Proact IT Group AB

STO:PACT

Earnings Call Transcript 2021-Q2

[Jonas Hasselberg]

Thank you for joining our conference and video call, at least for Swedes, it's starting to come vacation time. So we definitely appreciate that you're taking the time to join us here, also obviously on relatively short notice after the release of our quarterly reports, which was done only 30 minutes ago.So my name is Jonas Hasselberg, the CEO of Proact; and we also have Linda Holjo, our CFO, on the call. We'll kick off immediately. We'll ask that you stay muted during the call, and then we'll open up for questions towards the end. And there's going to be ample time for questions. So just bear with us here as we go through this.We'll, obviously, talk a little bit about the company. We -- you guys should have read the report and seen the numbers. We are not happy with the revenue for the quarter, and we'll talk quite a bit about what we're seeing in the marketplace and what's driving the revenue in the quarter. There's a lot of other things going on in the business and in the company that are more positive, but we acknowledge and recognize, of course, that we're not happy with the revenues, and we'll cover it out here as we go through the presentation.Well, as always, give you a bit of an introduction to the company and our view of the market. What's happened in the quarter, and then we'll go quite deep into the financial results. And like I said, we'll have plenty of time for questions as we get towards the end here. So again, welcome, and we'll kick it off here.So to start with, those of you that haven't met us before, Proact is a Stockholm-based IT company. We are serving customers across Europe with the purpose of making sure that they have the right IT infrastructure. And obviously, we put a lot of focus on making sure that the IT investments are customers are doing are geared towards driving the business value and the growth ambitions of our customers.We're serving 4,000 customers now. That number is growing, which is great, turning over about SEK 350 million, as you've seen. We're a little bit over 1,000 employees now, which is also growing, in particular, considering the acquisitions we made over the past 6 or 9 months or so. Think the way we want to describe ourselves is that we deliver value to our customers. And in particular, we want to be a specialist. We don't do everything for everyone, but rather we really focus our expertise and skills and our people in being really good in helping our customers managing their data and managing their information.It doesn't mean we only do storage. It means we do a lot of things, but we're really geared around helping our customers get that value they want to get out of all the data they have. All the digital transformations ongoing in the world is very much geared around data. So we provide advisory service around data strategies. We obviously provide storage solutions to store all the data.Networking, which is becoming more and more important as people are working remotely and data store in central data center locations. Protecting even more important, both in terms of just pure accessibility and availability of the data, but obviously, against cyberattacks as well. And, ultimately, helping our customers get that value out of the data regardless of whether that's a high degree of automation in processes or big data analytics, artificial intelligence or whatever it may be.In terms of what we're actually selling to our customers, you see the 4 different product lines here at the bottom, consulting services, managed cloud services, delivering IT-as-a-Service, still infrastructure related, but where the customer is buying it on a services basis.We still -- of course, still do a lot of reselling and implementation of hardware and software, so physical equipment on our customers' premises. And at the bottom of this slide, tech will support making sure that all of these solutions and infrastructure is working in accordance with expectations.So those are our 4 product lines, and they are equally important to us because we believe in a world where customers will have what we call very much a hybrid infrastructure, meaning they will have a combination of these different deployment methodologies and technologies.The value we bring to our customer is mapped to our product portfolio. So in this picture here, with the customer at the at the center, which is always true to us. We put the customers in the forefront. And then in the next circle, you recognize our 5 value proposition. And then the range of products and services that are enabling these value propositions.A couple of things that are worthwhile highlighting is, obviously, the management services around, whether it's consulting services or support services or monitoring services, but maybe equally or even more important, and 1 question we get a lot from analysts and investors like yourselves, but also from people in general is our -- what we call our deployment model.So we're very much designing our solutions in a way that it doesn't matter how the customer wants to deploy their technology. So if a customer wants to buy hardware and software and run in their own data centers, that's perfect, or if they want to use a global public cloud provider like Microsoft or Amazon for their infrastructure, that's totally fine, too. Our value proposition can still be delivered on any 1 of those deployment models or architectures.And for us, it's more important to deliver that value we talked about, and our services and expertise is valid equally so on-premise infrastructure or in a public cloud or as a managed service from ourselves. So this is an important part of our product strategy and our value proposition to our customers.Obviously, there -- the result of this quarter triggers questions around where is the market going? And is there a change in the marketplace. We don't believe there is a change in the marketplace. There's definitely a lot of things happening, and there may be some swells or some waves following a lot of the COVID reactions during 2020. But in general, on the macro level, we don't see a major shift, but rather continued big focus on IT to drive the digital journeys and transformation projects that our customers are doing.It's all being very much business-driven with the purpose of, of course, enabling new business opportunities or improving efficiency in existing business. What we do see is potentially then 2 things. Obviously, there's a technology shift ongoing. We've talked about that for some while, and we are strong believers in what we call the multi-cloud, as we showed on the previous picture, meaning that our customers will have a variety of infrastructure depending on purpose and performance and their abilities.So multi-cloud, meaning that they will use public cloud for certain things, and they will run their own data centers for other things, and they will use services from Proact and our peers in the business for yet another thing.So the technology trend remains and the overall agenda with our customers remains. What we have seen is, of course, during 2020, in particular, quite a bit of adapting to the new work behaviors during the pandemic. So obviously, the majority or most of our customers' workforce is working from home, putting new requirements on the workspace solutions, security solution and just the internal support and IT services.I think part of the reason we're now seeing a bit of a delay in some of the investments with our customers is that they're now coming out of those investments from 2020 rethinking a little bit, "Okay, now we're back to -- or getting into a more normal pace again or a new normal," if I may use that word, and are rethinking their investments going forward a little bit more carefully.So again, we don't think the overall trends are changing. We continue to live and operate on a market that's growing, but we have seen longer decision-making and longer sales cycle, and we believe that is largely effect of people now coming off of the COVID investments and adapting to COVID and taking a breath before they continue to go back to investing in the future.So with that, the quarter looks like this. We usually try to get more positive plus signs on this slide and the minus side. But this quarter, of course, with a revenue decline from last year's very good quarter to SEK 878 million this quarter was not as good as we expected.That had, of course, a follow-on effect on our EBITA results. So the EBITA result is, to the vast majority, driven by the volume decline in revenue. So we landed on a 5.2% margin, partly then offset -- the volume was partly offset by good cost control, so lower SG&A improvement in our both gross margins, but also in our administration costs or SG&A costs, as I mentioned already.It's systems that is driving the decline. So you can see here 19% down in systems. You know that from before, systems is a volatile business. We tend to have, in a couple of markets, a dependency on major enterprise customers that are doing large system investments and sometimes they slip between quarters, and then volatility is impacting our revenue quarter-by-quarter, and that's obviously what we're seeing in this quarter again.On the more positive side then, services up, to some degree, driven by the 2 acquisitions we've done over the past 9 months, primarily Conoa in Sweden with a consulting-heavy business, but also with Cetus in the U.K. with both managed and support services. Gross margin, a good increase of 1 percentage point. Continue to see low SG&A. Cost decreasing year-over-year by about 3%. So efficiencies, but also, of course, continued very low sales, travel and entertainment costs.And as we've communicated already earlier, as we announced the Q2 results, although it did happen in this quarter -- sorry, in Q1 results, but it did happen in the second quarter, the acquisition of Conoa is a big milestone in this quarter.So a couple of other things, just to go a little bit deeper. So I mentioned it already. We see decision-making being a little bit slower than we've seen earlier. It's been not probably for another -- it's been going on for about a quarter or 2. We don't see the activity within our customers going down. We don't see the investment opportunities disappear.We don't see an increased loss of deals, but we do see that customers are thinking one extra round and also bringing the business side of the organization into the decision-making to a larger degree, now, again, coming off of the pandemic.In the later half of the second quarter, the global semiconductor shortage situation had some impact on deliveries. That came later than we expected, but we've seen it with some of our vendors. This is something we manage very closely with our vendors, and we have good processes in place to do supply chain planning and forecasting together with our vendors. So we'll see how long this continues.I think you read and follow this as much as we do. Obviously, all our partners and semiconductor vendors in general are doing a lot of efforts now to ramp up capacity and close the backlog from previous quarters. So we'll see if this impact is significantly going forward. It may do for the rest of the year, but like I said, I think we're managing this very carefully with our vendors and have long-term forecasts with them to be able to manage the supply.We have 2 ongoing integration projects that are well on track. It's Conoa, again, the most recent acquisition in Sweden, good progress in the integration, and we're seeing some very positive feedback from customers in terms of the combination of the skills of Proact in Sweden and the skills of Conoa here in Sweden. And so that's -- the cross and upsell is making good progress. And in addition, one of the key strategic rationales for the acquisition was the ability to do co-development of services offerings, which has kicked off well as well here during the first couple of months of the integration.And similarly, with Cetus, the company in the U.K. that we acquired in October of last year, ahead of plan with regard to the integration. It's been a very smooth integration operationally, and we've had very positive commercial synergies already in terms of being able to go in with cross-sell and upsell and a combined offering to our joint customer base. So it's been a good and positive progress in development since the acquisition in October.Just a little bit deeper on Conoa, it's more of a reminder than anything else. So it's a relatively small, but very fast-growing company, again, based out of Stockholm. They're heavily geared towards consulting and educational services. They have a specialist or geared very focused on what we call modern or cloud-native development platform.So this is the modern way of doing application development for any enterprise customer and Conoa are the experts in designing and implementing the underlying infrastructure required to make that happen. They have very strong partners and are recognized in [indiscernible] region with the global market and technology leaders in this area. So we'll be using in our dialogue with Conoa, technology terms like container technologies and DevOps and those kinds of technology transfer, Kubernetes that are really the center of this application development technologies that are for the future.Again, as I mentioned, good progress on the integration. We see a very significant demand for their consulting services. So we're -- we have a good pipeline in terms of sales and good utilization of the consultants. And like I mentioned already, we're now already very eagerly going into our customers with a cross and upsell proposition in both Conoa's existing customers, but also Proact's existing customer, and that's working really well.And then we want to productize a lot of these capabilities. So the technical expertise of Conoa combined with the operational expertise of our existing managed services platforms and capabilities, is a great combination to develop effectively platforms as a service offerings, and that's kicked off really, really well.Conoa is contributing with about SEK 22 million in revenue in the quarter, and about SEK 3 million in EBITA when adjusted for transaction costs of the actual investment. That, of course, means that we continue to execute on our acquisition strategy over the past 18 months. We've done 3, and this is roughly the pace we try to be at.So people were, back in October 2019, which brought in 220 very skilled experts in workspace and cloud-based, Microsoft-based solutions. Cetus, as we mentioned, brought in another just sort of 50 very skilled people on hybrid cloud solutions, and now another 30 with Conoa experts in, again, what we call cloud-native or modern development platform. So we're happy with the pace and the types of targets that we are -- or companies that we were able to attract and partner with here.With that, let me hand over to you, Linda, and go a little bit deeper into the financial numbers.

[Linda Holjo, CFO & VP of Investor Relations]

Yes. Thank you. So highlights. And I think you've mentioned most of them already. Revenue is down by 11%, with systems down 19%. Services growing 2%. Adjusted EBITDA down as a consequence of that revenue decline, down 18% to SEK 46 million and a margin of 5.2%. And profit before tax down a little bit less, 12%, down to SEK 35.1 million and 4% margin.So we will, as usual, go into the details with, first, covering the revenues, then profitability then a little bit about the cash flow and balance sheet. So revenues on the right-hand side, we have the -- first of all, the overall revenues by quarter and rolling split by systems and services. And you can see that it's the dark blue part, the systems that fluctuates a lot.We had a good second quarter last year, and it's slower this year. And in the quarter, we also had negative currency effects of minus 2%. The acquisitions that Jonas mentioned contributed positively by 5%. So overall the organic decline was minus 14%. On the 12-month rolling basis, we see that the revenues are still increasing at 2%, with services growing 5% and the systems declining a little bit.If we go into the services increase of 2%, which was then basically flat to adjusted for acquisitions and exchange rates, we see good growth in support services, which is, of course, encouraging that our customers appreciate the support and the value adding we provided there, organically growing 5%, and, in total, 8%.Consulting services increased 19%, both Conoa and Cetus, and primarily Conoa, contributed quite a lot here. So organically, they are declining 2%. And here, we typically, both for support and consulting fee, and especially for consulting, quite a strong correlation with systems growth. So encouraging that we still see good relatively better performance here.Then we have the cloud revenue, which is declining by 7%. Organically, it's declining a little bit less, 4%. And that is primarily a result that we, last year, had lower TCV for quite some time. Then we had a strong Q4. So we signed a lot of new countries in Q4. Also, we've been signing at a relatively good pace in the year so far. It's taking a little bit of time to onboard these new contracts that we've won. And then at the same time, we have a couple of older ones that have expired. So that's the decline we see here, relatively small.If we move to services, we had a decrease of 19%, it's 21% organically, so slightly more. And we see that several countries have had a challenge this quarter, and we're reducing revenues compared to the same quarter last year. U.K. was a strong one. The other ones that were down, and as Jonas was mentioning, we see slower decision-making, some prolonged delivery lead times with semiconductor shortages impacting.And then lastly, the TCV that we -- or the amount of new cloud contracts that we've signed, where it's SEK 72 million this quarter, so on the same level as last year, basically about SEK 77 million. So that's the revenues, and then we move into the profitability.We have, on the right-hand side, the adjusted EBITDA total and rolling and then the profit per share on a 12-month basis, return on equity. So we can see it as we saw -- as we said already adjusted EBITA going down and margins going down a little bit.We look into the details of that. We have the gross margin that's actually increasing, primarily in systems, but also in services. We see a good level of cost control also that we're able to keep the prices that we want to our customers. And so that's, of course, good development. We see SG&A costs also going down, 3% was the total number. If we look at comparable units, it's down more, 8%.We did, as you may remember, most of you, launched the cost saving program last year. So that has the effect now. And even on top of that, we continue with cost control. So of course, if we don't see sales coming in, we are careful with adding any extra costs. And then on the bottom line then, the earnings per share is also declining since EBITA and EBIT are declining. Financial net is actually slightly better this quarter than the same quarter last year, since we had some negative FX effects last year. We do no longer.Then if we go into our individual business units, Nordic and Baltics, our biggest one. You can see here, revenue is going down by 14%. It's the same trend as overall that systems are going down by 12% -- sorry, 22%, organically slightly more. Services up 12%, but also up organically and mainly consulting, increasing here with the acquisition of Conoa.We see that Q2 last year was a very strong second quarter, looking back at all of the years, historically, whereas Q2 this year was slightly less positive, it's -- looking at the individual countries, it's -- Sweden had a very strong quarter last year. So they're back to maybe more normal levels. Norway did see quite a lot of slow decisions and lost quite a lot of system business this quarter. And then as a result of the decline in revenues, EBITA and EBITA margin declined to 5.5% from a very, very strong level last year.We'll go to our next business unit, it's U.K. Here is the business unit where we see growth, 33%, organically 18%. So we're also growing very, very strongly organically, and it's primarily systems that's growing, services also. Cetus is contributing by about SEK 22 million revenues in the quarter. But even excluding that, systems are growing organically by 43%.Here, it's a little bit of opposite of course. As you know, our revenues are a little bit lumpy in the systems in particular. The U.K. did have a slightly weaker Q2 last year and a stronger Q3. But of course, still good development here.Then if we move to business unit West, this was the business unit where we had, in Q1, quite -- we had a loss. So this is where we've put a lot of our efforts during -- end of last quarter and this quarter to turn this trend around. That quarter was a significant decline in systems revenues. That decline continues, but less pronounced, also a little bit of decline in services. So we do see that, that continued pressure on revenues, but not to the extent we saw in the first quarter.And given this impact over these revenues, we were able to see improved gross margins here. Also, of course, keeping SG&A low. So despite that decline, we were able to get us back to profits, 1.9% EBITA margin. So of course, not where we want to be, but still a good improvement from the last 2 quarters.Okay. And then if we go to the last and smallest business unit, Central, which is the German and Czech Republic, here, this quarter, which we didn't have last quarter, also saw a significant decline in particular in systems with, again, similar story here, the slow decision-making at customers, underlying strong good demand, but not able to close business at the level we did last year.However, here, we continue to see good margins. The action programs we did after the 2019 results continue to have good results, keeping SG&A costs down quite significantly. So we see continued good margins. With the decline in revenues, EBITDA, however, is slightly lower than last year.Okay. So if we move to cash flow, very strong cash flow in the quarter. Cash flow from current operations of SEK 247 million. And a large part of that is change in working capital, SEK 176 million, which happens to correspond to the decrease in accounts receivables.And this, for those of you who follow us, is something we see with the resale business we have and a lot of both accounts receivables and payables coming due at the end of the quarter, it can fluctuate quite a lot depending on if we get paid within the quarter or outside. So first quarter, which you will see in the next slide, which is year-to-date was weaker. And now we got the positive change in working capital.Cash flow from investment activities, minus SEK 92 million, primarily the acquisition of Conoa here. Cash flow from financial activities, we did have dividends this month -- or this quarter. Leasing liabilities end up here with new accounting rules. And then we did increase our bank loans a little bit to finance the Conoa acquisition, but financed it partly from cash. So in total, SEK 115 million change in liquid funds and cash of SEK 500 million at the end of the quarter.And then very quickly, the next slide just shows year-to-date, where we can see the major change here is that the change in working capital in the quarter is SEK 46 million. So you see it does fluctuate quite a lot. And otherwise, no major differences. A little bit less of a change in liquid funds here of total $19 million. But continued good cash flow overall and strong cash position.Equity ratio in the quarter ended at 21%, same as end of the year. And net -- we don't have a net debt position. We have a net cash position even when adjusted for leasing liabilities of SEK 26 million. We have unutilized overdrafts of SEK 158 million and unutilized portion of our current facility of SEK 95 million. So overall, strong balance sheet with a lot of funds available.So I think that was the last finance slide, Jonas. No, this one. This is an important one. So this is what we always have as well, our -- the financial goals we've communicated and how we're tracking towards those on a rolling 12-month basis. Sales growth of 2%, so that's lower than the target of 10%. So the -- this quarter's reduction in revenue does impact that quite a lot. And the EBITDA margin, that also then is impacted by that loss of revenue at 12 months rolling is 5.8%. So we have -- still we've got the target of 8%.Net debt to EBITDA is significantly better than with the cash position, so we have room to increase leverage. Return on capital employed is lower with both IFRS 16 that happened after we set the target and the acquisitions that add to our balance sheet. Of course, it's also related to the profitability. And dividend, we paid out SEK 4.5 million per share in May, and right in line with our target of distributing 25% to 35% of our net profits.

[Jonas Hasselberg]

Great. Thank you, Linda. So the summary, I think, is pretty clear. We continue to see volatility in our systems business. So a decline in system sales drove a decline in the overall revenues, and we see that, in turn, being driven primarily then by longer sales cycles with our customers. We do have growth in services and improvements in gross margin, and overall, a good control of our costs, which is offsetting them from an EBITA perspective, to some degree, the revenue decline. That's how we would like to summarize the quarter.So thank you for taking the time and listen. We'll open up for questions. And I think the easiest is if you raise your hand in teams and Anna will then let you in, in good order. [Operator Instructions]

[Operator]

Fredrik Nilsson.

[Fredrik Nilsson, Equity Research Analyst]

Okay. Fredrik Nilsson from Redeye here. One question about the growth in cloud revenue. You mentioned that the total contract value declined a bit during the pandemic. But if I compare those numbers to the 1 you had 3, 4 years ago, it's still stronger. And then I don't really see why it should have a negative impact on the cloud revenue growth at this point. So maybe some kind of explanation so I can understand the dynamics there?

[Jonas Hasselberg]

Yes. And I think we've been clear for some time that a lower TCV, so lower bookings or intake of MCS contracts during 2020 will have an impact on the MCS revenue. And the 2 main reasons that we need, obviously, revenue decline is renegotiations of existing contracts that are coming in the different levels or can come in at different levels.From a revenue perspective, they may be lower. It doesn't necessarily mean that there is a lower margin for those particular contracts, but it is impacting the revenue. And every now and then, loss of contracts, and we've had this discussion up in this form a couple of times.If we see a change in churn, and we're still not seeing an increase or a change in churn, we have relatively low in churn, meaning stable and loyal customers. But every now and then, we do then contracts and that is impacting revenues. So the -- there is a certain amount of TCV needed in order to counter churn and renegotiation effects.

[Fredrik Nilsson, Equity Research Analyst]

Okay. One more question. Do you have annual figure for us regarding the impact of the shortage on components?

[Jonas Hasselberg]

Not specifically. I'm not sure. I'd say it's a smaller -- it's less than half. It's a smaller portion of the decline in revenue or the lack of revenue, whatever it be. Obviously, you can have a different view of what the revenue should have been, I understand that. But we see with some but not all our vendors and towards the end of the quarter. So in terms of total revenue, relatively small.

[Fredrik Nilsson, Equity Research Analyst]

Okay. One last question from me. The administration costs came in very low. Is that a sustainable level going forward, or was there anything extraordinary in the quarter?

[Jonas Hasselberg]

Yes and no. And I think you guys know already how this work. There are 2 pieces that are keeping SG&A lower than some sort of a steady state. I can't even use the word normal anymore because I don't know what it means. But -- and I don't mean for Proact. I just mean in terms of how people will behave when we go back to work here. But there's 2 pieces.One is, of course, commissions. The sales commission is lower when revenue -- or sales is lower, and then travel and entertainment. So yes, if we have a good quarter in the future and/or we start seeing a little bit more normal behaviors in terms of business travel and entertainment, SG&A will go up a little bit from current levels, everything else equal.

[Fredrik Nilsson, Equity Research Analyst]

Okay. Just to follow up there because I think it's particularly administration expenses, and I suppose they are not linked to the sales and marketing.

[Jonas Hasselberg]

Correct.

[Fredrik Nilsson, Equity Research Analyst]

So on that part, I think you've done a good job, it looks like. And should we expect that as a reasonable level going forward as well?

[Linda Holjo, CFO & VP of Investor Relations]

I think that there are -- it is, I would say, on the lower end, but also something we really do keep track on. So we expect it to remain at a low level. I think one of the things that I think we mentioned 1 year ago is when we launched the cost program, we had some extra costs that were hitting administration in that quarter. So of course, that's one of the reasons the comparison looks good. From that perspective, that's sustainable. But they are a little bit lower than we expect them to be in the coming quarters.

[Jonas Hasselberg]

More questions? [Operator Instructions]. All right. Then I think we will wrap up. Thanks again for joining on a day like this. It's 29 degrees in Sweden or at least where some of us are. And clearly, middle of June here -- July. So I know some of you are first, I guess, in frequent reporting times and then longing to vacations. So again, thanks for joining. We look forward to see you again in October after our Q3 results. So until then, have a great summer and see you soon again.

[Linda Holjo, CFO & VP of Investor Relations]

Thank you so much. Have a nice summer.

[Jonas Hasselberg]

Thanks. Bye-bye.

[Linda Holjo, CFO & VP of Investor Relations]

Bye.