NFON AG (NFN) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to today's conference call regarding the presentation of the half year results 2021 of NFON AG. [Operator Instructions] Let me now turn the floor over to Sabina Pruser.

Thank you. Good morning, ladies and gentlemen, and a very warm welcome also from my side to our call. My name is Sabina Pruser. I'm the Head of Investor Relations. Joining me today are Klaus Rottkay, our CEO; Jan-Peter Koopmann, our CTO; and Petra Boss, our CFO. Klaus will present the financial results for the half year 2021. 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 Klaus.

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 us dive right in. Obviously, let's start from where we actually are aiming towards is 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 and our voices, traditionally our strength, but obviously, communication has evolved massively. There are many different ways of communicating in the business world. Telephony and IT world have increasingly melted together and continue to do so. That is continuously increasing overlap between telephony collaboration business application space. And we have a the voice is involved. This is something where phone aims to play. And I'll come a little bit into more detail going forward, how to think about that. Then what is NFON. For those of you who know, please check. If you remember the DNA of our company started as a company introducing cloud PBX, which was kind of the second 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 there's 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 for partners in about 15 European countries. And by now, I'm 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 called direct, obviously, direct is something we employ very selectively usually for larger accounts where we actually help our partners, either close the deal or deployed a solution or frankly, just whether the customer wants direct access to the solution provider and basically as additional credibility before the better farm on the solution that the partner recommends. But we always -- we never go direct like all the way even if the customer contacts us and we involved throughout the sales cycle, that's also a part at the in the deal. And our traditional model is through dealers and -- but in some countries, wholesale is an important model, and we have both that we support with our airtime and with the wholesale partner providing their own airtime. So our business model basically consists out of licensing fees for the seats, the PBX extension that for the service we are 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-off beat for activation where that applies be it for hardware, if the customer sources it through us. and be it through professional solution where they are required, especially when implementing more complex solutions, premium solutions or with 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 -- 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 is 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 is 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 2/3 of the land lines and with enterprise taking the last third. So this is a 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 Cloudya, just a couple of weeks ago, you can see that we have actually started the journey. And third, 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. 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 the 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've started ramping the invest in Q2. However, 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 250 seats. And this is something we want to do on a very cautious let's say, cautious, let's say, it's maybe not cautious, but we are very deliberate about the opportunities to engage in, 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 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're 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. Well, we have started intensifying our activities in the CEE 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 this is a really exciting high-growth region that we are opening up for us. And in 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 Meetecho, an Italian leader in web RTC 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. Centrex 3 for our daughter Deutsche Telefon Standard, which is basically a new cloud 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 Telefon Standard onto NFON technology. So we are one homogeneous technology within the company. And we're also already using our new business 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 & Share kind of like our video calling through Cloudya, which has had a 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 you can see we grew the seat base year-over-year by 13% and -- And I'll mention maybe like -- maybe just let me explain to you why it's only 13% still 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 this a lot stronger into H2 2021 and that we have the programs now in place in the investments ramping since Q2 that we actually accelerate growth in H2 2021, and especially obviously then towards '22, 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 likely as far as we foresee the pandemic developing and now major insolvency driven turns, which currently there is no visibility for that. ARPU 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 there's a bit of the other side of the medal of somewhat slower seat growth on this. All right. But let's look at the development of the recurring revenues, which has continued to develop very nicely with a growth of 17% compared to the first half year 2020. Total revenue growth was 15.6%. So you can see recurring revenues, again, grew more strongly than nonrecurring revenues, a couple of reasons for that. I will mention later. But especially in Q2, we had actually a good growth of nonrecurring revenues, which is basically hardware, installation fees and professional services. But hardware actually sales 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 of any more, 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 I said, for us, strategically, it's not a problem, but it just has an impact in terms of like nonrecurring one-off revenues still being on a very low share, which basically supports our business model with our recurring revenues been almost in the order of 89% for H1. All right. Then gross margin obviously has developed nicely, which is due to the fact that I just mentioned, higher airtime, 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 seen increased in higher staff at the end of H1. So this has, obviously, as you can see, like influence our personnel costs, but in terms of in percent of revenues, we're still below last year. But as I said, with over investment in technical resources, we even see that towards the end of the year and beginning '22, 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 -- a lot 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 to ramp up. So there will be more spending in H2, which obviously then like quarter, specially 2 quarters afterwards, you also see that reflected uptick in growth. Selling expenses reflect that we are really focusing on our channel and using that just because it's more scalable as I said, like we reduced 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 in terms of profitability, in 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 it actually implemented. And all of that together results in that we stand by our guidance. We gave that in terms of we expect the growth of our customer base between 15% and 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 pick up 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 to buy cloud PBX, but especially the larger move around unified communications and 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 and nascent European markets where we have presentations and -- our business model allows us to grow massively while having sustainable recurring revenue, which is obviously the beauty of a cloud SaaS business. We have -- 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 on that -- based on that platform, we can scale our growth further for which we've developed our strategy. And there's not just 1 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 us 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.

[Operator Instructions] And we already have the first questions in the line. So first up is Gustav Froberg from Berenberg.

I just have one, Klaus, if I may. And that's just about the investments that you have put in place in Q2 so far this year. Now I know we've talked about the ramp-up of these investments 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 is this you've done in Q2 so far that you expect will have a positive impact already on bit growth in H2?

Okay. I think -- okay, if you say it concretely on seat growth, it's basically a, we started to invest more marketing and b, we have more partners to drive the seat growth. So that's kind of like the very short answer. Obviously, we've done more investments that may not necessarily already result in seat growth in H2 like in our ramp-up of technical resources. So this is a little bit of a more long-term, long-term play, but these are kind of like the most important ones. And yes, there are many more, but it is like if it's really about H2 impact, those are the 2.

Next question comes from Alina Koehler from Hauck & Aufhauser.

I actually have 3 questions. The first 1 is recurring revenue has been stable quarter-over-quarter and ARPU came down a little bit. Does this mean that the voice minutes are coming down now. I think you highlighted this in the Q1 call, that's your expectation. Then the second question is we've seen very strong growth at DTS of more than 33% in H1. What is this driven by? And the third question would be, there are 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 do you think that this hampers some of your growth because it doesn't say anything on cloud solution -- on-prem solutions?

All right. Thank you. For the first one, basically, I thank you, Alina, for the questions. I think the first 1 you referred to Q2 versus Q1, I think.

Yes.

So I think -- I mean, short-term ARPU fluctuations are often driven by actually 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 in what country we are 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, 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 Centrex 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 NFON Group obviously continues to take -- make progress. And the last 1 in terms of funding program, actually, that's a really good question, I did not have on the radar. So before I pull something out of my head, 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 on Germany-centric like okay, where the solutions are actually being deployed. And I'll try to bite my tongue about the short-term impact of those usually is government programs on the small and medium business in Germany usually.

Next up is Knut Woller from Baader Bank.

Yes. Actually, 3 questions. The first 1 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 EUR 0.9 million. Can you share here the reasons for this development. And lastly for Jan-Peter. Two questions. The first 1 on Centrex 3.0, how do you expect that to drive the growth momentum of DPSAG 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 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 are actually launching a deal registration program soon in order to increase the visibility and comparability of the pipelines because, as I said, like you know, 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 the individual countries, I see a pipeline that's continuing to develop. And therefore, we are confident that there will be 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 '22. So this is not, as I said, like the sales cycles, especially also when for bigger accounts tend to take a little bit of time. In terms of depreciation, I probably know the answer, but I may just deferred is to Peter.

I think yes, it's quite easy. We had a lot of more activation of R&D effort in the last period. So this will rise in the future continued. And there's a second reason that due to technical reasons from 1 of our partners, we had to reduce the useful period and therefore, we had an extra depreciation that's a one-off effect which you don't expect to be repeated.