CompuGroup Medical SE & Co KgaA

XETRA:COP

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Moritz, 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 Corporate Vice President, Investor Relations, Claudia Thomé. Please go ahead.

[Claudia Thomé, Head of Investor Relations]

Good morning, and welcome to the CompuGroup Medical investor and analyst conference call for the third quarter 2021 results. Great to have you with us, whether you have dialed in via the phone or are following by the webcast. As always, we published our presentation early this morning on our website as well as the quarterly statement and the press release. We're going to start with presentations by our CEO, Dirk Wössner and our CFO, Michael Rauch. We will then move on to the Q&A with both Dirk and Michael available for your questions. By the way, Dirk has again dialed in from the U.S. today since it worked very well last time. We are hoping for a good connection today as well. And just in case should there be any technical issues, that's the reason why. One more housekeeping thing before we get going. Please take the disclaimer on Chart 2 as read and taken to the notes. And with that, I would like to hand over to our CEO, Dirk Wössner. Over to you, Dirk.

[Dirk Wossner, MD, CEO & Chairman of Management Board]

Thank you, Claudia, and I'm indeed dialing in from the U.S. visiting our team. And so at the moment, it's 4:00 a.m. here in Austin and a good morning to all of you. I would like to start by setting the stage for the quarter. Allow me to remind you of the megatrends driving our industry more than ever, digitization in health care. We have seen this in other industries. Digitization means transformation and change, creating massive opportunities. Now this is happening in health care and the pandemic is accelerating this development. Patients are taking an active role, new digital offers and ecosystems are emerging, and the use of artificial intelligence is just beginning with significant potential to create value for doctors and patients. CompuGroup is positioned at the core of these developments, and we actively support and drive innovation. Our customers' world is transforming massively. Doctors are at the center of these developments and transformation health care needs to start here with the doctors. At CompuGroup Medical, we've been operating and innovating in a doctor-centric way since the beginning. This is what we excel at. The industry transformation brings huge changes and opportunities, but also challenges for our customers. Parts of the patient interaction can be managed in a digital workflow now, resulting in efficiencies and allowing for more quality time for the patients for the actual consultation. In times of pandemic, mobile work becomes a viable option. Access to data, to big data and being connected to a large network allows for decision support, enhanced using artificial intelligence tools are evolving based on speech recognition, for example. And in 2021, many of the challenges that have been developed over a number of years are finally launched into daily operations in the doctors' practices in hospitals and elsewhere. We've talked about at the Capital Markets Day a couple of weeks back in more detail. For CGM, there are 3 major categories of change. First, the mandatory elements of the regulatory road map in any country. Doctors have to follow to digitize and monitor that, typically government funded. You can see this across all the markets that we operate in. Second, new modules and features bringing additional value or efficiency gains for doctors. And third, the whole universe of the doctor-patient interaction that can be a huge game changer going forward by digitization. In the third quarter, we've seen huge progress in all 3 categories. I will come back to the details in a couple of minutes, but this is basically what has been driving our performance in the third quarter. We're happy to report a strong third quarter. Just looking at the headline figures, group revenues have grown by 19% year-on-year and by 7% organically, which is both above the midpoint of the guidance for this year and above the midterm target we have set ourselves for organic growth. Revenue quality continues to be high with 62% of revenues recurring. As expected, the adjusted EBITDA margin is down year-on-year for the quarter but shows a strong 26% margin. The main driver for organic growth in the group has been the Ambulatory Information Systems segment, with a strong 10% organic increase year-on-year. The teams in the DACH region have shown an excellent performance, and we have seen good progress and trend. Since the beginning of the year, we have been guiding you towards a back-end loaded growth in this segment, and now it is finally happening. We have been successfully rolling out numerous modules to doctors. Telematics Infrastructure is progressing and finally taking an active role in doctors' practices with all the use cases that are implemented this year. The rollout of the eHealth record modules has taken a big step in Q3. We have reached around 37,000 installations. The TI-based secure e-mail communication tool, KIM, which is the prerequisite for doctors being able to use eSickNotes, which are mandatory as of the fourth quarter, is used to roughly 24,000 practices. We also rolled out our eVaccination certificates to around 60,000 practices. And at last, but not least, all our relevant products are certified for the usage of the ePrescription module. The hospital business has delivered another strong quarter with 17% top line growth, driven by the latest acquisitions of VISUS and KMS and with 5% organic growth. From an organic perspective, this was a quarter with tough prior year comps. Q3 last year was the first quarter including the assets acquired from Cerner, and the team hit the ground running back then and showed a really excellent first post-merger quarter. Again, against this backdrop, a 5% organic growth rate is very good, and it was driven by G3 in Germany and Spain. Not yet meaningful in terms of revenue impact, but keeping his colleagues extremely busy is the Hospital Future Act, the large government initiative in Germany to drive digitization and modernization in hospitals. The project funnels continue to evolve, and we see more than 50% of projects with our customers featuring patient tools, patient portals and IT security. We continue to expect a total of EUR 40 million to EUR 60 million revenues over the next couple of years from this initiative, with the main impact from 2022 onwards. The third quarter has obviously been a strong quarter in the Consumer & Health Management Information Systems segment. We have rolled out the next-generation connector upgrade to our TI customer base. This has been the big revenue driver this quarter and is finally enabling new use cases like eHealth records and the enhanced electronic signature, which is crucial for a number of applications in the daily practice of doctors and their admin support. With this pure e-mail communication, KIM, we currently have a market share of roughly 50%, being one of the early movers. In the third quarter, we have launched several security protocols under the new branded CGM PROTECT. Our unparalleled access to data is one of the driving forces to unlock value for doctors, patients in the industry to help save more lives. We've made good progress in the third quarter with 11% organic growth and continue to deliver on the digital marketing trend in pharma. On the consumer side, we have now reached more than 800,000 users of MEINE GESUNDHEIT, which is our eHealth record for private insurance and makes us the largest provider of this kind of record in the industry. Now we are confirming our 2021 guidance after a strong quarter, especially in the AIS and CHS segment. We continue to expect revenues of more than EUR 1 billion and an adjusted EBITDA between EUR 210 million and EUR 230 million. And with that, I hand over for Michael for the details on the financials.

[Michael Rauch, CFO & Member of Management Board]

Thank you, Dirk. And welcome, everyone, from my side as well. Let's turn to the financials for the third quarter. So starting with the top line, Dirk has already mentioned it, revenues are up 19% reported and 7% organically. Organic growth ex TI is even slightly better with a 7.5% increase year-over-year. If you look at organic growth in Telematics Infrastructure on a stand-alone basis, this was 5% in Q3 versus the prior year Q3. Recurring revenues increased by 26% and represented 62% of total revenues in Q3. Revenue quality has thus increased compared to the same quarter last year. Now let's take a closer look at organic growth. The main drivers have been the AIS segment, where growth is picking up as expected and the CHS segment, where we recognize the Telematics Infrastructure connector upgrade in the third quarter. The PCS segment has sequentially improved this year and the HIS segment showed a strong organic growth in Q3 against tougher prior year comparisons, where the assets acquired from Cerner have been consolidated for the first time starting July 1, 2020. A quick look at the segment overview. The overall double-digit revenue increase was driven by acquisitions in the AIS and HIS segments with eMDs and the hospital assets, mainly VISUS and KMS, being the most relevant. Adjusted EBITDA increased by 9%, and the margin is down in line with growth investments we have announced for this year. The P&L reflects those growth investments. The strong revenue increase is eaten up mostly by the growth-related buildup personnel costs, particularly in R&D and sales, where we also build up further headcount. The gross margin has remained stable on a high level, and hence, the investments into personnel have led to a lower margin than prior year as guided throughout the year 2021. Turning to free cash flow. This year, the TI connector upgrade was invoiced towards the end of the third quarter, and thus, we will see the majority of the cash inflow in the fourth quarter. This is the reason for the free cash flow being below the prior year with EUR 73 million in the first 9 months of this year versus EUR 79 million in the prior year. Net debt and leverage have increased this year. At the end of Q3, we stood at EUR 627 million net debt, corresponding to a leverage of 2.7x. The year-to-date increase was mainly driven by net payments for acquisitions of roughly EUR 100 million, and the share buyback was EUR 71 million. Let's turn to the segments, our largest segment first, the AIS segment. Dirk has touched on this already. Excellent growth of 34%, including the eMDs acquisition in the U.S. and also strong organic growth of 10%, mostly due to additional modules like the eHealth record module and vaccination certificates. The revenue quality has always been high in this segment, Q3 being no exception with 75% recurring revenue share. Adjusted EBITDA has been impacted by growth investments, mostly into G3 technology and into CLICKDOC. The adjusted EBITDA margin is additionally impacted by the lower margin of our acquired U.S. business. Excluding the U.S. acquisition, the AIS margin would be close to 30%. Moving on to the second largest segment, HIS. Revenue growth, including the latest acquisitions of VISUS and KMS, was excellent with 17%, and even the 5% organic growth was pretty good considering the fact that we are still pre-hospital future revenue impact-wise here. And the prior year was a very strong quarter. The 5% organic growth year-on-year was driven by a positive business development in Germany, mostly due to G3 introduction and in Spain. Recurring revenues increased even stronger than revenues overall and their share of total revenues is now 68% in the segment. Adjusted EBITDA increased in line with the revenue progress with a stable margin year-on-year. Moving on to the CHS segment, where the absolute revenue level was very strong, both this year and in the prior year Q3 due to the connector upgrade we did last year and this year for our TI customers. Telematics Infrastructure revenues were up by 5% year-over-year, as already said. Excluding Telematics Infrastructure, the organic growth rate was a strong 11%, and we continue to see an excellent performance in our data business. Overall, organic growth in the CHS segment stood at 7%. Please keep in mind, the strong prior year in the fourth quarter due to the TI pharmacy rollout, which we are running against. We therefore expect TI and CHS revenues below the prior year in Q3 -- or Q4. Both adjusted EBITDA and the margin are down versus the prior year due to growth investments in line with the overall investment strategy. And finally, the PCS segment. On the revenue side, organic growth has been sequentially going up this year and has reached 3% in the third quarter, mainly due to a positive business development in Italy. Recurring revenues are even up a bit more, thus, the revenue quality has improved slightly. Adjusted EBITDA and the margin are down year-on-year due to investments in G3 technology. Now, let's move to the guidance. So let's spend some time on this chart here. As Dirk had said before, we are confirming our full year guidance 2021. Regarding organic revenue growth, where we stand at 7% growth rate year-on-year for the first 9 months, please keep in mind that the fourth quarter will be below the prior year in the CHS segment as already mentioned, which will weigh on the organic growth overall. We therefore see no reason to change our revenue guidance in any way, well aware that the midpoint of our organic growth range is slightly below the 9 months performance we've seen. Regarding adjusted EBITDA, let me remind everyone that 2021 is our year of investments into growth. We are totally convinced that this makes sense and are, therefore, still happy with the range we've given in the beginning of the year and also with its midpoint of EUR 220 million. Regarding adjusted EPS, also no change in the guidance. I would like to point out the fact that the depreciation is sequentially still increasing due to the investment step-up we've seen over time. Looking at the segment revenue guidance, we see a diverse picture. While the HIS and CHS segment still have the potential to end up in the upper range of the guidance or exceed the range, both the PCS segment and the AIS segment will most likely be rather at the lower end of the guidance for the full year. And finally, in regard to our free cash flow. Since we've received a number of questions, let me confirm that the TI connector upgrade is mainly recognized cash flow-wise in the fourth quarter of this year. So depending on CapEx, we might end up a bit better actually than our so far guided value of above EUR 80 million in free cash flow. So looking beyond this year in terms of upcoming disclosure events, we will report the Q4 numbers in our preliminary full year 2021 results on the 3rd of February, together with our guidance for the year 2022. We plan to release our audited annual report for 2021 on March 24 and the first quarter results for 2022 on May 5, 2022. Thank you for your attention. And I would now like to hand back to the operator for the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Laura Metayer from Morgan Stanley.

[Laura C. Metayer, Research Associate]

Congratulations on a good quarter. I have 3 questions today, please. My first one is on adjusted EBITDA. So if we look at the Q3 adjusted EBITDA margin of 26%, it's quite above the full year margin that is implied by your full year guidance. But you have -- but your full year guide remains unchanged. Could you give us a bit more insight on why that is? Did you slow down investments in Q3? Or what is to be expected in Q4? Based on my quick calculations, I think we should expect a very low 20% margin in Q4 if you were to reach even the high end of the adjusted EBITDA guidance. Second question on the HIS segment. Based on my calculation, for you to receive the top end of the guide, organic growth in HIS would have to be flat in Q4 despite a pretty easy prior year comp, which was negative last year. Could you give us your thoughts on this one? And then last question on the AIS segment. You said you're likely to achieve the low end of the guidance for the full year. And I guess again here, based on my calculation, organic growth would need to be in the mid-teens for you to achieve the low end of the guidance. Can you give us a bit more insight on what is expected to drive the organic growth in Q4 for AIS?

[Michael Rauch, CFO & Member of Management Board]

Yes. Thank you, Laura. I presume I'm going to take all of the questions. So let's start with the most obvious, the general one on the adjusted EBITDA. You're right. When you look to the return on sales, we are right now running for the first 9 months, around 23%. And the question is, why do you kind of like confirm still the midpoint of the guidance here? EBITDA-wise, what will it do to the fourth quarter? And in that sense, we are going to see some investments with travel picking up and also with marketing after some conferences if resumed in the fourth quarter, which will actually weigh a bit on it. And let's also remind everybody here on the topic of us investing in this year, particularly in order to reap the benefits of growth in general. So by and large, if we have an opportunity to actually improve our investment strategy here with dwelling a bit more on contracted labor and other activities, we will not hesitate to do so. So yes, there might be a little bit of an upside. But I would still want to direct ourselves towards the midpoint of the guidance range here. Now you have the question on the HIS segment in terms of organic growth. And I said a bit earlier when giving color towards the overall guidance for the individual segments, that most likely on the HIS side, we're going to be at the upper end of the guided range. So -- and let's see if we could be even a little bit above that range. So yes, it could be a bit more than the organic growth that you have just calculated. But I mean, let's be a bit cautious here. Now on the AIS side, we are fighting against a weak comparison in that sense. We had 2 quarters at the beginning of the year 2021, where we were going against very strong prior year comps. Now in terms of organic growth, the quarters 3 and 4 were the ones where we had negative organic growth in the last year. That's why we remain confident to achieve positive organic growth here also in the upper single-digit range on the AIS side. But I also said that probably, AIS would come at the lower end of the overall year guidance for AIS. Is that sufficient for you?

[Laura C. Metayer, Research Associate]

Yes.

[Operator]

Then the next question comes from Knut Woller from Baader Bank.

[Knut Woller, Analyst]

Yes. First, looking on the capitalized development costs, Michael, it's -- they continue to go up. Can you give us an idea about the magnitude we should expect for the full year and also how we should think about capitalized development costs going into 2022? Then just a brief -- just a housekeeping question. The connector software update, is it fair to assume that the contribution was somewhere in the higher EUR 20 million? And then what I spotted a bit and where I want to get some more color on is on the net impairment loss for financial and contractual assets, they were up in 9 months, [ 21 ] year-over-year. Can you give us some idea here what drove the slight upward trend?

[Michael Rauch, CFO & Member of Management Board]

Yes. Thank you, Knut. I will take up all of your questions. So let's go to the capitalized development costs. And let's start maybe with the general situation. You've seen that number going up in general, in line with the sales growth also of the acquired businesses and the organic sales growth that we are investing here in a technology upgrade, mainly moving from the second generation of technology into the third generation of technology. And this activity leads to higher capitalization. We've been seeing that on the hospital segment for many years now, but we are also now actually moving into G3 technology on the PCS segment and on the AIS segment. That's why also in the Q4, we will see a bit higher self-developed capitalized costs here. And also moving into 2022, this is not the time for the guidance for 2022, but since you asked the question, I want to shy away from that. We are probably also going to stick at a higher level of capitalized investments for 2022 here, in line with our overall investment strategy, moving and upgrading our products towards G3 technology and towards cloud-based technology. You asked a question regarding the Telematics Infrastructure update on the connector side. And you are right, it came in above the EUR 20 million in sales, and it also came in with a very high margin. That's why we have a nice margin here on the Q3, moving up our overall margin on the first 9 months. Now your last question was regarding the net impairment losses. So there were some external ordinary impacts throughout the year. In general, we don't have, from acquisitions, impairment losses, so that's why we don't see going forward a higher amount of net impairment losses. But what we will see, and that is a question which you have been addressing throughout the last couple of sessions quite a few times is, we will actually see from the previous year's capitalized self-development software activities the amortization to become higher year-over-year. Because, as you know, according to IFRS regulations, you start capitalizing over many years and months, you bring a product into real life and into sales, then you need to start to amortize that. That's why the amortization will pick up over time.

[Knut Woller, Analyst]

And just a quick follow-up on the connector update. Is it fair to assume that we have been rather around EUR 30 million than above EUR 20 million? So we have been somewhere in the range of EUR 25 million to EUR 30 million tailwind from that?

[Michael Rauch, CFO & Member of Management Board]

No, it's the lower part. That has to do a little bit with the financing. So it is more EUR 20 million to EUR 25 million, Knut.

[Operator]

And the next question comes from Uwe Schupp from Deutsche Bank.

[Uwe Schupp, Small and Mid]

Yes. Three questions, please. Firstly, Dirk, you bought a small company in the quarter and -- sorry, I was slightly late on the call. In case you already addressed this, you can ignore the question. But just in case not, can you talk about this little company because they are active in geomarketing? And I was just wondering why would that be of particular interest to you. Secondly, Michael, on the free cash flow, you indicated that the connector upgrade will be cash flow relevant in Q4. And you also already said, I think, that the cash flow guidance of larger than EUR 80 million for the year, free cash flow, that is, could be exceeded. Are we then talking about a number that could be closer to EUR 100 million, would be my question. And then lastly, on electronic prescription, can you give us an indication on the level of pickup, really, from doctors for the -- I'm not talking about the connector, but rather about the software update, the patch that doctors needed in order to be able to perform electronic prescription at the start of next year.

[Dirk Wossner, MD, CEO & Chairman of Management Board]

Okay, Uwe. Thank you. I will start with the question on the company we bought. I assume you mean KMS which is a specialist, primarily actually known for hospital BI systems. If you mean another company, let me know. That's the one I have in mind. I don't think we bought another one in the third quarter of significance. The KMS company very much complements our hospital information product because it basically allows hospital management to get a very, very good view of the key KPIs and numbers across multiple systems in the hospitals that they manage. We believe this is a major trend because as hospital management becomes more and more aware of how to optimize and steer productivity and operations in a hospital, they will need insights that go across individual segments or individual software and hence, these providers like KMS, who have basically the ability to draw data across very different systems in a hospital and provide those in a, if you want, in a consolidated manner and manageable manner to hospital management are the key of the transformation that will come in hospitals. That's why we bought this company. We believe it adds significant value to our overall proposition and also allows us to cross-leverage things like their knowledge about data, data management and data presentation to also be used in other segments like, for example, the AIS segment. I hope that answers your question on that one. On the -- on your third question, the question about the ePrescription, if I understand that correctly with the connector update, we have done all those upgrades to all doctors, i.e., we have done the work that needs to be done for things to be used like the ePrescription, the eHealth, the eSickNote or the ePatient file that has been done as part of this connector upgrade that we just see. There are complements that need to be sold into the doctors for the doctors to use, for example as part of the AIS, which is also we talked about that, for example, KIM modules. They work in connection with the connector upgrade and we sell modules into the doctors to have a more comfortable use of this, for example, of multiple signatures [ at once ], et cetera. And that has been done. And I think we are ready for this to be rolled out. Obviously, we're part of an ecosystem here and the whole thing will only work if end to end everything works. And as you are aware of, there's been a couple of smaller delays, but we are confident that this will actually be in action in the next year. And as we said, we have done our part of the delivery to this, and this is in the field and working. And for the third question, I would hand over to Michael.

[Michael Rauch, CFO & Member of Management Board]

Yes. Thank you. Uwe, you asked, "Michael, can you please be a bit more specific regarding the free cash flow for the fourth quarter, what it will mean?" And since we are today on the 4th of November, I did see already the bank statements of the cash flow basically for the month of October, and I can confirm that the connector upgrade cash is coming in nicely. So that's why I said when characterizing a bit the 2021 guidance where we guided to be above EUR 80 million in free cash flow, that I'm very positive that we will surpass that. Now the question is, will it be above EUR 90 million or how high it will go? Most likely, it will be above EUR 90 million, maybe potentially we could go close to EUR 100 million, let's see.

[Operator]

And the next question comes from Charlotte Friedrichs from Berenberg.

[Charlotte Friedrichs, Analyst]

Two questions, please. The first one would be about the phasing of the hospital business for 2022. Do you have an idea already of how quickly the potential revenues from the Hospital Future Act will start to flow in 2022? Is there something that, that went on already in Q1? Or should we rather expect it to start towards the end of the year? And then secondly, a more general question on the Telematics Infrastructure. There has been recently a couple of more articles suggesting that the German government may want to go for a sort of connectorless solution. Is there anything that you've heard in the meantime, any indications from the 2 sort of from the coalition talks at the moment of how this may look like, what the time line could be?

[Dirk Wossner, MD, CEO & Chairman of Management Board]

Well, Charlotte, thank you very much for your question. And I will start with a question on the Hospital Future Act. As you know, the way this works is basically that the hospital will ask for a proposal for a certain project. We will make those kind of proposals. The hospital might then accept that proposal, and then it still has to go through a government certification or authorization process. There is, to my knowledge, a significant amount of work that now lies with those government authorities authorizing the payments, and it's very difficult for us to say exactly when that will be done. Originally, if you remember, the money was supposed to be spent, if I remember correctly, in the first 2 years, i.e., until the end of next year. I would guess that the spending of the money, not the start of the project, spending of the money will be somewhat prolonged because the process is somewhat cumbersome. This is not surprising. This is actually pretty general in any of those kind of programs. And hence, it's very difficult for us to say when exactly, what part of the cash flow or of the revenue will come in. But we remain confident in what we said overall that a large part of that revenue will come in within the next year. Phasing, again, is a little bit dependent on how fast that government agency works, and we do not have any information about that yet. To your second question, the connector upgrade. You might remember, there was a very high-level specification of gematik about the next-generation connectors. And there is a discussion that those connectors would be maybe soft connectors or maybe hardware-light connectors that hasn't been fully specified yet. And by that, you can also see that the time lines for this are probably, if you look at average development of this kind of technology, I would say 3 years at a minimum until that will be market ready and deployed. We don't have any -- we don't hear anything from the new government discussions around this issue. I think it's very clear that there has been so much investment into Telematics Infrastructure, and so many of the process are based on that, that it will prevail. And the question of the next generation, upgrade will be definitely around a different solution from what we have today, i.e., very hardware light or even a soft connector. But again, we are very closely in this kind of development, we're getting prepared for this. But I wouldn't expect any of us to come within the next 1 or 2 years. What is important with TI also is that next year, some of the legacy connectors will run out. So let me be specific, when the connect -- in the specification of the connector, there is, for security reasons, a dedicated end to the connector lifetime. And this is hard-coded on to the connector. That will happen next year. So we will have thousands of connectors basically coming to the end of their life next year, and that will be -- have to be prolonged by a connector upgrade. That is, right now, in specification. We expect that to be done by the end of this year. And then there will be a deployment and next-level deployment in TI next year to extend the connectors that we have today. But that will be a hardware solution because there is no way right now that a software connector could replace the hardware connectors. I hope that answers your question.

[Charlotte Friedrichs, Analyst]

Yes, it did. And one follow-up, if I may, on the last topic that you mentioned on the connector upgrades or replacement. Do you have any idea exactly how many connectors would be affected by these certificates running out? And what sort of the fee you could be charging for the renewal?

[Dirk Wossner, MD, CEO & Chairman of Management Board]

So all of the connectors will run out. In the next year, it will be around 30,000 to 40,000 that will run out from ours. And remember, we were the first ones to introduce. So ours are the first ones to run out. That will be the numbers. And there will be an upgrade to those which we'll redeploy in the second half of the year. There's still some discussions on whether that will be maybe a hardware upgrade or just a software upgrade. There's 2 different ways of doing that. But you can expect another hardware -- another upgrade of TI in the next year. Also, there will be a new TI release with certain features, primarily so-called MIOs which is the vaccination certificate and the mother's pass. I don't know what the English word is. It's the pregnancy documentation, and also some minor security things that will come next -- some security things that will come next year around the electronic patient file. So there will be definitely another upgrade next year in TI plus the prolongation of those connectors. And I said, around 30,000 to 40,000 next year, but the rest of those connectors then will expire always 5 years after we deploy them. So you can expect also in '23 and partly in '24 of some of these connectors to be replaced. And again, remember, a new solution, TI 2.0, I don't think will be around, definitely not before the end of '23 and maybe in '24. So there -- that will rely on what we call TI 1.5, so the middle between what we have now and what we will have in the newest defined solution. Also, remember, there's a whole market of other health care providers coming on to TI, which is, for example, physiotherapists, midwives, et cetera, et cetera. And we're also looking into solutions like Telematics as a Service, which basically is based on hosted connectors to go and roll out in these health groups. That has not been defined yet how exactly that will be done by the government, but I would assume that we will not wait for another 3 years to connect those groups, to the Telematics Infrastructure, which is, I think, an upside possibility we see in TI.

[Operator]

And the next question comes from Andreas Wolf of Warburg Research.

[Andreas Wolf, Research Analyst]

A few questions from my side. So the first one would be on pharmacies. You've mentioned in your remarks, that the pharmacies are moving to G3 as well. So my question regarding the product is whether it's built on parts of the hospital business or related to modules in the hospital-related G3 world? Or is it a totally new platform specifically for pharmacies? And what are the implications of pharmacies moving to G3 for your future M&A strategy in the pharmacy-related business? So that's my first question. The second is also related to pharmacies. I've seen that a price increase was implemented, EUR 2 per seat from next year onwards, mainly due to legal requirements. Could you tell us how many seats Lauer-Fischer actually has so we know the number of pharmacies, but the number of seats is probably also important and whether the EUR 2 is per month or per quarter, what the correct time frame is? I'm just trying to get a feeling of what the overall impact might be.

[Dirk Wossner, MD, CEO & Chairman of Management Board]

Andreas, thanks for the question, and thanks for asking about pharmacies. Now yes, we are building a new platform for pharmacies, which we saw the new generation platform for those. There are commonalities with the overall new infrastructure that we put in. That's why we call it G3, which is the framework which we use, the data model which we use, certain programming methodologies that will be used, and structures that will be used and also data structures that are common. However, a pharmacy module is basically, if you think about that, very much a logistics module. You basically manage the warehousing, the selling of that. So it's very different from its nature from a hospital product. However, it is obviously through certain data elements that are -- it's compatible, but we don't expect those things to be sold together. And because it's quite specific regarding warehousing and logistics for pharmacies, there's also not a lot of synergies between a hospital product and a pharmacy product. The good news about our pharmacy product is that actually, it's already in the market now in Italy. We have pharmacies in 2 key markets, which is Germany and Italy. In Italy, we have a market share of over 50%. And in Germany, we're around mid-20s. And we also have a pharmacy business in the Netherlands, which is not that known because there's part of the -- it's a little different model, it's part of the integrated model. And we believe that with this new element, we can actually provide new services to the pharmacies, we can be faster in innovation developments and also replace legacy infrastructure that's very, very cumbersome to maintain. That's the reason why we'll do that. We will roll out this new software over the coming 2 to 3 years across the pharmacies that we have, dependent on the different types of pharmacies that are around there. That will not have -- in the near future, will not have any implications of our M&A. As I said, it's where we have enough to do to kind of scale and do what we have with these products in the markets where we are and also know about pharmacies that's scaling there also, even though we will use the same solution in Germany and Italy always requires to make it specific to the market. So the next market we would then go in would be the Netherlands. However, we do have the potential then to scale across other markets, but again, that is probably not a short-term thing that we're looking into. Regarding the pricing of our modules, we don't disclose numbers of users or those kind of things. I would regard this as the regular pricing increases that we do across all of our products and not look at that as something specific or peculiar to that kind of the market.

[Andreas Wolf, Research Analyst]

Okay. That's helpful. One quick follow-up, if I may, regarding the hardware upgrade or renewal next year with regard to the connectors. Shall we assume that doctors will get their reimbursement for the renewal? Or do the various authorities expect this to be covered by the maintenance fee?

[Dirk Wossner, MD, CEO & Chairman of Management Board]

Well, that would be my guess. Again, we have no confirmation for this, but my expectation would be that, that will be covered as it has been in the past. But there's not been an official statement about this yet. On the other hand, as I said, the connectors will stop physically working. So there is a real issue here that this needs to be prolonged. And I cannot imagine that the government will tell them, after having the connectors for the last 4 or 5 years where they basically were not useless but didn't have a lot of use cases, put it this way. And in '22, the number of use cases on the connectors, and that's the first time, will be enormous, right, from ePatient file to eSickNotes to ePrescription. For all those, you will need a connector. So this is the backbone of the German digitalization initiative. So I cannot imagine that the government would let something like that slip. But again, we are in election year, we are in a time where everybody is a little wary. But on the other hand, I think it was said before, so far, we've had innovation on connectors every year and updates on connectors every year, and all those have been paid by basically at the end of the government. So I would expect that to happen again. But again, we have no confirmation of that.

[Operator]

And the next question comes from David Vignon from Bryan Garnier & Co.

[David Vignon, Research Analyst]

I have just one on CHS. During the CMD, you guided on 15% to 18% CAGR in the data business between 2021 and 2025. It has been ramping up this year, but it remains below those target for now. Could you give us an idea of the phasing we should expect here? And are those targets achievable from 2022 onwards?

[Michael Rauch, CFO & Member of Management Board]

Yes. Thank you, Brian. We will, of course, give a more specific look into the year 2022 when we give our guidance next year. But you ask for the longer-term period. And indeed, we are investing now, we're investing into capabilities, build up manpower. And that's why we will see a ramp-up here of the growth to come. And we will be more specific then when we go into the 2022 guidance in February.

[Operator]

Then the next question comes from Florian Treisch from ODDO.

[Florian Treisch, Analyst]

A clarification on your TI hardware update you mentioned for '22. So first of all, if I look at the dimension on revenues you have generated in recent years, first of all, we cannot say that this is a yardstick for '22 and '23 as well. Then maybe if you could follow up to that, can it also be done by a very simple, basically no-cost software update? And the last part is, if you assume considerable revenues from this hardware update, is that part of your above 5% organic growth rate? At this time, I would say that the comp base is rather clean so it would be really an incremental growth driver in the years to come.

[Dirk Wossner, MD, CEO & Chairman of Management Board]

Well, Florian, thank you very much for your question. Let me be -- I'm not sure I got the thing with the yardstick. So I'll go to the answers to the questions I understood. So the first one is, there is discussions whether this will be a software versus a hardware upgrade. But let me be clear, this is a hardware that was designed to go into extinction after 5 years. So if you want to do a hardware -- a software upgrade to that, you have to basically hack the connector and then extend its lifetime. This is not a simple procedure, right? And the risk that there is substantial that as part of that upgrade, if you do that, the connector will just be destroyed, right? Again, you're hacking the device, right? Let's be very clear. So we are looking into software solutions and a software upgrade for that. But again, that would not be free. There's a substantial effort to do this, to deploy this, to develop this, et cetera. And also, that would be part of another connector upgrade that we provide for next year with other things that I said, ePA extension, electronic file extension and the so-called MIOs i.e., the pregnancy pass, et cetera, et cetera. And hence, you can expect us to have another connector upgrade, which, yes, will compare to the organic growth rate that you spoke about. We're also looking and actually providing a hardware update -- upgrade to the connectors because there's other issues with the connectors that are right out there. Again, they were not designed for a 7- or 10-year lifetimes. They were designed for a 5-year lifetime. Hence, other components will come end of life as well. So we actually we're also looking at providing hardware updates -- upgrades to that, which also then will have better performance, faster speeds, et cetera, which will be relevant for our doctors. But again, coming back to your question, you can expect another upgrade to be coming. You can expect that to be part of the revenue that you're planning, and it is part of the organic growth rate that we have communicated.

[Operator]

And we have a follow-up question from Knut Woller from Baader Bank.

[Knut Woller, Analyst]

It's just going in the same direction as Florian's question. I read some articles in newspapers of pharmacies and doctors, and they suggested that the life of the connectors or that they, in fact, could be used longer. So I'm trying to square your thoughts, Dirk, around the upgrade that is planned for next year and also the hardware upgrade. The press articles suggested that doctors could use the connector longer than originally planned, which would point towards a software solution. So how confident are you that there will be really a replacement, a physical replacement of the connectors in place? Also keeping in mind that there will be discussions about the software solution probably in a 3-year time frame on the horizon.

[Dirk Wossner, MD, CEO & Chairman of Management Board]

Yes. Thank you very much. Let me be very clear. Without anything, so the connectors need to be either upgraded or exchanged. They have a physical end of life, and that will start depending on when you bought it and when it was deployed, that will start in the third quarter of next year. So if you don't do anything, that connector will go out of work. There is discussion and there is the possibility to a software upgrade. Again, we don't expect that software upgrade to be -- we expect it to be very complex. We also expect it to be a significant TI upgrade. Hence, it's not going to be cheap plus it is very complicated. You have to have to actually physically make sure that, that works because you have to exchange not only the connector, you have to exchange the chip cards that are in the connector. You have to get a certificate download at the same time. And if any of your software fails at that moment, your connector is destroyed. So again, this was built to prevent hacking, right? So the risk that you have as a doctor that this goes wrong is significantly high, and we will also provide a hardware solution for that, which actually, we don't think is that much -- going to be that much more expensive than the process that we just described. Now how that shapes out and how exactly that will work, we will have to see. But what will not happen is just an easy software upgrade without any cost that will basically extend the lifetime. The second thing is, again, I said, there's other components that will come out of end of life. This is just one. There are certain security protocols which are not supported anymore and which are not sustainable beyond, I think, at the end of '23. So unless you really have a software solution that works for everybody by that time, you will not get around having a backup solution anywhere until then. So this is a significant and large change that needs to be done next year. And we're supporting both a hardware exchange and a software exchange if it need be. We expect that as it was in the past, even though we don't have a confirmation to be supported by the government. But again, I don't -- I want to be very, very clear. This is not an easy "Oh, let's just do a software upgrade extension."

[Knut Woller, Analyst]

Okay. So if I understand you correctly, we should expect that the tailwind due to the complexity you just described should be a bit more pronounced than this year due to a higher price that you're charging.

[Dirk Wossner, MD, CEO & Chairman of Management Board]

Well, I think that we're taking it a little far, Knut, sorry for -- that we're not doing that. But I would expect to be another TI event next year. And I think Uwe said it before, sometimes, these things have -- they're not recurring revenues, but they feel like recurring revenues because they keep coming, right?

[Claudia Thomé, Head of Investor Relations]

And since we don't have any further questions -- sorry, there is one more question coming in from Uwe, I think. So we will try to get this into the call.

[Operator]

Next question is from Uwe Schupp, Deutsche Bank.

[Uwe Schupp, Small and Mid]

Sorry, just a very last one. Dirk, just on the potential -- I guess you didn't want to talk about this too much already. But I guess, can you confirm that currently, connectors are reimbursed to the tune of EUR 1,000 per connector? And is it fair to assume given higher complexity with the 1.5 generation, as you alluded to, could be a higher price than that?

[Dirk Wossner, MD, CEO & Chairman of Management Board]

So I can't confirm any of these numbers that you've just said. Also, the thing I would say is that probably, as you know, the connector was a very specific built -- historically done, I would expect that you get significantly better hardware and power -- processing power at a lower price right now. Remember, this is technology from 5 years ago. And even though you're not upgrading to the latest level of hardware, I would expect the cost for hardware factor to be lower than the ones that we've had in the past.

[Claudia Thomé, Head of Investor Relations]

Okay. And since now we don't have any further questions, thanks to all of you for dialing in today and thanks for the lively discussion. As always, Investor Relations is available for further questions, so please don't hesitate to call me or send an e-mail. And with that, we say goodbye and wish you a great day.

[Operator]

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