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Good morning, ladies and gentlemen, and welcome to today's conference call regarding the presentation of the Q1 results 2021 of NFON AG. [Operator Instructions] Let me now turn the floor over to your host, Sabina Prüser. Please go ahead.
Thank you. Good morning, ladies and gentlemen, and a very warm welcome also from my side to our call. My name is Sabina Prüser, I am the Head of Investor Relations. Joining me today are Klaus von Rottkay, our CEO; and Petra Boss, our CFO. Klaus will present the financial results for the first quarter 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 it's my pleasure to report results of the first quarter of 2021. And before we do that, maybe just a quick recap of our high-level strategy as we've presented them at our Capital Markets Day about 5 weeks ago. Overall, our mission is to be the leading provider of voice-centric business communications in Europe. And what we mean with that becomes a little bit clearer when we point out what our key differentiators are for that, it's to deliver really integrated business communications. We've seen that over the last, let's say, few years, especially months, there are traditionally more separated and more disjunct areas of telephony. Collaboration and business applications have merged closer and closer together and we think that in the future, it will become important not only to offer a full unified communication as a service suite but also complemented by open APIs that facilitate integration into business applications, into business processes and support workflows within customers' companies. For that to become more intuitive and more seamless as the complexity is ever increasing in the background, we focus on strong and easy user experience. And we'll revamp the entire design of our applications and integrations to facilitate that and to be transparent when it comes to the complicated integration mechanics, basically, taking place under the hood. And as we are a 100% channel-focused companies, we want to focus and double-click on that strength and build that out further both in terms of intelligence and especially in terms of quantity. And for that, we have a simple 3-step growth path laid out for the next few years. And one, as I said, like focusing clearly on these 3 differentiators and adjusting our product development and go-to-market efforts. Accordingly, on the product development side, it's not only about complementing the current offering, getting the platform more and more feature-rich to answer different needs and scenarios of customers, different customer sizes and different customer industries, but also complement them and make the transition to other applications and other adjacent workloads more seamless and close. The last one is obviously to scale the partner network that we have. We are building out our infrastructure a lot to facilitate and -- of our partners business with us to make them even more successful, betting their business on NFON. And obviously, we want to increase that in quantity quite a bit across the geographies that we operate in. For that, we've set ourselves some short-term milestones to see that we can get off to a good start towards the strategy and some of these milestones are actually pretty ambitious, i.e., starting with ramping up our technical resources massively. We target actually an increase of more than 50% year-over-year until the end of '21. You may know that we started an R&D side in Lisbon in September 2020, and that has been ramping nicely like the 20 senior developers on board by now, with a few more hires already signed and in the books for the next couple of coming months, which will be important to us. Second one is increasing marketing spend. Obviously, we are very eager to come out of some of the pandemic lockdowns in the geographies we operate to make that productive because obviously, we don't want to spend when both our partners and customers are not working at full speed yet. So that's why it has been a little bit slow year-to-date, but we're still confident that we can double down on this and achieve a significant boost for -- especially the second half of the year. We also have taken -- like want to take advantage of our platform having become ever more powerful and it can easily also address larger customers. We, at the same time in the past, obviously, want to focus on the SMB market because, a, it's the biggest one; and b, it's the one with the shortest sales cycles where customers have the least implementation hurdles. And obviously, we want to take advantage of our economies of scale, our platform and shy away from doing any kind of individually tailored solutions to one large account. So no bespoke solutions, it's economies of scale. But for many smaller enterprise customers, we basically roughly estimate the size to about 5,000 seats, they can often like have all their essential business communication needs addressed by our platform. It's something that we want to increasingly address. We've done that in the past on an opportunistic base but this is something we'll grow over the next couple of years, especially in like 12 to 18 months, we'll be able to address a lot more customers than that. But since these customers also have large sales cycles, it's important to -- not large, long sales cycles, it's important to start this journey early. We have decided to intensify our activities in the Eastern European region as this is something that's competitively a little bit underserved compared to the Northern or Western Europe. In fact, this month, we have founded our subsidiary in Poland to increase our partner development there, so this is on the way. And last, but not least, we are actively looking to enhance our technology portfolio not only through developing it ourselves but only -- but also through partnerships. And this is something we are in discussions with. There's nothing to announce to date but we are focusing on this lever as well. With that, let me dive into the results of last quarter. So our recurring revenue growth was about 19.5% for the first quarter, which is in line with our expectations, and considering the circumstances of these times, very respectable organic growth. And our seats grew by about 16% this quarter, year-over-year. And our recurring revenues make up for about 89% of our total revenues. As usual, I'd like to point out a little bit what that means in terms of split of recurring revenues versus nonrecurring revenues. Obviously, we are counting our revenues in terms of number of seats times the average revenue per seat. And that's made up through licensing of our solution, actually airtime or premium solutions that are being sold basically on top of that socket that we count as like a PBX expense. And on nonrecurring revenues, we have one component which is hardware. And this is something that has -- was a -- suffered quite a bit through the pandemic in terms of people buying less hardware and just, I would say, the headset is a new hardware, but this is traditionally obviously a low-margin business, and this is something we do to complement and facilitate the solution on customer side but not a strategic focus area for us. But getting activation fees for like new sales and especially professional services for a more solution-centric, less transactional sales is also an important part of our business, and this also accounts towards nonrecurring revenues. Let's go through the individual lines one by one. As I mentioned, seat growth was about 16%. At the same time, you may note that the ARPU has increased quite substantially to above EUR 10 now in Q1, which was definitely influenced by the lockdown. Just -- there was just higher use of airtime. Also, DTS business has developed positively. So -- and this is not something we foresee to continue long term, but this is rather a positive side effect of the lockdown, which, at the same time, obviously always results in a little bit like restrained growth. So it's kind of like the positive sign long term. We obviously strive for a higher growth and ARPU is approximately stable over the midterm average. Our recurring revenues grew by about 19.5%. As you can see, this is something I would say, like completely in line with our expectation and in line with our guidance for the full year. It's a little bit higher than our guidance for the full year because you have this year-over-year effect as Q1 2020 was not really hampered that much by the lockdown. Just started mid of March when there were many last-minute sales made and obviously, that is also reflected in the 12 months later, in a year-over-year effect of the recurring revenues. Other than that, it has increased steadily. Nonrecurring revenues were somewhat stable, even declining a little bit, which is also consistent with the year-over-year comparison. And with Q2 of this year, we, for the first time, will have a clean year-over-year comparison, basically pandemic versus pandemic, and these effects will be less pronounced. Gross margin increased slightly to a little bit over 80%, which is due to the fact that cost of materials stayed on an absolute level, in line with last year, while revenues increased. And increased airtime also contributed to that overall increase in gross margin, which has been steady over the last couple of years. We have a pretty constant personnel cost ratio versus revenue, while we increased the overall headcount year-over-year by a little bit more than 10% and which is something we will -- obviously, we'll continue and trying to accelerate especially when it comes to technical resources where we feel that we need to double down also to uncover some of the additional layers of growth we still have in stock for the next couple of years on top of that fundamental transformation from on-premise to cloud PBX. I briefly mentioned already, marketing was still influenced in Q1 '21 by the pandemic and obviously, we decided that we want to increase this massively. But first, we have to revamp some of the partner programs we have. So we're working on new partner relationship management tool to actually accompany the -- and facilitate the partner journey with us from -- all the way from onboarding through training, to presales, to quoting, to activating seats and post sales. And this is a necessary effort which will incorporate a lot of the learnings we've made over the last couple of years in different markets and that we can scale and use them across all these markets. We'll also build it in a more flexible way to work with a wider range of partners. And we are investing into like new and improved MDF programs that we have in place and which is something that we'll see pickup at the end of Q2, again, significantly as we expect to with the doubling down on these go-to-market efforts in H2 will actually lead to significant growth, especially for the year to come then. Sales commission, I would say, stayed on the same level. There's nothing much, I would say, to explain on that. Our partner structure is not changing that drastically in short term, so this is in line with expectations -- sorry, that was one too much -- that results in an EBITDA of -- in Q1, of EUR 1.6 million. And with some adjustments, we arrived at EUR 1.8 million adjusted EBITDA for Q1, which is a little bit higher than we expect for the full year, as I said, like in terms of the investments haven't fully taken place yet. But it demonstrates well that like the business per se is intrinsically profitable and only to accelerate growth further, we invest -- aim to invest a little bit more heavily. Coming back to our guidance we gave at the publishing of the 2020 results and which we'll confirm, that our seat growth will be somewhere in the order of 15% to 17% for '21. Our recurring revenues we expect to grow at about 14% to 16%. The difference to the Q1 result here is obviously a year-over-year effect of the corona months of 2020, Q2 forward, with lower business -- new business sales back then reflected in lower recurring growth numbers this year. And the recurring revenues we foresee to be stably above the 85% range also on the midterm. But we may not expect it to stay at this very high level, but we are feeling that the shape of the business is actually very healthy on that kind. And so we have, I will say, somewhat a wiggle room on that side. Good. With that, let me summarize again why we think that NFON is actually a great investment. Obviously, we have this underlying massive market disruption and the move to the cloud. I always point out that in our largest market in Germany, like cloud PBX penetration is at about 10% and this is a journey that is definitely taking place and going to happen. About the time scale, not everyone agrees but it will happen over the next couple of years in a massive way. So this is -- and we see the pandemic actually enabled, facilitated and accelerated development not just to a simple migration to the cloud but towards integrated business communications where telephony and IT converge more and more. So this is a massive underlying market trend. We have a strong business model where our growth is actually also reflected then in sustainable recurring revenues for the years to come. We have a native cloud solution built in Germany and run through German centers that can easily scale to serve all of our European customers. We have a proven growth strategy and have additional layers to that growth like, for example, upselling on the existing socket with premium solutions and adjacent workloads to the current telephony option. And we have a very strong channel partner base, which is somewhat unique because this has been traditionally our focus and this is something that we know how it works. We will now improve further with the investments we have planned. And this is obviously not only the basis but also the opportunity and potential for further scalable growth. With that, I'd like to conclude and like move it over to the Q&A session. Operator, can you facilitate this, please.
[Operator Instructions] We have -- first question is coming in. The very first one comes from Knut Woller from Baader Bank.
A couple of questions, Klaus. And first, looking at the investments, can you give us a better feeling how we should think about the investments in the coming quarters? Is that something where we should expect Q2 to see already the full run rate? Or is it rather something that you would say that we will still see a ramp-up with Q2 to a lesser extent than in the second half, seeing the investments in full steam? Then looking at the ARPU, which was clearly a positive surprise in the first quarter. Has there been any change to ARPU in the second quarter so far? Or is that relatively stable? The third question, you mentioned in earlier conference calls that the momentum, particularly in Southern Europe, suffered by the pandemic. Can you give us an update here what you're seeing currently in the market? Is here already an improvement becoming visible? And then secondly, on the seat growth, do you expect that your investments will already have a positive impact on seat growth also this year? Or is that something where we should expect to see a better momentum in predominantly from 2022 on?
Let's try to take this one by one and please correct me if I miss something. As I said like in terms of investments, when they're coming, basically are going to be visible full on. As you said, like I expect Q2 still to be a ramp-up quarter for the investments both on the marketing because -- I give you an example on the marketing side -- because we still have some infrastructural work to do before -- like putting the fuel to the fire makes complete sense, otherwise, we would just invest into the existing model, but we'd rather -- wanted to tweak the model and then increase investments. So in Q2, we'll still have ramp-up. I expect H2 to be in full swing there. On the R&D side, basically as well, we are hiring people. That takes a while. So I also expect here H2 to be more, say, representative of our investment level. On the ARPU level, I said like, okay, this has been a positive surprise. Actually, this is not super plannable, I have to say, because the last -- I mean, the last couple of percentage swings because it really depends a little bit on lockdowns that we have. That really has a significant effect and this is something that the pandemic and the political response basically determines. So it's really hard to make predictions. I mean, obviously, we don't have any numbers for Q2 to announce but I would say if you look at the lockdown activities across Europe, you pretty much can infer what this means in like, let's say, the swings in airtime a little bit up or down. And then you asked about Southern Europe. Actually, I would say Spain and Italy are still -- like has been still under a little bit more heavy influence of the pandemic, although in Spain, actually, I think, 1.5 weeks ago now, I think they ended the state of emergency. So I expect here positive development soon, but there has been somewhat a restraint. And then last one, seat growth, when we expect the impact of a seat growth. Yes, this is definitely going to be more towards the end of the year and especially the following year that we see an uptake there.
The next question comes from Gustav Froberg from Berenberg.
Also, I have 2, if I may. First one is just on the shape of growth that you expect for 2021. Clearly, Q1 saw very strong recurring revenue growth and I was just wondering how you see that growth rate developing through the quarters this year.And then my second question is on marketing investments as well. I was wondering if you could give us a little bit more detail on how you're planning to approach the ramp-up in marketing for the latter half of this year. How important are your off-line activities, for example, when it comes to marketing? Just a bit more color there to help us understand how you are -- how you're approaching the market with your solution would be very helpful.
Okay. Great. Thank you, Gustav. So in terms of the shape of growth for 2021, that really, I would say -- as I said, it's a little bit of a year-over-year effect of new business growth last quarters. Since I have been on board only for half a year, it's not something I intrinsically remember, but -- so I'm looking a little bit towards Petra. But like I've been -- and I would say that in Q2, we would probably still beginning to have a little bit more sale. When we went to lockdown, some customers frantically try to like get in position, then I think when the lockdown like became longer, many customers became very conservative as it became more serious. And then at the end of the year, there was some additional clamping down. So if you always add 12 months to that, I would expect that recurring revenue growth especially slows in the middle of this year and then probably becomes maybe a little bit higher again in the beginning of Q3 and lower again in Q4-something. But it's really a year-over-year impact and has nothing to do with actually the new business growth of this year, which is then a function of how it's going to continue a little bit. In terms of marketing investments. So basically, I did a little bit -- I talked a little bit about it but not that much. And you also want to know how much -- like can you not scale online like crazy basically, what you need basically, why will you bother about the lockdown. That's a little bit how I would interpret and please correct me if I miss something. As I said, like we are -- have been reworking the partner program and have built the partner relation management system, which we'll actually launch only in -- at the fall conference this year. We are developing a new MDF program which we then can fuel. And this is mostly targeted, not us like investing in online marketing but us enabling partners to invest in -- through partner and marketing activities and partner channel activities, attracting partners and then partners communicating that to customers and improving like the whole wholesale and distribution infrastructure and partner support. So it's not all that much about, let's say, online marketing -- obviously, it is part of that and that's like a steady flow of leads we're doing with that -- but more, let's say, indirect momentum-oriented marketing investments because just to give a very standard example, obviously, we could buy more leads, buy us here with diminishing economic returns. But this is kind of like you -- it burns quickly and then it's gone. We rather would like to generate more fundamental momentum and then also positively lift from the inertia thereafter. And so we do more indirect partner-focused marketing, and this is obviously a little bit slower in this sense, but obviously, will last longer, and that's our bet.
We have another question coming from Maurice Patrick from Barclays.
The question really has to do with your market shares in the different markets where you're operating. At the Capital Markets Day, you helped -- you gave some data on sort of the various markets you operate and the market positioning. Just wondering if your market shares are shifting in the various markets where you are like, are you taking share or losing share in Germany? Are you taking share or losing share in like Spain or Italy? Just the different share shifts would be helpful.
Okay. Some of it cut out a little bit. I assume I caught the gist of it. Please correct me if I'm -- if I am answering in not -- unsatisfactory manner. I understood you basically were wondering if our market shares are shifting in the different markets we operate. I would say not on a macroscopic level. Obviously, I think -- but I think your question was less targeted towards Germany, Austria, U.K. but more towards like the new markets we are entering. And there, we are definitely growing above market average. But since we are very small, I don't think it has a large macroscopic effect like on a quarterly level. That would be my assessment. But I also have to -- as a cautionary note, have to say like there are no official market share data that I could compare on a quarterly level. So this is more like a voice of the market that I'm repeating rather than being able to quote specific set of quantitative data.
Yes. I mean, I understand there's generally a lack of market share data. So yes, any commentary you give is very helpful. And apologies for my phone cutting in and out. It's an IP phone, so it's a U.K.-based. It's a U.K.-based one though, so it's not an NFON issue. But in terms of the sort of pricing environment that you're seeing in the market, I mean, your ARPU seems to be going in the right direction, but stable at around EUR 10. I mean, should we expect that ARPU is likely to remain flattish in the coming quarters ahead? Or do you see scope for that to grow?
I think in the quarters I've had, I probably would say flattish. And I think it's -- in the long term, we even actually see opportunity and like I use this -- choose this word carefully, for the ARPU to go down slightly because whereas we have some positive influence through higher airtime, we also have "negative" influence of the increasingly -- of increasing business with wholesale partners. Wholesale partners sell at -- we sell at a lower ARPU to wholesale partners because they basically put it into solutions that they then sell to their customer and we don't pay them commission. So basically less ARPU, more margin for us or like maybe at the end of the day, it's similar margin but the ARPU is lower. This business has been increasing steadily. It's less of a -- like a quarter-to-quarter as changes are obviously small. But since we are operating in some markets like in U.K., for example, or increasingly in France where wholesale is actually really strong, this has more of an impact. And also, I said like we are increasingly answering calls to serve larger customers and those ARPUs also tend to be slightly lower. So I think there is possibility for that ARPU actually to go down a little bit, basically making counteracting the increased airtimes, but this is more going to be a long-term development. And as I said, this is -- if so, it's additional business like on the enterprise that we wouldn't have otherwise, or for the wholesale, it basically has higher margins than it looks. So overall, I think it's positive and the blended ARPU figure alone may not tell the whole story.
That's actually very helpful. I hadn't quite appreciated them. On the Slide 15 where you talk about the dealer distributors getting a percentage share of revenues per seat, that's different from the -- when you sell on wholesale? So, i.e., you book -- in the case of dealer distributors, you book the full revenue and book the cost, but when it's wholesale, you just book the lower ARPU?
Yes, exactly.
Okay. And I'm presuming that's like what, 30% pay take rate kind of ballpark? I know it improves commercial but that sort of order of magnitude, the wholesale ARPU is what, 20%, 30% lower than the retail?
I don't have an average number, but it's like -- it sounds about right in terms of what you're referring to.
We have a further question coming from Thomas Coudry from Bryan Garnier & Co.
Could you provide us on an update on your, let's say, commercial discussions, whether directly with customers or with partners? I mean now that the pandemic has been -- has started to fade out, vaccination is ramping up and stuff and we pointed out that probably in 2020, a lot of the companies use some quick fixes type of solutions. They might be reconsidering more robust advanced solutions like yours after the pandemic. So do you start to see the type of discussions evolving and some potential customers turning back to you and saying -- starting reflecting on their long-term solutions again? That was my main question. And in particular, do you see any specific traction in wholesale, or not specifically, versus the last quarters? And then just a quick follow-up on the ARPU discussion. So I understand that the good surprise in ARPU mainly comes from airtime component of ARPU, right, not from the subscription type of ARPU? That was my 2 questions.
Okay. Great. Yes. So a very good question. In fact, obviously, I don't have, I would say, statistically significant set of data for the customer discussions. But anecdotally, it actually really has happened increasingly that I'm being pinged by partner companies, even Microsoft in certain instances, to say like, okay, that's a large partner who wants a telephony system -- telephony solution that works with Teams. And so this completely confirms basically your suspicion or knowledge that more and more partner customers that are getting used to like a more steady business development post pandemic where you will not bring back 100% of the people to a mode of working as before. As we all know, it's not going to happen. So that has happened. I do not -- and I'm getting positive signals of certain markets where this has been somewhat pronounced. So this obviously is an encouraging sign. It could also be that just by our partnership with Microsoft Teams, partners that we have become closer, that we see more of these opportunities, but this is definitely a trend that is taking place today in the market. I would guess and hope that this is going to become even stronger in the second half of the year but this is definitely something that's happening. And approaches for airtime, you asked me.
No. Touch the wholesale.
And wholesale, you asked me like if we have more traction with wholesale. Yes, we do. But we looked at the numbers, they're not -- quarter-to-quarter, they're not super significant. I would say what's also interesting is that we work with partners on, I would say, more complex arrangements in terms of billing where we can work with traditional IT partners. IT partners often have different shop solutions where they used to sell a number of licenses, but they cannot really bill for volume of airtime. So this is something they lack the capability. We are trying to help them by adapting our systems and this is something we have on the road map, but this is something that takes at least half a year to implement individual solutions like that. But also, these partners obviously have many, many, many sub partners. Obviously, there's a bigger one that we work with. So this is more like a long-term development. So I think there is good traction, but I would say the impact of that is something that we'll see earlier still by the end of the year and more likely '22 plus. And then you asked something about the -- yes, if it's mostly airtime, the component of the ARPU increase and yes, it is. As I said, like increasing wholesale would also be a negative effect, but it's small on the scale. So it's mostly lockdown impact on airtime.
[Operator Instructions] And the next question comes from Knut Woller from Baader Bank.
Yes. Just a quick follow-up on the ARPU, Klaus. You mentioned the long-term expectation that is -- that the ARPU could be slightly down due to a higher share from wholesale partners, which is in line with your growth strategy to strengthen the channel. However, on the other hand, you also have some premium solutions which are currently still very low in terms of penetration which would partly offset lower ARPU from wholesalers. Can you share your ideas about the impact of the premium solutions on the ARPU, which I missed a bit in -- with regards to the comments made on the longer-term RP trends?
Yes. You're absolutely right. I actually bit my tongue a little bit on the premium solution part because I usually talk about them so much because I'm very enthusiastic about that. Implicitly, I did talk about it because that's the whole idea of selling multiple layers of growth and doubling down on R&D now and technology partnerships. That's all, let's say, like 80% focused on increasing value-added solution sales on top of our sockets. But this is something that we would definitely think about, whatever, 2-years-plus then. So if you say like if you are considering long-term ARPU trend also with a 2-year horizon, yes, we will definitely have a positive effect from those solutions as well. And it's less of a -- right now, it's short-term lockdown or not and wholesale might happen over like 3 or 6 months period. Premium solutions sales is something that's a little bit more long term, but yes, then we'll definitely see an uptick of that. And we have some aggressive plans, i.e., we want to triple our premium solution sales over the next 3 years. And I think depending on how we go and if -- it might even be inorganic opportunities down the road, that could actually happen even faster.
Excellent. So we should think about ARPU relatively stable this year, then slight pressure on the back of the success of the wholesalers probably in 2022 and then the premium solutions offsetting that looking beyond 2022. Is that the right way to summarize it?
Yes. They are very well and concisely summarized.
The next question comes from Stéphane Beyazian from Stifel.
One question on gross margin, and I was wondering whether you're able to provide any color on the future for the gross margin. First of all, is it fair to say that you have a higher gross margin than some of your peers in the industry because you're much more developing internally rather than, for instance, licensing from [ Cisco-bought cell ], for instance? And I was just wondering whether your investments are really about your own R&D and not about licensing some additional products elsewhere so that you're able to maintain high gross margins such as what we see or hear in the future.And my second question is just about the wholesale, just to follow up on that. Are you able to sort of split for us or give some rough indication of the split between the direct revenues and the nondirect revenues?
Okay. So your gross margin comment, yes, it's true. I think that we have for -- in our industry, we have pretty high gross margins. You also have to see like the partner commissions come out before the dealers come out after that. So I think that's just fair to point that out. It definitely makes a difference that our own solution is our own solution with our native cloud tech stack. Going forward, yes, it is our strategy to provide most of the technology like the core technology ourselves but we also have some really successful partnerships already in operation now, like within this gross margin. And like we always do it on a case-by-case basis. What is better, develop it ourselves, buy or license.So -- and I think there's no one-size-fits-all answer. Obviously, if it saves us time and -- to not develop it ourselves, we'll actually consider buying. And if it's more helpful and quicker to actually license it and keep options on that side, then we definitely will consider licensing and we have some really interesting -- well, we have good solutions now and actually also interesting partner talks about licensing in the future. So I cannot really give like a generic one-size-fits-all answer there. Yes. I think that's probably it. And on the wholesale side, your question was like if we can split that out, which we do not.
[Operator Instructions] There seems to be no further questions.
Okay. Thank you. So dear ladies and gentlemen, may you have anywhere after this conference 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 day. Stay healthy until next time. Bye-bye.