Tieto Oyj (TIETO) Earnings Call Transcript & Summary

Good morning, and welcome to Tietoevry's webcast related to the announcement the company made during the weekend. My name is Tommi Jarvenpaa, I'm the Head of Tietoevry's Investor Relations. This morning, we will discuss the agreement to sell Tietoevry Tech Services business to funds advised by Agilitas Private Equity. We will start with the presentation presented by Tietoevry's CEO, Kimmo Alkio; and CFO, Tomi Hyryläinen, after which we will host a Q&A session. At this point, I would like to hand over to Kimmo. Please go ahead.

Thank you very much, and a warm welcome to all participants. As highlighted in our fourth quarter report, we have expected the strategic review to be concluded during the month of March and glad to be sharing this positive outcome. To confirm, we have signed the agreement to divest Tech Services to funds advised by Agilitas Private Equity for EUR 300 million, of which EUR 70 million in the form of earn-out payments. This is naturally a major milestone in Tietoevry's specialization strategy to create higher shareholder value and to build a future as a high-performing software and digital engineering company. This furthermore positions Tech Services to elevate its scale and value proposition to customers and employees, building on the very strong Nordic leadership, having formed the Nordic backbone of technology for a multitude of years. And furthermore, the transaction is expected to be closed during the third quarter of this year, naturally with all customer and employee commitments remaining intact. Agilitas Private Equity, naturally, we worked with very closely in the recent months and quarters, got to know the key individuals very, very well. Agilitas is experienced in both the Nordic region and in terms of technology-oriented investments. And we believe that Tech Services will be in good hands in this respect. Furthermore, and to confirm, I mentioned the purchase price, EUR 300 million, EUR 70 million as earn-outs. The earn-outs shall be based on years '26 and '27 performance. And the purchase price subject to customary adjustments at closing, including net debt and net working capital adjustments. As mentioned also earlier, I want to confirm transaction expected to be closed during the third quarter, closing subject to fulfillment of certain closing conditions, including the regulatory approvals. We'll talk more about the financial reporting a bit later on. I want to highlight that from Q1 '25, Tech Services to be reported as discontinued operations. In summary, we firmly believe this is the right decision for our shareholders, creating shareholder value, enabling the company to focus on software and digital engineering businesses as asset-light businesses with significant growth and scale potential also in the international arena. This decision balances the strategic rationale and expected future cash flow of this business within Tietoevry. And to confirm with these considerations, we are pleased with the overarching agreement and the decision reached. To confirm as a bit of a background, software and digital engineering-oriented future, we believe will be very exciting with the three software businesses, Tietoevry Banking, Tietoevry Care, Tietoevry Industry and the digital engineering-oriented Tietoevry Create, just as a kind reminder, create already over 50% of revenues outside the Nordic countries and the international market attractiveness being positive. And then to confirm that the Tech Services, which is and has been an outsourcing and transformation-oriented business across applications, cloud, data and the asset incentive parts of infrastructure services. In consideration furthermore of Tech Services, it is a well-run, good business. It is a different business than our software and digital engineering businesses. Tech Services has formed the Nordic backbone with enterprises and the public sector. This is a leading managed services type of business across applications, cloud data and infrastructure with over 7,000 experts globally. The future direction expected to remain very consistent and building furthermore in the market opportunities within the managed services category and expected to create future value to all core stakeholders. With these considerations in mind, we are fully expecting improved financial profile for the continuing Tietoevry Group. And for illustrative purposes, looking at the figures for the software and digital engineering part, meaning the future, revenues approximately EUR 1.9 billion, adjusted EBITDA approximately 13.5% compared then naturally to the full group past of nearly EUR 3 billion in revenues and 12.3% in adjusted EBITDA. I'll hand it over for Tomi for further views on the financials.

So thank you, Kimmo. So this transaction will result in improved financial profile in terms of the growth and profit and also reduce the overall capital intensity of the group. Recapping the prior page key highlights. So with our simulated '24 numbers, the revenue will decrease by EUR 920 million, while improving organic growth by approximately 1 percentage point. EBITDA adjusted increase -- would increase by approximately 1.2 percentage point as well. And of course, important to highlight that we believe that over time, there is significant potential for further financial profile improvement. In terms of the capital intensity, there is an expected significant reduction in terms of significant reduction in working capital employed, significant reduction in CapEx by approximately 40% due to the less capital-intensive operations of the continuing operations. And in addition, there is an expected significant reduction of the cash restructuring charges as Tech Services has accounted for a majority of onetime costs historically. Important to note that the net debt from the transaction will change quite a bit. So the transaction proceeds naturally impacting the net debt level. But in addition, there is a EUR 100 million reduction in lease liabilities of the group for the continuing part naturally. Short-term profitability will be burdened by the common group cost. This has to be with the time from signing to the end of the TSA period, after which, over time, we firmly believe that we will be achieving even better SG&A ratio for the continuing business due to the simplified operations. Then to reporting implications. So as of Q1 reporting, we will be classifying the operations as held-for-sale and report them as discontinued operations. This reclassification will mean remeasurement of the asset to fair value less cost to sell based on the IFRS 5 guidance, which will result in part of the goodwill being further impaired currently being EUR 234 million. We will be publishing full restated group and segment level financial information for comparable years '23 and '24 prior to publishing our Q1 interim report. We will also naturally update our '25 guidance for the continuing business operations as part of our Q1 interim report.

Thank you, Tomi. And now we practically go to the summary and then towards the Q&A. So very important milestone achieved now with the conclusion of the strategic review. This further accelerates the full transformation of Tietoevry in becoming a software and digital engineering company except -- and really building on the future opportunities in the data and AI-oriented global marketplace. Agreement to confirm was signed with Agilitas Private Equity for EUR 300 million, EUR 70 million in the form of earn-outs. I talked about the major milestone already and very importantly, continues to build a strong future for Tech Services, and we expect the transaction to be closed during the third quarter. So this summarizes Tomi's and my overarching presentation and glad to go into a Q&A.

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

[Operator Instructions] The next question comes from Daniel Djurberg from Handelsbanken.

Can you hear me? Yes, I have a question on this process, if you have also considered a spin-off, let's just say, similar to what you had in mind for the banking with this unit. So to me, it feels like, if we look at the valuation multiples over the EBITDA margin, it was 12.8% for '24, higher than Create actually. And it would be a multiple of last year of 1.8x to 2.3x depending on if you use the earn-out or not. So that -- to me, that is quite low multiples to say the least. So my question is really why you didn't give this asset to the shareholders instead in a, let's just say, a spin-off?

Thank you, Daniel. So I would like to confirm that the reason we firmly believe this is the right decision for the company, for the shareholders, and it is the balance of the future of the company as software and digital engineering in an asset-light model and in consideration of the expected future cash flow of this business within Tietoevry. And maybe just to a bit re-elaborate, we fully understand your consider kind of -- hear your considerations, very important to consider and recognize from the past as well, the type of asset intensity that this business has had and the magnitude of restructurings, and if you look at the pure cash flow generation, I think those are some of the factors where to be looking at. And overall, as I said, with the totality of considerations, absolutely the right decision, we believe.

Okay. And also on the earn-out, can you give us some more indication on the growth levels or the margin levels that needs to be seen here in '26, '27 to meet the high or the mid level of the EUR 70 million earn-out?

So we will not be publishing those. Those are naturally between us and the buyer, but we definitely expect to achieve these earn-outs. So that's how they're set up. So just to confirm.

So they are already in line with historical achievements, I guess, or...

We don't comment, as I said, the exact levels.