Itera ASA

OSE:ITERA

Earnings Call Transcript 2022-Q1

[Arne Mjøs, executive]

Okay. Welcome, everyone, to the First Quarter Interim Report 2022. My name is Arne Mjøs. I'm a Chief Executive Officer. We have the same agenda as always. I walk through the highlights of the quarter and also more detail into the business review. Then our Chief Financial Officer, Bent Hammer, will go through the financial review and some comments about the outlook. And last but not least, also, if you have any questions, put it into the chat because we also have a Q&A session at the end.

Okay. Let's start with the highlights then for the first quarter. When I reported the fourth quarter of 2021, it was on the 17th of February, and as you all know, at the 24th of February, there was a full-scale invasion from the Russian Federation in Ukraine. And I think we all have a lot of knowledge about what that means for Europe, and the world has really changed 180 degrees. Everything is changing.

And this is also a part -- major part of my presentation because when I reported the fourth quarter, I also talked about the business continuity plan because we have our business in Ukraine. Has been there for many years. And because of the business continuity plans that we already established before 2014, but we have opted for different scenarios. I think it has been extremely important to having in place because when the invasion started about, I think somebody called me at about 5:00 Norwegian time on the 24th, we were already in the process to just kick out the plan.

And because of that, we see that just after initial period, I was talking about days and week, 1 week. We managed to get all our deliveries up and running more or less closer to normal before the war, normal level before the war. I will show you some figures about that. It's very strong performance of the company.

We have also established new offices in Itera. That's a part of the plan we have in place to look at other locations within existing countries we are at present but also in new countries. And what is also in terms of the size of the situation in Ukraine, we also managed to complete our sunsetting of data center operation because the last part of it, the remaining part that was not causing us some customer that would not be able to migrate to the cloud. Now we sold it to another vendor in that space.

Some -- so all the figures that we present in this 2022 is what we call as the segment called core digital business. Now in 2022, Itera is only core digital business, 1 segment. So we are delivering in this quarter, despite the situation in Ukraine, 22% organic growth, and we have an EBIT operating margin of 14.9%. That's amazing. It's very strong figures despite the situation.

And we also show a good strong book-to-bill of 1.3 in the quarter and for the last 12 months, 1.2. We increased the number of employees by 25 in this quarter and 118 in the last 12 months, everything is organic in Itera. And the 12-month rolling cash flow from operations was NOK 69 million.

And as we communicated in the fourth quarter interim report, we, the Board has also made a proposal of ordinary dividend for 2021 of NOK 0.20 per share. So the figures for Itera now in 2022, as you see, in revenue, NOK 126 million (sic) [ NOK 176 million ] in the first quarter. That's 22% organic growth. We are 642 people. That's a 22% growth in the quarter. And as I said, the operating margin of 14.6% -- 14.9%. And our CFO, Bent Hammer, will go into all kind of deep details about the financial review -- in the financial review section. But I think he's really happy with these figures.

Okay. Let's continue with the business review session. As has said, we had the business continuity plan in place. So that has been very important. First priority has always been to take care of the people, the safety of our Ukrainian colleagues. So that was the high parity, but also quite soon, immediately as soon as possible, we also focus on our deliverables together with our clients.

So just after very initial period, we had impact. I will show you some figures about that. But almost all projects have been running close to normal during the war. So sitting in an air-raid shelter is, I will say, a normal situation, but is not -- isn't normal in terms of when it happens, there is WiFi. We're still working in the -- sitting there for 20 or 40 minutes.

So there's no any kind of interruption in the business as such. So that is what is we see in Ukraine. As I said, we have a business continuity plan. So we moved a lot of people more and more to the western part. Some people, except for men between 18 and 60 years old moved to other location in Itera. A lot of people moved to the Bratislava office. When I talk about people, not only our employees but also their families.

So we establish, we motivated, we mobilized all locations at Itera because we had crisis management meeting every day. So we know anything through the company, what's happening, how we can support our people in the best way. So what we also did was for some of the clients, we needed to improve or advance the security solutions. So we established what we call a virtual desktop from the Cloud Center of Excellence, our super cloud -- world-class Cloud Center of Excellence. So by having a Cloud Center of Excellence in place, it was -- we were able to really establish new controls, security controls around our solutions within 2 or 3 days. So that was extremely most important in this kind of new situation to establish the kind of security controls for our clients.

Before the war started, we also established a new office in Zilina in Slovakia. It's about 1.5 hour by car from Bratislava. We also -- because some of the Ukrainians were moving to Krakow. So we also established some kind of co-locations -- some temporarily, co-location there together with one of the customers that are located there, just to take care of our people because they were moving in different direction.

And now we are also starting to open a new office in Brno in the Czech Republic and that will be really running in the second quarter. So that has been a part of the strategy to establish new location. But I also say that we really stand with Ukraine because we have managed to build our new normal operation despite the war. And I will show you the way we operate quite soon.

As I said, this figure is quite interesting. I think it's -- a lot of people are very surprised. We made in some kind of notice to the Oslo Stock Exchange just after the situation, and we have published update every week more or less on our website about the situation where we talk about taking care of the people and also our customer deliverables.

But as you see here, on the 24th of February, you see there is a drop in revenue because the yellow one is showing the revenue per day before the invasion. So we have the drop, of course, taking care of the safety of the people in the first 2 days after the invasion to Thursday and Friday, and then we have Saturday and Sunday between. And then you see on Monday, on 28, we're running more or less at 60% of the pre-war operate.

And as you see, during the next week, we are more or less 80% in the company. So we very soon, after 1 week plus there is a public holiday on the 8th, as you see. But anyway, we have been quite close to normal operation after plus/minus 1 week. In addition, we have also mobilized other locations with services on top of this.

So this, I think, is a good, good example how this business continued. The plan has been working very well and also how we manage to put people into safety through everyday crisis meeting all over the -- across Itera, and also not at least the commitments together with our customer that we are really looking and taking care of the brave Ukrainian people.

I also made a visit to Ukraine. Just after the quarter, I was there in 3 days from the 7th to 9th April and visited our office in Lviv, and also had a car -- took the car together with our Head of Ukraine and we also met our people, some of our people at our Keiv office and also had a meeting with the Deputy Minister of Digital Transformation in Keiv. So that was -- I need to understand what is the real situation in Ukraine because our Ukrainian was saying to me, Arne, we have full control. It's possible to manage and deliver our services more or less as in the past, we take care of our safety, and I need to see this. I need to feel the atmosphere.

So I was very relaxed, well, I will say, very glad on behalf of the Ukraine to see what is the daily life for everyone in Ukraine, how we take care of the safety, how we take care of each other and not at least the brave and the strong and the support of all the Ukraine and how we can support them in the best way.

So they are really making a difference. And we, as a company, has also changed a lot because this is extremely important for all the employees in Itera. And I think also we have very strong support from our clients, but also not at least our competitors, saying to Itera we would like to support you.

And we're doing a lot, I think, keeping the business running, that is what they are asking me for. That is what I can contribute most. But also what we have done is actually we fully stand with Ukraine as ONE Itera. We have been helping as much as possible to organize reallocation of our people and their families in every kind of aspects of that.

We are also supporting some few people of Itera who's also part of the Ukrainian Armed Forces or some similar activities. So we also support them and pay their salaries together. So that's also extremely important for us. We know there is a lot of mental health needs. We don't -- we need to -- we have services for that. It is, of course, very individual based. And we are prepared that it might be more in the longer run. But anyway, we try to do as best as we can.

We do donations, as you know, also directly to the Ukrainian Army. We also see a change in the opinion also from the Norwegian government that we are also supplying weapons, advanced weapons so that we needed to also stay together in that perspective and not at least also Norwegian, the Ukrainian Chamber of Commerce. We are also part of the [indiscernible] leadership there. So there's also -- they also have very good donation alternatives because we have local competence about the needs on the ground.

And there is a lot of volunteering from Itera from the people in Ukraine. And all other, their army -- united army, Ukraine Armed Forces are really the heroes, but there's a lot of other people in Ukraine those are really the heroes that we really need to support in the best way in terms of medicine, food, whatever.

So that is just to say something what we are doing, but I think we can do even more. And that is why I also would need to meet the minister -- the Deputy Minister of Digital Transformation because President Zelensky and our Prime Minister, Støre, have quite a regular meeting. Of course, it has been talks about the weapons. And now finally, we managed to deliver advanced weapons to Ukraine.

The Norwegian population is actually really supporting. It's 8 of 10 that really support the government to supply weapons. So it's really a change in the mindset. But not at least President Zelensky is also asking Norway to provide reliable energy in terms of gas, more gas because we would like to stop supply of gas to Europe. 40%, as you know, is coming from the energy mix in Europe is from Putin, that support his war.

So it's extremely important that we also accelerate the shift to renewables. And Norway have a very strong position in terms of offshore wind, clean hydrogen, carbon capture and storage and not at least also batteries. So in order to deliver these kind of services and building these new industries, we also need a lot of digital technology because the digital technology as such is fully needed.

You can't create this dynamic new energy system without using technology. And that digital technology is already in place. You can use it tomorrow. And if we start using it in a full-fledged way, we can also manage to reduce the carbon by 1/3 of the targets that are set for 2030. But as [indiscernible] you see in Norway, we need 40,000 to 80,000 new talents in Norway, specialists or we can also talk about the Nordic countries where we also place. There is an enormous need for IT specialists in this space. So if you combine the energy transition and the IT, you have the perfect match. The perfect storm.

And that was a talk with the Minister of Digital Transformation as we in the Nordics or Norway need this capacity, and you can supply it, and we know it means a lot for your country in terms of export revenue, in terms of about NOK 15 billion to NOK 20 billion we can supply to your country. Of course, that's quite -- the IT sector is the third largest export sector, it's 25% of the food industry.

So it's really extremely important export revenue for them, and it's really valuable because it's easy to deliver in this situation. And also, if you look at the Norwegian side of it, according to McKinsey that the green transition could in 2030 create 210,000 new jobs in the green transition space and generate about NOK 310 billion in increased GDP by 2030. And that's comparing to our GDP contribution in oil and gas, it represents 70%. And that is what I'm talking with the Norwegian government, but also the businesses. The businesses are ready. So this is also an opportunity that really make a difference to support Ukraine also from a full-fledged Norway or a Nordic perspective.

So we also, as a part of -- together with The Confederation of Norwegian Enterprises, NHO a seminar or studio live production. They invited several Norwegian top executives from different sectors to discuss how could we really actuate to the green transition.

So what I will say is actually that when we come back to talk about Ukraine and the war we are a part of to secure the sovereignty and also the freedom for Ukraine and Europe and the world, it's extremely important that we also look at how we can increase buying products and services and also look at business opportunity on both sides. So this is just to say that the green transition is really needed, and we need to push for this to go much more into renewables.

Yes, I also mentioned that, that has been some kind of transformation for 2.5 years. But finally, in the first quarter, we managed to sunset the last part of the data center operation. It was sold to another vendor in this space. So just before the end of 2021, we closed down the data center in Denmark. Now we are really finished also in Norway.

That means that we -- all the figures that we have reported in 2022 will be what we call core digital segment, the core digital business, it's 1 segment. And Bent Hammer will tell you more about the details about the new figures. But this is really a new milestone for Itera. We haven't been stronger in terms of capabilities and no legacy in this company. So that's very nice.

Just to show you one example of a customer that really stand together with Itera and Ukraine is the DNV. It's a large customer of Itera. We are delivering service in many different countries. And in this particular case, we are delivering asset management system for the electrical grid in U.S. and also in Canada to improve the reliability in this energy system.

So in this case, we are using our scalability in our factory, we call it Digital Factory at Scale and also the Cloud Center of Excellence to really provide state-of-the-art solution at a faster -- with faster speed than in the past. As a multi-disciplined team fully transferred -- created together with DNV and also have people working from Ukraine as a part of the Digital Factory. And I remember that just after the invasion, they were reporting on the progress of this system and the project, this was really, really amazing. It was -- and we were also glad to have the CEO of DNV Digital Solutions to present his point of view to all employees at Itera on the company meeting, we had digital for all cross-border. It was a really important message, Kenneth Vareide, CEO was sending of all the employees.

So that's -- we also see a lot of heartwarming situation, and especially DNV is a very strong customer, in this case, just to show you one example. And then impact of that it has for the people in Ukraine. Another example is Össur, they are already developing an app for -- they have a strong position in prosthetic equipment that are more and more digitized. So we are building a new solution for them, also from Ukraine and not at least this company, this is a quite global oriented company, international company.

They also are helping Ukraine with people that have lost their leg or whatever, arm. So they are also doing a lot from their business model and also supporting with the new digital solution for all the people in Ukraine. So this is also a very strong case on how we can work together to really support Ukraine.

Okay. I will finish my part because I can see that Bent Hammer would like to present the figures quite soon. So just to give you some numbers about the order intake, as I said, it was the book-to-bill ratio is quite good, 1.3 and 1.2 for the last 12 months, that's good. And also in terms of customer development, we have very strong existing customer that are prolonged and prolonged and prolonged and we also managed to extend the services. So each of the larger customers growing steadily each year, that's very good, and that shows the quality of the company.

So in terms of new customers won over the past year, generated revenue for about -- 13.4% share of the revenue. So that is what we also measure. We would like to provide more and more new customers, but also not at least keeping the customer and growing each customer that already has been together with Itera for many, many years.

In terms of the number of employees we are now in Itera, that's 642. That's up by 25 and [ 113 ] in the quarter and 118 in the last 12 months. And the figures -- the graph on the right left side, on the right side, I mean, bottom side, as you see, this is showing the 12 -- rolling 12 months. So we're having a steady growth in terms of number of employees.

And as I told you last year time that we should manage to go to 200, maybe 250, maybe 350 that we onward. So Itera is a really organic driven company. And that's why we also established a new supply location. So we should have very strong access to new talents that go into our Digital Factory at Scale and the Cloud Center of Excellence so we can deliver to any country or any industry around the world.

The last slide I will just show you is actually, we are quite happy with also that we, as in Norway, that is the kind of competition. So for the 6 times in a row, we were awarded or recognized as amongst Norway Top 25 most innovated companies across any industry. So that's a very good proof once -- 1 time more.

So let's move into the financial review section. Bent, that's your part.

[Bent Hammer, executive]

Yes. Thank you. Good morning, everybody. So let me just start off with explaining the reporting structure. Those of you who have been following us will know that we last year, focused on what we call the core digital business. So that was essentially the total business, less the data center operations that we have been transforming over the last couple of years.

So that was in anticipation of finally discontinuing this business. So the comparative figures that we show now are -- for the business going forward is the same as we have been reported as core digital business previously. So into the figures, I'm very proud and humble to present this first quarter results. It's been a bit of a roller coaster in terms of emotions, I would say, for this quarter. It's been heartbreaking and heartwarming at the same time with the events that have been going on in the Ukraine.

How our people, both inside and outside of Ukraine have really come together and supported each other in the best possible manner. And that also extends to our customers as well as even some competitors that have reached out to us to ask whether they could support in any way. So very glad to see that we -- despite some dips obviously managed to deliver 22% growth. And we also delivered an EBIT of NOK 26.1 million, which is up by 18% from last year's corresponding quarter.

So in between, we see personnel expenses up by 22% as well. So that, for the most part, follows the increase in headcount. There are also some pressure from salary increases, both in the Nordics as well as in our Central European and Eastern European locations. So that's a reflection of the worldwide demand for IT services at the moment.

Other OpEx increased by 38% in the quarter, and that's a combination of several things. One is, of course, the growth in the business in itself, but also it's a bit of return back to normal after the Corona lockdown. We've had on and off over the past couple of years. So we see that traveling expenses, et cetera, are returning somewhat, although still not at pre-corona levels.

We have also invested some more in marketing activities in the first quarter to -- yes, just to set the stage for our future position in the area of digitalization. So -- yes, all in all, good margins, 14.9% in the quarter versus 15.3% of last quarter.

We had a cash flow from operations of negative NOK 0.4 million, but that includes approximately NOK 10 million of a negative contribution from the data center operations in the first quarter. So we end up with a cash balance of just south of NOK 30 million, which is NOK 11 million below last year's levels.

So again, we ended with 642 employees in this continuing business. And there are some 25, 30 people who will also be converted from the data center operations that we have discontinued. So they've been working on migration from data centers to the cloud. So they gained a very valuable know-how in that sense, which we will then in the coming few months be deploying out into the marketplace.

Looking at the sequential growth, we see nice growth curves here as well. Over the past couple of years, we've averaged 15.5% growth, which is quite strong, and we managed also to keep the profitability levels, so more or less at the same levels. Obviously, quarter-by-quarter, we see variations that are primarily due to the number of working days in a given quarter and also net of vacation. So Q3, our traditionally the quarter with a lot of vacations. So we see that both on the revenue side as well as the margin side. If we dig a bit into the discontinued operations to just to give you some more insight into that.

As mentioned, we have classified this as discontinued business now. So that means that under IFRS, we only report the net income figure from this operation. So that's the one in the blue bracket here now at the end. But looking at the gross figures that -- from that operations, we had revenues of NOK 7.8 million, of which approximately NOK 6.5 million were recurring revenues that will be taken over by this new vendor that we sold the remaining operations to.

Personnel expenses and other operating expenses are also inclusive of some termination costs, both in terms of redundance pay and also some cleanup of remaining issues. So after this quarter, we will have no more impacts from this discontinued business. So it's all cleared away now. The new supplier or the new, yes, new supplier of our -- the business we sold will resume responsibility for all the leasing agreements they've acquired all the assets on a net book basis as well as, of course, the customer agreements.

Yes, statement of cash flow, as mentioned, NOK 0.4 negative million from operations. And then we invested NOK 4.1 million versus NOK 7.3 million of last year. So the difference there was the investment we made in the Cloud Center of Excellence of last year. We had NOK 3.5 million from financing activities, which is down from NOK 6.4 million outflow in last year. So the difference is primarily related to the reduction in the data center operations where there were more asset lease contracts.

So all in all, we end up with a cash balance of NOK 29.5 million versus NOK 41.2 million of last year. 12-month rolling, we've generated NOK 68.8 million from operations. But again, that's including quite considerably negative impact from the discontinued business.

As Arne mentioned, the Board of Directors confirmed last night that they will propose NOK 0.20 per share dividend payment, ordinary dividend payment for 2021, and they will also ask for a renewed authorization to pay a second dividend at some later time during the year.

Our share price has taken a bitter dip from the start of the year to NOK 12 at the end of March. So it's been trading below that for the past several weeks as well. But we can only hope that this current reporting will provide some fuel to the price again.

So we have approximately 1.7 million of our own shares in treasury, which were valued at NOK 20.3 million at the end of the quarter. So our dividend policy remains fixed. We intend to distribute between 50% and 100% of earnings over time. So we will continue to repay the investors as quickly as our liquidity offers really in that sense.

Looking at the balance sheet. Lastly, there are no major changes to the balance sheet, really. As mentioned, some less cash receivables are a bit higher, but not much from last year. So not really reflecting the huge growth in revenues, I'd say.

And on the equity and liability side, there are hardly any movements at all. So we end up the quarter with an equity ratio of 22%, which is the same as last year. Yes, that was what I was going to go through in terms of the financial statements from Q1.

Just a few words on the outlook. We don't specifically guide on outlook, but we, as Arne mentioned as well, we remain fully committed to our business in Ukraine. We intend to continue to develop that. We can, of course, only hope that the war comes to a peaceful and positive end in the very near future. But we have, nonetheless, proven that we are capable of operating quite well even in the current situation.

The closing of the data center has finally freed up our resources and focus so that we can really be more focused on developing the cloud business that we have invested quite considerably in during the last year or so. We see continued very, very strong demand for our services. And that's, in essence, driving us to open more locations not because we need new locations in terms of serving the customers because we do that on a remote basis for a large part, anyways.

But we need to be closer to the talent pools available, and we just -- we need to expand to have more talents to dig into. So I'm not sure if I can promise 22% growth in the next quarter, but because we had quite a strong quarter of last year in Norway, particularly, but we are looking to continue well into the double-digit figures in terms of growth in the near future provided, of course, that nothing very substantially different happens in the world.

So thank you very much. We will be available for any one-to-one meetings that you'd like to set up to discuss Itera as an investment case further. So just be in touch with about probably -- primarily myself, and I will involve Arne if needed, but we are always happy to engage with discussions with investors.

[Arne Mjøs, executive]

Yes. Are there any kind of questions? No, we don't have anyone. So we are ready to do that follow up. And the last but not least, I think it has been a very new situation. We stand with Ukraine and are really proud, not at least for all the Ukrainians. You are so strong, you are so brave, you are so true.

So let's move on together as ONE Itera and for all other people out there in Norway and other countries. Let's buy more products, more services from Ukraine. We're all a part of this fight. So thank you, all, for all your support so long. And this is just beginning, I think, we have learned a lot during this first phase. Thank you for attending today, and see you for the next quarter.

[Bent Hammer, executive]

On August 25. Ukraine.

[Arne Mjøs, executive]

Ukraine. Thank you.