Atea ASA

OSE:ATEA

Earnings Call Transcript 2017-Q4

[Steinar Sonsteby, Chief Executive Officer]

Hi, and welcome to this Q4 presentation of the Atea Group numbers. Welcome to icy cold Oslo. Even though what we do is not rocket science, we're really, really proud of what we do, and the results of Q4 is no different. If you look at the revenue, we passed NOK 10 billion for the first time in a quarter. Actually, the second-best quarter before Q4 was Q4 last year of NOK 9 billion. We're really looking into a healthy market. But definitely, with 10% growth, we're also taking market share even though the currency is giving us some help. We're still growing fast or as fast on EBIT, and we almost crossed the NOK 400 million barrier in Q4. As I said, what we do is not rocket science, but the cash flow conversion that we've had over the last 3 to 4 years is almost there. And on the basis of this, with a NOK 100 million bank account going out of Q4, we will keep the dividend at NOK 6.50 if the General Assembly agrees with the board and management. As always, I'll leave it to Robert to give you the good news.

[Robert Giori, Chief Financial Officer]

Thank you, Steinar. Before we go into the results, I want to make a few opening comments regarding a change to our financial presentation. For many years, Atea's presented EBITDA as its key metric for operating profit. Over the course of 2017, we've steadily been focusing on EBIT as a more important profit metric for Atea.The Atea management team has converted all management reporting to EBIT and has changed compensation practices for its top managers accordingly. We've had made these changes because we consider capital expenditure and depreciation expense to be of high importance to our financial results. Therefore, we believe that measuring operating profit after depreciation expense is of greater relevance when reviewing the performance of the Atea Group in each country segment. IFRS 8 states that a company should present its operating and segment results based on the information which management uses to run its business. In accordance with this standard and to align our internal and external reporting, we will present EBIT as our primary profitability metric in this Q4 presentation, in our Annual Report for 2017 and going forward. We will continue to provide additional information on EBITDA in our financial reports as an alternative performance metric.As we make this change, we're aligning Atea's financial reporting with its key industry peers such as [ BECLA ], Computacenter and Dustin. All of these companies use a measure of operating profit after depreciation expense when presenting the profitability of their group and their business segments.Now let's take a look at the results for the fourth quarter. Total group revenue in Q4 was NOK 10.0 billion, up 10.1% from last year. Revenue growth accelerated from the last few quarters based on increased sales of products.Product revenue was up 10.6% from last year, while services revenue was up 7.8%. Demand from public sector customers was particularly strong. Changes in currency rates had a positive impact on growth in the fourth quarter. Adjusted for this impact, revenue growth was 6.5% in constant currency.Total gross margin was 21.2%, down from 21.6% last year based on a higher proportion of client software in the revenue mix. Operating expenses, including personnel costs, other OpEx and depreciation expense, increased by 7.9% compared with last year. Based on higher revenue and relatively lower growth in operating expenses, Atea's EBIT grew by 9.6% to NOK 392 million. We'll now take a closer look at revenue and profit development across the countries in which we operate, starting with Norway, which had a very strong fourth quarter to finish an excellent 2017. Total revenue grew by 12.8% to NOK 2.8 billion based on rapid growth in product sales. Product revenue was up by 14.5%, driven by higher sales of client and data center solutions. Services revenue was up by 6.0% based on growth in contracted services with a term of 1 year or more. Gross profit was up by 6.0% as profit margins were impacted by a shift in the revenue mix from consulting to product sales.While sales grew, operating expenses were up only 1.5% as headcount was flat from the previous year. Based on strong growth in sales and low growth in operating expenses, EBIT in Norway grew by 28.6% from last year to NOK 119 million. I want to congratulate the Norwegian team for the fantastic turnaround they've delivered since reorganizing in 2015. For the full year 2017, Norway had the highest EBIT percentage margin of any country in the Atea Group. We'll now move on to Sweden, where our business continued its strong momentum with another excellent quarter. Total revenue grew by 12.5% to SEK 3.8 billion. Product sales grew by 13.1% from last year, with a very strong demand from both public and private sector customers. Services revenue grew by 8.8% across a broad range of consulting and contracted services. Gross profit was up by 12.4% as margins remained stable from last year. Operating costs grew by 11.5% based on an increase in the number of employees and due to higher general and administrative expenses. With strong growth in sales and a stable gross margin, Sweden's EBIT grew by 16.8% to SEK 144 million. In Denmark, Atea reported lower sales and EBIT in the fourth quarter of 2017. The business partly offset lower sales by reducing headcount and operating expenses. Total revenue fell by 8.1% in the fourth quarter to DKK 1.9 billion. Product revenue was down by 9.0% from last year based on lower sales to client and data center hardware. Services revenue fell by 4.6%, with lower revenue from data center outsourcing and cabling services. Based on lower sales and a stable gross margin, gross profit fell by 8.5% from last year.As sales have fallen in 2017, Atea has reduced its staffing levels in Denmark. During Q4, the average number of full-time employees in Denmark was 98 or 6.2% lower than in the previous year. As a result, operating expenses fell by 4.5% from last year. With lower revenue partly offset by lower operating expenses, EBIT was DKK 84 million in Q4 2017 compared with DKK 107 million last year. Otherwise, the reorganization, which we communicated at the last quarterly presentation, was implemented as of January 2018. We expect that this reorganization will contribute to improved results during 2018. In Finland, our business continued its recent turnaround and delivered strong growth in EBIT in Q4. Total revenue in Finland grew by 5.0% to EUR 65 million. Product sales grew by 5.0%, driven by higher sales of client hardware and software. Services revenue was up 5.3% based on higher sales of contracted services such as managed infrastructure and cloud services. Gross profit increased by 10.6% as product margins increased from last year. While sales grew, operating expenses fell by 2.9% based on lower headcount and variable compensation compared with last year. Based on higher revenue, improved product margins and lower operating expenses, EBIT grew to EUR 2.2 million, up 156% from EUR 0.8 million last year. Finally, Atea Baltics had higher revenue and profitability in the fourth quarter, driven by very strong performance in its services business. Total revenue was up 14.7% to EUR 44 million. Product revenue increased by 12.1% from last year based on large implementation projects and increased software sales. Services revenue was up 27.0% based on strong demand for consulting and managed cloud solutions. Gross profit increased by 12.3% as profit margins were impacted by lower-margin product sales. Based on uneven demand trends during the last few quarters, the Baltic business reduced its number of full-time employees by 49 or 6.8% compared to the last year. Despite lower headcount, total operating expenses increased by 12.3% from last year. Nearly all of this OpEx growth came from depreciation expense. Depreciation expense was adjusted downward in Q4 last year as a result of a one-time recalculation. With strong growth in revenue, EBIT in the Baltics was up by 12.1% from last year to EUR 1.6 million.Lastly, a word on our cash flow. Cash flow from operations was NOK 1.8 billion in Q4 2017, the same level as last year; in fact, spot on. As you can see from this chart, Atea's operating cash flow is highly seasonal, with positive cash flow concentrated in Q4 when working capital balances are lowest. Based on this seasonal pattern, Atea's aim throughout the year is to continuously improve its working capital balance from the same period last year.At the end of Q4, Atea's net working capital balance was NOK 307 million below last year, reflecting higher days payables outstanding and lower days sales in inventory compared with last year. With strong cash flow from operations, Atea had a positive net cash balance of NOK 102 million at year-end compared with a net debt of NOK 350 million at the end of 2016. Overall, we're very pleased with the financial results in the fourth quarter. Our key financial metrics, revenue, operating profit and cash flow from operations, were at record high levels. Financial performance was driven by an acceleration in revenue growth, particularly within product sales. It's exciting to announce Atea's very first quarter with over NOK 10 billion in revenue.As we enter 2018, the market opportunity for Atea remains very positive as the scope and complexity of enterprise IT environments continues to grow. For a review of Atea's performance in the full year 2017 and an update on the status of Atea's key strategic initiatives, I'll hand the podium back over to Steinar.

[Steinar Sonsteby, Chief Executive Officer]

So thank you, Robert. If we put 2017 into more of a 3-, 4-, 5-year perspective, you can see that it's been constant growth. Actually, if we look at the average over the last 4 years, the revenue has grown by more than 10% per year. As we said several years ago, our mission would be to grow more than 5%, but to improve margins or EBIT even faster. Looking back at those years, those last 4 years, we can see that we have actually done actually better than what we expected both on revenue and EBIT, as EBIT on average grew by more than 20%. So yes, we're happy with what we've done. Let's look at some of the KPIs that we follow up on internally and that we started sharing with you, I think, 2 years ago very quickly. It's a little difficult to give you a full view of that '17 market because not all numbers are out yet, but we believe that we slightly grew market share. It could prove later that it was more than slightly, but anyway, we're okay on that. We're not -- we're still not fully at the 20-plus market share mark, but we believe we're well positioned still to reach that, but we're at least cross the 18%. Growth of margin, yes, we believe we're doing well. We're not all the way up to the 4% yet, but in Q4, we were. And so we have shown that the company and the machine are capable of exactly that. The cash conversion, Robert have said. What is to be said, 4 years ago, you all questioned the sustainability of the dividend. In the meantime, we paid NOK 2 billion in dividend and improved the cash position with more than NOK 1 billion. I think we all can agree that we can sustain the dividend and maybe even more. So we will pay out NOK 6.50 in 2 installments that we've already said. Looking forward, we started showing this slide about 2 quarters ago, and it sums up how we look at the improvements both internally and towards the market. From left to right, we do still have opportunities to increase efficiency, and it comes from several major areas. On the supply chain, there is still a lot to do to centralize certain processes. We've committed to a new central warehouse in Sweden that will be automated at a much greater scale than what we have today, so much more to do on that side. We can still nearshore both to AGS and Riga, but also, in general, centralizing better than we have. And even though we are an IT company, we can do better on the IT side.On the capabilities side, there are more demand than we can fulfill, and I believe the same goes with some of our competitors in the market on areas like security, hybrid cloud, business intelligence or artificial intelligence or analytics, whatever you want to call it. And at least, I think most of us could actually do everything on Internet of everything. The network is in the core of all of this, so we're so happy that, that has been and will be a part of our DNA going forward.There are also still more to do on the efficiency on the services even though that has been a big contribution to the last 2 years improvement of EBIT. As an engineer, I sat up late last night and watched SpaceX Falcon Heavy do its liftoff. Actually, 30 years ago, I dreamt about going to the moon. I was studying in the U.S., and I was driving to college or university one morning when the Challenger just blew up. I'm not going to say that, that blew my dreams of going to the moon, but at least it blew my dream of going there up. When I watched it last night, I was thinking that is probably the most advanced compute, analytics, sensor-based mission on and off Earth ever. And thinking that 50 years ago, Armstrong landed on the moon with less capacity than what I have in my pocket, it says something of what kind of capabilities we have going forward if we utilize those things.As I said earlier, what we do is not rocket science, but we have a lot of science in our future also in Atea because everything is now digital. Everything is creating data, data that has more and more meaning. And actually, a computer or artificial intelligence works completely opposite to the human brain. If you are going to be able to take a decision, you need someone to sort out what is waste of data or you ask for a management summary. A computer gets to better and better insight with more and more data. And we have plenty of data, but we will create more going forward. This will give us opportunities that we've never ever seen of how we run things, how we analyze things and how we predict things like catastrophes or even small things on when the garbage can has to be emptied. We have worked over the last 2 or 3 years and we've talked in general terms to you about this, so let me go into some more details on these things.All of these areas play straight into Atea's core. We know how to deliver a compute. We know how to deliver storage. We know how to deliver networks, wireless or non-wireless. We know how to do analytics. Through partners, we can create ecosystem both for analytics systems and for IoT. The number of sensors only in Norway over the next couple of years will grow to more than 10 million, creating data that we have no clue on how to handle if it's not handled by machine and systems. Starting with analytics. There are -- actually, if you want to put it into 2 buckets, there are actually 4 major areas that we work with, with our customers, both private and public. So one is to work with our customers in how they work with their, so either to grow business or to increase the quality of the dialogue or what they deliver.The second one is to mitigate risk. And for a lot of people today, risk is looked at in transparency and new laws and regulations. But risk is also being hacked or not even just being hacked, but know that you've been hacked and know what's happened. It can all be predicted or be seen by machines and analytics. To increase operational efficiency is something we've been doing with BI for years and years and years, but to drive innovation is a new and exciting area where you can actually look at behavior that we don't even know ourself that we are doing and then predict what kind of service or product you would like to buy in the future. As Steve Jobs said, "If I ask my customer what they wanted, I would never have created the iPhone."So there are things in the data that we don't even know happens. So I'm very happy to announce today that last Friday, we signed a contract with the Norwegian Tax Administration. I'm not sure all citizens of Norway would be happy, but there is no way your behavior, your data will not be detected a couple of years from now when we deliver this contract of analytics of between $10 million and $20 million. We competed against people that you might not think that we are competing against. And of course, I will not mention names. They would be ashamed.So analytics is a big area for us going forward, and we're working very, very close with the biggest partners that we have on this area, especially IBM and Microsoft, most of this hosted in a hybrid solution where the customer has some of the solution, we're hosting some of it and some is either in IBM Cloud or Microsoft Azure. Another area where we have invested quite heavily over the last couple of years with actually the same partners and the same type of setup is IoT. Well, IoT is a lot of sensors gathering information and then in the back-end, in many ways, the same type of setup with analytics looking at that data, deleting what is waste. Some of the data has very, very short and limited value just seconds after it's been created. Other data has value in years and years and years, and some you actually have to store for compliance.So the solution we have created in which we now are going out with pilots in both private and public sector is built on an Atea-hosted cloud and then with all the capabilities in the IBM or Microsoft clouds and then, a word that you might not have heard before, some of you might have, fog computing. I mean, we're great in this industry to create new fixtures on things. But it really means not in the cloud, but really closer to the user because there are really a lot of data we can't move around as much as I've talked about many times before.The number of sensors and the type of sensors are incredible, and let me talk to a couple of these. So in Norway, we are working with Norwegian Royal Salmon. They ship salmon out of Norway every day, so about 500 trucks every day, and about 20% of it is filled with ice today. So what we're doing is through sensors to figure out, is that necessary winter and summer? Or can you decrease the amount of ice in the winter because you have predicted the weather and that the system actually, when you load, know how the weather is going to be. Even in the summer, it's not always 30 degrees in Europe. Maybe just to cool fish in an isolated truck is enough. And that means that you can transport 20% -- 20%, 25% more in each truck or you can have 25% less trucks going with the savings. It's a simple system, which is looking at the problem in a totally different way because we have the possibility of doing so. The welfare systems, we've talked about before. We have 10s and 10s of small installations, pilots or contracts in movement around the Nordics where not only elderly, but people who need care in their home, which is much cheaper than bringing them to a hospital, can stay home but still have the safety. A lot of people ask me, "Well, do they really want to be watched by a camera?" And to be honest, the answer is, yes. Old people or sick people would rather be taken care of when they need it than die because someone didn't see them.There is a lot of things that we can do by sensors. Outdoor lighting, parking, information about where parking is free and not, and not only 1 hour or 30 minutes before you want, but you can actually book a parking spot when it's free so that it's free when you get to it.And something really interesting, or not really, but it's totally different. In all cities, and you've all seen this, there is this drainpipes or [Foreign Language], which we say in Norway, where in only the city of Stavanger, there's actually 3,200 of them. Below, there is some kind of fluid, either it's water or whatever, that if it's too full, it will -- the water, if that's what's down there, will pour into houses or parking lots or whatever and create damage into shopping malls or whatever.So all of these 3,200 are checked regularly to see if they're about to fill up or not. Interesting work. I would think -- I don't know this exactly, but I would think that there are kind of running around 3,200, get to the last one, you start with the first one here. Mostly, there are nothing to do. But if it's too full, which is 60%, they have to call for a truck that can empty it or whatever it is if it has to be repaired or whatever. Well, now we have a pilot in Stavanger with sensors that can see how this develops, so they can go and look at only those places where it's needed and not the 3,199 others. So this kind of gives you just a small insight into what compute analytics and sensor technology can help us with going forward. There's a lot of talk about robotics in all of this. And again, as I've said many times, robots, it's not machines looking like humans. Mostly, it's actually software doing our job much faster and better and reliable than what humans will ever be able to do. And of course, we both use them and sell them. And then last, to a completely different area that has opened up for us over the last year or so. A lot of people want to deliver these things as a service, and you are used to hearing that word. But delivering something as a service is, to me, very unprecise description of something. There is either by subscription or it's by consumption, and these things are very different.So let me give you an example that most of you either have or should take into consideration. If you want to be a part of a fitness chain, today, you pay, let's say, $25 a month, no matter if you go there or not, no matter if you stay there every day for 30 minutes or you go for an hour every Saturday. That's subscription-based. It's easy. You can get one bill digitally per quarter or per year or whatever. You just tell them what -- when you want it stopped, and it stops, very easy.But think if you wanted that consumption-based, so meaning not every time you went there, but how many kilometers you were running on the treadmill or how many kilos you were lifting. That would be -- first of all, you cannot send the bill before. You have to wait until after, and you have to be able to document that what you paid into the bill is 100% correct, not you're having trouble with all the people saying, oh, I didn't run that long or that fast or didn't lift that much. This is consumption-based. It's extremely difficult. It's complex. And it's how compute is going to be consumed in the future. And I'm not talking about cloud, I'm talking about consumption-based billing, consumption-based pricing.And how do you develop pricing in such a scheme? How do you bill in the right way? And how do you document the usage? And by the way, when you look at some of our customers or most of our customers, they have 1,000 employees or more, and we have to be able to show them this billing per employee, not per company, per employee, with 1,000 people doing different things, consumption-based. So what we started out 2 years ago was to develop -- we started out internally was to develop a tool that we were thinking could be a great tool, portal tool for us to do this and have a competitive advantage to a lot of our competitors in the market.So about 9 months ago, we were talking to Microsoft, and Microsoft says, "Do you know, this thing that you have developed for internal use is actually the best in the world." It's developed on Azure. It's cloud-based. It's supported by Microsoft. And we launched a company 1st of January this year called AppXite, and you can go to appxite.com and you can do whatever you want. This is not a pilot. This is not a development project. It's a company with real revenue. Of course, it's also a start-up. It's just in its start, but it's 100% owned. The company is 100% owned by Atea. And it's put there to do subscription, consumption-based compute. It is a distributor for Microsoft around the world. It's not concealed to a geography. We have people in the Nordics and Baltics, and we have high hopes. At the same time, we're not naïve. We know the world is full of people who want to capture interesting markets. And so for us, it's as much an internal tool which we need as it is an external possibility.Of '18 -- in '18 and first half of '19, we'll spend somewhere around EUR 3 million to EUR 3.5 million into this before we see net positive results. We will keep on reporting to you, and we'll give you some KPIs on how this develops going forward. It's not just a portal, it's a tool that makes it possible for ISVs to move to the cloud, have consumption- or subscription-based models on how they build their customers not only through us but through their resellers or other resellers like Atea around the world. Today, we passed 100 ISVs that have signed up and moved to Azure. Of course, Microsoft is really, really, really interesting, so they're paying for a lot of it. But we'll see, and we'll report going forward. It's a cool, cool new opportunity that arises for Atea. With that, we will close the Q4 presentation with Mr. Ib Kunøe, the Chairman and biggest owner, closing out with some remarks of '17.

[Ib Kunøe, Chairman of the Board]

Thank you very much, Steinar. Good morning, dear colleagues, dear fellow shareholders and all participants coming here or all the ones who are watching online. First of all, happy new year, and goodbye to the very best year ever, 2017. Last year, in my traditional end-of-year speech, I said the same, goodbye to the best year ever, 2016. So I'm very happy to repeat myself, although you shouldn't do that too often, but I'll do it next year again. Atea is advancing on all parameters, as you have seen, in spite of some challenges in Denmark. Our revenue grew to NOK 32.5 billion, up 4%. EBIT grew to NOK 800 million, up 18%, which shows us that our priority on improving margins are successful. There's no reason for taking loss-giving orders. Although we want to grow revenue as we do, but we don't want to do it at any cost. We are followed by a number of analytics. Some are here. And in 2017, we are happy that we beat you again. Our share price grew from NOK 79.5 to NOK 115.5, a 45% rise from year-end to year-end. And on February 1, it reached NOK 121, an all-time high. You can see, I wrote this a few days ago. So I'm sure that all my fellow shareholders are satisfied with their investment. We paid a dividend of NOK 6.50 per share in 2017, and that is 6.5% on the average investment. And I think the moment the share falls, the percentage will go up. That was very funny. But as Steinar said, we will also, this year, recommend to the board that we pay out NOK 6.50 in 2 installments of NOK 3.25 as usual. Atea as a company has become 50 years old. Under different names and looking back, it has been a very exciting journey. When I met the company 12 years ago, the revenue was NOK 3 billion, about the same size as the Danish company that I brought to the table. 12 years later and over 50 acquisitions and a lot of organic growth, we have passed NOK 32 billion, and we are looking into NOK 35 billion. What a journey.We've been consolidating the Nordic market for infrastructure, but our largest -- our latest acquisitions have mainly been to widen our knowledge base and recruit the right people. As Steinar have shown to you, Atea's market is in the center of all IT action. The development is fast and sometimes cruel. The market is growing, but so is the complexity and importance of IT for our customers. From, in the old days, we delivered hardware, software and infrastructure, we are now in the middle of our customers' competitive challenge.The customers' choice of IT solution and digitalization strategy are business-critical decisions. To help digitalization of our customers' business, we have developed our own tool, the AppXite, and we think that we, in the coming years, will see very interesting business here for Atea. We'll start -- or we have started investing quite some money in its development and sales. And as Steinar said, it's a start-up. But still, at the end of the year, there'll be more than 100 employees in this company. So as the biggest player in the Nordic, we are in a unique position to deliver the right solution to our customers because we have the right people. In my world, our business is people business. Whatever you do, it's people business. Atea has both a strong mission and a strong vision. And our strategy is simple: we should be the place to be both for our 30,000 clients, customers, for our shareholders and for our strategic suppliers, but first of all, for our managers and employees, because the companies that can recruit and keep the right people and develop them in a fast-moving market will be the winners. And that is why this is the most important thing to us, the place to be.So welcome, 2018. We are looking forward to another great year. We have changed the organization in Denmark and are putting the problems behind us, so I'm sure that Denmark will again provide us with the usual good results.I'll end by thanking all 6,900 employees for a job very well done. All shareholders are very happy with your achievements. You can be proud of yourself and your colleagues. And then we'll meet again on April 26 at 8:00 for our Q1 and presentation of the General Assembly. Thank you. No questions? Yes.