CompuGroup Medical SE & Co KgaA

XETRA:COP

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the Q2 2024 CompuGroup Medical Earnings Call and Live Webcast. I'm Moritz, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Michael Rauch, CEO. Please go ahead.

[Michael Rauch, executive]

Dear ladies and gentlemen, welcome to our preponed investor and analyst call for the first half year results 2024, which we had originally scheduled for August 8. We appreciate your attendance and the opportunity to address you directly in these exceptional circumstances.

Following the ad hoc release just 4 trading days ago, we took the decision to speed up the release of our half year numbers to the maximum. The team worked day and night to provide you with a complete and final set of financials for our first half year performance, including details on Q2 and the comparison to prior year.

We also decided to advance the usual quarterly investor and analyst call. Due to the very short time, we have not prepared a formal presentation for today. Instead, it was imperative to end the quiet period at the earliest possible moment and be able to engage in direct communication with you all on our performance.

With me today our CFO, Daniela Hommel; and our Senior Vice President, Investor Relations and Corporate Communications, Claudia Thomé. We will answer any questions you may have. And we will, of course, be available for any follow-up calls in the next couple of days.

Before we open up the line for questions, let me start with a couple of important opening remarks. First of all, what happened last week. When we announced our original guidance for the financial year 2024 in February, we had anticipated to grow organically between 4% and 6% and to achieve an adjusted EBITDA in a range of EUR 270 million to EUR 310 million.

We knew and communicated that we have tough comparables from onetime revenues in the first half year of 2023 and always expect that our second half year 2024 to perform stronger. We've also talked in the quarterly conference calls and in several investor calls and meetings about the overall moving parts of the guidance for this year, mainly impacting the nonrecurring revenues in AIS and HIS segments.

The first quarter showed a slower-than-expected start into the year, but we were still confident as voiced in our last quarterly call on May 8 to generate sufficient additional onetime revenues in 2024 to achieve our guidance given in February.

Things changed last week when we received the first view on our consolidated preliminary revenue numbers for Q2 and at the same time, looked at an updated forecast for the full year 2024. Both resulted in lower-than-expected revenues than originally anticipated for the full financial year 2024.

Hence, we immediately published this information via ad hoc release and informed the market as we did. Based on the updated forecast and on increased investments, particularly into artificial intelligence, database and patient-centered solutions, we also revised our guidance for the adjusted EBITDA. I will come back to the reasons for the guidance revision in more detail.

Now let's take a look at the results for the second quarter and the first half year 2024 first. We knew that like in the first quarter, we were facing a strong prior year due to the one-offs in Telematics Infrastructure. So what did we see?

Group revenues decreased by 6% year-on-year in the first half and by 9% in the second quarter. This was mainly driven by the one-off effects in Telematics Infrastructure. But we also saw an underlying slowdown in the second quarter after an already weaker-than-expected first quarter.

If we look at the organic development, excluding those TI one-off effects, revenues were slightly up for the first half but slightly down in the second quarter. This is reflected in the organic growth of the segments. Excluding the TI one-offs, the AIS segment was organically on prior year level in the first half but down by 3% in the second quarter.

Organic growth in the HIS segment was 4% in the first half, but 2% in the second quarter. The organic development in the PCS segment didn't slow down sequentially but was also below the strong prior year with minus 1% year-on-year. This shows also the main reason for the deviation in our forecast update versus previous forecast.

While recurring revenues continue to grow, the realization of nonrecurring revenues is not progressing as originally planned. Therefore, for the full financial year 2024, we corrected our organic growth guidance for the AIS and HIS segment.

Reasons are stated in the ad hoc release. In the AIS segment, there is a slowdown in additional module sales and professional services in connection with the larger projects. In addition, the second wave of the government initiative Ségur in France is now expected to start in 2025 instead of 2024.

In the HIS segment, with slower realization of projects in connection with the Hospital Future Act, [Foreign Language] leads to a lower organic growth rate. In any given year, there are numerous large building blocks of nonrecurring revenues built into our guidance.

Our recurring revenues remained strong. They grew by 6% year-on-year in the first 6 months and represented 75% of total revenues. However, in order to achieve our guidance, we mostly depend on the nonrecurring revenues to bring the additional growth and profitability. Over the past years, we have mostly been able to offset the delay in larger regulatory projects by other business areas that were performing more strongly.

This year, all the risks are materializing, plus we see a slower-than-expected revenue from additional modules and professional services. What does this guidance adjustment mean for the financial year 2024?

The guidance reduction in organic revenue of about 6 percentage points, taking the previously guided midpoint of plus 5% to the new guided midpoint of minus 1% is about EUR 70 million in absolute revenue numbers. Again, the difference of the midpoint of the originally guided adjusted EBITDA range to the newly guided EBITDA range, we now guide about EUR 55 million lower adjusted EBITDA, to the new range of EUR 220 million to EUR 250 million adjusted EBITDA.

This takes into account about EUR 70 million lower revenues and increased investments into AI database and patient-centered solutions. And please keep in mind that the nonrecurring revenues for regulatory initiatives usually come in at a high margin, since most of the investments have been incurred upfront.

What is management focusing on now to turn the situation around? Whilst we certainly do our utmost to also generate higher onetime revenues going forward, starting now with the second half of 2024 already, we will not be able to turn around the situation quickly.

Cost of doing business have increased with higher IT platform operating costs and higher security protection investments. But the main factor is that we deliberately continue to invest into R&D to increase product quality to meet the road map milestones for large projects, to develop new modules and solutions and intensify our efforts on artificial intelligence as well as database and patient-centered solutions.

In the first half year, R&D expenses increased by 4% to EUR 125 million, thus representing 22% of revenues. In the second quarter, R&D expenses increased by 5% to EUR 64 million thus representing 23% of revenues. These investments are essential to enable our customers, the everyday heroes in the health care sector, to master the significantly increasing challenges of their daily work.

Comprehensive and strongly growing amount of data need to be processed while the time for patient is limited. AI-based solutions can support health care practitioners with efficiency gains that can make a difference in doctors' practices, hospitals and pharmacies for the benefit of the patient.

Also, the total workforce cost, mainly personnel costs, contracted labor and outsourcing costs continue to be under inflationary pressure. While it was prudent to have executed our restructuring measures from the first quarter of 2023 in a very swift and fast manner with an already low to mid-single-digit million euro savings amount.

Today, with the half year report, we've also published the remaining guidance KPIs. We have lowered our free cash flow guidance to a range of EUR 40 million to EUR 60 million for the year 2024 and we have lowered also our adjusted EPS to a new range of EUR 1.55 to EUR 1.95.

This is a difficult moment for everyone trusting in us and we fully understand the disappointment. Rest assured that our focus is on improving our performance going forward. We remain 100% committed to return to revenue and EBITDA growth and we remain 100% committed to deliver higher free cash flows.

For 2024, we've updated our guidance in full this morning with the release of our half year figures. For 2025 guidance, we will update you with the release of our preliminary numbers for 2024 performance in February 2025. With that, we are now looking forward to addressing your additional questions. And I'm handing back to the operator.

[Operator]

[Operator Instructions] And the first question comes from Knut Woller from Baader Bank.

[Knut Woller, analyst]

And actually, 2 questions. Michael, can you break a bit out what the structural element is the -- or the regulatory element of the EBITDA guidance cut is versus the fundamental one where you said that some AIS add-on modules couldn't have been sold. As you said, Ségur, I think, is coming at relatively high margins. And I would love to understand what the regulatory element is, hence, only postponed revenues but not lost and what's the fundamental part of it. And to get a better understanding about the AIS larger projects that you cited. That's the second question. It would be helpful to get here some more color on what kind of projects these are and where they are now in the time line of execution to get also here better feeling when these revenues and profits will come in the future.

[Michael Rauch, executive]

Thank you, Knut. On the first question, you're talking about the EUR 55 million EBITDA, I'm taking the midpoint into account. So it's about half-half. So 50% more from regulatory and 50% from other things. Your second question was more detailed and tailor made towards the AIS, one on larger projects. What could that be? So as you might know, we are not only equipping smaller GP practices, but we are also actually doing initiatives here with the [Foreign Language]. So what is the English for [Foreign Language] say -- medical -- yes, thank you on the medical centers, where we had some projects running, and there were some delays, which will actually cause us to shift into 2025.

[Knut Woller, analyst]

So just to get the feeling then from a qualitative perspective, Michael, with Ségur coming in the next year with these elements coming in also a hospital future just being delayed. Normally, is it fair to assume that there should be a revival of profitability and also organic growth next year from a qualitative perspective?

[Michael Rauch, executive]

We would anticipate that overall, we see already an improvement in the second half year, as we always said, second half year is going to be stronger than first half year for 2024. And yes, we will also see effects of that going into 2025. However, I also want to say that we will update everybody with the guidance for 2025 in February. Why? Because as we all see many moving parts. Yes, there will be shift of hospital future. However, we are also reading news about hospitals struggling financially, and that might have also an impact on the realization and the timing of the project.

[Operator]

And the next question comes from Martin Jungfleisch from BNP Paribas.

[Martin Jungfleisch, analyst]

So 2 questions. Well, first one is on the EBITDA side. So you cut by EUR 55 million. Part of this, of course, the revenue drop through, but how much is the incremental investment that you mentioned? I mean how much of this is recurring? And how much of this is one-off? And also this includes some restructuring measures or additional restructuring measures? That's the first question.

And then second question on the top line. I mean it's been mostly on the AIS side and this is -- it looks like a cut of 30% to 40% to your non-res. So is that more market competition? Or is it sales people not doing their job? And then also you said that these revenues will come in 2025. So -- and how sure are you that this will actually come in 2025? So is this postponed investments by your customers? Or is this -- you just lost to competition?

[Michael Rauch, executive]

Yes. I will start answering the second question and Daniela will comment on the first question. So with regards to the guidance for 2025, I can only reiterate what I stated before, we will update everybody once we have more transparency in February 2025. But by and large, the questions you ask for AIS, we said that there's a slowdown in additional module sales and also professional service in connection with larger projects, so which does mean that some of the module sales, which we used to have in the past, for instance, security modules or other activities have been lower. And yes, there might be sales execution topics which we need to address, but there might be also general customer situations, which we also need to address.

[Daniela Hommel, executive]

With regard to your first question, you asked for the incremental investments into AI, and we consider them with low double-digit numbers to constantly invest into this field and not lose market track and that relates to central resources but also dedicated projects in each of our business segments.

With regards to restructuring, I want to answer, we constantly look for cost consciousness. So that means we are looking to adjust our cost base permanently. However, we have not decided on a restructuring project yet, whether we aim to adjust our cost basis on a recurring basis. You also asked whether the investments are recurring or nonrecurring. In the field of AI, that's kind of hard to say. Of course, we are just entering into that field. That means you can also see in the upcoming years, constant investments and the products that we try -- that we want to turn out into the market. Of course, they need ongoing investment and we also want to keep track with our competitors in that field. So the absolute number will increase over the next years in the terms of what we invest there is a recurring part and we also want to enter into new fields in terms of product or building a team data lake behind those products.

[Martin Jungfleisch, analyst]

Okay. Great. Maybe if I can follow up on 1 more question. Just on the free cash flow guidance. So EBITDA guidance was cut by almost 20% or plus 20%, but free cash flow is at 40% cut. What is the delta expected between these two?

[Daniela Hommel, executive]

Yes, sure. And the biggest difference in those 2 percentage rates that you calculated is the cash out for the restructuring program that we initiated last year that was included in the EBITDA of last year already via the accrual and the cash out this year. And then we see additional tax payments in a low double-digit number. We invest in the fees. So we have follow-up costs for acquisitions that we made. So that are the biggest parts that are moving.

[Operator]

And the next question comes from Florian Treisch from Kepler Cheuvreux.

[Florian Treisch, analyst]

Two parts, please. So the first is again on basically ending up in restructuring. So we have now seen AIS or, let's say, the historic core AIS doctors business really underperforming now a third year in a row. We have seen a lot of management change in the segment. So clearly, the segment has never really come to a point where it can perform again really. Isn't that really the time to go for a deeper restructuring here? And so far I would love to get your feeling on, you said in the past, you're ready to act when it's needed. My question would be, isn't that today the perfect time to be really aggressive on that end, to turn around the chip because simply in the end, if you lose section for many years in software, you've probably lost at some point in time.

And the second is around leverage and impairment risk. So you have now leverage above 3x. Is it fair to say that M&A and to be fair dividend at some point is now clearly not any longer your highest priority. The focus is on leverage again. And with that, is it also fair to say that divestments are now also a potential way to delever?

And then into impairment, you have now under delivered for many years and really recover. The impairment risk is getting higher and higher now. Is there any covenants in your financials, on your credit lines or covenants that equity ratio, et cetera, is important? Or is it just equity ratio and nobody cares?

[Michael Rauch, executive]

Thank you, Florian. I want to address your first question regarding the AIS segment. And indeed, you have a good point. It was a moment in time where we really we set for ourselves, our leadership on the AIS segment. And we brought only to me, our colleague here on board towards the second half of 2023. Plus, we also initiated company-wide restructuring activities in various businesses in the first quarter of 2023. Now when you do those things, these things need to take time until they go into effect. But you're right, there were a couple of things within the AIS segment, not in order, which we target now and which we and the team is changing and the effects will be seen over the next couple of months to come. Daniela, will you take up the second question on leverage?

[Daniela Hommel, executive]

Sure. With regard to this question, the focus remains unchanged, deleveraging. I stated this when I came on board and that's still our focus, the increase in the leverage is an effect that's calculated by the lower EBITDA, but still unfocused, our aim is to manage working capital in a way so that we can deleverage again. You also asked about a split between big investments and investments. Of course, big investments are currently not in our focus, but we said in the previous ad hoc announcement that we do and continue to do add-on acquisitions that led us not fall behind the market so that we can keep track.

Of course, we're also looking carefully for big investments, smaller ones and especially businesses that do not earn the margin that we expect. With regard to dividends, we just raised this and that we also stated that, that will be a level that we will maintain and that is unchanged.

With regard to impairment, you asked for the equity ratio, that would be a detail that we do not provide. However, if you are aiming to understand whether we foresee already big impairments right now, so an initial test on them has provided us with the insight that there are no big impairment risks currently. However, the detailed analysis will start in September when we have another quarter also in our books. That is what I can say to that question.

[Operator]

And the next question comes from Yannik Siering from Stifel.

[Yannik Siering, analyst]

I just have one follow-up. And that would be, again, on the EBITDA guidance. Last week in the press release or in the ad hoc, you mentioned that it's partly also due to increased investments, particularly into AI. I think previously, the understanding was that it's rather a shift of investments or coming out of your investment phase in '21 and '22. I think last year on the CMD, you already mentioned investments into AI and that's continued basically in the second half of '23 and then also in early 2024.

Now it sounds rather like it's really incremental investments into AI. Could you maybe clarify your thinking about this field and also about the visibility that you have on the amount of investments that you want to make in this space.

[Michael Rauch, executive]

Yes. This is going to be longer shot. Why? Because we will see with artificial intelligence, lots of opportunities going forward. So we will need to think on how much we're going to spend over the next couple of years to come. It is AI. It is patient-centered database. Those are the 3 areas for investments for us and they provide opportunities, lots of opportunities for us going forward. So take it as, for instance, the original investments, which we started in the year 2015 when we built our -- from scratch native to clinical system with G3 technology. So I'm not saying that there needs to be a multiyear investment period, but it certainly will not be over with just a blip of investment in 1 quarter. So we will continue to invest in order to build right artificial intelligence solutions, right database and right patient-centered solutions.

[Operator]

And the next question comes from Wolfgang Specht from Berenberg.

[Wolfgang Specht, analyst]

Three additional from my side. First, on cash flow, you're usually carving out any M&A and earnouts in your free cash flow definition. Do we -- for sure, we do not know about potential M&A, but what about earnout? Is that something material you can expect for the second half of the year? And then on the investments, you already sold a small asset with Turkey in Q1 and you told us just that you're evaluating other potential asset sales? Could this also mean something bigger? I'm just dropping one thing U.S. business? Or is this completely out of scale that you would dispose such a big asset?

And last thing, on the hospital segment, if I remember it right, the building module for your nation was still missing. It's set to be in place for customers early next year. Is this still everything on track in this direction?

[Michael Rauch, executive]

Well, Wolfgang, many thanks. I think we captured all of your questions. We didn't capture the last question. So which module were you asking for, please?

[Wolfgang Specht, analyst]

I guess, the building our accounting model that was stated on your homepage. It was still in preparation. That gives customers, let's say, the option to fully migrate to your solution and lease out...

[Claudia Thomé, executive]

Wolfgang, I'm sorry, we can't really hear. Your line is really bad. Sorry for that. We really don't get you acoustically. So maybe the third question, you come back to us because we really don't understand it, but maybe we'll answer the first 2 questions now.

[Wolfgang Specht, analyst]

Okay.

[Daniela Hommel, executive]

And I will do this. You asked about whether there would be any major earnouts for the free cash flow and the small ones coming, but not -- no major ones for the second half of the year. And then with regards whether we may sell the U.S. business, these statement, we are not speculating right now. I stated earlier -- we want -- we look at non-lucrative businesses or the ones that are not earning the margin that we expect and that's not the case with the U.S.

[Claudia Thomé, executive]

Okay. And since there are no further questions, we thank all of you for dialing in today. And as always, Investor Relations is available for further questions. So don't hesitate to shoot an e-mail to Frederic or to myself. We will get back to you or are available on the phone. Thank you very much, and have a nice day.

[Operator]

Ladies and gentlemen, the conference has now concluded and you may disconnect. Thank you for choosing Chorus Call, and thank you for participating in the conference. Have a good day. Bye-bye.