Netcompany Group A/S

CSE:NETC

Earnings Call Transcript 2019-Q1

[Operator]

Good morning ladies and gentlemen and thank you for standing by. Welcome to today's presentation of Q1 report. [Operator Instructions] I must apprise you that your conference is being recorded today on Wednesday 8th of May 2019. I would now like to hand the conference over to your speaker today, André Rogaczewski, CEO of Netcompany. Please go ahead sir.

[André Rogaczewski, Co]

Good morning, and welcome to this presentation of Netcompany's Q1 2019 results. My name is André Rogaczewski, and I'm the CEO and Co-Founder of Netcompany and joined today by our CFO, Thomas Johansen. But before we get going, there are some important disclosures that I need you to read through. So could we please have Slide #2 please? I will pause for 30 seconds here, and let you all have a read through of these important disclosures.And with that, can we please go to Slide #3, please? So the topic of today's presentation is an update on business highlights for Q1, and I will discuss our employee base and the development in that, and I will spend some time on giving you an update on the status of the 2 acquisitions we've made in the last 2 years, and how we progress against the plans in both Norway and in the U.K. Once a year, we conduct a survey with our customers to give us so-called net promoter score, in relation to this, I will also discuss the results based on this and the 2018 performance. Finally, I'll go through our guidance for 2019. Thomas will subsequently go through the numbers in greater details, including cash flow and work-in-progress. Can we have the next slide, please? In Q1, we continue our high growth rate albeit a little lower than what we reported in last year. Growth in revenue was 15.6% in Q1, which is fully in line with our own expectations. You've heard me say over and over again that we need to run the company at a responsible growth rates, as we will potentially jeopardize quality in our deliveries and hence long-term relationship with our customers and ultimately we'll see margins decline if we grow too fast. That is also why we, during the second half of 2018, slowed down the recruitment pace in Denmark significantly and the results here are this, that we have a Q1 with a lower growth in Denmark than when comparing with the same period last year. Our business, both in Norway and in the U.K. continued at growth rates around 30% in the first quarter of the year. Our gross profit increased at a higher pace than revenue leading to increased gross margins at 39.1%, an improvement of close to 1 percentage point compared to last year. FTEs grew by close to 19%, and I will come in more details on this in a few moments. Overall, we are off to a very good start of the year and our growth support of -- our targets for the year. Can we have the next slide please? So over the last year, we have increased employees to a total FTE level of 2,098, an increase of 19%. And if we look at the decomposition in a little more detail, we note that the amount of freelancers have been reduced to 54, which means that underlying increase was actually 23%. Average age remains around 32, reflecting the continued commitment to hire 8 out of 10 new employees straight out of university. And in Q1 alone, we've had 137 new employees starting. Churn for the last 12 months was higher than normal, 17% to 18% blended, as there was a significantly higher churn in Vietnam following the move to one office location only in the Ho Chi Minh City. In Denmark and Norway, the churn ratio was in line with last year, whereas it decreased in Poland. In the U.K., churn rate increased as a logical consequence of the ongoing change in the product portfolio there, which will require different skill set to deliver on. We continue to monitor the development in the churn rate closely, as always, and expect it to come down to around 17% to 18%, in line with historical averages towards the back-end of 2019. As a consequence of the IPO, we have strengthened certain administrative functions, also the continued growth of FTEs requires us to continue to invest into skilled researchers and HR professionals to ensure that we can continue to attract sufficient talent for our continued growth. In total the amount of administrative employees measured as non-client-facing resources grew from 5% in 2017 to 7.1% in quarter one, 2019. Some of that growth is related to the IPO and the step change that the IPO spurred us to make in our finance and legal departments in particular. And as such, we expect that the relative level of non-client-facing resources will converge around the 5% level over the next couple of years, meaning that the current level of admin, to a very large extent, can sustained continued growth in the business. Can we have Slide #6, please? So on Slide 6, during Q1, we continued to win sizable contracts in the public sector in Denmark of which we have mentioned the most significant ones here. Further, we've won a multi-year contract in the Danish private segment with a nondisclosed client, and we generally start to see more and more sizable and interesting casing -- cases materialize in our private sector pipeline in the Danish market. Now in addition, we have won new contracts both in the public space in the U.K. with Highways England, but also in the private segment also with a nondisclosed client there. Can we have Slide #7, please? On an annual basis, we get an external client to conduct a survey with our customers to keep track on how we are perceived with our customers. That's very important for us. We use a so-called net promoter score and the principles are as outlined on this slide. We've asked a total of 80 customers, 50 in Denmark, 15 in U.K. and 15 in Norway, how they view us and the results are shown on the following slide. Can we go to Slide #8, please? We are proud to see such high scores from our customers across all of the 3 geographies. The normal score in the industry is negative and is around minus 30, which reflects the general dissatisfaction with the quality in IT projects in general. During 2018, we increased the score in Denmark really as a consequence of the cleanup we did in the product portfolio in 2017 in the private segment in particular in Denmark, which impacted 2017 negatively. So in all fairness, 2017 is an easy comparable. It is worth noticing that the country with highest NPS score is actually the U.K., which supports our initial thesis when entering into the U.K., namely that high-quality IT delivery as performed by Netcompany would be a true differentiator in the U.K. market, a market that is known for long projects, big projects that run over budget does not work and generally creates higher level of dissatisfaction with traditional IT providers in that particular market. We will continue to focus on delivery of projects in agreed time, quality and budget. And by doing so, I'm confident that we will continue to see industry record NPS scores in the future also. Let's go to Slide #9, please. So the 2 acquisitions we've made in '16 and '17 in Norway and the U.K. respectively are both progressing to plan. In both countries, we saw increasing margins in the first quarter 2019 as well as continued high growth of around 30%. In Norway, growth was driven from private segment that grew at 47%, while public grew around 17%. In both segments, utilization was improved significantly, which in combination with lower use of freelancers led to increased margins. The pipeline in Norway looks promising, and when we are at the end of the 2019, the full integration of the Netcompany business model will be concluded and the Norwegian business will be expected to regenerating margins from then on in line with the long-term expectations. In the U.K., growth was driven by the public segment that more than quadrupled during Q1. Also more and more relevant cases are being injected into the project portfolio as the original type of engagements are being delivered or phased out and hence the ongoing improvement of the quality in U.K. will accelerate during 2019 with increased margins from Q1 2019 level to be anticipated. We do see a strong demand for our solutions in the U.K, which given the magnitude of that particular market, give a good promise to continued growth as planned. Can we go to Slide #10, please? So when looking into 2019, we currently have visibility for total around DKK 1.8 billion of our full year revenue. That's the highest amount of contractually committed revenue within public and it has been the case historically. However, we have seen improvement in the visibility in the private segment following major wins in both Denmark and the U.K. during Q1. For 2019, our pipeline looks good and consists of interesting cases in both private and public segments. The increased revenue visibility combined with a market that is still growing at a more than 10% percent annually gives us comfort in our full year guidance as outlined on the following page. Can we have Slide #11, please? So the guidance for 2019 was already given in connection with the Q3 report back in November 2018. So here, I'm simply reiterating what was already been communicated for 2019. So we expect organic revenue growth in constant currencies of 20% to 25% and an adjusted EBITDA margin of around 26%. And before I hand it over to Thomas to talk you through the numbers in detail, I want to extend an invitation to attend our Capital Markets Day in June. Can we have the next slide, please? On Slide 12, you will see the agenda for the day as outlined here. And with that, I will let Thomas go more into detail of the financial performances in Q1. Thomas, please go ahead.

[Thomas Johansen, CFO & Member of Executive Board]

Thank you for that, André. And like already mentioned, I am the CFO in Netcompany, and I will go more into the details with the financial performance for Q1. So if we move past the breaking Slide 13 and then straight into Slide 14, please? There we get an overview of the financial performance in Q1 as outlined here. For the group, revenue grew 15.6% in reported currencies and 15.3% in constant currencies. The growth was driven from the U.K. that grew by 28.3% and by Norway that grew 30%, whereas the growth in Denmark was 11.2%. As André has already commented on, the lower growth in Denmark is fully in line with our expectations and ambition to grow at a slower pace with a target of around 20% to 25% compared to the very high growth rate in Denmark in both 2017, but also the first half of 2018. Thus, we slowed down the hiring pace in Denmark in the second half of 2018, which has a natural impact on our growth in Q1 and Q2, 2019 as a starting point when comparing to 2018 is at a relatively lower level. While we have worked to manage growth to a slower pace in Denmark, we've not done the same in either U.K. or Norway. The reason for that is that both organizations are smaller in size than the Danish. And hence, in absolute numbers, the amount of new FTEs required is at a significantly lower level than in Denmark and a 30% growth is more manageable for some time. Another focus point we have had during the second half of 2018 is to reduce the amount of freelancers used in Denmark and Norway. In Q1 2019, the amount of freelancers used was reduced by more than 60%, which have had a positive impact on margins in the quarter. In addition, the utilization in particular in Norway was increased significantly, but also in the U.K., this utilization was increased leading to increased margins. Of the non-client-facing cost, administrative cost grew the most as they grew by 23.6%. However, administrative costs will typically grow alongside growth in FTEs, and if we isolate the growth in the administrative cost to the amount not related to FTE growth, the nominal increase in administrative cost in the quarter was reduced to DKK 3.3 million. Of that increase, the most can be related to the new remuneration plan in place post-IPO, which from a comparison perspective will not be fully in the 2018 numbers until Q3. Apart from that, there are no significant increase in the admin cost, which also mean that the increase on a year-over-year perspective towards the second half of 2019 will be normalized and more or less in line with basic FTE growth. Special items were significantly reduced as there were no IPO costs in the quarter, and the special items realized in Q1 2019 relates to the broken deal we had in Q1. Interest costs were in line with expectations reflecting the renegotiated financing terms post-IPO. Financial income for the quarter was related to currency adjustments on the British pound loan, related to the acquisition of Netcompany U.K. Tax rate was just below 22%, driven by both low level of nontax deductibles in Denmark and low effective tax rate in the U.K. So can we have the next slide, Slide #15, please? Growth in Denmark was evenly split between public and private as each segment grew by 11.3% and 11.2%, respectively. In the private segment, growth was driven by a combination of the win of a multi-year contract with a nondisclosed customer, new customers and increased spend with existing customers. In the public segment, growth was driven by additional requests on existing projects as well as a number of new projects won towards the back-end of 2018 starting to pick up in Q1 and onwards. Growth in Norway was driven by the private segment, which grew by 47% and in public segment, which grew by 17%, whereas the growth in U.K. segment was fueled by a growth of more than 277% in the public segment although from a low level comparing to 2018 and also a reduction in growth in the private segment. The difference in which segment growth is generated across the different geographies underlines our attitudes towards growth, mainly that it is more important to us that the projects we win are of a complex and business-critical nature rather than one particular segment over the other. So can we go to the next slide, please? Across all geographies, gross margin was improved in Q1 with significant improvements in particular the Norwegian business unit, where a combination of lower usage of freelancers, as mentioned, and high utilization ratios improved margins by more than 6 percentage points. In Denmark, margins were slightly improved. And in the U.K., margins improved by 1 percentage point. In the U.K., 1 project, which has had a negative impact on margins during the second half of 2018 and also in Q1 2019 has now been resolved, which, all other things equal, in itself will lead to increasing margins in the U.K. market throughout the year. And hence, we expect the margin development during 2019 in the U.K. to be opposite of what we saw for the U.K. during 2018 where margins were reduced during the year. So can we go to the next slide, please? The improvements in gross margin naturally flows through to EBITA margins as shown here as was the case on gross margin development, the most significant improvement is seen in the Norwegian entity. So without further ado, let's just move onto the next slide, please, Slide #18. Looking at the public segment, we see growth at close to 23%, and slightly reduced margins. The reduction in margins are attributable to the higher share of U.K. public revenue coming from the 277% increase in public segment revenue from the U.K. in Q1. Operating margin increases as a consequence of amortizations being reduced and some of the intangibles from the original FSN transaction back in 2016 are now fully amortized. And hence the absolute amortization amount are reduced compared to increased revenue. So can we have the next slide, please, Slide #19. When looking at the development in the private segment, we see growth of close to 7% primarily driven by growth in Norway of 47% and in Denmark of 11%, whereas growth in the U.K. private segment was negative. The relatively smaller impact from the U.K. on the private segment is the main driver of the increase in margins supported by improved performance in all geographies, all regions, already discussed. So can we have the next slide, please? In Q1, we saw an increased amount of development revenue, particularly driven from the private segment in Denmark and Norway and across segments in the U.K. Overall, we still aim to have a balanced distribution of development and maintenance revenue, but fluctuations will occur from quarter-to-quarter, depending on when larger projects are completed and moved to maintenance. And let's go to the next slide, please. So moving to cash flow analysis, we have adjusted our definition of free cash flow and calculation of cash conversion ratio to follow market practices. There's a full disclosure of all the new and old calculations in Note 12 in the company announcement. Free cash flow improved from DKK 67.7 million to DKK 75.2 million in Q1 2019. Working capital changes improved mainly as days sales outstanding was reduced. Of the amount of receivables overdue at the end of Q1, 80% has subsequently been paid in April. Paid taxes were significantly higher than in Q1 2018, and also higher than what was actually expensed in Q1 2019. And to explain that a little more, can we go into the next slide, please, Slide #22. So in Denmark, corporate income taxes are paid twice a year in Q1 and in Q4. The taxes paid in Q1 are the calculated taxes for Q1, the estimated taxes for Q2, and then any adjustment to taxes for the previous full year. In Q4, taxes for Q3 and Q4 are paid. If taxes are not paid according to this schedule, we, as a company in Netcompany are presented with a calculated interest cost that we have to pay to the Danish tax authorities. This interest cost is higher than our external financing cost and also the interest cost is a non-tax-deductible item, and hence, it is financially attractive to actually pay on account taxes. When looking at cash flow analysis, this of course have a negative or positive impact on the various quarters, as the paid taxes per quarter does not correspond to the calculated taxes for the same quarter. So to give a more meaningful account of cash flow in the quarters reflecting underlying performance, we have tax-normalized free cash flow here and the cash conversion ratios, so that taxes paid are matched to the relevant quarters. Over a full year, of course, normalizations will even out. We have shown a tax-normalized free cash flow and cash conversion ratios here for the last 5 quarters, and this shows that the underlying free cash flow improved significantly more than reported, mainly with 67% compared to Q1 2018 and the cash conversion ratio was 92.7% compared to 63.3% with including taxes paid in Q1 for both Q1 and Q2. And we believe that this way of reporting free cash and cash conversion ratio better explains the real underlying cash flow for our business. So can we have the next slide, please? And that's the final slide I have before we move into Q&A, and that is on our work-in-progress. So our balances of work-in-progress is a representation of work performed and income recognized but not yet invoiced or built to our customers for fixed-fee projects. In addition, a part of the work-in-progress balances are made up of pure time-and-material work, which for various reasons are invoiced the following month. Some fixed-fee projects have a rather back-end-loaded payment plan, which mean that work-in-progress will increase relatively more than revenue when the proportion of these types of projects are higher in the total revenue. During Q1, our work-in-progress increased by 10.3%, whereas revenue increased by 15.6%, reflecting a relative decrease in work-in-progress to revenue in Q1. However, to get an even better understanding of development in work-in-progress, we believe it gives better understanding of the dynamics to look at the last 12 months' revenue against the work-in-progress. The last 12-month revenue increased 33.4% against an 18.3% increase in work-in-progress. As of the end of March, less than a handful of projects account for around 60% of the work-in-progress balances. The vast majority of these balances are planned to be built and collected during 2019. Over the entire existence of Netcompany, we've never had a project that was not delivered. We've had some projects where we've spent more hours than planned, and when this occurred the estimated hours needed to complete the projects are accounted for on a monthly basis, and hence, in essence, projects are always accounted for and estimated to the latest estimate to complete. And with that remark, we've concluded the detailed financial analysis. And we will now open up the call for questions. So if we move to the next slide, the break slide for Q&A, and then open up the call for questions. Thank you.

[Operator]

[Operator Instructions] And your first question comes from the line of George Webb of Morgan Stanley.

[George W Webb, Equity Analyst]

Two questions, please. Firstly, on hiring. How are you thinking on planning the rate of hiring in Denmark through the rest of the year? Because obviously, last year, it impacted Q1. Are you going to step that up in the second half? And then secondly, just a clarification on the work-in-progress. Is it then right to think that we should expect that number to perhaps start to decline into the second half as well?

[André Rogaczewski, Co]

Yes. André, here. Yes. So that is correct. I mean -- I think for your -- to your first question, do we plan to hire relatively more people in second half of the year? Yes, we do. And we also have a tradition to hire people coming out of universities late summer, starting September. So yes. The short answer to that question is, we will hire more people. To your second question, work-in-progress. I have to say that looking at, as Thomas also mentioned, this is of course a number that we are closely following. It's less than a handful of projects constituting 60% of the work-in-progress. And we reestimate all projects every month when we go through the monthly accounts. So we do -- with the current project load and what we're doing currently, we do expect a decrease in the work-in-progress. Hope that answered your questions.

[Operator]

Your next question comes from the line of Poul Jessen from Danske Bank.

[Poul Ernst Jessen, Senior Analyst]

Question on the growth rate in Norway and the U.K., if I look at the growth in FTEs then it's about 20% in those 2 markets. But revenue growth is about 30% in those markets. Is it mainly due to a higher utilization or prices on the consultants? Or is -- or what's driving it? Second question is about the attrition rate in the U.K. It's going up from 23% to 31%. Is that led by the transition to London only? Or are there some underlying issues there?

[André Rogaczewski, Co]

Yes. André, again. So to your first question, the short answer is, utilization and not prices. We do see a higher -- an increasing utilization in both markets and that has to do with us putting in the Netcompany leadership model and the delivery model in both markets. To your second question, the churn in the U.K., while that has to do with us doing structural changes as well. We are moving into a much more project-based portfolio. And that means that we have to get rid of some employees and putting in new employees. Furthermore, we also have some changes in the office layout as you mentioned. But it has very much to do with moving into this different delivery model, and that means that we will have to say goodbye to some employees and actually hire some new ones.

[Poul Ernst Jessen, Senior Analyst]

And the follow-up on that one. When I look at FTE numbers for the U.K., then I see a high increase in external contractors versus the internals. Shall we see that continue growing? Or shall we see it being replaced by internals over time?

[André Rogaczewski, Co]

Well, we will see that at the same level maybe slightly increasing for a while and then falling down. We are doing the changes we do in the U.K., we will still need some external help, but over time, it will -- over longer time, it will decline.

[Poul Ernst Jessen, Senior Analyst]

Okay. And then a final one for now. About your comment on the margin in Norway. Is it correct you said that the margins in Norway at the end of this year should be at the long-term level? And what level are you looking at for Norway then?

[Thomas Johansen, CFO & Member of Executive Board]

So on the longer-term, when we make acquisitions there, Poul, we want to grow margins to 20%, 25% and then depending on how mature the project portfolio is, it will be closer to 25% than 20%. So when we look at Norway, we are expecting that margins will be comfortably within that range and mostly likely towards the upper end of that range without giving specific guidance for Norway for 2020.

[Operator]

And your next question comes from the line of André Thormann from ABG.

[André Thormann, Analyst]

In terms of the employees in Denmark, as you also touched upon, how much of a lower growth should we expect to see in Denmark due to this? And going forward in the year, I mean, is 11% what we should expect to see? Or should it definitely be higher in Denmark also?

[André Rogaczewski, Co]

We are sticking to our original guidance for the growth in Denmark in total. We have the employees we need. We will also put in more employees in order to get to a growth level of 20% to 25% according to our guidance. So we're of course tracking the big detail if we have enough employees to deliver the revenue that we need. And right now, we are following the plan exactly as we -- as was set out for the year.

[André Thormann, Analyst]

Okay. Very clear. In terms of revenue from maintenance, will we continue to see a low growth on this when compared to new clients? Or what should we expect from this?

[André Rogaczewski, Co]

There will always be a balance between development and maintenance. When we are going into new markets and delivering larger projects or engagements, especially in the U.K. and in Norway, we will see the development ratios go up. That goes for all markets. And it's, actually, it's a good sign that the company is growing. And when we deliver that can vary from quarter-to-quarter as well when we deliver large engagements that go into maintenance and then that will -- that part will go up. But we are aiming for a 50-50 split on long-term.

[Operator]

And we have one more question from Poul Jessen from Danske Bank.

[Poul Ernst Jessen, Senior Analyst]

Two minor questions. One is about public U.K. at close to 300% growth. Of course, it's from low level, but it's still material in the U.K. operation. Is this part of the strategy of focusing on the public sectors? Or is it just a coincidence given that there are contracts now coming up that you have that growth? Or is it a strategic movement? And then on the small numbers, the reversal of the DKK 10 million on onerous contracts, you made a provision in Q4, and now you are reversing in Q1. Is this related to one single contract? Or what's behind it?

[André Rogaczewski, Co]

Yes, thank you, Paul for that question -- for those questions. So to answer the first one. I think, Thomas, you can answer the second one. We don't have a deliberate strategy that we have to be more in public and less in private or more in private. We are always aiming for the complexity of projects and to be able to deliver high value to our clients with a long-tail strategy and a long partnership with our clients. So it's good to see that we're growing in the public segment in the U.K., but we'll definitely follow any opportunities in both segments. So I don't see that as a general strategic tendency. We -- in the U.K. we're growing our business, and that's the most important thing for us. And the complexity of projects is the most important guideline in that perspective. And to answer the second question, Thomas?

[Thomas Johansen, CFO & Member of Executive Board]

Yes. Sure. So the DKK 10 million on Q1 related to the general reserve we have, just a few remarks. Basically, all the projects are evaluated on a monthly basis in terms of percentage of completion and how many hours we need. So any project always entails and includes the latest estimate as to how do they look from a financial perspective. Then we have a general reserve, which at any given point reflects the overall risk picture in the project portfolio we have. So we will have projects that are early on in the implementation phase where we don't have any indications as to do we need to change hours up or down. But since there are some risks associated with that we have a general reserve for that. And when then we progress those projects throughout the development and the delivery and deliver on an ongoing basis in those projects, then the underlying risk profile will change. So the DKK 10 million that goes into Q1 is a reflection of, basically, advancement of some of those projects where we are now closer to being in final development and delivery phase and, therefore, the risk portfolio, the risk picture, has actually decreased. And when that decreases then we reduce the reserve a little bit. So it's more a reflection of the overall risk picture of any project in the portfolio.

[Operator]

And we've got one more question from André Thormann from ABG.

[André Thormann, Analyst]

Just a -- just one clarifying question from me. In terms of the margin in U.K, did I hear correctly that we should expect this increasing already in '19?

[Thomas Johansen, CFO & Member of Executive Board]

Yes.

[André Rogaczewski, Co]

Yes.

[André Thormann, Analyst]

Okay. And then another one, in terms of administrative cost, I heard you mention something about it, but did -- is this the level we should expect to see going forward also into 2019? Or is it extraordinarily high?

[Thomas Johansen, CFO & Member of Executive Board]

What will happen to the admin cost is that they will now start to grow in line with FTE growth. Right now, we grow admin more than FTEs and that's because there is a timing phase as to when we have the full cost associated with the IPO in the books for comparable purposes. So we'll have that on the second half of 2019 and that means that from 2019 second half and onwards, we don't expect any increases in admin that is not related to FTE growth. And the reason why there will always be some admin cost related to FTE growth is that when the new employees start, they got to have a computer, they got to have some education, which is admin cost on our side. So there will always be cost in admin associated with FTE growth. But it should not, on the longer-term, be higher than the relative growth in FTEs.

[André Thormann, Analyst]

Okay. And then on the long term and that's not for -- that's in '19? Or is that in 2020 or whatever?

[Thomas Johansen, CFO & Member of Executive Board]

We'll start to come down to that level in '19, whether we are all the way down there also depends a little bit on timing. But for second half, for sure, we will see admin cost develop more in line with FTE growth and then a more clear picture for '20 on and onwards. But we'll start to see it already from second half of '19.

[Operator]

There are no further questions at this time. [Operator Instructions] And we've got one more question from the line of Yiwei Zhou from SEB Bank.

[Yiwei Zhou, Analyst]

I have two. Firstly, on the U.K. and Norway growth, now you delivered 30% organic growth in both regions. And remember you guide 20% to 25% organic growth in all regions. Is it fair to assume in the following quarters, we should expect to see a slightly slow down? Or it's just better than your expectation? Then secondly, you mentioned the U.K. margin will continue to improve during 2019. Could you give us a sense of how -- what's -- how much is upside and so what level should expect in Q4?

[Thomas Johansen, CFO & Member of Executive Board]

Yiwei, it's Thomas, and my answer is going to be most likely as you would expect. So in terms of guidance for each individual countries per quarter and then what's going to happen there, we don't have any further comments on this at this point in time other than we maintain our guidance for the year, which is a 20% to 25% organic revenue growth. So we will stick to that. In terms of the U.K. margin and will there be a pickup? Yes, there will be a pickup. And what we've said so far in relations to the guidance on margins for the U.K. in connection with our full year, we said, we expect margin pickup in the U.K. from the full year level of around a couple of percentage points. And then we say that we expect margins to also increase during the year from the Q1 level. And that is the level of detail we can go into on the U.K. margin at this point in time.

[Yiwei Zhou, Analyst]

And I just want to follow up the second question, and so what is main driver for the improvement in U.K. margin? Is -- how much is from the reduce of external freelancers or contractors? Or is it from the type of contract?

[Thomas Johansen, CFO & Member of Executive Board]

Yes. So in the U.K., the labor from freelancers has not been reduced. That's -- when we look into the FTE over you, we have the U.K. contractors and then we have freelancers. And the reason why we do it that way is that the U.K. labor market, particularly for IT services is heavily driven by independent contractors. So in the U.K., the margin expansion has not been driven by a reduction in independent contractors, since that's actually not reduced. But is driven by higher utilization. And then also going forward, it will be driven by continued high utilization, but also the impact, as I mentioned, from one particular project which has had a dilutive impact on margins in the second half of '18 and also in the Q1 of '19, which has now been resolved. And therefore, there of course will also add to margin in Q2 and onwards.

[Operator]

Thank you. We have no further questions at this time. [Operator Instructions] And we seem to have no further questions. I would now like to hand you over to your host for closing remarks.

[André Rogaczewski, Co]

So thank you, everyone for joining this call this morning. This is the end of the call. I bid you a very good day. Thank you.

[Thomas Johansen, CFO & Member of Executive Board]

Bye.

[André Rogaczewski, Co]

Bye.

[Operator]

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.