Today, we are launching a series of analyses on Connections, a digital transformation company listed on the Bucharest Stock Exchange (BVB) under the symbol CC. This initiative aims to offer a clear and detailed overview of our rapidly expanding business. 

Our goal is to consistently highlight the essential aspects of our operations, providing maximum clarity and an overall picture of the journey we are building day by day. For financial details, you can find us on BVB (CC), where we offer transparent and updated financial reports, or visit our website at https://connectionsconsult.ro/investitori-v2/ 

As part of our #ConnectionsCEOTalks series, we start with an intervii featuring Bogdan Florea, Co-CEO and founder of Connections. He provides insights into the developments of 2023 and our plans for the current year, exploring revenue growth in our business divisions, the strategic decisions impacting company growth, and the balance between local and international markets. We will also discuss ambitious profitability goals for the year ahead. 

Let’s proceed to the interview with Bogdan to delve deeper into the company’s activities and future perspectives. 

REVENUE DISTRIBUTION: 

IT vs. non-IT, local vs. global 

HOW DID 2023 LOOK FOR CONNECTIONS CONSULT? HOW DID THE COMPANY’S REVENUES EVOLVE BY BUSINESS DIVISIONS? 

In 2023, we observed a shift in the balance between our business lines, driven primarily by accelerated revenue growth in the software development and digital transformation team, making this division the primary contributor to the group’s revenues. By the end of 2023, the revenue breakdown by business lines was as follows: the BPO division accounted for 15% of the group’s total revenues, IT outsourcing/IT support contributed 5%, combined private and public software accounted for over 70%, RPA (Robotic Process Automation) represented 2%, and technology outsourcing or consulting accounted for 5%. 

Compared to 2022, we notice a difference, an increase, as mentioned, in the software development and digital transformation area, at the expense of the BPO division, which decreased from contributing 48% to total revenues to 15%. However, this decrease was only in terms of percentage of total revenues, as the absolute value of the BPO department’s figures remained the same as in 2022. This is due to the evident growth in the group’s revenues, a rapid increase in 2023, as we would say. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The revenues of all business lines, except for the digital transformation business unit, remained stable in 2023 compared to 2022, and we are pleased to observe a rapid growth in the digital transformation team from 2022 to 2023. So, we have stability across all lines and a very — I would say an impressive growth in the digital transformation area. 

WAS THE GROWTH OF THE SOFTWARE DIVISION A STRATEGIC DECISION OR RATHER MARKET EVOLUTION? 

The shift in revenue distribution within the group’s total revenues is the result of a strategy formulated around 2021, coinciding with our entry into the capital market (listing on the BVB). Its essence lies in our strong desire to migrate almost exclusively towards the technology sector. 

Looking back to 2021, when we made the decision to list the company or group of companies, we also had a non-IT sector that was closely tied to technology, historically providing significant cash flow and opening doors to potential technology projects through cross-selling effects. Our goal was not only to maintain but also to significantly increase the group’s revenues, shifting predominantly towards technology and especially new technologies in the service portfolio offered to clients. 

We achieved this by adding clients from the governmental and public sectors to the group’s portfolio, heavily relying on European funds. We all hope these funds will contribute to the digitalization of both central and local public administrations, along with the National Recovery and Resilience Plans (PNNR) obtained by all EU member states following the Covid pandemic. Through this blend of strategy and opportunities emerging in the public sector domain, we successfully shifted the revenue distribution, placing much more focus on the tech IT area. 

FROM A GEOGRAPHICAL PERSPECTIVE – LOCAL VERSUS INTERNATIONAL MARKETS? 

Historically, Connections has typically derived between 20% to 30% of its revenues from international markets, with some fluctuations up until 2022. However, starting in 2023, this percentage has seen a significant decline in terms of its share within the total revenue mix. 

In absolute terms, our revenues from international markets have remained relatively stable or have shown slight growth. Yet, due to the rapid expansion of local revenues, the proportion of international revenues has diminished in the overall revenue composition of the group. 

We remain dedicated to identifying new clients in international markets, actively pursuing relationships with foreign companies to enhance our overall revenue streams. At the same time, we are committed to nurturing our presence in the domestic market. 

In economic theory and practical corporate management, there is a straightforward principle suggesting that international expansion becomes feasible when a company establishes a solid foundation in its domestic market. Expansion here entails not only establishing subsidiaries abroad but also effectively penetrating foreign markets. 

Considering ourselves a medium-sized company, with potential aspirations to grow into a larger entity in the near future, we are encouraged by our robust stability in the domestic market. Strengthening our foothold in the domestic market presents promising opportunities for expanding exports in the near to medium term. 

This perspective is compounded by current global economic indicators, unfortunately forecasting a downturn in the months or years ahead, alongside a prevailing trend towards localization of services. 

We observe a nuanced philosophical underpinning derived from global political and geopolitical dynamics: companies are increasingly sourcing suppliers closer to delivery locations, which introduces certain barriers in engaging with foreign markets. However, technology remains a unifying factor in the global economy, where common language transcends cultural or national barriers. We maintain our interest in international revenues while concurrently focusing on serving our domestic market clients. 

INCREASING PROFIT MARGIN: CONNECTIONS’ FOCUS FOR 2024 

Regarding the profit margin, in 2023 we saw a slight increase in percentage terms as well as in absolute value. Due to revenue growth, we achieved significantly higher gross and net profit figures, but the percentage terms remain within the same range, around 8%. One of the major goals of the group is to achieve a double-digit gross profit margin, including EBITDA, and sustain it for the next 5 years, aiming for a gross profit margin of approximately 11-12%, certainly above 10%. For us, it’s important not only to quickly achieve this margin in a single year but also to sustain it reliably over the long term. 

HOW WILL WE MOVE FROM A SINGLE-DIGIT PROFIT LEVEL TO DOUBLE DIGITS? 

Unfortunately, there’s no magic solution; it requires a lot of hard work and a clear plan that the entire strategy and team must follow. 

We can increase operational margin, but this is more challenging considering we are operating in an already stable market. 

The main opportunity lies in optimizing expenses, focusing on delivering services much more efficiently. A project that previously took 3 months to achieve a certain result can be revised to be delivered in a shorter time frame while maintaining the same quality standards — this represents a significant internal improvement and enhances the professionalism we offer to our clients. 

Additionally, we need to manage fixed expenses, where Connections is already performing well — fixed costs represent less than 10% of total revenues, which is considerably positive in my opinion. However, we will continue to monitor and control fixed costs to increase our operational margin and achieve our profitability goals for the entire group. 

This is the major challenge for this year, and we must demonstrate how capable we are in managing these aspects. 

 

Artificial intelligence (AI) has become a transformative force in the global economy, with the potential to revolutionize a wide range of industries. However, its adoption in Romania still lags behind other European Union member states.

According to the “Digitalization in Europe – 2024 Edition” report published by EUROSTAT, only 8% of firms in the EU were using AI technologies.

Romania recorded the lowest adoption rate, with only 1.5% of companies using AI. Geographically, Denmark and Finland are leading (15%), followed by Luxembourg and Belgium (14%), while Romania ranks last (>2%) alongside Bulgaria, Poland, Hungary, and Greece (all 4%). Source: Eurostat – access to dataset

This gap is significant, considering that AI has the potential to increase productivity, improve operational efficiency, and create new business models. The low adoption of AI in Romania is likely due to a number of factors, including a lack of awareness of the benefits of this technology, limited access to resources and expertise, as well as an uncertain regulatory framework.

Recognizing the importance of AI for economic competitiveness, the European Union recently enacted the “Artificial Intelligence Act” (AI ACT). This law establishes a regulatory framework for the development and use of AI in the EU, aiming to promote innovation, protect fundamental rights, and ensure public safety.

Implementation trends of AI in several pioneering fields:

• Cybersecurity: AI is used to detect and prevent cyber-attacks. Algorithms can analyze data to identify suspicious patterns and take swift remedial action.
• Healthcare: AI is used for the analysis of medical images (X-rays, CT scans) to detect diseases such as cancer and to personalize treatments for patients, taking into account medical history and genetic factors.
• Finance: AI is used to detect financial fraud through the analysis of transactions.
• Manufacturing: AI optimizes production processes to increase efficiency and quality, performs automated quality inspections of products, and conducts predictive maintenance of equipment.

Current Trends in the AI Market

The global artificial intelligence market is experiencing rapid expansion. According to Forbes, the size of the AI market is projected to reach $407 billion by 2027. This rapid growth is driven by several factors, including:

• Increasing adoption of AI by companies: More and more companies are realizing the potential of this technology to improve operations, increase productivity, and create new business opportunities.
• Large investments in AI research and development: Governments and private companies are investing significantly in AI research and development, leading to the creation of new technologies and applications in this field.
• Increased availability of data: The amount of data generated globally is continuously growing. This data serves as fuel for AI, allowing algorithms to learn and improve.

The Forbes study shows that over half of business owners are already using AI for cybersecurity and fraud management, while 53% of companies are using AI to improve production processes, and 51% are using it for task automation.

The significant gap between Romania and other European Union member states regarding AI adoption reflects not only a lack of infrastructure and expertise but also a complex set of structural and cultural issues. While the EU is adopting legislation and investing in AI research and development, Romania faces challenges related to education, regulation, and digital infrastructure.

As our country aims to close the gap, it is essential to address these challenges in an integrated and strategically planned manner. Investments in education and professional training, creating a business environment conducive to innovation, developing digital infrastructure, and promoting collaboration between the public and private sectors are just a few of the key elements needed to stimulate AI adoption and harness its transformative potential.

The European Union is betting on the positive impact of artificial intelligence and will invest in AI research and development, providing companies with opportunities to obtain funding for innovative projects. It will also support professional training programs in the field, thereby encouraging them to develop the necessary resources to adopt artificial intelligence.

It’s a train that can make several stops in Romania if there are passengers willing to board.

Connections (AeRO Premium, symbol CC) has recently obtained authorization to use 5G infrastructure equipment. This authorization not only opens new opportunities for us, but also facilitates our customers’ access to the most advanced connectivity solutions.

In 2021, Romania adopted legislation aimed at implementing “measures relating to information and communication infrastructures of national interest and conditions for the implementation of 5G networks”, a law enacted following a recommendation from the European Commission.

Under Romanian law, Law 163 of 11 June 2021 states that ‘the use of technologies, equipment and software in information and communication infrastructures of national interest and in 5G networks’ is allowed only with authorization from the Romanian state. Thus, the obtained authorization validates our commitment to provide high quality services, respecting the highest technological standards.

With this authorization, Connections becomes one of approximately 40 companies in Romania that hold this authorization, which gives us the right to compete for complex projects both nationally and internationally.

This key step allows us to offer our customers the most advanced 5G solutions, paving the way for a new phase of connectivity. We are committed to bringing the most advanced technologies while meeting the standards required by the relevant authorities. As Romania moves towards the adoption of advanced telecommunications infrastructure, Connections is emerging as a leading player in shaping the country’s digital landscape.

With a broad portfolio of solutions and services, we are once again demonstrating our expertise and ability to adapt to the demands of the ever-evolving market, contributing to innovation and development in the field of connectivity. Obtaining authorization to use the 5G infrastructure equipment is an important moment for us, strengthening our position in the market and opening new horizons for innovation and development in connectivity.