GFT Technologies SE (GFT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Sari, your Chorus Call operator. Welcome, and thank you for joining today's conference call on the full year figures 2023 of GFT Technologies SE. [Operator Instructions] I would now like to turn the conference over to Mr. Andreas Herzog, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, ladies and gentlemen. Welcome to this conference call following our publication of our preliminary figures for 2024 this morning. As always, here with me are our CEO, Marika Lulay and our CFO, Jochen Ruetz, and both will give you an insight in our numbers for the last year and our outlook for 2024. The press release as well as the corresponding slides for this call you will find on our website. Last housekeeping remark from my side before getting straight into the details. This webcast is recorded and will be available on our website afterwards. Having said that, I would like to hand over to Marika.

Thank you, Andreas, and also welcome from me to everybody in this call and let's immediately jump into the presentation to Slide #3. So our preliminary results for 2023 definitely demonstrate our ability to grow profitability, generate cash and manage a robust balance sheet. Total revenue for 2023 was a record EUR 802 million. This was in line with our revised guidance, and it represents a 10% year-over-year growth. And in line with this, we also improved the EBIT adjusted by 9%. And if we were to exclude FX, currency exchange effects, it was even 14%, which proves we are improving profitability while growing. As a fact, in 2023, the industry overall has slowed down, especially in the first half after 2 years of record growth. Now we reacted fast and despite the headwinds, we brought GFT to new highs. We began exciting relationships with more than 50 new clients, and we keep expanding and diversifying our service offering. We finalized the integration of targets as planned in 2023, and we also improved various ESG ratings. And some of you might remember, we launched the AI.DA marketplace in October, the marketplace for AI-based solutions. And since we have seen a rising demand to integrate AI technology into the IT landscape of our clients. This altogether, the whole performance in '23, which was not the most easiest year, demonstrates our agility, the quality of our management teams and above all, the strength of our positioning. In 2023, we also started engaging into an M&A -- into an M&A, and we made significant investments into Latin America with the acquisition of Sophos. We completed that in February to be precise on February 1. And with that, we are now the #3 in whole Latin America, serving financial services clients with IT professional services. And that clearly is helping us in order to get the demand from that really vibrant market. Now I say vibrant market because during 2023, we had some issues in Mexico. We had difficulties to grow in Brazil. Both are back on growth, back on profitability, and this is now accelerated with the recent acquisition in Colombia. We already identified new joint business opportunities, and we definitely see a robust pipeline in Latin America. Now let's go to Slide #4. And Slide #4 gives you a simple overview of solutions, and these are just 3 out of 20 on our AI.DA marketplace. For example, the banking agent, it answers queries from clients -- the queries from the clients of our clients. And because we could -- can connect this directly to the core banking system, it could also execute transactions. And definitely, when banks are using it, it delights the clients of our clients and simply stands for digital leadership in banking. So the clients who are using it obviously can improve their front end and their client relationship management. The second use case, totally different use case, GFT AI impact data, combines various AI technologies and approaches -- 2 act approaches actually to improve productivity in software development largely. So we use it ourselves together with our clients, but we also implemented and help our clients to improve their software development cycle. And we are also now doing first attempts to use GenAI for migrating old legacy code to new code. And the last solution, visual inspection is a solution which uses predictive AI technologies and is already used by various industrial companies to improve their production quality. So just to see it's not just talk and hype, there are real solutions already out there. Let's go to Slide #5. Slide #5, it's important for us that the industry analyst confirm our positioning simply because several clients sometimes use those reports from industry analysts to validate whether a partner is the right partner. And as a special market solutions provider where we work, especially with the industry-specific solutions, it's important to be part of very specific reports like the leader in digital banking or the winner for the Guidewire award. I'm personally really proud of this, just to share a bit the background 8 years ago. We did not even appear in any of these reports as a footnote. So the team really has done a fantastic job, first, in gaining the knowledge. Second, we applied it to the market. And third, then we were able to expand it properly to the industry analysts, and they do not even recognize that. With that, I hand over to Jochen Ruetz to go into the details of our financials.

Thanks, Marika. Let's directly jump into Slide #7 and look at the 2023 key figures. Revenue came in at exactly EUR 801.7 million, which is a 10% increase versus last year. This year, we have no FX effects on the group level, which was pushing down the revenue. Last year, we had 7%. So that's a big shift. This is pure business, no FX effects on the revenue side. The order backlog is up 7% and now includes targens, last year it did not include targens. And this is good from our perspective despite the order -- the shorter order cycles that we currently see. The number for order backlog, for sure, that not yet include the Colombian Sophos organization that we have just acquired. EBITDA is up 4%, only 4% because some M&A effects from the targens acquisition also hit the EBITDA, which is the order adjustments, order book adjustments to be precise. Therefore, let's look at the EBIT adjusted where we adjust for all M&A effects and virtual share effects that we have in the group. And the EBIT adjusted has grown to EUR 73.3 million, which is growth of 9%. On the right side, you see the third bullet point with a bit more explanations on the smaller bullet points. Capacity adjustments burdened. The EBIT adjusted, they stood at EUR 5 million in '23. You see the number for '22 was EUR 2.7 million. EUR 2.7 million is kind of the floor that we always have as capacity adjustments in the size of the group that we are today. With EUR 5 million, we spent nearly double. On the FX side, FX was not our friend in 2023. We have a negative effect of minus EUR 1.2 million. The year before it was a plus EUR 2 million. If we only exclude the FX effects, the EBIT adjusted would have grown by 14%, and the FX effects in the end hindered us to reach the EUR 74 million EBIT adjusted, which was the lower point of our last guidance, which was EUR 74 million to EUR 76 million. So for the EBT, earnings before tax, which is, of course, heavily hit by the M&A effects from the targens acquisition, this grew by 3 percentage points. The net income and earnings per share grew by 5% because the overall tax rate was a bit better than the year before. It was 29% versus 30% the year before. Let's move to Slide #8 and look first on the right side at the growth of our 3 sectors that we report on. Industry and other clients grew by 12% versus last year. They now represent 11% of our portfolio. We see the insurance clients decline by 2%. We saw 2 major programs with industrial clients come to an end in the year '23. We were just able to replace them. So nearly 0, but it was, in the end, a small decline of 2 percentage points. And the #3, the biggest block in the GFT portfolio is banking. And the #3, the biggest block in the GFT portfolio is banking. Banking is up 13%, of which 5% comes from the targens acquisition and the rest is organic growth. It represents 73% of the overall GFT business. Looking at the left side at our client portfolio, and looking at the left, left side of that graph, which is the clients above EUR 50 million, well, it's one client, it's Deutsche Bank, this against the trend of the last years, we saw Deutsche Bank increase somewhat to 16% of our overall revenue. So Deutsche was strong in 2023. It's not our fundamental goal to grow the share of Deutsche inside our portfolio. We'd rather keep it below 15%, but we see this happening again in '24. So the share of Deutsche will probably come back somewhat in the new business here. Our clients [indiscernible] EUR 10 million, EUR 5 million, pretty much in line with previous year. No big changes. Therefore, we believe we have a well-balanced client portfolio, including a nice funnel with clients below EUR 1 million of revenue with GFT in the year '23. Let's move forward, look at the quarter itself, the quarter 4 of the year 2023 had revenues of EUR 207.1 million, which is a growth of 10% versus the previous year. On the EBIT-adjusted side, it was a bit more than EUR 21 million, which is an increase of 12%. And this was despite the FX headwinds that we have experienced. It was mainly driven by the good top line in some of our markets and improved utilization. When we compare versus the previous quarter, so Q4 versus Q3 of 2023, it's obvious that growth was pretty slim, 2 percentage points up and yield adjusted also only up 1 percentage point. It's still reflecting the high utilization that we have. But of course, the December was hit by the -- in the last call discussed, MTA effects. So the saving of spending in the weeks or days before Christmas by clients, especially in the Anglo-Saxon region. Therefore, we always see a bit of a challenge for the fourth quarter. Brings me to Slide #10. Looking at the revenue and earnings by business segment, start with Americas, U.K. and APAC. The revenue is up 2 percentage points, so that's quite a slim growth this year. Organic [ FX ] was a bit negative with minus 1. Let me mention that we have grown in the U.S. and especially in Mexico, but we already talked about our challenges in Brazil and a bit also in Canada on the revenue side. And last but not least, we have moved business due to blind request from the U.K. to Poland. It was anyway delivered from Poland, but the clients now ask invoicing from Poland directly. This cost the U.K., and therefore, the segment, Americas, U.K. and APAC, nearly EUR 12 million of revenue. Coming to -- sorry, let's look at the margin. This all led to a margin, which was slightly below the previous year, slightly, especially because the Brazil challenges we had and the move of those projects. FX effects were also mostly hitting Americas, U.K. and APAC as Continental Europe, which I now come to, is mostly euro-based. Continental Europe grew by 23%, which, of course, includes the targens' acquisition for the first time, but we also saw growth in France, in Spain and Italy. And in Poland. Poland was supported by the already mentioned project moves of EUR 12 million, which came from the U.K. On the margin side, we see an improvement of 28% as well, so a bit stronger than the revenue improvement, mainly because of good utilization, the targens' contribution and those project shifts from U.K. So overall, we're up 6% organically, 4% come from FX, 10% revenue growth in total. And on the EBIT-adjusted side, we grew it by 9 percentage points. Let's get to Slide #11, revenue by markets. Brazil. We were talking about it in all the last calls. It was growing in Q4 '23 versus Q3 '23. So I think we're back on track. It's not jumping ahead, but we're back on track. So overall, for the whole year, it was a decline of 3 percentage points. The U.K. is down 5%. I already mentioned the EUR 12 million we moved to Poland. Therefore, we should add that to the real performance of the U.K., which would show growth, but it wouldn't show major growth. So the U.K., especially in the second half, was for sure, challenging for us and our competitors, and it will continue to be in the next 2 quarters. Germany, up 62%, mainly because of the targens' acquisition, but some organic growth helped as well. Maybe also to mention the U.S., overall growth 7%. I think when we looked at this table in Q1, it was still roughly 30% growth in the very first quarter of the year. Then the Silicon Valley Bank crisis came along and the U.S. contracted as well. It's the second half year of '23. And I believe the first half year of '24 will be continuing to be a challenge for financial service business in the U.S., and this is exactly what some of our peers have been highlighting before us. Poland. Poland is up 76%, but mostly due to the project moves they saw coming from the U.K. All this said, let's move to Slide #12 and look at the -- the client diversification, I go to the bullet points first. So the large client accounts above EUR 5 million and EUR 10 million revenues remained stable. One client grew in the bigger than EUR 5 million block. One client came in from the targens' acquisition, so no real organic major change. But overall, a good performance for the year '23. And we see that our land and expand strategy is working. We saw 57 new qualified clients who generated more than EUR 100,000 with GFT and who were not working with GFT before. So we believe, overall, the client group list is absolutely qualified. Let's get to the income statement on Slide 13, a quick one here. We discussed revenue. We always combined at the fourth bullet point on the right side, our personnel costs and our cost of purchased services, which is mainly freelances, because this represents the overall people cost that we have, and this remained stable in '23 at 80% of the revenue. Well, if this ratio remains stable, usually, the margin remains stable, it's heavily linked. We do see that other operating expenses, depreciation is growing a bit more slowly than the revenue side. And we see the interest is negative, in the year '23. This was linked to the targens acquisition, which we financed and therefore, we had a bit more financing costs in '23 than '22. On the income tax side, we have reduced the tax rate by 1 percentage point. We were able to allocate the first more than EUR 1 million to Brazil, which is helping the tax rate. And therefore, we believe the 29% is also the right number for the next year. Moving forward, Slide #14, cash flow analysis. On the very left of the graph, we see we started the year with nearly EUR 36 million in net cash, and we are ending the year with EUR 4 million in net cash. In between, we have an operating cash flow, which is like in the graph #4, in the bullet points #3, of EUR 40 million. This is a bit misleading because we had a very special cash flow effect at the end of the year '22 and at the beginning of the year '23, I talked about it last year already. And we received EUR 40 million from the European Union into our Italian organization. This happened before Christmas '22. This was pushing the cash flow of the year '22 upwards exceptionally by those EUR 14 million. And then in January, we had to distribute the same amount to our clients. And therefore, it was an outflow in January of '23. This means combined, the year '23 is understated by EUR 14 million, and the year '22 is overstated by EUR 14 million. The cash flow, if you want to do long term, the correct valuations in your spreadsheets, it would rather be EUR 14 million more in '23, EUR 14 million less operating cash flow in the year '22. Cash flow from investing activities. This was the targens acquisition. This was dominating disposition plus some more investments. targens acquisition cost us EUR 45 million. The main reason why our net cash reduced. But as you can see, we kind of earned it back throughout the year '23, and we're back at a positive net cash at the beginning of the year '24. We will play the same game in '24. We just acquired Sophos, so we will dig into financing. Therefore, we will go heavily negative on our net cash and called net debt, which we believe will be in line with the purchase price of roughly EUR 88 million, and we're going to half this as net debt until the end of the year '24. That's the target for the year '24. Moving forward, balance sheet. Well, not much to mention here. The balance sheet total simply increased because of the targens' acquisition. That was the main driver. And looking at ratios, I would only mention the equity ratio, which improved from 40% to 43%. If you have questions on this one, please do it in the Q&A session. And Slide #16, the people slide. Moderate employee growth by 3%. Some markets are up, Costa Rica, France, Germany, due to targens' acquisition, Italy and Spain. Some markets are down in people, Brazil, Canada, Mexico, a bit in Poland and Vietnam. Overall, 3% increase. We also use less freelances, excluding the targens numbers, we're down [ 30% ] in freelances which makes a lot of sense when you are not hiring that much and your utilization needs to be optimized. You work with your own people and you reduce as many freelances as you can. In our case, this was minus 30% throughout the year '23. You're looking at the utilization that came in at 91.7%, nearly as good as in the third quarter, not exactly as good. I mentioned the MTA effects in December, always a bit disruptive, but overall, a very strong utilization in the second half of the year '23. Net attrition, we see a continuous reduction. It's now 10.3% for the trailing 12 months, which is kind of the COVID number in the year 2020 that we saw. So the market is currently not seeing many people moving around. We believe this will stay low for the next 6 months and then let's see with that, back to Marika.

Thank you very much, Jochen. Now let's come to the outlook. So after 2023, which, again, was in absolute numbers, best year ever in GFT history. And as I keep saying, from -- of recent few years. And for the future, we hopefully always have best years ever. But let's look into the outlook for 2024, it's definitely impacted in all aspects by the Sophos acquisition. So the future growth of our total addressable market remains promising. It even has been expanded via the acquisition, but I'll come to that. In principle, we see the following situation. After an uncertain 2023 for IT spending, we do expect that the market gains momentum back in 2024, but most probably more in the second half. Including now 11 months of Sophos, we see a robust pipeline backing EUR 920 million of revenues, which is a 15% growth over '23. We continue to improve operational profitability. Therefore, our EBIT adjusted should scale up a bit by 16%, 1 percentage points more than revenues. The EBT is burdened by usual M&A effects heavily by the Sophos acquisition. Thus, it grows by nearly 6%. This actually brings me also to Slide #19 to talk a bit about the Sophos acquisition. And I can share with you that the addition of another delivery center in Colombia, which is quite price sensitive -- not price sensitive actually, let's say, quite interesting from a price point and the new competencies we gained around market solutions like Flexcube or Finacle really has enlarged our addressable market. We did not only grew by 20% in people. We also gained access to Tier 1 and Tier 2 financial institutions, mainly in Colombia, but also in other Latin American countries. And in total, GFT is now operating in 20 countries. It was a significant investment and so far, the largest M&A in our history. The next two slides talk a bit about our strategy, which, in a nutshell, has not changed. So Slide #20 talks about our way how to kind of predict the future, which is obviously always difficult. We simply focus on catching the next wave. And the ones who follow us now for a while know that since 2 years, we are investing into UDPN. UDPN stands for Universal Digital Payment Network and is a solution which addresses the cross-border payment of digital currencies, whether it's stable coins or fiat-backed digital bank -- central bank digital currencies. And today is actually a good opportunity to share the latest news. UDPN just launched a commercialized version of their digital currency sandbox. It enables commercial and central banks to learn about the latest digital currency technology, test build in use cases and develop their own custom use cases. The access was -- we had the sandbox already for a while, but the access was previously limited as it really was at an experimental stage. But the interest is apparently so great and so big that the banks are now prepared to pay for the use of the UDPN Sandbox. Hence, we launched it officially. And this is a major step towards the practical implementation of regulated digital currencies, we are at the forefront. And I keep saying, if the business invests into the future. I guess we see revenues and profits behind it rather in the years '25, '26, but our aim was and it looks like we achieved it that in '24, the investments we do into that solution are already fully covered by market -- by clients who pay for it with this sandbox movement seems to go into the right direction. We've come to our last slide before we go into Q&A, which is our overall strategy slide. It has not changed to the last presentation. And the summary is quite easy. Growth remains our mission. We continued to focus on custom developed software and industry-specific market solutions. Profitability should grow over time, we should see economies of scale while growing. Client diversification remains a top priority for us across all countries, all markets. But nevertheless, we do see a lot of value as being a global specialist. And let me -- especially on the backdrop of the current market development, let me explain this a bit. We do experience currently that for new initiatives, especially when it's about a large transformation program. When they get launched, the CIOs require higher levels of risk mitigation and greater certainty of outcomes than in the last 3 years. We simply would say the market became much more mature in using cloud and using new tech. There is less of a hype, there is more focus on true business return. And Gartner, the industry analysts, they even speak a bit, they call it a change fatigue. So people are a bit tired of just changing to change and doing new tech for new tech, which definitely plays to our strength. Being a specialist means we fully understand the sector-specific challenges. When it comes to platform modernization, and we do not just do supply -- we do not just supply capacity. So especially when it comes to regulatory aspects, we know how to cover them and implement them. Therefore, when we work for our clients, we bring solutions in production. We bring them to life and not just spend money. Also, our ability to source and scale quickly regardless of time zone, culture or logistics, among our globe [ reserve re-setup ] is a success driver. And especially with the Colombian acquisition, we added now a new delivery center at a very interesting price point, which also plays a crucial role because clients are now focusing also again more on cost savings. As a principal statement, all companies will need to reinvent every part of the enterprise using tech, data and AI to optimize operations to invent new services or products and accelerate growth. And to do so, they must build a digital heart of their company. Our pipeline is based on significant demand in areas like cloud migration and modernization, data and AI and the emergence of GenAI, in particular, all of which represent areas of great opportunity. And believe me, it's still early, a lot to be done in '24 and beyond. And the simple statement we used since years big enough to deliver small enough to care, describes our uniqueness very well and is proven by the loyalty of our clients and our ability to convince new clients even in challenging times to trust us. And with that, I'll open our Q&A. We're happy to take your questions.

[Operator Instructions] The first question comes from the line of Andreas Wolf, Warburg Research.

I'm curious about your view on the adjusted EBIT profitability for 2024. You've guided for a slight increase. I assume that given low utilization during H1 '23, the market expectation was somewhat higher, especially if I look at consensus. So what's your scenario with regard to utilization throughout '24? What should we expect in terms of profitability in H1 versus H2, I think a certain assumption is baked into your guidance here? And then on the EUR 9.5 million impact related to the Sophos acquisition that is impacting EBIT or is expected to impact EBT in '24. What is the split in -- in terms of interest rates and other PPA-related effects here. And if we look at your top line targets, how do you expect these three verticals to develop? Do you expect banking to be more agile again? Do you expect insurance to return to growth? That would be helpful.

Let me start, Andreas, thanks for your question. Let me start with the third question. The other two are more financial, I will leave them to our CFO. In terms of sector development for 2024, we continue to see as much as some banks going to a bit of cost saving mode, but we still see that there is a lot of demand. We expect them to grow. The insurance companies, we have seen them suffering the high inflation over the last 1.5 years which kind of let them not start new transformation programs. We can now speculate a bit that when the interest goes down this year, maybe in the second quarter or in summer that insurance would come back. So I would expect actually that we will more or less see the same picture as in 2023. In relative size, highest growth in industry and others, also driven by our products. Second is banking, and third should be insurance. So therefore, the overall mix might not change much in GFT. Jochen?

Let's go for the EBIT adjusted. First question was, where do you believe utilization will go? First half year, roughly 90%, 90.5% if we are on that side, but the first quarter will again not show the best utilization of the year. As Marika already indicated, I think myself as well, the first half year is the challenging part of the year. The second half looks a bit brighter, especially markets in the Anglo-Saxon region, we currently see some weakness in demand. We believe we will fight to get the same EBIT adjusted as in the first half of last year, and the growth on the EBIT adjusted will mainly come in the second half. On Sophos, EUR 9.5 million is the effect between EBIT adjusted -- sorry, last mentioned Sophos is contributing to the EBIT-adjusted margin because you saw we included EUR 60 million of revenues and EUR 8 million of EBIT adjusted. And so that is EBIT-adjusted margin above the GFT Group average so far. However, the M&A effects due to the Sophos acquisition are pretty hefty. We see roughly EUR 3 million of more interest coming our way. We have roughly EUR 700,000 of other M&A costs, which are due diligence, and we didn't have the insurance to cover the warranties. So these are all included there. And then the overall PPA effects of the first year covered the remainder. So that's nearly EUR 6 million from that side -- EUR 5.5 million. So that is how Sophos M&A effects come together. Did we answer your question?

The next question comes from the line of [indiscernible], Berenberg.

Some follow-ups on my side. It was not really well recognizable the impact of interest on this EUR 9.5 million. It would be great to have a clarification here. Then what can we expect from phasing? Will most of the costs pop up in the first quarter already with closing 1st of February? And then probably switching to another field dividend. What's the rationale behind increasing the dividend in the light of moving into a net debt position? And then regarding attrition, which is rather low at 10%, would it be rather healthy to move up here a little bit, at least in the second half of the year to allow some, let's say, unwanted [indiscernible]. Yes, that's it from my side for the time being.

Let me start with the Sophos effect. So the interest inside the EUR 9.5 million is roughly EUR 3 million. I just mentioned it for Andreas' answer, roughly 3%. Without that, we already would have assumed a minus 1%, so this will bring our overall interest cost for the year to minus 4%, but minus 1% is the pure GFT organic. The phasing will be -- it will be pretty linear over the year. The first EUR 700,000 all happened in Q1. And the order book adjustments, we still -- we're still working on that, as you can believe. It's just in the middle of the analysis. And the order book adjustments will be a bit more heavy in Q1 and Q2, but this will not be a major effect. So the most part of the PPA effects will be phased throughout the year. Same is true for the interest will also be phased throughout the year. And yes, we are then in deeper net debt territory, but we have ensured the financing for the Sophos steel. We have ensured -- or we have the target to pay back within the next 2 years, which is absolutely in line with our cash flows. And if we don't do further M&As, which would mean we have to rethink the way we finance it, currently, we're settled for the next 2 years easily. Marika on attrition?

Yes. So you're right. Actually, we think that attrition is too low. It's alerting signal in the market that the market is, let's say, not as vibrant as it was before. Obviously, the 20%, 25% we've seen in some markets was unhealthy as well. I would consider a healthy number, we always said around 15% is a healthy number. Obviously, it depends a bit on the countries. You have countries like Germany, which, by tradition are lower. You have countries like Brazil or Colombia, which by tradition are higher. But overall, the number is a signal that the market is a bit stalling. Now it has a positive effect, though, obviously, the pressure on salaries is also reducing logic because this is frankly linked to each other then we had high attrition of 20% north. We were really running behind set of increases. And then always, they had to do price increases and the timing, obviously, was not always perfect. This is now much more, let's say, under control. But I would hope it goes a bit up. So my expectation is it goes a bit up, maybe not yet in the second half '24. Usually, there is a bit of a time lag, but maybe in '25. Rational of dividend. Rational of dividend, you're asking rightly so why do you increase dividend given that you have raising net debt? Would it not be more intelligent? I guess this is your question to use the cash to pay back the loans, which I think is fair. It's obviously -- there is not a [ 0 1 ] answer. We looked at the dividend. You know that we have a guideline to pay out between 20% and 50%. The sweet spot is between 20% and 30% payout for the dividend. We want to be, let's say, a reliable trusted dividend payer to our shareholders. We have grown last year. We made significant investment into the company. If we would have used the exact same percentage payout than last year, which would be at least logic -- another logic, it would have been EUR 0.47, EUR 0.48. And then we simply thought okay, we either stay at EUR 0.45 because EUR 0.47 kind of was the number in between. So we debated, do we stay at EUR 0.45. We don't increase at all? Or we do increase and jump to EUR 0.50? Given that the company was growing, is growing, will continue to grow, we felt that the shareholders also should have their part. And the nominal impact to our cash is -- we can manage it. So we have a good cash flow generation. So therefore, we were easy to take that decision.

The next question comes from the line of Simon Keller, HAIB.

First, how can we think about current trading, i.e., Q1 growth, especially given that Q1 last year did not include targens yet. So the comp should be rather easy if I'm not mistaken. Then second question is how much did targets contribute in Q4, please? Thirdly, how is your project pipeline with Deutsche Bank evolving? And are you involved in the IT topics at DWS? And finally, what is the tax rate or what tax rate can we expect for 2024 and also thereafter?

I'll start. Q1 growth, indeed, is a challenging part. Last year, we did EUR 190.6 million. If you add targens for 1 quarter, which was always around EUR 10.5 million, EUR 11 million. In the fourth quarter, it was EUR 3.3 million of revenues. And we believe -- sorry, that's not the right number. It was EUR 10.6 million of revenues, looked at the wrong line, EUR 10.6 million. And if you will -- now looking at the Q1, we believe -- if we add targens, we will still see some growth. Now still excluding Sophos, we will see some growth versus the first quarter of last year, but it will be a low single-digit number. As said, Q1 is probably the most challenging part of this year because the Anglo-Saxon markets are quite weak at the moment. So single-digit organic plus targens. And targens would be roughly EUR 10.3 million, also, again, in Q4 of '24. And then Sophos comes on top, which should be 2 months out of EUR 60 million in a year, you can make the math. Tax rate. Tax rate, '24, We believe it will be in line with the tax rate '23, 29%, that's our current prediction. We could get a bit better because we are more allocating to Brazil, which reduces some double taxation we currently suffer, but we have added a market Colombia to the portfolio, which has an above average tax rate. It's I think, 35% in the local market, and therefore, this will push the tax rate up a bit. Last but not least, we have the minimum tax coming up. This 15% global minimum tax agreement, and we still have to see how that works for GFT. So far, we believe it will only hit us in '25. Now including Sophos, it will already hit us from a size perspective in '24, and we're currently analyzing -- but probably the 29% are the most accurate number I can give right now.

With regards to your questions on the clients, first of all, Deutsche Bank is a very healthy and good relationship. We grew last year. We have completed the huge migration program together with Deutsche Bank for Postbank and Deutsche Bank last year. Hence, it's actually a good message that although this was finished last year, we still see very stable revenues in 2024 because we were able to also expand into other areas. I can confirm that DWS is a client of us. But other than that, we are not commenting on individual projects.

The next question comes from the line of Knud Hinkel, Pareto Securities.

I've got four questions, I guess. Regarding the Sophos acquisition. So you have already a very strong presence in Latin America and Brazil. Maybe you can talk a little bit or contrast the role of these two areas in your overall strategy. So will Sophos more concentrate on local customers and Brazil will do more nearshore business? Or what is the sharing here? Or is it all of the same as for Brazil? Maybe you can say something on that. That would be my first question. Then on expected growth for '24. In '23, my reading is that you saw ex Deutsche and ex targens, you saw very low growth for the remainder of the business. Do I understand your remarks correct that you expect that picture to change in '24 that Deutsche should be stable. And we see growth coming back for the remainder of the business? That would be my second question. And the next two questions are the much beloved household questions. Can you say something already how PPA-related [indiscernible] will look like in the coming years? You said something in '24 already. How that -- how will that probably evolve in the years after that? And on capacity adjustments, that is my final question, you saw a quite high number in '23. Do we have already a number on your mind for '24?

I'll start -- I was looking at Jochen to start. So I'll start. So the role of the countries, let me explain like this. We have, yes -- Sophos has the majority of their people in Colombia, but also in other Latin American countries. We, ourselves, have a large presence even bigger than Sophos in Brazil, and we also had small presence or midsized presence in Mexico and Costa Rica. The future planned positioning is as follows, the Brazil team should mainly work for Brazil. There is a big inner market. We have a large Tier 1 clients there. We have a lot of demand, robust pipeline, much better than last year. The Colombian team, in Colombia, should work for Colombia, but also for other Spanish-speaking countries, definitely in Latin America, first, because that's very logic. That's what they already do today. We have clients in Panama, in Uruguay, even in Argentina, although we do not have a contract in Argentina, but we support the client in Argentina and other countries. And then the next step is that the Colombian team would also support our Spanish market in Europe, given the attractive price point Colombia can offer. And then the third strategic push, which is, obviously, the ultimate cherry on the cake, which Sophos had already started, is supporting the U.S. market from Colombia. Given that 70% of our team speaks only Spanish, not yet full English, it's, a, bit of a midterm approach. Second, we might actually do not position that so much on the banking side, which is more in the true Anglo-Saxon part of the U.S., but more on the industrial business, which is more in the southern part of the U.S., which then the Spanish language could actually fit quite well. Having said that, there's really, let's say, music for the future. This year, we focus on synergies in Latin America and together with Spain. And again, as I said, Brazil should focus more on Brazil. Costa Rica remains a nearshore center to the U.S. and our Mexican team works mainly for Mexico and maybe in the future as well for the U.S. Then your question towards organic growth in '24. Yes, you are right. Our -- if you take the pure organic growth ex Deutsche, ex M&A, I'm glad you did not deduct more clients, otherwise, the numbers become even more complex. But -- sorry, but if you do ex DB, ex Deutsche in 2024, we had organic growth, it was definitely below our original expectations. We do believe in '24, it will be better. But as we explained, the market sentiment in the moment is still a bit more constrained. We are also conscious what our competitors are saying about the market. Hence, we were not going to be, let's say, upper, upper limit. The year is still young, let's see how it goes.

Let me follow up on that numbers. From the EUR 802 million, we commit EUR 920 million. EUR 60 million from Sophos, EUR 10 million from targens, which means it's EUR 50 million organically, roughly 6% organic, just to put it in short numbers, which you probably already have done by yourself. PPA involvement, EUR 9.5 million -- well, this is again not only PPA, it is all M&A related to Sophos. This year, cost us EUR 9.5 million. In the year '25, we believe this will go down to EUR 4.0 million because, a, the interest part will have and the order book adjustment will vanish. And therefore, the biggest decline will happen in '25. And in '26, assuming no further interest, at least non-allocatable to Sophos, it will only be the classic amortization, which we expect to be between EUR 2 million and EUR 2.2 million for the years to come. So a strong decline over the next years. It's especially steep in the year '24, which was probably very hard for you guys to predict in your guidance or in your analysis so far. Capacity adjustments, the floor is at roughly EUR 2.7 million, as I said. This year, '23, we had EUR 5 million. I believe in '24, although the numbers are still very young, we will end up somewhere in between. We will not be able to be at the low end. There will be some capacity adjustments in the first half year. I hope it's not EUR 5 million, but it will not be as low as the floor, which is the EUR 2.7 million. It will be somewhere in between is what we assume at the moment.

The next question comes from the line of Lukas Spang, Tigris Capital.

I would like to firstly start with the topic of MTA, just to conclude that. Can you quantify the effect of the MTA in revenue for Q4?

In Q4?

In Q4 of the year '23, well, it came in as -- on the higher side. Therefore, we are at the lower side of the revenue bandwidth. I think we committed something between EUR 9 million and EUR 15 million. And I think it happened in the area of EUR 12 million. So that's what burdened in the end, the Q4 numbers, which was the highest MTA we've seen in many, many years. But nominally, anyway, the highest we ever had as our size has grown, but also in percentage to revenue in 1 quarter.

And then if I take your remarks for the first half of the year, you said that it will be hard to fight to reach the adjusted EBIT level from first half year last year. But if I take your comments also on organic growth, you said low single-digit revenue organically growth in Q1. So that's a good base, then Sophos and also the 3 months last year for targens. And then I don't get really your conclusion that it will be a hard fight to get the adjusted EBIT level in the first half from last year. So where do you lose earnings in the first half year of this year?

The challenge is simply the Anglo-Saxon markets at the moment.

[Operator Instructions] The next question comes from the line of Johannes Ries, Apus Capital.

Also some follow-on questions. Maybe first, how much maybe AI is already -- will contribute in this year, maybe to your revenues? And how you see maybe your pipeline developing there?

We lost the connection with speakers.

Line dropped, [indiscernible] had some questions. I think did everybody drop out or just us?

No. I think Mr. Spang's question you answered, we could hear.

Okay. But I was in the middle of answering and then it made boom. And I was not sure if he had a follow-up question on that.

I think he said it was all, if I got it right.

If he's still in the call, he should just come in again and go for another question. But let's go Mr. Ries.

Maybe a follow-on on the drivers of your business. How much AI will already contribute in this year to revenues? And how is the pipeline developing with all your AI offerings you have maybe in your portfolio?

So overall, we do -- we always combine AI and data as a category into one box because very often, the projects are not separated. You need to have a certain, let's say, a data basis and data structure to then apply AI on it. Both numbers together are at 8% of the total revenues in '23 and to compare this with the previous year, where it was rather in a comparable 6% to 7%. So it has grown more than the other categories. It's obviously still small in numbers. Why? As a matter of fact, if you really only, let's say, add the revenues which are associated to the AI technology part of the project, it's actually small in numbers. . It still might be the driver to win the project. It might be the driver to do the implementation or to do the modernization of the technology, but the associated revenues actually are small. So there is difference between whether it's a driver for business, which is true. It's a driver also for new business, but the associated revenues are more in the low 6 digits.

But do you expect in the coming years that the proportions will increase?

I think, yes, it will increase. What will happen, it's difficult to predict the percentage. You could even debate how relevant it is to predict the percentage. What will simply happen is that it will become a standard feature, a standard technology, which is used in all application solutions at whether it's used to even develop the solution like we do with GFT AI impact or whether it's a feature, which is then embedded into the solution, for example, like with the banking agent. I think it's like data basis, you would not ask us today anymore how much of your business is based on databases because it's actually everywhere. There is even a moment, we're probably going to drop the cloud-related revenues because cloud becomes standard. Therefore, over time, AI will simply become standard. I think it's still valid as the market is new and just started to share that growth and show that it is growing. But again, the associated revenues for the concrete technology isolated are rather small, but they're often connected with a bigger investment on, let's say, standard technologies. I hope I made it clear.

It's very, very clear. Maybe a follow-on question. Maybe your order in standard banking solutions actively installed some in Asia and you have a huge American customer who want to roll out broadly this technology with you. I have not the name in my head at the moment of the standard solution, but it's very, very well known. How is this proceeds? And is it also a driver for this in the following years?

I must admit your voice was a bit fading.

Okay. No, it goes -- my question was on the -- you have installed a couple of standard banking solutions. A huge American bank wants to roll out you...

JPMorgan.

JPMorgan, exactly. How much is this a driver and especially for the following years for your growth?

Okay, okay, okay. Yes. This actually, as you can see in our different categories, the percentage around platform modernization is -- is actually 53% of our business. So it's the majority of our business. Why? These are big tickets. These are big tickets. These are large-scale transformation programs and therefore, and very often a market solution like Thought Machine or Starlink -- engine from Starlink or [indiscernible], which is a new one. And there are multiple others or on the insurance side, maybe Guidewire. Those market solutions are often the core of the transformation program, but then this needs to be integrated. This needs to be customized. This needs to be individually orchestrated so that it fits to the client landscape. So these are the big tickets. And yes, they drive our growth. Obviously, our decision to start such a program can easily be delayed by 2, 3 months, 1 quarter, 2 quarters. But when it starts, it starts. Yes, clients might slow down the rollout. That's another option if they get a bit under pressure, but they usually don't stop it. They may slow down a bit. That's the max risk you see and definitely, especially the banking clients, but also the majority of the insurance clients, they have started their way to modernize their IT landscape and they will not stop that.

And this gives you all -- it's a confidence because there's always a question if I talk with my colleagues. Why are you also confident like other service companies, the same came from Capgemini, from [indiscernible] that the second half will be stronger. What is the visibility? And is it -- what you transact can only push out maybe for some time, but have to do the projects because -- therefore, is that the reason.

Yes. Basically, I mean, as much as nobody can really predict what happens exactly in this quarter, the assumption is simply the follows. If I take -- and I must look at Jochen now, be cautious of what I'm saying. If I take the pipeline as it is today bottom up in terms of revenues, I could easily go for a higher number, honestly. But as it is easy to delay by one quarter, start a bit later, and we do see that the clients are challenging their cost structure. They are looking into cost savings. They double check whether the outcome of the investment really makes sense. We simply assume that there's still be a bit more cautiousness in the first half. And combined with the assumption that the interest rates may go down, which would ease the whole, let's say, industry as such because then the client of our clients will become a bit more relaxed. That is purely the basis to assume that in the second half, let's say, latest it should go up. That's it. That's the whole [indiscernible] or the whole explanation of that assumption.

Very simple. Only maybe follow on, on the longer-term driver. UDPN, what potential is really behind it? I'm still feeling maybe to have an idea what maybe -- how big this can get you because it's even a different business model, isn't it, right, that you have so far.

Well, if I...

[indiscernible] isn't it.

It is -- so first of all, it is a platform we developed together with a partner. It is -- the revenue generated by this platform for us would be transaction-based, which obviously would be wonderful to scale our profitability. Second, we also can see normal business around the platform because these different nodes have to be integrated into the banks so into the clients who want to work with, which is I would consider a normal business. But the real fun, as you rightly so identified is the transaction-based revenues. Then, obviously, I can put now every Excel together you want. My simple answer is to look at SWIFT. SWIFT is doing this today for fiat money on a global basis. UDPN technically could do the same for digital currencies. Now do I believe that UDPN will simply replace SWIFT? It's a bold statement. And obviously, then numbers will be huge. I am convinced there will be multiple UDPNs in the future, although other people will develop those networks simply because several networks also are connected into different political regimes and therefore, people want to have alternatives. So it's not about being a monopolist, but simply taking the share of the market. We, obviously, totally refrain from giving any commitments on that. First of all, the ECB must launch the digital euro. The U.S. government must launch the e-dollar -- that is the fundamental basis for that, then a regulation must be defined for cross-border payment goals. So I would say keep it in your pocket. It's a good story and the challenges in '26, whether you see true numbers coming back.

Okay. It's option, definitely. Finally, on you personally, you will retire at the end of the year. Is already the search of a successful started. You are focusing more internal or externally -- can you -- any comment on this? It's still 9 months ago, but it's the most important position in the company.

Well, technically, it's -- yes, technically, it's 9 months to go. Yes, the [indiscernible] Board has started the search. Yes, they talk internally and externally, and you might appreciate I cannot comment further.

And now we go back to Lukas Spang because he came back via the question line, that's good. I don't know how much we answered on the last question, I am not sure.

Yes. So first question, we have done. But the second question, you started with it's the Anglo market and then the line broke up.

All right. Okay. Yes. Well, the Anglo-Saxon market, I said, U.K., U.S., Canada is the challenge in our first half year. We will earn less in those markets versus last year. And that is the challenging part. Then Sophos comes on top, you're right, of course. And that combined should bring us to the EBIT adjusted of the last first half year, but it is more of a struggle than we had anticipated. And there's probably no growth versus the previous year first half. And it is about the Anglo-Saxon market. Maybe you've seen the updates that some of our peers have given Thoughtworks and DAVA, First Derivatives, et cetera. They have the problem more than we do because they are very U.K./U.S. focused. In our case, it is -- the problem itself is limited because those 2 markets don't represent 80% of our revenue. But it is still roughly 25% and that is hurting us in the first half year. Europe currently is the location of stability, which in the past was usually the laggard. Currently, it is the stable market. And Latin America, too, yes.

Yes, I would say, in total, actually, you can see many people we talked a lot about diversification. We have improved diversification on the client side. We have improved diversification in sectors, and we definitely improved the -- not only improved, I think they're pretty diverse when it comes to market. So whilst we might not then over performed because we focus just on the 1 market, which in this year is overperforming, but we may also not fall down as much as some others as we are not so concentrated on a few markets. So simply more efforts.

And then on general margin development for this year, if I exclude the Sophos, we have a slight margin dilution from 9.1% to 8.9%. So why are you -- if we call it the GFT old part or the GFT 2023 part cannot improve the margin? Why is that?

It's exactly what I mentioned. It is the first half year in the Anglo-Saxon markets, full stop. We will come back somewhat, but we will not get those last 0.2 EBIT-adjusted percentage points. And then Sophos supported, and we can exceed it on a group level, including the new acquisition. And again, I always like to point out our acquisitions are self-financed via our cash flows. Our number of shares has not changed since 2023. And therefore, there's no dilution for shareholders in our M&A strategy. It's self-financed, and we will plan to continue to go down this route, except if we would find a real transformational deal on the M&A side, and we would tap into equity. But so far, we'd rather focus on the midsized and smaller acquisitions. Sophos was more a bigger acquisition, targens was a midsized acquisition. We will again do smaller acquisitions, and we will self-finance them for the time being. Is there another question?

[Operator Instructions]

Okay. So since there are no further questions left at the moment, in case they might arise later, please do not hesitate to contact our IR team. Thank you very much for your participation. Goodbye, and take care.

Thank you. Bye-bye.