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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon, ladies and gentlemen, and welcome to QSC's Conference Call regarding the company's 2019 half-year results. [Operator Instructions] Let me now give the floor to Mr. Hermann. Mr. Hermann please go ahead.
Thanks a lot. A warm welcome to our Q2 Conference Call. My name is Jürgen Hermann and I am the CEO of QSC and together with me like always is Stefan Baustert, our CFO, and Arne Thull, our Head of Investor Relations. Q2, ladies and gentlemen, was one of the most exciting quarters that I had in the last, let's say, 20 years, and I'm very happy that we could close the Plusnet deal end of this quarter. And this deal marks a key milestone for QSC's realignment with a clear focus on the markets Cloud, SAP and IoT as well as the sectors retail, manufacturing and energy.And starting with QSC -- starting with July 1, QSC is a growth company. In our call today, I would like to start with a short update on strategy. Stefan will then go on and inform you like always about the financials, which is not an easy task today because Q2 was really dominated by the Plusnet deal. And finally, I will give an outlook on the remaining year, and of course, we are happy to answer your questions at the final end.So as said, a new area of growth has started on July 1, with a clear focus and investments in sales, marketing and innovative technologies to support our growth synergies. Our growth strategy that we presented on the analyst conference earlier this year on Page 5, yes, we are the digitizer to the SME sector. And our growth strategy is based on 4 columns, what you see: attractive business portfolio, the top innovations and effective go-to-market approach, and the new and experienced management team and supported by future investments in M&A. And in our targets, 2022, we want to achieve approximately EUR 200 million revenues with an EBITDA margin of more than 10% and definitely with a positive free cash flow.There is no doubt, on Page 6, we're asking in a certain way the capital market for trust. And to support that, we decided to report a new KPI to show, let's say, higher transparency. But you can see here on this page is a total contract value, which is a total value of a contract for the period defined by the contract and legally binding signed. In our case, QSC's case, normal average contract period is 3 to 4 years. And what you can see here is that we achieved in the first 6 months more than EUR 84 million total contract value, which is a number that will support our growth in 2020.And with these remarks and this opening, I would like to hand over to Stefan for the financial update.
Thank you, Jürgen. Ladies and gentlemen, also from my side, a warm welcome to QSC First Half-Year 2019 Financial Reporting Call. Before we start with the presentation of the financial figures for second quarter 2019, I would like to point out that 2019 financial figures are based on IFRS 16 standards. Furthermore, as you know, the second quarter reflects the effects of the Plusnet sale and is, therefore, a comparability of the figures with last year is hard. I'll try to go with you through these figures. So on Page 8, I would like to start with the financial highlights. First of all revenues, EUR 85.2 million, where it was EUR 87.4 million in the first quarter this year and EBITDA of EUR 129.9 million, which is definitely has all the following figures as the result of the Plusnet deal. EBIT of EUR 115.5 million, net income EUR 106.1 million and free cash flow of EUR 156.7 million.And as Jürgen in the very beginning said, this was a fascinating and unique quarter. And we are pretty happy that we could perform and initiate and finally close the deal to sell our telecommunication activities and especially to sell it to EnBW, which is a good partner.If you come on Page 9, now to a closer view on the P&L. Quarter-over-quarter, second quarter '18 to '19, you see a reduction of revenues of EUR 6.6 million, which is basically reflecting losses in Telecommunication and Outsourcing and gains in Consulting and Clouds according to our strategy. The gross profit is literally unchanged versus last year. Sales and marketing expenses EUR 0.7 million higher than the prior year, which 100% reflects effects from migration costs that we will find on the next page on -- was EUR 0.7 million. The general and admin expenses, which are roughly EUR 10 million higher than last year, also reflect these one-time effects in transaction-related costs and the migration costs. And the same is true for the other operating expenses, where we have roughly EUR 3 million of transaction costs that have to fit into figure here in the other operating expenses.And then, of course, last, but not least the other operating income was EUR 135 million coming from the transaction of the sale of Plusnet. EBITDA jump is directly related to this. The depreciation increase is a result of the IFRS 16 effects and the financial results as well as the income tax result is 100% affected by the Plusnet deal. First of all, the financial results increased due to the finalization costs for the promissory notes and the credit facility, then the income tax is what our tax advisers have calculated as most obvious tax figure. You know that never 100% precise of the tax, it will be about roughly EUR 5 million that could come out of the deal. But this is just a provision, we don't know it yet.On the next page, we have tried to give you an overview of the deconsolidation gain coming to the deconsolidation gain, including the transaction, migration costs in connection with Plusnet of EUR 135 million starting. We have transactional-related costs as part of general and admin was EUR 8 million. Other transaction-related costs of EUR 3 million related to other operating expenses. Then, migration costs in admin and outsourcing of roughly EUR 5 million, and interest and taxes as already explained of EUR 7 million.So if you come to the different segments, I would like to start, as usual, with -- and this was the last time Telecommunication. We have seen in the second quarter of this year, a normalization in reseller business. While in the first half of last year, there was still a strong demand in this favorable market environment. It has normalized in the meantime. The revenue decline had an impact, of course, on the segment's contribution. And after the Plusnet deal, that means, starting with July 1, the TC, the Telecommunication segment, will still include the stable colocation business in the future. And as you can see, we have indicated for a better view the IFRS 16 effects, which is very strong in Telecommunications.Coming to Cloud. We have already in the early phase of the second quarter started with investing in future, the signing could be anticipated in an early stage. So we have started to invest in the personal cost and reorganization, marketing and sales spendings, investment in growth in general. The effect is a strong increase in revenue by 26% year-over-year and the negative effect is in the segment contribution. The growth has a price, and we definitely go in favor of growth at the moment.Then we had an amendment, revenues in the second quarter '18. We're impacted by an IAS 8 amendment of EUR 0.3 million and the effect for the full year is EUR 3.5 million with basically no effect on earnings and no effect on cash.Outsourcing, new structure is taking shape. You see revenues dropping EUR 6.9 million year-over-year, though we have, of course, a migration effect of existing customers in the outsourcing into the cloud services. And we have a termination of very well known 2 large contracts, [ Teshum and Ambrion ] in 2019, that finally, ended to make business with us at March 31 this year.All other contracts were extended or even expanded in scope in the years 2018 and 2019, and the reorganization will continue in 2019 as planned. Leaner organization is taking shape. And finally, we will put all efforts to move faster and stronger the Outsourcing into our Cloud business. And we have a very good feeling about a fast translating -- translation of this effect into cloud.Then coming to Consulting. You see here a strong increase in revenues year-over-year by 13%. Especially, we are proud on our increase in SAP consulting, which was flat over the last years. We finally achieved to increase the headcount by more than 15% in the first 6 months of this year, and we will continue with that. So we put a lot of effort and, of course, money in recruitment and we will continue doing it especially before the background that there is a lot of business in the market. And there is a lot of SAP 4HANA project in the market that we will get in the upcoming months.For a better view, we have printed the Page 15, which shows the revenue split between QSC and Plusnet in relationship to the Q2 revenues 2019. So out of EUR 47.4 million revenue in telecommunication, EUR 4.5 million will stay with the QSC new. Outsourcing, that will remain EUR 7.3 million in the new QSC without Plusnet consulting EUR 10 million out of EUR 10.5 million. And in Cloud there will remain EUR 8.2 million, that means we lose EUR 2 million per quarter, which is roughly EUR 8 million per year. So that's the split, EUR 55.1 million Plusnet and EUR 30.1 million QSC.If you come to the uses of Plusnet sales, we can say we will put the money definitely in accelerated implementation of growth strategy, potential acquisition for targeted additions to technology portfolio, and we have already, by end of June, repaid the debt entirely. That means EUR 120 million coming out of the promissory notes and the credit facility. That means at the end, QSC is completely free of debt, with an effect on liquidity, on the total asset side, you see the jump from EUR 53.6 million to EUR 81.9 million. And on the equity from EUR 90.1 million to EUR 193.4 million, which means an increase from equity ratio 32% last -- end of last year to 73% end of June this year. So a clear and proper balance sheet. The Plusnet sale led to an unusual high free cash flow. In second quarter last year, we had EUR 3.6 million, which reflected the operational business. And this year, we have EUR 156.7 million. Nevertheless, we have to make clear that a larger part of the transaction-related cost will be paid in the second half of this year. So the migration cost will also start now with July 1 and in the second half of this year. And definitely, we will continue to invest in future growth, starting also -- we have already started doing this.Investments in technology will be stronger in the future. That means on the other side, we have less customer-related investments, which were pretty high in the telecommunication environment. Every new customer in our telecommunication environment had to be activated. All that will disappear in the future, though our focus is in technology, cloud, data centers and IoT.CapEx in the second half is below the first half level of EUR 10 million. And just for information, the CapEx is presented excluding investments in finance lease, which means no IFRS 16 effect.That's it from the financial side. Thank you.
Thanks a lot, Stefan. As stated in the press release, we are on track concerning our guidance, and you can see the number from Page 21. Revenues of more than EUR 235 million, EBITDA of more than EUR 140 million and free cash flow of more than EUR 130 million. And these updated numbers shown here nothing else and the virtualization of the effect that we were able to close the Plusnet deal 1 month earlier, as originally planned.On Page 22, you can see that we -- let's start other way round. As Stefan already mentioned that the path of the EUR 85.2 million in revenues for the total quarter, the other -- the part of EUR 30.1 million for QSC. And we are convinced that we can show revenues for Q3 around EUR 32 million, based on our forecast so far and based on the good start in total contract value for the first 6 months. Yes, the last slide of our presentation. In the roadshows, Stefan and myself were very often asked what our M&A strategy is and how does it look like. And with this, let's say, profile, we want to make clear what we are looking for. And definitely we are looking for small tech specialists, let's put this way. And the profile is kind of unique technology in upcoming areas like Artificial Intelligence, Cloud Services, Analytics and definitely IoT. There must be a kind of proof-of-concept done, of course, first customers or first project on board. The revenue generation has started, so not pure greenfield approach. And this is very, very important from our side that we are able to take the majority over the time, over the companies. And to give you a number, we are thinking about manageable investments, this means as a rule of thumb, less than EUR 10 million per deal. Even definitely less than EUR 10 million per deal.Yes, that's our Q2 presentation. Thanks for listening, and now we are open and looking forward to your questions.
[Operator Instructions] And the first question comes from Patrick Schmidt from Warburg Research.
Maybe you could give us a bit more color on your total contract value on your new KPI. I mean is it a point in time now this EUR 48 million? And if I divide that by the average contract duration of 3 to 4 years, I get like about EUR 40 million in revenues per annum. Is that per -- which [ stack in ]? Is that the overall value looking at across your holding or how should we think about that and look at this?
Yes, total contract value, by the way, I maybe I made it not pretty clear. These numbers are without Plusnet. Although, it's referring to the first 6 months, it's not including Plusnet, because we are looking into the future. And from our point of view, TCV is a useful metric for predicting revenues, helpful in, let's say, areas where we have a long sales cycle or a long transition period -- before we can recognize the revenues. And in total, so we achieved EUR 84.3 million for the first 6 months. And it is, as you said, you can just divide this number. It's not 100% because sometimes you have one-time effect in the beginning of a project. But in general, you can just divide that number by the month. And in our business, its normally average 4 years, to give you an idea. We have one effect in the second quarter, which was the prolongation of Stadtwerke, which was a unique contract period of 10 years. So this is not the daily business, let's put this way. But as said, even if you deduct this 2-digit TCV for Stadtwerke, 2 digit in terms of millions, we had a very good start in this year, which is asset basis for growth in 2020 and so on.
Okay. So the EUR 12 million per year is allocated to which segment? Or is it to just across different segments, so your IoT, Cloud and Outsourcing the remaining part or colocation is also involved? Or just when you about think you segment structure?
It's referring to the group.
And next up is Wolfgang Specht from Bankhaus Lampe.
Three questions from my side. First on the telecommunications segment. I am little bit surprised that segment contribution is down from 16% while reseller revenues are only down around 11%. So can you give us some more idea why you lost so much segment contribution here? Second question is to the Outsourcing segment. Do you expect that the meltdown of the business will still allow you to, let's say, run the segment cash neutral? Or do you even expect midterm positive contribution from the segment? Or would you allow, let's say, a cash drain in the coming years? And then the last question to the Cloud segment, how do you see the split between growth coming from the migration from Outsourcing customers in new acquired business?
Wolfgang, thank you for the questions. First, telecommunication. We, of course, we still have this business and we still have to look at it. So we lost as you said 16%, it's EUR 1.5 million year-over-year. And the effect is, of course, first of all, coming from the reseller business, but also from the B2B business. Definitely, we have B2B effects here, which are reflecting in the markets. Second, Outsourcing. From an inside view, we have already started to look at Outsourcing and Cloud in common. For us there is, on view, no differentiation anymore. So if you look at the year 2020, we definitely have to think about new segmentation. And more and more basically all contracts that are in outsourcing besides the smaller ones that are pretty easy, have effects in the cloud. That means, if you look at customers like Tchibo or Fressnapf or others, we definitely have old business and every new business that we gain is Cloud businesses. This Cloud-driven business, be it directly in cloud activity, or be it in SAP 4HANA or whatever you mean. That means, if we look at the segmentation in the future, we put both together. And for both, of course, we have to find ways to come into a strong financial growth, and of course, in cash positive in the year 2020. So this was the question to Outsourcing...
The last one was on Cloud. How you see the growth coming from migration and really, let's say, new generated business from Outsourcing?
We have, yes, okay, I think the first part I have already explained. There is migration business definitely coming from cloud, but so far, roughly 50% at the moment comes from new customers and in the future, it will be more and more. And as you also said, we have a strong total contract value in the first half of the year. So if we deduct a big chunk for that, if there is still a remaining, I think roughly EUR 60 million. And if you look at this without giving you the details, biggest parts come from Cloud business and from Consulting business, definitely.
At the moment there seem to be no further questions. [Operator Instructions] And another question is coming from Wolfgang Specht from Bankhaus Lampe.
So maybe one small one on the total contract value. So that's the value of new signed contracts in the quarter, not like a total order book or something like that?
No. It's definitely as you mentioned, Wolfgang. If you take a contract that is legally signed in that specific quarter, we take the amount of this contract for the total period of time of the contract time, let's put this way. And this amount that we report. So it's a basis for future growth, that's what we're heading for here to show them.
[Operator Instructions]
Yes, maybe there's some questions that show up or something that's thinking about it. I just want to -- if you haven't read it so far, there was a very, very interesting -- some documentation, let's put this way, on T-Systems a few days ago. And as I read this -- these pages, yes, I saw some parallels to QSC. And in a certain way, I could even claim that T-Systems is following our strategy. But let's see what's going on in the future here. Very interesting, if you haven't read it. I can just recommend it.
So we have one more question coming from Patrick Schmidt from Warburg Research.
In terms of your CapEx plans, you said it's presented excluding investments of finance lease. How do you see that development over time? I mean I thought the main part should be attributable to the telco business. Is that correct? So I wouldn't assume much more finance lease to come in the near future?
Yes, Patrick, that's absolutely true. The finance lease that we have seen in the past is very closely linked to Telecommunication and former Outsourcing business. And so far, we expect that this will be at a very low level in the future definitely. I mean we can and we will not exclude finance lease issues in relationship to, let's say, contracts and new orders, which are, from time to time, a combination of standard Outsourcing and Cloud business. And unlike we did in the years '16 and '17, we do not reject these customers, but we rather take them as customers and try to convince them over time that 100% will be Cloud. And for the remaining part, I could imagine that there will be some minor finance leases, but not more.
There are no further questions.
Yes, ladies and gentlemen, if there are no further questions, let me thank you for taking the time. And we are looking definitely forward to the Q3 call in November. And hopefully, we can present you more very positive news out of -- and about QSC. Thanks a lot.