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

Ladies and gentlemen, welcome to the OVHcloud Quarter 1 Full Year 2025 Revenue. Today's speaker will be Benjamin Revcolevschi, the CEO; and Stephanie Besnier, the CFO. I now hand over to OVH team to begin today's conference. Thank you.

Yes. Hello, everyone. I'm Benjamin Revcolevschi, the CEO of OVHcloud. So thanks very much for being with us today for our Q1 FY '25 revenue conference call, and we would like to wish you a very Happy New Year for 2025. So let's turn to Slide 3 for the key highlights of our Q1 FY '25. So as key highlights for the Q1 FY '25 publication, we generated EUR 264 million in revenue. We had a solid start of the year with a like-for-like revenue growth of plus 10.1% compared to last year. And this is on track with our FY '25 revenue guidance of 9% to 11%. We also confirm all of our FY '25 guidance. And as you can see on the right-hand side of this slide, this solid first quarter growth of 10.1% is driven by an acceleration in Public Cloud at 15.8% like-for-like growth, a robust performance in Private Cloud at 10.2% like-for-like growth and a high revenue retention rate at 109%, demonstrating strong client stickiness. Finally, we are pleased to announce the success of our public share buyback offer, which was fully subscribed, enabling us to realign our shareholder base with the company's new development phase. So let's move to Slide 4 and the pillars of our new development phase. I wanted to give you an update on our vision for OVHcloud. OVHcloud has succeeded in building up strong core business fundamentals, and we will continue to leverage them to deliver on 2 priorities. First, on the left, we are now focusing on operational efficiency of our fundamentals to grow revenue and to leverage productivity, and this will help us to deliver more predictable and profitable growth. Our second focus is to improve structurally our cash generation. It's critical to our long-term success as it ensures that capacity to continue to invest and innovate. Then we are strengthening 2 of our future revenue growth upsides. First, we'll continue to reinforce our position as a global player in data sovereignty solutions. You know that there are growing concerns around data privacy and security and we are committed to provide our customers with trusted cloud solutions. The second upside is about enhancing our Public Cloud product offering to answer customer growing needs. As an example, we'll continue to strengthen our AI solutions, which are highly demanded by customers. So these 2 priorities and these 2 growth upsides are the pillars of our vision for OVHcloud to deliver on our financial targets. And let's move now to the next slide to highlight business achievements of Q1 FY '25. Indeed, I would like to share with you some of the latest developments that we achieved in Q1 FY '25. Firstly, as you can see on the left-hand side, we are excited to keep developing our AI offerings to provide our customers with the computing power and the solutions they need to build, deploy and manage their AI workloads. To illustrate this, we have taken 2 examples. OVHcloud supported the Digital Services Company, Sopra Steria, in the deployment of its engineering platform by providing GPUs and Platform-as-a-Service, PaaS solutions, including our AI deployed solution. Another example is Jalios, a French player in the digital workplace field, which recently developed its collaborative platform by adding AI tools such as writing assistance, document summarization and the creation of agents based on OVHcloud's AI endpoint solution. Then as you can see on the right-hand side of the slide, to drive international growth and to meet the regional demand, we keep expanding our global footprint. We'll open a new 3-AZ cloud region in Italy, in Milan, by the end of calendar 2025. In this region, we'll offer to our customers a presence in 3 geographically closed data centers, that we call Availability Zones, so that they can benefit from high resilience and low latency between the 3 data centers. And this offering will be developed to fuel Public Cloud growth. In parallel to support also our edge strategy, in Q1, we have continued to open Local Zones across Europe and the United States, bringing now that number to 17. And Local Zones are the small data centers in colocation mode to grow Public Cloud in new geographies with a lower capital intensity while providing low latency services with full control over data resiliency to customers around the world. So you see with these latest developments, we are continuing to deliver in line with our strategic plan to offer innovative offerings to our customers globally. Let me now turn to Slide 6 for a deep dive on each of our business segments, where we will concentrate the presentation on like-for-like figures. Firstly, on the Private Cloud segment, which includes Bare Metal Cloud and Hosted Private Cloud. We have delivered EUR 164.5 million in revenue in Q1 FY '25, which represents 62% of the group's revenue. We delivered a double-digit like-for-like growth at 10.2% compared to last year, fueled mainly by strong demand in the United States. As highlighted on the right-hand side of this slide, in Bare Metal Cloud, the customer acquisition trend remains good, thanks to the ramp-up of the new range of servers launched in Q1 FY 2025 and also a successful digital Black Friday campaign. Geographically, we're seeing different dynamics according to the region. In the United States, Bare Metal Cloud growth is primarily driven by continued high demand from technology companies and a high upsell performance, which is driving ARPAC, the improvement of the ARPAC, the average revenue per active customer. In Europe, we kept seeing infrastructure optimization from our existing customers, leading to slower ARPAC growth than anticipated. And given the cautious economic environment in Europe, we don't anticipate a change to this trend in the rest of the year. Our Hosted Private Cloud business continues to see double-digit growth, thanks to ARPAC increases, benefiting from price effects related to the new pricing for VMware licenses introduced by Broadcom at the start of May 2024. Thus, the growth in Hosted Private Cloud is also due to the strong demand for secure and sovereign offerings in Europe, supported by the ramp-up of a large healthcare contract won in Germany in FY 2024. Moving now to the next slide about Public Cloud. In Q1 FY 2025, the Public Cloud segment reached EUR 50.3 million in revenue or 19% of the group's revenue and grew by plus 15.8% like-for-like, fueled by an increase in ARPAC. As we said in our last publication, we have been focusing on boosting cross-sell opportunities among Public Cloud products for our newly acquired customers and also on improving the user experience for historical customers to fuel upsell and our strategy is paying off with this increase in ARPAC. As highlighted on the right hand of the slide, artificial intelligence, AI, is also fueling Public Cloud growth with our NVIDIA GPUs and our AI solutions. As said previously, thanks to our extensive range of artificial intelligence offerings, we are able to respond to an ever-increasing number of customer use cases in the inference market. This increase in ARPAC is also supported by our enhanced Public Cloud portfolio. We highlight some of these on the slide as, for example, our new Managed Rancher solution for managing and organizing containers in a multi-cloud environment. Also, our Key Management Service, our KMS, enabling cybersecurity. Also, our object storage in the Paris 3-AZ region, allowing high resilience and storage. Finally, the successful savings plan offers, motivating customers to commit to longer-term engagements also contributed to the increase in ARPAC. Moving to the Web Cloud segment on Slide 8. Here, you see that the website -- the Web Cloud segment reached EUR 48.8 million in revenue or 19% of the group's revenue and grew plus 4.4% like-for-like. If we exclude our legacy subsegments, Telephony and Connectivity, growth reached plus 7.4%. This good momentum for Web Cloud this quarter is supported by strong domain subsegment performance. And we are concentrated here on making our products easier for our customers to manage, which also benefits us through better retention. So the growth here has been driven by the geographical rollout of multiyear commitments and an improved user experience through automatic renewals. That concludes our Q1 FY '25 segment performance. And I now hand over to Stephanie for a financial and geographical overview.

Thank you, Benjamin, and hello, everyone. I am Stephanie Besnier, CFO of OVHcloud. Thanks for being with us, and obviously, I start by wishing you a very Happy New Year. As Benjamin said at the beginning, during this first quarter of FY '25, we managed to deliver a solid growth of 10.1% like-for-like, in line with our targets. The performance of Private Cloud, up 10.2% like-for-like in a consistently challenging environment in Europe was solid, particularly given that it was up against the strongest growth quarter of FY '24 when Private Cloud grew almost 15%. The rebound in Public Cloud continues as well. Growth was 230 bps higher than in Q4 '24. And again, on a year-on-year basis, it was up against the strongest comp of the year, which was the 18.9% of Q1 '24. So this is pretty robust. Moving to the next slide to look at the business dynamics by region now. So in France, revenue grew by 8.9%. Public Cloud delivered a like-for-like growth of 15.6%, driven by an increase in ARPAC after a good customer acquisition in FY '24. Private Cloud now increased by 9.9%, still impacted by some customer optimizing their workload. Finally, representing 30% of France business, Web Cloud & Other was driven by a strong domain name dynamics. Let's now look at our international sales, which account for 52% of our revenues. So first, in the rest of Europe, growth reached 8.9% like-for-like in Q1, thanks notably to Central and Eastern Europe. This was helped by the ramp-up of a large healthcare contract won in Germany in FY '24. In the Rest of the World now, we matched the strong Q4 growth with Q1's like-for-like growth of 14.2%. In Private Cloud, we continued to experience a strong momentum in the United States, thanks to our development strategy focused on the cloud migration needs of our technology companies. In addition, we witnessed encouraging traction in Public Cloud following recent rollout of product availability. I will now hand over to Benjamin to talk about our outlook.

Thank you, Stephanie. So let me now talk about our guidance for FY 2025. As Q1 was solidly in line with our expectations, we reconfirm our FY 2025 guidance. We expect FY 2025 like-for-like revenue growth between 9% and 11%. We expect on a full year basis an adjusted EBITDA of circa 40%. On CapEx, for fiscal year 2025, we anticipate total CapEx to be between 30% to 34% of our revenue with a split between recurring CapEx expected between 11% to 13% and growth CapEx expected between 19% to 21% of our revenue. Finally, we expect an unlevered free cash flow above EUR 25 million on a full year basis, improving compared to FY 2024. And before we move to Q&A, I'd like to share with you the results of our share buyback offer. As you know, we announced last October a EUR 350 million share buyback offer. The offer was opened until this Monday, January 6, and we can now share the results. It has been a successful project. We offered to buy back 38.9 million shares, and 47.6 million shares were tendered. On average, it means that 81.7% of the shares tendered will be bought back that's much higher than the minimum 53% we indicated at the launch. The share buyback aim was to realign our shareholder base and it has been successful. The Klaba family remains the core shareholder and will hold 81% of the company. Employees and treasury shares will amount to 1.7%. And the free float, including private equity funds, will be at 17%. These figures are still estimations. We will be able to update our shareholding structure once the threshold crossing will be published by our shareholders. And we can now open the floor to your questions.

[Operator Instructions] We will take the first question from line Toby Ogg from JPMorgan.

And Happy New Year. Just on the Public Cloud growth performance, you cited a few different drivers there, including the momentum of your AI offering and the potential to meet customer needs for inference. Could you give us a sense to how much of the Public Cloud growth is now being driven by AI? And how quickly that specific piece is growing? And then just on the inferencing element of the demand, could you give us some more detail on what the biggest potential inferencing use cases are that you're seeing? And how much of a driver do you expect that to be going forward?

Okay. Thank you for your questions. Indeed, the -- we are -- as you know, as you said, we are positioned in the inference market rather than the training market where the hyperscalers are, and which is very CapEx intensive. And thanks to our extensive range of AI offerings, which are both hardware GPUs, but also software, we are able to respond to an ever-increasing number of customer use cases in the inference market. And so we sell infra and applications. And in the servers, we sell the GPUs. So we have H100, A100, L40S. And in applications, we enable our customers to deploy and exploit the LLMs. So for the inference usage, we provide this data platform, this AI deploy modules, AI training modes and AI endpoints also, with the example that I just mentioned like for the Sopra Steria. So on your questions of the contribution on the Public Cloud growth in Q1, it's around 1.5 points of our growth in the Public Cloud segment. And indeed, these products and solutions -- AI product solutions, they enable indeed the entire Public Cloud segment to grow. And what is important is that there is no AI to that cloud. And AI is indeed pulling all our Public Cloud segment to grow and it feeds also our Kubernetes, our object storage, our databases services. And to the pure inference uses, all the tooling that I mentioned, we see customers asking for NLP usage, text to speech. We see for the translation. We see for video usage. We see this in the different segments. It can be in health usage. It can be marketing tech. So it's -- well, there is a real traction on the inference usage.

We will take the next question from line [ Daniel Cai ] from Citi.

Just quickly, on the regional demand, again, so I understand that U.S. now sees kind of better demand and Europe is remaining constrained. Just going forward now for the year, are you still kind of expecting that Europe will kind of be rather weakish in the first half, but then accelerating? Or do you have now better visibility of how it will shape up throughout the year? And my second question was just on -- given that now, in this quarter, you mentioned that the savings plan and Black Friday campaigns enabled you to amass more customers, do you see some impact on margins regarding those campaigns?

Okay. So I'll take the first, and Stephanie will take the second. On the rest of the year, we confirm our FY '25 guidance. As I mentioned, including our like-for-like growth target between 9% to 11%. And we don't know this -- as we communicated in our FY '24 results, we built this guidance by factoring the growth trend, so the strong demand in the U.S., a successful Hosted Private Cloud offerings despite that the price increases with Broadcom. And indeed, a stabilized environment in Europe even if not yet improving. So 3 months after setting the guidance, we didn't see any significant change in these growth trends to lead us to raise it as Q1 was in line with our estimates. There are still 9 months to go.

And with regard your question on the margin, specifically on the saving plans and the Black Friday, it delivered in line with our expectations. So on that basis, we confirm our targets with regard to the EBITDA margin as well as the rest of the year guidance. So I remind you, it would be around 20%. And on top of the 2 impact that you mentioned, just as a reminder, the levers for the margin improvement for '25 will be also on the COGS and the G&A optimization. As a percentage of revenue, it will keep decreasing. We have -- and we remain very strict on the cost control. And also, we expect to benefit from an impact on the electricity cost. You know that we have a hedging strategy. So we will see the benefit of the price decrease in our '25 margin.

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

Happy New Year to you. 4 question on my side. The first one, can you give us more color about your performance, business performance in December, especially in France, given all the turbulence we are seeing from a political aspect or other economic aspect? That's my first question. Second question, I'm trying to understand the impact -- or to size the impact of long-term engagement that you mentioned in your press release. Does it mean that you recognize part of the contract upfront in terms of revenues? That's my second question. My third question, can you share with us any KPIs or metrics that will help us to understand the success of your Local Zones offerings? Because today, we see the ramp-up in terms of new data center, but we don't have any revenue figure or number of customers or workload or things like that. Anything here that you can share with us would be helpful. And the last one on AI, when do you believe that the full product portfolio of your AI offerings will be in general availability? Because when I look to the current offering of -- around data platform or even high endpoint, it's not yet in general availability, beta or alpha phases. So I was wondering if this 1.5 percentage point incremental growth could become much more when all the [indiscernible] products will be in general availability, and when will they be in general availability?

Okay. So I'll take the first and the -- and third and fourth and Stephanie will take the second. So on the -- you asked for color in December. Indeed, we see December in line with the Q1 trends. So it's according to our expectations. And this is why we could reconfirm and we can reconfirm our guidance for FY '25. The performance in the U.S. remains good. The Public Cloud performance remains good. So that's why we can reconfirm FY '25 guidance. Maybe Stephanie on the long-term engagement.

Yes. Thank you, Derric. So on the long term, the saving plan, if I'm not wrong, you are referring to, we are invoicing on a monthly basis. So we recognized the revenue over the period. You don't have any specific one-off linked to the fact that we have a new contract over a long-term period.

Then on the -- on your third question on the Local Zones. So this is -- we have launched the Local Zones a year ago. It's a progressive rollout. Now we have 17 up and running. This is -- the way we develop the Local Zones is that we capture the feedbacks on each geography. It's a new market. This is for us lever to grow Public Cloud offerings with a low latency, with data resiliency. And we are really interacting with our customers to tune the rights offerings for the right use cases in each of these Local Zones. So it's early to share dynamics or figures on the Local Zones. And on the -- on your fourth question on when is the -- on the full AI products in GA, we have today an extensive range of products. We see these inference use cases growing and will continue to expand that on each quarter. As for our -- the rest of our products and our Public Cloud products, we enhanced the suits of the solution. We continue to resupply the GPU, so the hardware that's below on existing references, but also on the new references. So this is an evolving extension of our product portfolio for artificial intelligence.

We will take the next question from line Hugo Paternoster from Kepler.

And also wishing you a Happy New Year. My first question will be a follow-up on the European visibility that you may have. I understood that so far, it has been delivering in line with your estimate. And just wonder when you build your guidance for the current financial year, what were your hypothesis on the demand in Europe? And yes, I believe what are your expectations for the next quarter? The second question is on the Public Cloud. Namely, could you break down the driver for the ARPAC increase. I believe that you have product enhancements, customer offer and you already mentioned AI product delivering 1.5 percentage points. What are the other drivers? And as a follow-up on that, is how we should view the Q2 performance compared to the Q1, given that the comparative basis will get easier and easier along the year. So how should we view this?

Okay. Thanks for your question. I'll take the first, and Stephanie will take the second and third question. So your questions on Europe. Well, we have as many -- we have limited visibility on the macroeconomic conditions as IT companies in Europe currently remain cautious. For instance, according to a recent Morgan Stanley CIO Survey, the IT budget growth expectations into 2025 is plus 3.5%, and this is still below the pre-COVID average, which was plus 4%. Also, we see that the Digital Services Company in Europe only see a recovery in IT spending from H2 2025. And this timing of the recovery has been postponed several times. So we factored in our FY '25, and also in our long-term guidance, this cautious environment in Europe. Thus, long term, we are fully confident in the cloud market. And there's a lot of opportunities that are ahead of us with AI, with machine learning, with quantum ahead of us.

So on your first question with regard the Public Cloud momentum. So you see that we keep on accelerating. We have now like-for-like growth of 15.8%, so above 15%, and we started from below 13% in Q2 '24. For this quarter, it's mostly fueled by the increase in the ARPAC. What we are doing, we are focusing and boosting the cross-sell opportunities in Public Cloud. So we have our customers starting, for example, with compute. And what we see is that our customers are adding new -- other services, additional services quickly and quicker than what we saw in the previous quarters. So we benefit for the efforts that we did on the acquisition of new customers in '24, and we're able to grow the business with these customers more quickly. And this is driven by sustainable growth trends. The AI-driven demand, we commented before with Benjamin. We have also keep on enriching our offer of Public Cloud. And we have also launched this saving plan, which encourage the customers to commit to the long-term engagement. So all in all, the growth is very much driven also by the cross-sell and upsell on our customers. With regard to your third question on seasonality, I mean, you're right. So first, we deliver in line like you saw in Q1 and in line with what we expected in our guidance. We will indeed have more favorable comparable basis in Q2 and Q3. However, on the other side, we had a strong Q4 in FY '24 particularly because we started to benefit from Broadcom price increases. So all in all, we -- I end up with reminding on the lack of visibility that we have in Europe. So it's a bit too soon to be very precise. Anyway, we confirm the guidance for the full year.

Okay. Got it. And if I may, just a follow-up, it's regarding the guidance that has been maintained. And I would say it's broader question now. In the last publication, the previous one, you mentioned to introduce new initiatives to pursue the journey beyond 2025. And I'd just like to have an update on it, whether it should be new guidance, new figure functioning the guidance or more -- something more precise? Or whether it refers more to product offer and the global footprint expansion you already commented, whether it's on the guidance? Do you prefer to wait to have better visibility on the European momentum? Any color on that might be useful.

Okay. So the -- basically, the initiative indeed that we talked about, we mentioned that the levers are on different aspects. Some indeed on sales and marketing efficiency. Some are more on the optimization of our industrial operations. Some are more on working on our COGS and our G&A and some are also on the working capital. So we are reviewing indeed our costs, applying new strategies to generate revenues and to take the right decisions on the way we allocate capital and the way we prioritize our various revenue streams. So we expect indeed some of the [ cross optimization ] of these strategies to take still a few months. And hence, we'll look and come back to you at precising these initiatives in the coming months.

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

And Happy New Year from my side as well. Just a question on your capital structure and those aspects post the buyback to remind ourselves. Can you just remind me how you're thinking about kind of leverage, leverage reduction through maybe the next 1, 2, 3 years and what your kind of leverage range targets would be? And actually, when we think about 2025, with all of the debt facilities maybe a bit closer lined up, what sort of debt interest costs should we be thinking about for a year on a kind of percentage basis?

Okay. Stephanie will take this question.

Yes. So on the leverage, George, so we are working on the refinancing. What we have communicated is that on a pro forma basis, as of the end of '24, we expect financial leverage as per our documentation below 3x at 2.8x. We remain aligned with our internal financial policy where we want to remain cautious in terms of leverage and to be below 3x. The focus is indeed to progressively reduce this leverage. You remember that we are committed to deliver free cash flow in '26, so that will also contribute on top of the increase of the EBITDA to the deleverage. And clearly, that's the focus of the company.

We will take the next question from line [ Jan Iggy from Gilbert Viewpoint ].

I wish you a Happy New Year too. Two questions, please. The first one is on the VMware price impact. Is it around 3% this quarter on Private Cloud? And the second one around PaaS. Could you give us the current AR?

Yes. So the VMware price increase contribution is around EUR 3 million that's -- has...

Back in Q4.

Back in Q4. And on the -- your second question, so the PaaS contribution for Q1 is EUR 26 million for AR for PaaS.

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

So thank you so much for attending our Q1 FY '25 call. And as a wrap-up, during this strong quarter, we reached EUR 264 million revenue. We started the year on the right foot with a solid like-for-like growth of 10.1% compared to last year. This solid double-digit growth was driven, as you saw, by robust performance across Private Cloud, fueled by the strong demand in the U.S. and Public Cloud fueled by an increase of ARPAC and the good momentum for Web Cloud supported by the dynamics in domain names. Plus globally, we had a high like-for-like net revenue retention rate at 109%, demonstrating strong client stickiness. During Q1, we also continued our international expansion as illustrated by our strong growth in the Rest of the World. Operationally, the availability of 17 Local Zones as of end of November 2024 in major cities around the world, and the announcement of the opening of a new 3-AZ region in Milan by the end of 2022. In parallel, we kept on extending the range of our artificial intelligence solutions and products to meet the growing customer needs in terms of inference. So with this good start of the year, we confirm our FY '25 targets, a growth between 9% to 10%, an adjusted EBITDA margin of circa 40%, CapEx between 30% to 34% of our revenue and an unlevered free cash flow above EUR 25 million, improving compared to the one in FY '24. Yes, a growth between 9% to 11%, sorry, yes. We confirm our FY '25 target, a growth between 9% to 11% for revenue growth. So again, thank you so much for attending our call, and have a great day. Bye.

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