Arribatec Group ASA (ARR.OL) Q3 FY2025 Earnings Call Transcript & Summary

Hi, and welcome to our third quarter presentation. My name is Jakob Kjolvik, and I'm the Interim CEO of Arribatec. Joining me today, I have with me our CFO, Magnus Hofshagen. Together, we will walk through some of the business highlights and financial review for this quarter. If you have any questions during the session, please do not hesitate to use the web form, submit them, and we will do our best to answer them in the end of this session. I will start with a quick overview of Arribatec before we dive into more details. We are a team of about 300 people serving around 1,700 clients across all industries. The third quarter was a strong quarter with an EBITDA margin of 10%. And over the last 12 months, revenue has grown by 14%. Arribatec is built around 3 business areas: Business Services, which is our largest business area, deliver product and services around ERP, financial planning and analysis analytics and specialized own IP solutions for research institutes and apprentices. The team runs transformation projects. They do everything from defining the specific client solutions to the implementation and the ongoing support. Cloud delivers flexible, secure cloud services for both private and public sectors. They offer hosting across hybrid environment plus consulting, outsourcing and end-to-end cloud solutions. EA&BPM deliver enterprise architecture and business process management solutions and services, hence, the name EA&BPM, helping organizations work smarter, better and faster and in accordance with internal and external laws and regulations. Together, these 3 business areas deliver mission-critical systems and services across industries. Our people bring deep expertise, not just in technology around our software, but also in the industries we serve. And the market is moving towards industry-specific competence rather than one size fits all. We are also seeing that generative AI is no longer just about productivity, but it's becoming a real driver for business transformation. And that brings us to the next slide. AI brings tremendous opportunities, but many organizations stumble by starting at the wrong place. At Arribatec, we make sure your organization is truly AI ready, so you can unlock real value, not just boost productivity, but use AI as a strategic tool for transformation. The key is understanding your architecture. If you don't know how your strategies, processes, people and IT systems connect, your AI journey is likely to fail before it starts. That's why we begin by ensuring your processes work as intended. Only then does it make sense, for example, to power the processes up with AI and automation. So the architecture and operational excellence get your systems and processes aligned ERP execution adds power and insight to your operations and cloud unlocks automation and enable AI technologies on secure platforms. When these elements work together, AI becomes a true enabler for transformation and not just being a buzzword. The architecture ensures clarity and alignment, operational excellence, deliver efficiency and readiness and ERP provides a backbone for execution and control and cloud unlock innovation and future scalability. I will now give you some highlights from the business in Q3 before Magnus shares some more information on the financials. There are 4 things I would like to focus on and mention. The first is the strong financial performance that we have had, the margin expansion across the board and the journey from ERP to cloud, which many of our customers are undertaking or have planned. And lastly, the push we see for sovereign cloud and how we deliver on this. Starting with the financial highlights. We continue to grow our revenue, which has improved by 20% year-over-year. Recurring revenue remain important to us and now accounts for nearly 50% of our business. This growth comes not only from increased sales of our own IP and partner solutions, but also from the way we deliver our services as more of our services offerings are structured as ongoing subscription-based engagements. The EBITDA development is significant, and we operate now with over 10% margins and close to NOK 15 million in EBITDA compared to minus NOK 11 million last year. Now let's look at the 3 drivers of our business. All 3 business areas delivered positive EBITDA. Business Services goes from 2.5% same quarter last year to 13.8% this quarter this year. EA&BPM has grown from 0.9% to 6.2% and cloud from negative 1% to 7.1% positive this year. Business Services is currently carrying the most weight. The business area continues to -- its strong growth, driven by high activity levels, several new clients and contract extensions and excellent collaboration with our partners. Our own IP is also a key driver of this performance. In Q3 alone, we secured over 300 new wins, and we have just highlighted a few of them in this slide who has placed a trust in us in this quarter. EA&BPM experienced a decline in revenue compared to last year, mainly due to the temporary reduced operational capacity. Despite this, the segment delivered, as just mentioned, stronger EBITDA figures this year than last year. Capacity is now on its way back to normal as colleagues return from parental leave and new hires are joining the team. The client base remains strong, also exemplified by some of the wins in our third quarter. Cloud has made its delivery model more scalable and flexible. The team has secured several new contracts with [indiscernible] being the largest. Our partnership with Eidsiva has enabled us to deliver high-quality sovereign cloud solutions. And we also see that AI and security solutions continue to be in high demand. One of the most exciting developments year-to-date and in particular, this quarter has been the acceleration of our ERP to cloud transition. We are helping clients move from on-prem ERP solutions to cloud-based platforms. There are 2 main models: lift and shift, which moves clients from their on-prem environment to cloud. This alone will enable faster scalability and more frequent updates and scaling. And the second, rebuild that allows for rapid deployment, automation, native AI and analytics. The ERP shift to cloud increases reliance on us as service partner for our customers and also drives recurring revenue for Arribatec. Due to this, the project pipeline has increased with approximately NOK 60 million. And the ERP journey to cloud provides us also new ways of support and monetize client engagement in addition to increased visibility on long-term client engagements. Finally, I want to highlight our commitment to sovereign cloud solutions. We have established a new partnership with Eidsiva that allows us to provide a Norwegian owned and operated cloud, ensuring that all data is stored and processed within Norway's borders. This gives our clients full data sovereignty, eliminates geopolitical vulnerabilities and also guarantees public ownership and secure storage. Our sovereign cloud is fully scaled and tested, ready for large enterprises and is particularly well suited for public sectors and regulated industries, such as defense, national infrastructure, health care and financial services. Given the geopolitical landscape we are currently engaged, we are currently engaged with both national and local government and compare companies related to defense industry for this offering. The sovereign cloud offering is an addition to the cloud offering we have today. So it's not a replacement, just to be clear on that. These were the 4 highlights I wanted to share. Now I will hand over the presentation to Magnus, who will take you through the financial review of the third quarter.

Thank you, Ole Jakob. Good morning, everyone, and thank you for joining today's presentation. As Ole Jakob highlighted, this has been another strong quarter for Arribatec. And what we are now seeing in the financials is a continuation of the positive trend we established earlier this year. Let me take you through the financial review. We delivered revenue of NOK 137 million in the third quarter, which is 20% growth year-on-year. That marks yet a consecutive quarter of year-on-year growth on continuing operations. And what is particularly encouraging is that the growth is broad-based. Business services is the main engine, but we also see solid progress in cloud. On a trailing 12-month basis, revenue is now NOK 560 million, up 14% from last year, which provides validation that the business is scaling. EBITDA came in at NOK 14.6 million, representing an EBITDA margin of 10.7%, a year-on-year improvement of more than NOK 25 million. This is now our second consecutive quarter of robust profitability, confirming that the operational measures we've implemented across the past year are flowing through to the bottom line. We are moving from what we would call turnaround execution to ongoing disciplined performance. And that shift is visible in the consistency of the result. Turning to cash flow. Operating cash flow was neutral in the quarter. We had positive working capital movements from accounts receivable and payables, which were then offset by the release of deferred revenue linked to the execution on existing project obligations. The increase in release of deferred revenue in Q3 is tied to the level of prepayments we received in Q2. Importantly, this is a timing effect of successfully delivering on contracted work. In other words, execution driven. We also had NOK 17.6 million in cash inflow from the exercise of warrants, which contributed positive to total cash flow. As a result, cash ended at NOK 60.5 million, up from NOK 47 million in the previous quarter. And finally, on the balance sheet. We remain in a strong financial position. We have no interest-bearing debt and the full revolving credit facility remains undrawn and available. Equity stands at NOK 290 million. The balance sheet is clean, liquid and gives us strategic flexibility on future deployment of capital in a disciplined manner. That concludes the financial review for the quarter. To summarize, we're growing at strong double-digit rates, delivering disciplined profitability and maintaining a solid debt-free balance sheet with increasing financial flexibility. The trajectory is consistent, execution is controlled, and we entered the fourth quarter with operational and commercial momentum. With that, we are happy to open the session for questions.

Hi, and welcome back. We have received a couple of questions we would like to answer. We can just answer them in the order they came in. Can you just read the first question, Magnus?

Sure. We have first question here where we're asked to our recurring revenue is distributed across business segments. I can answer that one. So generally, in Business Services, we see roughly around 40% of the activity driven by recurring revenue contracts supported by managed services support agreements and increased contributions from our own IP. In EA&BPM, we have a blend of multiyear platform commitments combined with project deliverables. And we see a recurring around -- in cloud, recurring revenue is by far the dominant model and close to 80% is supported by subscription services and cloud environments and managed operations.

Let's see the next one.

So next question. We have a question here regarding strong pipeline and whether we can say a few words about what type of products and service areas this relates to.

Well, in general, it's been an increase in pipeline across the board. We see the pipeline increasing with all our products and services. I mentioned a few of them in the presentation just now with the use of AI security, the cloud migration projects and so on, but we see also increase in all the markets that we are in through our main products. So yes, it's strong with good logos. And yes. Thank you. And let's see the other one.

Yes. We have a question here related to how much of the order intake is related to? How large is the share of recurring revenue in Business Services, which we already answered. Do you expect Q4 to be better in terms of free cash flow? And also our Q4 a seasonally stronger quarter in terms of revenue and profitability compared to Q3? If you start with the first, the 2 last ones afterwards.

Well, we expect Q4 to be -- historically, Q4 is our strongest quarter. We expect that to be the case this year as well. The other part was we expect a better cash flow to the EBITDA as well...

How much cloud migration?

Do you want the exact number, but it's mentioned.

We don't have the exact numbers here, but for cloud migration is a predominant driver in our ERP to cloud, which we mentioned during the presentation and an important growth driver for our business.

Yes, especially now in the remainder of the year and also in H1 next year. Yes. And I think we mentioned also in the presentation about NOK 60 million related to...

Year-to-date.

Year-to-date.

Good. Then we have no further questions.

Okay. Thank you so much for joining this morning. That will be the Q4 presentation next year. But if you have any questions, please do not hesitate to reach out to Magnus or myself using the invite or the e-mail you see on the screen now.

Thank you so much, and have a great rest of the day.