Itera ASA

OSE:ITERA

Earnings Call Transcript 2022-Q4

[Arne Mjøs, executive]

Good morning, everyone. Thank you for -- I will present the fourth quarter interim period for Itera. So let's jump to the agenda. It's the same agenda as you know from the past. We -- I'll start with the highlights of the quarter, and then walk through the business review. Then we have Bent Hammer, Chief Financial Officer, that will go through the financial review, and I'll have some comments about the outlook. We also have chats that you -- if you have any kind of question, you can post in our chat, and we will walk through the chat as -- at the end in terms of the -- during the Q&A session.

Okay. Let's start with the highlights for the fourth quarter. In brief, we delivered very strong organic growth is 29%. So that's amazing, I think. It's -- I'm very proud of all the people of Itera that managed to deliver this kind of growth during the time where we have the invasion in Ukraine. We had an operating EBIT margin of 9.5%, which is also very strong when you also take into consideration what we have done in this quarter and this year.

In general, we -- there's still a very attractive market for digitalization, especially when you look into the green energy sector and also sustainability every company needs to talk about and implement the strategies for the more sustainable company and a more sustainable future. So it's a big driver for that. And also digitalization is also a tool for the customer to improve their cost efficiency when they're also in the time with a more dark macro environment also need to increase the efficiency.

If we look at the growth for 29% growth, it's also fueled by our investments in the Digital Factory at scale and also cloud center of excellence. So we started -- as you remember, we finished the transformation of our own data center in the first quarter, and we have used 3 quarters to really scale up our Digital Factory at scale and cloud center of excellence. So that has a big impact on the revenue growth in the fourth quarter.

As I also said in the third quarter, we are also ramping up 3 new offices in Central Europe to increase our international scalability, but also have some kind of alternative when we see that operation in Ukraine do not have the same growth potential because of the invasion in Ukraine. But we really stand with Ukraine and doing a lot of different kind of practical support and humanitarian aid or support in any kind. So of course, Ukraine is extremely important for Itera to stand with all the Ukrainian people and write the history together with the Ukraine, the brave Ukrainians.

If you look at the book-to-bill, it was very strong in the first -- fourth quarter, 1.5. And for the last 12 months, it was 1.2 as expected. Number of employees in the last 12 months has been 81. Most -- or more than 15% has been from the Nordics because we are making this kind of transition in terms of growth from our nearshore location from Eastern Europe to Central Europe. So it takes some time to really establish the same growth capacity that we have in Eastern Europe to make it to happen in Central Europe. But we have a very strong progress there also going into the 2023.

We have 12 months rolling cash flow from operation of NOK 76 million, which is very strong. And the Board of Directors proposed yesterday in the meeting to make an ordinary dividend for 2022 of NOK 1.3 per share (sic) [ NOK 0.30 per share ]. We also have -- the Board of Directors will also ask for permission to have an additional dividend later this year also. What we have done in the last 2, 3 years, I think we have 2 dividends payouts during the year.

So in total, I'm very happy. I'm very -- yes, very -- I didn't -- I couldn't imagine that we -- during this war in Ukraine or invasion in Ukraine, we could deliver this kind of financial performance and also do a lot of the changes that I've shown you here.

If we look at the figures in terms of the growth for the full year, it was 24%. And the operating margin, it was 10.5%. And the growth in number of employees was 13% for the full year and the fourth quarter. And as you see, we have also scalability in the company that is not directly connected to the number and places, which is very good. So I think I'll stop with the figures there, and Ben Hammer will make a deep dive into the financial figures in the review later in the presentation.

So let's go to the to the next session, which is the business review section. As you know, we -- as a company, we are specialists in sustainable digital transformation. We have 13 offices in the Nordics and Eastern and Central Europe. We have established 3 new offices to balance the new situation in Ukraine. So we have established Kraków, which is a new country in Poland for us, Itera. We have established Brno, which is a new country in the Czech Republic for Itera, and another office in Slovakia, where we have already, for many years, Bratislava office, but now we have also established Žilina. So these offices, we started to establish let's say, in the third quarter, late second quarter, and we are really building the position in these new areas, new offices to access the talents to balance the situation we had in Ukraine.

So if you go to the next one, I think it's just to do this one. If we look at the model itself for Itera, we have a very strong, steady growth organic model. I talk about the inner circle and the outer circle. The inner circle is actually our core business model where we focus on the consultancy where the scalability is connected to the number of employees. We have -- are very customer-centric. We are -- just a moment, someone kind of need to take this one here. Very customer-centric, we are related -- we have -- the customer-centric and the -- in focus on the selected industries. So we -- when we -- and then we have the scalability in terms of the more and more customer and talent, but most important is actually that we focus on the growth of the people.

So Itera is a growth company. So what is the most important thing is actually grow the people so -- and then the customer automatically grow and also the company. But we need also to focus on building ONE Itera. So instead of having different office that go in different direction. We really would like to have ONE Itera model, and that also makes sure that we are working very well across the border as ONE Itera. So that's the inner circle.

If I go to the outer circle, it's about actually how can we use more packaged offerings and more industrialized services, which is not one-to-one dependent on people. So then we are using this scalability to really increase -- the software actually to increase the scalability and speed of Itera and also increase their recurring revenue. That has also impact on the scalability for the group in terms of more customers and more talents. So these 2 circles, the inner circle is -- and outer circle is extremely important for the organic growth model of Itera.

So if I go to looking at the inner circle in terms of the scalability, in terms of the people, number of people, we have a long-term ambition to increase then the growth of number of employees by 2 -- something between 200 and 300 FTEs per year. That's an ambition. It's not any kind of guidance. But that's the drive we have. We have established 3 -- 13 offices, so we have the potential ongoing in that direction.

What we have seen until now is actually we are increasing the Central Europe position of Itera. So we have Eastern Europe that are keeping at more or less the same level but the growth going forward during the war in Ukraine is actually to increase the capacity and the scalability of Central Europe. So when the invasion of the war in Ukraine is finished, we will also continue to grow in the Eastern Europe as we had in the past. So -- but the ambition is actually to really have a net growth of 200 and 350 FTEs using ONE Itera focused on the people graph. So that's the inner circle growth engine.

If I look at the outer circle, it's about increasing the recurring revenue. That's why we have established this growth engine to enable the cloud migration and cloud modernization for our customer. So a lot of customers have a lot of system on the traditional classical data center. So what we are doing is actually to make this kind of journey. We start with a lite discover and assessment, make a digital strategy for the customer. And then we have -- normally the cloud journey execution is something about 2, 3 years timing.

So a portfolio, a lot of projects that are running, but the first one is actually to make the cloud migration, make the lift and shift of the core system in some way or the other to make sure that you establish the core platform in the cloud. So that has been extremely important, and that's why we have established this kind of capability in Itera. And we are also ready to really make a large migration project for customers because we have all the capability in place. A lot of the migration is about using software to lift and shift and migrate a lot of the -- from the existing systems today, existing data center.

Just to mention one example of a customer in this quarter is actually TESS, which is a strong -- have a unique position in Norway. They have about NOK 5 billion as revenue to 1,200 employees and various position in the specific area with 130 offices in Norway and some international places -- locations. So what we have done is actually to really migrate the systems for this customer, doing the lite assessment and discovery assessment first, lite discovery and -- discovery assessment, I mean, first, to make a plan for this, and now we will finish the migration of the system from the existing data center during the first quarter. So that's for Itera is a new long-term agreement, 3 years agreement of about NOK 30 million over a 3 years period. So this is just one example of how we are working with clients that would like to migrate their data center into the cloud.

If I look from more -- from a business perspective, this is with reference to also to Gartner, but they're talking about the digital dividends. What they are saying is actually that the business growth for company is more dependent on digital technology than people and machine that has been a growth engine in the past. Of course, digital -- every product will have a digital component. So if you have the speed to complete initiative is behind expectations, as saying here is some kind of analysis about 60% of the initiatives don't have the speed that was expected in terms of execution of the initiatives and also about 50% of the initiatives do not have the speed to realize the value that was expected.

So of course, this has a lot of impact on the digital dividend, they call it. Of course, that also have impact on the financial dividend or the financial value of the company. So what we have done from Itera to really be on the cutting edge to increase the efficiency and increase the speed of this kind of digital initiatives. We have established what we call a Digital Factory at Scale, where we typically increase the speed and throughput by 20% to 30%. And -- so by working in what we call a virtual factory where we have all the people on the competencies that are working in delivering these products. They can work on one product or they can work with other kind of products instead of locking each individual person to a specific project.

So this is really a new way of operating where you really work more as a team based on best practices and utilize and you enable to adopt the technology that actually come into the market every day instead of starting from sketch and build this kind of functionality by yourself in the system. So that's why we believe that we can typically increase the speed by 20 to 30 -- throughput by 20% to 30%. And we also have already examples where we achieved 40% compared to a traditional CV staff augmentation project.

And if I also refer to McKinsey, it's also saying that Digital Factory is really a new concept that you need to establish in order to scale the digital transformation to bring products to the market faster to do more with existing resources, whatever. So they also have go into more deep dive saying that you have -- you can achieve 50% reduction in management overhead for technology teams. You can achieve 70% reduction in the number of business analysts that needed to write the technology requirements.

You have a 90% reduction in number of testers due to test -- using test automation. And the last but not least, you have 8x higher performance of the top engineering teams than the level of peers. That means that this top engineering team, people can really work on different projects or more projects in parallel because they have this team working according to the same model.

Just to have one example, and this is also the industry that we are using this kind of Digital Factory. Itera is really taking a strong position in the energy sector where we have both new -- several new customers such as Å Energ, it's subsidiary Entelios, Hafslund ECO and Laki Power. The Laki Power, for example, in Iceland, and we also have a strong growth from existing customers, which are Eviny, BKK and also DNV Energy System. So these are just show some example of customers where we have in this sector. We are also doing some kind of together with a partner like THEMA Consulting doing a report, which shows we call it Strømrapporten in Norwegian, where we discuss how the electricity crisis in Europe creates new opportunities for electricity companies.

So the energy crisis and the need for more electricity is really a key topic for Itera and for Norway and the whole world. So this is also a topic that we are also looking at how could we really contribute to increase the efficiency of using electricity, but also increase the energy production in terms of electricity into the grid. So this is, of course, an important sector for Itera.

Just to mention another example, this is Opplysningen 1881, we will also establish and user system, cloud-based system for the call center because they have some customer service agents using or producing in 1881 with phone and SMS, but now they have new tools, digital tools, widgets that we call it, that makes it much easier for the agent using the call center at Opplysningen 1881.

Okay. So these were some kind of example. I also just want to say something about what we are doing for Ukraine. As you've heard, we are really using a lot of time for Ukraine people. This is an example of something very special. We started with a panel discussion by the Norwegian Ukrainian Chamber of Commerce where Itera has a very strong position. We have a Board member, being part of that for a long time. But during that meeting, the Minister -- the Vice Minister of infrastructure in Ukraine was present. And he said that we need a lot of stuff in this kind of to rebuild the infrastructure. And one of the topics he mentioned, it was temporary bridges.

And so we picked up that topic. It was our group COO, Jon Erik Høgberg, that was present and also together with our people in Ukraine and also the Norwegian embassy in Ukraine and also not at least the Norwegian Public Road Administration, Statens Vegvesen, made the team together to look at how could we support Ukraine as fast as possible. So what we did was actually in December, and I think they were transported in December, but now is installed in January and February. So Norway had delivered 10 bridges to Ukraine, 310 meters long together that are really needed in Ukraine to connect the settlements, but also ensure the liver of hematuria, cargo, the passage of ambulance, repair teams, whatever is needed is really important stuff. So I think this is a good example how Itera contribute to Ukraine much more than what we can do as a company. So that is one of very -- many initiatives that we have that really is supporting Ukraine in the best way.

I just also want to mention that we also hired Taras as our new Director for Central and Eastern Europe. He joined the company from the 1st of January, and he has more than 20 years of professional experience from another company. So he brings his [indiscernible] from the scalability of that company and also make sure that we continue to fast grow on Central and Eastern Europe as ONE Itera, that's extremely important that we build the company as ONE Itera in order to have the scalability and make sure that we can also continue to deliver as ONE Itera across all -- across the borders.

I also would like to say -- make some focus on the sustainability of Itera. We as a company also have very high targets on the sustainability. So we make some kind of benchmark regularly using Ecovadis as one of the world leading, the largest and most trusted rating company for sustainability. So in the fourth quarter, we went up 10% from 60 to 66 points of 100 points, which gives us a new silver medal in sustainability. So we only need -- 2 more points to get the gold medal. So I know that the Head of Sustainability Itera is really eager and together with Itera to get the last 2 points to really be amongst the top -- the -- get the gold model, we are already amongst the top 6%.

So the next -- we always would like to climb in that direction to have more and more according to the best practices for sustainability. We also have one idea from one example what we are doing from the communication part of it. We are really sharing what Itera is doing internally, but also with customer. We call it BITS. It's a new YouTube series. You can also go to the link and look at some of these examples. All are in Norwegian but is very -- it's showing Itera as people, which is extremely important for Itera.

So let's move on to the last part of my presentation. The order intake for the fourth quarter was 1.5 and 1.2 for the last 12 months. So it's a lot of the existing customers that are growing, but also some new customers coming in. And you can also look at this in terms of the customer development, existing customer accounted for 88% of the revenues in fourth quarter. And then we have the last 12% is coming from new customers. That's a customer that we didn't have for 12 months ago. So -- but a lot of the customer that we have in our existing ones are really -- some are growing, some are declining. So the portfolio of existing customers is quite flexible, and we have a strong portfolio that we can really continue the growth.

The share of revenue from the top customers is 83% is up from 76%. And that's also important if you look at the macro environment that can have more darker view going forward. It's important in terms of -- because we have been strategic -- have this strong strategic relationship, we also have very strong I will say, visibility also when we're going into more different macro situation. The last one is actually to look at the number of employees. We are 81 in the last -- up by 81 in the last 12 months, and that's a temporary impacted by the invasion in New Ukraine. And I said -- as I said earlier, more than 50% of the FTE growth in -- are coming from the Nordics because we are stabilizing Ukraine, flatting out Ukraine and building app Central Europe. But meanwhile, we have increased the number of employees, the capacity in the Nordics which is also good for Itera. So the nearshore ratio of Itera is 52% compared to 53% last year. So I think that was all from my section, and then we have a deep dive into the financial sector. So let's go into that, Bent?

[Bent Hammer, executive]

Yes. Thank you. You might remember that when I was here in Q3 reporting, I told Arne that I would bet on a 30% growth in the fourth quarter. And well, I'm a bit sorry to say that we just missed it by about NOK 0.8 million. That translates into less than 2 hours of production time. So it was very, very close. I guess our employees had to do some more Christmas shopping than I anticipated. Well, that's fine, well deserved. So -- but -- this is where you, Arne, Norwegian bill, I don't have many of those anymore, but this is my last one.

Yes. So the growth was very impressive, all things considered. We are in a situation where our biggest office is under frequent missile attacks from Russia. And despite that, we delivered 29.4% growth. It's quite amazing, I would say. The growth comes partly from new customers. They accounted for like 12% of our total revenues in Q4. More importantly, though, the growth came from our new cloud and application services, which constituted around 40% of the total growth. So we are very happy to see that line of business also now taking off and hopefully, we'll continue to do so through 2023. On a year -- full year basis, we had a 24% growth. So this was not just a one-off effect from Q4, but we have constantly delivered very strong growth throughout 2022.

On the gross profit side, we actually did make 30% just about and 25% on a full year basis. We have considerably higher personnel expenses in the quarter. That's somewhat driven by a weaker NOK versus our dominant currencies of USD, which we use in Ukraine and the euro for Slovakia and now has a more recent the Czech Koruna and the Polish Zloty. So that all contributed to the reported figure in NOK been higher. We also see that after last year's or '21 lockdown effect. We now do some more traveling. We have more social activities and so forth. And last but not least, we have invested quite significantly in recruitment capacity in these new occasions in Central Europe. Obviously, it takes more effort to drive recruitment in a market where we are a newcomer or nobody has heard or mention of Itera before. So it takes some more time to penetrate that.

On the OpEx side, we also see a sharp increase of 42%. Again, that's partly due to the new offices as well as some external recruitment fees, et cetera. And we have depreciation of NOK 8.8 million, which is up from NOK 6.3 million. Included in those numbers are a write-down of leasehold improvements and furniture in parts of the Kyiv office that we decided to exit in November. But because of obviously a drop in the growth trajectory that we had there. And also even before the war, there was less usage of the office as people were getting a customer to working from their home offices part time of the week.

And we also had another NOK 1.8 million in other out-of-pocket expenses directly related to the invasion of Ukraine. And that had to do with acquiring Starlink and power banks and so forth for our employees. So they could also be sure to have full uptime during energy shortages and downfall of the other 2 main Internet lines we have into the office and also, of course, to home offices. So that gives us even more robust protection against any attacks.

Also, we contributed to -- with the charitable donations, both through our employees who generously set of part of their salaries to salaries -- to charity, and the Itera matched the same contribution. So we have been able to provide the Ukrainian Army with, for example, SUVs, and drones, et cetera, that they need to be able to their defense of Ukraine, which is very important, not only to them, but for Europe as a whole. So we appreciate them standing in the front line of this conflict.

We had a resulting EBIT of NOK 19.4 million, which was up from NOK 18.1 million from last year, giving an EBIT margin of 9.5% versus 11.4% of last year. So if we adjust for those kind of direct cost of the war, we would have had an EBIT margin of around 11.0%. For the year as a whole, we delivered EBIT of NOK 77.2 million, which was on par with 2021. We delivered cash flow from operations of NOK 41 million, slightly up from NOK 33 million of last year or the year before, I should say, still in 2022. And we ended with a cash balance of NOK 42 million, which is the appropriate level, I would say, in terms of having sufficient liquidity for our working capital. And we ended with 698 employees or 700 on average for the quarter. So that's up 13% end of period and 16% on average. For the year as a whole, we had an average headcount, which was 22% higher than in 2021.

So I just wanted to show you the development in our quarterly revenues and earnings. We see that there is a quite steep curve on the revenue growth side. In fact, we have almost delivered 22% annual growth over the last couple of years, and we have done so with a pretty good profit of 11.6% on average. You will notice that the last couple of quarters have been somewhat below the average.

So I'll go and explain that a little bit as well. For 2021, we had an EBIT margin of 13.0%. And we actually had a margin expansion on our existing business of 1.6%. But this direct cost of the invasion had a toll of negative 1.0% on our margins. And I should stress that these are just some specific costs that we have identified as out-of-pocket costs. If we had included the massive effort done by the whole organization inside and outside of Ukraine in managing the crisis internally, making sure that we have a consistent and strong deliveries to our customers while safeguarding our people, trying to calculate that would, I guess, leave us depressed in terms of what could have been. But we are very happy to be able to support in the manner we have done for Ukraine, and we will continue to do that.

We have -- as mentioned, we also have invested in 3 new offices during the second half of 2022. And obviously, it takes some time before we can recover all the start-up costs in terms of setting into the place into a new organization with especially recruiters, but also other types of management and other overhead. So that I think we will -- during Q1 will be sort of up to a more regular run rate in terms of achieving profitability in those new locations as well. So that's not a big deal, but it does leave us very well positioned for future growth and less reliable on a single location.

Lastly, we has -- we have, as mentioned many times invested heavily into this cloud offering. We need to have in place quite a large organization to be able to deliver on all aspects of this kind of delivery and also have enough manpower to be able to take on larger and also multiple cloud migration projects at the same time. So this has been a conscious decision to run with a larger organization, then would be profitable in the short term. So again, this is something where we start to see the tail end of that kind of investment. And I think -- or it's -- the losses have gone down considerably in the last couple of months, and we expect that to continue into H1. And probably by H2, we will turn a corner on that one. And it will be a very important vehicle for us to achieve a margin expansion in the future as we're then able to packet here both our resources irrespective of location and combine that with the IP that we have developed and should, therefore, be able to deliver to the customer at a much higher speed and at a lower cost than sort of the traditional development efforts.

Statement of our cash flow. As mentioned, NOK 41 million from operating activities. Not much on the investment activities, just NOK 3.6 million by half of last year's or 2021. And the same is the case with the year as a whole. We invested NOK 15 million versus NOK 33 million in 2021. In Q4, we have a splash out quite considerable cash on financing activities, namely a dividend of NOK 0.30 per share to -- back to our investors. And also indirectly, we have also purchased 600,000 of our own shares from the marketplace, costing about NOK 8.5 million.

So those shares are intended to be used in the upcoming share purchase programs for our employees. As we find it very beneficial to have our employees on the ownership side in order to have same motivation and same targets as our investors. Yes. 12-month rolling cash flow is NOK 67 -- sorry, EUR 76 million -- sorry, NOK 76 million, up NOK 6 million from the year before, but not as strong as 2020, which was a corona era where there were some strange impacts, I would say, on the cash flow, among others, from a government providing some deferred payments.

Looking at the dividend payouts. Arne mentioned that the Board will propose to the General Meeting to distribute a dividend of NOK 0.30 as an ordinary dividend, and it will also, as tradition has it ask for an authorization to distribute a supplementary dividend during the year as well. Our share price was NOK 15.2 at the beginning of 2022, ended at NOK 13.45. And we paid dividends of NOK 0.50 in the meantime. So a decline of 8%. And I think that's comparatively quite strong compared to our peers, both in the Nordics as well as globally as tech-related shares have taken a beating during this year, as you may know.

With the share purchases, we have currently a holding of 1.6 million of our own shares. So they were valued at approximately NOK 22 million at the end of the year. And we will continue our high and consistent distribution of earnings as we are still intending to pursue an organic growth strategy and therefore, we'll distribute all surplus liquidity here as fast as possible, I would say, possibly in combination with share repurchase.

Finally, I look at our balance sheet. It's up NOK 13 million to NOK 234 million. It's most notably on the receivable side that we have an increase, and that's obviously linked to the high growth that we're experiencing. And on the liability and equity side, it's mostly the equity that increases by NOK 9 million. So we end up with an equity ratio of 21% up 3% points from 2021. And it would have been 3 points higher if it had been for this IFRS 16 leasing standard, which makes us take all the office lease agreements, for example, into the balance sheet.

So that was it. Quick word on the outlook. We don't guide specifically, but just to say that we continue our regional expansion in Central Europe and also in the Nordics for both, of course, on attracting more customers as well as more talents in these markets. We have an ambition of continued high growth. Macroeconomic environment will influence, of course, whether it will be a very high growth or a quite good growth, but we are quite positive that there is a strong market for digitalization still out there, which is an important vehicle to receive -- to achieve cost savings as well as provide new business opportunities. And we are ready to take on more and larger cloud transformation cases.

We are positioning ourselves strongly to be able to help both Ukraine and Norway with -- or the Nordics, I should say, with the green energy shift, which needs to be coupled with a lot of digitalization. And we know Ukraine has an abundance of IT talent, and they are also a future positive energy provider to Europe after the invasion is over, hopefully soon. And although we have a strong focus on growth, we will continue to do so on a profitable note. And we will have cash flow generation as a key focus point still to come.

So that's it. I don't know if there are any questions online.

[Unknown Executive]

We have no questions today.

[Bent Hammer, executive]

So then let's just end on a note that we will continue to stand by Ukraine. And we are very much open to have a one-on-one discussions with you if you we'd like to have so. Just feel free to contact me. I will get Arne to join if needed. Otherwise, I'll leave him to pursue more deals.

[Arne Mjøs, executive]

Very good. Okay. I think that's all. Let's do this for all the Ukrainian for the support together we are making. So hopefully, the war will end and we'll back to a normal situation. But we stand together as a company, really looking forward. I think you have very strong figures that you have presented. We going forward for the first quarter that will launch on the 11th ...

[Bent Hammer, executive]

Yes, 11th of May. Yes. So hope to see you back then.

[Arne Mjøs, executive]

Yes. Okay. Goodbye.