Gofore Oyj (GOFORE) Earnings Call Transcript & Summary

Hello, everyone, and welcome to Gofore's Q2 and H1 results presentation. My name is Mika Nylund, and I'm the CEO of Gofore. To begin with a piece of a bit unfortunate news, I'm usually here with our CFO, Teppo Talvinko, but he will not be here today due to health reasons. We, of course, wish our friend and colleague a speedy recovery, and we communicated this information earlier this week in a press release. As usually, we will have opportunity to ask questions on the streaming platform after the presentation, and you can type in the questions during the presentation, of course, already. And then I will be joined here on stage by Mr. Ville Rasanen, who is our Head of Financial Controlling and is deputizing for Teppo Talvinko during his absence. Okay. Let's dive into Gofore's Q2 and H1. Q2 for Gofore summed up in 3 points, basically here. Our profitability improved, which we are very happy about, being 12.7% of net sales in adjusted EBITA. On the other hand, although not surprising, we cannot be happy with the growth number, which shows only [ 0.0% ] net sales growth during the second quarter. And that, of course, has to do with the more difficult market situation that we've experienced during the 12 months, which has also meant for us a bit of a balancing act between profitability and growth. Our belief is that to enable success long term, we don't want to be in every case super aggressive on pricing, and that's, of course, the limiting factor when looking then at growth. I think the good news here is as -- and important to state that even though we still talk about a weak market and weak customer demand, the market is not dead as such. There's things happening and what we've seen during the first half of the year is an accelerating amount of things happening, positive signs, sales activity and also, on the other hand, then savings decisions by customers that often quickly and unexpectedly and make it difficultly to navigate this market situation. But as said, we can be a little bit positive looking forward. We are not expecting a quick and over the night turnaround anymore. It will be a longer and drawn out recovery from the weaker cycle. Looking at the Q2 in more detailed highlights. We have the profitability again here and net sales growth. But drivers behind that, worth mentioning is that utilization rate improved slowly, but on the other hand, and which is important, in a trend like manner during the first half and also the second quarter. And it's important to remember here that Gofore started the year in January with a quite low utilization rate, a big capacity on the bench as we -- in the industry say so, so free capacity basically. And this was, of course, our #1 priority for the beginning of the year to decrease the number of people on the bench, on the free capacity, and that's what we have managed to do during the first half and the second quarter of the year. Price competition has been quite fierce still, and that goes, of course, hand in hand with the weaker market and the overcapacity of IT consultancy services. What we see now here today in our Q2 highlights is an exceptional number -- a negative number in customer prices being minus 1%. The silver lining here is that during the weaker market, we have also managed to balance that out quite well on the cost side, where salaries, of course, are the biggest cost element. And average salary rise was 0.10% during the second quarter compared to a year ago. And this has to do a lot with the fact that even though recruitment has been quite slow, there's always recruitment -- replacement recruitment and so forth. And we have managed to reflect on the lower customer prices to the recruitment side. Number of employees went up. On the other hand, on the capacity side, the change is a bit smaller, so that means that we have also, during the 12 month period from the comparison period, shifted capacity over from subcontracting from our partner network to own capacity. If we then look at Q2 in the context of full year and comparison period. We need to remember that looking at '23 numbers, starting from Q2 and especially Q3, this has been a different market situation to what it was before that. It has been also a different game in the sense that, as I just referenced and explained, the market has been more competitive. The market has also been competitive in terms of pricing, and this is a situation that we have needed to learn to cope with and I think we have done quite well. This also includes the fact that when we get unexpected cuts from our customers and the projects are unexpectedly or quite quickly canceled or postponed, it presents a different challenge to resourcing. And being able to maintain such a high utilization rate as we have, I think, is a good indication of Gofore's operative capabilities. Some more points about the profitability side of things. As I just mentioned, the tougher market is tougher also for the profitability side. You would always want a little bit of growth, and it would be an easier equation to manage the resourcing and utilization rate equation. But as said, long term, we want to maintain the healthy margins for our work because we work long term with our customers. And having lower margins for the coming years is not a situation where we want to place ourselves. We have had unexpected customer savings, as mentioned already, and we also wanted to especially mention that this has also affected our DACH area business, so Germany, especially during the period. And this has had a negative impact, of course, on the German business. Recruitments has continued, but directly to customer needs, resulting in pretty much a net increase of 0 in recruitment side for a longer time. Utilization rate was already mentioned. Very important, though, to remember that all year, starting from the low point of January, we have managed to increase that trend in a trend like manner, and that's extremely important for the business in the long run. Again, customer prices and salary changes balance each out pretty well. Could be even better, of course, but it's not a catastrophic situation in any way. Last point highlights, once again, the shift from subcontracting work to work done by own resources. So this is also a result of the weaker market and a situation that we have managed quite well. Comparing half-on-half, again, it's worth remembering that the comparison period here, H1 in '23, includes a very, very strong Q1 that was still in a growth market, in a strong market situation. So that's worth remembering here. Something that I want to highlight from this slide is that for the whole H1 also, the average salary development was pretty well in control, so plus 0.8%. And that's, of course, an important thing to support the profitability also. What we've done during the whole half is also have a tighter grip on operating expenses and controlling that, that was started in Q3 last year basically, and we've managed to do that now for a 12 month period. The downside maybe of that is that, there's not that much anymore that we can save in addition to what we've already done. So this is what we can contribute in terms of operating expenses. Public sector and long term customer relationships are key to managing this well, to managing without bigger negative growth and to manage the utilization rates as well as we have done. So that's one of the key success factors here behind that. After all, quite good results. In terms of net sales distribution, public sector net sales has grown a little bit faster than private sector sales and resulted in a little bit higher share of public sector customers. That should change now with the weaker market we did for a number of years, do it the other way around. So private sector has been an area of -- where we have invested and went well forward, but the new market situation has changed. The difference there is not that big, but we have a little bit more growth on the public sector side. Another thing that has suffered due to same reasons, again, is the share of net sales from -- coming from outside of Finland, that's including our DACH business and other geographies outside of the DACH geography, and those have suffered actually more than the focus area for our international business, which is the DACH area. I already mentioned the subcontracting share of net sales, which also has come down from, I think, a peak number of 19% or 20% even, at its highest. To finish off the results, we have the financial indicators. And excellent financial indicators. And when we look at the balance sheet, basically there's no relevant changes or only changes for the better. Cash flow has remained very strong, and the position we have here is very strong that can support our growth by company acquisitions when we come across opportunities for such. The net debt position improved actually if we don't count the lease liabilities, which were quite a big amount of the net interest bearing debt number here, which doesn't really, in reality, weaken our position to make company acquisitions. Let's next look at the market and some highlights from that side. As I said, there are highlights from the market. So even though we talk about the weaker market and the whole industry talks about the weaker market, at least for us, that does not mean that the market is dead and there's nothing happening. There's quite a lot of things happening, which is, of course, really important. First of all, we have been able to serve our customers well or even better than before in these tougher times, which is extremely important. Customers have more of a choice in this market situation, so it's important to keep relevant and competitive all the time, and that's what we've managed to do. While not focusing that much on growth, we can focus on serving our customers. This is an extremely good position to build on when the growth returns, which we are very sure that it will in time. The amount of big customers increased a little bit. That, of course, reflects on the lack of growth in net sales. So that's a natural and good number, we think also -- also there. What we've also managed to do during times of lesser growth is to develop our offering, and that's, of course, something that we do to serve our customers now and especially serve new customers in a different market situation where the market again grows. We have been developing our offering for the 2 strategic customer segments that we have been focusing on, digital society and on the other hand, intelligent industry. What we want to do is provide unique value for our customers. And related to that, the big news in Q2 was that we started a cooperation with our customers, Ponsse and their subsidiary, EPEC, on a research and development project that is publicly funded by Finnish Business Finland and a program that the Ponsse calls -- Ponsse or EPIC calls Forward27. And Gofore will be a participant in this program, and we will also be investing almost EUR 3 million into researching and developing solutions and concepts for digitalizing product lifecycle, something that is an important concept for us for customers in the intelligent industry segment. The drivers here behind the whole research program and also our investments are that we see and Ponsse and EPEC important drivers being: increased autonomy of mobile work machinery sustainability, which oftentimes means electrification of these machines and data driven solutions, as mentioned by Ponsse and EPEC in the Forward27 program description. We trust that Ponsse and EPEC are global leaders in digitalizing mobile work machinery, and we want to be part of this ecosystem and have benefits from this development also for our other customers. In terms of customer agreements, it's good to note that we have a list of customer agreements also in Q2, so wins mostly on the public sector side as usually on these lists. Worth mentioning is maybe YLE, the national broadcast company, a big framework agreement with several suppliers, but continues our long time cooperation with YLE, which we are extremely happy that we can do. And on the other hand, a new win -- a good new win for a bigger development of a National firearms registry information system for the National Police Board of Finland. Good show of force from Gofore that we, in a competitive environment, can win big cases like these with quite strict requirements from the supplier side. What can also seen in this slide and otherwise in the sales pipeline is that there is quite a lot of activity from the healthcare and social services sector. Finland having being now a couple of years into the new regional entity that takes care of healthcare and social security, also social services and those regions developing their operational models, developing their strategy based on digital solutions, and we want to be a big part of that. The downside here is that, in the current situation, these areas, regions are a little bit held back by lack of funding, but there is a lot of need there. So we are happy that we have been successful also in these tenders. The other side of the coin about customer agreements coming to an end, we're also happy that there's nothing overly significant on this list. We've added a government agency, which will be -- the framework agreement that we have will be retendered maybe during this year or maybe early next year. The list could be much, much worse in a competitive price sensitive situation where we are right now. We are, of course, really happy that the list remains quite short. Indicators for employees are still very healthy. Attrition numbers are on a good level, on below our target level of 10%, so 9.5% in the last 12 months. That's a very good number for us. We are aware that this weaker market situation has meant that we have not been able to invest in our people and their professional development in a way that in the long term would be healthy. So that's something that we really want to do. And keeping a good profitability level allows us to do so also in the future, because that's, of course, the key element, the very key element of long term success of Gofore. So to sum it up market, there's market activity, but there's also negative market activity, which has meant that we are still, growth wise, on a like a net-zero level. But if this keeps on, we are expecting positive development, not over the night and not sudden, but on a longer period. So next, about the outlook and targets, and let's start with the short term and Q3 performance drivers. As I just said, we see positive signs in the market, but we don't expect a quick change or that we quarter-to-quarter will change the game completely. That's maybe something that, at the beginning of the year, felt more probable. But this seems like a drawn out -- more or less a drawn out return to, let's say, normal economic situations and normal investments into digital solutions. Recruitment will be moderate, and utilization rates, we expect to be in line with Q3 in '23, so that's good. We have still free capacity. It's higher than what we have earlier considered the normal or the target level. So there's work to do. If we can continue with the good sales activity, then that will be possible to fix. It's also important to keep in mind that Q3 and the Finnish holiday season is a time of year where it's especially important to be able to manage the operative efficiency in terms of getting people back to projects after the holidays. And that's something that we have been good at, but we haven't really gone through that work this year. So there's, of course, some question marks around that. Customer savings and caution is expected to continue in the current market situation. What we see, looking at the first half of the year is that there are less and less of this postponement and cancellation decision. And if that continues, then of course, that has a positive effect on the project pipeline that we have. Recruitment, as said, moderate, but we could be looking at an increasing number of employees from this third quarter onwards. Profitability-wise, utilization is -- when we look at the short term is the key here. And we are expecting this to be -- utilization rate to be on the same level as the comparison period a year ago. But we have some uncertainty due to the customer savings that have already occurred in the DACH area which we are reacting to, so not 100% sure there. But we are slightly positive about Q3 and looking forward. If you look at the longer period, I think it's important to say that maybe comparing to some peers from outside of Finland, we might be held back a little bit with the slower economic cycle here and slower economic catch-up here in the Finnish market and also the German market. So both markets seems to be a little bit late cycle in this sense, but we are confident that it's still about the economic cycle and the fundamentals underneath have not changed. There's a huge need for investments into digital solutions, and that's why we are here. In the public sector, we see a lot of activity in the sales pipeline right now. We see quite a lot of big cases also in the sales pipeline right now, which we are working hard to win. So even though the discussion here in Finland is a lot about cutting back on budgets and austerity, that's not the whole truth. You need to invest into new solutions. You need to upgrade and lifecycle changes will come to -- for IT systems in the public sector. So that's what's happening all the time. On the other hand, we need to be also honest about the tightening budgets. We've seen some effects for this year, not that much, but that will be a little bit bigger probably next year looking into '25. But as always, we think that this government implements a program that is quite good for digital development, and there's a need to invest into bigger projects, and that's -- we see that these 2 things balancing each out there, the austerity and on the other hand, the willingness to invest into the future and into the digital development programs. Private sector side remains a mixed bag. So there's good and bad and some customers are doing better than others, and those should be increasing their investments. We do estimate that there starts to build up a little bit of a bottle-up situation of the needs. So when the no investment phase is extended then we'll see something of a bottling-up phenomenon there, and that's something that should be at some point then starting to release. Again, I say that a turn in customer demand is taking place in the short term, but we expect this to happen gradually in a longer period of time, not overnight or quickly. Looking at our strategy, it remains the same. And as I said, we believe in the fundamentals being unchanged and they are for both of the customer segments that we have been focusing on. On the other hand, digital society and on the other than the intelligent industry, both customer segments having a big need to digitalize and renew. So no big changes there. M&A appetite for us is unchanged. We've seen a pretty long period of maybe not a very good meeting of supply and demand. So we are, of course, not happy that we haven't managed to successfully close any cases, but that's been -- the whole market has been like that, and that's hopefully starting to open up also now. Updating strategy is something that we have done with a 2-year cycle now for a longer period of time, and that's what we have been continuing. So we have now a process ongoing for a strategy update which will result in probably our strategy update late this year and also, we are aiming to have a Capital Markets Day where we can discuss this new strategy update together with you at the beginning of next year some time. So stay tuned. Board has not seen any reason to change our long-term over the cycle target setting for our business. So I say once again, over the cycle target setting. So we continue to target 15% profitability in adjusted EBITA and 25% annual growth of at least 15% organic growth. And we feel it's important to remind you all that, our track record shows that this is something that we are able to do. And we are still -- Gofore is prepared for the growth when it comes back also for the future. The things that made up our great track record are there, and they are ready to be taken into use again. Thank you. And now we will go over to the questions if we have questions and Ville will be also joining me here if we have questions regarding the financials.

Thank you. Good to be here. Looking forward to all the great questions that our audience might have.

Let's see what we have here. We have a question from Jaakko at SEB. How streamlined are you now? Should we expect some pent-up cost growth as well when the demand picks up? Maybe you want to add something to this afterwards, Ville. But I would say that in terms of operating expenses and cost like that, we are quite streamlined already. We are not really able to make significant bigger savings. We've already done quite a lot of work there. And as I said in the presentation, we feel that there's also maybe a little bit of a pent-up demand in investing into people's professional development. So that's a little bit of a situation where we can't do that much. But when you asked about how streamlined we are now, I think the more important part of that is that we all still have the free capacity. We still have a little bit too much many people on the bench, and that's a reserve that we can use for new projects and a reserve that we can use as a leverage for greater profitability and operating performance. Then we have [ Marcus ] asking, given your project pipeline, when would you expect to return to organic growth? Well, we don't give exact guidance on that. What we said on the Q3 drivers slide here is what we want to say about that. The difficulty has been all year and maybe even for a little bit longer time is that even though we have activity sales-wise and we win new cases, we also have a bigger than normal bigger than we are used to leaking at the other end, which is about the customer savings that they try to protect their own profitability and/or have budgetary cuts in case of public sector organizations. And that means that we also lose projects and that's until now has been -- as we see the net sales growth, has been a net-zero. So that's what we do expect to change, but how soon? We have to stick with what we wrote on the Q3 drivers slide. Okay. Then we have a question from Jaakko, SEB again about price competition. Are you seeing any signs of easing there? And how much do you think you've lost volumes because being disciplined in your own pricing? I think it would be rational to assume that price competition, unhealthy price competition, which I think it was at the worst phase. It's not something that can continue for long. So it would be rational to assume that it is easing. I think we need a little bit more time to actually say and have evidence of that actually happening also now. But looking at Q2, I think we have a good start there for such evidence. But let's wait a little bit. Jaakko also asks, are you seeing increasing demand for AI-driven solutions? How you are positioning in the market with your AI capabilities? Could AI-driven demand be the catalyst for improving market situation? Long-term, I think it's clear that AI and other technological advances, but AI being, of course, right now, the most significant of those and having the potential to change the game quite significantly is what will be driving also future market growth for IT consultancies or consultancies focus on digital solutions. So that's why I think it is clear that that will be happening. What we look at in the short run, it's still -- the situation with AI projects is mostly about smaller projects, mostly about customers building up their understanding of what AI solutions, AI technology is capable of and building proof of concepts, trying out things and so forth. So that's not -- the big projects are not yet strongly like AI driven. But that will happen. I suspect that the big projects will not be called AI projects mostly. They will be called business improvement and business change project as the digital solution projects are nowadays. So it will be like a natural part of every development. And I think we are well prepared for that with our broad set of capabilities. All of those, of course, look to include more and more AI elements into their offering. We have the software development side with AI-driven tools, AI-driven software development. But we also have, for example, AI-enabled testing, test automation. So getting more and more people out of the testing loop and getting more and more AI to work for the testing is a really important development on that side and so forth. There are so many areas where AI can improve on our services. And even more importantly, there are, of course, so many areas where AI solutions could change the way our customers conduct their business and operations. And we have not really yet seen that. Most of the discussion and most of the AI changes still focused on the individual level, on individual level productivity which I would supposed will be quite irrelevant in the bigger picture if the productivity increase is 30% or 50% when we try to -- when we start to look at more systemic level changes driven by AI. German operations. You sound a bit more cautious versus Q1. What has changed in the market? Or has there been changes in your local customer activity? Yes, this is -- you're absolutely right, Jaakko in the question. Q2 we had customer savings -- unexpected customer savings that impacted the operations quite significantly on the level, of course, what the operation is. We don't think of that as something of a more -- like a general development in the market. We see healthy activity in the sales pipeline also in the DACH. But one of our current or old customers made significant savings for basically H2, and that has a significant impact on the DACH team and that operation. So that's why we are a little bit more cautious and have also included that in the profitability driver update. Okay. We have a question from Joni Gronqvist from Inderes. When we now see the trend of customers cutting amount of suppliers, how have you performed and what are your competitive edges in these kinds of situations? So yes, I think we see that, yes, from -- especially from bigger buyers. On the private sector side that's been a clear trend this year that customers look for the, let's say, best prices of the day and also, at the same time, have the possibility to consolidate a little bit their supplier network, which for many customers has been quite dispersed because there's been a shortage of resources and knowledge and they have maybe at times needed to buy wherever they can get these resources. We feel that there are a couple of reasons why this is a development that generally favors us. The first off of those is that we can offer our customers a comprehensive offering of digital transformation services. Broad integrated offering which we think that many of the customers are looking at right now in this situation. The other one being that many of these customers are also customers that we have maybe not been that much involved in before having such a strong history in the public sector, and we have, therefore, of course, the opportunity to take more market share in these kinds of customers also. Is there some questions that I have missed, because they are not in any particular order? I don't think so.

Jaakko is asking about July sales.

Yes, thank you, Jaakko. About July sales. It is a small month, but did you see any major deviation versus previous year? Yes, it is a small year -- small month and we wouldn't like anybody to pay too much attention to July. We will be coming out with the numbers in conjunction with our August business review, which will come out --

In early September.

Exactly. And one more question from Joni. I think the big contracts in the pipeline, these are new clients, right, not continuing projects? When will we now -- I think he's trying to ask when will we get news if the contracts are won or maybe also about when this will affect the business. Yes, these are mostly new clients and if not new clients, then at least new projects, which we haven't been involved in before. So yes, very much like new business in the pipeline. And there will be several bigger cases that will be resolved now during Q3 and some of them, I think, will go to Q4 even. Most of these effect is, of course, for the coming years, so for '25 and forwards where we might see a small impact also on the year '23 and the last months of the year. I think that's it. Thank you for the wonderful questions, and thank you for listening. So if you have any further questions, just contact Investor Relations, Emmi Berlin will be there answering your questions. So don't hesitate to be in touch. Thank you.

Thank you.