CompuGroup Medical SE & Co. KGaA (COP) Earnings Call Transcript & Summary

Good morning to our U.S. audience, and good afternoon for our European audience. Thanks for being with us today. Before we get started, I need to read a disclaimer. So please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. The webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website. And if you have any questions, please reach out to the Morgan Stanley sales representative. Thanks for bearing with that. So today, we have with Mike Rauch, who is the CFO of CompuGroup. CompuGroup is the largest health care IT player in Europe with international presence. Michael, hi, and thank you so much for joining our event. I suggest we go right into the questions in the interest of time.

More than welcome, Athena. Welcome, everybody.

So Michael, for those investors that don't yet know CompuGroup, can you give us an overview of the company, please?

Absolutely. So first of all, many thanks that you're all listening in. Always nice to connect with everybody, and it's unfortunate, we can only do that virtually. I hope you're all feeling fine and not affected because of COVID-19. So that brings me to the company's mission, nobody shall suffer or even die because at some point, medical information is missing. So I guess we are one of the few companies that's always had a purpose and a mission and are not needing to spend consultancy money on it. Because we have a business model also that is centered around our mission. We are providing information systems. We are providing connectivity. We are providing services to doctors, to pharmacies and to hospitals. And we are, in essence, one of the major beneficiary of digitization in health care.

So what are the key pillars of CompuGroup's strategy, including M&A, given the have [significant M&A], including sizable ones recently?

Yes. So let me start with the organic growth. So obviously, we're driving organic growth by providing to our customers. And that is the provider side here. So I talked about the hospitals, pharmacies and doctors. With solutions that enable them to run their business more efficiently, and obviously, also more effectively, helping them to further digitize. And for us, here, the regulatory side is a tailwind. What does it mean? Well, now there's a lot of talk in Europe about introducing e-prescriptions across the markets. And that is one field where we actually own the access to the provider side of the doctors that are actually prescribing. And then it's about how to make sure, for instance, in Germany with the Telematics infrastructure, how to bring basically, the prescription out to the patients to make sure they can basically redeem their medicine at the pharmacy close by. And that's one field of digitization where we actually play a major role here within Germany. Now you talked about the CompuGroup strategy in general, also including M&A, so I started with the organic side. And so organically, we are investing strongly throughout in R&D. For us, it's important, making sure that basically everything, which, in the past used to be paper-based, it's going to be digitized in the future. That may be on-premise solution for practice management software, then maybe SaaS solutions for clinical software, but also for practice management software that may be a combination of the two. On the M&A side, we actually value M&A and have always done so as a very clear strategic add-on to our portfolio. In the sense of looking not only into little bolt-on acquisitions, but also into sizable ones, acquiring actually footprints into segments or markets where we have not been present so far. So I'll give you an example. For instance, a couple of years ago, we actually went with an acquisition into the German pharmacy space, and that actually gave us access overall to the PCS or pharmacy information systems market, which we are now getting a stronger foothold, not only in Germany, but also Italy and the Netherlands. But we're also doing acquisitions in technology, like, for instance, an acquisition we did in the beginning of the year, buying a small company in Italy, which was very beneficial during the COVID-19, a high season time during the beginning of the year and obviously, now when it returned, whereby patients that are not in a mission-critical position could be kept at home and the doctors and the hospitals. And also the practices had an opportunity to watch that condition via mobile device. And if the condition became more critical, to put them into the [ scarce ] beds and hospitals to do best treatment of them. I want to stop here in order to ask for more questions.

So from COVID, given that this is a life after COVID conference and you already alluded to a few points. But what are the key changes that you are seeing in terms of your business and operations?

Yes. Well, let me just characterize our company a little bit. We have EUR 746 million in annual revenue as of last year. So we go by fiscal year closure. And with that, we had more than 60% recurring revenue. And that's also something going into 2020, which gives us a lot of stability and resilience and a high free cash flow profile. And with that, we actually can afford to also invest maybe in more volatile times into making sure that our mission of the company comes to fruition and comes to life. When you look to COVID-19, indeed, we had been anticipating when it came upon us here, mainly in Europe in the month of March this year, we have been anticipating to see a little bit of effect on the dental side, because we also have practice management software to dental practices. And also on the hospital side because we were afraid that basically hospitals would postpone larger scale IT projects because they had to do immediate patient care. But what we saw throughout the year is actually that the hospitals kept investing into IT and then also the dental practices. Even though some were shutdown, did not shy away from also doing upgrades to the system. Some even changed during the times they were shut, for instance, the windows upgrade from Windows 7 to Windows 11, which gave us additional opportunities during COVID-19. So in essence, knock on wood, one has to say, we have, by and far, not been so much affected by COVID-19. On the contrary, if anything, it has shown actually that over the longer term horizon, there is much more need to even further digitize health care within the European arena.

Thanks, Michael. So you mentioned what's been happening this year. And you alluded to further digitalization in the longer term. So what do you think, in general, are the key growth trends in the industry? And how has COVID been accelerating those?

Yes. So one example, for instance, was in the past, doctors always believe that it's important to see all of the patients physically because they wanted to sell add-on services to the patients and patients also felt they would get better treatment by spending time with the doctors. And COVID-19 has shown one thing that basically for severe illnesses where potentially you have melanoma or something bad on your skin that needs to be with a machine, x-ray checked and so forth, yes, you might still want to go to doctors' practice. But maybe for less severe point -- actually, a consultation via video can take place. And so we saw, for instance, for us, in our business, video consultation skyrocketing. So we had a solution out there, which we find kind of hard to sell, at least to the German market in the years 2018,'19 for electronic video consultation. And once COVID-19 hit Europe, we actually saw that the application numbers for our CLICKDOC video solutions, skyrocketed. And this is here to stay. So we see that even during summertime, when there was a little bit of ease on COVID-19, usage has gone up on video consultation. And I'm fully convinced that telemedicine and telemedicine tools are more here to come and more here to stay.

And on that point, you also mentioned regulation. If we double-click on that, can you elaborate on how regulation is impacting the industry? Telemedicine, especially in Germany being one of points, but there are other key changes as well, not just in Germany, but across Europe.

Yes, yes. But obviously, since we have more than 60% of our presence within the German market in terms of revenue, at least as of right now. I want to stay with the German market to also give tangible examples. So for instance, the video consultation hours that the doctors spent with the patients were reimbursed by the insurance by only 1/5 prior to COVID-19. During COVID-19, also the regulator here gave tailwind to say, okay, reimbursement is now in full. And with that, obviously, also, there was more inclination, so to speak, from the practitioner side, from the provider side to engage in those activities. In addition, I don't know if you followed, there was just recently future hospital act enacted in Germany, which is actually making available 4.3 billion in funds in order to further digitize health care, primarily in the hospital sector. And that's the money to be spent over the next couple of years and just the individual 16 states of the country of Germany are discussing right now on how to basically loosen up that money and distribute it to individual hospitals.

And Michael, you mentioned that digitalization will be accelerating. Do you see cloud a big part of that acceleration as well, given that the health care industry has traditionally been a bit slower compared to software more broadly?

Yes. There's always a concern of how do we make sure that the data is secured? Because, obviously, it is sensitive data. Nobody wants his or her health records out there in the public, to be stolen by some kind of data thefts or [ smarts ] into doing something with the data. That's why security is higher focus and also why it's for us, an area where we always invested on. And maybe sometimes investors criticize us and say, but Michael, couldn't you move towards a 30% margin by now? And we say, no, we want to make sure that at any moment in time, full security is guaranteed to all of the data and data protection is fully lived within the company. That's why we're investing. That's why the company was actually the pioneer in the German Telematics infrastructure, which is a secured net allowing data to travel virtually from the different providers in a secured transformation. And we actually provided that service together with other competitors of ours. And that's something where we still benefit also going forward. We will see much more security selling opportunities for us, which will also propel our organic growth profile going forward. Now you talked about cloud solutions in general. There has been a little bit of hesitation in the past, which we also recognized from doctors, be it on the dental side or on the GP side, in order to move into cloud because there had been fears regarding data privacy. But I think that is maybe also moving away now. The more people are using video consultation -- are using telemedicine, the more people are also wanting to move into cloud solutions. And as we are offering cloud solutions, we see that coming more and more.

Understood. It's interesting because in software, an anecdotal point is that was expected to take place in over 2 years in terms of cloud acceleration. That took place over 2 months in the middle of COVID, so very much in line with what you are mentioning. Now moving on to on a related topic. A lot of what you're doing is around interoperability is connecting the stakeholders and the patients. Can you elaborate on that because I think it's a very important trend in the industry?

Yes. I think originally, that's also how we started our business when our founder founded the company about 30 years ago. We were focusing on making the providers' life easier and more digitized. So optimizing basically the practice management for the provider. And now going forward, we more and more realized over the past couple of years within the company, that it's not only about the provider, it's also making sure it's comfortable for the patient and is comfortable for all of the stakeholders within the health care arena to make sure that data travels seamlessly and you don't, for instance, have to fill out every time you're basically called from a doctor to a hospital. A new amnesia piece of paper in order to fill out whatever kind of illness you might have or whatever kind of medicines you take. So that has been very cumbersome and we are at the forefront of making sure that things are more interoperable. And that data can be exchanged easier. And we are actually sitting on a pool of data, which we have not yet fully mined, where we still have an opportunity to dig much deeper into because in Germany, for instance, if the doctor gives the consent, we can actually, on an anonymized way, use the patient data and triangulate that also with things, because we also have laboratory information systems and hospital information systems, from other sources within the company and play back some data patterns to either the pharmacy industry or the insurance or the payer industry. And actually, here is much more room for us to explore that field of datafication.

And if I think of the different stakeholders, you are already taking the bulk in terms of pharmacies, hospitals, doctors, insurance companies. Should we expect that cycle, overtime, to include research institutions or the big pharma or is that already happening?

That's happening, but there's more opportunity to grow. And you're fully right. That's one of the, I would say, pockets that we haven't tapped as much as some other areas of growth yet. So here's a potential that needs to yet be fully tapped.