Itera ASA (ITERA) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the interim report for the first quarter 2025. We have the same agenda as you know from the past. I will start with the highlights of the quarter and deep dive into the business review section. And then we have Bent Hammer, our Chief Financial Officer, that will bring us into all kind of details about the financial review and some comments about the outlook. We also -- it's also possible to post questions during the presentation, and we will take some of the questions in -- as part of the summary in the Q&A session, but also if there are any more details that you would like to discuss, Bent Hammer and I will appreciate that we can have this kind of follow-up talks after the presentation. Okay. Let's start with the highlights for the first quarter. The main message on a high level is actually we are showing growth and margin improvement, especially if you look at the sequential improvement, it is very solid, both in terms of revenue and profitability, driven by improving utilization and also strong sales efforts and sales pipeline. We also have talked about the enter Ukraine with Itera, which has been very -- we see a strong momentum on that in that offering, new offering that we brought to the market that also gradually impact the revenue and profitability during the year. And last but not least, also AI is a part of our industry, but also the community all over the place, but we're also embracing AI across all our business. We are actually looking at how we can also apply AI to increase our growth, but also not at least the productivity both for Itera and also for our customers. So that's at a very high level. And I will go into each of these parts during the session. Let's have a brief look into the figures. We delivered in the first quarter, NOK 232 million, which represent an organic growth of 1%. And let's keep a little focus on the top line because as you see on the graph, we have also shown year-over-year growth per quarter. So we're -- coming from a negative growth in the previous quarter in 2024. In the fourth quarter, we have 5%. And in the third quarter 2024, we also had 5% negative growth. And the reason for that, as you remember, it was one of the larger customer that Itera that -- we reduced the capacity because there were a global player that was involved in this customer. So we were reducing the capacity substantially. But after in November, we had a win back on that customer. So now if we look at that customer today, which was in the financial services sector, we are more or less 80% back to the run rate that we had before this change from the customer side. So we are -- that change in the customer mix was main reason for the negative growth last year. But now in this quarter, we managed to return back to 1% growth where -- which I think is quite impressive, I will say, because of where we're actually coming from based on this large customer that we actually lost in the beginning last year. So that's the top line. If you look at the margin, we are delivering 9.1% margin compared to 8.4% margin -- the similar quarter last year. And also, if you look at the sequential development coming from 3.5% in the fourth quarter going to 9.1% in this quarter, the fourth -- first quarter in 2025. So that's quite a large improvement we managed to do. We had also an adjusted fourth quarter of 5.6% in the fourth quarter 2024. But anyway, this is really a good improvement, strong improvement from the fourth quarter into the first quarter 2025. So -- if we look at the operational cash flow, we -- the last 12 months rolling 12 months operational cash flow showing NOK 76 million in the first quarter, and that's also up from NOK 24 million rolling 12 months in the fourth quarter '24. So that's also -- we are seeing that the operational cash flow also improving. If we look at the number of employees, we had 707 at the end of this quarter. That is some reduction to the first quarter last year and 18 people since the fourth quarter of 2024. The number of employees, we really believe we will also start to increase again because we also see a lot of growth opportunity in the market. So we don't believe the number of employees will be even more reduced. I think we are at the bottom, and we are also looking at opportunities to grow the number of employees going forward. So that's the figures in -- at a high level, Bent Hammer will bring us more into details for the -- in the financial review section. Let's also have small comments about the market view because we believe and see that the market demand remains soft, but we see some slightly improving after a slowdown in the past couple of years. However, we see also the increased geopolitical uncertainty -- but for the time being, we haven't seen any effects of the key industries, Itera. But of course, it's increased focus on Europe, which is quite interesting because Itera has a very strong presence in Europe. The ongoing shift towards cloud and data-driven solution integrated with the AI [core] capabilities is showing very substantial growth. I think we can look at growth rate above 10% in this area. And there's also new sectors like the defense and aerospace that are becoming a very fast-growing market for digitalization, largely driven by the war in Ukraine. So of course, there's some softness in the market still, but there are also several growth opportunities. So it's possible to also grow going forward despite, I will say, also uncertainty through the geopolitical, not at least after the new Trump administration. So that was the highlights for this quarter. Let's go into the business review. I just want to start with because also if you refer to the Trump administration, I just want to reconfirm that Itera is not doing anything changes in the value. We have diversity as a key part of Itera has always been, and we will just continue in the same way and actually strengthen that because Diversity is really a big advantage for Itera in order to develop our solution, our innovation capability and [indiscernible] at least also growing the company. So our value connected to trust, transparency, entrepreneurship, diversity, it will stay as it has been, and we will actually go further in this direction. If we look at Itera in general, as you see, we have a very strong Nordic roots, but we are also a very strong European presence. And I think that's quite interesting when you look at the geopolitical situation. We are a vibrant team of business adviser designers and technologists working across the border and according to one model, delivering services in a very customer-centric way in this area. We have 15 offices in Europe. We have a presence in 8 countries. And at least we have also been in Ukraine for 17 years. And if we look at Ukraine, I think you all know a lot about the citizens in Ukraine. We have Kiev, Lviv, and we really have a very strong footprint there. And also before the invasion, I think Kiev and Lviv were one of the largest hub of Itera. Of course, it has impacted Itera during -- after the invasion, but we're also looking for a lot of opportunities in this area. So I will just make -- bring your attention to Itera's going forward because we have actually 2 main offerings. One is actually our core business offering, as you already know, providing a comprehensive range of services to accelerate the sustainable digital transformation in our key industry, which are financial services, energy industries and public sector and some others, right? And the other one is actually we call it responsible business, where we provide expert advisory services for businesses seeking to enter, to rebuild, to learn from and protect Ukraine. And in this area, we have the enter Ukraine with Itera offering that I will also bring you more attention to in this presentation, but not at least also we are going into the defense and aerospace because that is also something that is a high-growth market that we also have very -- we can leverage from our position in Ukraine and also bring the knowledge from this sector into Europe because that's also extremely important part of Europe's security going forward. Okay. Let's start with the core business offering. I just show you one slide about the sector development of Itera. As you see, financial services is the largest sector for Itera. It's -- in the first quarter, it was representing about 39% of total revenue. It's a little down from the 2024, which represents about 47%. And one of the key reasons for that is this large customer in the financial services that we actually lost in the beginning, but we managed to have a win back with effect from November, right? The other industry, which is growing is energy and industry, which is going for 22% approximately to 24% in the first quarter. We also have public and organization as a third sector, which is more or less the same, but we think it will also increase going forward because we also focus on increasing the capacity also in this sector. And the remaining 24% is quite a number of different sectors. So all in all, 75% of the revenue of Itera is connected to FSI, Energy & Industry and Public and organization. And by having this focus, it's much easier for Itera to really build business understanding about this sector and also combine this sector, and it's also easier to go across border to bring value from one customer in one sector and bring the same value to another customer in another country. So this kind of sectorization is also important in order to develop our international growth strategy. I also would like to bring the attention to this slide. I know that you have seen several times, but it's really a strong business transformation enabled by digital transformation. It's still a lot of technology that we call legacy shown on the left side, but also a lot of customers that have moved to the cloud. About more than 50% are utilizing cloud -- public cloud in some way or the other. But most of these applications just moved from the legacy or the on-premise data center into the cloud, but hasn't been reorganized to utilize the cloud capability. So there's a large opportunity in terms of applying cloud in order to really piggyback on this capacity, this innovation, whatever, and also enable the business transformation. And AI is really accelerating this transformation from legacy into a cloud-based solution that also enable the business transformation. And just to show you that this is also impacting our industry, this is a reference to Gartner saying that by 2027, 3x ahead, generative AI tools are expected to significantly reduce modernization costs by about 70%, right, 70%. So when you're going from legacy moving into the digital transformation, as I said in the previous slide, that effort will be reduced by 70% and not at least driven by AI. And just to show you one example of what Itera has conceptualized during this quarter is looking at what we call assessment of application. So on the left side, you see how we normally do application assessment. You do this kind of assessment because you would like to move the application from the legacy side into digital transformation or in the cloud-based environment. So you need to evaluate this legacy system, you need to identify inefficiency, whatever. So always, it's a very complex environment that you need to look into. There's a lot of integration issues. It's incomplete or not updated documentation, if any, the data are in [silos]. There is a very resource incentive intensive in order to do this kind of work. You might missing some skills, whatever. And not at least is also a lot of the legacy quite exposed to security risks. So that's on the left side is how we have done this and taking weeks and months to do some kind of assessment of an application. By using AI tools on the left -- on the right side, you can do it much more automated, right? -- you will identify immediately inefficiency, you can build and do this kind of automated process. You always have up-to-date architecture and looking at the dependency. You can look at the system resilience, you can identify cyber security risk and also regulatory, how your system are according to the regulatory requirements. Of course, it will have a tremendous efficiency increase and not at least also making faster innovation. So we are going from -- in terms of this kind of assessment going from weeks and months for a large team to this kind of a similar assessment in minutes and hours. So this is just an example of what Gartner is telling about this 70% reduction, and we are really keen on learning from this and also conceptualizing our offerings to make sure that we are delivering even more value to our customer and not at least also increasing the productivity and also the growth of Itera. Yes. I just also in terms of service offering, I just also want to put some attention on the experienced department of Itera because when there is a downturn in the market, we always see in the past that it starts with this kind of services. But what we see and experience Itera, we have a remarkable utilization rate of 80% to 90%. That is not typical when there is some kind of declining market. And I just want to appreciate the work that Andrea [der von] and his leadership and the team has done because they have really looked at, okay, there's a downturn in the market and they have really managed to integrate offices into Itera and have focused on very mission-critical design solution. So example of customers is Kongsberg Digital and Viking School is 2 very interesting customers that where we have really changed the offering and integrated into Itera. We have these kind of services available for all the location because we are not only working as a specific service offering, but it's really a part of the full range of services that Itera is providing to our customer. So I'm very happy to see the growth of this unit of Itera and not at least also bring in profitability, which is not the normal way -- which is quite not normal when there is a downturn in the market. So that's just to show you that also despite the market, we can talk about the challenges in the market in some way or the other, but I think the improvement in Itera is showing is really because of people like Andre [der von] and the team that really has made this change to make this very profitable as a separate -- as a focused offering in Itera. Also, one comment about what we also see in terms of cloud -- applying cloud technology. The biggest giants are in U.S. And of course, with the new Trump administration, we also need to look and our customers are also asking because they feel that they might be a little too dependent on the tech giants in U.S. So also, we are also looking at -- because of our cloud and application services, we are also looking at how we can reduce the dependency on very specific providers or services in the tech space also. And that also make a lot of opportunity within Europe that the players in Europe also will have a strong advantage compared to the past. And I also see that the big giants like Microsoft are also repositioning themselves. They are also building and supporting Ukraine according to -- supporting Europe, according to European laws. So I just want to mention that this is also, I will say, important for Europe to build their own digital future. So I think also that might also have a big impact of the IT sector in Europe that they also have a lot of benefits by having more data located in Europe and also make sure that the resilience of the IT solution within Europe is strong because I think we have learned a lot from the potential threats from U.S. So that also, I believe, is also a big opportunity for Itera's presence in Europe. Okay. Let's turn to the other responsible business. And this is something that Itera has been working on since 2023. And it's a dual track. We focus both on the business side of it, but also the humanatarial side. So we combine business and humanatarial and look at how could we support Ukraine in their recovery. So our mission is to contribute meaningfully to Ukraine's rebuilding process by helping Nordic-based companies to enter rebuild and learn from and protect Ukraine. And just to show you 3 directions that we have talked about during the last 2 years, I will say. We started with the temporary bridges. This was in 2022, 2023, where we provided 370 meters of temporary bridges to Ukraine. Of course, that was extremely important in the early phase of the war. We have also, as you see, the energy system has been damaged a lot from Russia, and we are very happy to be able to provide through partners like Bergen Engine, 160 megawatts with power generated gas engine to Ukraine. And we really believe we can expand that to maybe 400 megawatts plus -- and just to put that into perspective, President Zelenskyy was asking for he needs 1 gigawatt during -- it was in June 2024. And if Itera through Bergen Engine and other players might bring in 400 megawatts, according to that goal, we really contribute to 40% of that target that was set by President Zelenskyy in June '24. So I think it's quite amazing how Itera is managing these kind of capabilities tilt to Ukraine. And the last but not at least, important track in terms of housing, new homes, hospital, military banks, we are also heavily involved in that business together with [indiscernible] because they really need to scale up their production capacities and [indiscernible] with their modules building is really one of the key players that could take a solid position and also support Ukraine in terms of the rebuilding perspective of that one. These are just to show you 3 very concrete examples. And to mention even the last -- within the energy sector, we have, in this quarter, established a strategic partnership with Naftogaz, the largest national energy company in Ukraine. focusing on a collaboration on both energy and digital technology. On this picture on the right side, you see the COO of Naftogaz together with the CEO of Bergen Engine and the guy #3 from the right side is [indiscernible] has been really facilitating this process. I think we have been working for this more or less for 2 years and increased the progress, especially in the last 12 months. So it has been a lot of efforts doing this, and we are very happy that we managed to bring the first 16 engines to Ukraine. But note at least, this partnership is also turning into digitalization because -- there is a lot of knowledge in the Nordics in terms of well efficiency and optimize their operations. So now we're also looking into a very interesting digitalization project, which is bringing me back to what I call the core business of Itera. So this is a good example of a new customer where we started on the enter to Ukraine -- Ukraine with Itera, and it also happened to bring business back to our core business offering. And another, I will say, is a new position Itera has taken is actually in the defense industry because as we see, security is extremely important in [indiscernible] Ukraine and the defense is really one of the most important to protect the country, but also protect Europe. So in this case, we're just showing different user scenarios that we see in Ukraine, and we are utilizing our digital factory at scale because NATO and this industry is working on what they call a software factory in order to increase the scalability of applying digital technology into their physical value chain, I will say. So digitalization is really a key part of this industry and also not at least bringing this knowledge from Ukraine into the defense in Norway, in the Nordics and Europe in general. So that's really some of the learnings we are bringing back from Ukraine to Europe and visa versa. So defense will be, of course, also an important part of Itera going forward. We already have some projects going there. I can't talk about them, of course. But of course, we are taking -- will take a very strong position also in this sector. And as you know, in terms of -- we are putting a lot of focus on the -- to bring the attention to Ukraine, it's extremely important to keep the economy running, but note at least also look at how the businesses in Nordic can actually enter Ukraine and learn from Ukraine and invest in Ukraine. That's really important part. So on the right side, you see our group COO, [Arne Mjøs], is doing a tremendous job and he has been into TV 2 and have also been there. So this is, I will say, also something that we contribute. But of course, it also have a big impact of the visibility of Itera. So to summarize this part, I just want to mention that coming from a full-scale invasion in February 2022, where we have one of the largest IT hub of Itera, delivery center of Itera in Ukraine. That was a tremendous threat for our business model, but we have turned that into a business opportunity that's really adding value to Itera. So we have talked about the brand. Itera is much -- we have a new brand, of course, but not at least also a stronger position. It's very easy to go to a new country and introduce Itera by showing how we contribute to Ukraine because the brand of Ukraine, I think, is one of the strongest in the world, right? So the war in Ukraine had also triggered new offices. We have built 5 new -- 5 new offices 3 to 4 of them are really based on the situation in Ukraine. We have established a new service offering like enter Ukraine. We are also going into new sector like defense and aerospace, and we also have our strong digital factory at scale capabilities, we really needed in this area. And note at least, we are learning a lot from artificial intelligence because I think Ukraine in different sectors are really very advanced using AI for a long time. So these are some kind of in order to summarize what has been a very big threat for Itera because of the Ukraine and the situation in Ukraine, but now also looking at a lot of new opportunities going forward. Okay. Before I hand over to Bent Hammer, I just want to also have some comments about the order intake. The book-to-bill in this first quarter was 1.0 and the last 12 months has been 1.0 also. So there's also some kind of combination of existing customer and also new ones. But I think during the last 9 to 12 months, I think we have done a very strong sales efforts through the whole Itera. We have changed the model. So I really see a growing pipeline of very promising opportunities. And that is something you can also see already have an impact on the customer mix. The share of existing customers were 87% in the first quarter 2025 which is -- yes, it was in first quarter 2024, it was 95%, right? So that means that the number of new customers in the last 12 months represent 13%, which is really showing that Itera is also providing a lot of new customers that increase the base for growing going forward. So we can't only piggyback on the top 30 customers, which has been reduced to 73%. I think that's quite healthy because now we have new customers that can also increase the growth rate of Itera. So new customer represented NOK 30 million in this quarter compared to NOK 12 million in the same quarter last year. So that's quite extensive improvement. And also in terms of number of employees, we have 707 people at the end of this quarter. So that's 29 down last 12 months, 18 in the last quarter. But as I said in the beginning, we are really pushing for the increase in the capacity because there are also a lot of growth opportunity. What has been good is actually that the reduction also have impact on the EBIT, but we are really in the game now to also start increasing the capacity going forward. So I think I'll stop there and hand over to Bent Hammer that will go through the financial review. Thank you.

Thank you, Arne, and good morning to you all. Well, after several quarters of negative development there, I'm happy to see that we now have leveled out and even recorded a small growth to NOK 232 million of revenue this quarter. We have done so with less employees. So that brings a positive impact on our EBIT, which grows by 9% to NOK 21 million in this quarter. And that gives an EBIT margin of 9.1%, which is 70 basis points above Q1 of 2024. We have an equity ratio, which is approximately the same as same period of last year of 20% -- and I'm just going to go to the development. We've had, as you can see from the graph, a couple of difficult years in a softer market, which now seems to level out and starting to recover slowly. We do have, irrespective of the market development, I would say, a lot of potential to both grow our business and also improve our margins back to sort of the previous levels we have experienced in prior years. Arne has been talking about this entry Ukraine with the Itera service offering, which is one of those. We still have a softer utilization than we can achieve in good days. And we've also opened up a lot of new offices in the past 2, 3 years that also have a potential to grow in what's immature markets from our side. I can mention we've had better revenue from our own consultants. So we've increased the revenue by -- per FTE by about 6% this quarter. So even though we've decreased our number of employees by 4%, we've actually managed to uphold and even have a little bit of more revenue from our own consultants. So that constitutes NOK 192 million this quarter. We continue to grow our subscription revenues this quarter by 5% to NOK 20 million. And other revenue increased quite a lot this quarter. This fluctuates a bit if we do some specific sales of software, et cetera, to our customers. So this quarter, it was NOK 11 million, whereas we see that the revenue from third-party consultants decreased by 15% to NOK 8 million. We use third-party consultants in those instances where we don't have that particular capacity available to our customers or if there are some specific skills or whatever that we typically don't offer. Cash flow from operations is quite seasonal. So Q1 is typically seasonally low in terms of generating cash from operations. This was also the case this quarter. So we recorded negative NOK 5 million from operations, which is in line with what we had Q1 of last year. However, looking at the rolling 12 months, we're at NOK 76 million, which is quite stable as well for the last several quarters. Our investment activities was an outflow of NOK 3 million for the quarter and approximately NOK 9 million for the last 12 months. This is, I would say, a normal level for our business. So we don't invest a lot. Most of the investments we do is in our own product development for those SaaS type of applications that we have and also a little bit in equipment and so forth for employees. Financing activities is also very seasonally impacted in Itera because we do the dividend payments typically in the Q2 and Q4. Rest of the quarters is generally just related to the leasing activities that we do primarily for office space. Our cash conversion from EBITDA has been on an upward trajectory, and we now have 92% of EBITDA in Q2 converted to cash for the last 12 months, which is up 8 percentage points from a year ago. So that shows that our type of business is very light on working capital requirements. And also, as mentioned, we don't invest a lot of money into the business. So that means that we generate a lot of cash that we can then distribute to our shareholders. which is evident on this slide, where we see that during the -- well, it's almost 20 years of history in this graph now, and we see that we more or less returned back all the earnings to the shareholders. The Board of Directors has proposed to the Annual General Meeting that we pay out an ordinary dividend of NOK 0.20 per share, and they will also ask for a renewed authorization to pay a supplementary dividend later in this year. Share price is impacted by the general market for IT services. We're down 17% if we included the dividend payments of the past year. So the share price was at NOK 9.24 at the end of March. And I think that was more or less the same as it closed yesterday as well. We had some share purchasing going on in March at the same time as we did the employee share purchase program. This more or less canceled each other out. Well, I think we sold a bit more shares to the employees and then we recovered from the market. But we now have a bit south of 0.5 million own shares in our treasury. So the value of that was NOK 4.4 million at the end of the quarter. That's it for the financials. Looking forward, I think this slide is unchanged from what we presented in February. We do feel that there is still a strong underlying demand for digitalization services. AI is obviously an accelerator into more digitalization. There has been some reluctancy among customers to invest because of macroeconomic uncertainty. But we -- like I mentioned, we see that it's been stabilizing now, and we do see signs of more activity in the marketplace. So we are confident that the market will return to higher growth in the quarters to come, although in the very short term, it's -- yes, probably stable, I would say. Like I also mentioned, we have good growth opportunities through our new [Rogaland] Stager office as well as the other offices we set up over the past few years. And not the least, we have a lot of opportunities related to our exposure to Ukraine and the bridge we're building with Norway in particular, but also the other Nordic countries. Focus is still on profitable growth and to generate cash. So that's unchanged, and we look forward to doing more of that. Okay. I'm not sure if there are any questions being posted online now.

No questions today.

Okay. We're very happy to entertain any questions you might have on a one-to-one basis. So please get in touch, if you like, probably through me, and I'll bring with me, Arne, if needed. And if not, we're happy to see you back on August 15 for our Q2 presentation. All right.