Itera — Interim / Quarterly Report 2018

Oct 19, 2018

INTERIM REPORT

THIRD QUARTER 2018

CEO ARNE MJØS CFO BENT HAMMER

OSLO, 19 OCTOBER 2018

HIGHLIGHTS OF THE THIRD QUARTER

• Key figures

• Revenue NOK 121 (108) million, up by 12% y-o-y
• EBIT of NOK 6.4 (6.4) million, 5.3% (5.9%) margin
• Core digital business
• YTD revenue growth of 23%
• YTD EBIT margin of 10.5%
• Cloud transformation of Itera data centres
• Significant interest in our scalable hybrid model
• The Customer Experience Provider of the Year 2018 (Global Sourcing Association)
• Successful employee stock purchase programme

FINANCIAL REVIEW

KEY

	2018	2017	Change	2018	2017	Change	2017
NOK Million	Q 3	Q 3	%	YTD	YTD	%	FY
Operating revenue	121.3	108.0	12 %	390.0	340.0	15 %	475.0
Gross profit	102.1	92.8	10 %	326.2	291.3	12 %	401.7
EBITDA	11.8	11.5	2%	41.7	40.6	3%	59.7
EBITDA margin	9.7%	10.7 %	$-1$ pts	10.7 %	11.9 %	$-1.3$ pts	12.6 %
EBIT	6.4	6.4	$0\%$	25.9	25.5	2%	39.3
EBIT margin	5.3%	5.9%	$-0.6$ pts	6.6 $%$	7.5%	$-0.9$ pts	8.3%
Net cash flow from operations	1.5	11.9	$-88%$	14.8	16.7	$-11%$	49.7
Cash and cash equivalents	19.6	59.1	$-67%$	19.6	59.1	$-67%$	59.9
Equity ratio	18.1 %	30.0 %	$-11.9$ pts	18.1 %	30.0%	$-11.9$ pts	23.7 %
Employees at end of period	493	475	4 %	493	475	4 %	491
Employees in average	485	453	7%	487	429	13 %	443

• FIGURES Continued double-digit growth in service revenue, particularly strong in nearshore deliveries and in Denmark
• EBIT on par with last year
• Cash conversion negatively affected by significant receivables falling due over the last weekend of September

STATEMENT
OF INCOME

	2018	2017	Change	2018	2017	Change	2017
NOK Million	Q 3	Q 3	%	YTD	YTD	%	FY
Operating revenue	121.3	108.0	12 %	390.0	340.0	15 %	475.0
Cost of sales	19.2	15.1	27 %	63.9	48.7	31 %	73.4
Gross Profit	102.1	92.8	10 %	326.2	291.3	12 %	401.7
Personnel expenses	75.8	70.3	8%	244.1	214.5	14 %	294.3
Depreciation	5.3	5.1	5%	15.8	15.1	4 %	20.3
Other operating expenses	14.5	11.1	31 %	40.4	36.2	12 %	47.7
Total operating expenses	114.9	101.6	13 %	364.1	314.6	16 %	435.7
Operating profit (EBIT)	6.4	6.4	$0\%$	25.9	25.5	2%	39.3
Net financial income	$-0.2$	$-0.4$	64 %	$-1.8$	$-1.1$	$-68%$	$-1.0$
Profit before tax	6.3	6.0	5%	24.1	24.4	$-1\%$	38.3
Tax	1.5	1.5	1%	5.8	5.9	$-2%$	8.7
Net profit for the period	4.8	4.5	6%	18.3	18.5	$-1\%$	29.6

Utilisation impacted by the cloud transformation of data centre

Cost of sales higher due to more 3rd party subcontractors

Opex increase from facilities, training and professional services

CLOUD TRANSFORMATION

Total

• YTD revenue growth 15%
• YTD EBIT margin 6.6%

CLOUD TRANSFORMATION

• High growth and strong profitability in core digital business
• Traditional data centre operations diluting growth and profitability
• - Invest in transformation to cloud offerings
• - Optimise and sunset residual business

Operating revenue

NOK million

Employees End of period

QUARTERLY DEVELOPMENT

REVENUE

• Revenue increased by 12% y-o-y
• Service revenues from own consultants increased by 11% to NOK 75 million
• Subscription revenue increased by 5% to NOK 34 million
• 3 rd party service revenue increased by 93% to NOK 8 million
• Other revenue, incl. HW/SW sales, increased by 1% to NOK 4 million

Revenue split (quarterly figures) NOK Million

Revenue percentage split (rolling 12 months)

STATEMENT OF CASH FLOW

	2018	2017	2018	2017	2017
NOK Million	Q 3	Q 3	YTD	YTD	FY
Cash flow from operations (EBITDA)	11.8	11.5	41.7	40.6	59.7
Change in balance sheet items	$-10.3$	0.4	$-26.8$	$-23.9$	$-10.0$
Net cash flow from operating activities	1.5	11.9	14.8	16.7	49.7
Net cash flow from investment activities	$-2.3$	$-4.0$	$-15.8$	$-10.2$	$-19.5$
Purchase of own shares	0.0	0.0	$-22.6$	$-1.6$	$-1.6$
Sale of shares	7.1	0.0	10.0	3.3	3.3
Borrowings repaid	$-2.1$	$-1.4$	$-6.2$	$-6.0$	$-8.1$
External dividend paid	0.0	0.0	$-20.5$	$-14.6$	$-35.1$
Net cash flow from financing activities	5.0	$-1.4$	$-39.3$	$-18.9$	-41.5
Net change in bank deposits and cash	4.2	6.6	$-40.3$	$-12.0$	$-11.2$
Bank deposits at the end of the period	19.6	59.1	19.6	59.1	59.9
New borrowing related to leasing	1.4	0.0	3.0	1.0	1.6

• Cash flow from operations NOK 1.5 (11.9) million in Q3
• Inflow from Share Purchase Programme to key employees

Treasury shares valued at NOK 14.2 million at 30 Sep.

• Share price was NOK 11.40 end of quarter, up from NOK 6.21 (+84%) same time in 2017 (+92% incl. dividends)
• More than 100% distribution of earnings last three years:
• Dividends of NOK 0.25 per share paid in Q4-17 and in Q2-18
• Net buy-back of 1m shares in Q2 and Q3 of 2018
• Current holding of own shares is 1,242,165 shares, down 972,377 from last quarter
• In Q2/Q3, 120 employees bought a total of 1,172,010 with a lock-in period.

STATEMENT OF FINANCIAL POSITION

• Cash and equity significantly reduced following high distribution of earnings
• Group equity ratio of 18% (30%) per 30 September.
• Cash balance of MNOK 20 (MNOK 59).
• Accounts Receivables MNOK 14 higher as main invoicing due date was on Sunday Sep 30

IMPACT OF IFRS 15 IMPLEMENTATION 1 JAN 2018 EQUITY REDUCED BY MNOK 3.0 FROM CHANGE IN ACCOUNTING PRINCIPLES

IFRS 15 implementation effects 2018:

NOK Million	Adjusted (IAS 18) 7-9 2018	Impact IFRS 15	Reported (IFRS 15) 7-9 2018	Adjusted (IAS 18) 1-9 2018	Impact IFRS 15	Reported (IFRS 15) 1-9 2018
Revenue	119.3	2.0	121.3	388.5	1.5	390.0
EBIT	5.6	0.8	6.4	24.6	1.3	25.9
Net profit	4.2	06	4.8	174	09	18.3

Affected areas for timing of revenue recognition:

• Customised development based where Itera retains the IP will change from a point in time (at delivery) to over time (over the licence contract period)
• Transition projects will be recognised when the customer can use and benefit from the services rendered

Q3 2018 effects:

• Positive impact on sales revenue of MNOK 2.0 (deferred income recognition)
• Positive EBIT impact of MNOK 0.8 due to capitalisation of costs
• Book equity on 30 September reduced by MNOK 2.1

BUSINESS REVIEW

Platform economy

challenges the business logic in

ALL industries

#1 in creating digital business

WE FOCUS ON OUR CUSTOMERS' CUSTOMER

through customer

journeys and lean

startup

WE WORK IN MULTIDISCIPLINARY TEAMS

WE TAKE LIFE-CYCLE RESPONSIBILITY

WE BRING VALUE THROUGH OUR HYBRID MODEL

combining communication & technology skills

embracing cloud and data protection issues

for greater scalability and cost-efficiency

FAST & HYBRID

FAST AND HYBRID

OUR SCALABILITY GAINS TRACTION

Itera helps to resolve the lack of digital talents in the Nordics …. while the talents remain in their home country

–Torbjørn Røe Isaksen, Minister of Trade of Norway, visiting Itera office in Kiev in September

Source: digi.no

Itera is amongst the best sourcing providers in the world by winning The Customer Experience Provider of the Year 2018

–Global Sourcing Association Summit, 1st-3 rd October Cape Town, South Africa

OUR JOURNEY

5-6 years to become mature within global sourcing

2014

New office in Bratislava. Scale into EU region by 9-12 months.

2016

2010

New office in Lviv. Build business framework.

2008

First office in Kiev. Innovate Nordic setup.

2019-

Huge scalability.

Global award winner. Nordic uniqueness.

Hybrid delivery model.

2018

GDPR & BCR-P compliance.

10 YEARS ANNIVERSARY

STRONG CLOUD MARKET MOMENTUM

Cloud IaaS is fastest growing subsegment, projected to grow 36.6% in 2017, 30.1% CAGR for next 5 years

–Gartner and IDC

	__
STATISTICS

80% of CIOs will be pressured by their business leaders to evaluate migrating their data centres to IaaS –Gartner

Cloud PaaS reduces time required to manage apps by 80% and time to deploy a new app by 50%

Global data centres amount for more than 50% of all processing power already

By 2021, hyperscale data centres will constitute:	2016
53%	of all data centre servers	27%
69%	of all data centre processing power	41%
65%	of all data stored in data centres	51%
55%	of all data centre traffic	39%

CLOUD TRANSFORMATION

MANAGED CLOUD SERVICES

Build cloud foundations on best practices and onboard new customer Build cloud foundations on best practices and onboard new customers

• Cloud foundations
• Cloud migration tools
• Self service
• ONE Itera with full range for services

LIFT AND SHIFT

Transform Itera data centre customers to cloud

ITERA DATA CENTRES

Optimise, lift and shift customers to cloud managed services

• Dedicated infrastructure
• Purpose-build hardware
• Customized processes and configurations
• Managed services only

ROADMAP PLANNING

DIGITAL HEALTH FOR NORDIC CITIZENS

Itera has teamed up with a large Nordic company to build the future ehealth hub for Nordic citizens.

MEDICAL GRADE WEARABLES + AI = PROACTIVE CARE

Medical grade wearables and accurate home diagnostics generate data

Chatbots and IT tools will assess risk when they notice an anomaly

Patients that require an

examination will receive

consult from a physician

Patients are routed to appropriate care or testing facilities

ITERA TEAMS UP WITH MICROSOFT

Order intake from existing and new customers

• Book-to-bill ratio*) of 0.9 in Q3 and 1.1 year-to-date

*) The book-to-bill ratio is the ratio of orders received to the amount of revenue for a specific period for Itera units

CUSTOMER DEVELOPMENT

• New business
• Existing customers accounted for 95.2% of revenues in Q3 2018
• New customers won over the past year generated revenues of NOK 5.8 million in Q3 2018
• Increasing visibility
• Share of revenue from top 30 customers up by 3 points y-o-y to 82%
• Increasing number of large projects and services managed by Itera
  • Strategic relationships
  • Full range of services
  • Hybrid delivery across borders

Revenue customers split

MNOK

Share of revenue

* Existing customers defined as customers that were invoiced in the corresponding quarter last year

^** New customers (Rolling Twelve Months) defined as customers won since end of corresponding quarter last year

Nearshore ratio % of all staff located nearshore

• Nearshore ratio of 43 % in Q3
• Target >50%

• Mixed teams of onshore and nearshore resources are increasing our price flexibility as well as providing access to a very large resource pool

• 1. Continue solid profitable growth in our core digitalization business
• 1. Invest in Managed Cloud Services unit
• 1. Lift and shift Itera data centre customers into cloud and reduce own operation
• 1. Transform into ONE Itera management team with fewer business units and reduced overhead

OUTLOOK

• Attractive market with high demand for digitalisation in all Nordic markets
• Profitable growth and cash flow are key focus areas
• Invest in new Managed Cloud Services unit and transform own data centre into the cloud
• Larger projects and customers expected to continue to increase revenue visibility, efficiency and scalability

Itera does not provide guidance to the market on future prospects

TOP 20 SHARE-HOLDERS

lo. Name	℅		Nat. Shareholding
1 ARNE MJØS INVEST AS	26.59 NOR		21 853 977
2 OP CAPITAL AS		5.30 NOR	4 358 001
3 EIKESTAD AS		4.50 NOR	3700000
4 GIP AS		4.28 NOR	3518000
5 DnB NOR Bank ASA EGENHANDELSKONTO		3.89 NOR	3 200 000
6 SEPTIM CONSTULTING A		3.32 NOR	2730000
7 BOINVESTERING AS		3.16 NOR	2 600 000
8 GAMST INVEST AS		2.68 NOR	2 200 000
9 JØSYRA INVEST AS		2.68 NOR	2 200 000
10 STOREBRAND VEKST VER JPMORGAN EUROPE LTD,		2.61 NOR	2 148 646
11 MARXPIST INVEST AS c/o Børre Gammelsrud		2.47 NOR	2031588
12 ITERA ASA		1.51 NOR	1 242 165
13 FRAMAR INVEST AS		1.22 NOR	1 000 000
14 AANESTAD PANAGRIAS		1.10 NOR	900 000
15 BNP Paribas Securiti BPSS LUX/CLIENT ASSE		1.03 NOR	850 000
16 BNP Paribas Securiti BPSS PAR/NO TREATY/U		0.82 FRA	672 000
17 ALTEA PROPERTY DEVEL Att: Trond Sigurd St		0.80 NOR	658 477
18 HØGBERG JON ERIK		0.78 NOR	637 551
19 NYVANG JETMUND GUNNAR		0.76 NOR	623 000
20 JENSEN LARS PETER		0.75 DNK	619 550
TOP 20	70.25		57 742 955

*Arne Mjøs Invest AS holds a future contract expiring 21 December 2018 on 3 350 000 shares currently owned by DNB Nor Bank ASA and Sparebank1 Markets. The total controlling interest of Arne Mjøs Invest AS is thus 25 203 977 (30.7%). ³⁵