Webstep ASA

OSE:WSTEP

Earnings Call Transcript 2020-Q3

[Arne Norheim, Chief Executive Officer]

Welcome to our third quarter 2020 presentation of our results. My name is Arne Norheim, and I am the CEO of Webstep ASA. I will be presenting our results today, together with our CFO, Liv Annike Kverneland. We will not be answering questions at this presentation but feel free to send in your questions at [e-mail], and we will respond as quickly as possible.So let's get started. Now our agenda is unchanged from prior quarters. So let's just get right to it.Revenue grew 6.5% with an EBIT growth of NOK 1.3 million. Sweden continues to do well and contributing to the revenue and EBIT growth. We did this while operating with a lower-than-normal utilization, driven by weak market conditions on the west coast in Norway, due in large part to the oil industry downturn. Utilization did improve throughout the quarter, and we're entering the fourth quarter closer to normal levels.Now due to the uncertainty created by corona, we slowed our recruiting efforts in the second quarter. We deemed this necessary to ensure our focus was on keeping our staff and projects are not idle. The demand is now growing, and we are now recruiting actively in all markets again. Overall, we exit the third quarter with 11 consultants more than we did last year.Our financial position is solid. We laid a strong foundation for the company late last year. And despite the new wave of restrictions due to COVID-19, I remain optimistic about our market prospects and believe that 2021 will be a very strong year for our industry and for Webstep. The Board announced a dividend distribution for 2019 of NOK 1.60, which was executed on October 15 this year.Our company's vision is developing for tomorrow, and that fits squarely into what our customers are asking of Webstep. The world is going digital, and digital transformation is becoming the essential path to solve the societal challenges our customers face. Global mega trends like the cybersecurity concerns, the second digitalization wave, industrialization of IT and use of new technologies like AI and IoT influence our customers and create new demands. So our customers want more from us. Now we're used to this. And through our agile and high-skilled consultants, we customize and enhance our offerings based on market demand, based on technological expertise and partnership with key technology providers.Now we do this to ensure that we are well positioned to develop tomorrow's digital solutions and the society that we live in, whether that is to provide our clients with an expert developer, technical project or test managers, or project teams that deliver the projects and solutions, which drive our customers' digital transformation.But developing for tomorrow is also about community engagement. Our company and our employees that span across 9 different locations in Norway and Sweden care about the community in which we operate. Several of the projects we are involved in have a link to solving societal challenges, whether it is the climate dashboard in Bergen municipality or healthy indoor climate with GK. We're proud that our work is being recognized as both relevant and important to our society.In August, Abelia invited me to speak at their conference focusing on how to boost innovation in Norway. And here, I shared the story of how Webstep is making a difference because our business is not purely commercial. We have a responsibility and an obligation to our society in the markets that we operate in. Our ability to understand the world around us makes Webstep a more relevant and valuable counterpart to our customers.So let me share with you some of our customer stories. More of our projects are driven by the digital transformation wave, which is sweeping our society. An example of that is our support of Swipload, a new company which is offering a matchmaking solutions -- solution for the road transportation industry. Now the idea is to match senders of goods with empty trucks returning from deliveries to reduce waste through reduced CO2 footprint and improving the efficiency overall for the industry. Swipload has now turned to Webstep to staff and deliver the developers that improve the design and solution for them. By using our expert developers, Swipload can go from idea to production in record time, saving time and cost as well as securing their first-mover advantage.Now Swipload has been operational since the spring and now has more than 250 transport companies registered on their portal. The company is growing fast, and Webstep is hard at work supporting Swipload during these exciting times. And as Swipload service spreads and succeeds in connecting empty trucks with demand for transport services, there's also direct environmental consequence in reduced CO2 emissions. That's why this project is important in so many ways. If they succeed, we all succeed.Now another important case I'd like to highlight is our support of Ambita. Ambita is a Norwegian technology company with specialized expertise in the property management information systems. They, too, are transforming their business. But high data center cost and limited flexibility in their existing data center solution was a challenge to them. Their solution was to migrate to the cloud. Ambita turned to Webstep, the #1 cloud expert house on Amazon Web Services in Norway, to help migrate their application to the cloud. Our consultants worked with Ambita to plan, to design and execute the migration, resulting overall in a decrease of number of servers from 600 to less than half and a cut in their operational cost by 40%. Perhaps the most important thing though is that Ambita now has a modern, flexible data platform that support their quests to expand and speed up development of their service offerings in their market.Now another important aspect of digital transformation is that data offers new insight and untold opportunities. The next case is a great example of that. Insurance fraud is one of the biggest challenges the insurance industry is facing, causing billions in fraudulent claims that, ultimately, the insurance buyer, you and I, end up paying for. Finance Innovation, a Norwegian fintech cluster in Bergen, is working with 3 of our largest insurance brokers in Norway to train their prediction models built on artificial intelligence to analyze insurance claims in order to detect fraud.Webstep is the technical partner, providing expert project teams that develop and build the cloud-based solution, allowing the company -- allowing the competing insurance companies the ability to share their data without access to their predictive models nor violating data privacy. The idea is that the solution will become an industry standard solution used by all insurance companies to detect and stop fraudulent claims.Our final case for today is a case from Sweden and our customer eSamverka. Now representing the Swedish authorities, eSam is working to digitize the Swedish society. In our digital world, professional websites require advanced content management solutions. A company's website shall inform, greet, transact, interact and protect all at the same time. Many old websites are built on outdated technologies and serve as a gateway for hackers and digital intruders, as they seek to wreak havoc on unsuspecting companies. As a result, more and more companies are selecting Sitevision as their digital framework for web content management. And as a partner of Sitevision, customers turn to Webstep to gain access to our experts that can assist them with structuring, developing and establishing their new sites on Sitevision. And eSamverka is one of several companies that have done that and leveraged our expertise in making this happen.Now let's take a look at our business segments. Our expert IT developers, the technical project managers, form the core of what we offer the market. And recently, we expanded our offering into security services, offering penetration testing, ethical hacking and security assessments of a company's security readiness. We believe this offering will complement our overall business offering as well. The demand for resources is high. But in Stavanger and Bergen, the lingering effect of the oil industry downturn was still being felt in the third quarter. Now we're pleased to see that the situation is improving and that our bench is slowly returning to a more normal activity level.Solutions, our project and solutions service segment, is continuing to grow fast, and we anticipate this growth to continue in the fourth quarter and beyond. And as I've said before, I believe this segment will be an important factor to our growth in 2021.Our organization continues to grow, up 5% year-over-year. The oil and gas industry downturn, amplified by COVID-19, has resulted in a decline in staff in the Bergen market. The reduction in itself has been uneventful, but it's amplified by restrictive recruiting in this market during the spring and summer months due to the higher bench numbers than normal. Now both Bergen and Stavanger markets are improving, and we restarted our recruiting efforts there as the bench has been reduced.As an experienced and well-regarded player in the IT industry, we need to be ahead of the game and constantly invest in our employees. We're used to an active calendar with regular courses and meet-ups to grow our consultants' skill set. This is our DNA. Skill enhancement and certifications are, therefore, important to us. But new technology introduces new ways of working. We know that. Technology alone does not solve problems. And for that, organizations need to change. But value doesn't come from change alone, it really comes from the changes if they get adopted and used. And that's why change management skills have never really been more important than now. And we're proud that we have now more than 50 Prosci's change management certifications in our group of consultants and counting.The other key area in which we see a significant increase in certifications is in the cloud platform area, where we, as of third quarter, have more than 80 certified cloud professionals covering the major global cloud platforms.Now 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 I would first like to start with a few general comments on the third quarter.Seasonality will always affect the third quarter of the consulting business, as we are significantly affected by the summer holidays in July and August. In Webstep, the third quarter is also normally affected by annual events, taking place in the entire organization where we invest in competence development and social activities for our employees. Of course, this has not been the case in 2020. So compared to other quarters of the financial year of our business, the third quarter will always stand out as the quarter that contributes the least to both our revenue and our EBIT.That being said, let's have a look at the figures. We are pleased to see a revenue growth of 6.5% and a slight strengthening of the EBIT in Q3. Headcount has increased. Demand is good. Operations are steady, and the positive development in Sweden continues.The revenue growth of 6.5% in the third quarter is driven by a headcount increase of almost 5% and increased hourly rates. This is offset by a reduced revenue from subcontractors. And we also see that the growth potential is higher as utilization has been slightly lower compared to what is considered a normal level for Webstep. This is particularly visible in the offices on the west coast, Stavanger and Bergen, as Arne mentioned, which have also been affected by the downturn in the oil-related industries. Webstep has a diversified customer portfolio, which fortunately makes us less vulnerable to changes in demand from single sectors or single customers.The COVID outbreak has had some effects on our cost structure. Other operating costs have decreased as a consequence of reduced traveling, reduced events and so on. And personnel costs have had a net increase, first and foremost, due to the increased revenue from our consultants, but also due to salary costs related to the COVID-19 salary program that we introduced for the employees in March in order to provide them with extra security and financial predictability throughout the crisis. The increase in personnel and salary cost is partly offset by reduced costs related to social activities for the employees, as mentioned.We have seen a slight strengthening of our profit in Q3 with an EBIT of NOK 2.8 million compared to NOK 1.5 million in Q3 2019. We've had a net positive cash flow of NOK 2.6 million throughout the quarter, while the cash flow in the corresponding period in 2019 was NOK 3.2 million. The cash balance ended at NOK 53.3 million compared to NOK 8.9 million at 30th of September 2019.Looking at the figures year-to-date, we've had revenue growth of 3.7%. Revenues from our own consultants have increased by 5.8%. This is, first and foremost, driven by a higher average headcount, which has increased by 4.3%, and also from increased hourly rates.We made an estimation of the negative effect of COVID-19 on revenues after the second quarter, and this is due to billable hours lost. The effect that we estimated after the second quarter was approximately NOK 13 million. However, we have also seen a slightly lower utilization in the third quarter, as mentioned. And also revenue from subcontractors has decreased by approximately 10%.So EBIT for the first 9 months ended at NOK 39.1 million, which is slightly down compared to NOK 41.3 million in the first 9 months of 2019. And the main reason for the reduced EBIT is increased salaries and personnel costs.The financial position of the group is strong, with an equity ratio of 68.3%. And the Board of Directors decided to distribute a dividend of NOK 1.60 per share, amounting to a total of NOK 42.7 million in October. And the dividend was based on the financial statement of 2019, and the Board utilized its authorization, as granted by the Annual General Meeting on the 7th of May 2020.The year-to-date cash flow is strong at NOK 27.9 million compared to a negative cash flow of NOK 24.6 million in 2019. Last year's cash flow, of course, included a dividend of NOK 42.4 million. And this year's cash flow has been positively impacted by a temporary effect of NOK 8.6 million due to extended payment terms for taxes by the Norwegian government.Okay. Let's move on to the Norwegian segment, which represents about 85% of our consolidated revenues. So most of the comments that I had to the previous slides are also relevant for the Norwegian segment. Revenue increased by 5.3% in the third quarter, and the growth is driven by increased headcount and increased hourly rates, offset by slightly lower utilization, as mentioned, and a decrease in revenue from subcontractors. And the EBIT in Norway ended at NOK 1.7 million, up from NOK 1.6 million.Looking at the figures year-to-date, we had a revenue growth of 1.7%. And the most important revenue is from our own consultants, which had increased by 3.1%.Looking at the revenue growth in the different geographic regions of Norway, we see a different picture then for 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 8% in the third quarter and 13.8% year-to-date. This quarter's growth in the regions have slowed down slightly compared to the rest of 2020 due to the previously mentioned lower utilization and reduced headcount in the offices on the West Coast of Norway, Bergen and Stavanger.And let's move on to Sweden, which accounts for about 15% of our consolidated revenue. Sweden continues to deliver revenue growth and stronger margins, which is, of course, very -- we're very pleased to see. Of course, this is partly supported by the weakening of the Norwegian kroner. But revenue in constant currency also grew by 1.1% in the third quarter and 5% year-to-date. And our most important revenue comes from our own consultants, which has had a remarkable growth of almost 18% in the third quarter and 16% year-to-date. And revenue growth from our own consultants is driven by increased headcount and higher utilization compared to 2019. Further, there has been a shift in revenue mix in 2020 in Sweden, where more of the revenue comes from our own consultants, and this also contributes to an increased margin.The Swedish team has focused on rightsizing the costs, which we see the effect of on increased profitability. EBIT ended at NOK 1 million, and EBIT margin of 4.7%, which is up from a negative result of NOK 0.1 million in Q3 2019. EBIT was NOK 6.3 million year-to-date compared to NOK 1.5 million in the same period of 2019. And the margin has increased from 2.3% to 8.2% this year.Okay. Cash flow and net debt. You can find the balance sheet and further details on the cash flow statements in our quarterly report. So I will not go through this in detail now but just mention a few highlights.In the third quarter, we had cash flow from operating activities of NOK 5.7 million. And the reason for the decrease from the corresponding quarter in 2019 has to do with a particularly high change in trade receivables in 2019. Cash and cash equivalents ended at NOK 53.3 million, 30th of September. And we have an unutilized 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 in Q3.Thank you, and I will leave the word to Arne again.

[Arne Norheim, Chief Executive Officer]

Thank you, Liv Annike. As we look ahead, we are optimistic about the market for IT services despite the new lockdowns in Norway and Sweden. COVID-19 has accelerated the digital transformation urgency among our customers, and we predict high demand for our services as we enter 2021.Now one clear trend that has emerged during COVID-19 is an increased focus on the cloud. Our customer wants consultants with documented cloud experience in all their new engagements. Now cloud is not new, but the uniform request for documented cloud experiences in all engagement is a step change and acceleration of the trend we've seen. We were early in investing in cloud competency and hold a very strong position in the market. And we intend to maintain this position through our ongoing training programs.The acceleration of digital transformation has increased the need for technical advisory services. High-end technical experts that help the customer navigate the ever-changing landscape of technical possibilities are growing in demand. This fits us well, and we have seen an increase in these types of engagements in recent quarters.Our headcount for the fourth quarter will be more or less flat versus the third quarter, but it's going to be up versus last year. Recruiting is going well, and I'm optimistic that we will be able to accelerate headcount growth in 2021.And with that, this concludes our third quarter presentation. Please remember to forward any questions you might have to [e-mail]. And on behalf of Liv Annike and I, we wish you a wonderful day.