Proact IT Group AB (publ) (PACT) Earnings Call Transcript

So good morning, and welcome to Proact's presentation of the interim report for the third quarter. My name is Christopher, and I lead Investor Relations and Communications here at Proact. With me today, I have President and CEO, Magnus Lonn; and CFO, Asa, who will walk you through the quarter. We have 4 items on the agenda. Magnus will start with a short introduction to Proact followed by the quarterly highlights. After that, Asa will present the financials in more detail. And lastly, we will go through some closing remarks. After the presentation, we will open up for questions. Please raise your hand and you will be handed the word. With that, I hand over to you, Magnus.

Super, and welcome, everyone. I'm really glad to have you all on the call here, where we will walk us through our Q3 results that we released this morning. But first, I think it is a good way to give an introduction to Proact and what we are doing. We are a specialist company that are in the middle of exactly the AI boom that is happening. We are experts in the content of every data center. And we are specifically really skilled at handling data and data storage and protecting that when it comes to IT. And if you think about that, this is exactly what every company has a need of. And what is happening now with all the AI scale-out, I think Proact is the best ever positioning, given what is happening in the market. We are not a new company. We have been actually doing this for 30-plus years. And over the years, we have become better and better in what we are doing. We're also on a growth journey, as you can see here on the graph that we, over the last year, have expanded. And as of today, we have around 1,100 experts working mainly in Northern Europe. You can see it on the colored map here, the countries that we are located in. And I think this is also a key thing when it comes to product that we are a European company. And given everything that is happening around data sovereignty and things like that, this is a big advantage for the customer that we are working with that we are a local player located in Europe that helps our customers protecting their most precious thing, and that is the data. And then for us as a company, it doesn't really matter if the data is in the customer's data center or in our data center or in the hyperscaler. We can handle it no matter what because our expertise is actually handling the data and give advice to our customers on how they can leverage that and build a safe and mission-critical infrastructure. If you look into how we are generating our revenues, I think this is a good reminder for everyone that is following us. We have 4 clear revenue streams, and I will walk them through from left to right here. So we start off with systems. This is the sort of the core foundation that Proact was built upon 30-plus years ago. We realized that we had a need to help our customer to store and protect the data. And that is what we have continued and become really, really good at. In the systems bucket, our revenue recognition is that, that is when we sell hardware and software related to that hardware. So we are advising our customers on how to build and how to design their -- for example, a data center. And then we help the customer with the procurement, we are negotiating with the vendors, and we are sort of taking full ownership of delivering the solution to the customer. Example of that is that it could be storage in form of NetApp or Dell. And of course, to that, it could also be compute like servers or as very popular these days, NVIDIA GPUs and of course, software related to that. The systems business is revenue recognized when we have done the delivery. And we at Proact, we are working with larger customers, and that means that the systems business can be very sort of volatile between the quarters. It depends on where delivery ends, if it's in the right side of the quarter or if it's in the next side. And the size of the deals can be quite big, and that also creates a sort of fluctuation in our revenue stream. I think this is important for everyone to understand. So when you are sort of evaluating us, you should see it over a longer term. And then to all the systems that we are selling, we often also provide our own support on the technology that we are selling. The reason for this is that we have the skill set, and we are really, really good at it. And that means that we also provide an extra safety for the customer because this is critical infrastructure. It can be a bank, it can be a hospital, it can be a store or anything. And that means that if the infrastructure breaks down, it has a great impact. And instead, we are providing our support, meaning that we have technicians that can help and restore the service if something is failing. The good thing with the support is that it's very long contract. It's often 3 to 5 years. And this is an example of recurring revenue. Also, it's very positive from a cash perspective because the contract is paid upfront and then we sort of distribute it over the contract length. Then we have our managed cloud services. And that is that everything that we sell within systems, we can also provide that as a service. That means that the customer, they don't need to have their own employees. They don't need to have their own data center. Instead, they can rent that as a service from us. And this is an area where we are sort of focusing and continue to build. It's a good example of recurring revenue. So in combination with support and our managed cloud service, we are creating a very stable base when it comes to recurring revenue. And then, of course, nothing of this could really happen in practice unless we had super skilled consultants. They are out there advising our customer. They are also really experts in their domain. It can be, for example, Dockers and Kubernetes or it could be Azure Cloud Foundation. And this is the sort of the skill set that there is a lack of out in the industry as of today, and it's very close to also the critical infrastructure. And that is also important when you're sort of evaluating us that every consultancy service that we are doing, it's related to the sort of the infrastructure layer and the sort of the hypervisor layer. And that is an active choice that we have made to really stick to what is critical. So from a CEO perspective, I'm also very happy to drive a company like Proact because we are actually working with sort of building the infrastructure that is now happening across the globe here when it comes to AI scale-out and digitalization. We are not working with software in the sense that we could be replaced by an AI algorithm. Instead, we are sort of working and helping our customers to build the AI infrastructure. And I think that is a very sort of differentiator when you look at Proact compared to other companies. If you look into our customer base, this is also something I think is also very good at Proact. We have a very broad customer base. And that means that, from a risk perspective, we have also a good mix. So we have not an individual sector that we are sort of dependent upon. And also, as I mentioned in the beginning, the sort of the sweet spot when it comes to our customer base areas, so if you look into the Nordic area, we are more into the larger customer. If we are in, for example, more southern part of Europe, there, we have the sort of more midsize. The thing with Proact is that we are aiming to become the super skill set in each of our geography. And the key thing is that the solution that we provide to our customer is actually the same. And then it depends on the customer size and for what solution that we bring to the market. One thing that is really common, and we can also see it in our customer employee survey is that we have very happy and satisfied customer. One of the key thing and something I work a lot with is that to maintain and keep the competence in our employees. They are the stars and they are really committed and working and helping with the customer. And if you have that, then you also build trust and then you also create long-term customer relationship. And I think, if anything, that is what is really good at Proact. And of course, you, probably all on the call, are looking into what is happening in the market. I already mentioned part of it, but there is a huge investment now happening globally into data centers. Traditionally, the hardware has not been the sort of -- it has always been reduced in cost and it has been not in focus. Now with the geopolitical situation and also the global AI scale-out, customers also realize that hardware is the key factor. And if you don't have a secure infrastructure, then you also put your company at risk. And I think that is one of the main drivers where hardware has got sort of the focus. And we at Proact have been working with this for 30 years. So we are really good at it. So the sort of the global trend is pointing to our direction here. Maybe worth mentioning is that if you look into statistic and the data, there is a difference compared to the hyperscalers when they are building new clouds and AI factories, that is done on a different scale. It's the Magic 7 companies that are investing in that. But we, at Proact, so far, is targeting more to enterprise customer and that part of the segment. And the growth there is still significant, but it's not on the same scale as the AI scale-out. So I think that's also important to understand the dynamics in the market. And then as we talked about, I think Europe, we have a hard wake-up call. We have realized that we need to also make sure that we protect our own data and foremost also that we are not building 100% dependency on, for example, a global American cloud provider. And hence, this question about sovereignty has increased the last couple of years, I would say. And this is once again an area where Proact is super skilled at. And as I mentioned in the beginning, we're also a European-based company. And I talked about that, going back some years ago, every company was thinking about the cloud-first agenda, given what's happening around the uncertainty. I think that the mix now is more into hybrid and that also company realized that it's super important to make sure that they have control of where the data is stored. And here also it's an area where Proact is really good at. And I don't think I need to mention the AI scale-out. I think you just need to open the paper, and it's in the news every day. But that is something that will continue for many years. And I would say that we as a -- and the companies are just in the beginning of that phase. And of course, cybersecurity and the resilience. And I usually say that it's just a matter of when, not if, when it comes to cybersecurity because that is really a challenge. And then the most critical question for companies is actually to really make sure that they can restore the service if something and when something happens. And this is also an area that Proact is really good at. So with that introduction, I'm also moving into the most important thing here, our quarterly update and what we have been doing in the last quarter. So I am really glad in that we, this quarter, provide an organic growth. We had almost 9%, resulting in SEK 1.11 million (sic) [ SEK 1,180 million ], and Asa will walk us through the details here. I'm also very satisfied with that the work we have been doing the last quarters when it comes to our cost program and also restoring profitability outside the Nordic region has actually gone in the right way as we have planned. And in some areas, has also been going faster than we had expected. And all this, together with a strong product mix provided a really good quarter when it comes to our result, this one. I talked about that earlier and memory prices, there is a shortage in the market. Prices is high and has been that for a while. I expect that the prices will continue to increase. If I look into the crystal ball and with everything I hear and know also from our vendors is that the prices will be on a high level at least for '27 and probably be a bit into '28 as well. The good thing with Proact is that even if the prices would go down, we have been really good and protecting our gross profit and margins. So from that standpoint, I think no matter what, the digital scale-out will continue even if the memory prices go down. So from that standpoint, I think Proact is in a very, very good spot here. Also during the quarter, I am very happy that we have announced that Asa now is a permanent CFO, and that is a really good step forward in building Proact. So I'm really happy with that. We continue with our share buyback programs. And we have also, during the quarter, announced that from starting of January next year are taking the next step in building Proact in the sense that we will be merging our 2 business units: West and Central into one. The main driver for that is that we see that we can do it better and create a better platform for organic growth. And then we also can, with that, create a more efficient organization that will sort of help the continuous work in getting back to growth in these areas. So that is the main driver, and I think it will be a really good step forward. My expectation is that once we are in a bit in that journey, we will continue to see incremental improvements. And we will talk more about that, but we have also been working on our strategy, and we will have a Capital Market Day coming up here on November 11, where we will go more into details around our plans forward and how we see the market and where we play in that. So overall, I think it was a good quarter, and we are progressing according to our plans. And with that, I think I will hand over to Asa to help us dig through the financials. Well, maybe first, we should look into the business -- I'll give it to you, Asa. You will take it away.

Okay. Thank you, Magnus, and good morning, everyone. So let's have a closer look at the financials, starting with total revenue. Total revenue amounted to SEK 1.180 billion, which is an increase of 8.9% versus last year. This was driven by organic growth of 8.3% to be compared with minus 4.5% in the same quarter last year. Currency had a positive effect of 0.8 percentage points, slightly offset by a net effect from acquisitions and divestments of minus 0.3 percentage points, and the growth was primarily driven by higher systems sales in the [ Nova ] and West business units. Systems sales then grew by 14.4% year-on-year to SEK 635 million compared with SEK 555 million last year. The development was driven by several large systems deals in, as mentioned, the [ Nova ] and West business units. Total service revenues amounted to SEK 544 million, an increase of 3% and 3.5% on an organic basis compared with minus 0.1% in the same quarter last year. Support revenues grew by 12.1% to SEK 181 million and managed cloud services grew by 3.3% to SEK 278 million, while the consulting services declined by 13% to SEK 85 million, and this is mainly an effect from the divestment of the Netherlands consulting businesses during Q2. Service revenues made up 46% of total revenue in the quarter compared with 49% last year. This is a mix effect following the strong systems sales, while the service base itself continued to grow. New cloud contracts of SEK 118 million was signed in the quarter compared with SEK 248 million in the third quarter last year. The decline is primarily a timing effect and the year-to-date intake is more similar to the year intake or year-to-date intake last year, only 4.9% behind. Moving on to top line development in business units. As described earlier, [ Nova ] and West were the main contributors to growth in this quarter. [ Nova ] grew by 16.5% to SEK 630 million and accounted for 53% of total revenue. West grew by 23.8% to SEK 217 million. And in both cases, the growth was mainly driven by systems sales. Revenue in U.K. declined by 9.3% to SEK 184 million. This is largely explained by a strong comparative quarter, Q3 last year, but also an effect of extended hardware lead times, delaying both systems deals and related services. Central declined by 10.2% to SEK 171 million, where systems sales decreased by 21.3%, while services increased by 0.7%. The decrease in systems sales is partly driven by the shift in focus toward a more unified offering with potential to improve margins. Yes. A growing recurring revenue base provides visibility and resilience as systems sales varies between the quarter, as you know, and as Magnus mentioned. Annualized recurring revenue has increased with 54% since 2021 and is after a small downturn in 2025, now back on the growth track. In the third quarter, recurring revenue amounted to SEK 459 million, equal to SEK 1.837 billion on an annualized basis, which is an increase of 6.5% compared with last year. Moving on to the results in the quarter. Adjusted EBITA amounted to SEK 112 million, which is an increase of 47.3% year-on-year and equal to an adjusted EBITA margin of 9.5% compared with 7% last year. Solid earnings development is, as Magnus described earlier, a combination of increased sales, a favorable product mix and the effects of the cost efficiency program. [ Nova ] increased adjusted EBITA by 61% to SEK 90 million, which is equal to a margin of 14.3%. West improved to SEK 10 million from SEK 1 million, and Central turned a loss of SEK 2 million into a profit of SEK 8 million. U.K. reported SEK 9 million in EBITA compared with SEK 16 million last year, reflecting the lower revenue and a strong comparative quarter as mentioned. So all in all, a very strong quarter with improved year-on-year earnings in 3 out of 4 business units. And rounding up the financials with an overview of the net debt development and how capital has been allocated in the last 12 months. Starting with a net debt of minus SEK 9 million by the end of Q3 2025, cash flow from operations, including change in working capital and leasing amortization amounted to SEK 488 million. The generated cash has been put into use in M&A of SEK 138 million, including then deferred purchase payments for BlackYaks and Consular throughout the year, capital expenditures of SEK 48 million, and SEK 172 million has been returned to shareholders through dividends and share buybacks. Leasing debt increased by SEK 87 million, largely reflecting a strong order intake and net interest amounted to SEK 13 million and currency and other to SEK 25 million, all resulting in a net debt of minus SEK 4 million by the end of this quarter. Cash balance by the end of the quarter amounted to SEK 542 million, which is an increase of SEK 98 million year-on-year. We reinitiated a share buyback program, as Magnus mentioned, after the summer based on the mandate from the AGM in May. And as of the last of September, 155,579 shares have been repurchased. Total shares in own custody now amounts to 551,324, which is equal to a little above 2% of total shares. And that sums up the financial section, and I will hand back to Magnus. Thank you.

Super, Asa, thank you for guiding us through the great numbers here. So just to close up before we open up for questions, so as Asa mentioned, I mean, we had a really strong quarter, and I'm really satisfied that we are back to growth and also profitability outside our Nordic region. So this time, we had 3 out of 4 business units delivering good. U.K. was a little bit weaker, but at the same time, I mentioned in my [ CEO ] that it was related to timing effects around system delivery. And I also know that we have a good backlog in U.K. So I'm not at all sort of worried around that for the time being. And as I said, we are also investing into improving our organic growth by the step that we are now taking that we are sort of merging our 2 business units. So Jacob Kronborg, who is heading up our Central business unit will lead that new. And Alexander, who is leading up West, he will focus on helping creating growth in this, so we can accelerate our organic growth even further. And as I mentioned, I see no sort of dip in memory prices and things like that. So we expect that, that will remain the full of 2027 and probably beyond that as well. And we, as a company, are really providing our focus and really helping our customers navigating in this sometimes challenging market. But at the end of the day, it is helping creating more business out there for our customers. And just to remind and also do a little bit of commercial here. We have done a strategic work, and we are more than eager to enlighten you all of that in our upcoming Capital Market Day on 11th November here in Stockholm. So I hope to see you all there and foremost, talk more about our plans going forward. So with that, Christopher, I think we should open up for some questions.

[ Daniel ], I see you raised your hand here. So please.

Yes. I start off with a question regarding Q3 and Q4. Did you see longer lead times in Q3 affecting systems sales negatively? Or are you just a bit more cautious on Q4 related to your comments?

I mean that's a good comment, [ Daniel ]. So what is happening, actually, it started already back in Q1 and then it has accelerated, is that the delivery times of hardware has been prolonged. And I think I have mentioned it earlier as well that, given that, it might also have an impact on our Q3 -- Q4 earnings in the sense that we have made the sales, but the delivery times may shift into Q1, for example. So of course, that is still something we're working on a daily basis. And actually, to be fair, I mean, it's also a challenge for our customers because the planning horizon has increased a lot for them. So yes, it can impact our Q4. But if you look into it in a longer perspective, that will then just be a timing perspective. So there is no sort of -- it's no stop or anything in the sales. It's rather that the delivery time might impact the quarter and when we do the revenue recognition.

I see. That's clear. And then secondly, related to that and in terms of order intake, you don't report that here, but are you seeing levels significantly above the current, like organic sales growth rates that you report due to pre-buying? And also, what kind of backlog do you have today for the coming year compared to historical Q3 levels normally?

I mean to your point there, we don't really disclose that, but I can speak in general terms and that I see that, in the quarter, we have not seen any sort of slowdown in our customer base or regarding demand and things like that. I think rather the opposite that many customers actually now have realized that it's not just a short-term issue. We are thinking about a new normal when it comes to prices and things like that. And the reason for it is that it probably will take a year plus until anything happening. So I think many customers now realize that it will not help them, short term, to wait. It's probably better to order now instead of risking further price increases. So yes, it's a dynamic market. And on that, I know also many customers are struggling with the longer delivery times as well. So we are doing a lot in order to help and mitigate the customers in this situation.

Yes, I see. That's clear. And if you look at the order backlog today, I guess that must be quite a lot higher than a year ago. Is that something you can comment on? I mean sales are 10%, 15% higher than a year ago roughly. But I guess that the order backlog is more, but is it like 20% higher than a year ago? Or is it even 50% higher than a year ago, given prebuying or preplaced orders but not yet delivered due to longer lead times?

I think looking back, [ Daniel ], we have not been good enough in creating organic growth, and this is one of my key focus areas to turn this around. Looking into this quarter, for example, West made a really big jump forward when it comes to sales and things like that. So my expectation is that we will continue to build upon the successes and keep our laser sharp focus and continue work with improvements. But as I said, we don't really yet disclose our backlog and so forth. But I expect that we will continue to perform on a good level. But as I've said many times before, what could impact our sort of earnings is probably the delivery times and our revenue recognition. But if you think about it, it's probably -- it's more a timing impact than anything else.