CompuGroup Medical SE & Co KgaA

XETRA:COP

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to the Quarterly Statement Q3 2024 Conference Call and Live Webcast. I'm Vicki, the Chorus Call operator. [Operator Instructions]. The conference is being recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Claudia Thomé. Please go ahead, madam.

[Claudia Thomé, executive]

Good morning, and welcome to the CompuGroup Medical investor and analyst conference call for the third quarter 2024 results. Thank you all for joining us today, whether you have dialed in on the phone or are following the webcast online. You find all the relevant information such as the presentation, the quarterly statement and the press release, which we published early this morning on our website. We will start with the presentation by our CFO, Daniela Hommel, 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's start. I hand over to our CFO, Daniela Hommel. Daniela, over to you.

[Daniela Hommel, executive]

Thank you, Claudia, and good morning, ladies and gentlemen. A warm welcome to all of you. Today, I want to start with a summary slide for the quarter to provide you with an executive summary. In the third quarter 2024, our new CEO has initiated considerable change within CGM. Fully focusing on the needs of our customer, this change is happening quickly. The focus is on boosting innovation while improving operational efficiency. We have proven our innovative strength with further milestones of launching AI and cloud-based solutions.

On the financial side, we have seen a mixed development with highlights and lowlights. To start with the lowlights. As we anticipated when we revised our guidance for the full year back in July, the onetime revenues are significantly below the prior year. This is both due to the strong prior year one-timers, but also attributable to the delay of projects. On the positive side, the recurring revenues came in strong with a growth of 6% year-on-year. We see this as a clear positive, a reflection of our strong and largely loyal customer base. As a result, overall revenues were almost stable. Looking at the adjusted EBITDA, we see a decline year-on-year, mostly due to the fact that we continue investing in R&D to drive innovation in healthcare. The success to manage all our cost is visible in our full P&L.

Now let's look into more details of Q3 development. A lot has changed at CGM over the summer. However, there are major things that remain unchanged. First, at CGM, we are committed to addressing the needs of healthcare providers in doctors' practices, hospitals, pharmacies and all the institutions caring for patients' well-being. We serve the entire healthcare sector with innovative solutions. We connect all players in healthcare for a fully digital patient journey. And we are prepared to add a new dimension to healthcare, which is the intelligent use of data, which will make all the difference in healthcare provision.

Second, also unchanged. We are well aware of our responsibility, the responsibility to improve the quality within the healthcare sector, reduce the burden on doctors, ensuring the well-being of patients and the protection of medical data, advanced digital innovation and thus healthcare provision. Third, also unchanged, CGM holds a key position in digital healthcare, started in Germany 35 years ago and holds a strong position in 19 countries and a unique footprint across Europe and in the U.S. We are unchanged as strong #1 and 2 in many markets with an excellent customer base, servicing tens of thousands of medical doctors, hospitals and pharmacies.

Fourth and most important, our purpose remains unchanged. As our company founder, Frank Gotthardt, has pushed this many years ago. Nobody should suffer or die because at some point, medical information was missing. Our purpose is more relevant than ever. In several of the countries we are present, medical data is now becoming available through connected products and AI modules in order to prevent patients suffering or dying.

At CGM, this is what drives every one of us to contribute to advancing healthcare. What has changed? The son of our founder, Professor Dr. Daniel Gotthardt is now heading CGM as CEO. He brings excellent experience in healthcare, IT and scientific research, having served as a medical professor at the University of Heidelberg for more than a decade, having founded companies to advance the usage of medical data to find rare diseases, for example. One of his focus areas is supporting our customers. This has several dimensions. But before I come to this, together with him and the whole management team, there has never been more experience in healthcare assembled in the Management Board at CGM.

Now more than 100 years across the 5 of us. Under Daniel Gotthardt's leadership, we are currently in an all hands-on deck mode, focusing on the following 3 priorities to position CGM for a successful future and serving our customers best. First, operational excellence. Our internal organization and core processes are currently improved from lead generation to sales management, order management and finance processes. We do this to unleash our full strength and interact with our customers best.

Second, we will further synchronize our great products in order to make healthcare more efficient and effective. Given our unique position in the healthcare sector, this is a significant potential to serve the market even better to enhance the patient journey by connected products. Third topic is the creation of copilots for physicians, pharmacists and patients and other healthcare providers. All healthcare practitioners need database solutions, including AI for managing their practice, for handling administration for software-assisted medicine. We have already started building these products and some of them are already serving our users and ultimately serving patients around the world. I will provide examples later, and there will be more to come.

We will add by this a new dimension to healthcare. Based on our powerful platform strategy and an unparalleled footprint in 19 countries, we will excite our existing customers, win new customers and thus inspire, support and enhance the market for digital health solutions. Our enormously strong foundation consolidated by over 35 years of experience in the healthcare sector is expanded through the use of artificial intelligence and database solutions, giving us the opportunity to significantly change the world for better.

Back to operational excellence. Under the leadership of our new CEO, Daniel Gotthardt, we are currently leaving no stone unturned within CGM. A comprehensive initiatives across all of CGM has started. First, to provide you with examples. First, excellence in R&D is an essential part thereof. The core of our success is the happiness of our customers with our products. They spend many hours of their lifetime with these products. We support them best during their daily work with best-in-class solutions, running stable and being developed quickly.

Points 2 to 4 on this slide. Equally relevant is the contact with our customers, as I mentioned to operational excellence. We are reviewing our sales, service and support functions across CGM as well as IT and IT security. For superior strategic and operational decision support as well as performance management and to act leaner and faster, we are enhancing our finance systems. Sixth, last but not least, we will only be successful with operational excellence if we have the right people on board. Therefore, we have adjusted our recruitment and performance processes.

We see already successes after just 7 weeks. For example, in product innovation, we have launched innovative copilot functions supported by artificial intelligence, and we are offering fully cloud-based and web-based solutions in several countries for specific customer groups. I will go into more detail in a few moments. Second, in service and support, we have achieved a significant improvement across most relevant KPIs in a short time frame. By optimizing our processes, we have improved the direct availability of our service and support by 1/3 to almost 90%, cut the average waiting time for customers in half and increase the percentage of problems solved directly by more than 50%.

Every little step we achieved here is directly related to our purpose and our goal to give our customers what they need most, more time with their patients. And third, we have focused on our most important asset, our employees. With several measures quickly designed and rolled out immediately, we are already seeing a higher number of applications with a better profile quality.

Let's talk about the already mentioned product innovations. We recently rolled out within our new product, CGM ONE, this fully AI-supported phone assistant that helps physicians practices saving time by accepting, forwarding, bundling and sorting patients' calls automatically. This phone assistant solves a number of problems in the daily practice workflow. It is available 24/7 and saves the time that can be used for more relevant activities. In times of scarcity of medical assistance and practice staff, this can improve an invaluable asset.

We are currently working on the next copilot function, which is scheduled to be rolled out at the beginning of the next year, the CGM ONE documentation assistant. It will support doctors in documenting a patient conversation by recording the conversation using a microphone and at the end, creating a structured summary of the conversation, including the analysis, findings, family history, previous medication, therapy and many more. These are some of the relevant milestones for doctors.

On the pharmacist side, we have received great feedback from customers on our innovative tool, CGM STELLA. The cloud-native system completely rethinks the workflows in pharmacies and elevate the processes to a complete digital level. It means pharmacists can move with all the data on a tablet within the pharmacy, consult a customer, not just standing at the workstation, but wherever they want in the pharmacy. They can get these things done with mobile devices from home or while traveling, including the AI-based tool ASK STELLA, which provides real-time support to answer questions, manage, track information and optimize workflows, we are offering a reliable and competent assistance for pharmacies, enhancing the service provided to patients.

When asking STELLA, you have all the conveniences that AI-based chat tools offer. No detailed introduction necessary. Typos are not a problem. You can even speak to STELLA instead of typing questions in. We have introduced STELLA first in Italy and presented it at expo trade fair in Munich recently for the German market, where the launch will happen in the course of 2025. Customer and even peer feedback has been extremely positive.

To summarize the situation at CGM currently, we have embarked on a new path under the leadership of Professor Dr. Daniel Gotthardt, who brings deep knowledge of the medical world and the healthcare sector, but also software, IT, technology background and last but not least, entrepreneurship to the table. There is plenty to do still. Basically, we have just started on the new path, but we have quickly achieved first milestones. We will relentlessly pursue our goal to support our customers and contribute to synchronizing healthcare for the benefit of patients across the world.

With that, let's take a look at the financials for the first quarter -- for the third quarter. Total revenues are down year-on-year slightly to EUR 283 million. As we said, we announced -- when we announced the guidance revision for 2024 in July, the revenue decline is attributable to the higher onetime revenues in the prior period and delays in the project business. I will come back to this topic in more detail since it is relevant for all 3 of our operating segments.

Recurring revenues, on the other hand, continued to grow nicely and have increased by 6% in the third quarter, resulting in a share of recurring revenues of 75%. Adjusted EBITDA was down year-on-year with a slightly lower margin of 19% compared to last year. Adjusted EPS stood at EUR 0.35, and we have improved free cash flow compared to last year. I will come back to the details.

Let's look at the quality of revenues over the past couple of years. First, recurring revenues have grown with an impressive CAGR over the past couple of years. In the 9 months of 2024, recurring revenues have grown 6%, and they now account for 3/4 of total revenue. As we explained in July, the main reason for the gap between the original expectation and the revised guidance for this year lies in the development of onetime revenues, where we are seeing a slower rollout of projects, while we had very strong onetime revenues in prior year.

For the group and for all 3 operating segments, it is an identical picture. Onetime revenues are down year-on-year in the third quarter, but represent a smaller part of our overall business. On the other hand, we see a continued and strong growth in recurring revenues in the group and in all 3 operating segments over the prior year. The development of recurring revenues shows the underlying strength of our business, representing a unique customer base valuing our products and services. The challenge is and will remain to anticipate the timing of the one-off revenues. The underlying business model is fully intact and an excellent foundation for our further growth. This, I want to explicitly point out.

Let's go into more financial detail at segment level, starting with our AIS segment, where we recorded a slight growth by 1% in the third quarter. I already showed the decline in nonrecurring revenues, which is mainly due to strong prior year comparables in the dental and in the U.S. business. Recurring revenues increased by 5% and now account for 77% of segment revenues. The adjusted EBITDA in the AIS segment was impacted by investments in product innovation and decreased by 3% with a margin slightly below the prior year.

Coming to our Hospital segment. Revenues were down by 4% on a year-on-year in Q3. The revenue decline is attributable to the decline in onetime revenues already mentioned earlier. On top of the delayed rollout of larger projects this year, the HIS segment was running against a strong prior year Q3 in terms of project rollouts in Germany, Switzerland and Poland as well as regulatory initiatives in the rehab sector. Against this backdrop, even the good growth of recurring revenues by 8% couldn't compensate. The continued investment in larger projects lead to a slightly weaker EBITDA margin.

Finally, let's talk about our Pharmacy segment. In Q3, the PCS segment was also up against tough prior year comps, where the Italian business benefited from onetime revenues. The decline in one-off revenues led to segment revenues slightly below the prior year level, where recurring revenues grew by 4%. The margin has seen another step-up due to efficient cost management in Germany, resulting in a strong margin of 36%, 4 percentage points higher compared to the third quarter of 2023.

Let me now give you a short update about the development of our personnel expenses, where we optimized, as I explained before, our way of working. You can clearly see what we have -- that we have become more efficient. After recording an increase in absolute personnel cost over the past few years, personnel expenses in the first 9 months of 2024 are at the same level as the prior year. The revenue per employee is increasing, productivity is thus improving.

At the same time, we are keeping R&D intensity high. I provided you examples why this is the case. We considered continued investments in our product portfolio and innovative solutions, a key to sustainable success. In the first 9 months of 2024, R&D expenses showed a slight increase, while R&D CapEx is below the prior year.

Let's move to the free cash flow. As expected, with EUR 56 million, free cash flow was below prior year level. But I want to point out that this is better than anticipated on its development due to the decline in one-off revenues, payouts for the restructuring accounted for in Q4 2023, additional tax payments already mentioned in the summer, free cash flow was below prior year. On the operative side, we see a noticeable improvement of our working capital management, which strengthens our attractive free cash flow profile so that we came out better than expected.

Talking about our financing. Our focus is on deleveraging from the current level above 3x EBITDA of the last 12 months. The net debt has increased from EUR 698 million to EUR 777 million. The increase is mainly due to share buyback in March and April, as well the acquisition of Pridok in June. At the same time, we will remain well financed with more than 80% of our net debt protected against higher interest rates. With our strong and constantly growing recurring revenue profile, we are well positioned for the future.

On the next slide, you find the guidance for full year 2024, which we revised in July. The guidance range for the organic revenue development is between minus 2% and 0%. The guidance range for adjusted EBITDA is between EUR 220 million and EUR 250 million. The recurring revenue share is expected to record between 65% and 70%, while the range for adjusted EPS is between EUR 1.55 and EUR 1.95. Free cash flow is expected in the range between EUR 40 million and EUR 60 million.

Please keep in mind that as always in the fourth quarter, there are still a number of moving parts across the different segments and countries. From today's perspective, there's a higher likelihood of ending up at the lower range for revenues and adjusted EBITDA, but there's also a higher likelihood of exceeding or ending in the upper range of the free cash flow.

Let's take a look at the upcoming Capital Markets event. Over the course of the past year, we have undertaken a comprehensive review of all the processes and functions in the finance department. I told you earlier, we have streamlined processes and optimized reporting structures. This enables us to move forward the quarterly publication for the first, second and third quarter by at least a week. We will publish the annual report almost 3 weeks earlier while skipping the in the market unusual single quarterly statement for Q4. And we will pull forward the Annual General Meeting also by a week. The next scheduled date is March 6, 2025, when we will publish the results for the full year 2024, including the 2024 annual report.

With that, let me summarize. CompuGroup Medical remains in an excellent position to benefit from future growth opportunities in the healthcare sector. The team shows a great spirit, fully focused on driving operational excellence, synchronizing our great products and introducing innovative copilot solutions for our customers. We are fully committed to add a new dimension to healthcare. With that, thank you for your attention. I am now looking forward to your questions, and I'm handing over to the operator for the Q&A session.

[Operator]

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

[Knut Woller, analyst]

Maybe three. Just looking, Daniela at the site, the delay of projects impacting the onetime headwind. Can you just provide some more color what was basically attributable here to the delay and what was -- basically, simply a decline of one-off revenues? Then looking at the AIS segment, it was quite encouraging to see that it's albeit it was only slow growth, but we have seen slow growth now in Q3. Can you provide here a split between the former CHS segment and the former stand-alone HIS segment just to get a better understanding about the different dynamics?

And then lastly, you stated that you focus on deleveraging the balance sheet. Is that also here an idea to help the deleveraging by asset disposals? Or should that rather be achieved only by the organic progression of the business?

[Daniela Hommel, executive]

Thank you, Knut, and I start with the third question first. You asked about the deleveraging. The primary focus lies on organic programs to increase our free cash flow further by working capital management. However, I cannot exclude single asset sales at the current time. With regard to your second question, the slow growth you mentioned and you asked for a split between the AIS (sic) [ HIS ] and the CHS segment, we have this no longer available. We merged the segments at the beginning of the year, and that's why we do not look at the numbers in detail.

On the project delays, your first question, we talked about 2 large drivers in this year. First of all was the Hospital Future Act and second, Ségur and that were basically the larger project delays. The rest remains to the stronger prior year's comps.

[Knut Woller, analyst]

Thank you, Daniela. And can you just attach a number to that, that we can see what kind of revenues normally should have been expected for Hospital Future Act and Ségur?

[Daniela Hommel, executive]

Unfortunately not, we don't share detailed budget numbers to this.

[Operator]

The next question from Andreas Wolf, Warburg Research.

[Andreas Wolf, analyst]

My questions are somewhat related to the new leadership by Daniel. I'm interested to know whether there are new priorities for the next 2 and 3 years. And maybe you could also elaborate on the AIS product portfolio. Although there are positive remarks with regard to the hospital product that CompuGroup has, there is also obviously there are some comments that the AIS product portfolio does not entirely match requirements of digital natives. Maybe you could comment on that as well if you are pursuing new product innovation routes, that would be interesting.

[Daniela Hommel, executive]

Knut, with regard to your first question -- sorry, Andreas, sorry. With regard to your first questions on the priorities in the next 2 and 3 years, I think that's why I spent so many time at the beginning to explain you what has changed and what has not changed. And the CGM strategy overall has not changed. We want to advance digitalization in healthcare, and we want to add a new dimension to healthcare. What we are looking at is execution to accelerate execution and at the same time, to focus on operational efficiencies, at least that are our current priorities. We are in the midst of our budgeting process. And I think in that, we are looking also at the priorities for the next year.

When you asked about the -- your second question on the AIS product portfolio, yes, it may be that some market participants state something as you have cited. However, I want to relate to the copilot functions that I have introduced earlier in this call, which are basically top of the notch functions that we put in the market as one of the first market participants, and that's why I cannot agree to aside of market participants stating that our products may be still outdated. So we have renovated them a lot and included state-of-the-art features, top-notch features on them like CGM ONE telephone assistant.

[Operator]

[Operator Instructions] The next question is from Wolfgang Specht, Berenberg.

[Wolfgang Specht, analyst]

Three additional ones from my side. First one on AIS. -- let's say, a significant part of your revenue contribution here comes from the Telematic flat rate that was introduced last year. Can you give us any view how you expect the rates here to develop? Any indications that gematik may raise it over the next 12 months?

Second question on the HIS segment. Can you give us at least an idea how your customer situation developed over the quarter? Are there gains? Are there losses? I mean we're looking at the SAP IS-H transition. So there should have been an option to pitch for new projects here. And finally, on, let's say, your position beyond free cash flow or beyond your free cash flow definition, is there any sizable earn-outs to be expected in the remainder of the year?

[Daniela Hommel, executive]

Thank you, Wolfgang, for your questions. With regard to your first question, we do not explicitly mention the TI flat rate effect anymore because it's fully -- it's a normal part of our business now. With regard to your question, whether we have an indication on what is gematik doing, we don't. And that's why I cannot comment on their pricing ideas. With regard to the HIS segment and customer gains, you were explicitly mentioning IS-H customers. I have even a better message for you. We have introduced G3 at smaller clinics, but also won a big hospital in the South of Germany for also G3 rollout. So we are gaining customers in that segment. I made and IS-H customers, however, we see they are still waiting. So that would be upside potential also. For your last question, could you please specify what you mean with earn-out? Sorry, I have to ask back.

[Wolfgang Specht, analyst]

From time to time, you have earn-out obligations with former targets. And it's hard for us to track if there are -- when these earn-out obligations are realized. So is there anything from past acquisitions that we should think of where you have to make payments?

[Daniela Hommel, executive]

Only minor, it's a low single-digit number. Thanks for clarifying.

[Operator]

The next question is from Fabian Piasta, Jefferies.

[Fabian Piasta, analyst]

Three questions from my side. So the first one is related to R&D expenses. So when you've already introduced a couple of AI functions to your product suite, can we expect some sort of fading of R&D expenses towards next year? Or is that going to be an unchanged stable level in terms of percentage of sales? Second one relates to phasing on Ségur and Hospital Future Act. Do you have like any indication on what you think when we're going to see some sort of ramp-up in 2025? Just some granularity on that.

And the third one would relate to the practice consolidation trend, especially affecting AIS. Would you give us some sort of indication of how your key accounts are developing? Is there some sort of consolidation effects? Yes, that would be grateful to have some background on that.

[Daniela Hommel, executive]

Fabian, many thanks for your questions, which I'm very happy to answer. With regard to R&D expenses, what I usually explain when I'm asked this question is, of course, we could promise you any number of R&D expenses saying it goes up or down, as to why exactly that number. However, I think no one of us would be happy about this because you see how the world changes so dramatically. I think we all gain more if sales opportunities and enhance our products in a way, as I explained this to you, for instance, for the ASK STELLA and also the CGM ONE.

So therefore, R&D expenses will be about in the range that we have today, they may go up maybe a little bit if we say there is market opportunities. And that is the way how we balance opportunities that we see and the money that we spend. So it's clearly focused on the return in your best interest and the interest of our shareholders. That is what I can say about the ratio and the expenses. So clearly, no fading because I think that would harm all of us because then we couldn't keep track with market developments.

Next question was on phasing of one-timers. You mentioned, for instance, Ségur, but also KHZG. The thing with this is the timing of the judge regulatory initiatives, especially this is true for Ségur is very uncertain. As you know and you may recall that during the summer, one reason for the profit warning was that Ségur was originally promised for this year. And currently, the French government will either start this in 2025 or 2026. We have no insight in these things. And that's why the phasing is unclear. And during our budget process, of course, we will work with assumptions and also do risk adjustments. However, that is really where we are dependent on when the government provides a kickoff to Ségur.

Hospital Future Act, I think many clinics are still waiting. So we see a market out there. However, when they will finally decide, we also don't know for sure. However, here, the timing is more certain because this law ends at some point of time in the near future.

With regard to your third question, practice consolidation, I don't want to limit this on our existing customers because generally, I think we can really benefit from that market trend. As we are a full service provider, meaning we have AIS and HIS products, the consolidation of practices, which usually comes then also with more complex workflows in a practice compared to a general practitioners practice that really plays into our cards, because we have the products, we could downsize the HIS products, we could enlarge the AIS products, it would hurt functionalities. So that's a real upside for us in the future.

[Claudia Thomé, executive]

All right. And since we do not have any further questions, we would like to thank all of you for taking the time today and dialing in. And with that, all is left to say is that Investor Relations, as always, is available for further questions. So please do call Frederic or myself or send us an e-mail, and we'll be in touch. Have a nice day. Thank you very much for your attention.

[Operator]

Ladies and gentlemen, the conference call is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines.