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Edited Transcript of ATG1V.HE earnings conference call or presentation 8-May-20 11:00am GMT

Q1 2020 Asiakastieto Group Plc Earnings Call

HELSINKI May 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Asiakastieto Group Plc earnings conference call or presentation Friday, May 8, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antti Kauppila

* Elina Stråhlman

Asiakastieto Group Oyj - CFO & Member of Executive Board

* Jukka Ruuska

Asiakastieto Group Oyj - CEO

* Pia Katila

Asiakastieto Group Oyj - IR Manager

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Conference Call Participants

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* Matti Ahokas

Danske Bank A/S, Research Division - Head of Equity Research of Finland

* Pete-Veikko Kujala

SEB, Research Division - Equity Analyst

* Sami Sarkamies

Nordea Markets, Research Division - Senior Analyst of TMT

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Presentation

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Pia Katila, Asiakastieto Group Oyj - IR Manager [1]

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Good afternoon all, and welcome to Asiakastieto's first quarter results webcast and conference call. My name is Pia Katila, I'm Asiakastieto's Investor Relations Manager. I have here with me today our CEO, Jukka Ruuska.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [2]

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Hello.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [3]

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CFO, Elina Stråhlman.

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Elina Stråhlman, Asiakastieto Group Oyj - CFO & Member of Executive Board [4]

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Hello.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [5]

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And Head of Financial Planning and Analysis, Antti Kauppila.

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Antti Kauppila, [6]

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Good afternoon.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [7]

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We will go first through our Q1 presentation followed by Q&A. At this point, I would like to hand over this to CEO, Jukka Ruuska. Please, Jukka.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [8]

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Thank you, Pia. And very warm welcome to discuss Asiakastieto's first quarter. And today, we have on the agenda, obviously, the numbers. But we have other important topics. So under these times, it's obvious that we are going to discuss the impact of the corona situation, but also how we have been dealing with employees and customers and so forth. But we have other important topics as well. And clearly, the new strategies is a key topic for this briefing.

But let's go to the actual topics, and I think that let's jump directly to the key figures. So during the first quarter, we grew, on a ForEx comparable number 10.4%, which is good. Clearly, in the latter part of the March, it was already impacted by corona, and I will discuss that more in detail. But looking at that general developments. So first, in terms of our Nordic integration process, we have been proceeding according to plan. So as we told in the end of the year, that we have reached, roughly speaking, half of the synergies. And since that, we have continued to implement our integration plan and it has gone according our planned goals.

Then on the business development side. So the first quarter was an active quarter. So we launched, as a whole, 17 new services, and the new services created 4.4% of our revenue during the first 3 months. And as you might remember, so what we are taking into, as new services revenue, those services, which have been launched max 24 months earlier than the period, so on a fairly good level on that. For the whole year, we are expecting a level that is exceeding last year new services shareholder venue.

Then let's pick up a few examples from these 17 new services. And first, corporate radar. And corporate radar is supporting decision-making concerning companies. And this service has been launched in Finland. And the idea is that within credit information part, and with that data, what can be used, based on regulation, to build risk classifications for companies. And there are a lot of important valuable way that cannot be taken into account. And that kind of data pieces, that kind of signals might be very important when making decisions concerning these particular companies. And now this corporate radar is providing alerts on that type of information.

And over here, we have some examples. So for example, if the number, the volume of inquiries on specific company is going almost strongly upwards, so it is an indication that there might be something exciting cooking. Another example is that we are providing data on validity of the financial statements. So one way to run corporate frauds is to use numbers from another company, i.e. that the financial statement is not the real one, the correct one, and we have capabilities to recognize that kind of situation. And there are other cases like that.

Then the other example on our new services is the ID protection for companies. And company identities are highjacked. And the most common form of these highjacks -- highjackings is such that the criminals are making changes on behalf of the companies to the register, which gives the possibility to do actions, transactions at the name of the company. And this services now alerting companies that that kind of changes have been done. And this is a new service, but this is also something that is synergistic, so it have been built in Finland first.

Then the third example is our completely renewed Omatieto service. Omatieto service is our direct-to-consumer service in Finland, i.e. we are providing directly to consumers, data and consumers' own grade ranking, credit scoring. It is providing services to protect consumers' ID, and preventing ID thefts and so forth. And since in Sweden, we have a very remarkable number of consumer customers, almost 0.5 million, so in our Sweden operations, we have developed a very good way to communicate and good sites and good service packages to consumers. And then now, we are utilizing that -- those capabilities and resources. And as I said, we have built our Finnish direct-to-consumer service entirely new. And it means that we have the new look and feel to our sites, really taking benefit of all the lessons learned. But then we have also changed our packaging of the offering, i.e., that we are going more and more towards subscriptions in our Consumer business as well -- direct-to-consumer business as well.

Good. And then briefly on our new strategy, and for this important in our strategy is that it has been created by our personnel. So huge amount of our persons, so our employees have been involved in really looking at the market, analyzing the market and building this strategy together, and therefore, this is not only a PowerPoint exercise. This is something that is already leading among our people. The key thing is really to define our purpose. And it is that we want to build trust in every day. And by providing data, by bringing transparency, we are building that kind of trust, which is enhancing and enabling transactions, enabling growth, enhancing interaction between people and companies.

And we define ourselves as the Nordic knowledge company. And in that role, we are bringing intelligence for the society. And clearly, the society includes companies, it includes consumers. It includes governmental authorities and so forth. In terms of the focus areas, the key themes. So we have designed 3 offering goals, themes and then 2 enablers -- key enablers. And on our offering goals, the first thing is really retain and strengthen our leading position in a credit information market. And there is plenty to do in credit information in this management area. So clearly, we can always improve the predictability of our modelings, we can and we are and we should be bringing more and more machine learning to develop algorithms and services. We have to utilize a broader set of data in order to provide as complete, as transparent understanding for our customers, concerning both companies and consumers.

Then the number two is our position as provider of business processes as a service type of services. And that is an area where we want to be the #1 choice. And that is especially with those business processes, which are based on data-intensive processes. So we want to help our customers to replace some of the business processes with our service. And clearly, it's easy than to click our [fees] to the customers' operations.

And we are already, as of now, strong, for example, in decisioning with this approach. And we have a lot of services, for example, in the field of housing. But there are plenty to do already within these areas, but then there are multiple of business processes to be digitalized, and clearly, that is where we see additional growth potential.

And then the third one, i.e., to become the leader within business information, and now emphasizing specifically on a noncredit basis. And on that side, the amount of raw material data is growing extremely fast, especially on the unstructured side. And our ambition is even better, even more efficiently utilize unstructured data in order to provide important insights on the companies.

Then in terms of enablers, so in order to make this happen, so we are leading capabilities and competencies. And it means that we are putting our focus to build a future-fit and innovative organization, which means that we have to strengthen our purpose-based, value-based culture. We have to be even more efficient in our change management. We have to be nurturing innovativeness and building more advanced structures in order to support and facilitate innovation. Nordic future platform is another key enabler. We have started our work to build Nordic future platform, and it will enable us to be not only more cost-efficient but, even more importantly, much faster to develop new services and provide those services to our customers.

And then we have been reflecting the strategy to do our financial goals and KPIs. And clearly, what we are recognizing is that there is significant growth potential within these focus areas we have defined. And it means that despite the current situation, we believe that we can keep our long-term growth goal, i.e., to be able to grow from 5% to 10%. In terms of margin profitability, so our long-term goal is to keep our EBITDA growth rate higher than the top line growth rate, i.e., that the EBITDA is expanding faster than top line. And then on the balance sheet side, so we want to have efficient balance sheet, but not to have too much leverage. And that means that we want to be below 3x net debt to adjusted EBITDA multiple. And new share services continues to be at the very core of our strategy. And therefore, it is also key performance indicator for us. And our goal concerning the new services is that the share of new services from our revenue keeps growing every year. And clearly, once we are ready with our Nordic future platform, then we have possibility to increase our ambition further with that.

And then we are looking at that our impact to the environment as well, since we are providing, and we want to really emphasize on providing, health for our customers to make sustainable decisions. But in order to get authorization to provide that kind of services, we have to behave as well. And in order to be good enough to provide sustainability services, we want to be sustainable also. And it means that we have set, as a goal, to be CO2 neutral by the year '23, 2023. So these are the key goals.

And in addition to that, so in terms of our innovation and renewal, so we intend to continue to invest to our new services development and to our Nordic future platform. And roughly speaking, it's -- our CapEx is going to be 10% of our revenue. And then now, again, after the integration effort, we reduced the acquisitions. So we are rebuilding our structured process to do add-on acquisitions and accelerate our development with add-on acquisitions.

And then finally, in terms of dividends that we are going to have 70% payout ratio at least. So these are our financial goals.

And then going over to the key numbers from the first quarter. So as already mentioned, so our growth for the first part on a ForEx-comparable rates was 10.6%. Our adjusted EBITDA was 12.4%. And it was growing at respective rate -- at respective comparable ForEx rates at the speed of 6.8%. So our EBITDA was not growing as fast as top line. And that was coming mainly, first of all, from our Proff acquisition. So the profit margin in our Proff business is not as high as in our other business. But also because during the first quarter, we had unusually high that type of IT spending. That was development type of spending, but it was not something that can be capitalized. We also spent more than usually to our market. This IT spending is temporary, so it is not at the level we want to be during the coming quarters.

And then if we go to quarterly based growth numbers. So it was decent quarter growth-wise, clearly, it's important to note that during the last 3 quarters we have had the Proff as an organic growth component included in our numbers. Then what comes -- the business areas. So Risk Decision was growing at a speed of 2.3%, and I think that the key thing and key topics, what comes with this decision, are that the Finnish consumer information was not growing. And the key reason for that was that the -- during the fall launch, 20% interest rate cap on consumer lending impacted the market and volumes, and we didn't have that type of growth we have been used to. Swedish consumer information market continued to grow. And on the business information side, finally, we saw some positive signs of growth on Finnish business information business. The Swedish was not growing that much. I will discuss the current trading in our corona part.

SME and Consumers was growing to large extent due to the Proff acquisition, but also the underlying business, the original business within SMEC was growing actually quite nicely. Digital Processes kept growing, and the growth is coming from Finnish real estate services, especially the valuation service for flats, for apartments. It was growing very nicely. But also in the compliance services, we are growing. And then in our Customer Data Management, we continue to go downwards. But the good news are that our Finnish business in this side has already started to grow. So I think that they are good prospects. However, they are impacted by corona naturally as well.

Then if you look a bit more closer to the profitability and how the EBITDA was broad. So altogether, our EBITDA was growing at 6.8%, with comparable ForEx rates. And the key variances in a cost -- within operating costs, so the increase of IT costs and marketing costs took place over here. So personnel costs looks flat, but clearly, there has been sort of major structural change. We disposed our telephone sales in Sweden, which had almost 100 persons. But then we have also acquired Proff with a bit more than 60 persons. In terms of free cash flow, 7.3%, and it did rise from quarter-to-quarter. When looking at the balance sheet, so the net debt in relation to adjusted EBITDA, 2.8x, and it is more or less that it should be. And clearly, our gross investments, we were at EUR 2.9 million. With our corona contingent plan, we have been postponing some investments, so it will be on a lower level during the coming quarters. I hope we can ramp up that part as soon as possible.

Well, then, going to COVID-19, or the corona situation. So first of all, so we managed to get through the spreading of corona well. We were quite early to guide our personnel to avoid traveling, and then, finally, to start working on a remote basis. And vast majority of our personnels are working from home as of now. And actually that has gone better than expected. So it has been a very smooth process, and I think that our personnel has adapted in a great manner to this change. And clearly, the health and safety has been the first priority to us.

We built the contingency plans immediately, and we get also organized so that we had and we have still 4 streams: people stream; business continuity; finance; and then customers and business opportunities streams.

In terms of the financial impact, so it's clear that then and the economic activity in the society decreases in a significant manner. So it has negative impact due to our volumes, and respectively, to revenues. However, we have some countercyclical elements. For example, in situations like this, so clearly, there's a huge need to negotiate and agree on restructurings on existing loans, and when that type of restructuring is done, so our services are needed most often. Another sort of growth element, growth contributor under these kind of crisis times, is that both companies and consumers tend to need additional liquidity. And that is contributing to the volumes and the respective revenues.

And as the third point, so when the things are more difficult, our customers are putting a lot more effort to look after the risks. And it means that our risk management services are used even more and in a more wider selection as such. And simultaneously, we have seen some very fast change -- several changes in our regulatory environment, especially in Finland. And the key regulatory effort has been decreasing the interest rate gap on consumer loans from 20% to 10% on a temporary basis. The proposal for that law is still at the Finnish Parliament. But I think that it's a fair expectation that it would be enforced from June, and then it will go to the end of the year. So it is temporary.

And at 10% interest rate cap environment, unfortunately, quite a big amount of consumers are left out of the credit market. And respectively, it will have an impact to our volumes since there are lenders that are providing loans for that kind of customers, whose risk profile is requiring a higher interest rates than what is possible under these circumstances. So it is going to have a negative impact to our volumes and revenues.

Fortunately enough, goods-related credits were not included to this net of credit cards, so it is providing some relief. And the revenue share, which this has impact as a whole is, roughly speaking, between 4% and 5% of total revenue. But we see and we have recognized also new needs, and we have been addressing those new needs. And for example, we have been bringing new data to our corporate reports, for example. Now you can find from our reports whether a company has received corona subsidies from Finnish government. So that applies only to Finland. Another example is that we are actively participating in discussion and providing our decision-making services for these subsidies -- subsidy processes.

And since the visibility is very low, first of all, we called in our guidance. So we really don't have capability to see ahead how these different components are affecting, what is the net impact. But nevertheless, we decided on EUR 5 million cost savings on our fixed costs. And that means -- and we wanted to be on the safe side, and that we can really meet how severe this corona crisis may come, but we are going to survive. And as already mentioned, so we have been reacting fast to new customer services.

Concerning our current tradings. So our current understanding of the volumes and revenues is such that we are, roughly speaking, on a flat growth -- more or less flat growth compared to the last year. But in order to be prudent, so we have safeguarded our financial position. So our current leverage is, relatively speaking, low. We have liquidity at a very strong level. We have credit facilities, unused credit facilities, and we don't have loans that would be due before 2023, respectively,

in order to be really prepared for whatever comes.

So today, the Board decided to give a new proposal for dividends, i.e., that instead of following the original dividend proposal of EUR 0.95, so we are going to, today, now EUR 0.61 as the dividend. And then the Board was -- the Board is proposed to be authorized by the general meeting to decide on the rest, i.e. EUR 0.34 per share, during in -- the fall, if the economic situation enables that.

And as a repetition, so these are now our long-term goals, and we have been checking them based on our new strategy, and they are still valid, and here is the dividend story, with a bit more words.

So now Pia, I think that it's time for questions.

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Questions and Answers

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Pia Katila, Asiakastieto Group Oyj - IR Manager [1]

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We are ready for the questions, and we start from questions over the telephone conference line. Please, operator.

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Operator [2]

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(Operator Instructions) Okay. So we take our first question.

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Matti Ahokas, Danske Bank A/S, Research Division - Head of Equity Research of Finland [3]

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Matti Ahokas, Danske Bank. A couple of questions, please. Firstly, if you can a bit clarify the statements regarding the Q2 development. Obviously, now we have slightly more than a month of evidence about the lockdown. And so you're basically saying that so far it looks like that Q2 would be 0 growth net compared to Q2 last quarter. Is that correct? And also, as a follow-up on that, so now we've had the 20% interest rate cap in Finland, but how's your evidence on business from consumer finance companies in Sweden? That would be my first question.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [4]

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Yes. Concerning the current tradings, so clearly, when we're looking at -- I'll touch on April numbers and then a bit from May, which is not still constituting April second quarter, but based on that that's what we have as for now. So our understanding, our interpretation of the current trading is that our growth rate -- organic growth rate is, roughly speaking, flat -- more or less flat. Then concerning the Swedish consumer market, so on that side, there hasn't been any regulatory implications, at least so far. And we are not really expecting any short-term regulatory decisions either.

However, what we have seen in the Swedish consumer market is that that market has been [going] somewhat down, i.e., that the growth has definitely [felled]. So I think that that market is still looking for the direction. So as of now, it's very difficult to say anything else, but I think that the direction is a bit uncertain on that side.

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Matti Ahokas, Danske Bank A/S, Research Division - Head of Equity Research of Finland [5]

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Great. Then just one clarification on the dividend. On the slide where you show the dividend payout ratio to 70%, but you said at least 70%, so what is the right figure? I can't see it in the press release, you don't say a dividend payout ratio, but is it 70% or at least 70%?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [6]

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Well, I think that what comes to the dividend per se, it is not so that we would be following certain formulas. So it is not that we are aiming to have it on 70%. It is more so that it is at least 70% reflecting our liquidity. So unless we are capable to use the money in a way that provides sufficient returns to our shareholders, we are going to give the monies back to shareholders. And if you look at our dividend payout ratios historically, so they have been very high. And if we cannot employ capital with sufficient returns, that remains to be. So effectively, it is at least.

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Matti Ahokas, Danske Bank A/S, Research Division - Head of Equity Research of Finland [7]

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Great. And then if you can just finally discuss a bit about the decision to split the dividend for last year. Obviously, what you're pointing out now, Q1 has been good, Q2 looks stable altogether. So was the decision to kind of split the dividend more based on liquidity factors? Or is it purely the fact that the future outlook is still so uncertain that you just want to be cautious?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [8]

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Yes, I think that it's fair to say that there are several reasons to make that decision. First of all, clearly, we want to be prudent. We want to safeguard that we have financial space to maneuver. For the second, so I think that under these circumstances, and that is a function of the lacking visibility. We really don't know what's going to come even though, as of now, it looks decent. The other one is that, under these circumstances when we don't know, so clearly -- and we want to also follow the general policy the general line among the companies. But also, we want to keep some ammunition in the case that there would be highly interesting M&A opportunities during these times. So that's another angle to this dividend decision.

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Operator [9]

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We'll now take our next question.

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Pete-Veikko Kujala, SEB, Research Division - Equity Analyst [10]

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This is Pete Kujala, calling from SEB. Actually, most of them were already asked, but I have a couple more. About the fixed cost reductions of EUR 5 million for 2020, is it so that we can expect this cost to basically come back after 2020, even though it's basically fixed?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [11]

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Yes. So these cost savings are coming, to a large extent, from us freezing our recruitment and, clearly, taking down the traveling, and that comes more or less automatically, and then clearly, having sort of less activity in terms of the development. So it's -- and clearly, what it comes to the CapEx, so I mentioned already that we are postponing some of the CapEx. So -- and CapEx always includes some OpEx aspects as well.

And it means that in due course, we definitely want to restart recruiting people. We really want to accelerate in our development. We want to get our Nordic future platform program ready at decent time. So in that respect, the cost base will go back. And clearly, our ambition is really to go back to that level as soon as possible, i.e., when we have sufficient visibility in terms of our revenue growth. However, there will be that kind of respective time lags. So if you start recruiting, so it takes time sort of to replace. And then clearly now we haven't done even the replacements for the time being. So there is a sort of significant time effect, but it is not a permanent cost base change.

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Pete-Veikko Kujala, SEB, Research Division - Equity Analyst [12]

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Yes. So that's very good. And then another one relating to the interest rate cap change in Finland. You mentioned that this revenue has some 4% to 5% share of your total sales. So what kind of impact should we be expecting to this share of revenue? Is it down 20%, 40%? Any color on that would be good.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [13]

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I think that in order to save myself from future embarrassment, I'm not going to give any guesstimates. But clearly, we are expecting to have sort of significant decrease in those volumes.

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Operator [14]

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Okay. We'll now take our next question.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [15]

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Sami Sarkamies, Nordea Markets. I have a couple of questions, still. Firstly, starting from the new strategy for 2020 to '23, what is new here? Or what are the main changes in comparison with the past?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [16]

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The key changes are really put -- or if I start from the other end, excuse me. So what is not changing is that we really want to strengthen our risk management, credit information business, so that continues. But new thing is that now, we are really putting effort to build our business processes as a service field. And we are recognizing a significant growth opportunities in that field. And the corona impact is even further accelerating that need among our customers really to digitalize the processes. And the easiest processes to be digitalized are the data-intensive, data-driven processes. And that is a clear change.

Another clear change is really to say that we are going to put major effort to our noncredit business information offering. And that applies especially to Sweden. In Sweden there is remarkable market, and we are way too small on that market.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [17]

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Okay. And then a technical follow-up on that. When you talk about the period starting 2020, is the baseline for the new strategy and targets 2019 or 2020?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [18]

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2019.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [19]

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Okay. And then finally, I would just like to recap your thoughts on the growth outlook for this year. I think you said that you're expecting revenues to be largely unchanged from the previous year. In Q1, we saw 10% organic growth. You're now talking about flat organic growth during Q2, I guess that indicates roughly 5% negative growth during the second half of the year. Is that how you're thinking it?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [20]

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No. So concerning the entire year, we haven't provided any guidance. So for the first quarter, we know now. And our touch on the current trading is that it is roughly on an organic basis, roughly at the same speed as last year, i.e., that the growth rate is flat. So those are the fact points, facts available to look at this. And then whether there is going to be recovery and how fast the recovery during the second half of this year, I think that nobody knows.

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Sami Sarkamies, Nordea Markets, Research Division - Senior Analyst of TMT [21]

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Okay. I may have misunderstood you previously, but thanks for the answer.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [22]

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Yes.

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Operator [23]

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Okay. It appears there are no further questions in the queue at this time. So I'd like to turn the conference back over for any additional or closing remarks.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [24]

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And then we have received 1 online question from Kimmo Stenvall, OP. CapEx will be 10% of revenue in the future, i.e., higher than before. Where is this additional CapEx to be allocated?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [25]

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Yes. And now we are discussing the period, during which we are investing to our Nordic future platform. And old -- I suggested before, UC transaction used to have a CapEx of, roughly speaking, 8% of the revenue. So compared to that level, there is a slight increase, and clearly, that increase is coming from our ambition really to build the future Nordic platform.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [26]

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And that was all regarding the questions. Thank you. And finally, we would like to remind you of our upcoming Investor Relations events, which will be -- we will have our AGM in Helsinki by the end of June. Our Board of Directors will send a new invitation. And our second quarter results will be published on 6th of August.

And that was all. Thank you for your participation. We wish you a nice weekend. Stay safe and healthy. Thank you.