Itera ASA

OSE:ITERA

Earnings Call Transcript

[Arne Mjøs, executive]

Good morning, everyone. Welcome to the interim report for Itera, the last quarter, fourth quarter and also the full year 2024. As you know, we normally have 2 takes, one in Norwegian and one in English. So now we are actually having just one take, and this is only in English.

So first of all, I think the agenda is more or less the same as previous. But of course, we will also look at how we can maybe change the format going forward. So for this session, there will be some [ questionnaires ] so that you can also, of course, post some questions. But I think also next time, we will try to make it even more interactive. So let's just continue the change for this time, having only one version in English.

So I will start with the highlights of the quarter and also walk through the business review. And then Bent Hammer, Chief Financial Officer, will look into the financial review and have some comments about the outlook.

And as I said, you can also post some questions during the session. So we will have an interactive session and look at the questions that you have posted. But of course, we are also available after this session if there are any kind of more specific meetings or walk-through that you would like to have.

Okay. Let's move into the highlights for the fourth quarter. I just want to mentioned 3 topics in the beginning. One is about what we have talked a lot about this kind of engagement in Ukraine. We have established a new service offering we call the Enter Ukraine with Itera.

And during the last 12 months, we are working quite hard in order to mobilize more of the businesses to look at opportunities in Ukraine. So we are navigating, doing a lot of business advisory and facilitating a lot of meetings with potential buyers in Ukraine.

And for this quarter, we are very happy to make an announcement that we have managed to do a very interesting project for Bergen Engines that provide gas turbines to Ukraine because there's a demand for electricity, as you all read in the newspaper. And of course, this is one of the proofs that we are showing that, in this case, we have been working more or less for 12 months in order to make this as a successful project.

We have more and more opportunities going in that space. So for the first time, we are also providing services into Ukraine and not only as a supply of resources out of Ukraine. So that's one of the topic you will hear more about going forward.

But of course, the second topic I just want to also make sure that you know, that, of course, frame agreement is extremely important for Itera. And this quarter, we are very happy to announce that we also have made another 3-year framework agreement with Gjensidige, one of the larger customer of Itera, has been there for many years, and we are very happy for having extension to that contract for another 3 years.

And the third, but not at least last important topic, is actually we talked about in the previous quarter that we were opening a new office in Rogaland through 2 smaller acquisitions we've made, and all these acquisition is fully integrated into the operating model as in Itera.

So we're very happy to see how we have been progressing this new opening of office in Stavanger, it's is actually strengthening our position in the western part of Norway. So we are also seeing a lot of benefits also in terms of sales pipeline, and we also closed several orders together from this office in Rogaland.

So if I look at the figures for the first quarter in brief. We have a decrease of 4% in revenue. That is one of the headlines. We -- of course, we will go into more in details. And we have adjusted EBIT margin of 5.6% in this quarter.

If I look at the market, I think it's -- we are seeing -- it has been quite challenging, I would say. The 5, 6 last quarters, we are coming from almost 30% growth. And now we have a negative growth, but that has been also connected what we've discussed in the third quarter that one of the large customers of Itera was changing the partner. But of course, we managed also to win back that customer. So that also has some gradual effect from mid-November.

So it has had some impact on the revenue growth. But going forward, we also look at the market that is turning into a established market, and we also see some growth trends in the market as such.

If I look at the order intake, I will say it's a very strong order intake with a book-to-bill of 1.4 in the first -- fourth quarter and 1.1 for the last 12 months. But in general, I think the company has really improved our sales activities and moved a lot of activities internal activity, to approach the customer. So I really see the pipeline visibility really has improved a lot in the last, I will say, 2 quarters. So we are quite optimistic about, also, the pipeline going forward into 2025.

As mentioned, the business advisory services and the Enter Ukraine with Itera has already started to yield results with several new agreements. That's very important that we manage to turn this into business. And as I also mentioned, the Rogaland office has been very successful with the integration, and we also see a very strong pipeline development based on that region.

If I look at the performance in terms of constant currency, it's about 3% decrease. And we see also some improvement in the utilization. It's still too low compared to what it was in the past, but we see gradual improving of also the utilization.

The cash flow is always strong for Itera, I will say, it's NOK 45 million in the fourth quarter and NOK 74 million in 2024. And of course, we have a very, very strong EBITDA-to-cash conversion of 91%.

And that means also that we continue to make dividend payouts. So there is a supplementary dividend for 2023 of NOK 0.20 per share that was paid in December. Totally, in 2024, it was actually payout of NOK 0.6 per share. And the Board has also proposed a new dividend for 2024 of NOK 0.20 and also potential additional dividends in 2025.

And if we look at the people I mentioned, we have now increased sequentially the number of employees by 26 since the third quarter.

So these are the figures itself, a decrease of 4% in the first quarter -- in the fourth quarter. In average for the full year, 3%. We have also adjusted, what we call the rightsize, the number of employees. It's minus 4%. And that's also a part of the business we have. We have quite many locations.

We have the flexibility to increase and also reduce the number of employees. So that is something that we're also looking at. But of course, we do not want to downsize the business too much because it also costs a lot to build it up again. So that's why we think we have done this in a quite balanced way.

And also if you look at the EBIT margin, it's -- in this softer market, I think, is acceptable for the 5.6%. Of course, we are not satisfied with that in general, but we also have adjusted the business in order -- to the softer market that seems to also improving going forward. And for the full year, the EBIT margin in 2024 was 6.2%.

Okay. So that's the highlights for the first quarter. Let's go into the business review section. I just want to put this in place because, of course, we are -- especially sustainable digital transformation. Of course, that has been our positioning. We have a full range of services. We have a very customer-centric strategy.

In this, you see that we have 15 offices and we are delivering services to about 20 countries around the world. So the model that we have established is actually very strong because we can build team combined companies from different locations and to provide this in a very unified way. Normally, we are providing services to clients based in the Nordics with people also from Central and Eastern Europe.

But as I also mentioned that we are also turning the Central and Eastern Europe into opportunities in the go-to-market. As I mentioned, the Enter Ukraine with Itera program, this is actually that we are helping customers to also enter this market, this opportunity, this new market that will arise by providing services into Ukraine. So that's also a growth opportunity at Itera because we are quite well established.

And as you know that this model has been developed over years. And in 2028, we were recognized as best in the world by Global Sourcing Association. So in case, we talked about this customer that we initially lost in the third quarter that was coming back, I think that was a very strong footprint.

Because some of the customers looking at Itera as a Nordic player, and that was a customer with very strong international footprint, and they try to use the international player to go also into the Nordic market. But in this case, we managed to win back the customer because of this recognition, I will say, that we were best in the world in terms of distributed model.

So it's not only about size, also not at least about the culture. So I think that's one of the strength of Itera, that we have built this company in -- according to one model. So also the scalability of Itera going forward, be able to work with Nordic-based clients and also provide services into any locations where they belong.

And also, I just want to mention, because we have talked a lot about the digital transformation, there is also a business transformation going on. A lot of customers have a lot of legacy IT, and that's one of the change in their business that they also need to look at how could they transform the legacy into more modernized platform.

But not at least that will also be accelerated through AI, because they are actually driving this business transformation and this digital transformation at a much higher pace than we -- they believe, in the past.

So there is a lot of focus in the businesses, how to really come into more cloud-based operating model because that's, of course, important when you are trying to utilize AI as one of the new driver or lever for this kind of change in terms of business and IT.

And I think this is just to also show you, because there has been a lot of discussion also in terms of expectation for AI. Of course, AI has a high expectation, but it's not only about technology. This is actually also about how not at least provide business value. So you need to look at where and how data and AI will create value and what kind of ambitions that you -- and targets that you set for your company.

So that's one aspect of this kind of holistic way that you need to look into. Another one is actually the operating model and the governance model will also be changed. It's new roles, responsibility, processes, whatever, not at least also the competence and the culture.

The data quality, the s*** in, s*** out is a part of what you know all about, and not at least also utilizing AI is more or less the same, but you also need to have data quality and access to your data in order to get the value of utilizing artificial intelligence.

And then you have the ethical and social responsible use of it, you need to also look into that. And then you also talked about technology infrastructure and tools. Of course, you need to apply the cloud platform. If you have a lot of legacy, as I mentioned on the previous slide, there's a long -- to make some steps in order to your technical -- technology platform to make it even available in terms of data and all the tooling that are also in the cloud operating environment.

And last but not least, you need to also ensure that the organization adoption of this kind of new technology and model itself are really put into use in -- by the end user and also into the processes.

So altogether, you look at the 7 items here that I mentioned, and Itera, because of our full range of services, are able to support any customer in this kind of transformation. So we have several customers that are starting on this transformation. And as I said, we also are very happy to see that the value of applying AI is also even more and more visible for the customer.

So I think also the trends coming forward, that this will also trigger the transformation that I mentioned from the legacy to digital platforms like -- especially the cloud you need to use, and not at least also changing the business environment itself.

Just to also look at some of the cases here. As I mentioned, Gjensidige has been a customer for Itera for decades. It's actually started in 1998. So we're very happy. And I think that's also some part of the quality that Itera delivered, that we have very long-standing customer. So this is one of the customers that have been there for a very long time.

And of course, we have a lot of competition every once, maybe 3 or 5 years. And in this case, we managed also to increase or extend this contract for another minimum 3 years. So we have been supporting Gjensidige in their digital transformation journey, enabling substantial advancements in automation and service delivery within the Nordic insurance market.

And as you know, Gjensidige has been very successful and also recognized globally for having some of the most outstanding digital claim solutions. So Itera has really, together with Gjensidige being part of this team, so we are very happy to look at the value. Together with Ukraine -- with Gjensidige, we have managed to create together. So Gjensidige is an important customer. I'm very happy to look at how we also extend the partnership for at least 3 more years.

Another one, as I mentioned, the Bergen Engines, this is more showing some more details about what we are doing. In this case, working from 12 months, whatever, in order to position the products and services in a quite complex Ukrainian market and also secure the funding for these engines.

And in total, Bergen Engines is providing 160 megawatts of electricity by these engines. And if you look at these kind of efforts is actually addressing the humanitarian energy needs for approximately 1.5 million people in some part in Dnipro region this winter.

So of course, this has a big impact for Ukraine and it also have a very interesting look at how we are also contributing to the new resilient and more, let's say, distributed energy system in Ukraine that has really been hit by all the missiles from Russia.

So this is one example of how Itera is working through the business advisory. It's very hard work by a very dedicated team together with Bergen Engines, and we also have other customers that going in the same direction.

I also want to mention, we -- as you might remember, in June 2024, we were recognized as 1 of 10 companies globally by this international flagship award that has contributed most to the business of -- creating business in Ukraine, and also invite more and more business to look at opportunities in Ukraine.

So this is another award that we achieved by the United Nations Sustainability Award in the fourth quarter for our Itera Employee Foundation. So we're one of the finalists in this competition, and we were recognized for all the collective efforts we have done for businesses and governance and civil society to build a better future for Ukraine.

And I think if we look at the geopolitical situation, as you know, all about from Trump, Kemp, et cetera, and also protecting the values and the democracy, I think this really has some impact because we need to stand up with Ukraine. So this is another initiatives that we are doing as a part of our corporate social responsibility.

And I'm very happy to look at and see how our Head of Ukraine, Oleksandr Storokha and the team there is -- has been appreciated by all the efforts they have done for Ukraine in the last 3 years. So I'm very proud of how the company is working and really standing together with Ukraine.

Okay. Let's go back to look at the order intake. As I said, it's very solid in this quarter. Normally, the fourth quarter is the best one. But as I said, I see there is higher visibility in the pipeline. So 1.4 in the fourth quarter and 1.0 for the last 12 months in terms of book-to-bill, I think, is quite strong. I'm very happy to see that.

And also, if you look at the customer mix, what I just want to put your attention on, if you look at the share of new customer, you see that there is 86.5% of existing customers. So the 13.5%, which are coming from new customers, that means customers that we didn't have for 12 months ago. So we are really increasing the number of customers, and that's good.

And you also look at the top 30 customer for Itera, it actually represents 77% of the total revenue. So I think that's also quite interesting strength, that we managed to establish more customers into Itera.

So we also have a stronger growth platform because of the stabilization of the demand increase for some of the largest one, so that's why we are looking at other customers. So we have a stronger customer base to scale or to grow the company. So new customer represented almost NOK 29 million in this quarter.

And let me also finish with my presentation and look at the number of employees. It's 725 at the end of 2024. That's down by 33 people in the last 12 months. But in general, I think that's quite -- that's what we call the rightsizing. We have managed to keep the company ready for continued growth.

Of course, we need to address something. But of course, we are also looking at opportunity because we opened, also, these offices, as I mentioned, Rogaland, despite the softer market. But now we are really looking at -- we are quite established.

It's a very strong platform, of course, but not at least, I'm very happy to see all the efforts that Itera are doing in terms of increasing the pipe and also having much more dialogue with the customer. And also there are a lot of new opportunities that are coming in. So I'm really quite optimistic about the pipeline development going forward.

So I think that was all from my side. So let's look into the financial review. Bent, and it's actually Happy Valentines to you today.

[Bent Hammer, executive]

Yes, not between us though. Good morning, everybody.

Yes, so as Arne mentioned, we had a slight decrease in our revenue this quarter, down 4% from the year before. This was due to us coming into the quarter with a very soft utilization as we lost some major engagements during the third quarter that -- throughout the tender process.

However, midway through the quarter, we managed to win this engagement back as the customer decided that they wanted to recover our services as they were not happy with our successor there. So that improved the utilization towards the end of the quarter, but still some softness in the quarter overall.

Our adjusted EBITDA margin was 9.4% in the quarter and our adjusted EBIT NOK 11.9 million or 5.6% margin. So the adjustment that we made is that we had to make a write-off of an investment we made in 2023 into a partnership that, unfortunately, proved not to be sustainable. So our reported EBIT for the quarter was NOK 7.5 million.

For the year, we had an earnings per share of NOK 0.43 and a dividend per share of NOK 0.60 per share. And we ended with an equity ratio, which was fairly unchanged at 16.8%.

Looking at the revenue and EBIT development. We have, through what, at best, has been a mixed market for the past 18 to 21 months, managed to keep the ship fairly steady. So our rolling 12 months revenue is more or less on par with what we had 5 quarters ago. And we can see that our average growth rate for the past 3 years is close to 13% still.

Our EBIT margin though is hurt by this softer demand over the last year. And as we have done some rightsizing, as Arne mentioned, we have nonetheless decided to maintain our capacity to a great extent in order to be able to bounce back when the market also comes back.

There are several vehicles though, for our future growth and also margin accretion. One is that the activity in the market is now picking up, and we see that our pipeline is growing. And so that gives us a lot of opportunities going forward. And we expect that to lead to a more normalization of our utilization.

We have -- we are expanding, of course, in Sweden, where we started up again not so long ago. And we have this new office in Rogaland in Norway, which will also be a vehicle for growth. Right now, both those are, call it, investment cases where we have to build some minimum capacity in order to have profits from those units.

Least but not -- last but not least, we have this Enter Ukraine with Itera service offering that is already providing some financial success, and we expect that to continue into 2025 and even accelerate from the fourth quarter.

If we look at the different revenue types that we have, the revenue from our own consultants decreased by 6% during the quarter. Again, on account of softer utilization, but also, of course, some less capacity. We grew though the revenue through subscriptions by 8%. The revenue from external subcontractors was down by 9%, and the revenue from other types of business, like hardware and software sales, was also increased by 9%, but small numbers though.

Our cash flow from operations was good in the fourth quarter as it typically is, I would say. You can see in the graph on the right-hand side that there is sort of seasonal fluctuations in our cash flow. So the fourth quarter is typically the strongest one and the second quarter, the second strongest. And then Q1 and Q3 are more challenging in that sense.

What I'd like to bring your attention to, though, is the EBITDA to cash conversion that we have, which both is strong in absolute terms, but also you can see that we've had a positive development over the past couple of years there, ending now at 191% EBITDA-to-cash conversion in Q4.

We spent quite moderately on the investing activities in the quarter. There was a positive impact on the acquisition we made as the cash outlay for that transaction was less than the cash that we took over from those companies. That was actually a favorable, I think, NOK 1.6 million in positive cash inflow. The rest of the transaction was share-based.

In financing activities, we spent close to about NOK 21 million, of which some NOK 16 million was paying out the supplementary dividend in Q4.

Yes. So together, we -- with a supplementary dividend of NOK 0.20 per share and the ordinary dividend that we paid out in the spring, we altogether paid out NOK 0.60 per share. The Board of Directors yesterday proposed to the general assembly that we will pay out an ordinary dividend of NOK 0.20 in May, June, and then ask for an authorization to pay a supplementary dividend in Q4 again as we have been accustomed to do over the last several years.

The share price was down to NOK 8.94 at the end of the quarter, which is 21% lower than the end of 2023, if we consider dividend payments included in the meantime.

We hold now 682,000, approximately, shares of our own after the transaction with the acquisition, and that's valued -- it was valued at NOK 6.1 million at the end of the quarter. So we continue to distribute our earnings on a consistent basis to our shareholders, generating positive cash flow from our operations.

Quickly on the outlook. Not a lot of changes there, except I would say that we now see more tangible evidence of the market seemingly returning to more normal growth. There are still some variances among the different industries.

Our biggest industry, banking and insurance, have been among the softer ones, I would say, in the past year or so. There are other industries like energy, though, that is increasing well. Public sector is picking up again. So there are variances, and we will, of course, try to find the opportunities that are out there and build on our strengths.

And there are -- I mentioned some of the growth opportunities. So I will not mention those again. Our focus though is on a balanced approach to growth in a profitable way. So we will be somewhat cautious with adding more capacity. We have still a lot of more capacity through our existing base of employees. And also, we have the opportunity to grow nonlinearly, I would say, with headcount as well.

So that's pretty much it. Maybe there are some questions posted online, Arne.

[Unknown Executive]

We have one question from [ Arie Hovedstad ]. That is, do you have any comments on the share development? The exchange rate has fallen from NOK 14, NOK 15 to around NOK 9 per now.

[Arne Mjøs, executive]

I think we shouldn't make any specific comments about the share price development. Of course, we do not like that the share price will -- has decreased. Of course, we are a big -- also a shareholder myself. If I talk myself, I don't like that. But anyway, I will say that, in general, I will say what we have been focusing on is actually we have really -- if you look at the average 3 years that you presented, that has been quite good. But during these 3 years, we have also built a very strong company. We have established 5 more offices, of course.

So short term, I don't like what we have seen and the organization do not like to see it either because there's a lot of, also, employees that also are a shareholder of Itera. So that's -- you are not satisfied and the employees are not satisfied. So we are at the same page. But also, we have been looking at how could we also make sure that we're downscaling too much because we really believe we are in a strong position, right?

So going forward, we have the ambition to really increase the value for the shareholder going forward, but also be smart in between because we see that has been a more softer market. But we also managed to really establish a quite good foundation that will also provide a lot of cash flow going forward. So being this kind of company that have the ability to adjust according to what we see.

From my point of view, what we have learned from this is actually that we are coming from a situation where there was quite -- after the COVID, there was a very strong demand for digitalization. And what we have done in Itera now is actually to change the company in order to be much closer to the customer, much more efforts into the customer engagement from the whole organization.

So I think that is also a part of what I believe might be -- have benefits going forward, that we managed to return back to the growth figures that we had in the past. Because we have the scalability from 15 locations, it's one model. So we have access to talent, that shouldn't be a problem.

And we also have looked at how could we also extend the number of customers. So we also have a stronger customer base, and not at least we also the organization itself has also improved how to approach. But more and more of the people, the culture with is even closer to the customer than it was maybe 2 years ago, right?

So -- but I really understand what he's saying. You are bleeding. We are bleeding. The employees are bleeding. But our ambition to really come back and also increase the value more than NOK 14, NOK 15. We really believe that the potential is much higher than that also. So I think we have the same interest in that perspective.

[Bent Hammer, executive]

Absolutely.

[Unknown Executive]

Thank you. That was everything for now.

[Arne Mjøs, executive]

All right. So we will present our Q1 figures on May 9. So we hope to see you back then. In the meantime, of course, we are always available for any one-on-one meetings that you might want to have or questions you want to post to us, then feel free to contact us.

Okay. All right. See you soon. And Happy Valentine's Day.

[Bent Hammer, executive]

Thank you. Bye-bye.

[Arne Mjøs, executive]

Have a nice weekend.