TXT e solutions SpA

MIL:TXT

Earnings Call Transcript 2024-Q3

[Sanela Begic, executive]

Okay. So good morning, everyone. So today, we'll be presenting TXT Group's fantastic 9 months, especially an exceptional third quarter in the top line growth. And so today, I have here, TXT Group CEO, Daniele Misani.

[Daniele Misani, executive]

Good morning.

[Sanela Begic, executive]

And also our investor relater, Andrea Favini.

[Andrea Favini, executive]

Good morning, everyone. Good morning.

[Sanela Begic, executive]

And so we'll be going through the results. So I'll just see if we have any Q&A now. [Operator Instructions]

[Daniele Misani, executive]

Okay. Thank you, Sanela. Thank you, everybody, for attending this conference. So we will start from, let's say, the top line results, as said by Sanela. These 9 months, we recorded a EUR 220 million revenues, and we are doing in 9 months what we did last year as a consolidated value. So there is a strong growth, that is plus 37.8% with the same -- with respect to the same period of the last year, and is driven by a solid organic growth.

In 9 months, we are recording, let's say, 26.5% increase in the top line in an organic way. This is due mainly to the synergies and the good work the team is doing in order to create opportunity for the sister company within the group and addressing the market more aggressively with respect to the past. In this special organic growth, there is an influence of some, let's say, noncore activities that we decided to undertake to, because let's say, position ourselves with a strong customer relationship. So there are EUR 10 million moreover in 9 months of, let's say, growth that is not core, so not recurrent also for the next year. But for this year is, let's say, giving us a boost in terms of top line growth.

In terms of EBITDA margin, we recorded EUR 28 million. So 31% better than the same period of the last year. This margin, we had some pressure about the margin in percentage, so we recorded 12.8%, more or less 13%. That is a little bit lower with respect to the guidance. This is due mainly to the fact that we are investing strongly to sustain the growth. So we are investing in R&D, we are investing in commercial activities in order to be, let's say, more effective in transforming our sales pipeline in contracts and in orders.

In terms of looking for the contribution coming from the different division, there is the positive factor that all the divisions are growing. So the most, let's say, fast-growing and it's important also for the margins in general, is the Smart Solutions division that is recording more or less 50% growth with respect to the same period of the last year. But also the -- the Digital Advisory and Software Engineering are growing 35%, 38%. So the total turnover is EUR 220 million against EUR 160 million last year.

In terms of EBITDA, as I said, there is a pressure on EBITDA margin. But of course, in terms of absolute value, we are recording a strong growth, so 31% more than last year, EUR 28 billion against EUR 21.4 million. Also in this, let's say, context, the contribution coming from the different division is strong, especially in the Smart Solutions with plus 53% more than last year, EUR 8.4 million with respect to EUR 5.5 million, with a good EBITDA margin also for the -- our product, let's say, division, so almost 20%.

In terms of growth and, let's say, pressure on margins, it's coming specifically by the Software Engineering division. So in which the average margin is lower with respect to the same period of the last year. So we recorded 10.5% against 12% last year. But as I said before, there is a contribution of noncore activities, with an EBITDA margin below the average of the overall single digit, okay?

In terms of, let's say, investment, we are continuing to invest. So for us, it's strategic to have, let's say, always advance the solution in our Smart Solutions division. So we invested EUR 10.5 million entirely expended during the 9 months, with a growth of 56% with the same period of the last year. And this investment is generating value because the Smart Solutions revenues are growing, so EUR 43.9 million in 9 months. That is almost 50% better than last year. So we are increasing our, let's say, market presence with new subscriptions with, let's say, new recurrent revenues that will bring benefit not only for this year but also for the future.

In terms of international revenues, we are now 26% out of the total with EUR 56.7 million. There is dilution of, let's say, the international revenues because we started to consolidate also the Digital Marketing division that is mainly Italian based. So with respect to the 6 months, there is a little bit of dilution in terms of percentage, but there is a growth in terms of volumes, of course.

In terms of debt, we have still a sustainable debt. We have more or less EUR 25 million in treasury shares and an adjusted net financial position of EUR 60 million debt, okay? In terms of incidence of the market, also this picture is quite good because our diversification into different market segments and the synergies in terms of technological and commercial activities are bringing value across the different market divisions. So they are growing -- almost in each segment, we are growing. So there is the Telco, Media & Gaming that is growing also by the noncore activities that I mentioned before. The main driver for the growth are the Aerospace & Defence division that is, let's say, capturing many opportunities in order to position ourselves always stronger than before.

And also the public sector is an area that is growing faster because we are, let's say, implementing all the activity that are, let's say, in our backlog from the tenders we won in the past few months. The new segment, MarTech is for the overall 9 months solid at 3% but because we started to consolidate these parts just from the Q3, so at the end of the year, we'll be more balanced according to, let's say, our complete portfolio of offering.

In terms of business evolution, so after the closure of the 9 months, we continue with our, let's say, M&A plan with our aggregations and we signed an important deal last week. So with the acquisition of Webgenesys. This acquisition was made in order to balance our presence into the markets. As you know, we have an offering for the public sector, mainly in the Digital Advisory segment, so in the consultancy part. And for us, it's strategic for each market segment to have Digital Advisory, Software Engineering and Proprietary Product Solutions. So Webgenesys is a software engineering company that is aggregating new competencies into our portfolio of offering and, let's say, strengthening our position in the public sector domain with many already signed contracts.

Because one point strategic of aggregating Webgenesys is to secure a robust order backlog. Because, let's say, the company has more than EUR 200 million of tender win, one that will be -- let's say, will generate revenue for the next 3 years. And of course, they are -- and we are working now together in order to capture more opportunity and to position the TXT Group as one of the emerging leaders also to serve the digitalization of the public sector segment in Italy.

There is a good -- the company has a good top line of more or less EUR 40 million with a good EBITDA margin because it's 22%. So it's a well-organized, good performing company that will be bringing value to overall Group. It's also for us strategic in order to cover better, let's say, the geography because the company is, let's say, present with 8 offices, mainly in the center part of Italy and south of Italy, in which for now the group, before Webgenesys, was present but not in a strong way. So for us, it's also geographical coverage that is increasing our presence on the Italian -- let's say, on the Italian country. And they provide also a digital offering and the expertise in terms of software engineering, competencies, technologies like IoT, like blockchain, like cybersecurity that are complementary to the ones that we have already in the group.

The acquisition of Webgenesys is important in terms of also investment. We agreed and signed a contract with an evaluation of more or less 7x the EBITDA, so with respect to EBITDA forecasted for the 2024. The price for the acquisition is EUR 63 million, and EUR 53 million will be paid by TXT in order to buy the 85% more or less of Webgenesys, 70% in cash, the remaining in treasury shares. Because for us, it's important to have the commitment and the strong commitment of the management team. So the management -- the current management team will stay on board to drive also the growth of Webgenesys for the next few years. And this important part of shares make them also a strong shareholder within the group with a strong commitment in order to create synergies and create value for all the shareholders, of course.

The contract includes clawback and earn-out. So there is the possibility to adjust the price according to the performances of the Webgenesys Group, and we are working with them for a business plan that will bring continuity in terms of EBITDA margin and growth in terms of top line. The investment was made, in this case is, particular for us, this is the first one. But we made it also together with HAT Technology Fund, a private equity fund because for us, it's also strategic to have this partner in order to continue to expand and also do future operations together because they are supporting us in scouting and finding technology companies that can be let's say, aggregated within our portfolio and perimeter. The HAT Technology Fund will have more or less 16% of the shares of Webgenesys. And we have also signed an agreement for a put/call option in order to buy the 100% according to results in the next 5 years.

Webgenesys was not the only, let's say, aggregation we did after the closing of the 9 months because we also acquired a small boutique in order to empower our offering in the industrial and manufacturing sector. So we acquired 100% of Focus PLM, that is a small boutique in the North of Italy with a good, let's say, presence in the market with a lot of current customers. So it's contributing for EUR 2.5 million, with an EBITDA adjusted margin of more or less 13.5% and double-digit growth expectation for the next future.

For us, it's strategic even if it's bold because we bring competencies in an area that, for now, is not growing so fast for the TXT Group for the market itself. But we plan together with TXT Tech and together with Teratron, and together with, let's say, DM Consulting to have a broader offering in order to address also the industrial and manufacturing market in a stronger way than before. So it's strategic in order to keep the positioning, bring the competencies and they have a customer base that is continuously increasing.

These are, let's say, the main updates after the closure of the 9 months. So I will ask now Andrea to introduce and explain a little bit more in detail in the financials. Andrea, it's up to you now.

[Andrea Favini, executive]

Thank you, Daniele, and welcome, everyone, to the financial section of this conference call. We start from the profit and loss of the first 9 months of 2024, showing revenues of EUR 220 million with an increase of 37.8% compared to the same period of the previous year. The organic growth was equal to 26.5%. And as mentioned by Daniele, there are also some, let's say, and noncore activities accounting for approximately EUR 10 million. So we can say that a normalized, let's say, organic growth is more on the, let's say, range of 20% year-over-year.

In terms of direct cost, we have an increase, which outperformed the increase in revenues, 44%. And this is linked also to the lower gross margin on the activities I mentioned before, and also on the different mix of revenues compared to the previous year, with a stronger incidence of service revenues against revenues coming from the Smart Solutions business. For this reason, the gross margin decreased from 35.6% in the first 9 months to 2023 to 32.6% in the first 9 months of the current year.

If we look at the indirect cost, we have a strong push in our, let's say, Technology and the Smart Solutions portfolio, which is visible from the growth rate of the first 9 months of R&D investment, which grew at 55.6%, an outperform of the growth of revenues and especially also an outperform the growth of revenues coming from Smart Solutions. Of course, those investments are fully expanding our P&L and the return on the investment are expected already for the first quarter of this year and for the future years.

Looking at the commercial cost, recorded an increase of approximately 21%, and are also included cost for marketing and management costs. In terms of general and administrative costs, the increase was 9.5%, and in the incidence of 6.5%, there are still some inefficiencies related to the growth, which will be, let's say, reduced looking forward and especially from the future years.

Given the effect of direct and indirect cost, the EBITDA of the period was at EUR 28 million, with an EBITDA margin of 12.8%, 60 basis points lower compared to the same margin of the same period of the previous year. So EBITDA margin -- EBITDA as an absolute value grew by 31% versus the 37.8% of revenue growth.

In terms of amortization, depreciation and write-offs in the first 9 months of 2024, they recorded a value of EUR 8.7 million. And they are mainly related to depreciation of fixed assets for EUR 1.4 million, depreciation related to the IFRS 16, so financial lease for EUR 3.4 million. We have amortization of other intangible for EUR 0.8 million and amortization of intangibles related to M&A, so intangibles allocate -- goodwill allocated to other intangible assets for EUR 2.8 million in the first 9 months of 2024.

This value of PPA is expected to increase in the fourth quarter because TXT will also allocate part of the price of the recent acquisition closed in the last 12 months. So there was the I MILLE Group and the Refine, for example. So due to the effect of the amortization and depreciation, the operating profit was at 8.8%, EUR 19 million, with a stronger growth, which is almost matching the growth recorded in revenue. So 37.6% growth year-over-year.

In terms of financial charges, the net financial result in the first 9 months of 2024, had a negative net balance of EUR 2.6 million, mainly due to interest expenses, bank charges and the result of minority interest. In the first 9 months of 2023, the financial results to show a negative balance of EUR 0.1 million due to the -- let's say, to the results to the one-off income related to acquisition that happened in the previous year.

Financial expenses in the first 9 months of 2024 consists of EUR 3.5 million related to interest expenses and bank charges, and EUR 0.5 million related to the share of negative results associated -- of associates, not consolidating the financial statement of TXT. The net financial charges of the period are partially offset by financial income from the fair value of trade securities held in the portfolio of the earnout for approximately EUR 1.2 million.

So the pretax profit was at EUR 16.7 million, 7.6% of revenues. And the tax rate was approximately 29%, slightly decreasing compared to the same period of 2023, bringing the net profit at EUR 12 million with a net profit margin of 5.5% in the first 9 months of 2023, slightly below compared to the 6.1% recorded in the same period of the previous year.

If we focus instead to the third quarter of the year, so revenue grew by 56.3%, and we are at EUR 81.4 million with stronger growth also from an organic point of view. So the organic growth was more than 35%. These noncore activities were, let's say, higher in the third quarter compared to the previous quarter. In fact, there was approximately EUR 5 million of those noncore activities accounted for in the third quarter of this current year. And this is, of course, visible also in the gross margin, which went down from 37.1% in Q3 2023 to 32.2% in the same quarter of the current year.

The same trend of the indirect cost is reflected also in the -- of the third quarter is, let's say, comparable to the one recorded in the first 9 months or so with a stronger push of R&D, which grew by 67.5%. A significant growth that will bring benefit to the future, let's say, period of the year.

Looking at the EBITDA margin, of course, as discussed before by Daniele as in this fourth quarter, we suffered some pressure in the EBITDA margin but this pressure is to sustain the growth. So we are, let's say, pushing more on the top line by losing also some efficiency in terms of operating profit.

In terms of amortization and depreciation of the fourth quarter of the year, also in this case, we have a strong incidence of PPA, approximately EUR 1 million. And also, let's say, the effect of IFRS 16 is significant EUR 1.2 million. The operating profit was same as per the 9 months, so 8.8% of revenues. And in terms of financial charges, there is a, let's say, EUR 1.3 million of interest and bank charges, partially offset by EUR 0.3 million of financial income. The result of minorities in the third quarter of the year was positive for approximately EUR 10,000. Net profit was at approximately 5% versus 5.8% in the same quarter of the previous year.

If we move to the next slide, and we look at the net financial position of the period. We have, let's say, the adjusted net debt as of September 30, 2024, which is equal to EUR 60 million, with an increase of EUR 28.5 million compared to EUR 31.4 million of December -- as of December 31, 2023. The increase is primarily due to cash outflow for acquisition, net of the acquired net financial debt and earn-outs; and for EUR 19.2 million, mainly the I MILLE Group and Refine. Earnouts related to those acquisitions for approximately EUR 6.5 million. The cash outflow associated with the buyback of treasury shares for EUR 4.6 million. Dividend payment for approximately EUR 3 million and interest payment on loans and net of financial income for approximately EUR 2.1 million.

The cash outflows were partially offset by cash generation from operations, which saw a slowed down in the third quarter due to a temporary delay in the collection of trade receivables associated with the business generated with one of the main customer of the TXT Group. If we look at the, let's say, items of the net debt, cash as of end of September 2024 were at EUR 25 million, mainly in euro, as with major Italian banks, down EUR 13 million compared to the year-end 2023, mainly due to the disbursement related to the acquisition.

Financial instrument fair value at EUR 26 million at September end 2024, and with an increase of EUR 1.8 million, which is mainly related to the fair value adjustment of the trading securities. If we look at the current financial debt net of the current financial asset is at EUR 58 million as of September end of 2024, mainly referring to the shorter-term portion of bank loans and stable -- let's say, stable compared to the year-end 2022.

If we look at the noncurrent financial debt as of end of September 2024, we have EUR 72 million, up by EUR 15 million compared to the year end of 2023. The adjusted net financial debt as of end of September includes a EUR 10.3 million of net debt related to IFRS 16. Stable compared to the year-end 2023, and EUR 12.5 million of debt for earnouts and put/call for the purchase of minority interest, an increase of approximately EUR 3 million compared to the year-end 2023.

The unadjusted net debt, so the reported net debt as of end of September 2024, amounted to approximately EUR 80 million, with EUR 19.3 million higher than the adjusted net debt as of the same date. And the difference is mainly due to the investment in Banca del Fucino, whose fair value of EUR 17.8 million was reclassified from fixed assets to financial assets to calculate the adjusted net debt.

If we look at the next slide, the balance sheet of the period show a fixed asset of EUR 162 million, an increase of EUR 31 million, which is mainly related to the acquisition period. As we can see, the increase is driven by intangible assets. And within intangible assets, as of September 2024, we have EUR 97 million of goodwill, some of which will be allocated through PPA by the end of the year. And the remaining, let's say, EUR 17 million are mainly related to IP or customer relationships acquired through the M&A plan implemented over the last 5 to 6 years.

And of course, the increase of the period is to be attributed to the acquisition of I MILLE, Uasabi and Refine, net of the amortizations. Also in terms of tangible assets, we have EUR 2 million increase, which is mainly related to the acquisition plus the CapEx of the period, offset by the depreciation of the period itself.

If we look at the are other fixed assets, they consist mainly of the investment in Banca del Fucino, for a fair value of EUR 17.8 million. Stable compared to the year-end 2023, and the decrease is related to let's say, the growth of 60% in a minority, which became, let's say, majority. So the difference is related to, let's say, the investment in minority.

So if we look at the net working capital, as discussed by Daniele during the first section of the call, we have a slowdown in the cash generation in fourth quarter, which is also, let's say, reflected in the growth of the net working capital. Special inventories, which includes the work in progress, so, let's say, customer projects that are ongoing and not yet invoiced grew by approximately EUR 7 million to be added to the EUR 11 million growth of the trade receivable.

Those effects has been only partially offset by the growth of payables. And this effect is expected to be somehow reduced, so an absorption of net working capital in the fourth quarter but mostly in the fourth quarter of 2025. So we already expect, let's say, some benefit from, let's say, cash receivable collection in this quarter. But the real positive effect is expected for the first 2 quarters of the next year.

Severance and other noncurrent liability grew by EUR 1.4 million. And also in this case, the growth is to be allocated to the acquisition of the period. While the growth of the shareholder equity is to be attributed to the net profit of the period plus the effect of the transfer of treasury shares to the seller in the context of the M&A plan, while the net financial debt reported was what we discussed before.

If we move to the next slide, we have the shareholding structure of TXT as of September 30, 2024, showing laser line, the financial vehicle of the Enrico Magni, owning the 30% of shares. We have managers with a 19% stake, increasing from, let's say, end of first half because of the transfer of share in the context of M&A. And this is an impact also in the treasury shares that were about the 10% by end of the first half of the year, and they went down to the 7%. The other -- the market is only the 40%. And within the manager, there is also a stake more than 3% related to the acquisition of Refine.

Dividend and treasury share repurchase in the first 9 months of the year show a disbursement of approximately EUR 3 million for the dividend of EUR 0.25 per share that was paid out on May 22. And then we have also, let's say, the repurchase of treasury shares for approximately EUR 4.6 million in the period.

In terms of performance of the TXT stock in the first 9 months of 2024, the TXT share price recorded an official high of EUR 28.25 as of September '19, 2024, and the low of EUR 18.48 as of January 5, 2024. As of September 30, 2024, the price was at EUR 27.3 per share.

In terms of treasury shares as of September 30, 2024, they were equal to 920,000 more approximately, representing 7% of the issued shares. Treasury shares were 1.3 million as of December 31, 2023. And the decrease is to be attributed to the consideration paying TXT share in the context of 2023 and 2024 M&A plan, net of share repurchase in the context of the buyback plan. In particular, in the first 9 months of 2024, approximately 577,000 shares were transferred to the vendor and current manager of TXT, and approximately 197,000 shares were repurchased at the average price of EUR 23.14 per share.

So I think we are done for the financial section of this conference call. Thank you for your attention. And now is the time for the Q&A section.

[Daniele Misani, executive]

Thank you, Andrea.

[Sanela Begic, executive]

Thank you very much. And so we did receive quite a few questions, so we'll get to them now. So we have a question from an anonymous messenger. So what would be the TXT margin excluding the one-off sales for EUR 10 million? And what can we expect on the margin, assuming the growth in 2025 normalizes that 10%?

[Daniele Misani, executive]

Yes. So considering, let's say, the noncore activities of about EUR 10 million, the EBITDA margin will be slightly, let's say, better than 13%. So it's 13.2%, more or less, okay? Because the EUR 10 million or, let's say, one-off projects, including resale of third party software or resale of hardware also, so with the low margins. And as I said before, we decided to undertake this opportunity in order to strengthen the customer relationship.

In terms of, let's say, future growth, probably, let's say, these 9 months are incredibly strong in terms of organic growth. It's driven, as I said before, by the Aerospace & Defence and the Public Sector domain for which we have a long-term engagement with the customers in terms of tenders, backlog and activities ongoing. The -- let's say, expectation for the next future, of course, there will be, in some way, reduced in terms of total growth, excluding the M&A of course. And, let's say, our goal this year is to position ourselves from the market. So we are pushing a lot in order to capture opportunity and increase the top line with some impact, of course, on the EBITDA margin.

Of course, there is the absolute value of the EBITDA that is growing because it's growing the top line. For the next year, assuming to normalize the growth at 10%, we will go back to our guidance of more or less 14% or better because we are growing also for the Smart Solutions divisions that are in average higher margin division. And also, we will have the contribution of good performing company that are included in our portfolio like Refine, like Webgenesys itself that with the volumes and the EBITDA margin that is stronger, we'll put benefit on the overall EBITDA margin of the group.

So for the next year, we think that after this phase of stronger and accelerated growth with steel growth, but at different levels, we are capable to go back to our guidance of 14% better for the next year.

[Sanela Begic, executive]

Fantastic. And we have another question from Andrea Randone. So after the impressive growth recorded this year, what can we expect for 2025? And can you please explain to us what is included in your order backlog?

[Daniele Misani, executive]

As discussed before, so the growth will normalize. So we are, let's say, now in phase of budgeting for the next year. So we see a growth that is more double digit, but not 20%, it's more slightly above 10%, 12%, something like that. So there will be a reduction of the steepness of the growth with respect to this year. Because, let's say, we are positioning and we have the possibility to continue to grow, but with lower -- yes, with a lower, let's say, impact with respect to this year.

In terms of the second part of the question, it's related to the order backlog. So in general, we start the next year with -- from 70% to 80% of business that is already secured for the next year. The stronger part of the backlog is related to public sector for which the tenders in digital innovation are multiyear, let's say, contracts. So we are speaking about a total, let's say, backlog in the public sector of EUR 300 million to be transformed the revenue in the next 3 years. So more or less from EUR 70 million to EUR 100 million per year that we will, let's say, register as revenue.

So this part is has a strong backlog for the future. That is the sum up of the backlog coming from Webgenesys and the backlog that is already in I MILLE, mainly from HSPI and PGMD for the public sector. We have a backlog, of course, related to our software because most -- we have different business model according to the kind of software. Sometimes we have upfront licenses with maintenance. Sometimes we have subscriptions. So there is the business related to Smart Solutions that has already a strong backlog of continuity for the next year because there is the renewal of the subscription or the impact of the maintenances.

And for the other division, in general, we are engaged on long-term programs on core activities and core business of customers. So mostly, there is no -- already the ordering because also for the Aerospace & Defence and the banking and finance most of the activities are renewed year-by-year but there is a recurring business because we are involved on long-term projects. So overall, let's say, our backlog is in continuity with the present year in all the divisions and in all the market segments. And as an estimation is from 70% to 75% of the total revenue already in for the next year as a recurrent business.

[Sanela Begic, executive]

Fantastic. And so we have another question here. So again, from Andrea. So you closed a number of acquisitions this year, with the last one significant in terms of size. Can you help us to summarize the impact on your net financial position from these deals, such as cash flows, future obligations, earn outs, transfer of treasury shares?

[Daniele Misani, executive]

Yes, I will ask maybe Andrea to support me in this question, if you can, but I think that is more related to Webgenesys because it's quite, let's say, impactful in terms of cash out, in terms of treasury shares that we transfer. So the treasury shares that we will transfer for Webgenesys are already in, so are already reset shares that we have in our portfolio. So it will be transferred and will decrease the number of treasury share and increase, let's say, the management shares in our shareholding structure.

In terms of price, I ask Andrea, if you can explain a little bit more the details of the deal.

[Andrea Favini, executive]

Yes. For sure, Daniele. So we said that the part in cash is about EUR 37 million, let's say. We will also get some cash -- net cash. So we can imagine that our, let's say, net cash out, let's say, considering goes to the cash that we will acquire will be on the range of EUR 30 million, for which we have already agreed on, let's say, loan and which will bring us to, let's say, net debt that goes close, let's say, to the EUR 100 million, I would say.

In terms of earn-outs and clawback options. We did not disclose yet in our financial report. If we will do the closing by the year end, we will, for sure, let's say, make a full disclosure with the full year, let's say, financial report. It's important to say that you mentioned before the put call option for a possible acquisition of the 15% that will be acquired at closing by HAT. In this case, is not, let's say, across it's a put and call option. So we have some option distributed between the approval of 2025 financial statement and 2028 financial statement. But are only option, and so we will not reflect the, let's say, estimated value of this option in our financial debt.

So, let's say, as of the end of September 2023, we have all the acquisition order, the Focus PLM, which is not really relevant in terms of investment. And this Webgenesys, so we can imagine our cash position also depending, of course, of the trend in the collection of outstanding receivable to be as per guidance. So 2x the pro forma, of course, EBITDA of 2024. I don't know if I answer completely .

[Sanela Begic, executive]

Again, we'll go on to the next question. So what do you expect in terms of the net working capital evolution? And how are newly acquired companies in terms of working capital?

[Daniele Misani, executive]

Yes. Also for this question, I will ask help from Andrea. But in general, as said already by Andrea, so we had some pressure on the third quarter about cash in. So we recorded bad performance in terms of payments of one of our main customer that will be compensated in the Q4. So we already are putting in place all the actions in order to have the cash in. So there will be, for sure, an improvement on the year basis.

But I ask also Andrea to be more -- to give more flavor to the answer.

[Andrea Favini, executive]

Yes. So I mean in these 9 months, as of end of September 2023, as we mentioned, the net working capital increase more than we expected. We have a significant, let's say, amount of overdue receivable more than 90 days. The new acquired companies actually have a leaner net working capital, especially Refine and I MILLE Group. Of course, the explosion of the net working capital is not to be attributed to the acquisition of Refine and I MILLE, more to the delay in the collection of the receivables with, let's say, historical customer.

And looking forward, also Webgenesys according to the due diligence analysis that we did as a leaner, let's say, working capital because they also work with some suppliers and subcontractors. So there are somehow able also to compensate, let's say, receivable with payables while, let's say, in the typical, TXT business with the vast majority of cost being, let's say, internal activities, let's say, the payment is, of course, due on a monthly basis. So Webgenesys has a leaner net working capital of -- compared to the TXT Group, with, let's say, net working capital relative to sales, which is between 10% and 15%.

So looking forward, we can expect net working capital, which will represent more or less 20% of sales, It's not a super, let's say, low value but it's somehow historical and also discount the fact that we have some larger, let's say, payment terms with one of the main customers in the Defense but also the fact that we are growing with the public sector and that somehow compensate also the better, let's say, performances in terms of the DSO of, for example, Refine and I MILLE. So all these effects, we expect that will keep us on incidence of net working capital on sales of approximately 20%.

[Sanela Begic, executive]

Fantastic. And we do have a few other questions. So from Jonathan. Can you comment on the surplus in the organic growth regarding the Software Engineering division? And your previous guidance were about low double-digit growth. Also, can you comment on the EUR 10 million in noncore activities regarding the Telco? Because without those EUR 10 million, the organic growth is more or less 16.5%.

[Daniele Misani, executive]

Yes. Without this EUR 10 million, the organic growth is more or less 20%.

[Andrea Favini, executive]

It's only Telco. I was also reading the question. I don't know if it's referring to the Telco segment or to the overall, yes.

[Daniele Misani, executive]

For The Telco segment, it will be around 16.5%, 15% yes. So this -- as I said before, these noncore activities our activities in the Telco and, let's say, Gaming industry, in our say, let's say, section related to Telco & Gaming, and were related mainly to one-off projects we decided to undertake in order to strengthen the customer relationship. So we are speaking about one-off projects of reselling services, hardware and software of third parties. So the marginality is quite also low.

It's a one-off project of serving this customer that is finished, okay? You -- the surplus in general for the Software Engineering division is driven by these noncore activities but also by our capability to address the market more strongly. In particular, the Aerospace & Defense has a strong component of Software Engineering that is growing in a sustainable way. So very, very strongly. Also above the expectation because we were able to take some market shares more than the expectation of the beginning of the year, because our competencies and our positioning allowed us to be more effective in, let's say, capturing opportunities on the market. So the -- these are the main drivers of this kind of growth.

[Sanela Begic, executive]

Thank you very much. And another question from Jonathan. So the R&D budget will decrease next year, should go back to the 14% or 15% EBITDA margin?

[Andrea Favini, executive]

Let's say, they go back to 14% to 15% of EBITDA margin will be driven not only by, let's say, a more accurate R&D investment but also by several factors. One of them is mainly the efficiency because impact of the pressure on the margin is mainly on the Software Engineering division, for which we are growing fast. Software Engineering is a service-based activity. So based also teams of people. This year, we hired a lot of new, let's say, competencies on a lot of new resources within our teams. So of course, when you hire a lot and you grow by certain people, you lose in efficiency because you have to train people.

And before they became, let's say, capable of delivering projects takes time, so it means that we have also investments in terms of recruitment training that is impacting the performances of the Software Engineering division, together with one-off, let's say, low-margin projects. So, let's say, the growth for the next year will be driven by -- mostly by more efficiency in the organization. Moreover, let's say, we have an impact of all the M&A activity we are doing. So this year, we already did 5 extraordinary, let's say, operations in terms of acquisitions. And so this has an impact in terms of cost, of course, that are fully expanded during the year. Because there are advisers there are, let's say, working time related to the team that is actively, let's say, working for this. So, let's say, with this increase in terms of big, let's say, acquisitions and increase in terms of resources within the team, we forecast, let's say, a more efficient -- operational efficiency for the next year, and, let's say, together with more focused R&D investment, we want to regain the 14%, 15% EBITDA margin.

[Sanela Begic, executive]

Fantastic. And the final question we have here, can you comment on Webgenesys' acquisition, so the synergies and strategies? And what about the exit for the PE fund? Why does the price -- why is the price fixed at EUR 20 million and not a multiple? And if I'm right, to avoid any dilution, the EBITDA must be multiplied by 2. Can you do it in 2 years?

[Daniele Misani, executive]

Okay. So commenting Webgenesys. So for us, it's strategic. I said before, because it brings the Software Engineering capability in a market, like the public sector one for which we were present only with the consultancy pathway. So with the Digital Advisory part. So of course, there will be synergies in terms of go-to-market because we put together 2 strong players, so HSPI and Webgenesys in a market that, let's say, is a particular market. So we have good managers, an organization in order to apply to tenders, an organization in order to manage and deliver complex project of digital transformation in public sector.

And we see a lot of capabilities also for synergies with the other Software Engineering companies, we have like SPS that is working in the Roman area with more than 100 resources specialized in Software Engineering activities. So there are technical synergies with the other companies of the group and commercial synergies in order to bring and to win bigger tenders also. Because you know that in public sector, it's very important to have references in order to get, let's say, more probability to get new business with the public sector. So putting together to strong players like HSPI and Webgenesys and PGMD also, in this kind of market segment bring us value in order to capture more opportunity than before.

The -- about the exit, as said by Andrea, we will be more, let's say, detailed in the option and the structure of the option after the closing. So for now, we signed with Webgenesys. There are some, let's say, conditions and authorization that will be -- must be implemented before the closing that for now is planned by the end of the year, okay, if everything is okay. And so we will be more, let's say, detailed about the options and the price and the earnout also for the seller and the agreement with the [indiscernible] as soon as we proceed with the closure of the operation.

And the last question -- part of the question, if I'm right to avoid any dilution of EBITDA.

[Andrea Favini, executive]

Yes. No, I think because it's not 2 years. So this is not a fixed price, and I guess it's not 2 years. So we have a first call option to be executing within 2 years but then it goes up to 5 years plan. So let's say, somehow, also from a timing perspective, also aligned with the plan that we share with the seller. So yes, the expectation is not that the multiply double in 2 years. But yes, within 5 years, possibly yes.

[Daniele Misani, executive]

Okay.

[Sanela Begic, executive]

Fantastic. And so we have the final question here. Okay. So now that you have acquired Webgenesys, will you plan to organize a CMD?

[Daniele Misani, executive]

Capital Market Day, I think that is CMD, sorry, full of abbreviation, it's difficult to understand. Now yes, so as we said before, we were planning already to do before the end of the year, but we were working very strongly on the Webgenesys, let's say, acquisition. And there is a transformative in some way for the size, for the price, in terms of volumes, EBITDA margins and so on, and we decided to postpone. We will announce the data of the Capital Market Day that would be in the first quarter of the next year. So in the next few days, we will communicate the data and save the date for the Capital Markets Day that will be in the first quarter of the next year. So I confirm that we are arranging and organizing it.

[Sanela Begic, executive]

Fantastic. And so I think we're out of questions now but if anyone does have any other questions, feel free to e-mail through, and we'll endeavor to get back to them.

[Daniele Misani, executive]

Thank you very much to everybody for, let's say, attending this meeting. Thank you, Andrea, from Berlin. Thank you, everybody.

[Andrea Favini, executive]

Thank you, everyone. Always a pleasure. Thank you.

[Daniele Misani, executive]

We have to make happy birthday to Sanela because it's her birthday today. So, yes. Happy birthday.

[Sanela Begic, executive]

Thank you very much.

[Andrea Favini, executive]

Happy birthday, Sanela .

[Daniele Misani, executive]

Thank you very much. See you for the next call for the yearly result. Bye-bye.

[Andrea Favini, executive]

Thank you. Bye-bye.

[Daniele Misani, executive]

Bye.