Webstep ASA

OSE:WSTEP

Earnings Call Transcript 2020-Q1

[Arne Norheim, Chief Executive Officer]

Welcome to our Q1 2020 presentation of our results. My name is Arne Norheim, and I'm the CEO of Webstep. I will be presenting our results together with our CFO, Liv Annike Kverneland. We're not able to facilitate questions at this time, but I do encourage you to submit any questions that you may have to our Investor Relations mailbox at [e-mail]. Now we'll go through the following agenda today. So let's start with the highlights. First quarter is behind us, and given the circumstances, I'm pleased with the result. Of course, the world has changed since the start of the year. The quarter was going well, and we saw good traction in our recruiting efforts. March 12 changed all that. With COVID-19 causing the closedown of Norway, many of our clients were impacted. We worked closely with those clients in the early days of the crisis to ensure continued support while ensuring that our employees were cared for and protected. We have had 1 confirmed case and 4 suspected among our employees and all have since recovered. The impact to revenue of about $3 million for the first quarter is mostly caused by increased absence due to sickness and home care as well as some lower utilization. Now let me take a moment to commend our consultants. During the chaotic early days, our employees seamlessly transitioned to home offices and continued to provide uninterrupted service to our customers to the best of our abilities. And I know many of them are shareholders and are listening to this broadcast, and I want to make a point of thanking them for keeping our customers' lights on. Thank you. Sweden had a strong quarter and grew at 14% versus last year at constant currency with an EBIT margin of close to 9%. The team has worked hard to right size the cost while recruiting new talent and, despite the situation, delivered strong results. And due to the COVID-19 situation, the Board will await further developments of the impact before potentially deciding on a dividend for the financial year 2019. In our strategy update back in November, we laid out ambitious plans to invest in our business to ensure continued growth and profitability for our company. We said that these investments would impact our profitability in the short run but were necessary to meet our long-term objectives of delivering profitable growth above market average. I thought it prudent to give an update on our progress. Now last year, we strengthened our recruiting capabilities for our core services by adding staff across our key regions. We were pleased to see that our regional offices are doing well, most growing in double digits. As discussed before, Oslo experienced high churn in 2019, which has since stabilized, and I expect that Oslo in the coming quarters will continue -- will contribute to our growth again. We also announced the formation of Webstep Solutions last year, an ambitious effort to capitalize on what we see as unique market opportunities for custom-made solutions and services. Now our consultants are among the best that Norway and Sweden has to offer. They know what capabilities lie in leveraging technology to its fullest, and they possess unique insight into the challenges that our customers face and how they can be solved. Now part of what we do in Webstep is to create forums and meeting places, where our consultants can collaborate, learn and develop. And we encourage this for our consultants' development and to the benefit of our customers that we serve. Webstep Solutions is about harnessing this creativity and commercializing the solutions created to the benefit of our customers. Now one example of this is an advanced analytics engine develop by our AI consultants in Bergen, an engine that today form a key foundation in many of the solutions that we work on. Now let me mention 2 key products in development and an important partnership which we believe have high commercial value in the near term. One key product is our analytics solution for population information for municipalities which is nearing completion. The product is developed in collaboration with our first customer, Larvik kommune, and the beta version is already in use. Our objective is to be able to offer this to the broader municipality market in the fall. We've also developed and delivered a climate portal for a municipality which provide them with insight into everything from air quality and to stuff like [ bike path ] use. And both of these products are [ bolstered ] on IP and are built to be delivered as a service to municipalities across the markets that we serve. Overall, our investments for the first quarter in solutions amount to a gross cost of NOK 3.6 million booked to our operating results. Our revenue will grow significantly in 2Q based on the contracts already signed. And given our strong pipeline, we are confident that Webstep Solutions will be an important contributor to growth for our company in the quarters to come. We have also partnered with GK Inneklima, Scandinavia's leading end-to-end technical facility manager and contractor. So let's turn to the next slide. See, through our partnership with GK, we will collaborate with them to develop the building management solution that can collect, analyze and visualize insight from the various data sources within a building. In practical terms, it's about automating the building processes, collecting all data streams and ensuring that the data streams talk together in a common ecosystem. In addition to providing better insight and decision-making support, the solution will simplify life for those who work in the building, providers and visitors to the building. The end goal is that the buildings themselves will become a service that deliver to the various user groups. Now there's a growing demand in the market for these types of solutions. And in collaboration with GK, we will develop solutions that collect and analyze data from different building systems, sensors and core systems. I believe this partnership represents an important growth opportunity for our company, and I look forward to collaborating with GK in supporting their clients. Now let's move to the next slide. See, COVID-19 has made the outlook for the year more open, given the uncertainty in the market. Given that, I wanted to share with you the sector breakdown of our revenue for the first quarter. Our customer base is fairly diverse, with about 30% of our revenue generated from our top 10 clients. We're well represented in most sectors, and approximately 26% comes from the public sector, while oil and gas represents about 11% of our revenue. And this last point is important, COVID-19 has all but overshadowed the substantial challenges facing our largest industry. But there's no doubt that our region exposed to this industry is experiencing an impact that comes on top of the COVID-19 challenges, and our Stavanger office bears the brunt of that. But I'm proud of the work the team has done to support the clients in this sector with creative solutions to ensure projects continue and finding new opportunities where consultants have been impacted by the downturn. Now let's take a look at some of our customer cases. Norwegian is, in many way, a modern-day business fairy tale for Norway, a small regional service provider in Norway that grew to become a global airliner that along the way revolutionized travel for the average citizen. Critical to its success was its focus on digital services, automating the ticket sales process and, later, the customer journey. Webstep is proud to have served Norwegian as a trusted adviser and supplier of key developer skills for the past 10 years. Our consultants have played an instrumental role in developing and servicing Norwegian's digital platform. And now, during perhaps the company's biggest challenge, Webstep consultants continue to support Norwegian in keeping their critical IT system operational. Now another important case is Larvik kommune, the Webstep Solution case I mentioned to you earlier. Larvik, like all municipalities, are required by the central government to report on population metrics and changes to the municipality demographics. Significant manual time is spent by Larvik and all other municipalities in performing these duties. Webstep Solutions has developed -- has collaborated with Larvik to develop a data analytics platform and a digital dashboard that automates this work. Larvik has signed on as its first -- as our first customer and a number of other municipalities have expressed interest in the solution. The product is hosted on a cloud platform and will be made available to the broader municipality market during the fall of 2020. Norgeshus is one of the largest providers of new building construction in Norway, known for its quality and a builder that is serious about digitizing its business. For 10 years, Norgeshus has relied on Webstep to realize the digital transformation of the company. And they have a holistic approach to digitalization. It's about improving the effectiveness of the work from the architect through the building process and, finally, documentation, handover and use. This is complex, and Norgeshus rely on Webstep to realize these objectives. Over the years, Webstep has contributed to the development of the complete cloud-based project control tool, Norgeshus KPD. But in addition, services and IT Solutions connected to other enterprise processes have also been developed and implemented, including a recent project-related to implementing digital contracts and electronic signature. This last project involving digital contracts and electronic signature came at a crucial time, allowing the sales processes and project collaborations with providers to continue uninterrupted, despite the COVID-19 situation. Now I also want to take this opportunity to highlight a Swedish customer where Webstep, for the last year, has been instrumental in supporting them on their digital transformation journey. Björn Lundén is a knowledge and software company that is primarily serving customers within the SMB space. Their solutions are simplifying processes connected to HR and accounting, among other business-critical matters. Now Webstep has been essential in setting up Björn Lundén's data pipelines using Kafka, an open-source stream processing software platform to stream data from more than 10,000 databases. The objective is to create an AI-based adviser that can improve resource management for Björn Lundén's customers. So to sum it up, our consultants work the hard problems and deliver real value to our customers. These are only 4 of many customer success stories that I think are relevant to mention in order to showcase the value we bring to our customers and the customer relationships that we have built. Now our base of consultants grew for the third quarter in a row on strong performance in the regional offices. Churn in Oslo has stabilized and the objective is to establish consistent growth in this market as well going forward. Now the COVID-19 situation landed in our laps in the days leading up to March 12 when the shutdown order was given by the Norwegian government. We know our employees are critical to our customers and ensuring their health quickly became our #1 objective. All joint activities were stopped, and we worked diligently with all of our customers to ensure our employees could work from home while supporting them from their home office. This transition went smoothly. Now our business model is based on our employees enjoying substantial freedom to choose how much a person should work any day, any week and in any given month with salaries tied directly to invoiced hours. This is a model that has served our employees and our company well, but it was not built for a situation like COVID-19, with government shutdown of whole sectors, schools and kindergartens. Now our company is our consultants and our customers depend on us. So to give our employees a safety net and some predictability, we implemented a minimum base salary for all impacted employees from March and 6 months forward. This has been well received by all of our employees, and it has been an important element to ensure our employees can devote their full attention to keeping our customers happy. Now although our bench grew quickly in the first days of the crisis, well helped by the parallel oil price case -- crash, all regions have reported continued high sales activity and demand for our consultants. Our bench situation today is much improved and the situation, as I see it, is under control. To date, we've had no layoffs or furloughs of employees. Now let me turn it over to Liv Annike to take you through the financials.

[Liv Annike Kverneland, Chief Financial Officer]

Thank you, Arne. As Arne mentioned, the year started on a high note with a strong market for IT services and many new Websteppers joining the organization. We started to see the positive effects of actions taken to restore growth, the arrows were pointing upwards. But then came COVID-19. Fortunately, our industry is not as exposed as a lot of other businesses in Norway and Sweden, but Webstep has, of course, also been affected by the major restrictions imposed in our societies. The prerequisites for revenue growth in Q1 were definitely there. Increased average headcount from 399 to 410, increased hourly rates and 1 more work day compared to 2019. The outbreak of COVID-19 impacted revenues with at least NOK 3 million due to reduced production capacity following the closing of schools and kindergartens in Norway. We also had a few projects that were abruptly canceled or postponed, which affected revenues. This took us to a slight revenue decrease of 0.8% from NOK 184.4 million in Q1 2019 to NOK 183 million in Q1 2020. As Arne mentioned previously, the picture is a bit different if you look at the geographic regions where Webstep operates. I will get back to this when we take a closer look at our segments. EBIT ended at NOK 13.1 million, down from NOK 20.2 million in Q1 2019. I will highlight a few explanations for the decrease from 2019. First of all, the revenues lost due to COVID-19 have, of course, affected our EBIT. Also, the cost of establishing Webstep Solutions, it does not meet the criteria for capitalization on our balance sheet, so this has a direct effect on EBIT. The net cost in Q1 related to Webstep Solutions was NOK 3.1 million. Webstep Oslo, Stavanger and Trondheim changed offices in 2019, which has increased rental costs compared to Q1 2019 by approximately NOK 1 million in the first quarter. These are some of the changes which we believe will make the organization better fit for future growth. So the EBIT margin ended at 7.1% compared to 10.9% in 2019. Net cash flow was strong with NOK 13.7 million in total and NOK 17.2 million from operations. Earnings per share ended at NOK 0.36 per share for Q1 compared to NOK 0.58 in Q1 2019. The group has a solid equity ratio of 64.8% at the end of Q1, down from 65.7% at the end of 2019. So let's move on to the segments. The Norwegian segment represents approximately 85% of total consolidated revenues for the group. So most of the comments that we had to the previous slide is also valid for Norway, the Norwegian segment. Revenue decreased by 3.8% in the first quarter of 2020 compared to the first quarter of 2019. In addition to the COVID-19 outbreak, the Norwegian market is also affected by the drop in the oil price, as Arne mentioned, especially the cities on the west coast of Norway, such as Stavanger and Bergen experienced a fall in demand from companies within the oil industry. But Webstep has a diversified customer base, which makes us less vulnerable to changes in demand within a single sector. Looking at the revenue growth in the different geographic regions, which you can see. You can see a split in your -- in the left column. There is -- we see a different picture looking at the regions compared to Norway as a whole segment. The regional offices driven by the larger cities of Trondheim, Bergen and Stavanger, in addition to Kristiansand, experienced an accumulated revenue growth of 18.5% year-over-year. This illustrates the previously mentioned challenges we experienced with high employee churn in Oslo. The growth in the regional offices has more or less offset the revenue lost in Oslo. EBIT in Norway ended at NOK 10.6 million, down from NOK 19.6 million. This represents an EBIT margin of 6.8%, down from 11.6% in 2019. So let's move on to Sweden. The Swedish segment accounts for approximately 15% of the consolidated revenue. Our business in Sweden was not affected by the COVID-19 outbreak to the same extent as in Norway, since schools and kindergartens have been kept open. We are pleased to see that Sweden had a significant revenue growth in Q1, 14% in constant currency. And the fall in the Norwegian kroner had a positive impact on revenues in Sweden in the consolidated statements. And the growth, in Norwegian kroner, was 21.3%. All major revenue drivers have contributed to this growth. The Swedish team has focused on rightsizing the costs, which we see the effect of in increased profitability. EBIT ended at NOK 2.5 million, an EBIT margin of 8.9%, up from NOK 0.6 million and a margin of 2.7% in Q1 2019. Cash flow and net debt. You can find that balance sheet and the cash flow statement in the quarterly report, and I will not go through this in detail, but just mention a few highlights. In the first quarter, we had a cash flow from operating activities of NOK 17.2 million. Cash and cash equivalents ended at NOK 39.1 million in the first quarter. We have a revolving credit facility in the group of NOK 110 million and also the credit facility in Sweden of SEK 3 million. And we have not been in breach with the covenants in Q1. Thank you. Now Arne will take you through the outlook.

[Arne Norheim, Chief Executive Officer]

Thank you, Liv Annike. It's hard to predict the future given the COVID-19 situation, even as we see the infection rate in Norway fall to a faint trickle. The global impact is not yet fully understood or seen, and there are enough dire warnings about what the future holds. What we do know is that the COVID-19 situation creates both opportunities and threats in the marketplace. Digitalization is relevant in good times as well as in bad times, even if it is for different reasons. The market value expertise, and I believe we are well positioned to seek opportunities that undoubtedly will be present in the coming months. We did see productivity fall due to the closing of the schools and kindergartens in Norway. While in Sweden, we saw the opposite effect with productivity improving with home office. And as Liv Annike mentioned, they did not close the schools and the kindergartens, perhaps having that direct effect. Now that the schools have opened in Norway, we see productivity again return to normal levels, which is, I think, an important step in the recovery of our nation's productivity. And perhaps most importantly, although the market has slowed down, there is still a demand for expert developers in the market, and our solutions pipeline continues to grow. Now from a recruitment perspective, there is no doubt that the COVID-19 situation has had significant impact. Given the uncertainty of the situation back in March, we paused active recruitment processes for several weeks. We have resumed recruiting again in areas where we do expect we will see demand in the fall. Now from a headcount perspective, we expect to end in June with less headcount than end of March. But if you look at it from an average headcount by quarter perspective, we will continue to grow in 2Q as well as I anticipate we will grow in 3Q and 4Q as well. So with that, I want to thank you all for listening, and I wish you a safe and good summer. Any questions you might have, please feel free to send them to our mail address, [e-mail]. Thank you.