Vitec Software Group AB (publ)

Thank you and a warm welcome to everyone on this call where we will cover the report that we reported early this morning. I'm Patrik Fransson, Head of Investor Relations and with me is our CEO Olle Backman. As always we will start with a brief overview of Vitek as a whole and then followed by an update of the Q2 and H1. And after that we will open up the we will open up for questions. So with that, I hand over to Jule.

Hey, thanks, Patrik. And welcome to the presentation. Sorry for the delay in the beginning there. But as Patrik said, we always start with a brief overview of the group and always with the customer perspective here. So we have our close to twenty five thousand customers that we're serving. We will go into the 40 business units that we have. We're still in 11 countries, so no change there. And these 11 countries are made up of our five home markets, which is the four Nordic countries and the Netherlands. And the rest of the countries are connected to one or two of the companies within those home markets. Proforma sales are by the last of June up to nearly 3.2 billion Swedish. 86% recurring revenue is something that we're very proud of. And to my aid, I have nearly 1,550 colleagues by now. Strategy chain as well here, no changes. And you can read this from left to right or right to left, depending on where you want to start. But if we start with the values, of course, products, keep it simple and trust and transparency. Over to brand promise, which is a very important part of what we do, which is to be a reliable both supplier, of course, but also a reliable employer. So we invest in products and we invest in people today in order to be relevant for tomorrow. Business concept, of course, being a providing standardized business critical softwares. And the objective is still to be a profitable growth company. And if we do all these things right, we will help in striving towards our vision, which is to shape a wiser and more sustainable future. And then talking about growth, growth can come from different parts. And if we start with the business units, which is always at the center and the core of our operations, we have the decentralized organization. They have all the resources they need and we support them from the group perspective. So they grow the organic growth there from the business units, of course, then fueled by the common business model, a high degree of recurring revenue with mission critical software and usually they are also market leaders in their niches. And then on top of that of course we add acquisitions and basically the criteria that we are looking for is to find small v-techs all over so we buy ourselves over and over again. So we look at verticality, established and profitable You own your own IP, the proprietary software, and also, of course, a high degree of recurring revenue as characteristics. And then just a few words on the acquisitions year to date, so we have made three so far this year, two within the reporting period, that's LDC in the Netherlands and the bid theater in Sweden in January and June, actually, and then just earlier Earlier this week, actually, Taxiteknik, also a Swedish company. So we will add that in the Q3 numbers. So we're up to three for the full year so far. And just looking at last year, the six acquisitions, and you can see also the distribution there. We had two Dutch, two Finnish, two Swedish, and with a variety of smaller bolt-ons and larger acquisitions like Innova. And looking at verticals, this is another way of displaying it. You can see the bubbles here are basically the size of the vertical. We have some 20 plus verticals that these 40 business units are spread across. And you can see the biggest ones are by now property management, energy, but they're quite evenly distributed as well here. And this is a great way of showing the the low risk or the risk distribution within Vitek. So we have 40 business units, we have loads of markets, and we have 40 verticals nearly. The latest acquisitions, of course, LDC, that's a small part here in labor mobility, and bid theater, it's a part of the media bubble there. This is another way of showing business units that you are used to. Just a few comments here. Even though we have made three acquisitions, we are actually at fewer business units year to date than we are when we started. But that is due to the fact that we have done some mergers across. When we see that it's a good idea on both from a product and development perspective, but also on the customer perspective and how we can approach the market. So NICE and VIMS, two Norwegian business units that were part are now what we call Vitek Forsikring, Norwegian, so their insurance market in Norway and Denmark. And then DL Systems, which was a smaller bolt-on, which has been merged into Aktor Smartbook. And this is also the way we look at the M&A landscape, so the distribution of the sizes of companies out there when we look for them. They basically match our own portfolio pretty well. Organization, same here. No immediate changes. We have the business units, which are at the core here, the 41s. And they are helped by the VPOs, which is our way of dealing with the day-to-day business and supporting them in their growth. And then of course, we have some common group functions also appear to support them. You may have seen the press release that we recruited a new CFO, Mr. Peter Lidström. He will start in the first of September. And then Sara Nilsson, our current CFO, she will stay on and be assuming a role of head of group reporting and controlling. And I'm very happy that Sara will continue with us. She's done a great job, but also looking forward to welcoming Peter on the team. And talking about teams, sharing knowledge is a very important part of the value of being part of the VTEC group for a smaller company. We have a lot of sharing forums where we have common culture concepts for sharing best practices. We have different vertical clusters where business units that are addressing the same market can talk and exchange ideas. This is really a very good way of fostering and cross-fertilizing ideas and experiences across the group. So very happy to have the opportunity for new business units to tap into the knowledge base of nearly 40 other peers. Then moving over to the numbers. The second quarter, net sales was up to 880 million, an increase of 22. Percent recurring revenue, which is what we really strive to increase, was up 27. We'll get back to a bit on the distribution there with, of course, Innova coming in really strong in that quarter, adding a lot of that growth. EBIT margin increased by 17 percent and then the margin is at 30 compared to 31 last year. It's also a bit due to the mix of the income for the quarter. And if we look at the first half year, because we have a long-term interest in everything we do. So we think that the longer the time period, the better it is to evaluate how we're doing. So for the first half year, sales is up 20%, EBIT margin, EBITDA margin up 18, and then the operating profit is up some 22%. And here also the cash flow is really strong on the first half of the year, up 37 percent to 783 million. Because, as you know, a lot of our cash flow comes in the first quarter and then because of the prepayment model that we have and really like. Net sales more compared to by quarter or over the years. We have a compounded growth over the last 10 years of 22%. So basically we're keeping up the pace. The EBITDA margin also a bit flattish this quarter, but I will get back a bit on that. But the healthy level of 30%. And we can move over to this page here. We can see the allocation or the distribution between the recurring revenue. And as you know, we have two types of recurring revenue. We have the traditional subscription based, which is the light blue there at the base, which is the source fees, the maintenance fees, the hosting fees. And that is growing at a really nice pace. And it's a very stable Then we have transaction-based revenues, which is basically value-adding services towards our customers, such as text messaging. It could be maps. It could be kickbacks on payments or spare parts or things like that that we have had all along. As you know, when we added Innova in last year, that really increased a lot because they have a fantastic value add to their customers in the way that we can take the excess capacity of the energy that they are having and make bids on the balancing market in the Netherlands. And that, as you see in this quarter, that really took off a huge margin. and fueled that increase. Basically, all of the increase apart, the rest is growing along with the organic growth, I should say, so it's still growing the other part as well. But Enova really had a fantastic quarter here. It's also a bit on the seasonality. In the summertime, there's a lot more renewable energy sources into the energy mix and more renewable resources. demands more balancing power and balancing power. That's what we sell for our customers. So our customers had a great quarter because this is a revenue share model we share with them. There's always some part of it that goes back to us, which we are very happy for, of course, but it is a bit lower margin than the traditional subscription kind of revenue, of course, because those are really high margins when you have your own So that's also an explanation on the fact that the margin for the quarter was basically one percentage lower than last year because this high volume has a bit lower gross margin component to it. But nevertheless, it is good money for our customers. It's good money for us and at the very low risk to that. Organic growth is also something that we're really proud of and that we see and we're keeping up the pace. You can see the FX part there is going down a bit, roughly 2% on the quarter. But we're keeping up near 10% organic growth in the subscription-based revenues, which we're really, really proud of. and this chart tells basically the same thing so all in all our total sales is the growth of nine percent you take away two percent FX so that's seven percent but that's a mix of all the different revenue streams but you can see up there twelve percent growth in the subscription based recurring revenue take out two percent of FX so that's a ten percent organic growth and that's a number that we're really happy and satisfied with. Diversification of sales, we mentioned that across the different markets, it's quite evenly dispersed. And we also have a great breakdown of the revenue in terms of customers. Great customer distribution, the other 10 largest one is just 7%. And the other 25,000 nearly covers the rest. And this is a bit of a sum up of the quarter. Steady customer development, strong continued additional sales. Like we mentioned earlier, new sales is still a bit hard, but we really have a good upsell and additional sales to the existing customers. We're still not seeing a lot of churn or anything like that. So pretty well. And then we added another three acquisitions year to date. So with that said, we're opening up for questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Daniel Thorson from ABG Sundal Collier. Please go ahead.

Yes. Hi, thank you very much, Ola and Patrik. A follow-up question on you elaborating on the margin in Innova here in the quarter. You made it really helpful for us, but just to understand it a little bit more, revenues were up quite a lot year-over-year in Q2, according to my understanding at least, and the lower margin is the result of more transaction revenues, obviously. But how should we think about the level? I remember one and a half years ago, you said that the margin in Enova was higher than the VTEC group margin, and I guess that in this quarter it must be a bit lower. So what were kind of the ups and the downs in the last one to two years in terms of profitability in Enova, please?

Well, the profitability in absolute terms is, of course, up due to the model, and we are making money on every euro that we sell. But a lot of... Some of the volume here is when you activate energy. Basically, when you sell energy or balancing services, it's like an insurance that you will be there if needed. And of course, the insurance premium there, we have a decent margin on. And then if the energy is activated, so if they actually call on the energy, then our customers also have a direct cost related to that. So then they will have a larger share of that revenue going through. So we have a lower margin on activated energy. And that is usually activated also during the summer period.

Yeah, no, I understand the dynamics. And just to give us an example, what could be the margin in a quarter like this versus what margin did we have in Q4 or Q1 for Innova? Just to understand the volatility between quarters for Innova, please.

We don't comment on individual business units, but they are, like we said when we did the first information and introduction, they are in line with the rest of the group and they still are on a full year basis. But it will be a bit up and down.

Okay, I see, that's fair. And then secondly, regarding those transaction-driven recurring revenues, also when you acquired BidTheatre here in June, I expect those revenues to be quite a lot of transaction-driven as well, and this will change the whole group mix to be more transaction-driven over time. Do you have any plan to convert those revenues into more subscription-based, or should we get used to a higher share of transactions?

Well, for the business units that we have today, largely, like I said, almost all the business units have some component of transaction based. And that is something that we actually encourage because it is value adding and you take a larger share of wallet from the customer and you become a more. important vendor to them so we really like that. Then of course Enova and Bidtheater have models that has basically shifted so that very low part of their income is subscription based and a large part is that and for those two units we should get used to that because that's part of their business model but then when they look at other companies, if you look at LDC or Taxi Teknik that we also bought this year, they are exactly like all the others with a more standardized 85, 90 percent of the subscription based period. So I wouldn't go so far as saying that this is something that we actively look for, but it's just an evolution of software companies and how they take on more part of their customers' potential offerings.

Yeah, I see. That's helpful. And then just the final question. How do you see salary inflation versus price increases playing out in the rest of 2024?

Yeah, well, both of them are basically done by now. So we have increased the years in pricing and the salary negotiations have been done already. And they are basically on par with each other, so they are roughly in the 4% range.

Yeah, excellent. Thank you very much.

The next question comes from Christian Binder from Red Eye. Please go ahead.

Hi, and thanks so much for taking my questions. First one would be, I wonder if you could elaborate on the consolidation of some of your business units. I think at first glance, it might seem like it's a little bit contradictory to your philosophy of decentralization. Can you just elaborate a little bit more on when you think it's appropriate to, for example, merge different business units?

Yeah, of course. That has been something that we've been doing for forever. If you take the largest one and the oldest one we have, which is Fastiheten in Sweden, that's actually seven business units that have merged together, but that's over a 35 year period. So it's not as visible perhaps anymore. When we do so, either when they are strict bolt-ons, and then we have that thing in the cards to begin with, and that was the case with both the entry event and deal systems. So those were add-on acquisitions to Aktor Smartbook. So that we did right away. And then for the Norwegian insurance companies, Vimsa Nice. that has developed over time and it always comes from the business units themselves. So when they see that as time goes by and when you are going to do new product features or new upgrades. They talk, okay, we see, can we do this jointly? Can we have some economies of scale here? And then it becomes quite natural. And also if they are, of course, if a business unit would be in a direct competitor or in the same market with the same kind of customer base, we always coordinate sales. And then after a while, that becomes quite natural that they see the benefits of merging. But we take it really slowly and it's always from the business unit perspective. So they must want to do this.

Perfect, got it. And then my second question would be, if I understand correctly, the sellers of toxic technique will retain minority ownership of the company. And correct me if I'm wrong, but I don't think you've done that that often in the past. Is this kind of a unique situation where that was what you did? Or do you plan to use minorities more often in the future?

We have done it a few times, but like I said, it's not that often. That's all depending on the situation. We are very clear that we will eventually, 100%, so it's not a long-term commitment in that case. It is a way of handling earnouts, I should say. Taxiteknik is a really fast-growing company, and it makes sense in our model to share that possibility. and risk with the sellers. So we have suggested that a few times, but sometimes it fits, sometimes not. So it will probably happen more in the future, but it's always kind of an earn out method because at the end of the day, we will own 100%.

Perfect. That was all from my side. Thank you so much.

As a reminder, if you wish to ask a question, please dial £5 on your telephone keypad. The next question comes from Daniel Lindqvist from Danske Bank. Please go ahead.

Hi, guys. Just briefly on the Innova, both sales and margins. This quarter should be seen as extremely good in a historical context, I guess. So just if you could give us any guidance of any kind for the future, because there are rather large numbers in this quarter. And then also on the incremental margins, should we expect when we have these kind of quarters that we have lower incremental margins, so the effect won't be as big, I mean, We were expecting slightly higher incremental margins this time around but lower volumes. So will that play against each other in the future as well so that we won't be that dramatic on EBITDA or how should we think?

Well first on the margins we don't think it's dramatic at all. With that high volume comes a bit lower margin and that would be the seasonality. So we're still seeing that Enova on a full year basis have a really good margin and it is absolutely in line with the rest of our targets. So I think that's what you should expect. and then of course the seasonality there even last year q2 was by far the strongest one with nearly a third of the revenue in one quarter yearly revenue in one quarter followed them q2 still a bit sorry q3 also also strong and then lower in in Q4 and then Q1 is sort of the least, the quarter with the least volume. So that's basically distribution. And of course, that was last year. We're seeing the same kind of distribution this year, but balancing markets, we are there at the hands, in the hands of bigger players than us dominating that market. So both in terms of volume and price. But like I said before, it's a fantastic add-on and we don't need to invest in R&D to keep up with this market. We don't need to hire a lot of people to keep up with that volume. So there's a very low risk related to it as far as we are concerned.

Okay, but just, I mean, we just calculated from the transactional, quarter over quarter change in transactional income versus the quarter over quarter change in the COGS and subscription and cost and subsidized costs. So, and from that, it seems like we just need to understand the dynamic is there. So if you could just give us some flavor on the difference between the insurance premiums and the activated is that some 10 percentage points in margin or something just to get our calculations right.

I think if you look at the COGS and compare that over quarter, because the rest of the transaction based revenues that we have, they are quite stable. So basically that would be an Innova effect. So if you calculate the COGS between the quarters, that should give you a good proxy.

Okay. Perfect. So I'll stop there. Congratulations, guys, on a good report, and congratulations on proving the transactional-based business being quite a success. Thank you so much.

Thanks.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Okay, well, thank you all for listening in and thank you for the questions. And if there's nothing further, we just want to wish everybody a good summer and I hope you get some holiday and relax after the hectic reporting day. So thanks a lot for listening in and bye bye.