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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hi, and welcome to the Q1 2024 presentation of the Atea results here from rainy Oslo. Revenue came in at SEK 7.6 billion, gross profit at SEK 2.6 billion and EBIT at a record high SEK 256 billion, which gives us a net profit of SEK 192 billion. A very, very good quarter overall.You'll hear us talk about tough comparisons in this presentation. It's not because the market a year ago was bouncing and now is very low, but we'll get back to that. So, that is the cliffhanger. Over to you, Robert.
Thank you, Steinar. Atea reported higher operating profit in the first quarter, driven by growth in its software and services business and by improved gross margins in all business lines.Total revenue was SEK 7.6 billion, down 12.5% from an exceptionally stronger quarter last year when Atea's revenue grew by 26%. The revenue decline was driven by lower hardware shipments, which fell by 19.5% from last year.In Q1 last year, Atea had an unusually high level of hardware deliveries. This was driven by a couple of factors. On the supply side, global constraints in hardware manufacturing were easing, and Atea was able to ship a large number of customer orders, which have been held up in backlog. This was the primary impact that we had on sales last quarter.On the demand side, customers were investing large sums to upgrade their workplace IT environments as the employees return to on-premise work following the COVID pandemic. These short-term tailwinds have faded since the second half of 2023, and hardware volumes have returned to a more normal level of demand.As a result, we're seeing lower hardware revenue compared with the exceptionally high hardware sales deliveries last year. Otherwise, software revenue grew by 8.4% from last year with higher demand from the public sector. Service revenue grew by 3.7%, driven by strong sales of managed service agreements.Gross margin increased to 33.6%, up from 28.9% last year based on higher hardware margins, an increased percentage of software and services in the revenue mix. With higher gross margin and low growth in operating expenses, Atea's EBIT grew by 2.2% to SEK 256 million.Net profit after tax increased by 9.6% to SEK 192 million. If we look beyond the year-over-year comparison, Atea's longer-term growth trend remains favorable. Over the 2-year period from Q1 2022 to Q1 2024, Atea's revenue grew at a compound annual growth rate of 4.9%.During this 2-year period, hardware revenue grew by 1.4% per year, sold for revenue by 22.2% per year, and services revenue grew by 11.3% per year. EBIT over this 2-year period grew at a compound annual growth rate of 18.3% and net profit grew at a compound annual growth rate of 21.1%.Atea's business remains on a good track, but shipments and deliveries are simply returning to the long-term trend line after a period of abnormally high shipments last year. We'll now take a closer look at revenue and profit development across the countries in which we operate. Atea faced the same overall business trend in all countries with slower hardware shipments offset by improved gross margins. The impact on Atea's revenue was less severe in Norway, Sweden and the Baltics.Despite a slower hardware business, Atea managed to increase its operating profit from last year in all of these countries based on higher margins and cost control. The revenue impact was more severe in Denmark and Finland, and these countries saw a decline in EBIT from last year.In Denmark, revenue fell by 32.5% as 2 major public sector frame agreements were inactive due to ongoing tender processes. Both frame agreements were awarded to Atea during Q1. With sales returning and resuming on these new frame agreements, Atea Denmark expects to return to revenue growth from next quarter.In Finland, revenue fell by 15.1% from last year. Last year, Atea had very high shipments to the public sector due to a large reorganization within health care. In sum, EBIT for the Atea Group grew by 2.2% in Q1 2024 as lower profits in Denmark and Finland were offset by higher profits in the rest of the business. Now, a word on our cash flow and balance sheet. Atea's cash flow from operations was an outflow of SEK 903 million in the first quarter of 2024. As you can see on this chart, Atea's cash outflow in Q1 2024 is in line with normal seasonal trends, where operating cash flow is typically negative in the first quarter due to higher working capital requirements.This negative trend was stronger than usual last quarter due to the timing of the Easter public holidays right at quarter end. This resulted in some delays of cash collection into April. In contrast, Atea had abnormally high cash flow in Q1 last year relative to the seasonal trend as Atea's working capital balances fell from their temporary elevated levels at the end of 2022.At the end of Q1 2024, Atea had a net debt of SEK 117 million as defined by Atea's loan covenants. This corresponds to a net debt-EBITDA ratio of 0.1%. Atea's net debt balance at the end of Q1 2024 was SEK 4.8 billion, less than a maximum allowed by its loan covenants.The company has a strong balance sheet and significant additional debt capacity before its loan covenants would be reached. That concludes the presentation of the results. I'll now hand the podium back over to Steinar to discuss the outlook for Atea's business for the remainder of 2024.
Thank you, Robert. So, let's look at this in a bigger picture. On this slide, you see the growth figures over the last many quarters.In the last 4 years, it's been difficult to predict and follow the revenue of Atea. Four years ago, the pandemic hit and we had the race to the home office. And, even though we were pretty well equipped in the Nordics and Baltics, we still saw a raise in revenue to support that new infrastructure.And then about 1.5 years later, we saw the race back to the office and the office had been neglected for a couple of years and needed an upgrade, especially on video and networking in general.At the same time, the supply chain constraint had occurred and we couldn't really deliver what we sold in most of 2021 and beginning of 2022. And then the supply chain issue started to ease and you saw the 4, 5 quarters in the later part of 2022 and beginning of 2023 where we had revenue growth on hardware of almost 30% in some of these quarters.The underlying market through all of this have been pretty stable actually. But the revenue in our books have looked differently. We are now, and we have said this for the last 12 months, we are entering a more predictable period where growth are supported by digitalization, by security and by AI and will return to high single digits for the next many quarters.We still, though, have Q2 where last year, we had a high growth and so our prediction is that you'll see more of the same, but less of an impact, meaning we think that we will grow EBIT also this quarter as we have for so many quarters behind us with a more or less flat revenue. Let's look at some of these drivers that supports my prediction. My prediction being revenue growing high single digits in the years to come, but a little slower in Q2. We have won the 2 biggest contracts in Denmark that we ever have.One, the 50.03, which we've started delivering on full throttle in April, where it is server and storage. And then the second one, the biggest one, the 50.40, which is PCs, which we will start delivering full throttle during this quarter. Both these contracts are expected to last for 4 years and support the underlying positive development we've seen in Denmark for the last 3 to 4 years.And then something that I think is in the mind of all of us, we have entered a different period in Europe, maybe even the world. And defense will be high on the agenda for all countries, for all politicians and specifically in our region of the world where we are closer to the first war in Europe since the second world war. This is an even bigger concern.Sweden and Finland have entered NATO. And even more so all the countries in the Nordics and Baltics are in NATO, and we will see a Nordic Baltic alliance within the NATO Alliance. You've also read and heard if you are living in this part of the world about the increased defense budgets in all of these countries and how important IT will be in the buildup or rebuild of the defense sector in this part.We are a big supplier to the defense and we are expecting a growing demand from this part of the market. We had expected that to be higher in 2023 than it actually ended up being. Maybe we just had too high expectations to our politicians. And then IT security. IT security alongside AI, maybe because of AI is predicted to be the fastest-growing part of our revenue in the years to come. And there are many reasons for this. The unstable situation and the war and the situation between the U.S. and China and many other unstable and parts of the world where things have become more complex are, of course, highly part of this.But also the NIS 2 directive in EU, which demands certain investments and training in IT security for most European companies and most of our customers will also be supporting the growth of that revenue. We've also spoken about the Windows 10 end of life. It's actually interesting to see how many people have missed that trend when we look back and how many are now starting to understand that they actually have to have a major shift in their infrastructure to be able to upgrade to Windows 11, which has a totally different IT security platform within it.So, several of these trends will support each other. And we believe there will be a massive investment in PCs as pretty modern PCs cannot run Windows 11. And, I have to say, I was supposed to be upgraded to Windows 11 last week, but my PC couldn't support it, so, I'm still on Windows 10. And then, of course, it's difficult not to speak about AI. AI is something that will fundamentally change how we do everything going forward. If you question that, I'd like to have that discussion. The big question, though, is how fast. And as everything with technology, it takes a little longer than what we think.But the fact that AI, the next 5 to 10 years will be driving massive investments in infrastructure, is a fact. It will drive massive investments in power or electricity and facilities. This will be the guaranteed driver for our business in many years to come.Some will choose to do this in the cloud, some will choose to do this on-prem, most will probably choose to do this as a hybrid solution and we are so much looking forward to supporting that development. So, if you look at our revenue over the last 4 years, as discussed in this part of my presentation, this is a 4-rolling quarter presentation. So, you have to look at it that way. But you see a development where in the last part of 2021 and beginning of 2022, it looks like the market was slowing. It wasn't. We built massive backlog.Actually, in that part of the history, we built backlog in the size of about SEK 3 billion to SEK 3.5 billion and most of it, of course, being hardware. And then around the later part of 2022 or beginning of 2023, we saw the supply chain problems ease, and it looks like we were jumping like Kangaroo here in the revenue but actually, we just started delivering what we had sold in the 2 years before.Now we're entering a more predictable and better for us period because it's easier to drive a company and improvements when things are predictable. We'll keep on growing the EBIT, and we're looking forward to presenting to you in the quarters to come.We will now go to Q&A.
Thank you, Robert and Steinar. Our first question here is looking at the fluctuations, how should we read hardware versus software development in all of this?
Yes. So, I think it's interesting when you look at our revenue and when you divide it that way, hardware, software and services. You'll see that everything you look at quarter-by-quarter over the last year support exactly what I'm saying because you'll see that software is pretty linearly increasing every quarter and so are services, while hardware is going up and down because of the supply chain problems.So, I think what you'll see going forward is that software grows a little bit faster than hardware. We've said this many times, there are more intelligence put into software than hardware these days. It doesn't mean that hardware will not grow, but a lot of vendors split their products into hardware and software and put more emphasize on upgrading the software from the cloud.So, software will grow a little faster than hardware, they will both grow and they will be supported by our investments in growing the services.
Our next question is, how do you see the cash flow for the rest of the year?
I think cash flow is going to be -- we're going to have a very good year in 2024 on cash flow. Q1 was a bit slower at the start. I mean, seasonally, it was in line with ordinary trends that we have a weaker cash flow in Q1 but it was a little bit lower than the average that we've seen over the past years.There is a very good reason for that, that was the Easter holiday. We had our overdues which were less than 7 days. So, just a few days overdue, jumped by SEK 500 million versus where they were last year and where they were the year before that.And so, we saw a lot of collections, which were just postponed by a few days when you see your overdues by just a few days extending by that much. That should normalize in Q2, and we have every expectation that we're going to have a strong cash flow for 2024.
Next question here is, how sustainable do you think the gross margins are going forward?
Well, gross margins, if you look at this product group by product group and not collectively, so, gross profit on services should be pretty stable. When we give out the numbers of gross profit on services, salary is not a part of it. So, when you look at that, it should be pretty stable.When you look at the software side of the house, it's interesting because within our software is also cloud because most of the cloud that we sell is actually software as a service, so, software sold from the cloud.That part of our business should have a growing gross profit, not massively a bit growing. And you've seen this over the last 4 or 5 years, it's been growing from high 6-point-something to now high 8-point something. When it comes to the hardware, it was higher in this quarter than what we, on average, expect.So, our gross profit on hardware over the last 12 years have been in the bracket between 12.3% and 14.24% and so mostly, it's in the area of 13.5% and that's what I think most people can pencil in but it was a little bit higher than we predicted in this quarter.But we are also, in general, working very hard to bring all the gross profit numbers up and it's not true that a lot of people think that these are constantly falling. That's not how our business have developed over many years.
New question. Good cost development, sorry, in the quarter. Any particular one-offs or anything we should be aware of on OpEx or on the COGS side?
No, nothing really on OpEx. The COGS, as far as the gross margin that we had in Q1 was high due to the business mix that we had. We had more software and services. Software margins and IFRS revenue are at 100%, services are above 60%. So, with a higher increase of software and services within the revenue mix that pushes up the margins that we have on that.Also, hardware was disproportionately higher margin hardware, and that was just due to fewer very large deliveries to the public sector, especially within Denmark that would typically drag down the hardware margins. So, overall, we had a very good mix of business in Q1, but no one-offs. It was just a very good mix of business that we had in Q1 when it comes to the gross margins.
But, just to be more specific on the cost, there were no one-offs on the cost and the people analyzing us have to understand that we have a high variable part of our cost, so, we can turn that up and down with a high percentage without going out with what that is. So, especially in Denmark, we turn, of course, because of their revenue, the cost down and so on. But no one-offs, no major changes.
I'll just point out one final thing. Headcount was down year-over-year. That's been something we've been telling people is going to happen as we've been just adjusting the headcount base for slower revenue that this was going to come down, and we saw that already in Q1.
Operating free cash flow question here. This is a bit of a longer one. The operating free cash flow is a little on the weaker side. There are seasonal fluctuations Q1 not as strong as Q4, but there's a higher amount tied up in capital for Q1 '24 compared to last year in Q1. How should we think of this going forward in 2024?
This was just due to our service, just mentioning, this is due to one-off factors, temporary factors a large part of that had to do with the seasonality of when the Easter holiday hit at the very end of the quarter.Overdues, which were 7 days or less, was up by over SEK 500 million versus what we saw last year and the year before that. And there's no fundamental reason why things that are just a few days overdue would jump by that much aside from the Easter holiday. This is going to normalize in Q2, so, I wouldn't worry about this at all.
All right. And our final question for today comes from a shareholder. I'm not actually interested in one quarter or the next quarter. Can you give us some comments on a longer horizon and any comments to the next years?
Yes, we have a lot of shareholders that are long term, and most of them actually have -- of the big shareholders have been shareholders since before I became CEO more than 10 years ago, so thank you to all of those shareholders.But as I think I commented in the presentation, we've had 4 years now, which have been very, very difficult to predict for the shareholders and also for us. We've done well. We've grown EBIT every quarter even with that unpredictable and complex situation.We believe that we are entering a more predictable part of the world but there are complexity there, but we think it will be more predictable and we think we will come back to our long-term guiding, which is high single-digit growth of revenue and EBIT growing 2 to 3x that.And if you look at a CAGR over the last 2 years, we're actually on the high side of that EBIT prediction. So, that is what we look at, and the reason for it is, is the 5 reasons of growth that I just went through. And as we have growth, it's easy to have EBIT growth, the scalability in the business is that way.So, with that, to all of you in the room and all of you that have followed digitally, we hope we have surprised you positively on the EBIT side. We'll work hard to do the same thing in Q2. Until then, thank you.