Welcome to Netcompany presentation for the annual report for the financial year 2023. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question and answer session. To ask a question, please press five star on your telephone keypad. This call is being recorded, and I will now hand you over to the speakers. Please begin.
Good day, and welcome to this presentation of Netcompany results for Q4 and full year 2023. My name is André Rogaczewski, and I'm the CEO and co-founder of Netcompany, and I'm joined today by our CFO, Thomas Johansen. Before we get going, there are some important disclosures that I need you to read through, so could we please have slide number two? I will pause for 30 seconds here and let you all have a read-through of these important disclosures. With that, can we please go to slide number three, please? The topic of today's presentation is our performance for Q4 and the full year 2023, as well as our guidance for 2024.
I will walk you through the business highlights for the fourth quarter and 2023 in general, and I will go through our financial guidance for 2024. And once I'm done, Thomas will go through the numbers in greater details before we open the call for questions. And can we have the next slide, please? We grew revenue in Q4 with 4.9% in constant currencies. Currency fluctuations impacted revenue growth negative with 0.7 percentage points, leaving reported revenue growth at 4.2%. For the full year, we grew revenue 10.7% in constant currencies, in line with the original guidance given at the beginning of the year.
Gross profit in Q4 decreased by 12%, yielding a gross margin of 28.9%, which was 5.3 percentage points lower than the same period last year. The lower gross margin was driven by lower margins in all business units, mainly due to the lower utilization, besides in the Netherlands. And Thomas will go more into the details behind the margin development in the specific regions. Adjusted EBITDA margin was consequently also lower in Q4 2023 compared to the same period last year. Adjusted EBITDA margin for the full year was 14.9% in constant currencies, in line with the updated guidance. We added 412 full-time employees when comparing to the same quarter last year, bringing the total FTE number to 7,765 and an increase of 5.6%.
During the year, we added a total of 778 full-time employees to the group and thereby increased FTEs by 11.3%. Can we go to the next slide, please? We have won several new contracts during the fourth quarter of the year, of which I'm mentioning a few here. In Denmark, we've been selected by the Danish Geodata Agency to take over the responsibility of the Danish cadastral system. We've been selected to implement our product for customs handling, ERMIS, in a European country, and we cannot disclose which, but clearly, we are glad to note that yet another product sale underpinning the importance of our go-to-market, market strategy with the increased focus on products and platforms is realized. In Norway, we've been chosen an exclusive strategic partner deal by Avinor, the operator of 43 airports and the airspace over Norway.
The agreement has a value of up to NOK 1.2 billion for the next seven years. In the Danish private segment, we've entered a technology partnership with BEC to replace the proprietary archive solution with a cloud platform, mit.dk. The solution is expected to handle documents for more than two million bank customers. Let's go to slide number six, please. In Netcompany-Intrasoft, we have signed several new contracts in the fourth quarter of the year, of which we are highlighting some here. In the European Union, we have signed a four-year framework agreement with the European Investment Bank for provision of IT consulting services. In Greece, we have signed two specific contracts under the framework agreement with the Technical Chamber of Greece. This project is funded by the RRF. Can we have the next slide, please?
In Q4 2023, we employed an average of 7,765 employees, which was an increase of 5.6% compared to the same period last year. On a sequential basis, FTEs in Q4 2023 were on par with FTEs in Q3 2023. In Intrasoft, employee growth was 10.2%, and in the UK and the Netherlands, employee growth was 13.1% and 24.6%, respectively. Churn for the last 12 months was 15.3%, which was a decrease of 5.9 percentage points compared to last year. Can we have slide 8, please? Before I get to the guidance for 2024, I would like to give my remarks to the year we've just finished....
Looking back at 2023, the year ended being as challenging as feared, with multiple external factors impacting our business throughout the group. Despite these challenges, we grew revenue in line with our financial guidance for the year at 10.7% in constant currencies, driven by strong growth in the international part of the group. In fact, all international entities grew more than 20%. This would not have been possible without our go-to-market strategy that we introduced in the beginning of the year. The strategy focuses on reuse of solutions that has already been implemented successfully elsewhere, and thereby benefiting both our customers and our business. Adjusted EBITDA margin for the year was 14.9% for the group, also in constant currencies.
Before provision for severance payments, margin was 15.1%, which was lower than in 2022, but still in line with our expectations and financial guidance for the year. Towards the end of the year, we've seen a shift in customer sentiment in the Danish private sector segment, and we have begun to convert pipeline cases, and our revenue visibility for the year has increased by 17% compared to the same time last year. And on the other hand, macroeconomic outlook still looks uncertain, though. Therefore, on, on balance, we expect to grow revenue between 7% and 10% and adjusted EBITDA margin between 15% and 18% in 2024. And with that, I will pass on the word to Thomas, who will give you a more detailed view on the financial performance in Q4 and for the full year of 2023. Thomas, please go ahead.
Thank you for that, André. And like already mentioned, I am the CFO in Netcompany, and I will now go more into details with the financial performance for Q4 2023 and for the full year. So if we move past the breaking slide number nine and straight into slide number 10 in one go, please. André has already spoken to our performance in general terms, and I will now go more in details with the performance for Q4 and for the full year 2023. Revenue increased by 4.9% in Q4, measured in constant currencies. Currencies impacted growth negatively by 0.7 percentage point, leaving reported revenue growth at 4.2% for Q4, mainly as the Norwegian kroner depreciated.
The growth was driven by double-digit growth in all of the international part of the group, offset though by the Danish business that realized a decrease in revenue in Q4 2023 compared to Q4 2022. As in previous quarters, prolonged decision processes and high uncertainty, mainly in the private sector, was the reason for the negative revenue development in the Danish business. The public segment in Denmark declined 1.9% in Q4 compared to the same quarter last year, and the private segment declined 6%, which led to a total decline of 3.6% for the Danish business unit. Despite the negative development in the Danish business, we saw positive signs during the quarter, and pipeline cases, in especially the private segment, started to convert into projects.
Netcompany-Intrasoft continued the strong performance and realized 10.5% revenue growth in the fourth quarter. The growth was driven by the public and EU segment that grew 13.9%, while the private segment revenue was on level with Q4 last year. In the UK, revenue grew 13.7% compared to the same period last year, thereby continued its strong growth momentum. Growth in Norway of 18.4% was driven by strong performance in the private sector and was mainly driven by one larger customer. Growth in the Netherlands was 48% in the fourth quarter, solely driven by strong performance in the public segment. And can we move to the next slide, please? Gross profit margin decreased by 5.3 percentage point to 29.3% in Q4 compared to last year.
However, this was an improvement sequentially from Q3 into Q4 of 0.4 percentage point. The decline was mainly caused by the lower margin in Denmark, which was 39.1%, compared to 44.9% in Q4 2022. The lower margin in Denmark was caused by lower utilization compared to last year, as conversion of pipeline still was affected by prolonged decision-taking, in especially the private segment during the quarter, which led to lower growth. As in previous quarters in 2023, the right sizing of the pyramid also impacted gross margin negatively, and in addition, provisions made for severance payment diluted margins, too. Margins in Netcompany-Intrasoft declined by 3.5 percentage point, negatively impacted by a relatively lower licensed revenue in Q4 2023 compared to the same period last year.
In the UK, margin was 23.4%, compared to 31.3% in the same quarter last year. The lower margin was a consequence of the continued preparation of tender material related to the DALAS Framework Agreement. Tender writing activities in the UK will continue to be at a higher level in the first half of 2024, as we continue tendering for projects under the DALAS framework. Margin in Norway decreased 0.9 percentage point in Q4 compared to the same period last year, but on a sequential basis, margin in the Norwegian business increased 17.7 percentage point compared to Q3 2023, as utilization increased during Q4. In the Netherlands, margin increased 6.9 percentage point and reached 30.4% in Q4. The increased margin in the Netherlands was a result of better project executing.
And can we move to the next slide, please? Adjusted EBITDA margin was 15.9% in Q4 2023. The seven percentage point lower margin compared to the same quarter last year was a result of lower gross profit and increased administration cost, which was also the reason for the lower EBITDA margin in Denmark. Netcompany-Intrasoft margin decreased by 5.5 percentage point, driven by the lower gross profit margin and higher administrative cost related to IT license costs for administrative tools, given the ongoing move to a common platform. Margins in the UK decreased by 7.6 percentage point to 11.2%, mainly driven by the lower gross profit margin. In Norway, margin increased 2.3 percentage point as a result of better utilization.
And finally, in the Netherlands, margin improved significantly by 15.9 percentage point and ended up at 13.7% due to better utilization and improvement in gross profit, as previously mentioned. Can we move to the next slide, please? Revenue grew 10.7% in constant currencies for the full year 2023, as a result of the strong international performance in the group that André has already mentioned. Total revenue in the Danish business was in line with 2022, despite a decline in revenue in the private segment of 7.3, as pipeline conversion was prolonged due to the high level of macroeconomic uncertainty during the year.
This was offset to some extent by the public segment that grew 4.9% in the year, purely driven by farming on existing customers, as no new legislation or tenders were introduced during the year. Intrasoft and the UK grew revenue by 20.6% and 21.9% respectively, both driven by strong performance in the public segment during the year. Norway grew revenue by 25.8%, driven by the private segment, and the Netherlands grew 44.7% by growth in the public segment. And can we move to the next slide, please? Gross profit margin was 28.3% in 2023, and 4.1 percentage point lower than in 2022.
The decrease was mainly caused by lower utilization in Denmark, but also impacted by increased business development activities in the UK, related to tender writing activities on the DALAS Framework. In the Netherlands, gross profit margin increased by 5.1 percentage points to 21.4%. The increase was a result of completion of legacy projects with low margins and better execution on new projects. Can we move to the next slide, please? Adjusted EBITDA margin before allocated cost from headquarters was 15.6% for the group in 2023, compared to 20.6% in 2022. The lower margin was a result of lower margin in Denmark and to some extent also Intrasoft and the UK. In Denmark, the margin declined due to higher level of forced churn, low utilization, moving costs and costs related to our go-to-market strategy.
In Norway, margin improved by three percentage points, and the improvement in margin is expected to continue into 2024 as a result of better project execution and higher utilization. In the Netherlands, margin improved by 14 percentage points, and the improvement again was driven by better gross profit margin and reduced global administrative costs. Can we have the next slide, please? Our focus on working capital management throughout the group, initiated in 2022 and accelerated during 2023, has led to a combined increase in accounts receivables and work in progress that was lower than our revenue growth. Despite the fact that a larger proportion of revenue in 2023 was generated under the RRF, with long work to invoice duration, while revenue from the private segment in Denmark, with short work to invoice duration, declined.
Work in progress increased by 3.2%, compared to revenue growth of 4.2% in the quarter and 9.6% for the last twelve months. Can we go to the next slide, please? Free cash flow was DKK 382.6 million in Q4, and the best ever quarterly free cash flow for the group. For the year, we generated DKK 552 million in free cash flow, yielding a cash conversion ratio of 135%, compared to a cash conversion ratio of 85% in 2022. We end the year with DKK 448 million of cash on our balance sheet, and our leverage remains unchanged at 1.4x, giving us a strong balance sheet momentum going into 2024.
Based on our strong balance sheet and cash flow, we have initiated the first tranche of our DKK 2 billion share buyback program by 2026, and we'll buy back shares for up to DKK 150 million from now until the first of May, 2024. And can we have the next slide, please? Revenue visibility improved 17.3% for 2024 compared to last year, and amounts to DKK 4.9 billion, of which contractually committed revenue amounts to DKK 4.56 billion. Non-contractually committed engagement amount to DKK 338 million. Visibility has increased by 19.9% in the public segment and 11.6% in the private segment. We see this as a clear sign that more public entities and private companies are increasing their willingness to increase their IT investments. And can we have the next slide, please?
Before opening the call for Q&A, I will give some comments on our midterm financial targets for 2026 and give some details on how we expect to reach these targets. To reach DKK 8.5 billion in revenue, our organic annual revenue growth expectations towards 2026 are as follows.... For Denmark, we expect revenue growth between 7% and 12%, as we expect both growth in the private and public segment to be more normalized than what we realized in 2023. For Intrasoft, we expect revenue growth between 5% and 10% towards 2026, as the extraordinarily high revenue growth in 2023 was driven by a significant ramp-up in projects under the RRF, which means that the 20% growth in Intrasoft is not likely to be sustained.
In the UK, we expect revenue growth between 10% and 30%, and for both Norway and the Netherlands, we expect revenue growth between 20% and 30%. EBITDA margin for the group is expected to reach more than 20% by 2026, and the building blocks towards a margin above 20% by 2026 from our 2023 level of 15% is broken down into five main buckets in the graph on your left. The primarily uplift in margin is expected from the increase in utilization in Denmark, which is expected to come back to previous levels as activity in the Danish business starts to normalize. Furthermore, we expect a positive impact on margins from positive earnings in Norway and the Netherlands.
This, combined with non-recurring impact on margin related to right sizing of the pyramid that we saw in 2023, continued margin improvement in Intrasoft, and flatlining of headquarters and go-to-market costs, will improve margin from the current level of 15% to at least 20% EBITDA margin by the end of 2026. As we have already highlighted, this morning we have initiated a share buyback program of DKK 150 million to be executed in the time from today until May 1, which is the initial tranche of our commitment of a DKK 2 billion cash redistribution, mainly as share buybacks, to our shareholders by 2026. And with that, I've concluded the detailed financial walkthrough of the numbers, and we now open up the call for questions. So if you move to the Q&A slide, please, and open the call for questions. Thank you.
Thank you. If you do wish to ask a question, please press five star on your telephone keypad. To withdraw your question again, please press five star once more. We will have a brief pause while questions are being registered. The first question is from the line of George Webb from Morgan Stanley. Please go ahead. Your line will now be unmuted.
Morning, André and Thomas. I hope you're both well. I'll start off with three questions, please. Firstly, on the 2024 revenue guidance, you've touched on the revenue visibility growth of 17%, which is clearly above the 7%-10% guidance range. How would we square those two numbers? Does that leave perhaps a little bit of risk for the upside if you execute through the year, or is there something else we should be aware of? Secondly, on the margin guidance range, I'm presuming you're expecting utilization to improve in 2024 in Denmark. So could you perhaps outline under what scenario margins might be flat at 15% this year, i.e., the lower end of the range? And then lastly, just on hiring in Denmark, 6% year-over-year growth in Q4. You seem to have...
That's not Denmark-specific, but you seem to have quite a lot of confidence around better demand conditions in Denmark in 2024. So how are you thinking about hiring plans and perhaps accelerating the hiring processes? Would be helpful. Thank you.
Yeah. Well, when it comes to the revenue and the visibility, well, it's actually very positive that we have such a great visibility and you might be saying that we are a bit conservative in the way we've been guiding here. But we are a bit cautious looking into also the slowness of decision-making, both in the private sector and also the public sector, to actually accelerate in Denmark. I mean, looking into the Danish market right now, we actually see the public sector waking up. There's a lot of legislation coming, and we also see private sector picking up when it comes down to investments into AI and data-driven larger projects.
However, you know, we need to see that materialize over the year, and that's, that's why we've been guiding as we have. When it comes down to your second question, in regards to the margin, I think also as Thomas alluded to in the introduction comments here, utilization in Denmark needs to get up. We will also see this, a similar margin pick-up in Norway and the Netherlands, but we need to see that materialize, and that's why we've been guiding the way we have. And I think 15%-18% is a responsible guidance in also in the macroeconomic environment that we are in. And when it comes to Intrasoft, the continued margin improvement there is also...
That relies on a long and steady project execution, both in Greece and slowly but surely changing the way we operate in the EU. So it's just looking at it, you know, it's a trend, and we know it's gonna happen, but we are just looking and observing it happening, and it's gonna be one long, great journey towards better margins and the revenue that we need, guiding for 2026, with the long-term guidance of DKK 8.5 billion in revenue and a +20% in profitability. So I don't think I can get closer to it than that. When it comes to the hiring, the third question, maybe, Thomas, you can comment on that one.
Yeah, sure. Thanks for the question, Sir George. In terms of hirings, as you can also see from the FTE numbers in our report, it has been fairly flat in Denmark for the last couple of quarters. Given the insight we have to our pipeline conversion and the forward look and the load, we are slowly beginning to see intake of new hires again in the Danish market, which is great. And that is also a testimony to our view on the Danish market for 2024. So we are beginning to see that in flow again.
Like André said, important for us to continue to focus on utilization, and we will. And to be specific in terms of what would be the case where we would be, you know, at the lower end of the 15-18, and the short answer for that is that we would see no improvement from 2023 into 2024, which is for sure not what we are planning on.
Very helpful. Thank you.
The next question is from Claus Almer, Nordea. Please go ahead. Your line will now be unmuted.
Thank you. Yeah, also a few questions from my side. The first question goes to this projects and pipeline within the Danish private segment. Do you expect the margins attached to these projects to be equal to what we are seeing in the past? That will be the first question.
Well, Claus, thank you for that question. Yes, we said before, you know, we need to get utilization up to the levels that we are used to, and the way we price projects and engagements and the way we execute upon them. Well, we've seen previously that we are able to have a great margin on those things, and of course, if we get back to normal utilization levels, we expect that to happen, too. I mean, there's nothing that should hinder us in getting to that point.
Okay, so underlying, you're pricing your project as you did back in, let's just say, before the COVID years?
Yeah, with one caveat. Remember that we introduced this sixth week of or additional week of vacation in Denmark and improved paternity, maternity benefit in 2022, which had a full dilutive impact on margin in 2022 and onwards of three percentage points. And those three percentage points, we're still struggling to get back. So with that caveat, yes, you're right in your assumption, Claus.
So as I recall, the CMD, you said that negative impact will be... There will be a catch up within a few years.
But I-
Like in 2024, that should be-
I heard the question towards 2024, and in 2023, as we've discussed a few times, that was not the year for us to start getting back on that. So fully remain committed to that, but I heard the question towards 2024, not towards the midterm guidance of 2026.
Fair enough. Then my second question is about the FTE. In the scenario where you grow your revenue by 7% and the scenario of 10%, how many more FTEs will you be adding?
That's a good question, Claus. And you know what the answer to that is, and that is that we're not really going to comment on that. Some of the revenue uplift will be from increased utilization, and some will be on FTE. And you might see a combination where we both have increased utilization and a FTE intake, which is then a sign that we are starting to be really busy. But I'm not gonna give you a percentage breakdown as to how much from 7%-10% is A or B.
Okay, and then just the final question. Pricing. So how much of a pricing impact do you assume in your guidance?
For 2024 or midterm?
Yeah. You can, you can answer on, on both, obviously, but, let's start with 2024.
On 2024, the margin guidance is not driven by a huge pickup in pricing. The same goes actually for midterm guidance, 2026.
What about revenue?
So revenue, yeah, I mean, revenue is driven mainly by increased activity. So it's volume driven, not price driven per se. Then, of course, there is-
Okay
... a change potentially in mix, and some of the different segments we have will have a higher revenue per FTE than others. But you're well aware of that, so it's just to make sure that you don't do a simple flatlining of the curve.
Sure. That was all from my side. Thank you so much.
The next question is from Yiwei Zhou, SEB. Please go ahead. Your line will now be unmuted.
Hi, thank you for taking my question. I also have a couple of questions here. Firstly, I remember when we went to sort of going to 2023, you said you couldn't pass the wage inflation to your customers. Could you also comment on the situation for 2024? Do you still have the same challenge, or it has improved?
I think the answer is... Or the question is, has a different impact for 2024 than 2023, all the time than in 2023, the underlying CPI, and especially in the month of November, December, and also early in the year, was between 8% and 10%. Right now, we see a much lower CPI and also a much lower salary inflation. At the same time, we've done a lot in terms of our pyramid structure in 2023, making sure that we have the right balance between junior, seniors, and the left- and the lot in throughout the pyramid.
So given the fact that we are not seeing the same high wage inflation pressure, and given the fact that we've done a lot to streamline the pyramid structure, and adding that increased activity will mean that we will hire more people, as graduates, we don't see the same challenge in 2024 as we saw in 2023.
Yeah, and maybe generally just-
Okay
... adding to that, there's also, I mean, the tendency or at least a trend where you see the heat on the IT resources has been going down a bit over the last six months to 12 months. That's not only for Denmark-
Mm
... but across Europe. So,
Mm
... you see, it's easier to get the right resources, and you also see, definitely, the levels of churn going down across the entire sector.
Great. Very helpful. And next question, could you maybe update the timeline for at least your expectation for the Danish public tenders? And you said in last quarter. Is it the same expectation? Could you remind us what the timeline is now?
Well, in general, you can see that the Danish public sector has an awakening happening. So there's a lot of legislation coming in through the first... I think the end of the first half year, you see much more coming in on the heavy welfare systems. And then you also see the first signs of-
Mm
... larger, big tenders coming out now. Some of them are very public, and some of them are still not known to the public, but they're planned, so, and several of them are already in the pipeline of larger Danish IT companies, including ourselves. And I, you know, the NemKonto is coming out. The student administration tender is also-
Mm
... even though it's divided into several parts, is also out there. And there's a lot happening on the legislation part with the reforms coming from government over the last six months and in the six months to come. So we see a different year in 2024 than in 2023. And we will see a pickup second quarter and coming into the third quarter for sure. There's a lot of tender activity going on.
Great. Very helpful. And, I will ask my last question, I jump back to the queue. That is regarding the Avinor contract. Could you maybe comment on how much you can utilize the smart airport platform? Yeah.
Yes, I think that the interesting part about the Avinor contract and basically all the various tenders that are related to our platforms, I think you'll see that the platform is extremely crucial in terms of picking and winning this one, but it's also the competencies and domain knowledge associated with the platform that is absolutely important. So the Avinor deal is basically about having the right domain skills and knowledge and the access to the platform, not necessarily using-
Mm
... the platform everywhere. And we'll see that happening, I think, across the entire sector of aviation, but also in airports, but also in other areas of transportation. So the Avinor deal is really basically a deal about having a lot of resources, helping Avinor to digitize the entire operation there, including maybe using parts of the platform. So the platform is not a particular part of this deal. This deal is basically having access to people who knows what to do and may be using the-
Mm
... parts or the whole platform in the next six years to seven years to come.
Which will then be added to the contract.
Exactly. Then that will be added to the contract. It's not even a part of the contract.
Mm
... but it's crucial in choosing the winner of the contract.
Okay. Very clear. Thank you. I jump back to the queue.
Thank you. The next question is from Jesper Stugemo from... Please state your own company. Go ahead, your line will now be unmuted.
Hello, Jesper Stugemo here from Handelsbanken. Thank you for taking my question. A few has already been answered, but follow up on the Norwegian contract here in Avinor. What does this NOK 1.2 billion in seven years mean for you in 2024? Will we see some already positive impact in Q1 here or more in the later part of the year? Thank you.
You will see some positive impact already in Q1 because the contract is very much about resources helping Avinor in various aspects and parts of their operation of the existing IT out there. So we will man up and start already now in Q1, so you will see an impact of that from the beginning of the year.
Okay. Very good, thank you. And my second question is, with regards to the UK framework agreement here. You commented on increased time spent for tenders within the DALAS framework, leading to lower utilization. But, can you comment a bit on this contract, how it will play out in 2024 in terms of the margins in the UK, do you see, and do you see that you have enough staff for taking on this such of task, or do you see any restraints here?
We do have the capacity both in the UK and with help from the rest of the group to write the tenders. These are large tenders, and they will materialize. Well, according to time plans, they will materialize and be selected. Winners will be selected during Q2, and then going into Q3, that they will be executed upon. So the first half year in the UK, we'll be spending some time in actually getting ourselves into positioning ourselves into winning one of these large tenders. And it's very big deals, it's part of our strategy. Just like with the Avinor deal, it takes time to position yourselves into it, but when you win them and when you start executing upon them, they are long-term deals with a very business critical nature.
So yes, I guess the short answer is, we still need some months to go in order to win one of these contracts, and then hopefully, during the second half year, you'll see more of an impact on the financial results of the UK office.
Yes. That also means that by that time in the second half of the year, when that happens, we will be adding additional resources to the UK.
Yeah.
Perfect. Could you say something about the margins here?
In the UK, for DALAS in specific? So, so difficult to-
Yeah
... difficult to comment in specific contracts. Also since we are on the framework, but we still need to win the contracts, which we are in the process of. What we can say overall is that increased activity in the UK will be accretive to margins in the means of better utilization, larger projects, where we can work with some of our unique delivery models. So that will potentially be accretive to margins when that happens. I'm not going to give you a number, Jesper, and you would not... Maybe you would want that, but I don't think you would expect me to be able to do that at this point in time.
Yeah, I see that. That's fair. Thank you. I will jump back in the line.
Thank you.
The next question is from Orson Rout from Barclays. Please go ahead. Your line is now open.
Hi, thanks for taking my questions. The first one is just on interest in profitability. If we adjust for the capitalized R&D, the margin there is now still at a very low 3%, and even despite the very strong growth this year, you saw margins contract. Now, in the midterm guidance margin bridge, interest in margin expansion seems to be a significant part here. So I was just wondering if you could touch a little bit on the levers and how you build conviction that you can expand margins within Intrasoft, even if growth is only going to be up 5%-10%, when margin was contracting last year when you saw growth at over 20%. That's the first one. Thank you.
Well, on margin and on capitalization and the like, Orson, thanks for the question. Also remember that part of the product development, if you so will, both for ERMIS and for SOLON, for PERSEUS and the like, is to the benefit of the group. So a number of these products are basically being sold and also generate revenue and profit throughout the group, which, of course, has a then accretive impact on the different entities in the group that are selling these products. It's not the full, but there is an impact on that.
Then when we compare margins in 2022- 2023, there was a higher proportion relative of software license or product license, if you will, in Q4 2022, mainly related to projects within Social Security. And that skewed the profitability bridge, if you so will, or profitability in Intrasoft in 2022, and then a little bit lower in 2023. We expect to see continued improvement in margin in Intrasoft, driven by even more product sales by more products under the RRF that tends to have a better margin than some of the other products.
We are comfortable that we will be able to get that margin increase that we have put in the midterm guidance of an impact of at least 2.8 percentage point.
Okay, that's helpful. The second question I have is just on phasing, and I guess in the industry, a big question is when, when are we sort of gonna see growth improve? And I was wondering whether the 4.9% organic growth in Q4 is something where you can say this is already a trough, and we think it's gonna improve from Q1 onwards, especially with the pipeline strength in Denmark you've been speaking to? Or is it a bit too soon for that, and do you expect that more to be towards Q2 or even second half, that sort of incline in the growth? ... Thank you.
Yeah, sure. And I'll, we'll talk on in general terms, also on, as we don't really guide per quarter. So overall, we do see better visibility going into 2024. It's no secret, and that has been the case throughout whenever we've reported, that when we start the year and we discuss revenue visibility, the revenue visibility tends to be, you know, higher in the close period compared to the end period of the year. That means that more of the revenue is contracted in Q1, Q2, and then less in Q3 and less in Q4, which is natural in a business like ours.
And then taking into consideration that revenue visibility is growing by 17%, you can draw the conclusion that it's probably fair to assume that we are seeing a growth in Q1, Q2, which will be larger than what we saw in Q4 on a sequential basis and also on a comparable basis.
Okay, that's very helpful. Then one final one, just on the fine related to the new digital mailbox or the suggested fine. It seems as if we shouldn't expect an immediate impact yet from a financial perspective, but was just wondering whether other Danish public entities had sort of raised it as an issue or been asking questions regarding that fine. Was also wondering, backward-looking, if the mit.dk contract was one of the reasons for perhaps weaker growth in 2022 and 2023. Did you have to make any sort of concessions as a consequence of sort of the problem in the first day that you saw there, or was that really a non-issue? Thank you.
No, that was really a non-issue. I mean, the event was a part of the launch two years ago, and it's been known by everyone in the public sector. Actually, before the date it was announced that we possibly could be fined in this. I think that fine, if it's gonna incur, it's gonna incur in one or two years' time or whatever. We, of course, contacted all the customers. So there's no surprise in this. It's been known for two years, and it has no effect on our overall relationship to the customers.
It's just part of everyday business that sometimes these things happen, and it's been approached very sensibly and doesn't have any effect on the, I guess, financials in 2024.
Okay. That's encouraging. Thank you.
The next question is from Gianmarco Conti from Deutsche Bank. Please go ahead. Your line will now be unmuted.
Yeah. Hi, thank you for taking my question. So I have three as well. Just if you could again touch base on the development of the new go-to-market strategy and tender writing, are you seeing traction in the use of your platform approach within new wins? And could this be a small contributor to your 20% margin target for 2026, given I'd imagine it's quite margin accretive. I'll go through questions one by one. Thank you.
Thank you for that question, and it's absolutely important for us that most of our tender activities, but also going to market and also in the private segment, is based on our platform, because of reusability and because of reliability in all the deliveries we do. So, without being too specific, I can say that we are very, very, very consequent in using our platforms again and again, not only in Denmark, but in every market. And will that have a positive impact on our margins? Well, that's why we do it. It is for sure. We cannot be specific about it, but for sure, that's one of the aims of doing it. Being more reliable and delivering on time and in budget will, of course, also increase our margins.
If you look at the bridge, Gianmarco, then you will note that to get to the 20%, we have not assumed that a lot of the margin will come from this go-to-market approach, meaning increased profitability from products and platforms. So that is another lever for the margin build-up towards the 20%. But it's not part of the assumption that we've made that all of a sudden we can only get there if we are very successful on our go-to-market strategy. Now, we want to do everything we can to be successful, and if that happens, and when that happens, that's gonna be positive to us.
Yeah.
Great. My second question is on the revenue guidance for next year. I saw you sort of informally guided for 5%-10% in the coming years on Intrasoft, and I was just wondering if you could touch base more on the levers as to why it's guiding so much lower than the 21% growth in 2023. Is it to do with having fewer opportunities up for grabs in the RF? And how exactly are you driving the margin increase in these projects, as you've briefly mentioned, that they're gonna be from the RF, and you're gonna get some higher margin projects there? Thank you.
Yeah. So the RRF is absolutely important, especially in the Greek market. I mean, we have won a great deal of tenders based on the RRF, and we don't expect that to continue in the same pace in the years to come. And to drive margin up, it's gonna be a question of executing and using the Netcompany methodology and even some of the platforms together with Intrasoft. So in the execution, project execution and delivery, we will slowly but surely try and drive margins up. But when it comes to revenue growth, we need to be a bit cautious because we've been winning a lot on the RRF, and we cannot expect that same very high growth rate caused by that particular institutional setup.
So you can view it in this way, Gian, so the high level of activity will continue, but if you look into 2023 and compare 2023 with 2022, then the public sector revenue increase, which accounts for around 15% of the total revenue in Intrasoft. That segment alone increased by close to 50%, driven by the RRF. And clearly we cannot expect, would be nice, but that's not how it is, to that to increase another 50%, simply because there's not that many projects. So 2024 will continue at the same high level, maybe a tad above, but we don't see the same build-up.
So when you look at Intrasoft in 2023 and 2024, view them maybe a little bit together and see the average, compare that with the previous revenue growth in Intrasoft of 78%, and you'll still see something which is very positive and for sure satisfactory.
Got it. And just my final question is, given the larger amount of tender activity expected in Denmark, in public over the coming six months to 12 months, won't this eat into your utilization rates for Denmark? I'd imagine you have to have a fair few people, you know, writing the actual tenders. And just as a follow-up from that one is, should we still expect a spillover effect in Q1 from the pyramid right- sizing?
No. So, I mean, the increased tender activity, we have the people that we need. We've right-sized the pyramid, of course, but we also took into consideration that we need to be able to deliver tenders in the high quality that we normally do. So that's already in everything that we've been right-sizing about. So no, it's not gonna affect the margins in that way.
And no spillover as we've seen in 2023 on right-sizing the pyramid, quote, unquote. And the reason why the impact was so profound in 2023 also had to do with the level of activity seen in the Danish business. Now as activity goes up, it's also much more efficient to manage that change to the pyramid.
Got it. Appreciate it. Thank you.
You're welcome.
The next question is from Mads Quistgaard, Carnegie Investment Bank. Please go ahead. Your line will now be unmuted.
Yes, thank you for taking my questions. I will take them one by one. So first, on the Danish public sector, is there any larger tenders which are set to leave your order books in 2024? Are you still able to maintain 100%, 100% re-win rate in the public sector? So basically, whatever you win in this period of time during 2024 will be added straight into your top line and will be contributing with growth. That'll be my first question.
Yeah. There's no, like, real big defense in the public sector in Denmark in 2024. However, many of the deals in Denmark, and some of them at least, are, you know, deals that are also very reliant on legislation, continuous legislation and changes into legislation. But there's nothing right now indicating that we need to defend a lot, and there's nothing indicating that the legislation will not go up. So taking those two things into consideration, overall, things that we win on will go on top of what was already there. But, yeah, some of the deals are of course, flexible, and if by any chance legislation will go down during the year, that can also affect negatively. But overall, there's no big defense going on.
Perfect. Thank you. Then I had a question on the, the margin bridge towards 2026, especially on Intrasoft, so the 0.8 percentage point. What is the impact on the 0.8 percentage point from the conversion of the independent contractors into perms?
Not significant.
Okay.
To say it in another way-
Very much
... we're not assuming to get to the margin by being able to convert 100+ freelancers.
Okay, good. Yeah. Then a question on the free cash flow in the quarter, which was extremely strong. Could you put some comments around your expectations for this year? Do you expect to continue with the improving working capital and so on?
Yeah. So we will refrain from commenting specifically on free cash flow. It is by nature a little bit wobbly from quarter to quarter. And therefore no specific comments on cash flow per se. We expect, and we will continue to focus very much on our working capital management. We will continue to see how fast we can move revenue from work in progress to receivables to cash. There are a number of things already on our plate that we expect to also be working on in 2024.
So, we will be diligent on that also in 2024, Mads, but I'm not going to give any guidance on cash flow per se. What we have said, though, is that we will buy back shares of at least DKK 500 million, so we will initiate the process towards the DKK 2 billion repayment by 2026. And clearly, that also is rooted in our expectations on our balance sheet and hence our cash during the year.
... That's very clear. Thank you for that, Thomas. Then my final question is on the client-facing employees in Norway, which is flattish on a quarter-over-quarter basis. You know, you have been awarded two large contracts in Norway right now in the beginning of this year. So I guess it would be fair to assume that you will increase the client-facing employees here, or will this be delivered on an existing bench, meaning a 100% utilization impact?
Great question.
Yeah, a very good question.
Yeah.
It's gonna be a mixture of that, and it's gonna be a mixture of that. And well, in Norway, yes, of course, very positive that we won these two great contracts, but we also had a breakthrough on the vulnerable children platform that we are rolling out to all the municipalities in Norway. So all in all, it looks really, really positive in Norway. And we are, we will be, of course, using some of the bench, but we'd also need to hire some new people there, and then we also help from Denmark. I don't think we can get closer to it than that.
All right. Perfect. Thank you.
The final question is from Aditya, from Bank of America. Please go ahead. Your line will now be unmuted.
Hey, this is Aditya from Bank of America. Thanks for taking my question. I only have a couple. Firstly, just going back to Denmark, the recovery you saw in client sentiment in the private sector towards the end of the year, can you just maybe talk about what sort of drove that and why you think that's sustainable going into this year? And then, second question, you saw a pretty big increase in profitability in Netherlands as well, and to an extent, Norway. So any comments on, again, how you're thinking about those two markets into 2024 and the sustainability of the margin increase there?
I think in Denmark, it's not like the sentiment in Denmark is much more positive than it was a year ago in the private sector in general. I don't think so. I mean, at least that's very difficult to say anything about, but about it. But when we look at Netcompany's GTM, go-to-market approach in Denmark, we are very much aware of which enterprises are really investing heavily into digitization, driven by, you know, they wanna be data-driven, and they wanna compete in a global setting, and they want to use AI and predictive AI on top of our solutions, and that is... We've been positioning ourselves into those accounts, and that is what we see as a very positive effect of all the work that has been done in 2023.
So that's why we see a more positive sentiment towards what we are doing at the moment. When it comes to the Netherlands, well, it's primarily in the public sector that we are operating in the Netherlands, and using our products and platforms from Intrasoft, combined with our platforms from Denmark, we see a pickup there as well. It's a very small office still, and there's still some work to be done in order to get to be known in the sector. But it's positive that we are busy again in the Netherlands compared to previous years, and I think I will leave it with that.
Maybe just to add to what André said on Norway and Netherlands on margin, as you specifically asked about. So the improvement in margin in Norway and Netherlands also has to do with the fact that we are now delivering projects much better and much more in line with how we want to deliver projects, which is positive to margin. As you'll recall, we had a number of projects that we took some write-offs on in Norway in Q2 2022, and we've had a suite of legacy projects that we took over when we acquired QDelft in Netherlands. So those projects have now been delivered, and that means that they are not, they're not dilutive to margin anymore.
So it's basically better project delivery and then continued the high level of activity, which is going to be accelerated even further, especially in Norway, with the contract wins that Mads was also asking about previously.
Okay. If I could just ask one follow-up. At the Capital Markets Day last year, you mentioned that you might give us some KPIs on KPIs to track the progress of the shift to using platforms more. Please share any color on that and what we should expect during this year.
So we are for sure seeing a lot more on products and platforms. It's still early days, and if you look at our revenue composition, it's still only 1%, which is driven by products, and our platforms are then clearly on a bigger part of our revenue. What we don't want to do is start to throw out a lot of KPIs too soon before they start to make sense.
Right.
So we will be readdressing and revisiting when to do that during the course of 2024, and then we'll engage with you guys in terms of what we will say, when, and how.
All right. Thank you.
You're welcome.
As there are no further questions, I will hand it back to the speakers for any closing remarks.
Well, thank you, everyone, and have a great day.
Thank you.