TietoEnator reports pricing pressure but good growth in banking Q1

Source: TietoEnator

Key financials

  • Net sales grew 8% to EUR 442.2 (409.8) million. Organic growth 10%.
  • Operating profit EUR 34.5 (29.8) million, operating margin 7.8% (7.3); these include EUR 1.7 (4.7) million of capital gains. Operating margin excluding capital gains 7.4% (6.1).
  • Profit before taxes EUR 32.4 (29.6) million.
  • Profit after taxes EUR 24.1 (20.8) million.
  • EPS EUR 0.33 (0.27).

General market overview

Market activity in the first quarter of 2007 continued to be favourable. Customers are increasingly looking at ways to increase their revenue growth by providing new types of services and to differentiate themselves by superior customer service. Cost savings, flexibility and business process efficiency are still required, but these are seldom the only drivers of demand. In most areas prices are either stable or slightly higher than the year before. Prices are declining in infrastructure services, which is normal for that business.

The labour market is very active and there is a lot of mobility. Recruitment levels are generally high and there is pressure to increase salaries.

Development of customer industries

Most of TietoEnator's business areas showed a good level of growth and the markets are active in all customer industries.

Demand in the banking and insurance sector is very good. The sector is highly competitive and there continues to be price pressure in some areas. TietoEnator's strongest growth markets in the banking and insurance sector were Sweden and the UK. TietoEnator's services business in Finland was stable.

In January TietoEnator agreed to acquire Swedish Abaris AB, which specializes in securities processing solutions. The company employs some 86 people in Sweden, Finland and Norway and its net sales in 2007 are expected to amount to EUR 10 million. The acquisition took effect on 1 January 2007.

In the telecom and media sector cost savings continue to be the main investment driver for telecom operators, equipment vendors anand media companies in Europe. This means that prices are under pressure, but it is also providing opportunities in consolidation and integration of systems. TietoEnator's prospects in the telecom sector are promising. In addition to cost savings, customers, especially operators, are searching for new sources of revenue growth.

In January TietoEnator recruited 140 people formerly working for the Taiwan-based BenQ's R&D centre in Wroclaw, southern Poland. At the beginning of February TietoEnator took over Ericsson's design centre in Aarhus, Denmark, with 86 employees. The design centre supplies IP software building blocks used in Ericsson products. Expected net sales for the unit in 2007 are EUR 10 million.

In the Finnish government sector overall market demand was good, especially in the taxation area. Customers are looking for improved government productivity, which requires efficient use of technology and new ways to provide services. In the manufacturing sector and in the retail sector the positive market situation continued and the biggest growth potential is in ERP implementations. In all of these sectors TietoEnator has a very strong position. Competition is tough as customers are implementing multi-sourcing strategies.

The digitalization of healthcare services requires that old legacy applications are replaced by modern electronic patient records and integrated hospital information systems. Large customers have high functionality demands and complicated IT environments, which makes their transformation challenging. TietoEnator has a very strong position in healthcare in Finland and the business is performing well. Also the Nordic welfare business is developing positively.

In Sweden, Norway and Denmark some customers now prefer transformation in phases and incremental renewal of systems. This resulted in lower than normal number of new orders in late 2006 and lower net sales in the first quarter of 2007. In Germany a product upgrade was delayed, which resulted in postponed sales and deliveries.

In January TietoEnator closed the acquisition of Provisio AB in Sweden. The company specializes in operating room information systems and has seven employees in Lund. In February TietoEnator divested its holding in TietoEnator Libraries Oy to AXIELL bibliotek AB. The net sales of the company in 2006 were EUR 2.4 million.

In the forest sector there are signs of market recovery after a long period of cost savings. Harmonization of IT systems and infrastructure is driving demand. TietoEnator's market position has strengthened in Central Europe and in the Americas. In the energy sector customers are willing to invest in IT as their financial performance is good. In oil and gas demand is good in all market segments. In the utilities area customers are mainly interested in consolidating current systems or renewing systems in the billing and self-service area.

The processing and network services market is very active, but prices are under heavy pressure. TietoEnator's competitive position is strong, but maintaining good profitability requires tight cost control and increased use of global sourcing.

In January TietoEnator and ÅF Group, a Swedish technical consulting company, agreed on TietoEnator taking over ÅF Group's internal IT operations. TietoEnator will provide operational IT services and the technical infrastructure for the ÅF Group. Around 20 people moved to TietoEnator. Started in February 2007, the contract will run for three years and has a value of around EUR 12 million.

Demand for digitalization services and self-service concepts accelerated in the first quarter. TietoEnator is able to offer solutions which combine industry-specific services with highly advanced technology and cost-efficient hosting.

Net sales

First-quarter net sales grew 8% to EUR 442.2 (409.8) million or 7% in local currencies. Organic growth improved clearly from 2006 to a good level of 10% or 9% in local currencies.

In the first quarter of 2007 Telecom & Media had the strongest growth, which is a remarkable improvement compared to its declining net sales in 2006. Growth was driven by several new outsourcing contracts and good general demand in the market. Prices have been stable compared with the previous year. A similar development took place in Forest & Energy, where the previous year's negative growth numbers became strongly positive, driven mainly by growth in the energy sector.

Government, Manufacturing & Retail's total growth was reduced by the divestment of government businesses in Denmark, Norway and Sweden in 2006. Healthcare & Welfare's growth suffered from reorganization in Norway and Sweden and the delay in the launch of a product upgrade in Germany. Banking & Insurance was still growing strongly, but growth was lower than in 2006 since new outsourcing contracts did not have impact any longer. Processing & Network continued on a healthy growth track.

In the first quarter of 2007 TietoEnator's growth came from outside Finland. In Finland net sales were stable. Sweden grew 6%. Net sales both in Germany and Denmark benefited from new outsourcing contracts. Germany grew 61% and Denmark 37%. The decline in Norway, -22%, is mainly explained by the divestment of the government business. In the UK growth was also strong at 30%.

Telecom and media, growing strongly, increased its share of Group net sales to 35% (31). The banking and insurance sector contributed 23% (22) whereas public sector's contribution declined to 15% (18).

The order backlog, which comprises only services ordered with binding contracts, amounted to EUR 1 341.5 million (1 131.0) at the end of the period, 19% higher than a year before. Processing & Network's share of the order backlog is about 29%. Approximately 49% (54) of the backlog is expected to be invoiced in 2007.


First-quarter operating profit amounted to EUR 34.5 (29.8) million representing a margin of 7.8% (7.3). Excluding capital gains the operating profit totalled EUR 32.8 (25.1) million representing a margin of 7.4% (6.1).

There were no material restructuring expenses nor any new material project overruns in the quarter, which means that the underlying operating profit was slightly higher than the year before at EUR 33 (32) million.

Almost all business areas improved their profitability in the first quarter. Telecom & Media's profitability benefited from good utilization. Government, Manufacturing & Retail's operating margin improved due to the divestment of low-margin businesses. Forest & Energy had less project overruns and Banking & Insurance's profitability improved in countries outside Finland.

Healthcare & Welfare's profitability suffered from its challenging business situation in Norway, Sweden, Denmark and Germany. For Processing & Network profitability reflected lower prices.

Operating profit (EBIT) included EUR 2.5 (2.0) million from amortization on allocated intangible assets in the first quarter. The costs arising from share-based payments in the first quarter, EUR 0.5 (0.8) million, were included in employee benefit expenses.

Net financial expenses stood at EUR 2.1 (0.2) million in the first quarter. Net interest expenses were EUR 1.5 (positive 0.1) million and one-time net losses from foreign exchange transactions EUR 0.5 (0.2) million.

First-quarter earnings per share totalled EUR 0.33 (0.27). EPS was affected by capital gains of EUR 0.02 (0.07) per share, amortization on intangibles of EUR 0.03 (0.03) per share and stock option expenses of EUR 0.00 (0.01) per share. Excluding these items EPS amounted to EUR 0.34 (0.24).

The 12-month rolling return on capital employed (ROCE) was 21.8% and the return on shareholders' equity (ROE) 17.5%.

Financing and investments

Cash flow amounted to EUR 38.8 (30.3) million in the quarter. Operating profit contributed EUR 49.1 (40.0) million and the increase in working capital consumed EUR 6.8 (-3.2) million. Tax payments were very low at EUR 1.8 (12.0) million as the deferred tax asset was further employed in Finland.

Payments for new acquisitions totalled EUR 9.3 million.

The equity ratio was 44.5% (34.7). Gearing decreased to 12.9% (43.9) as Personec Group with a substantial amount of debt was divested in December 2006. Net debt totalled EUR 72.6 (198.6) million including EUR 161.6 million in interest-bearing debt, EUR 10.5 million in finance lease liabilities, EUR 9.4 million in finance lease receivables and EUR 89.6 million in cash and cash equivalents.

The interest-bearing debt consists of a seven-year EUR 100 million private placement bond, a seven-year EUR 50 million private placement bond and usage of EUR 10 million from the short-term commercial paper programme. At the end of the quarter unused credit facilities totalled about EUR 486 million.

Accrual-based investments totalled EUR 27.3 (24.5) million for the period. Capital expenditure including financial leasing accounted for EUR 12.1 (15.7) million, investments in business activities for EUR 0.0 (3.0) million, and investments in subsidiary and associated company shares for EUR 15.2 (5.8) million.


The number of full-time employees totalled 15 182 (14 157) at the end of the first quarter. Acquisitions and new outsourcing contracts added about 195 employees during the quarter. The number of people recruited during the period grew strongly: a total of 879 (458) employees were hired. The highest recruitment numbers were in Finland, Poland and Sweden.

In total about 50 employees were affected by personnel adjustments during the first quarter mostly in Telecom & Media and Banking & Insurance.

Employee turnover has continued to increase as the labour market is very active. The 12-month rolling figure stood at 9.7% (7.5) at the end of March.

The average number of full-time employees was 15 026 (14 117) in the first quarter.

At the end of the first quarter the number of people in countries with favourable cost levels totalled about 2 300 or 14% of the total headcount. The recruitment activity in Poland added about 140 people in January 2007. The implementation of TietoEnator's global sourcing strategy progressed as planned.

Board of Directors and management

TietoEnator's Annual General Meeting on 22 March 2007 re-elected the following previous Board members: Mariana Burenstam Linder, Bengt Halse, Kalevi Kontinen, Matti Lehti, Olli Riikkala and Anders Ullberg. In addition, the meeting elected Bruno Bonati as a new member.

The Board of Directors elected Matti Lehti as its chairman and Anders Ullberg as its vice chairman. The Board also appointed a Compensation and Nomination Committee, comprising Kalevi Kontinen (chairman), Mariana Burenstam Linder and Bengt Halse and an Audit and Risk Committee, comprising Anders Ullberg (chairman), Bruno Bonati and Olli Riikkala.

Transactions with related parties

The related parties of TietoEnator are its Board of Directors, President and CEO, the Corporate Management Team and the Group's associated companies.

The base salaries and bonus levels of the President and CEO and Corporate Management Team members were reviewed with effect from the beginning of 2007. The President and CEO's bonus is a maximum of 80% of his annual base salary and is based on the Group's net sales and operating profit. The reward factors for the Corporate Management Team members are based on the financial performance of the Group and their own units.

In December 2006 TietoEnator's Board of Directors allocated 2006 B options. The President and CEO was allocated 10 000 options and the Corporate Management Team members in total 71 600 options. In the share-based incentive plan the CEO and President is entitled to a maximum of 6 000 shares and other Corporate Management Team members in total to 24 600 shares if the set performance criteria are met.

Transactions with the associated companies are not considered to be material.


The Annual General Meeting approved a dividend of EUR 1.20 (0.85) per share. The total dividend payment of EUR 88.3 million took place in mid-April.

Shares and options

The outstanding number of shares excluding the shares in the company's possession was 73 596 462 at the end of March. At the end of the quarter TietoEnator held a total of 500 000 of its own shares representing 0.7% of all the shares and voting power. The shares were repurchased in April 2006 for the three-year share-based incentive plan.

The Annual General Meeting authorized the Board to repurchase the company's own shares to the extent that this does not exceed 10% of the company's share capital in order to develop the company's capital structure. The authorization is in force until the close of the next Annual General Meeting.

TietoEnator's Annual General Meeting also approved authorizations to issue share and option rights or raise convertible bond loans. The Board has not exercised these authorizations.

'Profit 2007' programme

TietoEnator launched a programme called 'Profit 2007' at the beginning of February to improve its business performance. The programme includes plans to cut costs and divest or restructure loss-making businesses. In the first quarter detailed planning of the programme continued and the implementation started. Most of the benefits from the programme will take place during the remaining quarters of this year.

Initiatives to save on travelling, meeting and personal equipment costs were launched. At the end of the quarter these initiatives already started to show some impact. Low-performing units are under close scrutiny and their plans to improve net sales and profitability are supported by the programme.

So far this year TietoEnator has divested its minority holding in S.E.S.A. Spa in Italy, its majority holding in TietoEnator Libraries Oy in Finland and parts of the German Banking & Insurance business.

Events after the period

TietoEnator announced several new contracts in April.

TietoEnator and Blyk, the free, pan-European mobile operator for young people, entered into a partnership in which TietoEnator provides Blyk with an end-to-end BSS (Business Support Systems) solution related to web portals and infrastructure services. TietoEnator signed an agreement with Siemens IT Solutions and Services in Italy regarding the streamlining of business-critical and customer-related processes and services for mobile telephony. The value of the contract is expected to be EUR 40 million and the contract period is three years.

TietoEnator announced that it will be the main partner in Vaisala's corporate wide enterprise resource planning system implementation. Vaisala is a Finnish electronic measurement product, solutions and services company. TietoEnator signed an agreement with the Finnish-based metal products and services company Rautaruukki to extend the current relationship to providing full services for the information systems of Ruukki Production division. The total service comprises application development and integration, server management, IT operations management and data security, and customer support.

TietoEnator signed Memorandums of Understanding to divest Banking & Insurance's SAP businesses in Germany in two transactions to Resco GmbH and the management of TietoEnator's SAP Human Capital Management consulting team. The transactions are expected to be completed at the beginning of June 2007. In 2006 the total net sales of these businesses were about EUR 5.8 million and operating loss about EUR 1.2 million. In the first quarter of 2007 the businesses reached net sales of EUR 1.4 million and operating loss of EUR 0.3 million. Currently the businesses employ close to 40 people.

On 11 April TietoEnator announced that its President and CEO Pentti Heikkinen will be on sick leave due to the diagnosis of aortic valve insufficiency in his heart. According to the current plan he will return to work at the beginning of May. During this time his duties have been assumed by TietoEnator's Deputy CEO Åke Plyhm. Pentti Heikkinen's aortic valve will be treated with surgery during this year. Recovery from this surgery typically takes 1-3 months.

Some items affecting 2007

The net of acquisitions and divestments finalized to date is expected to have about a -1% impact on net sales for the full year 2007.

The restructuring and related costs are currently expected to exceed the level of 2006 (EUR 12.4 million). EUR 5-10 million of this is expected to take place in the second quarter.

Additionally the divestment of some of Banking & Insurance's businesses in Germany resulted in about EUR 4 million capital loss to be recorded in the second quarter.

TietoEnator expects amortization of intangible assets to total about EUR 10 (8.8) million and stock option expenses around EUR 2 (4.0) million. Costs related to the share-based incentive programme depend on the company's performance in 2007 and are currently expected to amount to a maximum of about EUR 5 (0) million.

Risks and uncertainties

The risks TietoEnator is facing and actively managing are mainly: the market becoming more commoditized, price pressure, new low-cost competition, customers demanding tighter contract terms, the availability and cost of resources, and the ability to control challenging deliveries.

Prospects for 2007

TietoEnator expects the general IT market to be active in 2007. On average prices are expected to stay roughly in line with 2006 levels.

TietoEnator will continue to invest in its low-cost sites and international expansion. The turnaround of underperforming units will take time and there are some deliveries with low margins. In some areas cost pressures cannot be met by price increases.

TietoEnator expects its full-year organic growth in 2007 to be higher than the 2006 level of 2%. Several outsourcing contracts will cease to have an impact on growth during 2007.

The operating profit of the underlying business is expected to exceed the level of 2006 (EUR 124 million). The 'Profit 2007' Programme is important for TietoEnator to reach its expected profitability in 2007. The operating profit of the underlying business does not include potential capital gains and restructuring expenses.

Financial calendar in 2007
  • Interim Report January - June 2007 on 20 July
  • Capital Markets Day on 12 September in Stockholm
  • Interim Report January - September 2007 on 26 October

The figures in this report are for continuing operations. The Personec Group business divested in December 2006 is treated as a discontinued operation for whole of 2006.

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