Itera ASA

OSE:ITERA

Earnings Call Transcript 2021-Q3

[Arne Mjøs, Founder & CEO]

Good morning, everyone. My name is Arne Mjos. I'm the Chief Executive Officer, and welcome you to the interim report for the third quarter for Itera. We have the same structure as previous quarter. I will start with the highlights of the quarter and then go into the business review section. Then our CFO, Bent Hammer, will have a deep dive into the financial review section and also some comments about the outlook. And we jointly take the Q&A session at the end of the presentation. So if you have any questions, please send the -- use the chat function as a part of the solution here, so we will look into the chat and bring all the questions at the end of the sessions. Okay. Let me make a brief overview of the highlights of the third quarter. First of all, I'm very happy to see a very strong growth. This is -- everything is about organic growth at Itera, so our core digital business, which is almost 94% of Itera's everything except our data center operation, which are actually transformed into the cloud. But anyway, the core digital business shows a very strong growth of 27% and also the EBIT margin, the operating margin for the core digital business was 10% in this quarter. If we look into the market, the market for our services is very strong, it's driven by sustainability and digitalization in all industries, all sectors. We have also made big investments in the first half year in our Cloud Center of Excellence and also Delivery Factory at Scale, and we look forward to see how this will leverage our position in the market. We, as a company, are the largest provider of services to Cognite and Aize, and also was in gold sponsor on the worldwide event, Ignite '21. I'll come back to that later. In Norway, we had very successful summer internships for 27 master students. I will also show you some of the examples of projects there. We have a book-to-bill ratio of 0.9% in the third quarter, and 1.1% for the last 12 months. If I look at the number of employees, it's up by 50 people in this third quarter and 103 last 12 months. So that's a very strong number for Itera, and everything is organic. The cash flow -- the 12 months rolling cash flow shows NOK 77 million from operations, which is also quite normal for Itera. And the Board of Directors have decided to make additional dividend of NOK 0.10 per share. So that's the overall highlights for the third quarter. Let me just show you the figures before Bent Hammer will deep dive into everything about the financial performance. But anyway, from my point of view is, I'm very glad to see this growth of 27%. We had, in the first quarter, 11% growth, in the second quarter 24% and now in the third quarter 27%. So that's a very strong progress. And also looking at the operating margin is very strong for this third quarter, 10.4%. We have 15% in the first quarter and 15% in the second quarter. So this is, seasonal wise, always the weakest quarter because we have people on vacation. But the 10% is also a very strong number for Itera and in the market itself in general. And as you see, the growth in number of employees is 21% in this quarter. Let me bring you into the business review section. As you know, Itera is a specialist in creating sustainable digital business. That's our position in the market. And we also would like to make a positive difference in the world because we are delivering our services not only to the Nordic-based clients, we also delivering our service to international clients. So what Itera -- as a company, we have a full-fledged, full range of services and also competencies. So we know everything about the customer and the user. We know everything about the business and not at least -- how to become a more data-driven business, and also the technology stack. So we bring these companies into autonomous teams for the customer because we really believe that is the way to operate, how to digitize faster than in the past. And as I said, we have -- we are delivering services for this Nordic-based or European-based clients that also have a quite strong international growth path. So through our Delivery Factory at Scale and our Cloud Center of Excellence, we can follow these clients around the world. So that has been a very uniqueness of Itera based in the Nordics, but also enable to supply services to almost any customer and the industry. But of course, we always search for clients that have a good strategic fit with the Itera operating model. What I also would like to repeat the message that this kind of model based on the Nordic culture, having this kind of multi-disciplined competence across border is one of the most advanced -- advantages we have in Itera. And we also were recognized as best in the world in 2018 by the Global Sourcing Association. So this is something that we have been very strong in for a long time. And also the interest from the market is also increased because the customer by themself have been more used to working across -- from home and distributed what we call our model. This is, really, a distributor model. What we have done in Itera, instead of only having consultants that are working onshore, we are also building a factory because we also, as an industry, as a services provider, also would like to industrialize how we deliver our services. That's why we build a factory, Delivery Factory at Scale for data-driven businesses. That meets the goals in terms of innovation, speed, agility, cost and control. So this criteria, we meet everywhere. And we -- through the Factory at Scale and the Cloud Center of Excellence really embedded into this Factory at Scale make it possible for Itera to supply or deliver services, innovative services -- at speed with high cost advantages and also full control that also embraces the security to any clients around the world. And if I drill down into the main segments at Itera, I will -- the 2 main segments at Itera is banking and insurance, where we have a lot of use cases, deliver project within customer journey and automation, how do we make a very seamless customer journey in the best way for the customer, and also most efficient for the company. We have a very strong business value prop in terms of all kind of data and analytics. And also in this segment, we have also started a very interesting journey about anti-money laundering and also safe payments, which is the biggest issues for all the banks around the world. So in this -- for the area, we are really taking a first mover position or a pole-position, I call it internally. So we really take a strong position in market with using the technologies to solve this kind of challenges for the customer. If I go to the other main segments, it's heavy assets and process industries where, for example, we have the energy, the transition of the full energy system, including the oil and gas and the green transition and also the power utility that merged into one global energy system, where we have technology that contextualize the data across OT and IT, and deliver value -- use cases in terms of predictive maintenance or data-driven maintenance, asset optimization or the digital workers that need to have these tools when they're working in the field, whatever. So by digitizing these kind of processes, with this kind of new technology based on cloud or hybrid cloud or the Edge. And we also have a lot of services in terms of how we make this kind of transformation for the clients in different industries. So these are the core competence or the core value prop that we deliver for our customers. What I also would like to underscore is actually how we deliver. If you look at the full stack of services, we -- the business side, the product side, are they really -- that need this kind of technology. It's not only about the technology as such, it needs to be fully integrated into the business and the product agenda. And they also take it even further to the customer, their customer. So for Itera, we have a full fledged of services, we call it a vertical end-to-end services, so we understand the full value chain and build these autonomous teams together with the customers. So we managed to build this value creation end-to-end. So having this kind of industrial focus, looking at the business outcome, how this technology can also disrupt some of the businesses or disrupt the way they work and also take a faster position in the market, of course, it's really extremely important to have the technology as a part of the business development process itself. So let me just show you one video for one of the largest clients at Itera that's Aize and Cognite. So just start this video, and you will have it also on online. So just have a look.[Presentation]

[Arne Mjøs, Founder & CEO]

Okay. So that was some kind of a glimpse into what is a typical project for Itera. In this case, Aize, and that is Cognite -- Aize is owned by the Aker group. So we also, as I said in the beginning, larger provider services for this startup company that's taking global position, and we were also a gold sponsor on the Cognite's Ignite Conference in September that were more than 1,000 participants globally. So Itera had a quite important role in terms of the discussion. We had 2 people on the stage to discuss how they transform the energy system, et cetera. So Cognite and Aize is really a big customer for Itera, so we really like to work together with this customer along the journey around the world because they are really having global position and really have a very interesting piece of technology that solve a lot of the challenges that we meet in the industries.I also told about the industrial analysis, and this is just another topic that we bring to our customers, so we sometimes do some kind of survey. So in this case, we have done some kind of survey for the Norwegian organization, how they are using data as a strategic asset, and also kind of which practices actually hallmark those who succeed and who -- how can we learn from the best one to really make this kind of change into more business-driven -- data-driven business. So there's a lot of proof of concepts what we see in the market, but what is important is really to bring this one to -- into more the -- use the fact from the data in the decision-making processes, so make sure that every people, every person in the company get insight from the customer, from the production, from the operation, from the people to bring this kind of data, this feedback loop to make sure that you are taking and change the business model through all the people in the organization. So we need to move it from a proof of concept to make sure that data is part of everyday's decision-making process for all the people. That is the -- that is when you are really becoming a data-driven business. So all data are really getting implemented into all kind of processes in the company. So another example of a survey we have done is actually -- and also a report. So we do some kind of analysis every 6 months of the Norwegian energy market together with a partner in -- that have deep knowledge into this industry, Thema Consulting. So this kind of report describes the essential parts of the market dynamic in terms of the market development products, overview and changes, customer preferences, of course, is important, pricing strategy and all kind of governmental regulation. And we also, as a part of this report, also put in some kind of examples and deep dive into national and international energy company. What can we learn from the best one and bring into this -- this situation in the Norwegian market. So this is how we are also building the position as a company that have very strong industrial knowledge, and we bring this and share this knowledge. And we make sure that we can also enable this kind of transformation for the customer in this industry. We also have a lot of new customer logos in this -- in the third quarter. This is just to show you one example. This is Sector Alarm, which is a company based in Norway, but have a very strong European position within a safety solution. So what is important for Sector Alarm is to have various high quality of the services that have about 600 customers around the world or in the Nordics, I will say. It's Norway, Sweden, Finland, Ireland, Spain, France and Italy. So these are the regions that they supply the resources and they had some kind of RFP process where Itera was chosen as their partner in terms of modernization of some of the core areas of applications. So what Itera did was actually put this kind of multi-disciplined team together so that we can plug into the strategic agenda and make this kind of scalability in terms of improving or modernize some of the core processes across all the border. So in this case, we are using our distributor model across border to increase the speed and the scalability and cost efficiency for Sector Alarm. That is a very exciting and a very typical example of a customer, and in this case, a new customer for Itera in the third quarter. As I also mentioned, we have also -- very interesting in the graduates. That's an important part of the Itera family that we also bring in the digital native and bring them into the project. So this is just to show you, in Norway, we onboarded 27 master students during the summer that were working in real customer project. We are organized into 4 customer projects for Aize, one of the customers we all see or have seen today. KLP, the insurance company, Storebrand to -- the insurance company, and also ADD+SPACE, I will come back to. But we put these students, they have -- they are coming from different university with different skill sets, and we've put them into multi-disciplined team. That is the way the Itera operates. And they are really doing very advanced stuff, so it's not some kind of left-hand product, it's really a core interesting -- a core focus area for the customer. And just to show with one example is ADD+SPACE, which is a Norwegian start-up that would take in the position for some kind of Airbnb for storage for storage. So they are using this kind of Airbnb thinking how could you actually ask the person that have a need for storage, how can you get the storage placed for other people that have storage available. So we're building this using different kind of technology during this 7 to 8 weeks to make a full pilot or the prototype of the solution so that this starter can really test this model. They have very strong ambition -- high ambition to really become the biggest self-storage company in the world. So they will start this journey and test them all in U.S. So during this summer, we have the first project to make this demo so it's easier to also go to the investors to look at that we are not only having the concept defined, we have also built a first demo of the solution, and then we take it further into MVP, et cetera. So this is really started in student project and now we -- Itera is engaged to take the next step going forward. So very, really fantastic to see how we combine some of the senior guys at Itera and a lot of graduates with multi-disciplined team, how big achievement that can manage to -- during only 7 to 8 weeks. So this is some kind of typical way we operate as a company in Itera. Yes. As I said in the -- as a part of the brief -- in the beginning highlights, we have a very -- a lot of new customers coming into Itera. The book-to-bill was 0.9%, 1.1% for the last 12 months. I think it's more or less according to the target. It could be a little higher, but it depends on some of the projects that are really prolonged very often in the fourth quarter or in the first quarter. So we expect that this book-to-bill ratio will also increase going forward because of strong attractive -- strong demand in the market. If I look at the customer development, what I just want to underpin here is actually the -- and we also see increasing share of new customer logos what is we call new customer won over the past year, the last 12 months. So the revenue for the last 12 months, which is new -- from a new customer is actually 40% of the total revenue. So I think that's also a very good indicators that Itera are onboarding in a lot of new customers, which is also important to support the growth going forward. And as we also have -- always have been reported, we have a very strong share of revenue from the top 30 customers. So it's a large corporation that has been for 10, maybe 5 -- at least 5 years. So we have some customers have been there for 15 years, and they are still have been showing a very steady growth going forward. So the visibility of the revenue stream in terms of what you normally call as subscription. With Itera, these kind of customers is actually more or less the same as a subscription because it's always there. The continuous new project -- finished on projects, but they always would like to increase the position for Itera, so we're always taking a share of wallet from these customers. So for me, this is some kind of recurring revenue because I know they will always be there, so really a strong resilient model of Itera. Okay. My last comment is actually related to the supply chain of Itera, which of course, important in order to support the growth going forward. And as I said, we managed to onboard 50 people in the third quarter and 103 people the last 12 months. So as you see at the graph at the right side, we are really having increasing 12 months in terms of net recruitment in a market where everyone is talking about -- yes, need more capacity. For the demand side, it's very strong all over the place in all countries -- in all industries, all countries at the same time. So really onboarding more and more people can be challenging, but we show the market now that we managed to have a quite substantial increase. And I definitely believe we can grow even with higher intake of talents going forward because we have increased the capacity on the recruitment on more or less all location. So for some of the location on -- in Eastern Europe, we have increased the capacity maybe something between 50% to 75% in order to onboard more people and make sure that these people are onboarding in a very systematic way. So it's a tear away operating, they should be trained and then we put them into the projects. So that is, I will say, the nearshore ratio is at 51%. It's always increasing, and it will continue to increase. I think we'll grow with a ratio of 1% in the Nordics and maybe 3% to 4% in the nearshore location. So this kind of nearshore ratio will continue. This is -- we see all the companies which are globally that have maybe 70% of the people from a distributed model. So this is quite normal going forward also, above this 50%. That was our first target to reach the 50%, so we will continue in the same way going forward. Okay. So that, I think, was the business review. So then we hand over the floor to you, Bent Hammer.

[Bent Hammer, Chief Financial Officer]

Thank you very much, Arne. Yes, to the figures. Any new attendance to our quarterly presentations for -- just a brief introduction to our reporting, where we have focused on the core digital business, which currently represents 94% of the total. And the reason for that is that the other bits, the on-premise data center operations is under transformation to cloud and will be more or less sunset by the next couple of quarters. So I'll get back to the data centers as well in a bit, but let's focus on the main business that's going forward. Arne mentioned our terrific growth over the past couple of quarters. And you might think that that's a rebound from last year's corona situation, but in fact, it's not because we also recorded an 8% growth in Q3 of last year. So this is just building and accelerating the growth we had last year as well. And this growth is fueled by some major new logos that we have attained over the past year, new business represent approximately half of the net growth. And we also grow some through using external subcontractors because we have been unable to fulfill demand entirely by ourselves despite our quite massive growth in the number of FTEs. And this rapid growth in FTEs also have some short-term impact on the revenue generation from those people because it will take some time to onboard and get those people out in the marketplace once they start. In Q3, of course, we also have a large proportion coming straight out of universities, so they need some training and working with seniors on projects before they are fully billable across the board. So personnel expenses is growing quite a lot. One of the major reasons for that is that we decided last year to postpone the annual salary adjustments from July to October due to all the risk and -- or nervousness in the market, I should say, related to the corona situation. So that means that we're now in the comparable quarter 3 over quarter 3, where we have sort of a double salary adjustment included. Also due to the strong financial performance, we have more variable compensation accrued in our books, which adds to the personnel expenses. And lastly, but happily, I should say, we were able to have some social activities with our employees again in Q3. So it was very nice to meet our great colleagues again for the first time in a long, long period and have some social activities. We haven't even had our own [indiscernible] repelling down a 60-meter high tower, which was eventfully in itself. Just shows he has no fear. In terms of other operating expenses, they are up by NOK 1.8 million, partially because of more employees driving that cost, partially because we had more recruiting fees to grow the number of people. And also, we had some, I'd say, start-up expenses related to our Slovakian office -- a new office. We relocated to a bigger office to accommodate the growth we've seen there in the past couple of years. So I'm looking forward to go and visit soon. So that left us with an EBITDA of NOK 21 million and an EBIT of NOK 14.5 million, which is more or less an unchanged EBIT margin of 10.4%. Looking at the quarterly development, we are -- our quarterly revenues are sort of strongly impacted, I would say, by the number of working days available in a given quarter, net of vacations taken. So obviously, in Q3 is the main quarter for taking vacations so we always have a dip in revenues and a stronger dip in EBIT margins. And also, typically, you can see from quarter-to-quarter, even throughout the rest of the year, that the number of working days will fluctuate. So that pattern is not so visible now because we have such a strong growth. So even Q3 is on par with Q4 of last year in terms of our revenue, even slightly above. So that -- yes, that just goes to show that we are having a very strong momentum these days. So to the data center operations, as communicated earlier and as planned, we are reducing the subscription revenues from the data centers quite a lot. We had this big dip at the beginning of the year, and now it's gradually going down so the major exits have already taken place. And so the remaining portfolio is now being migrated to the cloud. So we will see a further decline of this data center subscription revenues, and that will just be transformed to cloud center subscription revenues in due time. And also in the meantime now from September and onwards, we start seeing more consulting revenue from the migration work itself, and then those people involved in that migration will also be available for other new customers to help them in the migration work into our new Cloud Center of Excellence. I'm breaking down the figures. I've already discussed the core digital business. The data center operations had a revenue of NOK 8.5 million, which is down 69% from last year, and it produced a net loss of NOK 4.5 million compared to a profit of NOK 3.2 million of last year. So that just shows that we have built down the volume so radically that sort of the cost side of it is not following suit, but I will then be going away when we have completed the migration. So despite this radical drop in revenues on the data centers, we, nevertheless, produced a growth of 7.4% for the business in total, whereas the EBIT was NOK 10.0 million compared to NOK 14.5 million of last year. And year-to-date, we have a growth of 20% in the core digital business and 64% down on the data center operations for a net total of 3.8% positive growth. Going to the cash flow statement. Our cash flow from operations was pretty much on par with last year's. And we have spent a couple of million more on investment activities, primarily related to this Cloud Center of Excellence, and financial activities was more or less the same as last year at negative NOK 2 million. We do have, though, a much less liquidity at the end of the period compared to last year and that is a result of the dividend payments we have had in the meantime and also a larger share -- repurchase of our own shares in Q2. And obviously, the investments we've taken in H1 on the Cloud Center of Excellence. So that limits our ability to pay out a supplementary dividends as we typically do in this fourth quarter. We have though decided on a dividend of NOK 0.10 per share, bringing the total for the year to NOK 0.35 per share, and that represents 60% of our net earnings from 2020. And it is within our stated dividend policy, which says a minimum of 50% of net earnings. Share price was NOK 15.7 per share at the end of Q3, which is up 13% from last year and 17% if you also include the dividend payments in the meantime. And we hold now just north of 1.6 million owned shares, which were valued at NOK 25.7 million. And that again, obviously, brings down our equity value since we are holding our own shares in a sort of a negative equity, if you like. So that's down from NOK 57 million to NOK 38 million or 17% of the total asset base as compared to 24% of last year. So we reduced the total balance of approximately the same figure, NOK 21 million. So the other balance sheet movements are mostly related to the growth so receivables are higher than last year, but we have reduced on the asset side, the right-of-use assets, which are the IFRS 16 classification of the future lease obligations we have for our office leases in particular. Yes. So yes, I guess, that was what I was going to disclose of our financial performance for Q3. Just briefly on our outlook. The only change we've made on this slide is actually the color of the boxes. So we have the same view on the future ahead. We see that we are in a very attractive position in the marketplace. The distributed delivery model we have with the nearshore operations embedded is -- has only increased its attractiveness after the corona lockdown where more customers have been accustomed to working in distributed teams, not having to meet physically. So that's -- I think that's just a positive for us. And we see we have a very good reception of this Cloud Center of Excellence and our Delivery Factory at Scale out in the marketplace, so we're quite bullish on our prospects for growth in that area as well. And the data center transformation is entering its final stage, and we hope to close that by the end of Q1. And we're also looking to expand a bit regionally, still organically, if nothing very attractive case emerges, but we see that we are having success both in attracting talents but also getting that customer proximity when we establish some regional offices here and there. So we'll do, I would say, a modest pursuit in that area as well. We just recently registered a legal company in Iceland. We have been there for about 4 years and delivering purely remotely from our nearshore operations, but we are now establishing a tiny onshore front to have the customer proximity even better. Great. So I think we'll close that, unless there are questions. We are always welcome to meet on one-to-one. If you have questions, if you want to deep dive a bit into our investment case, we'll be happy to entertain that.

[Arne Mjøs, Founder & CEO]

Are there any questions in the chart? No, no. So then I think also -- I think we should also give a very big thank you to all the employees that they are really doing a very good job every day. We are so fantastic -- happy for the efforts we are building into the company. So really, this was a very strong achievement. So really, we're looking forward to the next step. We have taken the tail out to an even higher level, I guess, around the world.

[Bent Hammer, Chief Financial Officer]

Yes.

[Arne Mjøs, Founder & CEO]

So thank you for attending and looking back to see you.

[Bent Hammer, Chief Financial Officer]

17th of February for the Q4 and preliminary 2021 results.