Solocal Group S.A. (LOCAL) Earnings Call Transcript & Summary

Hello. And welcome to Solocal Q1 revenues webcast 2020. My name is Karis, and I'll be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Eric Boustouller, CEO, to begin today's conference.

Thank you. Good morning, ladies and gentlemen. And welcome to the first quarter 2020 results of Solocal. I share with you today our Q1 revenue and the outlook for Q2 onwards. I'll be joined in this call by our CFO, Olivier Regnard. But before starting, I hope that everyone in this call is feeling fine, as well as your beloved ones. For some of you recovering, well, if you've been effected, unfortunately, by the COVID virus at some point. And that will -- you will always remain safe anyway moving forward. I'm sure you will share as well my hopes for the sanitary crisis to be under control as soon as possible. And for -- and we hopes to have as well for a fast social and economic recovery for our world. Having said that, let's get into our Solocal Q1 business. And moving to Slide 3. Let me call out the key highlights of today's presentation. Q1 profile was very special with 2 periods, a good start of the year and then a brittle stop. Indeed, we are at a good start in line with our strategy and business expectations, building on our Q4 digital sales momentum. Our new Digital services, including Presence and the Priority Ranking, continue to meet customer demand with a positive adoption rate. We also moved with the deal in terms of new customer acquisition and cross-selling of our existing customers, which are 2 motions that are high priority in our 2020 agenda. We had good traction across the board until the crisis outbreak. This was very brutal, right from the beginning of the lockdown. Ever since, we've literally lost 70% of our business in terms of Digital order intake versus last year. Needless to tell that the impact is massive on our business and consequently, on our financials, which we will disclose later in the call. Now it is too early to tell what will be the full impact of the present crisis on our business. There are lots of moving factors such as the uncertainties around the evolution of the health crisis, the conditions of the end of the lockdown, the soft or fast economic recovery. For all these reasons and many others, we have suspended our guidance for the current year. Yet, we'll provide some direction in this call. And hopefully, we'll nail this down no later than the end of July at the time of our first half earnings release. Now moving to Page 6. So as well depicted on the slide, and as I said, trends were all going in the right direction at the beginning of the year, in line with our strategy and in line with our expectations. Look subscriptions with auto-renewal clients were up to 79%, a 7-point increase versus Q4 2019. This high adoption rate of our new business model confirms the relevance of our strategy and secures recurring revenue growth and less churn going forward. In the same time, the migration pace of our customer base from the old search to the new Digital services, including Presence and Priority Ranking continued to accelerate up to 88%, and increasing from 86,000 customers to 132,000 customers, representing 45% of the overall customer base. Until mid-March, we were definitely on track to meet 2020 expectations when it comes to our strategic goals, namely subscription and migration. Moving to Page 7. We were also contemplating a good momentum in our 2020 priorities, including acquisition, cross-selling and long maturity offers. As a reminder, 2020 is the year of the [ competition ] of our 2020 transformation plan. As per our strategic plan, switching to subscription with auto-renewal, salespeople who were used to primary renew contracts with customers are now supposed to focus primarily on acquisition of new customers, upselling and cross-selling of existing customers and taking well care of our -- of their customers to contribute to churn reduction. That's the model. In Q1, we definitely switch gear in sales execution as reflected by the numbers on Page 7. New customer acquisitions grew by 22%, driven by a huge increase in sales and marketing leads, generated by the intensification of marketing campaigns, including digital audit on solocal.com, which proved to be very powerful. Indeed, prospects and customers can simply assess their visibility in a couple of minutes through a self-carrying digital audit available on solocal.com. This kind, a very intentional visit on our web property represent to date hottest lead, which converts quite well into tangible sales. This is quite unique in the market. I can tell that we will push this engine significantly moving forward. Cross-selling was also doing well. As an example, we enjoyed more than a 4x growth in order intake in our Booster Contact product. Booster Contact is a performance-oriented Digital Advertising product, which provides a given customer with a number of committed contacts, meaning leads to be converted into customers. This is a unique product in the market, which comes through a 6 months or 12 months subscription with auto-renewal. We are quite confident that post crisis, we can resume with such a growth pattern and even go beyond not only on Booster Contact, but also an additional focus on websites. Finally, our new long maturity offers, namely 24-month subscription for Presence and Priority Ranking and 12-month subscription for Booster Contact enjoyed very promising dynamics. Indeed, 44% of the Booster Contact subscriptions are now 12 months long. 65% of the Presence and Priority Ranking products are subscribed for 24 months. This encouraging trend is very much consistent with our ambitions and expectations. Indeed, customers tend to engage for the long term for relevant products and trustworthy brands. In parallel, long maturity subscriptions mechanically reduced churn rate as customers become [ by design ] more loyal. Having said that, we will continue to offer various options to our customers. We will standardize our offers around 6-, 12- and 24-month subscription with more incentive, for sure, to go for the long maturity ones. Now this was our business profile before the health crisis outbreak and the lockdown implementation, which, as I said, burdened and totally disrupted the economic and business environment, as you know well. The situation is well portrayed on Page 8. Look, top traffic collapsed everywhere. Digital Advertising revenues dropped brutally by 80%. Searches on the web declined across all platforms. This is not something new for all of you, as all markets, all economies, the world was impacted in the same magnitude. This is unprecedented and totally unanticipated. And honestly, the outlook was not rosy by the time and remains quite good. Moving to Page 9. This is all about Solocal. Indeed, the lockdown had a huge impact on Solocal, mechanically impacted by the economic disruption, which affected primarily all the small and very small businesses, which represents a high percentage of our customer base. Digital order intake dropped drastically from day 1. Minus 68% decrease versus 2019 in week-12 that was back in mid-March. Minus 78% week-13; minus 61% week-14. And as a consequence of that lockdown and the business impact, we made -- we had to make very fast decisions to adjust the organization to this new environment. We moved a fair amount of our people in remote working to protect their health and safety. This encapsulates field sales, marketing and support functions, some of our service sales and customer support. All are working remotely as we speak. This is a change. This is a real change. But honestly, this works pretty well. There are lots of learning out there. Now, we also put 50% of our personnel in partial and total employment state. Most of the costs being supported through government measures. Moving to Page 10. It's all about our reaction, not in summary, not only internally, as I just described, but also externally vis-a-vis our customers. We had to react quite fast as well, when it comes to adapting our Digital services to this very new context. As the key partner of a small and very small enterprises, we felt accountable to help our customers extremely impacted by the crisis, help them really, really face you that context. We decided to make rich content update on PagesJaunes; free software over the [indiscernible]. This service as businesses display relevant information and useful news and initiatives really available on the web. We launched a new website, called commerces-ouverts building on our PagesJaunes platform to increase visibility of open businesses on the web. This was designed and rolled out in less than 10 [indiscernible]. Similarly, we updated our platform -- Mappy platform, this mobility assistance platform to help consumers identify, visualize these open businesses on a digital map. We accelerated the development and the rollout of some very relevant features on PagesJaunes, such as instant messaging to enable professional to be better interact with consumers and also the new order form to enable local click & collect. We did all that in record time with true benefits for our customers with the aim to really support their business. Now moving forward, what's our plan? We need to be ready for the economic upturn and hopefully, positively help nurture that economic upturn. So what's the agenda? One, we are preparing ourselves to be back to work right at the end of the lockdown around mid-May in France. To be very specific or more specific, on the front line, most our sales, marketing and customer support staff will be operational by that time. Some working remotely, some in our offices, which will be adapted in the meantime to respect sanitary measures and protect health and safety of these people. We believe that most of our customers will be back to work as well. They just cannot cope longer with the huge financial impact of the crisis on their business. We also consider that digitalization will help fuel business recovery of small and very small enterprises. We see, in fact, the early signs of that phenomenon with customers, some existing customers and new customers attracted by features such as e-commerce, click & collect, bookings, other websites and also very attracted by lead-oriented Digital Advertising services. This is all about boosting their business at the time they are suffering. We're going to be there to support their business through our Digital services, generating awareness and leads. You see, this is definitely an opportunity that we can see that Solocal can see. Two, we will leverage our CapEx investments that have not been stopped during the lockdown. All our R&D teams have kept on developing our new Digital services, which will be rolled out in coming months. Just to name a couple of them. We launch new Presence services between July and September time frame this year. They will include new features, such as click & collect, bookings, instant messaging and all of them with vertical skills. We'll also introduce, in the same time frame, new Presence services for our large accounts customers. Finally, we'll stick to our strategic priorities, building on our Q1 momentum. We're primarily focused on the customer base. We keep up with the migration to the new Presence and Priority Ranking services. We'll also keep on upselling and cross-selling our customers with strategic digital products, including websites and performance advertising products such as Booster Contact. And quarter after quarter, we resumed with customer acquisition. But first and foremost, we need to protect the customer base. We need to sell and cross-sell customer base and we'll have to acquire more customers as a second priority. This is what I wanted to cover. Let me now hand over to Olivier, who will share with you our financials and outlook. I'll come back to you for the Q&A. Olivier, the floor is yours.

Thanks for that, Eric. Good morning, ladies and gentlemen. So let's go now a little bit more in the details of our financial performance over the first quarter, and let me present you our main KPIs. First, our digital revenue decreased by 7.4% compared to Q1 2019. Even though this trend is still negative, it is getting better. As you remember, digital revenue decreased by 9.3% over H2 2019 and by 7.6% over H1 2019. This small inversion illustrate the impact of the good performance in order intake over H2 2019. It supports the fact that we were adding to stabilize and then increase our Digital revenue by the end of 2020. Secondly, orders in-hand at the end of March amounts to EUR 330 million and are lower by 3% compared to December 2019. These numbers include the first impact of the COVID. Let me remind you that we are usually doing almost 50%, 5-0 percent, of our orders intake over the last month of each quarter. Therefore, the lockdown that happened mid-March had a severe impact on our order intake performance. Based on Q1 revenue and the EUR 330 million of orders in hand that we had as at March 2020, we have already secured EUR 360 million of Digital revenue for 2020. This is less than the previous year by 5.8%. Another time, you have to keep in mind that this takes into account the last 2 weeks and a half of the quarter, which are usually very strong and which would have significantly contributed to this KPI. The new subscription mode is still quite successful, as mentioned by Eric, since 80% of ours sales are now performed under this mode, while only 20% -- 29% last year. As you remember, this shift to a subscription mode is absolutely key in our strategy to reduce churn, but also, and foremost, to enable our sales team to be focused in developing existing customers and acquiring new ones. PagesJaunes traffic decreased by 10% over the quarter, mainly impacted by the COVID crisis impact, which severely impacted the traffic from the beginning of the lockdown, as already explained by Eric. Moving to Page 14. Group revenue amounted to EUR 126 million compared to EUR 141 million revenue in Q1 2019. This takes into account the revenue deriving from the Print business. As you know, 2020 is the last year for the Print business since the company decided to discontinue this activity. Print activities only accounted for 6.5% of total group revenue in 2020 compared to 10% over Q1 2019. In terms of Digital revenue, it is perfectly consistent with our expectations and amounts to EUR 117 million. Revenue has not been yet impacted by COVID crisis. As you remember, orders intake converts into revenue over the length of the rendering of the service. Since the lockdown began mid-March, the drop in orders intake did not affect revenue as of March 2019. Nevertheless, there will be a significant impact over the year -- the annual revenue. Moving to Page 15. Let's now do a focus on the actions taken to limit this impact. In order to preserve the company and offset part of the impact, we treated to conservatory measures and implemented operational measures with 2 main objectives: the first one is cutting costs; and the second one is to preserve our liquidity position. You remember that we are fixed cost business. Therefore, cost reduction is critical in this context. We have identified almost EUR 40 million, 4-0, of savings on top of initial savings identified initially. Clearly, this takes into account impact of the technical unemployment. More than 50% of our employees have been fully or partially impacted by such measures. This amount also includes some direct savings, but also many indirect costs, such as the decrease in corporate marketing expenses; limitation in travel expenses; freeze of recruitment, except for strategic ones; reduction of all types of subcontractings or consulting expenses. Nevertheless, we decided to maintain our strategic investments in order to be in a position to immediately benefit from the recovery. In terms of liquidity, you remember that our margins of maneuvers were limited. We then took immediate actions to preserve our liquidity position. It is why we decided to preserve the liquidity position of the company in deciding conservatively, not to pay the coupon of mid-March just after the announcement of the closing of [indiscernible] by the French President. We also decided to postpone the payment of social charges due for March as allowed by the state. On top of this, we are currently discussing with some partners to obtain a PGE. Let me now wrap up the key messages of this presentation. COVID impacts had a very significant impact on our business. As for now, we are still assessing the impact on our business and on our clients. This is why we decided to sustain all our guidance for 2020 and clearly, we will update you as soon as we will have reliable guidance. Despite an already secured EUR 360 million Digital revenue for the year, our first approach of the order of magnitude for 2020 or a decrease by EUR 100 million of order intake compared to last year, translating into a decrease in group revenue by 20% in 2020. This will also impact 2021 revenue. This decrease in order intake will impact both 2020 and 2021. The group implemented a cost reduction plan that should enable savings by EUR 40 million, as already mentioned. After having obtained a standstill by -- with 80% of our bondholders, we are now going to begin to discuss with them, as we are also discussing with some partners to obtain a PGE. As you see, our objectives are now to preserve our liquidity, but also to execute our strategy to move into a fully digital company on the subscription mode. Thanks a lot for having taken the time to listen us. And now we will open the Q&A session.

[Operator Instructions] We've had a question come through already from the line of Conor O'Shea from Kepler Cheuvreux.

Eric, Olivier, just a couple of questions, please. Firstly, on the -- your sort of assumptions in terms of the hit from the drop in order book -- Digital order book sales to P&L. So from EUR 100 million hit to around 20% -- or more than 20% of revenues in P&L for 2020. Just what -- bearing in mind the lagged effect of order book into P&L, what are your sort of rough assumptions about order book declines post Q2 adding to the more normalized situation coming in? That's the first question. Second question, just in terms, if we're assuming more than EUR 100 million hit to revenues for the full year 2020, P&L and EUR 40 million of additional cost savings, are there any other sort of moving parts that could impact the EBITDA versus the initial expectations? Are there maybe additional direct costs that we need to take out? Or is that included in the EUR 40 million?

Okay. Thanks for your question. On your first question, I think it's a little bit too early to give a sequence in terms of decrease of order intake. We gave you some orders of magnitude, but clearly, well, the world is currently quite uncertain. And let's say, the speed of the ramp-up of the business post lockdown is quite tough to, let's say, to assess. So I clearly do not want to give you any, let's say, detailed number of orders at the end of Q2 or Q3 and so on because clearly, this ramp-up is a strong -- is clearly a very strong assumption, and we are still uncertain.

So does that -- Olivier, so does that mean the 20% decline for full year P&L impact, that's just what you're seeing so far?

Yes. Yes, clearly. It's what we think, so for taking into account assumptions on the ramp-up and so on. So it's very difficult for us to time this recovery. On your other point, you're correct. The EUR 40 million that we are talking about do include direct cost. But as you remember, our margin, let's say, on -- after direct cost is very high. So while -- the savings that we will be in a position to do related to the decrease in revenue, expected decrease in revenue is less -- is far less than EUR 10 million within this EUR 40 million, 4-0, of savings. So more or less, the big buckets are unemployment, direct savings, but not that much. And after -- well, we did an in depth, let's say, work on the cost savings that we could do. Nevertheless, I remind you that we already did a lot of cost savings over the last 2 years. You remember that we decreased our, let's say, operational expenses by more than 18%, 1-8, over the last 2 years. So clearly, it's tougher now than it was before, but we did the job, and we are confident on this EUR 40 million, 4-0, savings.

That was the only question in the queue. [Operator Instructions]

So we have some written questions here. So first question is, could you clarify and quantify the good start of the year until mid-March in terms of growth?

Is this last question? Did you -- I take it?

Please take it, please take it.

Okay. So this is Eric speaking. The question was about the growth before mid-March. And I assume that the question is relating to order intake. And I want to remind all of you that we decided not to communicate anymore in terms of order intake growth numbers but to really focus on revenue growth. So that's a big change versus the last 2 years. Just to give you a sense on why we've made the decisions for the ones that -- that's mild. There are too many moving parts in the, let's say, to make the comparison on a year-to-year basis to make them irrelevant. We've switched dramatically our business profile, or our sales profile, one with a focus on acquisitions, on upselling and on cross-selling. And the second thing, if you remember, the pace of migration is now -- migration to new Digital service is under control. Historically, our salespeople were renewing contracts 6 months in advance. We've reduced that to 4 months, which has an impact, obviously, on the amount of order intake, which we've made consciously to ensure that there is the right mix and the right balance between the different motions, including acquisition, upselling, cross-selling, churn reduction and migration. For all these reasons, there is no way you can make a comparison, a fair comparison, a relevant comparison from Q1 2019 to Q1 2020. And therefore, we've switched to revenue outlook and the revenue disclosure. And finally, consider that, again, everything was going on track, really on track and then collapse happened in mid-March. In the last 2 weeks of March, really, really, really impacted the -- our momentum.

We have another question. How would it be possible to face a new loan considering the current debt of the company?

Olivier speaking. So I guess the question is, how are we -- how would it be possible to, let's say, to contract a PGE considering our, let's say, debt structure. Well -- again, this is a good question, and this is a point that we will have to discuss with our bondholders and our RCF lenders. Nevertheless, clearly, it's exceptional -- it's an exceptional context and situation. So -- well, this is the point that we will have to discuss with them in order to, let's say, get the right and get the authorization to, let's say, to benefit from this loan.

We have a question regarding the size and any details on the terms of the possibility of the loan from the BPI.

Well, clearly, it's -- in terms of, let's say, in terms of partners -- clearly, when we are talking with some customers, we can talk with for PGE. We are talking with -- we had some interactions with BPI also. So everything is, let's say, being discussed currently with the factors. On the size of the potential PGE loan, clearly, it's a little bit early to tell because, well, clearly, while the current situation is quite -- while the current time is quite uncertain, we are finalizing our forecast, our business plan, and we are sizing our need, but it has to be clear that this need will also highly depend on the end of the lockdown and how we will be, let's say, unlocked progressively and, let's say, the speed of the recovery. So I think it's much too early to talk about any, let's say, size or potential PGE or support from the BPI.

Okay. Now we have a question regarding the cost reductions. Is partial unemployment included in the EUR 40 million cost reduction announced?

Yes. As mentioned earlier, it's included in this EUR 40 million.

We have a question on the phone line from the line of Eric Blain from Finance Connect.