Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- TietoEVRY Corp (STU:TTEB, Financial) reported organic growth of 1%, driven by its software businesses.
- Improved profitability of 11%, supported by Tietoevry Tech Services.
- Strong customer wins and order intake with a book-to-bill ratio of 1.3.
- Recognition as one of Europe's Climate Leaders for 2024 by Financial Times and one of the World's Most Sustainable Companies by Time Magazine.
- Healthy cash flow from operations of EUR68 million and a 2% growth in the order backlog.
Negative Points
- Softer IT services market expected to continue in the second half due to economic and geopolitical instability.
- Mixed revenue development in Tietoevry Create, with challenges particularly in Sweden.
- Profitability in the Banking segment impacted by higher technology costs and increased depreciation of capitalized R&D.
- Organic growth in Tietoevry Care only 1%, impacted by the health and social care reform in Finland.
- Traditional infrastructure services in Tietoevry Tech Services declined by 5%, and end-user services were down by 16%.
Q & A Highlights
Q: My question is on the Banking business. You mentioned a 1.5-percentage point headwind to the profitability margin due to the legal separation of the Banking business. Now that you're not divesting that business, will you regain that margin headwind?
A: (Tomi Hyrylaeinen, CFO) The independence-related costs are being optimized as we keep Banking within Tietoevry Group. The Q3 guidance and profit improvement have multiple drivers, including seasonal strength in H2, BaaS side, and technology improvements. The independence costs are not the main driver for the profit improvement.
Q: Could you help us understand the drivers of growth coming in at the upper end of the full-year guidance range? What would the scenario look like if growth comes out at the lower end?
A: (Tomi Hyrylaeinen, CFO) The upper end of the guidance range would require a market recovery. As of today, there is no clear sign of market recovery for the rest of the year, so we are looking at the lower end of our guidance range of 0% to 3%.
Q: Can you talk about what you're investing in AI across the portfolio? Any specific examples?
A: (Kimmo Alkio, CEO) Each business is advancing AI and GenAI functionality in products and services. Examples include AI-centric capabilities in financial crime prevention in Banking, AI functionality in Public 360° solutions, and AI-driven software in Lifecare. We are also focusing on productivity improvements through AI in areas like fault prediction in Tech Services and software development.
Q: Are you seeing any signs of improvement in any of the segments, or has the situation in Create become more challenging?
A: (Kimmo Alkio, CEO) We have not seen improvement in the second quarter. The digital engineering category, in particular, faces limited short-term growth potential due to market conditions.
Q: Can you be more specific about the additional restructuring measures you're planning to implement?
A: (Tomi Hyrylaeinen, CFO) The primary measures are in Create, impacting 400 roles, and will support profitability in the second half. Smaller programs are also being implemented in Banking, Industry, and Care to provide profitability stability.
Q: What surprised you on the downside during the second quarter in Banking and Care?
A: (Kimmo Alkio, CEO) In Banking, factors include the modernization of core banking in Norway, higher costs from the strategic review process, and high technology costs in the legacy environment. In Care, investments in sales capacity and Lifecare localization for Norway impacted profitability, but we expect to return to traditional levels.
Q: How will potential liabilities from the ransomware attack be booked?
A: (Tomi Hyrylaeinen, CFO) Claims for damages will be booked against revenue if they occur. The maximum aggregate contractual limit of liability is below EUR10 million, and we have cybersecurity insurance in place. The resolution of claims and insurance discussions will take several quarters.
Q: Should we read the exclusion of potential capital gains in your one-time cost item guidance as improved visibility into the potential Tech Services divestment?
A: (Tomi Hyrylaeinen, CFO) The exclusion of capital gains refers to the Buypass sale expected to close in Q3, not speculating on the Tech Services sale.
Q: Could you talk about the potential disruption and benefits of the new operating model in Create?
A: (Kimmo Alkio, CEO) The new model, live since May, aims to increase capabilities and activity levels by accessing global resources. While there may be short-term productivity impacts, we expect long-term benefits in pipeline growth and efficiency.
Q: How should we think about the benefit from the lower impact of the social care reform in Finland on Care's growth in the second half and into next year?
A: (Tomi Hyrylaeinen, CFO) We expect Care's growth to accelerate in H2 as the impact of the health care reform lessens. This will likely continue to impact the first part of 2025 and then gradually diminish.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
