Itera ASA (ITERA) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the Interim Report for the Third Quarter 2025. We have the same agenda as you have seen before. I will start with the highlights of the quarter, go into the business review section and then our CFO, Bent Hammer, will walk through the financial review and some comments about the outlook. And the last one is also a question-and-answer session. So, for all the guys that are online today, you might also post a question that will look at the end of this session or we can have a separate meeting later. So, let's start with our highlights for the third quarter. We delivered 7% revenue growth in this quarter and also 3.8% EBIT margin. The improvements year-over-year were primarily driven of 2 topics. One is actually higher billable utilization and the other one is actually initial effects from the operational improvement program that we also talked about in the second quarter. The operational improvement program is about implementing our more regional structure and also empowerment of the region or units or location, what we call it. We are simplifying processes and also reducing overhead and support costs. I will walk into that program later in this presentation. Also, as you remember, that Itera has also been driven by very strong growth. So the foundation of the growth path of Itera has been very strong. So we also see that for some of the parts of Itera, especially the cloud and application services is showing very strong revenue growth in this quarter, 29% and also 21% year-to-date. So that has been very successful after multiyear of investments into our capability in the cloud, where we are increasing the management services and also empowered by AI automation. So that's the highlights. If you look at the figures in more details, Ben will go through all figures later. But if you look at the revenue growth, it was 7%, as mentioned, NOK 160 (sic) [ 196.3 ] million in this quarter compared to NOK 184 million the same quarter last year. So that's a growth of 7%. If I look at the first year year-to-date, I will say the growth for the year-to-date is actually minus 1%. The EBIT margin in this quarter was 3.8%. This third quarter is the summer holiday quarter. So, it's always the weakest quarter in the consultancy business that we are. So year-to-date, the margin is 5.2%. The operational rolling 12 months operational cash flow is NOK 54 million compared to last year NOK 86 million. That's also because we are -- the working capital dynamics is also changing when we also started to grow again. And the number of employees was 705. That's 6 more people compared to the same quarter last year. So that's the figures before let's have some other topics that we discuss and sometimes we always look at the market. We get a lot of questions about the market. What we observe in the market is actually the market is more or less the same. It's not even positive or negative signals, major shift in that. So, all the improvement that Itera shown in this quarter is actually driven by Itera. It's not driven by the market itself. But what we see also in the market is actually the AI is actually rapidly emerging as the defining force in digital transformation. So we have, in this quarter, more project in that space that also had triggered more customer and also more revenue coming into the company. And also, if we look at defense, I talked about last quarter, but we also see the importance of protection of critical infrastructure is also becoming a high-growth areas for digitalization, not at least driven by, of course, the war in Ukraine, but not at least also in Europe, the drone attacks that you have seen the last months. So, there are several segments of the market is really showing very high interest for increasing the investment in digitalization. Okay. Let's go into the business review section. And as you know, we are a Nordic-based company. We have our roots in the Nordic, but have a strong European presence. So, Itera is a vibrant team of business advisers, designers and technologies. So, we are very working as according to one model across the border. And we are very close with the customer in each of these 14 location as you see on the map. And as you know, we have been in Ukraine for 17 years. So that has also been shaping, I will say, and redefining Itera the last 2, 3 years. As we discussed in the previous quarter, we have 2 main offerings. One is the core part of Itera, where we call just digitalization services in very specific industries, as you see, financial services industries, public sector and defense and aerospace. And we have the other one that has been driven by the war in Ukraine. We call it responsible business, where we provide expert advisory services for all businesses that we like to enter, we will learn from or protect Ukraine. That's where we have the Enter Ukraine with Itera program. So, I will deep dive into both of these topics. But in this presentation, I will focus most on the first one. Okay. So, let's look at the sector development for the first 9 months. As you see, Financial Services has been strong and still the largest segment at Itera. It's down by 5%, but that's also part of the regional structure implementation that we have because financial services is not the key topics in every location, right? So when we have more concentration of the customer maybe in the central part of Norway like the Oslo region, we have a lot of focus on the financial services. But we see also kind of changes on the other side, there is other -- the other kind of customer that brings in. Some of the others will also be in the defense sector. So, I think if we look at the sector mix of Itera, I think it's quite balanced. So we continue to grow in each of these 4 segments as you see here. And I also believe that defense and critical infrastructure will grow as we go forward. As we talked about last time, there's a lot of discussion about AI. Of course, AI is a really key topic of Itera also. And the last quarter, we talked about these agents that are extending the capacity and the competence by each developer in Itera. So, what we see is actually that for each developer, they also have a lot of digital agents. And so we talked about the human agent ratio. So, they will always -- that means that the developer or the consultant at Itera will have even more power to do even more work for our customer. So, somebody is actually saying that, okay, what will happen with the consultancy survey. We really believe is actually AI is an expansionary, not deflationary. So, what we mean by that is actually there is even more opportunity for the consultancy company with AI -- without AI because when we see some kind of efficiency in areas like coding operations, these kind of saving do not disappear. These cost savings will be reinvested into new customer priorities because the list of digital ambitions is virtually limitless, right? So what we see is actually when we bring in this kind of increased efficiency for the customer, then they also -- there will be some kind of reinvestment strategy for the customer. So, our role will actually be even more strengthened by the customer because we actually deliver more value for the customer in their full and realize the full digital potential. So, we really believe that this is the technology that really expand our position in the market and also kind of services. So -- and we have been through a lot of tech evolution. So every time there is some new tech coming in, we really believe that's a real, a new opportunity for Itera to grow. And to mention one of the example where AI is extremely important is actually in the Cloud and Application Services unit that we have investment -- invested substantial money over time. And we now see that these capabilities powered by AI is showing in this quarter 29% growth -- revenue growth and 21% year-to-date. And that's because we are leveraging automation and AI to accelerate the delivery and the customer value. So, a lot of the revenue increase is actually driven by that, we do not need to increase the capacity by manpower, but we can really use the software to support the next growth and the next revenue that is coming into the company. So, when the revenue is growing and the cost is actually more or less at the same level, then you see the potential both in terms of growth and also profitability, and what is also important that this is also, of course, when the customers see the potential on AI in their businesses by having this kind of cloud and application services where all the technology, all the infrastructure is in place, that means that the customer might even be faster and have larger scalability to use AI to develop their business and also take the position in the market. So, I think the timing for these investments really show is very good and is also support, I would call it, the new growth engine of Itera. And one of the example is actually from our Gjensidige, just to mention that because we have been working for Gjensidige for decades -- 2 decades actually. So, we have a very strong partnership with Gjensidige. And there we are also selected by one of the key partner in applying AI in their organization in terms of enablement, but also using AI in the tooling part, how could we actually analyze the application. We have been working together through all kind of shifts in the digitalization journey from digitizing manual processes through ensuring GDPR readiness and today is also all kind of AI-driven opportunities. So, Gjensidige is really a very interesting customer because they're always pushing the next bar, and we are really growing together and looking into AI as a real potential value creation for Gjensidige, but also as a part of strengthening the partnership of Itera. Another customer I just want to mention in this quarter is actually in Sweden because that has also been a grown organic setup. We restarted Sweden operation and also in this quarter, we have very strong footprint in Sweden, like Vattenfall, where which is one of the largest energy companies, a part of one of the verticals that we focus on in Itera. So, in this case, our consultants based in Stockholm is working in different kind of key domains like data platform, electricity trading, customer information system and not at least also marketing automation. So, in this case, this is just to show that also a part of Itera's organic growth that we take the investment establishing a new office. That is not that you don't do that for 0 investment, but now we are really coming into a profitability position in Sweden, and we are also showing very strong customer mix that also make the next step going forward where we can look at what we call our group-wide capabilities like the distributed model of Itera or as I mentioned, also our cloud and application services. So, this is how we as an international company, take new position in a new office, build it from scratch. There are some investments, but in this case, we are turning into profitability, and we have a very solid organization that is really integrated into one Itera strategy. So also, if I just want to talk about Financial Services, this is also one of the pillars of Itera. We had Cicero is a part of Itera. And we have recently had a very interesting thought leadership. We made a report called Think Twice. And this is -- the picture is from event we had in Oslo. We had also that same event in other countries, but it was really very attractive where we -- most of the people from the sector is coming, where 150 people. We need to have some kind of list of who can actually have a seat because it was overcrowded. So that -- this is really showing Itera with very deep knowledge about the industry itself. In this case, the Nordic finance that are really facing the strategic crossover either need to focus on scale or specialization because doing both is actually a risk of losing direction, innovation agility. So, it's actually having the inflexibility is actually a key risk going forward. And that is actually what we are looking at, how could we actually challenge this, how could the challenge it drive with speed and relevance. So that was actually going into where we have very specific domain knowledge, and we also have all the capabilities that can help this customer through the shifts and what also include not at least in this sector is actually applying AI as a part of the position in the market. Okay. So that was what I call the core business of Itera. Just also mentioned some within the responsible business. We have been in Ukraine for 17 years. And in August, as you see on the picture on the right side, I was spending 1 week together with my employees there and also have a lot of meetings there. As you see, we had a gathering summer party. This was the day after one of the largest attack at that moment. I think there were about 800 missiles and drones that was attacking Kyiv. And you see the day after we went out for summer party. So, what is actually quite interesting to see is how we really adapt to any kind of new threats. So it's amazing to be together with our Ukrainian people to understand how they really for any kind of new threats that are coming from Russia, we adapt to and make some measures according to what is happening on the ground together with the Ukrainian people, and we keep moving on and delivering our services with high quality and a really high commitment because they believe and they see that with the support that European countries have given them, they really feel that they are fighting for the values that we also are a part of as a part of Europe. So, it was very interesting to be there and also understand how we adapt to any kind of new threats that we read in the newspaper. When I go into and meet the people, we are quite calm and we are quite adapted to any kind of situation, and we keep on moving. So that's not only the technology part of Itera is actually that we are really also contributing to all entering Ukraine businesses that would like to do something in Ukraine. We are really ready and supporting more and more customers and businesses that really would like to go into Ukraine. And also, I mentioned this on -- in the previous quarter, and I just want to re-mention this because we saw the first lady, Olena Zelenska was in Norway yesterday, we met her, and we also talked about this Blaho for communities that is a donation platform where Itera has built the platform together with this organization to some kind of -- to make sure that the international donors can actually support Ukraine, and we make sure that this money is really used in small towns and rural areas affected by the war. So, this platform is actually making sure that all business that would like to support Ukraine is actually that the money is really spent on what is really needed. So, I think being a part of this, building the solution, also see how we can contribute to all the strategies that you see in Ukraine by having more donation that really make a difference in Ukraine is really something that we also believe is a part of the responsible of being a company today. And also when talking about the defense sector, I do not want to mention any kind of specific customer because it's -- I do not want to be connected into specific situation in Ukraine. But of course, we are working in several of these areas in Ukraine and also outside Ukraine because a lot of the defense in Norway is also looking at how we can bring the knowledge from Ukraine into the defense capability in Norway or other Nordic or European countries. So, we really have very interesting position. Yesterday, there were NOKIOS one of the largest public event in Norway. And our Head of Ukraine, he was attending there together with the Norwegian defense in the final debate about how to protect Norway, the total protection of Norway, Civil something we call in Norwegian. So in this case, he brought the view of what's happening in Ukraine and by -- so we see more and more the interest from other players in the Nordics that would like to piggyback on the knowledge that we bring from Ukraine. So, I really see there is also a lot of opportunity, not only in Ukraine, but also outside Ukraine because of the learning path that we can bring to Europe. Okay. I also mentioned the operational improvement program. And the reason for that is, of course, is to enhance the profitability, the competitiveness and the resilience of Itera. So, it's about having a more regional structure and power the regional units, this 14 location that we have, we have built the one Itera, which has been very successful in order to have one model. So, in any case, where you're being engaged or hired or onboarded in Itera is the same patterns, the same culture that you see. But we also see that leveraging AI can also increase internal efficiency because we are moving this also closer to the regions. We also have more flexibility when we have the support function, we have more flexibility. So, some of the support function can also be closer to the customer and also be some kind of billable, and we can also utilize to have more flexible cost structure. So when we have more free resources available, we can also use these resources to build new products or to do some internal process improvement. So, we try to make it more a flexible structure of the overhead to make sure that we optimize the resource utilization of Itera. So the goal is actually to have 14 location that have both customers and also capacity. So they are working across the regions and make sure that we can have a more resilient performance or robustness performance because when the market change, then we have more flexibility to balance the needs. And also when the market return back, then we have 14 units on both customers and also supply in order to grow more than we've done in the past. So, I think this change that we're doing in the business model also have impact when the market is changing, going down and also when the market is really improving. And that is what I told you that we are already seeing effects on that in this quarter. Okay. So, before I hand over to Bent Hammer, I just want to talk about some numbers about what we really believe is important. If I look at the customer side, here, we have always a combination of existing customers and also new customers. So, what we have in Itera in terms of share of new customer is actually 13% of the revenue coming from new customer that we didn't have for 12 months past, right? So that, I think for some of the other competitors, I see the number is comparable is maybe 4%, 5%. So, this I think is quite good that we extended the customer base, and that is also a part of the regional structure because we are also looking for more customer than only the customer we had in the past. So I think that's the key driver for it. We also as you might remember, we also have the book-to-bill KPI, but we see that the book-to-bill KPI is not working. It's not efficient as a very important KPI for Itera because the revenue stream is actually come from much more locations and it's not only driven by the sales guy that report into the CRM system, it's also driven by the people very close. So, we do not manage to collect all the orders that are coming in, right? So that's why we really believe that new share of new customer is important. And the other one is actually to look at the visibility and that we're looking at existing customers. So it's actually 87% of the business is coming from -- from existing customer. And also if you look at the visibility, 72% of the customer is coming from the top -- 72% of the revenue is coming from top 30 customer. And you can also look at the figures from graph there on the right side, you see that the top 10 customer with Itera is about 50% of the revenue. So we have some very large customer, but also on the graph to the left, you see also the share of new customer, which I think is even more balanced because we need to have more customer to actually have the potential to growing forward. So I think this trend has been very strong that we actually managed to onboard new customer and we also -- because some of the existing customer reducing the investment for sometimes, and then we have more flexibility to move the capacity for other customer to really have the growth platform in place. And also, if we look at the number of employees, as I mentioned, we have 6 up in the last 12 months. On the graph on the -- at the bottom, you see that these are showing rolling 12 months net FTE growth. As you see going back to 2022, we have 112 people net growth in the last 12 months. And then the last maybe 6, 7 quarters, as you see, we had a reduction, and now we are finally coming back to some kind of growth level. And that is also how we adjust the business in terms of the capacity according to the market demand. So I think that was all from me. So Bent Hammer, so please go into the financial review. Thank you.

Thank you very much, Arne, and good morning to you all. I'm very happy to be here to say that we have finally returned to growth in Itera in this third quarter and also made some improvement to our profits. The growth has generally come from more services from our own consultants. I'll get back to that in a short-term -- in a short while. We have improved our utilization quite significantly in this quarter. It's quite widespread across locations, but there are still some areas where we have some work to do in terms of getting full capacity utilization and some service lines. But all in all, a very good progression in that area. We've seen that our gross profit is also up by 7%. Our gross margin is up by 0.6 points. And that's a reflection of some less third-party consultant usage and then sort of a more favorable revenue mix in that sense. Our profit is NOK 7.6 million in the quarter, and that gives an EBIT margin of 3.8%, which is up from the low 0.1% we had of Q3 last year. There are some elements that hampers the profits, and that's one is that we have some reduction in our nearshore operations and also the development of our market rates has been more or less flat over the past 12 months. If we look at the revenue and EBIT development, we've been through a couple of difficult years in the marketplace. But I'm very proud to say that we have been resilient in terms of maintaining our top line. We're just marginally down from 2 years ago, I think 1% or something over those 2 years. And we managed that to -- by expanding our customer portfolio. So as Arne was mentioning, we've had quite strong growth in new customers over the last several quarters. This has, of course, taken some more acquisition costs than incumbent customers. And also, we have had to shift a bit of resources in terms of skill sets and also geographical markets, and that has taken some transition cost and time. So that has been detrimental to our profits in this period. However, going forward, I see several opportunities for expanding our profitability again. As I said, utilization has come up pretty well, but there's still some room for improvement. But I feel that we have our arms around the utilization now. So, the next focal point will be to increase rates again. We see that our recurring revenue is on steady increase, and that will also provide some more revenue streams and also contribute positively to profits going forward. And we also see that we have these sort of rather new markets that we have entered into in Sweden and Rogaland or Southeast of -- sorry, Southwest of Norway. And these will also provide vehicles for further expansion. And lastly, our Enter Ukraine with Itera Advisory Services will also contribute, I think, in the future to more revenue and also not the least, margin growth. If we look at the revenue mix, overall, our revenue per employee is up by 7%. So that shows that we have really expanded through capacity utilization rather than adding capacity as such. The revenue from our own consultants is up by 7% to NOK 158 million, whereas the subscription services increased by 6%. And related to that, cloud consumption and so forth is included in the other revenue, which increased by 43% to NOK 11 million, and that's an area that will bring more growth in the future as we -- as Arne also mentioned in that area. We have reduced the third-party services to NOK 5 million, which is down 33%. This might fluctuate a bit depending on what type of engagements we're in. In general, we try to service our customers with our own consultants. So, we just use third party whenever we don't have the right skill set or the right level of capacity in that given situation. The cash flow was a bit mixed in this quarter. We had cash flow from operations of minus NOK 7 million versus plus NOK 7 million in the corresponding quarter of last year. The difference there is mostly related to the growth we experienced towards the end of the quarter. So that naturally gives more outstanding customer receivables and therefore, take a toll on the cash flow. So that's embedded in any type of high-growth scenarios, there will be some lag in terms of customer payments, although customer payments is generally within 30 days after delivery. For the past 12 months, we have delivered 54% -- sorry, NOK 54 million from operations versus NOK 86 million the last -- of the previous 12 months. In investment activities, there was a little bit more spend this quarter, NOK 3.9 million versus NOK 2.5 million of last year. This is mostly related to investments into our own IP. This increase now is related to this humanitarian platform in Ukraine that Arne was talking about. And also the regular investments into ordinary equipment, et cetera, is included in here. Yet over the last 12 months, we've spent the same amount as the previous 12 months. Cash flow from activities in this quarter is just related to leasing obligations, NOK 4.6 million, same as last year. Last 12 months, NOK 51.5 million versus NOK 87 million in the previous 12 months. The biggest difference there is related to dividend payments. So, we paid less dividends this last 12 months. So, we have had a very strong cash conversion over the several last quarters. Now it's down to 74.5% from 93% in the previous 12 months. So that's, as I mentioned, it's mostly related to the negative impact on working capital that you will have from growing the business. So we -- well, depending on the growth rate going forward, we still expect a higher level of cash conversion from our EBITDA. So, our business is very much a cash-generating business. And this, of course, as you've been accustomed to is paid back to the shareholders as quickly as possible, I would say. So, we delivered an ordinary dividend for 2024 in June of NOK 0.20 per share. And the Board has now announced that we will pay another supplementary dividend of NOK 0.10 per share, which will be paid on December 9. So that will bring the total payments to NOK 0.30, which is for -- was like 64% or something of earnings of last year. So that's well within the range of our dividend policy, which states that we should pay out a minimum of 50% of earnings each year. Share price was only NOK 8.58 at the end of the quarter. We've seen the whole market for IT services going down in the last several months or even years -- a couple of years. So last year, we -- our share price was at NOK 10.95. And so, we're actually down 18%, including the dividend payments in the period. We hold approximately 0.5 million own shares, which was valued at NOK 4.1 million at the end of the quarter. So, looking ahead, I'm very confident that Itera is standing on a solid platform for future growth and improved profitability. Although the market is expected to recover gradually only, we will have -- we will capitalize on this trend and expect to be -- yes, to be growing in the time to come. This will be ordered business improvement program that we're running will assist in that manner. We're well positioned in all our markets to take on this growth. The cloud and application services is a key vehicle to this future growth, grew by 29% in Q3 and 21% year-to-date. So that's a vehicle that we will continue to use as we're growing. AI is becoming also a key vehicle to digital transformation and at Itera, we see this as a way to boost productivity and efficiency, and this will enable us to shift or add priorities to customers, so they can reinvest in other areas with positive ROI, and this sort of the reinvestment cycle will strengthen us as a strategic partner to our customers and help them take out the full potential in the digital transformation. The defense sector is certainly an area where we see future growth, piggybacking on our strong position in Ukraine and all the valuable experience that we gain from that, and we will also see that our Enter Ukraine with Itera initiative will bring some spikes in future profits as we enter into high-value contracts in efforts to assist in the recovery in Ukraine through the digital transformation. So all in all, our focus will continue to be on profitable growth and generating cash. We will use the momentum in our operational improvement program to -- and allow our regional structure to be empowered and take out the opportunities in the marketplaces. We will continue to streamline our organization to be even more agile and more externally focused, so we can take out some more efficiencies through our organization as well, and we're looking forward to getting the help from the market in general. So thanks a lot. That's it. I don't know if there are any questions being posted online?

No questions today.

No questions today, okay. So, the message was clear and understood, I suppose.

Yes. But again, we are ready if you would like to have some meetings, just to call either him or me. So we are ready to talk more in details if you like to do that. And the next time we meet is on the 13th of February, I checked it.

You checked it? Yes, that's correct.

So, that's okay.

That's before the winter holidays in Norway?

Yes. So thank you for attending for this -- in this session and looking forward to see you soon again.

Thanks a lot.

Thank you. Bye-bye.