It's my pleasure to hand over to Michael Rauch, CEO. Please go ahead.
Dear ladies and gentlemen, welcome to our Preliminary Investor and Analyst Call for the First Half Year Results 2024, which we had originally scheduled for August 8. We appreciate your attendance and the opportunity to address you directly in these exceptional circumstances. Following the ad hoc release just 4 trading days ago, we took the decision to speed up the release of our half-year numbers to the maximum. The team worked day and night to provide you with a complete and final set of financials for our first half-year performance, including details on Q2 and a comparison to prior year. We also decided to advance the usual Quarterly Investor and Analyst Call. Due to the very short time, we have not prepared a formal presentation for today.
Instead, it was imperative to end the quiet period at the earliest possible moment and be able to engage in direct communication with you all on our performance. With me are today our CFO, Daniela Hommel, and our Senior Vice President, Investor Relations and Corporate Communications, Claudia Thomé. We will answer any questions you may have, and we will, of course, be available for any follow-up calls in the next couple of days. Before we open up the line for questions, let me start with a couple of important opening remarks. First of all, what happened last week? When we announced our original guidance for the financial year 2024 in February, we had anticipated to grow organically between 4% and 6% and to achieve an adjusted EBITDA in a range of EUR 270 million-EUR 310 million.
We knew and communicated that we have tough comparables from one-time revenues in the first half year of 2023, and always expected our second half year, 2024, to perform stronger. We've also talked in the quarterly conference calls and in several investor calls and meetings about the overall moving parts in the guidance for this year, mainly impacting the non-recurring revenues in the AIS and HIS segments. The first quarter showed a slower than expected start into the year, but we were still confident, as voiced in our last quarterly call on May 8, to generate sufficient additional one-time revenues in 2024 to achieve our guidance given in February.
Things changed last week when we received the first view on our consolidated preliminary revenue numbers for Q2, and at the same time looked at an updated forecast for the full year 2024. Both resulted in lower than expected revenues than originally anticipated for the full financial year 2024. Hence, we immediately published this information via ad hoc release and informed the markets as we did. Based on the updated forecast and on increased investments, particularly into artificial intelligence, database and patient-centered solutions, we also revised our guidance for the adjusted EBITDA. I will come back to the reasons for the guidance revision in more detail. Let's take a look at the results for the second quarter and the first half year 2024 first.
We knew that, like in the first quarter, we were facing a strong prior year due to the one-offs in Telematics Infrastructure. So what did we see? Group revenues decreased by 6% year-on-year in the first half, and by 9% in the second quarter. This was mainly driven by the one-off effects in Telematics Infrastructure, but we also saw an underlying slowdown in the second quarter after an already weaker than expected first quarter. If we look at the organic development, excluding those TI one-off effects, revenues were slightly up for the first half, but slightly down in the second quarter. This is reflected in the organic growth of the segments. Excluding the TI one-offs, the AIS segment was organically on prior year level in the first half, but down by 3% in the second quarter.
Organic growth in the HIS segment was 4% in the first half, but 2% in the second quarter. The organic development in the PCS segment didn't slow down sequentially, but was also below the strong prior year, with -1% year-on-year. This shows also the main reason for the deviation in our forecast update versus previous forecast. While recurring revenues continue to grow, the realization of non-recurring revenues is not progressing as originally planned. Therefore, for the full financial year 2024, we corrected our organic growth guidance for the AIS and HIS segments. Reasons are as stated in the ad hoc release. In the AIS segment, there's a slowdown in additional module sales and professional services in connection with larger projects.
In addition, the second wave of the government initiative, Ségur in France, is now expected to start in 2025 instead of 2024. In the HIS segment, the slower realization of projects in connection with the Hospital Future Act. In any given year, there are numerous large building blocks of non-recurring revenues built into our guidance. Our recurring revenues remain strong. They grew by 6% year-on-year in the first six months and represented 75% of total revenues. However, in order to achieve our guidance, we mostly depend on the non-recurring revenues to bring the additional growth and profitability. Over the past years, we have mostly been able to offset the delay in larger regulatory projects by other business areas that were performing more strongly.
This year, all the risks are materializing, plus we see a slower than expected revenue from additional modules and professional services. What does this guidance adjustment mean for the financial year 2024? The guidance reduction in organic revenue of about 6 percentage points, taking the previously guided midpoint of +5% to the new guided midpoint of -1%, is about EUR 70 million in absolute revenue numbers. Taking the difference of the midpoint of the originally guided adjusted EBITDA range to the newly guided EBITDA range, we now guide about EUR 55 million lower adjusted EBITDA at the new range of EUR 220 million-EUR 250 million adjusted EBITDA. This takes into account about EUR 70 million lower revenues and increased investments into AI, database, and patient-centered solutions.
Please keep in mind that the non-recurring revenues for regulatory initiatives usually come in at a high margin, since most of the investments have been incurred upfront. What is management focusing on now to turn the situation around? Once we certainly do our utmost to also generate higher one-time revenues going forward, starting now with the second half of 2024 already, we will not be able to turn around the situation quickly. Costs of doing business have increased, with higher IT platform operating costs and higher security protection investments. But the main factor is that we deliberately continue to invest into R&D to increase product quality, to meet the roadmap milestones for large projects, to develop new modules and solutions, and intensify our efforts on artificial intelligence as well as database and patient-centered solutions.
In the first half year, R&D expenses increased by 4% to EUR 125 million, thus representing 22% of revenues. In the second quarter, R&D expenses increased by 5% to EUR 64 million, thus representing 23% of revenues. These investments are essential to enable our customers, the everyday heroes in the healthcare sector, to master the significantly increasing challenges of their daily work. Comprehensive and strong strongly growing amounts of data need to be processed, while the time per patient is limited. AI-based solutions can support healthcare practitioners with efficiency gains that can make a difference in doctor's practices, hospitals, and pharmacies for the benefit of the patient. Also, the total workforce costs, mainly personnel costs, contracted labor, and outsourcing costs, continue to be under inflationary pressure.
While it was prudent to have executed our restructuring measures from the fourth quarter of 2023 in a very swift and fast manner, with an already low- to mid-single-digit million EUR savings amount. Today, with a half-year report, we've also published the remaining guidance KPIs. We have lowered our free cash flow guidance to a range of 40-60 million EUR for the year 2024, and we have lowered also our adjusted EPS to a new range of EUR 1.55-EUR 1.95. This is a difficult moment for everyone trusting in us, and we fully understand the disappointment. Rest assured that our focus is on improving our performance going forward. We remain 100% committed to return to revenue and EBITDA growth, and we remain 100% committed to deliver higher free cash flows.
For 2024, we've updated our guidance in full this morning with the release of our half year figures. For 2025 guidance, we will update you with the release of our preliminary numbers for 2024 performance in February 2025. With that, we are now looking forward to addressing your additional questions, and I'm handing back to the operator.
Ladies and gentlemen, we will now begin the Q&A session. Anyone who wishes to ask a question may press star and one on their telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star followed by two. Questioners on the phone are requested to disable the loudspeaker mode and eventually turn off the volume from the webcast while asking a question. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from Knut Woller from Baader Bank. Please go ahead.
Thank you. Actually, two questions. Michael, can you break a bit out what the structural element is, or the regulatory element of the EBITDA guidance cut is, versus the fundamental one, where you said that some AIS add-on modules couldn't have been sold. As you said, Ségur, I think, is coming at relatively high margins. And, and I would love to understand what the regulatory element is, hence only postponed revenues, but not lost, and what's the fundamental part of it?
And to get a better understanding about the AIS larger projects that decided, that's the second question, it would be helpful to get here some more color on what kind of projects these are and where they are now in the timeline of execution, to get also here a better feeling when these revenues and profits will come in the future. Thank you very much.
Thank you, Knut. On the first question, you're talking about the EUR 55 million EBITDA, taking the midpoint into account. So it's about 50/50, so 50% about from regulatory and 50% from other things. Your second question was more detailed and tailored towards the AIS one on larger projects. What could that be? So as you might know, we're not only equipping smaller GP practices, but we are also actually doing initiatives here with the MVZ. So what is the English for MVZ? Say it loud. Medical, yes, sorry. Thank you. The medical centers, where we had some projects running, and there were some delays, which will actually cause the also shift into 2025.
So just to get the feeling then from a qualitative perspective, Michael, with Ségur coming in the next year, with these elements coming and also Hospital Future Act just being delayed, normally, is it fair to assume that there should be a revival of profitability and also organic growth next year from a qualitative perspective?
We would anticipate that, overall, we see already an improvement in the second half year. As we always said, second half year is going to be stronger than first half year for 2024. And yes, we will also see effects of that going into 2025. However, I also want to say that we will update everybody with the guidance for 2025 in February. Why? Because as we all see many moving parts. Yes, there will be shifts of Hospital Future Act, however, we are also reading news about hospitals struggling financially, and that might have also an impact on the realization and the timing of the project.
Okay. Thank you very much.
The next question comes from Martin Jungfleisch from BNP Paribas. Please go ahead.
Yeah. Hi, good morning. Thanks for taking my question. Oh, actually, it's afternoon. So two questions. The first one is on the EBITDA side, right? So you cut by EUR 55 million. Part of this, of course, the revenue drop too, but how much is the incremental investment that you mentioned? And how much of this is recurring, and how much of this is one-off, and also if this includes some restructuring measures or additional restructuring measures? That's the first question. And then the second question on the top line, I mean, it's been mostly on the AIS side, and this it looks like a cut of 30%-40% to your non-RECs. So is that more market competition, or is it salespeople not doing their job?
And then also you said that these revenues will come in 2025. So, and how sure are you that these will actually come in 2025? So is this postponed investments by your customers, or is this lost to competition? Thank you.
Yeah. I will start answering the second question, and then Daniela will comment then on the first question. So with regards to the guidance for 2025, I can only reiterate what I stated before. We will update everybody once we have more transparency in February 2025. But by and large, the questions you ask for AIS, as we said it, there's a slowdown in additional module sales and also professional service in connection with larger projects. So which does mean that some of the module sales, which we used to have in the past, for instance, security modules or other activities, have been lower. And yes, there might be sales execution topics which we need to address, but there might be also general customer situations which we also need to address.
With regard to your first question, you asked for the incremental investment into an AI, and we consider them with low double-digit numbers to constantly invest into this field and not lose market share. That relates to central resources, but also dedicated post- projects in each of our business segments. With regards to restructuring, I want to answer, we constantly look for cost consciousness. So that means we are looking to adjust our cost base permanently. However, we have not decided on a restructuring project yet, whether we aim to adjust our cost basis on a recurring basis. You also asked whether the investments are recurring or non-recurring. In the field of AI, that's kind of hard to say. Of course, we are just entering into that field.
And that means you can also see in the upcoming years, constant investments and the products that we try or that we want to churn out into the market. Of course, they need ongoing investment, and we also want to keep track with our competitors in that field. So the absolute number, the increase over the next years, in the terms of what we invest, there's a recurring part, and and we also want to enter new, enter into new fields, in terms of product or building up a data lake behind those products.
Okay, great. Maybe if I can follow up on one more question, and just on the, on the free cash flow guidance. So EBITDA guidance was cut by almost 20% or plus 20%, but free cash flow is a 40% cut. What is the delta, exactly, between these two?
Yeah, sure. And the biggest difference in those two percentage rates that you calculated is the cash out for the restructuring program that we initiated last year. That was included in the EBITDA of last year already via the accrual, and it's the cash out this year. And then we see additional tax payments in a low double-digit number. We invest in certain fields. So we have follow-up costs for acquisitions that we made. So that are the biggest parts of-
Okay.
That are moving.
Okay, thank you.
The next question comes from Florian Treisch from Kepler Cheuvreux. Please go ahead.
Yes, thank you for taking my question. Two parts, please. So the first is again on on basically ending up in restructuring. So we have now seen AIS, or let's say, the historic core AIS doctors business, really underperforming now a third year in a row. We have seen a lot of management change in that segment, so clearly the segment has never really come to a point where it can perform again, really. Isn't that really the time to go for a deeper restructuring here? And so if I would love to get your feeling on... You said in the past, you're ready to act when it's needed. My question would be, isn't that today the perfect time to be really aggressive on that and to turn around the ship?
Because simply in the end, if you lose traction for many years in software, you are probably lost at some point in time. And the second is around leverage and impairment risk. So you have now leverage above 3x. Is it fair to say that M&A, and to be fair, dividend at some point, is now clearly not any longer the highest priority, the focus is on leverage again? And with that, is it also fair to say that divestments are now also a potential way to delever? And then in the end, to impairment, you have now under-delivered for many years, and really the covenant, the impairment risk is getting higher and higher now. Is there any governance in your financial, in your credit lines or governance, that equity ratio, et cetera, is important, or is it just equity ratio, and nobody cares? Thank you.
Thank you, Florian. I want to address your first question regarding the AIS segment. And indeed, you have a good point. It was moment in time where we really reset for ourselves our leadership on the AIS segment, and we brought Uli Thomé , our colleague here on board, towards the second half of 2023. Plus, we also initiated company-wide restructuring activities in various businesses in the first quarter of 2023. Now, when you do those things, these things need to take time until they go into effect. But you're right, there were a couple of things within the AIS segment, not in order, which we target now, and which Uli and the team is changing, and the effects will be seen over the next couple of months to come.
Daniela, will you take up the second question on leverage?
Sure. With regard to this question, the focus remains unchanged, deleveraging. As stated, that's when I came on board, and that's still our focus. The increase in the leverage is effect that calculates by the lower EBITDA, but still unfocused. Our aim is to manage working capital in a way so that we can deleverage again. You also asked about a split between in- the investments and investments. Of course, big investments are currently not in our focus, but you saw from the ad h oc announcement that we do and continue, will continue to do add-on acquisitions, that let us not fall behind the market, so that we can keep track.
And of course, we're also looking carefully for deinvestments, smaller ones, and, especially businesses that do not earn the margin, that we expect. With regard to dividends, we just raised it, and that we also stated that, that will be a level that we will maintain, and that is, unchanged. With regard to impairments, you asked for the equity ratio. That would be a detail that we do not provide. However, if you are aiming to understand whether we foresee already big impairments right now, so an initial test on them has provided us with the insight that there are no big impairment risks currently. However, the detailed analysis will start in in September, when we have another quarter also in our books. That is what I can say to that question.
Great. Thank you very much.
The next question comes from Yannik Siering from Stifel. Please go ahead.
Yeah, thanks for taking my question. I just have one follow-up. And that would be again on the EBITDA guidance. Last week in the press release or in the ad hoc, you mentioned that it's partly also due to increased investments, particularly into AI. I think previously the understanding was that it's rather a shift of investments or coming out of your investment phase in 2021 and 2022. I think last year on the CMD, you already mentioned investments into AI, and that's continued basically in the second half of 2023, and then also in early 2024. And now it sounds rather like it's really incremental investments into AI.
Could you maybe clarify your thinking about this field and also about the visibility that you have on the amounts of investments that you want to make in this space? Thank you.
Yes, this is going to be a longer shot. Why? Because we will see with artificial intelligence, lots of opportunities going forward. So we will need to think, on how much we're going to spend over the next couple of years to come. This is AI, it is patient-centered, data-based. Those are the three areas for investments for us, and they provide opportunities, lots of opportunities, for us going forward. So, take it as, for instance, the original investment, which we started in the year 2015, when we built our, from scratch, native clinical system with G3 technology. So I'm not saying that there needs to be a multi-year investment period, but it certainly will not be over with just a blip of investment in one quarter.
So we will continue to invest in order to build right artificial intelligence solutions, right database, and right patient-centered solutions.
Thank you.
The next question comes from Wolfgang Specht, from Berenberg. Please go ahead.
Yes, hello, good afternoon. Three additional ones, sorry, from my, from my side. First one, on free cash flow. You're usually carving out any M&A and earn-outs in your free cash flow definition. Do we for sure not know about potential M&A, but what about earn-outs? Is that something material we can expect for the second half of the year? And then, on divestments, you already sold a small asset with Turkey in Q1, and you told us just that you are evaluating other potential asset sales. Could this also mean something bigger, and just dropping one one thing, U.S. business, or is this completely out of scale, that you would dispose such a big asset?
And last thing on the hospital segment, if I remember it right, the billing module for your new version was still missing, set to be in place for customers early next year. Is this still everything on track in this direction? Thanks a lot.
Well, Wolfgang, many thanks. I think we captured all of your questions. We didn't capture the last question, so which module were you asking for, please?
I guess the billing or accounting module, that was stated on your homepage, was still in preparation. That gives customers, let's say, the option to fully migrate to a solution and leave out-
Okay, Wolfgang. Wolfgang, I'm sorry, we can't really hear you. Your line is really bad. Sorry for that. We really don't get you acoustically, so maybe the third question, you come back to us, because we really don't understand it, but maybe we answer the first two questions now.
Okay. Thanks a lot.
And I will do this. You asked about whether we foresee any major earn out for the free cash flow, and we see small ones coming, but no major ones for the, for the second half of the year. And then with regards whether we may sell the U.S. business, clear statement, we are not speculating right now. I stated earlier, we just look at non-lucrative businesses or the ones that are not earning the margin that we expect, and that's not the case with the U.S.
Thanks a lot.
Okay, and since there are no further questions, we thank all of you for dialing in today, and as always, Investor Relations is available for further questions, so don't hesitate to shoot an email to Frederic or to myself. We will get back to you, or are available on the phone. Thank you very much, and have a nice day.