Webstep ASA

OSE:WSTEP

Earnings Call Transcript 2019-Q4

[Arne Norheim, Chief Executive Officer]

Welcome to our quarter 4 2019 presentation of our results. My name is Arne Norheim, and I'm the CEO of Webstep ASA. I will be presenting our results today 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.We will go through the following agenda. So 2019 is now behind us, which is a reset year in many ways, a year in which we saw a very high churn in the first half of the year with residual effect following us into the third quarter. I assumed the helm as the new CEO back in May, and we hit the 2-year mark since our stock exchange introduction.2019 was also an investment year. We've invested in sales and recruiting capacity, recognizing that in today's war in talent, this is necessary. We launched, Webstep Solutions, a highly sought after by our clients service offering where Webstep delivered complete service -- the delivery teams and service outputs. And as we enter 2020, our 20th anniversary since our humble start back in Bergen in the year of 2000, I believe that we are well positioned in a market that fits us very well.Our objective is simple: continue to provide our clients with the best skills in the market. We need to deliver growth by growing our team of skilled Webstep consultants and delivering on our sizable pipeline of opportunities in Webstep Solutions.So let's take a look at our quarter, shall we?Our revenue is mostly flat for the quarter and for the year. The EBITDA results for the year came in at just over NOK 60 million for the year. We're growing our consultants base for the second quarter in a row, and we anticipate growth to continue into the first quarter of 2020.Our consultants deliver higher value in the market than other companies out there. This was well documented in a recently published Konsulentguiden. Konsulentguiden is an independent market survey covering the IT consultancy market in Norway. The report covers 35 vendors, and more than 1,000 IT buyers have been asked to rank the vendors in 14 different categories. And as a vendor, Webstep was ranked highest in the 2 of these categories. One, the highest value per krone invested or invested; and two, Webstep was the vendor that responders was most likely to repurchase from or buy again from.And we're very happy with this feedback, and I think it underscores our core belief that experts are more efficient and provide higher value to customers than junior consultants and, more importantly, get the clients faster and with higher quality to their objectives. We believe there is a willingness to pay a premium for the expert consultants from Webstep. And in 2019, we had a good progression on increases in hourly rates. We expect this to continue in 2020.We're well positioned. We have a strong order book and a great product. Board intends to propose a dividend of NOK 1.60 per share.Revenue from operations in the fourth quarter grew slightly on a higher number of consultants, as mentioned before, and higher hourly rates, but offset by a smaller dependency on subcontractors.2019 has been a year of investments, and fourth quarter was no exceptions. We've added sales and recruiting resources to strengthen our ability to recruit in a tough market. That said, it's encouraging now to see that our headcount is growing for the second quarter in a row. And as I said before, we will continue to grow into first quarter.We highlighted our key strategic focus areas and our strategic -- in our strategic update during the third quarter presentation. And I want to take a moment to just recap quickly.Our core service for our business is our team of expert consultants, where we provide expert developers to assist clients with their projects. Our key differentiator is our focus on continuous development of our expert skills and our ability to match the right expert with the right client project. Our consultants are highly thought of and our order book for 2020 is strong.Our focus for this line of business for 2020 is to continue to focus on skills development for our people while recruiting and onboarding new experts that fit our Webstep values.Last fall, we launched Webstep Solutions, and this was a result of us listening to our clients who are asking us to take a broader role and responsibility in delivering solutions to them. Our clients' response to our announced offering so far has been overwhelming. The first projects have been signed and delivered, and our pipeline is growing rapidly. Our strategic partnership here with Telenor is very important, and it's given us access to Telenor's clients that need help implementing IoT solutions. We've also signed a partnership with IBM that gives us access to their experts and advantageous terms to their software and solutions.Our last specialization, Advisory services is a smaller team that assist our clients to map out their digitalization road map for their enterprises. We find the clients that have invested in digital -- we find the clients have often invested in digital point solutions that don't deliver the savings or value that they have bargained for. We help our clients evaluate their environment and map out a strategy for digitizing their enterprise, both technically but also the processes and the people. These people in this team is highly skilled consultants that can see through the maze and create clarity, vision and the necessary road map for our clients.I would like to take a couple of minutes to reflect on 4 of our ongoing customer projects that are tightly linked to our revamped business strategy. These are all engagement that clearly show that our strategic platform and strong initiatives to restore growth are beginning to yield. In fact, they show that Webstep is delivering on its promise, which is developing the society of tomorrow.Bergene Holm is a leading vendor of wooden products and lumber founded in 1946 with 8 factories with more than 400 workers and IT systems that were not connected. They had challenges in connecting and getting access to relevant insight in their production line. Through tight collaboration with Webstep, they're now developing their IT strategy to increase productivity and drive automation. Our engagement with Bergene Holm is a good example of how Webstep Solutions is engaged in digitization projects, optimizing the whole IT value chain for our clients.Our second case, Kolumbus, is not a new customer of Webstep, but I think it's a good example of how we succeed in renewing our business through continuously challenging our customers to move forward using technology to drive better outcomes. Kolumbus is a leading transportation company with more than 23 million passengers annually. And our technology experts have been key to developing a new core IT system that provides a significant improved user value. Through AI and cloud technology, Kolumbus is now able to process real-time data and provide location-based information that can generate more precise and active information on delays and time of arrival. Our user experience -- I'm sorry, user experience here is key to building loyal customers. And here, Webstep is proud to make a difference in this area.If we look at our next case, Norwegian Public Road Administration or Statens Vegvesen strives to ensure that all those who walk, cycle, travel by car or use public transport should get to their destination safely. In 2017, a new regional reform was approved by the parliament. This severely impacted IT systems being used to operate Statens Vegvesen. To handle the changes that were needed to comply with these new regulations, Webstep was asked to manage these IT projects and to monitor activities updating the IT systems. Advisory services were deployed, and we're currently working to support Statens Vegvesen on their digital journey.The last case is a new customer of ours, FuelBox. They are originally a traditional board game company and needed help in making their business digital. Through collaboration with Webstep, we're making their key product digitally available for mobile users and integrating the solutions on a new payment platform. Our advisory services, combined with our technology experts, are literally driving innovation for our client and helping them become a digital player in an analog industry. Their goal is to help fuel conversations among people, and Webstep is thrilled to be able to help them succeed.I believe that these customer projects mentioned today are important for our story. They demonstrate how we're able to put our strategy to work and how we're more than ever are making a difference to our clients.Our consultants is our lifeblood, and headcount is an important KPI to Webstep. We have been through a period where we've had to rely heavily on subcontractors to meet the demand for Webstep in the market. We have reduced this dependency in the second half of 2020 while growing our numbers of consultants overall. We have a good recruiting momentum, and we project that growth will continue in the first quarter of 2020, as mentioned before.Now the other side of that coin is retention, which is an important factor in our business. And being a consultant is not for everyone, and some attrition for a company like ours is always expected. Now managing attrition closely is important though and something that we focus on as a management team.In the fourth quarter, we concluded an important project to strengthen our employer identity and branding. This project engaged the entire population of our consultants and will be an important foundation for our increased focus on communication, both internally and externally, to tell the Webstep story to our clients, to our employees and, of course, to our prospective candidates out there.So with that, let me turn it over to Liv Annike, who will take you through the numbers. Liv Annike?

[Liv Annike Kverneland, Chief Financial Officer]

Thank you, Arne, and good morning, everyone. Okay, before we dive into the details, as previously communicated, we have put behind us a year where the market for IT services had been strong, but Webstep has struggled to follow the market growth due to the reduced capacity compared to 2018.And as mentioned in the strategy update in Q3 and also by Arne now, we are working on the implementation of measures to restore growth. These are measures that have a negative impact on our EBITDA when we compare year-over-year figures, but which we believe will build a solid platform for future growth.And with that, let's have a look at the fourth quarter figures before we move on to the full year.As Arne mentioned, we are pleased to see that we have a quarter of revenue growth and further growth in headcount in Q4. Q4 is actually the first quarter in 2019 where we exceed 2018 in terms of headcount. Revenues are up by close to 1% from NOK 175.3 million in Q4 2018 to NOK 176.8 million in Q4 2019. This may seem insignificant, but we see that the underlying growth in revenue from our own consultants is stronger. We have chosen to quantify the increase in revenue from our own consultants, where we had an increase of NOK 5 million in Q4 due to increased headcount and hourly rates. At the same time, we reduced our dependency on subcontractors, and the revenue was down by NOK 3.5 million compared to Q4 2018. And this leaves us with a net increase of NOK 1.5 million.EBITDA for Q4 ended at NOK 12.0 million, down from NOK 17.5 million in Q4 2018. And adjusted for IFRS 16, EBITDA was NOK 8.7 million. The main reason for the reduced EBITDA is the recruitment of sales and administrative personnel in 2019, which increased the salary costs. These are recruitments that makes the organization better fit for future growth. EBITDA margin ended at 6.8% and 4.9% with former principles for leasing.Looking at the full year. Year-over-year revenues are more or less flat. The change in revenue mix that we saw in Q4 is opposite when we look at the full year. Throughout the year, average number of employees have been lower than in 2018. And despite the increased hourly rates, revenues from our own consultants have dropped by NOK 15.6 million. At the same time, revenues from subcontractors have increased by NOK 13 million, which has offset most of the impact. However, the revenue from subcontractors has a lower margin than revenue from our own consultants, which results in a negative effect on the EBITDA margin for the full year.EBITDA for the full year ended at NOK 60.4 million, down from NOK 78.8 million in 2018. And adjusted for IFRS, EBITDA was NOK 52.7 million. The reason for the decrease of NOK 26.1 million, first and foremost, the aforementioned measures to restore growth. But there are also some one-off costs related to the change of CEO. We have increased the lease costs related to location of our premises and 3 Webstep offices. And also costs related to IoT of about NOK 3 million were capitalized in 2018, and these are now expensed directly.EBITDA margin ended 9.1%, 8% with former principles for leasing.This takes us to earnings per share at NOK 1.36 per share for the full year compared to NOK 2.12 in 2018.The group has a very solid equity ratio of 66% at the end of 2019, which is down from 70% at the end of 2018.So let's have a look at the figures for Norway. The Norwegian segment accounts for about 86% of our total revenues. And the comments that we have for the group, obviously, are mostly related to the Norwegian business. So I'm not going to go into details here.Revenue growth year-over-year was 1.1% with a positive shift in revenue mix, as more of the revenue now comes from our consultants compared to Q4 in 2018. The market situation in Norway remains good, and the main challenge is to retain and recruit employees in order to capitalize on this good momentum.Looking at Sweden. Sweden accounts for about 14% of our total revenues. And revenues for the fourth quarter ended at NOK 24.7 million, which is a decrease of 0.4% compared to 2018 and 1.1% when we measure this in constant currency. We are pleased to see an improvement in EBITDA in Sweden in Q4, and this is actually despite some excess capacity in the period, which we also talked about in the Q3 outlook. The EBITDA ended at NOK 2.3 million, NOK 800,000 when we look at the former principles for leasing. The increased EBITDA from 2018 is due to a shift in revenue mix from subcontractors to more profitable revenue from our own consultants and also a reduction in operating costs.As mentioned in the third quarter presentation, Sweden experienced a slight slowdown in the market during the fourth quarter, and this has resulted in lower utilization year-over-year, but we do see some improvement into 2020.Revenues for the full year are down by 2.8% in Sweden, 2% when measured in constant currency. EBITDA ended at NOK 4.9 million, NOK 2.2 million with former principles for leasing. And this represents an EBITDA margin of 5.4%, 2.5% with former principles.Okay. Looking at the cash flow and net debt. You can find the balance sheet and the full cash flow statement in the appendix. So we'll not go through this in detail now but just mention a few highlights.In 2019, we had a cash flow from operating activities of NOK 41.8 million. As you can see from the graph, this is very close to the dividend paid in May 2019, which accounts for most of the change in cash and cash equivalents.Cash and cash equivalents were NOK 33.5 million at the beginning of the year and ended at NOK 25.5 million at the end of 2019. We have a 2-year revolving credit facility of NOK 110 million, which was renewed in 2019.And with this, I would leave the word to Arne again, who will take you through the outlook.

[Arne Norheim, Chief Executive Officer]

Liv Annike. Looking ahead, we see continued high demand for IT consultant services. Our order book remains robust, and we are experiencing strong growth in the pipeline for Webstep Solutions. In fact, we're very encouraged by the development of solutions which we believe will contribute to our growth in 2020. And as mentioned earlier, our headcount has grown for the past 2 quarters and will continue to grow in the first quarter of 2020, while our dependence on subcontractors will continue to fall. Our utilization remains high but is down from unsustainable levels that we saw in the second half of 2019.Now as I peer into 2020, I can't help but feel optimistic about our prospects and the year ahead.So I'll take some questions now.

[Unknown Executive]

Okay. If there are any questions, please just raise your hand, and I'll give you the microphone. We also have a webcast going and there is currently no questions that have come in so far.

[Unknown Analyst]

Are there any covenants attached to the RCF? Any covenants attached to the RCF?

[Liv Annike Kverneland, Chief Financial Officer]

Yes.

[Arne Norheim, Chief Executive Officer]

Yes.

[Liv Annike Kverneland, Chief Financial Officer]

And the covenants, yes. And you can get details on the covenants in the Q4 report, yes.

[Arne Norheim, Chief Executive Officer]

Okay. With that, then this concludes our quarterly presentation, and I thank you for joining online and for those of you that joined us here in Oslo. Thank you.