adesso SE

XETRA:ADN1

Earnings Call Analysis

Company's Mid-Year Earnings Performance

The company installed a new SAP system to improve working capital management, with initial struggles now mostly resolved. Invoice writing and receivables management are back on track, though there's still a backlog to clear by year-end. The aim is to match past working capital figures this year, with further improvements targeted for next year. Cost saving measures are under review, specifically in other operating expenses, but major savings are expected from higher utilization instead. The CEO transition is forthcoming, with a successor announcement planned for Q4. The first half of the year saw weaker license revenue at around EUR 2.5 million, but expectations are set for a stronger second half, with high single-digit million figures anticipated.

Ongoing Strong Sales and Positive Full-Year Outlook Despite Earnings Dip

adesso opened the earnings call with a sense of cautious optimism. They reported an impressive 33% year-over-year sales growth. However, it was not all good news, as the second quarter earnings were weaker than anticipated due to below-average capacity utilization and fewer working days. Despite these challenges, adesso is confident that its measures to improve capacity utilization will bolster earnings in the latter half of the year, allowing the company to confirm its positive full-year guidance.

Working Through SAP S/4HANA Transformation Challenges

adesso has faced hurdles with their SAP S/4HANA transformation, which went live in April. This changeover caused headaches involving delays in invoicing and recording billable hours, leading to increased working capital. The result was a significant bump in short-term debt to finance these temporary capital requirements, and a dip in operating cash flow. adesso expects these issues to smoothen out and is working hard to normalize its cash flow and debt position by the end of Q4 2023.

Utilization Rates Central to Financial Performance

A key performance indicator for adesso is their employee utilization rates, which they measure in detail through various KPIs. For the first five months of 2023, the company's utilization hovered around 80%, causing inadequate earnings since each percentage point in utilization translates to substantial financial impacts. The company witnessed an encouraging increase to 83.4% in June, which if maintained or improved upon, could lead to a profitable second half of the year. Efforts to improve utilization have already shown positive results in July.

Planned Expansion and Shoring Efforts

The company is expanding its largest office in Dortmund, expecting to double its capacity, which underscores its commitment to growth. Further, adesso is venturing into shoring by acquiring a small entity in India, which is proving to be a positive step for scaling operations. Additionally, the company has well-established shoring capacities in Turkey, Bulgaria, and Romania, which it aims to leverage more in Western European projects.

Ongoing Measures to Improve Working Capital and Cost Savings

adesso is actively working to reduce its working capital to past years' levels. The new SAP system, despite its initial troubles, is expected to eventually aid in improving cash flow and working capital efficiency. Simultaneously, the company is scrutinizing its operating expenses looking for potential savings, although it notes that more substantial financial benefits are likely to come from improved employee utilization rates.

Adesso's Resilient Customer Base and Strong Service Demand

The company has seen record-level order entries, which are outpacing sales growth. This is attributed to adesso's deep, lasting customer relationships, with many spanning over a decade. Despite being primarily a project-based company, its focus on essential business processes for clients ensures continued demand. Any fluctuations in IT service demand aren't expected to easily disrupt these customer relationships.

Earnings Call Transcript 2023-Q2

[Martin Mollmann, executive]

Good morning, everybody. This is Martin Mollmann of adesso IR speaking. First of all, I'd like to thank you for joining our Q2 and half year 1 earnings call regarding our half year report we've published today. Within our release this morning, you found adesso pretty much confirming the outlook for the remainder of the year given with the Q1 figures. adesso reports ongoing strong sales with extraordinary 33% compared to previous year. As expected, the second quarter was weaker earnings-wise since capacity utilization was still below average and the fewest number of working days. However, adesso sees capacity utilization measures starting to take effect and will help with earnings contribution in the second half of the year. Hence, outlook for the full year 2023 remains positive and guidance has been confirmed.

I'd now like to welcome as well our CFO, Jorg Schroeder, who will give us a deeper insight into the figures of the first half of the year and the outlook for the remainder of the current year. As always, I'd like you to mute yourself during his presentation. Feel free to open up the channels for the Q&A session afterwards. [Operator Instructions]

And Jorg, please go ahead.

[Jorg Schroeder, executive]

Thank you, Martin, for the introduction. Welcome also from my side to everybody who is listening right now. I will start the half year report with, as usual, the sales numbers.

As you see here, the top line growth, and Martin already pointed that out, is 33%. Compared to the first half year of 2022, the total number now is EUR 546 million. And of course, we are very happy with that, and that shows that our kind of services are still in demand in the current market environment. And also, the outlook for that is pretty much on that line here.

What is -- what has not worked out in the first half year, and Martin briefly mentioned that, too, is the earnings you see here on the right-hand side, the EBITDA going down to only EUR 25 million. That's a decline by 34% compared to the first half year of 2022. And it is impacted by the really high pace of recruiting that we had already started actually in 2022. And then concerning low utilization, capacity utilization went down due to the higher pace of recruiting. So we really have a lot of new staff, and not everybody into projects soon enough and early enough.

So that is basically the problem that we had pretty much through the whole first half year, at least for the first 5 months. I will later come to what has changed now or what we see in change, and that was actually changed in June already. But until June, the capacity utilization was really bad compared to previous years also and to average figures. So that is why the earnings didn't match the good sales growth that we saw.

Okay. First, let's dive deeper into the sales numbers. So here, we see the sales split by industry as usual pointed out. And as usual, we see that basically all industries work out just fine. Only automotive is still lagging a little bit behind with just pretty much the previous year number, only plus 1% growth. All other sectors grow by double-digit numbers. And we see banking by plus 16%, and all the other sectors are actually beyond 20%. So this is really, really good, and we see also the new -- yes, new kids on the block, the newer sectors that we started pretty much last year with retail and utilities with really good growth figures here in the high 60s and high 70s. So this is really a very good development, and we hope that we continue that also in the future.

And it's still that the public sector is our biggest sector now, the first time happening that was last year. And now public alone makes EUR 90 million revenues in the first half year, which is even more than the EUR 80 million that we do in insurance.

The growth figures, however, they are pretty much in line now with the more mature verticals that we see here. So public sector now is still growing and good growing, but not with that outrageous growth figures that we see, for example, in utilities and retail.

So yes, this is a really good development. We are happy that we can continue this. And also, I can say it on this page already. This -- the outlook for the rest of the year is also pretty good in all the verticals pretty much.

So now the sales split by region. We have added a couple of countries here because we get more and more international. Now we are active in 15 countries. Of course, still, as you see here, 82% of the sales is done in Germany. So we are still a very German company. And the sales growth in Germany is 31%. But that also means that the international growth rate is actually, on average, 40%. So higher than in Germany, and that is why the average overall for the group is down 33%.

And we see here that the more mature countries like Switzerland and Austria are growing good with double digits: Switzerland, 31%; Austria, 26%. And we added new countries here with Netherlands and Italy because they now have domestic revenues over EUR 5 million, and they are also growing in the terms of Netherlands. Italy is pretty new. We started last year, but it basically became a bigger country for us with the acquisition of WebScience that we just closed in January of this year. So Italy is a pretty new story. And then we have Turkey here only showing the domestic revenue. Turkey also have a large part in the shoring capacity in the near and offshore capacity.

And -- but even in the domestic revenues, we see high growth rates and also for all the other countries, in total, it's 15 countries now, 14 outside of Germany. And most of them or a lot of them are doing really good. Of course, they are much smaller than the German-speaking area, but we think that development is on a good track.

So coming to the bedside of the numbers, which is the earnings. We see that the EBITDA margin declined 4.6% for EBITDA is actually pretty bad, and this is largely driven by the low utilization. And as what you see here, the key figures is the high rise in personnel costs. So we see FTE on average, and this is now comparing first half year '23 to first half year of '22, is 32%. So what we see here or what we saw in the last couple of quarters is that this figure was inflated. It was much higher than the sales growth, and now it's coming pretty much in line. So we have stopped now the really over-paced growth of hiring people, but we started that in February basically. And you always have a delay. So contract -- asset or contracts with employees are already signed. So if you say we don't hire that much in February, until you see the first effect, it lasts like 3 months on average, I would say, because the rest is already done in that period.

But now we see that employees rise with 32% is pretty much in line. Again, we see the sales growth of 33% and then we see that other operating expenses are even disproportionately low. What we see is disproportionately high is the personnel costs. So here, we see that is a phase of the high recruiting pace and a phase of rising personnel cost per FTE, which you see down here at the slide, is now at plus 6%, which is quite a lot. It's the, by far, biggest position, the biggest cost position for us, the personnel costs and that increased by 6%. It's, of course, an issue.

We don't expect it necessarily to increase further than from here. But right now, we have to deal with that. But we hope that we can get more in line in terms of sales growth and personnel costs now in the remainder of the year to reach our numbers.

If we look at the profit drivers, we see, of course, most important one is utilization and that was pretty bad in the first half year. The daily rates have increased. Still, we are at around 5%-ish in terms of daily rates. So this is basically good news. And we still see room for improvement here in the future because the demand is so strong, and so we still see a lot of projects happening. We don't see any bad signs in terms of recession or business going down, so that is definitely not the case.

If we look at our license fees that we had this year, the first half year was weaker than the first half year of 2022. 2022 was a record year. We also have to mention that, but we still have a pipeline there for in|sure for the second half of the year. Probably most of the deals that we have in the near future outlook will come only in Q4. That's just because the decision-making processes that the insurance companies are designed in a way that they usually do it pretty late in the year. But still, we are looking for more license sales this year, but not to reach the same level as last year. That doesn't look very likely.

And yes, personnel cost per FTE, I already mentioned that. I would say from this slide, this is probably the main takeaway that we are really, at this point in time, have a high increase. And because it's the biggest cost figure, the EBITDA looks as bad as it does here and the margin went so much down.

Yes. And then it doesn't get any better if EBITDA is so much weaker and pretty much, everything else is more or less in line with the proportions of our growth pace. But the absolute figures are, of course, then in a range where EBT, earnings before taxes, are positive. But no, it's actually -- it should be negative, minus EUR 5.4 million. And the consolidated earnings then is minus EUR 6.3 million. So we are actually in the negatives and also for earnings per share in the first half year, we have lost money. So that is not very common for us, and we are not very happy about that and we want that to turn around. So as good as all that sales growth is, we have to watch out that we stay profitable, of course, and not growing so fast that our costs run us away. But I will come to that. We are confident that we can shift and make the turnaround to profitability again, and we also can do that this year.

First, some numbers of the balance sheet and financial KPIs. I have to mention one thing because they are largely impacted by an S/4HANA transformation that we made. And the go-live for our new SAP system was in April, start of April, and we faced some issues with that. First, of course, we do these kind of transformations to SAP at a ton of our customers. So we are quite used to what does that mean to have a new ERP system in place. And we did it with our own consultants and also some external help. But in this case, we are the customer. And yes, pretty much like all the projects, you always face some hiccups after the go-live. And we are no exception here, unfortunately. So we had some difficulties to get invoices out in time to book all the billable hours and to have the receivables management in place.

So we had a couple of weeks where we really had to work hard to get everything done, and we see that reflected pretty well here in the balance sheet because our cash position is as it is. But we see a high increase in financial debt, and this is largely driven by short-term debt because we use that additional debt leverage to finance the working capital issues that we see here within the year.

We see that the net cash flow -- or net debt position has increased by pretty much the same amount. Operating cash flow is on really bad levels, and this is driven by the high increase of working capital you see here by 48%. So at the end of the quarter, we were able, again, to write all the invoices or a lot of invoices. So you see an increase of accounts receivable. But what we even see more is a large increase of contract assets that increased. And this is not only driven by a fixed price project, that's also the case, but also by a large part of billable hours that are chargeable but where we haven't written the invoices yet. So this is booked in the balance sheet under contract assets, and so this drives really the working capital. We have booked the numbers, but we haven't written the invoice, so the customer doesn't even know yet that he has to -- of course, he does know that he has to pay, but he doesn't have a formal document for that, and that means working capital really went through the roof.

I'm still confident that we can turn this around in the second half of the year, can get this working capital issues to at least normal figures because actually, we did this SAP transformation to get better with these kind of numbers. But in the first quarter, we actually got much worse. So this should not be the long-term future. But at this point in time, it is driven by the transformation and the go-live hiccups that we face the first few weeks after the go-live.

And that, of course, also means that the equity ratio goes down because of -- on the active side of the balance sheet, we see the high increase of contract assets. And on the right-hand side, we see the high leverage figures. So this drives equity proportionately down and we see equity ratio going down. Hopefully, we can solve these kind of financial KPIs, things to the end of the year. So in Q4, latest, I hope that we have turned this around and are at least on track with usual figures, what we know for adesso.

Okay. So for the guidance, as you probably also have seen that we are in line and think that our guidance is still in reachable grounds. So sales-wise, it's probably more easy because we already have EUR 546 million of revenues booked and we want to be over EUR 1 billion. So we are at 55% of the guidance reach, and we have the second half of the year so this looks pretty good. We don't know yet how much better than the EUR 1 billion we really get, so that is why we haven't changed there anything. But of course, we will look in the next couple of months how this turns out.

In EBITDA, we are lagging a little bit behind with just EUR 25 million of EBITDA after the first half year. So that is around 23% to 25% of the guidance level, and we want to be above EUR 100 million. This is still manageable. When you look at the bullet points that we have on this slide here, we see still a strong market demand for in particular, the IT service business. So we don't see any industry where this is actually going down. What we rather see is that our order entries are on a record level. Of course, this has to do with the growth, but order entries are still good. So sales force is working, all industries are looking for digitalization projects, software engineering and invest in modern technology, and we have our fair share of wins in that. So that is why order entries are also looking pretty good. So sales is not our problem.

And what we also did, and that is what I briefly mentioned with what I think is kind of a turnaround is that we reduced our hirings in the second quarter to slower the growth pace. If you have too much growth, it's really tough to handle because we are highly dependent on this, yes, direct growth that we hire people and utilize them in projects, and that's too much. It's hard for us to get the utilization numbers in place.

But the last point here, utilization jumped in the end of Q2. I will mention what we mean by that is because on average, in the first 5 months, we had a utilization figure as we define it for ourselves of roughly 80%. And that is like working 4 days out of 5, so that is really not enough. And it's not anywhere near of average figures.

And also to say is that every small change in that figure has a huge impact. For example, in June, and that was the first month in 2023 where we had that figure, the utilization number was 83.4%. And that doesn't sound like much, just a 3 percentage point increase, but it actually changes the world for us. So much is -- are these numbers are of importance for our earnings because, yes, that's actually for the whole year will mean a lot of millions change if we would have just this 83% on utilization.

And we could even do a little bit more. What we also see is that into the start of Q3, we can continue with that kind of utilization number that we had in June, and it's largely driven by slowing the growth pace. So growth pace is going down a little bit. We are doing much more in terms of increasing utilization in the projects and have a much deeper focus on that, and -- but it has a delay. So we started with all these measurements and initiatives around that in February actually, but we see the first routes only in June. That is all the facts.

But because it actually happened in June, we are quite confident that the guidance level also to EBITDA is reachable this year. So that is why we still stand EUR 1 billion in sales, over EUR 1 billion in sales and over EUR 100 million in EBITDA is possible with a good second half of the year.

So I will close this with 2 updates that actually happened at the beginning of Q3 because we have Executive Board updates here with 2 new members. Kristina is joining the Board. She is actually a long-time adesso employee and was heading the HR department beforehand and now has joined the Board. Yes, is now a part of the Executive Board team as well as Mark. Mark is also -- or has been a long-time adesso employee for, I think, over 10 years, something like 12, 13 years and then left adesso roughly 2 years ago to become CEO of a banking software company, CoCoNet, and now has rejoined adesso as member of the Executive Board. So 2 new colleagues, very nice people. I think this is a very good team. I'm very happy about that. and looking forward to conquer the world with these colleagues.

Yes. And this pretty much concludes my slides. I'm happy to take your questions.

[Martin Mollmann, executive]

Thank you, Jorg. That's great. So let's start with the Q&A, and I see Mr. Spang from Tigris Capital will have a start. Thank you.

[Lukas Spang, analyst]

Maybe we can start from a general perspective. If we look to other IT service companies, and they also reported today or in the last few days, it seems like a rock-solid from today's perspective if we look to your organically high growth. So maybe we can jump a little bit more in detail. From your perspective, what makes you in these times of environmental uncertainties more resilient? Maybe you can also elaborate a little bit more in your point of view how maybe from a perspective from the customer side, you are more deeper in the business of the customers. So how can you sustain compared to other IT services companies these high growth levels? That would be my first question.

[Jorg Schroeder, executive]

Yes, of course. Thank you, Mr. Spang. I think that's a very good start of the discussion point, and you're absolutely right. Of course, we have seen that other IT service companies to look at things a little bit different, and we have asked ourselves whether we are maybe too positive on that. But we can just reflect on what we actually see.

So we see the order entries on a record level and growing actually even faster than our sales growth. So order entries and sales is not the problem. And why that is, we can also only guess. I think a lot has to do with our really deep, long-lasting relationships with customers. So we are seldomly doing onetime projects. Of course, that is one thing that a lot of analysts and investors are critic when they look at our kind of business because it doesn't have a lot of recurring revenue by definition. So it's not contracts that renew every year and for a lot of years.

But what we have is a lot of repeating revenue with customers for over a decade or even 2 decades where we continue the business again and again, sometimes only on a quarterly basis with new projects, but these are long-lasting relationships. So customers don't easily change their preferred IT service provider just -- and in particular, not in times of uncertainty. So we do have a lot of these good customer relationships, and that helps pretty much.

What we also do is we are not just an IT service provider, I would say, the other big ones are probably also not who are just designing websites or something. We are really in the backbone of core business processes of our customers. So it's really deeply connected to the success of the customers and how they utilize software for their own business processes. And so that is why there are still a lot of things going on because customers say, okay, we can invest in software engineering on certain types of use cases, and we actually have benefits of that in our own business.

So it's not just something you can just discard and say it's not important, it's actually very important, what we do to our customers. And combined with the deep customer relationships, that's just my guess to be completely honest here, but that is what we see. So no customer lets us down. They all have a lot of things to do, and they're still coming to us.

[Lukas Spang, analyst]

Then in terms of utilization, some calls ago, you explained a little bit more in detail how you measure utilization and you showed us these 3 main KPIs: free people, classic utilization of billable hours and booking intensity. So if you look at these 3 main KPIs, what is currently -- or if you look back to Q2 and Q1, what is still the main issue from these 3 main KPIs?

[Jorg Schroeder, executive]

Yes. That's the key question here, I would say. We still look at these 3 main KPIs. We work a lot with them. So just to get everybody on the same page, we have actually a ton of KPIs around utilization. But the 3 most important ones are the first one we call free employees or something like a [ beachside ], so people who are not working in projects, just we pay them but they don't have a project at this point in time. So this number is -- for us, it's good if it's below 11% and between 11% and something like 15%, 16%, it's normal yellow and after that, it turns red. And we had a couple of departments where it was red. These departments are now -- there's no at least big department where we -- or big team where we see that kind of figure. So we are pretty much not in the green with everything but on the low yellow side here.

So we turned that around a little bit, so we get more and more people into projects. Then we have a second KPI, which is probably the most important one that is what we actually call utilization, is we take all possible billable hours. So we just take all operating workforce and possible, hours they can work in a particular period, usually a month and then look at how many hours were chargeable in that period and compare that against each other. We normalize that, so we subtract holidays and illness because that just happens and we take it out from the general basis. But after that, we get a utilization figure of how many hours from the chargeable number have really been charged.

And this number is good if it's -- it's really good if it's above 85%. So that is really would be fantastic, actually. Between 80% and 85%, it's yes, in the middle and below 80% is really, really, really bad. And so we are pretty close at the low 80s and pretty much 80.3%, 80.4% was the average for the first 5 months of this year. And this is really what we see reflected here in the numbers. We don't earn any money with that kind of number, so it's just not enough.

Another point was that April and May have the least working days this year, but combined with a really bad utilization rate, so this doesn't come out very good. With -- in June, we actually see a big jump in utilization to over 83%, so 3 percentage points higher. And if we would have seen that in the full first half of the year, we would look at much, much different numbers.

So what gives us confidence now is that we think that we can maintain or hopefully even increase this 83-point-something percent in the second half of the year. We actually pretty much have the same number in July already, so that's the start of Q3. And hopefully, we can continue that. And with a 83.4% or 83.5%, we earn good money.

And then we have a third KPI. You also mentioned the booking intensity that is looking at the population of only employees who are working in projects. So only really in project working people, and we look at how many of their hours is designated to the project and what goes away for administrative staff and other things. So this number should be in the high 90s, something above 97%. If it's okay, between roughly 90% and 97%; if below 90s, it's definitely not enough, then we should focus more on the project.

And there was also an issue, we were in the low 90s in the first half year and have to look to get this number up. But I would say the most important factor, and that is what we see in end of Q2 is to get utilization really up and get more hours really booked against what we could do there.

[Lukas Spang, analyst]

So did you say 80.3% utilization rate for first half of the year, [ what was over this minimum ]?

[Jorg Schroeder, executive]

Yes, for the first 5 months was 80.3% or 80.4%, something in that neighborhood, yes.

[Lukas Spang, analyst]

Okay. And can you roughly quantify what is 1 percentage point in terms of EBITDA more or less?

[Jorg Schroeder, executive]

Yes. That's -- yes, that's the hard part. But I can give you the assumptions what we use, and then I'll let you do the rest. So you take the number of operating workforce. And we usually look at the big German entity, the adesso SE. It's the mother company of the group, but it's also by far the largest operating entity. From the 8,800 FTE that we have, roughly 6,000 are already in the SE. And roughly 2/3 or 3/4 of that is operating workforce, so people who can charge billable hours. Of course, we also have a lot of shared services in the mother company so that we don't need to do that in countries or in sub-entities.

So we have a large operating workforce of roughly, let's say, 4,200 people. Then you have to, of course, subtract illness and holidays. That changes every month, of course, you have to subtract that to get our utilization figure. And then you look at 8 hours a day for the number of days in a given month times an average daily or hourly rate, which we don't disclose but you get the ballpark there. We are probably pretty much in -- on average, in the sector average. And then you get a feeling for what 3% means. And it's a big figure. If you look at that for a month, it can be already millions. In a year, it can be a really big number.

[Lukas Spang, analyst]

Last question on this topic. If you take your guidance for the full year, so the gap between the first 6 months and your guidance, what is the necessary utilization rate for the second half of the year to achieve this?

[Jorg Schroeder, executive]

So I would say if we continue with that utilization rate that we started with in Q3, we are probably pretty much in line to get where we are. Ceteris paribus, meaning, of course, our fixed-price project would need to work and all other assumptions what need to work. But with the normal utilization rate, normal good utilization rate, we will be able to achieve the guidance goals.

[Martin Mollmann, executive]

Next in line is Mr. Wolf from Warburg Research.

[Andreas Wolf, analyst]

Congratulations on the strong top line expansion in Q2 as well. My question is on the price increases. To what proportion of your clients have you already spoken about price increases and which proportion is still ahead? And what revenue volume would this address basically? That would be my first question, and the second will follow thereafter.

[Jorg Schroeder, executive]

Yes. Thank you, Mr. Wolf. Welcome. So from our customers where we work already together, I think we have talked to probably pretty much everyone because we started these price initiatives already last year. You always have time to negotiate new contracts and to get it into writing and then sign it and then to have the new contracts start. So I would say we were in contact with pretty much every client.

Of course, not new clients that come to us, that would not be a price increase just a new customer where we usually already start with increased daily rates. But -- so what I said we are not done yet is that we again and again have renewals of contracts. We have new quarters, new years and new things happening. And also within the contracts of clauses for inflation, we have clauses where we state that, for example, if a consultant increases in skill and maturity, and then he -- we can charge higher prices for the consultants. And so obviously, clauses happening and renegotiating taking place still, and we also have a focus on daily rates.

So this is why I say it's an ongoing process now but it's not finished. I wouldn't say for the next 2 years, nothing will happen in terms of daily rates. How much we can increase it further, that's -- well, I couldn't give you a really hard figure here.

[Andreas Wolf, analyst]

Okay. And then maybe you could provide us some insight regarding your M&A pipeline. So that's obviously part of the business. I'm just curious regarding the pipeline, what it might add to the business going forward in terms of technologies and revenue size.

[Jorg Schroeder, executive]

Yes. Yes, I can only say what I usually say here is we always have an M&A pipeline. We always have running projects. But one thing, if we look at the financial KPIs that we have seen, we see that we have a higher leverage figure now within the year, largely driven by working capital issues, but that also means that our headroom for M&A activity is going down. So we might be a little bit slower on the inorganic side for this year. Then we might be in terms where working capital is in normal territory, which I hope we will reach at the end of the year, but we still have something to do there. So the firepower for M&A is a little bit less attractive right now.

[Andreas Wolf, analyst]

Okay. And then my last question is on the actual coding of your operative people. So what proportion of, let's say, overall business, overall work is related to pure coding? The background of my question is basically the LLM, right, and the efficiency increases it can create within this part of work.

[Jorg Schroeder, executive]

Yes. So from the operating workforce, I would say it's roughly half-half. So half is more consultancy based and half is more coding based. There is no clear order between that. So some coders also do some kind of requirements, engineering, for example, and vice versa. So it's no clear boundary, but roughly half-half.

And in terms of the large language models that you said, I think there are 2 sides of that. So first, of course, it can mean that we have efficiency increases because we can utilize LLMs and Copilots, what is actually done right now in order to write code faster and better. Actually, it's not working that easily in practice, but that should be the case sometime in the near future. And there's also the other side of -- or another angle that at some point in time, artificial intelligence might be able to write code itself. So how much do you need software engineers in the future? That is what we get asked pretty often. I would say this is more in the future line scenario than really near term. Of course, nobody can say when it will be done and eventually might be the case that sometime, software engineering is done by artificial intelligence. But not right now, not in the near-term future. So -- but both these angles have to be looked at.

We are pretty much a proponent of everything related around artificial intelligence. It gives a lot of interesting boosters for use cases in the business world where questions get asked how you can utilize this kind of engineering software to make businesses better, make business processes smarter and better and more efficient. So that is why we have a positive outlook in general for that. But of course, there are different kind of angles that you have to take into account.

[Martin Mollmann, executive]

Before I hand the mic to [ Mr. Wetterling from ISA Holdings ], I'd like to read out a question from the chat from [ Emmanuel Catron from Kastor ]. Does adesso need to sign license deals to reach the EBITDA goal for the full year?

[Jorg Schroeder, executive]

So how I interpret that question is whether we do license deals of in|sure, so licensing our own license deals. Yes, that's pretty much the case, not the large case because the majority of the business is an IT service business, so service related, project based. But of course, we are still looking at a pipeline of in|sure and hope that we can make one or the other license deal probably later in the year. Q3 looks like it will probably be more or less flat. But we have some interesting looking projects into -- going into Q4. And these are part of the guidance, of course, yes.

[Martin Mollmann, executive]

And then [ Mr. Wetterling ], please go ahead. [Operator Instructions]

[Unknown Analyst]

Congratulations on a strong half year. Staying on the topic of product business and licensing, your maintenance fees, which normally should be recurring revenues have gone down from EUR 18 million to EUR 12 million in the report, Page 30 in the half year report. If you could comment on that drop in what should be a pretty stable return in revenue, that would be helpful. Then housekeeping on your product business, if you could comment on your health care activities, DRG last time. I think you were still very, very bullish, very positive. And also housekeeping banking, I assume no change, but at what point would you make a final decision on what you will do in the banking field?

Below the EBITDA, there's actually pretty much all the office rent expenses because the leasing contracts are capitalized and then depreciated. If you could comment on what effectively the rental expenses are, what -- how much is cash, how much is depreciation? How we should look at it. And given that you deliberately want people to come back to the office, you need more office space. On the other hand, office space should become less expensive. What's the run rate? How do you see the expenses for office developing?

And my last question on geographies. You've given us the split on the end customer side. How are you near and even farshoring activities developing or the very small units in India? What are your first experiences? What are your plans in India and other nearshoring activities? How are they developing?

[Jorg Schroeder, executive]

Yes. Thank you, [ Mr. Wetterling ]. A lot of questions. So I will start, get through them one by one. So maintenance, first, I actually would need to look it up because the maintenance fees for in|sure, which is the majority part, is actually or has increased. So you're referring to Page 30, I would have to look it up and see what really changed there. Can be a structural change of some things because in terms of real business change, I cannot remember anything really big changing there. For in|sure, which is the largest part of that, the maintenance fees are higher than previous year.

So for the -- yes, the software products, so DRG, the software is actually now called smile, is running at the first customer. So we do have license sales there. It's a smaller, much smaller product than in|sure. But also to get everybody on the same page, smile is doing -- or is a product where health insurance companies, statutory and private health insurance companies, can use that product to prove or look at what hospitals are charging to them and whether it's correct or not. And using artificial intelligence and modern algorithms behind that, in a market where, at this point in time, there's only one other product. So monopoly if you don't have a stand-alone solution, which pretty much nobody has a good solution for that.

So that is why it's an interesting market. That is why we invested into the product. That is why we actually sold the product without having the product finished. And now we are still looking to do our usual sales work there and looking for more customers in the future. But so far, it feels good.

Not so good, as you mentioned, on the banking side, meaning that there's really not much news. So we are not investing. So the -- you asked whether we have a final decision to make there. We probably don't have to because it really doesn't cost us anything. We still have the joint venture with Asseco, our Polish partners there. We still have, from time to time, discussions with customers who are thinking about have a new core banking system in place, but really nothing pretty close to decision is made on the customer side. But we don't have to invest at this point in time. So it doesn't cost us a lot. We are still on good terms with our Polish partners. I introduced you, Mark Lohweber, my new colleague on the Board. He was actually the one who initiated the deal back then a couple of years ago. And he will -- he just told me last week that he will go to Asseco next week, I think, and discuss with them further activities.

But in terms of real business value here, we don't have anything new to report to this point in time. Yes. And then you had the topic of office rent and leasing. You're absolutely right. I mean IFRS designed it in a way after IFRS 16 was introduced in 2019 that we reported in a way where we have a right-of-use asset on the balance sheet for all office space that we rent, and that has appreciated. So that is what you see below EBITDA. But of course, there are other depreciation and amortization issues or positions included there.

And you asked whether you can get a good feeling of what we really pay in terms of leasing, and you can get that. If you look at the cash flow statement, actually, and on the financing side of the cash flow statement, there is one item listed there, which means what we pay for leasing. And so the number is something like EUR 12.8 million in terms of cash flow, so that is also what came with IFRS 16. So in there, you can get a pretty good feeling of what we really have to pay in terms of cash flows of that.

To your other remark, I would also say it's absolutely on spot. We really like a culture and environment where we are able to meet with our colleagues, where we can collaborate together, where we utilize office space, more in the future. And I would say it should pretty much grow proportionally with our overall growth. So of course, there are times where we have bigger steps. So one new bigger office locations and other times where we are floating a little bit around. At this point in time, we will have a new office location in our headquarter starting in September, I think, will be the opening. And that will actually mean that we double the size of the headquarter, which is by far the biggest office location that we have in Germany or pretty much everywhere. It's in Dortmund and so that we will have a lot more office space at headquarters. But of course, there are other locations where we add on from time to time and find more attractive or bigger office locations to attract the local people who are working close by. And we will continue that pretty much proportionately in terms of growth.

And for your last topic about shoring, you are again on spot there. We bought a small target in India because we want to try it out. We are usually a little bit hesitant or yes, let's say that we first like to try out and not do too big steps. But India actually feels quite good. It's a small entity. A small entity means 23 people for India, that's tiny. For us, it's still an investment, yes. So -- but the entity that we bought was actually used to these shoring activities and not only used to shoring activities, but the company was used to work for a German company in the insurance world. And so pretty much what we do. So not too much for them changed. We learn new things, how to implement them in our project here.

So at this point in time, it feels quite good. And we actually think that we can scale this up. By how much and how fast, we will see. But at this point in time, our first experience with that is looking good. And overall, the by far biggest shoring capacity that we have is in Turkey. So Turkey is growing domestically pretty good and even better on the shoring side. We are also having good shoring capacity in Bulgaria and in Romania now. This all feels pretty good, and we are quite used to it because we do it for a couple of years already, and we will probably also continue that in the future.

And we think that in terms of really having a global operating model in the future, we need to utilize these shoring capacity even more in Western European projects. So at this point in time, we are still at the first steps, I would say, to learn and experience how we can do that. But we are making good progress there and the experience is beneficial for further expansion on that side. Yes. So I hope I got all your questions. I'm not completely sure.

[Martin Mollmann, executive]

Okay, great. Then I'd like to read out another question from the chat from [ Taimur from Herald ]. Has the new SAP installation settled down in terms of invoicing? And do you expect to be able to reduce the working capital balances by Q4 2023? I think you mentioned that before, but maybe you can give us more detail about that.

[Jorg Schroeder, executive]

Yes. Thank you, [ Taimur ]. Yes, absolutely. So feeling like the customer was new or at least unknown in this kind of projects. So now it gives me more feeling how the customer might feel if we do some SAP transformation on their side. And you always have to have some struggles in the beginning, I would say.

I would say the worst part is over, so we are able to write invoices. We are able to do our receivables management and of course, we still have a backlog, yes. And that is what we need to get down to until the end of the year. I would say it's definitely possible to get the working capital figures in the neighborhood of the past years. Actually, for me, that wouldn't be enough. We did this ERP installation so that we can get better in terms of working capital in the future. But this will most likely not happen this year. I hope that we have another shot next year. But this year, the goal is to get at least at the same rate as we had in the past. And then hopefully to continue with that and improve working capital so that we can collect cash earlier and be better in that regard. Yes. So I hope we got you.

[Martin Mollmann, executive]

So looking at the time, we maybe have room for another question. Is there anybody from the audience? I see Mr. -- hello? Again?

[Wolfgang Specht, analyst]

Yes. Wolfgang Specht, Berenberg. Can you hear me?

[Martin Mollmann, executive]

Yes. Yes, we can hear you, Mr. Specht.

[Wolfgang Specht, analyst]

Okay. I have 2 additional ones. First on your cost side, what you expect for half year 2. You explained well how utilization will take its effect. But are there any additional cost saving measures planned in the second half of this year? It would be one question. And the second question to the transition of the CEO position now, that less than a half year of residency of Mr. Kenfenheuer has left. Is there any development in this regard?

[Jorg Schroeder, executive]

Yes. Welcome, Mr. Specht. So first on the cost savings side, yes, we are looking on that. This is largely in the field of other operating expenses, where we look at this and that. So the benefits of really saving a lot there are smaller than really giving a full throttle on the utilization side. So the effects will be much, much smaller. But nevertheless, we are looking at that. And actually, that is a benefit of the new SAP system. We are now aware that -- so we defined a new cost structure in the system, and with our cost centers and real ownership behind that and we can track that and report that and look at that. And there's -- what we do right now and we'll figure out where some savings can be done in the second half of the year. But just to be crystal clear here, I think the benefits will be much smaller than having a couple of even basis points of utilization in the right direction.

Yes. And for the second question about the CEO transition, you're right, Michael Kenfenheuer will leave the Board at 65 years old at the end of the year. The Supervisory Board has stated that they will say who is the successor in terms of CEO in Q4 this year. So we have to be or wait a little bit and then it will be disclosed.

[Martin Mollmann, executive]

Okay. There was another question from the chat from Dr. Jakubowski from SMC Research. Has the IT security issue you reported earlier this year has been completely solved?

[Jorg Schroeder, executive]

Yes. Yes, whatever completely solved means. But in terms of how one probably can define it, yes, there are no outstanding issues there. The forensic search is done and concluded. There is a final report. We are well set up with all customers and partners. So there's nothing more to expect from that.

We have actually initiated a lot of things around the cybersecurities or organization-wise and technical-wise. We get a little bit more safer in terms of restrictions that we now have on the organizational side and also on the technology side for ourselves, but just to improve security actually. And I would say that now we feel pretty safe. And since we are advising and consulting these things ourselves, I would say that we are in better shape now than in the past.

Nevertheless, there's never a full guarantee that nothing can happen anymore in the future. So you cannot get that by anybody in the world. So we also can't, and -- but I would say we are now as safe as you can get, pretty much.

[Martin Mollmann, executive]

Okay. Do we have more questions from the audience? Mr. Spang from Tigris Capital again.

[Lukas Spang, analyst]

Yes. One quick follow-up on the in|sure topic. How much license revenue did you make in the first half of the year? And what is the necessary amount you have planned or factored in for your full year guidance?

[Jorg Schroeder, executive]

Yes. So the first half year was worse than last first half year. I think well, I also had to look it up. Now from the top of my head, it's something of EUR 2.5 million, in that ballpark for the first half year. The second half year will most likely be stronger and should be stronger. We still have figured a number in the high single-digit million area.

[Lukas Spang, analyst]

For the full year?

[Jorg Schroeder, executive]

No, for the second half of the year.

[Martin Mollmann, executive]

Okay. Do we have more questions? Or all good? No further questions, I think. So then thank you very much for your interest in our call today and your participation. I wish you all the best for now. Goodbye, and see you soon. Bye-bye.

[Jorg Schroeder, executive]

Thank you.