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

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining Compugroup Medical's conference call. [Operator Instructions] I would now like to turn the conference over to Head of Investor Relations, Claudia Thomé. Please go ahead.

Good morning, everyone, and welcome to the Compugroup Medical investor and analyst conference call for the Q4 and financial year 2020 preliminary results. I'm delighted to introduce to you today our new CEO, Dirk Wossner, who joined CGM at the beginning of the year. We will start with his presentation followed by the overview on the financials and guidance by our CFO, Michael Rauch. After that, both Dirk and Michael will be available for your questions. I trust you had an opportunity to access our presentation, the quarterly statement and the press release, which we published this morning on the website. You can follow this call via webcast. Please check our newly launched website for the link. Please take the disclaimer as read and taken to the notes. The most important comment on this particular call is that the results we are publishing today are preliminary and unaudited. They remain subject to the completion of the accounting closing process and Board approval. We will provide the full and final set of results on March 25. And with that, I would like to hand over to our new CEO, Dirk Wossner.

Thank you, Claudia, and a warm welcome also from my side to my first investor and analyst call at Compugroup Medical. I'm happy to be here and look forward to getting to know you in due course. Let me start by introducing myself quickly. Dirk Wossner. I'm 51 years old. I am married, and I'm a father of 4 kids. After a Ph.D. in chemistry, I worked for McKinsey in the telco and high-tech sector in Germany and Spain. I joined Deutsche Telekom 19 years ago and spent most of my professional life there with various management positions in Germany and U.K. In 2015, I left for a great opportunity in Canada, where I ran the consumer business for Rogers Communications, the market leader in wireless and cable in Canada. I rejoined Deutsche Telekom in January 2018 as the CEO of the German business. Now what are my reasons for coming to CGM? I believe there's so much opportunity in this market and in this company, and the glass on this chart is clearly just only half full. For CGM, in particular, the company has a clear and compelling vision: to be a trailblazer for digitized health care, both for health care professionals as well as patients based on transparent information and secure and open standards. We're at the heart of this digitization in health care, software and health care being a sweet spot in terms of attractive markets and industries. Lots of other industries have already been digitized. It's now happening in health care. We can drive innovation based on our strong installed base of health care professionals. I believe that family-controlled companies have a competitive edge due to long-term strategic view and fast decision-making that we've always seen at CGM. And I've also liked the entrepreneurial approach that's been present here, very quick decision process and efficient execution. And last but not least, Frank Gotthardt. He won me over for this company. I'm well aware of the footsteps I'm stepping into. I'm taking over with this privilege, and I see this as a huge opportunity. I'm very happy that Frank will stay with us to help me and guide me to the success of this company. The team I'm coming into is a very strong team. I'm very happy to be part of this team. It's a set of great, dedicated and committed individuals with great business know-how and market expertise. We have an open and direct communication style. We're a very close-knit team. And there's a mix of long-term CGM managers and executives that joined the Board in the last 2 years, and we share an ambition to take CGM to the next S-curve of growth. Now looking back at 2020 together, the year of the COVID-19 pandemic challenged the world and our industry. With our customers being doctors, hospitals and pharmacies, the main priority was supporting them in the best possible way to cope with the challenges of the severe situation. Being an IT company and used to quick decision-making and efficient execution certainly helped moving the vast majority of our employees to home office within 48 hours in the first lockdown. At the same time, CGM successfully managed operational challenges, such as the massive ramp-up of video consultation and pioneering digital health apps. Regarding telematics infrastructure, CGM was again the first mover in the next-level digitization of health care, the first to receive regulatory approval for the connector upgrade to doctors, the first to supply pharmacies with TI access and the first to offer the secure e-mail communication, KIM. I would like to take this opportunity to say thank you to everyone in the health care sector in this extreme situation that has lasted for almost a year now. Many of them are our customers. Doctors, whether in hospitals or practices, nurses, medical staff and others, as well as people working overtime in the public health offices, a big thank you for your contribution, your timeless efforts and your dedication in this horrible pandemic. Now coming back to CGM. It was an extraordinary year in 2020, in which the team also closed the 2 largest transactions in company history to date. Both transactions were strategic moves in each of their segments, AIS and HIS, adding relevant scale in key markets such as HIS in Germany and AIS in the United States. A very impressive overall performance that speaks again to the strength of CGM in terms of entrepreneurial approach, fast decision-making and efficient execution. Going forward, it's about delivering the anticipated value creation, and the HIS segment has given a good head start with 2 first quarters of excellent contributions from the newly acquired activities. Michael will give you some more details in a couple of minutes. The U.S. transaction was closed at the year-end 2020, so we will see first results in 2021. M&A has always been a core element of the CGM growth strategy and will continue to be that going forward. And whilst M&A is important, it's not the whole growth story here at CGM. Due to the excellent customer base we have among health care professionals in our markets and due to the worldwide trend to increasing digitization in our sector, we're in an ideal position to benefit from numerous growth opportunities. The pandemic has accelerated some of the developments even further. At the beginning of December, CGM published the intention to step up investments significantly in 2021 to drive further growth. To that end, we're going to increase R&D expenses from EUR 168 million last year to more than EUR 200 million this year. We're also strengthening our marketing and distribution capabilities and adding technical experts and consultants. R&D efforts include platform modernization, G3, as well as improvements to our user experience and interoperability. Michael will lay out the guidance 2021 a bit later, which contains first revenue contributions from our growth initiatives. I will just mention some of them on a high level. There's the consumerization opportunity for the increasing digitization of the patient journey. This requires easy-to-use, data-secure patient platforms. IT security is becoming increasingly important to many of our customers reinforced by regulatory tailwind, for example, from the Hospital Future Act in Germany that designates EUR 4.3 billion to the digitization of German hospitals in the years to come. The benefit of using anonymized aggregated data has clearly been revealed by the pandemic and providing cloud services is going to shape our business activities in the midterm. The goal of the investments we have targeted for this year is to drive further growth. Let me summarize why Compugroup Medical is well positioned for further growth and value creation. We're a beneficiary of the digitization in health care. We have an excellent track record to deliver innovative solutions and can leverage our strong position to up- and cross-sell these solutions into our base, generating organic growth. We've further reinforced our market position with 2 major acquisitions in key markets last year. M&A is part of the growth story, and the M&A integration track record so far has been excellent. And last but not least, we have the financial strength to enable further growth for the coming years. And finally, before handing over to Michael for the financials, I would like to share some early thoughts on the priorities of my first year at CGM after a month in office. First of all, we will strengthen our core business by continuously emphasizing customer experience as our #1 priority. This will lead to increased value from lower churn and increased up- and cross-selling. Second, we will make the combined U.S. business a success and set it up for the next growth phase, fast post-merger integration, leveraging synergies, both on revenue and cost, and earning our rights to further growth, both organic and inorganic. Third point, given our position in the center playing field of all health care providers, we will deliver along the patient journey by leveraging our installed base and complementing it with innovative services. We will continue our successful M&A activity with the aim to implement -- complement our existing strengths in individual markets, both regarding new technologies as well as boosting market share. Finally, company culture is an often-underestimated factor, even more so in this case, given the pace by which the company has grown for years now and given the crucial transformation we will face to grow beyond the EUR 1 billion company. So this is what I will focus on in the coming quarters. I look forward to meeting many of you in due course after the initial phase of getting to know CGM better. And for now I hand over to Michael for the financials.

Big thank you to you, Dirk, and a warm welcome to everybody also from my side. Let's take a look at the 2020 financials together. To start with, Compugroup Medical posted another record year in terms of financial performance. Not only did we perform significantly better than prior year on all financial KPIs, but we also performed fully in line with our original guidance published at the beginning of February 2020 and even fully in line with our raised guidance from the beginning of August. As you can see, it is a double check mark for all the relevant tick boxes. If you look at group revenue, adjusted EBITDA and adjusted EPS, we landed well within the increased guidance ranges. And for adjusted free cash flow, we exceeded our guidance significantly. Regarding free cash flow and -- regarding free cash flow guidance going forward, we will guide face value reported free cash flow only as extraordinary adjustments, like, for instance, the cash-settled options from my predecessor now lie behind us. Let's take a closer look at the segment performance against 2020 guidance. All of our operating segments posted revenues at the upper end of the guidance range or even exceeded it except for the AIS segment, where we achieved the initial guidance given in February, but ended up with revenues slightly below the increased guidance published in August. I will discuss the segment performance in more detail shortly. Just this much for now. In the AIS segment, TI revenues came in slightly below plans and, more importantly, the COVID-19 impact we started seeing in the dental sector and in our U.S. business in Q3 continued into Q4, thus, preventing us from achieving the increased guidance in this segment. To summarize, this is an excellent performance in all of our businesses, given the challenges in this first pandemic year, and overall top line growth rates were led by the HIS segment due to the large acquisition and the PCS segment due to the first time TI rollout. Top line growth stands at 12% year-over-year with recurring revenues growing even stronger at 14%. Much of the 2020 growth was driven by acquisitions. However, also, organic growth contributed nicely with 4%. The further rollout of the telematics infrastructure contributed positively to the organic growth and also TI, we are looking at an organic growth of -- sorry, and also excluding TI, we're looking at an organic growth of positive 2% this year. Regarding the free cash flow development, we've seen a strong increase year-on-year coming from an improvement in operating cash flow that overcompensated the increase in capital expenditure. The quarterly free cash flow development reflects the phasing as expected, with a larger contribution to the 2020 free cash flow in the second half, reflective of the TI business development. Free cash flow has increased both reported and adjusted year-on-year. With EUR 101 million, we've achieved an adjusted free cash flow significantly above the raised guidance of more than EUR 85 million. As already mentioned, going forward, we will focus on the reported free cash flow. As announced in November, we've decided to take one more step to crystallize the underlying AIS and PCS performance by reallocating the Telematics Infrastructure business to the CHS segment. Some quarters ago, we introduced the additional KPI, organic growth ex TI, to provide more transparency on the underlying AIS and PCS business. Going forward, we will be reporting both segments, AIS and PCS, excluding the TI business, which in turn will be recorded within the CHS segment where Eckart Pech and his team take a holistic view towards the Compugroup TI business opportunities. Hence, we will, therefore, discuss today the segment performance of Q4 one last time in the old segmentation and move on to the new segmentation with the guidance for 2021. For your convenience and for modeling purposes, we've provided pro forma figures for the full year and for the quarterly numbers 2020 under new segmentation in the backup. For the next section of the presentation, I will focus particularly on Q4 2020 performance. The strong revenue growth in Q4 was mainly driven by the consolidation effects from acquisition. Our strong organic growth in Q4 was largely driven by an excellent TI rollout to pharmacies. Excluding Telematics Infrastructure, organic growth was minus 4%, in line with the anticipated specific prior year comparisons in 3 out of 4 segments, which I will explain further as we walk through the segments. Moving to the Q4 performance. We can see that all the segments contributed to the 18% total revenue growth. Obviously, the main contribution comes from the newly acquired HIS activities, by the way, with an excellent performance in 2020 but also from the accelerated TI rollout to pharmacies as well as positive contributions from add-on TI activities within the AIS segment. Turning our eyes straight on to the AIS segment, where the revenue increase in Q4 was attributable to the TI rollout and the EPSILOG acquisition. We've completed our connector upgrade, which we provided and built to our installed base in Q3. We've received more than 2,000 orders for the KIM, the secure communication system within the TI framework, and we supported our AIS customers to realize TI feature benefits like the emergency data set and the electronic medication plan. Looking at the organic growth ex TI, we see some -- the same pattern like in Q3 with a strong prior year performance due to Windows 10 and the ELGA introduction in Austria, and this year, a negative impact in both the dental sector and in the U.S. market from COVID-19. For the full year 2020, AIS organic growth ex TI stands at positive 2%, a solid organic growth performance, especially in the light of the COVID-19 pandemic. The margin decrease in Q4 is attributable to the revenue mix with a higher hardware share this year and increased investments. Now coming to the PCS segment. Q4 headline revenue growth was again strong, with a 15% plus, fully attributable to the continued TI rollout to pharmacies that started in Q3. We've made good progress in Q4 regarding invoiced TI installation, finishing the year 2020 with roughly 5,000 invoiced connectors, including third-party orders. Looking back, we made good use of our first-mover advantage regarding the TI rollout in the pharmacy segment, having achieved a higher share than our own customer base. In the PCS segment, we deliberately prioritized the TI rollout in Q4. And in combination with a strong prior year business in Italy and windfall benefits from Windows 10, it doesn't come as a surprise that revenues ex TI are down year-on-year. Adjusted EBITDA growth was also driven by the TI rollout in Q4. Overall, a very strong performance in the PCS segment in 2020, also showing the revenue guidance outperformance for the full year 2020, as mentioned above. Turning to the next segment, the Hospital Information Systems segment. We've seen another stellar quarterly performance in Q4, majorly due to the excellent contribution from the business activities we acquired in the summer. With revenues of EUR 23 million, the synergy plan was again surpassed like in Q3 already. Apart from the integration of new activities, organic growth in the HIS segment in Q4 looks a bit weaker at first glance with minus 3%. But taking into account the one-off hardware revenues in prior year Q4 due to the Nökis rollout, we actually saw a very good performance of the underlying HIS business in Q4. The adjusted EBITDA increase was even stronger, and the margin reached 23% in Q4 due to the excellent integration progress and a better revenue mix. Now with 17% return on sales for the full year 2020, we've seen a 3-percentage point margin increase year-over-year. Whilst we like that, I would like to remind everyone on this call that with increased HIS business, we will see mathematical dilution impact on group EBITDA return on sales going forward. And finally, the CHS segment for the last time in the old segmentation without the TI business. Here, the performance in Q4 continued to benefit from strong intermedix business in Germany. Adjusted EBITDA has been impacted by investments in platforms such as CGM Life and CLICKDOC. Looking back at 2020 as a whole, the CHS segment has done very well with revenues at the upper end of the guidance range and investments were increased according to plan. Now so much for Q4 and the financial year 2020. Please be reminded that those are unaudited preliminary numbers. We will release the full set of audited financials with our annual report on March 25. And now let's take a look -- forward-looking view upon our guidance for the current year 2021. In December, we communicated our expectation to reach EUR 1 billion in revenue for 2021 and an adjusted EBITDA margin between 20% and 23%. We have now specified this to a range between EUR 1 billion and EUR 1.40 billion for revenues and for adjusted EBITDA between EUR 210 million and EUR 230 million. As always, this guidance represents CGM's management's current best estimate of market conditions for 2021 and how our businesses will perform in this environment. The continuing COVID-19 pandemic situation is creating additional uncertainty. The guidance does not include any impact from potential acquisitions to be signed and closed in 2021. Also, the TI activities may be subject to regulatory adaptations as we have all been experiencing in the past years already. And finally, due to the increased exposure to the U.S. dollar, the financial performance may be impacted stronger by foreign exchange effects than in the past. Turning to the segment revenues. This guidance is referring to the new segment structure, effective as of January 2021. Please refer to the appendix for an overview of what the segment financials would have looked like in 2020, had we already introduced a new structure back then. Based on the new structure, the AIS and PCS segment no longer include the business -- sorry, no longer include the TI business that is now accounted for in the CHS segment. In addition, we have the consolidation effects from the 2 large transactions we did last year in the AIS and the HIS segment. For the AIS segment, this translates into a guidance range of EUR 485 million to EUR 500 million, including the impact from eMDs for the full 12 months. Our guidance range for PCS revenues is between EUR 115 million and EUR 120 million. For the HIS segment, that is, now including the large acquisition on a full year basis, we anticipate revenues in the range of EUR 240 million to EUR 250 million. The expected revenue range for the CHS segment and the new setup has gone up to EUR 160 million to EUR 170 million, now obviously including the TI revenues that were formerly accounted for in the AIS and PCS segment. Regarding the other guided KPIs, the total targeted revenue of EUR 1 billion translates into a 4% to 8% organic growth range, so 6% organic growth at guidance midpoint. Recurring revenues should again account for more than 60% of total revenues, and we expect the adjusted EPS between EUR 1.70 and EUR 1.95. Due to the investment mode, which we are significantly stepping up this year to further drive digitization in health care, we expect CapEx in the range of EUR 70 million to EUR 80 million. This CapEx increase, together with increased OpEx investments, as mentioned by Dirk and myself before and also reflected in the EBITDA guidance, leads to a free cash flow guidance of EUR 80 million and above. To give you some color on the quarterly phasing during 2021, organic growth rates should gradually build up towards the second half. There are a number of reasons for this. First, our CLICKDOC growth initiatives should kick in after an initial phase of additional investments and increased selling and marketing activities. Any revenues resulting from the additional funding hospitals should receive, backed by the Hospital Future Act, I expect it to be realized not before summer. We are planning to ramp up IT security initiatives step-by-step, and the next TI upgrade is likely to be implemented in the second half. On the cost side, we would see a rather front-loaded impact from the additional investments we've announced in December and which Dirk has also explained in more depth before. All together, we expect this to result in softer margins in the first half year, and we anticipate the ramp-up of revenues and EBITDA throughout the year. Summarizing today's presentation. We completed a very successful year 2020 in a challenging environment. Compugroup Medical remains well positioned with strong market positions and technology leadership, providing an excellent basis for further growth in 2020 and beyond. We're going to execute our investment plans to drive further sales growth in 2020 and beyond, investing into additional EBITDA growth momentum, with margin expansion ambition and a continued strong cash flow profile driving total shareholder return. 2020 has reemphasized our track record of value-enhancing M&A, and we are determined to further enhance shareholder return and value generation. We remain committed towards driving further digitization in health care. In line with our purpose statement, nobody should suffer or die because at some point medical information was missing. Now the next touch points will be the publication of our detailed and audited annual report on March 25 and the Q1 call on May 6. With that, I would now like to hand over back to the operator for the Q&A session.

[Operator Instructions] First question is from the line of Knut Woller from Baader Bank.

Yes. Actually, I think 3 ones. First, looking at the pandemic, you've cited headwinds in dental and, I think, also the situation in the HIS segment is a bit suffering by that. Can you give some ideas about how we think about the impact of the pandemic especially now in Q1 and likely also in Q2? On the back of the pandemic, do you expect the headwinds in dental and potentially also in HIS to persist? Then taking a bit more the approach, you've mentioned that you invest in SaaS products. So looking a bit further down the road, we see -- we saw an acceleration of growth in 2020. You're guiding at midpoint for another acceleration of growth in 2021. How should we think about growth going forward? Do you expect SaaS products to take over, which should be a headwind on growth theoretically? And what will be the impact then on margin expansion going forward? That would be it from my side.

Okay. Thank you, Knut. Michael here. I'll take your questions. If I'm not mistaken, basically 2 group of questions. So let's start with the first one. On the pandemic side, the short answer is yes to your question. So we will also anticipate going into the first quarter, as we are already right now in the first quarter, some headwinds from the pandemic still on our dental business, some softness probably also on the U.S. business. And you also mentioned some impacts on the HIS business. I'm not so worried so far on the HIS business. It looks very promising also with the Hospital Future Act but cannot obviously rule out any impacts. And I was earlier mentioning the guidance a bit throughout the year 2020 and that, obviously, is reflective of our anticipation of the situation. Now with regard to your second question on the SaaS products. You tied that question together with the acknowledgment of the step-up in organic sales growth, which we saw from 2019 to 2020 already from kind of like 0%, if we include TI into that, to now around 4%, and then 2021 with a midpoint of a guidance of 6%. Now that is yet not including the step-by-step rollout of SaaS activities. You're fully right that would have an impact if we were to fully full-blown go into SaaS activities going forward into 2022, 2023. But for the year 2021, we are just stepping up the SaaS activities. So that's why we feel comfortable with the 6% organic growth midpoint guidance given. I hope that answers your questions.

I think I understand it, Michael. But just if I look a bit further down the road and if I understand you correctly that you -- that we will see the real full impact of the SaaS products in 2022. Should growth then decelerate again for a certain period of time of the transition of the business model or not?

We have some tradition here at Compugroup by giving out annual guidance and that's what we would like to stick to also. So here, we will update you along the course as we have more experience on how much SaaS traction, we're going to see also in the market coming and then we will update you as we have more visibility.

Understood. Thank you. And welcome to Dirk to the company.

Thank you.

Next question is from the line of Uwe Schupp from Deutsche Bank.

Dirk, also welcome from my side to the company and to the capital market as regards to Compugroup. Dirk, when can we expect you to stand up and kind of tell us about your initial views on the business and what you saw, what you like, what you didn't like and potentially also a midterm or even a long-term guidance? Should we expect the normal kind of 100-day period for that? Or would be the coming Capital Markets Day, whenever it is in autumn, a better time to look out for that? And secondly, Michael, if I remember correctly, you guided us for an EBITDA margin for '21 in early December. I think it was 20% to 23%. Now if I do the math today, I obviously technically calculate a small guidance increase, at least on the lower end. And I'm sorry I missed that in your presentation, but if you could just give us your thinking what's changed between early December and now and why you kind of increased the guidance slightly on the lower end.

So thank you for welcoming me. And also, let me take the first question, and I'll hand over the second one to Michael. I think I am 40 days -- 30 days in the job, so obviously, looked at the business. I gave you some very, very first impressions already today in the call. But you can expect me to go further into detail in the second quarter. I think the results call is around the 6th of May, if I'm correct. So in the second quarter, I think, we'll have a further outlook. As it would be normal, we're reviewing the strategy. We're looking at the plans. I don't expect massive turns or anything. It's a refinement of what we do. We're doing this throughout the course of the first half of the year. And then we'll have the Capital Markets Day coming up in September. So I think you'll hear continuously from me updates along that process, probably with the first -- big step being in Q2.