Itera ASA (ITERA) Earnings Call Transcript & Summary

Welcome, everyone, to Itera's interim report for the second quarter. We have the same agenda that you have seen before. I will start with the highlights of the quarter, then a deep time into the business review section. Then we have our new CFO, Bjarte Petersen, that will go through the financial review and also outlook. And we also will have a joint session at the end with Q&A. If you have any kind of questions, please use the chat to pause your questions. I'm very happy to see Bjarte a new position. The transition from Benham has been very smooth. So Bjarte started actually before he entered formally from the first of August. And he's -- him and the team has also worked very well together in order to make sure that at is already up and running fully. So thank you, Bjarte, looking forward to your presentation as soon in the financial section. So let's go to the highlights for the second quarter. There are 3 main messages in this quarter that I will follow, and he will also go more into details in terms of the financial part of it. But the first message is actually that we improve the growth and profitability of Itera that's really connected to the operational improvement program that we launched in 2025. So we see now revenue growth in local currency of 7% in this quarter. We have high utilization. We have lower overhead costs, and we have also because of this implementation of the program, we have also decided to divest recruitment business that we acquired in -- for 2 years ago. because we find it not that connected to the growth of the Itera in the region. We saw some synergies in the customer side and also to having a strong recruitment link in part of Itera, but now we defined that as a noncore business. So that's why we, in this quarter, also had some divestment. So totally, the margin and operating performance has improved. We are also in the second -- first quarter, also talked about some customer receivables at Iceland so what we have also done in the second quarter, we have also written off these customer receivables. So totally, we will also show the then no recurring a lot of what do we call it, the one-offs for this quarter is actually something that we will go deeper into in the financial review section. So 1 of the message is actually improve growth and profitability. The second message is actually that we see driven the bond, all our across Itera is shifting from explantation to implementation. So that's also opening large opportunities for modernization, cloud data and managed services. So that's the second topic for this presentation. The third topic, I will say is about -- we have a very strong growth platform in the cloud and application services that continue to show a growth trajectory with a 28% gross profit in the second quarter. And this growth is shown as a gross profit, not only revenue growth because in this business, there are some cloud consumption. So and the margin of some of these cloud consumption might be also challenged by big players that offer a very small margin. So that's why we focus on the gross profit growth when we measure the growth of cloud and application services. So that continued to show a very strong growth for Itera and also strengthening the profitability and margin expansion going forward for Itera. So altogether, I think we have a very disciplined execution, and we see also now AI-led demand that also provides a quite strong second quarter for Itera. If I deep dive into the business review section, just show you the figures in brief. Baker will go more into details. As has told you, we have 7% growth in constant currency but reported is 4%. About 50% of our revenue or business are in Sweden, Denmark and euro and U.S. So these currencies is quite -- is impacting also the revenue growth of Itera. So reported revenues 4% so we delivered NOK 210 million in the second quarter compared to NOK 203 million in the same quarter 2025. If we look at the adjusted EBIT margin in this quarter, it was 6.8% and compared to 2.3% in the same quarter 2025, so that's an improvement from 2.3% to 6.8% in terms of adjusted EBIT margin. We also have a quite good operational cash flow of NOK 18.6 million in this quarter. And also the number, please, is down by 30 people. We have 672 people, but the majorities of this reduction is also connected to, I will say, nonbillable functions. So it doesn't have the impact on the growth of Itera. So we are growing by 7% in local currency, while the number of employees is down by 4%. So in total, and that will also provide a stronger EBIT. So that's the figure. So Bjarte will go more into all kind of detail sales. I'll leave the figures and to her deep that in the third section. If I look at the market view, as I told you, AI is really moving from experimentation and pilots to enterprise-wide business transformation. And I guess you also are using AI in your business more and more every day, and we see quite maturing interest for using AR through all the services that Itera provide. From the business consulting guys, to the designers, to all the developers and not at least operation. So there is really coming a real need for this kind of technology or this approach through whole Itera and also we see the same at the customer. So AI in the past, we talked about digital transformation and business transformation, and we see that AI is also really coming into the business. So the AI is also driving the business transformation for our customer. And 1 of the key area that we see is actually modernization because the customer have a lot of legacy debt. So that is where we see that AI is very suitable in today in order to start modernizing these kind of legacy depth of this technology depth. And we also see a faster transformation into cloud and also what we call a core renewal. So they're looking at the system that has been with the core of the business, now is actually the opportunity to start transforming or modernizing this kind of application. So Agentic AI is actually gaining momentum through all the value chain of Itera. From the developers is much more productive than in the past and also operation. And so that's something that we see along the whole value chain of Itera. As you also heard about, we have all this kind of geopolitics and cyber risk. Of course, that also are stressing the value chain for a lot of the industries. So we also see that digital severity is also something is a key focus in every sector -- and we also have this experience from Ukraine because that is where we have volenarities all over the place. So that is something that we bring in the discussion with the customer. So that's also a really strong topic. And we also see that there's a lot of customers that do not want to be that connected to the U.S.-based global tech in. So there is also opportunity to build a European data and infrastructure industry. So we are also more robust if there are any kind of threats from the West also. And that also has an impact on the consulting. A lot of the people are also talking about will the consulting business be really radical -- reduced. We don't believe that because we see there is a shift in terms of also how we deliver service come back to that, but also focus more on outcome. So the complexity of this AI is something that they are coming all over the place and not at least also this also have a lot of impact on how the business will transform into a more agentic business going forward. So that's the market view. And if you look at Itera, we have a position, as you know, in the Nordics. We have European presence. By presence, we mean in Central and Eastern Europe. We consist of business divided designer technologies and not at least also AI agents. So that's also something that we see from all of the places there were AIR implemented and these AI agents are also something that we try to reduce across the across the Itera group. So the AI implementation is really group-wide, and I also see very strong position in terms of how we adapt our offerings, how we are using proof-of-concept, much faster, et cetera. So that's something that are impacting Itera and the industry quite well, and it's very interesting to see the higher productivity that we can deliver to the customer. Let me further, before I deep dive even more in this section. I just mentioned that we -- if we look at the sector, we have a strong growth in the financial services -- and that's also connected to the modernization because there's a lot of the financial, the banking and insurance companies, as you might also be a part of by yourself. There's a lot of legacy there in the core banking or the core insurance system. So we see there's also opportunities now to utilize AI to really start to modernize these kind of debt that has been there for many, many years or cost a lot, and now maybe it's the time to really go into it and transform it into a more modernized platform. The energy and industry is also some percentage share down. That's also connected to renewables. We don't have that exposure in oil and gas which is growing, but we see some opportunities in oil and gas. So we also believe that both renewable and oil and gas will also increase energy and industry going forward. And the rest of public and organization and others are more or less at the same level. Going back to the AI transformation. We see some we call new growth engines. And here, we are showing a stage model. So the largest volume is on step 1. It's actually about the legacy transformation or modernization. Because of this, the customer would like to reduce the technology debt, they will like to element the data silos. There's a lot of data silos. So in order to use the right data into the mall, they would like to see how they can tap into the silos and also utilize the data in a more efficient way than in the past. That also applies to the integration complexity because they integrated build workaround solutions around this core system and that's also have a lot of depth that might be renewed when you actually move into a more AI technology stack. So that in the first step, there is a really large opportunity that we saw in 2025. So we'll see a quite good pipe building up and some of the projects have already started. So I expect that the legacy transformation will really mature going forward during the next 2, 3 quarters. It will take some time before you see the full effect of it, but we have already seen and started on project in the second quarter that is also reflecting in the revenue growth of Itera. The second 1 is actually the AI enablement agent enablement that we help the customer to establish the agents. We are established in governance and security and also make sure that they are using AI responsible, and we are also looking at how they should change the software development process or the operating process in order to really utilize the new technology. Then we have the third station, which is what we call the AI factory and the intelligent operation, then you have all the agents that are running. You need to orchestrate it. You need to make sure that you reduce this kind of workflow and you can also make it full the fresh into the integrated operations. So softer development and operation will really be seamless integrated one. And you have the humans and agents that are working together. And then you have the improvement of your business in terms of new products and services and not at least also that you are transforming, the business transforming and the digital transformation into more agent -- AI genetic enterprise going forward. And there's a lot of culture and a lot of new processes that need to be changed. So this is a strong momentum for doing changes along your business but not at least also along the value chain or that you are part of. A lot of you have discussed, I see a lot of reports here and there that talks about the reduction of the technology partners of the service industry. I don't believe in that because as I said, there is a value for the customer in terms of faster modernization, longer operating -- lower operating costs, higher productivity and better resilience. Of course, what does it mean for the customer? They can really because AI is the engine for growth and efficiency, productivity, all over the place, not only IT, the digital part, but also the business part. If we look at the value for a service provider like Itera, we can utilize agents together with the people. So it's not only providing people as in the past, you're providing competencies, but also that are connected to a lot of agents that we bring in or that the customer already have in place. So we are talking about, as we talked -- discussed earlier quarters, we talk about the human agent ratio. So for each human, there is also a lot of digital agent that support and increase the productivity. So the increasing productivity for Itera is also creating opportunity for more recurring revenue because you have the people and you have the agents and then it's more effective to also establish new service line or new revenue line revenue streams. It's also a possibility to establish IP and workflows that we can reuse. And we can also discuss as we also showed you that the revenue was growing 7%, but the reduction in FTEs was 4%. A major part of it, as I said, was some kind of non-billable. But of course, we will also have growth trajectory that is less dependent in a linear matter with FTE growth. Cloud and application services is really structured in that way. We have seen that we are growing the top line without increasing the number of FTEs in a linear fashion. So this is something that we will see a long Itera going forward. And in order to also showcase what we are doing, so we're saying that the future of consulting is agentic. As you see, we are -- when we have engagement deliver, we capture the knowledge in terms of AI, agents that we are using. So when we -- so when we capture these agents because in the past, it was only the people. Now is also a lot of agents that we have developed, and these agents we can look at how can we reuse these agents across customer. So when we start a new project, we really have a more effective way. We have higher productivity. There might be some services that are recurring, et cetera. So that is the way we are changing the business model. And when you are looking at the value chain on the first low euro, you will also see that we have also started to build capabilities. We started from more than 1 year ago to invest into 3 products. One is actually called Compass, which actually is, we call it called intelligence where you actually look at any kind of legacy system and get full analysis of all the dependency of the code, whatever, what is codes working, what is core is needed, what over what we would like to go continue with whatever. So when you have a very precise documentation used by AI, then you have also an opportunity to take the next step to use AI agents to really rebuild or restructure or modernize or build a total new application. In the past, it took a lot of time, cost fortune to do this one. Now we are using the AI to really have precise documentation. When they have the precise documentation, you can use the digital factory with the agents. For each developer, you might have 5, 6, 7 agents that are working alongside, so increase the productivity. And also the last part is also how you migrate data from the old system to the new system. So these products are really increasing the efficiency, and that is also something IP that we have developed. So when we go to a new customer, we can also charge either higher rate or have some kind of recurring subscription-based revenue steam alongside with the consultants. And all these are actually based on our cloud and application services. That is the foundation that these products are built on. So when we meet the client we connect into the agents that the clients are using. And we are also having -- adding value where we have knowledge across customer that we have delivered before and not at least also looking at all kind of open source and functionality that are very available in the market. So we bring this knowledge when we meet the clients. What is also important is actually that we are very proud of that being the first company in Norway that was certified according to ISO 42001, which is the first certification for AI management system. So we took that position in Norway, and we are amongst the first in Europe to achieve that certification. That's extremely important for Itera support the strategy for a. So we had the ambition to be the first and we managed to be the first, and that is actually verifies that Itera utilize AI in a govern development deployed and monitored according to the standard. And these are all combined with other certifications, we managed to complete in the second quarter in terms of ISO-991-1411 and also 45011 connected to quality environment and broken environment. So -- through this certification, we are really having a competitive advantage when we are going into more regulated industries and not at least are increasing the importance of having standards in place because now we also need to have control of all the dimension of how we deliver this in a responsible way, but not at least also with high quality so the customer reached the goals. So that is also something we achieved in this quarter. I just want to mention that one. Regarding I talked about the digital resilience or resilience in a broad sense -- of course, we all see from Ukraine that, for example, energy infrastructure or energy system is a part -- has become a part of the battlefield. We see the same trend in terms of all kinds of cyber attacks -- for Norway because of the agreement between Norway and Ukraine. So these threats, we are seeing all over place. What is nice that actually that Itera really have a strong position because of the position we have been in Ukraine for 18 years. So we say that Ukraine is really the real-world laboratory for energy resilience of digital transformation and innovation in the extreme conditions. So that's why we are doing Arnold Zuka and also no ONS in Stavanger this week. Really, I have a lot of discussion with clients in different industries to see how we can increase the resilience of the company's -- and what they told us tell us is actually they would like to learn more from Ukraine. That means the interest for also looking into not only the support with also getting the learning from Ukraine and also see how to jointly bring the solution that they are working in Ukraine to Norway or the part of the region in where we have the same threat. So this is actually really connected to the future fairness in -- across the industry, really a very interesting unique position at Itera have. So the resilience is nothing that only a paper now, now is a threat. And also, there's also a lot of opportunities that we need to develop. So this is something that also raises the demand for our services. Before I end up my part, I just want to talk about the order intake show you quarter-by-quarter. We focus on the share of new customers. It was 9% of the revenue in the last 12 months, this new customer that we didn't have for 12 months ago. And if you compare to other competitors, that's a quite large numbers. We are quite happy with this share of new customer revenue of the revenue because we would like to grow. We have also, if you look at the opposite, actually, 91% of the existing customer are -- 91% of their revenue is coming from the existing customer and as you also see, 71% of the revenue is coming from the top 30 customers in Itera. It was compared to 73%. So it was down 2%. For me, that's okay, actually because I also would like to develop new customers to make sure that we have a growth potential going forward. But the figures here are quite strong and not at least also as you see when the market has been some kind of challenges. We have -- of course, we don't have the same growth rate, but we have quite stabilized the growth and we also see the demand coming from AI. So we are really looking at the next quarter, how we are actually -- we as a company, but also the industry actually maturing into growth pockets going forward. If we look at number of employees, we were 672 at the end of this quarter compared to 702. And as I told you, most of these people are connected to nonbillable functions. And we have a net ratio that is the ratio of the people in Central and Eastern Ruben, about 50% of the business. So that's -- yes, that's a part of the operation improvement program. And -- but we're also recruiting. So some people are leaving, but we also would like to -- we also continue recruiting in pockets where we see the demand is very strong. So that was the first part, then I think we can go into the business financial of the business -- the financial review gate. So please have you placed there.

Thank you so much. First of all, pleasure to be here. And first Q2 -- first quarterly reporting from my side. Happy to join Itera team and I'm looking very looking forward to work with all of you and also with your investors and your analytics. As mentioned by also Arne, Itera delivered a good quarter with 7% underlying growth and improvements in profitability. Our adjusted EBIT for second quarter reached 6.8%, 4.5% points, up from 2025. Adjusted EBIT for the second half year and -- the first half year reached 7.9%, which is up 1.9% from 6% last year. For our consultancy business, the growth is to a large extent within the financial sector, where we historically have our biggest footprint. We also have a strong profitability development in our cloud and application services, CAs with 28% gross margin improvements. Our improvement program has delivered on target, and our billable utilization has increased the last 4 quarters in a row. It's actually also the highest level in 8 quarters. We have some nonrecurring items this quarter and also for the first half year. These are related to our strategic decisions or there are 2 matters actually. One is the strategic decision to divest Mosaic headhunting, which was acquired in 2024. The second 1 is writing off additional customer receivables on Iceland. These are all described in the report, also in the notes 4 and 5. Total EBIT effect for the -- on nonrecurring for the second quarter was NOK 8.6 million and for the first half year was NOK 11.7 million. Looking at the last 12 months revenue, they are quite stable also in respect of a type of revenue. But we had, in the second quarter, an uplifting 5% reported growth on consultancy revenue. Revenue from subscription, third-party services and other revenue were stable. Reported revenue per employee were up 7% in second quarter. Q2 marks a positive shift, both for 12 months rolling revenue and adjusted EBIT. Going forward, we see opportunities that customers are moving from AI pilots and testing to deploy and utilize agent at scale. Given our investments in AI capabilities with the Cold Compass, Digital Factory and Atlas Data Fabric, we are well positioned on these areas. And cover these product area as well. These are really agnostic platforms, which enable us to deliver value to the customers even faster. Other key drivers in the market are digital servainity, security resilience demand across sectors and we have unique knowledge through our big footprint and experience with Ukraine especially on the resilience demand that are emerging. On the cost side, we will continue also to focus on improving cost structure and have a cost discipline. We had a solid cash flow from operation in the second quarter with NOK 18.6 million. Looking at cash flow from operation last 12 months, this is in the lower end and explained by higher working capital from changes in timing of employee tax payments, but also on timing of payments from a couple of fixed price projects. Cash flow from investing activities are stable, and we have paid out dividends to our shareholders of NOK 16 million in the quarter, which are reported under financial activities. And looking at our cash conversion, it's the working capital that are -- has giving us a temporary dip in the conversion when we look at the last 12 months EBITDA to cash conversion. These are temporary effects. Of course, the change in employee tax rules and payments in Norway has permanent lift in the working capital. But in terms of cash conversion, they are temporary. So is the payment terms from EBIT in the projects that we are talking about. Our dividend policy remains the same. We will have a consistent high distribution of earnings to our shareholders. We paid out NOK 0.2 per share in the second quarter amounting to NOK 16.2 million. Now for the outlook. Market and demand remains cautious, but we also see improving pockets of activity. And as mentioned, these are driven by modernization, data platforms, it's within cloud transformation and also managed services where we have a good footprint now with Cas. And it's on digital sovereignty and resilience that we have also mentioned. AI and genetic AI are emerging as key growth drivers and enabling and accelerating in every open pocket. Operational improvement program is delivered on plan, but we will also continue to embrace the opportunities in the technology to work smarter and keep high cost discipline and utilization. We've also continued to look at our cost structure going forward, but not in a formalized program that we will report on. On the currency effect, we have a large footprint abroad in Ukraine, in Denmark and Sweden, Poland and also in Czech and Slovenia. So given that the NOK has strengthened during this year, we have an effect on the top line. So -- and this amounts approximately in the second quarter to 3% points where you can see that our reported growth is 4%, while our constant currency growth and underlying growth is 7%. We will see this effect continue also in the third quarter and probably also in the fourth quarter. But this is, of course, dependent on the currency development. Profitable growth, it will remain our main focus. This will be supported by enhanced commercial capabilities that we are building into our companies in all our regions. Thank you. So then I invite Arne back for our Q&A session.

Yes. Yes, there might be some questions.

We do have some questions. This came in Norwegian, so I will translate. When does management expect the onetime costs to be fully completed? And will you confirm that the margin target will be achieved this autumn?

Yes, in terms of nonrecurring items, we don't have any plan to continue with nonrecurring items. So this is completed this quarter, right? And we do not guide on Itera revenue growth or EBIT. Of course, our ambition is actually to increase, as I said, both the revenue and also the profitability going forward. And we see the AI demand is actually there already. But as you said, there is some cautious about the currency impact on the revenue top line, right -- so that is what we are telling you. But of course, we believe that the foundation of Itera also not at least also the demand we see from is something that we are quite positive for the future. But of course, we need to take some quarter in order to see that it materialize all the -- in all sectors. So it always takes some time before you have the full effect of AI. But from my first quarter to the second quarter, I see quite a fantastic improvement, I will say.