GFT Technologies SE

XETRA:GFT

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the half year figures 2024 of GFT Technologies conference call and live webcast. I'm Vicky, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Andreas Herzog, Head of IR. Please go ahead, sir.

[Andreas Herzog, executive]

Thank you, operator, and good afternoon, everybody. Welcome to our conference call following the publication of our results for the first 6 months. We welcome you with a fully set-up panel today. On board, we have our two Co-CEOs, Marika Lulay; and also Marco Santos, who was appointed as Co-CEO from July 1 on, and will take over full responsibility as CEO from 1st January 2025; and, of course, also Jochen Ruetz, our CFO. After the presentation, we will be entering into a Q&A session where you will be able to ask all your questions. Last housekeeping remark, this call will be recorded and available afterwards on our website. Also there, you will find the corresponding slides for today's call. That's now enough for me. I would like to hand over to Marika.

[Marika Lulay, executive]

Thank you, Andreas, and also a warm welcome from me to everybody. Let's go into our numbers and the summary. I go to Slide #2. I'm happy to share that we -- actually, Slide #3. Slide #2 is agenda. Thanks, Jochen. I'm happy to share that we strongly grew in the first half '24 amidst challenging markets, 11% growth to EUR 430 million in revenues, and our adjusted EBIT margin was growing even stronger by 15% to EUR 36 million. Now, the strongest market is Brazil with an organic growth of 12%, and our -- simply the story is our geographic diversification helped us to overcome the Anglo-Saxon market challenges. Nevertheless, we see signs of recovery in North America, but honestly, it's still a bit too early to tell whether they are sustainable. Our order backlog increased, clearly driven by the Sophos acquisition, but not only, and this backs our revised guidance by more than 85%, which is, by the way, higher than the backlog compared to the guidance last year, so compared to 1 year ago at the same time. Hence, we are confident that we will meet the guidance, which we amended due to the ongoing volatility, especially regarding client decision cycles. We now expect revenue and adjusted EBIT both to rise by 12%, and also this demonstrates our resilience and operational strength, but also our positioning, which allows us to win profitable business in tough markets. Now, our Sophos integration is on track, and interesting and good to tell, we already realized new business together, and therefore the goal, which we had when we acquired Sophos, which was to enlarge our addressable market with that acquisition, has been proven. Our recently-started product business is gaining market interest. For the first time, we won a prestigious award for our project portfolio management solution called Engenion, but even stronger is the market feedback on our AI.DA marketplace, AI and data solutions. Beginning this year -- and I probably talked about this already in the last call, beginning this year, we released the product AI Impact, which boosts the productivity in the software development lifecycle remarkably. Now, Marco Santos, my successor and Co-CEO, will now take you through the amazing results we achieved with our products. Marco, over to you.

[Marco Santos, executive]

Thank you, Marika. Slide #4. As Marika just said, the Sophos integration project is on track. We have already started to collect results from this, business synergies and nearshore capabilities. And number 1, we got a very successful project at GFT U.K. due to the Sophos core banking capabilities. Number 2, we already started to collect results from the offshore and nearshore services already supporting USA, U.K., and Mexico. We started the migration of our contracts -- client contracts. Also, we started some activities with marketing activities, joint participation, and marketing sales events together with the teams. And we strengthened our client access and value proposition in the markets. We already started the integration of all our HR activities and employee parts. And the Sophos Mexico legal entity is fully integrated. It's going to be fully integrated by end of August. And our goal is to finish and complete the whole integration of Sophos in the end of Q1 2025. Moving to Slide #5, the AI data marketplace. It's been growing. It's been very successful for GFT. We've been adding new use cases and assets into our marketplace. And starting from vision inspection, predictive maintenance, customer service, fraud detection, AI engineering, shop floor, and many others. And must highlight the GFT AI Impact, which is one of the products that we created last year. And now we are collecting real results in order to accelerate the software development lifecycle utilizing Generative AI. We got already a few clients, and we started in-license model for that, for GFT AI Impact, and already capturing around 90% of results in terms of efficiency in elements of the software development lifecycle. We also created some other products and assets in the AI.DA marketplace that I would like to highlight, the Generative AI tool that simplifies the regulatory compliance for the [ smart ] business. And the security ChatGPT solution to help enterprise moving towards Generative AI. Moving to Slide #6, GFT was also awarded by ISG, which is one of the leading technology research firms in the world, in their magic quadrants, as they lead their own data and analytics and implementation and integration service related to cloud and AI. This makes us very confident that we are recognized by such an important technology research company in the world. Moving to Slide #7, GFT and our Engenion products were also awarded as the Gold Winner by Globee in 3 main categories. Number 1, the Most Innovative Company of the Year in Cloud/SaaS. The second one, the Most Innovative IT Software. And the third one, the Project and Portfolio Management. This makes us very confident about Engenion products as a solution for project and portfolio management. Now handing to you, Jochen.

[Jochen Ruetz, executive]

Thank you very much, Marco. Going into the financials, directly to Slide #9. First half year key figures, Marika already indicated solid growth supported by M&A. Revenues came in at EUR 429.6 million, 11% up versus the first half of last year, 9% from M&A; 2% organic, of which 1% is FX-driven. Our order backlog is up 19%, including the Sophos piece. Taking out Sophos, it would still be a growth of 11%, as Marika indicated, a better coverage of our second half year's revenues than 12 months ago. Going for the EBITDA, we're up 10%, only touching it briefly, and let's go a bit deeper on the adjusted EBIT. You see some comments on the right side, third bullet point and the smaller bullet points. We had, again, capacity adjustments inside GFT. Last year, in the first half, capacity adjustments were all about Latin America, mainly Brazil and Mexico. This year, first half year was mostly about U.K., where our clients got far more cost conscious and heavily reduced buying local IT experts, which is why we had to reduce capacities there. The low demand in the Anglo-Saxon markets also resulted in some adjustments in our Polish nearshore teams. Overall, we spent EUR 4.4 million, which is more than the first half of last year. Second small bullet point, we have a special item, an accrual release for fiscal proceedings in Brazil, which generated EUR 6 million of positive profit in the quarter. Let me go a bit deeper on this one. GFT and many other IT companies challenged the change in Brazilian social security, roughly 3 to 4 years ago. The case went to the different courts and in Q2 of this year, the first half of the case was finally decided by the Brazilian Supreme Court of Justice in favor of GFT and the other IT service companies. The other 50% are believed to be a formality and should follow in the second half. We have released the full amount related to this fiscal proceeding in the current quarter. We had to backfill some other accruals related to the '23 closing and some supplier invoices so that the [ Saldo ], one-off positive effect in Q2 was plus EUR 6 million. And the third little bullet point is FX effects, which were minus EUR 700,000, a bit better than last year where we stood at minus EUR 1.1 million. Coming to the EBT, the EBT stood at EUR 30 million, so pretty much the same figure as in the first half of last year. The gap between EBIT adjusted and EBT has widened as expected due to the Sophos acquisition. We have more interest expenses and more M&A-related amortization. Tax rate, I will touch later, for workforce, just as well. So let's move directly to Slide #10 and look at our sector development. So the growth was driven by banking and industry business. As we see on the right side, let's start on the right side, our banking business increased by 16 percentage points versus the first half of last year. It's now generating 76% of GFT group revenues. Growth mainly comes from our M&A activities. On insurance, similar to last quarter, we see weakness. We had some big projects coming to an end last year. We have a hard time covering them and rebuilding the pipeline. Therefore, we're down 7% in the first half. But let me mention, after one quarter, we were down 11%, so we have increased a bit. And I hope we will get close to 0 for the full year, but that is still a stretch. So insurance will be our weakest sector in 2024. And the third, at the top of this graphic, is industry and others, where we did grow by 12%, and it now still represents 10% of the GFT business. Moving to the left side of the slide, we see our client portfolio. We are now showing it a bit different to the last quarters. Maybe it's easier to read now. We see it's 1 client, which you don't see, but I tell you it's 1 client in the bracket, more than EUR 50 million, Deutsche Bank, for you guys who follow us for a longer time, 16% unchanged to last year. Clients between EUR 10 million and EUR 50 million represent 38% of our business, and clients between 5% and 10% (sic) [ EUR 5 million and EUR 10 million ] represent 19% of our business. You see that 3 percentage points move between the two, which is simply because some clients just fell under the threshold to get into the bigger block, 27% is all other clients in the GFT portfolio, and we believe this portfolio is well-balanced for GFT. Moving to Slide #11, looking at the quarters one by one. Steady revenue growth despite high market uncertainties. When we compare Q2 of this year to Q2 of last year, we see a growth of 10%, which is mainly M&A-driven. Organic growth inside was 2 percentage points. Looking at EBIT adjusted, it's heavily influenced by the release of the provision in Brazil. The positive P&L effect from Brazil was offset by higher capacity adjustments and lower utilization in high-priced countries of GFT. Comparing quarter-over-quarter, so Q2 over Q1 of this year, we see 2% growth, which is still mainly related to M&A because the first quarter only included 2 months of Sophos. The second quarter now includes 3 months of Sophos. And on the EBIT adjusted side, we see a growth of 7%, which is still positively impacted by the Brazil provision and negatively impacted by the capacity adjustments and weaker product business in that quarter. Let's move forward, Slide #12, looking at our business segments. Starting with Americas, UK & APAC, revenues up 6 percentage points, but you see in the details that 11% comes from M&A, which is the Sophos acquisition. Organic, it was minus 6% FX plus 1%. We saw growth coming from Sophos, but also from our Brazilian entity, where we established further growth in our banking clients. Lower revenues in all our Anglo-Saxon market clients, U.S., Canada, and the U.K. Adjusted EBIT is supported by the extraordinary income related to the provision in Brazil, I already mentioned, and offset by the capacity adjustments, the weak local Anglo-Saxon markets, and that resulted in lower utilization. Looking at Continental Europe, we see growth of 20%, supported by the acquisition of targens, which was last year, but only from April. This year, we have 6 months of targens inside our half-year numbers. And it was also supported by strong development in Spain, Italy, France, and Poland. So our continental European markets did well, organic growth of 12 percentage points. On the EBIT adjusted side, we're a bit down, mainly because of some capacity adjustments in Poland, which I already mentioned, because of the lower demand from the Anglo-Saxon market for our nearshore services, and a lower utilization. I would like to mention Others today. Usually I don't, but today I want to mention it, the segment Others. On the right side, you see that the EBIT adjusted has improved from minus [ EUR 4 million ] to minus EUR 700,000. Part of it comes from strictly managed cost space, but EUR 2 million come from a higher allocation of holding fees into Brazil, and therefore into the Americas and U.K. APAC markets. We're able to allocate more cost after very closely checking this, avoiding Brazilian import taxes, which are very high. And for these EUR 2 million, in the half-year, we are able to avoid import taxes. This means Others looks EUR 2 million better, and Americas, U.K. & APAC is burdened with the same EUR 2 million. Last but not least, GFT Group has already stated 11% growth on revenue; 9% M&A; 2% coming from organic; EBIT adjusted up 15%. Let's move to Slide #13 and look at the revenues by market. And we see that Brazil and almost all European markets are on a growth course. Brazil is our biggest market right now, representing 15% of the GFT business, growth of 12 percentage points. We see the European markets, Germany, Spain, all up. Germany, of course, somewhat impacted by the growth coming from the targens acquisition. Italy is up, Poland is up, France is up. European markets are kind of saving the day, while the Anglo-Saxon markets show weakness. We see U.K., we see U.S. and Canada, all down between 7% and 15%. Colombia is new, that's the Sophos entities, and here we see it for the first time, so there is no growth rate yet. Let's move to Slide #14, income statement. What I was talking about on the Brazilian provision release is reflected in the second line, other operating income. You see here that we mentioned the EUR 11.2 million, which is the gross effect, and we have other compensating accruals of more than EUR 5 million, bringing us to a net effect of EUR 6 million in the second quarter. We usually look at personnel expenses plus freelancers versus revenue. It is reflected in the fourth bullet point on the right. Here the ratio is 84.5% for the first half year. We already thought 81.9% in the first half last year was not a good result. Of course, we're not happy and satisfied with the 84.5%. It fully reflects our capacity adjustment costs and the lower utilization we're experiencing. Last year, for 12 months, we were able to reduce it to 80%. We will fight for the 80% this year as well. It will probably be a bit above 80% at 12-month basis. I wanted to mention depreciation and amortization, which is only up because of the Sophos acquisition. Therefore, it is somewhat expanded on amortization and income taxes. We were able to improve that by nearly 1 percentage point of tax rate. This is related to the already mentioned allocations of holding fees to Brazil, which is also tax-optimizing for the group. This brings me to Slide #5, which is our cash flow analysis. Overall, we see a decline in net cash, but it's all due to the Sophos acquisition and our standard working capital position mid-year. We started the year with EUR 4.4 million in net cash. And as you can see, at the end of June, the net cash position was minus EUR 108 million. In between, the most important KPI is the cash flow from operating activities, minus EUR 5.3 million. Last year, it was minus EUR 10 million, so it is improved. And we have some special income tax payments, which are just, by coincidence, reflected in the first half. Last year, most of these payments came in the second half. So, classic working capital effects, which will compensate throughout the year. So we are on track on operating cash flow. Cash flow from financing activities -- sorry, from investing activities includes the Sophos acquisition with an outflow of EUR 79.45 million. And then, we see the financing activities, we brought on board debt to finance the Sophos purchase. Moving forward, Slide #16, balance sheet. Very quickly, it's all related to Sophos. We see an expanded balance sheet, which also means we have a reduced equity ratio. It's now again below 40%, but I think latest somewhere mid-25%, which should be above 40% again. So, we will fight back if we don't do M&A, which brings me to Slide #17. Our people slide, we see a larger workforce mainly due to the Sophos integration. On the very left, employee numbers, up 20% compared to June of 2023. This is driven by Colombia, the Sophos acquisition, our growth in Brazil, and hirings in India and Spain. Compensating, we have some reductions in Mexico, Poland, U.K., and Canada. Looking at contractors, the number is stable despite the growth and the inclusion of Sophos. We still have roughly 1,140 freelancers on board. Utilization rate, the graph in the middle shows we had a utilization of 89.9%, which isn't very different from last year's Q2. But the big difference is, this year, we had high-priced countries with underutilization. Utilization is a per-person quota, so it doesn't matter if somebody is non-utilized from Brazil or from the U.K., but monetarily it matters. The U.K. guy is far more expensive. This year, our issues were in the high-priced countries. That's why utilization looks in line with last year. Profitability is somewhat below because it's in different regions, and that was the driver. We believe in Q3 and Q4, we will see 91% utilization again. We now have done most of our homework, as we think, and therefore utilization should be closer to what we have seen in the second half of last year. Last but not least, on the very right, attrition remained below 10%. It's now stabilizing, so we see a trend of stabilization, 9.8% now for 2 quarters in a row. Still very low, but probably, it will pick up somewhere in the next 2 quarters. Let's get to the last slide, Slide #18, our outlook for 2024. Revenue and earnings growth rates have been amended. Revenue, as Marika pointed out, is now expected at EUR 885 million, 12% up versus last year. On the EBIT adjusted, we also see a 12% increase to EUR 82 million, which is EUR 3 million less than last year. And the EBT should be up 3% at EUR 70 million, which is EUR 2 million less than the last guidance. Sorry, on the EBIT adjusted, it was the comparison to the last guidance, not the last year. Versus last year, we see a significant improvement. We believe revenues per quarter will go up by 3% in the coming 2 quarters. That's what we need to get to the EUR 885 million, which shows -- yes, it's still something we have to deliver, but it's not overambitious, and it reflects the current tough market we face. All this said, I think we're done. Ready to take your questions.

[Operator]

[Operator Instructions] The first question is from Wolfgang Specht, Berenberg.

[Wolfgang Specht, analyst]

Yes, 3 questions from my side. The first one on Sophos integration. You stated it's on track. How does that match with taking down the full year EBITDA contribution by EUR 1 million? Second question is on the EBT guidance. To what extent has the accounting effect in Brazil been already included in your initial guidance for the year? That would be interesting. And then finally, on the AI.DA product portfolio, you mentioned it's gaining traction. Is this just a, let's say, qualitative quote, or do you already see it in order book or even in the current sales?

[Marika Lulay, executive]

Okay, so let me take the first question. So when we acquired Sophos, and you might remember that when you go into the documents from the Q1 earnings call, our goal was to generate EUR 60 million revenues with Sophos, and therefore, accordingly, an EBITDA for that. We have now taken that down to EUR 55 million contribution to the full year because Sophos operates in Colombia, influenced by Anglo-Saxon markets. So we see the same behavior there as in other markets, mostly in North America. So the reduction on the EBITDA contribution is simply related to the revenue reduction in terms of expectation. And then let me cover the third question. I guess the second is taken over by Jochen. In terms of AI.DA, no, it's not just qualitative, Mr. Specht. We do generate real revenues alone for AI Impact together with other Generative AI solutions. We talk easily 2 digits for this year. And in total, we show 8% of our total revenues related to AI and data solutions.

[Jochen Ruetz, executive]

This brings us to the EBT and the guidance question on the Brazilian provision, EUR 3 million was included in our guidance. That's on EBT and EBIT adjusted.

[Operator]

The next question from Andreas Wolf, Warburg Research.

[Andreas Wolf, analyst]

I have a question on the customer behavior. So do you see the number of projects which are held back by clients growing? So would there be significant pent-up demand once the confidence in economic development changes? That would be my question. And what do you see on the wage side? Are wages approximately stable or do you still see inflationary pressure on wages? And the third is on capital allocation. So you carried out the Sophos acquisition, it seems like currently, it might be difficult to find a target that has a similar valuation as GFT. So would it make you reconsider the recent capital allocation and maybe also consider buying back shares?

[Marika Lulay, executive]

So Marco will answer the first one.

[Marco Santos, executive]

The customer behavior. We have seen a change in customer behavior this year. So we see big banks, Tier 1 banks, that they are moving into insourcing and also bringing requests to optimization of the service. And that's a trend that we see, especially on Anglo-Saxon markets and also a request about implementation of AI and Generative AI and deploying Generative AI in order to improve productivity of your services. So those are 2 main customer behaviors that we see across the board, and GFT is tackling that. So we are moving very fast in order to provide very good response and a very good value proposition for the first one that I mentioned, optimization, that the clients are requesting it. And number 2, also with the GFT AI Impact, that is a direct product in order to address the utilization and deployment of Generative AI into our current services.

[Andreas Wolf, analyst]

Do you also see a certain reluctance by clients to start new projects, or are clients currently satisfied with the status of their IT?

[Marco Santos, executive]

We see -- yes, I think that's one element that is represented on the reduction of our Anglo-Saxon markets, that clients are postponing decisions. So they are postponing decisions of an implementation of a project, or starting a strategic initiative. And this is across the board. That's what you see with cloud, with data AI, and with other technologies, and that's what we see today. That's what is being impacted in our Anglo-Saxon markets.

[Jochen Ruetz, executive]

On the wage side, currently it's stable. We don't see much salary inflation at the moment. New hires happen on the basis of existing people's salary packages, sometimes even below in some markets. But mostly it is stable at the moment.

[Marika Lulay, executive]

With regards to your question on capital allocation, I, for sure, fully understand, you probably hint towards share buyback programs, which so far were not part of our capital allocation strategy. And I'm answering being the departing CEO, so this gives room to my successors. They can change the strategy the next year. They keep doing [ hurrah ] in the moment, but to answer more serious -- thanks, Marco. To answer more serious, still programmatic M&A would remain our preferred capital allocation strategy, obviously, followed by paying dividends. Having said that, we don't rule out doing share buybacks if there would be no, let's say, good M&A coming up. In this moment, we are honestly focusing on paying back the loan. We want to get the debt in a -- let's say, in a good range, which gives us either the flexibility to do another M&A if things come up and look good, or evaluating share buyback programs.

[Operator]

The next question from Simon Keller, HAIB.

[Simon Keller, analyst]

Actually, I have 3. First, how do you see current trading in July and August? Then secondly, it's very similar, my question. You mentioned an uptick in the U.S. Can you please specify what you see precisely? Does it mean that new projects start? And thirdly, I'm wondering what happened to the underlying margin in Q2. The net effect of the Brazilian provision reversal and the capacity adjustment is net EUR 6 million, is that correct? If so, the underlying margin would have been surprisingly low at 5.8%, and therefore, my follow-up question on this is, why do you expect the H2 margin to be noticeably higher than the one we have seen in Q2?

[Marco Santos, executive]

Current trading?

[Marika Lulay, executive]

Yes. So in terms of the current trading, July-August looks good. We have seen a very good utilization in July, above 91%. That is very promising. Also, our pipeline, and I want to stress that, our current pipeline fully backs the old guidance and, for sure, the new guidance. So, it looks positive. Having said that, we have seen clients postponing. We also listen to what our competitors are saying, also their announcements. Therefore, we became simply a bit more cautious for the second half, because we still aim to simply, ideally, over-deliver the guidance. So, trading looks good, promising. Therefore, we are really confident on the given guidance. The uptick in the U.S., again, and maybe put this into conjunction, one thing is to compare quarter to quarter. Obviously, there you see a reduction, or half-year to half-year. There you see the reduction in the first half compared to the first half last year. When we look into our pipeline, and we do the comparison of the second half to the first half, so sequential comparison, we clearly see an uptick of up to 2-digit organic growth in the second half over the first in these Anglo-Saxon markets. Again, this has to be delivered. We have to turn the pipeline around, but we have pretty good ground for that and a lot of opportunities, which includes new clients and existing clients.

[Jochen Ruetz, executive]

Margin in Q2, don't get it wrong, the EUR 6 million net does not include the restructure, right? The EUR 6 million net effect is with other accruals. And again, as I said, we had to backfill some accruals from last year's closing because this Brazilian court case was seen very critical by the auditors at the end of last year. So the EUR 4 million -- EUR 4.4 million of restructuring then comes, so plus EUR 6 million, minus EUR 4.4 million, minus underutilization. So yes, you're right. Our operating margin is below previous year, but the gap is not that big. There was another question we didn't fully answer, I just realized. Sophos was also not contributing yet the margin we had expected. We are a bit below the business case, as you had indicated in your question. We said we are on track with integration, which is the technology of integration, right? The technique of doing it. The business case of Sophos is currently roughly 10% behind the business case they brought up when we acquired the company. They see similar effects like we saw in Brazil last year. Things moved to the right. Client decisions are postponed, especially outside in the markets -- Sophos markets outside of Colombia. There we have more issues getting to the growth we have been expecting. That's why also Sophos has not contributed the same margin that we had hoped for. And all these lead to a Q2 overall operating margin, which we are not happy with. But after all we've done, after all the adjustments that we now have put into action, we see the second half as guided.

[Simon Keller, analyst]

One follow-up question to be sure that I understood it correctly. So there was net EUR 6 million accounting effect, and -- so positive, and negative EUR 4 million roundabout restructuring. So net-net, the impact on Q2 was EUR 2 million. Is that correct?

[Jochen Ruetz, executive]

Yes. As I'm German, I like to make things complex. You should take the delta to last year. So the restructuring effect was only net EUR 2 million. And you see that the underutilization effect was far bigger this year than last year. I hope I wasn't complex, just precise.

[Marika Lulay, executive]

And to your last question, why do we believe second half will be better? Let me just summarize. A, we've done our homework. Capacity adjustments have been vastly done, mostly done in the countries, and utilization currently looks as designed.

[Jochen Ruetz, executive]

As you asked July utilization, July was 91%. So that's already a number we can share.

[Operator]

Your next question from Knud Hinkel, Pareto Securities.

[Knud Hinkel, analyst]

First of all, on -- yes, we've seen now a couple of [Audio Gap] from Deutsche -- from aside from Deutsche. So my question would be -- or let's put it differently. You said, okay, that is all in the Anglo-Saxon space, interest rates have been up, less pressure from fintech, banks are decreasing investments into better IT. So do you expect that to completely revert if interest rates will have normalized? Or what's your thinking about that? Will then we see organic growth back on track? Or do you have also to adjust your portfolio beyond what's already been visible in your presentation? So that would be my first question. Secondly, on [Audio Gap] in the first half of the year, what's your expectation for the full year? And same question for underutilization. What would be the effect that you expect for the full year? I hope I was -- I hope it's audible.

[Marika Lulay, executive]

We understood, for the second question, you want to know the kind of a guidance for utilization for the full year. But what was your first request?

[Jochen Ruetz, executive]

There was a question in the middle, the second. Underutilization and what else did you want for the second half?

[Knud Hinkel, analyst]

Capacity adjustments. What would the effect...

[Jochen Ruetz, executive]

Capacity adjustments. Got you. Yes, it was just lost in the train. Marika?

[Marika Lulay, executive]

Okay, so to your first question. So as we know, the Fed has indicated they might -- they may address the interest in September. And as much as we consider if this happens, it would have a positive effect, we should also not forget that we still are then in the fourth quarter. Most clients, most banks do their budget in September, October. And whilst it could still be that they then all of a sudden start some projects, it would only be projects we already have in the pipeline. So this could positively trigger additional orders which have not yet been given. Contrary to that, banks tend to optimize their fourth quarter, simply to optimize their own EBT, which then would be a positive effect for Q1. Whilst I keep saying the year is always too short and December 31st always comes too fast, we would love the year to be longer. So I would say it's definitely our guidance -- and maybe this helps you, our guidance is not dependent whether the interests are lowered or not.

[Jochen Ruetz, executive]

Let me pick up the other 2, underutilization for H2, and let's put it different. Utilization for the second half should be closer to the second half last year, as I think I already said on that slide, so between 91%, 91.5% and much below previous year. That was very, very strong. We still have 1 or 2 markets where utilization is not perfect. But 91% plus is our target. Going for the capacity adjustments for the second half, well, this is, for sure, linked. If utilization in those 2 markets I was mentioning is not picking up, we could see EUR 1.5 million up to EUR 3 million of further capacity adjustments in the second half. That is included in the guidance.

[Operator]

The next question from Lukas Spang, Tigris Capital.

[Lukas Spang, analyst]

Yes, I would like to follow on, on the topic from Simon about Q2 margin and Q2 EBIT in absolute terms. If I compare Q2 this year and Q1 this year and exclude these both effects from restructuring costs and the topic of Brazil, I miss around EUR 2.5 million of adjusted EBIT in Q2 versus Q1. And so, for example, the less earnings effect from Sophos, I would assume that was also an impact in Q1. So, can you please explain again or more precisely what was the reason that you have, excluding these effects, lower adjusted EBIT in Q2 versus Q1? That's the first question. And let's do it one by one.

[Jochen Ruetz, executive]

Yes, you're right. We miss those EUR 2.5 million too. They are missing. It is underutilization, which is far more costly this year than last year. Maybe it's EUR 700,000 Sophos effect but, of the two -- in the second quarter, but of the EUR 2.5 million, mostly this is underutilization in existing high-priced GFT locations. We see that come back, and we've done restructure, we've seen it come back via better pipeline in the second half. That's why we're not concerned. We have done our homework just like we have done it last year, but in other markets. It was Latin America then. This time, it is the more costly markets. But we see a positive outlook for the second half because of the restructurings that have come underway.

[Lukas Spang, analyst]

And then this Brazilian, EUR 6 million, that's a net effect. And in your half-year report, you write about EUR 11-something-million in the operating income. So, where did you put these negative effects on the other side? Was it other operating expenses?

[Jochen Ruetz, executive]

It is personnel expenses and other operating expenses. Those 2. Pretty much half and half.

[Lukas Spang, analyst]

Okay. And then last one, it's not really a question, but more a suggestion and a wish from investor side. I think and I know macro and geopolitical effects are always challenging, especially in this time and hard to predict, but in the past, you were more the candidate of under-promise over-deliver and in the last 18 or 20 months, you had free profit and/or revenue [ warning ]. So, I think it would be a favor from investor side to be more cautious or more conservative in terms of guiding in the future again, if I may say this in this point of time.

[Jochen Ruetz, executive]

Point taken. We have the same goal to be precise, we don't over-commit. Well, we had 2 years where we have under-committed. That was '21, '22. Now we have 2 years where we have over-committed. Lessons learned. We will try -- always try to be spot-on in our guidance. That's our own internal target.

[Operator]

[Operator Instructions] We have a follow-up question from Andreas Wolf, Warburg Research.

[Andreas Wolf, analyst]

With regard to the missing EUR 1 million or EUR 2 million sequentially, to what extent was the number of working days an effect that we should consider? So, in a sequential comparison, at least in Germany, there were 3 working days less. I know there are other geographies as well. But is it an effect that was noticeable for you in Q2 versus Q1?

[Jochen Ruetz, executive]

Simple answer. I can't blame the working days. We had 1 day more than a year ago, second quarter. We had 1 day more than Q1. We had Easter in between, which is usually a holiday period. Nevertheless, we had 1 day more. It was the underutilization. It was not the working days. Important to note is, Germany is, of course, only one small market. Working days in Brazil count far more when I do my group average billable days. And therefore, it's different than when German peers report on their billable days. Nevertheless, it's not the explanation for Q2. Simply not.

[Operator]

Next question from Johannes Ries, Apus Capital.

[Johannes Ries, analyst]

Also, 3 short follow-on questions. First, on your vertical insurance, we have seen a more bigger development after maybe you finished some larger contracts. How is the pipeline now? Is there a chance that next year we could see a re-acceleration of this business? Let's start with this and I'll come with the follow-on questions.

[Marco Santos, executive]

Yes. So, we saw a -- we see a reduction in our planning of insurance business. And one important element, it was one specific project. It's a large-scale project that we delivered and we do not -- and we delivered the project and finished the project correctly and everything went well in U.K. And we did not have a renew in our next phase project in U.K. due to [ postponations ] of decisions, et cetera. So, that's one. It has impacted overall our figures in terms of insurance. Regarding next year, 2025, we are committed with a strategic plan in order to bring insurance into a growth trajectory again. So, that's our commitment. That's what we are working right now. And that's our expectations for the further years.

[Johannes Ries, analyst]

Okay. So, pipeline, you see supporting these few years?

[Marco Santos, executive]

We see a -- we have a strong pipeline and the word strong is, it's really strong in pipeline in insurance and in Anglo-Saxon markets. And what we have experienced is [ postponation ] of decisions, especially in Canada, that happened this year that clients, they did not give up of the projects, but they simply postponed the decision-taking of clients -- of projects. So, the pipeline is positive, is good, and we are committed to bring that -- to materialize the pipeline in the second half of the year and I expect for next year as well.

[Johannes Ries, analyst]

Great. Maybe a short follow-on, on Sophos. How maybe had attrition in Sophos maybe developed after the acquisition? Has you been able to maybe hold it at the same level or had the attrition increased because of the new owner? Or only maybe from this part, very often, if there's an owner change, there's maybe some increase in attrition, which also has some negative effects on the business.

[Jochen Ruetz, executive]

Yes. We understand the theoretical question, but we didn't see that. But we don't measure Sophos yet with our classic tools because integration for that will be happening in January. But when we look at the local numbers, there was no change on the management team. All the team members are stable and we didn't see relevant changes on the people side. Therefore, no, nothing to mention on attrition for Sophos.

[Marco Santos, executive]

And just important, the leadership of Sophos, it is super stable, so the [ team is stable ].

[Johannes Ries, analyst]

Great. Good news. Finally, on your AI activities, AI.DA, remind us how much revenue, I think it's quite small at the moment, you do at the moment and what do you expect for the coming 1 or 2 years? Is there an acceleration from this business? How much this is a growth driver in the next maybe 12 to 36 months?

[Marika Lulay, executive]

No, we do not give detailed numbers for the AI.DA marketplace as such. What we do publish are all the revenues for all AI and data-related solutions and projects. This encompasses currently to 8% of the total revenue. And given that the revenue grew, last year I think we were at 7% on a lower absolute revenue number, so 8% on a higher revenue number shows you that it is growing, mostly actually organically because it's more in the modernization part of our project. Nevertheless, we don't give a concrete guidance for that for next year, not on a solution level. Qualitatively, yes, we expect this will continue to outgrow the other solutions. But again, we don't give a specific guidance on that.

[Operator]

We have a follow-up question from Mr. Simon Keller, HAIB.

[Simon Keller, analyst]

Yes, just one quick follow-up. In the new guidance, do you factor in any exceptionals for H2 now still?

[Jochen Ruetz, executive]

No. Very simple, no.

[Operator]

[Operator Instructions] There are no more questions at this time.

[Jochen Ruetz, executive]

Okay. Then thank you very much for the questions you asked. It seems all of them have been answered. If any questions might arise afterwards, please feel free to contact our IR team who will be happy to assist. Thank you very much for your participation. Take care and goodbye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.