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

Today's speaker will be Michel Paulin, CEO; Benjamin Revcolevschi, Deputy 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. Thank you very much for being with us today for our Q3 fiscal year '24 revenue conference call. Let's start with Slide 3 on the key highlights. As key highlights for the [ purification ], we generated EUR 737 million in revenue for the first 9 months of our fiscal year '24 with a robust like-for-like growth of 10.1% compared to last year. Looking at Q3 revenue, we reached EUR 251 million, representing a like-for-like growth of 9%. This performance underpins the resilience of our business with a strong traction in the United States, while there is still and challenging and uncertain environment in Europe. Looking ahead, we are fully confident in our guidance for the year and the left quarter with strength in data sovereignty and new solutions launches in PaaS and in AI. Let's move to Slide 4 for our strategic pillars. Early January presented an update of our strategic plan. When we consider the broader picture and despite the current short-term headwinds in Europe, we are delivering on our strategic levers, which remain at the heart of our long-term vision for OVHcloud. We had a reference for the data sovereignty as shown by the strong development of our sovereign cloud offering SecNumCloud and we will continue to meet customer demands for more control over the data and immunity to extraterritorial laws and we'll keep on leading the way in addressing this highly critical topic of data sovereignty everywhere in the world. Innovation is one of our core values of OVHcloud. We are on top of today's AI wave with new NVIDIA GPU instances and the integration of cutting-edge AI model for our customers. We continue to introduce new PaaS solution to expand our addressable market and preparing for the new tech revolutions. Our third objective is to consistently deliver sustainable and profitable growth. We are organizing our cost structure for the long-term profitable growth. Our fourth objective is to maximize cash generation. We have invested a lot in recent years, and we will continue to invest for our future growth. But we are also focused on maximizing cash generation as we have already demonstrated in the last 2 semesters, and we will continue to do so. And now I'm handing over to Benjamin Revcolevschi, our new Deputy CEO, to highlight the operational achievements of Q3 fiscal year 2024.

Thank you, Michel. Hello, and welcome, everyone. I'm Benjamin Revcolevschi. I was honored to join OVHcloud 2 months ago as Deputy CEO in charge of all operations for the group. I joined OVHcloud after 25 years in technology and business operations. I was recently Head of France and Benelux for the global IT services company, DXC Technology focused on applications, data architecture as well as security and scalability of public, private and hybrid clouds. OVHcloud positioning is extremely strong both as the reference in data sovereignty and the most attractive cloud player in terms of price performance ratio. And today, I'm excited to share with you some of the latest developments we achieved in our Q3 2024. So first, as you can see on the left-hand side, we are proud to keep developing new AI solutions to address current demand, we now offer a full AI suite of solutions powered by the latest NVIDIA GPUs, such as H100, L4 and L40S. And these last generation GPUs have a high utilization rate highlighting the strong demand from our customers. So we are able to provide our customers with the computing power they need to deploy and run their AI applications and in addition, we offer a full AI suite, which includes solutions like AI Endpoints and also AI Training, AI Notebooks and AI Deploy, making it easier than ever to build, deploy and manage AI workloads. And that's not all, as you can see on the right-hand side of the slide, to drive international growth and to meet the regional demand, we expanded our geographical footprint by opening a new data center in Australia, in Sydney. We also opened 8 Local Zones which are small data centers in colocation mode to grow public cloud in new geographies with a lowered capital intensity. These Public Cloud offerings in Local Zones further reinforce our commitment to providing low latency services with full control over data residency to customers around the world. With these latest developments, we are continuing to deliver in line with our strategic plan to offer innovative and sovereign offerings to our customers globally. Let me now turn again to Michel for a deep time on each of our business segments.

Thank you very much, Benjamin and welcome again. In Q3 fiscal year '24, the Private Cloud reaches EUR 157.6 million or 63% of the group's revenue and accelerated in Q3 to grow by 10.7% like-for-like. We had some interesting contracts wins in the U.S. with Admiral Beverage Corporation, a leader in premium beverage production and also in France, like Inserm, the French National Institute of -- for health and medical research and also with the French Army. As main highlights, thanks to our focus on technology companies, we had a strong growth in the U.S. Then our strategy of upscaling our positioning of high-end servers is successful with a continued increase in our revenue per customer -- average revenue per customer. In Q3, we continued to see workload optimization for existing customers, and we remain cautious in Europe for the next quarters. Regarding data sovereignty, as I said at the beginning, the traction for our SecNumCloud solution remains very solid, and this range of products reached an ARR of EUR 13 million at the end of Q3. Furthermore, with our status of pinnacle partners at Broadcom, which acquired VMware, we now have a better visibility for our VMware offering. We have increased our prices, but we have less churn than anticipated. Finally, we are currently launching a new generation of entry-level Bare Metal server called ADV Generation 3 with latest AMD technology to improve the competitive positioning offering and to continue to grow in this segment. Moving to the next slide about Public Cloud. So in Q3 fiscal year '24, the Public Cloud segment reached EUR 46 million or 18% of the group's revenue and grew by 11.9% like-for-like. And like in H1, there was no incremental benefit for price increase in Q3. We had a continued growth in the past offering with an ARR reaching EUR 19 million in -- at the end of Q3 fiscal year '24. AI is clearly offering Public Cloud growth with NVIDIA GPU instances and AI software enjoying a strong growth, and we have just launched this new solutions in Q3. Finally, as we said in the last publication, we have been focusing on customer acquisition on Public Cloud, and our strategy is paying off. We are acquiring more customers than before using our premium and postpaid initiatives. We think this will give us significant room for upsell and cross-sell when the market accelerates again and when customer usage ramps up. In the short term, the revenue per customer is growing slightly slower than before, but this is due to the combined effect of a mechanical accession of this initially lower value customer, less incremental demand for existing customers due to the continued macro uncertainty, especially in Europe, that is what drives an ARPAC average revenue per customer -- active customer growing slightly slower than before. But we do believe this will again give us significant room to upsell and cross-sell when the market pick up again and customer usage ramps up. And this new acquired customer as a reservoir of future growth for the coming month. Moving to the Webcloud segment on Slide 8. Webcloud segment reached EUR 47 million or 19% of the group's revenues and grew by 1.2% like-for-like. If we exclude our legacy subsegments of Telephony and Connectivity, mainly in France, growth reached 4.3%. We continued to benefit from strong domain subsegment performance thanks to our change in our user experience and the addition of new features and functions. Regarding our web hosting businesses, we -- is showing signs of recovery following the release in Q3 of new solutions based on more [ peripheral ] hardware. Let's conclude our Q3 segment performance. I now hand over to Stephanie for a financial and geographical overview.

Thank you, Michel, and hello, everyone. I'm Stephanie Besnier CFO of OVH Cloud. Thanks for being with us this morning. So as we should say at the beginning, despite a persistently challenging environment in Europe, which is weighing on cloud workloads and projects. We managed to deliver in Q3 a sustainable growth of 9% like-for-like and 10.1% as reported. Our revenue retention rates remains high globally at 106%, underlying an unchanged churn and a good ARPAC growth, although slightly slower than in previous quarters as explained by Michel. Moving to the next slide to look at business dynamics by region. So as you are very well aware, European macro conditions remain difficult. And as you know, Europe represents a significant part of our revenues. After a good start of the year, we faced a slowing of the momentum in this region with some contracts new renegotiations by our customers and allow us an expected value of new contracts. However, in France, we managed to maintain a double-digit growth in Public and Private Cloud. This was offset by the Webcloud segment and in particular, the historical Telephony and Connectivity subsegments, which brought the overall Q3 growth rate in France to just under 8%. In the rest of Europe, Germany and Eastern Europe continue to drive growth which was 8.6% in the quarter like-for-like, 1 point below Q2. Rest of the World, we saw like-for-like growth accelerate to 11.9% versus 6.9% in Q2. As I commented at the H1 stage, we saw a sharp improvement in U.S. market conditions at the end of the quarter, and this carried through into Q3. We experienced strong momentum in the U.S.A., particularly in the Private Cloud, thanks to our development strategy focused on the cloud migration needs of technology companies. And we witnessed improving trends in APAC compared to previous quarters. I will now hand over to Michel to talk to you about our outlook.

Thanks, Stephanie. So Q3 was in line with our expectations, and we are happy to see continued signs of strength in the U.S., good resilience in Europe and the positive impact as we look at the end of the year and into fiscal year '25 of good trends in product introduction and new customer acquisition. Thanks to this sustainable growth and the short-term trends, we are highly confident in confirming our fiscal year 2024 targets which are as follows: An organic growth between 9% and 10%. We are at 10.1% after months. And keep in mind that Q4 has a tough comparison basis. An adjusted EBITDA margin of more than 37%, which is cautious as we have taken into account the potential negative effect from Broadcom new license costs on our hosted private cloud offering. Recurring CapEx and gross CapEx of 12% to 14% and 21% to 23%, respectively, which are lower than anticipated at the start of the year. A positive unlevered free cash flow on a full year basis as opposed to be just positive in H2, as initially anticipated, which is a direct result of our clear focus on cash generation. Our target for '25 and '26 are unchanged and we are very focused on execution and delivering on our strategic plan with real very strong focus on cash generation while maintaining long-term growth potential. We can now open the line to Q&A.

[Operator Instructions] We will take the first question from line Emmanuel Matot from ODDO.

Emmanuel Matot speaking from ODDO BHF. Three questions, if I may. First, can -- do you think that Q3 should be the low point for organic sales growth? If yes, what will enable OVH to accelerate from the next quarter onwards. Second, you remain a company with a high exposure to France. All current political uncertainties began to wait on your customers' investments for cloud. Should we fear disruptions to your business in the coming months in France? And my last question is about artificial intelligence. Do you think artificial intelligence is raising barriers to entry in favor of hyperscalers? Or is it an opportunity for smaller players, such as OVH to gain market shares in the infrastructure of the [ serious ] market.

Thank you, Emmanuel, for your questions. And we'll take the first question and Michel will answer your second and third question. So indeed, we expect a better Q4 than Q3, as we mentioned during H1. We are still cautious as we navigate through mixed trends. We have very good news in the U.S. And on the other side, we have limited visibility in Europe. To give you a bit more color on the business, the trends we are observing for our different segments in the -- since the few months. So first, in Public Cloud, we have new customers. They are focused on entry range products, so we have a lower average ARPAC for these new customers. And we had a slowdown in ARPAC growth in existing customers mostly in Europe. In Private Cloud, the picture is different. We have customers that are migrating towards high-end servers, and this leads to a sustained increase in ARPAC and a reduced capital intensity. And as for the Webcloud, we're experiencing a positive trend in domain activities. However, it's difficult to extrapolate for the rest of the year. But all in all, we expect a better Q4 than Q3.

Yes. About the second question, it's clear that we don't have a clear visibility of what's going to happen in France politics and what will be the impact on the economy. That's why we have been cautious and we are absolutely convinced that today, we have a very resilient model to be able to confront our positioning even in France. Moreover, we are absolutely convinced that in the current scheme in Europe, the sovereignty points are really arising everywhere in all the elections, and that's our positioning will certainly help OVHcloud to maintain a strong position. Why we -- that's why we are cautious, but we are very confident on our capacity despite the fact that there is a huge uncertainty in terms of politic and also economical impact of the elections in France. About AI, I just want to repeat what we said last time about our positioning. We believe that the market will be not divided, but will be, in fact, in with 2 points, 2 elements. The first one is what we call the training of the large LLMs and also the inference. OVHcloud is really focusing on the second one. Which is a way to help the customers to use artificial intelligence trained systems based on different type of LLMs and to allow them to take the benefit of AI solutions. That's why we have introduced many new GPU instances with, I mean, L4, L40S, A100, H100 depending on the size of the type of AI end points you want to have and that helps. And we see really today already a strong momentum, especially in the mid tech sized company, which are not willing to have training model, which are very, very expensive and which need very large infrastructure. But clearly, which is today a good way for us to resolve some of their use cases they want to introduce in their solutions. And also, we have introduced the AI -- OVHcloud AI Endpoints solutions, which is a way to help the customers to introduce new LLM easily, quickly with the right pricing based on any type of LLM model. So we have introduced Mistral, we have introduced the Facebook Llama, Meta Llama 3. So this is really the way we address the market and we are absolutely convinced today that there is for OVHcloud, despite the fact that some hyperscalers are trying to convince the customer, there is no alternative, that there is a way for the inference to have really cost and price performance capacity, and that's when we demonstrate with a very, very high traction on AI solution that we propose to the market.

We will take the next question from line George Webb from Morgan Stanley.

I've got 2 questions, please. First thing, just coming back on to the France topic. I know you're calling out Europe as a whole has been quite subdued. But sequentially, France was the main area of slowdown in Q3 much more so than Europe ex France. Is there anything specific you're seeing in that market? Or is it just a mix factor? And then secondly, just noting that the Telephony business or even the whole of Webcloud has been a pretty persistent growth drag over time? And how strategic do you see any or all of those activities? Or is there anything you might consider divesting?

So as you know, I will take the first question, and Michel will answer your second question. So as you know, we have a slightly different dynamic between France and the rest of Europe because our Webcloud business is waiting on our France activity first. And we are also quite cautious with the recent discussions that we had with very large customers. So all in, that explains most of the difference in terms of dynamics and the reason why we had this growth in France that is just below 8%.

On the second one, I just want to repeat what we already said about the strategic vision of what we have on the Webcloud and again, in the Webcloud, we have 2 different terminal. One is really the Connectivity and the Telephony, which is mainly in France, where for us, clearly, it's decreasing activity. But for the rest, domain and Webcloud, we are absolutely convinced that this is a fuel to increase, especially the entry-level and small- and medium-sized companies. Why? Because, in fact, they enter the cloud evolution and the cloud migration, starting with simple things like Webcloud. And after they migrate to other more sophisticated solutions, so it's like VPS why not also some of the simple public cloud instances. Moreover, there is a strong market of companies, which are resellers. So companies which are tech companies offering web cloud, offering web design, web agencies and these targets are very interesting because, in fact, most of the time, they want to have a full scope of solutions, including public cloud. That's why we maintain that Webcloud especially for domain and Webcloud, very important strategically for Webcloud to acquire new installed base, especially in the SMEs market.

[Operator Instructions] we will take the next question from line Yann from Gilbert Dupont.

A few questions, please. The first one is on AI. You mentioned in the previous quarter that it was about EUR 7,000. What about this quarter? And then maybe what is the utilization rate, sorry, of GPUs. And then maybe on U.S.A., can you disclose the growth, please?

So for AI, we disclosed in H1 the fact that the AI contributed by 2% to our Public Cloud growth and the impact is similar in Q3. We have a very high utilization rate, and we keep adding new GPUs on a regular basis because we are convinced and we see it in the numbers that it will also fuel the growth in the coming quarters.

About U.S., we do not disclose the U.S. growth specifically because we disclose the rest of the world, but the growth has been very, very good during the last 2 quarters, and we see -- and we are very confident about the perspective for the next quarters. Just to explain where we see the growth. First, as you know, we are fairly dedicated first to the tech segment in the U.S. So that means companies which are doing technology based on our solutions, and we are providing a full set of solutions now in the U.S. gaming companies, streaming companies, software editors, fintech, green tech. And we see that today, our positioning of the fact that we provide price performance solutions and also the fact that we do not touch customer data, and we are completely, I mean, not competing with our customers is something which is resonating today in the U.S. market. And not just the U.S. market is really booming. For us, it's a huge opportunity. The second point, which is a new thing is that now we also see that some mid-and-large companies, and we mentioned Five Guys last quarter. We mentioned also ABC this quarter. I know we're very interested with our enterprise, I mean, solutions, mainly based on managed Kubernetes or managed Nutanix solutions and for us, we see that as also a new market which may be very interesting to address. That's why we are very strong, very confident on our capacity to continue to accelerate our growth in the U.S.

Okay. And then maybe just about the European market with a lot of investment from hyperscalers. What do you think about this, about this competition? Does it change anything for you or not?

I think you know that the hyperscaler are investing a lot, especially in the AI and they've made major investment everywhere in the world. I think for me, it's a positive sign. It is a sense that it shows that the market -- because it's a long-term investment and the latest investment that Microsoft or AWS has announced, will have the products and the solutions will be available only in a few 3 years at most, shows that there is a strong confidence in the market that we are today in different market on a long-term growing market and that's why we believe today that we are in the right market to continue to provide profitable growth for the long term.

We will take the next question from line Adam from Bank of America.

Just one quick one from my side. In the past 2 presentations, I believe you mentioned you were looking to perhaps early address the upcoming maturity wall and the capital structure more broadly. Just wanted to check if there's any update there. You haven't reiterated that statement here from what I can see.

Thank you for your question. So I think we'll refer also to the refinancing of the debt, if I am correct. As we mentioned at H1 and we'll give an update for our full year result, we have a very low leverage is 1.9x in H1 and a lot of available liquidity, EUR 477 million at the end of February. So we're very comfortable. Our debt is maturing on October 2026, and we're starting on working on this refinancing knowing also that we are improving our cash flow profile. So all in, we are very confident in our refinancing project.

We will take the next question from line Vincent Hagan from Stifel. No response from Vincent. There appears no further questions at this time. Thank you.

No questions anymore. So sorry for the interruptions since there is some issues, so sorry about that. So thank you very much for attending our Q3 fiscal year '24 call. As a wrap up during this quarter, we reached EUR 251 million revenue. We showed our business resilience in a very challenging environment with double-digit growth in Public and Private Cloud with very good traction in our AI solutions, our PaaS solutions and in our data sovereignty solutions. During Q3, we also continue our international expansion as illustrated by our strong growth in the U.S. Our good momentum in Germany and Eastern and Central Europe, and operationally, we opened a new data center in Asia, in Sydney and 8 Local Zone and Benjamin explained what is our strategy on Local Zone to be able to have an extension of our addressable market. Finally, we confirm with high confidence for our fiscal year '24 targets and reaffirm our midterm guidance. So thank you very, very much, and have a very good day.

Thank you for joining today's call. You may now disconnect.