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

Welcome to Vitec Software Group Q4 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, and a warm welcome to today's conference call. I'm Patrik Fransson, Head of Investor Relations at Vitec Software Group. And with me in the room here in Stockholm is our CEO, Olle Backman. In the call, we will cover the report released earlier today. But first, also give a short overview of Vitec Software Group. And finally, after the presentation, we will, as always, open up for questions. So with that, Olle, I hand over to you.

Thank you, Patrik. And like Patrik mentioned here, I will give a short overview of Vitec today and then move into the report. But always starting with the same picture here, the overall Vitec Software Group of today. We turn nearly 26,000 customers. We have 45 business units and business units is basically the same as the company. We're a small group of companies. We have operations now with feet on the ground in 12 countries, but we say that we have 6 home markets and our home markets is where we have a company which is originated from that country and has its headquarters there. So they are the 4 Nordic countries plus the Netherlands and since 2024, also Belgium. Pro forma, so that's the run rate that we're operating in today, we have sales of nearly SEK 3.6 billion and 87% of that is what we define as recurring revenue, which has to do with our contractual base and then the software that we are providing, and I have nearly 1,660 colleagues to my help. Looking at our strategy chain, which is basically unchanged for a few years now, but starting with the values and, of course, for our employees, which is very important, the products. That's the foundation. We are a product-based company, so we are not dependent on services or anything like that. Keeping things simple in everything we do, development, sales, but also how we interact internally and the wind society as a whole. And then, of course, trust and transparency, which is absolutely critical to maintaining a long-term relationship with your customers and your employees. Brand promise, which pretty much sums things up, which is to rely on today and tomorrow. And this is also very important for us. That's to that tomorrow component here, that rhymes very well with the long-term aspect and the long-term relationships that we want to have with all our stakeholders. And if we do things right, of course, we will then hopefully take part in shaping that vision of ours, which is to shape a wiser and more sustainable future. Talking about the growth, then how do we go about that? Well we have the fundamentals so that's the business model. Our companies are usually market leaders in their small niches. They have a high percentage of recurring revenue and that's also something that we try to operationally drive all the time. And then we work to develop them. So that's the how, the how of the value creation within the business units. And that is done through our decentralized model, so where decisions are taking locally in their proximity with customers and employees. That goes for product investments and growth initiatives. And then, of course, we would like to add more nice companies to the group based on our quite strict criteria that we look for. So we try to acquire nice vertical and then profitable software companies that own their own proprietary software, so that we are in control over the road map. We also would like to see that they have a decent amount of recurring revenue to start with. Then talking about acquisition. Last year, we made a record of 7 for the year and then 3 just in the last quarter, also adding a new home market, like I mentioned, where we acquired Belgium Trinergy in Q3. But like you can see here, 2 Swedish, 3 Dutch, one Finnish and 1 Belgium company, and they come in all shapes and sizes, and that pretty much is what our sort of market looks like in various forms. But the common denominator here is that they all meet our targets, and they are all really nice vertical market software companies. One way of looking at the entire group is, of course, based on verticals. So we have nearly 45 business units, but we are present in I think it's 22 or 23 different verticals. And you can see also that Property Management, the Energy, HealthCare, Auto, and Finance and Industry are quite big ones where we have been active for a long time, and we also usually have multiple business units within them. But we are equally happy for the ones that we only have 1 business unit in because they are always the market leader in their niche. And then looking at the business units on an individual basis. You can see the sizes here and also the proportions of recurring revenue and the like that you can see. They come in all shapes and forms and sizes. But if you look at the average, that's roughly SEK 30 million, SEK 40 million or a EUR 3 million or EUR 4 million company, which is the average size, and that pretty much has been a constant number over the years. Organizational-wise, we have the same structure, like I said, a very decentralized organization. So in the red square here, that's all the business units with their individual CEOs. They have all the autonomy. They have all the decision-making power and all the resources that they need to conduct their business. And then from group management through the VPO model, we try to support them and coach them and teach them and also, of course, challenge them but also connect them with each other so that we can have a great learning experience. And talking about that, this learning experience that we have, forums, what we call a sharing forum, where we also share not only the culture and the values, but also very specifically things that we can learn from each other, each other's successes or mistakes and this is just getting better and better with the increased size because there's a bigger and bigger knowledge pool to tap into. And it's also very much appreciated by the business units out there. And then moving over to the numbers, both for the full year and for the quarter, but starting with the quarter here. So sales was up to SEK 927 million, an increase by 25%, really happy with that, and recurring revenues grew even a bit more, they'll be 26%. Our EBITA margin increased by another 20%. the margin was fairly stable 29% compared to 30% last year, more of, I would say, an effect of mix in the income, which we also talked about in the Q3 and that's sort of -- we also were a bit into Q4, so no drama there. The operational margin, 19% compared to 20% for the quarter. Cash flow from operations, really strong, especially compared to last year, but I would say it's more on the level where it should be. I think that the Q4 in last year was perhaps the odd one out. And like I mentioned, 3 really strong acquisitions during the quarter with the Olyslager and the Figlo in the Netherlands and the Roidu in Finland. Moving over to the full year. Sales up to SEK 3.3 billion, 20% increase on the top line. Margins also there, like I mentioned earlier, a bit of a mix that has made it a bit lower 30% EBITA compared to 32%, but that's more different, yes, like I said, mix of the income that we reported also earlier on, so nothing new there. Really strong operational margin, 21%, slightly above our target, and the target is actually more of a floor. So we say that we should reach an operating margin of at least 20% and growing. So that's what we aim for, and that's what we push our business units towards. Earnings per share increased by 19%. Also cash flow from operations, really strong, just over SEK 1 billion here. And the Board of Directors propose an increase in dividend to SEK 3.6 of share, so that's an increase over the SEK 3 last year and also that's the 23rd consecutive year of increases. So that's something that we are really proud of. And digging a bit deeper into the sales, you can see as the distribution both over the years and which is a really strong 21% compounded growth. And if you look at also the individual quarters, you can see an all-time high here in the Q4. And of course, the margins the same. We're here increasing the margins, of course, in absolute terms, a compounded growth of 27% over the last 10 years. And you can see in the quarter, same here, it's a really strong absolute number and the margin is fairly flattish over the time. Moving over to revenues. So the allocation which we have been showing for the past year or so, the total of the recurring revenue, but split into 2 sections, which is the subscription-based revenues, which is the absolute fundamental. So these are the SaaS fees, the maintenance fees, the hosting fees are really stable, groundbreaking and that was really strong here in Q4, both in terms of organic but also fueled by some really nice acquisitions that added to that picture. And on top of that, we have transaction-based revenues, which is really value-adding services on top of our software directed to our customers. That could be text messaging, that could be maps, that could be kickbacks on spare parts, it could be all sorts of things. And then from mid-2022 when we acquired Enova, also Energy Services on the balancing market. And looking at that growth, we have always guided throughout the year on the organic growth on a pro forma basis, which we think is a good proxy for everyone to know at what pace are we working on today. So that's why we have the pro forma SEK 3.6 billion compared to the SEK 3.3 billion, which is reported. And here, we have also a 9% organic growth on a pro forma basis on the total, which is a strong number. What we'd also now highlight is perhaps a more traditional way of calculating organic growth. So that's more backwards looking. So it happens to be the same number. So 9% organic growth, and we had basically a 0% FX during 2024 and then 11%, of our total of 20 were from acquired units during the year. Diversification of sales is also an important feature within Vitec that really shows the great variety. So we have, of course, the country perspective, we have our home markets there, great distribution over that. We also have a breakdown of sales from our customers' perspective and also the customer distribution. So we have a very low concentration on the customer side. So all the 26,000 customers basically sum up to 92% of the revenue and then there are very few, the top 10 ones, only count for 8%. And then to sum things up for Vitec for 2024. We think that we have a really strong year with a 20% growth again and 9% from organic which we're very happy with. Of course, record of 7 acquisitions in the year and also opening up Belgium as a new home market and continued strong cash flow and basically another solid Vitec year, I would say, for 2024. So with that, we hand over to questions.

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

Olle and Patrik, I have a question on the cash flow here in Q4 and specifically, the M&A cash outflow in Q4. That was higher than I expected at least, and even without the earnouts of previous acquisitions. So firstly, could you share what you paid for Olyslager in the quarter, please? And then secondly, how large do you see the current financial headroom based on the leverage? It looks to be up again to levels where you have been historically, despite that you raised SEK 1 billion as late as in September.

Well, thank you, Daniel. No, we don't disclose the individual numbers. That will probably be shown in the annual report, of course, for those who want to dig into it. But yes, it was pretty high levels of capital deployment during the quarter, but we always pay according to profits. And what we always also do, that we pay for the current profit, that's the cash outflow today. So all the 3 companies combined together, they are really high-quality companies with good margins. And on top of that, we have some contingent earnouts for all those 3. So we hope and expect them to continue to grow. So they were all very profitable companies. And then we still -- I mean, we pay according to what we guided. So we haven't sort of deviated from our multiples.

Okay. That's clear. And then the follow-up on your current financial headroom, given that you had almost SEK 1 billion outflow there in Q4?

Yes. We still have roughly a bit over SEK 1 billion in firepower in our existing credits because where we move into now Q1 and the first half year, which is traditionally where we have our strong cash position and also, of course, with the fact that we have acquired quite a lot of revenue and then the income, so according to the leverage that we are operating with, which we show with our bankers, we are very good in line and are very comfortable with the levels that we are at and that we can also accumulate more debt if we want to do so. I think we're in a good position. So that's not something that limits us in any way.

Yes. Excellent. And then the final question, what price tailwind do you expect for the group as a whole in 2025 from CPI-linked price increases roughly?

Well, that would be basically a mix of the CPIs in the various markets that we are in. We have sort of concluded all the numbers yet, but what it looks like is, yes, approximately around 3% from the pure price increasing from the CPI-linked.

The next question comes from Christian Binder from Redeye.

I have one quick one regarding the contingent consideration reversal in the quarter, which was rather large. Can you talk a little bit more about whether there was an acquiree who underperformed your expectations? Or was it rather quite ambitious goals that were met? So if you can give any more color on this one?

Yes. First of all, I think it shows that we have a very prudent approach when we allocate the considerations that we pay. And it was more a case that we wanted the sellers to have an ambitious target to work against, and it's always a negotiation. I want to have an opportunity to reach a certain goal. And we said, "Yes, I'm fine with that, but I only pay for what I see." And in this case, they have performed well, but they haven't sort of performed as high as their sellers would have expected. But we are happy with the development of the company, and we have paid accordingly. So then we just sort of write off that consideration and also decrease the goodwill. So it doesn't have any result effects, and it doesn't have any cash flow effects. So it's more of an accounting gain. But that again, I think it only proves that we have been prudent.

Got it. And I mean, you've previously discussed how, to some extent, competition has increased and there might be changed price expectations. Do you kind of expect this pattern to continue in terms of to be able to agree on the price, you have more ambitious contingent considerations, so to speak?

I think the contingent considerations, they are here to stay, and we have been working with that for many, many years because, again, we are very happy to pay for what we see. And are they delivering according to a really ambitious plan? Then they should be rewarded for that. And I think that's an important message to the sellers and say that, of course, if you have an ambitious agenda, but it's just a risk distribution on that. And if you believe in it, fine, then let's set up a plan for you to be able to reach it. But at the end of the day, you will always be paid for what you deliver and the actuals, sort of the facts. So I think that's here to stay, and I think it's a good way of distributing the risk and the opportunities between seller and buyer.

[Operator Instructions] Next question comes from Predrag Savinovic from Carnegie.

You mentioned price hikes around 3%. So you mentioned price hikes of around 3% going into 2025. What about upselling and new sales? Previously, you have commented that upsells and new sales are a little bit more challenging. Do you see that as consistent with the past? Or do you see improvements there?

I think we have seen a little bit improvement. First of all, upsale, it is more on the constant good level because we worked closely with our customers and we have a mission-critical software that we provide and they ask us constantly, okay, what else can you deliver, and then we work to always increasing sort of new features, new modules, things like that. And then in some sectors or some verticals, we are seeing a bit sort of better times, better investments from the customers because they can't sort of be tight on the investments forever. So we are seeing some positive signs but that's yet to be proven, of course, but yes, we have a fairly positive view on that going into 2025.

Okay. And then looking on an aggregate level on the acquisitions that you made in '24. What kind of margin levels are these operating at? Are they below, similar, or above the level of Vitec?

The last quarter's acquisition, they are sort of, yes, roughly slightly above. So you can see that in the numbers on an EBITA level. So they are a few percentages on top. So they have been really successful and high-margin companies that we have added to the group.

Okay. Super. And finally, if you could elaborate a bit on that quarter-over-quarter growth in service revenues -- or actually, in fact, maybe in the total revenue increase Q3 into Q4. It was fairly above the market and our expectations. And then probably also relate that to the margins. So I think given the higher sales number, one could have assumed that the margin would have picked up as well. Is there a high level of transaction revenues here at lower margins? Is there anything specific in the costs to be aware of?

I think I mentioned that also during the quarter where we finished a few projects. That has been going on for quite many years actually and so they rolled over into the last quarter. And projects is not a huge thing within Vitec, but occasionally, we do that and then a project could be -- there's a bit of services, there could be a bit of hardware, it could be a bit of licenses, so it's sort of a mixed bag. But all these projects, they, of course, fuel their recurring revenue for the coming years because then they move over into a maintenance sort of mode. So a few larger projects were finished during the quarter. So I think that sort of is what sort of constituted the difference on a quarter-to-quarter basis. But they were good projects for us. But like I said, it's not that usual that we do them.

The next question comes from Viktor Lindström from Nordea.

So first one, how do you see the recruitment needs going into 2025? And can you also elaborate a bit on the wage inflation here into 2025 compared to 2024?

When it comes to recruitment, I mean, we constantly recruit because once we grow and, of course, we have a slight turnover of staff as anybody else. But we've seen -- if you had asked me 2 or 3 years ago, that would have been the greatest risk in finding the right talent. It has been a bit easier. It's not easy in this industry to find good but it's easier. So we don't see any big problems in that and also that we -- I think we filled up a lot of the vacancies during 2024. So we're quite in a good spot now in the various business units. So we're not seeing any significant increase in numbers, but it's always just the annual staff turnover that we try to accommodate. And when it comes to wages, different markets have different timetables there. In the Netherlands and Denmark, they are quite early in the year. So they have basically done. Sweden, Norway, Denmark, it hasn't really started yet, and it's usually in April that the salaries are set and the negotiations haven't even started yet. So we will see. But of course, the expectations is that roughly around the CPI for each market, that's to be expected at least Finland have done some. Yes. So that's the expectations at least. And from the Netherlands and Denmark, we can see that that's quite accurate.

The next question comes from Daniel Lindkvist from Danske Bank.

So two things basically that surprised me in the report. If you'd please elaborate on those. The recurring revenue on subscription seems to be much higher from acquisitions than I had expected. Have you low-balled the numbers from the acquired companies? Or have they really performed strongly in the quarter?

They have both performed strongly in the quarter, and the companies that we have bought, they are in the high 90s in terms of current revenue. So really good additions there.

Perfect. So sustainable for the coming quarters then as well. And then the next thing was the price in Q3 with a bit high capitalizations and in this quarter, it was rather the opposite and to quite some degree. So could you just elaborate on the capitalizations? If there's something we should think about for the future? Or if this situation is going to normalize once again in Q1? I mean this is really call it a beat today, but what should we expect for the future?

I think if you look at the full year, that's probably the best proxy for that. Like I said, it was a bit higher capitalization in Q3, a bit lower in the Q4. But if you look at the full year, I think that's a good proxy going forward. Like I mentioned earlier, we had some projects that we rolled out, and we've also done a lot of customer implementation. And in small companies, it's usually the same people who do development that also help out with such cases. So it's been a sort of if you do a lot of rollouts on new customers, it usually gives you a bit fewer hours on development, but that's just on the quarter, it could bounce back. So I think the full year is a fairly good proxy.

Okay. Perfect. Then nothing else from my side. Just congratulations on a strong report.

Thanks, Daniel.

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

Okay. So thank you all for listening in. And we -- it's a strong report yet again, and we hope to hear from you again in the next quarterly session. Thank you, and goodbye.

The host has ended this call. Goodbye.