Good day from Inderes! We watchers. Witted announced its Q3 results today, and we have the company's CEO Markus Huttunen in an interview. Welcome to the interview, Markus! Thank you. Frans. Revenue decreased slightly organically, but then again, the margin improvement was very clear. It also beat our expectation. How would you summarize Q3?

Right, revenue as a whole grew. Naturally, organically we came down a couple of percent. The margin development indeed stayed on that same track we've been on now. We've been on it the whole year now. And what was naturally important for us was that this vacation season in Q3 is usually a bit more difficult, and it was a good proof to ourselves that it no longer has a significant impact on earnings. We have talked about how we are on a strategy of profitable growth, where profitability must be demonstrated, and after that we can invest more in growth. We don't seek profitability by having to grow to a certain size. It has gone quite naturally along with that. Would I want our organic growth to be in the positive? Yes I would, but this is how it is in the big picture. In summary.

Well, if we go a bit deeper beneath the surface of the numbers, let's start with revenue. Perhaps what's of particular interest there is this organic development, which decreased by a little over two percent, and then the number of experts also turned to a decrease, even though new sales have continued quite briskly. Could you comment on what's under the surface? What has happened under these numbers?

New sales have been at that level. Our new sales have been for four quarters now, actually five quarters at a really good level, and at a level that should be able to show organic growth. And the place where we have repeatedly suffered is that projects in our existing, older order book are ending more than would typically be the case. The silver lining in that is that they typically end in topics that are less significant for us both in terms of count and EUR. Bottom line, in EUR terms there is more, channel-driven business. We have had a big shift, particularly in Norway, towards working directly with clients, which provides a much better gross profit and better visibility into the business. And we have moved on to larger customer accounts, which typically means that they are more solvent companies, and through that, it translates into longer project durations for us.

This is essentially the underlying thing, that we have more of those endings that are concentrated on these channel customer accounts. Then those where the technology base being used is not modern in the same way as today. A good half of the projects starting today focus one way or another on artificial intelligence. These are usually projects that represent the previous technology generation, and there aren't corresponding cases. A certain kind of renewal of the order book is taking place there. What is happening all the time? One would like to see the bleeding at the base stop, and the new order book help us to continuously grow organically. But we have had some challenges there.

If I ask as a follow-up question about the ending of subcontracting agreements, or channel sales, can you somehow quantify what their share has been? What is it like now, and perhaps what are the expectations for it going forward?

If we take a couple of points in time, let's take 2023–2024. If there was a more general market disruption, back then for us. Leading up to that situation, we had the channel everywhere. Channel business was the biggest business, and direct business was less in Finland. Transitions have been made so that we have. We still have channel customer accounts left in Finland too, but they are ones where we are talking about different profiles. Their margins are in order and they are good strategic relationships that we maintain. But it is. We are talking about scale, that 80+ % of revenue in Finland. In Finland, it has been direct business for a long time.

Now in Norway, which is the next big market area, this same shift has happened a bit later. When I started a little over a year ago, there was still a clear majority. Over 50 percent was business done through the channel. And today it is now, when it starts with a two. The percentage where it still exists. But it can't, so to speak, disappear endlessly. That side of the business where we have weaker visibility.

Okay, so especially in Norway now during this past year or so. You could say that the quality of revenue has improved quite significantly.

That is the case, and we see in these. Our data shows very clearly that now that we are with larger clients and we have those direct relationships, our contract durations are on average 50–100 % longer there than what is typically the case with smaller clients through the channel. And now if this thing takes hold so that the same thing we've seen in Finland comes through to Norway looking just the same, I hope that in six months I won't be talking about this same topic anymore.

Right, well let's move on to the margin development, which indeed was really good now. Here in Q3, can you comment on where the better margin level came from relative to our expectations, and particularly considering this typically weaker seasonality of Q3?

One thing is of course the Software Sauna acquisition, which means that they take vacations too. It's not, but that vacation season is at a different point, roughly a month apart. That brings everything. It also falls into the third quarter, but it evens out between those months. The margin difference. And Software Sauna has indeed been a more profitable business than our other business. That is one thing in it.

But then these. What itself. When we go right to the number level and look at where it comes from, then. Roughly half of that difference comes from us having a better gross profit. In EUR terms, and roughly half comes from us having. We operate more efficiently in the back office. We do the same amount and a little more work with fewer personnel. We don't spend money on unnecessary things. We are operationally more efficient. Pretty much fifty-fifty.

Okay, but for the future and for long-term earnings growth, organic growth is everything. And if we think, you just commented that over half of your new projects already relate to AI in one way or another clearly, what are these projects like compared to earlier projects in terms of type? Are these shorter? Are these longer-term, are there any other differences? And perhaps you already. Since we are still at such a new stage in this AI demand, are there any special characteristics here? Have we already moved from piloting to actual proper assignments?

Pilots very rarely come to us. That's typical for our business model. We don't do a huge number of projects, so we hardly ever do 10-thousand-euro feasibility pilots. So in that sense the demand is similar to what we. What it has always been in other business or other types of expertise. That there are larger projects where clients are driving long-term change. It's difficult for us to show directly from data yet that these now last on average roughly that assignment. The average duration is around a couple of years overall, so now that these have started in a big way in the spring, it's hard for me to say that these are three years in duration. But how they are bought, what kind of clients buy them, they are just the same. They are purely production matters.

And if you look at what their content is, the big change we have now. During Q3, we were in Q2. We saw these a lot in our Finnish software development business. Now it is. Now it is, so to speak, across all business units. It doesn't matter if it's Finland or Norway, it doesn't matter if it's change consulting, if it's technology consulting. It shows everywhere, everywhere in recruitments, etc. So it's pushing through everywhere, so to speak. And the core work there is that yes. The nature of software development and the expertise required for it have evolved and changed enormously. What kind of expertise is then offered to the client? Well it is. That is the core change.

But in addition to that, a change has now started appearing as new, where this has nevertheless been. It is demand in the area of the IT or technology director. Now a new flow of demand has started to emerge where we are in the core change of the business itself. We are talking about finance management and marketing and sales and the renewal of end-to-end operating models and processes there. And in that now, if you think about our change management expertise that we have had, and this technology expertise, they have been. Still there has been synergy, but they have been a little bit like, they haven't been fully together. And now we see that the demand hits in a way that combines all of this. These activities are even smaller and they are perhaps still a little more experimental than now. Just like, you don't sell pilots for a few tens of thousands. But. There is. There is a bit, it's not yet so that such requests would come in 100 a quarter, but at the same time it is also the subject area. Where we see that. Perhaps short-term is a little too much to say, but in the medium term this is the area where demand is going to strengthen very significantly.

Has there also been a kind of shift here where, for example, you are also moving more into the territory of management consultants and in a certain sense these markets are merging more?

In a certain sense yes. My own background. Is management consultant. That's where I come from. I don't, well, business itself. It is shorter-term and of shorter duration, so to speak. Order books are shorter, and you don't particularly crave it as a business model. But the expertise portfolio that is in it, it doesn't. It is less and less about what programming languages you know and what the background for it is, and more about a broad systemic understanding of how organizations operate. And that has traditionally been how this software development organization of ours operates and how the benefits that are at the individual level are brought to a larger, higher team level and so on.

But that same fundamental idea is now transferred to be the topic of much larger parts of the organization, if one puts it that way. The topic, if one puts it that way. But then there. You can't solve them with that normal management consultant method of making a hundred pages of PowerPoint. Saying, do it like this, but you use modern technologies there to solve them. But you must know the things that a typical management consultant has known, and at the same time the things that a typical technology expert has known, indeed.

Let us continue with the topic anyway. It is an interesting theme. I have myself been toying with such a scenario here perhaps as early as starting next year in the coming years. There might be a FOMO regarding AI expertise and development among client companies, as the benefits you can get from it seem so obvious. And perhaps one notices that someone is getting these benefits over there. Someone is getting them over there, but then in your own organization, it feels like things are moving slowly, and yet it always requires a lot of changes at the organizational, technological, and human levels, so how do you see this situation yourself? Is FOMO possible, and perhaps exactly this? Let us also reflect on the situation that there is a quite limited number of such hard technology and business experts available at the moment.

Yeah, I think this is a very sharp observation. So we have always operated. We have said that we believe companies will become software companies, and we operate particularly with regard to these digitally mature companies. And when we thought about it back then, who were the first ones in e-commerce and digital service transactions, they are the very same companies that are now at the forefront of utilizing AI, and those that have built that competence through digital transformation, so to speak. They are. They are the ones who experience a fear of missing out. Not that they have a fear of missing out. From others. This is the crowd we primarily work with.

And now, then, their way of handling this. They see technology as a competitive advantage, not just competitiveness. If the competitive advantage is how I can be even better than the neighbor in this matter where I am already better than the neighbor. And competitiveness is then that, okay, that neighbor is good, how do I catch up with them? So we are. We are with that customer group that is now creating that lead and thinking about these technology investments in such a way that if previously I could do 10 things because the cost of technology was something. Now I can actually do 20 or 30 things for the same money, so it makes sense for me to do 40 or 50 myself, because I can pull even further ahead. Well, that will certainly manifest for those who are following a bit further behind as a really strong fear of missing out. It is not yet showing for us. Like, from the perspective of the customer structure, it is not showing significantly in our business. But I believe it is. It is a very strong trend in the upcoming market.

Do you still have the ability to attract these top talents? And in the past, you have had a very good ability.

It is really hard to see why that would have eroded. The basic trends that people want to define their own careers more, want to get stronger compensation when they do expert services, and want to decide more on the balance between work and free time. Some want to work much more and some want to take breaks in between. All of these lead to the same thing, which is kind of our freelance and variable-pay market. The delivery model, well it certainly applies to this expertise as well. Just as it applies. Applies then, so to speak, to software development expertise.

Well, regarding organizations, are you now combining all the business operations of your Finland business under one leader and apparently bringing them together even more strongly? So what? What concrete benefits are you targeting with these changes?

Well, actually, it is showing now. It has perhaps been perceived more as the unification of the Finnish business, but in fact, we built a matrix organization across countries. So the idea is that we have traditionally had very separate, very independent limited companies that are close to the customer interface and then do business very independently in their own area of expertise. Well, now what? What has changed is that when the demand is around one and the same theme, slightly different-looking demand, it is more natural for the customer interface to be unified. That is one thing, and the second thing. The thing is then that now as we continuously modernize and automate that basic back-end work, so to speak, which is. It leads to the fact that, in practice, the processes should be the same.

Technologies should be the same, data should be the same, because if they are not, then all automations utilizing artificial intelligence have to be done many times over. So what is being done here now is that we are getting stronger functions through which we manage this, so to speak. How sales are done, how resource acquisition, staffing is done. We have unified tools, we are unifying processes, measurements, etc. And then again, we bring that market-driven, customer-close approach into it in such a way that it no longer respects these offering boundaries, but cuts across all of them. So what does this do now then? What are we aiming for with this? We are not targeting cost savings. We do not have. There are no personnel reduction needs of any kind, but we want to allocate more and more of the resources we have to value-generating customer work.

And simply put, when we remove some reporting structures and administrative structures, and at the same time streamline how, for example, a salesperson does their work. When we are able to automate various stages of the sales process, if we today still encounter a run rate of around four thousand customer meetings a year. If we get twenty percent more than that with these actions, that is just as big a deal as if we were to raise twenty percent more sales from investments. More sales. It is that simple in the end.

Well, let us move on to the target of your strategy period, which then ends as early as next year. And indeed, you are targeting a combined organic growth and adjusted EBIT sum of 20 percent. So what about now then? Organic growth turned slightly negative in Q2. So what do these growth prerequisites look like for next year?

Yes, that is our goal when we set out, and of course the five-year guidance is there to modify our goals for the strategy period. And then we will provide more details closer to the time. Closer to it or during next year, at the same time as we go through the earnings report. But. The goals have not changed at all. This is naturally where we are heading. As a numbers person, you can probably. You can see that that 20 does not come solely from the EBITA margin. So it definitely has to, organic growth has to be included, and it already is. When we spoke last time, we noted that that is the area where we are now turning our focus more.

We have had a theme here that we must show through actions that we achieve what we talk about. So, um. These actions that are now being taken regarding the organization, for instance, aim precisely at that exact same thing, that we invest more in sales so that we get more customer meetings, so that we generate more opportunities. But we cannot invest in it by just increasing the cost level somewhere, but rather we reduce routine tasks elsewhere.

If you think about the market demand as a whole for next year and just that key area for you, namely the private sector, how do you see it? Do you see? There is certainly this very strongly growing artificial intelligence there, but then other expertise there, where a certain area of expertise is certainly on a downward trend, so how do these as a whole affect market demand next year, taking into account that many peers have had a hard time, even though many have also been doing a bit better?

Well, we have had. Now we have had a fairly similar level of new sales for 5–6 quarters in a row. And what has changed there. We have indeed talked about the composition of what the demand is. We have indeed learned to sell better at the same time, and we have more of these situations where customer demand is encountered. It certainly appears to us that the demand is like that. It is stable, mildly growing. But it is indeed then the structure of the demand that is changing there, which then means that the foundation, or what was sold two years ago, is simply not bought as much as it is today.

Yeah, well, let us finish with capital allocation. You have the good problem that the business generates a nice cash flow and at the same time your balance sheet remains strong, so how would you comment, how do you view profit-sharing in terms of capital allocation? Or alternatively, making acquisitions. And perhaps there is particular interest now in whether those interesting acquisition targets are. Whether they are related to AI, for instance, are they at such prices that one might not look at them quite as closely, or what does the market look like?

Well, so in itself, one can start with the easy things, that part of capital allocation is more of a board question than an executive management question. Whether there are share buybacks, what the dividend policy looks like, those are handled quite a bit board-led, and it is hard for me to comment on them. But then if. We look at what to spend money on. Otherwise, corporate acquisitions, we have. They have been and are. They are still one tool in the toolbox.

What is good now, of course, is that when cash flow is generated, it is not just some pot that is in the cash register. And then once it disappears from there, it is not entirely gone, but we continuously generate cash flow, which then enables corporate transactions either with that cash flow or even with leverage. We are constantly looking at them. They just have to be such that they have strategic value and owner value in the sense that they generate value for the shareholder. It is quite difficult for us to make acquisitions going in the wrong direction with valuation arbitrage, where the company's valuation multiples would be significantly higher than ours. But. We certainly will not make acquisitions where the EV/EBIT is 15, as has been seen with some American ones. In expert services. But. I cannot directly answer your simple question here to state anything, so as not to reveal trade secrets. Say something. I can: we are keeping an eye on them.

Yeah yeah, this is understandable. Thank you, Markus, for the interview and good luck with the rest of the year! Thank you.