Earnings Report /
Saudi Arabia

Solutions by STC: Earnings Call Summary – Q2 22

  • Solutions’ total revenue increased by 16% yoy driven by strong growth in Core ICT and managed services segments

  • EBITDA grew by 11.1% yoy to SAR350mn driven by strong revenue growth

  • On the back of strong H1 22, the company revised its FY2022 revenue guidance

SNB Capital
14 August 2022
Published bySNB Capital

Below are the key highlights of Solutions’ Q2 22 earnings call.

Financial performance

Revenue

  • Solutions’ total revenue increased by 16% yoy to SAR2,254mn in Q2 22 driven by strong revenue growth in Core ICT services and managed services segments.

  • Core ICT services revenue increased by 20.8% yoy, Managed services grew by 21.8% yoy while Digital services revenue remained flat yoy.

  • Core ICT services revenue accounted for 55% of the topline, Managed services represented 26% while Digital services revenue makes up for remaining 19%.

  • Revenue from STC grew by 15.6% yoy to SAR666mn (representing 30% of Q2 22 topline) driven by major data center project that were undertaken during the quarter.

  • Government’s revenue increased by 15.4% yoy to SAR1,200mn and private sector revenue grew by 21.4% yoy to SAR388mn, representing 53% and 17% of Q2 22 revenue respectively.

Profitability

  • Cost of sales increased by 16.2% yoy to support the revenue growth. As a result, gross profit increased by 2% yoy to SAR505mn while gross margins remained broadly flat at 22.4%.

  • EBITDA grew by 11.1% yoy to SAR350mn driven by strong revenue growth despite increase in opex. As a result, EBITDA margin contracted by 70bps yoy to 15.5% in Q2 22 compared to 16.2% of Q2 21.

  • Overall opex (excluding D&A charges) were up by 34.1% yoy driven by the acquisition related expenses and higher personnel expenses.

  • Depreciation and amortization expenses increased by 15.5% yoy, mainly due an extraordinary capex related to a project conducted for Aramco at the end of 2020.

  • The increase in depreciation is also impacted by the change in depreciation method for one of the assets.

  • Net profit increased by 6.6% yoy to SAR273mn compared to SAR256mn in Q2 21.

Cashflow and working capital

  • Accounts receivable at the end of Q2 22 stood at SAR3.4bn vs SAR3.0bn of Q4 21 while DSO remained flat at 136 days.

  • STC accounts for 68% of Solutions’ receivables, while government and private clients accounted for 25% and 7% respectively.

  • Accounts payable at the end of Q2 22 reached SAR2.0bn vs SAR1.9bn in Q4 21, while DPO declined to 106 days in Q2 22 vs 117 days at the end of Q4 21.

  • Working capital increased by 60% yoy to SAR2.47bn vs SAR1.55bn in Q2 21.

  • Capital expenditure in Q2 22 reached SAR25mn vs SAR36mn of Q2 21. Capex/sales ratio stood at 1.1% vs 1.9% in Q2 21.

  • Free cashflow stood at SAR392mn, mainly due to higher cash from operations and lower capex.

  • Solutions has a strong net cash position of SAR1.78bn (after deducting SAR500mn debt).

M&A Strategy

  • Solutions’ management M&A strategy aims to strengthen the existing portfolio, expand into new segments and geographies and entering disruptive technologies.

  • As a part of its M&A strategy, Solutions signed an agreement with Inergia Technologies in April 2022 to acquire 89.49% stake in Giza systems, and 34% of Giza Arabia, a subsidiary of Giza Systems Company. Giza Systems is a leading IT company, providing systems and applications integration services as well as emerging technologies in Saudi, UAE, Qatar, Egypt, USA, etc. The company services client-base in over 25 countries.

  • Giza’s acquisition will help Solutions achieve key strategic objectives like acquire capability in key strategic domains, expand addressable geographic markets and diversify customer base.

  • The transaction will be based on an Enterprise Value amounting to US$158mn to be paid in cash.

  • The management expects the Giza transaction to be completed by the end of Q3 22.

Others

  • The company has witnessed growth in demand from all customer segments like government, large enterprises and SMEs.

  • The company renews majority of its licenses in Q4 and delivers in Q1 hence there will be a seasonality in revenue while receivables collections improve in Q4 due to higher government exposure.

  • The management clarified that it is not competing with STC in data center business as solutions’ business is to provide professional services to cloud and data centers which differs from STC-Alibaba’s JV business of deploying and operating data centers.

  • The company does not compete with STC in enterprise business, instead it sells through STC on a shared revenue model.

  • In the Digital Services division, the company is witnessing accelerated growth in its product portfolio which can translate into a good revenue share in the short to medium term.

  • The management stated that Core ICT division generates best margins followed by Managed Solutions. Digital Services have comparatively lower margins.

  • The management stated that there won’t be any write-offs or impairments on Giza transaction (post the consolidation) due to the 20% devaluation in Egyptian currency as the devaluation is already accounted for while valuating the Giza acquisition.

  • The company has an attrition rate of 5.0% till the end of December 2021.

Outlook

  • On the back of strong H1 22, the company revised its FY2022 revenue guidance from a mid-to-high single digit to 9%-11% yoy growth in revenue.

  • The revenue guidance does not include planned M&A activities while expects a seasonal revenue decline in H2.

  • Management reiterated EBITDA margin guidance at 13.0% to 15.0% and revised down the capex intensity guidance from 2.0%-2.5% to 1.5%-2.0%.

  • The company believes that it has a good level of backlog to support future revenue growth and expects to increase its headcount to support its growth.

  • Despite having strong cash balance, the company raised the debt to fund the Giza acquisition and will continue to raise debt to finance future acquisitions to optimize its capital structure with the right balance of debt and equity.

  • In the long run, the company targets to maintain a debt to equity ratio in-line with the market.

  • The company expects the revenue share from STC to decrease in the future and plans to increase from B2B to reduce the dependency on STC.

  • The management expects the Giza to contribute to revenue from the fourth quarter of 2022.

  • The company expects the current cost levels to sustain and plans to optimize the digital services’ cost structure to improve margins. Moreover, it expects the M&A programs to support margin expansion plans in the mid-term.