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

Welcome to the Netcompany Q4 and Annual Report for 2022. [Operator Instructions] This call is being recorded. I will now hand it over to CEO, Andre Rogaczewski. Please begin.

Good day, and welcome to this presentation of Netcompany's results for Q4 and the full year of 2022. My name is Andre 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. Could we please 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 is our performance with focus on the presentation of the financial performance in Q4 and with summary comments for the full year also. I will walk you through the business highlights for Q4. And I'll also go through our financial guidance for 2023. In addition, I will introduce our new structured go-to-market approach that we have initiated at the beginning of 2023. And 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 grew revenue in Q4 was close to 32%. Of that growth, 18.9% was organic and the remaining 13 percentage points comes from the acquisition of Intrasoft International in October 2021. For the full year, we grew revenue 52.7%, of which 14.9% was organic and gross profit in Q4 increased by 35%, yielding a gross profit margin of 34.2%, which was slightly better than the same period last year despite the inclusion of Netcompany-Intrasoft for a full quarter compared to only 2 months in the same period in 2021. And in particular, in the U.K. and with Netcompany-Intrasoft, we saw substantially improved margins, whereas the Danish operation delivered along the same lines as for Q4 2021. For Norway and the Netherlands, we also saw improvements to margins in the quarter. Adjusted EBITDA increased more than 45% to DKK 349 million for the quarter, yielding a margin of 23%. And for the full 2022, the strong performance in both Q3 and Q4 led to margins of slightly above 20%. We added close to 2,000 full-time employees during '22 and here at Intrasoft also adds a significant share to the number of employees and constitutes a big part of the increase. And can we have the next slide, please? We have won a number of new contracts during the last quarter of the year, of which I'm mentioning a few here. In Denmark, we've won additional work with a number of existing customers in the private segment. An example of this is the frame contract with Energinet Denmark that we believe will entail good opportunities for us in terms of winning large transformational projects under that agreement. In the public segment in Denmark, we signed agreement with the Ministry for Fishing and Agriculture. And in the Netherlands, we signed a contract with the department that is handling all water supply and water infrastructure in the country. Together with Netcompany-Intrasoft, we signed a new and significant contract with HMRC in the U.K. And Netcompany-Intrasoft was already a supplier to HMRC as they had sold one of the older versions of the tax solution developed years ago. The relationship with HMRC is now expanding. And under the new contract, we'll be working with HMRC to improve and introduce efficiencies. The contract is the enabler for us to be able to work closer with the HMRC and potentially initiate update projects to the older platforms previously sold. Projects like this is one of the prime arguments for why we acquired Intrasoft in the end of 2021. And can we have the next slide, please? In Netcompany-Intrasoft, the year was closed on a very busy note. We signed new contracts in both the public and the private segment, along with the EU wallet contract in the EU segment. And in the public sector, a number of the expected projects under the RRF were finally signed. Projects like the one with the Greek Ministry of Justice mentioned here is an example here of more projects under the RRF are expected, and they will put Greece in a position to digitize further and faster. In the private segment, we signed a contract with Alumil, as mentioned here and also one of the leading banks in Greece. And further to that, we continue to expand our presence with the telco segment. I also want to highlight the contract won with European Union related to the implementation of a common digital wallet across Europe. The potential and opportunities within that agreement are vast that will give us an opportunity to develop key critical digital infrastructure to be used potentially in all of Europe. Overall, we are very pleased with the activity levels seen in Q4, not only in the Netcompany core, but certainly also within Netcompany-Intrasoft. And can we have the next slide, please? Continuing on to the ones that makes this possible for us to continue winning new contracts, and that is, of course, all our employees. The breakdown here shows the growth in FTEs in both Netcompany core and in Netcompany-Intrasoft. Freelancers and independent contractors in Netcompany core are declining and have reached a steady level now. We also note that out of close to 3,200 employees in Netcompany-Intrasoft, now close to 700 are freelancers or contractors as a result of the very different delivery model in Intrasoft compared to Netcompany, in particular, within the European Union. Of the 700 freelancers and contractors, 465 of them are based in Belgium or Luxembourg working on projects within the European Union. Churn for the last 12 months was on par with the level observed last year apart from in Luxembourg. However, the trend currently is clearly towards a fast and steep reduction in the churn ratios observed throughout the group, also for the freelancers in Luxembourg. Looking at the 3 months rolling churn rates, we noticed significantly lower churn rates, which is a clear result of the cooling down of the labor markets. The macroeconomic outlook with a recession in the horizon spurs many to stay in their current secure jobs rather than shop around constantly as was the case during the second half of '21 and the first half of 2022. For Netcompany, this is the recruitment efforts somewhat, and our expectation is that we will be able to continue to attract talent as required. And can we have Slide #8, please. So despite unprecedented uncertainty in our market in 2022, we delivered financial results in line with our original guidance and slightly better than our narrowed guidance from Q3 2022. With the acquisition of Intrasoft, our financial metrics have changed, and we expanded the level of details in our guidance for 2022 to allow for full transparency in the initial year of ownership of Intrasoft. Hence, our guidance table for '22 was somewhat busy, as already discussed in our previous quarters. Our guidance for '23 is simplified as we guide for the group altogether. And as we only expect organic revenue growth in '23, we limit our guidance to 2 metrics: revenue growth and EBITDA margin. Our guidance reflects that we expect part of the Europe to be in a recession of the year, we see continued geopolitical uncertainty. The inflation is still high, and we expect high uncertainty in decision-making within our customers. At the same time, we initiate a new go-to-market strategy, which will require investments into our organization and our solutions. We will move into new headquarters in both Copenhagen and in Athens and above anything, we'll continue to invest into our employees. These investments are made to ensure a solid foundation and future for Netcompany despite temporary turmoil on the financial markets. This leads us to guide for an 8% to 12% top line growth with an adjusted EBITDA margin of between 15% and 18%. And before I pass the word on to Thomas to give you a more detailed view on the financial performance, I want to spend a few minutes talking about our new go-to-market strategy. So can we please move on to the next slide, please. During the last couple of years, we have worked structurally with grouping our many solutions into a more logical framework. The Govtech framework for public sector and the composable enterprise framework for the private sector. And with the acquisition of Intrasoft in 2021, we gained a number of additional solutions, some actually in completion stage that qualifies them more as software. We have merged these solutions into our existing frameworks, and we are now ready to commercialize. To do so, we have worked on a new go-to-market strategy that we expect will facilitate faster growth outside of Denmark by using a replicable approach to sales and implementation across all markets in the group, existing and potentially new ones. We have identified 8 industry verticals to focus on, 4 in the private sector and 4 in the public sector that are all described in detail in our annual report. The level of maturity and reusability is different within each of these industry verticals and so are our offerings. Can we move on to the next slide, please. The new go-to-market strategy enforces a much more strict focus on what you can call one common approach. We have already implemented different solutions that can be replicated in other countries and to ensure that we can continue to scale. And at the same time, reap efficiencies. We acknowledge that we need to take much more unified approach in all of our markets. We also need to change our approach to selling, and we will be introducing a number of senior marketers in organization globally. We will still be an IT company where IT people lead IT people, but we need also to add some additional market competencies to be able to reach our vision of becoming a European IT leader by the end of this decade. Despite of the dilutive impact on the margins that this investment into our new go-to-market strategy has, I am convinced that it will be an investment that will enable us to deliver on our aspiration of becoming European IT market leader by the end of the decade. And can I have the next slide, please. I look forward to share our progress with you on our new go-to-market approach during the year. And in that aspect, I will invite you to participate in the Capital Markets Day, and we will host at our new corporate headquarter in Copenhagen on the June 1, 2023. Here, we will get the opportunity to meet more of our colleagues responsible for the go-to-market execution, and you will be able to get a look at our new office location in Copenhagen. And with that, I will now give the word to Thomas to take you through the financials in greater details. Please, Thomas, go ahead.

Thank you for that, Andre. And like already mentioned, I am CFO in Netcompany, and I will now go more into details with the financial performance for Q4 2022 and add some remarks regarding the full year of 2022 also. So, if we move past to the breaking Slide #12 and straight into Slide #13, please in one go. Andre has already spoken to our performance in general terms, and I'll give more detail in our performance, both for Q4 and for the full year. Revenue growth for Q4 was 32.5% measured in constant currencies. Currencies impacted growth negatively by 0.6 percentage points, leaving reported revenue growth at 31.9% for Q4. Growth was, in particular, driven by the U.K. and Netcompany-Intrasoft, that grew 33% and 24.5%, respectively, in Q4 compared to the same period last year. Both Norway and the Netherlands also realized growth rates above 30%. However, from a smaller base and given the relative share of the total group, the high growth in these 2 units have limited impact on total group revenue growth. In the U.K., growth was driven by strong completion of ongoing contracts, onboarding of new private segment clients and continued improved utilization and prices. In Netcompany-Intrasoft, growth was driven by income recognition of licenses sold and "pass-through revenue" related to technical equipment for a specific project realized towards the end of the year. This was also a main contributing factor for organic revenue growth for the month of November and December to reach 26.8% in Netcompany-Intrasoft. The Danish operation grew 12.7% in the quarter and continued to be driven by strong performance in the private segment. And can we move to the next slide, please. Gross profit margin increased slightly with 0.2 percentage points compared to Q4 2021. The full inclusion of Netcompany-Intrasoft, in the quarter had a dilutive impact on group margin of 1.8 percentage points. Gross profit margin in Denmark improved by 1.1 percentage points. Lower utilization impacted margin negatively while lower cost for variable remuneration impacted margins positively. Further, the underlying deliveries on projects continue to be strong in the quarter, and a relatively higher proportion of revenue from the private segment impacted margins positively too. In Norway, gross profit margin improved by 3.4% compared to the same period last year. Better utilization was the main explanatory factor for the improved margin. In the U.K., margin increased from 30% in 2021 to 31.6% in Q4 2022. Strong deliverables on projects, onboarding of new clients and improved rates drove margin up in the last quarter of 2022. The largest relative improvement in gross profit margin was realized in the Netherlands, where margin improved from 10.6% in 2021 to 23.5% in Q4 2022, an improvement of almost 13 percentage points. While the Netherlands is still a small part of Netcompany, the market potential is 2x the Danish market and hence, it is naturally important that we start realizing more satisfactory margins in the Netherlands. The main reason for the increased margin is the conclusion of a large fixed fee project that has been on the books in the Netherlands for some time now with a low margin. In Netcompany-Intrasoft, margin was 22.8% for Q4. The improved margin was driven by income recognition of licenses sold towards the end of the year. Can we move to the next slide, please. Adjusted EBITDA was 1.3 percentage points higher for Q4 compared to 2021 at 22.9%. Netcompany-Intrasoft had a dilutive impact on margin in Q4 of 1.8 percentage points, which was better than originally expected, driven by a strong performance in Q4 with Netcompany-Intrasoft. Margin was flattish in Denmark despite increased amount of FTEs and thereby associated costs. In Norway, margin was improved by 6.7 percentage points. However, from a negative level in Q4 2021, which is more the explanation to the improved margin than extraordinarily strong performance in Norway in Q4 2022. In the U.K., strong performance led to the continued increase in margin from 15.5% in Q4 2021 to 19.3% in Q4 2022. With a high level of remote work still being the predominant working condition in the U.K., we managed to grow significantly in FTEs but without having to add additional office spaces, which naturally was positive to margin. In the Netherlands, margin improved by 21.5 percentage points. However, as was the case is in Norway from negative levels in Q4 2021. And the improvement in the performance in the Netherlands in Q4 2022 is also a result to some extent of lower performance in the same quarter in 2021. Finally, we saw significantly improved margin in Netcompany-Intrasoft, compared to the 2 months of November and December for 2021. Margin improved from 7.1% to 15.4%, more than a doubling of margin. This was mainly driven by income recognition of license sold to customers in the public segment, but underlying strong project management in all 3 business units in Netcompany-Intrasoft, also added to the improved margin. While a 15% plus margin is not where we see Netcompany-Intrasoft in the short term, it is reassuring to be able to realize such a margin within 1 year of the acquisition. We are of the firm belief that Netcompany-Intrasoft will continue to add substantial value to the group going forward. And can we have the next slide, please. Work in progress improved significantly when seen relative to revenue and only increased marginally by 1.8%, whereas revenue grew close to 32% in the fourth quarter. This was a result of tighter management of processes around work in progress in Netcompany-Intrasoft. Along with an increased focus during 2022 on collection and time to cash, the actions around work in progress is really the starting point for improved working capital management in the group. And can we go to the next slide, please. Free cash flow in Q4 was strong based on both strong earnings and better working capital management as a result of the actions taken on both work in progress, but also on collection of receivables. Receivables more than 90 days overdue was reduced from DKK 112.8 million at the end of Q3 2022 to DKK 63.2 million at the end of Q4. Days sales outstanding was reduced from 81.7 days in Q4 2021 to 66.8 days in Q4 2022. In total, free cash flow was improved by 140% compared to Q4 2021 and was DKK 323.4 million. Cash at hand at the end of the year was DKK 336 million and it is our expectation that free cash flow in absolute nominal values will be improved in 2023 compared to 2022. Free cash flow in 2023 will, for all practical matters, be used to pay down debt further, and we expect to deleverage significantly from the current level of 1.6x during the course of 2023. Can we have the next slide, please? While the level of uncertainty is unprecedentedly high in 2023, we do have level of visibility for our revenue for the year, as highlighted here. Overall, revenue visibility improved with 9.3% to almost DKK 4.2 million at the beginning of the year. And with that, I've concluded the 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] The first question is from the line of George Webb from Morgan Stanley.

Andre, Thomas, I'll kick off with 3 questions, please. Firstly, you can see the expected cost impacts from these investments being put in today. Can you talk a little bit more about those potential benefits that you might see stemming from this? And should we expect to see growth accelerate further out? Secondly, on margins. If I take Denmark as an example, to get the new FY '23 guidance to work, it looks like margins in Denmark must be somewhere around the region of 8 to 10 points lower than levels you see if you go back in 2018 or 2019, for example? And most of that contraction has come over 2022 and now 2023. How confident are you that 2023 can represent a low point for margins and perhaps we can see some expansion resume after that? And then just thirdly, also on margins. Can you just talk us through why there's such a wide 3-point range on the margin guidance for this year?

Well, thank you, George, to answer your first question about the benefits from the investments. There's no doubt that we have been -- during the course of '22 being able to structure offerings into the industries that we talked about. And we have both platforms, and we have a structured approach going to customers the same way in our different markets. This means more standardization, starting all projects the same way and delivering the same way, centralizing much more of the knowledge around the particular domains. It means that we're going to approach our customers much more aggressively with solutions that are directly connected to their desire to keep OpEx down and to take in new technology in order to become more efficient. So we do expect this to have an impact on the way we sell, but also on the way we deliver and it's going to be very important for us to be able to scale the business from Denmark with many of the solutions that we have in Scandinavia into the U.K. and into all the other markets that we have also into Intrasoft. We're doing the same way. We're doing the same thing the other way around. So we're taking Intrasoft Solutions into what we are approaching the markets with -- in the other countries. We've seen that with custom solutions, and we are now doing that with other solutions as well. So this is a very important exercise. We have been -- and we have been training for this for quite a while, but we're now launching it officially from January 1, 2023, and I'm indeed very convinced that this can actually help us scale much more efficiently than till now. And when it comes down to the margins in Denmark, maybe you can answer that one, Thomas.

Yes, sure, and thanks for the questions. We don't guide on specific countries or regions. And unlike in 2022, we guide now for the group altogether. So I'm not going to be able to comment specifically on your remarks as to what the margin in Denmark looks like. 2023 is clearly a year with high uncertainty, and that is reflected in our guidance. So whether that's a low point is difficult to say, all the fact that we don't know what's going to happen in 2024 and 2025. But clearly, the current outlook from a macroeconomic aspect is having an impact on the margin that we see in 2023. And if that changes in 2024, then the logic is that our outlook potentially will also change, but we'll take 2024 when we get a little more ahead in 2023. In terms of the last question you post as to the range of the guidance of 15% to 18%. Historically, so that means before 2022, we have -- when we started the year, actually used a guidance range of 5 percentage points. So we have historically guided with a range of 5%. So in that aspect, it's narrowed a little bit. And it reflects also then the lower level given the macroeconomic outlook. So I'll leave it at that and I hope that was the answer to your question, George.

Can I just ask one follow-up as well. When we talk about compensation raises for employees in 2023, can you give any color on how you see the levels you're putting through against what you expect to see for the broader industry or levels you saw last year?

Well, there's no doubt that we will spend more investment into going the GTM model that we just described before, that's for sure. And there's also the fact that we see churn levels going down in Netcompany in general from a higher level to a lower level, which means that our pyramid is a bit -- will become a bit fatter as long as that continues. So overall, looking into salaries, we might be able to see somewhat a bit higher average age in Netcompany, which will mean a bit of higher salaries. Compared to what we normally see, this is very, very typical when going into recession or crisis situations, we've seen that before. So that's one of the reasons why salaries could go up a bit compared to the overall revenue coming in on fixed price projects. So that's definitely also a thing that we are looking into -- when we look into a recession scenario in 2023. But overall, setting up the guidance that we do, I think, is a reflection of being -- is a responsible guidance in the situation we are in right now. We have so much coming in, exciting pipeline, good visibility. We are positioning ourselves very well in the market. We see lower churn and we still want to hire new young people coming in and a lot of talent. So we need to replace some of that with new talent coming in that will become a bit difficult to do when churn is so low. But hey, that's the name of the game when you're running a company like ours. I think this is also a time of opportunity. So overall, I think the guidance is responsible and also when it comes to the salary part of it.

Thank you, George. The next question is from the line of Claus Almer from Nordea.

Also a few questions from my side, and I will take them one by one. So the first one is about the recession in your guidance. And for sure, the magnitude of recession is also discussed in these days. Will it be fair to assume if we're going to have a mild or maybe even in no recession scenario, then there will be upside to your guidance? That will be the first question.

And thank you for that question. So I'll answer it in a fairly formal way, and that is that our guidance is given under the assumption that there will be a recession in Europe. And clearly, if recession is not in Europe, then main prerequisite for the guidance has changed without answering whether that is then having an impact or not. But our guidance is given under the assumption that we are looking into a recession. And if that changes, then we'll see what impact that has.

Fair enough. Okay. And then the second question, if you are that negative or assuming a recession in Europe, still your FTE is up by 14% end of '22 year-over-year. That is somewhat higher than your revenue growth guidance. So how does that -- those 2 trends match each other?

It's true that FTE grew over the year. And when we look into our hiring policies and how we structure that during a year, then, of course, we take into consideration our expectation for growth and also our expectation for churn and that then gives the growth that we have to hire to meet the net requirement on FTE. Now churn is coming down fast. And that, of course, has a reflection into what our base is looking like than going forward. We still expect to grow, which I think is an important message to send. And therefore, we will still continue to hire. And then we'll work diligently throughout the year and making sure that the pyramid structure reflects our outlook into the market and the revenue that we expect to have.

That makes sense, but would it be fair to assume that you may be preparing at least the start of the year on a slightly stronger note than your full year revenue guidance, giving the 14% more FTEs?

Yes, I think it's very early days to discuss the volatility or the variability of our guidance. We come into the year on a good note. We closed Q4 strong. We have a number of talented people on our books and then we look into a difficult 2023. So without giving you a straight answer on that, of course, there is some big room around it.

Fair enough. Then just a small final question, if that's okay. Given the growth you're guiding for, I'm not asking for a specific number, but don't you expect a continued margin improvement outside Denmark, in '23 at least?

If we look at the full year margin, particularly in Holland and in Norway, which was not impressive, I think that's fair to say, in 2022. It's hard not to expect an improved margin simply because we've done project cleanup in Norway and to a certain extent, also in Holland. So just the comparable factor will have an impact. On the U.K., the technical impacts on 2022 compared to 2021 was that we were much better in utilizing our resources in 2022. So the utilization rate went up compared to 2021. That in itself give an instant impact on margin. Now the level of utilization in the U.K. is pretty much where we want it to be. So the same pick-up is not going to be seen in 2023. We still expect U.K. to deliver strong, and then we'll see where margin ends. And then that leaves Intrasoft and there are some ups and downs in Intrasoft. And in Q4, we had revenue recognition of some licenses, which, of course, has a positive impact on margin. And depending on how 2023 turns out, that will be impacting 2023 also. So long answer, but I cannot give you a just straight yes or no. The cloud around it is important, I think.

The next question is from the line of Poul Jessen from Danske Bank.

I have a few questions as well. I'll start out by coming back to the salary question. I assume that having a high increase in personnel and especially Denmark is also part of unmanaged attrition not coming down as fast due to the market right now. And as you then increase the average age, as you spoke about before. I was just wondering, is this a temporary or should we see that looking beyond '23 that this can be turned into somewhat of a tailwind instead of headwind as we see this year?

Thank you for that, Poul. I mean, historically, it would certainly be looking as a temporary thing, but we never know with recession scenarios and how long they last. And whether these things are structural for a longer time. The thing is that we are doing -- one thing is the lower churn and, of course, our possibility to react faster to that. Over time, we will be better at reacting towards that, of course. So we'll mitigate that. And at the same time, I think there's also some winning to be had here because -- going into the our new GTM model, where we will help countries even further in scaling both in the U.K., Norway and Netherlands and also working closely with Intrasoft, somewhat these experienced employees that some of them will actually be used in order to gain more market share and to deliver even faster in other countries. So it is a balance. It's very difficult to say whether this is temporary or not. But historically, the pyramid will eventually evolve back to what the shape and form it's always been. If you look at it historically, the business model, the pyramid will grow fatter in crisis times, then we will slim it. And yes, it fluctuates that way. So historically, you're absolutely right.

Okay. I was just trying -- coming back to the IPO, some of the pushback was that you could benefit from your pyramid when you're one country company but when you go internationally, then you should have more admin and more central functions to run the company? And are you due to the go-to-market strategy, adding on some of those competencies now as the average age moves up again, are you becoming more normal within the industry?

Well, while we are not normal, we are still very much contenders, especially and a different one when it comes to how we deliver, but also how we go-to-market. So the people we are investing into here, most of them are very close to the deliveries of what we do, and they are definitely more -- very close to our solutions. So we are not inventing think tanks or a lot of bureaucracy as we see in many of our competitors. However, we need to have more domain knowledge in particular areas when it comes to, for instance, tax and customs or when it comes to transportation or safety or in energy and utilities, which is quite normal in a growth scenario that we've been through over the last years. So I think this is a natural development, and we will make sure that not many of these people are non-client facing. I mean most of them will be sitting with our customers, talking to our customers, selling to our customers, even invoicing our customers.

Okay. And my final question is we have for some time, spoken about that you are participating in a number of custom tenders in Europe. And these are, by nature, larger projects. I was just wondering the guidance you're giving, does that include that you are winning some of those? Or is this on top?

The guidance, Poul, reflects high uncertainty. And clearly, the more we win of large tenders, the better the result will be.

The next question will be from the line of Yiwei Zhou from SEB.

And I have also a few questions, I'll for one at time. Firstly, a question back on the margin guidance. Could you maybe specifically help me to understand the 1.5 percentage points that impact from the wage inflation. My question is to the extent of the underlying wage increase? Is it fair to assume this has been also increased compared to previous years? And also, could you comment on the price increase. You mentioned a report you will not be able to pass on the cost inflation to the customers in the recession. Is this a situation or issue specifically to any market or is it across the board?

I'll answer that question. So in terms of the price increase, what we write and what I think is important to stress is that we said that it's more difficult to have a full one-to-one lift over of underlying CPI in prices. Underlying CPI is between 8.5% and 10% in the markets that we're in. So that is the reflection on that. And the 1.5% that we mentioned as a dilutive impact to margin in 2023 is then the part of the consequence of the lower growth and lower churn to the pyramid structure that we cannot pass on to our clients. A lot of the cost increase that we see and also a lot of the wage inflation that we see in Netcompany is still passed on in prices. We still raise salaries for top performers with between 14% and 15%. The salary increase for the full employee base on January 1 is still somewhere between 7% and 9% as it has been historically. However, with the current recessionary focus with the time in terms of rebalancing the pyramid structure, there is a little bit of an overhang, which we have to cater for ourselves, which is 1.5%. So we don't see it as a permanent change or anything in terms of wage inflation now being higher than normal or whatever, but it's a combination of the facts of the market conditions, the underlying growth. And then I think as we've discussed many times, our model works very well with the pyramid structure when we grow these 15%, 20% and have a churn of 17%, 19%. And of course, when both metrics into the pyramid structure are lower, then there is a little bit of time for us to work with that. So that is a reflection of that.

Okay. So could you also comment on, is it expected to any market or it's across Netcompany group different geographies?

Across all markets.

Okay. Very clear. And my second question is regarding the Q4 margin for Intrasoft. You booked this license income. Is it fair to understand this is a nonrecurring income, maybe is that a little bit, I guess...

So it's true that we -- in Q4 have income recognized margin, and you can see that in the notes and the amount is DKK 16 million, DKK 17 million. And the logic of the go-to-market approach that Andre was talking about is that we want to be able to do more of those. That's the pure logic of it. Then timing, of course, is always difficult to predict, but we would be disappointed if this was a one-off event in Q4 2022 only. The reason why we do the go-to-market and the reason why we put effort into making sure that we reuse our solutions that we make them more and more reusable across markets is exactly to be able to get benefits like this also. Not that we only want to sell the license because we also continue to want to implement around it, and that's why we have more than 7,000 people. But there is some scaling to be had in terms of pushing the license and the platform even further.

Yes. And adding to that, we will, of course, be disappointed if we don't sell licenses next year, of course. But it's not only the licenses, we can also hopefully deliver more efficiently. And in that sense, both attractive from a price point of view to the customer but also from a margin point of view, be more secure in the sense where we're delivering. So yes, that's the whole idea about the GTM approach and the reusable components. And in some cases, like in this case, even licenses come in because of our structured approach.

Great. And this license, is it relating to any specific software? Or is a few software which developed by Intrasoft?

Some customs area.

Okay. Great. And my final question is regarding to your business in the U.K. NHS. One of your peers recently commented on the -- we have seen a few projects delayed in this customer. And as I recall, this has been a big customer for Netcompany U.K. What are you seeing in your business?

We couldn't hear. What customer were you asking about?

The U.K. NHS.

NHS? Yes. So well, NHS is an important customer to us. And what we're dealing with there is applications where we deliver insight based on health data. That's one of the major and most important areas within the NHS in order to become wiser in terms of where to put in resources and where to be efficient. So that part of NHS is probably the least part to be cut down. However, of course, you're right, NHS is under pressure in the U.K. But I think we are very well positioned and at least for what we can -- the foreseeable 2023 will still have NHS as an important client there. So I don't think I can reveal more than that, but we are in a very strategic position when it comes to the NHS engagement.

The next question is from the line of Aditya from Bank of America.

Just a couple from my side. So firstly, on this new go-to-market approach, why do you decide to sort of announced this now or it changed the approach at this point? Is there anything which is you've seen from customers or just caused you to do this given you had a strategy update last year in April? You talked about as much at that point. Second, in terms of the higher investments in the go-to-market approach, I know you can't comment on specific countries, but is that more focused on any particular geography, maybe the U.K. or Norway, Denmark and how do you think about the split of the investment there? And how confident are you that you don't need to invest more in that even in 2024 to this year. And then finally, on the -- just on the current tone of condition with the clients on new projects or existing ones? Anything you could comment on what's the current sort of sentiment because you are factoring in some sort of recession in your guidance, but is there anything at this point to suggest that when that may come into the picture?

Thank you. That's great questions. So first of all, why now? I think the answer is twofold. One is that we are actually mature enough. Technology is mature enough. We've been working with the platforms and the underlying foundations for many of our solutions for quite a while now. And standardizing them and making them one approach is feasible now. It's actually possible to do so. So there's a lot of technical maturity in that. The second answer to that one is also that clients are much more interested now in -- and starting off on platforms where most of it is already in place and the ownership of the platforms in many ways are given to the client, especially in the government sector. So these are much more agile platforms where you can almost configure everything but still reuse a lot. So it's not one size fit or standard software, as we know from old days. However, you get the best of the 2 worlds. You get standardization, but you also get flexibility. And that's exactly what customers are looking for at the moment with a low OpEx cost and not a huge standard software license cost associated to it. And that brings us in a very front position in terms of approaching these customers. Now which markets -- the platforms can be used in all markets. So we, of course, defined the strategic industries that we will go into. Of course, in the public sectors, digital government is health care. It's public safety, tax and customers. We'll go into those areas in all our markets, specifically also in the core part of Netcompany and when it comes to the enterprise sector, we will see that a lot of effort would be going into the energy, utility and financial services market. And of course, we also have telco coming in from Intrasoft, Transport & Logistics is also very interesting for us. When we invest more into this, I think we've reached a level of investment that is where we want to be. We don't want to invest more. We rather co-invest with customers as we do right now. So don't expect us to invest more in the years to come. I think this is the level that is needed in order to become the leader in this. And whether it's new or existing customers, I'm pleased to say that we have a lot of existing customers embracing this, but we certainly also have a pipeline growing with new customers because this is a new way of looking at bringing OpEx down and becoming much more efficient at our customer side. So it's both. I hope that answered your questions.

Yes, that's really helpful. Just I think one follow-up, maybe on the license sales. So I guess you did mention that you would be disappointed if you don't see more of that in '23. I mean, could you give us any color on how to think about the phasing of that and given the pipeline and structure like that, but how does that look in terms of phasing maybe during this year?

Thomas?

Yes. Well, in terms of specific guidance as to what is going to come, what and when and in which format we will at this point in time, be fairly silent on that. And then basically, you just comment that we have a pipeline and we have a number of projects that are teeing up, which we believe are supportive of the guidance that we have given even in a recessionary scenario. And then, of course, are we selling more and are we able of selling more platform solutions software, then that's, of course, good. But we're not going to go into details in terms of what we expect and how the pipeline is composed at this point in time.

The next question is from the line of Balajee Tirupati from Citi.

Three, if I may. Firstly, on growth in Denmark business in fourth quarter. Fourth quarter has -- fourth quarter '21 was relatively soft. And when we look at fourth quarter '22 growth, it has come over a softer base as well as the seasonality for the previous quarter, that is third quarter '22 appears lower versus history. Are there any factors we need to be aware of?

Yes. Do you want to take one by one, Balajee, or do you want to pose all 3?

Okay. Then maybe I'll pose all 3 and then you can answer them together. Second question is could you talk about the free cash flow view for 2023 as Netcompany expects improvement in absolute term despite an 8% to 10% decline in EBITDA. Will all of this improvement will be coming from working capital and would that imply -- that likely would imply a material improvement in working capital over 2022, which you already have seen some optimization? And then third question is at this point, where are the plans around expansion into new regions, particularly in the [ DAC ] region? Those are the questions from my side.

Okay. Balajee, I'll do the first and the third question, I think, and then leave the free cash flow to Thomas. I think when you're looking at the fourth quarter, especially in Denmark, we've seen, especially in December, more sickness again because in Denmark, we are hit by actually 3 different, we call it the 3 disease phenomenon and a lot of companies were hit by that in December. So we had a definitely more sickness in December, like anyone else in Denmark. It's been quite an interesting year in 2022 in this geography. We started off with the pandemic then it cleaned off, and we didn't have more or less a normal summer and autumn and then people were sick again with the flu and combination of 2 other diseases in December. So that's why I think that was a bit more softy in December. And when it comes to your third question about ambitions in the [ DAC ] region. I think what we -- the signal we are sending right now is that we will be focusing very much on the markets we're already in doing organic growth using our GTM approach. That does not mean that we are not attentive to acquisitions, but our main focus is certainly right now to -- because we have a lot of market to grow in the existing geographies. And I'll leave the cash flow thing to you, Thomas.

Yes. Thanks, Andre. And on the cash flow, you're right, Balajee, that we stated in our report that we expect cash flow in 2023 to be better in nominal terms than in 2022. That is driven by continued improvement of working capital management, mainly within Intrasoft, both in terms of -- it's twofold. So it's in terms of -- how fast can we get all the work that we do into work in progress and from work in progress to receivables? So that's one part. And there's some optimization still to be seen the result of in '23 there with all the work we've done in '22. And then it is a faster collection. And then one good example is increased focus that we put on for instance, the 90 days overdues that we had in Q3 at DKK 112.8 million, which were reduced to DKK 62 million in one quarter. So we'll continue to focus on that. There are still some improvements and then we'll see the full impact when we look at cash flow in '23 when comparing to '22 because of all the work we've done in '22. When comparing '22 with '21, it was a little bit apples and oranges in the manner that 2021 was very "clean" in terms of being only Netcompany goal. And then 2022, all of a sudden, we had Netcompany-Intrasoft as part of the books. Now we are comparing like-for-like in 2022 and 2023. And there, you'll see the continued improvement of working capital management.

The next question is from the line of Daniel Djurberg from Handelsbanken.

Thank you very much, operator, and thank you for letting me in here. And hi, Andre and Thomas, I would like to ask a question on the attrition rate. Obviously, very good news coming down to 14% from, I think, 23% if you look at the last 3 months. And I'm trying to get my head around how important this is, if and how to put number on it because I guess you have indirect savings and a lot of efficiency gains from -- obviously, better utilization levels, less cost for recruiting, perhaps better product quality and so forth. So any comment on how important this is for the operations and also quality of projects would be helpful.

Well, it's -- there's 2 sides of the metal here because you're absolutely right. I mean you don't want attrition rates to become too high in a sense, but you don't want them to become too low either because the business model we've been running for plus 20 years. We actually want attrition rates to be somewhere over 15%, 16% towards the 20% because we want people to leave us after 2, 3, 5 years, and we also want to add new talent, and that will keep our salaries to a level where we are younger and not older. And what we've shown over the last 22 years is that we're actually able to deliver high quality using that business model. We also serving our geographies as the main school or academy for IT, and that's a societal role we play in many countries and that, of course, when churn goes down too low, you also need to encourage sometimes people to set for new opportunities. So it's -- it went down from a little bit over normal to now under normal. That's where we are actually right now.

We should use some of that at Handelsbanken, I think that's another question on the market expansion, you mentioned that you will take a little bit easy now given some potential headwind. But looking at Sweden, I think you did start to enter organically. And I guess you're looking for the Swedish public sector. Can you comment on Sweden and the opportunities you see there? And if I'm right or wrong here with this assumption on the organic entry?

That's a very correct assumption. We are -- especially with the GTM approach that we've been preparing and now launching here in January. We have a great deal of very, very interesting possibilities where we can enter Sweden with Scandinavian solutions and platforms and prerequisites that will fit very nicely into the digital ambitions of the central administration in Sweden. So we're certainly working on that. And I think that's a very strategic part of our -- I think an organic entry to Sweden would be the right thing to do.

We're already working with our entry preparedness into Sweden, Daniel, and that is then currently embedded within the Danish organization.

Yes. Perfect. And I guess it's much easier now to find talented employees just a couple of months back here...

It's easier, yes.

And my last question, if I may, a little bit on revenue visibility. I think it improved some 9.3% year-over-year. And then I was looking a little bit on the noncontractual commitments in the engagement you have and list is up, I think, 19% year-over-year. So my question is really, how sticky are these engagements? Are you -- with the risk of downsizing cancellations, et cetera on this DKK 426.8 million and just how to think?

It's a result of more work in the private sector where some of the contracts tend to be on a shorter rolling basis and therefore, not a 3-, 4-year long contract as we see in the public sector. They are sticky and the noncontractual committed revenue we are including in the revenue visibility because we are fairly certain that it will happen. Now of course, if businesses go bust or if central administrations close down, then we might have a contract. And if there's no business the contract is what it is. But historically, what we've seen is that the noncontractual committed part of the revenue visibility is actually being converted. So we are comfortable with that also.

Perfect. And my last question, if I may. When we look at contract work in progress, I think that is up a little bit less than 2%. Should we be worried here on that amount? Or is it more that you have been able to invoice very much of the fixed project during latter part of '22 that is behind this?

Another part of your question. So we've been able to invoice faster, and we want to continue focus on making sure that we don't have unbilled work in -- that we can build being parked in work in progress. So diligent focus, particularly within Netcompany-Intrasoft, but also a couple of fairly large contracts in the public sector in Denmark, where we've reached contract milestones moving work from work in progress to receivables.

[Operator Instructions] The next question is from the line of Gianmarco from Deutsche Bank.

Hi, Andre and Thomas. To start, sorry to get back on this, but on the go-to-market investments, what exactly is the difference from this new framework compared to what you've been doing previously with the Govtech framework, i.e., where exactly are you investing in additional more focused sales force, like a new targeted ad campaign to those verticals you've mentioned? Any detail there would be great because as far as I understood the Govtech framework have been there for a little while now, so I'm just trying to understand the differences here. Secondly, could you provide maybe some color on the general backlog and pipeline development. I mean, are you seeing a slowdown in replenishing the backlog? And then when you say no significant reduction in backlog, could you expand a little on the specifics of the projects that you see most at risk versus those that have initially already taken a hit. I know you can't really talk about specifically the projects, but maybe like the areas which you're seeing maybe more at risk? And I might take a follow-up...

Yes. Thank you for that, Marco. So I think the main difference between the initial, you can say, talk about, for instance, the Govtech framework and what you're seeing in being launched now is that before it was much more conceptual, so it was used to frame ideas and concepts and how to reuse from a conceptual point of view. Now you see technical foundations and technical components really being used and being demoed and being a part of the GTM approach. And of course, combined with that, you also see that the maturity I talked about before. So if you go into a particular government area, particularly enterprise area like transportation, there are particularly domain specific areas that we now talk about and specific solutions that are much more down to what it's all about and not just conceptual. So from a grouping and assembling solutions that we are reminding customers about what to do, this is much more based on real technical components and real technical demos and real domain specific solutions. So it's certainly less conceptual and much more tangible. You can say it and...

No, I thought you were already doing that. I thought the Govtech framework was already in play in demos, in selling sort of a composable architecture standpoint that you can plug. You can get some of the projects that you've already done previously in other public, I don't know, agencies or municipalities and you were selling that already? Was that not the case?

Yes, it was the case, but the maturity of the components and the foundations has not been in place as it is right now. There's much more structured and systematic reuse than what it was before. And that's especially outside of Denmark. So much of the effort right now has also been directed towards really reusing that outside of Denmark and not just reusing the references. So -- and they're also reusing it in domains and also in the cloud. So we are certainly -- you can call it version 2 of the Govtech framework where the first one was, creating the interests and relating to solutions, this is much more coming with solutions that can form a real start-up for a project. So it's definitely different. And also the GTM approach itself, we are much more into specific problems in specific government institutions and specific departments than before, where it was much more in general. So see it as a maturity when it comes to technology, but also what domain specific problems that we are dealing with. So that was in terms of your first question. And the second question was about the pipeline backlog. So I think to be absolutely clear, when we're dealing with business-critical and society-critical solutions, the larger ones, that part of the pipeline and backlog is definitely much more interesting than when we're just adding people or trying to help customers. We have been very good at positioning ourselves as a vendor that can replace older systems with new systems and bring OpEx down. So the whole OpEx bringing down issue with many -- both in governments and in private businesses is one of the main characteristics of what we do in our pipeline and our backlog. And when we come in on those strategic deals, this is also what we see actually right now, the stickiness is really high. So that resemble -- I think that's a very good characteristic of the pipeline in the backlog that a large part of what we do also in outside of Denmark is more and more related to replacing existing old systems with new ones and replacing the parts of the businesses that are critical for our customers.

And then in terms of adding to the seasonality in pipeline backlog and the backlog we disclosed is purely with Netcompany-Intrasoft, and then we have the revenue specifically for the group. But the backlog for Netcompany-Intrasoft has DKK 1.55 billion being realized from the backlog into 2023, which is a fairly big amount. There were a number of very large tenders in the European Union, especially in 2022. That activity might come down a little bit in 2023. But the backlog with Netcompany-Intrasoft of DKK 7.6 billion is more than sufficient to support the growth, even though that pipeline might be a little bit lower in absolute terms in 2023 compared to 2022. When we say that we have not seen any cases dropping as of yet from the pipeline, that is exactly as Andre refers to, on the big transformation of the projects. What is different to really have a firm opinion on is the timing of them, and they can be moved 2 weeks or even 4 weeks difficult for us to see. But importantly, they are still in the pipeline. I hope that gives you the flavor on the pipeline backlog.

Yes. No, it definitely does. I actually have a follow-up on that about the EU RRF program. I remember there were a fair few projects that slipped from Q3 to Q4. If you can maybe, a, to share how much of that did you manage to capture versus how much of those are slipping more further into Q1, if at all? And then b, just another separate one. If you could perhaps quantify the impact of that specific project that had amped up the margins for Intrasoft in Q4. So we have sort of an understanding removing that license portion of it? That would be great.

The license portion of the software is also in the notes, it's around DKK 16 million license revenue income recognized in Q4. So that's the top line impact. And you can assume that, that has a fairly high margin. So that is clearly on the other side of 60% margin and probably also a little bit higher. So if you take that away, there's still strong margin in Netcompany-Intrasoft in Q4, which is driven by strong performance in all 3 parts of the group in Q4. So that's on the license. In terms of the RRF, I think 2 or 3 of the projects that we expected in Q3 were signed in Q4. One is pushed into Q1.

Correct.

And that looks to -- that looks positive as of now. The good thing about the RRF is that the money needs to be spent within a 5-year period. And if the Greek government do not spend them, then at least that's how the European Union works, then those money are gone. So they will be spent. And it's more a matter of some administrative actions on the Greek government side that needs to be in place rather than they're willing to spend and they're willing to initiate the projects.

So you don't think that there's any possibility in that region to have, I don't know, competition, snap up some of those deals or some of that spend within the 5-year period? I mean....

Absolutely. We have a market share in Greece of 20%. We are not expecting to win 20% of the RRF. So we -- when we do our assessment, we expect to be prudent to win a lower part of the RRF. For 2022, so far, we have won quite a lot of all the RRF that has been out there. But we don't expect to win everything. That would be overly optimistic. So we are in a comfortable situation, Gian.

As there are no more questions at this moment, I will now hand the word back to the speakers.

Well, thank you all, and have a nice day.