Vitec Software Group AB (publ)

STO:VIT B

Earnings Call Analysis

Strong Quarter with Robust Recurring Revenues and Solid Cash Flow

Vitec Software Group reported a strong Q1 2024, with total sales up 17% and subscription-based growth at 10% in local currencies. The EBITA margin increased by 1 percentage point to 31%, and cash flow surged by 42%, reducing net debt to EBITDA from 1.8 to 1.4. The company highlighted its diverse customer base and stable recurring revenues, accounting for 86% of total sales, ensuring low risk. Tax rates are expected to be around 24% due to a higher mix of U.S. revenue. Vitec remains confident in its M&A activities and plans to continue its strategic acquisitions throughout the year.

Solid Growth Amid Challenges

Vitec Software Group delivered a strong performance in the first quarter of 2024, with total sales growth of 17%. This growth stemmed primarily from a 10% increase in subscription revenues, which constitutes a significant part of their business model. It's noteworthy that despite facing some seasonal challenges and a slight decline in service and license revenues compared to Q4, the company managed to align its results closely with internal expectations.

Robust Financial Metrics

The company reported an EBITA margin of 31%, increasing from 30% year-over-year, indicating improved profitability. Additionally, EBITA for the quarter rose by 19%. Strong cash flow growth of 42% was another positive highlight, reducing net debt to EBITDA from 1.8 to just below 1.4. These metrics suggest a solid financial foundation, conducive to continued operational and strategic initiatives.

Stable Recurring Revenue Model

Recurring revenues accounted for a substantial 86% of total sales, contributing to business stability. The organic growth in recurring subscription revenues grew 13% year-over-year, highlighting the company's strong customer retention and the effectiveness of its pricing strategy. Price increases, averaging about 4% based on various inflation indices and labor costs, were successfully implemented across the board, ensuring revenue growth amidst inflationary pressures.

Diversified Customer Base

Vitec's strategy of maintaining a diversified customer base paid off, as the top 10 customers comprise only 7% of subscription revenue. This mitigates customer risk and enhances revenue predictability. The company serves nearly 25,000 customers across various sectors, ensuring that fluctuations in individual markets have minimal impact on overall performance.

Strategic Acquisitions and M&A Activity

The company remains committed to its M&A strategy, aiming to identify and integrate profitable software companies that have high recurring revenue models. Although only a single acquisition was made in Q1 2024, Vitec maintains a robust pipeline with active discussions ongoing. Management indicated plans to increase the number of acquisitions in the coming year, reflecting confidence in identifying suitable targets and executing deals.

Market Conditions and Outlook

Market sentiment has been stable, with varying performance across different verticals. While some markets are growing robustly, others face challenges. Management remains optimistic about overall market dynamics, guided by recent acquisitions and strong customer relationships. Looking forward, the company anticipates a steady demand for its core offerings, which are enhanced by its significant investment in R&D and customer engagement.

Sustainability Focus

Vitec has committed to sustainability initiatives, setting a target to reduce carbon emissions by 75% by 2030. This commitment not only positions the company as a responsible corporate entity but also may appeal to environmentally conscious investors and customers, further enhancing its market position.

Guidance and Future Expectations

Looking ahead, Vitec expects to continue its growth trajectory with revenue guidance reflecting a sustainable increase, particularly driven by its recurring revenue model. The company reiterated its confidence in achieving healthy EBITA margins and maintaining strong cash flow. As more price adjustments roll out in Q2, the company expects sustained revenue momentum through the year.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to Vitec Software Group Q1 2024 Report Presentation. [Operator Instructions]

Now I will hand the conference over to CEO, Olle Backman; and IR, Patrik Fransson. Please go ahead.

[Patrik Fransson, executive]

Thank you, operator, and a warm welcome to everyone on this call, where we will cover the Q1 report of 2024. My name is Patrik Fransson, I'm Head of Investor Relations at Vitec Software Group. And with me in this room is our CEO, Olle Backman. We will again start with a brief overview of Vitec, and then followed by the update of Q1. And as always, after the presentation, we will open up for questions.

So with that, I hand over to you, Olle.

[Olle Backman, executive]

Thank you, Patrik, and a warm welcome to this presentation. And as always, I will start off with the broad picture here. Those of you who have seen it before, not much change, but that's part of the point. What has changed, of course, is that we are now 41 business units. And the pro forma sales is close to SEK 3 billion, and we're approximately 1,500 employees. Other than that, it's fairly stable.

And if you look at our 5 home markets, the 4 Nordic countries and The Netherlands, you can see the sales distribution is, by quarter-by-quarter, becoming more and more even, basically. And that's also a good thing.

And then just moving on, no changes here either, but it is very important to keep in mind how we work with the strategy and the strategy chain, and you can read this left to right or right or right to -- or the other way around, starting with the values or starting with the vision. But I prefer to start with the values because that is sort of the foundation of the company.

And here, it's very clear that we are a product company. That's our foundation. We try to keep things simple. But as always, we don't mistake simple for being sloppy, it's really hard doing simple things, but it's just a mindset of trying to do things in the most efficient way. And then, of course, trust and transparency. And the bigger the group becomes, and I wrote that also in the Q1 comment, it's very important that we share knowledge and share best practices within the group. But that really makes us grow, makes us more efficient. So that's a very valuable part of this.

And then, of course, the brand promise: To rely on today and tomorrow. And that's basically what we do. We invest today in our products and in our people in order to be relevant tomorrow and have a clear communication with that to our customers. It makes us not only their choice for the future, but they stick with us, and that's also a very important part of what we do in and how we do it.

Then moving over to our focus areas, which we have -- this is a way we have chosen to work with sustainability, and this is also nothing new. We have 4 focus areas. Responsible growth, which is basically taking care of existing customers, our brand and how we work together. We have, of course, our enabling products, which is, by far, the biggest impact that we can have on society, but most of that impact is with our customers. So we facilitate them. We help them through our software.

Then of course, empower people, our staff doing all the work and the fantastic efforts there. And of course, we reduce our own footprint, where we can and then so forth.

Moving over just to that, the responsible growth, touching on that a bit. And it's all in developing the business units that we have. We do that through our decentralized organizations, product investments and solid focus on organic growth. To help us there is, of course, our business model, where we have a high percentage of recurring revenue, which is something we strive for. We're usually also the market leader in our respective niches.

And then, of course, we add acquisitions on top of this. And here, we have the same set of criteria that we look for in each company. It should be, of course, be vertical, well-established, profitable. They have their proprietary software, which means that we are in total control over the product development. And a decent amount of recurring revenue, and this has been very consistent over the years.

And then one way of looking at the entire group is, of course, by vertical here. It's a bit of a new picture. We just tried to highlight the great variety within the group, which makes us a very sort of stable company. So that we are not dependent on any subsegment or vertical, especially some are bigger, some are a bit smaller. You can say property management, energy, health care. Very stable verticals that we have been active in for many, many years. And then you have others popping up with acquisitions coming along.

But all in all, we are more than, I think, 20-plus different verticals distributed across these 41 business units. And of course, looking at the business units of today, this is a picture that you also recognize. So in which country, when we bought them, the annual sales numbers for last year and the recurring revenue portion there. And here, you can see it's everything from 46% to 100% in recurring revenue model.

Talking about the acquisitions. Of course, this year, we started in January with the acquisitions of a Dutch LDC, the software that helps in labor mobility in the Netherlands, career coaching matching of candidates and vacancies and trainings and so forth. A really nice addition that has all the characteristics of a nice software company that we like. A bit on the small side, but nevertheless, very good addition.

And just a few more. This is last year's 6 acquisitions that we did. And here, you can also see the range between smaller, like Entry Event and DL Systems, which are actually add-ons to an existing business unit that we have. And then Neagen, Codea, Memorix and Enova, are all stand-alone businesses. And you can also see that it was both in Sweden, Finland and the Netherlands for last year.

Organization-wise, we look pretty much the same. We have our very important strategy here with the autonomous business units there in the bottom, of course, and then they are doing all the work and that's the foundation of the company. Through their aid, they have the very important VPOs, which is like working Chairman of the Board helping, coaching, but also challenging them to become a little bit better each year. And then, of course, we have group functions that support this.

And one of these support functions is all about sharing, like I mentioned earlier that this is something that has grown over the years. And we have now a very good platform on how to share this common culture, with sharing concepts and forums for best practice. And it could be anything from development. It could be marketing. It could be finance. It could be product development. Basically, everything that is of interest. Of course, today, UX, AI forums and such, like they're -- we challenge each other. We share good practices, best practices. But also, of course, mistakes that have been made in order to -- for everyone to be able to become a bit better.

And finally, of course, we have our own footprint that we try to take care of. We have a target to be -- reduce our carbon emissions by 75% through 2030, and we are on the path in that direction moving along nicely. Of course, we had a huge downfall in the pandemic, but we have sort of been able to sustain that level even if we grow a lot. So this is something that we work with continuously during the year.

Then moving over to the interim report and some numbers for you. If we look at sales by quarter, pretty solid what we saw, 17% in total. And if you look at just the subscription-based part, we grew 10% in local currencies, which is a good number. Services and licenses are a bit lower, especially if you compare to Q4, but there is a bit of a seasonality effect as well. And an effect, like I mentioned in the report, that it has during 2023 been a bit slow in new sales in certain verticals, and of course, that affects license and service revenue a bit.

But of course, looking at the profit levels, margins really good, 31% EBITA compared to 30%. And then keeping up that pace is really important for us. EBITA margins, which is a bit lower down, follow the same pattern basically at 21% compared to. And then, of course, really, really good cash flow for the quarter, as it should be, but we had 42% growth in cash flow which was really strong. Of course, that cash flow also has an impact on our financials. And so the net debt to EBITDA came down from 1.8 at the year-end down to just below 1.4.

Talking about organic growth, which I mentioned a bit before, you can see 2 charts here. One is the organic growth in subscription-based recurring revenues, and this is really the big foundation of Vitec that gives us the stability. And like I said, 13%, 10% if you take out the currency or FX effect. On total sales, the equivalent numbers was 9% growth or 6% if you take out the currency effect.

And this is on a rolling 12 months basis, because we think that's an appropriate way of measuring such a stable business like ours, where we usually send invoices a year ahead or quarterly ahead or something like that. We increased prices once a year perhaps. So I think rolling 12 months is a good way of measuring how the company is developing.

And of course, diversification of sales, like I mentioned, this gives us great profitability and the low risk you have between the countries there. You also have the bigger recurring revenue of 86%. And of course, also the customer distribution. So no big -- single big customers. The top 10 only accounts for 7% of the subscription-based revenues. And all in all, we have nearly 25,000 customers.

And then just rounding up some highlights there. Well, like I said, a solid quarter in terms of growth in sales, and of course, the annual recurring revenue part is up to SEK 2.5 million total sales. Like I mentioned earlier, SEK 2.9 billion on a rolling 12 months basis. EBITA for the quarter, up 19%. Margin, up 1 percentage point to 31%. And strong cash flows. So all in all, a pretty solid quarter, totally in line with what our own internal expectations were.

So with that, we sort of round off the presentation and open up for questions.

[Operator]

[Operator Instructions] The next question comes from Erik Larsson from SEB.

[Erik Larsson, analyst]

I have 2 questions. So first off, a question on Enova. So you acquired it more or less a year ago. And I'm just curious if you have noted any clear seasonal patterns that are worth mentioning that we should take into account going forward?

[Olle Backman, executive]

Yes, Erik. Yes, we acquired it -- I should say, we consolidated Enova from March 1. So in the comparison numbers, we have 1 month. And of course, we have the full 3 months in this quarter. So that's one thing to note. And then the seasonality, yes, there is a certain seasonality in that market where they have the balancing market. And it's usually the Q2 and Q3 are the strongest because when the power plants are running at full speed during winter time, there is less volatility in the grid. And during summertime, of course, they tune down them a bit, and then there's more solar power, more wind power. So usually, Q2 and Q3 are a bit stronger in that particular market.

[Erik Larsson, analyst]

Okay. Great. And then second and final question, just on the M&A outlook. So I'm curious if you have any specific country where discussions are better in terms of price and such? Or any market standing out on the negative side perhaps, did you have anything you can share?

[Olle Backman, executive]

Well, no, not really anything to share. We are active in all our markets and we also look at new markets, like we always have. Like I mentioned many times before, we apply the same set of criteria both when finding the companies and we have a fairly similar model when we look at prices and multiples. So we are basically standing at the same spot all the time and then markets go a bit up and down, and sometimes we are more successful and sometimes we're not.

But I'm pretty confident that we are able to keep up a decent M&A pace. We have lots of things to look at. So there is no shortage in volumes or inflow of companies coming our way. But of course, we need to assess them. We need to always buy the right type of companies for the right reason and, hopefully, for the right price. But there's no market that's especially standing out in one sense or the other. It's very company by company.

[Operator]

The next question comes from Daniel Thorsson from ABG Sundal Collier.

[Daniel Thorsson, analyst]

I can start off with 2 questions as well. The first one is on recurring revenue, that was up 1% versus Q4. I guess pricing is behind that, which means, annualized, roughly some 4%. Is that the correct observation for the current price increases that you see? And also, how do you think we should think about kind of the quarter-over-quarter organic growth here in recurring revenue during 2024? Is this 1% level here in Q1 a fair assumption also ahead? Or maybe slightly higher than that?

[Olle Backman, executive]

Well, if you take price increases, yes, they are roughly in line with, that's a fair assumption that you mentioned there, around the 4%, because that's basically the average of the different CPI indexes that we have in the various markets. We also have some companies that use more labor cost index, and they are roughly the same as well and it becomes a bit different. Not all price increases have been made during Q1, there's a bit of a lag there. So -- but by Q2, we have made all of the price adjustments for the year. But the ballpark is in Q1, for sure.

And then when it comes to growth, sequentially, I think you should look at the subscription-based part of the recurring revenue, because the transaction part, that is a bit more volatile and it's not always we control in any sense of that. But it's also a very different gross margin contribution from these 2 different revenue streams. Of course, the subscription-based part is very high because it's our own in-house developed software. And then the transaction-based is some sort of revenue share or cost-plus component to that, and that's of course a very different gross margin profile.

[Daniel Thorsson, analyst]

Okay. That's helpful. Second question then on M&A, which I think is relatively in line with Erik's question here. But if I rephrase it a little bit. I think in Q4, you said that you looked at some 200 targets last year, you bid for 26 and you won 6 or so, if I remember the numbers correctly. And has this year started off at around the same pace for Q1 if we kind of look at by quarter? Or do you see any changes in the M&A landscape to be aware of for us?

[Olle Backman, executive]

No, not if you look compared to last year's number. Of course, M&A also has a bit of seasonality in it. Lots of things that -- usually, they want to close before the big holidays, and then that's some part you wait in the year-end figures. So January is always slow, but that was the same last year. So I think this year has started up in the same way as last year. So yes, it looks basically the same in terms of the volume.

[Daniel Thorsson, analyst]

Yes. And all the potentials you see out there and so...

[Olle Backman, executive]

Yes.

[Operator]

The next question comes from Viktor Lindström from Nordea.

[Viktor Lindström, analyst]

So first off, the number of employees seems to be up 6% on a sequential basis, but the personnel cost is roughly flat. So is there any specific reasons for this?

[Olle Backman, executive]

I think it's a bit of a calendar effect there, that the Easter was early this year. There is some more holidays basically taken out. So no drama there.

[Viktor Lindström, analyst]

All right. And the second one here. So you said that you've seen some slower, I mean, sentiment, market sentiment here. Have you seen any changes here by the start of Q2 in terms of new sales?

[Olle Backman, executive]

No, it's very consistent both how we end ballpark of 2023, all of Q1 and also insofar in April. No changes really. It's very different from vertical to vertical. There are some verticals that are doing really great and some are more challenged. So there's no change in the pattern what we can see.

[Operator]

The next question comes from Christian Binder from Redeye.

[Christian Binder, analyst]

I have 2 quick follow-ups on Enova. You already mentioned the potential seasonality was stronger Q2 than Q3. Looking at your transaction-based recurring revenues, it seems like there is a sequential decline since the first quarter of consolidation in Q2 2023. Is that purely due to the seasonality you mentioned? Or do you think there's also maybe a broader mean reversion for the demand for Enova's product, so to speak?

[Olle Backman, executive]

I think we -- I can answer that in a few layers there. One, of course, the demand for Enova's products. Enova is a software company to start with, the demand for their underlying software is great, actually, and it's really growing very steadily and very well. Then, of course, it is this big transaction-based part, which is the participation on the balancing market.

And there, no, I haven't seen -- there's no sequential decline there. It's in line with our expectations of how the grid or the balancing market works. But yet again, we don't control the balancing market because that's totally up to the big power plants and the big utilities if there is a market or not. What we can see is that we hold up our market share, we hold up our margins. But then the volumes, there, we are totally in the hands of others.

But as I've said many times before, this is a great value add for our customers, which is the horticulture sector mainly in the Netherlands. We provide great value to them. And of course, we make a decent amount of money on that as well. But there is no big risk to it because we don't have to invest to protect this kind of volume and we don't have to organize ourselves against it. So it's -- I mean, we just have to go with whatever the big utilities are doing there.

But I would say it has been more stable or less fluctuations than we actually expected. But still, of course, there are some bumps up and down there, but actually less than expected.

[Christian Binder, analyst]

All right. Got it. That's very helpful. And one last follow-up there. So I guess out of your current potential contingent considerations of SEK 900 million, around SEK 500 million were related to Enova. So I guess your view on how much you need to pay there, potentially, remains unchanged?

[Olle Backman, executive]

Yes. Yes, it does. Remember we paid the first installment now and during Q2, and they are performing great. So we still expect them to reach their full potential. And hence, we have accrued for that full earn-out.

[Operator]

Next question comes from Erik Sandstedt from Kepler Cheuvreux.

[Erik Sandstedt, analyst]

Erik Sandstedt from Kepler Cheuvreux here. Just have a few questions. Firstly, a follow-up on M&A, although you elaborated on it in the previous question. But you've only done one acquisition year-to-date, and is that related to lack of interest in companies to buy at the right valuation multiples? Or that is rather reflective of the higher gearing in the company right now, although it came down seasonally in Q1? Just a bit curious on that.

[Olle Backman, executive]

It's the first part there. Like I said, we have a good pipeline, but we buy companies for the right reason, for the right price. So now we have -- there's nothing stopping us from -- financially that is, from buying nice companies, so.

[Erik Sandstedt, analyst]

Yes. Okay. Fair enough. Also in terms of you only disclose organic growth on a rolling 12 months basis. And I guess the deviation on revenues relative to expectations in this quarter may have been on acquired units. Can you share some more details and light on the revenue impact year-on-year from acquired companies in this quarter? And also, I guess, is it fair to assume that the impact will be lower in Q2 versus Q1 from acquired units?

[Olle Backman, executive]

Well, we don't distribute it in that detail. Sorry, I can't really help you with the specifics there. But on a general note, of course, looking at next quarter, we will -- we've made some pretty big acquisitions throughout 2023. So for sure, there is -- we have a tailwind with us, especially now in the early parts of the year. But then like I mentioned, of course, we hope to land a few acquisitions this year, more than the one we've already made, but that's still to be seen.

[Erik Sandstedt, analyst]

Yes. Then just a couple of specific questions. Tax rate guidance for the year.

[Olle Backman, executive]

Yes. That has gone up. And that's, of course, a mix in the Nordic countries where we have very stable tax. And then in the Netherlands, it's a bit higher. And then we have quite a chunk of revenue coming from the U.S., where taxes have really gone up. So looking at where we are now, I think it's roughly around 24%, and that seems to be a fair assessment going forward with the mix we have today.

[Erik Sandstedt, analyst]

Yes. And also specifically on the depreciation cost in Q4 was pretty high, SEK 33 million I think, and now it was down to SEK 22 million in Q1. And if I understand it correctly, there was a leasing impact in Q4. How should we think about depreciation over the coming quarters? Is the Q1 sort of level a fair proxy going forward?

[Olle Backman, executive]

It's a fair proxy on existing units. What happened in Q4 is that we acquired some of the units in the later part of the year and then we started recalculating that according to IFRS. So we have the right number now for the units that we have. So I would say the Q1 depreciation is the best proxy for that.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Olle Backman, executive]

Okay. Thank you. Well, thank you all for listening in and also for posting the questions. Always interesting to have a dialogue with you guys. And all in all, we are pretty happy with the quarter as it turned out, and we look forward to the next. So hopefully, we will hear each other in the next quarter. Bye-bye.