Earnings call transcript: VITAC Software Q4 2024 shows strong growth

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Published Feb 05, 2025 04:42AM ET

 Earnings call transcript: VITAC Software Q4 2024 shows strong growth

VITAC Software (ETR:SOWGn) Group, with a market capitalization of $28.73 million, reported robust financial results for the fourth quarter of 2024, showcasing significant sales growth and a strong operational margin. The company's sales increased by 25% in the quarter, reaching 927 million SEK, while the full-year sales saw a 20% rise, totaling 3.3 billion SEK. Earnings per share also grew by 19%. Despite a slight decrease in the EBITDA margin, the company maintained a high recurring revenue rate of 87%. According to InvestingPro .

Executive Commentary

CEO Ole Backman emphasized the company's focus on products over services, stating, "We are a product-based company, so we're not dependent on services." He also highlighted the company's financial discipline, saying, "We always pay according to profits." Backman reinforced VITAC's commitment to reliability with the statement, "Our brand promise is to rely on today and tomorrow."

Risks and Challenges

  • Wage inflation could impact recruitment and operational costs.
  • Continued reliance on acquisitions may pose integration challenges.
  • Economic fluctuations in home markets could affect sales.
  • Maintaining high recurring revenue levels amid competitive pressures.
  • Navigating revenue and capitalization variations.

Q&A

During the earnings call, analysts inquired about VITAC's M&A cash flow and financial headroom. The company clarified its approach to contingent consideration and discussed expectations for recruitment and wage inflation. VITAC also addressed variations in revenue and capitalization, providing insights into its financial strategies.

The company's strong financial performance and strategic expansion efforts reflect its robust market position and growth potential.

Full transcript - Vanceinfo Technologies Inc (VIT) Q4 2024:

Conference Operator: Welcome to VITAC Software Group q four twenty twenty four report presentation. For the first part of the presentation, participants will be in listen only mode. During the questions and answer session, participants are able to ask questions by dialing 5 on their telephone keypad. Now I will hand the conference over to CEO, Ola Backman, and I. R.

Patrick Fransen. Please go ahead.

Patrick Fransen, Head of Investor Relations, VITAC Software Group: Thank you, and a warm welcome to today's conference call. I'm Patrick Fransen, Head of Investor Relations at Vtech Software Group. And with me in the room here in Stockholm is our CEO, Ole Backman. In the call, we will cover the report released earlier today, but first, also give a short overview of VTech Software Group. And finally, after the presentation, we will, as always, open up for questions.

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So with that, Ole, I hand over to you.

Ole Backman, CEO, VITAC Software Group: Thank you, Patrick. And like Patrick mentioned here, I will give a short overview of Vitek today and then move into the report. But, always starting with with the same picture here, the overall. So, we'll take software group of today. We serve nearly 25,000 26, sorry, thousand customers.

We have 45 business units, and business units is basically the same as a company for a small group of companies. We have operations now with the feet on the ground in 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 form a, so that's the run rate that we're operating it today.

We have sales of nearly 3,600,000,000.0. 80 7 percent of that is what we define as recurring revenue, which has to do with our contractual based on the software that we are providing. And I have nearly sixteen sixty colleagues to my help. Looking at our strategy chain, which is is basically unchanged for 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 with development, sales, 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, to 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 then, hopefully take part in shaping that vision of ours, which is to shape a wiser and more sustainable future. Talking about the 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 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 we try to acquire nice vertical and profitable software companies that own their own proprietary software so that we are in in control over the road map. And we also like to see that they have a decent amount of recurring revenue to start with. And talking about acquisition, last year, we made a record of seven for the year and then three just in the last quarter. Also adding 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 Belgium company. And they come in all shapes and sizes, and that pretty much is what our sort of 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 industry are quite big ones where we have been active for a long time, and we also usually have multiple business units within them. But we are equally happy for the ones that we only have one business unit in because they are always the market leader in their niche. Sizes here and also the proportions of recurring revenue and the like you can see, they come in all shapes and the forms and sizes. But if you look at the average, that's roughly 30,000,000, 40 million Swedish or 3,000,000, 4 million euro company, which is the average size, and and that's pretty much has been a constant number over the years. Organizational wise, we have the same structure.

Like I said, they're very 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 VPAO model, we try to support them and and coach them and teach them and 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 and the values, but also very specifically things that we can learn from each other, each other's successes or mistakes. And 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. And then moving over to the numbers, both for the full year and for the quarter. But starting with the quarter here.

So sales was up to $927,000,000 and increased by 25%, really happy with that. And recurring revenues grew even a bit more, a bit 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, an effect of a mix in the income, which we also talked about in the Q3 and it sort of rolls over a bit into Q4, so no drama there.

The operational margin 2019 compared to 2020 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 other one out. And like I mentioned, three really strong acquisitions during the quarter with the Ollischlager and the Figlo in The Netherlands and Roidio in Finland. Moving over to the full year, sales up to SEK3.3 billion.

Swedish, 20 percent increase on the top line. Margins also there, like I mentioned earlier, a bit of a mix that has made it a bit lower, 30% EBITDA compared to 32%, but that's more different, yes, like I said, mix of the income that we reported also 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 SEK 3.6 per share. So that's an increase of over the SEK 3 last year and also that's the twenty third 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 as the distribution 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, same way here increasing the margins, of course, in absolute terms, compounded growth of 27% over the last ten 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. So these are the SaaS fees, the maintenance fees, the hosting fees, a really stable, groundbreaking. And that was really strong here in q four, 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 to our customers. That could be text messaging.

That could be maps. That could be kickbacks on on spare parts. It could be all sorts of things. And then from mid twenty twenty two when we acquired Enova 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 form a 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 form a 3,600,000,000 compared to the 3.3, which is reported. And here we have also 9% organic growth on a pro form a 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% FX 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 Witek 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 very low concentration on the customer side. So all the 26,000 customers basically sum 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 a 20% growth again and 9% from organic, which we were very happy with. Of course, record of seven acquisitions on the year and also opening up Belgium as a new home market and continued strong cash flow and basically, another solid VTech year, I would say, for 2024.

So with that, we hand over to

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

Daniel Thorson, Analyst, ABG Sundal Collier: Yes. Good morning. Thank you very much, Uli and Patrick. I have a question on the cash flow here in Q4 and specifically the M and A cash outflow in Q4. That was higher than I expected at least and even without the earn outs for previous acquisitions.

So firstly, could you share what you paid for Eudesliga 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 SEK 1,000,000,000 in September. Thank you.

Ole Backman, CEO, VITAC Software Group: Well, thank you, Daniel. No, we don't disclose the individual numbers that 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 quarter, but we always pay according to profits. And what we always also do that we pay for the current profit, that's the cash outflow today. So all the three companies combined together, they are really high quality companies with good margins.

And on top of that, we have some contingent earn outs for all those three. So we hope and expect them to continue to grow. So they were all very profitable companies. And we still limit up we pay according to what we guide. So we haven't sort of deviated from our multiples.

Daniel Thorson, Analyst, ABG Sundal Collier: Okay. That's clear. And then the follow-up on your current financial headroom given that you had almost SEK1 billion outflow there in Q4?

Ole Backman, CEO, VITAC Software Group: Yes. We still have roughly a bit over SEK1 billion in Firepower in our existing credits because we move into now Q1 and the first half year, which is traditionally where we have our strong cash position. And also, of course, with the fact that we have acquired quite a lot of revenue and then 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 are very comfortable with the levels that we are at and that we can also accumulate more debt if we want to do so. I think we're in a good position, so that's not something that limits us in any way.

Daniel Thorson, Analyst, ABG Sundal Collier: 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?

Ole Backman, CEO, VITAC Software Group: 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.

Daniel Thorson, Analyst, ABG Sundal Collier: Excellent. Thank you very much.

Conference Operator: The next question comes from Christian Binder from Redi. Please go ahead.

Christian Binder, Analyst, Redi: Hi and thanks so much for taking my question. I have one quick one regarding the contingent 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 if you can give any more color on that one?

Ole Backman, CEO, VITAC Software Group: Yes. First of all, I think it shows that we have a very prudent approach when we allocate the considerations that we pay. And it was more a 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.

Christian Binder, Analyst, Redi: Got it. And I mean you previously discussed how to some extent competition has increased and there might be changed price expectations. Do you kind of expect this pattern to continue in terms of to be able to agree on the price you have more ambitious contingent consideration, so to speak?

Ole Backman, CEO, VITAC Software Group: I think the continued 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 then 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.

Christian Binder, Analyst, Redi: Perfect. That was all from my side.

Daniel Thorson, Analyst, ABG Sundal Collier: Thank you so much.

Ole Backman, CEO, VITAC Software Group: Thanks, Christian.

Conference Operator: The next question comes from Pedrag Sabinovich from Carnegie. Please go ahead.

Pedrag Sabinovich, Analyst, Carnegie: Thank you very much for taking any questions. Good morning all.

Ole Backman, CEO, VITAC Software Group: Good morning.

Pedrag Sabinovich, Analyst, Carnegie: You mentioned price hikes of around 3%. So you mentioned price hikes of around 3% going into 2025. What about upselling and new sales? Previously, I've commented upsells and new sales are a little bit more challenging. Do you see that as consistent with the past?

Or do you see improvements there?

Ole Backman, CEO, VITAC Software Group: I think we have seen a little bit improvements. First of all, up sale is 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, okay, what else can you deliver? And then we work to always increasing sort of new features, new modules, things like that. And then in some sectors or some verticals, we are seeing a bit sort of better times, better investments from the customers because we can't sort of be tight on investments forever. So we are seeing some positive signs and but that's yet to be proven, of course.

But, yes, we have a fairly positive view on that going into 2025.

Pedrag Sabinovich, Analyst, Carnegie: Okay. And then looking on an aggregate level on the acquisitions that you made in 2024, what kind of margin levels are these operating at? Are they below similar or above the level of Etech?

Ole Backman, CEO, VITAC Software Group: The last quarter's acquisition, they are sort of, yes, roughly slightly above. So you can see that in the numbers and 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.

Pedrag Sabinovich, Analyst, Carnegie: Okay, super. And finally, if you could elaborate a bit on the quarter over 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?

Ole Backman, CEO, VITAC Software Group: 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 Witek, 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 licenses. So it's a sort of a mixed bag. But all these projects, they, of course, fuel the recurring revenue for the coming years because then they move over into a maintenance sort of mode. So a few larger projects were finished during the quarter. So I think that's sort of is what sort of 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 them.

Pedrag Sabinovich, Analyst, Carnegie: Okay. That's all for me. Thank you. Thanks, Bernadag.

Conference Operator: The next question comes from Victor Lindstrom from Nordea. Please go ahead.

Daniel Thorson, Analyst, ABG Sundal Collier: Hi, Olen, Patrick. Thank you for taking my question. So first one, how do you see the recruitment needs going into 2025? And can you also elaborate a bit on the wage inflation here in 2025 compared to 2024?

Ole Backman, CEO, VITAC Software Group: When it comes to recruitment, we constantly recruit because we grow and of course, we have a slight turnover of 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 just 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 Yes, so that's the expectations at least. And from The Netherlands and Denmark, we can see that that's quite accurate.

Conference Operator: The next question comes from Daniel Lindqvist from Danske Bank (CSE:DANSKE).

Daniel Lindqvist, Analyst, Danske Bank: So two things basically that surprised me in the report. If you please elaborate on those. The recurring revenue on the subscription seems to be much higher from acquisitions than I had expected. Have you did you have you low balled the numbers from the acquired companies? Or have they really performed strongly in the quarter?

Ole Backman, CEO, VITAC Software Group: They have both performed strongly in the quarter and the companies that we have bought are they are in the high 90s in terms of recurring revenue. So really good additions there.

Daniel Lindqvist, Analyst, Danske Bank: Okay. Perfect. That's sustainable for the coming quarter then as well. And then the next thing, I was surprised in Q3 with a bit high capitalizations. And in this quarter, it was rather the opposite and to a quite some degree.

Could you just elaborate on the capitalization? Is there 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 a beat today, but what should we expect for the future?

Ole Backman, CEO, VITAC Software Group: 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.

So it's been a sort of 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. So I think the full year is a fairly good proxy.

Daniel Lindqvist, Analyst, Danske Bank: Okay. Perfect. Then nothing else from my side. Just congratulations on a strong report.

Ole Backman, CEO, VITAC Software Group: Thanks, Daniel.

Daniel Lindqvist, Analyst, Danske Bank: Thanks.

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

Ole Backman, CEO, VITAC Software Group: Okay. So thank you all for listening in and we think it's a strong report yet again and we hope to hear from you again in the next quarterly session. Thank you and goodbye.

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