Itera ASA

OSE:ITERA

Earnings Call Transcript 2023-Q1

[Arne Mjøs, executive]

Good morning, everyone. Welcome to the interim report for the first quarter 2023. My name is Arne Mjøs. I'm the Chief Executive Officer, and I will walk through the highlights of the quarter and the business review. But in addition, Chief Financial Officer, Bent Hammer, will walk through the financial review and also have some comments about the outlook. And at the end, we will have a Q&A session. So if you have any questions, please post your question into the chat, and we will look into it at the end of this presentation.

Okay. Let's start with the highlights for the first quarter. In brief, it has been a remarkable quarter. I'm so happy with this. We are showing you all 31% organic growth, fantastic. And also, in addition, if we look at the EBIT margin, operating margin, it shows 14.4%. So when you're talking about the Rule of 40, we are really according to this formula more or less 45 and this is also some kind of continuation of the fourth quarter. So we are really according to the strategy that we should improve the growth and also the profitability quarter-by-quarter.

If we look at the market for digital transformation is quite good, quite attractive, because of the green shift and the sustainability, but not at least also all hype about the new generation AI that I also will comment in this presentation.

Our growth is also fueled by leveraging our international growth in terms of 3 new offices and not at least also our capability, we call it the digital factor at scale and our cloud and application services by doing more with less.

We have also, during this quarter, I have a lot of focus on the new -- next generation of AI. We have also established our own Itera GPT that we have been starting to use internally, but also -- as well as discussing with our customer. If we look to our -- as you all know, we are quite a strong presence in Ukraine, but I will tell you all that our operation in Ukraine is running as normal. It's fantastic. We are showing 90% utilization availability in this quarter. And we also see increase in interest from customers that really would like to contribute to the sustainability of the social responsibility that we all should be a part of according to support Ukraine in the best way.

If I look at the book-to-bill showing 1.3%, that's good in the first quarter, 1.2% for the last 12 months. Number of employees increased by 33 in the first quarter and 89 employees during the last 12 months. The 12-month rolling cash flow is up by 23% to NOK 84 million. And also, as we discussed and presented in the fourth quarter, the proposal of the ordinary dividend for 2023 will be at NOK 0.38 per share.

So all in all, it's a fantastic, remarkable, I am so glad and I will -- I'm very grateful for all the employees that contributed to this fantastic quarter. Here, you see the figures, 31% we provided the NOK 230 million in revenue. Employees, we ended up by NOK 731 million. That's an increase of 40%, and the EBIT margin is 14.4% in the quarter.

Okay. Let's go into more about the details about this highlights. I will start with the positioning of the company. As you know, we are specialists in sustainable digital transformation. And as you know, we have also established after the situation in Ukraine. We have established 3 new offices in Kraków, Brno and Zilina. Kraków and Brno are in 2 new locations -- 2 new countries for Itera. So building, taking the presence and new location in a new country, building on ONE Itera model is extremely important. I am so happy to see that all these 3 offices are running with profit after more, let's say, 6 months plus, so we are able to establish an entry in a new country.

And at this time, 3 new offices in parallel is fantastic. I think the reason for that is the Itera ONE operating model. So we don't have any kind of silos, we are building ONE Itera. We have very focus on alignment, but also autonomous. And I think that's the reason that we managed to build this company with this kind of financial performance in terms of the growth and profitability because of the investments that have been built into the ONE Itera operating model.

And also I'm talking about, we have a very strong organic model. It's a steady growth. And you see these are 2 circles, the most important, in any case, is let our people grow. So we say people growth is the most important thing. When they grow, the customer will grow and also the company will grow. That's the inner circle of Itera, the consultancy services, but in addition, we have also started on increasing our packaged offerings and more industrial services in order to increase the speed and reusability and not at least managed services or some kind of subscription that will also increase the growth of the company itself.

So Itera today, I say we do not have any kind of legacy. We are really on the sweet spot on digital transformation. And if I refer to some of [ IDCs ] talking about what is the global forecast for digital transformation showing 16.5% in the period of annual growth actually in the period of 2022 to 2024. And you also see that the digital transformation will be 55% of the ICT investment in 2024. So really, this is a really important part of the transformation of most of the industries out there. And it's really not at least triggered by all new focus on AI that I will also comment later.

And also, we, as a company, we are also having one of the inner circle drivers is actually connected to the number of employees. So after the invasion in Ukraine, we have stabilized growth in Ukraine. So we have -- but we are also establishing new offices in Central Europe, outside Ukraine. So these offices are really contributing more to the growth of Itera, but also, we also see a future where also we will come back to the quite radical growth also from what we call the Eastern Europe after the war. But we already are seeing some of the customers that are approaching Itera and say that we would like to use our Ukraine and IT specialists.

So I also believe that we will continue the growth also in Ukraine, but not at least after the invasion, we really see a really radical growth also in Ukraine going forward. So the ambition -- the long-term ambition is actually to have a net growth of 200 to 300 FTEs each year. So that's the ambition we are striving for, and we'll show you some of the figures on the journey we are towards that ambition.

I also just want to tell you about some example of the outer circle about the industrialized offerings because a lot of customers like tests. We have mentioned also in the previous quarter, but I just mentioned this because we finished and completed this digital transformation or this cloud transformation, I will call it, where we moved all their on-premise equipment and systems into the cloud, and we ended into the Azure Club, so we managed to do this by and complete that project by end of the first quarter according to plan.

And what is important for test because they have very large high ambition for the growth, they should double their revenue, they should double their earnings within 3 years. And because of they can use the new technology in the cloud, they do not have any kind of obstacle that from the IT stack, they are really on using the cloud, and they have more flexible solutions for changes and innovation, which is extremely important to support the scalability to double the business, but not at least, what is also important that the security functionality of all the users are really higher than in the past because then we can use all kind of security functionality that are in the cloud.

So this is just an example of a customer that has taken the step into the cloud, fully operating in the cloud, and that also will have a major impact on the business going forward. And as you see from the, test them only from the customer, they have been very happy with Itera. We have been a fantastic partner throughout the migration to the Microsoft Azure. Another customer, we also mentioned in the previous quarter is actually using the digital factory at scale, where we are using this technology to build what we call [indiscernible] for the Norwegian -- the IMDi, which is actually supporting the Norwegian integration of female immigrants. So we make sure that these female immigrants that are staying at home today are enabled to be -- to enter employment or some kind of formal education. So that is an extremely important solution as part of the society itself in terms of the inclusion, but that is enabled by using our refractory digital factor at scale. And this digital factor at scale, and talking about a lot of time, but that has been also an important investment in Itera, all about doing more with less.

So when we approach our customer, we can show the customer that having everything as part of our rig when we start engagement, everything is in place. So we can increase the speed and throughput in terms of digitalization by 20% and 30% or even more. We have some cases that we managed to do it at 40% and maybe 50% increased speed and throughput.

And I also believe that when you understand the consequences of using AI, which is the next topic I will go into is actually that we have also heard a lot of AI. It's really a disruption coming in. But Itera has been using AI and machine learning for a decade. This has been a part of Itera and not at least as part of the digital factory. But now it's even more powerful. And if you look at some of the analysis that the AI adoption continues to -- actually it is saying that 95% of the enterprises report that they consider AI technology to be important to the digital transformation.

So of course, AI is not only the future, we have been using it, but now it's really more tangible and it's more even more powerful than we have seen in the past. And what we have done at Itera, we have been starting. We have a separate AI focused team that are really looking at the new generative or the new -- next generation of AI and also ChatGPT that is really -- we are testing out. We have also built our own GPT. So everyone is actually looking at how we can use this kind of technology, but not at least, we are also attending a lot of conferences. And to talk about these opportunities and also as a part of the drivers and the trends out there, but also not at least in a more focused meeting with customers that really keen on to understand what this kind of technology will have -- what kind of impact it will have on their business going forward.

And as we also talked about that we at Itera and our people have also established Itera GPT that is also implemented in our internet. So we are testing the technology for our internal processes and purposes, but also using ourself as showcases for our customer. So this is nothing that has just happened to be. We have been watching the ChatGPT and looking at the opportunity, and it will be really implemented all over Itera and not at least as an extension to the digital factory at scale.

I also just want to mention that we have one of the key industry that we focus on is actually the finance -- banking and finance and we have our subsidiary, Cicero Consulting, that have published a trend report about the 5 trends that shape the future of finance and one of these trends, of course, is responsible AI, so what we see that we also in this kind of trend report, we really look at how using technology, what are the key drivers? What are the trends and how could we contribute for a specific sector and making some kind of conference with customers, with other kind of partners to discuss and take a lead on these kind of changes.

So you can go to Itera website, itera.com, and you can download this kind of report to look at how we address the 5 trends for shaping the future of financial services.

Yes. I just also want to mention, as we have heard a lot of time that Itera have 300 people more or less in Ukraine. So we have been standing together with our Ukrainian colleagues during this difficult time after the Russian invasion. So I had my fourth visit in March and as you see on the top row of pictures. And together with my people in the offices, we are going out on the restaurant, have dinner together and also showing you that during this last visit, there were a lot of new attack. It was 45 missiles that are coming in. So I need to go to the shelter at my hotel, sleep at the [indiscernible] and try to understand how is the -- how have the Ukrainian adapted to the new situation. And I tell you, and now I talking about the western part of Ukraine, which is actually at the size of Germany. They -- the society have really adapted to the new situation.

So I'm very confident when I meet our people and see that look at all kind of availability of Internet that power supplies 100% available as in the past, and the availability of the delivery was about 90%, quite normal. But also as a part of the Chamber of Commerce in Norway, Ukraine, we are also doing much more than only the business. We are really staying together with Ukraine during this kind of difficult time. As you know, they are also fighting for our sovereignty and also our freedom.

So I think this is extremely important for a company like Itera that we are doing something much larger than ourselves. And in order to look at also some of the things we are doing. We talked about some bridges in last quarter, but this time, I focus on the energy sector itself. It's a huge opportunity for Nordic Energy business in the renewables transition. We have a lot of technology. We have full space. But just to tell you, because we have, in this meeting on the right side, you have the Minister of Energy and his 3 deputy ministers on the right side, and we have Itera on the left side. And also in addition, we invited Rystad Energy on teams to discuss how could we make this kind of energy transition to a more renewable future.

And according to Rystad Energy, we are talking about 300 gigawatts of wind and solar. And if you compare to what we are talking in Norway in terms of floating wind, we are talking about 30 gigawatts, so it's actually 10x more. So of course, this is a great opportunity, so that Ukraine can really become a significant energy exporter to Europe. And we have the technology and they need this kind of technology. And of course, Itera will be a part of this transition because any kind of new energy system need to use AI, need to use more intelligent software. So we need to look at the twin transition, both the energy transition, but also not at least supported and enabled by digitalization.

So this is to show you that for Itera, our presence in Ukraine is really strategic and long term as a choice because of the great people we have in Ukraine, but not at least in terms of the energy transition and the rebuilding of Ukraine, that will start at some time. We know that Ukraine will win this war. We really believe in them, and we are really prepared to support them during the war, but not at least after the war in terms of the rebuilding.

So this is also a big opportunity for the growth of Itera going forward. The order intake in this quarter was quite good. It was 1.3%, the book-to-build ratio is good in the first quarter. And it then has some kind of different numbers quarter-by-quarter, but that's where we always look for the last 12 months. It's showing 1.2%, which is also quite strong. And we saw here some new customer logos that has been quite important for Itera to look at new customers because we have this kind of rapid growth.

So in this quarter, we also managed to win a new customer, but not at least also prolong and extend our business for the existing customers. And this is also quite documented -- well documented here. If you look at the existing customer accounted for 87% of revenue in the first quarter, it's down from 91%. But for me, that's very good because the new customer won of the past year generated revenue of 30% share actually. So that's why one of the key KPI we have in Itera is actually what is the share of new revenue, revenue that didn't have from customer in the last 12 months.

So this is showing a quite strong change in the customer mix, which is supporting the growth going forward. And the share of revenue from top -- 30 top customer is now 84% that's also very good because it shows the visibility of the revenue from this customer because we are so tightly -- strategically tightly with their business. And also, if you look at the number of employees, as I told about, I would like you to put attention on the graph on the right down, so if you look at the rolling 12 months, as you see in the second quarter 2022, we reached a peak of 122 net increase FTEs. And then we had the invasion in Ukraine. So Ukraine was really 1 of the key contributor to the growth of Itera. And that's why we needed to establish the 3 new offices. And as you see, it's just started to grow both in the Nordic, but not at least also from Central Eastern Europe -- Central Europe. And the net ratio is actually 53% but we really believe, as I told you, that we will reach this 200 to 350 FTEs annual growth.

In 2022, we had a target passing going towards 150, 170 FTEs but because of the invasion, we needed to stop a little and establish new offices. But we are quite geared on quite interesting to make this happen as a long-term ambition for the group, 200 to 300 net increase. That's why I'm talking about this organic driven model because I do not want to have fragmentation in the company. I will have ONE Itera company because then we have very satisfied employees that are working according across the borders, across the competence fields, whatever. So that is what I really see today, I really believe it's one of the reason for the growth rate we are showing for you guys today.

So I think that I'll stop on that, and now we will go more into the financial review. So please, Bent Hammer. I think this is a pleasure for you to go into the details. So let's.

[Bent Hammer, executive]

Absolutely on a day like this, yes. Good morning, everybody. I'll dig into the numbers, Yes. As Arne mentioned, we produced a growth of 31% in the first quarter. And that was mostly from our own consultants. So we actually had an even stronger growth in terms of gross profit, which grew by 34%.

Personnel expenses were up 35% to NOK 158 million and other OpEx, up to NOK 18.3 million. In terms of the latter, we have more expenses related to the new offices that we have established over the last year as well as more traveling now post COVID and also more training, both post COVID as well but also as an increased investment into our people.

So we end up with an EBITDA of NOK 40.8 million, which is up by 22% from last year and an EBITDA margin of 17.7% and after depreciation, we are left with an EBIT of NOK 33.2 million, which is 14.4% EBIT margin. So that represents an increase of 27% on EBIT year-over-year.

Cash flow from operations more positive this year than last year as well at NOK 7.8 million. Q1 is traditionally a rather poor quarter in terms of generation of cash flow following the strong Q4. If we look at the 12-month period, we are up to NOK 84 million from operations, which is I think it was NOK 68 million in the previous 12 months. And we left with a cash balance of close to NOK 15 million, which is good in terms of the dividend payments that are due in early June. I'll come back to that in a second.

Employees, we ended with 731 employees at the end of the quarter, which is up 89 people from the same period of last year. And also, on average, we were 14% more people than last year.

Looking at the sequential development, we see that we have a very strong growth trajectory. In fact, we have now had an average growth of 24.3% over the last 2 years. And we've done that with an EBIT margin of 11.7% on average. We can see that from Q1 of 2020 to Q1 of this year, we have grown revenues from about NOK 130 million to NOK 230 million, so an addition of NOK 100 million.

In terms of the margin, Q1 is traditionally the quarter where we produced the best margin. This year is -- we also managed to keep more or less the same margin as in the previous 3 years. It's been around 14%, 15% in the first quarter.

So that's a strong start to the year of 2023. If we look at the margin development comparing Q1 of last year with Q1 of this year, we see that we are expanding the margin of the sort of the underlying business by another 0.5%. The direct cost of the invasion, which this time around is mostly related to us subsidizing the salaries of some of our employees that have been drafted to military services, also some extra costs related to ensuring that we have connectivity and power at all times, so we can work uninterruptedly towards our customers. Arne mentioned that the offices that we have set up in Central Europe are now producing back figures. So they are sort of -- they're up and running, they are over the first hurdle of development. I left the Swedish office as a downside in this quarter.

In Sweden, we started a reentry in October of last year. We have a different model there versus the Central Europe, which is more capacity-driven. In Sweden, we are targeting to increase demand. So we are attacking the Swedish customer market, and now we're building up the demand side there. And we will add some capacity there as well in due time, but we also look at a distributed delivery model as the prominent entry there.

The Cloud and Application Services, we -- as mentioned in the previous few quarterly reports, we have built up both the technology and the service offerings, but also the capacity to be able to take on larger implementation and transformation into the cloud. So that had a very small impact on the margin of this year -- this quarter.

Going forward, we expect this to be neutralized, and then start to add to the margin, i.e accretive to the margin.

Yes. Repeating myself, Cash flow from operations were NOK 7.9 million in Q1 versus negative NOK 0.4 million in last year. We invested NOK 3.9 million, mostly to product development, but also some in terms of equipment, et cetera, and at least all the improvements in our operations.

In terms of the financing activities, we actually had a positive inflow of NOK 2.9 million in the quarter, and that was related to the employee share purchase program that we had in very end of March. Previously, we've had those in June. So we sold 647,000 shares. I believe it was for a combined total of NOK 6.2 million. So that expanded the employee shareholdings even further, and we think it's a good thing to have our employees on board as investors as well.

Yes. So we ended with NOK 49.7 million versus NOK 29.5 million in the corresponding quarter of last year. On a rolling 12-month basis, we generated NOK 84 million from operations versus NOK 69 million of last year. We have no intention of sitting with a huge cash balance. So again, we will distribute the surplus liquidity to our shareholders, beginning with NOK 0.3 per share in beginning of June. And the Board has also asked the Annual General Meeting for an authorization to also pay a further dividend in later of this year as we have been accustomed to over the past several years.

Share prices at the end of March was NOK 12.6 per share, up from NOK 12 on 31st of March of last year. And combined with the NOK 0.5 per share dividend payments we have done in the past 12 months that gives a positive development of 9%. And yes, we have been trading at a high level in the last few days, and I see that the market has reacted positively to our Q1 results, which came as no surprise to me. So that's good news. Our current shareholding is 971,000 shares after we did the sale of shares to our employees in March as mentioned. Yes. So we show a consistent high distribution of earnings and we can continue to repay to the shareholders.

The balance sheet has increased quite a bit from last year. In fact, the NOK 57 million, a large portion of that is an increase in customer receivables, which is a natural consequence of our growth. So we don't have any issues with our receivables. We have a solid customer base, and we have not in my 7-year tenure, we had any significant losses on receivables.

Equity ratio ended at 29%, up from 22% of last year. And you can add another 3 percentage points if you remove the impact of this IFRS 16 leasing standard that was introduced a couple of years ago. And I think that was it, in terms of going through the Q1 results.

Just some brief comments on the outlook for the future. No big changes there from what I reported in Q4. We continue with our expansion, our new offices have only seen the sort of the initial phase of growth, and we will continue to expand there. And as soon as the Ukrainian situation is solved than we expect to be able to grow quite significantly in that market again.

In terms of the overall market, we are not obliged to signals out there from our peers that there is some softening demand at the moment in some certain areas. However, we have not been impacted by that as of yet in Itera. And we have a positive outlook still going forward. We are small enough to be able to also gain market share, even if the overall market is not growing at the same pace as in the past year or so.

We also are in the initial phases of this Cloud and Application Services business unit. So that will also add to our growth potential going forward. And so we will continue on a high growth journey, market permitting at least, where we will have focus also on getting the profitability and the cash flow to follow. So we will not grow at any cost, so to speak.

So we will keep a close watch on the developments in the market and also, of course, in our in current customer base as such.

Great. No questions being posted online. So I think we will just end by saying that next reporting will be on August 24. Arne and myself are always available to further discussions and any questions you might have about the Itera and our financial performance and outlook.

[Arne Mjøs, executive]

Yes. I think, Bent, we are really on fire today, right? And because of all our employees, we're so proud of what we have achieved together, how we are working as ONE Itera across the border, how we are growing, making our customer growing and the company growing. So I'm really on fire today, and we're really looking forward for this kind of continuation of growth we are going on now. So thank you for attending today and looking forward to take the next step in the next quarter. Thank you.

[Bent Hammer, executive]

Absolutely, thank you.