Gofore Oyj (GOFORE) Earnings Call Transcript & Summary

Welcome to Gofore's 2023 full year and fourth quarter results presentation. My name is Mikael Nylund. I am the group CEO of Gofore and with me I have...

Teppo Talvinko, CFO of Gofore Group. Good to have you.

Extremely delighted to be here today with you, or for you maybe more, because we are streaming live. And how we'll do it today is that we will first look at the results from 2023 from a business point of view and then Teppo will guide you through more financial figures, and after that we'll have a quick look at Gofore strategy and especially how that translates to our offering and building of strategic customer relationships. And to round off, after that, we'll be looking at the outlook for this year and forward, and then we'll have the Q&A at the end. You'll have an opportunity to ask questions on the streaming platform, and we will take them together here with Teppo. And yes, as I said, we are especially delighted here today because we have a fine quarter to report to you. 2023 did continue on the very consistent performance we at Gofore have been able to showcase over the years. Net sales we already reported at EUR 189 million. Our organic growth from EUR 189 million meant that it's plus 22% and the adjusted EBITA for the full year was at 14.1%. So fine numbers as said. The numbers to some extent conceal even being that strong. The fact that 2023 was also a bit of an end to an era. The post-COVID era of very strong investments into digital technology were changed during the year 2023, and we saw a small decline in investments from our customers' side. Full year profitability was due to a strong 2024; Q4, very good. And we managed a very good adjusted EBITA in the Q4 of 16%. That is due to a lot of facts that we will go through in this presentation, but especially how we handled the utilization rate in a difficult quarter. Growth slowed down in Q4 in line with the market situation pretty much but was still at plus 13%. So very good numbers considering a strong comparison period from our side also. Recruitment continued during Q4, but at a slower speed than we have seen over the whole of 2023. Looking at the full year, the highlights include a very strong, comparing to the industry, organic growth of plus 22%. We also acquired Creanex in the summer, nicely complementing our offering to our Intelligent Industry customers and contributing to growth in an inorganic way. I'm also happy to share here, of course, that our rising trend of dividends will continue. The Board is proposing a dividend of EUR 0.47 share, and this, as said, continues the rising trend that we have had since 2017 for our dividends. Customer prices and salaries developed in a balanced way. Customer prices on an average were up 3.5% and the average salary was up 3.6%, very close to each other, of course. And I think one of the special highlights of the year was the resilience that Goforeans showed during the year. If we look at the whole year, Q2 was a bit of a miss for us in profitability. And that was when the full power of the changing customer demand really hit us, and we were a little bit too far ahead in our recruitment and that accumulated some free capacity, which was then reflected on the profitability. But we quickly bounced back with the second half, again, stronger in profitability. And that's, I think, a very good indicator of how resilient of an organization, how resilient Goforeans as a whole are, and that's really important for us also going forward. Also, comparing to a lot of companies in the industry, I think it's good to see that we have industry-leading profitability also that can be upheld in a slower market and how we can really react to different market situation. Subcontracting part of our sales went down a little bit during the year, also reflecting on the market situation, so nothing alarming there. Our large customer strategy also continued working. It's a very good indicator of how our strategy as a whole works. Our amount of big customers went up from 31 to 43, and by big customer, we, in this case, mean customers with annual sales of over EUR 1 million. Share of existing customers was big, in line with strategy. The smaller number of new customers was further underlined by company acquisitions. Creanex, during the year, came in as a new company acquisition, but Creanex strengthened mostly or almost completely only our current customer portfolio, so no new customers via Creanex. Our customers are satisfied with the work we do, which, of course, is the ultimate metric for our success and the value that we can produce to the customers, so extremely important. From a people point of view, recruitment, as said, continued, although the [ mode ] was a bit different, and more than before, driven by clear customer needs. So this is reflected on the amount of people recruited as a whole. Almost 300 people were recruited, not as strong as the year before, but still a very good number, showing our capabilities of taking in new people, working with recruitment, working with onboarding, getting people to work in an orderly fashion. Attrition, people leaving us, slowed down to a number of under 10%, which we have for a long time said that is also our target. I think this tells about the attractiveness of Gofore as an employer, which is really important. Tough year for all of us Goforeans, but we did really well and that's something that we are super happy for, of course. And now over to Teppo for some financial information.

Thanks, Mikael. So let's jump into financial 2023. So we've been discussing here about our strategy. And it means that the big customer strategy we want to be more international, and those key elements can be seen here. So how does this top line look like in terms of our focus areas at big customers and going forward in our path to more international company? Our target is to grow and, of course, not forgetting Finland, our home base. We also want to be bigger in other countries, especially in DACH area. And other countries today bring about 16% of the net sales, and the growth rate has been quite rapid, 85%. So key takeaways here, eMundo acquisition back in 2022 and also how we have put more emphasis in Intelligent Industry approach. All these are contributing to our nice increase and development in our business outside Finland. The other focus area, big customers and Intelligent Industry. You can see a good development in private sector sales. Rapid growth, 35%, and a nice developing presence to utilize that big potential that our big customers have in the segment. Please. Okay. About year 2023, it was a year of segregate quarters. Last year was quite diverse from quarter to quarter. We started Q1 that was kind of a continuation of '22 figures. It ended to growth and strong profitability. Demand was strong, so we were able to recruit and the organic growth was quite good, 32%. We were also able to keep the utilization rate on a decent level. Also a long quarter, 64 days, that all led to excellent adjusted EBITA. Then the second quarter, Q2, that was soft in terms of profitability. Demand slowed down, and we were still making recruitments upfront. And that all led to situation where the utilization rate dropped below what we were expecting and wanting. With a short quarter, only 60 days, that led to moderate adjusted EBITDA. Frankly speaking, we were not too happy about the results. Q3, that had a bit slow start after the holidays, but lessons learned. We put a lot of focus on customer work. We were focused on improving the utilization rate, and also we started measures to curb down our OpEx inflation. Also, the recruitments slowed down, and this all resulted to kind of a turnaround after the very weak second quarter. The last quarter, Q4, that was strong in performance in profitability, again, keeping up the focus on utilization, keeping up the focus on customer work, and continuing measures to deal with OpEx development. These were supporting the good profitability. Recruitments were done on the spot, that means that they were done only for direct customer needs, and that was leading to more moderate operative growth, only 9%. Okay, about the year-on-year development and the factors behind that.

One slide back, please.

Thanks. So first of all, we can see that the net sales growth 26%, organic growth 22%, all were good numbers on the target level. Organic growth even better than our long-term target. So what were the factors behind that growth? Of course, demand was good. So we are operating on a digitalization market which is growing faster than the legacy ICT market. And even though when the market is weaker now, it still is there. It has not gone anywhere. And it's also concerned both public sector and private sector segments. On supply side, you know that we made acquisition, latest was Creanex, speeding up the development on Intelligent Industry and also eMundo acquisition back in 2022 supporting the net sales growth but also supporting strong organic growth. They are, in a way, feeding each other and supporting each other. So what are the tools behind these growth factors and growth figures? So, first of all, comprehensive offering from change management down to quality assurance, and there are a lot of nice offering between those, and that's giving us a nice boost in growth but also giving us resilience in hard times; then employer brand also supporting the growth but also giving resilience in bad times; and then, of course, focus on big customers. If we talk about the...

One slide back, please.

If we talk about the year-on-year profitability, so we can see that the key factors that are supporting the nice profitability that we had was a lean operative model. It's our digital platform. It's the focus on customer work and, of course, we have been taking measures to curb down the OpEx or reduce that inflation that we have there. And all that gives us a resilience when we are going forward. Good. So about the balance sheet and excellent financial KPIs that we have in place. Of course, strong operative cash flow, that's the cornerstone of our excellent financial KPIs. And as you can probably see the net working capital was a bit increasing, so it's now in focus. It's partly due to calendar, it's partly due to the fact that we are growing quite heavily. We are having more business in private sector. We are having more business in DACH area. So these are affecting but still need to say that I'm not too worried about. We have started to take actions to curb down the net working capital. And in that sense, I think, it's a solid situation. Then the net gearing, that stayed negative, even though we made an acquisition of Creanex, we made a couple of earnout payments, eMundo and Devecto, that were pretty much, not all, but pretty much paid in cash. So positive, strong operative cash flow, negative net debt, all these are making us resilient. They are also enabling us when we want -- when we have a good match on an M&A sector, so we can move on with the acquisitions when needed. It also gives us a flexibility to have an efficient loan or debt financing if we need. In the era of higher interest rates, we know that many companies are scratching their heads how to cope with this situation. In our case, we have hedged 70% of the loan position, and that is something that makes us quite comfortable, even if the interest rates are moving up. So in this respect, we have a really good resilience toward any hikes that might take place. To sum up, with a really solid balance sheet, with a strong operative cash flow, negative net debt, we are in a really good position to go forward. We have a really good resilience and possibility also to take advantage to further opportunities.

Good. Thanks, Teppo. And sorry for the hassle about the slides. We have a little bit of technical problems here, but I think we have them sorted out now. As was mentioned by Teppo and me also in the beginning, we at Gofore have continued developing our offering and with it the customer value that we can offer. We had a strategy that was released in end of '22 and that's what we've worked on and that's something that we want to build on in terms of offering also. To remind you, the strategy here is that we have 4 growth avenues -- 3 growth avenues: we are building on the Digital Society success that we've had over the years, building better digital everyday life for us all, with well-functioning, individually-tailored services. We want to challenge, which I think we've already shown for a couple of years, that we can do in intelligent industries, so big industrial customers, developing smarter machines that combine the physical and digital in products and also production. Adding to that, we will continue the M&A strategy that we've had, which is also used primarily as a tool to develop our offering and delivering more value to our customers. This thinking is portrayed on the next slide, which shows our offering as a whole, standalone offering, as we call it, at the bottom, and the integrated strategic offering, which is then a combination of our standalone offerings and directed towards the specific needs of our customer segments at Digital Society and Intelligent Industry. So what we are going to do next is look at a couple of videos from a few customers of Gofore. They are both from our hometown, Tampere, so the city of Tampere, which is about our Digital Society customers. And then there's the Tampere Tramway that operates Skoda Transtech trams and that is also, of course, here in Tampere, and both of these are customers of ours. So I hope you will enjoy these short videos about our customer stories. [Presentation]

Welcome back to our livestream, again, and hope you enjoyed the videos about our customer cases. And now for the last section, we will be looking at targets and outlook for the started year, as said. And after that we will have the possibility for questions and answers from our side, hopefully. First Gofore long term targets. These are the targets that we've had for a little bit over a year now. We want to achieve 25% minimum annual growth in net sales, of which 15% should be of organic annual growth. We have a profitability target of 15% of adjusted EBITDA. And being in a little bit different market situation than a year ago, we went through this with the Gofore Board of Directors and decided that we will reiterate, keep these long-term financial targets. And these are, as said, long term. And for us that means that they reflect the kind of company we want Gofore to be, evidenced, of course, especially by our track record looking back, but also now and in the future, so something that we constantly are trying to achieve. We are a growth company, there's no question about it. We have the capabilities, and we've showcased them, and there's the track record of doing that, what it takes to efficiently scale the consultancy business, and we are strong in profitability. And as we saw from 2023 numbers, that's something that we can do both in slower markets and also a better customer demand situation. So we are confident with these long-term financial targets going forward also. If you look at the market outlook now, I think, what we see is continuing technology driven growth in the market. No question about it, because there's no stopping the accelerating development of technology. One example and good evidence of that is, of course, AI, all the discussions and all the technological development around AI that is happening, will drive the market also forward. Our customers will want to and will even be forced to invest into digital technology. Right now, of course, we are in a market of slower customer demand, and that's driven by the macroeconomic factors and geopolitical uncertainty and so forth. So we are in a different market situation, but we are pretty optimistic about the market, and we looked at the 4 perspectives of the market in our report also. First, the public sector, we see, although there are a little bit of a slowdown because of financial and budgetary measures and austerity measures, we do see that the government program in place in Finland right now is very digital development friendly, and that will have an impact on the market. That will start new investments. Of course, keeping in mind that there needs to be also the money to make those investments, but we do believe that there's a lot of positive in the market. We have a lot of price competition, especially with the public sector market right now, which is because of the whole industry having a little bit of overcapacity and that being directed towards the public sector market quite easily. On the private sector market, companies are in different positions. But as a general observation, we do think that interest rates are very much driving the investment decisions of our private sector customers. And if we can see a lowering interest rate environment, then we'll also see more investment decisions from our private sector customers. In the DACH area, the German-speaking area, we do see a lot of activity. That area is pretty much equally affected by the economic cycle as Finland is, so it's not all fun and games in DACH either. But we see a lot of activity with industrial customers, and we do believe that in Germany, the need for turning around the economy from the old model to a new, more digital model is very present, and that drives the investment. The other side of the markets, the talent market, is, for the moment, clearly easier than it has been, and the reasons are, I think, quite self evident. When there's a slower customer market, companies in the industry are not as eager to recruit. So we have an easier talent market also, for now. We don't believe that will keep up. So we'll have to take all the measures to make sure that Gofore is a good player for the talent market also in the future. And that's something that we are constantly working on. We wanted also to look at a little bit more short-term performance drivers for Q1, because the market situation is, as said, a little bit different and quite uncertain at this moment. And we already know now that there's a special or more-than-normal rate of slowness to the January start. January is always starting a little bit slow because there's [ discontinuity ] in projects for the year end and a new project start in January. But this year that is bigger than before. This means that we started January with a pretty high free capacity, or as some like to put it, a bench capacity. So that's something that is a negative driver for January and also for the whole of Q1. Growth wise, it means that we are in a slower period. We are looking at when the market will pick up and profitability wise. Similarly, free capacity affects utilization rate, which will affect profitability. Comparison period was also strong, so keeping that in mind, we would have required a very, very strong start of the year if we would have kept up with the comparison period. Silver lining here is, of course, that free capacity is like a reserve of capacity, so it enables a faster bouncing back when the customer demand picks up. And we do believe that customer demand will pick up. It's a matter of how fast and at what point, and we want to focus on the bouncing back side and the longer-term results and not on the short-term results.

With that, I think, we have some questions here on the tablet. Let's start by a couple of questions from Jaakko Tyrvainen from SEB. First question is that customer prices were up 2.7% in Q4, and that is somewhat less than seen in previous quarters. Is this coming from new deals or [ ended ] old deals? And also, could you talk a bit about pricing between public and private sectors? I think -- and do add if you have anything, Teppo. Yes, there's slight slowdown, I would say. It's quite slight. The slowdown in customer price development is due to the fact that we have price competition in the market. And we need to be, when offering for new projects, the price level is a bit lower than we have been used to. Of course, we are very happy that the price development is positive at all, so that's good. Between public and private sectors, public sector, as said, you can see directly the effects of price competition. The tenderings are open, you see all the results, and it's very evident that in many cases we have strong price competition there. On the private sector, on the other hand, when our customers are themselves in a little bit of a slower cycle, a weaker cycle, and maybe not doing that well, they are more cost conscious. So we see it on that side too. And of course, what our job is to make sure that we produce the customer value that is worth every cent that the customers use on us and by that get our price levels up even though the competition is hard. But in the end, in terms of average hourly prices, there's very little difference between public and private sector even in this new situation. The valuations of non-listed companies should have declined. Are you aiming to exploit the situation in the near future? Well, I don't know how Jaakko defines the near future, but as said in the presentation, M&A is a very important avenue for growth for us and a very strong part of our strategy also going forward. The economic cycle has not affected our appetite on M&A. We see opportunities. Maybe there's a couple of dynamics in play, maybe the competition for good targets is not as fierce as in some market situation with money having a little bit of a price, and maybe not all players therefore being present in all cases. On the other hand, maybe sellers who are not that optimistic about the future, the slower economic cycle, as Jaakko's question also implies, would drive the valuations to be more fair from our perspective also. So we are working on it constantly. Whether that will bring results in the near future, time will tell. That's, of course, something that we'll have to just wait and see. A couple of questions from Daniel Lepisto from Danske Bank. First of all, Q4 '23 sales in the DACH area and other countries seemed a little soft adjusting for the eMundo acquisition. Should we expect stronger growth abroad this year versus core market Finland? How is the project pipeline and new customer acquisitions developing? As said, the DACH market and pretty much every market outside of Finland has been impacted by the same economic cycle as the Finnish market, so there's not much difference there. We also have seen slowing down of the market in DACH going into the end of last year. However, at the moment, we have quite a lot of activity going on, so maybe a new rise with the new year, we hope that will translate into stronger growth in [ DACH ] and that's what we also are, at the moment at least, seeing and expecting. So there shouldn't be really any big differences going forward in the growth of Finnish and outside of Finland markets. Can you discuss your project pipeline and visibility, especially in the public sector? Any update on potential bigger retenders of current projects coming up potentially later this year? Yes, that's a very good question. We have wanted now to-- in name of transparency, we wanted to give an update for the next 12 months in terms of what kind of retenderings are up for our public sector customers. That's something that we only can do for the public sector customers and not always for them either. But we have 1 framework agreement mentioned in the report that is coming up for retendering potentially at the end of this year or actually in November. That's a framework agreement that if not retendered will continue into the next year. So we'll have to wait and see what the customer wants to do with it. But in the name of transparency, we wanted to include that also, even though it's uncertain when that will be retendered. This is a good situation, we think, because of the price competition situation. Big contracts coming up for retendering now, might present problems, might be subject to aggressive pricing from competition. So we are quite happy with the situation. Otherwise, the public sector project pipeline and the visibility there not drastically changed from what we'd seen earlier, a little slower with new projects, but still pretty much similar to what we've seen before. Last year's end there were budgetary discussions that went late into the year and that's something that impacted us also and our ability to or the visibility into this year, but in the end not that much. So what we are expecting is that there will be no huge changes during the year. Then we have a question from Frederic Leer. How do you see the M&A pipeline for 2024? Is the challenging market conditions creating opportunities? Are you mainly looking at DACH for the next additions? As said, yes, we think that the market situation presents more opportunities and challenges for us as a buyer because we are prepared for new acquisitions, and we are looking at both DACH opportunities, and we are looking at Finland opportunities. Our activity being mostly in the DACH area where we are more of an unknown player in terms of a buyer where we need more activity. In Finland, we are pretty well known as a buyer and get offered most of the cases or the transactions that happen in the market. One more question from Jaakko Tyrvainen. Do you see the current market slowdown to create similar pent-up demand that we saw post-COVID slowdown? I think that's the rationale that we think will happen. As said in the presentation, also, technological advancements are not like waiting for us to get into the right economic cycle. It happens all the time. So yes, there should be a little bit of that effect in the market and that's why we also think that independent of the economic cycle, the market will grow and we'll have opportunities. One question from Joni Gronqvist from Inderes. One technical modeling question. Is there some onetime items in depreciation in Q4, or is this purely due to the new rental agreements and hence higher depreciation level? If you want to look at it, Teppo, you can see the question here, and Joni is referencing our new premises here in Tampere with [ long ] agreements.

So there are no material rights offers or onetime items in the depreciation side. So increase comes from new headquarters and investments there and that kind of normal activities.

Then we have a question from Mäkisen Ville. How have you prepared for the weakening of the Finnish state's economy and inevitable cost cuts among your key clients? This will inevitably impact the order backlog in the future. If I may, I might disagree a little bit with the premise here that it's inevitable. I think we can agree that we have problems with the public finances and that the budgetary deficits are too big for Finland, and there needs to be actions to make that situation better. But what we believe is that the correct actions to righten the course of the Finnish boat, if we put it that way, is to invest in digital technology, to invest into the future operating models that we need to have in place. We need to have them in place for monetary, for budgetary reasons. There will not be enough money to uphold this service if the operating models are not reinvented or improved upon. But we have other reasons, too. We have a shortage of employees in, for example, the welfare sector. So there needs to be investment and there needs to be a situation where we come up with better working models and that will involve digital technology. So we don't maybe completely agree on the premise of the question here. We do, of course, follow very closely the budgets of our public sector customers and the state and other levels of public sector budgets. And we also follow the bigger investment cases that are, most of them mentioned in the government program that the new government in summer published. If you want to see our deeper analysis on the government program, you can go to our H1 report from last year. That's, I think, where we have the commentary on the government program. I don't think we have any more questions. So with this, we can end the live broadcast. Thank you, everybody. And when you want to stay in touch with Gofore, use the email address on the slide. Thank you, everyone.

Thank you.