Vitec Software Group AB (publ)

Welcome to this conference call. I'm Patrik Fransson, Head of Investor Relations at Vitek Software Group. And with me in the room is our CEO, Olle Backman. As always, we will first give you a short overview of Vitek and then follow by comments on the report released early this morning. And after that, we will open up for any questions. So, Olle.

Okay, thank you, Patrick. And again, sorry, obviously not a VTech software that was used for this. But like Patrick said, always starting with a short intro on the group level and then moving over to the Q1 results. So, you know, this picture by now, many of you starting with the customer perspective, 27,000 customers by now. We have 49 business units. We started the year with 47. So we added two acquisitions during the first quarter. We have our feet on the ground in 13 countries. And the pro forma sales is after the two latest acquisitions up to 3.9 billion Swedish, roughly. And you can see the distribution of sales there across the different geographies. And you can see that we have roughly 25% in Sweden, which means that, of course, we are exposed to the foreign currency fluctuations for good or bad. And to my help, I have nearly 1,850 colleagues by now. Moving over to also the further breakdown of this diversification. The first pie there, you saw that on the previous picture, so that's the sales by market. If you break down on the business units, so no single business units is more than 7% of the total. And also on the customer side, so the top 10 customers are not more than 7% of the group, which of course gives us a great risk distribution. um moving over to to how we we operate a bit i mean we have a business model of course that we work with the business units that we have they are usually the market leaders they do have a high degree of recurring revenue and this is something that we continuously work upon so we further develop them through the decentralized organization a lot of product investment focus here and that really fuels the organic growth so we work with what we have the 49 business units And then we try to top up that with acquisitions each year. So far two this year. So the characteristics that we look for, also very familiar by now, of course, the vertical approach to everything. We look at the well-established profitable companies that has been around for a while. So they are usually the market leaders. They do have the proprietary software so that we are in control over the product development. and we do that with mainly internal resources and they have the recurring revenue model already to start with so that is sort of a few of the characteristics that we are looking for and then moving over to acquisitions for the past 12 months here you can see we did two during last year q1 q4 and then we started off really well in q1 this year with a dutch auto net and swedish infometric And you can see on the pie there the various acquisitions throughout the year. So for this year, it has been quite a good start, as we say, adding nearly 175 million Swedish kronor in terms of acquisitions to the growth. Sales by vertical, this is also a way of distributing the great distribution across the 22 different verticals that we're in. Property management being the largest one, followed by energy, healthcare, auto and finance, but we're not at all opposed to adding a few new bubbles on this chart so when we look at these verticals it can mean that we add another vertical or that we buy a company that further develops than existing vertical but we are quite agnostic so that we can do both ways so that means that we're not sort of solely dependent on any single industry single customer or single country for that matter Business units, this is what they look like in terms of size and the proportion of recurring revenue. You've also seen this quite a few years by now, but it gives us a good overview of the different sizes. And this is also kind of a blueprint for the M&A pipeline, what it looks like in terms of size. So the medium size is roughly 50, 60 million. sick company and that is kind of what it looks like out there. The sharing of knowledge across these business units is really the sort of superpower within the tech. So this is actually one of the most tangible things that a business unit experience when coming into a larger group like ours. So the the possibility to tap into the knowledge base of all the other 48 business units. And here we have some of our specialists for us. So that could be everything from customer support, finance, operations, of course, a lot of focus around IT, AI, UX, sales, marketing, and So forth. So this is a very sort of appreciated and very vivid and active part of what we do and how we can cross fertilize good ideas and really speed up development throughout the group. Of course, a few words on AI and innovation here. We always have this last couple of quarters. But overall, a great speed in the adoption across the group. For internal purposes, of course, we use that to increase our own internal efficiency a lot. But it's also a lot of new customer applications that are being deployed month by month at an ever increasing speed. But it's really down to the deep domain knowledge and the expertise that we combined with the proprietary data and all of that really strengthen the moats around the various business units. Here are some examples for the auto industry, Olisch Lager in the Netherlands, but they sell across the world, so they have seen some remarkable increase in usage. Just as an example, the garage owner or whomever it is, they can take just a photo of the license plate or the VIN number and then they automatically get all the matching components for their lubricants and so forth. It also shortens the time to market so that we can really do all this matching, new languages and everything else at a great higher speed and accuracy for that matter. and you can see a lot of the others if you go to the other end where we take energy for instance our models there that we do help the utilities to forecast their production facilities so that it's now 20 different ai models that we combine together to identify sort of identify really complex connections and linear connections between them. So that's weather data, that's consumption data, that's both in historical. And so it is a great value for our customers there and an ever increasing scalability for that matter. So really encouraging things that are happening throughout the group here. Moving over to the numbers then, some of the highlights here. So sales increased all in all by 9% to 955 million. The 9%, the mix here is roughly 5% organic. There's a 7% from acquisitions and then we have 3% FX headwind. But all in all 9%. And we are really back on track, which is something I'm very pleased with that we increase the profit levels at a higher pace than the we increase the sales. If you remember correctly, I mentioned that in the q4 report, which was something that we were sort of less happy with that we increased overall last year, yes, but the the margin expansion didn't really follow the top line. But now we're back on track where we can sort of increase the margins at a higher pace than we can increase the sales. So 11% up on both EBIT and cash EBIT, which is our sort of internal metric that we use. And 13% on the operating profit and also margin increasing by one percentage point. Cash flow, always the strong Q1 here, so super strong as always. But this is really something you can look for at the LTM basis. So what we have in the column there that the last 12 months, 1.1 billion in the total cash flow. So yeah, some of the details around that cash flow, like I said, a fairly strong quarter, perfectly in line with the previous years and really sort of what we expect. Like I mentioned, we usually have all the cash flow come in in Q1 and then we have a pretty flat for the remaining three quarters of the year. um net sales as i mentioned um up by by nine percent uh for the quarter up to 3.9 billion there in the pro forma sales look at the profit levels here i think it's really encouraging to see the the last 12 months there that we sort of back on track to increasing uh margins again so really promising, one percentage point up on the margin there on the quarter also from 25 to 26. And the cash EBIT, which is sort of net of any activations and amortizations. So very close to the operating cash flow. Also encouraging here that we increase it by one percentage on the margin and 11% on total quarter to quarter here. at 21% compared to 20 last year. And then the distribution here of our recurring revenues. So we had a 6% organic growth in our subscription-based, which is the SAAS fees, the maintenance fees, and the really sort of bulk of our income. So the higher blue bar there, really stable. You can see it's a bit down from Q4, but that is also to be expected. We have some Q4 results where a lot of customers are sort of buying bundles and then we recalculate them and see how much they spend on last year. So that's kind of to be expected. You can see that in the chart there. So the organic growth in Q4 was 6% all through the year and then 8% in Q4 and then down to six again. So it's kind of a normal swing there for us. Also, the transaction based grew slightly with 3%. So that made up. So on the mix there of the total is 5% for the quarter in organic growth. Like I mentioned, 3% headwind on FX. and then the 7% which we added through the acquisitions. And then just to sum things up, I think it's really encouraging that we're back on track to growing both margins and in absolute terms and the margin also in percentage expansion. Fairly good cash flow, good cash conversion. We're steady at the 80% level here. Two really nice additions with Autonet from the Netherlands and Informatrix from Sweden. And we're really seeing some rapid AI adoptions across the organization, both internally, but also in the customer application side. And as you might have seen also in the full report, we have some adoptions basically on the numbers in the back there too. align it with how the annual report is presented so that was something that we were asked to do and and we've done so and we also added some additional disclosures on the back here among other things the cash conversion which I just mentioned there which is at the 80 percent so you can see that in in the charts at the back of the report But all in all, fairly happy with the quarter and the progress from across the group here. And also, like I mentioned, that we are back on the small incremental improvements in both margins in absolute terms and in terms of efficiency. And with that, I think we will move over to the questions and answers section.

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 DNB Carnegie. Please go ahead.

Hi, guys. Thank you for taking my questions. I have a few. I think let's start with your comments around increasing EBITDA at a higher rate than sales. Are you expecting to see improving margins now for the rest of the quarters on a year-over-year basis for 2026 based on the growth you see now and the planned cost levels ahead?

Absolutely, because that is part of the overall financial targets that we have is that we want to improve that gradually quarter over quarter or I would say rolling 12 months because there are some seasonalities between the quarters. Q1 a bit lower, Q2, Q3 is a bit stronger usually. So yeah, on a full year basis, we are expecting it to increase. No big numbers, but you know, a few tens of percentages all in all so yeah for sure we are expecting that and like I wrote in the report there it's a combination of course the organic growth in sales but also cost control basically and also that we were sort of starting to see some of the efficiencies of AI and other stuff really filtering through.

Okay that's very good. Could you discuss a bit more specifically on the NOVA for Q1 and also for the upcoming Q2? Because this volatility in energy prices in the last months, is it reasonable to expect more business and some improving growth there in the short term?

On the sales side there, it's always hard to predict because it is weather dependent and also really exposed to market conditions in terms of energy prices and so forth. Quite slow start for the first months and then March, of course, with the war there in the Middle East. So gas prices really went off the roof and that added both volatility and the price increasing. Overall, the quarter was sort of fairly in line with last year. And then it's really hard to predict going forward here in these prices. But what we can say that we have done is that we have worked a lot with the mix of the products and the offering that we have so that we have a lot more stability in the actual sort of earnings from whatever volume may come. in that sense. It's super hard to predict. Usually Q2 is fairly okay, but I don't know what the weather is going to be like.

Does AI make your customers move faster? Historically, you've had a lot of tools and services and upgrades, but your clients weren't ready? Is this changing now for you because of the amount of mindshare that it captures? And will you be able to roll out more now than you could three years ago? And not specifically for AI, but that might be a driver for customer adoption of more stuff from your portfolio. What do you think?

I think that we can move a lot faster today and certainly a lot faster than our customers. So our customers, there's a lot of dialogue that they want to feel secure and sure that they will eventually benefit from whatever gains comes from AI. But at the same time, they are really sort of... not moving really fast and want a lot of wait and see and they don't want a big bang because it is their processes yeah over the long run yes they will and and we can for sure keep up with the customers and actually like i said we can move faster than they can but at this point it's a lot of proof of concept here you need to show the actual value and and really talk to them over gradually sort of implementing new functionalities rather than any big bangs so overall not a lot of sort of push that we can't handle or search in demand but everyone is curious and they want to know that we're on top of it and we are okay very good thank you very much for the answers thanks for doing

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

Yes, thank you very much. I also have a follow-up question on Enova. And if I'm right, I've heard that you have said that you could export this business into other markets. And have you started to do that? And what's the plans? And is this something we will see in sales in 2026?

Yes, we can and we have started it. It has been an initiative for over a year now. the market that we're currently mostly working on is the UK. But you have to start with selling the software. So we are selling our traditional energy management software to customers in the UK. And then when you have enough volume and you have all the accreditations that is needed, then you can start selling these value added components in terms of the grid managing and participate on the balancing market. So yes, we have started since some time back and win a few customers in the UK on the sort of traditional software side. And then we hope to sort of add the grid balancing services on top of that when volumes and all the permits are there.

Okay, I see. That sounds promising. And then another question on your organic net recruitment plans for 2026, excluding M&A. I guess that they could be somewhat slower than historically, given both the internal productivity you mentioned, but also perhaps a somewhat slower market and lower price increases. Is that a fair assumption?

On the first part of your assumption, yes, it is. You know, we are really sort of a few years ago, it was sort of an autopilot. If someone left, you need to recruit it again. If someone leaves now, then we really sort of challenge that, okay, can we work more efficiently? Can we sort of do that with the resources that we have left? So we are expecting, and that has basically been flat on the Q1 here, so no organic increase in staff at all. for the first quarter and we're not expecting it to pick up either. So for sure we will be using efficiency gains and new ways of working to be more productive in that sense.

Okay, I see that makes sense. And then another question on these productivity tools, like all of the AI tools that you work with. Do you see that these providers are raising prices to the extent that it becomes not a problem, but less efficient in terms of replacing one person with all of the different AI tools now coming because of aggressive price increases? Or is that further out in the future, you think?

I think that's further out if it comes at all. The licenses that we're buying and the token spend that we have, it's not huge at all at this moment. So it's not anywhere near the efficiency gains in terms of productivity.

Okay, I see. And then the final one on the private M&A market. Have you seen to any extent any derating of multiples and expectations given the public valuation multiples?

I think the expectations from our side has certainly derated. We are absolutely one of the parties here that are trying to really sort of have fair valuations that you can live with in the long run, which we have always had. So we are hoping that you know not necessarily paying a lot less than we paid before because we have always been conservative but hopefully we can be more successful instead but the private markets are moving really slow and there's not a lot of deals that has been done. But we are very active. We have a lot of discussions with potential sellers here. So, of course, we're hoping to add more. I mean, we did two really great acquisitions during the first quarter, I think, really added a lot of value here to the group. So, yeah, we are certainly hoping that others will sort of follow the example as well.

I see. Thank you very much.

The next question comes from Thomas Nielsen from Nordia. Please go ahead.

Thank you for taking my question. I just want to go back to the transaction-based recurring revenue, which grew by 3% in the first quarter. Can you talk about your expectations for this segment for the rest of the year and also what's included in this line besides Enova?

It has over the years been very stable and basically growing in line with the subscription part. Roughly 50% of that volume is ordinary text messaging, mapping, third-party components, point-of-sale solutions, kickbacks and so forth. 50% of that volume comes from a wide variety of other business units that basically has to have value-added services that we sell to our customers, which grows fairly in line with the subscription part. And then there's the two biggest parts. One is Innova and the other is BidTheatre, which is programmatic buying. And in that sense, we are having the customers spend on ads going through our books. And that basically follows the sort of usual patterns for ad spending basically throughout the year. So those two are a bit but they in combination those two is 50% of that volume and the other is really spread across at a very stable rate.

Okay, then as a final question, perhaps if I may, since AI can both be a changing competitive dynamic, but also an opportunity,

what is your overall view of how ai will affect your industry and what is the most common misconception among investors do you feel i think if it's a misconception among the investor community that's uh you know to say that the the encumbrance like ours uh companies and the fact that we have a lot of legacy code and that that is somehow a bad thing i think it's quite the opposite you know the legacy is a very positive and good thing because legacy is what brought us here legacy it was our customers are paying for right now legacy is what is working. So if you have vertical market software, there's like a zero tolerance for failure, everything has to work, it needs to be very specific. And there is just so much more to a software offering than just the code. So and on the other hand, Having that legacy, of course, there has traditionally been a lot of effort that needs to put into modernizing that over time. And here, these tools are really helping companies like VTech so that the transition and the upgrading of our legacy software has just become so much easier and faster and thereby cheaper as well. So I think that we're in a really good spot here. And again, like I said on some of the previous questions there, we can move a lot faster than our customers at the moment. And it's really adding these components at the pace where the customers want and can adopt it. And that's just being out there and talking to them and proving the value.

Okay, thank you very much.

The next question comes from Fredrik Nielsen from Redeye. Please go ahead.

Thank you. Hi, Olle and Patrik. I want to continue on the track with AI here and connect it to acquisitions. So what questions regarding AI are you asking potential acquisitions and what kind of answers are you looking for to see that they really fit into your strategy?

I don't think that the questions are necessarily that new because we've always asked questions and looked into the tech stack and see how modern is it? Where are they? in terms of how up to date is the actual product in that sense. And then, of course, disruptions in the potential market. I mean, like I said, we are looking for the market leaders, stable, battle tested, proven companies. Of course, we need to look into Is there any potential disruption? But we have always looked for software that solves these kind of eternal needs. I mean, will we need housing? Yes. Will we go to the bank? Yes. Will we need the health care? Yes. Will we need education? Yes. Do we need to fix the car? Yes. So we're really looking into these niches that themselves, the niche will be there and there will be a need for a vertical solution within them. So kind of the same questions. Of course, the speed of the competitors is a bit new. And of course, we are sort of asking these questions, have they popped up? Anyone new since the last years and so on? And how are they selling? What are their arguments against the customers? And what is your response to that, basically? But roughly the same kind of questions that we have always used, actually, but just a bit of new light on them.

I think the key here is that we always look for, you know, the eternal needs and really, really need to have software that sort of your business process are dependent on. So that's always been the key. So I think that because it's always been a competitive environment all the way through. Very much the same, but then we added a few things that Olle said. But, you know, really important software for the businesses. That's the key and the soul spin.

I see. Great. Thanks. And could you perhaps give us a few examples of initiatives that have been shared over your internal forums that you mentioned?

I can just share a few really encouraging ones. Usually it's like a 45 minute teams meeting, two or three business units share very more sort of kind of inspirational. This is how we did it. This is what we succeeded with. This is what we failed with. I can take an example, for instance, from the auto industry, they have sort of automated the If a support ticket comes in and now it's fully automated or support ticket comes into the system, it can really run through all the documentation, all the previous answers and questions around that. And then it digs into the software itself, finds out whether or not it is a bug. and then comes up with a solution that we then later quality test, of course, through one of our developers. So that process has really sort of increased the pace and a lot of these views have already done that and they showcased it to the others and then they can sort of easily either just get inspiration or they can then later on directly contact these and get the hands-on explanation on the bits and pieces of how they did it but they are very much inspirational and then you can sort of deep dive if you want to separately and that is sort of really picked up the pace. Another example has been where one business unit invited all the others to sit beside us digitally and see us work for a full day. So this is how the processes have been worked because they are really fully automated. So they got hands on to see how they actually work online with customer support tickets and development and bug fixing and really inspirational.

Great, thank you very much. That's all for me.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Eric Larson from Seb. Please go ahead.

Thank you. I have two questions. First on the subscription revenue. It seems like some type of seasonality has emerged here with a really strong Q4 and then Q1 coming down.

so could you just explain the factors here i mean my understanding is that it's primarily only slugger but but any you know general description would be helpful yeah there are basically two things there like i mentioned q4 one thing is sort of uh olish lager is one of the business units but there are a few others as well uh customers they buy bundles throughout the year and that is of course accrued throughout the year and then at the year end we sort of recalculate and see how is the actual spend and the actual spend usually is a lot more because customers are usually you know trying to low ball and have a bit lower on the spend throughout the year but that's usually a very positive thing because we're saying hey your customers are interacting a lot more with you so that you have spent more and then we get a little bit boost there in in q4 And the other sort of flip side of that is in Q1, we still don't have a lot of churn. It's roughly 1-1.5%-ish. But of course, the churn comes in at Q1. it kind of goes both ways there it will go in the separate ways there so no we're not concerned that it is you know sequentially q4 to q1 a bit lower that's just to be expected yeah perfect and then just the second question on the cash flow you spent around 676 million on acquisitions so I wanted to understand is this

Specifically for InfoMetric and AutoNet or is it something else in there too?

It is AutoNet and InfoMetric, the ballpark. And then there is also a small issue there from some of the earnouts that comes. But yeah, the absolute ballpark are those two.

Okay, yeah, because it looked a bit higher than I expected. And obviously, I don't have the full picture here. But it implies that these two acquisitions have quite the margins. So I'm just curious, you know, what did you pay? Yeah, I guess it's both of them. Yeah. All right. Okay, that's all for me. Thank you.

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

Okay, thank you all for participating and listening in, and I apologize for the technical hiccup there in the beginning, but I hope you got a good picture of VTEC and the Q1, and see you in three months' time.