N
NNIT A/S
CSE:NNIT
NNIT A/S
CSE:NNIT
Price:
111.2 DKK
-0.36%
Market Closed
Updated:
May 13, 2024
Section:
Earnings Call Analysis
Summary
Q2-2023
Q2-2023
Company Aims for 15% Revenue Growth, 6% Profit Margin
The company anticipates a revenue increase of approximately 15% for 2023, provided that key currencies remain stable. This optimism is buoyed by the expectation of a rise in activity levels and ongoing vigilance on cost management. Operating profit margins, excluding special items, are targeted to hit around 6%. Growth seems likely to be driven by the robust performance of custom application management and production segments. However, the company projects that special items will incur around SEK 70 million in costs for the year.
You don't have any saved screeners yet
Hello, everyone, and welcome to the NNIT Q2 2023 Results Conference Call. My name is Harry, and I'll be coordinating your call today. [Operator Instructions]
It's now my pleasure to hand you over to NNIT's CEO, Par Fors to begin. Par, please go ahead.
Thank you very much, Harry, for the introduction. And also, thank you for joining our call today about NNIT's results for the second quarter of 2023 and the performance of our newly introduced regions. My name is Par Fors, and I'm the CEO of NNIT, and I'm joined by our CFO, Carsten Ringius, and we both look forward to covering the highlights of the quarter and our recently upgraded 2023 guidance. We will take your questions after the presentation. Let us turn to Slide 2 and a brief overview of the key figures for the quarter. We were really pleased to maintain the momentum from the beginning of the year and to generate a solid revenue growth of 15% and an organic growth of 11% in the second quarter of 2023. This positive trend is important as it underlines the strength and focus of our offering and people in the transition phase characterized by the divestment of our infrastructure business and the launch of our new strategy.
Group revenue was DKK 424 million in the quarter on the back of an overall high activity level and an improved capacity utilization in Denmark and the U.S. in particular. The strong business performance resulted in a significant improvement of our earnings with an operating profit of DKK 25 million before special items. Profitability increased substantially to 5.9% after a good first quarter and again, a tough Q2 last year. Special items amounts to DKK 30 million in the quarter and are mainly related to M&A earn-out payments following a decision by the Danish Business Authority concerning accounting treatment, which we have appealed. The second quarter and half year performance came up better than initially expected, and we, therefore, upgraded our 2023 guidance last week. We maintain our focus on strategy execution to continue on this positive track in the coming periods. Please turn to Slide 3 and a brief introduction to the new regional and financial reporting structure. To support execution of our new strategy, we have introduced a new organizational setup structured around 4 regions of Denmark, Europe, Asia and the U.S. assisted by our corporate function and the global delivery and support functions in the Philippines and the Czech Republic.
We have introduced a new organizational structure to be close to our customers and follow them as they expand globally while ensuring a high level of coordination between our regional units. The new setup also introduces increased autonomy and P&L responsibility in each of the regions with an unchanged focus on the high complexity areas where we have deep subject matter expertise and a strong competitive edge. We wanted to reflect the new organization structure in our financial reporting as well and also introduced a new disclosure level to align internal and external reporting to increase transparency for each of the regions going forward.
Let us now take a look at the Q2 performance of each region. Please turn to Slide 5 -- Slide 4, sorry. And please go ahead, Carsten.
Thank you, Par. The Danish business is well positioned to serve central government bodies and publicly owned companies operating in a relatively recession-proof space. The expertise and experience of our 500 people working with critical processes in life science and the public arena can also be applied in other privately owned companies operating in complex environments. Life science customers in Denmark are served by region Europe. We delivered strong growth of 22% in the Danish business in the second quarter based on work performance for the Danish National Bank and projects with the Association of Danish pharmacies, Ara Energy and Nordisk. The good performance with these accounts was supplemented by really strong progress in SCALES Group which grew revenue by 30% in the quarter and signed a new contract with [indiscernible].
Towards the end of June, we announced that the Danish Agency for Higher Education and Science choose to withdraw from the development of a new student grants and loan systems after the end of the clarification phase. We expect a retender for this project later this year and are confident that we will remain well positioned to take on this assignment in its new shape. The high activity and utilization level drove solid revenue growth and resulted in strong earnings growth. For Q2, we lift the group operating profit from DKK 1 million to DKK 18 million, corresponding to a profit margin of 10.9 this quarter. We are very pleased with the business and financial performance in Denmark in Q2 and a positive market outlook. On that note, we are proud that we also won solid expansions of our engagements with the National Bank [indiscernible] as well as to Microsoft Partner of the Year Awards during the quarter.
Now please turn to Slide 5 and a few comments on the development in Europe. Our European business is well established and serves customers in the life science industry across all parts of the value chain. We have offices in 9 European countries and around 400 skilled employees in this business unit. In the second quarter, we reported stable revenue in our European markets impacted by uncertainty and volatile macroeconomic developments. This slowed down our customers' overall investment decision-making, resulting in delayed project kickoffs as well as execution. Despite the temporary slowdown, we maintained a solid gross profit margin and managed to continue improving the business unit's group operating profit reaching a breakeven level in Q2.
As we seek to improve performance, we will continue to drive efficiency initiatives in the coming period. We're also pleased that the Europe region secured important extensions and expansion of several long-term customer engagements in life sciences and continue to grow the Manufacturing Solutions business. The outlook is positive in the Europe region, and we are committed to ensuring further progress.
Please turn to Slide 6. In the U.S., we have built a highly specialized consulting business with deep life science expertise and particularly strong positions in R&D and quality management as well as a growing presence in production. Our 160 employees work from our offices in the New Jersey area. Business was good in the second quarter as we posted revenue growth of 36% in the U.S. region, driven by extensions of contracts, expansion of our current customer relationships as well as the onboarding of new customers.
The U.S.-based group company, Excellis Health Solutions contributed very positively to the growth. We lifted the gross margin quite significantly based on the revenue growth in the quarter and improved the group operating profit from the U.S. business to DKK 14 million, corresponding to a very satisfactory profit margin of $13.6 million. The positive development was driven by a high utilization and a strict focus on cost. The U.S. market is expected to see strong growth in the coming years, and we have a good and strong pipeline and bright prospects for continued success going forward.
Let us continue with Slide 7 and the Asia region. Our Asian business is focused on life sciences with a particular emphasis on manufacturing and supply chain, quality management and commercial solutions. We have around 300 people employed at 2 offices in China and an office in Singapore. Region Asia saw a slight decline in revenue as a consequence of our decision to move support functions from China to the Philippines and recalibrating our setup in China, which was also impacted by a very challenging macroeconomic developments and now low investment appetite among new customers.
Our office in Singapore accounts for around 20% of revenue in the region and generated strong progress on the back of new engagements and expansion of existing contracts. The regions group operating result fell to a loss of DKK 7 million, which is, of course, not satisfactory, due to the macroeconomic uncertainty in China, we are reducing cost adjusting the workforce and sharpening our efforts to optimize utilization with a view to improve our profitability in Q4 this year.
Please turn to Slide 8 and a brief review of the group financials. We grew consolidated revenue by 15% and to DKK 424 million and delivered organic growth of 11% in Q2, driven by the positive developments in the U.S. and Danish regions. Gross profit improved substantially to DKK 117 million from DKK 94 million in Q2 '22. And the gross profit margin improved to 27.6% in the quarter. The combination of strong revenue growth, improved utilization and cost reductions lifted the Q2 operating profit significantly to DKK 25 million before special items. This also means that we delivered a profit margin of 5.9% in the quarter against a negative margin in the comparison period.
Special items amounted to DKK 30 million in the quarter and DKK 44 million in the half year mainly compromised or comprised of costs related to earn-out payments in connection with acquisitions. For the half year, we grew revenue by 16% to DKK 837 million and generated operating profit of DKK 45 million against a loss of DKK 34 million in the first half of 2022. We are very pleased with the strong traction, and we will work hard to build on the progress made.
Please turn to Slide 9 for a few comments by Par on the 2023 outlook.
Thank you, Carsten. As mentioned, we are pleased with the positive developments in Q2 and the first half of the year. This was also the background for our upgrade of our '23 outlook last week, and we are now aiming for higher growth and profitability as we leverage a sharpened focus on our core competencies in life sciences and public spaces.
Revenue growth is expected around 15%, assuming stable key currencies as we have set our eyes on an operating profit margins before special items around 6% in 2023, as we expect to benefit from a higher activity level and maintain our focus on costs. The positive trajectory within custom application management and production is still expected to contribute to the progress in the financial year and going forward. Special items are still expected to amount to around SEK 70 million in 2023. And most of these costs will be related to earn-out payments in connection with completed acquisitions. Please note that we have appealed the Danish Business Authority's decision concerning these earn-out payments.
We will continue the effort to build a stronger NNIT and deliver profitable growth in the coming years, and we look forward to sharing more information about each of our regions and the plans for the future at our Capital Markets Day on the 18th of September.
Thank you very much for listening in. We look forward to taking your questions. Next slide, please.
[Operator Instructions] First question of today is from the line of Poul Jessen of Danske Bank.
I think first question now that you've come up with a new reporting structure and that the margins in particular have changed very much versus earlier reporting, I think, especially on the gross margin, which including stranded cost is up from 10% to 28% on full year last year. I think is it possible for you to give some flavor on what's in the different cost lines now? And what's been taken out of the production cost to make that margin impact?
Yes, definitely. We can do that. The old reporting setup or the previous reporting setup at a contribution of back office functions, IT, facility cost, et cetera, going into the production cost labeled as allocated production cost. This has now been made more transparent in the new financial operating model, where we are primarily focusing on having the actual production costs going into the production cost line, meaning that these are the billable resources delivering on the projects. There is a small element of also non-billable resources in the production cost from the leadership in the production department, but mainly it's a variable production cost and thereby, of course, by nature, just giving a shift upwards in the gross margin compared to the to the previous reporting model.
The stranded cost that you mentioned that we communicated about as part of the re-segmentation for '22, giving a picture of the continued business is in this re-segmentation allocated as corporate costs. This was the allocation previously allocated to the discontinued business. This has, for the re-segmented numbers been allocated as corporate costs in the re-segmentation for '22.
Secondly, for the regional profit and loss, what we are aiming at having as regional cost is, of course, all other admin costs, building costs, facility costs and et cetera, endured in the regions. So what we actually have as a corporate cost is the remaining overhead cost with one, you can say, point of clarification required. Our global delivery centers are recharging their hours into the regions on a cost recharge basis. So the remaining overhead costs when all the production hours has been recharged into the regions are remaining as a corporate overhead costs and are subsequently being allocated into the regions. But the delivered hours from the global delivery centers are part of the production cost in the regions. I know if that gives some more clarity on the distribution of costs.
I think it does. I was just wondering, you had some stranded costs in Q1. Are stranded costs now history? Or should we expect -- I can see that you have DKK 11 million -- or DKK 9 million decline in corporate costs from Q1 to Q2. Is that a further decline mean that they are out and we should not any more focus on these being eliminated?
We have been very focused on actually reducing our costs following the divestment. We are now running a much more simple and less complex business. And we had a lot of, you can say, additional overhead required because of the more complex business we were running before. As part of the new strategy launch, we have done some organizational restructuring, taking out a significant amount of cost. And this, you can say, will not be added to the organization again. Besides that, we have some further, of course, cost optimization programs that we are focusing on, on executing. But part of that or the main part of that will be taken as you can say, performance management on basis of the now more transparent financial operating models that we have implemented. So we have been addressing main parts of this stranded cost already.
Okay. And then final question on corporate cost. it's about DKK 200 million on a run rate. When we model going forward, should we assume that continuously down? And what kind of leverage should we put in on either annual or quarterly base?
If you look at the cost rate, we will continue to address the cost base. We will also, as mentioned previously, revisit our headquarter requirements looking at facilities that are more suited for the new company that we are now being a consultancy business. So we plan in that process also to, you can say, achieve substantial cost savings in the longer term or midterm.
Even indicating if it's 20% lower or 10% lower or 30% lower than the DKK 200 million run rate? That's -- I'm not asking for timing.
Well, we are not putting a number on it now, but we are eagerly addressing the remaining corporate cost, of course, as we get further transparency on the, you can say, a required level of support required from the [indiscernible]. So it will be further reduced, but I cannot give you a number at this point in time.
Final question for now. If we go to the Region Denmark. Can you give an indication of how much of revenue which is private sector and public sector?
Poul, this is Par. Yes, I can give about -- I would say, in the area of 35%-ish is to the public sector. But then there also is within the SCALES business unit, they also work with some -- with the public. So the totality is probably somewhat north of that. But in the NNIT kind of core business, it's around 35%, that is public of totality, but then you need to add some from SCALES and then [indiscernible].
And SCALES how much is that out of the Danish business nowadays?
It's -- of the Danish business, it's around 35%-ish of the revenue. Of the revenue of Denmark, approximately 35% is SCALES.
Okay. And when you look at growth going forward, if you just let that between public and private and how SCALES is going to support the private partner? Are you -- when you look forward seeing those 2 parts as growing at the same rate?
Well, we are not giving, you can say, outlooks on segment level -- but we are, you can say, of course, assuming growth of in totality of 17% or 15% in NNIT as a whole, but we will not go into details on the segment projections.
But in general, Poul, I can say that, I mean, we are seeing a positive market in the public sector in Denmark, also with the services that we are addressing that when we're looking into the pipeline for the future, even though we were elaborating on the SL situation before, but also with that in consideration when we look to the future, we see quite a good flow of interesting opportunities of tenders coming out in the fourth quarter of this year, but even more in '24.
[Operator Instructions] And here, we have a follow-up question from the line of Poul Jessen again.
Okay. I'll continue then. Europe, you had 0 growth in Europe and adjusted acquisitions in the recent year, you acquired SL Control in '21 and Prime4services in '22? And then overall, you are not growing at all. What is holding back growth? Is that across all businesses? Or is there specific pockets of your business that is declining and then we are not just able to see where you're growing?
Yes. First, I just like to reinstate, I mean, the positive growth of the company as a whole. We are very, very positive about the increased growth that we are able to demonstrate. But you're correct that when you look on the different units, and that's the beauty of the new model that we are putting in place that it's been very transparent to you how the underlying operation is looking. So coming back to Europe, I mean, Europe is also in a kind of -- in a transformation state because Europe was a unit because you should remember that Europe also includes the whole life science deliveries in Denmark. And here we are kind of setting a new structure in place without the infrastructure piece because there, we had some large engagement where we will deliver both infrastructure engagement and consultancy engagement.
And now we are setting up a structure which is, of course, solely focused on consulting, and that has stolen some time actually to set the structure in place. We see a growth in Novo Nordisk, which constitutes about around 22% of the revenue in Europe is Novo Nordisk and we see good growth actually in Novo and actually look into the future and even accelerated growth. So I do say that when we look at Europe, I am positive and to the future and also to the near future. Of course, when we look into the updated forecast that we have provided that embedded in that is a quite significant improvement in Europe built into those numbers. So I'm looking forward to growth for the full year in Europe, but most notably, I'm very positive to the forecast of Europe going into '24.
Okay. And then to the star perfomer U.S., is that Vivo products and solutions? Or is it spread across all kind of services over there?
Yes. Actually, it is -- I mean, if you look on the U.S. business, you can say if you facilitate it a little bit, you have the Excellis business, which is actually in supply chain. So we have supply chain solutions, which is growing very nicely with a very good profit margin. And then you have the, what we call the NNIT core business, if you use that word in the U.S., which is a lot centered actually around Veeva. [indiscernible] And there, we also see a good growth. In both of those 2 units, we see a good growth. In the third part of the business, which is old reliance, that acquisition that is now we are labeled the migration powerhouse. We've actually been seeing a little bit slower growth in the early part of the year, but now accelerating to the second half of the year. So it is primarily the first 2 business that are demonstrating a fabulous growth, I would say, while there is still some potential actually in the last 1/3 of the business.
And are you beginning to succeed doing some cross-selling from the acquisition in the U.S. and then Europe and then selling services across the Atlantic?
To be very honest, I mean, one thing of the regional structure, the reason for implementing that, that there are not immense cross-selling across the geographies. But having said that, we are definitely utilizing the solution we develop in 1 region to work in other regions. And on that topic, I'd like to mention the production IT because with the acquisition of SL Control with also prime4services and the competence is also in the European part of the NNIT. We are actually using that now to establish the production IT offering in the U.S. where we actually see a nice demand.
So there, you see cross-selling from the Europe to the U.S., where we foresee that happening. Also, we are now within the client base, we are working with in the U.S., which is not the least -- the little bit smaller company than the big pharma that when we implement our solution and work with them, call them, venture capital-backed companies, we are actually using our Microsoft offering in Europe to be implement that. We are now becoming a player with actually being able to implement ERP solutions for pharma companies more medium-sized in the U.S., utilizing our competencies in Europe.
And from a delivery point-of-view, you can just look at LinkedIn. And also we've seen in earlier quarters that for some time, you lost some resources, but you've also seen a lot of good hires. Are you in a place now where you feel very confident about the structure and the quality of capacity that you have in place?
Well, one comment in. I mean I'm very humble around the fact that during the last 18 months, NNIT has been in a huge transformation. The starting point a couple of years ago when I came onboard was actually a declining business with shrinking margins going down to more or less a loss-making business. So we have been -- and then we have taken a lot of action to actually improve that situation. But the change is sometimes painful when you go through it and get all the things in order. And of course, that could affect actually people who are -- I mean that might look for other opportunities. That could -- that's a higher risk for that when you are in a kind of period of change. Going forward, I mean, I think also -- and to be very frank, just a communication we've done the last week around the improved forecast of the company so we can really show now that the strategy that we put in place is actually off to a very good start. I'm confident that I will increase the energy and in -- among us NNIT people and thereby making it easier for us to keep people going forward and not the least, increase our ability to recruit new people. Because there are some areas of our business where demand is far greater than supply. So we are hoping to be able to attract a lot of great people to NNIT family in order to meet the demand of our clients.
So I have one final one. That's just a clarification on the -- there's no numbers on the slide, but you have a pie chart where you showed the number of employees on region. How does that match up to the total number because if you add these numbers up, then you have 800 people more than you report on the group level?
I can guess maybe you have -- I don't know how that adds together. But usually, the global delivery centers that, in some cases, could be -- no, that's split out, right, Carsten? Because in Denmark, you have 520, we are -- and then we are in global delivery, we are 335 people. So I think, to be very honest, I think that number is likely a bit deflated, Carsten. I don't know. To be honest, I don't -- I don't have it added.
I was just wondering how it should be read?
Yes. No. But we take that homework and come back to you.
But this is adding up to 17, 15 right? This on the pie chart.
But I can imagine Paul, you said a general one, when people talk about the numbers, so that includes both, especially Europe and Denmark. I mean the people in global delivery are supporting Denmark, especially in Europe. And sometimes, they view those people that [indiscernible]. So sometimes, when they talk about the numbers in Denmark and U.S., I'm sure it has happened that they implicitly have included the people working in Manila and Czech. But in this slide, you should be correct. But...
We'll take that later Poul.
Okay. that's fine. That's all for me.
[Operator Instructions] It appears we have no further questions being registered in the queue today. So it would be my pleasure to hand back to Par Fors for any closing remarks.
Thank you very much, and thank you for everyone attending this conference, and thank you for your interest in NNIT. If any of you would have any further follow-up questions, please feel free to reach out to us. We'll get back to you as soon as possible. Thank you, and have a great day.
Thank you.
Thank you. This concludes the NNIT Q2 2023 Results Call. Thank you for joining. You may now disconnect your lines.