Proact IT Group AB

STO:PACT

Earnings Call Transcript

[Magnus Lonn, executive]

Good morning, everyone, and welcome to Proact's Q1 Report 2025. I am Magnus Lönn, I'm President of Proact, and I'm here. And for you who have been listening into this meeting before, you see that we have a new do here to present our Q1 report. It's me, Magnus; and Noora, our CFO.

And I, myself, I took over as CEO for Proact 1st of March this quarter, but I have a long background in the company in the sense that I have been leading our Nordic & Baltic business for the last 3 years. And I've also been Deputy Group CEO for the last year. So I'm well aware about our company and our potential and our business, foremost. So just really glad to have you all on the call here to walk you through this quarterly report.

And as usual, I will give you a short introduction to Proact as a company for you who are new to the call, and then I will give you a short overview over the market that we are operating in. Of course, we will dig into the quarterly highlights, and then Noora will guide us through our financial results, and then I'm more than happy to take questions at the end of this session. So let's get started here.

So Proact, we are a leading expert when it comes to provide critical business infrastructure to our customer. And this we have been doing since over 30 years as a company, and we were founded in Sweden 3 decades ago. And what we are really, really good in is exactly this around IT infrastructure, and I will go a little bit more into detail around this later on. But this is actually something that every customer in today's society has a critical need of because all our businesses may more and more digitalize, and this is the area where we are in.

Today, we are operating in 12 different countries, and you can see them here on the map. So we are very Europe-centric. We serve around 2,000 customers on an active basis. And we have a yearly turnover of 5 -- roughly SEK 5 billion. Been stock-listed since '99, so a well-established company. And as you can see to the right here, over the past 5 years, we have actually done a good growth session, growing our revenues and also EBITA, foremost.

Today, we are around 1,200 experts across our countries. And I would say that we are really -- we are a local trusted partner. And nowadays, I'm also very proud to say that we are a local European partner because this is, given the last turbulence in Q1, is something that we experienced that our customers are valuing more and more, I would say. So that is us in a short, but take the next slide here.

From an operational standpoint, we have divided our business into 4 different business units, and this is also how we report our financial numbers. The red one here is Nordic & Baltics, and this is roughly half of our company in size when it comes to revenue. Then we also have business units in U.K. And we have one business unit called West, which consists of Belgium and Netherlands. And then we have our Business Unit Central that consists of Czech and Germany.

Out of these business units, we are also delivering -- we have located our service hubs, and I will go into more details around that, but that is actually where we produce our services that are supporting these 2,000 customers that we were talking about with our own produced services.

If we look into our revenue stream as a company, I would say that we have a really good spread when it comes to how we generate revenue here. We have the 2 to the left here, our system and support services. And this is actually the core of Proact where we were started 30 years ago and then we have expanded out this. So hence, there is a different size of it. But our system is that we are helping our customer with designing, providing and install systems that are taking care of their critical infrastructure. It can be service, it can be storage. It can be NVIDIA infrastructure that are enabling AI, for example, and it could be on-prem and it could be in our data centers.

Then to all the systems that we are selling, we are very often providing our own support, meaning that if a customer gets a critical failure or something in their environment, then our team are there to support and help and fix it. And this is something that are really working well and is really appreciated by our customers.

And then we, as a company, also have the possibility to provide what we are selling also as a service, meaning that we own the hardware and we operate the hardware on behalf of the customer. And this is something that we are actually seeing growing more and more. And this is what we call managed cloud services, MCS.

And of course, we, as a company, we are a tech company. And at the end of the day, that means that we are experts in what we are doing. So we are also selling our competence in form of consultancy services. And I would say that all our consultancy services related to the competence that we have, it could be designing a new data center, it could be a cloud-native service, it could be around public cloud and things like that. So we have a really skilled team.

And for you who follow other tech companies and also in general, I would say that cybersecurity and finding solutions for them, this is on top of every company's agenda. And if you think about it, the best solution or protection for cybersecurity is actually to have a good backup of your data. If something happened to your primary site, then you could restore your data and then you can get back to business again.

And this is something that more and more customers actually realize. They can invest enormous amount of money into cyber protection, but at the end of the day, the ability to restore and back up your data is probably the best protection that you can have in the environment that we're operating in. AI is, of course, a super-important driver, and we see more and more of that coming. And we are the experts in building the infrastructure around AI, and that is important to point out.

If you look into the market, I was talking about that we are in a very good position. So if you can see here down to the left in the graph here, this is the society that we all are living in, that the amount of data that we are consuming, both as a private person, but also as a company are generating is actually growing. And this data needs to be stored somewhere, and that means that then there is a need for services and taking help from a company like us.

And if I would bet, I would say that the amount of data beyond 2026, it will just continue to increase because this is how we see it. You also see, unfortunately, that these cybersecurity trends and the spend in the market, that will just become more and more because the -- it's like a war against criminality that are becoming more and more sophisticated and then ways of finding and to protect it.

At the end of the day, I think we at Proact here are actually super good positioning because we can help and design so that when, and I say when because the likelihood is very high that you get attacked by a cyber-criminal, but then that you can restore data and that you can get up and run your business again. And this is some of the key, what to say, experience and knowledge that Proact possessed.

Hybrid cloud, this is also something that we see more and more coming that many of our customers, especially, I would say, the last year, have really rethought what they think about where to store the data. Maybe it's not the best thing to store your critical business data in a cloud that are operated by American company. This, for 2 years ago, this was not a question. But given the last 100 days and what's happened in the U.S., now many customers are really rethinking this. And here, we are actually there to help our customers designing the most optimal solution for them to help and store and protect the data.

I was mentioning that we see an increase of AI, and this is sort of a customer case that we were working with during Q1, and that was that Göteborgs Universitet, a really science-focused environment, they were building up an environment for their research to test and apply new methods. And we enable them with adding NVIDIA card in order to test and use AI to their data. And this was something that we developed over the past couple of months here together with Göteborgs Universitet. So this is a concrete example that how we can use our competence and what we are doing on a daily basis together with our customer.

This picture is actually something I really like, and I will guide you through it because this, in essence, describe what Proact is doing. So if you look into the blue part here, there it says data management and it says on-premise, private cloud and public cloud. This is actually how every company is built up because if you have a tech infrastructure, you need to store your data somewhere, either it can be on-prem, meaning that you have your own hardware and things within your company, then we can help you with that; either you outsource and have your data in a private cloud provider like us, then we can help you with that; or you take help from Microsoft, Google or Amazon and have your data stored in their public cloud, then we can help you with that.

And this blue part is actually the core of what Proact has been doing for 30 years. We are experts in this field. And it doesn't really matter if your data is located on-prem or in the cloud, we are there to help you. And in today's society, every customer have this setup and structure. This is how we design IT infrastructure today.

And then, of course, you see the yellow part here. Of course, we want to do something with our data. We are using AI to extract more data and do things more quicker. Then you need to have a foundation that your AI are operating on, and this is what we are helping you.

And today also, some of the hardware are moving into more into software with cloud and native and container technology. And this is a way to develop applications quicker. Here, we also have experts that are doing this on a day-to-day basis that can help you. And of course, all of this happens around the key value for the customer is protect the data, make sure that you have a backup and recovery, make sure that your data is secure. And if something happened, then we are there to help you.

And to the right here, you see this is also how we can deliver it. Either we can help you and sell only technology or we can sell technology with premium support or we can sell it as a service. It doesn't really matter. So this is really a flexibility that we have as a company. And at the end of the day, we have super-skilled 1,200 people that are here for helping our customer.

So I think Proact as a European trusted local partner, we are in a really good position to be in. So I'm really feeling excited about this, I realize when I talk to you. So with this, that was both a short background about Proact and also around our market.

So going over to some key highlights here. As I mentioned in the introduction, I'm the successor of Jonas Hasselberg, 1st of March. And I've been working with Jonas since the last 3 years, so I have a good understanding of our business. But even more exciting was that we acquired BlakYaks, which is a British consultancy company based in U.K. that are experts in cloud transformation and Azure technology. So it's fantastic to have them on board and joining the Proact family. Their cutting-edge knowledge will, for sure, help us going forward. And for us, the U.K. is a super-important market. So with them on board, then we also feel confident that we have strengthened our U.K. position.

What was also really, really great during the quarter was that we was named Enterprise Partner of the Year by NetApp. NetApp is a global expert company within data storage. We have a super-long relationship together with NetApp, and we're helping a lot of our customer with NetApp technology. But just to be named this and the best in Europe, I think that is a testimony to our skills, foremost, for our own staff that are working on this with a daily basis. So this is good.

And when it comes to the financials, and Noora will guide you through here very shortly, but we had a revenue of SEK 1.2 billion, and our EBITA landed around SEK 80 million. And Noora, would you be so glad to walk us through the more details around this?

[Noora Jayasekara, executive]

Thank you, Magnus.

So turning to Slide 10. Revenue in the first quarter, as Magnus mentioned, reached SEK 1.2 billion, an increase of 2%, largely driven by good performance in Nordic & Baltics, offset by lower sales in business units U.K., West and Central, with the BlakYaks acquisition contributing positively with 0.6%. Organic growth reached 1.5%.

System sales increased with 7.8% to SEK 688 million. And sales from services business decreased with 4.8% to SEK 524 million, driven by higher system sales in Nordic & Baltics, offset by lower sales in U.K., West and Central.

Cloud service revenue decreased with 6% to SEK 271 million due to contract terminations and higher customer churn, mainly in West and Central. Improvements in Nordic & Baltics partially offset the decline, but could not fully compensate.

On Slide 11, annualized reoccurring revenue amounted to SEK 1.7 billion in the first quarter, a decrease of 2.8% compared to Q1 2024. New cloud service agreements amounted to SEK 122 million in the first quarter compared to SEK 182 million last year. Onboarding of cloud contracts are typically between 3 to 6 months, hence, the revenue effect will come over time.

Next page, please. Adjusted EBITA amounted to SEK 79 million, mainly due to lower revenue in the services business and reduced gross margin. Business Unit NOBA and Baltic stands out this quarter with an EBITA increase of SEK 15.1 million. We have initiated cost efficiency measures in U.K., West and Central to create a more sustainable cost base over time.

Further to cash flow and net cash position on the next slide. Our net cash position at the end of the quarter amounted to SEK 101 million compared to SEK 330 million at year-end 2024. Changes in working capital had a negative impact of SEK 57 million on cash flow, partly due to tougher terms from both customers and suppliers, including timing effects and revised payment conditions. Despite this, our strong financial performance enabled both M&A activity and share buybacks during the quarter while maintaining a solid financial position.

Now some details starting with Business Unit Nordic & Baltics. Revenue landed at SEK 717 million in the quarter. EBITA increased with 20% to SEK 80 million, resulting to an EBITA margin of 11.2%, being well above the group target of 8%. System revenue increased by 28% to SEK 500 million, driven by several large deals in Sweden. Service revenue grew by 5.4% to SEK 217 million. Business Unit Nordic & Baltics continues to deliver impressive results in the first quarter.

Further to Business Unit U.K. In the U.K., revenue decreased with 7 -- with 13.7% to SEK 159 million, primarily driven by lower system sales. EBITA declined to SEK 1 million, corresponding to an EBITA margin of 0.6%, mainly due to lower system sales volumes and continued pressure on gross margins. BlakYaks contributed positively to adjusted EBITA with SEK 2 million, achieving a strong EBITA margin of 28%.

Business Unit West on this slide. Revenue in West decreased with 21.3% and landed at SEK 181 million in the quarter, reflecting a downturn in both systems and service revenue, primarily due to lower activity levels and churn. EBITA decreased to minus SEK 4.2 million with an EBITA margin of minus 2.3%. The decline in EBITA is primarily due to lower revenue with efforts underway to create a more adaptable cost structure.

And finally, Business Unit Central. Revenue decreased to SEK 183 million in the quarter, mainly due to lower system and service sales in a tough market climate. EBITA landed at minus SEK 1 million, corresponding to an EBITA margin of minus 0.6%. The EBITA decline is primarily due to lower revenue, particularly in the cloud services segment.

And on this slide, our financial targets. As mentioned, organic growth in the quarter was 1.5%. Coupled with the recent acquisition of BlakYaks, we reached a total growth of 2%. We still have a way to go to reaching our target of 5% of organic growth and additional 5% growth via acquisitions.

EBITA margin in the quarter was 6.5%; and last 12 months, sum up to 6.8%. We are moving towards a long-term target of 8%. As I previously mentioned, we are in a net cash position, meaning that our leverage is well below the set level of 2x EBITDA. And ROCE is at 15.9% for the last 12 months.

And this concludes the financial overview of this quarter. Back to you, Magnus, with some final comments.

[Magnus Lonn, executive]

Thank you, Noora.

So trying to wrap up here. So as you can see, I mean we have a continued strong performance in the Nordic & Baltics, of course, super happy with that. And I'm also really pleased that we, during the quarter, made the acquisition of BlakYaks because this really strengthened our U.K. position. And also this expertise with cloud-native services is an area where we also see we'll continue to grow going forward. So just really glad to have them on board.

As you also can see in the report, I mean we are having challenges in West and Central. And as Noora explained, it's mainly related to customer churn, and we have had experienced contracts. But I would also say that, especially in Germany, we have a tough, let's say, macro financial situation. So the market there is extra challenging. And of course, then there will be even more competition when it comes to sales and things like that.

But we have initiated cost efficiency measures across the board here. So I believe that over time, we will also work with address them. And I mean, as an example, when going back, NOBA have doing great now for a time, but we also had some challenges. So it takes time to get this in the right position.

But overall, I would say that when we look into the market context, this has been, Q1, especially turbulent and things like that. But I think we -- as I believe strongly that we, as a company, really stands out as a local European trusted partner, and that is what we see that our customers are really valuing and appreciating. Of course, this turbulence that are in the market with tariffs and things like that, it might make an impact our customers' decision, but this is something that we are really closely watching in the coming quarters, yes.

So with this, I am opening up for questions to all you, and thank you a lot for listening in.

[Magnus Lonn, executive]

And we see here, Daniel, please go ahead.

[Daniel Thorsson, analyst]

Magnus, welcome to Proact and these calls.

[Magnus Lonn, executive]

Thank you.

[Daniel Thorsson, analyst]

So the first question is on Nordics & Baltics and the strong system sales here in the quarter, up SEK 110 million year-over-year. Is that driven by the market performing well or you mentioned the large -- a couple of large deals, especially in Sweden? And what type of deals, customers, end markets do these relate to?

[Magnus Lonn, executive]

It's a super good question. I think in the Nordics, one of the big drivers here is, unfortunately, the uncertainty that we are experiencing in the surroundings. We are working with both public customer and also private customer. And I would say that every customer in Nordics region are now really revisiting how are they storing the data, do they have a backup, how are they protected. And of course, that drives investments because many have probably taking these questions around cybersecurity, data intrusion and so a little bit too light. But with the market condition that has changed, I would say, many are experienced with that.

But then also, we are a long-term partner, meaning that we are having long-term relationships with our customer, and that also builds trust. And as you saw, we were also able to increase our revenue during the quarter. So I would say that is the main drivers.

[Daniel Thorsson, analyst]

Yes. I see. And does it also mean that it looks promising for the rest of the year? Or do you expect any short-term hiccups here in Q2 in the Nordics? Or do you expect that to be the out-performer in '25?

[Magnus Lonn, executive]

I will answer like this, that I would say that Q1 was quite turbulent and then things in the macroeconomic, I think that impacts everyone. So I mean it's really hard to predict what will happen in the future. We are, of course, focusing on what we can impact, and that is what we are doing on a day-to-day basis. But I will not either promise or commit to anything. So I'm really looking forward to talk more in the coming quarter here. But we have -- yes, I'll stop there.

[Daniel Thorsson, analyst]

Fair enough. Fair enough. And then a second question on the services development in Q1 here in general, down quite significantly year-over-year, minus 6% to historically quite stable grower line. Anything to keep in mind here for the rest of 2025? Is it the; low utilization on the consulting side or any large lost deals behind this?

[Magnus Lonn, executive]

No, I mean it's some -- as you can see also, we have challenges especially in West and Central that we are addressing. And we have had, in my opinion, too high churn in our customers. And of course, that accumulated over time then gives us this decrease. But worth mentioning is also that during the quarter, we were signing SEK 120 million in new contract deals, and that will, of course, materialize over the coming quarter. But we have some more work to do in our other business units before I am happy at least.

[Daniel Thorsson, analyst]

Yes. I see. And you touched upon it already here, but cloud revenue is down, I think, 7% year-over-year in Q1 here and order intake lower than last year, even though you mentioned SEK 120 million here. But any reasons for that to pick up this quarter or that the customer churn picked up in this quarter specifically? Or was it an expected development driven by, for example, contract expirations where customers have already hinted that they will not extend the contracts with you? Or is it only a sign of a weak market?

[Magnus Lonn, executive]

No. I mean, to some extent, it is related to a bigger uncertainty in the market, especially outside the Nordic, I would say. And in Germany, the market there is extremely tough. They are really struggling with their financials in the country on a macro level. And of course, that means that some decision in deals that we have been working with for a very long time might have been pushed into the future. So I would say I would expect that, especially outside the Nordics, this will continue at least 1 quarter and before we know more what's happening here.

[Daniel Thorsson, analyst]

Yes, I see. I see. And just to follow up there on the German weak development and some customer churn, do you understand that they have left for another partner or a solutions provider or another solution or they have just decided to reduce their investments in this area?

[Magnus Lonn, executive]

Yes. That's a super good question, and we have really digged into this. And many of the customers that we have lost, we have lost due to price because some other vendors have really lowered their price expectations, things like that. And for us, we are not in that game. I mean we are not raising to 0 because we think we are delivering value and value then it should be well worth paying for. And as I said, it's very easy that you end up in a situation, especially when it is tough in the climate, that there will be a raise to 0, but we are sort of looking into that.

And then, of course, some customer, if you have had a long relationship, maybe they want to test another partner and things like that, but our doors are always opening. So we are, for sure, making sure that we are building long-term relationships here.

[Daniel Thorsson, analyst]

Okay. That's fair. And then I have a separate question here. As the new CEO of Proact, also having heading up the Nordics business, are there any structural reasons for why Nordics & Baltics should be a higher profit margin than the other segments over time? Or do you see a journey where you can drive these other margins up to the Nordic levels by implementing a new kind of thinking that you executed in the Nordics?

[Magnus Lonn, executive]

Yes, otherwise, I wouldn't have signed up for this new work, of course. So I think we have done a great job here in the Nordics. We have a good momentum, have a good team. And of course, my ambition is to spread that to the rest of our team. And we have a fantastic management team. So we have some more work to do, and I'm really looking forward to continue to develop Proact going forward.

[Daniel Thorsson, analyst]

Yes, sounds good. And then the final question, on M&A, and the ones that you have been involved with so far before the BlakYaks acquisition, what type of acquisitions do you think fit best for Proact and comes with lowest integration risks and, obviously, highest possible return?

[Magnus Lonn, executive]

Yes, that's also a super good question. Conoa, who we acquired 4 years ago, I think that is a super good example. We are working super good together. We are doing business together, and all of the founders are still in the company, and that is what I think it should be. We are considering BlakYaks as the same thing. I mean we are allowing both them to do their business and then we are focusing on strengthening each other. And that is what I think how M&As should be done, focused on value creation. And then over time, you implement the integration and synergies that you need, but don't rush it. That's my philosophy.

Do we have any more open questions here? Then I would like to thank you all for listening in. And Noora and I are really looking forward to report coming quarters, and talk and see you soon, and have a great continued day. Thanks a lot from us. Bye-bye.