Atea ASA

OSE:ATEA

Earnings Call Transcript 2019-Q2

[Steinar Sonsteby, Chief Executive Officer]

Hi, and welcome to warm and hopefully sunny Oslo and welcome to the Q2 Atea presentation. I must say another eventful and good quarter. But before I get into the numbers and the highlights, I want to give a couple of comments. First of all, for the first time, we'll take live questions from the people streaming this presentation through the email link that you'll see where you got the link for the streaming. So bear with us since this is the first time. If we can't or will not be able to take your answer -- or your question and answer your question live, we'll certainly do it through the day on email.And secondly, later today, I believe it's 10:00, the judge in the Danish appeal court will announce the verdict in the appeal case that 5 former employees in Atea and Region Zealand has going and have had going over the last 6 months. Atea is not involved, and we do not carry any legal responsibility in the court case no matter what the verdict will be. Our case was settled 12 months ago, and it's behind us. Hopefully, though, this will mark the end to a very long legal process that started as early as summer 2015.So to Q2 and the Q2 numbers. This is the first quarter in a long time, well, where all countries have growth both in revenue and EBIT. Revenue came in at NOK 9.5 billion, a growth of 4.3%; EBIT at NOK 145 million, which is a growth of slightly more than 14%. So again, a quarter where we believe, even though we haven't got the market numbers yet, we grow as our target is as fast as the market or faster and EBIT grow 2 to 3x the growth of revenue.And due to the new financial setup that Robert had discussed over the last year with many of you and we have announced on one of the quarterly calls, our cash flow has normalized over the year. And even though Q2 usually is a difficult cash flow quarter, we ended the quarter with hardly any debt. We feel very confident leaving Q2, and I'll come back to more comments on Denmark and other things later. But until then, I'll leave you to Robert to give you all the good news.

[Robert Giori, Chief Financial Officer]

Thank you, Steinar. We'll now take a closer look at revenue and profit development across the countries in which we operate. Starting with Norway, where Atea reported solid growth in operating profit based on higher sales of software and services. Total revenue in Norway was NOK 2.2 billion, an increase of 8.7% from last year. Product revenue is up by 6.2% as software sales grew 29.3% based on large agreements with public sector customers. Services revenue increased by 16.3% based on higher sales of service and support contracts and an increase in the number of consultants within strategic growth areas, such as information management. Gross profit increased by 3.4%. These higher sales were partly offset by lower margins on products and services. Operating expenses were up by 2.6% based on growth in the number of employees. During the last year, Atea has increased its consulting workforce to meet growing demand for infrastructure services. With higher sales and relatively slower growth in operating expenses, EBIT was NOK 71 million, an increase of 9.1% from last year.We'll now move on to Sweden, where our business continued to show strong growth in profitability. Total revenue in Sweden grew by 2.7% to SEK 4.3 billion from a very strong comparable period last year. Product revenue grew by 2.2% based on higher sales of software to the public sector. Services revenue grew by 5.3% with increased sales of both consulting and contracted services. Gross profit was up by 3.4% as margins improved due to a shift in the revenue mix towards services. Operating costs grew by 1.9% as the business continued to scale. With solid growth in services revenue and slower growth in operating expenses, EBIT in Sweden grew by 12.3% to SEK 130 million.In Denmark, Atea had revenue of DKK 1.8 billion, in line with last year. This marks the first quarter since the Region Zealand case finished that Atea Denmark did not report a revenue decline from last year. In sum, Atea had moderate growth in sales to the private sector, offsetting slightly lower sales to the public sector. Product revenue grew by 4.7% from last year driven by software sales on recently renewed frame agreements. Services revenue fell by 17.4% based on lower sales of consulting and contracted services. Services is the business area which has been slowest to recover based on longer sales cycles for large consulting projects and managed service agreements. Gross profit fell by 8.9% due to a lower percentage of services in the revenue mix. Total operating expenses fell by 9.1% based on a reduction in the number of full-time employees from last year and due to a onetime legal penalty of DKK 10 million, which was recognized last year. Based on lower operating expenses, Atea Denmark's operating loss in Q2 2019 was lower than last year. EBIT was a loss of DKK 30 million compared with DKK 34 million last year. Steinar will discuss the status of the business recovery in Denmark in the second half of this presentation.In Finland, Atea had another strong quarter with rapid growth in product sales. Total revenue in Finland grew by 15.4% to EUR 77 million based on higher demand from both the public and private sectors. Product sales grew by 16.8% driven by strong sales of data center and network equipment. Services revenue grew by 2.9% based on a higher demand for consultants. Gross profit was up by 18.7% as the revenue mix shifted toward higher-margin products. Operating expenses were up by 19% from last year as Atea increased its workforce to pursue an aggressive growth strategy in Finland. With strong growth in product revenue and improved gross margin, EBIT grew by 15.8% to EUR 1.3 million.Finally, Atea Baltics had exceptionally high EBIT growth in the second quarter. The profit improvement was driven by a very healthy services business. Total revenue in the Baltics grew by 11.1% to EUR 30 million. Product sales grew by 8.4% from last year based on large projects to the public sector. Services revenue is up by 17.5% with strong demand for Atea's services within managed cloud and software development. Gross profit increased by 11.7% as margins improved due to a shift in the revenue mix towards services. Total operating expenses increased by 7.7% from last year as Atea services business continued to scale. Based on very strong growth in sales of services, EBIT grew by 83.6% to EUR 0.7 million.Finally, a word on our balance sheet and cash flow. Atea had a net debt of NOK 289 million at the end of Q2 2019 as defined by Atea's loan covenants. This corresponds to a net debt-EBITDA ratio of 0.25. This is well below the company's long covenants of 2.50. Cash flow from operations was an inflow of NOK 873 million in Q2 2019 compared to an outflow of NOK 302 million last year. In order to offset seasonal working capital movements, Atea has entered a securitization agreement on selected accounts receivable with its primary bank in December 2018. The use of a securitization facility explains most but not all of the improvement in cash flow from operations during Q2. The securitization facility allows Atea to stabilize its net debt balance throughout the year. Atea expects to maintain a net debt-EBITDA ratio below 1.0 for the remainder of the year with a low point at year-end.That concludes our summary of the second quarter financial results. Now for an update on recent developments at Atea's business, I'll hand the podium back over to Steinar.

[Steinar Sonsteby, Chief Executive Officer]

Thank you, Robert. So I'll take the opportunity, before we wrap up with questions, to take you through 3 areas that we think are of interest to investors and others following the company. Three areas that, in one or another way, we've invested heavily in over the last period.First, Denmark. There's no doubt about it. We knew it'll take time to get back in Denmark, but it has taken a little longer. There is no doubt that we have invested so that when we get back to full force in Denmark, we will be the dominant player in Denmark as we are in the other countries. Of course, we could have scaled down more earlier, but it would have, in our mind, tampered the speed of which we could come back. So I'm happy to say that we have managed to deliver a revenue and profit at same level of this Q2 as last year. It's actually the first time that we managed to return to positive growth since Q1 2017. Having said that, I'm of course not satisfied and nor is Morten Felding. The numbers in Denmark are not good enough. Morten are doing a great job, but it just is so that reality is that it takes a little longer, and then we anticipate to get back to healthy growth on revenue. When that is said, and I'll come more into details on this, we still plan for a normal growth on revenue in Q3 and profitable numbers on EBIT.The slide behind me shows a lot of frame agreements. I'll try to explain this to you in the best way I can because we get a lot of question, especially from investors and people who follow us outside the Nordics. So first of all, a bigger part of the Nordic and Baltic IT market and I believe all markets, but at least the IT market, is done through the public or to the public since the public is giving more services to the employees and people who live here than in most places in the world. In IT, about 50% to 55% of all investments are done by public or publicly-owned companies. In Denmark, as in all European countries, this is not completely similar but it follows the -- a similar pattern. This is done through frame agreements, and the frame agreements very often have 3- to 4-year duration. And you can see on this slide all the live frame agreements that SKI, which is the central purchasing organization in Denmark, has where it's relevant for Atea to participate at all times.It's been a very heavy work over the last 6 to 9 months to participate and win every single frame agreement that has been out in the market. It's a big job to answer these big questions and bids that come from, in this case, SKI. There are tens of people working on each single frame agreement to win them. Right now, we're waiting for the -- waiting for answers on the last frame agreement, as you can see here, called 50.07 Networking. We had hoped to be able to put the name of Atea behind it before this presentation, but we're just days away from, hopefully, hopefully, have another frame agreement in the bag.So let me take you through this very briefly. There are 3 ways actually to purchase, in this case, in Denmark, if you're a public organization. You could either purchase if the purchase is below DKK 1 million, without a frame agreement or you can go out on every single purchase, if it's above or higher than DKK 1 million, but then you have to go out to the market with a full-blown bid for every single purchase you do. Both of these are tedious and difficult and a lot of people -- and can be questioned through the purchasing law of EU. So most of the purchase is done on 1 of 2 types of frame agreements. That's when you have cleared the buyer and the seller to do business in a certain way described in the frame agreements.So there are 2 different frame agreements, and this is actually different in Denmark than the other Nordic countries. There are 2 different -- there's the binding and the nonbinding. So I'll try to explain. As you can see here, the nonbinding are on top of the agreement. They're actually called 02 dot something. And on these, Atea is on every single one but the PC agreement. I'll comment on these later. These are frame agreements that SKI had negotiated. Typical to nonbinding agreements, there are more vendors on them, and there are less commitment from the public to buy on them.Secondly, you have the binding ones. That's more for central government. They're committed to buy. They cannot go out and buy on anything else. They have to buy. So for instance, on the Server & Storage, 50.03, they -- the people have committed to buy on this agreement, which they do, and state before it's out for bid, have to buy no matter what it is. There are typical a higher commitment and fewer vendors on these, so often more competition and more work to get them. Again, we are on almost every single one of them as of today, and again, we're waiting for the answers on the last one.To get to have this buying platform or selling platform, I should say, from our point of view, is a lot of work. We're the only one that are even close to having this platform. We thought that we would have been there a quarter ago. We know these are scheduled to come out, and we had hoped that we would have had these earlier in first half. Now they're -- almost all of them or most of them are there so we can start selling on them. Seven out of the 14 frame agreements are won within the last 6 months, and they last for years to come. And most of these frame agreements are prolonged in the optional period.A last comment on this. One of the difficulties when it comes to beating last quarter -- or last year's similar quarter has been because in June last year, we lost the PC agreement. So we had it for Q2 last year, but we didn't have it after Q2 last year. So we've been able to replace one of the biggest frame agreements and still get back to growth this quarter and predicted even higher growth next quarter.I hope that gave you a little better understanding on how business in -- or how public business in Denmark are developing and on what base the business is done. So we'll feel confident that we have the platform now. And in Denmark, the private has outgrown, in first half, the public because private is getting back, and the public have been working heavily to get -- securing the frame agreement. So we believe that we're in a better and healthier position going forward.Secondly, we presented AppXite to you -- I believe it's a year ago, a little more than a year ago. AppXite started as an internal IT project as some and probably more of IT will be consumed in a hybrid setting where resources are not centralized in one place but in several places and it becomes more complex to follow and at least bill to different department when the consumption of IT is set up that way. And then we were asked if AppXite couldn't be something other could use, and so we set up a company called AppXite. The development of this has -- in the market, it's not as much us as the market, has gone much slower in the Nordic and Europe than most people predicted about 3 years ago.We are giving you the numbers in the quarterly presentation. But the numbers are broken down a little bit more per month, and you can see the developments. So still small numbers, still the jury is out on what AppXite will become. But what we do see and are more confident on today than ever is that IT will be consumed in many ways and that people or companies in the IT space have to have different tools and IT platforms to be able to sell and deliver and build that kind of more complex setup. We're still hopeful for AppXite. So we'll come back to you with more information as we go.The third area and last area I want to focus on, which is actually one of the biggest, if not the biggest, investments that we've ever done in the history of the company, is the new central warehouse that we have built and opened in Växjö. The product name was Nylanda, very Swedish name. And it's actually pretty amazing, at least when you compare to where we come from with 3 different warehouses and very old buildings and setups.The building or the warehouse -- the building is bigger, but the warehouse is 21,000 square meters, 10 meter high. So 210,000 cubic meters, which actually doubles, exactly doubles the capacity without any need for hiring more people since most of this is automated fully or partially. It's secure, and it's carbon neutral through, amongst other things, solar panels, which you'll see in a minute, on top of the roof.We have booked about SEK 7 million -- sorry, NOK 7 million in extra cost one-offs in Q2 because of moving all the goods from 3 warehouses into this warehouse, a little less capacity in that period, especially in May, and of course some higher salaries as people have worked double shifts sometimes during this process. This is onetime. It's not recurring cost for quarters to come.But for a little bit better visibility to what this is and the size of what this investment can mean for us, you take a look at this film.[Presentation]

[Steinar Sonsteby, Chief Executive Officer]

So as you can understand, we're very proud of the opening, which is behind us, and we are in full production. We still have some small moving to do, not of the operations, but other thing to get it completely out of the last warehouse. But that will be done through Q3, and then we're over to paying only one rent, so a very good part of the movement to increase our margin, EBIT margin.So to sum up the quarter, we believe that the 4.3% growth that we had is about in line with the market, maybe a touch higher than market growth, which has been predicted to be 3.5%. The EBIT is still growing faster and, in this time, more than 3x faster than the revenue. And the cash position is more comfortable than -- at least for the last 7 or 8 years. So a great quarter, a great base for a great second half, and our forecast looks just like that for second half. So we're confident we are where we should be before entering the summer and taking a little bit of vacation. So thank you for the interest, and thank you for showing up or watching online. And we'll open up for questions, and we'll try to do this as lively as possible, even though we'll have some come in on email. And we'll have Christian read those to us.

[Christoffer Wang Bjørnsen, Analyst]

Christoffer from DNB Markets. So first of all, it is very impressive, this new facility in Sweden. So just wondering if you could help us understand how this is going to impact your EBIT going forward if you compare it to the previous setup. And now having had kind of 2 rents for a period, how much of a lift up should we expect?

[Steinar Sonsteby, Chief Executive Officer]

Well, what we've said before is that we believe that we're in -- when we're in full production -- I'll get back to what I mean by that -- we have moved. But we're still not fully taking advantage of the new building and the automation. But when we're there, which we believe we'll be during Q -- sorry, first half 2020 and of course we want that to happen as quickly as possible, it'll mean as much as $100 million a year, so in yearly effects. It has to do with cost, margins, volumes, but in total, about $100 million.The thing is that we have fully automated what we believe -- at the end when we're fully taking advantage of it, it will be 40%. And where we're coming from, it was 0. And -- but also because we have completely different building, the efficiency will increase massively. So we can take much bigger volume without hiring more people. So there are several things. But another thing is that we will take more through our central warehouse than buying from other distributors, which will also influence our margin. And the last part is that we were out of space to do recycling or what we call Go IT loop. And recycling is actually the most profitable part of our business. So the fact that, that was out of space or out of capacity, which now is several times bigger. So some small and some big parts of it, but about $100 million in yearly effect when we're fully there.

[Unknown Analyst]

Great. I'll try to be quick.

[Steinar Sonsteby, Chief Executive Officer]

That'll be a new one, [ Christian ].

[Unknown Analyst]

So gross margins continues to be under pressure across many of the business areas. So other than this improvement from the facilities in Sweden, is there any other trends you're seeing that will kind of turn around and kind of start picking up the gross margins again in the coming quarters? Or...

[Steinar Sonsteby, Chief Executive Officer]

Well, it's...

[Unknown Analyst]

Continue to decline.

[Steinar Sonsteby, Chief Executive Officer]

Yes. Well, if you look in a longer perspective, it's not overall declining if you look into the each of the areas. So this has a lot to do with mix. So it's more the mix of what we end up invoicing during a quarter than the actual pricing or margin because it's such a big difference on margin on the different products and services. So we've had a, which I say, un-normal high software quarter, and some of that software have a lower margin. So it's more of a mix than it is a continuous, which I say, price pressure or competitive situation or whatever. And it's also a part of the Danish recovery. Denmark is about, what is it, 24% of our revenue, something like that. And they've been a little bit over-leaning on the software, which, again, has a little lower margin. So we believe that working on the mix and getting a little more stable situation in Denmark, which we have now and the new frame agreements and working on them to be efficient on that will definitely take us there. But we're not thinking that gross -- when you call margin, I believe you mean gross profit because that's where it starts, so to speak. We have lower costs. So it's really the gross profit on the product side, which important for us right now.

[Unknown Analyst]

A little word quickly. AppXite seems very exciting. It seems they are more scalable than your core business. So -- but taking longer time. But how big should we think about this when we're going to look on your kind of 5-year plan? How cool or interesting can this be for your shareholders? And then secondly, on a kind of more bigger-picture level, I suppose many have seen you commented at some media that you expect or hope to be in another country within the next 12 months. So could you just comment a bit on that? And do you still expect that? Or will it take longer? Do you see any opportunities now?

[Steinar Sonsteby, Chief Executive Officer]

Well, I'll start comment on the last one. I have no new comments. So my comments from the last quarterly presentation is the mention that we have that. As we're working on that, we can't comment round by round on where we are. It'll be difficult, but we are working on that. When it comes to AppXite, I think the way you should look at it is there is shifts in the market. And I mean most of you have seen IBM closed the Red Hat acquisition this week, and it's a huge investment that IBM does in the same things that we do, a shift. I'm not saying Red Hat is the same as AppXite or vice versa, but they're all investments in a shift where you consume things, where you buy IT in many different ways. And how -- right now, it's very difficult, I would almost predict, impossible to do what the vision says. It has to do with how you deliver, if it's possible to move around from one data center to another without huge investments and how are you going to bill for this or keep track of what you're using and then possible to bill. So AppXite -- the investment in AppXite, you should see as much as understanding and being a part of driving that change. But it is promising. It's something everybody needs. Customers, resellers, producers -- or vendors, sorry, distributors, everybody needs it, and we're kind of early out of the gate. We'll see what we can do with it. We have an asset, we have a knowledge on how to do this, and we'll see how we can cash in on those IPs, all the knowledge and in codes, so to speak. Christian, anything online?

[Christian Stangeland, Director of Business Control]

Yes, I have.

[Steinar Sonsteby, Chief Executive Officer]

Okay.

[Unknown Analyst]

Yes. Okay. Maybe a question regarding Denmark, first. Seems like the 12 months' rolling EBIT seems to have bottomed out, and it was better than Q2 last year in Danish kroner. Could you be a bit more specific or explicit on what kind of EBIT level you think you could manage for the full year 2019 for Denmark? And maybe also comment on what you think about next year, 2020, for Denmark.

[Steinar Sonsteby, Chief Executive Officer]

Okay. We'll be a little bit careful on being that specific on all the numbers. We do not have any history in any country to be that specific, but I can comment on it. First of all, we believe we've crossed into the area where both revenue and EBIT will show significant improvement in the quarters to come. And there's many reason for that. We said frame agreements, but it's also putting the past behind you and new people charging on. Secondly, we're saying that we have a prediction for Q3 that will have significant growth in revenue and large improvement, in fact, positive EBIT in Q3. And then we believe we'll be on a more natural movement from there as in all the other countries. And if I believe -- and don't arrest me on this, I believe that 2017 Q4 was something around 80 million plus. So that's what we comment on before.

[Unknown Analyst]

Okay. And then interesting to see the development with all the SKI wins over the past few years, is it possible to say anything about margin difference between nonbinding and binding agreements?

[Steinar Sonsteby, Chief Executive Officer]

It differs from agreement to agreement. And I know that's not the answer you're looking for, but it's actually the true answer. So -- but if you look at the -- I would say if you look at the product part of those agreement, because there are services agreement, there are managed service or cloud agreements in there, the software agreements are tougher on the committed agreement. On the others, I would say not that big of a difference.

[Unknown Analyst]

And then would you say there is any particular reasons why you have won so many in the past 6 months? Have you -- I mean, winning these agreements, you have a platform to actually answer on the tenders. So I suspect that there's a number of criteria to tick off to be competitive, including price. And then I mean since you have won so many over the past 6 months, is there any particular reason that has contributed to that?

[Steinar Sonsteby, Chief Executive Officer]

I would say we're the best, but I'm of course paid to say that. No, but answering these bids is really -- I mean you will not understand how much work it goes into those. And we are, by far, the biggest and have the most resources. So that is one of the answers, and this goes for all the countries actually. So one of the big benefits of having the size -- and this is something that you guys haven't focused as much on, and I've tried to say it's not all about the purchasing price from the vendors. There is a lot of other things. This is one of them, to be able to have the breadth of an organization to put 25 people in a room and work for months to produce the material to win a frame agreement, it takes the people, it takes the knowledge on how to win, what to write. But of course, price is an element. There's a lot of other elements, the possibility or the delivery capacity, the quality on things and so on. Some of them are must things, you have it or you don't. If you don't, you're disqualified. Others are rated on a scale. Price is a part of it. But we get information and the others get information on how we rate. And it's -- and it gives me the question gives me the opportunity to answer or give you the information. It's not so that we've dropped the pants. We have won these agreements. We're either the same or slightly better priced than the people we've been competing with. It's competitive. It's competitive, but that's how it's judged.

[Unknown Analyst]

And then just a question on the new warehouse, where you're doubling the capacity. But how should we think about the ramp up in, let's say, utilization rate, I mean in the utilization rate of that warehouse. I mean now, you're getting to your full production, you said, let's say, first half next year, but do you still have then 30%, 25% spare capacity left, so that this warehouse will be, let's say, good to use, let's say, for another 3, 4 years before you need extra capacity again?

[Steinar Sonsteby, Chief Executive Officer]

Yes. We do not have to build on this building next year or 2. Of course, if we do, I'll be very, very happy. But -- because we've outgrown the market many times. But what I -- we are in full production as we speak, okay? We have no production anywhere else in that building. And that move went much better than what we had planned. We had planned for slower movement, but we moved faster than what we anticipated 6 months ago, okay? But when I say full utilization of the capacity -- or not the capacity, but the investments in the building, it's to put more and more of the orders through the fully automated process instead of half or fully manual process. And that's where we can start saving some of the cost to utilize investments in robots, physical, hardware robots, software and how many recycling things we can do per hour, per computer and so on or how much many PCs. Right now, we're -- I think we're planning to have something like 150,000 PCs through the warehouse within the next 4 weeks, 5 weeks to deliver to school, high schools around -- in the Nordics.So when we're -- but we can do that more automated this year than last year, but we'll probably be even better in a year from now than what we are today. So full production and full utilization is 2 different things. When we are, as we are now -- right now, it's a little slower. July is a little slower if you look past the school PCs. We will be at somewhere around 55% utilization of square meters or shelves, which they count. So we have quite a bit of volume that we can increase, but with 10% growth a year every year, we'll be there pretty -- in 3 years or so.

[Unknown Analyst]

And then you talked about a NOK 100 million, let's say, cost efficiency...

[Steinar Sonsteby, Chief Executive Officer]

EBIT effect.

[Unknown Analyst]

EBIT effect, yes. Should we then expect a gradual, let's say, impact of that NOK 100 million then from, let's say, now and over the, let's say, next quarters to come?

[Steinar Sonsteby, Chief Executive Officer]

Yes. Could we just take a couple online, if you're okay, and we'll get back to you?

[Christian Stangeland, Director of Business Control]

I have a question from Henriette Trondsen, Arctic. You mentioned that you expect an improvement in Denmark. Do you expect a positive EBIT in Q3?

[Steinar Sonsteby, Chief Executive Officer]

Henriette, yes. I do expect a positive EBIT in Q3.

[Christian Stangeland, Director of Business Control]

Second question, how was the hardware mix in Q2?

[Steinar Sonsteby, Chief Executive Officer]

Well, Q2 was different than what most people around the world expect. It was -- the growth areas were servers and storage and networking. We're actually a little slower on the PC side or the client side, so everything around the user. And we -- Q3 will be different because of the student PC, so it's a big part of the hardware in Q3. But we still see networking as a very, very promising area going forward. So -- and we believe storage is underrated. But what we call system products grew faster than the client products in Q2. I believe that was true for all first half, Robert, if I...

[Robert Giori, Chief Financial Officer]

That's correct. Yes, that's correct. Last year was actually a very strong growth on client. So the comparables on the clients' side were challenging. But the growth has been coming from -- the growth areas have been networking and data center.

[Christian Stangeland, Director of Business Control]

Okay. Question #3, storage, server, PC and mobile are down in the report. Why is not the gross margin better?

[Steinar Sonsteby, Chief Executive Officer]

I'm not 100% sure if -- still Henriette?

[Christian Stangeland, Director of Business Control]

Yes.

[Steinar Sonsteby, Chief Executive Officer]

I'm not sure if she means on product in total or on hardware, specifically. But we can get more into details, Henriette, if you call us later. But the total product margin in this quarter is influenced by the software mix. And the difference -- we're not saying it's a huge difference between the -- in the hardware but -- in the mix. So PC isn't crashing and servers going through the roof. So it's a huge revenue. So it wouldn't change the margin -- or gross profit, sorry, in that way. But I'm not 100% sure I'm -- answering the question as specific as the question was put.

[Robert Giori, Chief Financial Officer]

Hardware margins, there's strong variations in year-on-year on a country basis with Norway having had the most -- the steepest drop in the hardware margins. So there's local differences in how they've been playing the markets.

[Christian Stangeland, Director of Business Control]

Okay. Another question from Jan Horsager, IDC. Can you elaborate a bit on the growth in service net revenue in Norway? You were mentioning consulting.

[Steinar Sonsteby, Chief Executive Officer]

Yes. We -- I mean Norway have had a healthy development on services, not every quarter but overall in quite a little while actually. But we did investments. We did an acquisition about a year ago in a company called Sherpa, which were 50 people -- 48 people. And that has moved and developed very -- in a very interesting way, and it's actually led us several other discussions with companies like that in Norway we'll discuss with over the next 3 to 4 months. But we have recruited more people. So it's some new people in some new areas, information management where Sherpa works, analytics and IT -- IoT, sorry, and some AI. But it's also a little better utilization on existing production. So that is one area. I know the question were around Norway, but I also wanted to say that we've had a tremendous development over the last couple of years on cloud management in the Baltics, which is actually probably one of the more healthier business we have in the whole group. So just to put that in there when we're talking about services.

[Unknown Executive]

Aksel, do you have a question?

[Aksel Øverland Engebakken, Lead Analyst]

Yes. A question on Denmark. There have been many, but one more. So Denmark, if we adjust for the cost of the penalty last year, the EBIT is slightly down year-over-year in Danish kroner. If you look at the employee staff in Denmark, that's down some 6% year-over-year. So you had done some measurements there. You talk about increased revenue as a driver. But are there other drivers? Could you do anything more on the cost side, on the employee side, on the margin side? Or is it mainly boosting the top line?

[Steinar Sonsteby, Chief Executive Officer]

I would say that Denmark, if I should focus on one thing and look at one thing if I were you and it's the same thing we're doing, it's gross profit on products. We need to get to a better level. When we get into a little bit more stable situation, which we are, it's easier to work on those things, which are a little bit more intellectual, so to speak. So I'm not saying it's the only one, but that is an important part of the recovery in Denmark. In Q2, it was 7.1%, on average, on software and hardware, the gross profit. If it would have been a 10%, which it maybe should have been, that would be DKK 43 million better EBIT. So that says something about the scaling of that KPI, so to speak.Could we do more on cost? Yes, we could do more on cost. But as I said, we've seen as an investment, as we do other investments, to keep a production capacity. So that when we're at that turning point, we'll return quicker. To bring people out and bring them in again is both costly, money-wise, culture-wise and knowledgeable -- or when it comes to the competences. So it's an investment that we've done to keep it to a level where we feel comfortable that when we turn, it's a good base. But yes, we are very careful on hiring people until we kind of see that, and that's why you see 6% less people than a year ago.Thirdly, I comment on -- I mean we are in a growing market, and we are a company that are put together in a way where we should outgrow the market. We have more capacities. We have a broader view on the market than any of other -- our competitors. So growth will always be a part of our thinking. And we haven't -- as I said, we haven't been able to grow in Denmark in, what is it, 3 years, almost 3 years. So growth -- getting back to growth is important. We have a base, which can -- of production, which can take a bigger revenue than what we see today. So we need to grow, and we need to improve, which is a little bit more -- takes a little bit more brain power, so to speak, to improve the margin. And we judge the costs every single week.

[Aksel Øverland Engebakken, Lead Analyst]

Just a follow-up question on the product margin in Denmark. So we know that you were very aggressive during the turmoil last year, maintaining market share, bidding in that low prices, pushing down the margin. So will it be then all below margin contracts being renewed at a higher margin now? That will be the main lever to get the product margin back up. Or are there other drivers to get that product margin higher up to the -- those 10%?

[Steinar Sonsteby, Chief Executive Officer]

Now the answer to that question is why people say that this is not a trade, it's an art. If it was that simple, that it only had to do with the price, everybody could do it. It's how you purchase, what you purchase at which time, what kind of programs utilize. It's also of course the price and contracts, but it's a whole range of things. That's why I'm saying it takes a little bit more of an intellectual approach than just go out and sell more. So there's a lot of tools in the toolbox, so to speak, to improve the gross profit.

[Aksel Øverland Engebakken, Lead Analyst]

Okay. And then last question on the organic revenue growth. So one sees that it comes down in [ Q2 ] Denmark, notably in Sweden. Do you see any changes in the organic growth prospects for Atea relative to the market or the market as a whole in Sweden? Now...

[Steinar Sonsteby, Chief Executive Officer]

In general?

[Aksel Øverland Engebakken, Lead Analyst]

Yes, in general.

[Steinar Sonsteby, Chief Executive Officer]

Okay. So let me very briefly comment on Sweden because it's 42% or so of our revenue. Sweden had a lower growth this quarter than they've had and actually than the average of the group. They came into Q2 with a little lower backlog than normal. They're actually exiting the quarter with a higher backlog than what they entered the quarter with. So we believe that this is more of a quarter thing than anything else. But of course, we -- I mean 5 years, every quarter, 5% to 15% growth, I mean it -- you can't do that every single quarter forever. But we don't see anything -- so that's Sweden specifically, and we've comment on Denmark specifically. We won a huge frame agreement in Finland, one of the biggest we've won actually, a couple of weeks ago. So overall, we do not see less activity in the market. Overall, we don't see less interest in areas where we believe we'll create huge growth, which are small now but will create huge growth going forward. So we don't see any change in the healthiness of the market, so to speak. But -- and we're entering a part of the year, which is a big -- it's like the winner for ski resorts, I guess, for us.

[Robert Giori, Chief Financial Officer]

It's worth mentioning as well that in Q2 last year, specific to Sweden now, Sweden's product revenue grew by over 20%. So the comparables last year were actually a very challenging comparable, very heavy on the client side that we saw in Q2 last year. What's great about Sweden is even if the comparables were tough on product revenue, the product revenue wasn't hitting the growth rates that it had last year. Services continues to do very well, In particular, the sales of their own consultants continues to do very well. And so they're scaling based on the services revenue, which we're generating within Sweden. That's the positive side.

[Christoffer Wang Bjørnsen, Analyst]

I see we have 2 more minutes. Christoffer from DNB Markets again. I just wanted to follow up on Aksel's questions on the growth because the growth in Norway has been a lot stronger than last year, more than double the growth rate, and I see Sweden is more than 50% lower growth than last year. So you say there's some special items here and there. But for the full year, should we kind of expect Sweden to be in line with last year and then all the Norway to come down to kind of last year's single-digit growth and Sweden on double-digit growth for the full year?

[Robert Giori, Chief Financial Officer]

Oh, I'd vote for the double.

[Steinar Sonsteby, Chief Executive Officer]

Yes. Well, let me comment on revenue. We believe Sweden had exceptional growth last year when you look at the size and the market share that Sweden have or the Atea in Sweden have. And I think I've said this before also on quarterly presentation at least in public, that you can't -- we have that in our budget, that they will grow with the same speed. But at the same time, we don't see a slowdown when it -- that would really make a huge difference. But the comparables are more difficult, and the growth last year were phenomenal.We believe that Norway, in 2018, were growing too slow, and I think I also comment on that. And so we started kind of leaning forward a little bit more than we should, and that's why cost in Q1 and also in Q2, to be honest, is a little too high on personnel. So we believe growth in Norway this year, complete calendar year, will be higher than in '18; Sweden, a little lower.Okay. Well, thank you to both our streaming friends and our friends in the room. And I really, really hope I'll have a great summer, and hopefully, you'll have, too. Thank you.