NNIT A/S (NNIT) Earnings Call Transcript

Hello, and welcome to this NNIT Q1 presentation for 2024. [Operator Instructions] This call is being recorded. I'll now hand the call over to the speakers. Please begin.

Thank you, operator, and good afternoon, everybody, and thank you for joining this webcast. My name is Par Fors, and I'm the CEO of NNIT. And with me today, I have our CFO, Carsten Ringius. And together, we will present our results for the first quarter, which we released this morning. Please turn to Slide 2. I will walk through the key business highlights, including the regional performances. After that part, Carsten will go through the group results, including our financial outlook for the full year. Please pay attention to the disclaimer. Let's turn to Slide #3. Last year, we initiated our new strategy called the new beginning after the divestment of our Infrastructure business. During the first quarter of the year, we have showed good strategic progress as we are becoming a more focused company. We are dialing in because we are to become more commercially savvy, meaning building a stronger commercial mindset across the organization post the divestment. We are also in the final stage of the IT separation from Aeven, which is a step change for NNIT. What also proved that we are on the right track is the business performance. We are growing our total business and taking market shares in key regions such as Denmark and Europe, and we are expanding within the public space and the life sciences area. We have continued to build on our strong relationship with customers and also improved our customer satisfaction where we are sitting on a 4.6 on a scale to 5. Last year, we were at 4.3. Another important metric where we have improved is attrition. We are currently trading at 14% attrition rate, which also improved the resilience of our organization. We can see that we are in a better place now compared with a year ago. That does not mean that everything is perfect, but we are definitely heading in the right direction. We are also in the middle of a simplification of the backbone of NNIT to become a more efficient company. Carsten will go through those details later. All in all, we strongly believe that we have progressed well, and we're doing the right things to support the long-term ambitions of the company. Please turn to Slide 4. On an overall level, the first quarter result ended as planned. We have managed to grow the business despite the headwind from the macroeconomic situation in Europe and Asia and including the timing of Easter. Total revenue growth was 12.2% compared with last year with revenue ending at DKK 463 million. This is actually the highest quarter revenue recorded for NNIT since the divestment and compared with the restated figures back to 2022. Organic growth was 80%, driven by Region Denmark and Europe and partly offset by the slow start of the year in the Region U.S. and the deterioration of the business in Region Asia. I'll go into more details on the following slides. Group operating profit, excluding special items, increased by around DKK 4 million compared with last year, where margin was 5.2%. Carsten will give you a more detailed view on the profitability development in later on in the presentation. Lastly, we have maintained our full year outlook as the first quarter performance was in line with our plan and because we have a solid backlog and pipeline for the rest of the year. Please turn to Slide 5 for the regional performance. During the first quarter, Region Europe managed to grow as expected to DKK 126 million. This translates to organic growth of 12.2%. We're happy with the growth as Region Europe has somewhat been negatively impacted by the macroeconomic challenges across many European countries and the timing of Easter and a challenging start of the year for our data migration business, which we call migration powerhouse. The growth is primarily driven by our ability to expand our engagement with existing customers. Even though we saw a solid organic growth, profitability was slightly below last year's level, ending at 1.3%. Our strategic choice in Region Europe is to win in life science, shows promising signs due to the growth, but profitability has been lacking. Besides the timing of Easter, we have people with low billable utilization rate than normally. We have kept our people as our order entry has progressed, and we do see further work ahead to drive the utilization up without increasing our manning. We are also continuously scrutinizing the cost base as we need to obtain more leverage on our regional overhead costs to unlock the profitability potential. We expect to see gradual improvement in the profit margin throughout the year. Please turn to the next slide concerning Region U.S. performance. Despite that we have observed improved performance month by month in Region U.S., the year has started slow with a negative organic growth of 5.5%. As our other business areas delivered improved performance across 2 out of 3 areas. The main reason for the decline is due to the temporary large decline in the data migration business, it significantly suffered due to delayed or postponed projects. These challenges in the data migration business are seen to be temporary and resulting from changing in the customers' approach to data migration efforts and tools. This has enabled a diversification and slight recalibration of NNIT's offering. We were somewhat aware of that as a backlog and pipeline was soft coming into the year. And now we're seeing a change to the rest of the year as more Veeva-related projects are returning to our business. The overall backlog and pipeline of Region U.S. looks solid and promising for the rest of the year. We have managed to reduce our cost base mainly by lowering the number of subcontractors. And together with the tight cost control, we almost managed to make up for the revenue decline in the data migration business on the bottom line. However, margin ended at 6.3% compared with 7.2% last year. Please turn to the next slide. And that covers region Asia. The quarter performance in region Asia was weaker than we initially planned for. The business declined 12% organically, largely due to macroeconomic challenges in China. We have experienced low demand for [ corner ] support and hesitance from our customer to expand existing agreements. Besides the action we took during the end of last year, we have now taken further mitigation actions to improve and rightsize the business to cater for the current market demand. We have reduced our workforce, mainly billable employees by more than 40 people and cut other SG&A-related costs dramatically to improve profitability. There will be a positive effect on profitability during Q2, but the effect for our action is expected in the second half of the year. Please turn to Slide 8 for an update on the performance of Region Denmark. The revenue Region Denmark grew by 29%, ending at DKK 212 million despite the timing of Easter. The growth was driven by all business areas, including our group company SCALES, especially the public business continued its good momentum from last year and now accounts for around 30% of the business in Region Denmark. The organic growth was 18% if we exclude the revenue generated towards Aeven. The good development in the organic growth is a testament to a strategic direction for Region Denmark with winning public being a key piece. The region's operating profit grew from DKK 17 million in Q1 '23 to DKK 22 million in this quarter due to top line improvement and the focus on the cost base. Even though the profit increased, we also have a material amount of billable employees being dedicated to internal projects such as IT separation from Aeven. This has, of course, resulted in less leverage on the cost base compared to under normal circumstances. All in all, we see further opportunities to increase profitability through improvement in billable utilization and the sourcing mix. Please turn to the next slide. This concludes my part of the presentation, and I will now hand over to Carsten for the group financial performance, comments on how we are improving our business and the financial outlook. Carsten, please?

Thank you, Par. Please turn to the next slide. Our overall financial performance is in line with our plan. For the first quarter, the group revenue ended at DKK 463 million in [ selling a ] total revenue growth of 12.2% compared with same quarter last year. The revenue grew organically by 8%, and the main difference to local revenue growth is mainly due to the sales towards Aeven, assets being booked as inorganic, foreign exchange had a minor negative effect of 0.3 percentage points. The growth has comprised us of bringing in new customers and especially expanding our existing engagement despite of a challenging macroeconomic environment and timing of Easter. The group operating profit, excluding special items, increased from DKK 20 million to DKK 24 million, which is partly driven by the increase in sales and a continued strong focus on cost and utilization. We continue to follow our plan of reducing costs across the business and streamlining ways of working to become more efficient in an IT. As an effect, the margin increased from 4.8% to 5.2% during the quarter. As Par mentioned, we have taken further actions to improve profitability for the rest of the year with the most drastic measures taken in region Asia. Please turn to Slide 11. We expect stepwise improvement to the business to drive profitable growth. As Par mentioned, we are upgrading the backbone of NNIT of larger things, I want to highlight that we're in the final stage of implementing our new ERP platform and our new HR system. These systems are high importance for NNIT to enable future growth, deliver synergies and drive efficiency across the company. The new operating model we launched in connection with the infrastructure divestment is fully up and running. We are seeing the benefits of it, meaning we are closer to our customers, and we have achieved better transparency how the company progresses, which is leading the enhanced performance management. We will, of course, continue to refine and improve the way we work, but we have taken a step change during the last year. I also want to highlight that we are relocating offices, we moved into new offices in China. And this summer, we will move offices in Czech and Copenhagen. This will both reduce our facility costs, but also support our ambition of being the employer of choice. All of these 3 things I've mentioned are part of us delivering on our vision for 2026. These levers will support our way of working to become more efficient and increase profitability down the line. Please turn to the next slide about the financial outlook. We have maintained our full year outlook for 2024, meaning around 10% organic revenue growth. The group operating profit margin, excluding special items, between 8% and 9%. We are well aware of the performance for the rest of the year implies an acceleration in both organic growth and profit margin. The first quarter performance ended in line with plan, the solid backlog and pipeline we are looking into for the rest of the year and the seasonality of our business, we remain confident in our outlook. Please turn to the next slide. Before we head into the Q&A, we will conclude the presentation with some closing remarks. Please turn to Slide 13. During the first 3 months of the year, we have continued to progress well on our new beginning strategy. We are doing a range of good things to improve the business and the backbone of NNIT to set up ourselves for future profitable growth. On an overall level, the Q1 performance ended as planned. On one hand, we saw strong performance coming out of Region Denmark and on the other hand, a deterioration of our Region Asia business. The scattered performance across regions has led to actions taken to improve profitability by reducing costs and optimizing billable utilization. Lastly, we remain confident on our outlook due to all of the improvements we are seeing within the business and due to the solid backlog and pipeline. Therefore, we have maintained a full year outlook. This concludes the presentation for today. Thank you for joining the call. Now we will open the line and take your questions. Operator, please turn to the next slide and open for questions.

[Operator Instructions] We have a question from Poul Jessen from Danske Bank.

I have a few questions. The European margins, there has been some quite volatility in that one in the recent quarters. Can you give a little more flavor on the gross margin performance, if you look at it being going from 22% and then to 30% and 31% and now you're down at 23%. Is that Easter impact? Or what is impacting the gross margin here?

Yes, we have several sort of explanations for the development in the gross margin. Firstly, we have our migration powerhouse, which has not really been performing as expected. We have seen some reduced pipeline for that business now materializing in a lower gross margin, both in actually Europe and in U.S. as well. Of course, the Easter has an effect, as you also hint that. And then thirdly, we see that with the growth that we have seen in top line, we see though these growth areas materialize in slightly different areas, if you compare with our capacity, meaning that we have a mix effect. So in some areas where we have a higher capacity, we have seen less activity. So it is also a matter about different sort of utilization levels across the different areas in our business in Europe.

And added to that, if you take the market, Poul, you can say that there is a kind of split market in Europe because our Europe includes, of course, the Danish business and also the Life Sciences business in the rest of Europe. And I mean Denmark is a big exception where, of course, on known reason, there's a very high demand in the market, not the leads from Novo, but also some other clients, while outside Denmark, there is, in general, a much more hesitant market climate and some more macroeconomic headwind. And then on top of that, once again, we had the more specific challenges within our data migration business, which has not that much to do maybe with the macroeconomic situation is more structural challenges.

And how should we then look at the growth in Europe, we think we move another Danish is the 13% growth been sustainable? Or is that -- are you impacted short term by some very high activity to that will level off?

No, we expect the growth to be sustainable and what we will do is, of course, balance our capacity to match the pipeline. So we should also look into increasing our profitability.

And the same more or less comes for the Danish market, where you have -- if we include the Aeven part 29% growth, and you had a very strong 23% as well, should we expect in the coming quarters that the growth levels in Denmark will come down?