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

All right. Welcome, everyone. I hope you can hear us okay. I'm here together with Noora, our CFO. My name is Jonas Hasselberg, I'm the CEO. We're going to go through the Q4 and full year results for Proact. Just bear with us a second as we get the audio correct. Is everybody muted, though?

Everybody needs to mute. I think that's the challenge.

I will ask our technician to make sure that everybody is muted. Just bear with us again. All right. It sounds better. Okay. So we're going to do this the normal way. We will go through an introduction to Proact, some of you have heard it before. We'll cover the highlights of the quarter as well as the year, and then we'll go a little bit deeper into the financials of the report. But first, a high-level introduction. Most of you know us quite well by now. Proact is now on its 31st year. We are helping customers across Europe with business-critical IT solutions. We deliver infrastructure, IT infrastructure to mission-critical applications for big and midsized enterprises across Europe. You can see our presence across Europe on the map here on the slide. We are just short of SEK 5 billion in turnover and are about 1,100 employees. We've had a good growth in terms of our revenue over the past couple of years. And obviously, EBITA at a record level at SEK 351 million when we look at full year '24. And we'll see on the next slide, we're a highly decentralized business. We are organized in regions where Nordics & Baltics is the largest in terms of turnover, followed by Central and West and U.K., which are then divided into individual countries. But this is the way we run our business. So each region and each country is very close to their customer, quite autonomous in terms of making sure we do the right things in each market. We know the competition. We know the customers. We can adapt our offerings. At the same time, we do a couple of things across the organization in a more standardized, not so much centralized, but standardized way, which is particularly the way we deliver our cloud services. So we do that out of 4 coordinated and harmonized standardized delivery hubs so that all our cloud services are delivered in the same way to all our customers. And this is an important part of our strategy. So we can be close to customers through our decentralized organization, but we get scalability and can bring in a lot of new customers, a lot of cloud engagements without having to necessarily add a lot of cost to that delivery. So that's the way we're organized. We also have, in 2 areas, security operations centers, one in the U.K., one in Germany, which enables us to, across our regions and across our markets, help our customers, making sure that their infrastructure is protected and safe from cyber threats. On the next slide, we'll show the revenue splits. You know this already. We have 4 main revenue streams. Systems is the reseller business of hardware and software, still making up roughly half of our revenues. This is a very traditional quick turnaround business. And this is also the, let's say, a little more volatile part of our business, which we also noticed here in Q4. Sometimes this is -- we have strong quarters, sometimes less strong. But over a rolling 12-months period, this is typically a stable and slowly growing business. Sales cycles, relatively quick; delivery cycles, even quicker, and then obviously immediate invoicing. We keep no inventory, but these are immediate customer-specific deliveries. Support services, an important part and complementary to the systems. This is where we make sure through technical expertise that the systems at our customers are running at full performance. All lights are green. A slightly different business model as these are typically 3-year contracts, but with upfront payment. So from a cash flow perspective, a very good business. And then that revenue is deferred over the period of the contract. Third, and strategically maybe most important, the cloud services of our own. So this is where we deliver roughly the same functionalities of storage, compute, networking, security, backup, disaster recovery, work space, but we deliver it as a service. So our customers do not own and operate the underlying technology. We do it for them and we invoice them on a monthly basis. And last and actually the least, consulting services, anything from advisory around technical solutions, architecture, installations, migration, training, typically time and material engagements as you would expect in the consulting business. We highlight on this slide a couple of areas of expertise that you saw at the bottom here, cybersecurity, cloud-native application development, AI, of course, and Microsoft. These are just examples of areas where we invest in making sure that we have leading competencies and experts that really can help our customers. These are fast-moving technologies, and we need to be at the forefront to be able to help our customers. And these are just 4 examples of areas where we invest in competence development. Then on the next slide, just quickly on the market. It is a fast-moving market and it's a growing market, which is good for us. There's a number of underlying drivers. The digital transformation remain the main driver. And what we mean by this is our customers need and demand and want to improve their own operation, their own offering to their customer, their own decision-making, automating their workflows, whatever it may be, through IT. And this is obviously a big driver across segments and across our geographies. And it's not new. It's been there for a long while, still a strong driver for us. Security, as I mentioned already, very strong driver as well, popping up more and more, unfortunately, as the threat levels are increasing. Sustainability and regulatory issues, now of course, upcoming are increasing security requirements on a lot of public and private companies that needs to be fulfilled in terms of the NIS2 regulations. And then lastly, we're more technology-driven, but the technology pace is very quick. And obviously, our customers want to be at the forefront and leverage the capabilities of cloud and leverage the capabilities of hybrid architectures. And last but not least, an ever-increasing demand for data. All these 5 are driving the demand for our services. And on the next slide, we'll just show schematically how we think that the market is accelerating in front of us. We expected this to pick up already in the second half of 2024. That may not exactly have happened for macro-level reasons, but we still think that this demand is growing when we look forward into 2025 and onwards. So what we do, and you'll see here on the next slide, is really deliver mission-critical solutions to our customers. So what we do for our customers is fundamentally important. If our things do not work, if our services are not up and running, typically, the business of our customers will be standing still. And we've highlighted a couple of examples in the past, including the need to digitize patient records, which is now a regulatory requirement in the U.K. This will help the caretakers to be more efficient in the way they meet their patients, but obviously, security requirements become incredibly important. So here, we're helping hospitals, large hospitals in the U.K. to both make sure that they're more efficient and spending more time with their patients as well as making sure that the patient records are secure and only accessible by the right people. Software as a Service is another very good example where customers are delivering, like Fortnox, usually our favorite example, services over the web to their customers if our infrastructure is not running, the product to their customer is not working. So these are all good examples, and we have a very clear go-to-market model we call the snake here on the right-hand side of the slide, starting with the business understanding of our customers, taking them through the whole journey of transforming their IT, migrating to a modern hybrid cloud architecture and then operating it for them, enabling our customers to spend their time on their own business and their own customers, not on the IT infrastructure, and we do that for them. We have 2 cases that are new for the quarter. We always bring in, of course, new customers every quarter, but these are a little bit extra fun. There's a customer in the U.K. called Teacher Stern. It's a legal firm, relatively large, and they've selected Proact as their new vendor for their infrastructure, and we deliver that through a hybrid cloud platform. And then the other example is a Swedish-based part of Dole, Dole Nordic, which is the big fruit and vegetables company global. They are also running their infrastructure on top of a cloud offering from Proact. So these are both good examples of the relevance of our hybrid cloud portfolio where we then enable our customers to really tailor the infrastructure for their particular needs by using on-prem solutions where they need, the public cloud where they need our cloud services where that makes sense. And these are also, in particular, Dole using our, what we call Container-as-a-Service platform, which enable them to do rapid application development, which is extra interesting. We have done a lot of work. You've seen this with our customers around the offering, the quality of our services, the speed with which we deliver and which has actually been noticeable in an increase in Net Promoter Score, which is great. So we've upped our customer satisfaction 3 points to 62 in terms of Net Promoter Score; a very, very strong score, which is fantastic. So Q4 then, a couple of things. We did go out, as you know, with the profit warning right before Christmas. We expected a decline in both top line and EBITA. That did indeed happen, a little bit less so than we anticipated, which feels good. We had a bit of tailwind across 3 different areas that all aligned on the right side for us. We did close a few more deals at the very end of December that we were able to deliver. So that helped the result. We had a little bit lower cost than we anticipated, which is also good. We're obviously very keen on cost control. And last but not least, at the end of the year, we get some of the rebates from our vendors, and they came in better than we anticipated. So there were 3 different components that all 3 kind of aligned and had positive tailwind in the quarter, which dampened the results a little bit. So a bit of decline in top line, but less so than we anticipated, slightly better EBITA than we anticipated, but also here a decline. However, I guess the good news, a record level intake of new cloud contracts at SEK 224 million. And also when we summarize the year, a record year along many parameters, record revenue, record EBITA, record cloud intake in terms of value of contracts. So a good full year to say the least for Proact. Noora, I'll hand over to you, and you can talk a little bit more deeply about the numbers.

Thank you, Jonas. On this slide, revenue in the fourth quarter reached SEK 1.3 billion, a decrease of 6.7% and 7.2% organically. System sales decreased with SEK 97 million, 12.3% organically, primarily due to a temporary decline, mainly within business units NOBA and Central. Revenue from business -- revenue from services business increased with SEK 4 million and organically 0.1%. Business Unit U.K. continues to demonstrate steady revenue growth, driven by continued positive momentum. On the next slide, annualized recurring revenue amounted to SEK 1.8 billion in the fourth quarter, an increase with 1.9% compared to Q4 2023. New cloud service agreements amounted, as Jonas mentioned, to SEK 224 million in the quarter compared to SEK 197 million last year. This is a new quarterly record, primarily driven by Business Units U.K. and NOBA. A significant number of existing cloud contracts were also renewed during the quarter, highlighting the strong customer satisfaction. Next page, please. Adjusted EBITA amounted to SEK 80 million, a decrease of 12% compared to the same period previous year, mainly due to lower sales in the systems business. Business Units Nordic & Baltics stands out this quarter with an EBITA increase of SEK 20.5 million. Further to cash flow and net cash position on the next slide. Our net cash position in the end of the quarter landed at SEK 330 million compared to SEK 80 million at year-end 2023. Our strong financial performance has enabled us both share buybacks and dividend during the year, still leaving us in a strong financial position at year-end. Some more cash flow on the next slide. Strategic efficiencies and focus on the service business has driven strong cash flow development. Cash flow from operating activities amounted to SEK 207 million, while total cash flow for the quarter reached SEK 152 million, an increase from SEK 135 million in the same period last year. The quarter was impacted by a slight increase in working capital, mostly due to timing effects. Now some details from our business units, starting with Nordic & Baltics on the next slide. Revenues landed at SEK 717 million in the quarter. EBITA increased with 39.6% to SEK 72 million, resulting to an EBITA margin of 10.1% being above the group target of 8%. Business Unit Nordic & Baltics Nordic continues to deliver stable results in the fourth quarter. Further to Business Unit U.K. In the U.K., revenue increased with 5.9% to SEK 174 million. The increase is driven by good system sales. EBITA declined to SEK 3 million, corresponding to an EBITA margin of 1.9% due to revenue mix shift leading to lower gross margin. On the next slide, Business Unit West. Revenue in Business Unit West decreased with 5.6% and landed in at SEK 198 million. EBITA decreased from last year's SEK 13 million to SEK 4 million this year, an EBITA margin of 2%. Revenue and EBITA both declined due to lower systems and services revenue during this quarter. And lastly, Business Unit Central on this slide. Revenue decreased to SEK 210 million in the quarter, mainly due to lower system sales. EBITA landed at SEK 6 million, corresponding to an EBITA margin of 2.8%. Both EBITA and EBITA margin decreased mainly due to lower system sales and integration costs for previously acquired businesses. On the next slide, our financial targets. In the quarter, we experienced organic decline of 7.2%. Looking at total growth for the full year, we still have a way to go to reaching our target of 5% of organic growth and additional 5% growth via acquisitions, but we haven't made any acquisitions during a slow M&A period in the market. EBITA margin in the quarter was 6.7% and last 12 months sum to 7.2%. We are closing in on the long-term target of 8%. As I previously mentioned, we are actually in a net cash position, meaning that we are well below the set level of leverage of 2x. Return on capital employed is at 19.7% for last 12 months, just below the target, which is 20%. And this concludes the financial overview of the fourth quarter. Back to you, Jonas, for some final comments.

Thank you, Noora. Yes, I think we are, in general, quite positive about the market. The demand is still good there in the marketplace. And we communicated in the profit warning before Christmas that the decline in systems is temporary. We still believe that is the situation, which is good. So we're looking positively to 2025. I do remind everyone, we had a very strong Q1 in terms of gross profit and gross margins last year. So the comparables are tough. But overall, good and positive outlook for '25 where we think that organic growth is back in the books. Incredibly strong balance sheet, as Noora just mentioned. So we are very active on the acquisition side as well. And we may have glossed over it, but with a strong position, the Board will recommend an increase in dividend from SEK 2 to SEK 2.4 in -- to the AGM here later in May. So that will be a bit of a good increase in the dividend back to our investors. So with that, thank you so much. We will open up for questions.

[Operator Instructions] So go ahead, Daniel.

I start off with a question where you ended on the gross margin. You have said or told us to be a bit cautious to extrapolate the strong one here, but now you report 24% again in Q4. And last year in Q1, it was above 25%, obviously. But do you see that you have leveled up in terms of gross margin at least a little bit ahead of the 22%-ish we have been historically?

A little bit. So gross margin is an important lever for us, as you know, and it's a couple of things and we talked about quite some time. One is the shift to services where we do have a higher gross margin than for the systems business and then getting scale out of our delivery -- the cloud services delivery, which we talked about. A lot of work has been done to standardize and automate and make our delivery capabilities more efficient. So yes, you do see the effect of that. I think the only caveat maybe that I'll highlight, and it's not a huge one, but Nordics is obviously running at a very strong gross margin and also a very strong EBITA margin, they're at over 10% in this quarter. That may be a little bit tough for the long term. We are well above 8%, which is great. We can show now that we can run the business over 8%. They may not be able to run at this high level consistently. And the main reason for that would be, I would think, an increase in sales costs, which doesn't hit gross margins as much as it hits, of course, bottom line.

Yes, I see. I see. And then the second one, on regional development, you walked through Q4 numbers here a bit. West and Central were down organic year-over-year. How should we think about 2025 in terms of the regions? What's your kind of different outlooks there?

I mean I think we're seeing growth in all regions at a slightly different pace. We have good momentum already in the U.K. We think we're going to see Central and West also pick up. For the full year, they were a little bit better than in the quarter. They were also impacted by, in particular Central, by the temporary decline in systems. But I think we -- there is growth in all our markets. We've said this many times before that Germany may be the toughest market right now for macro levels, but we still think there's growth opportunities also in Central.

Okay. And then product-wise, do you have any partnerships or collaborations you think will be more important in 2025 or maybe '26, like any suppliers that gained lots of ground in recent market development with AI or cybersecurity that is worth highlighting?

I don't think there will be a huge mix when we look at our total mix. But one thing that we do see, and I think we mentioned this also before, but we talked a lot about AI over the last 2 years or so and that customers would originally start thinking around, as I would call it, maybe prototyping, experimenting is a better word in the public cloud. We do see now people investing in their own infrastructure, so NVIDIA-based, high-performance compute platforms, either through a systems deal or even through cloud services from ourselves. So there is that little pendulum that we've talked about that people start bringing some of this AI compute power back home because it's cheaper or safer or in better control is starting to happen at a slow pace. So that will be interesting to see for 2025, the increase of AI compute platforms.

Okay, makes sense. And then finally, on the cost side, you said it came in a bit lower than you anticipated in mid-December. Anything we should be careful to extrapolate into Q1? Are there any like nonrecurring cost reductions in Q4 that we should not extrapolate or so?

No, I think overall, we're running at a tight cost level, and it showed its benefits at the end of the year. Nothing extraordinary in the quarter that you can -- that you should subtract or adjust for. I think we're coming into the year at a good cost level.

Yes, I see. And then if I may, on M&A as well, I mean you have lots of financial headroom at least. Do you think -- is the organization and balance sheet ready for a larger acquisition? Or should we expect like the size as we have seen historically?

I mean it's a tricky one. We would like to do larger because it's easier in many ways. I think the amount of work we put into a transaction is roughly the same for a smallish versus a larger. So it's more bang for buck to do a larger acquisition. To some degree, it's a little bit more stable, maybe a little bit less risk on one parameter at least, but there are fewer targets of larger size. So we're looking across the board from -- I'll just kind of round off, but order of magnitude, turnover of SEK 100 million up to, let's say, SEK 1 billion or above. But in all fairness, there's more targets at the lower end of that spectrum. [Operator Instructions] Erik Larsson, go ahead.

I'm from SEB, FYI. I just want to follow up on M&A. So what's usually the main reason when you look at acquisitions, maybe you're approaching a deal and then it falls through? What's the main reason for not reaching an agreement usually?

There's been 2 reasons that are the dominant: valuation, where we don't meet on the valuation. We saw that in particular maybe during 2023, I think there was a lot of -- and a lot of these companies we're looking at are founder-owned and founder-led. So they have a bit of an emotional attachment to their companies, which is fully understandable. And they come in from a low interest rate kind of period into a period where we saw inflation and high interest rates, which meant that their view on the valuation wasn't fully aligned with ours. So we saw that a couple of times where we couldn't meet. And then the second one, which I find a little bit more interesting is that we, in a couple of cases, have noticed that our cultures are not fully compatible. And it's one of those things that we spend a lot of time on, make sure that these target companies would also fit within Proact and vice versa that we can work together in a great way. We do want to integrate these companies into our local operations, get the teams to work very closely together, and that means they also need to like working with each other. So we do quite a bit of culture due diligence as part of the process. And there have been a couple of cases where we realized in the process that this may not actually work as well as we would like. Those would be the 2 main reasons.

Okay. Yes. I had a follow-up on sort of the main challenges with integration. And I guess it sounds like culture and those types of things might be the...

Yes, there's one more. If we look at now, we spent an incredible amount during the last year on finalizing the integration of a company in Germany we acquired a few years ago called ahd. And there's a third component there in terms of the integration work. They also have or had now, before they were integrated, a portfolio of cloud services, which means they have their own processes and their own portfolio and their own underlying IT tooling, the systems to deliver those cloud services. It's not getting better, is it? And that integration was difficult. Is it gone? Almost. So in terms of integration challenges, it is difficult when they have a high degree of cloud portfolio, cloud processes and underlying tooling. The good news is we finalized that integration here over the Christmas time. So all of the portfolio, all of the tooling, all of the customers have now been migrated into the Proact tooling, and we've lifted the Proact capabilities to a high level with the help of ahd. But that's a tough amount of work, tough challenge, but definitely doable. Anybody else? Yes, [ Neil ], go ahead.

Just a couple of follow-on questions. In December, you referenced obviously a slightly softer systems business, but also continued weakness in Germany. Is there any chance you could just give us an update on the German market conditions?

I think the German market condition remain the most challenging in Europe for all the known reasons of their overall economic situation on a macro level. I still think there's a bit of growth there. But if we compare our 4 regions, the growth rate is the lowest we expect in Germany versus the rest of the regions. And it's probably the highest in the Nordics, maybe followed by West. So if I would rank the growth -- the expected growth rates here over the next year or so, I think Nordics is probably the highest, followed by West, followed by U.K. and then Germany with the slowest growth rates, but still a little bit of growth. So I think the opportunity is still there for us to have a bit of growth also in Germany.

Okay. And just to clarify, on the systems business, was it primarily a volume issue? Or was there some price pressure? And if those -- if that situation is recovering, are both volumes and price recovering? Or is it sort of...

It was a volume issue only, and it happens every now and then. It is -- some of these deals are very large. They can be in the tens of millions of Swedish krona or many millions of euros, sometimes up to EUR 10 million. So these are big deals. The sales cycles are relatively short. And as I mentioned in the beginning, we customize the systems specifically for the customer, and we ship them with relatively short notice. So there's no inventory or anything else. So we have quarters where we come in a little bit better than we expect, and we have quarters where we come in a little bit short. Usually, we look at the systems business over a rolling 12-month period. It gives us a better feel than individual quarters. So Q4, you should look at it as a low-volume quarter on a -- one of those volatile quarters that happens every now then.

Okay. And then final question, which is a much longer-term strategic question. Obviously, the margins outside of the Nordics, the larger Nordics region are at a sort of a lower level. One presumes that scale has something to do with that. How should we think about those margins over the long term as revenues naturally do build in those markets and how quickly can they rise?

No, we're -- our ambition is to not only run the whole company at over 8% of EBITA, but each of the regions at 8% EBITA. And we think that's definitely doable. There's not -- there is some scale in the fact that we want to shift more to cloud services. And yes, we want to grow quicker in cloud services than anything else. But we don't have to -- it's not like we have to double the businesses and of the regions to get there. So this is within reach, within our planning horizon. So shifting to cloud, continue all that work we've done to be even more efficient and standardized in delivering our cloud services and accelerate the sales a little bit, those are the main drivers to achieve 8% in all our regions, and we believe it's doable. Good. [Operator Instructions] Great. If no more questions, thank you so much for listening. We will be back for our Q1 report, which is May 6. Until then, have a great time. Thank you again for dialing in and for listening. Thanks so much. Take care.