Simcorp A/S
CSE:SIM
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Good day, and thank you for standing by. Welcome to the SimCorp Q1 Report 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, CEO, Christian Kromann. Please go ahead.
Thank you very much, and good morning, everyone, and welcome to SimCorp's Q1 '23 Report. So first and foremost, we are obviously extremely pleased with the Q1 result, we're delivering and the fact that we are delivering on the ambitious plan we announced in the middle of February. But we will go through some details. I would do some introductionary remarks and then we will go to the numbers afterwards. Before we start, as always, the disclaimer on Page 2 that I'm sure you all are familiar with.
The agenda is, I will go through the key highlights, then we will hand it over to Michael Bjergby, our CFO, for the financial review and the financial outlook, and then we will open up for Q&A in the end of that.
So let's start with the key highlights of the quarter. And why not start with the statement on the received takeover offer from Deutsche Börse that was announced on the 27th of April. And the overall transaction is that SimCorp and Deutsche Börse have entered into an agreement to which Deutsche Börse will make an all-cash voluntary recommended takeover offer to acquire all of the issued and outstanding shares except the treasury shares at SimCorp. The offer have a price of 735, will represent a considerable premium both on spot and the 3 months rebook. The key conditions are minimum acceptance threshold of 50% plus one share and of course, the necessary approvals and clearances by relevant regulatory authorities that are obtained. The overall timeline is that the start of tender is expected in May '23. So since we are now in the middle of May '23 will be the end of May '23, and the offer period is expected to receive approximately 7 weeks from announcement of the offer document. Expected completion of the offer communicated by Deutsche Börse is late Q3 '23.
And with those words about the Deutsche Börse part, let's shift on to what's going on inside SimCorp. We are executing extremely well on the 3 plus 3 levers that we introduced mid-February. The platform leadership, the SaaS acceleration, the ecosystem scaling from a growth point of view, but also very importantly to note that what we are doing on the operating model excellence, commercial excellence and the cost excellence, we are also operating according to plan, which I'm particularly pleased seeing. If we take a quick look on Page 7, on the strategic investments that we announced. We have 2 on a platform leadership point of view, 2 on the SaaS acceleration, and then we obviously have the commercial excellence in the ecosystem scaling on the back of that.
On the front office, we are boosting the development and the commercial efforts to significantly improve our front office competitiveness and win rates so that program has really got off of a great start. And secondly, we are developing the efficiency and scalability of the platform to ultimately create a new platform and engineering practice built on industry standard tooling to enhance velocity and output. On the SaaS acceleration, there's 2 parts, the TCO bid which is all about accelerating our automation and optimizing the infrastructure, allowing us to deliver a SaaS and a very attractive price point and also to make money on it, of course. And secondly, the BPaaS innovation, where we're building a competitive investment operation service and investment accounting service that allows us to take a further responsibility vis-a-vis our customers, especially in the middle office and the back office. And combine that with the strong platform that we've developed over many years.
On the commercial excellence side, it's a change of commercial structure and market units and creating one vertically specialized sales team in each market unit, and that has also come off to a good start. Finally, on the ecosystem scaling, we continue to sign up more and more partners, and we are also starting to see more and more customers going live on the combination. Obviously, somewhat interesting in the context of Deutsche Börse. We have now the first customer live on Axioma integrated into SimCorp Dimension.
In terms of new clients for Q1, we signed 1 in East and 1 in West. Very pleased to see, in particular, the one in West where we are now seeing a great combination of the value of the platform and the investment operation services that we are providing through our BPaaS investment. And on top of that, they are also having the data management service. So really, what I would say, a poster to our client or what we really start to see is the part of the unique value proposition that only SimCorp can deliver. And then we also signed a core customer, a client reporting customer in Asia. So good to see that Asia is also on the map for this year.
We had an extremely exciting global summit in Stockholm this year. We were actually just south of 1,000 participants with -- obviously, the vast majority was clients flying in from everywhere in the world, literally everywhere in the world, which was great to see actually for the first time post COVID that we saw a real presence and a real global participation. So that's super great to see. We engaged clients and prospects, and we also had a relatively large variety of partners participating, updating information on new offerings, sharing our ideas, aligning perspectives with industry peers, both the networking opportunities and obviously cultivating a sense of community.
So it was really a great event, and I participated in all the days with great pleasure, and it was so great to see all the customers participated in Stockholm.
A bit of news here. I think we talked a bit about it last time when we talked about how we are going to extend our capabilities in talent locations. At that point, I don't think we were fully specific. Now we can be specific and say that we've made the decision to go into Mexico to kind of finalize the -- follow the sun, all time zone coverage that we need in our value proposition. So we decided to open an office in -- during '23. This is to ensure an efficient business delivery model to best support SimCorp's future growth, as we talked about. And we are now taking the first steps to establish this office in Mexico City over the summer and start to attract talent already at that point.
And with those introductionary words, and we shift over to you, Michael, for taking us through the numbers.
Yes. Thank you, Christian, and good morning to all. So I'll take directly into the numbers on Slide #12. So as Christian mentioned, we believe that we had a solid start to the year and from a growth perspective, all our metrics accelerated during the quarter. Our main KPI that we're using for business growth is the forward-looking ARR, and it grew in local currency by 12.6% year-over-year. We see a pretty clear pipeline for this number to be building up throughout 2023. The ratable revenue, our KPI for cash revenue, i.e., adjusting for a point in time recognition, grew by 11.8%, and was favorably impacted by some timing factors, but also solid growth of our SaaS services and professional services. Reported revenue growth was around 19% driven by SaaS revenue again. And in turn, this led to an EBIT margin of 20.8%, an improvement of around 640 basis points compared to last year. Costs grew around 10% when you exclude for the special items.
Program FuEL was initiated through the quarter, but we already start to see an initial positive effect, and I'll come back to that later in the presentation. Finally, a very strong cash flow of more than EUR 45 million. This is a year-over-year improvement of 127% and almost the same cash flow as we generated for the whole of last year.
I'll now dive into the details of the different numbers, starting with revenue on Slide #13. So forward-looking ARR is the main KPI that we use to measure how we are building our book of business, and it's a leading indicator for both the future ratable revenue and reported revenue. We added a net around EUR 16 million in the quarter. Two new customers added a couple of millions, but the largest growth driver was indexation. The larger part of our annual indexation is implemented in Q1, but there's still some more to go, which -- where indexation happens later in the year. The 2 SaaS migrations are also added sizably to the book of business, and we saw some, but relatively normal trend in the quarter. ARR is an alternative performance measure that we introduced in February, and I just want to make sure that you noticed that we made an upward restatement of the base for '21 and '22 to correct for some contractual revenue that should be considered recurring. This does not impact growth figures or guidance or the trajectory as outlined.
Revenue on Slide #14. From an overall perspective, it should be no surprise that we are seeing strong growth in the SaaS revenue. It grew by 84% in the quarter, but we also saw steady growth in on-prem business as well as our professional services, which both grew in the mid single-digit area. The largest growth driver of the license revenue is what we call regular additional sales, but also some larger renewals that we had in the quarter. On-prem software update and support is the only revenue line without growth driven by customer conversions to SaaS.
Our SaaS business is growing fast. This is the result of the acceleration we've had in recent years, but we also had 3 successful go-lives in this quarter. And thereby, we are seeing more revenue continuously being added to this revenue line, which is recognized over the period. In the column to the far right, I've also strived to illustrate the components of the ratable revenue. You can see the only difference is on licenses. And we are actually, in this quarter, invoicing more from what we have previously recognized than what we are adding of the upfront revenue recognition.
Let me move to Slide #15 and a review of the cost. So the cost developed generally in line with expectations in the quarter. The largest increases are visible in cost of sales in R&D, and this reflects our investments both in the SaaS solution but also in the new innovative product enhancements that we have -- are conducting. Sales and marketing costs declined in the quarter. This should be seen more as a temporary effect as we have restructured the EMEA sales organization and some -- quite significant planned commercial investments will ensure that the sales and marketing cost increases from Q2 and onwards.
So the FuEL program is overall on track, and we have executed a number of initiatives that are going to be important. We have previously announced the 120 employees, which were made redundant in the quarter. We've terminated 4 European office leases and moved to a managed office setup. And finally, we're opening in Mexico, as Christian just reviewed, and this is to allow for further use of talent locations. The effect of the FuEL program will be building up throughout the year and the restructuring costs related to the program amounted to EUR 5.4 million in the quarter. We also continue to support our colleagues in Ukraine as much as we can. We have ongoing costs related to this, but nothing that we have treated as extraordinary or special items so far in the year.
Please go to Slide #16 for review of the cash flow. The free cash flow was solid in Q1. And also here, we see that we have been able to move some handles that we cannot replicate every quarter going forward. But we are focused on working capital, and especially in this high interest rate environment, we carefully track both the payment terms of our suppliers and outstanding receivables.
So we estimate that the working capital management in the quarter has led to an inflow in the ballpark of EUR 20 million. The other important driver of the improvement is the cash-generating profit. In essence, that ratable revenue is growing faster than all in costs when you look at the absolute euro amount. And this has generated a cash flow improvement in this quarter, but that is also what is going to drive sustainable and continuous increase of the cash flow for the future.
I'll now go to Slide 17, and my final slide on Q1. So here, we have outlined the development in order intake as we usually do it. I will not spend much time on this. And the reason is that the order intake only comprise license revenue and therefore, less relevant as we transform into a SaaS business. One example is the largest migration that we have signed in Q1. This has actually no impact on the order intake because the customer converted to subscription-based license in Q4. So the order intake for that customers in Q4, but the big value add was actually achieved in Q1 '23. And this is the mismatch that we find to be not representative and why we try to use ARR as a better indicator for our business group. The order intake was EUR 22.7 million in Q1 '23. This is slightly lower than the same quarter last year. Q1 2022 was, however, unusually high for Q1 due to 2 early renewals that were signed in that time. So this finalizes my review of the quarter.
I'll now jump to Slide 19 for a few comments on the financial outlook. So today, we are confirming our financial guidance for 2023. The business has performed in line with expectations, and this means that we expect that ARR will be growing 12% to 17% during the year. ARR has accelerated from 11.7% by the end of 2022 to 12.6% growth in Q1, and we see potential for this number to continue to accelerate throughout the quarters to come. Ratable revenue is still expected to be between 6% and 11%, even though we delivered more than that in Q1. But the dynamics of ratable revenue is different than ARR and more impacted by timing of invoicing of [ contract assets. ] So therefore, we can see some strength in the ratable revenue growth throughout the year, but so far, it is developing as expected.
Finally, we expect an EBIT margin of 21% to 24%, and this is also firmly confirmed. As always, the profitability is expected to be back-end loaded with by far the largest and highest EBIT margin number in Q4. We expect costs to increase quite materially already from Q2, and this is actually investing harder both in R&D and sales and marketing, reflecting the 5 accelerated initiatives that Christian has mentioned.
On special items, we still plan up to EUR 20 million in FuEL restructuring costs, but I also want to mention that we expect also additional costs related to the takeover offer from Deutsche Börse. These costs are mainly related to advisory fees and of course, naturally highly dependent on completion of the transaction.
That concludes my part of the presentation. I'll now hand over to Anders and the operator for the Q&A.
[Operator Instructions] There are no questions at this time from the audio. So I'll hand the call back to you for now.
All right. Thank you very much. That was obviously a quiet morning, but thanks for joining and see you in 3 months.
Yes. See you. And very expected there is not a lot of questions.
That's correct. Thank you.
Thank you.
This concludes today's conference call. Thank you for participating. You may now disconnect.