Ovh Groupe

Today's speaker will be Michel Paulin, CEO, Benjamin Dravkuleski, Deputy CEO, and Stephanie Basnia, CFO. I now hand over to OVH's team to begin today's conference. Thank you.

Hello, everyone. I'm Michel Paulin, CEO of OVHcloud. Thank you very much for being with us today for our Q3 Fiscal Year 24 Revenue Conference Call. Let's start with slide three on the key highlights. As key highlights for the publication, we generated $737 million in revenue for the first nine months of our fiscal year 24, with a robust like-for-like growth of 10.1% compared to last year. Looking at Q3 revenue, we reached 251, representing a like-for-like growth of 9%. This performance underpins the resilience of our business with a strong traction in the United States. while there is still a challenging and uncertain environment in Europe. Looking ahead, we are fully confident in our guidance for the year and the last quarter, with trends in data sovereignty, in new solutions launches and paths, and in AI. Let's move to slide four, to our strategy pillars. Early January presented an update of our strategy plan. When we consider the broader picture, and despite the current short-term headwinds in Europe, we are delivering on our strategic levers, which remain at the heart of our long-term vision for OVHcloud. We are the reference for the data sovereignty, as shown by the strong development of our sovereign cloud offering, Secnum Cloud, and we will continue to meet customer demands for more control over the data and immunity to extraterrestrial laws. and we will keep on leading the way in addressing this highly critical topic of data severity everywhere in the world. Innovation is one of our core values of OVHcloud. We are on top of today's AI wave with new NVIDIA GPUs instances and the integration of cutting-edge AI models for our customers. We continue to introduce new PaaS solutions to expand our addressable market and preparing for the new tech revolutions. Our third objective is to consistently deliver sustainable and profitable growth. We are organizing our 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 we will continue to invest for our future growth, but we are also focused on maximizing cash generation as we have already demonstrated in the last two semesters, and we will continue to do so. And now, I'm handing over to Benjamin Raczowlewski, our new DPT CEO, to highlight the operational achievements of Q3 fiscal year 2024. Thank you, Michel.

Hello, and welcome, everyone. I'm Benjamin Raczowlewski. I was honored to join OVHcloud two months ago, as Deputy CEO in charge of all operations for the group. I joined OVHcloud after 25 years in technology and business operations. I was recently head of France and Benelux for the global IT services company DXC Technology, focused on applications, data architecture, as well as security and scalability of public, private and hybrid clouds. OBS Cloud position is extremely strong, both as the reference in data sovereignty and the most attractive Cloud player in terms of price performance ratio. And today, I'm excited to share with you some of the latest developments we achieved in our Q3 2024. So first, as you can see on the left hand side, We are proud to keep developing new AI solutions to address current demand. We now offer a full AI suite of solutions powered by the latest NVIDIA GPUs, such as H100, L4, and L40S. And these last generation GPUs have a high utilization rate, highlighting the strong demand from our customers. We are able to provide our customers with the computing power they need to deploy and run their AI applications. And in addition, we offer a full AI suite, which includes solutions like AI Endpoints and also AI Training, AI Notebooks, and AI Deploy, making it easier than ever to build, deploy, and manage AI workloads. And that's not all. As you can see on the right-hand side of the slide, to drive international growth and to meet the regional demand, we expanded our geographical footprint by opening a new data center in Australia and Sydney. We also opened eight local zones, which are small data centers in collocation mode, to grow public cloud in new geographies with a lowered capital intensity. These public cloud offerings in local zones further reinforce our commitment to providing low latency services with full control over data residency to customers around the world. With these latest developments, we are continuing to deliver in line with our strategic plan to offer innovative and sovereign offerings to our customers globally. Let me now turn again to Michel for a deep dive on each of our business segments.

Thank you very much Benjamin and welcome again. In Q3 fiscal year 24, the private cloud reaches 157.6 million or 63% of the group's revenue and accelerated in Q3 to grow by 10.7% like for like. We had some interesting contracts wins in the U.S. with Admiral Beverage Corporation, a leader in premium beverage production. and also in France, like Inserm, the French National Institute for Health and Medical Research, and also with the French Army. As main highlights, thanks to our focus on technology companies, we had a strong growth in the U.S. Then, our strategy of upscaling our positioning of high-end servers is successful with a continued increase in our revenue per customer, average revenue per customer. In Q3, we continued to see workloads optimization for existing customers, and we remain cautious in Europe for the next quarters. Regarding data sovereignty, as I said at the beginning, the traction for our SIGMIM Cloud solution remains very solid, and this range of products reach an AIR of 13 million at the end of Q3. Furthermore, with our status of pinnacle partners by Broadcom, which acquire VMware, We now have a better visibility for our VMware offering. We have increased our prices, but we have less churn than anticipated. Finally, we are currently launching a new generation of entry-level bar-meta server called ADV Generation 3 with the last AMD technology to improve the competitive positioning offering and to continue to grow in this segment. Moving to the next slide about Tubelift Cloud. So in Q3 fiscal year 24, the public cloud segment reached 46 million or 18% of the group's revenue and grew by 11.9% like for like. Unlike in H1, there was no incremental benefits for price increase in Q3. We had a continued growth in the past offering with an IR reaching 19 million at the end of Q3 fiscal year 24. AI is clearly a fueling public cloud growth with NVIDIA GPU instances and AI software enjoying a strong growth and we have just launched these new solutions in Q3. Finally, as we said in the last publication, we have been focusing on customer acquisition on public cloud and our strategy is paying off. We are acquiring more customers than before using our freemium and postage initiatives. We think this will give us significant room for upsell and cross-sell when the market accelerates again and when customer usage ramps up. In the short term, the revenue per customer is growing slightly slower than before, but this is due to the combined effect of a mechanical accession of this initially lower value customer, less incremental demand for existing customers due to the continued macro uncertainty, especially in Europe, That is what drives an ARPAC, average revenue per customer, active customer, growing slightly slower than before. But we do believe this will again give a significant room to upsell and cross-sell when the market pick up again and customer usage ramps up. And these new acquired customers are the reservoir of future growth for the coming month. Moving to the webcorp segment on slide eight. Webcast segment reached 47 million or 19% of the group's revenues and grew by 1.2% like for like. If we exclude our legacy sub-segment of telephony and connectivity, mainly in France, growth reached 4.3%. We continue to benefit from strong domain sub-segment performance thanks to our change in our user experience and the addition of new features and functions. Regarding our web hosting businesses, it's showing signs of recovery following the release in Q3 of new solutions based on more powerful hardware. Let's conclude our Q3 segment performance, and now I'll hand over to Stéphanie for a financial and geographical overview.

Thank you, Michel, and hello, everyone. I'm Stéphanie Besnier, CFO of OVHcloud. Thanks for being with us this morning. So, as Michel said at the beginning, despite the persistently challenging environment in Europe, which is weighing on cloud workloads and projects, we managed to deliver in Q3 a sustainable growth of 9% life-alike and 10.1% as reported. Our revenue retention rate remains high globally at 106%. underlying an unchanged churn and a good ARPAG growth, although slightly slower than in previous quarters, as explained by Michel. Moving to the next slide to look at business dynamics in five regions. So as you are very well aware, European macro conditions remain difficult, and as you know, Europe represents a significant part of our revenues. After a good start of the year, we face a slowing of the momentum in this region, with some contracts and renegotiations by our customers and a lower than expected value of new contracts. However, in France, we managed to maintain a double-digit growth in public and private cloud. This was offset by the web cloud segment and, in particular, the historical telephony and connectivity sub-segment, which brought the overall Q3 growth rate in France to just under 8%. In the rest of Europe, Germany and Eastern Europe continued to drive growth, which was 8.6% in the quarter like-for-like, one point below Q2. Rest of the world, we saw like-for-like growth accelerate to 11.9% versus 6.9% in Q2. As we commented at the H1 stage, we saw a sharp improvement in U.S. market conditions at the end of the quarter, and this carried through into Q3. We experienced strong momentum in the USA, particularly in the private cloud, thanks to our development strategy focused on the cloud migration needs of technology companies. And we witnessed improving trends in ABAC compared to previous quarter. I will now hand over to Michel to talk to you about our outlook.

Thanks, Stephanie. So Q3 was in line with our expectations, and we are happy to see continued sign of strength in the U.S., good resilience in Europe, and the positive impact as we look at the end of the year and into fiscal year 25 of good trends in product introduction and new customer acquisition. Thanks to this sustainable growth and the short-term trends, we are highly confident in confirming our fiscal year 2024 targets, which are as follows. An organic growth between 9% and 10%. We are at 10.1% after a month. And keep in mind that Q4 has a tough comparison basis. An adjusted EBITDA margin of more than 37%, which is cautious, as we have taken into account the potential negative effect from Broadcom new license costs on our hosted private cloud offering. Recurring capex and gross capex of 12% to 14%. and 21% to 23% respectively, which are lower than anticipated at the start of the year. A positive and levered free cash flow on full year basis, as opposed to be just positive in H2, as initially anticipated, which is a direct result of our clear focus on cash generation. Our targets for 2025 and 2026 are unchanged, and we are very focused on execution and on delivering on our strategic plan with real very strong focus on cash generation while maintaining long-term growth potential. We can now open the line to Q&A.

Sure, thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the first question from line 2. Emmanuel Mattel from Odo. The line is open now. Please go ahead.

Good morning. Thank you for this presentation. Emmanuel Mattel speaking from Odo UHF. Three questions, if I may. First, do you think that Q3 should be the low point for organic sales growth? If yes, what will happen? enable OVH to accelerate from the next quarter onwards. Second, you remain a company with a high exposure to France. Have current political uncertainties begun to wait on your customers' investments for cloud? Should we fear disruptions to your business in the coming months in France? And my last question is about artificial intelligence. Do you think artificial intelligence is raising barriers to entry in favor of hyperscalers? Or is it an opportunity for smaller players such as OVH to gain market shares in the infrastructure as a service market? Thank you.

Thank you, Emmanuel, for your questions. We'll take the first question, and Michel will answer your second and third questions. So, indeed, we expect a better Q4 than Q3, as we mentioned during H1. We are still cautious as we navigate through mixed trends. We have very good news in the U.S., and on the other side, we have limited visibility in Europe. To give you a bit more color on the business, the trends we are observing for our different segments since a few months. First, in public cloud, we have new customers. They are focused on entry-range products, so we have a lower average ARPAC for these new customers, and we have a slowdown in ARPAC growth on existing customers, mostly in Europe. In private cloud, The picture is different. We have customers that are migrating towards high-end servers. And this leads to a sustained increase in ARPAC and a reduced capital intensity. And as for the web cloud, we're experiencing a positive trend in domain activities. However, it's difficult to extrapolate for the rest of the year. But all in all, we expect a better Q4 than Q3.

Yeah. About the second question. It's clear that we don't have a clear visibility of what's going to happen in France, politics, and what will be the impact on the economy. That's why we have been cautious and we are absolutely convinced that today we have a very resilient model to be able to confront a positioning even in France. Moreover, we are absolutely convinced that in the current scheme in Europe, The sovereignty points are really rising everywhere in all the elections, and our positioning will certainly help OVHcloud to maintain a strong position. That's why we are cautious, but we are very confident on our capacity, despite the fact that there is a huge uncertainty in terms of politics and also economical impact of the elections in France. About AI, I just want to repeat what we said last time about our positioning. We believe that the market will be not divided, but will be, in fact, with two points, two elements. The first one is what we call the training of the large LLMs and also the inference. OVHcloud is really focusing on the second one. which is a way to help the customers to use artificial intelligence trained systems based on different type of LLMs and to allow them to take the benefit of AI solutions. That's why we have introduced many new GPUs instances with L4, L40S, AM100, H100, depending on the size of the type of AI endpoints you want to have. and that helps and we see really today already a strong momentum especially in the mid-tech size company which are not willing to have training model which are very very expensive and which need very large infrastructure but clearly which is today a good way for us to resolve some of their AI use case they want to introduce in their solutions and also we have introduced the OVHcode AI endpoints solutions, which is a way to help the customers to introduce new LLM easily, quickly, with the right pricing, based on any type of LLM model. So we have introduced Mistrial, we have introduced the Facebook Lama, Meta Lama 3. So this is really the way we address the market. And we are actually convinced today that there is, for OVHcloud, despite the fact that some IP escalators are trying to convince the customer there is no alternative, that there is a way for the inference to have really cost and performance capacity. And that's when we demonstrate with a very, very high traction on AI solution that we propose to the market.

Thank you, Stephanie. Thank you, Michel.

Thank you. We will take the next question from line George Webb from Morgan Stanley. The line is open now, please. Go ahead.

Hey, morning, Michelle, Benjamin, Stephanie. I've got two questions, please. Firstly, just coming back onto the France topic, I know you're calling out Europe as a whole as being quite subdued, but sequentially, France was the main area of slowdown in Q3, much more so than Europe X France. Is there anything specific you're seeing in that market, or is it just a mixed factor? And then secondly, just noting that the telephony business or even the whole of web cloud has been a pretty persistent growth drag over time. How strategic do you see any or all of those activities or is that anything you might consider divesting? Thank you.

Thank you, George, for your questions. So as you know, I will take the first question and Michel will answer your second question. So as you know, we have a slightly different dynamic between France and the rest of Europe because our web cloud business is waiting on our France activity first. And we are also quite cautious with the recent discussions that we had with very large customers. So all in, that explains most of the difference in terms of dynamics and the reason why we have this growth in France that is just below 8%.

On the second one, I just want to repeat what we already said about the strategic vision of what we have on the web cloud. And again, in the web cloud, we have two different models. One is really the connectivity and the telephony, which is mainly in France, whereas for us, clearly, it's decreasing activity. But for the rest, domain and web cloud, we are absolutely convinced that it is a fuel to increase, especially the entry-level and small and medium-sized companies. Why? Because, in fact, they enter the cloud evolution and the cloud migration, starting with simple things like web cloud, and after, they migrate to other more sophisticated solutions like VPS, why not also some simple public cloud instances. Moreover, there is a strong market of companies which are resellers. So companies which are tech companies offering web cloud, offering web design, web agencies. And these targets are very interesting because, in fact, most of the time they want you to have a full... scope of solutions, including public cloud. That's why we maintain that the web cloud is, especially for domain and web cloud, very important strategically to OVH cloud to acquire new install base, especially in the SMEs market.

Okay. Thank you.

Thank you. As a reminder, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. We will take the next question from line Jan from Gilbert DuPont. The line is open now. Please go ahead.

Hi, good morning. A few questions, please. The first one is on AI. You mentioned in the previous quarter It was about 7K euros. What about this proper? And then maybe what is the utilization rate, sorry, of GPUs? And then maybe on USA, can you disclose the growth, please? Thank you.

Thank you for your question. So for AI, we disclosed in H1 the fact that the AI contributed by 2% to our public cloud growth, and the impact is similar in Q3. We have a very high utilization rate, and we keep adding new GPUs on a regular basis because we are convinced, and we see it in the numbers, that it will also fuel the growth in the coming quarters.

About U.S., we do not disclose the U.S. growth specifically because we disclose the rest of the world, but the growth has been very, very good during the last two quarters, and we see and we are very confident about the perspective for the next quarters. Just to explain where we see the growth, first, as you know, we are fully dedicated first to the tech segment in the U.S., So that means companies which are doing technology based on our solutions. And we are providing a full set of solutions now in the U.S. Gaming companies, streaming companies, software editors, fintech, green tech. And we see that today our positioning of the fact that we provide price performance solutions and also the fact that we do not touch customer data and we are completely transparent I mean, not competing with our customers is something which is resonating today in the U.S. market. And now the U.S. market is really booming. For us, it's a huge opportunity. The second point, which is a new thing, is that now we also see that some mid and large companies, and we mentioned Five Guys last quarter. We mentioned also ABC this quarter. I know we're very interested with our enterprise solutions, mainly based on managed Kubernetes or managed Nutanix solutions. And for us, we see that as also a new market, which may be very interesting to address. That's why we are very confident our capacity to continue to accelerate our growth in the US.

OK. And then maybe just about the European market with a lot of investment from hyperscalers. What do you think about this, about this competition? Does it change something for you or not?

I think you know that the hyperscalers are investing a lot especially in the AI and they've made major announcements everywhere in the world. I think for me it's a positive sign in the sense that it shows that the market because it's a long-term investment, and the last investment that Microsoft or AWS has announced, the products and the solutions will be available only in a few, three years at most, shows that there is a strong confidence in the market that we are today in the cloud market on a long-term growing market, and that's why we believe today that we are on the right market to continue to provide profitable growth for the long term.

Okay, thank you.

Thank you. We will take the next question from line Adam from Bank of America. The line is open now. Please go ahead.

Good morning, and thanks for taking my question. Just one quick one from my side. In the past two presentations, I believe you mentioned you were looking to perhaps early address the upcoming maturity wall and the capital structure more broadly. Just wanted to check if there's any update there. You haven't reiterated that statement here from what I can see.

Thank you for your question. So I think we'll refer also to the refinancing of the debt, if I am correct. As we mentioned at H1, and we give an update for our full year result, we have a very low leverage. It was 1.9 times in H1, and a lot of available liquidity, $477 million at the end of February. So we're very comfortable. Our debt is maturing on October 2026, and we're starting on working on this refinancing, knowing also that we are improving our cash flow profile. So all in, we are very confident in our refinancing project.

Thank you.

Thank you. We will take the next question from line Vincent Pogon from Stiefel. The line is open now. Please go ahead.

Hi, Vincent. Your line is open now for questions. Please go ahead.

No response from Vincent. There appears no further question at this time.

Thank you. No questions anymore. So sorry for Vincent. Since there is some issues, sorry about that. So, thank you very much for attending our Q3 Fiscal Year 24 call. As a wrap-up during this quarter, we reached €251 million revenue. We showed our business resilience in a very challenging environment with double-digit growth in public and private cloud, with very good traction in our AI solutions, our past solutions, and in our data sovereignty solutions. During Q3, we also continue our international expansion as illustrated by our strong growth in the U.S., our good momentum in Germany and Eastern and Central Europe. And operationally, we opened new data center in Asia, in Sydney, and eight local zone, and Benjamin explained what is our strategy on local zone to be able to have an extension of our addressable markets. Finally, we confirm with high confidence fiscal year 24 targets and reaffirm our mid-term guidance. So thank you very, very much and have a very good day.

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