TietoEVRY Oyj

Good morning and welcome to Tieto Avery's third quarter earnings webcast. My name is Tommi Järvenpää. I'm the head of Tieto Avery's investor relations. This morning, we will be discussing our Q3 results, as well as progress with our actions to improve performance. The teleconference line is now open, and as always, we will be hosting Q&A after the presentation. With me here today are our CEO, Endre Rangnäs, and CFO, Tomi Hyröläinen. With this, I would like to hand over to Endre. Please go ahead.

Thank you, Tommy, and welcome to the Tea to Every Q3 2025 quarterly presentation. It's been a very active and I would also say a productive quarter marked by the execution of our cost efficiency program. Over the past few weeks, we have also held a large number of meetings with investors and clients to gather valuable data points and insights to preparation for our Capital Markets Day on November 25. And my message is clear. We don't need a new strategy. We just need an execution of the strategy that we already have. We have entered into a new era now following a major milestone in Q3, namely the successful completion of the tech services divestment. Our business now comprises of three focused software units and a consulting arm, and I would say each well positioned in their respective domains. We have a much more focused E2Every, We are excited to move forward. And then we look at now the current revenue split. Approximately 44% is coming from the create business, digital consulting. Banking represents 30%. Care, 12%. And then industry, approximately 14%. So in less than five weeks from now, we will unveil the next phase of plans for T2 Every at the upcoming Capital Markets Day. While the market environment was, I would say, a bit of a challenge also in Q3, we are starting to see early signs of margin recovery, mainly supported by the measurements taken then in Q2 and Q3. We delivered a top line growth of 4%. However, the underlying organic growth remained slightly negative, still impacted by a weak market. Then, Our transformation efforts are progressing well. Everything from cost optimization to our customer focus has resulted in improved profitability across all businesses, delivering a 19.3% margin in the quarter and 15.2% eliminating the banking court ruling effect. 75 million euros of the year end 2026, 115 million cost optimization target is already achieved by end of Q3. And we are now 1,500 colleagues or FTEs less compared to end of Q3 2024. So with the divestment of tech services now completed, we are operating with a sharper focus and a more resilient structure going forward. So these current developments gives us also a confidence that we are going to continue executing on our transformation agenda. As communicated in connection with our Q2 report, we have initiated a set of actions to get back on track with T8 Every. As the first step, we have started to strengthen customer-focused sales and delivery capabilities. As an example, we have launched a new governance structure with our clients to build trust and to ensure a better interlock with the clients. We have started the sales harmonization project across all business units in Teotihuacan, including our CRM reporting structure, and we have kicked off also a sales recruitment program during Q3. Then, of course, the AI Boost program has been initiated to harmonize AI governance and also then compliance across the group. It covers case and role-based AI education, sharing our best practices of embedding AI into our products, services, and also sales, and AI tools also for internal productivity, all of this with clear KPIs. We have also executed actions to reorganize or recreate business to strengthen our position as a local partner with global delivery capabilities. This transformation involves a significant competence shift that is already underway. It marks an important step towards a more agile and customer-centric operating model with a tight future link to strategic software partners. And we have also seen, already mentioned, that the cost optimization program is absolutely on track. Looking then at the Q3 performance, growth was partly driven by the core tooling in T2 over banking. This had a positive effect also on the margin. However, the underlying profitability improved also when excluding this additional revenue. The quarter ended with strong order backlog, especially in industry and banking. Organically, the order backlog is up 11% year-over-year, But then also partly due to a long lead time in some of the contracts, this will start contributing largely in 2027 and forward. But this is a good foundation for our future growth ambitions, of course. Over-operating cash flow was solid while the numbers are not fully comparable. While we are presenting now figures for continuing operations, cash flow includes tech services for two months only in Q3 of this year compared to, of course, three months of the last year. Leverage is at 2.4. If we exclude then the IFRS 5 effect, we are at 2.2 from a leverage point of view. Let's then have a look at the Q3 business highlights, starting then business unit by business unit, starting with Create. In our consulting business, Create, we still have a challenging market condition across the geos in which we operate. But capacity adjustment and SG&A reductions are showing results and we are able to improve profitability while we operate in an environment with zero inflation and also partly some price pressure. As part of Cr8's focus initiatives, we are now actively working towards an operating model to improve customer centricity, to become a strong local player with local and global deliveries, and with a strong link to selected strategic software partners. Also on the positive side, we won several new agreements during the quarter. For example, Park Holidays UK, which is a leading provider of holiday parks across the United Kingdom. They choose T2 Every Create as its three-year exclusive partner to accelerate the digital modernization. We will then focus on mobile apps, websites, data processing, and human-centered design services, among other things. The Finnish Patent and Registration Office, PRH, selected Theta Recreate as its partner for delivering low-code, no-code development platform. And this will be a platform that will enable rapid and efficient development of web applications without requiring deep programming expertise. So this agreement covers an eight-year period. And then the third example, a leading European tier one supplier selected Teater Recreate to support the development of the next generation automotive audio platform. The objective is to develop modular and generic audio solutions that can be easily customized for future weekly programs across major automotive manufacturers. And this approach is leading to reduced development cost and faster time to market. Looking then at banking, in banking, profitability improved also with all the revenue related to the court ruling. So underlying margin is over 16%, up from 13% last year. Then we are not satisfied with the underlying revenue growth. It's down by 2%, mainly impacted by an expired margin dilutive contract, a mainframe contract, having a negative impact of 2 percentage points. We have a positive development in banking as a service, mainly the core bank solutions in the Norwegian market, and then growth in financial crime prevention continues. Looking at also then the order backlog, it remained at a high level, well above 1 billion, which is a 20% increase versus Q3 2024. Again, the contribution to growth will mainly start in 2027 and forward because of a relatively long lead time for implementation. The agreements, examples, we can start off with the SAS agreement with IC Cash Services, which is a cloud-based ATM platform. So it's a five-year agreement with IC Cash Services marking their entry into the German ATM market. And the partnership provides IC-Cache with a fully regulatory compliant private cloud-based ATM platform designed to enhance security, scalability, and operational efficiency across its European network of more than 2,500 ATMs. And then also following the merger of SR Bank and SB1 South East Norway, they become Sparebank 1 Sørenorge, T2 Every Banking, then jointly with the client and other parties has completed a very complex technical consolidation covering approximately one million accounts. Sparebank 1 Sørenorge is currently now among top three banks in Norway. Then looking at care, also care turned back to growth in Q3, driven by a healthy growth in Finland of 6%. So by now we have won 16 out of 21 well-being services counties in Finland. However, due to transition periods, the full growth again, the contribution will come starting mainly in 2017 and forward. Four of these contracts coming from six last quarters, four of these contract wins are still waiting for the market court decision, which has an impact on growth and profitability of approximately two percentage points. Also, growth continued to be impacted by the legacy product business with a minus four percentage points effect in Q3. Then, we are very proud of the progress in international expansion with care. We announced yesterday a win in Catalonia, Spain. So with this strategic agreement, Tid to Every Care and NTT data will jointly participate in the development of Catalonia's new open health platform. This is one of the core projects of the region's digital health strategy from 24 to 30. So the project based on European open HR standards includes architectural components and application marketplace, platform services, etc. So the partnership reflects a shared commitment to openness, innovation and excellence in digital health. And of course, this is another significant step for us in the expansion into broader European healthcare market. We also signed a life care EHR contract with North Karelia Wellbeing Services County, a new customer of Tea at Every. Life care client and patient information system will cover specialized medical care, primary health care, social services, dental care, as well as mobile documentation and operational management for home care. The third example is a life care client information system that was signed with the Wellbeing Services County of South Savo with the value of 35 million euro. This will be Life Care EHR, which is streamlining the works of social and healthcare professionals to provide a real-time comprehensive view of client and patient information. Going then to industry, we made good progress in industry in the quarter. Revenue turned to growth. Development was healthy in all businesses except pulp paper. And I would say a kind of a market driven decline. Overall market activities are improving, visible in significant increase in the order backlog, which is up double digit, organically 34% growth. Also profitability improved, again mainly driven by the cost optimization initiatives launched in Q2 and also in Q3. And we have several wins, I would say, across the businesses in the Nordics. Some of them are the National Government Services Center, Statens Service Center, which is a central government agency in Sweden. Tieteware has signed a new long-term contract for a continued delivery of HR payroll system called Primula to Swedish government agencies. So for public sector organizations, this will be stability, ease of use, and security in all aspects, which is quite important also in this sector, of course. Kesko in Finland entered into a strategic agreement with TE2EVERY industry for provision of the TE2EVERY CRED big supply chain messaging services. for business transactions with customers and suppliers so these services enable smarter stock level management ensuring that the supply chain operate with speed agility and reliability demanded by today's market of course and then thirdly also city council in norway launched plan obig 360 I would say next generation digital solution developed by and with T2Every. This will replace a 25-year-old legacy system and this cloud-based platform supports 600 employees in streamlining planning and building applications. So key benefits again include automated invoicing, AI-powered decision support, and improved transparency for residents and businesses. That brings us to the CFO report. So, Tommy, please.

Thank you, Enri, and good morning, everyone. So, Q3 highlights where our improved profitability in all businesses, which was supported by our cost optimization program and closing of the tech services divestment. Our organic growth of 4% included a positive revenue contribution from the court ruling in banking of 24 million in total. Out of this 24 million, 22 million related to prior periods and 2 million related to deliveries in Q3. This 2 million price increase element is recurring and will continue also in the coming quarters. Our Q3 profitability was positively impacted by contribution from our cost optimization program with approximately 15 million of gross savings. Cost burden from tech services impacted margin negatively by approximately 4 million or 0.9 percentage points. As a result of cost optimization program, our one-time items were relatively high at 23 million. However, by the end of Q3, most of the restructuring costs are now booked. Closing of the tech services divestment had primarily two main implications in Q3. Firstly, we received consideration from the deal of 223 million with net cash impact of 201 million. The delta is primarily coming from transfer of debt-like balances and the cost to sell, which includes bankers' and lawyers' fees. Secondly, we de-recognized the tech services from the group, which resulted in a loss of 129 million, which is recognized in discontinued operations. This amount includes relatively small changes in the carrying amount of net assets from the initial recognition, and the majority relates to technical reclassification of FX differences from equity to discontinued operations P&L. These are the so-called cumulative translation differences in equity. On 15th of September, we updated our guidance for the year. We saw a strong September month and we currently believe that we're tracking towards the upper end of our profit guidance. As mentioned, we made good progress with our cost optimization program and reached 75 million run rate savings by end of Q3. This resulted the 15 million savings already realized in Q3. We expect to reach approximately 85 to 90 million run rate by the end of this year. By the end of Q3, we have recognized 41 million of the one-time cost from the estimated 45 to 50 million total program costs. In this slide, I'll highlight some of the key financial profile changes resulting from the tech services divestment. Upper left-hand corner illustrates the cost burden impact to each of the reported quarters, including the Q3, where we have still two months cost burden impacting our profitability. You can see that minus 4 million there in the picture. From Q4 onward, we expect the TSA income to offset the cost burden and relevant cost reductions to happen in line with the TSA services reductions. This can take over 12 months depending on the service being delivered. Upper right hand corner illustrates the capex change from tangible assets to intangible assets. However, the overall capex levels compared to revenue as a percentage are roughly at the same level being approximately 3% of revenues. Below on the left hand, you can see the significant reduction of net debt from 875 million to 552 million. However, due to reported EBITDA decline, the leverage remains at 2.4, excluding the IFRS cost burden. As mentioned, leverage would be at 2.2. Below on the right-hand side, you can see that networking capital level improves and changes from positive to negative, so the continuing businesses tie up less capital compared to the earlier group setup. So as mentioned, we continue to deliver healthy operative cash flow in Q3, which is seasonally a weak cash flow quarter. Our networking capital increased by 52 million due to seasonality. Prior year networking capital increase was abnormally high due to positive weekend impact in accounts receivable. Note that Q3 cash flows include two months of tech services and comparable periods include full three months. And of course, going forward, none of that will be visible. Free cash flow was impacted by tech services divestment, as commented earlier. And the leveraged net debt reduction to 552 million was driven by the tech services divestment with main elements being the received net cash on disposal of 201 million and the reduction of lease liabilities of 102 million. Net debt debit DA as mentioned 2.2. On employee matters, LTM attrition has remained at low levels, being 7.5% at the end of Q3, reflecting the soft market environment. Impact from cost optimization measures are visible in the reduced personnel across all businesses. Our net personnel reduction from Q2 was approximately 600 employees with over 9% reduction year over year. Group salary inflation is expected to be approximately 4% in 2025, which would be slightly lower than prior year. Next, remarks on Q4 outlook. On growth, CREAT will continue to be impacted by weak demand across all markets. Banking continues to be impacted by the ending of the significant margin dilutive mainframe contract with negative five percentage point impact. Care continues to be impacted by the legacy product decline by negative four percentage points. Then on profit remarks, banking is negatively impacted by increased non-deductible VAT due to tax services divestment by one percentage points. This impact is recurring and continues in the coming quarters. All businesses will benefit from savings delivered through cost optimization program. And then, as mentioned, cost burden from the IFRS 5 is mitigated by the transitional services agreement income. On other remarks, FX impact revenue is positive by 4 million. Q4, profitability outlook for businesses. Tieto Every Banking and industry are expected to be above prior year profit level, create at or above prior year, and care at or below prior year level. Now back to you, Endre.

Thank you, Tommy. And then a couple of final remarks from my side. we are now heading into i would say a really exciting phase with it every and in just under five weeks we will be in london for our capital markets day with our client base our software and services portfolio and our great people we have a solid foundation to build on Currently, we are focused on execution of our cost efficiency program, turning to much more customer-centricity actions, and then simplification and further growth initiatives. At the C&D, we will share how we plan to accelerate the long-term growth, sharpen our portfolio, and unlock new opportunities. It's really going to be a forward-looking session. We warmly invite our investors and stakeholders to join us in London on November 25. We look forward to engaging with you there. And then I think we are opening up for the Q&A session. Thank you.

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 Mark Hyatt from Morgan Stanley. Please go ahead.

Hi, Andrew. Hi, Tommy. Thanks for taking my question and thanks for the presentation. Can we start with the outlook for Q4? You've obviously reiterated the guidance that you just did down in September, but there's still quite a wide range of outcomes implied into the final quarter of the year. So maybe you could just talk about some of the main swing factors into Q4 and how much confidence does the improvement in care and industry give you into that final quarter? uh secondly uh the backlog as you say stands at over two two billion euros a double digit year on year but you know that most of the contribution from that is expected in 2027 and onwards can you just break down the moving parts here how much visibility does that give you into 2026 uh and then maybe just finally just one on a kind of ai you mentioned in the release that you're adopting ai across all your offerings I suppose there's been some reports elsewhere in the industry that some of the potential cost savings around project delivery as related to AI are being passed on to customers. Do you see any evidence of that in the market that you're operating today? And maybe just a general comment on the price environment would be very helpful. Thanks very much.

I could take the first one, maybe the Q4. So as you know, typically Q4 is quite an active quarter. And then when we consider the market environment currently, we've commented, if we specifically talk about care first, we've commented on the Finnish well-being countries, budget restrictions, that is a bit of an unknown how those will materialize. So there's risk in terms of Q4 for care. And then overall, the market, it's a bit volatile. So I wouldn't say it's like sort of very clear how that will turn out. And that's why we have this range. Now, as mentioned, the September came in quite strong and that's why we gave a comment that we're tracking towards the higher end of this profit guidance. But overall, the uncertainty is still within the market and Q4, that's the reason for the range.

And on the backlog side, I think we have clearly communicated during Q3 that 2026 will be a kind of year of transition in terms of the top plan. We are experiencing headwind in the market, especially in the digital consulting part. And a lot of these contracts signed now in care and in banking are contracts that will materialize after kind of conversion migration project, which is phase one. And then you get the full scale effect of that in 27 and onward. How much is hitting 26 is not going to be disclosed at this stage. But I've clearly communicated lately that Q, sorry, 2026 will be a year of transition in terms of the top line. However, the ambition is absolutely then to expand on the bottom line margin going into 2026. Like Tommy has already commented, we had a strong September and that's why we are also saying that we are tracking towards the upper end of the guidance range. In terms of AI, we have now set out many initiatives internally. And we see clearly also that there is a huge interest in the market from the client side to start off with AI project. But it's relatively early stage currently. How much of the effects of the productivity effects that will be kind of given back to the market side based on competition, that's also a bit premature to say. But we have also clear kind of evidence when we are looking now at also implementing distinct KPIs by business unit related to AI. We have already evidence in one of the business units, we have like a 30% productivity improvement in terms of software development. Then it's a question, should we kind of, what's the effect of that? How should we position ourselves in terms of growing going forward? which I think are able to kind of deliver on this productivity improvements in the future, we will actually take market share. That's the ambition. Price pressure, nothing new in Q3 going into or being into Q4. It's a relatively, I would say, challenging market condition, which we also communicated, especially for our great business. Nothing new, not the kind of higher price pressure. It's more like we have been through in 2025 in total. Yeah, that's the comment to that.

Great. Thank you so much.

The next question comes from Aditya Budhavarapu from Bank of America. Please go ahead.

Okay. Good morning. Thanks for taking my question. There's a couple from my side. So on Create, you spoke about the reorganization. Could you just give a bit more color maybe in terms of what are the specific actions you're taking there to revive growth? And also you spoke about the links to selected strategic software partners. If you could maybe just expand on that as well. Second question. Given the impact from the headwinds in Q4 on banking and especially CARE, do you still think, especially in CARE, do you think they could still grow in Q4 given the continued headwind from the legacy product business? And then final one, you've seen margin expansion in CARE in Q3. Again, but you were talking about margins being below, at or below last year. So just going forward, how should we think about the margin outlook for the care business? Do you think there's still more investments that need to be made? Or should we start to see a bit more opportunities coming in there?

we can start off with the margin in care margin is slightly up compared to q3 24 mainly driven by the the cost efficiency effects however we have the seasonality usually in q3 so i think it's a bit difficult to say that we are going to continue at that level but I mean, we have been at relatively high levels for care during a relatively long time. So I would say that we should continue at the levels we have been on historically with care. Having said that, of course, the international expansion will also kind of implicate investments into expanding globally. but we shouldn't kind of experience any significant dip related to that from a margin point of view. So pretty much stable going forward on the margin side of care. Top line, yes, it takes some time to materialize what we do in terms of international expansion. However, we have no breakthrough in several countries, but that's also why we commented that from a top line point of view, And looking at the backlog, majority of this will materialize in 2027. I would not say that we are experiencing a lot of headwind in Q4 compared to Q3. So yes, there are challenges within the Crate area. Back to your question then on what do we really do with CREAT in terms of repositioning. I think it's a couple of things which we can mention now and then we will come back to this in connection with Capital Markets Day. But first of all, we are changing the focus from aiming to be a global digital consulting player to turn this much more, which is our strength, to be a local player with local deliveries and of course global delivery capabilities. This is one of the shifts that we do. This means also that we have to then be much more selective on strategic accounts key account management. We are looking also now at a competence shift in terms of turning from much, I would say, too high content of time and material and CV sales into a much more, I would say, narrow angling through selection of strategic software partners, which I think is the key driver in the market. Also looking at what happens with public cloud also looking at what happens with ai also looking at the interface between public cloud deliveries and the client which is close to what we call infrastructure as a service which is a growth market going forward so that is the transition that we are looking at currently for a crate But we will come back to this, of course, in more detail when we come to capital markets. Hopefully, at that point in time, also with some very concrete examples in terms of strategic partnerships.

Thank you very much.

The next question comes from Felix Henriksen from Nordea. Please go ahead.

Thanks for taking my question. Two for me. First, a quick one. I think you sort of beat your own segment margin guidance for Q2 in Create and Care. So could you just provide a bit more color on what sort of drove the better than expected performance there on the margin front? And then secondly, I guess a bit more strategic question. I've seen some of your peers for Create international peers sort of talking about potentially exploring more fixed or outcome-based pricing model for IT consulting given the sort of efficiency gains that you might experience from AI, you know, as opposed to this sort of traditional hourly billing model. Is this something that you're considering at the moment in CREAT as well? Thanks.

Let's start with beating the guidance on Crate and Care. So it's quite evident that, let's start off with Crate. It's quite evident that we have taken down the cost structure significantly within Crate, talking about a substantial number of people within SG&A, but also then from a cost point of view. So we immediately now see the effect of that. Part of this was taken in Q2. Part of this has been taken in Q3. And that's why we see primarily the margin expansion in Crate. Care is... not the magnitude of cost takedown, but we also have taken a cost takedown in care, which is again mainly the effect seen coming through a bit quicker than anticipated when we announced the cost reduction program or cost optimization program in connection with the Q2 interim report. On the fixed outcome of outcome results rates we have not been considering that for the time being we are going through in create a significant shift and focus towards more industry standard software then you could say that some of these players in that software market they have ai embedded So let's see what is the impact of turning the business towards now software standards, software infrastructure players and the partnership with those moving away from, I would say, too high content of time and material and CV sales. But it's a bit premature to say what will be the kind of future pricing strategy in CREAT that we will come back to also in connection with the Capital Markets Day.

Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Jocko Turveinen from SEB. Please go ahead.

Good morning, gentlemen. Jocko from SEB. A couple of questions still on my side. the hit count in Create is still down by 13% year over year. Is this just adapting to the lower volumes, or is it implying the efficiencies and productivity gains found through AI-powered software development? And then, in general, you are noting that there is some AI-related demand among the customers, but Are you seeing AI impacting negatively in CREATE, for example, in the maintenance type of contracts? And the second question goes to NetDev, to EBDA, which is still well above two times. What are the key measures going forward to take that to a more moderate level? Thanks.

Yes, I can take or start with the net debt TBDA. So naturally, as I went through the numbers with you, the improvement in this metric comes from profit improvement, and there I mean the reported profit improvement. This year we have had quite significant one-time items which are taking the reported profits down and that we are aiming to improve then in going forward which will automatically of course then have an impact on the reported profits and the EBITDA and then improve the metric. That's of course the primary aim that we are doing. Then on the AI, Andre, maybe you want to address that.

Two questions actually related to CREAT. One was related to the kind of head contributions, and I would say that when we look at the initiatives taken in Q2 and Q3, And we look now at the margin expansion in Crate that's basically driven by those initiatives, not AI driven productivity improvement. Then, of course, we have many different kind of client projects working on AI, which will drive productivity improvement in the future. But again, When you look at the trends, when you look at what's happening in the market, it's still a bit premature to say that all of this is going to be realized, all of this is coming through. But again, I think it's quite important for us that we are capturing now the growth pockets and the growth opportunities in the markets. That is why we are partnering up with strategic software partners. That is why we're shifting from, like I've said, much more time and material and cv sales much more to kind of industry standard software and then having ai as enablement for for kind of quick or rapid implementation all that okay excellent thank you from my side

Thank you, Enri and Tomi, and thank you everyone for the questions, and thanks for watching as well. As mentioned earlier, our Capital Markets Day will be hosted on 25th of November in London. See you then.