Proact IT Group AB

STO:PACT

Earnings Call Analysis

Earnings Call Transcript 2023-Q4

[Jonas Hasselberg, executive]

Good morning, everyone. Welcome to our Q4 call. We'll wait just a few more seconds so everybody can get into the Teams meeting. So bear with us a few seconds. And while we wait, I will remind you that we are recording this call just so that you're aware, it will be published on our external website as well. You are all muted, but we will let you in for questions later in the meeting.All right. I think everybody has been able to get in. Again, good morning. Welcome to our call. My name is Jonas Hasselberg. I'm the CEO and I also have also Asa Regen Jansson with me. Good morning, Asa.

[Asa Jansson, executive]

Good morning, everyone. Good morning, Jonas.

[Jonas Hasselberg, executive]

We are going to go through the results. So we'll go through a couple of slides and then as I mentioned, we'll open up for questions towards the end and then we should have plenty of time for both. So let me start.Agenda-wise we'll do the same as always for those of you who have been with us before. We'll talk a little bit about the company, our view of the market, obviously some of the key developments in the quarter and our financial results.So most of you know this already, we're actually turning 30 years old this year. We're gearing up for a big celebration later this year here in Stockholm. We are serving large and medium-sized enterprises across Europe with IT infrastructure, so really the mission-critical platforms for large enterprises across Europe.Our turnover is about SEK 5 billion and we have 1,200 employees across our markets in Europe and obviously, it's very skilled and competent employees, one of our key success factors, definitely ability to provide some value through our skills to our customers.Markets not changing, we see the same drivers in the marketplace. Maybe some of them are increasing even more than last time we met. But most -- and of course most importantly is that our customers are driving business value from their investments in IT. We usually use the somewhat vague term of digital transformation, so really changing the way they run their businesses and we'll go a little bit deeper into this here in a second, by using IT.There's a technology trend which is moving very rapidly. We call it Hybrid Cloud, so using cloud technologies for all of this transformation. Obviously, one part of cloud has been very obvious over the past maybe a year or so, it's artificial intelligence, which is just one out of many examples of how IT is serving in the technology. The pace of technology development is serving the transformation.There where we see most maybe noise and news and unfortunately, not always good news is in the area of cybersecurity with an increased amount of, in particular, ransomware attacks. So the need with our customers to be able to both protect their data, but frankly also recover the data is increasing rapidly and is an area where we're helping a lot of customers these days.And last but not least, the need or the opportunity, I should say, for IT to help our customers and ourselves to be more sustainable. We are able to drive a lot of these IT services and IT solutions in a more energy-efficient way than our customers can do themselves. So therefore, we're also helped and we're becoming more sustainable from an environmental perspective, which is great.From a market more macro perspective, I think you see the same as we do. Obviously, still some uncertainty during last year in terms of the inflation and potential downturns seems to be a little bit more positive over the last couple of weeks or months, which is good, but uncertainty in general, makes our business a little bit more difficult and in particular, a little bit more hard to predict. Still a good year. So we're quite happy despite the uncertainty.So I just want to go a little bit deeper into what it is we actually do. And I want to talk about the use cases and these are real use cases with real customers. They are quite often very mission-critical. And I'll pick a few here. We're helping customers with digitizing their patient records, for instance, to streamline flows between different care providers and obviously making quick access to data and making the data available not onto the caretakers, but also to patients.You can imagine, of course, the sensitivity of this data. So here, not only the digital access is important, but also the way it's stored and the security around it is one great example. With another use case, we're helping a public sector customer with redacting document using AI. So they -- through the -- the need to be able to provide documentation to the public, not all information in those document is public and they're using AI to redact their documents rather than do it manually.We're helping other customers with automating their warehouses. Other customers are having a large number of trucks, thousands of trucks that they route across Europe for deliveries. It's in-home deliveries. So a lot of small trucks would deliver to individuals. And obviously, the routing here becomes very important, the more optimal you can route, the more efficient your delivery is. So these are just a couple of examples of the use cases we're helping our customers with.So when we talk about digital transformation and mission-critical solutions, these are just a few of those examples to help you understand what is we're trying to do and how we try to help our customers.We talk a lot about the Hybrid Cloud. So by Hybrid Cloud, we mean that our customers should be able to use all the benefits of cloud technologies, but also realize that not all of these applications and use cases can be realized in what we call a hyperscaler or a public cloud, sometimes better to keep running your applications in your own data centers or in a data center managed by Proact. And the combination of this is what we call Hybrid Cloud. It's not as easy as it sounds because data should still flow transparently between these different clouds. Security is still important. The access for the users is still important.So we have a whole set of services and products where we help our customers from the beginning, just thinking through what should the architecture look like, how do we realize these business-critical use cases to design, migrating their old applications to new applications or old data storage to new data storage or whatever it may be into their new architects and then we run all of these on behalf of our customers.Ultimately, we want to be the ones that manage the applications and services for our customers so that our customers can focus on their business. We don't think our customers should have to have a lot of, let's say, basic IT skills and competencies, they should focus on their own customers and their business and let us run the IT.So this is [indiscernible] trying to explain how we take our customers through this journey of thinking through what their Hybrid Cloud architecture should look like and what the journey to a Hybrid Cloud environment can be. That's what we do. You know this already. We have a quite a broad set of value propositions to our customers around this journey, advisory services, storage services, connectivity and networking services, security and data protection and data recovery services and ultimately, of course, the products and services that they need to realize, to be workspace solutions, artificial intelligence platforms, so on and forth.And in all cases, we can deliver this value in a couple of different ways. So we allow our customers to select whether they want to have it in their own data centers and we sell it as a systems business, meaning a resell of hardware and software or if they want us to host it in our data center and run it for them or if you want to go to the public cloud and these applications are run on top of Microsoft or Google or Amazon, for instance.In all cases, a typical customer implementation consists of compute power, so effectively CPU power, networking, store and workspace solutions. Some customers buy all of it from us and some customers buy only pieces of it. It all depends on how they select the vendors.And so a lot of this infrastructure we speak about, I mentioned already can stand in different data centers and gives different types of benefits for our customers, a lot of flexibility, a lot of ability to innovate on technology that constantly is moving. And we have a broad portfolio of products and services across these different areas.So we can help our customers in their own data centers with storage and networking and compute platforms and we can operate them for them in their own data centers or they can run it as a service or we help them on top of the public cloud and we can run their service and applications also on top of [indiscernible]. So we have a very broad Hybrid Cloud offering. I think we're quite unique in this space that we can help our customers across the range of cloud catalysts.Third, we run our services out of service delivery hubs. So we have 24/7 delivery of our services and we run them from our different centers. And there's one in Sweden, there's one in Germany. There is one in the U.K. and there's one in the Netherlands. And hereby, we can deliver different services from different places. We build our competence centers in these areas, but we can serve any customer across our footprint from any of these centers. And this gives us a good reach and with good balance between local presence and local understanding of our customers and at the same time, scalability across our footprint.And that's also true for us here in the operations center. So we run 24/7 security monitoring for our customers, both out of U.K. as well as out of Germany. And this is another key skill, which is not so easy for our customers to replicate themselves to have 24/7 every day of the week and year coverage and monitoring of what's going on in your networks, what's going on with your infrastructures, so another core value of our customers.So just to kind of wrap this up and make it simple, we have 5 core value proposition we spoke about. Our revenue streams, as you know already, is categories -- in 4 different categories. We're selling consulting services or professional services as we call them, managed cloud services. We're reselling hardware and software and we're selling technical support services. You'll hear us talk a lot about recurring revenues. That's the combination of managed cloud services and our support services. So these are the ones that we report as recurring.We think our customers are quite happy. We measure, of course, customer satisfaction on a very regular basis. And we also measure what's called Net Promoter Score. It's a quite a common way of measuring customer satisfaction and customer loyalty. It went up from 46 of last year to 59, 2023, which is great. So we're very proud of that number.And equally, of course, we measure our employee satisfaction, which is also quite high number of 31. Both are getting the same -- roughly the same question, as you say, the Net Promoter Score question goes, would you recommend Proact as a vendor? Or would you recommend Proact as an employee to your peers in the industry? It's a way just to get people -- understanding if people would recommend us or not and the higher the number, the better. So quite proud about that.Good, the quarter was quite positive in many ways. We had a strong fourth quarter, in particular, when we look at our services business and most notably, the recurring revenue business, so our supporting cloud service had a good growth in the quarter. We spoke about a big chunk of 2023 with you guys around our cost program.We started the year realizing that the inflation is impacting us a little bit more than we were hoping for and we addressed that very immediately and we have now finalized the program and we're able to reduce the cost as per plan in both in terms of COGS and our delivery capabilities as well as sales and administration costs.We continue to get a lot of recognition for our partners. We work a lot, of course, with partners and this is just one example from one of our big vendors, Dell, in terms of being awarded the excellence in security and we continue to build on our skills on top of the public cloud and have broadened our skills there together with Microsoft.And then, frankly, at the very beginning of this year, we announced our new permanent CFO, Noora Jayasekara. She will join us here during the second quarter of this year. And in the meanwhile, Asa, you will be helping us.So if we can start looking a little bit at the numbers, quite a lot of positives, strong services growth and very strong growth in annualized recurring revenue. So on a yearly basis, we're now at SEK 1.8 billion of recurring revenues. We had a record quarter of new cloud contracts or TCV, total contract value, as we call it. So the value of new contracts closed under the fourth quarter was almost SEK 200 million, which was great.Cost program, I mentioned already and our cash position is now very strong. Even though we're also initiated a share purchase program towards the end of the year, we still have a strong cash position, which, of course, gives us opportunities to invest in the future.A little bit of revenue decline, which you remember, it was from a very high level, the quarter before -- the quarter of the year before, in 2022, we grew by over 50%. So we're coming down a little bit from that very high level, but we're maintaining a good growth compared to the 2 years ago and a slight decline in a similar way of our EBITA. So a couple of strong things in the quarter and a little bit of a drop back from an incredibly strong Q4 in '22.So with that, Asa, let me hand over to you.

[Asa Jansson, executive]

Thank you, Jonas. I will start with some highlights from the income statement in Q4 where total revenue declined with 5.6% to SEK 1.36 billion in the quarter, corresponding to a minus 6.9% growth on a like-for-like basis. This was a result of lower system business sales of minus 11% compared to an exceptionally strong last year, as mentioned by Jonas, whereas the service business revenue grew with 5%, driven by growth in our recurring business.Adjusted EBITA was down 11% to SEK 91 million, equal to an adjusted EBITA margin of 6.7%, following the lower sales where lower COGS and SG&A could not fully compensate. Profit before tax was down 4% to SEK 82.6 million, equal to a margin of 6.1%, which was an improvement of 0.1 percentage points compared to Q4 last year.And then looking a bit more into the numbers, starting with the revenue development. Revenue, as mentioned, decreased with 5.6% in the quarter. Still, Q4 is a strong quarter, looking at a longer trend, but with a very strong comparative. Underlying development of minus 6.9% was affected positively from currencies of 1.8% and by a small negative effect from divested businesses of minus 0.4%.As mentioned, Q4 was a record quarter for new cloud contracts that amounted to SEK 197 million compared to SEK 142 million last year, which is a good start for the New Year. The service business grew with 5% and 2% organically, where strong development in cloud services and support was offset by a decline in consulting services connected to lower system sales in the quarter and somewhat a weaker market.Annualized recurring revenue, consisting of support and cloud service revenues increased 13% and 9% on an organic basis. System sales decreased with 11%, largely a result of the strong Q4 last year and to some extent, due to continuously longer sales cycles.Yes, moving on to the profitability development then. Adjusted EBITA in Q4 amounted to SEK 91 million, a decline of 11% from SEK 102 million last year as a result of the lower sales in absolute numbers, where efficiencies and improved gross margins in the service business together with SG&A cost reductions could not compensate in full.Otherwise, sales and administration expenses decreased by 6% despite negative impact from cost inflation, especially during H1. And this was enabled by the cost program launched in Q2. The cost efficiency program has been successful and met the target of reductions in the underlying cost base of approximately SEK 50 million in 2023.Earnings per share in Q4 increased slightly compared to last year due to improved financial net, mainly from lower interest costs.And then let's plunge into the different business units. Starting with business unit, Nordics and Baltics, our largest business unit, that delivered a strong quarter, only beaten by the even stronger Q4 '22.System sales were down 5% on a like-for-like basis, whereas the service business increased with 8%, driven by cloud services and support. Reported EBITA in the quarter decreased to SEK 51.8 million from SEK 65.4 million last year, primarily as a consequence of lower system sales, but also to some extent from timing of cost in the quarter.And then we have Business Unit [ U.K. ] where revenue decreased by 13% on an organic basis, once again in the light of a strong last year, but also impacted by longer system sales cycles and a spillover effect on the consulting business. EBITA was down to SEK 4.5 million and a margin of 2.7% from lower revenue. However, those were to quite some extent compensated by low cost.And then we move on to Business Unit West. Organic revenue was down 19% from a large decline in systems. The service business grew with 2% organically where a decrease in the consulting revenues counteracted growth in support as well as in cloud services. On a positive note, though, the contracted value in cloud services increased significantly, which gives a good start into 2024.Despite shortfall in revenue, West profitability was almost on par with Q4 '22, with an increase in EBITA margin driven by the improved margins in the service business. And then lastly, Business Unit Central, delivering a fairly strong quarter with an underlying negative revenue development of 2%, driven by lower consulting revenues, partly explained by lack of resources.Profitability, however, increased to SEK 16.6 million, positively affected by the lower sales costs and administration expenses.And then a few words on cash flow and our balance sheet. The cash flow in Q4, healthy cash generation from operations, excluding working capital of SEK 148 million and with a positive change in working capital of SEK 93 million, largely from timing effects.Investments in fixed assets of SEK 13 million and an outflow of SEK 93 million from financing activities, including repayment of loans, share buyback program, as Jonas mentioned and resulting then in a cash balance of strong SEK 548 million.And a few words on the full year cash generation. Very healthy cash generation from operations of SEK 532 million, of which SEK 427 million from current operations and SEK 105 million from changes in working capital. Investment activities of SEK 52 million, primarily in fixed assets, but also from acquiring the remaining minority in the Czech subsidiary.The strong cash generation from operations has enabled repayment of bank loans of SEK 224 million during the year, dividend payout of SEK 51 million and share buyback of SEK 20 million as of now.And then let's have a look at the balance sheet and some financial KPIs. The profit and change in capital structure result in an improved equity ratio currently at 25% and in a net cash position of SEK 80 million at year-end. The strong finances make Proact well positioned to pursue with the acquisition agenda and in addition to further create shareholder value through dividends and repurchase of shares.And finally from my end, let's have a look on how we are tracking against the long-term financial goals. Sales growth of 1.9% in '23 has obviously showed a 10% growth target. But taking into account 2022 year's growth of 35%, it is a decent compound annual growth. EBITA margin of 6.2% decline year-on-year and behind the target of 8%, but with a shift in business mix towards services and efficiencies through underlying sizing of the cost base, we have a good foundation for moving towards the targets.Net debt over EBITA rolling 12 months is significantly better than target which creates possibilities. Return on capital employed, down year-on-year due to some one-off effects impacting the results negatively in 2023. But excluding that, fairly much on par with last year, even a small increase. Reflecting then a solid underlying performance, the Board proposes a dividend of SEK 2 for the financial year 2023 to be resolved at the Annual General Meeting on May 7.And that was it from me. So back to Jonas. Thank you.

[Jonas Hasselberg, executive]

Thank you, Asa. So just a quick summary. A strong quarter, we're quite happy with the quarter. The revenues around cloud is increasing in a good way. This is, of course, where we put a lot of our strategic focus and a record quarter in terms of new contracts. Our annualized recurring revenues continues to grow, which is great. We think we are in a good position and we're happy to be able to propose an increase in dividends, just like you mentioned here, Asa.So with that, we have come to the last slide. We'll open up for questions.

[Jonas Hasselberg, executive]

You can either raise your Teams hand or unmute yourself and throw you into the mix, whatever works for you. So welcome with questions. And Anna, you can help us let people into the call. Fredrik I think is first.

[Anna Linde, executive]

Yes. Fredrik Nilsson is first.

[Fredrik Nilsson, analyst]

I want to start with sales and marketing expenses. They were almost as high as Q4 2022, which had a quite high level, considering the cost savings program, I did expect a more substantial decrease. What am I missing there?

[Jonas Hasselberg, executive]

The main thing you're missing is that we had a very strong performance in the Nordics and Baltics and in Sweden in particular. So sales cost in the quarter were a little bit higher than expected or normal because we're recovering some of the commissions for the full year. So in fact not enough reservations of the commissions in previous quarter because of very strong performance in the second half and strong performance in the last quarter for Nordic and Baltics.

[Asa Jansson, executive]

So partly then a timing we could say.

[Jonas Hasselberg, executive]

Yes, exactly. So covering some of the sales cost for previous quarter, simply.

[Fredrik Nilsson, analyst]

Okay. I see. So could you elaborate a bit on the strong intake of cloud contracts, any large deals boasting, for example?

[Jonas Hasselberg, executive]

There's not one significant deal that covers that is driving. So there are several deals in all our regions, although West is definitely strongest in this quarter. But it's not one single customer driving this growth. It's spread across multiple customers and multiple regions, which is good.

[Fredrik Nilsson, analyst]

Okay. And lastly, what's your view of the market for 2024 in general?

[Jonas Hasselberg, executive]

I think we're slightly positive. It seems if the macro development is now improving as we see some signs of a little bit better economic situations, interest rates coming down a little bit and nothing other crazy happens, I think '24 will be -- can be a good year. We see investment increasing a little bit. So I'm carefully positive.The one thing we saw in the 2023, which we talked about during the years, a little bit longer sales cycles. So customers are more careful with their investments. Typically, more people within a customer would be involved in making a decision. Purchasing departments have slightly higher impact than they've had in the past. So I think we expect to see a little bit of out of easing off and maybe a little bit of pent-up demand to come to us here in 2024.We don't give any forecast. We're just giving you some market insights here, but we're quite optimistic. And like I also said here, we had a good start of the year simply by having so much contracts closed in the end of last year. So it's, of course, just good to have that in our back.

[Anna Linde, executive]

We have one written question whether we plan to expand into Japan.

[Jonas Hasselberg, executive]

We have no plans to expand into Japan, unfortunately. It would be fun, but no plans.

[Anna Linde, executive]

Thank you. Then Daniel Thorsson is next up.

[Daniel Thorsson, analyst]

Sorry if I repeat any questions here. I missed the first part of the Q&A here due to another call. But I have a question on the systems business. How is the competitive situation at the moment? It was quite good development given the tough comps in Q4 here. Have you seen any price pressure or aggressive competitors during 2023 when the market seemingly fell, I guess?

[Jonas Hasselberg, executive]

I think from the actual vendors, I think it's quite stable. We've seen, obviously, there's a couple of large global players here, including Dell and NetApp, and most of you know NetApp is one of our biggest partners and biggest providers. I think they are quite stable, definitely doubling down in terms of -- there is a shift if you want to slightly, what we would call capacity storage, so slightly lower cost, but higher volume storage, which is good.So that's an increasing area for us. In terms of our competitors locally, so other system integrators and service providers, I'd say it's pretty stable. There's always a bit of a price pressure when people are pressed for growth. I think we've been able to counter that quite well. We want to be a premium provider.We want to add a lot of value to our customers and keep margins high. So in the cases where we compete with players that are selling at 0 margin because they want to drive the revenue, we'll rather move on to a customer who could appreciate and get some value out of the competencies and the skills and the services we bring. So I wouldn't say there is a significantly higher competitive pressure. There's always competition, but not significantly higher.

[Daniel Thorsson, analyst]

Okay. I see. I see. It's interesting to hear about that. And then the second question on cybersecurity here, everyone could read about it to every and so on. Have you seen any increased demand or more interest for driver backups, disaster recovery consulting services in conjunction to that? Or there is something we should expect in 2024? Do you have a positive outlook on that?

[Jonas Hasselberg, executive]

Yes, no, we do see a demand for it and I think we will see an increased demand and you're spot on, Daniel, a lot of things related -- so there's -- simplistically you need to do two things. You need to protect your environment, your IT environment, network storage, applications from attacks. And if you have had attack in a way, you need to be able to restore your environments.And we see a lot of interest now in backups, secure backups and disaster recovery solutions. Obviously, this is one of our absolute key skills and this is where we grew up -- some of you know, we grew up as a storage and a backup company. So if there's anything we know really, really well, it's storage backup and disaster recovery. So yes, there is a good demand for it and we're already helping a lot of customers here.

[Daniel Thorsson, analyst]

Good. And then I have a general question ahead as well. AI driving data storage. We see that NetApp is talking about it. They saw some big banks in the U.S. ordering some systems related to AI use cases, et cetera. How do you see your customers are driving demand or showing interest related to AI here in the Nordics and in Europe?

[Jonas Hasselberg, executive]

No. But we've been working with AI solutions for quite some time, and we have customers here in Sweden and in other parts of the -- parts of our footprint as well with AI platforms. So we would then help our customers with the storage and the high-performance compute platforms for AI.I think the significant hike we've seen since about a year ago hasn't translated in significant business yet. And the reason is there's still a lot of prototyping, piloting, learning going on, and it's relevant -- it's prudent for customers to do that with a public cloud platform. So then we use a Microsoft or an Amazon or a Google platform to do that.And what we can expect is that when those go into more commercial production, they will start to optimize performance and cost and this could then lead to also business opportunities in our services and our products. So I think we're in a good position. We've done it already with several customers. We have not seen the big spike in demand yet.Great. Thank you, Daniel. Any other questions? Great. Thank you so much. I appreciate that you all call in on a busy morning like this. We will be back in May with our Q1 report. So until then, have a fantastic time. And again, thanks for calling in. Take care.

[Anna Linde, executive]

Thank you.