Wirtek A/S

CSE:WIRTEK

Earnings Call Transcript

[Unknown Executive]

Welcome to today's event where we have the pleasure to present Wirtek. To help us through today's presentation, we are joined by CEO and Co-Founder, Michael Aaen. Today's the Q1 '25 interim report, it will be today's topic fresh from the press this morning. As always, you're very encouraged to ask questions in the box down below. Do it during the presentation, but we will take the main part of the questions in the end. And of course, if you feel like it, you can also ask in Danish, and I will try and translate to the best of my abilities. But for now, I think I will hand the call over to you, Michael.

[Michael Aaen, executive]

Thank you, Michael. My name is Michael Aaen, and I am the CEO in Wirtek.

Next slide, please. So I will start with a few operational highlights from our first quarter of this year. So there's really no need to beat around the bush here. Q1 was a challenging quarter for Wirtek. We saw a decrease in revenue, primarily driven by the completion of a Danish client engagement. And we continue to experience delays in client decision processes. Our sales pipeline continues to grow, so we are well prepared as market conditions improve. Now the decrease in Q1 revenue combined with investments in the new Solutions division has resulted in the first negative quarterly EBITDA result in many years for Wirtek. So despite the current challenges, our core business remains strong, and we are very confident in our ability to return to profitable growth, which actually is a central pillar of Wirtek's strategic foundation.

So we will from this quarter, carefully evaluate investments, and we will be implementing cost savings in order to return to positive quarterly EBITDA no later than Q3 this year. Now on the positive side, we saw growth in our International business during Q1. Revenue from existing U.S. and Dutch clients grew. And we also signed 3 new contracts with clients outside of Denmark during the past 3 months. Two of those contracts are with clients in the energy sector. And on that note, we continue to see strong fundamentals in our energy business. Q1 delivered 67% year-over-year growth and energy-related business now accounts for 48% of our total revenue.

So let's have a look at the financial highlights. Next slide, please. So in Q1, we delivered revenue of DKK 15.5 million, which is a decrease of 14% compared to Q1 last year. And in the previous slide, I did mention the reasons behind this decrease in revenue. EBITDA was negative by DKK 1.1 million compared to positive DKK 1.8 million in Q1 last year. Now lower revenue combined with investments in our Solutions division are primary causes behind our first negative quarterly EBITDA in many years. So we are obviously not satisfied with an EBITDA margin of minus 7.2%. So we will be implementing cost savings already beginning this quarter to get back into positive EBITDA territory, as I already mentioned before.

Earnings per share was minus DKK 0.25 and of course, it's driven by the negative profitability during the quarter. Wirtek's equity ratio, it remained strong at 47% despite the acquisitions of Pragmasoft and Seluxit last year. Our liquidity ratio is also very solid at 137%. So although it is 12% lower than in Q1 last year, it is actually up from 135% end of last year.

Next slide, please. In Q1 last year -- this year, Danish clients accounted for 34% of total revenue. It is a significant reduction compared to the 47% we had during fiscal year 2024. Now on the positive side, we are experiencing year-over-year growth of 2% with our U.S. clients and 3% with our Dutch clients during the first quarter. U.S. clients now account for 33% of total revenue and our Dutch clients delivered 20% of our total revenue during Q1 this year. And through the acquisitions of Pragmasoft last year, Portugal now accounts for 8% of our total revenue. The remaining 5% that came from clients in Austria, Romania and Germany.

Now given Wirtek's growth in the U.S. business and also with the very significant uncertainties concerning the U.S. policy and its potential impact on the U.S. dollar. I do want to mention that Wirtek's exposure towards the dollar is very small. Most of our contracts with U.S. clients are euro-based.

So on the right side of this slide, you can see a graph of the quarterly revenue and EBITDA development during the past 5 quarters. So Wirtek does have seasonality dependencies as an integral part of our business model. So revenue from quarter-to-quarter does fluctuate quite a bit. But of course, it is quite obvious that Q1 this year does have a dip. The graph also shows the big dip in our EBITDA during Q1. We are determined to change this track, so we get back into positive territory during the coming months.

Next slide, please. So lastly, I want to present Wirtek's outlook for 2025. Earlier this year, we published our expectations of 2025 revenue in the range of DKK 70 million to DKK 75 million. Now this amounts to a growth of negative 3% to positive 4% compared to last year. This revenue outlook reflects the significant geopolitical uncertainties that delays the investment decisions from existing and potential new clients as well as the previously mentioned completion of a client engagement.

So we expect EBITDA in the range of DKK 1 billion to DKK 5 million in 2025. This amounts to a negative EBITDA growth of 81% to 4% this year as we have budgeted with investments in our new Solutions division as well as continuing our investment in business development as well. Although EBITDA was negative in Q1, we expect to get back into positive EBITDA territory so we can reach our EBITDA outlook for the year.

So as a closing to my presentation, I will say this, it is virtually impossible right now for us to predict when we will see an improvement in market conditions. Uncertainties such as the ongoing threat of a tariff war still exist, but we are optimistic concerning our prospects based on a solid sales pipeline, and we, therefore, maintain our expectations for 2025.

So this concludes my presentation. So back to you, Michael.

[Unknown Executive]

Perfect. Let's jump into some questions. Actually, the first 1 is touching a little bit upon where you already were. You kind of a viewpoint when you speak to your customers and the recent development, how do you view the rest of 2025?

[Michael Aaen, executive]

Well, without getting into too much details, we are -- since we are maintaining our expectations, we do expect that our core business will remain strong. And again, our sales pipeline has never been stronger than it is now actually. So we do foresee once we, hopefully, things get settled a little bit down and maybe there is some clear vision for what the future is going to look like in the U.S. with their tariff threats, I expect that investments are going to come back. And as many companies are delaying those investments right now, I would imagine that you could see kind of a catch-up effect at some point.

[Unknown Executive]

Perfect.

[Michael Aaen, executive]

And we still do get new clients, as you can see, 3 new contracts in the past 3 months, right? So yes...

[Unknown Executive]

When you look at maybe the business segments, your clients are in, are they hard hit by tariffs or could be? Or is it more like you feel you are uncomfortable with your clients' business sectors?

[Michael Aaen, executive]

Well, since very few of our clients are directly threatened by what has happened until now, I think it's the uncertainty that postpones the investments because when you don't know what next month is going to look like, you're not going to start big new investments, right? So I think it's more of this -- I don't think that a big part of our clients have this direct impact.

[Unknown Executive]

Perfect. And then there's a question about this lost customer in Denmark of finalized completion. The question here is, did you already knew that when you guided for '25? Or is that new? And why is it first informed to investors now?

[Michael Aaen, executive]

Well, it's part of normal business, of course. We -- sometimes you get new clients and sometimes you lose clients, right? So that's part of the normal business that if we don't think that it has a direct impact then, of course, it is put into the expectations there. And we do have this already calculated into the expectations that we know that its projects do end with clients as well, right? So that's just part of normal business.

[Unknown Executive]

And that's somehow why it's...

[Michael Aaen, executive]

It fluctuates. And again, as also -- based on our acquisitions there, our -- but our revenue actually fluctuates even more now because of the type of clients that the companies we acquired have and how those clients put in their orders with Wirtek.

[Unknown Executive]

And there's a little question. Can you tell more about the client and maybe the size? Or is that too delicate information?

[Michael Aaen, executive]

That's not something we've published information about. So -- but it is something that is already calculated into the expectations for this year.

[Unknown Executive]

And I guess it's not unnormal that bigger projects ends and sometimes they can restart or you need to do some, you might say, maintenance or running their systems or develop a little bit new. So is that a client that could see something coming back?

[Michael Aaen, executive]

Well, for this particular client, it's not that we'll still work with this client on other projects in the future, right? So nothing is forever, right? So of course, Wirtek has had this very nice situation where most of our revenue actually is in place when we start the year for the prediction there. And that's also the case this year when we started 2025, we will already know about 80% of our revenue for the year. So we have this very nice revenue base as part of our business. We don't have to reinvent all our business every year.

[Unknown Executive]

And then there's a question where there staff reductions in Q1? And do you plan to reduce increased staff next quarter? A little bit about the cost savings. I don't know whether you actually said it was staff reduction or it's an miscellaneous cost. But was the staff reduction? And do you expect to reduce also staff in the coming quarters?

[Michael Aaen, executive]

Well, this is a decision that the Board has made that we are now going to look into this. So this is going to come beginning this quarter already and we are looking at everything including staff, including overhead costs, administrative costs, whatever thing is our kind of business, very close to 90% of our revenue -- of our costs are related to personnel, right?

[Unknown Executive]

And then a little bit about the visibility. You mentioned the 80%. So do you have some tools to drive where you see you can see ramping up and going down in the staff and so on. Do you feel pretty comfortable doing that with the visibility you have in the type of businesses you have?

[Michael Aaen, executive]

I'm not sure I fully understood the question.

[Unknown Executive]

Yes. I mean you mentioned that you have 80% of your revenue already locked the visibility seems okay. So do we have good tools to ramping a little bit down on your cost and maybe being ready to ramp them up again if market conditions should change. So do you have the time to do that and don't lose business if you are too fast, try to take cost out and can ramp it up if the market conditions suddenly changes?

[Michael Aaen, executive]

Well, this is, of course, is a delicate balance when you have an IT services company, right, because you don't want to have people sitting waiting for task coming in because that's the cost that you're having where you don't get the revenue. So it is always going to be the case when you're going to ramp up a new client engagement. Our HR department have to go out and find the right competencies to deliver on a new order.

[Unknown Executive]

Check. And then there's a question. Are you still looking at M&A targets? Or does the current market uncertainty give you hesitation on the M&A side? Or actually, does it create greater opportunities because uncertainty also sometimes can press down the price on M&A targets?

[Michael Aaen, executive]

Well, M&A is part of our strategy, right? It is part of how we see growth. We want to grow organically and that has been challenging for the last period here. But of course, with pipeline building up organic growth is going to get back into a good situation again. But M&A is also part of our inorganic growth so that we can boost our growth in the future. So it's still on the table for potential growth. But again, we are also looking at the condition of stock price, and we feel that maybe right now, it would require significant dilution if we're going to go out and make any major acquisitions, which is also one of the reasons why we actually chose to postpone our strategy last year is because we did not want to go out and make a big acquisition that would result in a very high dilution of the existing shareholders.

[Unknown Executive]

Check. Do you expect to continue the growth in international markets such as U.S. and Netherlands in the upcoming quarter based on the current pipeline. So are they still the growth drivers of your business right now, also looking a little bit ahead?

[Michael Aaen, executive]

Well, we have a significant amount of opportunities internationally. We also, of course, want to grow our home market Denmark as well. But right now, where we are having a big presence outside of Denmark, we will also, I believe, continue to see significant growth outside of the borders of Denmark.

[Unknown Executive]

And then there's a question here. Do you see markets have changed dramatically since you gave your guidance? Is there more uncertainty, more prolonged processes? So a little bit on the viewpoint here since you gave your guidance.

[Michael Aaen, executive]

Well, I will say this, that the total uncertainty of what is in Donald Trump's mind, if I have -- if I can be that blunt, definitely has increased the uncertainties. Who knows what is going to happen concerning tariffs, right? There's a new -- you open up the news every day and he's saying something new, right? So it's really, really tough to navigate in this situation here. So I do expect until there is more settlement of what is going to happen there. We don't know what's going to happen in Europe yet with the tariffs towards U.S. as well, right? So until we know that, I'm sure that major investments to a big extent is going to be postponed, delayed.

[Unknown Executive]

At least that's what we hear from a lot of companies that there is a little bit waiting and seeing with all the investments. So that makes sense. What is your expectation on the Solutions business compared to the Service business? Maybe a little bit -- have you had any thoughts on how big can it get as a percentage?

[Michael Aaen, executive]

Well, it will take significant time to build up a Solutions business, right? Through the acquisitions we did last year, of course, we got some very valuable building blocks, but that's going to take years. As you could see in our quarterly report, 97% of our revenue comes from our core services business, right? So that's going to -- it would be for the long run, if we're going to see an effect on this. So it's a way of playing on multiple horses in the market there because the IT services, it is a market that scales one-to-one and in Solutions, you do have the possibility to scale both with annual recurring revenue as well as with deliveries of hardware to potential clients as well. But it's 2 very different types of businesses, which is also why we have chosen to split them into 2 separate divisions.

[Unknown Executive]

Can you give us an indication on the investments you're doing there? I don't know whether you want to give us an amount, but some indication on would you have been profitable without those investments you need to do some kind of a feeling here on the investments you are making into the Solutions business.

[Michael Aaen, executive]

I did -- we did not put that out into the quarterly report. So I can't really go into more detail than what we have already published there. But investments have been significant, no doubt about it.

[Unknown Executive]

And do you activate those on the balance sheet? I looked at the cash.

[Michael Aaen, executive]

Not much in Q1.

[Unknown Executive]

Then the last question is regarding -- maybe it's a statement, but also a question. Could you consider using an leverage, meaning borrowing to kind of go out and look at the M&A targets and not only your share, you have a pretty strong balance. So could that be a part of it?

[Michael Aaen, executive]

Well, that's what we've kind of done until now, right? So we always look at it as a whole and see, okay, how are we going to finance an acquisition? And some of it is going to be with -- we always want to try to commit the sellers of an acquisition target there. So they also feel part of the future here. But we also want -- we don't want to dilute existing investors as well. So we also want to use existing cash reserves as well as bank overdraft facilities or bank loans, if necessary there. But we did 2 acquisitions last year. Most of that is already paid, and it was handled through our own cash as well as bank overdraft facilities.

[Unknown Executive]

Perfect. That was actually the last question. Thank you to you, Michael, for taking us through the results and answering questions, and thank you for the audience for listening in.

[Michael Aaen, executive]

Thank you, Michael.