Highlights:

• Second-quarter net sales grew 4% to EUR 443.1 (427.7) million. Half-year net sales totalled EUR 883.7 (834.6) million with 6% growth.
• Second-quarter operating profit totalled EUR 28.3 (56.3) million and included capital gains of EUR 3.5 (14.7) million. Operating margin excluding capital gains was 5.6% (9.7). Half-year operating profit totalled EUR 63.2 (92.3) million.
• Profit before taxes EUR 24.4 (57.7) million in the second quarter, EUR 56.3 (92.7) million in the first half.
• Six-month profit after taxes EUR 40.0 (68.1) million.
• Second-quarter EPS EUR 0.23 (0.57), six-month EPS EUR 0.51 (0.87)
• Full-year guidance is unchanged

General market overview
Overall demand for IT services and solutions is healthy and market activity is at a high level. Cost cutting and business process efficiency improvement continue to drive investments. However, new revenue growth, time-to-market and better customer service are increasingly important investment drivers.

Pricing trends remain diverse. Local businesses are enjoying improving pricing conditions whereas in the big customer segment price pressure persists. Global sourcing is pressing average prices down in more and more customer industries. Prices were stable compared with the first quarter, however.

Local market players are actively recruiting new staff. Competition for the most experienced professionals is heating up. There is however no material acceleration in general wage inflation.

Development of customer industries
The slowdown of growth in the second quarter is mainly related to seasonality and not to a change in the underlying business performance. Growth varies strongly among the different business areas due to differences in the current business environment and the impact of seasonality. The overall good level of volume growth has continued but total growth is being reduced by declining prices.

The positive investment sentiment among banks has continued. Both partnership services and banking solutions are experiencing good demand, although the increased market activity is also being reflected in more aggressive competition and price pressure. TietoEnator's systems integration business is stable and the insurance sector business in Finland continues to perform very well. A specific area of great interest in the Nordic countries is electronic invoicing, where several new co-operation agreements with banks were closed. In Finland electronic invoicing is now expanding from business-to-business to business-to-consumer segment.

Measures to improve the business performance of TietoEnator Financial Solutions UK (former AttentiV) were continued and the company returned to profit in the second quarter. The utilization in the business is improving and the sales pipeline is continuously increasing. The company contributed EUR 8.6 million of net sales and EUR +0.6 million of operating profit in the second quarter, and EUR 17.0 million and EUR -0.6 million in the first half. In the first half of 2005 AttentiV's net sales totalled EUR 16.7 million and comparable operating profit EUR -2.2 million (at 2006 exchange rates).

The latest joint venture in the insurance sector in Finland, TietoEnator Esy, started operations at the beginning of 2006. The joint venture company employs around 180 people.

Price pressure is impacting TietoEnator's telecom business but prices have not deteriorated compared with the first quarter. R&D budgets are tight among telecom equipment vendors and operator customers are focusing on cost cutting. Competitiveness requires an attractive on-site/off-site mix and TietoEnator's Telecom & Media business area is making consistent progress in this area. Growth opportunities come from new potential outsourcing contracts.

At the end of the second quarter TietoEnator and Siemens Communications signed the agreement announced in March to deepen their co-operation and to transfer Siemens' switching and migration to next-generation networks to TietoEnator. The transition meant that around 250 employees from Siemens moved to TietoEnator Telecom & Media at the beginning of July. The transaction is expected to increase TietoEnator's net sales by about EUR 15 million in the second half of 2006. The commitment for the whole contract period is approximately EUR 100 million.

In June TietoEnator agreed to acquire 51% of the share capital in Polish RTS Networks Ltd, a provider of telecom R&D services. The main customer of RTS Networks is Siemens. The acquisition strengthened TietoEnator's R&D expertise and added 110 employees. RTS networks will be consolidated from the beginning of July 2006.

In July TietoEnator and DNA, a Finnish mobile operator, signed a Letter of Intent regarding outsourcing of value-added content and IP-based services. The agreement includes a three-year service contract estimated at EUR 5-7 million and services will be performed in a new service centre with resources from both companies.

In the government sector market demand is good in all Nordic countries. Price competition, especially in the project business, continues to be tough. In May Tietokarhu Oy, the joint venture between TietoEnator and the Finnish Government, and The Finnish National Board of Taxes revised their service agreement. The service agreement is a fixed-term agreement to expire in 2016 and includes the development and maintenance of the complex core IT systems underlying Finnish taxation. Its annual impact on TietoEnator's net sales will remain unchanged and the total value for the remaining term of the agreement is estimated at EUR 300 million.

TietoEnator's manufacturing business is performing well. Demand in this business is driven by customers' focus on process harmonization and business transparency. In the retail business companies are i nterested in investments that improve customer service and support cost-saving programmes.

The situation in the different Nordic healthcare markets depends on their local healthcare IT programmes. In Finland the national health projects are progressing and create business opportunities. In Norway the development has slowed down. Sweden is now somewhat later in starting its national IT initiative in the area, while Denmark is reorganizing its healthcare sector. In Germany vendor consolidation is creating opportunities for new suppliers.

In the forest sector growth opportunities are increasing as many customers are finalizing their restructuring programmes and planning to use more external vendors. Forest sector customers are increasingly requiring that part of the services offered are produced in low-cost environments. In the energy sector customer investments mostly relate to consolidating existing systems and automatic meter reading. In TietoEnator's utility business some big customer projects are at the ending phase. The oil and gas business is performing well.

In May TietoEnator and Ericsson Enterprise announced co-operation in Automatic Meter Reading and Automatic Meter Management. The plan is to create a full end-to-end provider of solutions for the area.

The processing and network services market continues to be active. In June TietoEnator and SEB Eesti Ühispank agreed on the outsourcing of on-site services and resources in Estonia. The agreement, which includes services such as PC support, ATM support and PC banking services support, added 17 persons to TietoEnator Processing & Network.

In Personec Group's businesses - HR and financial systems and services - customers are very interested in outsourcing and ASP services at the expense of the traditional licensing model. Consulting services are in high demand as well. In June Personec signed a contract with the City of Gothenburg for the supply of an IT system to manage the city's HR administration. The first stage includes implementation of the system and is valued at around EUR 5.3 million. Personec's acquisition of Manpower's payroll and Human Resources outsourcing business in Sweden became effective in February 2006 and added 178 employees.

Net sales
Second-quarter net sales grew 4% to EUR 443.1 (427.7) million. Growth in local currencies was also 4%. Organic growth was -1% in euros and in local currencies. Organic growth was lower than in the first quarter because Easter fell in the second quarter this year and because the performance based rewards from partnership contracts in Telecom & Media were lower than a year ago. The impact of fewer working days on net sales growth is estimated to be around two percentage points.

Six-month net sales grew 6% to EUR 883.7 (834.6) million. Growth in local currencies was 6% and organic growth 1%.

The impact of Easter is the highest in the business areas with most exposure to professional services: Telecom & Media and Government, Manufacturing & Retail. Telecom & Media's performance-based rewards from partnership contracts totalled EUR 0.5 million (EUR 6 million).

First-half growth was 15% in Norway (13% in local currency), 4% in Finland, -4% in Sweden (-2% in local currency) and 2% in Germany. In Sweden the decline was mostly due to Telecom & Media.

TietoEnator adopted IFRIC 4 (Financial Reporting Interpretations Committee's interpretation on accounting of leasing contracts) from the beginning of 2006. As a result a total of EUR 2.8 million of invoicing from customers was recognized as leasing contracts and not as net sales mostly in Processing & Network during the first half. The interpretation has been applied retroactively for 2005 and the half-year 2005 impact was EUR 2.5 million. IFRIC 4 also lowered depreciation by EUR 2.6 (2.3) million and increased the Group's interest income by EUR 0.2 (0.2) million.

The banking and insurance sector increased its share to 21% (16) of Group net sales in the first half with the help of acquisitions, good organic growth in the Banking & Insurance business area and extended contracts in Processing & Network. Telecom and media's share fell to 29% (35). The public sector contributed 20% (19) of sales, the forest sector 5% (5) and the energy sector 5% (5).

The order backlog, which comprises only services ordered with binding contracts, amounted to EUR 1 299 million (984) at the end of the period, 32% higher than a year before. Approximately 39% (45) is expected to be invoiced in the current year. Processing & Network's share of the order backlog is about 34%.

Profitability
Second-quarter operating profit amounted to EUR 28.3 (56.3) million representing a margin of 6.4% (13.1). EBIT includes capital gains of EUR 3.5 (14.7) million. The divestment of 51% of the shares of TietoEnator 121 Oy to the publisher Kauppalehti contributed a gain of EUR 3.0 million, which was allocated to all vertical business areas equally. Additionally there were some smaller gains in Processing & Network and at the Group level. Excluding capital gains the operating profit totalled EUR 24.8 (41.7) million representing a margin of 5.6% (9.7).

Second quarter profitability was burdened by seasonality due to Easter, lower performance-based rewards from the partnership contracts and restructuring expenses in Telecom & Media.

It is estimated that the negative impact of Easter falling in the second quarter this year compared to 2005 was about EUR 5 million on operating profit for the Group with biggest impacts on Telecom & Media and Government, Manufacturing & Retail.

Telecom & Media's performance-based rewards from partnership contracts had EUR 4.5 million lower impact on operating profit in the second quarter of 2006 compared to 2005. .

In the second quarter restructuring expenses totalled EUR 4.6 (2) million. This included EUR 3.6 million in Telecom & Media's R&D infrastructure unit in Sweden, where 56 jobs were reduced. Smaller restructuring expenses took place in Processing & Network (EUR 0.6 million) and Personec (EUR 0.4 million).

Most of the projects that were underperforming in the first quarter proceeded according to plan in the second quarter. The costs for project overruns totalled EUR 1.9 million, substant ially lower than the EUR 6.2 million in the first quarter.

The underlying decline in profitability is related to some parts of the business having sub-optimal utilization, temporary increases in investments and lower license sales than the year before.

First-half operating profit totalled EUR 63.2 (92.2) million. Capital gains totalled EUR 8.2 (15.6) million and operating profit excluding capital gains EUR 54.9 (76.6) million. This represented a margin of 6.2% (9.2). First-half operating profit was burdened by restructuring costs of EUR 11.4 million and costs for underperforming projects of EUR 8.2 million.

Operating profit (EBIT) included EUR 2.4 (1.0) million from amortization on acquired intangible assets in the second quarter and EUR 4.4 (3.1) million in the first half.

Costs for share-based payments of EUR 1.1 (0.4) million in the second quarter, and EUR 1.9 (0.8) million in the first half were included in employee benefit expenses.

Net financial expenses were EUR 3.9 (+1.5) million in the quarter. Net interest expenses were EUR 3.1 (1.1) million and one-time net losses from foreign exchange transactions EUR 0.5 (+3.8) million. EUR 1.7 million of net interest expenses were in the Personec Group.

Second-quarter earnings per share (EPS) totalled EUR 0.23 (0.57). EPS was affected by capital gains of EUR 0.05 (0.17) per share, amortization on intangibles of EUR -0.03 (-0.01) per share and stock option expenses of EUR -0.02 (-0.01) per share. Excluding these items EPS amounted to EUR 0.23 (0.42). Six-month EPS totalled EUR 0.51 (0.87).

The 12-month rolling return on capital employed (ROCE) was 21.0% and the return on shareholders' equity (ROE) 22.8%.

Financing and investments
Cash flow from operations amounted to EUR 65.0 (67.3) million for the first half. Operating profit contributed EUR 86.7 (103.7) million and the increase in working capital consumed EUR 4.4 (30.8) million. Tax payments were higher at EUR 15.0 (9.8) million. The increase is mostly due to the payment of previously recognized deferred taxes in Sweden. The deferred tax asset was further employed in Finland.

Payments for new acquisitions totalled EUR 37.3 million, which included around EUR 25 million for Manpower's payroll and Human Resources outsourcing business. Divestments generated cash totalling EUR 9.4 million. The total dividend payment of EUR 64.6 million was made in April.

The equity ratio was 35.0% (40.2). Gearing increased to 61.6% (43.3), which mostly reflected the dividend payment and the acquisition payment in Personec. Net debt totalled EUR 283.1 (218.1) million including EUR 382.8 million in interest-bearing debt, EUR 17.1 million in finance lease liabilities, EUR 9.0 million in finance lease receivable and EUR 107.3 million in cash and cash equivalents. EUR 134.0 million of the debt belonged to Personec Group. The other interest-bearing debt consists of a three-year EUR 50 million bilateral credit facility, a seven-year EUR 50 million private placement bond and usage of EUR 145 million from the short-term commercial paper programme. At the end of the quarter unused credit facilities totalled EUR 260 million.

Accrual-based investments totalled EUR 70.7 (143.3) million for the period. Capital expenditure including financial leasing accounted for EUR 31.2 (49.6) million, investments in business activities for EUR 5.3 (7.2) million, and investments in subsidiary and associated company shares for EUR 34.2 (86.5) million.

Personnel
The number of full-time employees totalled 15 387 (14 053) at the end of the second quarter. Acquisitions and new outsourcing contracts added around 620 employees during the six months. Recruitment was slightly stronger than in the year before: a total of 974 (863) employees were hired. The highest recruitment numbers were in Finland, Czech, Latvia and Sweden. Most of the net recruitment took place in low-cost countries.

In total 167 employees were affected by personnel adjustments during the first half mostly in Banking & Insurance, Processing & Network and Telecom & Media. Personnel negotiations in Telecom & Media's unit Telecom R&D Infrastructure were completed during the second quarter. The process affected 56 employees.

Employee turnover has continued to increase. The 12-month rolling figure stood at 8% (6) at the end of June.

On average the number of employees totalled 15 290 (13 832) in the second quarter.

At the end of the second quarter the number of people in low-cost countries totalled about 1 500. The acquisition of RTS Network in Poland will increase the number by 110 people. TietoEnator is planning to increase its staff in favourable cost environments to roughly 2 000 by the end of 2006.

Board of Directors
TietoEnator Corporation's Annual General Meeting on 23 March 2006 re-elected the previous Board members: Mariana Burenstam Linder, Bengt Halse, Kalevi Kontinen, Matti Lehti, Olli Martikainen, Olli Riikkala and Anders Ullberg.

In April the personnel of TietoEnator chose Jari Länsivuori with Esa Koskinen as his deputy to be the new representative of the personnel organizations on the TietoEnator Board of Directors. Jari Länsivuori replaces Pirjo Salo. Elisabeth Eriksson and her deputy Bo Persson will continue as the personnel representatives on the Board.

Shares and options
The outstanding number of shares excluding the shares in the company's possession was 78 841 462 at the end of June. The 2 903 860 shares the company had repurchased in 2005 were nullified in April. Also in April the Board of Directors decided to start a share repurchase programme. Under the 2006 AGM authorization shares were purchased for the three-year share-based incentive plan that the Board of Directors decided in December 2005. A total of 500 000 shares were purchased between 4 May and 9 May. The cost of the shares was EUR 12.4 million or an average share price of EUR 24.88. The company now holds 0.6% of its shares, which represents 0.6% of the voting power.

In July TietoEnator's Board of Directors decided to start a new share repurchase programme totalling EUR 40 million. Under the 2006 AGM authorization the shares will be purchased to develop the company's long-term capital structure. The repurchases will start on 1 September at the earliest.

A total of 1 250 new shares were registered as a result of subscriptions by options under the Stock Option Programme 2002 A during the second quarter. The subscription period for the 2000 A/B/C/D warrants ended on 31 May 2006. No shares were subscribed with these warrants.

In March the Board of Directors of TietoEnator decided to allocate approximately 500 000 stock options 2006 A each entitling to subscribe for one share to about 300 key employees. A total of 483 900 stock options were subscribed by 258 employees. The subscription period of the 2006 A options is 1 March 2009 - 31 March 2011.

Full dilution (assuming all options were excercised fully) amounted to 4.1% compared to 6.4% at the end of 2005.

The Board has not exercised its authorizations to issue share and option rights or raise convertible bond loans during the period.

Some items affecting the 2006 full-year accounts
The net of acquisitions and divestments finalized up to this date is expected to contribute around 3% of net sales growth in the full year, thus lower than in the first half.

TietoEnator Financial Solutions UK is not expected to reach the exceptionally high level of sales and operating profit recorded in the third quarter of 2005 (EUR 16 million and EUR 6.4 million). This will impact Banking & Insurance's growth and profit development compared with 2005.

The amount of performance-based rewards from partnership contracts in Telecom & Media is not expected to be material in the fourth quarter of 2006. In 2005 they totalled EUR 4 million.

In the first half restructuring expenses totalled EUR 11.4 million and for the full year they are expected to amount to around EUR 12 million.

TietoEnator expects amortization of intangible assets of around EUR 9 (6.9) million and stock option expenses and costs related to the share-based incentive programme of around EUR 5 (3.0) million in 2006. These are included in the Group's operating profit.

Prospects for 2006
In 2006 organic growth is expected to increase from 2005, but will be affected by the low growth prospects of the Telecom & Media business area and the increase in global sourcing. TietoEnator will further invest in its low-cost sites and continue its cost-cutting programmes. Performance is expected to improve in the second half. It is based on signed contracts bringing higher organic growth, lower restructuring expenses, higher utilization of staff, low impact from underperforming projects and the recovery of Banking & Insurance's business in the UK. The fourth quarter is expected to be clearly better than the third as it traditionally is the best quarter of the year with a high level of licence sales.

For the full year 2006 TietoEnator expects total net sales growth to be 5-9% excluding potential new acquisitions. The EBIT margin excluding capital gains but including restructuring of around EUR 12 million is expected to range between 8% and 10%.Download the document now 316 kb (Adobe Acrobat Document)