Simcorp A/S

CSE:SIM

Earnings Call Analysis

Strong Q2 Results with Positive Outlook

Q2 proved successful with double-digit organic revenue growth for the second consecutive quarter. At 13.6%, the annual recurring revenue (ARR) surge surpassed all key performance indicators. Ratable revenue, crucial for cash flow, expanded by over 20%, pushing first-half cash flow up by 111% year-over-year. This resulted in EUR 132 million of earned revenue, an organic increase of 15% for Q2, and close to 17% for the half year. With cost growth controlled, EBIT margins improved to 17.5%. Looking ahead, ARR is expected to rise within the guided range of 12-17%, while EBIT margin maintains its course, indicating a strong, predictable, and increasingly SaaS-oriented business model.

Strong Quarter with Accelerated Growth and Raised Margins

The company saw another quarter of double-digit organic revenue growth, marking continued progress in its transformative efforts. Specifically, there was a notable 15% organic growth in Q2 revenue, reaching EUR 132 million, and an approximately 17% increase for the first half of the year. The robust revenue performance, paired with more moderated cost growth, propelled EBIT margins to a strong 17.5%. This reflects not only the company’s successful transition but also a strategic balance between cost management and investment.

ARR Shows Momentum Leading Business Forward

Annual Recurring Revenue (ARR) growth, a critical performance indicator for the company, climbed to 13.6% by the end of Q2, signifying an acceleration from 12.6% at the end of Q1. This increase aligns with expectations with a projected continuation of this trend. Furthermore, the company added EUR 11 million net to the ARR book in Q2, showcasing its ability to expand its recurring revenue base effectively.

Ratable Revenue and Cash Flow Surge

Ratable revenue, which is pivotal in generating cash flow, rose by more than 20%. This substantial growth, primarily driven by SaaS services, contributed to a remarkable 111% increase in cash flow for the first half of the year compared to 2022. Additionally, the company's sustained conversion to a SaaS-based model is indicated by nearly 80% organic growth in SaaS revenue. Meanwhile, professional services also displayed strength with a 7.3% increase in Q2.

Cost Management On Track Amid Growth Investments

With strategic alignment of expenses, the company managed to stay on budget with cost development. This was underpinned by a fuel cost program designed to optimize expenditure. The period also saw active recruitment, contributing to a net increase of 200 full-time equivalent (FTE) employees, while R&D investment rose by roughly 16%, emphasizing the company's push toward innovation. Special items for the quarter summed up to $3.4 million.

Guidance Indicates Confidence and Tactical Business Approach

Espousing confidence in their strategic investments and buoyed by the positive financial and operational indicators, the company projects to reach the higher end of the forecasted ARR growth range of 12% to 17%. Although ratable revenue exceeds initial guidance, a strenuous Q3 comparison implies adherence to the projected scope. It is worth noting that expected robust growth could ease in Q4 due to tougher year-over-year comparisons. Nonetheless, optimism pervades as EBIT margins are anticipated to continue trending favorably towards the year's end.

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the SimCorp Q2 Report 2023 call and webcast. [Operator Instructions] I would now like to turn the conference over to your speaker, Mr. Christian Kromann, CEO. Please go ahead, sir.

[Christian Kromann, executive]

Thank you very much, and good morning, everybody, and welcome to SimCorp's Q2 '23 results. I'm here in the room together with our CFO, Michael Bjergby.

Let's get started. First, on Page 2, the normal disclaimer that most of you will have seen before. But as always, make sure you're familiarized yourself with that.

And then, let's go on to the agenda on Slide #3. I will start by introducing the key highlights about our business and also an update on the Deutsche Borse transaction. Then, Michael will take us through the financial review of H1, and then also take us through the financial outlook for the rest of the year. And then, as always, we will finish off with a Q&A session.

So let's go to Slide #5, where we have basically an update on the takeover offer from Deutsche Borse Group. You're most likely all familiarized with the actual transaction, the offer with the DKK 735 per share and the minimum conditions of 50% plus 1 share. So we are currently -- they are currently working through the approvals and clearances with the authorities as they come and has recently updated and extended the time line with what is -- seems to be the final time -- and that also indicates that by September 19, the pending approval from the European Commission would also be completed in the end, that means that the offer is expected to be settled and completed by 29th of September '23 at the latest.

If we then shift back to SimCorp on Page #6. It's just a quick recap on the 3 plus 3 Excellence levers and Growth levers that we are driving the company towards. Starting with the SaaS acceleration, which is, as you can see in the numbers, is really taking off. The Platform leadership is going to continue to generate our competitiveness for now and far into the future. And then those 2, coupled with the ecosystem scaling where we now have more than 100-plus partners that are leveraging our customer base, and we're also leveraging their capabilities to basically generate customer -- generate customer value.

And the 3 Excellence levers, which are somewhat new to SimCorp, starting with the Operating Model excellence, which is ultimately driven by our SaaS acceleration. The Commercial excellence that allow us to be as effective as we possibly can in our go-to-market. And then finally, the Cost excellence that has been introduced with the Program FuEl but it's obviously much wider than that. It is basically to ensure that we spend money wisely, allowing us to make the right investments to secure the future of SimCorp.

Slide #7. A quick update on the continued focus on the so-called accelerated investment areas that we also outlined in the communication earlier this year, starting with the platform leadership that is split into front office and the development efficiency of the overall R&D group of SimCorp. There, we are very much on track. We are extending our capabilities in the front office as planned, and we have now fully launched our cloud-native Performance Management Module, which is now fully commercially available, and we also signed the first new customer on that, a customer that will go-live towards the end of the year. So that's really exciting.

The development efficiency and scalability is also on track, and we start to continue to see the efforts in creating more and more development capacity because our developers are becoming more and more effectively utilizing the capabilities we have. But we really expect to start seeing the full impact of these things once we turn the dial of the year and move into '24 and certainly also '25 and beyond.

Then we have the SaaS acceleration point with SaaS TCO and BPaaS IOS/IAS. And on the -- also here, we are on track. So we really start to see the scale advantages from the investments we are doing into the way we run the SaaS, both in terms of how we utilize the technology, but also the whole administrative capabilities we are building around the SaaS delivery model.

Obviously, a part of that is also the fact that we get more and more customers on to the SaaS platform and we now turn to a very -- we believe, at least a very important point that we now have more than 25% of our customers being delivered through our SaaS capability. So obviously, also to get more and more customers utilizing it also create scale.

On BPaaS, we are also on track. We have key now -- key implementation projects in many parts of the world, and we are gradually, as planned, moving customers live with some pretty significant go-lives towards the end of the year, but we're also building up the pipeline further to hopefully sign some very exciting customers in the end of '23 and beyond.

Then finally, the commercial excellence, the new go-to-market model, all of the structural changes were executed in Q1. And now the market unit teams are really transitioning into a streamlined new ways of working, in the new structure. So I would say, all in all, I'm very pleased with our progress on these very important accelerated investment projects across the group.

If we then shift to Page #8. As you can see, also in Q2, we were capable of landing new exciting customers. In this case, to Middle Eastern customers, both very significant participants in the growth in the Middle East and we've also managed to kickoff Q3 in a great way by signing a very, very large Asset Manager in the U.S., so it's exciting to get our foot in the door there by delivering our client communications capabilities, actually in this case, as a SaaS solution as well.

We've also landed another channel play customers. And finally, with Atika partnership that most of you would know about, which is our joint venture with our Australian customer, Challenger, in Australia. We're also starting to onboard customers as time is passing on.

And now to my final slide, just a quick heads-up. As you probably would remember, a big part of our strategic plan announced earlier this year was to make sure that we do 2 things in parallel that we secure, that we have a follow-the-sun approach that allows us to provide our SaaS capabilities everywhere in the world. But at the same time, also create more and more talent locations where we have very good access to all the new talent we need, and Mexico is now live. So we set up an office, which has gone live end of Q2. So this office will support and ensuring efficient business delivery model to best support SimCorp's future growth here under the SaaS. Mexico City will complement the existing delivery center set up and providing an opportunity to attract strong talent and support the around-the-clock concept, which is very important in our SaaS delivery model.

The choice of Mexico City was based on a thorough analysis of all potential locations in the Americas, focused on macroeconomics, labor costs, labor availability and overall risk consideration. So it's really great that we now have the team onboard. And we have actually already employees working out of Mexico City and it's all very exciting.

So with those words, over to the financial part of the presentation. So over to you, Michael.

[Michael Bjergby, executive]

Yes. Thank you, Christian, and good morning to all from me. Please turn to Slide #11 for a snapshot of the Q2 financial performance. .

So Q2 was a solid quarter, and we created double-digit growth -- organic growth across all our revenue parameters for the second consecutive quarter in the year. It is clear from the numbers that our transformation success is now having effect, especially on the revenue, and after some investment years, this is really coming through.

The ARR growth, which is our main KPI and what will be driving the business up, increased to 13.6% by the end of Q2, and this compares to 12.6% by the end of Q1, so accelerated. This acceleration was in line with expectations, and we continue to see that trend going forward.

The ratable revenue, which is really the cash generating revenue, grew more than 20%, and this drives continued strong cash flow. You can see that in the first-half year, we have actually been able to increase the cash flow by a 111% compared to 2022, and I'll come back to the details of that later.

The reported revenue was EUR 132 million, an increase of 15% organically in Q2 and almost 17% in H1. The profitability reflects the strong reported revenue growth also compared to the more muted cost growth, and this means that we see that the EBIT margin is up nicely compared to last year and for the first-half year at 17.5% EBIT margin.

Let's go to the next slide, and we will dive into the details, and I'll start with the forward-looking ARR. So the forward-looking ARR is really the main KPI for us, how we manage the commercial organization, how we manage the business, and what will drive -- how we try to drive the business into a more predictable and recurring revenue stake. It accelerated in Q2 as we added EUR 11 million net to the book of business.

Indexation only had a quite small effect in Q2. So if you look at new business, one, excluding the indexation effect, then we actually added more in Q2 than we did in Q1. The largest contributions were the SaaS conversions, 3 of those in the quarter and then, of course, also supported by our 2 new customers, that the Christian mentioned, where the larger one Hassana added around -- between EUR 1 million and EUR 2 million in ACV as well as ARR.

In the first-half year, we saw churn of approximately 1% of the revenue. This is in line with the historical churn, 50% of our churn was comprised by our middle-size customer in EMEA due to a merger and consolidation with another player in that market. As you know, our contracts are completely irrevocable and hence, the customer paid the committee licenses upfront, which had an effect on the ratable revenue as you will go to on the next slide, Slide #13.

So ratable revenue grew more than 20% in the quarter, and we really see that this is driven by the SaaS services that are trying to have a [ peak.] We continue to have more SaaS implementations. And this is driving a higher business and cash generating revenue.

We just mentioned the churn that we have in the EMEA region, added approximately 1/4th of that growth. So hence, underlying ratable revenue grew just above 50% in the quarter. In that sense, you can see also on the reported revenue figures that we're really shaping the business now to a real SaaS business, creating scale and efficiency on our SaaS offering and creating predictability as well as recurrence for our reported revenue.

In that sense, On-premise's revenue was flat to slightly declining, both in Q1 and H1 -- as well as Q2. And our SaaS revenue grew materially almost 80% organically in the quarter. Professional services were up 7.3% in Q2. And so we still see strong growth in that part of the business, mostly as a result of the higher complexity and the larger projects that we are implementing with the SaaS.

Move to the next slide, Slide #14, for review of the costs. The cost development is on track compared to our plan. We are seeing that the fuel cost program has the effect that is intended and we are confirming that. At the same time, we're accelerating hard in the acceleration cases that Christian presented.

We have hired 350 FTEs in the first-half year. This is a net increase of 200 FTEs. So in that sense, you really see that the business is still moving fast and increasing. If you see how we are saving the cost to really investing where it creates the most value, you can see that the administrative cost is flat for the first-half year, year-over-year, and we see that our R&D investments is up almost 16%. So we'll be reshaping administrative costs into more R&D, and this is basically all of our accelerated investments that are creating that increase.

Special items amounted to $3.4 million in the quarter, $2.4 million related to the execution of Program FuEl and $1 million exactly related to the transaction, mainly adviser fee.

Please move to the next slide on Slide 15. As I mentioned, the free cash flow increased by 111% in the first half year compared to last year. This is an increase of more than $30 million, and in a big ballpark figures, you can say that half of it is driven by our strong ratable revenue growth compared to our more muted cost growth. This creates a -- one-half of the increase in cash flow and the other half of the cash flow increase is really driven by the capital improvements that we are doing, and this is both related to payables as well as receivables.

So in that sense, a very strong cash flow and also stronger than expected in the first half year.

There was a review of the financials in -- for H1 and Q2, and I'll now move to Section 3 and Slide #17 on the financial guidance. Overall, we are confident that we are on the right track. We are shaping the business into a more predictable, stronger and recurring business and on all our KPIs and reported figures, we are close to plan.

On the strategic agenda, we believe that the strategic investments are progressing and Program FuEl has the effect that we intended. So ARR is expected to accelerate during the year, and hence, we expect to climb up in the guided range that we have between 12% and 17% and then higher than where we are currently by the end of Q2.

Ratable revenue is, in H1, materially above the guidance range, but this is more dependent on timing and we do see that we have a quite tough comparison base in Q3, which means that we still see that the guidance range is relevant, although this probably might end in the higher end of the range.

On the reported revenue, I think it's important to remember that we still have very strong growth, and we expect that to continue also in Q3. But in Q4, we'll have a tough comparison base and hence, it will probably be less strong in the fourth quarter as planned all along.

The EBIT margin is fully on track, and as always skewed towards the fourth quarter as well. So overall, comparing the guidance on all parameters.

With that, I will hand back to the operator and initiate any potential Q&A. It's probably not a long Q&A given the circumstances of the transaction.

[Operator]

[Operator Instructions] We have no questions on the phone line, so I hand back to you. Thank you.

[Christian Kromann, executive]

And we have no questions on the webcast as far as we can see. So Michael, you're absolutely correct, a very short round of questions, but as we probably also said, we do understand the circumstances. So we are very proud of Q2 and H1. So with that, we wish you a wonderful weekend. Thank you very much.

[Michael Bjergby, executive]

Thank you, all.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.