Proact IT Group AB

STO:PACT

Earnings Call Transcript 2021-Q1

[Jonas Hasselberg, CEO & President]

All right. Welcome, everyone. Thanks for joining. We'll just wait another minute for everybody to join and then we'll get going here. Thanks for joining, and just bear with us a little bit more. And Anna, can you help us keep people muted until they raise their hands.

[Operator]

Yes.

[Jonas Hasselberg, CEO & President]

Okay. Good. Well, good morning, everyone. Thanks for joining and in particular, maybe thank you for people calling in from the U.S. I realize the morning is early there. So thanks for getting up and joining our call. My name is Jonas Hasselberg, I'm the CEO of Proact. And with me, I have Linda Holjo, CFO and VP Investor Relations. So we'll go through the Q1 results of Proact. We'll stick to this agenda roughly, we'll just, for those of you, who are new, to probably give you a very brief introduction to the company and our view of the market, but obviously, we'll spend the majority here on the actual developments and the results of the first quarter. And then, this most of you have seen a couple of times before, who is Proact? We're a European IT company. We have been in the business since 1994. We're serving 4,000 customers across our markets that you see mapped out here on the European map. It's primarily large enterprise customers and midsized enterprise customers. We're turning over about EUR 350 million on a yearly basis. And we're just above 1,000 employees across these regions. Obviously, Sweden is the biggest from a revenue perspective; Netherlands is bigger from a people perspective; and Netherland U.K. are roughly the same from a revenue perspective; and then Germany is coming there in the fourth place, may be shared with Finland and Norway. So that's roughly the way the sizing is looking here. We pride ourselves in being specialists, and it's a very important part of our business. These 5 red blobs here on the slide is depicting what value we deliver to our customers. So again, obviously, it's all about delivering IT infrastructure, but that IT infrastructure needs to provide some value to our customers. And to us, it's all about data. It's all about helping our data -- our customers get value and drive innovation and growth through better use and better management of their data and information. So we provide advice and strategy and consulting around the data. We obviously help our customers store the data. So large storage solutions. And for those of you who have known us for a while, this is definitely a big part of our legacy. Connectivity, so being able to connect to your data. More and more data is hosted in either the customers' data centers, but it could be a Proact data center or a public cloud data center so connectivity in order to access and shuffle data back and forth is important in a secure and low-latency way. Protection, making sure that the data is always available, not corrupted not being accessed in a way you wouldn't prefer. So protection is key. And ultimately, of course, getting value out of that data, which could be data analysis or production systems or artificial intelligence or whatever is relevant for our customers. What we actually deliver is in the 4 boxes below. So we deliver consulting services. It's one of our revenue streams. We deliver managed services; so hosting and operating IT infrastructure, either as a service or on behalf of our customers; a reselling of hardware and software; and technical support. These are our 4 business lines or revenue streams, if you will, that we deliver to our customers. So if you've seen this before, we are very well positioned, and we are operating in a market that has a positive outlook for us. Our customers, in terms of their IT agenda, is increasing in importance, and we know that the vast majority of our customers are putting a lot of effort around their digital transformation journeys and really making use of IT as a business driver. So the business value and innovation focus in terms of IT continues to increase. The requirements of IT is more and more driven by business rather than just an operating function. So the requirements and the expectations just continue to increase. A key trend that we've talked about a lot, and that may or may not be a little bit too technical here is what we call multi-cloud, meaning that all our customers are moving to what we would call cloud of technologies. So very modern architectures. And that can be deployed in different ways. Some customers may use Office 365 or Microsoft 365 for their productivity and their e-mails in a public cloud environment, but they may still host some of their mission-critical production systems in their own data center. So they are using different clouds all may still be using modern cloud technologies. And this is a trend that's very important and is playing in our hands. A couple of things around corona, of course. And for those of you who have seen the numbers, Corona definitely had some impact still on our business, but we also see it as, in fact, with our customers, of course, they need to support remote work. It's been the biggest one and a lot of effort was put in 2020 to enable that. That in turn drove security needs. So now you have different behaviors of your employees within a customer or different ways to access your -- the customers' customers, and that opens up for new security needs and production needs within our customers, and obviously, new workloads for the IT departments of our customers that have frankly enabled us to backfill and provide some new services to them. So trends are roughly the same or very much the same, some acceleration or different needs driven by the pandemic. But overall, we believe in growth in our market across our different revenue streams. That, of course, then takes us to the result in the quarter, and it's a bit of a mixed quarter for us. There are things in here that we are very happy about, and there's things in the quarter that we are less happy with. Revenue is up, which is good and a growth of 6%. We also had a significant growth in the sales or bookings of our managed cloud services. And you remember, we measured out as total contract value. The value of the contracts we signed during the quarter. Typically, the average length of the contract is 3 years, but some are longer, some are shorter. So in the quarter, we signed up new contracts to a value of SEK 78 million, which is significantly up from last quarter of SEK 51 million. Systems revenue very strong, driven by very, very good development in the U.K., also strong development in the Nordics, but we're also seeing in some of our markets, in particular, then in Business Unit West, a decline in systems in the quarter. You may have seen that our Board is recommending for the upcoming AGM that we've provided a dividend of SEK 4.50. And there's also a proposal for a stock split of 3:1. So each share will be of 3 new ones. And last but definitely not least, a very, very exciting acquisition. We squeezed it in here on this slide, knowing it was done on April 12, which is obviously not in Q1 but in Q2, but the vast majority of the work behind the acquisition was, of course, done in Q1. So we put it in here as it's fresh and new. On the flip side, a decline in EBITDA margin. A couple of things behind that. Some challenges in West where the systems business did not all reach up to our expectations, and that's a significant driver here and some pressure on service revenue and service margins partly and largely, I should say, both of these effects driven by COVID, so we don't see these as long-term effects, quite the opposite. And in Q1, we had multiple countries in our markets that have significant lockdowns and more severe lockdowns and restrictions than before throughout the pandemic and the U.S. was one of those regions that were pretty -- had pretty tough restrictions during the first quarter. So a little bit of negative development in our EBITDA and services largely driven by COVID. Before I continue, let me just explain a couple of things that you may have seen in the report. We're reporting in a different business unit structure starting this year. And we're also reporting a little bit of higher granularity in terms of our services business so that you guys can all understand how the services business is developing. So the 3 different revenue streams on the services, consulting support and managed cloud services are reported separately with regards to revenue. Good. Let me just talk a little bit more about the acquisition. It's not a huge one from a size perspective, but strategically very, very interesting and exciting to it. It's a Swedish company, the name is Conoa. They've been around for a couple of years here, founded in 2012. It's primarily a consulting business, but they are consulting in a very IT infrastructure near way, so they're helping large enterprise customers to develop the platforms for application development. And this is all about what we will call as non-techies modern or cloud-native development platform. So they're using very front leading-edge technologies to enable these development platforms with a lot of open source and partners that most of us haven't necessarily heard of and technologies that we necessarily haven't heard of. Like Kubernetes and container technologies that are all very relevant and at the forefront when it comes to application development. Very strong in the enterprise segment, so a good fit with our customer base, and particularly in Sweden, which means we can go hand-in-hand to either a joint customer or respective customers with a more complete proposition, very complementary in terms of the portfolio and competencies and skills. So we have a lot of expertise in the underlying technical infrastructure with regards to storage and servers and networking. And we obviously have the operational capabilities of running the platforms and the infrastructure, whereas Conoa don't have the skills and the expertise of designing this for application development purposes. So a very complementary and a good fit from a value proposition perspective. So this will enable us to go into the customers with a broader offering, and that's just one of the obvious and short-term synergies that is easy to realize. But it also enables us to package this combined offering to more of a package set of services, and in particular, then managed cloud services. They have a better EBITDA margin than we do. So there will be obviously a revenue contribution, but also a margin contribution from the company. Their yearly run rate is roughly SEK 8 million, an EBITDA margin of above 12%. And as you know already, we acquired them at a 10.5 EBITDA multiple, which was purchase price of SEK 105 million on a cash-free debt-free basis. That means that our strategy, which we've been clear on that we accelerate our strategy with acquisition is continuing in a good way. Through acquisition, we believe we can broaden our portfolio, we can increase our skills, we can broaden our customer base, and, ultimately, improve the mix of services versus products or systems and thereby also improve our margins. So we did PeopleWare acquisition, which added about EUR 28 million about 1.5 years ago, the Cetus acquisition about 6 months ago, which added about GBP 13 million. And now here in Stockholm, the Conoa acquisition, which adds about SEK 80 million to our revenue. So we're happy that this strategy is still panning out and working for us. But that's not the only thing. We have a couple of other positive developments in the quarter. First one here, there is a Swedish research institute called Radar. They ask customers about the preferred and the vendors that they are more satisfied with, and we were very happy to see that we were top provider in a couple of categories and a winning provider in one of the categories. So great development in terms of customer satisfaction perspective. Number two, here, LogicMonitor is a market-leading provider of tools for monitoring IT infrastructure. And our partnership with them will enable us both to improve quality of our own services but also new products and new services to our customers. And that's exciting partnership for us. We've updated some of our portfolio, in particular, this has to recover this quarter and also qualify for a frame agreement that spans across Europe in terms of research and education communities, so good door opener to get into a set of customers across our region. So some good positive development also outside of the pure financial dimension, which is a great segue. Over to you, Linda.

[Linda Holjo, CFO & VP of Investor Relations]

Thank you. So the financial development then. First, just as Jonas said, we've updated how we do the interim reporting with our new business unit structure, which looks like this. We have Nordic and Baltics with the countries listed here, the U.K., West and Central. And in bold, you can see that the reach of the business units now has a hub country, which is the largest country of the business units of regions. So Sweden, U.K. and Netherlands and Germany. And in addition to that, then, we previously reported services revenues, of which cloud services or managed services. And from now on, we are splitting up the full services revenue also in the tables and also purposes units, the support services, the cloud or managed services and the consulting services.

[Jonas Hasselberg, CEO & President]

And it's fair to say, I think all of it does both support and cloud are typically contracted recurring revenues. So if we would look at our recurring revenue trend, we would base that off of to support business and the cloud business.

[Linda Holjo, CFO & VP of Investor Relations]

Exactly. Whereas consulting is more of really project-related. Exactly. So highlights. Q1, as we've talked about a little bit already, good growth in revenues of 6% where systems grew more, 12%, where services declined a little bit by 2%. Adjusted EBITDA declining a little bit 2% with a declining margin 4.7%, and profit before tax declining slightly more by 8%, down to PBT margin of 3.5%. So then we will work through the details as usual with -- starting with the revenues. So of the 6% growth in the quarter, we look at the growth organically, which is then adjusted for both acquisitions and currency effects. We actually -- we grew 6% organically. It's a good organic growth as well. And on top of that, we had acquisitions, which in this quarter was ceded solutions that we acquired in the U.K. late last year contributed by plus 4%. Then we had adverse currency effects contributing by minus 4%, which is why we have the same organic growth as total growth. And on a rolling 12-month basis, we have a total growth of 10%, fairly evenly split between services and systems. If you look at the right-hand side, you can see, as usual, the revenues rolling 12 months. The dark blue bar is the systems business, which is where we have the bigger volatility on a quarter-by-quarter basis. We look at the services decline of 2%. That's primarily driven by adverse currency effects. So organically, services business is unchanged. And drilling down into that, now that we're reporting in more detail, we see support services growing by 3%. Whereas consulting services had the largest decline, and this is related to that in certain countries where we have significant consulting businesses. The lower systems revenues also led to lower demand for consulting integration and installation services. Cloud revenue declined of 4%. That's primarily -- or it is a currency effect. So it was 1% organic growth. Of course, here is where we aim to grow. And if you look at this right-hand graph, you can see that the growth organic -- or the total growth has been limited. And we see that as a result that we closed quite little new contracts early 2020 or the first 3 quarters of 2020 where we saw a lot of uncertainties around COVID-19. And customer is hesitant to go into these type of longer-term contracts. So we see the effects of that now that it's impacting revenues. However, of course, we expect -- or we're still confident in the longer-term outlook of the market and our offerings in here. Then systems growth, 12% growth, of which 10% organically. And here, it's the U.K. and Nordics and Baltics that have -- are showing the big growth whereas West has a very, very significant decline. And then the new cloud contracts, we closed SEK 78 million of those in the quarter. So it's a significant uptick compared to first quarter last year. Then we go further down in the income statement to the profitability. If we look at the adjusted EBITDA, we can see that it is declining by 2% with the margin going down. The key reasons for that is the decline in gross margin, and primarily in services. We have some mix shifts, we also see some increased complexity in certain minor services contracts where customers are working from home and then having unexpected issues and more complex support requests. Biggest impact here is in the U.S., which is then hit also by the declining systems, which is the reason why we've now launched -- or we've initiated an actual program to secure that our costs are aligned with our revenue outlook here. SG&A costs continue to remain low, reducing by 4% for comparable units. So the cost-saving program we initiated late Q1, early Q2 last year. We continue to see the effect of that as well as continued limited travel and sales-related costs, so in total, less impacting them positively. Then we have the EPS that is declining. EBIT is flat, but we do have a higher negative financial net in the quarter compared to last quarter, primarily due to us having some positive FX effect in the financial net last year. On a rolling 12-month basis, which is what we show on the right-hand side, you can see that it's a little bit of decline from Q4 last year, but still on high levels. Okay. Then our new business units. First, Nordics and Baltics, as we've mentioned, good revenue growth, 14% where it's strong systems revenues. You see on the right-hand side here with the slides that it was a fairly weak Q1 last year. And so okay, Q1 this year, some differences in different countries here as well. We see some hit harder by COVID-19 restrictions than others. And Sweden, in particular, was the main growth driver. EBITDA margin increasing compared to last year, and that's primarily as a result of the increased revenues that contributed more than the corresponding cost increase. Next business unit is U.K. So here is where we have the acquisition of the Cetus contributing. So the total revenue growth was 34%. Now that's including adverse FX effects, but also including Cetus. So if we exclude Cetus, then really the FX effects, the organic growth was 19%. Total growth, very strong growth in systems, both in the U.K. and with Cetus. And we can see that the acquisition of Cetus in total contributed by SEK 33 million on top line. The EBITDA margin decreased a little bit, but in total, the EBITDA increased quite significantly in absolute terms. And that is, of course, to a large extent, driven by the increase in revenues. We had slightly lower gross margins here as well. So we did have some pressure here as well as in the West, which is the next business units we come to. So here, we can see that revenues decreased quite dramatically. Huge decline in systems revenues, 56%, where we did see severe lockdowns, very hesitant customers. So that really impacted growth. We also saw that affected services. But as we have a significantly more contracted services here or revenues. The impact is, of course, smaller. However, the decline in -- or a decline in both these have an impact on the EBITDA margin directly. Of course, reducing revenues by 56% in systems takes away a significant part of the gross profit to cover our SG&A. And that combined then with lower gross margins also in services led to a loss in the quarter. And of course, this is not something we're happy about at all. So we've started as soon as we -- earlier in the quarter, initiated an action program to ensure we can turn this trend around. And then our last business unit centrum, to Germany and Czech. This is now our smallest business unit. Here, a little bit of revenue decline as well, also a little bit of COVID impact, of course. Primarily in systems, services was unchanged. Here, we do see an increase in EBITDA margin. And as you may recall, those of you who have followed us for some time. In 2019, we had quite significant challenges. At that time, the U.S. was Netherlands and Germany and Belgium together. So we haven't shared the details on this level before, which you can see here that we actually had significant losses in Germany at the time for just BU centrum. So we can see that the actions that we initiated at that time continued to impact. So still successful. We have a reduction in SG&A as well. And that together led to an increase in EBITDA margin compared to last year. So that was the income statement. And then quickly, cash flow and balance sheet. So current operations before changing working capital, positive cash flow as expected. Then for those of you who follow us, we do have these quite large swings in our working capital, primarily when we have these -- we have larger system deals and the accounts receivables versus accounts payables there, can impute quite a lot. So we ended last year at a very strong cash flow and now the opposite effect a slight negative working capital And so the total cash flow from operations was negative by SEK 56 million, a little bit of investment in fixed assets primarily within our MPS business. And then cash flow from financial activities in the quarter, minus SEK 30 million, that's primarily leasing liabilities that with the new country routes these days end up in the financial activity. So in total, change in liquid funds of minus SEK 96 million, still, however, a strong cash position of SEK 393 million at the end of the quarter. Then if we go to the next slide, which is the balance sheet, this is what it looked like. Equity ratio at 21%. Cash position, as I said, SEK 393 million. The net debt is SEK 68 million. And if we exclude leasing liabilities, we would have a net cash position or we have a net cash position of SEK 177 million. We still have unutilized overdrafts of SEK 150 million as well as an unutilized part of our EUR 3 holding credit facility of SEK 134 million. So still strong balance sheet, strong cash position. I think that was -- no, that wasn't my last. This is my last slide. So we have communicated financial targets for this year, new, the ones on the left-hand side here. And if we compare the outcome now, the last 12 months rolling towards the target, sales growth was 10%, so in line with the target. EBITDA margin. Last quarter, we were at 6%, now we're at 5.9% rolling 12. So this is where we still have a gap, and this for the 8% is a longer-term goal that we're working towards. Net debt over EBITDA, we were at 0.32, so that's still significantly better than targets. So we have the room to take on more debt if required. Return on capital employed, it continues to be below target, of course, with the EBITDA margin impacting, but also as we acquire companies. And with IFRS 16, we see negative effects on this metric here. And the dividend, the proposed one of 4.56 per share is right in the middle of our target to distribute between 25% and 35% of net profit. Okay.

[Jonas Hasselberg, CEO & President]

Good. Thank you, Linda. I'll just summarize a little bit, and then we'll open up for questions. So I think to start with, and I mentioned already, our view of the long-term market is no different. We think we have a very good position, and we think the market is growing but we still have growth ahead of us. It was a bit of a challenging quarter and maybe a little bit more mixed quarter than previously during pandemic, like you've seen here now, there are some business units like U.K. and Nordics and Baltics that did pretty well and others like West that did not do pretty well or as well. Definitely impacted by COVID to a larger degree, with tough lockdowns, slowing down decision-making. We haven't seen lost deals, but we've seen delayed deals in the quarter. It's most visible in the West, but we've seen it in other countries as well. That's obviously a significant impact in combination then with slow contracts or TCV development during last year, which is now impacting the growth of revenues for MCS. And those of you who have tracked us for a while know that it takes us about 6 months from today of closing a cloud service contract to onboarding and start invoicing a customer. So with slow developments during last year, we now see then the revenues not developing as quickly as they otherwise should have this year. We're also seeing some mix shift in MCS, but that's more according to plan. And again, we don't see this being a long-term challenge for us, but driven by COVID. And you remember, we had a good TCV, it's a good inflow of cloud contracts in Q4 and also strong here in Q1. So we believe this is something will get behind us relatively quickly. No growth in general is positive, and the acquisition in Sweden, we're very excited about. So that's how I would summarize the quarter. So Linda I see at least there are some hands being raised on that. Anna, if you can just help us let people in at the appropriate -- in the appropriate way.

[Operator]

Yes. I'm opening up for Simon, wherever he went.

[Simon Granath, Research Analyst]

This is Simon Granath at ABG. Thank you for the presentation. I have a couple of questions, but I'll keep them short as I can, and let others ask questions as well. Initially, why is system sales in West performing below your expectations? Are you seeing price pressure from competitors? Are your sellers not performing? Or Is there anything else? Could you give us some more color to that?

[Jonas Hasselberg, CEO & President]

Yes. I think there's 2 pieces. One we mentioned already. There's definitely delays in decision-making. So deals being pushed forward because of uncertainty. There's another aspect which is we've flushed out quite a bit of system deals in Q4. So coming into the year with this lower pipeline than otherwise, it takes a while to build up that sales pipeline. But there's another piece that isn't where -- the Dutch market is slightly different for us. We're more targeting -- we have a high degree of midsized customers than enterprise customers. So midsized customers, we find a little bit more, say, hesitant in times of COVID and are also more open, I'd say, to cloud services. So there's a shift to cloud services in Netherlands in the customer base we're addressing there. And that's also the reason why the PeopleWare acquisition was so important to us to be able to pick up those customers with the cloud-based offerings through the PeopleWare portfolio. But the decline we saw this quarter was definitely much more significant than just been explained by any shift in the market towards cloud services. It's primarily driven by the slow decision-making and lower sales in the individual quarter.

[Simon Granath, Research Analyst]

Okay. Okay. And -- or sorry, if you weren't finished.

[Jonas Hasselberg, CEO & President]

No, I was just saying it was significant. You saw a 50% decline. The vast majority of that is driven by the COVID impact. And therefore, we believe there are short-term impacts.

[Simon Granath, Research Analyst]

And as a follow-up question to that. You mentioned that some of the midsized customers in this region are a bit more hesitant in terms of decision-making due to COVID. How has that delta changed over the past quarters? I mean COVID has been around for some quarters now. So how has that changed?

[Jonas Hasselberg, CEO & President]

It has. I think the -- there's a couple of details that are playing in here. Some is that it's a new calendar year, new projects, new budget. So there's a little bit of a restart in how companies are planning, may have some effect. But it's more that -- we've seen more severe lockdowns end of last year and going into this year than ever before in -- during the pandemic, in particular, in countries like Netherlands, Denmark, Norway or some except -- even Germany, to some degree, more severe lockdowns and restrictions than earlier during 2020.

[Simon Granath, Research Analyst]

Also another question, then I'll get back into the queue. What actions are you taking in west? And when do you expect these to yield full effect? As Linda showed earlier for business units, some units probably took you about 2 quarters to turn these losses around. How should we think here?

[Jonas Hasselberg, CEO & President]

No, I think we're positive about the systems business. So like said, these are not lost deals but delayed deals. So that, I think, should be a short-term turnaround for us. We've worked and already fixed a lot of things around consulting and make sure that we are planning the way we assign our resources to the right projects So consulting business is already recovering. And then we have onboarding of new contracts ongoing that will help on the revenue side and significant cost initiatives that have already been executed and will continue to execute. So it's a range of revenue-driving activities on both MCS and Systems NPS consulting as well as cost initiatives, all of which are already implemented or being implemented as we speak. Thank you, Simon.

[Operator]

So next will be Fredrik Nilsson.

[Fredrik Nilsson, Equity Research Analyst]

Fredrik Nilsson from Redeye here. I want to continue on Business Unit West, considering that you seem to believe that the main reason for the decline is the COVID. Why is it necessary with the restructuring?

[Jonas Hasselberg, CEO & President]

I don't think there is a restructuring, but we're adjusting costs to the level we're seeing, and obviously, like I said, TCV has been a little bit lower during last year than we expected. But -- so there's no significant restructuring, but always managing costs and then focus on driving revenue, both in systems, but also in services, MCS, NPS. So I wouldn't claim as a big restructuring, but always good to keep costs low, and that's a key initiative here.

[Fredrik Nilsson, Equity Research Analyst]

Okay. I see. The organic growth in cloud revenues was 1%, which is lower what we're used to. Are there any specific reasons behind that, except for the slightly lower contract values during last year?

[Jonas Hasselberg, CEO & President]

No, not really. We have -- there's 2 things that drive decline in revenue: Churn, so people leaving us completely; and renewal, so we've had a customer over the continent for the contract, and we're renewing the contract. And the renewal may increase revenue, it may decrease revenue. It may also increase or decrease margins. Then roughy at the same levels we've seen over many quarters. So there's no significant trend change in churn or renewal impact. Obviously, just like with systems, you may have some volatility, meaning if a significant customer is changing their commitment to some level, it may or may not have impact on that kicks in, in a particular quarter. But in general, if we look past over Q1 and also the previous quarters, renewal rates and churn rates remain low. Well, churn rates remain low, Renewal rates remain high, I should say. The impact of renewals and churn remains low.

[Fredrik Nilsson, Equity Research Analyst]

Okay. And I really like that you now disclosed the service revenue mix and the support revenue held up well in the first quarter. Was the situation similar during 2020 as well?

[Jonas Hasselberg, CEO & President]

Support has been a little bit more -- I can't remember exactly the numbers now for support. But it's a part which is more flattish in our expectations than MCS or cloud services, which we expect to grow faster. But as you know, it's tightly connected to systems. And systems business has been growing pretty good here lately, and support revenue then follows. So let me give you a little bit more color to that. In general, when we look at our growth opportunities, we believe systems business on average over time is growing by low single digits. And support business should then follow at that rough same level. But you're absolutely right, it's increasing better this quarter than just low single digits. Thank you, Fredrik

[Operator]

Then we're letting in Dale Robertson.

[Dale Ward Robertson, Fund Manager]

Dale Robertson from Chelverton Asset Management. Apologies, but I'm going back to Business West as well. So is there a structural reason why Business Unit West can't achieve effectively group level margins? It's the first part of the question. Secondly, you had some issues in Business Unit West in 2019. I realized that, that was when Germany was part of the disclosure. Were those issues -- I can't remember exactly, were those issues Germany-related or the Netherlands-related? And are these issues actually still the same ones that you're dealing with now?

[Jonas Hasselberg, CEO & President]

I'll start with this latter question, Dale. Yes, we had challenges in both Germany and Netherlands back in 2019, not related to what we're seeing now. 2019 was before the acquisition of PeopleWare and we had, I think, simplistically a little bit of poor sales steering. So again, poor system sales at the time at -- and which impacted both systems revenue and consulting revenue that would turn around relatively quickly at the time as we mentioned here already. So not the same issues. These are more COVID-related. With regards to margins, there's no reason West shouldn't be at our group average levels. At an EBITDA level, we do see that the people -- and this is no secret, so to speak, you guys have seen this already. They will be running at slightly lower gross margin or gross margin profit levels for MCS services because of the product categories, the characteristics of the services of PeopleWare. So a little bit lower margins on the PeopleWare service, but on the flip side, a bit lower SG&A. So the bottom line, no reason they shouldn't be at group levels.

[Dale Ward Robertson, Fund Manager]

Okay. And then my next question was on services margin. You mentioned the increasing complexity of delivering services because of the customer request. And you referred to something called ServiceNow, I think, which is about automating your delivery of services. Could you talk a little bit more about that, please? And maybe quantify what it could mean for margin? Because obviously, we're looking at the long-term margin target of 8%, and obviously there's a considerable gap there, presuming services as part of closing that gap.

[Jonas Hasselberg, CEO & President]

Yes. So say the quarter volume is partly putting pressure on the service margins, as we mentioned already. There are some specifics and it also relates to Business Unit West and we touched on it already the services. The MCS services at West are slightly different than most other of our markets. And one component of that is that we do a higher degree of customer service and unused service in Business Unit West. And we have seen an increase of complexity in the errands or increasing complexity of solving errands when both our staff and the customers' staff is working from home. So cost of solving or cost of delivering our services is increasing due to the pandemic because of that reason. So the cause of remote working in both ends. So again, that we believe it's a short-term issue that will be resolved as our own staff is coming back into the office as well as our customers' staff. Longer term, we are committed to the 8% target. There are a number of things that we need to do in order to get there. Operational efficiency, we've talked about a few times, is a key thing. We know that we can be better internally in streamlining our processes, and more importantly, automating our processes. And the ServiceNow project is a key part of that automation. Also the logic monitor that we mentioned here in the beginning is another part of streamlining those processes. To shift the revenue shift mix to more and more cloud services is the second part of reaching that target and scale and continued growth, both organically and through acquisitions is an important lever for us in order to reach it. So we still believe in it, but it is a long-term journey for us, which requires all of those 3 pieces to come into place.

[Dale Ward Robertson, Fund Manager]

Okay. Maybe just last one working our cash flow. And you highlighted the volatility in working capital to obviously positive in the last year, negative start of this year. I expect a similar pattern over the coming quarters? Or how does that kind of smooth out over this year?

[Linda Holjo, CFO & VP of Investor Relations]

Yes. I would say -- yes, because we have significant large deals, the timing how it hits the end of the quarter will impact. Over time, we're running basically at a negative working capital. So over time, we don't expect a significant negative effect on cash flow from working capital. But in individual quarters, it will continue to fluctuate like as long as we have a significant systems business.

[Operator]

Thank you. We're handing over to Simon Granath again.

[Simon Granath, Research Analyst]

You had some larger deals in U.K., as you mentioned in the report. How is system sales developing excluding these? Are there any chances that Some of these larger deals could have been recognized in Q4, in Q1. You mentioned earlier that you had -- you saw a similar occurrence regarding the pipeline in West, et cetera. So any color on this?

[Jonas Hasselberg, CEO & President]

No. I think we've seen historically, and Simon, you and those of you who followed us for a while know that the large system deals are coming somewhat arbitrarily and can impact the quarter positively or negative depending on which side of the quarter they land. And we expect that to happen over the summer rolling period, we will always have large deals and I think that volatility will remain. In general, we mentioned a couple of times, definitely a little bit more difficult to close the deals lately since roughly November, December time frame when lockdowns were tightened and through the majority of Q1 here, but again, more driven by the uncertainty and around COVID than anything else as far as we see now. I'm not sure that answered your question, Simon, though.

[Simon Granath, Research Analyst]

I think it did. I think it did.

[Jonas Hasselberg, CEO & President]

Maybe.

[Simon Granath, Research Analyst]

Historically, there's been about a 2-month lag, I believe, from cloud orders being recognized to revenue. Is this dynamic similar now? Has this changed over the past year or so?

[Jonas Hasselberg, CEO & President]

I think what we said is 6 months from signing a cloud contract, and we reported as TCV and until then, they are on board and then we deliver service and invoice. So the average is typically 6 months. It varies a lot. Some are significantly shorter, some are longer. But it's a good rule of thumb to assume that it's 6 months from signing a contract until we start invoicing on that same contract.

[Simon Granath, Research Analyst]

Apologies. I was referring to 2 quarters, not 2 months.

[Jonas Hasselberg, CEO & President]

Okay. Sorry, yes. Then we're aligned.

[Simon Granath, Research Analyst]

Perfect. As a final question. You said that you also saw some minor price pressure in -- some minor pressure rather, on gross margins in the U.K. What did that relate to?

[Linda Holjo, CFO & VP of Investor Relations]

I think here also, we see not -- it's not really a general market pressure. It's rather the mix of the different deals that we have been closing and have been expecting to close that puts some pressure on the margin, both in customer support and MCS. So which meant that the margins were going down in the quarter. So it will vary...

[Simon Granath, Research Analyst]

Sounds fair.

[Linda Holjo, CFO & VP of Investor Relations]

Yes. So it's not a trend rather the deals that we got in this quarter compared to the ones we had last quarter were slightly lower margin deals.

[Jonas Hasselberg, CEO & President]

Good. Thank you, Simon.

[Operator]

Next question will come from Wilhelm Gruvberg.

[Wilhelm Gruvberg]

I have a question regarding the acquisition of Cetus in U.K. This is the first quarter you have it consolidated for the full quarter. Can you tell us a little bit about the the development in that company since you acquired it? And is it according to plan better or worse? And also, if you can comment on the M&A pipeline going forward? What are you looking for? And what should we expect going forward there?

[Jonas Hasselberg, CEO & President]

Yes. Cetus acquisition has gone well. We're happy about that. They're delivering a little bit ahead of our expectations, which is great. And more importantly, I think the integration and the collaboration with our Proact team and the Cetus team is going really well. We've established a new organizational structure in the U.K. where the Cetus team is now plugged into in a good way, and that seems to be working fine. Sales is well aligned and we're able to actually get some synergies out of the sales already in this quarter -- this first quarter where we get better deals and better margins out of deals by going together than we would have done individually. So I think overall, Cetus has been only positive in this first quarter. And on the M&A, continues to be a priority for us. We do want to do a couple. So, let's say, order magnitude 2 to 3 per year. The target size for us remains to be in the few hundred million Swedish krona per year in terms of revenue run rate. It will be the sweet spot for us. So PeopleWare was right up there. Cetus also, whereas Conoa is maybe on the smaller end, but then Conoa is strategically super interesting. So that's from a size perspective, we're looking for. Germany is still a super interesting market. Netherlands in the near future will -- or West, I should say, Netherlands and Belgium. I mean it's an interesting region for us to continue to grow. If Cetus continue to be integrated at the pace, we're currently seeing the U.K. can open up for another opportunity here in the near future as well as Nordic, and probably in that order, I would say. But you never know, and you all know that it's arbitrary to some degree or sarcastic when we find a target that -- and all stars are aligning in terms of fit, price tag willingness to sell those kinds of things. And pipeline-wise, we're working in all the regions and constantly build and review pipelines or targets.

[Operator]

And I don't see any more people who would like to raise questions.

[Jonas Hasselberg, CEO & President]

All right. Thank you very much for joining. We're always available if there are any other questions. So you can always reach us at our e-mail addresses or phone numbers. So don't hesitate. But for now, thanks for joining, and have a good Thursday. Thanks very much.

[Linda Holjo, CFO & VP of Investor Relations]

Thank you.