Columbus A/S (COLUM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Columbus Interim Report the First 6 months of 2021 Conference Call. [Operator Instructions] After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Soren Krogh Knudsen. Thank you. Please go ahead.

Thank you, Dulce, and thank you all for joining the webcast today. My name is Soren Krogh Knudsen, and I am the CEO and President of Columbus. I would just like to start by saying that I'm very excited to have joined Columbus. I joined just before summer and had 4 very intense weeks, where I met people across the organization and was basically introduced and familiarized myself with the business. My first impressions are very positive, and I've met many talented and engaged people across Columbus. Columbus has initiated an exciting journey, and I'm proud to head up Columbus in its next venture. I'm pleased to host the web conference today, which is the first time I present the financial results for Columbus. I'm accompanied by Hans Henrik Thrane, who has done this many times before and who is our Corporate CFO. Next slide, please. So in terms of agenda, at today's call, we will start by looking at the highlights and the financials for the first 6 months of 2021. We will then cover a brief update on the momentum of the Focus23 strategy implementation. We will end the presentation with an outlook for 2021 and long-term guidance followed by a Q&A session. Let's go to Slide 5 to begin the presentation with some financial highlights. So Columbus realized a revenue of DKK 426 million in the second quarter of 2021, corresponding to an increase of 6% year-over-year. The increase is partly due to high demand from our customers and the fact that Q2 last year was hard hit by the uncertainty related to the COVID pandemic. The revenue growth in Q2 comes from all our markets except Russia and the U.S. Especially, Norway had a strong development in Q2 driven by all business lines. In addition, we completed a successful integration of our acquisition of Advania Business Solutions, which we made in January last year. With the revenue growth in Q2, the revenue gap opened in Q1 is almost closed again, leaving an accumulated decline in revenue of 1% for the first half year in total. In Q2, EBITDA increased by 12% to DKK 31 million. And for the first half of the year, Columbus realized an EBITDA increase of 28%, amounting to DKK 86 million. The EBITDA increase is mainly driven by a significantly higher customer work amounting to 59% versus 55% for the same period last year and, to some extent, by cost savings, in particular, less travel cost and employee-related costs. I'll now hand over the presentation to Hans Henrik, who will take us through the financial review.

Thank you, Soren. So we are now on Slide #6. And on this slide, we have illustrated the bridge between the reported organic and normalized numbers. We have also included this in order to demonstrate currency impact on our business. If we eliminate the foreign currency impact, the organic revenue is 1 percentage point lower than reported revenue. The effect is caused by the headwind on U.S. dollars and tailwind on Swedish and Norwegian krone. The amount or the adjustments of provision for a loss-making contract in last year's numbers is related to the Norwegian fixed-price project we have previously disclosed and talked about. In Q4 last year, we made a final settlement with the customer, and therefore, we will have no further negative impact from this project in 2021 and onwards. And actually, since January this year, we have continued a large engagement with this particular customer on new and balanced terms. So the key takeaway from this slide is that our organic revenue is slightly lower than reported revenue due to the positive impact from foreign exchange rates. So now we move to the next slide on the overall income statement. External product cost has decreased significantly due to a reduced usage of external subcontractors, which has now been converted into internal hirings or resources. Our staff costs in Q2 has increased by 10% primarily dominated by increase in Denmark and U.K. Columbus realized a profit before tax of DKK 13 million in the second quarter 2021, corresponding to an increase of 14%. The increase is mainly driven by the positive development in the EBITDA numbers. Accumulated for the first 6 months, Columbus realized a profit before tax of DKK 61 million, corresponding to an increase of 73%. The increase is mainly driven by the positive development in EBITDA and the financial income from currency adjustment, as previously stated. So profit after tax from discontinued operation amounts to DKK 720 million in the first half of 2021. This result is mainly related to the realized gain of the sale of our software company To-Increase in January this year. So next slide, please. And now we are on the growth in service business, Slide #8. And what you can see here is that our service revenue for the second quarter increased by 8% to DKK 348 million. This increase is driven by all business lines, where especially Columbus Care, Digital Commerce and Data & Analytics are growing with double-digit numbers. Accumulated for the first 6 months, service revenue increased by 1% to DKK 698 million. The increase is driven by all business lines except Cloud ERP, which is still impacted by the reduced number of consultants compared to last year. And now we move to the next slide with the headline increase in recurring revenue. In second quarter this year, recurring revenue increased by 11% to DKK 103 million. The recurring revenue constitutes -- continues to constitute a larger part of the total revenue with second quarter recurring revenue constituting 24% of total revenue. The development in the recurring revenue in second quarter shows great progress in our Columbus Care contracts growing by all 21% and Cloud products increasing by 75%. However, subscription declined by 13% due to the cloud conversion, as expected. This development is expected to continue. Accumulated for the first 6 months, recurring revenue increased by 4% to DKK 193 million and constitutes 23% of total revenue for the first 6 months. And now on Page 10, our development in customer work. So our chargeability is significantly higher in the first 6 months of 2021 than it was last year, increasing to 59%, coming up from 55% chargeability. The high cost and the demand combined with a reduced number of consultants resulted in very high utilization of our consultancy business. This is despite the fact that most of our employees have served our customers remotely working from home during the first 6 months of the year. We consider this development satisfactory. So next slide. So we are now on market units, Slide #12. As previously mentioned, Norway had a strong development in revenue in second quarter and the first 6 months driven by all business lines in Norway. Our market units in the U.S. and Russia have been particularly hard affected by the corona pandemic as well as a decline in both dollars and Russian rubles compared to last year. The reported decline in revenue for U.S. for the first half year is 14%. However, if we look at it in local currency, the decline is only 6%. And for the Russian business, the reported decline is 23%, but again, in loan currency, the decline is only 9%, so a big currency impact there. The improved EBITDA in both second quarter and for the first 6 months is mainly driven by a progress in Norway and Sweden. For Norway, EBITDA increase is directly related to the revenue growth. For our business unit in Sweden, the increase in EBITDA is mainly due to a very low base in 2020 due to a number of extraordinary costs we had in 2020. The decline in Denmark is primarily related to staff costs caused by 3 main components: we have onboarded a number of new sales resources; and we had an impact from 2020 bonuses; and also, a slight increase in salary costs compared to last year. I'll now hand back our conference to Soren, who will cover our Focus23 strategy and our outlook.

Thank you, Hans Henrik. Let's move to the next slide, where I'll share our overall progress with the implementation of the Focus23 strategy. So that would be Slide 14 with the headline momentum implementing Focus23. Now for many years, Columbus has been leading within the ERP space. And in recent years, Columbus has started to broaden the portfolio to deliver end-to-end digital solutions, what we refer to as the 9 Doors to Digital Leadership, comprising new offerings such as Digital Commerce, Data & Analytics and Application Management services. Within Digital Commerce, we have already established a leading market position in the Nordics, especially in Sweden and Norway. And we help companies build their digital commerce platform such as marketing automation, website user interface and search engine optimization. Data & Analytics is still constituting a relatively small but fast-growing part of our business, where we increasingly take on the role of strategic advisers to help our customers build a data-driven business. Columbus Care is our portfolio within Application Management services that ensures high uptime of business applications and proactive support 24/7. Columbus Care has delivered continuous growth in the past years. And for me, what Columbus Care is really about is the responsibility we take for our customers getting full value of the investments that they've made, so it's a very essential part of our offering. And overall, by offering a broader set of services, we have opened new opportunities to grow our business with existing customers as well as entering new markets. We've also increased our focus on larger customers and continue -- will continue to do so as we think they see the value of our broad digital transformation offerings, the geographical reach we have and our world-class Columbus Care offerings. With the Focus23, Columbus has framed the next in our growth journey to move up in the value and become a true digital truster adviser for our customers. This strategy is being executed as we speak. initially, we have prioritized the Focus & Simplify initiative, where we've made good progress. This includes an important initiative to reorganize the company in a new operating model with global business lines embedded in local market units. The new operating model means better leverage of both sector and service expertise. It provides for more flexibility of our delivery capacity as well as sharing of best practices across borders. And to support the new operating model, we're implementing a new suite of business applications including resource planning and financial systems. The implementation is running according to plan and will continue through the second half of 2021. Overall, the new Focus & Simplify initiative will lead to a simplified operation, faster decision-making and increased empowerment of our employees, all with the purpose of delivering value to our customers. So to summarize, I believe that we are in a good position with talented employees, relevant solutions and an increased demand for digitalization services. We've made good progress, and we're building increased momentum in executing the Focus23 strategy, but the journey is still in its initial phase. And I look forward to sharing more details with you in the coming calls as we progress. Next slide, please. I'll now cover the outlook for 2021, which you will find on Page 16, and the headline is guidance for 2021 maintained. Columbus has already stated an ambition to gradually increase profitable growth to a minimum of 10% annually by 2023, which we're working against. Based on the financial performance in the first half of the year, current order books and pipeline, our guidance for the full year of 2021 will remain unchanged as follows. The revenue is expected to be in the range of DKK 1.65 billion to DKK 1.8 billion, corresponding to a growth between 5% and 14%. From an EBITDA perspective, the EBITDA is expected to be in the range of DKK 125 million to DKK 150 million, corresponding to an increase of 1% to 21% compared to the 2020 EBITDA adjusted for customer provision and earn-out adjustments. I will now hand over the conference call to the operator for questions, and we'll try to read as well from the -- any written questions as well.

[Operator Instructions] There are no further question in here. We'll pass if there are any written questions.

All right. I see we have one question on the chat, which I will read. And I think I will ask you to respond to it, Hans Henrik. So let me just read it out loud for everybody. We have an EBIT margin in the quarter of 4.3%, which is well below other IT services peers. This is despite strong utilization. What is the EBIT margin target level and the main measures needed to get there?

Okay. Yes, but the EBIT margin is, of course, a function of EBITDA. And we have in our guidance -- long-term guidance indicated that we will gradually improve the margin, but we have not set a definite EBITDA target yet. And then the difference -- the primary difference between the EBIT and the EBITDA is, of course, the amortization we have in the group which is, yes, related to the amortization of our office. The new IFRS 16 rule that came that where you need to treat all office spaces and office rents as if you have purchased it, and that calls for a larger depreciation in the past. So again, if it's lower than peers, it's because we are in the strategy will gradually improve the margin as we also will prepare our business for growth. But due to a number of uncertainty with COVID and our change journey, that also have cost related, we have decided not to set a definite target for the margin yet. But I can say it will improve.

Yes, super. Yes, and from a business perspective, I can add to this one. Obviously, as we start from the top line, I mean there are some aspects for me that indicate that we -- one is that we still have some units that are not performing as they should, so that would definitely have an impact on the EBIT. I think as we execute our advisory model strategy, we should be able to achieve a better price point in the market, which will also have an impact. And thirdly, I think it's about also growing into a slightly better revenue-to-overhead ratio, if I can call it that, which are all 3 factors sort of strictly from a sort of core business metrics that we'll be working to improve. Okay. [ Michael ] is asking a new question, which, I guess, is for me. It said a question for Soren. You bring in new eyes on the company. Where do you see the largest potential for improving and growing the Columbus business? Great. So let me try to cover at least sort of 3 or 4 points on that one, [ Michael ], but there are obviously many aspects to it. So let me start by saying a few more words about this advisory model, why it's important for us. So going from being a delivery partner to a true advisory and sort of digital transformation partner means that we will be engaging with our clients earlier in the process so, basically, where the clients or customers are still making their plans for digital transformation. And we will have our opportunity to help them design the best possible plans. It is my expectation that, that in itself is new work for us, driving growth, but also that it will help our new growth units come closer to the customers. And that should be seen sort of as opposed to a picture more today where the clients perhaps approach Columbus a bit more to purchase services or products that they've already decided upon. So there's a great impact in that one. I do also expect very big benefits to come from our new operating model. So to bring that to life, going from a predominantly country-based organization, we are going into global -- and we have already set this up, global business units that span across all Columbus countries. And what we hope to get out of that is basically a much better usage of sector expertise, which is difficult to build on each individual market. And this is what the market demand is basically we arrived -- that we arrived to advise them, and we know about the taxonomy of the sector they operate in. And we're not just generalists. We need to know a lot about how their business operates. It's easier to build if you can use them across the borders. It also allows us to -- in the events where we have overcapacity or undercapacity in any geographical market, we can swing that better to meet the market demand. So that's an important one. I think the third one for me would be the client segments we are pursuing, where we have stated that we are in pursuit of larger clients compared to our current average. And that's, as I said before, simply before, those are the clients that should benefit the most from what we are investing in. So the sector knowledge, the global reach, setting up a true global care function, these are things that mainly benefit clients that have some degree of globalization themselves and some degree of operational complexity rather than a small and simple business. I think we'll end there because I could probably go on and on there a little bit. So -- and I will expand on that as we go in the coming calls, but those are some of my initial thoughts. Thank you, [ Michael ]. Did we have anything else? And I think the phone line is still open. [Operator Instructions]

No questions at this time. Please continue.

No questions? All right. Then I think we'll close the call. Thank you for attending. We hope to have you with us again as we do the next update. Thank you.

Thank you.

And this concludes today's conference call. Thank you for participating. You may now disconnect.