Nyherji: Net Profit of ISK 266 Million in the First Nine Months of the Year

Nýherji presents the results of the third quarter and first nine months of 2017

Highlights:

• Goods and services sold amounted to ISK 3,515 million in the third quarter (up 2.5% from Q3 2016) and ISK 11,120 million in first nine months of 2017 (up 5.4% from the first nine months of 2016) [Q3 2016: ISK 3,429 million, 9M 2016: ISK 10,555 million]
• Gross profit of ISK 859 million (24.4%) in the third quarter and ISK 2,739 million (24.6%) for the first nine months of 2017 [Q3 2016: ISK 860 million (25.1%), 9M 2016: ISK 2,676 million (25.4%)]
• EBITDA of ISK 229 million (6.5%) in the third quarter and ISK 682 million for the first nine months of 2017 (6.1%) [Q3 2016: ISK 247 million (7.2%), 9M 2016: ISK 686 million (6.5%)]
• Net profit in the third quarter of ISK 29 million and ISK 266 million for the first nine months of 2017 [Q3 2016: ISK 93 million, 9M 2016: ISK 204 million]
• Equity ratio was 45.2% at the end of the third quarter versus 43.8% at the end of the preceding quarter
• Nýherji hf. acquires Timian Software ehf.
• TM Software ehf. purchases the Dacoda software solution for car rental companies
• Significant stake in Tempo ehf. put in formal sale process

Operating results for the first nine months of 2017

• Goods and services sold totalled ISK 11,120 million in the first nine months of the year, as compared to ISK 10,555 million over the same period in 2016, representing a year-on-year increase of 5.4%.
• Gross profit was ISK 2,739 million (24.6%) in the first nine months of the year, as compared to ISK 2,676 million (25.4%) over the same period in 2016.
• Operating costs totalled ISK 2,479 million for the first nine months of 2017 (22.3% of revenue), as compared to ISK 2,364 million (22.4% of revenue) over the same period in 2016.
• Payroll and payroll-related costs as a percentage of revenue was 39.8% for the first nine months of 2017, as compared to 36.9% over the same period in 2016.
• Net financial expenses were positive by ISK 22 million, as compared to net financial expenses of ISK 98 million in 2016. In the first quarter the company concluded a forward contract for the sale of foreign currencies as a partial hedge for business units which generate revenues in foreign currencies while having most of their costs in Icelandic krónur. Exchange rate gains from contracts are recorded under financial income.
• EBITDA was ISK 682 million (6.1%) in the first nine months of the year, as compared to ISK 686 million (6.5%) over the same period in 2016.
• Net earnings totalled ISK 266 million in the first nine months of the year, as compared to ISK 204 million over the same period in 2016.

Balance Sheet 30.09.2017

• Current assets decreased by ISK 849 million from year-end 2016, from ISK 3,624 million to ISK 2,775 million. Cash on hand decreased by ISK 646 million during the period, primarily due to early repayment of interest-bearing loans. Accounts receivable and other receivables decreased by ISK 293 million during the period.
• Interest-bearing debt decreased by ISK 512 million over the period, from ISK 2,028 million at year-end 2016 to ISK 1,516 million at the end of the first nine months of 2017.
• Trade and other receivables decreased by ISK 704 million from year-end 2016, from ISK 2,431 million at year-end 2016 to ISK 1,727 million at the end of Q3 2017.
• The equity ratio increased up to 45.2% at the end of Q3 2017, up from 33.7% at year-end 2016.
• The working capital ratio was 1.52 at the end of Q3 2017, up from 1.42 at year-end 2016.

Cash Flow 30.09.2017

• Cash from operations totalled ISK 196 million at the end of Q3 2017, as compared to ISK 765 million at the end of Q3 2016. The difference may mainly be attributed to changes in operating assets and liabilities.
• Investment activities amounted to ISK 521 million in the first nine months of the year, as compared to ISK 696 million over the same period in 2016. The difference can mainly be explained by less investment in fixed assets for the year so far as compared to the same period in 2016.
• Financing activities amounted to ISK 321 million as compared to ISK 264 million in 2016.
• Cash on hand at the end of the period was ISK 226 million, as compared to ISK 500 million at the end of the same period in 2016.

Operating results for Q3 2017

• Goods and services sold totalled ISK 3,515 million in Q3 2017, compared with ISK 3,429 million over the same period in 2016, representing a year-on-year increase of 2.5%
• Gross profit amounted to ISK 859 million (24.4%) in Q3 2017, as compared to ISK 860 million (25.1%) in Q3 2016.
• Operating costs totalled ISK 774 million in Q3 2017 (22.0% of revenue), as compared to ISK 746 million (21.8% of revenue) in Q3 2016.
• Net financial expenses amounted to ISK 83 million for the quarter, compared with ISK 16 million in the same quarter of 2016. In the first quarter the company concluded a forward contract for the sale of foreign currencies as a partial hedge for business units which generate revenues in foreign currencies while having most of their costs in Icelandic krónur. Exchange rate gains from contracts are recorded under financial income.
• EBITDA was ISK 229 million (6.5%) in Q3, as compared to ISK 247 million (7.2%) in the same period last year.
• Net earnings in the third quarter amounted to ISK 29 million.

Nýherji, TM Software and Applicon to merge in the new year

Nýherji, which is an IT service company and the parent company of the group, occurred revenue rise by more than 10% in the quarter. The results were in line with expectations and somewhat better than for the first half of the year, proportionally similar as last year.

Sales of PC equipment from Lenovo to corporates were strong, while sales of audio and visual solutions from NEC, Bose and Sony to businesses and through Nýherji resellers grew more than 50%. Revenues from managed and consultancy services grew by 22% year-on-year in the third quarter and demand is strong. Sales of infrastructure equipment, servers and storage solutions continue to be robust, but remain unchanged year-on-year.

Revenues from Nýherji's software solutions rose substantially, almost 30% from the same period last year. Security solutions such as QRadar from IBM are in strong demand, with such solutions having become a larger point of emphasis for Nýherji in recent years. The country's major financial services companies now use QRadar to monitor their systems, with such monitoring about to become even more important when new EU rules on date protection (GDPR) come into force. Other solutions offered by Nýherji for the purpose of supporting the implementation of GDPR and quality management systems cumulate plenty of interest, including CCQ (Cloud Compliance & Quality), which is a new cloud solution for quality management processes.

At the beginning of next year, Nýherji will merge with two of its subsidiaries, TM Software and Applicon. This change will simplify the group's organisational structure and solution offering, improve service to customers and promote further growth. The merger will enable the group to reduce infrastructure costs, harmonise work processes and make better use of staff.

Despite a solid position there are various challenges on the horizon. In line with the global trend, recent years have seen greater competition from foreign IT companies which are increasingly marketing their services and solutions in Iceland. This is an ever-present challenge for Icelandic IT companies. At the same time, fluctuations in the price of the Icelandic króna have generally had a negative impact on the group's operations. Rises in wages are also a major issue, but efforts have been made to reduce payroll costs, the full results of which are expected to be seen in the first quarter of 2018.

The outlook for the operations of Nýherji is good. Demand for IT solutions is expected to remain strong and further growth is expected in the outsourcing of IT operations by businesses and institutions.

TM Software widens its solution offering for companies in the tourism industry

TM Software posted revenues of ISK 280 million in the third quarter, a 2% increase from the same period last year. The results are in line with expectations. Revenues for the year total ISK 897 million thus far, an increase of 5.5% from the previous year.

TM Software has acquired the Dacoda software solution for car rental companies, in addition to developing its own car rental solution, Driver Guide, a fleet management and navigation system for car rental companies and their customers. TM Software recognizes significant opportunities and synergies between the new solution and Driver Guide. TM Software's car rental solutions will be marketed under the name Caren.

The project pipeline is robust in most areas and the outlook for operations is good.

Continued revenue growth at Tempo

Tempo, which develops a time tracking solution of the same name, posted revenues of USD 12.6 million for the first nine months of the year, representing a year-on-year increase of 34% (in USD). The third quarter revenue was USD 4.2 million, up 33% (in USD) from the previous year. This rapid rise in revenues has been the story for Tempo since its foundation, with its clients now comprising over 11 thousand businesses and institutions of all types and sizes, in all industries, in more than 110 countries. The company works closely with 120 partners on the sale and servicing of the software, with its partners now generating a significant portion of new sales. Tempo employs about 100 people, including 32 in North-America.

The success of Tempo comes primarily from the improvements in production and efficiency that customers can achieve by using Tempo Timesheets, Planner and Budget, the company's main solutions. From the beginning Tempo has worked closely with Atlassian, the developer of JIRA work orders and the service system supported by the Tempo solution. At the Atlassian-Summit in San Jose in September, Tempo presented Tempo Cloud for JIRA, as well as connections to cloud services such as Slack and Google. The new solution is based on Tempo's own cloud environment in AWS (Amazon Web Services), offering opportunities for product development and growth through direct sales to customers regardless of whether they use JIRA from Atlassian or other cloud solutions. Tempo Cloud for JIRA is expected to continue to drive strong revenue growth at Tempo, both through products from Atlassian and in new markets.

For the past year, the investment bank AGC Partners has been consulting Nýherji and Tempo regarding the proposed sale of a stake in the company. As part of that process, Tempo management team gave presentations at investment conferences in San Francisco and London. AGC will now follow up on this by placing a significant stake in Tempo in a formal sale process. The goal of the sale is to bring into the company a partner with knowledge of how to build a global software operation. This will promote further growth and success for Tempo while also creating more value for owners and customers alike.

Good results at Applicon Iceland

The results of Applicon Iceland, which develops and sells business solutions, were good and in line with expectations. Applicon had total revenues of ISK 267 million in the third quarter, which is somewhat lower than the same period last year, but revenues in the third quarter of 2016 were unusually high due to very large contracts for the sale of software from SAP and Applicon's own software. In the first nine months of the year, revenues totalled ISK 887 million, up 4% from the previous year. Earnings for the quarter were similar as in 2016 but earnings as a percentage of revenues were higher. The operations are stable, with steady growth in subscription income from human resource and payroll solutions, good utilisation of consultants and innovation. The project pipeline is strong and diverse. The outlook for sales is good.

In early October, the acquisition of the entire share capital of Timian Software ehf. was finalised. Timian Software develops and implements a business solution of the same name, an electronic purchasing system which connects buyers to suppliers, making purchases more efficient and transparent. The company fits well with Applicon's existing business and there are opportunities of growth with respect to the company's other solutions and in cross-selling to customers of Applicon and Nýherji.

Good results at Applicon Sweden

Applicon Sweden, which specialises in consultancy and implementation of business solutions for banks and financial services companies, is currently engaged in large projects for SBAB Bank and Landshypotek Bank. The company had revenues of SEK 66 million in the first nine months of the year and results from operations were solid. Third quarter revenues amounted to SEK 18 million, decreasing substantially from the same period in the previous year. The decrease may be attributed to a very large software sale which was recorded in the third quarter of last year. However, service revenues rose year-on-year, up 10% in the quarter. Demand for services remains strong, among existing clients. The outlook is sturdy, growth is expected to continue and more staff is expected to be hired.

Outlook

Operating prospects for the Nýherji group are good. Continued moderate growth of revenues is anticipated with a similar return on operation as seen in recent quarters.

Shareholders

At the end of Q3 2017, the company had a market cap of ISK 12,978 million. The share price closed at ISK 28.3 at the end of the quarter. Outstanding shares were 459 million as of 30 September 2017 with a total of 592 shareholders.

Financial calendar

• 31.01.2018 Fourth quarter and annual results 2018.
• 02.03.2018 Annual General Meeting, 2017.

Approval of Financial Results

This interim statement was approved at a meeting of the Board of Directors of Nýherji hf. on 25 October 2017. Nýherji hf.’s financial statements comply with International Financial Reporting Standards (IFRS).

Nýherji hf.

Nýherji is a group of companies in the IT sector. Nýjerji is a service provider which aims to help customers achieve improvements in their operations through IT technology, the expertise of our staff and flexible service. Nýherji hf.’s shares are listed on NASDAQ OMX Iceland hf. under the ticker symbol NYHR.

The Board of Directors of Nýherji comprises Ívar Kristjánsson, Chairman, Hildur Dungal, Emilía Thórdardóttir, Loftur Bjarni Gíslason and Gudmundur Jóhann Jónsson. Hjalti Thórarinsson is an alternate member of the Board. The CEO of Nýherji hf. is Finnur Oddsson.

Disclaimer

Forward-looking statements contained in this press release may be based on management’s current estimates and expectations, and not on facts that may be verified after its publication. Such statements are inherently uncertain. We therefore caution the reader that there are a variety of factors that could cause business conditions and results to differ materially from what is contained in our forward-looking statements, and that we do not undertake to update any forward-looking statements. These forward-looking statements speak only as of the date of this presentation and are qualified in their entirety by this cautionary statement.

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