Earnings Call: Q1 2021

May 12, 2021

Flow over to your host, Sebastian Bucher. Welcome everybody, good afternoon to today's earnings call on the results of the first quarter of 2021. My name is Sebastian Bucher, Manager Investor Relations. With me is Thomas Stark, our CFO, who will present the results, and some details in addition to what we already published. 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 Thomas Stark speaking, CEO of Cancom, and I'm very pleased to have you on the call 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 first quarter 2021. First of all, on group level, I think we have shown a very significant growth in EBITDA. We have approached a 20% growth rate, pretty closely with a 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 against. We had a very strong first quarter 2020. In the first quarter 2020 was characterized from not having 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 6th, 2020. 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 hard and software for mobile solutions. 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 224.4 million as of end of March, which is a 18.6% increase versus the prior year. 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, hopefully it's the last time, about some accounting principles in more detail, just as we did it, that's very important from my point of view. In the last earnings call, when we released 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, starting with the group, we see a growth rate of roughly 8%, most of them organic, which is the part that we see anorganically that is basically the acquisition that has contributed from beginning of 1st of January 2021, and is mainly comprised of the revenues generated from Anders & Rodewyk. 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 anorganically in both revenue and EBITDA. They contributed approximately EUR 500,000 EBITDA anorganically, and approximately 1% of the revenues was generated by Anders & Rodewyk. Purchase price was approximately EUR 12 million. From our point of view, we have a very good initial integration into the group, and we have already them contributing to the overall results. We have two 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 first quarter 2021. We have an increase of provisions of approximately EUR 500,000 for potential write-offs of accounts receivables. In spite 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&A session as well, about the potential shortage in the supply chain. We have already commented on this in the one earnings call on 30th of 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. We have still a EUR 50 million surplus backlog compared with the previous year that we have not been able to fulfill. Given that, we have some effects that already are included and nevertheless show the strength of the business and the strength of the first quarter. In the contrary, in the last year, we had a one-off effect that really was one-off. That is a EUR 2.4 million severance payment for the step-down of our former CEO. 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 first quarter, and we can see the impact of having some major or bigger projects onboarded in a quarter if you look at the contribution to the P&L. Despite of only showing an organic growth in terms of revenue of 3%, we show an 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 and we are only delivering services, and we are onboarding customers, and we are delivering recurring revenue, we see the whole strength of the segment. That contributes to a margin and EBITDA margin profile of 29.6% in this segment, and reflects perfectly the potential of this segment. From our point of view, we still have some reluctance of customers to invest more long-term projects. That's why the medium base 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 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. I think everybody knows client devices and the margin profile that's connected with client devices is lower than our average. 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 is why we have a decline in EBITDA, a slight decline despite of having grown the business in terms of revenue. 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 transforming 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 solution segment compared with the IT solution 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, I would like, and you know this is a very personal and important thing to me, 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 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 or to what extent the revenue generated with software 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 two 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. There's no impact on EBITDA, EBITA, gross profit, and so on. This is classified in the annual report. We have discussed this. We had liked to, well, simply end the discussion about this topic, and well, 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 1.317633 million, as you see in the slide, is 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 this slide. 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 two years. That means very good development. We always have to bear in mind, we talk about potential shortages in the supply chain. We talk about still having higher inventories than usual. This is something that affects those KPIs and where we deliberately have decided to 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. 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 & Rodewyk, clearly we have a change in the amortizations from PPA. We have adjusted the slide. Anders & Rodewyk is basically IT solutions based business. We have acknowledged it to be part of the amortization in the IT solutions segment split. This is just an update with the latest news that we have incorporated into these data. An updated slide set for you and your models. Some statements on the financial calendar. We will have the annual general meeting in Munich as an online event on 29th of June. Clearly interim report as at 30th of June 2021 will be released on 12th of August. These are the next most important data on the financial calendar. Last but not least, I think this is of your interest most, what 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 start in 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 experiencing 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 fourth quarter. This is some kind of uncertainty with the rest of the year. If you look at our individual situation, then 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 Q2 that has to be compared with Q2 2020. That was poor. It was the only quarter in 2020 that did not meet the expectations of, I think, the financial community and of our own. We will perfectly beat the second quarter, significantly, that's for sure, never mind what the backlog situation or the shorter 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. We see a strong need for follow-up investments and a decline of the reluctance 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 us having the right products in place. There's no question about having the right demand in the market. From 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 two 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 government has increased the funds for the IT infrastructure management for the German institutions from EUR 5 billion to EUR 7 billion. Only EUR 1.5 billion have already been deployed. That's a good potential, and we have a new law in place since January 1st, 2021, that is supporting the healthcare sector with another additional EUR 4 billion in place to invest in their IT infrastructure management improvement. 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. From my side, I would thank you for your interest and I'm looking forward to your questions now in our Q&A session. Thanks a lot. Ladies and gentlemen, if you would like to raise a question now, please press nine and star on your telephone keypad. In case that you'd like to withdraw your question, please press nine and star again. The first question comes from Martin Jungfleisch. Your line is open now. Yes. Hi. Good afternoon, and thanks for taking my questions. I have three, please. The first one is on the principal agent accounting, and just for understanding, in software reselling, you are now as of Q1 classifying each software resale under the agent principal, 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 first quarter. What has driven this large decline? Was this mainly by the U.K. or was there any specific issue in another country? The final question is on those provisions you mentioned for bad debt in the first quarter. How large were those? Can you quantify them? Thank you. Yes. Thanks, Mr. Jungfleisch. Good questions. Let me start with the principal agent topic. We have put a 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. That means we are only showing the commission, and we are not showing the revenue generated anymore. That's absolutely right, and that'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 report 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 an improvement of EBITDA profitability in U.K. Potentially, we all know U.K. was hit, I think it was the worst quarter from a pandemic point of view in U.K. in the first quarter. We in Germany had a quarter that was impacted from the pandemic or the quarter that was impacted most in second quarter 2020, at least from our point of view. There was a decline in product business. It was not a decline in managed services, neither was it a decline in professional services. The contribution, the profitability even increased. However, yes, you're right, the product sales were reduced in U.K. Last but not least, you talked about what are the provisions that we have, well, done or made in the first quarter of 2021. That we talk about approximately EUR 500,000 additional provisions that we have done, and we have now a total of roughly EUR 2 million of provisions for potential write-offs in the balance sheet. Okay. Very helpful. Thank you. The next question comes from Christoph Burberg. Line is open now. Hi, everyone. I think that was me. I have three questions, please. The first one is on working capital. How do you think that your cash flow will develop in Q2? Also for the remainder of the year, both in general when it comes to cash generation, but also with respect to working capital. In that regard, I'm also particularly curious on how you're managing inventory through this. I'd like to stop here and I'll wait with my other questions for after. Christoph, 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. Usually, we have a negative impact in the first quarter and another negative impact in the second quarter before turning into a positive impact in the third quarter, and a significantly more positive impact in the fourth quarter. That's usually the course of the year, and it's pretty much in line. Depends a little bit on at what point of time projects start and at what point of time they might end. Basically, this is the development that we see. The total of the requirement for working capital or the effect in the operating cash flow, not working capital, sorry, the operating cash flow, should be a total of EUR 20 million-EUR 30 million. We've ended the first quarter with a EUR 10 million. The normal course of the business will signal, well, there could be an additional EUR 10 million-EUR 20 million. 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 have not changed the goals of having an improvement as indicated in the annual report on this call six weeks ago. All right. Super. Thank you. 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 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 two years ago already successfully implemented SAP for the consulting business. Now we are about to change our transactional business, so the trading business tool SAP 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 spent some money in renewing all our subsidiaries in the major cities. We are represented throughout Germany in very good locations. We have done the last one and finished the last one in Q1. This is already included in the CapEx in Q1, and this should be another potential for improvement. 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 years. Super, thanks. A final question from me on IT solutions and your margins there. Could you give us some more color on the organic business mix versus the business mix that was contributed from Anders & Rodewyk, please? Yes, I think that, well, you see this from the growth rate. I think Anders & Rodewyk was at EUR 3.7 million, I think it's the 1% difference that 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 3.7 million in revenues. Yes, sure. Just on the business mix and how that impacted the margins, both coming from Anders & Rodewyk, but also organically. Could you just talk a little bit about the dynamics there, just to understand the margin development a bit better, please? Well, if you're only reflecting about Anders & Rodewyk, then the KPIs that are in relation to each other are EUR 3.7 million of revenues and roughly EUR 500,000 of EBITDA. That shows that they have a good margin profile. They have a very valuable business, and they chose that they are basically focusing on data centers. There you see the proof point for a 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 to 2021. Overall, if you look at EUR 500,000 in relation to EUR 31, I think there's a small impact on the overall margin profile that can be calculated easily. Super. Thank you so much for your answers. The next question comes from Lars von Klak. Your line is open now. Thank you very much. Good afternoon. Two quick questions. Maybe I'll start with a little 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 map models, I assume. 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, yeah. Thanks, Mr. von Klak. First of all, yes, we will provide a split for the segments. We always like to provide the best of transparency we are capable to do. Please get in touch via ir@cancom.de, you will get the information and the split in the segment, as I'm perfectly aware that you need it for your model. It should be no problem, 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 overall profitability in the second quarter 2020. That was the quarter when I think it was more about the customers that allowed us to go on site than being able to work remotely. In the cloud segment, usually you work in a support center, software supported, you're monitoring the IT infrastructure management with tools 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, in 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. This segment should not be affected at all. I think in the IT solution segment, when we had the severe impact in the second quarter 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. 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, then we will have to do this. We have not been quite sure what the fourth quarter with the second lockdown would mean. We have seen that we had roughly no impact at all on the delivery of services. This is what 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 or 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. Then a quick follow-up question, if I may. 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. That's what we commented on at the beginning of the call. Yes, we have a very significantly better order intake in April than compared to the previous year. We are very confident to have a good start in the second quarter. 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. I may repeat. If you want to ask a question now, please press nine and star on your telephone keypad. We have a follow-up question from Martin Jungfleisch. Go ahead. 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? It was 7.2% on group level, but maybe you can disclose it also by the two segments. That would be helpful. Thank you. Yes, Mr. Jungfleisch. We will do so. Frankly speaking, we have released and disclosed the growth rates or the comparable growth rates of the overall group in the Q1 report. You can find it on page seven. You're right, we have missed to do it on the segment level. We will provide information from IR at cancom.de. We don't have it available. There are no significant changes in terms of the growth rates. Okay, no worries. I will follow up. Thank you. There are no further questions from the audience. Thanks a lot for your time, and hope to speak to you soon again, and especially on our next earnings call after the second quarter results. Thanks a lot, and stay safe. Bye-bye.