Webstep ASA

OSE:WSTEP

Earnings Call Transcript 2020-Q2

[Arne Norheim, Chief Executive Officer]

Welcome to our second quarter 2020 presentation of our results. My name is Arne Norheim, and I'm the CEO of Webstep ASA. I will be presenting our results together with our CFO, Liv Annike Kverneland. The presentation will be taped and made available after the call. We will answer questions after the presentations, and you may post questions online. Now we have no change to the agenda as we've gotten used to it over the past few quarters, so let's get right into it, shall we?I'm pleased with the results given the situation we, as a society, are in. The investments we put in place last year are starting to yield results, and for the second quarter, we saw revenue grow by 6% and EBIT grow by 18%. The market for IT expert service is strong, and we are pleased to see that most of our clients, even those who were significantly impacted by COVID-19, have renewed their contracts with us for the fall. This has allowed us to return our recruiting activities back to normal after 4 months of reduced activity. We launched Webstep Solutions late last year. Solutions is a natural next step for Webstep. IT is complex, and not every client is able to design, build and implement the solutions they need on their own. The intent of Solutions is to use our expertise to deliver solutions and products to our clients that solve their problems. But launching a new service line in the middle of a global pandemic brings its own sets of challenges with it. And I'm pleased though that, despite of COVID-19, that we have experienced significant interest in our offerings and are registered important signings and seen strong growth in the second quarter, helping contribute to the overall growth for the company for the quarter. Sweden continues to do well, delivering another strong quarter. Despite a difficult market, we managed to keep a high activity level among our consultants which yielded an improved profitability on our Swedish operations. Finally, in regards to dividends, the Board maintains its intention to distribute dividends in 2020. Moving on. I've been pleased to see that despite the special situation of the second quarter, there has been no disruption to the services we provide to our clients. Our focus on high-skilled experts have allowed us to remain mostly unaffected by the situation as our clients have continued to contract our services. Most clients, as I mentioned, have renewed their contracts with our consultants for the fall, giving us confidence to accelerate recruiting for 2021, even clients which were severely impacted by the COVID-19 crisis. Most have retained our services through the spring and summer and extended their contracts with us through the rest of 2020. And now that we return from vacation, we experience high activity in all the regions that we operate in.Webstep Solutions saw a significant jump in revenue in the second quarter and its first positive results in the month of June, and we're pleased with the development of this business segment, registering our first contracts with recurring revenue booked in the second quarter. It is our objective that recurring revenue from this segment will be an important contributor to revenue and results of ours in the coming years. Our municipality offering, which so far is sold to 1 client, continues its development and is scheduled for a broader market launch in October. The product allows municipalities to more effectively collect and report demographic data to the broader public as required by government regulations. The tool includes a decision support function, which will give municipalities the ability to reach good decisions faster.And our partnership with GK Inneklima has yielded fairly immediate results with the signing of a strategic contract with GK towards Statsbygg to build a smart building platform for tomorrow's buildings. The planning for this work is ongoing, and we're anticipating work to start up in early fourth quarter. Now another important contract signature is our partnership with Enova. For the past year, Enova has sought a technology partner that can lead the work to design and build a new cloud-based business platform called plattform 42. The new platform is to be a toolbox for digitalization of energy and climate incentives. Now Enova's ambition is that this platform will contribute to drive lasting changes in our society and people's behaviors necessary to reach a climate-neutral society. The technology partner is to support Enova end-to-end over a 4-year period, including IT advisory, projects, cloud and development and maintenance of all IT activities for Enova. We're pleased to be selected by Enova to be the lead partner during this 4-year period and look forward to contribute to Enova's mission of reduced climate footprint through reduced gas emissions, development of energy and climate technology and a strengthened security of supply. This contract fits well within our climate portfolio, which include, among others, the climate dashboard we built and delivered to [ a ] municipality and our partnership with GK Inneklima.Now the second quarter is the first full quarter, with COVID-19 dominating our lives. And COVID-19 has been disruptive to a number of our clients. Our Webstep has fared well during this time by being responsive and supportive of our clients' needs. Some of our clients have been actively involved in the response to the COVID-19 threat. Laerdal Medical, a global provider of products and services to the health care industry and a longtime client of Webstep, has played an important role in the Norwegian response to the global pandemic. During March and April, Webstep's senior consultants supported Laerdal in the development of a new digital app for peer-to-peer training related to COVID-19 protection equipment. Access to high-end developers working closely with Laerdal Medical's own professionals allowed Laerdal to quickly respond to concrete needs and launch their tool to the market. And with the support of our consultants, this app is now modified for use in 19 countries and ensures that health care personnel receive proper training in the use of protective equipment and thus reduce the risk of transmission. We're proud to support Laerdal Medical's mission of helping save lives. Now turning to our operations. We ended the quarter with 414 employees, and this is up 28 since last year. Second quarter recruiting, which is really recruiting for the second half of 2020 due to the 3-plus month lag we typically experience with our recruiting target group of experienced professionals, was substantially reduced given the uncertainty in the market. With summer behind us and most contracts renewed, our focus has again turned to active recruiting. We anticipate demand growing for IT professionals through the fall and into 2021, and growing our consultancy base is our key focus for the second half of 2020. Now I thought I would comment a little bit on the effect on COVID-19 to our own organization. Most of our consultants have worked from home office during the second quarter. The transition to home office went well and was mostly complete by the end of March. Now our business lends itself well to remote work, and IT developers are particularly adept at working in front of their computer at home. And we work closely with our clients to help them transition to remote work. I have to admit that we saw some skepticism on whether -- among our clients on whether remote work would be effective, particularly from clients who had previously not deployed remote work as part of their work habits. However, I believe from speaking with most of our clients that this has gone very well and that the use of remote resources and work-from-home solutions likely will be more acceptable and available even after the pandemic is behind us. What did have an impact, however, was the closing of schools and kindergartens. What we saw was an increase -- significant increase in hours claim for home care and sick leave. For our consultants with young children, juggling home care with work was, for some, a significant challenge. Some worked evenings or in shifts with their spouse to make up for the time caring for their children or loved ones. But for some, a full workload was impossible. Now that schools and kindergartens are again open. It is an important reminder of the importance of keeping transmission and infections at a minimum while we await a vaccine for the population so that businesses can stay open and keep our economy going. Now to better serve our Swedish market in Sundsvall, we have consolidated the office into Stockholm and we will serve Sundsvall from our Stockholm office going forward. I will now turn over to Liv Annike, who will take you through the financials.

[Liv Annike Kverneland, Chief Financial Officer]

Thank you, Arne. And this has been quite an interesting quarter from the perspective of the CFO. Managing risk in uncertain times with frequent management meetings on video and forecasting where you have no idea whether your assumptions will hold and all the while having a 3-year old running around with mom and dad as their only -- his only playmates, it's been quite a steep learning curve. But as Arne mentioned, we are very pleased to see that our revenues grew by 6.4% in the second quarter of 2020. The demand in the market for Webstep services has been strong, and our business model has worked well in these challenging times. Our society has been faced with challenges. From the lockdown, our employees have worked from home, as Arne mentioned, and some of our customers have faced serious challenges. Webstep has a diversified customer portfolio, which fortunately makes us less vulnerable to changes in demand from single customers or sectors. The revenue growth in the second quarter was driven by headcount increase of almost 6% and increased hourly rates. We also see that the growth potential was higher. We have lost billable hours with a revenue impact of approximately NOK 10 million in the second quarter. These are, of course, only estimates. But looking at 2019, which was more of a normal situation, we see a significant fall in utilization and, as Arne mentioned, the increase in family care hours, which allows us to calculate this impact to NOK 10 million. The loss was especially significant in April, but it stabilized over May and June as the schools and kindergarten opened in Norway.The events, this particular quarter, had some effects on our cost structure. Other operating costs have decreased as a consequence of fewer events and less traveling. Personnel costs have had a net increase, first and foremost, due to the increased revenues from consultants, but also related to something that we call the COVID-19 salary program. This is a program that we introduced early on in the pandemic in order to provide security and predictability for our employees because our employees' salaries are, to a very large extent, connected to the revenue that they generate. But this salary program has been more or less funded by the cost savings that we've had from less traveling, less social events and also from the government grants from the Norwegian and Swedish governments. And the Norwegian and Swedish governments have, as most of you know, they gave all the companies reduced social security contribution tax and also increased family care leave compensation.And we have also seen a strengthening of our profit and profitability with an EBIT of NOK 23.2 million, which represents a strengthening of our EBIT of 18.6%. And an EBIT margin of 13.5%, and the margin has increased by 1.4 percentage points from 12.1% in Q2 2019. The net negative effect of COVID-19 on EBIT is estimated to be approximately NOK 1 million in Q2. We've had a strong cash flow in Q2 of NOK 11.6 million, while the cash flow in the corresponding period in 2019 was negative with NOK 19.9 million. The cash balance ended at NOK 50.8 million compared to NOK 5.7 million in 30th of June 2019. Of course, the corresponding cash flow in 2019 included a dividend of NOK 42.4 million to the shareholders, which had a significant impact on cash flow. The cash flow in 2020 is also positively impacted by the support measures from the Norwegian government as the payment terms for national social security contribution were extended. I will get back to this in a few slides. Looking at the figures from the first half, we've had revenue growth of 2.6%. This is driven by headcount and increased hourly rates. The estimated negative effect of COVID-19 on revenues due to billable hours lost is approximately NOK 13 million for the first half year.EBIT for the first 6 months ended at NOK 36.3 million, which is down from NOK 39.8 million the first 6 months of 2019. The main reason for the reduced EBIT is increased salary costs compared to 2019. The net negative effect of COVID-19 on EBIT is estimated to be approximately NOK 3 million in the first half year. The financial position of the group is strong with an equity ratio of 68.7%.So now I will turn over to the figures from Norway. The Norwegian segment represents approximately 85% of our consolidated revenues for the group. So most of the comments we had to the consolidated figures, both regarding revenue and EBIT, are valid for the Norwegian segment. So I will not repeat myself. Revenue increased by 5.3% in the second quarter compared to the second quarter of 2019. The increase is driven by increased headcount and increased hourly rates. The COVID-19 effect on revenues mentioned in the previous slide relates to the Norwegian segment.EBIT in Norway ended at NOK 20.5 million, up from NOK 18.6 million. This represents an EBIT margin of 14%, up from 13.4%. Looking at the first half year, revenues in Norway are more or less flat at NOK 300 million while EBIT ended at NOK 31.1 million, down from NOK 38.2 million. Looking at the revenue growth in the different geographic regions of Norway, we see a different picture than for Norway as a whole segment. Regional offices, driven by the larger cities of Trondheim, Bergen and Stavanger, in addition to Kristiansand, experienced an accumulated revenue growth of 14.1% in the second quarter and 16.4% in the first half year. This illustrates the previously mentioned challenges we experienced with high employee churn in Oslo in 2019, which has now stabilized.The key figures from Sweden. Sweden accounts for about 15% of our revenues. Our business in Sweden has not been affected by the COVID-19 outbreak to the same extent as in Norway since schools and kindergartens have been kept open there. Sweden is more or less flat on revenues in Swedish kroner in Q2, but when converted to Norwegian kroner, the revenue increase for the group is 13.1% due to the weakening of the Norwegian kroner. Further, there has been a shift in revenue mix in 2020 in Sweden where more of the revenues are generated by our own consultants. And this also contributes to an increased margin. The Swedish team has focused on rightsizing costs, which we see the effect on in the increased profitability. EBIT ended at NOK 2.8 million and EBIT margin of 10.4%, up from NOK 1 million and a margin of 4.2%.Revenue growth in the first half year was 17.1% in Norwegian kroner and 6.5% in constant currency. EBIT was NOK 5.2 million in the first half year compared to NOK 1.6 million in the first half of 2019.Okay. Cash flow and net debt. You can find the balance sheet and the cash flow statement in our quarterly report, so I'll not go through this in detail, but just mention a few highlights.As I mentioned, we've had a strong cash flow in the second quarter. Operating cash flow of NOK 14.1 million, and this includes a temporary positive effect of NOK 8.7 million in payment terms of taxes. So cash and cash equivalents ended at NOK 50.8 million in the first quarter. We've also -- we also have an unused revolving credit facility of NOK 110 million in Norway and SEK 5 million in Sweden, and we have not been in breach with any covenants.So that's all for me, and I will leave the word to Arne who will take you through the outlook.

[Arne Norheim, Chief Executive Officer]

Thank you, Liv Annike.Okay. Since the return from the vacation period, I've been pleased to see a high activity level in all of our regions, both in Norway and Sweden. And despite restrictions in how we meet clients and candidates from a traditional physical sense, we experiment -- we experienced high demand for our services. And as I mentioned earlier in the presentation, most clients have renewed their contracts with us, and newly signed contracts in Solutions give me -- gives us a solid foundation for the second half. The reduced recruiting activity in the second quarter would likely have a short-term effect on us in the fourth quarter, but we're working hard to mitigate this and catch up. Third quarter headcount is expected to be higher than in the second quarter. In March, we rolled out a COVID-19 salary program for our consultants, as Liv Annike mentioned to you, protecting their income in case a client cancels a contract due to COVID-19. We've decided to extend this through October, but do not expect this to materially affect our results in the third quarter. And given the uncertainty of COVID-19 that remains, our focus in the coming quarters is to grow our existing locations organically through high focus on recruitment and improved utilization.And with that, I'm now open for questions that you may post online, and we'll read them up here. And I'll do my best to answer them together with my CFO, Liv Annike.

[Unknown Executive]

So if there are any questions out there, just post them online, and we're happy to answer those directly here.All questions related to second quarter and first half.There's been no questions at this point in time.

[Arne Norheim, Chief Executive Officer]

Then we will conclude this broadcast. And I thank you for listening, and have a great day.