OVH Groupe : OVHcloud - H1 FY2023 Results - Conference call transcript

OVHcloud H1 FY23

Results

Wednesday, 19th April 2023

Transcript produced by Global Lingo

London - 020 7870 7100

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OVHcloud H1 FY23 Results

Wednesday, 19th April 2023

OVHcloud H1 FY23 Results

Name: Hello, and welcome to the OVHcloud H1 Full Year 2023 Results Call. My name is Caroline, and I will be your coordinator for today's event. For the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the presentation. This can be done by pressing star one on your telephone keypad to register your questions at any time. If at any point you require assistance, please press star zero and you'll be connected to an operator. Please note, this conference is being recorded.

Today's speaker will be Michel Paulin, the CEO, and Stéphanie Besnier, the CFO. I now hand over to OVH team to begin today's conference. Thank you.

Michel Paulin: Hello, everyone. Good morning. This is Michel Paulin, the CEO of OVHcloud. Thank you for joining us today for our H1 2023 results. This first semester has been a period of growth acceleration. Our revenue reached €439 million, up 15%, as reported, and 12.8% like-for-like, with the Q2 growing at plus 13.9% after a Q1 at 11.7%.

We had a strong growth acceleration. Our H1 adjusted EBITDA reached €156 million, leading to a margin of 35.4%. Higher than expected energy costs in Germany and the timing of our sizing[?] of our price increases meant the EBITDA was modestly below our initial expectation.

We continue to monitor our investment level with discipline. Our CapEx is lower than last year, with recurring CapEx of 17% of our revenue and gross CapEx of 27% of our revenues. We are pleased to see that revenue accelerated in Q2 with growth reaching 13.9%, up from 11.7% in Q1.

So let me give you an update on our guidance for next - this year. Overall, H1 was encouraging, but in March and so far in April, we have seen signs that some clients are taking longer to conclude contracts. We are still confident our offering in quality and price will remain competitive and attractive.

Nevertheless, we think it's prudent to temper our full year revenue guidance to take into account this. We now anticipate our full year 2023 revenue growth to be between 13-14% like- for-like, and we were previously at 14-16%. It's still a very strong growth level and represents an acceleration compared to last year and in H2 over H1. Given the operational gearing of the business, the lower level of revenue growth is impacting EBITDA, where we now look for a full year '23 margin of at least 36%.

We had previously looked for 29%. The new target still implies a stronger second half margin with the increase driven by the effect of volume growth, price increases and the front-end loading of costs and, of course, continued strong cost discipline. We expect our CapEx to be in the lower range of our guidance, recurring CapEx between 16-20% and growth CapEx between 28% and 32%.

We have a clear focus on financial discipline and flexibility. We continue to invest selectively for future growth in new products, new data centres, especially in new infrastructures, and remain agile as we were positioned on a fast-growing market long-term and remain focused on delivering profitable growth.

The next slide is about OVHcloud, which operates in a fast-growing market with an expected five years CAGR of more than 20%, as you can see on the left-hand side of this slide. The

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Wednesday, 19th April 2023

cloud market is driven by cloud adoption from all customer segments and it is mission-critical to their operations.

Everyone is moving to the cloud. Data usage is growing fast, and we keep seeing new usage, new habits, many new opportunities for growth. Multi-cloud and hybrid cloud trends accelerate the momentum. More and more organisations deploy multiple cloud solutions to finally address their digital transformation needs.

In this market, as the European cloud leader, we are recognised by IDC as a major player in the cloud industry, and we are ideally positioned to continue to capture opportunity in this fast- growing market.

OVHcloud is the European leader in data sovereignty and current regulation evolution is a very strong tailwind for us. The global legal framework is increasing favourable to OVHcloud. In Europe, with the Data Act, European institutions are reinforcing freedom of choice for cloud users. This is even resonating in the UK. British authorities are undetermined - determined, sorry - are determined to ensure fair competition and are currently preparing an investigation on the cloud market practices.

We continue to see a strong traction for our sovereign solutions. Our SecNumCloud offering is doubling every quarter. It shows the traction for the highest level of security and trust. Data sovereignty is a strong driver now for business, as shown by our recent wins as AP-HP in the health, and also with Dalet in the media industry for the Olympic games.

We are working on several aspects, including the extension of the certification to Public Cloud and bare metal solutions beyond our current Private Cloud offering. This extension will be driving business momentum as we also are expanding our existing certification in Germany to also expand in new market opportunities in these locations.

OVHcloud's leading position for a sustainable cloud is recognised by analysts and customers. We are very proud to have reached a score of 71 over 100 at S&P Global Ratings, which is a 5- point improvement compared to 2021. With this high score, we have - we are above the average of technology companies in all geographies.

Also, we are in the top 15% of the software and service companies in 2022 in Sustainalytics ranking with a low-risk ESG profile. These new rankings are a clear confirmation of our leading position. More importantly, our continued work to improve our carbon footprint, energy and water efficiency is driving business momentum that our customers and clients are looking to optimise our environmental footprint.

Let me give you a few points regarding our growth acceleration strategy. We had in H1 a continued growth acceleration with a very strong Q2. In Public Cloud, we reached €74 million of revenues in H1 with a like-for-like growth of 18% in Q1 and 22.8% in Q2.

In Private Cloud, our revenue reached €273 million in H1, with again, a like-for-like growth of 12.8% in Q1 and 16.6% in Q2. In web cloud, our revenue reached €92 million with a like-for- like growth of plus 2.5% in the semester.

At Group level, our growth accelerated from 11.7% to 13.9% in Q2. This growth acceleration is fuelled by our key long-term differentiators: data sovereignty, sustainability, open and reversible cloud, predictable and transparent pricing, best performance price ratio, which are, in this period, key competitive advantage.

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It has been a strong first half, and it's come with both existing customers and new customers wins. Our existing customers show a high level of loyalty, as you can see on the revenue retention rate reaching 111% in Q2. Capitalising on this high level of trust, we are delighted to register good upselling and cross-selling dynamics within our customer base.

In addition, we have seen and continue to see good momentum with new client wins. As you can see on the right-hand side, we continue to win significantly clients this quarter in various sectors such as finance, insurance, media, software editors, marketplace or gaming. And I would like to share with you three flagship names that we won this quarter. All three of these wins are of the type that have significant medium-term potential.

The first one is Allianz, where we will host a workload of one other affiliate on the hosted Private Cloud. The second is in the health sector with AP-HP, the public hospital system in France in Ile-de-France. This is a very interesting new opportunity. We will build with them a new health data app to develop a sovereign health platform with open data - open source data. It will grant help to large corporate, hospital, clinics, laboratories, public entities or researchers to access to significant amount of health data. It will accelerate their progress on various projects such as AI for instance.

Finally, we are very proud to have been selected by Dalet to manage and store the very significant amount of media data that will be generated during the Paris Olympics games of 2024. This will build their infrastructure on our Public Cloud and PaaS offering. All these customers underline how data sovereignty, price performance, product performance of the product and price predictability are important for them.

They are the key - these are key differentiating strengths for OVHcloud and drive strong new business momentum.

We have a steady dynamic in our go-to-market performance with a continued strong traction both for the digital and the enterprise channel. The success of our partner programme is key for us. We now have more than 1,250 partners worldwide, mostly IT integrators, such as big- name Accenture, Capgemini, Sopra Steria, that can integrate to OVHcloud on their own offering. It enables them to offer to their customers their expertise, coupled with our unique cloud offering.

First, it's increased our total addressable market as large corporates can be addressed with our partners. Secondly, in the period where some customers are looking to optimise costs, our strong relationship with partners is a key asset to understand what our customers want and how we can best address their cloud needs in the short and long term. We will continue to increase our work with partners that is clearly successful and very appreciated by existing and future customers.

As we know, we started our price increase mid Q2. The customer response has been encouraging. There were no change to our commercial dynamic with continued strong new customer acquisitions and double-digit ARPAC growth amongst existing customers. It confirms that our value proposal is robust, and our pricing power potential is very strong.

We had a very good first half, especially in Public Cloud, where we saw a significant increase in brand awareness. The performance of our product is recognised. We booked 10,000 new customers in Public Cloud in H1 compared to the same period of last year. It also enables us

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at Group level to continue to grow with existing clients. The more they use OVHcloud, the more they understand and proceed the value and performance we can bring them. ARPAC has increased by around 10%.

In terms of churn, as this chart shows, dynamic is unchanged and very encouraging. We closely monitor all operation KPIs that we have, and we didn't see any change in our monthly revenue churn compared to historical trend and the price increase rolled out. We have limited monthly volatility with 0.5 maximum of variation between the maximum and the minimum for the more than two years. We will continue to strictly monitor these KPIs and to adapt all the time our action plans.

We have been developing and improving our PaaS offering for the last two years. PaaS enables users to develop easily cloud-based applications. We demand - demand for these kind of solutions continue to be very strong. We have now thousands of customers for our different solutions such as Database-as-a-Service, storage or containers.

In Q2, PaaS represents 8% of our Public Cloud revenue after a very significant growth since the beginning of the year. We expect our PaaS offering to continue to be a significant growth driver, accelerating and expanding our customer base.

Looking at geographies. We are pleased to report double-digit growth in all regions with a growth acceleration in Q2. We had a continued double-digit growth in Public and Private Cloud in France. And despite lower growth in web cloud, as anticipated, we grew at 12.4% like-for- like in Q2 and 12.8% like-for-like in H1. We had a strong growth acceleration in Europe, driven by very good performance in Germany and Eastern Europe in all segments.

In the Rest of the World, it's a strong performance as we again - we are again growing at a double-digit growth pace despite high comparison basis in the US and the continued deceleration in Russia. We announced a new data centre in India with a few quarters ago, and we are very happy to have officially launched the commercial go-live early March.

We had a very good traction as soon as we launch it, and we were rapidly, unfortunately, sold out for the first wave of service, which confirms the high growth potential of this region. The Indian cloud market is expected to grow by more than 30% in the next five years. And thanks to these new data centres, we are strengthening our presence in this fast-growing region, which is also concerned with data sovereignty.

This is a rising demand in India for data sovereignty and for the highest level of data protection, which fits perfectly what our offering - what we are offering to our customers. We operate in a very fast-growing market, and we are investing selectively to boost our future growth. We are focused on financial discipline. Our model is highly flexible, and we can see in the CapEx evolution versus last year.

The CapEx needed for the servers is 20% lower than last year, and we have been using stocks that we have decided to increase last year because of the supply tension. We continue to invest in infrastructure CapEx to expand our capacity, especially in new regions and new data centres. The road map of opening we planned at the start of the year remain on track with nine new data centres next year. We also have invested in Hyper-Resilience CapEx related to the new security standards we have implemented in our data centres.

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