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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 Third Quarter Results in 2019. [Operator Instructions] Let me now hand the floor over to Mr. Jürgen Hermann.
Yes, a warm welcome to our Q3 conference call, the first clean quarter post Plusnet. I'm calling in from Munich. My colleagues, Arne Thull, Head of Investor Relations; and my CFO, Stefan Baustert -- our CFO are in Cologne. Yes, and like always, I would like to start with a strategy update and a kind of introduction before I would like to hand over to Stefan, who will lead us through the financials.So let's immediately start with Page 4. Not a surprise because we already pre-released revenues on October 15. Yes, simply said, we are back on growth. Plus 7% on the adjusted Q2 numbers from EUR 30 million -- EUR 30.1 million to EUR 32.3 million, mainly driven by Cloud business and Consulting.Let's come to Page 5 where you can see the total contract value, which is the order entry in millions of euro on the basis of, yes, let's say, legally binding contracts, and it does include -- as well as -- new contract as well as prolongation. In any case, it is the basis and a very good KPI for our business looking forward into the future. On the next slide, which you can see on Page 6. Our expectation for revenues in Q4 is actually in the area of EUR 33 million. We expect to grow in Cloud business, and Consulting will be [ touched ] little bit due to fewer working days, especially at the end of the year in December. But as said, we will stick to our guidance that we will grow sequentially quarter-by-quarter and 2-digit growth year-by-year.Let's come to Page 7. And I would like to -- this is quite an important transaction. I would like to comment and explain our investment in aiXbrain, a start-up, a little bit more than a start-up in artificial intelligence technology. We got a first step of 25-plus percent, but we do have the right to acquire majority stake later on when we want to, and the numbers are fine, together with the other shareholders, which invested as well. So we invested in the area of EUR 0.5 million, not more, and the other invested pretty the same. So finally, we expect that in total, the EUR 1 million cash will be sufficient before we get into breakeven.The team is headed -- the team of mathematicians, engineers and AI experts is headed by Prof. Dr. Rudolf Mathar, which is kind of -- yes, let's say, preeminent in this area. He had to resign from the university due to age limit. And this, let's say, acquisition or investment, complements our portfolio in a perfect way. Why? And with that, let me explain in 2 slides what aiXbrain is doing.And when you look at Page 8, you see -- yes, let's say, the current system, the legacy system of production process as of today, on the left-hand side, you see the back office, or let's say, the main quarter, the main -- the headquarter where the management, the CIO or the CDO, the sales, the purchase, the finance is located. And then you have to go over the parking area to the shop floor, to the production area, let's put this way, of company, where another guy, who's responsibility, the planner. And this planning process is such a production company is new defined each and every day in the morning. And today, it's really kind of old-fashioned where they plan production, [ Excel-based ] and other proprietary software systems, and when the sales are getting in with new orders or changes of orders, the planning guy has to adjust the production process day by day.On the next slide, you can see that solution of aiXbrain is exactly putting with their self-learning software between these systems, so between sales and the management on the left side and the production process on the other side. And we introduced Q-loud here as well because with our Edge Gateways that are produced by our side. We're on the -- the shop floor is well integrated. So you can see that all these pieces are getting together and fitting together. So I'm very, very happy that we were able to win this startup for our purposes.Come to Page 10. This is a slide that you already know. We presented it early this year and it underlines again that we do have an attractive portfolio, especially with our software competence that guarantees margins and with our as-a-service approach that guarantees recurring revenues. We do have the top innovations, which basically are definitely Cloud, SAP and IoT, but IA -- AI, artificial intelligence is a good example that we added as well. We have established our strategic partners, and the sector focus is like, let's say, a compass of our growth strategy. And definitely, the new and really younger management team is on board. And what we included here, to new combined services on the top innovations, I would like add a few sentences on the next slide, where we do -- where we can see that all these elements are fitting together. And when I'm talking about IoT and there was -- last weekend in Hamburg on a conference, on Saturday, and IoT is a very, very, let's say, all-embracing technology. And at the end of the day, QSC, when we are talking about IoT, are focusing on sensor technology. We are talking about the hard- and the software in the area of sensor technology, where we are really addressing the T of the IoT, which is very important because this hardware, where the software is included as well, and you know that that we are developing the software on our own, we have a kind of door opener in this technology.And then you can see on this slide that the data that is collected in whatever volume, is transferred securely into the applications. This can be industry-specific solutions. This can be basically SAP, mainly S/4HANA, there is Microsoft and other specific services. And then we have the cloud where all these things are stored, and we can use our QSC Cloud, we can use third-party cloud, if it's Amazon or Microsoft, and of course, especially when we are talking about customer premise -- production processes is on the customer premises. So you can see these things are sticking together and all is in place by artificial intelligence and data analytics at the end of the day. And we really want to mention this because it's a kind of USP of QSC in comparison to other companies.So having said that, I would like to hand over to Stefan to lead us through the financials. Thank you very much, Stefan.
Yes, thank you, Jürgen. Ladies and gentlemen, also a warm welcome from my side to QSC's third quarter financial figure review. As Jürgen said, it's the first time that we present the figures without our telecommunication activities.So we come to Page 13. We start with our Cloud segment. Despite the fact that activities like WiFi, telephony in the cloud and [indiscernible] which were part of the Cloud segment until June 30, have been sold. We could achieve a growth of 24% quarter-over-quarter in this segment. So Cloud revenues, like our segment revenues, are positively impacted by Plusnet customers and segment contribution of only EUR 0.2 million is related to QSC investment in future growth.We come to Page 14. Here, we see a outsourcing situation with a stabilization of revenues. We have today a stable customer base and all due contracts were [ expended ] or even expanded, its scope in 2018, 2019. We have continuously step-by-step migration of existing customers to Cloud services, of course, and the reorganization is up and running. The segment contribution of minus EUR 0.1 million is because of ongoing reorganization, which we will continue in the upcoming months.The next page shows Consulting. And here, we have invested heavily in further SAP experts. On a net basis, we increased 25 people this year to our headcount basis. And this was, of course, a costly process, which we will see also in the segment contribution. The revenues, nevertheless, were up by 5% quarter-over-quarter, and we have high demand, especially in SAP / 4HANA projects.On Page 16, we come to -- yes, in former days, we had here telecommunication. Today, we call it colocation because colocation was part of our Telecommunication segment and it is the only remaining part in this area. The colocation characterized by long-term contracts, and here, we could increase slightly by EUR 0.1 million, the revenue with a strong segment contribution of EUR 1 million in the quarter. The segment margin reached 22% in Q3 2019. And we also see continuous growth in the future in this segment. By the way, the segment split or the segment definition will change in the next year to make a more stronger fixing to the remaining parts in our business.On Page 17, you can see the first P&L after Plusnet sales. We did not show a comparable Q3 2018 because the figures are not at all comparable. As you know, more than 50% of our revenues and a very large part of the earnings have left by June 30 with the sale of Plusnet. So we can, of course, tell you what has been in Q3 versus our own expectation. And here, definitely, we see that the revenues developed as expected.The current cost base allows future growth without increase of costs. That means the company is set up in a way that scalability of the business model is given. The IFRS 16 depreciation is at a level of EUR 1.2 million within the depreciation figure of EUR 4.1 million. And we have one-off tax effects because of Plusnet transaction, which leads to positive impact of the tax line overall.So the EBITDA is at the level of minus EUR 2.2 million, which is also in line with our expectations. And the net income is slightly better because until middle of the year, we did not expect that the tax effect of the transaction would be strongly lower than we expected.On the next page, you'll see the development of the G&A costs. They will be reduced in 2020. Today, we are still working with a number of people for Plusnet. This is paid, you see the payments that we receive in a big chunk in the other income on the P&L of the previous page. So for next year, we see a decrease when most of the people are switched or the activities are switched to Plusnet itself.On the next page, you'll see the operating free cash flow, which is in line with the EBITDA development. The total operating free cash flow was minus EUR 11.8 million. EUR 8.8 million, we have one-offs because of the Plusnet transaction, which is advice, legal and as a transaction fees and the CapEx of roughly EUR 1 million in Q3. So this, in total, comes to a figure of roughly EUR 11.8 million.The CapEx in Q3 was EUR 0.9 million, was definitely below our average expectation for the upcoming months -- so -- quarters. So we expect in the future about EUR 2 million per quarter, which was with respect to the CapEx figure.On Page 20, you see our balance sheet. It's a strong balance sheet with still more than EUR 70 million liquidity. As you know, we have paid all debt back. So we are free of any indebtedness. The equity is at a level of EUR 191 million, which means 76% equity ratio for our business.So if we come finally to the expectation and the forecast for the full year, we see that revenues of more than EUR 235 million can be reached. That was the guidance. At the moment, we are at EUR 204.9 million. We also see that the EBITDA of more than EUR 140 million will be reached. Today, we are at EUR 143.6 million, and the free cash flow of more than EUR 130 million, which we guided is also for us easily reachable. We are at the level of EUR 140.2 million. So that's with respect to the figures. And I would like to invite you to ask your questions.
[Operator Instructions] And the first question comes from Wolfgang Specht, Bankhaus Lampe.
Three questions from my side. First, on your acquisition in Aachen. It looks a little bit like you predominantly bought [ brains ] and not an existing business. So can you give us an idea how the customer structure, any sales or earnings figures of that entity is? And how is the personnel bind to the company? So how sure can you be that important people stay within the company?Second question is on potential restructuring. Do you believe that your back-office capabilities will be in a good shape after a transfer of employees to EnBW? Or will there be additional needs to reshape the organization?And finally, on free cash flow. Looking at 9 months result, you could still have EUR 10 million drain in Q4. Isn't that a little bit too much looking that most of your one-off spend for the transaction have already been booked in the third quarter?
Jürgen, are you going to -- for the first one or...
Yes, yes, I would take the first one, and I guess, it makes a lot of sense that you take #2, and 3 of Wolfgang. So Wolfgang, your first question is a good one. First of all, of course, it's a kind of startup. But it's fair enough to say that the CEO, who is Alexander Engels, who is a very, very smart guy, set up this business approximately 3.5 years ago. And they are already existing customers in the area of, let's say, 4.5. One is just in contract phase. So let's say, 5 customers that are in a place with a kind of partly transforming their production process on the platform. So there is existing business on a small level, and there is revenues on a small level. The major shareholders put their money into the company, so they are binded by their money in a certain way. And the other guys, who are the, let's say, the AI experts, in total, the company as of today, 8 people, it's a small company, but 8 experts. And so they are binded to the company by equity or via stock option plan. So we are pretty sure that there is no risk that they will leave the company. And as said, our expectation is that with the cash of EUR 1 million, we will lead this company to breakeven. And now that's an important point, we come to that, that we -- and we have last -- next Thursday, the first workshop with a customer that QSC knows. So now we can with our sales power transport this technology and this competence into our customer base. And I'm pretty sure that this will be a major player in the Industry 4.0 environment.
Yes, I'll take the second question, Wolfgang. The actual situation is as follows. Most of the activities in the G&A environment for Plusnet are done by people which are on our payroll. Plusnet pays for these activities quarter over -- or month-over-month, nevertheless, in quite a substantial number. We have defined the people who will go over by January 1 to Plusnet. This is basically people in areas like controlling, who have always worked in the controlling environment of telecommunication or in the billing or in the HR and other areas. That means these people will just leave us without creating additional costs.Besides that, we have attributed a number of people who we are not seeing after January 1 or April 1 next year in our environment because the activities have been reduced. We will have done all provisions for these people. That means there will be no P&L burden from that side. There will be, of course, some cash burden in the next year.The activities, however, for the restructuring of the G&A environment is finalized. That means all activities are done, all people are attributed and everybody knows that he or she will leave at what conditions and so on. So that's done. That's all done. That will not influence at all the business anymore. And we have enough people. Of course, we have structured it in a way that the existing or remaining QSC is able to fulfill all these activities.With respect to the cash flow, you see we have roughly EUR 140 million free cash flow in the first 9 months. We have given a guidance of 130 million or more. And if we see the third quarter and if we deduct the extraordinary cash-outs, we should easily be able to reach the goal of more than EUR 130 million for this year.
The next question comes from Patrick Schmidt, Warburg Research.
Just a follow-up on the aiXbrain acquisition. How was the deal structure? So do you expect any earn-out payments for the -- or -- to take the -- on the majority? And yes, what kind of KPIs do you rely on to make your decision? And is there already a price agreement for a potential majority?And the second question is, could you maybe describe your way to profitability in the next 1, 2 or 3 years? So in terms of revenue development versus cost development, you said that your cost structure is pretty much in place, but you also mentioned some investments into Cloud. So -- and looking at your gross margins, you would -- they will need quite a jump in, let's say, in the gross margin as well as revenues in order to turn profitable within the next 2 years. So maybe you could give us better idea of how you think about revenues and the cost structure over the next 2 years. That would be great.
Yes, Patrick. Thanks a lot for the question. Concerning aiXbrain, so we have signed the stake of 25-plus percent, and we have already agreed even on the pricing to taking more than 50%. And there are some, let's say, rules in the kind of corridors how to get even at the end of the day the majority stake, even 100%. But finally, which is much more important than the major shareholders on the other side, apart from the Professor Mathar, which is 63, the other guy is even younger than the management of QSC, they're very, very keen to bring this company into success. And I have no doubt that this will be a major player, as I said, in the Industry 4.0 environment. And all the things as -- as so far foreseeable concerning put options and call options, are in the agreement that we signed last week finally described.Concerning profitability, so QSC, as I said at the beginning, as I said earlier this year, is a growth company. And we are highly committed to invest into this growth, especially in the area of IoT and some other things. And so I would really be interested that we can grow quarter-by-quarter. And if we can show growth on a annual basis, more than 10%, and we will come out with, let's say, more detailed numbers end of this year in the different presentations that we will have. I think Arne will start in Frankfurt at the end of this month where we will show some more detailed numbers for the next years, especially next year and the year after that.
Okay. At the moment, there are no further questions. [Operator Instructions] And we have another question from Wolfgang Specht, Bankhaus Lampe.
Yes. Maybe an additional one on your branding. Are there already, let's say, broader plans to rename the company after, let's say, the QSC core brand will probably stay with EnBW?
Good question, Wolfgang. So definitely, we took the decision, and it was -- and you can imagine that, especially for me, it was not an easy one. I'm with the company since 23 years now or nearly 23 years. And -- but we have decided to rename the company, which will be presented on the next AGM. You know that an AGM has to commit to this decision. And the reason for that is quite simple, we think that QSC is a good brand, but at the end of the day, it's very much linked to the business that we had in the past concerning telecommunications area. And we want to really, really reposition that for the -- for our customers, and as well, which is much important for our current employees and the potential employees to make sure that they all understand that this is a new company even with a new name. And we will come out with a new name early next year with the invitation to the AGM, but the decision has been taken full stop.
Okay. So we can also, let's say, attach some extra cost to the rebranding side next year?
This is already including all the plans. This is not so much to be honest, because at the end of the day, we are not a consumer brand. Therefore, this will be a very, yes, let's say, conservative -- this will be a conservative approach from our side.
[Operator Instructions] There are no more questions from the audience.
Let's wait a second. Maybe there is a further question, not to be unpolite.
There are no additional questions.
If not, yes, ladies and gentlemen, thank you very much for attending our conference call. Let me summarize this call with a clear statement that we do have a growth strategy based on the main technologies that are necessary for digitalization, which is Cloud, SAP and IoT. We have a clear focus like the compass with our sector focus. We do have an integrated approach from sensor technology to the application to the cloud. With our own software development competence, we can guarantee the margins in the midterm. And with as-a-service approach, we can guarantee the recurring revenues, and not to forget our solid financial situation. Thanks a lot to Stefan, we are in the position to invest in an M&A project, which will support our growth strategy. So thank you very much, and hope to see and to talk to you soon.