Itera ASA

OSE:ITERA

Earnings Call Transcript 2020-Q2

[Arne Mjøs, Chief Executive Officer]

Welcome to the interim report for the second quarter for Itera. My name is Arne Mjøs, and I will go through the highlights of the quarter and the business review; and Bent Hammer, Chief Financial Officer, will look into the financial review and some comments about the outlook.The highlights for the second quarter. I think we're quite satisfied with this quarter due to this COVID-19 uncertainty. So we are very glad that we can report for what we call the core digital business of Itera that exclude the data center. So all in all, it's 81% of the total business, delivered gross profit growth of 8% and EBIT margin of 12.7% compared to 11.1% last year. If we look at the total business, including the data centers that we had decided for 2 years to sunset and make some kind of migration into the cloud, the total revenue was about NOK 151 million compared to NOK 143 million last year. That's an organic growth of 5% year-over-year. The gross profit amounted to NOK 131.6 million compared to NOK 102.1 million (sic) [ NOK 122.1 million ] last year. That's organic growth of 8% year-over-year. And the EBIT for the total business was about NOK 16 million compared to about NOK 14 million last year. That represents a margin of 10.5% compared to 9.7% last year.If we look at the COVID-19 situation at Itera, we only had some kind of moderate impact. We've seen some kind of increased competition, but our position is strengthened really because we have our hybrid delivery model with certain onshore and nearshore. So when we meet some increased cost pressure, we also have the measure to mitigate this kind of discussion versus our competition, our local competition, especially.We do not see any kind of productivity loss due to COVID-19 because we have been working remote from home office or from different location. That's a part of the core business model, operating model of Itera. The number of employees has increased by 31 the last 12 months, and we're also very happy that we could continue with summer internships, as planned, with 31 master students in Norway. We onboarded them in the second quarter, and we also -- yes, we continue -- we conducted a project for them, both in the end of June and also during July and completed the project in the first week of August.If we look at the dividend, we paid out ordinary dividend for 2019 of NOK 0.20 per share, and we also have the authorization to distribute additional dividends later that normally the Board will look into when we report third quarter.So all in all, if we look at the total quarter-by-quarter, I don't see any major impact or any kind of impact from the COVID-19. I think we are in a solid position and also not at least -- the request or the demand for digitalization has seen, that is very important also, not at least during the COVID-19.Okay. If we go to the business review. As you know, our -- the position of Itera is to be a specialist in creating sustainable digital business where we deliver end-to-end services comprising the user, the end user or the customer, the business and more and more data-centric businesses and also all kind of technology combined into one team. So for Itera, it's also important to take some sustainability responsibility. So if you look at United Nations 17 sustainability goals, Itera selected 3 of them. That's -- goal #3 (sic) [ #9 ] is about industry innovation and infrastructure, how we can actually advise our customer to move into sustainable value chain. That's very important for the services that we deliver and can also really contribute to that goal. If -- the next goal is actually goal #11 about sustainable cities and communities where, from Itera's perspective, we also have a lot of smart technology or smart concept in terms of smart cities or smart mobility or smart energy that are directly connected to goal #11. And the last, but not least, also Itera as a player in the market should also have focus on responsible consumption and production.So that means that the sustainability is the core part of Itera's strategy. It's a part of how we make a difference. So -- for our employees, our customers, our -- their customers and also the society as a whole. So the 4 fundamentals of Itera in terms of skilled people and multidisciplinary teams, platform first, ONE culture, ONE Itera culture across the border and also the entrepreneurship and also local ownership is added with sustainability focus as the fifth pillar or the fundamental of Itera.The sustainability business has been a process that really started in 2019, where we established the strategy. We selected these 3 goals. We have been certified according to Nasdaq Environment, Social and Governance initiatives. And we also have started through our consultancy also support our customer in the transformation towards more sustainable business. In 2020, we are really putting this into the core of our business. We will also report to the financial community our relevant KPIs for these 3 selected goals. We have signed a contract with United Nations Global Compact, and we also have established internal competency arena, like we call it the Itera Sustainability Academy, that also train all the employees all over the place and all over the location we are into the same understanding about what Itera means and the responsibility we take in terms of the sustainability.So in 2021, we will continue with the full realization. We will develop new concepts and tools combining sustainability and digitalization. We will -- of course, when we onboard our new consultants, we -- of course, that will be a -- sustainability will be a central part. We believe also developing sustainable business down the road will also be the new normal. Every customer or every industry really have that as a key focus and that's at least also driven by the COVID-19, where this -- the most of the sectors of the industries are really trying to shift into the green economy where Itera should also be a key player in that transposition.So we are already doing a lot of -- several levels, call it, sustainable engagements. One was actually reported in the previous quarter, we call it Elop, which has some kind of scanner technology that really scans all concrete to have more information about the structure of the concrete structures. And if you combine this data with weather and all the kind of data, you can also extend the lifetime of the concrete. So the impact of that is actually the production of cement which has a large carbon footprint, represents 8% of global CO2 emissions. So if we extend the lifetime of these concrete structures, you will, of course, reduce the CO2 emission, but also lower the community cost and the potential to also save life if you, for example, think about the bridge, whatever, you can extend the life of a bridge, of course, and also make sure that you don't break down because you extend the life.What is also important and what we also see after the COVID-19 and also the packages or the stimuli from the government in Norway, but also from the European, where it is some kind of large [ GENCO ] money that are putting into the transformation from the -- and reduce the carbon footprint in the oil and gas, but also -- not at least also the rise of the floating offshore wind power, which is actually benefiting Norwegian industry because we have a long history of actually doing this kind of complexity in terms of offshore. So the whole offshore industry that has been working for oil and gas can also go into the renewable in terms of floating wind power. And also, you see many of the oil and gas energy players also within oil and gas are really also going into the floating wind power game. So Itera also have the technology and also concepts for some of the clients mentioned here that are having this kind of transition, either in the oil and gas, but also -- not at least, also in power utility really have focused on sustainability.Yes. I also talked about the summer internships that we had a lot of discussion whether we should continue. I think that also is part of the social responsibility that we take as a player in the market. So we continue with the summer internships of 31 employees or students that were participating in 3 -- in 5 projects for customers like Pelagia, Kværner, Nordea, KLP and Fjordkraft. And they really did a very good job, supported by the concepts by Itera. And we see several of the projects had real sustainability gains in terms of energy optimization, better working life or also sustainable resource utilization.And one of these projects was actually completed or done for Kværner, which is quite large -- they have quite a large yard at Stord, north part of -- north of Bergen with thousands of assets, such as wagons, production equipment and trucks that are continuously moving. So what we did was actually using machine learning, different kind of tracking technology and advanced robotics, like this Spot, this dog, that are actually taking 3D street view review. So for the truck driver or the fleet management plan or whatever, they have complete overview of where all the assets are located dynamically. So today is -- some apps that are not updated because of the grids have changed because of the asset of the structure. The asset in the yard is actually -- is quite dynamic. So by using the new information from this [ robot ] that have always information about where the assets are allocated, of course, they can onboard these assets into the construction work for offshore or onshore plants or energy station, whatever they build, because there are many projects in this kind of yard that are delivered in parallel. And that's why it's so important to always have information of where all the assets are located. So this project was actually delivered on time and as a live prototype for the customer within 7 weeks. So I'm very impressed of the students, what the kind of quite advanced solution they managed to deliver only through 7 weeks' work. And that solution was actually based on Cognite, which has a lot of this technology in place that is much easier to build the end user solution on top of it.What is also important, and we are very proud of, is actually that Itera during the second quarter was awarded as the best Project Management Office in Europe. So Project Management Office is -- of this association has about, I think, 1,000 -- 10,000 members in 110 countries, and we've become the final winner of the European competition, where each country was actually competing, and there was some kind of the final between the 2 best in Europe, and Itera was the final -- the winner of the European part of it, and now we are into the final competition with only 4 players left. So we are actually top 4. And in some weeks or maybe a month, I don't remember, but in -- quite soon, the winner of the global competition will be launched. But we are very happy that already we have been the winner of the European League, and I think there is some kind of confirmation because in 2018, we also were winner of the Best Hybrid or the Best Sourcing Model across border by the Global Sourcing Association. So that was also a big achievement we managed in 2018. And in 2020, we also managed to take another, which was winning the project management. So we really have the best project management team in the environment of the competencies in Europe.Yes. We are also doing a lot of seminars for the customers. We -- as I mentioned in the second -- first quarter, we had done for some of the government initiatives for COVID-19. So there was a project called kompensasjonsordningen that we were part of the team. So they managed to develop a solution within 3 weeks. That has a big impact on all the businesses that are requesting money from the government. And today, Itera -- this solution is actually built in the cloud -- on cloud technology, and we have the operation and responsibility for that solution today.So there's a lot of interest from different customers who are looking into how did we manage to develop such a quite comprehensive solution only in 3 weeks. So the sharing of this knowledge and what we can -- how we can utilize that for new projects going forward is actually very interesting topic for many customers. So we have 8 more webinars planned in the second half year this year.If you look at the order intake from selected new and existing customers, it represents 0.8 in the second quarter. It's -- the book-to-bill ratio was actually 0.8, which is actually lower than in the past, but if we see, in July, there were some kind of orders that have been coming. Normally, that's a vacation period in Norway, in the Nordic region, also some part of the nearshore. So all in all, it has been 1.1 in the second half year. We see there is a lot of activities in market. It was more unsecured or uncertainty in this second half year, but now we see that the business is coming back. Some had stopped in the second quarter, but they are coming back now. So we really believe in the recovery in -- for our business going forward.And it was very interesting, also we were happy for -- looking for some of the existing customers, which is Gjensidige that entered into a frame agreement, a 5-year frame agreement with Itera. It's 3 plus 1 plus 1 agreement that covers Gjensidige's operation in the Nordic and the Baltics. We are very happy that we can also expand into other parts. Today, most of the services are delivered for the Norwegian partner Gjensidige, but now it's a part -- it's a frame agreement that also go into the Nordic and the Baltic countries. So -- and it also contains the services that we should cover is actually the full range of services in Itera. So we're very happy that we can utilize the full Itera capability for that client that has been for -- client for Itera for more than 20 years. And that is also -- if we're looking at the customer development, existing customer accounted for 89%. Of course, Gjensidige is one of them that has been there for 20 years, where many -- or actually this customer that has been with Itera for many, many years. But we have also put focus on winning new customers to have a larger customer base to continue the organic growth. So the share of new customers that we -- that wasn't customer for Itera for 12 months ago was actually 10.9% in the second quarter, representing NOK 16 million in the second quarter.And as you see, the top 20 -- 30 customers represent about 76% of total revenue in Itera. So it's quite stabilized, but we will still continue to win new accounts, large accounts because we historically see that the accounts -- the large accounts with Itera, minimum are customers of Itera, 5, 10 or maybe 15 years. So winning more of these customers, get the trust and really scale up is a part of the demand side for the growth of Itera.If I look at the employees, we have a lot of skilled and innovative employees. I think it's a very high standard. I'm very happy with all the employees we have at Itera and the work they are doing or not at least during the COVID-19. So we were 530 employees at the end of the quarter. That's up from 3 last quarter and 30 (sic) [ 31 ] from the last -- the same period last year, 12 months ago, actually. And the nearshore ratio is stabilized on 48%, so that's more or less according to this value.And as we see, if we go back, we had some kind of intake the last 12 months. Net increase of FTEs, employees has been around 100, if we go back to 2017, and we are working quite hard to go back to that track. That was a part of the plan. We need to adjust a little due to COVID-19, but hopefully, we will soon come back to the track that was actually in each of the plant for Itera coming into.So that was actually what we had in the business review session. So maybe Bent can talk more about the financial review.

[Bent Hammer, Chief Financial Officer]

Absolutely. I'll be happy to. Good morning, everybody. As Arne mentioned, we had a growth in this quarter of 5% on the top line. More importantly, our gross profit grew by 8%. So I'll come back to more details about this development in a second.Our personnel expenses were up by 9% in this quarter. There were multiple impacts on that. One, of course, was the growth in the number of employees, most importantly. We also had some foreign exchange effects on our nearshore and Danish operations as the Norwegian kroner was quite a bit weaker in the quarter -- this quarter compared to last year. On the other hand, we had some relief from the Norwegian authorities with respect to social security taxes. So that provided NOK 1.5 million or something like that in relief in this quarter as a one-off.So we ended with an EBITDA of NOK 25.8 million, which is up by 14% versus last year. Our depreciation charge was NOK 10 million, which is 15% higher than last year. And that was to do with the investments in expanded facilities in Kyiv due to the growth in headcount there. Also, we've modernized our IT platform and also we had this currency effect on the assets that we have in our foreign entities.So the EBIT ended up at NOK 15.8 million, which gave an EBIT margin of 10.5% versus 9.7% in the corresponding quarter of last year. We had a very good cash flow from operations of around NOK 40 million. That was also helped by government incentives in -- well, relief packages, I would say, from the COVID-19 virus, whereby they extended the payment deadlines of some taxes and VAT and so forth. So yes -- so the relief from that was, I think, close to NOK 23 million in this quarter and, obviously, that will reverse in the subsequent quarters.Nevertheless, the underlying cash flow was quite positive, as I will go through in more detail in a few slides. Equity ratio at 18.6%. The number of employees ended at 530, which is 6% above last year.If we look at the 2 main business segments that we have, the core digital business with the consulting and some of our IPR offerings, that grew by 5.2% last quarter, and that was the part of the business that was mostly impacted by COVID-19, as there were some customers that decided to either defer the start-up of new projects or even canceled some of the existing projects due to the uncertainty they were facing in their own businesses.The data center operations grew by 5.5%, which is the kind of the growth rate that we've seen for the past several quarters now. The data volumes that they have in their data centers is on a constant growth path, as their existing customers consume more and more data.Gross profit is where the 2 businesses separate more clearly as we grew the core digital business by 8.3% in the quarter versus 4.5% in the data center. And year-to-date, 12.6% for the core digital business. EBIT margin as well, very distinct difference there now with the mature data center operations, which we are underway to transform to a more cloud-based business at a very low margin, whereas the core digital business have a very strong margin in the double digits.We will intensify the transformation of the data center in the next coming 6 to 12 months, as our customers are now getting more matureness in doing that journey from on-prem to cloud. So we will likely see some more investments and transformation costs related to that in the next couple of quarters. Looking at the sequential growth, we can see a distinct pattern in the EBIT margin, whereas the Q4 is traditionally the quarter with the best profitability and Q3 the lowest. And you have a line between there for the Q2 and -- sorry, Q1 and Q2. We expect the same to be true for this year, as Q3 is typically a quarter with a lot of vacations and also a slower start-up in terms of utilization -- billable utilization as we take on this year's university graduates, and it takes some time to deploy those into the marketplace. The 12 months rolling revenue shows a top line of NOK 587 million, which is 7% higher than the corresponding 12 months earlier. And the EBIT has grown by 24% to NOK 63.5 million, giving an EBIT margin of 10.8%, up by 1.5% from 12 months before that.We grew the own consulting services as well as the subscription services by 8% in this quarter, and those are the 2 dominant business lines. Our third-party services as well as our other type of revenue, like hardware/software sales but also billable travel were both down by 25% to 28%, albeit on very small numbers.Looking at the cash flow statements, we had, as mentioned, NOK 40 million derived from operating activities, of which NOK 14.4 million came from balance sheet improvements, and a lot of that was attributable to the government in extending their payment schedules. But we also had a very favorable development in our customer receivables, which were down like NOK 12 million to NOK 13 million, I think, from June 30 last year. So there's no sign of customers delaying payments or defaulting on their payments. Our customer base is consisting of very strong logos, which are going well through the COVID-19 situation, I think, all in all.Investment activity is somewhat lower than last year when we invested in more of facility costs, so only NOK 3.9 million this quarter. From financing activities, a high outflow this year as well, same as last year where we paid a dividend -- ordinary dividend payment of NOK 0.20 per share this year. We also did a rather large repurchase program of own shares, some of which have been sold to key employees in July. So there will be a positive inflow from that in Q3.And we ended our cash balance of approximately NOK 48 million. 12 months rolling, we see that we have generated NOK 106 million from operations, which is up from NOK 65 million in -- 12 months before that.Yes, as mentioned, we paid the dividends on June 4. Share price was NOK 11.55 per share at the end of Q2, which is up 52% from the corresponding date of last year if you include the dividend payments that have been distributed in the meantime. And as you will have seen, the share price has increased quite considerably after quarter end as well, now trading at some NOK 14 per share. And we had 1.7 million own shares at the end of the quarter. I think we're now down to a bit short of 1.2 million.As mentioned, the balance sheet is progressing pretty well with receivables and work in progress going down NOK 18 million from NOK 105 million to NOK 87 million. The big chunk on the top, right-of-use assets is related to the IFRS 16 leasing accounting standards where we had to capitalize the rental agreements on facilities predominantly, some other rental agreements as well, but mostly facilities. So that also reduces the equity ratio by approximately 4 percentage points to 19% compared to the previous accounting standards.That was what I was going to tell you about the Q2 results. Just looking briefly at the outlook, we are of the opinion that the underlying demand for digitalization is still very strong, and I think those businesses that were lagging behind in their journey to digitalize their business has had a tough awakening in this COVID-19 times with lockdowns. And that should, I would think, give them incentive to speed up their -- the digitalization. There are, of course, still uncertainties with respect to their own financial outlooks. So there's still some hesitance in starting up the projects, but we're seeing a sharp increase in activities in that respect these days. So we expect demand to pick up in the next few weeks.We're probably, I would say, a month or so behind in our normal upsurge in utilization. But it's -- we're, as I mentioned, confident that it's on its way now. So we're looking forward to a stronger end to the year. We, as mentioned, will also now accelerate this transformation of our cloud journey and create a hybrid cloud business unit that will combine the traditional on-premise data centers with the new cloud offerings. I hope to be able to tell you a bit more in detail about that in our Q2 -- sorry, Q3 presentation to be held on October 27. So hope to see you here with us then. In the meantime, if there are any questions online, we'll be happy to field those.

[Arne Mjøs, Chief Executive Officer]

There seems to be no questions from the web.

[Bent Hammer, Chief Financial Officer]

Okay. Then we thank you all for watching. And if you have any questions, please feel free to contact either myself or Arne Mjøs at any time. We'll be happy to give you more in-depth presentation of our company or answer any questions you may have. Thank you very much.