26% growth in recurring revenue

Short-term pressure on margins

Long term looks promising

Recurring revenue keeps growing…
Vitec delivered sales in Q2 4% above ABGSCe, while group adj. EBIT was 6% below our estimate. Momentum in recurring revenues is still strong, now amounting to 75% of net sales. However, the fast change of business model keeps pressuring margins as recurring revenue does not fully offset the drop in license revenue. Moreover, most divisions showed solid growth, while Finance & Insurance faced tough comps with higher license and service revenue. Although Education & Health experienced negative EBIT (Q2 being a seasonally weak quarter), we expect a strong delivery in Q3 from previously acquired MV/Nordic, leading to a positive operating profit.

…but profitability is still under pressure in short term
Our estimate changes at group level are largely the effect of including the acquired Cito IT. The division Finance & Insurance will continue to face tough comps throughout the year, and after the report, we have lowered our expectations for service revenue for 2018e and 2019e, and thus also the margins for the group. Overall, we have increased our 2018e-2019e sales by 3-5% for the group and lowered our 2018e EBIT by 4%.

Softer 2018e – but long-term potential intact
A previously strong contribution from MV/Nordic has driven sales during the last twelve months. Although Q2 was intensive in terms of acquisitions (three targets), the addition to sales will be significantly lower ahead. With today’s leverage of historically high levels, further acquisitions would be surprising already in Q3. In total, 2018 will be a year of change. With that said, operational momentum is moving in the right direction in most divisions, and we expect further growth in recurring revenue to keep strengthening profitability in the long term. Vitec is currently trading at EV/EBIT of 25.8x and 22.1x for 2018e and 2019e, respectively.

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