Proact IT Group AB
STO:PACT
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Proact IT Group AB
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Good day, everyone. This is Jonas Hasselberg, CEO of Proact. Welcome to our quarter 1 briefing. I have with me also the CFO of Proact, who will complementing me as we go through the presentation and the slides. Thanks for joining via WebEx. Obviously, we would have preferred or liked to see everybody face-to-face as we normally do. But this is a way of adapting to the situation. And I think it will be working fine as well. I think all of us have been spending quite amount of time over the past couple of weeks in Skype and video calls, so we're well-trained by now. So we'll spend a couple of time here or a couple of minutes going through the slides, also just give a little bit of an update on where we stand as a company in terms of our -- what's developed with the company over the past few months since we met last. And then of course, we'll go through the key figures of the quarter. And if you want to ask questions, you're more than welcome. [Operator Instructions] All right. We'll get going here. Again, thanks for joining. We will do a little bit of repetition. It's always good to make sure you remember who we are as a company. Proact, as you remember, we turned 25 years last year. We're now on our 26th year. We are a company that focus very much on being a specialist in data center solutions with a great focus on delivering multicloud solutions to our customers' data. And how our customers manage data and information is obviously at our core of our DNA. And we're going to look a little bit more deeply into what that means for us. We are turning over -- we turned over roughly SEK 3.5 billion, SEK 3.6 billion and we are over 1,000 employees now across our different markets in Europe. Remember, we acquired a company in the Netherlands in October of last year, PeopleWare. They've added another -- a little bit more than 200 people to our business and another SEK 300 million or so of revenue to our business. We are headquartered in Stockholm. And we are organized around 4 business units that we operate around in our different countries. As I think you know already, our view of the market, obviously, we all know this, uncertainty is the name of the game right now. The world is uncertain also for Proact. We have had a better quarter 1 than we expected or than we dared hope for. We have had a good start of the second quarter as well, but uncertainties still are much ahead of us. And we don't know how the world will develop over the next few quarters as long as the COVID-19 crisis is still ongoing. All that said, if we look beyond and if we look at what our view was of the market going into the situation, it is still a strong market, and we do still see a lot of activity with our customers. Clearly, the new situations that we are adapting to are generating new demands. There are capacity increases as people work more from home and we see new end user behaviors and customer needs coming up. So we are positive about the market. But I cannot stress enough, of course, the uncertainty that we and everybody else is seeing. Multicloud is something you're going to hear us speak more and more about. Multicloud for us is the fact that our customers will not have one way of deploying their IT infrastructure but multiple different ways. They will use cloud technologies in a number of different variants. Public cloud with big vendors, like Microsoft and Amazon, is definitely going to be used. Private clouds that our customers are hosting and managing themselves will also be used. We will be delivering cloud services and are, of course, already delivering cloud services to our new customers and existing customers. Point here is that the new normal here for our customers is that they will have a wide variety of different ways of deploying their technology. And that means, frankly, that the situation for them may not be easier, but rather more difficult from a pure IT perspective. The value they can generate out of their IT is increasing. The importance of data, the information is increasing. But clearly, the options for our customers remain increasing, and therefore, IT also continues to be difficult. And that's good for us. It means that there's a new opportunity for us and it generates new types of use cases within our customers and therefore some new types of buyers within our customers. And we mentioned it already, corona definite impact is definitely short-term. Practically all of our employees are working from home now. We are very proud of the fact that we've been able to deliver unchanged quality levels to our customers. We are maintaining a very good support-level, service-level in response to our customers' incidents and change and just managing [ or drive ] infrastructure as if people would be working normally in the offices. So the quality that we're maintaining, we're very proud of. Health has been a key focus for us, the health and safety of our employees, of our customers and partners. And we've been able to be managing that very well here over the past couple of weeks and months. So I think the main point we're trying to get across here is the overall view of the market is positive. Corona is an uncertainty. And we, of course, do not know for how long we will be impacted nor do we know what the longer-term changes will be. Clearly, we will be using IT in a different way over the longer term, which most likely will give us some positive opportunities also in the future. We have described before what our differentiated value is, but I think it's worthwhile repeating. We are specialists in the area of data. And by that, we do not mean storage, even though storage is one of our core offerings and one of our core legacy pillars. But we look at data very broadly when we engage with our customers. We advise customers through helping offerings in terms of what -- how they should manage data and information. Obviously, we do help our customers to store their data in a number of different ways, whether they want it stored in their own premises, running their own infrastructure, if they want to store it in our cloud services or if they want to store it in the public cloud. We do help our customers with storage. Data is, of course, not useful unless you can connect to it and use it. So the connectivity is another area of a key value that we provide to our customers. In particular, the more distributed the world becomes and data resides in one place and user system in another, so connectivity and networking is important. Protection of data obviously is super important. The integrity of the data, the ability to restore data, back up data and protect data is very important. And last but by no mean least, there's a purpose for our customers to store and manage all the data. And that's to bring the value out of it. And we see a lot of activity here, of course, around areas like advanced analytics and artificial intelligence and machine learning, which are great, interesting trends that are also bringing new opportunities for Proact. The use cases that our customers are investing in are important to us. And there's a wide range of them, anything from high degree of automations and business processing to increasing their own commercial activities with its product development or new business model or even new channels or e-commerce, analysis and artificial intelligence, obviously super important. A lot of initiatives also now being ramped up as part of the opportunities we see with 5G and edge computing and Internet of Things. So as we engage with our customers, we put a lot of effort and pride in being able to discuss with them the value our customers are trying to get out of their IT infrastructure and their data, what are the use cases they try to achieve. And our role then becomes to translate the use case and the value to what are the underlying technologies and solutions that we need to deploy. So our product portfolio continues to evolve. And we're going to look at a couple of new things here recently. But we still look at them in 4 main buckets. We do provide consulting services. We provide all solutions with an on-premise hardware and software solutions. We provide a wide range of support offerings to make sure that the solutions are up and running and delivering on the service levels expected. And we have our own managed cloud services, that offer the same value in a different deployment. We do separate the way we deliver the value in these 3 categories to the right here, on-premise, private or public. We try to advise our companies on what's best for them. And there's a number of different parameters to take into account. Data often is sensitive. You want to have a very strong control of your data. It may or may not be something you want to leave the company premises or the country borders. You may or may not want them to be in a public cloud provider solution or you want to have them on your own infrastructure. And we don't really have a strong opinion, but we work with our customers on all those options. So if they want to deploy a solution that they run in their own data centers, that works fine. If they want us to host it for them and run it off of our Proact service portfolio, that's fine, too. Or if they want to leverage [ it on the ] cloud provider networks or any combination of those as we then would describe as a multicloud solution. That means that we describe our overall position in the market like this. And obviously, we put our customers right in the center. We have those 5 areas of value around our customers that are translating their needs into the infrastructure and the IT solutions and then our portfolio and the way we can deploy that. We continue to be very proud of our customer base. Of course, we have a very strong set of customers, and they have been very loyal with us for a long time. One new case study that is interesting to share with you all is Statnett. It's Norway's -- system operator of the power grids in Norway. Obviously, for them reliability and availability is super important. Any downtime has huge consequences. The power network needs to run literally 24/7 every day, every week. So we're very proud that we are delivering a lot of infrastructure to Statnett around backup and disaster recovery and security to make sure that we can help them manage their data and their IT infrastructure. That's one good example of a customer who is running mission-critical IT infrastructure and where Proact has had the pleasure of being able to deliver that service in those products. So in -- on the product side, we've launched a couple of new products recently. They've been in the works, some of them, for some time. And a few of them have actually been accelerated here in the light of corona, as it becomes more obvious. So the backup is a Backup-as-a-Service product offering that we provide our customers for Office 365, so helping all our customers that are running the Microsoft productivity tools in the cloud, whether that's Exchange e-mail or the Office suite or OneDrive to make sure that that data is backed up securely and can be recovered and restored in case of any incident of any sort. So that's a great way for helping our customers to move their productivity suite into the cloud, which in turn helps them work more dynamic and more remotely and still feel safe and secure that the data is protected and able to be restored. So that's one new service that we just brought out to the market. Anti-Phishing-as-a-Service is a service that we're expanding into the -- our markets around preventing phishing threats through e-mails. So obviously, that's an increasing threat to a lot of the customers. And the ability of some of the phishing attempts, how to make them look very professional and more difficult to detect is increasing. And they're becoming more and more good at what they're doing. And therefore, anti-phishing becomes a bigger and bigger problem. So this is a service that helps our customers to detect anti-phishing through a combination of machine learning as well as human intelligence. And it's being run out of our 24/7 security operation centers. There is a day and night service that we provide our customers to make sure that anti-phishing are detected. And last but not least, we've upgraded our SIEM-as-a-Service. It's a security monitoring service that constantly monitors the activity within our customers' IT infrastructure. And we can detect abnormal behaviors and then take countermeasures. It could be log-ins from regions or geographies where people typically are not logging in from or different usage patterns on an individual level that hasn't been seen before and then detect them and take countermeasures. So these are just 3 examples of some updates we've done to our portfolio over the past weeks and months to strengthen that value proposition that we've [ addressed ] on these slides. That takes us to this business slide, just to give you a glimpse of what that total offering looks like. So again, the customer here is in the middle, of course. They are front and center of everything we do. We have our 5 core value propositions or value add for customers and then a broad range of products, ranging from our traditional legacy, if you will, of storage, all the way up to networking and cloud solutions and security solutions, all the way through to analytics and artificial intelligence services. So a range of products and services that we offer our Proact customers across these 5 core values that we want to bring. And like we said already, this is complemented by consulting services and our ability to deploy these conditions, whether on-premise, in our customers' data centers or in our data centers or in the public. So a pretty comprehensive set of values to our customers that continues to evolve on a week-by-week basis. All right. That's a quick refresh of Proact as a company. Let's dive into the Q1 numbers. Remind you again that if you do have questions, feel free to use that. [Operator Instructions] Pretty sound and stable and robust quarter. We obviously, like everybody else, have been concerned with the impact of the coronavirus. We are improving our EBITA margins, which is great. And obviously, we're also improving our PBT numbers. Obviously, you need to remember, which I'm sure you do, that we had one-off adjustments of SEK 11 million last year. So the EBITA in absolute numbers is flat and PBT is a slight decline when you include the adjustments. But still a strong performance here during the last couple of months despite the fact that we have seen impact of corona. The people who have followed us for the past quarters know we have had operational struggles in the Business Unit West that's been impacting us over the past 2 or 3 quarters. We've seen really strong improvements in Business Unit West this -- first quarter of this year and back to good profit levels and revenue levels in both Netherlands and Germany, which has been struggling in the past. So we're very proud of the work that the teams have done in Germany and Netherlands, respectively. Launched products, I just mentioned, it's a great thing. And I've also mentioned that we have been able to maintain high-quality operations in the light of corona with our customers. And last but not least, our MCS revenue is growing in a very good rate. 58% is obviously a super number. A chunk of that is coming from the acquisition of PeopleWare that we did in October. The organic growth is still good at 20%. So we're happy with these numbers. We do see a decline here in the revenue, primarily driven by systems. We do see some delays in deliveries in the first quarter, also came into the first quarter with -- after a very strong fourth quarter in the Nordics region. So we had to rebuild our opportunity pipeline a little bit and came in slow to the quarter. So system sales has been the primary challenge or reasons for a bit of a decline here on top, of course, of the impact we're seeing of corona. And also the contract value, the TCV number, as we call it, the value of new cloud contracts has declined in the quarter. And we've seen customers delaying some of those decisions and postponing them. We've seen customers in the transportation segments and air traffic segments as well as the health care segments that postponed their decisions as two very concrete examples. So the systems decline and the new contract value is something that we'll put a lot of focus on, a lot of effort on as we move forward into the second quarter. So if we summarize the numbers for Q1, this is what it looks like. Revenue declined to SEK 844 million compared to SEK 910 million in the first quarter of last year. That's a decline of 7%. System sales, as we just spoke about, had a rapid decline whereas the services sales is up 30%, so -- and that includes then, of course, the support services and the professional consulting services on top of our managed services. So EBITA, the adjusted EBITA, pretty much flat, SEK 42.6 million versus last year's EBITA of SEK 43 million. And we have an EBITA margin of 5.1%. And again, profit before tax at SEK 33 million. If we then look at the same numbers on a rolling 12-month basis, we're running at a little bit over SEK 3.3 billion on revenue, which is a slight decline. And also here, we see good growth rate of the services sales and an EBITA that is just below 5%. And if we then take the breakdown on a per business unit level, you see that we've had, like I mentioned already, positive development of the cloud business with a growth of 58% to SEK 180 million, where -- of which 20% is organic. Nordics, some of you who have followed us in the fourth quarter know Nordics had a good fourth quarter, now see a bit of a revenue decline here, driven by the system sales. Pretty sound and solid growth, however, on the services side. U.K., also a bit of a decline. Services, in particular cloud service here, grown nicely. And as I mentioned already, West did a good quarter in the first quarter this year with an increase of revenues, partly driven then, of course, by PeopleWare and also a very strong recovery of the EBITA level, where we've been struggling in the third and second -- fourth quarter of last year. All right. With that, I was going to hand over to the CFO of Proact, Jonas Persson. Are you ready to join me?
Yes. So yes, now I think everything works. Good morning, everybody. My name is Jonas Persson, I'm the CFO. I will go through the cash flow and some key ratios. So move on to the next slide. Cash flow. Yes, we have a strong cash position at SEK 290 million at the end of March. And of course, that's important in these days. We have a negative change in working capital. As mentioned already, in Q4, we have had a peak. We had some luck with some customers, paid us just before the year-end, where we have to pay the vendors in the beginning of January. So we had a huge peak in the change in working capital in Q4. And now we see a decline of that coming back, of course. But if you look at the numbers for rolling 12 months, you will see a stable working capital. And that should be rather stable, as the only thing we have to work is customers and vendors, we don't have any stocks. So that's the story behind this minus SEK 112 million. And we do some investments for our leasing company called Proact Finance. That's minus SEK 11 million in the quarter. And then we have the setup of IFRS 16 with the leases. It's hurting us with SEK 34 million. So yes, as I said, SEK 290 million is a strong cash position at the end of March. Next one, please. In the balance sheet and other key ratios, we have improved the solidity to 20%. We -- I think we ended the year with 18% caused by the acquisition during the fourth quarter. And the goal is to be somewhere between 20% and 25%. So I'm pleased that we're now back on track again. And the cash position, we have talked about. And we have unutilized overdrafts of SEK 258 million. And that's for the daily operation. So that's also good to have in place these days. The net debt is SEK 247 million. And that's also now -- this includes the lease liabilities of SEK 300 million caused by IFRS 16. And for the acquisition part, we have unutilized 3-year revolving credit facility of SEK 130 million. So we are well-prepared for the future, taking care of corona, but also looking forward for acquisitions.
Good. Thank you, Jonas. We track our financial goals. They are unchanged. And those of you that have been following us remember then, we want to grow on a revenue basis of more than 10%. We are aiming for an EBITA margin of 8% and then a good debt ratio as well as return on capital employed. Obviously, right now, we're tracking a little bit below our revenue targets. As we just look through, we have a good contribution from PeopleWare but it needs to get past the uncertainties here and get back into strong revenue growth. EBITA margin, this is on a rolling 12, all these numbers here are just below 5%. So here, we have some work ahead of us to get back into the positive numbers of where we want to be. And then beyond that, we have some impact on IFRS in terms of our return on capital employed. And last but not least, we have a recommendation from the Board to retract the previous proposal. And we're proposing a 0 dividend in the upcoming AGM, which is on May 6 here in 2 weeks. So with that, if we just summarize the quarter, the results were solid. And despite the fact that we have been impacted operationally by the COVID-19 crisis, the growth in the MCS revenue of 58% is obviously something we're proud of, including the organic growth. And we're very glad to see that we've recovered in Q1 in our Business Unit West in both Germany and the Netherlands. And obviously, as we look forward, the uncertainties remain high. We continue to see good activity with our customers. But every day, things change and we track it on a day-by-day and week-by-week basis. So that's our last slide. Thank you very much. Again, if you have questions, feel free to ask them. [Operator Instructions] And of course, we need to see the chat.
Jonas, we have a question from Fredrik Nilsson. It is in the chat area.
Yes. Fredrik, yes, well, we're seeing good activity with our customers in -- so far in the second quarter. So it's about 3 weeks. We don't see a difference in any particular market. It's pretty good activity across the board. We see some customer accelerating their IT investments. We do see customers that are postponing, of course. But it's difficult to see any particular trend now. There's no particular market that behaves differently. We see some segments, of course, that are postponing. As I mentioned already, things like travel, hospitality and health are focusing on other things. But beyond that, I think we see across our markets and across our segments decent activity trend.
Jonas, we have Daniel Thorsson, who has raised his hand, I will just open his microphone in just a minute. Daniel, you should be able to -- we should be able to hear you now.
Daniel, can you -- we can't hear you, Daniel. All right. There's another question from Fredrik here in the meanwhile, which is have the improvement measures in BU West reached their full potential during this quarter? No, I don't think we have reached the full potential yet. We're still working through some of the operational challenges and also tuning some of the basic operations there. But like I said, we've seen great improvements. So I think we're going to -- I'm very careful with giving you any predictions because of the uncertainty. But there's more work we can do in Business Unit West. We're also very proud and very happy with the work that the teams have done so far in the first quarter. Daniel, if we can't hear you, feel free to type the question in the chat window. Any further questions?
Jonas, I will try to make Daniel...
Here comes Daniel, his question is coming out.
Okay, good.
Have you started to help clients on the financing side? Yes. There are some minor -- well, minor is the wrong word. We definitely see indications that our customers are more interested in financing. So there has been some financing deals recently. I think it's a little bit too early to tell whether those are -- I'd hope, so to speak, where we start seeing more of a trend here with customers needing financing over the crisis period. But yes, there has been a couple of activities and financing projects over the past few weeks. We're also seeing efforts from our vendors to pass through some payment term improvements if needed. So there's definitely a good attitude across the value chain with helping customers in the crisis period. Yes. So another question here from [ Ula ], if we're expecting system sales to be affected more than sales in general. Yes, I think if we look at our business models, the 2 areas that we are keeping an extra close eye on are system sales because it's obviously transactional and also a very big part of our business. So that's the quickest one that can have an impact on our business. So we're tracking that on a very high frequency to make sure that we're seeing any changes in the trends. And obviously, our consulting services, the second one, any customers that are seeing financial travels, we can expect that they will start making savings efforts by reducing their external consultant engagements. At this point, we're not seeing any drops in our consulting business. We have a very good engagement and utilization still in our consulting. So I said our system business is good activity. So although those are the 2 ones, systems and consulting, that would be impacted the quickest, those are also the ones that we're not tracking the closest and putting most focus.And then there's another question from Daniel, made any firm actions in terms of employee reductions. No, we have not at this point. And we -- obviously, we are fully up to speed with all the governmental stimuli and support offerings that are being provided. We're using the ones that are relevant for us. We are preparing for stronger measures if needed. But at this point, we have not had to do any temporary or permanent layoffs. More questions are welcome. It seems like the chat window is the best working method, so feel free to ask more questions.
We have [ David Walton ], who has raised his hand. I'll just try to make him a panelist, so he can talk to you.
David? I do not hear you, David. In the meanwhile, [ Ula ], you asked another question. Are there acquisitions still on the table? Yes. We're still active as before in terms of building pipeline and M&A continues to be a key focus for us. Obviously, we're going to be very careful with our cash position here in the short term. And as we believe that our liquidity and cash situation is key to maintain a crisis situation if it becomes longer or worse than we're currently seeing. So we continue to work in acquisitions as before. But don't expect that we would make any transactions in the very near term as we manage cash carefully. And then Daniel, you asked the question about the recovery. No, we're not seeing changes in the German or Netherlands market. But we have seen a lot of good efforts with our teams. The sales activities and the sales steering in Germany has improved greatly. We've done a number of really positive customer deals and the same also in Netherlands and also been, of course, getting positive results out of the PeopleWare acquisition, and I mentioned before that that integration is going really well. And the 2 teams in the Netherlands and Belgium, the Proact team and the PeopleWare team, have found each other really well and are actively engaging with joint customers now with the combined [indiscernible] . And then there's a question from -- okay, here's David's question. Are you disappointed with the cloud contract value, the TCV, in Q1, given the priority of clients in these times? Yes. I guess I'm disappointed. I think we should always drive growth in our TCV numbers. I understand why we're seeing a little bit of a lower value. Obviously, most of our contracts are 3- or 5-year commitments. The sales cycle here is relatively long. In these situations, we do see a bit of a hesitation within our customers to make long-term commitments in times of uncertainty. So we don't see a longer-term change in the market here, quite opposite considering now that a lot of people changed their behaviors and are in need of IT support to handle things like remote work. So I don't think this is a market trend nor do we see that our portfolio is any less relevant, quite the opposite. But we have seen a bit of a longer decision-making within our customers and postponement of some of our deals in the last quarter. All right. We're always available, of course, for you. So if you feel you didn't get a chance to ask your questions or if there was something that wasn't clear, feel free to reach out to myself or to Jonas Persson. We're always happy to talk to you guys individually as well. Hopefully, you got some good information today. And we appreciate you took the time to listen to our presentation. With that, we're going to close the meeting. We wish you a great Friday and also a good weekend. Enjoy and stay safe. Thank you very much.
Bye-bye.