Welcome, everyone. We'll start this here on a call on the Proact . Thanks for calling in English, because we think we have English-speaking participants on the line. Hope that's okay for everyone?
Yes.
Thank you. We'll go through a couple of slides. I'll talk through the results. We'll let still a couple of people dialing in, but we'll get going here. And, of course, let me start with saying that we have just announced a quarter that we're not happy with. The performance in the second quarter was not as good as we would have liked it to be, and as good as we expected. So I'll take the time here during the presentation to give you a better view on the second quarter and try to explain what has happened. And I'll pause every now and then, so you guys can all ask questions as we go along the slides here. There are slides available on the website, so you can follow on the slides.
I'll try to be clear in terms of which slide that I'm referring to as I speak. So I'll go ahead. I'll be on slide three, and this is a key part of the conclusions here as we look back on second quarter. The performance of the second quarter, again, not something that we're happy with, is not driven by any significant changes in the marketplace. Quite the opposite. We remain positive in terms of where the market is developing. The trends that we have discussed before are still ongoing. There's an increased investment in IT and IT infrastructure, the importance of the type of solutions that Proact are delivering, where data and information management and getting value out of all those vast amounts of data that our customers are generating, that value is increasing.
Our specialist competence in this area remains very important, very strong. We have a strong position with our customers. So it's not a change in the marketplace as much as we've had poor results, particularly in one of our business unit, the one we call West. So we'll come back to some of those details. On slide number 4, a couple of key highlights then, or high and low lights. If I may, the participants, please mute your phones, if possible. We're not able to do it from here, so if you don't mind, please mute. Again, results declined in the second quarter, 7% compared to last year, to SEK 806 million. There are some positives in the quarter too, our new signed contracts for cloud services increased by 55% to SEK 96 million.
So it's a strong development in the quarter, and the revenues from cloud services increased 12.5%. So that's also a positive development in the quarter. We see strong development in several of our main countries, including Sweden and Finland, for instance, U.K. doing an okay result. Although revenues are low, we keep a good profits in the U.K. And then last but not least, here on this slide, we divested our subsidiary in Spain during the second quarter. This will have a positive effect on our results going forward, and it's also an operation we've been not having a positive contribution for quite some time.
So that's a positive things to move forward with Spain, not in our business, and also giving the team in Spain actually a better opportunity to grow the business with their new owners. All right, I move on to slide number 5. Just a little bit more details then, in terms of the key numbers. So revenues landed at SEK 806, down from last year's equivalent second quarter of SEK 867. You can see the biggest hit here is on system sales. It's in particular, sales from systems perspective in the U.K. and the West business units that are struggling. A combination of several reasons for this. Again, mostly not market related, but a couple of deals that have been lost, a couple of deals that have been delayed.
And that gets, in turn, a follow-on effect on the corresponding services to our consulting services and more importantly, our support services, and more importantly, our consulting services. So lower system sales, which is typically a bit of a volatile business, hard to predict over the quarters, and then you get a corresponding follow-on effect on the support and consulting services. I'll move on to slide number 6. Just give you the same numbers, but on a 6-month basis, so year to date. Positive revenue growth year to date. Remember, we had a strong Q1 with 20% revenue growth and a very strong system sales in that quarter. Services remain flat or slightly behind.
For those of you who remember, we are still comparing, when we look at the year-to-date numbers, with a handful or a few, two to be exact, major deals that were lost a year earlier. If you don't mind muting, I'd appreciate it. I know it's difficult for the customer to follow when we have background noise. Okay, for those who hope you can still follow, I apologize for the background noise here. And then last piece on this, which will be slide number 7, you can see on the rolling twelve months continue then to see that growth, and here we also see services growth, and again, the cloud business is dragging these services up in a good way, whereas we are behind on, or declining on the supporting professional services.
So let me do slide number eight, and then I'll pause for questions for a second. But then I think you have a lot of information I want to share with regards to the quarter. So the numbers here on slide number eight are related to the second quarter. Again, positive development in our cloud business with a revenue of SEK 122 million, 12% up from same period of last year. Nordics is practically flat with good gross margins. Some decline in EBITDA, and we spoke about this before, that we are building up our service delivery capabilities here for our cloud services, which is impacting the EBITDA in the Nordics.
U.K., also strong in terms of the cloud revenues, up 15%, and then slightly tougher in the U.K. with regards to the system sales, but remained a good profit in the quarter and increased their EBITDA margins. Like I said already a few times, our biggest challenge this quarter was our business unit West. A couple of different reasons, as I mentioned again, lack of system deals made negative impact also on our primary consulting business, and it hits then both the revenue and the results in this business unit. Cloud revenues, however, good progress, which is a positive sign. East, strong on both systems and services, then I mentioned already that we will take then a one-time cost related to the divestment of Spain, which will impact the second quarter.
And last, and probably most important, we are continuing and also adding some new initiatives here to get back to performance. We will make changes to our efficiency, with our delivery, our services, to make it even more efficient. We will adjust our cost levels going into the second half of this year to make sure that we are getting back to the level we aim to be in terms of our profits. We will also, of course, put all the effort back into making sure that revenues are coming in. We are remaining confident in our growth ambitions that we have spoke about previously, which means that we will put all the efforts into getting back into growth from a revenue perspective, including across all our business units, that we are taking measures to be cost efficient as we do that.
All right, I'll pause here for a second. I know there's quite a few people on the line, so we'll try to take questions. It may be a bit of a... I don't have a way of lining you up, so to speak, but I'll pause and let you ask questions for a second or two. Anyone? Can you still hear me? No questions?
Yeah. Hi, this is Erik. Yeah, sorry, from Redeye specialist firm.
Hi, Erik. Yep, I hear you fine.
Yeah, great. Just quick question on the seasonality. Do you see any effect of, like, Easter and stuff like that affecting the quarter as a whole, or is that just marginally?
Marginally, or not at all. No, we cannot use that as an excuse. It's been a normal quarter two compared to all the other quarter twos in the past. So no, no impact on holidays or similar.
Okay, thanks.
This is Simon from ABG Sundal Collier
Yep. Hey, Simon.
Hi. You mentioned that some contracts were lost during the quarter. Could you elaborate a little bit behind why these contracts were lost? Was it due to pricing or something else?
Yeah, we've, we've had a couple of different reasons, and it's, and I think it's just normal business that we, we don't win all the contracts. We're, we're not seeing an increase in loss rate, but obviously, if you lose contracts very late in the period, we, we don't get visibility into the impact on the numbers. So we've seen this across the business units, not necessarily a specific trend, like, like you asked if there's a pricing or, or competitive pressure, but just rather the normal competition of not us winning all the deals, unfortunately. Some slipping into the next, the coming quarter here, or this, this current quarter, but also deals that have been, been lost to competition.
Okay, that makes sense. Also, another question from my end. For instance, could you explain a little bit on the development in the different regions during the quarter? For instance-
Yep
... were sales weak in the regions for the entire period, or did they improve or they sound in the middle of the quarter?
I think when we look at, I'm gonna split it up a little bit. So when we look at the cloud business, it's relatively even. We don't see a particular trend between the different business unit either. So our new contracts for cloud business are trickling in relatively evenly. The systems business, which gives us then big one-time revenue impacts, tend to come towards the end of the quarters in general. That also gives us a little bit of a hard time in terms of predictability. So if there are deals at the end of the quarter and they don't come through, obviously our forecast methods is not able to cope to that. Don't...
I'm thinking if I'm answering you correctly. Correct me if I'm not answering your question, by the way, Simon here, but I don't see a particular trend in terms of shifts in sales trends between the business unit or across the months. But in general, the system business is back heavy in our quarters, which makes it a little bit more difficult for us to get visibility. But that's nothing for this quarter, that's a general dynamic of the business.
That's okay.
Did I answer your question there, Simon? I'm not sure I did.
No, I think you did. It was a good answer. I'm happy for mine.
Hi, this is Patrick from Vega. Can you explain a little bit, if those were especially in West business unit, those were lost contracts, does that mean that the development is gonna bleed over into the coming quarters? I mean, most of those contracts run for a longer period, I would say.
Oh, yeah, important distinction. Thank you. The system deals are a little bit more one-off. It all depends on then what, what upsell and more, service attach rate we get. So it's, it's, these are not cloud contracts that we're talking about here, that we've underperformed in, in the second quarter. And that's, to some degree, that's positive, because that means that when the next time there is a, a significant deal coming up, we're, we're back in business, and, and we don't have to wait for a contract period of that. It's, it's the next time it shows up. So it's, it's not as impactful for the next coming quarter as, as it may proceed, but obviously it is a lost revenue, and it is a lost opportunity for selling support services as well.
So, no, it doesn't give you a direct slip over into third quarter, but a lost deal is a lost deal, so. You understood the difference, right, between a cloud contract-
Yeah.
Which typically runs three years versus this being a binary transaction?
Yes, understood. Thank you. Was it the bulk of the... I mean, because it has a very disproportionate impact on the margin, right, of that particular business unit. Can you—I'm sorry, I jumped on a little bit late, if, if you already did, I apologize. But could you explain a little bit how the margin impact comes to, comes to be, and whether that was the result of one or two deals with very high margins in the prior year's quarter that didn't come through this year?
And we may have covered it before. So the impact we're seeing in business unit West is a slow development on the systems business. And typically when we do systems business, we also get a good attach rate of our own services, support services and consulting services. So-
Mm-hmm.
When business are not coming through in accordance to our expectations, we both get a negative hit on the margin contribution from the systems business and the contribution from the corresponding then services. So it gives a bit of a negative effect in terms of both product areas, systems and services, not contributing.
But was it, so because of the disproportionate to EBITDA, can that be traced back to the one or two particular deals that didn't come through that were very high-
Mm-hmm.
-margin in the prior quarter in 2018?
No, I don't think you can connect it to major deals or a few deals in the same period of last year. But we are relatively sensitive to few deals, so it wasn't a lot of deals missed here, but each deal, as you know, when we talk about the system business, are significant. So they put us on the right side or the wrong side of our targets. So it's not a lot of deals in terms of the numbers, but they're significant in kronor.
Mm-hmm. Okay, thank you.
Simon here again, if I can follow up with some questions.
Yes.
I'd like to go back to the U.K. development. Are you feeling any impact from potential Brexit there? And also, did you, to any extent, prioritize profitability over growth in that region, given the high margins?
... we see a bit of a, and I don't think we see more impact on Brexit than anybody else does. So I'll comment a little bit more specific, but just want to caveat that I think everyone who's doing business in the U.K. are concerned with Brexit, and so are we. And we do see a little bit of cautiousness with our customers because of Brexit, and the unstable climate or macro climate or political climate, if you will, in the U.K. I think we are always try to on top of our profits, and of course, that's, I hesitate saying that since we now have a quarter behind us where we weren't successful. But no, we haven't optimized profits over growth. We want to do both.
So, I guess the short answer is no, but we were successful in keeping our costs low here, and that's good.
Okay, perfect.
Fredrik Nilsson from Redeye here. I have a question regarding the connection between system revenue and service revenue, if I may?
Okay. Yes, please go ahead.
Generally, there's no clear correlation between the system and service revenue in the same quarter. Look at Q1 in this year, for example. But this time it is, and I don't really understand why it's such a clear connection in this quarter, when we haven't really seen that before.
Yeah, no, I think the correlation is, it's not 100%, but it's not zero. So we do typically we will get consulting business there in prior to or even part of a systems deal. It could be anything from design services, installation services, operation services from a consulting perspective, and then to contract and support services on top of that. But you're right, it's not a 100% correlation. So you'll see some rubber banding, if I may use that analogy, between systems business and services business. And then, of course, the cloud component of our services revenue is to an even larger degree, disconnected from the systems business.
Okay, so there's no-
TS, our consulting business have typically a relatively close correlation. Support business have a very close correlation, but that's a contracted revenues typically spread over time. And then the cloud services or the MCS revenues have a low, but not zero correlation to systems business.
Okay, so the share of consulting related to each system sale hasn't changed?
No.
Okay.
Not in general, no. Any other question on this? I think the second quarter is the most important one. I'll go on, and I'll pause before there. So on slide number 9, same numbers, but with year to date scope. Here you'll see that we are growing at a good pace in the Nordic business unit. We already spoke about U.K. being improving our EBITDA margins. And, of course, also in a year to date perspective, West is challenged by the impact we're seeing from the second quarter. And last, and frankly, the East also, but very positive development in our East business unit. We also had one-off restructuring costs in Q1 related to the structural changes we did.
So all together, if you look at the year to date numbers, there's SEK 20.2 million in one-off costs related to year to date numbers. Then on slide 10, just quickly, I'm going to hand over to Jonas Persson, our CFO, the cash flow.
Yes, thank you, Jonas. We just have some people here. The cash flow has been acceptable or okay in Q2, and the big change this quarter has been the dividend of SEK 38 million. Also, can look at the change in working capital is positive, so that's good. And of the fixed assets, the investments for Proact Finance is SEK 17 million. And then we have this new setup with the repayment of leasing liabilities related to IFRS 16, downstairs in the numbers. And we have no change in bank loans and overdraft facilities in this quarter. So we have, at the end, still we have a strong cash position of SEK 219 million.
If we move on to the general view, cash flow, there is a negative change in working capital, but still, as we have in this report, we have a plus SEK 56 million, if you look at twelve months rolling. Of course, with the system sales we have between the quarters, it's up and down, but at least it should be put vision and look at twelve months rolling. For the investment part, the Proact Fi nance is SEK 13 million. Then, again, we have the dividend, no change in bank loans, overdraft facility during this period as well, like in Q2. We have, as said before, a strong cash position of SEK 290 million.
So, any questions about the cash, cash flow? Okay, good. Then we move on to the balance sheet. The solidity is 21%, and the long-term goal is to be between 20 and 25. So at least it's in between that. And of course, we have been hitting a lot with the new IFRS 16. In our balance sheet, it's a hit of SEK 258 million. And that's of course also hitting the net debt. So we have a net debt today of SEK 155 million, also with a hit of 258. And we have an unutilized overdraft facility for the daily operation of SEK 242, and we have an unutilized three-year revolving credit facility for acquisitions and others of SEK 213 million.
A strong position still, as even after a weak Q2. Question? Okay.
All right. Thank you, Jonas. Slide 13, just summarizing where we stand then in terms of, performance, towards our long-term financial goals. These numbers here are in green, are rolling twelve months. We've said that our growth should be at least more than 10%, or it should be more than 10%. We're currently rolling twelve months at 8%. Clearly, the second quarter didn't contribute positively. Our EBITA margin should be above 8. Here we're now at 5.4, which is a negative development, which in addition, of course, we're not happy with. Net debt over EBITA is just, a way for us to make sure that we are running a healthy business, and it's gonna be important as we continue our acquisition focus, that we, have a good control of our financial strength situation.
So this target right now is, of course, in a good position, and we're gonna keep it up too. Return on capital employed below the target this quarter. Rolling twelve, and it's a comparison of IFRS contribution. So with the new IFRS 16 rules, we get a negative impact on the return of capital employed, and then you add on top of that a lower profit before tax, and we get a negative development here. Dividend is our dividend policy, of course, unchanged on this year. The result for 2018 was a 30% dividend, which has already been executed. So to summarize, we remain positive about the market opportunity. We are not fundamentally changing our strategy.
We are continuing to run a business where the systems business is an important pillar for us, and the long-term growth opportunities are coming from our services business and the services opportunity we see moving forward. And then on top of our organic growth, acquisitions is a priority, and we are executing on that. As we've outlined a couple of times before, we've built all the things we need internally with processes and financing and skilled people on board to run the M&A processes for us. So the market is positive. We are executing our strategy. We are not happy with our performance here in the second quarter, so we'll take the corrective actions to get back on track, and we look forward to meeting you guys all again after the third quarter. So with that, I'll pause again for additional questions.
I could start, if I may?
Yeah.
I'm on here again. How's the current M&A pipeline looking? You haven't elaborated too much about that during this call.
Yeah. No, I think M&A is easier to talk about when we do something, and before then, it's just talk. We've described before what we've done in order to build up the capabilities we need. We have a good financing that Jonas has outlined already before, CFO Jonas. We have a person in place that is dedicated in running our M&A process with many years of experience, who's already on board and up and running. We have established a process together with our board in terms of how we do the M&As and how we run through the approval processes and everything. And we have a gross list of targets that is healthy, including a handful or order 9-10 prioritized targets that we're actively working with.
But as you guys all know, acquisitions are even more volatile than the system business. So when we do an acquisition, we will let you know. It's really hard to predict when it will happen.
Okay, all clear. And just a follow-up question.
Yeah.
How's the progress on, in terms of rolling out the larger cloud orders that you contracted by the end of 2018? And by that, I refer to Q4, of course.
Mm-hmm. Yeah, yeah. So we had a good second half in terms of our cloud orders, in particular than the fourth quarter, we had orders of SEK 176 million and also good progress the quarter before that. And they are now and typically we count on average six months of transition time, meaning six months of transition time from the order until we can start invoicing the customer. Which means that we are now seeing a good growth in the cloud revenues coming from the orders that we gained second half of last year. And we continue to see a good forecast of the cloud revenues going into Q3 and Q4. So they are progressing, as you would expect, in alignment with that six months typical transition time.
Excellent. All clear. Just a final question from my end.
Mm-hmm.
Could you explain a little, little bit about the reasoning behind the divestiture of the Spanish operation?
Yeah. So Spain is a relatively big country. We had a small operation that have not been contributing positively to the business. Different market dynamics, far away from our core operation. So it's a combination of, in order to get critical mass in the Spanish market, we would have to invest. It didn't contribute positively, and very different from the business and markets that we see in more northern parts of Europe. So for us, it was a way to divest a non-profitable operations and put our management focus and investment focus in our home markets in the northern parts of Europe.
All clear. Thank you.
Thank you.
This is Andres from DNB. I have a question regarding your comments regarding West. You mentioned number of countries here that's weaker than you expected. Is that a new trend here, or is it just for this quarter?
I wouldn't call it a trend, no. There are things we need to get better at internally. I think we can fix them quickly. So I wouldn't call it a trend. It isn't a trend. It's not market-driven, as we talked earlier in the call. So it's, we need to get focused back on selling our systems business as well. We are running a two-legged business operation, the traditional systems business and our growing cloud business, and we need to be able to do two things at the same time. And so some regained focus on the systems business is required.
Just follow up on that one. Does that mean that you see possibilities or rather paths coming up on the new, on the same level as before?
That's our ambition. We don't give forward-looking forecasts, but, but, clearly, we're not happy with Q2, so.
Right. Thanks a lot.
Yeah. Yeah. More questions?
Can you perhaps elaborate a little bit more on what specifically the measures are to turn around or to improve sales in the West going forward? So was it about the way that you put attention on this particular aspect of your service, of your, sorry, of your product offering, or just maybe a little bit more color?
Yeah, and I think it's a different sell to sell a system compared to selling a service, and we need to be able to do both. So it's about strengthening or re-strengthening, I should say. We've always traditionally been very good at it, so we know how to do it. So that is one key part to it. It's about the balance between the number of salespeople versus the number of technical people. I think we can strengthen ourselves a little bit, just in terms of number of people. And we need to get better at forecasting and really early see the development in the marketplace.
Mm-hmm.
We are, and I mentioned already, we are also making additional investments, or not investments, that's the wrong word, efforts into making our delivery of our services more efficient. So we will speed up the programs we've already put in place in terms of driving efficiencies out of our delivery organizations. But at the same time, I want to be very clear, we are committed to our growth targets. So over time, as we achieve our growth targets, we will continue to invest in that growth. So while we are gonna be more cost-conscious here going forward, coming out of a quarter we're not happy with, it doesn't mean we're gonna drive profits through cost measures. We're gonna drive profit through growth.
Mm-hmm.
So it's a bit of a putting one foot on the throttle and the other foot on the brake pedal at the same time. We're gonna be on top of our costs, but we're committed to growing the company.
Okay. Thank you.
We are over time. Happy to take more questions, but I don't want to keep you guys longer than we promised, which we already... Any more questions? If not, wish you a great summer. Thanks for calling in, and thanks for your interest, and we'll meet again at the third quarter. Thanks very much.