Atea ASA

OSE:ATEA

Earnings Call Transcript 2022-Q1

[Steinar Sonsteby, executive]

Hi, and welcome to the Q1 presentation of the Atea members here in beautiful Oslo. The world is really challenging us for the time being. Not only COVID and, of course, the terrible situation with the war in Ukraine, but also increasingly demanding supply chain problems. And so we are really proud of delivering the best Q1 in the history of the company.

The delivery problems have increased, and they have changed somewhat. But in total, they become worse. And so we are building backlog and leaving Q1, the backlog passed NOK 6 billion. This puts a strain on us, our employees, our customers and partners. But it also proves that Atea is winning big time in the market. Actually, our managed services contract base grew by more than NOK 700 million in Q1, still not implemented.

We won long-term frame agreement with the Norwegian defense and a Finnish defense, alongside a lot of other wins in the market. The activity is high and the pressure on our people is, therefore, high. In Q1, we build revenue of more than NOK 10 billion, a growth of approximately 5% in constant currency.

EBIT came in at a record high NOK 183 million. A lot of things went well in Q1. Denmark, though, disappointed us. And for the first quarter since Q1 2020, Denmark is a little bit behind their recovery plan.

This is due to the extraordinary problematic supply chain situation on networking, which is the biggest part of our Danish business, but also the fact that we weren't able to onboard some of the managed service contracts that were in our plan for Q1. These will, of course, be implemented in the quarters to come.

But more on this and other details, I'll leave it to Robert to take you through all the good news.

[Robert Giori, executive]

Thank you, Steinar. I'd like to start by reviewing our income statement. On the surface, the headline numbers in Atea's first quarter income statement show little change from last year. Gross sales was NOK 10.1 billion, up in the first quarter, up 0.9% from last year. Gross profit was NOK 2.1 billion, up 0.4% from last year. Operating expenses was NOK 1.9 billion, almost unchanged from last year. And EBIT was NOK 183 million, up 3.6% from last year.

When you look deeper within the numbers, however, there are some very important underlying growth trends despite the supply chain constraints we face. First, Atea's sales are picking up across all lines of business. This isn't visible in the Q1 figures due to currency movements and due to an exceptional hardware delivery to an international market last year.

For this reason, I'd like to break down the sales trends in more detail, so we can see the underlying growth rates. Last year, Atea reported NOK 10.0 billion in revenue in Q1. During the last 12 months, the Norwegian krone has strengthened greatly, especially relative to the Swedish krone, the currency in our largest market. This currency fluctuation had a negative impact of 3.9% on our reported growth rates as gross sales in foreign currencies were translated into a stronger Norwegian krone. If we translate last year's sales into current exchange rates, Atea's sales last year were NOK 9.6 billion.

The other major factor which impacted revenue last year was an exceptionally large international order, which Atea received from a global nongovernmental organization, or NGO, based in Denmark. The order required Atea to ship over NOK 500 million in tablet PCs to a Latin American country during Q1 2021 as part of a big development project to support education in the country. This was an unusually large hardware delivery outside of our home markets, which we both notified to the stock exchange and disclosed in last year's Q1 financial reporting.

When we adjust for constant currency and deduct the exceptional hardware delivery to our international market, our sales in home markets last year was about NOK 9.1 billion. In Q1 2022, our sales were NOK 10.1 billion, almost entirely to our home markets. Atea's sales growth in constant currency to our home markets was then almost 11% or approximately 8% in hardware, over 15% in software and nearly 11% in services.

Atea is seeing demand for IT infrastructure picking up across all lines of business as customers return to the workplace, expand their IT environment, upgrade older solutions and innovate with new ways of working. Supply chain constraints continue to hold back our hardware business, especially in the data center and networking product categories. But overall, demand for IT solutions is strong, and we expect supply chain issues to ease during the remainder of the year.

I also wanted to clarify the new revenue reporting, which Atea announced to the stock exchange earlier this week. This requires a brief detour into accounting standards. On April 20, the IFRS Interpretations Committee concluded an agenda decision which provides guidance as to how the principal agent criteria in IFRS should be applied to revenue reporting for software resale. The guidance is also relevant to the resale of standard vendor services such as warranty agreements.

In prior years, Atea has determined that it acts as a principal in the resale of standard software and vendor services and has recognized revenue from these products and services on a gross basis, with gross invoice sales reported as revenue and cost of the resold products reported as cost of goods.

Under the new agenda decision from the IFRS Interpretations Committee, Atea has determined that it acts as an agent in the resale of standard software and vendor services under the principal agent criteria in IFRS 15. For this reason, Atea has implemented a change to its accounting policy and will now recognize revenue from standard software and vendor services on a net basis, with revenue equivalent to gross sales, less cost of sales.

The impact on Q1 is that both revenue and cost of sales is reduced by NOK 3.2 billion. Neither gross profit, EBIT, net profit, the balance sheet nor the cash flow statement are affected in any way by the accounting change. Atea will continue to provide information on gross sales in our 2022 financial reports in a manner consistent with prior financial reporting. The gross sales figure will be the basis for monitoring sales growth, margins on sold products and services and working capital metrics related to sales volumes.

Moving down the P&L to discuss our EBIT performance. As I mentioned earlier, Atea's EBIT was NOK 183 million in the first quarter. Atea's first quarter EBIT has grown at a compounded rate of about 16% over the last 3 years. In Q1 2020, Atea's EBIT fell sharply due to a reorganization in Denmark. In Q1 2021, Atea's EBIT surged to NOK 176 million based on improved results in Denmark and rapid growth in hardware deliveries.

This year, Atea's EBIT grew by 4% from a very strong performance last year despite the supply chain constraints that we face. Atea's EBIT growth in Q1 '22 -- 2022 was primarily driven by higher profits in Sweden and the Baltic countries, both of which increased EBIT by more than 20% from last year.

Now a word on our cash flow and balance sheet. Atea's NOK 696 million in the first quarter compared with an outflow of NOK 641 million last year. Working capital movements, excluding the sale of receivables, had a negative impact of NOK 791 million on cash flow. Much of this impact is normal seasonality. Our cash peaks at the end of the year then reduces in the first quarter of the year based on fluctuations in the sales mix towards the public sector. But part of the impact on working capital is the result of a higher inventory balance.

Over the past year, Atea has preordered inventory and held buffer stocks to secure hardware deliveries to customers during a period of supply constraints. In the short term, this has boosted sales but increased Atea's working capital and debt requirements. Atea plans to reduce its inventory balance to normal levels and release cash flow.

Moving on to our debt balance. Atea had a net debt balance of NOK 150 million at the end of Q1 as defined by Atea's loan covenants. This corresponds to a net debt-EBITDA ratio of positive 0.1%. Atea's loan covenants require the company to maintain a net debt-EBITDA ratio of less than 2.5. Atea has significant additional debt capacity to pursue its growth strategy.

That concludes the presentation of the first quarter financial results. I'll now hand the podium back over to Steinar to discuss capital allocation and recent investments in the business.

[Steinar Sonsteby, executive]

Thank you, Robert. In the Q4 presentation in February, we briefly touched on the allocation of capital and how we're thinking about it going forward. So let me update you briefly on some of the activity. The dividend will hopefully be decided on later today in the general assembly to be NOK 5.50 as proposed by management and Board. It will be paid in 2 installments and as the same process as the last couple of years or many years.

In Q1, Atea bought back about 1 million of its own shares. And again, we'll ask the general assembly to give us the opportunity to do more buybacks in the coming year. Capital investments in Q1 was a little bit more than 0.5 percentage of sale, so well within the guidance that we have given of 1 -- or maximum 1%.

But in this part of my presentation, I really would like to focus on the M&A activity. First, Atea announced earlier this quarter or in Q1 that we would, through a carve-out, take over the product -- the infrastructure products, hardware and software business of KMD in Denmark. We are late in the process of ending that takeover and are just waiting for the government to approve the deal. This will add up to DKK 700 million in revenue, which will come in a good way for the Danish business to scale better.

Secondly, Gambit. It's kind of the last puzzle or part in the puzzle in Finland. Gambit is a company of almost 50 employees on the west side of Finland, close to Sweden. It's an information management company, and we are really looking forward to getting some new colleagues. It will increase the number of people in Finland by a little bit more than 10%.

And then eRate, which we talked about in the Q4 presentation, and I just want to put this in a context for you. So about 5 years ago, Atea chose to test if the mobile subscription business was something for us. We've been a reseller for some time. But through IoT and 5G, we were investigating if this could be something that could add to our growth. We did this investment only in Norway as we do sometimes pilot new IDs in only one country.

As part of that, we bought shares in eRate, which were the building platform for the mobile subscription business. During 2021, we decided that this was not something we would scale to other countries. And so the decision was to leave the mobile business. As part of this, we sold the shares in eRate as we needed to do that before we got out of the business itself. The profit of that was taken in Q4, as you know, with NOK 32 million.

In Q1, we then sold the Atea mobile business with a profit, which will be taken in Q2, not in Q1, in Q2 of NOK 40 million, so combined for the shareholders in Atea, a profit of more than NOK 70 million over a period of 6 months. We hope that our colleagues that leaves us for Nortel will have a joyful journey together with their new colleagues. And of course, as it always is sad to say -- see someone go, I think this is the best for everybody. Atea will return to becoming a reseller of mobile subscriptions.

The opportunity on the M&A side has almost never been bigger. And so we will keep on being active also going into the future. And as Robert just touched on, we have the gunpowder to do exactly that.

So we're leaving Q1, happy with what's happened, really strong sales, some issues, and we need to return to our plan in Denmark. We are very confident on 2022 and our targets. And we're looking into a very strong Q2. And so I'll leave you with 5% growth in revenue in Q1 at a profit of NOK 183 million.

We'll then go to questions, both from the audience and from online.

[Unknown Executive]

Thank you, Steinar. We have received some questions. The first question is supply chain problems have become an industry problem. Can you explain more how you have seen the development of the program and how you see this going forward?

[Steinar Sonsteby, executive]

Thank you. So the problem, as we started to see, it started in the second half of 2019. And during COVID, there was a lot of speculations if this problem had to do with transport or production problem due to the COVID situation. But as we now look back and as we now are more knowledgeable as an industry, this is actually driven by higher demand, not only from the computer industry, but from everybody who uses these components from cars to appliances all over the world. The problem has increased because demand is keeping on rising and the production is still not bigger than what it was 2 years ago. But it's moved.

So we have less problems on the PC or client side today, but huge problems on networking, server and storage. And as the networking and server business are driving services more than the PC and client business, this has an impact on us. We believe from all our sources, from -- all from [ intel ] to our vendors that this will not go away for the rest of this year. So we are planning when it comes to how we operate to stay with this problem for the rest of this year.

On the other hand, it looks better if you look 12 months into the future. But again, today and through Q1, this has been a severe problem, especially on networking. And I want to just touch briefly on that when we look at Denmark because Denmark in dollars is the biggest networking revenue or represents the biggest networking revenue in the group. And so this comeback in Denmark is tempered more by the networking problems than supply chain issues in the other countries. So unfortunate, but that's how it is.

[Unknown Executive]

Thank you. Next question. Can you please explain why it was right for Atea to divest the mobile strategy?

[Steinar Sonsteby, executive]

As I tried to say in the presentation, we believe there was an opportunity there if we go back 5 years. and we were looking into some major changes in how SIM cards and the subscriptions were or could be used. We've tested it. We didn't reach the levels of business that we wanted.

On the other hand, the demand for the business we had created and the shares in eRate was high from other players. And so it was a combination of us not 100% succeeding and, therefore, not wanted to scale it to other countries and the demand for and the price we could get for the business we already have. So I would say a good opportunity to do some good business.

[Unknown Executive]

Thank you. Next question. Last week, you were awarded a framework agreement with the Norwegian Defense. Can you please give some more insight?

[Steinar Sonsteby, executive]

Absolutely. And the Norwegian Defense has been this group's biggest customer for many years. And last week, we're still in the [ compliant ] period for another 10 days, I think it is. But last week, we were -- the week before that, we were awarded a frame agreement that has a value of more than NOK 10 billion over the next 7 years. This is substantially more than the previous agreements that we've had within Norwegian Defense. And we are the sole company that can deliver on these frame agreements for the next many years.

And I should add, and this is all infrastructure products and services. But I should add to that, and I maybe should have said that clearer in my presentation, we also, a couple of weeks ago, won the Finnish defense and a new frame agreement, a frame agreement we haven't had for the last 2 years, and this is a very important part of the growth strategy we have in Finland.

The contract is for 4 years, and we should at least do EUR 150 million of sales over that few -- 4 period. This is also a contract where we are the sole supplier. So 2 very large wins. And actually, the Norwegian defense is the biggest frame agreement this company has ever closed, so some good news. And we are probably not the only one that's going to have some benefits from investments from the defense departments around in Europe.

[Unknown Executive]

Thank you. Do you want to comment on the recent development of the share price?

[Steinar Sonsteby, executive]

Well, I don't really want to -- as a CEO, I don't really want to comment on the share price. But as I am also a substantial investor in Atea, I can say that the share price have had better days from an investor's point of view.

On another hand, all our peers in Europe have had the same journey over the last 3 months, and so have the Oslo Stock Exchange. So as a CEO, we're working hard to make this company better and better. And we are every single quarter. And then hopefully, the share price will follow when the world becomes a little bit calmer around us.

[Unknown Executive]

Thank you. The next question, can you please elaborate on what you mean with a strong Q2 and particularly the dynamics that make you confident in Q2?

[Steinar Sonsteby, executive]

Well, first of all, a strong Q2 is a Q2 where we grow revenue faster than the market and EBIT 2 to 3x the speed of the revenue. That's what we've defined as a strong quarter or a strong performance. The reason why we feel confident is that we look into backlog and we see delivery of some of that backlog into, which will give us a healthy revenue, but also the fact that we are able to control both gross profit and cost in a good way, even though it's a little bit unpredictable.

So it's just the visibility for us at this time into the quarter. Q1 was a very tough comparison that Robert touched on. Q2, a little easier comparison. So those are factors that give us that confidence.

[Unknown Executive]

Thank you. And then a last question. Are you confident on your plan in Denmark?

[Steinar Sonsteby, executive]

I am very confident that we're doing the right things. And when you are turning something around or on a return to normality, it will never be linear. And I was a little surprised and disappointed with Q1. On the other hand, we know exactly what the cause for it was, and so we can focus on that. And we have taken some cost measures during March and April, which will help us when we get over the summer.

So yes, I'm confident that we are on our way back in Denmark. And it's a balance between how much gas do you want to give, how much powder do you want to put behind your plan compared to how fast you'll get into the right EBIT numbers.

We could take down the number of horsepowers that we give the Danish management to use to get back on sales, but it would lower the potential in the longer term. So it's a balanced act. We are very confident that our actions and our plan is the right one and that we will see the results in the quarters to come.

Okay. Then that ends the Q1 presentation and Q&A. We would like to thank all of you and give our support to our Ukraine friends all over the world. Thank you.