Earnings Call: Q1 2023

May 11, 2023

Summary

Q1 revenue grew 31% organically to NOK 230m, with a 14.4% EBIT margin and higher operating cash flow. Expansion and cloud services support the outlook, while management is monitoring softer demand signals and prioritizing profitability.

Morning, everyone. Welcome to the interim report for the first quarter, 2023. My name is Arne Mjøs. I am the Chief Executive Officer, and I will walk through the highlights of the quarter and the business review. In addition, Chief Financial Officer Bent Hammer will walk through the financial review and also have some comments about the outlook. At the end, we will have a Q&A session. If you have any questions, please post your question into the chat, and we will look into it at the end of this presentation. Okay, let us start with the highlights for the first quarter. In brief, it has been a remarkable quarter. I am so happy with this. We are showing you all 31% organic growth. Fantastic. Also, in addition, if we look at the EBIT margin, operating margin, it shows 14.4%. When we are talking about the rule of 40, we are really, according to this formula, more or less 45. This is also some kind of continuation of the fourth quarter, so we are really, according to the strategy, that we should improve the growth and also the profitability quarter by quarter. If we look at the market for digital transformation, it is quite good, quite attractive because of the green shift and the sustainability, but not at least also all hype about the new generation AI that I also will comment in this presentation. Our growth is also fueled by leveraging our international growth in terms of three new offices, and not at least also our capability, we call it a Digital Factory at Scale, and our Cloud and Application Services by doing more with less. We have also, during this quarter, had a lot of focus on the new next generation of AI. We have also established our own Itera GPT that we have been starting to use internally, but also as well as discussing with our customer. If we look to our As you all know, we are quite strong presence in Ukraine, but I will tell you all that our operation in Ukraine is running as normal. It is fantastic. We are showing 90% utilization and billability in this quarter. We also see increase in interest from customers that really would like to contribute to the sustainability of the social responsibility that we all should be a part of according to support Ukraine in the best way. If I look at the book-to-bill, it is showing 1.3, that is good, in the first quarter, 1.2 for the last 12 months. Number of employees increased by 33 in the first quarter and 89 employees during the last 12 months. The 12-month rolling cash flow is up by 23% to NOK 84 million. Also, as we discussed and presented in the fourth quarter, the proposal of the ordinary dividend for 2023 will be at NOK 0.30 per share. All in all, it is a fantastic, remarkable, and I am so glad, and I am very grateful for all the employees that contributed to this fantastic quarter. Here you see the figures, 31%. We have provided NOK 230 million in revenue. Employees, we ended up by 731. That is an increase of 40%, and the EBIT margin is 14.4% in the quarter. Okay, let us go into more about the details about these highlights. I will start with the positioning of the company. As you know, we are specialists in sustainable digital transformation. As you know, we have also established after the situation in Ukraine, we have established three new offices in Krakow, Brno, and Žilina. Krakow and Brno are in two new locations or two new countries for Itera. Building, taking the presence and new location in a new country, building on ONE Itera operating model is extremely important. I am so happy to see that all these three offices are running with profit after, let us say, six months plus. We are able to establish an entry in a new country, and this time, three new offices in parallel. It is fantastic. I think the reason for that is the ONE Itera operating model. We do not have any kind of silos. We are building ONE Itera. We have very focused on alignment, but also autonomous, you know? I think that is the reason that we managed to build this company with this kind of financial performance in terms of the growth and profitability because of the investments that have been built into the ONE Itera operating model. Also, I am talking about the We have a very strong organic model. It is a steady growth, and you see these are two circles. The most important in any case is let our people grow. We say people growth is the most important thing. When they grow, the customer will grow, and also the company will grow. That is the inner circle of Itera, the consultancy services. In addition, we have also started on increasing our package offerings and more industrial services in order to increase the speed and reusability, and not at least managed services or some kind of subscription. That will also increase the growth of the company itself. Itera today, I say we do not have any kind of legacy. We are really on the sweet spot on digital transformation. If I refer to some of, IDC is talking about what is the global forecast for digital transformation, showing 16.5% in the period of annual growth, actually, in the period of 2022 to 2024. You also see that the digital transformation will be 55% of the ICT investment in 2024. Really, this is a really important part of the transformation of most of the industries out there. It is not at least triggered by all new focus on AI that we will also comment later. Also, we as a company, we are also having one of the inner circle drivers is actually connected to the number of employees. After the invasion in Ukraine, we have stabilized the growth in Ukraine. But we are also establishing new offices in Central Europe outside Ukraine. These offices are really contributing more to the growth of Itera, but we also see a future where also we will come back to the quite radical growth also from what we call the Eastern Europe after the war. But we already are seeing some of the customers that are approaching Itera and say that we would like to use our Ukrainian IT specialists. I also believe we will continue the growth also in Ukraine, but not at least after the invasion, we really see a really radical growth also in Ukraine going forward. The ambition, the long-term ambition is actually to have a net growth of 200 to 300 FTEs each year. That is the ambition we are striving for, and we will show you some of the figures on the journey we are towards that ambition. I also just want to tell you about some example of the outer circle about the industrialized offerings, because a lot of customers like TESS. We have mentioned also in the previous quarter, but I just mentioned this because we finished and completed this digital transformation, or this cloud transformation, I will call it, where we moved all their on-premise equipment and systems into the cloud, and we ended into the Azure cloud. We managed to do this and complete that project by end of the first quarter according to plan. What is important for TESS, because they have very large, high ambition for the growth, they should double their revenue, they should double their earnings within three years. Because they can use the new technology in the cloud, they do not have any kind of obstacle from the IT stack. They are really on using the cloud, and they have more flexible solutions for changes and innovation, which is extremely important to support the scalability to double the business. Not at least, what is also important, that the security functionality of all the users are really higher than in the past, because now we can use all kind of security functionality that are in the cloud. This is just another example of a customer that has taken the step into the cloud, fully operating in the cloud, and that also will have a major impact on the business going forward. As you see from the testimony from the customer, they have been very happy with Itera. We have been a fantastic partner throughout the migration to the Microsoft Azure. Another customer we also mention in the previous quarter is actually using the Digital Factory at Scale, where we are using this technology to build what we call a Jobbsjanseregister for the IMDi, which is actually supporting the Norwegian integration of female immigrants. We make sure that these female immigrants that are staying at home today are enabled to enter employment or some kind of formal education. That is extremely important solution as part of the society itself in terms of the inclusion, but that is enabled by using our factory, Digital Factory at Scale. This Digital Factory at Scale, I am talking about a lot of time, but that has been also important investment in Itera because it is all about doing more with less. When we approach our customer, we can show the customer that having everything as part of our rig when we start engagement, everything is in place, so we can increase the speed and throughput in terms of digitalization by 20% and 30% or even more. We have some cases that we managed to do it at 40% and maybe 50% increase speed and throughput. I also believe that when you understand the consequences of using AI, which is the next topic I will go into, is actually that we have also heard a lot of AI. It is really a disruption coming in, but Itera have been using AI and machine learning for a decade. This has been a part of Itera and not at least as part of the Digital Factory. But now it is even more powerful. If you look at some of the analysis that the AI adoption continues to actually, it is saying that 95% of the enterprises report that they consider AI technology to be important to their digital transformation. Of course, AI is not only future, we have been using it, but now it is really more tangible and it is even more powerful that we have seen in the past. What we have done at Itera, we have been starting, we have a separate AI focus team that are really looking at the new generative or the new next generation of AI and also ChatGPT that is really, we are testing out. We have also built our own Itera GPT, so everyone is actually looking at how we can use this kind of technology. Not at least, we are also attending a lot of conferences to talk about these opportunities, and also as a part of the drivers and the trends out there, but also not at least in a more focused meeting with customer that are really keen on to understand what this kind of technology will have, what kind of impact it will have on their business going forward. As we also talked about that we at Itera and our people have also established Itera GPT that is also implemented in our intranet. So we are testing the technology for our internal processes and purposes, but also using ourself as showcases for our customer. This is nothing that is just happened to be. We have been watching the ChatGPT and looking at the opportunity, and it will be really implemented all over Itera and not at least as an extension to the Digital Factory at Scale. I also just want to mention that we have one of the key industry that we focus on is actually the finance, banking, and finance. We have our subsidiary, Cicero Consulting, that have published a trend report about the five trends that shape the future of finance. One of these trends, of course, is responsible AI. What we see that we also in this kind of trend report, we really look at how using technology, what are the key drivers, what are the trends, and how could we contribute for a specific sector and making some kind of conference with customer, with other kind of partners to discuss and take a lead on these kind of changes. So, you can go to Itera website, itera.com, and you can download this kind of report to look at how we address the five trends for shaping the future of financial services. Yes. I just also want to mention, as we have heard a lot of time, that Itera have 300 people, more or less, in Ukraine. So we have been standing together with our Ukrainian colleagues during this difficult time after the Russian invasion. I had my fourth visit in March, as you see on the top row of pictures. I am together with my people in the offices. We are going out on the restaurant, have dinner together, and also showing you that during this last visit, there were a lot of new attack. It was 45 missiles that are coming in. I needed to go to the shelter at my hotel, sleep at the Sokosak, and try to understand how have the Ukrainian adapted to the new situation. I tell you, now we are talking about the western part of Ukraine, which is actually at the size of Germany. The society have really adapted to the new situation. I am very confident when I meet our people and I see that, look at all kind of availability of internet, the power supplies 100% available as in the past, and the billability of the deliverables about 90%, quite normal. As a part of the Norwegian-Ukrainian Chamber of Commerce, we are also doing much more than only the business. We are really staying together with Ukraine during this kind of difficult time. As you know, they are also fighting for our sovereignty and also our freedom. I think this is extremely important for a company like Itera, that we are doing something much larger than ourself. In order to look at also some of the things we are doing, we talked about some bridges the last quarter, but this time I focus on the energy sector itself. It is a huge opportunity for Nordic energy business in the renewables transition. We have a lot of technology, we have full space, but just to tell you, because we have in this meeting, on the right side, we have the Minister of Energy and his three deputy ministers on the right side, and we have Itera on the left side. In addition, we invited Rystad Energy on Microsoft Teams to discuss how could they make this kind of energy transition to a more renewable future. According to Rystad Energy, we are talking about 300 GW of wind and solar. If you compare to what we are talking in Norway in terms of floating wind, we are talking about 30 GW. It is actually 10 times more. Of course, this is a great opportunity so that Ukraine can really become a significant energy exporter to Europe. We have the technology, and they need this kind of technology. Of course, Itera will be a part of this transition because any kind of new energy system need to use AI, need to use more intelligent software. We need to look at the twin transition, both the energy transition, but also not at least supported and enabled by digitalization. This is to show you that for Itera, our presence in Ukraine is really strategic and long-term as a choice because of the great people we have in Ukraine, but not at least in terms of the energy transition and the rebuilding of Ukraine, that will start at some time. We know that Ukraine will win this war. We really believe in them, and we are really prepared to support them during the war, but not at least after the war in terms of the rebuilding. This is also big opportunity for the growth of Itera going forward. The order intake in this quarter was quite good. It was 1.3. The book-to-bill ratio is good in the first quarter, and it can have some kind of different numbers for quarter by quarter, but that is why we always look for the last 12 months. It is showing 1.2, which is also quite strong. We show here some new customer logos that has been quite important for Itera to look at new customers because we have this kind of rapid growth. In this quarter, we also managed to win a new customer, but not at least also prolong and extend our business for the existing customers. This is also quite well-documented here. If you look at the existing customer accounted for 87% of revenue in the first quarter, it is down from 91%. But for me, that is very good because the new customer won over the past year generated revenue of 30% share, actually. That is why one of the key KPI we have in Itera is actually what is the share of new revenue that did not have from customer the last 12 months. This is showing a quite strong change in the customer mix, which is supporting the growth going forward. The share of revenue from 30 top customers is now 84%. That is also very good because it show the visibility of the revenue from this customer, because we are so strategically tightly with their business. Also, if you look at the number of employees, as I told about, I would like you to put attention on the graph on the right down. If you look at the rolling 12 months, as you see in the second quarter 2022, we reached a peak of 122 net increase FTEs. Then we had the invasion in Ukraine, so Ukraine was really one of the key contributor to the growth of Itera. That is why we needed to establish these three new offices, and as you see, it started to grow both in the Nordic, but not at least also from Central Europe. The net ratio is actually 53%, but we really believe, as I told you, that we will reach this 200 to 350 FTEs annual growth. In 2022, we had a target passing, going towards 150, 170 FTEs. But because of the invasion, we needed to stop a little and establish these new offices. But we are quite geared on, quite interesting to make this happen as a long-term ambition for the group, 200 to 300 net increase. That is why I am talking about this organic-driven model, because I do not want to have fragmentation in the company. I will have ONE Itera company, because then we have very set of employees that are working according across the borders, across the competence fields, whatever. That is what I really see today. I really believe it is one of the reason for the growth rate we are showing for you guys today. I think that I stop on that, and now we will go more into the financial review. Please, Bent Hammer, I think this is pleasure for you to go into the details. Let us- Absolutely. Yeah. On a day like this, yeah. Good morning, everybody. I'll dig into the numbers. Yeah, as Arne mentioned, we produced a growth of 31% in the first quarter, and that was mostly from our own consultants. We actually had an even stronger growth in terms of gross profit, which grew by 34%. Personal expenses were up 35% to NOK 158 million, and other OPEX up to NOK 18.3 million. In terms of the latter, we have more expenses related to the new offices that we have established over the last year, as well as more traveling now post-COVID, and also more training, both post-COVID as well, but also as an increased investment into our people. We end up with an EBITDA of NOK 40.8 million, which is up by 22% from last year, and an EBITDA margin of 17.7%. After depreciation, we are left with an EBIT of NOK 33.2 million, which is 14.4% EBIT margin. That represents an increase of 27% on EBIT year-over-year. Cash flow from operations, more positive this year than last year as well, at NOK 7.8 million. Q1 is traditionally a rather poor quarter in terms of generation of cash flow, following the strong Q4. If we look at the 12-month period, we are up to NOK 84 million from operations, which is, I think it was NOK 68 million in the previous 12 months. We're left with a cash balance of close to NOK 15 million, which is good in terms of the dividend payments that are due in early June. I'll come back to that in a second. Employees, we ended with 731 employees at the end of the quarter, which is up 89 people from the same period of last year. Also, on average, we were 14% more people than last year. Looking at the sequential development, we see that we have a very strong growth trajectory. In fact, we have now had an average growth of 24.3% over the last two years, and we've done that with an EBIT margin of 11.7% on average. We can see that from Q1 of 2020 to Q1 of this year, we have grown revenues from about NOK 130 million to NOK 230 million, so an addition of NOK 100 million. In terms of the margin, Q1 is traditionally the quarter where we produce the best margin. This year, we also managed to keep more or less the same margin as in the previous three years. It's been around 14%-15% in the first quarter. That's a strong start to the year of 2023. If you look at the margin development, comparing Q1 of last year with Q1 of this year, we see that we are expanding the margin of the sort of the underlying business by another half percent. The direct cost of the invasion, which this time around is mostly related to us subsidizing the salaries of some of our employees that have been drafted to military services. Also some extra costs related to ensuring that we have connectivity and power at all times, so we can work uninterruptedly towards our customers. Arne mentioned that the offices that we have set up in Central Europe are now producing black figures, so they're sort of up and running. They're over the first hurdle of development. I left the Swedish office as a downside in this quarter. In Sweden, we started reentry in October of last year. We have a different model there versus Central Europe, which is more capacity-driven. In Sweden, we are targeting to increase demand. We are attacking the Swedish customer market, and now we are building up the demand side there. We will add some capacity there as well in due time, but we also look at a distributed delivery model as the prominent entry there. The Cloud and Application Services, as mentioned in the previous few quarterly reports, we have built up both the technology and the service offerings, but also the capacity to be able to take on larger implementation and transformations into the cloud. That had a very small impact on the margin of this year, of this quarter. Going forward, we expect this to be neutralized and then start to add to the margin, i.e., be accretive to the margin. Repeating myself, cash flow from operations were NOK 7.9 million in Q1 versus a negative NOK 0.4 million in last year. We invested NOK 3.9 million, mostly to product development, but also some in terms of equipment, et cetera, and leasehold improvements in our operations. In terms of the financing activities, we actually had a positive inflow of NOK 2.9 million in the quarter, and that was related to the employee share purchase program that we had in the very end of March. Previously, we have had those in June. We sold 647,000 shares, I believe it was, for a combined total of NOK 6.2 million. That expanded the employee shareholdings even further, and we think it is a good thing to have our employees on board as investors as well. We ended with NOK 49.7 million versus NOK 29.5 million in the corresponding quarter of last year. On a rolling 12-month basis, we generated NOK 84 million from operations versus NOK 69 million of last year. We have no intention of sitting with a huge cash balance, so again, we will distribute the surplus liquidity to our shareholders, beginning with NOK 0.3 per share in beginning of June. The board has also asked the annual general meeting for an authorization to also pay a further dividend in later of this year, as we have been accustomed to over the past several years. Share prices at the end of March was NOK 12.6 per share, up from NOK 12 in 31st of March of last year. Combined with the NOK 0.5 per share dividend payments we have done in the past 12 months, that gives a positive development of 9%. We have been trading at the higher level in the last few days, and I see that the market has reacted positively to our Q1 results, which came as no surprise to me. That is good news. Our current shareholding is 971,000 shares after we did this sale of shares to our employees in March, as mentioned. We show a consistent high distribution of earnings, and we can continue to repay to the shareholders. The balance sheet has increased quite a bit from last year. In fact, NOK 57 million. A large portion of that is an increase in customer receivables, which is a natural consequence of our growth. We do not have any issues with our receivables. We have a solid customer base, and we have not in my seven-year tenure had any significant losses on receivables. Equity ratio ended at 29%, up from 22% of last year. You can add another 3 percentage points if you remove the impact of this IFRS 16 leasing standard that was introduced a couple years ago. I think that was it in terms of going through the Q1 results. Just some brief comments on the outlook for the future. No big changes there from what I reported in Q4. We continue with our expansion. Our new offices have only seen the initial phase of growth, and we will continue to expand there. As soon as the Ukrainian situation is solved, then we expect to be able to grow quite significantly in that market again. In terms of the overall market, we are not oblivious to signals out there from our peers that there is some softening demand at the moment in some certain areas. However, we have not been impacted by that as of yet in Itera, and we have a positive outlook still going forward. We are small enough to be able to also gain market shares, even if the overall market is not growing at the same pace as in the past year or so. We also are in the initial phases of this Cloud and Application Services business unit, so that will also add to our growth potential going forward. We will continue on a high growth journey, market permitting at least, but we will have focus also on getting the profitability and the cash flow to follow. We will not grow at any cost, so to speak. We will keep a close watch on the development in the market and also, of course, in our current customer base as such. Great. There are no questions being posted online, so I think we will just end by saying that next reporting will be on August 24th. Arne Mjøs and myself are always available to further discussions and any questions you might have about Itera and our financial performance and outlook. Yeah. I think, Bent Hammer, we are really on fire today, right? Because of all our employees, we are so proud of what we have achieved together, how we are working as ONE Itera across the border, how we are growing, make our customer growing, and the company growing. I am really on fire today. We are really looking forward for this kind of continuation of growth we are going on now. Thank you for attending today, and looking forward to take the next step in the next quarter. Thank you all. Absolutely. Thank you.