adesso SE (ADN1) Earnings Call Transcript & Summary

Good morning, everybody. This is Martin Mollmann of adesso IR speaking. First of all, I'd like to thank you for joining our Q1 earnings call regarding our quarterly statement we have published today. Within our release this morning, you found adesso once again showing above-average organic growth of 11% in sales to EUR 353.4 million. This is exceptional in a macroeconomic environment such as the recent one. The operating result was on previous year's level with EUR 17.8 million. This is partly due to the known burdens from the product business, which should improve from the second half of the year. I'd now like to welcome as well our CFO, Michael Knopp, who will give us a deeper insight into the figures of the first quarter and the outlook for the remainder of the current year. [Operator Instructions] Thank you so far, and Michael, please, your turn.

Thank you, Martin, and good morning, everybody, also from my side. Very happy that you are interested in our Q1 figures, which we have published this morning. Yes, Martin already mentioned it, we are really happy about the development of our sales in Q1 2025, an increase of 11% to EUR 353 million is a very nice result. It's much better than the market and the figures we have seen from most our competitors and peers. And it's also important to highlight, it's almost entirely organic. So no M&A impact there. It's really organic growth. And please keep in mind, I mean, we are -- adesso is a company which generates more than 80% of the revenues in Germany. And Germany is still in a difficult economic environment. It's probably the third year of a recession in a row. Gross domestic product was shrinking in 2023 and 2024. And for 2025, it looks much better. And in such a difficult environment, being able to grow the business by 11%, this is really a great figure, and we are really happy about that. If we look at the development of our headcount, headcount has grown year-over-year by 5% to 10,461 employees, which is an increase of 535 employees. So we are still adding headcount. We are still growing our headcount, but we do it much more cautiously as we have done it in the past. Let's have a look at the split of our sales. And this slide, I would like to start with the explanation that we are highly diversified. So there is no sector which contributes more than 20%. The most important 10 customers contribute a little bit more than 20% in this quarter and the most important customer, a little bit more than 3%. So we are highly diversified. We are not dependent on a single sector or a single customer. And I think that's a very good positioning. If we look at the different sectors, let's start with the overall statement. All the sectors were growing, except for automotive. And actually, this is not really surprising because our automotive industry in Germany is in a very difficult environment. It's struggling. And therefore, to see a slight decrease here is not really surprising. Manufacturing, still growing with 6%. Financial services, insurance banking growing as well. Insurance without any significant license sales, similar to last year. License sales is something we expect in the second half of the year. If we look at utilities and health, these are the 2 sectors which are continuing this wonderful growth, 37% for health, 25% for utilities: Health driven by our bread and butter business, so nothing special in there; Utilities, driven by the strong market position for SAP in this sector. We are probably one of the market leader in this, and this shows up in the development of our revenues there. And last but not least, our most important sector at the moment is Public. Public growing by 11%. That's a nice growth rate. If we look last year, for the whole year, it was 12%. But we still see that budgets are shifted, budgets are delayed. So after the German election, the new coalition needed to be formed. And we believe that there's much more possible and should be possible, and we will hopefully see this in the second half of the year. In addition, we believe that this will also have a positive impact that the government has set up additional spending budget for the armed forces and the infrastructure, which should give an additional push for next year. So 11% is nice, but there is more possible and should be possible in the future. If we look at sales by region, on the first view, it looks a little bit boring because not too much change. If we look at the split by region, 84% for Germany. But actually, I think that's surprising. I mean, it's already our most important market, and we have a very important positioning there, but we were able to grow the revenue there by 13% even more than what we have seen for the whole group. In addition, Austria, Netherlands, Italy, Turkey, 4 foreign countries, which have shown a very nice growth in revenues. For Turkey, I need to add that this is only the revenue which is generated in Turkey itself. So if you have shoring and which at the end shows up in Germany, this is not included here. Switzerland, a little bit less than what we have seen last year. However, this is nothing special in there. It's just a thing of cutoff at the moment. Let's take a look at the earnings. And as Martin already pointed out, on the first view, it's only a growth of 1%. We stay at EUR 17.8 million. However, it's important to consider that last year, earnings got a significant contribution on a reversal of accruals for warranties, which was a result of the tax audit, which was finalized a little bit earlier at that time. So if we exclude this, it's a very nice increase as well. It was mainly driven by an improved capacity utilization. And what was also important, we have what I've already shown you some slides ago, headcount grew by 5%, revenue grew by 11%. So we also have some more material cost because we used a little bit more external staff than in the past year. If we look at the development of our EBITDA margin, revenue grew by 11% and EBITDA only by 1%. So the margin, that's just mathematics, has a little bit decreased to 5.1%, but that's, I think, a normal development if we look at Q1. Personnel costs, if we look at the different position of our P&L have increased by 9%. That's a typical development in Q1, partially driven by more staff. We have hired 535 people since last year. And in addition, we have seen the normal salary increases. So also nothing special in there. Other operating expenses slightly higher, mainly because of hiring expenses, which were slightly higher; marketing expenses, slightly higher; and travel expenses, external consultancy and legal fees a little bit lower. What are the main profit drivers and how did they develop? The most important one, probably the first 2 ones in this line. Utilization has increased. We already started in January better than last year and February and March were little bit more improved compared to last year. So also very good trend so far. And at least April, what we see is also better than what we have seen last year. So that's fine. Daily rates have improved. We are working continuously on that, looking through our contracts, optimizing our projects. So that's also a positive development. License maintenance was flat. There was not much in last year. Same applies to this year. Personnel costs per employee have increased by 3%. However, if we look at the gross profit contribution by employee, it increased by 4%. So in total, this cost item is also fine -- the development of this cost item is also fine. If we look at the earnings per share, earnings per share, minus EUR 0.54 compared to EUR 0.49 last year. If we look at the P&L, EBITDA flat, depreciation slightly higher. So earnings before taxes also a little bit less than last year. Income taxes, a little bit less because the tax rate is lower. 79% is still pretty high compared to the 33% we normally should have. As always, there are certain expenses which are not tax deductible and some companies contributed a negative result and not all the deferred -- the loss -- net operating losses were put as a deferred taxes on our balance sheet. Let's have a look at some other key figures on our balance sheet. Cash is almost the same compared to March last year. Financial debt has increased. The same -- net debt has increased. It's around about EUR 20 million. There are 2 main reasons for that. At the beginning of this year, we have increased our shareholding in KIWI from 70% to 100%, same with Adesso Orange, now a digital business consulting. We also raised our shareholding from 71% to 100%. Related to that, we have seen a cash out of EUR 27 million. In addition, we have done a share buyback in Q4 and Q1. So this was another EUR 10 million. So in total, EUR 37 million cash outs, which are not related to the operating business. And if you look at the increase of net debt, it's EUR 20 million. So a part of that could be -- of this EUR 37 million could be covered by operating cash flow and the other shows up as an increase of net debt. Net working capital, a little bit higher. However, if we consider the increase in revenues of 11%, net working capital only 3% higher. So that's, I think, fine as well, could be better, sure, but it's still okay. And equity ratio, a little bit lower impacted this year by the loss -- after-tax loss and also by the share buyback, which is deducted from the equity. Let's have a look at the operating cash flow. Operating cash flow is lower, and that's probably something which is not that nice, but it's a question of cutoff. We have more contract assets this year on our balance sheet, it's EUR 19 million, and this more or less explains this development. As always, these contract assets will be reduced in Q2, Q3 and the following months. So that's normal despite the fact that this increase isn't that nice. So cash -- free cash flow is negative, but that's the normal development we always see in Q1 and probably also in Q2. And then in Q3 and Q4, this turns around. I need to highlight that we do factoring. Factoring last year was EUR 52 million. This compares to EUR 57 million in the first quarter of 2025. So let's have a look at our guidance. I mean our market demand for our services is still high despite the difficult environment. So this at the beginning, gives us a positive perspective. We will see an improved margin because our utilization will be higher, and we have already shown this in Q1 this year, and we will also have some reduced investments. So this is a very important piece and utilization is also higher because, as I pointed out, we still add staff. We hire people, but we do it a little bit more cautiously than in the past. So we avoid that utilization is going down because we add too fast, too many additional employees. If we look at the guidance in terms of sales, if you say we should achieve 25% of our contribution to the guidance in each quarter. Q1 fits perfectly between 24% and 26%. So that's fine. EBITDA is a little bit less, but that's normal. This also will be the case in Q2. One main reason for that is that the second half of this year will have 7 more working days, and this has a tremendous impact on our earnings. So this development is fine. And actually, it's exactly what we also have included in our budget. So it's -- we are on track. We -- therefore, we can confirm our guidance, guidance of EUR 1.35 billion to EUR 1.45 billion in revenues and also the range will be EBITDA, EUR 105 million to EUR 125 million. We believe that during the year, public sector will get some positive impacts from additional spending from the government. We are pretty optimistic regarding our SAP offering. And what's also important is our EBITDA margin because of the higher utilization, and we believe that we also -- with this regard, we will achieve our guidance, which says improvement there to 8% plus x. At the moment, we are totally on track. Thank you.

Thank you, Michael. And we'll now go ahead to the Q&A session, as you might know.

[Operator Instructions] Do we have questions at this point in time? Mr. Wolf from Warburg.

Congratulations on the strong top line performance. The first question is regarding the public sector. It grew quite nicely at 11%, but it seems like you expected or would have been prepared for even higher growth. Is that correct? As you're mentioning, some underutilization in this field. And at the same time, you had higher material expenses. I'm just trying to match that. So you were relying on more external expertise. I'm just wondering to what extent the internal capacity can be allocated to the different verticals that you have as obviously, there was a higher reliance on external expertise. So that's kind of question number one. Then question number two, it seems like the gross profit per head increased in Q1. And I'm just trying to match that with the higher material expenses, as usually, I would assume that the gross profit per head would usually then have a negative impact if material expenses increase. I'm just trying to understand this. Do we also have higher -- or to what extent did you increase daily rates? Let me ask the question this way, just to better understand what was going on in the first quarter.

Okay. I mean, public sector, an increase of 11% in revenues is a good figure. And if we look at the overall increase of our revenues, it's exactly in line. However, we all know that there is a lot to come. And so we are, let's say, despite this 11%, disappointed, maybe the wrong word, but more should have been possible. But due to the election and the shift of budgets pushed to a later stage this year, a higher increase in revenues wasn't possible. So that's more from this perspective. 11% it's a great figure, but we believe more is possible. And before there was this, let's say, change in government, if at the time we made the budget, we probably hoped that we will see this increase a little bit earlier. If we look at the material expenses, this is not related to a specific sector. It's just that we increased our employees, but the demand increased higher than the increase in employees. And please keep in mind, every person has a specific skill and you always need to find the right match. So even if you have some people which are not fully utilized, it doesn't mean that you always have the right skills sitting on the bench. And therefore, you will always need some material -- some external staff, which will show up in the material expenses. And if you look at the gross profit per head, I mean, you take the employees you have and then you compare it with the gross profit. So even if the contribution per head is, let's say -- if you use external staff, this helps also the gross profit per head.

Okay. Does it answer your questions, Mr. Wolf?

Yes.

Then we have more questions from Sven Sauer from Kepler Cheuvreux.

Just one question from my side. I was wondering how employee attrition developed in Q1?

Yes. It's still below 10%, somewhere at 8%. We have seen sometimes some -- a little bit lower rates, but we are still -- 8% is still a pretty good figure, especially if you look at the rates what you see with some of our competitors. So 8%, it's okay for us.

Do we have more questions? Mr. Sauer, again.

Yes. Actually, I do have one more question. I was wondering if the political turmoil in Turkey has any impact on your business there over the past couple of months?

No. I mean, so far, we are growing in Turkey because Turkey, first of all, we -- they have their local business, more than 300 employees are generating revenues for Turkey customers and the other 50% of the staff are used for shoring. So far, let me say it in these words, it was not part of our discussions internally. We have a revenue meeting -- with Turkey management meeting that the business is impacted by the political development. I mean Turkey in the last few years was always a little bit challenging, the environment, its high inflation, which is always not that easy to handle. But so far, we are -- we don't see any impact from that.

Mr. Wolf again.

Okay. A quick follow-up, if I may. Maybe on the IT Solutions business, could you speak a bit about the volume of the pipeline and the conversion that you expect towards H2? That would be helpful to better assess what H2 might look like?

Let me say it in these words, the pipeline looks much better than last year at the same time. So we are pretty optimistic that we can close some deals in the second half of this year. However, different to our IT services business, the whole thing is more digital. I mean it's not that you have a pipeline with dozens of significant deals in there. There are a few very nice deals in there. But at the end of the day, it's a yes or no decision. So it's very, very difficult to predict. But what I can say is the pipeline looks significantly better than what we have seen last year in Q1. So there should be some deals possible in the second half of the year.

And one further question regarding the contract assets that you mentioned during your presentation. As you pointed out, they've gone up. Is there any specific customer behavior which is expressed in this increase? So are clients asking for more fixed price contracts in this type of environment where at least for many other players, demand appears to be somewhat sluggish?

The contract assets are put together from 2 different items. One, normal time and material contracts where we already -- the time was already spent on the project, but we were not able to invoice it for technical reasons. Normally customer approves the time sheet before we send an invoice. So this has a little bit picked up. And the other reason are, it's right, related to fixed price projects. But actually, my view on this is more technical reason. There's no specific reason for that, that it increased. This will decrease over the year, similar to what we have seen in the past. That's not a trend or something special behind that.

And my last question, and then I'll go back into the queue. Could you comment also on SAP and how it has helped you to improve this overall process from the service delivery to invoicing, whether you see significant enhancements and if you expect this process to improve even further?

Yes. At the moment, we are still in the rollout. I mean we have rolled out SAP to the adesso SE, then we have continued to roll out to some of our subsidiaries. This rollout is still going on. And the other important thing and all the people who have ever worked with an SAP system are aware of that -- all the people who work with SAP are aware of that. SAP system is never finalized. You always need to continue to improve the processes. And actually, we are currently in this situation that we have SAP working, but there is a lot of room for improvement. So we are still going through the different processes, making things easier for our staff to make it better to handle, to be quicker. So it's a very nice tool and it's probably the best decision we could do for this finance area and all the other areas which work with the SAP system. But there's still a lot of room for improvement. And actually, it's pretty positive because this will have positive impact on our cost structure.

Then we have Dr. Jokobowski from SMC Research.

Great. Maybe you've already answered it. I had to reconnect again after I lost the connection. Could you give us some details on the utilization compared to the normal level? How far away are you still from this normal utilization? Or how much space for improvement do you still have in regards to the utilization? That's my first question.

The utilization is always a little bit different in the 4 quarters. So Q1 and Q2 is always a little bit -- you always normally see a little bit less utilization than in Q3 and Q4. But if we compare this year's Q1, it was much better than last year and also the year before that. The other important factor is always how many working days do you have and how many vacation you take. So that's why Q1 and Q2 are always a little bit weaker. You have less working days. You have more bridge days. You have Easter, you have seasonal part on all these special days. So that's why Q3 and Q4 throw in, let's say, not only a higher utilization, but also this utilization applies to more working days because you don't have the public holidays and less vacation.

Okay. Okay. But last year, in Q1, the utilization was really bad. So if you compare this year, the first quarter with, I don't know, 2 years ago or 3 years ago, is there still room for improvement?

It's comparably good. If you compare it with the last few years, it was really one of the better years, and it was a good start for us in 2025 and was much better than in 2024 or 2023.

Okay. Great. And then maybe you could give us some details on your activities in India. How are you doing there?

This year, we will increase our staff in India significantly. We are close to 200 people now and further increases are expected. This is -- I mean, so far, everything is going according to plan. It's -- we hire the staff and then we need to get them into our projects in Germany, Switzerland or somewhere else. And so far, everything is going according to plan, and we intend to increase our staff in the second half of this year further. So far, we are pretty happy with the development.

Okay. And the last one, if I may. If I saw it right, in your income statement, the minority interest was quite higher than last year. And taking into consideration that you bought the remaining shares in KIWI and Adesso Orange, I was assuming that the minority interest would sink this year. What was my mistake?

You're right. And yes and no. The mix in the minority interest has changed. Last year, part of the minority interest was KIWI and Business Consulting. This year, a major part is material.one and [indiscernible] and some other smaller companies. And the important difference is it's a minus this time, it's not plus. And because the 2 companies which would have contributed -- would have plus there, that's where we have increased our shareholding to 100%.

Do we have more questions from the audience? [Operator Instructions] No more questions. Then I'd like to thank you very much for your participation in our call today and your interest. I wish you all the best and hope to see you in person soon, maybe on the German Spring Conference tomorrow or other occasions. Thank you. For now, goodbye.