Proact IT Group AB (publ)

All right. Welcome, everyone. I hope you can hear us OK. I'm here together with Noura, our CFO. My name is Jonas Hasberg. I'm the CEO. We're going to go through the Q4 and full year results for PROACT.

Everyone, you can hear us OK. And I get a bit of an echo, unfortunately. Jonas Hasberg, I'm the CEO. We're going to go through the Q4 and full year results for PROACT.

Just bear with us a second as we get the audio correct.

Is everybody muted though? Everybody needs to mute. I think that's the challenge. I will ask our technician to make sure that everybody is muted. Just bear with us again.

all right this sounds better okay so we're gonna do with this the normal way we will go through an introduction to proact some of you have heard it before we'll cover the highlights of the quarter as well as the year and then we go a little bit deeper into the financials of of the of the report But first, a high-level introduction. Most of you know us quite well by now. PROIT is now on its 31st year. We are helping customers across Europe with business-critical IT solutions. We deliver IT infrastructure to mission-critical applications for big and mid-sized enterprises across Europe. You can see our presence. across Europe on the map here on the slide. We are just short of 5 billion Swedish in turnover and are about 1,100 employees. We've had a good growth in terms of our revenue over the past couple of years and obviously EBITDA at a record level at 351 when we look at full year 24. and we'll see on the next slide we're highly decentralized business we are organized in regions where nordics and baltics is the largest in terms of turnover followed by central and west and uk um which are then divided into individual countries but this is the way we run our business so each region and each country is very close to their customer quite autonomous in terms of making sure we do the right things in each market. We know the competition, we know the customers, we can adapt our offerings. At the same time, we do a couple of things across the organization and in a more standardized, not so much centralized, but standardized way, which is particularly the way we deliver our cloud services. We do that out of four coordinated and harmonized standardized delivery hubs. So that all our cloud services are delivered in the same way to all our customers. And this is an important part of our strategy. So we can be close to customers through our decentralized organization, but we get scalability and can bring in a lot of new customers, a lot of cloud engagements without having to necessarily add a lot of cost to that delivery. um so that's the way we're organized we also have in two areas security operations centers one in the uk one in germany which enables us to across our regions and across our markets help our customers making sure that their infrastructure is protected and safe from cyber threats on the next slide we'll show The revenue splits, you know this already, we have four main revenue streams. Systems is the reseller business of hardware and software, still making up roughly half of our revenues. This is a very traditional, quick turnaround business. And this is also the, let's say, a little more volatile part of our business, which we also noticed here in Q4. Sometimes we have strong quarters, sometimes less strong. but over a rolling 12 months period, this is typically stable and slowly growing business. Sales cycles relatively quick, delivery cycles even quicker, and then obviously immediate invoicing. We keep no inventory, but these are immediate customer specific deliveries. Support services, an important part and complementary to the systems. This is where we make sure through technical expertise, that the systems at our customers are running at full performance. All lights are green. Slightly different business models. These are typically three year contracts, but with upfront payment. So from a cash flow perspective, a very good business. And then the revenue is deferred over the period of the contract. Third, and strategically maybe most important, the cloud services of our own. So this is where we deliver roughly the same functionalities of storage, compute, networking, security, backup, disaster recovery, workspace, but we deliver it as a service. So our customers do not own and operate the underlying technology. We do it for them and we invoice them on a monthly basis. Last and actually least consulting services, anything from advisory around technical solutions, architecture, installations, migration, training, typically time and material engagements, as you would expect in a consulting business. We highlight on this slide a couple of areas of expertise, like you saw at the bottom here. cybersecurity, cloud native application development, AI, of course, and Microsoft. These are just examples of area where we invest in making sure that we have leading competences and experts that really can help our customers. These are fast moving technologies and we need to be at the forefront to be able to help our customers. And these are just four examples of areas where we invest in competence development. then on the next slide uh just quickly on the market it is a fast-moving market and it's a growing market which is good for us there's a number of underlying drivers the digital transformation remain the main driver and what we mean by this is our customers need and demand and and want to improve their own operation their own offering to their customer their own decision making automating their workflows whatever it may be through it and it's obviously a big driver across segments and across our geographies and it's not new it's been there for a long while still a strong driver for us security as i mentioned already very strong driver as well popping up more and more unfortunately as the threat levels are increasing sustainability and regulatory issues now of course upcoming are increasing security requirements on a lot of public and private companies that needs to be fulfilled in terms of the NIS 2 regulations and then Last two are more technology driven, but the technology pace is very quick and obviously our customers want to be at the forefront and leverage the capabilities of cloud and leverage the capabilities of hybrid architectures. And last but not least, an ever increasing demand for data. All these five are driving the demand for our services. And on the next slide, we'll just show schematically how we think that the market is accelerating in front of us. We expected this to pick up already in the second half of 2024. That may not exactly have happened for macro level reasons, but we still think that this demand is growing when we look forward into 2025 and onwards. so what we do and you'll see here on the next slide is really deliver mission critical solutions to our customers so what we do for our customers is fundamentally important if our things do not work if our services are not up and running typically the business of our customers will be standing still And we've highlighted a couple of examples in the past, including the need to digitize patient records, which is now a regulatory requirement in the UK. This will help the caretakers to be more efficient in the way they meet their patients. But obviously secured requirements become incredibly important. So here we're helping hospitals, large hospitals in the UK, to both make sure that they're more efficient and spending more time with their patients, as well as making sure that the patient records are secure and only accessible by the right people. Software as a service and other very good examples where customers are delivering, like Fort Knox, usually our favorite example. uh services over the web to their customers if our infrastructure is not running the product to their customer is not working so these are all good examples and we have a very clear go-to-market model we call the snake here on the right hand side of the slide starting with the business understanding of our customers taking them through the whole journey of transforming their it migrating to a modern hybrid cloud architecture and then operating it for them, enabling our customers to spend their time on their own business and their own customers, not on the IT infrastructure. We do that for them. We have two cases that are new for the quarter. We always bring in, of course, new customers every quarter, but these are a little bit extra funders. A customer in the UK called Teachers and Stern, it's a legal firm, relatively Large, they've selected Proact as their new vendor for their infrastructure, and we deliver that through a hybrid cloud platform. And then the other example is a Swedish-based part of Dole Nordic. which is the big fruit and vegetables company, Global. They are also running their infrastructure on top of a cloud offering from Proact. So these are both good examples of the relevance of our hybrid cloud portfolio, where we then enable our customers to really tailor the infrastructure for their particular needs by using on-prem solutions where they need the public cloud where they need our cloud services where that makes sense and these are also in particular using our what we call container as a service platform which enable them to do rapid application development which is extra interesting um we have done a lot of work you've seen this with our customers around the offering the quality of our services the speed with which we deliver and which has actually been noticeable in an increase in net promoter score which is great so we've upped our customer satisfaction of 3.262 in terms of net promoter score very very strong score which is fantastic So Q4 then, a couple of things. We did go out, as you know, with the profit warning right before Christmas. We expected a decline in both top line and EBITDA. That did indeed happen, a little bit less so than we anticipated, which feels good. We had a bit of tailwind across three different areas that all aligned on the right side for us. We did close a few more deals at the very end of December that we were able to deliver, so that helped. The result, we had a little bit lower cost than we anticipated, which is also good. We always very keen on cost control. And last but not least, at the end of the year, we get some of the rebates from our vendors and they came in better than we anticipated. There were three different components that all three kind of aligned and had positive tailwind. in the quarter, which dampened the results a little bit. So a bit of a decline in top line, but less so than we anticipated. Slightly better EBITDA than we anticipated, but also here a decline. However, I guess the good news, record level intake of new cloud contracts at 224 million. And also when we summarize the year, a record year along many parameters, record revenue, record EBITDA, record cloud intake in terms of value contract. So a good full year to say the least for Proact. Nora, I'll hand over to you and you can talk a little bit more deeply about the numbers.

Thank you, Jonas. On this slide, revenue in the fourth quarter reached 1.3 billion Swedish krona, a decrease of 6.7% and 7.2% organically. System sales decreased with 97 million Swedish krona, 12.3% organically, primarily due to a temporary decline, mainly within business units NOVA and Central. Revenue from business service Revenue from services business increased with 4 million Swedish krona and organically 0.1%. Business unit UK continues to demonstrate steady revenue growth driven by continued positive momentum. On the next slide, annualized reoccurring revenue amounted to 1.8 billion Swedish krona in the fourth quarter, an increase with 1.9% compared to Q4 2023. New cloud service agreements amounted, as Yunus mentioned, to 224 million Swedish krona in the quarter compared to 197 last year. This is a new quarterly record, primarily driven by business units UK and Nubba. A significant number of existing cloud contracts were also renewed during the quarter, highlighting the strong customer satisfaction. Next page, please. Adjusted EBITDA amounted to 80 million Swedish krona, a decrease of 12% compared to the same period previous year, mainly due to lower sales in the systems business. Business units Nordic and Baltic stands out this quarter with an EBITDA increase of 20.5 million Swedish krona. Further the cash flow and net cash position on the next slide. Our net cash position in the end of the quarter landed at 330 million Swedish krona compared to 80 million at year end 2023. Our strong financial performance has enabled us both share buybacks and dividend during the year, still leaving us in a strong financial position at year end. Some more cash flow on the next slide. Strategic efficiencies and focus on the service business has driven strong cash flow development. Cash flow from operating activities amounted to 207 million Swedish kronor, while total cash flow for the quarter reached 152 million kronors, an increase from 135 million in the same period last year. The quarter was impacted by a slight increase in working capital, mostly due to timing effects. Now some details from our business units, starting with Nordic and Baltics. Revenues landed at 717 million Swedish krona in the quarter. EBITDA increased with 39.6% to 72 million Swedish krona, resulting to an EBITDA margin of 10.1%, being above the group target of 8%. Business unit Nordic and Baltics continues to deliver stable results in the fourth quarter. Further to Business Unit UK. In the UK, revenue increased with 5.9% to 174 million Swedish kronor. The increase is driven by good system sales. EBITDA declined to 3 million Swedish kronor, corresponding to an EBITDA margin of 1.9% due to revenue mix shift leading to lower gross margin. On the next slide, Business Unit West Revenue in Business Unit West decreased with 5.6% and landed in at 198 million Swedish kronor. IBITDA decreased from last year's 13 million Swedish kronor to 4 million this year, an IBITDA margin of 2%. Revenue and IBITDA both declined due to lower systems and services revenue during this quarter. And lastly, business unit central on this slide. Revenue decreased to 210 million Swedish krona in the quarter, mainly due to lower system sales. EBITDA landed at 6 million Swedish krona, corresponding to an EBITDA margin of 2.8%. Both EBITDA and EBITDA margin decreased, mainly due to lower system sales and integration costs for previously acquired businesses. On the next slide are financial targets. In the quarter, we experienced organic decline of 7.2%. Looking at total growth for the full year, we still have a way to go to reaching our target of 5% of organic growth and additional 5% growth via acquisitions, where we haven't made any acquisitions during a slow M&A period in the market. EBITDA margin in the quarter was 6.7%, and last 12 months, some to 7.2%. we are 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 leverage of two times. Return on capital employed is at 19.7% for last 12 months, just below the target, which is 20%. And this concludes the financial overview of the fourth quarter. Back to you, Jonas, for some final comments.

Thank you, Nora. I think we are in general quite positive about the market. The demand is still good there. in the marketplace and we communicated in the profit warning before christmas that the decline in systems is temporary we still believe that is the situation which is good so we're looking positively to 2025. i do remind everyone we had a very strong q1 in terms of gross profit and gross margins last year so the comparables are tough but overall good and positive outlook for 25, where we think that organic growth is back in the books. Incredibly strong balance sheet, as Nora just mentioned. So we are very active on the acquisition side as well. And we may have glossed over it, but with a strong position, the board will recommend an increase in dividend from 2 to 2.4 Swedish krona to the AGM here later in May. So that will be a bit of a... a good increase in the dividend back to our investors. So with that, thank you so much. We will open up for questions. You will have to raise your hand, Daniel, always the quickest, and you will have to unmute yourself as well. So go ahead, Daniel.

Yeah, thank you very much, Jonas. I start off with a question where you ended on the gross margin. You have said or told us to be a bit cautious to extrapolate the strong one here. But now you report 24% again in Q4. And last year in Q1, it was above 25, obviously. But do you see that you have leveled up in terms of gross margin at least a little bit ahead of the 22%-ish we have been historically?

A little bit. So gross margin is an important lever for us, as you know, and it's a couple of things we talked about quite some time. One is the shift to services where we do have a higher gross margin than for the systems business. um and then getting scale out of our delivery the cloud services delivery which we'll talk about a lot of work has been done to standardize and automate and make our delivery capabilities more efficient so yeah you do see the effect of that um i think the only caveat maybe that i'll highlight and it's not a huge one but but nordics is obviously running at a very strong gross margin and also very strong ebitda margin they're at over 10 percent in this quarter That may be a little bit tough for the long term. We are well above eight, which is great. We can show now that we can run the business over eight. They may not be able to run at this high level consistently. And the main reason for that would be, I would think, an increase in sales costs. Which doesn't hit gross margins as much as it hits, of course, bottom line.

Yeah, I see. I see. And then the second one on regional developments. You walked through Q4 numbers here a bit. West and central were down organic year over year. How should we think about 2025 in terms of the regions? What's your kind of different outlooks there?

I think we're seeing growth in all regions at a slightly different pace. We have good momentum already in the UK. We think we're going to see central and west also pick up. For the full year, they were a little bit better than in the quarter. They were also impacted by, in particular central, by the temporary decline in systems but i think we we there is growth in all our markets we've said this many times before that germany may be the toughest market right now for macro levels but we still think there's growth opportunities also in central okay

And then product-wise, do you have any partnerships or collaborations you think will be more important in 2025 or maybe 2026, like any suppliers that gained lots of ground in recent market development with AI or cybersecurity that is worth highlighting?

I don't think there will be a huge mix when we look at our total mix. But one thing that we do see, and I think we mentioned this also before, but we talk a lot about AI over the last two years or so, and that customers would originally start dinking around as i would call it maybe prototyping experimenting is a better word in the public cloud we do see now people investing in their own infrastructure so nvidia based high performance compute platforms either through a systems deal or even through us cloud services from ourselves so there is a that little pendulum that we talked about, that people start bringing some of this AI compute power back home because it's cheaper or safer or in better control, is starting to happen at a slow pace. So that'll be interesting to see for 2025, the increase of AI compute platforms.

Okay, it makes sense. And then finally on the cost side, you said it came in a bit lower than you anticipated in mid-December. Anything we should be careful to extrapolate into Q1? Are there any non-recurring cost reductions in Q4 that we should not extrapolate?

No, I think overall we're running at a tight cost level and it showed its benefits at the end of the year. Nothing extraordinary in the quarter that you can that you should subtract or adjust for. I think we're coming into the year at a good cost level.

Yeah, I see. And then if I may, on M&A as well, I mean, you have lots of financial headroom at least. Is the organization and balance sheet ready for a larger acquisition or should we expect the size as we have seen historically?

I mean it's a tricky one we would like to do larger because it's easier in many ways I think the amount of work we put into a transaction is roughly the same for a smallish versus a larger so it's more bound for buck to do a larger acquisition to some degree it's a little bit more stable maybe a little bit less risk on one parameter at least but there are fewer targets of larger size so we're looking across the board from I'll just kind of round off but order of magnitude turnover of 100 million up to let's say a billion or above but in all fairness there's more targets at the lower end of that spectrum yeah excellent that's all for me Thank you very much, Daniel.

Thank you.

Anybody else, please raise your hand. Here we go. Erik Larsson, go ahead. You can unmute yourself.

Thank you. Hope you can hear me.

Yes.

Great. I'm from SEB FYI. I just want to follow up on M&A. So what's usually the main reason when you look at acquisitions, maybe you're approaching a deal and then it falls through. What's the main reason for You know, not reaching an agreement usually.

There's been 2 reasons that are. The dominant evaluation where we don't meet on the evaluation. We saw that in particular. maybe during 2023, I think there was a lot of, and a lot of these companies were looking at our founder-owned and founder-led, so they have a bit of an emotional attachment to their companies, which is fully understandable. And they come in from a low interest rate kind of period into a period where we saw inflation and high interest rates, which meant that their view on the valuation wasn't fully aligned with ours. So we saw that a couple of times where we couldn't meet. And then the second one, which I find a little bit more interesting, is that we, in a couple of cases, have noticed that our cultures are not fully compatible. And it's one of those things that we spend a lot of time on, make sure that these target companies would also fit within product and vice versa, that we can work together in a great way. We do want to integrate these companies into our local operations, get the teams to work very closely together, and that means they also need to like working with each other. So we do quite a bit of culture due diligence is part of the process and a bit a couple cases where we realized in the process that this may not actually work as well as we would like those would be the two main reasons okay yeah i had a follow-up on sort of the main challenges with with integration and i guess it sounds like culture and those types of things might be the um yeah there's one more if if we look you know we we spent an incredible amount during the last year on on finalizing integration of a company in germany we acquired a few years ago called ahd and there's a third component there in terms of the integration work they also have or had now before they were integrated a portfolio excuse me portfolio cloud services which means they have their own processes and their own portfolio and their own underlying IT tooling, the systems, excuse me, to deliver those cloud services. It's not getting better, is it? And that integration was difficult. Is it gone? Almost. So in terms of integration challenges, it is difficult when they have a high degree of cloud portfolio, cloud processes and underlying tooling. The good news is we finalized that integration here over the Christmas time. So all of the portfolio, all of the tooling, all of the customers have now been migrated into the Proact tooling and we've lifted the Proact capabilities to a higher level with the help of HD. But that's a tough, tough, tough amount of work, tough challenge, but definitely doable.

Okay, that's all for me. Thank you very much.

Thank you, Eric. Anybody else? Yep, Neil, go ahead. You will have to unmute yourself. Can you hear me okay? No, we do, yes.

Okay, just a couple of follow-on questions. In December, you referenced, obviously, a slightly softer systems business, but also continued weakness in Germany. Is there any chance you could just give us an update on the German market conditions?

I think the German market conditions remain the most challenging in Europe. for all the non-reasons of their overall economic situation on a macro level. I still think there's a bit of growth there. But if we compare our four regions, the growth rate is the lowest we expect in Germany versus the rest of the regions. And it's probably the highest in the Nordics, maybe followed by West. So if I would rank the expected growth rates here over the next year or so. I think Nordics is probably the highest, followed by West, followed by UK, and then Germany with the slowest growth rates, but still a little bit of growth. So, I think the opportunity is still there for us to have a bit of growth also in Germany.

Okay, thank you. And just to clarify, on the systems business, was it primarily a volume issue or was there some price pressure? And if that situation is recovering, are both volumes and price recovering?

It was a volume issue only. It happens every now and then. Some of these deals are very large. They can be in the tens of millions of Swedish kronor or any millions of euros, sometimes up to 10 million euros. So these are big deals. The sales cycles are relatively short. And as I mentioned in the beginning, we customize the system specifically for the customer and we ship them with relatively short notice. So there's no inventory or anything else. So we have quarters where we come in a little bit better than we expect and we have quarters where we come in a little bit short. Usually we look at the systems business over a rolling 12-month period. It gives us a better feel than individual quarters.

so q4 you should look at it as a low volume quarter on a one of those you know volatile quarters that happens every now and then okay thanks and then final question which is a much longer term strategic question obviously the margins um outside of the nordics the larger nordics region are at sort of a lower level one presumes that scale has something to do with that how should we think about those margins over the long term as revenues naturally do build in those markets, and how quickly could they rise?

Our ambition is to not only run the whole company at over 8% EBITDA, but each of the regions at 8% EBITDA. We think that's definitely doable. There's some scale in the fact that we want to shift more to cloud services, and yes, we want to grow quicker in cloud services than anything else. But it's not like we have to double the businesses and other regions to get there. So this is within reach, within our planning horizon. So shifting to cloud, continue all that work we've done to be even more efficient and standardized in delivering our cloud services and accelerate the sales a little bit. Those are the main drivers to achieve eight in all our regions. And we believe it's doable.

Thanks very much.

Thank you. Thank you. Good. Anyone else? You know how to do it now. Raise your hand. Unmute. Ask. Great.

If no more questions, thank you so much for listening. We will be back for our Q1 report, which is May 6. Until then, have a great time. Thank you again for dialing in and for listening. Thanks a bunch. Take care.