Itera ASA

OSE:ITERA

Earnings Call Transcript 2024-Q3

[Arne Mjøs, executive]

Good morning, everyone. Welcome to the interim report for the third quarter for Itera. I will -- we have the same agenda, as you know, from the previous quarter. I will start with the highlights of the quarter and walk through the business review session. And then we will have Bent Hammer, Chief Financial Officer, that will bring us through the financial review and also some comments about the outlook. And if you have any kind of questions, please use post the message, and we will pick it up at the end of this session and look -- make some comments on them, but we can also establish meetings after this presentation.

Okay. Let me start with the highlights for the third quarter. There are 3 messages I just want to talk about in the beginning. One is actually we call it a large customer win back because one of our global customer has made a decision to replace Itera with their global supplier. That has impact of 35 to 40 consultants in the third quarter. But due to the unsuccessful transition by this global supplier, this customer decided to return the project to Itera starting in November. So it was actually a major customer that we were reducing our activities substantially by -- but we are very happy to see that this customer really would like to continue the project with Itera because of our successful delivery model. So that is one of the highlights for this quarter that is -- that also have impact on the revenue and the profitability.

The second topic is actually that we, in this quarter, has closed -- signed 2 new large agreements with an estimated value up to NOK 500 million over 4 years. And the last but not least, we are also opening an office in the Stavanger region to -- because this is a very interesting region for the capabilities for Itera, but not that also the sectors there. But instead of starting from scratch, we are making an acquisition that add 20 skilled employees and brings us a running business based on the customer base that already are in place. So we're making a small acquisition. We call it more organic acquisition in this case.

So these are the highlights for the quarter, and we will return back to each of these topics later in my presentation. If I go and look at the third quarter in brief, as I told you about the organic growth is impacted also the EBIT, but the growth in this quarter was a decline of 5% and plus/minus 0.1% EBIT. If I look at the market, as one of the item here is actually that we have seen a quite challenging market environment -- business environment the last 12 to 15 months, whatever. But what we see now is actually there are some more positive trends. That is what we see from our customers. But also when I look around and looking at our competitors, we have been talking about that this market will return back, and we see more positive signals on that in the market.

That is also supported by the wins we made in this third quarter, NOK 500 million in estimated value for over 4 years. We have an order intake of 0.7 in the third quarter and 1.1 the last 12 months. You know that we are quite well established in Ukraine. In terms of our business operation in Ukraine is running as in the past. But what is also important to mention is actually that we also are providing more business advisory services under the program we call Enter Ukraine to support more businesses to establish themselves looking into this market in terms of the rebuilding activities, but not at least also for this potential future where Ukraine might be one of the larger market in Europe for decades after some kind of solution for the war situation.

As mentioned, the performance is impacted by this temporary loss of the major customer. We're happy to see that the customer continue with effect already from November. So that's good to see. The cash flow from the operation was NOK 6 million in the third quarter. What is -- if we look at the last 12 months, we had operational cash flow of NOK 82 million, but not at least a very strong EBITDA to cash conversion of 89%. So Bent will take us more into these kind of details later.

The Board of Directors has decided to pay a supplementary dividend of NOK 0.20 per share to be paid in December. So, total dividend payouts for -- in 2024 is NOK 0.60 per share.

Our capacity, of course, has been adjusted because of this more flattening, I will say, of the demand side. So we have -- the number of employees has decreased by 63 employees in the last 12 months. And that means that we also are able to adjust the cost base as the revenue is actually more flat. Then we also need to look at the cost side. So the personnel costs and employees are the highest cost, but this is something that we have done quite regular -- quite dynamic according to the needs we see in the market.

The key figures is shown here. As I said, the growth for year-to-date is 2%. It's almost flat during this challenging environment, and not at least also this impact we had on one of the large customer. But hopefully, they are already starting to roll back this project already with effect from November. So we're very happy to see that the rollback is starting this month.

And also, if you look at the EBIT margin year-to-date, 6.4%. It was 0.1% in the third quarter. But in general, in this market, I think 6.5% is also something is quite sustainable. So that is what we have seen in terms of the key figures. And Bent Hammer will show more details about the figures that we have here.

Okay. So let me go into the business review section. And as you know, we are a specialist in sustainable digital transformation. That has been our key position. And in this -- now we have 15 offices because we've also shown on this map that we are establishing a new office in the Stavanger or Rogaland region, I will call it. So that is -- and you see the western part of Norway, we have 3 offices there, Bergen, Stavanger and Bryne. So that is also very interesting to look at how we are closer to this quite interesting market in -- based in Norway.

We have talked a lot about the trends in the market, and I have shown this slide before. I think it's quite interesting to look at the scheme here because if you look at the legacy, a lot of customers have a lot of technical depth and running on traditional data center. So there are still 60% of the volume on the legacy part.

Only 40% has -- is more utilizing cloud. But if you look at the cloud, use of cloud is actually only 20% that are really utilizing the cloud with the capabilities that are available. 20% just made some kind of lift and shift applying cloud just as another data center, but not applying the capability that the cloud offer. So there's still a large opportunity left. Cloud transformation is just on a very early stage. So I will say it's 80% potential left because everyone need to utilize the cloud in order to utilize these tools to also make every industry more and more digitized.

And when it comes to AI, because there's a lot of discussion about AI in the market. And what is shown here is a very -- a news update from Gartner. They have this large conference in Barcelona this week. So I just think this is showing the impact of AI. They call it the AI stack hamburger showing where AI will be applied.

So if you look at the top layer, so it's about the data will be everywhere and every kind of data. So AI will be applied in what they call embedded AI. That's all kind of enterprise applications, like the ERP, like CRM, like Office, these kind of tools, where 40% of the volume of AI will be in this layer. So there will be a lot of tools that will -- so all the software vendor in this space will apply AI. So, all the customers, through this application, utilize AI as part of the embedded technology that they bring into this space.

Then you have the next layer called bring your own AI. That is more packaged AI software and capabilities for a specific business unit or department. And at the bottom, you have what they call a built AI, that is where you have AI capabilities that are working closer to your back-end system or your legacy system, where you need to extract the data and build these capabilities so that you can also utilize AI also in terms of all the data that you have in a more structured way.

So in this way, you combine unstructured data, I will say, from utilizing typically generative AI in terms of all kind of tools that are on the top layer, but also you bring it together with all kind of tools that you are utilizing from your more structured data.

So what they're telling here is actually that the most important thing now is also to establish a layer called trust, risk and security management. But otherwise, you can't trust the data, you can't trust the AI outcome. So that's the key focus going forward that you see that AI will be implemented through the whole value chain, and you need to have control of the trust and the risk and security. That's the most important thing where there will be a lot of investments. And also in this kind of hamburger, you see that this will be implemented through the whole value chain of organization.

And if you turn that into Itera, it's similar here, bring your own AI. We have established our own AI platform called Sapience which is providing AI capability, generative AI capabilities for all the employees in Itera in a safe environment and effective environment. So everyone in Itera can apply this kind of tools. That is our own AI platform for all the employees.

In addition, we have our Digital Factory as we have talked about a lot of time. So through our factory and our cloud community of excellence, our cloud operation, we are also applying AI tools through the whole value chain. So we are ready to apply already -- AI is already ongoing for some of the delivery builds already, but we are really prepared to implement this kind of AI stack or this hamburger stack I had shown here in these 3 perspectives.

Okay. So going back to what we talked about this customer win back, this is a customer -- it's a global customer. It's a customer that we have a very long history together with. We have delivered high quality for a long -- for many years. And because they would like to consolidate their vendors and because they are global players, it's always some discussion about whether some of the global players should also address the Nordic region.

So in this case, they made a decision that one of these global players should provide some of the engagement that Itera was involved into. It accounted to about 35 to 40 consultants. But after a while, after some months, they understood that this global supplier didn't manage to have the same productivity that they have been working together with Itera.

So after some months looking at the outcome from this shift, the customer decided to return the portfolio back to Itera. And that rollback, we call it, is already starting in November. So in this case, losing 35 or 40 consultants in terms of engagement was quite a big impact on our revenue and profitability. But not at least in this case, we are also very happy to see this win back because then we have also tested our entrepreneurial model, our distributor model in hard competition with a global player. So we really believe that our model is very based on Nordic values all over the place, and that is why they also believe that this model for this customer have higher value than going for a more global setup.

Okay. So let's -- we also talked about in the beginning about this NOK 500 million in terms of framework agreement. Just to show you one of these examples, it is Kredinor. That is a renewal of existing framework agreement for the next 4 years. So the value of that is something between NOK 20 million to NOK 25 million, where we are providing more or less a full range of digitalization services.

The second one is IMDi, which is have -- we also talked about later. We have shown some example from IMDi. We had -- we were the largest supplier of -- to IMDi for the past 2 years. And then there were some kind of procurement. So they needed to make a procurement process and RFP, and Itera was the best provider with a potential value of NOK 300 million over the next 4 years.

Okay. I also mentioned in the beginning that we are opening a new office in the Stavanger region. And normally, when Itera establish a new office, we normally do this via a very organic setup, hire some people and start this kind of establishment. In this region, this time, we have also looked at a small acquisition, we call it organic acquisition. And there is 2 very interesting companies based in the Stavanger region called Revoltr, which is a consultancy company, and Mosaique, which is a recruitment company.

So through these acquisitions, we get 20 skilled people and a very attractive customer base and not at least also recruitment capabilities to support the growth in this region. And the region is very interesting because that is where we have a very strong industrial cluster in Norway, the strongest one within offshore oil and gas and renewable energy like wind, carbon capture, tech, et cetera. That's a very interesting region. And not at least also most of these larger customers have offices, both in Oslo, Stavanger and Bergen.

So we will have a very clear differentiation in this market. We will be an international player that we are already in place, but with a strong local presence based on our entrepreneurial culture, the flexibility, this agility that we have with the customers and not at least also full range of services. So we will bring in services from other location at Itera in order to represent the full value chain of Itera in this region. So now we will have the footprint in Stavanger and really ready to continue this growth in this market.

Okay. Before I finish, just want to have one example in terms of our Ukraine initiatives. As I said in the beginning, we have what we call the Enter Ukraine. So this is an initiative we call Housing for Ukraine. This is a pilot project that we are working together with our customer, Moelven, that has made a decision to make a pilot to bring in build based on this module concept they have to establish home for families that have lost their homes in the war.

So in this case, the Minister of Trade and Industry, Cecilie Myrseth, is really into this project. She really like this project, how we approach this together, Itera, Moelven, and how we can support in this case, the first 4 families. This is, as I call it, the pilot to test the value chains of different suppliers, whatever. So -- but the ambition for Moelven is much larger because it's a large need for reconstruction and rebuilding of Ukraine in terms of homes, whatever. So after this pilot, we will look at quite large volume of housing that is needed.

So Moelven is really taking a very strategic move into this market through this partnership with Itera. We really are working closely to look at the full range of services and full end-to-end setup for these homes in Ukraine.

Okay. Order intake in terms of book-to-bill was 0.7 in the third quarter and [ 1.1 ] for the last 12 months. Here, we have shown some of the logos, some are existing ones and some are also new ones. But if we go to what we call share of existing customers, 92% is from the existing customers. So, about 8% of the volume is based on new customers that are new for Itera the last 12 months. And I like this key buy because we are also working on having more customers because some of the larger customer has reduced their growth, and that's why we also need to have a larger customer base in Itera.

So our top 30 customers represent 80% of the volume from -- compared to 83% 12 months ago. So that -- I think that's a very positive trend at that month -- in that context, I will say. So revenue from the new customer was actually NOK 50 million in this third quarter compared to about NOK 10 million last year. So that's a good trend.

And also when you look at the number of employees, we have about 700 employees. The nearshore ratio is about 51%. And if you look at the graph on the bottom, you will also see the rolling 12 months net FTE growth. And you see that it happened something in the second quarter 2022, and that was also when we had the invasion in Ukraine. It started in the first quarter in 2022. But of course, that was -- has not only been the most impact of Itera.

I think the demand -- the change in demand and the environment -- the business environment has more effect on the net growth. But this shows also that we managed to adjust the capacity. So we are able to also provide a profitable profit for the customer -- for our stakeholders in terms of dividend. So that is also an important part of how we configure the business in this situation.

So that was my first part, and then I hand over to Bent Hammer.

[Bent Hammer, executive]

Thank you, Arne, and good morning to you all. As Arne mentioned, we -- our revenue is down 5% for the quarter, and that's primarily due to lower utilization on our consultants. So the -- and also the number of consultants have gone down from last year.

On our subscription services, though, we have a growth of 8% from third quarter of last year. For the year-to-date, we have a decline of 2% only. So it's not a dramatic decrease despite the softer market we have experienced over the last, I'd say, 15 to 18 months or so. So we've been fairly resilient in that sense.

Personnel expenses down 2% for the quarter and up 1% year-to-date. We see that our business optimization program that we started in Q3 of last year has been very fruitful. We have a reduction of 6% in this quarter compared to, I would say, the already started optimization impact of last year. And year-to-date, we have a 14% reduction in other OpEx.

That brings us to an EBITDA of NOK 8.3 million in the quarter and a margin of 4.5%, which is down from 8.7% of last year. Year-to-date, 10.3% margin on EBITDA versus 13.0% last year. Our EBIT for the quarter is fairly marginal at NOK 0.1 million or 0.1%. That compares to NOK 8.7 million in last year and a margin of -- sorry, a margin of 4.5%. And we have generated around NOK 40 million in EBIT so far this year, which is NOK 20 million below last year.

Positive cash flow from operations in this quarter versus slightly negative last year. Year-to-date, we have generated NOK 26 million from operations versus NOK 37 million of last year. And as Arne mentioned, we end the number of employees at just about 700 at the end of September.

Some more about this business optimization program that we initiated in Q3 of last year when we saw that the market was softening. So we have had a strict control of our spending ever since. We set a target to improve the EBIT margin by 1.2 to 1.6 points by implementing these measures, and that's what we've delivered on as well.

We can see that for the past 5 quarters, we've been at a level per employee that is more or less at the same level as before the pandemic and even during some of the pandemic quarters as well. So that's significantly down from what we saw in late 2022 and early 2023. So that's positive.

The revenue and earnings development quarter-by-quarter, we see that even though we have had negative growth as of late, albeit marginal, we still can show a double-digit growth annually over the last 2 years. So that means we came from a very, very strong growth scenario and hit this lower market. We're still poised to grow back again and back to those double margin -- double-digit growth, which is our aim for the future.

Our EBIT margin down also, as you can see in this graph. But there are multiple possibilities to expand that back to the levels of 10%, 12% where we have traditionally been. First one is, of course, to get a normalization of our utilization on our consultants. Secondly, it's to get more volume on our cloud business to have positive contributions from that. And then we've been expanding in Sweden over the last year or so. And now with this small organic acquisition, we also have some growth opportunities there and potential to improve our margin as well.

Not the least, our big effort into Ukraine, not only providing IT services from Ukraine to the Nordic market, but also now as of late, helping Nordic companies with their establishment in Ukraine to help Ukraine with both replenishing energy supply, housing and so forth and in general, rebuilding the country after all the bombings. So we see that we can utilize our strong presence in Ukraine to really make a difference for those companies wanting to go in there. And that, in turn, also we expect will also bring us some of the digitalization services that they require, both in that effort, but also in their ordinary business as well.

Looking at the cash flow, as I mentioned, NOK 6.2 million in positive generation from operations. Looking at the 12-month rolling, we have generated NOK 82 million from that, which is slightly above the previous 12-month period. We're not investing a whole lot, NOK 2.5 million. That's primarily related to IP that we are developing in some of our subsidiaries. Also on the financing side, nothing special in this quarter, just regular lease payments, et cetera. So that brings us with an ending cash balance of NOK 30 million, which is down NOK 12 million from last year.

A bit more on our cash conversion. We are a company that doesn't require a lot of working capital to grow the business. So that means that we have a full focus on converting the EBITDA to cash. And there will be some seasonal variations in that sense. We can see, for example, on the top-hand graph that Q1 and Q3 are typically lower generating months -- or quarters rather, whereas Q2 and particularly Q4 are those quarters where we generate the most cash.

However, looking at the bottom graph, we see that on a 12-month basis, this is pretty stable. We typically generate between 70% and 90% of EBITDA into cash flow from the operations. One of the difference up to 100% is, of course, tax payments. But this has 2 impacts, I would say. Number one, as I mentioned, we don't require a lot of cash to grow the business again. And number two, this gives us a very solid and predictable financing of the dividend payments that we have been accustomed to paying out twice a year to our shareholders. And again, we're doing this now by giving a supplementary dividend based on the 2023 figures of NOK 0.20 per share. And so that adds to the NOK 0.40 we paid out in June for a combined total of NOK 0.60 per share.

Share price at the end of the quarter was NOK 10.95. If you add back the dividend payments during the period, and that means our shareholders has had a negative 2% return on investment, which is, of course, below our ambitions to put it lightly. And -- but it's a reflection of the market we have been in, in the last 12 months or so.

We had 1.1 million own shares at the end of the quarter. With this announcement today of the acquisition in the Stavanger region, we will spend 458,000 shares on that initially. So that means we're just short of 700,000 shares left. We see from the graph that we are very consistently distributing the EBIT in this case. So there is a strong correlation between dividend plus any share buybacks on the one hand and this EBIT line. So that gives the shareholders some good predictability in terms of what they can expect to get in dividend payments.

Our financial position at 30 September rather than 30 June, as put on the slide, is a total balance that is almost NOK 50 million reduced from last year on all items really. Equity ratio is now at 19%, which is 5 percentage points below last year. If you add back the impact of this IFRS 16 leasing standard, that makes us capitalize all the office leases, the equity ratio would be about 5% higher.

Yes, I think that was what I was going to say about our results for Q3. Just a quick note on the outlook. As mentioned, we've experienced a softer market in the last 15 to 18 months. We're now seeing the signs of this improving through more activity in sales. There are more requests for information or request for proposals that are out there that we are working on at the moment. And I think also our competitors are also signaling that they see the early signs of a recovery here.

The market picture is a bit mixed from sector to sectors. Energy sector is still a place where there's high demand. Banking and insurance has been a bit more quiet or even negative as of late. But yes, we expect most sectors to return to growth again in 2025. And we have some good opportunities to grow further, both with this new Stavanger office as well as our relatively recent entry into Sweden. And we also have built up a lot of capabilities through our now 15 offices to deliver to customers, not only in the Nordics, which is sort of our home market, but we can also deliver remotely through the rest of the world.

Yes, key focus still on profitable growth and generating cash, and again, distributing to shareholders as fast as possible. Yes. So that was it. I'm not sure if there's any online questions.

[Unknown Executive]

No, not this time.

[Bent Hammer, executive]

No. Then I will round it off by saying that we will present Q4 and preliminary 2024 figures on February 14 at the same time. So until then, I wish you a good weekend and winter holidays when that time comes. And if you have any questions and want to have some follow-up one-to-one, we are always welcome to that. So just be in touch. Thanks a lot.