Atea ASA

OSE:ATEA

Earnings Call Transcript 2018-Q3

[Steinar Sonsteby, Chief Executive Officer]

Hi, and welcome to the Q3 presentation of the Atea Group. This has been a very crazy quarter. Almost everything has been perfect. The growth in the market and the growth that Atea has shown outside Denmark has never been experienced in Atea before. But then we still struggled in Denmark, and I'll come back more to that a little later. I hate not to overachieve, but it's so good news from so many areas of the company that there is plenty to feel great about. So to the numbers. The revenue came in at NOK 7.1 billion, a growth of almost 7% in the quarter all in all. The countries outside Denmark grew by 16%, but Denmark showed a decline of a little bit more than 20%. We'll come back and explain more on how we look at both the countries outside Denmark and Denmark a little later.The EBITDA came in at slightly below NOK 250 million before share-based compensation, and share-based compensation has accelerated in this quarter as the share price hit all-time high at the end of the quarter. So share-based compensation was NOK 22 million higher in this quarter this year compared to last year.The EBIT came in at NOK 132 million, including the NOK 4 million in fine that was paid in Denmark in July. I'll leave it to Robert to take you through all the good news and then I'll come back and tell you more about Denmark afterwards.

[Robert Giori, Chief Financial Officer]

Thank you, Steinar. We'll now take a closer look at revenue and profit development across the countries in which we operate. Starting with Norway, which delivered exceptional growth in EBIT based on the strong increase in product sales. Total revenue in Norway grew by 15.0% from last year to NOK 2.1 billion. Product revenue was up by 18.2%, driven by higher sales of client hardware and communications software to the public sector. Services revenue was up by 4.7% as demand for consulting services increased. Gross profit grew by 13.1% based on higher product sales and improved margins on services. Operating expenses grew by 9.4%, primarily due to higher personnel costs. With increased revenue and relatively lower growth in operating expenses, EBIT in Norway grew by 36.7% to NOK 83 million.We'll now move on to Sweden where our business continued to show very high growth in revenue and profitability. Demand was strong from both the public and private sectors. Total revenue in Sweden grew by 18.2% to SEK 3.0 billion. Sales growth was strong across all lines of business. Product sales grew by 18.6% from last year, driven by a high volume of orders on recently renewed frame agreements to the public sector. Demand from large corporate customers was also strong. Services revenue grew by 16.4% based on increased sales of consulting. Gross profit was up by 16.6% as higher revenue was partly offset by lower product margins on new frame agreements. Operating costs grew by 15.4% based on an increase in the number of employees. Atea has hired additional consultants in Sweden to meet strong market demand for infrastructure services. With rapid growth in sales across all lines of business, Sweden's EBIT grew by 23.4% to SEK 112 million.In Denmark, Atea reported lower EBIT in the third quarter as the company was impacted by a court conviction in June relating to former employees. Following the conviction, the public procurement authorities in Denmark recommended that customers stop ordering from Atea Denmark until they had the opportunity to evaluate the corrective self-cleaning actions the company had taken to prevent future misconduct. This recommendation was not lifted until late in the quarter and significantly impacted revenue throughout Q3.As a consequence, revenue in Q3 was down 21.9% from last year to DKK 1.0 billion. Product revenue declined by 23.4% and service revenue fell by 17.9%. Gross profit fell by 18.6% compared to last year as an improvement in product margin partly offset the decline in revenue. Operating expenses fell by 0.8% in Q3 compared to last year. Operating expenses included a onetime legal settlement of DKK 3 million resulting from the case. Based on lower sales, EBIT was an operating loss of DKK 39 million in Q3 2018 compared with an operating profit of DKK 19 million last year. Steinar will elaborate further on the Danish business later in this presentation.In Finland, Atea reported very strong EBIT growth in the third quarter. Total revenue was EUR 67 million, up 52% from last year. Product revenue was up 64.4% based on increased sales of client hardware and a few large software agreements to the public sector. Services revenue was down 15.0% based on lower sales of consulting. Gross profit increased by 9.2% as the revenue mix shifted to lower-margin products sales. Operating costs grew by 2.2% from last year as the company had only a small increase in the number of employees from last year. Based on very strong growth in product sales and tight control of costs, EBIT in Q3 in 2018 increased by 160.3% to EUR 1.0 million.Finally, Atea Baltics also had strong EBIT growth in the third quarter. Total revenue grew by 7.7% from last year to EUR 26 million. Product revenue increased by 6.8% driven by large projects to the public sector in Lithuania. Service revenue was up by 10.1% based on increased sales of cloud services from Atea's data center in Vilnius. Gross profit increased by 9.1% with higher sales and improved margins in hardware and contracted services. Total operating expenses was up by 5.3% from last year due to local salary inflation and increased variable compensation. Based on solid revenue growth and relatively lower growth in operating expenses, EBIT increased by 48.5% in Q3 to EUR 0.8 million.Finally, a word on our cash flow. Cash flow from operations was an outflow of NOK 196 million in Q3 2018 compared to an inflow of NOK 189 million last year. The operating cash flow in Q3 was negatively affected by lower profitability and a higher working capital balance. As you can see from this chart, Atea's working capital balance is highly seasonal and fluctuates greatly throughout the year. Based on this seasonal pattern, Atea's aim throughout the year is to maintain or reduce its working capital balance from the same period last year. At the end of Q3 2018, the net working capital balance was NOK 287 million compared to negative NOK 321 million last year. The increase in net working capital was due to higher receivables and lower days payables outstanding compared with last year. Collection of accounts receivable was negatively impacted by a reduced collection period in Q3 as the last 2 days of the quarter were on a weekend. Days payables outstanding fell as an increased proportion of product costs were incurred at the start of the quarter and paid before quarter end.This concludes our summary of the third quarter financial results, so I'll now pass over the podium to Steinar to discuss the current status of the business.

[Steinar Sonsteby, Chief Executive Officer]

So thank you, Robert. I think you agree with me when I say that we have excellent performance on all arenas outside Denmark. So the question is really how can we get back to the same run-rate in Denmark as we had in 2014 and before that and as we have shown the last 3 or 4 years in the other countries. There is a lot of technology reasons for why things are going as well as they are, but mostly it's because Atea is perfectly positioned and everything that we have done over the last 3, 4 years have shown to position us that way.But let me take you through my view on the Danish situation. First, a little glimpse backwards. So the court ruling in the case came 27th of June. And immediately after that, surprisingly to us, there were a hold on purchases in public purchasing in Denmark given by the Minister of Finance. We had already done our self-cleaning, but they wanted to look at it one more time. The self-cleaning -- or the ban -- or the exception for buying from Atea was lifted 100% Friday, the 7th, or for us doing business really Monday, the 10th of September. We had expected that to come, to be honest, 2 weeks earlier and that gave us a very short period to close out Q3 in a good way in public in Denmark. It's not like every order we take we can invoice immediately on the same day or the day after. A lot of the things that we have, have 1 to 2 months' delivery time and we can't invoice before we delivered. So the delay influenced Q3, but also the start to Q4. But we look -- if you look at the order taken, we can see that it has picked up through September and so far even more into October.We've got a lot of questions on frame agreements in Denmark, and I do understand that for people who do not do business this way it's difficult to understand what is a frame agreement, how does it work. It's really something we live with in all the 7 countries we are in and there is nothing special with the frame agreements in Denmark. A frame agreement is an agreement to sell to a certain part of a public [ instant ] for a certain period, very often 3 to 5 years. Very often, there is 2 to 4 vendors that can compete. They are on the same frame agreement. In Denmark, there are tens and tens of these frame agreements and we are on most of them. We have not been banned from any of them. None of them has been stopped. And we can all -- or we can do business on all of them immediately after the ban was lifted on the 7th of September. It wasn't like everybody stopped doing business with us the 27th of June either. Of course, I mean, the sale was down 20%, which is tough, but it obviously wasn't a full stop. But there is no change in the frame agreements in Denmark. By the way, 3 of the biggest ones were renewed with Atea just, I think, it was 2 weeks ago or 10 days ago and you will see some good news on new wins on frame agreements in Denmark in just a couple of days.So there is nothing there that will keep us from getting back to normal business in public in Denmark.I'm actually -- as you can see on this slide and in our report, we think it will take a little longer for private businesses that has chosen to look to others to get back to full throttle. But public business, we are very confident and that's why we're saying that we're actually planning for public business in Q4 to be very close to, if not 100%, on normal. Enterprise will take a quarter or 2 longer to get there. This will, of course, influence the Danish numbers this quarter -- sorry, Q4 this year compared to Q4 last year. But we will see significant improvement week for week, month for month.The organizational change that we did has followed on pretty well, but it's in the enterprise area where we still have some adjustments that we've done over the last 3 to 4 weeks with, amongst others, a change of sales director. I'm very happy to see the change in energy and motivation, though. The self-confidence I would maybe say in the Danish organization going around and we had all managers together Friday almost 2 weeks ago and I was there all day with them and it's a completely different energy in the room than what it was just before the summer or during the summer. So we're very confident. We know exactly the medicine we should give the patient. We've proven that in all the other countries, just look at Finland. It's not more than 2 years ago we were having a different dialogue. So we're confident, but we are a little cautious about the very short-term development and actually more in enterprise than in public.I also want to take this opportunity to thank all our 10 strategic partners for their support in Denmark, but also outside Denmark through this process. They've been outstanding. And I have talked to many investors and people in the investor community on the relationship that we have with our vendors. And I can tell you if there's been a time where I've seen proof of what that means, it's been through the last -- especially the last 3 months, but the last couple of years. And so I want to thank all of them: Microsoft, Cisco, HP Enterprise, HP Inc., IBM, Apple, Lenovo, VMware, Dell EMC and Citrix. It means the world to me.So as I've said, there is so much good to talk about. And when you -- after 3 quarters and the most difficult quarter, I mean, no matter situation in Denmark, Q3 is the most difficult quarter in our industry, and we have had almost 15% average growth in all countries outside Denmark. I mean, none of you had ever in your dreams expected that, and to be honest, I hadn't either. But I did warn you that you had to lift your expectations from approximately 5% to maybe as high as 10%, and that's where we are. We can't -- we haven't been able to deliver that for the whole company and we have talked about that. We've been very transparent about that and we would have wished for that not to be there. But actually, to be honest, I think you all believe that we are going to fix that. It's a matter of time.But this growth is not something that just came. It wasn't just because someone ordered more pieces. This is a fundamental change in how we operate, how we build and how we really vision the life and the cities and the countries and international companies and the reach. It's just fundamentally a big change in how things are done. And it doesn't go over because we end the quarter or go into a new quarter. This is the new order. And the biggest, biggest problems here hasn't been tackled yet. The biggest build hasn't been built and the biggest task to solve like ethics, like security, with AI and analytics, with cloud, all of these things are still ahead of us and so we feel we have plenty to do. But before we can talk more of that, we understand that we have to tackle our biggest challenge right now, which is Denmark and I can promise you that we are working on it and that we feel confident we will.Again, I just want to point out in the Danish numbers so far this year on DKK 81.5 million in loss, there is DKK 13 million in fines to the Danish government. And there is a ton of legal and other fees that we have had to pay and upheld through this process that we will not have to do going forward.With that, I'll conclude on the Q3 presentation. We're looking forward to seeing you after Q4. And I think I said I wouldn't comment on Denmark after Q3, I'm sorry, I didn't keep my word on that. But I'll try not to next time. Thank you.