q.beyond AG (QBY0) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to QSC's conference call about the company's preliminary results for 2019 and its outlook for the year 2020. [Operator Instructions] Let me now give the floor over to Mr. Jürgen Hermann.

Yes. Thank you very much, and warm -- and in these uncertain times due to the coronavirus, a healthy welcome to our conference call. My name is Jürgen Hermann, and I'm the CEO of QSC and together with me is Arne Thull, our Head of Investor Relations. So let me start with the remarks concerning the corona discussions that the company is doing its business. And so far, we have no operational impact at all concerning this issue. So with that, I would like to jump into the presentation, and we start on Page 4, where we can see that QSC is back on growth, plus 10% in the last 3 quarters. And let me state that high visibility concern in the first quarter this year. And you know that it's very important to have recurring revenues and I can tell you that approximately 75% of our revenues are scalable. Next page, we are focusing on 3 main technologies, which are the basis and absolutely necessary to execute digitization in the Germany market. And it's IoT, it's SAP and it's cloud. Why these technologies? On Page 6, and what we are talking about nothing else than the digital value chain, and the value chain and the digitization is always the same. It all starts with the key in the IoT on the left side, with the sensor technology where we can record all this data that is necessary to predict and then whatever you can do with the data. And then we do have the competence in SAP and the other relevant applications. And last but not least, we have the competence in cloud. If it's our cloud in our data center or third-party cloud like Amazon, like AWS and Azure. Or on the customer premises, we give possible as well. The chart on Page 7 shows the accumulated total contract value, which stays EUR 133 million in last year, which is to be very precise here, the volume of binding contracts regarding the total terms of contract. So if we sign a contract over 4 years with a TCV of EUR 20 million, for example, this means that EUR 5 million per year are relatively safe in our terms. So this is a good basis for the growth in this year. And what we are looking for on Page 8. This year is revenues more than EUR 143 million. And when we look on the adjusted numbers in last year, so the EUR 127 million, you can see is without Plusnet. So you can compare these numbers absolutely. And you can see that we have communicated and told the market what is our plan for 2021 and 2022. And it's always on the basis of high share of as a service revenues, which is a guarantee of a scalable business model. And one of the ingredients for our growth story on Page 9. It's definitely -- and I start on the left side, our business portfolio, which is well suited for the German Mittelstand. It's, as I said, our competence in technologies like IoT, SAP, cloud and others, but these are the main 3. And it's very important to understand that from our point of view, it's necessary to combine these different technologies. And these are not only stand-alone if you want to really be successful in digitization. The third column is the market approach. We have a clear sector focus on the 3 sectors, retail, industry and energy, and definitely, last but not least, a young and a new management team. You know that concerning the Management Board since January, I am representing QSC alone. But it's very important to understand that the company is managed by another 6 people, and you know them for the different areas like SAP, cloud, IoT, the sector focus, the financial path and technology. And due to our financial strength, we are able to support this strategy by M&A transactions. So this new QSC is taking shape. Concerning the targets on Page 11, we met all the targets for last year. And by the way, we did this since 2014. So in the last 5 years in series, we always met our targets. And we -- when we look at the P&L on Page 12, you can see and you know that these numbers are highly affected by the Plusnet transaction. So it's not really comparable with this year, 2018. And it will not be comparable with the year 2020, definitely not. So in 2019, there are some transaction costs based on the transaction. Of course, we had the other operating income in the amount of EUR 135 million. We have a higher volume of depreciation due to IFRS 16 and one-off adjustments concerning goodwill. And last but not least, and this is what we announced this morning as well, we adjusted the deferred tax position. On Page 13. So for the balance sheet, the transaction has a lasting effect. We have, end of last year, a net liquidity of EUR 66 million, an equity ratio of 71%, and we are debt free. So very, very strong balance sheet, which is a basis for our growth strategy in the next years. Let's have a short look on the, let's say, old segment reporting on Page 14. And here, you can see the unadjusted figures with the, let's say, 4 old segments: Cloud, Consulting, Telecommunication and Outsourcing. And the main message here is that Cloud and Consulting are the growth drivers. If we look on the new structure following the Plusnet sale on Page 15, here are the 29 (sic) [ 2019 ] key figures as well. You can see that the new QSC, and I mentioned this already before, is showing revenues of EUR 127.4 million, which is a basis for the growth in this year where we are heading for more than EUR 143 million. So in this way, it is a starting point. But you can see here in which way the different revenues in the old segments linked to the new QSC. And when we talk about the new QSC on Page 16, you see the new segmentation that we have implemented. So Telecommunication will not make any sense anymore. There is only Colocation, which will be linked to the new segment, Cloud and IoT as well as Outsourcing and the Cloud areas. And as well, a small portion of non-SAP consulting, which has a lot to do with Cloud Consulting. So this is one segment with cloud and IoT. On the other hand, we have the pure SAP business, as you already know it with EUR 36.6 million concerning last year numbers. So highlights in 2019, definitely the Plusnet sales, which is not the starting point, but a milestone for our growth strategy, which has been started years before already with the transformation within the company. We have technologies and products in a fast-growing area. We met all the targets last year. We are debt free, and we told the market that we want to propose the AGM dividend as in the years before of EUR 0.03 per share. With that, I come to the guidance on Page 19 for this year. As said, operating growth of at least 13%, which would lead us revenues of more than EUR 143 million. And because we are still investing in new services, in new products, in innovative business solutions, we plan a negative EBITDA of up to minus EUR 5 million and the free cash flow of up to minus EUR 16 million. And as said in different conference already, we expect a sustainable positive EBITDA from Q4 this year, and the sustainable positive free cash flow from Q4 last year. So I'm very convinced that what was right in the last 6 to 7 years in IT business will not be sufficient for the next 6 to 7 years in IT business. We need, driven by digitization, new services and innovative business solutions. And this is where we are investing, and you can see some examples for our growth on Page 20, where we are investing in digital shelf solutions with all the different functions that you can see here. And this is a very, very interesting for our sector, retail, especially. On Page 21, we have -- we show a graph from DSAG concerning S/4HANA transformation. And you can see where we are already expected -- with discussions with our customers that the main, let's say, portion of transformation will take part within the next 3 years. So far, we are below 10% concerning S/4HANA transformation. And on Page 22, this is an example that we are building our own intellectual property, concerning electronic shelf labels as well as investor solutions based on artificial intelligence. In the last, let's say, 4 years, we transformed more than 60% of our employees, and we are -- now have the new, let's say, competencies on board like S/4HANA specialists, software developers, outstanding cloud architects as well as creative business developers, which are the basis for the new -- for direction. And this is important because it's not only in USP of QSC, it's important as well because intellectual property drives profitability. QSC has a strong balance sheet. So of course, we are looking for growth potential driven by acquisitions. We have planned, let's say, an amount of roughly EUR 25 million for this purpose, approximately EUR 5 million for start-ups and approximately EUR 20 million for already established businesses in future technologies. And so this is the main focus, and always tell the market if there would be a QSC 2 or second QSC, we would not go for it because we are really not looking for acquisitions where we are looking for synergies, we are looking for technology acquisitions. This is very important to mention. So the new QSC is in place with a clear focus on growth markets, a strong attractive business model based on as-a-service solutions and S/4HANA transformation, supported by acquisitions. And at the end of the day, we will definitely bring the company back to profitability, starting with Q4 this year. And with that, ladies and gentlemen, I would hand over for your questions. Thank you very much.

[Operator Instructions] And the first questioner is Patrick Schmidt from Warburg Research.

I have 3 questions. So first would be, what are your CapEx plans for 2020? And what is it spent on? Second is what tax rate can we assume going forward? So if I remember correctly, you stated that you can use some of your tax loss carry forward. So should we expect a single-digit tax rate in the mid-term still? Or is there some changes ahead? And last question would be, in terms of your segments, I know you're changing your reporting structure, but how should we think about the old, let's say, telco, which is effectively Colocation and Outsourcing. So are these kind of still declining? Or can we assume that they are stable? And how should you -- or how do you think about Colocation going forward? Is there a potential disposal likely to trigger some real estate value you're having in Hamburg potentially? And how do you think about your competitive advantage in terms of having your own service in Germany, et cetera, versus using open cloud solutions from Microsoft and Amazon, potentially?

Yes, a lot of questions, Patrick. I hope I got them all, and let's start with the easy one. So CapEx, we expect CapEx approximately in average, EUR 2 million per quarter this year. Concerning the tax rate, you are right. We have a high tax loss carry forward. As far as I remember, it was in the 3-digit million area. And due to that and the unchanged tax situation, this means that we have to pay taxes on 40% only, assumed a tax rate of 30% leads us to an effective tax rate on -- of 12% for the next, be honest, few years, at least. Concerning the segment, we have chosen these 2 segments because Telecommunication is not, let's say, longer -- any longer in place. Outsourcing is something what we will might create definitely into cloud, step-by-step. And the amount is so small, let's put this way that we can be sure that we can extend these contracts or migrate them into the cloud. And therefore, we expect growth in all segments starting this year. Colocation is another thing. Let's put this way. Colocation is another business. It's not based on a very, very small amount based in Hamburg, the majority is based in Nuremberg and Munich. And of course, due to the fact that this business where we -- I always name it square meters, where we just rent the space for our customers and providing power and security and all these things. To grow in this area would mean to invest in further data center. So we have the capacity and we are running this business quite successful. If we -- there can be the possibility to dispose it, but we have no -- we have not took a decision so far. And this is different from the situation in Hamburg, where we have our own real estate, and it can be an opportunity to sell this real estate. But we haven't taken a decision here as well so far.

Okay. Maybe one follow-up. Can you tell me how many square meters do you have in Hamburg?

Concerning the real estate?

Yes, the whole property.

Or concerning data center?

Both.

So I'm not -- I don't know it's just -- we have roughly 10,000 square meters real estate overall, including parking places and other things. And in total, including Nuremberg and Hamburg, we have 20,000 square meters of data center capacity. Of the real estate, so the -- it's 10,000 square meters, all including.

Okay. But not only Hamburg, so all including?

No, Hamburg. Only Hamburg.

Only Hamburg 10,000? Okay.

So next up is Wolfgang Specht from Bankhaus Lampe.

Three follow-ups from my side. First, on your order book. Can you give us a rough indication how the order book splits into the new segmentation you've got? And do you expect total contract value to continue growing sequentially in 2020? And then probably on your pitch situation, can you give us some insight what kind of deals are currently available? Or what is your priority currently while pitching for projects?

Yes. Thank you very much for your question, Wolfgang. Concerning the order book, I can tell you the info -- or I can give you the information for 2019. For 2020, I just can tell you that we had a good start. So full stop. 2019, it was very similar to -- comparable to the revenue split. On the one hand, and the second information due to that, it was roughly 50%. So half of it on existing customers and 50% half of it on new clients. Concerning TCV 2020, due to the -- our internal, let's say, KPI book-to-bill, we are heading for TCV that is in the area of our planned revenues, which means more than EUR 143 million. If it's really -- on the growth, which is, let's say, step by step, this can be -- differ from quarter-to-quarter, depending on maybe a large project that we were able to win. But overall, for the year, I told you the number. Concerning the pitches, we have 2, let's say, private groups. One is definitely still large pictures, which means definitely more than EUR 10 million TCV. But very, very important, is definitely a lot of, let's say, smaller pictures in the area of EUR 5 million to EUR 10 million TCV, which are very important as well. And yes, there are some interesting projects so far that we are working on and more to come.

The next question comes from Heike Pauls from Commerzbank.

A couple of my questions have been answered -- or asked and answered already. The first one is -- or the remaining is that can you explain the rationale of the deferred tax adjustment in the fourth quarter? Is that driven by deconsolidations or anything else? I'm just trying to understand what's behind this. And the second question, you already discussed Hamburg, but said that no decision has been made yet, whether you will sell or not. What does it depend on because the sale seems to make an awful lot of sense based on the current prices? So what exactly is your reasoning behind this?

Concerning before tax, it has just to do with the new plants, the new plants are in place. You know them already because we have published them with the EUR 200 million target in 2022. Due to the fact that we have -- or generating now losses, planned losses and due to the fact that we are just looking for a period of 3 years concerning deferred tax assets, this adjustment is quite a normal cause of business in the audit for last year. Concerning Hamburg, to be pretty clear, we are talking about, and the discussions that we are -- that we have here is about the real estate. We are not talking about the data center. So in case we would take the decision to sell the real estate, we would definitely have a rental contract to use the data center even in the future. So it's just that we are asking ourselves, is it necessary to have real estate on the balance sheet. That's the only purpose and nothing else, which is different concerning discussions in Nuremberg and Munich where we're talking about a whole business colocation, yes.

Okay. Just -- does it make any sense to completely relocate the data centers in Hamburg-Winterhude?

That is the question that will -- our customers decide. A few years ago, nobody was willing to get into the cloud at all. And if there is a change in the meantime -- or in midterm, which will take definitely a few years. But there might be a point of time where customers are willing to get totally in the public cloud area. But nothing that we were to see as of today. Our customers are still very interested in at least part of the data that has to be thought in the private cloud like we are offering. But I don't know what the future will bring us here. And honestly, I'm not so convinced that some projects initiated by the politics -- by the politicians, concerning like Gaia-X or others will be successful. But this is my own opinion in this environment.

And next up is Lukas Spang from Junolyst.

I want to ask my questions one by one. The first question be on the S/4HANA topic. Can you give us some details of the current development in this area? Do you see also the rising momentum as said in the DSAG survey?

Definitely, although SAP announced that they prolonged the period to do the transformation from 2025 to 2027. We still see the necessarily that it's necessary to transform. And our projects are all, in a certain way, dealing with S/4HANA transformation. Not always the whole environment, the whole architecture, but the main parts on the table, definitely. There is appetite in the customer segment.

But do you see any possible delays due to the prolongation to 2027?

I don't expect that. And my -- what I -- I always said gentlemen, please use the time you got from SAP, and just don't stop it now and wait another 2 years. Because at the end of the day, it always very busy in -- other than project. So our statement is, let's start now. Now is the right point of time to do the migration.

Okay. And then two questions on your guidance. First, on your EBITDA guidance with up to EUR 5 million. What is the fair range to assume, for example, 0 to minus EUR 5 million? Or what would be a fair assumption?

On a quarterly basis?

For the complete year.

The complete year. Yes, this is a fair assumption.

Okay. And then on your free cash flow guidance. Is the guidance up to minus EUR 16 million included IFRS 16 effect or without?

All numbers are including IFRS 16.

Okay. So free cash flow is EBITDA and CapEx and IFRS 16 and then cash outflows?

Yes.

Operating cash flow instead of EBITDA?

Yes.

At the moment, there seem to be no further questions. [Operator Instructions]. Mr. Hermann, there are no further questions.

Yes. Thank you very much, ladies and gentlemen, for your interest in our conference call. Yes, and hope to talk to and see you soon on the Q1 results. Thank you very much.