Wirtek A/S (WIRTEK) Earnings Call Transcript & Summary

Hi, and welcome to the presentation of Wirtek's Annual Report 2024 with CEO, Michael Aaen. Michael, I remind the audience that you can write in all your questions in the chat. We have already received many questions, and I'll make sure to ask all of them to Michael after his presentation in the Q&A session. As you can hear, this presentation will be done in English, but please feel free to also ask in Danish, and then I will do my best to translate them to Michael. With that said, Michael, I will hand over the call to you.

Thank you, Casper. So my name is Michael Aaen, and I am the CEO of Wirtek. Next slide, please. So first, a short overview of Wirtek. So Wirtek is a Danish IT company and we were established back in 2001 as a spin-off from Nokia. Wirtek, we've provided high-quality IT services to our clients during the past 24 years. And back in 2006, Wirtek was listed on NASDAQ. First North Growth Market as I think the third company in Denmark. And as far as I know that we are the only one from back then that is still on First North in Denmark. So in 2024, we grew our clean energy revenue by 84%, but I'll come into this a little more later in my presentation. And last year, we concluded two acquisitions, PragmaSoft in Portugal and Seluxit in Denmark. In Wirtek, we are headquartered in Aalborg in Denmark, and we have 2 development and test centers in Romania, 1 in the northern part of Romania in Cluj-Napoca, and one in Bucharest. And through the acquisition of Pragmasoft, we actually now also have the development and test center in Portugal. So next slide, please. So this morning, we published our annual report for 2024, and I want to present a few financial highlights from this report. In 2024, we delivered revenue of DKK 71.9 million. It's a growth of 2% compared to 2023. Our EBITDA was DKK 5.2 million, which is 17% below 2023. However, if we look at the two acquisitions we did in 2024 and actually adjust for the onetime costs we have in relation with those acquisitions, we are DKK 6.2 million, which is actually in line with the 2023 EBITDA. Earnings per share last year was DKK 0.28 per share, which is down 47% compared to 2023. Now if we look at the right side of the slide, our EBITDA margin in was 7.3%. And while the adjusted EBITDA margin increased to 8.7% compared to the 7.3%. And despite the acquisitions of Pragmasoft and Seluxit in 2024, we actually have an equity ratio remaining very strong at almost 52% and the liquidity ratio is also very solid at 135%. And if you want to put this a little bit into perspective, when we did our CoreBuild acquisition back in 2024 -- sorry, 2021, we actually had an equity ratio down to 35% and the liquidity ratio at 96% with the numbers for '24. Next slide, please. As a Danish -- sorry, I think we actually need to go -- sorry, I was a little bit too fast there. So as a Danish company, we've always focused on ensuring a solid client base in Denmark. And in '21, we actually made the strategic decision to also start growing more internationally. So if we look back at 2020, we generated something like 71% of our total revenue from clients in Denmark. And now here in '24, our Danish clients account for 47% of the total revenue, while USA accounts for 26% of our revenue and the Netherlands for 17% of revenue. Now through the acquisitions of PragmaSoft last year, Portugal now provides a 5% of the revenue, while the remaining 5% came from clients in Austria, Romania as well as United Kingdom. Now on the right side of the slide, we show the revenue and EBITDA development during the past 5 years. And revenue has grown each year even during COVID lock down and during the last couple of years with high inflation rates and geopolitical uncertainty out there. And EBITDA has been negatively affected during the past couple of years. But if we look in '24 of the adjusted EBITDA, then it's actually in line with 2023. Next slide, please. So EU has set some very ambitious and legally binding energy efficiency targets through the energy efficiency directive. So this requires massive investments in Europe into renewable energy sources like wind and solar and in infrastructure and IT systems that actually will be able to handle an increasing variability in the energy production. Because, as you know, society, we actually need to function even when the wind doesn't blow or the sun doesn't shine. So Wirtek -- in Wirtek we actually saw this transition of the energy sector as a significant opportunity back in 2022. And we made a decision to actually put focus on clean tech opportunities at a time when we already saw some geopolitical uncertainties out there that has started to put pressure on other business areas. And this has paid off big time, this actually grew by 84% in 2024 and it has grown from being our smallest business area in 2022 to largely being our biggest business area accounting for 34% of total revenue. Next slide, please. So as part of our growth strategy, Wirtek pursue strategic acquisitions that will support the future growth of the company. So in '24, we concluded two acquisitions. So in August last year, we acquired Pragmasoft. It's an Portuguese IT company with focus on the clean tech sector. So this acquisition supports Wirtek's existing focus on clean tech, but it actually also helps us expand our international footprint. And we actually also achieved one of our strategic goals of providing our clients with multi-sourcing capabilities. So I could put a checkmark on that one, they are now being able to support clients both from Romania. And in addition, Pragmasoft has also actually developed the SolarTech product portfolio that will support Wirtek's change in strategic direction, which I will actually talk a little bit about a little later here. Now in July last year, we actually also acquired the assets from Danish Seluxit, and we hired -- so Seluxit has actually developed an impressive and robust IoT platform that supports solutions for renewable energy as well as wireless communications. And Seluxit provides Wirtek with the foundation for actually building solutions that can scale through recurring revenue streams, both from a SAAS, Software-as-a-Service product solutions as well as from hardware deliveries. So the addition of recurring revenue streams will support higher margins in the medium to long term, although it will require for us to actually invest in the short term. Next slide, please. So as I mentioned before, we at Wirtek, we are changing strategic direction. So we've seen significant global changes and market shifts during the past couple of years. And this has actually led to many companies delaying investments in IT projects. So as a consequence, Wirtek, we've chosen with the new solutions model in actually being supported by our acquisitions of Pragmasoft and Seluxit. So those two models, they are very fundamentally very, very different. So services is an area that is very resource intensive. And it actually requires consultants to deliver all the services. So scalability can primarily happen by adding more consultants into the picture. Now solutions, on the other hand, it allows Wirtek to scale the business through recurring revenue streams from Software-as-a-Service solutions as well as from hardware deliveries. So in order for us to actually address the unique requirements there from -- of these different business areas here. We've established two new divisions from January this year, Services and Solutions. So I'll now dive a little bit more into each of these two divisions. So next slide, please. So the Services division represents, so now we do -- we have streamlined it and we've taken our existing 5 five business units and putting them into 3 business units, now segments with high growth potential. So we have also expanded our geographical reach through the acquisition of Pragmasoft, as I said before, actually now being able to support our clients from both. And one of the business units Energy. It's our largest business unit in Services. And we will continue leveraging our deep knowledge of the energy industry to actually continue growing this business unit. Now, Wireless Communication, Automation, another business unit, we'll leverage the rising demand in connected devices and smart systems, and we actually do expect that this business unit will work closely with our Solutions division, it acts in order to capitalize on these strong IoT capabilities that we acquired from the Seluxit acquisition. And the last business unit in this Services division is ad tech -- X-Tech, sorry. And it will explore opportunities in emerging technology areas in order to support the ongoing digital transformation all over the world. So just the next slide, please. So I have here one of the clients in the Services division. This is a company called Efacec, the company is headquartered in Portugal, and it operates in 84 -- sorry, 87 countries around the world and is focused on energy and mobility solutions. Now Wirtek actually gained this client in relation through our acquisition of Pragmasoft. And the partnership between Efacec and PragmaSoft has actually now lasted more than 15 years. And we are currently -- we have 6 active projects with this client supporting clean energy transformation. So the big important thing here is that this client partnership actually demonstrates that Wirtek is very focused on maintaining a long-lasting client relations and it's in line with how we also treat our existing clients in the organization, in the Services business there with long-term relations often accounting for more than 10 years. So next slide, please. Now the new Solutions division, it complements services with scalable products and platforms. Now scalability will happen both with annual recurring revenue streams, and it's from Software-as-a-Service solutions as well as from hardware deliveries. Now market validation has actually already happened since we have closed major orders from clients during second half of last year. We've chosen to focus our efforts into 3 business areas here. So based on a solution that we are actually currently delivering to part of Aalborg, we will provide a Tenant Consumption Management solution to owners of multi-tenant buildings. Now this solution streamlines building and administration, while adhering to EU's energy efficiency directive. And this as of January 2027, providers of tenants in multi-tenant buildings actually have to be able to provide detailed billing information to each tenant on a monthly basis, which our solution, of course, supports. Now the second business area is focused on SolarTech products, allowing clients to actually easily manage and maintain solar farms. Third business area provide solutions based on the advanced IoT platform that we acquired from Seluxit, and although I cannot name the specific client, and one of the contracts that we signed during second half of last year was a significant solution with custom IoT hardware and Software-as-a-Service platform integration as well. And this solution will actually generate recurring revenue, both from hardware deliveries as well as from the service -- Software-as-a-Service platform. Next slide, please. So one of the clients we have in Solutions is a Danish company called Pilar. It's an innovative company that provides a screw pile technology to significantly reduce CO2 compared to traditional concrete foundations for buildings. Now Wirtek, we are delivering an IoT solution that allows Pilar to actually monitor and collect critical data in some very tough environments out there. Now Pilar's product supports EUs aim to actually achieve fully decarbonized building stuff by 2050. And a study has shown that Pilar screw pile technology actually achieves an 85% reduction in CO2 compared to normal concrete foundations, which I think is actually quite remarkable. So next slide, please. So lastly, I want to present Wirtek's outlook for 2025. So with the increasing geopolitical uncertainties that impact decision process with existing as well as potential new clients, we actually project a conservative revenue next year -- for this year in the range of DKK 70 million to DKK 75 million. Now this amounts to a growth of negative 3% to a positive 4%. Now in '25, we will continue to invest in business development that we started last year in preparation for a rebound once markets either adapt to and new levels of uncertainty or hopefully, there will be a reduction in the level of uncertainty out there. Now in addition, Wirtek will invest in leveraging the products and platforms from the progress of the Solution acquisitions in order to build a strong Solutions division. So of course, these investments in the short term stability with the expectations that growth in both revenue and profitability will increase significant in the medium to long-term. So with this in mind, we project an EBITDA in the range of DKK 1 million to DKK 5 million in '25, growth of 1% to 4% this year. So I guess this concludes the presentation last slide, please. So thank you for watching and I'm ready for some Q&A now.

Yes, and thank you for the presentation as well, Michael. Let's take the questions. We have received a lot, so I'll try to collect them and take them not one by one, but at least I will try to cover all of them. So if we start with the guidance where you ended this presentation, Michael, you said yourself that this guidance has seemed to -- or it's considered to be conservative due to the uncertainty that you're seeing in the market right now. We have a question that could be related to this because there's a question here saying, how much of the current revenue guidance is covered by existing agreements and new orders. And into that, is that higher than we normally see this year because of this, you can say, conservative guidance?

Well, what we've said historically is that in our Services business, we -- when we start a new fiscal year, we've got about 80% of our revenue in place. And actually, for this year, I think it might even be a little more then 80% of the revenue base in place here because of all the uncertainties out there, it is harder right now to generate growth in revenue when companies are sitting back and waiting for what happens next month, right? We -- there's a lot of uncertainties, especially driven by the U.S. right now. So who knows where we end up with that.

Sure. And talking about USA, we also have the question here, it says that USA marks a good portion of your sales, and you mentioned it was 26% in '24. And the question is, do you see greater risk here with the new tariffs and how do customers see this situation?

So the majority of the revenue we are generating from U.S. clients is actually delivered to their clients inside of EU. And Not a small part of that is actually also in the Energy business area there. So I don't foresee a significant impact in the short term. But again, everybody can -- all companies out there can be affected by tariffs and that will increase prices on products that might eventually have our clients, clients reduce their demand for services. So it is really hard to predict this change here, but I don't think that our U.S. clients as such are that impacted. I see the challenges with business in general out there because everybody could potentially be impacted by this -- but if we look at the energy sector, specifically, we have some tough targets in EU that needs to be adhered to. And as you just saw as -- just Germany, the other day was yesterday, has put a big package also put into the energy -- renewable energy sector there. So I don't foresee that there's going to be a big pressure on the energy sector as such. But other industries for sure can be impacted here.

Yes. And in regards to one of the other questions, can you maybe dig a little bit more into this '24, you can say guidance where you don't expect that much growth, at least the range right -- that you have right now in terms of the -- why is that? And do we expect this newly acquired companies to contribute to the revenue growth later? Or why don't you see this effect coming here in '25?

So yes, so if you talk about the guidance for '25, and the range on revenue is put around approximately around where we actually ended on in 2024. And it's -- yes, we did some acquisitions. And of course, we get some revenue from those acquisitions. But at the same time, we've also lost revenue from existing clients simply because it's hard out there for them as well, and they've had to reduce business from that side. So it kind of balances out there.

Yes. All right. Okay. So if we continue to one of the other parts regarding the employee growth and also the staff cost, you can say, first of all, do you expect organic employee growth in '25.

It's hard for me to say exactly if it's going to be a big or small by the end of the year. I could imagine, it probably could be a little bit bigger. But as I see it, moving forward, since we now have also a new Solutions division, where head count growth is definitely not what is going to drive that business with more growth in recurring revenue streams there. So the metric of head count becomes less significant for Wirtek as a whole in the future. But in Services, yes, of course, it's still going to be driven by the number of head count we actually have delivered in services to the clients there. But since the revenue projection for this year is quite in line with what we had last year of actual revenue, I don't foresee big changes in head count this year.

Okay. Got it. And I don't expect you to guide on this, but we have a question here in regards to the billable percentage, what do you expect '25 as far as I remember, if I correct to remember -- correct, sorry, then the billable percentage was about 85% in '24, down from 91% in '22. So maybe you can assess some perspectives on how is this expected [ to development ] at least in '25?

Well, so we started back in '21, '22 to actually invest in the future growth. We had no idea where the world was developing at that time, right? And we started building up an organization that actually should be able to support us from being a couple of hundred people to being a much bigger company in time. And that requires you doing organizational building in the company. So in principle, we can support growth -- significant growth in head count and billable head count now without requiring significant changes in the organizational structure in the overhead part of the company here. So and -- but we don't want to make short-term optimizations that could hurt our ramp up growth again once things start to stabilize out there. So, yes, percentage of billable is lower right now than it was a couple of years ago here, but we do expect that this will improve over time. And again, as Solutions will start building up over the coming years here, this metric is not going to be so relevant in the future. We actually would want to have less growth in people head count to generate higher revenues from recurring revenue streams, of course.

Yes, sure. Makes sense. And then we also have a question regarding the share buybacks. The question is whether you will do the share buybacks in 2025?

So we have an earn-out payment for Pragmasoft happening this year for the 2024 earn-out. And I could easily envision that we would actually go out and buy the shares in order to deliver those shares to the sellers of Pragmasoft in order to not take further dilution to existing shareholders.

Yes. And if I would -- could brought this question a bit out, what is your considerations regarding the share buyback versus your dividend payouts because you reduced your payout a bit -- your dividend a bit this year. Or at least your -- yes, you expect that. So what is your thoughts about maybe introducing a share buyback instead of paying out dividends?

So we do a combination here. So we are reducing our payment -- dividend payments this year, but then also combining that with some share buyback in order to not having to issue a lot of new shares to pay back an earn out. So there is a combination there, but we -- actually, we provided in the annual report in the shareholder information section, we actually described the new capital allocation policy that Wirtek will follow from now on.

It's perfect. All right. Then if we move to some of the other questions, I think we have a very specific one here regarding the acquisition of Seluxit, the question is here, Seluxit had a technology that could monitor defibrillators, so you could see whether it worked or not. The person asking here this question states that a cooperation was established with Telenor and the Danish Heart Association, Hjerteforeningen and the percentage here may be very large as England after Christian Eriksen heart attack in 2021, immediately installed 50,000 additional defibrillators. So yes, the question is whether Wirtek today is working with this technology or have you acquired this asset?

So I'm aware of the project that was concluded. And I'm also aware that the business case was actually not that solid at that time, at least that's the information that I've been provided with here. And they are actually -- this platform from Seluxit has so many opportunities here. So we actually have had to do some important prioritizations here. And so this is not part of the prioritization we've actually made here. We want to make absolutely sure that the platforms -- that there is a recurring revenue possibility in the back-end platform to actually storing a lot of data. And this solution here does not sound like it's one that actually has this potential scalability as part of it. Of course, yes, you're scaling on the hardware side, but there's not really a lot of data potential for scaling there.

Yes. At least from the outside, it seems like it doesn't fit into the new strategy, right? So as for the business units, so that makes sense. All right. So if we move to one of the next questions, is AI capable of doing coding or as AI is capable of doing coding work with Service business also end up being scalable? That's the question.

So as I see it, AI is really, really important. And our developers have already started to use it in their day-to-day work. So AI is going to -- is here to stay, right? And it is going to help increasing productivity significantly for people out there doing programming during other kind of development tasks in our industry. And the important area is that we need to embrace this technology and help our clients become even more successful because that's how we can maintain the growth in our industry here. So I don't think that AI is going to had replaced developers, but I think developers embracing AI has [ got to ] replace developers that do not right, so it's going to be really important. So in services there, it is something that can help us help our clients become even better in their products. In Solutions, I see AI as an important part of integrating it in the solutions we are going to provide to our clients there. Because the solutions we are working with is actually collecting future amounts of data there, and you can use AI to do some very interesting things with this data.

Yes. What is your feeling here? Do you think that you actually invest more in AI than your peers?

Well, we don't allow -- account for this specifically in our financials or anything like this, but we are definitely embracing it at all levels of the organization.

Makes sense. Okay. Then we have some other questions related to the midterm strategy. Any news here, and we also have a question asking whether the growth story in Wirtek is over. And so maybe you can elaborate a bit on this.

Well, there are hard times out there right now. No doubt about it, right? So yes, the uncertainties out there are enormous right now. We don't know what happens tomorrow. Maybe the President of USA is going to come out with a new threat tomorrow, right? And that does have an impact. So of course, when markets are down, it does impact our business as well. But what we are trying to actually combat is that we're now diversifying our portfolio. And besides having services alone, we now also will go into solutions here. And this is a totally different field that allows scalability at a different level. And that actually will also reduce the competitiveness in the area, for instance, in tenant and consumption billing. That's a totally different competitive market that in services, where you're in principle, if you are not focusing enough in services, you have potentially tens of thousands of competitors out there, right?

Yes. And then give us some dates or some of the quarters where you expect to update this to the market?

Sorry, I couldn't hear the first part of question.

The midterm strategy. When do you expect to update the market with a new strategy after this [indiscernible].

So when we came out with our changed expectations in December last year, we actually, at the same time said that during second half of this year, The Board of Directors is going to work on an updated strategy. So that word is going to happen during second half of this year. So when we come out with it, I cannot tell you yet. It also depends on how the -- what happens out there, right?

Yes. So in the second half, yes, that's a good answer to the question here. Then there's also a question here regarding the listing. Do you still target for NASDAQ main market listing?

Yes, we do. But of course, this has been pushed a little bit out in the future. It does not make sense for us to pursue a listing on main market with our current size and market value.

Perfect. I think we'll take the last question here. How much of the current -- no, sorry, -- what explains the strong momentum in the Energy business units? I think you covered it well, but the question here in regards to -- or relates to higher energy cost, does that also have an effect?

So the higher energy costs that came on the backside of Russia going into Ukraine, of course, has probably made us speed up in the renewable energy sector around Europe. So that definitely has not been bad for the -- this business area here. So -- but it's also us focusing. We've made this conscious decision to focus on energy and pursuing opportunities in this business area there that has paid off. So instead of focusing other places, we rightly -- we chose to focus on energy because that's where we saw the big opportunities. And yes, it did pay off, yes.

Got it. So I think, Michael, I believe we covered all the questions. So thank you very much again for your presentation. Also thank you for all of you listening in to this event also afterwards when we shared -- yes. With that, I will conclude this event and wish you all a great day. Thank you.

Thank you.