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Edited Transcript of ATG1V.HE earnings conference call or presentation 8-Aug-19 11:00am GMT

Half Year 2019 Asiakastieto Group Plc Earnings Call

HELSINKI Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Asiakastieto Group Plc earnings conference call or presentation Thursday, August 8, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Hugosson

Asiakastieto Group Oyj - Deputy CEO, Acting CIO & Director of IT and Technology

* Antti Kauppila

Asiakastieto Group Oyj - CFO & Member of Management Board

* Heikki Koivula

Asiakastieto Group Oyj - Director of Risk Decisions

* 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 Markets Equity Research - Head of Equity Research of Finland

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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 Half 2019 Results Briefing. Welcome also all of you who are following this on the conference call line or through webcast.

First, I would like to introduce Asiakastieto's management present here: CEO, Jukka Ruuska.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [2]

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Good afternoon.

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

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Deputy CEO, Anders Hugosson.

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Anders Hugosson, Asiakastieto Group Oyj - Deputy CEO, Acting CIO & Director of IT and Technology [4]

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Good afternoon.

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

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CFO, Antti Kauppila.

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Antti Kauppila, Asiakastieto Group Oyj - CFO & Member of Management Board [6]

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Good afternoon.

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

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And Director of Risk Decisions, Heikki Koivula.

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Heikki Koivula, Asiakastieto Group Oyj - Director of Risk Decisions [8]

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Good afternoon.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [9]

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My name is Pia Katila. I'm Asiakastieto's Investor Relations Manager.

Our today's agenda is as follows: Jukka will start with the highlights of Q2; and then give you an update of Asiakastieto's state of status in Nordic; followed by financials, outlook and guidance; and after the presentation, we take first questions from our audience here in Helsinki, Kalasatama; then conference call and online questions.

And for your information, all the presentation material is available on Asiakastieto's Investor pages at asiakastieto.fi.

Let's start with the presentation, please Jukka.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [10]

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Thank you, Pia, and very welcome to discuss Asiakastieto's results from the first half and from the second quarter. So well, I think that it is sort of relieving to say that now onwards, we are going to have actual comparison figures on a quarterly basis, so normal pro forma figures on for quarterly. Obviously, we are going to use pro forma for whole year for a while, but since our proceedings, since now it's a bit more than a given year from the moment when Asiakastieto and UC were combined and the UC acquisition was closed. So time flies.

In terms of the topics. Clearly, one of the highlights, most important topics during the second quarter was the acquisition of Proff. And that is something I'm going to discuss among other things. But I will sort of jump over to these highlights from the second quarter immediately. So over here. And clearly, the first thing is the integration work and the integration work related to this Asiakastieto and UC combination. And then the Nordic business development continued even though, clearly, we have committed a lot of resources for this integration work, but business development continues simultaneously.

Then we had this Proff acquisition and clearly, sustainability continues to be an important thing to us. In terms of integration, so we have been proceeding with our cost synergies according to plan. And clearly, cost synergies are creating the vast majority of the maturities to be obtained during this first year of the first period after the closing of the UC acquisition. And now all business areas and sales equally have sort of full speed to deliver also synergy revenues. And definitive revenues are coming from cross utilization of existing services in our combined new business development. And clearly, sort of getting new customers.

Housing valuation service launched in Finland 3 months ago is a good example of this sort of cross-utilization opportunity we have, and from there we can sort of update revenue synergies. And we have ongoing intensive creating on how we are advancing with our synergic roadmap, synergy plans. So we know fairly well where we are or actually very well where they are. And we can also keep sort of deleting those initiatives, those road maps that are found to be not workable and replacing those with the new that we keep finding when we are sort of learning better what are the opportunities. So as a whole, we are proceeding according to the plan that was communicated for level of synergies, i.e. EUR 17 million as a run rate for full year 2021.

Then if you go over to business development. So altogether, we launched 14 new services during the last quarter. And the particular services I would like to highlight are: First of all, monitoring of foreign companies provided finally for Finnish customers as well; the other one is Allabolag start; and then the third one is scoring of our unregistered sole traders concerning Finnish market. I mean if we start with that so there is a sort of significant economic activity conducted by unregistered sole traders. This has been a bit sort of beyond traders. So they haven't been sort of on the screen, not for banks, for finance providers, but neither for those who are doing business transactions, business deals with these sole traders. And now we have been able to bring them in and sort of combine the both business and sort of consumer and also sole traders. So important new segment has been brought in onto our services.

Then we have this monitoring our international companies or foreign companies, and that is something that has been lacking from our offering in Finland for a while. And clearly, it has been excluding certain customer segment from our reach, especially if those customers want to use single provider of services. And now we have this sort of missing piece available. So it's highly important.

Another sort of exciting new service is Allabolag Plus. And Allabolag is our freemium business information site in Sweden. It has set a huge traffic, so 2.3 million unique visitors per month. By far, the leading site in Sweden. And there are ways to monetize this traffic. One of those ways is to use this site as site for e-commerce, and that is what has been done. But our ambition is to sort of convert that business even more to subscription based to recurring revenue type of business. And Allabolag Plus is sort of major step towards that. So what we have done is that we have bundled business information, including some new information like estimated company value and historical company board member, member state that, as bundled data package. And then we are providing that as an ongoing service as a subscription. And the sales of Allabolag Plus have gone according to plan, so that's excellent.

And as a whole, the share of new services, our revenue -- our total net sales has been declining. So the reason is that simply, especially during fall season while last year, this integration work and all related activities have used our resources. Those resources are what we are needing and using for business development. And clearly, also ongoing some share of those resources will be occupied with our platform integration initiatives. But simultaneously, we are in a position to sort of use more of these resources also for business development. So definitely, our ambition is to accelerate new services development and then, in due course, also to get a higher share of revenue to be created by new services.

In the environment of -- or in the field business development, we have to also decide that -- to close some of the services. And one service we have decided now to close is our Swedish KYC, know your customer, service. UC KYC. And the reason is that simply when we analyzed this so we have found out that we don't have sufficient basis to believe that this service will generate enough revenue, enough cash flow to fund the coming investments needed, the immediate CapEx to develop that service further. And therefore, we have decided to close that. This means that there will be a down -- we are going to write-down EUR 1.5 million, and it has also an impact to our EBITDA from that work that has been conducted during this year, that is EUR 349,000, rounded to EUR 0.3 million in our material. And the important point is that this doesn't mean that we are not committed to develop compliance services. We are investing. We continue to develop our compliance services because, first of all, they are very close to our core capabilities of what we really know. And our customers have a huge need to automate and then digitalize compliance processes because it has become such a huge cost. So this particular service didn't fly and it has been closed, but we will continue to invest in very interesting opportunities and initiatives in the sales of compliance services.

Then if you jump on Proff acquisition and clearly, so the very first important question is where does that acquisition is always what is the rationale with the acquisition. And with Proff it's a bit sort of twofold. First of all, it is sort of creating in us -- providing us presence in Norway and to some extent, in Denmark as well. And clearly, that is something that we have been communicating that we have a Nordic ambition. So we want to serve our customers with the Nordic service portfolio. And clearly, Proff acquisition is a step towards that goal. The other reason is that Proff is running the largest business information freemium site in Norway and Denmark. In Norway, it has more than 2 million unique users, which is in a market like in a size of Norway, it's just huge traffic. And it has also the largest site in Denmark, even though smaller sort of below 1 million visitors in Denmark. And in order to monetize freemium sites, so clearly, you can have -- use them as e-commerce as we already discussing in connection to Allabolag Plus. But also clearly, it is besides a monetized by providing it as advertising and channel and also to provide visibility for companies. And now altogether, we have 6.5 million unique visitors on our freemium sites. This is a huge audience, huge traffic and which means huge audience. And clearly, being able to address such a huge audience is a great benefit to those who want to use us for advertisement or who are seeking visibility on our freemium sites.

And on e-commerce side and on service side. So now we can use our sort of combined business development, combined set of new services to be provided on our all freemium sites. And clearly, the Allabolag Plus is a good example of that kind of service that can be multiplied to all our markets. And now we can put our flack on all Nordic countries. In all fairness, so when it comes to Denmark, we have only one employee over there, but we can put the flack off anyway there.

And then on sustainability. So we have now published our first nonfinancial information report, sort of a very sexy name for a report, but it's sort of addressing those principles and practices we are following in order to act in a responsible manner.

Then if they start going to the figures -- to the key ratios from the second quarter. The group by 4.2%. And then if you take into account the impact of Swedish krone -- so Swedish krone has continued to weaken, so then we end up to 5.8%. When thinking how good it is, so then it's good to keep in mind that we had one banking day less during first quarter. So it has clear impact to growth. So I would say that the growth rate was okay-ish, so -- especially when you take into account this change or difference in terms of the number of trading days.

On profitability side. So our adjusted EBIT grew on a comparable ForEx rate basis, a bit less than 21%. Something to be kept in mind is that, that number includes the impact of closing this KYC service. And definitely, we don't believe and that we end up sort of closing services too often. So clearly, it's an unusual item. And clearly, this is sort of the type of discussion, but it shouldn't be -- should we have not closed that service though, then the margin would have been 3.6% units higher then -- or the growth would have been 3.6% higher than it was. And in EBIT, clearly there is a -- the EUR 1.5 million impact from that write down, respectively.

Then turning to business area growth and looking at the pro forma figures at a comparable ForEx rates. So clearly, the growth was coming from risk decision, and especially from consumer services, supported by new services. And clearly, there has been a good speed with Risk Decisions and consumer services. This is very visible on these figures.

On -- in the field of risk, SME and consumers. So there is a decline coming from 2 drivers, to some extent, from the fact that we had a lower number of sellers -- sales people in our Swedish Affärsfakta operation, but mostly from the fact that our mix -- product mix has been somewhat different, i.e., that we have been selling less economic publications, which is a one-off sale each time, and we have been selling more recurring services. And if you look at our gross sales, so they are flat compared to the last year. But the revenue we can recognize from these sales is lagging behind. So in that respect, so clearly that -- those sales that are periodized and recognized in due course will come, but they will come later.

And in the field of Customer Data Management and the sort of negative change that the contradiction comes from the discontinued service in Swedish market. So they used to provide services for marketing, for consumers and that service was discontinued during the second quarter last year. So -- and that impact will vanish from our comparison figures now on.

On Digital Processes, growth coming mostly from real estate information services, and to some extent, also from Tambur, even though very rapid growth coming from Tambur is leveling off. So it's growing, but sort of growing at normal rates from now on.

And in terms of EBITDA, so no change in other OpEx, in other operating income, which is sort of minor item anyway. Small increase in materials and services cost less than -- the growth was clearly, this is the area where both the synergy efforts are visible, but also on sort of the impact of turnover of personnel.

In the operating expenses. So we have over here the EUR 350 million item coming from the closing of UC KYC. Plus, over here, is additional cost reflecting this. So we have temporary consultants, especially in Sweden to replace those persons we don't have in our permanent positions for time being. So that is how it sort of cooks down to adjusted EBITDA and then for the sake of comparison. So we are showing the impact from IFRS 16 separately over here.

Balance sheet wise. So level of debt in relation to EBITDA is pretty much in that neighborhood for where we want to have it, so at around 3. Clearly, one has to remember that since the end of second quarter, we have paid for Proff from our cash, so it will have an impact on net debt. But obviously, there will be also EBITDA contribution coming.

In terms of cash flow, EUR 5.3 million. And so that the comparable, so truly comparable starts from here. And there are -- so on usual items, so roughly speaking, EUR 1.5 million included.

On the investment side, gross investments EUR 3.2 million so far. And I think that's more or less at the level we were expecting. In terms of guidance, we made a small change in connection to closing to Proff, and this sort of reminds a bit a kind of play where you have to sort of seek for differences and the differences that now we have taken are very slightly below those adverts that are deleted reflecting the acquisition of Proff and the weakening Swedish krone. When it comes to our organic growth, I think that it remains pretty stable as we have sort of seen earlier.

So these are the highlights. So Pia, do you take sort of the question part.

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Questions and Answers

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

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And we will continue with the questions, and we will start with the questions from our audience here in Kalasatama, Helsinki.

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Matti Ahokas, Danske Bank Markets Equity Research - Head of Equity Research of Finland [2]

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Matti Ahokas, Danske Bank. Couple of questions from my side. Firstly, you said that the sales growth was okay-ish. Which parts were it satisfied on and which not? And where do you see kind of improvement potential?

Secondly, I remember you guys talking about the interest rate gap on consumer loans. So in Finland, you introduced now, I guess, in September. Any update on your thoughts on the impact of that.

And then I was just wondering, with Proff, would that be reported as a separate business unit? Or will that be included in the current business segments?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [3]

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Good. Clearly, in terms of sales, the thing I would love to say is accelerating business development, i.e. new services contribution. This was as we expected. So no variance to that, but clearly, in our business, in our market position I think that it's fair to expect. So the okay, the contribution for growth coming from new services. And so that the okay-ish is coming from that part. And I think that there are many opportunities for growth, and you are sort of growing a bit sort of impatient to utilize those opportunities. But -- so we have sort of great opportunities to grow and now it's about sort of making those materialize.

Then what comes to this new regulation coming in force in Finland in early fall. So our expectation is that it will lower what the volume is for Finnish consumer lending market. And at least, we think that this will model follow the same pattern as earlier, i.e. that you have had so a growing underlying volumes. And then when the regulation comes, so the volume falls but then sort of the players, the consumer lending houses start development processes and then sort of they get back to the sort of growth path and then the volume sort of comes. So we expect that pattern to follow. Then how large the dip is going to be that remains to be seen. And it's very difficult to estimate.

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Matti Ahokas, Danske Bank Markets Equity Research - Head of Equity Research of Finland [4]

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This is included in your guidance, I assume, for 2019.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [5]

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Yes, it's included, correctly -- correct. Proff is going to be included in SME and Consumer business area.

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Matti Ahokas, Danske Bank Markets Equity Research - Head of Equity Research of Finland [6]

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I just may have a follow-up. If you're going to introduce 14 new services. To me, it sounds quite a lot. So just wondering how many services you have altogether? And are these kind of 14 so small that they don't really have an impact because I said, it sounds like a very high figure.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [7]

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Impact if I say that as a whole, our revenue is on a ballpark of EUR 150 million in Proff terms. And 4% of EUR 150 million is, nevertheless, EUR 6 million. And clearly, it's not -- it's an important contribution to our growth, and we are sort of counting the new services. Our definition for new services is that we consider those services launched during the latest 24 months, as a new service, which is -- if we compare ourselves to other companies, it is a fairly strict manner. So usually, in our industry, it varies from 3 to 5 years, what is considered as a new service. And so in that respect, so I think that -- on this level, it contributes. But clearly, we have potential to be higher.

On this 14, and clearly, so the number of new services is secondary. So we don't have KPIs and that we have to sort of launch 16.5 new services per quarter. Our KPI is really the euros and share of the revenue. But these 14 services include quite small new things, some quite incremental things. But they are, included in every quarter, they are sort of that kind of significant new services like these 3 examples I mentioned. At least, when I'm looking from my perspective, they are remarkable. Maybe they are not taking (inaudible), but however our customers are perceiving them important. And another important point is that it's highly important for our customers that we can sort of meet their changing needs and demands.

And clearly, time to time they are smaller things as few of these 14 are. And then time to time, they are sort of very sizable new services like our new services in the field of housing market, process digitalization where they are in the process to really change the entire industry, to disrupt the entire industry, how the processes are run, potentially. So in that respect, so I think that good new services development work. But the fact that is making me and us impatient is that there are opportunities to do so much. So that is one of the beauties of this industry.

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Matti Ahokas, Danske Bank Markets Equity Research - Head of Equity Research of Finland [8]

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Finally, is it possible to launch some of the services via Proff in Norway and small Danish business as well? Is that your plan as well? Or are you going to run the business as it is?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [9]

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Absolutely. And I think that this Allabolag Plus is excellent candidate to be in Norway and in Denmark. So our revenue from Denmark is fairly limited. So for example, we haven't started even to sell advertisements in our Danish freemium site even though we have sizable traffic over there. So we believe that there are that kind of low-hanging fruits to be picked.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [10]

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Any more questions? Then we will continue with the questions over the telephone conference line. Please, operator.

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Operator [11]

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(Operator Instructions) It appears there are no question signals. I'll turn the call back to our host for any additional or closing remarks.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [12]

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Then we have received some online questions.

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [13]

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One additional aspect. I was mentioning about sort of looking at our peer group, or at least a peer group, and there is one major difference how we are sort of making capitalizations. And that is the fact that we don't capitalize our data. And Antti, would you be in a position to briefly sort of address that question, so that difference, how we are creating out sort of data acquisition costs?

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Antti Kauppila, Asiakastieto Group Oyj - CFO & Member of Management Board [14]

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Sure. Thanks Jukka. So in our reporting. Although, you might say that we certainly sort of benefit from our database and the data inherent in our database for longer than the current period that we're in. We are expensing those costs when they occur. We do have sort of peer group companies, international companies, who would sort of capitalize partly their data acquisition costs as well on the note that they would utilize that data in their models for, let's say, for multiple years. So that's some -- one difference that when you are looking at our peer group and looking at sort of our EBITDA levels, in comparison, it's good to note that there are certain differences that can provide for, let's say, fairly large difference in comparison in the EBITDA margin levels.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [15]

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Okay. Online questions. We have [Raul Etaylamaki] from [Field Clover]. The EUR 1.5 million write-down seems quite a lot some compared to your annual gross CapEx. What do you think went wrong in the initial investment analysis?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [16]

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It's a sizable write-down in our perspective, that's for sure. So I think that the reason why we are closing this service is that market didn't develop as we were expecting, i.e. that we were not able to the pressure the market to start using that particular service. And also that due to this regulation and the cost base comes, relatively speaking, high and fixed. So I think these are the 2 very, very simple reasons.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [17]

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Another from [Raul Etaylamaki]. Does the current Q2 new services revenue include any cross-border revenue?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [18]

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Can you please repeat that?

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Pia Katila, Asiakastieto Group Oyj - IR Manager [19]

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Does the current Q2 new services revenue include any cross-border revenue?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [20]

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Some minor elements, but it's -- practically speaking, no.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [21]

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And the third one, how much of the acquired Proff revenue is currently subscription based? Do you need to build the subscription base from scratch?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [22]

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There is a subscription base. So in Norway, we have a specific section that is recurring. Anders do you have sort of a ballpark figure for that?

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Anders Hugosson, Asiakastieto Group Oyj - Deputy CEO, Acting CIO & Director of IT and Technology [23]

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There's also some business in Sweden. So I don't have breakdown on that.

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Antti Kauppila, Asiakastieto Group Oyj - CFO & Member of Management Board [24]

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It's about almost 40% of sort of the Norwegian revenues are subscription based. It's -- so it's quite a large share of the Norwegian business in Proff. So not building from scratch, certainly not.

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Pia Katila, Asiakastieto Group Oyj - IR Manager [25]

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And that was all. Any more questions from our audience?

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Jukka Ruuska, Asiakastieto Group Oyj - CEO [26]

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Thank you for your interest and attention. So thank you.