TietoEnator Corporation Stock Exchange Release 20 October 2006, 8.00 am EET
This is a release without tables. You can download the complete report using this link: Interim Report 3/2006
* Third-quarter net sales grew 5% to EUR 397.0 (379.1) million. Nine-month net sales totalled EUR 1 280.7 (1 213.7) million with 6% growth. * Organic growth 2% in the third quarter, 1% in the first nine months * Third-quarter operating profit totalled EUR 31.4 (36.1) million and operating margin excluding capital gains was 7.9% (9.1). Nine-month operating profit totalled EUR 94.6 (128.4) million. * Profit before taxes EUR 28.6 (27.3) million in the third quarter, EUR 84.9 (120.0) million in the first nine months. * Nine-month profit after taxes EUR 60.1 (87.2) million. * Third-quarter EPS EUR 0.26 (0.24), nine-month EPS EUR 0.77 (1.11)
General market overview Market activity in IT services and solutions is high. The biggest drivers of demand are improvement in clients' customer service, new product introductions, cost savings and business process efficiency. Pricing trends are positive in many customer industries. Prices, however, are under pressure in the most commoditized services and in the areas where global sourcing has higher traction.
Labour market activity continues to increase. This is visible as competition for the most experienced professionals and the slowness of recruitment processes rather than as general wage inflation.
Development of customer industries Growth in TietoEnator's business areas varies substantially due to different growth prospects in their respective customer industries, acquisition and outsourcing activity and a diverse pricing environment.
Banks have continued to focus on new revenue generating investments instead of cost savings. Market activity is at a high level and competition is becoming more aggressive. The Single European Payment Area (SEPA) has now started to be visible in the sales cases and consulting work. The Finnish insurance business is driving growth in the partnership business. The banking and payment solutions businesses are growing. The UK banking business continued to focus on sales activities and was making a clear profit. In Germany net sales are lower than the year before as some parts of the operation were closed in late 2005.
Banking & Insurance announced its new business model and organization for 2007. The changes will make the business area a lot more capable of selling and delivering solutions internationally and developing products for the global market. The head office of the business area's sales will be located in London.
In August TietoEnator was selected by Nottingham Building Society to replace a number of the Society's core business systems. TietoEnator will be providing complete systems replacement, including web-based point of sale, application processing, account administration and back office collection and recoveries.
Also in August TietoEnator won a contract to deliver a comprehensive life insurance solution to the Finnish OP Bank Group. The project has been started and will be completed by spring 2009. The latest joint venture in the insurance sector in Finland, TietoEnator Esy, started operations at the beginning of 2006. The joint venture company employs around 180 people.
In the telecom industry there are signs that some operators will start investing in new services, which should impact the demand from this sector positively. Consolidation among telecom infrastructure suppliers will reduce these companies' R&D budgets but will also create new outsourcing opportunities. Further outsourcing opportunities are also emerging from operators' cost-saving and reorganization programmes. In response to aggressive competition and continued price pressure in the telecom industry, TietoEnator will accelerate its implementation of global sourcing.
At the end of the second quarter TietoEnator and Siemens Communications signed an agreement to deepen their co-operation and to transfer Siemens' switching and migration to next-generation networks to TietoEnator. The transition meant that around 250 employees from Siemens moved to TietoEnator Telecom & Media at the beginning of July. The transaction is expected to increase TietoEnator's net sales by about EUR 15 million in the second half of 2006. The commitment for the whole contract period is approximately EUR 100 million.
In June TietoEnator agreed to acquire 51% of the share capital in Polish RTS Networks Ltd, a provider of telecom R&D services. The main customer of RTS Networks is Siemens Communications. The acquisition strengthened TietoEnator's R&D expertise and added 110 employees. RTS Networks was consolidated from the beginning of July 2006.
In September TietoEnator was chosen by the German telecom operator O2 to upgrade its current customer service platform by migrating it to Voice over IP (VoIP). This includes implementation of an IP contact centre suite, which is tightly integrated into the operator's business applications.
In the government sector market demand is good. Customers' multi-sourcing strategies are maintaining tough price competition. In October TietoEnator sold its government business operations in Sweden, Denmark and Norway to the Icelandic telecommunications company Síminn and the management of TietoEnator's government business in Denmark. These operations have not been part of TietoEnator's core business and investing in them would not be according to the company's strategy of focused internationalization in banking, forest, healthcare and telecom. In 2005 the divested businesses generated EUR 58 million of net sales and a slightly negative operating profit. Currently they employ about 420 people.
In May Tietokarhu Oy, the joint venture between TietoEnator and the Finnish Government, revised its service agreement with The Finnish National Board of Taxes. The fixed-term service agreement, due to expire in 2016, includes the development and maintenance of the complex core IT systems underlying Finnish taxation. Its annual impact on TietoEnator's net sales will remain unchanged and the total value for the remaining term of the agreement is estimated at EUR 300 million.
TietoEnator's manufacturing business is performing well and customers' ERP implementations and enhancements are providing the biggest growth potential. In the retail business customers are implementing cost-saving programmes and are looking for IT-enabled standardization and automation opportunities.
In the healthcare business demand for new systems is strong. Customers' high demand for new functionality and the requirements created by national healthcare IT initiatives often slow down the start-up of implementation projects and increase development needs. In Finland, demand for self-services is emerging strongly, for example in children's daycare in the welfare area.
In September TietoEnator agreed to acquire two companies in the healthcare area, Swedish Laps Care AB and German Cymed AG. Laps Care specializes in IT support for resource optimization in elderly care, homecare and home nursing. The company has eight employees and operations in Stockholm, Linköping and Malmö. Cymed specializes in hospital information solutions and hygiene software for hospitals and laboratories. Cymed has 34 employees in Bochum. In October TietoEnator acquired Quickclic Finland Oy's welfare and healthcare business, which employs five people. Quickclic specializes in interactive and wireless communication services for the social welfare and healthcare sectors. All three acquisitions took effect on 1 October 2006.
In the forest sector customers' restructuring programmes have resulted in increased interest in outsourcing. Sales and decision-making cycles are very slow, however, and customers are very cost-conscious. Outsourcing is increasingly being considered by energy companies as well. Customers are looking for cost savings even though their financial situation is strong. In TietoEnator's utility business some big customer projects are at the ending phase. The oil and gas business is performing well and its customers are focusing on standardization.
In August TietoEnator strengthened its capabilities to serve utilities in Europe by acquiring the business of TOPAS Consulting GmbH in Germany, which has been consolidated from the beginning of October. The acquisition is expanding TietoEnator's customer base with European utilities and includes 74 SAP experts located in Dortmund and Mannheim. The net sales of the business in 2005 were EUR 8.5 million.
The demand for processing and network services in the Nordic countries is good. The market consists of a large number of smaller outsourcing cases rather than big one-off transactions. In August TietoEnator and Stora Enso agreed on TietoEnator hosting StoraEnso's ICT infrastructure in all of the countries in which it operates. The agreement is an extension of services in Finland to cover Stora Enso's ICT infrastructure globally. The service contract is for five years and is worth EUR 20 million.
In October TietoEnator announced its co-operation with Nokia in the enterprise mobility area. TietoEnator will offer next-generation mobility services that include access to enterprise systems such as Customer Relationship Management, Supply Chain Management and Enterprise Resource Management. The new services are based on Nokia's Intellisync Mobile Suite technology and are part of TietoEnator's Digital Workplace management concept.
In Personec's businesses - HR and financial systems and services - customers are very interested in outsourcing and ASP services at the expense of the traditional licensing model. Consulting services are in high demand as well. Personec's acquisition of Manpower's payroll and Human Resources outsourcing business in Sweden became effective in February 2006 and added 178 employees.
Net sales Third-quarter net sales grew 5% to EUR 397.0 (379.1) million. Growth in local currencies was 4% and organic growth 1.5%.
Nine-month net sales grew 6% to EUR 1 280.7 (1 213.7) million. Growth in local currencies was 6% and organic growth 1%.
Q3 net Q3 EBIT % Q3 organic 9M organic sales excl. capital growth % growth % growth % gains Banking & Insurance -1 7.4 -1 11 Telecom & Media 5 7.1 -2 -7 Government, -2 4.5 -1 3 Manufacturing & Retail Healthcare & Welfare 8 4.6 6 8 Forest & Energy -5 4.3 -3 -2 Processing & Network 8 13.8 8 7 Personec Group 16 11.2 4 5
In Banking & Insurance organic growth declined clearly compared to the first half of 2006. This decline is very much explained by TietoEnator Financial Solutions UK's very strong license sales in the third quarter of 2005. The unit's net sales were EUR 7 million lower than the year before. In Telecom & Media organic growth improved from the levels it has reported earlier in the year mainly due to the new outsourcing contract with Siemens Communications. Prices in Telecom & Media are at a lower level than a year ago but have not declined from the first half. Growth in Healthcare & Welfare was reduced by postponed projects.
Nine-month growth was 21% in Germany, 13% in Norway (12% in local currency), 4% in Finland and -2% in Sweden (-1% in local currency). In Sweden the decline was mostly due to Telecom & Media.
The banking and insurance sector increased its share to 21% (18) of Group net sales in the first nine months with the help of acquisitions, good organic growth in the Banking & Insurance business area and extended contracts in Processing & Network. Telecom and media's share fell to 29% (33). The public sector contributed 20% (19) of sales, the forest sector 5% (5) and the energy sector 5% (5).
TietoEnator adopted IFRIC 4 (Financial Reporting Interpretations Committee's interpretation on accounting of leasing contracts) from the beginning of 2006. As a result a total of EUR 5.2 million of invoicing from customers was recognized as leasing contracts and not as net sales, mostly in Processing & Network during the first nine months. The interpretation has been applied retroactively for 2005 and in the first nine months of 2005 the impact was EUR 3.8 million. IFRIC 4 also lowered depreciation by EUR 4.9 (3.4) million and increased the Group's interest income by EUR 0.4 (0.4) million.
The order backlog, which comprises only services ordered with binding contracts, amounted to EUR 1 353.9 million (998.0) at the end of the period, 36% higher than a year before. Approximately 25% (29) is expected to be invoiced in the current year. Processing & Network's share of the order backlog is about 31%.
Profitability Third-quarter operating profit amounted to EUR 31.4 (36.1) million representing a margin of 7.9% (9.5). Excluding capital gains the operating profit totalled EUR 31.2 (34.6) million representing a margin of 7.9% (9.1).
Profitability in the third quarter improved clearly from the first half, but is lower than in the previous year. That decline in profitability is due to lower prices, project overruns or project postponements and investments in international business and product development.
Due to vacations the third quarter is normally the weakest for TietoEnator and especially for those business areas that have the highest exposure to professional services: Telecom & Media and Government, Manufacturing & Retail. Profitability in Telecom & Media was however higher than in the first half as there were no restructuring expenses and the actions taken earlier have started to pay off.
In Banking & Insurance the operating margin is higher than earlier this year mostly due to the recovery of its UK operations. Compared to 2005 the margin is lower as the UK operations had very strong license sales in the third quarter. The unit's operating profit was EUR 6 million lower than in the year before.
For the less labour-intensive business areas Processing & Network and Personec, the third quarter is normally strong. Processing & Network's profitability has continued to improve based on the consolidation investments made in 2005.
Project overruns burdened the profitability of Government, Manufacturing & Retail by EUR 2.1 million and of Forest & Energy by EUR 1.1 million. In 2005 the costs for project overruns were not material for the Group. Restructuring expenses were EUR 1.5 million, mainly in Processing & Network (EUR 0.6 million) and in Personec (EUR 0.6 million). In the third quarter of 2005 TietoEnator had around EUR 7 million of restructuring and other related costs.
Group operations expenses were lower than in the previous quarters of the year at EUR 3.1 million. This was based on some one-time items and benefits from cost-saving programmes.
Nine-month operating profit totalled EUR 94.6 (128.4) million. Capital gains were EUR 8.4 (17.2) million and operating profit excluding capital gains EUR 86.2 (111.2) million. This represented a margin of 6.7% (9.2). Nine-month operating profit was burdened by restructuring costs of EUR 12.9 (about 11) million and costs for underperforming projects of EUR 11.3 million (not material in 2005).
Operating profit (EBIT) included EUR 2.3 (1.9) million from amortization on acquired intangible assets in the third quarter and EUR 6.7 (5.0) million in the first nine months.
Costs for share-based payments of EUR 1.3 (1.1) million in the third quarter, and EUR 3.2 (1.9) million in the first nine months, were included in employee benefit expenses.
Net financial expenses were clearly lower at EUR 2.8 (8.8) million in the quarter. Net interest expenses were EUR 3.4 (2.7) million and one-time net gains from foreign exchange transactions EUR 0.6 (-6.2) million. EUR 1.9 million of net interest expenses were in the Personec Group.
Third-quarter earnings per share (EPS) totalled EUR 0.26 (0.24). EPS was affected by capital gains of EUR 0.00 (0.02) per share, amortization on intangibles of EUR -0.03 (-0.02) per share and stock option expenses of EUR -0.02 (-0.02) per share. Excluding these items EPS amounted to EUR 0.31 (0.26). Nine-month EPS totalled EUR 0.77 (1.11).
The 12-month rolling return on capital employed (ROCE) was 20.9% and the return on shareholders' equity (ROE) 24.0%.
Financing and investments Cash flow from operations amounted to EUR 42.7 (121.7) million for the first nine months. Operating profit contributed EUR 133.4 (155.0) million and the increase in working capital consumed EUR 66.0 (15.4) million. The increase in working capital in the third quarter is mainly the result of lower vacation pay accruals, increase in accounts receivables related to the outsourcing contract with Siemens and high payments of working capital liabilities. Tax payments were higher at EUR 19.5 (14.3) million. The increase is mostly due to the payment of previously recognized deferred taxes in Sweden. The deferred tax asset was further employed in Finland.
Payments for new acquisitions totalled EUR 41.2 million, which included around EUR 25 million for Manpower's payroll and the Human Resources outsourcing business. Divestments generated cash totalling EUR 9.4 million. The total dividend payment of EUR 64.6 million was made in April and altogether EUR 52.3 million was used for the share repurchase programmes in May and September.
The equity ratio was 33.3% (39.3). Gearing increased to 80.4% (46.3). Net debt totalled EUR 354.6 (222.8) million including EUR 438.7 million in interest-bearing debt, EUR 15.0 million in finance lease liabilities, EUR 14.9 million in finance lease receivables and EUR 84.6 million in cash and cash equivalents. EUR 134.2 million of the debt belonged to Personec Group. The other interest-bearing debt consists of a three-year EUR 50 million bilateral credit facility, a seven-year EUR 50 million private placement bond and usage of EUR 202 million from the short-term commercial paper programme. At the end of the quarter unused credit facilities totalled EUR 203 million.
Accrual-based investments totalled EUR 77.1 (247.8) million for the period. Capital expenditure including financial leasing accounted for EUR 34.8 (67.1) million, investments in business activities for EUR 4.5 (9.3) million, and investments in subsidiary and associated company shares for EUR 37.8 (171.4) million.
Personnel The number of full-time employees totalled 15 899 (14 428) at the end of the third quarter. The net recruitment took place mostly in low-cost countries. Acquisitions and new outsourcing contracts added around 974 employees during the nine months. Recruitment was stronger than in the year before: a total of 1 613 (1 305) employees were hired. The highest recruitment numbers were in Finland, the Czech Republic, Sweden, Latvia and Norway.
In total 206 employees were affected by personnel adjustments during the first nine months mostly in Banking & Insurance, Processing & Network and Telecom & Media.
Employee turnover has continued to increase. The 12-month rolling figure stood at 8.5% (6.5) at the end of September.
On average the number of employees totalled 15 469 (14 022) in the first nine months.
At the end of the third quarter the number of people in low-cost countries totalled about 1 830. The acquisition of RTS Network in Poland increased the number by 110 people. TietoEnator is planning to increase its staff in favourable cost environments to roughly 2 000 by the end of 2006.
Shares and options The outstanding number of shares excluding the shares in the company's possession was 73 596 462 at the end of September.
The 2 903 860 shares the company had repurchased in 2005 were cancelled in April. A total of 500 000 shares for EUR 12.4 million were repurchased in April for the three-year share-based incentive plan. In July TietoEnator's Board of Directors decided to start a new share repurchase programme totalling EUR 40 million to develop the company's long-term capital structure. A total of 1 745 000 shares were purchased in September at an average price of EUR 22.86. TietoEnator's Board of Directors will propose the cancellation of shares repurchased under this programme to the AGM in 2007. The company now holds a total of 2 245 000 shares, 3.0% of its share capital, which represents 3.0 % of the voting power.
Full dilution (assuming all options were exercised fully) amounted to 4.1% compared to 6.4% at the end of 2005.
The Board has not exercised its authorizations to issue share and option rights or raise convertible bond loans during the period.
Some items affecting the 2006 full-year accounts The net of acquisitions and divestments finalized up to this date is expected to contribute around 3% of net sales growth in the full year. The divestment of the government businesses in Sweden, Norway and Denmark is expected to take effect at the beginning of November. The transaction will reduce TietoEnator's net sales, but the impact on operating profit or operating margin is marginal. In the first nine months of 2006 these businesses had net sales of EUR 45 million and operating profit of EUR 1.7 million. The expected capital gain from the transaction is about EUR 9 million.
The amount of performance-based rewards from partnership contracts in Telecom & Media is not expected to be material in the fourth quarter of 2006. In 2005 they totalled EUR 4 million.
No material restructuring expenses are expected for the fourth quarter.
TietoEnator expects amortization of intangible assets of around EUR 9 (6.9) million and stock option expenses and costs related to the share-based incentive programme of around EUR 6 (3.0) million in 2006. These are included in the Group's operating profit.
Prospects for 2006 In 2006 organic growth is expected to increase from 2005, but will be affected by the low growth prospects of the Telecom & Media business area and the increase in global sourcing. TietoEnator will further invest in its low-cost sites and continue its cost-cutting programmes. The financial performance is expected to be clearly better in the fourth quarter than in the first nine months of the year. This is based on seasonality and the higher impact of actions taken to improve profitability. The uncertainty regarding the fourth-quarter performance relates to the level of licence sales and to success in project control.
For the full year 2006 TietoEnator expects net sales growth of around 5% excluding potential new acquisitions. The EBIT margin excluding capital gains but including restructuring costs of around EUR 13 million is expected to be around 8%.
Financial calendar in 2007 Interim report for January - December 2006 and Financial Statement Bulletin for 2006 on 6 February 2007 Annual Review and Financial Review 2006 in pdf in week beginning of 12 February 2006 Annual Review and Financial Review 2006 printed 5 March Annual General Meeting on 22 March Interim Report January - March 2007 on 27 April Interim Report January - June 2007 on 20 July Interim Report January - September 2007 on 26 October
The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 December 2005 and as described in the annual financial statements. All changes in standards, amendments to standards and interpretations have been applied, but of these only IFRIC 4 is relevant for the Group. The figures in this report are unaudited.
Key figures 2006 2005 2006 2006 2006 2005 2005 7-9 7-9 4-6 1-3 1-9 1-9 1-12 Earnings per share, EUR - basic 0.26 0.24 0.23 0.29 0.77 1.11 1.75 - diluted 0.26 0.24 0.23 0.28 0.77 1.11 1.75 Earnings per share, EUR a) 0.31 0.26 0.23 0.26 0.79 1.01 1.66 Equity per share, EUR 6.10 5.97 5.98 6.24 6.60
Return on equity rolling 12 month, % 22.8 27.6 24.0 20.4 27.3 Return on capital employed rolling 12 month, % 21.0 28.8 20.9 27.0 29.7 Equity ratio % 35.0 34.7 33.3 39.3 39.8 Net interest-bearing liabilities, EUR million 283.0 198.6 354.6 222.8 199.9 Gearing, % 61.6 43.9 80.4 46.3 39.1 Investments, EUR million 6.4 b) 104.5 20.3 50.4 77.1 247.8 270.3
a) Excluding goodwill impairments, amortisation on allocated intangible assets from acquisitions, stock option expenses and one-time capital gains. b) During the third quarter some of the capital expenditures in Jan-June 2006 have been defined as customer dedicated assets according to IFRIC 4 and are now reported as loan receivables.
Press conference for analysts and media will be held in Stockholm, Nordic Sea Hotel, Vasaplan, cabinet Oceanen, at 9.00 am CET, (10.00 am EET, 8.00 am UK time).
The conference will be hosted in English by President and CEO Pentti Heikkinen, Deputy CEO Åke Plyhm, CFO Timo Salmela, SVP Communications and Investor Relations Päivi Lindqvist and Investor Relations Manager Paula Liimatta.
The conference will be webcast and published live on the Internet at TietoEnator's website www.tietoenator.com/presentations and there will be a possibility to present questions on-line. An on-demand video will be available after the conference.
Conference call starting at 3.00 pm CET, (4.00 pm EET, 2.00 pm UK time) will also be available as live audio webcast on www.tietoenator.com/presentations. The call will be hosted by Timo Salmela and Päivi Lindqvist. Callers may access the conference directly at the following telephone numbers: US callers: +1 617 597 5327, non-US callers: +44 20 7365 8426, code 'TietoEnator'. Lines to be reserved ten minutes before start of conference call.
A replay will be available until 27 October 2006 in the following numbers: US callers: +1 617 801 6888, non-US callers: +44 20 7365 8427, access code: 2659 5401. An on-demand audiocast of the conference will also be published at TietoEnator's website later during the same day.
TietoEnator publishes financial information in English, Finnish and Swedish. All releases are posted in full on TietoEnator's website www.tietoenator.com as soon as they are published.
TietoEnator is among the leading architects in building a more efficient information society and one of the largest IT services providers in Europe. TietoEnator specializes in consulting, developing and hosting its customers' business operations in the digital economy. The Group's services are based on a combination of deep industry-specific expertise and the latest information technology. TietoEnator has over 15 000 experts in more than 25 countries. www.tietoenator.com
DISTRIBUTION Helsinki Stock Exchange Stockholmsbörsen Principal Media
TietoEnator Corporation Business ID: 0101138-5 Kutojantie 10 PO Box 33 FI-02631 ESPOO, FINLAND Tel +358 9 862 6000 Fax +358 9 862 63091 Registered office: Espoo
Kronborgsgränd 1 SE-164 87 KISTA, SWEDEN Tel +46 8 632 1400 Fax +46 8 632 1420
e-mail: [email protected] www.tietoenator.com
