CompuGroup Medical SE & Co KgaA

XETRA:COP

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. I am France, your Chorus Call operator. Welcome, and thank you for joining today's CompuGroup Medical Investor and Analyst Call. [Operator Instructions]

It's my pleasure, and I would now like to turn the conference over to Corporate Vice President, Investor Relations, Claudia Thome. Please go ahead, ma'am.

[Claudia Thomé, executive]

Good morning, and welcome to the CompuGroup Medical Investor and Analyst Conference Call for the third quarter and the first 9 months results 2022. It's great to have you with us, whether you've dialed in via phone or are following the webcast. You'll find all the relevant information such as this presentation, the quarterly statement and the press release, which we published early this morning on our website. We're going to start with the presentation by the Spokesman for the Managing Directors and CFO, Michael Rauch, followed by the Q&A session.

Before we start, 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 for the entire call.

Thanks a lot for your patience. And now let us begin. I 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. In the last 9 months, we reported revenue growth across all segments. With 8% growth, we achieved more than EUR 800 million in group revenues. Organic growth impacted by strong prior year's quarter showed 1.5% growth.

A quick reminder. The results of the third quarter 2021 had a strong positive one-off effect due to the onetime revenue recognition of the Telematics Infrastructure connector software update, the so-called product type version 4 update or in short PTV4 update. The next generation of TI software update called PTV5 is expected in 2023, as we announced last week. Adjusted for the 2021 PTV4 upgrade, organic growth stood at 4.5% after the first 9 months 2022.

Recurring revenues grew even stronger by 11%. And the share of recurring revenues increased by 2 percentage points, a strong proof of our resilient and sustainable business model. Looking at profitability, Q3 was another small step into the right direction of leaving the margin trough behind with a slight increase of the margin throughout the year 2022, achieving 21.4% for the third quarter.

When talking about the strategic milestones we laid out over the last months, I want to start with the Ambulatory Information Systems segment, which is fully prepared for a strong fourth quarter. Around 14 million e-sick notes, approximately 16 million KIM communication in medicine messages and 60,000 e-prescriptions have been processed within the CGM network by the end of September, which is a strong proof of our ongoing growing relevance in the health care sector. To gear up, the governmental health care initiative to push the digitalization in France is now in the rollout phase. And the more than EUR 7 million order intake are starting to convert into revenues.

On our Capital Markets Day in September, we updated you on our progress in the U.S. business. The team has reached an important milestone by starting to replace a third-party provider with our own solution, eMEDIX. Also at the Capital Markets Day, we talked about the fact that our customers' world is transforming the trend towards larger practices and multi-provider facilities, where we are well prepared with our CGM M1 PRO product offering, specifically tailored to fulfill those needs.

In Q3, we won a significant tender project in Germany to equip 90 emergency practices with CGM M1 PRO to allow a uniform workflow for cross practice use. With the rollout of this project, CGM is at the forefront of this market trend. The winning of this tender is a strong signal and a clear confirmation to our future-oriented product offering.

Now looking at our hospital systems segment, it is visibly clear that the demand for our next-generation technology is unbroken. High order intake is continuing, proven by the recent customer win in Switzerland as well as a continuously growing order intake from the Hospital Future Act, which now, as all of the projects totaled to EUR 65 million and gives us strong confidence in our revenue target of EUR 50 million to EUR 80 million related to the German governmental initiative. Initial projects related to the Hospital Future Act have started, and we expect the ramp-up in revenues over the next quarters.

So summarizing the development in HIS, the hospital segment shows strong momentum and is well on track towards our midterm ambitions. Convincing evidence of our M&A strategy and execution has been delivered within the Consumer and Health Management Information Systems segment in the third quarter. Within only 8 weeks, a new product offering for pharma companies jointly developed by CGM and the recently acquired Insight Health has been launched. The new product, DARWIN, which is a combination of CGM Ambulatory Information Systems Data and Insight Health Prescription Data, offer steep insights about distribution of diagnosis for pharmaceutical drugs and prescribing doctor specialist groups. The first strategic customer has already been won, underlying our focus on the promising data business.

Let's now move to the financial details. During the first 9 months 2022, group revenues have grown by 8% year-on-year, leading to an adjusted EBITDA of EUR 166 million. The corresponding EBITDA margin stood at 21%. Our adjusted earnings per share advanced to EUR 1.33 for the first 9 months. Free cash flow was below previous year, resulting in EUR 24 million after 3 quarters. And I will, of course, provide more details on the development in a couple of minutes.

Coming to our organic growth rates, it is important to mention that the growth rates for the first 9 months and especially during Q3 have been impacted by higher one-off revenues in the prior year Q3. As already said, organic growth on group level recorded a 1.5% after 9 months and 4.5% adjusted for prior year's Connector software update PTV4, which is fully reflected in the negative organic growth rates in the CHS segment.

AIS came up against the strong prior year quarter with 10% organic growth in the prior year's Q3, while the HIS segment showed again strong performance with an organic growth rate of 6%. And we see a continued strong performance in the pharmacy business, leading to an organic growth of 7%. Despite the delayed connector software update, PTV5, we still expect a strong finish of the year and anticipate an organic growth rate in the range of 4% to 6% for the full year 2022 as a number of growth opportunities are materializing in the fourth quarter.

For the third quarter, impacted by intra-year phasing effects, our revenue grew by 3%. Adjusted for acquisitions and foreign exchange effects, it showed a decline of 3%, like explained on the previous slide. Organic growth adjusted for last year's connector software update resulted in a 5% increase year-over-year for Q3. Recurring revenues increased over proportionately by 8% and represents 65% of total revenues in Q3.

Please let me go even in more financial details now, starting with the Ambulatory segment. Against tough prior year comps, revenues grew by 1%, supported by FX effects, resulting mainly from our U.S. operations. Organic revenue growth stood at minus 4% against the strong prior year's quarter with additional rollouts of new modules like eHealth record and the vaccination certificates in the DACH region, so Germany, Austria, during Q3 2021, as mentioned before.

Recurring revenues amounted to a strong 80% of total revenues, representing a growth of 8% compared to the previous year, underlining the continued strength of the segment. In the DACH region, Germany, Austria, growth of recurring revenues was even stronger at plus 12% due to the recurring revenue contribution from the models I just mentioned, which we started rolling out last year in Q3.

Now coming to the hospital segment. We can say that revenue growth was again very strong with 7%, mainly driven by a strong organic growth rate of 6%, which is remarkable given the fact that the Hospital Future Act effect is only starting to ramp up in revenues as we speak. Recurring revenues increased by 7% and the share of total revenue stood at 68%. Due to the investments to execute on the Hospital Future Act and further rollout of our G3 technology, adjusted EBITDA decreased year-on-year and so did the margin. But these investments are paying off now. Revenues in the context of Hospital Future Act are hitting the P&L as we speak. And as you know, the main revenue impact will come in the years 2023 and following.

Let's move to the segment with the largest shifts during the year or the biggest impact due to a strong prior year quarter, the Consumer and Health Management Systems segment. Revenues grew here by 2% against strong prior year's quarter, including the recently acquired Insight Health. Like-for-like, so adjusted for last year's connector software upgrade, organic revenues increased by 5%, driven by the beginning of the TI connector hardware exchange. Excluding the TI, organic revenue stood stable.

Here we've seen an impact due to macro-crisis-related headwinds in the pharma industry. As described earlier, last year's connector software update has also impacted the adjusted EBITDA comparison. Year-over-year, we reported adjusted EBITDA of EUR 10 million, resulting in an adjusted EBITDA margin of 17%. So let me emphasize this again. The rollout of the PTV5 connector software update is merely postponed to the coming year. The connector hardware exchange, on the other hand, is ramping up at full throttle and will support our strong fourth quarter.

Finally, let's talk about our Pharmacy Information Systems segment. Again, the PCS segment recorded a very strong quarter with revenue growth of 8%, partly driven by 2 smaller acquisitions in Italy for drug home delivery and a cloud-based [indiscernible] software, but also the organic growth of 4% was driven by strong continued good business. Due to a controlled and very prudent cost management here from the colleagues, the adjusted EBITDA grew by 29%, leading to a margin of 30%, up 5 percentage points versus the prior year quarter. Recurring revenues grew by 11%. All in all, a very satisfactory quarter in the PCS segment. So thank you, colleagues.

The development of the free cash flow requires some explanation. Now you've seen that we adjusted our expectations for free cash flow from more than EUR 100 million down to now EUR 40 million to EUR 70 million last week. Let me start with the most important message. The overwhelming part of the change in guidance is phasing. Cash inflow from large growth initiatives and from projects we are starting to see falling into next year instead of this year. So shedding some light on the free cash flow development during the first 9 months of 2022. While the second quarter has been influenced by the purchases of connectors, so for the TI hardware exchange, which began in September, free cash flow in the third quarter was impacted by payments resulting from management changes and restructuring.

Now what's our view on free cash flow in the fourth quarter. We know that the PTV5 connector software upgrade is postponed into next year. Together with the expenses for management changes and restructuring, this brings the new upper end of the range in our guidance to EUR 70 million. Then there's a development of free cash flow in the fourth quarter, depending on the cash to invoice ratio of the connector hardware exchange and the cash realization of projects related to the Hospital Future Act and secure. Whilst we recognize the revenue of these projects in Q4, the question is when can the cash flow be recognized. So including these uncertainties of timing, we see the new lower end of our free cash flow guidance now at EUR 40 million.

And let me emphasize again, free cash flow 2022 is impacted by phasing, whilst our fundamental business model is on a rock-solid basis. Net debt at the end of the first 9 months was around EUR 90 million higher compared to end of December 2021 as dividends and the Insight Health acquisition impacted the development over the first 3 quarters, leading to a leverage of 3.2x EBITDA. We secured a crisis resilience financing at attractive conditions, mainly protected against rising interest rates. Our financial firepower is still strong as besides the EUR 400 million term loan and the EUR 600 million revolving credit facility, we have also accessed a EUR 200 million credit line of the European Investment Bank, as you know, for R&D development projects.

So looking ahead to the last 8 weeks of 2022, please let me highlight the revenue boosters that are here to come. The Telematics Infrastructure connector hardware exchange is in full swing, and we are seeing ramp-up in the current quarter compared to Q3. The governmental program, the Hospital Future Act is up and running, and we have already more than EUR 65 million order intake and the revenue recognition is getting higher until the end of the year. The more than EUR 7 million order intake related from the French governmental digitalization initiative, [ Segur ], has started transforming into revenue during the current quarter. Even within the adjusted revenue guidance range, after knowing that the connector software update PTV5 will fall into next year, we still expect a strong fourth quarter.

Let me now reiterate the adjustments we announced to our guidance last week. Due to the postponement of the PTV5 Connector software upgrade into 2023, we now expect group revenues between EUR 1.1 billion and EUR 1.13 billion, supported by an organic growth rate between 4% and 6%, in line with our midterm ambitions, resulting in total adjusted EBITDA in the range of EUR 220 million to EUR 240 million. In the light of the midterm ambitions, let me address the first proof point we achieved in the third quarter on the cost side.

Having invested for future sustainable growth, we noticeably drive profitability from next year onwards, and we have shifted gears towards the margin expansion in 2023. With our investment initiatives started in December 2020, we ramped up personnel expenses. Organic growth of personnel expenses has been very strong in 2021, lessened slightly in the first half of this year. And in the third quarter of 2022, we now see organic personnel expenses, meaning, adjusted for acquisitions and FX effects, almost stable for the first time in more than 2.5 years despite increasing revenues and ongoing growth opportunities. So that's the first milestone towards our midterm goals and the result of the focused efforts of all of our CGM employees.

However, there's more to be done post investment mode as we are steering the company towards significant margin expansion. We already implemented a centralized purchasing, which will prove the gross margin onwards -- sorry, improve the gross margin onwards, increasing recurring revenues and ongoing easing of R&D intensity and an optimized spend base are the drivers on our way towards the 2023 margin expansion. Together with all our teams, staff with highly motivated employees, we are fully dedicated to make our customers happy, thus delivering on our midterm ambitions of growing with a CAGR of more than 5% in organic growth until 2025 to deliver a recurring revenue share of more than 70% by 2025 and to significantly improve the adjusted EBITDA margin back to a level of around 25% where it used to be in the past and then further up to 27% in 2025.

Looking forward, in terms of upcoming disclosure events in the next reporting milestone, that is the publication of Q4 and full year 2022 results, including the guidance for 2023, which will all happen on February 9, 2023.

With that, I would like to 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. Thank you.

[Operator]

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

[Knut Woller, analyst]

Yes. Michael, can you just give us some more color for the reasons of the delay of the PTV5 update? Is it something like a back and forth here for the certification of the update or any other reasons here? And do you already have some insights when we should expect the PTV5 update to happen? Is it rather an H1 expectation or H2 2023? Then looking at the personnel expenses, I think that's quite encouraging. Still, I would assume that this year had the tailwind probably from early agreed inflationary tendencies.

And what is the expectation for personnel expenses going into 2023, looking at the rising inflation in the -- particularly now from the second quarter onwards, how should we think about these cost items? And then looking at the margin target for 2023, you said in your midterm ambition, it's around 25% in 2023. I know you're not providing guidance, but with the high-margin PTV update delayed now into 2023, I think there should be some -- is it fair to assume some more confidence that we should be not only around, but rather be at 25% in 2023?

[Michael Rauch, executive]

Thank you, Knut. If I recall, those were all 3 forward-looking questions. So with a little bit of caveat I try to answer as much as possible. The question regarding the PTV5. And please I ask everybody for understanding, this is a situation whereby we are in discussion with three parties. So this is a federal authority for information security. This is a certification institute, which in Germany is called [indiscernible]. And then Gematik, which is the approval authority. And so there are things happening, which are not always in our hands, but we are very confident that we will get the PTV5 update in the first half of 2023.

Now with that, I want to answer also your third question because you said, okay, Michael, if that hasn't moved now from 2022 into 2023, how should we think about it in terms of the EBITDA margin? Well, as you might know, there is not only this time an update of PTV5, but there's also the next update then around the corner, which then depending on when we get our PTV5 update might be then postponed into 2024. So that's why at this moment in time, we are sticking to our guidance of around 25% as we gave it out.

Now that brings me to your second question. Second question regarding personnel expenses. How should we think about that? And here's what we do. So we have been hiring significantly new people on board in the year 2021 with a net headcount increase before acquisitions of 700 FTEs. This is what we have not done and continued in 2022. So we are now in a kind of like a steady mode, full swing stage, and we will make sure that we will do the best with our internal in-house resources we have. We have a program out here CGM first to make sure that we have internal career developments for all of our people and this will mitigate the increase in personnel expenses.

At the same time, we also look into external parties subcontracted labor, which we've taken on board on contractor side. And also that's a cost position, which we will be managing much more closely in the year 2023 to come than versus prior years. So the question is how much is the inflation impact going to be? That's, of course, effect, which we are watching out for and while we also do a lot of price increases on our recurring revenue base, which has also been, I think, picked up by the press to some degree already. Thank you.

[Operator]

The next question is from Laura Metayer from Morgan Stanley.

[Laura Metayer, analyst]

Michael, 2 questions for me, please. One, could you please comment more on the macro-driven headwinds that you're seeing in the data business? And what share of the business exactly impacted? And are you seeing a worsening of the situation in Q4? Second question, are the projects postponement going to be incremental to previous expectations for 2023? Or have your expectations lower than other areas such as the data business and basically you would expect this project to offset this?

[Michael Rauch, executive]

Yes. Thank you, Laura. Let me be more explicit on the products that we postponed. So the main project postponed is a PTV5. So the other ones are rather smaller and minor projects. So we didn't want to be too explicit in the way when we announced all I talk but I can confirm to you the main project here is PTV5.

The second question -- or your first question was regarding the data business in general. So let me just basically give a little bit more glimpse on the way we see our data business. So Insight Health, which is not yet organic, as you might know, we closed the transaction in May, is growing nicely. So growing here with a single to high -- sorry, with mid- to high single-digit number. And our already onboarded data business, which we have here on the organic growth rate is kind of flat. And this is where the comment refers to with regard to the spent of the pharma business. So as we do, for instance, also some e-advertising here for pharma business and other data-related activities, these have been scaled back. And that's probably something which we might see also continuing into Q4 and Q1 of next year.

[Operator]

The next question is from Martin Jungfleisch from BNP.

[Martin Jungfleisch, analyst]

2 questions, please. The first one is on the pricing as a follow-up. So could you share if you are able to implement some price increases to your customers already, and that's mainly in the hospital and the AIS segment? And then are you able to increase the entire maintenance or support revenue base next year or that be a step-by-step process whenever contracts expire or roll over? And then would you expect that price increases would also offset rate inflation next year? That's the first question.

And the second question is on the AIS growth, which was quite weak at minus 4% organically. Can you comment on the organic performance of the U.S. business? Is that already in line with the 6% to 9% target?

[Michael Rauch, executive]

Yes. Thank you. Our stock margin was -- the question on the AIS growth regarding particularly the U.S. business. So the U.S. business is ramping up in organic growth, and we are not yet at that overall CAGR, which we gave until 2025. But we are making very nice convergence of basically replacing a third-party provider now here with our own emetic solution, and we will see ramp-up of organic sales growth here on the AIR side in the U.S. over the next quarters to come.

Now your first question was basically a series of questions regarding price increases. So yes, you're right. We will mitigate wage inflation with price increases. We will actually even overcompensate it. So we have issued price increases in the AIS field on HIS, on PCS. And typically, the price increases are, as you rightly say, on the recurring revenue base. Most of the contracts that was also a question from you, run for 12 months, some contracts, and then have a 3-month notice period where basically you could cancel the contract if you wanted to, but as you see the stickiness of the business that is rarely happening.

So most 12 months, some run for 24 months, some for 36 months. So there will be a step-by-step impact also on the price effect going through. But we have already started with price increases on the HIS side on the PCS side and also on the AIS side, significant price increases are planned for the first and second quarter next year.

[Operator]

[Operator Instructions] The next question is from Florian Treisch from Kepler Cheuvreux.

[Florian Treisch, analyst]

I have 3, one was a follow-up just on this PTV5 update. I can't understand that you cannot guide for specific months, but as you were quite confident at the Capital Markets Day beginning of September, there must be something happening in between. Can you simply shed some light here, i.e., we are at 95% completeness. And we are really talking about little configurations? Or is there like a major obstacle as we are now seeing with prescription, which is basically a stop project as of now?

The second one is on the TI update replacement. So in the last call, you gave for some order numbers. Can you tell us where we are here when it comes to orders, what has been the contribution in Q3 and what you are expecting in Q4. And the last one is on free cash flow. So if I listen to your comment on the free cash flow, a lot of shift, I would say, and not the kind of cancellations. Is it then simply fair to assume that you will catch up a majority of that in H1, i.e., you will see a significant push in H1 '23 on the free cash flow side?

[Michael Rauch, executive]

Yes. Thank you, Florian. Again, with the caveat that we are very carefully regarding forward-looking statements. I would confirm the tendency of your third question regarding the free cash flow that we expect the free cash flow to ramp up in the first half of 2023.

Now your first question on the PTV5, yes, maybe just for everybody, throughout the update process, it is always possible that the 3 relevant parties I mentioned before can change specifications and can ask basically for those that have not received yet the certification that they need to follow basically the changes in specifications and build those into the program. And that's why some of the specifications have been changed, and the Gematik owners' assembly is yet to take place and to improve those. And then depending on the timing, the certification might be a little bit delayed. That's why. So but we remain highly confident that we will achieve that, as I also mentioned, to cloud a bit earlier in the first half of 2023 to get the PTV5 certification.

Now your second question was regarding the hardware exchange on Telematics Infrastructure. So besides the software upgrade PTV5, we also have in the ongoing exchange of the hardware connectors. That has started in September. So we recognized the first revenues now in Q3, and we will see a significant ramp-up over Q4 and Q1. And we always said that we have about 30,000 connectors to be exchanged until the end of Q1 2023, and we are making good progress here. So we will give you the next update on how many have been actually exchanged in full in the call on February 9 when we talk about our fourth quarter.

[Claudia Thomé, executive]

And since we do not have any further questions at this point, we thank you all very much for dialing in. Should there be any more questions, Investor Relations is available for you after the call on the phone or by e-mail. So don't hesitate to contact Frederic or myself.

And with that, thanks a lot, and have a nice day. Bye-bye.

[Operator]

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