Itera ASA (ITERA) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the interim report for Itera for the second quarter. We have the same agenda as previous quarters. I start with the highlights of the quarter and then go into the business review section. And then Bent Hammer, the Chief Financial Officer, will go into the financial review section. And then we are together on the last part, which is outlook. And of course, we also have a Q&A session. It's possible for all the guys on -- that are attending today that you can also post a question that we will look at the end of the presentation. And if there are any kind of more specific deep dive you would like to do, we can also arrange a separate meeting for that. Okay. So let's start with the highlights for the second quarter. I will just start with the financial part because our financial performance is still affected by the soft market. We see all the uncertainty and the geopolitical discussion, so that's still also impacting our industry. So what we also, in this quarter, just to remind you that in the second quarter this year, we had the easy period while it was in the first quarter last year. So that always has some kind of seasonality impact on the financial performance. What I also would like to mention, which I think is extremely important also when there is a soft market, is actually that we achieved record-high revenue from new customers because not all the existing customers are growing in the same pace that it was when this was a more normal market. But we have managed to really increase the new numbers of customers, which is also important that we have a large customer base to continue the growth. So that is something I will also deep dive during my session. The second topic I would just want to put your attention on is actually the Enter Ukraine with Itera initiative that we have talked about that also starts to have impact of Itera. And the focus in this quarter is actually that we also are taking a huge step into the defense sector. So the Enter Ukraine program or initiative is actually based on a quite interesting business model where we have both consultancy, billable consultancy, but we also have some quite interesting risk/reward models. I'll go back to a little more about that later in this presentation. But we really have strong progress in that area. And the last, but not least, of course, because of the market situation, we also need to continue improving our effectiveness in the company. And one of the big opportunities there is actually to apply AI internally in the processes, but we also need to continue looking at the overhead and the operating expenses of the group to even optimize even further. So these are the 3 main topics for this quarter. If I look at the figures in brief, as I said, the second -- the Easter was in the second quarter. So we achieved NOK 203 million, which is year-over-year minus 9% compared to NOK 224 million this second quarter last year. And that also have impact on the EBIT margin. That was 2.1% for the quarter. In average, for the first year, we have about 5.9%. And also if you look at the revenue stream, it's actually a decline of 4% in average. Because if you take the first half year, you can have more comparable figures with the previous year. If we look at the operational cash flow, it hasn't been that impacted by the decline on the growth. So we still have very strong operational cash flow of NOK 68 million compared to NOK 76 million in the previous quarter. So operational cash flow is still very strong in Itera, and that's one of the key focus. So we managed to continue paying the dividends for you, shareholders, right? And also the number of employees has been quite more or less flat, I will say. It's about 702. So we still also need to adjust the capacity to make sure that we have the capacity needed according to the growth figures that we see today. Okay. Some comments about the market view. As I said, there's still -- the demand is, of course, depending on the uncertainty in the market. I think that's also quite common for most of the players in our industry. So that means that it's longer sales cycles and also reduced visibility. So that's for sure. There are some areas that have grown quite well, which is also, for example, the cloud native, the current cloud transformation and the data-driven solution and now with more and more AI capabilities. So we also see that in Itera that we also, in terms of what we have called the cloud application center or cloud application services in Itera, is quite -- showing quite interesting growth figures. So some part of the business is growing quite well, and others we need to adjust and be more careful with the capacity going forward. And as I mentioned, defense, of course, or the security situation in Europe. Defense has become a very high-growth markets where also Itera taking big steps into that, not at least also driven by the situation and the war in Ukraine. So that's some topics I just want to mention in the beginning. So I'll go more deep dive into the business review section. As you see, we, as a company, are based on Nordic roots, but with quite interesting European presence. We have been in Ukraine for 17 years and stay together with Ukraine. Ukraine is really a big opportunity for Itera because it's a responsibility to support in the fight for our freedom, but also not at least, Ukraine is also a very interesting area to take insights from different transformation or innovation they have achieved in different sectors and bring it to Europe. So also have a lot of business opportunities by supporting Ukraine, and that is also part of the mission. If I go to the business model we have in Itera, this is something we presented in the first quarter that we are saying that there are 2 main offerings. One is actually the classical digitization services, where we focus on financial services, energy and industries, public sector and now also extended with defense and aerospace. Aerospace is also very related to defense, so that's why we combined it into one area. And the other one is actually the responsible business where we provide expert advisory service for businesses that are seeking to enter, rebuild and learn from, and not at least, protect Ukraine. And that's why we have this Enter Ukraine with Itera initiative, I will return back to you shortly. Okay. So let's start with digitalization services. I just want to put your focus on the sector development of Itera because if you look at the 3 largest sectors of Itera, we have the financial services, as you see. It has been the largest one, but now we see little, reduced to 40%. I think that's a big share and quite interesting because we are increasing energy and industry, which is almost 25%. And then we have more or less a flat share of the revenue connected to the public and organizations. And you see the others are also increasing, and others is also where we have today the defense sector of Itera. So we will also -- after a while, I think, we will also increase the public and organizations because I think that will also contain the defense sector later. So in any way, the reason for having this sector focus is actually that we get deep insights about the industry and make -- and then it's much easier to combine the business knowledge and all the digitalization of services to help the customer in their transformation to a more efficient and also more innovative company. One of the key topics in our industry, but all over the place, I will say, is AI. And I just want to mention that AI is also really taking huge, huge steps in our industry. We talked about and I think everyone knows everything about some kind of assistance. You have the Copilot or whatever. But now we are also having what we call agents, which is digital agents or AI agent, whatever you call it, that really also redefine how we build our software because a digital agent is actually, I will say, some kind of software-based entity that can perform tasks or make decisions or interact with users and other systems. So what we see is actually that around each human or each person, there will be, we call it, agents that extend the people capabilities by having software that develop or perform task on behalf of the human being or make decision on behalf of the being by -- and you see that we are talking about -- going forward, we are talking human agent ratios so for each person, there will be also another virtual person or software that supports that person into a more efficient or doing more with less, which I talked about earlier. So this is really a big step for the industry in building this software, but not also the impact that the software have on every industry. So for Itera as a digital company, it's extremely important to embed AI all over the place in Itera. So what we have done in Itera during the quarter is actually we have established a group-wide AI Enablement Team to empower every part, every person in Itera to get the knowledge and the tools that are needed and we're also being some very interesting tools in, for example, the area of how we analyze the complexity of the software portfolio of the customer and how we can use this to actually help the customer to accelerate the transformation into cloud and cloud environment where we have much more innovation in terms of capability than they have on the traditional classical on-premise environment. So this is extremely important. We are also using this in order to improve the efficiency of Itera. So we can also use a lot of these processes, of this kind of tooling or agents into our internal processes so we can be even more effective. That is what we also talked earlier today about improving the operational effectiveness Itera. So we need to also use this current technology to be even more effective in Itera. Then I switch to some important milestones for Itera. One is actually we managed to close the frame agreement with Statkraft IT. Statkraft is, as you know, one of the largest European renewable companies. And so we are very happy to sign a contract with Statkraft because this is a large opportunity coming forward. So having the agreement in place is much easier to Itera to provide our services for such a large international company. So that's one of the major milestones in this quarter. Another one, I will also mention that we also managed to win a frame agreement with Bane NOR in the testing capability or area. So this is, of course, an important step for Itera to also piggyback to establish a relationship with such a large company, which also will go through a large digital transformation. So very happy that we also managed to be in one of the categories that was in this frame agreement tender. So now we start also to build the relationship with Bane NOR and also get another sector credibility. As I said in the beginning, it's 13% of the revenue of Itera. So of course, this is another step to also build a stronger position in the public domain. And also, I just want to mention that if you look into international position of Itera, just also put your attention on Iceland, which has been very successful for Itera. In this case, we have entered a frame agreement with Digital Iceland for a web app development, which is a multiyear public sector engagement with quite large engagement. What is important is actually that we also build a relationship into the public domain in Iceland. And we are also having some other interesting partnership with the tech firm, Lagaviti, and also we are joining the Icelandic Energy Cluster. So of course, in Iceland, we are really increasing our footprint with more customers also in the public sphere. And what is also interesting is actually that we are also extending our local presence because we really see that is really growing fast in Itera Group, but also we can support them with more local capabilities so we can also grow even faster going forward. So that is one of the areas. Despite the decline in the group, I think Iceland is showing quite well progress. I just want to mention that. And another one is actually Pelagia. This is in a cloud transformation topic. I mentioned the cloud application services of Itera is really improving. And one of the typical cases actually, we help Pelagia in the seafood industry that's having a lot of factories and is really highly effective in the operation, but most are running on an on-premise environment and now they will make some kind of transition in a smart way to cloud. We've done this assessment and are looking forward to the next step, where we are also transforming in a smart way their on-premise into a cloud operating model, where we also integrate IT and OT systems. So this is also another quite interesting case in that area where we have just done this kind of first assessment. So we are looking forward for the next step to really move this transformation for all the factories at Pelagia into a cloud operating model. So that's the first part, I call it the digitalization services. If we start -- go into the other part, I call it responsible business just to make you understand what we are talking about because this is also redefining Itera because it's a new business model where we have business advisory -- billable business advisory on one hand, but we also have a risk/reward model. So we have -- after this full-scale innovation, we started, as you remember, with a lot of work effort for Ukraine where, for example, bringing the bridges to Ukraine in 2002 -- 2022 and 2023. We have done energy supply by Bergen Engines that have electricity generators that provide energy to Ukraine, whatever. So these are some kind of examples that we've already done. So what we see is actually that the portfolio of this kind of engagement is really expanding. In total, if I look at all the activity on the existing and the opportunities of this because we are almost talking about NOK 10 billion, and this is something we have spent time on the last 3.5 years and we really see that it started to have an impact on revenue. Still, we don't have every quarter where we have this kind of additional revenue. But as long as the portfolio is increasing, we will have more sustainable model that brings in revenue every quarter. So one of the examples, just to put your attention on that, is actually, we have talked about Moelven as a case. And Moelven, we have been working together for almost 2 years and we have spent a lot of time together with Moelven. We are doing some billable work for Moelven as a company. But in terms of these major projects for Moelven is actually to provide housing capabilities, building models, whatever, from Moelven into Ukraine. So what we have done in the first half year together with Moelven is actually to make the first pilot in the Borodianka region, which is about 1 hour driving a little north for Kiev, where they have built the first pilot as free of charge for 4 apartments there. But what we managed to do now during the Ukraine recovery conference in Rome, we managed to establish LOE between Vlasne Misto and Moelven in terms of delivering 1,350 facilities -- apartments, I mean, to a region in Lviv. So in this region, they are really building a future city of 47,000 people. So this is the first agreement where we will establish -- deliver 1,350 housing apartments to this region that are really building from scratch. So in this case, we have got some billable consultancy, but now we are also starting to get some risk/reward revenue because now we start into real projects where all the investments we have done together with Moelven is starting to also pay off and be recognized in the revenue stream of Itera. So this is just to show you about this NOK 10 billion portfolio that we have. So now we have NOK 1.5 billion already in terms of contracts, and we will piggyback on that going forward. And in terms of the energy space, I think there are more than already in place almost NOK 1 billion. So altogether, NOK 2.5 billion. So it's about 25% of the portfolio is really in place with either already delivered services or that will also have impact going forward. So this is quite interesting going forward that this will also impact the revenue stream for Itera. By doing this, it's not only for the risk-sharing model, it also brings in value for all the kind of digitalization services. Another example is actually this partnership, Ukraine and Norwegian partnership, that launches a platform for post-war recovery to develop what we call the Blaho for Communities. It's some kind of Ukrainian word. Blaho is actually, let's say, welfare for communities. So we are building a digital platform for enabling transparent, targeted and very accountable support for reconstruction of small towns or in rural areas in Ukraine. So we're building these digital services, all digital platforms. So all kind of donors are seeing that the value -- the donors that brings value to Ukraine is done in a very transparent, targeted and accountable way. So this solution will be launched in October. So we have built this on scratch together with this, and there will be consultancy services going forward as long as this model will be successful in the market. So this is also another example of our support for Ukraine that also have revenue impact for Itera going forward. I'd just also mention that also defense is extremely important sector for Itera, and we won't make all the announcement with what kind of customer that we make agreement on because of the safety of being in Ukraine. That is important that we can't tell anything about the very concrete stuff we are doing. But I will say that in this second quarter, we have made a frame agreement with one of the larger defense players in the Nordics. So this is also an area where we can help the player and the industry itself in terms of delivering trust and secured digital backbone or empower personal and modernized facilities, whatever, as you see from the slide. So this is also based on the knowledge we have from, I will say, the most advanced warfare situation. We are piggybacking on this experience and also make sure that when building the European military sphere, we also make sure that we are also modernizing everything based on all kind of learnings from the war in Ukraine. And also during Arendalsuka, which is the largest, I will say, event where the politicians, business leaders, NGOs, academia and the public in general are meeting to discuss different kind of topics. So in this, during Arendalsuka, we have managed to have focus on how Norway can learn from the war in Ukraine. So on my right side, you see the Chief of the Norwegian Army, Eirik Kristoffersen. We have representatives from NATO. We have representatives from the politicians and also the Head and the CEO of Kongsberg on the left side. So this is showing you that we, as a company, based on our presence and our Enter Ukraine with Itera capabilities, are really able to really bring this knowledge into the event sector and also see how we can support the players when they take a position because they need to build more and more of the capability in Ukraine. So that's -- this is just to show you an example that this kind of Enter Ukraine with Itera is not only about material support. The responsible business is very strong at Itera, as you know. This is one of the advantages that we have for the people and the customers that provide value or engage with Itera, but we're also looking at how we can extend the business dimension of it because Ukraine would like to have business. We need to keep the country running. So this is also from Itera's perspective, nothing -- it's not only supporting, we need to also make sure that all the time we are spending on this is also adding value in our company. Okay. So let's finish with some numbers that you already know before I let Bent Hammer go into the financial part. As you see, we have order intake of 0.8 in the second quarter in average. We always need to look at this figure in average. Over the last 12 months, it was 1.1. So comparing to the revenue growth, as I showed you, this is quite okay. For the time being, we would like to, of course, go to 1.5, 1.2, whatever. As you see, some of the numbers, some are new ones and others are existing ones. So this is quite interesting to look that we have very interesting company or customer in our portfolio. As I mentioned, one of the key takeaway from this, look at the figures on the left side, share existing customers, 82%. That means 18% of the revenue in the second quarter is based on new customers that we achieved in the last 12 months. So we're thinking about that, that kind of number is more or less quite normal in the area of 5% -- 4% to 5%, 6%. In this quarter, we registered that we have 18% of the revenue, which is new for Itera. So that you also have impact on the top 30 customers, which is down from 82% of share of the revenue to 73%. So they are not growing in the same pace as it was in the past and that's why it's so important to also extend the customer base with new customers. So when you -- when the market is actually maturing in a more normal way, I will say, both existing customers, that is 73%, but also -- the existing top 30 customers represented 73% will also start growing faster. And then we have a much larger customer base, so that should manage that Itera comes back into quite interesting growth pace. So that's just to make a comment on that. And also, if you look at the employees, it's, as you see, we are careful with hiring. We are reducing net by some people. We also see that there are some very large opportunities. So this is -- there might also be some increase depending on the contracts that we see. And this, in some of the near-shore organization or some of the opportunities that we see in Ukraine, for example, we also believe we will scale up again after a period that we have downscaled the capacity based on the demand in the market. So that, I think, was all from my end, and then I hand over to Bent Hammer that will bring us into the financial review section. Thank you.

Thank you, Arne, and good welcome -- welcome to you. As Arne alluded to, we hoped for a better quarter this quarter. As said, the trends that we saw emerging in Q1 were on the positive note. However, those seemed to take a dip after all the geopolitical and macroeconomic uncertainty reemerged again. So that coincided with us having 3 major projects that employed some 20-plus consultants that coincidentally ended at the same time, which is really a normal course of our business. But because of the market at this point, it took some more time to redeploy these resources into new assignments. So that meant we had a quite a significant dip in our utilization in the first part of the quarter, which only reemerged at the end of the quarter. So entering into Q3 is at a better place than the last year, but utilization isolated in Q3 -- sorry, Q2 was below our expectations. So that meant we ended up with a revenue of NOK 202.9 million in the quarter, which is 9% lower than last year. Part of that effect is the Easter effect, which provides fewer working days. And as a lot of our revenue comes from hourly work, the number of working days is an important factor in terms of our ability to generate revenues. We -- yes. So when we have the lower utilization that trickles down pretty much to the bottom line as well, at least on a short-term basis. On a long-term basis, we're able to adjust the organization, but short term and when we have good prospects of returning back to better utilization, we will be part -- or temporarily stuck with a higher cost base and that is reflected in our EBIT of NOK 4.4 million in the quarter. Neutralized for the Easter effect, if we look at H2, we have NOK 25.4 million in EBIT, which is quite a bit below last year's NOK 40.3 million. The soft market that we have experienced in the last couple of years has put pressure on the price on our labor rates. And at the same time, this doesn't seem to be so much pressure on the war for talent because there are a lot of companies insourcing IT competence as well. So we're not only competing with our competitors, but also other potential customers of ours for the same people. So there is a pressure on margins resulting from that. So that means we have to continuously look into our cost base and become more effective. And AI is a tool also for us internally to achieve that. Looking at the sequential development. As you can see from the graphs, the last couple of years has not been very positive, not for Itera, but not for the marketplace as a whole. So the underlying demand for IT services is still great. There's a lot of things that need to be digitized. In order to make proper use of AI, you have to have your data in order, so there are a lot of projects out there that we are waiting for customers to embark on. So we have a lot of potential, opportunities for margin expansion as well as revenue expansion related to the pipeline we see and just getting normal utilization again that there is a huge upside in terms of margins from that. And we have new markets for us that we have not fully gotten up to speed to explore yet. So there are plenty of opportunities there. And then lastly, we have this Enter Ukraine with Itera initiative where we are uniquely positioned and that could provide us with some significant both revenues and profits, from that in the next few years. Looking -- breaking down the revenue by type. We see that the main issue has been the revenue from our own consultants, which is down 9% to NOK 166 million. I think I've gone through the explanations for that. On the subscription side, we continue to grow not much in this quarter, but that is a constantly growing part of our business. We had some large projects involving subcontractors that stopped in Q1. So revenue from third-party services was actually down 50% compared to last year, whereas we grew other revenue by 16% to NOK 10 million. So in other revenue, there are -- there's also things like Azure consumption that is on a steady growth path. Cash flow is doing well. We delivered NOK 20.8 million from operations in Q2 compared to NOK 28 million of last year. And for the rolling 12 months, we've delivered NOK 68 million versus NOK 76 million in the prior 12 months. We're not investing much. So this quarter, it was NOK 2.7 million compared to NOK 1.9 million in Q2 of 2025, which I think was a bit lower than normal. So NOK 2.7 million is pretty much our normal rate. So we can see that for the last 12 months, we've invested NOK 9.6 million versus NOK 16.6 million the year before. In terms of financing activities, this is pretty much driven by dividends. So we paid out a dividend of around NOK 16 million in Q2, a bit less than the year before. We've -- all in all, we have spent NOK 51.5 million last 12 months on financing activities versus NOK 81.7 million in the last 12 months. If we compare this to our earnings, our EBITDA, we see that we have a very strong conversion of this into cash. In fact, this quarter, we were above 100%. And we can also see that we've had an upward trend in the last couple of years. But on average, some 90% conversion rate, which I think is very strong. It shows that we don't need a lot of working capital in order to sustain our business. And of course, this is an important part of our business because generating cash, free cash, means that we can repay our shareholders as fast as possible to sustain our dividend policy. And coming to this now, we paid an ordinary dividend based on the 2024 results of NOK 0.20 per share. And the Board was again authorized to approve a supplementary dividend later in the year as we have been accustomed to over the last several years. Share price has had a poor development in the last year for us and in many of our competitors as well, unfortunately. So that's part of the sentiment in the market, I guess, that it's been on the low side for a couple of years now. So it's -- if we include the dividend payments, it's down 15% at the end of June. We hold ourselves a bit shy of 0.5 million own shares in stock. So that's it for the financials for Q2. Looking ahead, as mentioned, we still believe that there's a lot of untapped demand out there. So it's now a matter of getting the customers to start investing at a larger scale again. And as I said, AI is a driver of this because you need to prepare your organization and your data, your systems in order to fully take advantage of AI. As you all know, it's more than just a language model. It can be used in many different ways to both become more effective, but also to drive new revenue streams for customers. This Enter Ukraine with Itera initiative, where we have entered into several contracts with different players in the Nordics and in Ukraine, this holds the promise of generating some, I'd say, quite substantial revenue and profits for us in the next 2, 3 years. It will not come at an even pace because we have this risk/reward model embedded into most of these that could certainly give us a spike in revenue in any given quarter. Related to this is the traction we now have in the defense industry, where we are able to utilize our position in Ukraine to get quite unique feedback from what is working, life in Ukraine and then use that to constantly drive innovation in terms of defense technology. So that's something we're exploring more and more. Our main focus, though, remains now on profitable growth and still generating cash. And I think we will see better results going forward. I think we're over the worst slump now. And I think -- yes, I think the market will slowly maybe, but gradually, come back, and we will do our best internally to make sure that we're in a fit state in terms of cost effectiveness. All right. Thank you. I don't know if there are any questions posted online.

You have -- it actually came in a question in this very second. So can you please comment further the surprisingly major sector drop in financial services?

It's actually, I will say, it's going back to one of the larger customers we had in 2024. We got a drop there and it's not fully back to 100% the level we had. That's one of the scenario. But of course, when we are also increasing the capacity on the other one also will have some impact. So I will say the financial services, both banking and [indiscernible] lot of opportunities there. So it's not that they're are down scaling, I think there's sometimes the projects are finished. But of course, they're also looking into AI as a new way of innovation. So I think that's more normal that it will have some up and downs also in that area. But from Itera perspective, we have -- in the past, we believe we were a little too much focused on one sector. So I think it's more 40% is quite a major part of Itera still, right? And one of the opportunities that we're also seeing from Ukraine is actually in the financial sector. So I think that will also depending on some quarters going up. There have been trends going down because we have that focus on energy. And now we also focus on defense. So it will be -- I will say that it will be more level to more -- not 50% or 46% as it was in the past. I think it maybe will stand on the 40%, I guess.

And other from that, I think you have explained very well this quarter. So no other questions.