q.beyond AG

Good afternoon ladies and gentlemen and welcome to QSC's conference call regarding the second quarter results 2020. At this time all participants have been placed on a listening remote. The floor will be open for questions following the presentation. Let me now give the floor to Mr. Jürgen Herrmann.

Yes, thank you very much and good afternoon to everybody as well. My name is Jürgen Herrmann. 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 four times in a row, which you can see on page three 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 three-thirds of our revenues are recurring and platform-based. We are still strong in cash with net liquidity of approximately 55 million and an equity ratio of more than 70%. And we believe that the shutdown will trigger a wave of digitalization amongst meat 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 on page six on the P&L. And here we can see, as mentioned, that revenue is up to $34.5 million the second quarter and ETA improved as well. So step by step, quarter by quarter, we are improving and therefore we are quite confident to reach the EBTA positive pre-given starting Q4 this year. Let's have a look at the segments. First of all, cloud and IoT on page seven. 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 one million in Q2 may be counteracted by one of initial costs due to a large cloud project. This is scalable business, full stop. When we look at SAP, We can see the impact on the COVID-19 pandemic and Corona in Q2. I'm not sure how the rest of the year will develop. We cannot foresee how much, 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 EBTA, create even in Q4. And the main drivers are still the transformation projects to the new technology S4 HANA. Yes, as mentioned in the introduction already, strong balance sheet, net liquidity of approximately 55 million and equity ratio of 72%. The capex in the first six months was 2.5 million and free cash flow in plan with minus 2%. 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 occurring not only in Germany but all around the world. So we expect revenue growth up to a target of more than 143 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 tech 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, yeah, in a certain way, shows how the main columns for our growth strategy are. It's the 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. definitely the experience management team that supports me as well. And with that, we are still stick to our target of 200 million in 2022 with more than 10% EBTA margin and a positive free cash flow. Yeah, 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. Yeah, and the InCloud expects for the full year roughly a little bit more than 4 million in revenue and the positive earnings and we will consolidate because we are now have 100% of the company from August 1st. And on page 13 maybe you remember this slide where we show 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 in applications with the focus on SAP and S4HANA, and we have the competence in cloud. And in cloud, 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 applications, and native apps and 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 two corporations 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 an 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 channels. 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 QoS 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 data 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 is a chance to get a foot into the door. Yeah, and this partnering and M&A will support our growth plans. And on page 16, you can see the numbers again. So the 143 for this year and leading up to the growth in 2021 and 2022 to a target of approximately 200 million. And with that, the main driver 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. What's going on in Q3, apart from the fact that we are prepared to deliver again our growth, there is the next growth push in the sense of market signal is our rebranding to Q Beyond. It will take place the end of September, to be precise, on the 20th 2nd, where let's say the big bang is. And we are pretty confident that this reprinting campaign, which symbolizes in a certain way the new QSC, now QBeyond, that it will raise awareness and generate further leads. Yes, ladies and gentlemen. That was it. Very shortly, what is the situation about QSC and future QBeyond currently and about Q2, and I'm very happy to take your questions now.

Ladies and gentlemen, if you would like to ask a question, please press 9 and star on your telephone keypad. In case you wish to cancel your question, press 9 and star again. And the first question comes from Jonas Blum, Warwick Research. Please go ahead with your question.

Yeah, good afternoon and thanks for taking your questions. I had three, if I may. Firstly, I was wondering with regards to your strong water intake and especially for current split additional services and contract extensions. I mean, the split actually shifted from 60 to 40 to 70, 30. 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 of what kind of industries are your main driver here? Is it still retail or is it perhaps something else that would be helpful? And perhaps also a bit of color in terms of queue-free order intake. There's strong development in sustain. That's basically the first. Second, just around your SAP consulting. 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 your cloud and IT, I mean, as far as I understood it, you had some investments here in growth, and you had some advance payments for individual projects. Could you quantify those investments, and is it fair to assume that those advance payments should diminish over the next two quarters? Thank you a lot.

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 missed something. Yeah, it was a strong order intake in the second quarter and our target number is indeed 50-50 and I do not make a large difference if it's a new customer or if it's additional service to existing customers. So 50-50 is a split between new services and existing customers and yeah I can tell you that the new services mainly when it's not a new customer new services for existing customers 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 You know that we are working in three 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 coming and going fast as well. Energy is still in the lower area and we are still developing. Q3 order intake is not finished yet. There is still some weeks to go, but let's say I'm confident that we are even able to beat the strong Q2 numbers. We will see, but we are prepared 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 at the end of the day we will see it, but it may be that the second half will be a little bit weaker than the first six months this year. But then it's just postponing because I do not expect that in the mid-term S4ANA transformation project will be postponed in the mid-term. Concerning the new services and the investment in future services, you are right, it's mainly based on IoT on the one hand As 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, it's approximately 5 to 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 safe costs here?

Edmund, 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 two 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 ABTA in Q4.

Great, got it. Thanks a lot.

And the next question comes from Heike Pauls, Commerzbank. Please go ahead with your question.

Yes, hello. I hope you're doing well. I have a couple of questions. First, is it correct to assume that you do not anticipate any major integration costs for in-cloud 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 was the profit contribution of the collocation unit and also the third question is could you give us a usual conversion rate of order books into actual revenue thank you okay heike thanks for your questions um there's definitely no

major integration costs that we plan or expect related to in-cloud. There is a subsidiary in Darmstadt and this will definitely be operated in the future as well because 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 is not plans to integrate in-cloud 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 Thorsten Racquet and the managing directors of InCloud and they of course share their knowledge and make sure that all have the most maximum impact of that. Concerning, I hope I got you right, the sale of the remaining telco business, I think you were referring to co-location. As a tone to the market, we see a positive environment currently, no doubt about that. We are preparing to migrate the business into a separated 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 conversion rate related to what, sorry, may I miss that?

Yes, I asked if there's a figure you can give us for the users.

Okay, yeah, concerning the order intake, yeah, okay. I just noted conversion rate, but I missed what it was related to. So conversion rate, it's, of course, different, but normally it starts the next quarter already. So order intake in the second quarter is showing revenues in the The following, definitely in the second quarter after we had the intake.

Okay. Your answer to the second question is a small bit. I also asked if you could give us a profit indication. Okay.

Yeah, the collocation business is in the area of 20 million revenues, approximately. and show the EBTA margin of roughly 25%.

Perfect, thank you.

And the next question comes from Wolfgang Specht, Bank of Lampen. Please go ahead with your question.

Yes, hello, good afternoon. One additional one on the acquisition of InCloud. We heard that there will be hardly any integration costs But what about the PML impact of the five months? Is it sizable or rather negligible? The second question goes, again, to the effects of the pandemic. We learned that your cost base in consulting was positively affected. How do you see trading going into the second half? Do you expect more onsite consulting to be possible here? And then we didn't hear too much about IoT products or IoT projects. Can you give us an idea how the pipeline looks like? And maybe if it's enough time left, regarding teams here, is it right that you do not have a project currently running, but you have a pipeline here?

Okay.

Let's start with the answers. Thank you for your questions, Wolfgang. Maybe I come back to the, maybe you can give me one more sentence to the second concerning SAP. I'm not sure if I got the question.

You mentioned in the presentation on the report that you had some cost savings because you 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 in-cloud. As mentioned, we do not expect major integration costs. And as said, in-cloud for the full year has planned revenues a little bit higher than $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 you can see approximately the impact on the P&L. But let me make clear that in-cloud was not acquisition to buy revenue. It was really the acquisition to get talent on board and the fact that they have a lot of customers in the SME area and they have revenue and they are positive underlines that. At the end of the day, the main issue, the main driver was to get skilled people in the software development area. the savings on SAP. Yes, it was not only external drivers, it was travel costs as well, because there was a shutdown at 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 these large customers. Let's say it's the area or 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 solutions. And the strong projects are the retail and the industry area, but it's still something that I expect that will take some weeks. Maybe we can see definitely something this year, but this is work in progress. Concerning Key Lua and the corporation, there is not a huge impact in revenue so far, but we have definitely in sales for the first prospect.

At the moment, there seem to be no further questions. If you would like to ask a question, please press 9 and star on your telephone keypad. and we have one more question coming from Lucas Spang. Jonas, please go ahead with your question.

Yes, hi, good afternoon. One quick follow-up question on the S4HANA business. We certainly saw also the cooperation or partnership between AlphaOne and the S&P Group for an automatic transformation to S4HANA. How do you see this cooperation or this new offering to their customers from your point of view?

Yeah, thanks for the question, Lukas. I think that using high sophisticated software to make the transformation from the existing suite to S4HANA easier, it helps, but you need a lot of, let's say, pre-work 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, yeah, we made a lot of projects in this area as well. We have our experience, but so far we think that this optimization is more suitable for really large transformation projects. When large, I'm talking about even DAX companies and others.

Okay, so you don't see any urgent of a software-based transformation? Not yet, no.

Okay, good. Thanks, that was everything.

And we have another question coming from Heike Pautz, Commerce Bank. Please go ahead with your questions.

Yes, my question is that you think we're on track for your free cash flow guidance this year, and the question is, is there any elevated investment or working capital requirements you see in the second half, or is the target just conservative?

No, there's no major impact. It is as planned, and we stick to our guidance, full stop.

Okay. Thanks. And now we have no more questions from the audience.

Yes, as the operator said, there are 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 in 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.

The conference is no longer being recorded.