Earnings Call: Q3 2021

Oct 21, 2021

Linda Hellje, our CFO. We're going to talk through the Q3 results with the following agenda, give you an introduction to the company. Most of you know us pretty well, but there may always be someone who his curious of who we are and what we do, talk a little bit about the market, of course, and then focus on the developments and the financial results of the Q3 of the year. So I'll get going here and we'll make sure that there's plenty of room for questions either through the presentation or definitely after the presentation. All right, ProActs, we are almost 30 years old. We are a Stockholm based company, but we operate in about 13 different countries across Europe. We're serving primarily medium and large sized enterprises across our footprint. And you can see them here in the map on the left hand side of the picture and we're about 1,000 employees and of course our focus is very skills and competence focused. We have 1,000 very skilled and technically competent employees who are serving our customers with consulting services and infrastructure solutions and managed cloud services. What we do is simplistically described in this picture. Our primary focus is to help our customers to drive business value out of their IT. We do provide IT solutions to them, but very important that it's business focused and business outcome focused. We have 5 primary value propositions that we provide our customers with. We provide a device and all of this is around getting value out of data, by the way, all these flat value propositions, all related to how we get value out of how our customers get value out of their data. So we advise on data strategies. We provide solutions for storing data, Blueprint solutions for connecting to the data and the thing around networking, making sure that users can connect to the data or premises can connect to data centers or data centers can connect to the Internet. We protect and secure the data, which of course is fundamentally important and ever increasing need in the years of cyber attack and ransomware attacks. And ultimately, we help our customers actually get that value out of their data. We do all this through 4 primary products or offering categories and also these are the way we report our revenues: consulting services, managed cloud services, reselling of hardware and software and technical support services. These are the 4 primary categories in terms of what we offer and deliver to our customers like I said, also the way we report our revenue streams. Market wise, you see this probably as much as we do. There is a big demand in the industry for IT solutions. We look at this out in a couple of years in the future, we see 3 primary trends, the digital transformation, which is definitely the business driver for most of our customers. They want to get more business value out of their IT, they want to drive innovation, they want to get value out of all that data they have in terms inside the company, it could be anything from taking quicker and more informed decisions or automating production the or improving their customer experience, all of which are typically driven by digital investments and better use of data. There's a technology trend as well in the marketplace, which we define as a multi cloud trend. So that's architecture, if you will, of technology and infrastructure solutions that enables then faster speed of innovation and development, high degree of flexibility and obviously, maybe most importantly, high degree of availability of the solutions. And by multi cloud, we mean that it could be a combination of infrastructure and technology that our customers host themselves in their own data centers or they can leverage some of our products in a private cloud solution or they could go to the big, what we call hyperscalers, the Microsoft and the Amazons of the world for global cloud solutions. And typically, our customers will do a combination of all three, that's what we call multi cloud. These three cloud variants, if you will, needs to coexist and integrate, very tightly. The 3rd trend, which I've touched on already, is obviously the need for protection and the high degree of security against cyber threats. And all of these three trends are very important as we look at our strategy and what we execute on the future. Corona, of course, continue to impact us. And for those of you who look at the numbers, you can see it a little bit. Definitely put a lot of uncertainty in the marketplace in general and our customers have had to adapt to new behaviors and new needs. We don't think it's changing the long term trends, but it's definitely impacted the investment of the regulators over the most recent year and a half and also speeding up probably some of the investments in particular around things like networking and security. So if we look at the market a little bit more numbers, you see on the top the 3 key trends. The picture below is showing our customers' willingness or strategy, if you will, in terms of the cloud investments and to the far left customers that would spend all of their IT investments on infrastructure that they run themselves in their own premises. To the far right, you would see the amount of customers that will do the opposite, meaning run all their infrastructure and all their IT in the public cloud. And like we already touched upon, the numbers here prove it is a multi cloud world. Our customers will be in a mix and a hydrate of all of this. Growth wise, as we look into the future, we still see a positive market. The infrastructure markets, so the ProWatt's traditional market, if you will, the market for reselling hardware and software is still growing, but at a very modest rate, probably the lower single digit rates on a yearly basis, whereas the managed cloud services are growing at a healthy pace of probably around 10%. So we think that our position in the marketplace is good, both because of the growth rates, but also in terms of our offering, which is very much a multi cloud offering. This is the way we describe our offering to our customers. Obviously, we put our customers here in the front and center, then you see our 5 value propositions in the red circle around the customers, the advising, the storing, the connecting, protecting and then driving value out of data. Again, data is at the core of what we do. Specialists and experts in data. We don't want to be the generalist of everything. And then in the next circle out the black color, you see all the different offerings and products that we're offering from service storage solutions to networking and backup solutions, disaster recovery, cybersecurity and segments. So a pretty complete portfolio of products and services, all then surrounded with our own professional and support services and the different ways of delivering to our customers, the hybrid cloud or on prem or public cloud. It doesn't really matter to product. We can deliver in any variant, whatever suits our customers. And we described it this way that we can have all of these different cloud variants public, private and managed, supportive depending on our customers' preference. So we are happy that our customers are happy. Obviously that's key to deliver great services and great quality in our services. And clearly, we try to measure that both we have very close relationships with our customers and we've had for a very long time. As most of you know, our customers are very loyal, but we also measured in a number of different ways and obviously NPS is a very established way of measuring customer loyalty and customer satisfaction. And FAS stands for Net Promoter Score. It's based on the very simple question of how likely are you to recommend a product to other organizations and peers. And we have a score of 44, which is definitely a strong and positive score. That makes us very happy, of course, and proud. Just give you one example of a customer that we are working with, which is a Swedish customer called AFA, AFA Insurance. And what's interesting with this, a customer where both ProUp and our most recent acquisition, Kanoa are collaborating and working very closely with this customer. They are redesigning their infrastructure with regards to application development and with the objective of accelerating the speed of application development. And the objective is to go from taking months to get a change or a new application deployed to their end users and customers to ours. That's obviously a very drastic improvement. This is all about what modern and cloud native development infrastructures is all about and also the reason why we acquired Konowa here in April of this year. So it's a good case study and a good proof pride of why the expertise of the Konowa team is crucial to our customers and really complementing the product strengths. So in this case, we've delivered the design and implementation of the container platform. So container is the terminology for modern and cloud native application developments, on boarding support, training, security tools and obviously ProAct's more traditional offerings of storage backup and server infrastructure. So a very good example of a customer success story where ProArc and Konoha together does more than we could have done individually. So then jumping into the quarter, a bit of a lot more positive than previous quarter we had here in the back or last quarter with positive development of our services revenue and gross margins, definitely positive development. And of course, our EBITDA result improved quite good here in the quarter, both because of the gross margins and obviously also cost control. And we're happy to see that our TCV numbers continues to increase. We've talked about it a lot during the pandemic that it's more difficult to engage with customers on long term contracts when you can't meet in person and do detailed workshops and joint planning, but a good jump up in this quarter. We do have a revenue decline and that's driven by lower system sales of 6%. We have seen some volatility in the getting hesitance with our customers to make big decisions. We also have a little bit of a tough comparison in particular in the UK with the big deal we did last quarter sorry, this quarter last year with NHS Blood and Transplant. So partly then just volatility that we've continued to see in our customers making decisions and in some unfavorable comparisons in Italy in particular. Tracz very shortly the quarter. Obviously, we're going to go in a little bit more in details here in a second. Just a couple of other things before then that I want to highlight. Our integration of our 2 recent acquisitions, Cetus in the UK and Konowa here in Stockholm, Sweden are on track and in case of Cetus ahead of plan, really good progress and we see both operationally good integration progress, but more importantly on the commercial side, very good process. So we're happy about that. We have very recently been awarded achievements from our main partners. NetApp it's a U. S.-based provider of storage solutions and market leading provider. We are their EMEA Solutions Partner of the Year. Cohesity as a backup provider and we received their EMEA Impact Marketing Partner of the Year. And as we spoke this morning, we also got a Dell award, which obviously will be a Q4 award, but that's been. AI is one of those areas which is related to our ability to drive value out of data and we've engaged with a key initiative here in Sweden called AI Sweden, a good initiative to drive AI investments and develop an infrastructure that's available to a number of customers and companies here in Sweden region. And then last, we do continue to see a little bit of semiconductor impact here in the quarter, a little bit less maybe than we expected, but some partners are definitely impacted Weidern, and we continue to see impact at least for the next 2 or 3 quarters, we believe. It's been manageable, but we think it's going to continue for a while longer. Good. Thank you. So that's briefly who is ProAct and just a glance into the quarter, I'm going to hand over to you, Linda, for a little bit more details on the numbers. Yes. Thank you. So the financial development and the highlights very much What Jonas was saying, growth overall of minus 1%, driven by the decline in in system sales of 6%, whereas services sales were growing by 6%, adjusted EBITDA then growing by 11% to about SEK60 1,000,000 at a margin of 7.4%. And then correspondingly, the adjusted profit before tax also growing to €50,000,000, a 14% growth and a 6.1% margin, so very high margins in the quarter. And then as usual, we'll go through the details a little bit more, starting with revenues, then profitability and then our different business units. So if we look at the minus 1% revenue growth or decline, organically, it was more than, of course, a 9% decline, where acquisitions were contributing by a positive 8%, barely any currency effects in the quarter. Rolling 12 months growth is minus 2%, also here impacted by Systems decline of 5%, whereas Services is growing. If we then dig in a little bit the services growth of 6%. Organically, we see a flat growth where organically consulting is flat, but with especially Konowa as a consulting company, I also see this a little bit a little extent contributing, so strong overall growth of 24%. Support Services, a little bit more flat. That's, of course, also connected to our systems business, so organically declining minus 2%. These are, as you know, longer term recurring contracts, of course, much less volatile than our systems business. And then the cloud revenue or the managed services contracts increasing by 2%, same increase organically, where we've onboarded most of the contracts that were closed earlier in this year, where we had a little bit of slower take up last quarter. So we can see if you look at the graph on the right hand side at the bottom there that we're back on growth now for the managed cloud services contracts in line with our strategy. Whereas on the top, you see the revenues with the split of systems and services where we see that Q3 is typically a weak quarter from a systems perspective, a lot of occasions impacting this quarter than even weaker than last quarter. We had the 16% organic decline, where the majority of that is the 70% decline in the UK that I will get into in a few slides. Then also Nordic and Baltics declining somewhat, while both Central and West actually growing their systems business. And then the new cloud contracts that we've closed during the quarter contracted revenues of SEK75 1,000,000. So that's 23% growth from same quarter last year. So that's also something we're happy about, of course. If we then go into the profitability, again, we see the adjusted EBITDA increasing quite a lot. And you can see on the right hand side of the slide there, the graph that Q1 and Q2, we had some challenges, especially Q2, and now Q3 is improving quite a lot, see a high margin. And it is primarily the gross margin that's impacting. It's increasing In particular, systems, where we did see in the quarter good pricing development and a good customer mix. Depending on what customers we get and what types of deals, we will see different gross margins, but of course, also our ability to keep pricing up in a good way. SG and A costs did increase by 4% for comparable units organically. However, last the year, of course, we're in the middle of the pandemic, so very, very low levels. So it's still the 4% increase we think is we're still at low levels. And then earnings per share increasing and of course, that's a result of the increase in EBITDA. Then if we move into a little bit of details on our different business units, we can see Nordic and Baltics growing by 6%. Here, the Konno acquisition is contributing by €32,000,000 a little bit or it is in systems, but also primarily in consulting services. So systems is declining 9% organically. That's primarily Norway, where we had a strong quarter last year and a quite weak quarter this year. Most several of the other countries are developing very well. And services organically growing 14%, good development most of the areas there. And in particular, cloud services, we see strong growth there. EBITDA margin increasing slightly with the increase in revenues and then also good gross margins and then overall EBITDA increasing as a result of that. If we then move to our next business unit, U. K. Here, we can see the strong Q3 last year. I mean Q3, as you know, is typically a quite weak quarter, but last year was very, very strong with this NHS Blood and Transplant deal that we closed. So systems down 46%, organically 70%. So of course, this is impacting the overall picture for the group. Services is up 21%, of which 4% organically. So there we do see growth. And if we look at the margins, we were able to keep margins at a very high level. So the margins are increasing to 6.4% from 5.5% last year. And here, we see that with the revenues we did close, both systems and services, we did have stronger gross margins, which are impacting and then also good cost control. Pay, if we then move to Business Unit West. This is as you well, you can see on the graph down to the right where we had the challenges, in particular in Q1. Q4 last year, Q3, we had some impacts from integration, but also a little bit of challenges. But Q1, we started the significant decline, in particular, in systems revenues, but also some issues in and the changing mix impacting cost in our services business. We did implement quite an extensive action program, both to focus on reversing the declining trend in revenues, but also to keep control of our costs. We saw the first results of that in Q2, and now we're continuing to see these results with organic growth of 1% And EBITDA margins increasing to 5.6%, which is better also than last year. So we see that gross margins are improving both for Services and Systems, which is leading to this increase in EBITDA. Then if we move to the last business unit, Central, here we do see really good revenue growth, course from a slightly weaker quarter last year, but we saw strong sales in the summer. Q2 was a little bit weaker here, as you may recall. So we're recovering part of that as well. Both systems and services growing compared to last year at strong margins. We have a 7.6% EBITDA margin here compared to 5.7% last year. Also then, of course, together with the revenue growth, we did a turn increase in EBITDA. Here, we do see that our SG and A costs are declining, while we also have the increased revenues so then in total leading to this increase in EBITDA. So overall, overall business units are increasing in EBITDA margins this quarter and leading to this increase in overall profitability. Then if we move to cash flow, we do have a positive cash flow of about SEK 100,000,000 in the quarter before changing working capital. As you may recall, we ended last quarter at very, very high cash flow, very positive development from working capital. And we see the opposite effect of that now that we had some outflows in working capital. It's primarily decreasing accounts payables that's leading to the negative change in working capital of SEK240 1,000,000 approximately. Then very little other cash flow impacts, little investments in fixed assets and then, of course, we will always have leasing liabilities that the we repaid here. The total change in liquid funds of SEK 180,000,000. We did also, in the quarter, close a new revolving credit facility of SEK 600,000,000 compared to the previous one that was SEK 350,000,000 for 3 years with the option to extend for 2 additional years. If we then just quickly look at the year to date, we can see that here overall the cash flow from current operations even after change in working capitals. Positive, we did have investment activities impacting of SEK112 1,000,000, which is to a large extent the acquisition of Konoha we did in April. And then cash flow from financial activities, we have the leasing liabilities. We did have payout dividends. We've slightly increased our bank loans to pay for the acquisition year to date. But overall, still at strong liquid funds end of September at SEK 320,000,000. Then the last financial slide, our balance sheet. We do have a strong equity ratio in the quarter, 24%. We see a net debt of SEK160 1,000,000 and that's after the leasing liabilities of SEK223 1,000,000. We do have unutilized overdraft facilities of SEK 158 1,000,000 that we're not using and an unutilized portion of this new revolving credit facility of SEK 343,000,000. So quite a lot of available cash if required as well. Yes. And then our long term financial goals where we have the communicated targets that we measure against the 12 months rolling outcome. Sales growth, as we've mentioned now several times, is the key GAAP in the quarter and we see also rolling 12% that we're declining, which is of course not in line with our targets. EBITDA margins also gapped our long term target of 8%, but improving from last quarter. Net debt to EBITDA, as mentioned before, we have a strong cash position, limited debt, so we're quite far away from our target to be below 2%. Our at our targets, we're below 2%. Return on capital employed is challenging with the target not only because of the EBITDA margin, but also as a result of IFRS 16 and acquisitions that add to our balance sheet. Dividend, we're just in the middle of our target to give out between 25% 35% of our net profits, where the last dividend we did was at SEK4.5 per share or SEK1.5 after the split, 31% of our net proceeds. Okay. Good. Thank you, Linda. Just to end then, a quarter where we were impacted by the decline in systems, which those of you who have tracked those celebrities has been volatile here and particularly during the COVID and the market is a little bit more hesitant in terms of when COVID is ending, but also spend a lot of their time in making sure that workspace solutions are up to par when people are working from home. But on the positive side and growth in our services and a strong EBITDA and profitability development driven largely by the gross margin improvements and good cost control, of course. That's the end of the presentation and we'll open up for questions. And I think if you have any questions, you're all muted. So if you raise your hand Teams, we will unmute you or you can unmute yourself, I guess, as well. Hi, it's Dean Robertson from Chalberson Asset Management. Can you hear me okay? Yes, we can. Can I just ask a little bit more about the working capital outflow, which you mostly attributed to decline in accounts payable? Is this you effectively prepaying suppliers to get guaranteed access to product because of Or is that not part of this? It's a very good question. And as you Some of you probably know, we do see quite a lot of volatility in our working capital. And it's rather that typically, especially in our systems business, We do match receivables and payables. So we ensure that we have the same payment terms with our customers and our suppliers. And then especially at quarter end, we have a lot of invoices coming due at quarter end and paying and sometimes we're not able to match. And so it's rather a few days around quarter end that's impacting than any other longer term things. So this is basically just an effect that we paid out just a few days later bigger invoices than when we received it from the customers last quarter and then we're hit by that this quarter. So no, we're not prepaying any of that. We make sure that we have payments and we secure deliveries from our suppliers when we sell to customers. Okay. So from that, I guess, you'd expect there should be something of a reversal in Q4. I guess back to that last point, is the component shortage point, is there an argument for prepaying Or changing payment terms to guarantee access to product or you're not that concerned about it that you would need to think about doing that? No, there is we are impacted to some degree in particular from certain vendors, not all our vendors and not the ones that we are mostly dependent on. I think the biggest concern we would have, if anything, is price increases. Most likely be list price increases going forward. Sure. But I guess your customers are aware of that and will be expecting that to be passed on? Probably. Probably. Yes. Okay. And one slightly different question. Is M and A on the agenda at the moment? M and A is always on the agenda, yes indeed. And that's why I think it was important for us to both to renew the revolving credit facility and highlight here today the availability of financing. So it's something we continue to pursue with high focus. Our ambition is to do roughly 2 acquisitions per year. So we did see it as in October of last the Kanoa in April of this year and we think we can continue on that pace. That's our ambition. Okay, great. Thank you. Next, Fredrik Ilson. Please unmute yourself. Hi, Fredrik Ilson from Redeye here. Can you hear me? Yes, we can indeed. Good morning, Fredrik. Nice. The gross margin came in quite strong. Is that mainly due to sales mix or do you see a structural improvement as well? It's a combination of things. It's a little bit of mix shift. It's definitely customer mix shift as well. So different customers are in different situation in terms of what they buy and our relationship with them. So I wouldn't call it structural, but it's a result of just good commercial focus in both the system business primarily the system business but also in general the gross margin improvements. Okay. One more question. You mentioned that some of our customers are a bit cautious because they don't really know how the post pandemic needs will look like. However, as most of your big markets now have opened, is there any change in that? Well, I think we're and obviously, the markets are still in terms of opening or not opening, a little bit hesitant. Just referring to the dialogues we're now seeing in the U. K. Environments where still fires and infections are spreading, also seeing the same in Finland and part of Baltic. So obviously, we're coming off of the pandemic in a bit of a stop and start mode. But anyway, obviously, our customers have spent a lot of time over this past year, year and a half from figuring out how do we make sure that we can support a hybrid work model and make sure that we can have and make sure that we can have maintain security when people are working from home. I think a lot of customers haven't been able to meet themselves the same way we've all worked from home, our customers have been working from home, which means that some of those more long term strategic decisions have also been halted or at least delayed because they can't get get in a room and do their white boarding. And then to some degree, maybe rethinking whether their strategy is right or wrong in terms of their infrastructure planning. But that's that last point is, I think, more just a continuation of the trends we've talked about for a long while, meaning people do move to multi cloud technology architectures and then do move to more service oriented delivery of IT. So I think it's a continuation of the things we talked about before in these meetings in terms of hesitance, not being able to get together, focusing on making sure that it can be operational during the pandemic and in new hybrid working modes and obviously making sure that the long term architectures and investments are business driven. Okay. That's all from me. Thanks. Thank you, Frederic. Next, we have Rohan Padvigal. Please unmute yourself. Hi, morning. Can you hear me? Yes. Super fantastic. 1st of all, congratulations on the numbers. I was just trying to understand, can you give us an idea of Also, delta between the margins that you're making at this point and the return on capital versus the target ambitions? What's the difference? How do you bridge that sort of gap? So yes, you want to know, so our 12 month rolling EBITDA margin of 6%, how are we planning on reaching the GAAP bridging the gap to 8%. I think I can complement Jonas that a lot of this is through our transformation to selling more managed cloud services, which we see as a stronger growth market where we provide more value add and thus have the ability to take on higher margins or generate higher margins. And then, of course, as we grow, we also see different scale effect in our cost base. Overall, that should enable us to increase margins. Those are the 2 main drivers. And similarly to return on capital employed, a large part of that will be through reaching our improved margins, but then also continuing to work with capital efficiency, managing our working capital and our cash management situation. But I think of the two measures, the key one we are focused on there is the EBITDA margin. Understood. Super. Can I have a follow-up question as well? In terms of top line development, can you give us an idea of At what rate for the incumbent markets growing in the past 12 months? Sorry, I missed the question. The market? The growth rate of the market. Yes, the end market in the past 12 months at what rate Well, it's quite a fragmented development and we believe different markets have managed differently, I think, over the past 12 months. I think our view is that the if we split it into 2 kind of segments we discussed in the beginning of the presentation, there is a systems markets or infrastructure market, the reselling of hardware and software, that is probably relatively flat over the past year. And then you have the market of managed cloud services, so selling IT as a service, which and here it's a little bit more difficult, but here you include anything, including then public cloud services and for anyone who as follow kind of Amazon's and Microsoft development, you see that they are growing very quickly. So they're probably pulling some of that, but probably some growth, high single digit, we would probably claim. Thank you. Big market and this is always a difficult one when you look at product. We are a niche player and that's or a specialist player, I should say. So we don't play in all the segments that the market is measuring. We focus on the infrastructure related to helping our customers get value out of the data. So we don't do a large degree of workspace solutions or software as a service solutions. And when we've analyzed, of course, also our big or the different countries we're in, we do see very different trends in those as well. And we see that, say, Netherlands, where we've had the declines in systems revenues, we see that that is also trends we see in the market. So generally, we see similar trends on the markets as we see in our revenues as well. Indeed. So key markets like Netherlands, Germany, flat or even decline in the market, others more stable or flattish. No more questions? All right. Thank you everyone for joining and listening in. We will be back in business, what I was about to say, we were back in this forum when we do the Q4 report, which is on February 11 maybe early February. So thanks, everyone. See you soon again. Take care. Thank you.