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

[Audio Gap] to VTech's Software Group Q2 2026 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 everyone attending this conference call today. I'm Patrick Fransson, Head of Investor Relations Group, and with me is our CEO, Olle Backman. First, we will give a short overview of Vita Group and then followed by comments on our report released earlier this morning. After the presentation, we will, as always, open up for questions. So Olle, with that? I hand over to you.

Thank you, Patrick, and a warm welcome as well from my side. So we will just jump ahead, as Patrick said, into the report -- and this is us and Patrick, your host for the day. And just taking the Takin brief picture as we always do. So 27,500 business-to-business customers. So we're serving that at the moment. We do that through the 49 business units or companies that we have. feet on the ground still in 13 countries, but all in all, we have sales in over 60 countries by now. The pro forma sales, roughly SEK 3.7 billion 85% of that is recurring revenue, which is an important part of our business model. And to my aid, I have the benefit of having 1,870 colleagues by now. And you can see the sales distribution there on the right, and we will get back to that. Talking about sales distribution, we have a really broad exposure, but what we like to say, a very limited dependency. So you can see the largest customer business units of the total. It's just 8%. And of course, the 10 largest customers only account for 7% of the total sales. So that gives us a great risk distribution in that sense. And also on the geographical markets, you can see down there, they're quite evenly distributed 25% in Sweden, 24% roughly in Finland, 14% in the Netherlands and so forth. So good distribution, and this is also something which we normally look for and really appreciate in the M&A investigations that we do is to search for companies that have a similar good risk distribution. Talking about growth, how we do that, we call that the responsible growth path. So what we look for when we acquire companies is, of course, that they are vertical software companies that they are established and profitable to start with, that they own their own software, the IP rights, so they have a proprietary software and they have a business model based on recurring revenue. Then if they are successful, we continue to really nourish that business model making them market leaders if they are not already market leaders when they come into the group. And then we further develop that through the decentralized organization, we look very closely and monitor product investments. Of course, we don't just invest for the fun of it, we invest in future growth, the organic growth. Going forward then, being a perpetual owner, we continuously develop our companies in order to make this small but nice incremental steps all the time to continue on the growth path. Talking about acquisitions. This is the 4 latest ones, so 2 for last year and 2 earlier on this year, we did not conclude any acquisition during Q2. But we finished to really nice one in Q1, that short to net and then Swedish infometric and you can see on the bars there that in total that these 2 have combined sales of roughly SEK 190 million added to the group. When we look at the different verticals that we serve, we have a great variety of those, roughly 22 different verticals. You can see the top 5 ones there in percentage, property management being the biggest one with 18%, followed by the auto industry for 15% and then health care and welfare sector of 11%. And then we have energy and utilities 8%, bank finance, roughly 9%, and then it goes on. And in these bubbles, we can have sometimes just 1 business unit or we can have multiple business units in multiple countries as well. Talking about the business units. This is chart that we have shown you a lot of times before. So there is basically no news here, apart from the fact that, of course, it has also been amended for Enova and bid theater on the new way of accounting for their revenue according to the agent principle. So Enova is in this bar here, roughly SEK 100 million, and it used to be roughly SEK 300 million. and bid theater is roughly SEK 36 million, and it used to be roughly SEK 150 million earlier on, read more about that in the report. One big part of -- the big benefit of being part of purely software-focused group is the shared knowledge, which really contributes to the success and just keeps on getting better and better with size. And here, we gather forums internally where we share knowledge, we share successes, we share failures. I mean, it's also a great catalyst for spreading good or best practice or good practice across the group, and especially, of course, with AI coming in here at a great speed, we can really have these good examples. What has been used, what worked, what did not work, what were the experiences? How did the customers react? How did the internal organization react and so forth. We have lots of these different forums usually. 3 times a year, just over teams and sometimes they meet up physically as well just to further share the knowledge and making it easier to reach out across the business unit. A great benefit across the group here. Then talking about AI. I mentioned some on the report here. Of course, there are lots of things going on at the moment. At this time of year, we have just concluded the strategy sessions for each of the business units. We do that throughout May and June, and it has been super encouraging to really learn and see what's in the pipeline, what they have already done, how far they have come? Or are they some of them on more early stages, but everyone is doing something. It could be internally, it could be both internally and in the customer applications as well. We firmly believe that it is a deep learning here and goes just faster and faster, and the value proposition are broadening the scope, what we deliver to the customers, things that previously might have been out of scope or too expensive or taken too much time, that is now more feasible for us so we can really improve the scope and in parallel, of course, our internal efficiency in doing so. We firmly believe that the combination here, of course, domain knowledge, proprietary data and just the skill set and the deep cooperation that we have with our customers really underpins this market position that we have and the competitive advantages that goes with that. Then we have a few examples here. If you take a very broad ERP-like system, which we have initiated in the protect sector here in Sweden. Already 2 years back, they have been really focused on AI, what that can do for us starting off internally and then also widening that to the customer side. Nowadays, we have quite a few entirety. It's more of an ecosystem, so it's really going from the system of records to an ecosystem with a system of records in that sense. So we have language support. We have waste of publishing text. We have AI assistance and customer support, both at our customer side and also our own customer support, of course, internally, really enhancing that. Same goes for Finnish acute, which is in the health care sector, and it's really all about continued automation of the clinical documentation within the health sector. Of course, here, really combined with compliance and security. -- it, another Finnish company within the waste management, it's also a very sort of business-critical, system critical for our customers that this works. then we really are on the brink of releasing a brand-new version and that version has really been sort of fast forward a lot given the AI applications that we have done. That's more internally still. Then Vitec Energy, which is a very sort of domain specific and very pointed products for automating better forecasts and both the quality of the forecast, but also the way that we can harness more and more different forecasting models, drawing out the best conclusions from that and delivering it to our customers with the benefit and health of AI. That was a few examples of what we are doing in that field. Then moving over to the numbers. The highlights for the quarter. I really think that, of course, the continued growth in sales and a 15% in total, roughly 4% of that, just over 4% organically and 11% growth in the subscriptions, 20% growth in the transactional software revenues and this is after we have recalculated everything according to the Agentic method, and it proves that there are multiple of business units that have these revenue streams, and it is kind of a sign that it is a good momentum in the economy in the fields that they are operating in. Especially here, we can mention the real estate agents that have quite a big portion of and always have as long as we have owned them for over 15 years now. Part of that revenue is transaction driven and there's a good momentum in that market. There is a vast amount of business units that are all contributing to that 21% growth in transaction revenues. Of course, the cash EBIT, which is our internal metric very close to the cash flow. 18% growth and 1 percentage point up on the margin from 24% to 25%. It's really encouraging to see. Talking about cash flow, all according to plan, really, this is highly what is expected. As you will remember, we have basically all the year's cash flow in Q1, which is a fantastic model, and we're super happy with that. Then the rest of the 3 quarters are fairly sort of even as a total. It's really perfectly in line with expectations and slightly better than last year. If we continue to the growth, this is growth in total sales. You can see the bars there by quarter or by year, and also rolling 12 months there. And if you take the 10-year average growth here is 19%, which is, of course, super strong. This year, so far, we are at 15% after 6 months. More importantly is, of course, the growth in profits here. This is the EBITDA result. You can see the increase in both margin in absolute terms and also margin-wise for the quarter and growth here over the 10-year period has been 24%. Then cash EBIT, our internal metric here, as mentioned on the quarter here, 1 percentage up on margin from 24% to 25% and increase also in absolute terms, of course, actually making it one of our absolutely best quarters in terms of cash EBIT performance. The organic growth important, as I mentioned, we divide that by subscription, which is the maintenance revenues, the SaaS fees the hosting fees that grew 4% or 4.4% actually in the quarter. So just on the mark there, 4.4%. Also in line with expectations, we are seeing less of a tailwind from price increases than last year just due to the fact that they are usually CPI linked, and that has roughly gone through by now. Then you can see there the 21% growth in transactional revenues. To just some things up. It's been a fairly sort of okay to strong quarter, I would say. We're happy with the results all the way through. It's really very much according to plan, I should say. Like I mentioned in my text on the CEO comments for the report, we are seeing some sort of light in the tunnel in some of our business units. There is more activity today you can -- when you contact a customer, you can get a meeting in a week or 2 rather than, okay, don't call me, I would call you in 3 months' time. These kind of effects, we haven't yet seen it in the revenues, but we are, for sure, building up order book and the momentum for the next few quarters ahead. We're cautiously optimistic on that side. The same goes for the M&A environment. More things to look at more dialogue on the way. We haven't closed anything yet. But as usual, we use the same criteria. We are very sort of consequence and around the valuation multiples, what we think a nice VMS company should be valued at. Hopefully, we will be able to deliver something on the M&A as well. But always using the same characteristics and roughly the same multiples as before because we think that is -- has served us well in the few past and it will serve us well here in the future. With that, I think we will open up for questions.

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

You can start by discussing the outlook commentary a bit more in depth where you state to see improving business climate. Could you discuss in which areas, overall, are you agreeing to the comment that it sounds like the demand is increasing. Ideally, if you could potentially translate this into organic growth numbers, maybe even?

Yes, I can sort elaborate a bit on we see that -- we have seen that across, like I said, the health care sector and the sort of public sector, that has been an increased demand in that space. That is, of course, always not so dependent directly on the general economy, but nevertheless, they are picking up. In that sense, we also have seen it in the sort of proptech or real estate sector as 2 good examples there and then, of course, also in the real estate agent sector. All these 3 have been really sort of picking up, like I said. We haven't yet seen it in the actual revenues. Like I said, it's more the fact that earlier on this year and all throughout last year, it was more like, yes, it's interesting. We can discuss it, but we can do that in the next 3 months or 6 months or something. Now you get into the meetings, you get into the dialogue and also in some cases, we have actually been able to sign a few orders as well. That's really encouraging, and it's -- but as I said also, it's not across all of the business units. But for certainly in those 3 areas, it is picking up, and that's really encouraging to see.

That's very good. So basically, there could be some lag before we see this in the reported organic numbers, but perhaps towards the year, you can see further improved growth rates due to this better climate, you see now?

Yes. For sure, there is a lag here. I mean, if we're signing orders today, there is an implementation. And that's the beauty of -- I mean, we are delivering mission-critical quite complex system. It shouldn't be easy either to just put them in or to take them out. So it's sort of it's sort of built into the business here. There is, for sure, a lag, but it is encouraging, nevertheless, that we are in dialogue. We have signed more orders now than the earlier parts of the year and also through last year.

Okay, very good. And then in terms of the improved organic growth on the transaction revenue side, I mean, previously it was more tilted to Nova. But now with the new reporting, it's more balanced. Could you elaborate on the growth in the overall transaction space, which areas you see driving that?

Yes, it's actually a lot of the same areas that I discussed that we have seen. So we usually see an activity in our existing customers, for instance, in the real estate agent sector that has quite a large portion, which is driven by transaction. Especially in the Norway where we had tremendous success, and there's a really good momentum in the real estate market. I think they grew their transaction based over 30% quarter-over-quarter. So that's one. Then it's more of the fact that we have had this kind of revenue all year, but it has just been sort of muted a bit by bit being so large. But at the same time, Inova is actually quite flat on comparison numbers a bit better on the quarter, a bit Q1 was a bit lower, Q2 was a bit better. If you take a bit hit, they are growing really healthy and good. There's more advertising spend in our customers, which then drives that revenue.

Okay. And then finally for me on the pro forma organic growth and the recurring around 7%. How sustainable is this growth in your opinion? And this growth will be more representative of say, for the end of this year and next year given what you also see in the overall market trends improving?

The pro forma -- that is, of course, in 6 months of this year and the 6 months of last year. The pricing component will go down a bit in that as well because we are at roughly 1%, 1.5% lower in terms of pricing tailwind and that sort of leaves it at the number of roughly 5%, 6% where we have seen over the years that has been a fairly sort of normal number for us to be trading at. I would expect it to go down perhaps 1 percentage point or something like that. So roughly 5%, 6% going forward.

The next question comes from Thomas Nielsen from Nordea.

Perhaps if you could discuss what you're seeing at the forefront of AI developments. Are you seeing any form of new competitors emerging in your niche markets? And are you seeing any changes in customer churn or by new entrants in your niche markets?

We haven't really seen any customer churn just on the basis of AI yet. Yes, we have a churn as everyone else, but not deliberately on the fact that a specific new entrants just because of AI, no. But of course, whenever we have more and more start-ups coming in, in certain sectors, and I would say in bank finance and real estate, they are, for sure, very active, but they are usually very niched. If you're the sort of ERP provider, if you are the system of records, in that sense, we're not seeing, but we are seeing more on the peripherals on the smaller modules customers coming up. But on the other side, that's also where we are experiencing most of our own AI development at the moment that we can offer to our customers. We are seeing the demands we are talking to the customers. Of course, we're also seeing what the competitors are doing. because that is just an easier and faster step, you don't rewrite an entire ERP system that easily. For sure, you don't exchange it that is a bit what I said earlier on. It is sort of built into it that these are very slow moving things, and they should be. That's why they are mission-critical.

Okay. Okay. And a final question for me in terms of AI monetization. Do you have any concrete examples of AI features that you found the customers being willing to pay for and when do you think that we take that I could make a measurable contribution to organic growth?

I think that going forward, basically everything that we develop now is somehow linked to AI, if I mean, new features, new modules because that has been fueling the organic growth because if you have super high market shares that many of our business units have. You already have the system of records. The way we have grown is through more and more modules, more functionality. That will, for sure, be driven by AI or if it's not produced by AI, which everything is today, it will be an AI application in itself. That will just be a natural step of what we do just super natural for us in that sense. Yes, in some cases, of course, if you come with new functionalities, customers are willing to pay for it, -- but if you just exchange a current module that is doing 1 thing with a more efficient 1 that is doing something that has previously been really hard to charge for. But in this case, if you can prove to your customer that by using this, for instance, some identic function, their processes becomes more easy. They can save money on it. Then you have a possibility to have a dialogue around, okay, what is the customer value and what part of that should we be rewarded for.

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

Yes. First 1 on M&A. You mentioned increased activity, but also know acquisitions in Q2. Are sellers more keen to meet at lower multiples as seen in public markets? Or is there anything else behind the increased activity you mentioned?

What we've seen so far is just the volume, really. And quite interestingly, there is volume of a bit bigger targets by our standards, I should say. Some of the larger targets and also a lot of smaller add-ons and still that mid layer, the sort of what we call usual sites, the SEK 40 million, SEK 50 million, SEK 6 million company sizes, they are more still absent and far and few in between because they are usually founder led still, and they are a bit cautious in waiting, okay, how will this pan out and they are usually not in a hurry either. The slightly bigger targets usually have some sort of institutional or private equity co-ownership or -- and of course, they need to turn around their assets every now and then. So I think that is a lot of what I've seen. Really hard to say we are really not driving the prices upwards anyway. So we are still losing more than we're winning because we really firmly believe that we will put the fair value on this asset. If someone is willing to pay some crazy multiples, that's up to them. I can't justify that. Hopefully, we will be able to meet up. Like I said, we've done 2 really nice acquisitions so far this year and we did just the entire last year, and we still have 6 months to go. For sure, we are in a lot of dialogues. But we're not going to go crazy and still be very disciplined around the multiples.

Okay. That's helpful. And also, do you see any regional differences in terms of M&A activity? And also, are you looking outside your current markets to find new targets?

Well, actually, sort of the hunting ground is Europe. So yes, we are, for sure, looking outside our current markets, yes. Naturally, we are less well known outside where we already are. Europe is a big place. So here in the Nordics, we are pretty well known. I should say we probably get to look at not everything, but most of the things that are active here. But it is, for sure, a lot around the more Continental Europe.