Welcome to the Netcompany Interim Report for the first six months of 2023. For the first part of this call, all participants are in listen-only mode. Afterwards, there'll be a question and answer session. To ask a question, please Press Star five on your telephone keypad. This call is being recorded. I now hand it over to CEO, André Rogaczewski. Please begin.
Good day, welcome to this presentation of Netcompany's results for Q2 2023. My name is André Rogaczewski, 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. Could we have please, slide number two? I will pause here for 30 seconds 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 the second quarter, and I will walk you through the business highlights for the second quarter of the year.
I will also go through our financial guidance for 2023, which is maintained from what we communicated to the market in January, in connection with the release of our annual report for 2022, and again, in connection with the presentation of our results from the first quarter. Once I'm done, Thomas will go through the numbers in greater details before we open up the call for questions. Can we have the next slide, please? We grew revenue in Q2 with 15.7% in constant currencies, all organic. Currency fluctuations impacted revenue growth negatively, with 1.3% leaving reported revenue growth at 14.4%. Gross profit in Q2 increased by 10.6%, yielding a gross profit margin of 27%, which was 0.9 percentage points lower than the same period last year as expected.
We saw continued strong margins in the U.K. and continuously improved margins in both Netcompany-Intrasoft and in Norway and in the Netherlands. The main reduction in group margin is a result of lower margin in the Danish business. Adjusted EBITDA margin was consequently also lower in Q2 2023 compared to the same period last year. We added close to 1,000 full-time employees when comparing to the same quarter last year, bringing the total FTE number to 7,701, an increase of 14.6%. Can we have the next slide, please? We have won a number of new contracts during the second quarter of the year, of which I'm mentioning a few here.
In Denmark, we have won and re-won a number of contracts in the private segment, despite a clearly low activity level seen in that particular segment. This is important validation to us that the private segment indeed will rebound once the current uncertainty diminishes. In addition, we see more cases being driven by the potential use of AI. We continue to win new businesses in the U.K. and we have won a sizable contract with the Insolvency Service to modernize their technology stack over a three-year period. In addition, we have won a couple of significant and large contracts early in Q3 in the U.K. that will provide the foundation for continued high growth in the U.K. Can we have the next slide, please?
In Netcompany-Intrasoft, we've also signed a number of new contracts in the second quarter of the year, of which we have highlighted some here. A couple of contracts were won with the government of Greece, one being the contract to implement the new social security system in Greece. This project is funded by the RRF and includes the implementation of our product called PERSEUS, which is a complete solution for social security systems, also implemented in other countries by Netcompany-Intrasoft. A contract was won with the government of Austria to implement our product, ERMIS, which is the custom solution also implemented in Denmark, among other countries. In the private segment, a contract was signed with a major bank in Greece to expand the current relationship even further.
Alpha Bank already uses the product due to its experience for banking and is now digitizing the back-office operations into procurement, too. It is an important win in our ambition to continue to expand our footprint within the FSI vertical throughout the entire group. Can we have the next slide, please? The transition into a European IT service provider is continuing into Q2, and as of now, 28% of the employees are based in Denmark, a further reduction from Q1, where the share was 33%. Employee growth in Intrasoft was 14%, and in the U.K. and Norway, employee growth was 25% and 29% respectively. In uncertain times like these, I'm truly proud of our continued employee growth and our continued commitment to hire top talent in all of our markets.
Churn for the last 12 months is in line with historic perspectives at 17%, which is 7% lower than the same period last year. In addition, the composition of the churn has changed so that the proportion of involuntary churn has increased from 0 in 2022 to a level more in line with historical levels of Q2 2023. three months rolling churn rates have come down significantly in all countries, apart from Denmark and Luxembourg. In Denmark, the higher proportion of involuntary churn is keeping total churn at a higher level, which is as a result of the right sizing of the pyramid structure, as previously explained. In Luxembourg, the higher churn is a result of more external freelancers working for Intrasoft on EU projects, leaving than seen in other years.
The actual transition from freelancers into own employees for Intrasoft is not initiated yet. This is still expected to be initiated sometime during 2024. Can we have slide number eight, please? We have continued a strong growth momentum throughout the entire group, apart from the private segment in Denmark. Our margins in Q2 was in line with our expectations. For the first six months of the year, we have realized growth of 14.7%, measured in local currencies, and a margin of 14.4%. Despite the strong revenue growth in the first six months, we still see uncertainty in the remainder of 2023, and hence we maintain our guidance for the revenue growth of 8%-12% for the full year.
Margins for the first six months of 14.4%, which is slightly outside of our target range for the full year, just as it was in 2022. Last year, at this point in time, our margin was 16.7%, and we realized margins for 2022 of 20% as guided for. Based on past performance typically seen in the second half of the year, and based on our pipeline and ongoing projects, we are comfortable to maintain our expectations to a full year margin guidance of 15%-18%. With that, I will pass on the word to Thomas, who will give us a more detailed view on the financial performances in Q2. Thomas, please go ahead.
Thank you for that, André. Like already mentioned, I am the CFO of Netcompany, and I will now go more into details with the financial performance for Q2, 2023. If we move past the breaking slide nine and straight into slide 10, please. André has already spoken to our performance in general terms, and I will go more in details with the performance in Q2, 2023. Revenue growth for Q2 was 15.7%, measured in constant currencies. Currencies impacted growth negatively by 1.3 percentage points, leaving reported revenue growth at 14.4% for Q2, and the negative impact from currencies was mainly associated with the Norwegian kroner that has depreciated. Growth was above 25% in all units apart Denmark in Q2.
While we are still seeing the negative impact on growth from prolonged conversion time of pipeline cases in the private segment in Denmark, we are very satisfied with the international growth throughout the group. As mentioned, the results in the private segment was the main negative driver in Denmark in Q2. The private segment declined 7.8% as a result of these prolonged decision processes. Public segment in Denmark, on the other hand, grew by 9.8%. In addition to the soft performance in the private segment, the second quarter had one working day less compared to Q2, 2022 in Denmark.
This fact impacted revenue growth negative by 1.2% or 1.8% in Denmark in the quarter, and thus on a quote on like-for-like basis, revenue growth in Denmark would have been 4% instead of realized 2.2%, had the amount of working days been equal. Netcompany-Intrasoft continued the strong start to the year and realized 25.1% revenue growth in the second quarter. The growth was broad-based and driven by strong performance in both the E.U. the public, and the private segment. In the public segment, the contract signing of the customs project in Austria and the Social Security project in Greece further contributed to the positive revenue growth, with licensed revenue income recognized in the second quarter also.
In the UK, the growth was again driven by strong performance in the public segment, where we now start to see the result of the focus on platforms to support the sales processes. For the remaining part of the year, we expect that to continue and to be further enhanced. Growth in Norway of 58.5% was driven by both public and private segment. In Q2 last year, we made adjustment to projects which then impacted revenue negative by DKK 15 million. Adjusted for this, the underlying growth in Norway was still strong and above 25%. Growth in the Netherlands was 74.8% in the second quarter. As was the case in Norway, an adjustment was also made to a project in Q2 2022 in the Netherlands. Adjusted for this, underlying growth was above 40%.
The growth in the Netherlands is driven by strong demand for our solutions and significantly better project pricing and high utilization compared to last year. Can we move to the next slide, please? Gross profit margin decreased by 1 percentage point in Q2 compared to last year, which however, was an improvement sequentially from Q1 into Q2 of 1.1 percentage point. The decline was mainly caused by the lower margin in Denmark, which was 37.1%, compared to 34% in Q2, 2022. The lower margin in the U.K. impacted group margin to a lesser extent. As was the case in Q1, the lower margin in Denmark was caused by the impact from the change in composition of churn. We realized a higher proportion of involuntary churn in Q2, 2023 compared to last year.
In addition, the continued delay and prolongation of decisions on some projects in the private segment pipeline led to lower growth in Q2, also impacting gross profit margin negatively, as utilization was lower than in the same quarter last year. Margins in Netcompany-Intrasoft was improved as a result of better delivery on projects, and the positive impact from licensed revenue from two projects realized in the quarter two. In addition, a number of new projects were initiated under the RRF framework that tend to have a better profile for margins, as they are longer and larger in duration. In the U.K. margin was 24.5, compared to 26.8% in the same quarter last year.
The lower margin was a consequence of significantly increased level of business development and tender writing activities in the quarter, which have a dilutive impact on utilization and hence a dilutive impact on margin. These activities are needed, though, to generate the foundation for further growth, and the relative higher-than-normal level of tender activities and business development was due to the size of the tenders being worked on. In that aspect, it is highly positive to note the winning of two large and significant contracts early in Q3 in the U..K. These contracts will lay the foundation for continued high growth in the U.K. Equally important, they will enable the U.K. to expand margins due to the size and type of contract work in the future. Margin in Norway also increased, mainly as a result of better project deliveries.
In addition, the comparable quarter last year was negatively impacted by adjustment to projects. The increased margin in the Netherlands was a result of better project pricing, the completion of low-margin projects back in Q4, 2022, and the fact that the comparable period last year had an adjustment to one project impacting margins negatively in Q2, 2022, just like the case was in Norway. Can we move to the next slide, please? Adjusted EBITDA was 1.6 percentage point lower than compared to Q1, 2022, at 13.9%, sorry, Q2, 2022. Adjusting for the impact of one working day less in Denmark, group margin would have been 0.7% better at 14.6%.
The reduction in EBITDA margin realized in Denmark was a result of the impact from lower gross margin and the increased cost for the enhanced go-to-market approach and one working day less. Netcompany-Intrasoft margin increased by 1.9 percentage point, driven by better gross profit margin. The performance within Netcompany-Intrasoft continues to improve, and more joint projects are continuously building in the pipeline for the group. In the U.K. margin was 2.3% point lower, purely driven by the lower gross profit margin already discussed. Margins in Norway improved significantly by more than 26% point. Part of the improvement was driven from better gross profit margin, and in addition, administrative cost was lower, as there were no cost for severance payment in Q2, 2023, opposite to that of the same quarter last year.
In the Netherlands, margin improved by 39% point on better gross profit margins and also no cost for severance payments in Q2 2023, unlike in Q2 2022. Can we have the next slide, please? Work in progress increased by 28.2% in Q2, compared to revenue growth in the quarter of 14.4%. This increase is mainly driven by increased work in progress from Netcompany-Intrasoft, driven by additional wins of projects under the RRF. The development of work in progress on a quarterly basis will by nature be lumpy, as relatively large payment milestones in a given quarter will have a significant impact, on the total balance of work in progress.
As most of work in progress balance remains on our balance sheet for 9- 12 months, it is more reasonable to compare growth in work in progress to last twelve-month revenue, which in turn grew by 27.5%, supporting that work in progress is indeed increasing alongside revenue growth. Can we go to the next slide, please? The free operating cash flow in Q2 was negative, with DKK 72.5 million, compared to positive DKK 7.3 million in Q2 last year. Increased work in progress, as just discussed, was the main negative working capital change. On the other hand, days sales outstanding continues to improve, days sales outstanding was reduced from 77 in Q2, 2022, to 68 in Q2, 2023.
The overdue part of trade receivables was further reduced as relative part of total receivables from 39.7% in Q2 2022 to 35.7% in this quarter. The amount of trade receivables per 30th of June, paid in the month of July, also increased from 42.5% last year to 47.5% in this quarter. All are objective signs of the continued focus on cash collection and quality of cash and trade receivables throughout the group. We have also continued to deleverage in the quarter and repaid DKK 100 million on our bank loan during Q2, bringing the total repayment of debt so far to DKK 300 million in 2023. Leverage was reduced from 2.4 in Q2 last year to 1.7.
Free cash flow will, for all practical matters, be used to pay down debt further, and we expect to deleverage further from the current level during the remaining course of 2023. Can we have the next slide, please? While the level of uncertainty remains high in 2023, we do have a high level of visibility of our revenue for the year, as highlighted here Overall, visibility improved with 10% compared to last year and was almost DKK 5.5 billion at the beginning of July 2023. With that, I've concluded the detailed financial walkthrough, and we will now open up the call for questions. If we move to the Q&A slide, please, and open up the call for questions. Thank you.
Thank you. If you wish to ask a question, please Press Star on your telephone keypad. To withdraw your question, you may do so by pressing five star again. There'll be a brief pause while questions are being registered. The first question will be from the line of Austin Raikes from Barclays. Please go ahead. Your line will now be unmuted.
Hi, Austin Raikes here from Barclays. Thanks for taking my question. The first was just on Denmark, which obviously slowed quite significantly in, in the private segment, despite actually quite an easy comp. I was just wondering whether you can comment on the dynamics you've seen into Q3, because Q3 is obviously a significantly tougher comp, so could potentially see an even more difficult backdrop in Denmark in, in Q3. I was wondering whether at this point you feel confident to commit to growth in Denmark in Q3, or is there a real possibility of flat or even declining revenues in, in the Danish business? That's the first question I have. The second would just be on headcount. Obviously, you've continued to add headcount sequentially, and you're seeing headcount grow 15% year-on-year or so.
However, the top line implies guidance for H2, implies quite a slowdown. I was wondering with, with revenue implies the slowdown in H2, are you still looking to hire at similar rates to what you've been hiring at, so sort of in the mid-teens range? Or will you look to slow the headcount addition to protect the margin? Maybe as part of that, you could also touch on utilization and how you expect that to be impacted by the high headcount additions. Thank you.
Thank you, Austin. Maybe I'll take the first question. Thomas, you can do the second one. When it comes to Denmark and the dynamics of the private pipeline, well, as we also mentioned in the report here, decision-making processes are longer when we actually propose enterprise replacement of core systems. The good thing is that the pipeline is looking really even better, in a better shape than it was last year at this time, and the structure and the type of projects is definitely also better in the sense that they're bigger and more business critical. Going through Q3 and Q4, we expect to see some of that coming into the books and definitely help the situation in the Danish private pipeline.
I mean, I can't, I can't answer whether it's gonna be Q3 or Q4, but it certainly looks really promising. That's to answer the first question. To the second of the headcount, Thomas, you can
Yeah, and, and thanks for the questions, Austin. On, on headcount, there is this impact from the change in the churn, where in 2022, churn was 100% voluntary, and now there is a part of churn which is involuntary. That means that a number of FTEs that have been given notice are actually still counting as FTEs because they're still on, on, on the books, so to say, not generating revenue, but they're still there as cost. Until they are, quote-unquote, out of the books, you will see a little bit inflated high FTE level. That will come out of the books during the second half of the year.
Then you'll see a more, a more, adjusted, growth in FTEs, also reflecting the underlying, activity level. We are still, active in, in, in the, recruitment, market. Of course, we are, watching very carefully the underlying activity. However, we do not think that the current slowdown in the private business in Denmark, driven by longer decision processes, we do not think that that is going to be a, longer term, meaning, for the full 2024, for instance, issue. Therefore, we also need to make sure that we are, ready to, do the projects, whenever they, whenever they materialize. Right now, utilization is lower, from that, in, in, in the Danish private sector.
That also means that some of the revenue growth will be on existing FTEs, simply by increasing utilization, which of course will have an impact on numbers, and that's most likely gonna be in 2024.
Okay, that's helpful. Thank you. If I may ask one quick follow-up just on the attrition, given you touched on that. Obviously, a couple of quarters ago, it was a bit of a worry that attrition was too low in Denmark-
Mm-hmm
which led you to have to increase involuntary attrition. Now, looking at the three-month rolling basis, I noticed that especially the U.K. and Norway have seen churn come down quite a lot. Was wondering if this could become an issue and if you may have to start increasing voluntary churn in the U.K. and in Norway as well, or are the dynamics there slightly different from the Danish business? Thank you.
churn, churn in those entities will come up, and then we'll see that already from Q3 and onwards.
Okay, great. Thanks.
Thank you, Ulf. The next question will be from the line of George Treves from Morgan Stanley. Please go ahead, your line will now be unmuted.
Hey, morning, Andre and Thomas. A few from my side. Firstly, just on the, on the Norwegian business and the margins there. I think the commentary back at the first quarter stage is that margins would improve through the year. Looks like Q2 was a little bit worse than Q1, mostly on the private segment. A little bit of color around there, and your confidence that that will improve into the second half will be helpful. Secondly, just on the guidance range for EBITDA margins, still have that pretty wide, 15%-18%, full range. What in your mind drives an outcome now to the upper or, or lower end of that range? I think, Andre, you mentioned the 2 Q margins were pretty consistent with your internal expectations.
Is that in line with your expectations to a specific part of the range, so midpoint, low end, high end? That would be an interesting point. Lastly, curious as to how disciplined you're being on cost internally. Is it normal course of business around signing off discretionary costs? Or are there any tighter controls in place at present? Thank you.
Yeah, I can do the, the first two. I mean, the Norwegian business is definitely improving, and we have a much better pipeline now, and also converting some of that. I mean, that, that should help on the margins in the second half of the year. We have major engagements in the private sector as well. That should improve. When it comes to the range of the, of, of our expectations for, for the EBITDA, I think it has very much to do with the rate of converting the pipeline in the second half of the year. Now, the faster we start moving on some of the larger engagements, also, of course, in the Danish private market, the better it will help on, on the, on the margins.
When it comes to the cost structure and, our how conservative we are about that, Thomas, I'll leave that to you.
Yes. The main part of our cost, George, is, as, as you're well aware of, salaries are related to our FTEs. We are making sure that we are adjusting our capacity to the activity level to the extent that we can. We are prudent in that aspect. There are certain things that we continue to invest in because we believe that is the long-term right thing to do, which, for instance, is the enhanced go-to-market structure. We are already starting to see benefits from that. It would be short-term fixing an issue which would haunt us in 2024 and 2025 if we would try to save DKK 10 million on something, which we probably could, but it would simply be the wrong decision.
Where it makes sense, of course, we are diligent with our cost structure. There are also certain things that we will maintain in going forward. Just maybe one more comment on the EBITDA range. Clearly, we're not gonna give you a figure for if it's high or low, but some of the things, apart from what André also said, that can impact the margin is the type of contracts we win and how many of the contracts entail usage of some of our products. Now, in Q2, we signed two contracts down with Intrasoft, one with PERSEUS that has license revenue, and one with ERMIS in Austria that has license revenue.
Depending on how many of the contracts we convert in the second half, that entails products that will clearly drive license revenue, which have a positive impact on margin. But timing in there is difficult to predict, clearly whether it's Q3, Q4, or whether it slips into January. So those are some of the dynamics.
That's clear, Thomas. Just on that last point on the license front, obviously, Q4 last year for Intrasoft was very strong, and that was part of the reason. When, when you look at the pipe for the second half and, and acknowledging some things can always slip, but does that look strong to you in terms of where the license revenue could come in, or is it. You know, how, how would you describe that, I guess?
Looks strong.
Okay. Thank you.
Thank you, George. The next question will be from the line of Daniel from Handelsbanken. Please go ahead. Your line will now be unmuted.
Thank you, operator, and hello, André and Thomas. Yeah, a couple of questions from my side. Starting off, again, on the license revenue that you just touched upon. Is it possible to give any ballpark on how to pencil in license revenues ahead, i.e., looking at the contractual revenue that you have totaling DKK 5.5 billion, is it possible to give any, you know, percentage-wise, or, or you don't have that number, yeah, really? Just understand how to, yeah.
The realized, license revenue is part of the DKK 5.5 billion. The potential revenue from license-
Yeah
in Q3 and Q4 is not part of the, is not part of the revenue visibility because we need to sign those contracts, that will then entail it. But the EUR 30 million so far-
Yeah
is part of the 5.5.
Yeah. You only can tell us that the visibility or, or the pipeline for more license revenue growth is decent year-over-year. That is the fair assumption that you gave, I, I guess.
Mm-hmm. It's, it's, it's not that we don't have an.
Yeah.
It's not that we don't have, an, an idea of what it is, Daniel. It's just something we don't disclose.
Yeah.
But, uh-
Yeah.
To follow up on also what George asked previously, we do see cases in the pipeline, where we have a strong conviction that they will materialize, which also includes license revenue in Q3, Q4.
Yeah
... this year.
... Great. A-and may I ask, perhaps André, on the, you mentioned the freelancers, obviously up year-over-year, but the same % of average FTEs. But, but, if you, you, you talk about recruiting from these in 2024 timeframe, is this mostly on back of that you're awaiting the market development or? How, how would we can, can a ballpark say anything about the margining impact from, from the freelancers versus your own?...
No, I mean.
FTEs
In general terms, our strategy, and that, that's what we've been going for throughout the years, is to diminish the number of freelancers, of course. We're doing that in, in all core countries, and we've been very successful in doing so in the U.K. as well. When it comes down to Netcompany Intrasoft, we said already when we did the acquisition, one, two years ago, that we would also go and, and, and, and, and minimize the number of freelancers, but we won't start doing that before next year. That was what I alluded to. It's specifically for Netcompany Intrasoft, specifically also in Luxembourg. Right now, when we're winning new engagements with Netcompany Intrasoft, we, we are delivering those together as much as possible, and using all the resources that we have in the, in the core countries.
The existing engagements, specifically also in the E.U. are still, majorly exposed to freelancers because we still have a lot of people working thre on the E.U. engagements.
Mm-hmm
which is a structure that we will change gradually starting on from next year.
we've previously,
Okay
we've previously given some, some insight on the on the magnitude of the opportunity or the impact on, on earnings with that, Daniel. If we take-
Yeah
the freelancers in Intrasoft, for, and, and, and put them in, in broad terms, for each 25 freelancers that we can convert into our own employees, and this is then under the assumption that we have an effective pyramid structure and blah, blah, blah. For each 25 that we can convert, being, being freelancers to, to our own employees, we will see an improvement in margin, of, around, around EUR 1 million, or the equivalent of 50 basis points. That's for each 25, and, and there are 600 of them. We're not saying that we can go from 600- 0 in one year. It took us four years to go from 275- 40 in the U.K. but there are significant opportunity.
That's of course, some of the things we want to unlock and look into. Like Andre say, there are some legal and some contractual constraints as to when we can start that, because of the structure of the contracts within the E.U. here it's written, hard written in the contract, that, person A, B, and C needs to be on the project.
Mm-hmm.
We cannot change that, but we can start to look at that from 2024 and onwards. Of course, we will do that to improve our underlying margins.
Sounds great. I will get back to the queue here. Thank you very much, and good luck in Q3.
Thank you.
Thanks, Daniel.
Thank you, Daniel. The next question will be from Yiwei Zhou, from SEB. Please go ahead. Your line is now unmuted.
Hi, André and Thomas. Thank you for taking my question. I have two question left here, both are follow-up. firstly, I just also want to ask you about the Norwegian business. Could you maybe indicate a bit on what level of top line do you need to deliver in Norway for you to be breakeven? Could you also maybe comment or indicate if you are still use the Danish senior resource in Norway? I'll do next question, I'll do the next one later.
Yes. I have to disappoint you, Yi, but, you, you probably know what I'm going to answer.
Mm-hmm.
That is that we don't guide specifically per country. It's going to be difficult for me to give you a straight answer as to what kind of top line do we need to see to have some breakeven results in Norway. What we can say though, is that one of the reasons why we are positive on the development of the margin in Norway, is that part of the pipeline in Norway for the second half, also includes projects where a for Norway, a fairly nice amount of license revenue is part of the is part of the pipeline. Which of course will have a very positive impact on margin. That alone will will give some positive impact to margin.
I'm not going to-
Mm-hmm
to be more specific than that. There are still some Danish resources working on Norwegian projects. It is gradually coming down, but there are still some, which of course has a drag on margins, but it is coming down.
Okay, fair enough. My next question is on the Danish operation. 11% headcount growth in the quarter. I understand you have laid off some and which still book there. Could you maybe indicate the underlying sort of at hand growth if you adjusted for those layoffs?
Well, I have to say that the Danish operation is really running very well. I mean, in the public sector, we have seen a fine growth, doing a lot of things for existing customers, and pipeline seems to be bettering also starting next year. When it comes to the private line of business, I think the nature of the project has changed a lot over the last 9 to 12 months. We're seeing bigger chunks of work, much more business critical. Now, the things that we're doing with staff and, and, and taking care of the pyramid is c ompletely normal. We're back to normal churn levels in Denmark, and this is just running the business as we've always done for 23 years.
Making sure that the shape of the pyramid is as accurate as possible in relation to the work coming in. I think in both dimensions, we are in control. Now, we will see how developments will go in the second half year. We have a good pipeline, good visibility, and we also have the necessary tools to shape the pyramid in the right way. We'll be doing exactly what we've been doing for the last 23 years, actually.
Yes, without being too specific, way, but the impact of the FTEs would have been somewhere around 2-3 percentage point if they had been off. That's, you know, the magnitude.
Great. Just on a follow-up on this: if we assume, if we assume the private segment, private segment projects coming a bit later than you expected, let's say not in Q3, but in Q4, we should still see a short-term dilutive impact on the margin in Q3?
That, that's a detailed question.
Sure.
-on, on margin guidance per quarter, which, we generally try to, to stay away from. Overall, we are comfortable with the margin guidance for the year of 15%-18%, based on performance right now. Pipeline that we can see convert, the possibility also to short-term increase utilization, and things like that. In, in, in that aspect, we, we are comfortable for the full year.
Okay. Great, thanks. We'll jump back to the queue.
Thank you, Ivan. The next question will come from Claus Almer, from Nordea. Please go ahead. Your line will now be unmuted.
Thank you. Yeah, also a few question from my side. The first goes to the slide about UK business. You had a comment that you are having investment in business development cost. What does that actually cover? That will be the first one.
Thank you, Klaus. Well, it covers a great deal of tender writing. We literally had a breakthrough in the public sector in the U.K. Specifically, we're working a lot with on the, in the health area, NHS, but also working a great deal with customs and tax, and also defense. In order to get into those larger contracts and play that role that we want to play, we've been. It's been necessary for us to write some large tenders. All those investments into tender writing, I think, has been showing really, really solid results. Now we're, we're sitting with customers, building the right, the right things in the U.K. That's, that's, that's the, the major part of the investment, that's tender writing.
You both mentioned business development and tender writing.
Yes.
I thought business development be something different than, tender.
Yes. In, in our, in, in our terminology, business development covers both activities and hunting meetings, preparation.
Conferences
... conferences and, and, and all the things you do to make sure that you are on the radar screen when tenders come out. Business development is all of that, making sure that you are in front of the customer, making sure you do presentations, making sure you have meetings and prepare and all of that, which is basically then time that you cannot bill. Therefore, it has a dilutive impact on utilization and tender writing. Those are the two parts that goes into business development in our terminology.
Fair enough. The second question.
I think, I think so, Claus. I think that's what other companies would label as sales and marketing cost. But for us, they are in business development, and that's why they're part of the gross profit.
All well. Second question goes to the backlog. The non-committed part of the backlog, do you see changes to the time schedule, maybe even cancellations more than normal?
I guess the short answer is no.
Correct. The uncommitted part of the backlog, just also to reiterate that, is where we are working on projects that are typically rolling without a firm contract, but where we are doing critical work for the clients, so that basically, it would be very difficult for clients to continue to work if we were not doing the services that we're doing. From a pure legal perspective, it is uncommitted or contractually uncommitted work, but it is very certain. There's very, very little uncertainty in that part of the backlog.
Okay. Then, just a final question, going to the pipeline. As you didn't mention a sudden, you know, improvement in the conversion for pipeline to orders here in Q3, I guess that has not happened. Andrea, now, when you are out talking to these potential clients, what are they saying? Are they waiting for specific milestones, or could this just drag on for a number of quarters?
No, I, I did not say that it wasn't happening in Q3. I'm just saying it's happening continuously. Many of these decisions are based on a long-term, long-term cooperation with Netcompany. It's not just a project of three or six or nine months. It's actually something that we can do together for probably several years, which is also gonna change the entire core systems of, of our clients. I think in, in many respects, typically you have analysis phases going on. They could probably be prolonged by three or four or five weeks in order to get all the conclusions right before you take the final decision to embark into a real design implementation phase of a, of a larger program. That's just, that's just normal, especially when it comes down to larger projects.
Also, I think the first half of 2023, we've seen some kind of reluctance within clients because no one really knew how the, the financial environment would, would develop in the year. Now we see more comfort, but also we see more eagerness into investing into new technology, not only as a, as a tool to create more sales channels or service channels, but also in order to be more effective, even if times are a bit tougher. There's also a transition going from IT being a growth engine to IT becoming something that you use in order to decrease cost, and that's also something that the clients had to go through throughout 23. In all respects, I, I see a lot of very, very interesting dialogues where we continuously shape the deals.
I, I expect within the next quarters, those deals to come in.
Okay, just so I understand, it sounds like, you know, your gut feeling or your understanding from, from speaking to specific clients that, you know, late this quarter may, things will, will normalize and things will catch up. Is that how I should understand?
I cannot guide quarter by quarter. I would just say that continuously the dialogues are getting more mature, and we are doing, for most, most parts, we are already doing paid work in those dialogues, doing analysis phases, leading to more work. The, the exact timing of it, I will, I will not go into detail about.
Fair enough. That was all me. Thanks. Thanks so much.
Thanks, Claus.
Thank you, Claus. The next question will come from Charles Brennan from Redburn Atlantic. Please go ahead. Your line will now be unmuted.
Hi. Good morning, guys. Just three questions from me. Obviously, the growth recorded in the first half implies a deacceleration into the second half. I think the compound growth rate to get to your midterm target is just over 11%. What's driving that reacceleration? Is it, is it a mean reversion on the macro and uncertainty lifting off customer spend? Just some more clarity there would be great. At the start of the call, you mentioned AI coming on to customer spend. It'd be great to just really understand what exactly you're doing. Are you fine-tuning LLMs and data labeling? Just some of the services that you're offering as part of that AI offering would, would be great. More clarity. The final one is just on M&A.
Do you see any interesting opportunities at the moment, either bolt-on or, or larger? Just interested if there'll be an inorganic component of growth going forward. Thank you.
All right. Thanks, Harry, for the question. I'll, I'll take the first one and leave Andre to the to number two and number three. For growth in the second half and where that will end, a number of different building blocks, so to say. Clearly, some mix in terms of when we convert pipeline cases in the private sector. Also, what type of contracts we will convert. Some of them will have license revenue embedded, which will have a higher than normal amount of revenue simply because we're income recognizing upfront.
When we look at the second half, and how the 14.7 stacks up to the to the 8.12, we're still cautious with the Danish private sector. We'll see where that ends. Clearly, there are some, some positive signs, but there's still uncertainty. I'll basically leave it at that.
Yeah. When it comes to your question about artificial intelligence, I'm really happy about that question. I, I, I guess the work falls into three areas and, and in some cases, it's actually all three areas at the same time, and with some clients, it's only one of those three areas. Basically, what everyone is trying to look into right now is how to, to use AI in specific departments in order to automize specific roles. It could be within sales, service, or HR, and typically be using those language models for that. That's not the most important part of the work we do. It's a part of it, but it's not the most important part.
I think the most important part is, is looking into the self-service functions of larger corporations, where prompts will be replacing existing self-service functions, where simplifying the whole way of self-servicing and integrating into all the systems behind the scenes is crucial for many companies. The third area where we are certainly feeling a lot of interest and a lot of investments is into the what the area I call operational excellence, where real-time data and the capturing of data to be used for pattern recognition and, and optimizing operation is crucial. The airport, the Copenhagen Airport project, is an, is a very good example of that, and we have a platform that we call Pulse, which is assembling real-time data and ensuring, ensuring optimization of the, the core processes of.
of, of larger enterprises and even ecosystems of enterprises. That's, that's where we are, we are having the dialogues right now. It's really interesting dialogues, and we have platforms already in use that can be used for this. It's, it's, it's, it's truly exciting times, and I think all large enterprises are into these dialogues right now. When it comes down to mergers and acquisitions, I think we are always, in, you know, we always are looking, we should be. Where we are looking at, what we are focusing on is, of course, also to look into whether we can find platforms or even software products that could that could supplement and, and be a part of our offerings, whether it's AI or whether it's whether it's workflow or whether it's self-service.
We are always looking into platforms that we, we can use, even platforms within specific verticals or industry verticals. We have had several wins over the last year, where we've been using our own platforms or platforms from other vendors to come in and play an important vital role, whether it's public or private. We gave some examples throughout the presentation today. I think it's, it's evident that when you are... Especially when you're a new geography than where you are already known, it's important to have both the technology stack, the software with you, the domain expertise, and the references, and not only being saying, "Well, we're Netcompany. We are typically better at delivering." You need the other stuff as well. When we look at M&A, M&A subjects, we definitely look at software and platforms as well.
Very clear. Thank you.
Thank you, Harry. The next question will come from Balaji Thupati from Citi. Please go ahead, your line will now be unmuted.
Hi, thanks for taking my questions. two from my side, if I may. firstly, could you clarify the comment and presentation, stating growth is expected in both private and public segment in 2023? Is the reference for expectation of growth in revenue for 2023 for Danish private and public segment? the second question is, if you could provide update on 2023 FCF. In the beginning of the year, outlook was for growth in absolute terms over 2022. Do you retain that outlook?
The first question, Balaji, was, what do we expect in terms of full year, full year growth, in the different segments, in Denmark? While we don't guide specifically on public-private in neither of the geographies, we do expect public still to remain strong. The results of the private sector in Denmark will be very much depending on how fast we can convert the cases in the pipeline, as Andre has already alluded to, and we see some good progression in that. The second part of the question was difficult to hear, can you repeat the second question, please?
Second question was on FCF for the year. The outlook previously was for growth in absolute FCF over 2022.
On cash flow-
FCF-
or what?
Yes.
Yes, we still expect cash flow to be higher in absolute terms than it was in 2022.
If I add one follow-up, we have seen many global IT service companies highlighting, delayed decision-making in the private segment. Do you sense that after accelerated rate of investment in digitalization over the past couple of years, customers can actually now afford to make more major investments going forward?
Well, I, I think that's a good question. I think what I'm sensing right now is that there's a shift towards using technology and digitization, not only for, for, you know, digitizing existing growth patterns, but also to, to look at being more cost effective. There's also definitely a very, very big interest in how to use AI on top of existing technology stacks and older systems. That requires many companies to invest into data gathering, integration, all the boring but tough parts of any IT engagements, because AI in itself is very, very promising, but you can't really use AI without data. Getting into the data layers of the businesses in an intelligent and, and, and, and not polluted data is actually difficult for a lot of large enterprises.
What we are seeing, especially in the private sector, is a bigger incentive and also eagerness, actually, into getting to know one's own data and how to get into that. This is an area where we are very well situated, both with our platforms, but also with our competencies. There's a shift going on towards this. I think it's very promising. Hey, private business is always, when you look at it, private enterprise business is always much more fluctuatious and maybe more exposed towards general financial feelings and terminologies and, and how the world is evolving.
I think overall, digitization, AI, integration, and data gathering is gonna be a key driver for this sector, and I think it's gonna be very important for Netcompany, and this is, this is an area where we are still investing, and I, I see a very promising business development in that area.
Very helpful. Thank you.
Thank you. The next question will be from the line of Aditya Buddhavarapu from Bank of America. Please go ahead, your line will now be unmuted.
Hi, Andrea, Thomas. Thanks for taking my questions. A few from my side. Firstly, I can see in the presentation on slide 23, you give a breakdown of the working day impact for the different markets. I, I, I think in Q3, you have 1 less working day across all the markets, and then in Q4, a couple more. Could you just maybe, you know, talk about the impact of fewer working days, on, in Q3, Q4 at, at maybe the group level? That's the first question.
Yeah, you're absolutely right, Aditya. Thanks for the question. Fewer working days have a negative impact on revenue growth, as it had in Q2, it also have in Q3 and Q4, both in Denmark and Norway, and one less in the UK and also in the Netherlands. That means also, and that's also coming back a little bit to one of the questions that was asked previously by Harry, in terms of what is some of the drivers for the acceleration or lower growth in the second half, is there are simply fewer working days.
In general terms, one working day less is to the tune of 1.5% point in negative impact on growth. There will be that impact in Q2, sorry, in Q3 and Q4. That is already taken into account when we guide for the full year. It will also have an impact on margin, huh?
Yeah, understood. Thank you. On the go-to-market approach, I think you talked about DKK 7 million impact on admin costs in Q2, a similar level in Q1. I think based on what you said at the beginning of the year, should expect a similar impact for the second half as well, so roughly DKK 14 million-DKK 15 million?
I didn't get the first part of the question, sorry.
The investment in the new go-to-market approach.
Oh, okay. Yes.
I think you said in the release. Yeah, yeah.
Same, same, same level throughout the quarters. The same, same, level in the second half as in the first half. Yes, correct.
Understood. Okay, probably we shouldn't expect any more impact from the headquarter moves in the second half of the year. That's all done and forgive?
Correct.
All right, on the free cash flow, you talked about the work in progress impact related to RRF projects. Given what you've said on the RRF pipeline, over the next few years, should we assume that maybe in general, this should become a larger feature of the free cash flow, or a large part of the overall work capital cycle, over the next few years then?
Right. It, it will fluctuate, work in progress will fluctuate, and, and it's, it, it can lead to wrong conclusions, looking at work in progress on a quarterly basis, alone. If we look at work in progress to, to overall revenue, and if the, and if the split between public and private is more or less the same, then, overall, on a yearly basis, you'll not see big fluctuations. There can be fluctuations within the year. That has to do with when different, projects are hitting different payment milestones, whereby we are allowed to invoice, which we can then subsequently, subsequently collect. Like I said, typically a project sits on the balance sheet of, you know, nine, 12 months in, in work in progress.
That does not mean that all projects are then being invoiced in the 11th or 12th month. Some have milestones in the middle of the project, and some have in the end of the project. Depending on the composition of that project portfolio going into work in profit, work in projects in progress, sorry, it will fluctuate from quarter to quarter. But on overall, if you look at it on an annual basis and if you then also add trade receivables, then you should be, you know, more or less in line. It can fluctuate a little bit from year to year, but it would be, you know, more or less on a stable level.
Okay, sorry, so just to follow up, is there anything structured related to the RRF projects which, which means that, you know, there's a, that there's a different working capital cycle for those?
The composition in Intrasoft is different because a lot of the contracts that are won right now are based on RRF, which means that they are fixed fee driven with payment structures. A majority of the work that was driving growth in 2022 was more related to E.U. business because the RRF was not that active yet. That is more time and material. The composition of the type of work that Intrasoft is doing is having a negative impact right now on work in progress. That's actually a positive thing because, I mean, of course, we want our money, but at least we get a lot of projects initiated from the RRF, and the RRF is money that will be paid.
It's guaranteed by the European Union. We're not too worried about tying up work in progress in there. If you understand me correctly, of course, we want to get the cash flows as soon as possible, but this is just a thing that we cannot get out of, and there's a difference in mix of the revenue growth in Intrasoft.
Okay, understood. Then the last one from me. You called out the business development costs and tender work in the U.K. impact the margins. Again, is there anything specific to the UK which, which made you call that out? Because I assume you've, you know, bid for similar large contracts in, you know, Denmark and other markets in the past. Anything specific why the U.K. has been called out this time?
It's, it's some really, really big things they're working on.
Yeah.
That's why there is this large impact. So it is really, really big, not just for the U.K. but also for the group.
Yeah. As you, I guess as you bid for more of those contracts, then should we expect, you know, more of that impact in the second half or, you know, going forward then?
Yes. Second half already-
Okay.
Then, and then, laying a foundation for continued, strong growth, in, in, in multiple years going forward.
Okay, great. Thank you.
You're welcome.
Thank you. The next question will be from the line of Mads Criscoll from Carnegie. Please go ahead, your line is now unmuted.
Yes, thank you for taking my questions. I will take them one by one. First one, coming back to Denmark. The public sector is once again down to single-digit growth. Can you maybe talk a bit about the timing of the outcome of the larger public tenders in Denmark? That'll be my first question.
Sure. Thanks for that. Yeah, if you look at 2023, there hasn't been that many large, huge tenders in Denmark. There's been a great deal of work on existing contracts and renovating existing systems. Now, we see by the end of this year and 2024, there's much more happening. There's gonna be new tenders coming out. The tender for the new student administration system is out again, and there's also commission working right now on which rules needs to be changed, both for social benefits and other vital areas where the company is present, delivering the IT services for that. There will be more happening, definitely by the end of 2023 and the whole of 2024.
When you look at the the existing engagement and the digitization level in Denmark, I think we can expect that we can still and remain confident that we can create the necessary growth. I mean, it's single, single digits, yes. I think it's this quarter, it's almost 10% on existing business. It's a solid a solid base, and we expect more to happen over the end of 2023 and 2024.
Okay. Thank you. Then I have a question on Free Cash Flow. Again, you, you commented that it, in absolute terms, should be higher this year compared to 2022. Any specific timing on the third and the fourth quarter this year?
Thanks, Mads. No specific timing on quarters. To reiterate, we try to stay away from guiding specific on quarters. We do expect cash flow overall to be higher for the full year. That is going to be driven by projects hitting milestone payment milestones being collected, and then performance in the second half of the year also, but no specific comments as to whether it's Q3, Q4.
Okay, fine. I, I was just thinking that you, you first have to convert it into to trade receivables and then convert it into cash. I was just guessing that quarter four might be, you know, stronger from a Free Cash Flow perspective, but, I might be wrong.
I'm not going to comment on that because then I'm going to answer the question that I was trying not to answer.
Fair enough. The, my last question is on the margin bridge, which you announced in the annual report. You also gave some insights into, to the different aspects here and the timing of that, but maybe you can comment on what. You know, also, especially on remuneration, which is also expected to impact the third quarter. What is sort of left in terms of the phasing of the, of the full year cost?
In terms of remuneration, the vast majority is embedded in Q1 and Q2. There's gonna be little bit in Q3. But the, but the majority of that impact from the bridge has been observed, absorbed, absorbed, sorry, during Q1 and Q2, mainly in the Danish business.
Okay. Then you have the working days impact, will the mainly be in the third quarter and the new go-to-market, which will hit the, the year equally, right?
Yes, correct.
Okay, good. Thank you.
You're welcome.
Thank you. As there are no further questions, I'll hand it back to the speakers for any closing remarks.
Well, thank you everyone, and have a wonderful day.