Atea Q3 2013 financial results

Highlights Q3 2013

• Revenue of NOK 4,663.6 million, up 4.8% y-o-y
• EBITDA of NOK 158.4 million, up 0.3% y-o-y
• EBITDA margin of 3.4%, down from 3.5% y-o-y
• Operational cash flow of NOK -96.9 million, down from NOK 39.5 million y-o-y

    
Market update

According to IDC's latest forecast from September 2013, Atea's target market (the Blue Box) grew 5.9% in the Nordics in Q3 2013. The hardware market grew 6.4%, software grew 7.2% and services grew 4.6%.

Atea has not been experiencing the positive market growth in Q3 2013 as indicated by IDC. Atea is rather experiencing a hesitancy to invest and prolonged sales processes with the customers. This has particularly been the case in the hardware segment, where demand for servers and PCs has declined.

Financial review Q3 2013

Group

Group revenue was up 4.8% (up 0.7% in constant currency) from NOK 4,450.5 million in Q3 2012 to NOK 4,663.6 million in Q3 2013. Hardware revenue was up 3.0%, software revenue was up 9.7% and services revenue was up 7.0%. The currency effect for Q3 2013 was positive by 4.1%. Organic revenue was down 0.4% in constant currency. The organic revenue development reflects tough market conditions in the hardware market in particular in the PC and server segments. The tough conditions in the hardware market have also affected the services business as there has been fewer server projects and PC roll-outs.

EBITDA in Q3 2013 ended at NOK 158.4 million, up 0.3% y-o-y. Lower than expected revenue growth was somewhat compensated by improved or maintained margins within all three segments, and Atea achieved EBITDA in line with last year.

Total revenue year to date 2013 was NOK 15,250.2 million, which is up 4.4% compared with the same period last year. Organic growth amounted to 1.0% in constant currency. EBITDA ended at NOK 439.7 million, down from NOK 475.5 million last year, representing an EBITDA margin of 2.9 % versus 3.3% last year.

In order to enhance operational efficiency and to improve profitability going forward Atea has taken actions to reduce personnel and other operating costs by NOK 200 million per year from the beginning of 2014. This reduction in costs will mainly come from a reduction in number of employees by approximately 300. A restructuring cost of approximately NOK 70 million related to the termination of employment contracts will be accrued in Q4 this year.

Additionally, Atea will focus on taking full advantage of the shared service operations in Riga, Latvia. Atea has already near-shored some parts of its back office administration, and in 2014 more back office processes will, in a controlled manner, be transferred to the shared services centre in Riga. The aim is to enhance quality, strengthen the competitive edge and lower the yearly costs by approximately NOK 100 million. This will start to have a positive effect in 2015 and will have full annual effect in 2016.

Norway

Revenue in Q3 2013 was NOK 1,498.2 million, down 0.5% compared with Q3 2012. Hardware revenue was down 5.7%, software revenue was up 30.0%, while services revenue was up 1.1%. Organic revenue decreased by 2.0%.

Organic hardware revenue decreased by 7.3%. The decrease in the hardware revenue is mainly due to lower volumes of school PC roll-outs this year compared with last year. Organic software revenue increased by 29.7% as a consequence of a number of large orders within this segment. Organic services revenue was down 0.7%. This reflects a more even distribution of projects this year, whereas a number of large projects were being completed in Q3 last year.

EBITDA in Q3 2013 ended at NOK 45.5 million, compared with NOK 60.7 million in Q3 2012. Product margin ended at 13.3%, up from 12.6% in Q3 2012, influenced by lower volumes of low margin school PCs in Q3 2013. The total gross margin ended at 25.9%, up from 25.6% in Q3 2012. The higher gross margin compensated for the lower revenue, and gross profit increased by NOK 3.6 million. Organic growth in operational costs of 3.4% reflects organic growth in the average workforce of 78 employees. EBITDA margin ended at 3.0% versus 4.0% last year.

In order to enhance operational efficiency and to improve profitability going forward, actions have been taken to reduce the current cost base. These actions are estimated to have an annual effect of NOK 75 million from January 2014.

Sweden

Revenue in Q3 2013 ended at NOK 1,589.5 million, up 12.0% (up 6.9% in constant currency) compared with last year. Hardware revenue was up 6.5%, software revenue was up 2.4%, while services revenue was up 11.4% in constant currency. Organic revenue in constant currency increased by 5.4%.

Organic hardware revenue increased by 5.9%. The growth in the hardware revenue reflects higher sales to both the public and the private sector. Organic software revenue increased by 1.7% on top of 40.7% growth in Q3 last year. Organic growth in services revenue of 6.7% was driven by particularly strong revenue from contracted services.

EBITDA in Q3 2013 ended at NOK 32.2 million up from NOK 25.9 million in Q3 2012. Product margin ended at 12.7%, down from 13.5% in Q3 2012 as a consequence of price pressure in the market. The services margin ended at 58.7% compared with 59.5% in Q3 2012. The decrease in the services margin is a result of use of subcontractors on a number of specific projects. The total gross margin ended at 23.2% for Q3 2013, down from 23.6% in Q3 2012. Organic operational costs were down 0.2% as a consequence of an increased focus on costs. EBITDA margin ended at 2.0% versus 1.8% last year.

In order to enhance operational efficiency and to improve profitability going forward, actions have been taken to reduce the current cost base. These actions are estimated to have an annual effect of NOK 46 million from January 2014.

Denmark

Revenue in Q3 2013 ended at NOK 1,169.4 million, up 1.1% (down 6.7% in constant currency) compared with last year. Hardware revenue was down 3.9%, software revenue was down 21.0% while services revenue was down 6.8% in constant currency. Organic revenue in constant currency decreased by 6.7%. The decline in revenue was mainly driven by tough market conditions within the PC and server segment, which have had a spillover effect on services.

EBITDA in Q3 2013 increased to NOK 61.9 million, up from NOK 56.6 million in Q3 2012. Despite tough market conditions the product margin increased to 11.6% from 10.3% in Q3 2012. The services margin increased to 67.0% from 61.9% in Q3 2012. The increase in the services margin was due to growth in the datacenter business and less use of subcontractors. The total gross margin ended at 25.8% for Q3 2013, up from 23.5% in Q3 2012. The higher gross margin compensated for the lower revenue, and gross profit increased by NOK 27.1 million. Total EBITDA margin increased to 5.4% compared with 4.9% last year.

In order to enhance operational efficiency and to improve profitability going forward, actions have been taken to reduce the current cost base. These actions are estimated to have an annual effect of NOK 77 million from January 2014.

Finland

Revenue in Q3 2013 ended at NOK 261.4 million, up 1.9% (down 8.0% in constant currency) compared with last year. Hardware revenue was down 11.6%, software revenue was down 1.6%, while services revenue was down 4.7% in constant currency. Organic revenue in constant currency declined by 8.0%.

The decline in revenue was caused by tough market conditions and strong competition in both the private and the public sector.

EBITDA in Q3 2013 ended at NOK 1.3 million, compared with NOK 0.4 million in Q3 2012. The decline in revenue was compensated by a higher margin than last year. Total gross margin ended at 20.9% compared with 18.4% in Q3 2012.

The Baltics

Revenue in Q3 2013 was NOK 166.7 million, up 15.1% (up 7.4% in constant currency) compared with last year. Organic revenue in constant currency increased by 4.1%.

The increase in revenue was driven by particularly strong services revenue growth of 52.9%, which was positively affected by a number of projects related to the current EU presidency in Lithuania.

EBITDA in Q3 2013 ended at NOK 13.1 million, compared with NOK 7.2 million in Q3 2012. Total gross margin was positively affected by a higher share of services revenue and ended at 23.6%, up from 21.4% last year.

Equity and cash flow

Shareholders' equity at 30 September 2013 was NOK 3,644.4 million corresponding to an equity ratio of 40.7%, down from 41.7% compared with 30 September 2012.

The Group generated an operational cash flow of NOK - 96.9 million in Q3 2013, compared with NOK 39.5 million in the corresponding quarter last year. This is primarily explained by seasonal fluctuations end of quarter related to customer and vendor payments. Operational cash flow year to date is improved by NOK 155.0 million compared with the first three quarters last year.

The working capital ratio at 30 September 2013 was 2.9%, down from 4.0% at 30 September 2012.

Capital expenditures in Q3 2013 amounted to NOK 44.6 million compared with NOK 48.6 million in the corresponding quarter last year. These investments relate to general maintenance investments including further development of internal systems and investments in the Group's hosting centers.

At the end of Q3 2013, the Group's net financial position was NOK -957.6 million, down from NOK -772.8 million at the end of Q2 2013.

Liquidity reserves, including unutilized credit facilities and limited by a gearing ratio of 2.5x (financial covenant from loan agreements linked to "net interest bearing debt/EBITDA"), at 30 September 2013, were NOK 980.6 million. Please see note 8 for further information.

Operational efficiency programme

Market demands are currently undergoing a transformation towards more solution based sales, and for the 11th consecutive quarter Atea reports double digit growth rates within the contracted services segment. It is very positive that a growing number of the customers are looking to Atea for serving their growing needs within services, outsourcing services and IT infrastructure as a service. In the future Atea will continue to develop solutions, increase competencies and focus on the segments where Atea believe the market is growing.

Going forward Atea will therefore strengthen its investments in mobility, hybrid cloud, and collaboration, helping companies to take advantage of the growing possibilities within these areas. To create room for new investments and to drive profitable growth, Atea has launched a programme to enhance the operational efficiency.

The operational efficiency programme is two-sided. The first part is a cost reduction programme that will be conducted in Q4 2013. The target is to reduce the current cost base with an annual effect of NOK 200 million or 3.8% of the current cost level from January 2014. This reduction in costs will mainly come from a reduction in number of employees by approximately 300. The organizational changes will be achieved by increasing the span of command, by consolidating departments and by a general reduction in all types of personnel. A restructuring cost of approximately NOK 70 million will be accrued in Q4 this year.

The second part of the programme focuses on taking full advantage of the shared service operations in Riga, Latvia. Already today Atea has near-shored some parts of its back office administration. During 2014 more back office processes will, in a controlled manner, be transferred to the shared services centre in Riga. The aim is to enhance quality, strengthen the competitive edge and lower the yearly costs by approximately NOK 100 million. This will start to have a positive effect in 2015 and will have full annual effect in 2016.

Taking these actions, Atea will be better positioned to serve customer needs in an efficient manner and will improve profitability going forward. With an annual cost base which at the beginning of 2014 will be NOK 200 million lower than the current run rate, EBITDA will improve assuming unchanged or improved gross profit in 2014.

Outlook

IDC's latest forecast for Q4 2013 for Atea's Blue Box in the Nordics shows growth of 0.7%. The services market is expected to grow by 3.5% and the software market by 4.4%. The hardware market is again expected to drop substantially from growth of 6.4% in Q3 2013 to a decline of 2.9% in Q4 2013.

IDC believes that the hardware market in Q4 2013 will be driven by continued reduction in the PC and server markets, while networks, smartphones and tablets will grow. This is supported by the ongoing shift in the client market, where the use of desktop PCs is declining, the use of laptop PCs is stagnating, and the use of smartphones and tablets is increasing. Growth in the product market will be driven by a gradual increase in Windows 8 projects and the new touchscreen products related to this, which are being launched in Q4 2013.

In 2014 IDC expects market growth of 4.0% for Atea's Blue Box in the Nordics. The services market is expected to grow by 4.2% and the software market by 5.2%. The hardware market will return to positive growth at a rate of 3.3%. The PC market will decline further but at a lower rate than during 2013, the server market will return to positive growth rates, whereas networks, smartphones and tablets will continue to grow.

The outsourcing of internal IT functions to external partners represents a strong trend in the services market, particularly the outsourcing of client management. This trend is being reinforced by increasing complexity in the client environment, with more and new types of equipment, more operating systems and programs, as well as increased demand for access and availability. Atea is well positioned for further growth in this area.

The uncertainty in the outlook primarily relates to macroeconomic developments. A macroeconomic downturn or increased uncertainty may result in hesitancy to commit to large investment programmes. However, because of the relatively short lifespan of the IT infrastructure environment, investments cannot be postponed for longer periods of time.

Investments in IT infrastructure are an integral part of the solution to the major challenge facing the western world, which is increasing efficiency. IDC therefore believes that the IT infrastructure market in the Nordics will grow faster than GDP at an average annual rate of 3.3% towards 2017. Atea is well placed to take advantage of the opportunities ahead.

In November 2011, Atea launched the 'Together Towards The Top' strategy, which set the stage for Atea's development towards 2015. Key initiatives in the strategy include market-oriented actions aimed at increasing services revenue, and in particular contracted services revenue, a dedicated sales focus on mid-market and international customer groups, as well as internal actions to improve gross margins, improve processes and lower the cost base. On this basis, Atea expected to gain market shares and improve profitability in the coming years.

The financial goal of the strategy was to increase revenue to NOK 30 billion and EBITDA to NOK 1.8 billion by 2015. A key assumption for achieving this financial goal was that the market conditions would be positive, and that the market would grow at an average rate of 4.3% from 2011 to 2015. In light of the market development in 2012 and 2013, the Board of Directors has revisited the financial goal.

The Board of Directors still believes that the operational actions and initiatives in the Together Towards The Top strategy are right for the company, and with these actions Atea will ensure increased market share and profitability going forward.

Targets solely in nominal value are not a meaningful measure in a market with low visibility. Atea will maintain the market share target of 20%, and will achieve this by growing the revenue organically faster than the market, and continue to be a disciplined buyer of companies. A continued focus on operational excellence and total customer satisfaction will ensure that EBITDA grows faster than the revenue. The long term target for the EBITDA margin is maintained at 6%.

For further information, please contact:
Claus Hougesen, CEO Atea ASA, Mobile +45 3078 1200
Rune Falstad, CFO Atea ASA, Mobile +47 906 14 482

Enclosures on www.newsweb.no
Please go to www.atea.com/reports for the quarterly report and presentation.
Video of the press conference is available at www.atea.com/webcast

   
About Atea
Atea is the leading Nordic and Baltic supplier of IT infrastructure with approximately 6,600 employees. Atea is present in 82 cities in Norway, Sweden, Denmark, Finland, Lithuania, Latvia and Estonia. Atea delivers IT products from leading vendors and assist its customers with specialist competencies within IT infrastructure services. Atea had revenue of approximately NOK 21 billion in 2012 and is listed on Oslo Stock Exchange.
www.atea.com

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