NFON AG (NFN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. On behalf of [ Montega ], welcome to the NFON AG earnings call regarding the half year figures of 2022. Thank you very much for your interest in joining the call. We are further delighted to welcome the CEO, Dr. Klaus Rottkay; and the CFO, Petra Boss; as well as the Head of Investor Relations, Sabina Prüser who will give you a presentation on the financials in a moment. The floor will be open for upcoming questions following the presentation. Let me now hand over to you, Mr. Rottkay.

Okay. Well, good morning, everyone, from my side as I'm in the U.S. right now. Obviously, good afternoon everyone else. Thank you very much for dialing in. Yes, let me just reflect a little bit on the last 6 months about our financial performance, and I'll give you an overview of where NFON has come, where the overall market stands right now and what has basically happened over the last half year. And then Petra is going to go through the financial results. And we'll conclude obviously, with the outlook. Sabina, if I may ask you to advance the presentation. All right. As always, let's start of where we're heading. We want to become the leading provider of integrated business communication in Europe. It actually has become even more important now to understand what we mean with integrated business communication, and I'll spend a little bit more time on that. Actually, there is even like market research coming in now that companies are increasingly looking to innovate, especially on that integrated component of business communication, but more to that in a second. A quick look at the numbers. As you know, we have passed the really, really important threshold of 600,000 extensions being managed and run from our data centers. It's a really, really big and important milestone. But more importantly, also the milestones underneath that we've achieved in H1, we have completed our product portfolio in a very important manner by having now a really full-blown UCaaS and CCaaS, unified communication and contact center, as a service solution in the market. The latter was possible by the partnership with our Czech partner company, Daktela. This is now in the market, and it's been positively received. We concluded another major wholesale partnership that we signed in Q2, which is going to become operational some time in Q4. More to that later, but it's important that we continue the journey and take off some of those really important milestones. And in overall seat growth, obviously, we also gave the guidance last time ahead that we had one big account churning in Q2, which you see basically is one of a little dip in the overall growth numbers. But more to that later. So let's take a step back in what's happening with the market. As I said, like market research says that now companies are increasingly going from individual cloud investments to enterprise-wide cloud strategies. So for us, it means that the strategy shift we've taken from cloud PBX to integrated business communication is actually very timely, because it's not just about replacing a point solution, although a very important one in the overall portfolio of our customers, but also innovate the entire software telco workings of a company, with the obvious benefits that brings in terms of much higher agility, less CapEx needed for that and the possibility to further digitize and automate integrated workflows within the company. And for that, we have built out our Cloudya platform and have now an offering in the market that customers can use for that. And obviously, there's a lot more work to be done. But for that, we have increased our technical staff and can deliver on the product roadmap now. So the important part is what you have to remember is communication technologies, together with business applications, that is basically the field of integrated business communications where NFON is playing. And somehow, to understand kind of a little bit in the situation of the development where we are. Now, we've done significant progress in actually delivering the road map according our mission. That has been mostly, you would say, like mostly launched between Q4 of last year and Q1 beginning Q2 this year. We also announced that we'll increasingly enter the enterprise segment and, therefore, increase our partner and customer base also on that side, like with accounts larger than 250 seats. This is something that shows steady progress. Some of it will be seen later at a later stage because the bigger the win, the longer the deployment. We have some individual examples of large wins that actually we've won in our end of Q1 then will take 3 years to deploy. Obviously, though, this is also not a short-term strategy, but a long-term strategy that's also helped by our product road map. And I just want to be clear that this is something that will take until the end of '24 until this journey is basically up to full speed that we envision now. Overall, I think what's really changed in the last quarter is overall market sentiment in most markets we operate in. But most certainly in Germany, the Ukraine crisis, followed by obviously a rising energy costs and leading to overall higher inflation, has led to many sales cycles becoming longer and longer. Customers may not change their mind on their investments, but they prioritize them more carefully and sometimes just postpone them a little bit. We've seen this especially like in the mid-market, where I would say like there has been steady growth but it hasn't accelerated versus the pandemic months, but rather actually slowed down in Q2 for a bit. We hope, obviously, once companies get more comfortable with that, will becoming a little bit more -- it's like more of a steady pace. But the overall economic forecasts are obviously somewhat dire. For that, we have actually said like, okay, but the good thing is we have -- kind of like we are actually now reaching the peak of the planned investment wave. We told last year that we especially have to increase technical resources to deliver a product road map. Now that has basically been accomplished. We had to kind of like reposition ourselves with the complete product portfolio and the rebranding has now also been finished in Q2. And we said like we would only invest that much marketing where there is profitable -- the ROI for profitable growth is very good. When the market is slowing down, it gives us the opportunity to like tailor the investments to the level of growth and that will actually increase in higher profitability, which is also something at the last quarterly results I already mentioned, that we want to be EBITDA breakeven in 2023 going forward. And obviously, this is like now a clear priority and it works basically nicely with the investment wave rhythm that we had planned. And we are basically now entering the next phase. Quick view on the product portfolio. As I had mentioned it, we start coming from cloud PBX. We have continuously improved our offering on that side. We have a full UCaaS offering now as of this last half year. We have complemented it now with a really competitive customer contact solution. And we have now, with CRM Connect Plus, and also an important new element of integrating our communication platform with business applications. More of that to come, but at least now, really, the corner elements of our integrated business communication strategies are in place. And this is something we can work with. And with the resources we have on hand now, we can continue to develop the road map as planned and don't need to plan another big investment wave, but this is something we have going for now right now. All right. A quick look at the development of our partnership. This is the pan-European landscape we're playing on. Obviously, like a big majority geographies where we play is Germany, Austria and U.K. But we are present in many other European countries, be it through own sales offices, be it through partners. This has also -- this footprint has helped us quite a bit supporting international customers and having a value proposition for internationally-minded larger partners and gives us the opportunity to develop those partnerships also beyond relationships in one country. So there's a steady progress after we rolled out our new partner program and this is obviously never stopping. We will continue to acquire new partners and have done so already in H1, which we'll also see continued momentum going forward. On the customer side, the same. We continue to develop our customer base. We have now almost to 50,000 business customers receiving their cloud services through our technology and our data centers. It gives us the opportunity, obviously, to address this customer base with our new premium solutions. And as I said, it's very early since we only launched in Q2, but we are slightly ahead of plan on our premium solutions, including our contact center services. This is obviously a longer sales cycle that we need. There's more professional services involved because the solution has to be really custom-fit into the environment of the customer. But we see some positive momentum there and feel like this is a good start for the development over the next 2 years. And as we mentioned before, some of those larger accounts, we can actually conquer with those and will actually plan in multi-year development cycles. But it's important to get the first foot in the door and then continue the good work. Why don't we take a look at the numbers, and I'll hand over to Petra.

Thank you, Klaus, and good afternoon to everyone. Yes, we want to look at the numbers and reflect on them. And as you can see, the seat growth is 9.4%, which might be fall a little bit behind of the expectations of most of you. But this first half year was burdened by some factors, like we had to digest the departure of quite big customer, a public sector one in the U.K., and we were not able to win the public tender again due to the change of requirements. But this was already 2 years ago, though we have been quite happy to have the customer longer than we expected to. But now is the time that the customer migrated. And on the other hand, as Klaus said, the overall economical capital situation made our customers to don't take decisions very quickly. They are very hesitant. And they are not -- we are growing out of our customer base. And when our customers don't grow that much, we don't grow on this side. But we are very optimistic that we have more seat wins and better seat growth in the second half as we already anticipated to be so in the budget. Like we said that Q3, especially Q4, we hope -- we intend to have more seat wins. And we have a quite promising pipeline with large customers, which always have a relatively long sales cycle but we want to harvest in Q4. So we are still quite confident that we are able to reach our guidance but more on the lower end of it and Klaus will say some words to that later on. And when we have a look at the ARPU, because it's the basis for the next slide. Now, could you please stay on slide, Sabina. Thank you. Then you see a quite special effect in the first half of last year that we have been able to reach an ARPU about EUR 10, which normally we are around about EUR 9.80. The full year last year was EUR 9.84. So it's a really special effect of the first half which was due to corona that we had more voice traffic -- significantly more voice traffic in spring last year and this was not the situation this year. So we have lower ARPU in the first half of the year, but it's still on the level of last full year and above previous period. So we are not worried in any way that we have been decreasing ARPU. We do some price increases for our products which we already did in the end of the last half year, but we have 6 months effect in the next half. So when we look at the next slide, you see the recurring revenues, as a result of everything I said before grew, only by 8.6%. But here we are, due to the same reasons, optimistic that we will stay in our guidance and be slightly above 10%. It's like -- as I said, the ARPU is one of the main reasons that we have not received a very big growth in the first half year. And -- but we have a very high share of recurring revenues. So we have now reached a percentage above 90%, which is very important for us because the recurring revenues are the ones with the high margin. And so they are the basis for future revenues. Next slide, please. So here, you can see that the gross margin is as well constantly increasing. It's a result of our very high share of recurring revenues. As I said, they are the ones with the higher margin. And same as with the ratio of the cost of material. It's even lower because the nonrecurring revenues have been a little bit lower and they are the ones with low margin and the high cost of materials. So you can see, as Klaus already said, that we -- our strategic way was to have an increase in the headcount last year. And now we have the full year effect. And as a consequence, we have a higher ratio of total expenses compared to the revenues. But this is only an intermediate effect for a short period of time because, from now on, we try to get into a phase of scaling. And we will have a lower margin compared to the last period. Next year and in the future midterm will get below this ratio. So we had quite significant marketing expenses in the first half of the year. This is due to the rollout of new partner program and the repositioning of the NFON brand. And we will slow down on that, we're scaling as well. And we -- in the second half, the marketing expenses will be lower than the first half. So selling costs and sales commissions, we had an increase from 12.6%, which is not perfectly in line with increase of the revenues. But there are various effects on the -- mostly regarding the channelship. So when we have less direct channel, then we have more sales commissions. But in the future, we expect more wholesale business, which -- and they don't have sales commissions as well. We don't have to pay sales commissions in this area, so it's not a constant development in the next future. So as Klaus said, we have a clear focus on profitability and want to step into the phase of where we really scale on costs and reduce investments, but the first half year was still a period of investment regarding marketing and full year effect of personnel costs. So we have an EBITDA of minus 4.1 million and adjusted EUR 1.5 million, but still, definitely, our goal to be breakeven next year and positive from then on. And with that, I hand over to Klaus again.

Okay. Sure. Then let me just reiterate the guidance for '22. We confirm the guidance gave in terms of number of extensions growing at the end of our customer base the end of the year, between 10%, 12%. Although, given the current economic climate, we think it would rather be -- we probably be rather at the lower end of this. Likewise for the recurring revenues where we confirm our guidance range, but I think might be rather at the lower end of this on the recurring revenues. We confirm that we anticipate to be above 88%. And as I said, like right now, obviously, it's -- we are significantly above that and we're also confident that we will be within this guidance by the end of the year. So let me summarize again, kind of like what we think we have going for NFON. We are a leading player, and especially in the DACH region, the #1 player, in the integrated business communication market. Obviously, from a traditional focus for SMEs, we continuously grow towards mid-tier enterprises. And considering where customers are going in their investment priorities, we think we are really well positioned to benefit from that. Made in Europe is a claim that cannot be overstated enough as an important characteristic that we have for our customers. As you know, there have been recent like rules in the public sector area in Germany where like U.S. players, even with German data centers, may not be eligible for certain -- for certain tenders. So I think it's -- in our more local world today, it's an important factor and many of our customers and partners appreciate our German engineering hosted in Germany and also in other European neighbor countries. We have a good track record of double-digit growth. Although right now, with H1 being a little bit weaker, we have a clear strategy in place to continue grow that again. And with increasing possibilities on new partners, new customer segments and new products, we see that we have multiple ways to achieve that. And we should never forget that as we provide a really mission-critical service to our customers, our churn is traditionally extremely low. And therefore, we have a very robust and stable business model we can build on and with the largest network of European channel partners who are loyal to us and who actually have good ideas of how to increase their business betting on NFON. Thank you very much. I think with that, we'll probably go to the Q&A, if I'm correct.

Thank you very much for the presentation, first of all. We will indeed continue with the Q&A session. We already received some questions via the chat, feel free to do so. [Operator Instructions] We will start with the question from Knut Woller. Please go ahead.

Yes. It's actually, the first one more from a short-term perspective, to Petra. Petra, did I get your comment regarding the scale back on invest accurately, that the EBITDA in the second half should be better than in H1? And then overall, on the topic of profitability, it seems to be kind of a paradigm shift from NFON and I want to get a better feeling what that means then going forward. Looking at your focus now on profitability, is it fair to assume that growth going forward is likely to be a bit lower than the years prior to the pandemic and, therefore, profitability is now going to be scaled up? Is that the right way to think at it? And also to get here an understanding in terms of the cash flow, should we also expect a cutback in terms of capitalization in the coming years versus what you're saying that the peak of invest is behind. And lastly, just a technical question. Can you share with us what the seat loss from the U.K. public sector customer was?

All right. Petra, maybe I start with whatever I understood and you take the -- whatever I missed, and please help me. So understand the shift to question is, is there a paradigm shift here to profitability? I wouldn't say not completely. Maybe like if you go a couple of years back, where it's basically just growth and we don't -- we don't -- we will be profitable at some time in the future. Obviously, a business model, especially a scaling SaaS model, should scale at some point. I've been repeating this since I've been with the company. And we feel there's only -- you should invest as much as to maximize ROI on the profitability, but not more. So I think this is making -- and we've basically implemented our strategy and there's no need to acutely invest more. And profitability will ensue because revenues keep growing and we don't have to like go so hard after the additional market growth which may not be there right now. So actually, it will automatically shift into a higher profitability mode. But as I said, like it's been a plan all along. At some point, all of the investments need to bear fruit. And now it's a good time after we have the things in place that we need to deliver our growth. So in terms of H2 comment, I think EBITDA H2 comment, I'll hand over to Petra.

This one will be more profitable, definitely. And regarding the capitalization, we expect the capitalization on a more stable level because we have now a certain amount of technical guys making the development and we won't increase, but we won't decrease the number of staff there. So -- and we expect a certain level of constant development cost we can activate and we'll capitalize in the future years.

And I think there was another question on the U.K. account which I remember. That was basically a public sector account that ran -- basically had been a long NFON customer that ran a second tender about 2 years ago or something, that was even before my days. And back then, we didn't have the product to fulfill all those requirements of the tender and didn't win. And then kind of decided they didn't want to move on -- move off our platform and kind of like dragged it out as much as they could until they were legally required for us to turn them off actually and that happened some time in Q2. And I think it was about 4,000 to 5,000 seats as an order of magnitude. But as I said, like this is a little bit cleaning up history of the past.

We are now hearing the questions from Stéphane Beyazian.

Can you hear me?

Yes. We can.

Yes.

It's very useful, and I've got 2 questions. I'd like to follow up on the previous one. I just want to try to bridge the lower customer addition in the second quarter versus the first quarter and which are down by 15,000. I think you made clear that the customer losses is about 1/3 of that. But you also mentioned 2 other factors, I think the repositioning and perhaps the rebranding and also the slower economic climate. So I'm just wondering whether you could perhaps help me guess between these 2 factors and also with the customer loss, try to help me understand, by order, which one has been the most important, you think, in the customer addition in the second quarter and whether you think that was, again, bottom and you should hopefully do a little bit better in the second half. And the second question I have, if that is possible, is regarding capital expenditures which I can see are a little higher in the first half versus last year. So I was just wondering whether we could just double that to have an estimate of the full year, which would then be around EUR 10 million, and including tangible and intangible, by the way, in the overall calculation. So are you going to run at much higher CapEx levels going forward? Or there are just some one-off payments that you've been making?

All right. I think I'll take the first one was basically what is the decisive factor for slowed down customer additions? Is it the one basically a big churned account? Is it overall market sentiment? I would say, in Q2, obviously, both played an important role, but that customer churn, I think that was a onetime effect. Also we have no visibility for that. We had quite long time -- long-term visibility. We have no visibility of any other large customer that's like endangered for H2. And we have, in terms of market environment, yes, we've seen that especially in the mass market. So basically, our dealer channel has struggled a little bit in terms of just single-digit growth rates on their own. So that definitely was a decisive factor. And considering -- I mean we're already in mid-Q3, and when you open the newspapers, I think the market sentiment definitely hasn't improved. So I think this is something, obviously, on top of that onetime churn, there is some significant market momentum slowing down. Obviously, as I said, like even though the economic outlook might not be great, many customers who will learn how to adjust that and they will not postpone important cloud investments forever. It's usually other things that they save money on. So I'm actually confident that we will be living quite nicely also in a somewhat like a more difficult economic climate Q4 and thereon. Yes. And I think, Petra, there was a question on the CapEx side.

Okay. Regarding the CapEx, to say, it's like, will be the second half more or less like in the first half? Whether it will be lower in the upcoming years as right now we are developing [indiscernible] system, which is a system which should support most of our business processes and make the order to cash process, for example, more efficient. And there, we have now -- we go full throttle with this project. But we still have some activations next year for that, but with a lower -- to a lower rate. And so the upcoming years will have lower CapEx. And we invested in this year and last year a lot into the data center, et cetera. And there, we will be able to lower the investments in the upcoming years as well.

That's useful. And Klaus, please, if I may, just follow up. I'm trying to understand one thing that, because you did also the rebranding and the repositioning in the second quarter or at the end of the first quarter and between the second quarter, did you decide to do that after starting to see that potentially the market was becoming more difficult? Or could this decision potentially also had an impact on your customer addition in the second quarter. And sorry, just to follow up a little bit, how do your partners react overall with your rebranding and the repositioning?

Okay. First of all, I'm glad now we -- basically, we -- it was a logical decision to do the rebranding when complementing the product portfolio and it was a decision we had done a long time ago. Obviously, you could always say like, does it make sense to do in the moment when the market is slowing? I would say, in this case, yes, because it's very important for us to especially illustrate a new way we go forward when we also win new partners to have that. And while it's I think it had 0 impact on -- it's like mass customer acquisition in SME and certainly not a negative one. It really has helped us positively with conversations with new partners and especially large partnerships. I mentioned 1&1 Versatel. As I said, like this is going to come -- become productive only some time in Q4. This is -- it really helps for that. And also major partnerships, even existing partnerships, it's very important for them to understand what strategy we go and how we differentiate against hyper scalers and has been very positively received. So I think the same as in our kind of like enterprise strategy, where like the contracting takes place a lot before actually the seats are being activated. So I think, for this, it was the right investment at the right time and the payback will be multiyear going forward.

Thank you for your questions. We continue with the questions from Philipp Sennewald.

Guys, some follow-ups to the questions from my colleagues. I would like to put the view a bit more midterm. You mentioned that the investment cycle is now over at least next year. When I look at consensus, I see analysts expecting profitability on EBITDA level at like 2025. After your presentation now, can I assume that to come earlier? And second question, regarding your growth prospects, you mentioned cross and upselling potential in your product portfolio. How much of your growth is expected to come from existing customers?

So did I understand the first question correctly? Is it like, if we become EBITDA profitable before 2025? Yes, for sure, like '23 that is our internal goal. And going forward, it's not a onetime thing. So -- but we will be EBITDA profitable '23 plus. On the cross and upsell, we usually have a pretty -- we look at it, how much of the growth comes from new customers versus existing customers? And usually, I have those numbers ready. Unfortunately, I've had fever for a week because I have COVID, and I can -- I think I lost the data point. But I think is it about -- how much is it?

I think a rough estimate would be 2/3...

I think 2/3, 1/3, yes. 2/3 new customers, 1/3 existing customers.

It varies over the time. But it's a rough estimation you can live with, I think.