Wiit SpA

MIL:WIIT

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the WIIT S.p.A. Nine Months 2024 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Alessandro Cozzi, Chief Executive Officer. Please go ahead, sir.

[Alessandro Cozzi, executive]

Thanks. Good afternoon, everybody, and thanks for joining in this conference. The Board of Directors of WIIT approves the results for the first 9 months 2024. You can follow with the presentation I sent the last hour. I can start to present the figures. And after the presentation, there is a possibility to have a Q&A session.

I start with the highlights in Page #3 of the presentation. Revenue adjusted growth 19.7% to EUR 115 million compared EUR 96 million last year. EBIT adjusted growth 12.9% at EUR 42.6 million compared to 37% of last year. EBIT adjusted grew 7.2%, EUR 22.5 million compared to EUR 21 million last year. Net profit adjusted, growth, 4.6% to EUR 12.2 million compared to EUR 11.6 million, and net profit reported, growth, 50%, EUR 10.2 million compared to EUR 6.8 million. Net debt was adjusted, excluding the IFRS 16 impact and then including the value of the treasury share at the value of end of September was EUR 161 million compared to EUR 154 million of the previous year.

In Page #4, there is the breakdown of the revenue and the EBITDA. Italy closed the first 9 months with EUR 44 million of [ 4 ], which is 38.5% of the total group revenue. EBITDA in Italy was very, very good because EUR 20.5 million is a 46% EBITDA margin, which is very, very good and is 48% of the total group EBITDA. EBIT margin in Italy was EUR 9 million, and the EBIT margin was 20.2%.

Germany is running good, well. Revenue, EUR 51.7 million. Over half of the business now of WIIT is based in Germany. And in terms of EBITDA, the result is very, very good, EUR 21.8 million, is EBITDA based in Germany. The EBITDA margin is 35.4% in Germany. EBIT margin was 14.4% in Germany, and the EBITDA margin was 23.2%, higher than in Italy.

Swiss, the new country we opened this year, got here in May. It's a turnaround company. I need to remember that; for this reason, the profitability is lower than usual in WIIT. Revenue is EUR 9 million. The consolidation started from 1st May, so in these figures, we have only 5 months of revenue. We just achieved breakeven in terms of EBITDA. It's close to 0, but it's positive. It's at EUR 300,000. Currently, we have, naturally, an effect in terms of amortizing the EBIT, which was negative for EUR 800,000 in this period.

Page #5, in terms of growth of the revenue. The organic growth was 6% average. Italy's growth -- organic growth was 4.8%, and 5% in terms of core revenue in cloud services. In Germany, the organic growth was a little higher. It's at 7.6% in this period. And the contribution of the newly acquired company is EUR 4.4 million related to the Edge&Cloud asset deal closed on 1st April, and EUR 9 million is the total revenue of the company acquired in Switzerland, in -- also in the 1st of May.

Page #6, there is the details of the revenue level: current level, 86% of the core revenue is recurrent; in Italy, we have 84% of the core revenue recurrent; in Germany, 99%; in Switzerland, as we see, 68%. The core revenue growth 19.7%, in the large part based in Germany and in Italy.

Page #7, there is the detail of the profitability of the company. We are very, very happy for these results, because we can show here the improvement in terms of margin like-for-like, without the effect of the acquisition. Naturally, every company we acquired, we have a little dilution in the margin because the company acquired on the first day is not running, is not performing with the same level of EBITDA and weak. For this reason, the EBITDA margin is 37%, but there is, if you realize, like-for-like without the acquisition --without the M&A effect, the margin was 41.6% compared to 39% of the previous year.

In detail, in Italy, the margin was 46%. It improved a lot compared to last year, which was 43%. In Germany, we are very, very happy to show these results because this is the effect of the extract of the synergies of all the companies acquired and the strategy to put more high-value services on all the customer base acquired. If you analyze the figures in Germany, the average is 55%, but the like-for-like margin without the M&A effect was 38% or 41% if we exclude the consulting business, compared with 33.8% total revenue last year and 36% without the consulting business.

EBIT margin is growing like EBITDA. If you go directly to Page #9, in terms of the season of net debt, we closed gross debt at EUR 250 million. The cash generation was strongly at EUR 37 million. This price, we have -- we are impacted for the acquisition of Edge & Cloud we paid in April, and Econis in May, a small purchase of treasury shares for EUR 700,000.

And the CapEx at the end of September, we have EUR 22.8 million of CapEx. Consider that the budget for the full year is EUR 27 million, at the moment, currently, we expect to stay in line with the guidelines in terms of total CapEx [ expenditure ] for the current year. In this CapEx, we have an IFRS impact is sustained for EUR 12.7 million and dividend paid totaling EUR 7.8 million. That's all. We are ready for the Q&A.

[Operator]

The first question comes from Giorgio Tavolini of Intermonte.

[Giorgio Tavolini, analyst]

The first one is on the current trading. I was wondering if you can provide more color on the organic growth trends going through Q4? And also what to expect for 2025 in Germany after the acquisition of MMP in terms of contribution?

The second question was actually a clarification. I was wondering why the EBIT margin in Germany is much higher than in Italy. I guess you have a much -- a greater number of data centers, so I was wondering why maybe the amortization is higher, I don't know.

And the second point is why the recurring revenues are 99% in Germany. So there is a great gap compared to Italy. So Germany is quite a new country for you, so I was wondering why there is this gap?

[Alessandro Cozzi, executive]

Okay. About -- I'm starting to answer the first question about organic growth. There is -- naturally, we may -- connected here, ramping, actually entering a discussion to give more color. But in general, in Italy, we are totally in line, just now on the full budget in terms of booking of our sales. That means we expect next year in Italy to grow at high single digit from 8% to 10% in terms of sales of core revenue, okay?

In Germany, we are a little delayed. It's not a bad result, but the pipeline -- the sales pipelines are good. Our expectation is to close something in this. We are in the final phase in the next 2, 3 months. It means for German, too, we expect it to grow high single digit for next year. This year, we have a little delay in Italy in terms of activation of new contracts. For this reason, the organic growth was a little lower than in Germany. But now we are recovering well. In the last quarter, we expect to close the migration, and we estimate a step-up in terms of core revenue from 1st January 2025.

The question about the EBIT -- no, sorry, the new -- the EBITDA margin in Germany is higher, yes. The reason why, in Italy, we have more amortizing is actually, the business in Italy is more positioned to high critical applications. In Germany, we have 25% of the business like WIIT in Italy, and the other are more traditional data center and gas business. In Italy, we are more focused on this business.

And this business needs more enterprise storage and hardware, which is more expensive. So we have more CapEx to support these critical [ apps ]. This is the reason why we are a little more amortizing. There is another, not a strategy, another reason, we centralize, in Italy, something, CapEx and after we provide to give our German company, something, software. So we do the CapEx in Italy and after, we provide the software to our subsidiaries.

This is the reason we have more CapEx in Italy than in Germany. But the main reason is the focus, because the labs have more -- higher requirements in terms of resilience and performance in storage, and the cost of this platform is higher than the traditional form in Italy. In Germany, the data center is in a sure -- in a -- positioned such that we don't need additional investment to improve capacity. Currently, Italy's the occupational data center rate is 40%, in Germany's it's 60%. For this reason -- another reason we opened in Italy a data center last year, and we doubled the capacity, and we have, not, really, more amortizing.

[Giorgio Tavolini, analyst]

Okay. And regarding the recurring revenues that are almost 99% in Germany compared to Italy?

[Alessandro Cozzi, executive]

Yes, consider that 90% of the core revenue. If you consider the total revenue, it is a little lower. The reason in Italy, -- in Italy, we have more projects for the migration is the main reason.

In Italy, we have more big clients, and the size -- the average of the size of the deal is actually higher in Italy. Usually, in these contracts, there is a small part, but there is -- to migrate the customer from an internal on-premise data center to our cloud, and the customer pays on accounts on the project, and for us, it's not recurrent. It's not inside our IRR.

[Operator]

The next question is from Domenico Ghilotti of Equita.

[Domenico Ghilotti, analyst]

A few questions. The first is related to the Econis integration, because if I'm not wrong, you were targeting some EBITDA breakeven in Q4. So I'm trying to understand if you are running ahead of plan or if you had some, say, one-off -- positive one-off in Q3?

And second is on German profitability that was particularly strong. And if I'm not wrong, it is also significantly up compared to the second quarter. So here again, I'm trying to understand if this improvement, apart from the M&A dilution, is structural. So on an organic basis, if you really able to run at this level going forward.

And last but not least, so on the pipeline for the German business. If I understand well, you are confident to be able to deliver high single-digit organic growth for next year in Germany, but you need to close some contracts that are in the pipeline. I understood properly?

[Alessandro Cozzi, executive]

Yes. So I'll start to answer -- sorry, I realized the last question about organic growth in Germany, sorry.

Okay. The first question about Econis. Our target was to achieve breakeven point at EBITDA level for the last quarter of this year. To be honest, we anticipate -- we are happy because we just obtained this breakeven in the Q3. It's not related to one account activity, but it's a strong reduction of cost in terms of lease and its data center, okay? The new target, we changed last year with our management team in Germany, because at the moment, Germany is driven the German -- our German guys. And the new target is to achieve EBIT margin positive EBIT margin in the second quarter of next year.

EBITDA is just done. It is a very good result because when we bought this company, it was very, very negative in terms of EBITDA, in terms of EBIT. Our target now is to achieve a positive EBIT level by the -- for the second quarter of 2025.

Germany is running well, and is correct. It is a little higher of our expectations. The reason is a little seasonality, vacation impacted a little bit the cost of salaries. In Germany, the revenue is all recurrent. That means we have less cost of employees during this period. And we have a good impact from the last acquisition. There is good results in terms of cost synergy extraction from Edge&Cloud.

We expect for the last quarter of this year the same level of profitability because the revenue continues to grow organically. And in the last quarter, we have -- not have the same impact as in summer, but a small reduction in terms of salary costs for Q4. And the revenue continues to grow organically, high single digit.

In terms of next year, we expect if the next 3 months we close the 2 contracts we have in the pipeline, we confirm an organic growth in Germany of [ 7.90% ] for the last year. Naturally, it depends a lot on the timing of the close of the contracts because these 2 big contracts we have in the pipeline need -- it mean we have a big transition and a migration period of 6 months, like usually the contracts we have in Italy.

Because now Germany is copying -- is following the Italian business, but that means more timing in terms of migration and more [ stagnant ] in terms of activation of the contracts, and the revenue is a little shifted in time after -- when migration is had. With these, I prefer to say 5% to 7%. And this is the type of our contract. The duration of the migration is not totally under our control. The customer needs to check the application and collaborate for the migration. There is third party without our direct feasibility.

[Domenico Ghilotti, analyst]

Okay. If I may add just another question is on -- if you can comment on the recent contract you announced. So you had an extension that was also an upgrade in size. So if you can give us some color on that?

[Alessandro Cozzi, executive]

Yes, this contract is an important upselling of an existing customer of -- it's Matika, a company acquired in Italy in 2020. And after 2 years inside WIIT, we upsell from basic cybersecurity services only for the Italian subsidiary. We expanded globally in all the countries with cybersecurity, but most important, the migration of all the applications in our cloud.

The contract's original value was roughly EUR 120,000 -- EUR 100,000 yearly value. It expanded over EUR 0.5 million yearly value. In the same play that we are -- in order to give you more color, we are in the final phase to renewing our 2 important contracts with 2 of the 5 big clients, one in Germany and one in Italy. Hopefully, we can disclose it all in the next 2 to 3 weeks on the market, the value of these renewed contracts.

That is only the renewal of the actual revenue. We don't have upsell in this case, but it's very important because 5 years of extension, making sure the revenue of the company for the next 2 to 3 years.

[Operator]

The next question comes from Gabriele Berti of Intesa Sanpaolo.

[Gabriele Berti, analyst]

A couple of questions from my side. First one, can you remind me if Econis and Edge&Cloud are subject to seasonal effects? I mean, should we expect to see more or less the same contribution as in Q3 in Q4 clearly? Or any significant difference? And then if you can provide the usual update on M&A pipeline?

[Alessandro Cozzi, executive]

Yes. I consider a very, very low impact in Econis and Edge&Cloud because they are smaller inside the group. The size of the companies, one is EUR 4 million, EUR 6 million in value, and the other one, the same. There is no material impact for the season, okay?

In terms of M&A, we have a very, very good pipeline. We consider to continue the consolidation in Germany. The last 2 are [indiscernible] is a company that's perfectly matching with our indirect channel in Germany. It is a company that provides platform, is a client of WIIT, again, in fact, in Germany, just our client. And he provide services for notary in Germany. It's matching with our acquisition we had 2 years ago, Group that provides services for tax advisers. The merger of this company inside WIIT, we can extract EUR 1 million of synergy in the next 18 months.

We have additional targets in the pipeline, always in Germany, a midsized provider. The target we are discussing now is in the range of EUR 3.5 million to EUR 4 million in revenue, and in Switzerland. In Switzerland now, after the achievement of the turnaround, our strategy will be find a good acquisition to increase the size in Swiss. The discussions are naturally in the preliminary -- in early stage, but we have 2 targets on the table in Switzerland and another 2 in Germany.

We continue to prefer, currently, to consolidate the German market. The German market is a growing market. We see in our figures, 7% organic growth is a very good result, but we can accelerate more now because of the size we have in Germany, we are starting to receive benefits for the size and the references we have. And the pipeline is now increasing. We think that in the next 2 years, we can grow very, very higher in Germany than in Italy. Currently, we are growing more in Italy in terms of volume of sales, but the rationale, the potential we have in Germany is so higher for the next 2 to 3 years.

[Operator]

The next question comes from Giorgio Tavolini as a follow-up from Intermonte.

[Giorgio Tavolini, analyst]

I would like to know if perhaps you have any plan to -- on your financing to refinance your -- in advance, your existing bond or if you're happy with the current capital structure?

[Alessandro Cozzi, executive]

Our bond maturity is October 2026. We are now -- now we're still in the window to see the market in terms of interest rates. Sure, next year, if we see that interest rates return to good position, good level, we can go in the market. But currently, we don't have the necessity currently to [ fund ] the refinance the bond.

Consider that all the small transactions I talked about before in Germany and Switzerland, enterprise value is always in the range from EUR 4 million to EUR 8 million. We can pay for that with the generation of cash we forecast for next year. Because consider that the CapEx next year will go down from EUR 27 million. We estimate it will go to EUR 22 million to EUR 23 million.

And the EBITDA, we forecast an increase in EBITDA, because organic growth will push up our revenue, and it could be the scale that we have. And we have the residual part of synergy to extract in the acquisition. The EBITDA, we expect to increase and CapEx decrease. For this reason, we can finance these small acquisitions with the cash generated.

[Giorgio Tavolini, analyst]

And regarding the depreciation and amortization, should we expect an increase by EUR 2 million next year in the range of EUR 29 million, the ordinary D&A, I mean, excluding the PPA, roughly EUR 29 million, if it's, I don't know, a good estimate in your opinion?

[Alessandro Cozzi, executive]

The forecast of amortizing for the next 2, 3 years. The CapEx depends a lot on the M&A, Giorgio, because like-for-like, sure. Amortizing go down because following the reduction of the CapEx, but depends a lot on the M&A. For example, Econis increased, amortizing EUR 2.5 million only with IFRS. And the new acquisition in Germany, have additional probably EUR 800,000 of amortizing. Like-for-like, sure, depreciation go down. But with the M&A, we increased amortizing.

[Operator]

The next question comes from Domenico Ghilotti of Equita.

[Domenico Ghilotti, analyst]

I have a question on 2024. So I see the consensus targeting something like EUR 56 million EBITDA, if I'm not wrong. So it is correct, the Bloomberg consensus. So it implies the Q4, not particularly strong. Do you -- so do you feel confident about consensus? Do you see some upside on that number? Or maybe, okay, that's fine, and we will see.

[Alessandro Cozzi, executive]

Currently, we are a little optimistic because roughly, if you consider EUR 42 million at the end of September, EUR 14 million for the first quarter is, sure, achievable. Naturally, we can do a little better, but at the moment, I don't want to comment. Sure, it's achievable. EUR 56 million is achievable, sure. But it depends -- the last quarter, it depend a lot. Something, here, the customer ask more -- have more budget, ask more -- it's not all the same situation. It depends a lot on the requirement of the client. Sure, EUR 56 million is very, very achievable.

[Domenico Ghilotti, analyst]

So Q3, as you were mentioning, Q3 has also really some favorable seasonality due to labor cost. And so it's a level of profitability that, okay, you are not, let's say, planning to repeat.

[Alessandro Cozzi, executive]

Correct. What I see is, sure, a step-up in first quarter because in the last quarter, we have a lot of activation of the new client, and we don't have a big effect in the Q4, but sure for Q1. we expect is the increase of the recurring revenue part in the Q1. This is very important because it's a part of a revenue, more resilience, more confidence in terms of profitability.

[Domenico Ghilotti, analyst]

So the order intake that you had will translate into, say, higher recurring revenue starting from 2025. And so you are starting with a good level of, say, revenue growth already in Q1?

[Alessandro Cozzi, executive]

Correct. Consider that we have -- all in Italy, we have roughly EUR 3 million yearly value of contract in phase of activation. That means quarterly, EUR 0.5 million more revenue recurrent for the Q1. This is our expectation.

[Operator]

[Operator Instructions] Mr. Cozzi, there are no more questions registered at this time, sir.

[Alessandro Cozzi, executive]

Okay. Well, thanks all for joining this conference, and we update about shortly, I hope, with the new renewal of this big client and naturally in case of additional information on the market. Thanks, and bye-bye.