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Good morning, ladies and gentlemen, and welcome to the analyst and investors conference call of NFON AG regarding the financial statements for the first quarter 2020. [Operator Instructions] Let me now turn the floor over to Sabina Pruser.
Thank you. Good morning, ladies and gentlemen, and a very warm welcome to our call also from my side. As last time, we welcome you today from Munich, Berlin and Mainz to the presentation of the financial statements for the first quarter 2020. My name is Sabina Pruser, I'm the Head of Investor Relations at NFON AG. Joining me today are Hans Szymanski, our CEO and CFO; Jan-Peter Koopmann, our CTO; and César Flores, our CSO. Our format today will include the presentation of the results by Hans followed by Q&A. With that, let me turn over the floor to Hans. Hans, please.
Thank you very much, Sabina. Good morning, ladies and gentlemen. My name is Hans Szymanski, and I'm very pleased to present to you the financial results for the first quarter 2020 for the NFON Group. As always, I would like to start with our vision, and this is that we want to dominate the European cloud telephony market by delivering freedom of business communication. And how important freedom of business communication is, I think that's something that we experienced especially during the last weeks. I now would like to draw your attention to the changes going on in the telephony markets. These are mainly influenced by the following developments. First of all, we see an increasing multichannel and multidevice communication. As we reported the last times also, we see that the carriers all over Europe are moving from the ISDN infrastructure to the All-IP infrastructure. And last but not least, I think we all know that the way we work keeps changing, and this evidence increased since the crisis, of course, dramatically. Customer know now exactly that location independence, mobility options, amongst other things, are very, very important. This, in connection with the reliable and the secure communication that NFON offers, this gives us a lot of tailwinds. So no changes until now, but of course we have to consider that the crisis speeds up these developments. I now would like to present to you the figures of the Q1 2020. This was an excellent start for the year 2020. We have a very successful start in a challenging environment. We have seen a recurring revenue growth of 35.6% year-on-year. And the recurring revenue growth, excluding the inorganic growth, is by 22.3% year-on-year. The total revenue growth, 35.5% year-on-year. And the same, excluding the inorganic growth, we have seen here a total revenue growth of 22.9% also year to date -- sorry, year-on-year. The share of recurring revenues in the total revenue is over 85%. And we have seen an increase of seats by approximately 20%. To be more precisely, by 19.6% year-on-year. So this is summarizing an excellent start in the year 2020. Let us now have a look on the milestones that we completed the last quarters and years. You may remember that we have launched in the market our new core product, Cloudya, in the year -- end of '17, beginning of '18. We have had the takeover of Deutsche Telefon Standard, a very successful takeover, in the beginning of the year '18. We have opened new countries as Italy and France, and we are now present in 15 countries as the pan-European cloud telephony company, the only pan-European cloud telephony. We have also launched new products end of last year as NCTI Pro and Nvoice for Microsoft Teams. We have successfully done a capital increase and won a new shareholder active ownership. And end of last year, we have also successfully taken over Onwerk GmbH, a software team who immediately helps us to speed up with the resources of -- for the R&D and to develop our product portfolio. We have now more than 40,000 customers all over Europe and more than 2,700 partners. Let me now lead you to the financial results. NFON has a strong business model, resulting in a unique combination of massive growth and sustainable recurring revenue. The recurring revenues amount to 86% of total revenues, and the recurring revenues consist in license fee per extension that we ask our customers to pay every month, we have also the recurring revenues driven by the airtime and by premium solutions. On the other side, we have the nonrecurring revenues. These nonrecurring revenues amount to 14% of total revenues. And here, we have the activation fee, also the sales from hardware, nonrecurring revenues driven by hardware, and for professional services. So with more than 86% -- or almost 86%, we have a very high ratio of recurring revenues, and this give us a very sustainable and solid basis in our business model.If we look at our seat base and the development here, we see a continuing growth of the seat base. And as you may know, the seats are our main driver. We have increased the total number of seats by 20%, if we compare the first quarter 2019 with the first quarter 2020. The influencing factors for the ARPU development is a huge increase of the airtime volume in March 2020 due to the lockdown and to the move to the home offices. So in figures, the ARPU for the first quarter is -- amounts to EUR 9.88 in comparison with EUR 9.74 in the first quarter of the previous year. And if we look at the ARPU in March 2020, we see a further increase to EUR 10.43. This high ARPU in the month of March, is, of course, due to the higher usage of airtime, and this leads to this additional increase in the ARPU in the month of March.We further see a very low gross churn rate of less than 0.5% per month, and this underlines the quality of the product and the services and guarantees the continuous recurring revenues. And we have also additional premium solutions, such as voice recording, contact center solutions, et cetera, and these premium solutions represent further upside potential for the ARPU development in the medium term. We see, as I commented in the beginning, a significant increase of the recurring revenues, which grew by 35.6% compared with the first quarter of the previous years. The recurring revenues, excluding the inorganic growth coming from Deutsche Telefon Standard, grow by 22.3%. The total nonrecurring revenues grew by 35% compared to the same quarter of the previous years. The total revenue grew by 35.5% and is in line with the recurring revenues growth. We have to consider that we have, in our business model, a cumulative effect quarter-by-quarter expected and due to the steadily growing total number of seats. Let us now have a look on the gross margin. And here, we see a consistently high gross margin, which amounts to 77.6%, and is at the same level as in the first quarter 2019. The cost of materials grew by 36.8%, in proportion to the revenues with a material cost ratio of 22.4%. The high gross margin continues to show a constantly positive development. And if we now compare the gross margin in the year-end of 2017, which amounts to 72.8%, and if we compare that with the gross margin in the first quarter for 2020 with approximately 78%, this shows also that the quality and the value of the revenues is constantly increasing. We have a strong employee base, and this is, in our consideration, the future of NFON, a very strong, high-qualified employee base. The personnel expenses, as reported, amount to EUR 7.2 million in the first quarter 2020. We have smaller adjustments of EUR 0.3 million, mainly for retention bonus and stock options, so that we have seen an increase of the adjusted personnel expenses by 29.7%, including the effect from the acquisition of Deutsche Telefon Standard. The adjusted personnel expenses amount to EUR 6.8 million, due to the increase in workforce by 38.8%. If we compare the number of employees that we have end of Q1 2020, these are 397 employees in comparison with 286 employees that we have had in the average of the first quarter 2019. So we continue to strongly invest in high-qualified, new employees in, for instance, R&D, but also for sales and marketing support amongst others, despite the actual crisis. Let me emphasize that, that we are doing that because we strongly believe that a very high-qualified employee base is the future of NFON. The marketing expenses leads to a strong brand and a broad partner network as key for success. The marketing expense on previous year's level, with an amount of EUR 1.7 million in the first quarter 2020, and we have -- as in the several quarters before, we have here a clear separation of central marketing and local market activities. We have our focus on strong brand awareness, but we have also high attention and we are focusing on on-boarding new partners, especially in the markets like Spain and in new markets like France and Italy. We have now 2,700 partners across Europe, and they very successfully sell the NFON products and the services -- offer the services to our customers. The development of the adjusted other operating expenses shows the scalability of our business model. In general, other expenses comprise of sales commissions, supporting costs, general administration expenses, consulting fees, et cetera, and amount to EUR 6.0 million in total as reported. NFON adjusts the other expenses by marketing costs and sales commissions. The sales commission increased from EUR 1.4 million in the first quarter 2019 to now EUR 2.0 million in the first quarter 2020. The slight increase of the adjusted other operating expenses from EUR 2.0 million to EUR 2.3 million is mainly due to the Deutsche Telefon Standard, but we see, at the same time, a significantly improved ratio, and that's what I mean with the scalability of the business.Let me now draw your attention to the positive adjusted EBITDA, which reflects the strong Q1 2020 development. The strong development of Q1 2020 leads to a positive development of the EBITDA as reported of minus EUR 0.1 million. We have to consider smaller adjustments as retention bonus and stock options in the amount of EUR 0.3 million, so that we then report an adjusted EBITDA of EUR 0.2 million positive. Although we have, of course, continued with our growth and the gaining of market share as our first priority, nevertheless, the profitability is not far away and we have seen the breakeven point on the EBITDA level for the first quarter 2020. Due to the excellent first quarter 2020, NFON expressively confirms the guidance, taking corona effects into account. So we expect a significant growth of our customer base between 20% and 24%. We expect the revenue growth rate for 2020 to be between 22% and 26%, not taking into account any further acquisitions, that's the pure organic growth rate between 22% and 26%. And we expect the resulting recurring revenue in 2020 to be in the ratio of between 80% and 85%. Let me now summarize the key investment highlights. We see and we have a huge addressable business communication market, which is actually being disrupted by a structural shift to cloud PBX solutions. Mobility options, location independence and all the advantages from the cloud telephony market is one of the reasons for this disruption that we are seeing in the market. NFON is the only true pan-European cloud PBX company. We are present in more than 15 countries, and we are best positioned to become the dominant European player. We have a very strong business model, resulting in a unique combination of, on the one side, massive growth, more than 35% in the first quarter 2020; but on the other side, basing on a very sustainable recurring revenue, with a ratio of more than 85%. We are state-of-the-art German engineering, and we offer a cloud PBX solution tailored to the European customer needs and considering security, reliability, data protection, et cetera. Looking to the last years, we have a proven track record of scalable growth. And last, but not least, we have also a proven growth strategy which is levered by a multi-dimension layers of growth. We have a 5-pillar strategy, and we are developing the group along this 5-pillar strategy. So that was the presentation for this morning, and we are now open for your questions. Thank you very much.
[Operator Instructions] And first up is Knut Woller from Baader Bank.
Congratulations to the good start to the year. A couple of questions. The first one on the ARPU trend, Hans, which was quite encouraging driven by the airtime upheaval. Is there any reason to believe that this positive momentum did not continue so far in the second quarter? Secondly, when we look at the premium solutions, can you remind us how, here, against the backdrop of COVID-19, the adoption of premium solutions might saw also an uptick in terms of your pipeline? And the last 2 questions, briefly on the partners. You have announced a substantial increase in the number of partners. Can you give here some more color on the regional trend. I would expect some wins in the newly entry -- entered countries. And then lastly, also related to this question, an update on the progress in Italy and France.
Thank you very much, Knut, for these questions. I will start to answer this, and I will then hand over to my colleague, César, to answer you the question about the partners and the development in the new countries. Let me start with the ARPU. Yes, we are very happy about this ARPU development that we have seen in the first quarter, a clear increase in comparison with the quarter before. And this, despite the success that we have with the wholesale partners, because you may remember that the wholesale partners have a lower ARPU, generate a lower ARPU, due to the fact that they use their own airtime. So despite that, we are very successful with the wholesale partners, we see an increase in the ARPU in the first quarter, up to EUR 9.88. And especially in the month of March, we have seen a further increase up to EUR 10.43. As it is mainly driven -- special, the ARPU increase in March, as it is mainly driven by the usage of airtime, we cannot think about that this will last forever. So it depends strongly here on the usage of the airtime. Of course, we have also placed and sold additional premium solutions, and this is also upside potential for the ARPU, as you may remember, but the ARPU is mainly driven by the airtime usage. So if this would continue, we would expect a further positive development in the ARPU. If this goes, let's say, back to normal, we have to expect a slight decrease also in the voice usage and then coming back to the tendency in the ARPU that we have seen before. That's more or less what we expect here. The second question, premium solutions. I answer that, also. We are seeing customers asking for additional premium solutions. And this is also a positive development also because we can further penetrate the customer base that we have, but we can also win additional customers only through the premium solutions. So it goes both ways. And for the questions concerning the partners and the developments in the new countries, I would like to hand over to César, please.
Thank you very much, Hans. Good morning, César speaking. In order to answer your questions, let me start with the partners first. We have seen a sharp increase in the number of partners to over 2,700 partners in Europe. These partners, the new partners, are very well spread, but rather with an emphasis in the new countries, where we have been able to win some really good new big partners to help us drive our business locally. We also have seen an increase regarding new partners that were rather coming from a Microsoft environment. As you probably remember, we published our new MS Teams Nvoice product last year in October. And therefore, we have been approached -- we have been approaching new partners from this space. That means that partners that in the past so far were solely selling Microsoft products, mainly Office products, they are now selling our telephony solution on top. That is a particular big chunk of the new partners that we have been able to get on board.If I look specifically at the new countries Italy and France, they have been strongly impacted by corona, as you would expect. Nevertheless, we have been able to secure and expand our partner base and customer base in these 2 countries. We have seen a positive development, and we have seen also that the overall openness, especially in Italy being less penetrated regarding such solutions, is very open for these kinds of solutions. We see a great development still and ahead, which is great for us. So all in all, in line with our expectation.
Just a quick follow-up on the ARPU. I understand the mechanisms behind what drives it up and what risk factors are there, whether that's maintainable. But just to get a feeling for how thing progressed in April and also now until mid-May, is it fair to assume that the trend you have seen in March has not changed in -- as of today in the middle of the second quarter?
Thank you for the follow-up questions, Knut. As you may know, we are not reporting the second quarter today, but we are reporting the first quarter. Nevertheless, let me give you an indication here. I think in March, we have seen a spectacular peak in the voice usage. And this will not be the same, in our expectation, in April or in May. So people are coming back to the offices more and more, so that the usage of March was -- I think, was a peak here. We expect a positive development but -- in the voice usage, but not as we have seen in March. But let me -- this leads me to another remark. It is very interesting, in my opinion, to see what a peak in the voice's usage can generate on the ARPU side. Because this EUR 10.43 is clearly above the first quarter's ARPU and also above the first quarter of '19, as I commented before. And this shows very well that the more the people use the system, the better it is for NFON, that's not a surprise. But also this effect, which amounts then to EUR 10.43 monthly ARPU in March, shows also that here is -- that we can expect and that we have seen a positive effect. But again, April will not be at the same level as March.
The next question comes from Stephane Beyazian from MainFirst.
Just a few questions, if I can. The first one is on the EBITDA, which I think is quite encouraging, I was just wondering whether you do stick to the guidance, which I think is not positive EBITDA probably before 2023. Is the first quarter actually making you more optimistic that you could be profitable earlier than 2023?My second question is regarding Deutsche Telekom. During their call, they said that they need more solutions for home workers. Actually, it wasn't more clear than that, to be totally fair. But I was just wondering whether you could remind us how difficult it is for a carrier to be able to implement from scratch and develop a solution such as Cloudya, because I think they tried in the past, so I'm just trying to understand what are the barriers to entry and how strong is your product and cannot be easily replicated. So that's my second question. And my third one is, are you seeing a lot of, let's say, action in the M&A market? I mean I suspect that we've seen Verizon buying BlueJeans for the conferencing, so this comment from Deutsche Telekom. So I'm just wondering whether there is any color you could provide to us in terms of what's happening in the market. I would say there are a lot of talks.
Thank you, Stephane. I would like to ask the question concerning the EBITDA and M&A, and I will then hand over to my colleagues, the question with the solutions to César and the question about the scalability of the business model to my colleague, Jan-Peter. So let me please start with your question about the EBITDA. And you have asked if we are now more optimistic on the EBITDA to achieve the profitability maybe sooner than later. Let me please reiterate that our first priority for the NFON Group is growth, and we maintain this 100% focus on growth. Nevertheless, you are right, we have informed the market that the EBITDA breakeven point could be reached in the medium term with the same level of development that we have -- that we are seeing now. So we would like to stay with the medium term, that the EBITDA would be achieved in the medium term, although we have now seen an EBITDA breakeven in the first quarter, but this has to do with the clear increase in the ARPU and also with the excellent first quarter that we have had in 2020. So summarizing a little bit. The first quarter shows the potential of the NFON Group with a clear focus on growth. Your question concerning the M&A. In our opinion, yes, we are seeing further M&A activities. And as you may know, M&A is the fifth pillar of our 5-pillar strategy. And we have, of course, a strong focus, not only on the organic growth but also on the inorganic part of the business, so that we expect to continue analyzing potential targets, we continue the talks that we have. And when we think that everything fits and that this is good for the NFON group, then we will, of course, consider also further M&A. This is a clear topic for us. The -- we are seeing an intensive consolidation in the market, and the NFON Group wants to be an active part of this consolidation. Let me now hand over the question about the solutions and to -- how to place the solutions to the customers now to my colleague, César, please.
Thank you very much, Hans. Regarding solutions for homeworking -- home office and sort of teleworking, all big telcos, carriers, are looking actively for solutions if they don't have any, but most of them are already using some sort of platform or technology around in Europe. We are in contact with all of them. You know that we work very closely together with O2-Telefónica; with T-Systems, a subsidiary of Deutsche Telekom, and offer our solution as a white-label solution to the market. So far, what we can say is that none of the carriers in Europe have developed their own platform. All of them are using platforms like NFON to go to market and offer home office solutions or teleworking solutions. And let me just state as well, before I hand over to JP, that video alone, video telephony, videoconferencing, is not a complete homework -- home office, sorry, and teleworking solution. It's part of it, but it's only one part of it. JP, over to you.
Thank you, César. Stephane, I believe one thing that is very important to understand is that we are, in contrast of other vendors like the big platform vendors, we are not selling or operating just a platform. We have our own technology and it's a full ecosystem that we are delivering, both when we are doing this in our own name, but also when we're doing this together with wholesalers. And by ecosystem, I really mean the technology. I mean the road map, which is our road map and not the road map of one of the, for example, big U.S. players, which you are then dependent on. We control our own feature set. We have excellent support, support systems, and the business support is extremely crucial when it comes to enterprise customers. Quite different from B2C customers, so that is very important for us. We have a lot of experience there, which both our partners and our -- especially also our carrier and wholesale partners are depending on. This complete ecosystem, which consists of also the telephony features, the administration features, all the support features that we have, but also very secure provisioning, for example, that's what's really making the difference here. And moreover, we have the excellent experience to not only do this in one market, in one regulatory system, but mainly across basically all the European countries because we're in -- active in regulatory environment of more than 15 countries. So that really makes us the pan-European player that we are. And it's really very important that we are able to react to these -- to all the new opportunities but also threats that are coming up. If you challenge, for example, security issues that have been arising in the market with vendors, Chinese vendors coming also over to Europe, we've been the only one to handle this correctly with -- we've been there in time and we've been excellent in this, and we only were able to do this because it's our own platform. And what we always see is that we tend to be a lot faster in reacting to those issues, both to market demand but also to things like the regulatory changes across Europe than most carriers are able to. I hope this answers your question, Stephane.
At the moment there are no further questions. [Operator Instructions] And the next question comes from Alina Koehler from Hauck & Aufhäuser.
I just have a question -- one question on your premium solutions. Which is the one that is selling the best in these times? Is it the Microsoft solution or contact center?
César, please.
Yes. Happy to jump in. Thank you very much. Alina, it's both. In terms of volume, though, definitely, it's more contact center than Teams. But Teams, our Nvoice for Microsoft Teams solution is taking off really fast and growing faster than anything else.
And we have a follow-up question from Stephane Beyazian from MainFirst.
Sorry, I was on mute. I couldn't answer that. You did answer my question. I have a follow-up, one regarding the ARPU. Can you already make some comments on, since the end of the lockdowns, whether you are already starting to see a little bit of a lower ARPU as employees return to offices?
The way, Stephane, that you asked if we see people coming back to the offices, is that correct?
Yes, indeed, and therefore if that brings the ARPU already a little down since, let's say, the beginning of May?
Well, we see, indeed, people returning to the offices. The developments are a little bit different in the several countries where we are in. I think very cautious is still Spain, France and Italy, but also these countries are more and more opening and releasing the lockdown measures. So we see a back to normal. And also in Austria. In Germany, as you may know, the most things are now, we cannot say back to normal because it's still a strange situation, but the most people are returning to their offices. We can confirm that. For NFON itself, we have developed a plan to -- also to return to the office in the next weeks, although we will separate the company in 2 groups, group A and group B. And these groups will work separately in alternating weeks. So this is our way to come back to normal way and normal times. And this will happen now within the next 14 days. I think this is the first step. Of course, as soon as we can, we will also return to the time that we have had and the processes that we have had before this crisis.
And one additional follow-up, if I can. In terms of higher traffic, looking at your margin, it seems to me that the gross margin in the first quarter is pretty similar to the previous quarter margin than to the first quarter of last year. So would it be fair to assume that the higher traffic is coming at a margin which is broadly at par to the rest of the business, the traffic margin?
Well, of course, the airtime margin is not as high as the seat margin that we have, the extension margin. That's clear because the extensions are our own product. And the airtime, we buy that from a few vendors and we sell that then, so the margin is lower here. If you look at the gross margin, we are happy about this development, with a very, very high gross margin that we have, almost 78%. And I think that's a positive result, but that cannot be increased constantly without changing things. So the high margin is reliable, but depends also, of course, on the structure of the revenues.
Stephane, may I just...
Will you be able...
Stephane, may I just come back to your previous question briefly on the ARPU. I think the ARPU increase that we have seen in Q1 actually shows the strength -- or sorry, the potential that we actually have in the ARPU. We have seen that increase due to higher traffic. That may be something that due to the high potential that we see, and we already mentioned contact center and the Nvoice for Microsoft Teams integration, we may -- we see here the potential impact of it on our ARPU overall.
And the next question comes from Thierry Serero from Meliora Capital.
Just a quick question on the nonrecurring revenues. They haven't been -- they've been relatively weak for a long time now, but yet the number of seats is growing. So I'm just trying to understand the connection between the 2. So is it that the activation fees are still growing, but it's the [ rates ] that is going down? Or can you just explain how it can be that you're still growing the seats but the one-offs are going down or have been -- that's growing a lot less than the seats over the last several quarters or years.
Yes. Thank you very much. I will start with the answer, and I will then, for more details, hand over to César. You are right, we have achieved an interesting level now of the nonrecurring revenues, an increase in the first quarter 2020 compared with the first quarter in the year 2019. You may remember, Thierry, that the nonrecurring revenues, these are -- they are mainly driven by hardware sales, professional services, but also by activation fees. So the activation fee is something that we ask our customer to pay when they first time sign for an NFON service. And this activation fee is a one-off, and this is part of the nonrecurring revenue. So it depends, of course, on the number of seats that we win in our customer base. And this has, as a consequence, then also an increase in the nonrecurring revenues. César, do you want to give some more color here, please?
Sure. Yes, I'm happy to do that. You already showed the past, Hans, which is the one-off revenues consist of the 3 components, hardware, professional services and setup fees. Setup fees are in line with our expectations. It's hardware being less so, given that, especially what we already have seen in March. I mean nobody wants a desk phone on his table. When they are at home, they're using the soft phones of our mobile solutions. So therefore, the one-off revenues then tend to be lower given this component is slightly lower.
And let me add something -- sorry, go ahead.
No, no. Carry on. Carry on, sorry.
Let me add something also to that. The increase, the growth of 35% in the nonrecurring revenues compared with the previous year, please taking into account that this is including the effect of Deutsche Telefon Standard. So the 35% is organic, but also inorganic. If you consider only the organic growth, then we are here on more or less the same level as with the recurring revenues also. So no really change here. But the numbers show as reported 35% because we have here the effect of the Deutsche Telefon Standard included, which has been now consolidated for the first 3 months in the year 2020. And in the year 2019, we acquired DTS in March. So in the previous year, we had only 1 month of nonrecurring revenues from the DTS in the consolidated figures.
Okay. So just to clarify, you had a number of seats that were sold but not yet activated on previous quarters, the companies were delaying a little bit. Do you have a backlog of seats that are not yet activated? Or is it all back to normal and now you should have activation fees more or less following the number of seats?
That is still the case, I can confirm. We have still have backlog of nonactivated seats or so-called contracted seats.
At the moment, there are no further questions. [Operator Instructions] There are no further questions.
Thank you. Ladies and gentlemen, may you have any further questions or need more information following this conference call, do not hesitate, of course, to contact me by telephone or email. For now, we would like to say goodbye. Thanks for attending our call today, and wish you a nice day. Stay healthy. Bye-bye.
Thank you very much. Bye-bye.
Thank you. Bye-bye.