Release Date: August 27, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- NNIT A/S (FRA:5NN, Financial) achieved an 11.8% total revenue growth in Q2 2024, with 11% organic growth.
- The company signed its largest-ever contract in the US, worth approximately DKK130 million.
- Region Asia showed a significant turnaround with a 6.4% organic growth and improved profit margins from -17% to 3.9%.
- Region Denmark experienced strong organic growth of 27%, driven by all business areas.
- The company successfully implemented new ERP and HR systems, which are expected to enhance efficiency and data quality.
Negative Points
- Region US experienced a 15% decline in organic growth due to a large decline in the data migration business.
- The net cash flow ended at minus DKK91 million, with free cash flow at minus DKK262 million, worse than the previous year.
- The group operating profit margin, excluding special items, was dampened by the decline in the data migration business and low utilization of billable employees.
- The company had to reduce its workforce in Asia by more than 40 employees to improve profitability.
- There were delays in invoicing due to the transition to the new ERP system, causing a temporary increase in trade receivables.
Q & A Highlights
Q: Could you elaborate on the low single-digit growth guidance for Q3? Are there any specific factors contributing to this?
A: We expect continued growth, but it will be single-digit in Q3. The data migration recovery will not be fully realized until Q4, and the large contract win in the US will only start to materialize late in Q3, with full effect in Q4. Hence, double-digit growth is expected in Q4. (Carsten Ringius, CFO)
Q: Can you comment on the Danish gross margin in Q2, especially considering the Easter effect?
A: The underlying performance is consistent between Q1 and Q2. Q1 had minor one-offs that improved the gross margin, such as spillover revenue and reversed reservations. These factors overshadowed the Easter effect, making the underlying performance similar across both quarters. (Carsten Ringius, CFO)
Q: Is the significant improvement in the gross margin for region Asia sustainable, or were there any one-offs in Q2?
A: We believe the turnaround in Asia is sustainable. We have reduced our workforce by over 45 employees, which is a significant capacity calibration. The full effect of these measures will be seen in Q3 and Q4, leading to expected margin improvements. (Carsten Ringius, CFO; Par Fors, CEO)
Q: Regarding the surprising organic growth in APAC, do you see this as a one-off, or is it expected to continue?
A: We have seen positive momentum in APAC and expect this to continue in the remaining quarters. The growth is sustainable. (Carsten Ringius, CFO)
Q: Can you provide an indication of where cost reductions will impact in the coming quarters?
A: Cost reductions will impact various lines. In the US, it will primarily affect production costs due to capacity adjustments in the data migration business. Relocation of offices will reduce corporate costs, and the completion of the IT separation will free up resources, positively impacting revenue and gross margin. (Carsten Ringius, CFO)
Q: Have the costs related to ERP and HR systems been capitalized, and how will this affect billable hours going forward?
A: The development-related costs for ERP implementation have been capitalized, while some costs have been expensed. The completion of these projects will free up line-of-business resources for external projects, improving margins going forward. (Carsten Ringius, CFO)
Q: Is the decline in the data migration business temporary, or is there a structural change in the market?
A: The demand for data migration remains strong. Veeva's decision to build capabilities internally affected our revenue stream. However, we are seeing a pickup in complex migrations and have started using data migration capabilities in other areas. We expect to return to profitability at a slightly lower level than before. (Par Fors, CEO)
Q: Should the profit margins in Q4 be considered indicative of future margins beyond this year?
A: The cost levels in Q4 can be extrapolated into the next year, considering seasonality. The gradual improvement in profitability indicates the level we will start at in 2025. (Carsten Ringius, CFO)
Q: Can you provide an indication of the savings from relocating offices?
A: The expected savings from relocating offices are between DKK15 million and DKK20 million for the full year, compared to last year's spend. Transition and moving costs have been expensed in Q1 and Q2, with some spilling into Q3. (Carsten Ringius, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
