Proact IT Group AB (publ)

to PROAC's Q3 report. My name is Jonas Hasberg. I'm here with our CFO Nora as well. We'll take you through the presentation here. Before we start, I'll just let everybody know, I want to let everybody know that we are recording this session and it will be published on our website after the session. And we'll make sure that there's room for questions at the end. But until then, We will keep everybody muted so that you can hear us okay throughout the presentation. Good. So good morning again and welcome. Here we go. I'll start with just a couple of introduction slides. Most of you know us quite well. Proact is a tech company, a European-based tech company. We help our customers to secure and manage their business critical data and business critical applications. We just turned 30 years old, which we're quite proud of. Not all tech companies survive that long. We are based in the countries you can see here on the map. We're divided into four different business units, Nordics and Baltics, Central with Germany and Czechia, West with Netherlands and Belgium, and UK with UK. And we have about 4,000 customers. We employ almost 1,200 people. those people are very, very skilled, which is an important part of our success, of course. Here now we're roughly distributed, also in terms of the revenue and the employees. You see the four regions I just mentioned. A couple of things to highlight here is that we deliver our cloud services out of four delivery hubs one in each region so there's one in sweden one in germany one in netherlands one in the uk and this enables us to both be very close to our customers but also standardize and build scalability into our delivery capabilities in our cloud services which is very important to us we also run security operations center out of two locations, one in the UK and one in Germany, which enables us to do 24-7 monitoring and security incident handling for all our customers across the regions. So while we're highly decentralized and highly local and very close to our customers, we also build scale through those delivery centers and the security operation centers. We run, excuse me, we run for main revenue streams as you can see here the numbers here based on the full year 2023 systems so we're reselling of hardware and software is still the biggest revenue stream for us and continue to grow it's a very traditional reseller business but obviously it's mission critical hardware solutions we speak about here so they're quite quite important and quite niche if you will for our customers in the sense that we only do the types of solution that we're really good at Support services, so this is an add-on service to the systems, helping customers to keep those systems running. There's a quite high tax rate here, and these are typically contracts running throughout the lifecycle of the actual system solution. Third, managed cloud services, very important. This is delivering the same type of infrastructure functionality and tech service, but as a service, so customer buy on a contract instead of owning and operating the equipment themselves. And last and least, consulting services. Anything from strategy, transformation, onboarding, migration, design, education. So a broad range of consulting services that helps customers to modernize and drive their infrastructure evolution. A couple of key areas that we just highlight in terms of skills. not complete in any way but those are in relative in terms of or in important in relation to key trends security solutions I touched on already with our operation centers we have great skills around what's called cloud native so enabling customers to rapidly develop their own applications and speed up application development significantly AI infrastructure in a number of different flavors And last but not least, a lot of skills around Microsoft, both in terms of the workspace as well as their cloud services. So skills-wise, we have a broad range of skills and also services. Just want to highlight this, maybe a little bit of bragging almost, but we did celebrate our 30th anniversary here recently. And I want to highlight that for two reasons. One, we have a fantastic culture in this company. and great employees that bring all that value and all those skills to our customers. We spoke a lot at the celebration around our purpose and mission and our core values because they truly unite the company here. Even if we've grown through acquisitions and we exist in many different companies, many different countries, excuse me. But when we do come together like this, we all realize that we are definitely running on top of the same foundation in terms of values and mission. You'll see if you read the report carefully that the cost of the celebration is covered here in the Q3. So the EBITDA results is including the cost of the celebration. Key trends in the market. Just want to highlight a few things. Clearly, the business driver is the underlying driver for everything we do. We are helping our customers with their business development. all sorts of use cases we see our customers doing. They deliver software as a service and need reliable infrastructure. They may be running healthcare systems where there's super sensitive data and all their patient records needs to be digitalized. They may be running AI use cases to improve the productivity of their own processes. Most of what we do is underpinning the critical mission and the business development activities of our customers. Data is growing very rapidly, partly because of AI, or probably accelerated by AI, but that's obviously a core and the legacy of Proact is all around data. So this is good for us, but also has the drawback of cyber threats. So the more data increases, the more value there is, and the higher the risk of cyber threats. So while it's a business opportunity for us, it's also a negative trend, of course, in the marketplace. Sustainability increasing in importance very rapidly. You've all seen some of the statistics. The IT business in general is definitely a big consumer of electricity. As we move into AI and the high performance compute platforms needed for AI, that need for electricity is multiplying drastically, five to 10 times more needed than on a normal platform. So for us, this means a lot of work around highly energy efficient platforms, super efficient data centers, only running on renewable energy to make sure that we can help our customers be sustainable. And then last but not least, the technology trend around cloud. So obviously, all these types of solutions we speak about here are cloud based, but there's different flavors of cloud, which we call hybrid cloud, and that's very important. Not every There's not a one size fits all for our customers in terms of cloud, but they really do a lot of cherry picking and we want to be able to help them with all of those different barriers. So these are all five key drivers that are driving the growth for us. And when we look at a market, in particular core markets here, we think the market is accelerating as we look into maybe the tail half of this year and going into the next few years. This is from external analysts. So we think both the Cloud business as well as the traditional businesses are, well, the total business is growing, accelerated by cloud, of course, but still a healthy business also in the non-cloud segment. So a good trend for us when we look at the growth opportunities going forward. I touched this already, what we do for our customers. There's a number of use cases. that are all very critical so we are working very closely to our customers not only on the tech side but also on the business side and you see the somewhat complex snake as we call it on the right hand side in terms of how we help our customers we engage early really try to understand their business needs and how technology can enable those business needs we have to design and migrate and transform the right infrastructure to be modern and then we run it deliver it to them or even run it for them through a hybrid cloud solution. So we have a very broad and business driven engagement with our customers to make sure that the technology is truly helping the business. A couple of new services we've released and made available over the past couple of months, just very quickly on the top left. We have AI enabled our core cloud services. So these are tried and true services we have in our portfolio already. They are secure. They've been tested in real life for many, many years. But now we've added the AI capabilities through the NVIDIA hardware and software components. So we can do generative AI workloads on top of our existing cloud platforms. So this is great. And a good natural extension of our existing portfolio. on the right hand side what we call sovereign cloud so again taking our existing tried and true technology but make it available in a way that is very secure not only technically but also legally in terms of jurisdiction and geography to customers with extra high security requirements financial sector would be a very good example of this where they need the infrastructure and the data to be very secure from a technical perspective sometimes not even connected to the outside world, but also from a jurisdictional perspective. And then a third product we've also made available recently is what we call a clean product. This is in our security portfolio. This is a product that enables customers to recover after a ransomware attack or any type of attack. So, and as you may know, Ransomware attacks, you don't know typically how long before the actual attack, how long before the attackers penetrate your systems. That could be many quarters before the actual attack happens. So they may have been lingering in your systems for many, many months. So when you recover your system, you don't know if you bring back in then the old ransomware software, even if it's restored from a backup. So the purpose of this solution here, the clean room solution, is to restore a customer environment fully in a production environment, but it's disconnected from the outside world. So you can actually run your complete environment in a clean room and validate that everything is working the way it works, the way we expect, and that it's free from any ransomware or malware. So these are just three examples of how we evolve our portfolio, leveraging, of course, the existing products and services we have, and evolve them to meet our customers' needs in terms of, in this case, AI and security. So those were just a couple of highlights in terms of the company in general and also what we've done from a portfolio perspective since we met last. If we don't turn to the numbers, I'll just quickly run through them and then I'll hand over to Nora here to go a little bit deeper. Good growth. in the quarter, driven very largely by our systems, also strong organic growth. Organic growth was almost 9%. Good cash generation, as you're used to when you look at PROAG. EBITDA also good growth, almost 9%. And as I mentioned already, that includes taking the cost of our celebration, which was almost 9 million Swedish on top. So if you add that back, a very good EBITDA growth year over year. I think the only thing we are a little bit excited about or unhappy with is that we have a bit of a decline by 2% organically in our services business. ARR, recurring revenues, is flat organically, but we had a bit of a decline in our MCS business. We're not super worried about it. It's a little bit of a timing effect. It's been a little bit slower in terms of closing new contracts. Contracts are expanding in scope. They're expanding in complexity, and therefore they take a little bit of a longer time, which means it takes longer to onboard, and we get a small dip in our MCS revenue. As I said, we're not happy, but we're not super nervous either about it. But it's maybe the thing that could have been even better in this audit. Good. With that, I'll hand over to you, Nora.

Thank you, Jonas. So on this slide, revenue in this quarter reached 1.1 billion Swedish kronor, an increase with 6.3% of which 8.8% organically. The improvement is driven by strong system sales, as you can see, which is up 17.6% and actually 20.1% organically. As Jonas mentioned, the services business decreased with 4.7%, 2.3% organically compared to Q3 2023 due to lower revenue in both managed cloud services and consultancy revenue, while support services remain flat. Business units Central and West stand for much of the increase in this quarter, as well as UK, thanks to good system sales. Nordic and Baltics remain stable with some changes in product mix, which we will come back to. Services revenue accounted for 45.5% of total revenues, a slight decline compared to last year, driven by the good system sales in this quarter. And as previously mentioned, the system business is a bit volatile with large deals in individual quarters impacting the mix. On the next slide, we have our annualized recurring revenue that amounted to 1.7 billion Swedish krona in the third quarter, a decrease with 2.4% compared to Q3 2023. Organically though, ARR was flat. This quarter was still affected by lower support services, primarily in the UK, and longer sales cycles for complex deals in managed cloud services, as Jonas mentioned. During the quarter, we have signed for new cloud services contracts amounting to 102 million Swedish krona, a decrease from last year's 190. On the next page, adjusted EBITDA amounted to 79 million Swedish krona, an increase with 8.9% compared to the same period previous year, where business unit Nordic and Baltic stands for the majority of the increase. The improvement is driven by increased revenue and improved gross margin from last year's 23.5% to 24.2% this year, coming from increased margins within system sales as well as continued efficiencies within services delivery. As a result of the higher gross margins, EBITDA margin increased to 7% compared with 6.8% last year. And as mentioned by Jonas, this quarter includes circa 9 million krona cost related to the 30 years celebration. Further to cash flow and net cash position on the next slide. Our net cash position at the end of the quarter landed at 175 million Swedish krona compared to 80 million at year end 2023. Our strong financial performance has enabled both share buybacks and dividends, still leaving us with a stable financial position at quarter end. And some more cash flow on the next slide. Cash flow from operating activities amounted to 83 million Swedish krona. Total cash flow in the quarter was 42 million Swedish krona compared to minus 5 million last year. And some details from our business units, starting with Nordic and Baltics on this slide. Revenues landed at 566 million Swedish krona in the quarter. EBITDA increased with 12.4% to 64 million Swedish krona, resulting to an EBITDA margin of 11.3%, being well above the group target of 8%. Business unit Nordic and Baltic continues to deliver stable results in the third quarter. Further to business unit UK on this slide. In the UK, revenues increased to 170 million Swedish krona, an organic increase of 10.4%. The increase is driven by good system sales. EBITDA remains flat at 3 million Swedish krona, corresponding to an EBITDA margin of 1.6% due to revenue mix shift leading to lower gross margin. And on the next slide, business unit West. Revenue in West increased organically with 17.1% and landed in at 216 million Swedish kronor. This quarter system sales are driving the improvement. IBITDA increased from last year's 4 million Swedish krona to 9 million this year, a margin improvement of 2.1 percentage points to an IBITDA margin of 4.4%. The improvement is mainly driven by good cost control and volume increase. And Business Unit Central on this slide. Revenue increased with 16.9% to 210 million Swedish kronor. The organic growth was 21.2%. The increase, although compared to a somewhat weak third quarter last year, is driven by some large system deals also in this quarter. The services business was down with 10.8%. 8.1% organically. IBITDA landed at 6 million Swedish krona, corresponding to an IBITDA margin of 2.7%. The improvement in IBITDA is mainly attributed to the increase in revenue. And on the next slide are financial targets. In the quarter, our organic growth reached, as mentioned, 8.8%, which is slightly above the long-term financial target of 5% of organic growth and additional 5% growth via acquisitions. Looking at total growth comparing last 12 months to full year 2023, we still have a way to go where we haven't made any acquisitions during a slow M&A period in the markets. EBITDA margin in the quarter was 7% and last year, last 12 months, some up to 7.3%. So we are definitely closing in on the long-term target of 8%. As I previously mentioned, we are actually in a net cash position, meaning that we are well below the set level of two times EBITDA in leverage. Return on capital employed is at 21.1% for the last 12 months, well above the target, which is 20%. This concludes the financial overview of a good third quarter. Back to you, Jonas.

Thank you, Nora. The summary is easy. Good growth continues to be strong. Organically and above what we would have expected, as Laura mentioned, we typically plan for roughly 5% organic growth. EBITDA development also good in particularly considering the one-time cost of the celebration, very strong financial position. And we are, as always, very positive about the market outlook. We are positioned very well in a market that's growing quite rapidly, so still positive about the future. So with that, we've gone through the slides. We'd be happy to open it for questions. You know how to do it. You either unmute yourself and scream or you raise your team's hand, however you feel comfortable.

Go ahead. Just a question on the balance sheet and the really strong cash flow with this recurring revenue base that you have and very strong cash flows and a big net cash position. You have announced that you will do some buybacks but it's really been quite shy of volumes is there something that makes you avoid the buyback or is it like you have a very good pipeline of M&A just trying to understand?

Yeah it's a couple of different things that all kind of add up but we said before I think we're quite clear we'd rather do M&A than buyback so you're absolutely right we want to keep our gunpowder for M&A we also started the buy back in July and it was only not too many months of activity before we get into this quiet period and then we also try to balance a little bit when and how we buy considering our own share price not that we're saying that we're overvalued but we want to be smart about when and how we buy so there's a couple of different things that are just balancing out when and how we do the buybacks.

Okay thanks.

On the M&A topic I'd We definitely see a better activity in the market now than we did last year and, frankly, also the beginning of this year. We thought maybe the M&A market would open up a little bit earlier this year. It's been a little bit slower, but good activity. And I think valuations are starting to harmonize again as I think it's been a slowdown in the market in general. And maybe interest rates are coming down, helping as well. So that's positive as we look forward.

Good, Daniel. Yes, thank you very much, Jonas. And I'm very sorry if you have already answered this one, but I had two other calls coinciding with this one. So I shoot my questions anyway. The first one is on cloud revenues here, organically down 1% year over year. What was the main reason for that? And is that the trend that we should expect ahead as well? Or any feelings for Q4 here?

No, quite the opposite. We shouldn't expect this. It's a bit of a timing effect, frankly. So a couple of different things happen at the same time. We have a little bit of a slower TCV during the last two quarters, largely because we see that the sales cycles are long. Maybe, quite likely, people are still a little bit concerned with where the general market is going. Consumption hasn't really picked up. Economy is still in some sort of a, waiting mode, but also that our contracts are becoming more complex. And I don't mean the legal contracts, I mean the scope of our contracts, the types of services we're delivering. So obviously our customers are more accurate, more particular with the contracts. And then onboarding of some of the contracts we've done in the past also being complex, takes time. So it's mostly timing effect of closing deals, particularly during summer times, with onboarding of previous deals. So we're

continue as always to be positive about our clouds we're not happy with the dip but we would rather have a continuous of course growth but it's more of a timing effect than anything else yeah so it's reasonable to expect that to come back to growth relatively soon i guess that is correct yeah excellent and then second one on consulting revenues they were down here in q3 year over year is that the market thing i mean all the it services companies have a very hard time out there or are there any company specific reasons for that no there's there's definitely

slightly tougher market for consultants um we're also lower on consulting we haven't staffed up our consulting teams to the level we plan for for that very reason for the market reason so i think yes it's there is some market reasons but the good thing is we don't sit with a lot of bench warmers as we would call them there's not a lot of people in our consulting staff that are not active not billable but uh on the top line you have a negative impact

Yeah, so the utilization in the consulting revenues are still good. It's still good. Yeah, I see. And then I have a question on the gross margin here. The system business drove the growth here in the quarter while gross margin was still up slightly versus last year. Were there any positive one-off deals on the system side or is this a good underlying trend to expect?

No, I think it's thinking back on the

list of deals so you're asking me i'm doing real-time analysis that's dangerous uh uh no i think it's more there's not one deal that sticks out as we've seen some other quarters so i think it's a good mix uh in terms of the systems portfolio decision deals so it's rather that we as you all know we've worked quite hard on efficiencies and working up our margins and we see the positive effects

Yeah I see and then finally on the cost side here going into 2025 will you be a bit more forward leaning investing in cost or will you continue to be prudent as we now see your growth picking up?

Well we're always prudent of course but if there are areas we would invest it would be on the commercial side so sales and consultants those are the areas where we would want to invest. I think we're We're quite good and quite okay in our admin and our operations costs. So you've heard us say this many times. We want to build scalability into our operations. We can bring in new customers, more volume into our cloud and support services without having to add a ton of more people. And I think we are in a better shape there now. So if we do investments, we will do investment. It'll be primarily in driving our commercial agenda and the consulting business.

Yeah, makes sense. Thank you very much. Thank you.

Any other questions?

Yeah, can you hear me?

Yeah. Yeah, sorry to barge in. Christopher here from DMV Markets. Just wanted to pick your brain on these incentive scheme changes at Microsoft from January of of next year. So first of all, are you primarily doing CSP, given your SMB focus, and do you see any upside to that, that I think there will increase rebates for CSP next year?

There may be. I think we're quite careful with running our business off of Microsoft incentives. And the reason is exactly the reason you bring up, they change year by year. So our business model is primarily driven by two things when it comes to Microsoft. Number one is we try to do as little licensing as possible. So just licensing Azure or Microsoft 365 is not our core business. It doesn't mean we don't do it. We do do it, but to the minimum extent possible. And the second piece then is that we try to make our business up of our own services on top. So we do security services and or running all the workloads on behalf of our customers on top of the public cloud. So our own cloud services on top of Microsoft is more important to us and they're unrelated to the licensing schemes. So those are the reasons why it may have a positive impact, but that's not what we build our business models on. If that makes sense.

Thanks, but just to be clear, you're primarily on the licensing CSP oriented or?

um yeah or maybe you don't disclose the split uh we don't disclose the split and i don't even have it in my head so so i i um that's okay yeah we'll have to make it up which is not a good answer yeah thank you super helpful sure thank you all right yes uh valine almatis here

Congratulations on your 30 years celebration.

Thank you.

I had a question about that, the nine million cost. Why don't you consider that a non-recurring item?

We always try to minimize the non-recurring items. We try to run stable operations that is predictable. I know it was really on the verge, but that's kind of the general, philosophy where we try to do as little non-recurring items as possible. Keeping a good culture and engaged, happy employees is part of the business. Obviously, now all the costs happens in one quarter. I totally recognize that, but that was the rationale behind it.

Thank you for the quick answer. Good.

Feel free to reach out to us if there's any more questions coming after this call. As mentioned, the recording will be available on the website. The slides and the report is already available there. If there's no more questions, we wish you a great Friday and a happy weekend. And we'll see you in February.