Yep. Very strong quarter for Topicus. Here is my snippet from the quarter. Keep in mind, 4% organic growth is right inline with normal numbers.
Topicus continues to prove that it can scale within the European market, and thus far, we are seeing zero impacts from artificial intelligence in the company’s results. In fact, the company is accelerating growth. The one concerning element is that despite this rock-solid quarter, the company did not move in price much at all post-earnings. Pre AI-disruption fears, results like this would have sent the company up by anywhere from 7-10%. Now we have a situation where growth is higher than its ever been and the market is rewarding it with a 2%~ increase after a 50% drawdown.
What does this tell you? Well, it tells you valuation multiples will need more than a single quarters worth of strong results before the market rewards the company with a higher multiple. On a higher level? It means you’re going to need to be extremely patient with software stocks, and watch their results like a hawk. Don’t expect short-term rewards from these companies, is what I will say. Let’s get to the results.
Total revenue jumped 20%, and while the 4% organic growth rate might look a bit low to some, it is exactly what we should expect from Topicus. It’s right inline with historical averages in terms of organic growth. This is one of the elements that was supposed to face pressure in regards to AI. In theory, companies can threaten to build their own in-house solutions and as such, can use this as leverage on renewals for upcoming contracts.
Earnings were all over the map, but this is primarily due to acquisitions. This is pretty typical of a company like Topicus, and most all acquisition-heavy companies. If you want to know how the business is actually doing, you have to look at cash flow. In this regard, the numbers were outstanding. Free cash flow available to shareholders grew 23% for the year, and the fourth quarter alone saw a 40% jump in that same metric.
Management remains aggressive on the acquisition front, deploying nearly 400 million euros into new businesses plus the massive commitment to Asseco. They ended the year with over 320 million euros in cash on the balance sheet, which is a significant increase from last year and tells me they aren’t planning on slowing down the deal flow anytime soon. What it does tell me is the company is likely stocking up cash, anticipating some deals in the future due to the substantial valuation re-rating we’ve witnessed across the entire sector.
For those who were worried that the high interest rate environment in Europe plus AI fears would hurt their ability to find and close deals, these results show that this is not occuring. It is the same old story here as it is with their parent company, focus on the cash flow and the capital allocation, and ignore the noise in the GAAP earnings figures.
Of note, there was a lot of misinformation out there about Topicus coming out and specifically commenting on AI. In reality, what this was was a boilerplate AI risk piece that was added into their annual report. Companies are legally require to disclose the largest potential risks they see and put them in their annual reports. This will not be unique to Topicus. In fact, I would not be surprised if this type of AI commentary in the risk section of annual reports isn’t in 70%+ of companies reports moving forward with all the potential disruption.
Ignore the noise with Topicus and focus on the results. But also, don’t expect any sort of quick turnaround here.