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

At this time, I would like to welcome everyone to NNIT's Q2 2026 Results. Today's call is being recorded. If you have any objections, please disconnect at this time. I'll now turn the call over to your speakers. You may now begin.

Thank you very much, operator, and everybody, please turn to Slide #2. Good morning, and thank you for joining NNIT's webcast. My name is Lars Petersen. I'm heading up the Communications Department at NNIT. With me today at the headquarter in Copenhagen, I have the pleasure of our CEO, Claus Rydkjaer; and CFO, Carsten Ringius. In a minute, they will present the business highlights and second quarter results for 2026, which we released yesterday afternoon. Please turn to Slide #3. Claus will go through the key highlights, including the regional performance, and then Carsten will follow with the group financial highlights and financial outlook. Before heading to the next slide, please do pay attention to the disclaimer in the bottom of the slide. Having digested that disclaimer, let's turn to Slide #4, and I will give the word to Claus, please?

Thank you, Lars, and good morning, everybody. My name is Claus Rydkjaer, and I am, as mentioned, the CEO of NNIT. I will now briefly go through the second quarter '26 key financial figures. First of all, we are tracking according to our internal plan. Our revenue for the second quarter amounted to DKK 442 million, corresponding to a reported revenue growth of minus 4.5% and constant currency growth of minus 4.4%. Despite the revenue development continues to be negative, we improved compared with the first quarter where the constant currency growth was minus 7.3%. Sequential improvement is driven by the growth initiatives actuated in the beginning of the quarter and improved order entry. Our group EBIT, excluding special items, was DKK 21 million, equal to a margin of 4.8%. We're pleased to see that the profitability was broadly in line with the same quarter last year despite significantly less revenue. This is due to our regional improvement with uplift in utilization capacity adjustments carried out and realization of cost savings. Please turn to the next slide. During the quarter, we had a laser-sharp focus on the performance, not only on a group level, but down to every single customer-facing consultant. Our performance management setup is running at a higher cadence where we, across the management team are being very operationally focused. This is necessary to change current trajectory. Therefore, we're also pleased to see uplift in the utilization across our consultants across regions and much lower bench time. Moreover, we continue to receive high customer satisfaction scores from our customers and see more sales activity. Overall, we are trending in the right direction. As we mentioned at our last webcast in May, we launched two AI platforms, Lumina and Alira. In the second quarter, we've deployed our AI services to selected customers across our regions. From the first use cases, we see tangible efficiency gains not only from an IT perspective, but also from a customer perspective. Beyond time to delivery reductions, we have become more competitive where we are now bidding on projects that we would normally not pursue. It is especially within new system upgrades where we can deliver much more tailor-made systems than the current standardized systems currently being used by customers, particularly in the Public segment. At the Q1 webcast, we mentioned that we need to act and conduct an exhaustive analysis of the company, including operating model and commercial execution, leaving no stones to ensure that we can restore growth and lift profitability. Late in the quarter, we completed this strategic review that confirmed NNIT's core strength, a strong position with Big Pharma, high customer loyalty and satisfaction and deep domain expertise. The review also made clear that to fully unlock this potential, we need to sharpen our commercial delivery and operating model. We're, therefore, redesigning how we organize what we take to market and how we sell it. We will share more detail as this work concludes. Therefore, we've kicked off a comprehensive transformation program that forms the foundation for our new strategic direction. Our aspiration is clear. We want NNIT to become an innovative and AI-enabled niche specialist serving the international life sciences industry and regulated industries in Denmark. As part of the program, we're already addressing near to midterm performance improvements whilst initiating the strategic direction and ambition for the company in the longer term. At a later stage, we will share more details about the transformation program and the updated strategy for NNIT. The transformation work is underway, and I'm confident that it puts us on the right path. Lastly, I'll just briefly highlight that we've maintained our full year financial outlook. We continue to expect to see further improvements to the revenue from the initiatives carried out and profitability gradually improving as part of revenue uplift and effectuated cost savings initiatives. Please turn to the next slide. In our Life Sciences regions, we see a somewhat fragmented picture. However, the revenue in the second quarter has contracted across the regions, which mainly can be attributed to the lower than usual order entry in the first quarter. Despite the revenue decline and lower profitability, the financial performance in Region Europe was as internally expected. In constant currency, revenue declined by 11.9%, impacted by the lower order entry in Q1 and continued customer hesitation amongst Tier 1 customers. Region Europe has continued to grow its lower-tier segments and we see further growth opportunities based on the current demand. During the quarter, we scaled up delivery on an AI engagement with a mid-tier global pharma client. More broadly, AI demand continues to build our AI services now feature in a significantly higher share of our bids than just a few quarters ago. The Regional EBIT declined compared to the same period last year, driven by the revenue decline. This was partly offset by the materialization of cost savings and capacity adjustments we've carried out. And our last webcast, we said that we expected Region U.S. to gradually improve through the coming quarters. Region U.S. revenue declined by 11.2% in Q2 on the back of a soft order entry in Q1. However, the quarter-over-quarter performance improved. Especially towards the end of the quarter, the sales activity increased where the U.S. won a number of contracts forming a growing backlog for the rest of the year and leading into next year. In Q1, we noted our participation in the U.S. National Drug Code program, the NDC-12 pilot program. The program has now advanced to its second phase, and we're seeing solid commercial traction with multiple contracts signed. While individual deal sizes remain modest, we see this as a meaningful growth opportunity as the NDC transition gathers pace from across the industry. One of the key highlights in Q2 was the Region U.S. return to strong profitability. The margin was 29.5% compared with 21.7% in the same quarter last year, and 2.9% in Q1 of this year. The uplift is driven by realization of initiated cost reductions and utilization improving. Furthermore, we've adjusted the capacity will also structurally lower the nonemployee driven costs. In the second quarter, Region Asia continued to be significantly impacted by a decline in revenue from an existing large Tier 1 customer that was not possible to offset from new contract signings. As a result, the constant currency growth was minus 10.6%. As we've mentioned previously, Region Asia has expanded its sales strategy to target local pharma and biotech companies. The Region has continued to execute on that strategy in Q2, bringing in more local market customers with more projects focusing on AI. After the quarter closed, we announced the divestment of Singapore. We want to channel our focus on the other Life Sciences areas, where we do see opportunities to grow, which also the strategic analysis concluded. The Region's EBIT margin declined year-over-year due to the lower revenue. And beyond cost savings, materializing and planned, Region Asia has continued to tighten its cost base and adjust capacity in areas with low demand. Please turn to the next slide, where I will go through Public Denmark and SCALES. The Public Denmark segment delivered strong growth of 10% in Q2, driven by ramping up on the projects won in late 2025. These contracts are with the Danish Health Data Authority, also known as Sundhedsdatastyrelsen with the Danish Agency for IT and Learning, also known as Styrelsen for It og Laering. During the latter part of the quarter, the tender activity has notably increased after the government was formed. After the launch of Lumina in late Q1, we've moved our AI framework into commercial application. We've deployed Lumina to selected customers in the public sector with promising initial results. Lumina is not only generating efficiency gains for NNIT in terms of project delivery, but making an impact for our customers that adopt Lumina as a service. Based on the initial use cases, we see further opportunities to apply alumina to bids around legacy system transformation where new customer solutions -- sorry, new customer solutions are in demand. All in all, we are pleased with the progress so far and expect our AI framework to be a central part of our services going forward. The Regional EBIT margin increased from 6.4% in Q2 last year to 10.4% in Q2 this year. The margin uplift is driven by leveraging revenue growth and from the actions taken during Q1 where we initiated further cost reductions and capacity adjustments. SCALES has continued its growth momentum into Q2, delivering constant currency growth of 10.9%. The growth has mainly been driven by existing customer engagements and partly from new customer projects. Q2 was also the first full quarter where the integration of the Microsoft service offering from the former region, Denmark was in operation. We do see solid synergies coming out of the integration and the stronger and more coherent offering towards our customers. The regional EBIT margin slightly declined compared with the same quarter last year, which was driven by increased user subcontractors due to internal capacity constraints, and newer projects carrying a lower margin than previously completed projects. Please turn to the next slide. Now I will hand over to Carsten for the next section. Carsten, please?

Thank you, Claus, and good morning. Please turn to Slide 9 for the key financial highlights. Starting with the top line. Reported group revenue was DKK 442 million, a decline in reported currency of 4.5% or 4.5% in constant currency. As Claus mentioned, this was in line with our initial expectations and reflects the lower order entry carried over from Q1 and continued Tier 1 customer caution in Life Sciences. The lower revenue development was partly offset by strong growth across Public segment and SCALES. Comparing quarter-over-quarter, we saw order entry pick up across all regions towards the end of the quarter, which gives us improved visibility going into the second half. On profitability, group EBIT excluding special items was DKK 21.3 million, corresponding to a margin of 4.8%. This was broadly stable compared with 5% same quarter last year. The earnings impact of the approximately DKK 21 million from the revenue shortfall was largely offset through efficiency gains, cost reduction initiatives and capacity adjustments. Special items in the quarter were DKK 18.5 million, down from DKK 20.3 million in Q2 last year. These relate primarily to restructuring costs as we continue to rightsize the organization. The average head count for the period was 1,533 full-time employees, down from 1,710 in the same period last year, reflecting the restructuring and capacity adjustments we have implemented over the past year. Free cash flow in Q2 was DKK 8 million compared with negative DKK 61 million in Q2 last year, a year-over-year improvement of DKK 69 million. The improvement was driven by stronger operating cash flow specifically through improved trade receivables collections, better customer payment timing and a net tax receipt. This was partly offset by lower trade payables and increased prepayments related to larger new transition projects. Turn to the next slide, please. Finally, turning to our full year financial outlook. We maintain our financial outlook for 2026 as communicated on the 7th of May. Constant currency revenue growth is expected to be single-digit negative for the full year. The improved order entry we saw towards the end of Q2 supports our confidence in a better revenue trajectory in the second half including the offsets from growth initiatives and further initiatives to come as part of the transformation. Group EBIT margin, excluding special items, is expected to be in the range of 4% to 7%. The sequential improvement from Q1 to Q2 confirms that our cost actions are materializing as planned, and we expect to sustain this trajectory through the second half. Special items are expected to be below last year's level of DKK 83 million. Year-to-date, we stand at DKK 27 million, which is well below the DKK 46 million at the same point last year. Special items for the remainder of the year will mostly be related to restructuring costs. Just to summarize, Q2 came in on plan, the cash flow trajectory has improved materially, and we are maintaining our full year guidance. Combined with the transformation program, Claus outlined, we believe we are taking the right steps to position NNIT for a return to sustainable, profitable growth. Please turn to the next slide. Now I will hand it back to Claus for closing remarks, Claus.

Thanks, Carsten. And let me wrap up with a few concluding remarks before we take your questions. First, on performance. Q2 came in on track Revenue declined as anticipated given the customer caution we've been experiencing, but the sequential trend improved from Q1 to Q2. And importantly, order entry picked up across all regions towards the end of the quarter. Furthermore, we saw improved operational performance with utilization increasing. The profitability was broadly stable compared with last year, reflecting the actions taken to reduce cost and adjusting capacity. We deployed our AI service offering to selected customers with promising initial results, both internally and with our customers. The offerings are making us more competitive, enabling us to bid on projects we previously would consider out of scope. A comprehensive review we completed this quarter confirmed both where we are strong and where we must improve. On that basis, we've launched the transformation program focused on our operating delivery and commercial model. This program lays the foundation for NNIT's future strategic direction, an AI-enabled niche specialists serving Life Sciences internationally and regulated industries in Denmark. We will share the full transformation road map and updated strategy in due course. We are maintaining our full year outlook as we have confidence in the trajectory we're seeing. This concludes the Q2 presentation today. With that, Carsten, and I are happy to answer your questions. Operator, please turn to the next slide and open for questions.

[Operator Instructions] Our first question comes from the line of Poul Jessen from Danske Bank.

I have a few ones, to start, emphasis on that you have improved your utilization, could you -- it's a little more where you see that because if I look at your gross margin, let's say, the last 6 quarters, then this quarter is still in the low end and you grow or cut is by 10% year-over-year and revenue down by 4%. So where is this improved efficiency or utilization seen in the numbers?

Yes, it's a question. Well, we do see increased utilization across several areas, as I mentioned. But what we are also focusing on as part of our strategy review is how we can improve our delivery excellence. That means how we can across the Life Science business, set up our delivery capacities to to deliver, you can say, higher profitability by ensuring a less fragmented structure on how we deliver to customers. This is something that we are now focusing on as part of the transformation. So this will, to a higher degree, lead into improved gross margin.

It's going forward than already seen...

It will be a key driver for improved profitability going forward. And if we look at some of the projects that we have been finalizing and working on throughout the first half of the year, having a lower margin has also commented specifically on SCALES We see the need for using more subcontract contractors to actually deliver on projects within SCALES as the growth, we're not able to be managed directly by internal resources. So these are some of the elements that is impacting the margin negatively. And if you look specifically at Asia, we have another revenue mix compared to last year where we have a larger proportion of hardware sales. So it is a range of different elements that are impacting the margin negative and pulling the effect of the higher utilization in the opposite direction.

Coming to the comment on SCALES with the external contracts. The growth in SCALES is more or less the same level for a long time, about 10%, 11% or so. What is then the reason for suddenly that you need to take external contractors in? It should be at a level where you could do ordinary planning scores for the increased activity.

Well, it has been needed because you can say we have some projects being in the same phase of the realization, meaning that the specific profiles required to deliver on the projects have been constrained. Of course, it is something that they are usually capable of managing, you can say, to ensure that we can deliver with internal resources. But this first half of the year, it has not been -- they've not been fully able to sort of balance this delivery to an extent that we could deliver fully on internal resources. That's why they have been required to put in external resources. But it's, of course, something that we are working to backfill internally and ensure that we get the recovery on the margins and return to previous profitability levels.

Two questions on strategy. You said that you would focus on Life Science and regulated industries in Denmark. You didn't talk much about this equation.

So, if we look at the focus from a transformation point of view, it is a tight focus on actually improving the Life Science business initially with the update on our product portfolio. So that has, you can say, a key focus. The second key focus is getting the delivery excellence in place as we commented on to really see the margin improvements by having a more optimal way of delivering our services. And then the third part is the entire operating model on how we actually, also from an enabling function structure, our support functions to deliver to the business in a more -- supportive business in a more optimal way. So this is what we consider having the largest potential to -- you can take it back to positive and sustainable growth with the current scale performance of growing double digit and having, you can say, best in market margins, we believe that we are on a good trajectory in SCALES, requiring less sort of strategic and transformation effort compared to the rest of the business. That's why in the communication that Life Science and Danish business is taking the main proportion of the lines in the communication.

So it's more because that SAES performs in line with history and what you expect that communication is on the other parts, which has come through?

Yes.

Then you sold off your Singapore assets? And what you still in China, China is still struggling a lot. Could we see that a consequence of the strategy would be that you would focus on Europe and the U.S. as there are plenty of business to go for?

Yes, if you look at our Chinese remaining business, it is a smaller proportion of the total NNIT. And from a transformation point of view, it's clear that the effort and the biggest impact will come from looking at Region Europe and Region U.S. So that's why it has our transformation program.

Next is Yiwei from SEB.

I'll do one at a time. You highlight the AI platform. Could you please elaborate a bit here on the -- what they are and the pricing model for the platforms? And what type of projects you are doing for your customer?

If you look at the sort of the 2 platforms that we specifically mentioned, so Lumina and Alira, then sort of Alira is targeting the Life Sciences segment, and it is a platform that enables sort of our customers to access and process large volumes of data in a validated -- fully validated environment. which means that together with our customers, we are able to deploy an array of use cases that will help them streamline their business or their Life Science operations in a fully validated manner. If we look at Lumina, Lumina is a sort of a platform that zooms in on accelerating software development and also supporting all the disciplines in and around software development. So with Lumina, we use the platform or kind of -- or allow customers to use it for things such as sort of legacy migration could be an example where you want to create a quick overview of your legacy applications. You want to generate documentations that may not have been created to the full extent over the past 25, sometimes 30 years in order to come up with a clear road map for how you can migrate out of a sort of an old custom legacy solution and into more sort of a modern technology. From a pricing perspective, sort of there are different approaches depending on how we sell it. One is, of course, that we factor it into sort of a project model where we go with a value-based price for the platform alongside the hours and materials that are being brought in. We are also looking into subscription-based models when it is offered more as a service. For Al, we are essentially approaching it in the same way where sort of a value-based price together with a CM-based project or as a subscription based model. There is no doubt that the whole sort of pricing of AI solutions and services is something that we are sort of spending a lot of time sort of both looking into and also sort of evolving to keep up with the market. But it is an area that continues to change, and I don't see we have seen -- I don't think we've seen sort of the final models yet. So this is something we do expect will continue to change as we move forward.