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

Welcome to Netcompany Interim Report for the First 9 Months of 2023 Conference Call. Today's call is being recorded. [Operator Instructions] I would like to introduce your speakers, CEO, Andre Rogaczewski; and CFO, Thomas Johansen. Please begin.

Good day, and welcome to this presentation of Netcompany's results for Q3 2023. My name is Andre Rogaczewski, and I'm the CEO, Co-Founder of Netcompany. I'm joined today by our CFO, Thomas Johansen. And before we get going, there are some important disclosures that I need you to read through. So could we please have Slide #2, please? I will pause 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 for Q3. I will walk you through the business highlights for the third quarter of the year. And I will also go through our financial guidance for 2023, where we narrow our expectations as we are now 9 months through the year. And once I'm done, Thomas will go through the numbers in greater details before we open the call for questions. And can we have the next slide, please? We grew revenue in Q3 with 9.2% in constant currencies, all organic. Currency fluctuations impacted revenue growth negative with 0.8 percentage points, leaving reported revenue growth at 8.4%. Gross profit in Q3 decreased by 14.6%, yielding a gross profit margin of 27.5%, which was 7.4 percentage points lower than the same period last year. The main reduction in the group margin is a result of lower gross profit in the Danish and Norwegian business. Adjusted EBITDA margin was consequently also lower in Q3 2023 compared to the same period last year. We added 720 full-time employees when comparing to the same quarter last year, bringing total FTEs to 7,760, an increase of 10.2%. And can we have the next slide, please? We have won a number of new contracts during the third quarter of the year, of which I am mentioning a few here. In Denmark, we've been selected by the Danish Business Authority to develop and maintain 4 critical systems, including the Central Business Register. In Norway, we have been selected as a vendor for framework consultancy for Allente where we will provide maintenance and support lead of their critical service platform. And I'm also glad that I now can put names on the 2 U.K. contracts we announced in connection with Q2. The NHS mentioned on this slide. And if I can have the next slide, please? I'll put some more words on the DALAS Framework contracts we have been selected for. So Slide #6, please. In the U.K., we've been selected as a supplier on the Crown Commercial Services DALAS Framework agreement, where we, among 5 other vendors have been selected for the -- to a -- focusing on large-scale digital integration and development services for the HMRC. The contract period for the DALAS Framework is 4 years, and we expect to be well positioned for the tenders with our products and platforms portfolio. The first contracts are expected to be tendered during the month of December, which also means that revenue from the DALAS Framework will impact from 2024 and onwards. I cannot stress the importance of this framework enough for future development in the U.K. market. Not only is a DALAS Framework, the largest ever in the U.K. We are also selected for the part of DALAS, together with large multinational professional service companies like Accenture, Capgemini, IBM and CGI, which is a clear indication of development that we have been -- the development we have been undertaking in the U.K. in the past couple of years. And can we have the next slide, please? In Netcompany-Intrasoft, we have also signed a number of new contracts in the third quarter of the year, of which we have highlighted some here. A couple of the contracts were, one, with the government of Greece, one being the complete modernization of the Greek National Organization for Health Care Service Provision, the EOP Y-o-Y. The project includes a brand-new citizen benefit system new and advanced electronic services for health care providers and citizens and a real-time claims approval system. This project is funded by the RRF. And furthermore, Netcompany-Intrasoft were awarded a 4-year contract in the European Union for the layout and graphic design services for the European border and Coast Guard Agency, Frontex. And can we have the next slide, please? The transition into European IT service provider is continuing into Q3, and we continue seeing double-digit employee growth in our business units outside Denmark. In an Intrasoft, employee growth was 12%. And in the Netherlands and U.K. employee growth was 27% and 20%, respectively. Churn for the last 12 months is in line with historic levels at 18%, which is 8% lower than for the same period last year. In addition, the composition of churn has changed so that the proposition of involuntary churn has increased from 0 in 2022, to a level more in line with historical levels now. Three months rolling churn rates have increased in all entities apart from Greece during Q3. And can we have Slide 9, please. We have delivered a satisfactory Q3 result despite uncertain market conditions. For the first 9 months of the year, we have realized growth of 12.8% measured in local currencies and a margin of 14.6%. Despite the strong revenue growth in the first 9 months, we still see uncertainty in the remainder of 2023 as prolonged decision taking related to pipeline cases in the Danish private segment has continued into Q3 and is expected to impact full year results negatively. Therefore, we narrow our expectations to revenue growth and now expect growth to be between 8% and 10%. And we expect margin to be realized in the lower end of the guided range of 15% to 18%, both within original guarded target ranges. And with that, I will pass on the word to Thomas, who will give you a more detailed view on the financial performance in Q3. Thomas, please go ahead.

Thank you for that, Andre. And like mentioned already, I am the CFO in Netcompany, and I will now go more into details with the financial performance for Q3 2023. So if we move past the breaking Slide #10 and straight into Slide #11 in one go, please. Andre has already spoken to our performance in general terms, and I will now go more in details with the performance in Q3 2023. Revenue growth for Q3 was 9.2% measured in constant currencies. And currencies impacted growth negatively by 0.8 percentage points, leaving reported revenue growth at 8.4%. And mainly as the Norwegian kroner has depreciated during the quarter. All units outside Denmark delivered growth in Q3. And while we are still realizing the negative impact on growth from prolonged conversion time of pipeline cases in the private segment in Denmark, we are satisfied with the international growth throughout the group. The public segment in Denmark was in line with Q3 last year, and the private segment declined 12.6% as a result of the prolonged decision processes. In addition to the soft performance in the private segment, the third quarter had one working day less compared to Q3 2022. This fact impacted revenue growth negative by 1.5 percentage point in Denmark. Netcompany-Intrasoft continued the strong first half of the year and realized 28.3% revenue growth in the third quarter. The growth was broad-based and driven by strong performance in both the EU, the public and the private segment. In the U.K., revenue grew 22% compared to the same period last year, and thereby continued its strong growth momentum. We expect the strong growth to continue and to be further enhanced as contracts within the DALAS Framework will start to come into tender and be realized during 2024. Growth in Norway was 7.3%. As in Denmark, Norway also experienced prolonged decision taking time during the -- due to the uncertain macroeconomic environment. And growth in the Netherlands was 44.5% in the third quarter. The growth in the Netherlands was driven by strong performance in the public sector. And can we have the next slide, please? Gross profit margin decreased by 7.6 percentage points in Q3 compared to last year, which, however, was an improvement sequentially from Q2 into Q3 of 0.5 percentage points. The decline was mainly caused by the lower margin in Denmark and in the U.K. and Norway. The lower margin in Denmark was, to some extent, caused by the change in the churn composition as there was a higher proportion of involuntary churn in Q3 2023 compared to the same period last year. However, the main negative factor impacting gross profit margin was the continued prolonged conversion time of pipeline on new projects in the private segment, which led to lower growth in Q3 and impacted gross profit margin as utilization in the quarter was lower than in Q3 2022. However, compared to the previous quarter, the gross profit margin in Denmark increased from 24% to 40.3% sequentially into Q3, which shows the impact of the rightsizing of the pyramid and reducing the bench in the Danish operation. These actions, the rightsizing of the pyramid and reduction of the bench, will continue as part of the day-to-day management of the operation. Margins in Netcompany-Intrasoft declined by 2.4 percentage points as a result of different revenue mix compared to Q3 2022, where the proportion of license revenue was nil compared -- was nil in 2023 compared to $7 million in Q3 2022. In the U.K., margin was 21.8% compared to 26.7% in the same quarter last year. The lower margin was a consequence of the continued preparation of the tender material related to the DALAS Framework agreement and all the larger pipeline cases. Tender writing activities in the U.K. is going to be at a higher level in Q4 and Q1 as well as we start to tender for the actual projects under the DALAS Framework. Margin in Norway was 4.5% compared to 16.4% in Q3 2022. The decrease was a result of low utilization in the Norwegian business as Norway has also experienced prolonged decision taking time as was the case in Denmark. In the Netherlands, margin increased 4.1 percentage point and reached 25.5% in Q3. The increased margin in the Netherlands was a result of better project execution and better pricing on new projects compared to the legacy portfolio of projects that have now been completed. Can we have the next slide, please? Adjusted EBITDA margin was 15.8% and up 1.9 percentage points sequentially compared to Q2 2023. Adjusting for the impact of 1 working day less for the entire group, margin would have been 1.3 percentage point better at 17.1%. The decrease in EBITDA margin in Denmark was a result of the lower activity in the private segment and the 1 working day less compared to last year. Netcompany-Intrasoft margin decreased by 1.8 percentage points, driven by the lower gross profit margin, as already discussed. Margin in the U.K. decreased by 5.3 percentage points, mainly driven by the lower gross profit margin. In Norway, margin declined as a result of the low utilization, also discussed already. In the Netherlands, we continue to see improved margin, improved significantly by 10.9 percentage points and ended at 7.9% in the quarter due to better utilization and improvement in gross profit margin. So can we have the next slide, please? Work in progress increased by 21.2% in Q3 compared to revenue growth of 8.4% in the quarter and revenue growth of 16.2% for the last 12 months. The increase was mainly driven by increased work in progress in Netcompany-Intrasoft, as we have continued to win more and more projects funded under the RRF. These projects have a much longer "duration" in work in progress, which is typically 9 months before they are invoiced and subsequently paid. So while this impacts working capital negative in 2023, it is a timing impact, and it will be fully remunerated for these projects under the RRF. Supporting this matter is the payment received in September for one project under the RRF of EUR 9.5 million which was paid less than 14 days after the invoice was raised. And can we go to the next slide, please? Free cash flow was DKK 100.4 million in Q3 compared to DKK 221.5 million last year. The decrease in free cash flow was a result of lower EBITDA and the development in working capital changes in Q3 2023, mainly driven by a reduction of other creditors and the increase in working progress related to Netcompany-Intrasoft. Cash flow from investing activities was impacted by the investment in Festina Finance of DKK 106 million. Leverage measured against the last 12-month EBITDA was reduced to 1.6x and we find ourselves on the right track towards our midterm targets for 2026. Free cash flow generated in Q4 will be used to deleverage further. And can we have the next slide, please. Even though the level of uncertainty remains high in 2023, we continue to see a satisfactory level of visibility for our revenue, which is highlighted here. At the beginning of October, revenue visibility was close to DKK 5.9 billion, which was 10.8 percentage points, which was 10.8% higher than at the same time last year. And with that, I have concluded the detailed financial walk-through. And we now open up the call for questions. So if can move to the Q&A slide, please, and open up for questions. Thank you.

[Operator Instructions] The first question is from George Webb from Morgan Stanley.

I've got 3 questions to kick off with, please. Firstly, on the updated guidance on the revenue side, given you're running at what, 12.8% constant currency growth at the 9-month stage, even to get to 10% growth seems to imply low single digit in Q4. I know interest has a tough comp, but curious as to why you've kept 8% on the table. Is that seems unrealistically low? Is there a real scenario where you could come out at the low end of the revenue guide, particularly as you are talking about a slightly better pipeline conversion potentially from Q4 and onwards? Secondly, just taking a step back, margins in 2023 likely to be down 400 or maybe 500 basis points on last year. Can you remind us on why you're so confident to get back above 20% in the midterm, particularly given you're now going to be at the lower end of this year's range? And then thirdly, just on license sales. I think at Q2, we talked about potential for some of those to come in during Q3 or Q4 if they didn't slip. Doesn't look like there was so much license sales in Q3. So wondering if that's still some confidence in Q4 what the outlook trend looks like.

Thanks for the questions, George. So on the first question as to what can happen to go to the bottom end of the revised guidance of 8% to 10%, some of it has to do with your third question in terms of licenses. It is absolutely true as you state that we have no licenses in Q3. And we do have some licenses that we expect to realize in Q4. With licenses, it is always this matter that even though that we think that they are on track and they are, if they are postponed, then they have a fairly big impact, of course, in the quarter that was supposed to fall in. So the 8% and the bottom of the range has to do with the risk if everything comes to a halt and we signed no licenses and we see no conversion of the pipeline in the Danish private segment in Q4. So a fairly dark scenario, you could say. On the question in terms of what makes us comfortable for the midterm financial targets as when it comes to margin despite the margin drop that we've had this year, what is important for us is that the vast majority of the margin decline in 2023 has to do with basically lower utilization, low utilization coming from -- it takes longer time to convert our pipeline cases. It takes a little bit of time to adjust, as we say, rightsizing of the pyramid. But once we are through with that, then the mechanics of a professional services company is that when you are running at low utilization and you start to realize sales again, then the initial part of that sales revenue generated will be delivered on already existing staff, which means that the first part of revenue growth will be on a 1:1 ripple effect down to profit. And that is also what we saw, for instance, in the U.K. in 2022 where the U.K. grew revenue of around 30%, but only grew FTEs at 15%. And that was not because we increased prices in the U.K. by 15%. That was because utilization increased. So what is going to drive off margin is the impact of rightsizing of the pyramid, which we start to see already now in Q3, sequentially from Q2 in Denmark and then high utilization. And then as you asked and I answered on the first question on the license, we still have license that we expect to realize in Q4. Some of it could have happened in Q3, but it didn't. So now it's in Q4.

Absolutely clear. And maybe just one question coming on to Norway. I mean the financial performance in Norway, mostly from a margin perspective, hasn't been particularly, I guess, exciting for quite a long time. I know you've tried to do things internally around resource sharing and the likes. I mean is there anything structurally you need to do to the Norwegian business to get it sustainably at least in -- I know the macro is tough but to get it sustainably in a better position than it is now. Is that something you're looking at?

Well, I don't think we need to do anything structurally in the Norwegian business. Actually, it's the same case as in Denmark. We just need to convert some of that pipeline and we do have people there ready to undertake complex projects because over the last 3 years, they've been practicing that. So no, we are actually ready in Norway when we get more work to do. And also, of course, rightsizing the pyramid, we will also look at that continuously depending on how the financial economical environment develops.

The next question is from Claus Almer, Nordea.

Also a few questions from my side, and we'll do them one by one. So the first one is, given the performance in this quarter, maybe also the full year 2023 or 9 months this year. When you look at the falling margins, does that make any changes to your strategy and your cost planning? That will be my first question.

We adjust our cost base on an ongoing basis here, Claus. You can also see, for instance, admin costs coming -- being slimmed somewhat. The main cost we have still is employees. That is what, 80%, 85% of all cost. So it is really coming back to this "rightsizing" of the pyramid. And you start to see the impact of that in the numbers. It does take some time before it's really out of the numbers. But sequentially, if you look at the FTE growth, for instance, in Denmark from Q2 to Q3, then you start to see that the FTE growth in the group is not really generated in Denmark. It is generated outside. So we are adjusting our structure all the time compared to what we expect for top line activity.

And when it comes to the overall strategy, Claus, and thank you for that question, is then there will be no changes. We are constantly working towards getting bigger and larger engagements, both in the private and public sector and reusing all our experiences, methodology and platforms as much as possible in order to get an effective delivery as possible. And if we look outside of Denmark, going into a new market and being relevant and chosen into those framework agreements, that's the first priority that we have. And then when we get in there, we will deliver reusing our platforms and skill sets and hopefully bringing margins up gradually over time, delivering on reusing our experiences. So that's the same strategy that has been for quite a while.

But this reusing the components and the platforms, do we see that in the numbers in the third quarter? Or when should we start to see this, you could call it profitability leverage or is just being passed through to the clients getting the product cheaper?

Well, it's not in the numbers, say, in Q3. It is something that we start to see from 2024 and onwards. Part of the benefit we will share with our clients so that they will experience faster time to market, lower total cost of ownership, which we believe will put us in a better position to win large-scale projects. And part of it, we will contain within Netcompany Group and pass on to the shareholders. But that is something which will start to be more visible in the numbers from 2024 onwards towards our midterm financial guidance as previously mentioned.

Okay. Just maybe a question regarding the private sector in Denmark down by 12% in the quarter. And now we talk about a more optimism and a better conversion of the pipeline. So what is actually these potential clients saying why would they in Q4 start to -- start these projects? Why not in Q2, why not in Q3? And maybe a highlight due to resistance is in front of us. So maybe a little bit more flavor to this pipeline conversion would be very helpful.

It's a good question there, Claus. I mean there's a big difference between replacing a core system in a large company than just being an in-house consultancy partner where you buy resources for specific tasks. And if you look at the pipeline in the private sector in Denmark, it really has the character and resembles of something that is truly business critical for many of the clients. And we are running through several discovery phases where we are depicting and making more precise what the business benefits will be. And many times, these discovery phases can actually be prolonged and become even more fundament for a longer strategic partnership. So that's really, really normal. The larger and more critical projects are the bigger decision it is and the more you have to substantiate everything you do, and that's what happens during these discovery phases. What I'm happy to see is that we're actually involved in many more of these types of discovery phases than we've ever been before. But of course, we also need to see some of these things convert into and to be realized into large-scale work, which we are hoping for in Q4, Q1.

And further to that, Claus, we are starting to see some of those projects actually being begun. So we have started on some of those projects that we have -- that we had in pipeline, both in Q2 and also starting Q3. They are beginning to start up.

Totally understand that things may take longer, et cetera, et cetera, but we talk about revenue being down 12% in the quarter year-over-year. And I think in the past, you have explained this prolonged decision phase due to risk or uncertainty about the macro situation. And yes, I guess, macro outlook, it does not look more certain today than it did 1 or 2 quarters ago. So more trying to figure out why is it now that these clients or the companies are deciding to push the bottom and move forward?

Well, I generally believe that there's been a shift over the last year in the way that you've been looking at digitization and technology in some of the big enterprise companies. It is absolutely true that the outlooks -- financial outlooks now, probably not more certain than they were 2 or 3 quarters ago. But many companies have been taking this as an opportunity to really rethink the technical fundaments and replace legacy system and also to open up for the possibility of using AI in the future. And that has caused many enterprise companies to start and embark on analysis phases where they actually turn every stone and look into what are they actually structurally going to do differently than they have been doing for years. And these are the places that you want to be -- this is where you want to be a part of that -- those decisions. And that can actually bring you on a journey with these customers for not only 1 or 2 years, but like 5 or 7 years where you replace the most important systems. So I think, yes, technological development, but also financial uncertainty has actually pushed some companies in to look into their structural costs in terms of IT and how to use IT to rationalize and become much more effective. It's not all companies, but it's definitely a proportion of large enterprise companies that will go that way. And I'm happy to say that we are very well positioned where that happens.

And next up, we have Poul Jessen from Danske Bank.

Just to follow up on cost moving to the public sector in Denmark that has been more or less nothing going on this year in tenders. How are you looking at that going forward? Do you see it now starting to move from the fourth quarter and especially into '24? Or what are you [indiscernible] state here?

Yes. Well, public sector, you got 3 main components when it comes to revenue in public sector for us. And one is, of course, ongoing farming as existing customers where you bottom up, drive revenue up just being there helping with various tasks. The second one is legislative changes on existing larger systems. And the third one is the one you're mentioning. When you have big tenders coming up, when you take them one at a time, we've been pretty good at farming. '23 was a result of kind of continuous farming. And you're absolutely right, the big tenders have been postponed or not even put into place. Also the new government had to find its feet to stand on in terms of what to do with digitalization. There will be a new digitization strategy published in 1 or 2 weeks. There will be legislative changes in '24. We know that in some of the various areas where we are present. And that will also be larger tenders in '24, but I think we'll see those materialize in the second half of '24. So to answer your question, is the public sector going to be a standstill sector in '24? I don't think so. We will see growth in the public sector. But the exact timing of it is probably going to be depending on how these 3 components vary in terms of each other. But there will be growth in the public sector in Denmark in '24 compared to '23.

Okay. And then also on the platforms you have, can you say something about both what's going on in the custom side across Europe. I think you have a lot of tenders out there. You've been in 2 now, U.K. and Austria and also on the AIRHART, what's happening there?

Sure. So when it comes to the custom software, where we are primarily using the products that were originally constructed by Netcompany-Intrasoft. We see an ongoing and positive development in the pipeline build. More and more countries are either postponing their existing plans and looking into standard software, which is great. As you said, U.K. is a very good example of how those products can be used, but also we see positive developments in Netherlands and in other countries. So that's great. And I think in general terms, the EU prolonging some of its deadlines actually brings us into play because countries are not necessarily delivering what they're supposed to as fast as they're supposed to, and then they turn in to look into how can they just acquire this as a combination of software products and consultancies. So we are very well positioned there. And the Austrian example is a good example of us going in somewhere. We're actually not even present physically and still being able to deliver it as a combination of delivery from 3 different offices in Netcompany. When it comes to AIRHART and the whole airport software, it is -- well, the Copenhagen Airport system is now into full production. It has been used as a demo site. Anyone can come here and look at it, and it's quite impressive what's going on there. We have a growing pipeline and we expect to convert some of that. So this, again, is a very good example of something that is absolutely strategic for any airport. It is a heart surgery of an airport. And there's always a question of when going up -- when you're going up some stairs and you start losing your breath, when is it time to actually shift that heart? And I think we are in a very good position in many airports. There's a lot of constructive dialogues going on, and I can go into more detail than that, but it's a positive development.

Okay, fine. About customs, when you say prolonging that launch, what are the debt lines now?

Well, many countries now have been prolonging their internal deliveries. And right now, the deadline has been pushed into 2025.

So it's been close to 1 year, Poul?

Okay. And a final one about the guidance on the margin of 15% to 80% and you say the low end, why not then curing it to 15% to 16.5% or something? Why are you keeping the high end?

I don't think that we are keeping the high end. I think we say deliberately in the low end. So the low end is not 80%. So the low end is in the low end of the range table. So I don't think that we're keeping the high end.

No, no. But why...

Yes. We have chosen to guide for this way. Other companies might choose to do it in another way, but we've chosen this way.

Next up, we have Yiwei Zhou from SEB.

I also have a couple of questions and I'll do one at a time. And firstly, a question back to Denmark. It seems that the demand side is still a bit uncertain. But then I can see your client-facing FTEs still grew like 5% in Q3 and how should we unspend is still growing despite your also doing the rightsizing at the same time. So if you assume like flat to revenue decline in Q4 in Denmark, does it mean sort of you still have quite a lot of margin dilution from the low utilization in Q4?

When we look at the client-facing FTEs, it's also important to look at it on a sequential basis because when you look at it on a sequential basis and not quarter-over-quarter, then you get the impact from rightsizing of the pyramid. And if you look sequentially from Q2 into Q3, you'll see that FTE -- client-facing FTEs for the Danish operation is not growing a lot. So the impact of the rightsizing is starting to be shown in the numbers. And that, of course, will have an effect also going into Q4.

Okay. Clear. And I just also want to follow up Claus and Poul's question here. The public tender remember last quarter, you mentioned that the expectation was some of the public tender would be materialized before the year-end. And I understand -- if I understand correctly, so some of those live tenders have been postponed to second half of 2024. Could you confirm?

I think what we can say in terms of public tender and the public tender that we have discussed previously that potentially could have come out in Q4 was specifically related to the retender of the student administration system that is going to be retendered. When that decision was taken, I think it was in April or May that the project would be canceled, and it would be retendered. There could have been an anticipation that, that would have come in Q4. Now they're still working on the retender material. So that is going to come out sometime in the early part of 2024. So that was the one that we were basically referring to as something that could come out in Q4 2023 now looking more towards the first part of 2024. The remaining part of the public tender as Andre is also alluding to is coming out. Some is coming out in the first half of the year, some is coming out in the second half of the year. And it all comes down to the digitalization initiative that's going to be presented by the government in the next 1, 2 weeks in terms of what's going to happen and how fast is that going to happen. So we'll wait and see on that way as to when it comes. Certain things can come in the first half, for sure, also the student administration and then certain will come in the second half.

Great. Very clear. And my next question is regarding the Festina investment. When do you expect to contribute? I know it's not a consolidation, but I understand if it was nil company consultant to deliver the project and you were still benefiting from top line -- organic top line growth, could you please give some color on the pipeline, et cetera?

So the pipeline on Festina Finance, which is the, I think, the investment you are referring to is looking good and strong. And that is mainly then, of course, in the private sector in Denmark, which is good because that's where we need some more pipeline to convert. And we have a couple of cases that have a conversion time experience to be fairly near, I would say. So there are certain cases that we are working on together with Festina Finance, that will converge and that will give revenue on the consultants that are working on them. That will also be '24 and '25, and that will be both in Denmark, but also in other countries in Europe.

Okay. Just want to follow up on this. So when you book the financial effect, so there will be organic revenue from -- for the implementation work, and then you will have 20% of the license income book below the EBIT line? Is that right?

Correct. Absolutely true, yes. Correct.

Okay. Great. And what the size of those projects are you talking about?

That varies a lot depending on the size of the customer. Some of the projects that are right now being implemented, especially ones in the Netherlands with APG and AZL. They are big in size, and they are big in size because they're big projects. APG is the largest life pension fund in Europe. EUR 640 billion asset under management and to implement a system of records for their life pension scheme to be compliant with new Dutch legislation being put in place by 2027 is a huge project. So right now, that is mostly being done by Festina Finance himself, will gradually help them to do that. The AZL project right now is being staffed by consultants from Acentia and then we'll look how we can change that also. So the projects by nature will be large and big and take a long time.

Okay. Very clear. And last question, if I may ask, regarding the cost per contract FTE for Denmark. If I take you right, it has increased by 6% in Q3 if you compare it to last year Q3 last year. And then there has been sort of declining trends on the -- on this personnel metrics for some quarters. Could you give a bit of color on the change of what has been increasing, is there any sort of cost in place in the sector?

There's some ups and downs quarter-to-quarter. It's always dangerous to compare one specific quarter with another specific quarter. Better to look at last 12 months against last 12 months, we do have in terms of rightsizing the pyramid, some people that we say goodbye to, and that has a little bit of a cost and the likes. There's nothing imminent in terms of large salary increases per se in Q3, which would yank it up in Q3 last year. There were also some other impacts to cost that actually reduced the cost a little bit in Q3 last year.

The next question is from Gianmarco Conti, Deutsche Bank.

I have 2 on the DALAS Framework, and then I'll ask a follow-up. So my first question is on the DALAS Framework indeed. Given the higher tender writing activities causing margins to fall from low utilization rates, should we expect this trend to continue in Q1 of next year? Will there be more tender writing activities that might reduce seat utilization rates ahead of Q4, specifically relating to DALAS? And my second question is, how does the chargeable rate of the DALAS projects compared to the baseline of projects in the U.K.? Could you give us a sense of whether there is added pricing or premium given the complexity nature of the projects...

Yes. Great questions, Gianmarco. Difficult for us to be very specific on not because we don't have an opinion on it. But the first question has to do with 2024 guidance, which is a little bit premature. So we're not going to be able to have any firm comment on what's going to happen on utilization in 2024 in Q1, Q2 in the U.K. because that has, of course -- then talking into 2024. We will see those some business development and some tender writing activities, but there are also other things that can impact 2024. In terms of rates under the DALAS Framework, we still lack to see the actual tenders coming out, the ones that we're going to win and write on. So that we will have to come back to. Of course, the logic is that if we do large-scale fixed fee implementation projects also under the DALAS Framework, then margins will be better, but we'll have to see how the tenders are structured before we can be more certain on that, unfortunately. So I know I didn't really answer your question.

That's okay. So maybe changing the second topic as a follow-up. On the margins for Intrasoft, I understand that licensing caused a tough comp. But when should we expect margins here to pick up to a similar baseline of either the group or the U.K. or Denmark? I mean, of course, Denmark is going to be a tough one, but even just like close to where the U.K. is standing will be a good start to see. And then when do you plan on reducing the contractor's head count maybe in 2024? Or is that going to be pushed back even further?

Yes, big question. In Intrasoft, there are more than 600 contractors, and they are by legal requirements and written into the contracts with the European Union. So that is something, which is not really something that is easily changed. We will expect margins to continue to improve in Intrasoft. There are various elements that will have any impact on that in 2024 and onwards. But the big lift up towards, for instance, U.K. margin level or the like is going to be a gradual improvement over the years to come. That's what we have said all along with our acquisition of Intrasoft. We don't have any magic bullet that can just help us increase margin by 5 percentage points in 1 year, but we will continue to see improvement year-over-year as we do more and more fixed fee projects as we do more and more of the projects delivered with our own employees and that, of course, will have an impact on margin. And I'll just leave it at that.

Okay. Just one last one. All things equal, given that there are 2 additional working days in 2024, should this have an impact on margins? I know you can't give us guidance. I'm not asking for guidance because I'm trying to understand that there's quite a strong correlation with high number of working days to the margins. So if you could make any comments around that, that would be great.

But that's easy because that's just yes. So that's yes, Gianmarco, that's an easy one. Yes, there will be.

Next up, we have Aditya Buddhavarapu, Bank of America.

Firstly, on the margin, just to clarify, I think something said earlier on Denmark. Did you say there's going to be more rightsizing in Q4 as well? And so would that have some more impact on the margins because earlier I thought rightsizing would largely be done by Q3. So that's the first question. Second, are there any other large tenders similar to DALAS, which you think might impact utilization levels in Q4 or even in 2024, not just in the U.K. but across your different markets? And then finally, if you go back to your midterm targets, it implies about roughly 11% organic growth. Now this year, you're going to do something between -- your guidance is between 8% to 10%, clearly implies an acceleration over the next few years. So what gives you confidence on that? Is it the pipeline or maybe just the overall demand environment improving just to get a sense of what drives that acceleration?

Okay. I'll take the first question, Aditya, and then Andre will talk to other tenders and then we'll talk about the midterm targets in the end. The reason why we have singled out the impact on margin on rightsizing of the pyramid, especially in Q1 and Q2, is that we didn't do it to the same extent last year. So 2022 was, in many aspects, a different year. We had high churn. And most of the churn was voluntary, meaning that people were leaving us due to the hot labor market where, especially IT services professionals were in high demand, not so much right now and probably even less in 2024, looking at the overall labor market. So what has happened in 2023 is that we've had a "catch up" if you so will in terms of rightsizing and managing the pyramid which we've done in 2023. So that means that we've managed the involuntary churn more to a higher level than we did in which is why there is this margin impact. It's an ongoing operational thing for net company. all the time to manage our pyramid. So we just want to highlight that and that's why we mentioned it. So just because we go into Q4, that doesn't mean that we are stopping looking at how does the pyramid structure look. But the relative impact to margin will not be of a magnitude where we will continue to explain margin dilution with that element. So that's the reason why we phase it the way we do.

When it comes to the tenders, the reason why we are mentioning DALAS specifically, it is because it's one of the largest tenders in the U.K. as such, also for the public sector. And being a part of that framing agreement also means that we will or in the quarters to come will bid on different things there. And of course, we'll be using spending activity on that as such. But overall, structurally, we will not be doing more tender work than we usually do, which will still be the same proportion of what we normally do. The reason why we are mentioning the other things because this is a breakthrough in the U.K. market, and we will be spending in the near future, more time when getting into that framework and actually materializing it.

And then finally, on the midterm targets, the revised, if you so will, or the narrowed guidance of 8% to 10% instead of 8% to 12%, for revenue will have no impact on our ability to reach our midterm targets by 2026 where we've said that we aim to do at least DKK 8.5 billion in revenue, at least 20% margin and in the period to 2026 to redistribute DKK 2 billion to shareholders, mainly in terms of share buyback. So performance in 2023 is still supportive of that, irrespectively of the fact that we have narrowed the guided range.

Got it. Maybe just 2 quick follow-ups. If you continue to see the private sector remaining weaker in Denmark, do you think there's more rightsizing of the pen that needs to be done outside of just the normal activity you would do? Or put it another way, are you now happy with the shape of that pyramid assuming demand doesn't deteriorate further. And to just going back to DALAS contract, I know it's difficult to correct the timing of those tenders, but anything you can say on the phasing of that during the year first half, second half, you think about when those revenues start coming.

When it comes to the private sector outlook in Denmark and whether we continue rightsizing, we will always right size and it's going to be a continuous thing to do, looking into how many people. Of course, there's always a lack in time depending on how situations develop. But we've done a good deal of rightsizing in '23 and in a very good position, and we have a positive outlook in the pipeline. And when it comes to the timing of the public tenders themselves, we've already mentioned that materializing is visibly to DALAS Framework. It will take some time. It will happen during '24.

We expect the first initiatives in terms of tenders within Lot 2A to come to market sometime during December and into January. So that's when things start to unlock, if you so well...

The next question is from Harry Read, Redburn Atlantic.

Just 2 for me. It seems that Netherlands has reached profitability a bit of ahead of expectations on previous commentary. Should we expect that going forward that now you've reached a level where we can expect kind of consistent profitability? Or will there be fluctuations within the cycle in the summer profitable quarters? That's the first one. And the second one is that -- it looks like there's a bit of a theme of guidance being downgraded in the last quarter before the financial year-end. Just wondering if the visibility in the business improves as some of the smaller divisions start to scale up towards Denmark and growth rates start to normalize? That would be great.

Okay. So just to do your first question, I think, Thomas, you can do the second one. But the Netherlands, the short answer is yes. So we have more the right people there. We've rightsized the company. We have been positioned into the public sector, both in some of our traditional areas like customs -- tax and customs, but also within our -- with our solutions into case management. So that short answer is yes. And when it comes to the second question...

In terms of visibility and how we look at Q4, it's clear with the narrowing of the range on top line. It fits with what we see in the pipeline and in the conversion of the pipeline. So on that, we are close to the end of the year, and we feel comfortable with the range that we are setting out.

Up next, we have Mads Quistgaard from Carnegie Investment Bank.

I will take them one by one. So first, on the free cash flow, which has been a topic in the quarter. So it would be nice to have some comments around free cash flow for the fourth quarter. And also expectations for the coming year given what you see in the Danish business segment against Intrasoft and so on.

Sure. And cash flow for third quarter and year-to-date is lower than what we anticipated at the beginning of the year, and that is due to a combination of performance and revenue mix, and revenue mix has a toll on working capital, especially because we are basically substituting revenue in the private sector in Denmark with revenue generated under the RRF in Intrasoft, that has a longer duration, as I mentioned, in working progress, which means that our working capital is negatively impacted there from that. Working capital -- or sorry, work in progress in Intrasoft has increased around DKK 300 million, mainly driven by RRF projects. So of course, that has a toll on free cash flow, and that's also what you can see in free cash flow compared to last year. It is mainly a timing. So we'll start to see some of that being unlocked into 2024. Not going to give any specific guidance into what we expect for cash flow for 2024 or for Q4 for that matter, as that would be too specific at this point in time, Mads. But we are starting to see some of the work in progress that we have clocked up in RRFs to be materialized in invoicing and also in cash as we saw in September where we had EUR 9.5 million invoiced and paid as one of the RRF projects.

Then my question on license sales. So in the previous quarter, you stated that you expect 1% of full year sales to be licensed sales. If I take the midpoint range of current guidance, it translated into DKK 60 million for the year. Nine months, you have DKK 40 million books. So should we expect DKK 20 million in the fourth quarter?

It's difficult to argue with your logic. So the answer is yes. That's the logic of it. And then it can be as always, with licenses, it is these things that are really binary. And if they are signed at the end of December or if they're signed at the beginning of January, it doesn't really have any impact on the long term for the business. But of course, it has an impact on Q4 versus Q1. But our expectation is still around 1%, yes.

Okay. Perfect. Then on the private sector in Denmark. So it's great to hit that you're starting to convert some of the projects in the pipeline, but you're also executing on existing projects. I'm just trying to figure out what is sort of the order intake compared to what is leaving the books because, I guess, most of what you give in the private sector is time and material. So could you put some words around how to think or in the private sector, not only the pipeline but also what you're executing on what you put into your order books?

Yes, that's more difficult for us to answer because tenders in the private sector is not widely known and available. We actually do have a good part of the revenue generated in the private sector in Denmark. That is fixed fee or fixed fee like the tenders are not really known to everybody. And therefore, it's also something that we cannot comment on in details, not like in the public sector where you can look it up and then check database, and then you can see it. That's not how it is in the private sector. So we'll have to be a little more muted on that math. We still see a backlog of contracts in the private sector. And we also have some of them being renewed and also some of them to be renewed in Q4, and we are on good track on that. But the in and out that you're asking for, I'm sorry, I cannot give you.

That's fair. Then maybe on the public sector because what is leaving our books in the fourth quarter and in the first quarter next year? Because, I guess, we have 2 quarters, which, given the pipeline also will remain somewhat flattish in terms of revenue. So could you put some words around the public sector in Denmark then?

Yes. Without going in specifics as to in out in Q4 because then I'm guiding in Q4, which would be premature compared to where we are now, just discussing in Q3. But of course, you know the numbers and you know what we are delivering on, as Andre say, we're still doing quite a lot of farming in existing public tender or public clients. And the farming part is typically something that you don't see in the big tenders because they are awarded on existing frameworks. They are awarded with budget being flushed out for the year. So we do have some of that also in Q4.

Perfect. My follow-up question is on the capital allocation because you announced a big share buyback program on the Capital Markets Day. But in the meantime, we have seen interest rates, which have increased a lot. So what is your focus between what this comment around the share buyback program and also the financial costs you have today?

So we are using free cash flow in Q4 to deleverage even further. The interest rates that we see on our funding is still stable compared to where it was at the Q2. So all other things equal. And with the current level of capitalization and moving towards a target of a leverage of one by end of 2026. We would most likely expect to see some sort of initiation of share buybacks sometime during 2024. Whether that's going to be in the first half or second half is difficult for us to say right now. But we -- and of course, it also has to do with how things are developing, which is really difficult to predict these times. But I think there's a general consensus and expectation that interest levels are at the top end of the range right now, especially looking into the European bank with the latest statement coming out and you see inflation in Euroland or Euroland coming down also. So we'll see into '24 how that pans out, Mads.

And the next question is from Orson Rout, Barclays.

First one is just on Denmark and sort of the medium-term implications because the minus 5%, obviously, a further worsening and worse than sort of we were expecting. And I think then sort of expectations of the company were going into the year as well. And -- it's not only private. We've now seen public also go to 0% growth. So thinking about sort of the medium-term target, where do you think sustainable growth levels to Denmark can be coming out of this recession? Is it sort of mid-single-digit growth? Or do you still hope to be able to grow higher than mid-single digit in Denmark? And if the weather still growth [indiscernible] to come from minus 5% to, say, high single-digit growth in that region? That's the first one. Then the second one. Do you want me to take one by one? Is that easier?

Yes, one by one. Thanks. So I'll answer the first question there. So generally, we don't the guide for revenue expectations on a country-by-country basis. And we've also been explicit on that when we did our Capital Markets Day. Now of course, clearly, as Denmark is still 45% of revenue in the group and it will take some time before that comes down significantly. Then the pure math of it is that it's going to be hard to get to where we want to be by 2026 if there's no growth in Denmark, simply because of the large impact that the Danish business has still in the group. So we do expect growth in Denmark. And we also expect growth, which is more than 2 percentage points, just to say a number. But I'm not going to give you how much we then expect that to grow because then we end up guiding on a country-by-country basis, which is what we are not doing. But we do expect growth to come back in Denmark. It's going to be both in the private sector. It's also going to be in the public sector. And like Andre said earlier on, 2023 has been a fairly "mega year" in terms of new large tenders. It is expected that new projects will come out in the public sector, both in terms of within the defense area, within personal taxation. We see the student grand administration system come back into tender. So we will expect to see public sector grow again going forward. And I'll just leave it at that.

Okay. That's helpful. The second one is just on margin development with a lot of focus, obviously, on the call having been on sort of utilization rightsizing of the pyramid, which we knew going into the year on which you sort of guided on quite clearly. Was just wondering if anything in Q3 and perhaps Q2 panned out worse than you'd expect in terms of margin developments going into the year because actually, top line has been quite solid. And understand the mix effect to interest of is obviously impacting the sort of margin. But I was wondering whether in terms of competition and perhaps pricing pressure. This is also something that you're increasingly seeing in this macro environment and whether there's any margin impact from that?

No. I think when it comes to pricing, we don't see any structural change in there. I mean we need to be competitive, of course, and using our platforms. We are competitive also in the functional and business kind of way. But we don't see any increasing price pressure structurally right now, across markets.

And then I think it's probably fair to assume also that. Looking into -- when we started 2023 and when we did the budget for 2023, we would not have budgeted for negative growth in the private sector in the market, for sure, right? Now the group as such is faring what we would label as satisfactory. We see strong growth in the international part, which is then covering for the lack of growth in the private sector in Denmark, which is the weak -- the soft point in the report. So on balance, we take comfort in the fact that we are actually growing and we're one of the fast -- one of the companies in Europe that is showing growth. But the mix has changed. So that, of course, has a toll on margin. And we are working on a day-to-day basis operationally to make sure that we do everything that we can do to change that going forward. And we are starting to see the impacts of that already.

Okay, helpful. Perhaps one final one just on free cash flow. It sounded on the question before is if you're somewhat stepping away from the prior guidance that you're expecting absolute year-on-year growth in free cash flow. I was just wondering, and I know you're not going to guide into 2024. But if you could give some color regarding this ongoing drag from the mix shift because obviously, the RRF contribution should continue to sort of grow into next year, I'd expect. So is it right to think of the mix shift being an ongoing drag on free cash flow, all else equal?

Yes. So first of all, we didn't guide on free cash flow for 2023. It's correct that we've said when asked. What do we expect in terms of free cash flow generated that at the beginning of the year, where revenue mix was different, we would expect to generate on a nominal term same cash flow or even better than 2022. But we never guided on it as a strict guidance per se. Going into 2024, the mix impact would most likely be less than it has been in 2023. And the reason why the mix impact has been so big in 2023 is that the lack of revenue generated in the public sector -- or sorry, in the private sector in Denmark has been more than covered for by the revenue generated under the RRF in Greece. Now we would not expect the same mix delta, if you so will, in 2024. And hence, the tying up of working capital into work in progress in Greece under the RRF would be relatively smaller in 2024 than in 2023.

Okay. Great. But just to be crystal clear, you're no longer expecting year-on-year free cash flow growth for 2023. Is that correct?

Yes, that's correct. We don't expect free cash flow in 2023 to be higher than it was in 2022. That is correct. Yes.

And finally, we have a follow-up from Mads Quistgaard from Carnegie.

I just have one question left. So looking at the revenue visibility for Intrasoft, it looks extremely strong for the fourth quarter. Have you seen any signs of market slowdown for Intrasoft? Or is this one of the segments where you feel extremely confident that you will see a strong performance over the coming months as well?

We will see strong performance. And much of what we're seeing is long-term engagements in projects. So yes, we will see a strong continuous development.

And on that note, the Greek economy is faring pretty well. Greece as a country was recently upgraded to investment grade, which, of course, is great for Greece. And as a result of all the changes they've done after the big financial issues they had back in 2012. So the private sector in Greece is stacking up very strongly, so is the public with all the funding from the RRF.

If you look at away from license sales, what sort of drives the operational leverage in Intrasoft?

That's what we've discussed some times. And also, as we discussed in the working cap -- at the Capital Markets Day. So that is more joint projects together with the Netcompany call. So more of these projects are within customs where we sell the license and implement together. It is the increased use of our own employee base rather than externals and then continued delivery using Netcompany methodology as we grow closer and closer. So it's a combination of those 3 things. But since it's a big operation, it does take some time.

And then maybe to rephrase my question. So of your backlog today, which is extremely strong in Intrasoft, how much of these projects will be based on a Netcompany for quality or will it be based on joint projects between Netcompany-Intrasoft and so on?

As of now, the vast majority in Netcompany-Intrasoft still resides within the European Union, so the EU and on a short-term basis, which means '24, '25. That is mainly being delivered by Netcompany-Intrasoft. The projects under the RRF in Greece are mainly being delivered by Netcompany-Intrasoft because they're in Greek and even though our methodology is very unique, it's difficult for Danish people to work in Greek projects simply because of the language. There are more and more projects coming into the backlog, which are based on joint projects. So the Austrian project for customs is one example. The work that we do together with our friends in Holland is another example. And we do more and more of those. So that will increase without giving you a specific percentage match, but it is increasing.

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

Okay. Thank you, everyone. Have a good day.

Have a good day.