Proximus PLC (PROX) Earnings Call Transcript & Summary

Hello, and welcome to the Q&A session of the Proximus International Capital Market Day. My name is [ Seb ], and I will be the moderator. Please note that this Q&A session is being recorded [Operator Instructions]. Our first question comes from David Vagman from ING.

[indiscernible]

So I'll start with the governance question. I hope you can hear me okay. Here is a bit of echo, but hopefully, you can here us okay. So on the governance. So first, we have -- as from the start, when we signed the deal, I think 1 year ago, we always say that Christophe will be responsible for [indiscernible] is underway for DI across all entities and that Rajdip will be responsible for CPaaS across all entities, and then what we announced today that also BICS be fully integrated in that operating model going forward. I think that all the career activities of BICS will be also managed the same way with a new leader for that business side to be appointed by the end of the summer. Today, I'm acting as responsible for the carrier activity for the [ integrated ] activities of Proximus. So you're going to have 3 business leaders, and then you're going to have some support entities on product from go-to-market, from ops that will be centrally organized so that we can maximize the synergies, but also make sure that we have 1 clear execution path and also a clear set of common objectives in between the different entities of the group. So that's the way we will operate going forward.

David, thanks for the question. So how should we think about it? Maybe take a step back, I think the overall targets are constituted, as you pointed out, BICS, Telesign and Route Mobile. I think, as always, as you get from us, we've been very thoughtful in terms of how we put together our guidance I think on the revenue side, I think we've been -- we've seen and we've been talking about that in previous quarter earnings, in terms of some of the market trends we're seeing specifically on the revenue on the headwind for instance, on the B2B voice. But we've thought that very carefully across the 3 entities. We've given you guidance very clearly about how that translated to direct margin. And I think we are very, very focused on our direct margin guidance because of some of those volatility element and the fact that it doesn't always translate to direct margin, which is really the way we see the health of the business. So that's a little bit about how we came to the guidance today. And I think, again, I'm sure we're going to get into a little bit more of the direct margin with the constitute part of that and the EBITDA guidance. But again, hopefully, you'll see that it's a very, very strong story when you look at the '24 numbers or even further out to '26. Hopefully helps you constitute how we put the guidance together.

[indiscernible]

Very little. I think what you -- why we want to have those 3 entities operating together because if you want to win in the CPaaS business, you have to make sure you have the best route to deliver the message. And BICS brings that direct connectivity to MNOs all over the world. And that's a key competitive advantage compared to other competitors in the CPaaS activity industry of the market today. So having strong and direct routes to MNOs all over the world is a key competitive advantage compared to not having those routes. That's why I think the different entity is a [ connect part ], a CPaaS network part, along with the engagement platform is so important for us. And for me, as a key strategic enabler of the growth of the group going forward. Within BICS we have a very small CPaaS platform, [indiscernible] MOBtexting, and but that's very limited and very small and that will be integrated within the CPaaS platform of Route Mobile, and both platforms are today operated out of India. So that means that it will be quite an easy process to integrate the 2 platforms altogether.

Our next question comes from Nicolas Cote-Colisson from HSBC. I see that he has removed himself. So the next question comes from Akhil Dattani from JPMorgan.

[indiscernible]

Okay. So I'll try to start with the first question around the CPaaS market. So first, you need to look at the underlying trends of that business, engagement platforms, connection in between hyperscalers, but not only hyperscalers, large organizations and more and more small organization in between their services and the end customers. And that trend is not going to -- to slow down to the contrary is that the trend that will accelerate over time. So the need to have more intelligent conversations in between end users and services being delivered by hyperscalers, [indiscernible] are enterprises or small-sized organizations. That trend is going to continue to be growing quite fast going forward. The second element you see is that the main channels to deliver that -- those messages or those conversations, will shift from being mostly SMSs towards omnichannel kind of approach, meaning that SMSs will be probably still 50% of the channel used by 2026, but the other channels are going to develop themselves. So WhatsApp, RCS, Viber, voice. And those channels will take 50% of the share of voice of the preferred channels for end users. So the key is that if you look at the revenue trends of those markets. When you send an SMS, you have to pay a termination fee to the MNO and that termination fee is considered as a revenue, but also as a cost for CPaaS players. So imagine when you shift from an environment where most of the messages are SMSs to an environment where half of the messages are SMSs, the rest is on other channels. Then you have a mechanical effect on the cost paid by hyperscalers or large [ organization ] to deliver message, with no effect for the CPaaS players on the margins they are making, just an effect on the revenue they are making. That's why sometimes some industry analysts are a bit confused on what is the value of that market, the value of the market, the cost to deliver the message will diminish, but the value for the people delivering that services will still grow quite fast. And that's what is reflected in the way we look. When you look at the organization, this is what is reflected. So more caution on the revenue line, but we are still very confident that on the direct margin will grow super-fast. And that's really the way you should look at the opportunity. Why on top of that, we believe that we can beat that 10% to 15% CAGR, I would say that probably the at the DM level, we should see that the direct margin or gross profit level, you should see that kind of trends for the CPaaS players and for the industry, why we think we can bid that because, first, we have the delivery machine that direct connectivity to a lot of MNOs all over the world. That's a key, as I said already, a key success factor for the industry going forward because you want quality route and you want low latency when you deliver the message. So that's super important. Second, exposure to fast-growing geographies. If you look at our competition on the CPaaS activity, very few of them are as exposed through us to geographies where you see the fastest growth in terms of digital adoption and need for this kind of engagement services. And we are exposed to India. We're exposed to Africa. We have more exposed than others to Asia, where you see a very, very strong market growth. And the adoption of these services and that the last point I would share with you today, if you look at the still super penetration of those services are still very low, only 50% of the corporations, like operations today are using CPaaS platform to deliver their messages to the end users. We expect that number to be 90% within 3 years. So if you combine those 3 elements, that's where we believe where I think that market has a need that demand will continue to expand. The cost to deliver that services will diminish. But for CPaaS players, it will be an opportunity to still grow very, very nicely, strongly our gross profit, our direct margin, if you want to do that -- align to look at the business. That's why, again, revenue for CPaaS not that relevant. Gross profit or direct margin are the relevant KPI to look at. And if you look at the trajectory, we shared with you today. I think it's a quite nice trajectory in line with the fact that we still believe and that it's not only us, I think the industry still believes that the need for conversations, engagement of customers with high quality is something that we'll continue to develop over time.

And maybe I'll just add to it. I think also there's a synergistic element to the growth level as well that our competitors don't have, Akhil. So I think that when you add that to the mix, I think that adds to our confidence. In terms of the pathways, look, I think where we are today is we're very, very confident in terms of what we've set out in terms of the path of the organization. In terms of what are we going to focus on, first, we're clearly -- we spent the last 8 to 9 months preparing for this moment. We're ready. We're going to be laser-focused on delivering the synergies. That's really important. Capturing the organic growth, as Guillaume said, I think we have a fantastic platform, fantastic go-to-market ready to capture that organic growth. And then as I said, we put on the slides, there are multiple paths to expose that growth to investors in the future, and we will explore those in the midterm. That's our thought process at the moment.

[indiscernible]

I think it depends, of course, of the geographies that you consider, but RCS in some -- in Asia Pacific is almost ready for prime time.

The next question comes from Roshan Ranjit from Deutsche Bank.

[indiscernible]

Roshan, let me start. I mean we're not giving that exact mix. But I think if you take the -- the way I'd go at it is we said we fully believe that we'll take the top end of our of our inter domain segments in terms of CPaaS, Mobility. I think if you look at that and apply those type of growth rates, you very quickly get to what B2B will be. So clearly, it would be a smaller proportion of the business by the time we get to 2026. So that's a little bit how I would think about it. I think you can get to that kind of trajectory, more or less from what we've been able to provide. So -- but we're not actually providing that level of granularity at this point.

But today, we -- if you look at the voice business of BICS, we are #4 in the world in terms of market share. And we're also positioning ourselves more and more into a partner to help other operators to outsource this voice business to us so that we can scale our existing platforms. And that we're going to see also more. So we have that kind of a last-man-standing approach also for that voice activity, which I think could also demonstrate why we can bid that the declining market trends over time. And that's something that we will probably also continue to look at in terms of making some new successes acquisitions in terms of outsourcing voice platforms for -- delivering outsource services for voice platforms to other operators. On the geographical footprint equation and the complementarity between our activity within BICS, our activity within Route and our activity within Telesign. I think the very nice element of that transaction is that, of course, in terms of cost, we're going to have the best operating cost model because we're going to have all our platforms operated out of India, which is quite good in terms of our ability to be extremely efficient for our platform development, but in terms of customers, of course, the footprint of Route Mobile is way more exposed to the fast-growing geographies that have already been mentioned by -- in the presentation in the deck, that I mentioned earlier also in the Q&A session, where I think we can leverage that go-to-market capability of routes in India, of course, but also in some other geographies that are fast growing in Africa and also in other parts of Asia where Telesign is not that exposed today. So I think one of the key assets we have as a group is that go-to-market reach because with BICS, we talk to all operators in the world. And when you think about the firewall capabilities of Route Mobile, we have the go-to-market with BICS to sell those firewall capabilities to MNO so that they can be protected again for [ during ] messages. And then when you look at the revenue synergies that we -- that we presented today, that's one of the key elements is to leverage our access to those different geographies where today, Route is mostly selling CPaaS, but tomorrow, those go-to-market and salespeople will be not only selling CPaaS but also DI. And that reach is 1 of the key advantage of the deal. Now we have a worldwide reach and then we can cross-sell our products in every sales call that we can have because those products are quite adjacent and you're talking a bit to the same people when you were selling the 2 products. So that's the way you should look at it, so very complementary geographical footprint in terms of go-to-market that we want to leverage to cross-sell as much as we can our different products.

The next question comes from Kris Kippers from Degroof Petercam.

[indiscernible]

Yes, Kris. So in terms of the upgrade, I think if you take a look, the overall cost synergies are in line with what we discussed before. So again, we've been doing some pre-merger integration for the last 8 or 9 months. And so we -- as Guillaume alluded to, we see some fantastic opportunities in terms of across both platforms in terms of the growth in some of the markets that we're now going to have exposure to from both sides of the acquisition. So in terms of -- that's really where you see the upgrade come from. I think the confidence level is very high. on both the cross-selling revenue synergies, the cost of goods sold, which is effectively taking a view around our termination -- optimized our termination costs in terms of the best route quality pricing optimization. And then on the OpEx side, I think it's all around, again, we touched on in terms of optimizing across our global footprint, to ensure that we've got the go-to-market, the research and development, administration of the business done in the right place. So in terms of overall synergies, I think we're super confident in terms of the delivery of that. Again, in terms of the timing, we spent a lot of time thinking through the phasing of that. And again, we've given you some guidance about where that will come today. So hopefully, that is super helpful for your outlook.

I can take that question. I think we have a very clear slide on it, I think -- I don't know which number it is [indiscernible] we have Chris Van de whose is responsible [ forward ]. So you have -- that team will be responsible for during the synergies. So it's a combination of the business line leaders, that's Rajdip and Christophe and the new leader for Career Services that will be appointed by the end of the summer. And then we have the technology for the group, the product management for the group, which is Milind then we have operation, which is in Antoine. So -- and then supporting cast, which for finance marketing and strategy. So that's the team that will be responsible for delivering those synergies. So I think it's quite straightforward.

[indiscernible]

Yes. I think the objective is quite also clear here. I think we give to ourselves a time horizon of 3 to 5 years to find a moment to crystallize that value and that the way we also operate that those International activities, so that in case we need to do that -- organize that crystallization moment, we are ready for it. The mindset and the way we'll operate those activities. So that's the moment we can crystallize we do it, and we will prepare for it. So that's one element. Second element is, I think, the way we're going to drive it and steer it. It will be also extremely focused and again, if you look at the ambition of Rajdip, for example, he has reinvested half of the proceeds of the deal within Opal and it will be extremely incentivized to ask the management team of the International activities of Proximus to get to that crystallization and value crystallization moment. And I think this is very -- what is nice with that framework that we have all interest aligned because Rajdip now is fully invested in Opal and we'll all be running to demonstrate to investors that we can create a significant amount of value linked to those activities.

The next questions come from Siyi He from City Group.

[indiscernible]

Sure. Let me touch on the start of the conversation. I think on the revenue side of the business, I think there are dynamics in the domains of P2P and CPaaS that make the revenue element, not the key measure of the -- what we'd say is the health of business. That's why we really focus on direct margin. But there are elements in terms of the market evolution. Just pointing to -- we talked a little bit earlier about the P2P evolution, what will happen in that market. CPaaS is moving to omnichannel. And therefore, we've taken those market evolutions into consideration in our revenue guidance. But then when we look at direct margin, again, we'll talk more and more as we talk about the international business over the coming earnings season. The guidance there is really based on our view as we set out in terms of the market growth of the domains of CPaaS, Digital Identity, Mobility and P2P and it clearly also has an element as I alluded to earlier, the synergy realization that will come through over the next 3 years in terms of giving us that kind of CAGR ambition. And we've considered it carefully. So I think, again, as we had a question earlier, I think it's an ambitious goal we set ourselves, but it's 1 that we think is manageable and achievable over the next 3 years or 2.5 years.

[indiscernible]

Yes. And I think, again, there is a slide in the deck around where we expect our overall net debt to EBITDA guidance to -- I think the 2024 guidance is a reflection of the financing of this transaction. But we continue -- and again, if you look at our EBITDA guidance for the group, we said at the Capital Markets Day and the effect that this will have on the overall international inclusion of that, clearly, that will start to delever ourselves from '25 onwards. And I think that continues to be our ambition to keep our operating -- our debt-to-EBITDA leverage in the guided area that we talked about in the Capital Markets Day.

But to add to Mark to say I think the focus of the team now is really to deliver the synergies, make sure that we can deliver the growth ambition we shared with you this morning. That's really where we are in terms of thought process and make sure we can deliver that integration, deliver the synergies and make sure we can grow faster than the market.

The next question comes from Nicolas Cote-Colisson from HSBC.

[indiscernible]

So I think it's early to say how we're going to organize our product suite going forward. But the idea we have is that we don't want to operate our international activities based on the 3 entities. I think we want to have business line leaders so that we can operate our different business lines independently of what is the legal entity behind the scene. And that's really the mindset to which we want to have our go-to-market teams, but our product teams and also the business line leaders to Rajdip and Christophe. So Rajdip, indeed will be responsible for the CPaaS activities that is today delivered at Route Mobile, but also today delivered at Telesign. So you will have that overall responsibility across Telesign and Route Mobile legal entities. So that's extremely important to understand. And then today, we'll see how it goes, but little by little. I think we want to have 1 brand on -- I would say differently. We want to have 1 platform for CPaaS and 1 platform for DI. Today, we have 2 platforms of DI because Route is also active in the digital identity activity as well. And we have probably 3 platforms of CPaaS because we have the 1 of Telesign, 1 of Route Mobile and we also have the 1 of BICS that we mentioned earlier, the MOBtexting platform. So that we want first to have -- to make sure that we are using [ advanced platform] for every service that we deliver to end customers. Then there is a branding issue. Do we want to keep the Telesign brand? Probably, yes, for the time being because Telesign is a very strong brand for some hypescalers that are in the U.S. So it might be that we keep the brand even despite the fact that the platforms are unified and we are running our services on 1 platform. So that branding -- as a branding of our product portfolio, we'll see how it evolves. We might create some simplification. But for sure, now the focus is to make sure that we are not creating negative synergies in transforming too rapidly the branding environment and as such we are not confusing our customers. So that's 2 different tracks. The one is on brands. The other one is on platforms. On platform, then we can accelerate very rapidly and the objective is to merge those platforms extremely rapidly in the coming year. And all the cost of those platform integrations are reflected in the cost of the -- today, the synergy that we have shared with you today no additional marketing cost to be envisaged on top of the cost that you have seen in the deck.

[indiscernible]

So let me take the first one. I think I mentioned Nicolas here but as I said, we confirmed the cost synergies as we did -- as we set out the initial set of the transaction. The revenue synergies are higher, which is 1 of the elements of the main element of the upgrade. Our confidence around those revenue synergies are significant. As I said, we've had 9, 10 months of premerger integration. The teams have been working together where possible. And again, when we look at the geographic, the platform complementarities, we're super confident on that one. In terms of incentivization, I don't know, Guillaume, do you want to?

It is this market standard to foresee some incentivization programs for this kind of fast-growing social company, that's something we have planned for. And it's also backed into the numbers that we have shared with you.

And then on the interest cost, I think, again, I think we've talked multiple times in terms of our Proximus interest refinancing. We hedged back the '24 refinancing and the '25 refinancing, they were hedged that kind of prewar rate. So we secured that financing. We raised a 700 million bond in March to finance this transaction. I think we shared at the quarterly earnings, the right there, but it was around 3, 3.5 percentage points on that 700 million. So again, it's because of our credit rating, and our ability to manage the balance sheet. I think it's kind of very muted in terms of any significant change on interest costs.

[Operator Instructions] Our next question comes from Joshua Mills from BNP Paribas.

[indiscernible] Capital version you put through the slides. It would suggest that you're aiming for around 200 million plus free cash flow from the international segment by 2026 could you maybe respond if that's the case? And then the third one was a see a bit high level on there's been a lot of work to get the deal at this point in time. You've put a very credible team in place. But there are lots of other challenges facing Proximus at Group level into the next few years, not least someone into [indiscernible] into the Belgian market. So how much of your time management team are now going to be expense focused on the international segment versus the domestic segment? And how has that changed versus, say, a year ago?

So I'll start with your third question to answer the first one. I think what I've clearly said to you also in the last Q2 -- or Q1, sorry. Q1 meeting is that we have 3 priorities. First 1 was to execute on our Route Mobile acquisition so that make sure we can deliver the growth, deliver synergies. That's number one. Second was to make sure we can adapt the right way, the market structure when it comes to Fiber roll-out. That's the second priority for me and for the management team. Third priority is Digi and make sure that we can absorb the launch of Digi but also absorb the launch of Telenet in the south of the country, without materially affecting our strong commercial momentum that you see since years now. Those are the 3 priorities for me and for the management team. Everything else is not on the table. So I think this is quite clear. And if you look at the I think this is a good thing that we know when there is an asset to be sold or rumors that we -- our name is mentioned because I think we have become with acquisition Route Mobile one of the most important player in the industry, but that said. As I also said to [ provision ] that call, the priority is today to deliver on the growth and on the synergies and to make sure we can have a nice framework for collaboration and make sure that we are still leading commercially for the next 2, 3 years, despite the fact that Digi will be entering the Belgian market. That's the priority. And in terms of time allocation, 1/3 to 2/3 is probably a good way to look at the way we allocate our time. And I think when we -- and I think that when we can demonstrate to you that we delivered on our international ambitions that we have adapted the right way the Fiber roll-out our co-investment framework for Belgium. And Digi is not successful in Belgium, then we can talk about other things, but not at the moment.

And Joshua, on the free cash flow, maybe a couple of points. I think as I said, we're confident on the synergy level and that synergy level other than the elements we noted in terms of the initial investment to capture some of the -- [ migration ] of the acquisition, that is meaningful to us by the time we get to 2026 in terms of the growth that we'll provide from the core business and the synergies, I think also Telesign, we've been talking for several quarters now, Telesign is becoming past its investment peak and therefore, becoming EBITDA generative for the group. And so as I said, we're confident in getting to that free cash conversion level. And again, if you do the math, you're in the right range. We don't provide that specific guidance, but I think your math is broadly in the right direction.

The next question comes from David Vagman from ING.

[indiscernible] A question now on the energy footprint. Can you explain us how [indiscernible] should we expect the DI anything to move to India? [indiscernible] to India. I understand that CPaaS is clearly moved to India. Does that is [indiscernible]

I think in terms of where we're going to operate the company, it's not only about R&D. You have your operations, you have product management. You have product development. I think the idea is that product development will be mostly delivered out of India where you have the talent to do it, and you have the expertise to do it. So I think this is quite clear. But it's not like we have a rule. I think we will be also flexible depending on the type of activities to be considered. But as a trend, you can expect indeed that the product development will be delivered out of India, but operations need to be also delivered in different geographies to cope with the different time zones of our customers. And product management, then it's a different question because there, you have to be close to your customers. So we see whether we can have a more -- a more equal reposition between Europe, India and the U.S. That's the way you should think about it.

And David, again, maybe just take you back to point you have made it at the start. We bought Telesign 3 years ago for $200 million to $300 million. This deal values Telesign at $1.4 billion. There is no few of impairment to Telesign asset in any way through this acquisition.

The next question comes from Nuno Vaz from Bernstein SG.

Two from side as well. I think relatively simple questions. One on the timeline of the synergies until 2026, we're talking about 2.5 years left now. Do you feel confident that it is enough time. Is this a bit quite short, especially things such as cross-selling may take a bit more. [indiscernible]

So let me take a little bit on the timing of the synergies, again, in the deck, we laid out year 1, year 2, year 3 we're confident that we're going to get them. Is it going to be exactly 1 side or the other of the year 3. I think we're planning clearly for '26, but it's not a '27 '28. So I think in terms of the planning of the synergies, we're confident I said we spent a lot of time thinking through and planning those. In terms of exposure to the direct margin, it's something that we're pretty experienced in terms of some of the work we already do with Telesign, with BICS, Route Mobile clearly also has been exposed and is able to master that. So it's something we're aware of, but it's not something that we're we think is going to be a material issue in terms of -- we've got the experience to do that in the business existing.

[Operator Instructions] Our next question comes from Michiel Declercq from KBC Securities.

[indiscernible]

Okay. I'll start with the DM split between SMS and OTT. Today, the vast majority of the DM for CPaaS activities is around SMS. But the fastest-growing part is, of course, on the OTT. And so today, so that's a reality. So the transition is happening as we speak. But also you have also to look at the business a bit differently now because it used to be a transaction business that you were trading SMS delivery for your customers. Now you are delivering a service so that you're going to say to your customers, I will ensure that you're going to get 99.9% of the reachability of your message to the end users, and we're going to choose for you the best channels for that delivery. So it's the best channel to get to 99.9% in 120 milliseconds of latency then we're going to use SMS. If we think that it's a WhatsApp that your customer is preferring that we're going to use the WhatsApp instead of RCS. So we're going to make that decision going forward, so that intelligent decisions based of the insights we're going to get from end users. So you can start to see that we're going to shift progressively from transactions kind of activity to a more -- as a service type of activity because we're going to deliver that service with the right quality on the right latency. That's the shift that you're going to see happening in the industry going forward. And with the Route Mobile platform, we are very well positioned to take advantage of that shift. And certainly, the platform has the ability to deliver with the right quality. And that's where a BICS direct routes to MNO makes a lot of difference. So that's the answer to your first question. On the second question on the signaling. So you have BICS you have mainly 2 types of businesses. You have the person-to-person invoice messaging business, which is, as we already mentioned, a bit on declining trends, but where we want to be that last man standing kind of a provider are outsourcing those voice platforms. And aggregating all the volumes of voice for the midsized operators all over the world. That's the play we're going to follow for voice and P2P. For signaling here, it's a growing market. I think the signaling part of BICS and Mobility Services, this is really a nicely growing market, a 5% CAGR. I think this is the number that we are sharing with you today, because of [ Twilio -- Twilio ] is back, and we continue to develop for the next 3 years. Then the migration towards NPM and 5G-powered NPM services will also be something that will create a lot of traction for BICS. So I think those types of services will be nicely growing, and they already represent 20% of the overall DM of the international activities of the group. And those 20% will be growing at 5% CAGR for the next 3 years. That's really the way we should look at it. And that's why we also love that big business by the way because being the last man in the 1 industry, it's always good. You create a lot of opportunities when you are in that position. And we are exposed to a also to growing activities like signaling activities, which is a fast-growing activity, 5% a year compared to growth rates in the telecom industry, it's a nice growth rate for the next few years.

[Operator Instructions] There are no more questions, so I will hand back the microphone to Nancy Goossens, Investor Relations Lead for closing words.

Sure. Thank you very much. This indeed closes the session for today. I hope you found it useful. Should there be any follow-up questions, then obviously, you can reach out to the Investor Relations team.