OVH Groupe S.A. (OVH) Earnings Call Transcript & Summary

Hello and welcome to the OVHcloud Quarter 1 Fiscal Year 2024 Revenue. My name is Caroline and I'll be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] Today's speaker will be Michel Paulin, CEO; and Stephanie Besnier, CFO. I now hand over to OVH team to begin today's conference. Thank you.

Hello, everyone. I'm Michel Paulin, CEO of OVHcloud. First of all, I would like to wish all of you a very Happy New Year. Thank you very much for being with us today for our Q1 fiscal year '24 conference call. As you can see on the slide, we had a good first quarter of the year with 12% like-for-like revenue growth marked by very good growth levels for the Public and the Private Cloud as they grew, respectively, by 18.9% and 14.9% driven by market share gains, especially in the Private Cloud. The trends we have been behind this performance are among others; Public and Private Cloud remained strong with growth engines, the continued good performance in Europe as successful consequences of our sales and marketing focus in this area and a strengthened demand for our Sovereign solutions and continued ramp-up of our newly developed PaaS solutions. So the next slide we can see that if we quickly delve into the Cloud business, Public and Private Cloud, we see that it continues to have a high level of growth quarter-after-quarter with this quarter at 15.8% growth despite all the macro uncertainties. Our SecNumCloud revenues reached EUR 9 million ARR and was multiplied by 4 versus last year and our PaaS solution reached EUR 17 million ARR and grew by 75%. When we look at customer acquisition, we had some very interesting deals around the world in cybersecurity, public sector, software and defense. The next slide is about AI. As part of our Q1, we have been working a lot on artificial intelligence. AI is a massive way for our customers and, as we always said, we are ready to accompany them in the evolution. To adapt artificial intelligence solution, the companies must have 4 attributes: large infrastructure and storage, data and private data assets, software and skill. And our ambition is to provide the tools which allow then all the enterprise to have access to these 4 pillars with simple, affordable and conforming solutions. And if I select only a few one and I just want to explicit what we are doing. On the large-end infrastructure and storage, we have a full range of NVIDIA GPU available today on the market; B100, A100 and since a few days we have now H100 solutions, which is available to all our customers. And we will make available the L4, L40S in the coming weeks. And we are already working intensively with our partner NVIDIA on the new generation of GPUs that will come in the next quarters. But also on the software tools, which are very important, we do not have the intention to develop our own generative LLM, but we have applications which allow the customers to implement this LLM in their solutions; AI Model, AI Training and AI Deploy; which are very successful. And now we have AI App Builder and [Audio Gap] in a beta version, which will bring additional capabilities for our customers with the same target of making AI easier, simple to deploy and leverage. And of course all follow while maintaining the highest level of data privacy and data sovereignty to protect data, but also to protect all the private data, sorry. The next slide is about sustainable cloud. One key aspect of our vertically integrated model is that we are sustainable by design. Rankings after rankings, we keep showing that we are leading the way. We disclosed in our 2023 ORD, our eligibility and alignment to the EU Green Taxonomy, which focus on 6 environmental objectives. We are very proud of reaching such high level as a measurement is highly demanding. As you can see, as mentioned in EY 2023 Barometer, we are way above our tech peers in all KPIs. It's another example of how sustainable is our model. But now let's now hand over to Stephanie for more details on our financial performance.

Thank you, Michel. Hello, everyone, and Happy New Year as well. I am Stephanie Besnier, CFO of OVHcloud. So as Michel said, we registered in Q1 a good level of growth fueled by Public and Private Cloud. Our growth dynamics remain strong even though our customers are still careful in their spending and we benefited from 3.7% of price effect in this quarter, which is in line with our expectations and in line with our full year estimate of between 1% and 2% price effect. Moving to the next slide, we have a more detailed view of our performance by segments. So if you look at each segment, you see that we had good business dynamics in the Public Cloud segment despite continued cautiousness from customers with a like-for-like growth of 18.9% in Public Cloud fueled by strong growth in Europe and good customer acquisition in Rest of World. Our PaaS solutions have reached EUR 17 million of annual revenue rate in November '23 growing at 75% year-on-year growth in Q1, which is also contributing to the good growth level. In Private Cloud with plus 14.9% like-for-like growth while definitely growing faster than the market and gaining market share. Hosted Private Cloud accelerated in all geographies driven by Sovereign products in France and by new offerings released few months ago. Finally, in Webcloud & Others, the growth was minus 1.4% despite good traction from Web Hosting thanks to a recently revamped offering in this segment and also to domain. We had a high comparison basis versus Q1 '23 as we had very good Black Friday campaign last year. Overall, if we exclude legacy subsegment Telephony & Connectivity, like-for-like growth was 2.5% on Webcloud versus last year. Now let's have a look on the next slide to our revenue by geographies. Europe has been leading in terms of like-for-like revenue growth with high growth in all segments in the region with Central and Southern Europe performing particularly well. In France, revenue growth in Q1 was 9.3% with double-digit growth in Public Cloud and Private Cloud even slightly below Q4 and the country was mostly impacted by the negative performance of Webcloud in the quarter. Excluding Webcloud, our cloud businesses in France grew by 16.5%, a very dynamic growth again. In the Rest of World, we had a very good quarter in Private Cloud and strong double-digit growth in Public Cloud even if it slightly slowed down compared to previous quarter. Before giving the floor back to Michel for the outlook, we can have a quick look at performance by go-to-market on the next slide. So on the left-hand side of the slide, you see that digital represents 45% of our business and we had strong level of growth in Public Cloud in France and that both Public and Private Cloud grew strongly in Rest of the World. For Enterprise, which is now 55% of our business, we had an unchanged strong traction from partners and acceleration in Private Cloud driven by Private Cloud and strong growth in Public Cloud in Rest of Europe highlighting the success of our sales and marketing organization in the region. Thank you. And I now hand over to Michel for the outlook.

Thank you, Stephanie. So we confirm all our fiscal year '24 and fiscal year '25 targets. As a reminder for 2024, like-for-like revenue growth between 11% and 13% and adjusted EBITDA margin above 37%, recurring CapEx of around 16% of sales and gross CapEx of around 24% of sales. We will also be positive in unlevered free cash flow in the second half of the fiscal year 2024. On the back of tremendous shift in the macroeconomic environment and increasing cost of capital, we have managed our operating model to be more efficient, more sustainable and more cash generating in the short term and in the longer term. We maintain a steadfast belief that the cloud transition is still in its early stage and will continue to unfold over the coming years. This trajectory will propel substantial growth within the overall market and notably for OVHcloud. We will be able to provide more color on the longer term during our Investor Day next week. And as you see in this slide, we have our own Investor Day in London and it will take place on January 17 in Canary Wharf. The team will be very, very pleased to share more colors on our differentiating strengths, strategy and outlook. It will be a great opportunity to reconnect with you all in person. We can now start the Q&A session.

[Operator Instructions] We will take the first question from line Mark Hyatt from Morgan Stanley.

Michel and Stephanie, Happy New Year. I just have 1 question on the growth outlook for 2024. Obviously in Q1 you delivered 12% like-for-like growth in the first quarter, which is at the midpoint of the full year guide. So could you just help us understand how you think about the phasing of growth through the year? Should we expect to see growth slow as the price effects moderate over the course of the year or are you baking in some recovery in underlying market demand environment?

Thank you for your question. So our growth in Q1 was a bit depressed due to Webcloud comparison basis. When we look at the underlying volume growth, we expect it to pick up progressively. We have seen a very good customer acquisition in Q4 last year and in Q1 and we know that the cross-selling of our new customers takes time. That's very much our focus now and we will increase the ARR progressively to help them ramp up with our product. So that should support the growth over the coming quarters.

We will take the next question from line Toby Ogg from JPMorgan.

Happy New Year to you as well. Just a couple for me. Just on the Cloud segment growth rates. So just firstly on the Public Cloud side, slightly softer growth there in Q1 just versus the Q4 exit rate and you called out continued cautiousness in cloud spending in Europe and France. Have you seen customers becoming sort of incrementally more cautious in Q1 versus sort of what you saw in Q4? And when do you think it's realistic for us to be thinking about a reacceleration in growth in the Public Cloud? And what do you see as the most important drivers of any potential reacceleration? And then just secondly, just on the Private Cloud side specifically in Bare Metal Cloud, you're seeing an acceleration in the Rest of the World, but a slight slowdown in Europe and France. Again what are the drivers of these 2 different dynamics across the different regions for Bare Metal and should we expect these trends to continue?

Okay. Thank you for your question. So if we take a step back on the Public Cloud and if we look at the last 2 years, we've been growing between 18% and 23% with some quarters better than others. Q1 is in line with this trend and is actually growing faster than Q1 last year if you look at those numbers. Now to give you more detail on the performance. Like I said, we have very good customer acquisition. We have rolled out new offerings and specific marketing actions to fuel this and it's working. Since summer, we had a nice increase in the digital traffic of our website and we've also started to see since a few months an increase in our conversion rates. So again we had a good volume of customer acquisition. Now what we see is that these customers have a lower average revenue than we used to have. So clearly our focus, and that's where our guidance is based, is to make sure that these new customers ramp up is as fast as possible and that we can cross-sell as much as possible other services and that will fuel the growth for the coming quarters.

On the second point, which is Bare Metal, I just want to remind that we have a very focused go-to-market by regions. On the Rest of the World, we are really digital which explains also why we have different type of profile of customers, mainly SMEs and pure tech companies compared to Europe where we have much more enterprise markets with larger workloads and capacity. And we know that when the customer are more enterprise, they were and they are still very cautious about the cost control and that's the reason why we see a different dynamic between the 2 regions. The second point, in the rest of the world, we have the U.S. country which is today included and it's the second largest country for OVHcloud. And we see also that in the U.S., which is always at the front end of the market, that there is a slight recovery to reinvest compared to what we've seen in the past. So I think that really explains the reason we see in the market of the different momentum that we have to compare the rest of the world with Europe.

And if I could just squeeze 1 more in actually just on the Webcloud. Just on the Connectivity and Telephony subsegment driving the weakness in that segment. Again sort of similar thing on kind of route from here. How do you expect that sort of weaker activity to continue? And when do you think it's realistic for the overall Webcloud segment to perhaps return to growth?

As we said, in the Webcloud we have what is more telecommunication, which is Connectivity and Telephony and which is more pure Webcloud web and domain. And definitely there are 2 different dynamics where the telco, which is mainly in France, is more than stable because the market itself is very, very low growth driven. What we see today and we've seen that also with the Black Friday success is that on the Webcloud on the contrary, we have rather a good dynamic at the end of the year. And in domains for example, we have a very strong growth during the last few months. And that's the reason why we are very confident that we will get back to the positive momentum for the whole Webcloud even so the Connectivity and Telephony is rather stable. So that's the reason why we are very confident that thanks to everything by staying very focused on the marketing, very focused on the innovation that Webcloud will go back to growth for the next quarters.

[Operator Instructions] We will take the next question from the line Ben Castillo from BNP Paribas.

Question really you might have addressed this at the CMD, but since you pointed out the numbers there in the results just around the PaaS and the SecNumCloud annualized revenues, you have some attractive growth there. I guess my question on that is could you share some thoughts on your expectations in terms of scaling those 2 exciting opportunities in the next 12 to 18 months? How do we think about your ambitions? What are you seeing so far in terms of uptake relative to perhaps your expectations a year or 2 ago?

I will start with SecNumCloud. You've certainly seen a few days ago that we have confirmed our investment and our focus on SecNumCloud for 4 main reasons. The first one is that, as you know, it's becoming in Europe a very, very important focus and it has been I would say regenerated by the fact that the fee side in the U.S. has been extended and maybe in terms of timing, but also may be extended in terms in perimeter. And so there are a lot of concern in some governments, but also large corporations in France about how they are going to protect their sensitive data. That's the reason why we believe that SecNumCloud, which is today a very fast-growing segment for OVHcloud, is a very good investment and that's why we are continuing to propose new products. We have now the new certifications. We extended with the third data center in [indiscernible] and we have even to the [ NC ], the ambition to certify all the PaaS, the 40 PaaS solutions for the next years because we believe it will be a compelling offering. Today, we are the #1 in SecNumCloud in France. But also we believe that there is a second opportunity, which is that in Europe there is a UCS certification which is today in debate and they are much more and more concerned at the European Commission about this data sovereignty and data protection. And we do believe that we might have the capability to extend what we have been successfully implemented in SecNumCloud outside in Germany, in Italy, in Spain because this is definitely something which is becoming a real concern for the public sector; but also for the health sector, for the banking sectors and more and more to the industrial companies across Europe. On the PaaS, today we are continuing to develop the offering. We have announced during our summit that we will achieve 40 solutions of PaaS. Today we have a lot of solutions which are in alpha and beta and we are gaining all the feedback from our customers and our prospects and we have a very, very rich and dense road map of launching the PaaS solutions especially in Q2, which will allow us to continue to accelerate our growth on PaaS and also will allow us to increase the ARPC revenue per customer by cross-selling and upselling and be able to promote more and more services for each customer install base. Because as you know, we are very focused to continue to accelerate our growth by focusing by acquiring new names, but also to increase the revenue per customer by cross-selling and the PaaS is really a very strong, I would say, key to open and to develop new revenues per customer. So that's today what we are doing and that's our focus in terms of research and development and marketing and sales operations.

[Operator Instructions] We will take the next question from line Derric Marcon from Societe Generale.

Michel and Stephanie, Happy New Year from my side as well. One question on price and 1 question on Platform as a Service. On price, I would like to understand how we should reconcile or how we can reconcile the fact that in Q1 it's almost 4 percentage points positive impact on your top line growth. While for the year you are guiding on 1% to 2% impact -- 1 to 2 percentage point impact. So what would make the difference between the low end and the upper end of the range because it means that if we shoot for the low end, it means that you will -- or you assume that you will have almost no price impact as of Q2 and onwards. That's for price. And on Platform as a Service, it would be interesting to know what would be your best case in terms of lending for the year at the end of the year in terms of ARR. So EUR 17 million in Q1 as you said plus 75% year-over-year. What's your target at the end of the year?

So on the price, you remember that we launched our specific repricing campaign at the end of Q1 and beginning of Q2 last year. So that explains why we have this impact in Q1 mostly. We expect this impact to smooth during the year. And now on the rest of the quarter, one of the key elements will be also the commit from our PaaS customers and the mix of our products. So that explains the range that we've given of 1% to 2%, which relates mostly to this impact that we have in Q1. On the PaaS, we'll give more information on the Investor Day on our strategy. But as you know, we don't guide on the specific performance. You see that we still have a very good dynamic that we're very happy with and the focus is very much to accelerate the launch and the ramp-up of our new products.

Could I add just a follow-up, Stephanie. On the breakdown between ARPC and new customer acquisition, can you help us to quantify the 2 in Q1? So out of the 12% organic growth, what is coming from new customer acquisition, what's coming from ARPC?

We don't disclose this level of information. I mean the indication that is on pricing is 3.7% again. And what I can tell you is that the dynamic is still very positive on customer acquisition. And in subsegments, we had this lower ARPC from our new customers that we will focus on improving over the next quarter.

There appears no further question at this time. I'll hand it back over to your host for closing remarks.

Okay. Thank you for your questions. As takeaway, we had a sustainable growth in Q1 fiscal year '24 with a revenue reach of EUR 240 million. Our growth was 12% like-for-like and 15.8% for Public and Private Cloud and our net revenue retention rate has reached 110%. As main highlights for the quarter: Public and Private Cloud are main growth engines, we'll achieve EU Green Taxonomy way above our peers and we launch new AI solutions. And finally, we confirm our targets for 2024 and 2025. So thank you and have a good day and see you at the Investor Day. Thank you.

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