TietoEnator's Q4 growth 14%, EBITA margin 12.6%
TietoEnator Corporation Stock Exchange Report 4 February 2005 at 8.00 am EET
Full-year sales growth 11% to EUR 1 525.3 (1 374.3) million
Fourth-quarter operating profit (EBITA) 20% better than in 2003 at EUR 54.1 (45.0) million and margin 12.6% (12.0).
Full-year operating profit (EBITA) of EUR 253.0 (143.3) million was impacted by capital gains (EUR 81.6 million) from the minority divestment of the Resource Management business area and the divestment of real estate. Operating margin before capital gains 11.2% (10.4). Profit after tax EUR 258.9 (66.6) million.
Fourth-quarter EPS EUR 0.23 (0.30). Full-year EPS EUR 3.19 (0.79).
Proposed dividend EUR 1.00 (0.50).
General market overview
Digitalization needs and ageing information systems are driving demand for IT spending. However, during 2004 the investment constraints and cost-saving initiatives of customers prevailed. The market for IT services and solutions is recovering slowly. There are signs of growth in the number of consulting projects and standard software products, but big projects are still being postponed. Competition is intense as the low-growth environment drives vendors to fight for market share. Offshore offerings are slowly gaining more customer interest. Customers' buying power is reflected in tough pricing negotiations although, overall, prices have become rather stable.
Consolidation in the sector has continued both internationally and in the Nordic countries. Intense competition is driving this development further. The labour market is still favourable. Recruitment activity has slightly increased, but this has not resulted in any bigger increase in labour mobility. Wage inflation stayed moderate.
Development of customer industries
Overall, the market situation in TietoEnator's main customer segments is better than a year ago but there are distinct differences in how the customer industries have developed. TietoEnator has been active in acquiring small- and medium-sized vertically focused companies and acquisitions will continue as an integral part of its growth strategy.
Conditions in the banking business were difficult during 2004. Partnership customers were still cutting costs and solution sales were low due to postponed investments. The trend in this business is slowly improving, however. The level of customer activity increased during the year with prospects most promising in payment systems. The fourth quarter was seasonally strong for smaller-scale card systems. The core banking systems business had a challenging year, but closer to the year end TietoEnator was able to sign a couple of contracts in southern Europe. The demand in the German banking sector is still weak. In the Finnish pension insurance sector demand has remained strong.
In April TietoEnator extended its relationship with one of its most important payment customers, The Royal Bank of Scotland. In June TietoEnator concluded a new group-wide payment system for the Norwegian DnB Nor. At the same time the core banking implementation with former Gjensidige Nor was put on hold as the customer became part of DNB Nor. In December the company made two new agreements in the banking solutions area: an internet banking solution for the Montenegrin bank, CKB, and core banking and internet banking solutions for the Portuguese BPN. TietoEnator's Banking & Insurance business area concluded one acquisition during the year; Inveos in Germany was acquired in January to improve local solution delivery capabilities.
TietoEnator made two outsourcing contracts in 2004 in the pension insurance sector. In May TietoEnator acquired Octel (130 employees), which was the shared IT company of several Finnish pension insurance providers. In September TietoEnator agreed with the Finnish pension insurance company Ilmarinen to set up a joint venture to which over 140 of Ilmarinen's employees were transferred. In November TietoEnator's and Sampo's joint venture Primasoft decided to reorganize, to meet the cost-saving targets of the customer. Around 120 jobs will be reduced in Primasoft during 2005.
The activity in the telecom market has increased continuously and TietoEnator's telecom business is growing strongly. Operators are harmonizing their IT systems and investing in new infrastructure. The interest in low-cost sourcing is attracting offshore competition and affecting pricing discussions.
In addition to strong organic growth TietoEnator also made several acquisitions in the telecom sector. The company closed the acquisition of Ki Consulting, TeliaSonera's Swedish application partner, in January, which increased the number of employees working for the telecom operator customers by 770. The integration of Ki Consulting was smooth and financially the acquired unit generated expected net sales and profitability well in line with the Group average. In December TietoEnator completed negotiations to buy the biggest telecom R&D supplier in Germany, S.E.S.A. AG. This company employs around 600 people in Germany and France providing R&D services mostly to telecom equipment vendors and operators.
The public sector market is showing some increase in activity but hard competition and price pressure continue. The healthcare market on the other hand is growing and licence sales were at a very high level especially in the seasonally strong fourth quarter. Primary healthcare and hospitals are actively adopting new-generation systems in all Nordic countries and TietoEnator has been able to take an increasing share of this market.
The healthcare unit made several acquisitions to improve its product portfolio and customer access. The smaller acquisitions were the imaging business of Jons-Medical in Finland, a minority holding in the Norwegian Helsekomponenter, the Norwegian Respons, a private healthcare software company Doctorex in Finland, laboratory systems provider Informationslogik in Sweden and C&S Healthcare in Sweden. In November TietoEnator signed a letter of intent to buy German ITB AG, which marks entry into a new geographical area. This company, which provides healthcare information systems to hospitals, has a workforce of altogether 170 people including 120 software developers in India. The Indian operations will provide an excellent platform on building a more extensive offshore resource base in the future. In Denmark TietoEnator closed an outsourcing agreement with pension insurance and banking provider Pen-Sam, taking on 27 people in December 2004.
In the forest sector European customers are saving costs, which is affecting TietoEnator's sales to this industry segment. The US business is more stable but Asia is the area with the most activity. The energy sector has been stable. TietoEnator strengthened its position in the electricity business with two acquisitions in the customer information systems area. OMX's energy business with 45 employees was transferred to TietoEnator in February and in October Tekla's customer information systems for the energy industry and the municipal sector were acquired, adding 115 employees.
Of the vertical businesses focusing on the Nordic market, manufacturing is suffering from the cost-cutting measures started by customers during the industry downturn in 2003. Customers' profitability has been improving, however, and growth is expected to return slowly. Demand from the retail segment has declined as TietoEnator has completed its customers' system renewal projects and the new systems are less expensive to maintain.
The demand for processing and network services is stable. Competition and pricing are aggressive. The normal year-on-year reduction of unit prices has stabilized, but still means that without new outsourcing contracts growth in the business is limited. TietoEnator has been able to achieve good profitability in the business and this can be maintained if efficiency is continuously improved. To ensure this, TietoEnator is centralizing, automating and consolidating production sites at an increasing pace.
During 2004 TietoEnator strengthened its ability to exploit the advantages of global sourcing, establishing its first Group-level software centre in Ostrava, Czech Republic. At the end of 2004 TietoEnator employed around 470 people in low-cost areas and plans to increase the number to over 800 employees by the end of 2005.
In July TietoEnator sold the Resource Management business area to a new holding company, retaining 51% of the shares. The other 49% are held by the private equity firm Nordic Capital. The transaction enables TietoEnator to provide capital for expansion in its core verticals while still participating in the future consolidation of the Resource Management market. In November Resource Management changed its name to Personec Group and started the process of focusing on its own core businesses. In December Personec divested its financial ERP business in Norway and acquired IFS's payroll solution business in Sweden. Licence sales in Personec were high in the fourth quarter, reflecting the normal seasonality of the software business.
Fourth-quarter net sales grew 14% to EUR 429.6 (375.3) million. Organic growth was 3%. Full-year net sales increased by 11% to EUR 1525.3 (1 374.3) million and 1% organically. Changes in foreign exchange rates did not affect growth.
Full-year net sales grew 2% in Finland whereas Sweden increased strongly by 31% mostly due to the acquisition of Ki Consulting. Growth in Norway was modest at 1%. In 2004 Finland represented 51% of net sales, Sweden 34% and Norway 6%.
The highest growth, 50%, took place in the telecom and media customer segment, which accounted for 30% of Group net sales in 2004. The growth is attributable to the Ki Consulting acquisition, the outsourcing contract with TeliaSonera and a good level of organic growth. The growing public sector accounted for 21% and stable banking and insurance for 17%.
The order backlog, comprising only services ordered with binding contracts, amounted to EUR 860 million at the end of 2004, EUR 18 million lower than in 2003 but EUR 57 million higher than at the end of the third quarter. Around 70% (70) of the backlog is expected to be invoiced in 2005.
Fourth-quarter operating profit (EBITA) was 20% better than in 2003 at EUR 54.1 (45.0) million. The operating margin climbed to 12.6% (12.0). Operating profit (EBIT) totalled EUR 37.4 (34.4) million. The high level of licence sales in healthcare, card management systems and Personec affected fourth-quarter profitability positively. Banking & Insurance's profit was burdened by EUR 1.7 million in restructuring costs in Germany. Telecom & Media again received semi-annual performance based rewards related to some of its partnership contracts. These added around EUR 10 million to net sales and around EUR 8 million to the operating profit. Telecom & Media also benefited from good utilization in all of its business units.
For the full year 2004 operating profit (EBITA) before capital gains from divestments increased by 20% to EUR 171.3 (143.3) million. Including capital gains, operating profit (EBITA) totalled EUR 253.0 million. The operating margin (EBITA) before capital gains improved to 11.2% (10.4). Operating profit (EBIT) totalled EUR 194.5 (102.7) million.
The full-year operating profitability improved due to exceptionally good performance in Telecom & Media, gradual market recovery, good fourth-quarter licence sales and efficiency measures taken in 2003 and 2004. For the full year Telecom & Media's performance-based rewards had a positive effect of EUR 19 million on net sales and EUR 12 million on the operating profit.
Goodwill was reduced by an additional EUR 8 million on top of the planned annual amortization. EUR 5 million of the additional amortization took place in Banking & Insurance in the third quarter and EUR 3 million in Public & Healthcare, Production & Logistics and at the group level in the fourth quarter.
The operating margin (EBITA) before one-time capital gains in TietoEnator's main markets reached 17% in Finland and 10% in Sweden for the full year 2004.
There were two divestments which generated substantial capital gains during the year. The 49% divestment of the Resource Management Business area resulted in a gain of EUR 68.0 million and the divestment of two office buildings in Finland in a gain of EUR 13.6 million (net of tax EUR 8.7 million). The total of these capital gains had a EUR 0.94 effect on EPS.
In July TietoEnator received an advance tax ruling from the Finnish tax authorities. Based on the ruling the company recognized a deferred tax asset and income amounting to EUR 119 million, or EUR 1.46 per share.
Fourth-quarter earnings per share before goodwill amortization amounted to EUR 0.44 (0.43). After goodwill amortization fourth-quarter earnings per share totalled EUR 0.23 (0.30).
The financial expenses related to the Resource Management transaction had a EUR 1.7 million negative effect on TietoEnator's net financial items in the fourth quarter. The minority interest from the shares held by Nordic Capital had a positive EUR 1.3 million impact on TietoEnator's net income in the fourth quarter.
The full-year earnings per share before goodwill amortization, capital gains and the deferred tax income climbed to EUR 1.52 (1.28). After goodwill amortization, capital gains and the deferred tax asset earnings per share amounted to EUR 3.19 (0.79). Return on capital employed (ROCE) was 35.6% and the return on shareholders' equity (ROE) 47.9% in 2004.
Financing and investments
The full-year cash flow from operations totalled EUR 157.1 million. Operating profit contributed EUR 210.0 million while the increase in working capital consumed EUR 36.2 million. Net tax payments were EUR 10.6 million and substantially lower than in 2003 as the deferred tax asset was employed.
Net investments consumed EUR 56.8 million of cash. The real estate divestment generated EUR 72.5 million. The biggest single investment was the EUR 72 million payment for Ki Consulting in January.
TietoEnator paid a dividend of EUR 41.5 million in April and an extra dividend of EUR 39.4 million in December. Additionally the Group used EUR 97.4 million for share repurchases.
TietoEnator signed a EUR 150 million credit facility in June. The total of EUR 413 million in credit facilities were unused at the end of 2004. Interest-bearing loans increased as the Resource Management transaction resulted in new consolidated debt, the balance of which was EUR 75.9 million at the year end. Nordic Capital's shareholder loan of EUR 36.9 million has been treated as equity.
At the end of December the consolidated balance sheet totalled EUR 1 052.5 million, a 30% increase compared with 2003. The biggest items affecting the balance sheet were the one-time deferred tax asset, divestment of the real estate and the impacts of the Resource Management transaction on consolidated goodwill, equity and debt. The equity ratio was 59.5% (60.8) and gearing was +12.1%. Net debt totalled EUR 31.0 million including EUR 91.3 million in interest-bearing debt and EUR 66.7 million in cash and cash equivalents.
Accrual-based investments totalled EUR 166.2 (61.6) million for the period. Capital expenditure including financial leasing accounted for EUR 56.9 (48.5), goodwill from business activities for EUR 14.1 (4.5) million, and investments in subsidiary and associated company shares for EUR 95.2 (8.6) million.
The Group had 12 773 (11 680) full-time employees at the year end and 12 518 (11 836) on average during the year. The net change in the number of employees was +1172 (-292) during the year. The headcount has mostly increased due to several acquisitions which added altogether 1 340 employees. Recruitment stayed moderate, and a total of 933 (550) employees were hired. TietoEnator has continued personnel reductions and in total 380 employees were affected during the year. Employee turnover is still at the very low level of 5%.
Board of Directors and management
TietoEnator Corporation's Annual General Meeting on 18 March 2004 elected two new Directors: Bengt Halse and Olli Riikkala. Olof Lund did not seek re-election. The Board of Directors elected Kalevi Kontinen Chairman and Anders Ullberg deputy Chairman. In May TietoEnator's personnel elected Elisabeth Ericsson and Pirjo Salo as the representatives of the personnel organizations on the TietoEnator Board. The Board of Directors established two committees in June. The Compensation and Nomination Committee comprises Kalevi Kontinen (Chairman) and Bengt Halse. The Audit and Risk Committee comprises Anders Ullberg (Chairman), Thomas Falk and Olli Riikkala. Lars Gahnström is no longer a member of the Operative Management Team, but as CEO of Personec Group he reports to Personec's Board of Directors. In November TietoEnator implemented rotation of a number of business unit and sub-business unit managers. The purpose of the cross-business area, cross-country and cross-function rotation is to develop management capabilities and leverage synergies and experience.
Shares and options
In September TietoEnator's Board of Directors decided to start a share repurchase programme. Under the 2004 AGM authorization shares are being purchased to develop the company's capital structure. The maximum amount of shares to be purchased, 5% of the share capital or 4 144 322 shares, were acquired through public trading on the Helsinki Stock Exchange in September - October. EUR 97.4 million, an average of EUR 23.50 per share, was used for the repurchases. The company thus now holds 5% of the shares and the voting power. The outstanding number of shares excluding the shares in the company's possession was 78 742 122 at the year end, and on average 79 279 158 in Q4 and 81 977 804 in the full year. The number of registered shares was still 82 886 444. TietoEnator's Board of Directors is planning to propose to the 2005 AGM that the repurchased shares be cancelled. An extraordinary general meeting in November decided on the extra dividend of EUR 0.50 per share in addition to the EUR 0.50 dividend paid in April. The Board has not exercised its authorization to issue share or option rights or raise convertible bond loans. The subscription period for the 1998 warrants ended in May and 1 055 244 subscription rights expired unused. The Board allocated 491 400 stock options from the 2002 option programme as part of the company's incentive programme in April. Around 800 000 options from the programme still remain non-allocated.
Events after the period
The acquisition of S.E.S.A. AG was closed and EUR 64 million of the purchase price was paid in January. Also the acquisition of ITB AG was closed and the purchase price of EUR 9 million was paid in early February. Both acquisitions will be consolidated from January 2005.
671 755 of the warrants of the 2000 programme were annulled in January 2005. After the annulling the 2000 programme entitles to subscribe for 3 028 245 shares. In total all outstanding options and warrants can increase the number of shares by a maximum of 5 911 775.
Pekka Viljakainen was appointed Senior Vice President, Strategic Customer Management and a member of TietoEnator's Operative Management Team (OMT) from 21 January 2005.
Updated financial targets
TietoEnator has revised its financial targets. The Group's overall goal is to improve shareholder value through growth, profitability and effective use of capital. The specific long-term financial targets are:
Revenue growth of 20%
Operating margin (EBIT) to exceed 13% (after depreciation, amortization of intangibles and goodwill impairments)
Each business area to create shareholder value, measured by EVA internally
Long-term gearing target of 40%
Dividend payout ratio of around 50% of net income including one-time items. The annual dividend payout will, however, depend on the financial position and the major investment needs of the company.
According to the new dividend policy TietoEnator's Board of Directors is proposing a dividend of EUR 1.00 (0.50) per share for the year 2004. Around EUR 0.40 of the dividend is based on recurring net income and around EUR 0.60 on the one-time items. As the capital gains and the deferred tax income already increased TietoEnator's cash assets in 2004, the company paid an extra dividend of EUR 39.4 million, or EUR 0.50 per share in December 2004.
International Financial Reporting Standards (IFRS)
TietoEnator's preparations for the transition to IFRS have proceeded as planned. The process has included analysis of the standards, employee training, development of an accounting manual and assessment of the biggest impact areas. IFRS-based comparison figures were collected during 2004. TietoEnator will publish a reconciliation of equity and income statement and comparison figures for Q1-Q4 2004 on 28 February 2005. The only areas where the impacts are expected to be material are business combinations (goodwill) and employee benefits (pensions). Goodwill amortization will discontinue and will be replaced by impairment testing. Also, the purchase prices for acquisitions made in 2004 and later will be allocated to several asset classes, not just to goodwill. The amortization of intangible assets is expected to be around EUR 3 million for 2004. The Finnish GAAP goodwill impairments of EUR 8 million made in 2004 total EUR 19 million according to IFRS. Some of TietoEnator's pension arrangements will be treated as defined benefit plans. The impact of these pension arrangements is expected to be around EUR 30 million in additional debt in the 2004 opening balance sheet and to increase by EUR 11 million due to acquisitions in 2004. Resource Management's shareholder loan from Nordic Capital (EUR 37 million) will be treated as debt instead of equity. More information on TietoEnator's IFRS transition and impacts can be found at www.tietoenator.com/ifrs.
Prospects for 2005
The slow overall market recovery is expected to continue in 2005. TietoEnator's growth thus depends mainly on new acquisitions and outsourcing transactions. The acquisitions finalized up to this date are expected to contribute around 7.0% of growth in 2005. The discontinuation of the zero-margin pass-through invoicing from Primasoft will reduce the Group's top line by 1.0% in 2005 and TietoEnator will also adjust its reported organic growth for this effect.
For 2005 TietoEnator expects the second-quarter net sales and profitability to be seasonally higher than in the first quarter partly due to investments in process harmonization and solutions. Further, the amount of performance based rewards is expected to be lower in 2005 than in 2004.
In the first quarter sales are forecast to grow 6-8% compared with the first quarter of 2004. Full-year sales growth is expected to range between 8-12%. The first-quarter EBITA margin is expected to range between 9-11%. The full-year EBITA margin is expected to exceed 10%. The full-year effective tax rate is expected to be approximately 28% for pretax profit after tax-deductible goodwill amortization.
The full-year cash flow from operations is expected to continue strong and is improved by the utilization of the tax asset. The prospects are based on Finnish GAAP accounting. There are no material differences expected between 2005 Finnish GAAP and IFRS net sales and EBITA (earnings before interest, taxes and amortization including amortization for intangible assets).
Financial calendar in 2005
2004 financial statements bulletin on 11 February 2005
Financial Review and Business Review 2004 on TietoEnator's website in week 7
IFRS comparison figures for Q1-Q4 2004 on 28 February 2005
Annual General Meeting in Espoo on 17 March 2005
Interim report for January - March 2005 on 21 April 2005
Interim report for January - June 2005 on 22 July 2005
Interim report for January - September 2005 on 19 October 2005
Press conference for analysts and media will be held today in Stockholm, Nordic Sea Hotel, Vasaplan, at 9.00 am CET (10.00 am EET, 8.00 am UK time).
The conference will be hosted in English by CEO Matti Lehti, Deputy CEO Åke Plyhm, CFO Timo Salmela and SVP Investor Relations and Financial Communication Päivi Lindqvist. Notification of attendance to Therese Edehorn, email@example.com, +46 8 632 1411.
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 also be available after the conference.
Conference call starting at 4.00 pm EET (3.00 am CET, 2.00 am UK time) will also be available as live audio webcast on www.tietoenator.com/presentations. The call will be hosted by Matti Lehti, Åke Plyhm, Timo Salmela and Päivi Lindqvist. Callers may access the conference directly at the followin telephone numbers: US callers: 617 614 2711, non-US callers: +44 207 365 8426, code 'TietoEnator'.
A replay will be available until 11 February 2005 in the followin numbers: US callers: 617 801 6888, non-US callers: +44 20 7365 8427, access code: 78498000. 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 http://www.tietoenator.com as soon as they are published.
TietoEnator ist einer der führenden Architekten für die kontinuierliche Weiterentwicklung der Informationsgesellschaft und einer der größten IT-Dienstleister in Europa. TietoEnator ist spezialisiert auf Beratung, Entwicklung und Betrieb der zunehmend technologisch bestimmten Geschäftsprozesse seiner Kunden. Das Angebot der Gruppe basiert auf der Kombination von umfassenden Branchenkenntnissen und modernem IT-Know-how. TietoEnator beschäftigt 16.000 Experten in rund 30 Ländern. www.tietoenator.de