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

Hi, everyone, and welcome to our Q2 report presentation. My name is Christopher Ramset, and I am Investor Relations and Communications Manager here at Proact. With me today are Magnus Lonn, President and CEO; and Asa Regen Jansson, CFO, who will walk you through an introduction to Proact followed by a quarterly update, financials and lastly, our closing remarks. [Operator Instructions] With that, I hand over to you, Magnus.

Thanks, Christopher, and welcome, everyone, and it's glad to see that we have a bunch of dedicated investors and shareholders on the meeting here. So as Christopher said, I will walk through a short introduction of product and what we are doing and how we are earning our money. And then, of course, we will, after that, into our quarterly numbers. and then also will guide us through, and then we will end up with questions and so forth. So Proact, we are tech company that has been around for 30-plus years and is founded in Sweden. Throughout the year, we have really specialized what we are doing. We are super good and great in something that everyone is needed these days. We are working with protecting data and helping our customers to store data. That is our core business and focus what we started the company go with 30-plus years and what we are still doing. And over the years, we, of course, have expanded this wheel, but we remain really solid in that. And if you think about this, this is exactly what is happening now with a global AI scale out and things like that. This is the core of what we're doing and the sort of essence of product Today, we are operating in 12 different European countries. You can see them on the collar for map here. And our sort of offering. I will go into that a little bit more, is part of that we are doing in system sales, and then we have a lot of recurring revenue coming from our services. You also see in the graph here that we are one of a growth journey, both from a top line, but also our results -- and this is something that we have been doing good for the last year and something we will focus even more going forward. And as you see in the picture, down to the left there, for us, it doesn't really matter where the data is. We are true experts in handling if data is in our data centers. if it's at a customer data center or if it's at one of the hyperscalers. So we are really into data. That is what Proact really, really good at. So if you take the next slide, Christophe. So when it comes to our revenue and how we earn our result is that roughly half of our business comes from system sales, as we call it. That means in practice that we are working super close with our customer in guiding, advising them on how they should build and create critical infrastructure, in practice that could be storage from example, Net up Odell. It can be an NVIDIA GPU that should be part of an AI solution it could be a backup solution and this is something that we are really, really working tight with our customers and are advising them. And the solutions that we have provided, it's more related to enterprise and large companies, and it's part of the critical infrastructure that is needed. On everything we sell. We also have the expertise that we can provide our own support, meaning that if something breaks, then we have our own staff that is helping the customer to get it up and running again. This is our -- what we call our support service. The good thing with the support service is that it's off a long contract. It's often 3 to 5-year it's upfront payment, and we are there and have a close relationship with the customer throughout this. And this is also some of the key things for us a product that we are building long customer relationship. There is one thing also I forgot to mention around our system business and that is that given that we are working with larger customers and we do revenue recognition when we have delivered the stuff our system business can vary from quarter-to-quarter. So when EvaluateProAct and our system business, I think it's super important to see it over a longer term because sometimes a system deal can be recognized in the quarter or a few days after. So it can be a little bit variance. Also, as I said in the beginning, everything we sell, we can also provide that as a service to our customer. And this is what we call our managed cloud service. This is a key area for us because this is recurring revenue. We are focusing a lot around this one because -- and I will come back to that when it comes to memory prices and things like that in the market. We see this as an area where we see continued good growth and good momentum in. And I always say this we would be not doing anything unless we had really great consultants that are out helping our customers with really high competence level. So for us, the combination of all of these 4 revenue streams are often in close connection to each other, and they are strengthening each other and that also is a good way for us to be very close to our customer and help them. So if you take the next slide, Chistopher. So if you look into the customer base that we have here at Proact and if you take one step back, is that the solution and the problem that we are helping our customer to solve is generic because as the world have developed today, I can't come up with any company out there that doesn't have an IT system or a core critical infrastructure as a key part of their business model. Therefore, our solution and the sort of the spread of our customer is generic. From a risk perspective, I think this is a really strong position for Proact because we are not dependent on any specific sector. We you're operating in many sectors, and that also creates a sort of robustness when it comes to our performance. The key thing for us, and that I also said that it often starts with our support and building long customer relationship is that we have customers that are very satisfied in what we are doing, and they are really valuing our competence. And I think that is a key thing for building a company and being really good at it and foremost, also be able to sell and get value out of what we are doing, and that is that you should be focusing on solving the complex and hard problems that our customer is focusing upon. And that is what we are doing on a day-to-day basis. So the next slide Christopher. So if you zoom out a little bit and you look into the trends, I think you all on this call are well aware about the global AI scale-out that is happening. Data center and creating the ability for companies to grow and handle their critical infrastructure. It's a trend that has been ongoing for a while, and I think that is something that will continue many years to come. And this is Proact's core business. So we are really well positioning here. Another thing that has actually been accelerating, and this is also coming a lot from the U.S. and also how the macro politic environment has developed over the years is also the demand for severenity and also making sure that our customer owns the data and that they are certain about where the data is stored and that they can sort of making sure that it doesn't spread or someone else can turn off their business because that, as I said before, critical data is a key thing for our customer and becoming more and more relevant to build a robust environment. So this is a trend that we are working with, and we see more and more. And then in general, that amount is increasing. We, as individual and companies are generating more and more data. And if you have data, that's the sort of the foundation to be and creating value out of AI because if you don't have good data and if you don't have control of your data, then it's a really hard thing for an AI to create value out of it. And then the fifth trend that is unfortunately becoming more and more relevant is the security and cybercrime resilience. Given that we are becoming more and more digitalized, a lot of unfriendly entities and also criminals are doing a lot to get hold of company's data to destroy and do ransomware attacks and things like that. And therefore, helping our customers protect and far most building an environment where they can restore the data I would say that has become more and more relevant. So all of these sort of 5 trends is something that we will be seeing coming more and more and that we will talk about. And Proact as a company, this is what we can and what we are doing and what we are helping with our customer. So this is a sort of a short overview of us as a company. to get a little bit more sense of what we're doing. So with that said, I think we should move into our quarterly result and what we have achieved and released earlier today. So as you saw, Q2 for us was a really great quarter. We delivered a growth of almost over 10%, and we also increased our profit with almost up to 40%, resulting in EBITDA of SEK 105 million. Also I will guide us through the details in a short while, but I just want to zoom in on some highlights before that. you that has been following us for a while know that we -- if you look into the graph here, we have had some long-term down fall in our business units outside the Nordic region. I am very satisfied with that me and my management team and the work that we have done throughout the spring with a cost efficiency program now actually are paying off. So we see the second quarter in a row where both Central and West are moving in the right directions. U.K. has done a fantastic job and also moving in the right direction. And the Nordic region continues to deliver on a very, very high level. And that is really satisfying to see that we are all business units are back where it should be. And as you can see in the graph, we have definitely more work to do, and that is something that we are really large shape focused upon and will continue. But we are -- in this quarter, I can definitely say that we are on the right track. Also, in the quarter, we signed up a strategic partnership with True -- this is part of our strategy that's becoming more and more trustworthy and also provide other solutions when it comes to cybersecurity to our customers. A key thing, and we probably will dig into that a little bit later also in the closing and the question is the memory prices. As you all know, due to the global AI scale out, there has been a shortage of memory components. The impact of that is that through the last year, accelerating the second half of the year, the memory prices has increased and becoming more and more expensive. During the quarter, we have seen that this continues. And what has maybe a little bit more accelerated than I thought was that now delivery time of this component is becoming more and more longer. And that is due to the fact that there is such a high demand in the market. So even if all the factories are producing memory ships as fast as they can, the demand is much higher and then that then that creates this impact of longer delivery times. During Q1, when we presented that, my best projection was that the memory prices should be at least a good part in 2027. Today, I would say that I'm more convinced that the memory prices will be -- continue be on a high level at least for the full of 2027. And that is that the sort of the demand is still there and increasing. And we have also seen that a lot of customers really realize this and also then continue and buy because we, as I said before, this is critical infrastructure. And it's not easy to sort of not doing these investments because then you can put your company at risk. Another key thing is that we have been working a lot with our strategy. We have come far on that. We have we'll announce also after the summer that we will have a whole Capital Markets Day I will get back with the dates. But now I think we are in a position where we also have done our homework and that we have a clear view of what we are going to focus upon going forward. So I think all in all, with that said, I think we deliver on a good quarter according to our expectation and also plans. So if you take the next step -- next slide here, Christopher, This is also just further on to see also how our 4 business units are delivering -- as I mentioned in the beginning, the Nordic region are doing really great work. I'm really pleased to see that the team are really continuing and deliver on a high level. As I mentioned, U.K., looking back and with the work that Jamie and the team have done, it's really going in the right direction. Worth mentioning is that U.K. on a system side had a weaker quarter, but still, the team managed to sort of continue boost the margin in the right direction. And maybe what I'm most satisfied with is that both our business, both West and Central are back to positive numbers. And if you compare the same quarter last year, I think the work that we have done there is really going in the right direction. But as I said, we are by far ready. And as you can see, we are not at all on the levels where we expect to be. But still the trend is there, and that also gives us a sign that we have been doing the right actions. Now it's more about doing more of that and then continue to be persistent to made it even better going forward. So I think with that sort of opening in a sort of high-level summary, I am very glad to hand it over to you, Asa.

Thank you, Magnus, and good afternoon, everyone. So let's look a bit closer at the numbers for the quarter, starting with total revenue. Total revenue amounted to SEK 1.286 billion, which is an increase of 9.8% versus last year. driven by continuous strong underlying demand and with contribution from our acquisitions. The organic growth amounted to 8.1%. Where the contribution from the Danish business Consular that was acquired in December last year and the effect from the divestment of the business consultancy business in the Netherlands, had a net impact of 2.1%, slightly offset by a smaller adverse currency effect of 0.4%. And if we change slide and look into the distribution across the business segments. Systems sales grew by 16.1% year-on-year and 12.2% on a like-for-like basis to SEK 744 million. The development was driven by demand and higher prices, although somewhat halted by the extended delivery times that Magnus talked about. System revenues grew by 9.6% to SEK 174 million on the back of the growth in system sales. Managed Cloud Services declined by 0.8% on reported as well as like-for-like basis. where the growth in NPA and Central was offset by a decline in U.K. and West business units, driven by churn from last year then primarily. Consulting Services declined by 2.4%, following the divestment of the business consultancy business in April and increased by 3% on an organic basis. Total service revenues amounted to SEK 541 million, which is an increase of 2.1% and 3% on an organic basis and made up for and made up 42% of the total revenue in the quarter. New cloud contracts of SEK 217 million were signed in the quarter, an increase of plus 50% compared to the second quarter last year and are expected to start generating revenue later in the fall or later in '26. So moving on to the top line development in the business units. Revenue increased in all business units, except for U.K., driven by the system by system sales, together with growth in Nobaand Central Services. The weaker revenue development in the U.K. is largely explained by lower systems revenue or systems volumes following price increases but also an effect from last year's customer churn in Managed Services, as mentioned earlier. Recurring revenue then. I think if we shift slide, thank you, Christopher. Recurring revenue amounted to SEK 444 million in the second quarter which is an increase of 3%, driven by customer support. Annualized recurring revenue increased to SEK 1.774 billion in the quarter, which is equal to 37% of the total revenue. So I think it's time to move over to the results in the quarter. Adjusted EBITDA amounted to SEK 105 million, which is an increase of 38% year-on-year and equal to an EBITDA margin of 8.2%. The solid earnings development is, as Magnus described earlier, a combination of increased sales and the effects from cost reductions and improved efficiencies which is reflected both in gross profit and in general and administration costs. Business unit, Western Central have improved profitability significantly compared to last year, now hold the cost structure better adapted to the business, which is a result of last year's efforts and efficiency program. So looking at -- moving on to the capital allocation, how we have utilized the funds that we generate. Started at a net cash position last year and by the end of Q2 2025 of SEK 100 million. Cash flow from operations last 12 months have contributed with close to SEK 450 million, which has been put in use through M&A. The Danish business mentioned in last fall or last December. A dividend payout in Q2 '26 and shares have been bought back to a value of close to SEK 140 million during the last 12 months. Amortization of leasing amounts to SEK 121 million over the last 12 months. And this takes us to a net debt position of minus SEK 12 million by the year end of Q2, which then includes leasing debts. Total cash amounted to SEK 475 million by the end of Q2 to be compared with SEK 571 million by the end of Q2 25 million. And Proact has loan facilities totaling approximately SEK 800 million and consisting then of EUR 20 million term loan, which is currently fully utilized and [ SEK ] 600 million revolving credit facility which is currently not in use. So I think that was it from me for this presentation. And now back to Magnus for some closing remarks.

Thank you -- so to wrapping up that this before we start up with some questions. So is that -- I mean, we had a good quarter. and we go both organic and also top line and bottom line. So that's really satisfying. And also that we have done what we said and that the thing that we have done has also resulted in the expected result. And I'm really also pleased with the work that has been done both in West and Central business units. We have a lot more work to do there, but we are on the right path here. And at the same time that we continue to sort of invest in U.K. and the Nordic area, where we have a really good and strong position. So I think we're also doing the right things here. As I also mentioned there the memory and also the delivery times the best prediction is that this will remain for a longer term. at least during the whole next year. Delivery times will be longer and longer. And as you recall in the beginning, we have a lot of system sales, and that means that this can vary a little bit throughout the quarter. As I said, during Q1, we expect that end of the year might be a little bit weaker. I still think that Q4 might be a little bit impacted, but it's really hard to sort of predict around this because it depends very much on the delivery times and things like that. And this is something that we will get back to during the coming quarter. But overall, -- and that is super important is that the underlying sort of demand and the business is actually going in the right direction. -- of course, due to that we are spread around different geographical the different countries might have different, let's say, positions and the challenges in the market. But overall, the thing that Proact is working with that securing data, making sure that customer can scale out, that's a very good spot to be in. And I'm also very glad that we are not AI company delivering software because -- the thing that we are doing will not be replaced with an AI algorithm because we are enabling this -- and this is something that also every company is looking to. So with that, I think I'm really keen on providing you with more updates and far most also to talk more around this with all of you on Capital Market Day later on this year where we can do a more deep dive into our focus and priorities for the coming years. So with that said, I would like to thank all of our great employees, customers and also shareholder for a fantastic good work during first half of 2026, and we are -- all of us at Proact are looking forward to the second half of the year here. So with that said, I think let's open up for some questions, comments.

Daniel, please Donofromb.

Yes. Perfect. Magnus. I start off with question on system sales and Q3 comments here. Can you quantify approximately how the longer lead times affected system sales in Q2 and potentially how much of sales were pushed into Q3? And should we therefore expect a higher or a lower organic growth rate in system sales in Q3...

It's a really good question, Daniel, and I will give you a generic example. So 1 year ago, the delivery times was counted in weeks. As of today, the delivery times of standard components, especially related to memory components. -- are in the length of months. So -- and of course, that creates this where I also try to guide it a little bit difficult to sort of project what will happen in the coming quarters here. But with that said, -- we also know that we have a good backlog with us into Q3. And as I said, the demand from our customers is still there, meaning that we will continue to sell -- but then the big question is that when the system sales will be delivered. So exactly how this will play out, we need to come back to. But I hope and I also feel certain around that with the sort of the underlying fundamental here is there. And also with this said, as always, when you have a situation like this in the market, we and also our customer looking into other ways to sort of handling this. Some of it is that we are looking into more services and utilizing our existing infrastructure and things like that. And -- but yes, so it's a good question, and it's -- I think -- this is something -- and this I also want to be super clear upon. This is a global issue. This is not related to Sweden and our or anything. This is a global issue. Every company on earth are having the same sort of challenges when it comes to memory components and stuff like that as it looks right now.

Okay. That's clear. And you mentioned the backlog here, but you don't report order intake or order book. But if we compare the backlog today than the 1 that you had a year ago when you closed Q2 -- can you say something about how much larger or higher it is today?

I think part of it is true on here. We actually try to guide around our managed cloud service, where we present our TCV, total contract value. And there we -- as Asa mentioned earlier, during this quarter, we had a really good strong sales when it comes to our services, and they grew with 50% compared to last year. When it comes to our system sales, we do not guide that externally. And one of the reasons for it is also due to this delivery times. So I think -- because that is also important to understand even if we have a committed delivery date sometimes from our vendors, that might change. And then we also, as a company, need to adapt and handle that. So right now, it's a moving target, I would say.

Okay. Fair enough. On the 12% organic growth in system sales in Q2, what's kind of the price and volume components in there -- are they both like positive here? Or is prices up more than that, the volume is negative? Or how is the mix?

It's skewed towards prices. Prices are the main driver would say. But as also, as mentioned by Magnus, the underlying demand is there, but the main driver currently and also with the extended lead times of the delivery at this price.

And also, I think to put a more flavor on that is that -- this is a challenge for every company out there because think about this, if you are a CIO running a company and then suddenly, the price for your infrastructure and plan upgrades are becoming super much more expensive. That is a challenge. So we are working a lot with our customer to see how it can help and navigate and find other ways around this. But as I said also earlier, you can't avoid doing investment because as soon as you do that, then you expose your company for risk running critical infrastructure on old hardware is not a good and sound way of running a business. And we are working with sometimes country super secure systems and it could be health care and it could be bank and so forth. And you don't want to take risks when it comes to that.

I can understand. A couple of more questions. One on the cloud order intake you mentioned -- when I look at first half of it versus last year first half, it's up 40%. So it seems to be strong. Is this a positive trend shift you see in the market? Or is it more a result of comps and a few large orders impacting this?

An for us creating and generating more recurring revenue is a priority. And that comes from our support business and it comes from our managed cloud service business. And this is something that we will continue to focus upon. My strong belief is that if you focus upon something, then over time, you also become better on it, and that goes with us as well. Then of course, when it comes to sales, there will be variation between quarters and things like that. But overall, I think focus and also that we have a good and strong offering for it. And also think about this that given that it's sometimes hard to -- and also prices has gone up a lot when it comes to memory components and also gives and stuff like that, then buying it as a service could be an attractive alternative also for some of our customers. So we are really trying to meet our customers where they are so that we can work in finding the most an optimal solution for them.

Okay. Okay. That's interesting. And related to that, service sales they grew 3% organically here in Q2. Is that sustainable going forward? Or are there any backlash risks here related to a potential lower growth rate in system ahead? Or how should we think about the services revenues as a whole.