The IT service and consulting firm is one of the youngest companies in our portfolios. It stands apart from our other companies by neither paying dividends nor repurchasing own shares. However, the growth rates are worth a chapter of their own, and so is the company’s culture. We are glad that we have become co-owners.

Issues such as digitalisation, use of data and optimisation of processes are discussed in board rooms around the world as well as in this book. But how do companies exploit all the opportunities available today, when their systems were developed in-house and based on IT platforms developed in the last millennium? One piece of advice is to call Netcompany, where a unique and ambitious corporate culture delivers on their end of the deal to the standard that has been agreed, on schedule and on budget.

In the year 2000, the best-selling mobile phone was Nokia’s model 3310. The tiny, colourless screen had no access to the internet or emails. Today, smartphones from brands such as Samsung or Apple can process data and access the internet faster than a desktop PC could back then. Considering this pace of technological development, it can be hard to imagine that some companies still use important software developed 20 or more years ago. The big question remains: How can one optimise that kind of software to meet today’s many requirements and opportunities available?

One most likely cannot. Certainly not with the same speed and security than that of more recently developed systems. Netcompany was founded in 1999 by André Rogaczewski, Claus Jørgensen and Carsten Gomard, who had a dream and a mission of creating a leading IT consulting firm that would supply modern IT solutions to all of Northern Europe.

Today, that mission has definitely been accomplished in Denmark, and a smaller (but rapidly growing) business in Norway is also flexing its muscles while the first steps have been taken on the UK market as well.

A teenage company in a growth spurt

Netcompany is a purebred IT service provider supplying innovative societal and business-critical solutions. The company aims to grow its revenue by 20 to 25 percent per year and has been growing at this rate for the last decade. Additionally, the ambition is to increase the already high operating margin. Compared to the rest of our companies, Netcompany is relatively young. Some may consider it to be in its late teens, but what is clear is that the company is definitely going through a growth spurt.

The company has a strong position on the Danish market, currently holding a market share of ten percent. Netcompany does not supply standard software or platforms. Instead, they sell and develop project-based solutions to their customers. Private companies represented just over 40 percent of the company’s revenue of 2 billion Danish kroner in 2018, while the public sector represented the remaining 60 percent. In 2018, Netcompany won almost 70 percent of the tenders that they participated in, and at the end of the year, they even had to reduce the pace of taking new orders a bit.

The corporate culture at Netcompany is quite special. With a focus on being an ambitious workplace, the company is organised like many other consultancies: a lot of young consultants and clear career development paths for those of the right calibre.

As part of the model, the proportion of young and hungry consultants should be the largest. The number of employees will gradually be reduced for every step closer one gets to becoming a partner. Currently there are 16 partners in Netcompany – less than 1 percent of the employees. The average age in Netcompany is 33, which is half a decade younger than among some of its Danish competitors. In other words, the model is to hire young, ambitious and “cheap” employees who, if they demonstrate strong results, can advance in the ranks.

Day fines are avoided

A corporate culture does not create value in itself, of course. However, the culture is the foundation of what allows Netcompany to keep the promises made to its customers. Netcompany does not have a sales department separated from its other employees. The IT employees sell the IT projects. As a result, the same project manager who helps win a project will also deliver it. This creates a great sense of ownership and accountability, and we see it is part of the formula that allows Netcompany (as one of the only IT companies) to always deliver quality projects on time.

This may sound like no big deal, but when projects surpass their deadlines, this typically ends up being very expensive for the supplier – in this case, Netcompany. The customer does not pay extra when a project is delayed, and there may even be day fines for every day the project is ongoing after the agreed deadline. Delivering projects on time helps to maintain a high and persistent income level, and the operating margin has been stable at around 25 percent for the last decade. Thus, everything is delivered on schedule – but just as importantly, it is delivered to the agreed standard. A satisfied customer is more likely to return with more projects.

For Netcompany, the business is not only about developing and delivering software. It is also about the subsequent maintenance work. Approximately half of the revenue is from maintenance and support services – a stable and profitable business. When a supplier has developed software, there is a clear advantage for the customer in letting the same supplier maintain and update it, as the history and methodology behind it match that of the supplier. Public tenders in Denmark typically involve a development phase of 12 to 18 months. After that comes maintenance.  The maintenance services agreement of a five-to-seven-year period has typically been part of the initial contract.

Netcompany’s revenue from the public sector amounted to 1,150 million Danish kroner in 2018, which is equivalent to 60 percent of the company’s total revenue as previously mentioned. The expectation is that the Danish public sector will have tender rounds for IT projects worth a total of 13 billion Danish kroner over the next 5 years. If Netcompany can maintain its high success rate in winning these tenders, they can win much attractive revenue and market shares.

You need to keep employees hungry for more

Retaining the ambitious culture while the number of employees is rapidly growing is one of the greatest challenges in maintaining Netcompany’s growth rates and meeting the management’s target of 20 to 25 percent annual revenue growth. Today, Netcompany employs more than 2,000 people, and in 2018 alone 750 new recruits were added to the army of consultants. Due to a desire to maintain the corporate culture, management restricted the number of new hires at the end of the year. This was an essential decision aimed at preventing a culture of self-satisfaction or resting on past laurels. Even though Netcompany’s has had success in the last 20 years, the many consultants working for the company need to be kept lean and hungry.

Netcompany’s visionary CEO André Rogaczewski is the frontman and one of the three founders, all of which are still active in the management of the company. Claus Jørgensen is COO, while Carsten Gomard sits on the board and continues to contribute to the growth of Netcompany. The founders and early key employees have maintained their share of ownership at 13 percent after the company was listed. We see them as highly capable partners who can steer the supplier of IT services towards fulfilling its North European mission. The CFO, Thomas Johansen, contributes with a knack for understanding the strategic and financial aspects involved in the operation of medium-sized tech companies. This understanding comes from almost six years spent in the management of the succesful Danish software developer, SimCorp.

The founders’ vision is that Netcompany should not merely be a Danish success story, but that it will eventually deliver high-quality IT projects to all of Northern Europe. In our view, the Danish business unit is a predictable, growing and attractive foundation for this endeavour. The international expansion takes place through acquiring small IT consultancies who can create a presence and platform on new markets.

Almost 10 percent of the revenue comes from the Norwegian market, where Netcompany has a market share of 2 percent after having acquired a small consultancy firm in 2016. The margin in Norway is 16 percent, and thus not quite as high as the almost 30 percent in the Danish business. We find it realistic that the market share in Norway can grow significantly from the current 2 percent and that eventually the profitability will reach Danish levels.

A different kind of due diligence when making acquisitions

When looking for and deciding upon international acquisitions, it is important that Netcompany carries out the right kind of research into the markets and companies. When evaluating potential acquisitions, the company does not only evaluate key employees. It also ensures that there is strong management potential among the remaining workers. After all, if a corporate culture is truly strong, it reaches beyond the executive offices.

Netcompany has debts amounting to two times EBITDA. This is a legacy from the time where it was owned by a private equity fund prior to its listing on the stock exchange in June 2018. We would like to see this debt reduced – and in fact, we would prefer that Netcompany operates without any debt at all. Management expects that the debt will continue to be reduced, and that new debt will only be incurred as part of international expansion projects. Without acquisitions, the debt should soon be decreased.

Netcompany’s business model generates a lot of cash flow, as growth only requires more employees and providing each of them with a computer. The free cash flow growth should therefore be able to match the earnings growth at more than 20 percent.

No dividends will be paid in 2018 or 2019, but we believe that there may well be the potential for them in the future. However, when acquisitions are a large part of the strategy, we find it reasonable to preserve financial flexibility – even if this means that the cash flows will not be distributed to the shareholders in the years to come.

Netcompany is the only company in our portfolios that neither pays out dividends nor buys back own shares. However, the company is expected to have the highest revenue growth – both organically and including acquisitions. In our meetings with management we have had the clear impression that this is their mission in life, and we are confident that Netcompany faces many exciting years ahead.