CompuGroup Medical SE & Co KgaA

XETRA:COP

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Maira, your Chorus Call operator. Welcome, and thank you for joining today's CompuGroup Medical Investor and Analyst Call. [Operator Instructions].

I would now like to turn the conference over to the Corporate Vice President, Investor Relations, Claudia Thomé. Please go ahead.

[Claudia Thomé, executive]

Good morning, everyone. And welcome to the CompuGroup Medical Investor and Analyst Conference Call for the Second Quarter and First Half Results 2023. It's great to have you with us, whether you have dialed in via the phone or are following the webcast. You find all the relevant information such as this presentation, the quarterly statement and the press releases, which we published early this morning on our website.

We're going to start with the presentation by the CEO and CFO, Michael Rauch, followed by the Q&A session. Before we start, as always, there are some housekeeping remarks. Let me remind you on our safe harbor statement, which is shown at the beginning of the slide presentation and is valid throughout the entire call. Thanks a lot for your patience. And now let's start. I would like to hand over to Michael Rauch. Michael, over to you.

[Michael Rauch, executive]

Thank you, Claudia. Good morning, ladies and gentlemen, and a warm welcome to all of you. Every company has its defining moments. For CompuGroup Medical, the first was a strategic decision in the late '80s to prioritize practice management systems. Since then, our focus has been on empowering doctors, first, in the ambulatory field, later also in hospitals.

Starting in 2011, we extended our footprint to pharmacies and supplied almost all health care practitioners from that point on. Starting in 2017, CGM spearheaded and facilitated connectivity in health care. Thus enabling a faster interaction between all participants in the health care sector, being the pioneer in telematics infrastructure. And the most current moment is right now for CGM for the entire health care sector and lots of other industries.

The rise and actual usage of artificial intelligence is set to revolutionize health care. And again, CompuGroup Medical is at the forefront of this development. Where do patients stand with regards to artificial intelligence? Apparently, the majority of patients tend to trust artificial intelligence to support the doctor and would be willing to share the data for this purpose. We will help our customers making the difference enabling them to spend more time with their patients while having easy-to-use tools on their hands to improve health care. But especially our direct customers, doctors, dentists, pharmacists, paramedics, and all other health care practitioners have the most to gain.

The eternal bottleneck is the time they have with their patients. Efficient work processes faster and better based decision-making, a more targeted diagnosis for all of these, there's enormous potential in AI-supported solutions in order to help the patient even better.

The core AI fields for CGM customers range from chronic care management, prevention, diagnostics, population health management to improving operations and resource management, a key topic for doctors.

So what are we at CGM focusing on to support our customers even better? We've defined the core areas that should benefit from AI. We're going to boost R&D and stepping up the game in service and support functions. Improving our internal processes will make our business operations even more efficient. And at the end of the day, and that's the most important thing, we are adding game-changing value to our products and solutions. This is just a fraction of the mega trend, our capabilities and the opportunities for the entire health care industry. We will go into more detail with this topic at the Capital Markets Day on September 7. So stay tuned.

The rise of AI in combination with our strong footprint from the industry brings us even further towards our ambition to be the leading medical software company. Building on the energy and motivation that all CGM employees release every day to advance digitization in the health care sector, we are ready to build on a long-standing tradition to seize future trends and continue creating the future of eHealth together.

With that, let's now turn to the financials of the second quarter. Ladies and gentlemen, we expected a very good quarter, and we delivered an outstanding one. With 15% top line growth, we achieved more than EUR 300 million in group revenues. Organic growth, positively impacted by the TI connector software upgrade and the dynamically growing hospital business showed a plus of 13% and 5% excluding Telematics Infrastructure completely in line with our mid-term ambitions of around 5% average organic growth.

Recurring revenues grew also in the double digits by attractive 12%. Adjusted EBITDA grew by 36%, hence improving our bottom line significantly. And just to be clear, a note about peculiarity in this quarter, since the reported EBITDA is even higher than the adjusted EBITDA that has to do with the one-timer in other operating income. So the line other operating income, which you see needs to be adjusted by that one-timer. If you adjust that for you, you will automatically have the adjusted EBITDA as we have. This has to do with the release of an LTI, which did not come into fruition. And as you know, we always adjust for the LTIs for the officers on the Board.

And being fully on track with our strong performance in the first 6 months of 2023, we are confirming our full year guidance. So before we deep dive into the numbers, I want to shed some light on the strategic milestones we laid out over the last 3 months, starting with the Ambulatory Information Systems segment, which showed continued momentum with all of the digital initiatives that show progress in the European markets, especially the ongoing rollout of e-billing modules in dental practices in Germany, developed very well.

Another milestone was reached in advancing the digital patient journey where the CLICKDOC e-prescription function fully complements the doctor-patient interaction. Again, our colleagues in the U.S. delivered a very good performance during the last 3 months. An organic growth rate above segment average driven by the rollout of our eMEDIX solution to Aprima customers is a strong proof that CGM is playing an important role in the U.S. market.

I would like to further comment on the quality of our products, which was awarded by KLAS, the best-in-class report, recognizes software and services companies who excel in helping health care professionals improve patient care. And again, one of CGM's products, ARIA Revenue Cycle Management, has been recognized as best-in-class. Congrats colleagues.

Looking at our Hospital Information Systems segment, we delivered again on our strong market position and impressively demonstrated that the demand for our generation technology is unbroken. The order intake from projects related to the Hospital Future Act, grew to now more than EUR 130 million, a strong proof of our confidence in our capabilities.

For the first time, we're increasing our revenue target to now EUR 130 million to EUR 140 million related to the German governmental initiative. We will see a stronger revenue recognition per quarter and expect a strong finish to the year. But not only our hospital colleagues delivered over the last 3 months.

Let's move on to the Consumer & Health Management Information Systems segment where we delivered in both pillars. In the Telematics Infrastructure business, we achieved what we promised. The connector software upgrade PTV 5 has been rolled out and is fully reflected in the Q2 results. For the sake of our customers, we welcome the latest decision by the Ministry of Health to introduce a so-called TI flat rate. It will provide health care practitioners with an increased visibility and predictability.

Moving to the TI flat rate will also support our strategic direction of increasing our recurring revenue base. In addition, we are making great progress with the TI Messenger and our offering for TI as a service is constantly being expanded. The other important pillar of the CHS segment, the data business also delivered during the second quarter 2023. We see growing relevance and reach of our innovative products in the data sector, as mentioned earlier. There is more opportunity for us and our customers in this area. And we realize this as INSIGHT Health showed again excellent progress in the second quarter.

Please let me remind you that as of the third quarter, INSIGHT Health will be fully supporting our organic growth rate. In addition, we managed the full rollout of the recently acquired GHG Praxisdienst, which will further strengthen our already good position in the market. So operationally, CGM is in great shape and we are set to tackle the numerous growth opportunities ahead.

Let's dive into our financials. Before discussing the financial performance of the segments, let me highlight our top line development. As already mentioned, total revenues are up 15% reported and 13% organically. Organic growth ex-TI resulted in a 5% increase year-over-year. Recurring revenues increased by 12%. And the 66% share of recurring revenues is impacted by the higher one-off effects in Q2, but still at an excellent level, a strong proof of our resilient and sustainable business model.

Shedding more light on the organic growth rate, it is impressive that for the second consecutive quarter, group's organic growth rate was above the full year level in 2022, even excluding the TI business.

In Q2, AIS overall delivered a solid 2% organic growth while it's HIS, CHS and PCS all showed an excellent performance above our guided ranges for the full year.

In summary, we are delivering an excellent financial performance in the first half of 2023. Adjusted EBITDA overperformed compared with revenues, resulting in EUR 133 million for the first 6 months, growing 27% year-over-year. Also, our adjusted earnings per share increased to EUR 1.07 and we've seen a strong free cash flow increase with EUR 83 million recognized in the first half as anticipated in earlier calls.

Please let me go into more financial detail, starting with the Ambulatory segment. Supported by acquisitions, revenues grew by 4%. Organic revenue growth stood at plus 2%, as already mentioned, driven by the organic progress of the U.S. business in the eMEDIX rollout and several digital initiatives in Europe. The recurring revenue share was remarkably strong with 80%. Against tough prior year comps with the rollout of additional modules in Germany and Austria, adjusted EBITDA stood on prior year's level.

Coming to the Hospital segment, we can say that revenue growth was again very strong with an organic growth rate of 10%. This development is not only supported by the Hospital Future Act, but also by strong project business in Poland and Switzerland. Despite additional expenditure for larger projects and ongoing investments to execute on the Hospital Future Act, we see a turnaround on the margin side, as promised on the last call, which will continue to uplift in the second half of this year.

Let's move on to the Consumer & Health Management Systems segment, which recorded an outstanding quarter. Revenues grew by 65%, mainly driven by the software connector upgrade in TI and by the strong development of the acquired INSIGHT Health. Organic growth, excluding Telematics Infrastructure, increased despite macro crisis-related headwinds in the pharma industry, and we've seen the first step of the anticipated pickup in the organic growth for the data business in CHS. Adjusted EBITDA was impacted by the TI one-off resulting in an EBITDA margin of 43%.

Finally, let's talk about our Pharmacy segment. And again, the PCS segment recorded a quarter above our expectations with revenue growth of 7%, supported by the acquisition effects in Italy. Organic growth was at 5%, driven by the excellent performance in Italy and in Germany.

Again, our prudent cost management in Germany and Italy is paying off. Adjusted EBITDA grew by 10%, leading to a margin of 33%, 1 percentage point higher compared to last year's period. Well done PCS colleagues.

Let me now give you a short update about the development of our personnel expenses. After leaving the core investment phase last summer -- and let me just reiterate, in the light of the recently made announcements regarding KI or AI initiatives that the core investment phase is behind us, is past us. So after leaving the core investment phase last summer, the organic development of personnel expenses has almost been stable and was indeed on the prior year level in Q1 2023 despite increasing revenues and ongoing growth opportunities.

Even with wage inflation, we only record an increase of 3%, well below the average inflation rate and personnel expenses adjusted for acquisitions and FX. Due to a prudent cost management and a focus on highly motivated employees in emerging locations like India, we will not see an increase in personnel expenses at the levels we saw in the years 2020 and 2021 during the core investment phase with massive buildup and headcount.

Not only personnel expenses are well under control, so are our R&D expenses. Again, here, after ramping up the R&D intensity since 2020, the total R&D expenses of EUR 61 million in Q2 are still increasing a bit but compared to total revenues, the share declined by 2 percentage points. And that trend will continue no matter what AI activities we are going to roll out in the future. And we are well on track in bringing the share of R&D expenses compared to revenues further down. Compared to prior year, R&D CapEx is decreasing and well under control. This is the next proof that the path we've taken is the right one. We are well on track towards a significant improvement in adjusted EBITDA in 2023.

Let's move on to free cash flow. We recorded an excellent free cash flow after 6 months of 2023. With EUR 83 million, free cash flow is up by EUR 55 million from last year's level and thus well on track towards our more than EUR 100 million goal.

We are benefiting from strong revenue growth, but please keep in mind that the exact amount of free cash flow at the end of the year depends on progress of our customer projects during Q3 and especially Q4. With EUR 693 million, our net debt at the end of the first 6 months has slightly decreased compared to end of December 2022. Together with the increase in EBITDA, this leads to a noticeable improvement of the leverage to 2.7x EBITDA.

Our financial firepower is very strong as besides the EUR 400 million term loan and the EUR 600 million revolving credit facility, we still have access to the EUR 200 million credit line of the European Investment Bank. Growing revenue, stronger than cost in combination with an attractive cash position underlines the confirmation of our guidance 2023, where we expect an organic growth rate of around 5% on group revenues, the adjusted EBITDA is anticipated to be between EUR 260 million and EUR 300 million, and for the adjusted earnings per share, we forecast an increase at least of 10%. The share of recurring revenue is expected to be in the range of 60% to 70% compared to total revenues. And we aim at improving the free cash flow to be more than EUR 100 million.

In the light of the midterm ambitions, we are on a clear path towards our targets with highly motivated colleagues around the globe, focused on supporting health care practitioners and bringing more digitization into the health care sector, we have the clear goal to deliver an organic revenue growth CAGR of around 5% until 2025 and these revenues will be generated with a high quality, leading to a recurring revenue share of more than 70% in the year 2025. Combined with increased efficiency, also helped by the use of artificial intelligence, this will expand our adjusted EBITDA margin to around 27%.

I am really looking forward to September 7th when we invite you all to our CMD here in Koblenz. We, including all my Board colleagues and Derek Pickell, the CEO of our CGM US business, will give you a deep dive into the trends in eHealth, future opportunities and exciting business segments of CGM. This exciting day will be rounded off with interactive product showcases. Please do not forget to sign up via our Investor Relations website and sent an e-mail to Claudia or Frederic. Thank you for your attention, and we are now looking forward to your questions. And I'm handing over to the operator for the Q&A session.

[Operator]

[Operator Instructions]. The first question is from Knut Woller from Baader Bank.

[Knut Woller, analyst]

A couple of questions actually. Firstly, looking at HIS segment, Michael, you said that you're feeling confident that we should see ongoing sequential margin and profitability improvement in the HIS segment. We have seen historically 17% EBITDA margin. So is it fair to assume as a first step that this should be also within reach for the second half and then looking a bit further down the road, which margin levels do you expect in HIS to be achievable?

And I think also an important element of that, looking at the sequential EBITDA momentum in the second half, is it fair to assume that the HIS improvement should offset the missing tailwind from the connector replacement in the second half in terms of profitability at least.

Then looking at the guidance, Michael, you confirmed your guidance, but we have seen noticeably stronger growth momentum organically in H1 than your full year targets with 12% versus around 5%. So just talking hypothetically, if we would see an outperformance in terms of growth, is it fair to assume that this should become visible in terms of operating leverage? Or would there be any incremental cost attached to an outperformance?

And then lastly, on the AI initiative, can you shed some light already on the revenue potential and on the timeline when you expect that to become material for CompuGroup on the revenue side?

[Michael Rauch, executive]

Thank you, Knut. Very good questions and all extremely relevant to today's call. So let me start with the first one on the HIS segment. Indeed, you might have noticed that start Q4 last year, we had significant investments for larger projects on the HIS side that continued also to entail into the first quarter of 2023 and a little bit into the second quarter 2023.

Yes, the historic margin on the HIS side was 17%. So if we go back from prior year, it was 9%, then that was an exception. So we want to see that margin again also in the second half. And you connected that question with the bigger part of the connector replacement. So just for the benefit of everybody explaining that we started September last year with the connector exchange, so that connector exchange onetime revenue will not reoccur in the second half of this year. So the benefit from the organic growth from HIS together with the margin increase on HIS will more than compensate the EBITDA contribution from the Connector Exchange. So we're very confident on that one.

Your second question was regarding the growth rate overall first half and second half. And indeed, if we just back out the TI elements because we are running up against onetime revenues in TI for the second half year, if we just back out the TI elements and look into the underlying growth on HIS, on CHS, on AIS, and on PCS, then you're fully right. The more we can achieve a higher organic growth rate, the stronger our margin will be. So it comes every single time in addition comes with a very high contribution margin. That is fully correct.

And the last question was with regard to AI. So let me just remind everybody that we went out at the end of 2020 and said that we are going to build a lot of new features, product solutions, and are going to deploy them to the market. And that's exactly what we're doing. And so now with the use of more AI coming to the market, for instance, since the release of ChatGPT in the second half of last year, we are also utilizing these tools not only to build into our product solutions and offerings but also to boost our own internal R&D activities and also to make our backbone work much more efficient. So this is, for us, a benefit on the product side with increased revenues at a build and part of the guidance for 2021 to 2025 since we saw already the usage of artificial intelligence coming into play, but it also gives us additional opportunity here on the efficiency side. I hope that answers the questions.

[Operator]

Next question is from Laura Metayer from Morgan Stanley.

[Laura Metayer, analyst]

Two sets of questions for me, please. First, regarding the AIS segment organic growth of 2%. So you flagged a strong business in the U.S. and with dental practices. But can you give a bit more details on the rest of the business? And can you give more details also on how much price increases contributed to growth and how you're doing on the cross-selling of modules? And do you expect growth to pick up in H2 '23 for AIS?

The second set of questions is very quickly on generative AI. Do you have any early insight on how you think generative AI can enhance the CGM products. I know you said you would share more at the CMD, but any kind of early insights on how you think that can enhance products would be very helpful?

[Michael Rauch, executive]

Thank you, Laura. So yes, I want to start with the second question, generative AI. And yes, we will talk more about that at the Capital Markets Day on September 7. However, let me just make 2 comments here. The arrival of generative AI with ChatGPT or other LLaMA or whatever solutions out in the market, is good and is highly welcome. There is an issue connected to data privacy and making sure that proprietary knowledge is not shared in an open forum. So we will also find our own ways on how to deal with that. But we will not be a company building another generative AI solution next to Microsoft or Meta just to be clear. And we will talk about more of that in the September Capital Markets Day.

Your first question on AIS is one which is actually reminding those of us that have been with us in 2017 and 2018 of that situation. So I want to go back to the situation of connector exchanges. We put all of our people on the ground from AIS side, particularly in Germany, to help and support the connector exchanges at the end of Q3 2023 all the way through the beginning of Q1 -- sorry, Q2 2023. And that has an impact on AIS. And we saw that, and we can go back in time exactly in the numbers in 2017 and 2018 on the AIS side as our personnel was focusing on making sure they actually help with all of the connector exchanges. So this is primarily done by the AIS team.

That's why also we are running up against a fairly lower comparable base on AIS the second half year. And that gives us confidence that we will restart on the cross-selling of the modules and improve on organic sales growth here also within the core business on AIS.

You asked a question of price increases. And yes, we have put price increases through on the recurring revenue. But like I said, the onetime revenue has a little bit stalled because we have been focusing on exchanging the connectors. I hope that explains on where the benefit will be also for the second half year as we don't go into connector exchanges anymore.

[Operator]

Next question is from Florian Treisch from Kepler Cheuvreux.

[Florian Treisch, analyst]

I have one question on the EBITDA guidance for the current fiscal year. If I just take H1 as a starting point and deduct the software revenue part, which is a onetime benefit in Q2, there needs to be clear improvements in H2 to get towards the midpoint of your guidance. Are you still confident on the midpoint? And maybe can you add the key details or leverages why you are confident? Or is it fair to assume that the lower end is more likely?

Second one on CHS. In the last call, you mentioned that the pharma clients are kind of carefully investing only. Are they now coming back? And are you seeing like the light at the end of the tunnel here.

[Michael Rauch, executive]

Thank you, Florian. I want to start with the second part of the question. On the CHS side, I think I said this in -- earlier on this call, and I want to reiterate that we see the pharma clients coming back, but still, we would want to get to more projects build up and ramp up over the next quarters to come. So yes, we are back into positive organic growth territory on the data business. However, we want to see more of that.

On the first question regarding the EBITDA guidance, you're fully right, the one-timer on the software upgrade was in the first half. And against that runs in the second half, the significant improvement on EBITDA, and I'm talking here absolute EBITDA on the Hospital business, right? So that one will clearly overcompensate the one-timer on the software upgrade.

In addition, we will see, as I was explaining a bit earlier, a better growth situation on AIS and also an improved profitability plus we have been watching costs very well. So we will see that our R&D expense ratio will go down, and you've also been listening to the 3% personnel cost increase only, which we were showing after the salary increases. So that all gives us confidence that we can achieve our guidance as we set it out.

Now you have asked regarding the guidance range. So kind of like Michael, why is it so wide from EUR 260 million to EUR 300 million, can you narrow it down a bit? And maybe I burnt my fingers a bit by last year's August conference where we actually narrowed the guidance a bit. We are in a regulatory environment, and it depends a bit also on when we are allowed to deploy and recognize some of the revenue. I want to give you a specific example. The race was very close last year, for instance, with Segur Ma de la Sante, where we were allowed to recognize the revenue, and that still needs to be seen in the fourth quarter.

[Operator]

[Operator Instructions] The next question is from Martin Jungfleisch from BNP Paribas Exane.

[Martin Jungfleisch, analyst]

I have 3, please. The first one is on the cost side. On Slide 19, you show that personnel expenses have grown 3% and then 7%, including the acquisitions, so basically reversing the trend a bit this year. Would you expect that this run rate would sustain in the second half and with the roughly EUR 146 million in personnel expenses that you have seen in Q2 be a good indicator for Q3 and Q4? Or were there some special effects that have I guess, elevated personnel expenses in the second quarter?

And then the second question is on interest cost. So net interest expenses was EUR 6 million in Q2. Is that a good proxy also for Q3 and Q4? Or would you expect that your hedges would alleviate a bit of that?

And the final question is on the Epic entry. So you said that the Epic, the U.S. market leader for software would basically roll out a software in a few hospitals in Germany this year or in the coming years. So basically just want to see what's your views on that?

[Michael Rauch, executive]

Thank you, Martin. I want to start with the personnel cost one, so take the order of your question as you voice them. On the personnel cost side, just to remind everybody, we typically have in the majority of our jurisdictions, the salary increases, if we do salary increases on an annual basis in the month of May, so they have full effect for 2 months. You will see a little bit of trickling over that, then when we take Q3 and Q4 into account. But they are very well under control. So -- and we don't expect additional one-timers somehow here on the personnel costs to come plus our headcount build up if it takes place, is taking place in lower cost countries like, for instance, in India, where we're shifting resources to. And you see that also when you take a detailed look into the FTE number. So confirm that costs are under full control.

Second part of the cost you mentioned was the interest cost and indeed, we had hedged very on, as you know, with the cap at the time for our term loan activities and then also swapped our European investment bank line. And with that, we are actually safe in terms of rising interest rates and the EUR 6 million, which you mentioned too, EUR 6 million, EUR 6.5 million basically is a number that will also be seen in Q3 and Q4.

Your last question is an interesting market question of the dynamics. The American firm Epic seems to be talk of the town also by the German Ministry of Health as he was even promoting that firm to the irritation of some other market participants. I see that rather as a chance. So Epic is the most expensive hospital information system and most complicated hospital information system, one can bring to the market. The price points are significantly higher than the price points of all of the other players in the market. So if our hospitals are willing to pay for that, that gives us a huge opportunity also going forward.

[Operator]

We have a follow-up question from Florian Treisch from Kepler Cheuvreux.

[Florian Treisch, analyst]

A follow-up on HIS as well. So now we're talking about competition. But on a positive, as we are raising again your order intake guidance, it looks that obviously, more orders are coming in than you are expecting or was thinking about being possible. So my question would be a bit where are these orders coming from? Where are you gaining market share? Is there like a specific trend behind that better-than-expected numbers?

[Michael Rauch, executive]

So it seems like the consolidation in the market is bearing fruit. So at the time when the Hospital Future Act was enacted, it was not known that SAP would position itself as it did to move out of the market. So that their business is up for grabs. People are actively participating in that and also we see opportunities here for us. Plus, congrats to our HIS sales team, they are doing a very good job. We now just need to turn orders into revenue in the second half year and in the years 2024, '25.

[Claudia Thomé, executive]

Okay. And since we do not have any further questions, we would like to thank [Audio Gap] to give Frederic or me a call or send an e-mail. Thanks for taking the time today, and we hope you have a great day. Bye-bye.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.