NFON — PBX moving to the cloud

NFON — PBX moving to the cloud

NFON is a pan-European provider of business telephone services via the internet. IP-based, cloud-hosted switching systems (cloud PBX) are expected to grow strongly over at least the next four years as they replace legacy hardware. NFON aims to dominate this market in Europe and believes the combination of its scale, in-house IP and balance sheet will enable it to execute this strategy. On an FY20e EV/sales multiple of 1.7x, the shares trade at a 42% discount to its nearest peer.

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Written by

NFON

Telecommunications

Price

€10.2

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Market cap

€149m

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Share details

Code

NFN

Shares in issue

14.3m

Net cash (€m) as at 30 June 2019

12.6

Business description

NFON provides telephone services via the internet to 408k seats at more than 30,000 businesses across 15 European countries, including Germany, UK, France, Italy and Spain. It is the only pan-European cloud PBX operator and aims to be market leader across the region. It was listed in H118 and has 362 staff and over 2,000 sales partners.

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Bull

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

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High (85%) recurring revenue offers good visibility.

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

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Bear

Consensus forecasts EBITDA losses to 2020.

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Highly competitive market and currently consuming cash.

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

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Analyst

Dan Gardiner

+44 (0)20 3077 5700

PBX moving to the cloud

NFON is a pan-European provider of business telephone services via the internet. IP-based, cloud-hosted switching systems (cloud PBX) are expected to grow strongly over at least the next four years as they replace legacy hardware. NFON aims to dominate this market in Europe and believes the combination of its scale, in-house IP and balance sheet will enable it to execute this strategy. On an FY20e EV/sales multiple of 1.7x, the shares trade at a 42% discount to its nearest peer.

Strategy to become the market leader in Europe

NFON is a clear leader in cloud PBX in Germany (a 25%+ market share) and also has a presence across 15 other European countries. Its strategy is to build on this scale advantage over most of its peers to establish market leadership across Europe. Greater scale enables it to spend more on marketing and sales activities and invest more in R&D. Over 20% of its employees (77) are engaged in R&D and, unlike many of its nearest competitors, its solutions (eg Cloudya) are largely developed in-house. Over the last nine months NFON has launched services in France and Italy as well as further strengthening its position in Germany through the acquisition of Deutsche Telefon Standard. In July the company announced it had established additional financial resources to ensure it could execute on further M&A opportunities.

Sustained growth in core market expected

MZA Consultants expect the European cloud PBX market to double between 2017 and 2023 as penetration rises from 10% to over 19%. This forecast implies a 16% CAGR and is supported by evidence from the UK and North America where penetration rates have already reached 18% and 22%, respectively. Within the cloud PBX market multi-tenant systems are expected to gain share as customer confidence in the technology increases.

Valuation: Trading below peer on EV/revenue

NFON recently reported revenues of €41.5m in 9M19, up 33% y-o-y driven by a 38% rise in recurring revenues. For FY19 management guides to year-on-year revenue growth between 30% and 33%, implying a similar growth rate in Q4. On an FY20e EV/revenue multiple of 1.8x, NFON currently trades at a 38% discount to closest European peer Gamma Telecom (2.9x).

Consensus estimates

Year
end

Revenue
(€m)

Adj. EBITDA (€m)
(€m)

PBT
(€m)

EPS
(€)

EV/
revenue (x)

EV/adj EBITDA (x)

P/E
(x)

12/17

35.7

0.2

(1.8)

(5.45)

3.8

N/A

N/A

12/18

43.0

(1.2)

(8.6)

(0.76)

3.2

N/A

N/A

12/19e

57.8

(5.2)

(9.1)

(0.63)

2.4

N/A

N/A

12/20e

75.8

(3.2)

(5.4)

(0.39)

1.8

N/A

N/A

Source: NFON, Refinitiv

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

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London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

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

1,185 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

General disclaimer and copyright

This report has been prepared and issued by Edison. 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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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

1,185 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

Frankfurt +49 (0)69 78 8076 960

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

1,185 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

Research: TMT

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