Bechtle AG (OTCPK:BECTY) Q3 2022 Results Conference Call November 9, 2022 10:00 AM ET
Company Participants
Martin Link – Head of Investor Relations
Thomas Olemotz – CEO
Conference Call Participants
Thomas Olemotz
Good morning, ladies and gentlemen. Welcome to our analyst call on Q3 and thus also on the first nine months of the ongoing financial year 2022 of Bechtle AG. I’m very happy to see that many of you are interested in our company. The year is trying to close and the general framework conditions we’ve been dealing with for the whole year far from over. We all know that and the war in Russia — of Russia in Ukraine is unrelenting, and there is high-risk inflation. The situation in the global supply chain has improved somewhat, but it’s still far from being back to normal. And also, the situation around COVID-19 is still with us, and we’ll have to wait and see how we get through this winter together.
Against this general backdrop, we’re very happy that in Q3, Bechtle AG has developed very positively. We’re a rock in stormy seas as it were. And we’ll show you the numbers in a minute that will reflect that trend. But first of all, just quick technical remark by way of exception. I’m not going to be the one presenting the presentation today, but Martin Link, the Head of Investor Relations. The reason for this is that I am somewhat sick. So if you know me, you will have heard that my voice is not what it usually is, but I am going to be ready to answer your questions in the Q&A session later on. So I hope that you will understand why we have chosen to have Mr. Link present the presentation.
Martin Link
Good morning, everyone. Even though I’m a different speakers, the presentation as a whole is going to remain unchanged. It is subdivided in four major sections. We’re first going to take a look at the key financials for Q3. And we’ll take a quick glance at our share performance. We’ll also look at the highlights, the non-financial highlights of Q3. And of course, we’ll also end with an outlook for the remainder of the year, although it’s already November now.
Let’s start with business development. I’m sure you’ve looked at the numbers that we published at 7:30, and you will have seen that we have experienced an unchanged high pace of growth at basically driven by our customers consistently high demand for IT solutions.
We’re not yet registering any major restraint on the part of our customers. This is especially important because we’ve been asked many times whether we are seeing the first indications for recession, but that is definitely not the case across the board for our customers. Our customers have recognized the high level of relevance of IT and investments continue at a high level. At the same time, we are becoming better at gradually reducing our historically high order backlog compared with the level at June 30th, 2022, it has already decreased by around EUR200 million to EUR1.6 billion. We also see this positive trend reflected in the development of our business volume.
Business volume growth gained further momentum in the third quarter, now totaling over 20%, even more momentum than in the first two quarters of the year at 18.9%, most of the growth we saw in Q3 was organic. In the first nine months of the current year, our growth rate was almost 15%, given the challenging underlying conditions, I consider this a really impressive performance. Another thing you see looking at these figures is that in a quarter like the one under review Q3, that is it becomes particularly clear how important it is to also focus on business volume. We introduced this ratio as an alternative ratio because software revenues are no longer to be reported under revenue according to IFRS 15. So business volume is the only ratio that fully reflects the scope of our software business. And this business, unfortunately, we’re no longer able to show it under our revenue is a very important business area and has been one of the growth drivers in Q3.
From here, let’s turn to our revenue with revenue growth at 14.6%. Bechtle managed to maintain the high level of the previous quarter. Organic revenue growth was 12.7%. You see high discrepancy between business volume and revenue, and this is due to a higher demand for software overall in Q3, but also to large volume software business that basically conducted in the period under review. But demand was also high in the service and hardware areas. As figures show, the global supply chain situation has continued to improve. But we’ve heard it we’re far from business as usual, and we see improvement for individual product categories only and not yet across the board.
Let’s now take a look at revenue development in the segments and the different regions. In the segment view, we see that the roles that we’ve seen signed over the past few quarters have been reversed. In the third quarter, our growth engine was the IT System House and Managed Services segment. At 21.7%, we were able to significantly boost sales in Q3 organic sales to increase considerably by 18.6%. And Year-to-date, we were able to grow from quarter-to-quarter. Business is returning to normal after COVID-19 and customers are increasingly investing in their existing IT infrastructure.
We’ve always pointed out that our customers have focused on the newly created home office structures and investments into on-site infrastructures we’re not prevalent in 2020 and ’21. So there is a catch-up effect. And as a rule, the revenue growth of 21.7% also includes some large volume projects at such a level of sales growth, this is stating the obvious. In the IT e-commerce segment, revenue increased by 3% compared to the previous quarter. In addition to the challenging comparative figures from the previous year, this is also due to high software share in the business. In terms of business volume, however, growth in this segment was at a remarkable 7.4%. So the 3% is somewhat misleading. But still, we see that the software business is a driver.
Let’s quickly take a look at the distinction between Germany and abroad. The picture is rather balanced with a slight advantage for our companies abroad. And this brings us to the development of our earnings, and we will first take a look at EBIT trends by quarter. It is relatively obvious that pressure has increased from quarter-to-quarter, a trend we anticipated for two main reasons: one, some of the cost savings resulting from the pandemic in 2020 and 2021, no longer applied in the course of this year. And the effect was even stronger than anticipated, and we have seen that things went back to normal, and the cost base increased year-on-year, particularly in the case of vehicle costs and travel expenses.
Secondly, inflation has left its mark in the form of higher costs, especially in the area of facility costs due to the increase in energy prices. What is more, our business in Q3 was characterized by a comparatively high proportion of large volume and thus low margin hardware and software projects. And finally, we were up against a positive net extraordinary effect of EUR3 million in the previous year and we managed to at least partially offset this effect by writing back risk provisions in Q3. So it was a low-digit million amount.
Let’s take a look at the development of our segments. In the System House segment, this effect was more pronounced due to close and direct customer contact, vehicle costs are more associated with this segment’s business model. Likewise, building costs have a greater impact since we’re talking about more than 80 different locations. And the large-volume projects mostly took place in the System House segment, which also resulted in greater pressure on our earnings and margins.
In addition, the one-off effect in the previous year was fully accounted for by this segment, the System House segment. So the effects are more marked in this segment. But having said that, a margin of 6% in the System House segment is still very good, so the level of the previous year, 7.8% is definitely not the normal numbers.
In addition to the offsetting effects of all these factors, there is yet another reason for the very positive development in the IT e-commerce segment, thanks to the higher share of smaller-scale business, price effects have had a more positive effect impact and these effects had been obviously in the first two quarters for both segments, but this has changed somewhat.
Let’s now take a look at cash flow still showing a positive trend. Operating cash flow in Q3 was minus EUR28.3 million. It goes without saying that we cannot be satisfied with this number. But as you can see in this chart, there are some positive aspects here, which we want to explain. One is that cash outflow from inflated inventories no longer reached the high level of the previous year. And the same goes for the buildup in accounts receivable. For both items, we see positive effects now. And this is, of course, a trend that we would like to see continue towards the end of the year.
Another thing we saw in Q3 was that cash outflow from the reduction of accounts payable is more marked. However, this effect was deliberate, and we trust that we can manage this effect in Q4. It’s difficult to manage inventories. It all depends on the supply chain shortages. It depends on whether our customers are ready to accept partial deliveries. It also depends on revenue growth in Q3 or Q4 rather. So we don’t have much leverage here. But in terms of accounts payable, we have some discretion, and we are planning to do — use that discretion.
Let’s now turn to our headcount development. As of September 30th, 2022, baseless headcount was 13,789. This equals 8.2% or 1,045 people more than in the same quarter last year. 239 new colleagues joined basically in the course of acquisitions, which amounts to around a quarter of the total increase. In organic terms, our headcount grew by 6.3%.
In addition to recruiting new employees, the focus of human resources work at Bechtle has always been on training and further education and that was definitely the case in Q3. We continuously invest in certifications for our employees, for instance, in the vital areas of security and multi-cloud architectures.
Now I’m going to be brief, but still, we’ll take a look at the performance of our Bechtle share. Now we’re not an outlier. The situation on the stock markets remains very tense. The reasons are well known. Dr. Olemotz already mentioned the framework conditions, the war in Ukraine with its economic rig percussions such as the energy crisis and increased inflation, the ongoing problems in the global supply chains, the uncertainties about the overall economic development and the interest rate policy of the central banks. So this unfavorable mix has also hit the development of our share. So you can see here that since the beginning of the year, our share price has dropped with slight ups and downs in July and August. And you know the reasons tech values are under pressure. And the situation is still ongoing.
There’s the assumption that cap values show higher flexibility and also sensitivity to interest rates, whether this is true remains to be seen. And we can see that this is a trend that we cannot simply ignore or withdraw from and it also hits us. So it’s not possible for a single share to withdraw from that. We had excellent press statements such as, for example, the further internationalization.
If you take a look at the share price development, you can see that this hasn’t really reflected itself on our share place. So these statements come and go and afterwards, the share price of Bechtle just follows the overall trend of the stock market, which this year has been downwards, unfortunately. Now as unfortunate, this is for our shareholders on the one hand, that doesn’t really affect us because we still focus on our operational business because we are convinced that valuation in the capital markets will also reward our success.
As usual, let’s then talk about the non-financial special highlights in Q3. Now we’ll talk about the three highlights, and they cover our strategically most important fields of action, namely training and securing skilled workers, our international positioning, and our further expansion of cloud services. Let’s start with some beautiful news regarding the new training year, which started in September 2022. In the trailing year 2022, Bechtle set a new record with 256 trainees and bachelor students, more young people started their careers at Bechtle than ever before. Across the group, we’re currently training 815 junior staff in 12 technical and commercial apprenticeships and nine deal university program students, 106 more than in the previous year. The training ratio across the group is around 6% and Bechtle aims to increase this to 10% by 2030, as you know.
There’s a new vocational training course because we’ve now got the so-called digitalization management assistant. And as far as the causes of study are concerned we’ve now got cybersecurity, data science, and software engineering as new degrees. So as you can see that with vocational training and university degrees, we’re leading again.
The next highlight concerns a partner award that we’re particularly pleased about. Let me say this upfront. Every day we could come up with statements about awards, almost every day. And let’s just talk about this one here because it’s really special for us. The U.S. network specialist Cisco has honored bases public sector partner of the year in the EMEA region. With this award, the manufacturer once again acknowledges the outstanding development of the corporation and public sector digitalization projects in the modernization of network infrastructure for customers from all industries.
Why is that so special? For two reasons. They’re honoring our international positioning because this EMEA award doesn’t focus on our strength in the DACH region, but recognized specialty as an international player. And you know that internationalization is particularly important in our strategy. It’s important to us to be a really true European player. Therefore, we’re pleased that Cisco has recognized us as an international player and has given us that fantastic award.
Now in addition, the award underlines our extremely successful positioning in the public sector. Bechtle is one of Cisco’s strongest partners in the education sector, especially in the high-growth market segments of schools and universities. Now the third highlight is the expansion of our data center capacity to our customers. Bechtle is expanding its capacity for private cloud services with a new data center in the Rhine-Neckar metropolitan region.
To this end, we are cooperating with a co-location provider, PFALZKOM. In addition to high availability and comprehensive security, PFALZKOM’s data centers already meet the essential criteria of the climate-neutral data center packed whether significantly expanding the existing capacities is not only important for us, but customers can basically then use this also for their sustainability reporting. They can report that they are using a data center, which is fulfilling largely all of the criteria of the climate-neutral data center requirements. And therefore, this is important also for the usage of renewable energies. So the Bechtle data center built in Mutterstadt enables the highly available and scalable operation of private cloud services. And it allows us to use cloud services, and this will be good news for medium-sized and large companies as well as public clients.
To conclude the presentation, I would like to take a look at the remaining weeks of the year and give you our outlook. Now it’s the middle of November, the year 2022 will be soon over. Nevertheless, uncertainties remain. We still don’t know what the last weeks of December and even November will look like. And unfortunately, there will, of course, also be uncertainty, especially for the year 2023. We at Bechtle be very satisfied with what we have achieved so far. The year-to-date development is completely in line with our expectations and in some cases, even exceeds them.
And you’ve seen this by looking at our figures. However, the fourth quarter is again decisive for the success of the year as a whole. And therefore, some of you who’ve been also attending Capital Markets Day you have been chatting with us in between. We’ll know this, we are confirming our outlook, our forecast for 2022. So even back in August with the Q2 figures, we confirm the guidance, and we haven’t increased it. Some of you might have expected that we’re not increasing it.
Let me also tell you why we’re fully aware that the top line is above our guidance about — above our forecast. And that the good chances we will exceed it. Also, the October figures are not the reason as to why we’re confirming our guidance or our forecast because, again, the top-line growth is extremely good and has reached a great level. However, the forecast is composed of various components after all. And there’s not only top-line growth, but also bottom-line growth.
And then you also have to consider the margin development. And if we don’t increase our forecast, it doesn’t mean that there will be a bad top-line development in Q4, but it means that uncertainties regarding cost development are extremely high. And the overall macroeconomic development continues to be uncertain. And for that reason, we prefer to leave our forecast, our guidance as it is.
And let me just give you the following — because if I’m in the driver seat I might also be allowed to make a personal comment. If we consider that other companies on two occasions have hard to correct the guidance downwards twice.
We think it’s very wise of best leave our guidance as it is. That doesn’t have to be a disappointment to the capital market. As I just explained, we believe that we have a very clear view on top-line development. Yes, we’re exceeding our forecast, but uncertainties regarding bottom line and margin are such that we should be in line with the consensus of the capital market. We’re still positive and optimistic as far as the trend towards the end of the year is concerned and also the development in 2023. So that was it. Thank you very much indeed for listening.
Question-and-Answer Session
End of Q&A
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