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

All right. So we'll go through this. For those of you who do not know us, we'll do a quick introduction to the company. We'll give you a quick update of the market situation and then go into the actual meat of today's presentation, the key developments and financial results of the fourth quarter of 2021. And it will be a bit of a tag between myself and Linda here during the presentation. So again, for those of you who do not know us, we are a Sweden-based IT company. We provide IT infrastructure to large and midsized enterprises across Europe. We serve about 4,000 customers across the -- our footprint, which you can see here on the map, turning over a little bit more than EUR 350 million per year. And we are now 1,100 employees, which has increased in the quarter through the acquisition in Germany that we'll come back to here in the presentation. Obviously, we're operating on a very fast-moving market. It's very much driven by our customers' transformation journeys. Practically all our customers are going through, what we call, a digital transformation. They try to improve their business operations through IT and technology. We believe that the vast majority of that transformation is driven by the value of data. So that could be anything from making better decisions through analysis of data, automating processes, improving manufacturing flows, increasing customer satisfaction, whatever it may be that our customers want to achieve, speed up their application development pace. A lot of that is based on getting value out of all the data they have in the house. And this is obviously an area of expertise for Proact, and it has been since our start almost 30 years ago. So the business driver in the marketplace is very much the digital transformation and drive business innovation through IT. There is a technology trend, which is probably equally important, which is what we call multicloud, meaning that our customers want to use modern cloud architectures to achieve the transformation. That doesn't necessarily mean what we usually call the public cloud, meaning large worldwide hyperscaler providers like Microsoft or Amazon. It could be cloud solutions that they manage in their own data centers, designed in a modern way with scalable and flexible and high-performing architectures. And then the third trend, which is maybe a little bit less [ positive ] is obviously is the threat of cybercrime and cyber attacks. All these 3 trends are important for us and very important for our strategy and very much what we design our strategy around. We believe corona has definitely had an impact on our business. Hopefully, and seemingly, it's fading away finally, but clearly has had some impact in terms of changing IT infrastructure to enable different kinds or different ways of working, a lot of remote working, definitely managing security more actively, both because of the increased threat, but also the change in how people work. So that's another trend that may have been accelerated a little bit here through the pandemic. So we are a specialist. It's very important to us. We want to be extremely good at what we do, which means we do not do everything for our customers. We do the things where we really can add value and be an expert, and we are focusing our expertise around data and information management. Obviously, that means a lot of things, and it's a broad spectrum. We help our customers with their data strategy. We help them store their data in a secure and accessible way. Connectivity, of course, becomes super important. We want to connect the users and processes and different sites to where the data is stored. Protection, as we touched on, making sure that the data is protected. It can be restored in case of failures. So protection is important and ultimately getting value out of that data wherever it is AI, automation, rapid application development. The actual services we provide are listed here in the 4 bars at the bottom here, consulting services, everything from strategic consulting on how to design infrastructure, how to transform the business to installation, implementation, training and even operations of infrastructure. Managed Services. So actually, delivering IT function as a service. So rather than customers owning and managing their own infrastructure, we manage it on their behalf, or we sell them to them as a service, super important and growing area, of course. Third, revenue stream, if you will, a product line is the reselling of hardware and software, our traditional business, if you will. So selling equipment that our customers own and manage. And last but not least, supporting the infrastructure, so making sure that it's always operational and up-to-date and functional as expected. So these are the 4 areas of offerings and also the 4 revenue stream that we are reporting. Clearly, we have a pretty broad value proposition. I'm not going to go through it here. It's very much geared around our customers, of course, and make sure that they are delivering value to our customers and are geared to driving business value to our customers, but it ranges from everything from storage solutions, networking, workspace backup, recovery, security, artificial intelligence solutions. And one important piece that I think I can't stress enough is that we can deliver this in a number of different ways. I think there is a, let's say, perception that we resell equipment and that is definitely true, but we can also deliver this in a number of different ways, definitely depending on what the customer prefers. If they want to run their infrastructure in a public cloud environment, we can handle that. If they want us to run it for them, we could do it. Or if they want to manage themselves, we can do it. So -- and this is what we mean by multicloud. There's a variety of ways to deliver the technology and manage the technology. And most of our customers will live in, what we call, a hybrid world. They will definitely use Microsoft for their office suite and their desktop solutions, but then they still want to store their data in their own data centers to make sure it's in their control and is safe. And all these different variants need to work together, of course. And this is an important part of our value proposition. Good. So that's a little bit about the company. If we're then switching gears to the quarter. I think most of you know this already. It was a quarter that was largely impacted by the semiconductor shortages, which meant that our revenues went down. There are some positives here. We had a good positive decline in our services revenue.

Increase.

Thank you for the clarification, a good increase in our services revenue, which is obviously very important and a key part of our strategy to increase the mix towards services. We did have a record quarter in terms of the signing new contracts for managed cloud solutions, what we here call TCV, total contract value. It reached SEK 177 million in the quarter. So that's the value over the contract period for all the new contracts, which is great. Within acquisition, as I mentioned here in the beginning in Germany, the company called ahd, which will come back to a very strong managed cloud service provider in the Cologne part of Germany. Systems were down mostly then impacted by the fact that towards the middle and second half of Q4 delivery times increased quite drastically from our core vendors. We have been spared, quite frankly, from impact of the semiconductor shortages during a long period of time, but it caught up also in our space here in the fourth quarter. And that also, of course, had an impact on our EBITDA, which as a follow-on from the volume decrease also decreased. So EBITDA is down as a consequence of the shortage of semiconductor and the volume decrease. Just want to talk a little bit more about the semiconductor shortage just to give you a little bit of background, and you know this already. It's a global phenomenon. It's been going on since almost 2 years now. A lot of different root causes to it. Definitely, the pandemic have had impact. Trade conflicts, in particular, between the U.S. and China has had some impact. The big containership that got stuck in the Suez Canal had an impact. Severe weather has had impact. There's been foundries and factories in Texas, in Taiwan and other places that have been closed down due to weather impacts. And all of this has then created a huge backlog of semiconductors. Large industries have been impacted. Some of them definitely long before we did. The automotive industry has obviously been one of the ones that has been talked about the most. There's now some light in the tunnel. We'll see how long this will take. But major manufacturers, including U.S.-based Intel and Taiwan-based TSMC are expecting incremental here during -- incremental improvements during 2022, which is good. Our impact was, as we announced already in December, quite significant in Q4, but very little up until then. Our estimate here is that we had a revenue impact of about SEK 200 million that was then shifted as backlog into 2022. We believe that the situation is the same here in the beginning of 2022. It's not worsen, but it hasn't improved, it's the same. But hopefully then, as mentioned here, incrementally improved during the year. And then just give a little bit of an update or insight into the acquisition. This was done right after we announced the Q3 report in October. So ahd is a fantastic company based out of Cologne -- sorry, I said Cologne, it's in the Dortmund area, apologies, Dortmund area in Germany, which is great. It's a region which is very important, of course, from a business and financial perspective in Germany and a region where we don't have a significant footprint from before. We're bringing in about 120 people, and they are really good in managed cloud services. So they are doing almost half or more than half of the revenue already as managed cloud services, very strong capabilities here. Complementary, targeting the same type of customers, but very small customer overlap. So there's a good opportunity for cross-sell and upsell. They're processes. I mean the way they deliver the services is quite mature, and we're bringing in a company that we can learn from and leverage from in terms of improving our own operations, which is great. And obviously, they will have a positive contribution to both our revenue and our margins. These numbers here have been announced before. We -- the purchase price of about EUR 26 million, was a multiple of 9 on their EBITDA results. So they will be adding roughly EUR 30 million on a yearly basis to our revenue with an EBITDA margin of 10%. So that's a very good contribution to our business, and we're particularly happy that we're making acquisition in Germany, which is one of, if not the largest, IT market in Europe and where we're now effectively doubling our footprint and doubling our market share through this acquisition. And again, a very good strategic fit regionally in the German market. So a couple of other good things or developments in the quarter. Good progress on previous acquisitions, the Cetus acquisition that we did in the U.K. a year before has now been fully integrated and rebranded. So they are now a fully integrated part of the Proact operations in the U.K. We acquired Conoa here in Stockholm in spring of last year, also a very good integration of that company and, in particularly, good progress in both of these businesses in terms of the commercial synergies. And we've actually done customer engagements and business deals during the year that we wouldn't have been able to do without these companies. So it's great to see that we're actually getting the commercial benefits and the strengthening in our offerings through these 2 companies, a good progress. We've announced or we delivered a very exciting infrastructure to Region Vastra Gotaland. So one of the biggest health care public sector organizations in Sweden. It's a collection of municipalities in the western part of Sweden. So a great showcase of our strengthening of our portfolio into the AI space. A number of awards were received in the end of the last year from our core vendors, in particular, Dell. We also received a few from NetApp that was announced earlier and some good recognitions also in terms of our people efforts in terms of being a carrier company of the year in Sweden for the coming year, which is great. Obviously, we are a people company and put a lot of effort in making sure that we can attract and retain very, very strong talent. So good achievement also in some other areas. So just very quick lines on Region Vastra Gotaland or VGR as they shorten themselves. So they have defined -- it's a health care provider and one of the largest employers in Sweden. And again, it's a public sector provider of health care in the region and are now running AI infrastructure to improve their service and health care services, and they're running this on top of a platform that we provided together with some our core partners NetApp and NVIDIA. So a very potent computing platform that enables AI processing of their health care initiatives. And then jump into something completely different. Cybersecurity, as above mentioned, is increasing threat, but it's also an area where we have some very skilled capabilities that are rarely visible. And obviously, this is maybe a set of services that mostly talk about in a negative way. So there was a big incident, a global incident in the quarter of last year, the fourth quarter of last year, which is called the Log4J. It's an utility and open-source utility provided by Apache, an open-source organization that is used in hundreds of products and thousands, if not millions, of systems across the globe. This is not a Proact-specific, but a hugely global used utility. It turns out I had a pretty significant vulnerability in it, which was then announced, if you will, a zero-day vulnerability, meaning that the actual providers of utility didn't know until it was exploited. So it means that everybody had to react after hacker started to exploit. The security hole allowed remote hackers to run code in the systems, including ransomware, relatively easily, and millions of systems probably affected by this. And since we are managing a lot of our own systems and, in particular, then customer systems, of course, this was a big incident. But we are providing security services to our customers, and we managed to handle this in a very, very good way. We applied a large number of technicians to secure then systems that we are either running on behalf of our customers or our customers' own systems. And this is obviously a race against time because it's a zero-day vulnerability. We had to fix and patch and upgrade systems in parallel with attackers exploiting them. But I'm happy to say that we were successful and this severity of this vulnerability on a global basis has now been down greatly significantly, and risks are managed, both globally, but of course, also for Proact and our customers. So a good example, I think, of the security services that we provide to our services and that we maybe speak a little bit too little of considering the importance of it and the increasing threats. So that's a couple of examples and highlights from the quarter in terms of what has happened, including customers and services and otherwise. I'm going to hand over to you, Linda, for the financials.

Thank you, Jonas. So if we start with the first slide, thank you. So highlights for Q4 revenue growth or revenue decline of 4% to SEK 942 million, where systems was declining by 16%, whereas service growing by 17%. This then led to the decrease in adjusted EBITDA of 14% and a margin of 6% and the corresponding decrease in the profit before tax, 26% down to a margin of 4%. So into a little bit of details then. So the revenue growth, 14% decline organically where the acquisitions contributed by 9%. And the acquisitions here include the both ahd, the latest one that has been consolidated for 2 months and then Conoa and Cetus, where we had 2 months of revenues last year and then 3 months this year. No significant currency effects in the quarter. As Jonas mentioned, the TCV or the new cloud services contracts that we closed was SEK 177 million compared to SEK 142 million same quarter last year. Also fourth quarter has been good several years in a row, actually, but also really, really good this year. And then if we go more specifically to the services growth. We're really happy that, that is growing and also growing organically with growth in all of our 3 services streams. Cloud revenue increase of 16%. Here, the majority of the impact is from the acquisition of ahd, but organically, it's a small growth. Support services growth, 8%. The majority of that is organic. Really happy that our core support is appreciated by customers and that we're able to have good rates of support services despite systems not performing. And then consulting services, 31% growth. Here, the acquisition of Conoa that we did earlier in the year, and that is focused on consulting, provided a large part of the growth. But also organically, we've seen good demand over the later part of this year for the types of competencies we have. So in most places also strong growth there. We started in this quarter to talk a little bit more about recurring revenues, just to clarify and be more specific about what parts of our revenues are recurring. So when we talk about recurring revenues here, we add the support services and the cloud services, the managed cloud services. Those are both typically 3-year contracts, up to 5-year contracts with a large proportion of contracted revenues. And that's -- the new graph you see to the right-hand side is the recurring revenues quarterly, individual quarters as well as the 12 months rolling. If we look at that -- in the fourth quarter, the combination here grew by 13%, 3% organically to an annualized level of SEK 1.3 million. And then systems, the decrease as we've talked about, we see a 16% down, of which 24% organically across the board because it was several of our main products affected. It's not a single country, but rather the majority of our systems products. So organic decline by -- you can see, from 33% to 17% in [indiscernible] business units. And as Jonas was saying, we estimate the overall impact to be around SEK 200 million as we communicated earlier. So if we then look at the profitability, of course, impacted by the revenue decline. The gross margin in the quarter was unchanged compared to last year. So we did have some declines in systems margins, which are -- can be a little bit volatile. We get different types of incentives and different types of larger deals that happened between different quarters. Whereas the services part, then we saw an increase in the gross margins. Also the effect of larger services shares that favorable mix had a positive impact. SG&A costs remained low. They were low last year as a result of COVID and cost-cutting measures and even lower this year. So we continue with the smart cost control. Also, we saw that with lower revenues, we have lower commissions and the lower sales. So that also impacted the SG&A costs in this quarter. And then on the bottom line, earnings per share went down due to the decline in EBIT basically. And if we move to the different business units, we'll go through them quickly. Nordics and Baltics. Here, we have Conoa that we acquired in Sweden in [indiscernible]. So the revenue growth -- or decline was 2%, but organically 14%. In the fourth quarter, they did actually contribute also and systems had a quite large system sales relatively. Here, we see the main impact of the decline is the semiconductor shortage where we saw systems revenues declining in all of the countries here. And the EBITDA margin decreasing a little bit on the EBITDA as well, and that's a pure result of the lower revenues. So if we move to next business unit, U.K. here, going down by 19%, 16% organically. Systems down 42%, hopefully more than the organic decline due to a lot of delays also for Cetus that we had for part of the quarter last year. Services, on the other hand, up 8%, of which 4% organically. So that's good. And here, we see strong consulting revenues, in particular, related to some of the both managed cloud services deals we're taking here as well as some of the previous systems deals. We do see in the U.K., the impact also of semiconductor shortages, but also during this year, we continued to see quite long decision cycles. So we've had lower system sales here for a few quarters. EBITDA margin here also going down, but here as well, it is a result of the lower revenues. So if we go to West, to a similar story for all of the business units. Here, systems declined also of 18%. Here, we haven't acquired anything. So the difference between revenue decline absolute and organic is purely currency effects, the small currency effects. We also see a decline in services where we've had low volume of new cloud service contracts during the year that is impacting as well. EBITA here is increasing. For those of you who have followed us, we started to have some issues with profitability here in both due to lower system sales, but also in the services business in Q4 and Q1, initiated an action program where we saw results in -- but starting in Q2, now we're seeing full results of that. So the margin has come back significantly. We're really happy about that. So we have both better gross margins and lower SG&A now than previously. Move then to Central. Here, and that we acquired is, of course, a huge contributor to revenues. It's about the same size as our current German business, so contributing significantly. We see revenue growth here of 23%. Whereas organically, it's declining by 16%. And since ahd is particularly strong in services, it's there where we see the big growth of 76%, and they contributed by SEK 39 million in revenues. The EBITA margin is decreasing a little bit. And EBITA in absolute terms is flat. ahd is contributing positively. SG&A costs are also down, so also contributing positively, but the reduction in revenues is impacting negatively as well as the gross margins that are actually going down a little bit here. Okay. So if we move to next slide, cash flow, positive cash flow in the quarter. We will have the full year in the next slide. We had both -- well, we typically would have positive cash flow from current operations before working capital. For those of you who follow us, it's the change in working capital that fluctuates a lot between the quarters depending on when we get paid for certain big deals and when we pay our suppliers. It's positive here. So with the increase in accounts payables, but also partly offset by an increase in accounts receivables is the major impact. Not that much investments in fixed assets. The acquisition here, of course, of the ahd is one of our big cash outflows and that brought an increase in our bank loans of SEK 222 million that affects it the other way around. And then the other major cash outflow is the repayments of leasing liabilities. So we end the year at a strong cash position of SEK 464 million. As we complete the full year, here, we can see that the change in working capital for the full year is minus SEK 50 million, so a little bit negative. We ended, as you know, last year in really, really strong levels as well. And here, acquisition of subsidiaries is both ahd and Conoa then. Yes, I think that's what we need to talk about here, and then we go to the balance sheet remaining on an equity ratio of 21%. Net debt, when we include leasing liabilities, is SEK 261 million, whereas there was slightly negative or net cash position last year. And of course, the main reason for that difference is the acquisitions that we've been doing. We still have unutilized overdraft facilities of SEK 158 million and an unutilized portion of our updated 3-year revolving credit facility of SEK 116 million plus a strong cash position. Then we added, I believe, within the next slide, 1 slide now that we have the full year on where we ended the full year. I can talk about the financials, and then Jonas, you can mention the other highlights. A little bit of a decline of full year revenues as well, 8% organically, 3% overall. And of course, it's systems revenues here that has the big impact and, in particular, Q4, but we also had earlier in the year, which continued to see impacts of our long decision cycles. Services revenues, on the other hand, did grow over the year by 6% in total with recurring revenues showing 3% growth. This is the consulting revenues, strong growth there 16%. EBITA was going down, and that's purely through the impact of the revenue decline. We did see improving gross margins and organically reducing SG&A. So overall, yes, we have been hit pretty hard from these revenue shortages, would be the main conclusion and underlying profitability, we think is developing well.

I think that's a good summary. Thank you, Linda. And there's other things, of course, that have been going on, which are important to us, and I've only summarized or we have only summarized a few of them here on this slide. First and foremost, we put customers front and center what we do, and it's been great to see that we continue to have a good and high customer satisfaction. We measure it as NPS or Net Promoter Score with a result of 44. So that's a strong and positive sign that we're doing the right things for our customers. We made 2 acquisitions during the year, as you know, Conoa in Sweden in April of last year and then ahd in Germany in October of last year. So we are now, I think, running roughly -- over the past 2 years, we've done 4 acquisitions, which is a good pace for us. Good recognition among both partners but also other type of, let's say, research institutes that are rating Proact highly in a number of our key markets. So we received awards from Dell, NetApp and other institutions that are rating as high-quality providers of IT services and IT solutions. Launched a couple of products during the year, including an important disaster recovery product in what we call a multi-cloud environment. So going back a little bit to what we opened up with here, the importance of being able to protect the data and being able to protect data regardless of whether you have it stored in a public cloud or in your own data centers or with Proact. So we're making sure that our portfolio is capable of handling that typical environment that we see in our customers, meaning they use a number of different cloud options, and we can support over that. We've upgraded our internal operations. We've talked about that a little bit here in the calls that one of the important piece for our long-term strategy is internal process and efficiencies and tooling to just deliver better quality to our customers, but also being able to do it faster and more efficient. And during the year, we moved into a monitoring platform that's based on what's called AI ops or artificial intelligence operations, so really being able to monitor and run our systems with a high degree of intelligence and automation. So those -- the sort of a couple of milestones during the 2021 that has been driving us in the right direction that we wanted to highlight here today. We then look at our goals. Obviously, this year will come out a little bit tougher, and there's no secret that we have had, I think, net negative impact of the pandemic, unfortunately. So growth is declining as we talked about here. EBITA margin is still a couple of points away from our target, and it's very much volume driven, as we mentioned. Net debt over EBITDA is still very strong as we work through our balance sheet here and also the return on capital employed is below target and were both impacted by some of the accounting rules, but obviously, the acquisitions are keeping us below the target here a little bit and will do for some time to come as we continue our acquisition journey. And then last but not least, again, apologies for the incorrect statement here in the beginning of the morning, the correct dividend is SEK 1.5, which is unchanged from last year, and we're right in the upper end of that dividend target that we've communicated a couple of years back that we should have dividends in the 25% to 35% of profit after tax. So still a strong statement, I think, in terms of our view of the future and our financial position. Just to summarize, definitely a tough quarter with the delivery situation, but still some good things that we're very happy with and proud of. Record sales of cloud contracts is one of those very good underlying demand, and we're going into 2022 with a backlog that's significantly higher than a normal year. And again, last but not least, strengthening our position in the German market, I think these are a couple of highlights from the quarter to summarize the presentation. So thank you very much for listening. We'll be opening up for questions. [Operator Instructions]

Fredrik Nilsson from Redeye. I was a bit late into the meeting, unfortunately. So I apologize if you already touched upon this. But I mean, as you mentioned, the cloud intake was very strong. However, you mentioned a big order in the U.K. Could you tell us a bit about the underlying development as well?

Now the underlying development has been good, and we see a good, I think, general market activity and demand and customer activity around cloud deals. So definitely, the U.K. deal helped. It is a significant one, but it's not the only one driving the success in the quarter.

Okay. Also the sales and marketing was quite low. According to me, at least, you mentioned lower commissions, but are there anything else affecting the number as well? I suppose the traveling expenses were still quite limited.

Yes. So obviously, general SG&A is low as it was last year same quarter because of the pandemic, very little travel, very little entertainment, those kinds of things. And then SG&A or commissions and sales costs low because of the lower volume. Those are the main drivers for us. Anything else, Linda?

Then seasonally, we did have some sort of positive vacation effects hit in Q4 versus sort of earlier in the year. So a little bit of sort of -- there's no shift in their cost.

Okay. And one last question from me. I mean you mentioned that the backlog is strong. But what about the components, what's the outlook right now?

Yes. So we did mention this, and apologies that you had some troubles coming into the meeting, Fredrik. Our view right now is that the situation in terms of components and in particular, deliveries from our most important vendors is unchanged compared to Q4 or compared to the second half of Q4, meaning still longer delivery times than normal but not worsened. So equally bad as at the end of Q4. We did speak a little bit here on the call on the general trends in the global situation. And if we look at people like Intel and TSMC, they communicated that they will expect to see incremental improvements during 2022. And I think that's roughly the same view we have that this will improve during the year, not get worsened, but improved during the year. Whether that -- whether we'll see that already here first half or whether we'll see the effect in the second half, we don't have a strong view on that currently. No more questions.

Okay. We're always available if you want to set up one-on-one or have another question.

Absolutely. So thanks for calling in, and feel free to reach out to me or Linda, if you have any further questions. And with that, we wish you a good Thursday. Thanks again, and see you next quarter. Bye-bye.

Thank you. Bye.