Ovh Groupe

Hello and welcome to the OVH Cloud H1 for your 2023 results call. My name is Caroline and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the presentation. This can be done by pressing star one on your telephone keypad to register your questions at any time. If at any point you require assistance, please press star zero and you will be connected to an operator. Please note, this conference is being recorded. Today's speaker will be Michel Paulin, the CEO, and Stephanie Vesnia, the CFO. I now hand over to OVH team to begin today's conference. Thank you.

Hello, everyone. Good morning. This is Michel Paulin, the CEO of OVHcloud. Thank you for joining us today for H1 2022 results. This first semester has been a period of growth acceleration. Our revenue reached 439 million euros at 15% as reported and 12.8% like for like. With the Q2 growing at plus 13.9% after a Q1 at 11.7%, we had a strong growth acceleration. Our H1 adjusted EBITDA reached 156 million, leading to a margin of 35.4%. Higher than expected energy costs in Germany and the timing of our sizing of our price increases meant the EBITDA was modestly below our initial expectation. We continue to monitor our investment level with discipline. Our capex is lower than last year with recurring capex of 17% of our revenue and gross capex of 27% of our revenues. We are pleased to see that revenue accelerated in Q2 with gross reaching 13.9% up from 11.7% in Q1. So let me give you an update on the guidance for this year. Overall, H1 was encouraging, but in March and so far in April, we have seen signs that some clients are taking longer to conclude contracts. We are still confident our offering in quality and price will remain competitive and attractive. Nevertheless, we think it's prudent to temper our full-year revenue guidance to take into account this. We now anticipate our full-year 2023 revenue growth, to be between 13% to 14% like-for-like, and we were previously at 14% to 16%. It's still a very strong growth level and represents an acceleration compared to last year and in H2 over H1. Given the operational gearing of the business, the lower level of revenue growth is impacting EBITDA, where we now look for a full year 23 margin of at least 36%. We had previously looked for 29. The new target still implies a stronger second half margin with increase driven by the effect of volume growth, price increases, and the front end loading of costs, and of course, continued strong cost discipline. We expect our capex to be in the lower range of our guidance, recurring capex between 16 to 20, and gross capex between 28 and 32. We have a clear focus on financial discipline and flexibility. We continue to invest selectively for future growth in new products, new data centers, especially new infrastructures, and remain agile as we were positioned on a fast-growing market long-term and remain focused on delivering profitable growth. The next slide is about OVHcloud, which operates in a fast-growing market with an expected five years of more than 20%, as you can see on the left-hand side of this slide. The cloud market is driven by cloud adoption from all customer segments, as it is mission critical to their operations. Everyone is moving to the cloud. Data usage is growing fast, and we keep seeing new usage, new edits, many new opportunities for growth. Multi-cloud and hybrid cloud trends accelerate the momentum more and more organizations deploy multiple cloud solutions to finally address their digital transformation needs. In this market, as European cloud leader, we are recognized by IDC as a major player in the cloud industry, and we are ideally positioned to continue to capture opportunity in this fast-growing market. OVHcloud is the European leader in data sovereignty and current regulation evolution is a very strong tailwind for us. The global legal framework is increasingly favorable to VxCloud. In Europe, with the Data Act, European institutions are reinforcing freedom of choice for cloud users. This is even resonating in the UK. British authorities are undetermined, are determined, sorry, are determined to ensure fair competition and are currently preparing an investigation on the cloud market practices. We continue to see a strong traction for our sovereign solutions. Our second cloud offering is doubling every quarter. It shows attraction for the highest level of security and trust. Data sovereignty is a strong driver now for business, as shown by our recent wins as APHP in the health and also with Dalet in the media industry for the Olympic Games. We are working on several aspects, including the extension of the certification to public cloud and barometer solutions beyond our current private cloud offering. These extensions will be driving business momentum, as we also are expanding our existing certification in Germany to also expand in new market opportunities in these locations. OVHcloud's leading position for a sustainable cloud is recognized by analysts and customers. We are very proud to have reached a score of 71 over 100 at S&P Global Ratings, which is a five-point improvement compared to 2021. With this high score, we are above the average of technology companies in all geographies. Also, we are in the top 15% of the software and service companies in 2022 in Sustainalytics ranking with a low risk ESG profile. These new rankings are a clear confirmation of our leading position. More importantly, our continued work to improve our carbon footprint, energy and water efficiency is driving business momentum as our customers and clients are looking to optimize their environmental footprint. Let me give you a few points regarding our growth acceleration strategy. We had in H1 a continued growth acceleration with a very strong Q2. In public cloud, we reached 74 million euros of revenues in H1 with a like-for-like growth of 18% in Q1 and 22.8% in Q2. In private cloud, our revenue reached 273 million euros in H1 with, again, a like-for-like growth of 12.8% in Q1 and 16.6% in Q2. In WebCloud, our revenue reached 92 million euros with a like-to-like growth of plus 2.5 in the semester. At group level, our growth accelerated from 11.7% to 13.9% in Q2. This growth acceleration is fueled by our key long-term differentiators, data sovereignty, sustainability, open and reversible cloud, predictable and transparent pricing, best performance price ratio, which are, in this period, key competitive advantage. It has been a strong first half, and it's come with both existing customers and new customers' wins. Our existing customers show a high level of loyalty, as you can see on the revenue retention rate reaching 111% in Q2. Capitalizing on this high level of trust, we are delighted to register good upselling and cross-selling dynamics within our customer base. In addition, we have seen and continue to see good momentum with new client wins. As you can see on the right-hand side, we continue to win significantly clients this quarter in various sectors such as finance, insurance, media, software editors, marketplace, or gaming. And I would like to share with you three flagship names that we won this quarter. All three of these wins are of the type that have significant medium-term potential. The first one is Allianz, where we will host a workload of one of their affiliates on the hosted private cloud. The second is in the health sector with APHP, the public hospital system in France in Ile-de-France. This is a very interesting new opportunity. We will build with them a new health data hub to develop a sovereign health platform with open source data. It will grant health large corporates, hospitals, clinics, laboratories, public entities, or researchers to access to significant amount of health data. It will accelerate their progress on various projects such as AI for expenses. Finally, we are very proud to have been selected by Dalet to manage and store the very significant amount of media data that will be generated during the Parry Olympics game of 2024. This will build their infrastructure on our public cloud and path offering. All these customers underline our data sovereignty, price performance, product performance of the product, and price predictability are important for them. These are key differentiating strengths for VHcloud and drive strong new business momentum. We have a steady dynamic in our go-to-market performance with a continued strong traction both for the digital and the enterprise channel. The success of our partner program is key for us. We now have more than 1,250 partners worldwide, mostly IT integrators, such as Big Name, Accenture, Capgemini, Soprasteria, that can integrate OVHcloud on their own offering. It enables them to offer to their customers their expertise coupled with our unique cloud offering. First, it increases our total addressable market as large corporates can be addressed without partners. Secondly, in a period where some customers are looking to optimize costs, our strong relationship with partners is a key asset to understand what our customers want and how we can best address their cloud needs in the short and long term. We will continue to increase our work with partners. It is clearly successful and very appreciated by existing and future customers. As we know, we started our price increase mid-Q2. The customer response has been encouraging. There were no changes to our commercial dynamic with continued strong new customer additions and double-digit impact growth. among existing customers. It confirms that our value proposal is robust and our pricing power potential is very strong. We had a very good first half, especially in Public Cloud, where we saw a significant increase in brand awareness. The performance of our product is recognized. We booked 10,000 new customers in Public Cloud in H1 compared to the same period of last year. It also enabled us at group level to continue to grow with the existing clients. The more they use OVHcloud, the more they understand and perceive the value and performance we can bring them. RPAC has increased by around 10%. In terms of churn, as the chart shows, the dynamic is unchanged and very encouraging. We closely monitor all operation KPIs that we have and we didn't see any change in our monthly revenue chart compared to historical trend as the price increase rolled out. We have limited monthly volatility with 0.5 maximum of variation between the maximum and the minimum for the more than two years. We will continue to strictly monitor these KPIs and to adapt all the time our action plans. We have been developing and improving our PaaS offering for the last two years. PaaS enables users to develop easily cloud-based applications. Demand for these kind of solutions continue to be very strong. We have now thousands of customers for our different solutions such as our database as a service, storage, or containers. In Q2, PaaS represents 8% of our public cloud revenue, after a very significant growth since the beginning of the year. We expect our past offering to continue to be a significant growth driver, accelerating and expanding our customer base. Looking at geographies, we are pleased to report double-digit growth in all regions with a growth saturation in Q2. We had a continued double-digit growth in public and private cloud in France. Despite lower growth in Web Cloud as anticipated, we grew at 12.4% Light4Light in PO2 and 12.8% Light4Light in H1. We had a strong growth acceleration in Europe, driven by very good performance in Germany and Eastern Europe in all segments. In the rest of the world, it's a strong performance as we are again growing at a double-digit growth pace despite high comparison basins in the U.S., and the continued deceleration in Russia. We announced a new data center in India a few quarters ago, and we are very happy to have officially launched the commercial Go Live early March. We had a very good traction as soon as we launched it, and we were rapidly, unfortunately, sold out for the first wave of servers, which confirmed the high growth potential of this region. The Indian cloud market is expected to grow by more than 30% in the next five years, and thanks to these new data centers, we're strengthening our presence in this fast-growing region, which is also concerned with data sovereignty. This is a rising demand in India for data sovereignty and for the highest level of data protection, which fits perfectly what we are offering to our customers. We operate in a very fast-growing market, and we are investing selectively to boost our future growth. We are focused on financial discipline. Our model is highly flexible, and we can see in the capex evolution versus last year. The capex need for the servers is 20% lower than last year, and we have been using stocks that we have decided to increase last year because of the supply tensions. We continue to invest in infrastructure CapEx to expand our capacity, especially in new regions and new data centers. The roadmap of opening we planned at the start of the year remains on track with nine new data centers in the next year. We also have invested in hyper-resilient CapEx related to the new security standards we have implemented in our data centers. Finally, we continue to invest in the development of the new technology and software such as PaaS, We have introduced new solutions recently, such as long-term archive storage, node AI solutions, and new initiatives will be also launched very soon in security and data management. We have a highly agile model and can reduce or accelerate our production and investment in anticipation of market trends. So now, let's now move to financial parts with Stephanie.

Thank you, Michel. Good morning, everyone. I am Stéphanie Bessonnier and I am delighted to be with you today to present you our key financials for the first half of the year. I am thrilled to join OVHcloud as a CFO after more than 20 years of investment in strategic areas. I am convinced about the strategy and outlook of the European cloud leader. I'm honored to join an outstanding management team and I'm looking forward to meeting you soon in person. As Richard said at the beginning, we registered in the first half of the year a strong revenue growth of plus 12.8% life-for-life and plus 15% as reported. Growth in Q2 accelerated compared to Q1 and reached 13.9% life-for-life. This growth is fueled by a strong acceleration in private and public clouds Generating a favorable with evolution as shown in the next slide On this slide we can see that the mix continues to evolve to work more public cloud which is the most dynamic market and Private cloud with a continued strong growth in this segment thanks to the success of our go-to-market strategies Public cloud now represents 17% of our revenue at one point versus last year, and private cloud represents 63% at 1.5 points. The strong performance of our cloud businesses is driven by a robust customer acquisition, especially in public cloud, a continued RPAX growth, and a steady ramp-up of our batch solutions. and the profitability side, H123 adjusted EBITDA is at 156 million euros, representing a margin of 35.4%. In terms of cost, spot electricity prices in Germany were higher than expected. Germany is the only country where it was not possible to fully edge our consumption. In addition, our continuous efforts to invest in our talent base, particularly early 2023, led to personal costs that were higher than anticipated. Looking forward, H2 margins should increase significantly. We've taken action. First, we are deploying a company-wide cost reduction plan, including extra discipline on hiring. We also expect to have the full effect of price increases in the coming quarters, And finally, we continue to have an active hedging strategy and electricity costs. Bottom line, we expect these actions to bear fruit as early as H2 and support margin increase in H2. Looking at our full P&L, operating income increased at minus 7 million euros compared to minus 21 last year. It includes share-based compensation for 4 million, depreciation of outdated or damaged servers for 5 million euros and a premium in insurance fees for 2 million euros. We continue to benefit from a very attractive cost of debt thanks to the package negotiated during the IPO, the opportunity financing from EIB in 2022 and an active strategy of hedging our debt. Now, moving on to cash flows, we improved in H1 are operating free cash flow after investments at minus 53 million euros versus minus 18 million euros last year, reaping the benefits of increased adjusted EBITDA and financial discipline. We continue to invest selectively in infrastructure and network CapEx, as explained by Michel, with a great flexibility and a clear focus on execution to maximize our future value creation. we focus on improving our capex efficiency. The recent reduction in hardware capex with stock consumption and production control demonstrates the flexibility of our industrial model. Moving on to the next slide, I want to insist on the strength of the balance sheet. At the end of the year, our net debt to EBITDA ratio is at two times, and I'm glad to share that good financial decisions of 2022 are paying off. 75% of the debt is held at fixed rates, and current average interest costs is 3.2% all in as we speak. Also, with more than 500 million euros of available liquidity, OVHcloud's growth acceleration plan is fully financed until the end of the year 2022. Ending on this good note, I would like now to hand over to Michel for the outlook and key takeaways.