Proact IT Group AB

STO:PACT

Earnings Call Transcript 2020-Q3

[Jonas Hasselberg, CEO & President]

Good morning, everyone. Welcome to this Q3 briefing for Proact. I hope you all can hear me okay. This is Jonas Hasselberg. I'm the CEO. We will be running this over Teams, obviously. Most of you, actually all of you except myself, are muted. If you do want to ask a question, no problem. Please use that raise your hand feature in Teams, and we'll let you in. So that should be okay. So we can all ask questions along the way here. So with that, I'll -- it's 11:15, so we'll get going. Thanks for joining. Just a look at the agenda. We're going to go through a brief, brief, brief introduction of the company for those of you who doesn't know Proact, just to give you an up-to-date information on the quarter and what's been happening over the past couple of months, the financial results, and then we're going to wrap it up. But before we do, I would love to introduce Linda, who's our new CFO, and joined here only a couple of months ago in mid of August. So welcome, Linda. And please give us a brief introduction. Who's Linda?

[Linda Holjo, CFO & VP of Investor Relations]

Thank you, Jonas, for the welcome. Yes, so I've been here for 2 months now. And previously, I joined from a company called Quant, Quant Service, where I was the CFO, similarly sized to Proact but privately owned. And before that, I'd worked in different settings within finance, both at large tech companies like Ericsson, but also smaller start-ups. I also have a background in investing, financial asset management and M&A. So I'm very happy to have joined Proact. It's an exciting company, and it's a fun start to the job to present this quarterly report.

[Jonas Hasselberg, CEO & President]

Well, great. It's great to have you on the team, so a big welcome. All right, over to today's presentation. So most of you know us pretty well, Proact. Who are we? Well, we're 26 years old now. We are serving about 3,500 customers across Europe with IT infrastructure. That's our expertise. We are definitely a specialist in that area, and that's where we focus. We're turning over around EUR 350 million, and we are 1,000 employees. And obviously, one of the things we're announcing this morning is an acquisition in the U.K., which adds another 50 great individuals, Proactivists, as we call them into the company, which we'll talk more about, of course, during the presentation today. A bit of a background just to why we think we are in a very, very good position, and this is nothing new. We've talked about this before, but our customers, obviously and most often represented by our customers' CIO. They have a complex agenda ahead of them, and I've listed a couple of things here that are key. Obviously, for a long while, the majority of our customers are putting a lot of focus on driving business value out of IT infrastructure and IT investments. More and more, they need to drive flexibility and speed and making sure that the company can adapt to new market environments, create new offerings to their customers, meet customers in a new way or just be more efficient by using IT. One of the key fundamental building blocks in this is what we call multicloud. And by multicloud, we mean that the majority of our customers will run IT infrastructure in a number of different ways, all working together at the same time. They will definitely use public cloud like Microsoft or Amazon or Google Cloud Services. They will have old legacy systems, IT infrastructure they've been running for many, many years. They would want to have data protected and stored locally where they know where to keep that data and know that it's safe and that the data meets regulatory requirements. So this will result in the fact that most customers will have the mix of cloud environments, and that's what we call multicloud: local cloud; private cloud; public cloud, all in a combination. And this is very important to our opportunity forward. Cost efficiency, obviously, a lot of harmonization and modernization. And then last and definitely not least, all of this needs to be secure. And like we mentioned already, all the data, in particular, all of our customers need to know that it's secure, where it's stored and how it's compliant with regulations. That said, obviously, the world has been a little bit different over the past 6 months, and our CIOs have a short-term focus on managing the pandemic, frankly. It puts a lot of new strains on their teams and on their own agenda. The basic, what we all do every day and we're frankly doing right now as we speak, remote working. Not all companies were ready to have 100% of their workforce dialing in from home and working from home. They need to accelerate a lot of their digitalization to increase efficiency, speed up innovation, enable new use cases. Security threats, definitely always, of course, been high on the agenda, but now new threats coming up with employees and partners and vendors working in different ways. And obviously, working from home also needs to make sure that the workspace is modern and can handle all these new behaviors within the end users and the employees of our customers. So the big trends definitely remain, but in the short term, a lot of our customers had to refocus their efforts to solve some of these more short-term challenges and short-term needs. For Proact, what does that mean? Well, we've said this many times before, but we do believe this is a great opportunity for us. We are what we call a data management specialist. We don't want to be a generalist. We don't want to be everything for everyone. We want to be specialists. And for us, it's all about helping our customers manage their data and getting value out of their data. We talked about 5 core propositions or value propositions from our company. Helping our customers with strategy advice or consulting advice in terms of how to manage data and their overall data strategy. Storing data, clearly, the root of our legacy and where we grew up is in helping our customers to store huge amounts of data. Connect to their data, so more and more data is distributed across data centers or cloud solutions and users are spread across the company. And this data needs to be available with high availability, low latency, a great deal of security. So connectivity is important and a core value of ours. Protection and security, making sure that it's stored in a safe way and again, stored where -- the customer knows where the data is, is becoming more and more important. And ultimately, at the end of the day, customers want to get value out of their data. And that means a lot of things, and it means different things to different customers. For some customers, it's just being able to analyze the data, for some, they use it to automate processes, run AI, research projects, so on and so forth. But ultimately, it's all business value coming out of data. And Proact then is focusing all these 5 core value propositions to bring to our customers. We have a product portfolio that encompass these 5 value propositions. It consists of a pretty large number of product areas: storage, security, networking, backup, data recovery; a range of product areas that we can deliver to our customers, either as traditional infrastructure, hardware and software that we sell to the customer, but more and more, of course, as services that we deliver in the form of cloud services. Same functional value to the customer, but delivered as a service instead and offloading the customer so they can focus on the business and we focus on their IT infrastructure. This wheel you see on the left-hand side is kind of summarizing the whole portfolio and the proposition. And at the very outer ring here, you'll see that we don't really mind whether the customer wants to run their infrastructure themselves in their own data centers. And we have a lot of customers that do and continue to do or vice versa, some that want to go very rapidly into the public cloud. Most cases, they will do all of the above, and we really support our customers in however they want to run their multicloud environment. And that's an important piece of our proposition, that we focus on the business value and the functional value of their IT infrastructure, not how it's deployed or how it's purchased. So that gives you a little bit of an introduction to the company. Nothing new. With regards to the quarter, we're obviously very excited this morning because we think we have 2 good pieces of news that we're bringing to the market, a very strong Q3, frankly the best Q3 in the history of the company. And we're also announcing an acquisition of a company called Cetus Solutions in the U.K. that we're also going to talk about in the presentation today. So a couple of plus points on the slide. Definitely, revenue is up 17% in this quarter to SEK 821 million compared to SEK 700 million a year ago, 7% of which is organic growth. EBITA, significant growth, up 46% from last year to SEK 54 million, clearly driven partly by the volume, but also because of a lot of those cost activities and efficiencies and lower SG&A costs that we've been working with throughout the year. As a result, of course, margins also up to 6.6% in terms of EBITA. Cloud revenues continue to grow, largely due to the acquisition of PeopleWare, which was done exactly a year ago, but also organic growth in the cloud services. Total growth also in services. And as we communicated about a month ago, the Board of Proact has proposed to reinstate a dividend of SEK 2.5 per share, which will be approved in an upcoming General Meeting on November 5. We do have minuses or less positive news in terms of the quarter as well. We continue to see challenges in closing new cloud contracts, which we call TCV, or total contract value, in the way we report our numbers. So this is -- in this quarter, we closed another SEK 61 million in contract value. And you know already that's the value of the contract throughout its commitment length. Typically, the contracts are 3 years, but they range from everything from a few months all the way up to 5 years sometimes. And we've talked about this in previous quarters as well, that it is more difficult to get our customers to sign on or commit to longer-term contracts or for new customers to engage in contracts like this during the pandemic. And that, we've seen also here in Q3. We continue to see uncertainties in COVID. Obviously, over the last few days and weeks, there are signs of a second wave, which is a concern to all of us, and we are managing that concern carefully. But that means that, as usual, we have a little bit of a hard time seeing what the next quarter is going to look like similar to what the situation has been over the past 2 quarters. But overall, a very, very strong quarter with good revenue growth and a very strong development of our EBITA. A couple of things we've done in the quarter, and I'll just rush through this quickly. We spoke already about how we want to be a specialist, and we worked quite hard during the quarter on reinforcing and making that position in the marketplace more crisp and more precise. We'll update our website just to reflect that market position a little bit better. So hopefully, our brand and our core value proposition is coming across a little bit more clearly in that new website. Customer expansion has always been a key focus for us. We announced only a few days ago a very exciting deal with the National Health Services in the U.K. and in particular, the Blood and Transplant Services, which is the authorities that are managing and administrating all blood donors and organ transplants in the U.K. And a very interesting deal that we've just concluded with them here in the quarter related to building a cloud infrastructure for their future IT infrastructure or for their mission-critical business and processes. Very exciting. Obviously, we'll continue to broaden our portfolio. The acquisition today is one step in that, but we're also tying our partnerships with NVIDIA a little bit closer. So we're now a lead partner with folks on their AI platforms. And some of you may know that they are the market leader in providing compute technologies for artificial intelligence and high-performance computing. So this is super exciting that we have that closer partnership here in the Nordic region with NVIDIA. Customer experience, the core and center of everything we do. We have, in the quarter, upgraded our customer processes and the automation of those through a market-leading platform called ServiceNow. So this will give our customers a much better customer experience. It will also enable a much more automated and programmable interface between ourselves and our customers. And obviously, it also enables ourselves to be more efficient internally. Very important and very big milestone for us. Cost efficiency program, we talked about a couple of times. We see positive effects off it. And for all intents and purposes, it is now implemented. The only outstanding item there is a closing down of 2 data centers that are underway and in accordance to plan. All other activities have been performed. And obviously, again, we've been working hard on our M&A agenda. We didn't close the deal in the Q3, we closed it yesterday night. But obviously, most of the work was done in Q3, so we're still claiming that we did good execution on our M&A agenda during Q3. So then talk then a little bit about the acquisition. So this morning, we announced that we've acquired a company in the U.K. called Cetus Solutions. They're based out of Manchester in the U.K., and they also have offices in London. They are just short of 20 years in the business with very strong capabilities in cloud solutions and modern workspace solutions. And this is obviously perfectly aligned with both our strategy, but also very complementary to our portfolio. They're bringing in technology and solutions and skills that are complementing what we already do, and in particular then, in the area of workspace and enabling customers to work in new and different ways. A lot of good technology partnerships very important to us listed here on the slide like Citrix and Microsoft and VMware and also NetApp and Dell, of course, which we already have established relationships with. And out of this, I do want to highlight Citrix because they are enabling a lot of those modern workspace solutions together with Microsoft. And it's an area where we will be able to use these capabilities, not only in the U.K. but across the group. Great strategic fit, of course. I mentioned that already. We're addressing the same types of customers and the same customer segments in the U.K. market. We're very similar as companies, which has always been very important to Proact when we make acquisitions. We want to integrate company's operation into our business. And then it's super important that people can work together, and we have the same leadership fundamentals and cultural values and the same focus on customers. And in this case, I must say, it's almost scary how alike we are. And we engaged the first time here during the summer, and I met with the team and the founder of Cetus and it looked like we were using each other's slides when we're presenting the company. We're very, very similar. Portfolios complementing skills and competence, I mentioned already. The interesting thing and good thing here is that we rarely overlap in terms of customers. So while we are addressing the same segments and we have very similar capabilities and skills, our customer bases are complementary, and this gives us great cross-selling and upselling potential between our 2 customer bases. So this, of course, will give us an additional revenue and have a positive contribution to our EBITA margins as well, which is, of course, very good. A couple of basic facts. We purchased Cetus on a cash-free, debt-free basis of GBP 7.7 million. They will bring into Proact a yearly revenue of roughly GBP 13 million. The multiple we're paying on an EBITA is 8x based on their 2020 results. Their 2020 fiscal year ended here, end of September. Obviously, there are synergies in the business case so that multiple will be a little bit lower going forward. And they are bringing an EBITA margin, looking at their past performance, of about 7%, which is slightly higher than current products as you all know. So this is a great acquisition in a market that's very important to us. The U.K. has been a focus in our M&A efforts, and I'm very happy that the team has been able to close this deal here during the third quarter or yesterday, I should say. Good. That was a little bit of update on what's happened here in Q3 and a little bit of introduction to Cetus. With that, I wanted to hand over to Linda and take us through the financials.

[Linda Holjo, CFO & VP of Investor Relations]

Thank you, Jonas. So if you go to the next slide. So some quick highlights in the quarter and a little bit similar to what Jonas already walked through. High-growth revenues, 17% to SEK 821 million. Systems grew also by 14% and then services even faster by 22%, in line with our strategy to increase the services share. And then again, to reiterate, adjusted EBITA growth of 46% to SEK 54 million, corresponding to a 6.6% EBITA margin. If we look at the profit before tax, similarly -- similar development, 45% growth to SEK 43.4 million and a 5.3% margin. Okay. So a little bit of more details. If we look at the key developments in terms of revenue in the quarter of the 17% growth, 7% then was organic and the remainder is from the PeopleWare acquisition that we closed in November last year. On a rolling 12-month basis, the growth is 8%, of which 25% is services. And again, here, as you will see in the next bullet, PeopleWare is the key driver of the services growth. They had a strong -- or have a strong services position. So organically, services grew by 1%, and with the PeopleWare acquisition, 22%. Systems then, also strong growth. Of the 14% growth, 11% was organic here. And here, we see a very strong growth in the U.K., which we'll see in the coming slides when we look at the specific business units. And of the services growth, cloud revenue, which is our key -- one of the key strategic priorities, grew even faster, 43%. And we're happy here that the -- organically also it's showing high growth of 10%. And the main issue we have here is that the number of new cloud contracts or the size of it is declining by approximately 30%. So we closed SEK 61 million worth of contracts. And we think the impact from COVID-19 is challenging us here. It is more difficult to sell these type of longer-term outsourcing or services contracts with customers, especially new customers, when you don't get to meet face-to-face. It's easier for them to just buy systems or regular services. But we do work actively, obviously, with our customers, remote, to be able to change this trend going forward. Okay. Profitability then. We see here the adjusted EBITA. That's the highest ever we've seen in the third quarter with a good development. The components there, we have the gross margin and SG&A costs. We see the gross margin in percentage is declining in the quarter. We see 2 main effects in the services, particular, we have a dilution from the PeopleWare acquisition. On average, their gross margins were and still are lower than Proact average. So now that we're consolidating them fully in this -- for this year, the effect is negative on the gross margin percentage in services, in particular. We also see a decline in the gross margin in systems, where it's specific deals that we've closed this quarter that do have lower gross margins than what we've seen historically. So that means that the main reason for our increase in adjusted EBITA is the strong revenue growth. So in absolute term, gross profit is up, but also a significant reduction in SG&A costs. So if we look at comparable units, so excluding effects from acquisitions, they reduced 12% compared to same quarter last year. And of course, we have the cost-saving program we announced earlier this year that -- where we see impact from that in the SG&A. But it is also -- so that typically, especially our sales costs, we have quite significant costs related to travel, entertainment, cars that are significantly reduced due to COVID-19. So -- and then Q3 seasonal -- some seasonal effects in SG&A with vacation also impacting. So part of the reduction is clearly due to the cost savings program, but part is more due to specific factors that benefited us in this quarter. And then the end result, the EPS is also improving significantly, of course, primarily as a result of the EBITA. The other main impact here is the financial net. So it's more negative than it was in Q3 2019, so having a negative effect, but it is better than it was last quarter. And the main effects in the financial net here are unrealized foreign exchange effects related to our internal loans. Of course, with exchange rates fluctuating a lot in the corona crisis, this has had some effects, some different effects in the quarters. So I'll quickly walk through the different business units as well and the developments. I think all of them have performed pretty well this quarter. We see Nordics revenue growth of 2%, all organic here. Service is growing slightly faster than systems. Here, it's Sweden. That's the main growth driver. In general, when we look at our different countries, we see different effects from how COVID-19 is impacting. So in some countries, we see strong demand and then some, it's significantly weaker. But on average then, quite a good impact. EBITA margin increasing significantly here with the reduction of SG&A costs of 8%, of course, contributing to a big extent to that increase. Okay. Next business unit is U.K. Here, we have, with the NHS Blood and Transplant deal, significant revenue growth. Systems increasing by 91%. Service is more challenging. Definitely, here, we see effects from COVID-19 on that, but in total then, 32% revenue growth and it's a very high growth. EBITA margin, on the other hand, here actually is decreasing. So despite the reduced SG&A costs, and that is partly due to, of course, these big deals that come at a lower than average gross margin in the quarter.Next business unit is West. Here, this is where we have the PeopleWare acquisition impacting. So here, we have the organic versus total growth. So in total, growing 38%. Here, we have an impact of COVID-19 that's leading to declining growth organically.We have some customers related to travel, hospitality, those kinds of industries where clearly the demand has been very low. If we look at the split here, services increasing a lot more than systems, and that is, to a large extent, due to the PeopleWare acquisition that was very services heavy. Then EBITA margin here also increasing. Here is -- for those of you who've been following the company for a while, where we had some issues last year, in particular, in Germany. We see that the cost savings or the turnaround programs we have implemented are clearly giving results here. So the EBITA margin is increasing. The SG&A costs are decreasing here as well significantly, not only due to the COVID and cost program, but also due to this turnaround program. So in general, good development compared to where we were last year. And then our last and smallest segment, East, also doing well. High growth in systems, in particular, of 28%, leading to a revenue growth of 16% in total. Here, we see also very high EBITA margins, good development, reduction of SG&A costs of 9% impact. So those were the business units. Then quickly on the cash flow, we do see, as we would expect, a positive cash flow from current operations, the operations generating SEK 97 million in the quarter and then a negative effect from the change in working capital. And this is something -- we had the opposite effect in the last quarter. And what happens here is that we have -- can have pretty significant fluctuations in accounts receivables and accounts payables in particular, depending on when we get certain deals in and when we'll pay our vendors. So this is a pretty normal fluctuation. Then we have cash flow from investment activities in fixed assets. That's typically our financing offer. Finance, where we do some investments. And then cash flow from financial activities in this quarter was primarily affected by the repayments of leasing liabilities that end up here. So in total, a small change in liquid funds of SEK 7 million, but we can see that we had a very, very strong development last quarter. So that means that it's slightly lower this quarter. But a good liquidity position of SEK 396 million at the end of the quarter. And just, for the next one, just to look at the year-to-date, similar development. We have SEK 202 million total cash flow from operations where we have a positive -- higher contribution from operations and then a negative change in working capital as well. If we look at the 12 months rolling, the effect of changes in working capital is positive of SEK 59 million. And the total, I don't need to go through all of the details here, but the total change in liquid funds here was SEK 35 million. Okay. Then just very quickly on the balance sheet. Our equity ratio is strong, 22%, strong cash position. Net debt is SEK 92 million. If we didn't -- if we exclude leasing liabilities, it's a net cash position of SEK 166 million. We still have unutilized overdrafts of SEK 250 million and unutilized portion of our revolving credit facility of SEK 120 million, of which we will use parts to finance or have this actually to finance the Cetus acquisition. Okay, then the last slide for me. It's how we are tracking towards our long-term financial goals. So we have a sales growth, 8%, slightly lower, and this is a 12-month rolling then, slightly lower than our target, but still significant growth. EBITDA margin, 5.5%, here adjusted for onetime costs. And so it's still some way to go towards our target, but clearly improving. Net debt to EBITDA. Here, we have 0.27%, so quite a lot lower than our target level, even though we are affected here by IFRS 16 negatively. Return on capital employed. Here, we're also -- still have a gap towards our target. We're at 16% versus our 25% target. Of course, we do have some effects from IFRS 16 that affect negatively acquisitions. Typically, will affect negatively since we increased the capital employed more than the return. Still something we are working on, of course, to achieve. And then for the dividend, we've added the proposed dividend of SEK 2.50 per share. That is in line with our target, 29% of last year's net profits, which is in the middle of the target of between 25% and 35%. Okay. So that was the financials.

[Jonas Hasselberg, CEO & President]

Great. Thank you, Linda. So quick summary. Again, we're very excited about the results. Best quarter ever or best third quarter ever. Very excited about the acquisition in the U.K. with Cetus Solutions. And then we continue to see, of course, a strong demand for what we do, and we're very confident in our position in the marketplace. And then short term, as before, where we are, how the pandemic develops here over the short term, but that's obviously nothing unique to provide. I think that's just something we share globally, a concern of the pandemic. So that's a summary. Thanks for listening. We now open up for questions. And as mentioned over in the beginning here, raise your hand using the Teams function, and we'll let you into the meeting here and ask your question.

[Jonas Hasselberg, CEO & President]

Daniel, do you have a question?

[Daniel Thorsson, Analyst]

So do you hear me now?

[Jonas Hasselberg, CEO & President]

We do hear you.

[Daniel Thorsson, Analyst]

Excellent. Okay. So I start off with the question regarding cloud orders. They are down 30% year-over-year. That's the fourth quarter in a row with declining trend. When should we expect to see a negative effect on revenue recognition, which is actually still growing?

[Jonas Hasselberg, CEO & President]

So we've talked about this a couple of times, that we're seeing -- it takes us roughly 6 months to onboard new customers. So from order to revenue invoicing or invoicing and revenue recognition, it's, on average, 6 months. We're still closing deals, as you know. So the growth, it's more a reduction of growth pace. The flip side of this is churn, so customers potentially leaving us and renegotiations. So contracts that have been running for a long while where customers continue, but they prolong. And the balance between those is a little bit uncertain because we've -- and we've spoken about this also previously that our churn levels are low. Our renewals are successful, meaning we renew a high share of our customers. So I think with the 6 months' guidance, in terms of how long it takes, you can see that our growth rate will be lower than we otherwise would have expected. So that's reflective of the amount of time from booking to invoicing.

[Daniel Thorsson, Analyst]

Okay. So even if order intake continues to decline due to the pandemic a bit, we may see growth in the revenue but at a slower pace in the coming quarters. Could that happen?

[Jonas Hasselberg, CEO & President]

That can happen. And again, it then depends on churn, which continues to be low and potentially renewals, where we renew at the lower level in the cases where underlying investments and equipment have been depreciated. That's one example. But correct.

[Daniel Thorsson, Analyst]

Okay. Good. Okay. And then secondly, on service revenues. If I split out the non-cloud service revenues, they have actually been declining for 7 quarters in a row now. And with some pressure on new sales in cloud orders, as you mentioned, could that cause a negative development in service revenues as a whole already from Q4 when PeopleWare doesn't contribute that much?

[Jonas Hasselberg, CEO & President]

We don't think so. So there's a couple of things there. One is cloud service is growing, as we mentioned already. Support is a bit of a volatile revenue for us because it's driven by sales of systems. So we will -- we think we will see a bit of a rebound in support or we can at least hope for rebound in support. And then consulting is an area where -- and we spoke about this already going into Q2. It's obviously one of those areas where we were the most worried going into the pandemic situation, that our customer will discontinue consulting engagement because it's a quick way for our customers to save money. But as we see, still a high activity in the marketplace, as we've spoken about throughout Q2 and Q3. We expect consulting to be a very important piece of our offering as customers going to these scenarios we spoke about here. So the digital transformations and rethinking how they want to work in the new environment. So consulting, we think, is an important opportunity going forward. What Q4 is going to look like, we don't communicate. And so you'll have to make your own conclusions on this one, Daniel. But there are things here that in the past, that are -- that also can be better going forward considering support and consulting.

[Daniel Thorsson, Analyst]

Okay, okay. Fair enough. And then 2 questions on Cetus Solutions here. What has been the growth rate in that business in the last few years?

[Jonas Hasselberg, CEO & President]

Significant, I think, is what I'm looking at, Linda, a little bit, is what I'll say. They made a very good 2020. So like I said, their fiscal year ended by September 2020, and they had a really good growth rate without quantifying more than that. It's strong growth.

[Daniel Thorsson, Analyst]

Okay. And then secondly, what is the split in terms of system service and cloud for sales in Cetus?

[Jonas Hasselberg, CEO & President]

They are a little bit more software and hardware-centric than PeopleWare. So this is a company that are more similar in their revenue mix to the traditional Proact.

[Daniel Thorsson, Analyst]

Okay. We can expect some 60% system, 40% service, of which maybe 1/3 or 1/2 is cloud for the services. Is that reasonable?

[Jonas Hasselberg, CEO & President]

Well, I think one key thing is one of -- there's many reasons why we're excited by Cetus, but one is the opportunity to drive the services agenda also there. So as part of our synergies, shifting that mix is one of the key drivers behind the acquisition and the collaboration.

[Daniel Thorsson, Analyst]

Yes. But the mix today is similar to Proact a couple of quarters ago?

[Jonas Hasselberg, CEO & President]

Correct.

[Daniel Thorsson, Analyst]

Excellent. I'll stop there.

[Jonas Hasselberg, CEO & President]

Thanks. Other questions? Just raise your hand. Fredrik, do you have a question? Okay. We've got to unmute you first here.

[Fredrik Nilsson, Equity Research Analyst]

Yes. Can you hear me?

[Jonas Hasselberg, CEO & President]

Loud and clear. Now you disappeared. Sorry, Fredrik, bear with us here for a second. Sorry, Fredrik, just hang on a second here. Can we -- did we lose Fredrik?

[Fredrik Nilsson, Equity Research Analyst]

Can you hear me now?

[Jonas Hasselberg, CEO & President]

Now we hear you.

[Fredrik Nilsson, Equity Research Analyst]

Okay, nice. Could you give us some rounded number regarding the proportion of cost savings coming from the cost savings program relative to temporary corona-related cost savings during the quarter?

[Jonas Hasselberg, CEO & President]

Linda, can we?

[Linda Holjo, CFO & VP of Investor Relations]

I think it's hard -- it is hard to split that specifically because on top of that, we also have vacation that's coming in. But we do have significant travel costs typically that we don't have. So it's -- I would say both are significant contributors.

[Fredrik Nilsson, Equity Research Analyst]

Okay. So I guess it may be too early to say. But I mean, looking at Proact and many other companies, there are lots of savings being made due to less traveling. What's the possibilities going forward? Do you see a scenario with less traveling even after corona?

[Jonas Hasselberg, CEO & President]

Yes, of course, we do. I think we've all been positively surprised with how easy it is to work remotely and, frankly, what it gives in terms of positive effect. It's not only positive effects. There are definitely pent-up demand for social interaction, if nothing else. But we do get efficiencies and simply a better working environment, work opportunities by working remotely. So I don't know exactly, but it will be significant reduction in travel costs going forward, also when the pandemic is behind us.

[Fredrik Nilsson, Equity Research Analyst]

Okay. You mentioned...

[Jonas Hasselberg, CEO & President]

I wouldn't promise anything, but I would guess, up to half.

[Fredrik Nilsson, Equity Research Analyst]

Okay. Interesting. You mentioned that the strategic system deals decreased the gross margin during the quarter. In what way would they be strategic? Is it new customers or what are we talking about?

[Jonas Hasselberg, CEO & President]

Yes. And it's obviously the deal in the U.K. that we mentioned here, with NHS Blood and Transplant. I think as I saw, there was a [ file ] on the slide. It's a great customer, that's a good opportunity because they're rebuilding and rethinking how to serve their purpose. So we're building a new cloud architecture for them to do application development of their platform. And then we have, in the Nordic region, a number of significant deals, some of which are, frankly, just [indiscernible] customers we haven't been engaged with. And that opens up longer-term collaborations and relations.

[Fredrik Nilsson, Equity Research Analyst]

Okay. One last question for me. The cloud revenues are typically lower during the third quarter compared to the second quarter. Why is that? Are there negotiations or something else affecting the numbers?

[Jonas Hasselberg, CEO & President]

No, I don't think so. It's more that we do see -- so on top of the contracted value, there are usage variations. Obviously, variation depends on capacity needs as they use it. So it's more variance in each system than anything else.

[Fredrik Nilsson, Equity Research Analyst]

Okay. That's all for me.

[Jonas Hasselberg, CEO & President]

Great. Thank you. More questions? Daniel?

[Daniel Thorsson, Analyst]

Yes. Does it work?

[Jonas Hasselberg, CEO & President]

Yes. We hear you.

[Daniel Thorsson, Analyst]

Yes. Good. Okay. So how do you plan to integrate Cetus with Proact in the U.K.? Are you going to merge offices to reduce costs? Or do you find it more as a sales synergy case?

[Jonas Hasselberg, CEO & President]

It's a combination, but it's more of a sales synergy case. There are some basic synergies as well, of course, but we will integrate the teams. So the Cetus team and the Proact team will, over time, be one operating team. I mentioned in the beginning that they are very complementary, both in terms of customer base as well as offerings. So we will put a lot of focus on the growth opportunities, both [ interoperability process ] and also with existing customer bases are joined [indiscernible] as well as adding new customers and being more competitive against other players in the market.

[Daniel Thorsson, Analyst]

Okay. Makes sense. And then a similar question, but related to PeopleWare you acquired a year ago. How has that actually developed over the 12 months you have owned it? Has that been growing versus the year you acquired it on? Or...

[Jonas Hasselberg, CEO & President]

Yes. It's been really good. So PeopleWare is growing and doing as per plan, which is impressive considering the circumstances here with COVID. We're also, in the Netherlands, integrated with their teams. So now the old Proact team and all the [indiscernible] that were PeopleWare teams, it's one single operating unit. And also here, we've combined portfolios. So we now have one unified footprint in the marketplace and are engaging with customers and [indiscernible] selling also here. So it's been a good and successful integration and the business has been maintaining well.

[Daniel Thorsson, Analyst]

Okay. And in terms of employee turnover post-acquisition, have you seen anything more or less than you expected in PeopleWare?

[Jonas Hasselberg, CEO & President]

No. I wouldn't say so. No.

[Daniel Thorsson, Analyst]

Okay. And then finally, touching upon Germany a bit. We talked about Germany, I think, 80% of the [ comps ] was a year ago. What is the status there today? Expanding -- you expanded into new offices, you lost some salespeople, et cetera. Where are you now?

[Jonas Hasselberg, CEO & President]

No. So we're -- like Linda mentioned, we're happy about Germany. We've done a lot of work in Germany ever since, well, this time a year ago. We have a new team in place with the new managing director that we recruited from externally. Sales team has been rebuilt. We're adding some sales capacity. We're adding consulting capacity into the German team. We closed down that office and team we had up in North, which was an ambition of ours to grow the footprint in the northern part of Germany, where we didn't feel that we got fast enough traction. So in order to refocus and regroup, we closed that down. So we've reduced costs, reduced staff and rebuilt the team a little bit locally. And we've seen now definitely a strong quarter in Q3, but also good improvements already in the first half of this year.

[Daniel Thorsson, Analyst]

Okay. And then in terms of profitability, are they -- how much below group level are they? Or are they at group level now? Or...

[Jonas Hasselberg, CEO & President]

Well, you saw the West numbers there, which is primarily Netherlands and Germany. So you can draw the conclusion from that, I think.

[Daniel Thorsson, Analyst]

Okay. Fair enough.

[Jonas Hasselberg, CEO & President]

We don't report Germany separately, as you know. Thank you. More questions? All right. Thanks, everyone, for joining. It's always a pleasure meeting you, even virtually. So there's no more questions. I think we'll end here. Again, we're happy with the results. We were happy with the acquisition, and we're looking forward to seeing you all, guys, after our fourth quarter, which will be in February. So we'll see you then. Take care, and have a good weekend.

[Linda Holjo, CFO & VP of Investor Relations]

Thank you. Bye.