Arribatec Group ASA (ARR) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our second quarter presentation. I will take you through the financial numbers, what has happened on the market side and talk a little bit about the operations. So let's dive in here. So second quarter revenue is a record high revenue for Arribatec, came in at NOK 150.1 million. Adjusted EBITDA came in at NOK 3.4 million, where there are around NOK 3 million in one-offs. That reduces the EBITDA to just above breakeven level. Business Services had, outside of Norway, a somewhat lower activity compared to same quarter last year. And EA & BPM likewise lost out on a couple of larger projects that we had bid for, for the early part of Q1 -- sorry, Q2 and that also impacted our EBITDA and our margins. However, Flytoget had picked up some of the revenue and -- or the revenue gap and -- but still at somewhat lower margins than we would have had on the Business Services and the EA-BPM projects. Finally, from a financial perspective, cash is at NOK 30 million at the end of the quarter. And as you may remember, we have been at NOK 39 million for the last 4 quarters. However, for this quarter, we had a large VAT payment coming due that relates to all the prepaid license fees from our customers early in Q1 that fell due in Q2 and that took down our cash level to NOK 30 million. On the operation and market side, we signed a global partnership agreement with Orbus Software, which we announced. We are now exclusive partner for Nordic countries except Norway, and we can sell and implement and support Orbus software throughout the rest of the world. In Norway, we have an exclusive agreement with QualiWare. Hence, we cannot sell Orbus in Norway. We also signed and announced the NOK 73 million agreement we signed with EEAS, which is an agency under EU and that is for support improvement and cloud migration. That is a 4-year contract, and we have already started working on this contract, and that will clearly have an impact on both the revenue and EBITDA for us going forward. And also Unit4 cloud migration projects, we have now signed 20 new agreements with Unit4 customers to help them prepare for the migration up to Unit4 cloud that will have to take place. Additionally, we have 65 more agreements that is the way we see it ready to be signed and expect to sign them during Q3 and early Q4. These cloud migration projects will actually start -- some of them will start already during Q4 this year and continue into 2025. So if you look at first revenue here, as I said, NOK 150 million, that's a 1% improvement compared to a year ago. We are also happy to note that the recurring revenue is now at NOK 64 million for this quarter, that is up NOK 10 million from the same quarter last year, and that's a 19% growth in -- actually recurring revenue volumes. Recurring also accounts for 43% of our total revenue, up from 36% a year ago. And cloud -- our cloud business today accounts -- or 80% of their revenue or just short of 80% of their revenue so far this year is recurring. So that certainly is something we appreciate. Again, adjusted EBITDA, as I said, NOK 3.4 million versus NOK 8.4 million a year ago and a clean EBITDA of NOK 0.4 million. If you look at the geographical spread, revenue in Norway is at a record high of NOK 106 million. That is also up 19% compared to a year ago, and it accounts for 71% of the total revenue in Arribatec for the quarter. Continental Europe, revenue of NOK 22 million, that is down around NOK 9 million compared to a year ago and 15% of the total revenue for the group. Lastly, revenue in U.K. and U.S. stands at NOK 22 million for the quarter. That is also down NOK 6 million compared to very well a year ago. We do expect that the revenue both in Continental Europe and in U.K. will pick up during Q2 -- sorry, Q3 because of the -- as we said, the EU project as well as cloud migration projects, among other things in the U.K. as well. If you look at the first half of 2023 combined, then we have a revenue of NOK 295 million, which is almost at par with the first half of 2023. Recurring revenue is up also for the half year, up 19% to NOK 124 million and accounts for 42% of the revenue in the first half of the year. Adjusted EBITDA for the half year is NOK 4.6 million and the clean EBITDA is NOK 0.4 million. Today, we -- or we are now also present with offices -- 17 offices around the world, 11 countries, and we have a little bit more than 350 people in the organization serving 1,700 clients. This figure you are -- you have seen before, it shows how we have organized our business with the 3 larger business areas in light blue here that are, I would say, industry-agnostic. And there is a lot of cross synergies between these 3 business areas. As you can see in the inner circle, Business Services account for 45% of our revenue for the -- so far this year, 18% for EA-BPM and 24% for cloud. And then we have the 2, what we call industry verticals, being Marine and Hospitality, accounts for around 50 people and a little bit more than combined 10% or 13% of the total revenue. When we look at the products and services that we offer to the market. This is also a familiar slide for those of you who has been following our presentations. There is really nothing new here compared to what I showed you last quarter, but I would like to point out that when you look at the ERP activities or service offerings on the left-hand side here. We had SAP in there as a product that we offer. And during Q2, we have hired a Director of the SAP practice, who joined us now in August, and we will be building up that practice over the next few quarters. Okay. So let's look at the individual business areas. First, Business Services. A total revenue of NOK 68 million for the quarter and an EBITDA of NOK 6.6 million. As you can see, it's a 10%, 11% decline compared to a quarter ago. And that's mainly due to, let's say, a somewhat soft quarter for the regions outside Norway. But this, we expect to improve as the large projects, for example, the EU project kicks off after that's been secured and signed in Q2. We also have, as I said, signed 20 Unit4 cloud migration projects, and we expect to sign at least 65 more for the rest of the year. That is for work that will start late in 2024 and lasting well into 2025. The ERP unit in Norway has also won 2 large implementation projects for Norwegian customers. They have already -- or both of them has -- the first one has started and we are performing work on it, and the second will start during August. We see that with increased volumes for business services, the margins are expected to come up. EA-BPM, a revenue of close to NOK 27 million. That is a 5% decrease compared to a year ago, and we have a EBITDA of NOK 2.7 million or a 10.3% EBITDA margin. We lost some projects early in the year that we were supposed to execute on or expected to execute on in Q2. We were hiring people in the last part of 2023 and in Q1 in order for -- to prepare for the increased business volume that we expected to come. However, since we did not have those project with us, we had -- for a period now, we have had too many people and we have decided to temporarily lay off or as what we call it in Norwegian, [Foreign Language], some staff in order to protect our margins. Having said all that, the Orbus partnership which we entered into during Q2, have provided us with existing customer list, which we now are approaching. And we have actually signed the first Orbus customer already in the Nordics, and work will commence on that now in August. That's a project worth or the total value of around NOK 3 million. So we are very happy with the Orbus partnership, and we see that it brings us a lot of new opportunities. Having said that, we are also working on large business opportunities in Norway together with QualiWare, which is our partner in Norway. And the projects we are working with are -- the business volume has come up -- will come up with them. And with higher volumes, we expect the margins to improve also in EA-BPM. Cloud. It has a record quarter, revenue of almost NOK 40 million, that is more than 12% increase compared to a year ago. And the adjusted EBITDA is NOK 4.5 million, while the clean EBITDA is NOK 2.4 million. The difference here between adjusted EBITDA and EBITDA is a NOK 2.1 million loss on a customer in Norway that actually went bankrupt. We also see that the recurring revenue continued to increase as a portion of total revenue in cloud, and we are actually close to 80% recurring revenue now for cloud and that for us is very comforting to see. We are competing also in cloud for several large projects now. And we are optimistic that we will be able to land, if not all, at least some of those, which will bring our revenue up further. Then Hospitality, NOK 14.7 million in revenue, of course, that is a record high revenue for the quarter. And of course, the Flytoget project, the Norwegian high-speed train to the airport that we signed back in 2023 has been delivered during second quarter. 29 ticket vending machines are installed on all the stops and also out in the airport. And that has both a hardware -- the project had both hardware components and software development components. So that has brought the revenue up to NOK 14.7 million and EBITDA -- adjusted EBITDA of NOK 1.7 million and a margin of -- adjusted margin of 12%. We expect also that we have finished the core delivery on the Flytoget project by November this year. And we are also in dialogue with Flytoget to help them with additional development based on their needs. So we have had a very good project and very good cooperation with Flytoget, and we believe they are satisfied with what we have delivered to them so far. In addition to delivering on the Flytoget, we have signed 12 new hotels during the second quarter with 16 check-in, checkout kiosks to be installed. Most of them during September and October. We have also broken into Ireland as a new country during the quarter, and that is good to see that we continue to be expanding outside of Norway. Lastly, Marine has a revenue for the quarter of NOK 10 million and an EBITDA margin of 5% or NOK 0.5 million. That is down 23% compared to a year ago. And the main reason for the reduced revenue is that last year, we saw our customers taking delivery of several new building -- new built ships and they installed our system infra ship onboard all the vessels. Most of these vessels have now been delivered, and that, let's say, revenue source is not there anymore. So we are now working hard both in Greece, in the Italian market and the North European market to secure new clients and new ships into using our software and our services. Then again, a familiar slide, this shows our revenue development on a group level over the last 9 quarters, divided into the different 5 business areas. And as you can see, the second quarter this year is the best quarter by slight margin compared to the quarter we had in first quarter of 2023. You can also see that the mix or the revenue development for each of the business areas has changed over the last year. And you can also -- maybe most importantly for this slide, look at the top, where we show the total recurring revenue as a percentage of the total revenue in the company and we are now at a all-time high of 43%. And as I said, we are very satisfied that we can see that development. Sales and new contracts. This has been -- or second quarter has been the second best quarter so far in terms of order intake for the group. And we have signed the new agreements for scope extensions and new business worth NOK 194 million, and that is distributed over 441 new contracts. That compares to NOK 121 million in Q2 a year ago. Business Services actually more than doubled the order intake this quarter compared to a year ago. And of course, the EU project of NOK 73 million accounts for 50% of the total order intake. And this, of course, will impact Business Services performance going forward. Hospitality and Marine has -- sorry, Marine has a lower order intake this year compared to a year ago, while hospitality, of course, has a higher new business intake compared to a year ago. EA-BPM and Cloud is fairly stable if you compare them to a year ago. Okay, so now to cash flow development for the quarter. As you can see, over the last 4 quarters, we have ended a cash balance around NOK 39 million while now we are at NOK 30 million at the end of Q2. Cash flow from operation is negative by NOK 22 million, and the main explanation is, number one, a change in contract assets that has reduced by NOK 13 million. And more importantly, we paid a NOK 13.1 million VAT bill related to payment from customers early in Q1 related to the upfront payment of licenses. Net cash flow from financing activities was positive by NOK 16 million where NOK 22 million stems from increased overdraft drawdowns and a reduction in the opposite way of 4.4 -- or NOK 8 million installments on lease liabilities. Net cash flow from investing activities was negative with NOK 2.6 million where the main component is capitalized development costs. So we end the quarter with NOK 30 million in cash and cash equivalents. So lastly, the balance sheet. Again, as in previous quarters, it doesn't move much. We have a equity of NOK 246 million, and that's an equity ratio of around 48%. And on the asset side, very small movements compared to the end of year 2022. Okay. So to the last slide, outlook for the next couple of quarters. We expect a robust demand for the Cloud services will drive growth for our Cloud and managed IT services. We also see that the cloud migration and related transformation projects will continue to increase. We expect Hospitality to continue to build SaaS revenue as they sell more check-in and checkout kiosks, and we see additional consulting work for Flytoget as well. Marine will grow. We have several projects in the market today that we are bidding for. And we will also continue our multiple partnership strategy because we have seen it in Q2 and that it is beneficial for us to have several partners within each of our main areas of expertise and it has dropped benefits already to us. Lastly, initiatives to improve our EBITDA margins is -- going forward, will be initiated for the purpose obviously to improve our margins above or to a better level than what we have seen in Q2. So with that, I will let you take some 2 minutes to send in questions, and we will come back and answer that. Thank you.

Okay. Welcome back. We have received a couple of questions. First one is related to Hospitality and how, let's say, the rollout of kiosks in hotels is going, considering that we announced a agreement with one of the large Norwegian hotel chains last year. The thing is that once we sign a chain or a brand, that does not necessarily mean that the brand or the chain will roll out to all hotels immediately. And first, they typically want to test out on a couple of hotels and then they start a more planned and sequenced rollout. Also, several of the large brands, they have partner hotels inside their portfolio and they cannot necessarily tell the partners, which -- or when to take, onboard new technology or new offerings from data suppliers. However, the change typically will say that if you want a check-in, checkout solution, for example, you can only choose the one that the brand has chosen. So the -- a sign or a signature with a, let's say, global brand or a local brand do not necessarily mean that immediately the rollout starts. It takes long -- or it takes some time and it also depends on what the hotel chain has capacity to take on in terms of change in new technology. And then we also have a question on should we extrapolate the elevated COGS going forward? Or do you see the change in the revenue mix with higher hardware sales as more permanent? This quarter, we have had delivery of some NOK 8 million worth of hardware to Flytoget. So that has kind of boosted our hardware sales and we do not expect that -- or we do expect that actually the hardware sales will come down from what you're seeing in Q2. Most of our, let's say, hardware sales on a running basis, if you look away from Flytoget is actually generated in cloud and that is servers and tech equipment that is being sold. So the answer is that we expect the hardware sales from this quarter to be extraordinarily high and will come down to normal levels going forward. Then the second question is, there has been declining revenue in Business Services for 4 quarters. Given the high order intake in Business Services, could you expect this market to improve through 2024? Yes. For us, the answer to that is, yes, we do expect the volume in Business Services to increase partly because you have won the EU project, which is -- has a total value of NOK 74 million over 4 years. We have started work on that project now in August, and that will certainly add to the revenue and EBITDA for the quarters going forward. Additionally, we have won 2 large ERP installations and cloud migrations in Norway during the quarter, and that is work that will be performed both during Q4 and into 2025 as well. Lastly, you need to mention that we have signed 20 agreements now for the Unit4 cloud migration preparations and we have some 60 more agreements to be signed, we expect through 2024. These migration projects typically have a value of some -- from a couple of hundred thousand Norwegian kroner to a couple of million Norwegian kroner. And we will be performing -- start performing those type of projects during Q4 this year, and that will run long into 2025. Next question is, is the whole Flytoget contract revenue recognized as of now? Will there be any recurring revenue from this contract going forward? So we have some -- we have some remaining work or deliveries in Flytoget -- for the Flytoget project. The estimated final delivery will be in November, and there are some development work remaining for us to do. Recurring revenue, definitely. We are managing the Flytoget installation, and they pay us for that on a monthly basis. Last question is any thoughts on liquidity and potential need for external financing. Well, we have shown you the cash flow development. We have external financing already in terms of an agreement with Danske Bank. And we see that we will -- we have a very good dialogue with Danske Bank. And when it goes -- going forward, we expect that the liquidity situation should improve towards the end of the year as we expect Q3 to be a fairly strong quarter for the company. With that, that was all the questions we have received. Thank you so much for attending, and see you soon.