Tieto Oyj (TIETO) Earnings Call Transcript & Summary

Good morning, and welcome to TietoEVRY's Fourth Quarter and Full Year 2023 Earnings Webcast. My name is Tommi Jarvenpaa, the Head of TietoEVRY's Investor Relations. Today, we will naturally go through our earnings development and outlook. But in addition, we will also discuss the progress in TietoEVRY Banking strategic review. With me here today are our President and CEO, Kimmo Alkio; and CFO, Tomi Hyrylainen, who will next go through the highlights and results of the quarter. Kimmo, please go ahead.

Thank you very much, and a warm welcome also on my behalf. Very exciting, another quarter we have behind. The highlights being, we were able to deliver resilient performance in quite a mixed market environment, growth of 1% and having seen solid underlying performance in software businesses, which tend to be somewhat less impacted by potential macroeconomic volatility. Healthy profitability, slightly over 14%, naturally supported by efficiency measures executed, especially throughout the second half of '23. We are today confirming good progress with the strategic reviews. In case of banking, the demerger is being proposed to list the business, retaining the optionality for other alternatives and sales process is ongoing in light of -- ongoing in parallel in light of the market interest. Furthermore, in the case of Tech Services, we are on track with the previously announced schedule and we have active engagement with potential buyers. And finally, the final main message we have, we do have increased dividend as proposed by the Board of Directors at EUR 1.47. I would also like to confirm our utmost attention and continued firm execution of our specialization-based strategy, whereby the implementation began 2 years ago. Us building businesses, which will be taking advantage of the cloud data, GenAI centric opportunities in the world are very important foundations for building further growth and scale for the businesses and for the group. All businesses continue their distinctive paths to be aiming to be amongst the best in the market. And we have an ongoing process naturally or repositioning TietoEVRY as a leading software and digital engineering company. Given the current environment, we think it's worthwhile pausing briefly regarding other factors in the environment. We do see like many of our peer companies commenting continued soft macroeconomic environment, this also impacts the IT market demand. We'll talk about this a bit further as part of our guidance. We naturally continue high attention on resilience, both in terms of supporting our customers achieving their resilience and efficiency objectives and naturally continued attention in our own operations. We do anticipate the geopolitical environment -- the fragility of the geopolitical environment to continue and for us naturally very important, the support for our Ukrainian colleagues and their families. I'd also like to confirm our strong attention and investments into cloud and AI-centric technologies that continue to be really important for our clients and will support businesses to advance, and over time, beneficial to the societies within which we live. Regarding the full year revenue growth of 4%. Adjusted EBITDA at EUR 359 million, 12.6%; operating cash flow at EUR 266 million; order backlog being EUR 3.2 billion; net debt to EBITDA at 2.2x. Throughout the year, we have seen solid performance in software businesses, while Create and Tech Services impacted by the softer market, especially after Q1 of '23. The performance resilience enabled by proactive efficiency measures, which I commented earlier, and naturally important to continue our attractive dividend proposition, as commented earlier here, representing a dividend yield of 6.8%. As always, I'd like to make a couple of comments on interesting and important wins in the fourth quarter. We are seeing good success winning footprint in the marketplace in all the businesses. In digital engineering business, as everybody well aware, we call the TietoEVRY Create. In the software and platform side, we have our banking business. The care and industry, Managed Services & Transformation category, with Tech Services, each of the businesses, having the very distinctive peer groups. What we can see in common in the wins is the importance of the combination of cloud-centric modernization further and as well as gaining more value out of data, whether it is machine learning, artificial intelligence, and to be fair, early stages of GenAI proof-of-concepts and use cases. I would also like to comment importance of sustainability and our continued development. In this category, I'd like to comment on the 4 factors today of the greenhouse gas. The emissions reduction, we are at 84% level. Goal was in this 3-year program, 80% reduction. We are at 99% carbon-free electricity, one percentage point short of the goal of 100%. We have -- on the diversity side, we have 31% of women in the workforce globally. And we continue to make progress in this category. And we have an ambitious goal by 2026 of 40%. And furthermore, the importance of employee engagement at a healthy level at 82%. This has been a very important factor given all the different eras we have experienced in the last 2- to 3-year time frame, and we continue to be a really good employer for 24,000 colleagues. Naturally, of high degree of interest today, I'd like to carefully go through the recovery activities of this criminal ransomware attack that took place in one of our many data centers. It took place in Sweden -- in one data center in one segment of this one data center in the night of 19th, 20th January. I do want to always confirm our consideration and apology. We sincerely regret inconvenience caused by the ransomware attack. We share this very openly. The attack impacted customers across number of industries and consequently, more broadly, the Swedish society. Today, we are highlighting progress made to-date. We are at 90% level of server and system restoration. While the recovery of customers' full set of services at 70%, the delta being work required to be done by either third-party application providers and/or service providers to get back into full service availability. All restorations are being saw with the highest possible urgency. Short considerations on actions taken and ongoing. We naturally informed the police and relevant authorities immediately on Saturday, the 20th of January. We executed in the night of 19th to 20th of January, the crisis mode fully according to the high urgency timetables, including throughout the night war rooms. As this was happening, the affected platform was isolated immediately and no impact to other TietoEVRY infrastructure. We have naturally assessed the potential attack vectors and carried out related security verifications. We also today want to offer the consideration and our important opinion that due to the criminal nature of the attack and for security reasons, we cannot publicly share the technical details of the attack, the restoration details, no customer-specific information. This is also the clear advice from authorities and third-party security companies. And to confirm, full attention continues until all customer systems are restored. We are today also highlighting current estimate of the business impact. As a background, the customer services impacted here represent approximately 1.5% of group revenues. We anticipate the incremental operational costs in the early part of the year, primarily Q1, to be between EUR 1 million and EUR 2 million, similarly impacting revenues and profit. And important to confirm, our companies of our profile and role as a service provider, naturally, we do have cybersecurity insurance in place also to address the challenges of service interruptions customers have had. As a final summary, very important, we continue full collaboration also with the authorities to complete the investigation and date every day, every second, highest attention with customers to reach full restoration. And today, we have been sharing quite constructive progress as highlighted with the 90% of impacted servers and 70% of full services. Next, I'd like to go into part of the core of naturally the fourth quarter considerations and performance. We already talked about the organic growth of 1%, healthy profitability level, supported by a number of efficiency programs. Healthy cash flow at EUR 153 million. Order backlog flat. Here, fair to highlight that the fourth quarter book-to-bill was slightly over 1.4. That's an important development. Next, we go into TietoEVRY Create. Growth, clearly, impacted by lower demand. Growth of 1%, profitability at 15%. This is the business that tends to be impacted fast in a downward trending economic environment, impacting some of our businesses within Create. That is not the case in every market and every customer engagement. The larger engagements of strategic nature, as we had commented earlier, many of them continue to develop favorably. And we want to highlight the unpredictability of business from Ukraine given the unfortunate and dynamic developments of the war. Healthy profitability is being supported by actions taken on capacity adjustment, as we are in an era of lower demand. And to confirm, Harri Salomaa was appointed as the Acting Managing Director as of 9th of January, running the full operation and having the experience to do so given his prior roles in the company and naturally before being with TietoEVRY. TietoEVRY Banking, nice to highlight the continued strong underlying growth of 5%. Here, good to recognize fourth quarter of '22 included 4 percentage points of positive onetime impact. Growth driven by the combination of cards, wealth and financial crime prevention. Profitability at the 14.3% level, supported in addition to naturally top line development, the cost optimization measures taken during the second half of the year. While these are partly offset by the increased costs resulting from legal separation. We are highlighting separately on banking the strong order intake, including a big Nordic bank and a number of significant renewals. TietoEVRY Care, consistent strong profitability, well aligned with our own expectations. Organic growth of 2% driven by the welfare and data and analytics side. As we had highlighted since last summer, we have anticipated and it has materialized temporary demand reduction given the health and social reform in the country of Finland. Profitability continues strong at the 30% level, driven by the scalability that has been built into the software architectures of this business. Still a lot to do more to deliver even greater scalability for all software suites in Care. This part is referring primarily on the scale side to the hospital information systems on the suite we call Lifecare, which is getting very positive feedback, including the user experience as it's been designed with doctors and nurses. Strong order intake in welfare in Sweden and Norway. Then we go into TietoEVRY Industry, as we had expected for -- throughout the second half for healthy performance, fourth quarter organic growth of 6%, driven especially by pulp and paper, as well as data platforms. Healthy profitability, 16.6%. And there's an implication where we may not be fully satisfied as there were lower year-end license sales somewhat impacting profitability. Good development, as mentioned overall. And as we had announced earlier, Carsten Henke began as the Managing Director of this business as of 1st of November. Regarding TietoEVRY Tech Services, the highlight would be the solid profitability development to 10.2%. It has been very important cost structure optimization programs throughout the second half of the year. While on the top line, the market slowdown is visible and continues to be visible in shorter cycle time and material work and has impacted, especially in the fourth quarter the data and application services side, which declined by 8%. Cloud platform and security growing by 2 percentage points. Traditional infrastructure quite stable at the minus 7% level, while user experience services up by 11%. Then as commented, the efficiency program where execute -- implemented very rigidly. With this in mind, now over to Tomi.

Thank you, Kimmo, and good morning, everyone. Despite the softer market as discussed, we delivered healthy financials for Q4. Our resilient performance was largely due to our proactive actions taken to respond to the lowering demand during the year, as well as overall cost cautiousness across the company. At the same time, we've taken firm steps towards forward with our strategic agenda in our specialized businesses and in the strategic reviews as discussed today. Our reported numbers continue to be impacted by significant FX headwind due to depreciation of Norwegian and Swedish currencies. Q4 impact to revenue was minus EUR 43 million. Our Q4 onetime items were EUR 13 million, and full year was at expected levels of approximately 2% of revenue, which included 1% from the strategic reviews. Our Q4 cash flow was strong, which I'll cover in the next page. So we delivered strong operating cash flow of EUR 153 million. Our cash flow was supported by positive working capital development of EUR 28 million despite the Q4 ending on a weekend, impacting negatively the AR level similar to Q3. Overall, our cash generation foundation remains healthy. Our net debt decreased by EUR 42 million, ending up EUR 912 million, and net debt-to-EBITDA was 2.2x at year-end. The slight increase in the leverage metric was due to the lower LTM EBITDA compared to Q3 of '23 and a big contributor to this being the FX rates. On personnel side, the rolling 12-month attrition continued to decline being 10.1% at the end of Q4, with quarterly attrition being already below our normal level of 10% to 12%. Net headcount decreased by approximately 400 FTEs from Q3, mainly driven by the efficiency measures to respond to the lower demand environment, as discussed. We have also reduced recruitment base to respond to the lower attrition levels. Group level salary inflation was 5% for '23 as expected, and we estimate the '24 salary inflation to be slightly lower between 4% to 5%. Next, I'll summarize the performance drivers for Q1. On growth drivers, we expect the Q1 growth to be the lowest quarter for the year due to impact from negative working days of 1.5 day -- 1.4 days and high comparables. Consistent with Q4, the weaker economic environment will continue to impact Create and Tech Services. In TietoEVRY Create the negative working days will have the highest impact of the businesses due to the consulting nature of that business. TietoEVRY Banking is expected to continue its good momentum, however, impacted by the high comparable. Finnish health care reform continues to impact the growth in TietoEVRY Care. On profit drivers, we see positive impact from the efficiency measures executed during '23. In Tech Services, good to remember, the annual price discounts will kick in, in January, consistent with every year. In Banking, the legal separation, which was done in Q2 '23 will continue to impact the -- impact being 1.5 percentage point on profit. Negative working day impact to profit at group level, we estimate to be approximately minus 1 percentage points. On other drivers, the FX impact is, as estimated, to decrease and be approximately 10% on revenue. Then the profitability outlook per business for Q1. Create and Care, we expect to be below prior year level. Industry and Tech Services are expected to be at the level of prior year profit and Banking is expected to be above Q1 of last year. Over to you, Kimmo.

Thank you, Tomi. And next, I'd like to go through 2 things: First, the perspectives on guidance and then the deeper considerations on the strategic reviews. First, the background to our guidance. We expect our addressable market to grow 0% to 2% and the demand for software to remain healthy. The overall market softness is expected to continue in H1 and actually at this point of the year, limited visibility into H2. Organic growth, we expect to be normalizing after the first quarter. And as Tomi mentioned, Q1 impacted by the high comparables and fewer working days. And to be fair also, our guidance range reflects the macroeconomic environment and related uncertainty. With all these considerations in mind, our organic growth guidance between 0% and 3% and adjusted EBITDA 12.0% to 13.0% level. Overall, our consideration for way forward, we absolutely continue to advance our strategic agenda and drive for business resilience. All businesses continue their strategic intent and aim to be among the best in the market. As we'll go through the strategic reviews in a minute, this will continue with very high momentum. And we continue to work actively to capture the opportunities of, I would say -- once the economy gets somewhat healthier, grabbing then the future opportunities in the cloud and AI-centric world. With this as a background, we'd like to now go deeper into the very interesting topic today of the strategic reviews. So first, I will do the prompt summaries of both and we'll go into more detail then in a few minutes on TietoEVRY Banking. So first, the main message is on the Banking side. Our Board of Directors is proposing a demerger to list the business, while retaining the optionality to pursue other alternatives. As we see the market interest towards TietoEVRY Banking, sales process is ongoing in parallel. Also to confirm, the management team has been strengthened during the first quarter with Minna Smedsten appointed and started as CFO on the 1st of February. Regarding Tech Services, we have 3 messages, if I may. First of all, we are on schedule. That's a lot of effort ongoing naturally equally. For Tech Services, we have active engagement with potential buyers ongoing, and we anticipate the strategic review conclusions by the end of second quarter this year. Then into a more granular perspective on TietoEVRY Banking. As mentioned, the Board of Directors has decided to continue the separation process and has approved a demerger plan. Proposal is to separate TietoEVRY Banking as a stand-alone company to be listed on NASDAQ Helsinki. The demerger is subject to shareholder approval in an EGM expected to be held in June of this year. There is a preliminary target to complete the demerger on 30th of June. Upon completion shareholders to receive TietoEVRY Banking shares in proportion to their shareholding in TietoEVRY. We have taken steps to secure the financing for both TietoEVRY Corporation and TietoEVRY Banking for the purposes of the demerger in the form of term and credit facilities amounting to EUR 852 million with certain Nordic banks. And to confirm, TietoEVRY's Board of Directors retain the optionality to pursue other alternatives before completion of the demerger, if in the best interest of TietoEVRY and its shareholders. And as mentioned earlier, sales process ongoing in parallel. With this in mind, this will lead into the opportunity of separating TietoEVRY Banking and be able to realize the value as a specialized financial services, fintech software player as an independent company. And furthermore, we continue the repositioning of TietoEVRY as a leading software and digital engineering company for further growth scale and value creation. I'd like to also confirm the rationale behind the Banking to operate as a stand-alone firm and focus on an even faster pace on its strategic priorities. The opportunity to position TietoEVRY Banking as a fintech software company in the eyes and minds of customers and in the eyes and minds of global talent specializing in fintech software. And given the opportunity to become valued in line with the fintech software-centric peer group. And very importantly, to be able to build its own investments for growth and scale with the timeliness required to maximize potential to accelerate performance and driving additional shareholder value. A few factors quantitatively of the business in TietoEVRY Banking. Significant share of customers, over 400. Part of the business has already begun in the recent years, internationalizing 3,500 employees globally. For '23, organic growth of 10%, adjusted EBITDA margin of 12.4%, even or also within an economic environment with degrees of softness in the macro. I'd also like to confirm the business mix and solution portfolio. As often having been discussed also in the interim report, we have 5 SaaS and software-centric solution areas, making up slightly over 70% of revenues, payment side, the cards, financial crime prevention, credit and wealth and many of these businesses have already begun expansion outside the Nordics and naturally strong presence in the Nordics as well. Then we have -- on the platform side, the Banking as a platform, approximately 30%, practically 29%. Scalable, compliant, API-based, end-to-end banking platform, primarily and currently for the Norwegian market. Very formidable, extensive role that Banking place in terms of the types and number of transactions, very critical for the customers and all this as a foundation for further market expansion. And now over to Tomi.

Yes. For the clarity purposes, I will still summarize the intended time line for the demerger. So as of today, the Board has proposed a demerger for Banking, and we will be filing the demerger plan today. Early March, we will begin the consent solicitation process for the bondholders. And simultaneously, we will be coming out with supplementary financial information to support the process, of course, primarily for the remaining company's bondholders. In May, the prospectus is expected to be issued ahead of the Extraordinary General Meeting, which is -- will be held during June, with the effective date of the merger planned to be 30th of June with first trading on or about 1st of July ASAP after the demerger effective date. Also, TietoEVRY Banking is planning to host the investor events along the process to provide further insight into the business. These timelines, we will get back later on. So this concludes our presentation, and we're ready to move into Q&A.

Thank you, Kimmo, and Tomi. We are now ready for the questions.

[Operator Instructions] The next question comes from Christoffer Bjornsen from DNB Bank ASA.

Christoffer here from DNB Markets. So you say in the review that there is interest from potential buyers for the Banking business, but -- that you are pursuing a spinoff on the listing. Does that mean that you will sell the business for cash if you are offered the price you deem good enough? And that if you don't sell it, you will distribute 100% of the business to your shareholders?

Yes. Thank you, Christoffer. So as a normal process in these type of spinoffs, the market also activates and we, of course, naturally are obligated to look at that, and that's where the comment comes from. That we look at the market interest and evaluate that if it's in the best interest of the shareholders.

Then a quick follow-up on that. So you're -- Tomi, you're mentioning this parallel process of looking to sell the business. Is that only for the Banking business as a whole? Or are you seeing that there are also opportunities to sell parts of the business that does not necessarily fit into this whole SaaS and fintech kind of framework of the Banking business as a whole, like for instance, car manufacturing or -- yes.

We don't, Christoffer, want to speculate at this point in time on these questions.

The next question comes from Daniel Djurberg from Handelsbanken.

Congrats to the Board decision. I think, I would like to ask you also on the Banking, on the alternative side. From the start of the demerger process and up to date, have you been approached by any serious bidder for this unit as of today or is it only a -- yes. That's the question.

Yes. So I've kind of answered that question already. So we evaluate any market interest. Unfortunately, should not go any further than that.

Fair enough. May I ask you also on -- with regards to Tech Services, you say that you will continue this process until late Q2. And given a decision of a spinoff or sell, how far have you come with the separating the unit with regards to the intra-group processes, et cetera? Yes, that's the question.

Really good question. And of course, I mean, as you can all tell, these are big carveouts that we are now contemplating with the strategic reviews. We are actually very far in the process. And -- but we have been communicating earlier of the legal structures, the carveout financials, all the internal processes. So we are very far to confirm.

Perfect. And my last question before I get back to the queue would be on the order backlog. It's down around some 2.7%, partly of structural reasons. Can you comment on volume versus price in this? If you see a price increase year-over-year or if it's -- yes, the mix would be great to know.

Yes. So if I first comment on the order backlog. The order backlog strengthened 7.5% from Q3 to Q4. When you adjust that with FX, we are at the same level as we were at prior year. So it has not deteriorated, just to confirm that. And then we don't publicly talk about the mix of the volume and price for our order backlog, so.

The next question comes from Sami Sarkamies from Danske Bank.

I have questions regarding the ransomware attack. You're flagging direct effects being EUR 1 million to EUR 2 million revenue loss and EUR 1 million to EUR 2 million of extra costs. Will this be treated as normal operating items and not any one-offs?

So the restoration cost, we will treat as [ OTIs ], the revenue loss and that margin impact is operational.

Okay. Do you have any impacts on indirect effects that may arise due to negative impacts on your customers' business?

Time will tell, I think there. We need to, of course, carefully make sure the restorations are completed. So time will tell. We look at it a humbly. To be fair, with many customers' very close collaboration or recognizing that this criminal attack is towards our company as a service provider. But naturally, some customers have bigger challenges, and we need to work very closely that we get the full restorations completed. So nothing really else to, I think, comment on that.

Okay. And then regarding the insurance cover that you're flagging, just thinking about more material indirect effects to your customers. Are you confident that you're covered by the insurance? I think you have a scenario where the attack could have happened, for example, because of weaknesses at your practices.

You would understand we have a very sort of good coverage and good understanding of what the insurance does. And we feel comfortable that we have sufficient insurance for this type of incident.

Okay. And then finally, if we think about the ongoing trade sale for Tech Services, do you see this incident complicating the sales process?

Should not. Of course, we need to make sure that the firmness of the restoration. We today shared data on the progress on restoration with this in mind. Should not. Of course, we need to complete all the steps carefully. Currently, my perspective would be that the restoration timing we have been able to do is quite typical for such criminal or such ransomware activities, they do very often take several weeks. And then again, as mentioned, all the final parts of getting everybody 100% up and running, this attention absolutely continues.

Okay. And then my final question would be on industry where I think you missed your own margin guidance in the fourth quarter. You're talking about lower license sales. Can you elaborate on the matter a bit more in detail?

So we normally get sort of towards the year-end more license sales. That's a normal skew of the software businesses. And this year, it was less than we anticipated.

Yes. Will this come with impacts on the outlook for this year as well?

The totality proceeded quite fine. So then naturally, the kind of penetration and uptake on the SaaS side. More and more of the software businesses are shifting to SaaS, so this is kind of part of the normal shift.

The next question comes from Matti Riikonen from Carnegie Investment Bank, Finland branch.

It's Matti Riikonen, Carnegie. Couple of questions. I'll take them one by one. First, regarding your debt. Your net debt increased by 34% and net debt to EBITDA is now 2.2x. It's slightly above your target range. And of course, financing costs have increased. At the same time, you are increasing dividends. So do you think that you can reduce the debt with organic cash flow? Or are you expecting that the cash proceeds from the separate listing could help the situation? So do you plan to have any kind of cash from the separate listing of banking?