Topicus Q1 2025 Earnings Brief
Less Expensive Than Perceived
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Summary
On May 7, 2025, Topicus (TOI.V) released its Q1 2025 results, revealing another quarter of strong revenue growth fueled by 12% acquisition growth and consistent YoY maintenance organic growth of 4%. The stock experienced a ~6% surge the next trading day. Despite this, some investors express caution or are even trimming holdings, concerned the market is prematurely pricing in the impact of recent substantial capital deployment. Our analysis suggests the market's valuation is appropriate, reflecting the anticipated FY25 year-to-date recurring cash flows rather than overreacting to recent M&A.
For the first quarter of 2025, total revenue reached €355.6 million, reflecting a 16% year-over-year increase of €55.2 million, of which 4% was organic (6% for maintenance and recurring revenue).
Cash flow from operations for the first quarter of 2025 increased by €43.9 million, reaching €271.4 million, a 19% rise from the €227.5 million reported in the same period of 2024.
Free Cash Flow Available to Shareholders (FCFA2S) for the first quarter of 2025 increased by €28.2 million, reaching €161.7 million, a 21% rise from the €133.5 million reported in the same period of 2024.
We'll revisit our original investment thesis, outline our expectations for 2025 and provide a current perspective on valuation.
Investment Thesis
Reinvestment Machine
Topicus (TOI) excels as a reinvestment machine, driven by its extensive VMS acquisition pipeline and unique, decentralized M&A infrastructure. This structure allows acquired personnel to drive future deals, creating a self-sustaining and expanding capacity for high-return M&A in the massive global VMS market.
Defensive & Diversified
TOI's diversified portfolio of VMS businesses provides a highly defensive foundation, driven by recurring revenue and minimal churn. Notably, its acquisition strategy is countercyclical, with volumes and returns expected to increase during periods of macroeconomic stress.
Data & Post Acquisition Care Competitive Advantage
TOI enjoys a distinct competitive advantage in smaller VMS acquisition market. It faces minimal competition from traditional private equity or strategic buyers, primarily encountering specialized copycats and niche roll-up companies. TOI's strengths lie in its extensive historical data for accurate valuations, its reputation for post-acquisition care, its ability to offer management career paths within its ecosystem, and its deep VMS expertise.
Shareholder Alignment
TOI aligns employee and shareholder interests through a unique bonus structure: cash bonuses are awarded based on unit performance, and a significant portion (25-75%) must be reinvested in TOI shares, locked up for four years. This achieves strong alignment without relying on traditional stock options.
As we analyze Topicus's quarterly and yearly results, we maintain a focus on these critical long-term drivers put bluntly by Jamal:
“It’s impossible to understand our business by trying to understand all the individual businesses we own. ... From a valuation perspective, what counts is how much capital can we deploy, at what rates of return, and what the underlying organic growth is of our businesses. Those are the key things you need to understand to decide whether this is a solid investment.” – Jamal Baksh, CFO