Vitec Software Group AB (publ)

Thank you and a warm welcome to today's conference call. I'm Patrik Fransson, Head of Investor Relations at Vitek Software Group and with me in the room here in Stockholm is our CEO Olle Backman. In the call, we will cover the report released earlier today, but first also give a short overview of Vitek software group. And finally, after the presentation, we will, as always, open up for questions. So with that, Ulle, I hand over to you.

Thank you, Patrik. And like Patrik mentioned here, I will give a short overview of Vitek today and then move into the report. But always starting with the same picture here, the overall. So VTech Software Group of today, we serve nearly 26,000 customers. We have 45 business units and business units is basically the same as a company. We're a small group of companies. We have operations now with feet on the ground in 12 countries, but we say that we have six home markets and our home markets is where we have a company which is originated from that country and has its headquarters there. So they are the four Nordic countries plus the Netherlands and since 2024 also Belgium. Pro forma, so that's the run rate that we're operating it today. We have sales of nearly 3.6 billion. 87% of that is what we define as recurring revenue, which has to do with our contractual based and under software that we are providing. And I have nearly 1,660 colleagues to my help. Looking at our strategy chain, which is basically unchanged for a few years now, but starting with the values and, of course, for our employees, this is very important. The products, that's the foundation. We are a product-based company, so we're not dependent on services or anything like that.

Keeping things simple. in everything we do, development, safety, but also how we interact internally and with society as a whole. And then, of course, trust and transparency, which is absolutely critical to maintaining a long-term relationship with your customers and your employees brand promise which pretty much sums things up which is to rely on today and tomorrow and this is also very important for us that's the tomorrow component here that rhymes very well with the long-term aspect and the long-term relationships that we want to have with all our stakeholders. And if we do things right of course we will hopefully take part in shaping that vision of ours, which is to shape a wiser and more sustainable future. Talking about growth, Then how do we go about that?

Well, we have the fundamentals. So that's the business model. Our companies are usually market leaders in their small niches. They have a high percentage of recurring revenue. And that's also something that we try to operationally drive all the time. And then we work to develop them. So that's the how. the how of the value creation within the business units. And that is done through our decentralized model, so where decisions are taken locally, in near proximity with customers and employees. That goes for product investments and growth initiatives. And then, of course, we like to add more nice companies to the group based on our quite strict criteria that we look for. So we try to acquire nice vertical and profitable software companies that own their own proprietary software so that we are in control over the roadmap.

And we also like to see that they have a decent amount of recurring revenue to start with. Talking about acquisition. Last year we made a record of seven for the year and three just in the last quarter. Also adding And a new home market, like I mentioned, where we acquired Belgium Trinergy in Q3. But like you can see here, two Swedish, three Dutch, one Finnish, and one Belgian company. And they come in all shapes and sizes and that pretty much is what our market looks like in various forms. But the common denominator here is that they all meet our targets and they are all really nice vertical market software companies. one way of looking at the entire group is of course based on verticals so we have nearly 45 business units but we're present in I think it's 22 or 23 different verticals and you can see also that property management, energy, healthcare, auto and finance and industry are quite big ones where we have been active for a long time and we also usually have multiple business units within in them but we're equally happy for the ones that we only have one business because they are always the market leader in their niche and then looking at the business these units on an individual basis you can see the sizes here and also the proportions of recurring revenue and like you can see they come in all shapes and the forms and sizes but if you look at the average that's roughly 30 40 million swedish euro company which is the average size and that's pretty much has been a constant number over the years

Organizational-wise, we have the same structure. Like I said, a very decentralized organization. So in the red square here, that's all the business units with their individual CEOs. They have all the autonomy. They have all the decision-making power and all the resources that they need to conduct their business. And then from group management and through the VPO model, we try to support them and coach them and teach them and also, of course, challenge them but also connect them with each other so that we can have a great learning experience. And talking about that, this learning experience that we have forums that we call a sharing forum, where we also share not only the culture and the values, but also very specifically things that we can learn from each other.

each other's successes or mistakes and this is just getting better and better with the increased size because there's a bigger and bigger knowledge pool to tap into and it's also very much appreciated by the business units out there. Then moving over to the numbers both for the full year and for the quarter, but starting with the quarter here, sales was up to 927 million and increased by 25%. They're really happy with that and recurring revenues grew even a bit faster. more with 26%. Our EBITDA margin increased by another 20%. The margin was fairly stable, 29% compared to 30% last year. More of an, I would say, effect of a mix in the income which we also talked about in the Q3 and rolls over a bit into Q4 so no drama there. The operational margin margin 19 compared to 20 for the quarter cash flow from operations really strong especially compared to last year but I would say it's more on the level where it should be I think that the Q4 in last year was perhaps the odd one out And like I mentioned, three really strong acquisitions during the quarter with Ole Schlager and Fugle in the Netherlands and Rodeo in Finland. Moving over to the full year... sales up to 3.3 billion Swedish 20% increase on the top line margins also there like I mentioned earlier a bit of a mixed That has made it a bit lower, 30% EBITDA compared to 32%, but that's more a different mix of the income that we require.

earlier on, so nothing new there. Really strong operational margin, 21% slightly above our target and the target is actually more of a floor. So we say that we could reach an operating margin of at least 20% and growing. So that's what we aim for and that's what we push our business units towards. Earnings per share increased by 19%. Also cash flow from operations really strong, just over a billion here. And the board of directors proposed an increase in dividend to 3.6 kronor per share. So that's an increase of over the 33 kronor last year and also that's the 23rd consecutive year of increases. So that's something that we are really proud of.

And digging a bit deeper into the sales, you can see just the distributions. both over the years and which is a really strong 21% compounded growth and if you look at also the individual quarters you can see an all-time high here in the Q4. And, of course, margins, the same way here, increasing the margins, of course, in absolute terms, compound the growth of 27% of the last 10 years and you can see in the quarter same here it's a really strong absolute number and the margin is fairly flattish over the time Moving over to revenues, so the allocation which we have been showing for the past year or so. It's the total of the recurring revenue but split into two sections. which is the subscription-based revenues, which is the absolute fundamental. These are the SaaS fees, the maintenance fees, the hosting fees. A really stable groundbreaking and That was really strong here in Q4, both in terms of organic, but also fueled by some really nice acquisitions that added to that picture. And on top of that, we have transaction-based revenues, which is really value-adding services on top of our software directed to our customers. That could be text messaging, that could be maps, that could be kickbacks on spare parts, it could be... sorts of things and then from mid 2022 when we acquired Nova also energy services on the balancing market

And looking at that growth, we have always guided throughout the year on the organic growth on a pro forma basis, which we think is a good proxy for everyone to know at what pace are we working on today. So that's why we have the pro forma 3.6 billion compared to the 3.3, which is reported. And here we have also a 9% organic growth on a pro forma basis on the total, which is a strong number. What we also now highlight is perhaps a more traditional way of calculating organic growth. So that's more backwards looking. So it happens to be the same number. So 9% organic growth.

And we had basically a 0% effect during 2024 and then 11% of our total of 20 were from acquired units during the year. Diversification of Sales is also an important feature within VTech that really shows the great variety. So we have, of course, the country perspective. We have our home markets there, great distribution. over that we also have a breakdown of sales from our customers perspective and also the customer distribution so we have a low very low concentration on the customer So all the 26,000 customers basically come up to 92% of the revenue, and then there are very few. The top 10 ones only account for 8%. And then to sum things up, for VTech for 2024, we think that we have a really strong year with 20% growth again and 9% from organic. which we were very happy with. Of course, record of seven acquisitions on the air and also opening up Belgium as a new home market. Continued strong cash flow and basically... Another solid VTEC year I would say for 2024. So with that we hand over to questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad.

The next question comes from Daniel Thorsen from ABG Sundahl Collier. Please go ahead.

Yes, good morning. Thank you very much, Ola and Patrick. I have a question on the cash flow here in Q4, and specifically the M&A cash outflow in Q4. That was higher than I expected, at least, and even without the earnouts for previous acquisitions. So firstly, could you share what you paid for Oilschlager in the quarter, please? And then secondly, how large do you see the current financial headroom based on the leverage? It looks to be up again to levels where you have been historically, despite that you raised one billion as late as in September. Thank you.

Thank you, Daniel.

We don't disclose the individual numbers that It will probably be shown in the annual report, of course, for those who want to dig into it. But yes, it was a pretty high level of capital deployment during the crisis. but we always pay according to profits and we always also do that we pay for the current profits and that's the cash outflow today so all the three companies combined together They are really high-quality companies with good margins. On top of that, we have some contingent earnouts for all those three, so we hope and expect expect them to continue to grow. So they were all very profitable companies. And then we still, we pay according to what we guide, so we haven't sort of deviated from our multiples. Okay, that's clear. And then the follow-up on your current financial headroom, given that you had almost 1 billion outflow during Q4. Yeah, we still have roughly a bit over a billion in Q4. in firepower, in our existing credits, because we move into Q1, the first half year, where we have our strong cash position. also of course with the fact that we have acquired quite a lot of revenue and the income so according to the leverage that we are operating with which we show with our bankers we are very good in line and very comfortable with the levels that we're at and that we can also accumulate more debt if we want to. I think we're in a good position so That's not something that limits us in any way. Excellent. And then the final question.

What price tailwind do you expect for the group as a whole in 2025 from CPI-linked price increases, roughly?

Well, that would be basically a mix of the CPIs in the various markets that we are in. We haven't sort of concluded all the numbers yet, but what it looks like is approximately around 3% from pure price increasing from the CPI linked.

Excellent. Thank you very much.

The next question comes from Christian Binder from Redye. Please go ahead.

Hi, and thanks so much for taking my question. I have one quick one regarding the contingency consideration reversal in the quarter, which was rather large.

Can you talk a little bit more about whether that was an inquiry who underperformed your expectations or was it rather quite ambitious goals that were met so she can give any more color on this one? Yeah, first of all, I think it shows that we have a very prudent approach. when we allocate the considerations that we pay. It was more the case that we wanted the sellers to have an ambitious target to work against. and it's always a negotiation. I want to have an opportunity to reach a certain goal. And we said, yeah, I'm fine with that, but I only pay for what I see. And in this case, they have performed well, but they haven't sort of performed as high as the sellers would have expected. But we are happy with the development of the company and we have paid accordingly. So then we just sort of write off that consideration and also decrease the goodwill So it doesn't have any result effects and it doesn't have any cash flow effects. So it's more of an accounting gain, but yet again, I think it only proves that we have been prudent. Got it. And I mean, you've previously discussed how, to some extent, competition has increased and there might be change price expectations. Do you kind of expect this pattern to continue in terms of um you know to be able to agree on the price you have more ambitious considerations so to speak i think the continuing considerations they are here to stay and we have been working with that for many many years because again we are very happy to pay for what we see and are they delivering according to a really ambitious plan then they should be rewarded for that.

And I think that's an important message to sellers and say that, of course, if you have an ambitious agenda, but it's just a risk distribution that if you believe in it, fine, then let's set up a plan for you to be able to reach it. But at the end of the day, you will always be paid for what you deliver and the actual sort of the facts. So I think that's here to stay. And I think it's a good way of distributing the risk and the opportunities between seller and buyer.

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

Thanks, Christian.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad.

The next question comes from Predrag Stavinovich from Carnegie.

Please go ahead. Thank you very much for the giant question. Good morning, all. We mentioned price types of runs. We mentioned price spikes of around 3% going into 2025. What about upselling and new sales? Previously, you've commented on upsells and new sales. new sales are a little bit more challenging? Do you see that as consistent with the past, or do you see improvements there? I think we have seen a little bit of improvements. First of all, up-sale is a more on a constant good level because we work closely with our customers and we have a mission critical software that we provide and they ask us constantly what else can deliver and we work to always increasing new features, new modules, things like that. In some sectors, for some verticals, we are seeing a bit of better times, better investments from the customers because you can't be tight on on investments forever. So we are seeing some positive signs. But that's yet to be proven, of course. But we have a fairly positive view on that going into 2025. Okay. And then looking on an aggregate level on the acquisitions that you've made in 2024, what kind of margin levels are these operating at? Are they below similar or above the level of VTech? The last question. Porter's acquisition, they are roughly slightly above, so you can see that in

The numbers on an EBITDA level, so they are a few percentages on top. So they have been really successful and high margin companies that we have added to the group.

Okay, super. And finally, if you could elaborate a bit on the quarter of a quarter growth in service revenues, or actually, in fact, maybe in the total revenue increase, Q3 into Q4, it was fairly above the markets and our expectations, and probably also relate that to the margins. I think given the higher sales number, one could have assumed that the margin would have picked up as well. Is there a high level of transaction revenues here at lower margins? Is there anything specific in the costs to be aware of?

I think I mentioned that also during the quarter, we finished a few projects that has been going on for quite many years actually and so they rolled over into the last quarter and projects is not a huge thing within VTech but occasionally we do that and a project could be there's a bit of services there could be a bit of hardware it could be a bit of all the licenses so it's just a mixed bag but all these projects they of course fuel their recurring revenue for the coming years because then they move over into a maintenance mode So a few larger projects were finished during the quarter. So I think that's what constitutes the difference on a quarter-to-quarter basis. But they were good projects for us, but like I said, it's not that usual that we do that. Okay. Well, that's all for me. Thank you. Thanks for the talk.

Next question comes from Victor Lindstrom from . Please go ahead.

Hi, all, and thank you for taking my question. So first one, how do you see the recruitment needs going into 2025? when it comes to recruitment we constantly recruit because we grow and of course we have a slight staff as anybody else but we've seen if you had asked me two three years ago that would have been the greatest risk in finding the right talents it has been a bit easier

It's not easy in this industry to find good, but it's easier. So we don't see any big problems in that. And also that we... I think we filled up a lot of the vacancies during 2024. So we're quite in a good spot now in the various business units. So we're not seeing any significant increase in numbers. But it always... You know, just this annual staff turnover that we try to accommodate. And when it comes to wages, different markets have different timetables there in the Netherlands and Denmark. They are quite early in the year, so they are basically done.

Sweden, Norway, Denmark it hasn't really started yet and it's usually in April that the salaries are set and the negotiations haven't even started yet so we will see but of course expectations is that roughly around the CPI for each market that's to be expected at least and then some Yeah, so that's the expectations at least from the Netherlands. And then Mark, we can see that that's quite accurate. Right, great. Thank you very much.

The next question comes from Daniel Lindquist from Danske Bank. Please go ahead.

Hi, guys. So two things that surprised me in the report, if you could please elaborate a on those. The recurring revenue on subscription seems to be much higher from acquisitions than I had expected. Have you labeled the numbers from the acquired companies or have they really performed strongly in the quarter? They have both performed strongly in the quarter and the companies that we have bought are in the high 90s in terms of recurring revenue. Really good additions there. Okay. Perfect. It's sustainable for the coming quarter then as well. And then the next thing, I was surprised in Q3 with this high capitalization. And in this quarter, it was rather difficult to quite some degree. Could you just elaborate? on the capitalization, if there's something we should think about for the future or if this situation is going to normalize once again in Q1. I mean, this is really called the beat today. But what should we expect for the future?

I think if you look at the full year, that's probably the best proxy for that. Like you said, it was a bit higher capitalization in Q3, a bit lower in the Q4. But if you look at the full year, I think that's a good proxy going forward. Like I mentioned earlier, we had some projects that we rolled out and we've also done a lot of customer implementation. In small companies, it's usually the same people who do development that also help out with such cases. If you do a lot of rollouts on new customers, it usually gives you a bit fewer hours on development, but that's just on the quarter, it could bounce back. I think the full year is a fairly good proxy.

Perfect. Then nothing else from my side. Congratulations on a strong report. Thanks, Daniel.

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

Okay, so thank you all for listening in. and we think it's a strong report and we hope to hear from you again in the next quarterly session. Thank you.