Good morning, everyone. Welcome to our Q3 call. I have Linda Höljö, our CFO with me, and myself, Jonas Hasselberg, the CEO of Proact. Before we start, I just wanna remind everyone that we are recording this call, and we will be publishing it on our proact.eu website for later enjoyment. We'll keep you muted throughout the presentation, but we'll make sure there's time for questions at the end. You'll get all your questions answered, we hope. With that, I'll start, and we'll do the normal agenda. We'll talk a little bit about the company and our market, just to give you a refresher and a reminder. If there's somebody new on the call, you get a little bit of an introduction to the company, and then we'll talk about the Q3.
Most of you know this already, we are an IT solutions provider. We provide data center and cloud services to European enterprise customers. We have about 4,000 customers across our 11 countries, and we turn over just around SEK 5 billion and have 1,200 very, very skilled employees across our 11 countries. And obviously, we operate in a very fast-moving market, and we usually drive our strategy and execution around these four defining trends in the market. Nothing new, you've seen this before. There's a business trend where all our customers are trying to... Not only trying, they are driving a lot of their business transformation and business innovation through IT.
And this could be anything from automating processes in their, in their production flows, could be improving their customer experience, could be big data analytics to make smarter decisions or automating administrative processes through AI. So there's a lot of different use cases, remote healthcare, all sorts of use cases that IT enables, of course. And this is the main driver for our customers and their investment in IT and IT infrastructure. There's obviously also a technology trend around cloud and more specifically, hybrid cloud. So a technology architecture, if you will, that helps our customer be more quick, and flexible, and innovative in their transformation efforts. And then there's a maybe less positive trend, obviously, of the increased threat of cybercrime and the need for cybersecurity and making sure that any particular data is resilient and protected.
And last, but definitely not least, we see IT as a very strong enabler to help our customers to be more sustainable. So these are four key trends that we are building our portfolio around and where we're helping our customers. And then, to no surprise to anyone, obviously, there's still a bit of uncertainty in the larger environment or the larger economic situation with inflation and risk of or even ongoing economic downturn that we all try to navigate. So no surprise here, but these are important trends, and these are the key trends that makes us still very positive about, about the future. Our job is to create good business value to our customers, and we do this through these red five areas in our portfolio wheel.
We help our customers through consulting and advice to help them really design their IT infrastructure and their cloud architectures and how they get value out of data in particular. We help our customers to store data in secure and reliable ways. We help our customers to connect to that data, and the data may be stored not where people are sitting, so to speak, or where the data is used. Obviously, secure, reliable, and low-latency access to data is very important. Protecting the data and ultimately, actually getting use of it through basic stuff like workspace solutions or more advanced, like AI and large analytics solutions or application development environments. So we do all of these five areas to really help our customers be better through their IT investments.
We talk about something we call hybrid cloud, and I'll explain that a little bit deeper, but that's very important. I think there's a lot of belief in the marketplace that everything is going to what we call the public cloud, so the Googles and the Microsofts and the Amazons of the world. We have a more nuanced picture. We think our enterprise customers will leverage the best of all variants. And the way to explain this is that IT infrastructure typically resides in three different places, if you will, and it's been like this historically, and it will definitely continue to be like this also going forward. So customer have their own data centers or what we would call on-premise.
They can have leverage our data centers and, more importantly, our cloud services to get a local provider of dedicated services, or they can use what we call the hyperscaler data center, so the Googles and the Microsofts and the Amazons. Typically, what we are seeing is that our customers use all three of these, and it's all about optimizing the environments. You can get cheaper or more control of your data if you keep it in your own data centers. You may have legacy applications that are difficult to migrate. At the same time, you may not have or don't wanna invest in the skills and expertise to manage backups or development environments or storage solutions.
So you use Proact to host and manage that for you, but still make sure that the data is in your local country, in your local jurisdiction, managed by experts. And then you still use Microsoft for your office environments, or your email environments, or Google for your analytics, for instance. So our customers will live in these three worlds and leverage the cherry-pick, the best of all three different variants. And this is great 'cause we can do all three of it. We help our customers through what we call a hybrid cloud journey. It all starts with a lot of advisory and consulting engagements, both designing what that target environment looks like. When do you use the public cloud and hyperscalers? When do you use Proact? When do you manage the IT yourself?
And then, maybe more importantly, we help them on this journey, 'cause this means perhaps re-architecting applications, migrating data, restructuring, technical architectures. And then ultimately, we can run these environments on behalf of our customers, regardless of whether the actual equipment is standing with the customer in Proact data centers or in the public cloud. So ultimately, we can make sure that this is operated and run in a secure and optimal way for the customers. So this is what we do. We have a lot of offerings in this area. We have a lot of storage, networking, compute platforms, and services to our customers when they run in their own data centers. We have a lot of cloud services ourselves.
Our Proact Hybrid Cloud infrastructure platform, our managed container development platform, immutable storage solutions, so customer can protect themselves from ransomware, detection and response services to prevent cyber attacks, and then a number of services in the actual cloud to help our customers run their workloads, their applications and data in the public cloud in efficient ways. So we have a very broad portfolio covering all of these three different clouds and enabling this hybrid cloud. Good. Over the past couple of months, we continued to move forward with our value proposition and how we help our customers, and I'm just highlighting a few here. We're going deeper and deeper into a couple of verticals, because obviously, different enterprise segments have different needs.
And here are just a couple of examples where we're helping higher education in the U.K., particular solutions for the insurance business, as well as healthcare. So these are just a couple of great examples where we take our expertise and our knowledge one step deeper to not just provide generic IT infrastructure, but really help and understand our customer-specific business needs. Another example, which is obviously becoming more and more important, is to help our customers with their own sustainability and data resilience drive. So we help customers effectively reduce their energy usage by having either providing services ourselves or helping them run on more efficient equipment, and thereby drastically reduce not only the usage of energy, but also the cost of energy. We can help them very, in concrete ways, calculate the benefits of this.
And on top of that, there's a lot of new regulations coming up in terms of data resilience and how customers are required through regulations to protect their data, and we're helping them with those, both assessing their current capabilities, but also providing services to make sure they are compliant. So all some good services and support to our customers to be more sustainable and, and more resilient. So with that, let's move in to the Q3. So we're shifting gears here a little bit. A couple of points here. First and foremost, we spoke in our Q2 announcement that we're gonna execute a cost program, which we have. So we're executing that as per plan.
The majority of the work is done already, and we're still on track to do everything we plan to do by the end of this quarter, so Q4, the end of this year. So that's good, and we see now improvements both in our gross margins as well as lower administration and sales costs, which is great. Here in Sweden, where we have our headquarters, we were yet again named one of Sweden's top 10 best companies for young talent, which is great. We're happy to be able to attract young and very skilled people. This is good, a good award. And the same, we have one of our favorite and largest partners is a company called NetApp, and this year again, we received the top awards in their annual partner event.
So just a recognition of our skill level and how well we're working together with our partners. And then two, new appointments to my team in our group management team, as we call it, so the company leadership team. We have a new business unit director appointed for Central, Maria Gomez. She comes most recently from Microsoft Germany. Also spent a lot of years with IBM Germany. She will be both the country manager for our German subsidiary, as well as running the business unit Central, and joins here in January and replaces René Schülein, who left the company here for personal reasons in September.
And then, as we announced during the summer, Linda, who's sitting here right next to me, our CFO, is leaving in the beginning of next year, and we have appointed an interim CFO in Åsa Regen Jansson, who comes most recently from Viaplay here in Sweden, and she will be the interim CFO until we appoint a permanent replacement of Linda. So developments here during the quarter, which takes us into the actual numbers. So good growth of services still, which is where we put a lot of our strategy and focus, and in particular, good growth in what we call annualized recurring revenue. That increased 18% year-over-year to just short of SEK 1.8 billion.
As most of you know, annualized recurring revenue is revenue under contract, which for Proact means our cloud services and our technical support or customer support services. Gross margin is improving by a full percentage point in the quarter compared to last year. As I mentioned already, the cost efficiency program is going as per plan, and we start to see the positive effects of it. TCV, total contract value, so this is the contract value of new cloud contracts, a little bit lower than last year. This time, I put a little bit of an asterisk on this number, 'cause we have also closed a couple of very large contracts that are of more variable nature. Those will add significant revenue on top of our current revenues, but are not reported at TCV.
We see this as a trend in the marketplace. Our customers want a little bit of flexibility, flexibility either in the volume commitments they're making to the service or in the amount of years, the number of years they're committing to. This is a general trend in the marketplace, not just with Proact, but obviously the TCV metric then becomes a little bit blunt. So you have to take that with a grain of salt. There's more deals closed in the quarter on top of this 119. EBITA declined a little bit, but it's still at a decent level at SEK 73 million, and obviously, we have a bit of a revenue decline.
Also boosted the revenue is through currency effects, but then you need to remember that we had an incredibly strong Q3 of last year, so the comparables are relatively tough. So overall, a quite good quarter, and, and we're happy with the progress in a number of the areas that we're highlighting here. With that, Linda, let me hand over to you.
Yes. Thank you. I'll go in a little bit more into the details. The income statement highlights, as you, Jonas, pointed out, 3% decline overall. Systems then declining most, 17%, and that, as you know, is the volatile part of our business, whereas we see strong growth in services sales, which we're very happy about. That revenue decline leads to a reduction in adjusted EBITA of 7% and a margin of 6.8%. We had some one-off effects that are impacting our profit before tax positively, so that is increasing by 14% from last year and then at a 6% margin. We'll go into, as usual, a little bit more of details first on revenues.
So the 3% revenue growth is, or revenue decline, is an 8% organic decline. The main reason is that we have a very strong comparison quarter for our systems business. For those of you who have followed us, in late 2021, we got hit by the semiconductor shortage crisis, started building up quite a lot of backlog, and we delivered that in Q3 and even more in Q4 last year. So those quarters were a little bit artificially strong. We do also see in some markets outside of the Nordics, some longer sales cycles and a little bit of impact from the macroeconomic uncertainties, especially in Germany still, so that's also hurting. We divested our Lithuanian business in the quarter, a very marginal business for us, a little bit of loss-making.
Yeah, as you can see, so that contributed -0.4%. And then currency effects, we still see strong effects from the weak Swedish krona, so 6% of our revenue growth is due to currency effects. The cloud contracts, as Jonas said, declining a little bit, but as you can see on the right-hand side, our, our recurring revenues continued to grow strongly. Services overall growing 15%, 7% organically. We actually see organic growth in all of our business units, which we think is a, it's a good signal of underlying strength still in our market.
The cloud revenues, growing 18%, 8% organically, as we've won contracts, and as Jonas pointed out, sometimes not fully contracted, but still our customers, we're sticky, so we still see good growth even when our contract values are not growing as much. Also, very strong growth in our support services. That is also connected to the little bit of delay. So when we closed strong system sales last year, we typically have three-year support contracts, so that gives us good growth for a number of years. And then consulting services is the area where we see an organic decline. It's growing due to currencies only, and that's partly due to the consulting that's connected to the systems revenues.
In those markets where we have lower systems revenues, we see less consulting revenues, and we've also taken out in, in some of those markets, people. So our utilization is okay, but, but we're fewer consultants, so that's impacting the revenues. And in total, we had service revenues of 51% of our total revenues, and given that we had done a slightly weaker systems quarter and a very strong services quarter. Our annualized, yeah,
Sorry.
Yeah, that's okay. I think I said it all. The systems decrease is the big one, the organic decrease of 20%, while recurring revenues to cloud and support services growing 9% organically. Then profitability. Can go to the next one. So adjusted EBITA
We've had—of course, we're continuing to push for price increases, but also we're seeing that our services margins have been impacted positively by the cost program, and we also had some earlier efficiency measures done, in particular in the Nordics, that are giving an effect here. So we're happy to see those effects. Then our SG&A costs, they are up due to currency effects, but organically down 1%. So we had, as those of you know who followed us, quite a lot of cost increases during the end of last year and big in Q1 of this year, which is why we implemented our cost program. So we see now that costs are coming down to more levels where we'd rather want them to be.
And then our earnings per share is increasing, as I mentioned, a little bit of one-off effects, 'cause we do have higher interest costs. But that's offset because of our... We did a partial write-down of the earnout that we have booked, related to the sepago acquisition. We do continuously evaluate the probability of paying that out. And given the somewhat weaker consulting market with the little bit of fewer people, we see a lower probability of paying that out. And then the sale of Lithuania had insignificant effects on revenues and profitability going forward, but we did get a little bit of accounting-wise, profits from the sale of that we've booked as non-recurring items. So then into our business units.
So business unit Nordics and Baltics, which is by far our biggest business unit, is developing very, very, very well. So 2% increase organically in revenues. So in all business units, our systems are down, and it's down the least here organically, 3%. So we're seeing very, very strong demand here. But the Q3 last year was then also a strong quarter due to the delivering out of backlog. Services, 14% organic growth, 17% in total. We see good growth in all areas here, including consulting. And the revenue increase together with improved gross margins led to a good development also in the profitability, with EBITA margin increasing to 10.1%, which I believe is a record. So really good results in the business unit, Nordics and Baltics.
If we go to U.K. it's a little bit weaker results here, and it's primarily due to the systems decline. Systems revenue down by 51% organically. We did have a strong quarter last year, we've also seen a little bit during this year, longer sales cycles with our customers, so that's impacting. Services growing strongly, organically 11%. We do see the biggest growth in cloud services here. We won good cloud contracts, previously, and that's delivering revenue results now. And here, consulting services is decreasing organically with connection to those lower system sales. The EBITA margin is then, as a result of the decline in revenues, also decreasing along with the EBITDA. We do have improved gross margins.
We do have lower sales and SG&A costs, but we're not able to fully offset the decrease of 24% organic revenue decline. If we go to business unit West, it's a little bit of similar trend here. Revenues decreasing 3%, systems 22% organically. Services increasing a little bit less, 2% organically here, where it's the consulting revenues that are decreasing, also related to system sales, but here we think we're still trying to recruit staff in certain areas, as well. But we do see a little bit of lower demand that's impacting. Support services growing strongly here, as well as in Nordics and Baltics. Here again, that revenue growth or decline organically is hurting our EBITA margin.
We also see one of the biggest challenges with cost inflation we have seen in West. So we are of course doing things here to reduce costs, but we're not fully where we want to be yet. So we have we are seeing decreasing gross margins and increased SG&A compared to last year here. But of course, continuing to take action to make sure we turn that trend around. And then our last business unit, Central. Here we also have a big decline in systems revenues, organically down 47%. While service is growing 13%, organically 2%. And as we've talked about in the previous quarters, Germany is where we have seen the biggest market impact with macroeconomic uncertainty, prolonged sales cycles. So we continue to see that this quarter.
The organic growth in services is particularly strong in support, also in cloud services, but the consulting revenues here are declining with fewer consultants employed due to that lower demand of consulting services. And here again, we see the same trend. It's hard to keep margins up when we have these dramatic declines in revenues. So here we have fairly flat gross margins, but lower sales and administration expenses organically, but we're not able to offset that big drop in revenues here either. So EBITA margin is going down, as well as EBIT, EBITDA. And so those were our business units. If we then look at our cash flow, we have very strong cash flow in the quarter, and we have SEK 133 million from our current operations, a little bit of positive impact from working capital.
Limited investments in the quarter, which means that we've paid off 90, yeah, almost SEK 100 million of our debt in the quarter, and leasing liabilities, SEK 31 million. Ending the quarter with SEK 429 million in cash. And if we look at where we... the corresponding slide for the full year, it's a similar trend here. Little bit of positive impact from a change in working capital, strong cash flow from operations, some investments in fixed assets, not that much. We've... and then some investments or repayments of leasing liabilities, in the year, we paid SEK 200 million of our bank loans and paid out dividends, and still ending the year with very, very strong cash flow position.
Generally, we're very well positioned for any further macroeconomic uncertainties, but even more importantly, for the ability to do M&A if, if, when we find good targets. We have a slide on our balance sheet. The strong results is having a good impact on our equity ratio, 27%. Net debt of only SEK 82 million, including leasing liabilities, net cash position if we exclude those. We also have unutilized overdraft facilities in place. We closed, as we mentioned before, a new credit facility, three-year term loan of EUR 20 million in the summer, which means that our three-year revolving credit facility that runs until 2026, we are only using SEK 25 million of that and have SEK 575 million still to use. Very, very strong cash position.
And then, as usual, we conclude by looking at where we are in terms of our financial goals, and those we compare on a 12-month rolling basis. Sales growth, we're quite a little quite over our target of 10%, with almost 16% growth. EBITA margin , a little bit of decrease in the last 12 months, which is one of the reasons we have our cost program in place to turn that trend around, to get to our 8% target. Net debt EBITDA, as is, we saw very, very low, so quite a lot below our target, still. Return on capital employed, 16.5%, also a little bit of decline from end of last year.
If we were to adjust for our non-recurring items, I think, in comparability, we would be at the same level as last year. So tracking well, and our dividend that we distributed this year for last year's results was right within our target as well. So Jonas, do you want to summarize the last slide?
Yes. So overall, a decent quarter, a good quarter, although a little bit differences between the business unit, primarily through the systems business that, as Linda explained. Services, very strong growth, which is leading to a strong growth in our annualized recurring revenue, which perfectly align with our strategy. We see good growth both year-over-year, but also with the most recent quarter here, quarter two of this calendar year. And then, as mentioned, we do see the effect of our cost efficiency program, and we're quite happy that we acted early on the inflation signals and have been able to execute most of the program already through, before the summer and also here in Q3, and will be done by the program as per plan, during Q4.
With that, we've done all the slides, and we will hand over to questions. Who wants to go first? I see hands in the air. Anna, will you help us facilitate a little bit?
Yes, Daniel Thorsson, will you please-
Yes.
Unmute?
Yes, I'm unmuted. Do you hear me?
Yes, we do. Good morning.
Excellent. Good morning. Okay, so first, a question on the cost reductions here. You are down 5% in employees over the last year and still deliver more services to your customers, as you write in the report. Is there a risk that quality is going down and may hamper growth rates when demand comes back again next year, for example?
No, we don't think so. We measure quality constantly, and we've been very happy and proud that we continue to keep it very stable and high customer satisfaction. So this is more on just in line with our strategy that we've spoken about before, making sure that we can deliver our services more efficiently. We've standardized our services over the past couple of years, so we can be a little bit more automated, but also deliver the same service over and over again. This gives us scalability, drives quality, and it drives efficiencies. We're starting to see a little bit of effect in those along those lines.
I see. That makes sense. And then just to understand where we have seen most of the headcount reductions and cost reductions, is it in the, if you call it, the old Proact, or is it in any of the acquired units? And then also geographically spread out, if you can share that.
It's across the board. It's not more in acquired... And let me take a step back. In terms of the acquired entities, most of the ones that are a little bit older than two years are fully integrated. So here we don't separate the acquired or non-acquired. But it's across the board, both in our operations teams and in general administration and sales teams. And I'm gonna lean a little bit to Linda here if there's any particular geography.
Yeah, I mean, we've of course with the Nordics and Baltics performing as well as they are doing, it's we've done less reductions there. And also, we've been able to then invest a little bit in headcount there. We also have some other places where we can afford to invest in headcount, but across the other geographies, it's pretty spread out.
Excellent. Can you say how much of the effect we did see in Q3, and should we expect more effects in Q4, or have you kind of reached the run rate here?
No, you should expect to see more effects in Q4. We've done, as, as Jonas said, part of it, not all of it. It's, it's always hard to measure, since we've done the cost program versus the Q1 baseline, and then we have Q3 with vacations impacting, and then you have, well, new business coming in. You have everything happening. So, so, it's not really possible to put the specific number in place, but we've done the activities as per plan, where we see that a lot of the cost is coming out in Q3, but even more in, in Q4.
Okay, I see. That's clear. I have another two questions, so I start off with the first one here. Can you say something on the order book? You haven't reported orders or order book historically, but order book level for system sales and your visibility on deliveries near term?
Mm.
Do you have any customers, for example, that have placed orders recently but maybe delayed the wished delivery time because they see challenges in their, in their operations that could hamper near-term growth rates? Or how, how do you find the quality of the order book here in deliveries?
So first and foremost, our order book is relatively short, so we can deliver relatively quickly from order. So it's a pretty quick turnaround of the order book. We did close quite a good number of deals in the end of Q3 that we couldn't deliver in Q3, so they will show up in the books in Q4. We have a backlog of orders that is at a good level, higher than normal, but not higher than last year. And you remember, then again, last year was extraordinary because we built a backlog from the semiconductor shortage throughout Q4 of 2021, and Q1 and Q2 of last year as well. But the backlog is good, and if we look at our...
We still see a lot of activity in the marketplace and still good demand, so we're actually quite optimistic still. You all know that the systems business is volatile. We get strong quarters, and then we get less strong quarter, and we realize it's difficult for you guys to anticipate and predict, but it is overall still a good market for us.
Okay, that's clear. Seasonally, typically, Q4 is stronger than Q3 as well, so.
Absolutely. Q3 is one of the weaker quarters due to vacation times-
Yeah
... in general.
Yeah. Good.
Yeah.
My final question, I guess, is for Linda here. How should we think about the full-year cash flow and working capital movements in Q4 specifically? Year to date, it has been extremely strong, but, how to think about Q4 movements here to get the full year relatively, relatively right?
Yeah, so as you know, the cash flow development is pretty stable. We have strong, except for working capital. So if you exclude the working capital, I think you, you know, we don't see any big changes. The working capital is even harder to predict than the systems business, because it goes with that volatility, and then it will depend on which customers, what type of products, which distributors, et cetera, exactly how it works. But I think overall, as you know, we operate with a little bit of negative working capital. So over long term, we don't expect to have big impacts from the working capital. So I think that's the guidance I can give.
Okay, so you don't see any-
I would.
Yeah, so you don't see anything clearly reverting in Q4 that you already know, or we should be aware of causing a big negative movement, for example, or nothing that you know today?
Not that we're aware, not that we're aware of, but as you know, any single quarter can have quite big, big effects.
For sure, for sure. Thank you very much. That's all for me.
Thank you.
While the rest of you think about great questions, when we speak about the cost program, we've not only then executed it as per plan, but we're getting the results we expected in terms of cost. I think, Linda, your point is, things happen along the way, so it's, it's always difficult for anyone outside of the company to predict what is the actual bottom line effect of it.
Mm.
But we're driving out the cost we expected through the program. Good. More questions? Is everything crystal clear? I find that a little bit hard to believe - ... but maybe you're shy. All right, then we thank you very much. We will be back in beginning of February for the full year announcement. We will put the slides and this recording on our website, so you can enjoy it again when you go to bed, what - whatever leisure time you want to enjoy that. But until then, have a great day, and thank you for joining, and thank you for listening.
Thank you so much.
Thank you. Bye.