Datagroup SE

XETRA:D6H

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the DATAGROUP SE conference call on the Q3 figures for the financial year '21, '22. [Operator Instructions] The presentation is also available for download in the Investor Relations section on DATAGROUP's website. I would now like to welcome Mr. Oliver Thome, CFO of DATAGROUP.

[Oliver Thome, executive]

Thank you very much. Ladies and gentlemen, I welcome you on the analyst call for the Q3 figures of DATAGROUP. My name is Oliver Thome, CFO. And would like to start a little bit in another way, like in the past, that means when you look, the current times are influenced by different uncertainties. We have the war in Ukraine, Russia, we have the delivery problems for high-tech products, we have the inflation and last, but not least, we have the search for professionals, especially in the IT sector.

So before we start in the very strong result of DATAGROUP in the third quarter of the fiscal year '21, '22, I would like to focus you on our business model, and to get a better understanding for you what we are doing and why we believe that in the current crisis, can be a chance for our business model.

So let us have the first look on what we are doing. What we are doing is, in a summary, we run your IT, and you have the possibility to focus on your core business. That means that we are focused on the German market for companies with a revenue size between EUR 100 million and EUR 5 billion. Then, we make, as the leading IT service provider with about 3,500 employees only in Germany, our IT production. And that shows you that the war between Russia and Ukraine has no impact on our business model.

How do we work? And in the center of our strategy is a full service offer for companies as a USP, and we call it our CORBOX. The CORBOX is a modular offering Product-as-a-Service approach with which we are able to perform our own customers and their IT. Beside this, you can see on the left side, the IT transformation, that means how we are transferring the cloud platform application, or SAP, from their own systems to our CORBOX.

On the right side, it's very interesting and important to see, we have the IT solutions. The IT solutions are the segment in which we have our own consulting for the digitalization for our customers and their business. What we are doing there is to bring them to the digital time and what we can do with this is that we can use this technology for us as well. But what we do not do is we are no hardware vendor. So the delivery problems you can see are no problems of our business.

What we are doing is for the CORBOX and the base of the CORBOX is the standardization. The standardization is last, but not least, the base for automation. And on the left -- on the right side, we have seen on the CORBOX picture is that we use our own technology and the knowledge for our own business to compensate the expected wage inflation in the mid and long term.

How do we work? We work with a centralized -- virtual centralized business unit for our operations, our service desk, our SAP or our application management service and offer these services to our market companies, which can offer these products for their customers. This is much more efficient, it's more scalable in the workload.

But let us have a look for what are the drivers for our business in the future. And the drivers for the future will be the lack, what they have in their business, they have the problems for searching professionals in the IT sector. That means they have problems to run their own IT. And in the third pillar, they have security aspects, and they have -- really, they have a need for the protection for cyber attacks.

What we are doing is with our long-term recurring revenue side of our contracts, especially what we are doing on the employee side. Sorry. Before we start with the employees, I would like more detailed view on our contract side, how we work with our customers.

What you have seen in the picture of our CORBOX, on the left side, we start with the traditional transition. This transition period, mostly is between 6 and 10 months. After this, the contract phase 1 starts. The contract phase 1 is in between 4 and 5 years and normally will be increased in the contract phase 2 so that we have the duration up to 8 years with our customers. This guarantees us recurring revenues, recurring margins in our business and so very plannable margins.

On the other side, you see the very strong order intake with the CORBOX -- with our CORBOX business. You see that in this year, we won CORBOX orders in market units and exhibitions and software development, energy and the public sector, logistics, industrial bakery as well as toy manufacturer. So you can see we do not have any cluster risks, sector risks or market risk.

Here, one example, what we won this year and Koelnmesse is for us, a very good customer and international exhibition cooperation. It's #3 in Germany and among the top 10 in worldwide. And we won this current Koelnmesse offering with a full stack offering of our CORBOX production possibilities. It's a 60-month operation. After the -- meanwhile running 10-month transition, we are very happy to get access to customer like Koelnmesse.

Now we start with this, what I've explained. We have a very strong employer branding. We do very much on the market to win the challenge for the best professionals in IT sector. And this allows us to get these professionals to run the IT for our customers. And this is why we are very open-minded, and we are looking forward into the -- and positively into the future that we were able in the combination between our digitalization knowledge, in which we can make more efficiency into our standardization. And on the other side, that we collect top marks as employer and to get the best professionals we need to get more intake into our CORBOX and a very good contact to new customers.

What we have done further is the development of our security services. The security services, very important are included in our CORBOX and very important to have our own security operations center. Our security operations center with in-depth security experience and tooling for protection, monitoring of the CORBOX platforms. So we are very good and stable positioned to get in touch with the future. And we are -- we believe that the search for professionals, especially in the security service will push our business into the future.

Let us now have a look on the estimation for the current fiscal year. We just had a look for revenue side between EUR 480 million and EUR 500 million. As I just explained in our business model, we have very strong recurring revenues, recurring margins with our CORBOX with recurring noncloud services so that we have an estimation of reaching an EBIT between EUR 39 million and EUR 42 million.

Now let us have a look for the excellent Q3 results. We have had a very strong performance across all DATAGROUP market units. Like I've just explained, we do not see negative impacts from the war in Ukraine or in the supply chain bottlenecks. And the outstanding performance from the new acquisitions, URANO, the Baden-Württemberg and it has very quite good.

As you have already seen maybe in the press release for the first 9 months, we started very, very well and we have a very strong Q3 and the actual fiscal year '21, '22. We have a substantial increase in our revenue side of nearly 13%, up to 372.9%. Our organic growth of 0.5% during the past 12 months, sorry, is within the expectation of the management.

Let us have a look in the very strong previous year. In the previous year, we have had a very strong onetime project revenues, mostly driven by the COVID pandemia. And these onetime project revenues could be covered in this year by high-margin CORBOX business. So that is what we can see in the EBIT margin. And the EBIT margin, which increased in the same period from EUR 47 million by more than 24% up to EUR 48.3 million.

Very, very nice is that we were able in this year to perform with our CORBOX. We just reached 15 new customers, 32 contract renewals and 19 contracts have been expanded. You see the same development in our EBIT and the great development of our EBIT with more than 50% up to EUR 32.7 million is also reflected in the EPS, which rose by 23.9%, which means nearly 24%, up to EUR 0.0239.

Let us have a look on some selected profit and loss figures. Like I just explained, the revenue side rose up to nearly 13% to EUR 373 million. The gross profit rose in nearly the same range. And very important to see, and this is what we have seen in the past quarters as well, is that the personnel expenses only rose by 9.2%. So reached really a nice development in the EBITDA and the EBIT as well. And so we can have a look at some selected balance sheet ratios.

The increase in goodwill is due to the acquisition of the Hövermann IT in this year as well as the URANO and the Baden-Württemberg. But very important, and this we can see in the cash flow statement on slide -- later, that the net debt amount is stable to the past year. So we were able to pay the investments in the new companies from our own operating cash flow. By the way, the net debt, EBITDA ratio of 1.1 is really great. And with this, we are very fine with our partners in the finance sector.

Let us have a look on the cash flow side. And this is, I think, where we can be very proud on because we do not -- we earn money. And we earn money with a change of about more than then 40%. And this shows in the cash flow from operating activities, the strength of the DATAGROUP companies.

What did we have done with this company -- with the money we have earned? We invested it. We invested it, but only in a very small way in the CapEx with lower than EUR 6 million in the first 9 months and especially as for the outflow for acquisitions.

Those of you who have been with us for a long time know the excellent development from the share price. But last, but not least, in the year '22, we have an impact, like the whole stock exchange in the world. So that our share is currently affected as well, but we are nevertheless very satisfied with the development from the long time period. But we are optimistic for the future and of our business model that we can go in touch with the development of the past.

Let us have a look for a short extract from the financial calendar. You see we are, and we continue this year, very actively to present our company to the existing and potential investors and to show the attractiveness of the DATAGROUP business model and the DATAGROUP in Germany to present it in Europe and in the U.S., we have done in this year, like in the past years as well.

Thank you very much from my side, from the presentation. And now, I will be glad to answer your questions.

[Operator]

[Operator Instructions] So first, we got question from Mr. Knut Woller. He asked several questions. First one is, what measures do you take to accelerate organic growth in the coming years?

[Oliver Thome, executive]

Okay. In the future, it will be driven especially by this one, I explained, our business model with a need from our customers to outsource their IT. And what's not reflected in this moment is to what we have made in the presentation, we have 15 new customers in our CORBOX, but they are in the phase of the transition period. And so they cannot be part of the organic growth at this moment.

So I think we have to look for it. But I think that we will be in a range between 5% and 7% of the future organic growth with our CORBOX business. Maybe it can rise up when we are able to put in more pressure and put in more technology and efficiency, but I think this will be a range 5% up to -- yes, 5%, more or less, maybe a little bit more.

[Operator]

Okay. And then he asked also if you can provide us with an update on your M&A strategy?

[Oliver Thome, executive]

The M&A strategy is really the same, what we have done in the past. Mr. Woller, you know that we have changed a little bit. We had -- in the past, we have said we'll make the growth 1/3 organically and 2/3 unorganically. Because we now see that our CORBOX, especially we have made more technology in it, our newest CORBOX, it's called CORBOX 3, is now possible to board on more customers on this technology. So that we have said, let us add more look on the organic growth and to turn it a little bit to 50-50. So that means that we will still running our acquisition story, and we will focus more on our organic growth. But nevertheless, we have the two pillars, it's organic and unorganically.

[Operator]

Regarding M&A, he also asked if price expectations come down? And should we also expect larger M&A again going forward?

[Oliver Thome, executive]

It's a very good question. And this is what you see in this moment that -- or my expectation is that the rising up of the prices from -- in the past years, and you have seen what we have paid out for companies 5 years ago and what's now, this is M&A sector and IT industry. It's very much influenced by private equities meanwhile. And they bring up the prices. But now the inflation and the rising tax rate and my expectation is that it will, at minimum, stabilize the target prices.

We select our targets, especially from what kind of synergies can we bring with our business, and we can bring them into the future with our standardization of our CORBOX. So it's more or less not the question, what we have to pay for the company. It's more or less which strategy do we follow with these companies to bring them into the range of our EBIT estimation.

But to answer the question, I think it will stabilize. If they go down, we have to see. And when there's the possibility to get a bigger target, the question, what's the bigger target, but what we have done in the past is between EUR 10 million and EUR 50 million. This is quite on the upper side or the upper level is what we can do. When the acquisition possibilities get bigger, we have to look for the strategy in which we can include them into DATAGROUP business model.

[Operator]

Okay. Thank you. Last question from Mr. Woller was regarding the inflation. He asks, how do you offset inflation, rising energy costs and wages?

[Oliver Thome, executive]

The inflation -- we start with the inflation. What we try in the past is that we have an inflation rule in the contracts. So that from the sites that doesn't have anything. And -- but we have, as well, other contracts in which we do not have this. But the question is where do the prices for us rise up?

Energy prices are, for us, only a small part. You know that the wage inflation is for us much more in our focus. And this is where I explained in the business model for what we are looking. Because the wage inflation in IT industry is so what's -- it's very broad. It's happened with our competitors. It will happen with us as well. But in our business model, with the standardization, with the [ studies ] of standardization, this is quite unique. We are able to use more technology in this sector to compensate this on a mid- and long-term level.

[Operator]

Are there any more questions? [Operator Instructions] Mr. Froberg has a question.

[Gustav Froberg, analyst]

Can you hear me okay?

[Oliver Thome, executive]

Yes, we can hear you.

[Gustav Froberg, analyst]

Perfect. I just have one because most of my questions were already asked and answered. Just on guidance for the full year and into Q4. It seems like you're on track to hit the upper end of your guidance. Could you just give us a little bit of color on what you're seeing in the market for Q4 and kind of how we should think about the fourth quarter of your business just seasonally given everything that is going on in the economy today?

[Oliver Thome, executive]

Yes, I would like to do this, but this is where we have looked as well. But the big pillars we have now mean that we have said, let us be conservative and do not rise the estimation. We only confirm the estimation because we have to look, what will happen, how we can implement it, for example, technology, what will cause this.

Maybe -- you know us. You are with us since a long time. And I think we are -- we have always been conservative. So we only have the estimation contract. And -- but you now see we have now reached a sales range on the upper side. And on the EBIT side, we are very in good mood as well. But we are not in the time to say that we will -- that we can rise up our estimation for the current year. We will see, but not at this moment.

[Gustav Froberg, analyst]

Maybe just a quick follow-up. Could you give us some reasons for why? Is it that you have limited visibility? Is it just that you prefer to be conservative like you talked about? Or yes, just a little bit more color, please, would be great.

[Oliver Thome, executive]

Yes. So it's more or less the question, but -- and Q3 happens, and like in the past, when you look -- one of the customers we have just in our order books is vaccination centers, for example. The vaccination centers were normally very strong in the -- in our -- in the fiscal year, the Q1, Q3 -- sorry, in our fiscal year Q1, Q2, and Q3. A little bit in Q4. Normally, not so much because there is no COVID pandemia. There's nothing to vaccinate in this quarter so that we have to see which impact comes out of this. So we are a little bit more conservative to see what will happen on this case.

[Operator]

And we have a question from Mr. Siering.

[Yannik Siering, analyst]

Also from my side, just one question left. Maybe talking a bit more about the midterm, especially on the EBIT side. You have made very strong progress and pretty much approached your target margin. Could we expect any updates to this target margin over the next couple of quarters? Or -- yes, what's basically the potential that you see going forward?

[Oliver Thome, executive]

Mr. Siering very, very nice and very good questions that you know our estimation. For the next quarters, we normally do in the general meeting in the next year. So we have to evaluate this, but we are optimistic that we can operate with a good development. So we have to see, but the things that inflation as well, what happens with our customers. Some of -- the most of our business is recurring business. So we are very plannable. But some of this are extensions that we are able to exceed the CORBOX business with project services, for example. And we have to look, therefore, we have to evaluate this because the situation of the inflation -- the wage inflation for our customers, for ourselves so that we have to evaluate it to plan. So I'm not just able to give you a fourth outlook. Besides this, what we just give on our midterm guidance.

On this stage, we do not make any difference, and we confirm the guidance. So we do not see anything on this. But the times we have now are very turbulent, I will say, not only for us, it's for the market.

On the long-term side, this is what I've explained to you in the presentation, I am very optimistic that we will be a winner of this crisis. But how it will cause or focus and enforce our accounts in the next years, we will see, but as well, we have made the presentation of our estimation and we confirm this.

[Operator]

And I'm not sure if I'm seeing still the hand raise from Mr. Froberg or is it another question from -- hand is down. So I guess, there is no further question. If there are no questions, then we will make available today's call on the website. And with this information, I will hand over to Oliver Thome again.

[Oliver Thome, executive]

I would like to say thank you very much, and see you soon. Take care and see us next time. Thank you very much.