Netcompany Group A/S (NETC) Earnings Call Transcript & Summary

[Operator Instructions] Today, I am pleased to present CEO, André Rogaczewski; and CFO, Thomas Johansen. Please begin your meeting.

Good day, and welcome to this presentation of Netcompany's results for Q2 2021. My name is André Rogaczewski, and I'm the CEO and Co-Founder of Netcompany. And I'm joined today by our CFO, Thomas Johansen. And before we get going, there are some important disclosures that I need you to read through. So could we please have Slide #2, please? I will pause here for 30 seconds and let you all have a read-through of these important disclosures. And with that, can we please go to Slide #3, please? The topic of today's presentation follows our usual layout, which is that I will first give you an update on the business highlights for Q2. I'll also go through our revenue visibility and our financial guidance for 2021. Once I'm done, Thomas will go through the numbers in greater details before we open the call for any questions. And can we have the next slide, please? We continued the strong momentum from the last quarter into this recently ended quarter and grew top line by 21.2% in constant currencies, all of which was organic. This is very satisfying, taking into consideration that we are starting to see more of the deferred vacation not taken in Q1, being taken in this quarter, in line with what we had expected. Gross profit increased by 13%, yielding a gross margin of 35.5%, which was 3 percentage points lower than in Q2 2021. The reason for the lower margin can be summarized into one single reason, and that is support of international growth. Thomas will go more into details with the mechanics hereof, but, overall, we've seen a need to continue to support our international entities in establishing a solid foundation for both short-term and longer-term growth. This has a negative temporary dilutive impact on margins. However, it sets us up for continued longer-term growth on the entire group level. And that is what we believe is more important than short-term margins. The lower gross profit margin naturally impacts adjusted EBITA margin to the same tune, and adjusted EBITA was DKK 166.7 million, which yields a margin of 20.2%. In addition to the gross profit-related impact to adjusted EBITA margin, we also had nonrecurring severance costs related to our U.K. operation in Q2, further diluting adjusted EBITA margin. For the third consecutive quarter-over-quarter, FTEs grew by more than 500, actually 575 to be specific. And I'm particularly proud of our ability to continue to attract new employees and to retain our value talent in a labor market that has increasingly tightened. I believe this to be a testimony to our strong employer brand build over the last 2 decades, where we have always focused on delivering complex and important projects to our customers in both the private and public sector. And can we have the next slide, please? Continuing on the employee topic, the breakdown here shows where the 575 new FTEs have been hired. We have added FTEs in all our units, and we have reduced the level of independent contractors in the U.K. to 14, which, for all practical matters, means that we have concluded the conversion away from independent contractors to own employees in the U.K. The main intake of new employees was in our largest unit, Denmark, where FTE increased by 287 people. However, on a related basis, the highest intake was in the U.K., where the level of our own employees increased by 39%. Of that increase, around 15% was conversion of independent contractors to employees and the remaining 24% was net new hires. In our 2 talent pools, Vietnam and Poland, we also increased our FTE level with close to 150 FTEs compared to the same period last year. Churn for the last 12 months was 18.3%, which was 2.4 percentage points higher compared to last year. In Denmark, churn has picked up during Q1. And overall, we begin to see more movement of employees between different jobs, a clear indication that we are coming to an end to the COVID-19 spillover effect on the labor market. While we clearly enjoy a strong employer brand, we see increased competition at the time with digital competencies across all the geographies we are in. Churn also picked up in the U.K. and in the Netherlands. In the Netherlands, the churn is at a high percentage level, but with limited employees actually leaving. The amount of administrative employees measured as non-client-facing resources was 5.9% in Q1 2021 compared to 6.8% in Q2 2020 and thus continuously decreasing towards our target, which is 5%. Can we have Slide #6, please? We have won a number of larger multiyear contracts, both with different governmental agencies, but also with different private customers in various geographies, and I will mention a few here. In Denmark, we've won the contract with the Agency for Labour Market and Recruitment, a contract which will lead to a modernization of the platform used for unemployed citizens. In addition, other of the agency solutions will be in one list. Also in Denmark, we've won a contract with the Agency for IT and Learning. This contract was a 4-year new contract with a customer that we've already served for many years. In the U.K., we've continued to expand our presence with the NHS, following our award to participate on the framework contract that we succeeded to get on to last year. More specifically, we have recently been awarded 2-year projects to support NHS Digital in improving quality of data, which in the end will lead to better health care for the citizens in the U.K. Two new deals were signed in the Netherlands in Q2, 1 framework agreement and 1 where a current customer prolonged their cooperation with us for another 4 years. In addition, we have also signed another larger framework agreement in the Netherlands with a unit called Logius in the beginning of July, so actually in Q3, but I wanted to mention it in this setting, too. In general, there's been some delay in decision-making in awarding topic contracts in the Netherlands following the election in the spring. With these recent wins in the Netherlands, we are confident that utilization will increase. Overall pipeline in all countries look healthy and lays the foundation for continued growth throughout the rest of the year. Can we have the next slide, please? The investment in terms of increases usage of -- sorry, the investment in terms of increased usage of Danish resources in Norway, the U.K. and in the Netherlands was continued from Q1 into Q2 as we firmly believe that this will give us a strong foundation for longer-term growth outside of Denmark. Revenue in Norway increased more than 47% in Q2 following the strong growth of 30% in Q1 on the back of the strong momentum we had in Norway in Q4 last year. Margins improved, also supported by the high utilization realized in Norway in Q2. We see strong demand for our services in Norway, and we have finally been able to get our employees back into the offices in our new headquarters in Oslo and our new office in Trondheim. In the U.K., we've seen a positive activity following the win from last year with the NHS. And we have seen a growth of 22% in the quarter and improved margins also. We see an interesting and continuously developing pipeline in the U.K. And with our finalization of changing from independent contractors to our own employees, we now have the foundation to really expand on. In our most recent acquisition, the Netherlands, the integration is progressing to plan. However, we are very negatively impacted by the election in February and there's still not a new government in place there. This has delayed decisions on larger tenders, which negatively impacted our revenue growth in the second quarter. However, things are beginning to progress in the Netherlands, which the signing of a couple of new framework agreements is a testimony to. We are satisfied with the progression of our integration of the new markets, and we are convinced that they are solid foundation for significant future growth. And can we have the next slide, please? The strong performance in all of our business units has increased the level of contractually committed revenues close to DKK 3.1 billion at the beginning of July, which was an increase of more than 23% compared to the same period last year. As in recent quarters, we see improved revenue visibility in both the private and the public segments throughout all of our units. And this leads me into our expectations for 2021. So can we have the next slide, please? For our top line, we now expect revenue growth of between 18% to 20% compared to 15% to 20% previously. As we also mentioned in our Q1 earnings call, some of the growth we have had so far in 2021 is caused by deferral of vacation from the employees as we see societies generally easing COVID-19 restrictions, and we expect that the further vacation will be held, which in turn will impact our revenue growth and margin numbers negatively, as expected. However, the underlying sentiment in the markets we operate in are positive, and we do have a better revenue visibility than we did last year, which also means that we have raised our expectations to the top line growth to the upper end of the guided range for revenue at 18% to 20%. Despite the strong performance in the first quarter, we still expect to have -- to invest in our entities internationally by utilizing Danish resources on international projects. Hence, we maintain our expectations to our margin at between 23% and 25% for the full year. And with that, I will give the word to Thomas to take you through the financials in greater details. Please go ahead, Thomas.

Thank you for that, André. And like already mentioned, I'm CFO in Netcompany, and I will go more into details with the financial performance for Q2 2021. So if we move past the breaking Slide #10 and straight into Slide #11 in one go, please. Now André has already spoken to our performance in general terms, and I will go more in details with the performance in Q2. Revenue growth was 22.4%, positively impacted from currencies by 1.2 percentage point, leaving growth in constant currencies at 21.2% against Q2 2020. All revenue growth was organic in Q2 2021. Gross profit margin was 35.5% in Q2 compared to 38.4% in Q2 2020. The lower gross margin was a combination of different factors, which I will elaborate on a little later. The common denominator though can be labeled as "future growth-enabling investments." Administrative costs grew by DKK 26 million or 27.5%. In that, a nonrecurring severance payment of around DKK 7 million related to our operation in the U.K. was included. And adjusted for this, administrative costs grew by around 20%, driven by normal costs associated with hiring new employees, cost for external advisers in connection with our new headquarter in Oslo and our new office in Trondheim and, in general, more costs related to employee-related activities following the gradual easing of COVID-19-related restrictions. Amortizations have reduced by more than 60% as part of the intangible assets related to the FSN acquisition of 52% of the shares in February 2016 have now been fully amortized. Net financials was reduced by 58% as both interest cost on our loans have gone down as we reduced the outstanding amount due. And also, we have converted a loan related to our acquisition of Hunter Macdonald in 2017 denominated in British pound to equity, which has reduced the currency adjustment included in net financials, too. Can we have the next slide, please? Public sector revenue grew by 10.4% in Q2, driven by growth in particular Norway, where revenue grew by 77.6%, and in the U.K., where growth was close to 14%. In contrast to the period up to 2020, revenue growth in Denmark was the lowest of the units in the public sector, this time at 6.5%. This was, as in Q1, due to a combination of more larger-scale projects being won in the private segment in Denmark and also a number of resources from the Danish public segment organization working on projects outside of the Danish organization. The usage of Danish resources on projects in other countries leads to lower margins in those countries as resources in Denmark are more expensive. However, it sets us up for future margin expansion and the cross-usage of resources is an important element of implementing the correct Netcompany methodologies in the countries outside of Denmark. Adjusted EBITA margin was 15.1% compared to 18.8% in Q2 2020, mainly driven by the increased usage of freelancers in Denmark, increased cost realization and more hours spent on business development. Can we have the next slide, please? As in Q1, the private segment outgrew the public segment again in Q2 2021 and grew by 45%. The growth is broadly based from both the Danish, Norwegian and the U.K. operation. Private segment revenue in Denmark grew by 40.7%, where the growth in Norway was 46.7% and the growth in the U.K. was 46.7%. As the level of private segment businesses outside of Denmark is still limited, the cross-usage of resources from both the private Danish operation does not impact the private segment in the other countries to the same magnitude as for the public segment. And hence, we do not see the same level of margin decrease in the private segment for the group as seen in the public segment. Consequently, margins in the private segment increased in Q2 2021 compared to Q2 2020. Gross margins increased to 40.3% from 39.6% last year. Adjusted EBITA margin was unchanged at around 26%. Can we have the next slide, please? All units, but the Netherlands, grew revenue compared to Q2 2020, and the group grew revenue by 21.2% in constant currencies in total. Denmark grew by close to 20% despite the fact that a significant number of resources were working on projects in the other operating units. The growth was, as mentioned, based on strong performance in the private segment. Norway saw the stronger growth in the group and grew by 47.1% as a result of the wins on the public segment during Q4 2020, which has led to an increased utilization in Norway. In the U.K., revenue grew 22.3%, driven by our relationship with the NHS, but also with other large existing customers. In the Netherlands, revenue declined 2.9% following lack of decisions on a number of larger public tenders following the election in February. It was only towards the very end of the quarter that these tenders were finally awarded. And Netcompany managed, as André has already mentioned, to get on 2 of these. So can we have the next slide, please? Gross profit margins are 3 percentage points lower than for Q2 2020. There are a number of factors impacting the gross profit margins and they fall in 3 groups with the same common denominator, future growth-enabling activities. Firstly, we have increased the usage of freelancers in the Danish operation by 40 compared to the same period in 2020. This has impacted gross profit margin negatively by 1.5 percentage points. Second, we've had an increased level of cross-utilization on projects in the group, whereby senior resources from the Danish organization have been utilized on projects in the U.K., in Norway and the Netherlands. The amount of senior Danish resources currently on international assignments is around 100. This has impacted gross margin negatively by around 1.5 percentage points. Thirdly, we've spent more hours on what we call business development activities in the second quarter this year compared to the same period last year. This covers tender writing activities, enhancing of our govtech framework, investing into solutions delivered that potentially can be developed further into platforms and so on. When we do these activities, the level of utilization declines, leading to lower revenue but on costs that are still maintained. This has reduced gross profit margin by around 2 percentage points. Offsetting these negative impacts to gross profit margin was significantly improved performance in the U.K. and in Norway, which together improved group margins by a little more than 2 percentage points. While the activities related to the increased cross-utilization have a short-term impact on margins, it is our firm belief that they are the right ones to make as they will enable the units outside of Denmark to generate growth at a rate which will sustain the strong growth of the group as seen historically. And can we move to the next slide, please? Adjusted EBITA margin for the operating entity decreased by 4.1 percentage points in the quarter. Most of that is due to the reduced gross profit margin that I just explained. In addition, a nonrecurring severance payment in the U.K. accounted for 0.8 percentage point of the 4.1 percentage point reduction in adjusted EBITA margin. We did see increased costs related to employee activities, and this was expected, and we are actually pleased that it's now possible to have more face-to-face activities with our employees. We expect these type of costs to continue to increase through the remaining part of 2021. And can we move to the next slide, please? Free cash flow was negative DKK 10 million in Q2 2021 compared to positive DKK 103 million in Q2 2020. The main reason for this was the payment of DKK 96 million due to the Danish Vacation Foundation following new vacation law implemented in Denmark, whereby employees earn the right to their vacation on a monthly basis rather than in the old model where it took 1 year and 4 months to have the right to paid vacation. The payment of the amount due related to the vacation for the Danish employees is voluntary for all companies in Denmark. However, if you, as a company, do not pay the amount, you will have to pay an interest to the government. And given our strong cash position, we have chosen to pay the amount due. Days sales outstanding were 65, in line with the level in Q2 2020. And in general, DSO tend to be a little higher around Q2 as the end of June is also the high season for holiday with many of our customers. Work in progress has increased by 16% and accounts receivable around 26%. Together, they increased by 21.9%, in line with revenue growth. In Q1, we repurchased own share -- sorry, in Q2, we repurchased own shares of around DKK 50 million, and we have invested a further DKK 25 million into the JV we have with Copenhagen Airport. So despite all of these payments, cash at hand still remains high at DKK 179 million. So with that remark, I've concluded the detailed financial analysis, and we'll now open up the call for questions. So can we move to the Q&A slide, please, and open up the call for questions? Thank you.

[Operator Instructions] The first question comes from the line of George Webb from Morgan Stanley.

André and Thomas, I hope you're staying well. A couple of questions in mind. So firstly, to touch on that Danish resource cross-utilization topic. And as you've mentioned, that's set up this year and expect it to continue for the rest of the year. Can you give a bit of background on what prompted you to step up that cross-utilization in Q1 and Q2 of this year, in particular? Is that down to anything around the progress the non-Danish business units were making? Was it tied to the whole working progress being made easy by remote working? Or is there any particular catalyst there? And to what extent is this still a short-term measure that only last this year to accelerate that build-out of capability? Or could it continue into 2022? And then just secondly, as a background question, can you talk about what level of wage inflation you've been seeing in prior years in your business and what you're expecting for this year as a whole?

Yes, thank you so much, George. Well, basically, the usage of Danish resources, in particular in Norway and the U.K., is a result of complex, high-end projects where we need Danish resources to make sure that we get things done the right way. And as you know, telling about a methodology or showing a methodology is not enough. Sometimes you have to work with them in order to make sure that the people you train do it the right way. And the whole idea is to have more Norwegians, more British people and also more Dutch people knowing this and using it the right way because then they can teach, again, their employees. So it's just -- it's actually on a positive background because many of the projects that we've won, particularly also in the public sector, requires us to use some of the best people. And that's investing into future growth. The question in regards to whether it will continue into '22, well, the reason why we're doing it now is because many of these projects are being defined and also many of the employees we've hired in Norway and hired in the U.K., they need that now in order to reflect and teach onwards to the people there. So we -- right now, what we're looking into is at least this year, and then hopefully we'll have trained enough, so the competencies in these markets are on a substantial level. I mean depending on the growth and the type of projects we get, we might need to help more or less. But right now, we've chosen to invest into competencies, at least specifically in Norway and in the U.K. And when it comes to the wage inflation, Thomas, do you have any projections in regards to that?

Yes. Typically -- and thanks, George, for the questions. Typically, what we do in Netcompany is, once a year, we adjust the wages for all of our employees. And then we have our own "rhythm." And the ones that are well performing will have historically been given salary increases of between 9% and 12%, which, even in a tough and tightened labor market, is still competitive. Now we can do that and still maintain our performance, given the usage of the pyramid structure and the ongoing hiring of new employees. So when we look at it on a full year, cost per employee is fairly stable. Now in terms of what wages are going to look like next year, it's still premature to look like or to say anything about. But during the year, we have not increased the wages midterm or what have we. So we've managed with our model so far.

That's really helpful. And maybe just one quick followup. I mean just in Q1, attrition was kind of sub-16% LTM, up to over 18% in Q2. Is that -- do you expect that to get worse from here? Or is that now at a kind of level that you can plateau at even in a tough labor market?

I think it's a result of COVID being more or less over, at least in the minds of people. And we have also seen smaller churn when we were in the midst of the pandemic. So I think it's a natural reaction. Well, it's difficult to say exactly what's going to happen. But right now, we are able to attract new talent. We see no change in the satisfaction of employees at the moment. So I think those 2 things indicate that we still have a very positive work environment and people like to be with us. So we're definitely hoping that this increase in churn is just a result of -- let me put it this way that the labor market is free again in a sense.

Your next question comes from the line of Claus Almer from Nordea.

Also a few questions from my side. The first question goes to the high tender activity mentioned in the report and I guess also in this presentation. When do you expect these projects to be awarded? And also is the nature of the projects that you are tendering for, especially outside Denmark, changing in structure, size and so on? That will be the first one.

Yes. Thank you for that question. I think it's a very good question. And I'm actually delighted to say that the nature of the projects and also the size of the projects that we're bidding for is -- they're getting more complex and they're also getting larger. And that goes both for Norway and the U.K. And especially when it comes to the govtech framework and our public tenders, you need to know exactly what you're doing and you need experience. And that's also one of the reasons why we've chosen to invest some of our Danish resources into that. So it's on the basis of a positive development. And theoretically, you can continue to grow in Denmark by more than 20% for many, many, many years. But practically, I think it's a good idea to invest into winning larger projects in the other markets. And when it comes to when these will be awarded, typically, it's on the 6 months, 6 -- 2 quarters -- typically 2 quarters from tender writing activities to winning. That's approximately 6 to 8 months typically when it comes to the public tenders. Some a bit quicker, some a bit slower, but that's typically the time frame.

Okay. That makes sense. Then the second question goes to the employees. The number of employees is up by something like 22% year-over-year. You also mentioned that you are adding Denmark's external consultants. So what is the total amount of client-facing resources up year-over-year?

The client-facing resources is up by around 0.8 percentage points. So the non-client-facing 5.9% compared to 6.8% quarter-to-quarter. So around a little bit of 1 percentage point, Claus. And then clearly, we spent more time, as André say, on activities related to tenders. We spent more time with Danish resources on projects in U.K., Netherlands and Norway, and that does not yield the same revenue. So that's why there's not a one-to-one match on that in top line growth.

But does that include the external consultants you added in Denmark?

Yes, they're included because they're fee billers. So everything that is fee billers is included in that. So the freelancers, the 77 in Denmark, is included. And the independent contractors, the 14 that is left in the U.K., are also included because they are fee billers or fee generators.

Okay. Sure. And then this growth, if you look at it year-over-year, more than 20%. And if we try to match that with your [ interested ] guidance for revenue growth in the second half, then you have grown your number of employees somewhat more than is reflected in the guidance. Does that mean you are expecting to keep using a lot of resources on tendering activity? Or how do you try to match these development in employees and revenue growth?

I think in general, what we said in Q1 and what we've also highlighted here is that part of the growth that we had in the first half of the year is also due to the fact that our employees have deferred some of the vacation. So that means that some of the growth that we have had in Q1, you can say is something we've borrowed from -- or in the first half is something we've borrowed from the second half. So irrespective of the fact that we are more FTEs, and I fully understand your logic which is correct, then we do not expect the full impact of that in the second half of 2021 because there is still some deferred vacation that will be taken and that will clearly have a negative impact on the potential growth. So I understand your logic, Claus. And the reason why it's not a full one-to-one spillover is that there is still some deferred vacation to be had in 2021. To comment from my side, I could just see that there on the presentation, I was referring to 2 slides that are in the appendix. So we'll update the latest version, but the slides that we're missing and the reason why you could not potentially reconcile ongoing is the revenue in public and private and then the first 2 slides in the appendix. So that's where they are.

The next question comes from the line of Yiwei Zhou from SEB.

André and Thomas, I have 2 left here. So you mentioned the higher attrition rate in the Dutch operation. Would you add a bit more color on this? Are you seeing sort of more senior in the management level employee leaving the company? Or it was more sort of a consultant leaving? I have 2 questions, 1 at a time.

Okay. When it comes to the Dutch operation, it's, as you guys know, it's the most recent acquisition. And for sure, we've also taken some deliberate action in taking some people out and putting in new people. We've also done that. So this is a natural thing that we do. And it actually also happened in Norway and the U.K., if you look at it historically. So we're not too worried about that.

To add on what André said, there's also a little bit of timing in it the way when you compare and when you calculate these churn rates. So from the time people leave us and then until we have hired new ones, if that happens in different quarters, then, of course, the quarter where we have leavers but no new starters, the churn will, by pure math, be higher. On the last couple of months, we've seen inflow of staff in Holland to the tune of 8 to 10 new employees per month.

Okay. And can I just follow up here. So if you compare to Denmark where you have a very strong brand, do you see it more challenging for you to hire people in this new market?

Well, of course, you don't have the same brand as you have in Denmark, but it's similar to what we did in Norway and also in the U.K. You got to start up by working closely with universities and taking one step by step. And then over time, you will build up your brand. And that's no different from the Netherlands, that has been in Norway and in the U.K. And so in Norway, for instance, we now have a much better brand and we're also doing it in the U.K. But it actually follows the pattern, because in the beginning, you don't need that many people relatively. And then when you start building up the brand and the activity starts to yield results, you can hire even more. So we're following that path as we normally do.

Okay. Very clear. And then my second question is regarding the utilization rate for Norway and the U.K. So it is positive to see the gross margin improved at Q2, and how should we compare the utilization rate to Denmark?

We don't disclose the utilization rates on ratios on a country-specific level. On the group, historically, and that's also the case now, we've had utilization rates of between 86, 87, 87.5-ish. And both the U.K. and Norway have enjoyed increased utilization rates during Q2, which, of course, is also leading into improved gross margins. Neither the operation in the U.K. nor Norway are at an accumulated level to the same to the group on utilization year-to-date, but they are picking up and Norway is a little bit ahead of the U.K.

The next question comes from the line of Gianmarco Conti from Deutsche Bank.

André and Thomas, I have a few. Maybe just one going back on the Danish resource. How are you actually addressing the now recurring problem of having Danish resources to other geos, which will lead to lower margins as well as having to hire freelancers? Like my question is, could this be a recurring event potentially closing [indiscernible] guidance? Do you have plans on hiring in your staff in those geos you replicate the Danish business? That's my first question. My second question is in what geos did you actually invest in for business development activity such as tender writing? And then I might take a follow-up.

Well, thank you for those 2 questions. I think the first question, it's about, again, how to utilize Danish resources in the other geos and will that continue and will we hire senior staff in those geos? I mean, of course, we will also hire senior staff in those geos and we will also -- I think that's very important, to make sure that the next generation of new hires in these geographies, because we also hire consultants and senior consultants that are thought of by Danish managers to do what they have to do in order to succeed with the projects we win. And this is a long-term investment because we want to be successful in delivering these projects to the customers in both Norway and in the U.K., where we are spending most of the time right now. And that's because we know that winning and delivering projects will yield a long-term relationship with our customers. So that is an investment into our customer relationship building and an investment into teaching the next generation of local staff how to do. And that the best way to do it, specifically on complex projects, is by doing it together. So that's what we do. And then I've also said earlier, when you've done it with -- 1 person can typically grasp maybe 2 or 3 persons on the level lower. So by doing so, we will create more people in the local geographies that are capable of doing the same exercise again after the Danish have been around. So that's what we're doing right now and specifically in the government sector and specifically investing more -- a lot of time, both in Norway and in the U.K., where I think we've had a breakthrough on several verticals in government. So I think it's a sensible thing to do in order to create the necessary growth there and the potential of growing even more in those countries. And sorry, I think I forgot the second question. Maybe I didn't write it down. Sorry about that.

Yes, no worries. Yes. So the second question was in what geographies did you exactly invest...

That was the U.K. and Norway specifically, yes.

Everything is the same in Norway?

Yes, also because the size of these -- the Netherlands, it's not that we're not helping the Dutch, but they are still a small operation. So what takes more effort is, of course, both Norway and the U.K. where we've -- where we've been for a longer time and where we see the demand of more complex in the company projects and engagements.

Okay. Just a follow-up. How many freelancers did you actually add in Q2 and how many did you have in Q1? I'm just trying to understand freelancers, what would be the margin impact potentially on a quarterly basis.

So from Q1 into Q2 or from Q2 to Q2?

So how many freelancers did you have in Q1 '21? And how many did you have in Q2?

Okay. Q2, we had 77. And in Q1, we had 59. And in Q2 2021 -- sorry, in Q2 2020, sorry, we had 40, 44, 42 and 38, and then 77 in Q2 2021. So the increase from Q2 to Q2 was 40, so 40 more net freelancers. And sequentially from Q1 into Q2, the increase was 18.

Right. So...

On the level of normal freelancers, sorry, Gianmarco, the level of normal freelancers is -- I mean, historically, would have been somewhere around the level of 40-ish in the group.

Right, right. That's actually very helpful. Just to follow up on -- on the first question, I was talking about the Danish resources. Is it not just possible to effectively hire someone -- like some number of senior figures, for example, in the U.K., so you don't have to basically export people from Denmark? Or is the level of the complexity of the projects that you are addressing, for example with the NHS, so much company-dependent that you actually know how to not take the modality how you're doing consulting a company.

Well, the thing is that there's a reason why we actually create those -- I mean, those margins that are industry-specific high because the reason why we create these margins is because we actually deliver in time, on budget, within the required policy. And I know this sounds a bit bullish, but you really need to know what you -- you have to be trying -- you have to be working with this for quite a long time to understand how to do and how to operate and run a project that comes at a time. And you see it again and again in the industry. You're going to have experienced people that you hire and you put them in charge of a project. And even though they've had 5 or 10 years of experience in other places, there will not deliver on time and on budget and within the required quality levels. So we know from experience that taken -- taking 1 or 2 very, very talented and great project managers from -- and it's not only Denmark, but primarily Denmark, taking some of those resources that have done this before several times will yield a successful project and then yield the margin we need and yield the people that we need to build up in the local geography. So to answer it shortly, no, you cannot just hire experienced people in the lower geographies and then think that after reading the manual, they will run a Netcompany project exactly the same way as we do in -- with experienced resources in Denmark.

[Operator Instructions] The next question comes from [ Ned Kriska ] from Carnegie.

I have 2 questions, I will take them one by one. My first question is on the gross margin. You have 2 percentage point impact, which is explained by increased business development in the Danish public sector. Is focus tilting again towards the public sector in Denmark? And is it mainly tender writing activities which drag on the margin? Or is it from building on the govtech framework? So that's my first question.

Well, we are definitely, even though the private market has been growing a lot in Denmark, we are still very much into the public market as well and we see a great deal of interesting tenders coming up. So we're definitely writing on that, too. And when it comes to the govtech framework, as you know, this is a strategic asset for us, and we're using it across borders. So we're also investing some time and resources into that. But most of that time, spend is on tender writing or business development directly associated to customer engagements. That's the closest I can get to an answer to that.

The next question comes from the line of [ Frederic Boulan ] from Bank of America.

André, Thomas, 2 questions, please, on my side. Firstly, if you can discuss the competitive environment, especially outside of Denmark. Are you seeing some of the pressure on the labor market starting to be reflected in a more favorable pricing environment? And then secondly, around particularly the U.K. and the Netherlands, any specific verticals you're focusing on or where you're seeing the strong momentum? You see that U.K. has been very much driven by the NHS. But any more color on verticals would be very useful.

Yes. I think when it comes to favorable prices going up on our services and because of digitalization being more and more controlled in businesses, I think it's very difficult to predict that. I think in the government sector, there's a very high competition on all tenders. And in the private sector, one might expect that some prices will go up if the need of -- if the resource becomes more and more scarce. But looking at it historically, I think when we look back over the years, we haven't seen a tremendous price development in service. It has been quite stable really, and that's what we've been planning with so far. When it comes to industry specifically, I think the govtech framework, as you -- if you look into that framework, you see there's a lot of focus there on both grant management solutions, but also on the whole tax and customs part and a lot of -- on self-service and larger portals for self-serving solutions for citizens. And that's where we are definitely putting our focus both in the U.K. and in Norway. And of course, health, as you mentioned, yourself, the health sector, which is already at somewhat where we penetrated both Norway and the U.K.

We have a further question from [ Ned Kriska ] from Carnegie.

Yes. So then my second question. Is it possible to give an update on Sweden? I guess, can some of the margin drag be explained by tender writing activities into Sweden? So maybe just to explain, are you in the middle of tender writing in Sweden? Are you awaiting the results of certain tenders in the public sector?

Well, I mean we are also writing some tenders to the Swedish market. That's the closest I can get to that. But we have an open opportunity to go into Sweden also on a greenfield basis if we want to do that. But I cannot come closer to that than we are -- when we see something interesting coming up in the Swedish market that we think we have a good chance of winning, then, of course, we will invest into tender writing there. But we take it on a case-by-case basis. Sorry, I can't get into more detail other than that.

[Operator Instructions] We have a question from Claus Almer from Nordea.

Just a few follow-ups about the Danish operation. We saw that the Danish operation was down profit-wise year-over-year. Should we expect the same for the second half of this year? That will be the first.

Say, down, Claus, which things are you referring to?

Sorry, EBITA level.

Yes, so on EBITA level, it's correct that the Danish organization was down year-over-year. There are some costs that are coming in on administrative level, as also alluded to in the second quarter. And also remind you that Q2 in 2020, we had a significant reduction of costs since we did not use any travel or anything. Denmark closed down on the 11th of March 2020, seems a long time ago, but -- so Q2 was kind of low. We will increase or continue to increase cost during the second half of the year and that is all reflected and incorporated also in our guidance for the full year where we maintain with the 23% to 25% margin.

Okay. Then also mentioned during this presentation that you are transferring resources outside Denmark, thereby having a negative revenue impact. Does this mean you're also tendering for less projects in Denmark? Or it's actually more a timing of revenue in Denmark, i.e., we will see more revenue, everything equal, going forward?

I mean, that's a question with many moving parts, which makes it difficult to give you a straight answer. But in terms of revenue in Denmark and potential going forward, if you look at it in another way, we have around 100 people from the Danish organization doing jobs in international units. We have substituted them with 44 more freelancers compared to Q2 2020. So that means that could we have had more top line in Denmark? Was there more work if we had substituted the full 100? Most likely. But if we would have done that, that would have just been passed through, of course, and no real meaning to do so. So the level of FTEs, which is a good indicator for how the future will look, is looking promising in Denmark also. There's some timing in terms of when we write tenders and when they come, and that's how it's always been. That is particularly so in the public sector. And then we continue to focus on larger potentials in the private sector, which also looks promising for the remaining part of the year. So that's as close as I can get it. I know that -- I think you wanted a more detailed question, but we cannot be more detailed at this point in time.

We have no further questions, so I will pass back for any closing comments.

Well, thank you so much, and have a very good day.