Message from the CEO

Over the 9-month period ended on September 30, 2021, our group recorded operational revenues of RON 85,4 million, which represents an increase 9.6% compared to the same period of last year. According to the model already known of operational leverage, it generated an increase of 20.1% of the gross margin, up to RON 17.8 million. The operating profit for the period is RON 6,18 million, 79% higher than in the same period of 2020. The operating result increased by RON 7.5 million (an increase of 270% in the module) and we saw an improvement by RON 958K (a tripling) in the results brought by the companies where we have minority shareholdings, which generates a gross profit of RON 10.77 million for the period (and a net profit of RON 9.75 million), i.e. an increase of almost 13 times compared to the same period of 2020.  

If we review the “trailing twelve months” perspective, the total income and gross margin decreased slightly (from 120.5 to 117.1 million in the case of income and from 25.1 to 24.45 million in the case of gross margin) and the reduction of almost RON 1 million in financial costs, related to the financial profit increased by RON 8 million generates a gross profit of RON 13,1 million for the last 12 months. 

At the date of publication of this report we are in the middle of the 4th quarter, which brings (on average, traditionally) 40% of the turnover. The fact that in the first 9 months of the year we have almost generated the budgeted profit for the entire 2021 did not lead to a slowdown of the activity, but on the contrary, “the match continued until the last minute”, as our purpose was to enjoy the results of the transformation of the operational models implemented throughout this year. 

In light of these results, I would like to bring back to the investors’ attention some elements that can help to better understand our activity: 

1. The on which the annual BVC is built starts from the assumption that during the current period we will “work” harder than the previous year to achieve the same gross margin (i.e. the gross margin expressed as a percentage of turnover will decrease compared to the past period). This puts pressure on the team to generate increasing revenue in order to record an increase in gross margin. Instead, if sales to customers have more value-added services attached to them during one period, or we record increased operational efficiency, the group will generate a higher gross margin than estimated, even if revenues are not necessarily higher. Gross margin is what generates operational profitability. 

1. The team structure and the operating model of the group generates a leverage (“multiplier”) for gross margin as compared to revenue. Thus, as we can see now, an increase of less than 10 percentage points in revenue generates a double increase in gross margin (a 20 percentage point increase in gross margin), which is the key element to generate operational profitability. 

1. The delivery terms and availability of the technology manufacturers have stabilized at the values we are used to, even if they are much higher than before the semiconductor crisis (120 -150 days compared to 30-45 days). This means that currently invoiced revenues have started to ‘catch up’ with estimates. In other words, looking ahead, we expect that at some point to see a sudden increase in revenues in a given quarter or two, when equipment deliveries will return to ‘normal’ lead times. In contrast, it seems that the equipment delivery situation has been stabilised by the manufacturers, so there should be no further ‘breaks’ in revenue, caused by delayed deliveries. A return to normal lead times is forecast to happen in 2023 at the earliest. 

1. More importantly, these delays of the manufacturers not only affect Bittnet’s ability to generate sales, but also the ability of the manufacturers themselves. Thus, the entire ecosystem of technology partners is working hard to offer alternative solutions to customers – be it additional services or software upgrades to existing equipment. Thus, our revenues now have a stronger service or product component with higher gross margins, driven by the manufacturers themselves.  

In difficult times you can see the value brought by a professional management and an organisational culture that keeps the team focused on finding solutions to seemingly impossible problems. Even though we have been operating for over 18 months in an unfavorable economic environment (initially the Covid-19 crisis, then the economic downturn caused by government measures, then the drop in demand for one of the group’s core products – training in the classroom, then the semiconductor crisis), and the entire organisation has faced many challenges, financial stability has allowed us to composedly build the new operating model from which we begin to reap the rewards.  

On an operational level, for the Technology Division, Q3 was a period of growth in terms of both turnover and gross margin generated and profit. The growth in financial indicators is also reflected in higher activity at team level – including in the area of IT and ERP services –with over 700 projects implemented in this quarter. In this respect, we can say that at division level and implicitly at company level (Dendrio and Elian) the seasonality in the first 3 quarters was close to the pre-pandemic seasonality. It is important to note that we have thus managed to recover the drop in revenue recorded in the first 6 months, but moreover, we have managed to accelerate the margin growth generated in these three quarters. 

The joining of ISEC, IT Prepared, but also Nenos and Nonlinear to the group (and to the Technology Division) will allow us to accelerate projects in areas of maximum interest to the market – cybersecurity, managed services, but also in areas with huge future potential such as artificial intelligence. Q3 is the first quarter in which these companies have become operational within the Group, which has resulted in increased attention to the integration of teams, the migration of IT tools and operational-financial processes, as well as the strengthening of the financial position of these companies. As a proof, both in the case of ISEC and CLC, the solid financial position of our group allowed us to approach the creditors of these companies and to propose them to pay in advance the debts of these companies, in exchange for a 65% reduction of these debts – a very profitable situation for us. Thus, ISEC and CLC start their journey within the Bittnet group with a much better financial situation, being able to focus on increasing their core business. The process of operational integration of the teams continues in Q4 and we will be able to consider them fully integrated only at the beginning of 2022. 

Q3 2021 was atypical for the Education Division. While, traditionally, the activity in this quarter was significantly reduced due to the holiday period – both for our trainees and our trainers – this year, the activity was uninterrupted and we were able to recover much of the decrease of over 20% compared to 2020, recorded at the end of the first two quarters of this year. Given that traditionally Q4 is our busiest quarter, we are confident that we will be able to exceed last year’s result, marking the resumption of the growth that the Education Division recorded every year before the pandemic. 

One of the main concerns for the second semester of 2021 is to develop and professionalize the team of internal trainers and collaborators. The fact that we now have a Training Manager for both technical and soft skills training has helped us to be able to build a significant part of the processes and procedures needed in the final stage of the Buyer Journey. In this way, in addition to improving the experience of our trainees, we have taken important steps towards the goal of developing BittNation, the community of those who attended the courses of the Education Division.  

Customer Success managers also completed working procedures and 3 Use cases that demonstrate the ROI achieved by customers for the educational projects carried out with us. In Quarter 3 we delivered a total of 132 classes for a total of 1220 learners, which corresponds to an average of about 9 students/class. This slight increase compared to the last year’s average helped us to maintain an average gross margin of over 50% at the division level. 

About stock market performance  

Bittnet’s share price fell by 16% in the first 9 months of 2021. The total trading volume recorded in the first 9 months was of 77,063,824 shares, with a total value of transactions exceeding RON 45.6 million, values that confirm the membership of the BET-XT index or FTSE Russell indexes, based also on the liquidity of the shares. 

Today we have a different shareholder composition than in the past: we have reached a number of almost 4,000 shareholders (including 12 investment funds) of which several are ‘new shareholders’ (who joined our company after the transition to the main market). In formal or informal discussions we have learned that some of them are facing a decrease in the value of their investment – which causes dissatisfaction with the company, although the stock market performance of the share price cannot be controlled by the Issuer. We are sure that among the 4000 shareholders there are also speculators, but we hope that we also have a significant number of shareholders who understand that the chances to thrive by investing in a company increase in proportion to the time spent both studying the company (Shareholder’s Manual, Universal Registration Document, Messages from the CEO) and especially to the time spent as a shareholder, so that the company’s development plans can show their effects and the market uptakes new information. 

We have shown on the Facebook group dedicated to Bittnet investors some figures that we consider relevant, which could increase the confidence of shareholders in the long-term evolution of the share: 

• The annual growth rate of revenues and assets is over 60% 
• Return on capital from investors is over 40% annually 

• Capital raising transactions to acquire other companies or to settle SOP plans generated an average return of over 20% for shareholders who did NOT participate 
• Bittnet’s valuation indicators today equal almost half the average of similar companies listed on mature markets, companies that do not have our growth rate. Moreover, if we compare ourselves with other companies in the industry listed on the Romanian stock exchange, we notice that they have higher valuations in conditions where the turnover is even several times lower than that of our Group. 

We conclude this chapter1 with a few references to the virtue of patience when it comes to investment in the shares of individual companies (“stock picking”): 

• “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” – Benjamin Graham 
• About the interaction with “Mr Market”, paragraph reproduced from the Berkshire Hathaway Shareholders Letter, 1987: 

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.  

Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behaviour, the better for you.   But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game.  

Development through M&A 

In Q3 we completed 5 transactions out of those already announced (Nenos & Nonlinear, ISEC and CLC, IT Prepared) – all of these companies will start generating results that will be taken into consolidation only in Q4 2021. In parallel we have advanced the negotiation processes with the others that are still ongoing: Servodata, Datascript, Top Tech. We only need these transactions to be successfully concluded and we will start 2022 with a capacity to generate business of around RON 250 million. We are looking for 4 to 5 more transactions that will allow us to strengthen our presence both in the classic IT&C integration business and in the cyber security area.  

For the companies where the transactions are completed, the journey of operational and financial integration has begun, to unify tools and procedures, to learn from each other what we perform well, and to increase our chances to cross-sell and up-sell. Each company goes through a dedicated integration process based on the information we uncover in the preliminary transaction analysis phases. We estimate that by the end of Q4 these organisations will be aligned to the group standard in all respects. 

Taking into account the continuing expansion of the group through acquisitions (M&A), which generates different basis of comparison for impairment testing, we intend, with the approval of our auditors, to change the policy for the valuation of holdings in other companies – by shifting to an independent valuation thereof. Now we estimate that the independent revaluation of holdings will increase the value of these assets in Bittnet’s individual financial statements. 

Please read more about the structure of the group and the role of M&A activity in achieving the EUR 100 million turnover target in the Shareholder’s Manual.  

I conclude my letter with an example that I think is self-evident to explain our accelerated growth objectives. We believe that it is much easier to generate higher profitability in nominal terms from a company having a turnover of RON 500 million than it is from a company with a turnover of RON 100 million, or as it was from an even smaller company. This quarter gives us a clear measure of how true this statement is: the profit for the Quarter 3 of 2021 alone is higher than the entire annual turnover of any of the first 8 years of Bittnet’s existence. It is obvious that we could not have extracted a profit of RON 9 million from a company with a business of RON 7 million.  

Equally, if we reach the target of RON 500 million turnover in 2024, and this is accompanied by an average profitability for the industry of 15%, the resulting net profit would be impossible to achieve from current turnover, no matter how much attention to cost, ingenuity and operational mastery we provide. On the other hand, such a company, valued even at only 10x profit, or only 1x revenue (well below the historical average of these indicators), would still be worth 3-5 times more than today.  

As always, we welcome your questions at investors@bittnet.ro. 

Mihai Logofatu, 
Founder and CEO Bittnet Group