Good morning, and welcome to Proact's presentation of the interim report for the third quarter. My name is Christopher, and I lead investor relations and communications here at Proact. With me today I have our President and CEO, Magnus Lönn, and CFO Åsa, who will walk you through the quarter. We have four items on the agenda. Magnus will start with a short introduction to Proact, followed by the quarterly highlights. After that, Åsa will present the financials in more detail, and lastly, we will go through some closing remarks. After the presentation, we will open up for questions. Please raise your hand and you will be handed the word. With that, I hand over to you, Magnus.
Super. Welcome, everyone. I'm really glad to have you all on the call here, where we will walk us through our Q3 result that we released this morning. First, I think it is a good way to give an introduction to Proact and what we are doing. We are a specialist company that are in the middle of exactly the AI boom that is happening. We are experts in the content of every data center, and we are specifically really skilled at handling data and data storage and protecting that when it comes to IT. If you think about that, this is exactly what every company has a need of. What is happening now with all the AI scale-out, I think Proact is the best ever positioning, given what is happening in the market.
We are not a new company. We have been actually doing this for 30+ years, and over the years we have become better and better in what we're doing. We're also on a growth journey, as you can see here on the graph, that we over the last year have expanded. As of today, we have around 1,100 experts working mainly in Northern Europe. You can see it on the colored map here, the countries that we are located in. I think this is also a key thing when it comes to Proact, that we are a European company.
Given everything that is happening around data sovereignty and things like that, this is a big advantage for the customer that we are working with, that we are a local player located in Europe that helps our customer protecting their most precious thing, and that is the data. For us as a company, it doesn't really matter if the data is in the customer's data center or in our data center or in the hyperscaler. We can handle it no matter what, because our expertise is actually handling the data and give advice to our customer of how they can leverage that and build a safe and mission-critical infrastructure. If you look into how we are generating our revenues, I think this is a good reminder for everyone that is following us.
We have four clear revenue streams, and I will walk them through from left to right here. We start off with System. This is the core foundation that Proact was built upon 30+ years ago. We realized that we had a need to help our customer to store and protect the data, and that is what we have continued and become really, really good at. In the System bucket, our revenue recognition is that is when we sell hardware and software related to that hardware. We are advising our customer of how to build and how to design, for example, a data center. Then we help the customer with the procurement, we are negotiating with the vendors, and we are taking full ownership of delivering the solution to the customer.
Example of that is that it could be storage in form of NetApp or Dell. Of course, to that, it could also be compute, like servers, or as very popular these days, NVIDIA GPUs, and of course, software related to that. The System business is revenue recognized when we have done the delivery. We at Proact, we are working with larger customers, and that means that the System business can be very volatile between the quarters. It depends on where delivery ends, if it's in the right side of the quarter or if it's in the next side. The size of the deals can be quite big, and that also creates a fluctuation in our revenue stream.
I think this is important for everyone to understand. When you are evaluating us, you should see it over a longer term. Then to all the systems that we are selling, we often also provide our own support on the technology that we are selling. The reason for this is that we have the skill set and we are really, really good at it. That means that we also provide an extra safety for the customer, because this is critical infrastructure. It can be a bank, it can be a hospital, it can be a store or anything. That means that if the infrastructure breaks down, it has a great impact. Instead, we are providing our support, meaning that we have technicians that can help and restore the service if something is failing.
The good thing with the support is that it's very long contract. It's often three-five years. This is an example of recurring revenue. Also, it's very positive from a cash perspective because the contract is paid upfront and then we distribute it over the contract length. Then we have our Managed Cloud Services. That is that everything that we sell within System, we can also provide that as a service. That means that the customer, they don't need to have their own employees, they don't need to have their own data center. Instead, they can rent that as a service from us. This is an area where we are focusing and continue to build. It's a good example of recurring revenue.
So in combination with support and our Managed Cloud Service, we are creating a very stable base when it comes to recurring revenue. Of course, nothing of this could really happen in practice unless we had super skilled consultants. They are out there advising our customer. They are also really experts in their domain. It can be, for example, Docker and Kubernetes, or it could be Azure Cloud Foundation. This is the skill set that there is a lack of out in the industry as of today, it is very close to also the critical infrastructure. That is also important when you are evaluating us, that every consultancy service that we are doing, it is related to the infrastructure layer and the hypervisor layer.
That is an active choice that we have made to really stick to what is critical. From a CEO perspective, I am also very happy to drive a company like Proact because we are actually working with building the infrastructure that is now happening across the globe here when it comes to AI scale-out and digitalization. We are not working with software in the sense that we could be replaced by an AI algorithm. Instead, we are working and helping our customer to build the AI infrastructure. I think that is a very differentiator when you look at Proact compared to other companies.
If you look into our customer base, this is also something I think is also very good at Proact. We have a very broad customer base, so that means that from a risk perspective, we have also a good mix. We have not individual sector that we are dependent upon. Also, as I mentioned in the beginning, the sweet spot when it comes to our customer base varies. If you look into the Nordic area, we are more into the larger customer. If we are in, for example, more southern part of Europe, there we have the more mid-size. The thing with Proact is that we are aiming to become the super skill set in each of our geography.
The key thing is that the solution that we provide to our customer is actually the same, then it depends on the customer size and for what solution that we brings to the market. One thing that is really common, we can also see it in our customer employee survey, is that we have very happy and satisfied customer. One of the key thing, something I work a lot with, is that to maintain and keep the competence in our employees. They are the stars, they are really committed and working and helping with the customer. If you have that, then you also build trust and you also create long-term customer relationship. I think if anything, that is what is really good at Proact.
Of course, you probably all on the call are looking into what is happening in the market. I already mentioned part of it, but there is a huge investment now happening globally into data centers. Traditional hardware has always been reduced in cost, it has been not in focus. Now, with the geopolitical situation and also the global AI scale-out, customer also realized that hardware is the key factor. If you do not have a secure infrastructure, then you also put your company at risk. I think that is one of the main drivers where hardware has got the focus. We, Proact, have been working with this for 30 years, so we are really good at it. The global trends is pointing to our direction here.
Maybe worth mentioning is that if you look into statistic and data, there is a difference compared to the hyperscalers, when they are building new clouds and AI factories. That is done on a different scales. It's the Magnificent Seven companies that are investing in that, b ut we at Proact so far is targeting more to enterprise customer and that part of the segment. The growth there is still significant, but it's not on the same scale as the AI scale-out. I think that's also important to understand the dynamics in the market.
Then, as we talked about, I think Europe, we have a hard wake-up call. We have realized that we need to also make sure that we protect our own data, and foremost also that we are not building 100% dependency on, for example, a global American cloud provider. Hence the question about data sovereignty has increased the last couple of years, I would say. This is once again, an area where Proact is super skilled at. As I mentioned in the beginning, we're also a European-based company.
I talked about that going back some years ago, every company was thinking about the cloud-first agenda. Given what's happening around the uncertainty, I think that the mix now is more into hybrid, and that also companies have realized that it's super important to make sure that they have control of where the data is stored. Here also is an area where Proact is really good at. I don't think I need to mention the AI scale-out. I think you just need to open the paper, and it's in the news every day, b ut that is something that will continue for many years. I would say that we, as the companies, are just in the beginning of that phase and o f course, cybersecurity and the resilience.
I usually say that it's just a matter of when, not if, when it comes to cybersecurity, because that is a real challenge. Then the most critical question for companies is actually to really make sure that they can restore the service if something and when something happens. This is also an area that Proact is really good at. So with that introduction, I'm also moving into the most important thing here, our quarter update and what we have been doing the last quarter. So I am really glad in that we, this quarter, provide an organic growth. We had almost 9%, resulting in SEK 1.11 million . Åsa will walk us through the details here.
I'm also very satisfied with the work we have been doing the last quarters when it comes to our cost program and also restoring profitability outside the Nordic region has actually gone in the right way as we had planned. In some areas, that's also been going faster than we have expected. All this, together with a strong product mix, provided a really good quarter when it comes to our result, this one. I talked about that earlier, and memory prices, there is a shortage in the market. Prices is high and has been that for a while. I expect that the prices will continue to increase. If I look into the crystal ball and with everything I hear and know also from our vendors is that the prices will be on a high level, at least for 2027 and probably be a bit into 2028 as well.
The good thing with Proact is that even if the prices would go down, we have been really good at protecting our gross profit and margins. From that standpoint, I think no matter what, the digital scale-out will continue even if the memory prices go down. From that standpoint, I think Proact is in a very good spot here. Also during the quarter, I am very happy that we have announced that Åsa now is a permanent CFO, and that is a really good step forward in building Proact. I'm really happy about that. We continue with our share buyback programs, and we have also during quarter announced that we, from starting of January next year, are taking the next step in building Proact in the sense that we will be merging our two business units, West and Central, into one.
The main driver for that is that we see that we can do it better and create a better platform for organic growth. We also can, with that, create a more efficient organization that will help the continuous work in getting back to growth in these areas. That is the main driver, and I think it will be a really good step forward. My expectations is that once we are a bit in that journey, we will continue to see incremental improvements.
We will talk more about that, but we have also been working on our strategy, and we will have a Capital Markets Day coming up here on November 11, where we will go more into details around our plans forward and how we see the market and where we play in that. Overall, I think it was a good quarter, and we were progressing according to our plans. With that, I think I will hand over to Åsa to help us dig through the financials. Well, maybe first we should look into the business now. I give it to you, Åsa. You will take it away.
Okay. Thank you, Magnus, and good morning, everyone. Let's have a closer look at the financials, starting with total revenue. Total revenue amounted to SEK 1.18 billion , which is an increase of 8.9% versus last year. This was driven by organic growth of 8.3%, to be compared with the -4.5% in the same quarter last year. Currencies had a positive effect of 0.8 percentage point, slightly offset by a net effect from acquisitions and divestments of - 0.3 percentage points. The growth was primarily driven by higher System sales in the NOBA and West business units. System sales then grew by 14.4% year-on-year to SEK 635 million , compared with SEK 555 million last year. The development was driven by several large System deals in, as mentioned, the NOBA and West business units.
Total service revenues amounted to SEK 544 million , an increase of 3%, and 3.5% on an organic basis, compared with -0.1% in the same quarter last year. Support revenues grew by 12.1% to SEK 181 million , and Managed Cloud Services grew by 3.3% to SEK 278 million , while the Consulting Services declined by 13% to 85 million SEK, and this is mainly an effect from the divestment of the Netherlands consulting businesses during Q2. Service revenues made up 46% of total revenue in the quarter, compared with 49% last year. This is a mix effect following the strong System sales, while the service base itself continued to grow. New cloud contracts of SEK 118 million were signed in the quarter, compared with SEK 248 million in the third quarter last year.
The decline is primarily a timing effect, and the year-to-date intake is more similar to the year-to-date intake last year, only 4.9% behind. Moving on to top-line development in business units. As described earlier, NOBA and West were the main contributors to growth in this quarter. NOBA grew by 16.5% to SEK 630 million and accounted for 53% of total revenue. West grew by 23.8% to SEK 217 million , and in both cases, the growth was mainly driven by System sales. Revenue in U.K. declined by 9.3% to SEK 184 million . This is largely explained by a strong comparative quarter, Q3 last year, but also an effect of extended hardware lead times, delaying both System deals and related services.
Central declined by 10.2% to SEK 171 million , where System sales decreased by 21.3% while services increased by 0.7%. The decrease in System sales is partly driven by the shift in focus toward a more unified offering with the potential to improve margins. Yes. A growing recurring revenue base provides visibility and resilience as System sales varies between the quarter, as you know and as Magnus mentioned. Annualized recurring revenue has increased with 54% since 2021 and is after a small downturn in 2025, now back on a growth track. In the third quarter, recurring revenue amounted to SEK 459 million , equal to SEK 1,837,000,000 on an annualized basis, which is an increase of 6.5% compared with last year.
Moving on to the results in the quarter. Adjusted EBITA amounted to SEK 112 million , which is an increase of 47.3% year-on-year and equal to an adjusted EBITA margin of 9.5% compared with 7% last year. Solid earnings development is, as Magnus described earlier, a combination of increased sales, a favorable product mix, and the effects of the cost efficiency program. NOBA increased adjusted EBITA by 61% to SEK 19 million, which is equal to a margin of 14.3%. West improved to SEK 10 million from SEK 1 million , and Central turned a loss of SEK 2 million into a profit of SEK 8 million . U.K. reported SEK 9 million in EBITA compared with SEK 16 million last year, reflecting the low revenue and a strong comparative quarter as mentioned.
All in all, a very strong quarter with improved year-on-year earnings in three out of four business units. Rounding up the financials with an overview of the net debt development and how capital has been allocated the last 12 months. Starting with a net debt of SEK -9 million by the end of Q3 2025. Cash flow from operations, including change in working capital and leasing amortization amounted to SEK 488 million . The generated cash has been put into use in M&A of SEK 138 million , including deferred purchase payments for BlakYaks and Consular throughout the year. Capital expenditures of SEK 48 million and SEK 172 million has been returned to shareholders through dividends and share buybacks.
Leasing debt increased by SEK 87 million, largely reflecting a strong order intake, and net interest amounted to SEK 30 million and currency and other to SEK 25 million . All resulting in a net debt of SEK 4 million by the end of this quarter. Cash balance by the end of the quarter amounted to SEK 542 million , which is an increase of SEK 98 million year-on-year. We reinitiated a share buyback program, as Magnus mentioned, after the summer based on the mandate from AGM in May. As of the last of September, 155,579 shares have been repurchased. Total shares in own custody now amounts to 551,324, which is equal to a little above 2% of total shares. That sums up the financial section, and I will hand back to Magnus. Thank you.
Super. Also, thank you for guiding us through the great numbers here. Just to close up before we open up for question here. As also mentioned, we had a really strong quarter, and I am really satisfied with that we are back to growth and also profitability outside our Nordic region. In this time, we had three out of four business units delivering good. U.K. was a little bit weaker, but at the same time, I mentioned in my CEO that it was related to timing effects around system delivery, and I also know that we have a good backlog in U.K., so I am not at all worried around that for the time being. As I said, we are also investing into improving our organic growth by the step that we are now taking, that we are merging our two business units.
Jacob Kronborg, who is heading up our Central business unit, will lead that new, and Alexander, who is leading up West, he will focus on helping creating growth in this so we can accelerate our organic growth even further. As I mentioned, I see no dip in memory prices and things like that. So we expect that that will remain the full of 2027 and probably beyond that as well. We, as a company, we are really providing our focus and really helping our customer navigating in this sometimes challenging market, b ut at the end of the day, it is helping creating more business out there for our customers.
And just to remind and also do a little bit of commercial here, we have done a strategic work, and we are more than eager to enlighten you all of that in our upcoming Capital Markets Day on 11th November here in Stockholm. I hope to see you all there and foremost, talk more about our plans going forward. Christopher, I think we should open up for some questions. Daniel, I see you raised your hand here, so please.
Yes, thank you very much. I start off with a question regarding Q3 and Q4. Did you see longer lead times in Q3 affecting System sales negatively, or are you just a bit more cautious on Q4 related to your comments?
That's a good comment, Daniel. What has been happening, actually, it started already back in Q1 and then it has accelerated, is that the delivery times of hardware has been prolonged. I think I have mentioned it earlier as well that given that it might also have an impact on our Q4 earnings, in the sense that we have made a sales, but the delivery times may ship into Q1, for example.
Of course, that is still something we're working on a daily basis. Actually, to be fair, it's also a challenge for our customer because the planning horizon has increased a lot for them. Yes, it can impact our Q4, but if you look into it in a longer perspective, that will then just be a timing perspective. There is no stop or anything in the sales. It's rather that the delivery time might impact the quarter and when we do the revenue recognitions.
I see. That is clear. Secondly, related to that, in terms of order intake, you do not report that here, but are you seeing levels significantly above the current organic sales growth rates that you report due to pre-buying? Also, what kind of backlog do you have today for the coming year compared to historical Q3 levels normally?
To your point there, we do not really disclose that, but I can speak in general terms and that I see that in the quarter, we have not seen any sort of slowdown in our customer base or regarding demand and things like that. I think rather the opposite, that many customers actually now have realized that it is not just a short-term issue. We are thinking about a new normal when it comes to prices and things like that.
The reason for it is that it probably will take a year plus until anything happening. I think many customers now realize that it will not help them short term to wait. It is probably better to order now instead of risking further price increases. It is a dynamic market. On that, I know also many customers are struggling with the longer delivery times as well. We are doing a lot in order to help and mitigate the customer in this situation.
Yeah, I see. That is clear. If you look at your order backlog today, I guess that must be quite a lot higher than a year ago. Is that something you can comment on? Sales are 10%-15% higher than a year ago, roughly, but I guess that the order backlog is more, but is it 20% higher than a year ago, or is it even 50% higher than a year ago, given pre-buying or pre-placed orders, but not yet delivered due to longer lead times?
Yeah. I think looking back, Daniel, we have not been good enough in creating organic growth, and this is one of my key focus areas to turn this around. Looking into this quarter, for example, West made a really big jump forward when it comes to sales and things like that. My expectation is that we will continue to build upon the successes and keep our laser sharp focus and continue work with improvements. But as I said, we don't really yet disclose our backlog and so forth. But I expect that we will continue to perform on a good level. But as I said many times before, what could impact our earnings is probably the delivery times and our revenue recognition. But if you think about it's more a timing impact than anything else.
Yeah, okay. Fair enough. I also had a question on the gross margin, 25% in Q3, but you have said several times that we should not expect the level of 25%. Is it anything specific in this quarter doing that, or should we at least expect slightly more than the typical 22%-23% level going forward?
It's a good question. I think in this quarter, as I mentioned, we had a really good product mix in the sense that resulting in this good gross profit. But I think if you look forward, it's more likely that we'll be on our normal levels when it comes to the gross margin. Also, if you look into the regions, for example, Nordic region are doing fantastic. There, our focus is more in growing the business. And if you are about to growing the business, that also might come with a lower gross margin because sometimes we want to do bets and maybe be a little bit more aggressive. All in all, I think that, of course, can also have an impact on our gross margin. But then the expectation is that we should be higher on growth instead.
Okay. That makes sense.
Yeah. If you look into, for example, Central and West, there we have also a clear target that we are working on incremental improvements and get higher up when it comes to our margins. So internally, we have a clear focus where we want to go.
Okay, perfect. That makes sense. A final question on the cash flow. Very strong here in Q3. Very strong year- to- date, operational cash flow. How does your M&A pipeline look today, and also ongoing discussions and what you're thinking about the alternative between acquisitions and buyback and at current levels?
Yeah. That's a good question. We are actively, as you know, M&A is part of our strategy. However, we are quite picky in what and if and when we do acquisitions. So for us, it's more important that we find the right target and that we can see that we can create value out of it in a good way. We have also, since I entered, changed the way of how we do integration and so forth with M&As. But we are continuing, and we are working on it in the background. And once we have something that we can talk about, then we will inform the market. But we are working more actively in our cash allocation, and I don't know if you want to comment anything there also.
No, I think we will be a little bit more explicit about our priorities on the Capital Markets Day that is coming up. As Magnus mentioned, organic growth is a focus, and making sure that we invest there as well. But yeah.
Perfect. Thank you very much. I saw that we had also some questions in the chat here. "In Q1, when your gross margin was at similar level to Q2, you explained partner programs and temporary benefits. Are there any similar effects in play this quarter?" I can tell you that it's not the sort of partner programs, it's rather the customer base and what they have bought that has created a gross margin in this quarter. Then we have a question here from Jan, "If the data center being built out, if that in the future can compete with us?" That's a good question. I think rather the opposite. It's more likely that we will work with the hyperscalers and so forth, and if you look into our product mix, we have the capability also to help and build them in the scale-out.
But of course, this is something we are really looking into. At the end of the day, what is really lacking out in the market is competence, and that is something that Proact is really good at. So no matter what, that is what we will focus and provide our customers. So I think, in the future, if there will be a surplus of data centers, then Proact's knowledge will probably be more on consultancy service and the key thing around that. So no matter what, I see positive in the future. Then we have a question from Oscar, "If you, I can break down how much of the 10% growth is coming from System, is price versus volume?" This is a really good question, Oscar.
I can say that price increases has, of course, a positive impact, and that you can also relate back in the value chain. So if you look into NetApp and Dell, and you see in their sales, it's definitely impacting and increasing. However, as I mentioned, organic growth is a key area for us, so this is something we are definitely working into. In this quarter, I know we have made a lot of progress in some of our areas, so it's a combination. Then there was a question if I expect System business to grow organically in 2027. Yes, I think so. The reason for that is that the market is continuing to really ask for this type of component knowledge, and I don't see that there will be any sort of hold back when it comes to the build-out and scale-out.
As I mentioned many times before, the amount of data that we are generating, it's not decreasing, it's increasing. From that perspective, I think Proact will have many good quarters coming ahead related to that. Then there was a question from Fred Skulund, "If you can discuss about deliveries of AI servers." Sorry, and it jumped in about, "AI servers, how much of the System sales during 2026 is AI servers, and what would your guess be for 2027?" That's a really good question, Fred. Traditionally, we at Proact have not been super eager to sell servers, and the reason for that is that as of today, servers has been a commodity product. It has been very low margin, and it has been very commoditized, low value. But now with AI scale-out, this is changing. It's a more complex business and so forth.
AI servers is, of course, something we are helping our customer with. But the big amount, and many people forget that, for one server, you need a lot of storage. That is where we have our sweet spot. But I can tell you this, I don't have any percentage, but the number of AI servers is increasing. The reason for that is also that companies are now investing more and more into building their own AI capability. There is a worry at the companies to be dependent on Claude and OpenAI and stuff like that. Instead, many companies are investing in own AI infrastructure in order to mitigate any sort of further price increases.
Then we have a question from Tom, "On the lower cloud order intake in Q3, could you give some more details on what drove that, and how do you see the pipeline going into Q4?" In general, we see that it was more a timing impact. However, you could reflect upon that many of our customers, and customers in general, are struggling with high price increases related to hardware. This is global. It's not related to the Nordic area or Sweden or us as a company. This is a global thing. You can take any company, then you see that they are investing a lot more of their budget into hardware. The consequence of that is that the customer needs to do priorities, and that could then impact in that sometimes they hold back on investment in services and things like that.
It is a sort of balance game. But for us this quarter, the lower intake when it comes to cloud volumes was more a timing impact. Then if you compare to last year, I know we also made a very strong quarter there. Then there was a question regarding Q4. "You are holding down expectation due to delivery risk slipping into Q1. Do you think Q4 will show growth or decline?" I think, as I mentioned before, the delivery time might impact our bottom line and also top line in the sense that if the delivery time slip over to next year, then we might be a little bit slower.
But with that said, I know also we have a backlog. So how this will play out, that I'm more than happy to talk more about to you when we are closing our year-end statement after new year. And then we have a last question here. "Clarification, please. On the cost of hardware storage, do you fully consolidate customer requirement across the entire group in order to maximize your purchase power with suppliers, or is this just done country