Vitec Software Group AB (publ)

Thank you and very welcome to this Q1 2025 presentation for VTech. I am Olle Backman, the CEO, and you will have to do with me because Patrick is not available at the moment. But as always, I would like to start with a general presentation of the group and starting with the big pictures here. Customer perspective, we always start with that. We have nearly 26,000 customers that we serve all business to business. We do that out of today, 46 different business units, business unit, basically a company. We have our feet on the ground in 12 countries, but we actually have sales in over 50 countries today, all in all. But you should also remember that most of our business units are a very domestic business or regional at best. Proforma sales, which is a bit of a guidance since we do lots of acquisitions, is up to 3.7 billion Swedish after Q1. 88% of that was Proforma recurring revenues and to my assistance I have nearly 1,660 colleagues. You can see the sales distribution there by market. It's quite evenly distributed between the origin of E-Tech from the Nordic countries and then spreading further out into Europe with our footprint in the Benelux area. Our strategy chain, which we work with throughout the group, it's always based on our values. That is the products of the foundation. It's very important to remember that we are a product-based company. We like to keep things simple. That's more to do with efficiency and how can we improve? How can we make this in a more efficient way? So it's a mindset. And then, of course, trust and transparency that works best. towards our customers, towards the society as a whole, and always, of course, internally, because it's a great value for us to be able to share knowledge between the different business units. Then we work further into the brand promise, which is to rely on today and tomorrow, especially important in these times, perhaps, that we are a very stable company that has been here for a long time, and we really care about our long-term customer relations and then working through the business concept and objective and then hopefully then also reaching towards our vision which is to to shape a wiser and more sustainable future um and talking about that future and and the growth that goes with it we have a way of trying to describe how we grow Of course, the business model, as I mentioned, all our business units are market leaders. They have a high percentage of recurring revenues and they work with that business model. We develop these business units from a decentralized perspective. So we are a very flat organization. We make a lot of efforts into the product investments, which is very important for us in order to be that trusted company in the future. And all of this fuels the organic growth of the business units. And then we top that up with acquisitions. And then basically we look for nice vertical market software companies, established and profitable. They have a proprietary software, which means that they own their own product roadmap. And of course, they already have a decent amount of recurring revenue. So basically the characteristics of VTech itself is what we look for in new acquisitions. Talking about acquisitions, this was the seven that we did last year, and I'm not going to run through all of them, but the point here is that they come in all shapes and sizes, and they're also in a very spread out geography. Really interesting here for us internally. Of course, we opened up a new home market with our first acquisition in Belgium last year. So far this year, we acquired the Dutch company Integrip in January. A really nice addition. Also a great proof of a company that does not only have a mission-critical software for its customers, but also software that is critical to society as a whole. That was a really nice addition. If you look at it... By vertical, we perhaps could cluster them together. So we have our big footprint here in the energy field, in property management, healthcare, auto, finance, and so forth. So sometimes we buy companies that sort of jack into one of these existing verticals, or we could buy a company in a totally new vertical. And this is another way in which we show our business units. You can see here the sizes and the proportion of recurring revenue and also the year of acquisition. And this is pretty much like a blueprint of the M&A market as we see it in our existing geographies. The average size is roughly four or five million euro company, some bigger, perhaps one out of 10 or so. So that's pretty much what it looks like when we look into our pipeline as well. Organization, like I mentioned, it's a very flat organization. So in these blue boxes, that's where the business units are. That's where all the business decisions are taken locally. That's where it all happens. And to their aid, they have the VPOs, which is a vice president of operations. So they are part of the group management team, but they work exclusively with these business units so they don't have anything else on their plate they just work to coach them to guide them to make them a bit better year by year and then we have a small group office at the headquarters supporting the business units one of the things that we do drive centrally is this sharing of knowledge which is a very important part because when you have 46 companies that are basically doing the same thing, which is vertical market software, although directed at different industries. It's a very important thing that we can share our common culture, but we can also share concepts, best practices and worst practices for that matter as well. So we share both successes and failures. And this just keeps on getting better with size. So it's a very powerful thing within the VTEC group that really helps us to become better. Moving over to the numbers for the quarter then. Net sales was up 23%, up to 880 million. The recurring revenue part increased by 28%. EBITDA margin at 220. Margin-wise percentage unchanged or unchanged in absolute terms. The margin decreased to 25%. dropped from 31 operating profit which was 153 million same there unchanged but the operating margin at 17 compared to 221 last year reason for this is basically a bit of a mix in the revenues so we had a Less services and less license sales, although they are a quite small part of our total business, but they are 100% margin business because we have all the resources already at our payroll. We thought we saw some increase in the activity in the market in the end of last year. We were hoping that to come through in Q1. Unfortunately, it hasn't done so. So the turmoil around us has sort of postponed some of the rollouts of new projects, rollouts of new features and things like that. So that's still the picture that we see. We don't experience that we have actually lost anything, either customers nor businesses. It's just a lot of postponements of new initiatives. And although at a quite small scale, because we have this really stable business model with the recurring revenue, it's still sort of the cherry on top there that also falls through in the marketplace. But if we look at the operational result, I will get back to that shortly. It's still an okay quarter, not our best, but okay. And if you look at it by quarter or the yearly, so the graph here is just an expression of that. You have read that through the numbers, I think. Compounded growth over the past 10 years is 21%. If you look at the EBITDA margin, same here, we are increasing in absolute terms year by year. But if you see the margin on the last few quarters, it has dropped a bit down to the 25 for this quarter. And talking about what I mentioned here, which is sort of the cash generating profit, this is one way that we measure internally because we don't do the activations and the amortizations and things like that on a business unit level. So when we coach and guide our business units and set their targets we use an internal KPI which is basically a cash EBIT. So this is just a bridge for you to understand the 153 million which we reported if you deduct the capitalization and you add back the amortization and the acquisition related amortizations you get to the cash EBIT which actually then increased With 12% and the margin is 20 compared to 22. And this is also stems very well with the actual cash generating. So the cash flow was up, I think 9% this quarter. Look at the distribution here. You can see the very important thing that the subscription based revenue is growing healthy underneath. And then we have the transaction based revenues on top, which is a great value add for our customers. But as I mentioned before, they have a very different gross margin profile. So it's a lot less profit in that dark blue part of the portfolio. But all in all, a very good offering for our customers and very appreciated, which makes us take a greater share of the wallet. So growth then, as I mentioned, one acquisition so far this year. And then if you look at the organic pro forma, which is what we have been guiding for now for a couple of years. So that's one quarter in this year and of course, three quarters in the last year. So we are expecting that to go down a bit because we have still some tailwind from the higher inflation year of last year. So the price increases there are... expected to go down a bit in this year. If you look at it in a more traditional way, we measure this on a full year basis. So this was last year's numbers. So then we had an organic growth of 9% in comparison. The diversification of sales, as I mentioned, through the geographies, it's quite an even spread, but also a very nice diversification when it comes to breaking down the recurring revenue, of course, and also on the customer side. So we have a very low customer dependency. And then that is just to sum it up a bit. Like I said, nice growth. one acquisition so far this year and the cash flow from the operating activities was pretty much in line with what we expected. And with that, I think that we will hand over for any 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 Predrag Savinovic from Carnegie. Please go ahead.

Good morning, Ola, and thanks for taking my questions. I think first off, how much should we read into the comment around the mix shift? Is this an isolated event for the quarter, or this is something that we will see more of during 2025?

The mix there, we are both hoping and expecting that some of these projects will start rolling out. Like I mentioned, we haven't experienced that we've actually missed anything. But of course, with all the turmoil that goes around us, VTech itself, we are not that affected, but our end customers might be. So we're still hoping that we can pick up on the project and the rollouts. So that is to be expected.

Okay, and if you could elaborate on this kind of transition around services and on the margin, I think if you can help us.

where is this happening on their respective revenue lines and and where is the margin impact hitting you in your perspective yeah it's basically two things and one is of course like i said it's uh it's a bit less portion of our revenues but we have services and we have licenses it's Services is by far bigger licenses is roughly 1% today. But the service department here is that we have all the resources available because we are doing all this with our own staff, of course. So by that, it sort of flows down directly through the P&L. So it's basically 100% gross margin impact if we get that up to speed. And the same goes with the activation, so the R&D efforts that we do. It's a bit less on that part as well. We will see if that is something that could be maintained over. So it's an increased efficiency. It's still a bit early days to say whether or not that is here to stay. We are very focused on having the correct sort of level of R&D spend because that's our investments for future profits. So these two things combined. And then, of course, we have the transaction-based part of our recurring revenue, which has a lower gross margin. So if that has a larger part of a single quarter, of course, that would affect the margin. But we saw a lot of that during last year. We still have this quarter where, for instance, we have companies like Innova and Bidtheater. Bidtheater was not part in Q1 last year, so that will still sort of be visible here. They came in late in Q2 last year. So I think all in all, we are expecting or I would say hoping and expecting that the project part will pick up. at some point. The rest of the revenue should be fairly stable going forward. And then we also have on the OPEX side, Q1 is by far the highest proportion of the OPEX. We know that we have a bit lower due to the holiday seasonalities in Q2, Q3, because staff is by far our biggest cost. So also from an OPEX perspective, Q1 is usually a bit higher than the others.

Okay, so we should expect the OPEX to decrease in the second quarter. And could you give some more color on margins for Q2, Q3, et cetera? Because, you know, given there's a large change year-on-year and sequentially, I know you don't want to do guidance, but understand the moving parts a bit more on how this can trickle down in. for the rest of the year.

Like I said, like you said, we don't do guidance on specific quarters because also we really like to think of VTech as a very long term and long term oriented company. Things are moving quite slowly as usual in our And we don't see any dramatic changes in this regard. Yes, we have a bit more on the transaction-based part, but that came through most of it in Q3 and Q4 of last year. In Q4, we had a lot of projects that came through. And these projects, exactly like I mentioned earlier, they had a lot of services there were some licenses which fell through so we had a fantastic strong q4 of last year so i should say if you look at the the sort of rolling 12 months basis is always what we'd rather like to think our best guidance for the future okay that's uh that's clear thank you very much thanks very much

The next question comes from Eric Sandstedt from Kepler Shoebrew. Please go ahead.

Hi there. Thanks. I've got a few detailed questions perhaps on amortizations, trying to get a better understanding of the difference here between the P&L and the cash flow, although you kind of briefly commented on it already. But if we look at amortization of intangible fixed assets, it amounted to 67 million in the quarter, right? And I think this line has tended to be around 30 to 50 million per quarter historically, although it was pretty high also in Q4. How should we think about this cost line going forward? Is Q1 sort of the new normal here?

Yeah, so I think I can flip back if you look at the... You have them here, the 67. You can see quite a good increase from 38 to 67 and then 66, which is actually decreased. Yeah, the latest quarter is always kind of a good proxy. And then, of course, because what we did was... the larger acquisitions that we did, and especially the ones in Q4 of last year, they had intangibles on their own balance sheet. So what happens then is that if you don't have any activations on your own balance sheet, the amortization will end up in the acquisition related. But if you have it already, then it's already part of the PPA. between these two lines so yeah I would say that Q1 is a good proxy going forward because of course these are all amortizations according to plans so they will stick with us for many years but it's really the distribution between these two lines when we do the PPA allocation

Because that actually brings me to the second question, because if you look at the acquisition related amortizations, those were 63 million in the quarter, right? And I think that's only sort of on par with the same period last year and clearly below the Q4 level of 78 million. So is that related to your previous comment or are there any sort of acquisitions where

yeah like i said it's really a distribution between these two lines that's one thing the other is of course that as our companies sort of fall over the 10-year frame they will be fully amortized from that row and that also happened last year we had Some of our acquisitions that were made 10 years ago, which were a bit bigger by then, actually fell out. So, yeah, that will happen.

But has anyone fallen out in this quarter that explains that pretty low number, 63 million? Or is it more the mix between the two?

It's more of a mix, but they fell out already January 1st.

Yeah. Okay. Yeah. Good. And then finally on organic sales growth, because that continues to hold up pretty well, growing double digit in local currency terms in, I guess, what's still a pretty tough market. Could you maybe share some more light here and also maybe comment on pricing specifically but more also generally what is driving double digit organic sales growth in a pretty tough market?

Yeah, like I mentioned, that's on the pro forma basis, which we think still it's a good guidance of the pace and the size that we have today. But we have done three quarters in last year and one quarter this year. So gradually the organic part is expected to go down a bit because we don't have the same tailwind from price increases. Price increases last year were perhaps in the Four and a half, five, five and a half range this year, probably like two percentage lower, at least more on the three, three and a half part, which we see so far this year. So that is expected to go down a bit. And the rest has been an upsell to existing customers, like mentioned before. So we still see a decent activity in the existing customers, which we can sort of sell. And one of the things that we do sell them, that is actually the transaction-based products that we have. Because like I say, they are always sold to a customer that already has the subscription part. So we can't just do the transaction-based part. There's always a subscription at the basis.

Yes, but I mean, how does this then relate to the cost of goods and services that is up quite a lot? I think you mentioned it already, but coming back a little bit to the question, how one should look upon that going forward, because this relates, I guess, to the transactional part of the business. But cost of goods and services are up a lot year on year.

Yeah, they are predominantly related to the transaction based. They are the transaction based and then there is the external hosting. That's basically what's in there. So if we have a higher degree or higher gross number on the transaction based revenues, we will have an increase in the cost of goods sold. So that pretty much follows it. So same here, giving the distribution within the quarter, the sort of gross margin level that we have now, it could go up a bit, like I mentioned, if we get more service sales, if we pick up on that line, of course, gross margins will pick up a percentage or two. So they are very closely related.

Okay, perfect. Thanks a lot.

The next question comes from Patrick Schwartz from Pareto Securities. Please go ahead.

Thank you. Hi, Ola. I have a question on the product mix. So transaction revenues were up on volume. Is this specific to bid theater and sales? Innova or is this broader among your subsidiaries?

They are by far the biggest one in that category. But still, there are lots of other business units that also has transaction-based volumes. But they are by far the two biggest ones.

Okay, thank you. And then on seasonality, normally Q1 is lower on transaction revenues from RBS. Was this true this quarter also, or did we see an increase?

Lower on the transaction from Enova, I should say. Enova is still expected to have larger volumes in Q2 and Q3 due to the seasonality. The other companies that have transaction base, they are much more even throughout the year. So it's basically Enova that has a big seasonality effect.

Yeah, okay, thank you. And then on cost per employee, you now had about three quarters where cost per employee has been up about 6% year over year. Is this starting to become a longer trend or how should we think about that?

If you look last year, 6% up, that was pretty much in line with just the salary increases within the IT industry. We are looking for very talented and highly sought after people. And last year, salary increases were in the 5-6 range, expected to be a bit lower this year. But yeah, we will basically follow the IT industry in that sense.

Okay, thank you Ola. I'll get back in line.

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

Hi, and thanks for taking my question. I just have one quick follow-up. You know, looking at the M&A front, you already elaborated on, you know, general economic uncertainty doesn't affect your recurring revenues that much. But when it comes to M&A, have you seen anything in terms of sellers maybe turning a little bit more cautious, or is the market still unaffected, so to speak?

We still experience a good pipeline. There are lots of companies to look at. So we have a really good funnel in that sense. But it is dragging out a bit in time. There are longer discussions. There are more uncertainty, of course, from both buyer and seller. But in this case, as we have done in many, many years, we have a really focused approach. We have set criteria and we're back to the fact that Vitek is to be relied upon. We have the funding available. So we are what we think a very stable partner in that sense. But from a seller's perspective, of course, bit more uncertainty i should say and we have experienced that the discussions are taking a bit longer perhaps but it doesn't change anything in our strategy or the way we think about what we're looking for or how we should price things all right perfect thank you so much the next question comes from eric larson from seb please go ahead

Good morning. I hope you're good. I just have one question. And I know you don't usually comment or I guess never comment on single business units. But given the tangible deviation to expectations there, I'm just curious if you saw any earnings decline in any of your particularly larger subsidiaries. And of course, I'm always interested in Innova, since that's a bit more difficult to assess.

Exactly like I said, Erik, we don't comment on the profitability on individual business units. What we can say, first of all, this is not the margins here. When we look at it operationally, like I mentioned, because that's how we measure our business units, profit was at a 20% margin level compared to 22% and it is 12% up. Really no drama, nothing that sort of makes us think in any different way. Of course, we're always cautious on costs. We're always looking ahead and then seeing, okay, what's the activity like out there? But no, there were no really surprises for us in this quarter. So pretty much business as usual.

All right. That was my only question. Thank you.

Thanks.

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

Yes, thank you very much, Olle. Many questions already asked here, of course, but I looked at the earnouts paid out here in Q1. They were 175 million SEK. Do you have any kind of outlook or guidance for the rest of 2025 in planned paid out earnouts?

Yeah, if you look at the short-term part there, I think it's roughly a bit over 100 million or so left, if I remember correctly. So if you take the short-term... Yeah. So that's to be expected to be paid out, and... The companies that relate to that, they are performing really well, so we are expecting that to be materialized.

Yeah, I agree. Okay, that's fine. And then also, out of the 1,600 employees, roughly how many work with fully service-related projects and revenues, if that's possible to measure?

Unfortunately, that's not possible to measure because the... The smaller business units, I mean, they are one individual has sort of many roles. So they can be a developer, they can be a tester, they can work in customer success. So it's really hard to measure.

Yeah, I see. And then the final one, we already got some questions on Innova and Bid Theater, but Are there any of these two companies that have particularly tough comps in any quarter in 2025 here versus 2024 that you would like to highlight?

No, not apart from, like I said, Enova has an expected seasonality, but yet again, I don't know what the weather will be like in the Netherlands in May and June.

Fair enough. Okay, thank you very much.

Thanks.

The next question comes from Victor Lindstrom from Nordia. Please go ahead.

Hi, good morning, Ola. Just a follow-up on OPEC's question. So you mentioned that you expect OPEC to decrease here going forward, but does that still include that annual salary increases? Are those completed, or should we expect those to kick in from Q2 and onwards?

both salary increases and also price increases. When we reach the end of Q2, so during the first half year, both price increases and salary increases will be done. Up until this point, roughly, I think 40% has fallen through. So it all depends on the different sort of patterns in each country.

Okay. Thanks. That's all for me. Thanks.

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

Okay, so thanks all for listening in. And we're looking forward to the AGM, which we have next week. So you're most welcome up to me if you have the opportunity. Thanks for