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

Welcome to today's presentation where we have the pleasure to present Wirtek. The occasion for today is the Q2 H1 Interim Report you sent out. As always, we are joined by Michael Aaen, CEO and Founder of the company, who will take us through the results and of course, answer questions. [Operator Instructions] But for now, I will hand the call over to you, Michael.

Thank you, Michael. So let's go to the next slide, and I'll start my presentation. So first, I'll address a few significant operational highlights from our second quarter of this year. So after a quite challenging Q1 with our first negative EBITDA result in many years. I promised in my Q1 presentation that Wirtek would get back to positive EBITDA territory, again, no later than Q3 this year. And I'm actually very happy to say that we achieved a positive EBITDA of DKK 0.3 million already in Q2. So we started implementing a significant cost optimization measures in Q2, and we already see a positive effect on our profitability. So we've also seen a clear improvement in the year-on-year revenue development compared to Q1. It's driven by stronger commercial focus as well as a successful signing of multiple new orders during the first half of the year. So while market conditions, they do remain mixed, we are finding ways to win new business and close deals more efficiently. So at the same time, we have been very conscious about striking the right balance between strict cost discipline and continued investments in areas that will drive our future growth. So this is especially true for our Solutions business, which is still at a very early stage, contributing a mere 4% of revenue in Q2. Now here, we are leveraging technologies and capabilities we acquired through the Seluxit and Pragmasoft acquisitions we did last year in order for us to build scalable platforms and products with recurring revenue potential. So these targeted investments, they are laying the groundwork for significant long-term growth. So in parallel, we have initiated a strategic review to ensure that our business model and priorities are aligned with long-term market opportunities as well as evolving client needs. So the conclusions from this review, they will be shared with investors in Q4 this year. So finally, a key part of our forward-looking strategy is embracing AI, not as a buzzword, but actually as a practical driver of efficiency in our operations, as a catalyst for innovation in our offerings and a way to create measurable value for our clients. So we see AI as both a big opportunity for Wirtek as well as a potential disruptor, and we are committed to integrating it deeply into the way we work and the solutions we deliver. So now let's have a look at the financial highlights. So next slide, please. In Q2, we delivered revenue of DKK 15.5 million, which is a decrease of 8% compared to Q2 last year. So in the previous slide, I did mention the reasons behind the decrease in revenue. So while growth is negative in Q2, it is still a significant improvement over the negative growth of 14% during Q1 this year. So as we are actually now starting to see the positive effect of multiple new orders we gained during Q1 and Q2. As I mentioned also before, EBITDA was positive by DKK 0.3 million in Q2. This is a big improvement over the EBITDA of negative DKK 1.1 million we presented in Q1 this year. And we're obviously not very satisfied with an EBITDA margin of 1.7% for the quarter or a negative 2.7% margin for the first half of 2025. So we will continue implementing cost optimization measures, grow our revenue in order for us to get back to positive EBITDA for the full year. Earnings per share was minus DKK 0.13 per share, and we're still having negative net profits during the quarter. So this kind of explains why it's still negative at the EPS level. Wirtek equity ratio remained strong at 44%, despite the negative net result we've had during the first half of the year as well as payout of dividend during Q2 and the effect of the Pragmasoft and Seluxit acquisitions in 2024. The liquidity ratio is also very solid at 102%. Next slide, please. During Q2, Danish clients, they accounted for 30% of our total revenue, which is a significant reduction compared to 47% during fiscal year 2024. So during the first half of this year, we have announced several new orders from U.S. clients, and we are actually already now starting to see the effect of this and U.S. clients now account for 32% of our total revenue and is actually now our largest regional market. So while Wirtek's exposure towards the U.S. dollar is relatively small and the threat of the U.S. EU trade war seems to be mitigated for now, we will continue to monitor the situation very closely. So we're also growing in the Netherlands, and our Dutch clients delivered 22% of total revenue during Q2 this year. Portugal also is now approaching 10% of our revenue by accounting for 9% of our Q2 revenue. So the remaining 7% of our revenue came from clients in Austria, Romania and Germany. So on the right side of this slide, our quarterly revenue and EBITDA development during the past 5 quarters is presented. So while revenue in Q2 this year is at the same level as Q1 this year, this is actually a sign of growth as Wirtek historically has higher revenue during Q1 compared to Q2. This is something the seasonality in our business, but this is also reflected in the fact that our revenue growth was negative by 40% -- 14% during Q1 and improved to minus 8% during Q2, indicating that the revenue growth is trending up. The graph also shows the significant improvement in EBITDA during Q2 compared to Q1 this year, and we do expect to improve EBITDA even further during the second half of this year. So next slide, please. Lastly, I want to present Wirtek's outlook for this year. Earlier this year, we published our expectations for 2025. And for revenue, it was in the range of DKK 70 million to DKK 75 million, which amounts to about a negative 3% to a positive 4% growth compared to last year. Now we've gained multiple new orders during H1, as I said before. And we already now see -- start to see this positive impact on our revenue. However, the pace of the recovery is not sufficient for Wirtek to actually reach the revenue targets for 2025. So we revised our revenue guidance yesterday to the range of DKK 64 million to DKK 69 million. On the positive side, we are maintaining our EBITDA guidance in the range of DKK 1 million to DKK 5 million in 2025 as we already are back into positive EBITDA territory, and we do expect further improvement in profitability during the second half of the year. So this concludes my presentation for today. So back to you.

Yes. Well, let's jump into the questions and get through the case through that way. When do you expect to see net organic recruitment at Wirtek?

So if we're talking about hiring new people, that's quite, of course, always relevant in our services division of the company because there is a one-to-one there where we have to put in new consultants for every time we have a growth in that part of the business. And we are continuously recruiting new people there as we've got a lot of new orders and some of these are also in the services business, we are actually actively recruiting new people to our services business. So it's ongoing.

Okay. There are companies laying off IT consultants for software development tasks, coding, working management, consulting and replacing this with AI. How do you view this trend? I think you touched a little bit upon it, but I'm not asking you to come with your strategy now, but maybe you can give us some insight on how you're seeing these trends.

Well, the trend is real, right? AI actually brings a lot to the table in order of efficiency, productivity gains, and we will be embracing this. We are going to come up with new offerings in the market that is going to help our clients get better or better solutions faster at a lower cost and of course, making sure that the quality is the way the clients expect it. And we want to be on the forefront on this area. So we will take it into our business as something that is just part of the future of our offerings. The same in our Solutions division. It's going to help immensely both in the development of our products and platforms, but also in actually helping working with the big amounts of data that we are collecting in our, for instance, in our [indiscernible] cloud platform, be able to add even more value for our clients there by helping them process these huge amounts of data and make good decisions in a timely manner.

And by saying it, it's real. I know there's a lot of areas in the AI where maybe in the future, we will have some solutions that helps us. But I guess what you mean here in your area, coding and software development that we are -- as we are saying, we are seeing layoffs in Microsoft and a lot of companies. So what you're meaning, it is here now. Is that how I should understand it? The tools are here, the ways to implement this is here right now. Is that how I understand your answer?

Yes, it's here now, and it helps with the significant productivity gains across the board. But you still need to have the creativity. You need to have the competence, the know-how to utilize it the right way. So it's not just automatic that you're going to implement industry scale quality software just by the push of a button. That's not where we are. So we still need very capable developers delivering the right quality to the clients. But by using -- utilizing AI in the right way, they can drastically improve productivity.

Perfect. What was the development of hourly prices [ belt ] to customers during the last 12 months?

Well, they are higher than they were 12 months ago, the prices there. And what -- we've had a lot of new orders coming in from U.S. And in general, our rates in U.S. are actually on the high side of what we -- for our average rates in the services business.

Okay. Do you see AI as an opportunity to increase revenue without increasing employees? I think we already touched upon it by the productivity improvement. But I am asking the question.

Well, yes, that's going to be the effect of this, right? And of course, while some companies, of course, will utilize this as an opportunity to make even more at a faster pace, some will also use it to actually reduce their costs overall. And our intention is to come in and be part of that delivery, making sure that we can help them achieve what they need to have done in a cost-effective and timely manner.

And I'm not asking you to guide. I'm not asking you. I know it's still in the early stage, but I think there is some reports out there indicating how much you can improve efficiency. Are you thinking of any percentage numbers, or am I asking something you actually don't want to put out there? Have you seen reports? Have you seen your own feel of being in this industry, how much efficiency maybe you can improve by using AI tools by the software development?

Of course, this is also part of the strategy work we have ongoing right now, but there will be significant improvements in productivity. But depending on what kind of tasks you're doing there; the productivity gains will be different.

Okay. I also didn't expect to get a percentage out of you, but thank you. Then there's a question about the market. Have you experienced improved market condition? And secondly, what difference do you see between the Danish Market and Forex market such as the Dutch market, but I think also the U.S. market might see interesting. So a little bit about the market condition, whether you are seeing it showing up and maybe a little bit about the different market because it seems like Denmark is still a little bit pressure where other things are picking up.

Yes. The market conditions are still difficult out there, but we still do succeed in getting new orders in there as the stream of new orders we've announced during the first half of the year, of course, can -- will show, right? And again, market dependency, yes, it could -- we see a lot from U.S. right now, and that's absolutely very positive for us, especially because we don't have a U.S. department in the company. So it actually is quite significant for us still to be able to attract a business from far away in that sense. In Denmark, we -- as we presented back in our Q1 report, some significant big projects ran out beginning of the year or end of last year. So that, of course -- and that was Danish based. So that gave us a big push down there. But we are now also starting to see business picking up in certain areas in Denmark as well.

And we always talk about market conditions and then improving. And I want to know when you see it improve, and I'm not going to ask you because I think it's a muddy picture out there. But what do you think needs to change for market condition for consultants, software and so on? Is it a general uncertainty removed from the companies? Or are there other things that you see out there that might trigger that decision process will be a little bit less long, and a decision being taken in the companies.

Well, I'd like to -- of course, personally, I'd like for some of these uncertainties out there to somehow go away that we somehow got peace or at least stand still in -- or in Ukraine, right? And what is happening down in Middle East is not very good for business either, right? And I'd definitely like to see that U.S. does not get into a recession based on these tariffs there because although our friend on the other side, Trump there, he suggests that it's not something that is paid by the consumers or the -- it is actually paid by the consumers at the end, a lot of it, right? And it could have an inflationary effect. And other things are happening over there also that could essentially -- or there is at least a risk for U.S. to get into trouble later this year, right? So if we somehow could get some stability there as well as in Ukraine and in the Middle East, I think that will be good for business. Right now, with everything going on in the U.S., companies have a hard time understanding what's the basis for the decision for the long-term.

Yes. That is fair. It's also what I'm hearing. But maybe also now we talk in general about the market conditions and IT consulting and software, but you are also in the energy industry. And I think maybe they are getting a little bit boost. Are you seeing any differences between your different market segments or market segments, I don't know. But the end customer in which sector they are in, do you feel comfortable with your exposure to the energy sector is another way to ask it?

Well, energy has become a really important part of our service delivery as well as in solutions. It's a key part of our Solutions business as well. And especially in Solutions, we are also seeing this combination of IoT with energy as a really, really important potential growth driver for us in the long-term. And I see -- although there have been some challenges in certain parts of the energy industry like wind power, I don't see this -- our clients tell being that hit by this. And of course, we have clients in many different areas of energy.

Yes, I know.

Energy is a very big field, right? So we do see as things being affected differently in different areas of the business. But as a consequence of what is happening out there right now, still, we see our energy growth as pretty solid.

Perfect. Then there's -- have you been approached by companies that want to acquire Wirtek?

If we were, you together with everybody else out there, we know exactly at the same time, right?

Yes. I think that's the answer you can give. Do you expect to do any acquisitions? Is that a part of your strategy review and so on. So that you can answer a little bit about, of course, or whether you want to do any but the thinkings about it.

Yes. Acquisitions have been part of our strategy since back in 2021. So we are always interested, of course, in boosting our business through acquisitions. We did 2 last year, right? So that still has to be integrated. And at the moment here with our share price being under pretty much of a pressure there right now, that, of course, is also taking into account when we decide what to do as part of the acquisitions there because we don't want to get into a situation where we also dilute existing investors too much.

Makes sense. I don't know whether you want to answer this one, but how much would growth have been adjusted for the one Danish customer, the one who is dragging things down. So maybe to get a -- maybe not a precise percentage, but would you actually have been flat? Would you have been growing? It's a very good indicator on how is the underlying development in your industry or in your company.

Well, if you calculate backwards with the Q1 and Q2 report and with last year's reporting, then you can probably see that the effect was very significant. And if that had not been the case, then yes, we would have been at a different place right now. So a single client situation here with the project has really impacted us quite significantly.

Perfect. What has contributed to the fact that you achieved positive EBITDA already in Q2 and not first in Q3?

Well, more orders that we have started to execute on as well as we decided to implement cost optimization in the company to make sure that we get back on track with our profitability there. And as maybe you recall from my last presentation with the Q1 there, I promised that no later than Q3, we would be back in positive EBITDA territory, but we were quick at starting the implementation of cost optimizations there. So we are already there now.

And then the last question, EBITDA guidance is kept, but you're lowering your revenue guidance. Looking at an IT consultant, that normally is a little bit of a different picture. So do you expect larger cost cuts in the coming quarters than you originally expected? And secondly, how do you actually balance these cost cuts with the potential market recovery?

Well, this is a delicate balance, as I've also said before as well as also presented in our Q2 report because we're also investing. We are investing right now in business development, first of all, and we are seeing a bigger and bigger pipeline. We are just hoping for things to get to a point where investments start again, so we can actually start getting even more new clients into the company. But we are also investing in our solutions business, which will require us to invest significantly in order to get the platforms and products at the place where we can go out and sell them in the market. So those investments, together with us also doing cost optimization is a very delicate balance for us to find. And that's what we believe we are doing right now.

Perfect. And then finally, do you expect to see growth in the next 18 months? I haven't actually done the calculation on your guidance, what you are guiding for the second half year, but -- do you expect to see growth in the next 18 months that you will start growing again?

Well, if you look at the first half year revenue and then look at our updated guidance, then you can, of course, expect that H2 is going to be growing. And also, we are getting these new orders where the full effect of those implementations are going to carry into next year. So we are not putting out guidance for 2026, but things are definitely looking promising right now.

Perfect. That was the last question. Thank you to you, Michael, for taking us through your results and answer our question. And may everybody viewing in, have a nice day.