NFON AG (NFN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. On behalf of Montega, welcome to the NFON Earnings Call regarding the preliminary fiscal figures of the financial year 2022. Let me now hand over the floor to the Head of Investor Relations, Sabina Pruser for the presentation and the presentation of the Board.

Thank you, Ms. Schilling. Good morning, ladies and gentlemen, also from my side and a very warm welcome to our call today. My name is, as Ms. Schilling said, Sabina Pruser. Joining me today are my colleagues, Klaus von Rottkay, our CEO; and Petra Boss, our CFO. Klaus and Petra will present the preliminary results for 2022 and the outlook for 2023. The presentation will last about 20 minutes. As always, there will be an opportunity to discuss your questions afterwards. With that, I hand over to my colleague, Klaus. Klaus, please?

All right. Then good morning from side, welcome, and I'll ask Petra to lead you through the financials, and I will then go into details on the outlook.

So good morning, ladies and gentlemen. Let's shed some light on the last year's figure. As we all know, last year was not an easy one economically and was characterized by many uncertainties. In this environment and however, NFON was able to confirm its growth path and keep earnings constant. Even though we had initially set ourselves higher targets, we are not dissatisfied with the past year. Overall our revenue increased by 6.5% year-over-year and we were able to increase recurring revenues by 8.3%. This means that we are able to achieve our updated guidance, which is good news for us. As in previous years, non-recurring revenues made a relevant contribution to our revenues. But with a decline of 9%, we were unable to match last year's results. And -- but our business model is of course based on the growth of recurring revenues and [ seat ] as a basis for future revenues. And here, we were able to achieve an all-time high of 91%. With a growth of 8%, we also achieved the guidance for our seat base and here at the upper end of the prognosed corridor. The figure reflects the weakening growth in the overall Cloud PBX market. While growth figures of over 15% were expected in recent years, this has not been confirmed in this way, neither for the past year nor for the medium-term future. For example, Cavell now assumes market growth of around 9%. So it's substantially lower than the 15% estimated before. In addition, the lower relative growth is also an indicator that we are now growing on a very large seat base of more than 600,000 seats. And this is naturally that it's more difficult to achieve major leaps here than on a small base. The very large seat base is supported by the constant low churn and still about to take 6% per year. And here, we have not observed any negative effect from economic terminals. So we have not observed that more customers went bankrupt or something like that. And it's still a very stable seat base. When we have a look at the ARPU, we see that it's slightly lower than last year figures. But the year '21, as you all know, was positively influenced by high voice minute revenues due to lockdown whilst Corona pandemic. So in this respect, ARPU in '22 decreased slightly compared to previous year, but is still slightly higher than pre-pandemic. So when we look at 2019, we had EUR 9.64 ARPU and so we are still very stable in this area. And as you know, the ARPU is influenced by many factors like how much business do we make with wholesale partners because wholesale partners have lower prices for each seat, months for -- each month. So it's dependent on how many voice minutes people use and -- on the other hand, it's positively influenced by the premium solution we additionally sell and by the price adjustments we make. So we made some price adjustments already and could stabilize the ARPU via that and we will continue to increase the prices as we have an inflation on cost side as well, though to keep the gross profit stable, we have to do that and customer understands that we have to do it because of the [indiscernible]. So in total, ARPU remains very stable, which is very important for us. And it is -- in addition to the seat base, our second pillar for future revenues. When we look at the EBITDA, we see that the EBITDA lowered from EUR 2 million to minus EUR 5.4 million. But I think due to the fact that we had some one-off effects last year. But they will not impact the current year and they do not stem from last year's operating business. So that's the reason why we adjust them. And when you look at the adjusted EBITDA, you see that we are even slightly better than last year. And for this [indiscernible] will affect balance each other out. It's like we were able to achieve higher revenues and thus higher gross profit. But on the other hand, we have an some full year effect on the cost side because we hired last year due to our strategy some more people and we have higher personnel costs. But we already in the second half of last year, we made some measures to be more efficient and to lower the cost. And therefore, we -- that's the basis for being able -- to profitable growth next year and to achieve scaling effects from now on. And with that, let's have a look on the financial results summary and compare to the guidance. So we reached all our targets since the number of seats was 8% and the recurring revenues was 8.3%. We are in our corridor and we slightly overachieved our recurring revenue share, as I mentioned, it was 91.1%. With that, I hand over to Klaus.

Thank you, Petra. Yes. Now let's look ahead. What hasn't changed is the -- our final goal, where we want to be, is to become the leading provider of integrated business communication in Europe. And let's see how the market has developed there and what our strategy is to get there. Overall, obviously, our overall targets are -- that will be, as I will guide later on. And 3 main pillars that our strategy is based on to reach those targets is to achieve additional growth through products. It doesn't mean necessarily owning new products, but just product-driven growth that we have the right offers for the right segments and that we continue to build out our strength in a channel and create a truly best-in-class channel business. At the same time that we accelerate especially long-term growth through further strategic partnerships and alliances, but also just keeping the ones that we have started already in the previous year and ramping those up and making those productive. All right. So overall, the market. Historically, we have -- our company was founded about 15 years ago with the main goal to move the traditional on-premise PBX into the cloud. And this still remains a major part of the market and especially in the geographies where we are operating with a focus on Germany, there's huge untapped potential. So this is some cloud transformation that's taking place really, really slowly, especially when I compare it to the cloud transformation in the IT space. But in fact, that's actually good news for NFON because there's lots of potential. On Unified Communications side, that's the market that actually got the major boost through the pandemic lockdowns, where now remote working, hybrid working and online collaboration are just main parts of doing business. However, obviously, with the consequence of post pandemic, the growth has slowed down a little bit and where we want to go and where we see, obviously, the first markets of forming is Integrated Business Communication, where it's really mostly about integrating telco solutions with IT in order to support business processes and support -- making the work of our end customers fluid. All right. Overall, this is not a direct translation of the previous buckets, but let's still look at it. The Cloud PBX market is still a massive one, especially in our geographies, those are European numbers and supposed to grow at least over the midterm substantially. The UCaaS market is a very large one, but as I said, like growth has slowed down a bit. And we see actually a really good growth potential in the currently still smaller Customer Contact as a Service market where we also are ramping up our efforts. So overall, we see that the attractiveness of the market overall is stable in the long term. There are a lot of changes underneath, but the fundamental customer needs in these areas is still large, remains large and will even grow. So overall, we estimate an addressable market of about EUR 11 billion in Europe. We are, especially, I would say, like in the more traditional geographies of Europe strongly positioned in SME and low- to mid-tier enterprise. And obviously, the large untapped potential in the DACH space is something that we want to deliver into the cloud. And so therefore, we see a lot of potential there, whereas with [ Select], there was over time, strong focus on the UCaaS market. We now want to strengthen our efforts both on the Integrated Business Communications side and launching -- continuing to launch our second Contact Center as a Service solution but also focus on the core needs of many customers out there still having the transition to the cloud from a PBX point of view ahead of them. All right. So let's look a little bit what do we mean with scaling growth via products. Overall, the rationale is that the core market is still -- stably growing, but becoming more mature, obviously requiring a more precise positioning. We have a very strong positioning in the Cloud PBX since it's our heritage. We were born in the cloud and have had many, many years to hone this, and we are continuing to build this out, especially with a focus on the user experience, both on end customer and on partner side and delivering features required also for larger enterprises. This is obviously not new. We told you this for about a little bit more than a year now. And our road map that basically supports this is -- takes until the end of '24 but we are making steady progress in this -- the numbers and the market feedback actually proves this is the right direction. Then if you want to be an Integrated Business Communication player, it's good to have integrations, which we do and obviously we continue to increase those. We have been one of the leading integration solutions for Microsoft Teams through our direct routing solution and we'll be happy to announce very shortly to join the Microsoft Operator Connect program that enables Teams users to use voice over the PSTN network and we have further innovations in -- on the road map for the middle part of this year around integrating Microsoft Teams and voice-enabling Microsoft Teams customers, which is, as I said many times, still the dominant trend, I would say, in the market taking place today. And then as I mentioned, we launched our Contact Center Solution through our Czech partner, Daktela, pretty much a year ago, I think it was April '22 and have had a good progress in most of our geographies, and this continues to be resonating well in the market which has happened to have the Contact Center World in Berlin about 2 weeks ago, with very positive customer feedback and the pipeline is growing. Obviously, this is solution sales with a long sales cycle, but we feel that there's strong customer demand and a strong rationale to grow this further and also integrations for this site. Obviously, one of the leading -- leading necessities in order to integrate it well with the customer progress -- sorry, customer processes when it comes to their end customer interactions. On the channel side, we are obviously proud to be a very strongly committed and focused channel player, which is important also for the channel to know and that's how they know NFON. We have a strong focus on increasing the number of active partners. So really just we have a large set of partners, who occasionally trade but we want to focus on the number of partners, who are actively driving business with us, since there's just a lot of more economies of process to be achieved with those. And we support this through building out our partner program that we have in place called NGAGE with different elements, having a strong partner relationship management platform, delivering training materials to partners on that. So this is something we continuously build out. And on the road map -- on the admin side of things, we will deliver additional innovations and enhance user experience to our partners later on. And last but not least, we need to build out the relationships with large players in the Integrated Business Communications market. I'm glad to announce that after -- I think one we did, we closed it about April or May last year. We closed a partnership with 1&1 Versatel. We passed the final quality gate in February that now basically leads to active selling and marketing on their side with a good ramp-up of activities. We all know this is going to be a long-term engagement to ramp up this partnership, but we are super thrilled that this is now complementing other important partnerships we have in the market with 2 in Germany, 2 of the -- 2 more large operators and complementing this with additional partnerships with on the IT side or on even the distribution side. We continuously evaluate where we can take in additional products through tech partnerships or, let's say, enhance our existing products with partner solutions and that's something we have done traditionally, but we have a couple of things, more things that we are evaluating. And although right now may not be the prime time for M&A as it is evidenced in the market, this will come back in the -- I would think in the midterm. And we obviously still check for selective opportunities to scale existing businesses or enhance our long-term product portfolio. And what's really important to me and I think this is the first time we covered in that position also in an earnings call that we have made a decision to not just have one of our top priorities to further our sustainability efforts, but that we've really placed sustainability front and center to our -- not just our strategy but actually our way of working. We've made significant progress last year, especially on the Social side and the Environmental side. We have had early focus and have done a lot of the green transitions already in the past, but this is something we still continue to build out. And every year, obviously, we can -- professionalize further aspects of governance and communication, which is also something of changing market requirements and innovations, and this is something we would happily invest additional efforts to make sure this is reflected both internally but also externally. It should be an intrinsic part of doing business. With that, let me give you an outlook a little bit in terms of guidance. So we think that recurring revenue growth in '23 will range somewhere between the mid- to upper single-digit percentage range in terms of year-over-year growth. It's a somewhat a careful assumption because, I mean, we don't know what happens. We just see the market, how it's developing now. And obviously, it has slowed down quite a bit in, I would say, Q2 of '22 and hasn't really come back. And so it's a little bit of a wait-and-see approach. But from what we currently see and how the markets currently behave is still a little bit slow, meaning like decision cycles take long. We don't lose [indiscernible] agents competition, but often customers don't invest. So we think, okay, before this market comes around, we expect our revenue growth to be on the stable side. Obviously, we are ready to accelerate whenever markets permit with a decent ROI. We continuously think that our recurring revenues will be in the high percentage range. we don't necessarily plan for a higher share of non-recurring revenues. But if you have a large installation, for example, one customer can easily get a large non-recurring portion. So -- that's why we also want to be somewhat conservative in terms of what range we are aspiring to. And most importantly, we've decided and also with -- after feedback from some of our investors, to also reflect our focus for profitable growth in guiding on the EBITDA. We want to achieve a significant jump into a positive EBITDA. of larger than EUR 4 million adjusted this year, while we don't obviously foresee a major adjustments and I think last year may have been a little bit of an outlier on that front and do not guide on the number of customer seats any longer. Since actually, it's not just a pure market replace one customer box and move it to the cloud, but it's actually a lot more about the value you're selling, about upselling premium solutions and focusing on like, as I said, like whatever we can build on integration around a customer seat is not reflected necessarily in the number of customer base but actually is reflected in the profitability of that. And that's why we think it's only consistent if we guide on unprofitable growth that we also give you a corridor of where we expect our positive EBITDA to end up for the year. With that, let me summarize a little bit why we think that NFON is special. We are obviously a leading player in the European Integrated Business Communication market with a focus on the lower end of the market. But as I said, like by -- until the end of '24, slowly growing up in the customer size. As we're the #1 in Germany like we still have very, very, very large untapped market potential to pursue, just the value proposition of made in Germany, host in Germany still resonates very well. And it is like through some geopolitical turmoil, it actually sometimes makes it even stronger of a value proposition. Our strong recurring revenue base is a very stable basis that we can use to pursue profitable growth as we are guiding it. And since we -- basically a consistent low churn actually signals that we have still a business-critical business solution to our customers that is not easily replaced or turned off, especially when the going gets a little tougher, but it actually is one of the core pillars that our customers need in order to communicate with their customers or partners and that is a very stable value proposition. With that, I'm happy to opening it up for Q&A. How should we do it? Should we go through the chat questions. I'll leave it up to the moderator.

Thank you, first of all, Mr. von Rottkay and Mr. Boss for your interesting and detailed presentation. We'll now move forward to the Q&A session. [Operator Instructions] We already received some questions and would start with a question from Knut Woller.

Looking at your recurring revenue growth expectations for 2023, can you share with us to which extent ARPU is expected to be a driver and to which extent the seats? So just to get a better feeling what you're expecting to drive recurring revenue growth. And also, can we get an update on the cash burn in Q4, looking at the EBITDA development, it looks like cash burn hasn't deteriorated. Is that correct? And then briefly, Petra, you talked about price increases on the ARPU side. Can you share here some light on to which extent or by how much you're increasing prices for your solutions?

Maybe I can comment on the first part in terms of how much price increases versus customer seat increases are driving the growth. And let Petra handle the rest. So we actually -- I mean we've seen this -- Petra has actually won ARPU side, I mentioned this a bit. And what's actually -- we think it's about even in terms of growth is relatively in line with the increase in customer base for now because we have 2 effects that are kind of like counterbalancing each other a little bit. There is actually an impact of higher ARPUs on the license side, and we have good growth on that. But obviously, the -- the minutes are decreasing a bit by seat and that even [indiscernible] each other out approximately on the ARPU side. And that's something where we have some positive effects from selling additional premium solutions. So there is a slight uptick in ARPU that we see, but it's not a major part of the profitability increase. Petra, maybe you want to take the cash burn?

When I continue with the price increases, like it's not [indiscernible] easily can be undertake. We raise the prices by 5% or something like that. It's kind of a science because we look at each customer group and contract duration and which price they started with and for the new selling contracts and like -- it's a mixture of all of it, but we try to make the price increase quite moderate, that we don't want to have some churn as a result of our price increase because that in the end wouldn't help us. Also we -- and the price increases were -- it's not one price increase is shocking like, but some waves and as I said, moderately. And the cash is -- regarding the cash, I can say that we still invest in our i[indiscernible] system and something we -- some investments which are not reflected in the EBITDA, but we think and let's answer another question in the Teams and in the chat already. It's like our cash position at the end of last year was about EUR 13 million, which is now targeting positive EBITDA. And we expect cash burn to totally slow down and go the other direction and that we get along, as I said in the last earnings call with our own money and that we are not forced to go to the capital market. We might do so if we have an M&A target, which is very interesting or something like that. But we want to really get the turn not only in profitability but in cash burn as well.

Maybe I can add on the pricing side. So we have done some price increases in different cohorts. So overall, we like select our premium, Cloud PBX proposition, which is a full UCaaS proposition went up from [ 880 to 990 ] in terms of list price and we have also implemented some of these price increases with existing customers, but that has been on last year and sale is only -- it's some driver, as I said, like that complements, some of the lower voice minutes through use of online collaboration rather than calling. So as I said, there is some positive effect on the bottom line, but it's not like a not -- yes, it doesn't extend to the overall base of our revenues, but just the customers on, I would say, on the latest Cloudya tariff.

We will continue with the questions from Philipp Sennewald.

Yes. Thank you very much. Can you hear me?

Yes, we can.

Perfect. So first one regarding the Contact Center Hub. Mr. Rottkay, you mentioned a good progress -- positive customer response. And you also said pipeline is growing and also mentioned like long-sales cycles. Can you maybe give us a bit more color on that? What does pipeline growing mean? How long is the sales cycle? Can you give us some more color may be on that progress on the Contact Center side?

Muting helps. Yes. So obviously, it's hard to simplify it on a common denominator. But I would say, rather than having sales cycles from 3 to 4 months on like a simple cloud PBX cell on the context and the site for like a medium opportunity can easily be 6 to 9 months. And so considering basically we launched it in Q2 last year, we saw the first, I would say, interesting wins to come down about in Q4 of last year. And then usually when you have the win then the customer needs about 2 months to actually use the demo installation they have to integrate into the business processes and to activate the agent. So it's actually -- after about -- takes about on average 2 months after the contracting to actually activate the usage. So I would say on the larger deals, we are working, they're actually becoming active in Q1. I would say this continues -- we started basically from very low, but we actually budgeted an internal growth of this line of Contact Center to double this year. But we obviously have still our existing and Contact Center solution out there with happy and satisfied customers on it and even simpler requirements we address with other solutions. So I would say it's a continuous progress. Focus there also is mostly Germany, Austria and U.K., which are the 3 of our 4 areas, basically, how we think in? I know there's another question on geography later. I'll probably touch upon this later. So I'd say like we see -- have seen encouraging growth. I don't know what -- I don't have the growth number on top of my head in terms of the overall Contact Center business, but it's obviously -- it helps the overall business in terms of growth and next year, it's going to be -- we add double to it and actually see that progress for quite a while, especially since now partners -- new partners come on board that actually believe in the solution and are getting behind the wheel.

That was quite helpful. Then I have another question on the P&L. You gave us the EBITDA figures. I'm seeing quite significant improvement over the course of the year. What we've seen at many IT companies that already reported figures is that we've seen some impairments on goodwill rising interest rates and some other factors influencing company value last year. Did you have any impairments? Anything we have to expect there on the EBITDA line?

No, you -- there's nothing you should expect. It's like we think and we are convinced that we won't have any goodwill impairment or something like that.

Thank you for your questions, Mr. Sennewald. We received some further questions over the chat. Mr. von Rottkay, you already touched the point regarding the developments on country-based and regional base. Maybe you would like to elaborate a bit on that on now?

Sure. I think what's important maybe to point out at this call, I don't know if I -- I probably mentioned in the last earnings call, but it's probably good to reiterate it, that we have consolidated a little bit our regional activities. So we have combined our Italian, French and Spanish subsidiaries more or less into one area, running from the Italian subsidiary. So we consider this our fourth area. Area 1 is Germany, Area 2 is Austria, CEE, Area 3 is U.K. and Area 4 is basically Southwestern France -- France -- Southwestern Europe. And in terms of development, I would say, like in Austria, CEE remains to be our strongest overall growth performer, obviously, also helped with the new markets in Eastern Europe. U.K., the U.K. market has actually proven to be quite resilient despite economic difficulties, but our U.K. performance has been hampered by a loss of the -- a large retailer that was bought by a competitor migrating the customer base away. So while the new business is actually growing at a decent pace, it has been eaten up by churn more or less for -- for about 12 -- like in the last whatever is like 8, 9 months and maybe like 3 or 4 to come. But overall, the business underneath is healthy. Germany has been, I would say, like in terms of breadths, market momentum struggled a little bit. And we expect actually some positive momentum through the new partners we've signed and through a third operator partnership we are launching this year. And Italy obviously remains and France and Spain on a small level remain drivers of a good strong relative growth, but still low on absolute side. I mean we're talking for the 3 subsidiaries together. We're talking somewhat a little bit more than EUR 1 million in terms of contribution, but obviously growing strong relatively. So there, we focus on adding additional partnerships, especially in Italy to grow this business to a critical size in the following years. Yes. And then I think next question was collaboration is gone from strategy working, will you focus on communication. I would say when, obviously, we have never really focused on collaboration in a sense of Teams with integrated with SharePoint because that is basically, I would say, a battle that has been thought probably like more than 5 years ago with my Microsoft Office 365. But obviously, when you include video conferencing into that domain, this is obviously something we also offer, but we are somewhat realistic that the market has moved in terms of -- to Teams and that our focus is providing collaboration solutions to customers that, for some reason, don't want Teams or don't want to pay for Teams or are really low-end SMB businesses that want installation free out-of-the-box functionality. But rather than that, we actually enhance the solution around Teams, around voice and specialist business integration features. So that is our focus. So we still have a full unified communication and Contact Center Communication solution that can provide everything, but in terms of whether customer need is the most pronounced. That's a little bit what I referred to in the market section before. And on the UCaaS side, especially on the collaboration side, the market growth rates just have plummeted because everyone has their COVID solution in place, and there's not so much growth on that side. And as I said, like the things that customers really value is actually getting that productive and integrated into the business processes.

Thank you very much, Mr. von Rottkay. [Operator Instructions] We now have one final question left on the chat concerning your competition. Who are your biggest competitors? And what is the biggest problem in your business or the market right now?

Okay. I think -- how biggest, if you want, there's only one competitive trend actually, and I just visited -- attended the annual conference of this industry in London yesterday organized by Cavell, and the biggest trend is Microsoft Teams by far. That's not so new, but it's just -- it's blatant how much it has actually evolved over 12 months. And to us, we don't see it as a competitive threat. It's something that has shaped the market completely, and that's why we also offer launch additional offerings to take a part in that market trend and enhance Microsoft Team solutions and voice enable them. And as I said, this is something we have some stuff in place. Some we are launching, I don't know when, next week probably and the other ones in the middle of the year to benefit from that and to create customer value. There is not any single competitor that is dominant in the markets we operate in. I would say like it's just the one thing that's working the least is that the market's growth has really tremendously slowed after the -- from whatever -- from the consequences from the Ukraine crisis, but this is nothing to worry about because in some channels, I would say the market is slowing then we just work on creating new channels and avenues to market segments we haven't touched before. There's still enough -- plenty of latent demand in the market that we just have to address. And even if it might be temporarily subdued, we're sure it was going to come in the mid to long term. So I think fundamentally, the outlook hasn't really decreased on that side. Sorry. Did I miss the question?

We have a follow-up question from Knut Woller.

Yes. Just on the large enterprise segment, can you provide here an update on your successes? I'm aware that sales cycles are also longer than normally in your business, but how is here the pipe tracking? And what should we expect looking at 2023 from the larger enterprise segment?

Yes. Good question because, obviously, it's part of our strategy. I always also point out that the strategy is supported by a roadmap that takes until the end of '24. And we continuously track what customers we succeed with and I would say there's a slow, I would say, like a positive trend in terms of adding large accounts to the pipe. But if we take large accounts, enterprise customers start at 250 seats. They may not be always above 1,000 per quarter. But I would say every quarter, we may be add one more than we did the previous quarter in the 100-plus seat range. We're talking obviously to some customers in the 4-digit seat range, but some of those sales cycles are kind of ridiculously long, like we're talking 12-plus months. And I would say that I would expect the real change really and once we have those features ready in '24, '25 on that side. So right now, we'd say incremental growth on a low level every quarter. But with real breakthrough supported by a precise road map with that target definition and partner strategy, which we all have in place and which is running right now, but it's going to be -- as I said, it's going to be another close to 24 months.

As we did not receive any further questions, in the meantime, we would come to the closing of this earnings call. Just the kind information regarding those who were wondering if that there was no balance sheet in the press release, only a P&L statement? The balance sheet will be released with final consolidated figures on 27th April. For now, it's for me to say thank you to -- for your interest and attending the call. And of course, to you, Mr. von Rottkay and Mr. Boss for taking the time in the presentation and answering the questions. I hand over to you for some final remarks.

Well, thank you, everyone. It was a pleasure to give you a brief glimpse on our results. Obviously, we'll be happy to announce those once finalized and hope to answer any remaining questions. And when you see the full breadths of numerical detail, maybe some of that will be resolved. Anyway, in the meantime, if you have any questions, please reach out to us, and we'll try to tackle it individually as good as we can. Thank you very much.