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

Welcome to Netcompany's interim report for the first 6 months of 2024. [Operator Instructions] This call is being recorded. I will now hand the call over to your speakers. Please begin.

Good day, and welcome to this presentation of Netcompany results for Q2 2024. 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. Before we get going, there are some important disclosures that I need you to read through, so could we please have Slide #2? I'll pause for 30 seconds here and let you all have a read-through of these important disclosures. With that, can we please go to Slide #3, please? The topic of today's presentation is our performance for Q2 2024. I will walk you through the business highlights for the second quarter and our financial guidance for '24. And once I'm done, Thomas will go through the numbers in greater details before we open the call for questions. Can we have the next slide, please? In Q2, we grew revenue by 10.2% in constant currencies. The strong growth was driven by the continued progress in the Danish part of the group as well as continued strong growth in Netcompany-Intrasoft and in others. The timing of Easter impacted revenue growth positively around 3 percentage points in the quarter. And looking at the first half of '24, where the Easter impact was neutral compared to '23, we realized revenue growth of 6.8%. Gross profit in Q2 grew 19.3% in constant currencies, yielding a gross margin of 29.2%, which was an improvement of 2.2 percentage points compared to the same period last year. The increase was positively impacted by more working days in Q2. And nevertheless, comparing the first half of '24 to the first half of '23, gross profit improved 9.3% in constant currencies. Adjusted EBITDA grew 38.7% in constant currencies in Q2 '24 and in the first half of '24, adjusted EBITDA grew 19.2% in constant currencies. For the first 6 months of '24, adjusted EBITDA margin increased 1.7 percentage points to 16.1% in constant currencies. The increase in margin was a result of continued progress in the Danish part of the group and improved performance in the Netherlands and Norway. We added 186 full-time employees when comparing to the same quarter last year, bringing the total FTEs to 7,884, an increase of 2.4%. And can we have the next slide please? During the second quarter of '24, we have won several new contracts, of which I am mentioning a few here. Netcompany has been chosen by the Swedish Tax Agency Skatteverket to modernize the central tax systems with our commercial off-the-shelf product SOLON TAX. The project will be delivered through Netcompany Denmark and Netcompany-Intrasoft resources. Netcompany Denmark has signed a number of new contracts in the public segment and I will mention some of them here. We have signed 2 new contracts under a framework agreement with the Danish Business Authority at a combined value of up to DKK 1.1 billion. Furthermore, Netcompany Denmark has signed a contract with the Danish Business Authorities to deliver and maintain solutions for annual reports and financial accounting. And as previously communicated, Netcompany has won a significant contract in U.K. under the DALAS [ Lot 2a ] framework agreement. The contract has a duration of up to 5 years and estimated value of GBP 120 million. Revenue from this contract is expected from the second half of '24 and going onwards. In the Danish private segment, Netcompany has been selected as strategic partner for the modernization of Energi Fyn's application landscape. And can we have Slide #6, please? In Netcompany-Intrasoft, we have also signed several new contracts in the second quarter of the year of which we have highlighted some here. In the EU, Netcompany-Intrasoft has been awarded a 2-year framework contract with the European Medicine Agency. The agreement is to provide external services for software development, implementation and maintenance for all current and future IT capabilities. Netcompany-Intrasoft has also signed a contract with the Ministry of Economy in Albania. The delivery will be including our ERMIS Customs product. And furthermore, Netcompany-Intrasoft has entered a 3-year maintenance agreement with the largest social security organization in Greece, the EFKA. In the private segment, in Greece, Netcompany-Intrasoft has signed a framework agreement with the National Bank of Greece to provide design and maintenance services. And Vodafone Greece has selected Netcompany-Intrasoft for a project to provide design, implementation, support and maintenance services for all applications supporting Vodafone fixed telecommunication services. And can we have the next slide, please? In Q2 '24, we employed an average of 7,884 employees, which was an increase of 2.4% compared to the same period last year. In Denmark, the number of employees decreased compared to Q2 last year, but during the quarter, we welcomed 174 new employees to our offices in Denmark. Employee growth in the Netherlands and Netcompany-Intrasoft were 12.3% and 7.4% respectively. Churn for the last 12 months was 17.2%, which was in line with the same period last year. And can we have Slide #8, please? For the first 6 months of '24, we grew revenue by 6.8% and realized an adjusted EBITDA margin of 16.1%, both in constant currencies. We maintained our expectations for the financial performance of '24 and expect revenue growth for the group to be between 7% and 10% and adjusted EBITDA margin to be between 15% and 18%. Based on strong cash flow, we increased the share buyback program for '24 going from DKK 500 million to at least DKK 700 million. Furthermore, we reiterate our midterm targets to be achieved by '26 with a revenue target of at least DKK 8.5 billion and adjusted EBITDA margin of at least 20%. We also reiterate our commitment to redistribute at least DKK 2 billion of cash to shareholders, mainly as share buyback and in that aspect, we initiate a new share buyback program of DKK 150 million to be executed by the 29th of October 2024. And with that, I will pass the word to Thomas, who will give us a more detailed view on the financial performance of the second quarter 2024. Thomas, please go ahead.

Thank you for that, Andre. And like already mentioned, I'm the CFO of Netcompany and I will now go more into details with the financial performance for Q2 2024. So if we move past the breaking Slide 9 and straight into Slide #10 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 for Q2. In Q2, revenue increased by 10.2% measured in constant currencies and currencies impacted growth positively by 0.3 percentage point, leaving reported revenue growth at 10.5% for Q2. The growth was driven by continued progress in the Danish entity and continued strong performance in Netcompany-Intrasoft and the Netherlands. Revenue in Denmark increased 14% driven by an increase of 15.9% in the public segment, an increase of 11% in the private segment. The improvement in both segments was driven by increased utilization and also by 3 more working days in the quarter due to the timing of Easter. For the first 6 months of 2024, revenue in Denmark grew 6.6%. The Netcompany-Intrasoft continued its strong start of the year and grew revenue 10.9% in the quarter. The growth was driven by the public and the EU area that grew 15.6% despite a tough comparable. Netherlands continued the strong growth from the beginning of the year and grew revenue 61.2% solely driven by the public segment. In Norway, revenue increased 7.5% driven by a 10.9% increase in the public segment, which was slightly offset by a 3.5% increase in the private segment. In the U.K., revenue declined 16% compared to the same period last year. The decline was a result of a slower than expected ramp up under the DALAS framework agreement. And can we have the next slide, please? Gross profit margin increased by 2.3 percentage points to 29.6% in Q2 compared to last year. The increase was driven by more working days in Q2 2024 and better utilization, which more than offset the DKK 15 million lower license revenue in the quarter. In Denmark, gross profit margin increased 4.7 percentage point. The improvement was driven by better utilization and 3 more working days compared to the same quarter last year due to the timing of Easter. Looking sequentially at the gross profit development, the margin was up 1.6 percentage point compared to Q1 2024 despite 1 working day less in Q2 2024 underpinning the improvement in utilization in the Danish business unit. Margin in Netcompany-Intrasoft declined by 0.8 percentage point, negatively impacted by lower license revenue in the quarter. In the U.K., margin was 15.6% compared to 24.6% in the same quarter last year. The lower margin was a consequence of decline in revenue and additional time spent on business development. Margin in Norway increased 3.5 percentage point in Q2 compared to the same quarter last year, positively impacted by more working days in the quarter. And in the Netherlands, margin increased to 34.4% in the quarter compared to 4.5% in Q2 last year. The increase in margin was a result of better project economics and improved utilization driven by joint projects. And can we have the next slide, please? Adjusted EBITDA margin before allocated cost from HQ increased 3.4 percentage point to 17.3% in Q2 and for the first 6 months of 2024, the margin increased 1.7 percentage point to 17%. In Denmark, margin increased 6.1 percentage point to 24.1% in Q2 2024 compared to Q2 last year. The increase was driven by additional working days and better utilization supported by flattish absolute administrative cost compared to last year. Margin in Netcompany-Intrasoft decreased 0.6 percentage point due to the different revenue mix as already mentioned. In the U.K., margins decreased by 7.2 percentage point to 3.8%, mainly driven by lower gross profit margin. In Norway, margin improved 6.3 percentage point as a result of improved gross profit margin and a minor decrease in administrative costs. In the Netherlands, margin improved significantly by 38.7 percentage point to 20.2% and the increase in the Netherlands was driven by improved gross profit margin from projects and administrative costs on level with the same period last year. And can we have the next slide, please? Work in progress decreased by 14.3% to DKK 847.2 million in Q2 2024. The decline was a result of larger amounts being invoiced at the end of Q2 2024. As a total, combined work in progress, pre-built invoices and trade receivables increased by 3.4% to DKK 2.17 billion, whereas revenue for the last 12 months increased by 6.6%. And can we have the next slide, please? Free cash flow was DKK 148.2 million in Q2 2024 compared to negative DKK 72.5 million in Q2 last year. The improvement in free cash flow was driven by the improvement in EBITDA and improvement in working capital changes further supported by the reversal of the negative impact from payments of accounts receivables seen in Q1, which was pushed into Q2. Net working capital changes in Q2 2024 improved compared to Q2 2023, positively impacted by the timing of Easter, which postponed the collection of trade receivables, as already mentioned. The absolute amount of trade receivables increased significantly in the quarter due to a large amount of work in progress invoiced at the end of Q2. Days sales outstanding increased by 5 days, leading to a DSO of 73 days. This increase is expected to reverse in the coming quarter. And trade receivables as of 30th of June paid in the following month amounted to DKK 703.7 million in July compared to DKK 536.7 million in July 2023, supporting the accelerated repayment of receivables, which will have a positive impact on DSO, as just stated. Leverage was 1.5x in Q2 2024 compared to 1.4 in Q2 2023. And can we have the next slide, please? Revenue visibility improved 6.7% to DKK 5.8 billion, of which contractually committed revenue amounted to DKK 2.4 billion and non-contractually committed engagements amounted to DKK 157 million. Visibility increased by 8.2% in the public segment and 3.4% in the private segment. In addition, we've realized a lower amount of license revenue at this point in time compared to last year, which implies that license revenue in '24 will be more back-end loaded than it was in '24. It also has an impact on revenue visibility. We continue to see a clear indication that public entities and private companies are increasing their willingness to increase their IT investment. And with that, I have concluded my detailed financial analysis and we will now open the call for questions. So can we move one slide to the Q&A side, please, and open the call for questions? Thank you.

[Operator Instructions] The first question is from Yiwei Zhou from SEB.

I have a few questions, but we'll keep working 3. Firstly, I realized that the [ PK ] attrition rate was 24% and it seems that it is quite high over the last 3 months. And if I remember correctly, you have found the restructuring already late last year. Could you maybe elaborate a bit here? And in relation to that, could you also confirm that there was in Q2 cost of the service? There was not a lot of severance payments included here in Denmark.

The question weighs. It's a little bit...

I do one question at a time.

Thank you for that. It's difficult to hear the question clearly. I don't know whether you're on a line which is not going through. But we'll try to answer what we think you asked. And the question was related to the churn, 3-month rolling churn in Denmark, which was 24% for the last 3 months. And then the question that was the reason for that. And was there any severance payments per se? And on the churn in Q2, a little bit of timing in terms of when people leave and when they don't leave. And there's been more in Q2 than there was in Q1. So it's more of a technical matter. And there are no significant severance payments related to that in Q2. So I hope that was the question. At least that's what we're answering.

Oh, yes. That was clear. And my next question is for the U.K. profitability. And you mentioned in the slide that there was a negative impact from contracts being discontinued due to price setting. Could you maybe elaborate also on this?

I think from Q2 in the U.K., we have a few contracts that are being discontinued. But it's not really a big impact per se. It's just more for completion that is mentioned in the notes.

Could you indicate if that was in the private segment or public segment or...

A little bit of both.

Okay. My next question here is the Danish public segment. Could you give us an update on the current tender market and the pipeline?

Thank you, Yiwei. I mean, there's no doubt that '24 is a better year than '23 in the Danish public market. So there's definitely more larger tenders out there. And also more to be had in terms of cross-selling to existing customers, modernizing their legacy applications. So we see that across the Danish public sector. So we have a few larger tenders that we're bidding on. And then we also have an overall cross-selling mechanism happening to existing clients. And that's what we see during '24 more than we saw in '23. Hope that answers your question.

Yes. Yes. And if you can maybe add a bit on the timing for the large ones?

That happens continuously. So also as we mentioned in the notes today, you saw that we won significant work at the business authority. That will spread over some time. And that goes also for the other larger tenders. So it's not something that will jump up and down. I think you'll see an overall smooth over the next 1 to 2 years effect on what we do of tender work in Denmark.

And next up, we have Aditya Buddhavarapu from Bank of America.

This is Aditya from Bank of America. A couple from me. Firstly, could you just talk about the U.K., you mentioned the delay in contract ramp-up. Could you just talk about what you're seeing there, when you expect that to start coming through? Second, could you just talk about the free cash flow? You increased your buyback for the [indiscernible] to get to the level of confidence on the free cash flow generation, but given the dynamics around trade receivables, how do you think about that for the rest of the year? And then finally, if you also just give an update on the ramp-up of the Avinor contract in Norway and when that should start to come through?

Yes, thank you for your questions. When it comes to the DALAS framework agreement, it is a complex system and a complex set of services that we are providing and it's all about timing and getting in there with the right resources at the right time. So we are expecting to have more people rolling on over the next quarters and that will continue also into '25. Now to be absolutely exact on what will start exactly which month and when is very difficult to say, but we are in good progress there and there's no indication that this will not happen. It's more timing issues and getting the right things in place, which is also the case for your, I think, third question, Avinor. We see a very positive effect in Avinor now where we have been working now together for 6, 7 months and the receiving organization is much more able to start work up with us. However, these things always take a bit more time than typically one can expect, but there's no indication whatsoever that we will not get into to be working even more with Avinor according to the sum of the contracts that we've been indicating. So it's all about timing, nothing else.

And then I will answer your second question on free cash flow and what we expect for the remaining part of the year. And we don't really guide on free cash flow as you're well aware of, but given the strong performance on cash flow for the first 6 months and especially in Q2, the continued expectation of trade receivables to actually be paid and we can see that subsequent payment of the part of the outstanding at the end of Q2 being paid already in July has increased significantly. We are in a situation where we feel comfortable to increase the expected share buyback amount from at least DKK 500 million to at least DKK 700 million. And in that aspect, we've initiated a third range of a share buyback program to run in Q3 of DKK 150 million.

Got it. Maybe just one follow-up for me on Intrasoft. Clearly, growth there has been quite strong, probably maybe even a bit better than you expected. Should we -- I mean, is there anything to think about there in the second half? Any reason why this level of growth will not continue given the contract wins you've seen?

So the timing of the growth in Intrasoft, I fully agree with you in your statement, it has been strong. And our overall expectation for the revenue growth on Intrasoft, as we've outlined in the expectation to reach our midterm targets, is between 5% and 10%. And that is still what we expect, between 5% and 10%. And there'll be some fluctuations between the quarters, but for now we still continue to have an expectation of 5% to 10% average growth for Intrasoft.

The next question is from Claus Almer, Nordea.

So the first question is about adding people in Norway and the U.K. So how is that progressing? That'll be the first one.

Well, it's progressing according to plan. So we will be adding people in Norway and in the U.K., but of course, always adjusting that to the actual demand.

That I would assume, would say, so but maybe more about, do we get the right people? Do we get young people, experienced people? More about how this uptake that is needed to service the backlog?

Well, overall, that goes for both Norway and the U.K. We see over the last 1 to 2 years, it's been easier for us to attract the right people with the right qualifications. We do make a big effort into combining the best people from various offices, delivering the new, larger projects and hence, getting a new generation of people, both in the U.K. and Norway. Norway is definitely, from a delivery point of view, in a much better shape than it was 2, 3 years ago. In the U.K., we see more and more of our deliveries being delivered with a combination of half-experienced U.K. people, new U.K. people and also experienced people from the rest of the group. So we have definitely entered into a phase where we are building up competencies in the U.K. as well.

That sounds good. My second question goes to the pipeline. So if we exclude these larger public tenders ongoing, how does the order backlog look for second half this year? And maybe to put some comments on the main markets, Denmark, Intrasoft and U.K.?

Yes. So when it comes to many of the private segment customers, specifically in Denmark, but also in other countries, we have a very strategic, long-term relationship with more and more clients, which means that they are definitely buying more services from us. Now some of these private clients, they tend to buy it like running time material, or they buy smaller projects within one frame or strategic work. So we see that coming in over time. When it comes to the public clients, this is still being governed more by typical tender processing. But overall, the backlog situation is comfortable and we see a good development across the group. It is not because the market has been easing up. It's not that decision processes are being, I think, lowered or anything like that, but we have our platforms and products and offerings that brings us into the room. And so decision processes are definitely longer than they were 2 years ago, but we are much more relevant now than we were before, also as strategic partners. And that gives us a lot of comfort because we are definitely staying longer time with customers, with wider engagements and being invited into much more strategic dialogues, not only in Denmark, but also in the other countries. So that's a very, very positive development, one which we are following in great detail because that's the most important thing for the overall long-term growth of Netcompany.

[Operator Instructions] Up next, we have Mads Quistgaard from Carnegie Investment Bank.

I will take them one by one. First, is it a fair assumption that your revenue visibility for this year, which is lower compared to the previous 2 years, is a result of prolonged decision-making in the Danish public sector? Is that a fair assumption?

There's a lot of -- it is an assumption which is not completely wrong, Mads, but there's also some technicalities that play into the revenue visibility when we look at it and compare with revenue visibility for 2023 at a given point in time and then have the growth in revenue visibility. So a little bit of a technical impact. When we look at 2023, the amount of revenue visibility we had on a quarterly basis included more short-term contracts compared to 2024, where we early on in the year had a high proportion of longer reaching contracts. At the same time, when we look at the 2023 Q1 and Q2, revenue grew by, on average, 16%, which means that the realized revenue, which is part of the revenue visibility, clearly was higher in 2023 than it was in 2024. Now 2023 had high growth in Q1 and Q2 and somewhat lower growth in Q3 and Q4. So the comparables in that aspect are tough. So there's some technicality also in the revenue visibility.

All right. Fair enough. Very clear. And then I have a question on coming back to Intrasoft. I think this is the first quarter where you have negative growth in the number of client-facing employees that we've got on a quarter-over-quarter basis. So does that reflect your expectations for upcoming growth in Intrasoft, or how should we view it?

No, not necessarily, Mads. You can also view it as that is a indication that we are becoming a little more effective.

Okay. So the margin increase despite lower license sales is actually something that is here to stay for the coming quarters?

So it will have an impact on margin, yes. And when we look at the Q2, the main drag on margin in Intrasoft is the revenue mix, which in Q2 this year has a lower proportion of license revenue, which not surprisingly has a very high margin. So adjusting for that, you would see slightly increasing margins in Intrasoft. Yes.

Good. Then my final question is on 2026 ambitions. So obviously, assuming midpoint of full year guidance, it assumes that you will deliver a revenue tag of 13.5% over the next 2 years of the '25 and '26 to end above DKK 8.5 billion in sales. I guess that is a bit ambitious, but could you sort of explain how this should take you to -- what should take you to 13.5% revenue tag over the next 2 years, given where you are today and what you're guiding implicit with your current revenue visibility?

In terms of how we get to 2026, the only thing we can say at this point in time is basically to reiterate the revenue expectations that we have for the different countries. And they are for Denmark between 7% and 12%, for Intrasoft 5% to 10%, for the U.K. 10% to 30%, for Norway and for Netherlands 20% to 30%. And that's average in those areas. So on top of that, we will also and we will include that in the regions where they are being delivered. But for instance, the revenue that we are generating on the SOLON case in Sweden will, as of now, be accounted for in the Danish business and in Intrasoft. So there are various additional revenue streams that will come in those 5 regions. And that's all we can say for now, Mads, in terms of how we get to the DKK 8.5 billion.

The next questioner is Orson Rout from Barclays.

Congratulations on this fantastic Q2 results. Three questions from my side. First, is just on the guidance where you quite explicitly talked to license revenues being more H2-loaded. So there seems to be quite a high conviction that you will see a good chunk of licenses in H2. I was just wondering what gives you that sort of confidence given normally you're quite conservative on how you speak to the timing of license deals? And perhaps have you already seen some that have slipped maybe into July or August that give you that increased confidence? That's the first question.

Thank you for that, Orson. And you almost know what I'm going to answer, but I'm going to answer it anyway. And of course, we cannot give specific guidance on Q3 and Q4 as of yet. But with the license and the projects related to that, that our expectation is, of course, based on where we are in the different sales cycles, in the opportunities and with the sales cycles that we're running, we are confident that we'll get those contracts in Q3 and Q4. So that's all I can answer at this point in time.

Okay. Makes sense. And the second is just on the U.K. and specifically on the margin expectations for the DALAS framework. I think in the [indiscernible] there was a bit of detail on the accounting treatment for subcontract is and how that might impact the margin. So I was just wondering, so on a headline margin basis, do you expect the DALAS contract to be margin dilutive because there's accounting treatment or is it a bit too early to tell?

Too early to tell, but in overall terms, we do not expect that the overall DALAS contract, including the pass-through on [ SOPs ] will be margin-dilutive to the U.K. business.

Okay. That's encouraging and good to hear. And one last slightly tricky one just on the related party transactions. I noted that the revenue from Smarter Airport has increased for the first time in like 7 or 8 quarters. Before that it was decreasing year-on-year. I was just wondering what the sort of reasoning behind that quite substantial uptick is and maybe if you could link to that sort of your expectations for the ongoing loss from JV and associates, should we expect that to turn into a positive sometime over the next couple of half years or is it a bit too early to tell?

Sure. So the revenue related to Smarter Airport and you're right that it's the first time it's there, is related to work that Netcompany has done to Smarter Airport, but it is now done on the application and to Smarter Airports after the development of AIRHART. So in joint venture accounting when we are developing a piece of intangible, then the revenue that we have needs to be backed out and showed while we are in implementation mode or development mode as other comprehensive. But now it's completed and it's sold and it's used in Copenhagen Airport meaning that the intangible, which is owned by Smarter Airport is fully developed. And then whenever we work for Smarter Airport that now goes to revenue as a normal client relationships. So that's the technical explanation for that. We do expect the result from both Smarter Airport and Festina Finance eventually to be positive. Not this year, most likely not next year. It has to do with the scale up in both entities. So selling more of the solutions software offered both in Smarter Airport and in Festina Finance. So that is following the plans that we have made with those 2 companies already. So during -- sometime during 2025 we'll start to see some positive on a quarterly basis, but most likely not for the full year of '25, but then onwards from there.

As there are no more participants in queue for questions, I will hand it back to speakers for closing remarks.

Well, thank you all and have a great day.

Thank you.