Itera ASA

OSE:ITERA

Earnings Call Transcript 2022-Q3

[Arne Mjøs, executive]

Good morning, everyone. Welcome to the interim report for the third quarter for Itera. My name is Arne Mjos. I'm Chief Executive Officer. And together with me today is Chief Financial Officer, Bent Hammer.

So I will start with the highlights of the quarter and then walk through the business review section. Then Bent Hammer will look into the financial review and the outlook. And at the end, we have a Q&A session. So if you have any questions, so please use the chat. We will pick up the questions and take it in the last section. Okay. Let's start with the highlights for the third quarter.

Q3 in brief. We delivered 23% growth. Everything is organic in Itera. So -- and we had an operating margin, EBIT margin of 5.9%. So we continue to ramp up our new offices. We have 3 new offices and also our cloud capabilities to increase our international scalability. So the profitability for this quarter is actually impacted about NOK 5 million in the establishment of the new offices. But overall, it's a very strong quarter for Itera according to our plan.

We also have a good traction on new customers. So in this quarter, we had a frame agreement with Agder Energi, and the subsidiary Entelios is important part of Agder Energi. We got -- we enter into a large end-to-end agreement to build a new customer solution.

In terms -- so we have talked about the transformation from data center to the new Cloud Centre of Excellence. We also see a very strong pipeline of cloud migration and cloud modernization opportunities.

Our operation in Ukraine is running as normal. Despite the new -- the drones that we have seen, the attack by the Russian -- or Putin, I will say, but we are running quite normal. It doesn't have any kind of impact on our running business in Ukraine. And we're also ready to continue our growth in Ukraine.

In Sweden, we have appointed Joachim von Ekensteen as a new CEO to establish a larger footprint in the Swedish market. We have a book-to-bill in this quarter from -- at 0.8 in the third quarter. And that's 1.2 in the last 12 months.

The number of employees is increased by 112 last 12 months, of which 40 in the third quarter. And the last but not least, for our investors, we have a supplementary dividend for 2021 of NOK 0.30 per share that will be paid after the 4th of November.

Okay. If we look at the key figures. As you see, we have 23% growth in the third quarter. Year-to-date is 22%, so we delivered NOK 171 million in this quarter. The growth in employees represent 19%, 19, yes. And also the operating margin, it was 5.9% in this third quarter. And year-to-date is 11%.

The third quarter is normally the weakest quarter because of the summer vacation and also in this quarter, we have this investment and established 3 new offices in 1 quarter. So that has some kind of impact of at least 3% in margin itself.

Okay. So let's move into the business review section. Itera has 13 offices now. So we have these 3 new offices in Krakow, Brno or Zilina. That is 3 new offices after the invasion in Ukraine. So the strategy for Itera is working with Nordic-based companies and follow these companies around the world. So we are delivering services on a very customer-centric way to 20 countries around the world. As you see at the upper right corner, we are also delivering a lot of services to the U.S. market.

And the reason for being able to do that as a quite small company is actually because we have a very strong distributed delivery model, which is today enhanced into what we call digitalization factory or Digital Factory at Scale. And we had a recognition by the Global Sourcing Association in 2018. That was the best in the world that has this kind of distributed model based on the Nordic culture. As you know, very flat agile team, flat organization, et cetera, so that is why we had this top rated by the international organization Global Sourcing Association in 2018. That was the best in the world that has this kind of distributed model based on the Nordic culture. As you know we are a flat -- agile team, flat organization, et cetera. So that is why we have this top rated by the international organization, Global Sourcing Association.

So that has been the model for Itera. And also, if you look at Itera's model itself, the growth model we are talking about, so it's only organic growth. We don't have any kind of acquisition in the company because we really believe in the culture. In this case, we have 13 offices, so we see extremely important so that we have ONE Itera culture across the border. So the strategy is actually based on a very customer-centric approach. So we follow the customer around the world in selected industries, especially with industries where the Nordic country has a very strong position, for example, banking and finance or energy. So in this case, we managed to grow together with this customer along their international presence. And by that, we also increase our scalability both in terms of customer market but also talent market, talent pool.

So as I said, in this quarter, we established 3 new offices in Central Europe. That increased the scalability on supply side of Itera. In addition, we had -- we hired a new person, the Head of Sweden. That also accessed the new market in the Swedish -- yes, in Sweden.

When we have the scalability, it's extremely important that we grow as one company and also that we have a very focus on the people growth. That is the most important that you start with the growth of every employee because when the employee grow, then the customer growing, and then also the company is growing. So that's why we have this fundamental approach to have a very strong culture that everyone like to grow because then also the company is growing. And having this kind of distributed delivery as a part of the DNA of the company is something we just do it now and then, it's a really key part of the way we operate our model itself.

In addition, if you look at the circle to the left is actually that we also have another scalability in terms of more package offerings and also industrial services. That's why we established this kind of Digital Factory at Scale and Cloud Centre of Excellence but also all the kind of more offerings, value offerings in terms of, I will say, a deep industry knowledge, whatever, or offering for data analytics, whatever. So these are really increasing the speed for our customers for Itera but also reusability and also more recurring revenue or subscription-based revenue. That, again, increase the scalability of customers and talent, again. So everything is about growth, growing the people, growing the company, growing the customer and growing the company.

And we really believe that today, we can really look at the long-term target of increasing the capacity in terms of FTEs by 200 to 350 people. We were running at 112 people in the last 12 months. We really believe that we can increase that to about 200 -- something between 200 and 350. And that is where you again generate the value in addition to the scalability of the software itself, that this Digital Factory will also have a large contributor to the scalability of Itera because we're not only depending on the people itself.

And one of the major investment we've done this last 2 years, I think, and we still will have 3 to 12 months we are going breakeven to have this because there's still the economic investment case. But we are doing this because we are taking a pole position in this area. Everyone needs to do the same that we have done with our own data centers, that we move more and more of the capacity of the workloads into the cloud. So we have established very mature processes in terms of assessment, in terms of establishing a digital strategy and all kind of cloud journey execution, migration and modernization of the portfolio. So that's a large portfolio application and engagement, there using 12 months to 3 years, whatever, in order to make this kind of cloud journey completed.

So that's a large opportunity and more and more customers going in that direction. And then you are in the cloud and most of the new applications are building as a cloud native application where we have this Digital Factory at Scale itself, where we have a lot of applications today that we are really building from scratch into -- as a part of the cloud, where all the kind of services are available and all kind of innovation are coming into this platform every day.

So that's one of the components of the growth engine. The other component I will talk about is actually the supply side. As I said, we are increasing the capacity in Itera by establishing 3 new offices, 1 in Brno in Czech Republic, 1 in Zilina in Slovakia and also Krakow in Poland. So this is just to show you one video to establish the Brno office, as you see.

[Presentation]

[Arne Mjøs, executive]

Yes. As you see, there's a lot of things we need to do in terms of recruiters, established office administration, also building the brand, onboarding the people. So it costs some money when you establish them. So we estimated to about NOK 5 million in the third quarter. That will also have some negative impact also in the fourth quarter but less because now it is starting running the operation. We have hired people, and we started to deliver services from this location.

And as I said, our ambition is actually to manage to -- long term to increase the organic net increase of Itera by 200 to 350 FTEs. And if you multiply that by maybe NOK 200,000 per employee, then you can really see the scalability of the model in terms of EBIT growth annually. So that is what we are targeting, that we have built a very strong model, growth model that's based on organic -- very complete organic setup.

And according to this McKinsey saying that the shareholder value for organic companies is larger than the companies that are based their growth on a lot of acquisitions. So we really believe that this will have a material impact on the value for the shareholder at Itera also moving forward.

Yes, we have talked about a lot of Ukraine. As you know, we are quite well established in Ukraine. We went into Ukraine for 14 years ago. Ukraine, as you know, was released from Ukraine for 31 years ago, so we have a lot of knowledge about this country. And we are doing also quite tremendous job, I will say, in order to look at how could we actually support Ukraine in terms of when they look at the rebuilding of Ukraine as part of the European Union because every country needs to participate in the rebuilding. And the Prime Minister of Norway, Store, and President Zelenskyy has agreed that the Norway's contribution should be in the energy sector.

So what we did in September when I was in Kyiv, we had a very comprehensive meeting with the Energy Ministry, Minister of Energy of Ukraine. As you see the Energy Minister and his 3 Deputy Ministers were attending. And we also invited Rystad Energy to outline a process where we can establish a fast-tracking cooperation between Norway and Ukraine in the energy sector because Ukraine and the EU is actually building, establishing a Marshall Plan that has some estimated to USD 349 billion in order to rebuild Ukraine.

So we are focusing a lot of the digitalization part of the energy sector for Ukraine because Ukraine will also be a quite large contributor to the energy supply too in Europe as soon as the war is stabilized or are completed. So this is a great opportunity, and the planning for this is really happening now. They're not waiting for the war or what they call the war end or what they call the victory. So they're talking about the pre and after -- before and after the victory. So that as you see that the Ukrainian by themselves have a really strong belief that it's possible to win the war in some way or the other.

And that you can also look at the map here because on the left side, you see the map for -- on the 20 of March, I was visiting Ukraine a few days after that. It was around the 4th of April. That was a time that when Putin announced that he will withdraw his troops North of Kyiv. But at that time I was also traveling from Lviv to Kyiv and saw that most of the part -- or most part of the Ukraine was untouched in terms of this attack from Russia. And you need to look at Ukraine as a large country. If you look at the Western part, it is the size of Germany, and the Eastern part is the size of the U.K. So if you think about Ukraine, the Western part is a large, large country like Ukraine -- like Germany. So -- and this area, yes, there are some attacks here and there. there's very small impact of the country. So they're really united to manage, to also win this war together with the support from EU and also NATO.

And if you look at the right side, that is the current situation, where you have the red color is actually the new area where Russia has taken -- or the risk part after the invasion. So it's still a quite small area that are occupied. So most of the country, despite the drones, it's untouched. So it's about 1 million people that do not have electricity but against 45 million people in Ukraine.

So what is important is actually to when we look here and read the newspaper, we need to also look at the opportunities because the country like the Western part, size of Germany, is more like business as usual. So that's important that we keep running the economy in Ukraine. Don't -- because they need us, we can't take -- have 45 million refugees. So it's extremely important that we manage to also look at the opportunity and not being -- yes, also look at the opportunities despite this kind of dramatic situation we read in the newspaper every day.

So that's why I talked so much about the energy sector is a big opportunity in Ukraine but also as a part of the green transition of the energy sector, where Norway has a very strong -- or the Nordic region have a very strong position in Europe but also globally. So that's the way for Itera to follow this customer, these large businesses in -- through the whole value chain. There's a lot of use cases where we are actually using our Digital Factory at Scale to really increase the speed and also reusability and also more and more subscription. Because we have built these capabilities, so it's manageable to actually deliver services to another country around the world.

And this factory has -- we have invested about NOK 30 million over time, so it's a quite big investment for Itera. So -- but now we are really seeing good impact on it that we will have also a large impact on the growth. We are talking about 23% in this quarter. And we really believe we can manage 30% growth because we also -- we have more effect from also the Digital Factory at Scale and also Cloud Centre of Excellence.

Just to mention one customer in this area, in the energy sector, is actually Entelios, which is Norway's largest electricity supplier to the corporate market. They also have a strong position in the Nordic. They have offices in 9 countries around in Europe so a quite international company. And they have selected Itera as their digitalization partner. So we are using our Digital Factory at Scale with a full-fledged team, a multi-disciplined team from Itera, where we are building a new customer solution, where the customer have data about consumption, so they can set energy measures, efficiency measures, whatever, in order to be able to reduce the electricity cost and also strengthen their financial -- finances and also [they have not] at least the sustainability goals.

So it's quite important today that you increase efficiency and not at least for the corporate market in Norway but also in the Nordics. So it's a very exciting customer that we got -- we won in the third quarter. We really believe that this customer can grow to one of the larger customers of Itera.

Another customer we have mentioned early is actually DNV. We were working with the electric grid through DNV. They have a very strong software position, software products in the U.S. for -- that are used by 150 of the large electricity suppliers in the U.S. and Canada. So it was based on a desktop solution.

Now we have modernized that application built in the cloud in Azure. And it was launched now on the user conference in Oregon, where we -- one of the key stakeholder, Yuriy from Itera in Ukraine, was present. So he made a very strong presentation about how we have built this application also during the war time because he's -- he and his team has really been impacted in some way of the war, but it has not any kind of impact of the delivery to the customer. So the customer or the audience were very happy to have Europe presenting his work and the team's work but also because he was Ukrainian. I think we're applauding, the audience responded with the 2 minutes standing ovation, as I said in the slide here. So it's extremely well appreciated that Ukraine are supporting DNV and the U.S. market in their building. It's also important in terms of asset management monitoring of the electric grid.

We also have a customer we mentioned in the second quarter. We had a frame agreement with the Director of what we call the Department of Integration and Diversity, IMDi. That is responsible for implementing the government's integration policy. So in this case, we are using the Digital Factory at Scale, I mean, where one of the projects we called Jobbsjansen programme, where we are working on how to increase the employment among the immigrant women who are far from the labor market. So we have a goal that for the project that about 7% of all the participants either go into the work or some kind of education for the immigrant women. So it's extremely important project that also have a big value for the country but not at least for the women that is not the part of the work in life today. So that's another project that they're using our Digital Factory at Scale.

I mentioned that we are increasing our footprint in the Swedish market. So Joachim von Ekensteen is appointed as our new CEO for the Swedish entity. So we will increase our market share and also build a local organization in Sweden. We are about 40, 50 people that are delivering to the Swedish customer from remote locations. So now we are building a local footprint, that we also have more a hybrid model that people, Swedish people located in Sweden are working very close to the customer. And then we have the distributed model with people or talents from other places at Itera. But again, using our Digital Factory at Scale, it doesn't matter where the people are located. So he will look at the opportunities, build this organization locally but not at least use the scalability as such in Itera.

I just want to also mention our design and user experience unit because that's also a quite interesting story itself we called and is named Experience. And they are really taking a pole position by developing and hiring the top talent in market. So this unit is delivering service design, business design, brand innovation, interaction design and digital design. So I will say there's most creative people in Itera, but they are also very strategic because they are bringing Itera to a higher-level discussion with the customer in terms of working with the business and product agenda and creating higher value by delivering the optimal experience. Broadly defined, is not only the visibility, but it's also how the service, how the products is experienced by the end customer. So they are really doing a very business development, strategic development for the customer and bringing in the rest of the factory at Itera that really have everything you need to realize this project or these new products at speed and also with higher efficiency than on this delivering in terms of a team of consultants.

Yes. We have also in Itera increased visibility. We had Arendalsuka. I think I mentioned that in the second quarter. But of course, Itera is present in many different arenas, not at least also bringing in the agenda from Ukraine to the business side and more and more are also quite interesting in what's happening because they are seeing that they will be establishing kind of Marshall Plan. So a lot are based on the knowledge we have. We have a strong executive connection with many companies that are really looking at this opportunity as long as the -- as soon as the war is ended. And we also have at Arendalsuka, we also have the team by in terms of data analytics and AI and also using local presence at Arendalsuka that had a very interesting speech to the audience.

We also are building a very strong culture, as I said in the beginning. It's extremely important that we also build a strong brand among the people that attract more people to Itera and build ONE Itera. So we also need to onboard a lot of these people in the same way. It's not only one corner office here and there. We have 13 offices, so we need to be very structured in order to make sure that they know and learn the tools, they learn the culture, they learn how to operate, learn how to work, how to learn or teach or share knowledge, whatever.

So that's why we are -- in this case, these are from weekend, we had at Vestlia Resort in Geilo in Norway, where a lot of people from the Nordic or the Norwegian organization were attending. But extremely important to build the culture and keep the people at Itera.

The order intake I mentioned here just show you some logos. Some are new, some are existing ones. And also, if I look at the customer development here, it's more quantified in terms of the red color is from existing customer, the blue one is customers that are new in the last 12 months. So 8.7% were from a new customer in the third quarter. And we have all the existing customers growing, growing, growing continuously with Itera year-by-year. But now we're also looking at more new customer logos because the supply part of Itera is quite strong. So we're also looking at the new customer to increase the demand side of Itera.

And also the last one before we go into the financial review section is the people, number of people. We had, as I said, 701. And if you look at the graph on the right side, on the -- yes, the lower side, I will say, we had -- you see the rolling 12 months net FTE growth. It was 122 in the second quarter, 112 now. But that is what I really believe that we will go into 200 to 350. So that's the engine in terms of the growth from the people perspective.

And the other engine, as I told you, was the Digital Factory at Scale, where we grow more than the people itself in terms of services. So that will -- I think I will stop there, Bent, so let's go into the financial review section.

[Bent Hammer, executive]

Thank you, Arne, and good morning to you all. .

Yes, so we had a net growth of 23% in this quarter, which is up a little bit from the first 2 quarters of this year. So year-to-date, we have 22% growth. So this acceleration in growth we expect to continue into the fourth quarter as well. And indeed, as Arne alluded to, we may even reach the 30% mark for the fourth quarter.

Gross profit is up by 1% higher than the operating revenue, both for the quarter and for the year as a whole, whereas personnel expenses and other OpEx are up by 28% and 51%, respectively.

And there are a number of factors contributing to this growth. One is that we have a natural hedge on most of our contracts in terms of foreign exchange currency. But there was a very swift increase in both the dollar and the euro versus the Norwegian krone, which led to a negative impact of about NOK 1 million in September. So when -- if and when the Norwegian NOK appreciates again, then we might have a reversal of that.

Furthermore, we have invested in these 3 new locations, where we have a lot of hiring capacity as well as overhead with respect to that, also onboarding of new employees, which take a little bit time to get into the market race. So all in all, roughly maybe a NOK 5 million impact -- negative impact from that during the third quarter. This will continue at some speed in -- also in the fourth quarter, albeit at a lesser impact.

We also had a number of main training and social events all coinciding in the third quarter. So that also had a particular impact on this quarter compared to other quarters. So yes, I think adjusted for those sort of more one-off impacts, we have profitability that is more or less in line with the previous year.

We ended with an EBIT of NOK 10.2 million and an EBIT margin of 5.9% versus NOK 14.3 million and 10.3%, respectively, in the same quarter of last year. Year-to-date, we have an EBIT of NOK 57.8 million versus NOK 58.9 million in third quarter of 2021. And we generated net cash from operations of NOK 22 million versus NOK 12.5 million previous year. And we ended the quarter with NOK 41 million in cash.

Number of employees at September 30 was 701, which is up by 112 from September of last year. Looking at the sequential growth, we see that we have a fairly steep growth curve. And indeed of the past 24 months, we have an annualized growth rate of about 20%. And we have managed to do that with an EBIT margin of 11.8%, which is relatively good profit figure for our industry and compared to our peers.

Cash flow, I mentioned the cash flow from operations. From investment activities, we had an outflow of NOK 3.7 million versus NOK 6.4 million in the corresponding quarter of last year. We had a net outflow of NOK 4 million related to financing activities versus a net inflow of NOK 1 million last year. The inflow was due to the share purchase program that we had for our employees. Yes. So the rolling 12 months cash flow from operations was about NOK 67 million versus NOK 73 million 12 months ago.

As Arne mentioned, the Board has resolved to pay a supplementary dividend of NOK 0.30 per share based on the 2021 figures. So we will trade ex dividend tomorrow, and we will make the payment on November 4. The share price is -- was at NOK 12.65 per share at September 30, which is down 19% from the same date last year. And that is, I would say, more or less in line with our Nordic peers. We currently hold about 1 million owned shares, which were valued at NOK 12.8 million at September 30.

Looking at the balance sheet. We have an equity ratio of 27% at the 30th of September. This will obviously go down when we make the dividend distribution in a few days. Our cash balance is up by NOK 18 million from last year. Receivables and work in progress up by NOK 13 million, and our so-called right-of-use assets are down NOK 7 million. Those are related to the capitalized lease expenses on our facilities. Our equity up by NOK 27 million, again, this will take a hit when we do the dividend distribution of approximately NOK 24 million. There were no other really significant movements on the liability side.

So that was a quick run-through of our financials for the third quarter. Looking ahead, we see still a strong demand despite maybe some macroeconomic uncertainty, I would say. We continue the regional expansion with our new offices, and we see still high demand for our services. And obviously, we -- our services are helping the customers to realize cost efficiencies and also to generate more revenue potential. So we're still a very good investment in terms of buying services.

Our focus is to grow and to do that in a profitable manner and generate cash flow, which we will distribute to our shareholders more or less as fast as we can. We have sort of maintained a biannual dividend payments for most of the last several years, and that's still the intention.

So with that, I'm not sure if there are any online questions.

[Unknown Executive]

There are no questions.

[Bent Hammer, executive]

But we are always available for investors to get in touch with. If you have any questions or would you like to a more in-depth presentation of Itera, just feel free to contact myself, easier to get hold of than Arne. We'll bring him in by demand.

[Arne Mjøs, executive]

Good. Okay. Thank you for attending. See you soon.

[Bent Hammer, executive]

Thank you. Bye-bye.

[Arne Mjøs, executive]

Bye-bye.