Good morning, everyone. We're just letting everybody in through the lobby, so we'll give it another couple of seconds before we start. Good morning. All right. A few more coming in here. Should we start? All right. Good morning again. My name is Jonas Hasselberg. I'm the CEO. We will do this the way we usually do. We'll talk a little bit about Proact, go a little bit deeper into what we do, just to make sure that everybody understand what is the offerings of Proact, then we'll dive into the number and talk through the quarter in quite some detail, exactly as normal. The agenda therefore looks like this. It'll be myself and Linda Höljö that we'll present today also as normal. We'll talk through Proact as a company, the market, what happened in the quarter, and like I said, the financial results.
Before I start, just want to remind everyone that we are recording this session. Also remind everybody to stay muted, then we'll open up for questions at the end, and there will be plenty of time for that. If you don't mind, please stay muted until the end, then we'll make sure there's plenty of time for questions. All right. Most of you know this already. Who is Proact? Well, we are an European IT provider. We provide solutions to medium and large-sized enterprises across 13 countries in Europe. We focus on medium and large-sized enterprises in both public and private sectors. We're turning over just short of SEK 5 billion on a yearly basis, and we employ 1,200 highly skilled and very technically competent people across our properties here in Europe.
We live in a market that we think is growing, which of course the quarterly results is showing, and the growth is driven by a couple of key trends in the marketplace. These are no new trends. You've heard us talk about this for quite some time. The main business driver is all the customers' needs to transform their own business, transform the business to get better decisions made or to streamline their operations or to deliver better experience to the customers or automate their production. Whatever it is, a lot of effort and investments go into using IT to transform the business. Maybe one angle here that's unique and something that Proact is extra focused on, that in all this of transformation, there's a lot of focus on leveraging the value of the data within a company.
Obviously, we've been working with data storage, data management, information management for 30 years. We think this is a competitive edge of ours. The second trend, which is very important, is the trend of cloud. Again, nothing new, and maybe more specifically what we call hybrid cloud, and we'll dive into that a little bit more today, which enables our customers to get more flexible and more innovative and higher availability infrastructure to run their applications and systems on. Security, fortunately, I should say, the increase of security threats continue and the need then for good protection is important. Last but definitely not least, and something we maybe haven't talked enough about, sustainability and how IT enables our customers to be even more sustainable.
Obviously we ourselves put a lot of effort into making sure that we are a sustainable company. Also helping customers so that they can be more sustainable. More short-term dynamics, nothing new. You've seen this. There are some macro trends that are impacting us from inflation and recession, which we'll try to navigate through in the best possible way. Those are driving our business and also a very, we believe, positive growth engine for Proact. We continue to put our focus on our customers. They're always front and center. You've seen this picture many times. We deliver value in five core areas of our value proposition. Strategic consulting services to help our customers on how to get their transformation going, how to get value out of their data, how to renovate their solutions for whatever they do in their business.
We store data on behalf of our customers, so databases, storage solutions, archiving solutions. Connectivity, which is super important because nowadays the data is distributed across wide areas. The data centers can be in one end of the country, and the facilities or where the data is being used or crunched maybe in another end of a country or maybe not even in the country. Connectivity, high speed and highly secure connectivity, super important. Workspace solutions, so for users, end users within a company or within a customer, to being able to actually get access to and use the data, clearly also important.
Protection, anything from good old traditional backup, air-gapped backups, being able to recover data and cybersecurity solutions is all in here. Last but not least, everything needed to get some value out of that data, whether it's compute platforms, analytics, data lake solutions, or artificial intelligence platforms. These are the five areas of our value proposition. One key here, of course, that we have a lot of services around this, consulting services, technical support services, and we can deliver this in a number of different ways.
We talk about this as hybrid cloud, which means that we can enable our customers to get the best of all the different cloud worlds, continue to run things in their own premises if they wanna have high-cost performance, higher security, better control of their data, or in a public hyperscaler cloud because they wanna get better scalability or being able to do some innovation based on latest and greatest technology for companies like Microsoft or Google or Amazon, for example. I just want to dive into that a little bit more 'cause it's one of those things that are not necessarily super easy for people that are not spending all their days in the industry. When we look at infrastructure, and by infrastructure, I mean basic IT solutions to the company, not simple, but basic.
Storage, compute platforms, networking, workspace solutions, the basic building blocks for a customer to be able to run their IT. It can be hosted in their own facilities, can be hosted by us, or it can be hosted by what we call a hyperscaler, a public cloud provider like Microsoft or Amazon or Google. Typically, customers can, if they traditionally have done it in their own data center, this is where we're coming from, this is where historically it's been done, and we help our customers design, provide a solution, implement them, and manage, provide some technical support. Also, if the customers want, we can run it as a service for them, a managed cloud service. It can be hosted with the customer, but we run it on behalf of the customer.
This is the kind of first level of Proact providing a cloud service to the customer, hosted by the customer in their own data centers, but we run it and deliver it as a service. The second level here is that we host it on behalf of our customers in our data centers or data centers where we rent space. This is a direct cloud service provided to the customer. We own and manage the equipment, but we sell it on as a function or as a service to the customer. Then obviously, we can help customers put some of their load, could be applications, could be data loads, on a hyperscaler service, and we manage on behalf of them. We have the skills, we have the processes, we have the tooling to make that cost-efficient and in a high-quality way.
What happens typically, though, and this is the important piece, that most customers do all of the above. They will be running some of the solutions in their own data centers, could be more cost-efficient, could be that they have old applications that they don't wanna redesign, could be for regulatory reasons. They wanna put some in our data centers 'cause we have local presence and suitable solutions. Could be security solution, backup solutions, so-called air-gapped backup solutions, so backups that are disconnected from the internet. They wanna be able to use hyperscalers for flexibility or innovation, for instance. This is what we call the hybrid cloud, and this is the very clear trend in the enterprise segment that our customers do all of the above. This becomes more complex than for our customers typically. This is a non-trivial setup from a technical perspective.
Data should flow seamlessly between these different environments. Security should span across applications to be managed across these different types of clouds. This is one of the, let's say, trends that we believe that we can definitely help and serve our customers with. Just wanna share that a little bit more detail so you understand what hybrid cloud is and why this is important to Proact. We put a lot of our product development and skills development into this. We definitely let the customer choose.
We love when they buy their systems and manage it and run it in their own data centers. We love equally much if they let us run it for them, either in our data centers or run it for them in the hyperscaler. It's really up to the customer to design a solution with our help that brings the best of all the cloud worlds to them. That's just to paint a little bit more of a picture around what is hybrid cloud. I hope that helps understanding where we're going and what we're doing. Q1, in brief, a little bit of a mix. We're very proud of the growth. We continue to see a very strong market out there and a strong demand for all our services.
The growth definitely driven by both systems but also services. 15% with 8% organic growth is good. EBITDA also growing, but not at the same pace. A little bit of pressure on our EBITDA margins. We'll dive into that a little bit. A mix of things combined with a little bit of seasonality and as some of you who have been tracking us for some time, you know that the systems business is a little bit volatile. When one business unit is going strong, another may having a slightly weaker quarter. Also we see some increase in cost driven by inflations. We'll dive into where that is and what we're doing about it here in a second. Good growth also in what we call annualized recurring revenues.
This is the revenue under contract, both managed cloud services as well as our customer support. Up 15% year-over-year to just short of SEK 1.6 billion on a yearly basis. That's also good. We maintain or even grow a little bit our gross margins year-over-year to just short of 22%. Strong in terms of revenue, strong underlying market, a little bit of pressure on our COGS and SG&A, as you can see. SG&A, kind of, sorry, TCV. Our new contracts, the total value of new contracts for cloud services, a little bit down from last year, mostly a seasonality effect. These are large contracts, and we can see some slightly extended sales cycles in some cases, but not a sign of an underlying market change, just rather more of a seasonality problem or challenge, as I mentioned.
Inflation, we see the impact on COGS and our SG&A. I think we have been good in countering the inflation in price increases, but we see a little bit of negative impact here now in Q1 in the MCS business driven by COGS and also a little bit of an increase in SG&A. Therefore, we have initiated a cost program. We've always managed costs carefully. We've taken actions already before this, but we see the inflation is not bulging or going away. We take a little bit of a tougher grip on this, and we will execute a program here during Q2. Trust the quarter very briefly. We'll dive into the numbers here in a second. Just want to highlight a couple of other positive things here in the quarter and just spend a little bit of time on partners.
Partners is obviously super important to us. Everything we do is based on technology partners. We got some really fine and good recognitions during this quarter. NetApp, which is an American provider of storage technology, awarded us Partner of the Year in Europe, which is great. Also good recognition from VMware, which is a large software provider of cloud software, highlighted in particular efforts in Norway. Germany got awarded the best managed service provider, third place, I should say, in the best managed service provider in the German market. Quantum, Rubrik, also good awards. Rubrik, in particular, a new group-wide partner agreement for their data security solutions. Some good progress here on the partner side and good recognitions of the work we do together with our key partners.
With that, let me hand over to you, Linda, and we can dive into the numbers a little bit more in detail.
Thank you, Jonas. Highlights, I think you've walked through them mostly. Good growth overall in revenues, 15%. The same growth in both systems and services. Good growth in both areas. The adjusted EBITDA growing slightly less to SEK 57 million or a margin of 4.7%. With the acquisitions we've made impacting amortization and increased interest rates, the profit before tax is then stable at SEK 37. As usual, we start with the revenue development. The revenue growth is 8% organic, typically or generally good demand. We see acquisitions, which was sepago that we bought or acquired in July last year, contributing by approximately 3% in the quarter. The weak SEK gives us positive currency effects, about 4% in the quarter.
You can see on the right-hand side here where we have the different longer-term trends that from Q4, we had a very, very strong systems quarter in Q4. Q1 typically can be a little bit lower seasonality-wise. As we were saying, good demand. New cloud contracts, as Jonas was saying, down slightly from last quarter. As he was saying, it's typically not a huge amount of contracts. Depending on which quarter we close them, it can impact. No big shift in demand as we see it. If we go to the services then, 15% growth, of which 6% organically since sepago that we acquired. It was primarily a consulting company, they have contributed to the consulting growth primarily. The cloud revenues increasing 8% organically.
Last year, we won quite a lot of new cloud contracts, that's now translating into revenue growth, as well as the price increases we have been doing. Also see very, very strong support services growth, 15%. That's, of course, very related to that we've had last year strong system sales. Also here, we've been increasing prices. That's translating into good growth. Then the area where we have organic decline is the consulting services. We still do not see that as a change in demand. Still see strong demand. Actually, one of the main reasons we're not growing is that we're fewer consultants employed. We have vacancies that we're not able to fill. In a few isolated markets, we're seeing a little bit of lower utilization. The main reason is that we're fewer people. Due to the war on talent.
In total the services revenues increased a little bit as a proportion of the total to 43% of revenues. The lower slide shows the recurring revenues continuing as expected to grow quarter-over-quarter in a stable fashion, 8% organic growth, 15% total growth, we're now at an annualized level of SEK 1.6 billion. Last, systems increase of 14% here, slightly higher organic growth, 10% with a strong demand in all business units except UK When we go into the business units, you will see that it's quite different reasons for the development for the different business units.
After revenues, we move to profitability, we can see on the right-hand side here that Q1 EBITDA is lower than the other quarters, and it's quite often the case from a seasonality perspective after a strong Q4. This thing from last year, 8.5%. However, with especially the SG&A cost increase, the margins are going down slightly. The gross margins we're happy about that they are stable and even slightly increasing. It's primarily systems that is slightly increasing margins. We can see that we're able to pass on price increases here. Also for services, the margins are unchanged. We do see, as Jonas was mentioned, quite a lot of effects of cost inflation here, but we are working with both price increases and efficiencies. We're able to keep them unchanged quarter-over-quarter.
Still, we want to improve the margins here, so that's part of the cost program we're introducing. The reason for the declining EBITDA margin is the increase in SG&A costs. The organic increase is 15% for comparable units. It's primarily cost inflation, salary cost inflation, premises, et cetera. Also a little bit of increased investments in sales, as well as sales related costs. When we sell a lot, we will have sales commissions, et cetera, that increase as well. Finally, the EPS on the rolling 12, it's decreasing a little bit, but still on high levels. On a quarter-over-quarter, it is decreasing.
I mentioned the PBT was flat, and then in addition, in the Q1, we had an unusually low tax rate than the Q1 last year. Overall, EBITDA going up primarily with the strong revenues, margins going down a little bit due to the SG&A cost increase that we're then, cost program that we are initiating. If we move to the different business units, Nordics and Baltics, revenue-wise, you can see they had an extremely strong fourth quarter, continuing with the seasonality adjusted strong Q1 as well at 22% organic growth. 'Cause it's systems here driving a large part of the growth, and especially Sweden and Denmark that's delivering strong results here and generally continued high demand. Services, also growing well organically 14%.
Very good growth in support as well as cloud services in particular here. The EBITDA margin is increasing. We see both the revenue growth impacting increased gross margins, especially in services here. We do see quite increase in sales cost with the strong revenue development and inflation here, but EBITDA margin overall increasing from last year. Next business unit is UK. This is the business unit with a revenue decrease at 25% organic revenue decrease. It's the systems revenues that are decreasing. You can see on the graph on the right-hand side here that we had a very strong Q1 last year. From that, the revenue is going down 45%. It's primarily we see longer sales cycles, some deals were slipping into the next quarter.
At this time, we don't see this as a sign of decreased demand. Services growing organically 4%. Here it's both cloud and consulting services growing well. Support is lower here with lower systems revenues impacting also the product mix where we've sold systems that have slightly less of our support services attached. With that significant decrease in revenues, we see EBITDA going down and EBITDA margins going down. We have reduced SG&A costs in the business unit, but not enough to counter the 25% decrease in revenues. Okay. Business unit West. Here revenues are growing at 7% organically. We see continued growth in systems. We had some weaker quarters here in 2021, 2022, now it's growing 20% organically.
owing a little bit. Here is one of the business units where we see consulting revenues decreasing, and it's primarily due to lack of staff, and where we're putting continued efforts into recruiting the right type of competence here. Support and cloud showing good growth. Then the EBITDA margins are going down. We do see with increased costs in our services in particular, the gross margin is going down. We're also relying on external resources since we haven't been able to recruit as we want, and they are more expensive, and other inflation-related costs are impacting. SG&A, same issue here, especially cost inflation are impacting, and that's taking down the EBITDA and EBITDA margin for West.
If we move to Central, here is where we have sepago contributing to revenue growth, quite strong, 41% overall revenue growth. Organically, it's 16%, with systems growing well, 24%. Service is also growing at a slightly lower rate, 6%. The systems we saw quite a lot of deals delivered in the quarter, also continued strong demand. When we look at the business side, it's in particular support services is growing quickly connected to the system sales we've done. Consulting services decreasing organically. Here is one of the areas where it's also a little bit of lower utilization and then fewer projects delivered in the quarter. EBITDA margin on low levels, just as they were Q1 last year, it's still an improvement from last year.
We do see the increased revenues contributing positively. Gross margins have been going up, but we had quite a lot of sales and admin costs in the quarter. Some of them related to the integrations of ahd and sepago that are ongoing at full speed. That was the last business unit. If we look at the cash flow, we had positive cash flow from current operations of SEK 90 million, partly offset by an change increase in working capital. This is primarily related to our accounts payable going down after a very strong Q4. Our receivables also going down, not as much so. A little bit of investments in fixed assets.
We did also buy out the minority shareholder in GO-AHEAD in our Czech subsidiary in the quarter, so we now own 100% of that. When it comes to the financing activities, it's primarily the leasing liabilities of SEK 16 million impacting. Overall, still very strong cash position and good cash development. Quickly, if we look at the balance sheet, a strong equity ratio, 24%. Net debt, if we include our leasing liabilities, of SEK 250 million, approximately. Same level as last year. We have during the last year bought, acquired sepago on dividends. Strong underlying cash flow generation. As most of you know who've been following us, it's volatile on a quarterly basis due to the big shifts we can have in working capital.
Over time, we see that we are generating good cash. We still have unutilized overdrafts and utilized portion of our credit facilities, so quite a lot of capital if we need to for acquisitions and other things. Then we, as usual, follow up on our long-term financial goals. Here, it's the 12-month rolling data we're looking at. Our 12-month rolling sales growth is 33%. Very strong and quite a lot higher than our target. Our EBITDA margin, we still have a gap to our target, so this is one of our key focus areas. As we mentioned now several times, something we will take action on to continue improving in the coming quarters. Net debt EBITDA quite a lot below our target. Return on capital employed is in line with where we were end of December.
Still some way to go to reach our target of 20%, which, if you remember, we did decrease, last quarter from 25%. Our dividend, which we expect our annual general meeting to approve today, is 27% of last year's net income, so quite in line with our target. Okay. I think that was the last slide. Do you want to summarize, Jonas?
Yeah. Growth continues to be good. We're in particular a little bit extra proud of the annualized recurring revenue, very important part of our business and strategically something we focus a lot on. Good growth both year-over-year, but also from just the previous quarter in Q4. The cost increases here in SG&A a little bit higher than we want. We are initiating a cost program to make sure that we get back on track on our margin journey as well. That's the quick summary. Thank you, Linda, for sharing the numbers in more detail. With that, we will stop sharing and open up for questions. It looks like Daniel was the fastest. Daniel, GO-AHEAD.
Yes. thank you very much, Jonas and Linda. Do you hear me clear?
Yeah.
Yes.
Okay. Excellent. A question on the cost reduction program. I mean, the costs were obviously up 22% roughly year-over-year in Q1, employees up 5% driven by sepago acquisition. What in practice is gonna be the cost reduction program? Is it gonna be number of headcounts, or is it gonna be costs around, like, sales activities? Where should we expect to see them?
You'll expect to see them across the board, it'll be efficiencies in our service delivery, a reduction of SG&A costs. It can be headcount and OpEx around that.
Okay. The timing and the magnitude of the program, something you can share?
We will execute the program during Q2 and try to get effect of that already here in Q2, so we can benefit from it for the rest of the year. We won't comment on the magnitude of the program. I mentioned already the ambition of the program is to get back on track on our EBITDA journey. That's the ambition level. By that, I do not mean that we're gonna get to 8% this year, but this year being a step on that journey.
I see. I see. Any costs for the program we should expect?
We'll have to come back to that.
No problem. In terms of demand and sales here, I mean, it was good in the quarter, as you said. You were able to increase prices, et cetera. You're also partly a reseller on third-party hardware from, for example, NetApp and Dell. When I look at their forward-looking comments and expectations from the market, they indicate a declining growth rate into negative territory in the coming quarters. Is that something that could happen to you in system sales in 2023, given that you had a very strong growth in 2022 and lead times have probably prolonged a little bit here and one can expect CapEx investments to come down among enterprises?
There's definitely certainty in the market for maybe second half of this year. I think the underlying demand is still there, and we've always built our business plans, as you know, on a slow growth on the systems business. I think we see both NetApp but also their competitors to really double down on their portfolio and adding products into their portfolio to drive growth, but also their sales efforts. I think it's a little bit too early to tell that they're gonna be in decline. We believe in growth, so the main uncertainty for us is, of course, if the general macro level takes an even more negative turn. We don't see anything better there, or more, I should say, than you do.
Currently, the demand is good, and we know that the underlying demand with our customers is strong. It's more temporarily driven than by uncertainty around the macroeconomics.
Okay. if we see negative growth in the coming quarters, we should also see a accelerated negative view on the macro, not as it is right now, I guess.
That's our view, yes.
Okay. Fair. Regarding cloud revenues here, we see large cloud providers raising prices at the moment and going into 2023. Is that helping your growth rate in this environment right now, or how does it affect you?
An increase in... Sorry. Say again, Daniel. I missed part of it.
Yes, the increased prices on cloud space.
Yes.
We see Microsoft Azure increasing prices, et cetera, and you are partly reselling their cloud space obviously. How is that going to drive the growth rate for 2023?
Um-
I guess that's gonna have a positive impact.
It does have a positive impact in, actually in two ways. Reselling of cloud licenses or Microsoft licenses is not a huge part of our business. It's not, it's not zero, but it's not where we focus. We will get some benefit there of their increase in pricing. More importantly, it actually increases the competitiveness of our own services or customers staying with some sort of what we then call hybrid cloud solution. It also drive customers to be a little bit more careful in moving to the public cloud or putting all their workloads in the public cloud. It both drives a positive effect on the reselling of licenses, but equally so on an increased demand of our own cloud services. Does that make sense?
Yeah. Absolutely, it does. I was a little bit interested around the gross margin here. I mean, it's up year-over-year despite systems growing faster than services, et cetera. Is that sustainable going ahead?
The gross margins?
Yeah
they should be sustainable. Yes, they should be sustainable. We definitely talked about this for some time, that part of our journey towards the 8% EBITDA is to improve gross margins, and particularly in our services. A lot of the work we do around both scaling that business but also improving our internal efficiency is to drive gross margin improvements.
Excellent. That was all from me.
Thank you. I think, Fredrik, you were second on the trigger.
thanks. Fredrik Nilsson from Redeye here. I mean, I suppose that you would have needed to increase your prices even more to compensate for inflation. Is that anything you believe you can do going forward?
I think we can. I think the trickiest thing with price increases. Let me flip that around. The easiest thing with price increases is reselling of the systems business, where we can do immediate price changes, consulting, where we can do immediate changes to hourly rates and new cloud contracts, where we can make increased our list pricing. The biggest challenge is increasing the prices of existing contracts. Some of our contracts have indexation clauses, which we obviously have executed. Some of them have not, and we've actually tried to increase prices there as well, but have not come as far as we would have needed to. This is, I think, where we have the biggest challenge. Installed base of cloud contracts, but everything else, we continue to increase pricing to the level we can.
Okay. The recurring revenue grew by 8% organically. Could you elaborate a bit on the mix of volume and pricing in that growth?
Linda, do you wanna give it a try? We don't have hard facts on it.
Yeah, because since we're selling not identical products or services, it's run a case-by-case basis. I would say the larger part is probably still volume. Definitely it's a combination, Fredrik.
Okay. That's all for me. Thank you very much.
Thank you, Fredrik.
Thank you. Any other questions?
I can follow up with another one. Daniel from ABG.
Sure.
When we look at your consulting business, you said that it's declining because you reduced number of headcounts. Do you also see a pressure on the, you know, possibility to raise prices versus salary inflation that is kicking in this year, the possibility to increase utilization as demand may come down? We hear those trends from the pure consulting companies in their Q1 reports at least.
We haven't really seen it yet. I think we. It's a little bit different in different markets and different competence groups. The majority, we still see strong demand, hard to recruit, and thus also quite easy to keep prices up in line with salary inflation. We have pockets where it's softening a little bit, but we think it's too early to tell if that's a trend that will be sustained or if it's something we can counteract now.
Okay, it's more a fact that you are less people, as you said.
Mm.
Okay. Secondly, in terms of M&A going into this year, will this market create more opportunities and targets that may be up for sale at price levels that are more in line with your preferences? How does it look, the pipeline?
Pipeline is pretty good, and I think one positive development we've seen after being active in M&A last year or the last few years is we definitely get involved and get introduced to a lot of more opportunities. I think the pipeline is good. Don't think we've seen the reduction of at least expected price as much as we maybe expected. I think we talked about that before as well. A lot of the sellers are founders, and they've kind of got an expectation level set by previous years. We still have not seen pricing coming down, and I think in the case of where there has been transactions, price is still aggressive. Definitely good pipeline, plenty of targets out there. Not a significant decline in price levels visible to us.
Excellent. Thanks.
I should just clarify one more thing on that question, Daniel. I think we've been pretty good in getting decent price levels. You know, we've been purchasing at levels around 7, 8 times. I think we maxed out at 10 times. Those are the levels we try to aim for. It's not coming down from that level. Good. Any more questions? I hope we try to paint a clear picture. Revenues are good. Inflation driving up costs a little bit. The war on talent puts also a little bit of pressure here, both a little bit more difficult to hire consultants, so a decline in consulting revenues, but also increasing cost and by subcontractors into some operations. We have actions in place to counter the cost increases, and we're positive about the future. All right.
Thank you for calling in. We will see you again on July 14, maybe.
Yeah.
July 14. All right. Take care, and I'll see you then.
Thank you so much.
Thank you.
Bye.