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

Welcome to the Netcompany interim report for the first 6 months of 2023. [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 Q2 2023. 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. So could we have please, Slide #2. I -- and I will pause here for 30 seconds and let you all have a read-through of these important disclosures. And with that, can we please go to Slide #3, please? The topic of today's presentation is our performance for the second quarter, and I will walk you through the business highlights for the second quarter of the year. And I will also go through our financial guidance for 2023, which is maintained from what we communicated to the market in January in connection with the release of our annual report for 2022. And again in connection with the presentation of our results from the first quarter. Once I'm done, Thomas will go through the numbers in greater details before we open up the call for questions. And can we have the next slide, please? We grew revenue in Q2 with 15.7% in constant currencies, all organic. Currency fluctuations impacted revenue growth negatively with 1.3%, leaving reported revenue growth at 14.4%. Gross profit in Q2 increased by 10.6%, yielding a gross profit margin of 27%, which was 0.9 percentage points lower than the same period last year as expected. We saw continued strong margins in the U.K. and continuously improved margins in both Netcompany-Intrasoft and in the Norway and in the Netherlands. The main reduction in group margin is a result of lower margin in the Danish business. Adjusted EBITDA margin was consequently also lower in Q2 2023 compared to the same period last year. We added close to 1,000 full-time employees when comparing to the same quarter last year, bringing the total FTE number to 7,701, an increase of 14.6%. And can we have the next slide, please? We have won a number of new contracts during the second quarter of the year, of which I'm mentioning a few here. In Denmark, we have won and rewon a number of contracts in the private segment despite a clearly low activity levels seen in that particular segment. This is important validation to us that the private segment indeed will rebound once the current uncertainty diminishes. In addition, we see more cases being driven by the potential use of AI. We continue to win new businesses in the U.K., and we have won a sizable contract with the Insolvency Service to modernize their technology stack over a 3-year period. In addition, we have won a couple of significant and large contracts early in Q3 in the U.K. that will provide the foundation for continued high growth in the U.K. And can we have the next slide, please? In Netcompany-Intrasoft, we have also signed a number of new contracts in the second quarter of the year, of which we have highlighted some of them here. A couple of contracts were won with the government of Greece, one being the contract to implement the new social security system in Greece. This project is funded by the RRF and it includes the implementation of our product called PERSEUS, which is a complete solution for social security systems, also implemented in other countries by Netcompany-Intrasoft. In addition, a contract was won with the government of Austria to implement our product, ERMIS, which is the custom solution also implemented in Denmark, among other countries. In the private segment, the contract was signed with a major bank in Greece, to expand the current relationship even further. Alpha Bank already uses the product to its experience for banking and is now digitizing the back office operations into procurement too. It is an important win in our ambition to continue to expand our footprint within the FSI verticals throughout the entire group. And can we have the next slide, please? The transition into a European IT service provider is continuing into Q2. And as of now, 28% of the employees are based in Denmark, a further reduction from Q1 where the share was 33%. Employee growth in Intrasoft was 14%. And in the U.K. and Norway, employee growth was 25% and 29%, respectively. In uncertain times like these, I'm truly proud of our continued employee growth and our continued commitment to hire top talent in all of our markets. Churn for last 12 months is in line with historic perspectives at 17% which is 7% lower than the same period last year. And in addition, the composition of the churn has changed so that the proportion of involuntary return has increased from 0 in 2022, to a level more in line with historical levels of Q2 2023. Three months rolling churn rates have come down significantly in all countries, apart from Denmark and Luxembourg in Denmark. The higher proportion of involuntary churn is keeping total churn at a higher level, which is as a result of the rightsizing of the pyramid structure, as previously explained. And in Luxembourg, the higher churn is a result of more external freelancers working for Intrasoft on EU projects leaving that -- leading then seen in other years. The actual transition from freelancers into own employees for Intrasoft is not initiated yet. This is still expected to be initiated sometime during 2024. And can we have Slide #8, please. We have continued a strong growth momentum throughout the entire group, apart from the private segment in Denmark. Our margins in Q2 was in line with our expectations. For the first 6 months of the year, we have realized growth of 14.7% measured in local currencies and a margin of 14.4%. Despite the strong revenue growth in the first 6 months we still see uncertainty in the remainder of 2023, and hence, we maintain our guidance for the revenue growth of 8% to 12% for the full year. Margins for the first 6 months of 14.4%, which is slightly outside of our target range for the full year, just as it was in 2022. Last year, at this point in time, our margin was 16.7%, and we realized margins for 2022 of 20% as guided for. Based on past performance typically seen in the second half of the year, and based on our pipeline and ongoing projects, we are comfortably -- comfortable to maintain our expectations to our full year margin guidance of 15% to 18%. And with that, I will pass on the word to Thomas, who will give us a more detailed view on the financial performances in Q2. Thomas, please go ahead.

Thank you for that, Andre. And like already mentioned, I am the CFO of Netcompany, and I will now go more into details with the financial performance for Q2 2023. So if we move past the breaking Slide #9 and straight into Slide #10, please. Andre has already spoken to our performance in general terms, and I will go more in details with the performance in Q2 '23. Revenue growth for Q2 was 15.7%, measured in constant currencies. Currencies impacted growth negatively by 1.3 percentage points, leaving reported revenue growth at 14.4% for Q2, and the negative impact from currencies was mainly associated with the Norwegian kroner that has depreciated. Growth was above 25% in all units apart Denmark in Q2. While we are still seeing the negative impact on growth from prolonged conversion time of pipeline cases in the private segment in Denmark we are very satisfied with the international growth throughout the group. As mentioned, the results in the private segment was the main negative driver in Denmark in Q2. The private segment declined 7.8% as a result of these prolonged decision processes. Public segment in Denmark, on the other hand, grew by 9.8%. In addition to the soft performance in the private segment, the second quarter had 1 working day less compared to Q2 2022 in Denmark. This fact impacted revenue growth negative by 1.2 -- 1.8% in Denmark in the quarter and thus on a like-for-like basis, revenue growth in Denmark would have been 4% instead of realized 2.2% had the amount of working days been equal. Netcompany-Intrasoft continued the strong start to the year and realized 25.1% revenue growth in the second quarter. The growth was broad-based and driven by strong performance in both the EU, the public and the private segment. In the public segment, the contract signing of the customs project in Austria and the social security project in Greece, further contributed to the positive revenue growth with license revenue income recognized in the second quarter also. In the U.K., the growth was again driven by strong performance in the public segment where we now start to see the result of the focus on platforms to support the sales processes. For the remaining part of the year, we expect that to continue and to be further enhanced. Growth in Norway up 58.5% was driven by both public and private segment. In Q2 last year, we made adjustment to projects, which then impacted revenue negative by DKK 15 million. Adjusted for this, the underlying growth in Norway was still strong and above 25%. Growth in the Netherlands was 74.8% in the second quarter. As was the case in Norway, an adjustment was also made to a project in Q2 2022 in the Netherlands. Adjusted for this, underlying growth was above 40%. The growth in the Netherlands is driven by strong demand for our solutions and significantly better project pricing and higher utilization compared to last year. And can we move to the next slide, please. Gross profit margin decreased by 1 percentage point in Q2 compared to last year, which, however, was an improvement sequentially from Q1 into Q2 of 1.1 percentage points. The decline was mainly caused by the lower margin in Denmark, which was 37.1% compared to 34% in Q2 2022. The lower margin in the U.K. impacted group margin to a lesser extent. As was the case in Q1, the lower margin in Denmark was caused by the impact from the change in composition of churn, where we realized a higher proportion of involuntary churn in Q2 2023 compared to last year. In addition, the continued delay and prolongation of decisions on some projects in the private segment pipeline led to lower growth in Q2, also impacting gross profit margin negatively as utilization was lower than in the same quarter last year. Margins in Netcompany-Intrasoft was improved as a result of better delivery on projects and the positive impact from license revenue from 2 projects realized in the quarter 2. In addition, a number of new projects were initiated under the RRF framework that tend to have a better profile for margins as they are longer and larger in duration. In the U.K., margin was 24.5% compared to 26.8% in the same quarter last year. The lower margin was a consequence of significantly increased level of business development and tender writing activities in the quarter, which have a dilutive impact on utilization and hence a dilutive impact on margin. These activities are needed, though, to generate the foundation for further growth and the relative higher than normal level of tender activities and business development was due to the size of the tenders being worked on. In that aspect, it is highly positive to note the winning of 2 large and significant contracts early in Q3 in the U.K. These contracts will lay the foundation for continued high growth in the U.K. Evenly important, they will enable the U.K. to expand margins due to the size and type of contract work in the future. Margin in Norway also increased mainly as a result of better project deliveries. In addition, the comparable quarter last year was negatively impacted by adjustment to projects. The increased margin in the Netherlands was a result of better project pricing, the completion of low-margin projects back in Q4 2022 and the fact that the comparable period last year had an adjustment to 1 project impact on margins negatively in Q2 2022, just like the case was in Norway. Can we move to the next slide, please. Adjusted EBITDA was 1.6 percentage point lower than compared to Q1 2022 at 13.9%, sorry, Q2 2022. Adjusting for the impact of 1 working day less in Denmark, group margin would have been 0.7% better at 14.6%. The reduction in EBITDA margin realized in Denmark was a result of the impact from lower gross margin and the increased cost for the enhanced go-to-market approach and 1 working day less. Netcompany-Intrasoft margin increased by 1.9 percentage points, driven by better gross profit margin. The performance within Netcompany-Intrasoft continues to improve, and more joint projects are continuously building in the pipeline for the group. In the U.K., margin was 2.3 percentage points lower, purely driven by the lower gross margin -- gross profit margin already discussed. Margins in Norway improved significantly by more than 26 percentage points. Part of the improvement was driven from better gross profit margin. And in addition, administrative cost was lower as there were no cost for severance payments in Q2 2023, opposite to that of the same quarter last year. In the Netherlands, margin improved by 39 percentage points on better gross profit margins and also no cost for certain payments in Q2 2023, unlike in Q2 2022. Can we have the next slide, please? Work in progress increased by 28.2% in Q2 compared to revenue growth in the quarter of 14.4%. This increase is mainly driven by increased work in progress from Netcompany-Intrasoft, driven by additional wins of projects under the RRF. The development of work in progress on a quarterly basis will, by nature, be lumpy. As relatively large payment milestones in a given quarter will have a significant impact on the total balance of work in progress. As most of work in progress balance remains on our balance sheet for 9 to 12 months, it is more reasonable to compare growth in work in progress to last 12-month revenue, which in turn grew by 27.5%, supporting that work in progress is indeed increasing alongside revenue growth. Can we go to the next slide, please? Free operating cash flow in Q2 was negative with DKK 72.5 million compared to a positive DKK 7.3 million in Q2 last year. Increased work in progress, as just discussed, was the main negative working capital change. On the other hand, days sales outstanding continues to improve and days sales outstanding was reduced from 77 in Q2 2022 to 68 in Q2 2023. In addition, the overdue part of trade receivables was further reduced as relative part of total receivables from 39.7% in Q2 '22 to 35.7% in this quarter. The amount of trade receivables per 30th of June paid in the month of July also increased from 42.5% last year to 47.5% in this quarter. All are objective signs of the continued focus on cash collection and quality of cash and trade receivables throughout the group. We have also continued to deleverage in the quarter and repaid DKK 100 million on our bank loan during Q2, bringing the total repayment of debt so far to DKK 300 million in 2023. Leverage was reduced from 2.4x in Q2 last year to 1.7x. Free cash flow will, for all practical matters be used to pay down debt further, and we expect to deleverage further from the current level during the remaining course of 2023. Can we have the next slide, please? While the level of uncertainty remains high in 2023, we do have a high level of visibility of our revenue for the year, as highlighted here. Overall, visibility improved with 10% compared to last year and was almost DKK 5.5 billion at the beginning of July 2023. And with that, I've concluded the detailed financial walk through, and we will 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 will be from the line of Orson Rout from Barclays.

Orson Rout here from Barclays. The first was just on Denmark, which obviously slowed quite significantly in the private segment, despite actually quiet an easy comp. So I was just wondering whether you can comment on the dynamics you've seen in Q3? Because Q3 is obviously a significantly tougher comp. So could potentially see an even more difficult backdrop in Denmark in Q3. So I was wondering whether, at this point, you feel confident to commit to growth in Denmark in Q3? Or is there a real possibility of large or even declining revenues in the Danish business? That's the first question I have. The second would just be on headcount. Obviously, you've continued to add head counts sequentially and you're seeing headcount growth 15% year-on-year also. However, the top line implies guidance for H2 implies quite a slowdown. So I was wondering with revenue implies the slowdown in H2? Are you still looking to hire at similar rate to what you've been hiring that so sort of in the mid-teens range? Or will you look to load the headcount addition to protect the margin? And maybe as part of that, you could also touch on utilization and how you expect that to be impacted by the high headcount additions.

Thank you, Orson. Maybe I'll take the first question and Thomas, you can do the second one. When it comes to Denmark and the dynamics of the private pipeline, I -- well, as we also mentioned in the report here, decision-making process is longer when we actually propose enterprise replacement of core systems. The good thing is that the pipeline is looking really even better -- in a better shape than it was last year at this time and the structure and the type of projects is definitely also better in the sense that they are bigger and more business-critical. So going through Q3 and Q4, we expect to see some of that coming into the books and definitely help the situation in the Danish private pipeline. So I mean I can't answer whether it's going to be Q3 or Q4, but it certainly looks really promising. So just to answer the first question. And to the second of the headcount, Thomas, you can...

Yes. And thanks for the question, Orson. On headcount, there is this impact from the change in the churn where in 2022, churn was 100% voluntary, and now there is a part of churn, which is involuntary. That means that a number of FTEs that have been given notice are actually still counting as FTEs because they're still on the books, so to say, not generating revenue, but they're still there as cost. And until they are "out of the books," you will see a little bit inflated high FTE level. That will come out of the books during the second half of the year. And then you see a more adjusted growth in FTEs also reflecting the underlying activity level. We are still active in the recruitment market. Of course, we are watching very carefully the underlying activity. However, we do not think that the current slowdown in the private business in Denmark, driven by longer decision processes, we do not think that, that is going to be a longer term, meaning for the full 2024 for instance issue. And therefore, we also need to make sure that we are ready to do the projects whenever they materialize. Right now, utilization is lower from that in the Danish private sector. And that also means that some of the revenue growth will be on existing FTEs, simply by increasing utilization, which, of course, will have an impact on numbers, and that's most likely going to be in 2024.

Okay. That's helpful. If I may ask one quick follow-up just on the attrition given you touched on that. Obviously, a couple of quarters ago, it was a bit of a worry, the attrition was -- [indiscernible] in Denmark, which led you to have to increase involuntary attrition. Now looking at the 3-month rolling, if I know it's that especially the U.K. and Norway have seen churn come down quite a lot. I was wondering if this could be common issue and if you may have to start increase in voluntary churn through churn in the U.K. and in Norway as well? Or are the dynamics there slightly different from the Danish business?

Churn in those entities will come up, and we'll see that already from Q3 and onwards.

The next question will be from the line of George Webb from Morgan Stanley.

Andre and Thomas, a few from my side. Firstly, just on the Norwegian business and the margins there. I think the commentary back at the first quarter stage is that margins would improve through the year. Looks like Q2 was a little bit worse than Q1, mostly on the private segment. So a little bit of color around there and your confidence that will improve into the second half will be helpful. Secondly, just on the guidance range for EBITDA margins, still have that pretty wide 15% to 18% full range. What in your mind drives an outcome now toward the upper or low end of that range? And I think, Andre, you mentioned the 2Q margins were pretty consistent with your internal expectations. Is that in line with your expectations to a specific part of the range? So midpoint, low end, high end, that would be an interesting point. And then lastly, curious as to how disciplined you're being on cost internally? Is it normal course of business around signing off the discretionary costs? Or are there any types of controls in place at present?

Yes, I can do the first 2. I mean the Norwegian business is definitely improving, and we have a much better pipeline now and also converting some of that. So I mean that should help on the margins in the second half of the year, and we have major engagements in the private sector as well. So that should improve. When it comes to the range of the -- of our expectations for the EBITDA, I think it has very much to do with the rate of converting the pipeline in the second half of the year. Now, the faster we start moving on some of the larger engagements also, of course, in the Danish private market, the better it will help on the margins. And when it comes to the cost structure and our -- how conservative we are about that, Thomas, I'll leave that to you.

Yes. The main part of our cost, George, as you're well aware of, salaries related to our FTEs. And we are making sure that we are adjusting our capacity to the activity level to the extent that we can. So we are prudent in that aspect. There are certain things that we continue to invest in because we believe that is the long-term right thing to do, which, for instance, is the enhanced go-to-market structure. We are already starting to see benefits from that, and it would be short-term fixing an issue which would haunt us in '24 and '25 if we would try to save DKK 10 million on something, which we probably could, but it would simply be the wrong decision. So where it makes sense, of course, we are diligent with our cost structure. But there are also certain things that we will maintain in going forward. And just maybe one more comment on the EBITDA range. Clearly, we're not going to give you a figure for if it's high or low. But some of the things, apart from what Andre also said, that can impact the margin is the type of contracts we win and how many of the contracts entail usage of some of our products. Now in Q2, we signed 2 contracts down with Intrasoft, one with PERSEUS that has license revenue. and one with ERMIS in Austria that has license revenue. So depending on how many of the contracts we convert in the second half, that entails products, that will clearly drive license revenue, which have a positive impact on margin. But timing in there, is difficult to predict. Clearly, whether it's Q3, Q4, whether it slips into January. So those are some of the dynamics.

That's clear, Thomas. Just on that last point on the license front. Obviously, Q4 last year, so stuff was very strong and that was part of the reason. When you look at the price of the second half and acknowledging some things can always slip, but does that look strong to you in terms of where the license revenue could come in? Or is it -- how would you describe that, I guess?

Looks strong.

The next question will be from the line of Daniel Djurberg from Handelsbanken.

Yes, a couple of questions from my side, starting off, again, on the license revenue that you just touched upon. Is it possible to give any ballpark on how to pencil in license revenues ahead, i.e., looking at the contractual revenue that you have totaling DKK 5.5 billion. Is it possible to give any in a percentage wise? Or do you don't have that number really. So just to understand how to...

So the realized license revenue is part of the DKK 5.5 billion. The potential revenue from license in Q3 and Q4 is not part of the revenue visibility because we need to sign those contracts that will then entail it. But the DKK 30 million so far is part of the DKK 5.5 billion.

Yes. And you only can tell us that the visibility or the pipeline for more license revenue growth, it is decent year-over-year, that is the fair assumption that you gave, I guess.

It's not that we don't have an idea of what it is, Daniel. It's just something we don't disclose. But to follow up on also what George asked previously, we do see cases in the pipeline where we have a strong conviction that they will materialize, which also includes license revenue in Q3, Q4 this year.

Great. And may I ask perhaps Andre, on the -- you mentioned the freelancers, obviously up year-over-year, but same percentage of average FTEs. But if you talk about recruiting from at least in 2024 time frame. Is this most come back that you're awaiting the market development? Or -- and how do we -- can ballpark say anything about the margin impact from the freelancers versus your own FTEs?

I mean, in general terms, our strategy, and that's what we've been going for throughout the years is to diminish the number of freelancers, of course. And we're doing that in all core countries and have been very successful in doing so in the U.K. as well. When it comes down to Netcompany-Intrasoft, we said already when we did the acquisition 1, 2 years ago that we would also go and minimize the number of freelancers, but we won't start doing that before next year. So that was what I alluded to is specifically for Netcompany-Intrasoft, specifically also in Luxembourg. Right now, when we're winning new engagements with Netcompany-Intrasoft, we are delivering those together as much as possible and using all the resources that we have in the core countries. But their existing engagement, specifically also in the EU are still majorly exposed to freelancers because we still have a lot of people working there on the EU engagements, which is a structure that we will change gradually starting on from next year.

And we have previously given some insight on the magnitude of the opportunity or the impact on earnings with that, Daniel, and -- if we take the freelancers in Intrasoft for -- and put them in broad terms. For each 25 freelancers that we can convert into our own employees, and this is then under the assumption that we have an effective pyramid structure and blah, blah, blah. But for each 25 that we can convert being freelancers to our own employees, we will see an improvement in margin of around DKK 1 million or equivalent of 50 basis points. And that's for each 25 and there are 600 of them. Now we're not seeing that we can go from 600 to 0 in 1 year. It took us 4 years to go from 275 to 40 in the U.K. But there are significant opportunity. And that's, of course, some of the things we want to unlock and look into, like Andre say, there are some legal and some contractual constraints as to when we can start that because of the structure of the contracts within the EU, where it's written, hard written in the contract that person A, B and C needs to be on the project, and we cannot change that. But we can start to look at that from 2024 and onwards. And of course, we will do that to improve our underlying margins.

The next question will be from Yiwei Zhou from SEB.

I have 2 questions left here, both are follow-up. Firstly, I just also want to ask you about the Norwegian business. And could you maybe indicate a bit what level of top line do you need to deliver in Norway for you to be breakeven? And could you also maybe comment or indicate, if you still use the Danish pyramid resource in Norway? And I'll do the next question -- I'll do next question later.

Yes. And I have to disappoint you, Yiwei, but you probably know what I'm going to answer. And that is that we don't guide specifically per country. So it's going to be difficult for me to give you a straight answer as to what kind of top line do we need to see to have some breakeven results in Norway. But what we can say though is that one of the reasons why we are positive on the development of the margin in Norway is that part of the pipeline in Norway for the second half also includes projects where for Norway, fairly nice amount of license revenue is part of the pipeline, which, of course, will have a very positive impact on margin. So that alone will give some positive impact to margin. And I'm not going to be more specific than that. There are still some Danish resources working on Norwegian projects. It is gradually coming down, but there are still some which, of course, has a drag on margins, but it is coming down.

Okay. Fair enough. And then my next question is on the Danish operation. 11% headcount growth in the quarter. So I understand you have laid off some and which is still booked there. But could you maybe indicate the underlying, sort of get how the growth, if you adjusted for those layoffs?

Well, I have to say that the Danish operation is really running very well. I mean in the public sector, we have seen a fine growth, doing a lot of things for existing customers and pipeline seems to be bettering also starting next year. . When it comes to the private line of business, I think the nature of the project has changed a lot over the last 9 to 12 months. We are seeing bigger chunks of work, much more business-critical. Now the things that we're doing with staff and taking care of the pyramid is completely normal. We are back to normal churn levels in Denmark. And this is just running the business as we've always done for 23 years. Making sure that the shape of the pyramid is as accurate as possible in relation to the work coming in. And I think in both dimensions, we are in control. Now we will see what -- how developments will go in the second half year. We have a good pipeline, good visibility. And we also have the necessary tools to shape the pyramid in the right way. So we'll be doing exactly what we've been doing for the last 23 years, actually.

Yes. And without being too specific, Yiwei, but the impact of the FTEs would have been somewhere around 2 to 3 percentage points if they had been off. So that's the magnitude.

Great. And just, I want to follow-up on this. So if we assume -- if we assume the private segment -- private segment projects coming a bit later than you expected, let's say, not in Q3 but in Q4 so we should still see a short-term dilutive impact on the margin in Q3?

That has a detailed question on margin guidance per quarter, which we generally try to stay away from. Overall, we are comfortable with the margin guidance for the year of 15 to 18 based on performance right now, pipeline that we can see convert the possibility also to short-term increased utilization and things like that. So in that aspect, Yiwei, we are comfortable for the full year.

The next question will come from Claus Almer from Nordea.

Yes. Also a few questions from my side. The first goes to the slide about U.K. business. You had a comment that you are having investment -- business development cost, what does that actually cover? That will be the first one.

Thank you, Claus. Well, it covers a great deal of tender writing. So we literally had a breakthrough in the public sector in the U.K. Specifically, we're working a lot with -- in the health area, NHS but also working a great deal with customs and tax and also defense. So in order to get into those larger contracts and play that role that we want to play, we've been -- it's been necessary for us to write some large tenders, but all those investments into tender writing, I think, has been showing really, really solid results and now we're sitting with customers building the right things in the U.K. So that's the major part of the investment. That's tender writing.

But you both mentioned business development and tender writing. So I thought business development is something different than tender.

Yes. In our terminology, business development covers both activities and hunting meetings, preparation for.

Conferences.

Conferences. And all the things you do to make sure that you are on the radar screen when tenders come out. So business development is all of that, making sure that you are in front of the customer, making sure you do presentations, making sure you have meetings and prepare and all of that, which is basically then time that you cannot build and therefore, it has a dilutive impact on utilization and tender writing. So those are the 2 parts that goes into business development in our terminology.

Fair enough. Then the second question.

I think that's what other companies would label as sales and marketing costs. But for us, they are in business development, and that's why they are part of the gross profit.

Second question goes to the backlog. So the noncommitted part of the backlog, do you see changes to the time schedule, maybe even cancellations more than normal?

I guess the short answer is, no.

Correct. And the uncommitted part of the backlog, just also to reiterate that, is where we are working on projects that are typically rolling without a firm contract, but where we are doing critical work for the clients so that basically, it will be very difficult for clients to continue to work if we were not doing the services that we're doing. But from a pure legal perspective, it is uncommitted or contractually uncommitted work, but it is very certain. So there's very, very little uncertainty in that part of the backlog.

Okay. And then just a final question going to the pipeline. As you did mention a shortened improvement in the conversion of pipeline to orders here in Q3, I guess, that has not happened. So Andre, were you out talking to these potential clients, what are they saying? Are they waiting for some specific milestones? Or could this just drag on for a number of quarters?

No. I did not say that it wasn't happening in Q3. I'm just saying it's happening continuously. And many of these decisions are based on -- on a long-term cooperation with Netcompany, not just a project of 3 or 6 or 9 months, it's actually something that we can do together for probably several years, which is also going to change the entire core systems of our clients. So I think in many respects, typically, you have analysis phases going on, they could probably be prolonged by 3 or 4, 5 weeks in order to get all the conclusions right before you take the final decision to embark into a real design implementation phase of a larger program. So that's just normal, especially when it comes down to larger projects. And also, I think the first half of 2023, we've seen some kind of reluctancy within clients because no one really knew how the financial environment would develop in the year. Now we see more comfort, but also we see more eagerness into investing into new technology, not only as a tool to create more sales channels or services, but also in order to be more effective. Even if times are a bit tougher. So there's also a transition going from IT being a growth engine to IT becoming something that you use in order to decrease cost and that's also something that the clients had to go through throughout '23. So in all respects, I see a lot of very, very interesting dialogues where we continuously shape the deals. And so I expect within the next quarters, those deals to come in.

Okay. So just so I understand. It sounds like, you got feeling or your understanding from speaking to particular clients that, late this quarter may -- things will normalize and I think will catch up? Is that how I should understand?

I cannot guide quarter by quarter. I would just say that continuously, the dialogues are getting more mature, and we are doing -- for most parts, we're already doing paid work in those dialogues, doing analysis phases, leading to more work. So the exact timing of it, I will not go into detail of that.

The next question will come from Harry Read from Redburn Atlantic.

Just 3 questions from me. Obviously, the growth recorded in the first half implies a [ deceleration ] into the second half. But I think the compound growth rate to get to your mid-term target is just over 11%. What's driving that reacceleration? Is it a mean reversion on the macro and uncertainty lifting off customer spend? Just some more clarity, that would be great. At the start of the call, you mentioned AI coming on to customer spend. Would be great to really understand what exactly you're doing. You're fine-tuning LLM, data labeling and just some of the services that you're offering as part of that AI offering, would be great, more clarity. And then the final one is just on M&A. Do you see any interesting opportunities at the moment, either bolt-on or larger? Just interested if there'll be an inorganic component of growth going forward.

All right. Thanks Harry, for the question. I'll take the first one and leave Andre to the -- to #2, #3. So for growth, in the second half and where that will end, a number of different building blocks, so to say. Clearly, some mix in terms of when we convert pipeline cases in the private sector. Also what type of contracts we will convert. Some of them will have license revenue embedded, which will have a higher-than-normal amount of revenue simply because the income recognizing upfront. So when we look at the second half, and how the 14.7 stacks up to the 8.12. We're still cautious with the Danish private sector, and we will see where that ends. Clearly, there are some positive signs, but there's still uncertainty. So I'll basically leave it at that.

Yes, when it comes to your question about artificial intelligence. I'm really happy about that question. I guess the work falls into 3 areas. And in some cases, it's actually all 3 areas at the same time and with some clients, it's only one of those 3 areas. But Basically, what everyone is trying to look into right now is how to use AI in specific departments in order to automize specific roles. It could be within sales, service or HR and typically be using those language models for that. That's not the most important part of the work we do. It's a part of it, but it is not the most important part. I think the most important part is -- is looking into the self-service functions of larger corporations where prompts will be replacing existing self-service functions where simplifying the whole way of self-servicing and integrating into all the systems behind the scenes is crucial for many companies. And the third area where we are certainly feeling a lot of interest and a lot of investments is into the, what the area I call operational excellence, where real-time data and the capturing of data to be used for pattern recognition and optimizing operation is crucial. The airport -- the Copenhagen Airport project is a very good example of that, and we have a platform that we call PULSE, which is assembling real-time data and ensuring optimization of the core processes of larger enterprises and even ecosystems of enterprises. So that's where we're having the dialogues right now is really interesting dialogues, and we have platforms already in use that can be used for this. So it's truly exciting times. And I think all large enterprises are into these dialogues right now. And when it comes down to mergers and acquisitions, I think we are always -- we always are looking, we should be where we are looking at -- what we are focusing on is, of course, also to look into whether we can find platforms or even software products that could -- that could supplement and be a part of our offerings, whether it's AI or whether it's workflow or whether it's -- it's self-service, we are always looking into platforms that we can use even platforms within specific verticals or industry verticals. We have had several wins over the last year where we've been using our own platforms or our platforms from other vendors to come in and play an important vital role, whether it's public or private. And we gave some examples throughout the presentation today. I think it's evident that when you are -- especially when you're a new geography, then where you are already known, it's important to have both the technology stack, the software with you, the domain expertise and the references and not only being saying, well, we're an [ air ] company. We are typically better delivering any of the other stuff as well. So when we look at M&A subjects, we definitely look at software and platforms as well.

The next question will come from Balajee Tirupati from Citi.

Two from my side, if I may. Firstly, could you clarify the comment and presentation, stating growth is expected in both private and public segment in 2023? Is the reference for expectation of growth in revenue for 2023 for Danish private and public segment? And the second question is if you could provide update on 2023 FCF view. In the beginning of the year, outlook was for growth in absolute terms over 2022, do you retain that outlook?

So the first question, Balajee, was what do we expect in terms of full year growth in the different segments in Denmark and while we don't guide specifically on public, private in neither of geographies, we do expect public still to remain strong, and then the results of the private sector in Denmark will be very much depending on how fast we can convert the cases in the pipeline as Andre has already alluded to, and we see some good progression in that. Then the second part of the question was difficult to hear. So can you repeat the second question, please?

Second question was on FCF [ view ] for the year. The outlook previously was for growth in absolute FCF over 2022.

On cash flow?

Yes.

Yes. We still expect cash flow to be higher in absolute terms than it was in 2022.

If I add one follow-up. We have seen many global IT service companies highlighting delayed decision making in the private segment. Do you sense that after accelerated rate of investment in digitalization over the past couple of years, customers can actually now afford to make more major investments going forward?

I think that's a good question. I think what I'm sensing right now is that there's a shift towards using technology and digitization not only for digitizing existing growth patterns, but also to look at being more cost effective. And there's also definitely a very, very big interest in how to use AI on top of existing technology stacks and older systems. And that requires many companies to invest into data gathering, integration, all the boring but tough parts of any IT engagements because AI in itself is very, very promising, but you can't really use AI without data and getting into the data layers of the businesses an intelligent and not polluted data is actually difficult for a lot of large enterprises. So what we are seeing, especially in the private sector is, is a bigger incentive and also eagerness actually into getting to know one's own data and how to get into that. And this is an area where we are very well situated both with our platforms, but also with our competencies. So there's a shift going on towards this. I think it's very promising. Now, hey, private business is always -- when you look at a private enterprise business is always much more [ fluctuatious ] and maybe more exposed towards general financial feelings and terminologies and how the world is evolving. But I think overall, digitization, AI, integration and data gathering is going to be a key driver for this sector. And I think it's going to be very important for Netcompany and is an area where we are still investing. And I see a very promising business development in that area.

The next question will be from the line of Aditya Buddhavarapu from Bank of America.

A few from my side. So firstly, I can see in the presentation on Slide 23, you gave a breakdown of the working day impact for different markets. So I think in Q3, you have 1 less working day across all the markets and then in Q4, a couple more. So could you just maybe talk about the impact of fewer working days in Q3, Q4, at maybe the group level? That's the first question.

Yes. And you're absolutely right, Aditya, thanks for the question. Fewer working days have a negative impact on revenue growth. And as it had in Q2, it also have in Q3 and Q4 both in Denmark and Norway and 1 less in the U.K. and also in the Netherlands. So that means also -- and that's also coming back a little bit to one of the questions that was asked previously by Harry in terms of what is some of the drivers for the de-acceleration or lower growth in the second half is simply fewer working days. In general terms, 1 working day less is to the tune of 1.5 percentage point negative impact on growth. So there will be that impact in Q2 -- sorry, in Q3 and Q4, and that is already taken into account when we guide for the full year. It will also have an impact on margin.

Yes. Understood. And then on the go-to-market approach, I think you talked about a DKK 7 million impact on admin costs in 2Q, a similar level in 1Q. I think based on what you said at the beginning of the year, should impact a similar impact -- expected some impact for the second half as well, so roughly DKK 14 million, DKK 15 million?

I didn't get the first part of the question, sorry.

The investment in the new go-to-market approach, I think you see that in the release...

Yes. Yes, same level throughout the quarters. So the same level in the second half as in the first half, yes, correct.

Understood. Okay. And then the probably we shouldn't expect any more impact on the headquarter moves in the second half of the year. That's all is then for [ the Q ].

Correct.

All right. I understand. And then on the free cash flow, so you talked about the work-in-progress impact related to RRF projects. Given what you've said on the RRF pipeline over the next few years, should we assume that maybe in general, this should become a larger feature of the free cash flow, a large part of the overall working capital cycle over the next few years then?

It will fluctuate, work in progress will fluctuate, and it's -- it can lead to wrong conclusions looking at work in progress on a quarterly basis alone. If we look at work in progress to overall revenue. And if the -- and it's the split between public and private is more or less the same, then overall on a yearly basis, you will not see big fluctuations. But there can be fluctuations within the year, and that has to do with when different projects are hitting different payment milestones, whereby we are allowed to invoice, which we can then subsequently collect. And like I said, typically, a project sits on the balance sheet of 9, 12 months in work in progress. That does not mean that all projects are then being invoiced in the 11th or 12th months. Some have milestones in the middle of the project and some have in the end of the project. And depending on the composition of that project portfolio going into work in profit -- work in projects -- in progress -- sorry, it will fluctuate from quarter-to-quarter. But overall, if you look at it on an annual basis and if you then also add trade receivables, then you should be more or less in line. It can fluctuate a little bit from year-to-year, but it would be more or less on a stable level.

Okay. So just to follow up. Is there anything structural related to the RRF projects, which means right now there's a -- that is different working capital cycle for those?

No. But the composition in Intrasoft is different because a lot of the contracts that are won right now are based on RRF, which means that they are fixed fee driven with payment structures, whereas a majority of the work that was driving growth in 2022 was more related to EU business because the RRF was not that active yet and that is more time and material. So the composition of the type of work that Intrasoft is doing is having a negative impact right now on work in progress. But that's actually a positive thing because I mean, of course, we want our money, but at least we get a lot of projects initiated from the RRF. And the RRF is money that will be paid. It's guaranteed by the European Union. So we're not too worried about tying up work in progress in there. If you understand me correctly, of course, we want to get the cash flow as soon as possible. But this is just a thing that we cannot get out of and there's a difference in mix of the revenue growth in Intrasoft.

Okay. Understood. And then the last one for me. You called out the business development cost and tender work in the U.K. impact the margins. Again, is there anything specific to the U.K., which maybe you called it out because I assume you've bid for similar large contracts in Denmark and other markets in the past. So I think specific why the U.K. has been called out this time?

It's some really, really big things they're working on, and that's why there is this large impact. So it is really, really big, not just for the U.K., but also for the group.

Yes.

And as you -- I guess is a bit for more of those contracts and should we expect more of that impact in the second half or going forward then?

Yes. Second half already and then laying a foundation for continued strong growth in multiple years going forward.

The next question will be from the line of Mads Quistgaard from Carnegie.

I will take them one by one. So first one, coming back to Denmark. So the public sector is once again down to single-digit growth. Can you maybe talk a bit about the timing of the outcome of the larger public tenders in Denmark? That will be my first question.

Sure. Thanks for that. So yes, if you look at 2023, there hasn't been that many large, huge tenders in Denmark. There's been a great deal of work on existing contracts and renovating existing systems. Now we see by the end of this year and '24, there's so much more happening, so there's going to be new tenders coming out. The tender for the new student administration system is out again. And there's also commission working right now on which rules need to be changed, both for social benefits and other vital areas where Netcompany is present delivering the IT services for that. So -- there will be more happening definitely by the end of '23 and the whole of '24. But when you look at the existing engagement and the digitization level in Denmark, I think we can expect that we can still and remain confident that we can create the necessary growth. I mean it's single digits, yes. So I think it's this quarter, it's almost 10% on existing business. So it's a solid base, and we expect more to happen over the end of '23 and '24.

Okay. And then I have a question on free cash flow. So again, you commented that in absolute terms it should be higher this year compared to 2022. Any specific timing on the third and the fourth quarter this year?

Thanks, Mads. No specific timing on quarters. And to reiterate, we try to stay away from guiding specific on quarters. So we do expect cash flow overall to be higher for the full year. And that is going to be driven by projects hitting milestone, payment milestones being collected and then performance in the second half of the year also. But no specific comments as to whether it's Q3 or Q4.

Okay, fine. I was just thinking that you first have to convert it into trade receivables and then convert it into cash. So I was just guessing that quarter 4 might be stronger from a free cash flow perspective. I might be wrong?

I'm not going to comment on that because then I'm going to answer the question that I was trying to answer.

Fair enough. Then my last question is on the margin bridge, which you announced in the annual report, you also gave some insights into the different aspects here, the timing of that. But maybe you can comment on what, also especially on remuneration, which is also expected to impact the third quarter. So what is sort of left in terms of the phasing of the full year cost?

So the -- in terms of remuneration, the vast majority is embedded in Q1 and Q2. There's going to be a little bit in Q3, but the majority of that impact from the bridge has been absorbed, sorry, during Q1 and Q2, mainly in the Danish business.

Okay. And then you have the working day impact, will that remain being in the third quarter and the new go-to-market, which will get the year equally, right?

Yes, correct.

As there are no further questions, I will hand it back to the speakers for any closing remarks.

Well, thank you, everyone, and have a wonderful day.