CompuGroup Medical SE & Co KgaA

XETRA:COP

Earnings Call Transcript 2017-Q4

[Operator]

Dear, ladies and gentlemen. Welcome to the CompuGroup Medical SE Conference Call. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Christian Teig, who will lead you through this conference. Please go ahead, sir.

[Christian Bartlett Teig]

Thank you very much. This is Christian Teig speaking from Koblenz and a warm welcome also from my side to today's presentation, which covers the preliminary and, so far unaudited, fourth quarter results and full year results for 2017. The format of this presentation is a little bit shorter than the full-scaled quarterlies. So I think we can go through the prepared slides fairly quickly, and then we will go into the Q&A session in very normal format.Yes, the presentation can either be downloaded through the link on the invitation or followed live through the web conference tool. And as always, I will try to read out the slide numbers, so that you can track where I am and where I speak on the slide deck.Which brings us then to the Slide #2. Just the normal disclaimer that we are still talking about uncompleted financials in terms of reporting process. Normally, we are fairly close at this stage to the final results, but formally speaking, they have not been fully audited yet. And those that want to see the final audited figures will then have to wait this year until the 29th of March, when they will be published with the full annual report.Then we will step into the quarter as such. This is then Slide #3. Here, we see the key figures. In terms of the updated outlook we gave in November last year, this is very much in line, which is a fairly strong fourth quarter, where we have some of the first effects on the important parts of TI rollout. There were some other, say, transitory short-term effects as well. But all in all, we're happy with how the quarter landed, and given that we've already given out our guidance. The report today, if not a full-on event, should not contain many surprises.Some bullet points on Slide 4. Yes, this is the first quarter, where we have the impact of revenue from the TI rollout in Germany. This is also the last quarter more or less, where there will be any impact from the ORS1 project, which has been going on since the beginning of 2014. All other areas, basically, had a good, as expected, finish to the year. Maybe the hospital business even more so than what we expected but that's also a little bit the nature of this business, where it has projects that, say, have a little bit more dynamic built into it than the other parts of our business. So those looking below the EBITDA line, you will see that compared to last year, where we had some wind in our backs related to the U.S. dollar on the financial line, these are all noncash bookings. This year, of course, the dollar has been weak, which then translates into a negative financial result into our P&L with no cash effect. So that's the short summary of the fourth quarter.Now into some specific points. The first one is the pilot project for the TI. This is probably the last quarter, where we will highlight this because it is successfully completed. And after we did the key trials of the insured patient master data, VSDM trials in July. The project customer basically decided that enough is enough. We were the only ones who had reached that milestone and the whole focus is transitioning in any case to the rollout. And they basically then said okay, everything left. So the electronic signature, the electronic letters between healthcare providers, all these other services will just be developed in some kind of open-market model, where anyone who wants to can develop products and services for this, get them certified by gematik and then bring them into the market. All in all, this meant that the project's value reduced with about EUR 5 million. Some costs also went out. But all in all, whatever it was, it's all reflected in the 2017 results that you have been given today.If that was a bit looking backwards on Slide 6, we are definitely looking forwards. The TI rollout, which is a very, very important part of our business for 2018. In 2017 -- and I guess, importantly, still as of today, we are the only company able to offer a complete product and service to customers in Germany. We were definitely the first and still, we are the only ones. Based on this, we were able to secure about 12,000 orders last year and 4,700 were installed in more or less an heroic effort in less than 4 weeks in December. And the positive news is that, that's gone really well and we've had any -- no issues to talk about in this rollout and the high volume of installation is continuing, beginning of this year.Sales is also picking up. We're happy how that develops. So far, the dynamics is within the CGM's own customer base, those are the ones that we address through our direct sales and our dealers. We have good discussions to set up distributors to take our products to the rest of the market. That part of the market hasn't really started yet, and exactly how that plays out this year, is still an open question. Obviously, we are still keen to go beyond our own customer base. That's unchanged but it's going to be some interesting quarters ahead of us to see how that part of the market slowly then starts in 2018. So far, TI is equivalent to CompuGroup. And I guess, we are fairly happy with where we are as of today.Moving to Slide 7. Anyone who is keenly interested can go to our web page, and you will see the evolving offers that we are bringing to our customers. Right now, we are at the no worries offer, which will run until the end of this month. And you see that we have effectively made an adjustment to the prices to reflect the financing agreements, the EUR 3,450 including VAT. You can buy some additional card readers and components for those who want that. But this is what we are delivering and promoting now in the market. And for the time being, it's practically taken by CompuGroup customers. And it's for those who want to buy and get this done sooner rather than later, this is the only offer still available in the market.So that was a short glimpse of the final months of 2017. Now we step through Slide 8 into the outlook section. And as most of you will know, this was preannounced a few weeks ago. One thing which is new, which hopefully is a positive in the audience is that we will after 10 years, do some change to our segmentation. As we are evolving the old, slightly acronymic segmentation of HPS I, HPS II and for HCS have now been replaced by the operating segments, which probably are more familiar to most of you. So going forward, and also in 2017 for the full year, you will get our segmentation in the AIS business, so doctor and dental software, PCS business, so software for pharmacies, HIS, Hospital Information Systems. And then, HCS, no longer divided into the smaller and probably now less relevant operating segments. And again, in 2017, you will have the bridge and the ability to see how this translates into the forward-looking part of our financials.Brings us to Slide #10. This is a slide that we always bring. Maybe in 2018, it's not of such a key relevance. Normally, we would present this. This year, we start with a recurring base of EUR 410 million, that's 4% more than last year. And that in a typical year, represents 66%, 67%, 68% of expected full year revenue. That's been a very, very consistent ratio over the last 10 years. This year, and we've included a sentence in the Outlook section on the report, that is different because of the additional revenue coming from the TI rollout, bringing more dynamics into the business. It means also our outlook ranges are somewhat wider than what is normal. But again, it just fully reflects the different nature of our business in 2018, because of a very positive, new and dynamic revenue component in our business model.Brings us to Slide #11. The outlook in some bullet points. Yes, it reflects everything we currently know and how we see the TI rollout in Germany in 2018. And when we've given numbers to the underlying segments, that's based on the new segmentation. So the AIS business in the range of EUR 471 million to EUR 495 million. Everything that we plan on the TI rollout is included in this segment for this year. We don't plan anything to pharmacies or to hospitals. Whatever would come would then show up in the respective segments. So this, of course, drives a very, very substantial and unusual organic growth. So more than 30% and small additional revenue from acquisitions in this context not that relevant in 2018. All other segments, very much the normal incremental continued growth. 1% to 3% in Pharmacy Information Systems. HIS, there are some special effects: A, we had a very strong year in 2017, and we're also changing some contract structures with some customers, which takes away, say, only work without any profit, so pass-through invoicing of third-party software. So that has some technical shift between 2017 and 2018. Other than that, we again look at the HI business as more of a flat business year-on-year. Same thing with HCS, lots of things going on but, obviously, compared to the dynamic in the AIS segment, the other segments are comparatively dull, as we see them for 2018.Slide 12. This is after many years of preparations and hard work and also absorbing significant losses in getting ready for the next phase of eHealth in Germany. You see it here that the outlook represents a significant step up in the profitability, forecasted between 25% and 26% EBITDA margin for the 2018 guidance.The summary of these outlooks, you can see on Page 13. This is what we preannounced 14 days ago. Revenue altogether is expected to be between EUR 700 million and EUR 730 million. The EBITDA between EUR 175 million and EUR 190 million. And this includes everything that we currently know, in particular related to the TI rollout but also to all other parts of our business.Slide 14. We see the roadmap for 2018 in terms of financial reporting, very much similar to last year, which means that, yes, on the 29th of March, come final numbers, there is a mistake here, there should be Annual Report 2017. Then on May 3, we have Q1, AGM, May 15. Right after the summer break in early August, we have Q2. Then we have our Investor Conference, October 18, so mid-October. Yes, and then finally, Q3, early November.That was the 15 minute step-through. And I believe that the procedure in our new, and so far excellent working video conferencing system, is to press 01 and you will be queued up and taken into the conference call for questions. So please.

[Operator]

[Operator Instructions] We already have a first question from Knut Woller.

[Knut Woller, Analyst]

Actually a couple of questions, Christian. Looking at the organic growth rate in 2017, can you help me understand what the organic growth was and also the underlying margin if we strip out the headwind in terms of cost as a preparation for the health card rollout to get a better feeling how should we think about your business, excluding health card also looking into 2018? Then briefly, on the AIS segment in Q4, if I've done the math correctly, you should have had a tailwind, if I assume the ASP of round about [ 3 5 ] and for location in the course of the rollout, that you mentioned in the Q3 call. That EH that you had, say, cards basically you had a tailwind of [ EUR 16 million ]. If I strip out here the headwind of EUR 5 million from ORS1, then I still come to around about EUR 10 million. And if I take that off the EUR 93.8 million, I come to a decline of AIS in Q4. So what would be the reasons for that or has anything been wrong in my assumptions? And then looking at the outlook 2018, and I think if I assume stable ASPs, then I come to the conclusion that you expect less than your installed base being addressed with the health card opportunity in 2018. You mentioned already that pharmacies and hospitals are not included in your guidance yet. However, it seems to be also the case that you don't expect all dentist and doctors to be on the health card infrastructure in 2018. Is that correct? And then also do -- does your guidance factor in some pricing pressure, once you're not alone in the market anymore and where should we expect ASPs to trend over time?

[Christian Bartlett Teig]

So I understand the interests in breaking out the health card, even in 2017. But we have made the choice not to do that. It is not a separate segment, and we believe that breaking that out is not relevant and could potentially work against our business interests. So as much as I would like to answer your question, in terms of stripping out this from the 2017 numbers, we will not do that. And we will also not do that for 2018 or going forward. It is an integral part of our business with our respective customer segments: doctors, dentists, pharmacies and hospitals. Again, we've been through many years now where it was relevant and important for us to show it separate, but we will no longer do that also for 2017, other than, say, the information that we give. Having said that, some things to consider relative to Q4: keep in mind that we had a very strong Q4 last year, which was also influenced by strong licensed sales in Germany on the Bundeseinheitliche Medikationsplan. So this was something that was actually expected earlier in the year and everything came in the final moments of the year. So it was almost like a prelude to the TI rollout. Ironically, there was funding given to doctors for a solution, which proceeded the TI rollout, and we used that to sell a software module, which we successfully did. And obviously, this was then replaced by TI rollout revenue this year. So -- and that's also why -- what belongs -- at the end of the day, these are add-on, up-selling opportunities to the customer groups in our respective countries. There is a very special opportunity, as you all know, in Germany right now, but breaking that out and talking also about profitability, say, for our activities, we will just simply not do. In terms of your third question, outlook 2018. That is correct that we don't expect pharmacies and hospitals, and that we have also not in our guidance expected that all doctors and dentists will install this year. Even if we will do everything we can to make that happen, there is still isn't enough that we see, both in statements from doctors' associations and also in our sales numbers to -- so that we can guide for that, that we will reach it. We are pretty sure that we will reach it. We will reach 100%, but in our guidance you are right, we have taken a certain percentage out for the 2018. And when we discussed with -- or when I discussed with many of you after the guidance which was prereleased, we said yes, if you take a mix of CGM customers, for which the business model is very well known, you saw it also on the slide with our no worries offer. And then our distribution strategy which goes through resellers where there is a lower revenue component to non-CGM customers. We've said that altogether in 2018, there is 50,000 to 60,000 in that mix which is not specified built into 2018. We will not specify that but it does include an element of prices changing during the year as we know that the competition has announced still an entry into the markets during the second quarter. But again, hopefully you understand that right now we tried to focus on the market and offering competitive packages that we can quickly get into the market, so that we use this window of opportunity to the maximum extent possible. And the exact details on our underlying assumption, especially on pricing, we will keep a closely guarded secret.

[Knut Woller, Analyst]

Okay. Then just a brief follow up on the AIS segment in terms of the U.S. business. Can you help us understand what the U.S. business reported and at constant currency?

[Christian Bartlett Teig]

So the U.S. business had a good fourth quarter. I will do -- I don't have that number right in front of me. But definitely, it was in local currency, there was growth, year-on-year, and maybe even in euros. But I will -- for those interested, I will share that exact figure. So I'm not sure that means so much, but if anything, there was a good finish stronger than the preceding quarters in the U.S. last year.

[Operator]

The next question comes from Andreas Wolf, Warburg Research.

[Andreas Wolf, Research Analyst]

There are also a couple of questions from my side. So do we have specific scenarios to what extent doctors might install the Konnektor during '18? Do we have any assumptions how many might slip into next year or the year after? The second refers to the P&L, obviously, compared to last year, the [ on were ] capitalized -- increased, so maybe you could shed some light on the background of this increase. Then this third question is regarding the software maintenance. It was more or less stable compared to the beginning of last year. So is there potential to accelerate growth going forward in this area? And then the last question as -- is with regard to the eHealth services. So since the gematik is changing its procedure with how the whole framework will be set up going forward. Do you see any changing implications for your business? So central definition of products [ and tenders ] versus setting frameworks and then allow all providers to offer product.

[Christian Bartlett Teig]

So in terms of the first question, the specific scenarios. I will treat this in this respect a little bit like the questions from Knut, that we have decided to give the highest-level figure combined CGM and non-CGM customers, 50,000 to 60,000, exactly how the mix is between on CGM and not CGM, we will not state publicly, at least not at this point. Second question, capitalized R&D. That is correct. You will also see that in terms of ranges of revenue and EBITDA, we were more in the lower end of revenue and in the higher end of EBITDA, and this is partially related to this EUR 2 million to EUR 3 million extra capitalization. This is basically the QES, KOM-LE. So the [ coming ] services that we had more or less developed in the pilot project, which now as it gets stripped out, becomes an asset into the rollouts asset base. So yes, that's the effect that you have there. Software maintenance, keep in mind that when we announced this early in the year, it's based on the current FX rates. So the key now, I would see that we actually -- say, we lost a few million compared to our expectation at the beginning of the year and how it came out. But this is basically because the euro has gone very strong to almost all currencies and in particular to the U.S. dollar. So that's -- those are things that evolve, and when we've given now the outlook, it's again based on the current January software maintenance and recurring portfolio times 12 based on the current FX rates and probably given that this is something that tends to grow roughly 4% per year, yes, the current FX landscape is more dynamic than that. Okay, a lot comes from Euro countries. But that's probably the biggest swing factor in terms of how this turns out. Fourth question, eHealth services and the market structure going forward. I think, we are encouraged by the wording which is used by gematik, where they call this a market model. This is exactly what we want and exactly what we think will bring the best product and services to this market in Germany in the best possible way. It means that requirements and specifications are made by gematik and they set up a completely open and neutral procedure to certify products and services. This is exactly how we know it from all Scandinavian markets. And then, it's up to market participants like CompuGroup and our competitors to deliver into this. And right now, it seems as though all important services will find its way into the Telematics Infrastructure over this market model. Maybe one thing, which will be an interesting development, is specifically on the electronic health record. So the personal health records, which is envisioned in the Telematics Infrastructure, where you see that also the insurances play an active role right now and want to position themselves to be players. That's completely normal. That's inherently nothing different than what we are doing with AXA and Debeka and the other private insurances with our MGS initiative. So it's just, say, other participants responding to the market model than software companies.

[Operator]

The next question comes from Victoria Kruchevska from Commerzbank.

[Victoria Kruchevska, Analyst]

I have a question from my side. Yes, I understand that you don't want to like, obviously, give too much information about the whole Telematics mix. Would just like to clarify just to understand the whole thing, I mean you quote -- you gave us one number, which is 4,700 in orders in the fourth quarter 2017. Can you maybe give, I don't know, like a guidance, what is the average selling price and I remember, if I recalled correctly, it was -- like the average selling price for the -- for your orders was around 3,400. If I remember it correctly, maybe you can like I don't know, give a guidance whether it's below or above this number, that will be my first question. The other question is regarding your -- the year-to-date orders. So you state till 2017 -- till the end of last year, you had 12,000 in orders, and if I recalled correctly, couple of weeks ago, we've talked and you talked about 13,000, so just -- to sort of like to understand the dynamics of the order inflow. During -- you have announced the early bird offer, the whole Telematics pricing strategy and stuff, I guess sometime in August. So these are around 5 months. And within these 5 months, you are gathered 12,000 orders. And now, we are pretty much like at the end of -- at that time, at the end of January and you had in total 13,000 orders, which implies the delta of 1,000 orders collected during January. So it seems a little slow to me. Maybe you can talk a little bit about that. That will be it.

[Christian Bartlett Teig]

Yes, so the first question, which is again on pricing. Again, I will be quite cagey when it comes to details there. Right now, we are in the market, every German doctor and dentist can buy our package for EUR 3,450 including VAT. And it's clear that in our guidance, we have assumed that number at some point to go down. When and by how much, we will keep a closely guarded secret. That's an assumption. The best scenario would obviously be that it stays where it is today. That would greatly depend on whether competitors do enter the market in the second quarter, as they have announced and how they do it. So that's a completely unknown, and right now, we are as best -- doing as best as we can by presenting something that we believe the market will take. And so far, at least, you can sell this for EUR 3,450 in volume. Maybe to your second question, the year-to-date orders, well actually, that's not a secret. On Friday, we crossed 14,000. So it means that we have now built up to a sales rate, which is between 500 and 1,000 per week. We only have, yes, that was the fifth week of the year, including a very slow first week. So I think we are exactly in terms of our outlook spot on to where we need to be. Obviously, that needs to continue and we need to sustain a sales rate. That's easy mathematics if you want to reach 50,000 to 60,000 during a year. Order of magnitude, 1,000 per month, no, per week. And as I said, the ramp up that we've seen now into the new year based on our no worries offer follows the plan which was made to fulfill these numbers.

[Victoria Kruchevska, Analyst]

Okay. And maybe the very last question regarding -- you have touched upon the MGS service, it's -- are there any updates on, I don't know, you insurance for your customers and your partners that you're working with compared to what you have communicated.

[Christian Bartlett Teig]

No updates on this. I mean, we are very, very busy to launch the service for our new co-shareholders [indiscernible] and Debeka. And that's the main priority. So there are no updates on further partners.

[Operator]

The next question comes from Uwe Schupp, Deutsche Bank.

[Uwe Schupp, Small and Mid]

Yes, 2 questions please, Christian. Really -- firstly, only a follow up, because I was slightly late on the call. Do you expect the pharmacy and hospital [ refinancing ] agreement also for this year or is it really a 2019 thing? First question, and then secondly, in terms of a potential reseller agreement or however you will call it for your nonsoftware customers today, can you share how far you have progressed here? How many potential partners you have already signed up or are basically potentially in the queue, so that we can maybe get a better feeling for your -- well, outside core customer base opportunity.

[Christian Bartlett Teig]

Yes. So, I guess, we do expect that financing agreements for pharmacies and hospitals will be published and finalized this year. We just started. But keep in mind that both of them have placed emphasis on this [indiscernible] management, so the emergency data management functionality, which is only scheduled for release towards the end of the year. So there is really no rush. So maybe, we could get something on the tail end. A, we haven't built that into our outlook for 2018 and it would be late in the year also because of the needed further development of functionality to support pharmacies and hospitals. So we do see them, materially, coming next year. In terms of the non-CGM customers and reseller agreement, we don't necessarily see this as a volume game. We need a handful of good and powerful resellers. They themselves will need to go through a material-accreditation process. Obviously, they will get the components from us delivered through our already certified delivery chain. Most importantly, is that they need this, yes, und dritte lesung, which means they need to become an accredited provider of the turnkey solution. And this is fairly extensive. This is also why most of the individual software companies will not do this themselves, and they will resort to taking this from a handful of players in the market. And we -- so as of today, I cannot say that a contract has been signed with every single legal document in place. But we are far advanced and it's kind of on the lawyer stage to establish the first one. And as I said, we expect anything from 1 up to a maximum of 5 who will be in the market under their own brand, under their own name and in our opinion, will be perceived very similar to other potential competitors that have no direct affiliation with the software company like CGM. That also remains to be proven. It's interesting, if you go to the gematik web page, they keep an update on all the different areas of certification. I looked through it during the weekend. There are now 54 software packages, which have been certified and qualified to run towards the Konnektor. Meaning, they can do VSDM. That is a big, big change and increase. So it means that more and more software packages are now compatible. And compatible means it's essentially plug and play. So that's becoming more interesting and there will be more and more addressable markets as more and more releases go through that process. Still, in terms of this special VPN and this und dritte lesung, there is still only one, it's CGM. Maybe the second one will be a CGM partner. There are some already working on their own accreditation. We believe that, definitely, T-Systems are working on that in parallel to completing their Konnektor. But again, that will come shortly. But it's not about -- it's not a game of numbers. We need a handful of -- and it doesn't have to be many because we believe that there will not be a large number of turnkey suppliers in the market. So we will certainly make press releases and announce it as soon as these distribution agreements become finalized and legally signed. But there will be some definitely announced shortly. That should be no surprise and then they will slowly get to work on the rest of the markets, and as we've seen exactly how that will play out, will be very interesting. We think we have some very good partners lined up who can compete on level I with the other expected participants in this market.

[Uwe Schupp, Small and Mid]

That's very key. Just one follow-up, in terms of the modeling. Is it correct to assume to basically take the EUR 3,500 minus VAT minus the [ handing ] fee in terms of to get an -- to an implicit potential value per package for you guys?

[Christian Bartlett Teig]

So you should maybe think of that a little bit different. So when it comes to these distributors, they by definition have their own installation force. So the service component, they will do directly, does not include us. They buy 2 components from us, the Konnektor, and most likely, they will buy the card readers through us because they can then be shipped through our logistic center together. So those 2 components will have a reseller price that they bundle with their service and our VPN service. VPN service has no upfront fee, that's then the recurring part that we will get alongside the maintenance of the Konnektor. So order of magnitude, you could say top line revenue, that would be roughly half of a CGM customer. So if a CGM customer is EUR 3,000, then order of magnitude, when we sell these components to a reseller, it would be something like EUR 1,500.

[Uwe Schupp, Small and Mid]

Plus the VPN, obviously, then on a monthly basis.

[Christian Bartlett Teig]

That's a recurring service. So the EUR 1,500 would then be comparable to selling the installation training, Konnektor and card reader directly to an end customer.

[Uwe Schupp, Small and Mid]

And the key now I would presume that the margin on this should be reasonably high?

[Christian Bartlett Teig]

Yes.

[Operator]

The next question comes from Charlotte Friedrichs.

[Charlotte Friedrichs, Analyst]

2 questions. One is a follow-up and the first one would be, do you expect a meaningful number of installations in 2019, or would that be something that will be more negligible? And the follow-up question would be, if you could confirm once again what the run rate of orders that you see year-to-date?

[Christian Bartlett Teig]

So we do expect something in 2019. But in terms of compared to 2018, it will be lower. I think the only thing that would change that is if there is a big initiative related to social care institutions, which at least on paper has a very high number. But it's still unclear whether they should be seen as part of the market potential or not. We have so far not calculated that. But if you say next year will be pharmacies, that's in Germany roughly 20,000 units, maybe you have this branch pharmacies, which adds a little bit to that. But that's more or less what it is. And the hospitals will be more project business, where you have roughly 2,000 locations in Germany. So obviously, high -- much higher value per location. But compared to what is expected. And then, maybe there is a tail end of doctors and dentists. But it -- so it's meaningful, it's not 0 by no means. But it's smaller than '18. Yes, as I said run rate, right now, I can only ballpark that between 500 and 1,000 per week.

[Charlotte Friedrichs, Analyst]

And that's order intake or installations?

[Christian Bartlett Teig]

That's order intake. Installations is higher because we have the backlog from [indiscernible].

[Operator]

There are no further questions at the moment. [Operator Instructions]

[Christian Bartlett Teig]

Seems not to be the case. Then, thank, everyone, for your continued interest in CompuGroup and if not before, we will revisit the results of the first quarter in early May. Thank you.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.