Proximus PLC (PROX) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to this Proximus Conference Call. For your information: This conference call is being recorded. [ At this time ], I would like to turn the call over to the Proximus CEO, Guillaume Boutin. Sir, please go ahead.

Thank you, and good morning to all of you. Welcome to this special conference call, for which I'm joined here with Mark Reid, by Mark Reid, the CFO of Proximus. Today, we're not going to talk about fiber, 5G or monetization of network investments but about the next big thing of the industry, which is the convergence between telcos and the software industry; and also how Proximus Group will become, through this transformational deal, a much more global company when it comes to software platforms. So we are very, very excited to bring you this news today. We have been looking at ways to crystallize the value of TeleSign and realize its full potential. Today, I'm proud that we can announce our intention to take TeleSign public. [ Note that this ] short intervention today is part of a longer presentation that was prepared in connection to this business combination. The complete investor presentation is published on the TeleSign investor website, but before we get into the transaction itself, a quick reminder about TeleSign: TeleSign has been the hidden jewel within the Proximus Group. You might not know it, but most of us use TeleSign on a daily basis. For example, when you or a family member logs in to TikTok using 2-factor authentication, you are using TeleSign. You need to reset your password of Alibaba and you are sent a onetime passcode. You are also using TeleSign. So for many [ digital daily ] operations we do, TeleSign is working in the background to keep you and families safe online. The mission of TeleSign is to bring trust to all digital interactions, and this is very close to the DNA of Proximus as well. Today, we announce our intention to take TeleSign public through a business combination with North Atlantic Acquisition Corp. or NAAC, but let me go through the highlights of the transaction. The transaction implies a pro forma enterprise value of TeleSign of $1.3 billion, indicating a significant uplift since we acquired full control back in February and then consolidated it from BICS. Thanks to this transaction, we are raising the necessary funds to fuel TeleSign's steep growth. Specifically, after closing, it's estimated that TeleSign will have up to $437 million in net cash on its balance sheet, assuming no redemptions by NAAC's stockholders and after payment of the transaction expenses. The capital raised also include $107.5 million from a fully committed PIPE. In order to remain exposed to future growth, Proximus decided not to sell any of its shares. As a result, Proximus Group will retain a majority with about 67% of the new combination upon completion of the transaction, again assuming no redemptions. We expect to close this transaction in Q2 2022 with the listing of TeleSign on the NASDAQ. Over the past months, we have gone through a lengthy process to determine the best strategic course of action for TeleSign. Out of the multiple scenarios, together with our Board, we chose for a SPAC transaction as the best path to drive shareholder return. We chose NAAC as a partner for a number of reasons. [ So it has a ] strong team with a solid reputation and track record. I guess that most of you know Gary and Andrew. And the adequate focus and expertise to help TeleSign and an overall good fit from a transactional point of view. So let's turn a moment to TeleSign. As reminder, TeleSign is a leading authentification and digital identity provider offering a full spectrum of solutions from end user account security to communications and engagement. Over the years, TeleSign has built a unique software platform that protects and engages users through SMS, voice, messaging and easy-to-integrate APIs for data analytics. A couple of noteworthy facts: Today, TeleSign has already a global footprint with active customers in more than 60 countries. About 21% of its revenues is generated outside of the U.S. TeleSign's customer base is already top-level blue chip, with 8 out of 10 of the top Internet companies relying on its product suite. TeleSign adds [ 25 -- more than 25 ] patents in mobile identity and already verifying over 21 billion transactions per year. Looking at the financials. The historical growth has been amazing, so far, with expected revenue of $391 million for this year. This implies a 42% revenue CAGR over the past 3 years in addition to delivering a profitable business model. Gross profit has also been growing nicely. And we see a gradual shift towards more profitable digital identification services, which will represent just over 30% of the total gross profit for this year. As the world around us is becoming more digital, TeleSign's mission to make Internet a safer place is also becoming increasingly important. Whether it is about shopping, education, travel, finance and many other things, all of these activities are rapidly moving online, with the smartphone as a primary entry point. This brings new challenges with an increasing risk of cyber fraud, safety issues and a lack of reliable digital identity data. That's why the market that TeleSign is operating in is growing so rapidly. In 2019, the total addressable market for TeleSign was about $18 billion. By 2024, it should exceed $54 billion, which means a CAGR of almost 25%. The tailwinds for the industry and for TeleSign are substantial. Digital transformation is undeniable, and the pandemic has moved things even faster. Of course, TeleSign will grow with this -- with its industry, but that's only a part of TeleSign organic growth strategy, as you can see on the slide. The second lever is [ continued cross- and up-selling ] from its current customer base. We expect the established customers to deploy TeleSign solutions across broader portions of their businesses. Today, about 35% of TeleSign customers buy products from 2 or more of TeleSign's categories, so buying authentification, CPaaS and full management products. While 35% is already a nice number, there is room for further growth within that existing customer base. The third driver of growth is to move into new customer segments, especially expanding from large enterprises into smaller companies with APIs. This is expected to bring significant value over the next year or 2. Lastly, TeleSign has a great opportunity in growing with existing and new customers globally. Today, [ 79% ] of TeleSign revenue is coming from U.S. companies, but the end users of [indiscernible] products are already spread around the globe. And this means that we have significant untapped potential. As I said, this is our organic plan supported by the existing talent and organic investments. Should there be M&A opportunities, it could accelerate the plan even further, thanks to the currency we just created, but this is not part of any of projections currently made. We expect this strategy to result in further growth going forward with an acceleration in the identity business. Specifically the CAGR for both revenue and gross profit in this business line is expected to be [ above ] 55% over the next 5 years. At the same time, the communication business remains an important financial contributor, and TeleSign expects to grow at least in line with the overall market. All in all, we should reach $1 billion of revenues by 2026. With today's announcement, Proximus continues to pave the way for future growth and value creation for our shareholders. On the domestic side, we have announced our return to growth powered by our gigabit network strategy, but also and increasingly so, we are expanding our reach, thanks to TeleSign and the rebound of BICS. Together, these complementary assets will ensure a more resilient and future-proof business mix. Very concretely, this transaction is beneficial for Proximus at 3 levels. Firstly, from a valuation perspective, we believe that the full value of TeleSign is not reflected today in Proximus' share price. By externalizing this value, making it transparent, we are bringing meaningful value uplift for Proximus shareholders. Secondly, we created currency for TeleSign growth. It will enhance the financial and strategic flexibility of TeleSign. This also means that it allows us to optimize our group capital allocation. We are able to reinvest in TeleSign without making compromises at a local level, mainly on fiber. And finally, as we remain a majority shareholder, we remain exposed to the attractive growth of -- profile of TeleSign, creating value in the long run. So to conclude. A public marking -- market listing of TeleSign will enable the company to accelerate its transition to digital identity and achieve its growth plan. It will fund the organic growth opportunity. It will support the geographic expansion. It leaves open the strategic [ opportunity ] for M&A important in the dynamic market in which TeleSign is active. And it will increase TeleSign visibility in attracting partners and customers. Second, Proximus remains a big believer in TeleSign growth trajectory. By keeping nearly 67% of ownership, we remain exposed to future value creation. Finally, through its mission of making Internet a safer place, TeleSign is contributing to Proximus' ambition to shape an inclusive future where people can live better and work smarter. So this ends my presentation. And we can open the line for questions should you have questions on the announcements of today. Thank you.

[Operator Instructions] So we have one first question from Mr. Joshua Mills from Exane.

Congratulations on finding one of the jewels [indiscernible] with M&A. My question is, going forward, how will your relationship with TeleSign evolve? How does this change their strategy? And more specifically, yes, in the event that more cash were needed to fund the acquisitions -- I know that you're in a net cash position from the get-go. Would Proximus be willing to invest more into TeleSign's? Or would you allow yourself to be diluted in the event of an equity raise, for example?

Thank you. I think the -- it's a little bit too soon to answer to -- that question. I think the focus of the management for the first quarters will be to deliver the plan that we have shared with you today. I think, the TeleSign governance, it is going to be very, very aligned with the SEC regulation and the way the U.S.-listed companies are operating. So with a lot of freedom and independence but with Proximus as main shareholders. Of course, as I said during the presentation, we will be really pragmatic and flexible in the way we want to help company, the development of the company. And we have now currency that we can use, but it's probably too soon to comment on future evolution of the shareholdership position of Proximus. I think the first main important points would be for us to deliver on that plan, and that plan will be fully funded by the cash that we're going to raise with that operation.

Yes, Guillaume, that's exactly right. And I think, Joshua, if you take a look at the financial projections that are in the deck, I mean, you can see the cash profile there. And so we truly believe this transaction will be more than adequate to fund that plan as we see it today.

Next question is from Mr. Martin Hammerschmidt from Citi.

I have 2 quick questions. And the first one is -- so why the need to bring TeleSign to the market now and not sort of continuing to develop it internally. I know you've talked about sort of unlock value and increased flexibility, but if you look at Proximus as a whole, TeleSign wasn't necessarily the biggest sort of cash [ consumptor of the fund ], so what do you see you can do in the new structure that you could not do before? Or is it really simply a matter of explicitly showing the TeleSign in the sum of the parts? And then the second one would be -- so why a SPAC and not sort of a normal IPO and get some cash out to fund, for example, some of [ other investments at home ]? So where do you see the benefits of listing TeleSign [ on a ] SPAC?

First question is why now. I think this is a good question but also a very important question for me. And I think that the timing was really important in that decision. I think we are [ at war for talent ] here. And we are operating in that software industry. And this is really important in that space, to create the right environment to be able to attract, maintain and retain talents; and that's important. Second, in that software business evolving so rapidly, if we have to have full flexibility, strategic flexibility, creating that currency was really, really important. That market is evolving so fast that we wanted to have all options available, hence to continue develop the company. So that's already 2 very, very important reasons. And there are 2 types of category in the software industry, also for creating momentum for our customers, our partners. When you are listed, yes, I think you are really changing the category of the company and you have also different discussions with your environment. And last but not least, and it's also important, I know we are not that leveraged. We have a very sound and healthy balance sheet, but at the same [ times, for ] capital allocation, I think this is a very sound decision to try to self-fund the development of TeleSign without jeopardizing our ability to develop our gigabit infrastructure here in Europe. So for all those reasons, I think the timing was quite important to go fast and to maximize the chances of TeleSign to grow to the $1 billion revenue company that we want to generate before [ 2025 ].

And Martin, on the route, I think -- as you'd expect, we considered multiple routes, whether strategic, IPO or SPAC. And I think, once we'd done that analysis, I think we very quickly came to the conclusion that the SPAC route was very appropriate for the type of company that TeleSign is, in terms of, as you'll see, the growth trajectory is very impressive. And the mix of the business as it goes forward is -- it's good to expose that from a valuation perspective. Guillaume talks about the speed and the -- again the process here in terms of IPO versus SPAC. I think you've seen the speed that we've been able to execute this deal. So I think that was one element also, and then valuation. And again I think we both agree that the valuation that we've been able to expose through here, we think, has been optimized through our choice. So that's the answer to the question.

Next question is from Mr. Ulrich Rathe from Jefferies.

I have 2 questions, please. The first one is the companies competing in this space all have slightly different profiles. And I remember, from the strategy presentation of Proximus that you did earlier, you highlighted Twilio and Sinch as comps. Who do you consider your peers most closely? And if you could draw sort of some lines in the business mix, where you see TeleSign unique compared to the peers. So sort of a bit of a view on that will be helpful. And the second question is, what is Proximus' role as an owner? I mean this is a bit of a funny company to own for a European telecoms operator, so why is Proximus the best owner for this? I mean I understand, of course, there's value creation to be had in principle, but it's just an investment in a business, so why is Proximus the right owner for this?

Ulrich, in terms of peers, again I think you touched on 2. So Twilio, Sinch. I think -- again, in our TeleSign deck I think we give quite a broad comparison there. So Bandwidth, Okta. And I think, in terms of TeleSign, I think again in terms of we've talked about where TeleSign operates in that kind of space between secure CPaaS and digital identity. And so TeleSign really uses the ecosystem of the CPaaS to fuel the platform that we use for digital identity. So I think we operate in a space that is between the two, and I think that's a uniqueness to TeleSign and again supports our overall growth trajectory for the business. So I think that's how we see it. And I think it's clearly set out in some of the material we released this morning.

And for me, it's not at all a funny company to own. To the contrary, as I said in the intro of the session of today, I think there is convergence happening, a convergence between telco and software. And we -- as telco company, we need to evolve towards software companies. And we're going to have some [ European and ] asset-based, infrastructure-based businesses in Belgium, in Luxembourg and the Netherlands. And we're going to have 2 global platforms. One is TeleSign, and one is BICS. And I think being active in the back office of the Internet with BICS on one side and with TeleSign on the other side; building the software capacities also from Belgium, using the talents of the country; creating centers expertise and excellence around AI and cybersecurity is going to fuel and supercharge our ability to build services in Europe but also to cross-fertilize what we are doing for other entities, yes, within the group. And I'm fully convinced that, strategically, telco organizations will evolve towards more software-centric organizations. And the good thing about software is that there is no limitation in terms of geographies. We can build a software and be immediately a global company, which is not the case with networks, but there are a lot of synergies in mastering the software piece to build the services that are going to be on top of your infrastructure in your -- in the countries where you do own an infrastructure. So I fully -- I'm fully convinced this is the way to go. This is a new type of convergence that will -- is going to happen in that industry. I'm sure that others are going to do the same. I think probably we are leading the pack in terms of that vision but fully convinced that this is the way to go. And the good thing about software, that you can become global without owning infrastructure. And we have that -- capabilities with 2 assets within the group, as I said, TeleSign on one side, BICS on the other side.

Next question is from Mr. Polo Tang from UBS.

Can I just clarify in terms of structure of this deal? You're not taking any cash out from this transaction. And then separately, will you be subject to any capital gains taxes as a result of this deal?

Polo, it's Mark. Yes. So you're correct that we are not taking any cash out of the deal. And yes, we don't believe this will be a taxable event for us.

We have no other questions. Back to you for the conclusion.

Okay, great. So thank you all for joining us at the very last minute. And [ this is me ] wishing you all a very nice Christmas holiday. Bye.

Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.