Letter from Cristian Logofătu

In 2015, with the listing of the company on the AeRO market of the Bucharest Stock Exchange, we offered investors a growth story already validated– the company had just been included in the “Deloitte Fast 500 in Tech” and then in 2016 in the “Financial Times fastest growing 1000 Companies in Europe”, but also with the promise to continue that accelerated growth. Thus, in almost every annual report published over the years, we have mentioned that the year was the best year in our history based on the increase in operating indicators, but also in revenues, assets, cash flow and equity.

From an operational point of view, 2022 was also an exceptional year:

• The combination of recruiting 90 new colleagues (approximately one every three working days) and a staff turnover of 15%, well below the industry average, helped us acquire over 400 team members across our 10 offices nationally.
• We completed two significant M&A deals (TopTech and 2Net – which joins the Cloud&Infrastructure pillar), and signed another deal for this business segment: Dataware – to be submitted to the Competition Council for approval. With Dataware within the group, the annual revenue generating capacity significantly exceeds RON 300 million.
• We have moved to a new location – at ONE Cotroceni Park – a development in the process of getting LEED PLATINUM and WELL certification, which focuses on employee experience, health and happiness levels of our employees and of our trainees.
• We completed 2 rebrandings for companies in our technology division: IT Prepared became Optimizer (managed services made simple) and GRX+ISEC became FORT (cybersecurity services).
• Optimizor colleagues took on 5,500 tickets, and of those, 99.99% were taken under SLA (Service Level Agreement), and saved over 5,000 hours of human intervention by automations implemented for customers.
• The colleagues from FORT have worked over 60,000 hours for the safety of our customers: +50% security audit projects, and +35% security consulting projects.
• The number of trainees trained by Bittnet Training colleagues reconfirms our status as the undisputed market leader: 6,000 trainees, 530 training sessions (12 training sessions per week, with an average of 12 trainees per training session!) – almost a doubling compared to 2021.
• Dendrio colleagues delivered 60% more Cisco projects with security components than in the previous year.
• Elian colleagues doubled their team to be able to deliver at least 1 go-live/month, the greatest number of projects delivered in one year.
• Colleagues at Nenos have been working on the Spell BOX project – the first IA diagnostic hardware for agricultural crops, launched by Chromosome Dynamics..

The above results were also presented on the various communication channels of the company, and the reaction from investors and those who follow our activity was that we should analyze whether a year is good or not for the group also in terms of profit or share price evolution on the stock exchange. Regarding the first point, the analysis from the profit perspective, I repeat the message conveyed both in the Shareholder’s Handbook and in the chapter “Bittnet Vision”, namely that in the case of Bittnet Group we think it is appropriate to follow first the growth of the entire size of the organization. Therefore, we have always focused on accelerating the Group’s growth in healthy conditions – through increased attention to cash flow and operational profitability, but also by making decisions that can create long-term value, regardless of the short-term impact. As a result of this approach, gross profit has fluctuated from one year to another.

Regarding the second point, the evolution of the share price on the stock exchange, naturally the management of a listed company does not manage its share price, but the situation is analysed in the chapter “Buffett Test” – you can draw your own conclusions. We want to reassure all shareholders that the activity of each member of the top management team, we are focused minute by minute on generating substantial long-term shareholder value. In addition, the value of BNET shares represents the core part of this company’s founders’ wealth – we are fully aligned with the goal of increasing company value. Returning to the discussion on profitability, the table on page 3? contains several pieces of information, of which I highlight the ones I consider relevant to take into account:

1. The organic growth of the group was 25% at business level and 15% at gross margin level, and if we analyse at the total size we are talking about a growth of about 100% at business level and 64% at gross margin level.
2. Perhaps more relevant is that if we look at a 5 year period, we maintain the known growth rate of over 40% annualised! If we only analyse in comparison to 2019, the year prior to moving to the main market, we record an ANNUALIZED growth of 39%. (“People overestimate what can be achieved in one year, while underestimating what can be achieved in 10 years” – generally consistency in following and implementing the right ideas in a business that can benefit from the compounding effect is not understood/appreciated correctly).
3. Growth of the team and indirect costs at a faster pace (partly due to inflation and partly due to investment in the team to support the next level of business size) has led to a decrease in operating profit margin. Total operating profit compared to last year was unchanged , helped by the acquisitions (organic evolution was down 32%). This item will be addressed as a priority in 2023.
4. If in 2021 we had non-cash items contributing positively to gross profit, in 2022 the actual cash generated by the business is more than 4 times higher, and also significantly higher than the profit for the year. This is because in 2022 non-cash items (mark to market revaluations and SOP) contribute negatively to profit. (hence one of the two explanations for this report – the need to understand the “real” business versus the accounting picture)
5. The different business lines have had different evolutions, with specific elements described in a dedicated chapter. But we signal the diversification of the net profit generation lines as a result of the Group’s long-term acquisition and development strategy, with the cybersecurity division reaching around one third of the Group’s net profit in 2022.
6. The diversity of the services and market niches we cover, but also the diversity of the type of companies within the group and their stages of development give us the advantage of a growth in conditions of balance and stability, which allows us to address calmly, in an orderly and intelligent manner, without panic, the various problems that arise in every business. It is a resilience that we have talked about before, a necessary step in the journey towards group anti-fragility.
7. The financial position at the end of 2022, is very good: RON 42 million in cash, and trade payables approximately equal to trade receivables. Combined with the capital increase that is currently underway and will be completed in February 2023, we will have a very favourable equity base (about RON 100 million) and cash position (about RON 60 million) to continue the expansion in the coming period according to a famous quote of Ayrton Senna: “You cannot overtake 15 cars in a sunny weather… but you can when is raining”. A solid company, with a track record of generating very good returns on capital, and with a track record of healthy M&A transactions is a very good option for difficult times, for entrepreneurs who want to sell their companies, for employees, and for shareholders.

One thing that I believe is very important to keep in mind is that, given the current size of the group, and the M&A transactions that are almost completed plus pipeline transactions, we believe we have all the ingredients to reach the RON 500 million turnover target in 2024.

Thus, if this year we expanded the team and the working environment to support the estimated business level for 2023 and 2024, but this has “eaten up” almost all of the additional gross margin generated over the previous year, it makes us believe that operationally, the number one internal priority for 2023-2024 will be to draw more profitability from the current business. As a result, we aim to complete 2 or maximum 3 more significant M&A transactions, but operationally, internally, we focus mainly on generating positive cash flow and profitability.

We have learned a lot from the difficult and intense process of consolidation through acquisitions and organic growth of the Bittnet Group in a highly fragmented IT&C market and we are aware of the opportunity we now have by diversifying our geographic presence and the areas in which we operate while increasing our revenue generating power at group level and optimising costs. Doubling in a single year (2022) including through acquisitions the total annual revenue generating power at the size of our group is an answer to the strategic questions that are constantly challenging us. Our focus remains on generating consistent long-term added value for shareholders. It is important to stress that generating consistent positive results for any acquired company (in any field not only within our group) requires a period of around 18-24 months to integrate, optimise, leverage synergies and scale the business.

I invite you further to deepen some significant elements related to IFRS accounting – what are the differences between the results presented in this document and the preliminary ones that will be published on 24 February, but also to read about the analysis of each pillar of our group structure.

Cristian Logofătu
Co-Founder of Bittnet Group