NFON AG (NFN) Earnings Call Transcript & Summary

A very warm welcome from my side. I'm Sabina Pruser, Head of Investor Relations. A very warm welcome to our presentation of the full year results 2022. With me are Klaus von Rottkay, our CEO; and Petra Boss, our CFO, both will guide through our presentation which will take about 20 minutes. And as always, we will have the opportunity afterwards to ask your questions. With that, I hand over to Klaus.

Okay. Just checking if we are complete because I see -- still see some people dropping in, but I think it's stabilizing. So then a very warm welcome from my side as well to our official report on the full year results 2022. We have already communicated the preliminary ones about a month ago, and I can already say there will be no big surprises. And maybe on the news since the, as you have all seen, this week, on Monday, we announced that I will not extending my term beyond November '23, and we are in a position to already announce my successor, Patrik Heider, which -- who will join the Board on May 15. And from then on, basically, I will be able to transition my responsibilities to him and make sure this is going to be smooth and effective. With that, it's my pleasure to take you back to what we set out to achieve and what we achieved in '22. Our mission in North Star, obviously, is to be a leading provider of an integrated business communication in Europe. And that is basically how we set out in 2023. In terms of strategy, there are 3 pillars, which is based on 3 main headline targets that the company has and the Board has. Obviously, it's to deliver growth according -- across the 3 dimensions of products, channels and partnerships. A major focus and that has been a shift in our strategy about a year ago is towards profitable growth. And sustainability has -- it's like increasingly continuously taken a much larger share of our minds. And we've actually made this more prominent. And Sabina Pruser, sitting across from me, has actually been leading that. And we'll see in the non-financial report a lot of the progress we've done, and I'm excited about the things -- the new things that we've set out for actually for '23 and beyond. But as I mentioned, the 3 pillars that our profitable growth strategy based on is to deliver additional products and product innovation across several dimensions. I would say like the top 3 strategy areas on the product side is [indiscernible] voice and PBX-enabled Microsoft Teams. Second is to deliver more integration capabilities to live up to our mission of integrated business communications. And the third one is to deliver more capabilities to enlarge our addressable customer share towards the enterprise. And those are the 3 things that are basically on the road map, with this year's road map mostly reflecting the Microsoft Teams side. We already published this year that we are now part of the selected operator [ connect less ] for Microsoft and will, in the middle of this year, actually complete our portfolio with our fourth offering around Microsoft Teams which -- by launching a Cloudya app for Teams. But more to that when we get to the product announcement. Second, obviously, we are a channel company. We have a large dedicated and loyal channel and continuously work on making this channel more productive and even more successful with NFON. So that's an important part. And channel is not only important for us to basically sell our products, but overall, partnerships can also serve us to enlargen our product portfolio and to deliver better services, and this is something where we have established some new partnerships in the past and built out those partnerships to scale. And obviously, always open for new partnerships to come and to help us further that. With that, I'll take a look at the official results for the year, which pretty much exactly confirm our preliminary results, so I don't make it too suspenseful. We grew our customer base in terms of extensions managed in our data centers by 8%, which was in the upper part of the revised guidance. And the recurring revenue growth, we ended up at 8.3%, which was pretty much in the middle of our guidance. And with our recurring revenue share, we clearly achieved the guidance of larger than 88%. And obviously, that just confirms what we already published in the past. But let's take a look under the hood and see what the numbers look like that led to these results. Now I hand over to my colleague, Petra.

Hello, and good morning to everyone. So as Klaus said, we have exactly the same revenue figures as we published with the preliminary figures. No changes here at all. Like we have an all-time high of 90 -- over 91% share of recurring revenue, which reflects our strong business model, that we have a sustainable basis for future business. And with an absolute figure, EUR 80.8 million revenue. Yes. And the seat growth, as Klaus said, has met our guidance. And we have globally lengthened sales cycles and an overall slowed down economic environment which is especially true for the UCaaS market. So tremendous growth figures which have been communicated in the past has slowed down a little bit. So therefore, we [ have ] a stable growth but not meeting the same figures in the last years, but we are positive that we can develop from thereon. And then even if we are targeting our profitable growth, we will have a stable growth in the future as well. And it is based as well on our constantly low churn rate which is about 6% per year, so that we are always growing seat base. And the ARPU, slightly lower than the last 2 years. But the last 2 years have been influenced by the pandemic, which had some positive side effect on the voice ARPU. So we slowed down a little here, especially when we compare first quarter to first quarter. But as you can see, we are above pre-pandemic level and we are quite optimistic that we will able to keep the ARPU stable as we had some price adjustment last year and we did some price adjustment in this year. So we can see in the first quarter already the effect that [indiscernible] very stable. Furthermore, we are selling more premium solutions which are stabilizing the ARPU and can compensate for slight decrease in the voice ARPU. So following this high share of recurring revenues, we have a rising gross margin as a recurring revenues have a higher margin. And so it's constantly growing from 76% in the year 2019 to now over 82%. And so we don't have very much price increases on the material side, so we are not struck by inflation or hit in a very hard way, and so we would keep our margin stable. So we have a higher personnel cost with a plus of 18.1%. And this is even more than the average number of employees [ staff cost ] number. And that's because we have some full year effect of people we hired the last year in Q3 and Q4. But we -- we have communicated with the preliminary figures that we are on our path now to more profitability. So we are reviewing and having staff and want to make streamline the organization, make it more efficient and have taken some measures, will have an effect in year '23. And there, we will see that we will be able to scale as more revenues with a stable or even decreased personnel cost basis. And the measures we've taken to be more profitable, I mean, you can see already in the past year by a decline of the marketing expenses and the ratio now declined from 12.9% to 10.5% compared to the revenues, and we want to decrease this ratio even more in the next year and for [ NFON ] basis for profitability. And we can -- we review our marketing mix constantly and we can profit from invest in the partner in brand and channel marketing, so it would be possible to guarantee our growth even with a little more moderate marketing investment. Selling costs increased. They increase always with the revenues, but the ratio has slightly increased as well, and there are mainly 2 effects. And one is that as a portion of revenues, we make [ few ] partners where we pay commission have slightly increased compared to the portion of like direct channel revenues where we don't pay commissions. And on the other hand, the selling cost consists not only of -- on commissions, but costs for investment in partners like partner training costs as well. And we have invested in partner training to enable them to better sell our products. Go in the end, we -- more or less on the EBITDA level, especially on the adjusted EBITDA level, we meet last year's figures. And we will see the results of the measures we have taken to be more profitable in the year '23. And we had to make some adjustments like you see for stock options which are not -- have no influence on the liquidity. And then we take measures to focus on core markets and some M&A activities and investment in rebranding which are all one-off investments and therefore more effects and therefore we adjust them. And we landed at the EBITDA minus 1.0. And in the future, we were -- we've communicated that we will guide on EBITDA as well. And this reflects that we really strongly focus on profitability and we are keen on to communicate figures for the first quarter, and we are optimistic that you will see the effect of our measures here already. And with that, I hand over to Klaus.

Sure. With that, I would like to reiterate the outlook for -- we have for 2023. And obviously, after years has been underway for a while, we are happy to confirm that we expect the recurring revenue growth being in the mid- to upper single-digit percentage range from this -- for this year. And recurring revenue should be, again, be responsible for a very high share of our revenue of more than 88%. And we expect adjusted EBITDA to be larger than EUR 4 million. And without stealing the thunder and Petra has already alluded to, we'll be happy to report on the results for Q1 in a month from now approximately and which will show that we are on a good path to achieve this. Overall, obviously, let me summarize our strength, that we are well positioned in a growing market in Europe of integrated business communication target towards SME, but also to mid-tier enterprise customers strongly positioned in the DACH area. And we differentiate ourselves as a Made in Germany, Host in Germany solution, and that resonates not only in Germany but also in some of our European neighbor countries. And we have a strategy that doesn't only rely on selling new seats, but also have additional avenues of profitable growth. That's also why we guide now on EBITDA and showcase that we can become profitable on this customer base very well. And obviously, our high share of recurring revenue basis of recurring revenue gives us a large socket of stable revenue growth that is made stable by a large network of loyal partners that lead to very low customer churn. And for that, I think that's a little bit of what we had to report. And we are looking forward to your questions. And I think even -- I think some have already received -- come in by chat, but I hand it over to the moderator to lead us through that. Thank you very much.

Thank you very much, Dr. von Rottkay and Ms. Boss for the detailed presentation. We will now move over to the Q&A session. [Operator Instructions] And as already mentioned, we already received a few questions from the Knut Woller. The first question is MSFT Teams is enjoying a solid demand momentum. Is this still your premium solution seeing currently the highest demand?

Yes. So overall, yes, Teams is in high demand and grows rather quickly. For us, though, in terms of our premium solution, our most important premium solution is contact center in terms of size, more important than Teams. I would say like, obviously, Teams helps pull through a lot of Cloudya seats that's why it is already important now and actually because of the high growth it's becoming more important in the future. And that's also why we are -- position a lot of additional offerings around that. But as I said like and that's I think your second question. How is the pipeline for your contact center offering building? As I said, like we will report on the Q1 results later, but I think we've had a pretty good start. Maybe took a little slower -- longer in '22 than anticipated. So often like that with new products, but the feedback has been good from partner side. The feedback has been good from customer side. And the collaboration is really working well with our partner company. And now we actually see the first larger wins come in. One actually happened already like -- I mean, we're [ accounting the triple agent ] wins which we had won in December already in Germany. And especially in Q1, we see a strongly increasing momentum. We grow well on a relative basis. And I think we actually set out to and exceed our, I would say, rather modest budget plans for this year quite well. So I think if there's one thing I'm happy about, that would be certainly a top contender for that. And if I can keep going. I see the third question here in the chat. How's the pipe in Eastern Europe building? So I think, to be specific, we have in terms of also our focus on profitable growth, we have -- so we are not massively investing in CEE as an overall region but more specifically into Poland, yes? We have also -- we also do a little bit of CEE. The big focus is obviously Poland, it's also the largest economy in that area. And that is -- I would say like -- has started to pick up at the end of Q1. So I can also report that after many [indiscernible] like things we had to do in order to set up the business well in '22 that we now have a team in place that is delivering good results and the pipeline is continuously building. So Q1 and the dwell for Poland and we have a Q2 pipe that's very solid. So we have a good line of sight for the next couple of months and we are optimistic that it will carry us through the year. So I think that is -- and actually just happened to review the business for the quarter in this area. And yes, Poland is finally coming around. And okay, then I just keep going, sorry, because I see the next question. Is the first noticeable tailwind from Versatel partnership? I wouldn't say it's noticeable in terms of results. I think the corporation has -- the collaboration has started very well. And some of the milestones for the overall collaboration were maybe a little later than we would have wished for. But we can attest to that they were kept on the day on the spot, so very precise planning. And actually, just yesterday, I think we had a large kickoff with one-on-one Versatel on the sales leadership. So there are a lot of inputs, things going on, and we have already built a pipe at the first wind site. I think the overall start is very encouraging. As I said that we will always like manage expectations, that these things take a long time and partnerships, as I mentioned, take years to build. But I would say we are off to a very good start.

Thank you very much Dr. von Rottkay. And received a question via audio line. Please go ahead, Stéphane Beyazian.

Hello, can you hear me?

Yes, we can.

I have a couple of questions. The first one if I may, regarding your footprint. Does it still make sense to operate in Italy, France and Spain? I mean looking at the revenues over the past 2, 3 years, I mean, France, Spain especially have been difficult markets. It is -- there's a little bit of growth in Italy but probably it still remains quite at such scale. So what is your thinking about this? I've got also a second question regarding to the contact center. Artificial intelligence potentially could be disrupting this industry. Are you confident that your solution is future-proof versus the emergence of artificial intelligence? And finally, third question, I was just wondering whether there is any comments you could make about whether you have considered any tie-ups with new partners or even with competitors to get more scale in the past couple of months.

Good. All right. Thank you, Stephane. So first question was like is it -- does it make sense to continue to operate in France and Spain? We've downgrade -- like downsized both countries quite significantly last year. So I think, overall, we run this on a breakeven basis. We don't invest additional, say, like outbound marketing, but we support existing partners who actually bring additional business. I have to say, also in Spain, we've seen some really nice wins over the last couple of months. In France, we have also a larger business opportunity without investing, just supporting existing partners. And obviously, it's our value proposition to our customers, our partners to have a pan-European offering. And therefore, basically, we put this in the -- into our offering for our customers, but we're not losing money in those countries. On Italy, I said a little bit different because we are actually a lot more bullish about the prospects and the market -- low market maturity in Italy. In Italy, we're still investing because it's a very large European market, 60 million people there. On the ARPU side, much higher than Spain, for example, twice the size. So -- and from the competition point of view, it's very large operator-centric. So I think there's a large opportunity for when that market develops. We also are looking out for new strategic partners there to enhance our channel capacity. We have a good plan how to reach profitability soon there. But soon definitely doesn't mean '23, it's probably like 2 years out. And overall, to have large potential in the short term on a relative growth basis and long-term growth basis. But for sure, Patrik is going to evaluate this very closely and build the strategy regarding that. Then the second question was, I think, contact center versus AI? Is that -- kind of like that's how I understood it, please correct me. It's like -- no, but of course, with AI, like -- but how does our solution measure up to that? Exactly. So I'm very happy to report that our partner company, Daktela, has been very active on the area of AI. They haven't only acquired IP on that side, i.e., bought AI companies, but they're extremely fast in innovating. They have now integrated ChatGPT into their solution. They have like have had different AI enhancements. So I think we are like very much on the brink of innovation there. And also the size of the company has increased quite a bit. So there are a lot of very technically, say, savvy engineers working exactly on that. So I feel very good regarding that. And I think there's a lot of opportunity for our customers leveraging the additional AI capabilities, and we have the right solution for that, I'm sure.

May I ask just one follow-up on this one. Do you have any chance to give us an idea of how much for your AI-driven contact center solution is cheaper and the traditional contact center solution? I understand that pricing is probably very different between one and the other. It is very difficult to compare other and peers. But do you have a sort of a rough idea what you can help customers save by that sort of solution.

Okay. All right. That's like three questions in one. First of all, in terms of pricing. Like if not -- we don't sell basically one contact center agents on the price list. It's always a solution. There are like, I think, 150 product codes that we pick from to create the solution for this specific customer scenario. So it's extremely hard to basically put a price tag on it. I would say our price position is very competitive, i.e., all the -- I'm leaving out like companies like Genesys who are famous for being the on the very high price side. But overall, I think we are very cost competitive. We're all major solutions, i.e., potentially cheaper. But your question was like how much can we save customers and that it really depends a lot on the customer scenario. Usually, the thumb rules is how many people you have now on the phone, how many agents and how many can you save with a good contact center solution which, unfortunately, is obviously cost efficiency only, I would say, calculation that really often convinces the CFO. But we should not neglect that many of the innovations are actually to make it more effective. The whole omnichannel idea is to actually combine multiple avenues of customer communication to integrate them into one panel to make sure you can provide better and consistent customer service and, therefore, actually increase your revenues. I think that a lot of the focus, especially on the SMB side is not just to become more efficient on the customer interaction but also become more effective. And that's obviously much harder to quantify. But as I said, I don't want to give you the classic or 30% like cheaper answer. But I would say, I wouldn't feel pretty comfortable about comparisons like that.

Sure. I'm sorry, there was a final one asked about whether you looked at M&A -- you always look at M&A, but whether you've been partially involved in strategic discussions in the past couple of months to get more scale and partners.

I think that's only -- there has been one conversation, but maybe not on the M&A front, but what I said like third channel partnerships and alliances. We are looking at alliance on the product portfolio side with our partner and nothing to announce now, but it's not an M&A deal. It's kind of like some like a AI license deal, right? Similar to what we have on the contact center side, so that I can confirm that we have. But on the M&A side, there hasn't been any immediate activity to report on.

Thank you very much. And we received another question by audio line. Please go ahead, Mr. [ Nguyen Popp ].

We can't hear anything yet.

Well, it seems that it's right now not working. Please place your question in the chat. And we also received one in the chat. How do you rate the start of Yoummday from Klaus Harisch telegate. Is it comparable? The valuation is twice as high as NFON. Unfortunately, we cannot hear you. Seems that there is a problem with the audio connection of Dr. Klaus von Rottkay and we will give it a second and kindly ask you to unmute. Maybe it is possible to dial in again. We'll give it another second. We will wait a second until Mr. -- Dr. von Rottkay is back again.

Mrs. Poss?

Yes, we can hear you again. .

Okay. Now I can hear you, okay. So [ Nguyen Popp ] said that you muted him so that he was not able to answer it. But I think his question which has already answered. Probably Mr. [ Popp ], we can then follow up with this question with out...

We can try -- give it a try again if Mr. [ Popp ] has a follow-up question. Please unmute yourself. Mr. [ Popp ], unfortunately, we cannot hear right now. Is it may be possible to place your question in the chat if you have a follow-up question on the first one you have placed.

Okay. I think it seems there are no further questions. Okay, Stephane, if you have one further question just...

Please go ahead.

Can you hear me well?

Yes, we can hear you well.

Good, good. Yes, I just wanted to follow up on two things, perhaps one to follow up on what Petra said. Are you confident that you can accelerate the growth even if you are more disciplined in your marketing [indiscernible] and in your [indiscernible] sort of [indiscernible] you're hopeful to be able to keep up with? And related to that, but in a different angle, in the report that you published yesterday, I mean, you still show the expert Cavell forecast. And I think for Germany, if I'm not mistaken, they are still targeting 20% revenue growth per annum over the next couple of years, which is obviously quite different to your level of growth. So can you elaborate a little bit the difference between -- first, are we comparing the same thing? What is making the difference between your growth and what they are forecasting? Is the impact of Microsoft Teams competition? What is explaining that difference that you have?

Stephane, do me a favor. Sorry for my voice, I'm a bit sick. Stephane, can you repeat, please, the company name that you one just compare to?

No, sorry. In the report yesterday, you still mentioned the forecast by Cavell, the market experts forecast 20% revenue growth and you're not looking at -- and producing that level of growth. So whether you could explain what is the gap -- the factors behind that gap on what their forecast and what you have your growth rate today?

Sorting out the audio, Stephane, give us a second because Klaus is back online and back on track. So he's hopefully able to answer in a moment.

Sorry. Can you hear us?

We can, yes.

You can hear us. We cannot hear you. I'm so sorry. This is a disaster.

Klaus, have you heard the question of Stephane? Or do you want me to repeat it?

I think it was just about -- what I understood was Cavell. We mentioned the Cavell numbers. They show like a high growth and higher than ours. So what's the difference? Is that approximately right?

Yes.

All right. Good. So I think what -- Cavell, I don't know -- like Cavell shows obviously reflect the high business potential in the market in terms of long-term growth and how much of that, they basically allocate to the different time periods. And my -- from my initial conversations was that they rather extrapolate how much growth of that in the future. And I said that was certainly quite depressed was like over the last half year. So I don't think that a precise breakdown of market growth by year is that accurate. I think on a long-term growth perspective, I would say we are rather aligned, although the analysts have traditionally, with analysts, I mean, basically Cavell and to list apart, MZA. Also been somewhat too optimistic. But it is true that a large portion of the growth actually goes towards Teams rather than traditional cloud PBX vendors. So I think that will certainly explain some of the difference, which we don't think is quantitatively a significant as is reflected in the Cavell numbers. But there was a marketing question and that we didn't understand. So maybe...

[indiscernible] Can you please be so kind and repeat the first question?

Sure. And probably was a question to you, Petra, as a follow-up on one of your slides where you suggested that you're going to stabilize or even reduce marketing expenses and stabilize staff. So I was just wondering whether you can elaborate on if you think you can reaccelerate revenue growth even if you're more disciplined in your cost structure?

I think there are various reasons why we are optimistic. [indiscernible] because one of them, as Klaus mentioned, that we focus regionally. So in the past, we spent a lot of money like in France and Spain without gaining that much growth potential and realizing it. And therefore, we are able to be a little bit more [indiscernible]. And on the other side, we invested in the past 2 years in the main channel initiatives. And so the basis for partner and the business, which we now want to harvest have on and we have more and more want to be [ channel-only ] company and therefore it's not important to target the end customer and via expensive brand measures. And therefore -- and spending the money very carefully and reviewing it where it really makes sense. And thus the best mix, I think it should be able to be conservative and enhance marketing ratio substantially.

Thank you very much. And we received from Mr. [ Popp ] the information that the answer wasn't -- the question that he asked wasn't answered due to audio issue. So I kindly ask you to repeat. Should I read it out again? It was how do you rate the start of Yoummday from Klaus Harisch telegate? Is it comparable? The valuation is twice as high as NFON.

Okay. I just said like -- I don't know the company detail, I just know it's a contact center company, and contact center obviously has a very different multiples than a combined UCaaS CCaaS player. But as I said, like I'm not familiar with the company in detail, so I cannot really comment on that. Happy to have a look at it.

Yes, indeed, it seems to be a completely different, very interesting business model, concentrating mainly on contact center technology, but also on what they call talents. So on really outsourcing the contact center agents and not only the technology. So it's a mixture of a technology and the service that they're offering, which I believe is simply not comparable to the line of business that we are in.

Yes. Exactly.

Okay. Thank you very much. And it seems that there are no further question, thank you very much for your question, and thank you very much, Dr. von Rottkay and Mrs. Boss and Mr. Koopmann for the detailed presentation and your time answering all those questions. And for some final remarks, I hand over to Mrs. Pruser.

Thank you, Mrs. Poss. And so yes, as it seems there are no questions, but if you have any further questions after this conference or would like to have more information, just don't hesitate to contact me or to contact us. In total, for now, we would like to say goodbye for -- and thanks for attending our call today, and we wish you a very nice day. Thank you. Bye-bye.