Atea ASA

OSE:ATEA

Earnings Call Transcript 2021-Q1

[Steinar Sonsteby, Chief Executive Officer]

Good morning, good afternoon around the world, and welcome to the Atea Q1 presentation. I have really been looking forward to this one. It's also the fifth presentation we do after corona, so digitally. And I'm also looking so much forward to having people, hopefully, on the next presentation. And also to travel around and see many of you physically again. But so far, we've done pretty well digitally. So to the numbers. For the first time, in a nonQ4 quarter, we passed NOK 10 billion in revenue. It comes from a 10.6% growth, with growth from all areas, meaning hardware, software and services. The EBIT comes in at NOK 176 million, a fantastic 453% growth in EBIT in the quarter. Of course, Denmark contributes greatly to this result. But it's also a quarter where all the other countries have record-breaking numbers. Of course, the cash follows and we had operating cash flow increase of NOK 557 million, which gives us a positive cash position at the end of the quarter of NOK 263 million, which I think has almost never happened before. So a very, very good quarter with all areas contributing. And as normal, I'll give it to Robert to present all the good news.

[Robert Giori, Chief Financial Officer]

Thank you, Steinar. I'd like to start by reviewing our income statement in Q1 with a focus on the key factors that drove our strong revenue and profit growth during the quarter. Atea's revenue in the first quarter was NOK 10 billion, up 10.6% from last year. Currency fluctuations had a positive impact of 0.7% on revenue growth as foreign currency earnings are translated into a slightly weaker Norwegian kroner. Atea's revenue grew across all business lines. Hardware was the fastest area of revenue growth in Q1, with sales increasing by 16.8% from last year. This surge in hardware revenue was driven by extremely strong sales in Denmark. Otherwise, software revenue increased by 5.4% from last year, driven by higher demand from the public sector in Sweden. Services revenue increased by 2.7% with higher sales of both consulting and managed service contracts. Gross margin fell to 20.8% compared with 22.1% last year due to a shift in the overall revenue mix toward lower-margin product deliveries. Total operating expenses were down by 2.9% from last year. In the first quarter of 2021, Atea had an average of 3.1% or 235 fewer full-time employees than last year. In addition, other operating expenses fell sharply from last year due to strict cost management during the COVID pandemic. Based on strong growth in revenue and a decline in operating expense, Atea's EBIT increased to NOK 176 million, up more than 5x from an EBIT of NOK 32 million last year. In Q1 last year, Atea incurred NOK 71 million in reorganization costs related to a restructuring of its business in Denmark and associated write-downs. If we exclude these reorganization costs from last year's results, Atea's EBIT still grew in the first quarter by 71% from last year. Atea's exceptional growth in profit during Q1 was driven by a major turnaround in Denmark, plus a record-high operating profit in all other countries. We'll start with Denmark, where Atea broke even in the first quarter, up from an operating loss of DKK 90 million last year. The EBIT improvement of DKK 90 million had several causes. First, the improvement was driven by very strong sales of hardware, up 80% from last year. Much of this hardware growth was due to a large order that Atea announced to the stock exchange in January. However, even excluding this order, hardware sales grew by an impressive 20% from last year. In addition to strong hardware sales, the EBIT improvement in Denmark was based on solid growth in the consulting business and margin improvement in the software business. Finally, Atea Denmark had DKK 51 million in extraordinary reorganization costs last year, which impacts the year-on-year comparison. Steinar will provide more detail on the turnaround in Denmark later in this presentation. Otherwise, in Norway, EBIT grew by 12.1% to a record high NOK 50 million. EBIT growth was based on higher software sales and lower operating costs compared with last year. In Sweden, EBIT grew by 14.5%, to a record high SEK 117 million. EBIT growth in Sweden was related to higher demand for software and improved hardware margins compared with last year. In Finland, EBIT grew by 26.4% to a record high EUR 2 million. The profit improvement was based on increased sales of hardware and services and lower operating expenses. And in the Baltics, EBIT grew by 22.7% to a record high EUR 0.9 million. EBIT was driven by strong growth in the managed cloud business. Atea group functions, which includes shared services and group costs was a net operating expense of NOK 23 million compared with a net operating expense of NOK 12 million in last year. The increased cost was entirely due to higher share-based compensation expenses resulting from an appreciation in Atea share price during the quarter. In sum, EBIT improved by NOK 145 million in the first quarter based on strong performance across all geographies. Now a word on our cash flow and balance sheet. Atea's cash earnings were an inflow of NOK 293 million. This was up from last year due to higher operating profit. Working capital movements, excluding the sale of receivables, had a negative impact of NOK 568 million in Q1 2021 compared with a negative impact of NOK 834 million last year. The growth in working capital during Q1 is caused by the seasonality of Atea's operations. In Q1 2021, the growth in working capital was less than in Q1 last year, due to a more rapid collection cycle on accounts receivable. Adjusted for working capital movements, but before the sale of receivables, Atea's cash flow from operations was an outflow of NOK 275 million compared with an outflow of NOK 780 million last year. Atea has entered a securitization agreement on selected accounts receivable with its primary bank as part of its overall financing structure. The securitization agreement allows Atea to accelerate its cash conversion by selling accounts receivable throughout the year. This form of financing is highly flexible and low cost for Atea due to the credit quality of its customer base. At the end of Q1, Atea sold a lower volume of accounts receivable to finance its operations than at the start of the quarter. This reduction in the volume of sold receivables during the quarter increased the working capital balance and therefore, reduced Atea's reported cash flow from operations by NOK 366 million. After adjusting for fluctuations in these volumes of sold receivables, cash flow from operations in Q1 2021 was an outflow of NOK 641 million, an improvement of NOK 557 million from last year. Moving on to our debt balance. Atea had a positive cash position of NOK 263 million at the end of Q1 as defined by Atea's loan covenants. This corresponds to a net debt EBITDA ratio of negative 0.2. Atea's loan covenants requires the company to maintain a net debt EBITDA balance of less than 2.5, which would mean that the maximum net debt balance allowed by Atea's loan covenants was NOK 4.1 billion at the end of Q1. Atea's net debt balance was therefore NOK 4.4 billion less than the maximum allowed by its loan covenants at the end of Q1. The company has significant additional debt capacity before its loan covenants would be reached. That concludes a summary of the Q1 financial results. I'll now hand the podium back over to Steinar to provide further detail on our turnaround in Denmark as well as an overall outlook for the business.

[Steinar Sonsteby, Chief Executive Officer]

Thank you, Robert. So there you have it, a record-breaking quarter. But we have, and we understand got a lot of questions over the last 3 years on Denmark. So let me try to explain where we've been, where we are and where we're going. But let me first start with providing you with some background information. In the countries outside Denmark over the last 6 years, the profit has gone from 1.8% to 3.1%, a steady improvement with an average growth in revenue of 8.8% every year and EBIT growth of 20.3%. This is what we've been working on. This is showing you that what we're doing in adding value for our customers and having the closeness to the customer really works. But of course, 3 years ago, we broke into loss-making territory in Denmark. And the development or the improvement, I should say, have taken longer than we then thought. So I'm so happy to say that now after Q1 2021 for the first time since Q3 '18, on a 4-quarter rolling basis, 12 months rolling basis, we are back in profit. If you take this quarter and the 3 previous quarters, Atea in Denmark earned DKK 26 million. The improvement over the last 4 quarters have been impressive. And as you see on this slide, Q2 last year was slightly minus 8 and then we've been profit or breakeven. The improvement over these 4 quarters in Denmark alone is DKK 145 million and we see this continuing. So what have we done? First of all, in January of last year, Kathrine took over the helm in Denmark. And Kathrine and her team has done an amazing job with the situation we had. Along the road, we've also changed some key players, and I'm not going to go into naming them, but you see them on the slide in all the key positions. And we now have a very, very strong and hungry and new team in place in Denmark. This team has acted on Atea's strategy as well as a turnaround agenda. So let's look at some of the things that have been done in Denmark. I'm not going to read the slide to you, but point out some very important areas. First of all, of course, as you know, in Q1 last year, we had to do a cost cut exercise. And 7% of the staff had to go or were not replaced. But it's also important to say that we've done things with other parts of the cost base. And also with the CapEx, which is adjusted downwards with 20%. We've improved the efficiency in the sales organization, especially against the private sector, which is important to us because we want the balance between public and private. And in the role of the account management or the account manager has been important specifically against the public that we have built a specific team to be certain that we utilize the frame agreement in the best possible way. The services area is probably where we will see the biggest change going forward in the numbers. Robert pointed out that consulting has already started to contribute. And I would say, over the last 3 quarters, they've really, really improved with new management. We have all the skills in place. So this is all about traditional management of consulting. We've had some issues, as many of you have followed the know on the Managed Services. The Managed Services business is, by nature, very different. When you start getting into some issues, it takes time before it shows in the P&L. And when you fix the problem, it takes time before it shows in the P&L. We have fixed the problems. We have a specific sales organization that are winning contracts that now are starting to come into the P&L. Managed Service contract very often have 6 to 9 sales cycle. And after that, a 3 to 9 months cycle before you're up and running. In the quarters to come, specifically second half of this year, you'll see great improvement in the contracted services numbers from contract we already have won. But I want to end this slide on something that really are close to my heart. We are measuring how satisfied the customers and the employees are with Atea every 6 months. And every year, we have a greater investigation into the customers. And we use the NPS method that many of you use or have been looking at. From '18, where our problem started until end of 2020, the NPS score went from minus 18 to plus 25. It's a massive improvement if you know the method. 25 is okay, but it's not where we want to be in the end. But it's good enough that the customers are choosing Atea. Of course, the employer satisfaction has also gone up, and this is a little bit like the chicken and the egg. But to further elaborate on this topic, I wanted to show you this slide because it's not only our investigation that shows that we're on the right track. And I want to thank Computerworld in Denmark for letting me using this material right off their website. Atea Denmark has gone from being the 43rd most popular IT company in Denmark, 2 years ago, to last year's 31st position to this year's 14th. And as you can see, most of the 13 above us are really our best friends. None of our competitors are above us. So I would say when it comes to recognition of what we've done, who we are and what we're capable of, we are just where we want to be finally in Denmark. So looking forward, where you can follow us on what we do in the months and quarters and years to go. We feel that the momentum, the position and that we have proven ourselves as a company is all in place. We have the competitive position in the Danish market that we want to have. Actually, we have exactly the same competitive advantage in Denmark as we have in any of the other countries. Specifically, the services which we now are developing and stealing with pride from the other countries will accelerate and they will benefit greatly from their colleagues. Competition in Denmark is no different than 5 or 6 years ago when Denmark was the most profitable country in the Atea Kingdom. I hope and I think that you see that, yes, it took 3 to 4 quarters longer than we thought. But now we're exactly where we want to be, and I thank the team in Denmark. So before we go to questions, and we are hoping that you have some digitally as we are alone here in Oslo in the office of Atea, a record-breaking quarter, NOK 10 billion in revenue and an impressive 453% growth in EBIT. A fantastic cash position. I am so much looking forward to the future. Thank you.

[Unknown Executive]

Thank you, Steinar and Robert. We're just waiting for some questions to come in. I will just point out that we had some technical issues at the beginning of the broadcast. So we think we've rectified those now.

[Steinar Sonsteby, Chief Executive Officer]

Okay. [Foreing Language]

[Unknown Executive]

Yes. So at this point in time, we don't have any questions that will come in actually to be honest. But I think what the best thing that we can do is, I expect some questions will come in after our broadcast today that we can answer all of those questions and get back to people throughout the daytime as we normally do and expect to have those questions coming in. And like I said, we'll answer them today. So thanks, Steinar and Robert.

[Steinar Sonsteby, Chief Executive Officer]

Absolutely. But I think 1 question that I know will come from some people and a lot of people have around the delivery situation since the whole world is aware of the shortage of components. And let me answer that in 2 ways. First of all, in Q1, we built backlog because of the shortage. So we're absolutely feeling it. But as the biggest player in this region, we are getting more than our fair share, so to speak, of the products that are coming. So overall, we didn't want to spend too much time talking about some of the issues that we are dealing with. We felt we dealt with it well, but the problem is there, and the backlog has increased in Q1. The problem is not going away. So Q2 and Q3 and probably also Q4 will be influenced by the shortage, not only by companies like Atea, but also other industries like car making and even stereos and so on. So -- or home entertainment, I should say, maybe, stereo I'm getting old. So the problem is there. But we're handling it and we're working with the vendors.

[Unknown Executive]

Very good. I think we have a question from Arctic Asset Management, Alexander Lager. Can you talk a little bit about the margin potential of consulting and the Managed Services in Denmark for the future?

[Steinar Sonsteby, Chief Executive Officer]

Yes. We don't want to go into a specific number, but the business of consulting and Managed Services are very, very different. So the consulting is important to us, not only because of the numbers, because it's really where we show the capacity or the knowledge that we have. But of course, a normal consulting company usually have an EBIT margin of above 10%. On the Managed Services, it's a little different because that is a business that scales really well. And we are right now just at the area where we start scaling in Denmark. So the profit margin on Managed Services are much higher potentially than on consulting because you don't have to hire 1 consultant for every whatever 1,500 hours a year or something. You can scale it much better. So that's why I pointed out that we are on the contracts we have already won, starting to scale in the quarters to come.

[Unknown Executive]

Very good. Thank you. Another question here from Handelsbanken Capital Markets, Daniel Djurberg. He asked how about pricing power versus the cost of inflation and the component shortage that you see? So what we see the inflation?

[Steinar Sonsteby, Chief Executive Officer]

Well, the -- let me answer that a little different than what it was asked, I think. When it comes to a situation where there is a lack of components or products, our cost of running our operation goes up. But potentially, our margin -- our gross profit, I mean, are also going up. So in total, it shouldn't, in the end, influence the EBIT. Of course, there could be quarters where this is not completely in sync, where the cost comes before the profit or vice versa. But Normally, we handle these things pretty well. So I wouldn't put too much emphasize on the change. It's more that we needed to do the revenue growth.

[Unknown Executive]

The second question. Well, I was wondering if you have -- can you comment a little bit on the overall salary inflation for 2021 in the various regions?

[Steinar Sonsteby, Chief Executive Officer]

Do you want to comment on that, Robert?

[Robert Giori, Chief Financial Officer]

It's something that last year was a year where we had very strong containment on the salary inflation. This year and what we would forecast would be something around 2% to 3% is what we would have in our estimates.

[Unknown Executive]

And a final question here. Can you comment on how we should think about the revenue mix in 2021 versus 2020, given hopefully less of a negative impact from COVID going forward?

[Steinar Sonsteby, Chief Executive Officer]

Yes. I would hope that COVID wouldn't influence 2021, but I'm sorry to say that I think it will the whole year actually. But we're getting more and more back to a normal business mix. So our hardware has been around 50% of the business and the software about 30% and services about 20%. And we don't see that mix will change greatly in the next couple of quarters. Software has been growing faster than hardware, the last 1.5 years approximately. But we have said several times that some of the consolidation has been taken out of the market, and that software growth will slow, but that hardware growth will come back. And that's exactly what you saw in this quarter, even though there were some special situations. We've seen exactly what we've said over the last year would happen. On the services side, we will see some growth in the second half of this year just because of COVID because there are services we cannot perform today because we don't have access to the customers' buildings. And that -- there is something of a catch-up effect on that part of the services. And there is also some Managed Services, which is tougher to get going because people are not in their office, not that we don't get access, but they are not there. So there are some influences. But overall, we think that the mix is pretty much where it should be.

[Unknown Executive]

Very good. All right. Well, I think we'll conclude with questions there today. As always, you can find both Steinar and Robert's contact information at atea.com, and feel free to send in your questions, and thank you very much for today.