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Ladies and gentlemen, thank you for standing by, and welcome to the Q1 interim management statement conference call. [Operator Instructions] I must advise that this conference is being recorded today, Tuesday, 28th of April 2020. I would now like to hand the conference over to your first speaker today, Thomas Honoré. Thank you. Please go ahead, sir.
Thank you very much, Brian. My name is Thomas, and I'm the CEO and President of Columbus. I'm here today with Hans Henrik, who is our Corporate CFO. Let's go to Page #4, where we will start the presentation. We will start today's presentation by looking at the highlights of the first quarter 2020. Due to the extraordinary situation related to the COVID-19 virus, we will cover the impact related to this. Hans Henrik will then cover the income statement, and then we will return to our financial value drivers and our geographical and business segments. Afterwards, we will cover our expectations for 2020 and our long-term guidance. And finally, we will open for a Q&A session, as Brian just said. I will now go to Slide #5 regarding the highlights of Q1 2020. Columbus came off to a good start of the year with revenue growth of 6%. However, in the beginning of March, the global outbreak of COVID-19 started to influence our business, which has impacted the results negatively for Q1. Revenue grew by 6%, amounting to DKK 510 million, which was driven by growth in recurring revenue, where especially Cloud and Columbus Care delivered growth. Recurrent revenue now constitutes 23% of total revenue, which is a satisfactory level. EBITDA decreased by 12%, amounting to DKK 53 million, primarily due to a lower efficiency caused by 190 new full-time employees, and thus, a staff cost increase more than service revenue. In addition, EBITDA is negatively affected by an increase in bad debt provision and COVID-19 impact.In general, we saw good progress across Columbus' business units during the first 2 months of the year where the majority of our business units delivered growth, especially our Columbus Care and Dynamics in Sweden stood out with very strong revenue growth. With the COVID-19 outbreak in the beginning of March, we started seeing our customers holding back investments due to a temporary production of sales decrease or even a shutdown of production. Due to this scenario, we expect to see a substantial short-term negative impact on customer demand, which has already started to materialize in some of our markets. We foresee a challenging 2020 due to the uncertainty caused by the coronavirus. However, we are also fully focused on adapting our business and commercial activities to the changing situation while maintaining our ability to serve our customers in the best possible way. Next slide, please. Due to the current market uncertainty caused by the coronavirus, we expect a negative impact on our business and financial performance in the coming quarters. In order to address the short-term uncertainty, we have initiated a business continuity plan. The purpose is to mitigate risk, keep our business in good health and, at the same time, having full attention on the well-being of our employees and customers during this challenging period. The business continuity plan constitutes initiatives such as capacity adjustments across the business and closely monitoring of resource allocation while increasing global sourcing. We have also applied different COVID-19 stimuli packages to minimize the business impact. As announced earlier, the Executive Board and the Board of Directors have reduced salaries by 30% for the rest of 2020, and we are executing a global hiring freeze, among other things. In order to push sales, we have launched a range of new services, which help our customers operate in this critical situation, and we are running digital marketing lead generation campaigns in all business units. As a global digitization company, we are used to working remotely, and we have broad experience serving our customers digitally. We experienced very positive and productive interaction with customers and employees, and we have adjusted 100% to working remotely. We can see that this global health crisis will lead to a intensified demand for digitization, and we expect that demand will pick up, and we are ready to serve our customers' digitalization needs and help them with a strengthened starting point after COVID-19. So as you can hear, we are fully focused on adapting our business and commercial activities to the changing situation while maintaining to serve our customers in the best way possible. Columbus has a strong financial position to withstand a period with turbulence. The group balance sheet amounts to DKK 1.6 billion, and the equity is DKK 659 million. I will now hand over the conference to Hans Henrik, who will cover the income statement. Next slide, please.
Thank you, Thomas. And as Thomas said, we had a growth of 6%. Organic growth is 2%, which is isolated for the acquisition of Advania Business Solutions in Norway. EBITDA decreased by 12% to DKK 53 million, mainly due to an increase in staff expenses and other external costs. The increase in staff cost is caused by increase in the 190 full-time employees compared to first quarter last year. The increased number of employees is part of our growth strategy. However, the onboarding of new consultants has caused a lower chargeability, and the close down of a number of societies caused by COVID has also led to a slightly lower chargeability in the last 3 weeks of March. Other external cost increased by 25% and is primarily affected by an increase in provisions for bad debt, and the increase in provision for bad debt is primarily related to customer engagement in U.K. and U.S. Furthermore, Columbus has had additional costs to software licenses due to the increased number of employees. Financial expenses decreased by 42% and is primarily affected by the fluctuation of exchange rates and less amortization of contingent considerations compared to last year. So let's go to Slide 8 where Thomas will take us through our financial value drivers.
Thank you, Henrik. I will now present the financial value driver and how we performed in Q1 2020. Please let's go to Slide #9. Our services business is showing positive progress with 4% growth. Organic growth is 2%, constituting DKK 397 million. The improvement is mainly driven by the increase in Columbus Care services and a general progress in the services business. Within customer work, chargeable hours showed a decrease of 4 percentage points from 56% to 52%. The decrease is primarily caused by a ramp-up of productive people and the adjustment to working setup in March and the postponement or cancellation of projects due to the COVID-19 situation. In Q1, we launched a cloud factory initiative where we are conducting assessment and migrate more large customers to the cloud, which is seeing good traction. In general, we saw good progress in the services business in Q1. Next slide, please. Columbus Software is in line with last year with a revenue of DKK 22 million. We saw a significant growth in cloud software, which grew by 39%, a very strong progress. However, sales of Columbus licenses declined by 23%, and subscription declined by 6%. The main driver is the cloud conversion where existing and new customers moved their core applications to the evergreen cloud environment. So let's go to the next slide, recurring revenue. Recurring revenue increased by 12%, increasing from 22% to 23% of Columbus' total revenue. The progress is mainly driven by strong growth in Columbus Care contract, which grew by 26%, as well as an increase in total cloud revenue by 51%. We consider the results satisfactory. This was the reporting on our financial value drivers. I will now hand the conference back towards Henrik, who will present the segments.
Thank you, Thomas, and let's start with -- go through Western Europe on Slide #13. Revenue grew by 8%, driven by most of the business units in Western Europe delivering satisfactory growth where especially Dynamics Sweden and Columbus Care Sweden and also Columbus Norway showed good progress. Western Europe is positively affected by the acquisition of Advania Solutions, which we acquired in January. Excluding this acquisition, the organic growth was 3%. Recurring revenue grew by 8% and corresponded to 18% of total revenue. EBITDA decreased by 10% to DKK 46 million, which is, again, mainly due to the ramp-up of new consultants, the COVID-19 impact, adapting to remote working and a higher provision for bad debt. Thanks to our teams in Western Europe. So now we are on Eastern Europe, Slide #14. In Eastern Europe, revenue increased by 13%. The revenue growth is driven by Russia and Estonia. Columbus Russia grew by 24%, driven by an increase in the service business in general. Columbus Lithuania decreased by 3%, and Columbus Estonia grew by 9%. EBITDA declined by 22%. The decrease is primarily due to a tough competitive marketplace, which has put pressure on market prices in both Lithuania and Estonia, causing a decrease in hourly rates. The decline in EBITDA is also impacted by the COVID-19 situation. So next slide to North America on Slide 15. Our U.S. business had a difficult year in 2019, which is expected to continue into 2020. In Q3, a turnaround process was initiated with our new CEO, and the turnaround is in progress. However, with COVID-19, the market has slowed down, and therefore, we do not expect a turnaround in 2020. Revenue declined by 9%, and EBITDA declined by 1%. We believe that we are on the right path. However, recovery will take longer time due to the COVID-19. Thanks to our teams in the U.S. So now to Columbus Software on Slide 16. Columbus Software business had a good first quarter with 11% revenue growth. The growth is mainly due to an increase in Columbus Cloud revenue, which grew by 53%; and services, which grew by 28%. The conversion to cloud continues, which it means that existing but especially new customers increasingly move their core applications to evergreen cloud environments. The cloud conversion affects the sale of licenses and subscription negatively, and they will continue to decrease as cloud increases. Within our software portfolio, the main driver is our horizontal software portfolio, such as Business Integration suite and Security and Compliance Studio. Revenue is negatively affected by some lost deals with rental and lease due to the COVID-19 situation end of March. As the manufacturing segment is affected by the COVID-19, the sale of ADM suite has also decreased. EBITDA increased by 13% due to increase in the services business, which is generated by some big rental projects with good utilization. Thanks to our software team. And I'll now hand back the conference to Thomas, who will take -- or address our thinking on the guidance.
Thank you. As stated earlier, the first 2 months of 2020 showed a general growth in our business with financial performance in line with our expectations. Now realities have changed radically. Due to the current market uncertainty caused by the coronavirus, we expect a negative impact on our business and financial performance in the coming quarters. Given the rapid day-to-day development in our main markets, we are currently unable to accurately assess the magnitude of this impact, including the duration of the contraction. We, therefore, are not able to give an accurate guidance to 2020 as well as our long-term guidance until we have a better insight into the impact on our business. As the situation normalizes, we will come back with further information about guidance and expectations. This completes the presentation, and we will now be open for questions. So I'm handing over the conference to you, Brian, as our operator.
[Operator Instructions] And your first question comes from the line of André Thormann from ABG.
Starting with the demand effect from COVID-19, I mean, can you elaborate a bit on which sectors you're primarily seeing hit and which services is primarily hit in the current situation?
Okay. Thank you, and thank you for asking questions here, André, appreciate your participation. So we could see that our retail business is hit hard. On the other hand, our e-commerce business is positively affected by this, or the impact is lower. We don't see any substantial changes in our manufacturing business. So retail, down; e-commerce, up; food, up; manufacturing, unchanged.
Okay. Food, up, yes. All right, cool. And then in terms of services, is there anything worth noticing there? I mean is there some consultancy services which are harder hit than others, et cetera?
No.
Okay. So the decline in terms of services is equally spread among the services?
It is, yes.
All right. And then in terms of -- I mean, you said that the first 2 weeks of March saw this 10% decline in revenue. Was that the same picture you saw in the 2 last weeks of March?
Actually, we did not see -- say that it -- revenue declined by 10% in the 2 first weeks. What we said was that the negative impact in production in terms of hours dropped by 10%, 9% to 10%. So there's a slight difference. Of course, you can use it for a good proxy of the activity but not exactly translate it to revenue because revenue is very different in our different geographies.
Okay. But was it also -- was it the same effect you saw in the 2 last weeks of March?
It was -- let me just see here.
I need to understand the question precisely. Can you repeat the question?
Just, I mean, this decline on 9% to 10%, as you mentioned, for the first 2 weeks of March when you reported Q4, was that the same effect that you saw in the last 2 weeks of March? Or was it intensified in any way?
I think it was more -- we were -- when we closed the annual report, we were so close to March. I think it was in that range, that will be my -- but we don't -- to be honest, we don't have the exact number. We were not able to track it so precisely because we don't do weekly accounting in that sense. But it is more or less in that level.
If you look at our weekly production, which we track a lot in number of hours, it is basically the same pattern we see in the last 2 weeks as in the 2 first weeks.
Okay. And I know it's hard to say anything about April, but in the current situation, I mean, are you seeing anything intensifying in April? Or is it also somewhat the same picture?
It is somewhat the same picture, but it is, of course, affected by the Easter holiday, which is impacting both week 15 and week 16. And last year, we had Easter in Q1, so it is impacting the production. So it's not easy to see a like-for-like comparison. And also, we see that in some business units around the world, people are having longer Easter vacation due to the working-from-home situation. But in general, it's the same pattern we see into April.
Okay. And then in terms of commerce -- your commerce services, I mean, you said that it was positively affected. I recall that you previously at some point have announced numbers for commerce. I mean do you see any more positive for this going forward in terms of non-omnichannel retailers have to turn omnichannel? Or can you give some reflections on that?
Yes. Definitely. We see as soon as the dust settles and customers have appetite for investment, this is one of the first areas we expect demand to pick up is for brick-and-mortar retailers and also normal business. Other businesses in manufacturing and food, they will need to invest in e-commerce. So we expect that to pick up.
Okay. All right. And maybe turning towards different geographies. In terms of U.S., just to recall here, and of course, things have changed a bit, what is your expectations in terms of the turnaround? Is that second half? Are we -- do we have to wait into 2021? Or what are you seeing currently in that one?
So we will have to wait until 2021 to see a turnaround in the U.S.
And in terms of Norway, I noticed that you have been changing CEO of Norway. Can you elaborate a bit on that? And how is this project going that we also spoke about in Q4? Is that also still running as expected? Or...
So regarding the change in leadership, we knew that Tor, our current country manager, wanted to step down. He is in the retirement age. So we have had an agreement with him to step down for quite a long time. He will keep on working for us part time, but he has left the managing director role to Erling, who was leading our commerce business previously. So it's a very controlled and expected move we do there. In regards to the customer project, we saw an improvement in Q4 of the relationship and the progress in the project, and that continued into Q1. So a relatively good performance from this project in Q1.
Okay. That's good to hear. And then in terms of this provision due to bad debt, can you maybe elaborate a bit more on that? How much is it? Why is it mostly related to U.K. and U.S., yes?
I mean it is -- we have sort of a schedule that we follow to provide the bad debt. And there are -- 1 customer is in the U.S., they have some discussion on their deliverable, but it's also partly because the customer actually are in a financial stressed situation from a liquidity point of view. So that's the one part. And the other one is a customer, a larger customer in the U.K. that has also -- where we have some discussions about the deliverables. So that's the 2 key reasons. And yes, it's -- I don't -- we don't disclose, sort of, the exact number, but it's, sort of, impacting our numbers, and that's why we're mentioning it. But it's sort of confined to these 2 markets.
Okay. And that U.K. client, is that client also in a financially distressed situation? Or...
No.
Okay. And in your retail portfolio, I mean, when you do this provision on bad debt, and I understand that it's primarily related to 2 clients, is that -- I mean, can you see a situation where you would have to do more of this due to your non-omnichannel retail portfolio going into a worse situation than they are already in?
But in general, we don't have few large receivables, our balance of accounts receivables are thousands of customers. So if you sort of ask if there are any particular worsening in bad debts with regards to retailers, we don't see that picture yet. Many of our retail customers, they actually do have this omni -- they have both online sales and they have physical stores. So they try to -- what is not possible to do through physical stores, they try to shift it to their e-business, so they can still move on. And we have had a few of these customer asking us to extend payment terms to -- because they are, of course, a little stressed. And we try to find a balance with those customers there to maybe extend our payment terms a little bit but, at the same time, sort of be cautious with how much credit and risk we take on that one. But it's also a way for us to, as you said, to create a longer and lasting engagement with these type of customers. But I know -- and we follow those -- the IFRS 39 (sic) [ IAS 39 ] schedule of how to make provision for bad debt. And if we do know that there is something extraordinary coming in, then, of course, we make additional provisions for that. So I would say the balance you see here in Q1, that is fully reflected in the provision for bad debt we need, and it is more or less in line with what is normal. And then there was a little bit of extra here in Q1 compared to what we normally do.
Okay. In terms of these postponed projects that you have mentioned...
No. It's not postponed projects. It's -- it was -- we have agreed to extend the -- for instance, they normally have 30 days, and then some of them, they've asked, could you agree to 60 days? And if we get something in return, for instance, commitment to do business, then we have looked into sort of make that settlement. And so they can initiate it there what they need to do business here in corona times.
Okay. So just to be sure that we are not speaking about 2 different things, I mean, in general, you haven't seen postponements of projects? Or...
Yes. So you're right, Andre. We also see postponing on projects. As Henrik was referring to the bad debt provision...
Yes. Bad debt provision, yes, definitely. That makes sense.
Please repeat your question.
Okay. But how many -- can you give any indication of how many projects have been postponed? Or how big a share of your client portfolio has postponed projects? Or is something we can -- a number or anything?
No. We are running hundreds of projects simultaneously in the business, and so we don't provide that level of information. We can see that the general trend is more negative than positive, but we don't come any closer than that.
No. But maybe we could also say that we had a couple of customers who -- when the society here in Western Europe locked down, they sent us a message that full stop, no further commitment, sort of, until they had an overview. Now we see 3 weeks later, they come back and would actually like to -- now, sort of, they have organized themselves and have an overview of their own financial situation, then they actually want to proceed with the engagements that were sort of already discussed. So I think it varies from customer to customer on when they have sort of analyzed their own internal situation in terms of what -- how much they can afford in terms of investment.
Okay. But you haven't seen any cancellations yet for now. It has only been postponements?
Yes. We haven't seen a big wave of cancellations.
No.
That is not the picture that we are seeing. But people are more cautious about starting and continuing new large engagements. And that is also -- if you go back to my previous comment about how much we see the impact on the overall hourly production, in April, it is the same level, down 9%, 10%. One of our business units is actually performing more hours than they did previously. So we don't see this massive stopping up, but we see it more as a postponement of activities. Of course, that can also be severely enough at the longer run. But generally, we are seeing a moderate impact, but a negative -- in a negative direction.
Okay. But you mentioned in terms of the decrease in chargeable hours, these 4 percentage points. You also mentioned these postponements of projects. Is that the primary reason for this decline? Because it seems that this transition towards remote working has actually been quite smooth.
Yes. The transition actually went pretty fast, and it caused some disruptions in -- I think it was week 12. But the primary reason for the decline in the Customer Work is the fact that we had invested 190 people, onboarding them, and they were not 100% productive, but we were investing in new growth, in new areas growth, and therefore, the KPI called Customer Work declined. That is the primary reason, and the secondary reason is the corona crisis.
Okay. And then just my last question here. In terms of Eastern Europe, you mentioned this new competitive situation with pressure on prices. I mean can you elaborate a bit on what you're seeing there. Is there a new competitor? Or what's going on?
No. It's not a new competitor. We just see that in Estonia and Baltics. In Estonia and Lithuania, we hear messages from our business unit executives that the competitive price -- the competitive pressure is higher and a higher pressure on our [ rates ], but there is no structural change why this should be the case.
[Operator Instructions] There are no further questions at this time. Sir, you may continue.
So if there are no further questions, I would like to thank the participants. And I would like to hand over the conference back to you, Brian.
Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect.