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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to today's earnings call of CENIT AG following the publications of the Q3 figures of 2023. The CEO, Peter Schneck, will speak in a moment and to get us through the results and the presentation. After the presentation, we will move on to Q&A session in which you will be allowed to place the questions directly to Mr. Schneck. And with this we're looking forward, Mr. Schneck, and I hand over to you.
Yes. Thank you very much. Ladies and gentleman, very nice good morning and warm welcome to the CENIT earnings call for Q3 2023. It is rainy, a grey day, here in Germany. As usual, I will run the presentation in English language due to foreign investors, analysts and shareholders in this call. At the end of my presentation, I will give you the opportunity to ask questions in German, English or French. And then of course I will translate up to your convenience.So before I dig into our Q3 figures, I would like to give you an update on our change in the CENIT Board as you have, or you might have seen this morning in our press release. Our former CFO, Axelle Maze, she was the CFO since October 2023 (sic) [ 2022 ], has resigned by end of October 2023. She was sick since our last shareholder meeting in May, and not in duty up until now, and therefore resigned due to private reasons.Axel Otto, a German citizen from the Stuttgart area, will take on the new role as the CFO of our organization by January 1, 2024. Axel has been the CFO or is still the CFO until the end of this year of Seeburger AG. Also a German software company that is kind of close to CENIT, but not a competitor. But I think Axel has the advantage that he knows very well the software business since many years, has worked for a lot of different companies in the manufacturing as well as in the software industry. So he's very well-familiar also with our products. And I'm looking forward to working with him by start of January 2024. Up until then, I will fill in the position as CFO in addition to my CEO role here at CENIT AG.So now let's come to our very promising figures for 2023. You might have seen this morning a very brief update. And of course, I would like to give you some background information to our figures, and then afterwards of course give you the opportunity to ask further questions.If you look at the sales, we have a major increase of 15.1% from last year's Q3 quarter up until now this quarter. So as you can see from EUR 115 million to EUR 133 million. This is a very nice jump. And of course what you have to bear in mind, this includes on one hand the acquisitions. So we have the first quarter of ISR that is included in those figures. Then of course we have the acquisition of mip, the Munich company that is consolidated since February of this year. And then of course PI, which is the Berlin company that we have acquired this year that is consolidated now by the 1st of July. So we have 3 months of this organization of course also in those sales figures. And finally ACTIVE BUSINESS CONSULT, the Austrian acquisition that is included or consolidated with 2 months. So this is one factor.The second factor is of course, as you can see here, we have, especially in the PLM sector, a major organic growth of 7%. If you would just look into SAP and the PLM business of Dassault, the increase is even higher. It's 7%, including the DFS portion. Digital Factory Solutions is of course a piece that we are restructuring, as you all know. This is our own software company but of course struggling. And what we also have to include is there's the deconsolidated effect of CENIT Japan, the sale that we have done in Q1, that is included in this one. So despite this effect, a major jump in the organic growth in the PLM sector.Then of course in the EIM sector you see about more than 60% increase in sales, in this case also organic growth, but mainly driven of course by our mip acquisitions. And then of course what you will see on the next page is that we have a major jump in the service and consulting businesses due to also the acquisition of ISR, which is of course in the main portion a consulting business.So overall grows 15.1%, as I said, on the on sales side. The acquisition contribution is about EUR 4 million, as we have stated here, so that you see in the base business, in the core business that we have without the acquisitions we also have a major jump in growth. So this is a very promising information. And I think also despite the economical environment that we're all facing, this is a very good news. And I assume that later on in your question portion this will be also one of your areas of interest.Then on the other side, the EBITDA jump, as you can see here, from EUR 6.1 million up to EUR 9.4 million. So 54% increase, which I think is also a very good message. Not only driven by the acquisitions, it's mainly really driven by the organic growth. And of course, also our [ ZIRIUS ] project. As I told you, we're running internally here an improvement project to increase or to improve our EBITDA. And finally, EBIT, certain cost saving programs that we have started as well as of course also a review of our teams.So coming to the EBIT, as you might conclude already by the nice EBITDA figure. You see that the EBIT jumped up from this year versus last year to Q3 78.1%, from EUR 2.58 million up to EUR 4.6 million. This is of course a major jump and very promising. One portion, again, acquisitions. The other portion is of course improvement of our organization growth and the ZIRIUS project, as I just mentioned. As a consequence, the EPS went up by 94% from EUR 0.147 to EUR 0.286, which of course is also a very nice jump. Now based on the first 9 months, the group EBIT margin is 3.45%, which is also a very good improvement to last year.And of course it's showing that we're heading in the right direction. As you all know, we are targeting EUR 9.5 million EBIT for the total year, which would end up in 5.-ish percent EBIT. So we're very confident that we will achieve this. And if we just compare to last year, and if we extrapolate, then we are ready without the effects of a deconsolidation Japan and without some other effects that we have here, we would be already at EUR 8.4 million. So this is very promising that we are achieving our goal. And of course please always bear in mind, we're coming from 3.9% EBIT margin for the total year. So I think this is a very clear indication that we're heading in the right direction.Now, looking into some of the figures from a different angle now on the balance sheet. First thing before we go into the balance sheet, I would like to point out our improvement in the gross profit. You see here 23.2% from EUR 64 million to EUR 78 million, almost EUR 79 million, which is I think a very nice improvement. And then of course what I also would like to point out is on the bottom line, the order backlog, as you can see, is still 14.2% better than last year. So EUR 53 million order backlog. So this is also very promising. And of course shows that also for next year in some of our business units, we're very confident that they will achieve their -- the targets, I wouldn't say easily but that they will achieve them because they already have such an order backlog that even next year is already quite safe.Now, if we go into the balance sheet, there you see a difference in the cash that went up from EUR 19.9 million to EUR 30 million. Please bear in mind that we also have increased our credit line by a clock deal with our banks from originally EUR 20 million now to EUR 40 million which of course has an effect on the cash side, and we haven't invested that much yet. So we had one target that we were looking at for about [ EUR 14 million ] buying price which is stopped at the moment due to some, yes, issues on the software side. So it looks like that there's a change of control clause. That's why we have raised the red flag. We're negotiating to overcome this. But then of course we might not do it if we can't come to a conclusion for this. So that's the reason why we have such a high cash at moment. And of course also from our growth side some, so cash is coming in, that's a nice thing.Then coming down to the cash flow side, here you see that we are lower on the operative cash flow than we were last year. And of course, one of the reasons is a change in the working capital. Just to give you also an idea on what we are struggling with or what we are facing at the moment is a kind of reluctant payment. So the terms from some of our customers are extended. They're asking for extension to 30 days, or some of our customers from 30 to 60 days, which is of course one of the reasons why the cash is coming in on a slower mode. And just to give you an idea and maybe a grip on what we're facing, the open payments by Q3 last year 2022 were about EUR 17 million, 1-7 million. And in 2023 Q3 we are facing EUR 26.7 million open payment. So there you see reluctancy in payment, extended payment terms which is a kind of indication that it's getting a little bit tougher and rougher out there. There is no money that we are losing due to any bankruptcy or Chapter 11 cases at this point. But what we definitely have to say is, it's getting rougher out there in the moment.And then of course, as I mentioned before, on the CapEx side, you see lower investment, which is mainly acquisitions, since we have basically no CapEx in the normal way. So that's why we indicated this year, this is mainly investments that we're doing. And this year we were a little slower than last year since we had last year the acquisition of ISR, which was a major portion. And then of course still a positive free cash flow, which is a good indication for our profit line for the future.Coming to the sales by revenue type, as I mentioned already before, the consulting and services went up by more than 40%, as you can see here, from EUR 38 million to EUR 53 million, which is a very nice increase, mainly driven of course by the EIM portion, which is ISR and mip as well as some consulting services from the core EIM business. So a very nice development and shows that we're heading here in a very nice direction in showing that we are reducing the dependency from just software sales. So this is important.As you all know, part of our strategy is that we're trying to get a much better mix of consulting and third-party and our own software sales. Then on the CENIT software side, you see still, like we had already in last quarter, a small gap of 4.1%. I think percentage-wise, this looks worse than it is in reality because if you look at the real figures, you see EUR 11.6 million to EUR 12.1 million. So that's the gap that we are still missing. So nothing to worry about, but there are different reasons for this one. As I mentioned already last time, I think there was one question from one of the analysts or investors why we are seeing this drop here, since we are still targeting the 20% own software, proprietary software share of our revenue. And of course this is not the right direction because it's basically steady or even going a little backwards.And you're absolutely right. I mean the reason number one which you should bear in mind is there is also the deconsolidation of CENIT Japan included, which is of course the DFS software, which is our own proprietary software. The second effect is what I mentioned already last time, there's a certain delay in a big project coming in. We hope that we will get this project now in the fourth quarter, which then by the end of the year, everybody would say, oh, wow, it still grows. They're still doing it the right way. Well, the problem is, like we had in the past always, especially in the sector, we're very much depending on the PLC license sales, so means onetime license sales. And of course this dilutes a little bit the situation. So if there's one big project coming of EUR 1 million, EUR 1.5 million, again, we look good. The reality is we are also facing now the situation in the CENIT software on the DFS side as well especially on the EIM side with our ECLISO product that customers are shifting from the PLC business into the SaaS business. So this is what you see here a little bit. And this is something that is new because in the past we had this on the Dassault side and the IBM side, but we didn't have this in our own software side. So this is a new situation that everybody was expecting, but now we see this happening.And what this means is for us, it's nice because it's more recurring revenue for the future. That's always the good message of this, but we will have a dip of 2 to 3 years and this shift. And that's also part of our acquisition strategy, to get to the 20% own proprietary software portion of our revenue. We also have to acquire companies that bring in own software solutions because still, again, this is one of our main targets that we -- as you can imagine, we have here a much better margin than just by selling third-party software so that we can really focus on increasing our proprietary software portion.And then as a result of the 7% growth that you see on the PLM software, there's of course a 3.5% in third-party software sales. So this is mainly Dassault and of course IBM software that is sold by our EIM team, including ISR and mip. So there you see of course also the shift. This has been for many years flat or even negative. And now we really have a very nice turnaround in this area as well. So a lot of dormant customers are now coming up again, and we're focusing on this. So there's a very nice increase in the structure.So if we look into the segments, EIM, so ISR, mip included in our core business, you see close to 60% increase. I think that's a very nice improvement, also organic growth, but of course mainly due to the acquisitions. And then on the PLM side, as I mentioned already before, the 7% increase, which I'm very happy about because of course it shows that we're heading also here in the right direction, waking up our teams and making sure that we get again and are even above the market growth when you look into the PLM sector for the areas that we're in. So we're really gaining more market share.And you will see also later on, we'll be coming a little bit more aggressive by even attacking other Dassault vendors and resulting in change of ours. So we're more aggressive, and we're heading here also in this field in the right direction.Now if we then just have a look on the Q3 result, so not the full year up until now, but just this quarter, including the vacation time. As you always know, it's a little difficult for us since, especially in Germany I have the feeling that vacation is extended more and more. For some time we were laughing about our French colleagues that were basically in vacation for 2 months. I have the feeling that the German are getting better and having more vacation than ever.So still looking into the Q3, I think we have done a pretty nice performance due irrespective of the situation that we're facing with the vacation time. You see just in Q3 we have an increase in sales by 9.3% in EBITDA, 35% in similar in EBIT. So also a very nice improvement, although the figure itself is just EUR 500,000. And then of course also the upwards in the net profit for us.If we then look into the sales by type, you can see third-party software, we had a 5.3% increase. And the CENIT software, as I explained before, deconsolidation effect as well as of course a shift into the SaaS situation. We have a small dip. But again, please always look at the figures. So it's basically just EUR 15,000 that we're talking here about. So it's nothing dramatic. And then of course we have an increase in the consulting services. And I think that's what's the most important thing to mention here about. So total increase in sales is about 9.3% versus last year.If we then look a little bit into the customer situations that we have faced up until so far in the Q1. As I mentioned already, some of those customers, Safran Aero Boosters, important here. They are still in the private cloud. They will stay in a private cloud since this is a defense business. But there's also quite a lot of potential for year 2024 since they will expand to 1,500 users worldwide. At the moment, we're running with then the shift in the 3DS business, but I think that there will be some smaller or some nice projects coming up that in the future.And below this one, as already stated as well, a German premium car manufacturer that has built our DFS solution, FASTSUITE. And we're waiting that they're going to extend this into 9 further production plans. So this will be a major license deal for us in 2024 that we're ready for.Then the luxury car manufacturer based in the U.K. already spoken about. This is a very nice expansion into the SAP connection. So what we've done here is the 3D experience connection to the SAP business. Important to mention here, SAP has recommended us to this manufacturer. And we are the ones running this project, and we are also the contract holder. So it's not SAP. It's us doing this with the support from SAP. And as already mentioned in one of my last calls, XCMG, which is a very large construction company in China or based in China, they have decided to run their units and their robots with our DFS solution.Then coming to Q2. As also already mentioned here, we have sold our ORTEMS solution to a key player in the energy sector in Germany. So ORTEMS is a solution of the DELMIA software, Dassault DELMIA software. And what we do with this one is the scheduling and planning solution to synchronize the production and to improve the delivery times. So this has been very successful. Also important to mention, we're much more focused now on ORTEMS, on top. And you see this on the right side as well. We have sold this also to a pharmaceutical manufacturing company. This is also a ORTEMS deal that we could achieve. So we're starting to sell more and more DELMIA and ORTEMS solutions on top of the classic 3DEXPERIENCE, which is also paying some fruits of our developments and our training that we have done in the past because we wanted to expand the sales of the Dassault portfolio and I'm very confident that there will be more ORTEMS and DELMIA solutions that we will sell in the future.Yes. Then I will -- because we spoke already about Q2, then coming to Q3, and I think this is now important for you to see how this continues. We have Quantron as a new customer where we have, and I mentioned this already before, we have been more aggressive in the market in Germany, and we have done a so-called change of [ var ]. What this means is we were able to pick this customer from one of our Dassault competitors in Germany and switch them to a CENIT customer. So this is part of our strategy as well that we're becoming much more present and more aggressive also to existing Dassault customers that are not CENIT customers. And you will also see this in future much more.Then the SAP team has sold their solution to connection -- CENIT Connect to a large diesel engine manufacturer based in Germany. So this is also a very promising project. There will be additional solutions coming in future. So this is just the entrance for our team.Then [indiscernible], you heard already, by beginning of this year we sold a solution from our team of the 3DS solution, so basically a PLM solution and now switched and expanded this by this CENIT Smart PLM solution means the SAP team is now integrated in this one. And of course connecting SAP world and 3DS solutions. So that's a car manufacturer. As you all know, automotive is under pressure, and they have decided to improve their efficiency in the organization by investing into software and this works out very well, and it's a very nice reference and good project for the CENIT organization.And finally, to mention, a leading aircraft manufacturer has also decided to continue or to go with the CENIT on the SAP side. And what I would like to mention is first of all this is a civil company. So it's not a defense company. Since lately we have done a lot of defense on the aircraft side, but this is a civil one. And the second thing to mention is we're connecting here the SAP world with PTC Windchill, which is the competitor of Dassault. But as you can see, we also have the flexibility to connect to PTC Windchill as well as to Siemens. And we're doing this of course with the intention and the idea to turn this customer and also and to do the [indiscernible] and to develop additional PLM business for our 3DS team.So this is just a very brief snapshot on the customer highlights in the third quarter. As you see, nice projects despite the economical situation that we're all facing. But we see that there's still a run on software and improvements in digitalization and especially the large companies, they're heading now this path.Coming to our inorganic growth. As you know, that's the second part of our strategy. So organic growth, yes, and our inorganic growth, what have we done so far. Last time I've shown you already this slide, except of the last bubble. That's why I want to expand is the last time. As you all know, I was, at the time, not allowed to mention because we had not signed a deal with ACTIVE BUSINESS CONSULT. But now we have them in here. And as you can see, this is a very nice company in the Austrian area. We might have heard already about them. So we will continue our strategy. We will continue the growth strategy. We see that the multiples are more likely calming down or even coming down. On the other side of course there was some increased interest. But like I always stated before and also in all the one-on-ones that we have on the conferences, I think that 4% to 5% interest rate is the normal rate. The 1% that we had before was not normal. Have grown up at times where everybody was lucky to buy a house at 9% or 10% interest rate. So I'm not worried about the 4% or 5% that we have at the moment. And it looks on top that way that even the interests are coming down also on this site or at least flattening because we're now in the middle of negotiating our syndicated loan for the future to ensure the financing for our acquisition strategy.So just going into the companies that we acquired this year so far, mip, I mentioned already several times based in Munich. That's why I will jump over this one. The one that we have acquired last time, and I think I just gave you a very brief snapshot about this company is PI Informatik. PI Informatik is based in Berlin. It's a company where both founders basically did a management buyout from ABB at that time and continued the IT department. They have about 30 team members and with an annual turnover of approximately EUR 3.5 million. They are consolidated now by the 1st of July 2023 of this year and very much focused on SAP solutions as well as IT infrastructure. So they become part of the SAP portfolio from [indiscernible]. And then of course we'll support other teams like [ DBS ], for example the IT infrastructure solutions for Airbus. They are now already involved. As you know, I'm a big fan of this cross-selling structure. We have presented their solutions to all the teams, and they look like that they will jump into the situation that they will sign also with our customer caution a deal in our existing contractual environment.And then the last number that I haven't given you last time, a lot of information is ACTIVE BUSINESS CONSULTANT. ACTIVE BUSINESS CONSULTANT is based in Vienna. The idea for us was entrance store to the Austrian market for all 5 divisions that we have in our organization. They will be part of the SAP portfolio because they're very much focused on SAP. They're focused on SAP logistics solutions. So one of their major customers is OBB, the Austrian railway organization. And this will of course allow us also to enter into this contractual relationship with additional businesses of our organization, but we're very confident that also some other opportunities will come up now in the Austrian market.They have 12 employees, but, and this was also key for us. They have a network of 70, 7-0, freelancers that are working with and around ACTIVE BUSINESS CONSULTANT in their network. This is the former team of a large consulting company, and this team is very well connected also in the Austrian industry and of course allows us to enter into new contractual situations with our portfolio. So we have acquired here only 60% of the shares, 40% are hold by the Founder and Managing Director of organization that signed an agreement for at least the next 5 years. As you know, what we always try to do is keep the team and make sure that the team stays on board and also the management stays on board so that we have a smooth hand over the next 5 years before Christoph goes then into retirement potentially or maybe extend, that's up to them.So this is just a snapshot on our inorganic activities. At the moment, we still have a nice pipeline. There will be an acquisition that we will announce in Q4 that will be applicable then by the 1st of January of next year. We have another EUR 60 million to EUR 70 million annual sales or revenue in our pipeline just by acquisitions that we're looking into, which doesn't mean that we're going to do them. But just that you see it's a vibrant environment and there's a lot of stuff happening.So in a nutshell, you see very nice figures, very promising. We keep our guidance. The guidance was EUR 180 million. With the acquisitions and of course some PPA effects I would assume that it's EUR 180 million plus, but I will still keep my guidance and not to give any further details. And the same applies to the EBIT. So we have EUR 9.5 million as an EBIT target. And then there will be some effect from the acquisitions. But again, with the PPA, this will not be a major effect in my guidance, still is EUR 9.5 million plus for 2023. Overall, in a nutshell, I think a good year and promising figures.So thank you very much at this point. And now I would like to give you the opportunity to run questions.
Thank you very much for your presentation. So we will now move on with our Q&A session. For a dynamic conversation, we kindly ask you to ask your questions by person, by audio line. To do so, please click on the "Raise your hand" button. If you have dialed in by phone, please use the key combination star 9 followed by star 6. If you do not have the opportunity to speak freely, please place your question in our chat box. And therefore, we already received the hand. So please, [ Mr. Shang ] go ahead with your question.
I would like to follow on on the M&A topic. You now said in your presentation that you stopped one project, which I would say was a bigger one with EUR 14 million.
Yes.
You also mentioned that you are very positive to close another M&A deal in Q4, which would be P&L relevant from January onwards.
Right.
Can you give us a little bit revenue details already for this M&A acquisition. And then you mentioned the EUR 60 million to EUR 70 million revenue pipe. Is there anything you can share with us at this point of time how you would rate the probability that kind of revenue or M&A deals will be closed next year?
Yes. Thank you, Mr. Shang for your question. So number one, as I mentioned, this deal that we -- that we have to stop at this point. We have expected just for this year that there would be -- and we had assumed that this would be a kind of half year impact. This would have been in the range of EUR 10 million revenue, that you would have expected EUR 10 million to EUR 12 million just for this year, if you would have signed this by the 1st of June, which gives you an idea that this total revenue impact for full year would be in the range of EUR 20-plus million. And when we were in the middle of our or I would say at the end of our due diligence, when we review of course all the contracts we found this situation that's software. So it's a software company that has our own software solution as well as services. And when we looked into this one, we realized that there's a change of control class because the software that they are selling was developed with a larger company based in Germany with a very big legal department that they might run into a situation because of this change of control clause and that this will fall back to software IP rights to this other company. And because of this legal department and all the stuff around us, we didn't want to mess around in this and take no risk for our organization, and that's why we decided to stop until they have found an agreement. So there's either the agreement with this entity that they will hand over the software and leave the software, which is with the selling company, or we basically will have -- and at the moment, I would say it looks more likely the way that they will not come to an agreement that the risk for us is too high and then we will have to stop this acquisition. So this acquisition is part of my EUR 60 million or EUR 70 million because it's still there. We're still basically waiting on the feedback so that then we can either go on or stop. Then the other acquisitions that we're looking into. And as I said, there's one acquisition that is very likely to happen by the end of this year, so in the fourth quarter. This will be in the range of the acquisitions that we have done this year, so in the range of maybe EUR 5 million to EUR 6 million annual revenue only, but very interesting and very key for us because it allows us to enter into a new segment that we are not addressing as of today. And I don't want to go into any further details because I think then it will become easy to identify in which direction we're heading and which companies are out there. Then for future acquisitions, the ones that we're looking in, we're in the middle of a [ DD ] of an organization, that is also a large team. So the revenue here, the full year revenue will be also in the range of EUR 20-plus million based in a foreign country in Europe and addressing also a foreign company in Europe that would be an expansion for us. So again, also here, I don't want to go into any further details. The likelihood, Mr. Shang, that you were asking for, until we haven't really signed this, we're not an exclusive environment as we are in the ongoing other acquisitions. So as you know, we typically like to be in exclusive environments so that we know that we will really come to a goal here. We are in a situation where we know that we're not the only one bidding for this. So it depends a little bit on the situation, what the others are bidding. We will not do any crazy movements. As you know, at the moment we are more likely in an environment of 4 to 6x EBIT multiple. And if there's somebody else coming in with crazy figures, then we have to walk and we will walk away. That's for sure. And then we have another acquisition that we're looking into, we were also in the middle of a kind of pre-DD. So we really haven't started the room now, the data room. But we're looking very deeply already in the information. And it's second one that we received already, so already in the next round. There we also think that we're not alone, so we don't have exclusivity as of today. We have the feeling that we might be the only one really bidding, but this is something that we will face. And this is something that is in the area also of EUR 50 million plus. So these are the ones where we are already in a situation either pre or even in the DD. And then of course we have some others in the pipeline that at the moment are just in [indiscernible] modes. So overall, I would say, if we're coming to the probability, the one with the EUR 5 million to EUR 6 million, I would say this is kind of 80% probability at this point since we are in an exclusive environment. And then the other ones, the one that we stopped, I would say it's a maybe 40% probability since at the moment I don't see that there will be this agreement with this larger entity or a dual cost of fortune to the seller. So I don't know whether they will continue this. And with the other 2 ones, I would say, one of both we will do. So 1 out of 2 should happen. So that's one. I'm confident that for next year, as you know in our forecast or simulation that we have done on our route, the EUR 300 million, we had in mind to get the EUR 20 million to EUR 25 million. And I'm very confident that we will have this EUR 25 million also next year.
That was very helpful. Then on the own software side, you mentioned that there is a big project which you hope for Q4. You mentioned EUR 1.5 million. Was this specifically for this project? Or was this just an example? And the project you mentioned for Q4, is this a license deal or would it be a SaaS deal?
No, this would be a onetime -- at least at the moment, what we see Mr. Shang, this would be a kind of onetime license deal. And these are basically 2 deals that we're hoping for. And that's why I'm saying also, I hope that 1 out of 2 should happen. One is EUR 1.3 million and EUR 1.5 million. And this would be onetime PLC deal. So it means selling our own software to those -- in both cases, insurance companies because it's EIM business. So it would be, in one case a new customer. In the other case, it would be an extension of an existing customer situation.
And last question also related to this topic in your press release and also now in your presentation, you said on the one hand delays. And but on the other hand, which I would say is not that bad for you because it will be revenue for the future that there is a change from license to recurring revenue.
Yes.
Can you give us a feeling of the split between delays and change in terms of revenue recognition?
So just to give you on the delay, this was related of course to the 2 deals that were -- that we hoped already to have earlier by -- in this year. So already the original idea was to sign one of these 2 deals beginning of this year and ideal of course both deals, some were during the year. So this is what I mean by delay/worst-case scenario, we're not getting them at all. So if we don't get both of them, then we're running short on this side. And then of course what we see is some other deals where we typically cope this type of situation that we're in now that we only have this 1 or 2 deals that are now kind of key. We typically have other deals in the range of EUR 200,000, EUR 300,000 that will happen. And summed up, if you do 5 deals, you can catch up EUR 1 million easily. Now the problem is that those deals are the ones where we see that customers also go for the SaaS situation. And as you said, yes, it's positive for the -- for us. It's also recurring revenue, even more stickier than the onetime sale of a license. In our business, definitely. And honestly, also the margin is better on these half deals than if you do the onetime PLC. As you can imagine, to attract now the customer to sign this deal before year-end, there will be a certain discount involved, which you typically don't have in the SaaS environment. And what this means is it's contracts 3 to 5 years. And then you split this, like I said, typical EUR 200,000, EUR 300,000 now over 3 years or even up to 5 years. So that's the split that we see. And that's why I also say, as we're facing this in the SAP business and also in the Dassault business since 2, 3 years. This starts now in the in the AEM business as well as a new situation for us because, again, in the past we were mainly selling onetime license sales. And also the model from IBM is still the onetime sales. So when we talk here about this additional SaaS business, so this is of course meant towards our own ECLISO solution. So you see that it's splitting now over 2 to 3 years, and that's the situation that we're facing. So it's still AEM is growing. If I would count this as the onetime revenues instead of spreading it in the SaaS situation, would be a very nice growth as we had forecasted also by the acquisition of ISR and mip to boost this. But of course now we have this effect so that it's spread over the next 2 to 3 years.
Thank you, Mr. Shang, for your questions. We will now move on with Mr. Filker. Please go ahead.
One question regarding the forecast for the Q4. You maintained your sales forecast. Means that it would be, yes, quite the same level as the last year's Q4. But at the same time, the EBIT will have to come more than EUR 1 million higher than in the last year's Q4. That means, what are the reasons behind that? Is it on one hand, serious effects? And on the other hand, the expected revenues with own software. And yes, you already said you are confident to reach 9.5, but it's still this gap of EUR 1 million [indiscernible].
So it's a mixture, Mr. Filka. So one reason is of course if we get one of those deals, as I mentioned before, with the proprietary software, we have a better software margin. So that's one portion. If we don't get the deal, you can still cope this, and that's why I'm a little reluctant in saying 9.5-plus, so I don't want to define the plus because this is not my [indiscernible] that I'm talking about. So one effect is of course the growth and the additional business, as I mentioned in proprietary software. Second effect is we have, as you know, an effect from Japan that over the full year then of course will have full effect also in the last quarter. So we have, as you know, sold our CENIT organization in Japan. So there is also a positive EBIT effect for the full year. Then of course we have the next effect. We have sold our last real estate business in our organization. So we had in Oelsnitz, a building that we have sold by the end of the year. So then we will of course also see this effect in Q4 quarter. And again, this is also in the direction that is covering quite a lot of the EUR 1.5 million. So that's why I'm very confident in saying, okay, if this is not happening, the other one will cope with this. And in an ideal world, if everything comes together, then the 9.5 plus will have a bigger plus. So that's why I'm very confident on this one. And then of course the last effect is where you also will see now you've seen already in Q3 and now in Q4 also full effect is the ZIRIUS project. Because over the year, we have -- and I mentioned this in Q1, we have started the ZIRIUS project. We had a lot of effects that we have to start. We also, in some cases, had to invest to get rid of certain situations. And of course now this pays off in Q3, as we've seen already, and also in Q4. That's why again to gap this missing EUR 1.-ish million, EUR 1.5 million, I think is something that I'm very confident that we will achieve this, even if we have a negative surprise in Q4. So it means if we're not getting those deals and if our proprietary software sale is not happening. So let's say, we will not win the ones that we're hoping for, then we would still be in a safe haven.
And just a follow-up question on that. You mentioned the Japan effect will be more positive in the Q4. Or will [indiscernible].
No, there will be an additional effect. That's just what it is. So it's nothing more positive. I think the total effect for the full year will be in the range of EUR 800,000. And then of course what we have to see -- and I think this is also something that you will see by the end of the year. And Mr. Shang has raised this question already twice. We will now also bring up more view on the EBITDA and EBIT because so far we were very much focused on the EBIT because of the PPR. Now you will see that as a major gap. And of course then you will also understand what the effects of different acquisitions are. And also deconsolidations like now Japan so that you have a full view on this thing. So we will show this by end of the year so that you really then can update your forecast.
Okay. Is the ZIRIUS effect already visible in the Q3 or in 9 months figures because what can be already seen as decrease in personnel expenses in Q3 compared to Q2.
Well, if you look into the -- you said an increase in the --
A decrease, decrease.
Decrease, yes, yes, yes. So if you do -- especially when you do the like-for-like, if I take out the acquisitions, and you've seen that we have 899 employees by end of Q3, while we had last year 861 by end of the year 2022. If you now count all the acquisitions on top, then you will see that overall we have done some adjustments, let's call it this way, which of course then has the positive impact on the personnel cost. So despite the average increase of 5% inflation and salary increase, we are still now negative in a like-for-like, if you would take out the acquisitions.
Okay, okay. And the last question regarding the EUR 40 million credit. Can you just tell us a little bit more about the conditions, the duration? And are there any covenants?
Yes. So what we have done is, as you all know, I started originally with the idea of a [indiscernible] a special agreement in Germany. So and then we turned into kind of [ club ] deal mode. So we are now in a club deal that is very close to a syndicated loan because we will now turn this club deal into a syndicated loan mode for the coming years. So the club deal at the moment is with 3 banks, which is the ABBV, Targobank and UniCredit. These 3 banks are covering the EUR 40 million. And now we are in the middle of negotiating for the syndicated loan for the future to expand this by another EUR 40 million to EUR 60 million. If the, of course the interest rates are interesting or not, this we will see and we will negotiate. And we will expand this to 2 additional banks. So we will invite further big banks to be part of this. As you know, I'm always a little conservative. So I would like to have more pillars for this financing. Now if we look at the current club deal structure, it's until 2026 set up with a kind of normal interest rate that you get at the moment. I'm not allowed to say too much about the rates, but it is definitely kept. So the maximum interest rate is 6%. We have a swap that we have agreed to. And below this one, we are at the moment. So we are not at 6%. We are still below this one in a kind of 5%. What are the covenants? So as you always know, there's a conservative view from my side and then there are other banks. So I always said, I don't want to be below 25% equity ratios. The banks went to 20%. And I'm not -- whenever we cross the 25%, I will stop. And the same applies to the net debt EBITDA view there. We have always said we don't want to have a debt situation of 2.5 that we would like to exceed, and the banks went up to 3.0. So as you can see, we have a certain cushion in between so that we're not running into a bridge, but there's a certain time or period in between where we can slow down our activities and adjust the activities so that we stay in our conservative view.
So now we received another question from Mr. Siering.
I have 2 left. So the first one would be more generally on the current demand situation. Maybe you could provide some color here, especially in light of the macro worries we see in some of your key end markets. And the second one, just a follow-up on your proprietary software sales. Do you still expect here the sales to be above the prior-year level? There would be some, I think, 7.5% in the fourth quarter. Does this really depend on closing at least 1 of the 2 deals you now mentioned? Or are you either way confident to reach this level? That would be it.
Yes. So starting with the last question, Mr. Ziring. It's, again, like always in life, it's a mixture of both. There we have our normal Q4 activities that are like always increased in our, unfortunately, in our company. So I'm still working by the SaaS and everything, that we can flatten this down. And I have a very easy view on the full year and not hoping for the hockey stick in Q4. But yes, there's a hockey stick, like always that is in here that is included, which also includes the normal standard business and a little growth as we've seen this so far during this year. And then on top of course one of those 2 big deals. If they don't come, we might not come to this full figure. But the nice thing is that the other areas, especially SAP and 3DS, due to their growth are above the plan so far. So in worst-case scenario, they would cover the missing EIM portion by the over-performance. So that's why I'm very confident that overall we will be at 180 plus. Then coming to the market situation, yes, it's challenging, I would say, like always, but maybe more challenging because of the environment that we are facing. As I mentioned in our last calls already, we see an increase in any aviation and kind of defense-related businesses. This is the positive piece. We also still see an ongoing business and a slight increase in the car manufacturing business. So a lot of companies that invest now in the digitalization. On the opposite side, we see limited investments or reluctant investment/delays in automotive supplier industry. So while the manufacturers are investing, we see that the suppliers are under pressure. I would call it this way, you've seen a positive example with [ Gibaungrela ], but there are others out there that are really under pressure and very reluctant in their investments. If we look at it by regions, we see a booming North American industry that, like I always said, I would like to participate also by an acquisition in the next 2 years so that we are much more present there. We also have now American customers, especially also in this case, again, defense customers, that place orders with us. And that's why we need a presence or a much larger presence in U.S. than we have as of today. We have 15 employees there. So that's a regional effect. Then the other regional effect or difference, I must say, is in Germany overall we are still growing because we are much more aggressive and we have introduced certain measures. But if I look at the German economy overall situation outside of CENIT, of course we see that there's a decrease. We see that it's much -- you have to be much more aggressive to do certain things. You've seen that we're now also targeting our competitors into the [indiscernible] environment to gain market share because we think it's now the right time because they're also under pressure. It's when you see [indiscernible] they had a very poor third quarter. So we are much more aggressive. On the opposite side, the French market is very nice, very good. The team there had a kind of a 10% increase in new sales activities, means new customers. So France is in a better shape than the German market, I would say. And if we then look into the German market, again backwards, like I said, automotive, twofold, manufacturer is good. The other ones are -- the suppliers are a little under pressure. Aircraft, booming, defense, booming. And then for us, new segments, you've seen energy suppliers and also pharmaceutical companies. We are entering into new segments which allows us to identify new potential customers. I think if we would have stayed just in our core business as we were in the past, we would be here under pressure. But I think the strategy shift that we've done by expanding also into other segments and also being more aggressive and also the cross sales activities, to be honest, opens a lot of opportunities. So in many cases, I would say, even in Germany, my restructuring or limiting factor at the moment is the staff. So we cannot take on all the opportunities and jobs that we identify. And in some cases of course we also have to train our teams because we don't speak the segment language. So it takes a little bit more time than maybe in segments that we are familiar with and where we basically can do paste and copy. Now don't get me wrong, in our business we don't do paste and copy. But when you're familiar with automotive, it's easier to talk about this than when you start now in a pharmaceutical environment. So it's a little bit more time-consuming and then at the end also maybe less margin at the beginning. I think down the road, it will be much more promising. So what we cannot forecast is of course if ever this situation escalates in Israel or then also in Taiwan, again, like I always said, I still expect that we will see something happening there in the next month. That's why we also went out of the Asian market. So we have mitigated our risk. But if this happens, I mean, I have no idea what the impact will be on our economy and also on CENIT.
We will now move on with the question from Mr. Hoffmann.
Just one question left. This will be on the Digital Factory Solutions segment since this is also a really high-margin business. So have you already completed the restructuring here? And secondly, I wonder what the demand situation is here, since you mentioned that both of the software deals in Q4 are easier ones.
Yes. Yes. Thank you for your question, Mr. Hoffmann. So first of all, the DFS restructuring is not fully completed. We had for this year the idea or the goal to be at the black zero. As I mentioned before, in the past, we've lost here in the area of about EUR 3 million. So by the end of the year, we will be at the black zero level, what I can see as of today. We have slowed down some of our sales activities in the area to focus on improving the quality and also the contractual situation and also the project management because there we were poor in the past. The teams were not really trained in good project management. So that's what we have done, and it's why we have slowed down a little bit the sales activities. Again, that's why I'm saying the restructuring is not fully finished. In my eyes, the restructuring is finished when we have reached the black zero, which we should show by the end of the year. And then we will focus on sales -- much more on sales activities by starting of next year. The market is there. There's no doubt about this one. We have -- as you know, we are focusing the software into 2 directions. One is on the robotic manufacturers, which at the moment is very promising for us because the companies like [ Clima ], where we are running our software as a white label on their robot, they are stopping and slowing down their own software developments for cost reasons because they say they are not software companies, so they want to focus on their core business, which is the robotic and the software basically then comes from us. And we see this as a trend also from other manufacturers. So this is a positive environment. And the second thing is, whenever we talk about cost saving in the manufacturing business, we talk about autonomous manufacturing. And for the autonomous manufacturing, you need the DFS. And you've heard that we have one larger car manufacturer that has equipped 2 plants now with our solution to run basically more likely autonomous their car production. And I'm expecting that there will be another 9 plants that will be also equipped with the solution. What typically then happens is that the other car manufacturers try to see how they can improve this and what the other one has done. So there's a very high likelihood that we could introduce also our solution to other car manufacturers. And that's why I'm positive in this environment. But again, like every time when you have this kind of restructuring, it's shaky and it's tough. And I can just recall some years ago, we were the same situation with SAP Solutions. Nowadays, SAP Solutions is 15-plus percent EBIT. So this is what I'm heading to also for DFS.
Thank you very much for your questions. And with this, we just go to Mr. Mueller. Please go ahead.
I he have 2 small clarification questions. Maybe we could start with that. The first one would be on the M&A effect. You reported about EUR 4 million of inorganic effects for the first 9 months. So that's only the 3 acquisitions of 2023, right? And then maybe you could provide the organic growth rate just for the third quarter? That will be one. And then on the club deal or restructuring your debt or redemption of the previous debt of [indiscernible]. There were no early redemption penalties or anything like that, right? Because then you transferred your debt into the club deal [indiscernible] clarification part.
Yes. Mr. Mueller, thank you for your questions. So coming or answering backwards with your last question. No, this was foreseen this way. And it's also seen that we're going to do this club deal, switch then into the syndicated loan without any additional payments or any other things because it was right from the beginning foreseen. So when we did the EUR 20 million deal with, in this case, mainly ABBV and UniCredit, it was foreseen that we will turn this into this club deal structure that we have now by adding another bank, which is now Targo. And now with these 3 banks, there's a very clear agreement that we will do the same now into a syndicated loan to make sure that we have our financing for the future ready and steady. So no additional payments, nothing, no fees, nothing attached to this. So this was your last question. Then the question before. The organic growth rate for the third quarter was in the range of about 4.-ish percent. Again, don't forget that we had here the summer vacation time. This is what I mentioned at the beginning. So basically we have 1 that month, which is of course August. So that's part of it. But overall, like I said, we are in a very, very promising growth rate.
Okay. Perfect. That's already very helpful. And then maybe the -- let's call them open questions in the EIM segment. If you look at it year-over-year, I mean, the segment now is very different from what it was a year ago, but the profitability is much lower now. Maybe you could add some color on why that is and where you see the segment going forward? And then another question on recurring revenue, which has also been growing nicely. What's your, let's say, midterm goal for the share of recurring revenue?
So starting now with the EIM business. The reason for the EBIT ratio or margin coming down is very easy because we had a shift or a major shift from just selling proprietary software now to also consulting business by the acquisitions of ISR and mip. They have very good margins, but the margins are of course lower than when you sell proprietary software like we had before. And what you also have to bear in mind, before this was a shrinking business. So basically there were a lot of team members that were leaving the organization because there was a new future or there was no future for the team. That's why they had -- basically they were understaffed. And now what we have is we have turned this around by these 2 acquisitions. And I think the team now sees wow, there is a very bright future. Like I always said, in 2025, we want to be at EUR 50 million revenue coming from EUR 17 million. So I think that's a major jump. And yes of course the effect on the EBIT rate, we will improve this, definitely. But bear in mind, software sales, proprietary software sales versus now a major portion of consulting. And as you can see, the consulting business and services went up very nicely, but with a lower margin than the proprietary software sale. So this was your first question. And the second question, what -- if you can just recall this one.
If you have any indication on where you see recurring revenue share in the future, what your goal is, let's say, 5 years in the midterm?
Yes, yes. I mean, we want to definitely of course improve this one. And the revenue or the recurring revenue should be in our area always 65-plus percent. That's what we're targeting for. At the moment, we are a little below this one. I think we have to look at it at the end of the year when I have a total view. At the moment where we're a little below 60%.
Thank you, Mr. Mueller for all your questions. And with this, we come to the end of today's earnings call. Thank you all for joining, your interest and all the questions. And we thank you also to you, Mr. Schneck for your presentation and the time you took to answer all the questions. Should further questions arise at a later time, please feel free to contact the Investor Relations team, or us from Montega. And with this, I wish you all a lovely remaining day. Stay safe and healthy due to the autumn season. And with this, I hand over to you, Mr. Schneck.
Yes. Thank you very much. And thank you to all of you for your questions and your patience in listening to our earnings call here today. If you have any questions, feel free to contact Tanja or myself directly, as you know. And of course, there will be also [indiscernible] and other sessions whenever you want. Please call me up. And I'm looking now to a very promising Q4 and hope to talk to you and to see you soon in good health. Thank you very much. Take care. Bye.