TietoEVRY Oyj

And welcome to Tieto Average fourth quarter and full year 2024 earnings webcast. My name is Tommi Järvenpää, the head of Tieto Average Investor Relations. This morning, we will go through our earnings development, key highlights, and outlook. With me here today are our CEO, Kimmo Alkio, and CFO, Tommi Hyryläinen, who will next go through the highlights and results of the quarter. Kimmo, please go ahead.

Thank you, Tommy, and a warm welcome also on my behalf. Warm welcome to our fourth quarter and full year 24 interim report session. I'd like to begin by the overarching view of end of the year. Our end of the year is characterized by the challenging market environment and overall challenging era. As visible in our Q4 revenue development of negative 7%, with the weaker demand actually impacting all of our businesses. Furthermore, and very importantly, we have maintained high attention on efficiency and business resilience. This has enabled us to deliver healthy profitability of 12.8% for the fourth quarter and strong cash flow, 128 million for Q4 and 326 million for the full year. Furthermore, these are the foundations of the board's proposal to increase the dividend to 1.50 per share. Relating to Tieto Everytech Services strategic review, we have recently made tangible progress and are now in the final stages of the sales process with the non-industrial buyer. We expect the strategic review to be concluded in March. Next, I'd like to move into giving perspectives on our view of the market development, which in the current environment continues to be, I think, very dynamically interpreted by any company in the tech sector. Our main highlights would be that we have clearly seen and as expected that the market softness continues, has continued into 2025, and we do anticipate gradual recovery for the second half of the year, which we'll be talking later in the presentation. In terms of the market dynamics, I would like to further elaborate that the lower demand environment, as it did impact also the software businesses in the fourth quarter, it tends to be quite seldom that we would see an environment where the macroeconomic implications are that broad that all businesses are impacted. Customer focus, given the type of efficiency drive our clients have until their visibility in volume development, they continue to drive efficiency, highly conscious cost-saving programs, naturally emphasizing from a client standpoint short-term results, versus long-term transformation. And naturally, we are supporting our clients in meeting their objectives, and this naturally is correlated to our important initiatives on efficiency and resilience as well, which we will maintain high on the agenda. We continue to see positive development in the AI adoption in the marketplace. This is visible in demand from the data services side, specifically in our Create business, and naturally important what I call here the AI-embedded software, naturally providing solid opportunities for our three software businesses, banking, the industry, and care. Furthermore, I'd like to highlight, given the type of a total economic and geopolitical environment, we absolutely continue very high attention on cybersecurity, overall resilience with clients, and considerations for regulatory compliance, which is a very important domain or factor where we support our customers in industries which are highly dependent on aforementioned compliance initiatives. Regarding the full year, just as a highlight, organic growth of minus 2%, adjusted EBITDA 345 million, 12.3%, healthy cash flow, operating cash flow of 326 million, our order backlog up by two percentage points. This is just to highlight the full year basis. Next, I'd like to briefly again highlight our important initiatives on sustainability and areas where we continue to work very actively for the most significant impact, highly consistent progress and priorities in terms both of climate action and the circular economy. In terms of diversity, we are pleased to see the increase of female hires up to 34% in the year. Diversity fits our corporate culture extremely well, given the Nordic heritage around equality as a whole, so positive developments. Furthermore, in terms of the responsible AI, getting very close to 100% level on the responsible AI training, which is highly valued by all employees in the company. and sustainability will keep these initiatives naturally high on the agenda. During the fourth quarter, importantly, winning significant contracts in all of our businesses, all enabled by the core technologies, data cloud and AI. Maybe just a brief summary, continuous strength in our banking business, create gaining further ground in the U.S. New customers, here's just a sample. That's a very important initiative for our company, and we'll be talking more about the create initiatives in the U.S. more or less continuously. Furthermore, managed service and transformation, significant wins. Here's a sample in the case of Norrbotten, Sweden, but the number of important ones in the fourth quarter. I would then summarize briefly on the other software businesses covering both the care and industry. These businesses continue to be competitive, although naturally there's some degree of savings that customers are driving in terms of competitiveness, especially in our care sector has been very compelling when we think of the new wins in the marketplace. Then before we go into the business-by-business views, I want to highlight a couple of factors in the whole adoption AI programs in the company. Very high priority. I confirm we have had for quite a long time, a couple of years already, each business driving value propositions and initiatives, both in terms of new products and new services, that they become visible to clients. and equally importantly driving internal productivity. I give a few samples. Tieto Every Create has launched in the US already a framework for AI ethics, safety and compliance. We think it's a very healthy angle that will work well in the US marketplace and fully supporting our growth initiatives in the US market. Regarding software businesses, care banking and overall the industry, here highlighting the public 360, more and more we will be seeing AI embedded core software releases very consistently moving forward, nice samples, more benefits moving on a fast pace in client engagements in software, tech services driving AI-centric innovation frameworks with clients, and very importantly, which we are used to driving efficiency through AI-enabled automation as well, just to name a few samples, and we'll continue to be AI domain very active in our agenda. Then, of a lot of interest, let's go into the real performance side. At the group level, the numbers have been visible already, so I shall not be repeating the minus 7%, 12.3%. 8% and so on already highlighted. Let me move over to the businesses. In terms of Tieto Every Create, impacted clearly by the softer market. We are seeing in the type of digital engineering market worldwide impacts from the macroeconomy. Overall, the performance in the fourth quarter was slightly softer than we have expected. We had weak points in performance in Sweden and Norway and quite rapid budgetary reductions in the telecom sector, some of the factors in the background. Furthermore, I want to highlight that the profitability has been impacted by price pressure in the marketplace, has to do with the overall demand demand outlook and demand view in the industry as a whole. And naturally, whenever there might be fluctuations in demand, capacity management will continue to be very active. I would like to confirm again, like we did a quarter ago, we continue to see indications of U.S. market recovery and our momentum overall continues to become encouraging. including recent wins and also improvements in the business pipeline. AI services, we are very active. I would say they are not yet extremely high in terms of the revenue contribution, activity level high. The projects tend to start small, but the number of projects that are being initiated is growing at a very rapid pace. So that's the overview on CREAT, so degree of dependency on the market recovery. In case of Tieto Evri Banking, performance very close to our expectations. We do have a bit high revenue comparables while stable profitability. In terms of comparables, actually four percentage point impact on that side. And very importantly, as we tend to see in the total portfolio of the banking business, we see number of the software businesses continue to grow in the fourth quarter, the combination of credit cards and financial crime prevention. And also very positively, we again see that we have a record high order backlog, which is being supported. I want to highlight also that by the longer term contracts, which gives the kind of a view for the longer term. stable profitability at 14.6% level, and overall, as mentioned, close to what we had also expected for the fourth quarter. Then we move over to our care business, continued strong profitability, and we'd like to highlight really significant and broad wins in the Finnish healthcare market, Overall, the performance was very close to our own expectations while highlighting also our predicted public sector budgetary constraints that impact the care business specifically in the Finnish and Swedish markets. Furthermore, we want to highlight that given the history of the care business, growth is being impacted by decline of legacy software products quite significantly. That's a factor in terms of how the full software suite modernization is happening, and it is a positive direction, but short-term creating a bit of a dent. We currently have, in the case of the Finnish well-being counties, 16 out of 21. We have been able to add a number based on the bids in the recent quarters. And we confirm, as previously, very importantly, continued investments into go-to-market activities. We'll be talking of those activities in the quarters to come more. And then the life care localization for Norway. We are also, from a Gen-AI standpoint, embedding into standard product release the smart nodes functionality, and the customer deployments are starting. And just to confirm the foundation for the healthy profitability level is the scalable Life Care software platform, as likely everybody well recalls as well. In the case of Tieto Every industry, here we have performance below our expectations. We have a degree of one-time headwinds, and pockets of market softness, very specifically budgetary reductions in the paper, pulp and fibre industry. I would say anybody following the paper, pulp and fibre industry would see that from the client standpoint that that has also impacted our short term. The public 360 business, the document management for public sector being impacted by public sector budgetary reductions. And furthermore, we actually have a one-time settlement Those are just factors behind this negative 5% level, naturally nowhere close to our longer-term expectations. And profitability also lower than our standards would be in expectations. Here we have, in addition to the revenue drivers, temporary overcapacity in a couple of the businesses, and with that in mind, and naturally efficiency measures are ongoing. Then we go into our tech services. Here we see positively resilient profitability in a soft market, and importantly, the type of business mix shift towards scalable services, very specifically cloud platforms and security growing up to 36% level. I would like to furthermore go through briefly the backgrounders to the organic growth at the minus 11%, ransomware impact, couple of percentage points, hardware, software, resale volatility. It tends to be a volatile market, about three percentage points. So that gives a bit of a flavor that the underlying at more or less at the levels that we tend to see. And I would like to highlight that profitability continues to be driven by high degree of attention on efficiency-oriented activities, which is required in the managed services type of business continuously. And there we have a fairly good track record. So strong profitability drive naturally to continue. With this in mind, I hand over to Tomi.

Thank you, Kimmo, and good morning. Our Q4 highlights are clearly strong cash flow and increasing dividend to 1.5 euros per share. Important to note that our Q4 growth and profit were impacted by one-time ransomware event-related settlements by almost negative one percentage point. If adjusted with the negative impact, our Q4 growth would be approximately minus 5.9% and profit approximately 13.6%. Overall, the impact from ransomware event related settlements was in line with our expectations with 6.2 million booked in Q4 and 7.6 million for the full year compared to our estimated 10 million maximum contractual limit of liability as communicated earlier. As a result of the soft market throughout 24, we have been actively managing our cost base. Our Q4 one-time items came in as we expected and ended up being 2.1% for the full year. We estimate 25 one-time items to be between 1 and 1.5% and the strategic review related one-time items to include only cash sorry, only cost to complete the tech services strategic review. As mentioned, we had a strong operative cash flow of 128 million. Our networking capital improved positively by 44 million, driven primarily by seasonal changes in vacation accrual and accounts payable. Our free cash flow was also strong at 108 million, supported by 13 million from bypass disposal during Q4. Our cash generation foundation is healthy. Our interest bearing liabilities decreased and were 872 million at the end of Q4. However, net debt EBITDA remained over two versus our target range between one and two. During Q4, we signed a 300 million two-year term loan to refinance our bond, which is maturing in July of this year. LTM attrition continued to decline, being 8.3% at year end, comparing to 8.8 at the end of Q3. These levels are well below normal markets, which are reflected by the current market conditions. In order to protect the margins and ensure continuous competitiveness of our businesses, we have continued with capacity reductions in Q4. Creators reduced approximately 200 FTEs, banking 100, tech services 50, and slightly less with industry and care. For 24, the group level salary inflation ended up 4.5%, and we expect similar levels into 25 between 4 and 5%. Next, I'll summarize the Q1 performance drivers. Overall, we expect the Q1 to be a soft quarter for us. Our Q1 revenue growth will be negative, We'll talk about later in the presentation of the dynamics of the full year 25 growth. Q1 growth drivers remain much of the same as in Q4, including the magnitude of the impacts, however, measured against slightly easier comparables. On profit drivers, soft market conditions increased, pressure on the margins while our efficiency measures, which we have executed during 24, support Q1 profitability. Increased mainframe software license costs will put pressure on banking and tech services margins in Q1. And as normal, tech services annual price discounts kick in in January. In Q1, we have 0.7 less working days, which impacts the margin negatively by half a percentage point in Q1. On other drivers, we expect FX impact to revenue being negative 9 million, and the working day impact to growth being negative 0.7 percentage points. Based on the prior page, Q1 drivers, tech services is expected to be at prior year profit levels and other businesses to be below prior year. Back to you, Kimmo.

Thank you, Tommy. Let us go into then the guidance, and I'm sure a lot of interest on the full year revenue dynamics will go into next. Just to confirm our guidance, organic growth of minus 3 to plus 1%. And it's important to recognize that the guidance range reflects the type of macroeconomic uncertainty within which we live at this point in time, adjusted EBITDA range 12.0 to 13.0. We have entered the year with weak market conditions, we are confirming, and we anticipate low to modest market recovery in the second half of the year. and naturally dependent on the magnitude of market recovery and our own execution, those shall be drivers into which part of the range we would be then gearing towards. And we confirm, which I mentioned a few times, given the low growth era or no growth era short term, high emphasis continues on resilience and cost efficiency. We are highlighting furthermore a component on a significant margin diluting mainframe services contract, which will be ending in the third quarter, having negative 0.4 percentage point impact on full-year growth as one element. Then, importantly, and likely of a lot of interest, how are we looking into the growth dynamics of the year? Understandably, our attention is extremely high in ensuring that we see a proper growth bounce back towards the latter part of the year. I would like to highlight quite granularly here or go through per business what are the types of dynamics that are supporting the H2 growth and to confirm what we have here, we have the type of a legend on the more negative, how the era contributes towards the annual growth objective of the business, whether negatively, neutrally, or positively. In the case of CREATE, you, as we have, as I had mentioned earlier, combination of indications of market recovery, new wins, and increased order intake. Very important for us, and will be a significant driver for the create business. Regarding the operations in Europe, we are seeing a 12% increase in the pipeline, driven specifically by the financial services and energy sectors in the Nordic countries. When we talk about the consulting-centric business model, naturally the second half level of growth shall be dependent on the magnitude of bounce back on the economy. Banking case, we do have, as recognized, a record high order backlog. We have strong current pipeline that are supporting our ambitions and objectives for the second half. And just to highlight, which was earlier mentioned, the margin dilutive mainframe services contract that impacts the banking business by two percentage points. In the case of our care business, the wellbeing county wins in Finland and market expansion in Sweden, including the earlier announced Karolinska win and the related deployment, we believe will be absolutely supporting our growth path in the second half. While we do have, and fair to highlight that the legacy product decline that I had mentioned earlier in relation to fourth quarter as well. Then in the care business, there is natural dependency of what happens with the budgets in our largest markets in the government sector. Industry continues to see solid growth in data platforms. We are expecting the pulp and paper industry to actually release the investments and some early signals towards that direction are already on a lower level and to some degree visible. While in the industry, the public 360 business depends on the public sector funding. Tech services, we do believe in the continued growth in cloud platforms and the security as well as in the data and application side. we anticipate the development of traditional infrastructure to be similar as previously, and tech services, as there's also the time and material type of work, so some dependency on market conditions. So here a bit of a brief summary per business, the dynamics, and this was a bit of a similar circumstance as we had a few years ago with lower growth outlook for the first half of the year, so very significant attention going into this, the second half bounce back that we do anticipate that will end up enabling actually a good 2025 and it will require good execution as mentioned for the second half in all of our businesses. Then a bit towards the closing and a kind of a reflection also on the way forward. It is a big agenda. It is an exciting agenda, what we call the NAI-enabled software and digital world. Our businesses, we believe, are well positioned, both in terms of driving future growth and also a bit waiting that there's a contribution at some point for the market bounce back. But very importantly, that it is also in our own hands, make sure that the growth initiatives are in place. We continue very firm transformation, it's a big one, historically from the integrated IT services company, highly specialized software and digital engineering future. As mentioned, businesses, the combination of resilience, working on the path of future growth, those we will be talking about in the upcoming months and quarters a lot more. Acceleration of full AI capabilities, benefit to clients and benefits on efficiency. And naturally, then, we will be coming back in due time regarding the conclusions of Tieto Everytech Services strategic review. So, this would summarize the highlights both from Tomi and myself in terms of fourth quarter, the full year, and way forward. Thank you.

Thank you, Kimmo and Tomi.

We are now ready for the questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Christopher Wang Bijan from DNB Bank ASA.

Please go ahead.

Christopher Wang Bijan, DNB Bank, ASA. Your line is now unmuted. Please go ahead.

Yes, good morning. Sorry. A couple of questions. So on the return to potential growth in the upper end of the range for 25, could you help us understand what would be kind of the biggest deltas in the segments? Is it create coming from that minus 5% for 24 to a higher level? and how you plan to achieve that? That's kind of the first question.

So I think here, naturally, if we think about the fourth quarter, that it's really exceptional that we had all businesses that challenged. So I would offer two considerations that we naturally do fully expect that all businesses will be returning to growth. And indeed, some of the larger deltas would be on the That's one component and relatively large one indeed, like you were referring to on the Create side. But I want to confirm it's been a really soft market and quite uniquely in many software businesses, the budgetary cuts by clients that have uniquely impacted the recent quarter.

Right, thanks. And then on the banking business, you noted that there was a customer consolidation, which grew like a four percentage point headwind. Is that kind of modeled in for that guidance for the full year that we'll see like a 1% hit to the top line for the full year from that kind of affecting you for the next three quarters, something like that?

Yeah, absolutely. It's baked into the forecast. It will impact the H1 of 25 and then basically no impact into H2. Slight in Q3, but basically none.

Thank you. And then finally for me, on that Goodwill impairment related tech services, could you maybe help us understand what kind of triggered that and what's changed there versus kind of the last impairment test a year ago?

Yeah, absolutely. Good question. So we're now within our normal annual impairment testing cycle, and then we look at all the businesses, of course. Now, the current market valuations for our tech services, so I name one of the drivers. So the SOTP of the analysts have come down 200 million during the year. This is one driver for us to reassess the value in use, which we have, of course, used as a valuation method for the impairment testing. So we are not in any other technical framework than the normal. But market softness basically and the overall valuation state of the business.

Thanks a lot. The next question comes from Felix Henriksen from Nordea.

Please go ahead.

Hi, thanks for taking my questions. I have three. Starting off with the industry where you missed your own margin guidance for Q4. Could you elaborate what surprised you negatively during the quarter and provide some further color on, for example, this customer settlement that seems to have an impact there?

Okay, so very good point there. So first of all, and I'd like to be very clear, so naturally the revenue contribution, to what degree these budgetary constraints kicked in, that is absolutely one factor. In a couple of the businesses we have had, here referred to as a temporary overcapacity, this has to do a bit of detail of the degree of professional services for historical reasons that may exist in a couple of the businesses. and that over capacity, that's a very direct kind of contributor to the low profit level and there very importantly as highlighted that the efficiency measures are ongoing that these levels are actually indeed, they are not acceptable. Those would be the main ones. There's nothing really unusual in the one time One time, there's something that has been due to a longer duration of a client engagement. Periodically, these type of things can happen, so nothing very, very unusual. But of course, one prefers that they would not happen, but sometimes the type of agreeing on prior agreements prior kind of whatever negotiations, dialogues, what may have been pending, agreeing on a way forward. So that's the case.

Got it. That's helpful. Then on the leverage, the net debt hasn't come down within your target range since the MentorMate acquisition that you made a while ago. Looking back at it, can you sort of describe on if something has worked against your own expectations in terms of reducing leverage and generating cash flow and sort of discuss a bit on the outlook for the leverage when we head into 2025.

Yes, very good question and as I already mentioned we have actually decreased our leverage per se. Now the EBITDA hasn't developed positively. EBITDA has declined now over these past quarters as our adjusted profits as well as we have now clearly reported. So we do need to improve the underlying profitability also to impact this net debt epi DA metric, which we primarily use. But overall, so the leverage level has gone down. Now, when we look into the sort of 25, I mentioned that we have a good foundation to deliver good cash flows. Our free cash flow for 24 was 198, close to 200 million. So I do expect us to be in a pretty solid position to continue to deliver this level of good cash flows.

Got it. And then finally, is there any risk for further ransomware related settlements that would impact growth and margin in 2025? And how have you sort of factored this into your guidance expectations?

Yeah, so I reflected this before. So we did an initial estimate of the maximum liability for these settlements based on the contracts that we have and size it to 10 million. We did book 7.6 for the full year. We did also sort of reserve some which are not settled, so expecting settlements. So those have been already booked. But of course, some of these are estimates, so I cannot say that there is none. But if something, those should be and would be very limited.

Got it. Thank you. That's very helpful.

The next question comes from Mark Hyatt from Morgan Stanley. Please go ahead.

Thanks for having me on. I've got a couple, please.

So just firstly on the guidance, how much of that is being driven by market factors versus, you know, Tieto-specific factors? I guess another way to ask the question is, what are your underlying expectations for market-level growth in 2025, and how does that compare with the guidance range that you've set? And then secondly, just on Tieto Every Banking, could you give us a bit of color on the outlook for that business? Has your view on that market changed at all since you took the decision to keep the asset as part of the broader group? Part of the reason why I ask that question is we've seen IT services peers in the Nordics pretty active from an M&A perspective in the banking space recently. So how do you view regional competitive dynamics as well? Thanks very much.

Okay, maybe we begin on the banking side. So the absolutely consistent intent and the strategy to develop the banking business as an international fintech software business, absolutely nothing has changed. So that's the most important part. Yes, there is an ongoing core banking renewal, naturally the full modernization in place. Core banking is largely the Norwegian business. These are some of the backgrounders, but also to the healthy backlog development, the contract renewals and the likes. So the overarching development that what is happening in the business, I think we are firmly heading exactly in the right direction. Yes, the short term overall development, of course, we'd like to see the growth being at the higher level. it's a bit too early for us to start to open up the expansion avenues. I shall mention that the software businesses are working actively on avenues for market expansion, but we would be coming back to these factors at the later stage. I think that would be the main highlight to provide now. On the guidance, it's a very interesting question that you have, So naturally it is a bit of a combination, but I would begin from a notion that it's really exceptional what we saw in the fourth quarter entering 25, that whether one thinks about the type of a global digital engineering type of business, that understandably macro impacts that quite rapidly. Managed services side, then you have the parts that is time and material that is being impacted. And we have a bit of a short-term unique headwind based on the sample of the public sector exposure in care business and the industry business that tends to be impacting ourselves. So that's kind of externalities. Now, at the same time, it's super important that all our software products are being modernized, are being classified, getting prepared for the common code-based deployments and enabling also the considerations for market expansion. If I gave any more detailed assessment on what's kind of market-centric, what's us, and actually it's a combination, I would say the most important is our very high determination to make sure that we bounce back on growth second half. That's our current thinking and the plan.

If I could maybe just ask a quick follow-up on that, Kimmo. If you think about the bottom end of your guidance range, how much of a recovery are you baking in that lower end? What's the worst-case scenario look like in that scenario?

Yeah, it may be good if I take this sort of recapping a bit of the logic of the minus 3 plus 1 scenario. So minus three is basically assuming that the market will stay at these levels, which we're currently expecting. Then when we think about a more, let's say, heavy market recovery already beginning at the middle of the year, towards the end of the year, we will be hitting the higher ends of our ranges. And then we sort of logically ourselves think that if we see market recovery during H2, we would likely be somewhere in the middle of the guidance range. That's sort of the high level, maybe ballparks that you should be also looking at.

That's about it. Thanks very much.

The next question comes from Fredrik Lithell from Handelsbanken. Please go ahead.

Good morning, gentlemen. Thank you for taking my questions as well. Very good answers on the previous questions. It clarifies a lot. Thank you. Could you elaborate a little bit more on your FTE base? That's the first one and how you see the immediate situation and how much you think you will need to sort of prune that, if we call it that. So a little bit more discussion around your FTE capacity that you have, will need to have and how you plan that. The second question is, you talk about salary increases around four to 5% in 2025. Is that also, is that the same to see how your salary costs will increase or do you think you sort of work with attrition and all that stuff and get juniors in and have a lower growth in the cost base? And how will you mitigate that with pricing if you could sort of dissect the pricing elements of your business route so we can get a feeling for how you see pricing in 2025? Thank you.

Okay, maybe we begin by the kind of the FT view. So we are absolutely expecting ourselves to be very actively managing not just the FT base, but also the type of the full pyramid per business. So your considerations are a little bit hand in hand, very fair points topics you had. So let me just give a couple of concrete examples, because they're naturally how to uh adjust capacity it in and the business cycles it should be and it is quite different this mean very different business logics now what do i mean so first of all in the type of create which is the consulting base we are eight percent lower head count at this point in time and given the type of demand fluctuation it is absolutely the right thing to do now in addition it's very important that when one considered capacity adjustment in the business where absolutely we believe we will be returning to a growth agenda, that the combination of competencies and capabilities, what might be the more historical capabilities, let's just take an example like a bit traditional application management services in a traditional industry, the likelihood of that growing is super low, while in the data and AI side, we want to build capacity. So it's both the competencies and it is the pyramid. Then in the case of software businesses, so again, I'll give a couple of somewhat concrete what I can share publicly, but you get a feeling on granularity. So when we look at the software business, sample being the care business that we've done for 25 to 30 years, we have highly modern, modern, sassified, cloudified services. That's the foundation of profitability. When we talk about the decline in legacy software products, by nature you actually make significant adjustments in the R&D capacity for legacy products. So you notice I do not wish to give a simplified overarching answer because it is done very carefully, very mindfully per business. These are the foundations of being resilient even in an environment like we have currently. Then we could talk separately on managed services, the development of automation that we've been very active on for the last... many many years and that's the foundation for the profitability development favorably also in tech services.

Yeah good answers and if we could continue a little bit I appreciate that there is a different situation for all the various units inside but if you would sort of try to sum it up are you still sort of actively pursuing that you will need for example to lower the number of FDs and the create business and what have you on you know the legacy product side that R&D is coming back down or will you shift people in between and give them training and push them into other situations?

Thank you, good point. So first of all that in the case of like create business so we absolutely believe that this business will start to grow so it's a matter of time that then we start to grow and we need to be really smart on the timing and really betting in where the future growth and scale will come from so that probability of that growing once we start to actually get on the growth path that will happen and that's the right thing to do Then when we think about the software businesses, that's depending on how fast we start to accelerate the top line. But there will be optimization. We see benefits of the gen AI-centric development tools that I've spoken about earlier in some of the software businesses, up to 25% productivity improvement. So I do not wish to give an FT forecast for the company at this point in time, but some will go up and some will drive efficiency. If we improve efficiency on R&D, we might be investing more in the go-to market. So the main thing is that the growth areas where we grow, we expect to be scalable and deliver continuously better profitability.

Fair point. The salaries and the pricing?

Yeah, that's an interesting question. So I said 4% to 5% for 2025. It's difficult, even though the market is a bit slow and one tends to think that the salary inflation becomes much lower, it's difficult to see that it would go below 4%. So I think this 4% to 5% is likely a good proxy. In terms of how will that then be translated into the P&L, so obviously, like any company, we as well... try to avoid this being one-to-one impact on our salary costs. So through pyramid and other optimization measures, we try to, of course, optimize our employee costs for the full year. Now on the pricing, that's a bit difficult one. In the service type of businesses where there's overcapacity, it's now really difficult to push through any of the price increases. So there the inventory pressure is really tough on the margins that it's fair to recognize. I wouldn't now then go and call out that somewhere else is much easier. This is a bit of a difficult situation for any company to push through high price increases in this type of a market.

Okay, thank you. i just squeeze in a final question and then i will get back to into the line you have sort of taken out a lot of of cash flow from the working capital uh correct me if i'm wrong there but i think you have done that and that has supported your your sort of your cash flow generation how how do you see networking capital going forward do you have still work to do in dsos and other metrics or or is it really a tight type situation then Thank you.

Good question. And of course, rightly so, you called out. Yes, we have been now taking or improving on the working capital. We do have some work to do there, continue working and getting the metrics in a better form. But then again, there's always the headwinds and pressure in that area as well. I think where we currently stand is actually quite a good proxy going forward. So I'm not assuming any big changes either way from these levels. That's why I refer to good cash flow generation ability.

Thank you very much.

The next question comes from Jocko Tervenen from SEB. Please go ahead.

Good morning, gentlemen. A couple of questions from my side, starting with the goodwill that is being left to the tech services segment, 230 million euros. Could you elaborate a bit and shed some light on the other fixed assets in this segment? Have you opened up the kind of segment space?

So these will be then, once we publish our financial statements, all of these will be, of course, presented there. So for now, those are not out.

Okay, but I can find them from previous year. Statements.

Yes, yes.

Okay, we'll check that one then. Then continuing a bit on the FTE and headcount topic, and especially create segment where your headcount is down 8% year over year. uh how does this correlate with the kind of current underlying volume development that you are seeing and and do you see room for improving utilization in the segment uh how much higher volumes you can operate with the current staff once the market starts to pick up thank you for that as well so good point so so very importantly that there is this so we see actually a way forward that

this business will scale. Now, why do we believe this? So, first of all, the demand in the marketplace, that tends to follow the economic cycles. That so far has been a fact. And we are seeing now improvements in the pipeline and the likes. Now, that was not yet the answer. So, really important that we launched in May of last year this global operating model for CREATE that it has a full global delivery network and then that is being accessible and utilized by every gold market that CREATE has. Previously, the delivery resources were to a very large extent based on local country resources. It's a humongous change that we are going through. This will drive efficiency and productivity. But then, of course, the fact that we need to make sure we succeed in winning the market share and bringing the contracts in. And as mentioned that in the US, we do believe that we will be seeing the fruits of the MentorMate acquisition. We had combined three different entry points to the US based on the prior ways of working into highly focused US market expansion. one organization and the like. So we will see, I think, these type of developments. And when in due time, as typical in the type of create business, in due time, we would then consider starting to add headcount. But that would be in due time.

Okay, that's very helpful and clear. That's all from my side.

The next question comes from Sami Sakamis from Danske Bank. Please go ahead.

Hi, I have three questions. We'll take this one by one. Firstly, continuing on CREATE, could you comment on the development of your capacity utilization rate during 24 and do you have the right amount of resources at the moment or should we assume further downscaling during the year?

So overall, in the case of Create, there has been a little bit of overcapacity in the end of year. And to be as always very frank, in this economic era, the price pressure is clear. So there's a bit of a market harshness that many players are seeing in the Create business. Now, Depending, we usually do act quite rapidly in case there would be volatility in the business, volatility downwards, we would act preferably predictively. We have become more predictive all the time and not just fixing afterwards. Similarly, when we start to see demand, we make sure that we have the resources available. Currently, I think we can do more volume based on current capacity than we are currently doing. The other point I do want to highlight that as a result of this global operating model, naturally, there's a significant review of any and all unbillable resources that is being conducted in CREATE. So all the factors are making sure that we do drive a good business model even if there's volatility on the top line. And to confirm, super important that we return back to growth. Of course, we need to demonstrate that exactly when that happens.

Okay, then moving on to industry. This is already talked, but I think I would like to get a recap on what actually happened in that Q4, because you missed your own expectations with the margins.

So just to be clear, so why we were below, let me first go through the revenue side, further reductions on the customers in paper, pulp and fiber, public sector cuts impacting the public 360 business, those are very tangible. And in a couple of the businesses here that have had exposure, a bit too much exposure on professional services as a software business, overcapacity, And those are the factors for the lower profitability, which is being, as I had mentioned, what we call the efficiency measures ongoing, these type of corrective actions underway. Those are the prime factors.

Okay, thanks. And then finally, regarding the ransomware attack, you have now disclosed the amount of costs you have incurred during 24. Just curious... Have you gotten any compensation from your insurance cover or do you expect this to happen going forward?

Yes, good question. So the way the process typically works is that you settle everything with all customers and then you end up in a negotiation with the insurance provider. you don't do it in between. So once we have closed everything, that's when we are only able to conclude the case with the insurance provider. So we have not received any compensation at this point in time. Okay, but I guess you expect... Absolutely, we expect, and this will be likely towards the mid-25 when we know know what amounts are we talking about. We have good insurance covers and definitely expect to get something back.

Okay, thank you. No further questions. Please state your name and company.

Please go ahead.

Hi, good morning, guys. Harry from Rebel Atlantic. Just a question on the tech services division. Could you give us a steer on the growth rates within your own IaaS and cloud business, what you used to call Connect and the consulting business Transform? And then just to follow up, just curious about the capital intensity of Connect, kind of what percentage of sales do you estimate that CapEx would be just trying to understand potential acquirers of this business and kind of the capital intensity dynamics there? That'd be really helpful. Thank you.

Okay, so maybe we'll take them indeed one by one. And I would like to comment, I hope you accept that it is not comparable to connect and transform. But let's talk about the business mix, the way it plays out. I think we can clarify your questions. Absolutely. So first of all, that when we look at the whole cloud, so when we talk about the importance of business mix evolution to become more scalable, it's really important that we advance in the combination of scalable cloud platforms and security, and then the data and application side. Because these are the areas where we believe that there is actually healthy scalability. And to be fair, we think have partially already proven that. Naturally, then the traditional infrastructure side, which is the so-called legacy side, that's the area that will continue to decline. And then we have the fourth basket, which is the end-user services, the hardware, software resale, that tends to be for selective customers based on larger frame agreements, where customers have seen it being important that they get more or less the full set of outsourcing services from the company. So if we think about the way forward, the important development we believe shall continue to be that the cloud platforms and security continues to grow, and based on the highly modern architecture, the shared environments in private cloud we have, and then the public cloud services, that will be a good way for tech services moving forward. Similarly, the data and application side, including the core ERP systems, including core application modernization and then the data side. And just to confirm, what the core of tech service is to predominantly serve large enterprises, large public sector players, transforming the full IT environment and architecture, infrastructure, applications, and the data layer per larger client in a highly transformative program. So those are the main drivers. That's why we prefer highly and strongly not to try to correlate it to any historical structures. CapEx intensity remains natural.

We have not actually disclosed and we will not disclose tech services separately. For the full group, our CapEx is 3% on revenue.

Okay, that makes sense. I was going to follow up saying, would there be an option to sell CapEx those businesses separately, but I think that that answer kind of confirms that no, it's not the case.

Yeah. Cool. Thank you.

The next question comes from Christopher Wangbijian from DNB Bank ASA. Please go ahead.

Thanks for squeezing in my follow-up. So just noted that there were some headwinds in tech services from what we call like resell of software and hardware. And that's pretty much in line with what some of your peers have reported. But they kind of also highlighted that's likely to be a challenging market in Q1. So just trying to understand how we should think about the growth in tech services in Q1. Do you expect that headwind to continue into Q1?

We do see it's soft. We don't specifically now call that out. But the indications are that that will continue.

Indeed. And just to confirm, indeed, the hardware software resale, I think we have mentioned earlier, it is volatile. It is very low margin. So that's how it is.

Thanks.

As it seems there are no further questions at this point, I would like to thank everyone and hand over back to Kimmo for final remarks.

Thank you everybody for joining today. As recognized, big and exciting agenda on the table, lots of opportunities in the world through new technologies. That might take a bit of time given the macroeconomic environment we are in. Very firmly we are proceeding towards our strategic future, software and digital engineering. And understandably, we will be coming back on the topic of tech services strategic review as further progress will be made. So thank you very much for joining today.