Gofore Oyj (GOFORE) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Gofore Group's First Half Results Presentation for 2021. My name is Mikael Nylund, I am the Group CEO of Gofore. And with me, as always, I have here today Teppo Talvinko, my colleague and CFO of Gofore Group.

Hi. Good to be here today.

I think at this point in the presentation, it's already good to say that we have had a very eventful and successful half year behind of us as usual. So it nice to be here today to present the results for the first half of this year. And of course, we are looking forward to the second half and doing even better. We always start this presentation with -- telling shortly about what Gofore is about and what we do. So Gofore a growing and profitable digital transformation consultancy. The Gofore-ians are experts in digital transformation, in digital technology, in what digital means for businesses, organizations for people's everyday lives. In essence, you could say that we are, together with our customers, shaping the very future of people's everyday lives and also businesses' everyday lives. Some selected examples of what we do together with our customers. The 3 first ones from the left-hand side are examples of how we work together with our customers, in this case, in the Finnish public sector to develop new kinds of digital services for everybody, for all of us, for all of the people and all of the businesses living and working in Finland. For example, in the middle, building a smarter education sector. We are working with the big cities in Finland to develop new ways of communication between schools, teachers, families, students, parents of the students. On the right-hand side, we have a couple of examples of what we think the future of digital will also include. It will be one part in our struggle to fight climate change. It will be one part of our struggle to ensure that our future way of life is sustainable in every way. So these kinds of things and projects together with our customers, we think are something for the future, and that makes us very excited. Because what Gofore is about is to deliver positive societal impact with our work. And all of these examples we think are just that. I also mentioned that Gofore is growing and profitable, and we have a short history of what Gofore has been here. In 2017, Gofore went public. We're listed on the Helsinki First North market. And this year, we transferred to the main market. And I think we can safely say that Gofore has had a strong history of growth or profitable growth. And that's something that we are very proud of, and that's something that has become the identity of Gofore-ians, the identity of this company. And of course, most important thing here now today is that we can say that we have continued on this path and presenting the results for the first half of 2021. It's in line with our history and our heritage, if you will. So some highlights, some numbers from our first half on the following slides. We are very happy about the financial results of the first half of 2021. Exceptional growth, almost 40% growth compared to the year before, driven by 2 company acquisitions during the last year and of course, driven also by excellent organic growth. EBITA profitability grew driven by growth in net sales very nicely. And also employee headcount grew -- of course, we are in the consultancy business. So that basically is the scaling model of our business. EBITA percentage, not quite on the level that it was the year before. And that's, of course, something that we are -- we cannot be entirely happy with. But we'll look into the reasons behind that in this presentation later on and want to give some explanation on that matter, too. Some other highlights for the first half. We continued with our mergers and acquisitions track and -- in February, we announced the acquisition of a company, a great company called CCEA is a consultancy company with exceptional expertise in human-driven change, which we believe is something that fits excellently into Gofore's overall offering in digital transformation consultancy. Digital transformation is not just about technology. It's not just about building the user-centric and new digital services. It's also about a larger transformation where organizations need to embrace digital on a much broader scale. And that's why we think that the expertise provided to the group by the acquisition of CCEA is something that is going to be extremely valuable for Gofore for and especially for Gofore's customers. As said during the first half, we also transferred to the Helsinki main market from the First North list as was planned. And we also successfully completed a directed share issue of 1 million shares, raising EUR 19 million in April this year. Something that is, of course, for the company, a very important thing as such, building the balance sheet that we need for our growth strategy to the future, where company acquisitions will play a part. But also from an ownership perspective, it was a very successful transaction where we managed to make Gofore a lot more international also in terms of ownership, which we believe is really important and will be, in the long run, beneficial for all owners of Gofore. We also had some success on the customer front. And here are a few selected examples of customer deals that we did during the first half. A couple of big agreements with public sector customers of ours with Finnish Tax Administration and City of Espoo that continue our successful and long-term partnership with these customers into the future. And we are now, in terms of agreements also -- apart from these 2, we are very well placed for the future to work long term and make successful results with our biggest customers in the Finnish public sector. So from these things over to Teppo and the numbers for the first year.

Thanks, Mikael. So growing fast. Net sales were up to 38% year-on-year basis. And what are the key drivers behind that really strong growth. So if we draw a line from our strategy, its acquisitions have strengthened our offering and especially delightful, increased our presence in private sector. Going back to offering slide, Mikael just showed a solid value chain from lead to create up to quality verification, all steps needed and vital when building customers' digital transformation. And of course, our, let's say, base layer, a strong presence in public sector in Finland, our home market. And of course, not to forget organic growth. All these factors were leading us to a solid strong growth in our home market, both public and private sectors. We want to be more transparent. And that's why we published our sales and all -- and FTE figures on a monthly basis, as you probably have noticed. So here, you can see a clear increase in graph caused by Qentinel and CCEA acquisitions and, of course, organic growth. Qentinel, that took place in the last year, September; and CCEA, now as Mikael mentioned, in March. There is a certain pattern with a certain seasonalities like summer holidays. So we know that there is a slump But in September, we are in a full speed. Gofore has been a profitable, fast-growing company now 16 years in a row. We continued on that path. Growth rate was excellent. Adjusted EBITDA increased 23% year-on-year basis. Growth drivers, as stated in our strategy, were successful acquisitions. CCEA in March positive trend in hourly prices, successful sales pipeline, very solid offering from end to end and of course, public sector success. Scalability in OpEx decreasing down to 10.5%, a couple of percent points lower than last year. And last but not the least, a very tight focus on utilization, and that's our key operative KPI. Okay. A few words about our quarterly development. So years are not brothers to each order. And looking back Q1 2020, so that was COVID-free. And since then, we have been living, I'd say, pandemic era. Q3 '21, so the question, as always, in consultancy business is how fast customers ramp up projects after holiday season. So we have a quite good feeling that it will start quite smoothly. Let's take a closer look at the net sales distribution. So some key findings to bring up. Second from the left by sector, increase in private sector sales in terms of euros and share of sales. We went, from last year, 27%, up to 36% this year. At the same time, we were successful in public sector. So very good development and well in line with our strategy. Our private sector clients are mostly big players in their markets in their industries. And digitalization and managing that change is a key topic there, too. Subcontracting in the right, the share was 19%, a small increase from last year's 17%. But as stated before, it's an ecosystem thing for us. Our capability network, it widens our capabilities and now how it's a booster, and it gives us more flexibility in our operations. About the financial guidance. So we keep our guidance intact. So we are saying that net sales will increase compared to 2020, adjusted EBITDA will increase year-on-year basis.

So maybe you can understand why we are so, so happy and even proud about the results for the first half. It's been a good and eventful first half, as I said. I'm going to now take a quick look into what Gofore's growth strategies and what kind of results we feel that we have achieved during the first half. And then we're going to take a little bit of a deep dive into the drivers behind the growth and behind the profitability numbers. We want to show what kind of things we have seen during the first half of the year and a little bit what to expect for the future. We have earlier said that Gofore growth strategy is about 3 avenues of growth. It's about growth in Finland, it's about international growth. and it's about a disciplined mergers and acquisitions, process and strategy, something that we have been working on since 2017 and have been learning along the road, and we feel that we have we have really, really improved in that area, and that's a big and important part also of the growth strategy. So looking at what we have achieved in these growth avenues, first of all, growth in Finland. Teppo mentioned that the biggest driver behind the net sales growth and the biggest figure there is our growth in private sector customers, over 90% growth year-on-year. Huge success, of course. And what we have done there is that we have been successful in providing our customers with a strategic partnership, with long-term partnership in digital transformations that we have also earlier learned to do with the public sector customers. The needs for the customers in the different sectors are, of course, a bit different and there are differences. But the idea of providing those customers with a comprehensive offering in digital transformation, not just technical know-how, not just helping them with strategy and so forth. All of this is something that is key to becoming a long-term partner with these customers. In the private sector, most of our customers and the big customers are big companies and leading players in their industries. A lot of that is in the export industry in Finland, which, of course, now is in the phase of the pandemic, where they are investing quite a lot and their order books are nicely filling. That also means that digitalization is quite a top priority for many of these companies, and that's why they also have need for services like what Gofore can provide them with. So that's a very good success we have had during the first half, of course, driven also by company acquisitions as part of the strategy. We have acquired companies that have strong foothold in the private sector company. We have acquired, above all, companies that complement the offering of Gofore and make it the comprehensive offering in digital transformation that we are targeting. So very good. On the other hand, public sector customers, we have had good success there. We have been able to win a lot of tenders that are about our long-term customers and have been able to secure our future with these customers for the coming years. We are now in a good position in that sense for the future. And also, we feel that for the biggest challenges in the public sector, not least the social and health care reform coming up there, we are very well placed to help our customers in tackling those challenges. So we are very confident about the future also there, and we are very satisfied with the results from -- also from the first half. Second avenue, the international growth, around 10% growth year-on-year. Not quite what we, of course, would expect in the long run. And a lot of that is about the pandemic hitting our ability sell internationally. And also, of course, in many countries, the pandemic hitting the customer segments that we have, much harder than here in Finland. So it's been a bigger hit for the international clients, at least for the clients that Gofore has. But that doesn't mean that the future is impacted in the same way. We are very, very confident about the future there also. What has happened there is that one part of our international growth strategy is our ambition to use the learnings, use the expertise and know-how that we have gathered here in Finland, together with the public sector in digitalizing society, use that to our advantage also outside of Finland. And we are -- we are really confident that this expertise is something that is needed in Europe as a whole. And that's something that we have now gotten some evidence of. Over the summer, we have had success in a few framework agreement tenderings for the OECD in Paris and the European patent office in Munich and then Hague, where we are now placed as a player in those framework agreements. And that's, of course, a big step for a Finnish company like Gofore. So we are very, very hopeful for the future in that sense also. The third avenue, disciplined mergers and acquisitions strategy, acquiring companies, basically making add-on acquisitions, too, that develop our offering. And also in the future, we are targeting -- develop our geographical locations. We have, over the last year, we have done 2 company acquisitions. We acquired Qentinel Finland, which will become Gofore [ Verify ] in the near future; and we have acquired CCEA as said. But for the future, I think the important things are that we have, again, developed our ability to take over these companies, to be successful in providing these companies with good home, a good growth platform, a good culture for the people from these acquired companies. So that's something that's really important for the future. And of course, you also need the means to buy the company. So we are also very well placed here now with the raising of EUR 90 million in the directed share issue that we did in April. So a good situation there in many ways. Of course, the market is quite heated right now in that area and company acquisitions are challenging in that sense, but we are still very well placed in doing that also. And what we have said earlier is that geographic-wise, we are targeting and looking at the -- mostly at the markets, Finland and Germany, German-speaking Europe. So expect things to happen in those geographies. Then I want to give you a look a little bit, let's say, behind the scenes and the drivers for why our numbers for the first half were what they were, both positive drivers and then challenges that we also have had. First of all, the positive thing that has impacted first half, but of course, is also a very important thing for the future. And that's positive development in customer prices. We have said in results presentations and other investor presentations earlier that the pandemic presented us with a big challenge in customer prices when the pandemic hit. It's now very -- I'm very happy to see that, that challenge doesn't seem to have become a permanent problem for us and probably for the industry as a whole. But at least for Gofore. So we have seen a positive trend in customer prices during the first half of this year, which is really important. And that positive trend has accelerated towards the end of the first half. So very good for the future also. We are, of course, doing what we can to keep this trend going. Very important. The other, which Teppo also referenced earlier here today is in terms of operative effectiveness and our day-to-day work, the most important KPI, our billing rate or the real utilization, as we call it. Real utilization, for us, is a number that mirrors both our day-to-day operations, how effective they are and it mirrors also the effectiveness of us as a whole, as an organization, how much -- what the distribution between people doing customer work, customer-facing work and people not doing customer-facing work is. So these numbers we have here or let's not call them numbers, these bars that schematically represent the billing rate during the first half include both of these things. Please don't take a measuring tape and try to compare those bars to each other. I can tell you that the difference between the high points and the low points here as a real utilization number is around 2.5 percentage points. So that's the difference there. And that's a big difference when we measure profitability. So we did have a dip in billing rate, which was evident in March, and it was at the bottom or the below point was in April. And much of this had to do with a big customer of ours, their agreement period coming to an end and a new agreement period starting. It doesn't mean that we lost customers or lost customer work. It means that we had a point in time where we needed to do a lot of changes. And we didn't manage those changes as well as we would have liked or as well as we should have. This customer, which is the gas center in Finland is one of our biggest customers. And even though we have, like, a negative information here on this slide, that customer relationship is now secured for the coming years in terms of agreements and that's really important for us. So that's a positive thing in the end and positive thing as a whole. But this is something that we needed to show you in order for you to understand also that this is something that impacts our profitability. The third thing going on is that for us and the industry as a whole, not just in Finland, it seems to be a very global phenomenon is that people working in the tech industry, especially which -- who, of course, have a lot of choice in terms of employment, are thinking about their future. We have both kind of pushed back, need to change between jobs because the early pandemic era was a time where people didn't change jobs. So that's kind of pushed back and we now see it. But there's also something bigger going on in the market, and that's something that we also see. And the negative thing about that is that we are experiencing higher employer turnover than we are used to and that's higher than we would like to see. And this is something that is, of course, a challenge for us. We need to, as always, invest time and effort into providing our people with the best employee experience in the industry. And that's something that we, for sure, are doing. But it's not just about doing more and being better at what happened before. It's about adjusting to the new situation brought on by the pandemic. And it's about increasing freelance work. It's about more remote work and so forth. And these are, of course, things that nobody is totally prepared for and something that everybody in the industry need to tackle and Gofore also. And we hope we are going to be successful in that during the last part of the year. It also means, of course, Teppo talked about that is that looking at distribution of net sales, we are expecting, in the long run, the subcontracting part of it going up. And that's not a bad thing at all. It's a good thing for us. It means that we are well placed in the ecosystem as the kind of platform player there and providing our partners with opportunities to work with the customers in their challenges. So those are the things that we want to show you, like, what is going on, let's say, behind the scenes and very, very important things for us looking at first half, also looking to the future. As you know, Gofore's long-term targets are to continue our rapid growth and do it with excellent and, let's say, better-than-industry profitability. And that's for sure what we want to continue doing. We have said that our growth targets is, in the long term, on a more than 20% annual growth. We feel that is still a good target for us, about half of it in the long term coming from company acquisitions and the other half coming from organic growth. Organic growth for the first half of the year, was almost at the level referenced by the long-term targets. The employee turnover is something that is going to impact that area. So we don't have that number in this material, but let's say that it's very close to the target set here. Profitability-wise, we are still very committed and very ambitious on building a company that is, like, structured to deliver this kind of profitability. And we are very sure that Gofore is a company that can do that. So that's what we look to do in the future. We need to get closer to that during the second half. We need to work on things to come closer to the 15% in the longer run. And what we just showed about the things going on behind the scenes, that's the things that have been impacting it for this first half of the year. Lastly, just want to remind you of what Gofore is about. Our aim is to always be growing and profitable, which, of course, this results presentation is very much about, but it's not just that. We want to be constantly renewing I think we have been very successful in that. We have constantly been building the comprehensive digital transformation consultancy offering that we have talked today -- about today also very much. We want to be impactful and responsible, very important for us. And as I said in the beginning, 1 trend for the future is that digital solutions, digital technology is going to be one of the key things to prevent climate change and the climate crisis. And that's something that we, of course, want to be part of. That's very important for us as a company and as people. We want to be more and more international. We have taken some steps towards that. And lastly, but certainly at least, we want to offer exceptional customer and employee experience. And looking at the situation in the market right now, and I'm again, referencing the post pandemic or the changes in the employer market. It's very important for us to be able to offer that exceptional employee experience to people so that they choose, of course, Gofore over the employer next door. So there's Gofore's first half, and now we are ready to take some questions.

So thank you, Mikael. Thank you, Teppo, for the presentations. And good afternoon also to webcast listeners from -- on my behalf. My name is Nina Pavon, and I'm from Gofore's Investor Relations. The first set of questions come from Jerker Salokivi from Evli. So the increase in personnel turnover, how has that affected new recruitments?

If we look at a little bit longer perspective and include last year also, I think what we've seen is that the beginning of the pandemic meant that recruiting also was a lot harder. People were reluctant to change jobs, reluctant to take the -- shoulder that -- not wanting to jump into something uncertain, let's say. Let's put it that way. That has -- during the second half of last year and this first half of this year, that has not been so much of an issue. We have had, during the first half, success in recruiting. We could always do better there. But we have continued recruiting people, and we have a bigger part of the net add of people is the employee turnover part. So recruiting has been successful during the first half. It can always be better, but it's -- that's not the biggest problem.

Secondly, are you seeing increases in average hourly prices across the board? Or is this a result of, for instance, the share of revenue of private and public customers?

It's a bit of both. The positive trend for Gofore has been across the board. But because of private customer prices actually going down last year, and again, we are talking about the pandemic and the shock effect there, the rise in private sector customer prices has been faster than on the public sector, which, of course, the dynamic is also different. Public sector prices don't change that quickly. It's usually in the situations where there is a big, big tender out.

The next set of question comes from Joni Grönqvist from Inderes. Going back to the employee turnover. It seems it has impacted more in July. How much was it affecting your Q2 figures? And what is the current salary inflation rate in your view?

We don't have actual numbers for salary inflation. But of course, employee turnover and salary inflation are kind of the same coin, different sites. And we have a higher risk of bigger salary inflation now that the employer market is what it is. So Joni's question was actually how has it impacted Q2.

Q2.

Yes. Well, it has been something that has accelerated towards the summer, let's put it that way. So yes, Q2 has been impacted by employee turnover.

So secondly, looking at subcontracting revenue, it's clearly higher than the amount of subcontractors you used in H1. So then you are using higher billing rates, profile subcontractors compared to own employees. Is this conclusion correct?

I am guessing that Joni is referencing our monthly business reports and the numbers that we give in terms of subcontractors and Gofore crew as we call the Gofore employers in terms of full-time equivalents. And those numbers are not exactly comparable because subcontractors don't work for Gofore. So how we calculate the full-time equivalents for subcontractors is for billable hours, so that's the difference there. So that's, of course, something also that's going to make comparing these numbers -- they are not comparable, let's put it that way.

So by -- about the international business, can elaborate a bit on the German IT services MA market, amount of potential target companies and valuation?

That's a huge question, of course. The German market is over 10x the size of the Finnish market. So that, of course, gives the picture. The amount of companies means that it's huge. And for us who are coming, like, from outside of the market, that's, of course, a challenge for us to learn that market, understand that market, understand the types of players there, and that's something that we have been working on and has been taken a lot of time, of course. But maybe the answer to the question is that it's over 10x bigger than the Finnish market.

And then lastly, how is your order book looking for H2? And do you see a need for continuous recruiting?

We feel that customer demand is on a good level at this point. We feel that if we're not going to see any huge changes in the pandemic situation, that will actually impact the business of our customers or the willingness to invest in the future of the business of our customers, then the situation is rather good. The second part of your question, are we going to continue recruiting? Certainly. Yes, we want to grow organically. Growing organically, to some extent, always means that we need to recruit. So yes, we are going to continue recruiting.