Wiit S.p.A. (WIIT) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the WIIT conference call to comment on the Release 42 acquisition in Germany. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alessandro Cozzi, CEO. Please go ahead, sir.

Good evening, and thanks, everybody, for joining in this conference call. We are very happy to communicate in the market our acquisition of -- from R42 in Germany. This acquisition after last month had negotiations with the sellers and was successful yesterday. And this acquisition is totally in line with our strategy to boost our project to expand our business in Germany and in Europe. You can follow the presentation I send. For starting, I want to hand out to Francesco Baroncelli because he can give you more detail about the target. And the second part, okay, I am happy to give you some more information about the financial of the acquired company. Francesco, you can start from the [indiscernible].

Sure. With pleasure. And before we go on with our presentation deck, I would like to start with some personal comments. And let me start from sharing our happiness. As already stated in our press release, we are really very, very happy for this new acquisition, on which, as you were saying, we have been working for months also in parallel with Mivitec, our previous acquisition in Munich and some other potential deals we are currently following. And we are happy because it takes us 2 years in advance to the goal of more than EUR 100 million of turnover, of which 50% are not developed in Italy, but abroad and more specifically in Germany. But we are happy because we are strengthening our position in Germany and also in Italy, and we will explain this a little bit better later. But also in Italy with distinctive skills on our core business and also on new areas where we did not have currently a strong position. You have surely -- for sure, seen that Release 42. The acquired group is made up of 2 distinct companies, 1 is Boreus and the other 1 is Gecko. The first one, Boreus is a perfect complement at myLoc because it brings us a portfolio of high-level customers in line with those we have initially both in terms of size and in terms of complexity of their critical infrastructures. The second one, Gecko brings us new skills more specifically what we call DevOps skills, in particular, on e-commerce platforms. And again, we will cover this later a little bit better. And these skills are very rare all over the world in Europe and for this reason, this will strengthen our position, not only in Germany but also in Italy and in general, throughout the group. Let me also add something on the -- on something on the geographical position of the companies we have acquired. Customers are distributed in the richest part of Germany such as Hamburg, Bonn, Frankfurt, et cetera. But the staff of these 2 companies is concentrated in Rostock and Stralsund that are located in the northern border of the country where there are excellent university and other training centers. But these locations do not have the competition of many other areas in terms of companies that could subtract resources. And this results in a very low human resource churn out rate and a very good level also on our cost -- personnel costs. It may seem maybe a secondary competitive advantage. But in reality, it is not, because the lack of human resources in our sector is starting to be quite a significant limit to the expansion of the business here and there. But apart from this in colors, these introductory comments, personal comments, now if you have the deck in front of you, we can start with the presentation. We can start from the first slide, that -- well, it's #3 -- if you have pages #3, where you have financials of the operation. The acquisition price, as you see the enterprise value. Let's start from the enterprise value is EUR 60 million, something more -- EUR 61 million, let's say, and the company has cash. So the price is higher at EUR 66.6 million to be precise. The implied multiple is again very good, it's below 8 and let me say that again, we've been lucky and good enough to be in the right moment at the right place because in this case, we have hold entrepreneurs that are no more involved in the management of the companies. They live abroad outside Germany, and they wanted to sell, and they were obviously interested in the money and the price, but probably more than that, they were interested in the future development of their daughters, let's say so, and the future of the people rather than just on money. And that's why they accepted our offer. It was a competitive process but they accepted our offer for industrial reasons for the future that -- for the good future that they see with WIIT. And also for this reason, you will see it below. They also accepted EUR 10 million paid with shares because they believe that they will receive an upside. And this is from another angle, another confirmation that they choose us not only for the money, but also for the future development of the whole group. If you jump on Page 2. Just to -- this slide is just to say that this new acquisition is completely current and consistent with our path of future growth that after the consolidation of the Italian market is now focused mainly even if not only on Germany. And let me also remind that we are currently working on other Italian possible deals to strengthen our competitive position, but not sure -- no doubt Germany represents -- still represents a strong focus on our development strategy. And jumping on the next slide, that is Slide #5. It's quite impressive. Let me say so in the slide, you have the time line of our M&A journey. It's quite impressive the acceleration that we have had with -- after the acquisition of myLoc. In 12 months, we have strengthened our position so much in Germany. We acquired myLoc, Mivitec just some months ago and now Release 42. And we are very happy, as I was saying before, and half of the revenues of the company are -- came in from Germany. But apart from the financials, we have now a very strong industrial position in Germany that gives us, let's say, the proper foundation for future -- extra future development in Germany and probably also elsewhere. Going to the next slide is just a recap on the left of the slide. You have a very old slide, but that depicts our strategy in Italy and in Europe. Maybe it's more interesting the right part of this slide where we try to show how this -- how much this acquisition is consistent with our search criteria because, again, we are talking about a company completely focused on critical infrastructure, as I said at the beginning, especially on e-commerce platform that are nowadays so critical and so important in every sector. And we are talking of a company that have also a very good data center in line -- partially in line with the best standards that we are applying in WIIT. We are talking about the group that, as I was saying before, gives us more power in terms of managed services and in terms of high-level skills in Germany. So to sum up, it's a very important acquisition, not only in terms of financials, in terms of very good multiplier, but also very good in terms of industrial features that this company has -- this group of company has. If you jump on the next slide, it's more focused specifically on these aspects. Here, you have summary of the financials. In terms of revenue, we are around EUR 28 million of revenues with almost EUR 9 million of EBITDA and a very good EBIT because it's almost EUR 8 million. So it shows the margins, both the EBITDA of revenues and the EBIT of revenue are very good. We think, and this will be clear in the next slide that we can add -- we can reach in the short term, even have better results in terms of profitability because we have found some cost synergies in the short term, but maybe also we will focalize a little bit better the business in the short future. So in short, we think that we have extra EBITDA and EBIT that we could extract from this acquisition. And the remaining part of the slide, you see other details that I have already shared with you that you have data centers and so on and so forth. So I don't want to go along with this. And to arrive at the very last slide here, we try to summarize. As you know, we are quite conservative when we have to estimate synergies. We only estimate cost synergies that are easily identifiable. In this case, we have identified EUR 2 million per year of cost synergies just on technology. So we are referring to a partial -- at least a partial consolidation of the data center that we have now in Stralsund and we want to move to the new facilities we are developing in Düsseldorf but we are also speaking about a very easy cost synergies on software licenses, connectivity. So what I'm trying to say is that probably in the midterm, cost synergies will be maybe a little bit higher than this EUR 2 million. But as always, we want to be conservative and these EUR 2 million are quite easily reachable in quite a short term. We have also other synergies that I already mentioned because again, these skills on DevOPs are very rare, and we have several customers also asking for the skills initially and we were not well positioned on this kind of skills and how we think that our positioning will improve a lot. And in short, maybe we will be able also to use the skills and to extract revenues also in Italy, thanks to the skills. Alessandro, I don't want to go further. I don't want to sit silent through the rest of the conference call. So I think I can stop here. If you have other things to add, feel free to do that. And obviously, I'm open to questions.

Yes. Thanks, Francesco. I think to close this part of our presentation, of course, after we have Q&A session, where we can give all the information investor needs. But in general, to summarize, the acquisition give WIIT particular advantage in terms of the presence in the money in the market. We bought this company in the specific offering in the e-commerce platform naturally critic application, exactly in line with offering. We have now a very, very good scale group in Germany to develop apps in the Kubernetes. Kubernetes is the new trend of the new apps recovering. Yes. So Gecko and Release 42 in general has been founded specific to focus on developing platforms, critical -- mission-critical platform in a pure native cloud environment. And this feature grant to the clients to have a platform, basically vertical fully developed for match the business requirements and fully available in a pure native WIIT leveraging all the capabilities of the cloud services and of course, all the scalability and feature provided for the Kubernetes. In terms of figures, the contributor of R42 is positive because before [indiscernible] follow the last slide when we indicated the numbers of -- the aggregate numbers in the sum of the -- of course, the management news plan of R42 for next year, the aggregate results will be increased revenue from EUR 82 million to EUR 110 million [indiscernible]. The EBIT run up -- EBITDA, sorry, from EUR 32 million to EUR 40 million. And a very important EBIT margin growing from EUR 18.5 million is the estimate like-for-like for WIIT for next year to EUR 25.7 million. And the EBIT -- the feasible EBIT margin increased from 22.4% to 23.2% of the revenue. I think we are ready for the Q&A session.

[Operator Instructions] The first question is from Giorgio Tavolini of Intermonte.

I was interested in understanding better the multiple for both companies if it's fair to assume the same multiple for each company, first. And secondly, the level of leverage, is it fair to assume that we are now below 3x, even including the treasury shares. So definitely in line with your covenant definition that you have just agreed for the bond. And the third 1 on the firepower for additional M&A, if it's fair to assume EUR 60 million more after the -- this acquisition of EUR 80 million, roughly speaking.

Consider that the large part of EBITDA coming from the cloud business. After -- in the negotiations, we initiated were a single price for all the company. And because the package is -- for the seller is if they want to sell to both the company. In general, of course, in our assumptions, the cloud business is running with a higher multiply than the software selection. But when we fix the price, we fix 1 single plans for a multi-company. In terms of net EBITDA, we are sure inside our covenants because you have to consider that the net debt before the acquisition was roughly EUR 72 million. We had, in this case, EUR 71 million on enterprise value because the residual is cash on the hand and we go to EUR 128 million. But you have deducted over EUR 30 million of the residual share -- treasury share. So the net EBITDA for the bond covenants, we have below EUR 100 million of revenue and EBITDA is EUR 40 million. We are largely under the figure. The figure is 5x. They are below 3x at the moment. So we have received the capacity to use the residual proceeds of the bonds and residual proceed of the capital increase is treasury share, additional EUR 60 million of our host -- of our software power.

Okay. And what about the CapEx needed for -- are you expecting additional CapEx for these data centers and now you have the 9 data center in Germany.

Yes. We hope to switch off. We want to operate as a center, but to increase the resilience of the Stralsund center, we estimate EUR 0.5 million of CapEx, but we deduct in the equity bridge, this CapEx from the sellers. Okay. From the temporary value, we -- when we define the equity bridge, we deduct EUR 0.5 million is paid by the seller, [indiscernible] CapEx. We deduct EUR 0.5 million.

The next question is from Domenico Ghilotti of Equita.

I have few questions. The first is on the level of concentration in your clients for the acquired companies. And you are mentioning that e-commerce clients are particularly relevant. So I'm trying to understand if there are, say, Tier 1 or T2 clients on the e-commerce business. And second, well, if you can elaborate a little bit more on the DevOps software concept would be useful for me. And maybe also a little bit of understanding on the visibility for the 2 companies. So contract duration for Boreus, what is the business model in terms of business revenue visibility for the other company.

Okay. Starting from the first question, the concentration of clients. So consider that Boreus mainly, but also Gecko develops over the time on the e-commerce platform. What do I mean? Normally, you know that e-commerce platform depending, of course, on the industry segments where the clients are running can be in the [indiscernible], in the [indiscernible] in many different segments. Currently, the e-commerce segment, the figures are roughly 35%, 40% of the revenues of Boreus. But this e-commerce platform, our vertical solution developed for the client itself. They are mission-critical because are the core business of the clients, of the companies. These clients are not generalistic providers. So they are not in competition with Amazon or in general, global platform. So they are not really facing competition landscape into their own segment. So there are still some of the major e-commerce platforms are currently running in Germany. So we do not expect a competition -- competitive landscape on that part. The remaining part of the clients are spreading 3, 4 other industry segments like professional services, companies that are developing digital platforms and in a pure cloud-native environment or media tech companies. The second question, DevOps. As you know, we already mentioned the fact that today, the clients that are -- and the companies in general, they are developing and they are becoming more and more digital. As soon as they understand that there are not really available standard platform like SAP or like Microsoft, for example, as soon as they need a digital platform to support their core business, need to develop this platform from scratch. So Gecko founded and started developing this platform since quite a long journey. But the new trend for the clients is build up this new platform in a completely different way. The new way is called DevOps, that mainly means that it is not more enough to develop the application, but you need to develop this application with the full integration of technical skill -- technical skills, meaning that during the development application, you need the competencies on the technical side to grant to the application, the possibility, their resilience, the hybrid scalability and they are -- in reality, they are pure cloud native. So the integration means you are developing a platform that has to be up and running immediately in the cloud, and that means leverages all the features provided by the cloud providers. This is something that the focus of Gecko, but consider that the other clients of Boreus, for example, develop their own platform in some cases by Gecko itself. So there are still in place examples of this DevOps, so from development to the running services in cloud. And in other cases, the clients have developed -- the clients of Boreus developed this application internally or through other providers. So this is a new way. In Italy, we have not so many cases -- success cases like the 1 that are in Germany. But this is a different way to have mission-critical application. We are more used to have SAP or international platform. But as soon as you enter in a vertical niche solution, you need to run this application in a completely new way. And this is the standard supported by the DevOps. In terms of visibility, as you know, Boreus is our...

[indiscernible].

Yes, they are usually 36 months, but consider that, for example, all the top 5 clients of Boreus has more than 10 years of history in Boreus itself. So they used to have need long-term contracts with auto renewal that is with automatic renewal for their own application.

May ask you, so there is a particular concentration?

No, like I said, the top -- as you know, Boreus have the classic breakdown top 20 clients roughly 80% of revenues, but the first client is no more than 20% of the revenues of Boreus itself and within the total...

The first [indiscernible].

Yes, the first one.

The second is 6%.

So they are not concentrated. There's no real strong concentration.

And if I may just add, do you see what are the key cost item? Do you see a risk on energy contracts or something that could prevent the profitability to be projected at least at the same level also for 2022?

They have roughly EUR 0.5 million of yearly cost energy, a similar WIIT. We have, in myLoc, a large exposure cost energy over EUR 4 million. But in MyLoc, we have a pass-through to the customer. We can a little bit -- we can bill -- we can charge the customer the difference of the cost of the energy. In this case, we have volume of EUR 0.5 million of total cost energy. It's not material there, the cost energy is more.

Okay. And just a follow-up, you were mentioning the seller. Could you clarify a little bit, who is the seller?

Seller is the old person live in U.S. He is an 85 years or particularly 85 or 84 years, I think.

Well, technically speaking, there is a holding company called JBM, Deutschland or something, but it's just the financial, let's say, holding tanks. And as Alessandro was mentioning, the main owner of this holding is quite an old man, 80 years old, living in the States. He founded the company with the other 2 younger in this case, but still in their 60s, partners of long -- a very long time ago. They run, they founded, they run the company for a very long time, but in the last, let's say, 8 years or so, they enrolled a management team that is still on board. So this is very good in terms of also of integration because the sellers are really not active in the company, are not involved in the company and the management team that we have there is largely a very good management team. But again, they are not involved now, but they live in the States or in the other 2 -- because there are 3 in total. The main 1 is in the States. The other 2 are in Germany, but in the different cities and again, not involved.

Okay. And very last question. On the share payment, so what is the mechanism?

It is the complex [indiscernible]. We give the share on the closing date. The price of share is the average of the last 8 market days, weight average of the last -- before the closing date, [indiscernible]. October 29. There is a call -- a put option by the seller and after 18 months, they can sell all the share at WIIT with a minimum price of EUR 10 million. But in case the market price is high, of course, they take the profit. And there is a call option from WIIT. We can receive to exercise a call and pay all the share or they can share -- sell the share on the market. They have the possibility to have the gain but they have the minimum price guarantee. This is -- these topics is 1 of the elements. We put on the table to convince the seller who sell with the company and not the other competitor because they have possibility to have the game upside.

So they are exposed to the upside and they can [indiscernible].

[indiscernible] they can guarantee the new price, EUR 10 millions for the upside, but the price is the average of the last 8 Market Day before the closing date. [indiscernible] share increase [indiscernible].

And Alessandro, maybe it has a sense to underline that if you take in consideration the real cost of the shares for us is much, much lower.

It's EUR 10, EUR 10, yes. We pay EUR 10. The average is EUR 10.