Ovh Groupe

Ladies and gentlemen, welcome to OVH Cloud Full Year 2024 Results Conference Call. Today's speakers will be Benjamin Raskoleski, CEO, and Stephanie Besnier, CFO. My name is Alan, and I'll be your coordinator for today's event. Please note this call is being recorded, and for the duration, your lines will be on listen only. However, you will have the opportunity to ask questions at the end. This can be done by pressing star one on your telephone keypad. If you require assistance at any time, please press star zero and you'll be connected to an operator. I will now hand over to OVH team to begin today's conference. Thank you.

Hello, everyone. I am Benjamin Refkelewski, the new CEO of OVHcloud. So thank you very much for being with us today for our FY24 annual results conference call. So let's start with slide three for the key highlights. In a nutshell, we delivered solid results in FY24 in line with our guidance, and I'm very glad to step in as CEO, taking over from Michel. I'm thrilled to lead OVHcloud while we enter a new phase of development for the company with more predictable growth and higher cash flow generation. Our FY25 guidance focuses on a solid growth and a significant margin improvement, with life-for-life revenue growth between 9% and 11%, an adjusted BDA margin circa 40%, recurring capex between 11% and 13%, and growth capex between 19% and 21%, and growing unlevered free cash flow in FY25 versus FY24. And as we enter these new phases for OVHcloud, we wanted to offer our shareholders the opportunity to continue with this new management story or to cash in part of their investments with a proposed public share buyback offer, OPRA, for a total amount of €350 million at €9 per share. And finally, we confirm our target of generation of positive levered free cash flow as soon as FY2026 even after the new debt raised for the Shell backpack offer. On the next slide, we review more precisely our FY24 figures. As said in the introduction, we published Challenge FY24 results in line with our guidance. Indeed, in 2024, our revenue reached 1993 million euros, and we delivered a sustainable life-or-life revenue growth of 10.3% above our 9% to 10% target. At the same time, our profitability substantially increased, with an adjusted VDA raising to €381 million, or a margin of 38.4%, better than our target of a margin above 37%. We also, as you see, generated a strong unlevered free cash flow at €25 million, significantly improving compared to last year, which was driven by a reduced capital intensity, with recurring capex reaching 13% and growth capex 22%, both in the middle of our guidance. And finally, our net revenue retention rate remained at a high level at 107%. Moving to the next page, I'm delighted to step in as new CEO of OVHcloud. I joined the company six months ago as deputy CEO in May. and I had the opportunity to work very closely with Michel Polin, who has decided to step down. OVHcloud has grown strongly under Michel's leadership and I want to thank him for that and for having onboarded smoothly myself to the CEO position in the past months. I look forward to building a clear path towards cash flow-generated growth with all the teams and will present detailed initiatives in the coming months to support this trajectory. And as you can see on the right hand of this slide, I already have identified some levers and initiatives to further improve the overall execution and profitability. Let's move to slide six to have a deep dive on these levers. Firstly, regarding top line. So we target like for like growth between nine and 11% in FY25 based on solid growth trends that we have factored in for our FY25 guidance. First, a stabilized environment in Europe, even if not yet improving. Second, a strong demand in the U.S. market. And third, successfully adapted hosted private cloud offering with limited churn, despite all the price increases that were announced by Broadcom last year. Then, on the right of the slide, when we look beyond 2025, we will consolidate our leadership in private cloud, we'll strengthen our public cloud offering and commercial setup, and will also leverage our leading positions in domain and web hosting. Secondly, on the next page, you see looking at the profitability. We target and adjusted the PTA margin circa 40% in FY25. And this is based on clear levers that we have factored in for our FY25 guidance. As you see for FY25, COGS and GNA optimization, with a continuing decrease in percentages of revenues of direct costs, such as licenses costs for web cloud, but also in GNA, will maintain a strict cost policy while benefiting from operating leverage. Second, gains on electricity costs, as they have been hedged at a better price per megawatt per hour than in FY24. On the right of the slide, when we look beyond 2025, we are going to first focus on our sales and marketing initiatives by better addressing promising products and customer segments, also improve our efficiency of marketing campaigns, and then we'll further enhance beyond 2025 our COGS, G&A, and improve the efficiency of our industrial operations. So let's now look on the next page at how we translate into cash generation. So thanks to this stronger BDA generation that I just talked about, combined with a reduction in capital intensity and stock management improvement, we target to improve our FY25 unlevered free cash flow compared with the 25 million that we have generated in FY24. In the medium term, beyond FY25, we'll increase cash flow generation thanks to three main levers. Further, a BDA improvement, as just explained in the previous slide, Second, working capital initiatives and additional purchasing savings plans. And third, optimization of our infrastructure utilization rates and improved data centers design and specification. Then coming back to FY25, we'd like to give now more granularity on short-term CapEx investment strategy, so moving to slide nine. For FY25, we have a selective investment plan which is focused on the revenue generating hardware CapEx while also optimizing our infrastructure. And as you can see on the left-hand side of this slide, we target a reduction in capital intensity both in growth and in recurring CapEx. So as you can see on the right, this CapEx strategy supports our 9% to 11% revenue growth, first by focusing on servers, which are generating immediate revenue growth, Second, optimization of our infra capex, as major data center investments are behind us in the past years, as detailed on the next slide. And also, stabilized teams in product development. And fourth, end of non-recurring programs, such as the hyper resilience program in our data centers. So moving to slide 10, you can see that over the last few years, we have expanded our global footprint to meet the regional demand of our customers. We now have 43 data centers in nine countries, and we have a large network with 44 points of presence. And during FY24, as you can see on the top right, we opened seven data centers in France, in Canada, in Singapore, in Australia, and we plan to open one more in FY25 in Italy. We continue also to open local zones, which are small data centers in co-location mode, to grow public cloud with a lowered capital intensity. So as you can see here, the major infrastructure investments are behind us. And now we are focusing on leveraging them. So moving to slide 11, our vision for OVHcloud after this period of significant investments is, with the midterms lever mentioned previously, that with this new leadership, we will focused on delivering first a more predictable growth, so circa 10%, also an adjusted EBITDA margin structurally above 40%, and a positive levered free cash flow in FY26 and growing afterwards. On the next slide, with this new phase of development and the new management, we wanted to offer an option to our shareholders And this share buyback offer, this offer that I mentioned, allows shareholders to stay with us for this new story or to partially monetize. And here I want to reiterate our confidence in the fundamentals of OVHcloud and that we as management will focus on delivering a more profitable, sustainable, and cash-generative growth with a confirmed long-term support of the CloudBath family. And before moving to the financial section, I would like to share with you our main achievements of the year. So over FY24, we delivered a sustainable like-for-like revenue growth of 10.3%, with a total revenue that reached 1993 million euros. And during this FY24, we, our customers, remain highly loyal, as you see, with 107% retention rate, and with a limited and stable revenue turn around 2%. Now let's deep dive in this slide in each segment performance over the year on the right. So firstly, the private cloud segment, we registered the revenue of 624 million in FY 2024, up 11.8% like for like. And this performance is the result of substantial growth in private cloud RPAC, fueled in particular by strong demand for a high-end range type of service. And in terms of growth initiatives, we are pursuing the rollout of our sovereign offerings and also the upgrade of our mid-range servers with a last-generation hardware. Second, in the middle of the slide, you can see our performance for public clouds. So our revenue reached $183 million in FY2024. I fought in the 2%, like for life. And this segment saw an increase in the number of new customers, resulting from the acquisition strategy we have deployed in FY2024. And we are focusing on increasing geographical availability and improving the products while deploying our new three availability zone, 3AZ, public cloud offering, which provides higher resilience and lower latency to our customers. Third, on the right side of the slide, for the web cloud and others, we posted a revenue of 187 million for FY2024, up 2.1% like for live compared to the previous year. And this performance is mainly supported by domain names and the launch of our new web hosting offerings. And we plan to continue to increase our customer experience in these two segments. Next slide, in private cloud, we have successfully managed VMware Broadcom changes As you are well aware, Broadcom bought VMware and decided to increase the price of VMware licenses in May 2024. And these price increases were one of the main uncertainties for us in H2 FY24, impacting our hosted private cloud business, which mainly uses our VMware licenses. However, the current trends are positively reassuring. As one of Broadcom's few pinnacle partners, We are able to provide our customers with the best possible support over this new period thanks to our adapted offerings. And therefore, we experienced limited churn after the increase was passed on to customers. And since May 2024 and the first price increase, we have had 4 million positive price impact on our FY24 revenue. Plus, as you can see on the right of the slide, medium to long-term, We are targeting new business opportunities, so we plan to launch new offerings with dedicated resources on a shared cluster to optimize existing small customer invoices and also to target on-prem VMware customers, which are fully hit by the price increases. Now the next slide on public cloud. In September, OVHcloud has been recognized again as a major player in the public cloud market by IDC, a leading consultancy firm. Indeed, on the left side of the slide, you can see that in the IDC, European Public Cloud Infrastructure as a Service 2024 by IDC, OVHcloud is the best-ranked company within the major players category. And it's an important success for OVHcloud, for our teams, as we showcase consistent improvement in its rankings. And really, I want to praise our teams for these great results. And on the right hand of the slide, you can see that we were named as a major player by IDC thanks to our key differentiators. First, our price transparency and predictability. Second, our digital sovereignty positioning. And third, our sustainability initiatives. And these recognitions are not just nice to have. They play a crucial role in attracting business because our customers or prospects often rely on these reports to make informed decisions when they choose their cloud service provider. On the next slide, finally, I want to show in FY24 that we also continue to enhance our data sovereignty and public cloud offering. So first, on the left of the slide, data sovereignty. We are the data sovereignty reference as the only major cloud player being immune to extraterritorial laws. Today, we have three data centers, which are SECNUM Cloud Certified, which is the top-level national security certification in France. And we launched our Bar Metal Pod offering in Q4 FY24. And this offering is sovereign, ultra-secure solution with a certification that is expected early FY25. And Bar Metal Pod has already raised interest with some customers, such as the AIFE, l'Agence pour l'informatique financière de l'État, which is attached to the French Ministry of the Economy and Finance. And in FY25, we plan to get the second cloud certification for our public cloud products that are eagerly awaited by our customers. Secondly, on the right of the slide, our focus is on running out public cloud products. Our offering is already extensive with more than 40 public cloud products available. and with particularly strong traction on compute products such as Kubernetes, storage products such as Object Storage A3, or databases such as Ivan. And we are working on increasing the geographical availability of these existing products and also on the rollout of these public cloud products that are not yet in general availability. And by doing so, we aim to facilitate the next wave of customer adoption and drive revenue growth for these public cloud products. So after this update on our FY24 achievements, I now hand over to Stephanie for the FY24 financials.

Thank you, Benjamin, and hello, everyone. I am Stephanie Besnier, CFO of OVHcloud. Thanks for being with us. Looking at our Q4, we delivered a solid life-for-life growth of 10.6%, improving compared to last quarter, with a total revenue that reached $256 million. In a stabilized environment in Europe, we registered a double-digit growth in both our cloud businesses thanks to a continued strong growth in the U.S. with a focus on our tech companies and successful price increase of our VMware products with limited term. Within the public cloud, we keep on benefiting from AI business. The AI business, which includes NVIDIA GPUs, and solutions such as AI Notebooks, AI Training, or AI Deploy contributed by two points to the growth of the public cloud segment again this quarter. We see a strong demand, especially for H100 and A100 GPUs that have a high utilization rate. In web cloud and others, we delivered a growth of 1.3%, knowing that excluding telephony and connectivity The segment is growing at plus 6% over the Q4. Despite this stabilized environment in Europe, we recently managed to win several new logos. As for example, our hosted private cloud solution is now offered in the portfolio of Brick Telecom Enterprises. And MySpace, an Ion Group subsidiary, has chosen our SNC solution to host its sensitive data. So now let's have a look to our revenue by geographies on the next slide. So we experienced a continued acceleration in the rest of the world, particularly into the US. Whereas at the same time, European micro-conditions were difficult over the year, and as you know, Europe represents a significant part of our revenues. After a good start of the year, we faced a softening of the momentum in this region, with some contract negotiations by our customers and a lower than expected value of our new contracts. However, in France, we managed to maintain a double-digit growth in both our cloud segments due to a solid momentum in hosted private cloud and public cloud with an acceleration in Q4 compared to the last two quarters. This was offset by the web cloud segments and in particular the historical telephony and connectivity sub-segments, which brought the overall Q4 growth rate in France to 9.5% and the FY24 growth rate to 9.4%. In West of Europe, Germany, Poland and the United Kingdom were the region's main growth drivers, which stood at 9.7% in the last quarter. In a still complex and challenging environment, Private cloud segments showed its resilience and public cloud performed well in central and northern Europe. In rest of the world, we saw like-for-like growth accelerate to 14.2%, whereas it was at 11.4% for FY24. Momentum gathered pace in the last few quarters, driven by ongoing sustained demand in the United States particularly in the private cloud segment for bar-metal cloud products. So moving to the next slide on our profitability. So as you can see, in FY24, our profitability significantly increased with an adjusted EBITDA of 381 million and a margin of 38.4%. The significant 210 basis points improvement in our APDN margin is coming from a strong operating leverage with a decrease in percentage of revenues of direct costs such as license costs from web cloud. Second, complain operating costs in our data centers. Third, reduced electricity costs as a percentage of revenue compared to FY24 at 6% of our revenue. And fourth, increased productivity of our administrative and sales and marketing teams with lower fees. H2 margin stood at 39%, 1.1 points up compared with H1, due in particular to a seasonal effect with notably lower fees and marketing event costs because of the summer. More savings effects than expected, particularly in electricity. and the final commercial agreement with Broadcom, coupled with a good fraction of our products, that turns out to have a slight margin contribution. So this cost discipline led to a strong improvement in net operating income, which turned positive in FY24 at 25.7 million, 37.7 million above last year. Net operating income includes a contained increase in DNA expenses of 23.9 million, down by more than one point in relation to revenue. In our DNA, we have a ramp-up in capitalized projects and write-off use from leased data centers amortization, combined with one-offs linked to depreciation of internal software and legacy COVID stocks. It also includes some non-recurring expenses such as acquisition costs and temporary insurance premiums. Below EBIT, interest related to loans reached 30 millions due to the increase in debt volume and interest rates over the period. Let's now have a look at how this increase in profitability translates into cash generation. So this strong growth in our profitability is reflected in our growth cash flow from operating activities, which rose to 378 million in FY24 from 310 million one year earlier. Our capex including excluding M&A amounted to 343 million in FY24 compared to 358 million last year. It has been significantly optimized and represented 35% of sales in FY24 versus 40% in FY23. In line with our guidance, we invested 22% of our revenues in gross capex, mostly in new servers and infrastructures, and we invested 13% of our revenue in recurring capex. With the optimization of our CAPEX linked to a reduced capital intensity and tighter monitoring of other investments, we have generated 25 million euros of unlevered free cash flow in FY24. So let me give you on the next slide a bigger picture of what we mean by optimization of CAPEX and a reminder of how flexible our model is. Thanks to our integrated industrial model, we have a significant flexibility in our capex. For service capex, which amount to 16% of our revenue, two points below FY23, we have reduced capital intensity of our newly produced service. If we look at infrastructure capex, which are three points below last year, we have the last phase of our significant data center's opening program, as well as limited new openings, and we continue some usual infrastructure work to prepare for the next phases of growth. Then, looking at product and software development, as announced, we are stable in absolute value and slightly decreasing in percentage of revenue. We continue to develop and enhance our products, notably our product public cloud offerings, and to improve our internal tools. Finally, we had exceptional capex on others this year, which are set to decline. For example, 28 million is linked to hyper-resilience program, which is expected to end early 25. Now I'd like to share with you the evolution of our financing structure. So first, as of August 24, We continued our deleveraging trajectory and we reached a leverage of 1.8 times. When we look at the pro forma of our financial structure as of August 24, post-refinancing, we land with a refinanced bank debt with 450 million of term loan and 200 of unrolled multipurpose credit line, both with five years maturities. and a new senior note of 470 million, which will be issued in the coming months. All in, the average interest rate should be between 5 and 5.5%. Finally, as of August 24 pro forma, we would be at a leverage of 2.8 times as per our current financial documentation, in line with our financial policy of remaining below three times. On the next slide, let me give you the details on the share buyback offer. So the total amount is €350 million, or a little bit below 39 million shares, representing 20.4% of total outstanding shares. The offer price is €9 per share, representing a 14.6% premium compared to yesterday's share price. The offer period will be between December 10th and December 30th. The Klaba family will only partially participate to the buyback offer, and their stake in OVHcloud will increase from 68% to a maximum of 81%. Thank you, and I now hand over to Benjamin for the outlook.