CompuGroup Medical SE & Co KgaA

XETRA:COP

Earnings Call Transcript 2019-Q1

[Operator]

Dear ladies and gentlemen, welcome to the CompuGroup Medical SE Conference Call regarding the Q1 results 2019. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Christian Teig, who will lead you through this conference. Please go ahead, sir.

[Christian Bartlett Teig, CFO & Member of Management Board]

Thank you very much, dear audience. A warm welcome, also, from my side to today's conference call about the first quarter 2019 results of CompuGroup. We will very much follow the normal format, which means that we will start with a slightly technical financial review then go through each business segment and elaborate on more detailed key events and figures. And then at the end, have a Q&A session. Altogether, should be about 45 minutes up to an hour depending on the length of the Q&A part.We will then start with the first slide, the slide which is #2. Here, we see the key figures in the first quarter. The headline numbers are strong. I would say, even very strong. And even if there are some positive onetime effects to consider, we are happy with how the first quarter of 2019 has developed. Yes, and in the following, we'll elaborate on the drivers behind this strong development.The Slide #3 will show the mentioned special effects. So these effects, one is external and applies basically to all listed companies in Europe. This is the new leasing standard, the IFRS 16. The second effect is a consequence of some staged M&A that we have done, which means that the prior holdings that we had gets a revaluation technical. It's also driven by accounting rules, which creates a onetime positive effect above the EBITDA line.Altogether, these effects represent 4 percentage points of margin improvements, which leaves 1 percentage point from like-for-like improvement in the operating business. So that's the high-level explanation on the very strong profitability improvement. Strong operating performance, we would say, but then accentuated by accounting standards and onetime effects.We will then move into more of the housekeeping items. We start with the Slide #4. This is a combined graph which shows revenue in the bars and the line profitability in percentages. Including all the effects, these are the reported GAAP figures on revenue and EBITDA margin last 5 years, and the growing trend in both areas is clearly visible with solid step-up on profitability as mentioned here in this first quarter 2019.Moving on to Slide #5. Here are the costs of goods and gross margin graphed out. So even if it is a relatively stable picture over this 5-year period, there is an uptick in terms of gross margin now in Q1. The most important contribution, if we compare this to the last, say, 18 to 24 months, basically is the less hardware and third-party components coming from a lower number of Telematics Infrastructure installations. There is also an effect from more direct distribution and more direct service in the AIS segment, which follows the acquisition of sales and service partners in the German market. So overall, gross margin and, say, the in-house developed products and services is moving in the right direction. And we are, in this quarter, at 83% gross margin.Moving to Slide #6, personnel expenses. This also shows an increasing trend. This comes mostly from new employees in the new companies which have been acquired. We are overall steadily growing the size of our organization to support the group-wide revenue growth.Brings us to the next slide, Slide #7, which are the other expenses and again, this item, other expenses, is significantly down and influenced by the new accounting standard IFRS 16 and the fact that office rents, leasing of company cars and other types of rental and leasing contracts no longer get accounted for as operating expenses, but rather become depreciation of assets. The most immediate consequence is that without any underlying change in our business, you have this significant step down in other expenses. It's not our [ idea, ] it's not our policy, it comes from the outside. And again, this applies to all companies who are reporting under IFRS. The main consequences again, other expenses that takes a step down in 2019 and has a new basis from where it now develops.Moving to Slide 8. Where did we spend our capital or parts of it? In this quarter, again, the IFRS 16 effects will pop up here. So as mentioned on the previous slide, it's no longer operating expense. And if we have new rental contracts and new leasing contracts, this shows up as capital expenditure under office equipment and other tangible assets. You should expect that to be something like EUR 4 million on a quarterly basis. So at the end, it all evens out to 0. So this is again a new basis from which future quarters can be judged. In terms of other capital expenditures, we have the acquisitions representing the largest part. Overall, so still at a fairly high level of capitalized R&D. Currently at a run rate of around EUR 20 million per annum.Brings us to Slide #9. Cash flow, operating cash flow. So notwithstanding the slightly excessive and, in my personal opinion, not so helpful wave of new accounting standards, cash flow is still unaffected. And I think never has, I guess, in the history of financial reporting has the cliché cash is king been more true because as everything becomes slightly intransparent, in my opinion, again, based on all these new accounting standards, cash is always true. And I think the rising trend in operating cash flow, which you here see over the last 3, 4 years is clearly visible and also shows that the quality of our earnings is high. And that behind all of these changes in reporting standards, underlying cash is solidly moving upwards and in the right direction.Slide #10 brings us again back to more or less the effects of changing accounting standards. And again, it's IFRS 16, which is the main culprit for changes. So assets and liabilities basically get around EUR 40 million addition from the assets that are related to leasing and rental contracts. We have the normal Q1 effect on top of this, which means some prepaid maintenance contracts for the year, but overall, the main step up in noncurrent assets and on other liabilities is related to IFRS 16. Otherwise, it is a very stable picture.So those were the more technical financial slides. We now get into each operating segment, starting through the placeholder called software for doctors. And moving into Slide #12, which shows the AIS segment, in layman terms called doctor's software. We here see a plus/minus flat organic revenue trend, which is very much as expected. This is the consequence of materially fewer installations and less revenue from the TI rollout, which is then offset by normal organic growth. The next slide will show you the bridge for this revenue development. What is important and is the movement of revenue lines underneath top, which shows that even if revenue top line is flat, we have a significant growth in recurring revenue, which is the shift from onetime installation revenue, which we all knew was in a transitional period into very sustainable recurring revenue coming from the new subscriptions and new services.And this recurring part, we see a year-on-year growth of 19%, which is a very strong solidification of the revenue basis, also, for the future in this segment.If we then move to the next slide, we have this broken down a little bit more than usual just to show the moving parts. So again, we start with Q1 last year, EUR 106 million of revenue. We then have about EUR 12 million less revenue coming from the lower number of TI installations. Some of that is offset by the strong increase in recurring revenue from the TI connections. This is about EUR 8 million. Then we have the effects from the acquisitions, EUR 5.5 million, which leaves about EUR 4 million of organic growth for the rest of the business, which, on a year-over-year basis, corresponds to 5%. So the mid-single-digit organic growth underneath these highly dynamic components coming from the positive development in Germany very much corresponds to the expected outcome for this segment. So all in all, brings us to about EUR 111 million of revenue in Q1 this year.I mentioned that we did some acquisitions in the quarter. The largest part of this capital expenditure, we see this on the Slide 14, were 2 sales and service partners in the doctor's software business in Germany. So altogether, these 2 sales and service partners serve about 7,000 medical practices. They all belong to our high-end product segment in Germany, which goes under the brand CGM Medistar. And this has been a long process over many years on the strategy of moving towards more direct distribution, which we already announced in 2013. So very happy that we have taken a big chunk and are now solidly moving in this direction of more direct sales and service in Germany also.Slide 15, another transaction, which is somewhat more product based, comes from the Netherlands. Many, many of our customers and in the long run, all of them will increasingly be measured and need to stand up to quality standards and also quality metrics and measurements. Qualizorg is exactly this type of a service which provides objective measurements of quality from very simple things to response times on appointment bookings to clinical outcomes. And these types of analytical services, we will increasingly bring into all our markets, and Qualizorg represents a very good starting point to bring this service into our portfolio of products and services to all our customer groups.Then on Slide 16, we are back to Germany and the TI rollout. So when we reported the Q4 of 2018, we were at 46,000 sold orders. We are now at 52,500. That's an additional 6,500 in the quarter. That's an okay outcome. The mix between own customers and external customers is fairly consistent compared to what we had until the end of last year. Not that many new installations, normal, say, progression there. The deadline has expired for orders. That doesn't mean that doctors and dentists have stopped ordering. It continues. It continued in April. And as we already said, when we did our prelims in February that despite these sanctions and deadlines, some of these users will just choose to do the installation and order it after the official deadline.So there will still be an interesting development to monitor both in terms of orders and installations. In the coming quarters, we certainly expect a solid number of installations to be done in the second quarter to use the deadline for what it's worth to get the practices to do their installation, but we will certainly do a significant number of installations also in the second half of the year.Slide 17 shows where we are in terms of current offer. So there is no change to this price setting or to what is included in the offer since the third quarter of 2018. We only change the heading and the name ENDSPURT, I guess, in English means, final push. I guess we may have to use this for some quarters. But for doctors and dentists, we think we will come a long way during this year. We try now to offer some symbolic incentives here and there in cooperation with other component suppliers. But other than that, have no plans, and we see also no dynamic in the market to change the price setting of a connection package to the Telematics Infrastructure.So those were the key events for the AIS segment. We now step through the placeholder and move to Slide #19 to go into the pharmacy software segment. Here, we have, for the full year, basically guided flat to slightly declining revenue as we had an exceptional growth in 2018, which was partially driven by some special Italian tax incentives. So far, at least, in Q1, this has fared better than what we had seen. Good positive growth figures coming from both Germany and Italy despite the incentives being discontinued. Everything is more or less good salesmanship with well-established products and services. In the financial report, there is something about the EU-directive securPharm, which has given us some additional revenue opportunities, that in Germany is fully implemented during February this year. So this is more or less a Q1 effect. And overall, we don't necessarily see a big change in our full year outlook. But certainly, we've started this segment somewhat better than what we expected when we guided for the full year.Brings us to Slide 20. What about the Telematics Infrastructure in German pharmacies. The main points are listed on this slide. Financing agreement is in place. For all practical purposes, adjusted for the VAT, very similar to doctor and dental practices. Altogether, combined with the necessary upgrades in software and services to be available, we expect that the nationwide rollout for TI connections for pharmacies in Germany will start during the second half of this year and will contribute somewhat to revenue also in 2019. Although, most likely most of it will be next year 2020.Slide 21, we did a small additional acquisition of a pharmacy software company in Spain, Eurosof. It's small. If you combine it together with OWL and Farmages, so the 2 acquisitions we did in 2016 and '17, we now have about 750 pharmacy customers in Spain. And you will see it from this graph that this represents 3% to 4% market share. We're still a small player in Spain. But the overall attraction and, say, the strategic rationale for targeting Spain as an interesting market is from its inherent size, and it is the second largest market for pharmacies in Europe, comparable to Germany, I guess, comparable to Italy. And again, it's been our goal to make inroads into this market to establish ourselves in the large pharmacy software markets in Europe. And even if it is not the final solution to that strategy, the Eurosof acquisition pushes us at least in the right direction. So those were the main parts or the main highlights in pharmacy software. We now move into the software for hospitals part, that is the Slide # 23. Again, we see here stronger than for the full year guided growth figures, 10% organic growth. Certainly, very strong. It comes from the overall strong performance in the complete German-speaking region. And also, a rebound what we've seen in the market in Poland. We've had some special revenue opportunities related to securPharm, also for hospital pharmacies. So altogether, a very positive and buoyant first quarter in the hospital software space. And of course, yes, we also, because of our patient business model, always get a benefit in the coming period when we are successful in new customer acquisition, and we had very positive developments in the German market in the Reha beds. We did about the 5% market share gain with winning some larger accounts in that market. And this also drives a solid, not quite double-digit, but almost double-digit growth in recurring revenue in this segment.And if we move to Slide 24, these are basically the restated targets that we put forward at our Capital Markets Day during last year, which shows that we feel ourselves to be on a very good way to rejuvenate this segment to be more of a growth segment. We already have some successes, the mentioned Reha beds in Germany. It's also clear that this year, we are participating in very important tender -- tenders with large hospital groups in Germany and Austria where we expect and hopefully can present some order intake during this year to show that the pipeline gets translated into bookings. And of course, longer term, we are benefiting not just in the standing and in the successes of booking new contracts in the market from a very strong and increasingly strong product offering, but this also over time, will bring efficiency from the currently 30 legacy products into 1 single suite, which is our CGM CLINICAL suite, which has also, for the second year now, presented strongly at the main trade fairs in Europe.So hopefully, again, we can bring some news flow in the coming period related to these strategic initiatives in the hospital segment. This brings us to the last, also the smallest segment, HCS segment. This is still around 5% of group revenue. On Slide 26, we see the main figures. Also, here a fairly good combination of organic growth and also the consolidation of FabLab, which is the Italian HCS company that we have partnered with the company there in 2017. And it has now become a group company. Even with some currency headwind, 6% organic growth at constant exchange rate basically means more successful and more buoyant market conditions on the pharma side.On group level, I guess, these don't turn the needle that much, but it's still a good positive start to 2019.So summarizing all of the 4 segments, we -- brings us to the guidance, which is reaffirmed and unchanged for the full year. This is on Slide 27. It was a very good and solid start to 2019, maybe puts us a little bit ahead of plan, but there is no need to adjust outlook quite yet, and we still maintain the outlook that revenue will be in the range of EUR 720 million to EUR 750 million. And the EBITDA, including the mentioned effects from the IFRS 16, EUR 190 million to EUR 205 million.Yes, and how well we are tracking towards these goals? You will be able to observe following this financial calendar. This is on Slide 28, which means, yes, we have the constitutional highlight of any corporate year, which is the Annual General Meeting. For us, this is next week on May 15. As I said, maybe, it has more of a constitutional and ceremonial significance, but still very important. In terms of hard numbers and facts, the next reporting date for Q2 is August 8. And then we follow very much the same annual cycle as every year with a conference, analyst conference in September. That's actually a little bit earlier than normal. And then Q3 early November.So those were the prepared slides. We did that in a little bit less than 30 minutes. We then move into the Q&A section. On Slide 29, you will see the instructions on how to do this. [Operator Instructions] So please, go ahead.

[Operator]

[Operator Instructions] The first question is from Andreas Wolf, Warburg Research.

[Andreas Wolf, Research Analyst]

Three questions, if I may. So the first one would be on the ratio of direct versus indirect doctor support in Germany/direct versus indirect sales. That would be helpful. The second would be on the current status of the legislation process in Germany, if you already see something at the horizon with regards to the EHR law that the current legislation has surpassed. And the third question would be on video consultation products. Where do we stand here? How do doctors adopt this product?

[Christian Bartlett Teig, CFO & Member of Management Board]

So in terms of the ratio of direct versus indirect, we are still below 50% direct. I don't have the exact number, but I would estimate that we might now be at something like 30% direct. On the second question, this is related to the anticipated eHealth Law II, which is expected to be more specific and more committing in terms of the personal health records, development in Germany among other things, there is nothing new. There is still no official draft published. But this is expected this year, and the legislative process, as far as I know, is still expected to conclude during this year. But there is nothing really new other than, I would say, normal work within the different departments and responsible people. I guess they involve industry here and there and in some areas not. But as I said, I think the next control or checkpoint for this will be when there is a draft published, which can then be commented on. And I don't actually know exactly when this is expected other than that the whole process is expected to be then concluded during this year, but nothing really new at this point. Third question, video consultation. We have started this now on a very active marketing campaign, also backed by the beneficial changes to reimbursement and financing both in France and Germany. I think it's fair to say that this is something where doctors still need convincing and explanation, which means we still haven't seen a large, say, order uptake or intake as many doctors want to understand better how this can work as a complement to how they run their practices today and not as a substitute. I think the first reaction is of healthy skepticism. Nobody wants to lose the relationship and connections to their patients. So I think it's our job to convince them that this reinforces those relationships. But we are still in some early days. We have some important large trade fairs during May in France, for example, where this is on top of the agenda. Hopefully, at the Capital Markets Day in September, we can come back with more specifics and numbers in terms of conversion rates and uptakes. But so far, it is in -- still in the marketing rather than in the sales phase.

[Operator]

The next question is from Uwe Schupp, Deutsche Bank.

[Uwe Schupp, Small and Mid]

Just touching on -- firstly on your remarks regarding the guidance just a minute ago and really just more of a semantic question, if you will. In the English version, if I saw it correctly of the quarterly report, you stated that the guidance was reaffirmed, which obviously could be interpreted as maybe slightly stronger than just confirming it. In the German version, you say it is Bestätigt here. So maybe slightly -- slight different here in translation. So just wondering whether we should be reading something into that or not? And then secondly, you received new orders for the TI, if I calculate correctly, of just below 7,000. Is that the run rate that you see credible also for the remainder of the year? Or is there, maybe an expectation that this rate may be accelerating as we are now entering the final phase of that rollout?

[Christian Bartlett Teig, CFO & Member of Management Board]

So for the first question. No, you should read anything into that. The 2 language expressions, reaffirm and Bestätigt, we have used unchanged, I believe, for more than 5 years every quarter when we have confirmed our guidance. So it is a manner of saying confirmed. But there should be nothing more read into it, and this is not a new choice of language.For the second question. Yes, this is a good question, whether it will accelerate or decelerate, you would say probably that will depend a lot on how everyone involved in this sector now addresses the fact that we still have 30%, maybe even 40% of doctors in Germany who have not yet ordered or committed to a TI connection. So if there is a successful campaign to turn them and get them onboard in high numbers, almost inherently, we should see some acceleration. If they remain sidelined and are unmovable by any reasonable means of communication, sanctions or combination thereof, then you may see the opposite. So I think this will be some of the unknowns for the remainder of the year. We would say, so far so good. We thought Q1 was more or less where it should be and what could be expected. And as I said, probably exactly how it goes for the rest of the year, will a lot depend not so much perhaps on us, but how the doctors association, the insurers, the ministry are addressing, say, those still sidelined on this initiative.

[Uwe Schupp, Small and Mid]

And based on what you are seeing in April so far, would the 7,000 or so be a good indicator for the Q2 as well?

[Christian Bartlett Teig, CFO & Member of Management Board]

I would say the soft guidance or indication that we gave beginning of the year, which says full year 20,000 to 30,000 additional is unchanged.

[Operator]

Your next question is from Victoria Kruchevska, Commerzbank.

[Victoria Kruchevska, Analyst]

Christian, most of my questions have been already answered, but just 2. Maybe a couple of questions in terms of hospital business. I mean 11% or 10% organic growth and you are also in the first quarter, and you're also keeping the guidance for the whole year unchanged, which is around 2% to 4% organic growth. We actually see, sort of, like, the upside pressure to the guidance. Or should we be looking at the, yes, declining of growth rates going forward? It will be the first question. Another question, also, in terms of with regards to the hospital segment. You've mentioned Poland has, sort of, like, a rebound. Maybe you can give us an idea of the market share of CompuGroup in the Poland market? And also, sort of like to reiterate on the Telematics, do you actually, sort of like -- I would say, like, disappointed in terms of the development of the first quarter? I mean the total number of connected doctors in this quarter was around 4,000, which is pretty low compared also to the very soft quarter last year of around 8,000. And as of right now if my calculations are correct, you are, sort of, like, own right now 35% of the total, sort of, like, GP market in terms of TI installations in Germany. Do you actually see that you actually push towards the goal towards 50%, just to have an idea in this sense? Yes, that would be it from my side.

[Christian Bartlett Teig, CFO & Member of Management Board]

So clearly group guidance -- on the first question and the upside pressure. I would go as far as to say that of the 4 segments where I would see the highest likelihood that we would exceed the full year guidance on segment level would be the hospital business. As I see no real signs that this would slow down, it will depend that we are successful and can start some new projects in the second half. But overall, I would say, yes, maybe there is a bit of outside pressure and we can happily live with that pressure. It doesn't change the overall group guidance at this point as there are still some moving parts. But again, very strong. And there is no real reason to see as long as we are continued to be successful also in terms of bookings and contract wins that this would decelerate. We are on a good trend there. The Polish market, I guess, to just place it in terms of significance. So Germany, Austria, Switzerland, is about 70% of the revenue. So would be on an annual basis, EUR 70 million plus. Poland is about 10%. So I guess maybe a little bit more, 10% to 12%. In terms of market share in the Polish market, we would be around 25% in terms of hospitals and beds. So it is a low-price point market. But we are very well adjusted to that market, we had some difficult years in Poland. This was related to the change in the -- on the political side, which took many, say, eHealth government projects away and since then, we have refocused really to core-core business, which is core hospital information systems. And this is where we've seen, last year was also quite great at this year continues to rebound and be strong. And again, we are happily running a business in Poland, which again size-wise is about 10% of our HIS segment.Your third question, were we disappointed with TI, Q1? Not really. I would say it was no more than what it should be. But if you look into our full year guidance, which was given already at the beginning of the year, we said altogether, we would see a flattish development in the AIS segment, and we saw that in Q1. Clearly, focus was more maybe on sales, on the doctor's side than on installations. Q2 should be easier to use to get as many as possible installed. We also had a lot of installations during 2018 in the second quarter. So I think the seasonality altogether is not going to be dissimilar to 2018, which means altogether, no, we were not excited nor disappointed. We saw that as a good confirmation on our planning for the year. Okay. So this sounds and seems to be the full set of questions. So thank you very much for all your interest and we welcome you back, if not before, then to the second quarter conference call, which is at the beginning of August. Thank you very much, and goodbye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.