Simcorp A/S

CSE:SIM

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to Q2 report 2020. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 12th of August 2020. I would like to hand the conference to your speaker today, our CEO, Klaus Holse. Please go ahead, sir.

[Klaus Holse, CEO & Member of Executive Management Board]

Thank you very much and thank you to all of our investors and other interested parties that are joining this call. As usual, if you flip to Slide #2, there is the disclaimer that most of you will have seen more than once, so we walk through it, but it is important to read that one if you haven't done so before. On Slide #3, you see the agenda for the day. First, I'll give a short update on the key highlights of our Q2, including a few numbers, but also a few things on how kind of the situation have impacted us. Then we're going to move to a little more detailed financial review, which Michael Rosenvold, our CFO, is going to give you, and he will also give you the outlook for 2020. And then we'll move on to Q&A. If you go to Slide #4, you will see kind of the highlights for Q2. And we think that Q2 was a solid performance despite the COVID-19 disruption that has been there. The order intake was about EUR 17 million for the quarter. It was down almost EUR 6 million from last year, which was an extraordinarily strong quarter. And you can even say there's EUR 3 million that we did not put into the order book as 2 of the new licenses that were signed have some special conditions to them, which meant we didn't put them in the order book. One is a government contract that makes that a little bit difficult in some senses. And the other one is a product, Coric Engage, that I'll get back to that needs a little -- that has a few things that we need to develop. And until we've done so, we've not put them in the order book. So all in all, a solid order intake compared to similar quarters. Revenue growth of minus 2.6%, again, a tough quarter to compare with last year. EBIT, EUR 26 million, a decrease over last year, a consequence of the order intake and the revenue being a little bit lower. If you look at cost that Michael is going to get back to, we actually contained that quite well. 12-month rolling software updates and support was 9.6% in Q2, it was 5.3%. So you are seeing that slow down a bit rolling 12-month, just as we have predicted. Professional services continued to grow, which we're quite happy about. They're delivering against projects that were sold in 2019 and the early part of '20. So we see continued growth there. Free cash flow is probably the highlight here, where even though revenue is declining slightly, free cash flow is up. If we move to Slide #5, we are adding up Q1 and Q2 into the first half. The first half had a total order inflow of EUR 36.8 million, a little bit down over last year. We have 3 new SimCorp Dimensions, 3 new Coric contracts signed in the half. Revenue growth is flat and EBIT is down as well, again compared with a first half that was very strong last year. Order book at EUR 39.1 million is about the same as it was at the end of 2019. So we've kind of maintained the order book throughout the year, actually increased just slightly. Professional services growth, almost 5% in reported currency in the first half. And again, free cash flow being the highlight on the slide. So overall, a good first half, we think, given the comparison to the first half of last year that was particularly strong. Michael is going to give you a little more detail on how that looks compared to other half 1s and Q2s in the -- of the past. If we move to Slide #6, then you have the usual flag list. You will see that we've added 3 flags to this. We've added a customer of SimCorp Dimension in Southern Europe, which is front and middle office. And we have added 2 clients in the U.S. that are Coric clients, 1 in cloud, and 1 not in the cloud. So overall, 6 new clients. As you can see, Coric, 3 and Dimension, 3. So a good first half in terms of new customer inflow as well. One of the questions we've gotten in the past has been, so has any deals been postponed due to Q2? Should this flag list have been longer? And I think we can safely say there's probably a couple of flags we would have had on the list had it not been due to COVID-19 and the slowness of getting some contracts negotiated. But we're quite happy with the 6 flags that are on the list today. If you flip to Slide #7 then, I just wanted to give you a short update on a product we call Coric Engage. This is the product that one of the U.S. funds signed onto. The cloud product, Coric Engage, and the one we've not put in the order book. This is a product that we are well underway developing in quite close collaboration with Microsoft. This is a fully cloud-enabled product that is a portal for engagement of clients or of asset managers. So this is very cloud native. It has a very intuitive design, a great client experience. It is also a way of be more dynamic in the client communication rather than just sending out PDFs and so on. So this is going to have a very dynamic client experience, which is going to be helpful for the asset managers out there. 24/7 access to this across all devices, given that it's a cloud product as such. And then we think that it's going to be easy for asset managers to implement. So we're quite happy that we got a client that signed up for this, as we are still in the process of finalizing the product, so they will help us finalize the product and be a good development partner of this. And then we will release the product most likely early 2021. So we still have a few months of development before it's a final product. But a new product we're adding to the Coric kind of product range that we have. We then go to the next slide. We wanted to give you a -- Slide 8, we wanted to give you a short update on where we are on the cloud transition. And as you can see on the slide, cloud is now becoming more and more prevalent of the clients we have on here. There's a total of 40 clients that are on cloud, a little over half of those is SimCorp Dimension. And then the rest is on SimCorp Coric and SimCorp Gain that we are also hosting in the cloud, a total of USD 3 trillion on this one. More than [ 2,500 ] users on it and interfaces to quite a number of other parties, including data, exchanges, trading partners and so on. So a very lively attraction there. And then as clients have multiple environments, they have a test environment, they have a production environment, they have development environments and so on. So we're actually hosting not only for the clients, but in total, 200 different environments that our customers need from us. The cloud operation is becoming a bigger and bigger part of what we do. And we are quite proud that this is globally distributed and that we've been able to operate this with very, very few smaller incidents and no major incidents at all. Of course, this is something where we are taking care -- great care. Quite a few of the ERP side in collaboration with IBM, and for those of you who have seen the latest press release we just sent out a few hours ago, we will also be working with Microsoft and Microsoft Azure to host future clients in the Azure cloud with Microsoft. So overall, good progress on cloud, both in the deployment of customers and also in the development arena. We move to Slide #19 (sic) [ 9 ] just a few reflections on COVID-19. The -- as you've seen, the numbers kind of reflect that we've done well. But if you kind of think forward on what does this mean for the market as such, I think that we are seeing our customers saying that the need for digitization has not gone down. On the contrary, they need to engage more digitally with their clients given that physical meetings is getting increasingly difficult. And there's an increased focus on data management, given that you want to have everything under one roof. There's an increased interest in cloud infrastructure because they're operating the infrastructure on your own, in a situation like this, has become more difficult. So cloud infrastructure, and you saw that from the previous slide, that is very clear. We also see that clients that have an integrated system like SimCorp Dimension, rather than many different systems with different operating units, have an easier time. So we see more interest from customers in getting into kind of an integrated solution that -- like what we are providing. And then I think that many customers are looking to understand and mitigate risk. I think that most I talk to will say that this is a great market, equities are going up and everything is good, but I think most will say there's also a sense of a little bit higher risk than what we've seen in the past. And then we do see kind of the continued consolidation among the buy-side. So overall, kind of the drivers of COVID, I would say, is a net positive for us. It's also negative that we can't meet the customers and so on, but net positive long-term that customers start to think about a more consolidated, a more cloud-friendly and a system that allows them to understand their positions end to end. So overall, that's the COVID situation. If you move to Slide #10, I just wanted to kind of mention that we merged our 3 European market units into 1, that we now call Europe, Middle East and Africa, that is led by Hans Otto Engkilde, who's been with the company for more than 20 years. Hans Otto started out with our Western Europe unit, then we merged that into the Nordics and then the U.K. and now also the German-speaking and Southern Europe. We've done this to get critical mass in EMEA, make sure that we have all of the people and the of the skill sets that are needed to the customers. And we do see many of these customers, given the mergers, and the interest and so on, becoming more at least regional, if not global. So this matches where our customers are going. No major disruption or anything, just wanted to mention that this is something we've done to better meet the demands of our customers. If you move to Slide #11, which is the last slide that I'll talk about, I just wanted to kind of talk about how the COVID situation has impacted our deployment with all of our customers. And I think we are quite proud that we've been able to take 15 products -- or 15 projects successfully live in Q2, which means that there's a real opportunity to work from home for our people and for the customers' people who work from home, and still be able to take instances live, and a couple of these were actually quite complicated. There's also a benefit, at least to our consultants, that they don't need to travel as much, especially if you're in the U.S., it's not uncommon, you get on a flight there Sunday night and come home Thursday or Friday night. And you spend quite a bit of time in an airplane. That is not the case anymore. And that means that utilization is a little bit better. It also means that we can put the right experts in front of our customers at all times. They don't have to spend time flying. Often we would fly for half a day to have a 2-hour meeting and then spend the other half of the day coming home or the day after. Now you can actually have 4 2-hour meetings in a day in 4 different states in 4 different jurisdictions. And if the time zones are with you, you might be able to have even more than that. So I think that there's a good opportunity to bring the right skill set and get better utilization on this. We've also been able to work remotely, of course, and that also means that the configuration centers we've built in Poland and so on has been utilized better because we've been able to work remotely. So from a utilization and from a cost perspective, that's also good for us. So overall, we've been able to live through this. Of course, we would love to come back to at least some of this with being in the customer's office, having the small talk at the coffee machine and so on, which is also important for future sales. But given where we are, we actually think we've come through it in a good way on the implementation side. And there's some of the learnings we'll be able to take forward, even into a world where COVID doesn't exist anymore. And with that, we will flip to Slide #12, and I'll give the word to Michael to take you through a more detailed review of the numbers.

[Michael Rosenvold, CFO & Member of Executive Management Board]

Yes. Thank you, Klaus. And I will flip to Slide #13 immediately. And as Klaus mentioned, the Q2 is, of course, the first quarter where we have been working almost 100% remotely in the entire quarter. And as Klaus also mentioned, it is a tough comparison to a very strong Q2 2019. So that is also -- you can see what you see on the revenue growth that we, in local currency, had a negative revenue growth of 3%. And if you also include the M&A impact and organic, negative growth of 6%. Looking at the margin, the organic margin was 25%, which is, you would say, solid result in this quarter, and that was compared with 29.5% in Q2. I think what is interesting is the next slide, 14. If you look at it on a 5-year perspective, then you can say the margin of 24.4% we reported or 25% organic, this is actually the second highest Q2 EBIT margin within the last 5 years. So as also indicated on the slide, Q2 '19 was relatively high also in a historic perspective. And then if we combine Q1 and Q2 on Slide 16, the picture is very similar, but a little better. So a flat growth in local currency and a slightly 3% negative growth organically. Looking at the margin, at 22% organic margin compared with 28% margin in H1 '19. And again, doing the same analysis over a 5-year horizon on Slide 16, it is -- the margin in H1 2020 is better than in '16 and in '17, on level with '18 and then lower than '19. So again, seen in the 5-year horizon, it is a solid result. The order intake, as also mentioned before, was down EUR 6 million compared with Q2 2020, and of course, to some degree, impacted by the fact that we had 2 of the new license orders signed which we have deferred also from an order intake point of view. And you can say the value of those 2 orders are a little more than EUR 3 million, just to put it into perspective. Included in the order intake is 2 conversions from perpetual to subscription-based licenses, which impacted the order intake with EUR 6.5 million. I will come a little bit back to these 2 conversions, and also, you can say, the impact on the future cash flow and revenue. Order book was EUR 2 million down within the quarter, but if you look at it on a half-year perspective, then it was EUR 1 million up. So you can say, seen over a 6-month period, we have not eaten from our order book, we have actually increased it slightly. Then on Slide 19, we have, as usual, the different revenue lines. And I think it's quite clear that we had a strong add-on license revenue while modest new license revenue. And if you look at it with, you can say, only EUR 2 million of new license revenue compared with EUR 14 million, that is, of course, the main reason for a slightly negative revenue growth for the quarter. But that was, you can say, partly offset by additional license sales to existing clients where we increased it by almost 70% in the quarter. And the other line, software update and support, we had an organic growth of 6% in H1 and 5% in Q2. While professional services organic revenue were down by 2% in Q2, but up 1% in H1. Then the split of the additional license sales. As you know, we have, you can say, regular additional license sales, then we have renewals and we have conversions. And this quarter, we had 2 conversions and that's -- actually the impact of those 2 conversions was, as I said earlier on, on order intake, EUR 6.5 million on revenue recognition EUR 6 million. But the important part here is actually that these conversions, they included upselling. And that means that going forward, we will have annual subscription-based payments, which are EUR 0.4 million higher than the maintenance we had early on. So that means, you can say, there is an additional annual cash flow of EUR 0.4 million. But because of IFRS 15, it means that the annual software updates and support fees will be EUR 0.9 million lower. You can also say that in a different way, that over a 5-year period, our software update and support fee will be EUR 4.5 million lower, but our cash flow will be EUR 4 million -- sorry, EUR 2 million higher. So you could say there is an additional cash flow impact over a 5-year period of EUR 2 million, and half of that will be license. That also means that if you look at the additional regular license sales, that was EUR 1.5 million higher than Q2 2019. And then you can, in fact, also add the EUR 1 million from the conversion. So EUR 2.5 billion (sic) [ EUR 2.5 million ] higher in reality. It's very similar for H1. We didn't have any conversions in Q1. And that means that the additional regular license sales was EUR 4 million higher than in H1 2019. And if you add the EUR 1 million from conversions, then it's EUR 5 million higher. That's on -- that was on Slide 21. And now I will take the cost picture on Slide 22. I would say, a key takeaways here is that -- are that the organic operating cost were unchanged compare with Q1 2019, that we see -- that it was a stable cost level compared to 1 year ago. And if you compare with Q1 2020, we actually managed to decrease the cost by 5%. And that is, of course, because of the measures we took in March following the COVID-19 outbreak. If you look at the individual lines, it's quite clear that the admin cost is -- when you look at the numbers, is increasing, but that is due to some one-off items. And one is a onetime cost related to the creation of the new market unit, EMEA, of EUR 0.8 million. And then we had additional costs for implementation of a new IT system of EUR 0.6 million. So you can say we have -- EUR 0.6 million. So we have EUR 1.4 million in one-off costs and the admin cost increased by EUR 0.6 million. So in fact, actually, also admin cost declined if you look at the ongoing recurring cost line. And then that leaves us with only one cost line increasing, and that's the R&D cost. And that is also very much in line with what we stated last time, that we do have some cost containment issues, but we are also investing into the future, and that means that we have continued our cloud-led initiatives and other strategic priorities in our R&D area, and that's why the R&D cost is increasing, as we also stated we plan to do in Q1. Cash flow development, as Klaus mentioned, relatively positive despite the fact that we had lower revenue and lower EBIT. The free cash flow is increasing, both in Q2 and in H1. And the 12-month rolling cash conversion is 93%, which is very satisfactory when we have an IFRS 15 and being so close to 100% for a 12-month period is at least, seen from our perspective, satisfactory. Then on Slide 25, that would be my last slide, leading to the full year guidance. The headline is that we maintained the expectation for the full year as we informed you about at -- in connection with the Q1 reporting. So we expect the revenue growth, measured in local currency, to be between minus 5% and plus 5%. And for the EBIT margin in local currency, we expect it to be between 22% and 27%. And we expect approximately 2% to -- of the revenue growth to come from the AIM acquisition and 1 percentage point negative impact on the EBIT margin. And that also means, you can say, that the organic underlying EBIT margin is between 23% and 28%. Then a final slide. Unfortunately, we had to cancel our Capital Market Day for natural reasons here in 2020. But we have now rescheduled it for 20 -- for April 28 in 2021. So we hope to see as many of you, if the world allow us to be together again in 2021, in Nice, in France, where we will host the Capital Market Day in connection with our user conference. That ends our presentation. So it's now -- now it's the Q&A session.

[Operator]

[Operator Instructions] And sir, your first question comes from the line of Hannes Leitner from UBS.

[Hannes Leitner, Equity Research Analyst of Software]

Yes. It's Hannes Leitner from UBS. First of all, congrats to the results. Maybe you could explain how well you are aware of that subscription conversion. As it seems, those EUR 6 million higher add-on licenses, they were supported in the quarter and also to the EBIT line. Yes, I know that there was some deferral of the -- I think also of the Q1 deferred contract wins. So maybe you can elaborate a little bit on those moving parts. How much was there already in the guidance? And then also based on that, you have now 86% contracted of your 2020 guidance which is well above the last year's number. And back then, you also met your guidance number. So where it comes to cautiousness at this point, given we have now 5 months -- we are 5 months into the pandemic situation.

[Michael Rosenvold, CFO & Member of Executive Management Board]

Maybe if I start with the conversion part. What we have stated also earlier is that there will be some conversions every year. And it's very, very difficult for us to time when it will be exactly. What we have in our full year guidance is the same level as last year. And then you can say the timing can differ. Last year, we had on the revenue part also some impact from conversions, but to a lesser degree than this year. And then we had some conversions later on. I would say one thing is that we do see clients actually, when they want to buy something new, if they want to go to the cloud or if they want to buy new stuff, then it is always a conversation, should everything then be on a subscription model instead of a perpetual model. So you can say, we do see more and more clients going into a dialogue about converting to an SBL. But if you if you ask what is in our guidance, then it's the same level for the full year as it was last year. So if we do more, then you should also have high expectation to the guidance. If we do less, then you should have lower expectations to the guidance. In terms of, you can say that we have secured a little more than we had at the same time last year and why are we then a little more cautious? I think in general, we are living in a more uncertain world now than we did 1 year ago. And no matter what, we are still depending on what happens in Q3 and Q4. And I would say, especially in Q4, is a very important quarter for us. And there is, of course, some uncertainty related to what will happen in Q4.

[Hannes Leitner, Equity Research Analyst of Software]

Okay. And then just one minor question, then another one. So the minor question is on the subscription services. Your order book received a boost in Q2. Did you recognize any revenues of these new launched products, because you gave EUR 1.8 million in Q4 as a part of the order book, which increased to EUR 5.5 million. I was just curious a little.

[Klaus Holse, CEO & Member of Executive Management Board]

Very little, [ really ].

[Michael Rosenvold, CFO & Member of Executive Management Board]

No. Nothing material.

[Hannes Leitner, Equity Research Analyst of Software]

Okay. And the last thing is rather more on the U.S. market opportunity. You signed 2 small deals in the Coric side. I think also BlackRock reiterated its 10-plus for the technology division. Maybe you can frame there, do you see there also a growth opportunity in the U.S. above -- in the double-digit area in terms of your pipeline?

[Klaus Holse, CEO & Member of Executive Management Board]

I would say on the pipeline in the U.S., it looks quite good. I would say we are -- we are in late-stage with a few customers in North America at this point. We'll then have to see whether they end up signing something in this current situation. But the deals are progressing. And at least, we would expect to see more deals coming out of the North American market unit before the year ends.

[Michael Rosenvold, CFO & Member of Executive Management Board]

And I would like to say that the Coric deals we have made in North America are not small Coric deals. They're actually of a relatively nice size in North America. Of course, Coric deals are smaller than Dimension deals, but it's some relatively good and large Coric deals we have made this year, both in Q1 and Q2.

[Operator]

Sir, your next question comes from the line of Gautam Pillai from Goldman Sachs.

[Gautam Pillai, Equity Analyst]

It's Gautam Pillai from Goldman Sachs. I have three questions, if I may. First is on the pipeline and seasonality. Is the pipeline still heavily back-end loaded into Q4? And can you comment on the maturity of the pipeline of these deals in advanced discussion stage, with a reasonably high probability of closing at the end of the year? Second question is on the launch of Dimension Azure. If I remember correctly, this does seem like this is tracking ahead of plan. Please, can you comment on that? And are you already having conversations with customers on a move to a SaaS in Dimension? And also, can you comment on where your competitors are on public cloud platforms?And my last question to Michael, following up on the conversions point again. Can you comment on what percentage of your customer base has been converted into a subscription model so far? And how should we think about this metric going forward? You mentioned that there will be an element of conversions every year. But what is the uplift on these contracts from upsell and cross-sell when you have these conversations to convert?

[Klaus Holse, CEO & Member of Executive Management Board]

So let me start out with the pipeline and maturity. I can also talk about the cloud and a little bit about the competitors, and then Michael can talk you through some of the details on the conversions. On pipeline, I would say our pipeline actually looks reasonably good. As I commented in -- or actually, it looks good, it's not reasonable, it's actually pretty good. When -- as I commented in the beginning of the call, I said there was a couple of deals that we were expecting to sign in Q2 that didn't sign in Q2 due to the customer is not having the same collaboration tools internal as we do. So having them kind of get their procurement and IT and legal and business and all of this together to actually make decisions, has been a little harder and taking a little longer than you would have hoped for. So that means there's at least a couple of deals that are in the very late stage of negotiation, and we're still hoping that they kind of get their -- get everything coordinated and get something signed in the not-too-distant future. Then, as I said, there are deals in the U.S. that we're working on that are also coming towards the end of the line, probably a little later than the first pieces I talked about here. But I would say there's a number of deals that are late-stage in the pipeline, and then there's a number of deals on top of that, that might end up getting signed this year as well. So I would say, good pipeline. And if the customers are willing to sign a multimillion-dollar contract with somebody they never met, we should be in good shape. They're developing in the right way. We'll then have to see if they can cross the finish line in this environment. We haven't proven that yet which is why we keep the guidance at -- as we do with quite a wide span in some senses. So that's kind of on pipeline and maturity. On launch of Dimension in the cloud, we are working quite well with clients in the cloud. And -- but as you can see, quite a few of the new clients coming on are launched in the cloud. We ticked that box in -- on the flag list, and you can follow it there. The last part we need is kind of the technology upgrade, where we are moving from a 2-tier to a 3-tier technology. We are becoming a native cloud vendor as such. And I think if you look at the newest competitors, which would be a BlackRock or a State Street and so on, then I think that BlackRock is also delivering in a cloud-like environment, like what we're doing right now with kind of a technology that is not upgraded to Tier 2, to 3-tier and so on. And our -- at least our understanding from the customers we talk to is that's kind of where BlackRock are. As far as I know, they don't have a project to lift their product to 3-tier, all of it, they might be doing this in pockets and so on. But we'll have to see with that. As for Charles River, they've been kind of a cloud product, 3-tier product for a long time. The rest of the State Street products are not, so there's some work to be done in that area as well. That's probably it. So there isn't -- I don't think there's anybody who has a particular benefit or advantage in that sense. There's a couple of newer competitors that are coming up in the lower end of the market, companies like Infusion and Invest Cloud and so on that are kind of -- that are built that way from the get-go. But their functionality is typically a little less than is needed in these large clients. They're typically competing in the lower end of the market. And so when we are in the low end of the market, we tend to see them. If we are at the high end of the market, we tend to not see them.

[Michael Rosenvold, CFO & Member of Executive Management Board]

Good. And then in terms of conversions, I will say that we have had like a handful of conversions in -- on an annual basis in recent years. And that means that we now have 31% of our Dimension clients, they are now on subscription. That also means that 69% are still on a perpetual agreement. So you can say the potential, or whatever you want to call it, for converting, is about 70% of our Dimension client base. I would say what we are focusing very much on when we do the conversions is, of course, you can say the upselling and the fresh money. And you can say, in this quarter, the upselling and the fresh money was, on an annual basis, EUR 0.4 million and on a 5-year basis EUR 2 million. So that's actually what we get in an extra annual and 5-year cash flow. Then also related a little bit to your question regarding if it is a fully cloud-enabled product or sub product we are selling, that will, of course, from a revenue recognition point of view, also means that, that will be taking over the term of the contract so to make it even more complicated for your spreadsheet.

[Klaus Holse, CEO & Member of Executive Management Board]

Maybe not as a guidance on what conversions means and revenue upsell and so on. But if you think about it, then there was a total impact of EUR 6.5 million on conversions for this quarter if you kind of convert it into the term of the contract. And as Michael said, about 2 of those is new money that gives -- you know. So had we done nothing, that would have stayed at [indiscernible].

[Operator]

Sir, we got another question, comes from the line of Poul Jessen from Danske Bank.

[Poul Ernst Jessen, Senior Analyst]

I have a few minor ones. First, on the conversions, if you can give insight into the length of those 2 contracts [ for money ]. How many years the contract is running?Then Klaus, you made a comment on the pipeline that in case that clients were signing up for contracts with a vendor which they haven't met would be a clear signal, my question is, does that mean that those contracts which you might have in the pipeline are contracts that has started up the process during the COVID-19 outbreak and not from -- prior to the situation? Then a question on the 2 contracts of EUR 3 million. I just want to be sure they are not in the order intake or in the backlog, just to be really sure on that one. And then the final one, gross margin. If I do some calculation, given high gross margin on the contracts or licenses, then I get an implicit margin on the professional services on 25% plus, which is still at a high range versus the past. Is that the level that we should continue seeing it on going forward on the professional services? Or are the recent year's margins exceptional? That's all.

[Klaus Holse, CEO & Member of Executive Management Board]

So why don't I do the pipeline first, then Michael does conversions and margins afterwards. So of the contract we are in negotiations or in the pipeline, there's both types. Obviously, the ones that we were hoping to sign in Q2 are some that we've been in contract negotiations with for a while, and somebody we met physically, sales processes that started up in 2019. There's also contracts in North America where we made -- where we did meet the customer early on in this, but where we've done mostly demos and proof of concepts and so on in a virtual way. And then as I look into more kind of the Q4, late Q3 pipeline, then there are sales processes that were started up by RFPs that was issued early stage in Q1, where we might have met the customer for early conversations and so on back in '19, but during the process of the RFP, it's really been mostly virtual. Typically, I would go personally meet with these customers, fly there, have a conversation, all of this. I do this on video, we have a higher frequency. I can meet these customers more on video than I would have done physically because I don't have to travel. But still, we need to see, is that going to get them over the line? We don't -- that, we don't know. I would say the indications are it will, but we still need to see the evidence.

[Michael Rosenvold, CFO & Member of Executive Management Board]

And then I can answer -- sorry, I can answer your 3 other questions. If you start with the length of the conversions, I think I used an example of 5 years. And that example is not taken out of the blue, and that's -- I think that's what I'll say about that one. Regarding the EUR 3 million, it's correctly understood, it's not part of order intake or order book or revenue recognition. So that's correct, understood. And then in terms of our professional services, our consultancy business and our profitability, there are no major one-off items in what we have reported in H1. So you can say whatever you calculate there is not impacted by any unusuals. And that also means that it should be possible to continue to deliver something like that if we keep our, you could say, purchasing power -- sorry, our selling power and our execution in that area. So we have no indications that, that should go different from what we're delivering right now.

[Poul Ernst Jessen, Senior Analyst]

Okay. Then just a follow-up on the 2 contracts. The contract announced in Dimension, is that one of those who are not part of the order intake reported?

[Michael Rosenvold, CFO & Member of Executive Management Board]

That is correct, but it's also a relatively small order.

[Poul Ernst Jessen, Senior Analyst]

Yes, I know. It's just for the book [ clearing ].

[Michael Rosenvold, CFO & Member of Executive Management Board]

But it is correct. It is correct.

[Klaus Holse, CEO & Member of Executive Management Board]

It's an institution with a special contract.

[Michael Rosenvold, CFO & Member of Executive Management Board]

Yes. Yes. As part of the RFP, so that is a nonnegotiable.

[Operator]

Sir, we got another question, comes from the line of Claus Almer from Nordea.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Yes, also a few questions from my side. I will take them one by one. The first question is about your guidance. In Q1 report, you stated that the guidance was under the assumption of a normal working environment after the summer break. That was not repeated in this report. Is that just the natural consequence being mid-August? Or is there anything else behind that? That would be the first question.

[Klaus Holse, CEO & Member of Executive Management Board]

So in -- when we did the announcement in May, our assumption was that we would mostly be back in the offices in June, which also turned out to be mostly true for Denmark, but not the rest of the world. And we had the assumption that the rest of the world would follow and we would be kind of entering into a more normalized situation come September and October. That was our assumption. And it was also our assumption that, that would need to happen for this to continue. I think we have revised our view on that. One is we don't think we're going to be back in the offices in the rest of the world. We're back in the offices in Denmark, at least for now. We're running at 70% capacity in this office, not that many people actually coming in, but we could run at 70% capacity if we wanted to. The U.S., I doubt that we will open our offices this year, to be honest with you. I think it's kind of where we are, even though we are in -- mostly in New York, where the situation is under control. But if you're on the 26th floor of a building that has 40 floors and there's 30 other companies on those floors, it kind of gets a little bit harder for the landlord to make this work. And then in a country that is highly litigious, then that might not be what's going to happen, let's put it that way. So we don't think we're going to be back in the offices as normal for a while. But at the same time, we've seen our customers kind of react to that and say they're not back in the offices either, and they still need to move on. So we're seeing things progress even though we're not back in the offices. So you can say our assumption is, no, we're not back in the office. And our assumption is we can still complete deals even though we're not back in the office. That's the new assumption.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. That makes a lot of sense. Then the second question goes to a comment you made in the report that Q2 ended as expected. But as Q2 also included this EUR 6.5 million from client conversion, the order intake and nearly EUR 6 million in revenue, I'm just wondering whether you had already expected such a high amount of client conversions? Or how should we think about Q2 ending as expected?

[Michael Rosenvold, CFO & Member of Executive Management Board]

I would say when we are saying that it is, by large, and when you take, you could say, the total picture, then it is more or less what we expected in terms of total impact of what we did in terms of our professional services if you take the license part and the fresh money and all that. So it was like -- it was not like we were taken by surprise that we ended where we ended. But especially for the conversions, as we have also said early on, it's very, very difficult to predict where they will be placed within the different quarters. So you can say on the reported numbers, maybe a little higher than, you can say, our internal forecast. But that is also taking into account that some of it is conversions. But the activity level, the utilization, everything was more or less anticipated.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. Good. Just -- that's was good to get that clarified. And then my third and final question goes to the DataCare and SFTR order intake. As I understood the Q1 call, you were pretty optimistic about the order potential in Q2. However, it ended only EUR 0.2 million. What happened in Q2? And should we see a uplift in Q3 instead?

[Klaus Holse, CEO & Member of Executive Management Board]

I think on DataCare, we actually feel quite good about that. That's moving. We've taken customers live. We keep engaging. So that feels good. There's a good pipeline on that. SFTR, I think we overestimated a little bit in the first quarter. That hasn't taken off as much as we would want to. Fortunately, that's a small impact, but that's not going as we expect it to, to be honest.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

So Klaus, should we think about this as a small EUR 200,000 order intake per quarter? Or would it -- should we think of the second half as the level? Is there a certain delta between Q1 and Q2?

[Klaus Holse, CEO & Member of Executive Management Board]

I think you should expect DataCare to be a growing business over the quarters to come. And SFTR is probably going to be what it is, which is close to nothing.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

So growing from Q2 or from the first half?

[Klaus Holse, CEO & Member of Executive Management Board]

I think you should at least expect it to be growing from Q2. Let's put it that way.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

I hope so.

[Klaus Holse, CEO & Member of Executive Management Board]

That's a safe answer. I think what happened here is that we sold DataCare and then we implemented it. We went live on the first client and the second client is very close to going live as well. So we have not been aggressive in selling more because it's actually much better than you absorb something, you've gone live. And then you go to the next clients and really show that you have something which is working quite well and that you go live plans, you can also fulfill those. So our expectations is that we will start selling DataCare again now.

[Operator]

Sir, we got -- [Operator Instructions] and we got another question, comes from the line of Magnus Jensen from SEB.

[Magnus Thorstholm Jensen, Senior Equities Analyst]

A couple of questions from my side. The first one goes to cost of goods sold. You talk about less traveling having an impact on your COGS. Could you say -- could you quantify more, to some extent, how much that is? And looking ahead, is that something that we should expect, to some extent, to continue since you could be changing the way you're working following COVID-19? Or should it just return to normal in terms of travel activities? That's my first question. And the second question is quite short. Could you inform the margin on conversions when you do those?

[Michael Rosenvold, CFO & Member of Executive Management Board]

I will start with the first question. And you can say our -- the travel cost, I will not -- I will tell you, you can say, our travel cost in total, not only related to professional service, but also to sales activities and internal travel costs and all that, so our travel cost is about between EUR 12 million and EUR 15 million on an annual basis. And it's quite clear that we have not traveled a lot in Q2. I would say going forward, we will of course start traveling again. But I think we, as all other companies in the world, have also learned from this. So there are -- there will be -- that's at least our expectation, less travel activities also when we return to a more normal situation. I think we can utilize our resources more efficiently by not traveling 16 hours for a 1-hour meeting. And that's actually the benefit for all our clients. If more people can then utilize our experts and our key people instead of they're sitting on a plan for 16 hours for short meetings. So we do expect that travel will go down also in the future. And then you can say the ramp-up period now, I'll say, Q3, I don't expect a lot of traveling either. Then let's see when we get further.

[Klaus Holse, CEO & Member of Executive Management Board]

And you could say, in the past, many of our customers did not have the infrastructure for us to conduct anything virtual. I've walked into more than 1 meeting room and said, "Do you have a projector?" And they would look bewildered at us and run around to find one. Now there's video equipment in many meeting rooms. So I think that people have changed in this period, which will allow us to do more. So the readiness on the customer side has also changed. Then the question on margin..

[Michael Rosenvold, CFO & Member of Executive Management Board]

We don't disclose margins on individual deals. And then here, we have 2 deals, and that will be very unfair to disclose that towards our clients. And we don't want to do it towards our peers neither or competitors.

[Klaus Holse, CEO & Member of Executive Management Board]

But not -- but for the extra money that comes from -- so the money that is already in there doesn't change. So the new money that comes in, think about that as a normal [ airlift ] contract.

[Magnus Thorstholm Jensen, Senior Equities Analyst]

Okay. That's clear. And just one more, if I may. You talk about that COVID-19 potentially have a positive impact in terms of asset managers choosing a fully integrated solution instead of pick and choose from different vendors. Why is that the case?

[Klaus Holse, CEO & Member of Executive Management Board]

I think that what you're seeing is that, at least the feedback we're getting from the market is that, if you're somebody who has 5 different systems with 5 different operating teams that are now all sitting at home trying to coordinate between the asset classes and so on, that's harder than if you have 1 system that handles all the asset classes that goes to a select number of custodians, you only have 1 operations team that are now working from home. That's an easier collaboration than the opposite. So that's what we're hearing.

[Operator]

[Operator Instructions] Excuse me, sir. No more question at this moment. Please continue.

[Klaus Holse, CEO & Member of Executive Management Board]

Very good. Then we will -- there's no questions online either. So then we will say a big thank you to all of you who dialed in, and thank you for a lot of good questions. We'll do our very best that we can also have a positive meeting in Q3. See you all then.

[Operator]

This concludes our conference for today. Thank you for participating. You may now all disconnect. Speaker, please stand by.