Welcome to Siili's Result Info for first half of 2023. My name is Tomi, and I'm the CEO of Siili. Before we get to the actual agenda of today, a few practicalities. If you have any questions or comments during this session, there should... I can't see it, but there should be somewhere a, a chat box or something like that. If you can, please write your questions or comments there, and we will answer those during the session or in the end of the session. Aleksi will join me here, and then we will answer your questions. Today we will go through the key highlights of the first half 2023, and of course, the numbers as well. I have here today Aleksi with me.
Aleksi is our CFO, and he will tell more about the numbers in a minute. Today's agenda, we have basically three parts. First, I will talk about the highlights of the first half. Second, Aleksi will go through the numbers. Then, in the end of the session, we will look a bit on how the future of Siili will look like. Then, of course, your questions and answers as well, after that. Right. Before I get to the highlights of the first half, maybe a few words about Siili in case it's not that familiar to all of you yet.
So the first, in one sentence, Siili is a full-service development partner for digital, advanced digital solutions, and that's, that's in one sentence what, what we do. We are a European company. We operate in eight countries in Europe and in U.S. Our development centers are in Poland, Hungary, and Finland, and we have customer care sites in Central Europe, a few countries, Central Europe, then U.K., and U.S. as well. We operate in eight countries, and we have 19 locations in total. What do we do? Custom software is, is our thing, so we are a software development company. We don't have own products.
Uh, we do- We are a service company focusing on, on software development, and we provide the whole, um, whole, uh, range of services. Typically, we start with the, uh, of course, together with, uh, with our clients, uh, with the innovation part first.... uh, so we, uh, maybe renew some, uh, uh, processes, sometimes it's completely new ideas, depending on, of course, on, on the case. But then after the innovation, uh, phase, uh, there's a design phase, which typically involves the, the business process, uh, design, um, as well as, of course, the UX, so the user experience, uh, design. Uh, then after the design phase, we build the, the actual, uh, software, and that's of course, majority of, uh, of the work, uh, is related to, to building the software.
We test the software, and then, of course, run it, so we have the maintenance services as well. We have a full range of capabilities: data, AI, automation, robotics, you know, design, of course, software engineering, obviously, testing, and cloud services as well. Our customers, our clients, our client base is diversified, and typically, we have very long-lasting relationships with our clients. We mainly work with big and mid-sized companies as well as with public sector. We have a global brand, of course, local companies as well, global brands as well as our customers, Ford, Daimler, and Zalando, for instance.
More than 90% of our business is time and material based, so which means, of course, that our risk level is in that respect, the business risk level is rather low. Public sector is clearly a, a potential. We are active, of course, already on the public sector, but that's clearly a potential growth area that we have identified for ourselves. Then if I move on to the highlights of the first half, and first a bit on the numbers. So the first half was actually quite, I would say, exceptionally kind of that the...
I mean, the first quarter was still quite okay, so the revenue was quite okay on the first quarter, and then the second quarter, the on the second quarter, the market quite changed quite a lot. We, on the profitability side, we were disappointed on the profitability level of the first half, and particularly on the second quarter of this year. The key numbers. These are the first half numbers. We made roughly EUR 65 million revenue, and that meant 11% growth, and out of that, a bit less than 6% was organic growth.
On profitability, our EBITDA was EUR 5 million, and that equals to a bit less than 8% as a percentage of, I mean, EBITDA percentage. Our share of international revenue was 26%. As said, Aleksi will later today, Aleksi will go through the figures in more detail. Maybe to point out a few factors behind the numbers. In Q2, our growth was lower than expected, as the demand on the market clearly cooled down. As the demand slowed down, there was excess capacity on the market. We had excess capacity as well as our competitors, and that led to tougher price competition.
Unfortunately, we failed to adapt ourselves fast enough to, to this changed market conditions, and that, of course, impacted our our profitability level. At the same time, when the, when the demand slowed down, then the cost level increased due to the inflation. No, no news there, but because of the inflation, the cost level increased, and of course, we were prepared as such for the salary inflation, and that, that was expected. However, due to the changed conditions on, on the market, you know, meaning in practice, the tougher than expected price competition, it was difficult and challenging to reflect the increased costs to, to our sales prices.
The cost level, it's nothing new that the salaries are increasing in this business and industry. Earlier, it was much easier to reflect the... You know, as the demand was higher, it was much easier to reflect the increased costs to sales sales prices. There was quite a essential change on the market conditions on particularly on the second quarter this year. It's been, I've been, I've been talking about this, I would say, probably a year now, that we are expecting that at some point, the market has to change. I mean, the market has been pretty good or very good for now more than 10 years, so it can't last forever.
So that, in that respect, it was expected that at some point, the market will change, of course, we didn't know when. However, it was difficult to, to do kind of, relevant actions in advance. For, for instance, cost cutting in an environment and in circumstances where you're competing... I mean, there was a tough competition for the past 10 years on the talent, and if you start to do cost cutting or some similar actions on that kind of conditions, then obviously, then you start to lose talent, and, and you have to be very careful on, on that. Therefore, you know, it was difficult to do such actions before the actual- I mean, the actual change on the market conditions actually happened.
Uh, so now I would say that, uh, that what, what I feel and what we feel, that now the key thing is to, to adapt on, on the change, uh, conditions, and I'm confident that, uh, we will do that, and, uh, we can do that. And later today on this session, I will get back to on, on the actions that we are, uh, we are planning. Then, a few other highlights of, uh, of the first, um, half. Uh, so on the client side, uh, we got several major wins, particularly on, on the public sector. And due to the increased uncertainty on, on the market, uh, uh, we aimed to secure, uh, some long public sector contracts, and we were actually very successful on, on that. So for instance, we won a big contract with, uh, Verohallinto.
Verohallinto is the Finnish tax authority. On the people side, we got our first own collective agreement in April. That was a big thing for us as a team and as a company. We, in a very good spirit, we negotiated, negotiated the contract with the employees, and we got several good things for the employees on the collective agreement. Also, from the investor perspective, I mean, the new collective agreement will also help us to secure the profitability level in the future, as starting from next year, the salary increases are linked to our profitability level. If our profitability level decreases, then the salary increases are linked to that, and that's starting from next year.
Also on the people side, we managed significantly to decrease our attrition rate from previous years, so very happy to. I mean, that was a, of course, a happy thing and good thing for us. A few other things. We acquired a software business from a company called Talentree, and as a result of that, we got a new office in Kuopio. By the way, I'm born in Kuopio. Kuopio is a very nice, nice town. Also we established a Siili Spaiks subsidiary for Siili, and Siili Spaiks will focus on AI-assisted software development.
I strongly believe that the AI-assisted software development will be a big thing in this business in the coming years, we always been a forerunner in software development, and of course, therefore, we want to take a role and have a very forerunner role also on the AI-assisted software development, and that's why we set up a Siili Spaiks. In January this year, we organized ourselves based on client domains, and that was to increase even further our client centricity, so that's of course important for us. Our returning client rate remained high, and it's clearly above 90%. Right, so if now next we move on, move on to the figures, Aleksi will tell more about the figures.
Thank you, Tomi. Let's take a brief look into Siili's first half financials. As Tomi mentioned, Siili continued the growth, but our profitability was below target, especially on the second quarter, mainly due to the quick change in the market environment. Starting from the revenue side, revenue growth continued, but the pace was lower than previously. Our first half ended with the revenue of EUR 65 million, roughly on group level, with growth rate of 11%, compared to over 20% the year before. Organic growth of the first half was below 6%, again, respectively, the year before, over 16%, so a big change in the organic growth.
The change was mainly on the second quarter, when overall group revenue grew by roughly 7%, compared to over 17 the year before, and the organic growth rate year last year second quarter, was the same, 17%, and this year only + 3%. Of course, second quarter was partly affected by lower number of working days, and that affected the growth rate. However, main reason was the rather quick change in the, in the market environment. On last 12 months, pro forma basis, Siili Group revenue was at the end of first half, in total, EUR 126 million, which is obviously our highest revenue number. Our international business faced also the headwind during the first half.
However, despite the situation, the overall share of international revenue from the group revenue amounted to 26% from previous year, 24%. Organic growth on the international business was still on very good level, exceeding 20% from first half last year. Since 2016, Siili International revenue has increased by average growth rate of 36% annually, and obviously it represents now even more important part of our group operations. On rolling 12-month basis, the international revenue at the end of first half was EUR 33 million. Moving on to profitability side, as mentioned, profitability declined from previous year, and EBITDA margin at the end of first half was roughly 8% compared to 11% last year, first half.
We faced more demanding market and at the same time, higher cost base, especially during second quarter compared to last year. Both these factors affected negatively, especially the second quarter profitability, where EBITDA margin was just over 5% versus almost 10% last year. We do have various actions ongoing, how we're adapting actively into this new situation, and Tomi will get back to those later in the presentation. From the headcount, we, we continued our recruitment, although kept really focused in, in efficiency of our operations. Year on year, Siili Group headcount increased by +13% compared to first half last year, and at the same time, the attrition level was slightly lower during second quarter compared to previous year. We managed to, to retain and develop our key competencies.
We have a very strong financial position, despite the challenging conditions. We had almost EUR 29 million in cash at the end of first half. Our equity ratio exceeded 40%, and net debt to EBITDA was close to zero, so we have a healthy balance sheet. Siili has a good financial position to move on, even in the more demanding situation. Finally, as a technical reporting matter, I'd like to mention that, starting from this year, Siili will be reporting adjusted EBITDA as an additional profit and profitability KPI. The definition can be found from our first half report, but mainly all the adjustments relate to items, material items affecting comparability, like M&A and that kind of items between the years.
As of first half this year, there were no adjustments reported. Tomi, over to Tomi.
All right. Thank you, Aleksi. Right, so next, a few words on going forward, so how the future of Siili looks like. The first, as I mentioned, we updated our guidance and because of the uncertainty on the market, our updated guidance for this year is that we estimated the revenue between EUR 120 million- EUR 140 million, and EBITDA between EUR 8.3 million - EUR 11.8 million. And although we changed the guidance for this year, we did not change the long-term financial targets, and that's because the...
Although the, the market conditions at the moment have changed and are more clearly more difficult than, than earlier. We expect that the, that the kind of mega trend of digital development and software development, that that's, of course, here to stay. In the long term, we expect that that the market, I mean, of course, we don't know when the, the market situation will get, get back to more kind of normal, but sooner or later, we believe that, of course, that will will happen. That's why we didn't change the long-term funds targets for for us. A few words on what we are planning to do and how we are adapting ourselves on on the changed market conditions.
As I said in the beginning of the session, that I believe that the, the most important thing is now to, to adapt ourselves on, on the changed situation and conditions. There is... No, it's not, I wouldn't over-dramatize the situation. Yes, the conditions have changed, but, but, you know, kind of, if you look at it, you know, longer run, then sometimes market goes up, and sometimes it goes, goes down. So now regarding the revenue, so first of all, we continue to focus on, on the value-based selling, and we've been strong on that, and we continue to do, do that. Of course, avoiding the tough, toughest price competitions.
We trust on our competitive advantages, and what I mean, what I mean by that is our execution capability is, I would say excellent, and, and our extensive talent pools are very talented people, very talented Siilis. We trust on, on those, our skill set and our, competitive advantages on, on the market. Also, we have a, a stable client base, and of course, we need to take care of our, our clients, and, particularly, we have, like I said, we have a public sector clients as well as, as typically the, the big, big companies, and they are, let's say, stable on, on these circumstances as well, and that, of course, gives us security regarding the revenue.
Now, on the parts that where we believe we, we have to adapt and make some changes, we have a very execution-oriented culture, and for the past 10 + years, the market has been very much about competing on talent. Of course, we have competed on clients as well, the emphasis has clearly been on competing on talent. Now, the key thing is that we need to adapt that execution capability with the emphasis on or moving the emphasis from recruiting to sales and efficiency. Yes, of course, we have those. Not done those earlier, but now the emphasis is changing.
It's a change, and, and it, of course, takes a bit time for us to, to adapt, but I'm confident that, I'm not concerned that... Yes, of course, we can reorientate ourselves, but it just takes a bit of time, and particularly as the, the change in the market, came, pretty fast. Now then, on the efficiency side, no, nothing new on the utilization, so that, of course, has been the most important thing regarding the efficiency in, in this, not just in Siili, but in this industry. So that continues to be, of course, the most important thing, so the, the optimizing the utilization and, and delivery.
Yes, of course, it's been on, on the focus, earlier as well, but now, now it's even more on, on the focus, and we have to focus, on, on the client, client work. If I look at us compared to, to the best, peers on the market, clearly, we have, room for improvement on, on the utilization levels, if we compare ourselves to, to our, peers on the market. Now then, we have put, a lot of effort on securing, long, public, sector contracts, and that's, of course, to protect the, the revenue and also the profitability, because that, that, helps, on the utilization, I mean, when the market is, is lower.
We've been, as said earlier, we've been quite or very, I would say, very successful on getting those public sector contracts. Then, on insourcing, outsourcing, what I mean by that, in insourcing, that, if I look at us, and compare us to our competitors and the peers, maybe we have used a bit more external partners than the peers typically. Why we have done that is, of course, to achieve the flexibility. As the demand has been high, then the kind of the client cases are sometimes very fast, and the requirement and the need is, you have to respond fast, and then if we don't-...
have such talent and skill set in our own payroll, then we either lose the deal or we use partners, and we have chosen to use partners in such cases. Also we have Siili One, which is our subsidiary, which is focusing on this. This is a very core business for us and has always been. Of course, as the conditions on the market have changed, so now we have to kind of review the partner network. By reviewing, I mean that we have to explore the opportunities, that are there opportunities to possibly to insource some parts of that work.
Re- reminding also at the same time that, that now the recruiting, of course, it's much easier as the market has slowed down. Therefore it's realistic to get in-house talent that was difficult to get earlier. Insourcing is one option, and then another option regarding the partners is, of course, to renegotiate the terms as you know, as the market conditions have changed. Of course, that has impacted us, I mean, our relation to our clients, and then, of course, we have to reflect the similar impact to our partners as well.
Regarding outsourcing, we need to review our internal functions that would it make sense to outsource maybe some of the work we do internally at the moment. No rather kind of normal procedures in this kind of conditions. Regarding the fixed costs, so we started or we have ongoing the change negotiations, and there, of course, one target is to reduce the cost level of fixed costs and as well do kind of maybe restructure a bit some of the things we do at the moment. Then how we can capitalize the situation on the market? Yeah, now if you look at us, I would say that we are clearly one of the strongest in...
I mean, one of the strong players on the market. We are rather big, stable client relations, long-term client relations, et cetera. Therefore, of course, in these kind of circumstances, I mean, that when the market is good, then it's, let's say, easier to be successful there. Now, yes, now on these conditions, it's a bit more difficult, but then typically the stronger gets even stronger in these kind of conditions. Of course, we aim to be among those strong ones. One key thing there is the retaining the key competence. That's of course, something we, we, we have to put effort that we can keep the key competencies in the company.
We will and of course, continue to focus on, on the strong client, segments, we have and, you know, the public sector I mentioned now many times, and then, the finance, banking and insurance is another one, which is, as a market segment, is, doing pretty well at the moment, and that, of course, helps us as, as well. Now, as said, in this conditions, it's much easier to recruit, so we can utilize the market situation to, to attract talent that was difficult to attract, half a year or a year ago. And that, of course... We aim to do that, and, and that, of course, makes us stronger in, in the long, long term.
In the field of M&A, so we've been doing M&A quite regularly and of course, are planning to continue to do so. Now the valuations of the potential target companies have come down. Also the high interest rates have impacted the private equities, possibility, or that would be my assumption, that it has impacted the private equities, possibility to do M&A. I would assume that there is less competition on the M&A market, and we have a very strong balance sheet, as Aleksi explained. You know, practically the most relevant investment target for us is to do M&A. Our position in this market regarding M&A is actually better than it was earlier. Right.
That was all we had today, and happy to answer any questions and comments you may have. Aleksi, join.
Thank you. You can from the teams, on the right-hand corner, there is a question mark and a Q&A button you can press and then type in your questions. We have one question online Joni Grönqvist, Inderes.
Can it's so funny small that-
It's too small. I will.
Yes
... I will read it aloud. Joni's asking whether our international growth on first half was it driven by Supercharge or Auto? Yeah, of course, we're, we're not disclosing separate entities. We had a very good growth in international business. Supercharge and Auto are, of course, the main part, the majority of the international business. However, of course, the situation is affecting their both growth rate as well. At the moment, organic growth was on a very good level.
Right. I guess that was.
That was.
Only question.
only question so far, just confirming.
Still one.
Okay, there is second question from.
Still as small as the previous one.
... Jaakko Tyrväinen, SEB. What is your analysis? What were the reasons for market demand cooling down in quarter two? Can you point any specific client verticals or geographical areas? Well, maybe geographically, we, we, explained already our international business. Tomi, maybe you can explain-
Uh
... a little bit.
Yeah. No, then, no, I would actually, I would rather put it that way, that the, I mean, the macroeconomics in No, Finland is of course the most important, market for us, and the, the macroeconomics in Finland hasn't been that good for, no, I, I'm not the economist here, but I would say that probably one year now already, it hasn't been that good. No, in quite a many occasions, I've, referred to that, that, that I have been kind of expecting that the...
I mean, it, it just cannot last forever, that if the macroeconomy is kind of going down or slowing down, then that our industry, it's, it's not a kind of independent bubble, that our, our customers and clients, they are companies in different market segments, and sooner or later it has to reflect on, on this industry as well. We actually, I would say that we started to see that in not, not in Siili, but in the market in general already, no, if not one year ago, but almost one year ago, so last autumn it was.
I mean, then, at that time, I would say that there was a kind of polarization on the market that, and that depended quite a lot on the, on the customer, on the client segments, of different, different software development companies had. Our kind of client segments, I would say were, and still are, among the strong ones. The kind of that this slowdown hit us later than than maybe some, some others in the market. Yeah, no, in the, when it comes to verticals, you know, of course there are different...
I mean, the, it follows pretty much the macroeconomics in a sense that the verticals that are doing well, then they are, continue to spend on digital development, and then the market, segments and verticals that are maybe not doing that well, then of course they are cutting down the expenditure, and all that reflects to us. And I don't mean us as, Siili, but, the whole, whole industry.
Thank you. [Hugo Viija] , sorry about the pronunciation. Do you see any improvement in the pricing environment in quarter three going forward on the short term?
Yeah. No, I would expect that, and again, of course, we don't know how long these conditions will will last, but no, I guess it's fair to say that I would be surprised that if, if we go back to the kind of high demand very fast. Now, how long will it last? Well, of course, I don't have an answer to that, but I would... You know, my, I guess it's fair to say guess, is that it will last months, so it has to... No, guess it's fair to say that I would expect that the quarter three that we won't get back to the...
No, I would be surprised that if we get back to the kind of high demand situation already during quarter three.
... Jaakko Tyrväinen, SEB, sales per employee decreased some 5% year on year during the second quarter. Could you talk a bit, how did this split between pricing and utilization? Well, maybe if I, if I start-
Yes.
Of course, we mentioned already in our quarter one report that we had some challenging projects where, where maybe there's more work carried out than what we get revenue. That kind of items are affecting, so it's not only about pricing. Of course, the pricing, we managed to increase the price level, but not as much as the general maybe cost increase, and that's, that's affecting the profitability.
Yeah, they, they are, they're of course, very much linked together. If and when the demand goes down, then, no, as I explained, then there, there is kind of excess capacity on the market, and that obviously it impacts on, on the pricing because there is tougher price competition. It also impacts on the... Equally, it impacts on the utilization, because then you have the excess capacity, and then if you start to calculate the, the utilization rate, then the, of course, that goes down if you have the talent who's not working full time on, on client work. Very much linked together.
Maybe let's take one question from Joni. There are several questions, but coming back to what Tomi mentioned in the last session, section, you still used a lot of subcontracting. What are your thoughts on subcontracting versus own employees?
Yes, very good point. Yeah, no, I agree that we have used, I mean, historically, we have used maybe more subcontracting than some of our peers. That has been in the very kind of DNA of Siili, and we were the first ones, I guess, in the market who started the Siili One and the whole kind of freelancing logic. It's like already said that it's not that black and white that now, hey, let's insource that. That's one option, but then, of course, the exactly the same market conditions impact the our partners as well. Then, no, basically the...
It's not, again, not that black and white, but roughly it goes like that, that the smaller the company, then the bigger the impact. Because then, I mean, that we, our clients are the kind of end users in a sense, and then we use subcontracting as do our peers. Then, of course, we, as others, we cut first the subcontracting, and after that, we started that's our own in-house capacity. When the market does that, then obviously it hits first the smaller companies, which typically, I mean, that their role is typically to do subcontracting for bigger companies like ours. No, basically, then it means that we have two possible actions.
One is to, to consider more insourcing, yes, now it's good time for do that because the recruiting is easier. Then there's always kind of certain profiles and talent, which, I mean, although we could recruit it, but it's not, let's say wise, because it's not something that we are asked on a daily basis or weekly basis. Yes, there might be a case at the moment, but then will there be a next case after that? If the likelihood is low, then it's better to use partners for that. Then the, the second, so the one action point one is, of course, to, to go, let's say, rethink and, and reconsider the... maybe to do more, more insourcing of some of that talent.
Another action is, is to start to, basically negotiate with our partners that, that this market condition has to impact them as well. That, of course, I mean, in some cases, it's probably actually faster way to impact and improve our, our profitability than than insourcing, which takes time anyway.
Yes. Jaakko Tyrväinen from SEB, you're planning to reduce around 15 FTEs. However, do you see need for recruitment in some areas? What should we think about your net recruitments during second half this year?
Yes. No, it's, it's not that straightforward that that there are, you know, there are completely different types of profiles and the, the change negotiations we have at the moment, the, the scope is mainly the, the support functions. That is, of course, a different thing than the consulting work that we that we sell. So now the ongoing change negotiations, the impact on that is mainly on, on our fixed costs and the, the cost structure on, on the fixed costs, and then the recruiting, I mean, oh, I don't know, 95% of the recruiting we do is related to, to consulting, so it's a different different thing.
Yes, the market has slowed down, but we are still, still growing, and that, of course, means that if and when we continue, and we believe that we continue to grow, then we need more people for that. We are not completely stopping recruiting. That, yes, we have to be careful that we recruit profiles that we believe that there is a demand on the market, and like I said, that we are planning to utilize the situation in, I mean, in a form that now it's a time to recruit the profiles that was difficult or even impossible, more or less, to recruit a year ago. We are in the change negotiation, but we are planning to do recruiting as well.
The timing is, of course. That's, of course, one kind of key thing on the whole recruiting thing, I mean, in any condition, is the timing, that we don't recruit people if we don't have work for them, and that has been always the policy.
Maybe a few more questions, one from Jaakko Tyrväinen. Follow up on the market cool down in second quarter, how sudden was the move, and did the trend accelerate towards the quarter-end? Should we expect the trend to accelerate in quarter three, meaning the slowdown? Well, maybe if I start...
Yeah.
Yeah, first quarter was still rather okay, second quarter slower, that happened across the second quarter, I would say. Are we expecting the trend to accelerate? Well, we did publish our new guidance for this year. That's the expectation for the rest of the year. That kind of reflects our, our estimates of the, of the overall conditions. Tomi?
Yeah, yeah, no, that's just well, well said. I think that, yeah.
From Joni Grönqvist, Inderes, could you split subcontracting from Finland, and what portion from nearshore? I suppose how much we could utilize more of the nearshoring in the subcontracting.
Yeah, good question. I have to say that I don't have a figure on top of my head. Now, let's say that, no, I don't have a figure to give you now, but as a kind of principle that we have on the market, we have been a company who has had already, I mean, for years, the nearshoring capability and almost half of our in-house employees are in Poland and Hungary. Of course, also, we have used. I mean, that it's a kind of a very normal thing and has been a normal thing for us to use partners as well from the nearshore area. I mean, we use partners, for instance, from Bulgaria quite quite often.
Yeah, no, I don't have a number to give you, but it's actually not that much, so and I... Of course, we play a role on that, but even more important is the clients, and that actually directs it, that how much we can. I mean, of course, we try to maximize the use of nearshoring, but in some cases, it's, I mean, client has a limitation because of the documentation is in Finnish or something, something like that.
Now then, of course, this market condition has and will impact the clients as well, and they are much more kind of I mean, earlier, they, they were looking for that, that whoever has the best team available on the time they needed it, that was the, basically the main driver. Now, of course, the client starts to be much more cost-conscious, and that, of course, drives or let's say, increases the demand for for nearshoring. Our position on... Regardless if we use our in-house or, or the partners, but we are on a strong position on that.
All right. I think that was the last question. We have no more questions, so, thank you very much.
All right. Thank you!