Ovh Groupe

Hello, and welcome to the OVHcloud H1 F424 results. Today's speakers will be Michel Polat, CEO, and Stephanie Besnier, CFO. I now hand you over to OVH team to begin today's conference. Thank you.

Hello, everyone. I am Michel Polat, CEO of OVHcloud. Thank you very much for being with us today with our H1 Fiscal Year 24 conference call. Let's start with the slide three for the key highlights. Overall, we are very pleased to report that we have successfully executed our strategic roadmap, maintaining a disciplined focus on business development and free cash flow generation. We generated 10.8% like-for-like growth in the first half of the year. The top-line growth was strong, especially in Q1, but a bit softer than anticipated in Q2, on the back of a surprisingly mild economic growth in Europe. But we are pleased to benefit from the pick-up in the US in the end of the quarter. Revenue retention remains high globally as a strong result of strong commercial executions. Our EBITDA grew by 19.8% and our EBITDA margins substantially increased at 39.9, up 2.5 points. Thanks to our robust operating leverage, driven by tight cost control. Our plan to optimize CapEx allocation to maintain growth and to reduce capital intensity is bearing fruits, and as a result, we generated a positive and leveraged free cash flow for the second semester in a row. This achievement underscores the strength of the strategic plan we presented in January, which allowed to maintain strong revenue growth and improve cash generation. As a result, our financial leverage is now stronger than ever, with a level of 1.8. Moving to the next slide. Early January represented you an update of our strategic plan. Despite the current short-term challenges, when we consider the broader picture, we are delivering on our old strategic pillars, which remain at the heart of our long-term vision. First, we are the reference for data sovereignty and we will continue to meet customer demand for more control over the data and immunity to extraterritorial laws. And we will continue to lead the way in addressing this highly critical topic of data sovereignty. Second, innovation is one of the core values of OVHcloud. We will continue to propose new products as today without, for example, our new AI solutions And we are preparing for the next tech revolutions, such as quantum. Third, our objective is to consistently deliver sustainable and profitable growth. H1 results are a good demonstration of it. We are organizing ourselves a marketing strategy and cost structure for the long-term profitable growth. Our fourth objective is to maximize cash generation. We have invested a lot in recent years and will continue to do so to sustain our growth momentum and this investment will allow us to maximize cash generation as we have already demonstrated this semester. The next slide is looking at Q2 fiscal year 24 as where we have demonstrated the strength of our business model despite the softer momentum than expected in Europe. On the left-hand side of the slide, you can see that our customers remain highly loyal. Our revenue retention rate for Q2 stood at 108%, which H1 turned around 2%, in line with our historical figures. H1 was marked by the addition of several new logos. In Europe, with the European Commission, for example, in India, with ServiceNow, to answer to local constraints on data sovereignty, as OVHcloud is a sole provider of OpenStack in India, in the US, with five guys for the cashier system, and OneNeck, which is a promising partnership already bearing fruits. Together with OneNeck, we aim to tackle the new challenge due to the VMware acquisition by Broadcom for customers, as we can offer VMware product in the cloud for customer on-premises, but also we can provide alternative solutions with products such as Nutanix. The relatively modest growth in Q1 in Europe was below our expectation. We added fewer new customers than expected. This appears to reflect a degree of customer caution against a backdrop of very subdued economic growth in Europe. There was also a customer focus on workload optimization while we had expected an improvement in that front. And of course, we had a tougher comparison basis as a benefit from price increase annualized in Q2. Nevertheless, We see strengthening conditions in the U.S. toward the end of the quarter, and these have continued. We also saw a strong pickup in the performance of our web cloud division, reflecting the benefit of some changes we've made in our sales approach. Overall, H1 has confirmed the strength of our model, as we can see on the next slide. We have been able to improve significantly our profitability, reaching an EBITDA margin of 37.9% up by 2.5 points compared to last year. It's a confirmation of our operating leverage with an end-change execution and monitoring of our costs. On the cash flow side, as presented during our investor day, we are reducing our capital intensity as we are demonstrating the demand-based profile of our model. We are working on all aspects of our industrial model, including operation, occupation rate of data center, or improving demand planning. The strategy is already bearing fruits, whilst we were able to generate positive and leveraged free cash flow as soon as H1, while we initially expected for H2. Let's now have a look with more details at our business performance by segment and geography. First of all, Public Cloud generated a revenue of €88.4 million over H1 fiscal year 2024, and grew lag for lag by 15.8% compared to last year. Within this field, we are increasingly benefiting from AI business, and AI business, which includes NVIDIA GPUs and solutions such as AI Notebook, AI Training, and AI Deploy, contributed by two points to the growth of the Public Cloud segment this semester. Furthermore, in a highly competitive market, we deliver a resilient performance in our digital channel, where our marketing investments are starting to bear fruits. At the same time, the impact of price increase was less significant in the second quarter than in the first quarter of fiscal year 2024, where the demand was milder than expected in Europe, with projects being postponed and ramped up slower than expected. Nevertheless, since the beginning of the second half, we took initiative to boost momentum. For example, we implemented a new freemium and posted marketing strategy aimed at enhancing customer acquisition, and this is already bearing fruit since the launch of this strategy in March 2024. The number of new public cloud projects has tripled compared with the average number of projects generated in first half 2024. Simultaneously, to attract more tech prospects, we participated in and organized sector-specific events such as PassForward, KubeCon, and the AOR World Cannes Festival. And lastly, we geared up to launch the three AZ cloud offerings. This solution, eagerly awaited by customers, will provide a presence in three data centers in relatively close proximity within the Paris region, to ensure even better data resilience and lower latency. The next slide about Prior Cloud. In Prior Cloud, we posted revenue of $302.5 million for H1 2024, up 12% like for like comparison to H1 fiscal year 23. This performance was notably marked by a sustained demand in the strategic data certainty market And as a leader in this field, we saw a sharp increase in our sovereign offering called Secnum Cloud in France, that I will describe into more details later in this presentation. The slowdown in growth, especially in Q2 fiscal year 2024, was due to lower than expected new customer acquisition through the digital channel. At the same time, we experienced a deceleration in the enterprise channel as prospects and customers are still optimizing their workloads, and particularly in Europe. Yet, at the end of the second quarter, we benefited from an upturn in demand in the U.S., where the momentum is considerably stronger. From the start of H1, we set up an action plan, which includes, in particular, new incentive plans for partners to strengthen the indirect sales dynamic with key accounts, new generation of entry-level bar metal servers in Q4 fiscal year 2024 to further enhance the technical performance of our private cloud offering, and we will also adapt our outside private cloud offering in line with changes linked to Broadcom acquisitions of VMware. We are a pinnacle partner of Broadcom, ready to provide our customers the best possible support over this challenging period. The next slide is about Web Cloud and Other. In our last segment, Web Cloud and Other, we posted revenue of 95.1 million for H1 fiscal year 2024, up 2.9% like for like compared to the previous year. In the second quarter, growth was up sharply by 7.3% like for like. This solid performance is mainly due to the positive momentum in domain names, supported by improvement in the user experience, such as implementation of multi-year name renewal schemes, and we had also successfully launched a new web hosting offering during the Q1 2024 and a stabilization in telephony segment thanks to an upgrade of product offering. In H2 2024, we plan to continue to take the benefit from the momentum of the domain name market, the ongoing development and the website builder features and the update telephony offering. The next slide, as you can see, very well aware that EU micro-conditions remain difficult with recent downwards revision of GDP forecast from 1.2 growth to 0.6 in March. And as you know, Europe represents a significant part of our revenues. After a good Q1, we were surprised by the milder growth anticipated in Q2 in Europe. Some contracts were renegotiated by our customers, but that was expected. However, the surprise primarily came on a lower demand and a lower-than-expected value of new contracts, and the challenge is this visibility remains limited. Looking at the rest of the world, we experience tougher competition in Asia, and the ramp-up of the Indian DC has been slower than expected due to some legal constraints. But the issues are now solved. Furthermore, in the rest of the world, we witnessed a rebound in the U.S. at the end of Q2 with a significant pickup, which has been confirmed in March. After this business update, let me deep dive in some of our strategic growth levers. First, data sovereignty. We have an ancient focus on enhancing our sovereign offering, and the demand for customers is robust. The annual revenue interest in the products we are currently developing, BarMetal Signum Cloud and now the full suite of the Public Cloud Signum Cloud. It's an ongoing development and the general availability should be in Q4 fiscal year 24 for BarMetal and fiscal year 25 for the Public Cloud path in particular. These new products will also enable us to target specific verticals such as healthcare or the public sector. If we take a step back, we see a global trend for data sovereignty, and this is accelerating everywhere in the world. In Europe, of course, where we have made significant progress in terms of regulations and new laws are still under negotiation, but more locally also in France, in India, for instance. We are the data sovereignty reference as the only major provider being immune to any type of extraterritorial laws and we are able to answer customer needs thanks to our dedicated products that are already available. The next slide has AI. At OVHcloud, we offer a clear and comprehensive solution based on our four pillars, providing all the necessary tools to fuel AI adoption for our customers. The first pillar, where we excel in offering one of the best technological solutions, is infrastructure. We have been rolling out our next best-in-class GPUs from NVIDIA, and we have 100% utilization for our A100 and H100 GPUs. We are adding new H100 and also new L4 and L40S capacities this month in April to fuel the growth. Additionally, our network and storage capacities play a crucial role in supporting AI workloads. and we are very proud of having one of the best private networks and recognize high performance in terms of storage. The second pillar is true for data transformation. Customers struggle with our data sets, so we have developed products and enabled customers to efficiently transform, prepare, clean, or label the data sets with full transparency control, making them usable by an AI model. All of this with very limited coding for the customer. This is an almost no-code solution. The third pillar is the AI product layer, with products already in general availability and others in beta. It's a central focus internally. We are committed to offering state-of-the-art products to our customers, enabling them to build their AI use case on our platform. This, in turn, will drive conception of our infrastructure. The fourth pillar is expertise. We have significantly improved our customer support and our ability to better serve customers including partnership with startups or system integrators. And we're also working on obtaining specific certifications for AI workloads. All these initiatives are integral components of our selective CapEx plan. It's supported by clear business models. Their success is already evident, as I mentioned earlier, the growth in AI facilitated by GPUs and products, contributed to a two-point increase in our H1 fiscal year 24 public cloud revenues. As you know, and this is the next slide, developing public cloud products, HPDPath solution is one of our key strategic driver. We remain dedicated to enhancing our offering and commercial value proposal. We focus on seven main segments, which you can see on the left-hand side of the slide. In the middle of the slide, you have the listed numerous products for each of these segments, identified by their technical names. Our offering is already extensive, with particularly strong traction on compute products such as Kubernetes, databases, and AI products. All these NewPass products reach an annual revenue rate of 18 in February 2024. Currently, our focus is on rolling out our NewPass products that are not yet in general availability, as well as improving the first versions that are already live. This involves incorporating customer feedback, enhancing the customer experience, and ensuring scalability and the cross-sell. By doing so, we aim to facilitate the second wave of customer adoption to drive revenue growth for these products. The last, as you know, is about local zone. As you know, we have acquired Gridscale, a German company, in September 2023. We are successfully integrating grid-scale teams, and in addition, we are currently leveraging their technology. Grid-scale technology enables us to deploy local zones. It means that we can easily deploy OVH cloud preferring in co-location data centers. It's part of our strategy of international expansion while reducing capital intensity. And we don't have to make significant upfront infrastructure capex. These local zones bring public cloud services closer to customers. It enables a full compliance with certain local regulations and guarantees a low latency and an easy access to new countries for existing customers and new local customers. We have already opened two local zones in general availability, one in Madrid, one in Brussels, and we plan to open new locations in the coming weeks and months. It's just the beginning in terms of product availability and customer adoption as we only start to invoice in Q3, but we're already some good feedback from the beta tester. So now I propose that we move to the financial with Stephanie.

Thank you, Michel. Hello, everyone. I am Stephanie Besnier, CFO of OVHcloud, and thanks for being with us this morning. So as Michel said at the beginning, we managed to deliver in H1 a sustainable growth of 10.8%, like for like, and 10.6% as reported, despite a challenging environment, especially in Europe. Price increases, which are not contributing significantly to revenue growth since December 23, contributed by 2.1% to H1 growth. We continue to expect a one to two points contribution from price increase on a four-year basis for FY24. Moving to the next slide, we have a detailed view on our EBITDA, which goes sharply over the semester. As you can see, in H1, we had significant improvement of our profitability. Our adjusted EBITDA grew like for like by 19.6% compared to last year, or 18.3% as reported, reaching 184 million, giving a margin of 37.9%. In line with what we announced during our last Capital Market Day, this significant 250 basis point improvement in our ABDA margin is coming from a strong operating leverage with a decrease in percentage of revenue of our cogs, mostly linked to our web cloud business, contained operating costs, and increased productivity of our administrative and sales and marketing teams. One of the significant items of our P&L is electricity, which is stable around 6% of our revenue. During the second half of 2024, we will continue to closely monitor our cost structure, while also launching additional marketing campaigns to fuel customer acquisition. These campaigns were delayed from H1 and will slightly weigh on H2 sales and marketing costs. This cost discipline led to an improvement in net operating income, which turned positive in H1 at 5.8 million versus minus 6.5 million last year. It includes some non-recurring expenses, such as acquisition costs for grid skills. In our DNA, we have a ramp-up in capitalized projects and right of use from leased data centers amortization, combined with a depreciation of internal software and legacy COVID stock for a bit more than 12 million. Below EBIT, interest related to loans reached 15.8 million due to the increase in interest rates over the period. We expect slightly lower financial interest in H2 as we have a lower all-in rate in March than the average in H1, and the rate is now almost fully fixed for H2. Let's now look at how this increase in profitability is being transformed into cash generation. So as you can see, CAPEX amounted to 162 million in H2 compared to 194 million last year. It has been significantly optimized and represents 33.4% of sales in H124 versus 44.2% in H123. With the optimization of our CapEx linked to a reduced capital intensity, increased selectivity, we have generated 14 million euros of unlevered free cash flow in H1-24, six months ahead of our initial target. We expect CapEx to be higher in H2 with some phasing of infrastructure and new generation launch. but we are now aiming to generate positive, unlevered free cash flow for the full year 24. Let me give you on the next slide a bigger picture of what we mean by optimization of CAPEX and how flexible our model is. So thanks to our integrated industrial model, we have a significant flexibility of our CAPEX. For servers, CAPEX amounted to 17% of our revenue, And here we have two major trends. First, we have a reduced capital intensity of our newly produced servers, and then a softer demand, leading to a decrease in capex compared to last year. If we look at infrastructure capex, which are slightly below last year, we have the last phase of our significant data center's opening program, and we continue some usual infrastructure work to prepare for the next phases of growth. Finally, looking at product and software development, as announced in January, we are stable in absolute value and slightly decreasing in percentage of revenue. We continue to develop and enhance our past offerings to fuel our public cloud growth. In essence, we're reducing our capital intensity and we're paving the way to free cash flow generation. Since 2021, we've consistently expanded our infrastructure, network, and server capabilities. We're on track to reach 45 data centers by the end of 2024, positioning ourselves to capture a significant share of the cloud market's long-term growth. As we explained during our Capital Market Day, it's worth noting that we've also entered in 2021 and in 2022 some exceptional capex. and also launched some product development initiatives that have yet to yield revenue. Regarding H124, we are ahead of our initial target of generating unlevered free cash flow in the second half, and we generated positive unlevered free cash flow for the second semester in a row. Moving to the next slide, I want to insist on our sound debt profile. At the end of this semester, our net debt to EBITDA ratio is 1.9 times, improving compared to the end of FY23. Our debt is edged at 96% and our current average interest rate is at 3.6% only, so quite low. We have more than 470 million of available liquidity, which gives us a strong visibility on our financing. with no major repayment before October 26th. We are very confident in our outlook. We are already working on all our options to prepare for refinancing, including increasing the spread of the maturities of our debts. Ending on this good note, I would now like to hand over to Michel for the Outlook Q. OK, so how does this performance translate in our financial targets?