Proact IT Group AB (publ) (PACT) Earnings Call Transcript & Summary

Welcome, everyone, and thanks for joining our call. My name is Jonas Hasselberg. I'm the CEO of Proact, I also have Linda with me on the Teams call here, our CFO. And we're going to go through the Q4 results for 2020 for Proact. So we'll get right into it. The agenda looks a little bit like this. We'll talk through, of course, just a very, very brief introduction to Proact for those of you that are new here today and don't know us as well. We'll go through the quarter, a couple of key developments during the last 3 months or the last quarter of 2020 and then, of course, go a little bit deeper into the financial numbers of the year. So quick introduction. Most of you know us, we are almost 30 years old or at least 26, soon 27 years old. We're an IT company in Europe that deliver IT solution, infrastructure solutions to large and medium-sized customers. We're just pushing that 4,000 limit now of customers. For those of you who have seen this slide before, remember, it used to say 3,500, but we are increasing the number of customers every day, which is, of course, great. We're, with today's result, pushing SEK 3.6 billion in turnover. And we are just above 1,000 employees across the region, and you can see the countries here on the map where we are present. Just wanted to talk a little bit about where we see the market going. And obviously, in particular now in the context of the Corona pandemic, we do see things both changing and new trends coming up and maybe even strengthening some existing trends. So if we look at the long-term agenda for our customers, the CIOs of our customers. Roughly the same trends we've seen for quite some time, of course. IT is very, very much driven around delivering business value and drive innovation with our customers. We see obviously a lot of focus to be flexible and quick to be able to have infrastructure. And by infrastructure, we mean truly basic IT solutions that are the core of our customers' IT solutions, storage solutions for large amount of data, compute platforms for applications and automation solutions, and obviously, networking to be able to distribute the data and distribute the applications across data centers or across office facilities and locations. Multicloud is a key trend. And by multicloud, we mean the fact that most of these infrastructure solutions are built with a cloud architecture, but it doesn't mean that they are all a public cloud solution. This could still be something that the customer hosts internally in their own data centers, could be something that we, Proact, run on our customers' behalf or it could be in one of the large so-called hyperscalers, global public cloud providers or more typically, frankly, a mix of all those variants, and this is where we believe the opportunity for Proact also lies, being able to be a really skilled expert in multicloud technologies. We obviously see a lot of things around COVID primarily, frankly, an acceleration. It doesn't mean that COVID has been all positive for us, but we definitely see a lot of acceleration when it comes to digitalization. Also brings some threats, particularly around security and reliability of the platforms and some challenges, of course, in enabling a workforce suddenly to be working remotely or working in new and different ways. So overall, we do think that the trends are positive and are sustainable for the long term. Short term, Corona is still impacting us, of course. And we'll see how long that remains, and we'll come back to that later in the presentation. A little bit more maybe data points that are more concrete. On the left-hand side here, you see data on how what we call systems market is developing. So this is the market for hardware and software solutions that we're selling into customers. And you see that the predictions here is that there was a pretty significant drop in our main markets between '19 and '20 driven by the pandemic, but a decent growth going forward. We believe that there is a single-digit growth in our core markets. So again, storage solutions, network solutions and compute platforms across our key markets. And then on the right-hand side, a higher growth rate for cloud services or managed services, where we manage the IT infrastructure on behalf of our customers and the customer buy it as a service. In general, roughly 8% market growth in our core markets, slightly different depending on infrastructure versus security versus network. But on average, a good growth rate going forward here for us in our core business, which is good. Obviously, we've talked about this a couple of times, but it's always worth reminding ourselves. Our promise to our customers is that we want to be helping our customers to store data, connect their users to the data, protect and secure our customers' data and make sure that they ultimately, of course, get value out of their data. And it's going to be different for different customers. Some of them do big data analytics and artificial intelligence solutions on their data, other customers use it to automate their business processes or production flows. Yet other customers use their data to improve customer experience or improve their commercial offering to the customers. But ultimately, a lot of the digital transformations we're seeing in our customers is driven and very much at the core of using the value of data, and this is where Proact has always been a specialist and continue to be a specialist. And just want to highlight 2 very quick customer examples where we think that value proposition of ours is really coming across from the last year. You've heard us talk about this before, Fortnox is a Swedish software-as-a-service provider of ERP or financial system for midsized companies, and they redid their platform for delivering their own software as a service, a mission-critical platform where we were lucky enough to be trusted to provide a platform to them. It's a great example of that multicloud environment. They have multiple data centers, some of their infrastructure they manage themselves, some that we manage, it's distributed to make sure that it's redundant and secure. And it will enable Fortnox to continue a very innovative journey for them in terms of having a platform that's scalable and flexible and allows rapid development of their own offering. So a very, very good example where we deliver our full value proposition of systems, managed services, consulting expertise and also technical support. So our full portfolio is at play when we look at Fortnox. And the other example that we have highlighted during the past year is the U.K. health service of blood and transplant. So the authorities in the U.K. that are handling blood donors and transplant donors, where they did a refresh of the data center infrastructure, make sure that they could run a cloud architecture, but hosted in their own data environments, and Proact, we're trusted to do all the design, deliver the full solution to their data centers and provide support to make sure that this also mission-critical platform is up and running at the customers expectations and meeting their business challenges that they were addressing. So good, 2 really good examples of customers from last year where our value proposition is coming to play in a very good way. So if I look at the quarter then in terms of results, there are a couple of things we are very proud of, and we think the result, in general, is strong. And obviously, we saw a bit of a rebound in our cloud contracts. So those were 2 things we highlighted. The adjusted EBITA increased 36% to SEK 66 million and we improved our EBITA margin to 6.8%, which is good. We're making a step in that direction where we have put our targets for. We have a long-term target of reaching 8% EBITA. So this was a good step in that direction. We've talked a lot about during 2020, the challenges of closing cloud contracts. So long-term contracts with our customers during the pandemic, not being able to meet our customers, not being able to go deep into technical understanding of customer needs, but also our ability to deliver on them has been a little bit prohibited during the year. But we saw a bit of a release of a pent-up demand towards the end of the year, and we closed contract value of SEK 142 million. So -- and I think you all remember, contract value is the sum of the value over the length of the contract. So typically, our customers commit to order amount to 3 years of a service delivery. It can be longer, sometimes, can be shorter sometimes. But that value then adds up to SEK 142 million for the full length of those contracts. Cloud revenue in general went up in the quarter by 9%, which is good; and services, a little bit less 3%. And and as you may have seen then, we're proposing increased dividend or our Board is proposing an increased dividend of SEK 4.5 per share, up from SEK 2.50 last year and SEK 4.15 in the year before that. A little bit still challenges, of course. There's never a quarter where there's not things we could be even happier with. Revenue was pretty much flat. In the quarter, up over the full year, but flat in the quarter. And then COVID continues to be an uncertainty, and we'll come back to that a little bit here during the presentation. A couple of things just to highlight in terms of what happened during the quarter and more operationally, if I may say so. We acquired a company, which you already heard about when we released the Q3 report, Cetus Solutions, based out of Manchester in the U.K. That acquisition was successful, and the integration has been initiated already, and we're very happy with the progress of that already. That's going quick and good. A couple of great achievements in terms of our partners. We're very close to our partners, and it's very strategically important to us to work with our partners. So we were up leveled a little bit with NVIDIA, who are market leaders in providing compute platforms for big data analytics and artificial intelligence. We also got good recognition from Dell and NetApp, both of which are, of course, big partners and vendors of ours. We launched a couple of new products in the last quarter, PHC, abbreviation for Proact Hybrid Cloud. Our hybrid cloud platform has been updated and relaunched and we're also piloting a new networking solution, which is called software-defined wide area network with customers across our properties, which is also an exciting and very and futuristic is maybe a strong word, but a future-proof product that will strengthen our portfolio. And last but not least, we've done a lot of good progress also with the integration of PeopleWare. PeopleWare is now fully rebranded to Proact and the teams are integrated fully, so that we have now one operating unit in the Netherlands and in Belgium. We're providing the full combined portfolio to our joint customer base. So combined customer base, combined portfolio and one single team that are addressing that market. So good, good progress across the board here in Q4. With that, let me hand over to Linda to talk through our numbers a little bit.

Thank you, Jonas. So first, the highlights slide. And I think Jonas has mentioned most of these revenues in the quarter fairly flat, where systems is going down a little bit and services growing. Adjusted EBITA up significantly and the margin at 6.8%. The adjusted profit before tax also up 58%, so even more. And the margin there at 5.5%. So now we will go through a little bit of the details here. So first, revenues, again, a decline of 1%. If we split it out organically, i.e., we adjust -- we take out the acquisitions, which is PeopleWare and Cetus and also just for currency effects. Organically, it's the same decline. So we have quite a lot of negative currency effects in the quarter that are impacting. Full year, the growth is 7%. And here, organically, it's up slightly, 1% adjusted for these acquisitions and FX rate. So we see that there is an impact from COVID, where we're not managing to get the type of growth fully that we expect and that we're hoping that the market will show going forward. If we dive a little bit into the services growth, it was 3% organically, then adjusted for FX and acquisitions, 4%. So it's slightly higher, and the services share for the full year is 40%. In Q4, it's slightly lower, but that's -- as you can see on the right-hand side, we can see that the systems sales, the dark blue bars, they are a lot more seasonal. We see a typically strong strong Q4s and Q2s. So systems, then, yes, declining by 3% that's exactly the same decline we see organically, cloud revenues growth of 9%. The organic growth is 7%. So we're happy that the contracts we have closed historically are getting us to growth. You can see on the right-hand side, the bottom graph that the individual quarters, the cloud services revenues are fairly flat. And we see that, that is a result of the lower amount of contracts we closed earlier in the year. So as Jonas said, we're happy to see that in Q4, we managed to close quite a significant amount so that the full year amount is decline of about 3% from last year. So that's giving some hope for next year. Good. If we go to the next slide and go to the margins. We can see on the right-hand side, the adjusted EBITA is on a record level this quarter and the 12 months rolling, the red line, is also increasing. Underlying, if we go into the analysis of that, we see that the gross margin is declining a little bit, in particular, in services. That's obviously something we follow a lot. We don't see any underlying major trends impacting, it's more of these things that happen depending on what deals we have and what's happening in the market. So the big impact on the adjusted EBITA is SG&A costs, where they are reducing for comparable units and currency adjusted 18% quarter-over-quarter. We see that the cost savings program that we launched earlier this year has been concluded successfully. So we see the effect of that in the SG&A. We do see also that SG&A costs are impacted quite a lot by lower travel and sales-related costs due to COVID-19. So part of these SG&A cost reductions we don't think are sustainable although we don't expect travel to get back to the levels that were before COVID. Also, if we look at the total SG&A costs and not the adjusted ones, the restructuring costs that we had in Q4 last year were quite a lot higher than -- but we didn't have any restructuring costs in the quarter this year. We had some one-off costs related to the acquisition of Cetus only. And then the bottom line, we can see that the EPS, profit per share, is also increasing, also at very, very good levels in Q4. And the reason, of course, is primarily the adjusted EBITA increase, although the financial net was also slightly better in Q4 this year than last year. Okay. So then we jump into the different business units. And just a quick summary of different developments there. Nordics, our biggest segment or business unit, we see was fairly flat quarter-over-quarter. They had a strong Q4 last year and managed to have an equally strong, on the revenue level, quarter this year. Services growing a little bit. Systems down a little bit. Here, we have a business unit where the EBITA margin is actually decreasing in the quarter. And that's -- well, primarily, they had a very, very strong Q4 last year with high gross margins for specific deals. So overall, the 6.5% EBITA margin is still a good margin. And also here, as for all business units, we see the reduction of SG&A cost that is impacting positively. Business unit U.K. here is then where we have, on the right hand, numbers here. Cetus is included from November 1. So the revenue growth of 12% is to a large extent attributed to Cetus. FX effects are pretty big in U.K., the pound versus SEK has had quite an impact. But organically then adjusted for both Cetus and the FX effect, we see growth of 4%. The systems growth is 11% organically, 30% with Cetus and services then declining slightly, both with Cetus and without the FX adjusted. If we look at the EBITA margin, here, we see a significant increase from Q4 last year, which was pretty weak. Here, we see the SG&A cost, of course, coming through as well as Cetus and the growth contributing positive. We then move to the next business unit. It's West. Here, we have PeopleWare, which was acquired in Q4 last year. The quarter-over-quarter, the effect of PeopleWare is basically in both numbers. So the total numbers include PeopleWare as well. Here, we do have quite significant revenue decline of 8%, particularly in systems, declining by 27%. We have seen in certain industries, of course, that are heavily impacted by COVID that as their revenues dropped dramatically, they also reduced spending with us. So that is impacting. EBITA margin is increasing slightly quarter-over-quarter. However, if we look at the trend during this year, it's a fairly weak margin. We see, of course, now the -- we see that -- I lost my train of thought. So we see a reduction of SG&A cost here as everywhere else. However, the revenue decline is impacting the EBITA. And also, we see that the integration costs for PeopleWare, as we went into quite hectic phase in Q4, are impacting gross margins in particular because that's where part of the costs have come. So that's why this quarter is not as good as the previous quarters. When it comes to Germany, that was one of the reasons for the low performance in 2019, that's still on track. So it's still developing positively. Then lastly, we go to our smallest business unit, East. Here, also quite a significant revenue decline of 23%. The biggest part of that is systems, 32%. Here, it's a small business unit. So individual deals can impact a lot. And we saw that the fourth quarter of last year had some bigger deals for the business unit. And that this year, they had a little bit more difficulties closing those deals, in particular, due to COVID-19. Very strong development in EBITA margins, however. The deals that they did close were high-margin deals to a large extent. And also here, we have the reduced SG&A cost, of course. Then if we go to the cash flow, strong cash flow in the quarter and cash flow from current operations of SEK 266 million, of which SEK 175 million due to changes in working capital. So we're happy about that. And those of you who follow our cash flow, the working capital is where we do see swings between quarters due to both individual deals and the type of deals we do in individual quarters. Investments in fixed assets, SEK 42 million of which Proact Finance, which is our financing company that finances then customers. So that's a large part of our investments, was SEK 40 million. We paid for a part of -- a major part of the Cetus acquisition in the quarter, and net of their cash, that payment was SEK 45 million. Then cash flow from financing activities, the biggest part is the leasing liabilities repayments that end up here with IFRS 16. Then in terms of bank loans and overdraft facilities, small change in bank loans here. With the strong cash development, we were able to pay for most of the -- or Cetus acquisition with our own cash flow actually. And then we did the payment of the dividend in the quarter, and we had the deferred purchase payment for PeopleWare here. So overall, that resulted in a change in liquid funds of SEK 90 million and ended the quarter at a very strong cash position of SEK 168 million. So if we go to the next one, similar story, this is the full year, also positive cash flow from current operations and positive working capital of SEK 100 million approximately. Investment activities here, SEK 150 million of the fixed assets investments, Proact Finance here made up approximately half. And here, we also have the acquisition of Cetus, of course. From financial activities, the biggest part here again is the leasing liabilities that we paid of SEK 133 million. Then we have the next slide, a quick look at the balance sheet. Equity ratio of 21%. The net cash position after leasing liabilities is SEK 22 million, strong. We also have about SEK 200 million in overdraft facilities that is unused, as well as our 3-year revolving credit facility, which the bank loan here, we have SEK 138 million unused there. So quite a strong financial position. And the next slide is just a recap of our financial goals and how we're trending towards those. And based on, when we calculate the rolling 12 months, sales growth, we want to grow more than 10% as a combination of organic and acquired growth. We ended up at 7% for the year, 8% if we exclude FX effect. EBITA margin, the target there is 8%. We're increasing. So 6%, we are getting closer every year. The net debt to EBITA, we want to be below 2. Here, we have a net cash position. So we're obviously quite a far away from that. Return on capital employed. We want to be over 25%. We ended the year at 17%. Here, we do see that the IFRS 16 is impacting negatively. And of course, acquisitions also build up on capital employed. And our dividend and the policy we have is to pay out 25% to 35% of profit after taxes with the proposal of SEK 4.5 per share that corresponds to 31%. So well within our target range. Then to summarize, Jonas.

Yes, thank you, Linda. I think the main conclusions from the quarter is on the slide here. We're happy with the a record EBITA result, both in the quarter and for the full year. We're happy to see that we could recover some of the cloud contracts in the last quarter. Part of that is due to a bit of a relaxation of COVID restrictions during the fall. So as soon as restrictions are eased off, we saw a little bit of an easier opportunity to close deals with our customers and then obviously, the acquisition of Cetus in the quarter. We still see the pandemic to be creating uncertainty. And obviously, a lot of countries have gone back to strict lockdowns towards the end of the quarter and going into 2021, which creates uncertainty also for us here for the next at least few months ahead of us. But overall, a good quarter, and we're happy with the strong results. With that, let's open up for questions. [Operator Instructions]

Fredrik, you're up first.

Fredrik Nilsson from Redeye here. Can you hear me?

We hear you well.

You had a solid rebound in the intake of cloud contracts, is it reasonable to assume that the intake is back to a healthy level? Or do you expect the pandemic to have a negative effect going forward as well?

I think it's reasonable to see that the intake is impacted by the restrictions of the pandemic. So when the restrictions are easing off, we see it's easier for us to engage with customers and the willingness to invest is a little bit more positive. And then when restrictions are increasing, we do see the challenges coming back. So I think, we'll see a bit of a bumpy ride until we can put COVID behind us.

Okay. So despite the quite strong number in cloud intake, you still had a negative impact, you believe, during the fourth quarter?