Atea ASA

OSE:ATEA

Earnings Call Transcript 2018-Q1

[Steinar Sonsteby, Chief Executive Officer]

Hi, and welcome to the Q1 presentation of the Atea Group results. And also welcome to sunny, and finally spring has come to the Nordics and Oslo. We are very happy with another growing quarter. Revenue growth ahead of what we expected. So we're not firing on all cylinders, yet. But as Michael Dell told me at lunch 3 weeks ago in Brussels, happy, but not satisfied, never satisfied. The numbers came in, as you see on the screen. Revenue grew by 13.3%, and EBIT by almost 17%. Cash flow was on the weaker side due to details that Robert will come back to, but no worries from our side. This was actually the 18th quarter in a row with revenue growth. And I promise you, it will not be the last.But as usual, I'll leave it to Robert to give you all the good news.

[Robert Giori, Chief Financial Officer]

Thank you, Steinar. As Steinar mentioned, Atea continued to deliver strong growth in revenue and operating profit in the first quarter. Total group revenue in Q1 was NOK 8.3 billion, up 13.3% from last year. Revenue growth was driven by higher demand for products, as hardware revenue increased by 10.7% and software revenue increased by 26.6%. Changes in currency rates had a positive impact on growth in the first quarter. Adjusted for this impact, revenue growth was 9.4% in constant currency. Total gross margin was 22%, down from 23% last year, based on increased proportion of client hardware and software in the revenue mix.Operating expenses grew by 8.0% compared to last year, declining as a percentage of revenue. The average number of full-time employees at Atea increased by only 1.4% from last year. Based on strong growth in revenue and relatively lower growth in operating expenses, Atea's EBIT grew by 16.3% to NOK 123 million.In January 2018, Atea started up a new business unit called AppXite to commercialize an internally developed cloud commerce solution. This new business unit is expected to operate at a loss during its ramp-up phase. If we exclude the operating loss in the AppXite startup, the EBIT of Atea's traditional business was NOK 127 million, an increase of 20.4% from last year.We'll now take a closer look at revenue and profit development across the countries in which we operate. Starting with Norway, which delivered solid financial results based on higher demand for products. Total revenue in Norway grew by 9.6% to NOK 1.9 billion. Product revenue was up 11.8%, driven by higher sales of client hardware and large software projects to the public sector. Services revenue was up by 3.2%, based on increased sales of cloud and outsourcing services. Gross profit was up by 7.3%, as higher revenue was partially offset by an increased proportion of low-margin clients and software in the revenue mix. Operating expenses grew by 6.7%, but represented a lower percentage of revenue compared with last year.Based on strong growth in product sales and relatively lower growth in operating expenses, EBIT in Norway grew by 14.7% from last year to NOK 43 million.Moving on to Sweden, where our business had exceptional growth in revenue and profitability. Total revenue in Sweden grew by 20.5% to SEK 3.4 billion. Sales were strong across all lines of business. Product sales grew by 22.5% from last year with higher revenue from public sector frame agreements, which had recently been renewed. Services revenue was up by 11.2% based on increased sales of consulting. Gross profit was up by 13.4%, as higher revenue was probably offset by lower product margins on new frame agreements. Operating costs grew by 10.9%, as Atea increased its workforce in consulting and sales based on strong market opportunities. With rapid growth in sales across all lines of business, Sweden's EBIT grew by 32.3% to SEK 99 million.In Denmark. Atea reported lower revenue in the first quarter. The business partly offset lower sales by reducing headcount and operating expenses. Total revenue fell by 6.6% in the first quarter to DKK 1.6 billion. Product revenue was down by 3.4% from last year, based on lower hardware sales, particularly within data center and network equipment. At the same time, software sales grew significantly based on frame agreements to the public sector. Services revenue fell by 17.3% with lower revenue from outsourcing services and fewer consultants compared with last year. In order to improve profitability, Atea Denmark has taken action to reduce its operating expenses. During Q1, the average number of full-time employees in Denmark was 124 or 7.8% below Q1 last year.As a result, operating expenses fell by 8.6% compared to last year. With lower revenue, partly offset by lower operating expenses, EBIT was negative DKK 8 million in Q1 2018 compared with positive DKK 7 million last year. In January 2018, Atea implemented a new organization structure in Denmark to focus on solution selling and cross-selling of products and services to customers. This reorganization aligns Atea Denmark with the key account team sales strategy, which has successfully been operating in the other countries.We expect that this reorganization will contribute to improve profitability in Denmark later in 2018. Steinar will further elaborate on actions taken to improve profitability in Denmark later in this presentation.In Finland. Atea's business continued to improve in Q1, as new frame agreements drove strong growth in sales to the public sector. Total revenue in Finland grew by 7.2% to EUR 91 million. Product revenue was up 6.9% based on higher sales of client software to the public sector. Services revenue was up 9.9% based on increased sales of consulting. Gross profit increased by 4.9%, as margins were impacted by a shift in the revenue mix toward lower-margin software. Operating expenses grew by 3.6%, but represented a lower percentage of revenue compared with last year. Based on strong growth in sales to the public sector, EBIT grew by 16.7% to EUR 1.2 million.Finally, Atea Baltics had very strong sales growth in the first quarter. Total revenue grew by 21.7% to EUR 26 million. Product revenue increased by 25.6% from last year, based on a very large client delivery to a private sector customer. Services revenue was up 13.5%, driven by increased sales of cloud and outsourcing services. Gross profit increased by 9.5%, as higher revenue was offset by an increased proportion of client hardware in the revenue mix.Total operating expenses increased by 8.3% from last year. Much of the growth in operating expenses was a onetime cost of EUR 300,000 related to a court judgment on a legal dispute from 2015. Otherwise, headcount in the Baltics was down from last year. Even after this onetime expense, Atea Baltics had an EBIT of EUR 100,000 in Q1, still an improvement from last year.Finally, a word on our cash flow. Cash flow from operations was an outflow of NOK 841 million in Q1 2018 compared to an outflow of NOK 321 million last year. As you can see from this chart, Atea's operating cash flow is highly seasonal with a positive cash flow concentrated in Q4 when working capital balances are lowest and a negative cash flow in the first half of the year when working capital balances increase. Based on this seasonal pattern, Atea's aim throughout the year is to maintain or reduce its working capital balance from the same period last year.At the end of Q1 2018, the net working capital balance was negative NOK 613 million compared to a negative NOK 906 million last year. The higher net working capital balance was due to increased inventory and receivables compared with last year. The increase in inventory was primarily due to customer projects due to be delivered in the second quarter. The increased receivables were the result of reduced collections during the Easter holiday, which took place during the last week of the quarter.This concludes our review of the first quarter financial results. I'll now pass over the podium to Steinar to summarize the quarter and provide a deeper look at some key factors, which are impacting our business.

[Steinar Sonsteby, Chief Executive Officer]

Thank you, Robert. I will address 4 specific topics that we constantly get a lot of questions about. And the 2 first ones, not strangely, is about Denmark.The legal case in Denmark. Since June 2015, Atea has given regular updates on the police investigation in Denmark and on the legal proceedings which followed. The district court of Glostrup began hearing the case on October 10, 2017. And the verdict is expected in June 2018. I will, therefore, use this opportunity to share with you my views on the case as it stands today.But before I do that, I will repeat some of the main elements in this case. Atea Denmark is under prosecution as the legal responsible entity for bribery and embezzlement carried out by 4 previous leading employees during the period between 2009 and 2014. Under Danish Law, a company can be held legally responsible for actions undertaken by employees. Atea has taken comprehensive measures to prevent future misconduct. These measures include the following: Atea Denmark has conducted a self-cleaning program in accordance with EU legislation under Danish Public Procurement Act. This has been reviewed by Deloitte. Atea Denmark has received the highest international certification for anti-bribery, the ISO 37001, as one of the first companies in Europe. The code of conduct for Atea has been updated and strengthened. All employees of the Atea Group, not only in Denmark, are required to complete a training and a test in ethics and the code of conduct with zero tolerance for breach. The whistleblower system has been strengthened for those who wish to report violations of the code of conduct or other relevant laws and rules.The Atea Group has established a thorough compliance system, including comprehensive control procedures. All compliance -- sorry, our Compliance Committee has been established in the Board of Director of the group. The group CFO, Robert Giori, has been appointed Group Compliance Officer. All business units report on compliance quarterly to make sure that the governance systems are working.All these efforts together result in a compliance regime of highest international standard. And now some personal views. There are many victims in this case, and Atea is one of them. There are 2 reasons why I say that. Firstly, no company can protect itself 100% against acts of crime. No compliance or governance system comes with a guarantee that misconduct cannot happen. Every system can be tampered with. And the risk of being exposed for crime is higher if the attempts are executed by leading employees as compared to lower-ranked employees without the access to and the approval rights in the system, which are meant to protect the company.Secondly, Atea Denmark has already paid a huge penalty in terms of time and money on handling the incident and loss of business. I fully support the principle that a company can be held legally responsible and penalized, if its former leading employees are found guilty in criminal activities. But I also believe, a company should be judged by its internal and external stakeholders on how it handled the incident. In my opinion, employees, shareholders, customers and business partners should all expect the company to be transparent, proactive, collaborative and humble. The company should also show regret and demonstrate the willingness and ability to turn every stone to understand how the incident could happen and what's needed to be done to prevent it from happening again.It is my personal firm belief that Atea has done all this. We acted proactively at an early stage. We have been transparent with all our main stakeholders throughout the process. We have collaborated fully and lengthily with the police. And on several occasions, I have apologized on behalf of the company. Finally, Atea has taken comprehensive measures to prevent misconduct in the future. I dare to say that Atea today has the most comprehensive compliance system of any Scandinavian company within the IT business.Therefore, and in this context, I am glad that the prosecutor in the Danish court gave a clear recognition of the proactive collaboration Atea has had over a long period with the police as well as the comprehensive measures our company has taken to prevent future misconduct. As a final point, I want to say that Atea is a safe and reliable partner for our customers and lenders. We have, both as a company and as employees, a zero tolerance policy towards corruption or unethical behavior. We are now looking forward to put this almost 4-year process behind us and get back to building Denmark with IT. So to the operational part of the question. Of course, it is influenced by the previous point. But as said, we're hopeful that, that part is soon behind us. As we explained after -- or, in our Q2 presentation last year, we started to take actions. And Robert mentioned them in his part of the presentation. We said after Q2 that we would take down the cost with between 70 and 100 people. The number is actually approximately 120, as we speak.We have no plans of taking down the cost further, as we see possibilities of growth again in the Danish organization. We also said repeatedly after Q2, Q3 and also again after Q4 that we would from January reorganize, restructure the Danish operation. That is also behind us. We are now in the structure that we have planned, and all cost for all that has been mentioned has been taken monthly over the P&L.And finally, as we also said after Q3 and Q4, we hope to see signs of improvement in Q2, but we certainly expect it to happen second half. This process has been difficult under the circumstances. But I am very happy to see that employees, vendors and customers are collectively giving us positive feedback on what we've done and the information given through this process in Denmark.And so to 2 more, what should I say, happy areas. First, to growth. I think that mostly we have surprised people and investors with the growth we have given over the last 3, 4 years. But as I have said many times over the last couple of years, the market is actually healthy. And if we've had the same growth on average -- or, in Denmark as we have on average in the other countries, our growth would be fantastic.And that is where we aim to be in second half of this year. And this is driven by the fact that traditional IT, traditional infrastructure is growing as IDC and others are saying with between 3% and 5%. We see no decline in the general business. This can swing a little bit from quarter to quarter, but, in general, the traditional IT keeps on growing as it had been doing. On top of this, we see hyper growth in certain areas, which for some reason do not seem to be a part of what researchers look into. These areas have been mentioned before, but just quickly to repeat them to you. Security and privacy and data protection has been a very, very hot topic. This is not only driven by media focusing on breaches on cybercrime or GDPR, but it's also driven by the fact that we connect constantly more and more devices to our networks. This area will keep on accelerating in growth.The hybrid cloud, as we've said many, many times, and as more and more people in the business and in IT community repeat and agree with us, the public cloud is no destination for no one. A modern infrastructure is built on a multi-cloud, multi-server hybrid environment. This gives the best performance for price and technology and user experience, but is also complex. And this is what we're working with our customers on these days. The server business, in general, in Atea is growing. And this is, among other things, explained by the fact that the average server price is up by 30%, as people want more power, more memory and more in or onboard storage.And then, data analytics or big data or business intelligence, the area has many names. This is the mother of all of these areas because they all receive, send, protect or store data. And that data is growing in a rate which is unbelievable. It is said that in Q2, we will produce more data than we ever have produced in the history of mankind. Most of it is stored. Some of it today -- or, a lot of it is what we call black data, meaning data we don't know is there, we're not using it, we don't know how to use it or analyze it. That's why this area is so important.And it's, therefore, with joy I can inform you that we yesterday hired 20 people in Oslo from the company, iKnow, and this brings the number of people working in this area in Norway to more than 50 and in the group to more than 100, just the last 6 months. They're all fully engaged with customers. And if we could get 20 more today, we would hire them.Internet of things is growing, and we're building systems for specifically -- or, more than anything for public sector and municipalities. And of course, network is the core of everything, or as an old friend, Scott McNealy, told me many, many years ago, the network is really the computer.AppXite. We started talking about AppXite after Q4 -- or, in the Q4 presentation. AppXite is a startup, but it's a startup within Atea, which makes it possible to bring the company faster forward. Atea is today the biggest reseller of AppXite. And we're now past 70, 7-0, resellers and ISVs around the world. AppXite is a global company. It is not constrained to the Nordics or the regions where Atea is represented.AppXite have caught a lot of interest, especially, for some strange reason, in the U.S. And also among investors that I have talked to over the last weeks. But even more interesting is that AppXite has caused the interest of our strategic vendors, like Microsoft, Cisco, IBM and just yesterday from Dell Technologies. We see promising results and interest in AppXite, and we will keep on giving you information about how the company develops. But I should also say it is a startup, a very promising such, and the business plan is something you would have enjoyed reading. We expect to lose about EUR 3 million in '18, and we expect to break even second half 2019, and of course, we'll keep you posted on this.So in summary, strong growth, both in profitability and in revenue. We are very happy with how the company developed and have been so over years. We're not satisfied with all parts, and some parts are still in the early stages. But we're very confident that the future looks bright. So all in all, a good quarter, another one in a long row of such. Thank you.