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Proact IT Group AB
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Good afternoon, everyone. This is Jonas. Can you hear me okay on the line?
Yes.
Yes.
Good. Good. Welcome, everyone. Well, so this is Jonas Hasselberg, the CEO. Thanks for calling in. I'm speaking in English because we think we have English-speaking participants on the line. Hope that's okay for everyone.
Yes.
We'll -- thank you. We'll go through a couple of slides. I'll talk through the results. Well, look, there's still a couple of people dialing in, but we'll get going here. And of course, let me start with saying that we have just announced the quarter that we're not happy with. The performance in the second quarter was not as good as we would have liked it to be and as good as we expected. Well, I'll take the time here during the presentation to give you a better view on the second quarter and [ provide a better understanding on ] what has happened. And I'll pause every now and then, so you guys can all ask questions as we go along the slides here. There are slides available on the website, so you can follow on the slides. I'll try to be clear in terms of which slides that I'm referring to as I speak. So I'll go ahead.I'll be on Slide 3, and this is a key part of all the conclusions here as we look back on second quarter, the performance of the second quarter, again, not something that we're happy with. It's not driven by any significant changes in the marketplace. It's quite the opposite and we remain positive in terms of where the market is developing. The trends that we have discussed before are still ongoing. There is an increased investment in IT and IT infrastructure. The importance of the type of solutions that Proact are delivering where data and information management and getting value out of all those vast amounts of data that our customers are generating, that value is increasing, and our specialist competence in this area remains very important, very strong. And we have a strong position with our customers. So it's not a change in the marketplace as much as we had poor results, particularly in one of our business unit, the one we call West. So we'll come back to some of those details.On Slide #4, a couple of key highlights then or high and low lights. The -- and if I may, the participants, please, mute your phones if possible. We're not able to do it from here. So if you don't mind, please mute. Again results declined in the second quarter, 7% compared to last year to SEK 806 million. There are some positives in the quarter, so our new signed contracts for cloud services increased by 55% to SEK 96 million, so it's a strong development in the quarter. And the revenues from cloud services increased 12.5%, so that's also a positive development in the quarter. We see strong development in several of our main countries, including Sweden and Finland, for instance, U.K. doing an okay result. The revenues are lower. We keep good profits in the U.K. And then last but not least here on this slide, we divested our subsidiary in Spain during the second quarter. This will have a positive effect on our results going forward and it's also an operation we've been not having a positive contribution for quite some time, so that's positive things to move forward with Spain not in our business and also giving the team in Spain actually better opportunity to grow the business with their new owners.All right, I move on to Slide #5. Just a little bit more details then in terms of the key numbers. So revenues landed at SEK 806 million, down from last year's equivalent -- second quarter of last year, SEK 867 million. And you can see the biggest hit here is on system sales. And it's in particular sales from systems perspective in the U.K. and the West business units that are struggling. A combination of several reasons for this, again mostly market-related, but a couple of deals that have been lost, a couple of deals that have been delayed. And that gets in turn a follow-on effect on the corresponding services, so our consulting services and more importantly, our -- sorry, our support services and more importantly, our consulting services. So lower system sales, which is typically a bit of a volatile business, hard to predict over the quarters and then you get a corresponding follow-on effect on the support and consulting services.I'll move on to Slide #6. Just give you the same numbers, but on a 6-month basis, so year-to-date. Positive revenue growth year-to-date. And remember, we had a strong Q1 with 20% revenue growth and very strong system sales in that quarter. Services remain slightly behind and for those of you who remember, we are still comparing when we look at the year-to-date numbers with a handful or a few, 2 to be exact, major deals that we lost a year earlier. Again, if I don't -- if you don't mind muting, I'd appreciate it. I know it's difficult for the callers to follow when we have background noise.
Everyone [ would be glad there ].
Okay. For those -- I hope you can still follow. I apologize for the background noise here. And then last piece on this, which will be Slide #7. You see on the rolling 12 months, continue then to see that growth. And here we also see services growth, and again, the cloud business is dragging the services up in a good way, whereas we are behind on -- or declining on the support and professional services.So let me do Slide #8, and then I'll pause for questions for a second, but Jonas, I think you have a lot of information that you want to share with regards to the quarter. So the numbers here on Slide #8 are related to the second quarter. Again, positive development in our cloud business with the revenue of SEK 122 million, 12% up from same period of last year. Nordics is practically flat with good gross margins. Some decline in EBITA, and we spoke about this before that we are building up our service delivery capabilities here for our cloud services, which is impacting the EBITA in the Nordics. U.K., also strong in terms of the cloud revenues, up 15%. And then slightly tougher in the U.K., which is mostly the system sales, but remained good profits in the quarter and increased their EBITA margins.And like I said already a few times, our biggest challenge this quarter was our business unit West, a couple of different reasons as I mentioned. Again, lack of system deals made negative impact also on our, primarily, consulting business and it hits then the -- both the revenue and the results in this business unit. Cloud revenues, however, good progress, which is a positive sign. East, strong on both systems and services. Then I mentioned already that we will take then a onetime cost related to the divestment of Spain, which will impact the second quarter.And last and probably most important, we are continuing and also adding some new initiatives here to get back to performance. We will make changes to our efficiency of our delivery of our services to make it even more efficient. We will adjust our cost levels going into the second half of this year to make sure that we are getting back to the level we -- into the -- in terms of our profits. We will also put all the effort back into making sure that revenues are coming in. We are remaining confident in our growth ambitions that we have spoke about previously, which means that we will put all the efforts into getting back into growth from a revenue perspective, including across all our business units that we are taking measures to be cost efficient as we do that.All right, I'll pause here for a second. I know there's quite a few people on the line, so we'll try to take questions in maybe a bit of a -- I don't have a way of lining you up, so to speak. But I'll pause and let you ask questions for a second I think. Anyone? Can you still hear me? No questions?
So on Slide #9, same numbers but with year-to-date scope. And you can see that we are growing at a good pace in the Nordics business units. Well, we spoke about the U.K. being -- improving their EBITA margins. And of course, also in a Q -- in a year-to-date perspective, West is challenged by the impact we've seen from the second quarter. And last and frankly the least also, but very positive development in our East business units. We also had one-off restructuring costs in Q1 related to the structural changes we did. So all together if you look at the year-to-date numbers, there is SEK 20.2 million in one-off costs related to year-to-date numbers.Then on Slide 10, just quickly, I'm going to hand over to Jonas Persson, our CFO, the cash flow.
Yes, thank you, Jonas. Jonas Persson, CFO here. The cash flow has been acceptable or okay in Q2 and the big change this quarter has been the dividend or the SEK 38 million, and also you can look at the -- in terms of working capital, it's positive, so that's good. And of the fixed assets, the investment for Proact Finance is SEK 17 million, and then we have this new setup with the repayment of leasing liabilities which relates to IFRS 16, helps that in the numbers. And we have no change in bank loans and overdraft facilities in this quarter. So we have -- at the end still we have a strong cash position of SEK 219 million.And if we move on to the January-June cash flow, there is a negative change in working capital, but still as we had in the June quarter, we have a plus SEK 56 million if you look at 12 months rolling. And of course, with the system sales we have between the quarters, it's up and down, but I think it should be positive when we look at 12 months rolling. And for the investment part, Proact Finance is SEK 33 million. And then again, we had a dividend, no change in bank loans, overdraft facilities during this period as well like in Q2. And then we have, as said before, a strong cash position of SEK 219 million. So any questions about the cash flow? Okay. Good. Then we move on to the balance sheet. The solidity is 21% and the long-term goal is to be between 20% and 25%. So that means it's in between that. And of course, we have been hit a lot with the new IFRS 16 in our balance sheet. It's a hit of SEK 258 million. And that's, of course, also hitting the net debt. We have a net debt today of SEK 155 million, also with a hit of SEK 258 million. And we have an unutilized overdraft facility for the then operation of SEK 242 million and we have an unutilized 3-year revolving credit facility for acquisitions and others of SEK 240 million. So strong positions there even after a weak Q2. Question? Okay.
All right. Thank you, Jonas. Slide 13, just summarizing where we stand then in terms of performance towards our long-term financial goals. These numbers here in green are rolling 12 months. We've said that our growth should be at least more than 10% or it should be more than 10% and we're currently rolling 12 months at 8%. Clearly the second quarter didn't contribute positively. Our EBITA margin should be above 8%. Here we're now at 5.4%, which is a negative development, which in addition, of course, we're not happy with. Net debt over EBITDA is just, well, first to make sure that we are running a healthy business and it's going to be important as we continue our acquisition focus that we have a good control of our financial strength situation, so this target right now is, of course, in a good position and we're going to get to 2. Return on capital employed below the target this quarter -- sorry, rolling 12 and it's a [ consequence ] then of IFRS contribution. So with the new IFRS 16 rules, we get a negative impact on the return on capital employed, and then you add on top of that a lower profit before tax and we get a negative development here. And dividend is -- our dividend policy, of course, unchanged and this year -- the result for 2018 was a 30% dividend, which has already been executed.So to summarize, we remain positive about the market opportunity. We are not fundamentally changing our strategy. We are continuing to run a business where the systems business is an important pillar for us, and the long-term growth opportunities are coming from our services business and the services opportunity we see moving forward. And then on top of our organic growth, acquisitions is a priority. And we are executing on that. As we've outlined a couple times before, we built all the things we need internally with processes and financing and skilled people on board to run the M&A processes for us. So the market is positive. We are executing our strategy. We are not happy with our performance here in the second quarter. So we're taking corrective actions to get back on track. And we look forward to meeting you guys all again after the third quarter.So with that, I'll pause again for additional questions.
Yes, this is [ Eric ], yes, sorry, from [ HDFC Telegram ]. Yes, great. Just a brief question on the seasonality. Do you see any effect of like Easter and stuff like that affecting the quarter as a whole? Or is that just marginally?
Marginally or not at all, no. We cannot use that as an excuse. It's been a normal quarter or 2 compared to all the other quarter or 2s in the past. So no impact on holidays or similar.
And this is Simon from ABG. You mentioned that some contracts were lost during the quarter. Could you elaborate a little bit behind why these contracts were lost? Was it due to pricing or something else?
Yes, we've had a couple of different reasons. It's -- I think it's just normal business that we don't win all the contracts. We're not seeing an increase in lost rate. But obviously, if you lose contracts very late in the period, we don't get visibility into the impact on the numbers. So we've seen this across the business units, not necessarily a specific trend, like you have to ask if there is a pricing or competitive pressure, but just rather the normal competition and not us winning all the deals unfortunately. Some slipping into the next -- the coming quarter here, this current quarter, but also deals that have been lost to competition.
Okay, that makes sense. And also another question from my end, and for instance, could you explain a little bit on the development in the different regions during the quarter? For instance, were sales weak in the region for entire period? Or did they improve or descend in the middle of the quarter?
I think when we look at -- I'm going to split it up a little bit, so when we look at the cloud business, it's relatively even, it's -- so -- and we don't see a particular trend between the different business unit either. So our new contracts for cloud business are trickling in relatively evenly. The systems business which gives us big onetime revenue impacts tend to come towards the end of the quarters in general. And that also gives us a little bit of a hard time in terms of predictability. So if there are deals at the end of the quarter and they don't come through, obviously, our forecast method is not able to cope with that. So I'm thinking if I'm answering you correctly -- correct me if I'm not answering your question, by the way, Simon here, but I don't see a particular trend in terms of shifts in sales trends between the business unit or across the months. But in general, the systems business is back-heavy in our quarters, which makes it a little bit more difficult for us to get visibility. But that's nothing new for this quarter, that's a general dynamic of the business.
Oh, that's okay.
Did I answer your question there, Simon? I'm not sure I did.
No, I think you did. It was a good answer. I'm happy about that.
This is [ Patrick ] from [ Vega ]. Can you explain a little bit if those were -- especially in the West business unit, if those were lost contracts, does that mean that the development is going to bleed over into the coming quarters? And then what are those contracts run for a longer period I would say?
Yes, important distinctions. Thank you. The system deals are a little bit more one-off. It all depends on then what upsell and more -- and service attach rate we get. So it's the turn of cloud contracts that we're talking about here that underperformed in the second quarter. And that's -- to some degree that's positive because that means that when the next time there is a significant deal coming up, we're back in business and we don't have to wait for a contract period of that. It's the next time it shows up. So it's not as impactful for the next coming quarter as you may perceive, but obviously, it is a lost revenue and it is a lost opportunity for selling support services as well. So no, it doesn't give you a direct slipover into third quarter, but a lost deal is a lost deal. You understood the difference there between a cloud contract, which we have won for 3 years versus this being a binary transaction?
Yes. Was it a -- the bulk of the -- I mean because it has a very disproportionate impact on the margin, right, of that particular business unit, can you -- I'm sorry, I jumped on a little bit late, so if you already did, I apologize, but could you explain a little bit how the margin impact comes to be and whether that was the result of some 1 or 2 deals with very high margins in the prior year's quarter that didn't come through this year?
We may have covered it before. So the impact we're seeing in business unit West is a slow development on the systems business, and typically when we do systems business, we also get a good attach rate of our own services, support services and consulting services. So when businesses are not coming through in accordance to our expectations, we both get a negative hit on the margin contribution from the systems business and the contribution from the corresponding then services. So it gives a bit of a negative effect in terms of both product areas, systems and services not contributing.
And -- but was it sort of because of the disproportionate [indiscernible] to EBITA, can that be traced back to the 1 or 2 particular deals that didn't come through that were very high margin in the prior -- in the quarter in 2018?
No, I don't think you can connect that to major deals or a few deals in the same period of last year, but we are relatively sensitive to few deals. So it wasn't a lot of deals missed here, but each deal, as you know, when we talk about the systems business, are significant, so they put us on the right side or the wrong side of our targets. So it's not a lot of deals in terms of the numbers, but they're significant in krona.
And Simon here again. If I can follow up with some questions.
Yes.
And so I'd like to go back the U.K. development. Are you feeling any impact from potential Brexit there? And also did you, to any extent, prioritize, I mean, profitability over growth in that region given the high margin?
We see a bit of a -- and I don't think we see more impact on Brexit than anybody else does. So I'll comment in a little bit more specific, but just one caveat that I think everyone who is doing business in the U.K. are concerned with Brexit and so are we. And we do see a little bit of cautiousness with our customers because of Brexit and the unstable climate or macro climate or political climate, if you will, in the U.K. We -- I think we are always trying to be on top of our profits. And of course, that's -- I hesitate saying that since we now have a quarter behind us where we weren't successful. Well, now we haven't optimized profits over growth, we want to do both. So I guess the short answer is no. But we were successful in keeping our costs low here. And that's good.
Fredrik Nilsson from Redeye here, yes. I have a question regarding the connection between system revenue and service revenue, if I may.
I'd say yes. Please go ahead.
In the end, there's no clear correlation between the system and service revenue, and it's in the quarter. Look at the Q1 in this year for example, but these time it is, and I think you'll understand why it's such a clear connection in this quarter when we haven't really seen that before.
Yes. No, I think the correlation is not 100%, but it's not 0, so we do -- typically we will get consulting business either in prior to or even part of a systems deal. It could be anything from design services, installation services, operation services from the consulting perspective. And then it's contract and support services on top of that. But you're right, it's not a 100% correlation, so it -- we'll see some rubber banding, if I may use that analogy, between systems business and services business. And then of course, the cloud component of our services revenue is to an even larger degree disconnected from the systems business.
Okay. So there is no...
So our consulting business are typically -- are relatively close correlation. Support business have a very close correlation, but that's contracted revenues typically spread over time. And then the cloud services or the MCS revenue is -- have a low but not 0 correlation to systems business.
Okay. So the share on consulting related to each system sale hasn't changed?
No.
Okay.
Nothing changes, no. Any other question on this? I think the second quarter is the most important one. I'll go on and I'll pause a bit for here.
I could start, if I may. Simon here again. How is the current M&A pipeline looking? You haven't elaborated too much about that during this call.
Yes. No, I think M&A is easier to talk about when we do something, and before then, it's just talk. We've described before what we've done in order to build up the capability. We have good financing that Jonas has outlined already before, CFO Jonas. We have a person in place that is dedicated in running our M&A process with many years of experience. He's already on board and up and running. We have established a process together with our board in terms of how we do the M&As and how we run through the approval processes and everything. And we have a grocery list of targets that is healthy, including a handful or order of magnitude 10 prioritized targets that we're actively working with. But as you guys all know, acquisitions are even more volatile than the systems business. So when we do an acquisition, we will let you know. It's really hard to predict when it will happen.
Okay. All clear. And just a follow-up question. How's the progress on -- in terms of rolling out the larger cloud orders that you contracted by the end of 2018? And by that, I refer to Q4, of course.
Yes, so we had a good second half in terms of our cloud orders, in particular then the fourth quarter we had orders of SEK 176 million, and also good progress the quarter before that. And they are now -- and typically we count on average 6 months of transition timing, and 6 months -- sorry, 6 months of transition time from the order until we can start invoicing the customer, which means that we are now seeing a good growth in the cloud revenues coming from the orders that we gained second half of last year. And we continue to see good forecast of the cloud revenues going into Q3 and Q4. So they are progressing as you would expect in alignment with our 6 months typical transition time.
Excellent. All clear. And just a final question from my end. And could you explain a little bit about the reasoning behind the divesture of the Spanish operation?
Yes. So Spain is a relatively big country. We had a small operation that have not been contributing positively to the business. Different market dynamics far away from our core operation. So it's a combination of -- in order to get critical mass in the Spanish market, we would have to invest. It didn't contribute positively. And that is very different from the business and markets that we see in more northern parts of Europe. So for us it was a way to divest nonprofitable operations and put our management focus and investment focus in our home markets in the northern parts of Europe.
This is [ Andrews ] from [ DNB ]. I have a question regarding your comments regarding West. There's -- you mentioned a number of countries here that's weaker than you expected. Is that a new trend here? Or is it just for this quarter?
I wouldn't call it a trend, no. There are things we need to get better at internally. I think we can fix them quickly. So I wouldn't call it a trend. It isn't a trend. It's not market driven as we have talked earlier in the call. So we need to get focus back on selling our systems business as well. We are running a 2-legged business operation, the traditional systems business and our growing cloud business, and we need to be able to do 2 things at the same time. And so some regained focus on the systems business is required.
So a follow-up on that one. Does that mean that you see possibilities rather fast coming up on the new -- on the same level as before?
That's our ambition. We don't give forward-looking forecast, but clearly we're not happy with Q2 so -- yes. Yes. More questions?
Can you please elaborate a little bit more on what specifically the measures are to turn around or to improve sales in the West going forward? So was it about the way that you put attention on this particular aspect of your service -- oh sorry, of your product offering? Or just maybe a little bit more color.
Yes. No, I think it is a different sell to sell a system compared to selling a service. And we need to be able to give both. So it's about strengthening or restrengthening I should say. We've always traditionally been very good at this, so we know how to do it. We -- so that is one key part to it. It's about the balance between the number of salespeople versus the number of technical people. I think we've been strengthening ourselves a little bit just in terms of number of people. And we need to get better at forecasting and really early see the development in the marketplace. We are -- I mentioned already, we are also making additional investments -- or not investments, that's the wrong word, efforts into making our delivery of our services more efficient. So we will speed up the programs we've already put in place in terms of driving efficiencies out of our delivery organizations. But at the same time, I want to be very clear, we are committed to our growth targets.So over time as we achieve our growth targets, we will continue to invest in that growth. So while we're going to be more cost-conscious here, going forward coming out of a quarter we're not happy with, it's -- it doesn't mean we're going to drive profits through cost measures. We're going to drive profit through growth. So it's a bit of a putting one foot on the throttle and the other foot on the brake pedal at the same time. We're going to be on top of our costs, but we're committed to growing the company.We are over time. Happy to take more questions, but I don't want to keep you guys longer than we promised, which we already have. Any more questions? If not, wish you a great summer. Thanks for dialing in and thanks for your interests. And we'll meet again at the end of the third quarter. Thanks very much.