NNIT A/S (NNIT) Earnings Call Transcript & Summary

Hello, and welcome to the NNIT Full Year 2023 Results Conference Call. My name is Alex, and I'll be coordinating the call today. [Operator Instructions] I'll now hand over to your host, Par Fors, CEO, to begin. Please go ahead.

Thank you, Alex, and thank you all for joining us here today. My name is Par Fors, and I'm the CEO of NNIT. Our CFO, Carsten Ringius, and I have been looking forward to presenting the highlights of 2023 and commenting on the outlook for 2024 in this call. After the presentation, we look forward to answering your questions. Let's move to Slide 2 and for the 2023 key figures. Overall, we were very pleased with the business and financial performance in '23, which exceeded the expectation we had early in the year and came in at the high end of our upgraded guidance. Based on the positive development in Europe, U.S. and Denmark, we grew revenue by more than 15% and generated organic revenue growth just shy of 11%. Our regions performed well across life science internationally and the public and enterprise business in Denmark. This is really a great start after the launch of the new NNIT during 2023. On this background, we delivered group revenue of DKK 1.7 billion against DKK 1.5 billion last year. The higher activity level enabled us to lift capacity utilization, and we took several steps to enhance efficiency during the year. The combination of solid revenue growth and improved efficiency resulted in significant increase earnings, and we are reporting operating profit of DKK 116 million before special items. Our profit margins had those increase to 6.7% in '23, which is more than 7 percentage point improvement from last year. Special items came in to DKK 69 million for the year, as expected. The majority of these costs are related to contingent consideration in connection with the completed divestment of our infrastructure business. As many of you are aware, this is due to a change of accounting treatment -- no, sorry, wrong of me. The majority of the special item, of course, is related to completed acquisitions, my mistake. And as many of you are aware, this is due to the change in accounting treatment following a decision by the Danish Business Authority, which we have appealed and we are still awaiting a final ruling. All in all, we are satisfied with the performance in '23, and we are in good shape for 2024. On this note, please turn to Slide 3 for an overview of 2023 highlights and milestones. Please go ahead, Carsten.

Thank you, Par. The strong progress in '23 enabled us to outperform our guidance on revenue growth and profitability, as Par just mentioned. This was a true team effort in a transformation year where we divested our infrastructure business and recalibrated the NNIT Group. It is worth noting that the good traction was generated with new and existing customers on the back of high customer satisfaction. We monitor and measure the KPI quite closely, and we're pleased to report a total score of 4.4 out of 5 with strong scores across all regions. The high customer satisfaction was secured even though we adjusted the organization and took steps to improve efficiency and lift profitability quite significantly during the year. We see good opportunities in our markets and are well positioned to seize these in the coming period based on the good development in 2023 and our strong presence across the 4 regions. After the launch of our new strategy and the divestment of our infrastructure business, we now also have the organizational setup and financial headroom to pursue attractive M&A opportunities and build on our proven track record in this area. I would like to add just a few comments on some important milestones reached during the past year. Firstly, we introduced our New Beginning strategy to make NNIT even more attractive to customers and investors. We are focused on regulated and complex industries with a clear ambition of delivering profitable growth. Our industry is growing globally, and we are well positioned to tap into the opportunities with this new setup, which provides the flexibility, agility and accountability for us to succeed in each region and as a group. We are lifting capacity utilization and leveraging our employee skills as efficiently as possible while reducing overhead costs. Secondly, we completed a transformative divestment of our infrastructure business to reshape NNIT as a pure-play IT consultancy business, highly specialized in global life sciences and the public sector in Denmark. NNIT is now a less complex business with one operating model and a sharp focus on solidifying our leading position, offering IT solutions for the entire life science value chain. Thirdly, we lifted our growth and profitability guidance in August on the back of a good performance in the first half of 2023. We followed up on this in the second half and landed the strong results presented here to today. And finally, we presented our new financial aspirations towards '26 in September at our Capital Markets Day in Copenhagen. We aim to deliver solid organic growth and significantly higher profitability in the 2024-2026 period as we leverage a number of positive drivers. We will get back to this when covering the 2024 outlook. Let's take a look at the regional performance and jump to Slide 4. Please go ahead, Par.

Thank you, Carsten. Let's start with Region Europe, where we delivered flat revenue in '23, which was impacted by uncertainty and a volatile macroeconomic development. Even though customers were taking a cautious approach to investments, we were pleased to expand existing customer engagement and onboard new customers during the year. There was a minor positive impact on '23 revenue from prime4service acquisition in early '22 and some currency tailwinds. Profitability increased significantly as we improved capacity utilization and reduced regional and corporate costs in '23. We delivered group operating profit of DKK 32 million for the year against a loss of DKK 33 million last year. This is great news, and we have seen sequential improvements throughout '23. Please note, however, that Q4 was positively impacted by one-offs relating to reallocation of costs from previous quarters. In Q4, we continued the positive trend of signing new orders with existing and new customers within Veeva and other digital transformation solution as well as manufacturing for life sciences. This underlines that Region Europe remains on the positive track. Let us flip to Slide 5 and the development in the U.S. Our U.S. business continued to deliver profit growth in '23, lifting revenue by 24% based on a high activity level with existing and new customers. This progress was driven by strong contribution from our group companies, Excellis and Valiance. The latter was fully integrated into NNIT in Q4 and we expect to integrate Excellis fully in '24 as well. We have already introduced a new leadership setup in the U.S. with Greg Cathcart heading all activities and look forward to completing the integration of Excellis. We increased capacity utilization on the back of higher activity level and lifted efficiency across the U.S. business. At the same time, we leveraged and streamlined the existing cost base. All in all, these efforts drove significant increase in regional and operating profit with the latter increasing to DKK 42 million from a loss of DKK 9 million last year. The profit margin came in at 10.9%. The U.S. market continues to show great strength, and we are confident that we will be able to deliver high growth in the year ahead based on a good pipeline. Please turn to Slide 6. The activity level in our Asian business was impaired by the macroeconomic challenges in China throughout 2023. This entailed a decline in revenue to DKK 144 million from DKK 157 million last year, and we took steps to mitigate the impact on our business. While the market conditions were tough in China, we actually managed to expand our engagement with large customers there. At the same time, we generated significant growth in our business in Singapore, which accounted for 20% of the regional revenue. We adapted the Asian business and reduced capacity during the year to mitigate the negative impact of low activity in China. We were, therefore, able to lift capacity utilization in the second half of the year and reduce the negative impact on earnings. Still, we came out of '23 with an operating loss of DKK 18 million. The adjustments made in '23 will have a positive impact on the profitability going forward. We continue to monitor developments in the Asian market and business very closely and would take further mitigation action if deemed necessary to continue to improve profitability. Please turn to Slide 7 and Region Denmark. The Danish business generated a solid progress in '23 and an organic revenue growth of 17% based on a high activity level. Including revenue generated from sales to Aeven, growth came to 30% for a revenue of DKK 732 million. The strong traction in the Danish market was secured across public and enterprise customers with good performance in Custom Application Development and Microsoft Advisory and Technology. This also included our large assignment with the Danish National Bank. And our group company, SCALES Group, performed well and contributed to the growth as well. The higher activity level entailed an increase in production cost, but cost reduction and improved capacity utilization drove an increase in group operating profit to DKK 60 million from DKK 49 million last year. We delivered a profit margin of 8.2%, which was slightly below 2022 level as we invested in building new capabilities in growth areas. The Danish business sees good opportunities across the public and enterprise market with several large public tenders coming up in 2024. Please turn to Slide 8 as I hand over to Carsten for brief comments on the financials and the outlook.

Thank you, Par. Revenue grew by 15.2% to DKK 1,728 million in 2023. The organic growth rate was 10.8%, and the difference is mainly due to sales towards Aeven in the Danish business being booked as inorganic. The positive development in revenue was driven by Denmark and the U.S. We lifted gross profit by roughly 9% and cut sales, marketing and administrative costs substantially in 2023, entailing a solid improvement in EBITDA to DKK 144 million. Based on the good sales development and cost reduction, we delivered group operating profit of DKK 116 million before special items against a loss of DKK 7 million in 2022. The profit margin increased to 6.7% and reached the high end of our 6% guidance against a negative margin of 0.5% last year. Special items amounted to DKK 69 million mainly comprised of costs related to contingent consideration in connection with completed acquisitions. This was in line with our expectations. After the divestment of our infrastructure business, NNIT has emerged as an asset-light IT consultancy business with a stronger balance sheet. At the end of 2023, we had reduced total assets by 28% to DKK 1,977 million and the net interest-bearing debt to DKK 77 million. Please turn to Slide 9 for a few comments on the 2024 outlook. We will build on the progress made in '23 and continue the positive track in '24. We aim to deliver organic revenue growth of around 10% and an operating profit margin before special items of 8% to 9%. The continued progress will be driven by higher activity, enabling us to improve capacity utilization and lift profitability. This will be further supported by the capacity adjustments completed in 2023. We will also benefit from increased use of the capabilities we have built in our Global Delivery Centers in Czech Republic, Poland and the Philippines. In addition, we see positive effects on efficiency and cost level from the introduction of the new regional structure last year, along with the implementation of the new internal financial steering model, which provides a better overview of performance and actions needed. Along the same line, we are implementing a new ERP system and other global platforms to establish a better basis for decision-making and enhance efficiency. This process will have a dampening effect on profitability during implementation in 2024 before contributing positively to efficiency and profitability going forward. The '24 outlook is in line with our financial aspirations of pursuing a compound annual organic growth rate of roughly 10% in '24 to '26. The organic growth rate may vary quite significantly from year to year, but we aspire to reach the 10% level in aggregate. We will expand the profit margin by leveraging the increasing scale of our business and reducing our cost base. We aim to report yearly average group operating profit margin of around 10% to 13% before special items. Again, this is a guideline for the period and we could, of course, see volatility from quarter-to-quarter and across years. Thank you for listening. We will now open the line and take your questions. Next slide, please.

[Operator Instructions] Our first question for today comes from Poul Jessen of Danske Bank.

Yes. Congratulations for the full year. My question will be on the quarterly numbers for the fourth quarter then. Can you comment on the minus 4% revenue growth if you combine all the life sciences totally, and that's also including special decline in Europe on why actually you're going into a decline when 3 months earlier you have indicated that we should see an improved performance in Europe?

Yes. In Europe, we saw, you can say, a slowdown in Q4. Again, as we have been communicating over the past quarters, we have seen, due to the macroeconomic situation, that we have a somewhat reluctant or a wait-and-see approach for some of the projects that we have in our pipeline. And this is also what is impacting our Q4 as to the revenue growth for that particular region in that quarter. In addition to that, we see in U.S. in the Migration Powerhouse also a slight, you can say, less growth in that business area. But I think we can say that we expect to pick up the growth, especially for U.S., during '24 as we have good progress in our pipeline in the beginning of the year.

And just to add some flavor to that, Poul. I mean, I think you should view it more as a temporary one in those areas that Carsten mentioned because we have been winning some nice new business, both in Europe and in the U.S. and not the least in the Migration Powerhouse [ and the localized ] business that actually will translate into higher activity already in Q1.

So we should see being back on growth in Q1 also in Europe?

Yes. I mean, Europe was -- from a growth perspective, a disappointment even though it was expected with regards to the macroeconomic situation. And we expect growth in -- also in Europe in '24, but of course, within the guidance we have already given.

Okay. And then you mentioned when you were discussing the U.S. performance that you expect high growth in the years ahead. Is high growth, is that 10% to 20%? Or is it 20%-plus when you look at what you would like to do in the U.S.?

I mean, we had a 24% growth this year, which was a really good year. What I can say, I expect the U.S. business continue to have the highest growth rate also in '24 due to the fact that, I mean, we don't see any of the macroeconomic headwinds as we see partly in some other geographies, most notably Asia but also partly in Europe and that, of course, we don't see at all in the U.S. So from a geographical perspective and a growth perspective, I'm -- I definitely see the highest potential in U.S.

Also when you include the Danish market? Or is it just when you look at life science?

No. It's -- from a regional perspective, I mean, I'm very positive to the Danish market as well. That has been growing really well in '23. But I mean, I would guess if you look on the organic growth in '23, we had a 17% growth in Denmark and a 24% growth in U.S. So I do expect that our U.S. business unit to have the highest growth rate also in '24.

Can you then comment on Denmark on the gross margin, which is down year-over-year 12 percent points on a full year basis? Is that just lower capacity utilization? Or is it investments in future growth? Or is it putting more resources on winning tenders? Or what's the reason for the 12 points decline in the gross margin?

Well, first of all, and I would like to repeat this every time I get the opportunity, when we are comparing to '22, we should be careful because we had another operating model back in '22 that we have tried to, you can say, make comparative numbers to with -- after implementing this new financial operating model during '23. As you know, we were working with recharges back in '22 also linked to the now discontinued business. But just to comment on the margin development we see in Europe, we are -- or in Denmark, we are investing in some of the areas that we have within the region. So we are expecting the gross margin also to develop positive from where we landed in '23 into '24.

And some examples of that, Poul, is for instance, SAP, I mean, we -- SAP is one important area at some of the public clients, and therefore, we have been investing to build our capabilities within SAP and recruiting a new leader and also recruiting some key people, which has not been fully utilized during the second half of '23 and also within cyber.

[Operator Instructions] We will take a follow-up question from Poul Jessen of Danske Bank.

Okay. I'll continue then. If you take the DKK 22 million -- I'm just trying to figure out on the fourth quarter here. If you take the DKK 22 million in Denmark of [ prioritization ], can you tell how that is impacting the gross margin and the lines below or is it DKK 22 million all the way down to the EBIT level?

No, it is not DKK 22 million all the way down. There is also some costs that have been, you can say, reclassified in Q4. As I have also mentioned a few times, we have, because of the split-out, been operating with also discontinued business in the subsequent quarters where we are splitting out revenue and cost related to the divested part of the business. And we have, in Q4, identified some revenue that should be classified as discontinued to show a true picture of the continuing business that has been taken out in Q4 and also some cost has been taken out, but not, you can say, equaling the revenue. So it will have -- if you adjust for it, it will have a positive impact, of course, on the margin, if you correct for it, but you cannot take DKK 24 million to the bottom line.

But can you indicate how much will the gross margin be changed and the regional cost and so on?

That cost that should be taken out is mainly related to the production cost. I would estimate around DKK 7 million or DKK 8 million should be taken out -- has been taken out of the production cost in Q4 related to this discontinued business. And on the -- on the corporate costs, we have some positive one-offs in Q4, which is meaning that the contribution, the allocation of corporate costs in Q4 is at a somewhat lower level.

Okay. And the DKK 10 million in adjustment of the salary costs in Europe, how much is in the gross margin and how much is on regional and corporate here?

It is purely gross margin.

Okay. I have to check here. You spoke about the ERP system and the global platforms, Asia and so on, which is being finalized in '24. If you then look at -- have -- when you look at a more normalized business, how much will that improve your cost base, if you have any idea?

Well, I have not -- I cannot give you some specific quantification, but I can tell you that as we are operating on different ERP systems now across our global scope, operating several ERP systems, this will enable us to improve efficiency on our -- in our enabling functions. That means finance and also implementing a new global HR system, which will enable us to work with global procedures. You can say also making the job of each individual person in NNIT somewhat more simple to perform daily tasks on the HR system that we currently have a quite fragmented system landscape on.

And my final questions, I have 2. One is just a clarification. You say special items 0 in the guidance sheet, but you also say DKK 15 million in contingent costs coming in. Isn't that part of the special items?

What we are saying is that we are not giving specific guidance on special items. And then we are also saying that because of the ruling from the Danish Business Authority, our best estimate is around DKK 15 million in '24 related to earnout. And if that ruling is not changed in '24, that will hit our special items.

Okay. And then it will be 0 for '25, the contingent liabilities?

That will be -- if we are not performing any MA activity, then it would be 0, yes.

Okay. Then my final question, I guess, that is for Par. You, also in the guidance, talked about public sector and pipelines. In general, to support the guidance, can you put a little more flavor on how you look at the tender market in Denmark on public sector because everybody talks about '24 to be a large public sector tender activity, but then also general on the other kind of business you have.

Yes, I'm happy to do that. Looking at the public sector, there's a quite wide variety of cases to compete for. And for us, it's more or less only new business. It's not -- hardly any prolongation of existing engagement. So what we do in the public sector is regarding new engagement. We are now selecting the ones that we will go for. We will not go for all. We would only go for the one where we can make a difference for our clients and have the highest possibility to win. Many of those will not be translated into any significant revenue in '24 and that's built into our guidance but will deliver more growth -- or hopefully some significant growth in '25 then. So we are very hopeful on the bids that we will go for and I'm not going to be any more specific on which those are, but there are -- we're not going to go for all of them, but there are some where we are quite optimistic to be able to win. So it's -- but it's as I said, it's a good pipeline and we are going to be selective and hopefully, we'll win high win rate.

You say not much revenue in '24, more '25. Is that because it's screwed towards the second half of the year, the tenders...

Yes. I mean, there are some -- actually some frame agreements who will deliver some revenue in '24. And some of the other ones are actually where we are building applications. There's usually a transition phase where you're onboarding the whole thing where you don't account for all that revenue in the beginning. So that means it will not be a big impact. But -- all of this is factored into the guidance we have given. So it's planned for that we don't see any significant contribution from new clients. However, and this is important, we are also blessed with having a number of really strong relationship in the public sector, let me just mention one, the Danish National Bank, which are developing very, very positively from our position. We are giving more and more opportunities for -- to support them, which translate into revenue growth in '24. And also with some of the other existing engagement we see not just potential, we see actually upselling happening as we speak and a good growth happening. So it's a good public market overall in '24, both on existing customers and also on new opportunities.

And for nonpublic and for life science?

Yes. If you take nonpublic in Denmark, I mean, it's primarily the Microsoft area where we are successful. And it's, of course, including the SCALES business, which has a very healthy pipeline. So there is -- we have been growing that business with good numbers in '23, and we continue to see good growth opportunities within the Microsoft ERP business. But also the other Microsoft business, which include both AMS commitments on Microsoft ERP customers as well as within BI and also some other Microsoft technology areas, we are seeing good growth. And also the investments that we've been doing in SAP, cybersecurity and cloud in '23, we are now expecting to reap some benefits from that investment in '24 to see that growing as well. On the Life Science business, I mean, we see continued growth across the line. We are very well positioned to support our clients. And as said, we are expecting to kind of change the outcome in Europe to be able to present growth. And also within in the U.S. business, as I mentioned before, where we have a really, really good position, close to some client cluster where there is significant growth happening. Last but not the least, China, it's a more -- that's a more difficult one where we foresee continued challenge on the macroeconomic level. Even though -- even in China, we also have some really good large client engagement, which -- where we expect to see growth coming, but there are other ones where we need to potentially to do some further capacity reduction. So overall, I would say we are very well positioned. And if I mentioned any specific thing in Life Science, I mean we talked about Veeva before, and I mean, that's a business DKK 200 million-plus business for us. And we see that actually now having some good growth opportunities across the line, both in Europe and in U.S. within the Veeva space.

[Operator Instructions]

Okay. Thank -- okay. Sorry.

At this time, we currently don't have any further questions. So I'll hand back to Par Fors for any further remarks.

Thank you, Alex, and thank you all for joining the call today. Please feel free to reach out to either Carsten or me if you have any follow-up questions. Thank you, and have a good day. Have a good afternoon.

Thank you.

Thank you for joining today's call. You may now disconnect your lines.