Vitec Software Group AB (publ) (VITB) Earnings Call Transcript & Summary

Welcome to Vitec Software Group Q2 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Olle Backman; and IR, Patrik Fransson. Please go ahead.

Thank you. A warm welcome to everyone on this call, where we will cover the report that we reported early this morning. I'm Patrik Fransson, Head of Investor Relations, and with me is our CEO, Olle Backman. As always, we will start with a brief overview of Vitec as a whole, and then followed by an update of the Q2 and H1. And after that, we will open up the -- we will open up for questions. So with that, I hand over to you, Olle.

Okay. Thanks, Patrik, and very welcome to the presentation. Sorry for the delay in the beginning there. But as Patrik said, we always start with a brief overview of the group and always with the customer perspective here. So we have our close to 25,000 customers that we're serving. We will go into the 40 business units that we have. We're still in 11 countries, so no change there. And these 11 countries are made of our 5 home markets, which is the 4 Nordic countries and the Netherlands. And the rest of the countries are connected to 1 or 2 of the companies within those home markets. Pro forma sales are, by the last of June, up to nearly SEK 3.2 billion. 86% recurring revenue is something that we're very proud of. And to my aid, I have nearly 1,550 colleagues by now. Strategy chain as well here, no changes, and you can read this from left to right or right to left, depending on where you want to start. But if we start with the values, of course, products, keep it simple, and trust and transparency. Over to brand promise, which is a very important part of what we do, which is to be a reliable, both supplier, of course, but also a reliable employer. So we invest in products and we invest in people today in order to be relevant for tomorrow. Business concept, of course, being a providing standardized niche business-critical softwares, and the objective is still to be a profitable growth company. And if we do all these things right, we will help in striving towards our vision, which is to shape a wiser and more sustainable future. And then talking about growth, growth can come from different parts. And if we start with the business units, which is always at the center and the core of our operations. We have the decentralized organization. They have all the resources they need, and we support them from the group perspective. So they grow the organic growth there from the business units, of course, then fueled by the common business model with a high degree of recurring revenue with mission-critical software and usually, they are also market leaders in their niches. And then on top of that, of course, we add acquisitions. And basically, the criteria that we are looking for is to find small Vitecs all over. So we buy ourselves over and over again. So we look at vertically -- verticality, established and profitable, you own your own IP, the proprietary software and also, of course, a high degree of recurring revenue as characteristics. And then just a few words on the acquisitions year-to-date. So we have made 3 so far this year, 2 within the reporting period, that's LDC in the Netherlands, and the Bidtheatre in Sweden, in January and June, actually. And then just earlier this week, actually, Taxiteknik, also a Swedish company. So we will add that in the Q3 numbers. So we're up to 3 for the full year this -- so far. And just looking at last year, the 6 acquisitions, and you can see also the distribution there. We had 2 Dutch, 2 Finnish, 2 Swedish and with a variety of smaller bolt-ons and larger acquisitions like Enova. And looking at verticals. This is another way of displaying it. You can see the bubbles here are basically the size of the vertical. We have some 20-plus verticals that these 40 business units are spread across. And you can see the biggest ones are by now property management, energy, but they are quite evenly distributed as well here. And this is a great way of showing the low risk or the risk distribution within Vitec. So we have 40 business units. We have loads of markets and we have 40 verticals nearly. The latest acquisitions, of course, LDC, that's a small part here in labor mobility and Bidtheatre, it's a part of the media bubble there. This is a business -- or another way of showing business units that you are used to. Just a few comments here. Even though we have made 3 acquisitions, we are actually at fewer business units year-to-date than we are when we started, but that is due to the fact that we have done some mergers across. When we see that it's a good idea in both from a product and development perspective, but also on the customer perspective and how we can approach the market. So nice wins to Norwegian business units that were part, are now what we call Vitec Forsikring, Norwegian, so the insurance market in Norway and Denmark. And then DL Systems, which was a smaller bolt-on, which has been merged into Actor SmartBook. And this is also the way we look at the M&A landscapes or the distribution of the sizes of companies out there when we look for them. They basically match our own portfolio pretty well. Organization. Same here. We -- no immediate changes. We have the business units, which are at the core here, the 41s, and they are all helped by the VPOs, which is our way of dealing with the day-to-day business and supporting them in their growth. And then of course, we have some common group functions are also here to support them. You may have seen in the press release that we recruited a new CFO, Mr. Peter Lidström. He will start in 1st of September. And Sara Nilsson, our current CFO, she will stay on and will be assuming a role of Head of Group Reporting and Controlling, and I'm very happy that Sara will continue with us. She's done a great job, but also looking forward to welcoming Peter on the team. And talking about teams, sharing knowledge is a very important part of the value of being part of the Vitec Group for a smaller company. So we have a lot of sharing forums, where we have common culture concepts for sharing best practices. We have different vertical clusters, where business units that are addressing the same market, can talk and exchange ideas, and this is really a very good way of fostering and cross-fertilizing ideas and experiences across the group. So very happy to have the opportunity for new business units to tap into the knowledge base of nearly 40 other peers. Then moving over to the numbers. The second quarter net sales was up to SEK 880 million, an increase of 22%. Recurring revenue, which is what we really strive to increase, was up 27%. I will get back to a bit on the distribution there with, of course, Enova, coming in really strong in that quarter, adding a lot of that growth. EBITA margin increased by 17%, and then the margin is at 30% compared to 31% last year. It's also a bit due to the mix of the income for the quarter. And if we look at the first half year, because that we have a long-term interest in everything we do. So we think that the longer the time period, the better it is to evaluate what -- how we're doing. So for the first half year, sales is up 20%, EBITA margin up 18%, and the operating profit is up some 22%. And here also, the cash flow is really strong on the first half of the year, up 37% to SEK 783 million because, as you know, a lot of our cash flow comes in the first quarter and then, because of the prepayment model that we have and really like. Net sales, more compared by quarter or over the years, and we have a compounded growth over the last 10 years of 22%. So basically, we're keeping up the pace. The EBITA margin also a bit flattish this quarter, but I will get back a bit on that, but at a healthy level of 30%. And we can move over to this page here. We can see the allocation of or the distribution between the recurring revenue. And as you know, we have 2 types of recurring revenue. We have the traditional subscription based, which is the light blue there at the base, which is the SaaS fees, the maintenance fees, the hosting fees, and that is growing at a really nice pace, and it's a very stable part. Then we have transaction-based revenues, which is basically value-adding services towards our customers, such as text messaging, it could be maps, it could be kickbacks on payments or spare parts or things like that, that we have had all along. As you know, when we added Enova in last year, that really increased a lot because they have a fantastic value add to their customers in the way that we can take the excess capacity of the energy that they are having and make bids on the balancing market in the Netherlands. And that, as you see in this quarter that really took off huge and fueled that increase. And basically, all of the increase apart, they are -- the rest is growing along with the organic growth, I should say. So it's still growing the other part as well. But Enova really had a fantastic quarter here. It's also a bit on the seasonality. In the summertime, there's a lot more renewable energy sources into the energy mix. And more renewable resources demands more balancing power, and balancing power, that's what we sell for our customers. So our customers had a great quarter, because this is a revenue share model we shared with them. There's always some part of it that goes back to us, which we are very happy for, of course, but it is a bit lower margin than the traditional subscription kind of revenue, of course, because there's a really high margins when you have your own software. So that's also an explanation on the fact that the margin for the quarter was basically 1 percentage lower than last year because this high volume has a bit lower gross margin component to it. But nevertheless, it is good money for our customers, it's good money for us and at a very low risk to that. Organic growth is also something that we're really proud of and that we see, and we're keeping up the pace. You can see the FX part there is going down a bit, roughly 2% on the quarter, but we're keeping up near 10% organic growth in the subscription-based revenues, which we are really proud of. And this chart tells basically the same thing. So all-in-all, total sales is a growth of 9%. You take away 2% FX. So that's 7%, but that's a mix of all the different revenue streams, but you can see up there, 12% growth in the subscription-based recurring revenue, take out 2% of FX. So that's a 10% organic growth, and that's a number that we're really happy and satisfied with. Diversification of sales. We mentioned that across the different markets. It's quite evenly dispersed. And we also have a great breakdown of the revenue. In terms of customers, great customer distribution there, the 10 largest one is just 7%. And the other 25,000 nearly covers the rest. And this is a bit of a sum up of the quarter. Steady customer development, strong continued additional sales, like we mentioned earlier, new sales is still a bit hard, but we really have a good upsell and additional sales to the existing customers. We're still not seeing a lot of churn or anything like that. So pretty well, and then we added another 3 acquisitions year-to-date. So with that said, we are opening up for questions.

[Operator Instructions] The next question comes from Daniel Thorsson from ABG Sundal Collier. Please go ahead.

Yes. A follow-up question on you elaborating on the margin in Enova here in the quarter. You made it really helpful for us. But just to understand it a little bit more, revenues were up quite a lot year-over-year in Q2, according to my understanding, at least. And the lower margin is a result of more transaction revenues, obviously. But how should we think about the level? I remember 1.5 years ago, you said that the margin in Enova was higher than the Vitec Group margin. And I guess that in this quarter, it must be a bit lower. So what were kind of the ups and the downs in the last 1 to 2 years in terms of profitability in the Enova, please?

Well, the profitability in absolute terms is, of course, up due to the model, and we are making money on every euro that we sell. But a lot of -- some of the volume here is when you activate energy. Basically, when you sell energy or balancing services, it's like an insurance that you will be there if needed. And of course, the insurance premium there, we have a decent margin on. And then, if the energy is activated, so if they actually call on the energy, then our customers also have a direct cost related to that. So then they will have a larger share of that revenue going through. So we have a lower margin on activated energy, and that is usually activated also during the summer period.

Yes. No, I understand the dynamics. And just to give us an example, what could be the margin in a quarter like this versus what margin did we have in Q4 or Q1 for Enova? Just to understand the volatility between quarters for Enova, please.

We don't comment on individual business units, but they are, like we said, when we did the first information and introduction, they are in line with the rest of the group, and then they still are on a full year basis. So -- but it will be a bit up and down, but yes...

Okay. No. Okay. I see. That's fair. And then secondly, regarding those transaction-driven recurring revenues also when you acquired Bidtheatre here in June, I expect those revenues to be quite a lot of transaction driven as well. And this will change the whole group mix to be more transaction-driven over time. Do you have any plan to convert those revenues into more subscription-based? Or should we get used to a higher share of transaction?

Well, for the business units that we have today, largely than, like I said, almost all the business units have some component of transaction based, and that is something that we actually encourage because it is value adding and you take a larger share of wallet from the customer and you become a more important vendor to them. So we really like that. Then of course, Enova and Bidtheatre have models that has basically shifted. So the very low part of their income is subscription-based and a large part is that. And for those 2 units, we should get used to that, because that's part of their business model. But then when I look at other companies, if you look at LDC or Taxiteknik, that we also bought this year, they are exactly like all the others with a more standardized 85%, 90% of a subscription-based period. So I wouldn't go so far in saying that this is something that we actively look for, but it's just an evolution of software companies and how they take on more part of their customers' potential offerings.

Yes, I see. That's helpful. And then just a final question. How do you see salary inflation versus price increases playing out in the rest of 2024?

Yes. Well, both of them are basically done by now. So we have increased the year's pricing and the salary negotiations have been done already. And they are basically on par with each other. So they are roughly in the 4% range.

The next question comes from Christian Binder from Redeye.

First one would be, I wonder if you could elaborate on the consolidation of some of your business units. I think on -- at first glance, it might seem like it's a little bit contradictory to your philosophy of decentralization. Can you just elaborate a little bit more on when you think it's appropriate to, for example, merge different business units?