TietoEVRY Oyj

Good morning and welcome to Tietoevery's second quarter earnings webcast. My name is Tommi Järvenpää, the head of Tietoevery's investor relations. This morning, we will go through our earnings development and outlook in the second quarter. With me here today are our president and CEO Kimmo Alkio and CFO Tomi Hyryläinen, who will next go through the highlights and results of the quarter. Kimmo, please go ahead.

Very well. Thank you very much, Tommy, for the introduction and a warm welcome to everybody again to a very interesting second quarter performance for Tieto Every. Second quarter performance characterized what we call as a steady performance in a mixed market. Overall, quite a healthy overall performance in light of the market dynamics. The main factors being organic growth of 1% driven by especially our software businesses, improved profitability of 11%. supported especially by the development of Tieto every tech services and very interestingly importantly strong customer wins and order intake with a book to build of 1.3 and we today confirm our earlier communication from July 1st, that the strategic review of Teato Everytech services is progressing, active sales process ongoing. We do not plan to provide any new information on the topic today. Naturally questions can be, as always, asked. From a market standpoint, I think it's fair in light of the softer geopolitical kind of economic environment and geopolitical instability. Good to confirm our perspective on the market dynamics. Softer IT services market, we also expect to continue. In the second half, I believe the peer group sees exactly the same signals. We also believe that the software market and our software businesses have the opportunity to continue to operate in a more stable manner. Customer attention in light of the softer economic environment, customer attention continues to a large degree on resilience, kind of reallocating investments into shorter ROI kind of periods. and to a degree impact the digital engineering centric investments, which were also slightly connected to the aggregate of software IT services market as a whole. So we believe that the customer perspective on resilience is very similar, has been very similar in the second quarter as it was in the first quarter. We anticipate this agenda to continue. We recognize the instability of the geopolitical environment. These are reflected upon also in our market estimates, and we confirm the high degree of importance into future technologies, very specifically AI, GenAI, cloud adoption, cloud modernization. These are top of the agenda for businesses, and these are the drivers that will continue to generate good opportunities for our industry and for Tieto Every as we think of the mid-term to long-term market dynamics. We would also like to confirm to the audience, especially to the audience that may not follow us on a monthly or quarterly basis, that we continue to be in the midst of a significant multi-year strategic transformation. For a long, long time, Tietoevery operated as an integrated IT services company. We shifted to a mode of concentrating and betting on specialized end-to-end businesses. This took place in early 2022. We are advancing in businesses becoming more independent, and our future positioning identity to be in the software and digital engineering category and practically today, as I'm sure recognised, we have three good software businesses in the company. We have care, banking and industry, and we have one business in the digital engineering category, Create, with an opportunity to continue its international path forward. The main objective, naturally, with our specialisation-based strategy, is to drive for higher expansion and value creation, aiming for each business to be in the world class category in performance terms, and with this foundation driving significant opportunities for shareholder value appreciation. Here, I would like to maybe second time mention, which I did already in the opening, that the tech services strategic review continues to progress. There is an active sales process ongoing, and we would be providing further updates latest by our Q3 report, which would be on the 24th of October. In terms of our customer dynamics and competitiveness in the second quarter, we have a very interesting and a healthy mix of customer wins, significant wins visible in the case of our banking software business, significant wins visible in tech services, and significant wins visible in our care business. Maybe if I were to highlight one, I would like to highlight the Tieto Every Care win. a real door opener in the Swedish market with Karolinska University Hospital and us being well competitive with our Life Care Open platform, enabling significant improvement in patient data and care processes, more efficient overall operations for the hospital in question. So this is in the path of our international expansion. for our care business and as mentioned significant win in Sweden. Furthermore, I would like to also confirm our commitment to our sustainability agenda and the sustainability pledge, which was announced earlier in the year. A couple of interesting developments during the second quarter. We were recognized as one of Europe's climate leaders for 2024 by Financial Times. and one of the world's most sustainable companies as identified by Time magazine. So important recognitions. And naturally, we also want to confirm our attention and commitment to diversity and inclusion. And here we are also and have been naturally participating in the respective events all across the Nordic countries. So, sustainability pledge continues high on the agenda. Then we move into the very interesting part, naturally, from a performance standpoint, summarising earlier mentioned 1% growth, reported at 3%, adjusted EBITDA at 11% compared to 10.5% a year ago, healthy cash flow from operations of 68 million and the growth in the order backlog itself by 2%. So overall, what we call steady performance in a mixed market. And to be clear, naturally, our longer-term ambition is to be a company with significantly higher growth. I believe we are all in the industry impacted by somewhat softer market dynamics. In the case of Tieto Every Create, I'd like to confirm that the new operating model was implemented as of 1st of May, enabling the businesses to drive for global scale, have access to global resources, quite a significant operational change for our our create business. In the first quarter, pardon me, in the second quarter, we did experience mixed revenue development with actually growth in Finland and international, including the United States. And our primary challenge in the second quarter has been in Sweden. In light of the volume development, capacity adjustments have been initiated. And as commented, further productivity improvements and efficiency drive is being derived from the new operating model. Naturally, we need a lot more attention on the SG&A level, given that the market dynamics are a bit challenging for the digital engineering type of business. I would like to also confirm, and as we should be expecting in digital engineering, acceleration of AI-centric projects well underway. maybe as a sample, the AI-driven network automation in telecom. We have significant history, naturally, in telecom-centric R&D and software development. And to confirm, we did announce the appointment of Cosimo de Carlo during the second quarter as the new managing director, effective as of 1st of September. and to confirm the profitability level for the second quarter, 11.4%. And with this profitability level, naturally, we have needed to be driving further efficiency programs. In the case of banking, really strong order intake as one factor. We did see the 5% growth and quite well across the portfolio of banking growth contribution by cards. financial crime prevention, credit solutions, and wealth management solutions. During the quarter, I want to expand a bit on the strong order book number of significant contracts. They have been, to a large extent, renewals. It is also expanding the collaboration with existing customers from a solution scope. and the significant order books very specifically in the core banking area Norway that we call banking as a service. And to confirm, it is a record high order backlog we currently have for banking. I'd also like to confirm that profitability level only at 9.9% level profitability has been impacted by higher technology costs and increased depreciation of capitalized R&D by approximately 2 million level. And we're glad to come back and reflect on banking development further in the Q&A. Then we go into Tieto Every Care, as earlier briefly reflected upon landmark win in Sweden with Life Care Open Platform, organic growth only 1% while returning to slight growth. Growth continues to be impacted by the significant health and social care reform by the government of Finland. And we, as highlighted here, we anticipate the impact to be somewhat lower in the second half of the year. A number of important wins that business has actually had in the past quarter, so we do see the longer-term perspective for the care business attractive. I'd like to also confirm that we are making conscious investments in sales capacity and life care localization, specifically for Norway, and this has led into a profitability level of 26%. We tend to be surfing between 28 and 30%. And that would be the norm we believe in. Activity around AI-driven software, actually one of the highest in Tieto Every. We have a number of solution deployments taking place also in the category of GenAI. These have been co-created with customers, and we anticipate these in the future to be integrated into our more standard product features. Very important work happened in the last six to nine month timeframe regarding AI and GenAI for care. Industry, second quarter consistent healthy performance. We have a portfolio of solution areas within industry. Largest proportion is the data platform, good growth in data platforms itself. And we are also highlighting a new release of case management. We call it the public 360 solution suite with embedded AI functionality, also contributing to a significant customer win in Norway. Profitability fairly healthy at 15.1% level. Then, furthermore, and very interestingly, development of theater and tech services, profitability improvement continues, and good to see a solid order intake level for the second quarter. This business does get partially impacted by the market dynamics. Anything to do with time and material, short cycle projects tend to be impacted. While I'd like to highlight good development in cloud platforms and security growing 17%, data and application services, we could say, growing only by one percentage point. We think there are much more significant opportunities in the future. Traditional infrastructure declining 5%. Quite often, it's been declining 7% to 9% level. End-user services tends to be quite volatile. Lower margin business, second quarter, negative 16%. Mentioned already, the solid order intake is an important factor, and very importantly in this business, driving efficiency, very strong core structure management, and increase in the profitability level to 7.7% level for the second quarter. At this point, I'll hand it over to Tomi.

Thank you, Kimmo, and good morning, everyone. Main highlights for the quarter are obviously that we returned to growth as we expected. We also delivered improved profitability compared to prior year. Other highlights of the quarter were our strong order intake with 1.3 book to bill and healthy operating cashflow of 68 million in a seasonally weak cashflow quarter. On one-time items, strategic review-related costs incurred year-to-date amount to 0.4% of revenues. Going forward, strategic review one-time items relate only to the ongoing tech services sales process. On the other one-time items, we increase our estimate for the full year from 1% to approximately 1.5% of revenues. This increase is driven by the additional efficiency programs launched in Q2 to address the current market environment. If we include the estimated capital gain from the sale of Bypass AS, which was signed on June 27th, the estimated full-year OTIs is around 1.3%. Q2 taxes have been booked using the estimated effective tax rate for the full year of 23.1%. As mentioned, we delivered healthy operating cash flow of 68 million. Our cash flow was supported by stable networking capital as the seasonal working capital headwinds were offset by a decrease in accounts receivable balance. To remind everyone, the negative impact from accounts receivable due to the quarter ending on a weekend is still with us in Q2, but not anymore in Q3 closing, so it will give a nice tailwind into Q3 cash flows. Despite the healthy cash flows in Q2, our interest-bearing net debt increased slightly quarter over quarter due to the dividend of 87 million paid in April. As a result, our net debt debit DA remained at 2.2. On personnel side, rolling 12-month attrition continued to decrease, being 9% at the end of Q2. However, quarterly attritions have remained stable for the past two quarters. Our net personnel was also quite stable, with a small decrease compared to Q1. During Q2, as mentioned, we initiated efficiency measures across the company to address the market environment. The more significant measures were initiated in tech services and in CREATE. In CREATE, the 400 roles being impacted include both capacity reductions due to market and non-billable SG&A roles from the implementation of the renewed operating model. We keep our estimate of the group level salary inflation for the year at 4.5% compared to 5% in 2023. Next, I'll give you an update on financial impact of the ransomware attack. There are three categories of costs, out of which two are substantially complete. Those two are the compensation for services not rendered, including SLA credits. And the second component is the cost to restore the services. We do not expect further cost in these categories, and all costs are fully booked as of Q2. Third category of potential costs are claims for damages from our customers. We have received certain claims for damages which are being currently evaluated. Our assessment of the maximum aggregate contractual limit of liability for direct damages is below 10 million euros. We have cybersecurity insurance in place that includes the scope of these cost elements. Good to note that we expect the resolution of customer claims and subsequent conclusion with the insurance provider to take several quarters. Next, I'll summarize the performance drivers for next quarter. On growth drivers, we expect continued soft economic environment to impact demand in create and tech services. We expect continued good momentum in banking and industry. Care growth is expected to accelerate while the demand continues to be impacted by the healthcare reform in Finland. On profit drivers, the initiated efficiency measures are expected to begin contributing already to Q3 profits. Q3 is also seasonally stronger due to the vacation period. On other drivers, FX impact is expected to be positive of 9 million on revenue, and working day impact will be positive due to 1.5 more working days. However, the actual impact from the working days will be reduced due to the vacation period. Then to Q3, profitability outlook for business. Tieto Every Create and Care are expected to be at or below of prior year level. Industry is expected to be at prior year level and banking and tech services are expected to be at or above prior year profit levels. Back to you, Kimmo.