Proact IT Group AB (publ)

Okay, hey and welcome everyone to PROACT Q2 report. I am Magnus Lund, I'm a CEO and president of PROACT and for you who doesn't know me, I have been in the company for five years, four years and before I became president I was nominated first of March this year. Before that, I was running as a deputy group CEO and I've been running our Nordic and Baltic business. So I am here today to give you an introduction of Q2 Result together with Nora, our CFO. And we will do as usual that I will give you a short introduction for you that are new to our company, what we're doing and how we are generating our money. And for you that knows our company well, I hope that this will also be a good reminder of how we act as a company. And then Nora will guide us through the financial details for the quarter. And then at the end, we will sum up with the questions and comments if you have. And then for the purpose of order, then just raise your hand and then we will let you in with the questions. So good. So I'm glad to kick off here. So we at Trueact, we are extremely good in taking care of our customers' data and work with data in all the forms that are available when it comes to IT and technology. This is our core focus, and we have been doing this for over 30 years. And if you think about this, Today, data is the sort of key for every company. So it doesn't really matter what industry that you are in or what company that you're running. At the end of the day, you need to have an IT infrastructure and you generate a lot of data, both as individual, but also as a company. And this is what we have been working with for 30 years. And we are really expert in this field. And of course, we have sort of expanded around that, but our core business is related to data. We are today having a turnover of roughly 5 billion. And as you can see to the right here, we have been on a growth journey, both from a sort of profit perspective, but also on a revenue the last couple of years. And this is a good trajectory that we are on. We are 1200 experts and dedicated employees that are working with this. And as you can see on the colorful map here, our geographical present is within the Northern Europe, which in the red, I would say in the Nordic and Baltics, we have sort of our main footprint where we started 30 years ago, and then we have expanded out of that. We are having a revenue split of around half of our revenue coming from our services, and half of that is coming from our system sales. So that is sort of a key thing. You can flip to the next slide, Kristoffer. From an operational perspective, we have divided our company into four clear profit and loss units. And we have the first one, Nordic and Baltics. This is around half of our companies, so this is by the far biggest business unit that we have. And then, following that, we have UK and then we have two others, West, which consists of Netherlands and Belgium. And then we also have Central, which consists of Germany and Czech. In our business units, we are also having our factories where we are creating and generating the services that we provide our customer. And I will talk more about what type of services further on. So we have four different delivery hubs which are collaborating. We have our own SOC that is up and running 24-7. And this is how we sort of operated and divided our company. So if you take the next slide here. So Proact as a company, we have four distinct and clear revenue streams. And I will walk them through and give you a little bit more highlight around them so you get a better understanding of what we are doing. Starting from left with our system sales, this is sort of the core of PROACT, the foundation that were founded 30 years ago and that we are still doing and is very, very good at. This means that we are providing our customers with system advice, recommendation, of how they should build their modern data infrastructure in reality this means that we are working with the sort of best brands in the world and we are targeting large and enterprise customer in this segment and then we are helping them sizing and delivering the system to them that they need in order to run their company. So what we are doing at Proact is actually we're working with the things that you don't see but you will for sure notice if the IT system is not up and running and this is what Proact is doing on a core basis. Our system business, here we are doing quite large deals and I used to say that our system business is actually a recurring business. And with that, I mean that it is very seldom that a customer leave us. We have very high customer satisfactions and the system that we are providing our customer are part of the core IT infrastructure. And if you think about that, it's very seldom you sort of do a heart transplantation and exchange your sort of system which we are providing them. But it's more likely that the customer also expands their current system environment and after some years they also do a tech refresh. So from that perspective I see our system business is very sort of reoccurring. I also want to reiterate that given the system business the deals that we're doing they can be quite large that means that sometimes it could be hard to evaluate us from quarter to quarter since it depends on if we get the system deal at the end of the quarter or the beginning of the quarter so when you're looking at us and evaluating us as a company i would recommend that you look into our system business long term Very tightly connected with our system sales is our support service. And that means that on the system that we are selling to our customer, we are providing also our technical staff that will help our customer to replace and repair if something gets broken. This is a super good example of good recurring revenue. The contract is often very long. It's three to five years normally. And that means that over time, we have a really tight and close collaboration with our customer. So our system and our support business is really tied together. At the same time, as I mentioned earlier, we have four different hubs where we are delivering services. And the services that we are delivering, it's actually sort of the same as we are selling to the system. That means that we can provide our customer with sort of modern, highly infrastructure as a service, meaning that our customer, they don't need to have their own staff. They don't need to have their own competence. We can provide them the same thing as a service. And also, given what's happening also around the world with all the uncertainty and things like that, we see a lot of customers that are appreciating working with a European service provider because there are a little bit too much uncertainty happening now when it comes to cloud and American companies. So I would say that our managed cloud service is a very good add on in our portfolio. And secondly, and I will not for sure say that it's the least, but it's really our consultancy service. Here we have super skilled talents and consultants that are working very closely with our customer, providing knowledge and technology of how to design a modern infrastructure. All of these four different revenue streams are really tight together and they also collaborating meaning that it's very often that we have a customer that maybe they start with a system deal and then they expand to a managed cloud service or a consultancy service we can move to the next slide as i mentioned also in the beginning i would say that proact is probably in a better position today compared to when 30 years ago when the company was founded. What is really key here is the data. And if you think about that, we as individuals are generating more and more data. Our society is sort of built upon IT and infrastructure. And every company also are using the data to do business. We want to do more analysis. We want to do more sort of refining of our customer data to understand more. And this is exactly what Proact is working with, providing the sort of the the storage and IT infrastructure that enables our customer to do their business. And then secondly, and this is also something I want to highlight and something that we discussed a lot with our customer is security. As you all now know, cybersecurity is a real threat that are happening more and more and more. This is becoming more and more complicated. The best way to protect yourself around cybersecurity is to protect your data. And the most sort of basic fundamental that you can do, which more and more customers actually are realizing, is that you are taking a backup of your data and store that in a safe place. And if you take a backup of your data, then you also need storage. And this is exactly what TrueWorks is working upon. And then we are helping a lot of our customers also to make sure to size their IT infrastructure and also design it so that when it happens, then you also can have a quick restoration of your data. And that, I would say, is very key. And the third trend that is also driving our growth is AI. And if you think about this is that in order to get value out of AI, you need to train your model. In order to do that, you need a lot of data. And this is the key where Proact have been working with for 30 years. So we are extremely good in sort of how to structure and build environments so that you can actually add on an AI capability and work on the data that you have. And this is an increasing demand that we are seeing from our customer. So I would say that the underlying trend in the business where we are positioning is very, very strong. So the market is for sure there. And on top of that, I also would like to just emphasize this, that in today's uncertainty, especially when Trump and the US and the sort of uncertainty, we have also a lot of dialogues with our customer around the cloud strategy and what is the best and things like that. So many companies are also rethinking about how is our long-term strategy? Is it cloud that is our first? Is it really smart thing to put all our critical business data in an American cloud provider? Or should we rethink this? And this is the sort of day-to-day dialogues that we have with our customers. And here I think we as Proact have a good add-on as being a trusted local European partner. Next slide, please. This is my favorite slide, and I will not go into the detail of it, but every company, as I said in the beginning, they are in a need for sort of data and modern IT infrastructure. And if you look into the blue colors here, it doesn't really matter if you store your data on-prem as an infrastructure, because then we can help you. Or if you sort of have a private cloud that is sort of a purpose-built cloud that you only can access, we can also help you around that. Or if you're working with some of the public cloud providers like Azure or Google or things like that, we at Proact are super good on storage and data. And it doesn't really matter for us where the data is allocated. We can help our customer around it. And then, as I mentioned earlier, on top of that, if you want to work with AI, the first thing you need to do is secure your data and hence AI infrastructure. That is a sort of a very good add-on on what we are doing at Proact. And if you want to use modern software development with cloud native and containers, that is exactly where we have a lot of competence. For example, in our consultancy company Konoa and BlackYox that we acquired during last quarter. And then on top of that, as I said, everything is actually related to data protection, backup and recovery, security operations and everything. And then it all starts with data. And then we as a company, we have the possibility to provide this both as a service or if you want to buy it as a system. And we could have done nothing around this if we wouldn't have extremely skilled staff. that are really knowledgeable around this. And this is what we are doing, and this is how Proact earns money. So this, I think, is a sort of recap and quick repetition of how we at Proact are earning our money and what our core business and infrastructure is. So with that, I will take the next slide, Kristoffer. And then talk and walk more into the Q2 highlights here. So all in all, as you can see, we released our report for, you know, 40 minutes ago. We made a revenue of 1.2 billion Swedish SEK and EBITDA result of 76 million. And that resonates in an EBITDA margin of 6.5. And Nora will walk through some of the details, but I just want to highlight part of it here. As I mentioned in Q1, we have actually done exactly what I said. We have had churn and we have some performance issues mainly related to central and west. Hence, we have during the quarter initiated a group-wide action program that we are being executed as we speak. This program is really focusing on addressing some of the underlying things. So we are looking into skills review, refocus our sales effort, and foremost, we are actually looking into building a more efficient organization. So this is exactly what I indicated in Q1 and what we now are doing in Q2. I also really would like to stress that in the Nordic region, for example, and in combination with UK, we see a strong result. We continue to grow in that area. And as you can see, and I mentioned in the beginning, Nordic and the Baltic, that is more than half of our company. So even if we now have some performance issue that we are being addressed, we have more than half of our company that is growing. During the quarter, I'm also super glad that we launched a new service related to AI. So we added AI capability to our product hybrid cloud. That means that our customer can directly access advanced AI workloads in our hybrid cloud environment. This means that our customer, they don't need to invest millions in setting up their own AI infrastructure. Instead, they can buy this directly from us as a service. This is also super dedicated to customer working in regulated environment, meaning that we are providing this in a sovereign cloud, meaning that our customer know where the data is. It's not outside EU. And this is also an increasing demand that we see from our customer that we can help and provide them. Also worth mentioning during the quarter was that we were named Enterprise Partner of the Year by NetApp. This is, of course, true testimony to our skills and experts that we have in the company. And the other two bullets here, I really would like to stress them because even if they maybe are more into administrative, that we are sort of getting decision from our annual meeting to initiate a share back program and we also canceled some shares. This is a true tool that are really explaining the sort of the strength positioning that have. We are doing a buyback program. We are working and having dividend as a company. And as we did in Kuwait, we are also investing and buying an acquisition of company like Black Yaks, for example. So all in all, with this, we sort of have a super strong position that we sort of are leveraging and are working. So all in all, I would say that we are focusing on what is working very well and working with enhancing that. in parallel that we have initiated sort of strong actions to work with the areas that we see that we can improve. So I think all in all Q2, given where we are, I think it's a solid result. So with this, I think, Nora, I hand it over to you to walk you through to some of the financial details from our business units. And then we wrap up with some question and summary at the end.

Thank you, Magnus. Okay. Turning to the next slide. Revenue in the second quarter reached, as Magnus said, 1.17 billion Swedish krona, a decrease of 7.9%, driven by good performance in the Nordic and Baltics and UK, offset by lower performance in business units West and Central. The decline in Central was driven by significantly lower system sales compared to an exceptionally strong comparison period. Organically, revenue declined with 7.2%. System sales amounted to 641 million Swedish krona, corresponding to a decrease of 10.7% with the same dynamics as total revenue. Services revenue amounted to 530 million Swedish krona, a decrease of 4.3%. Overall, the service business developed weak this quarter. On the next slide. Annualized recurring revenue amounted to 1.7 billion Swedish krona in the second quarter, a decrease of 2.8% compared to Q2 2024. New cloud service agreements amounted to 141 million Swedish krona in the second quarter compared to 133 million Swedish krona last year. Despite new contract signings, total cloud service revenue decreased by 5% to 272 million Swedish krona, primarily due to contract terminations and customer churn in west and central regions. Nordic and Baltics and the UK showed positive development, but were unable to fully compensate for the decline. Next page, please. Adjusted EBITDA amounted to 76 million Swedish kronor, mainly due to lower revenue in the services business and reduced gross margin. Business unit Nordic and Baltics stands out this quarter with an EBITDA increase of 9.4 million Swedish kronor. Central saw a decline of 21 million Swedish krona, following an exceptionally strong comparison period. West also decreased by 9.8 million Swedish krona, while UK remained largely flat. We have taken strong measures to reverse the negative trend, as Magnus was mentioning, both through initiatives to increase revenue and revenue and through group-wide actions to strengthen profitability. Particular focus on West and Central, where the challenges are the greatest. Further, the cash flow and net cash position. Our net cash position at the end of the second quarter amounted to 100 million Swedish krona compared to 330 million Swedish krona at year end. Total cash flow the first six months was minus 222 million Swedish kronor, with an operating cash flow of 182 million Swedish kronor. The year-on-year decline in operating cash flow was mainly due to lower operating profit. Cash flow from investing activities amounted to minus 241 million Swedish krona, largely driven by the acquisition of BlackYox in March, along with continued investments in both tangible and intangible assets. Cash flow from financing activities totaled minus 163 million Swedish krona, including a dividend payment of 64 million Swedish krona, lease amortizations of 72 million Swedish krona, And as Magnus also mentioned, repurchase of own shares amounting to 32 million Swedish kronor. Despite these cash outflows, we remain financially strong and continue to invest in strategic growth initiatives while maintaining capital discipline. Now some details for our business units, starting with Nordic and Baltics. Revenue in the Nordic and Baltics grew by 3.6% to 672 million Swedish krona in the quarter, mainly driven by strong performance in cloud and support services. This was partly offset by a decline in consulting services. Systems revenue increased by 2.9% to 453 million Swedish krona, supported by several large deals. Service revenue grew by 5% to 219 million Swedish krona, with cloud services as the main driver. Adjusted EBITDA increased by 16.3% to 67 million Swedish kronor, corresponding to a margin of 10%, clearly above the group's financial target of 8%. The improvement was mainly due to growth in services business and continued good cost control. Note that adjusted EBITDA excludes non-recurring costs of 4.4 million Swedish kronor related to the ongoing action programme. All in all, Nordic and Baltics continues to deliver solid and consistent performance. Further to Business Unit UK on the next slide. In the UK, revenue increased by 18.7% to 212 million Swedish krona, supported by strong development in both system and service sales, including positive contributions from Blackjacks. System revenue grew by 20.8% to 101 million Swedish krona, while service revenue was up 16.8% to 110 million Swedish krona. Consulting services increased by over 150%, mainly driven by BlackYox. Cloud services also showed solid growth of 5.7%. Adjusted EBITDA came in at 12 million Swedish kronor, corresponding to a margin of 5.8%. Black Yorks contributed 10 million Swedish kronor to EBITDA with an exceptionally strong margin of over 40%. Note that adjusted EBITDA excludes non-reoccurring costs of 0.8 million Swedish kronor. Business unit West on this next slide. Revenue in the West decreased by 14.4% to 176 million Swedish kronor, reflecting lower activity in both the system and services business. System revenue declined slightly by 2.3%, while services revenue fell by almost 18%. The decline in consulting services was notable, down 37% due to resourcing challenges. Adjusted EBITDA was negative at 2.8 million Swedish kronor, corresponding to a negative margin of 1.6%. Although cost savings were implemented, they did not fully offset the drop in revenue. We have initiated targeted actions to reverse the negative trend to a cost of 4 million Swedish kronor, which are excluded from adjusted EBITDA. Lastly, Business Unit Central, on this next slide, Revenue in central declined by 45.2% to 146 million Swedish krona, compared to a very strong performance in the same quarter last year, driven by a few large system deals. Hence, system revenues fell by 65.7% and service revenue declined by 18.1%. Adjusted EBITDA amounted to 3.4 million Swedish krona with a negative margin of 2.4%. The decline is mainly due to the significant drop in revenue and cost base not fully aligned with current market conditions. Several improvement measures are in progress aiming to stabilize performance going forward. Adjusted EBITDA excludes non-recurring costs of 11.5 million Swedish krona related to the action program. On the next slide, our financial targets. As mentioned, we had an organic decline this quarter, albeit compared to a strong quarter last year. Measured as the last 12 months, growth is now at minus 1.6%. Hence, we still have a way to go reaching our target of 5% organic growth and an additional 5% growth via acquisitions. Adjusted EBITDA margin last 12 months was 6.6%, As already mentioned, we have taken action to move back towards the long-term target of 8%. As I also previously mentioned, we are in a net cash position, meaning that our leverage is well below the set level of two times EBITDA. Return on capital employed is at 13.2% for last 12 months, where the decline is mainly attributed to the lower result. This concludes the financial overview of the second quarter. Back to you, Magnus, for some final comments.

Super, and thanks, Nora, for guiding us through the financial details. I just want to reiterate here that we have a clear strategy here. And as I said in Q1, we are really focusing on what is working, and then we act quickly where we need to improve. And this is what exactly we have done during the quarter. I see that we as a company have a super strong position in the market and I would say that it's actually strengthening given the sort of demands and the trends that are now and here I think we have a very good position especially when we are a local European trusted partner. As you can see here also, our sort of guiding star here are in the Nordics where we continue to sort of grow and show the way. I think this is a combination of that we have a strong cost customer base and and a really strong focus on profitability and trying to do as efficient as possible. During the quarter, we have actually implemented actions that also will over time improve our other business units. And as you saw here in the UK, we are seeing a really strong performance and especially glad that Black Yaks has gotten such a good start within our group. Then we continue to focus on business values and execution and then over time you will see that the long-term growth and that I think we as a company have a really strong position and together with a committed team and so I'm really really looking forward to talk more around that in coming quarters in reports but I think for now let's open up with some questions. Daniel, it's glad that you are first out here leading the way.

Yes, thank you very much, Magnus and Nora. I have a question on the cost reductions here in Central and West. Can you say how many people it will roughly expose?

We are doing quite a substantial what sort of adjustments to the organization. And over time, we will see the impact of that. However, at the same time that we're doing adjustment, we also maybe need to reset and hire people. So all in all, I would say that we are

have not communicated exact numbers except from the as you can see in the financial reporting the sort of impact that we are taking for doing the adjustments okay and then regarding any top line effects here because it looks like you are by intention churning out some parts of your revenues and business and we saw a negative seven percent organic growth here in Q2. Is it fair to see a further deceleration of that growth rate in the coming quarters given the reduction in number of employees or can you maintain roughly the current sales level you think?

I think if you're looking into specific maybe central invest I think you should expect that we will have an improvement but it will be weak and the impact and effect of what we're now executing that will take some further quarters to see a full effect of that. In the other business units Nordic and Baltics and UK we are sort of investing and accelerating so we sort of compensate on that.

Okay, I see that's clear. And then a question on the German business here. Is that up for sale from your end or can you really recover that business into a stronger margin by shrinking the business from here?

I mean, for the time being, we have fully focused and we know exactly what we are about to do and execute it. So selling is not on top of our agenda for the time being. Okay. So I think what we see short term is that the actions that we're doing, that is what we will continue and focusing upon.

I see. Okay, that's clear. And then on BlackYox, you mentioned some numbers here in Q2 look very strong, both on sales and margins, obviously. Do you see any early signs of cross-selling between the groups?

Absolutely. And that's a good point that you raise, Daniel. And I Exactly and during the quarter here I think we have seen several cases coming in going on both directions and this is exactly what we sort of have planned and what we want to enhance and focus. So instead of putting a lot of focus on creating integration activities, instead we have spent that time and focus on sales integration, meaning that we should open up our books and provide and give our customers more access to new technology and new offerings from our side. And maybe that is a contrast compared to the way that we have done it in Germany where we maybe focus more on integration and things like that. So roughly we are turning that around and Maria and the team in Germany are working really hard on that and I think over time we will see improvements also in Germany.

Okay, that's clear. And then another question on M&A here. In the Nordics specifically, now you're growing in a quite challenging market, at least from my view here, with both hardware resellers and IT services companies declining currently, in general, I would say. Does that increase your appetite to capture any opportunities in the market from not stressed sellers, but maybe a bit more willing sellers in a tough market?

Yeah, absolutely. And I think I said that also in Q1. When it comes to M&A, we are for sure looking into that actively, but we are sort of quite picky on which target that we are seeing. And foremost, Nordic and Baltic and the UK, since we sort of feel that we have this sort of momentum in the business that is very high likelihood that that will be the next place of our M&A. Then in central and west, long term, I see that we will also get back to an acquisition base there, but we have some more work to do and also to prove that our profit will be going in the right direction first. You need to have a sort of a proper home before you look into acquisitions, otherwise you create more problems for yourself.

Yeah, that makes sense. And in terms of targets, are you still looking for service related businesses more than hardware resellers?

For me, I think it's important that we look into companies that can complement and strengthen our existing business. Per se, that doesn't mean that it only needs to be service companies. If we find a good target that we see fits us and strengthen us, then for sure that will be on top of our agenda.

Yeah, I see. And then the final question here on the financial targets. As you showed in the presentation, you are a bit below both top line growth, margins and return on capital at the moment. And you are addressing this with actions. But how do you prioritize coming back to the targets? I mean, for me, it looks like you are prioritizing return on capital and margins before growth, given the cost reductions you do. But how do you think about them? And when is it reasonable to get back you know, meeting these targets, all three, how many years out is reasonable to expect?

First, let's talk about the priorities. Here and now, I prioritize profit, because if you have profits, then you also can invest to accelerate top line growth. And we have some homework to do, especially in business central and west. But at the same time, as you have seen in the Nordic and Baltics, we are way beyond our targets when it comes to margin there. So I think the answer to your question is maybe that we will do a little bit different depending on what business unit that we are talking about. And secondly, I just want to stress that as it is of today, Nordic and Baltic, that is more than half of the company. So even if you have four business units, they are not equally strong when it comes to impact and so forth.

Yeah, that's clear. And then the last part, when in time or how many years do you think it could take to meet all the three targets?

I would say that let us come back to that during the fall. I think here and now the focus for us is to sort of execute and do what we said that we are going to do. And then going forward, I will be more than happy to discuss this with you in coming quarters here. thank you very much that's that's all for me good do we have any other questions on the call here good if then I will wish you all a super pleasant and have a really really nice summer I'm Me and Nora and the full team are really looking forward to talk to you more again in our upcoming Q3. Probably we'll be here quicker than we think given the summer and everything. So once again, thank you for listening in and looking forward to talk more shortly. Bye bye.