Ladies and gentlemen, thank you for standing by. I am Moira, your Chorus Call operator. Welcome, and thank you for joining today's CompuGroup Medical Investor and Analyst call. Throughout today's recorded presentation, all participants will be in listen-only mode. The presentation will be followed by a question and answer session. Questions are possible for those participants dialed in by telephone. If you would like to ask a question, you may press Star followed by One on your touchtone telephone. Press the Star key followed by Zero for operator assistance. I would now like to turn the conference over to the Corporate Vice President, Investor Relations, Claudia Thomé. Please go ahead.
Good morning, everyone. Welcome to the CompuGroup Medical Investor and Analyst conference call for the second quarter and first half results 2023. It's great to have you with us, whether you have dialed in via the phone or are following the webcast. You find all the relevant information, such as this presentation, the quarterly statement, and the press releases, which we published early this morning on our website. We're going to start with the presentation by the CEO and CFO, Michael Rauch, followed by the Q&A session. Before we start, as always, there are some housekeeping remarks. Let me remind you on our safe harbor statement, which is shown at the beginning of the slide presentation and is valid throughout the entire call. Thanks a lot for your patience. Now let's start. I would like to hand over to Michael Rauch. Michael, over to you.
Thank you, Claudia. Good morning, ladies and gentlemen, and a warm welcome to all of you. Every company has its defining moments. For CompuGroup Medical, the first was a strategic decision in the late 1980s to prioritize practice management systems. Since then, our focus has been on empowering doctors, first in the ambulatory field, later also in hospitals. Starting in 2011, we extended our footprint to pharmacies and supplied almost all healthcare practitioners from that point on. Starting in 2017, CGM spearheaded and facilitated connectivity in healthcare, thus enabling a faster interaction between all participants in the healthcare sector, being the pioneer in telematics infrastructure. The most current moment is right now. For CGM, for the entire healthcare sector and lots of other industries, the rise and actual usage of Artificial Intelligence is set to revolutionize healthcare.
Again, CompuGroup Medical is at the forefront of this development. Where do patients stand with regards to Artificial Intelligence? Apparently, the majority of patients tends to trust Artificial Intelligence to support the doctor and would be willing to share their data for this purpose. We will help our customers making the difference, enabling them to spend more time with their patients while having easy-to-use tools on their hands to improve healthcare. Especially our direct customers, doctors, dentists, pharmacists, paramedics, and all other healthcare practitioners have the most to gain. The eternal bottleneck is the time they have with their patients. Efficient work processes, faster and better-based decision-making, a more targeted diagnosis. For all of these, there's enormous potential in AI-supported solutions in order to help the patient even better.
The core AI fields for CGM customers range from chronic care management, prevention, diagnostics, population health management, to improving operations and resource management, a key topic for doctors. What are we as CGM focusing on to support our customers even better? We've defined the core areas that should benefit from AI. We're going to boost R&D and stepping up the game in service and support functions. Improving our internal processes will make our business operations even more efficient. At the end of the day, and that's the most important thing, we're adding game-changing value to our products and solutions. This is just a fraction of the mega trend, our capabilities, and the opportunities for the entire healthcare industry. We will go into more detail with this topic at the Capital Markets Day on September seventh. Stay tuned.
The rise of AI in combination with our strong footprint from the industry brings us even further towards our ambition to be the leading medical software company. Building on the energy and motivation that all CGM employees release every day to advance digitization in the healthcare sector, we are ready to build on a long-standing tradition to seize future trends and continue creating the future of e-health together. With that, let's now turn to the financials of the second quarter. Ladies and gentlemen, we expected a very good quarter, and we delivered an outstanding one. With 15% top-line growth, we achieved more than EUR 300 million in group revenues.
Organic growth, positively impacted by the TI connector software upgrade and the dynamically growing hospital business, showed a plus of 13% and 5%, excluding telematics infrastructure, completely in line with our midterm ambitions of around 5% average organic growth. Recurring revenues grew also in the double digits by attractive 12%. Adjusted EBITDA grew by 36%, hence improving our bottom line significantly. Just to be clear and note about a peculiarity in this quarter, since the reported EBITDA is even higher than the adjusted EBITDA, that has to do with the one-timer in other operating income. The line other operating income, which you see, needs to be adjusted by that one time. If you adjust that for, you will automatically have the adjusted EBITDA as we have.
This has to do with the release of an LTI, which did not come into fruition, and as you know, we always adjust for the LTIs for the officers on the board. Being fully on track with our strong performance in the first six months of 2023, we are confirming our full year guidance. Before we deep dive into the numbers, I want to shed some light on the strategic milestones we laid out over the last three months, starting with the Ambulatory Information System segment. Which showed continued momentum with all of the digital initiatives that show progress in the European markets, especially the ongoing rollout of e-billing modules in dental practices in Germany developed very well. Another milestone was reached in advancing the digital patient journey, where the CLICKDOC e-prescription function fully complements the doctor-patient interaction.
Again, our colleagues in the U.S. delivered a very good performance during the last three months. An organic growth rate above segment average, driven by the rollout of our eMEDIX solution to our APRIMA customers, is a strong proof that CGM is playing an important role in the U.S. market. I would like to further comment on the quality of our products, which was awarded by KLAS. The Best in KLAS report recognizes software and services companies who excel in helping healthcare professionals improve patient care. Again, one of CGM's products, ARIA Revenue Cycle Management, has been recognized as Best in KLAS. Congrats, colleagues. Looking at our Hospital Information System segment, we delivered again on our strong market position and impressively demonstrated that the demand for our generation technology is unbroken. The order intake from projects related to the Hospital Future Act grew to now more than EUR 130 million.
A strong proof of our confidence in our capabilities. For the first time, we are increasing our revenue target to now EUR 130 million-EUR 140 million related to the German governmental initiative. We will see a stronger revenue recognition quarter per quarter and expect a strong finish to the year. Not only our hospital colleagues delivered over the last three months. Let's move on to the Consumer and Health Management Information System segment, where we delivered in both pillars. In the telematics infrastructure business, we achieved what we promised. The connector software upgrade, PTV5 , has been rolled out and is fully reflected in the Q2 results. For the sake of our customers, we welcome the latest decision by the Ministry of Health to introduce a so-called TI flat rate. It will provide healthcare practitioners with an increased visibility and predictability.
Moving to the TI flat rate will also support our strategic direction of increasing our recurring revenue base. We are making great progress with the TI Messenger, and our offering for TI as a Service is constantly being expanded. The other important pillar of the CHS segment, the data business, also delivered during the second quarter 2023. We see a growing relevance and reach of our innovative products in the data sector, as mentioned earlier. There is more opportunity for us and our customers in this area, and we realize this as Insight Health showed again, excellent progress in the second quarter. Please let me remind you that as of the third quarter, Insight Health will be fully supporting our organic growth rate.
In addition, we managed a full rollout of the recently acquired GHG Praxisdienst, which will further strengthen our already good position in the market. Operationally, CGM is in great shape and we're set to take up the numerous growth opportunities ahead. Let's dive into our financials. Before discussing the financial performance of the segments, let me highlight our top-line development. As already mentioned, total revenues are up 15% reported and 13% organically. Organic growth ex TI resulted in a 5% increase year-over-year. Recurring revenues increased by 12%, and the 66% share of recurring revenues is impacted by the high one-off effects in Q2, but still at an excellent level, a strong proof of our resilient and sustainable business model.
Shedding more light on the organic growth rate, it is impressive that for the second consecutive quarter, group's organic growth rate was above the full year level in 2022, even excluding the TI business. In Q2, AIS overall delivered a solid 2% organic growth, whilst HIS, CHS and PCS all showed an excellent performance above our guided ranges for the full year. In summary, we are delivering an excellent financial performance in the first half of 2023. Adjusted EBITDA overperformed compared with revenues, resulting in EUR 133 million for the first six months, growing 27% year-over-year. Our adjusted earnings per share increased to EUR 1.07, and we've seen a strong free cash flow increase with EUR 83 million recognized in the first half, as anticipated in earlier calls.
Please let me go into more financial detail, starting with the Ambulatory segment. Supported by acquisitions, revenues grew by 4%. Organic revenue growth stood at +2%, as already mentioned, driven by the organic progress of the U.S. business in the eMEDIX rollout and several digital initiatives in Europe. The recurring revenue share was remarkably strong, with 80%. Against tough prior year comps, with the rollout of additional modules in Germany and Austria, adjusted EBITDA stood on prior year's level. Coming to the hospital segment, we can say that revenue growth was again, very strong, with an organic growth rate of 10%. This development is not only supported by the Hospital Future Act, but also by strong project business in Poland and Switzerland.
Despite additional expenditure for larger projects and ongoing investments to execute on the Hospital Future Act, we see a turnaround on the margin side, as promised in the last call, which will continue to uplift in the second half of this year. Let's move on to the Consumer and Health Management System segment, which recorded an outstanding quarter. Revenues grew by 65%, mainly driven by the software connector upgrade in TI and by the strong development of the acquired Insight Health. Organic growth, excluding telematics infrastructure, increased despite macro crisis-related headwinds in the pharma industry, and we've seen the first step of the anticipated pickup in the organic growth for the data business in CHS. Adjusted EBITDA was impacted by the TI one-off, resulting in an EBITDA margin of 43%. Finally, let's talk about our pharmacy segment.
Again, the PCS segment recorded a quarter above our expectations, with revenue growth of 7%, supported by the acquisition effects in Italy. Organic growth was at 5%, driven by the excellent performance in Italy and in Germany. Again, our prudent cost management in Germany and Italy is paying off. Adjusted EBITDA grew by 10%, leading to a margin of 33.1 percentage points higher compared to last year's period. Well done, PCS colleagues. Let me now give you a short update about the development of our personnel expenses. After leaving the core investment phase last summer, let me just reiterate in the light of the recently made announcements regarding KI or AI initiatives, that the core investment phase is behind us, is past us.
So after leaving the core investment phase last summer, the organic development of personnel expenses has almost been stable and was indeed on the prior year level in Q1 2023, despite increasing revenues and ongoing growth opportunities. Even with wage inflation, we only record an increase of 3%, well below the average inflation rate in personnel expenses, adjusted for acquisitions and effects. Due to a prudent cost management and a focus on highly motivated employees in emerging locations like India, we will not see an increase in personnel expenses at the levels we saw in the years 2020 and 2021 during the core investment phase, with massive buildup in headcount. Not only personnel expenses are well under control, so are our R&D expenses.
Again here, after ramping up the R&D intensity since 2020, the total R&D expenses of EUR 61 million in Q2 are still increasing a bit, compared to total revenues, the share declined by 2 percentage points, and that trend will continue no matter what AI activities we are going to roll out in the future. We are well on track in bringing the share of R&D expenses compared to revenues further down. Compared to prior year, R&D CapEx is decreasing and well under control. This is the next proof that the path we've taken is the right one. We are well on track towards a significant improvement in adjusted EBITDA in 2023. Let's move on to free cash flow. We recorded an excellent Free Cash Flow after six months of 2023.
With EUR 83 million, Free Cash Flow is up by EUR 55 million from last year's level, and thus well on track towards our more than EUR 100 million goal. Please, please keep in mind that the exact amount of Free Cash Flow at the end of the year depends on progress of our customer products during Q3 and especially Q4. With EUR 693 million, our net debt at the end of the first six months has slightly decreased compared to end of December 2022. There was an increase in EBITDA, this leads to a noticeable improvement of the leverage to 2.7x EBITDA.
Our financial firepower is very strong, as beside the EUR 400 million term loan and the EUR 600 million revolving credit facility, we still have access to the EUR 200 million credit line of the European Investment Bank. Growing revenue, stronger than cost in combination with an attractive cash position, underlines the confirmation of our guidance 2023, where we expect an organic growth rate of around 5% on group revenues. The adjusted EBITDA is anticipated to be between EUR 260 million and EUR 300 million, and for the adjusted earnings per share, we forecast an increase at least of 10%. The share of recurring revenue is expected to be in a range of 60%-70% compared to total revenues, and we aim at improving the free cash flow to be more than EUR 100 million.
In the light of the midterm ambitions, we are on a clear path towards our targets. With highly motivated colleagues around the globe, focused on supporting healthcare practitioners and bringing more digitization into the healthcare sector, we have the clear goal to deliver an organic revenue growth CAGR of around 5% until 2025. These revenues will be generated with a high quality, leading to a recurring revenue share of more than 70% in the year 2025. Combined with increased efficiency, also helped by the use of Artificial Intelligence, this will expand our adjusted EBITDA margin to around 27%. I am really looking forward to September 7, when we invite you all to our CMD here in Koblenz.
We, including all my board colleagues and Derek Pickell, the CEO of our CGM U.S. business, will give you a deep dive into the trends in e-health, future opportunities, and exciting business segments of CGM. This exciting day will be rounded off with interactive product showcases. Please do not forget to sign up via our investor relations website and send an email to Claudia or Frederik. Thank you for your attention. We are now looking forward to your questions. I'm handing over to the operator for the Q&A session.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star, followed by one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star, followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star, followed by one at this time. One moment for the first question, please. The first question is from Knut Woller, from Baader Bank. Please go ahead.
Yeah, good morning, and thank you. A couple of questions, actually. Firstly, looking at the HIS segment, Michael, you said that you're feeling confident that we should see ongoing sequential margin and profitability improvement in the HIS segment. We have seen historically 17% EBITDA margin, so is it fair to assume as a first step, that this should be also within reach for the second half? Looking a bit further down the road, which margin levels do you expect in HIS to be achievable? An important element of that, looking at the sequential EBITDA momentum in the second half, is it fair to assume that the HIS improvement should offset the missing tailwind from the connector replacement in the second half, in terms of profitability, at least?
Looking at the guidance, Michael, you confirmed your guidance, but we have seen noticeably stronger growth momentum organically in H1 than your full year targets with 12% versus around 5%. Just talking hypothetically, if we would see an outperformance in terms of growth, is it fair to assume that this should become visible in terms of operating leverage, or would there be any incremental costs attached to an outperformance? Lastly, on the AI initiative, can you shed some light already on the revenue potential and on the timeline when you expect that to become material for CompuGroup on the revenue side? Thanks very much.
Thank you, Knut. Very good questions and all extremely relevant to today's call. Let me start with the first one on the HIS segment. Indeed, you might have noticed that start Q4 last year, we had significant investments for larger projects on the HIS side. That continued also to entail into the first quarter of 2023, and a little bit into the second quarter, 2023. Yes, the historic margin on the HIS side was 17%. If we go back from a prior year with 9%, then that was an exception. We want to see that margin again, also in the second half. You connected that question with the bigger part of the connector replacement.
Just for the benefit of everybody explaining that, we started September last year with the connector exchange, that connector exchange one-time revenue will not reoccur in the second half of this year. The benefit from the organic growth from HIS, together with the margin increase on HIS, will more than compensate the EBITDA contribution from the connector exchange. We're very confident on that one. Your second question was regarding the growth rate overall, first half and second half. Indeed, if we just back out the TI elements, because we are running up against one-time revenues in TI for the second half year. If we just back out the TI elements and look into the underlying growth on HIS, on CHS, on AIS, and on PCS, then you're fully right.
The more we can achieve a higher organic growth rate, the stronger our margin will be. It comes, every single dime in addition, comes with very high contribution margin. That is fully correct. The last question was with regard to AI. Let me just remind everybody that we went out at the end of 2020 and said we are going to build a lot of new features, product solutions, are going to deploy them to the market. That's exactly what we're doing.
Now with the use of more AI coming to the market, for instance, since the release of ChatGPT in the second half of last year, we are also utilizing these tools, not only to build into our product solutions and offerings, but also to boost our own internal R&D activities and also to make our backbone work much more efficient. This is, for us, a benefit on the product side with increased revenues, a build and part of the guidance for 2021 to 2025, since we saw already the usage of Artificial Intelligence coming into play. It also gives us additional opportunity here on the efficiency side. I hope that answers the questions.
Great. Thank you.
The next question is from Laura Métayer from Morgan Stanley. Please go ahead.
Hi, Michael. Two sets of questions from me, please. First, regarding the AIS segment, organic growth of 2%. You flag strong business in the U.S., and with dental practices, but can you give a bit more details on the rest of the business? Can you give more details also on how much price increases contributed to growth and how you're doing on the cross-selling of modules? Do you expect growth to pick up in H2 2023 for, for AIS? The second set of questions is very quickly on Generative AI. Do you have any early insight on how you think Generative AI can enhance the CGM products? I know you said, you said you would share more at the CMD, but any kind of early insights on, on how you think that can enhance products would be very helpful.
Thank you.
Thank you, Laura. Yes, I want to start with the second question, generative AI, and yes, we will talk more about that at the Capital Markets Day on September 7th. However, let me just make two comments here. The arrival of generative AI with ChatGPT or other Llama or whatever solutions out in the market, is good and is highly welcome. There is an issue connected to data privacy and making sure that proprietary knowledge is not shared in an open forum. We will also find our own ways on how to deal with that. We will not be a company building another generative AI solution next to Microsoft or Meta, just to be clear. We will talk about more of that in the September capital markets statement.
Your first question on AIS is one which is actually re- reminding those of us that have been with us in 2017 and 2018 of that situation. I want to go back to the situation of connector exchanges. We put all of our people on the ground from AIS side, particularly in Germany, to help and support the connector exchanges at the end of Q3, 2023, all the way through the beginning of Q1, sorry, Q2, 2023. That has an impact on AIS. We saw that, and we can go back in time exactly in the numbers in 2017 and 2018 on the AIS side, as our personnel was focusing on making sure they actually help with all of the connector exchanges. This is primarily done by the AIS team.
That's why also we are running up against a fairly lower comparable base on AIS for the second half year. That gives us confidence that we will restart on the cross-selling of the modules and improve on organic sales growth here also within the core business on AIS. You asked a question of price increases. Yes, we've put price increases through on the recurring revenue. Like I said, the one-time revenue has a little bit stalled because we have been focusing on exchanging the connectors. I hope that explains on where the benefit will be also for the second half year, as we don't go into connector exchanges anymore.
Great. Thank you.
The next question is from Florian Treisch from Kepler Cheuvreux. Please go ahead.
Great, thank you very much for taking my question. I have one question on the EBITDA guidance for the current fiscal year. If I just take H1 as a starting point and deduct the software revenue part, which is a one-time benefiting Q2, there needs to be clear improvements in H2 to get towards the midpoint of your guidance. Are you still confident on the midpoint? And maybe can you add the key details or leverages why you are confident, or is it fair to assume that the lower end is more likely? A second one on CHS. In the last calls, you mentioned that the pharma clients are kind of carefully investing only. Are they now coming back, and are you seeing, like, the light at the end of a tunnel here? Thank you.
Thank you, Florian. I want to start with the second part of the question on the CHS side. I, I, I think I said this in earlier in this call, and I want to reiterate that we see the pharma clients coming back, but still, we would want to get to more projects built up and ramped up over the next quarters to come. Yes, we are back into positive organic growth territory on the data business. We want to see more of that. On the first question regarding the EBITDA guidance, you're fully right. The one-timer on the software upgrade was in the first half, and against that runs in the second half, the significant improvement on EBITDA, and I'm talking here absolute EBITDA, on the hospital business, right?
That one will clearly overcompensate the one-timer on the software upgrade. In addition, we will see, as I was explaining a bit earlier, a better growth situation on AIS and also an improved profitability. Plus, we have been watching costs very well, so we will see that our R&D expense ratio will go down, and you've also been listening to the 3% personnel cost increase only, which we were showing after the salary increases. That all gives us confidence that we can achieve our guidance as we set it out. Now, you asked regarding the guidance range, Michael, why is it so wide from EUR 260-EUR 300? Can you not narrow it down a bit?
Maybe I burnt my fingers a bit by last year's August conference, where we actually narrowed the guidance a bit. You know, we are in a regulatory environment, and it depends a bit also on when we are allowed to deploy and recognize some of the revenue. Want to give you a specific example. The race was very close last year, for instance, with Ségur de la Santé, where we were allowed to recognize the revenue, and that still needs to be seen on the Q4.
Great. Thank you very much.
Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone. The next question is from Martin Jungfleisch from BNP Paribas Exane. Please go ahead.
Yeah. Hi, good morning. Thanks for taking my questions. I have three, please. The first one is on the cost side. On slide 19, you showed that personal expenses have grown 3% and then 7%, including the acquisitions, so basically reversing the trend a bit this year. Would you expect that this run rate would sustain in the second half and with the roughly EUR 146 million in personal expenses that you have seen in Q2 be a good indicator for Q3 and Q4? Or were there some special effects that have, I guess, elevated personal expenses in the second quarter? The second question is on interest cost. Net interest expenses was EUR 6 million in Q2.
Is that a good proxy also for Q3 and Q4, or would you expect that your hedges would alleviate a bit of that? The final question is on the Epic entry. It said that Epic, the U.S. market leader for software, would basically roll out a software in a few hospitals in Germany this year or in the coming years. Basically just want to see what your views on that. Yeah. Thank you.
Thank you, Martin. I want to start with the personal cost one, so take the order of your question as you voice them. On the personal cost side, just to remind everybody, we typically have, in the majority of our jurisdictions, the salary increases, if we do salary increases, on an annual basis in the month of May, so they have full effect for 2 months. You will see a little bit of trickling over of that then when we take Q3 and Q4 into account. They are very well under control. We don't expect additional one-timers somehow here on the personal cost to come. Plus, our headcount build-up, if it takes place, is taking place in lower cost countries like for instance, in India, where we're shifting resources to.
You see that also when you take a detailed look in through the FTE number. Confirm that costs are under full control. Second part of the cost you mentioned was the interest cost, and indeed, we had hedged very on, as you know, with the cap at the time for our term loan activities and then also swapped our European Investment Bank line. With that, we are actually safe in terms of rising interest rates and the EUR 6.5 million, which you mentioned too, basically, is a number that will also be seen in Q3 and Q4. Your last question is an interesting market question of the dynamics.
The American from Epic seems to be talk of the town, also by the Federal Ministry of Health, as he was even promoting that firm to the irritation of some other market participants. I see that rather as a chance. Epic is the most expensive Hospital Information System and most complicated Hospital Information System one can bring to the market. The price points are significantly higher than the price points of all of the other players in the market. If our hospitals are willing to pay for that, that gives us a huge opportunity also going forward.
Okay, thank you.
We have a follow-up question from Florian Treisch, from Kepler Cheuvreux. Please go ahead.
Yeah, thank you. A follow-up on HIS as well. Now we're talking about competition, but on a positive, as we are raising again, your order intake guidance, it looks that obviously more orders are coming in than you are expecting or was thinking about being possible. My question would be a bit, where are these order coming from? Where are you gaining market shares? Is there, like, a specific trend behind that better-than-expected numbers?
It seems like the consolidation in the market is bearing fruit. At the time when the Hospital Future Act was enacted, it was not known that SAP would position itself as it did to, to move out of the market, so that, their business is up for grabs. People are actively participating in that, and also we see opportunities here for us. Plus, congrats to our HIS sales team. They are doing a very good job. We now just need to turn orders into revenue in the second half year and in the years 2024, 2025.
Great. Thank you.
Okay, since we do not have any further questions, we would like to thank all of you who dialed in today. As always, Investor Relations is available for further questions, so if there is anything you would like to know, please don't hesitate to give Frederik or me a call or send an email. Thanks for taking the time today, and we hope you have a great day. Bye-bye.
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.