TietoEnator reports Q1 results

Source: TietoEnator

Highlights

  • Net sales growth 8.3% to EUR 440.6 (406.9 ) million. Organic growth 3.3%.
  • Operating profit EUR 34.9 (36.0) million or a margin of 7.9% (8.8).
  • Excluding the capital gain of EUR 4.7 million operating margin was 6.8%.
  • Profit before taxes EUR 31.9 (35.0) million.
  • Profit after taxes EUR 21.7 (24.2) million.
  • EPS EUR 0.29 (0.31)


General market overview

The overall demand for IT services and solutions is at a higher level than a year ago. Both the corporate and public sector are investing in information technology to increase the efficiency of their business processes or to harmonize them. Also investments to facilitate revenue growth are growing in importance.

Pricing trends continue to be diverse. Pricing for small-scale solutions or projects in local markets is improving. However, bigger projects for major customers are subject to global competition, and there price pressure is intense. Global sourcing is having an increasing role in these projects, which means that their average price level is declining.

Labour market activity increased further in early 2006. The professionals with skills in high demand are mobile, but people with more standardized skills are still in plentyful supply. For this reason, the general wage inflation is still moderate.

Development of customer industries

In the first quarter TietoEnator experienced growth in all of its business areas. Processing & Network, TietoEnator's infrastructure outsourcing unit turned 5% growth after a 9% decline in 2005. However, growth was weak in Telecom & Media and also in Forest & Energy.

Development of customer industries

In the first quarter TietoEnator experienced growth in all of its business areas. Processing & Network, TietoEnator's infrastructure outsourcing unit turned 5% growth after a 9% decline in 2005. However, growth was weak in Telecom & Media and also in Forest & Energy.

Banks in general have started to make revenue generating investments. Banking solutions face healthy demand and the demand for partnership services has stabilized. The systems integration business is still challenging. The insurance sector business in Finland continues to be a strong growth area.

In January TietoEnator and Handelsbanken made an agreement on the implementation of a new cross-border cash management solution. In February TietoEnator and Banco Português Negócios (BPN) expanded their co-operation in the services area making TietoEnator the prime IT partner for the bank's modernization programme in core banking. Also in February TietoEnator and Rabobank, a tier-one global bank, signed an agreement for the implementation of a new cash management solution in Rabobank.

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

In March TietoEnator and OMX, the Northern European securities market operator and technology provider, decided not to create the joint venture company announced in December 2005. The parties have, however, mutually decided to continue strategic co-operation in IT operations and software solutions. TietoEnator Processing & Network and OMX made an agreement on IT operations for OMX's Banks & Brokers business and 21 employees moved from OMX to TietoEnator.

The business integration of TietoEnator Financial Solutions UK (former AttentiV) continued. TietoEnator acquired AttentiV, a software and solutions provider to the UK banking market, in July 2005. One of the major customer projects of TietoEnator Financial Solutions UK was postponed in early 2006. There has also been some inefficiency in product development. As a result a programme to reduce employees was started during the first quarter. TietoEnator Financial Solutions UK contributed EUR 8.4 million of TietoEnator's consolidated net sales and EUR -1.2 million of operating profit in the first quarter. In the first quarter of 2005 the AttentiV's net sales totalled EUR 10.3 million and operating profit EUR 1.9 million (at 2006 exchange rates).

TietoEnator's telecom business is adjusting to its customers' demand for high-quality services at lower cost. The process of building an optimal mix of resources on-site close to customers, and off-site in beneficial cost environments, is on-going. As average prices in the business are declining, it requires volume gains to be able to grow. The prospective new outsourcing contracts are providing growth opportunities in the business.

In March TietoEnator and Siemens agreed to deepen their cooperation and to transfer switching and migration to next-generation networks from Siemens Communications R&D to TietoEnator. The transfer process is initiated and it is planned that approximately 270 employees will be transferred to TietoEnator Telecom & Media. TietoEnator expects that the effect on its net sales is about EUR 15 million in the second half of 2006 and the commitment for the whole contract period approximately EUR 100 million. The intention is to sign the agreement in May with final transaction on 1 July 2006.

In February TietoEnator agreed to acquire the business operations of Sofnetix Oy, a Finnish company specializing in software development for wireless and mobile systems. This acquisition strengthened TietoEnator's Telecom & Media business area's R&D expertise and operations and added 34 employees. In March TietoEnator acquired Telenor Business Consulting, a business unit with 40 employees in Norwegian telecom company Telenor. Through this acquisition TietoEnator strengthened its presence in Norway in the telecom area by broadening its customer and skills base.

In the government business the market situation is improving in all Nordic countries. However, customer's multi-sourcing strategies are maintaining broad competition and pricing continues to be tough. TietoEnator's and Saab's joint venture company TietoSaab Systems Oy launched operations at the beginning of February 2006. TietoSaab Systems is part of TietoEnator's Government, Manufacturing & Retail business area as TietoEnator owns 60% of the company's shares.

In the manufacturing sector the financial performance of customers is good and demand for IT services has started to increase. In the retail industry the investment focus is on upgrading existing systems to allow better customer service.

The healthcare business in the Nordic countries is becoming increasingly dependent on bigger projects as systems are mostly sold on a regional basis. TietoEnator currently has several significant deliveries on-going. In Germany the market is very active as vendor consolidation has resulted in customers reconsidering their vendor choices. TietoEnator's acquisition of Waldbrenner AG in Germany became effective in January 2006. Waldbrenner provides patient administration and clinical documentation software and employs 30 persons.

In the forest sector most customers are in the middle of heavy restructuring and cost saving programmes. This is reflected in TietoEnator's business with these customers. There are opportunities for new business and outsourcing, but competition and price pressure are heavy. In the energy sector customers are investing in IT but this mostly concerns the consolidation of current systems.

The processing and network services market is active. The traditional drivers of demand, consolidation benefits and cost cutting are still important, but there is also strong interest in new services and new pricing models. TietoEnator has continued to rationalize its production and customer service organizations. The savings from these measures are enabling very price- competitive service offerings, which is reflected in the business area's recent strong order intake.

In the Personec Group, consulting, outsourcing and ASP services are growing the strongest, whereas the more traditional licence sales are lagging behind last year's levels. Personec's acquisition of Manpower's payroll and Human Resources outsourcing business in Sweden took effect in February and added 178 employees.

Net sales

First-quarter net sales grew 8.3% to EUR 440.6 (406.9) million or 9.1% in local currencies. Organic growth was 3.3% or 4.1% in local currencies.

The organic growth in the Group was impacted by the negative development in Telecom & Media, which is TietoEnator's biggest business area. This is largely due to lower prices and weak demand for new projects. In most other business areas organic growth was at good levels. Banking & Insurance had the highest growth with a contribution from the new joint venture, TietoEsy, and good demand in the solutions business. In Government, Manufacturing & Retail, government and especially manufacturing had good organic growth. Processing & Network returned to healthy organic growth after declining in 2005 as new contracts and add-on sales now compensate for lower prices.

Due to the International Financial Reporting Interpretations Committee's interpretation (IFRIC 4) a total of EUR 1.4 million of invoicing from customers was recognized as leasing contracts and not as net sales in Processing & Network. The interpretation has been applied retroactively for 2005 and the impact on Q1 2005 was EUR 1.2 million. IFRIC 4 also lowered Processing & Network's depreciation by EUR 1.3 (1.1) million and increased the Group's interest income by EUR 0.1 million.

First-quarter growth was 16% in Norway (13% in local currency), 9% in Finland, and -6% in Sweden (-3% in local currency). In Norway Banking & Insurance and Energy have grown strongly, in Finland TietoEsy in Banking & Insurance contributed positively and in Sweden the decline was mostly due to Telecom & Media. In Germany net sales were at the same level as in the first quarter of 2005.

The banking and insurance sector increased its share to 20% (16) of Group net sales in the first quarter with the help of acquisitions and good organic growth in the Banking & Insurance business area and extended contracts in Processing & Network. Telecom and media's share fell to 29% (34). The public sector contributed 20% (20) of sales, the forest sector 5% (5) and the energy sector 4% (5).

The order backlog, which comprises only services ordered with binding contracts, amounted to EUR 1 215 million (943) at the end of the period, 29% higher than a year before. Approximately 54% (54) is expected to be invoiced in 2006. Processing & Network's share of the order backlog is about 37%.

Profitability

The first-quarter operating profit amounted to EUR 34.9 (36.0) million representing a margin of 7.9% (8.8). EBIT includes a capital gain of EUR 4.7 million from combining TietoEnator's defence business with Saab's Finnish business into a joint venture company. Excluding capital gains the operating profit totalled EUR 30.2 (35.1) million representing a margin of 6.8% (8.6).

The restructuring process of Telecom & Media's operators business in Sweden will be finalized during the second quarter and will reduce about 100 jobs. All of the costs related to this process took place in the first quarter and totalled EUR 5.0 million. There were additional restructuring expenses in Banking & Insurance (EUR 0.6 million) and Processing & Network (EUR 1.2 million).

Some of TietoEnator's units suffered from sub-optimal utilization during the quarter. These units were Telecom & Media in Sweden and parts of Banking & Insurance's systems integration business.

There was a higher than normal number of underperforming projects during the quarter. In Banking & Insurance one project was re-scoped in Denmark. In Telecom & Media one fixed-priced project resulted in a write-down in the operator business in Sweden. In Government one Danish project is requiring more resources than expected. Healthcare's one project in Norway has been delayed. In Energy a pan-Nordic project is running over planned cost estimates. The write-downs and provisions for these projects affect both net sales and profit. The profit impacts total EUR -6.2 million.

The pension liabilities of a number of TietoEnator's employees have been transferred to pension insurance companies from TietoEnator's own or its customers' pension foundations. This resulted in recalculations of pension assets and liabilities according to IFRS. The total net impact on the Group's operating profit was EUR +2.3 million.

Net financial expenses were EUR 3.0 (1.0) million in the quarter. Net interest expenses were EUR 2.5 (2.2) million and one-time net losses from foreign exchange transactions EUR 0.3 (+ 0.7) million. EUR 1.6 million of the net interest expenses were in the Personec Group.

First-quarter earnings per share (EPS) totalled EUR 0.29 (0.31). EPS was affected by capital gains of EUR 0.06 (0.02) per share, amortization on intangibles of EUR -0.02 (-0.02) per share and stock option expenses of EUR -0.01 (-0.03) per share. Excluding these items EPS amounted to EUR 0.26 (0.33). Diluted earnings per share totalled EUR 0.28.

The 12-month rolling return on capital employed (ROCE) was 28.8% and the return on shareholders' equity (ROE) 27.6%.

Financing and investments

Cash flow from operations amounted to EUR 37.5 (52.5) million in the quarter. Operating profit contributed EUR 45.4 (52.4) million and the decrease in working capital generated EUR 5.0 (4.5) million. Tax payments were higher at EUR 11.5 (4.3) million. The increase is mostly due to the payment of earlier recognized deferred taxes in Sweden. The deferred tax asset was further employed in Finland.

Payments for new acquisitions totalled EUR 27.6 million, which included around EUR 25 million for Manpower's payroll and Human Resources outsourcing business. The equity ratio was 34.7% (45.6). Gearing increased to 43.9% (20.6), but was at the same level as at the end of 2005. Net debt totalled EUR 198.6 (97.8) million including EUR 286.0 million in interest-bearing debt, EUR 19.6 million in finance lease liabilities, EUR 9.1 million in finance lease receivable and EUR 97.1 million in cash and cash equivalents. EUR 124.6 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 55 million from the short-term commercial paper programme. At the end of the quarter unused credit facilities totalled EUR 200 million.

Accrual-based investments totalled EUR 50.4 (134.3) million for the period. Capital expenditure including financial leasing accounted for EUR 15.8 (36.0) million, investments in business activities for EUR 3.1 (8.4) million, and investments in subsidiary and associated company shares for EUR 31.5 (89.8) million.

Personnel

The number of full-time employees totalled 15 318 (13 723) at the end of the first quarter. Acquisitions and new outsourcing contracts added around 500 during the period. Recruitment was slightly higher than the year before: a total of 491 (469) employees were hired. Most of the net recruitment took place in low cost countries.

Personnel adjustments have continued, mostly in Banking & Insurance, Processing & Network and Telecom & Media. In total 99 employees were affected during the first quarter.

Personnel negotiations in Telecom & Media's Operators unit in Sweden are ongoing and the process will be finished during the second quarter. The process will affect approximately 100 persons.

Telecom & Media's unit Telecom R&D Infrastructure will start personnel negotiations in Sweden to adjust the organization to the new business needs. Currently TietoEnator expects that the need to reduce the cost base in the unit corresponds to around 75 jobs. These actions are needed due to too low utilization of personnel and the change in the competence mix that customers are demanding.

Employee turnover has continued to increase. The 12-month rolling figure stood at 7% (5) at the end of March.

On average the number of employees totalled 15 235 (13 634) in the first quarter.

At the end of the first quarter the number of people in low-cost countries totalled about 1 330. TietoEnator is planning to increase its low-cost staff to roughly 2 000 by the end of 2006. TietoEnator considers that in the long-term up to 40% of its workforce can be located in low-cost countries.

Board of Directors and management

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.

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) and Bengt Halse, and an Audit and Risk Committee, comprising Anders Ullberg (chairman), Olli Martikainen and Olli Riikkala.

In February Mr Matti Viljo was appointed Senior Vice President of the Banking & Insurance business area from April 2006. In March Mr Juhani Strömberg, Senior Vice President, Strategic Offering decided to leave the company from 1 April 2006.

Dividend

The Annual General Meeting approved a dividend of EUR 0.85 (1.00) per share. The total dividend payment of EUR 64.5 million took place in mid-April.

Shares and options

The outstanding number of shares excluding the shares in the company's possession was 75 840 212 at the end of March. At the end of the quarter TietoEnator held a total of 2 903 860 of its own shares or 3.7% of the voting power. The Annual General Meeting decided to nullify all of the shares in the company's possession and the reduction in the number of shares was entered in the Finnish Trade Register on 10 April 2006.

A total of 750 new shares were registered as a result of subscriptions by options under the Stock Option Programme 2002 A during the first quarter and an additional 50 in April.

The Annual General Meeting authorized the Board to repurchase the company's own shares to the extent this does not exceed 10% of the company's share capital. The authorization is in force for one year. On 26 April the Board decided to start a share repurchasing programme with the purpose of hedging the costs of the three-year share-based incentive plan that the Board decided in December 2005.

A total of 386 530 non-allocated options from the Stock Options 2002 B programme were annulled and the change was registered on 10 April. After the annulment the remaining options of the programme entitle to subscribe for 962 300 TietoEnator shares starting on 1 December of 2006.

The Annual General Meeting approved a new stock option programme for TietoEnator's key employees with a maximum of 1 800 000 options each entitling to subscribe for one share. In March the Board of Directors decided to allocate approximately 500 000 options (2006 A) to about 300 key employees. The subscription period of the 2006 A options is 1 March 2009 - 31 March 2011.

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.

Some items affecting the 2006 full-year accounts

The net of acquisitions and divestments finalized up to this date is expected to contribute around 4% of net sales growth in the full year.

The growth in the second quarter will be affected by the fewer number of working days due to Easter and no material rewards from Telecom & Media's partnership contracts, which in the second quarter of 2005 totalled EUR 6 million.

The costs related to the restructuring process of Telecom R&D Infrastructure in Sweden are expected to total around EUR 5 million and to fall due in full in the second quarter. The process is expected to result in savings of around EUR 5 million in somewhat over 12 months' time. For the whole 2006 TietoEnator now expects restructuring expenses to total around EUR 12 million.

TietoEnator expects that the provisions for the underperforming projects made in the first quarter are sufficient and that the further costs from these projects will be minor during the remainder of 2006.

TietoEnator expects amortization of intangible assets of around EUR 9 million and stock option expenses and costs related to the share-based incentive programme of around EUR 7 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 intensify its cost-cutting programmes.

For the full year 2006 TietoEnator expects total 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 311.2 kb (Adobe Acrobat Document)

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