Earnings Call: Q2 2021

Aug 19, 2021

Good morning, ladies and gentlemen, and welcome to today's conference call regarding the presentation of the Half Year Results 2021 of Enfron AG. At this time, all participants have been placed on a listen only mode. Let me now turn the floor over to Sabina Pruza. Thank you, Karpuna. Good morning, ladies and gentlemen, and a very warm welcome also from my side to our call. My name is Sabina Proulge. I'm the Head of Investor Relations. Joining me today are Claus von Rotkei, our CEO Jan Peter Gopman, our CTO and Peter Bosch, our CFO. Claus will present financial results for the half year twenty twenty one. The presentation will last about 20 minutes. As always, there will be an opportunity to discuss your questions afterwards. With that, let me turn over the floor to Klas. Good morning, everyone. So thank you for dialing in. It's my pleasure to present you the numbers of the first half of this year to you. And yes, let's dive right in. Obviously, let's start from where we actually are aiming towards. It's to be the leading provider of voice centric business communications in Europe. Usually at this point, I explain a little bit what I mean with voice centric business communications. Voices traditionally are strength, but obviously communication has evolved massively. There are many different ways of communicating in the business world. It's in our telephony and IT worlds have increasingly melted together and continue to do so. There is continuously increasing overlap between telephony collaboration business application space and we have the voice is involved. This is something where Nfone aims to play. And I'll come a little bit into more detail going forward, how to think about that. First then, what is Ensign for those of you, please check if you remember the DNA of our company started as a company introducing cloud PBX, which was kind of the 2nd transformation wave hitting the telephony market. But since then, obviously, has grown far beyond that and now offering a full UCaaS portfolio, having entered the contact center space and offering additional solutions, integrating into other communication methods or business applications. So I think that has been a tremendous development and obviously going forward, there's much more to come. As you know, like we've been listed for 3 years. We are active through own representations or through partners in about 15 European countries. And by now, are proud to report a channel network of about 3,000 partners. All right. Let's dive right into it. As you know, we are 100% channel focused company. So, we rely on our partner network, and we serve customers from everything starting from SOHO up to enterprise. As you see on the left side, this bucket is called direct. Obviously, direct is something we employ very selectively actually for large accounts where we actually help our partners either close the deal or deploy the solution or frankly, just whether the customer wants direct access to the solution provider and basically as additional credibility before the beta pharm on the solution that the partner recommends. But we always we never go direct like all the way, even if the customer contact us and we are involved throughout the sales cycle, there's also a partner at the end in the deal. And our traditional model is through dealers and disties. But in some countries, wholesale is an important model, and we have both that we support with our own airtime and with the wholesale partner providing their own airtime. So our business model basically consists out of licensing fees for the seat, the PBX extension that for the service we're delivering to the customer side. Airtime is obviously additional to that. Those are kind of the recurring revenues. And on top of that, there is one offs, be it for activation where that applies, be it for hardware if the customer sources it through us, and be through professional solution where they are required, especially when implementing more complex solutions, premium solutions over larger accounts where there's more complicated heterogeneous environments. As you're all aware of, the market is moving massively. It's a very dynamic market, partly driven through technological progress, but also obviously the pandemic has had an accelerating factor for how people work. And traditional telephony has obviously completely developed into unified communication. There is it doesn't stop right there. So basically, also contact center is something that's increasingly intertwined with UC. You need to integrate nowadays in business applications for many customers. This should support some kind of workflow in the department that's actually relevant. And to have a seamless transition and support for these business processes requires obviously a good user interface. And these are the basically the different elements that keep growing together and making putting more emphasis on integration of these individual pieces and on providing the full suite. We have our focus market in for providing that in Europe. And the reason for that is Europe's really, really huge market and it's underdeveloped compared to, let's say, the U. S. And especially the geographies we are playing in, many of those have just really low penetration numbers of cloud PBX. As you can see on the right, the SMB market makes up about 2 thirds of the landlines and with enterprise taking the last third. So this is obvious and SMBs usually have an easier time moving towards a cloud service. So this has traditionally been the focus of us and also many other UCaaS providers and it's still massively underpenetrated with lots of growth still to come. All right. And therefore, we have presented about, I think to date about 4 months ago, the first time our strategy that plays on these developments in this market It's obviously to offer an integrated business communication solution with these different solutions and workloads integrating around business workflows, to double click on the user experience as we see that this becomes more and more important as the solutions underlying become more complicated. And as I said, like it really needs to support business processes. And you can I mean, this is obviously a longer journey we've embarked on, but with the release of our native iOS app for Claudia just a couple of weeks ago, you can see that we have actually started the journey? And 3rd, as I mentioned, we are a channel company. We're actually very proud to have a large and loyal partner network. And this is something we continue to hone as our strength and to further develop as you can see on our growth path. It's basically the 3 steps is to really target what we want to address on, which I briefly outlined, to enhance our product portfolio, to deliver on that and to scale our channel network across our geographies to increase our market reach and serve even more customers. For that, we announced a couple of key measures for our strategy to implement this year. So we can actually measure progress. One is that we aim to significantly ramp up our technical resources, which as outlined considering the increasing complexity in different workloads you have to play in and the different integration capabilities is required. And we are on good track. Obviously, it's really, really difficult to top technical talent in like full employment markets. But we have made significant progress and we are still aiming to increase the number of resource by about half until the end of last year versus end of 2020. We also said we would increasingly invest in marketing with a focus on channel, with also increasing more than 50%. As you can see, like those, many of the programs have been in place now, and we started ramping the invest in Q2, ever to maybe like a longer lockdown than we expected and having to establish those programs first. We started a little later than we wanted to, but we are on track in terms of delivering what we said. We actually continue to grow into larger accounts, enterprise accounts counting above 2 50 seats. And this is something we want to do on a very, say, like cautious let's say cautious, let's say, maybe not cautious, but we are very deliberate about to engage in terms of that we deliver a scalable cloud service and don't do bespoke one off custom developments for large customers. That's basically our premise. And we can see that there's a the pipeline is developing nicely with many accounts actually being in the enterprise. And this is something obviously, those sales cycles are a little longer at those customers where we increasingly see that we make inroads in, while also some of our product capabilities still need to develop for that, which we've also planned for 2022. We have started intensifying our activities in CE region, most notably with Poland, where we established and opened our own office in May in Q2. So obviously very nascent still, but more to come. Those are very attractive markets. Not I would say competition is rather new there. They're not very consolidated, but obviously have all their individual challenges. But then this is a really exciting high growth region that we are opening up for us. And then said like in order to amplify the increase in technical developments we aim for that we hire our own engineering talent for. It's obviously important also to find partners to help you accelerate this journey. We've taken a small initial step with acquiring a minority stake at Mitecho, an Italian leader in WebRTC technology that enables us to develop our own video conferencing solution better and commit to access to technology, leading edge technology for that. This has been closed and remind me, I think it was in June. So at the end of Q2, and we'll look forward to many good things coming from that with our own video conferencing solution at the end of the year being the first step of continuous development on that side. Then let's jump right into the business highlights. So for the end of H1, we are reporting seats of 575,000. We now have more than 3,000 partners selling, installing and supporting our solutions. We have as a milestone launched at the end of Q2, SentriX 3 for our daughter Deutsche Telefon Standard, which is basically a new Talt PBX offering. The reason why I'm mentioning it there is because it's an important milestone when we actually have actually completed the migration of the PBX offering from Deutsche Telefim Standard onto N phone technology. So we are one homogeneous technology. Support system that we've that we are still developing, but it's support system that we've that we are still developing, but it's already working for that part of the business. So it's an important technological milestone for us. And also like earlier in H1, we launched our meet and share kind of like our video calling through Cloudera, which has had nice pickup. And obviously, we are using that to come up with a more full blown version at the end of the year. But let's jump into the financial results now. All right. So as you can see, we grew the seat base year over year by 13%. And I'll mention maybe like maybe let me explain to you why it's only 13% still. It's significantly double digit in like the 12 months. There was a really, I would say, intense pandemic phase. And that's also a little bit part of the reason because of the we are comparing basically H2 2020 and H1 2021, which was especially marked by the pandemic against the previous seat base. And considering that we think that we'll have come out of it a lot stronger into H2 2021 and that we have the programs now in place and the investments ramping since Q2 that we actually accelerate growth in H2 2021 and especially obviously then towards 2022, which is part of our growth strategy overall. So we think this is somewhat a special situation in that time period we're looking at. And we foresee accelerating seat growth going forward. Obviously, this is like as far as we like foresee the pandemic developing and now major insolvency driven terms, which currently there's no visibility for that. ARPUL has continued to develop nicely. Obviously, this is like the positive side of the pandemic. I don't want to call it the pandemic doesn't have a positive side, it's a positive effect that the lockdown has on the business that just airtime is going up and we see that increasing ARPUs. So that's a bit of the other side of the metal of somewhat slower fee growth on this. All right. But let's look at the development of the recurring revenues, which has continued to develop very nicely with the growth of 17% compared to the first half year twenty twenty. Total revenue growth was 15.6%. So you can see recurring revenues again grew more strongly than non recurring revenues. A couple of reasons for that, I'll mention later. But especially in Q2, we had actually a good growth of non recurring revenues, which is basically hardware, installation fees and professional services. But hardware actually saves have been hampered through the pandemic, which as I mentioned several times, is not strategic to us in terms of we only need hardware to light up our solutions for our customers. And many customers have just less need for that or the often some customers say that the headphone is basically the new hardware they need. So I think it's not required that often anymore. But also sometimes actually hardware is not easy to come by as the semiconductor shortages on the world market also influence that a little bit. As said for us strategically, it's not a problem, but it just has an impact in terms of like non recurring one off revenues still being on a very low share, which basically supports our business model with our recurring revenues being almost in the order of 89% for H1. Okay. All right. Then gross margin obviously has developed nicely, which is due to the fact that I just mentioned higher airtime, the lower hardware sales obviously has a nice effect on that. We are doing, as we say, in terms of increasing our technical talent and investing in also in the channel, which has increased in higher staff at the end of H1. So this has obviously, as you can see, like influence our personal costs. But in terms of in percent of revenues, we're still below last year. But as I said, with an overinvestment in technical resources, we even see that towards the end of the year and beginning 2022 turning a little bit upwards. In terms of marketing, we've just basically started in Q2 to accelerate investments. Going forward, especially in H2, you see a lot of more of that, partly because, a, we have more we have a new partner program with more partners, so we have more room to invest. And we also have another market we invest into the ramp up. So there will be more spending in H2, which obviously then like quarters well, especially 2 quarters afterwards, you also see this reflected uptick in growth. Selling expenses reflect that we are really focusing on our channel and using that just because it's more stick scalable. We as I said, like we reduce our direct business to practically 0 where we can and taking partners into everything, which I think in terms of further scalability is an important step. And in the overall picture like on terms of profitability, H1 obviously has a pleasant feel of a positive EBITDA. As I said, some of it is due to with investments coming out a little later than we would have wished, also due to, as I said, the pandemic market situation, but it's picking up. It also reflects nicely that like our business model is like stable in these times. And we just as I said, like we would like to invest a little bit more aggressively to increase growth, which you're going to see in H2 actually implemented. And all of that together results in that we stand by our guidance. So we gave that in terms of we expect the growth by our customer base between 15% 17% for the full year, while we think that we may end up a little bit on the lower side of that growth, but as I said, like we expect the growth to be pickup in H2. Recurring revenue is also we expect to be on guidance. And the recurring revenue ratio should also be above 85% and even probably a little bit higher than that, as you can see. So with that said, as a summary, as you know, obviously, we are in a very interesting market situation by the business communications market being revolutionized, not just by cloud PBX, but especially the larger move around unified communications and the merging of different workloads. With our European position, especially our strong position in the markets like in Germany and Austria with we are best positioned to actually take advantage of this long term migration phase of businesses towards the new communication world and with many new nascent European markets where we have presentations in. Our business model allows us to grow massively by having sustainable recurring revenue, which is obviously the beauty of a cloud SaaS business. We have a we own basically a technology platform from the bottom up and know of the needs of our European customers and therefore are actually in control of further developments and further improvements. And we can deliver that from our data centers in Germany to the European market. We can obviously based on that platform, we can scale our growth further for which we've developed our strategy. And there's not just one level of growth, there are many, because I said also it's not always the number of seats. Sometimes it's also like upselling premium solutions on existing seats. And there's additional business opportunities we have for both new customers and old customers, which makes this a really interesting long term play for us. With that, I'll probably pause, and I assume we open it up for questions. Thank you very much. And we already have the first questioners in the line. So first up is Gustav Holberg from Berenberg. Over to you. Good morning, everyone. Thank you for taking my questions. I just have one, Claus, if I may. And that's just about the investments that you have put in PA in Q2 so far this year. Now I know we've talked about the ramp up of these investments that's sort of occurring in H2. But of the investments that you have put in place so far this year, could you talk a little bit more about what exactly it is you've done in Q2 so far that you expect will have a positive impact already on seat growth in H2? Okay. So I think okay, so if you say concretely on seat growth, it's basically A, we started invest more marketing and B, we have more partners to drive the seat growth. So that's kind of like a very short answer. Obviously, we've done more investments that may not necessarily already result in seat growth in H2 like ramp up of technical resources. This is a little bit of a more long term play. But these are kind of like the important ones. And well, yes, there are many more, but as it's like if it's really about H2 impacts, those are the 2. Okay. Super. No, that's very clear. Thank you very much. Next question comes from Alina Koehler from Hauck and Aufreuzer. I actually have three questions. The first one is recurring revenue has been stable quarter over quarter and ARPU came down a little bit. Does this mean that the voice mail are coming down now? I think you highlighted this in the Q1 call that that's your expectation. Then the second question is, we've seen very strong growth at DPS of more than 33% in H1. What is this driven by? And the third question would be, there's like funding programs in Germany right now, which are basically covering investments into digitalization projects. And I just wanted to see if you can benefit from this or if you think that this hampers some of your growth because it doesn't favor cloud solutions but rather on prem solutions. Okay. All right. Thank you. For the first one, basically, I assume I thank you, Alina, for the questions. I think first one you referred to Q2 versus Q1, I think, Alina. Yes, right. Yes. Right. Yes. So I think, I mean, short term ARPU fluctuations are often driven by actually new lockdown periods. I remember like especially in March, I think we had a very strong visible impact and depends a little bit on what geographies are all involved. So I think this is not like necessarily a long term trend, but short term fluctuations. I said long term, the ARPU from the voice minutes may go down. But for that, we continue to develop our premium solutions for which we have basically upside on the ARPU side. And actually, also another large influencer is our channel structure depending on in what country we are in our like growing more above average in terms of like if it's a wholesale or like a dealer partner. Regarding DTS, obviously, yes, the business has developed very nicely and has obviously also to do with airtime. We have like a good income from that. And we have been able to really sustain the PBX business there. Although we launched the new version at the end of Q2, beginning of Q3, the new SentriX 3 new technology version. And we have been able to uphold the steady progress on still selling basically old solutions. So that has worked out well. We're also massively hiring and ramping up the team there. It's and the integration with the InForm Group obviously continues to take make progress. And the last one comes with funding program. Actually, that's a really good question I did not say on the radar. So before I pull something out of my hat, I think I'd rather have to come back to you on that because I don't think I'm qualified to make like a statement in terms of especially what market. I think your question was more Germany centric, like whether the okay, where the solutions are actually being then deployed. Yes. And I'll try to bite my tongue about the short term impact of those usually best government programs on the small and medium business in Germany usually. All right. Thank you for your answers. Next up is Knut Voller from Baader Bank. The floor is yours. Yes. Thank you. Actually, three questions. The first one on the pipe. Can you give some more insight on how more advanced the pipe is compared to prior years? That should give us some more confidence in the growth acceleration clouds that you cited. You mentioned more partners and that this should drive growth acceleration already in the second half as well as marketing spend. So some more color here would be appreciated. Secondly, on depreciation, which went up sequentially quite strongly by €900,000, Can you share here the reasons for this development? And lastly, for Jan Peter, two questions. The first one on Centrix 3.0, how do you expect that to drive the growth momentum of DPS AG in the second half and going forward? And then on the functionality that you still have to develop to be more successful in the large enterprise segment, can you share on which functionality you're working here and when we should expect that to be completed? Thank you. Thank you very much for the concise questions. Regarding PIPE H2, and obviously, I cannot give a quantitative answer, but it's actually something we've been working on to get more visibility on. And we're actually launching a deal registration program soon in order to increase the visibility and comparability of the pipelines because as I said, like we have some wholesale partners where we actually have no visibility in pipelines. Some share, some don't. So it's we don't really have a 100% bulletproof basis to compare. But from my calls with individual countries, I see a pipeline that's continuing to develop. And therefore, we are confident that there will be 2 thirds success as we expected. But as I said, like we just started at the end of mid Q2, basically to ramp up our investment. Many of those will like will take a while with our full marketing power actually hitting at the end of Q3, beginning of Q4. This will have first impact at the end of the year, but then also like for 2022. So this is not, as I said, like those sales cycles, especially also when for bigger accounts tend to take a little bit of time. And in terms of depreciation, I probably know the answer, but I may just defer this to Petra. I think it's yes, it's quite easy. We had a lot of more activation of R and D efforts in the last period. So this will rise in the future. This will be continued. And that's the second reason that due to technical reasons from one of our partners, we had to reduce the mutual period. And therefore, we had an extra depreciation, that's a one off effect, which you don't expect to be repeated. Can you quantify that, please, the effect? It's about yes, it's about About Just a second. We're looking back, Knut. No worries. Take your time. You can also send it back to you that we can quantify. Maybe let me jump in and answer my question. And either we find the answer by then or we will hand over the answer later on. So thanks very much for your questions. SentriX 3.0, I believe the question was how in terms of expectations of growth. Well, as you know, the SentriX 2.0 was a product, let's put it politically correct, coming of age. It was not up to the highest standards. Obviously, partners knew for quite some time that a new version would be coming out. And obviously, what this creates in the partner and then customer area is that they are hesitant to buy the old product. Everyone is looking for the new one now. We are very happy that we got this out there on time. Now it's a matter of educating partners to fully appreciate the new functions, new functionality and everything that is going quite well. The reception that we are having is awesome, to be honest, because the Cloudera platform is obviously a lot stronger and has had a lot of positive developments in the past months years. So we have high expectations on the growth of SentriX 3 in the DTS environment. Hard to quantify when and how exactly, when especially because it is an the launch is an ongoing process. There's still some things in BSS and the processes and so on to be finished, educating especially the partners to really speed things up. But as I said, everything is on track, everything is on plan. So we are expecting the numbers to go up in the second half of this year and then fully launch with the new SentriX 3 Spirits in Q4 and next year. So expectations are quite high there. In terms of large enterprise functionality, it's an easy question with a complex answer. I'm not sure whether or not I'm able to give the full picture here. Reason for that is, Knut, there is not the one large enterprise sector. It's really dependent on what type of large enterprises are we looking at. For example, we are already very successfully addressing large enterprises with several thousands and up to 10,000 of seats when it comes to companies with a large number of subsidiaries. You know a few of them. So we are already addressing those with the feature set that we have. There is not the one feature that is missing for everyone. It's with all the large enterprises, it's different things. Some need a little bit more power in terms of UC. We're delivering this now. Some need additional functionality in terms of contact center or AI. We are delivering that with new NCC functionality, which is part of our strategy as well. A lot of them are targeting for or looking for a new and better administrative functionality, which is something that we are delivering with our new portal, which we're in development right now. We're going to see the first things of that in the next year, but the full functionality in terms of rights management and so on is expected to be coming earliest in 2023. But there is not the one feature that we need to have, which will allow us to di narrowly from one moment to the other address the large enterprise sector, whatever the large enterprise sector is. So it's going to be a slow process. And with every bit of new functionality we're putting in parts of our products, we're going to be able to address more in different types of large enterprises. So it's something that you're going to see increase over time and not with big bang with a feature being launched in, let's say, Q4 next year. It's going to be a slow steady rise. And if I may come to your question regarding the depreciation, the one off effect was about 800,000. Excellent. Thank you very much. And now coming to the next questioner, it is Thomas Coudry from Bryan Garnier and Co. Over to you. Yes. Thank you very much for taking my question. Good morning, everybody. Three questions, please. First one, like to come back on your deal in the Italian company on the WebRTC technology. Should we see that move as a defensive move to protect your access to the technology? Or does this the partnership with the company will provide you with a new competitive advantage or new technology products, whatever? That's my first question. The second one, maybe I misunderstood, but I want to make sure. There was a sharp increase in your nonrecurring revenues in H1 and in Q2 in particular. But however, there are less, let's say, customer acquisition seats acquisitions this year than last year. And I would assume that non recurring revenue 2? And then my last question please is, I'd like to get your comments on an important, I would say, deal in the sector over the last few weeks, the acquisition of the company Five9 by Zoom. I'd be interested to have your view on that. It's a very significant acquisition, significant move to contact centers and calls actually versus where Zoom was coming from. Is it very U. S? Can it have an impact on your customer? Well, overall, I'll be happy to get your thoughts on that move from Zoom. Thank you very much. Brilliant. Thomas, Jan Pieter here. Let me take the first question, please. Your question was whether or not our deal was intended to be more of a defensive move or well, let's put it nicely aggressive move in acquiring new technology and competitive advantage. I believe the correct answer is both. We have been using the technology of MeetEcho for quite some time to build our already in place Meet and Share technology. And we are working on our video conference system for quite some time and are happy to be able to put it out in the market later this year. We're already using it internally very successfully with very positive feedback. So this was built on at least a part of that was built on Meet and is built on Meet Echo technology. So of course, we have a substantive interest into securing this technology and having access to this and make sure nothing happens to this core component of our platform. However, that by far was not the only reason. The MeetEcho guys are very advanced. They have wonderful technology, most likely the leading WebRTC specialists out there in the world. And this is a field in real time collaboration software and back end technology that is evolving quite a bit. Basically, every month, whenever Google comes out with a new browser technology or enter some new codex or whatever, there are new functionalities that you're able to then offer to your customers. And to not have to reactively wait on new technologies come in there and see whether or not the priority of those developers is 100% aligned with our interest, but having the possibility to actively steer the product line to be part of this development and not only be a result of this development, obviously, is going to give us a competitive advantage and is going to speed up things, not so much this year, but in the coming years when we are on top of the UC functionality that and video collaboration functionality that we are going to offer end of this year, going to enhance this technology. This is a constant enhancement. And in this enhancement, we are going to see very positive impact due to the Meet Echo collaboration. I hope this answers the question. Yes? I would like to ask a a question regarding the non recurring revenues. You said rightly, it's a proxy linked with the development of new seats. But there are quite often some deviations and it varies due to hardware demands we have or have not from the one of the other customer. And for example, we had a one off effect here at DTS with the higher hardware demand. But it's not that predictable as the recurring revenues and not that strategic important for us. So and that's why we are so much concentrating on the recurring revenues. Okay. Thank you. And regarding Zoom's acquisition of Five9, I mean, I think that's obviously, I would say it confirms pretty much, I think, what we talked about in the beginning also this presentation. And the different communication workloads just keep growing together. And many customers require, I wouldn't say, integrated, not necessarily integrated solution, but like obviously when they use different workloads, obviously they'd like to then to work together. So there is positive influence. I think there's market study that more than 60% of customers prefer the contact center vendor to be the same as the UC vendor. So I think this obviously gives credence to this integrated communication strategy that we also have. Obviously, it's the multiples applied in this deal, they may just sound like a small premium to the stock price, but when you look at the revenue multiples, that's just staggering. So I think it also illustrates quite a bit that this is, you know, like the markets really in a decisive phase and obviously it mixes up the our play a little bit with Zoom and former partner RingCentral by throwing the I think the gauntlet, I think it's called in English. And as I said, like I think this is just a confirmation of our strategy that you need to play in all the relevant customer workloads. And I think most players who were serious need to play in those. And I think that's pretty much what I take away from that. Okay. Thank you very much. All right. At the moment, there are no further questions. There are no further questions. Okay. Thank you, Frode. So, ladies and gentlemen, may you have any further questions or need more information following this conference call, please do not hesitate to contact me. For now, we would like to say goodbye. Thanks for attending our call today. We wish you a nice further day stay healthy and until next time. Bye bye. Thank you, everyone. Bye bye.