Itera ASA

OSE:ITERA

Earnings Call Transcript 2020-Q1

[Arne Mjøs, Chief Executive Officer]

Okay. Good morning, everyone. Welcome to the interim report for Itera first quarter. My name is Arne Mjøs. I'm the Chief Executive Officer. I will go through this presentation in the same way we had done before. Today, we have presentations from our facilities in -- headquarter in Nydalen.And we go to Slide 2. I will take the first part, first, present the highlights of the quarter, and also deep into the -- deep look into the business review of Itera, where, after me, we'll have Bent Hammer, the CFO, Chief Financial Officer, will also go into more details about the financial figures and also some comments about the outlook.Slide 3, please. If I look at the highlights for the first quarter, first of all, I'm very happy to see that we have very high growth and profitability in our core digital business. So we had a gross profit growth of 20%, pure organic growth in this quarter, and the EBIT margin was 14.2% compared to 11.7% last year. And the core digital business represents 81% of total business of Itera.So if I look at the total business, these figures are quite strong also. The revenue came in with NOK 161.9 million compared to NOK 142.8 million. That's represented an organic growth year-over-year for over 13%. If I look at the gross profit, we have 15% year-over-year growth, and also the EBIT for the total business was NOK 19.2 million compared to NOK 13.8 million. That represents the EBIT margin of 11.9% for the total business of Itera. Of course, I know that you are very concerned about the COVID-19. What is the impact for Itera? Overall, I will say we have only minor setback from the industries most impacted by COVID-19. I will tell you more about that later. But overall, we are quite having a strong position with the company. And also, we have been focused on also increasing the revenue from new customers and new industries.So we will also continue to onboard new key -- new positions, I will say, for further growth. We have quite -- we have a high ambition for the future. We need to adjust a little because of the COVID-19. But in any case, we still continue to work according to the strategy with new position that will support the growth that we are looking forward.And if you look at the number of employees, it's increased by 39 in the last 12 months. The Board of Directors has proposed to reduce the ordinary dividend from NOK 0.30 per share to NOK 0.20 per share, which is actually to have more buffer because of the more uncertainty going forward. But there also will have the authorization to distribute additional dividends later this year. So that's actually the highlights for the first quarter.So if you go to the next slide, 4, we will see the figures here. We delivered NOK 162 million in revenue for the total business. That's quite a good sequel growth from the fourth quarter. And also, if you look at the EBIT, we came in with NOK 19.2 million, which is about 39% improved when compared to the first quarter 2019. And also, sequentially, as you see, it's still growing, it's still growing. So that's also good sequential growth also for the EBIT.Slide 5, please. Then, we're going to go into the business review section. I will make some comments about that one.Slide 6, please. First of all, I'm very happy with all the employees at Itera. They are really making a difference because when the COVID-19 reached Itera, also, we managed to move all employees to home office because we have been working with some kind of distributed model. So they're quite used to using social media, Slack channels, whatever, to operate across border, across this business, whatever. So moving to home office was not that big challenge for Itera because that's a part of the business model.But anyway, we -- when we have this -- we saw this threat also impacting Itera. We established different task forces that looked at how we take care of our people, how we take care of our customer and also how -- what could we do with the cost level of Itera -- cost base of Itera. So we were working quite systematically immediately to look at how do we handle this new situation because it really happened to impacted all the environment, all the customer needs. We didn't have any big setback from industries like travel, whatever, where you have a very immediate stop, actually. And we have also delivered a lot of core systems. We are part of the core systems, or the core application, or -- also, in oil and gas, we have some business in oil and gas. We are not some kind of add-on or nice to have project that is more a core or, I will say radical innovation. We are working with also oil and gas and how they can really radically improve their cost advantages or improve the digitalization in order to be more competitive in their own business. So for the time being, we are quite well positioned in the COVID-19 situation.Slide 7, please. And as I told you, in the fourth quarter, we have a position to be the specialist in creating sustainable digital business, where we understand the user, understand the business and understand the technology. So we are combining all these components into one project. And I think that has been very important in this kind of turbulent times, where you need to really work in the desperate environment with this -- all this components into the projects.And as we had told you before, we have quite a focused strategy on Platform First. So we have -- you know that this COVID-19 actually speeding the active digital change. The use of cloud has really asteriated because all kind of new solutions is actually build in the cloud, and we also see that if you look at the health care industry, they are focusing more on having data and also analyze the huge amount of data in terms of using Artificial Intelligence.So this kind of a cloud technology, which has this IoT space, the capabilities, data or the Artificial is much more in focus now than it was before the COVID-19. So we really believe that the COVID-19 is actually an opportunity for Itera.So if you go to Slide 9, for more specifics into it. Because if you look at what has been the consequences of this COVID-19 is actually that the value of digital channels for products and our operation has really become important. You see quite difference, big difference, between companies that deal has been successful with the digitalization compared to this, I would say, late mover in terms of digitalization because they have struggled more with remote work. And as you know, so all this kind of new platform on shopping experience that you need to do online instead of going to the stores. All this kind of have a big impact from -- on different industries and also different companies within this -- in the industries. So we also see more industries are also starting to use Artificial Intelligence because it's really a push in to be more radical in innovation, and Artificial Intelligence has some of the capabilities that you need to have in place, that you need to use in order to be more effective. For example, in oil and gas, with this lower oil prices that we have seen as a consequence of COVID-19.So for Itera, I mean, this kind of changes in the market, we believe, it's also kind of window of opportunity for Itera. We have a very flat organization structure. So we are able to really work close with existing and new customers to enable the digital changes. It's not the top-driven company that latency in terms of action taken is dependent on myself as a Head of Itera, we have everyone working close with the customer, and we intensively work -- we've increased the efforts on the people and the customer to really get real facts of what's really happening there. So we believe that this COVID-19 is actually a strategic advantage for Itera because we are used to working multi-disciplined in sales and deliveries. So we can really demonstrate our -- the way we're operating, and also the customer that are working from home office are also part of this digital collaboration model. That has been the part of the business model for Itera for a long time.So for Itera, we believe that the Platform First started, we need to really just continue the training and certification, and you get the confidence of this platform because they are really crucial for the future. As soon as the COVID-19 situation is more, I won't say, continue to be normal, but we have a more managed control of the COVID-19 situation, both in the Nordics, but also in some kind of -- in the global perspective.Slide 10, please. So for Itera, we have this 5 -- 4 focus areas in the strategy. So the most important thing is actually to grow our people. And when our people grow, our customer grow. And of course, when the customer grow, our people grow. So that's very important focus on the people and customer. So that's our 2 of the most important focus areas. The third one is actually we're creating a winning team. Always walk the last mile, the extra mile, to make the customer very happy, to make sure that we are always delivering high quality, to make sure that we are winning the next contract, et cetera. As we always think about the winning team, to make sure that everything is actually -- we can grow and we can make a new step for the organization, for the people, for the culture, whatever. So that's the third one. And the last one, but not the least, also very important for the society itself, but also for the employees and our customers. It's actually the sustainability. So we have put sustainability into the core part of the business at Itera.Slide 11. I'm also happy to announce that we -- during this COVID-19 situation, we have also onboarded 3 very key people in the organization. I would like to introduce Anine Ragnif in the new role as Chief Delivery and Performance Officer. She has more than 25 years of experience from the industry, not at least from Capgemini, as an International Company. So she will have a more -- she's coming from a position where she's had a leadership of [ sustain a few ] 50 people. So she has the scalability and the management structure of Itera to really look at how Itera can increase the speed of the growth and take the next step as a more international organization. I'm also happy to onboard Mette Mowinckel, which is 20-plus years experience from HR position in the IT industry, both from EVRY and Capgemini. She just started at Itera and has a very important role in terms of what we call the people and culture to make sure that we have the focus on the people and culture also going forward, but also looking at how we can increase the growth of Itera and make Itera really different -- make a difference as the vision of the position we have in the market.And not at least, also, André Nymoen. He's actually just onboarded during the COVID-19, quite interesting. But he is also one of the best in the market in terms of -- he has been put into new role at Itera, Chief Experience Officer. So he has more than 25 years experience in digital media in Norway and U.K. Last position was actually Head of Fjord by Accenture. But before that, he also had been a co-founder and creative director for the Bekk for 16 years. So he is also a very skilled person that are really putting -- taking Itera to the next position in terms of both experience, but also a product innovation. So I'm very glad that these people have onboarded at Itera.If we go to Slide 12, please, then I'll talk more about selected projects. And Slide 13, the first one is actually quite interesting. It's connected to the COVID-19. Because in -- when the Norwegian government needed to establish quite fast, it was actually during 3 weeks, a payout solution to enterprises with a significant drop in revenue, that solution was based on Azure. So they had 1 week to develop the solution, 1 week to test the solution and 1 week to put their solution into production. And you know that the financial of this, and all the different public bodies needed to work together as a multi-disciplined teams, where Itera were part of the team by BITS, which is our customer. We have done some Azure projects for BITS in the past. So BITS asked Itera to join the team and be a part of the team, work day and night, to make sure that these new solutions were really operating 24/7 with management solutions in Azure. So we created the dashboard to determine the performance and health and availability of the solution for kompensasjonsordningen.no. And today, have the Single Point of Contact 24/7 for follow-up and escalation of operational events.And what is amazing of this project is actually that this project wouldn't have been possible, maybe, if it should be some kind of ordinary physical meetings. These people that were involved from different bonds didn't have any kind of physical meeting, so they need to collaborate digital -- in a digital space, take fast decision, focused decision, make something up and running, ensure that the security was in place, et cetera. So that's a good example of that.Despite we are not working in the same way as in the past, we can actually increase the speed and do some kind of radical stuff within a few weeks, actually. So we are very proud of being a part of this project. And I think the payout, just -- so a number of that. I think the payout is about NOK 20 billion each month that are distributed to this SMB-related businesses. So it's a quite important functionality or process for the Norwegian government to reach out to these companies that needed to have this money in place. So that was one example of a solution in this quarter. But also if you look at -- go to Slide 14, please, we also have a project through our collaboration with a start-up Cognite. This is another start-up for Norwegian company, Elop, that has developed a technology that make it possible to read the state of concrete using just a sonic scanner called COBRI. So it's actually what they are doing. They're using the Cognite Data Fusion platform. That also collects preexisting bridge data and weather data, and combine this data with the data from the COBRI scanner functionality. So by having this kind of new data collected and analyzed through Artificial Intelligence, then it's possible to actually extend the service life of critical infrastructure, that has, of course, contribution to the environment. Because, today, the production of concrete accounts for 8% of the global CO2 emissions.So if you extend the life, you will reduce the consequences of that emission, CO2 emission environment, but it also will reduce the community costs and also potentially save lives. So all these and these kind of projects are really supporting United Nations Goal #9, 11 and 13.And the third example, if you go to the next slide, we also had a [ question ] that was more or less the spread in terms of we need to work remotely. They have been working remotely. So we helped the Danish recruitment company with 800 people. During 24 hours, we managed to make sure that this organization were running as it should in terms from the homes by using Teams. So because the Teams had been a part of Itera, as a part of our offering, so we managed to make sure that this recruitment company were actually up and running just during 24 hours. So that was a third example of what we've been doing during this COVID-19 time. If you go to the next one, Slide 16. If you look at the order intake for -- in this quarter, the book-to-bill ratio was actually 1.1 in the first quarter. It consists of both prolongment of existing clients that have been in the portfolio for a long, long time. 50% of the revenue of Itera is in the banking insurance that are not hit in the same amount, as you know, than other industries. So they have got a lot of financial support from the government, all over the place. So we haven't seen some kind of a setback from that sector. We are also represented in oil and gas sector. But as I said, we are mostly connected into the core system and also for some of the project related into, I will say, the need for innovation, radical innovation, by using the platform in terms of -- do smart maintenance or increase the production of time by having more data in place.So looking into the second quarter, I also see that we have also a good pipeline going forward. Some of the extensions have also been closed in the second quarter, in April. And we are also focusing very -- strong focus on how could we actually really start this new engagement, some expansions also, as soon as possible to -- because we also have capacity that we can actually also make sure that these contracts are fulfilled.If you go to Slide 17, please. If you look at the customer development, I will say, I'm very happy to look at that number, the share of new customer is almost up 12.3% of the revenue in the first quarter of 2020. That means that these customers are actually are won since end of the corresponding quarter last year. So like new customers that we managed to close and start business with within the 12 last months, actually. And that's, of course, very important in this COVID-19 because we are safeguarding our position at the existing customer. And we see for some of the existing customers, they reduced or delay something of the projects, and that's why it's very important to have a new portfolio, a new customer that really increased for Itera in terms of new opportunities for Itera. So we have the pipeline in order to continue the growth of the company. And if you look at the top 30 largest customers with Itera, they are more or less steady at 77% of the revenue, which is also important in this kind of COVID time that you are having a high value for the customer. If you are a big vendor for your customer, that's also important now that -- because you are not the first one that will like to change the relationship to. It's more or less more opportunities to less vendors, and mostly some of the bigger vendors are the players that are having the best position at the customer side.So if you go to Slide 18, please, and also look at the nearshore ratio. That is also more or less sequentially for the -- following the same pattern. Now 49% of all the employees at Itera is located nearshore in Itera. So that's actually according to the strategy.And we have this hybrid successful model, I will say, which is important in this COVID-19. When the customer will ask for reduced prices, whatever, we have to be able to respond on that challenge by the customer. They need to reduce some costs, and we can do more for less because we have this strong, established hybrid delivery model, where we have the flexibility to also meet the clients' need for cost savings in some of the industries.So that was actually the first part of the presentation. So let me switch over to the CFO, Bent Hammer, that he'll go into the financial review section.

[Bent Hammer, Chief Financial Officer]

Thank you very much, Arne, and good morning to all the viewers out there. If you go to Slide 20. As Arne mentioned, we had a very positive growth in revenue going up by 13% and the gross profit even more at 15% growth. We -- the personnel expenses that went up by 10%, and that's mostly attributable to a higher headcount, which grew by 7% on average. And also, there were some foreign exchange rates impact as the Norwegian krona has weakened quite considerably against USD, euro and Danish krona, which are the main currencies in our cost base.Other OpEx and also depreciation are also impacted by this foreign exchange valuation. OpEx is up also because of some higher office costs related to the expansion we did in the Kiev office to accommodate more consultants.And as for depreciation, we did some investments to modernize our IT platform that we use for our customer base last year. And also, we invested in intellectual property of the HR Compendia software, which now adds to the depreciation expenses.Nonetheless, we had delivered a strong EBIT of NOK 19.2 million, which is up 39% from the corresponding quarter of 2019 and an EBIT margin of 11.9%, which is 2.2 points better than in Q1 of '19.Cash flows from operations were also seasonally strong, I would say, at NOK 7.5 million versus minus NOK 5 million in last year. And we ended the quarter with a cash balance of approximately NOK 51 million. Equity ratio also up by 3.3 points to 25.6%, and the number of employees at 527 at the end of the quarter, which is up 8% from last year.If you go to Slide 21, we have, for the last several quarters, reported on 2 different business segments, one being the data center operations that are under transformation to more cloud services and the main core digital business. These are being reported separately because they have very different developments at the moment. The core digital business is growing very fast and with high profitability, whereas the data center operations also have a decent growth of 7% in the quarter, but have a slimmer EBIT margin of 1.7%. Slide 22, please. Looking at the sequential growth, we see, as Arne mentioned, a very good growth on the top line even sequentially. And the number of employees have now grown positively in 5 quarters in a row. And so that's good for our ambition of growing the company quite considerably over the next few years.And even more positive, I would say, is the sequential growth on EBITDA and EBIT. Typically, Q4 is the most profitable quarter of the year, and we actually managed to exceed Q4 with our Q1 numbers this year. And that's the first time in 5 years that Q1 has been higher than the previous Q4 figures in terms of profitability. So that's very strong. And it's -- despite the fact that we had at least 3 weeks of impact from COVID-19 in our March figures. Page 23. The mentioned revenue increase of 13% is primarily driven by the increase of our own service revenues from consultants, both onshore and nearshore, with the nearshore part being ending considerably higher in terms of growth, though the onshore revenues also grew by double-digit figures.So we're up at NOK 112 million from these services, whereas the subscription service is at NOK 38 million, which is up by 10% both from the data centers as well as the subscription services provided by our subsidiary Compendia, which, I could add, has received a lot of attention in the last few weeks from customers wanting to take part of the services they provide to have more automated HR related to services, including chatbot functionality. So they're experiencing more demand for their services, which is very positive, given the investments we have made into their software as well. Third-party services were down by 19% to NOK 7 million, and other revenues were up by 8% to NOK 4 million.Slide 24. The cash flow statement, as mentioned, positive inflow from operations at NOK 7.5 million. And if you look at the last 12 months rolling, we see that we have generated NOK 93 million in cash flow from operations. And that's a bit higher than EBITDA less paid taxes. So very strong cash conversion, I would say.We spent less money on investment activities in the quarter of -- with NOK 3.8 million versus NOK 5.5 million of last year. Finance activities were pretty much in line with last year at a negative NOK 2.5 million.Slide 25. As Arne mentioned that we will distribute or at least proposed to the general meeting that we will distribute an ordinary dividend for 2019 of NOK 0.20 per share. The Board will also ask for an authorization to pay a supplementary dividend later this year if the financial situation will allow for it. We have not changed our dividend policy, which says that we will distribute, at least, 50% of earnings, unless there are exceptional circumstances that would create disturbance from this.The share price is just 3% approximately higher than the same period of last year. So that's, of course, on the back of a significant decrease in the general stock market of 20%-plus decrease. So I think we've held up quite well so far. Before this earnings call, our share price was trading at around NOK 9.5. And I see that, so far this morning, the stock market has reacted positively to our report. We hold about 835,000 own shares in treasury, that's up 65,000 on year-end.Yes. Next slide. Our financial position, we see that our total assets are more or less unchanged from the same period of last year. We have a little bit more cash and a little bit more equity than the corresponding quarter. The equity ratio of 26% is, obviously, with the new IFRS 16 financial standard, where we have placed so-called right-of-use assets onto our balance sheet, which are predominantly office leases and also some other leasing contracts. So yes. So with the previous accounting standard to the equity ratio, we have seen some 3% or something higher than we report now.Slide 27. Yes, outlook. We can switch to 28 -- sorry, Slide 28. We feel that the underlying market for our services of digital, I would say, digitizing the customers' businesses is still very strong. Obviously, the COVID-19 shutdown that we have had in the Norwegian and also the other Nordic markets have put some breaks on the general economy as well as to a various degree impacted our customers was predominantly negatively or some businesses that I'm sure that have seen an upturn in demand even because of the nature of their services. But we do expect and we do see some softening of demand in the short-term space. I think, not at least because of the whole uncertainty of how long the shutdown will last and how long it will take for the economy to pick back up again, but I think we're very well positioned to gain market shares in this period, and also when the economy picks up again because we have a very attractive model for -- we're doing this in a cost-effective way.And now that more customers have gained first-hand experience of working in a distributed fashion with home offices, that would lower the bar for utilizing our hybrid delivery model, where we will work with a distributed delivery. So we can hope and expect that more customers will be positive to utilizing such a delivery model.Yes. Other than that, we don't really provide any specific guidance. And so I think we will leave it at that and open for any questions you may have submitted online. And if not, I will hand back the word to Arne to make a closing remark. And thank you for watching, and look forward seeing you back on August 25, hopefully, in a more normal session, where we have an audience, at least, for the Norwegian run through. Thank you, and have a nice day.

[Arne Mjøs, Chief Executive Officer]

And thank you, Bent. Excellent. I think the financial figures is very strong. We will focus on this quarter, second quarter and the third quarter. We have full attention on the uncertainty in the market. We need to continue working hard with the customer. We would spend as much as time together with our customers, take care of our people. There is a window of opportunity. And we're very happy that we are well positioned for this opportunity.So I'm looking forward to see you next to present the second quarter. So we will do our best to also present the next quarter just after the summertime. So thank you for attending this call. Thank you.