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

Hello, and welcome to the Netcompany Interim Report for the first 9 months of 2021. [Operator Instructions] Today, I am pleased to present CEO, Andre Rogaczewski. Please begin your meeting.

Good day, and welcome to this presentation of Netcompany results for quarter 3 2021. My name is Andre Rogaczewski, and I am the CEO and Co-Founder of Netcompany. And I'm joined today by our CFO, Thomas Johansen. Before we get going, there are some important disclosures that I need you to read through. So could we have Slide #2, please? I will pause for 30 seconds here, 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 Q3. I will also go through our revenue visibility and our financial guidance for 2021, including the impact from the acquisition of Intrasoft to our books this year. Once I'm done, Thomas will go through the numbers in greater details before we open the call for questions. 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 15%, all of which was organic. As expected, revenue growth was negatively impacted by more vacation taken in Q3 compared to the same period last year. And as communicated during both Q1 and Q2, our employees have in general, deferred some of their vacation, and that is what we see being held now as society are generally more open. Overall, the deferral of vacation from Q1 and Q2 impacted revenue growth negative by around 2 percentage points in Q3. For the first 9 months of 2021, we have grown revenue by 19.3%. Gross profit increased by 12%, yielding a gross margin of 41.2%, which was 1.1 percentage points lower than in Q3 2021. As was the case, in Q2, we continued to work with Danish resources on international projects, which led to lower margins on those projects and also higher usage of freelancers in Denmark. However, the relative level of such activities have been decreased during Q3, as expected and communicated in connection with our Q2 results. We have also made an adjustment to a fixed fee project in the Netherlands, which impact -- which impacts gross margin negatively. Thomas will go more into details with the mechanics hereof. The lower gross profit margin naturally impacts adjusted EBITA margin to the same tune and adjusted EBITA was DKK 199.9 million, which yields a margin of 25.1%, an increase of more than 5 percentage points sequentially from Q2 2021. We have seen most of our operations being almost back to normal, which means a lot of face-to-face meetings and activities. It also means more travel, education and client-related meetings, which all have impacted administrative costs negatively, however, through in line with our expectations. With the fourth consecutive quarter-over-quarter, FTEs grew by more than 500. 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 is increasingly tightened. I believe this to be a testimony to our strong employee 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 the public sector. And can we have the next slide, please? Continuing on the employee topic. The breakdown here shows where the 558 new FTEs have been hired in all our units. The main intake of new employees was in our largest unit, Denmark, where FTEs increased by 324. 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 and in line with the increase you've seen in Q2 2021. Churn for the last 12 months was higher compared to last year and reflects a tighter and more competitive labor market, with a general boom in the economy and taking into consideration also that for a longer period under COVID-19, lockdown -- during the lockdown, only few people actually changed jobs. And in times like these, I'm proud that we have been able to continue to add a significant number of employees across the group. The amount of administrative employees, measured as nonclient-facing resources, was 6.3% in Q3 2021 compared to 6.5% in Q3 2020 and thus continuously decreasing towards a target of 5%. And can we go to Slide #6, please? We have won a number of new contracts during the quarter of which I'm mentioning a few here. In Denmark, we have, amongst others, been selected to participate on this [ SKI 02.17 ] frame agreement, which is the largest of the [ SKI ] frame agreements for IT services and IT development work. We have also won a project to renew one of the main platforms for citizens of Denmark's communication with the government, including the delivery of the new digital post clients. In the health area, we have won a smaller contract to provide a system for overview of all clinical trials for new medicines in Denmark. While the contract in itself is not material, it is an important win in establishing Netcompany in the health area, which we believe to be an area of high potential for new large projects to be tendered. In the private segment, we won yet another project to extend the insurance platform for Topdanmark that we've been working on for some time now, and we have won a large strategic contract with Blue Water shipping to modernize all of their IT landscape. Recently, we have also won a large contract with a private customer in Norway which is a multiyear strategic development contract that will enhance our position in the Norwegian market. And can we have the next slide, please? Our investment in Norway and the U.K. continued to improve financial performance, with revenue growth of 28% in Norway and close to 19% in the U.K. Gross margin in Norway was improved from 20.3% in Q3 2020 to 22.3% in this recent quarter, whereas gross margin in the U.K. improved to 29% compared to 11.6% in Q3 2020. Performance in our Dutch operation was not satisfying as we saw revenue decline, with an equally sharp decline in gross margins. We have taken appropriate corrective actions in our Dutch operation, and we have enforced and changed the management team in the Netherlands. I am confident that with this new setup, we will facilitate a strong recovery in the Netherlands and in the Dutch market as such, just as we've seen in Norway and U.K. historically. This Monday, we also announced that we have completed the acquisition of Intrasoft, and we're excited to welcome Intrasoft to the Netcompany family. And I'm confident that when combined, constitutes a strong and highly competitive company that can compete for large and complex projects in most of Europe. The acquisition gives us better reach with Europe and within the EU institutions. 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 to close to DKK 3.3 billion at the beginning of October, which was an increase of more than 20% compared to the same period last year. As in recent quarters, we see improved revenue visibility in both the private and the public segment throughout all of our units. And this leads me to our expectations for 2021. So can we have the next slide, please? As we are now including the financial performance for Intrasoft, from the first of November to the 31st of December, the guidance table have become somewhat more busy. For top line, we still expect organic revenue growth of between 18% to 20% as communicated in Q2. We also maintain our expectation to our margin from the organic business as between 23% and 25% adjusted EBITA margin for the full year. For Intrasoft, we expect revenue to add nonorganic revenue growth of between 9% and 10%. Adjusted EBITDA margin for Intrasoft is expected to be between 7% and 8%. This means that the total revenue growth, based on constant currencies, is expected to be between 27% and 30% and adjusted EBITDA margin of between 24% and 26%. 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, Andre. And like already mentioned, I'm CFO of Netcompany, and I will go more into details with the financial performance for Q3. So if we move past the break in Slide #10 and straight into Slide #11, please. Andre has already spoken to our performance in general terms, and I will go more in details with the performance now. Revenue growth for Q3 was 14.9%, positively impacted from currencies by 1.1 percentage point, leaving growth in constant currencies at 13.8% against Q3 2020. Our revenue growth was organic. Gross profit margin was 41.2%, which was slightly lower than the same period last year, where it was 1 percentage point higher. Administrative costs grew by DKK 29 million, or 31%, driven by costs associated with hiring new employees; costs for our new local headquarter in Oslo in Norway; and our new office in Trondheim, also Norway; and in general, more costs for employee-related activities following the gradual ease of COVID-19-related restrictions. Especially cost for face-to-face activities with our employees have increased significantly and is now close to the same level as pre-COVID-19 lockdowns. Special items of DKK 30 million relates to costs accrued in connection with the acquisition of Intrasoft. Besides cost for customary due diligence related to the transaction, special items also includes the insurance cost for the W&I insurance that has been applied to the transaction. Amortizations have reduced by more than 60% as part of the intangible assets related to the [indiscernible] acquisition of 52% of the shares of Netcompany in February 2016 have been fully amortized. And can we go to the next slide, please? Revenue growth in Denmark was 14.9%, driven by continued strong growth in the private segment that grew 27.6% and public sector revenue that grew 7.3%. Norway saw the stronger growth -- the strongest growth in the group and grew 28% as a result of the wins in the public segment during Q4 2020 which has increased utilization significantly in Norway. Public segment in Norway grew 46%, whereas the private segment saw revenue growth of 6.6% in the third quarter. In the U.K., revenue grew 18.6%, continuously driven by our relationship with the NHS, but also with other large existing customers, mainly in the private segment. Overall, revenue in the public segment remained flattish compared to the same quarter last year, where revenue in the private segment grew 47.5% in the quarter as both new large customers was one and existing customers reinitiated projects that had been stopped in connection with the COVID-19 shutdown in the U.K. last year. In the Netherlands, revenue declined 40%, following lack of decisions on a number of larger public tenders following the election in February and a correction to a single fixed fee project. And can we have the next slide, please? Gross profit margin was 1 percentage point lower than for Q3 2020 and ended at 41.2%. Margins were reduced in Denmark by 2.8% as a combination of more use of freelancers and increased sickness observed in connection with people being vaccinated and also the increased social activity following the reopening of society. In addition, and as seen in Q2, a number of Danish resources has been utilized on international projects during Q3. This have led to an increase in the usage of freelancers in Denmark, however, at a lower ratio than seen in Q2. In Q3, the usage of freelancers was 20 people higher than in Q3 2020, which impacted gross margin negatively in Denmark by around 0.7 percentage points. In Norway, gross margin was improved from 20.3% to 22.3%, mainly as resources were better utilized compared to the same period last year. The margin for the Norwegian business is still, to some extent, negatively impacted by the usage of Danish resources which has offset some of the underlying improvement to margins from the better utilization. In the U.K., gross margin was improved significantly as utilization was improved compared to the same period last year. In addition, the usage of Danish resources was reduced from Q2 into Q3, as one of the larger projects that had a large number of Danish resources on it, the corona passports for the NHS, was delivered in the U.K. at the end of Q2. Unlike the positive trend seen in both Norway and the U.K., performance in the Netherlands was below our expectations, with gross margins dropping from 36% in Q3 last year to 6.3% in this recent quarter. The lower margin in the Netherlands was caused by 2 events. First of all, there is still some delay in decision-making in the Netherlands as a function government has still not been constituted. In addition, we've made an adjustment to a fixed fee project, which has impacted both revenue and margins negatively in Q3. While the relative reduction in gross margin in the Dutch operation is large in absolute amount -- sorry, while the relative reduction in gross margin in the Dutch operation is large, the absolute amount impacting revenue and gross profit negatively is only in the area of DKK 10 million. And while such adjustments to fixed fee projects and lack of decision on pipeline cases, for sure, is not optimal, the relative small size of the Dutch operation also means that the recovery will be fast. With new management team in place, as Andre mentioned, and increased focus on pipeline conversion, we are confident that we will see positive financial performance in the Netherlands already from Q1 and onwards. And can we have the next slide, please? Adjusted EBITA margin for the operating entities decreased by 3.1 percentage points in the quarter. And part of that is due to the reduced gross profit margin that I just went through. Also, we did see increased costs related to employee activities. This was expected, and we are pleased that it is now possible to have more face-to-face activities together with our employees. We expect these types of costs to continue to increase through the remaining part of 2021. In addition, higher costs for our new office in Oslo, which was taken in use at the end of Q2 this year, has impacted margins negatively in Norway, more than offsetting the improvements seen in gross profit margin. In Oslo, it was originally planned to sublet part of the new office until we have grown sufficient FTEs to occupy all of the new building ourselves. But due to COVID-19, this has not been possible and we thus carry the full costs ourselves. Can we move to the next slide, please? Free cash flow was positive with DKK 182.9 million in Q3 2021 compared to DKK 149.9 million in Q3 2020. The strong cash flow was used to repay another DKK 150 million on our bank debt. And at the end of Q3, our cash balances at hand was DKK 195 million. Days sales outstanding were 66, broadly in line with the level in Q3 last year, where they were 60. Work in progress has increased by 5.2% and accounts receivables by 25%. Together, the two increased by 15%, in line with revenue growth. Based on cash flow projections for the remaining part of the year and taking the recent acquisition of Intrasoft into consideration, too, we have, today, initiated a share buyback program to the value of DKK 50 million to be executed in the remaining part of 2021. And can we have the next slide, please? So before we go to the Q&A part, I just want to recap the implications from our acquisition of Intrasoft. The transaction was completed as of 31st of October, and as such, Intrasoft will impact our books with 2 full months for 2021. The margin profile during the quarters in the year for Intrasoft is not totally the same as for Netcompany. And in general, margins are lower in Q4 than the rest of the year in Intrasoft. The financial results incorporated into our books as per the guidance Andre gave is thus not a reflection of a full year margin profile for Intrasoft. When we report for Q4, we will report on "Netcompany classic" and "Netcompany Intrasoft" and, naturally, Netcompany total. We will also incorporate Intrasoft into our annual report for 2021, and we will provide guidance for both Netcompany classic and Netcompany Intrasoft throughout 2022. And with that remark, I have concluded the detailed financial analysis. And we now open up the call for questions. So if we move to the Q&A slide, please, and open up the call for questions. Thank you.

[Operator Instructions] Our first question comes from George Webb with Morgan Stanley.

Andre, Thomas, I have a few questions, please. Firstly, just on the Netherlands business and the large fixed fee project issue in the quarter. Can you talk a little bit more about the background of the projects in question and what drove that project adjustment? Secondly, on employee attrition, as you mentioned, about nearly -- up to nearly 21% on an LTM basis. And I guess high attrition is an issue for the entire sector at the moment. How are you viewing the current levels and the trajectory as you go into 2022? And when do you expect that to start to ease? And then lastly, on cost and specifically, the cost which was subdued due to the pandemic, travel, entertainment, face-to-face, as you mentioned. I think, Thomas, you mentioned that face-to-face costs now are close to pre-pandemic levels. If you take all of those costs together and include travel and entertainment, how close to a normal run rate are you now on those?

Thank you, George, for those questions. I think I'll do the first two ones and then, Thomas, you can do the third one. When it comes to the Netherlands, to say it very simply, we are doing -- I think, what we're seeing in the Netherlands is exactly what we saw in Norway and we saw in the U.K., but we're just acting quicker and changing the Netherlands a bit quicker than we've done in Norway and in the U.K. So we are aiming for larger and bigger projects faster, and we are changing the management team and also helping them more than we did with the Norwegians and in the U.K. historically. And it's actually the same, you see an initial pickup, and then you see a dive, and then after that when they work with the Netcompany methodology, they will be able to deliver projects better. And the net -- the fixed project in question here was exactly that, project that was slightly bigger than they're used to. And they made some mistakes during that project, especially controlling some of the scope, we had to come in and help them out. It is seen before, it's a very classic situation and is in order to avoid that too much that we're actually intervening faster than we normally do. And we've learned something from the Norwegian and the U.K. acquisition in that sense. When it comes to the attrition rate and whether we have a larger churn or not, I have to say that, well, we had very unnormal situation during COVID. We had a very low churn. And now we have a slightly higher churn. But looking at Denmark, for instance, the churn has always been around between 15% and 20%. And right now, the Danish churn is around 18%, which is quite normal. It's true that we have a higher churn in some of the other geographies, but that's also deliberately in some sense. So yes, there is a higher churn. But when we look at the satisfaction levels at our -- with our employees, when we look in general how things are evolving, I don't think that's too surprising. Of course, we need to keep a focus on that, as always, because you're right, resources of these kinds are very sought off and attractive in every setting. But we can also add to that, that we've been able to hire 450 people in the quarter. The quality level of people is very, very high. So we are monitoring it, but we are not too worried about it.

And then on the cost run rate, George, we are close to a normalized level. So we don't expect sequentially from Q3 into Q4 a huge pickup. There's still going to be some additional costs mainly for travel. And there's also going to be some costs for physical or face-to-face education activities. But the ramp-up is not going to be as steep as we saw from Q2 into Q3. And maybe just also adding on Andre's explanation, the fixed fee adjustment. So from a value perspective, we're talking about DKK 5 million that we have adjusted. So it's not a huge adjustment. Of course, for a small entity like the Netherlands, you can see it very, very clearly. But like Andre say, we're doing right now in the Netherlands what we've done in Norway and the U.K., we're just doing it 2.5 years earlier because we know it's the right thing to do. And it means that we will come to a more normalized financial performance in the Netherlands faster than if we've not done it.

Our next question comes from Claus Almer with Nordea.

Also a few questions from my side, and I will do them one by one. The first question goes to the turnover among the employees. In the report, it's mentioned that you are hiring more than normal within the partner level. As I understand, a vital part of your employee model is that high performers are being promoted. So is there a shift in your employee model? Or it is more linked to the situation in Holland when you are recruiting more partners? And also, is there a risk of loss of critical skills given the 20% employee turnover? That would be the first question.

Yes. Let me do that. I mean you're absolutely right when you say that we are hiring more partners is because we're actually changing the management team in the Netherlands. And subsequently, we've also added a partner or 2 in both the Norway and the U.K. operation. That is very normal. We do that, and that we do that in order to get the reach within the customers. We need local partners in those areas. We've seen that in Norway, half of the partner team there is actually new over the last 2, 3 years. We've seen the same thing happening in the U.K., and now we're seeing it in the Netherlands. So that's absolutely normal. There's nothing new to that. When we're talking about attrition rate and whether we are losing critical resources, I have to say no. We had a low churn during COVID. Now we have a little higher churn, as I said. In Denmark, which is the most experienced geography, with the most experienced people, we have a normal churn actually. So the answer is no.

And then I think also your question, Claus, on the partner part. The partners we're adding in Netherlands, in the U.K. and in Norway is because it takes, generally speaking, 15 years from you start until you're a partner, utilizing our view on the Netcompany model. Now we haven't really been in Holland yet for more than 1.5 years and Norway now 6 years and the U.K., 5 years, so the gradual development of our own partners still takes some time. But as Andre said, to get access to the market and to utilize the potential to really grow, we need to have somebody who can help facilitate opening the doors, making sure that we reach the market potential, and that's why we've added some partners from the outside. The plan is, for sure, that the organizations in Norway, in Holland, in the U.K., will produce their own partners, but it takes time.

Sure. Okay. That makes sense. Then my second question goes to Intrasoft, and it's DKK 6.7 billion large backlog. It would be very helpful if you could provide some details about the timing of this backlog.

And we will be able to do that when we come to the annual report. The reason why we cannot be too specific on this particular point is that for the first 10 months of 2021, Intrasoft belongs to another publicly traded company. And then we own it for the last 2 months. So there is a fine limit to what we can actually disclose and what we cannot disclose. And if we disclose too much, then we will -- or more information than what has already been disclosed in the books of Intracom Holding, which is the company that used to own Intrasoft, then we will violate the regulations in terms of what kind of information has been given to the market because Intracom Holding has not given this information. So I fully understand your question, Claus, but we cannot be more specific at this point in time until we come to the annual report, unfortunately.

Our next question comes from Frederic Boulan with Bank of America.

Andre, Thomas, two questions on my side. First of all, just to follow up on the previous question. So we'll try to get information in another way. But if you can, first of all, update us on your thinking in terms of go-to-market or upsell standpoint that goes beyond what you shared with us at the time of the deal. Have you done further analysis on work in terms of where you see the most amount of upside? And in terms of growth, if you can share with us what you've assumed in your 2021 guidance. And maybe give us a sense of the growth potential. And I think it's something we discussed last time, but 2022 seems to have been very strong, but between '17 and '19, we had a much weaker growth profile. So any insights on that would be very useful. And then secondly, on the Netcompany core business, if you want, maybe if you can discuss what's going on in the private side, in particular in Denmark and Norway. We've seen a bit of a growth deceleration. Any factors you want to point out and how you see the momentum is developing into next year?

Thank you, Frederic. I mean when we look at the Intrasoft acquisition and the company after that, we will go after growth together with Intrasoft in various aspects. First of all, they are providing us with a set of platforms, great platforms within the customs and tax area in several governments in Europe, and we will be able to address even more governments with that, solutions that we're already delivering in Denmark and we are also delivering in other countries. Furthermore, they have access to -- they're one of the top 3 vendors in EU institutions market. So we have access to customers there where we can address those customers with solutions that we've made in the Nordics and in the U.K. We have this govtech framework that constitutes more than 250 references and a lot of components that we would push through the connections and geographies that Intrasoft is in. And finally, but not leastly, Intrasoft is quite dominant in the Greek market when it comes to delivering to the government there. And we also see great potential for us delivering what we've done in Denmark and in Norway and the U.K. to Greece as well. So as you know, Greece is receiving more funds from the EU now in terms of digitizing the entire country. And when it goes to -- I hope that gives you some sense of where the areas are for potential growth together and how we can utilize each other. When it comes to the private pickup in -- as you said, in Denmark and in Norway, it is true that we see more and more private enterprises doing the entire shift out of their back-end systems. Actually, it's been a tendency that we've been talking about the last 2 years, but it's really picking up. COVID changed the attitude in boards. Many places, you see, the companies able to take decisions that they've been walking around or sniffing to for the last 2 or 3 years. Now suddenly, they think, okay, we have to change our kernel, our core systems, and we need to look at ourselves as a digital platform more than just a classical company. And here, Netcompany plays an important role. We are -- we've shown many times that we can come in and change the entire back-end system and put in a new digital platform. That's what we see in the private pickup. Most of the private customers we are starting a journey with is exactly that, long-term strategic partnerships where we do put in an entire new digital platform. And when we've done that, which typically takes 1, 2 years, just like in the public sector, then we start launching digital projects and initiatives every 6 weeks, 12 weeks. And that's the general idea of many private enterprises at the moment.

And to add further on that, Fred, like Andre mentioned, when we walked through the project wins in Q3, we've also won a significant contract in Norway in Q4 in the private sector. That project win, we think, will have the same magnitude of impact on the private business in Norway as when we won the Topdanmark business in Denmark a couple of years ago. So private is, for sure, picking up, not only in Denmark but also in Norway, and that is really comforting to see.

[Operator Instructions] Our next question comes from Poul Jessen with Danske Bank.

A few questions. One is on Intrasoft. when looking at 600 external contractors you have down there, I'm looking at the Intrasoft financials, then they carry a very large part of the cost of that company. Can you say something about, is it possible or what are the opportunities to migrate these 2 being internal and thereby improving the Intrasoft margins?

Yes. Thank you for that, Poul, that's a great question. And you're absolutely right. There are -- I think, you're right, it's about 600 contractors, primarily being situated in the Benelux. And they are working continuously on various engagements, many of them in the institutions. Some of these engagements have been going on for quite a few years, and some of these systems are very critical and crucial for the EU institutions. So I think as a general principle, we will always be looking into how we can subtract contractors and get rid of contractors and exchange it with perms. But I have to say that the growth strategy at the moment is to win more and to do that using the Netcompany methodology and hiring more perms. So of course, we're always looking into getting contractors out and putting perms in. However, having respect for Intrasoft being there for so many years, delivering quite a substantial number of systems to EU institutions, I think, growth will come primarily from winning new and exciting projects in those customers and then doing a little bit of exchanging the contractors in parallel.

But of course, you're right, Poul, in the analysis that the 600 contractors carry a average cost which is significantly higher than the average cost per employee, and that is also something that we are well aware of. So clearly, we will be seeking to optimize that split. And we'll get back to that once we came closer to the business and start to deliver projects together. It kind of resembles also what we did in the U.K., where we went away from a lot of independent contractors to our own perms. That took some time. So it is a time game. So we are on the same page with you that there's some interesting dynamics here, but we also just urge people to be a little bit patient. But of course, we'll look at it, for sure.

Yes.

Next question is on the deferred vacations. You had minus 2% in Q3. How should we look at Q4 there?

Yes. I mean what -- for Q2 -- sorry, for Q3, you're right, around 2 percentage points, it was 2.2%, to be absolutely specific. There's still some vacation being deferred. It's not to the same magnitude. The biggest part of the deferred vacation has been taken in connection with Q3. But there's still a little bit of a tail of deferred vacation, that's why we also maintain our revenue guidance of between 18 to 20 to cater for this uncertainty.

Okay. And then final question is on the [indiscernible] I see that you signed up Blue Water. You also have a lot of work with [indiscernible]. I was just wondering, is this a reuse of what you learned in [ DSV ], which you are building up on our vertical within logistics?

One could say, if you look at what we've been building platform-wise since -- actually since entering with the airport as well, we are building more and more real-time data platforms as well. We see that in the Airport with the platform we have there, we see it with [indiscernible]. And now we also see with Blue Water shipping. So the business model of Netcompany is, we are becoming, as we've said over the last 2, 3, years, more and more platform, where we come with -- we're not coming with entire complete software suites because they're too static in a sense, but we're coming with a lot of components and knowledge and know-how. And many times, we can conclude faster on what type of architecture and what components to use and we can, brick by brick, establish solutions faster. So you're absolutely right when you say that we are definitely moving into the logistics and transport sector using those components and these competencies. So -- and that's one industrial vertical that I think is really, really interesting, also in European perspective. And yes, we have the references. Yes, we have the components. We have the knowledge about how to set it up fast. And we're doing it real time. We are making real-time data platforms for many of those kinds of customers. And that is exactly what you need in order to win those clients. It is a question of experience, speed, time to market and reliability on the platforms you provide. And then, of course, the right people to do it together with the customer. So I think, seeing from a vertical industrial point of view, we're definitely in a great position in that area that we were not in just 2 or 3 years ago.

And a follow-up on that. You mentioned Smarter Airports, is that still scheduled to go live in November?

It will go -- we have right now -- right now, we are in parallel production with the solution and they will go -- switch live during Q1 as planned.

Our next question comes from Yiwei Zhou with SEB.

I have 3 here. I'll do one at a time. Firstly, a question regarding the U.K. I record that you had some large contract wins with the U.K. NHS early this year. But I'm just surprised that the current growth in the region now driven by the private segment, but not the public business. Could you elaborate a bit here on the current dynamics? And what is your expectation for the business mix in the U.K. for the near future?

That's -- yes, we are definitely doing both. We have a strong management team in the U.K. now that is concentrating on both private and public. And you're absolutely right, Yiwie, that within the health sector, we are working very closely, both with NHS, NHS digital, NHS X, so we have a good position there because of the COVID passport. And there's a lot of health solutions coming out for tender, and we are doing our most to win some of those and we have a good traction on that one. And then in parallel to that, I have to say that we are also addressing U.K. private customers because the sales cycle is somewhat shorter. And it's important for us also to be present in the private sector as we are in Denmark and Norway. And so we've done that in parallel historically, and we're doing that as well in the U.K.

And what is your expectation for the business mix in the U.K. for the coming quarter? Could you give us an indication?

It's going to be quite difficult to give you an exact indication of that because that's also dependent on exactly how -- what we're going to deliver when in the quarter. But expect both avenues to be a component in our growth.

Public is strong in the U.K., Yiwei. And there's a little bit of timing as to whether it's one or the other, but public is continuously strong in the U.K.

Okay. My next question is regarding the Danish public segment. So you explained the current tender markets been awake but they saw a lumpiness. And you expect the growth to pick up again in the coming quarter. Could you elaborate a bit here on the tender pipeline?

For the public part in Denmark, it's true that we've seen growth rates over the last couple of quarters that had been lower than what we seen historically, but that's also due to the fact that we have grown in private. So all over, we're growing. There are a number of tenders coming up in the public sector. There's a tender for a new election system coming up. There are some tenders for projects within the tax area. There are some more projects within the customs area coming up in 2022. So to a certain extent, there has been a little bit of a period with lower tender activities in the public sector, but we're seeing public sector to come back. And from the discussions we have and Andre have, we remain positive on the public sector.

Yes. And if I add to that, I think, it's important to -- we've said it many times, but it actually works that way. When we look at the pipeline, we see things coming in. If we can start a project that we find as long-tailed and complex, personally, I don't mind whether it's public or private. As long as it puts us in a position where we have a long cooperation with a particular customer and long tail and it adds to our competencies in a particular area, we go for that. And that's been the roof in Netcompany, and you see it quarter by quarter. You always want to know how much is private, how much is public, but it has been fluctuating over the quarters. And it's right now, in the group, we are 60% public and 40% private. Historically, it's been around 50-50. So yes.

Great. Very helpful. And my last question is regarding your financial guidance. Now when factoring the lower end of your guidance on an organic basis and also for Intrasoft, I get the implied EBITA margin on the consolidated base close 22%. But now you guide 21% to 23%. What is your assumption for you to deliver the 21% EBITA margin?

We guide around 21% to 23%, Yiwei. So if you look into the table in detail, you'll see that little paragraph sign which is around. So it is to cater for the uncertainty. And therefore, we are saying 21% to 23% instead of all kinds of percentages. So that's the reason why.

The next question comes from Gianmarco Conti with Deutsche Bank.

Andre, Thomas, I also have a few on my side. The first one is, if you can maybe explain a bit more color and a bit more detail what happened and what caused the lower growth in public. It's now 4 quarters of growth deceleration. I'm just trying to understand that it's driven truly by lower tenders. And so is that by value or by volume? And the second question is, if you could give some clarification on the total numbers of freelancers in this current quarter. And what was the increase on a sequential basis from Q2? I remember you guys commenting around Q3 being substantially lower than Q2 in terms of subcontractors and freelancers. And my third question is, could you perhaps give some color also on the impact of Intrasoft in the [indiscernible] specifically? I'm trying to understand from the guidance how much has that -- like how much has the growth baked in to Intrasoft, consolidating in those 2 months? And if you did not even purchase Intrasoft, what would -- if the guidance would have changed or not or if it would still be within your assumption?

I think I do the first two one, you can do the third one, Thomas. So when it comes to structural lower growth in public or volume or whatever, I mean, I think, we've said it a few times already. It's very different across the geographies. It's also a question of timing. Now we are positioned to grow in public across our geographies, for sure. We have the govtech framework. But it's very much to do with timing, as Thomas alluded to. In Denmark specifically, public growth has not been as high as normally. But instead, we've had private growth over the last 3 quarters at least. Will that continue into the next quarter? Maybe. But we also have great tenders coming in public in Denmark. So I mean it will go one way or the other. I don't see this as a general tendency in the group because we are also seeing great public tenders popping up both in Norway and in the U.K. So we just have to look at it and see what we win. At the same time, at the very same time, we are positioned to win some really great private tenders in those areas. So it's very difficult to predict exactly where we're going to go on these and how we're going to prioritize. And on the total number of freelancers, this is absolutely right that we're moving -- we have added some freelancers through -- especially on specific specialized areas, because we needed to help some of our growth projects in the other geographies. So when we take some specialized Danish people out to do something really specialized somewhere in Norway or in the U.K., experienced people, we might add some extra freelancers in Denmark in order to keep the operation going because they are surrounded by someone here who can actually make sure that they're not getting too much of a grip on what we're doing. We have no strategy or tactics or whatever in using too many freelancers, it's not part of our business model. But sometimes we use them for specific tasks in order to accommodate growth in all the geographies. We've done that before. We've done that again. And now actually, that number is falling as we also reported on and we will keep it down as much as possible. And when it comes to the Intrasoft reporting?

Sure. So what we've done in the guidance is basically just to add 2 months on nonorganic revenue growth for Intrasoft, 9% to 10%. And then we've used the expected EBITDA margin for Intrasoft of 7% to 8%. Then to be able to add margins together, we've also calculated or estimated the EBITDA margin on the organic business, which is basically to take the EBITA margin and then add back depreciations. And then when you add the whole thing, you get basically the Netcompany classic, which is the organic part. And then you get the Intrasoft. So if we had not added Intrasoft, our guidance would have been absolutely unchanged. So it would have been 18% to 20% top line and 23% to 25% EBITA. And then also just to put the numbers on the freelancers, we are right now in Q3 72 freelancers. That's down from Q2. In Q2 we were around 40% more -- 40, sorry, 40 persons, more freelancers compared to Q2 2020. And now we are 21 freelancers more compared to Q3 2020. So like we said on the call in Q2, we do expect the amount of freelancers relative to go down, and that is exactly what has happened during the quarter. The amount of independent contractors in the U.K. is down to 14. And for all practical manners, our change away from independent contractors to perm is considered complete.

Fair enough. Do you --can I just ask one follow-up on simply inflation. Are you guys factoring in the increased cost -- a potential increased cost base into this year and also next year? Or is that something that you don't see like developing as strongly? Especially given like for freelancers as well, I imagine that also has some higher impact on your cost profile.

I mean the underlying cost and whatever we pay for our resources are reflected in our guidance for 2021. Our guidance for 2022, we will come out with in connection with the annual report. So we can have a discussion on it there. But clearly, like everybody else is doing, we are also observing what's going on in society. And we do see general inflation starting to come, which is new. And of course, we will make sure to take care of that also. But that has to do with the 2022 guidance, which we're not giving right now. So we'll have to defer that a little bit.

Our next question comes from Balajee Tirupati with Citigroup.

This is Balaji Tirupati from Citi. Two questions from my side, if I may. First one on the Intrasoft business. And you mentioned about the potential for margin improvement by having lower usage of contractors in the Benelux region. But could you comment on how you expect the overall trajectory of this business, margin trajectory of the business evolve from here? And what are some of the other levers you expect at this early stage of integration? And then I have a follow-up question.

Yes, sure. Thanks, Balajee. We cannot really comment on the future margin expectations on Intrasoft because we're not guiding for 2022. What we are doing here is just basically including the 2 last months of 2021 into our books. Now what we can say, and this is just basically to echoing what Andre said earlier on, is that when we go to market on these new projects together with Intrasoft, we will, of course, seek to the extent possible, and we think that is possible, we will do them utilizing the Netcompany methodology and a combined team, which all other things equal, will have an improvement on margin. Now what we will also do is we will run Intrasoft, the current business, on a stand-alone business, on a stand-alone aspect. But of course, things that can be improved, we will, of course, improve. So I'm not going to be able to give you any specific aspirations because we haven't guided on that yet. But new projects will be joint projects, which will have more similarity towards Netcompany classic, if you so will. And of course, we'll look at how we can do things better on the current setting.

Understood. Maybe just a bit of additional color, if you can provide, because in fact Intrasoft business was seen having an operating margin in mid- to high single digits. So going forward, will it be see if that the company definitely would be looking at improving that margin profile for the Intrasoft part of business?

I think that's more or less in line with the previous question in terms of what do we expect of margin expansion. So I fully understand the interest to look at that, Balajee, but we'll defer that discussion until we have more meaningful guidance for 2022 to share with you all. So it's not because we don't have an idea and what we think we'll do, but it's a little bit premature given the fact that we are not guiding for 2022 as of yet.

Understood. The second question on revenue by types and the maintenance revenue has been going down or has been -- the trajectory has been moderating since last few quarters, while the development revenue has been strong. So any reason that we should be aware of? And how should we think about them going forward from here? And any impact that this may be having on the margins?

What you see, that's true, and there will be some fluctuation between maintenance and development revenue. And it has to do with, especially on the public projects, where we have a history, especially over the last 3, 4 years in Denmark, to develop large projects. And our logic is that whenever we develop a project then, that project is handed over. And whatever we do to that solution, will, by definition, be maintenance because we get it -- we only deliver it and develop it once. Now some of those changes to projects that has been going on in Denmark, especially over the last couple of years, have been quite significant. And if you think of a pension system and then a new pension law coming into play, is that a fairly large change to the current setting? Yes, it is. In our logic, we book that as maintenance, where other companies might want to book that as development. So the maintenance is not a strict linear progression in revenue development because there will be time from time when one quarter has maintenance revenue, which actually has carried of being development. But our logic is that we only develop things once and therefore we only have development revenue once. So that's more the swing. So it's not because we're losing maintenance, it's more because some quarters that we're comparing with had a higher proportion of development-related work being booked as maintenance, as per the way we do our bookings.

Our next question comes from [indiscernible] with [indiscernible].

I have a few questions as well, and I will take them one by one. So first, how much you were talking about the quarterly differences in the margins in Intrasoft. Could you maybe disclose the sort of normal margin range in a given year, simplify maybe in 2019 and in 2020?

I would be in trouble in terms of 2020 books because I'm guiding for 2 months here, which is part of 12 months, and the 10 other months belong to another public traded company. So I cannot give you any more clout than there are some seasonality in the quarters, and the 2 months here does not reflect a normal year per se. But I'm not going to be able to give you any indication as to what that would look then. I'm sorry, it's simply not allowed for me to do.

Fair enough, fair enough. Then another question here. Because as I understand that the projects funded under this facility will be tendered for locally. So do you see any margin differences between projects in Greece and in European context? At least it seems like the projects in the Europe are more competitive and even more focused on price points. What do you see there?

Yes. We -- that's a great question, and we'd love to discuss that more in detail when we are also able to tell you about what we expect from a guidance perspective going into 2022. So it would be -- it will be a one-sided answer, which would not add much value, to be honest, [indiscernible] if we went into discussing those things. There are a lot of different complex areas to that question in terms of how do we source the projects. As Andre said, there's a long history of utilizing contractors in Belgium and Luxembourg on EU projects. There is a big source of local resources in Greece. And of course, the cost base for those are significantly different. So that's going to be difficult for us to have a really, really good and detailed analysis on before we do the guidance for 2022, I'm sorry.

That's fair enough. At least you've answered my question because it seems like Greece, obviously, the largest opportunity for you guys and so also on the margins. But then talk a bit about Greece. As mentioned before, obviously, quite a large opportunity for you. But Intrasoft, they have a large share of the addressable market. So do you see any risk that Netcompany become too large in Greece and can take their fair share of this facility?

No, we don't see that. Greece is going to go through an immense digitization over the next 2 to 3 years. And much of that is also going to be funded by the EU. There's a lot of ambition in Greek digitalization. Actually, they've shown over the last 2, 3 years that they have been -- especially during COVID, that they've been able to digitize faster than, I think, many people actually expected. So there's a lot of ambition when it comes to the Greek public sector in digitization. And we are actually having a lot of those references and systems in place in Denmark. So I think that will position us really well in the Greek market.

Okay. And then my last question here, because looking at this facility, it seems like Germany, obviously, quite a lot of opportunity as well, what [indiscernible] EU and Germany today?

Well, I think Germany is definitely changing gear. We are seeing a different attitude towards digitization in Germany. As you know, it's not just one country, it's 16 countries more or less. But it's very, very interesting and there's a new digitization strategy coming up and we see it as a very interesting market. And that's why, I think, the more platforms and solutions you have, that's the entrance point. And it is obvious that being one of the biggest markets in Europe, it's one of those areas where we're looking into. And having all those EU institutions, having Danish, Norwegian, U.K. references, government is government and there's a lot of interesting platforms that we could address the German market with.

There are no further questions. I hand back the word to our speakers.

Well, thank you very much for joining this session, and I hope you have a great Thursday. Thank you, gentlemen.