Good viewers of InderesTV, welcome here! We are here at Sanomatalo. Along with Reaktor's CEO Pekka Horo.

Hello there.

Welcome to the interview!

Thank you very much.

Hi Pekka, in early summer you and Verner went through the business and so on a bit more deeply. And a couple of weeks ago, my colleague Frans and I also went through you a bit as an investment target. You can certainly look at those big-picture business matters from both of those videos. And today the intention would be to go through Q3 a bit more closely and perhaps also one topic that has been on investors' minds regarding your business. But hey, at Inderes we like to ask first: what were the CEO's main highlights of the quarter?

Yeah. Well, first of all, Q3 went well for us in, I think, a very challenging market environment. We grew organically by 1.8%, and this was our fifth consecutive quarter of growth. Adjusted EBIT was 11.3 percent of revenue. Although it decreased compared to the comparison period, it was mainly due to the growth in expenses, which had been anticipated. And then we have made investments in our growth, meaning margin remained good and we grew. If we look at this business of ours, our strategy progressed well in all three areas, namely Consulting, Technology Solutions business, Software Product business and then our ecosystem business. All in all, this was a good performance from us.

There were actually many things regarding revenue that went well and you did well, but maybe let's still move on to which things could have gone better regarding revenue.

Well, of course we always strive to grow our business, and if we look at our mid-term targets, we are not yet at those growth figures for this Q3 that we are aiming for, considering we are a growth company, and we are making heavy investments towards that.

Yeah, let's maybe delve still a little deeper into those revenue figures. Thinking from the sector context. That growth was good from you, but then on the other hand, regarding the Technology Solutions business, your ambition level is clearly higher than it is at present. By what means, or what needs to happen, in order to get closer to those 8–12 percent growth figures you are aiming for?

Well, in my opinion, our strategy is very clear, and our investments in growth stem from the fact that we naturally strive to grow our position and the strategic partnerships we have in place, both in Finland and internationally. But we certainly have a strong internationalization focus, and a good example of that was that our US business grew by 23.4 percent in Q3. It gives a good, strong sign that we are doing the right things. Meaning international growth in Finland and abroad. We want to develop the Software Product business, and in that, product development cycles and sales processes are clearly longer. So we are not yet seeing the performance that our mid-term targets entail, and then we want to develop our recurring services business. It provides opportunities for growth.

Meaning we have built applications and solutions for our customers that are very critical to them in their business, and we have the opportunity to increase the recurring services operations. So we will maintain those services for customers in the future as well. And one growth driver for us is also this expansion through our ecosystem. We founded a new hub in Amsterdam in the spring, and now we even founded a new company during the third quarter. The first company Gaia in Amsterdam. And then perhaps one area that of course does not bring organic growth, but brings growth that we look at closely. Is potential corporate acquisitions and partnerships, which previously have not been made in terms of acquisitions.

Yes indeed. Profitability, it was a good step up compared to the previous quarter and actually pretty much in line with expectations there, that the Technology Solutions business drove or supported profitability. Investments are currently being made in the Software Product business. From these comments that you just made, it seems, however, that you are also investing quite a bit in the Technology Solutions business, and not solely, or we expected, that into the Software Product business. The question is perhaps: can you shed some light on the scale so that we understand how much is currently being invested. At least in terms of personnel, there was clear growth there.

Yeah, you actually hit on probably one of the most significant investments, meaning we have been active in recruiting new top talent to Reaktor, and we see that this enables future growth. That is. Many new team members have started during this autumn and late summer, and then we have also been developing our AI capabilities, and we have also developed this software business. These are examples of a few investments that we have made.

Then perhaps moving to this. If we step away from this Q3 and think about the big picture. And perhaps one such central matter that has been on my mind and investors' minds. If we think about the fact that you have the Technology Solutions business which is relatively, or for those who have followed the IT services sector, is easily understandable business, ecosystem business already mature, also stable growing business. Then this third one, which in light of the numbers is relatively recent, namely the Software Product business. However, this has been partly developed for already 10 years. Perhaps related to this matter, if one thinks that what is the spearhead of that Software Product business, namely defense and security. This currently produces, to our understanding, the majority of your current revenue and license output. And understandably this is quite a sensitive topic of conversation, and you do not want to open it up very much. But can you here, or in your own review you revealed that new verticals are also coming, so are you able through this to give us analysts and investors a bit more clarity on when these would also provide support in terms of revenue and earnings?

A very good question, and I understand that it arouses interest. However, throughout its 26-year history, Reaktor has become known primarily for consulting and Technology Solutions business. But if I start from how we see this changing world and what we believe in our strategy, increasingly so. When we do demanding customer projects and operate at the core of the customer's business, we notice certain recurring themes that are often industry-specific, but not necessarily always. And when we do these projects, we always form an idea of what could be such potential seeds. We can talk about modules or platforms that would be scalable. Meaning that we build it for a customer, but this is a phenomenon or trend that would serve a broader customer base. And of course it is then always subject to our customer contracts, how much is said about it. The idea is perhaps talked about, that IP remains with Reaktor, but if we have opportunities where we build a solution for multiple customers. Expertise is generated for us and we see that there would be demand for this thing more widely among customers in that industry or even across different industries.

Whereupon we start developing such productizable components, and a product as a concept is quite a long continuum. There might be an individual consultant, who of course cannot be classified as a product because their work does not scale beyond a certain point. Then you might have such SaaS applications that you can download to your phone from some app store. But in between there fit very many different product elements on this productization continuum. And we are talking precisely about what we spin off from a certain offering into modules or platforms in our different product units and how we can change our commercial model so that it is no longer hourly billed work, but we sell some capability or feature to our customer and the customer pays for it e.g. license or usage rights for money, and that forms a new business for us. And this is on a general level that. The philosophy that we see that these different business models can work together, and they must work together in the future.

If one brings up a few examples, say we go to the health business unit, if we think about AI-based solutions for chronic illnesses, many Western countries have an aging population and are looking for more efficient ways in healthcare. Offering care and services to customers, whereupon we identify productizable opportunities in healthcare, for example. Another example might be that many industrial operators have very heavy processes. When they sell their products and services, how can artificial intelligence make these competitive bidding processes and responding to them more efficient? We have developed an application for that, and we see that there could be demand for other customers, or then in our aero business. So how could we, for example, network and connectivity. Operations be improved for the customer in the service of different airlines? So there is not yet enough to tell about what share of our revenue will come in the future, but I wanted investors to understand what this logic is based on and where these product ideas and seeds come from. And they are always based on projects that we have done and ideas that we get through very close and long-term customer relationships.

This is in a way one strategy that many other leading, or one can say. Successful IT houses successful in recent years have done, meaning moving to such productization and even more in this direction. Meaning previously sectors were thought about. These cannot be combined, but the market is certainly moving towards having to combine them. And in a way that AI disruption for industry also creates a moat.

And in my opinion we have already proven that we are also able to do this. In Defence & Security we have four NATO customers, and our products play an extremely important role in highly critical environments.

Indeed. Then in that review you state that customers demand commitment to measurable business results. Is this already visible in contract terms in some way as changes or in pricing models? And how? Does this affect the risk-sharing ratio between the supplier and the customer somehow?

Well, again, as mentioned, our clients primarily want time-and-materials-based agreements for our consulting work. But how that commitment to results manifests is that our client certainly has the option not to renew contracts with us or to seek other partners. However, we have very long-standing customer relationships, and we have been exceptionally strongly able to demonstrate that continuity. And that wouldn't be possible unless clients feel that our solutions and applications benefit their business. And that is by no means a coincidence. That is, when we start working with our clients, we want to understand very deeply how these solutions serve their business. What are their business goals, is it about renewing systems, or are we building entirely new solutions? Does this grow the current business, or are we creating entirely new business models? And here, of course, with AI assistance, we strive to create these solutions very efficiently, and also on the public sector side, cost-efficiency, that the solutions we build are cost-effective. Not only at the stage when they are made, but also through their lifecycle, these are all very much at the core of how Reaktor operates with clients and what our philosophy is in business.

You haven't given official guidance, but at the time of the listing you said you expect to grow, and that now seems clear during or after these first 9 months. But if we think about looking to the future, where is your focus now over the next 12 months? And perhaps which ones? Where do you need to succeed?

I would go to those growth drivers. Which ones did I mention? So it is clear to us that we want to grow our software, solution, or software product business and make major investments in it. And we just talked about how it's not just Defence & Security, but also other software products would play a strong role in our business. And as mentioned, we do not give short-term guidance, but the mid-term target is for the software product business to reach 60 to 90 million EUR in revenue by 2030, and adjusted EBIT of 30 to 45 million EUR by 2030. So definitely software product. Business investments.

Then on the technology solutions side, meaning consulting, we want to continue our good relationships in Finland, but we are investing in international growth, and it is a very clear goal for us that we want to take this expertise to a much broader customer base abroad. Managed services abroad are strongly connected to this. That is, we already have a strong customer relationship, so we want to build managed services business on the back of that strong customer relationship, strengthening it within the ecosystem. I think we already have good examples from this year, that we established an international hub in the Netherlands and created the first company there. So across all three areas. I think we have important and clear steps for how growth is being pursued and where investments are going. And as said, partnerships and potential acquisitions will certainly also be part of our future.

Regarding these acquisitions, nothing can certainly be said in terms of timing, but can you perhaps recap what they are? With what philosophy do you set out to execute them?

And as has been said, when we look at these opportunities, it involves. There is, of course, internationality, industry expertise, and the ability to leverage artificial intelligence in that work and potential productization as well. So that is perhaps the scope we are looking at.

Great. Thank you very much, Pekka, for your comments and best of luck for the rest of the year!

Thank you very much!