NFON — Cloud calling

NFON — Cloud calling

NFON is a pan-European provider of business telephony services via the internet. The rising adoption of IP-based, cloud-hosted switching systems (cloud PBX) is driving rapid sales growth and, with penetration still at low levels, this trend is expected to continue. From a strong base in Germany, it aims to expand into Europe and believes the combination of its scale, in-house IP and balance sheet will enable it to execute this strategy.

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Written by

NFON

Cloud calling

Telecommunications

Deutsches Eigenkapitalforum 2020

29 October 2020

Price

€13.7

Market cap

€207m

Share price graph

Share details

Code

NFN

Shares in issue

15.1m

Net cash at 30 June 20

€13.5m

Business description

NFON provides telephony services via the internet to over 500k seats at more than 40k businesses across 15 European countries, including Germany, Austria, UK, France, Italy and Spain. It is the only pan-European cloud PBX operator and aims to be market leader across the region.

Bull

Strategy to be the dominant European player across Europe by exploiting economies of scale and advantage of using its own PBX system.

High (85%+) recurring revenues offers good visibility

European cloud PBX market forecast to double over next four years. GDPR favours EU over US providers.

Bear

Consensus forecasts EBITDA losses to 2021 and currently consuming cash.

Highly competitive market and low market share outside Germany

Ongoing R&D spend required to maintain cutting edge in products.

Analyst

Dan Gardiner

+44 (0)20 3077 57 00

NFON is a pan-European provider of business telephony services via the internet. The rising adoption of IP-based, cloud-hosted switching systems (cloud PBX) is driving rapid sales growth and, with penetration still at low levels, this trend is expected to continue. From a strong base in Germany, it aims to expand into Europe and believes the combination of its scale, in-house IP and balance sheet will enable it to execute this strategy.

Executing on its strategy, COVID-19 tailwind?

Sales grew 25% y-o-y in H1 (17% organically), driven by a growing customer base and rising number of seats in existing customers. Germany (78% of sales) performed well, delivering 19% organic growth. While economic activity was affected by COVID-19, management believes that as companies embrace the need for greater operational flexibility and homeworking, the benefits of cloud-based telephony will become more apparent. The incremental sales, combined with a control of marketing spend, saw H1-adjusted EBITDA improve €4m y-o-y to €1.4m.

Growth focus expected to continue

Consensus expects this growth to continue in H2 and beyond. Forecasts imply 22% y-o-y revenue growth in H2 and 27% in 2021. With over 85% of sales (high margin) being recurring revenue and solid fundamentals, in our view there is reasonable visibility on this growth even in the current turbulent environment. Cavell Service Provider estimates the penetration of cloud communications in Germany was just 4% at the end of 2019 and will rise to 14% by 2024 (implying at least a 23% CAGR). This forecast is supported by evidence from the UK and North America where penetration rates have already reached 15% and 25% respectively. NFON’s strategy is to build on the strong position in Germany (25%+ market share) and proprietary technology to establish a pan-European business. It expects to increase marketing spend in H2 and will consider making further acquisitions to scale up.

Valuation: Trading below peers on EV/revenue

The acceleration in marketing spend in H2 is expected to see NFON report EBITDA losses in H2 and FY20. Hence it is difficult to value the company on anything other than EV/Sales. At €13.7, the share price implies a FY21 EV/sales multiple of 2.2x, a substantial discount to its larger European peer (Gamma Telecom, which is valued at 4.2x) and below the multiples commanded by US players such as RingCentral and 8x8.

Consensus estimates

Year
end

Revenue
(€m)

Adj. EBITDA (€m)
(€m)

PBT
(€m)

EPS
(€)

EV/Revenue
(x)

EV/adj EBITDA
(x)

12/18

43.0

(1.2)

(8.6)

(0.68)

4.5

N/A

12/19

57.1

(5.1)

(10.8)

(0.93)

3.4

N/A

12/20e

70.4

(2.6)

(6.9)

(0.46)

2.7

N/A

12/21e

89.7

(2.4)

(6.8)

(0.48)

2.2

N/A

Source: Company data, Refinitiv (based on three estimates)

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This report has prepared and issued by Edison as part of a road show package for companies attending the Eigenkapital Forum. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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