Earnings Call: Q1 2021

May 12, 2021

Over to your host, Sebastian Roper. Welcome, everybody, and good afternoon to today's earnings call on the results of the Q1 of 2021. My name is Sebastian Bucher, Manager of Investor Relations. And with me is Thomas Stark, our CFO, who will present the results and some details in addition to what we already published. So without further ado, I would like to hand over to Thomas Stark, who is after the presentation, of course, as always available for questions. Thank you, Sebastian. This is Tom Stark speaking, CEO of Genkom. And I'm very pleased to have you in the call and to provide you with some additional insights into the first quarter 2021, which from our view, has started promising and where we have achieved our goals. I will start with a Brief overview of the most significant events in the Q1 2021. First of all, on group level, I think We have shown a very significant growth in EBITDA. We have a brochure 20% growth rate with pretty closely with the 19.2% in terms of EBITDA growth year over year. That's a good foundation for meeting our full year forecast 2021, which I will comment on later. We had significant growth in revenue, and we have always to bear in mind what we are Comparing again, we had a very strong Q1 2020. In The Q1 2020 was characterized from not having any impact any negative impact from a pandemic. We had, in the contrast, Some additional demand for mobile devices already ongoing before we had this beginning of the lockdown on April 6, 2020. So given this, it's on top of that quite remarkable, and we are very satisfied with what we have achieved. In the segments, we see a very strong demand for hardware and software for mobile solutions. And in the cloud segment, we have seen and been able to show The strength of the segment, and we will explain in more detail later why it's a really superior segment, we have seen a very high EBITDA margin profile. Consequently, the annual recurring revenue hits EUR 224,400,000 as of end of March, which is a 18.6% increase versus the prior year. So pretty much in line with the development of the margin profile of the segment, the development of the recurring revenue. We will talk a little bit and hopefully the last time about some Accounting principles in more detail just as we did it, and that's very important from my point of view. In the last earnings call, when we release the annual report for 2020. We will get into this a little bit more in detail later on. It has no effect on EBITDA, EBITA, EBIT or any of the profit KPIs that we are showing as a group. Getting into the quarters and starting with the group, we see a growth rate of roughly 8%, most of them organic, which is The path that we see inorganically, that is basically the acquisition that has contributed from beginning of 1st January 2021, and is mainly comprised of the revenues generated from Anders and Roderic. They are pretty much in line with our expectations, Not only in terms of the revenue that they have contributed, but also in terms of the EBITDA that they have contributed, you can see the impact organically in or inorganically in both revenue and EBITDA. So they contributed approximately €500,000 EBITDA inorganically, And approximately 1% of the revenues was generated by Anders and Roderick. Purchase price was approximately EUR 12,000,000. And so from our point of view, we have a very good initial integration into the group, and we have already then contributing to the overall results. We have 2 things or some more things that have to be taken into account when we talk about the results. First of all, We had some negative impacts that are already included in the figures of the Q1 2021. We have an increase of provisions of approximately €500,000 for potential write offs of accounts receivables. So despite of still having no significant indication or no significant event that has triggered a write off, we have Increased slightly the provisions, therefore, this is already included in EBITDA that you can see on the slide. On top of that, and this relates to the revenues that we have generated. We were often asked about and I think this will be a part of the Q and A session as well about the potential shortage in the supply chain. We have already commented on this in the earnings call on 30th March when we released our financial statements for the whole year 2020. We have not seen a significant impact in 2020. Nevertheless, we still have a backlog that is significantly higher than usual. So we have still a EUR 50,000,000 surplus backlog compared with the previous year that we have not been able to fulfill. So given that, We have some effects that already are included and nevertheless show the strength of the business and the strength of the Q1. In the contrary, in the last year, we had a one off effect that really was one off that is EUR 2,400,000 severance payments for the step down of our former CEO. And this should give you a good view on the overall data for the group. In Cloud Solutions, we had a lot of smaller projects that were ongoing and were onboarded. We had some lighthouse projects that were really remarkable in the Q1, and we can see the impact of having some major or bigger projects onboarded in the quarter, if you look at the contribution to the P and L. So despite of only showing an organic growth in terms of revenue of 3%, We've shown organic growth of EBITDA of approximately or almost 20%. That shows the nature of the Segment comprises of hard and software required to onboard customers. In case we do not need hard and software, we are only delivering services, and we are onboarding customers, and we are delivering recurring revenue, we see the whole strength of the segment. So this contributes to a margin and beat to margin profit of 29.6% in this segment and reflects perfectly There is the potential of this segment. From our point of view, we still have some reluctancy of customers to invest more long term projects. So that's why the medium based or the medium sized projects are still missing. We see this as a real upside potential, and we are Now at the end of a pandemic, pretty much pretty sure that there will be the beginning of the catch up effect that will materialize in the course of 2021. IT Solutions, We still see an unusual product mix focused pretty much on mobile solutions and client devices. So I think everybody knows client devices and the margin profile that's connected with client devices is lower than our average. So if we have more data center products, network products, security, firewall products and so on, and we have in average a better margin profile, That's why we have a decline in EBITDA, a slight decline in spite of having grown the business in terms of revenue. Just according to the profitability of the cloud segment, we can see a Nice and steep increase of the annual recurring revenue. We are very satisfied with the most important KPI defining how quickly and how successfully we are Forming the business and adding managed services to the overall offering of Cancom, we have seen a growth rate of 18.6% year over year And thereof, 16.5% organically. This is basically related to the managed service offerings that we have in place and shows that we have a very good offering and a very good portfolio in place. We've already commented about the opportunities of the segment when we talked about the segment itself. On the lower part of the slide, we can see the development of the EBITDA of this segment. We can see the ongoing trend of Quicker development and the faster development of the Cloud Solutions segment compared with the IT Solutions segment, which is pretty much in line with the strategy that we are following. Finally, before Ending up with simply the revenue and financial KPIs related to the profitability, we I would like and this is a very Personal and important thing to me, I'll comment on the accounting policy that we have changed with the beginning of 2021. We have already and in detail commented on this in the earnings call at the end of for the Annual Report 2020. And we have commented on this in detail in the annual report itself as well. There was a debate about software licenses, whether this To what extent the revenue generated with software licenses, licenses has to be acknowledged as revenue Being a principal or whether we are only allowed to show the margin and then we would have to be classified as agent. You see in this slide what we have communicated and disclosed in the Annual Report 2020. You will see 2 tables, 2020, with principal rating and agent classification and the impact. Revenues and cost of materials are impacted the same way. The gross profit and all the KPIs that are on the slide below the gross profit are not affected at all, except for the EBITDA margin that is closely related to the revenue itself. So there's no impact on EBITDA, EBITDA gross profit and so on. This is classified in the annual report. We have We've discussed this. We had liked to, well, simply end the discussion about this topic And we'll have taken the decision to change the policies in order to well, hopefully, we have to report the last time about this topic. We have been asked by some of you what the split of the EUR 1,317,630,000 that you see in the slide If going forward for your models in order to be able to know what will be Q2 and Q3 and Q4 adjusted, And we are providing this information on the slide. So hopefully, this helps. In case there should be any more details missing, please do not hesitate to contact Our IR department, they will provide you with the information that you need in order to fill up your models. Let's go on with the operating cash flow. We have seen a strong improvement. Frankly speaking, this was not a surprise. We had an outstanding year 2020, which was really extraordinary. This slide perfectly shows we are pretty much back on track. If you look at the Q1 2021 compared with the Q1 2019, which would be a regular or normal year. Then we have even improved this KPI despite of having grown the company in the last 3 years. That means Very good development. We always have to bear in mind, we talk about potential shortages in the supply chain. We should talk about Still having higher inventories than usual. So this is something that affects those KPIs and where we deliberately have decided to, well, better steer the company by having availability of products and not focusing on optimizing any potential cash flow or later on working capital requirements. CapEx development is close to target. Here we have to bear in mind, we have the CapEx ratio is in relation to the last 12 months revenues, we have a reduced level of revenues now, having adopted a new accounting policy on license reselling. That means clearly, we have another ratio. Nevertheless, and we have commented on this in the last earnings call, we think we will stay below 2%. And going forward, looking at 2022, we've already commented we see further downside potential for the CapEx to sales ratio. So we keep the target staying below 2% until the end of the year with an improved outlook 2022 and forward. According to the acquisition of Anders and Roderic, clearly, we have Change in the amortizations from PPA, we have adjusted the slides. Anderson Rodelig is basically IT Solutions based business. So we have acknowledged it to be part of the amortization in the IT Solutions segment split, and this is just an update with the latest news that we have incorporated into these data, so an updated slide set for you and your models. Some Statements on the financial calendar, we will have the Annual General Meeting in Munich at an online event on 29th June. And clearly, interim report As at 30 June, 2021, will be released on 12 August. This is the next most important Data on the financial calendar. And last but not least, I think this is of your interest most, but are we commenting On the forecast for the rest of the year, I think we have been able to show you we have seen a very good starting 2021, pretty much in line with our expectations. We are quite confident with what we have satisfied with what we have achieved. What do we expect going forward? Yes, there are some questions about what about the shortages in the supply chain. We are Peerings in them, that's right. We will have an impact for the full year only if it happens to end up with a lack of supplies longer in the Q4. This is some kind of uncertainty with the rest of the year. Nevertheless, if you look at our Individual situation, and we have some very strong KPIs or indicators that show that we are very confident in achieving our goals. First of all, Yes, we still have a backlog to fulfill that is higher than usual. We have a very good order intake in Q4, which is significantly Or better to say, very significantly higher than in the previous year. We have a Q2 that It has to be compared with Q2 2020. It was poor. It was the only quarter in 2020 that was Well, did not meet the expectations of, I think, the financial community and of our own. So we will perfectly beat the 2nd quarter Significantly, that's for sure, never mind what the backlog situation or the shortage supply should be like. We see a strong demand in the market. We see a strong demand in the public sector that is still ongoing. And we see a strong, Well, need for follow-up investments and decline of the reluctancy of customers to invest. I think we are all pretty sure that the pandemic situation now should have come to an end or at least there should be some more visibility for each individual business what to come, What's the next to come and how to go on in the individual way? We know that the awareness for the need for products is in the market. We have no question There's no doubt about having the right product in place. There's no question about having the right demand in the market. And for that perspective, we think we have a very good proposition and a very good situation for achieving the goals for 2021, and we are very confident in doing this. Let me comment finally on 2 things that should be of interest. We have seen and we have talked last year about The funds that have been made available from the German government for the IT industry in the public sector, there are some news that are available. We have One third of our revenues that we are accounting for generated in the public sector. So this is of importance for us as well. The German governing has increased the funds for the IT infrastructure management for the German Institutions from €5,000,000,000 to €7,000,000,000 Only €1,500,000,000 have already been deployed. So that's a good potential. And we have a new law in place Since January 1, 2021, that is supporting the healthcare sector with another additional EUR 4,000,000,000 in place to invest in the IT Infrastructure Management Improvement, and we are very confident to get part of this business and to be able to get Some more tender processes won in this part of our business. So from my side. I would thank you for your interest, and I'm looking forward to your questions now in our Q and A session. Thanks a lot. The first question comes from Martin Jungfleisch. Your line is open now. Yes, hi. Good afternoon, and thanks for taking my questions. I have 3, please. The first one is on the principal agent accounting. Just for understanding, in software reselling, you are now, as of Q1, classifying each software resale under the agent principle, even though In some cases, you can apply the principal method. Is that correct? That's the first one. The second one is on your international business. I saw international revenues were down 20% in the Q1. What has driven this large decline? Was this mainly by the UK or was there any specific issue in another country? And then the final question is on those provisions you mentioned for bad debt In the Q1, how large were those? Can you quantify them? Thank you. Yes. Thanks, Mr. Jugfleisch. Good questions. Let me start with the principal agent topic. We have Put the slide on the screen again and to clarify. Yes, you're right. We are acknowledging any kind of license based business As being an agent, it means we are only showing the commission and we are not showing the revenue generated anymore. That's absolutely right. And that's all it's already the method that we have applied for the table that you see on the slide, and it has been released in our annual reports 2020. Secondly, you asked about the reduction of the revenues internationally. You're absolutely right. This is driven by U. K. We had a decline of product related revenues in U. K, but we had the improvement of EBITDA Profitability in UK. So potentially, we all know UK was hit. I think it was the worst quarter from a pandemic point of view in UK in the Q1. We in Germany had a quarter that was impacted from the pandemic or the quarter that was impacted most in Q2 2020 from at least from our point of view. So there was a decline in product business. It was not a decline in Managed Services, neither was a decline in Professional Services. So the contribution, the profitability even increased. However, yes, you're right, the product sales were reduced in UK. And last but not least, you talked about what are the provisions that we have Well, done or made in the Q1 of 2021 that we talk about approximately €500,000 additional provisions that we have done and we have now a total of roughly EUR 2,000,000 of provisions for potential write offs in the balance sheet. Okay, very helpful. Thank you. And the next question comes from Christoph Schrodberg. Your line is open now. Hi, everyone. I think that was me. I have three questions, please. The first one is on net working capital. How do you think that your cash flow will develop in Q2? And then also for the remainder of year, both in general when it comes to cash generation, but So with respect to working capital, and in that regard, I'm also particularly curious on how you're managing inventory through this. Alex is back here, and I'll wait with my other questions for Arthur. Yes, Christian, thanks a lot for your questions. The working capital requirements that we see in the course of the year triggered by the business usually are Having most of the money tied in the organization, usually end of Q1 or end of Q2, this is basically what's happening. So Usually, we have a negative impact in the Q1 and another negative impact in the second quarter before turning Positive impact in the 3rd quarter and a significantly more positive impact in the 4th quarter. So that's usually the course of the year, and it's Pretty much in line. It depends a little bit on at what point of time projects start, at what point of time they might end. But basically, this is development that we see. The total of the requirement for working capital or the operating or the effect in the operating cash flow, not working capital, sorry, the operating cash flow should be a total of €20,000,000 to €30,000,000 We've ended the first quarter with €10,000,000 So the normal course of the business will signal, well, there could be an additional €10,000,000 to €20,000,000 but this is something that should then fully recover until the end of the year. For the whole year, given that we have not yet The ideas of, well, what a supply chain topic might trigger, we are we have not changed the goals of having an improvement as indicated in the annual report earnings call 6 weeks ago. All right. Super. Thank you. And then just a question on CapEx to sales. You mentioned That you do see some scope for improvement with relation to your CapEx ratio maybe next year. Could you talk to us a little bit about Where you see scope for improvement, please? Yes, of course. We have most of the or a Big proportion of the CapEx that we have seen has been allocated to the introduction of new products. We have Successfully already implemented Salesforce as a customer relationship management. We have also, on top of this, successfully already implemented ServiceNow. And we have, 2 years ago, already successfully implemented SUB for the consulting business. Now we are about to change our transactional business. So the trading business to sub as well. This will happen in the course of 2021. And that means this proportion, this part of the investment, which is quite a huge investment, will simply drop off going forward 2021, At least from the amount or the total that we can see, and that's one of the reasons why we see a significant improvement. Apart from that, I've commented in the last call, we have well, spent some money in well, making renewing all our subsidiaries in the major cities. We are represented throughout Germany in very good locations. And we have done the last one and finished the last one in Q1. So this is already included in the CapEx in Q1, and this should be Another potential for improvement is then we have all the sites in a mode that is pretty much new, where no further investment should be needed for the next 5 to 10 Super, thanks. And then a final question from Humid IT Solutions and your margins there. Could you give us some more color on the organic business mix versus the business mix that contributes from or that was contributed from Anders and Roderic, please? Yes, I think that Well, you can you see this from the growth rate. I think, Anderson, really, it was €3,700,000 I think it's the 1% difference As you see in the growth rate, that's the difference between organic and inorganic. I think it was 1%, which is represented by approximately EUR 3,700,000 in revenues. Yes, sure. And then but then just on the business mix and how that impacted the margins, both coming from Anders and Roderick, but also organically. Could you just talk a little bit about the dynamics there just to understand the margin development a bit better, please? Okay. Well, if you're only reflecting about Anders and Rodewigt, then the KPIs that are in relation to each other are EUR 3.7 1,000,000 of revenues and roughly €500,000 of EBITDA that shows that they have a good margin profile. They have A very valuable business and they are that shows that they are basically focusing on data centers. So there you see the proof point for Better margin profile if you're dealing with this business. Here, we expect them to even accelerate in their Revenue and EBITDA contribution going forward in 2021. And this but overall, if you look at €500,000 in relation to €30 1,000,000 I think there's a small impact on the overall margin profile that can be calculated easily. Okay. Thank you so much for your answers. And the next question comes from Lars von Klaff. Your line is open now. Yes. Thank you very much. Good afternoon. Two quick questions, and maybe I'll start with a statement. Thank you very much for providing us With the restated figures, it would be also great to get them by division, so split by IT Solutions and then Cloud Solutions. That would be extremely helpful for our models, I assume. And the questions, Some of your competitors have reported that they are capable of doing more service business remotely now instead of being physically present at their clients. Is that also something you are seeing more and more for your business? Well, yes, thanks, Mr. Taher. First of all, yes, we will provide a split for the segments. We always like to You will get the information and the split in the segments as I'm perfectly aware that you need it for your model. So it should be no problem. And then you have the right data information going forward. Secondly, yes, working remotely, well, I think we have always been capable of working remotely. We can reflect a little bit about the segments and the different setups that we see. If you look at the Managed Services segment, the Cloud Solutions, we haven't seen any severe or significant impact on of all profitability in the Q2 2020. That was the quarter when I think it was more about the customers that were that allowed us to go on-site than being able to work remotely. So in the cloud segment, usually you work in a support center, software support that you're monitoring The IT Infrastructure Management tools that you are that you have in place, you do not need to be on-site. That's one of the reasons why we, in this business area, Have created or have founded our site in Slovakia and Kosice. We have now 150 People that are already hired and working on behalf of our customers' IT infrastructure management remotely, they do not need to be on-site. So this segment should not be affected at all. I think in the IT Solutions segment, when we had the severe impact in the Q2 2020, It was more about the customers that allowed us to get there. We have, with the help of our HP and with the help of our internal IT, Always been capable of providing services remotely. For sure, there are some services that cannot be done remotely like, well, if you have to implement or install a printer or something that simply has to be done physically on-site, and we will have to do this. We have not been quite sure what the 4th With the 2nd lockdown, we have then been seeing that we had roughly no impact at all on the delivery of services. So this This has made us quite confident in even having a good start in Q1 despite of a lockdown, which has actually materialized. From that point of view, we have always been capable of delivering services remotely. I think customers have got adjusted We're accustomed to the situation, and we might have some impacts due to a lack of efficiency of working remotely only, But we have no significant impact on profitability. Perfect. Thank you very much. And then a quick follow-up question, if I may. I mean, April lies behind us, half of May lies behind us. Has Q2 started as good as Q1 has ended? Yes, we have already commented on the order intake in April, And that's what we commented on at the beginning of the call. Yes, we have a good a very significantly Better order intake in April than compared to the previous year. So we are very confident to have a good starting the Q2 that gives us it's one of the reasons why we are confident with achieving our goals in 2021. That's how we commented on the order intake situation in April or in parts of the second quarter. Great. Thank you very much. Currently, there are no further questions. So I may repeat. And we have a follow-up question from Martin Jungfleisch. Your line is open. Yes, hi, and Thanks for letting me on again. Just a quick follow-up. Can you just disclose what was the growth rate of IT Solutions And Cloud Solutions in Q1 2021 on the old principal accounting. I mean, it was 7.2% on group level, but Maybe you can disclose it also by the 2 segments. That will be helpful. Thank you. Yes, Mr. Jinkaj, we will do so. Frankly speaking, we have released and disclosed So the growth rates or the comparable growth rates of the overall group in the Q1 report, you can find it on Page 7. You're right. We have missed to Luis on the segment level. We will provide information from IRR. It can come to CE. We don't have it available, but there are no you can change this in terms of the growth rates. Okay. No worries. I will follow-up. Thank you. There are no further questions from the audience. Well done. Thanks a lot for your time And hope to speak to you soon again and especially on our next earnings call after the Q2 results. Thanks a lot, and yes, stay safe. Bye bye.