Netcompany Group As Adr

Welcome to Netcompany's interim report for the first six months of 2024. For the first part of this call, all participants are in a listen-only mode. Afterwards, there will be a question and answer session. To ask a question, please press 5 star on your telephone keypad. 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 Andrei Rogachevsky and I'm the CEO and co-founder of NetCompany and I'm joined today by our CFO, Thomas Johansen. And before we get going, there are some important disclosures that I need you to read through. So could we please have slide number two? 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 number three, 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 2024. And once I'm done, Thomas will go through the numbers in greater detail 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 the company Intrasoft and the Netherlands. The timing of Easter impacted revenue growth positively around three 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 six 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 2024, we have won several new contracts, of which I'm 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 Intersoft Resources. NET Company Denmark has signed a number of new contracts in the public segment, and I will mention some of them here. We have signed two new contracts under a framework agreement with the Danish Business Authority at a combined value of up to 1.1 billion Danish. Furthermore, NET Company Denmark has signed a contract with the Danish Business Authority to deliver and maintain solutions for annual reports and financial accounting. And as previously communicated, NEN Company has won a significant contract in the UK under the Dallas Lot 2A Framework Agreement. The contract has a duration of up to five years and an estimated value of £120 million. Revenue from this contract is expected from the second half of 2024 and going onwards. In the Danish private segment, NetCompany has been selected as strategic partner for the modernization of Energifyn's application landscape. And can we have slide number six, 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 two-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 Aramis customs product. And furthermore, Netcompany Intrasoft has entered a three-year maintenance agreement with the largest social security organization in Greece, the EFCA. In the private segment in Greece, NET Company Intrasoft has signed a framework agreement with the National Bank of Greece to provide design and maintenance services. And Vodafone Greece has selected NET Company Intrasoft for a project to provide design, implementation, support and maintenance services for all applications supporting Vodafone fixed telecommunications 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 Intersoft 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 number eight, please? For the first six 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 500 million Danish to at least 700 million Danish. Furthermore, we reiterate our mid-term targets to be achieved by 26, with a revenue target of at least 8.5 billion Danish and an adjusted EBITDA margin of at least 20%. We also reiterate our commitment to redistribute at least 2 billion of cash Danish to shareholders, mainly as share buyback. And in that aspect, we initiate a new share buyback program of 150 million Danish 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, André. And like already mentioned, I'm the CFO in Net Company, and I will now go more into details with the financial performance for Q2 2024. So if we move past the breaking slide nine and straight into slide number ten 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 Netcom and Intrasoft and the Netherlands. Revenue in Denmark increased 14%, driven by an increase of 15.9% in the public segment and an increase of 11% in the private segment. The improvement in both segments was driven by increased utilization and also by three more working days in the quarter due to the timing of Easter. For the first six months of 2024, revenue in Denmark grew 6.6%. The net company Intersoft 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 UK, revenue declined 16% compared to the same period last year. The decline was a result of a slower than expected ramp up under the Dallas 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 15 million Danish lower license revenue in the quarter. In Denmark, gross profit margin increased 4.7%. The improvement was driven by better utilization and three 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% compared to Q1 2024, despite one working day less in Q2 2024, underpinning the improvement in utilization in the Danish business unit. Margin in net company Intersoft declined by 0.8 percentage point, negatively impacted by lower license revenue in the quarter. In the UK, 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% 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. Can we have the next slide, please? Adjusted EBITDA margin before allocated cost from HQ increased 3.4% to 17.3% in Q2, and for the first six months of 2024 the margin increased 1.7% to 17%. In Denmark, margin increased 6.1% to 24.1% in Q2 2024 compared to Q2 last year. The increase was driven by additional working days and better utilization, supported by a flattish absolute administrative cost compared to last year. Margin in the net company Intersoft decreased 0.6% due to the different revenue mix as already mentioned. In the UK, margins decreased by 7.2% to 3.8%, mainly driven by a lower gross profit margin. In Norway, margin improved 6.3% 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. Can we have the next slide, please? Work in progress decreased by 14.3% to 847.2 million Danish 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 2.17 billion Danish, whereas revenue for the last 12 months increased by 6.6%. Can we have the next slide, please? Free cash flow was 148.2 million Danish in Q2 2024 compared to negative 72.5 million Danish 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 working 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. Trade receivables as of 30 June paid in the following month amounted to 703.7 million Danish in July compared to 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 1.5 times in Q2 2024 compared to 1.4 in Q2 2023. Can we have the next slide, please? Revenue visibility improved 6.7% to 5.8 billion Danish, of which contractually committed revenue amounted to 2.4 billion Danish and non-contractually committed engagements amounted to 157 million Danish. 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 and 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.

Thank you. If you do wish to ask a question, please press 5-star on your telephone keypad. To withdraw your question again, you may do so by pressing 5-star again. We'll have a brief pause while questions are being registered. The first question is from Yiwei Zhou from SED. Please go ahead. Your line will now be unmuted.

Hi, Andrew Thomas. Thank you for taking my questions. I have a few questions, but I'll keep waiting for three. Firstly, I realized that the decay attrition rate was 24%, and it seems that it is quite high over the last three months. If I remember correctly, you have done the restructuring already late last year. Could you maybe elaborate a bit here? And in relation to that, could you also confirm that there were CO2 costs of the service? There was not a lot of service payments included in Denmark.

Thank you for that. It's difficult to hear the question clearly. I don't know whether you are on a line which is not going through, but we'll try to answer what we think you asked. The question was related to the three-month rolling churn in Denmark, which was 24% for the last three months. The question was the reason for that. 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. Thank you so much. And my next question is for the UK probability. And you mentioned in the slide that there was a negative impact from contracts being discontinued due to price setting. Could you maybe elaborate on this?

I think from Q2 in the UK way, 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 there was in the private segment or public segment or

A little bit of both.

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

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 there's 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. 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.

Yeah, 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 one to two years effect on what we do of tender work in Denmark.

Okay, thank you. I'll jump back to the queue.

And next up, we have Alistair Putarabu from Bank of America. Please go ahead. Your line will now be unmuted.

Hey, this is Alistair from Bank of America. Thanks for taking my question. A couple from me. Firstly, could you just talk about... The UK, 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 year, which indicates the level of confidence on the free cash flow generation. But given the dynamics around free to fee bills, how do you think about that for the rest of the year? um and then finally if you also just give an update on the ramp up of the avenue contract in the in norway and when that should start to come through yeah

Thank you for your questions. When it comes to the Dallas 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 2025. To be absolutely exact on what will start exactly which month and when is very difficult to say, but we had a 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 six, seven months, and... the receiving organization is much more able to start work up with us. However, you know, 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 them, you know, 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. We don't really guide on free cash flow, as you are well aware of, but given the strong performance on cash flow for the first six 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 500 million Danish to at least 700 million Danish. And in that aspect, we've initiated a third tranche of a share buyback program to run in Q3 of 150 million Danish.

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. Is there anything to think about there in the second half? Any reason why the sliver of growth may not continue given the contractions you've seen?

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

Well said. Thank you.

The next question is from Claus Elmar. Nordea, please go ahead. Your line will now be unmuted.

So the first question is about adding people in Norway and the UK. So how is that progressing? That would be the first one.

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

That I would assume, would say, 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.

Overall, that goes for both Norway and the UK. We see over the last one to two 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 UK and Norway. Norway is definitely... from a delivery point of view in a much better shape than it was two or three years ago. In the UK, we see more and more of our deliveries being delivered with a combination of half-experienced UK people, new UK 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 UK 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 the second half this year? And maybe to put some comments on the main markets, you know, Denmark, Intrasoft, UK.

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 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 two 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 NET Company.

That sounds good. So that was also my side. But congratulations with the strong Q2 performance.

Thanks, Lars.

Before we take the next question, let me just remind you that if you have a question, please press five star on your telephone keypad. Up next, we have Matt Crisco from Carnegie Investment Bank. Please go ahead. Your line will now be unmuted.

Yes, thank you for taking my questions. 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 two years, is a result of prolonged decision-making in the Danish public sector? Is that a fair assumption?

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. Thank you for that, Thomas. And then I have a question on coming back to Intrashaft. I think this is the first quarter where you have... negative growth in the number of client-facing employees on a quarter-by-quarter basis. So, does that reflect the expectations for company growth in Intersoft, or how should we view it?

Not necessarily, Mads. You can also view it as an 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 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 the 2026 ambitions. So obviously, assuming the midpoint of a full year guidance, it assumes that you deliver a revenue tag of 13.5% over the next two years of the 2025 and 2026 to end above 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 a 13.5% revenue pack over the next two 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 7-12%, for Intersoft 5-10%, for the UK 10-30%, for Norway and for Netherlands 20-30%. And that's average in those areas. So on top of that, we will also 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 five regions. And that's all we can say for now, Mads, in terms of how we get to the 8.5.

Okay, that's fine. Thank you.

The next question here is also Raoul from Barclays. Please go ahead. Your line will now be unmuted.

Hi, Andre and Thomas. Congratulations on this from TEF Q2 results. Three questions from my side. First is just on the guidance where you quite explicitly talk to license revenues being more H2 loaded. So there seems to be quite 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...

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, So 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.

Then the second is just on the UK and specifically on the margin expectations for the Dallas framework. I think in the aid memoir there was a bit of detail on the accounting treatment for subcontractors and how that might impact the margin. So I was just wondering sort of on a headline margin basis, do you expect the Dallas contractor to be margin dilutive because of this 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 Dallas contract, including the pass-through on SOPs, will be margin dilutive to the UK business.

Okay, that's encouraging and good to hear. And one last slightly tricky one, just on the related party transactions. I noted that revenue from smarter airports has increased for the first time in like seven or eight quarters before that it was decreasing year on year. I was just wondering what the sort of reasoning behind that quite substantial Arctic 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 years or is it a bit too early?

Sure. So the revenue related to SmartAirport, and you're right that it's the first time it's there, is related to work that the NET company has done to SmartAirport. But it is now done on the application and to SmartAirport after the development of AirHard. 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 Smart Airport, is fully developed. And then whenever we work for Smart Airport, that now goes to revenue as in normal client relationships. So that's the technical explanation for that. We do expect the result from both Smart 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 SmartAirport and in Fistina Finance. So that is following the plans that we have made with those two companies already. So sometime during 2025, we'll start to see some positive on a quarterly basis, but most likely not for the full year of 2025, but then onwards from there.

Okay, fantastic. Very helpful. Thanks very much.

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

Well, thank you all and have a great day.

Thank you.