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

Welcome to Vitec Software Group's Q3 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, operator, and a warm welcome to the fourth conference call in our history. I'm Patrik Fransson, Head of Investor Relations at Vitec Software Group and with me in the room is our CEO, Olle Backman. In this call, we will cover the report released this morning, but also give a short overview of Vitec Software Group. And as always, after the presentation, we will open up for questions. So Olle, with that, I hand over to you.

Thank you, Patrik, and welcome to the company presentation here for the Q3 report. And as always, I will start with run through over Vitec Software Group, starting with this overall picture, as always here. Starting customer perspective, 25,000 customers roughly still in line with what you had last quarter, 42 business units by now, and the business unit is a company or a group of companies that operate independently within our very decentralized organization. 12 Countries, so last quarter, it was 11. So we added Belgium now as a new home market with the latest acquisition of Trinergy. So we're very pleased with that. Pro forma sales, so that's the guidance of the run rate that we're operating at is roughly SEK 3.3 billion. And the recurring revenue part of that is nearly 87%. And I have nearly 1,570 colleagues of ours. And as you can see, the sales distribution there by market. I will get back to that a little later. Strategy chain, nothing changed here. As always, we have everything from our values through the brand promise business concept objectives up to our vision. And the objective for the group is to be a profitable and sustainable growth company that develops and delivers vertical market software. So nothing new here either. And how do we go about this responsible growth theme of ours? Well, first of all, our business units are already market leaders usually when they come in or when they operate within us. They already have a decent or high percentage of recurring revenues. And what we do is that we work very closely with them to develop them further. And that we do through our decentralized organization. We do that through continuously monitoring that we are on the right level of product investments, so we don't underinvest but we also don't overinvest. So we have a pretty good idea that has sort of evolved over time and combined experience of all the years that we have been working on, just how much you need to invest in order to be -- to rely on today and tomorrow, which is our brand promise. And of course, this all fuels our organic growth that we work very, very closely and hard with our companies that we have. So we work with all our 42 business units in a similar way and pushing them to become a little bit better each year. And then we add acquisitions on top of that. And we do that through searching very thoroughly throughout Europe, using the same kind of characteristics that we look for. So they should be vertical, they should be established and profitable usually market leaders, as I mentioned, they have a proprietary software that means that we own our own IPR that we are in control over the technology, and they have a decent amount of recurring revenue. So if they fit this criteria, we are very happy to look into them for future potential add-ons to the group. And so far this year, we have succeeded in buying 4 nice vertical market software companies. We started up in Q1 with LDC, in Q2 with Bidtheatre. And then during Q3, now we concluded the acquisition of Swedish Taxiteknik, and we also added Belgium Trinergy. All 4 of them, really nice additions that fit our criteria very well. So we're very happy with that. If you look at the group from a vertical perspective, like I said, we have 42 business units. They operate in roughly 20 different verticals. And as you can see, the property management sector and the energy sector are 2 of the biggest ones followed by health care or finance. And as you can see on the distribution here, we're not dependent on any single sector but even within these sectors, we always operate in facilitating and providing business-critical software for our customers. So that gives us a great stability to work from. The business units, you will find this chart also in the report. I won't go through all the details, of course, but you can see just the distribution there on size and the level of recurring revenues that they operate in, also which year they came into the group. And as I mentioned before, Vitec has become another size that we are basically a mirror image of the vertical software market in Europe. So when we look into the pipeline for future acquisitions, it pretty much looks like this when it comes to the different sizes and shapes of the companies. Organization, nothing really new here either. I mean we work in a very decentralized model. So it's the red box there at the bottom with all the business units, that's where all the action takes place. They are autonomous, they have the resources available to conduct their business in a very good way. And the rest of us are basically there to coach them, guide them and help them to become a little bit better each year. And one of the greatest things about being part of the group and also one of the big value-adds that we present to potential new acquisitions is the sharing of knowledge, what we shared -- call the sharing forums here. So here, you can tap into the knowledge pool of the other 42 business units, and this is a really great community to be part of, because being a single company in a small vertical and being a market leader, it's a pretty lonely place to be usually. So in order to have this inspiration and to find new ideas and also share your success stories. We have a lot of the sharing forums internally. So this is something that has evolved over time, and we're becoming better and better at it, and it's very, very much appreciated among the business units. Then going over to the interim report for the third quarter and also for the first 9 months. Looking at the quarter, sales was up to SEK 809 million. That's an increase of 15%, and we look at the recurring revenue part of that, that increased by 17%. The EBITDA level increased by 3%, and the margin was slightly down from 34% last quarter to 31%. This is, as I mentioned in the report, mainly an effect of the distribution of the revenues where both service revenues and license sales, which is a fairly small part of the total package, but of course, it has quite an impact on the short-term margin. So it was a bit lower on that, and that is partly an effect of the trends that we've been seeing that customers are not investing that much in new rollouts and new features or changing over from one competitor to us. So it's a bit slower on the new sales side, we have still seen quite a decent amount of upsales to existing customers, but I think that's pretty much it. And also the fact that we have been comparatively a higher degree of our transaction-based revenues, which has a bit lower gross margin profile than the others. But that's yet again, not something that I'm really worried about in the long term. Operating profit is up by 8%. And when you look at earnings per share, which is one of our key metrics that we work with closely internally and also from the Board here, it's an increase of 27%, which is a really good number. Cash flow is roughly in line with last year. And like I mentioned, the 2 acquisitions of Taxiteknik and Trinergy closed during the quarter. Look at the first 9 months, you can see that the growth level is roughly in line with 18% on the total and 23% on the recurring revenue. You can see the EBITDA margin is slightly down to 30% from 32%. Operating profit's up by 17%, good number. But really strong is the cash flow for the first 9 months, SEK 939 million compared to SEK 727 million. And we think that you should always look at cash flow when it comes to Vitec, either on a full year basis or at least on a rolling 12-month basis because we have a really, really strong first quarter when we have a lot of prepayments coming through and then we basically live off that for the first -- or the consecutive 3 quarters. So I think it's a fairly strong cash flow position that we have for the first 9 months. Net sales, basically, these bars explain what I had. The compounded growth over the years has been 22%. And like I said, the run rate today is up to SEK 3.3 billion. You can see it's a bit down from Q2, but during Q2, we have the seasonality effect in our transaction-based volumes that are usually really high during Q2. So that's to be expected. EBITDA margins, pretty stable. So no drama here, like I mentioned, a bit down in the quarter, but overall, around the 30% level, still a fairly good number. The allocation of the revenues there, you can see really the bars there on the basis of a subscription-based revenues, which is the light blue in the bottom growing at a steady and a really good pace, very stable and then you have the transaction based on top of that a bit more volatile. But as I mentioned, it has 2 very different gross margin components in this. So the profit is not affected in the same way from these swings. Organic growth, like we have measured it, which is on a rolling pro forma 12 months basis. That's good to give the guidance on the run rate today and also on the long-term perspective that we have. And as you can see here, we have had an FX tailwind for the past 2 years. It's not that we have forgotten to calculate it. It is actually at 0 level just now after 9 months. So we don't have any FX effects on the total group. And this is the chart that talks about this organic growth. And then there, we have the 9% on the subscription-based revenues, which we think is a very good number. And then we have the transaction base, this is growing at a lot, 17%, but that's, like I mentioned, a bit more volatile, but this was on a rolling 12-month basis. So it's still a great addition and the total is up by 8%. And like I said, there is basically no FX effects in these numbers. Diversification of sales just gives you the feeling that this is a very sort of distributed model that we are present in many markets, and we have a lot of customers. So no single dependencies here, which is totally in line with what we have talked about before and what we aim to be. And lastly, just a few slides, summing up here. I think fairly okay quarter growth-wise, a bit lower on the margin, like I said, but that's due to the distribution in the revenues for that specific quarter. And then we finished 2 really nice add-ons to the group with Taxiteknik and Trinergy coming in. So by that, we leave -- go over to the Q&A session.

[Operator Instructions] The next question comes from Erik Larsson from SEB. Please go ahead.

I got 3 questions. I'll take them 1 by one. So first off, on the margin. I hear you on these mix effects. But at the same time, those -- the same mix effects, they were larger in Q2 and in Q3 often has the seasonally stronger margins on top. But this year, they were around the same level. So I'm just curious, are there any parts where you see a slowdown that also plays into this weaker margin?

No, not really slow down. Like I said, the business units that has that profile of license or service revenue, that has been slow all year, basically. But it's also a bit of a seasonality because, of course, we have the holiday effect when it comes to services as well. So when you compare Q2 to Q3, we're having a more European footprint now. So we don't have holidays in June anymore. We have holidays in August and September in that. So it's a bit of seasonality there in the service revenue and also then, of course, sales in -- for licenses. And there are mainly the companies outside of the Nordics that has that distributions.

Okay. Great. And then in terms of these -- the new sales, are there any changes in the market regarding -- as that's been slow for quite some time. Are you seeing any changes?

Not that we have an effect of it yet, but we start hearing, at least from our customers due to the fact that there are lower interest rates coming in and energy prices have gone down. So the sectors where our -- and the customers, so to speak, are more sort of affected to hearing some positive signs, actually, but it hasn't materialized in any sales or revenues just now. But for sure, it's starting to sound like investments will start picking up probably during next year.

Okay. Great. And then a final question on my end regarding price. What are you seeing in relation to these KPI-linked indices as a basis for price hikes next year?

Well, we have to basically wait in. So there's nothing here. We have raised -- we've done our price increases already. We do that in Q2 and then some of it in April. So that's all done. So now we just have to wait in and that is starting with some use the October index, most use the December index. So we just have to wait and see there. But for sure, it will follow basically the local CPIs.

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

I have 2 questions. I'll start with one on the transaction-based revenues. That was around SEK 194 million here in Q3, can you share a proxy for how much Enova and perhaps Bidtheatre contributed with in the quarter, respectively?

No, we don't disclose that on that level. But you can see if you take the average before, when we have been at that 10%, roughly 10%, 11% level for years and years and years. And then Enova came in and then Bidtheatre came in, now first in this quarter fully because we bought them in June, so I would say the difference between that long-term rate, but it's a good proxy for their contribution.

Yes. Okay. That's fair enough. And just on Bidtheatre then, is there any seasonality effects there? Or are revenues evenly split throughout the year, roughly?

They are, for sure, more evenly because they are more connected to volumes in the advertising market. Of course, during the summer, it's a bit lower, perhaps, but not at all in the same way as for Enova that has the weather to tamper with. So it's, Bidtheatre is a lot more stable on the top line there.

I see. And then second question on M&A here, to maintain roughly our historical growth pace, you either need to do more acquisitions or larger, obviously. What do you think is most likely to happen in 2025? Is it to do larger acquisitions or more?

I hope for a bit a mix of both. We have the capacity to do more. We did 6 last year. We've done 4 so far this year, we can onboard more with the processes and the organization that we have. So we don't need to add any more resources for that respect. And then like we said many times before, larger companies, yes, when we go into larger countries, there are -- you can grow a bit bigger because a lot of the companies are still very domestic. And of course, like we said, the Netherlands is nearly twice the size of Sweden, Belgium is roughly the size of Sweden. So for sure, there are more companies out there that can become a bit larger than the average Nordic company. So hopefully, a bit of both.

The next question comes from Christian Binder from Redeye.

First off, regarding the acquisition of Trinergy, once again, like for Taxiteknik, you have some -- at least initially some minority started to plan to buy out eventually. Can you elaborate a little bit on the reasons for keeping some minorities there in the initial years?

Yes. That's true. So both of these acquisitions has done -- we buy a majority to start with, and then we have a very clear path on how to go to 100%. So it is in all essence, a version of an earnout. But in this, both of these companies are really high-growth companies compared to what we normally see. So we really want the entrepreneurs to feel that you're part of the company and also, of course, to meet the expectations of valuation going forward. It's a really good sort of risk distribution and also incentive distribution between us and the sellers and all the sellers of both of these companies are still very much present in the company and continue to drive this growth. So that's why we use that sort of technique. We have tried it many times before. It just hasn't been -- yes, the case has not been as clear as these 2, but they are really nice high-growth companies in our world. So then this is a good model for that.

Got it. And I guess most people would think that these smaller or at least high-growth companies traditionally are more kind of targets for VCs or PE companies. Can you elaborate a little bit on is kind of, for example, is minority is the main reason why they still choose yours? Or is it the value proposition that you maybe care a little bit more for the culture than other types of owners?

Well, I can speak for these 2 acquisitions, when the entrepreneurs there, they have been very clear on that they chose us because this -- like I said, they are targets that has been sort of on the market. And so it's a competitive environment that we operate in. But the shows and Vitec for the same reasons as the others that they want to come into the group. They think that we can add value over time and they really like our long-term ownership idea here. So it's back to the same reasons that we sort of use as our unique selling or buying points when we present ourselves to other companies. So they really like the entire concept of being a perpetual owner, being a software company. So I think that's the main reasons that they chose us. And then, of course, compared to PE or VC they usually reinvest quite a lot in the companies. And of course, buying it gradually instead. I think that's a better way of keeping the same incentives.