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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 afternoon, ladies and gentlemen, and welcome to QSC's conference call regarding the second quarter results 2020. [Operator Instructions] Let me now give the floor to Mr. Jürgen Hermann.
Yes. Thank you very much, and good afternoon to everybody as well. My name is Jürgen Hermann. I'm the CEO of QSC and currently in Hamburg. So my colleague, Arne is taking part as well, Head of Investor Relations, but out of Cologne. So ladies and gentlemen, still challenging times. Not only due to the temperature here in Germany, COVID-19 is still an issue. And therefore, we are proud to show growth fourth time in a row, which you can see on Page 3 of our presentation. From -- related to Q1 to the first quarter, it was not a big jump, but it was growth again since we sold our Plusnet telco business in Q2 last year. Coming to Page 4, you can see that order intake reaches a record high. So since we started to report this figure, it is the highest number so far. And I can tell you that I'm happy that in this quarter only 40% are related to contract extensions. The 60% is related to new business to existing and to new customers, so new additional services. And from our point of view, this is a strong performance under exceptional circumstances. And of course, I would like to mention that QSC has a stable and robust business model because -- and mainly driven by the fact that more than 3/4 of our revenues are recurring and platform based. We are still strong in cash with net liquidity of approximately EUR 55 million and an equity ratio of more than 70%. And we believe that the shutdown will trigger a wave of digitalization among SME companies, maybe not this year mainly but definitely starting next year. And therefore, we are prepared with our core technologies, Cloud, IoT and SAP to benefit from this development. Let's have a look at Page 6 on the P&L. And here, you can see, as mentioned, that revenue is up to EUR 34.5 million in the second quarter and EBITDA improved as well. So step-by-step, quarter-by-quarter, we are improving, and therefore, we are quite confident to reach the EBITDA positive breakeven starting Q4 this year. Let's have a look at the segments. First of all, Cloud and IoT on Page 7. You can see that revenues are up as well. Main drivers are cloud solutions and definitely the digital workplace. And we can see the segment contribution with EUR 1 million in Q2, may be counteracted by one-off initial costs due to a large cloud project. It's a scalable business, full stop. When we look at SAP, we can see the impact on the COVID-19 pandemic corona in Q2. And yes, I'm not sure how the rest of the year will develop. We cannot foresee how much the -- although the shutdown is gone, how much the projects will be postponed maybe into next year. But we are still confident that this segment will deliver its contribution to growth and definitely deliver its contribution to EBITDA breakeven in Q4. And the main drivers are still the transformation projects to the new technology S/4HANA. Yes. As mentioned in the introduction, already strong balance sheet. Net liquidity of approximately EUR 55 million and equity ratio of 73%. The CapEx in the first 6 months was EUR 2.5 million and free cash flow in plan with minus EUR 3.5 million, excluding the payment of dividends in the second quarter. Therefore, ladies and gentlemen, Page 10, we confirm our guidance despite the circumstances that we can see currently not only in Germany but all around of the world. So we expect still revenue growth up to a target of more than EUR 143 million for the full year. We expect to be EBITDA positive in Q4 and -- which is a little bit far out, but definitely positive free cash flow Q4 next year. And that despite the fact that we planned and invested in future growth with new services -- new innovative services, new products, especially in the area of IoT. So QSC, and this is a slide on Page 11, that is always part of our presentation because it's, yes, in a certain way, it shows how the main columns for our growth strategy are. It's a business portfolio with our recurring and scalable revenues; it's competence in technology; it's our effective go-to-market approach with the sector focus and our partnering; and definitely the experienced management team that supports me as well. And with that, we are still stick to our target of EUR 200 million in 2022 with more than 10% EBITDA margin and a positive free cash flow. Yes. On Page 12. Recently, we announced the acquisition of Incloud, and I'm happy that we were able to do this transaction. What we got is really more than 60 high developed software engineering specialists, mainly in the area of IoT front-end and public cloud knowledge. Yes. And the Incloud expects for the full year roughly or a little bit more than EUR 4 million in revenue and positive earnings, and we will consolidate because we are now -- have 100% of the company from August 1. And on Page 13, maybe you remember this slide where we showed the value chain of QSC, which is part of our strategy and part of our USP within Germany due to the fact that we have the competence in sensor technology, we have the competence and applications with a focus on SAP and S/4HANA and we have the competence in Cloud. And Incloud, the acquisition supports that perfectly. On the sensor area with the knowledge in embedded software development, in the application area with the competence in developing web apps and native apps in cloud area with the competence in public cloud to make sure that we are able to do the integration from private cloud to public cloud, especially Azure for Microsoft and AWS. Page 14, ladies and gentlemen, you can see 2 cooperations that we announced recently. On the one hand, Advantech and TeamViewer, both in the area of IoT. And let me tell that, IoT is still, there's no doubt, in early stage. But once there will be products available and the demand is there, we are very, very confident that we can grow the market much faster using partner channels in a certain way kind of indirect sales channel. And a good example for that is on Page 15, the IIoT Starter Kit. And what is it about? It is about to demonstrate what QSC is able to deliver. And we would like to prepare the market and raise interest in this environment and definitely to show our competence in IIoT and therefore this Starter Kit is given for free. And the companies and the customers can just use it, can develop it and they can, in a certain way, explore it and then we will see if there's a chance to get a foot into the door. Yes, and this partnering and M&A will support our growth plans. And on Page 16, you can see the numbers again. So the EUR 143 million for this year and leading up to the growth in 2021 and 2022 to a target of approximately EUR 200 million. And with that, the main drivers to achieve that will definitely be our as-a-service approach and the high share of recurring revenues and therefore, a scalable and robust business model. Yes, what's going on in Q3, apart from the fact that we are prepared to deliver again our growth, there is next growth push in the sense of market signal is our rebranding to q.beyond. It will take place at the end of September to be precise on the 22nd where the, let's say, the big bang is. And we are pretty confident that this rebranding campaign which symbolize in a certain way, the new QSC now q.beyond that it will raise awareness and generate further leads. Yes, ladies and gentlemen, that was very shortly what is the situation about QSC and future q.beyond currently and about Q2. And I'm very happy take your questions now.
[Operator Instructions] And the first question comes from Jonas Blum, Warburg Research.
Yes. I have 3, if I may. Firstly, I was wondering with regards to your strong order intake and especially for current split additional services and contract extensions. I mean, the split actually shifted from 60-40 to 70-30. So I was just wondering, those additional services, were those mainly sold to existing or to new customers? And could you also give us a bit more of an understanding what kind of industries are your main driver there? Is it still retail or is it perhaps something else? That would be helpful. And perhaps also a bit of color in terms of Q3 order intake. Does this strong development sustain? That's basically the first. Second, just around your SAP consulting. I'm just wondering if you could quantify here the COVID-19 impact, especially in terms of missing sales. And on the opposite in terms of cost savings from less travel and less expenses for external specialists? And does this trend already revert in Q3 2020? And finally, just with regards to Cloud and IoT, I mean, as far as I understood it, you had some investments here in growth and you had some advanced payments for individual projects. Could you quantify those investments? And is it fair to assume that those advanced payments should diminish over the next 2 quarters?
A lot of questions, Jonas. I hope I got them all, but let's start the answers and then just to come back if I miss something. Yes. It was a strong order intake in the second quarter, and our target number is indeed 50-50, and I do not make it large difference if it's the new customer or if it's additional service to existing customer. So 50-50 is the split between new services and existing customers. And yes, I can tell you that the new services, mainly, when it's not a new customer, new services for existing customers is mainly cloud-related services because we can see that step-by-step customers are recognizing the advantages of cloud-based solutions. And due to the focus to the sectors, yes, you know that we are working in 3 sectors, which is retail, industry and energy. And it's still the same, let's say, priority. Retail is the strongest area, but industry is, yes, it's coming and growing fast as well. Energy is still, yes, in a lower area, and we are still developing. Q3 order intake is not finished yet. There is still some weeks to go. But I am -- let's say, I'm confident that we can even -- are able to beat the strong Q2 numbers. We will see, but we are prepared to even to beat it. And that, despite the fact that you mentioned it, that SAP due to COVID-19 is a little bit under pressure. We saw it in Q2. Although the shutdown now is gone, we are not really pretty clear what about the projects in Q3 and Q4 will look like. It may be as of the end of the day, we will see it, but maybe the second half will be a little bit weaker than the first 6 months this year. But then it's just postponing because I do not expect that in the midterm S/4HANA transformation projects will be postponed in the midterm. Concerning the new services and the investment in future services, you are right. It's mainly based on IoT on the one hand and on integrated solutions on the other hand. So we are working very strongly on integrated retail and industry 4.0 solutions where all the technologies IoT, SAP and Cloud have a role. And concerning the number is approximately EUR 5 million to EUR 6 million cost that is related to these new, let's say, investment on new services. I hope I got all your questions. Otherwise, please come back to me.
Can I just ask again for the SAP consulting effect, especially in terms of missing sales and sale costs here?
As mentioned, you can see the missing sales when you look at development of Q1 to Q2, and this is something that may have an impact in the next 2 quarters as well. But at the end of the day, there's no doubt when you look at the cost, of course, we are looking precisely when sales are down at the cost situation, that SAP will definitely play its role and will contribute to our positive EBITDA in Q4.
And the next question comes from Heike Pauls, Commerzbank.
I have a couple of questions. First, is it correct to assume that you do not anticipate any major integration cost for Incloud this year? And the second question is, given that infrastructure multiples are favorable at the moment, are you evaluating the sale of your remaining telco business? And what's the profit contribution of the colocation unit? And also, third question is, could you give us the usual conversion rate of the order books into actual revenue?
Okay. Heike, thanks for your questions. There's definitely no major integration costs that we plan or expect related to Incloud. There is a subsidiary in Darmstadt and this will definitely will be -- take -- will be operated in the future as well because we have -- or the guys over there have a strong relationship to the local universities. And it's a very, very good environment to get new motivated developers and skilled people. So there are no plans to integrate Incloud in the sense of really integration. What we will do, and it already started is that we have a strong relationship between our manager controlling the software development with [indiscernible] and the managing directors of Incloud. And they, of course, share their knowledge and make sure that all -- we have the most maximum impact of that. Concerning -- I hope I got you right, the sale of the remaining telco business, I think you are referring to colocation. And as told to the market, we see, yes, a positive environment currently, no doubt about that. We are preparing to migrate the business into a separate legal entity as said to evaluate all strategic options and the sale of that entity at the end of the day can be one option. But it will definitely -- if it takes place, it will take place next year, not this year. And the last question was the conversion rate relating to what Heike, sorry, I may have missed that?
Yes. I asked if there's a figure you can give us probably users...
Yes. Concerning order intake. Yes, okay. Just noted conversion rate, but I missed what was it related to. So conversion rate, it's -- of course, it's different. But normally, it starts the next quarter already. So order intake in the second quarter is showing revenues in the following, definitely in the second quarter after we had the intake.
Okay. You answered the second question, missed a small bit. I also asked if you could give us profit indication for colocation business.
Yes. Okay. Yes, the colocation business is in the area of EUR 20 million revenues approximately and shows an EBITDA margin of roughly 25%.
And the next question comes from Wolfgang Specht, Bankhaus Lampe.
One additional one on the acquisition of Incloud. We heard that there will be hardly any integration costs, but what about the P&L impact of those 5 months? Is this sizable or rather neglectable? Second question goes again to the effects of the pandemic. We learned that your cost base of -- in consulting was positively affected. How do you see trading going into the second half? Do you expect more on-site consulting to be possible here? And then we didn't hear too much about IoT products, IoT projects. Can you give us an idea how the pipeline looks like? And maybe if there's enough time left regarding TeamViewer, is it right that you do not have projects currently running, but you have a pipeline here?
Okay. Let's start with the answers. Thank you for your questions, Wolfgang. Maybe I'll come back to the -- maybe you can give me one more sentence to the second concerning SAP. I want to be sure if I got the question.
You mentioned in the presentation report that you had some cost savings because you've saved on external consultants. Is this something a pattern that we are likely to see in the half year too as well?
Okay. So let's start with the first one relating to Incloud. As mentioned, we do not expect major integration cost. And as said, the Incloud for the full year is -- has planned revenues a little bit higher than EUR 4 million and a positive net income. And for the impact, you just can take the normal split. So this is quite not a huge impact concerning that the second half is very much higher than the first half of the year. So we just can divide the number, and then you can see approximately the impact on the P&L. But let me make clear that Incloud was not acquisition to buy revenue, it was really the acquisition to get talent onboard. And the fact that they have a lot of customers in the SME area and they have revenues and they are positive underlines that, but at the end of the day the main issue, the main driver was to get skilled people in the software development area. Concerning the savings on SAP. Yes, it was not only external drivers. It was only -- it was travel cost as well because there was a shutdown and all. And for the time being, we expect not a major impact on Q3 and Q4. So I more expect margins that are back to the area in Q1. Concerning IoT, there's a lot of discussions, a lot of talks with this large customer. Let's say, it's the area -- in the stage of proof-of-concept we are developing together, which is important to mention that, that we are not just developing in our buildings, we are developing together with the customer our solutions. And the strong projects are the retail and in the industry area. And -- but it's still something that I expect that will take some weeks. Maybe we can see definitely something in this year, but this is work in progress. Concerning TeamViewer and the cooperation, there is not a huge impact in revenues so far, but we have definitely in sales force the first prospect.
At the moment, there seem to be no further questions. [Operator Instructions] And we have one more question coming from Lukas Spang, Junolyst.
One quick follow-up question on the S/4HANA business. You probably saw also the cooperation or partnership between All for One and the SNP group for an automatic transformation to S/4HANA. How do you see this cooperation or this new offering to their customers from your point of view?
Yes. Thanks for the question, Lukas. I think that the -- yes, when you are using high sophisticated software to make the transformation from the existing suite to S/4HANA easier, it helps. But you need a lot of, let's say, prework. And therefore, our view on that is that it's worth for large transformation projects and not really suitable for the SME area. And therefore, yes, we have made a lot of projects in this area as well. We have our experience. But so far, we think that this automization is more suitable for a really large transformation project. When large, I'm talking about even that companies and others.
Okay. So you don't see any urgent of software-based transformation?
Not yet. No.
And we have another question coming from Heike Pauls, Commerzbank.
Yes. My question is that you seem quite on track for your free cash flow guidance this year. And the question is, is there are any elevated investment or working capital requirements you see in the second half? Or is the target just conservative?
No, there is no major impact. It is as planned, and we stick to our guidance, full stop.
Okay. And now we have no more questions from the audience.
Yes. As the operator said, there is no further questions. So thank you very much for calling in despite vacation period and high temperatures, at least in Germany. I can tell you, we will execute our strategy step-by-step. In a certain way, a little bit unexcited and exciting times. And yes, so far, which means starting mid last year, we delivered what we promised and I'm confident that we will deliver the next quarter as well. With that, thank you very much again, and hope to talk to you with the Q3 results. Thank you.