Tieto Oyj (TIETO) Earnings Call Transcript & Summary

Good morning, and welcome to Tietoevry's Third Quarter Earnings Webcast. My name is Tommi Järvenpää. I'm the Head of Tietoevry's Investor Relations. This morning, we will be discussing our Q3 results as well as progress with our actions to improve performance. The teleconference line is now open. And as always, we will be hosting Q&A after the presentation. With me here today are our CEO, Endre Rangnes; and CFO, Tomi Hyryläinen. With this, I would like to hand over to Endre. Please go ahead.

Thank you, Tommi, and welcome to the Tietoevry Q3 '25 Quarterly Presentation. It's been a very active and I would also say, a productive quarter marked by the execution of our cost efficiency program. Over the past few weeks, we have also held a large number of meetings with investors and clients to gather valuable data points and insights to preparation for our Capital Markets Day on November 25. And my message is clear. We don't need a new strategy. We just need an execution of the strategy that we already have. We have entered into a new era now following a major milestone in Q3, namely the successful completion of the Tech Services divestment. Our business is now comprises of 3 focused software units and a consulting arm, and I would say, each well positioned in their respective domains. We have a much more focused Tietoevry. We are excited to move forward. And when we look at now the current revenue split, approximately 44% is coming from the Create business, Digital Consulting, Banking represents 30%; Care, 12%; and then Industry approximately 14%. So in less than 5 weeks from now, we will unveil the next phase of plans for Tietoevry at the upcoming Capital Markets Day. While the market environment was, I would say, a bit of a challenge also in Q3, we are starting to see early signs of margin recovery, mainly supported by the measurements taken then in Q2 and Q3. We delivered a top line growth of 4%. However, the underlying organic growth remained slightly negative, still impacted by a weak market. Then our transformation efforts are progressing well. Everything from cost optimization to our customer focus has resulted in improved profitability across all businesses, delivering a 19.3% margin in the quarter and 15.2% eliminating the banking court ruling effect. EUR 75 million of the year-end 2026, EUR 115 million cost optimization target is already achieved by end of Q3, and we are now 1,500 colleagues or FTEs less compared to end of Q3 2024. So with the divestment of Tech Services now completed, we are operating with a sharper focus and a more resilient structure going forward. So these current developments gives us also a confidence that we are going to continue executing on our transformation agenda. As communicated in connection with our Q2 report, we have initiated a set of actions to get back on track with Tietoevry. As the first step, we have started to strengthen customer-focused sales and delivery capabilities. As an example, we have launched a new governance structure with our clients to build trust and to ensure a better interlock with the clients. We have started the sales harmonization project across all business units in Tietoevry, including our CRM reporting structure, and we have kicked off also a sales recruitment program during Q3. Then, of course, the AI boost program has been initiated to harmonize AI governance and also then compliance across the group. It covers case and role-based AI education, sharing our best practices of embedding AI into our products, services, and also sales and AI tools also for internal productivity, all of this with clear KPIs. We have also executed actions to reorganize our Create business to strengthen our position as a local partner with global delivery capabilities. This transformation involves a significant competence shift that is already underway. It marks an important step towards a more agile and customer-centric operating model with a tight future link to strategic software partners. And we have also seen already mentioned that the cost optimization program is absolutely on track. Looking then at the Q3 performance. Growth was partly driven by the court ruling in Tietoevry Banking. This had a positive effect also on the margin. However, the underlying profitability improved also when excluding this additional revenue. The quarter ended with strong order backlog, especially in Industry and Banking. Organically, the order backlog is up 11% year-over-year, but then also partly due -- partly to a long lead time in some of the contracts, this will start contributing largely in 2027 and forward, but this is a good foundation for our future growth ambitions, of course. Our operating cash flow was solid, while the numbers are not fully comparable. While we presented -- we are presenting now figures for continuing operations, cash flow includes Tech Services for 2 months only in Q3 of this year compared to, of course, 3 months of the last year. Leverage is at 2.4. If we exclude then the IFRS 5 effect, we are at 2.2 from a leverage point of view. Let's then have a look at the Q3 business highlights, starting then -- business unit by business unit, starting with Create. Our consulting business, Create, we still have a challenging market condition across the geos in which we operate. But capacity adjustment and SG&A reductions are showing results, and we are able to improve profitability while we operate in an environment with salary inflation and also partly some price pressure. As part of Create's focus initiatives, we are now actively working towards an operating model to improve customer centricity to become a strong local player with local and global deliveries and with a strong link to selected strategic software partners. Also on the positive side, we won several new agreements during the quarter, for example, Park Holidays UK, which is a leading provider of holiday products across the United Kingdom. They choose Tietoevry Create as its 3-year exclusive partner to accelerate the digital modernization. We will then focus on mobile apps, websites, data processing and human-centered design services, among other things. The Finnish Patent and Registration Office, PRH, selected Tietoevry Create as its partner for delivering low-code/no-code development platform. And this will be a platform that will enable rapid and efficient development of web applications without requiring deep programming expertise. So this agreement covers an 8-year period. And then the third example, a leading European Tier 1 supplier selected Tietoevry Create to support the development of the next-generation automotive audio platform. The objective is to develop modular and generic audio solutions that can be easily customized for future weekly programs across major automotive manufacturers. And this approach is leading to reduced development cost and faster time to market. Looking then at Banking. In Banking, profitability improved also without the revenue related to the court ruling. So underlying margin is over 16%, up from 13% last year. Then we are not satisfied with the underlying revenue growth. It's down by 2%, mainly impacted by an expired margin dilutive contract, the mainframe contract, having a negative impact of 2 percentage points. We are positioned -- we are -- I would say also that we have a positive development in Banking as a Service, mainly the core bank solutions in the Norwegian market and then growth in financial crime preventions continues. Looking at also then the order backlog, it remained at a high level, well above EUR 1 billion, which is a 20% increase versus Q3 2024. Again, the contribution to growth will mainly start in 2027 and forward because of a relatively long lead time for implementation. The agreements examples, we can start off with the SaaS agreement with IC Cash Services, which is a cloud-based ATM platform. So it's a 5-year agreement with IC Cash Services, marking their entry into the German ATM market. And the partnership provides IC Cash with a fully regulatory compliant private cloud-based ATM platform designed to enhance security, scalability and operational efficiency across its European network of more than 2,500 ATMs. And then also following the merger of SR Bank and SB1 Southeast Norway to become SpareBank1 Sør-Norge, Tietoevry Banking then jointly with the client and other parties has completed a very complex technical consolidation covering approximately 1 million accounts. SpareBank1 Sør-Norge is currently now among top 3 banks in Norway. Then looking at Care. Also Care turned back to growth in Q3, driven by a healthy growth in Finland of 6%. So by now, we have won 16 out of 21 well-being services counties in Finland. However, due to transition periods, the full growth again will -- the contribution will come starting mainly in '27 and forward. Four of these contracts coming from 6 last quarters, 4 of these contract wins are still waiting for the market court decision, which has an impact on growth and profitability of approximately 2 percentage points. Also, growth continued to be impacted by the legacy product business with a minus 4 percentage points effect in Q3. Then we are very proud of the progress in international expansion with Care. We announced yesterday a win in Catalonia, Spain. So with this strategic agreement, Tietoevry Care and NTT DATA will jointly participate in the development of Catalonia's new open health platform. This is one of the core projects of the region's digital health strategy from '24 to '30. So the project based on European open HR standards includes architectural components and application marketplace, platform services, et cetera. So the partnership reflects a shared commitment to openness, innovation, and excellence in digital health. And of course, this is another significant step for us in the expansion into broader European healthcare market. We also signed a Lifecare EHR contract with North Karelia Wellbeing Services County, a new customer of Tietoevry. Lifecare client and patient information system will cover specialized medical care, primary healthcare, social services, dental care as well as mobile documentation and operational management for home care. The third example is Lifecare client information system that was signed with the Wellbeing Services County of South Savo with a value of EUR 35 million. This will be Lifecare EHR, which is streamlining the works of social and healthcare professionals to provide a real-time comprehensive view of client and patient information. Going then to Industry. We made good progress in Industry in the quarter. Revenue turned to growth. Development was healthy in all businesses, except Pulp, Paper, and I would say, kind of a market-driven decline. Overall, market activities are improving, visible in significant increase in the order backlog, which is up double digit organically 34% growth. Also, profitability improved, again, mainly driven by the cost optimization initiatives launched in Q2 and also in Q3. And we have several wins, I would say, across the businesses in the Nordics. Some of them are the National Government Services Center, Statens Servicecenter, which is a central government agency in Sweden. Tietoevry has signed a new long-term contract for the continued delivery of HR payroll system called Primula to Swedish government agencies. So for public sector organizations, this will be stability, ease of use, and security in all aspects, which is quite important also in this sector, of course. Kesko in Finland entered into a strategic agreement with Tietoevry Industry for provision of the Tietoevry Create big supply chain messaging services for business transactions with customers and suppliers. So these services enable smarter stock level management, ensuring that the supply chain operate with speed, agility and reliability demanded by today's market, of course. And then thirdly, Oslo City Council in Norway launched Plan & Bygg 360, I would say, a next-generation digital solution developed by and with Tietoevry. This will replace a 25-year-old legacy system, and this cloud-based platform supports 600 employees in streamlining planning and building applications. So key benefits again include automated invoicing, AI-powered decision support, and improved transparency for residents and businesses. That brings us to the CFO report. So Tomi, please.

Thank you, Endre, and good morning, everyone. So Q3 highlights were our improved profitability in all businesses, which was supported by our cost optimization program and closing of the Tech Services divestment. Our organic growth of 4% included a positive revenue contribution from the court ruling in banking of EUR 24 million in total. Out of this EUR 24 million, EUR 22 million related to prior periods and EUR 2 million related to deliveries in Q3. This EUR 2 million price increase element is recurring and will continue also in the coming quarters. Our Q3 profitability was positively impacted by contribution from our cost optimization program with approximately EUR 15 million of gross savings. Cost burden from Tech Services impacted margin negatively by approximately EUR 4 million or 0.9 percentage points. As a result of cost optimization program, our onetime items were relatively high at EUR 23 million. However, by the end of Q3, most of the restructuring costs are now booked. Closing of the Tech Services divestment had primarily 2 main implications in Q3. Firstly, we received consideration from the deal of EUR 223 million with net cash impact of EUR 201 million. The delta is primarily coming from transfer of debt-like balances and the cost to sell, which includes bankers and lawyers fees. Secondly, we derecognized the Tech Services from the group, which resulted in a loss of EUR 129 million, which is recognized in discontinued operations. This amount includes relatively small changes in the carrying amount of net assets from the initial recognition and the majority relates to technical reclassification of FX differences from equity to discontinued operations P&L. These are the so-called cumulative translation differences in equity. On 15th of September, we updated our guidance for the year. We saw a strong September month, and we currently believe that we're tracking towards the upper end of our profit guidance. As mentioned, we made good progress with our cost optimization program and reached EUR 75 million run rate savings by end of Q3. This resulted in the EUR 15 million savings already realized in Q3. We expect to reach approximately EUR 85 million to EUR 90 million run rate by the end of this year. By the end of Q3, we have recognized EUR 41 million of the onetime cost from the estimated EUR 45 million to EUR 50 million total program costs. In this slide, I'll highlight some of the key financial profile changes resulting from the Tech Services divestment. Upper left-hand corner illustrates the cost burden impact to each of the reported quarters, including the Q3, where we have still 2 months cost burden impacting our profitability. You can see that minus EUR 4 million there in the picture. From Q4 onward, we expect the TSA income to offset the cost burden and relevant cost reductions to happen in line with the TSA services reductions. This can take over 12 months depending on the service being delivered. Upper right-hand corner illustrates the CapEx change from tangible assets to intangible assets. However, the overall CapEx levels compared to revenue as a percentage are roughly at the same level being approximately 3% of revenues. Below on the left hand, you can see the significant reduction of net debt from EUR 875 million to EUR 552 million. However, due to reported EBITDA decline, the leverage remains at 2.4, excluding the IFRS cost burden, as mentioned, leverage would be at 2.2. Below on the right-hand side, you can see that net working capital level improves and changes from positive to negative. So the continuing businesses tie up less capital compared to the earlier group setup. So as mentioned, we continue to deliver healthy operating cash flow in Q3, which is seasonally a weak cash flow quarter. Our net working capital increased by EUR 52 million due to seasonality. Prior year net working capital increase was abnormally high due to positive weekend impact in accounts receivable. Note that Q3 cash flows include 2 months of Tech Services and comparable periods include full 3 months. And of course, going forward, none of that will be visible. Free cash flow was impacted by Tech Services divestment, as commented earlier, and the leverage net debt reduction to EUR 552 million was driven by the Tech Services divestment with main elements being the received net cash on disposal of EUR 201 million and the reduction of lease liabilities of EUR 102 million. Net debt to EBITDA, as mentioned, 2.2. On employee matters, LTM attrition has remained at low levels being 7.1 -- 7.5% at the end of Q3, reflecting the soft market environment. Impact from cost optimization measures are visible in the reduced personnel across all businesses. Our net personnel reduction from Q2 was approximately 600 employees with over 9% reduction year-over-year. Group salary inflation is expected to be approximately 4% in 2025, which would be slightly lower than prior year. Next remarks on Q4 outlook. On growth, Create will continue to be impacted by weak demand across all markets. Banking continues to be impacted by the ending of the significant margin dilutive mainframe contract with negative 5 percentage point impact. Care continues to be impacted by the legacy product decline by negative 4 percentage points. Then on profit remarks, Banking is negatively impacted by increased nondeductible VAT due to Tech Services divestment by 1 percentage points. This impact is recurring and continues in the coming quarters. All businesses will benefit from savings delivered through cost optimization program. And then as mentioned, cost burden from the IFRS 5 is mitigated by the transitional services agreement income. On other remarks, FX impact to revenue is positive by EUR 4 million. Q4 profitability outlook for businesses. Tietoevry Banking and Industry are expected to be above prior year profit level, Create at or above prior year and Care at or below prior year level. Now back to you, Endre.

Thank you, Tomi. And then a couple of final remarks from my side. We are now heading into, I would say, a really exciting phase with Tietoevry. And in just under 5 weeks, we will be in London for our Capital Markets Day. With our client base, our software and services portfolio and our great people, we have a solid foundation to build on. Currently, we are focused on execution of our cost efficiency program, turning towards much more customer centricity actions and then simplification and further growth initiatives. At the CMD, we will share how we plan to accelerate the long-term growth, sharpen our portfolio, and unlock new opportunities is really going to be a forward-looking session. We warmly invite our investors and stakeholders to join us in London on November 25. We look forward to engaging with you there. And then I think we are opening up for the Q&A session. Thank you.

[Operator Instructions] The next question comes from Mark Hyatt from Morgan Stanley.

Can we start with the outlook for Q4? You've obviously reiterated the guidance that you adjusted down in September, but there's still quite a wide range of outcomes implied in the final quarter of the year. So maybe you could just talk about some of the main swing factors into Q4? And how much confidence does the improvement in Care and Industry give you into that final quarter? Secondly, the backlog, as you say, stands at over EUR 2 billion, up double digit year-on-year. But you know that most of the contribution from that is expected in 2027 and onwards. Can you just break down the moving parts here? How much visibility does that give you into 2026? And then maybe just finally, just one on kind of AI. You mentioned in the release that you're adopting AI across all your offerings. I suppose there's been some reports elsewhere in the industry that some of the potential cost savings around project delivery as related to AI are being passed on to customers. Do you see any evidence of that in the market that you operate in today? And maybe just a general comment on the price environment would be very helpful.

I could take the first one, maybe the Q4. So as you know, typically, Q4 is quite an active quarter. And then when we consider the market environment currently, we've commented if we specifically talk about Care first, we've commented on the Finnish Wellbeing Countries budget restrictions. That is a bit of an unknown how those will materialize. So there's risk in terms of Q4 for Care. And then overall, the market, it's a bit volatile. So I wouldn't say it's like sort of very clear how that will turn out, and that's why we have this range. Now as mentioned, the September came in quite strong, and that's why we gave a comment that we're tracking towards the higher end of this profit guidance. But overall, the uncertainty is still within the market and Q4, that's the reason for the range.

And on the backlog side, I think we have clearly communicated during Q3 that 2026 will be a kind of a year of transition in terms of the top line. We are experiencing headwind in the market, especially in the digital consulting part. And a lot of these contracts signed now in Care and in Banking are contracts that will materialize after kind of conversion migration project, which is Phase 1, and then you get the full scale effect of that in '27 and onward. How much is hitting '26 is not going to be disclosed at this stage. But I've clearly communicated lately that -- sorry, 2026 will be a year of transition in terms of the top line. However, the ambition is absolutely then to expand on the bottom line margin going into 2026. Like Tomi has already commented, we had a strong September, and that's why we are also saying that we are tracking towards the upper end of the guidance range. In terms of AI, we have now set out many initiatives internally, and we see clearly also that there is a huge interest in the market from the client side to start off with AI projects. But it's relatively early stage currently. How much of the effects of the productivity effects that will be kind of given back to the market side based on competition, that's also a bit premature to say. But we have also a clear kind of evidence when we're looking now at also implementing distinct KPIs by business unit related to AI. We have already evidence in one of the business units, we have like a 30% productivity improvement in terms of software development. Then it's a question should we kind of -- what's the effect of that? How should we position ourselves in terms of growing going forward, which I think are we able to kind of deliver on these productivity improvements in the future, we will actually take market share. That's the ambition. Price pressure, nothing new in Q3 going into or being into Q4. It's a relatively, I would say, challenging market condition, which we also communicated, especially for our Create business, nothing new, not the kind of higher price pressure. It's more like we have been through in 2025 in total. So yes, that's a comment to that.

The next question comes from Aditya Buddhavarapu from Bank of America.

Just a couple from my side. So on Create, you spoke about the reorganization. Could you just give a bit more color maybe in terms of what are the specific actions you're taking there to revive growth? And also, you spoke about the links to selected strategic software partners. If you could maybe just expand on that as well. Second question, given the impact from the headwinds in Q4 on Banking and especially Care, do you still think -- especially in Care, do you think they could still grow in Q4 given the continued headwind from the legacy product business? And then final one, you've seen margin expansion in Care in Q3, again, but in Q4, talking about margins being below -- at or below last year. So just going forward, how should we think about the margin outlook for the Care business? Do you think there's still more investments that need to be made? Or should we start to see a bit more operating leverage coming in there?