Vitec Software Group AB (publ) (VIT-B.ST) Earnings Call Transcript & Summary

Welcome to Vitec Software Group Q3 2025 Earnings Call. [Operator Instructions] Now I will hand the conference over to CEO, Olle Backman; and IR, Patrik Fransson. Please go ahead.

Thank you, and [indiscernible] Head of Investor Relations at Vitec Software Group, and with me is our CEO, Olle Backman. In the call, we will first give a short overview of Vitec as always, and followed by comments on the report we released earlier this morning. And after the presentation, we will open up for questions. So with that, I will hand over to you, Olle.

Thank you, Patrik, and welcome, everyone. Okay. Let's start off, as usual, with a short overview of the Vitec Group. By now, you know this picture. So it's -- the dots here represent where we have our sort of feet on the ground, where we have our own offices, which is all in all in 12 different countries. But we have sales actually in over 50 countries by now. So that's a bit more. We sell our mission-critical software to nearly 26,000 business-to-business customers. Pro forma sales is up to SEK 3.6 billion. And to my help, I have nearly 1,680 colleagues around the world. And it says here 46 business units, but as of October, we're actually 47 with the latest acquisition. Moving over just to show the diversification of sales, which is also a great strength of ours so that you can see that we are not dependent on any single country or any single customer or for that matter. So we have a great risk distribution in this. And you can see also that the distribution throughout the markets is fairly even by now. And then talking about growth, how we work with that. We have our sort of dual engine representing this. So we are the business units that work with market leaders in each of their markets, usually a high percentage of recurring revenues. So they develop this through our decentralized organization. So that fuels the organic growth. And then, of course, we have the acquired growth, which is the acquisitions, which we then fuel this with. Looking at last year, we did a record of 7 acquisitions heavily in the last -- later part of the year. You can see that they come in all shapes and sizes and also in a variety of countries, and we opened up a new market last year in Belgium. So far this year, we have made 2 acquisitions, one in the Netherlands and also opening up a new country this year with Poland, welcoming NMG here just after the quarter closed in early October. And sales by vertical, that is one -- another way of looking at this. So we have nearly 46 business units, but we operate through 22 different verticals. And you can see that the bubbles here are the sizes in terms of volume there. So property management, energy, health care, auto and finance are the biggest ones. We also show a picture of the various business units with the LTM numbers on the sales and also the share of the recurring revenue part. And you can see here also, this is the distribution here, some bigger, some a bit smaller, and that is basically also how our M&A market looks like. So by now, Vitec with all our 47 business units, it's a blueprint of the market. And when we work with these business units, one of the great strengths of belonging to a group is the sharing of knowledge across the group. So we have a common culture. We have a sharing concept, which we call where we have forums. We have, I think, nearly 12 different forums where we have our best practice sharing. And this is a very powerful tool because all of these 47 business units, although they operate in different markets, they are very much alike when it comes to business models, when it comes to technology, when it comes to utilizing technology and different types of tools, of course, AI tools for that matter. So within these sharing forums, we have a great opportunity to cross-fertilize good ideas to come. And just a short note on AI. I thought I'd mentioned that I wrote about it also in the report here. We have different ways of looking at this more from an internal perspective, of course, improving our ways of working, efficiency, quality, risk mitigation for that matter. And then on the right-hand side, we have a growth perspective, which is the more external perspective where we embed AI functionality in our applications, which we sell to our customers. So that gives us both us and the customers a competitive advantage. It gives us great scalability and also new revenue streams to come with that. And below there, we have some examples from some of the business units from the internal perspective, a lot of it is around both efficiency in coding, of course, with the tools, but also in customer success and customer support. And the same goes for the external perspective when we have our customer applications, which, for instance, in Vitec Energy, the AI models that we use for energy forecasting, which we sell to our customers. In the real estate agents business, we have a powerful tool there to help the real estate agents being more efficient in their daily work. And also in Appva, which is in the elderly care, where we help our customers to automate some of the regulatory data that they need to report and adhere to. And these are just some of the many, many examples that we have across the room. But also, like I mentioned in the report, this is more of an ongoing evolution. This is something that we have been doing for a long time. And with every new technology shift, we use it, of course, and see how we can work with it and to our advantage and also to the advantage of our customers. Then moving over to the third quarter report. We have the highlights here. Total sales, net sales was up 6%, 10% on the full year for the first 9 months. Recurring revenue share is very high, as always, 90% here. Our EBITDA was slightly down 5%. But the cash EBIT, which is something that we've been talking in these con calls throughout the year, so that's an EBIT margin net of any capitalization or amortization. So it's very close to the cash generating, and that's also the internal KPI metric that we use in our business units that was up 10%. So of course, the difference is there that we write off some of the intangibles quite heavily. So that's the difference between the EBITDA and the cash EBIT. So cash EBIT is really the day-to-day operations and how that is tagging along. So 10% up there for the quarter, 5% on the total. And also something I wrote in the report there this quarter, again, we have Enova, our Dutch business unit, which was down nearly SEK 50 million compared to the same quarter last year and with a gross margin loss there of SEK 11 million compared to the last year. That's something we also wrote about in the Q2 report where the numbers were even greater. So it's going in the right direction in that sense. And we also have done a lot of measures in the product development and also in the business development there to mitigate the ups and the downs there. But we are exposed there to the market conditions of the balancing market. But nevertheless, Enova is still doing great from a business unit perspective, but they also operate in quite a volatile market, but we will get back to that. Cash flow, quite according to plan and according to the seasonality pattern that we've seen throughout the years. You must remember, we basically have all our cash flows in the first quarter, which is a great thing with this recurring revenue models. So we generate all the cash in Q1 and then we are basically quite flattish throughout the rest of the year. So this is totally in line with expectations. And if you see the -- you should really look at the 9-month figure there, which is up by SEK 60 million roughly from operations. Net sales, we talked about that roughly up 6%, like I mentioned, for the quarter. The EBITDA result is by margin, a bit sequentially up, but compared to last year, it's slightly down by 5%. And the cash EBIT, which I mentioned earlier, there, you can see also the sequential improvements throughout the year from Q1 to Q2 now to Q3, but of course, compared to last year. We're also up with 10%, like I mentioned, for the quarter, which is quite good in this macro environment and despite that we had that SEK 11 million less of gross margin from Enova than we had last year. So overall, fairly happy with the development from the cash EBIT perspective, dragging along quite nicely. I also mentioned in the report there that we did a bit of a reminder that last year was an exceptionally strong Q4 with both -- the 5 acquisitions that came in, in Q2 and Q4, which also, of course, contributed highly to the growth, but also the fact that we had a great tailwind from a better general economy, and we had 3 large projects, hospital projects, which finalized. They were 3-year long projects, which came through last year. So you can see that if you look in the Q4 report for last year, you can see a very high numbers on license, other sales and services for that quarter. And like I wrote in the report, we have a stable environment today. Nothing really is happening not on the upside, but also not on the downside. So we are expecting a bit of a more flattish development in that sense for Q4. And by flattish, I mean, compared to where we are at this point. So it's not flat against last year, which was all in all, a huge record quarter. Then moving on to something new. We, from this report, start to report on the quarterly basis, the organic and the inorganic growth. There are lots of more numbers in the actual report. But in this presentation, I just highlighted here the subscription part, which is the absolute bulk and the SaaS fees and the maintenance fees, they were up 6% during the quarter organically, whereas the transaction-based was down 20%. And this is, of course, the SEK 50 million, which I referred to for Enova is behind that loss. So I hope that you will be able to dig into these details. I still think that Vitec is a really long-term company. You should really look at the LTM numbers and the long-term perspective of everything we do. But of course, there are quarterly things to look at. So just summing up steady operational improvements for the quarter. Enova, still a bit of a soft market there, but they are doing quite okay from a profit perspective. And in October, of course, we added the acquisition of NGM, which we were very happy with and look forward to reporting them in the Q4. So with that, I will hand over to the question-and-answer session.

[Operator Instructions] The next question comes from Predrag Savinovic from Carnegie.

First off, I'm curious if you could quantify the revenue and EBITDA contributions from the projects that you list benefited the fourth quarter last year...

Okay. Sorry. Now we hear you, Predrag.

Okay. I'll repeat myself. So first off, I wanted to ask if you could quantify the revenue and EBITDA contributions from the projects that you list benefited the fourth quarter last year?

[indiscernible] But if you look at the Q4, especially if you compare Q3 '24 to Q4 '24 and then Q1 again, you can see that there is an absolute increase in those line items. So other revenues, maintenance -- sorry, other revenues, services and license. So there are quite significant changes there. And as you know, both licenses and service revenues are very high-margin business because now we have all the resources, we work with our own staff. So I think you can look -- at if you compare those 3 quarters, you will see that Q4 last year really stood out.

Okay. That makes sense. And then on Enova, I mean, you discussed it already now and a bit in the report, but if you could discuss in terms of when you have large volume reductions and when you have large volume upgrades, what are typically the reasons for this? How much of that is relative to the market? How much of that is relative to your own performance? And yes, it looks like there's been some exceptional quarters. What could be reasonable to expect for the coming one now for the fourth?

Absolutely. these 2 quarters have been really exceptional. But I would say, first of all, 100% of it is due to factors that we basically don't control over. So the market volume and market pricing. So that depends on the production volume in the market at the moment. So where the big power plants running at full speed? Or is it more wind and solar power, for instance, and batteries. And we basically just place bids for our customers on their behalf. And we win some, we lose some. And so it's totally aftermarket conditions. So it's not our own sort of performance in any way. The software that Enova sells, of course, that's a pure SaaS model underneath there, roughly EUR 4 million a year. So that's progressing according to plan and the rest is a volatile market. But like I mentioned, we have done a lot of business development really looking into also pricing models and how we can expand everything to, of course, give our customers the best possible service, but also to, if possible, make that a bit more stable. And what we have seen throughout this year, so both Q1, Q2, Q3, it's a lot less volatile. So it was really yet again [ 2024 ] that had it really peaks and ups and downs. So it has been a lot more or a lot less volatile this year. But again, could something like that happen again? Of course, it could because there are market conditions there that is totally sort of out of our hands. But also as we grow and become bigger, I think this will be slightly diluted over time. But like I said, Enova is a bit of a one-off within the group. It's still a very nice company, like I said, and they are really contributing to both volumes and earnings even in that volatile market.

Okay. Very good. And thank you also for the increased disclosure on transactional and recurring and the organic growth rates. I think that's very good. And in terms of transactional streams, apart from just Enova, based on the growth rates you show here and the history, it looks more normalized when we look at Enova and your other transactional streams. Is that a fair assessment that, yes, we should probably not expect the same type of year-over-year effects in the coming quarters then also based on what you just said, Olle?

Yes, that's what we expect. I mean, of course, the caveat there that should some extreme market conditions appear for Enova. But for sure, in the transactional part, roughly 50% of it is Enova and 50% is spread out through all the other 45%, which is a lot more stable. I mean that's a typical SMS messages when you have an appointment, for instance, and things like that. So that is -- that's a true and fair assessment that you made there.

Okay. Very good. And just a final one in terms of upgrades to code and new technologies, which you discussed AI more here in the report. It's good to see you on the ball. I know it's early days, but is there any way to quantify the benefits you can get either in some of the divisions? You mentioned energy forecasting, management and so on or even better if you could reason around OpEx relative to sales a few years in the future?

We don't have any numbers on that yet. Like I said, it's still quite early days. And I think both we and a lot of other IT companies, I don't think that the usage of AI, for instance, in development would necessarily mean any reduction in costs. It's more that we will be more efficient. We will produce more with that in terms of coding. And then of course, the customer success and the customer service part, we will become more efficient. Also our customers will become more efficient. And over the years, all of these technology changes have usually sort of been to the benefit of the customers. And of course, some of that will spill over to us. But no, I don't have any specific number, but we do see productivity gains, yes, but hard to put a number on them.

The next question comes from Christian Binder from Redeye.

I want to talk a little bit about your most recent acquisition in Poland. Can you talk a little bit more about that market in terms of potential competing acquirers and potential acquisition targets? How does it kind of compare to the other markets where you're active in?

Of course, when we open up a new market for ourselves like we did in Poland, we have looked at Poland for quite a few years and looked at a number of companies there, but sort of haven't been able to close. We're very happy to be able to close the NMG. And for NMG itself, they have a great market position. They have 5 out of 7 of the grid owners in Poland as their customers and the number of meters that they are collecting data from, they collect, of course, from all types of meters, and that's one of their great benefits. But the penetration of so-called smart metering in Poland is roughly, I think, 35%, 40% and there is a law that says that I think it's by 2030 or 2031, that should be up to 100%. Of course, then even more data will be collected, and they are also fueling a new data hub that will be implemented in Poland. So there's lots of things happening in that space in Poland just for NMG. So we really look forward to NMG to continue to grow. And then, of course, when we enter into a market, we get a lot more attention. So we see that already now in terms of the M&A pipeline sort of filling up more with Polish companies. But we have a good pipeline all in all. But of course, we get more attention in a country when we are successful there.

Got it. And you previously remarked that due to increasing competition, at least in some regions, kind of acquisition multiples have sorted up over the last, let's say, 10 years. It's my impression that Poland may be a market where there is somewhat less competition. Do you think that kind of acquisition multiples there will be a little bit lower than in your kind of previous core markets? Or do you think it's quite similar?

Well, for now, they are a bit lower, in the Polish market than they are, for instance, in the Nordic and the Netherlands, probably due to, like you mentioned, the competition. So yes, they are still a bit lower, the multiples in Poland. So of course, we try to benefit from that.

The next question comes from Daniel Thorsson from ABG Sundal Collier.

A follow-up here on the Q4 comment that you said. You said flattish earnings versus Q3. Is that on EBITDA or cash EBIT? And was that statement including the NMG contribution or not?

No, the flattish towards the -- the Q3 -- and then when I meant that, that is according to the cash EBIT because that's what we talk about when it comes to internal operations.

Okay. I lost a little bit of the response there. Flattish cash EBIT, you said quarter-over-quarter. Was it including NMG contribution? Or will that be on top of it?

No, that is compared excluding the acquisitions.

Okay. Clear. And then on OpEx in the quarter, Q3 was slightly lower than I thought at least. Have you made any structural actions in OpEx in Q3 that we should have in mind ahead driven by increased efficiency or lower other OpEx, for example?

Well, first of all, we haven't really hired anyone. I think we talked about that early in the year. Of course, we have not reduced headcount per se. But of course, we have a staff turnover. And when someone leaves, of course, now we really question do we really need to replace them here and now? Or can we think of being both efficiencies or other ways of working. So I think that OpEx sort of compared to volume has sort of will gradually go down. And also, of course, the part of the OpEx is some of the COGS, of course, that is the bought energy, for instance, for Enova with lower volumes on subscription that also lowers the cost, of course.

That's clear. And then a question on the new good table here on organic growth in subscription-based recurring revenue. We clearly see that you have done around 6% organic growth during this year, which is a number you have talked about over many, many years, but that's a sustainable level longer term. Looking into 2026, moving parts like price increases, upselling potential, how do -- how should we think about this 6% organic growth in subscription-based recurring revenues? Is that a fair assumption for '26 or anything to flag here?

Well, to flag, of course, in those 6%, roughly 3% is due to pricing and then the rest is upsell and more selling of that. And we are expecting the pricing component to go down because for good or bad, a lot of our subscription revenues are connected to some sort of CPI which makes it very mechanical, the price increasing. And of course, at least if you take Sweden, Finland, partially Denmark, CPIs are trending downwards from last year. So there might be 1 or 2 percentage down on the pricing component. But of course, if we start to get some tailwind from the macro environment, then the upselling part could increase. And so that has been sort of the case throughout the years. So on average, I think we have been around 5%, 6%. And then in higher inflation markets, it's more price and less upsell and vice versa.

Very clear. Final question on M&A headroom. You stated 1.7x net debt to EBITDA here in Q3. We know that you have some earn-outs going out in the coming 12 months. How large do you view your financial headroom for acquisitions over the coming 4 quarters or so?

We have always said that we are comfortable and we can go up slightly on the EBITDA to net debt. So the 1.7 there, if we are at 2 or 2.5, I will still sleep very well at night with our recurring revenue model behind us. So in that sense, I still think that we have a bit over SEK 1 billion, SEK 1.5 billion easily in that sense. But you also must remember that we buy profitable companies. So that should add some as well. So no, I think we have enough firepower for now and for the near future anyway.

Excellent, that's very clear and thanks for increased transparency in the report as well.

The next question comes from Thomas Nilsson from Nordea.

When it comes to AI, could you perhaps talk a bit about the fear that if AI makes your customers more efficient, would they then be buying fewer seats? That's one concern that's in the market right now? And also, I think you perhaps answered this question before, like how much of a headwind will the 3 projects in Q4 [ 2024 ] make in the coming quarter?

Yes. I take the AI question there. Of course, there is a risk for us and everyone in the IT industry that if our customers become more efficient and we have a pure pay per seat model, we might get hit by that on the margin-wise there. But that's also why we have for the last, I would say, 2, 3 years, really thinking and experimenting and finding out other pricing models that correspond to the value that we actually create. It's usually a mix. So we're not going fully over to, let's say, for instance, in the financial industry, such as a lot of you guys are in, there's assets under management, that's one thing or you can have the number of transactions or if you are in towards the insurance companies, number of policies or if you're in the health care regions, number of inhabitants and if you are in real estate, you have by square meter instead. So there are lots of different components that we could add that corresponds to the value because it's all down to what value are we creating for our customers, and we should be sort of fairly compensated for that. So that's something that we have really worked with for years already. So that was before any AI hype because software in a sense that should make our customers more efficient, and that has always been the case.

The next question comes from Daniel Lindkvist from Danske Bank.

So just one quick question then on the same subject that we had from ABG earlier on. On the contingent considerations, how much is related to Enova and how is the setup? When are those evaluated, if you can just give some comment on that?

Well, we have 2 years left of the earn-out period for Enova. So given the volatility of the business itself, we entered into an agreement with the sellers, and they thought it was only fair because from their perspective, they could not sort of guarantee us the volumes as well. So we have a 4-year long earn-out for Enova. We are just halfway into that. So we will, at the end of the day, have paid a fair price for Enova given its performance. I can't go into the details of that because that's a bit sort of sensitive information, but we are only halfway into the earn-out period there.

Okay. So there's nothing due within the 1-year period and everything is related to the SEK 350 million between 1 and 3 years out?

We have estimated roughly SEK 300 million for next year for all of the acquisitions in total. So Enova is, of course, included in that total. But there are more companies in there, so to speak.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. I think that was all of the questions for now. But thank you for now, but thank you for listening in, and I hope that you have found the report and the increased disclosure helpful. So thanks for listening.