Itera ASA

OSE:ITERA

Earnings Call Transcript 2021-Q1

[Arne Mjøs, Founder & CEO]

Okay. Welcome, everyone, to Itera's Interim Report First Quarter 2021. And let's go to Slide 2 and look at the agenda. We have the same agenda as in the previous quarters. I will start with the highlights of the quarter. And deep dive into the business review section. And then the CFO Bent Hammer will look into the financial review and outlook. And then we have a question-and-answer session at the end. [Operator Instructions]So let's go to the first section, the highlight first quarter 2021, and we go to slide 4 to look at the first quarter in brief. I'm very happy to -- that we achieved 11% organic growth in the core digital business. As we had discussed for several quarters and actually for 2 years ago, we had the strategy saying that we will sunset the data center. So these core digital business represent 32 -- 92% of the total business of Itera, where the remaining 8% is relating to the data centers that are migrated into the cloud.So by the end of this year, our core digital business will be Itera's full 100% business model. So -- but if I keep focus on the core digital business, this 92%, we achieved strong growth in terms of 11% topline, and we also managed to have EBIT margin, operating margin of 15% for this business.So that, I think, is a good start for this presentation. And I think we will also bring you through -- we have also been quite long journey, this, I will say, during the COVID-19 because we see that the market due to COVID-19 really has accurate in terms of utilization and sustainability. So we have a strong market in all locations that we are operating for the time being. We have also, during the last 1, 2 years, we worked quite focused on stretching partnership with international, some are quite global, players like at DNV, Cognite and Microsoft and others, that also bring Itera to other part of the world.We are not only delivering to the Nordic region, but also delivering almost to 20 countries around the world. We are also looking at geographic expansion in marketplaces that we have facilities, for example, especially in Norway, we, of course, go to other part of Norway. We have been in Bergen for a long time. We extend -- expand our position in the western part of Norway, but we're also going into Fredrikstad, that's not far from Oslo to also look at the region.We're around the capital of Norway, but also quite close to the Swedish borders. This is also some kind of geographic expansion in the market that we are already in place.We are also building a delivery factory at scale, with the hybrid cloud center. So most of the application that we are building will also go into the cloud because that's a tremendous platform that you need to be on in order to then make or create the digital and sustainable businesses.If I look at the book-to-bill for this quarter it's 1.0. It also has a kind of seasonality. So we had a very strong book-to-bill in the fourth quarter last year. But if I'm looking at the 12 last months, we have a strong book-to-bill at 1.3.If I'm looking at the number of employees, we increased by 19 in the core digital business first quarter and about 60 the last 12 months. The cash flow -- the operational cash flow is still strong. It's -- the last 12 months it's NOK 93 million. And also the Board proposed an ordinary dividend of NOK 0.25 per share.So that is the highlights, I will say, in brief for the first quarter. So if we go to the next slide, you see the figures here. In terms of revenue for the core digital business that we present here, we had NOK 144 million that represents an organic growth of 11%. If you go to the number of employees in the core digital business, it was 523. That's representing growth of 13%. And if you look at the EBIT operating profit, we had NOK 21.1 million. That is a margin of 15%.So I think this is a good summary of the financial figures, and we will have a deep dive into these figures later in the presentation by CFO Bent Hammer.So let's go to the Section 2 business review. And then on Slide 7, we will also, as you noted, we have also established a new brand of Itera. So we had a strong project, and we launched a new brand in the end -- in March. So we're really working on being -- becoming a very agile, I will say, international player that find human solutions for complex challenges. And so that's the position that Itera have. So we saw that it was important to also rebrand Itera to take this more international position.So if we go to the next slide, we see that crisis actually accelerating the depreciation and sustainability and is referred to survey, I think, is quite important in -- to understand what's really happening in the market. One is from the Gartner, the IT resource analyst globally, quite well-known in this industry. That has some service saying that 65% of the CEOs across the world in different sectors will accelerate the digital business transformation.And also if you look survey by Mckinsey they're saying that speed of adoption of digital technology is increased by 7 years, globally, during the last 12 months during this COVID-19. So we're really taking a huge step into the digitalization across the world, and that is something that's really happening across every industry, every country in one very short time period.And what we see is actually that digitalization and sustainability are really interconnected. So after the COVID-19 or as a consequence of COVID-19, every industry is also more into sustainability because sustainability is also a business driver. It's not only some kind of left hand. It's really becoming a core focus of each business enabled by digitalization. So that is what we see is really happening in the market for the time being. So if we go on the next slide, this is showing the markets we are splitting into 2 parts, actually, the mature part, we will call the business to consumer, where we, as a consumer, have been using technology for a long time in terms of buying something or doing our insurance services or whatever on the net. So that's a part of that we are operating as human beings. If you go to the business-to-business, there's a lot of, what we call, operation technology, the technology around the machines, and then you have the IT. So in the business-to-business is really to unlock the data in the operation technology around the assets and the machines and connect it to IT.So it's an integration operation technology and IT technology. So when you manage to do this, you can really have a huge, a value creation also in the business-to-business in more or less the same amount that we had seen value creation in the business to consumer.So the fastest speed in terms of digitalization is actually in the business-to-business. And that's where Itera also put a lot of focus over the last 2, 3 years and really taking a strong position. So if you go on slide 10, you will see that how this business-to-consumer and the business-to-business are really getting connected, interconnected because it's really a value chain that need to be along from the consumer into the production, the full total experience, how you can actually industrialize or look at the value chain in a complete different way and a more sustainable way that we have been used in the past, actually.And then we are talking about the fourth industrial revolution. That's some kind of maybe a large word and a huge step, but I really think that if we're looking at the speed of adoption after COVID-19, we are really more closer. I will say, we are part of the fourth industrial revolution already because of the acceleration of the technology that we have seen the last 12 months.So if you go to the Slide 11. So that is also where Itera have a strong position because we have end-to-end services, so we can also unlock the new opportunities with the full range of services and the processes, the methodology, where we start with the vision and design, the journey of what build a solution and also take a life full cycle approach on that, using all kind of digital understanding in terms of the data and how the user should actually be a part of this to make sure that we build a human solution and also how we work with different partners that really add a part -- add the services into the new ecosystem of players, for example. And everything will be about the cloud, and it will also be about the Edge, which is more like the IoT. So a lot of the assets, the cars that we're already seen have actually a computer, but every physical asset will also having -- building a computer.So that's why we are talking about how the cloud and the Edge are working together, how we're really getting the AI as a part of the cloud because we need to have a lot of computing power to really look at the artificial intelligence. So that's the new ecosystem we will be a partner. That's why we also needed to reshape Itera in order to address these needs coming in.So if you go on the next slide. So Itera have, during the last, I will say 2 years, really build an industrial approach for delivering consulting services, we call it the delivery factory at scale for data-driven businesses. So the goal for this is actually that we assist our customer to actually increase innovation, the speed, agility, have control of the cost, efficient use of the cost of -- yes, the resources that you put into the project. But also not, at least, the control in terms of security and predictable, flexible service delivery and operation end-to-end.So these are some kind of targets that we deliver for our clients. And so what we needed to do is actually to reshape the Itera because we have a data center that was the classical data center for the classical business models, but the adoption into cloud is really accelerating. So that's why we have built a Cloud Center of Excellence, based on the best practices from the global vendors. So we invested a lot into the Cloud Center of Excellence to really take a poll position to manage, to build this new application or this new solution for human users. We did with very fast speed, and we do not have any kind of obstacle because we have the legacy from the past that we need to take care of. So that's why I said that we take this position, reshape the company and we work with partners like Microsoft and Red Hat to make sure that these Cloud Center of Excellence are also not only based on 1 cloud vendor, which is a multi-cloud vendor supported, what we call the hybrid cloud center.So this is actually what we have done in Itera. And if you go on Slide 13, this is just to show we have 1 example for quite global company. This is DNV based in -- with headquarter in Oslo, but have -- are represented in -- about 100 countries around the world. So Itera is working end-to-end, in terms of utilization services combined -- in combination with DNV very deep knowledge -- business domain knowledge in different sectors.DNV also have a digital solution. They also have software engineering skills. But with the partnership with Itera, they also have much faster scalability to really accelerate digitalization and the sustainability for all their business sector around the world. So this is really, really where we see the delivery factor at scale and the Cloud Center of Excellence really fit into this global company. And what I think also is very interesting in this perspective is actually that we see there is a green transition. If you look at the oil and gas discussion in Norway, what should happening, going forward, I think there's a large push for the floating win that have a huge potential for Norway. And not only Norway, but all the connected global business, they are a part of, to really take a global floating win position and also make sure that the energy -- the oil and gas companies are transformed into energy companies, which are much more sustainable than the pure oil and gas companies.So really a huge demand for these kind of services in this sector and also in order to support or enable the sustainable transformation of the planet, I will say. So this is just an example of a very interesting partnership that we have in DNV. And we see other players like DNV that we are also working more, very strategic to have access to different parts of the world.So if we go to the next one, I talked about the geographic expansion. It's important to Itera to also not only be represented in the capital city in the location we are present. So this is example in Norway. We have the western part of Norway, where we have already been in this -- in Bergen for about 2 years. It is about 45 FTEs or consultants that are the delivering services to clients based in Bergen with a typical ratio with 1 person locally placed in Bergen, and the rest is actually from other locations in what we will call it distributed.Norway have -- we look at the next level and have established a new office facility. That we move into in May to really continue the growing western part of Norway. And there is also another quite interesting on next week, we will move into a new co-location in Fredrikstad close to Oslo, but also with a very interesting market in Sweden.So then we also have more customer in this region, not far from Oslo, but also access the labor pools that a lot of people do not want to move into the capital city. So this is also very interesting, so they can stay, live where they live and also be a part of the delivery factory at scale and also work for international clients despite they are working or sitting or living in the neighborhood, not only in the capital city. So this is also very interesting how we establish these new kind of offices to reach both customers, but also the labor, the market.So if you go on to the Slide 15, I think this is also something I just want to address because we have in Itera, very strong position in banking and finance. And there is in-house analysis unit in Itera, we branded as Cicero Consulting that has done a very in-depth mobile banking report survey, using our best analysts and experts on services side, user interface and UX where they tested 16 mobile application and they identified that Sbanken was the best -- had the best mobile bank banking app in Norway, followed by SpareBank 1 and DNB.So we had a lot of webinar and media coverage because we orchestrated this competition. So it's a very respected analysis and a feedback loop to the banks because they always would like to compete in terms of the mobile bank, everything is about that one. And Itera's analyst and experts are really available for supporting or assisting other clients in this, in order to make sure that they will have improved application for the clients. So this is really how we are using example of we are using very deep domain knowledge in this sector, combined with the end-to-end delivery capability of Itera.So if you go on to the next slide, the order intake was quite normal, I will say, in the first quarter, 1.0, seasonality, very high in fourth quarter, but the last 12 months, we have 1.3. So that's very good. And here are some existing ones, but also some new ones. So there is always some current combination. We also have a focused strategy to also look at new logos because that's the part of the growth strategy of Itera.So if we go on the next slide, you will see that new business had -- was represented 88.5% of the revenue in the first quarter. And new customer are actually defined as customers that won -- that we won since end of the corresponding quarter last year. So that's a new customer that wasn't a customer for Itera 12 months back in time.So if I look at their revenue, they represent 11.5% of new business or new customer in the first quarter. So I think that's quite strong. And if you look at the visibility of Itera, we have quite large engagement. So top 30 customers, there's the 74% of total revenue is really a strong figure. So it's down by 3%. I think that's okay because we have some of the newcomers or new customers that really are stepping up quite fast. So I think in -- we're looking at the top 30 customers that it was a little too high. So now it's more going down 3%. For me, that's very good because I see that there are other customer coming in.So then we can go on to the 18. This -- I was talking about the data center, say forward, to tell you more about that. But as I said, in the fourth quarter, it was 81%, the core digital business. And in the first quarter, it's 92%, and by the end of 2021, it will go down to 0, and then we are talking about core digital business will be 100% of Itera.So -- and also the last one, if you look at Slide 19, in this section, we have as I said, we had, in the core digital business, it was up by 62 people the last 12 months, while we have the reduction at the data center by 22.So also in terms of the nearshore ratio, it was now 50% that has been a part of the strategy that we should reach 50%. And I think also going forward, we will see some kind of ratio of 1 to 3. So it will also still continue to increase, but we will also have -- we have full focus on recruitment also in locations that we are presenting close to the customer because that's the part of the business model itself that we should be close to the customer.So I think that was everything in this section. So let's move on with Bent. Let's -- I think you take over from here.

[Bent Hammer, Chief Financial Officer]

Yes. Thank you, Arne, and good morning to you all. So if we can move on to Slide 21. As Arne mentioned, we will a lot focused our financial reporting from now on the core digital business, as we think that provides you a bit better picture of Itera going forward.So I'll, of course, also present the numbers for the data center operations, but the main focus will be on this core digital business, which as of now, represents 92% of the business and increasing.So next slide. The core digital business had a growth of around 11% in this quarter. And this was driven primarily by some new customers. For example, we managed to get a new client [ ACE ], which is a part of the Aker system. And we developed that from nothing to being our third largest customer in March over just a few weeks' time. So that goes to show how well we are able to scale up on the new engagement really fast using our distributed delivery model.We also used subcontractors in a larger extent than before. That also provided some additional growth. The -- on the cost side, we see that our personnel expenses were up by some 11%, and that's slightly below the average headcount year-over-year.Other operating expenses were down NOK 2.4 million. Some of that is related to the lockdown situation we are in. So there was basically no travel at all in Q1. So that provides a bit of a saving. And there are other activities as well that are naturally at the lower level than regular.We also had NOK 1.5 million less in depreciation and amortization in this quarter. The main component of that was that we subleased around 40% of the office in Kiev because we're not using the office at this point in time due to the lockdown. And also, we see that on the short to medium term, even after the lockdown is over, we think that we will -- or our employees will continue to utilize home offices to some extent. So that we can optimize the usage of our own office facilities.In addition, we had around NOK 600,000 of lower depreciation due to some product development costs that we're now at the end-of-life in terms of depreciation. So that gave an EBITDA of NOK 28.3 million and a margin of 19.6%, which was slightly below last year due to more subcontractor work, whereas the EBIT was up from NOK 18.7 million to NOK 22.1 million.And the margin was also up by 1 percentage point to 15.3%. End of employees -- sorry, end-of-period employees counted 523, which was up by 62 compared to the same quarter of last year. So that's up by more than 13%.So going on to the Slide 23. We look at the quarterly development. So we -- as you can understand, we continue to recruit full fledge during this COVID period. Even though there was some pause in demand from customers, especially in the first phase of the COVID situation. So we have been running at the utilization rates of -- availability rates, which has been slightly below our normal standards during H2. And we -- but we see now that towards the end of Q1, we are coming back to normal levels. And that gives an impact on the EBIT margins that we see now in Q1.In terms of quarterly, both the revenues and results, these are heavily dependent on the number of working days after vacations. So Q3 will always be the lowest quarter for us. And the other one will be somewhat impacted by the number of working days. So in Q1, we had 1 fewer working days than the corresponding quarter of last year.So moving on to Slide 24. Well look into the subscription revenue that we have from the own data centers, we see that we had a very sharp drop from year-end to Q1.So that's part of this transformation that we have been planning for the last couple of years, really, of the transforming the data center into cloud. So by this, we went into the next and, I would say, last phase of this transformation.Q1 saw the fallout of our biggest and most complex customers that we have on the data center operations. So a sharp drop in revenues and corresponding drops in profitability as well. There will be some lag in the timing of when the revenue drops out. And when we are able to also get rid of the associated costs. We're currently below sort of a critical math to service the remaining portfolio in a profitable manner.So now it's a question of migrating the remaining portfolio and/or terminating those customers that do not want to migrate as quickly as possible to also get rid of the associated cost base.A lot of the manpower that we used in this business segment will -- are in the process of being rescaled move into the cloud operations. But there will be the cost reductions in terms of the legacy equipment and data center costs that we have. So going to Slide 25, we can see the -- in blue, we have the core digital business and the data center operations and the total figures. So this quite drastic drop in revenues from the data centers of 59% was almost mitigated by the strong growth in core digital business. So we had a drop of 2.6% on the total business.Isolated, we had also then a loss of NOK 3.7 million from the data center operations, which, again, was almost mitigated by the increase of the core digital business. So the net impact was only NOK 800,000.Looking at the cash flow on the next page. We had cash flow from operating activities of NOK 1.2 million, which was down from NOK 7.5 million of last year. The running last 12 months shows cash flow from operations of 99 -- sorry, NOK 93 million, which was the same as the previous 12-month period.We invested NOK 7.9 million in Q1 versus NOK 3.8 million in last year. So the difference being these investment in the Cloud Center of Excellence. This will be even higher than in Q2 when we complete the -- this NOK 15 million investment in in the Cloud Center of Excellence.From financing activities, we spent NOK 6.4 million, which was approximately the same as last year. So we ended with a cash balance of NOK 41.2 million, down from NOK 50.7 million of last year.Slide 27. As Arne mentioned, and as we have already communicated as well, the Board will propose a dividend payment of NOK 0.25 per share to be paid in early June. They will also, again, ask for an authorization to decide on supplemental dividends later in 2021. Share price at end of the quarter of NOK 14.6 per share was an increase of 73% compared to end of March last year, where we obviously had this massive COVID impact on the stock market. If we include dividends as well, the shareholders' return has been 80% during this past 12 months.We have owned shares of almost 1.3 million, which was valued at NOK 18.7 million at the end of the quarter.So next Page 28, the balance sheet. We have reduced the total balance by NOK 32 million to NOK 226 million. One significant component of that was the sublease agreement of the office space in Kiev, which reduced the so-called right-of-use assets. In total, together the other offices, this was down NOK 14 million from NOK 41 million to NOK 27 million.The equity ratio ended at 22% versus 26% of last year. And adjusting for this IFRS 16 meeting standard equity would have been 25%. So that was it.That was what I was going to present about the Q1 figures. Just briefly on the outlook on Page 31. We still see a very attractive market for our core digital business. And if anything, this market has accelerated with the COVID situation. So I think the restricting factors of the total market is the lack of competent resources in this tech space.We obviously have access to one of the larger IT pools in the world through our nearshore centers. So we're in a good position in that regards. We also have a strong position through our end-to-end deliveries and this distributed delivery model that we have received a lot of accolades even internationally, i.e., outside of the Nordic region. That puts us in a good spot, we think. We have also, over the past year or so, developed several very interesting and strong partnerships with the likes of DNV, Cognite, Microsoft to name about a few. So this will also add another layer to our position that we will pursue further. We're investing, as mentioned, heavily into this Cloud Center of Excellence, and we're ramping down in terms of in the own data centers. So that will have some short-term impact on our revenue streams and also profitability for that line of business. But as mentioned, the core digital business is growing fast and profitably. So we'll mitigate that.Yes. I think we will leave it at that. We are welcoming any one-to-one meetings that you might want to have to discuss further Itera as an investment case. So feel free to contact, either Arne or myself to set up some meetings. You will find our contact information on our both the report packages and also on our website, itera.com.So we're looking forward to hearing from you and/or seeing you back for the Q2 presentation on August 19. So until then, have a very nice day, and stay safe. Thank you very much.