Itera ASA

OSE:ITERA

Earnings Call Transcript 2019-Q4

[Arne Mjøs, Chief Executive Officer]

Okay, good morning, everyone, and welcome to the interim report for the fourth quarter. The agenda is the same as we have presented earlier. We -- I start with the highlights of the quarter and go into the business review section. And then our CFO, Bent Hammer, will walk through the financial review and also some comments about the outlook. Okay. The highlights for the fourth quarter is that if you look at the core digital business of Itera, which represent about 82% of total revenue, we had a net revenue growth or gross profit growth of 9%. And EBIT margin of 14.4% as a margin compared to 16.8% last -- same quarter 2018. If I look at total business that also includes the data center operation because we are transforming the data center into the cloud. So the total revenue growth was 3% in the fourth quarter. That represents NOK 146 million compared to NOK 141 million. And if you look at gross profit, we had 8% growth with NOK 127.2 million compared to NOK 117.9 million fourth quarter 2018. And if you look at the EBIT for the total business, it was NOK 18.6 million compared to NOK 16.9 million. That represents a very strong profit margin of 12.7% compared to 12.0% margin same quarter 2018. So Bent Hammer will go deeper into these deals. But if you also look at other important happening for Itera, we have increased the revenue from new strategic customer in new sectors. And so that has been very strong during the quarter, but also for the full year. We have also strong order intake with a book-to-bill ratio of 1.2 in this quarter and 1.3 for the full year. And the Board has proposed ordinary dividend for 2019 of NOK 0.30 per share. And we will also -- the Board will also ask for the possibility to -- for making dividend payment for 2 times a year, as we have done the last 2, 3 years. Okay. So let's go deeper into the business review. Just some highlights for 2019. This year has been, I think, the best year ever in Itera. We are still one of the top 25 most-innovative company across all industries in Norway for the fourth year in a row. We have new customers also in news industry that has been very strong. We have a world-class hybrid delivery model that also bring us into new geographies. We have very solid development of some part of Itera. We have started to work more on the western part of Itera, we call it Itera West, but also Iceland that has also been a very substantial footprint for Itera services the last 2, 3 years. We have focused on building the new competencies, recognized as the competence on the cloud platforms. We have more than 200 certification during the year. We have built also very strong Managed Cloud Services offering, which actually will be the replacement of the target destination for the data center operation. We have strengthened our recruitment and also attractiveness. Turnover of the company has really went down. So it's real improved during the quarter and also the year. And we also have made very strong partnership with Microsoft, Google and Amazon. If I look at the growth from the Azure business, that has been very strong for the full year. So 26% of the what we call the hybrid growth, which is -- actually represent Nearshore part of Itera. And the growth for the full year in the core digital business represent an 8% for the full year. Itera is specialist in creating sustainable digital business. So through a strategic process for 2020, we also implemented into the strategy that we should create sustainable digital business because digitalization is actually some kind of transformational power for all the United Nations sustainable goals, and we have selected goal number nine, 11 and 12 as our key focus goals in terms of sustainability. As we have discussed with you and presented several times, we have always focused on the platforms represented by the tech platforms. Today is characterized by cloud, IoT, lot of data and also artificial intelligence and a major platform vendor. If you look at the technology stack, it's represented by Microsoft, Google and Amazon. We focus on all these three, but also all the kind of business platform. I'll come back to some examples on that later in the presentation. Just to show you some example in power and utilities, one of the new industries for Itera. And you know that the industry for power and utility is really going to one -- from one direction, from the production to the retailer to be where also the retailer is not only consumption of energy, but also becoming a producer of energy. So this -- the full value chain from the production to the retailer will be in 2 ways. And then you need to have a new technology that really make it possible to streamline these processes, where you have new sources of energy, you have battery storage, new storage mechanisms that also are put into the grid. So it's more possible to really use full chain of components in the value chain in a more efficient than in the past. So you need to have this kind of technology and use real-time data and artificial intelligence to really make this digitalization be some kind of a part of the business. So when Itera go into this industry, we are coming from a software engineering perspective. Of course, we know the user, how we should be in the solution for the user, look into the business and also all the technology side, but we -- but not the energy domain expertise. We do not have these people. We have -- if we have some, they are very small. So we always try to do -- go into industry where we combined the industry knowledge by customer or by some partners. The Itera bring our scalability, our platform focus, how we build this -- the new digital business model. That is where we come in into this kind of new industry. And we always bring in some partners, either from technology or the key components that are needed in order to digitize this new industry. And what Itera have in place, which I think, is a very unique capability because a lot of these initial lacking resources. So we have a high scalability of digital talents and also build capabilities that is not only dependent on the people and the -- we also have -- we industrialize also ourself in terms of how we can increase the scalability. And the platform is part of the scalability that enable this new approach to the customer. So that is the way we managed to go into new industry with now being the domain expert on the industry itself. Because we don't believe that we can be more experienced than the customer or the players that have been in the industry a long time. But they are not that good at the software engineering. So this kind of combinations is some part of the key advantages that we bring in. I talk about the platforms from a technology perspective, but those are also what we call the business platform. If you look at some of the key processes for most industries, it's actually this customer relationship management. And there is Software-as-a-Service provider by Salesforce, that have been in the market for a long, long time. And some of our existing customers requesting -- asking Itera, "why don't you bring your hybrid model into this game. Because there's a lack of resources. You have a very beautiful scalability and also cost efficiency in your model, could you actually go into this market?".So in this quarter, we have established a strategic partnership with Salesforce to build the capabilities on this platform. So already through a partner with niche provider in nearshore, we have already 80 certified Salesforce exports as a part of the crew. And they are also in parallel building competencies and certify our consultant and also onboard more people in order to make this some kind of big opportunity for Itera. And this opportunity is actually -- if you look at the full range of service for Itera, we put our full range of services into a Salesforce context. So we build and combine our way of working into the perspective of Salesforce because they have a lot of experience that we also use and we implement this solution for our end customer. And what disputable here is actually, we have the flexibility of bringing people on-site and from different other locations from Azure, all the places in Itera. So we have the full scalability we can deliver the services from. Just to show you some project. I will start with Managed Cloud Services because that's a new offering that we have established during the last 15 months, more or less. And what is important when we go into the cloud, it's important to look at also the governance model, how you make this -- use of the platform in a cost efficient way. And if you refer to Gartner, they have said -- saying that by 2021, 75% of all organizations that do not proactively manage their cloud implementation will spend at least 30% more than on-premise deployments. So a lot of expectations are in the market that the cost will go down, but it won't go down if you don't manage this platform in a mature way. So what we did in Itera, instead of taking the data center and transform into the cloud, we started from scratch with the best people from the data center and from Itera from the application perspective and built a new Managed Cloud Services operation, based on Azure, and we build what we call the Cloud Management platform, where we have this capability in place. We also integrated security perspective. So you manage to do the security by design and privacy by design and also operate this security requirements or obligations you have for your business. So this kind of scalability in terms of that end station for the data center, we really have managed to establish and onboarded a lot of new customers. So we call it the Itera Managed Cloud platform that enables everyone to take a secure and controllable journey to a public cloud based on their actual needs with use of best practices from our specialists, that's the value proposition. And then just to show you some examples on that. These are just for selected customers. We also have others, but just to show here some of the examples from a smaller customer or the smaller organization like Kredinor to a large corporation Storebrand. So we -- these are all clients from Itera. But in this case, we have implemented or extended the collaboration to also take control of -- or manage the operation part of it. So we -- for all these customers, we have really using -- we're really using our Managed Cloud platform in order to make this in an efficient and controllable way. And also, if I continue with some other examples. If you look at power utility as a company in Norway, established by Glitre Energi, where they would like to establish a fully new digital retailer -- power retailer. So they started the discussion with Itera in 2017. And 2019, they really had a very beautiful new start-up company up and running. It was called Oss. And quite recently, in December, that company was actually merged together with Agder Energi that also have other initiative in the same direction. So they've combined this initiative into one company where they really try to disrupt and be some kind of really new power retailer, where they are using smart meeting data to really disrupt the industry. So Itera's been a part of that project. We are also connected to try -- to some insurance company to use this kind of data from the retailer, in terms of looking where you can find some falls in the electric system or incorrect use of the electrical equipment because that also can trigger fire, which is very important for the insurance company. And we have also been a part of some kind of innovation where we call this some kind of flexibility in marketplace, where that consumer that also become the producer can have a market where they can sell or buy this over capacity and energy. So we have been a part of the process, how we can make the micro payments working, where we are using some other innovator, which is also a customer retailer by Nets, where we're looking at using the blockchain technology to adjust the micro payments needs that we see will arise as a part of this new flexibility market where all the consumers are also some kind of producer of energy. This is just to show you one example from a Nordic perspective or Norwegian perspective, but we also have projects running in Oregon and Pennsylvania for DNV GL. We see also very interesting electric grid market where DNV GL has a strong position. So we are a part of the DNV GL to really make the transition into the new -- next-generation utility asset management system for electric grid based on Azure. And both these projects are represented of -- in this case, supporting the sustainability goal number seven and nine. So for most of the project going forward, you'll see that really Itera is a part of making the world more sustainable because we have the technology that can make this happen. To summarize what we have done this year, I don't feel that Itera is any kind of Norwegian based company or Nordic based company, we have really become an international company. We are delivering our services to almost 20 different locations -- different countries from 8 locations from Itera. And DNV GL is one of the global companies that we are serving in, I think, is 5 countries. Cognite is a new start-up in Norway in the oil and gas segment, but also in utility, which also have a very strong scalability and attrition -- attractiveness in the market. So we can follow them to more or less all places in the world. And also, if you look at the fishery, where Norway also have a strong history, we have also on-boarded some new customers in the fishery that also have a global position. I think this is very important for a lot of global businesses that look to Norway and look to the Nordic or look to Itera because the sustainability though global world is quite interesting from Nordic region. And we also have this Nordic culture where in terms of agility, et cetera, where we can serve these clients in other industries and other geographies. If I look at the order intake in this fourth quarter, it was 1.2 -- book-to-bill ratio of 1.2 in the fourth quarter compared to 1.3 for the full year. And also, what is important is to just to make -- mention some brands on that, but also more importantly, I think, it's also looking at the new business, which represents 13.7% of revenue in the fourth quarter, about NOK 20 million. That was actually only from the new clients that was onboarded in the last 12 months. So that has been important for Itera to extend the customer base. So now the top 30 customers represent about 75% of total revenue. That's down by 4 points, which is also important in terms of the growth path that Itera working on. If you look at the nearshore ratio, it was 49%. So it increased by 4 points in the last 12 months. So that's more accordingly to the strategy, and we will continue, I think, in the ratio 1:1 local in the Nordics and 3 nearshore. So that's, I think, the ratio that we'll continue going forward. And the last but also what is very important that we are -- we won the award as the best provider in terms of the category Customer Experience of -- by Global Sourcing Association. So this kind of model working cross-border, across discipline, we are best in the world. But I think what we'll say are very important also to be one of the top 3 best project management capability in Ukraine, across all industries. And so that was also a very important achievement because project management is also, of course, very important when we have distributed project across border for very important and critical industries. So we need to have a very strong focus on the quality. So this is a very big milestone for the people that we have nearshore. So that was actually all from the business review. So let's continue with the financial review. Bent?

[Bent Hammer, Chief Financial Officer]

Thank you, and good morning to all. As Arne mentioned, we had a growth of 3% on the top line in Q4, but the gross profit growth was significantly stronger at 8%. I will come back to our revenue mix there to explain more in details in a minute. Personnel expenses grew by 5%, which was, in general, driven by the number of FTEs. We had apparently some reduction in operating expenses. But as you may know, the IFRS 16 leasing standard has another classification of cost than we had in 2018. So in fact, it's up by a bit. That also has to do with the also hiring a business developer to help us out on Iceland, while we're now setting up a legal entity there. Also, we had some more recruitment charges, particularly in some key recruitments that we did in -- during Q4. Our EBIT up by 10% to NOK 18.6 million. And we're giving an EBIT margin of 12.7%, which was comparable to 12.0% in Q4 of 2018. Looking at the full year figures, we had a top line growth of 5% and gross profit growth of 9%, and we grew the EBIT by 31% to NOK 56.2 million. So we're very satisfied with that development. Just managed to get a double-digit EBIT margin for the year, which is always a victory in itself. Cash flow from operations continued strong conversion there in Q4 on the back of a very strong Q3. So more or less on par with Q4 in isolation. But for the year as a whole, we had NOK 80 million from operating activities compared to NOK 56.8 million the year before. Ended with a cash balance of NOK 53 million and an equity ratio smothered by the IFRS 16 again at 19.2%, 3.9% lower than it would have been under the previous accounting standards. So we ended the year with 512 employees, up by 26 from the year before, so a good development there as well. We have been communicating, and Arne has also inferred to as well that we have this traditional data center that we are currently transforming into Managed Cloud Services, and where we've come quite a bit away on that journey during 2019. So for 2020, we will start to report that Managed Cloud Services together with the core digital business part and just leave the legacy data center trends -- data center operations as a stand-alone in the reporting. For Q4, we had gross profit growth of 9% on the core digital business, 10% full year. We had an EBIT margin of 14.4% for the quarter and 12.1% for the year as a whole. Similar figures for the data center transformation -- transition, sorry. We had a gross profit growth of 3% for the quarter and 2% for the year and very strong EBIT margin comparatively for Q4 at 7.9%. Whereas, the full year figure was 4.0%. Sequentially, we can see that it's fairly stable over the last 5 quarters with the natural exception of Q3, which is the main holiday year -- season. So -- but the underlying gross profit development is obviously a bit different to that. We have 5 consecutive quarters now with the headcount growth, which are -- which we think is very satisfying, of course, in our quest for higher growth. And we're also very happy with the margin development, which then resulted in this NOK 18.6 million of EBIT in Q4, as mentioned. Digging into the revenue mix. Although, the total revenue only grew by 3% year-over-year. We saw the -- our own service revenues growing by a full 13% and our subscription revenues by 7%. So both of which was pretty good. The downside here was that we ended a rather large subcontracted project that we ran in Denmark in the quarter of -- fourth quarter of 2018. So that more or less halved the revenue from subcontracting to NOK 6 million and also the lesser activity in the data centers as well as the closing of our web shop, where we did some hardware and software sales previously. Also meant that other revenue were down by 40%. So -- but all in all, the most profitable elements of the business grew significantly more than the other ones and that's obviously then also reflected in the profits. Cash flow, as mentioned, very pleased with the conversion there with the full NOK 80 million from operating activities, bit inflated by the IFRS 16, again. So adjusted for that, still NOK 67 million compared to NOK 57 million and NOK 50 million in 2018 and 2017, respectively. We invested NOK 5.7 million in Q4 and NOK 18.8 million in the year as a whole. And a big portion of that was the extension of our Kiev office. So we now wait for further growth there as well. From financing activities, the big toll on cash was, obviously, the dividend payment that we did in Q4 of NOK 0.30 per share, whereas we didn't have that in last year and ending the cash balance with NOK 53 million on hand. With respect to dividends, I'm happy to announce that the Board last night decided to propose an ordinary dividend of NOK 0.30 per share to the general meeting that will take place on May 24. So payment date will be on June 4, if approved. And it will also ask for a renewed authorization to pay a possible additional dividend at the later stage this year as we have been in the last, I think, 3 out of the last 4 years or something like that. Share price at the end of the year was NOK 11.5 per share compared to NOK 8.5 the previous year. So that gives a yield of 35% and 42%, if you also count the NOK 0.55 per share of dividends that were distributed during 2019. We have treasury shares of approximately 0.75 million shares. We do have some share option programs that end now in June, second program that ends next June, and there was also a smaller program that was released in December of 2019 of some 440,000 options to a handful of new key recruits as well as some incumbent employees that we bank on will help us drive the future growth of Itera. So we continue with our profile of a high distribution of earnings. So it's really the available cash flow that is the limiting factor of our distributions. And hence, our decision to do that semiannually to keep it at the high level. In terms of the balance sheet statement. It's pretty much flat in the total asset side. Apart from this effect of the IFRS 16, which brings another NOK 45 million of future lease sold obligations onto our books. But we're very happy with the level of our receivables and the work in progress balances that we had at the year-end. And I guess, it's well reflected in the cash conversion that I just presented as well. So a solid financial statement. The equity ratio of 19% is a bit deflated by this accounting standard, as mentioned. So would otherwise be some 23%. Good. That was what I was going to go through of -- in terms of figures. We don't do a specific guiding on our outlook. I can mention that we have hired a separate recruit for our new office on the west coast of Norway, to drive further growth in that local market. Although, this will be a market that we will service heavily with our remotely delivered services from Kiev and Bratislava. We're also in the process of setting up a legal entity on Iceland, as mentioned, to get at least the thin local front to further service the 60-odd seats that we have on Iceland serviced from our nearshore locations. If you have any questions -- not sure if there is any posted online or not. If not, then you're very much welcome to get in contact with us. If you want to set up some calls or physical meetings to get to know the company better, then we're always available for that, so just give us a ring. And I hope you have a pleasant afternoon, and I look forward to seeing you back on May 5 where we present the Q1 figures. Thank you very much.