ATOSS Software SE (AOF) Earnings Call Transcript

Ladies and gentlemen, welcome to the Q3 2026 Earnings Call and Live Webcast. I'm [ Sergen ] the Chorus Call operator. [Operator Instructions] The conference is being recorded. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Carla Leicher. Please go ahead.

Thank you, operator, and hello, everyone. Welcome to our Q3 earnings call, where we will be discussing our results for Q3 2026. We are pleased to have you here with us today. I am joined by our Chief Financial Officer, Christof Leiber, and we are glad to have the opportunity to walk you through our performance and outlook. We will be referring to the earnings call Q3 2026 presentation, which was published earlier this morning and is available for download on our Investor Relations website as well as via the link provided in the webcast. The detailed Investor Relations presentation was also published this morning, which we encourage you to review for further insights, but will not discuss during this call. Please note that today's call is being recorded, and the recording will be made available on our Investor Relations website after the call. Before we begin, I would like to start with the disclaimer. Please note that the presentation contains forward-looking statements based on the beliefs of ATOSS Software SE. These statements reflect the current views of ATOSS Software SE with respect to future events and results and are subject to risks and uncertainties. Actual results may differ materially from those projected here due to factors, including, but not limited to, changes in general economic and business conditions, the introduction of competing products, lack of market acceptance of new products, services or technologies and changes in business strategy. ATOSS Software SE does not intend or assume any obligation to update these forward-looking statements. With that, I will now hand over to Christof Leiber, who will take you through our Q3 2026 results, including an update on business performance, recent corporate developments, our financial results and our outlook. He will also provide an update on our AI product road map and upcoming innovations planned for Q4 2026. We will then conclude with the Q&A session. Christof, over to you.

Thank you, Carla, and a very warm welcome from my side to everyone who's listening in. Today, I will walk you through our Q3 and 9 months results, highlight the key developments across the business and provide an update on our outlook. As always, we appreciate your interest in ATOSS and your participation in today's call. Let's begin on Slide 4 with key messages from this quarter and from the first 9 months. Following a solid third quarter, we continue to see strong business development across our key financial indicators. Revenue grew by 12% year-on-year for the first 9-month period until the end of Q3 2026. This was supported by continued cloud revenue growth of 26%. At the same time, profitability remained very strong. Our EBIT margin increased further to 37% until the end of Q3 '26, up from 35% in the first half of the year and again, above our guidance level. Order development remained solid in the first 9 months of 2026 despite the continued macroeconomic and geopolitical uncertainties that we all see around us. ARR grew by 17% year-on-year, driven by the continued strong momentum in our cloud and subscription business, which was up plus 25%. New ACV for the first 9 months of '26 came in slightly above of the prior year level, while in particular, Q3 set very high comparables. Going forward, pipeline for enterprise, SMB and international remains solid. But as always, execution will remain the key to success. Therefore, year-end new ACV for 2026 is most likely to come in slightly above the last year with 3% to 7%, but there remains still some upside potential, which could lead us to even come in at 10% plus over the previous year. Let me also briefly provide an update on the planned leadership transition. As already communicated, the transition of Pritim Kumar Krishnamoorthy to CEO and Andreas Obereder to the Supervisory Board has been part of a long-term succession process. In preparation for Andreas' transition to the Supervisory Board, German law required a Supervisory Board seat to become vacant at least 3 months prior to his appointment in January. For this reason, Klaus Bauer stepped down from the Supervisory Board effective of September 30. This step was taken to facilitate the planned transition and to ensure a smooth succession process. I'm pleased to say that the transition progress is progressing according to plan. On behalf of the Management Board, I would like to sincerely thank Klaus Bauer for his outstanding contribution to ATOSS over the past 13 years. During this time, he supported the company in various roles and most recently served as Chairman of the Audit Committee. We greatly appreciate his dedication and valuable contribution to ATOSS' successful development over that period of time. Finally, let me briefly turn to our outlook. For 2026, we continue to expect double-digit revenue growth and confirm our revenue guidance range of EUR 210 million to EUR 215 million, yet we expect to come in rather at the lower end of the bandwidth. The background here, recurring revenues are developing strongly, i.e., more at the upper end of the bandwidth indicated in our recurring revenues for 2026. That would mean around EUR 153 million to EUR 154 million by the end of 2026. However, perpetual licenses are coming -- continuing to come in lower. And although from our perspective, not material, this led us to indicate to the lower end of the guidance in 2026. In parallel and based on the margin development we have seen so far in '26, we are again uplifting our guidance for the EBIT margin. We now expect an EBIT margin of around 37% for the full year, uplifting the EBIT margin again and this time by around 3 full percentage points. Looking ahead to '27, we continue to see attractive growth opportunities supported by our strong market position and innovation road map. Based on our current assessment and given the current macroeconomic environment, the development of perpetual licenses and expectations for consulting revenues, revenue development for 2027 is likely to come in at the lower end of the previously communicated revenue range for '27. Again, recurring revenues projections are still showing solid growth, yet perpetual and consulting revenues are trending or expected to trend slightly lower, and this causes this a bit more cautious outlook. Overall, our confidence in the long-term double-digit growth opportunities for ATOSS remains unchanged. And in parallel, for the revenue outlook, we see the positive development of EBIT margins to continue well into 2027. Now let's move on to the income statement on Slide 5, comparing the first 9 months of '26 with the prior year period. As mentioned, total revenue increased by 12% year-on-year. Growth continues to be driven by our software business, which grew by 14% and now accounts for 75% of total revenues. Within software, cloud and subscription revenues remain the key growth drivers. This revenue stream increased by 26% year-on-year and now represents 55% of total revenue compared to 50% of total revenue in the previous period of last year. This development reflects the continued strong demand on our cloud solutions, supported by new customer wins, customer expansions and ongoing migration activity. Beyond software, consulting revenue increased by 5%, while hardware and other revenues grew by 14% and 4%, respectively. With the top line growing, we achieved an EBIT margin, as said, of 37%, up 3 full percentage points compared to the previous year quarter. Let's now take a closer look at the development of our recurring revenues and order backlog on Slide 6. And total ARR, including both cloud subscription and maintenance, increased by 17% year-on-year to EUR 157.1 million at the end of the third quarter. Looking specifically at cloud and subscription ARR growth, this remained very strong. Cloud and subscription ARR increased by 25% year-on-year to EUR 119.4 million. Turning to our order backlog. Total ARR backlog increased by 16% year-on-year to EUR 161.4 million. And finally, cloud and subscription backlog growth increased by 8% year-on-year to EUR 23.4 million. Given that the order intake can vary between individual quarters, we believe a rolling 12-month view of cloud and subscription backlog growth provides the most meaningful indication of underlying demand trends. It helps smooth out quarterly fluctuations and reduces the impact of individual quarters with exceptionally high or low order intake. For the full year 2026 and given our view on new ACV for the full year, we currently forecast the backlog growth to be flat or slightly above last year. Now let me briefly walk you through the development of our cloud and subscription recurring revenue base over the last 12 months on Slide 7. Net retention rate reached 112% in the first 9 months of 2026 with our ASES business, our ATOSS Staff Efficiency business, continuing to perform particularly strongly at 116% NRR, demonstrating continued growth within our existing customer base. Additional ARR was generated through both new customers acquisitions and new logo wins and cloud migrations. The breakdown illustrates that of total cloud ARR increase, approximately 48% came from expansion of our installed base and 52% from new logos and migrations. Compared to the previous quarter, migrations accounted for a slightly higher share of ARR growth, reflecting the continued progress of our cloud transition, as I believe I've already indicated in H1 quarterly earnings calls. Together, these drivers continued or contributed to the continued expansion of our recurring revenue base. Let me now turn to cash flow and liquidity on Slide 8. Overall, our cash flow development remains positive. Cash flow amounted to EUR 35.9 million, clearly above the EUR 22.1 million recorded in the previous year. The year-on-year increase also reflects lower income tax payments as the prior year period included income tax payments of EUR 18.6 million related to one-off effects. As already mentioned, in H1, financial activities were mainly impacted by the dividend payment of EUR 36.3 million. Turning to liquidity. Our overall liquidity position remained very solid at EUR 159 million. This reflects the continued strength of our cash generation and balance sheet and leaves us with very solid liquidity positions. With that, let me now turn to Slide 9 and our AI product road map. The road map continues to progress as planned, having successfully delivered the planned modules in the third quarter. I would like now to take a closer look at our Workforce Intelligence Agent release for ASES, or ATOSS Staff Efficiency Suite, planned for the fourth quarter of 2026. Building on our existing workforce management platform, this release introduces a new workforce intelligence layer on top of our workforce management layer. Its purpose is to bring together the AI capabilities already available across our solution suite and connect them through a single intelligence layer. At the same time, we are enhancing these capabilities with agentic functionality. In doing so, we are creating a common intelligence layer across the platform and taking the next step on our AI road map. Let me illustrate this with a practical example. In this scenario, a manager is reviewing multiple leave requests. Today, this typically requires assessing each request individually and checking the impact on staffing coverage. In this example, the agent has already analyzed the requests and grouped these requests into risk categories from safe to high risk. According to their impact on staffing, the agent can evaluate the implications for coverages, prepare the necessary communication and support the manager throughout the entire process. Importantly, all decisions remain with the manager. The agent prepares the recommendations and proposes actions, but nothing is executed without explicit confirmation by the manager. We call this human in the loop. This example illustrates how we intend to embed AI capabilities directly into our workforce management platform and support users in their day-to-day processes while maintaining full human oversight. Together with our strong market position, growing recurring revenue base and continued innovation, we believe this provides a solid foundation for the next phase of ATOSS development. And that concludes the presentation part of today's call. We'd now like to open the floor to questions and are happy to dive deeper in any topics you'd like to discuss. Thank you.

And the first question comes from Jarrod Chisholm from UBS.

First one, just on the competitive dynamics that you are seeing at the moment, particularly in regards to the likes of SAP, where you've historically had a coopetition relationship with the company. How does your AI product road map kind of compare to theirs in your view? And what are you hearing from customers on this would be of interest. Second is just if you could walk through the drivers of the margin improvement and how much more there is to go? And then how much is mix versus productivity versus other factors?

Thanks, Jarrod. Well, great question. Competition is always like an interesting angle to speak about. Well, with regard to the core HCM vendors, first, I think it's important to understand that they come from a completely different angle, whereas workforce management vendors like we are, best-of-breed vendors are really going deep into the processes with customers, basically assuring that their profitability, that their efficiency is being improved, either whether it be in a hospital or a port like last quarter's quarterly earnings call, I gave an example of Hamburg Port, or in a retail scenario where you want to kind of align the employees on the shop floor with the customers entering your stores in the best possible way in order to get the service that you want to provide to your customers in the store and ultimately, the conversion rate of these customers in your store into revenue. This is much more like an entrepreneurial and value-driven business than core HCM, where it goes in the most part on assuring that you have the right payroll or that you have the employee performance improved, et cetera. So it's quite a different topic. That's why the systems have evolved quite differently. We are much deeper in the efficiency play. Now as we are continuing to cooperate with and have technology layers integrating into SAP, into Workday and other HCM vendors, we don't see not really a fundamental shift there. We do observe that there are some elements like time tracking that they -- that SAP or Workday or others are developing in their suites and they may have announced to develop some simple rostering capabilities as well. But this is far from what we are delivering at this point into the market. So we don't really see that this will significantly impact us. Quite the opposite. Just to give you an example, yesterday, I was in a customer meeting with a university hospital or prospect customer in this case. And obviously, they're extremely excited about our depth in terms of productivity efficiency gains, in understanding the industry, in this case, complexities in hospitals, in understanding the regulatory framework that comes with hospitals. And this is something that they certainly are not seeing with these core HCM vendors. At the same time, they very much appreciate, and I think it's a key differentiator of ATOSS to have that very sound and assured integration layer with SAP and other HCM vendors because these are the HCM suites that they are using. So it's a perfect match from a technology point of view and from an operational point of view, and that's how customers see it. And we don't see a fundamental change coming there even if we operate more on a technology partnership than with a commercial partnership, let's put it this way. In terms of the AI road map, well, I mean, we are delivering AI capabilities starting from -- we started with that in '24, maybe started on the forecasting and demand driver side. Now we bring in Q4 this year for the enterprise suite, the agent agentic side and complement this, build an entire workforce intelligence layer on this. So for our customers, for our customer groups, this is very much appreciated. We just recently had our Innovation Days in Munich, a lot of excitement there, and this shows in the migration development as well that we see from customers coming from cloud -- from on-prem into our cloud solution. Going forward, we will complement this and further build out this workforce intelligence layer with configuration elements in the next year. And of course, the depth of AI, our workforce intelligence layer will continue to be developed. This is actually the area where we are continuing to invest quite substantially. Coming to margins, yes, it's true. Our margin profile has improved, and we have built out -- we are currently building out an AI factory internally as well in order to support sales, customer care, marketing. These are the 3 core areas in the beginning, so sales, professional services and customer care and marketing, plus, of course, the proper area of R&D. And this has led to a positive trend in efficiency, while in a nutshell, reducing increase of headcount or even for -- at this period of time, we are slightly below last year's headcount. Going forward, we will be more running in parallel, and this creates quite substantial margin improvements. Currently, we are operating at a 37% EBIT margin for the first 9 months, 40% EBIT margin in Q3. And the margin potential, obviously, is above 40%. But for the next year, we have at the end of H1, just uplifted the guidance to say more than 35%. Now I indicated that it's going to be more in the ballpark where we are right now at 37% or 36%. This is kind of the bandwidth at this point. And the full outlook for next year we'll provide once we report for the full year of 2026. I hope that answers your question.

The next question comes from Gustav Froberg from Berenberg.

I have a couple. I'll read them out and then if it goes too fast, please stop me and I will repeat myself. First one is on gross retention rates. It looks like they've come down a little bit in ASES again for the quarter. Could you provide us with an update on the situation here and maybe why some ASES customers have churned, whereas others seem to be buying a lot more as it looks like cross and upsell is very strong. Then I have a question on new and migrated customers. You mentioned that there are significantly more in Q3, but could you help me with a more precise split on the share of new and migrated ARR coming from new customers and migrations, respectively? And then there was a question on competition as well. You just talked through one topic, but I wanted to link it to your EBIT margins. They are very strong. Do you have any plans or considerations to reinvest in areas like sales and marketing to boost growth a little bit in light of the slightly slower-than-expected outlook on the top line for the rest of this year? And the last one is on consulting revenues. You expect them to be weaker in '27. This should be tied to implementation work and so on in my mind anyways. Is there any read across here to your expectation for new logo development in light of the expectation of slightly weaker consulting revenues? That's it.

Okay. Hopefully, I made good note of all of your questions. Otherwise, please come back and rephrase your question later on. Thanks, Gustav. Well, first on gross retention rate. Now, yes, for us, it is actually slightly lower than we had hoped for. And this is indicative of some selected churn. Generally speaking, we are -- churn and contraction, I have to say. Generally speaking, this is well offset by a stronger expansion at the same time with the net retention rate still at 116%, which is very, very strong from our perspective. So overall, we are, I think, okay here when we just look at the NRR number. When we look at the GRR number, then there's a way to do some improvement. And what we are seeing are there's a specific customer group that we maybe had already as customers for a very long time, like one in the middle of the '90s or early 2000s with pure time and attendance functionality and where, for whatever reason, we did not -- we migrated them at some point, but we didn't migrate them into scheduling functionality. And this group that is not operating or using scheduling is actually at risk here. That's something we have to look deeper into, and we have to kind of look at which part of the customers is providing a better ICP for us. And this is clearly the part of the customers that has on the one hand, complex regulatory requirements, but at the other hand, also high planning and scheduling requirements. And this ICP needs to be better positioned, and then we will -- what we are currently already seeing is that where this ICP is rightly addressed, the expansion works and also the new logo win works quite nicely. So that is my commentary on the GRR. Going forward, just to give you an idea on our projection now for '27 and the indication that I gave, we operate with an assumption of overall for the entire business GRR or a churn and contraction rate of 6%, so a GRR of 94%. That is our view for '27. And we believe this should be a good projection. Obviously, if we come in better, this will be a positive then. The -- I think I can actually connect this with the consulting revenue topic. Consulting revenues, well, there will be improvements in efficiency by having more cloud, by having more configuration agents than supporting the consulting revenue. We do believe that the new logo side will be more in line with this year's new logo development. So there's no decline anticipated there in new logos. And -- but what we want to do with the -- I'm always dividing there in billable capacity then of the current capacity that we have in professional services and skilled capacity. Obviously, the billable is skilled as well, but the purely skilled capacity that we may not be able to bill or utilize next year, we want to move parts of this capacity into the customer success areas in order to specifically employ those to reduce churn contraction rates and increase customer satisfaction levels. I think this gives us a tremendous opportunity to lower churn rates and improve upsell expansion because in the end, these people do have quite a deep skill and understanding of what our customers need and what our solutions can provide. So I think there's -- in this lower consulting revenue indication for next year, there is -- the positive is that we will use -- make good use of the capacity for more customer success going forward. Then on the differentiation between new and migration revenue or ARR on this Slide 7 that we've seen that you find in the presentation, there is an indication of EUR 12.5 million new ARR or ARR expansion coming from new and migrated customers. EUR 4 million of the EUR 12.5 million come from migration. That is up from the Q2 number. And they are already indicated that in Q2, in particular, and in H1, we have won some substantial customers to migrate them -- now it shows and that was to be expected more in the migration ARR number. As I said, EUR 4 million of the EUR 12.5 million is coming from migration. And the remainder is obviously purely then new logos. Maybe I forgot still one question, but please remind me if there's something missing.