Proact IT Group AB
STO:PACT
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Proact IT Group AB
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All right. Welcome, everyone, and good morning, again. My name is Jonas Hasselberg. I'm the CEO of Proact, and I have with me here on Teams also, Linda Holjo, our CFO.We're going to talk through the Q3 results with the following agenda. Give you an introduction to the company. Most of you know us pretty well, but there may always be someone who is curious of who we are and what we do. Talk little bit about the market, of course, and then focus on the developments and the financial results of the third quarter of the year.So I'll get going here and we'll make sure that there's plenty of room for questions, either through the presentation or definitely after the presentation.All right. Proact, we are almost 30 years old. We are a Stockholm-based company, but we operate in about 13 different countries across Europe. We're serving primarily medium and large-sized enterprises across our footprint. And you can see them here in the map on the left-hand side of the picture, and we're about 1,000 employees.And of course, our focus is very skills and competence focused. So we have 1,000 very skilled and technically competent employees who are serving our customers with consulting services and infrastructure solutions and managed cloud services.What we do is simplistically described in this picture. Our primary focus is to help our customers to drive business value out of their IT. We do provide IT solutions to them, but very important that its business focused and business outcome focused.We have 5 primary value propositions that we provide our customers with. We provide a device. And all of this is around getting value out of data, by the way. All these 5 value propositions are all related to how we get value out of -- how our customers get value out of their data.So we advise on data strategies. We provide solutions for storing data; web solutions for connecting to the data; anything around networking and making sure that users can connect to the data or premises can connect to data centers or data centers can connect to the Internet.We protect and secure the data, which, of course, is fundamentally important and ever-increasing need in the years of cyberattack and ransomware attacks. And, ultimately, we help our customers actually get that value out of their data.We do all this through our primary products or offering categories. And also, these are the way we report our revenues: consulting services, managed cloud services, reselling of hardware and software, and technical support services. So these are the 4 primary categories in terms of what we offer and deliver to our customers. And like I said, also the way we report our revenue streams.Marketwise, you see this probably as much as we do. There's a big demand in the industry for IT solutions. We look at this -- out in a couple of years in the future we see 3 primary trends: the digital transformation, which is definitely business driver for most of our customers. And they want to get more business value out of their IT.They want to drive innovation. They want to get value out of all that data they have in terms -- inside the company. It could be anything from taking quicker and more informed decisions or automating production processes or improving their customer experience, all of which are typically driven by digital investments and better use of data.There's a technology trend as well in the marketplace, which we define as a multicloud trend. So that's a architecture, if you will, of technology and infrastructure solutions that enables then faster speed of innovation and development, high degree of flexibility, and obviously, maybe most importantly, high degree of availability of the solutions.And by multicloud, we mean that it could be a combination of infrastructure and technology that our customers host themselves in their own data centers or they can leverage someone Proact in a private cloud solution or they can go to the big, what we call, hyperscalers -- the Microsoft and the Amazons of the world for global cloud solutions.And typically, our customers will do a combination of all 3, that's what we call multicloud. These 3 cloud variants, if you will, needs to coexist and integrate very tightly.The third trend, which I've touched on already, is obviously the need for protection and a high degree of security against cyberthreats. And all of these 3 trends are very important as we look at our strategy and what we execute on the future.Corona, of course, continue to impact us. And for those of you who looked at the numbers, can see it a little bit. Definitely, puts a lot of uncertainty in the marketplace in general, and our customers have had to adapt to new behaviors and new needs.We don't think it's changing the long-term trends, but it's definitely impacted the investments and the behaviors over the most recent 1.5 years. And, obviously, speeding up probably some of the investments, in particular, around things like networking and security.So if we look at the market in little bit more numbers, you see on the top the 3 key trends. The picture below is showing our customers' willingness or strategy, if you will, in terms of the cloud investments. And to the far left, customers that would spend all of their IT investments on infrastructure that they run themselves in their own premises.And to the far right, you would see the amount of customers that will do the opposite, meaning, run all their infrastructure and all their IT in the public cloud. And like we already touched upon, the numbers here prove that it is a multicloud world. Our customers will be in a mix and a hybrid of all of this.Growth wise as we look into the future, we still see a positive market. The infrastructure market, so the Proact's traditional market, if you will, the market for reselling hardware and software, is still growing, but at a very modest rate, probably in the lower single-digit rate on a yearly basis. Whereas, the managed cloud services are growing at a healthy pace of probably around 10%.So we think that our position in the marketplace is good, both because of the growth rates, but also in terms of our offering, which is very much a multicloud offering.This is the way we describe our offering to our customers. And, obviously, when we put our customers here in the front and center. Then you see our 5 value propositions in the red circle around the customers -- the advising, the storing, the connecting, protecting and then driving value out of data. Again, data is at the core of what we do. We are specialists and experts in data. We don't want to be the generalist of everything.And then in the next circle in the black color, you see all the different offerings and products that we're offering from service, certainly storage solutions to networking and backup solutions, disaster recovery, cybersecurity and so on. So a pretty complete portfolio of products and services.All then surrounded with our own professional and support services and the different ways of delivering to our customers -- the hybrid cloud or on-prem or public cloud. It doesn't really matter to Proact, we can deliver in any variant, whatever suits our customers. And we describe that this way that we can have all of these different cloud variants -- public, private and managed, supportive depending on our customers' preference.So we are happy that our customers are happy. Obviously, that's key to deliver great services and great quality in our services. And, clearly, we try to measure that both -- we have a very close relationships with our customers and we've had for a very long time. As most of you know, our customers are very loyal.But we also measure it in a number of different ways. And obviously, NPS is a very established way of measuring customer loyalty and customer satisfaction. NPS, stands for Net Promoter Score. It's based on the very simple question of how likely are you to recommend Proact to other organizations and peers? And we have the score of 44, which is definitely a strong and positive score. That makes us very happy, of course, and proud.Just give you one example of a customer that we are working with, which is a Swedish customer called, AFA, AFA Insurance. And what's interesting with this, it's a customer were both Proact and our most recent acquisition, Conoa, are collaborating and working very closely with this customer. They are redesigning their infrastructure with regards to application development, and with the objective of accelerating the speed of application development.And the objective is to go from taking months to get a change or a new application deployed to their end users and customers to ours. That's, obviously, a very drastic improvement. And this is all about what modern and cloud-native development infrastructure is all about. And also the reason why we acquired Conoa here in April of this year. So it's a good case study and a good proof point of why the expertise of the Conoa team is crucial to our customers and really complementing the Proact strength.So in this case, we've delivered the design and implementation of the container platform. So container is the terminology for modern and cloud-native application development. Onboarding support, training, security tools and obviously, Proact's more traditional offerings of the storage backup and server infrastructure. So a very good example of a customer success story where Proact and Conoa together does more than we could have done individually.So then jumping into the quarter, a bit of a -- a lot more positive than previous quarter we had here in the back or last quarter, with positive development of our services revenue and gross margins, definitely positive development. And, of course, our EBITDA result improved quite good here in the quarter, both because of the gross margins and obviously, also because our cost control.And we're happy to see that our TCV numbers continues to increase. We've talked about it a lot during the pandemic. That it's more difficult to engage with customers on long-term contracts when you can't meet in person and do detailed workshops and joint planning. But a good jump up in this quarter.We do have a revenue decline, and that's driven by lower system sales of 6%. We have seen some volatility in the market and has sit-ins with our customers to make big decisions. We also have a little bit of a tough comparison, in particular, in the U.K. with the big deal we did last quarter -- sorry, this quarter last year with NHS Blood and Transplant.So partly then just volatility that we'd continue to see in our customers making decisions and in some unfavorable comparisons in U.K., in particular. So that's very shortly the quarter. Obviously, we're going to go in a little bit more in details here in a second.Just a couple of other things before then that I want to highlight. Our integration of our 2 recent acquisitions, Cetus in the U.K. and Conoa here in Stockholm, Sweden, are on track. And in case of Cetus, ahead of plan, really good progress. And we see both operationally good integration progress, but more importantly, on the commercial side, very good process. So we're happy by that.We have very recently been awarded achievements from our main partners. And Netapp is a U.S.-based provider of storage solutions and market-leading provider. We are their EMEA Solutions Partner of the Year. Cohesity is a backup provider, and we received their EMEA Impact Marketing Partner of the Year. And as we spoke this morning, we also got a Dell award, which obviously will be a Q4 award, but still.AI is one of those areas, which is related to our ability to drive value out of data, and we've engaged with a key initiative here in Sweden called AI Sweden, which is a good initiative to drive AI investments and development infrastructure that's available to a number of customers and companies here in Sweden region.And then last, we do continue to see a little bit of semiconductor impact here in the quarter. A little bit less maybe than we expected, but some partners are definitely impacted by it and we continue to see impact, at least, for the next 2 or 3 quarters, we believe. It's been manageable, but we think it's going to continue for a while longer.Good. Thank you. So that's briefly who is Proact and just a glance into the quarter. I'm going to hand over to you, Linda, for a little bit more details on the numbers.
Yes. Thank you. So the financial development and the highlights. Very much what Jonas was saying, growth overall of minus 1% driven by the decline in system sales of 6%, whereas services sales were growing by 6%.Adjusted EBITDA then growing by 11% to about SEK 60 million at a margin of 7.4%. And then correspondingly, the adjusted profit before tax also growing to SEK 50 million, 14% growth and a 6.1% margin. So very high margins in the quarter.And then as usual, we'll go through the details a little bit more, starting with revenues, then profitability and then our different business units. So if we look at the minus 1% revenue growth or decline. Organically, it was more than, of course, a 9% decline, where acquisitions were contributing by a positive 8%, barely any currency effects in the quarter. Rolling 12 months growth is minus 2%, also here impacted by systems decline of 5%, whereas services is growing.If we then dig in a little bit into the services growth, 6%. Organically, we see a flat growth, where organically consulting is flat. But with especially Conoa, as a consulting company, I also see it is a little bit -- little extent contributing. So strong overall growth of 24%.Support services, a little bit more flat. That's, of course, also connected to our systems business, so organically declining minus 2%. These are, as you know, longer-term recurring contracts so, of course, much less volatile than our systems business.And then the cloud revenue or the managed services contracts, increasing by 2%, same increase organically, where we've onboarded most of the contracts that were closed earlier in this year, where we had a little bit of a slower take-up last quarter. So we can see it, if you look at the graph on the right-hand side, the bottom there, that we're back on growth now for the managed cloud services contracts and in line with our strategy.Whereas on the top, you see the revenues with the split of systems and services, where we see that Q3 is typically a weak quarter from a systems perspective, a lot of occasions impacting and this quarter, then even weaker than last quarter. We had the 16% organic decline, where the majority of that -- the 70% decline in the U.K. that I will get into in a few slides. And then also Nordic and Baltics, declining somewhat, while both Central and West actually growing their systems business.And then the new cloud contracts that we've closed during the quarter, contracted revenues of SEK 75 million, so that's a 23% growth from same quarter last year. So that's also something we're happy about, of course.If we then go into the profitability, again, we see the adjusted EBITDA increasing quite a lot. And you can see on the right-hand side the slide there, the graph, that Q1 and Q2 we had some challenges, especially Q2, and now Q3 is improving quite a lot.See a high margin, and it is primarily the gross margin that's impacting. It's increasing significantly. In particularly systems, where we do -- did see in the quarter, good pricing development and a good customer mix. Depending on what customers we get and what types of deals, we will see different gross margins but, of course, also our ability to keep pricing up in a good way.SG&A costs did increase by 4% for comparable units organically. However, last year, of course, we were in the middle of the pandemic, so very, very low levels. So it's still -- the 4% increase, we think is -- we're still at that low levels. And then earnings per share increasing, and of course, that's a result of the increase in EBITDA.Then if we move into a little bit of details on our different business units. We can see Nordic and Baltics growing by 6%. Here, the Conoa acquisition is contributing by SEK 32 million, a little bit -- or it is in systems, but also primarily in consulting services.So systems is declining 9% organically. That's primarily Norway, where we had the strong quarter last year and a quite weak quarter this year. Most -- several of the other countries are developing very well. And services organically growing 14%, good development across most of the areas there. And in particular, cloud services, we see strong growth there.EBITDA margin increasing slightly with the increase in revenues and then also good gross margins. And then overall EBITDA increasing as a result of that.If we then move to our next business unit, U.K. Here, we can see the strong Q3 last year. Q3, as you know, it's typically a quite weak quarter. But last year, it was very, very strong with this NHS Blood and Transplant deal that we closed.So systems, down 46%, organically 70%. Of course, this is impacting the overall picture for the group. Services is up 21%, of which 4% organically, so there we do see growth. And if we look at the margins, we were able to keep margins at a very high level. So the margins are increasing to 6.4% from 5.5% last year. And here, we see that with the revenues we did close, both systems and services, we did have stronger gross margins, which are impacting, and then also good cost control.Okay. If we then move to Business Unit West. This is, as you -- well, you can see on the graph, down to the right, where we had the challenges, in particular in Q1. Q4 last year, Q3, we had some impacts from integration, but also a little bit of challenges. But Q1, we started to see significant decline, in particular, in systems revenues, but also some issues in -- and the changing mix impacting cost in our services business.We did implement quite an extensive action program, both to focus on reversing the declining trend in revenues, but also to keep control of our costs. We saw the first results of that in Q2, and now we're continuing to see these results with organic growth of 1%, and EBITDA margins increasing to 5.6%, which is better also than last year. So we see that gross margins are improving, both for services and systems, which is leading to this increase in EBITDA.Then if we move to the last business unit, Central, here, we do see really good revenue growth, of course, from a slightly weaker quarter last year, but we saw strong sales in the summer. Q2 was a little bit weaker here, as you may recall, so we're recovering part of that as well.Both systems and services growing compared to last year at strong margins. We have a 7.6% EBITA margin here compared to 5.7% last year. Also then, of course, together with the revenue growth they can turn increase in EBITA. Here, we do see that our SG&A costs are declining, while we also have increased revenue, so then in total, leading to this increase in EBITA. So overall, all of our business units are increasing in EBITA margin this quarter and leading to this increase in overall profitability.Then if we move to cash flow, we do have a positive cash flow of about SEK 100 million in the quarter before change in working capital. As you may recall, we ended last quarter at very, very high cash flow, very positive development from working capital. And we see the opposite effect of that now that, that we've had some outflows in working capital. It's primarily decreasing accounts payables that's leading to the negative change in working capital of SEK 240 million approximately.Then very little other cash flow impacts, little investments in fixed assets, and then of course, we will always have leasing liabilities that we repay here. The total change in liquid funds of SEK 180 million. We did also, in the quarter, close a new revolving credit facility of SEK 600 million compared to the previous one that was SEK 350 million for 3 years with the option to extend for 2 additional years.If we then just quickly look at the year-to-date, we can see that here overall the cash flow from current operations, even after changing working capital, is positive. We did have investment activities impacting of about SEK 112 million, which is to a large extent, the acquisition of Conoa we did in April. And then cash flow from financial activities, we have the leasing liabilities. We did pay out dividends. We've slightly increased our bank loans to pay for the acquisition year-to-date. But overall, still at strong liquid funds end of September at SEK 320 million.Then the last financial slide, our balance sheet. We do have a strong equity ratio in the quarter, 24%. We see a net debt of SEK 160 million, and that's after the leasing liabilities of SEK 223 million. We do have unutilized overdraft facilities of SEK 158 million that we're not using and an unutilized portion of this new revolving credit facility of SEK 343 million. So quite a lot of available cash, if required as well.Yes. And then our long-term financial goals, where we have the communicated targets that we measure against the 12 months’ rolling outcome. Sales growth, as we've mentioned now several times, is the key gap in the quarter, and we see also rolling 12 months that we're declining, which is, of course, not in line with our targets.EBITA margins, also get to our long-term target of 8%, but improving from last quarter. Net debt to EBITDA, as I mentioned before, we have a strong cash position, limited debt, so we're quite far away from our target to be below 2%. We're at our targets, we're below 2%.Return on capital employed is challenging with the target, not only because of the EBITA margin but also as a result of IFRS 16 and acquisitions that add to our balance sheet. Dividend, we're just in the middle of our target to give out between 25% and 35% of our net profits, where the last dividend we did was at SEK 4.50 per share of SEK 1.5 after the split, 31% of our net profits. Okay.
Good. Thank you, Linda. Just to end then, a quarter where we were impacted by the decline in systems, which those of you have tracked us a little bit, has been volatile here in particular during the COVID. And the market is little bit both hesitant in terms of when COVID is ending, but also spend a lot of their time in making sure that workspace solutions are up to par when people are working from home.But on the positive side, and growth in our services and strong EBITA and profitability development, driven largely by the gross margin improvements and good cost control, of course.That's the end of the presentation, and we'll open up for questions.
I think if you have any questions, you're all muted. So if you'll raise your hand in Teams, we will unmute you or you can unmute yourself, I guess, as well.
It's Dale Robertson from Chelverton Asset Management. Can you hear me okay?
Yes.
Yes, we can.
Can I just ask a little bit more about the working capital outflow, which you mostly attributed to decline in accounts payable? Is this you effectively prepaying suppliers to get guaranteed access to product, because of the component shortages or is that not part of this?
It's a very good question. And as you -- some of you probably know, we do see quite a lot of volatility in our working capital. And it's rather -- that typically, especially in our systems business, we do match receivables and payables, so we ensure that we have the same payment terms with our customers and our suppliers. And then, especially at quarter end, we have a lot of invoices coming due at quarter end and paying, and sometimes we're not able to match. And so it's rather a few days around quarter end that's impacting then any other longer-term things. So this is basically just in effect that we paid out just a few days later bigger invoices than when we received it from the customers last quarter, and then were hit by that this quarter. So no, we're not prepaying any of that. We make sure that we have payments and we secure deliveries from our suppliers when we sell to customers.
So from that, I guess, you'd expect there should be something of reversal in Q4. But I guess, back to that last point, is the component shortage point, is there an argument for prepaying or changing payment terms to guarantee access to product? Or you're not that concerned about it that you would need to think about doing that?
No. There is -- we are impacted to some degree in particularly from certain vendors, not all our vendors, and not the ones that we are mostly dependent on. I think the biggest concern we would have, if anything, is price increases. But most likely be list price increases going forward.
But I guess your customers are aware of that and will be expecting that to be passed on?
Probably.
Probably?
Mostly.
And one slightly different question. Is M&A on the agenda at the moment?
M&A is always on the agenda, yes, indeed. And that's why I think it was important for us to also renew the revolving credit facility and highlight here today the availability of financing. So it's something we continue to pursue with high focus. Our ambition is to do roughly 2 acquisitions per year. So we did Cetus in October of last year. We did Conoa in April of this year, and we think we can continue on that pace. That's our ambition.
Next, Fredrik Nilsson.
Fredrik Nilsson from Redeye here. Can you hear me?
Yes.
We can indeed.
The gross margin came in quite strong. Is that mainly due to sales mix? Or do you see a structural improvement as well?
It's a combination of things. It's a little bit of a mix shift. It's definitely customer mix shift as well. So different customers are in different situation in terms of what they buy, and our relationship with them. So I wouldn't call it structural, but it's a result of just good commercial focus in both the systems business and primarily the systems business, but also in general, the gross margin improvements.
One more question. You mentioned that some of your customers are a bit cautious because they don't really know how the post-pandemic needs will look like. However, as most of your big markets now have opened, is there any change in that?
No, I think, we're -- and obviously, the markets are still, in terms of opening or not opening, little bit hesitant. I'm just referring to the dialogs we're now seeing, in the U.K. environments where still virus and infections are spreading, also seen the same in Finland and part of Baltic. So obviously, we're coming off of the pandemic in a bit of a stop and start mode.But anyway, obviously, our customers have spent a lot of time over this past year, 1.5 years on figuring out how do we make sure that we can support a hybrid work model and make sure that we can have -- maintain security when people are working from home. I think a lot of customers haven't been able to meet themselves the same way we've all worked from home, our customers have been work from home, which means that some of those more long term strategic decisions have also been halted or at least delayed because they can't get together in the room and do their whiteboarding.And then to some degree, maybe rethinking whether their strategy is right or wrong in terms of their infrastructure planning. But that's -- that last point is, I think, more just a continuation of the trends we've talked about for a long while, meaning people do move to multicloud technology architectures and they do move to more service-oriented delivery of IT. So I think it's a continuation of the things we talked about before in these meetings in terms of hesitance. Not being able to get together, focusing on making sure that it can be operational during the pandemic and in new hybrid working modes and obviously, making sure that their long-term architectures and investments are business driven.
Next we have [ Rohan Hardikar ].
Can you hear me?
Yes.
First of all, congratulations on the numbers. I was just trying to understand, can you give us an idea of the delta between the margins that you're making at this point and the return on capital versus the target ambitions? What's the difference? How do you bridge that sort of gap?
So yes, you want to know, so our 12-month rolling EBITA margin of 6%. How are we planning on reaching the gap -- bridging the gap to 8%. I think I can complement, Jonas, that a lot of this is through our transformation to selling more managed cloud services, which we see as a stronger growth market, where we provide more value-add and thus have the ability to take on higher margins or generate higher margins. And then, of course, as we grow, we also see different scale effects in our cost base, overall, that should enable us to increase margins. Those are the 2 main drivers. And similarly, to return on capital employed, a large part of that will be through reaching our improved margins, but then also continuing to work with capital efficiency, managing our working capital and our cash management situation. But I think of the 2 measures, the key one we are focusing on there is the EBITA margin.
In terms of the top line development, can you give us an idea of at what rate were the incumbent markets growing in the past 12 months?
Sorry, I missed the question.
The market...
The growth rate of the market?
Yes, the end markets in the past 12 months at what rate were -- yes.
Yes. Well, it's quite a fragmented development, we believe, different markets have managed differently, I think, over the past 12 months. I think our view is that the -- if we split it into 2 kind of segments we discussed in the beginning of the presentation, there's a systems markets or infrastructure market -- the reselling of hardware and software. That is probably and relatively flat over the past year. And then you have the market of managed cloud services, so selling IT as a service, which -- and here, this is a little bit more difficult. But here, you include anything, including then public cloud services. And for anyone who has followed kind of Amazon’s and Microsoft development, you see that they are growing very quickly, so they're probably pulling some of that. But probably some growth -- high single-digit, we would probably claim. But nothing kind of big market, and this is always a difficult one when you look at Proact. We are a niche player, and that's -- or a specialist player, I should say. So we don't play in all the segments that the market is measuring. We focus on the infrastructure related to helping our customers get value out of their data, so we don't do a large degree of workspace solutions or software-as-a-service solutions.
And when we've analyzed, of course, also our -- or the different countries we're in, we do see very different trends in those as well. And we see that, say, in Netherlands, where we've had the declines in systems revenues, we see that, that is also trends we see in the market. So generally, we see similar trends on the markets as we see in our own revenues as well.
Indeed. So key markets like Netherlands, Germany, flat or even decline in the market, others more stable or flattish.
Do we have any more questions?
No more questions? All right. Thank you, everyone, for joining and listening in. We will be back in -- business -- well, I was about to say we will back in this forum when we do the Q4 report, which is on February 11, maybe -- early February. So thanks, everyone. See you soon again. Take care.
Thank you.