Itera ASA

OSE:ITERA

Earnings Call Transcript 2018-Q4

[Arne Mjøs, Chief Executive Officer]

Thank you. Welcome to the interim report for the fourth quarter 2018.My name is Arne Mjøs, I'm the Chief Executive Officer. And we will have the same agenda as the previous quarters. So I take the first part with the highlights and then our CFO Bent Hammer will go into details for the financial section. Then I'll come back and present more about the business review and we end up with the outlook.So we're a little delayed today, but I think, we'll keep up the speed to tell you quite good story, I think, for the fourth quarter. We have quite strong growth. We have split it between what we call the core digital business, which is the business of Itera without the data centers that are transforming to the cloud. So if I look into the core digital business, we have a revenue growth of 9%, full year 18%, and the EBIT margin was actually 15% for the fourth quarter. For the full year, 11.7%.The total business, we had a revenue of NOK 141 million compared to NOK 135 million, that's organic growth of 5% year-over-year. And the EBIT was quite strong in this quarter, NOK 16.5 million compared to NOK 13.9 million last year. That represent a EBIT margin of 12% compared to 10.3% last year.As I said, we are migrating or transforming our data center into the cloud, and that's quite good development. This is according to the plans. We established a new Managed Cloud Services unit, which is up and running. And we have also established a partnership agreement with Arrow on all kind of cloud provisioning and the building part of it.We have also started to take a stronger position in Bergen. So Bergen will be a focus area in terms of geography. We are representing [ Stavanger ], and we also believe this is quite a good market in Bergen, and that's really hybrid setup. So there are some people working onshore in Bergen, but most of the capacity will be from our nearshore centers. And the Board has proposed ordinary dividend of NOK 0.25 per share, that is the highlight for the fourth quarter. So let's go into the details, Bent.

[Bent Hammer, Chief Financial Officer]

Thank you, Arne, and welcome. Yes, as Arne mentioned, we had quite a good growth of 9% for the digital core business, 18% for the full year. On the other hand, we had some negative growth in the data center operations, which brought the total growth down to 5%. Our EBITDA is very strong compared to last year, up 17% to NOK 22.3 million. And the EBIT, NOK 16.9 million actually, up 22% from 2017. And we have a full year EBIT of NOK 42.8 million versus NOK 39.3 million of 2017. I'll come back a bit to the margin development in a minute to give you some more details around that.The cash flow from operations were NOK 42 million in the quarter. We knew that it was going to be good, as there were some spillover effects from the receivables from Q3 that fell due on the last weekend of September and were only collected in the first week of October. However, even on the full year, we have a very strong cash conversion of -- we have NOK 57 million almost in cash from operations, which is more than the EBITDA less paid taxes would suggest. So very pleased with that.Our equity ratio is 24.5%, slightly down from 2017. And that's attributable to the impact of the accounting change related to IFRS 15 revenue from contracts with customers, which had the negative impact of NOK 3 million on the opening equity.Looking after the number of employees. We are pretty much flat or slightly down on the end-of-period number of employees. There's a bit of change in the mix. We have downsized a bit on the overheads and also a bit related to the data center operations and also converted some of the roles to -- from onshore to nearshore. So yes, slight change in mix, but overall, pretty flat.Yes. Moving on. As I mentioned in the Q3 presentation, we have split out the core digital business and the data center transformation for you in the presentation to show you that there are 2 distinct elements to our business now that develop quite differently.The core digital business is experiencing high demand, and we have been able to capitalize on that and produced a growth of 18% last year. Profitability is good and growing, as I will show you on next slide as well, whereas the data center transformation has been hit by somewhat negative growth and also a strong dip in the margins. And we are meeting that by transforming this into the new cloud business that Arne mentioned and surely, we'll speak more about it later. And then, we will, at the end of the day, probably migrate to totally out of our traditional on-premise data centers as the technology advances and we are able to migrate the customers.We can see from this picture that the full growth from NOK 475 million in turnover in 2017 to the NOK 531 million in 2018, it's the [ priority here ] and more so made up of the growth in the core digital business. And also looking at the EBIT development, we see that we had a negative contribution year-over-year from the data center operations of NOK 9 million, whereas the core digital business added NOK 12.4 million in EBIT. So all in all, a positive EBIT development, though the margin is slightly down due to these different developments.Sequentially, we can see that our operating revenue is going up and down quarter-by-quarter and that's despite the down the line growth of 5%. This is very much affected by the number of working days in the period and also obviously, the big vacation period in Norway in Q3.So we can see how that's impacted. I think, at the moment, we have approximately a NOK 1.4 million impact per working day. So Easter effects, et cetera, will shift this picture from year-to-year. As I said, employees -- number of employees has been pretty flat throughout the year and that's on the back of a huge growth in H2 of 2017.So we kind of consolidated our position there and changed the mix somewhat as mentioned. The EBITDA and EBIT development follows the top line to a certain extent. We can see that our Q2 was somewhat weaker relatively speaking in that sense, whereas Q4 has been pretty strong, and we ended the year with an EBIT margin of 12% in Q4, which is quite pleasing.Splitting the revenue into its different components. We see that the service from revenues from own consultants are actually down by 2% to NOK 88 million, and that's largely attributable to where the data center operations have been hit through less change works and new projects in that area because we can see that the subscription revenue both from that part of it, but also the digital tool part in Compendia has had an increase of 6% year-over-year to NOK 35 million. Third-party services doubled in Q4 to NOK 12 million, and that's largely related to a project in Denmark, whereas other revenue, including hardware-software sales and reinvoiceable costs, et cetera, were up by 6% to NOK 7 million.Cash flow conversion very strong, as mentioned, with rolling 12 months of NOK 57 million versus NOK 50 million of last year and NOK 48 million the year before that. We had lower investment spending in Q4 and that was related to the data center operations, where we cut back. Full year, though, slightly higher, but that's related to investment in the facilities in Kiev, whereas the -- from financing activities, nothing out of the ordinary, meaning that we didn't have the additional dividend payments of 2017 in this quarter. So that leaves us with a bank deposit of NOK 55 million, slightly down from 2017, but that's attributable to us having a lot more treasury shares now valued at NOK 10.4 million versus about NOK 1.5 million at the same period of 2017.If you look at the return for the shareholders, we've delivered 21% return, including the dividend payment of NOK 0.25 per share. We started the year with NOK 7.14 per share and ended at NOK 8.40. The Board has, as Arne mentioned, proposed an ordinary dividend of NOK 0.25 per share, and that's about 65% of the earnings per share. And we also will ask the general meeting for authority to decide on an additional dividend payment later.During 2018, 120 employees bought a total of 1.2 million shares. They had lock-in period ranging from 6 months to 3 years. So we are very pleased to have so many employees being on board with shareholding and thus have the same incentives as the owners. I think that's a very strong setup.In the financial position, I should mention that we have netted NOK 17 million of advance billing versus -- against the outstanding customer receivables at the year-end. That compares to NOK 16 million of last year, and these figures -- the last year figures has been restated, as we didn't do this [ nothing ] in last year's figures originally, brings about an equity ratio of 25%, just slightly below last year, as mentioned.Yes, I think I've gone through the other things. Lastly, about the IFRS 15 implementation. It had an impact on our opening balance, as mentioned, of NOK 3 million. During Q4, it positively impacted turnover of NOK 1.1 million, but no impact on EBIT. And full year, net EBIT impact of positive NOK 1.3 million.Just lastly, the IFRS 16 leasing standard will add NOK 54 million to our gross balance sheet, that's made up of predominantly our office leases. So that will -- that was implemented now at January 1.That is it for me. I will hand back to Arne to go through the business section with you. Thanks.

[Arne Mjøs, Chief Executive Officer]

Thank you, Bent. And yes, let's jump into the business review section. As I mentioned last time that I always talk about the amount of data that we see in the market where every industry is actually digitizing at full speed. So this is some kind of numbers that I think show what's really happening in there that today, we see that some more than 1 million new devices start coming into -- are getting online per hour by 2020. So that's actually quite fast to -- so and if you look at some of the other figures that the smart home will produce about 50 gigabyte data per day, but also the vehicle -- the electric vehicle will produce 5 terabyte data per day. So if I compare it to our data center, the capacity of the data center, that represents about 50 vehicles that are coming through Itera every day. That is more or less the same size of the data center that we have in our data center. So that's actually quite enormous data that we see will come into the market because of all the new IoT devices that we see in every industry.And the main focus for Itera in 2019 is actually to always think and work with platforms. So we have what we call it Platform First strategy in order to take our position, which is actually being #1 in creating digital business. And the position -- the strategic position as the #1 in creating digital business has been a long-term plan. We actually started in 2014 with customer-centric model. And then we on 2015 had a focus on ONE Itera instead of having a lot of different companies. We said that we should structure the consolidated company into 1 brand. Then we focused on, not only the customer, but customers' customer, that was the focus in 2016.In 2017, we achieved award as the -- amongst the top 5 most innovative companies across any industry in Norway. The last 3 years, we have been amongst 25 of the most innovative companies in Norway. So we're a quite innovative-driven company. And last year, 2018, we focused a lot on the hybrid scalability. So we became the winner of the customer experience provider of 2018 by the Global Sourcing Association. So that's kind of a confirmation that we have a very interesting, attractive Nordic mold that's -- where the culture in the Nordic is actually spread out or integrated in all our offices, both in the Nordic region, but also our nearshore centers in Ukraine and in Slovakia.And as I said, the focus in 2019 is actually the platform. What we mean by platform is actually 2 types. It's business platforms, as you see some of these guys here, the global guys, but also some local guys, like the FINN, you know and Ruter, also these platforms are enabled what we call by the technology platform, typically represented by Microsoft Azure and Amazon.And if you take this, everyone is talking about the future smart city. Yes, every industry is actually digitizing. And one of the major new technology, I'll say, that is a part of the batteries of digital twins. Digital twins is something that the engineering, R&D companies, the airplane industry, whatever these kind of industries have been working for a long time, but obviously, that some kind of every IoT will be represented by a digital twin in platform, so it's very easy to use machine learning and these kind of algorithms to really make this ITs to work together instead of having more in a structured way, some kind of programming in a traditional way. If then else, you don't work in that -- with that kind of programmings pattern or mechanism, you need to really go into the artificial intelligence space.And so we see that, yes, we are targeting smart city from different industries. It takes some time before the cities will be really smart, but you -- we see already if you look at some of the sectors we are working on like the smart energy and smart utility, smart buildings, these are really targeting the future of the smart city.What is important when you have this kind of new technology stuff, you also need to look at the new user interfaces and new generation and new experience. Of course, the business case, the processor will radically be changed, we call it use cases. Voice will be the preferred user interface because you can't discuss or you can't use all the apps for everything. You need to be more intelligent in the user interface because of all this data. And there will also be a new kind of visualization tools like augmentic reality or virtual reality that will also be available with not this big, big glasses, but more integrated into ordinary glasses.So these kind of technology we see is coming. And if you look at how we build the solution, as I mentioned, it will be more based on artificial intelligence and with some kind of elastic or access to computing power that we haven't seen in the past. It's very easy to spin off hundreds of thousands service at a second. So in the past, it was you need to go to the data center, ask for these resources and buy them. But in the data center -- in the global public data center, you can really just request these kind of services on demand. And that is, I think, that's an -- if you want to be in some kind of digital business, you needed to be in the platform. It's impossible to realize this kind of solution in the ordinary data center. That's why we made this transformation of the data center, as mentioned -- as Bent mentioned that we are really taking -- we are sunsetting our own data center and build a new unit that will really focus on the cloud platforms.And this is summing the energy space that we're working. We have an architecture to really digitize every part of the value chain in the utility space. We have also customers that are taking some part of it, but we are based on a global platform like in this case of Azure, they have the capabilities that are available in the market to start digitizing because all these products in the value chain will be digitized by a digital twin by themself. And what is important for different players is actually to access this kind of new information to build the new position in this new value chain, where we as a consumer energy will also be a producer of energy because of the solar panel or whatever we have or the battery we have in the Tesla, the electric car. So these what you call components of the assets will be part of the new smart energy ecosystem.And if you have started on the smart energy, you can also go into the smart buildings because one of the business cases for energy is in the buildings. So it integrates because in the buildings, you have solar, so the building will also be a producer of energy. And that's why energy will be going into smart buildings. But also in the smart buildings, there'll be a lot of sensors that kind of really optimize or produce something quite different experiences that we have in the past. Every lock will be digitized, every kind of lightning, the parking will be integrated, et cetera. So that is the kind of platform that are based on some of the global leaders that we have established kind of capabilities or competencies to really be able to develop -- start developing these kind of solution for our clients in the Nordics.And also, there is a case we call, I think that was quite interesting [ in the way we won ] this case in the fourth quarter. But as in Norway, there is some kind of quite good program at the top management from different private sector and the different public units that really look at how should we digitize or improve the collaboration, digital collaboration between the private sector and the public sector. So in this case, we had a project for the financial sector by BITS, which is the infrastructure -- financial infrastructure organization that look at what is the common thing for the finance players that need to be in place. So BITS engaged Itera to build some kind of gateway. So it's very easy for all the banks to integrate with different public units, both ways actually.So we established this on Azure with all the components in Azure that we could reuse, and we managed to build this solution by 2.5 months compared to, if you had -- should you do this in the past, I think it will be much more costly and didn't have all kind of future functionality already in place. We managed to do this as a first phase that will be in production in February, but for all kind of needs, we have all the capability, the building blocks in the platform. So it's very easy to integrate the next public unit or whatever.So that's some of the reason for having a platform. We have a lot of capabilities, it's much easier to develop the new solution and it's much more effective to also to take the future needs that come in.We had a good order take -- intake in the fourth quarter, 1.5. The order intake will vary by quarter-by-quarter. Some of them are prolongments of existing clients, but we also have some new players like IKEA, which is a new customer for Itera. It was driven by some kind of inbound because of our precision platform. So we have some international players, large players that are really targeting Itera because of the platform first strategy. They find it very attractive in terms of the digitizing processes or the transformation processes that they're running.If I look at the customer development, it's been quite very strong. We have 95% of existing clients still continuing with Itera the year after. So it's -- we have a very high loyalty from the customer. We have customers and most of the customers are at least in Itera for 10 years, and that means we are delivering quite high quality. We have a high visibility in the revenue stream. And also if you look at the top customer, it represent about 79% of the revenue. So I think, that's a good sign that we really have delivering quality and the customers still every year are planning new project with Itera. So that is very important in terms of the relationship and the visibility of revenue going forward. The focus forward is also to look at new customers.So we have some bigger players that have started to work with Itera. There is not a very high visibility in the revenue stream, but I think that will come going forward because the attractiveness of the mold and also the shortage of resource in the market is quite large. And thus we also have impact on the nearshore ratio, which is the percentage of staff located nearshore. So in the fourth quarter, it's 45%. And we've set a target for many years, a goal that we should pass 50%. I guess, it's quite reasonable to expect that it will might be in place this year or next year and maybe this year, I don't know, but we have a very large scalability in the nearshore part. So I don't see any kind of limitation. If the demand is in the market and have the customer, we can really scale quite fast with a nearshore setup because the access -- we're accessing the fourth largest pool of resources globally. And all the management processes, et cetera, is in place to really scale. So these guys that are running the nearshore partner of Itera has actually been -- are quite experienced management. They have been -- started some other companies in the past. So they have experience with 5,000 to 6,000 people, how we are operating in this kind of space. So I don't see any kind of scalability in terms of the nearshore part of Itera. So we have good access to resources in this market.And also, of course, we're doing a lot with confidence development, social engagement, et cetera, among the employees. So these are just to show you some of the headlines in this quarter. Podcast, we're introducing a lot of new employees. We also have started some kind of summit with Google, which also is important provider for Itera. So that is just to show you some snapshots of that.To summarize. First, we will, of course, continue our solid profitability growth in our core digital business. We will still investing in the Managed Cloud Services unit, which is already running with clients, but we will continue to bring more clients in and there will always be some kind of new stuff that we need to have in place.For the existing data center, we will lift and shift them. So I think this new Managed Cloud Services is also very attractive for the existing customers. So they see that we will migrate them, transform them into the Managed Cloud Services in some kind of good and appropriate rate for both parties. And the last, but also important is actually, we are also looking at the overhead, that is some of the reason that we have seen in profitability improvement because we have fewer business units, we have reduced 1 management layer. So it's actually a more integrated company that also will have impact on the profitability of the group.So that was actually what we have to say about fourth quarter. And going forward, it's more or less the same which was said before. The market is quite good as you all know. Every company and every industry is digitizing at full speed. We will focus on profitability growth and cash flow. Yes, there are some investments in the Managed Cloud Services and the transformation and that's where we will continue to show you the core digital business as one part and totally in order to make it easier for you to look at how is the business developing.And of course, as I said, for many times, actually we will continue to focus on larger projects and customer. That will also have impact on the visibility, efficiency and scalability of the group. So that was all we had for this quarter and looking forward to see you back if you have any kind of questions. So please contact Bent Hammer or myself. We will always be available to support you with any kind of questions you have. Thank you.