Earnings Call: Q1 2023

May 10, 2023

Quarterly report

Hello, everyone, and welcome to this live broadcast where you viewers also have the opportunity to ask questions. You do that in the live chat during the broadcast. Today's guest is Virtek, a Danish company who published a report today for the Q1 of in 23. And in the digital studio, I have its CEO, Michael Ahn. Welcome, Michael. Thank you very much, Michael. I'm happy to be here. It's good to have you back. I thought you could begin by summarizing the quarter. What were your first impressions? Well, it's a quarter where we do feel the market conditions are challenging. The high inflation rate and what's happening in Ukraine definitely does affect also our clients. And we've seen Softening in the market where some of our clients has reduced the capacity they need with us. But fortunately, we also see Other clients that actually need more of our services. So all in all, we actually still achieved a double digit organic growth during the Q1. Cost base has increased, so we also see a reduction in the total EBITDA level compared to last year, but It's something we see as manageable. So, I would ask you to elaborate on this, of course, but you have prepared a presentation. So I'll just let you go ahead. Thank you very much. So if we look at some financial highlights For the quarter, if we can go to the second slide. During the Q1, we achieved a revenue of DKK18,100,000 which is a growth of 11% compared to the Q1 of last year. Again, some clients have reduced a little bit the capacity, but other clients have actually expanded the capacity and we also had new clients coming in. So All in all, we see a double digit growth. On the AirPDA side, we achieved DKK 1,800,000, which is A 30% reduction compared to the record Q1 EBITDA of last year. Now it's Of course, something that we will be addressing because we see an increase in the cost base and we also actually have an In balance between the capacity we have as well compared to the demand from the clients. So this is something that The Board of Directors and Management are working to rectify in the future. The EBITDA margin as a whole was at 10% during the Q1. Now, one thing I'm very happy about is our ability to actually generate positive cash flow from our operating activities. We achieved $2,300,000 from operating activities in Q1, which is actually 15% better than last year. If we look at the development in revenue and EBITDA during the last quarters since Q1 last year, As we can see, there's a steady growth in the revenue quarter by quarter. And we can also see that, yes, The EBITDA in Q1 was significantly below what we had in the beginning of last year, but again significantly higher than what we achieved during Q4 last year. So all in all, we are looking positive for the full year as a whole. If we can go to the next slide, I can say that we will be maintaining our outlook for 2023. And what this means is that we expect revenue this year between DKK 73,000,000 and DKK 78,000,000, Which is an organic growth between 11% 19% for the year. And looking into the EBITDA expectations, We expect between DKK 6,009,000,000 DKK 6,000,000, which is a negative growth of 20% up to a positive growth of 27% and this reflects the uncertainties we see in the market right now to this larger than normal interval we have on EBITDA. But all in all, we maintain our short term expectations for this year and we also maintain our Strategic goals from our Accelerate 25 excel strategy. Thank you very much, Michael. When looking at the numbers from the revenue growing by 11% and the EBITDA decreasing by 30%. How do you view these numbers? Are they satisfactory? Or did they come as a surprise? Well, for sure, Revenue growth of 11% is within our expectations. If you look at the expectations for the full year, That's we also with an interval of 11% to 19%. So that definitely is according to our expectations. And yes, we've Also in previous quarters, we have said that we are seeing a rising cost base. Inflation for sure is a driver there as we've seen Inflation rates in Romania where we have our main development and test centers of up to 16%, 17% during the last year. And fortunately, now we're seeing, of course, inflation rates coming down slowly. But again, it has been a major factor. And we also have to remember that last year, you actually had a situation where it's really, really hard to find the capacity that we need in order to deliver the service Our clients are expecting, which also have mean that our external cost base has increased sharply compared To last year, I think, by more than 30%, while our staff costs has increased only by 8.6%. And of course, we are going to go in and review our cost base in general and finding out where we have a chance to optimize. And again, as I said Before in my presentation, we also have a misalignment between the current capacity and The demand from the clients, and we will also be adjusting that in order to make sure that we don't operate with a large oil capacity in the company. The cost base then, we'll talk a little bit about that. Have you already looked at some factors that you want to decrease? Well, for sure, we will be our capacity, of course, we will address. And there are multiple ways to do that. It's not only I'm not looking at this just as A way of decreasing things. We have to remember, I'm not going to optimize the business in order to Make it harder to reach our long term goals because those we are maintaining. So we are making very select Changes in order to make sure we don't hurt our ability to achieve our growth here. So and we are analyzing this. And also we are investing significantly right now in actually increase our sales capacity in the company as well. And Introducing new roles like a key account management for some of our big clients there is in place. We're doing more Initiatives and we're also going to wrap on actual sales capacity in the company here. So we are attacking it both from a sales point of view And from a cost point of view, but we're not just we're not going to save ourselves into doing better because we are actually promising high revenue growth, And that's what we're targeting. Of course, you're not the only company that are currently optimizing and looking over their costs. Your clients, you mentioned before that you've seen a slight decrease in your existing clients, but you've also seen sort of increased demand from new clients. I'm curious about these new clients. What can you tell us about them? Well, some of them it really depends on what kind of clients you have because some of our clients do have And need for instance from external financing. And those clients are in a very tough market right now where they have to go out and get further financing for the activities. So this is one of those areas where we've seen a decrease. And we also have some clients that actually see their clients buying less of their services, which also reflects back to us. But we're also having clients that are just doing really, really great in their markets there and they need further services for us. And as a total sum up, yes, We are still increasing our revenue there and growing quite healthy, in my opinion, when we look at the It's for market condition as a whole. I know that you and Wirtik takes much pride in the fact that you have clients stretching for, I think it was over 10 years. Have any of those clients been affected by this as well? Yes, we do also have clients that have been with us a long time that has had to do some reduction. I don't think if you look at the 10 plus years clients, I don't think any of them actually had had To do reductions. On the contrary, actually, but we do have clients that have been with us for years that actually have had to do Some adjustments. And again, a lot of uncertainty in the market right now, but inflation is coming down. I do believe that this is a current global crisis that hopefully won't be that long. And When it picks up again, we'll be there and help us service our clients because we have to remember, digitalization in the world is ongoing and this is not going to go down. But again, Companies are sitting back a little bit to find out how my business affected. And of course, that means that new projects might be delayed in that sense there. And the pandemic sort of introduced a whole other dimension of the digitalization right now when it's remote work. You mentioned this in the report that new offices will come in late 2023 to accommodate for hybrid work environment. While this will contribute to a work life balance, as you've stated in the report, for your employees, is Any money to be saved here as well in terms of optimization? Well, doing The project of getting new offices is not definitely not a savings activity there. It is making sure that we can reach our Strategic goals, which also include us being seen as a best in class workplace, you know, and having offices that accommodate the way of People working there and also being a place where clients see themselves with having people working for them From our organization is really, really important in reaching our goals. But talk Tell us more about the more operational changes in your company currently. From 2 businesses business units to 5, how has that developed during the quarter? Well, we worked a lot last To do a reorganization of our company going from a business units that were more on a technical level To now changing our business into business units where we are working inside of business domains, where we are having an easier time to make it visible to our clients that we actually understand their businesses. 1 of our big clients from last year, New clients from last year actually chose us amongst, I think, about 100 other candidates that we're looking at simply because of the fact that it's in the energy sector, Simply from the fact because we're also working on solutions for EnergyNet in Denmark, which is the company that is handling the energy infrastructure in Denmark. And the fact that this new client was developing solutions that had to integrate up against that made it an easy choice for them to actually go with Vertech because we already understand their world. So for us to go now into a more domain driven business unit structure makes a lot of sense because it makes it a lot more visible from the client's point of view what kind of service you can deliver for them and also the fact that we do understand the world they're operating in. You write in the report that the first part of your ERP system has now gone live. What can you tell us about this new ERP system? And what are some of the effects you already feel from it? Well, Implementing a new ERP system is a huge project and it's a multi year project and we started it early last year, The project and now we've gone live with the 3rd part of it with the accounting in place and being able to Align across business unit, the fact that we are also able now to account down on business unit level. Historically, we've been operating only at the group level. Now we actually can Get insight into costs and revenues based on the business units, which makes it a lot easier for us to track progress. Now we are also going to implement further. We are in the process actually right now of going live soon with invoicing and contract management and invoicing part The ERP system there and further on we're also going to have our time registration integration into the ERP system and so on. We are going to continue improving our Digitalization in the company there in order to make significant increases in our operational efficiency. What is the vision here? Where do you want this ERP system to be when it's finished? Well, It's one important system in the whole digitalization, right? But it is such an important part of us to be able to have Close to real time insight into the temperature in the business. That's really what we're going for, Making sure that we can track progress very, very quickly, making sure we don't have to spend a lot of time doing manual Work, for instance, consolidating reporting, it's going to help us a lot in being more efficient and doing things that are more value adding inside The company. Well, this is the Q1 of 2023. We'll be looking forward to 3 more. But what do shareholders have to look forward to in the rest of the year. What are your expectations of 2023? Do you expect markets to soften as well in the second half of the year? Well, that's my expectation, To be honest, we just saw today a new inflation numbers in Denmark, where that inflation has decreased by about 1 And it's percentage points since last month. So that's good news, right? When we get inflation under control, Hopefully, the interest rates are also going to go down again. And that means, again, companies are going to do more investments. And That's good for our business because we are preparing ourselves for the further growth, right? That's we are yes, we are hit like a lot of other companies there, but our Business fundamentally is healthy and that's the foundation for us to achieve our long term goals. Indeed, Michael Oen, CEO at Vivitec, thank you very much for your presentation as well as your answers. And I wish you good luck for the future.