Underlying turnaround visible
Excluding special effects, QSC AG NA O.N.'s (XETRA:QSCG) underlying Q114 results showed a modest, but expected, decline in revenues and slightly lower profitability, highlighting the nascent benefits of the company’s shift away from heavily regulated and highly competitive telecoms services towards the more benign IT services space. A key benchmark of this change is the decline in its once-dominant Resellers Business Unit to only 25% of revenues.
First quarter results also affected by special effects
QSC reported Q1 results that, at the headline level, showed a 3.5% drop in revenues to €109.1m, a 29% drop in EBITDA to €13.4m, and a collapse in net income to €0.3m. However, the results were affected by two special effects: the discontinuation of deferred costs of €5.2m per quarter that QSC booked from 2011 until the end of 2013, resulting from the early termination of its relationship with TELE2, and the ongoing difficult regulatory and competitive environment in its legacy telecoms services businesses, which is no longer simply affecting voice services but increasingly even ADSL2+. QSC estimates the impact of telecoms regulation alone to be €8m on revenues and €3m on EBITDA in FY14.
Investment in IT not likely to bear fruit before 2015
Excluding the distortion of deferred costs, EBITDA would only have declined 2.2% y-o-y, reflecting QSC’s decision to invest in direct sales to best implement its shifting business model and development costs, which are budgeted to double.
Consensus estimates: In line with reiterated guidance
QSC reiterated its full-year guidance, which anticipates revenues of €450-470m, EBITDA of €60-70m and FCF of €26-32m. With Bloomberg consensus estimates all within these ranges on the morning of the results, we do not expect any significant changes to forecasts.
Valuation: Remains reasonably valued, despite rise
QSC’s shares have risen c 35% over the past 12 months. This implies investors already have a high degree of confidence that the company’s transition is working and that further upside to shares will likely wait until the benefits of the changing business model bear fruit in terms of profitability. However, the shares do offer a 3% dividend yield despite their rise and a reasonable valuation compared to European IT Services, which trade on a median 7.3x 2014e and 6.5x 2015e EBITDA, and a possible share buyback in the next year for which the company has approval.
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