Atea ASA

OSE:ATEA

Earnings Call Transcript 2021-Q3

[Steinar Sonsteby, Chief Executive Officer]

Hi, and welcome to the third quarter results for Atea. I am pleased to say that we are no longer in the Atea office, but in a conference room downtown Oslo. It's also a sign of normality. I can also tell you that in the Nordics restrictions after COVID or during COVID is now lifted. And even on my flight yesterday, you didn't even have to use face mask inside the cabin. So things are getting back to normal. What is also normal is that we post another quarter of very, very strong numbers. And I am particularly pleased to see that the growth is still here with us. 6% growth and NOK 8.5 billion in revenue. And maybe the most impressive number is that services came in with such a strong revenue, particularly because Q3 is such a difficult services month -- quarter, sorry, normally, in the Nordics with vacations and so. The EBIT grew by 22%. So another quarter where we land revenue growth between 5% and 10% and EBIT growth 2 to 3x -- exactly now more than 3x of the revenue. The financial position and the cash balance is also very, very strong. So as normally, I let Robert take you through all the good news.

[Robert Giori, Chief Financial Officer]

Thank you, Steinar. I'd like to start by reviewing our income statement. Atea had record high revenue of NOK 8.5 billion in the third quarter, up 4.2% from last year. The underlying sales growth was higher than reported. Currency fluctuations had a negative impact of 1.7% on reported growth rates as revenue in foreign currencies was translated into a stronger Norwegian kroner. Adjusting for the currency impact, revenue growth in constant currency was 6.0% with higher sales across all lines of business. Hardware revenue increased by 5% or nearly 7% in constant currency, driven by higher demand for digital workplace solutions from the private sector. Software revenue grew by 2% or over 3% in constant currency driven by -- up from a strong comparable period in Q3 last year. Services revenue increased by 6% from last year or nearly 8% in constant currency. All countries reported very strong demand for services. Total operating expense was up by only 1.4% from last year as Atea continued to improve operating efficiency across its business. Based on solid growth in revenue and low growth in operating costs, Atea's EBIT in Q3 increased to NOK 261 million, up by 21.5% from last year. Net profit after tax increased to NOK 186 million, up by 25.1% from last year. We'll now take a closer look at revenue and profit development across the countries in which we operate. All countries reported higher EBIT during the third quarter of 2021. In Norway, EBIT grew to a record high NOK 86 million. Profit growth was driven by higher sales of services, which were up by 10% from last year, offsetting a decline in sales of hardware. In Sweden, EBIT grew by 22.6% to SEK 123 million with high growth in sales and tight control of operating expenses. Revenue in Atea Sweden grew by 10.8% from last year with strong performance across all lines of business. In Denmark, Atea continued to make major progress in its turnaround. Revenue grew by 8.3% with high growth across both products and services. And EBIT increased to DKK 8.2 million. Atea incurred onetime costs of DKK 7 million in the third quarter to comply with new labor regulations in Denmark regarding employee vacations. In Finland, EBIT grew to a record high EUR 2.1 million, up from a very strong comparable period last year. Revenue in Finland fell from last year due to the loss of a large public frame agreement in software but this was compensated by higher sales of services, which grew by 15% from last year. In the Baltics, EBIT grew by 46.1% to a record high EUR 1.2 million. Revenue in the Baltics increased by 17.5% from last year with exceptionally strong growth across both products and services. Atea also improved efficiency in its shared service subsidiaries. Atea's Group Functions, which includes shared services and group costs, generated a net operating profit of NOK 6 million compared with an operating expense of NOK 4 million last year. The difference was primarily driven by higher profits from Atea's Logistics operations in Växjö. In sum, Atea's EBIT improved by NOK 46 million or 21.5% in the third quarter with higher profit across all geographies and improved productivity in group functions. Now for a word on our cash flow and balance sheet. Atea's cash flow from operations was an outflow of NOK 503 million in the third quarter of 2021 as a temporary increase in inventory and related working capital items offset solid cash earnings during the quarter. Atea's cash earnings were an inflow of NOK 377 million in the third quarter. Working capital movements, excluding the sale of receivables, had a negative impact of NOK 784 million on cash flow. Due to global supply constraints in the electronics industry, Atea acquired additional buffer stock last quarter in order to secure availability of hardware ahead of peak demand in Q4. This impact on the working capital balance is expected to be temporary and normalized in the fourth quarter. Finally, Atea securitization finance program had a negative impact of NOK 95 million on cash flow from operations in Q3 as Atea sold fewer of its accounts receivable at the end of Q3 than at the start of the quarter. The securitization finance program provides Atea with flexible access to liquidity at low cost through the sale of accounts receivable. Moving on to our debt balance. Atea had a net debt balance of NOK 268 million at the end of Q3 as defined by Atea's loan covenants. This corresponds to a net debt/EBITDA ratio of positive 0.2. Atea's loan covenants require the company to maintain a net debt/EBITDA ratio 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 Q3. Atea's net debt balance was, therefore, NOK 3.9 billion less than the maximum allowed by its loan covenants at the end of Q3. The company has significant additional debt capacity before its loan covenants would be reached. That concludes the presentation of the third quarter financial results. I'll now hand the podium back over to Steinar to provide further detail on the business outlook.

[Steinar Sonsteby, Chief Executive Officer]

Thank you, Robert. So there you have it another solid quarter as I said in the beginning. I also want to say that if you want to post questions, you can do that from now on and we'll take questions from the room and from -- and digitally after my presentation. We very often get the question from investors and analysts how can you grow so consistently, I mean, years over years over years, almost every quarter between 5% and 10%. How can you be so consistent in growing? And how can you improve profit so consistently? Or a variation to the same question, is it possible to keep this going? So let me try to explain that and a little bit about what we're doing to be consistent on these 2 KPIs. First of all, of course, it's important that we have been and will be in a growing market. The Nordic market is consistent, which is a gift to us. But it's also been growing very, very consistent over the 10, 15, 20 last years. And IDC and other IT analysts predict the same for the next many years, so do we. There is no reason that now that we really have understood the value of digital processes that we will jump off the digitalization bandwagon. So the market is there. The market is pretty stable and the competition is not changing that much. So if you look at our performance for a part of that period, going back until when I took over as CEO, you will see that revenue wise, we have been pretty consistent at a little bit higher rate than the market. And I'll come back to the difference between the market and our performance in a couple of slides. You can also see the EBIT development. And as transparent as we are with our numbers, you all know that '18 and parts of '19 was difficult because of the situation in Denmark. But you could also see that if you isolate that little incident, the consistency also on EBIT has been there and there is no reason why our programs going forward will not help us also in the future. So I've bunched the actions or the situations into 4 buckets. The competitive advantage that we have built and that we will keep on building. The strategy that we are launching called One Atea to take out even more scale of our operation, both on the revenue side but also on the cost and therefore EBIT side. And of course, the turnaround in Denmark, which is hugely important to the future EBIT results of Atea. And then last, the consolidation coming both from organic and from M&A activities. So let's take a look at these 4 a little bit more closely. We do have a competitive advantage. And as I so many times tell my people, if we put the best team in front of the customer, we win 100 out of 100 times. So our job is to always put the best team in front of the customer. And that's why the local presence are so important as you see in blue here. We have offices wherever we need to have offices, and they're there as a part of our strategy: to be close to the customer and have the best team in front of the customer every time. We've also built a balanced capacity of product delivery, supply chain efficiency and services, both on-prem and as managed services or public cloud. And on top of this, we are the market leader, which gives us advantage both when we hire -- when we acquire new customers, but also when we work with our strategic partners. And during the pandemic, we have really seen how that market leadership have played in our favor, both with the customers, of course, that wanted a safe haven, with the employees that wanted a safe haven and with the partners that needed a strong friend during a difficult time. So there you go, the strong advantages that we have in the market towards the competition are there, it's real and we will expand it in the years to come. And then secondly, but as important, our own initiatives, the things that we control 100% ourselves. On the right-hand side, you see the initiatives that we started a couple of years ago to make Atea more efficient from a back-office and operational point of view. And you have all seen in the numbers over the last couple of years how this has improved the cost-to-revenue ratio of Atea. The furthest along in this has been the supply chain, and I'm so happy to see that during this very difficult supply chain period, but I'll talk about that in a little bit. What we have launched and will further launch during the next 3 months is a program we call One Atea. And the bit that we add to our efficiency program here is to align our people cross-countries. We're not reorganizing. We are aligning the people so that it's easier to share and use resources cross-geography, not only countries and borders, but cross-geography. But also easier to measure and hopefully explain to you how each of these business lines, these 4 business lines, are doing and developing. And then thirdly, the recovery in Denmark. So again, we did restructuring in the middle of Q1 2020. We hadn't had the positive development that we had hoped for in 2019, especially second half of 2019. So we needed to do a reshuffle and restructuring, and so we did. And Kathrine came on board in January of 2020. And as you can see, and these are not quarterly numbers. These are 4 quarter rolling numbers. So starting in Q1 2020, we had a pretty huge hole in the boat. And now 7 quarters later, the 4 quarter rolling has improved by NOK 160 million -- sorry, DKK 160 million, more than NOK 160 million. This is exactly what we plan. It's on the measure every quarter and my hat off to the Danish organization for this consistency. The plan is to keep this going, and at the same time, growing revenue to take back the clear leadership in Denmark as we have in the other countries. And with a revenue growth of about 20% on average, I think we are there or very close to. And then last but not least, the market is growing, but it's also consolidating. And there are many or several reasons for this consolidation. Let's start by looking at the organic part of it before I look at the M&A part of it. The organic part is very natural and we saw during 2018, 2019 very massively on software in the Nordics. That part is more or less done. The organic consolidation on software went very quickly as a result of changing partner programs from all our software partners in the infrastructure market. But the market is still consolidating as there are bits and pieces of certain vendors that are still not really consolidated. But there is a market growth for software. And again, there is a technical reason for that. More of the intelligence are sold in software than hardware from our strategic partners. The hardware market will keep on growing. I hear differently from some of the investor or financial community. I've heard that for 20 years. And as Michael Dell once told me when you guys predicted the death of the PC and it made a huge strong comeback and have done that for the last 6 years after he said this, he said, "Why can't they just predict the death of the rest of the hardware so that we can get going again." Hardware is essential, and it's a small part of the hardware that goes into a data center, local or on-premise data center, as you've heard me say many times. Hardware is -- or digital hardware is expanding into what you call manual or mechanical solutions before. And so the hardware we sell are now almost in anything you touch in life. The services is expanding even quicker because of these complexities. So there you go, the organic part of the market is an interesting market because it's growing and it's consolidating. But there is also a chance to do M&A. And we have listed some reasons to do M&A here and they are different in the different countries that we operate because our situation are different in the different countries. Size is important in the coming years in Finland, but certain competencies are more important in Sweden, where our market share is much larger. So we believe that the consolidation, both organic and M&A will give us possibilities above the organic growth in the market itself. So coming to the end and before we take questions. Revenue for this year so far, up 8% in constant currency, exactly what we've done every year the last 7 years. Net profit of almost 50%. I'm sorry to say I can't promise you that every year and every quarter. But I'm happy that it's happened this year so far. So with that, I'll give you guys a couple of seconds before we start taking questions.

[Unknown Executive]

Thank you, Steinar and Robert. I think I can aggregate a couple of questions here into 1 singular thinking. Can you make some comments about the delivery situation and supply.

[Steinar Sonsteby, Chief Executive Officer]

Absolutely. The delivery situation, as many know, have been difficult. And it's not only difficult in our industry, it's actually difficult in many, many industries. But in our industry this actually started long time before COVID. And because I always call the people I know that knows things the best, I call my friend, Pat Gelsinger, who now is the CEO and President of Intel. And I asked him, "Pat, so what is this? Tell me." And he said, "Steinar, basically, this is demand." It's demand driven and it started in 2019 before COVID. And the demand is coming from the fact that all these components are now going in massively into a lot of different products and not only computers. The setup and the forecast process have been made to work in the computer industry. But cars and appliances in the home and appliances in factories, and it's all over. So it's demand driven. COVID hasn't helped because transportation for everything, but also components and finished products have been much more difficult during COVID, especially 2020. But Pat also said, and that's what we feel, that this is actually for us as a big player in the industry about to balance itself out. And even though we have a huge backlog going into Q4, the backlog is not building as much as it did the last 4 or 5 quarters. So we feel the problem is starting to balance itself, transportation is starting to come back to more normal. Production is ramped up somewhat. And we are using our warehouse to also balance some of the instability. So mostly it's because of demand, which basically is good. So there you have it. Q3 for Atea, another solid quarter. There is no reason why it's not going to keep on going. But the world is not linear, but we'll try to make it so. Thank you.