Atea ASA

OSE:ATEA

Earnings Call Transcript 2020-Q1

[Steinar Sonsteby, Chief Executive Officer]

Welcome to the Q1 presentation of the Atea numbers. We're live from the new head office of Atea in the middle of Oslo. As the situation are really, really different and special to what they usually are on a Q presentation. We live in strange times, actually, and I would lie if I didn't say it is challenging to all of us. But I am so happy that we, Atea, is in such a high demand.Before I start on the numbers, I would like to say that I hope all the shareholders around the world that we can see in person and friends of us in the financial ecosystem are all safe and healthy, and we are really looking forward to see you again as soon as possible. So to Q1. Sales in Q1 came in flat compared to last year. As you all know in that we discussed on the Q4 presentation early in February, the end to Q4 was not as we had hoped, and so the backlog coming into this quarter was lower than normal. The backlog going out of the quarter has never been higher. This means that sales, the actual sales taken, the orders taken in this quarter was approximately 10% higher than last year and gives us a very, very healthy start to Q2. The gross profit came in -- the gross margin, sorry, came in with an increase from 21.2% to 22.1% due to mix, but also higher gross margin on all business lines. EBIT at NOK 103 million, admittedly, a little lower than what we had hoped, but as I said, this is due to higher backlog going into Q2. And our net debt situation is fully under control and about the same level as last year, and Robert will come back and discuss the balance sheet and the cash situation more in details later. I will address how the corona situation affects Atea, what kind of actions we've taken and will take and also the situation in Denmark when I come back. But until then, Robert, you take it from here.

[Robert Giori, Chief Financial Officer]

Thank you, Steinar. Atea's revenue during Q1 has followed a trend that we've seen for much of the last few years, with a shift in the revenue mix towards software and services.Looking closely at Atea's revenue by business line. In total, revenue in Q1 fell by 1.0%, and gross profit improved by 3.1% from last year. The decline in the Norwegian krone had a positive impact on growth rates of approximately 4.8% during the quarter. Gross margin improved to 22.1% from 21.2% last year. In Q1 last year, there were several large implementation projects, which increased product revenue but had a low gross margin. In addition, the improvement in margins reflected a change in the sale mix towards higher-margin software and smaller orders. Hardware revenue fell by 7.4% from last year, driven by lower sales of clients and data center equipment. Gross profit from hardware fell by only 2.4%, as the margins improved due to a shift in the sales mix from large project deliveries to smaller orders with short delivery times. Software had a rapid revenue growth of 6.7% and gross profit growth of 14.7% compared with last year. Once again, the improvement in margins reflected a change in the sales mix toward higher-margin software. Services revenue grew by 5.7% from last year. Margins fell slightly from last year due to higher costs on managed service agreements. We'll now take a closer look at revenue and profit development across the countries in which we operate. Starting with Norway, where growth in the services business drove a strong improvement in EBIT during Q1. Total revenue in Norway was NOK 2.2 billion, down 8.2% from last year. Product revenue declined by 13.4% from a very strong Q1 last year, when there were several large hardware and software deliveries to the public sector. Services revenue, on the other hand, increased by 11.6% based on growth in areas such as managed cloud, security and data analytic solutions. Gross profit was up by 1.5%, mainly due to a higher proportion of services in the revenue mix. Operating expenses were NOK 527 million, on the same level as last year. Based on a strong increase in sales of services and flat operating expenses, EBIT grew by 17.1% to NOK 45 million. We'll now move on to Sweden, where Atea reported lower EBIT due to slower demand for products. Total revenue in Sweden fell by 5.8% to SEK 3.6 billion. Revenue was impacted by a low order backlog from public sector customers at the start of the year, which led to weaker sales in January and February. Demand improved over the course of the quarter and revenue returned to growth in March. Product revenue decreased by 7.5%, with fewer large project deliveries. Services revenue grew by 2.1% based on higher sales of managed service agreements. Gross profit was flat from last year as margins improved due to a shift in the revenue mix towards smaller orders with higher gross margin. Based on a flat trend in gross profit and slightly higher operating expenses, EBIT fell to SEK 102 million, down from SEK 112 million last year. In Denmark, Atea reported lower sales of hardware and services and implemented a cost efficiency program involving a reduction in staff. Total revenue in Denmark fell by 9.2% to DKK 1.3 billion. Product revenue was down by 8.5% due to lower sales of client and data center hardware. Services revenue fell by 11.3% with lower revenue from managed service agreements to large corporate customers. Atea Denmark has won several new managed service contracts with the public sector in the first quarter, and these agreements will begin to generate revenue from Q2. Total operating expenses before reorganization costs were DKK 302 million, a decline of 4.4% from last year. Atea Denmark incurred reorganization costs of DKK 51 million during Q1 2020 based on a cost efficiency program announced and implemented in January. The reorganization included a replacement of the Managing Director in Denmark and a reduction of 67 full-time employees. At the end of March, Atea announced the severance of an additional 20 employees through a separate cost reduction process. EBIT before reorganization costs was an operating loss of DKK 39 million compared with an operating loss of DKK 20 million in Q1 2019. In Finland, Atea had another solid quarter with rapid growth in revenue and EBIT. Total revenue in Finland grew by 12.5% to EUR 113 million. Product sales increased by 12.1%, mainly due to increased sales of client software to the public sector. Services revenue increased by 17.9%, driven by higher demand for third-party consulting services and managed service contracts. Gross profit was up by 11.9%, with strong growth across all lines of business. Operating expenses were up 9.8% from last year due to an increase in staffing levels. Atea Finland has increased its workforce during the last year to pursue a growth strategy within services. However, additional recruitment plans are now on hold as a result of the COVID-19 pandemic. Based on higher revenue and relatively lower growth in operating expenses, EBIT grew by 30.5% to EUR 1.6 million. In the Baltics, Atea's EBIT fell from last year based on slow growth in revenue and higher operating expenses. Total revenue in the Baltics grew by 2.2% to EUR 32 million. Product revenue increased by 5% from last year, with higher sales of software licenses to the public sector. Services revenue fell by 5% due to lower sales of subcontracted services. Gross profit grew by 8.4% to EUR 8 million based on higher product revenue and an increased gross profit on sales of Atea's own consultants. Total operating expenses grew by 11.9% from last year due to higher personnel costs. The increase in personnel costs was driven by salary inflation and by a change in the employee mix toward higher-skilled consultants. Atea Baltics has now put a freeze on salary increases following the COVID-19 pandemic. With slower growth in revenue and higher personnel costs, EBIT in the Baltics fell from EUR 0.9 million to EUR 0.7 million. Finally, a word on our cash flow and balance sheet. Atea's operating cash flow before changes in the working capital was an inflow of NOK 54 million. This was down from last year due to lower operating profit. Working capital movements, excluding the sale of receivables, had a negative impact of NOK 834 million in Q1 2020, compared with a negative impact of NOK 1.1 billion last year. This high growth in working capital during Q1 is caused by the seasonality of Atea's operations and is consistent with prior years. Atea's working capital balance is highly seasonal and falls sharply at year-end due to a large volume of orders and prepayments from public sector customers. During the first half of the year, the working capital balance grows again to its seasonal peak. This has a negative impact on cash flow from operations in the first half of the year. Adjusted for working capital movements, but before the sale of receivables, Atea's cash flow from operations was an outflow of NOK 780 million compared with an outflow of NOK 986 million last year. Atea has entered a securitization agreement on selected accounts receivable with its primary bank as part of its overall financing structure. The securitization agreement allows Atea to accelerate its cash conversion by selling accounts receivable throughout the year. This form of financing is highly flexible and low cost for Atea due to the credit quality of its customer base. At the end of Q1, Atea sold a lower volume of accounts receivable to finance its operations than it had at the start of the quarter. This reduction in the volume of sold receivables during the quarter increased the working capital balance and lowered Atea's reported cash flow from operations by NOK 418 million. In Q1 last year, the opposite effect occurred. Atea increased its sales of receivables to finance its operations during the quarter. This had a positive impact on reported cash flow from operations of NOK 505 million during Q1 2019. After the impact of changes in the volume of sold receivables, cash flow from operations in Q1 2020 was an outflow of NOK 1.2 billion. The increase in outflows from last year was due entirely to reduction in the amount of sold receivables during the quarter. Moving on to our debt balance. Atea had a net debt balance of NOK 519 million at the end of Q1 as defined by Atea's loan covenants. This corresponds to a net debt/EBITDA ratio of 0.4. Atea's loan covenants require the company to maintain a net debt/EBITDA balance of less than 2.5, which would mean that the maximum net debt balance allowed by Atea's loan covenants was NOK 3.2 billion at the end of Q1. Atea's net debt balance was, therefore, NOK 2.6 billion less than the maximum balance allowed by its loan covenants at the end of Q1. The company has significant additional debt capacity before its debt covenants would be reached. Before we conclude on the first quarter financial results, I'd like to comment on the recent dividend announcement. In the AGM notice to shareholders on March 17, the Board stated that there was uncertainty on the duration of the coronavirus pandemic and its financial impact on the Atea Group. Given the uncertainty in the business environment, the Board would not propose a dividend payment in May 2020 as originally planned. The Board would instead request a power of attorney to pay a dividend at its discretion as market conditions allow. This power of attorney would expire at the next AGM meeting. This is the resolution to be voted on at the general meeting which is to take place later this morning. The Board would like to clarify that its decision on the May dividend payment does not mean a change to Atea's overall dividend policy. Atea plans to resume its policy of paying an annual dividend given that its requirements for financial risk management are met. The Board of Atea is evaluating a dividend payment of NOK 3.25 in November, in line with original plans, and will communicate its decision once there is greater visibility on the overall market environment. That concludes the presentation of the first quarter financial results. Now for an update on how Atea is responding to the impact of COVID-19 pandemic, I'll hand the podium back over to Steinar.

[Steinar Sonsteby, Chief Executive Officer]

Thank you, Robert. So Atea is a solid company, and I'm so happy and grateful that I am the CEO of this company and not a ton of other companies these days. But of course, there are special times, there are challenging times, not only for companies and countries, but also for individuals. So let me take you through how we've been taking -- thinking about this since we started as a special workforce for the coronavirus. We divided that work into 4 pillars or 4 projects, the first one being sales. And we mentioned this a couple of times already, both Robert and me, that sales, the real sales, the order taken, not the invoicing, but the sales this quarter has grown by a little bit more than 10%. And I want to clarify, it is not so that a company that does NOK 9 billion in invoicing in a company -- in a quarter are doing that through selling home offices. Most of what we have invoiced in Q1 has nothing to do with home office, actually. Most of that is in our backlog. What we are delivering to mainly public during the last part of Q1 is their backbone, their infrastructure to drive that remote workforce and to drive that higher demand of services from tax, from social security, from defense and police. I also want to comment and say that we see no problem in the supply chain as of now. We did in the end of Q4 and beginning of this quarter, but as of now it is not because of supply chain problems that we have a higher backlog, rather the fact that a lot of those orders came in so late and was not predicted in the quarter, and so we are in normal delivery times and most of it is already delivered in April. And then the cost control. You cannot run a company today and not be aware of your cost more than a normal quarter. We have had to say goodbye to approximately 100 colleagues around in the group, 100 out of the 7,500 people. We have furloughed or put 500 people on temporary leave, not all of them full time, but partial time, but approximately 500 people on temporary leave. And amazing enough, more than 1,500 people have voluntarily given away 10% of their salary in Q2, including me and my team and the country management teams around in the countries. Of course, other operating expenses are cut dramatically as we're not traveling, and we're not arranging big customer events and a lot of other small and big elements in the cost base. We feel that we have good control of the situation and the governments have given us the tools that we need to operate in this environment. And then, of course, Robert had told you about the balance sheet, but we have done several things to be sure that we are in front and not on the back end of this situation, the May dividend we've talked about being canceled, and all our major vendors have given us extended payment terms during this 3 to 6 months period. And again, we have the facility with the banks. So we are very, very comfortable on that side. And then, of course, not to forget to take care of our people. We're going to be stronger in the other end than any of our competitors. And if that is going to happen, we need to take care of our people. About 80% of the Atea employees work from home. Some people cannot work from home, people work in warehouses and stuff like that, but most people work from home, and it works beautifully. So if you need help with home office infrastructure, you know who to call. We also increased the communication through video and other tools to stay close to the people. And every morning and every afternoon, every manager are talking to their employees either one-to-one or one-to-many. It's really important to stay close. Not everybody is as strong as the strongest in tough times. There are a lot of talk about home office. So in the period from 14 to 17th of April, we had NORSTAT and the consulting company, Boldt, do a survey among people in the Nordics on how they look at home office and how that is working out for them. And so about half of the people in the Nordics are now working from home, and most of them are comfortable in doing so. And there are so that most of the people who really feel uncomfortable have never tried it before. So there is a training environment that we can do something with. One of the things that we have seen as challenges going forward because we think this will be the new normal, not that 80% work from home, but that people constantly work more from home, we need to be aware of the security risks. We need to be sure that we take care of the privacy issues. And as employers, you need to be sure to train people on how to work remotely, how to use the tools, and you have to supply people with the right tools. And as a company, you need to invest in your back-end so that those tools that you give to your employees are working well even though there is a lot of them hooking up that way. We're going to work more on this. And I have to say that as this period is being prolonged week by week, it's so interesting to see all the new things that happen. We have trained 10 -- or thousands and thousands of people in schools and universities how to teach kids and young people remotely. We have helped the health care industry to take patients remotely. There is a lot of things going on which will digitally change the world as we go through this crisis. So to sum up, large organizations, large private organizations are investing in their infrastructure. It's not a 1 or 2 or 3 weeks' blast, it's not earphones and portable PCs, it's their core infrastructure, as not only employees but also customers and vendors are hooking into them more digital than ever. So digitalization has accelerated and will accelerate after this, not slow down. We are in a robust situation in a part of the world that have been the least hit by this with a customer base of defense, police, tax, social security and municipalities doing almost 70% of our revenue, and we see packages coming to start projects early to bring the economy into healthy waters. Sales in March was dramatically up, and the backlog going into Q2 is strong. In Denmark, we have taken decisive actions during the quarter. 90 people have had to leave the company and 60 people have been put on furlough or temporary leave. Most of the people have taken a 10% voluntary salary cut and several other cost initiatives lead to between DKK 35 million and DKK 40 million lower cost in Q2 this year compared to last year. We believe in the change of management and the lowering of the cost that we are on a solid path to improvement going forward. With that, we conclude the Q1 presentation. As the situation is different. We will, of course, take your questions online, and I have Christian and Chris helping me, and Robert, if you could step up. But I also want to say that we are more available than ever as there are no lunches and no dinners and no travel for roadshows. We are very comfortable in taking your calls one-o-one or in any way you want. But let's start right now with some online questions.

[Christian Stangeland, Director of Business Control]

All right. So here's our first virtual question, comes from Henriette Trondsen at Arctic Securities. She's got several questions here. Can you quantify more the improvement into Q2? And then she says, I understand that March revenue was up year-over-year.

[Steinar Sonsteby, Chief Executive Officer]

It's true that March revenue was up year-over-year. And we're not giving specific guidance to the Q2. But I think looking at last year would be a good start.

[Christian Stangeland, Director of Business Control]

Yes. So can you give some -- which countries do you see improvements coming into Q2, though, where you'll see good improvements?

[Steinar Sonsteby, Chief Executive Officer]

The highest backlog and the biggest expectations are for improvement in Denmark.

[Christian Stangeland, Director of Business Control]

Great. And her last question was around Denmark. Denmark was, in particular -- I see this as soft. Can you give some more flavor on what you expect in Q2?

[Steinar Sonsteby, Chief Executive Officer]

We expect solid improvement in Denmark. We have taken some tough actions, and those actions have, of course, negatively impacted Q1. So in difficult situation, that adds up in the -- to the Q1 numbers. But we are very comfortable with solid progress in Q2 in Denmark.

[Christian Stangeland, Director of Business Control]

Great. We've got another question here from Hans Christiansen from Carnegie. Why is there such a large fluctuation in the volume of receivables sold into securitization program year-over-year?

[Robert Giori, Chief Financial Officer]

We are just simply using -- okay, the securitization program is a means of financing the operations of the company. Over the last year, our working capital balance has gone up. Therefore, we're using more of the securitization to finance the company's operations.

[Christian Stangeland, Director of Business Control]

Okay. Last question here. What is the increase in the operating expenses to NOK 72 million in Q1 related to? This does not include restructuring costs. That's the question.

[Steinar Sonsteby, Chief Executive Officer]

I'm not 100% sure what that question is. And since we are not live, it's difficult to ask to clarify it, but I leave it to -- was it Hans Christiansen -- to call me or Robert afterwards. But if he's talking about the restructuring cost, which is -- which we took in Q1 of DKK 51 million, that transfers to NOK 71 million now with the currency effect. If he's looking at some other cost, I'm not 100% sure what he refers to, so he has to call us.

[Christian Stangeland, Director of Business Control]

Yes. And Christoffer Bjørnsen from DNB. His question is here. You were saying sales were up 10% in Q1, and you're setting yourself up nicely for Q2. On the other hand, you refrained from providing any guidance for Q2. Can you give a little more color on what we should expect in Q2? This is his first question.

[Steinar Sonsteby, Chief Executive Officer]

Okay. So we're going into Q2 with a very strong backlog, actually, more than 60% higher than same period last year, and again, the highest improvement in Denmark. We're not guiding, as I said on Henriette's question, specifically for Q2. But we have a very good visibility for the last -- sorry, for the first 2 months of the quarter, but the visibility for June is much lower. When I say the visibility is lower, it doesn't mean sales is going to be lower. It's just that it's harder for us to know what governments are going to do with their programs, what they're going to do with the lockdown and what company -- or how companies is going to react to that. But since so much of our revenue is public, we feel very comfortable for this quarter. We're hoping, I think, like most other people that when we get into Q3, we get into something which looks more like a normal situation. And so we believe Q3 of this year will be more normal, so look at Q3 last year. And that's why we're saying 2019 would be a good guidance for people to look at with the adjustments that I just gave.

[Christian Stangeland, Director of Business Control]

Good. Second question from Christoffer at DNB. It's around our managed service contracts. Can you please quantify the expected Q2 contribution from the managed service contracts won during Q1, specifically related to Denmark?

[Steinar Sonsteby, Chief Executive Officer]

Yes. So we've commented on the managed service contracts in Denmark, I think, for the last 2 years that we have had a negative trend on the total base. That turned around in March. So we've reached a point where we will not have much higher Q2 sales or invoicing of managed service contracts, but the fall will stop and a small increase will occur during the quarter. There's many small initiatives that have been taken to come back and win contracts and increase the contract value. But the total sum of contracts won is about 10 million a quarter in invoicing and then hopefully there will be more contracts won going forward.

[Christian Stangeland, Director of Business Control]

We don't have any more questions right now, but I'll just repeat what you said, Steinar -- both Robert and Steinar are available for questions later, can be e-mailed to us and contact us.

[Steinar Sonsteby, Chief Executive Officer]

Okay. So that concludes our webcast. Thank you for joining. Stay safe, and we see you soon.