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Edited Transcript of ASCN.S earnings conference call or presentation 14-Aug-19 8:00am GMT

Half Year 2019 Ascom Holding AG Earnings Call

Bern 14 Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Ascom Holding AG earnings conference call or presentation Wednesday, August 14, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* André Neu

Ascom Holding AG - CTO

* Claes Ödman

Ascom Holding AG - COO & Member of the Executive Board

* Daniel Lack

Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR

* Francis Schmeer

Ascom Holding AG - Chief Sales & Marketing Officer and Member of the Executive Board

* Jeannine Pilloud

Ascom Holding AG - Chairperson & Acting CEO

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Conference Call Participants

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* Andreas Müller

Zürcher Kantonalbank, Research Division - Research Analyst

* Jörn Iffert

UBS Investment Bank, Research Division - Director and Analyst

* Michael Foeth

Bank Vontobel AG, Research Division - Head of Industrials Team

* Reto Huber

Research Partners AG - Senior Analyst

* Tobias Fahrenholz

MainFirst Bank AG, Research Division - Director

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Presentation

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [1]

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Ladies and, mainly, gentlemen, as I can see, I welcome you here and also over webcast, we are connected and there are people listening to this presentation as well.

I welcome you to the Half Year Media Conference of Ascom. My name is Jeannine Pilloud, I am the Chairperson and Acting CEO in one person at the moment.

What are we presenting today, also, it is welcome, we are in the middle of this. Daniel Lack is giving also financial review, and then I'm going to talk to you about the strategic execution and outlook for Ascom. I'm going to do this in 3 parts. I'm going to talk about market and strategy, but also the underlying values of Ascom, but also about what are we doing to bring the company so-called back on track.

If I give you a first glance of what we are going to say and what you have read this morning in the press already, the first half year 2019, the performance was weak and the second half year needs significant improvement. We had a weak demand in the OEM business and also 2 of our regions that did not perform in time, means like they had some stronger delays in larger projects.

The group profit was driven by one-offs, means like the EBITDA really suffered under this decline in the top line, but the EBIT basically, because we had the sale of the Technologiepark in Teningen, was slightly better than it was last year. We have opportunities for the second half of this year. The backlog increased -- basically increased at 8.7%, and also DACH and U.K. markets are growing high single digits, and this shows us that some of the things are going in the right direction.

The strategic potential is intact. That's the first message I want to give to you, and I'm also going to explain that later on. We are continuing to be leading in mobile workflow solution for hospitals and enterprises. And we had, as to mention in the first half, the successful launch of Myco 3, that's our hardware mobile for mainly hospitals we are using.

Now I hand over to Daniel Lack for an overview to -- of the financials. Thank you very much for coming, and I'm looking forward to have a discussion with you.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [2]

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Thank you, Jeannine, and good morning also from my side. We start with the key figures for H1. Here, 4 messages. Top line decreased both net revenue and incoming orders, mainly driven by the OEM business. Net revenue decreased by 4.7% (sic) [4.2%] at constant currencies. Incoming orders by 1.9%.

On the other hand, we had the strong increase in order backlog with an increase of 8.7%, which is a good base for the second half year and also for 2020.

EBITDA was impacted mainly by the lower revenue, but on the other hand, also by a lower gross margin. We will come to this, and that's why it's only at 1% EBITDA margin.

On the positive note, group profit increased from CHF 5.4 million to CHF 6.5 million, mainly driven by one-offs.

Coming to the incoming orders. You see that the incoming orders are pretty much in line with the previous years. If we exclude the OEM business, they even would have grown by about 0.6%. And as I mentioned already, we have further increase in order backlog. And this is one of the, maybe, few positive messages to the finance this time. Order backlog stands now at CHF 172.1 million. And I think, as I said already, this is the good basis for our future.

Coming to net revenue development. Here, as a first remark, please note that, traditionally, the first half year of Ascom is slower than the second half year. You see this year also on the overall and the first half year net revenue result was pretty much disappointing. I think this is a clear statement. The result was driven mainly by a weak demand in OEM. You see it's about significant decrease of about 30% due to different reasons. In addition, it was also impacted by a slow result in Benelux and Nordics, mainly impacted by delivery and support issues.

On a positive note, in the DACH region, we had increase of about 8%, and the same is also valid for U.K. U.K. is now here just a part of Rest of Europe and it has been offset with France and Central and Eastern Europe and so on, but U.K. also showed an increase of 8%. It is also on a positive note.

The share of revenue of Healthcare is stable with 64%. On the other hand, Enterprise sector got increased by 3 points, offsetting the decrease in the OEM business.

The geographic distribution of our revenue is pretty much stable. Europe and the Americas are both increasing a little bit, offsetting the decrease in the OEM business.

The hardware share of revenue of Ascom further decreased, and we are now at 52%. On the other hand, unfortunately, we were not able to increase the software share of revenue in the first half year, and management has now decided about dedicated actions to improve this in the second half year.

On a positive note and also in line with our strategy, we could increase the recurring revenue by 3 points, having now a recurring revenue of 26%.

Coming to the income statement. Here, I would like to make 2 remarks. Number one, the gross margin, unfortunately, dropped from 48% to 44.7%, impacted mainly by a lower top line. But on the other hand, also, there was lousy software, and we still had some issues with delivery and support.

Coming to the nonoperating result and extraordinary result. You see that there are one-offs altogether of about CHF 10 million, mainly driven by the sale of Technologiepark Teningen. Technologiepark Teningen was nonoperational site, north of Freiburg in Breisgau, belonging to the former division Energy Systems, which we divested in 2003, and Technologiepark Teningen was let to third-parties, so there were no Ascom activities there any longer.

We can sell this at a pretty good price and here, it's a combination of the proceeds from the sale and the release of provisions. In addition, as you can see, also, in the (inaudible) half year report, there is another release of provision related to a litigation partly also to the former division network testing.

Coming to the cash development. Here, I think the positive thing is that we had proceeds of CHF 5.5 million, up from the operating cash flows. On the other hand, the major cash out was for CapEx amounting to CHF 8 million and for dividends. Altogether, cash dropped by CHF 7 million in the first half year, which is pretty much typical because we always pay out the dividend in the first half year.

Coming to my final slide, this is the balance sheet. And here, I'd like to state that Ascom still has a very healthy balance sheet, although the cash and cash equivalents dropped by about CHF 7 million compared to year-end. On the other hand, we still have very low debt with CHF 10 million, and I think there is also a potential for leverage.

The equity ratio is at 35.2%, what is a good number for Ascom.

With this, I conclude this financial presentation, and I hand back to Jeannine.

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [3]

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Thank you, Daniel. Thank you. Good. As I mentioned, I want to do the strategic execution and the outlook information part in 3 parts. And the first one is basically looking at market and strategy. The vision of Ascom still stands and defines our very strong market position. Workflow, digitalization, analytics and smart data, workflow optimization for the Healthcare market. This is exactly what we do and there is where we stand.

If you look, have an outside-in view on the market attractiveness, then you see that this supports very strongly our business model. Our addressable market is highly fragmented and is also local. This means you have kind of like global offering, but you have to implement on a local level.

The advantage of CDAS in this patient care market is along with government initiatives, which gives us, on one hand, the security to really stay long in the market, but on the other hand, the sales cycles are longer because you have to do this regulation as well. But Ascom provides solutions in all market segments and, therefore, is very well positioned.

How do we address this market? Mainly, with the Ascom Healthcare platform, what is very important is in the middle that we have basically this orchestration software, that's the one part, and having these different parts that we have to integrate mainly in platforms in the hospitals that are developed since 30 years. All of the hospitals, they have IT, hard and software that is developed in the last 30 years, and they do not have the finances to exchange this all the time. Therefore, software to orchestrate this and also having the implementation skills is a very valid and very strong market offering.

From an offering standpoint, we are, therefore, in a good position. And Ascom Enterprise Platform, I wanted to mention this because it accounts for almost 1/3 of our revenue. Integrate, orchestrate and enable is something that is industry-neutral. And therefore, it's very important that we can take this as a redundant offering part and offer it also to so-called 0 tolerance companies they are alarming and basically all the safety and security things play a role as well.

So second part, the underlying value of Ascom stays intact. Why is this the case? I think, first, to mention, it's very important that we have a global presence. We are one of the global players in this sector. And we are having a very strong sign in the market as well because, with this local presence, we can understand the fragmented market, but on the other hand, also bringing in global expertise.

If you look at our broad customer base around the world, you could say, yes, this is a nice brand collection. But if you look at it from Americas to Europe to the AAA, it's impressive how many customers we have that are relying on Ascom and it's an impressive collection in the end and it's worldwide.

How are we doing this? It's not only that you described it as a health care platform, it's basically 3 parts. It's the software applications, it's hardware solutions and it's professional services or digital solutions.

If you look at the percentage is down there, you see that it's not yet basically 1/3, 1/3, 1/3, and this is something we have to work towards, that's what Daniel tried to show already in the figures. And there, we are basically standing, as a management team, to increase some of the parts in software and also professional services.

Let me look at some of the examples. If you go to the first part, software solutions, we have some actual projects, means like not things that are years ago. So we have a Digistat on the left side. It's the Roma University Hospital, where we are doing lots of work, and we have for this solution already over 100 installations globally.

On the right side, you see the Unite, you see the complete workflow orchestration and alerting solution that we did in the Netherlands for Amphia And also there, it shows that this kind of solution we can start to implement on a global level, but these are larger projects need really concentration.

If you look on the hardware side, then we have hardware solutions with the Ascom Myco 3. We have a successful launch in the first half year, and we already were capable to win some larger orders in the U.K., and Myco 3 will become the standard device for staffing over 1,000 care homes in the U.K.

This is basically a start with something we launched in the first half year, and there are a lot of so-called proof of concepts in other hospitals and care centers where we are going to work with Myco 3 with our customers.

If you look on the right side, you see the platform solution Telligence, that's our patient information system. It's -- not patient information, patient system, and it's very important to mention this because it's developing out of a so-called Nurse Call Systems that you all know, and we were talking about this a long time, but it's going more and more and more solutions that are integrated there and that are helping the care staff basically to deliver proper service in a decent time. Some brands, and we mentioned down there this is something that's mainly in the U.S., but will be provided worldwide as well.

And now we come to the third part, it's basically digital hospital, that's where I mentioned professional services, but also digital solution. I took here the Humber River Hospital as one of the examples because Ascom is an important communication and integration partner within this Humber River Hospital, and it is very important that you see that their integration plays a big role.

If you look at this picture, and I want this on this chart because it's a mission control center. And in the beginning, when I was there, I entered this room and I felt like I'm somewhere in a control center at Swiss Railways or telecommunication overview because it's basically the same thing. It's just different content. And the thing is that this kind of digitalization is basically coming now, and it's successful, therefore, also a lighthouse project because there are many hospitals worldwide that are working exactly on same solutions. They all have the same kind of boundaries. They do struggle with financial problems, and they do want to bring the costs per patient down. And these are one of the -- is one of the things they all are starting to implement. And we are there and we have the expertise to do this. Good. But this sounds now very nice and you, for sure, asking yourselves, but why are they where they are. And I want to show you a bit in the third part what are the initiatives that are going on that we can really move moving forward.

As a reminder, the Ascom fundamentals, we have a leadership position in the clinical workflow solution market. We also have a track record in innovation. We have clear growth opportunities across our solution and geographies. And there is a significant potential to deliver on larger and more complex projects and margin improvement opportunities there are, I can tell you, but you see a picture that we were showing you in March as well.

If we look at the transformation that we are in the middle, this transformation still needs effort. We invested a lot in the foundations. And yes, I can say, together with the management team there, we are there. We are in the middle of enabling, but the accelerating still needs a lot of effort that has to be done by the management team of ASCO, and there also lays our main priority and that's what we are stating today.

We have basically inside-out and outside-in 2 bundles of initiatives going on for the H2 2019. On one hand, we have to return to industry grow and stronger sustainable profitability. How do we do this because this is easy said, but it's not so easy to do. We are realigning the organization. We have to be a bit more standardized in delivery and go to market, but we also have to strengthen our management team. At -- I might introduce, at this moment, somebody that is basically I have also announced yesterday, it's Dominik Maurer. He is going to be, from the 10th of October on, our new CFO. Dominik, where are you? Stand up, please. So you see him in person, and he is going to start with us in October. I'm really happy that we could find him. He has a broad international expertise, and I know that he can be very hands-on. Thanks a lot, Dominik, for coming and basically sharing this with us.

Second thing. Bundle of initiatives is that we have to align our cost base. We not only have to come back on the industry benchmarks. We also have to reduce the complexity. We're in the middle of transformation to so-called one company, but we also have to act as one company because if Ascom wants to be the speedboat that we claim to be, then we really have to act there.

Second bundle of initiatives, we have to look also on the outside. From a strategy standpoint, focused evaluation of strategic options with the support of experienced adviser is kicked off. We also have to take into determination further partnerships. This is very important because it's going on different sites. There are additional strategic alliances we have to have because being a speedboat globally only helps you if you have strong alliances. We need sales partnerships, and we also need delivery partnerships, and this is very important.

If you do not want to implement that all 100% yourself and being a very large and heavy company, then you need this and you need it locally and not only globally.

In the interest of our shareholders, it is mainly that we have basically also a set of stakeholders. It's not only important for our customers, and some of them called me already in the last 10 days and approached us and I talked with them. It's also for our employees, but mainly for you all for our shareholders that we want to put a lot of emphasis now on these initiatives to really fulfill whatever we have promised in the past.

To sum it up, Ascom is a strong player in the health care ICT market. First point, Ascom operates in several exciting and growing markets in Healthcare and Enterprise solutions. This is -- I hope I could show you that.

Second, we are the only player with global presence and a comprehensive product portfolio, also that I tried to show you with some project examples.

Third, our innovation pipeline is full, and our platform solutions drive significant value for our customers, also that is something I tried to show you.

We are in the middle of significant transformation process and have taken decision action to achieve our goals. This is important. And for me, as I stand here, I can tell you that we are -- me, the Board and also the Executive Committee, we are taking the responsibly to do so.

Therefore, I have to admit that from a current point of view, Ascom will not achieve the targets 2019 as you saw in the press release already as communicated. The group is expected to achieve net revenue of about CHF 300 million with a high single-digit EBITDA margin as a base case.

And hopefully, we can surprise you for once, maybe on the other side. I'm looking forward to present to you more specific information about our initiatives on our next event, and I have it screened up here, Ascom Investors Day, 7th November 2019. Whenever there is something to communicate public, then we will do also before that date.

And now I'm ready with the team, and I want to introduce to you, André Neu, our CTO, please come on deck; Claes Ödman, he is our COO; and Francis Schmeer, our Chief Sales Officer, that's how it's called. They're all C level basically. They are coming on stage, and we are ready to take your questions and hopefully find answers to these questions. Thank you very much for listening, and thank you for being here.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [4]

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Ladies and gentlemen, we are coming now to the Q&A. As I said already in previous events, of course, it's also possible to ask a question in German, if you prefer this. Mr. Müller, please.

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Questions and Answers

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Andreas Müller, Zürcher Kantonalbank, Research Division - Research Analyst [1]

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Andreas Müller from ZKB. Can you be a bit more specific on where you want to decline the cost base or to reduce basically the increase in costs? And how related is that to the partnerships? I mean is that a means to reduce the cost? Or are they completely independent, so you would on top of reducing the cost or independently look for new partnerships? It's the first question.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [2]

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Okay. Two questions. Number one, we have to decline the cost base, and number two, how is this related to partnerships?

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [3]

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Okay. I think I take it. If you look at the costs, whatever I could find out in this short time, there are several areas where we are not in an industry benchmark, means like industry benchmark is not only that we take the ICT health care market, but we take the ICT market, in general, which I know quite well. And we are taking basically benchmarks in how many -- how much in IT costs you must have, how much in sales cost, how much back office, et cetera, et cetera. It's these kind of things. It's basically that the kind of homework you have to do, if you really look into costs.

And the second question was how do this partnership kick in there? If you look at, for example, the sales costs you have, partnerships are quite important because if you look at the channels that we have, we really have to toggle very, very clever between doing things direct, but also doing things indirect. And this -- there, you have an impact on costs, quite important.

Second thing is, if you look at delivery models, there, you have an impact as well. Partnerships, local partnerships with IT boutiques in some of the countries for integration business help you a lot in basically having more variable costs instead of having fixed costs in your company, and you know that this can have a huge impact.

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Andreas Müller, Zürcher Kantonalbank, Research Division - Research Analyst [4]

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Okay. And my last question on the strategic options, I mean, can you outline here a bit? I mean what's in the focus would that -- just elaborate a bit on that one.

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [5]

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Yes. The only thing I can say is that if you are in such a situation, the company is always not only obliged, but you also want to do this to really check on all the options there are. And it is not possible at the moment to say what specific the point because the Board and also the Executive Committees in the middle of evaluating in what direction it might go. And that's the reason why I have to ask you for some patience because I did not have a hell of a lot of time until now to start this process, sorry.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [6]

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Thank you. Mr. Iffert, please.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [7]

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Two, please. The first one is on the Healthcare organic sales growth, which I think was down 3%, 4%. What are you exactly doing to reach the turnaround here to bring it back to market growth rates? You introduced a couple of new products recently. You strengthened your sales team. So what incrementally can you really do, if you could provide us 2, 3 visible examples?

And the second question is, please, you mentioned your market growth rates are around 10%. Can you name us the competitors where you lost projects where you had a bidding process? So who is gaining market share versus Ascom? And what do you think were the reasons here?

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [8]

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Okay. I would say, Francis, this is your...

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Francis Schmeer, Ascom Holding AG - Chief Sales & Marketing Officer and Member of the Executive Board [9]

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Quite reasonable questions. On the Healthcare side, I want to stress first and this is related to both your first and the second part of your question is that projects have been delayed. So receiving the orders for certain projects have been delayed due to longer sales cycles, longer proof-of-concept times, longer certification cycles of the hospitals. That relates to your question in 2 ways. One is the Healthcare market, as we know, is still strong. Secondly, our product offering, we're convinced and the portfolio we have is leading and quite valued.

Then it comes to the sales cycles, which have been extended delaying orders. So we actually haven't lost many of these deals to competition. It's the negotiation decisions of the hospitals and the early care facilities that we work with to accelerate and pull those orders in.

I think the other part of your question was very much what concretely are we doing? You're right, we do have new excellent products. Myco 3, for an example, which we received the largest-ever smart -- Ascom smartphone order this year. We've won a number of actually leading flagship companies -- hospitals, Woodlands in Singapore; Cleveland Clinic, which is quite a prominent American chain. We're actually winning quite significantly as I spearhead their gains into Europe. So the wins are coming. So what are we specifically doing? We are making sure that we drive each POC, each test of Myco 3, of Telligence 6, of our other products on its hands-on as a matter as possible to accelerate those POCs and to ensure that the moment they are secured, we are driving the orders. And therefore, the second part, which relates to the revenue, ensuring our delivery and support teams are ready to go and to execute that.

So if I step back, Healthcare market strong. We have the right products. We have many good people, not only in sales, but in marketing, support and service. It's a matter of us getting the rubber on the road, driving the POCs and making sure that once those POCs are done, we are ready to deliver on the installations, which then drive the revenue. So I'll pause there.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [10]

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Okay. And I understand that the project delays impacting revenues, but orders were also weak. Just, in general, can you name us 3, 4 or 5 key competitors you are seeing in Europe for your Healthcare business?

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Francis Schmeer, Ascom Holding AG - Chief Sales & Marketing Officer and Member of the Executive Board [11]

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On orders in the Healthcare, it's important to also note, as the Ascom orders, as Daniel pointed out earlier, OEM was a significant negative impact on our entire order book as a company. In fact, the regions grew by close to 1%. So if we decompose that and look at the regional sales, orders not to my liking, but still in a positive direction.

In terms of competition, we face competition as many of you who followed us are quite aware, we face competition on a local basis. So in the United States, of course, we still compete against Hillrom, Rauland-Borg on the Nurse Call side. We compete against Vocera on certain software application side. Yet, in Europe, we face a different competitive set. We do not run into those players. In Europe, we run in much more local players on the Nurse Call Mobility side.

Spectra Link on the mobility side would be one of the few that we see on a global basis from the handset side.

So top 4, 5 competitors, again that differs very much market to market. On a global basis, we are top 3 in Nurse Call. We remain one of the -- if not, the largest enterprise mobile phone manufacturer. And from a software perspective, we are seeing as the leading value proposition for software, although the competition we face in Europe will be different from who we see in the United States.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [12]

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Tobias Fahrenholz, please?

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [13]

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Tobias Fahrenholz from MainFirst. Could we speak a bit about your initiatives? What kind of one-offs do we have to expect here for cost alignment and consulting? Could you quantify here maybe the net benefits you're seeing in the second half of 2019 and 2020? Would be my first question.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [14]

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Okay.

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [15]

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It is a bit too early because if you ask me what we really could do with the benchmark, the figure differs about CHF 50 million per year cost base. And I have to tell you that I need some time to investigate this to give you an exact figure because this would be apparent is that -- is a bit too far, and I do not want to overpromise here. But what we can see is that we have substantial costs that we've been taking out -- we are taking out of the organization.

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Tobias Fahrenholz, MainFirst Bank AG, Research Division - Director [16]

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Good. And then secondly, on your mid- to long-term targets, you were formally speaking about mid-single-digit growth, EBITDA converting to 20%. You haven't mentioned it now. Have these targets been canceled now completely or do you just need a little bit of more time? And do you think that you might comment on this maybe at the Investor Day?

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [17]

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Yes. Also not something that I can tell you an exact date, but this is something that we are investigating now very carefully, and we will come up with the information as soon as possible, but we'll not basically tell you that we are not going to reach it.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [18]

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Okay. Other questions? Reto Huber.

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Reto Huber, Research Partners AG - Senior Analyst [19]

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Basically, 2 questions. First one, those project delays that you've mentioned, where can I allocate them to regionally or are they mainly in North America, where I find is -- was rather bit disappointing? Or is it elsewhere?

And then secondly, this potential merger between your OEM customers, what impact is that going to have on your future business with them?

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [20]

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I think Claes, you may say something to these 2 questions. On OEM, yes, and then maybe to the first one, yes.

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Claes Ödman, Ascom Holding AG - COO & Member of the Executive Board [21]

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Let me respond on OEM. I'm not sure what potential merger you referred to, maybe we start, if you can clarify.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [22]

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I think he is thinking about potential merger between Avaya and Mitel.

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Claes Ödman, Ascom Holding AG - COO & Member of the Executive Board [23]

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And I don't -- if that happens, I wouldn't expect that to have any major impact. It's a potential opportunity for us. We are, I would say, almost sole supplier to Avaya. With Mitel, we are their only external supplier when it comes to enterprise mobility. So I see it as an opportunity.

Maybe I comment a bit on the OEM business in general because, clearly, there's been a dramatic drop in H1. And if we look at that market overall, enterprise mobility, where, of course, we are also active with our own branded devices. It's essentially performing relatively well. It's flat to slightly increasing in terms of number of units shipped. So the reason for the adjustment we had in H1 is mainly because of changes in purchasing and stock patterns with our customers. So one-off effects essentially.

And as I said, we remain a supplier to Avaya, Mitel, Alcatel-Lucent, Unify, all the major PBX and unified communication suppliers.

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [24]

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The first question, sorry.

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Francis Schmeer, Ascom Holding AG - Chief Sales & Marketing Officer and Member of the Executive Board [25]

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Delays as you've seen from the presentation on the net revenue by regions, we had the 2 largest regions that were impacted by the delivery delays and somewhat order delays was actually Benelux and Nordics. Hence, the sharp decrease in the net revenue for that period. Again, not losses, delays to either orders and/or extended delivery cycles on that.

Now regarding North America, there were some slight delays. But if we step back for a second, you remember, 2018 was a significant year of change for us in the United States. We put in a new managing director, revamped the go-to-market channels and revamped the number of the sales force, including changing our go-to-market structure by including more IDN and more and different indirect partners. So 2018 was quite a significant year of changing the actual go to market. We are finalizing that. We have made gains. You will see in the net revenue, which decreased by about $1.4 million -- 1.4% on a constant currency basis, which you wouldn't have seen as the following. We did have, I'd say, decent to solid orders growth, and that's driven by the fact we have received, as many of you may know as well, certification from Epic, the United States largest EMR provider, which allows us to participate very quickly with them in their installed base on our mobile devices. We announced that, I believe, sometime in May. So we are seeing that take off now that it is certified by that EMR player.

Furthermore, we've made pretty strong gains with the largest IDN player in the United States. I'm not able to disclose that, but we have made strong gains on the software side with IDNs, again per the American strategy we outlined in November of last year. So although I'm certainly not happy with the speed, I do see the very positive aspects when EMR players like Epic certify your products, when IDNs start bringing your software across your entire -- their entire national hospital chains, we know we're in the right path, and I'm confident of a solid progress for the United States.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [26]

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Thank you, Francis. Then you have a question (inaudible)

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Unidentified Analyst, [27]

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(foreign language)

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [28]

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(foreign language)

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [29]

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Okay. Mr. (inaudible)

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [30]

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It is worth to note, straight on the chair over next.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [31]

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Next question, [Neil Molonza], please.

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Unidentified Analyst, [32]

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[Neil Molonza from Citic Capital]. [Annheart] took my question. I was on the same lane. What's really wrong? And you told about the complexity in the company. So give us some examples. You come from the outside, what is too complex, give us some examples where sales support is missing and why those projects are not delivered in time and that customer satisfaction?

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [33]

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Yes. On one hand, you have -- I can choose the kind of like a generic answer to that what's my experience because I have quite some experience with country organizations from my earlier time before I joined the Swiss Railways. On one hand, you have so-called local specialties you always have to cover. That said that's what you really have to do in the market. But on the other hand, you have a lot of processes in your company that are like business operation guidelines that you can do globally the same. And I think there, we are not at the point yet. And I can say this because I took the time in the first half year to really visit some of the regions. And I must say, if you have a lot of sub-optimized units, it's not as a whole thing optimized as well. And that's the reason why we have to bring some or take out some complexity out of the company. That said -- sorry, it's a generic answer because I do not want to accuse anybody here now, I still need some more information about this.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [34]

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Yes. (inaudible)

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Unidentified Analyst, [35]

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Could you please describe the skillset and requirements needed of the new CEO? I mean, especially, in the context of what is missing in the go-to-market kind of weakness? And maybe the -- describe the process...

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [36]

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Yes. You're asking me whether it is my skillset to do this?

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Unidentified Analyst, [37]

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No, not your skillset, the skillset of the future CEO.

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [38]

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Yes. Okay. So...

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Unidentified Analyst, [39]

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Maybe describe the process where we're in and when do you envisage being able or in a position to announce that new person?

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [40]

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That's exactly what the Board is putting a lot of energy in. At the moment that I can say, I think one of my colleagues is here, he can assure you that we are putting a lot of emphasis in. On one hand, I showed you that we have a strong software side, we have a hardware side, but also we have professional services in the ICT area. And as a fourth factor that is very important is basically industry know-how and you need basically skills in all these 4 levels and you have to know how you have to manage international business in that sense.

And let's say, like this, sometimes you have to be also personality that can really inspire because people are following you, if you are really the personality to inspire the whole thing and that's a very important prerequisite. You also have to not only inspire, but fulfill against your shareholders. This is a very important, I would say, a summary of the skillset that we are expecting.

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Unidentified Analyst, [41]

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Do you envisage changing the Board composition as well since most of the Board members have been part of the last couple of years and are basically responsible for the situation we're in today?

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [42]

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I think this is not the question I can answer here now, but the Board is taking the responsibility now when we will discuss this very carefully.

There is a question back there.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [43]

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Yes. Please?

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Michael Foeth, Bank Vontobel AG, Research Division - Head of Industrials Team [44]

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Yes, Michael Foeth, Bank Vontobel. I have a question. You've increased your FTEs by around 6%. I was wondering where did you add people specifically?

And the second question would be, in the event that you lose projects or bids against competitors, what are the key reasons for them winning the project over you? And what can you do to or what are you doing to address those problems?

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [45]

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Thank you. I think our CTO, André, is answering this question.

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André Neu, Ascom Holding AG - CTO [46]

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So first question was on the FTE increase. This is largely professional services and R&D. Now with that said, if you look at the numbers, you can see that our R&D cost has actually declined and that has the effect of the near-shoring that I have discussed with you a little while back, probably 1.5 years ago when we engaged with our near-shoring facility in Romania. So we have less cost, but we have more people working towards the solution portfolio that we have.

And the second question was on the competitors.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [47]

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If we lose, why we're losing?

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Francis Schmeer, Ascom Holding AG - Chief Sales & Marketing Officer and Member of the Executive Board [48]

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(inaudible) the technical reasons and you and I can share some of the market reasons (inaudible).

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André Neu, Ascom Holding AG - CTO [49]

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I think we've discussed the challenges that we have in the professional services area around execution, and that is something that we must improve. Now quite honestly, I'm not aware of significant losses towards any competitor globally or a loss of market share or something of the like. It is a fairly long sales cycle that we are dealing with, especially in the area of Healthcare. And we need to be able to demonstrate with lighthouse and solutions that we have and that we are growing that we have the ability to deliver and see these projects grow.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [50]

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Francis, something to add?

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Francis Schmeer, Ascom Holding AG - Chief Sales & Marketing Officer and Member of the Executive Board [51]

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When we do deal loss analysis, oftentimes, what I am looking at more is why our deals not being pulled in faster, why the orders not being closed faster and that oftentimes relates to also the customer purchasing pattern. Give you an example of this, someone asked for a specific example, I'll try to be explicit and confidential at the same time. As an example of why orders do get delayed, I have a multi-small number of million order, large hospital project, I won't name the country or the client. It's started off at half the size and value. We continued negotiating and continued exploring and exposing the great value propositions we developed, and that value grew from 1x to 2x. As it cost that 2x barrier, it no longer became a departmental head purchasing decision, it became a client Board of Directors purchasing decision, which then delayed the closure of this opportunity by 2 months pushing that opportunity from H1 into H2.

So I just want to be explicit when we say that there are orders that are delayed, it's not necessarily only because of Ascom, it is a market dynamic. We're not alone in this market. We're not alone in trying to drive these sales cycles for these types of technologies. So I just wanted to give explicit positive example about why sometimes orders themselves are pushed off.

From a loss perspective, we -- I would suggest rarely lose on a feature functionality basis. We have excellent products. That's recognized from the clients. We have some of the leading CTOs and CEOs of the clients you've seen on this presentation tell us if you don't build another thing, you're still market-leading for the next year or so. Our products are good. They're recognized, they're respected by the users, by the client purchasing people as well as the C level.

Where we sometimes struggle is fighting in incumbent and an installed base. Some of our products have 10-year life cycles. And if we're trying to replace, simple example, a competitor in a Nurse Call System, who has been there for 10 years, they will have been there for 10 years building the relationship, being deeply installed into the hospital, having the right political leverage within the sales or the purchasing committee to be able to protect Ascom from winning.

Now the fact is we do beat those types of installed bases and we do it often, but that's an important factor. We don't always do new build hospitals from the ground up. We show you those are our flagships. We're quite good at those, and we win quite a lot. A lot of our business is beating incumbent competition. And when you're beating incumbent competition, you are always at a disadvantage from the relationship perspective, even if you have the best technology, the best features and functionality and very good salespeople. So that's one of the factors why sometimes we may lose a deal, and I'll give you an example -- a positive example as to why sometimes orders are delayed. So again, I'll pause there. André, would you like to conclude if anything on that?

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André Neu, Ascom Holding AG - CTO [52]

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Yes. So there is one aspect around the technology that you mentioned where I'd like to point out that our value proposition is very sophisticated in this market, and it's very, very compelling. And we definitely have an advantage and an edge over the competition. That is very hard to copy. So if you put it all together, it's very compelling. But even in the individual segments, I think it's safe to say we have the best Nurse Call System in the world. We have the best mobile value proposition, and we have, by far, the best medical device interfacing.

So from a portfolio perspective, we are actually in a very, very good position, and it's very hard for others to catch up to them.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [53]

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Okay. Then, Mr. (inaudible) please?

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Unidentified Analyst, [54]

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You were stressing the very long sales cycles that those projects take. At the same time, every time there is a closing, it's rather modest single million digit projects that are being taken in. What is the potential if you may start talking to other people at the hospitals that those projects gain in volume and that you don't have to spend very long sales cycles on very small projects and instead invest this time on more volume?

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [55]

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Do you want?

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Francis Schmeer, Ascom Holding AG - Chief Sales & Marketing Officer and Member of the Executive Board [56]

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If I -- let me try to repeat what I believe the question is, you're asking why don't we focus on the very big deals as opposed to a volume run of deals, is that effectively the question? I'm trying to make sure I have that right. Okay. The -- I'll start and then André and Claes will step into this as well.

As you know -- let me start from the Ascom Healthcare Platform perspective. When we say this is the Ascom Healthcare Platform that provides workflow solutions, efficiency, cost savings, better customer -- better patient care for the hospitals, remember, when we described this platform, that's the aggregation of our product set. We don't always sell that platform. When we do sell that entire platform, we are talking very large deals.

Now we can only sell that platform to a hospital that's in a position to at one go take the entire platform at once. For example, Woodlands Hospital, which is the newest flagship hospital built by the government of Singapore, our healthcare platform is there. Amphia in the Benelux, our entire healthcare platform there, and these are quite large deals. There is a percentage therefore of hospitals globally who are prepared to take the entire platform at once. So the majority of our business -- although we're doing more and more of those entire platform deals, the majority of our business is we go and we sell a Nurse Call System to hospital X in Kenton Y. Those, by nature, are important to sell because that's volume, it's margin, it's also stepping into that hospital to develop that relationship that you can grow from because the second part of our business isn't just the flagships, it's just not the individual products, it's stepping in and developing a strategic sales road map with that client. So in year 1, you sell Nurse Call; year 2, you sell Nurse Call plus medical device integration.

So although those volumes, as you say, may not be tens of millions each, in aggregate over the lifestyle of a customer, they build up to the revenue profile we want and the margin profile we want. That's the business we are. And I'll pause there and André and Claes put your comments as well.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [57]

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Do you have something to add...

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André Neu, Ascom Holding AG - CTO [58]

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Yes. Definitely, so there was also, earlier, other question on where do we need to get better and that is definitely an element around -- there is an element around key account management. So nobody wakes up in the morning or rarely the Hospital CIO wakes up in the morning, wanting to buy the entire platform unless they have to equip a fully new facility like in the examples that Francis mentioned, but more often than not, it's actually specific problem that is being addressed. And then we come in there, and we can grow the footprint that we have in there with a good key account management.

Now on the other side of this, we are accompanying this from an R&D perspective by building adjacent value propositions to what we have in the installed base, so that we continue to have something new that we can offer to these customers and an installed base.

And across Healthcare, that is actually a very typical business model that we see. Now over time as the clinical workflow solutions become more and more of a standard set and probably the horizon for that is a couple of years, then we're likely to see larger transactions right from the get-go. But at this point in time, it's more solving a specific problem and when we have the platform, and they're adding on to that or expanding the reach of that solution.

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Claes Ödman, Ascom Holding AG - COO & Member of the Executive Board [59]

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And we see that with those, I think, as pinpointed out, we have large clients where we are still in the, let's say, early in the joint learning curve where they contribute these lighthouses and that brings new clients on board in that region or in that country like we've had with Erasmus in Netherlands or Sengkang in Singapore. And we also see in Scandinavia that purchasing is moving from hospital by hospital to whole regions or Lansing making procurement for groups of hospitals and starting in one and then expanding from that into the entire region.

We've seen that with Nya Karolinska or with (inaudible) in Denmark, and we see it in Norway as well. I think what you -- what's behind your question is, in the sense, already happening.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [60]

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Thank you. Any further questions. Mr. Iffert, round 2.

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Jörn Iffert, UBS Investment Bank, Research Division - Director and Analyst [61]

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Number one, you mentioned professional services is also suffering our execution. Is this also affecting your lighthouse projects you have won over the last 2 years that execution is insufficient during the implementation? This would be the first question.

And the second question in terms of partnerships being from your side proactive rather than selling the company. What do you think really can be game-changing partnerships to you which is realistic?

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [62]

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Okay. How shall we start, you will talk about partnerships, you want to start with the professional services?

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Francis Schmeer, Ascom Holding AG - Chief Sales & Marketing Officer and Member of the Executive Board [63]

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I can start, Dan. I'd say -- I mean, as I exemplified earlier, we've had a number of large lighthouse projects like Nya Karolinska, (inaudible) Sengkang, Erasmus, where we've been moving up the learning curve, together with our customers. I'd say that our professional services capabilities are improving. We're improving the quality in our delivery, and we are improving the speed in our delivery. We are still not where we want to be, but the main focus that we need to have now moving forward is to improve productivity, improve profitability, making sure, one, as I said, we are productive and also making sure that we capture the full value of our delivery in the commercial setup with the customer.

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [64]

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Okay. I try to answer the question on the partnerships. As I presented before, there are 3 different areas we are looking in. The one is really strategic alliances. And there could be game changers because it depends on -- if you want to be a speedboat, sometimes you need, I don't know how you can call it, but we need a huge gas station vary from time to time, have more energy, more connections, more basically market or different projects that are going on. Therefore, strategic alliances are a very, very important thing to explore for us.

The second is sales partnerships. This is clear that is something I tried to explain, it's not only that we have to figure out how we do this on our own, means like they were mentioning account management, et cetera, but also how fast we can move with -- together with others. And this has, again, to do with sales cycles, et cetera, et cetera.

And the third area is really kind of like delivery partnerships. And the game changer could be, if you find companies that are supporting you, maybe, in several countries to really help and that you really basically have solid partnerships in new regions where you can not only have to discuss for each project from scratch, but establish partnerships, and this really helps. I know this out of our own -- my own experience that I did that there can be a game changer for a company because as a speedboat, you have to concentrate on what you're doing in the market and not basically on hiring constantly new people that can fulfill IT projects because within ICT, you can see there is a -- there are a lot of different skills that are needed and there are skills that are basically more common and you can get many places and there are others where you have to concentrate your cellphone, where it's more the expertise you need so up the scale.

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Daniel Lack, Ascom Holding AG - Company Secretary and Senior VP of Legal, Communications & IR [65]

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Are there any further questions? Otherwise, I think we come to the end of the Q&A session. We invite you here to the little up a row, and I ask the journalist just to contact. Mrs. [Bern], so she can make a list of you and then we can make one entry after the other. And so I hand back to Jeannine.

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Jeannine Pilloud, Ascom Holding AG - Chairperson & Acting CEO [66]

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Thank you for being here, listening to us, having the patience really to listen to all the points. I hope really that I can bring you more and more detailed information on our Investor Day, the 7th of November, looking very much forward meeting you there. Thank you.