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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good morning. And on behalf of [ Montega ], a warm welcome to today's earnings call of the NFON AG following the publication of the Q3 figures of 2023. We are delighted to welcome the CEO and CFO, Patrik Heider, as well as Friederike Thyssen from Investor Relations, who will guide us through the presentation and the results. [Operator Instructions] So with this, we are looking forward.So I hand over to you, Friederike.
Thank you. Good morning. A warm welcome to NFON AG's 9 Months 2023 earnings call. As Sara just mentioned, I'm Friederike Thyssen, and I'm responsible for Investor Relations and ESG at NFON. Joining me on today's call to discuss our results is Patrik, our CEO and CFO. We hope you have the opportunity to review the news releases, as well as the report we issued earlier this morning. These documents and the following investor presentations are available on our website.I would like to briefly point out that the KPI table in our originally uploaded report contained two little errors on Page 2, we would like to apologize for this. So we have now the corrected ones uploaded already in Q3, 2023, the non-recurring revenues totaled around EUR 1.2 million and not EUR 2.8 million, as originally reported. Also, the changes to ARPU are absolute changes not in percent. The reports are corrected right now and are ready for you on our website.Let me quickly outline the agenda for today's call. Firstly, Patrik will start with the highlights of the last couple of months, then, he will take you through our financial results before presenting our business outlook for the full year 2023. This will take approximately 15 to 20 minutes. We will then take your questions.So and now, I would like to hand over to Patrik.
Thank you very much, Friederike. A warm welcome from me as well to the earnings call of NFON AG. As announced in the last call, we will be working on operational excellence for the next couple of months to deliver a strong foundation for profitable growth in the future. After being with the company for 6 months and running a deeper analysis, we are focusing on 3 main areas to reach operational excellence. First, optimize our IT landscape to streamline processes, reduce costs and increase efficiency. This is mainly around our BSS, OSS, CRM and ERP systems. After bringing the right competencies on board, we defined the future target picture, and we are starting to move towards this.Second, integrate the DTS acquisition into NFON AG to fully benefit from synergies by reducing costs, reducing complexity and enhancing sales. The DTS acquisition of 2019 was not integrated in a streamlined cost merger integration process. In the meantime, we have set up these initiatives, and we are working on this.Third, optimize the operating model of sales, marketing, product management, development to ensure stronger top line growth and faster returns on every investment in those areas. Here, I have identified the need to work first and fast on the scalability and reliability of our technical infrastructure.Our new CTO with his huge experience will help the technical teams to perform this task with high speed and quality. I'm very pleased with the progress in all areas. We will also [ need ] 2024 in order to gain and see the full benefits for our company. Since our last call, we have already achieved some important milestones. Let's have a look on them on the next page.Highlights in the organization. From 1st of January 2024, Andreas Wesselmann will join us as our new CTO, as announced in the press release yesterday. I'm extremely pleased that we were able to fill the vacant position of CTO so quickly with such an experienced leader. Currently, the C-level team is in the process of adjusting the organization within their functions to enable efficiency and scalability.Highlights in the area of business processes. At the moment, we are preparing the smooth integration of DTS into NFON AG to fully benefit from the financial, commercial and customer synergies of the 2019 acquisition. We broke down silos between the most important parts, areas in the tech company. That is commercial sales, product management and technology. We streamlined them on the short-term product road map to work in an enlightened manner on the same targets.We received the C5 certification as proof of being a trustworthy and reliable cloud service provider. Thanks to extensive security measures, NFON has received a C5 tested certificate Type 1, and this is just establishing itself as an ideal partner for security-sensitive customers, who are active in areas, such as research and development, for public sector, other financial and healthcare industry.We passed the ISO 9001 audit, which is a well-known standard for quality management system. The implementation and development of QMS is a strategic decision that enables us to continuously improve our overall performance and focus on providing customers with products and services of permanently high quality.Highlights in the area of internal systems. We started to review, organize and evaluate the IT landscape in order to create an efficient and customer-enabling system with clear interfaces. A number of investments have already been in the past without having installed a strong project management nor defined an IT target picture. Both is now in place and all further investments will be aligned with this IT vision. This exercise will generate more efficiency and higher customer centricity in the future. From January 2024 onwards, the newly appointed CTO will drive forward and speed up those processes.Let's turn to the 9-month 2023 results. In an overview, our recurring revenue growth is 5.1% compared with 9 months 2022. We continue to have an increased high share of recurring revenue of 93.6%. Our adjusted EBITDA improved significantly to EUR 6 million.On the next slide, you can see our continuously growing share of recurring revenue of 5.1%, both by acquisition of new customers and by increasing penetration of existing customers. Total revenue grew by 2.1% year-on-year due to a decrease of non-recurring revenue, mainly hardware sales.On the next slide, you can see our improved gross margin of 84.1% due to successfully growing share of high-margin sales.On Slide 10, you can see the impact of reduced personnel expenses in line with our strategic focus to grow the business more efficiently and profitable. The average number of employees decreased by 14% to 444 people. The adjusted personnel expense ratio of 41% compared with 46.1% in 2022.On the next slide, you'll see our significantly improved profitability development. Adjusted EBITDA is up to EUR 6 million in 9 months 2023. Main adjustments were driven by severance payments due to reorganization activities. We will see some additional effect here also in Q4.Let's turn now to the outlook for the year and beyond. We are confirming our guidance for 2023 for recurring revenue in the mid- to upper single-digit percentage range. We are currently assuming that we will be in the mid-single-digit range. For a recurring revenue ratio higher than 88%, following the adjustments of 2023 guidance for adjusted EBITDA in the first half of 2023, we are raising the outlook slightly. We are confident that adjusted EBITDA for the full year 2023 is likely to be in the range of EUR 7.8 million to EUR 8.3 million. This adjustment reflects our ongoing endeavors to achieve a solid operating performance and put NFON on a sustainable profitable growth plans.What is our journey to 2025 looks like? In 2023, NFON embarked on a transformative journey focused on operational excellence. This strategic shift is essential marking a turning point. A part of this journey, investments are being driven to refine our processes, streamline operations and enhance efficiency across the company. The aim is to lay a robust foundation that will support our future aspirations of sustainable profitable growth. All defined initiatives will help us to increase efficiency and enable strong top line growth. As already mentioned, all initiatives will be carried out in 2024.In 2024, we will continue to increase profitability at a stronger rate than revenue, while transforming and preparing the business growth for stronger revenue growth in 2025. With the best people on board, the strong and loyal customer base and the solution with the greater stability in the market, I'm convinced that this transformation will be successful for our customers and all stakeholders.As our part -- as our commitment to execution, measures are in place to ensure the seamless implementation of those initiatives. We recognize the importance of not just defining ambitious plans, but also ensuring the execution. We will keep you updated on our progress, and I am now happy to take your answers -- questions. Thank you [ for answers ]. Thank you.
Thank you, Patrik. So now, we are looking forward to your answer. So we will move on with our Q&A session. [Operator Instructions] And we already received a question from Knut Woller.
Actually, for the first one, Patrik, on DTS and the synergies. Can you give us some ideas here about top line and cost synergies? Just a bit more color on that? Then secondly, on the channel. Looking at your -- what you did, you seem to focus a lot on [ revi ] having the channel. When should we see first successes of this revitalized channel?Third question. Marketing as a percentage of revenues was around the 5% level. Is that a level you're targeting also going forward?And then lastly, 14% headcount decline in average. If we look at your growth plans, how should we think about [ squaring ] growth in terms of top line, but also in terms of headcount, so which efficiency levels are still achievable here? And how should we think about that going forward?
Thank you very much for the questions, Knut. For the first one, the DTS synergies, I can't give you exact figures at the moment. I only can tell you that we need to invest into the -- into gaining the full synergies by really bringing the integration forward in all different functions in accounting, in sales, but also in technology, we do see synergies. But first of all, we need to invest also into the integration. So definitely, with the guidance giving out in 2024, you will see some impact in the business, but this is really for the future sustainable growth very important.The channel, I would say, we have very good discussions with the channel. We have Merano Mettbach and also Gernot Hofstetter onboard. They are actively working with the channel together. We are changing a lot. We first regain trust with the channel. And I would say, from mid of next year, you see -- will see first impact from that. We reorganized our sales structure completely, and I'm really positive with the discussions I have, all the channel partners now have, NFON, but they also want to see us to get it delivered.For the marketing expenses, as I already indicated last time, we do see around about 5% to 6% as a normal run rate of the revenues, but we will definitely shift them to more top line oriented marketing investments. This is an impact, what I saw also in profitability for this year and the increase in the guidance that we have too many marketing costs, which were not directly related to the top line. And that's exactly why we want to transform that more customer support, more channel support for marketing, which is now then attractive for us because it also increases top line.For the headcount, we see a drop of 14%. You are right. I do see a lot of more potential in terms of efficiency. What I do now at the moment is a so-called reallocation of [ gross profits ] in the P&L to the right one. In the 2025 picture, I would love to see the strongest functions within NFON is sales and marketing, product management and technology. Until this one, I'm really working on efficiency, but that also means, I need to improve processes and system growth. So definitely, you will see more efficiency. And as I already indicated in my last call that we do have a transformation of the business without any further investments [indiscernible]. So we can do it by our own, and that's a good news for next year's guidance as well. I hope I gave you a little bit more color for your questions.
Thank you, Patrik. And just a quick follow-up. So the first impact was for already expected for H1 from the channel. Did I get it right?
In the mid of next year. I would say...
Mid of next year.
Yes. I mean, it's realistic to say second half of next year.
Thank you for your question. So now we will move on with another question. So it's from [ my side ]. What changes should the new CTO drive forward in particular?
It's definitely first and the most important one or 2 main topics. I already indicated in my speech and the presentation of today's call. The first one is all to ensure scalability of our technical platform. You could call it technical debt. This is normal for every software company, but definitely, we need to work on this before we build something new on top. You can compare that to a house. And when you have a fragile foundation, you definitely need to work on the foundation in order to put new levels on top. And as I said, this is normal for every software company in the meantime, and this is what he needs to work first, and he's already into this topic, and I'm sure with his experience, he can help us a lot.The second part is definitely the one, which I indicated as the internal IT landscape, and that's all around the BSS, the OSS, the CRM and ERP to become a data-driven organization. And this is something I really appreciate also when Andreas Wesselmann is joining us with his great experience. He will help us with high quality and very fast to get that one improve.
Thank you for clarifying. So we are looking forward to the changes that will happen in the future. Now Knut has a follow-up question. So yes, Knut, just go ahead.
Yes. Thank you. So in light of the situation, I'm happy to ask some more questions. When we look at the ARPU increase in the third quarter, Patrik, can you just give some more color here, what drove the ARPU increase?And then also on the premium solutions, can you provide here an update also to which extent this should also help the ARPU going forward?And lastly, on the seat growth. Should we expect seat growth then to reaccelerate also in the coming years? Or will it be rather growth driven by ARPU increase?
So the ARPU remains more or less stable. What happened to the -- our view is that definitely, we saw some price increases, but a negative impact we had with the decline in voice minutes. So as I already indicated, after corona period, we saw really -- and that's also normal for all players that voice minutes came down. That is also part of the ARPU. And all in all, we had some price increases, as a counter impact, and this is why it remained more or less stable.From the future outlook and turning to your question 2 is the premium solutions. I would say, we have obviously the ambition to drive ARPU upwards and we have good opportunities seeing, for example, in the customer center world that ARPUs are starting from a level of EUR 30 to EUR 40 and even goes to triple digit. That means the more we're increasing such premium solutions like contact center hub, the more we can increase ARPUs as well. This is why it's strategically so important to move also with the core and definitely [ how to reach ] growth, but definitely with premium solutions like [ CCR ], ARPU will increase in the future.For the seat growth, and you know me, as a transparent communicator to capital market as well, we can't be happy with the seat growth at the moment. But we are working on measures and initiatives to get that one improved. As I already indicated, we do see seat growth permanently important, and you will see impact already by the mid of next year -- from the mid of next year into 2025. So we are working on the product side. And we are working with the teams in the sales efficiency part, but we are not happy with the seat growth at the moment, just to make that one clear and sure.And by the way, one last thing, Knut, I want to also establish a mindset of monthly of recurring revenues and also value growth thinking about our customers. The pure seat growth is over in telecommunications also. We need to add additional services, and this is why we are also changing the mindset within our organization that it's not only about seat, but it's also about additional services to our customer, meaning an MRR is much more important than a seat growth. But that will be something we, of course, will also inform you in the capital market, how we measure that.
So thank you for the question, and just for answering. A quick reminder, at this point, so if there's still open topics you would like to discuss, so please just raise up your virtual hand. And in the meantime, I have received another question. So who would you declare to be the closest competitor?
We do see different competitors of each market as in every software company and technology market, we need to see -- we need to see it really country wise. We see, for example, a lot of times and also functional wise, meaning there are different competitors to the contact center world like to the cloud PBX world. Yes, you can name the American competitors as RingCentral in the European markets, but we also see local small competitors in Germany, especially.We do see Gamma in the U.K. very often. That means, we can't really see one big competitor. But definitely, what we strengthened is our USP being a German, being a European player with the technical infrastructure and the server hosting in Germany, which makes us really unique, also having all certifications in place like the C5, the ISO, the different ISO certifications, et cetera. So we can't really name one big global competitor. We do see different in each regions.
Thank you so much. So as we -- yes -- did not receive any further virtual hands, we will, therefore, come to the end of today's earnings call. Should further questions arise at a later time, so please feel free to contact Friederike from Investor Relations or us. Yes, thank you, everyone for joining. You've shown interest in NFON, and yes -- just the questions. I wish you all a lovely remaining day. Stay safe and healthy, and I just would like to give for some final remarks back to you, Patrik.
Yes. Thank you very much for your ongoing interest and also trust you put into NFON. We are really happy seeing the progress of our transformative journey. And we are really confident to bring NFON, where NFON should be, as a European market leader in what we're doing. This is why I thank you. I will -- we will have several discussions in the next weeks. We'll keep you on track. I wish you also a wonderful, nice Christmas period, and all the best to you guys and see you soon, talk soon. Thank you very much.