Siili Solutions Oyj (SIILI) Earnings Call Transcript & Summary

Welcome to Siili’s result info for the First Half of '25. My name is Tomi, and I'm the CEO of Siili. Today, we will go through the key highlights of the first half and, of course, the numbers as well. And I have here today with me our CFO, Aleksi, and he will tell you about the numbers later in this session. Today, we have a few topics on the agenda. So first, I will talk about the highlights of the first half. Then Aleksi will go through the numbers, and then we will look at a bit on how the future of Siili looks like. In addition to standard topics on the agenda, we announced today that we are planning to change our organization model, and we will update you on that as well. Before we get to the first half of this year, maybe a bit update on Siili as a company in case it's not familiar to all of you yet. So our services cover the whole value chain from exploration, data AI, development, and test automation to maintenance. Our key client sectors include services, industry, public, and finance, and our key markets at the moment, Finland, the U.S., the UK, and Germany. We also have four specialized Siili companies, Siili subsidiaries focusing on what they each can be best at. And our subsidiaries are Supercharge, which is focusing on innovative solutions, CD Auto, focusing on car, HMIs, VALA, focusing on quality assurance, and the integration group, focusing on integration. Our client base is diversified, and typically, we have very long-lasting client relationships. Mainly, we work with big and mid-sized organizations, either in the public sector or in the private sector. And more than 90% of our revenue is time and material-based. Our slogan is Make AI real, and that captures the essence of our strategy. We updated our strategy roughly a year ago. And then we took the AI in the very center of our strategy. And we are in the middle of transforming the company, focusing more and more on AI as well. So, these elements are the elements that have been there already quite some time. So nothing new on this. So the target client segments are the same as they have been the industries and the markets have been the same already quite some time. And of course, our values, we haven't made any changes to our values. And then a year ago, we updated our strategy and took the AI in a very center of our strategy or data and AI. And we identified for ourselves three key things in strategy. First, the community of top talent. And this is not a new thing that has been there already earlier. And our aim here is to become the best AI-driven community for humans. Then, the second significant growth in the data and AI business. And third, to be a pioneer in AI-powered digital development. Then, moving on to the changes that we announced earlier today and I will go through the key things that we announced today. First, we are planning to go through the change negotiations. So all this is in a planning mode at this point. So, no decisions have been made yet as we go through the change negotiation process. But the plan at the moment is to first of all, to simplify our structure. So we are moving to a simpler organizational structure, which is based on current competence communities and teams. Second, sales will be strengthened with more subject matter expertise, and we started this already earlier this year. We launched our advisory service, AI advisory service, which is exactly this, and we are recruiting all the time more and more principal consultants who have the subject matter expertise as their main competence area. Then the third point, planning to organize ourselves around the three different client need types, and I will explain later what we mean by this. And this is to better match the market and what different client needs there is. Also, we continue to adjust our competence profile to better match our strategy as well as the needs of the market. And all this, we are implementing through change negotiations. And within the change negotiations, the scope is roughly 250 people, and our current estimate or maximum current estimate of the reduction needs is 47, and we are expecting roughly EUR 4.1 million to EUR 4.5 million annual cost savings as a consequence of this process. And then if we put this a bit on the timeline line that is what we have done earlier and where we are now, and what are the next steps. So the timeline here starts a year ago, when we implemented or announced our new strategy and put the data and AI in the very center of that. And then after that, we have identified the strategic focus areas where we will be focusing and have been focusing earlier this year, we aligned our support functions to be better aligned with the market situation. Now we are aligning the technical competencies and structure with our strategy. So that's basically what we announced today. We are expecting to get this process implemented by mid-September, and we should be fully operational by the beginning of October this year. Then, if we look at what changes we are making from the strategy perspective, first of all, this is not a new slide. We've been showing this already, earlier. So our goal is to help our clients become AI leaders in their own industries. And as Siili, we support our clients on their own AI-powered journey and through, of course, all the steps on that journey. And how that reflects on the different client needs. So now in the picture, the green boxes that those are the needs, where typically the client is after a faster time to market. And typically, they buy competence and delivery capacity from us. And now that the AI is part of the equation, the process innovation in the development is something where we are very good at, and that's the kind of advisory the clients are asking from us regarding the development process. So that's the green boxes in the picture. And then the blue boxes there, the driver for client typically is new revenue streams, and their maturity level is typically lower. Then, as a consequence of that, then on the kind of areas of the blue boxes, they typically want to buy end-to-end solutions from us. And now with the new organization setup, we are matching these two different types of client requirements. Then the third typical requirement is the maintenance or running. So there, we run the services that we have built, and that's the continuous services we provide. And there, the driver for the client is typically reliability and efficiency. Then, if we look at this from the kind of organizational setup point of view, we are now organizing or planning to organize ourselves based on these three different client need types. Also, the way we sell is obviously different in each of these types. So the first, the creation, that's a working title now. But anyway, the creation part of the whole thing is value-driven. So their client is after the new revenue, new services, and typically, they buy it as an end-to-end solution. Then the second, the development that's more mature from the client perspective. And there, they typically buy the delivery capability from us. So in practice, teams and individual experts, in some cases. And the sales model is different in both of these cases. So, in the development is typically competence-driven. And then in this creation of solutions, it's typically a value-driven sales approach. And now we are organizing ourselves based on this project. Then the third element is the running, so the continuous services, and that's typically SLA, service level agreement driven. So this is after stability and efficiency in running the application landscape. Then, moving on to the highlights of the first half and the second quarter. First of all, we focused on or have been focusing on looking after our overall offering and kind of transforming ourselves more and more towards the data and AI. And yes, of course, it takes time because we have other services in our portfolio. Also, we launched the AI advisory service earlier this year, and that was one of the things taking us towards that direction. Another concrete step we acquired the integrations group earlier this year. And we are updating our competence profile to better support the strategy as well as the market demand. And of course, we are strengthening our data and AI expertise. For instance, roughly 400 cities have completed our AI development course during the first half of this year. Then, looking at the numbers, Aleksi will go through the numbers in more detail, but on a high level. So the first half, we made roughly EUR 57.5 million revenue, and our EBITDA was 4.5% and international revenue was a bit more than 26%. Then, looking at the second quarter, the same numbers. So, we made EUR 27.6 million revenue and roughly 4.7% EBITDA, and the international revenue was roughly 25%. Now I hand over to Aleksi, and he will go through the numbers in more detail. So Aleksi?

Thank you, Tomi. Let's take a quick review of our financials, mainly to revenue, profitability, and then a few key figures from our balance sheet. The picture on top here shows our first half, second half revenue from 2016 up to the end of the first half this year. During the first half, as already mentioned, our revenue was EUR 57.5 million and respectively, minus 2.8% compared to the first half of last year. From the picture below, you can see the quarterly revenue from quarter 1 2021, until quarter 2 this year. In the second quarter, the revenue drop was roughly minus 6% from the comparison period. In general, the market continues to challenge us, and we saw revenue decline in the second quarter across the group, however, mainly on the international side. Of course, the revenue decline was partly driven by a lower number of working days during the second quarter. Moving to the international revenue side. The first half was here more challenging than last year, with lower revenue by roughly minus 10% compared to last year. Overall, the revenue share was over 26% of total group revenue, so still exceeding 25% share of the group revenue. Our focus has been on securing Seal's profitability in the tougher market environment. First half adjusted EBITDA was EUR 2.6 million and adjusted EBITDA margin was 4.5%, as shown by the picture at the top. We initiated cost savings during the first half, and this clearly supported our profitability. Looking at the quarterly profit, the second quarter adjusted EBITDA was EUR 1.3 million and a 4.7% profitability margin. There was a decline from last year, roughly 1% point. However, we have an improvement in the profit margin level when we compare it to the quarter 3 and the end of last year on a quarterly basis. Looking ahead, we're determined and committed to continuing our strong efforts to improve our profitability towards our long-term financial target. Our capacity at the end of the first half was roughly 1,000 employees and subcontractors. We have adjusted our capacity, and the decline in headcount from the end of last year was primarily driven by the change negotiations carried out during the first half. Our focus remains on improving our operational efficiency while we maintain the recruitment activity in our core areas like data and AI competence. Finally, review to our balance sheet. We continue to retain a strong financial position and healthy balance sheet. Our equity ratio grew to almost 50% from 47% at the end of the first half last year. Our net debt ratio was close to 0 and in line with last year. So overall, Siili has a good financial position to move on with our strategy execution. And now over to Tomi, and going forward.

Thank you. Right. Now, if we have a look at how we are looking for the next steps for Siili. For the whole year, this is not a new slide. So our focus this year has been on 2 things: executing our strategy, meaning scaling up the AI and data, and AI; and second, to improve profitability. And this is our agenda for '25, and the actions that we announced earlier today are obviously in line with these 2 targets. So we aim to support better our execution and, of course, to improve our profitability as well. The guidance, just to recap on that. So our guidance for this year and no changes here. So guidance is revenue between EUR 108 million to EUR 120 million, and the adjusted EBITDA between EUR 4.7 million to EUR 7.7 million. And when we have given the guidance, our expectation then was that the macro demand environment remains unchanged compared to '24, and we do not see any changes or changes on that. So the market has been difficult. And as we see it also from now on, that we don't have any signs, at least not at the moment, that the market would pick up or become any easier than what it has been. The AI, of course, the implementation speed of AI, it's obviously a relevant question for us, of course, as well. That was all we had today. And now we are happy to answer any questions you may have.

Right, and as previously, you can send your questions via Teams Q&A link, and we already have quite many questions here. I think there are several questions covering AI and its impact on efficiency. Maybe we can start with that one. So the question is, if I read it, how much the use of AI has improved the productivity of your own workers? And are you seeing such a productivity leap creating more overcapacity to the market, i.e., the amount of available hours growing more than the actual demand? And there are other questions about the AI efficiency impact.

Yes. So the main hour, not just hour, but the business logic and the invoicing logic in this industry has been mainly time-based, so hourly based, and that hasn't changed. So then, how we gain the productivity or the productivity gains we get, is basically that we split the gains between ourselves and our clients. And then it depends on that when we do fixed price projects, then of course, it's easier for us to benefit from the productivity gains brought by AI. And it also varies quite a lot, for instance, we still have clients who are not willing to use AI. So that's a limitation itself. Then we have clients who are willing to use it, but on a very limited scale. So we are not in a full scale or anywhere near a full scale at the moment. So it's more still not experimenting anymore, that it used to be a proof of concept and now it's a real life, but still the scale is, let's say, rather small, and it's not that straightforward that we can say that, hey, the productivity has increased this and that much because then it goes back to the invoicing logic. And then, traditionally, this industry has been based on time-based invoicing, and it takes time to change.

Right. Then we can see a few questions about the pricing. Maybe we take that one. Any comments on the customer price levels if you compare to the front book versus the back book? Have the prices in public tenders continue to slide?

Yes. The prices have dropped. That's not a surprise or secret that they continue to drop. No, I wouldn't say so. At least we see that, yes, the environment is tough, but that it would have been getting worse, or we would see that it would still get worse. We don't see such development. So in the market perspective, and that, of course, reflects the prices as well, now I would say it's rather stable. But like I said, no kind of significant signs that it would improve. And like I said, we have been prepared for this already since the year started. So when the year started, we did not expect that the market would get any better this year. That has basically been how the market has developed. So it's not a kind of surprise to us. But of course, it's something that we have to step-by-step adapt ourselves to.

Right. Then, the decline in International business in the second quarter was steep. What was driving this? Any commentary on Sei Auto versus Supercharge?

Yes. Yes, that's true that if I look at the kind of history in a bit longer term, our international revenue has typically been stronger than the revenue development outside Finland has been typically stronger than in Finland. And now it's not the case in the second quarter, and that's well pointed out or picked. And regarding the international business, we basically have 2 kinds of elements there. The City Auto, which is purely focusing on automotive, and then Supercharge, and the situation in automotive is difficult.  The tariff discussion, for instance, goes left and right every week, and that has created uncertainty in the market. And that, of course, reflects the demand simply because of the uncertainty. And that you can see in our numbers as well. Supercharge, yes, we have challenges there as well, but automotive is the main driver of the challenges outside Finland at the moment.

Continuing from here, actually going to the global trade tensions. I think you already partly answered that, but are you seeing the global trade tensions having a direct impact on the customers' decision-making, especially in International business?

Yes. Yes, we can see that. So it doesn't impact us directly, but indirectly because, let's say, the bigger and the more international the client, then, of course, it's pretty obvious that the uncertainty is there, and that reflects on their buying behavior.

At least not helping or supporting the market on that side. Not helping.