Vitec Software Group AB (publ)

Thank you and a warm welcome to today's conference call. I am Patrik Fransson, Head of Investor Relations here at Vitek Software Group and with me to my left is our CEO Olle Backman. As usual in this call we will cover the report released earlier today and also give a short overview of Vitek. And again as always we will open up for questions after the presentation. So with that I hand over to Jule.

Thank you Patrik and welcome all to this conference call. I will start as always with a short overview of the Vitek software group and as you know I always talk from the customer perspective first so we're serving the 26 000 business to business customers. We do that from a decentralized organization through 46 business units. We are today present with our feet on the ground in 12 countries, but we say that we have five or six home markets, which is the four Nordic countries and the Netherlands and Belgium as well, where we have the origin of these business units. I have nearly 1,700 colleagues to my aid and the pro forma sales is up to like 3.6 billion now. And talking about sales, we say that we have our feet on the ground in 12 countries, but we actually have sales in over 52 countries by now. So that's quite impressive. Moving over to the sales and the diversification and you can see here the distribution from the various markets. Only 25% in Sweden and of course we originated as a Swedish company to start with. So up until 2011 we were 100% in Sweden and now you can see that distribution there. You can also note here, and we will get back to it on the FX here, so Euro and Danish krona, it's roughly 60% today, so only 25% on the Swedish krona. And you can see the largest business units, it's only 10% of the sales on the software sales. And if you look at the customer also there, there is only 8% on the 10 largest customers. So all in all, this is a great risk distribution in our mind. uh talking about growth and and how we handle that from a strategic perspective we work with the the business model of course we are usually market leaders in our various niches we have a high percentage of recurring revenue so that's a standard for our business units and then we develop them further and we do that through this decentralized organization We do that a lot with innovation and the product investments. And of course, all of that is aimed at fueling the organic growth in the existing business units. And then we top up this with acquisitions. So basically what we look for are the characteristics that have made us successful over time. So great vertical software companies, they are established, they are profitable, they own their own IP. So we are in control of the product roadmap and they have a decent amount of recurring revenue to start with. So these are the characteristics that we look for when we look into acquisitions. And speaking about acquisitions, you can see this is last year's seven acquisitions we did up until Q2 last year. We have made two acquisitions and then you can see the seasonality there. So it's usually quite heavy at the end of the year. and so far this year we have made one acquisition in q1 of dutch integrip a nice addition here and as i mentioned in my ceo comments in the report we released this morning we think that we have quite a solid pipeline still on mna but there are some postponements there are delays the discussions are sort of dragging on it's taking more time than usual, usually from the sellers initiative. And there has been quite few closings as a result of that in the market. And a few that has been closed has also been very highly competitive. And here we are very focused on our strategies and what we think is a good value for a nice vertical software company. And we don't sort of get carried away and participate in the crazy auctions that sort of really driving the prices up. So we try to come up with a fair value to start with and stick to that as a strategy. And when you look also at the different verticals that we are present in, you can see here also a great display of the distribution between different segments and niches. You can see the big ones here, property management, energy, finance, healthcare, very stable, all of those. And there are some that are more exposed to Let's say the volatility and the consumer environment, that would be the auto industry, for instance, or trade and manufacturing, fast moving consumer goods and so forth. So it's always a mix. But all in all, it's a great stability and we still see quite low risk in all these segments and we have a very low churn. So that hasn't increased in this. time and i think this is a lot thanks to that we provide business critical softwares so they are not nice to have they are needs to have for our customers and the business units this is a distribution of sales and the proportion of recurring revenue and we usually talk about this model as well as kind of what the pipeline for M&A looked like, because we're basically a mirror image of our pipeline today. So there are a few bigger ones, but the average is roughly 40-50 million Swedish in turnover. Sharing knowledge is a very important thing within the VITEC and I also mentioned that in the CEO report this year. So we have a lot of ongoing forums which we call them where we share best practices across the groom and this is just getting better and better as we grow bigger. So it is a very much appreciated amongst the the stuff that we have. So we have different clusters and verticals. You can talk about different specific issues in that niche or from a technical perspective or from a marketing perspective or products or features. And of course, AI has been a really ongoing topic for the last years that we have had lots of collaboration between. And I like to highlight the very powerful thing when you hear a peer talking about a very concrete and intangible example of how they have done. It could be for internal efficiency, how they use the different models and the tools that we have available for us. Or it could be from a customer perspective where we actually use AI in our applications. Two examples of that could be, for instance, real estate agents, both in Sweden and Norway. They use great AI products for functionalities such as describing the neighborhood, describing the properties, text generating. So that makes the life a lot easier for the real estate broker. So we're really helping them with that. Another quite advanced thing is within the energy forecasting models where we have over the years used a lot of different models for forecasting. It could be weather, it could be production and to forecast the day ahead pricing and now that we have roughly 20 different models and we have trained our own AI tool to scan all of these for their strengths and weaknesses in different market conditions and different weather and then we use the best possible outcome to provide for our customers that they had pricing. So that's also a very powerful way of using AI that has really helped us and our customers. Moving over to the quarterly results, I would just like to discuss a lot on the highlights here. For the quarter, 4% increase in total net sales. For the first six months, that's 12% increase. The recurring revenue share is on a high and a good number, 89%. Our EBITDA margin and as well as our operating profit was 236 and 176 million. Down 10% in absolute terms, so we get back to some of the reasons or the bridge for that. But all in all the operating margin 19%, EBITDA margin 26%. Fairly good, not our best quarter, and there's absolutely room for improvements here, but better than Q1 for sure. So it's on the right track. Again, very importantly, and one thing we really monitor a lot is the cash flow from the operating activities. And that's also given the seasonality that we have, you should mostly look at the year to date figure there that has a health increase to 843 million. We also provided since last call the internal metric that we use, which is the cash EBIT, which is basically the operating profit but net of any activations and amortizations and depreciations related to the product development. So that's more closer to the cash flow generating profits. And as you can see, that deteriorated minus 5%, but still a good 22% margin there. And as I also mentioned in the report, one of the really things that stands out, or rather I would say the Q2 in 2024 was the exceptional high number for Enova, our Dutch business unit, and the difference there in their transaction-based grid management products was down 80 million sec compared to last year but at this point I would like to remind everyone that Innova is doing great it's a really great business unit it is totally exposed to the market conditions here so the market on the grid balancing market There are volume and there are price and we don't control any of that. What we can control is our strategy in winning the daily auctions and to what extent that we can participate. But it's also the fact that we participate with our customers energy or excess energy or excess capacity. So we're not an energy producer ourselves, we use their excess. So it's a great value add for the customers to have. But we don't have any risk, we don't have any production units to cover that. But in this case there is a sort of double whammy there. The volumes are a lot lower than last year and the prices are a lot lower due to higher competition and stable environment. So 80 million down on the transaction based for just Enova and 30 million on the gross profit for Enova. And you shouldn't mistake the 30 million to try to calculate backwards the gross margin for Innova. It is a lot lower than that, more in the 20-25% region, which is the run rate. So this is a combination of both falling volumes and falling prices that make up the number. um but if you had back the innova and and so all the the other 45 business units were doing fairly well uh there's as i said always room for for more improvements and that is in line with our target for for profits such as we should have an operating margin of at least 20 percent and growing over time so we we are working with that continuously Speaking about cash flow, then this is also just the highlights and nothing really out of the ordinary here. It looks quite standard and in line with the different quarters that we have with a very strong Q1. Of course, when we gather all our prepayments from our customers. The cash flow from the investing activities that is usually the earnouts and the activations in there for the quarter. Net sales, as we see on the quarter there on the right hand side, it's a bit up from Q1. So it's going in the right direction and decent organic growth underneath it, despite the downturn for Innova. And looking at the EBITDA margins, same there. We picked up a bit since Q1 quarter over quarter. Cash EBIT which I mentioned was sort of the internal KPI that we use and this is just to see how the bridge there from the operating profit down to the cash EBIT so with a 22 percent compared to the 24 but with that 30 million loss on or less profit I should say for Innova that's Fairly okay, as I said room for improvement for sure. I would also like to highlight that we mentioned something in the report on the amortizations on the intangibles and the acquisition related. It has been some mixed change there since last year so this is Perfect in line, the same we had in Q1, now in Q2. So please use the 2025 numbers when you try to forecast on the future here. And also looking at the distribution here between the very stable, which is the subscription based revenues, which is the basis here, very stable and gradually sort of improving over time. And here you can clearly see the Q2 2024. sort of outlier there with the very high bar on the dark blue compared to the others which are more stable if you look at it in the last four quarters it has been quite stable and the organic growth as I mentioned and also the acquisition rated one acquisition so far this year and the organic growth still a very good currency just the growth of nine percent we are expecting that to come down a bit these are pro forma numbers so by now you have six months of last year and six months of 2025 so it is coming down a bit as expected due to the fact that just the CPI indexes which usually constitute how we increase our prices are a bit lower this year of course so we're expecting that to come down a bit but still at a few percentage above the CPI level is where we usually land and here you can see a minus figure on that transaction based and that's like I mentioned due to the market conditions there for Innova. This is just comparing the last year on a yearly basis, another way of looking at the organic growth. And then to sum things up, quite stable underlying performance from the business units. Enova, still a good quarter, a fantastic company which we're very happy with. But they have a sort of challenging environment there. The M&A pipeline is solid and we are ready with our available resources for future acquisitions. And with that we hand over to the Q&A session.

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 Christian Binder from Redeye. Please go ahead.

Hi, and thanks so much for taking my questions. First one being, when it comes to, you know, increased customer caution above the organic side and on the M&A side, did you see any change throughout the quarter from some companies we've heard that April was very cautious and kind of normalized? Did you notice something similar? Was it pretty even throughout the quarter?

No, it's been very similar. Like I said, no really surprises on the upside, but nothing on the downside either. So it's been A bit dull, very stable, like I said, but usually stable is good in our environment. But in this case, we were expecting, like I said, in the Q1 call, we were expecting when we were there in Q4 that things were looking a bit brighter. But then all of you know how the macro environment has sort of panned out during this first six months. So it's a lot of wait and see.

Perfect. Got it. And you've already addressed it, but just to clarify, when it comes to this Q2, should we kind of see it as a quote unquote normal performance for ANOVA?

Yes, normal in the sense that it has been quite stable for the past four quarters. Q2 is a bit higher, a bit better season-wise because of the weather and the production mix. So Q2 is still their best quarter for sure, but there's a lot more stability. In hindsight, it's really the Q2 2024 that's the outlier.

the rest has been sort of fairly stable but still there is a seasonality for Innova for sure great perfect and then last question I mean you've addressed the potential use of AI several times in your operations longer term um you can obviously for example increase the efficiency per programmer that you employ but they're also like other associated costs so do you think you can use ai to kind to kind of improve improve your margin profile over time or do you think it will be roughly neutral

I would say that there is some room for that for sure but it will take some time. You have to also remember that we have 46 development departments we don't have one. So in some of the larger business units for sure there is more room for efficiency there. In the smaller ones one individual can have a lot of different roles. But I think that we can produce more. So yes, we will have efficiency, but we will not necessarily sort of cut down on the headcount for that matter. But I think that we can produce more and be more efficient so that hopefully, yes, there should be some productivity gains.

All right, perfect. That was all from my side. Thank you so much.

Thanks, Christian.

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

Yes, thank you very much. I think it's similar to the first question here, but just to understand Q3 comps, how was Q3-24 last year compared to historical Q3s and what should we expect for this year roughly?

I think Q3 didn't stand out in any specific sense. Like I said, it is very stable. So if you deduct the ANOVA, like I said, the Q2-24, the rest is fairly stable. So I think there's nothing really that stands out or stood out, I should say, in Q3 last year.

Okay, I see. In terms of cash EBIT then, can you comment how much Enova was down in terms of earnings year over year?

Is that possible? We were not guiding on the bottom line profit, but Enova is in line with all the others in terms of margin. But then, of course, the actual kronor there, which I mentioned, the 30 million, that sort of filters through. So it is 30 million less, basically, in absolute terms.

I see. And then on, I mean, given we have had weaker margin here for two quarters, are you doing some cost reductions within the group, like outside the normal trends and trims you always do? Anything this year to adapt to the market conditions?

Like I mentioned, we are a bit more cautious when it comes to rehire. We don't have any big group wide because like I said, we have 46 different business units. Some of them are progressing really well and are investing. according to plan and they are of course allowed to continue with that but then of course yes we are more cautious if someone is leaving do we really need to sort of rehire that resource right away and Things like that, yes, that is for sure ongoing all the time. And then, of course, what I mentioned on the earlier questions there regarding AI and the efficiency, I think that's still yet to be seen a bit going forward. But yes, we are seeing increased efficiency in coding. But I think that will be more like that we are able to do more with the same resources because you have to remember that the environment that we live in in the IT environment it's really hard to get talented people and once we have them on board we really want them to strive and to so of course produce more in that sense so but yes we are more prudent or cautious when it comes to rehire people right away so it's a bit more wait and see on that sense as well.

Okay I see and then final question on the M&A market you said it was a little bit more hesitant I think all of us could have seen that in Q2 but we also saw that in the public market the activity started here in June And I guess in the private market, it's a little bit longer lead times. What's your expectations after summer here and going into the fall? Do you think activity will pick up or do you see anything else in your processes?

No, we are expecting the activity to pick up because like I said the pipeline is really good and it has been fairly good but you can only postpone things to a certain extent. So yes we are expecting the M&A market to pick up. Then of course we need to be able to be successful there with our offering. But yeah there are some cases that we know that have been postponed and will sort of hopefully be decided upon during the fall here. And as you saw also on the charts last year we did two up until Q2 and then we did five during the fall. Excellent thank you very much. Thanks Daniel.

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

Hi guys, just to elaborate some more on Innova going into Q3. Now it seems like you're guiding for that it was nothing special with the volumes in Q3 last year, or at least not as much as in Q2, but On the profitability side, should we expect that the gross margin in that business is some 10% lower or something like that this year when we calculate our numbers or what's the fair assumption?

I think that's a fair assumption. The margin for both Q1 and Q2 this year has been fairly stable and we're not seeing any sort of further decrease in that. But compared to last year, the prices are lower. And like I said, that's a mix of more volumes in the markets, more players in the market and also very sort of just stable weather conditions that does that. But at the same time, I mean, we are innovating, we are expanding our product offering to look into more and more different product models for Innova as well. But yeah, the margins are rough. Yeah. bit lower than last year. But like I mentioned, Innova as a total are still very much on par with all the others in terms of the margin on EBIT level.

I guess it must be a bit frustrating for you guys if you have a low quality earnings beat from Innova being better than nothing happens with the share price. then you have a low quality miss in a quarter that's much isolated the q2 as i read it correct me if i'm wrong and then you get the 16 percent hit on the on the share price so naturally this is this is the subject that needs to be fully understood by by the market i guess yes and that's also why we try to be a bit more transparent than usual around that specific business unit and the comps there

Because all in all, like I mentioned, Innova is doing well. It is progressing nicely. They are absolutely on par with all the others and also in line with what we actually paid for the assets, not to mention that. So it's a good investment and they are doing great. And it is also by far the biggest sort of business unit that we have today.

And then my final question is on In the transactional part you also have the bid theater that entered with two more quarters than last year. How has that business unit performed and what should be expected since that will also hit the margin profile if they are successful?

And now they are in all the four quarters backwards. So that shouldn't sort of take anything if you just look at the four quarters going backwards from here. BidTheatre, they have a lower gross margin profile because like I said, they have a software and then we run through the media purchases through our books. Ideally, that's not something that we prefer, but the customers want it that way. So we just have to accept that. But the bid theater is also progressing according to plan, being quite a flat dish in terms of growth, because media spend, it's a bit up to the general market conditions there. But at the same time, they are yeah doing okay and but they're not going to make any changes or distort the numbers going forward but if you just look at the quarters behind us they are already embedded in that okay okay and then my final question for Q3 just to be a step ahead for my another sake if there's anything we should

bring with us in a newly acquired unit or some new dynamics that we haven't seen before that you could plug in and draw? So should it be just business as usual for the Q3 quarter?

Given that the acquisition we've done so far this year, it came really early in the year and it was quite small. So I think that there shouldn't be any big changes to or there aren't any big changes in how we operate today. We still see a bit lower on the services and on the licenses in an hour two weeks soon into july and the market conditions are the same as i mentioned they are not better but they are not worse either so it's kind of flattish so far and one of the companies that has a lot of that is of course ABS and they are going into the holiday season now in Europe in August here in September so no I think nothing really stood out last year and so that should be a fair sort of proxy going forward if you take the margins that we're roll that over. Okay, perfect. Thank you.

The next question comes from Predrag Savinovic from Carnegie. Please go ahead.

Thank you very much for taking my question. Good morning. I wonder if you could discuss the overall M&A strategy and rationale for the coming years if you see an environment where multiples are still higher, like you have suggested in the report and in this call. So if this competitive dynamic remains, how will you treat that?

I think that given that we have been in this market for many years now and we have a very sort of clear strategy. So there are lots of companies out there and we see them coming to the market. And like I said, the private market is slow to move up and slow to move down as well. And what we are thinking least my analysis so far is some of the postponements are in fact that the targets are perhaps not meeting their own ambitions and targets so you have an im with a real hockey stick and that they're supposed to take off and then they're progressing nicely and well but but not in a fantastic hockey stick way and then they okay am i as pretty as possible right now so then they are sort of holding on to that and that's a good reason then to postpone things and the few transactions that have sort of gone through they have either been really early stages and we're not in them or really big companies that have a potential to grow and especially internationally and there the competition from PE and others is fierce and okay Perhaps that's not possible for us to compete with because you have to be prudent when it comes to what you're able to pay. But we're confident that we have a really good offering and we pay decent prices and at the end of the day, especially if you're a founder-led company, the last euro is not the most important thing. But of course, we are looking into our offering and that can be, for instance, last year we Did two part acquisitions, both Taxi Technique and Trinity. We bought 60% initially, but we have a clear path to 100 there. So that's one way of sort of mitigating this. So we are looking out different earn out strategies and we're working constantly with our offering. to better sort of suit the the potential sellers so i think that we need to just think of how we offer the the yeah how the offering is is constructed okay very good thank you that's that's all on my end okay thanks

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

Okay, thank you for listening in, and I hope that we will hear each other again at the next conference call, which will be in October, and I hope you all have a really nice summer. Thank you.