Itera ASA

OSE:ITERA

Earnings Call Transcript 2019-Q3

[Arne Mjøs, Chief Executive Officer]

Okay. Welcome everyone to Itera's interim report for the third quarter. My name is Arne Mjøs, I'm the Chief Executive Officer, and I will present the highlights of the quarter, and also the business review section. And then, Bent Hammer, CFO of Itera, will take you through the financial review and also some comments about the outlook. Okay. Let's start with the highlights for the third quarter. I think we had a very strong growth in what we call the core digital business, which represents about 77% of Itera. So the revenue growth was 10% and the EBIT margin was 9%. As we are told about, we also have data centers. We're transforming the data center into the cloud business. So when I take the total figures, we had revenue of NOK 128 million compared to NOK 121 million in the previous -- in the same quarter 2018. That represent a growth of 6%. So if I look at the gross profit, it was NOK 111 million compared to NOK 102 million, which represent growth of 9% year-over-year. And the EBIT in this third quarter was NOK 9.9 million compared to NOK 6.4 million in the same quarter last year. That represent a margin of 7.7%, up from 5.3% from the same quarter last year. I also will make -- also talk about how we are increasing the revenue from strategic customers in new industries. That has been a key focus of Itera. I think we have -- we'll show quite good progress on that. Order intake in the core digital business was 1.2 (sic) [ 1.4 ] book-to-bill ratio in the third quarter, which is quite strong. Itera was also named as one of the top 25 most innovative companies in Norway across all industries. So that is also very important recognition of the position of Itera in this quarter. And last, but not least, the Board of Directors have decided to -- for an additional dividend of NOK 0.30 per share payable on 1st November. So that is all in all the highlights for the third quarter. Let's have a deep -- more discussion into the business review part of the presentation. As you know, we have a strategic position to be a specialist in creating digital business and we have a focus on platform. So we always talk about Platform First when we engage a customer. We have all the competencies that are needed in order to create digital business. So we know how to make sure that we engage the user, but also not -- at least also have a full customer experience focus. We know how to build or develop a more data-centric business and we also know all kind of technology need to really build a digital -- new digital business, including, for example, artificial intelligence, IoT or whatever. What we see in the market is there is a big shift from legacy system to the new digital platform or technology platform represented by Microsoft, Amazon and Google, which are the main driver in this shift. So all -- about 75% of their consumption in these platforms are actually based on legacy systems, but -- and only 25% are from new application built on this platform. So Itera is working both on the customer that are transforming their workload into the cloud and we're also working with clients that really build the new stuff on the new platforms. So when we have the technology platform in place, then we will also engage in how we develop new business models and new business platforms, both in the business-to-consumer and business-to-business environment. So Itera has a position that has been a long-term position for many years and we have also very specific strategy how we really take our steps into the future. So one of the major steps is actually that we are working with selected clients, we call them first movers, that really would like to be first mover in digital business. We are also -- when we get engaged, we are also organizing our teams in terms of what we call DevSecOps, or DevOps, which combines people from the development and also operation into 1 team, and we also include Sec, but Dev is not on the applications. Also the UX people, they are user experience people or the people that focus on the customer experience, but not at least also the product owner at the customer side, the business consulting people that we have to make a full-fledged team and working also across different borders. In addition, we are also moving an existing projects on the legacy stuff into the platforms and we are also transforming our own data center into cloud, so we are moving workload from the data center we have in place at Itera or data center for our customer that also take this transformation into the cloud. Just to have mention some projects, just selected 3 for this presentation. One is actually for Oslo Kommune, where there is a renovation agency that is actually -- would like to take a lot of the waste in terms of food, plastic and paper from the business customer and try to take this garbage into more recycling as a part of the Oslo Kommune climate focus. So we are really working with the Oslo Kommune to really take this as a journey, make the services sign. So they are making very good process and solutions also for all the business consumer -- business customer in Oslo Kommune. So that is one example, where we are engaging our services sign capability. If we are looking into another case, which is actually Norwegian Hull Club and they have a daughter company called Instech Solution based in Bergen, which is a world leader in marine -- maritime or marine insurance software. So they have built a software that are used by different brokers worldwide in order to support business in insurance over the maritime sector. So we are actually a partner to Instech to build this state-of-the-art solutions. And the third example is actually Cognite, which is started by Aker ASA in Norway, which has a very global position in -- taking the global position to digitize heavy industries. And we are working on 2 different projects: one in the utility sector, digitizing the utility sector; and also in the oil and gas. So in this case, we are using the platform by Cognite. It has a very advanced platform for integrating and contextualizing all this kind of data. So Itera is working with full fledge of services based in Norway, but also with scalability of the location of Itera that really make sure that we have high scalability of digital talents for this fast growing business. As I mentioned, we also have a very strong intake of new and existing customer for our core digital business. So the book to bill ratio was 1.4 in the third quarter and 1.5 year-to-date. So the pipeline of new business is quite good. And also, if you look at new customer coming in, the proportion, which is actually new customers increasingly higher quarter-by-quarter. So these are just to show you some brands or some companies, which really are new for customer -- new customer for Itera during the last 12 months. But we also have a good prolongments and also new services from the existing clients from Itera. As I mentioned, we are also very happy with the recognition that we are amongst the 25 most innovative companies across all the industry in Norway. We have been that the last 4 years, so we are very happy to get this kind of confirmation. If we're looking at the customer development, as I told you, the existing customer accounted for 86.7% of total revenue in the third quarter. So that represents NOK 7 million in new revenue or new -- revenue from new customers that has been a part of Itera in the last 12 months. So that has been a very good progress. And also, if we're looking at the top 30 customers, it's actually down by 5% to 72% -- going from 82% to 72 -- 77%, which, I think, is quite okay because we are increasing the new customers. So we do not want to be too dependent on the limited number of customers, so that we feel is actually bringing new customer in to have a stronger growth footprint also for Itera going forward. If we're looking at nearshore ratio, which has been continuously increasing, so in the third quarter 2019, it represent 48% of Itera. So we still are increasing the capacity nearshore. We will also still continue to grow the Nordic part, so we will both grow their part of Itera, which is closest to Itera, but also the nearshore capacity that we have from remote location. Also, just to mention, we are doing a lot of events with customer, but also for the employees. This was actually to show we have one example. We have this new PSD2, Payment Services Directive 2, that was actually implemented by the 14th of September and we have some kind of analysis by the consumer, who feel that this new directive has some impact on the experience as a customer. And 3 or 4 were saying that it didn't have any kind of impact. So -- but the banking and the finance industry has put a lot of effort into this one. So still the solution -- although it's easier to get account information from one provider of the banking services for all their accounts, but it doesn't have any kind of impact on the consumer. So we had an event about this. We brought 250 people plus from the banking and finance industry, including the FinTech company and we also made a podcast. So that was just a short example where we actually go into a sector and take a position to learn and also drive these trends to more and more value for the customer. So that was actually what we had in the business review. So we will then go into the more deeper look into the figures. Please, welcome, Bent Hammer.

[Bent Hammer, Chief Financial Officer]

Thank you, Arne, and good morning to all. As Arne mentioned, we had a growth of 6% in Q3 this year. More importantly, though, we had a growth of 9% in terms of gross profits and that signifies that the underlying growth produced by our own resources is growing at a higher pace. We have less usage of third-party subcontractors as well as other rebillable goods and services. The personnel expenses were up by 8% in the quarter and there are 3 major components to that where one is, obviously, the headcount growth. We had some underlying salary growth in this hot labor market and as well we had a weakening of the Norwegian krona, which had a detrimental effect on the cost of our natural resources, which constitute almost half of our headcount. Other OpEx is seemingly down quite significantly, though part of this is just a reclassification from OpEx to depreciation as a result of the IFRS 16 leasing standard that was implemented as of January 1 this year. EBITDA is neutral to that more or less, and we produced an EBIT of NOK 9.9 million, which is 54% better than the corresponding quarter of last year. And then that gave an EBIT margin of 7.7% versus 5.3% last year. Year-to-date as well, same growth figures as in the quarter and also the EBIT is up by 45% to NOK 37.6 million. We had a very strong cash flow from operations this quarter as Q3 is traditionally one of the weaker quarters in that sense. But finally, for the first quarter in some time now, we had the last day of the quarter falling on a business day rather than on a weekend. So that gave us a bit of a catch up in terms of collecting receivables. We ended the quarter with a cash balance of NOK 46 million, up from NOK 20 million of the same time last year. Equity ratio 23.6%, up from 18.1%. We also had a growth in the number of employees at the end of September, up 12 net to 505, though there was also a shift in the mix of people. A bit down on the traditional data centers and more up on the core digital business. Taking a bit into that split. The digital business had a revenue growth of 10%, and year-to-date, it's at 9%. It produced an EBIT margin of 9.9%, whereas the data center, that we are gradually now transforming into cloud services, had a decrease in revenue over 4%; and an EBIT margin of 1.7%. So we are still investing in the buildup of the new cloud services and we have come quite a bit away on that now and have gotten several very interesting customers that are now running on the cloud after a successful transformation. On the sequential part, we see that we have cyclical developments and it's mostly related to the number of working days, net of vacations. So Q3 always is the weaker quarter as we have the main vacation period in July and August. We had strong Q1 and Q2 though, and also Q3 is up significantly compared to last year. I mentioned the employee growth. If you look at the EBITDA, that has seemingly almost the same pattern as the operating revenue, but I should caution that the 2019 figures are inflated by some NOK 3 million from this change in accounting standard. EBIT though is a more accurate comparison to 2018 figures. We say that we had a very strong Q4 last year, which is traditionally also the strongest quarter of the year where we have kind of the full running of client projects typically in October, November and up till Christmas at least. And Q1 and Q2 are a bit dependent on when Easter falls because that shifts a few working days from one quarter to another. But again, Q3 very strong at NOK 9.9 million, which is a significant improvement from same period last year. Going into the revenue split, I mentioned that we had a lot of growth coming from the production of our own services. This is up by 11% to NOK 83 million in the quarter. Subscription revenue also a healthy growth of 6%. In particular, it's -- the subsidiary compendia has had a very good response in the marketplace with its new chatbot functionality that it's built into the -- its Software-as-a-Service on the HR systems. Also, the data centers have some growth on its incumbent customer base as the amount of data is ever-increasing, so does the subscription revenue on that. Third-party, I mentioned, is down as much as 35% in the quarter to NOK 5 million, and also other revenue is down by some 14%, but again, on quite low figures. Cash flow statement is looking very positive in the quarter as mentioned. Again, I should make you aware of the IFRS 16 impact that also hits the cash flow statement where some NOK 3.5 million of the depreciation charge shift from that has been added to the operating cash flow and substracted out of the financing cash flow. So that makes the cash flow from operations even more favorable than the comparative data from last year. Nonetheless, though, if we correct for this, the 12 months rolling cash flow from operations is a full NOK 69 million, which is very high compared to the underlying operating incomes and that's due to a very positive development on the balance sheet, which I will come back to in a second. We had quite a bit of investments in the quarter, partially related to an extension of our office facilities in Kiev in Ukraine as a result of the growth there. And also, there were some renewals in our data centers by our customers. So it's a customer-driven and also the responsibility of the customers to compensate us for this investment in the event of an exit. And also, obviously, adds to their subscription revenues -- or cost rather. So -- and earning the cash flow at NOK 45.7 million, up from NOK 19.6 million in September of last year. One of the happy news, I guess, for this quarter is the announcement of an additional dividend of NOK 0.30 per share. The share will trade ex-dividend on 25th of October and the dividend is payable on November 1. The share price development this past 12 months is negative due to the very high spike that we experienced in Q3 of last year where it went from about NOK 9 per share in July to, I think, it peaked at NOK 13.5 or something. And -- but since the drop in Q4 of last year, it's been fairly stable around the NOK 8 mark since. We hold about 0.75 million owned shares in treasury and it's almost unchanged since June. Lastly, the balance sheet. As I mentioned, we had a very favorable impact on receivables and work in progress, hardly any work in progress i.e., work that had been performed, but not yet built. And also, the receivables were close to the level of 1 month's invoicing. The total balance is obviously, again, hugely impacted by the IFRS 16 leasing standard where we have now capitalized the full amount of the future office lease commitments among other things. So that brought another NOK 45 million to our total balance sheet with a 5.4% impact on the equity ratio, which is still solid at a 24% before this dividend payment. That was it from the financial review. Outlook for the future is unchanged. We operate in a very strong market. Everybody wants to digitize their business and we are there to help out. We see good traction on the cloud services. We see that we have open up several new accounts that will utilize our natural capabilities. And we see that every customer that goes for either a hybrid onshore nearshore solution from us or even a pure nearshore setup are very happy and continue to build their business with us. So that's a very good signal for the future, and we also see that the sales cycles for opening up new nearshore accounts are finally going down. So there's more willingness to adopt such a model. So that bodes well for the future, I think. So thank you very much. If there are any questions from online, which obviously, there aren't, then we will close this session. Should you have any questions coming up or you would like to have a more full business presentation from us, then feel free to contact us and we'll set up either a physical meeting or a Skype call or something. Thank you very much for joining. We will see you back on February 25, when we deliver the Q4 results as well as the preliminary 2019 financial statements. Thank you.