our partners to be able to do that and to make our customers aware of the potential they can reap using NFON solutions. And a big part that we've also committed to is improving the support systems and tools we have because I think this will make it even easier for our partners and customers to do business with us. And this is also, I think, a good long-term investment to -- and a little bit paying respect to the size that we've grown to and making sure we have the platform to handle even more substantial growth over the coming years. And with that, I'd like to open it up for questions.

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

It's actually 3 I want to focus on. Klaus, thanks for the invest that you highlighted, and I think it makes sense, looking through the pandemic, trying to accelerate growth again. Can you share with us what your vision is of more -- a mid-term achievable growth rate in terms of seat growth that you think is realistic looking through the pandemic? That would be the first question. Then a question to Jan-Peter, can you shed some light on the areas of invest on the product side? So which areas will you spend the money? And you already gave a time line when you expect it to hit the revenue line, but I would like to get some more color here on the areas of invest. And the last question, you've got still a couple of smaller countries in your portfolio that are in early stages in terms of penetration of the market with your own solutions. Can you share with us your thoughts regarding your growth strategy in these countries? Do you think, apart from the organic angle, that it would also be an option to look for M&A to get a faster speed to market in these markets?

Okay. Great. Thank you. So let me take the first question in terms of seat growth. Obviously, we're not guiding seat growth beyond this year because as you -- and I don't want to make the answer too trivial, as you said, like, once the pandemic -- we are through that because I honestly -- I cannot predict exactly when that might happen. Anyone who has solid input on that, obviously, is welcome. But everything we do now in terms of investments in the partner channel plus the product road map, obviously, will influence the seat growth positively. And like, if we looked at the seat growth even in the pandemic, at least parts of those years that we delivered in 2020 and expect to deliver in '21, is in the order of 15% to 17%, which is quite sizable, like, deep double digits. And I think when the pandemic is gone, as I said, like the trends are -- the trend to digitalization has only strengthened, and we are making substantial investments of having more partners, better support to partners with better technology to sell. So I would say the management expectation is, obviously, that in the mid to long term, the potential is higher, growth potential is higher, than what we can see in the immediate future. Yes. And maybe JP, if you can take the product question, I think we'll come back to -- I can talk about the smaller countries right away, maybe that's technically easier. Yes, we have some more mature country representations and some newer additions to the NFON family. And we actually look in all those regions if there is -- like, how to grow best organically and if there's even good opportunities for inorganic growth. While I'd like to point out that I would say, at this stage, also where we are in terms of investment appetite, we look more towards -- when we look in inorganic growth, combine this rather with a technology area that would further strengthen our mid-term growth outlook also for the other countries. So we'd rather not just invest for one country's sake, but we'd like to also look for companies that develop something that we can then also leverage across the group, which is a more qualitative look at growth, inorganic growth, than just a quantitative number of seats as a way of growing.

Wonderful. So I'll take over. Knut, I hope you're feeling well. Your question was on investment on the product side. So as we've promised in the past months and also gave our press releases, a lot of the investment is evolving around video and unified communication. So we're going to see quite a bit on that during the year and all sorts of integration. Our integration, surely, is going to be, for example, CTI functionality that is going to come into our Cloudya product, something that partners and customers have long been waiting for. So we are going to fulfill that dream pretty soon now, everything looking good, but also in terms of APIs, APIs being also for the customers, but we are investing quite a bit in making the entire product, the entire onboarding process, more automatic, have a better and deeper integration with our partners, which is especially important for distribution channels and wholesale channels, for example, making things quite a lot faster and the entire experience nicer and faster and smoother. So a lot is evolving around customer centricity, user experience, things like this, so we are also investing heavily in our business support systems. So that's the back-end system, everything around billing, rating, which gives us the opportunity to also offer new product tariffs, new charge and new things like minutes tariffs and so on that people have been long waiting for and making these things easier. And we started heavily working on our service portal, which is going to make the entire administration tons easier and faster than we have it right now. So there are features like video unified communication or CTI, a lot on the integration front, API integrating even better with things like Teams but also, at some stage, later this next year, with a lot of CRM systems and so on, and tons of investment going into the entire partner network, into the user experience, into the onboarding process.

And just one quick follow-up to double check whether I understood the comments made correctly. Do you expect the reversal of the hardware sales in 2020? So are you expecting to deliver growth here again?

I believe, Klaus, this one is better answered by you.

In '21, yes. I think the -- I mean, as I said, like, it's a little hard to see when -- what the development with the pandemic will be, but we actually think that it will be somewhat above 2020 levels. But as I said, not all of the nonrecurring revenues will be hardware. There will also be other like activation fees and professional services in that. And there, we actually foresee even stronger growth than on the hardware side.

The next question comes from Stephane Beyazian from Stifel.

I've got 3 questions, if I can, one on ARPU, one on competition and one on distribution. Regarding ARPUs, I think if I'm not mistaken, the ARPU was pretty good in the fourth quarter. But your guidance is assuming some ARPU erosion in 2021. So I'm just curious whether -- what your implying there. Is it that you're cautious because of the macro? Is it a reverse effect of the COVID traffic benefits you saw in 2020? Or is it more contribution from the partners, which are potentially lower ARPUs? Second question on distribution of partners. How do you take more partners? Sorry to ask the question that simply. Are you looking to give away perhaps a better share of revenues to them? What is today their contribution to the new seats? I mean have we seen a little bit of, let's say, slowdown from your partners, and that's why you want to invest more with your partner channels? And my third question is, what can you say about the competitive environment in the past couple of months, especially with the different options that some customers can have between the cloud PBX solution or sometimes just moving to some more simple solutions like the Zoom and the Microsoft Teams? So I'd be curious to know how the market is moving and how competitors are doing.

Okay. Thank you, Stephane. So let me try to take the first one on the ARPU side. Yes, obviously, it's a little hard to predict what's going to happen in '21 with remote and distributed working over the course of the full year. But yes, we think there might be a somewhat -- maybe we will not see the same boost on voice minutes that we've seen in the latter half of 2020. At the same time, we think we see a little bit more -- when that happens, there will also be more like kind of, I would say, complex solution business, i.e., premium sales, premium solution sales, so which will then, in turn, increase the ARPU. So both of that is a little bit of a mix, what we see in there. But there, I would say, like, we have been, I would say -- yes, we didn't want to be too bullish on either side because it's a little bit hard to predict. But there are 2 competing trends we see. Plus, obviously, we sell -- our wholesale channel is growing quite nicely, and that also influences the ARPU. And in terms of distribution, sorry, I'm not -- basically, your question was exactly why we want to double down on the partner network because of how we see like...

I think, yes, it is more -- I mean my question is more are you going to share more of the revenues and tech to the partners in order to accelerate that? I mean what can you do to really get more distribution channels?

Yes. No, I understand. No, I mean I think there's fundamentally more we can do for our partners. We have a long standing and, I would say, close relationship with our partners. We have excellent partners we are really proud of. But we also get a lot of feedback from them what we can do even better. And we have committed in doing a lot of those things, what we can do better for our partners. One thing I mentioned, support systems. With that, we can make, basically, life for our partners easier, meaning like they spend less time on selling and installing our solutions. So make it easier for them. With that, we also would like to attract new partners which, obviously, if it's easier to make business with us, we'll also get more partners. And we support them through the entire life cycle, so basically ramp up training through the sales cycle and support and across the entire partner life cycle. We can do better. And with that, they will, for sure, also increase their business with us. So I think there's quite a bit we can do more, and we have the plans and are executing on those. Even -- yes, so I don't think it's purely -- it's not about sharing more revenues or commissions because I think they are, I would say, quite generous if the partners actually manage to do a lot of business on those. And I think the second latter -- second part of that is something we're working on. And the competitive environment, you said, like, what can we say about it. Obviously, I would say it's very intense. Yes, I could say it's heating up, but I think it was hot before. So I think it's somewhat -- I don't know how good of a relative statement it is, but since you pointed out some of the competitors with Zoom and Teams, who are the apparent winners, if you can use that word, from the crisis is, obviously, many employees easily could download like a software solution that they could just run over the web to connect with some of their colleagues or partners. And that, I think, is why that has seen a special boost in the last half year. But many companies, or most companies, have actually a heterogeneous work environment that doesn't only consist of white-collar office workers. So actually, they cannot just rely on some OTT service, and they have a more complex communication setup. And with that, I think a real unified communication solution looks more complex to that and has to take telephony into account. And this is something where we can help them. Obviously, some companies didn't default to that in the first instance of, whatever, saving -- keeping the business afloat during the pandemic, but this is something they have to work on midterm anyway because they cannot or don't want to live with separate and disjunct communication setups. That's also part of the reason why we came up with the integration to MS Teams to make sure that we can help our customers, if they run Teams, to run NFON solutions in parallel, which obviously meets a great interest of those customers who have standardized on Teams. On the other hand, some of our customers are even smaller and have not and are looking for a simple solution in order to be productive every day.

We have another question from Gustav Froberg from Berenberg.

I just have 2, if I may. The first one is just on the magnitude of investments that you're looking to do in 2021, 2022. I know that you're not explicitly guiding on EBITDA, but if you could help us with just any color on the scale of investments you're thinking about and also the relative split of money allocated to R&D investments versus marketing investments would be very helpful. That's my first question. Second is just with reference to some of your new countries and taking more of, I guess, midterm view, I was wondering if you could help us with your view on NFON's, I guess, potential market share in the coming years. So out to maybe 2025 or so, what do you think is an attainable level of market share in your new countries?

Okay. All right. Let's start with the easy one. That's the investments. Yes, you're right, obviously, we don't guide on those numbers. But we are thinking -- in the management, we are quite convinced that we need to be aggressive on that. And if we want to deliver a massive growth, which we want to, then we have to also invest properly. So therefore, I think we are quite bullish. And we will not just increase from the level of 2020 on a small relative basis as in the previous years, but we will rather look back to 2019 and assume that we increase our investments also through 2020 and increase those more. So we will, like, think really big picture on that one. So that's why we will not be shy if we see the return from those investment activities. And I would say the split, monetary-wise, between R&D and sales, without saying too much because there are different ways to calculate it, is probably going to be even with some of those, obviously, working short term, like in sales and marketing, you may rather have 6 months to a year payback whereas, on R&D, you probably have more, like, 18 to 24 months payback on those. So I think just to give you a little bit of a flavor on those. And in terms of NFON market share, I actually really don't know what to say because also, we haven't really looked at a reliable set of market share data in some of the countries we operate. Happy to do so, and if you can help with that. But yes, I mean, obviously, in all the areas we operate, we are working on substantial and overproportional growth and -- but as I said, like, we plan on an organic-only basis which then, with our recurring business model, will, of course, take years to come up to a decent size. And we look at every market individually how that is panning out. And yes, I think that's probably all I can say at this point.

[Operator Instructions]

Ladies and gentlemen, it seems you will, for now, not have any further question. May you have any further questions or need for more information following this conference, please do not hesitate to contact me. The fully audited report for financial year 2020 will be published on Thursday, 15 April 2021. On the same day, just to inform you, our Capital Markets Day will also take place to which we naturally cordially invite you. 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, bye-bye.

Thank you. Bye.