DIGIA THIRD QUARTER 2012: NET INCOME FROM QT DEAL INCREASES CONSOLIDATED NET SALES AND OPERATING PROFIT

DIGIA PLC INTERIM REPORT 26 October 2012, 09:00 A.M.

DIGIA THIRD QUARTER 2012: NET INCOME FROM QT DEAL INCREASES CONSOLIDATED NET SALES AND OPERATING PROFIT  

SUMMARY

January-September

- Consolidated net sales: EUR 75.0 (91.7) million, down 18.3 per cent

- Operating profit before extraordinary items: EUR 7.2 (5.6) million, up 28.9 per cent

- Extraordinary items include EUR 0.6 million in restructuring costs due to reorganisation (1-9/2011: restructuring cost EUR 3.8 million and goodwill writedown EUR 25.4 million)

- Operating profit after extraordinary items: EUR 6.6 (-23.6) million

- Profitability (EBIT%): 9.6 (6.1) per cent before extraordinary items and 8.9 (-25.7) per cent after extraordinary items

- Product business accounted for 36.6 (19.6) per cent

- Earnings per share: EUR 0.23 (0.21) before extraordinary items and 0.20 (-1.14) after extraordinary items

July–September

- Consolidated net sales: EUR 24.4 (26.0) million, down 6.1 per cent

- Operating profit: EUR 4.5 million (Q3/2011: EUR 2.7 before extraordinary items and EUR 2.1 million after extraordinary items)

- Profitability (EBIT%): 18.6 per cent (Q3/2011: 10.4 per cent before extraordinary items and 8.0 per cent after extraordinary items)

- Product business accounted for 47.6 (23.4) per cent

- Earnings per share: EUR 0,15 (Q3/2011: EUR 0.09 before extraordinary items and EUR 0.06 after extraordinary items)

On 8 August the company made a deal to buy Qt software technology and the related business from Nokia Plc. The acquisition became effective on 18 September and included a net income sum of EUR 9.2 million related to a license granted to Nokia. Of this, EUR 3.8 was allocated to the third quarter, bringing a significant temporary injection into the company’s consolidated net sales. It also increased the Q3 operating profit by EUR 3.2 million.

Even without the aforementioned Qt deal, the company’s Qt product business went well during the review period, with an increase in net sales and a rise in profitability to a good level. Thanks to the Qt business, the proportion of the company’s product business and international business grew significantly compared to the same period in the previous year. They now form an important part of the company’s operations, even taking into account the exceptional results generated by the Qt acquisition.

Despite the positive effect on net sales of the Qt deal in Q3, the company’s overall net sales fell significantly during the review period and slightly during the third quarter compared to the corresponding periods in the previous year. This was due to the major decline in demand for mobile contract engineering services which began in Q2/2011.

After those changes, the company has consistently and successfully adjusted its operations and organisation to correspond to the new operating environment. On 18 September 2012 the company initiated personnel negotiations with the aim of reorganising the Qt business. The negotiations apply to the personnel of the Qt business and the remaining mobile contract engineering business in the Helsinki, Tampere, Jyväskylä and Oulu offices. The negotiations may lead to personnel reductions among the 88 affected employees.

The decline in consolidated net sales taking place in spite of the aforementioned adjustment measures has led to an increase in the proportion of fixed costs, which in turn hindered the growth of operational profitability during the review period. Third-quarter profitability was also negatively affected by a loss provision of EUR 0.8 million related to two customer deliveries. Profitability was very high in Q3, however, thanks to the Qt acquisition. Excluding the temporary items of the Qt deal and the loss provision, the company reached a good level of profitability in Q3.

The transfer of personnel to the company as part of the Qt deal led to an increase in personnel expenses. These, combined with the costs arising from taking over the acquired Qt business will have a significant negative impact on the operating profit and profitability of the Qt business and the company as a whole, especially in the fourth quarter of 2012. The company predicts that it may make a temporary operating loss in Q4, but that as the planned streamlining measures take effect and the Qt business develops, the profitability will rise again to a good level in 2013.

GROUP KEY FIGURES AND RATIOS

MARKETS AND DIGIA’S BUSINESS

Weak economic prospects have from time to time caused delays in customers’ decision-making and therefore in the start-up of new projects. Customers are also facing pressure to make cost-savings, which has started to reflect in their purchase decisions.

The human resources situation has two quite different aspects. On the one hand, a large number of experts were released onto the job market from various contract engineering projects; on the other, there is a shortage of experienced architecture and business experts, which is causing lengthened recruitment processes and pressure for pay rises.

The company’s new organisation took effect at the beginning of 2012. Its implementation has on the whole progressed well and according to plan, but in some areas continued measures are needed to increase efficiency and profitability.

In the bespoke solutions business, the increased cost pressures on customers clearly had an effect on demand for the company’s services during the review period. Especially when it comes to outsourcing large-scale functions, there is a lot of cost pressure and price sensitivity among the customers. The company is focusing on sales and on developing its product selection to correspond even better to demand.

Demand for ERP systems and other operational systems was fair during the review period, although increased caution was evident in customers’ purchasing behaviour and sales cycles have become longer.

The Qt business increased its net sales, with operations progressing according to plan during the period. The profitability of the business improved, as expected, reaching a very good level. The Qt deal made with Nokia brought a major temporary boost to Q3 net sales and operating profit.

The focus of development of Digia’s Russian unit was on ERP system solutions for local customers within the retail value chain. The retail product selection had previously been expanded from BI products to video analytics solutions. Besides offering services locally, the Russian unit also supports the company’s business in Finland by providing near shore services, particularly within ERP system solutions.

The focus of development of Digia’s Chinese unit was increasingly on Qt business for the local Chinese market. The completed Qt acquisition reinforces the company’s competitiveness in this area.

NET SALES

Digia’s consolidated net sales for the reporting period were EUR 75.0 (91.7) million, down 18.3 per cent from the same period in 2011.

The decrease was due to a sharp fall in demand for mobile contract engineering services after the end of the comparison period, which continued into the current review period. Net sales generated by the Qt business grew significantly from the comparison period, reaching EUR 14.3 million during the period under review. Of that figure, EUR 3.8 million came from the granting of rights of use of Qt technology to Nokia as part of the Qt business acquisition.                                    

During the reporting period, the product business accounted for EUR 27.4 (18.0) million or 36.6 (19.6) per cent of consolidated net sales.

International operations accounted for EUR 15.4 (9.6) million or 20.5 (10.4) per cent of consolidated net sales.

Digia’s consolidated net sales for the third quarter were EUR 24.4 (26.0) million, down 6.1 per cent from the same period in 2011.

During the quarter, the product business accounted for EUR 11.6 (6.1) million of consolidated net sales, or 47.6 (23.4) per cent.

International operations accounted for EUR 4.7 (3.9) million, or 19.4 (14.9) per cent, of consolidated net sales in Q3.

PROFIT PERFORMANCE AND PROFITABILITY

Digia’s consolidated operating profit before extraordinary items for the reporting period was EUR 7.2 (5.6) million, up 28.9 per cent year on year. Profitability (EBIT%) before extraordinary items was 9.6 (6.1) per cent.                   

Digia’s consolidated operating profit after extraordinary items for the review period was EUR 6.6 (-23.6) million. Profitability (EBIT%) after extraordinary items was 8.9 (-25.7) per cent. Extraordinary items included restructuring costs of EUR 0.6 million related to the Group Management Team reorganisation as part of operational streamlining.

Digia’s consolidated third-quarter operating profit was EUR 4.5 (Q3/2011 EUR 2.7 million before extraordinary items), representing a year-on-year increase of 67.4 per cent. Profitability (EBIT%) was 18.6 (10.4) per cent In Q3 of 2011, operating profit after extraordinary items was EUR 2.1 million and profitability (EBIT%) was 8.0 per cent.

The growth in operating profit and profitability growth during the review period was due to the sale of rights of use to Nokia as a consequence of the Qt business acquisition. The income from this sale had a temporary effect on operating profit and profitability. Additionally, the company’s operating cost structure and profitability were negatively affected during the period by investments in the international product business, a relative increase in the proportion of fixed operating costs, and the costs caused by a higher personnel turnover at the start of the year. The profitability of the bespoke solutions business was lower than expected.

Third-quarter profitability was also negatively affected by a loss provision of EUR 0.8 million related to two customer deliveries.

Consolidated earnings before tax for the period totalled EUR 5.6 (-24.2) million, and net profit was EUR 4.1 (-23.7) million. Consolidated earnings before tax for the third quarter were EUR 4.2 (2.0) million, and net profit EUR 3.1 (1.1) million.

Consolidated earnings per share for the review period totalled EUR 0.23 (0.21) before extraordinary items and EUR 0.20 (-1.14) after extraordinary items. Consolidated earnings per share for the third quarter were EUR 0.15 (0.09). In Q3 2011, the consolidated earnings per share after extraordinary items were EUR 0.06.

The Group’s net financial expenses for the reporting period were EUR 1.0 (0.6) million and for the third quarter EUR 0.4 (0.1) million.

FINANCIAL POSITION AND EXPENDITURE

At the end of the reporting period, Digia Group’s consolidated balance sheet total stood at EUR 96.2 million (12/2011: EUR 87.8 million), and the equity ratio was 51.6 (12/2011: 47.8) per cent. Net gearing was 30.9 (12/2011: 34.5) per cent. Period-end cash and cash equivalents totalled EUR 8.5 (12/2011: 8.2) million.

Interest-bearing liabilities amounted to EUR 21.7 (12/2011: 21.9) million. These consisted of EUR 20.5 million in loans from financial institutions and EUR 1.2 million in financial leasing liabilities.

The Group’s cash flow from operations for the period was positive by EUR 17.7 (3.2) million, cash flow from investments was negative by EUR 15.8 (2.4) million, and cash flow from financing was negative by EUR 1.6 (7.6) million. Billing of EUR 12.2 million from Nokia in relation to the Qt acquisition deal had a positive impact on operational cash flow.  Cash flow from financing was negatively affected by the repayment of loans for a total sum of EUR 3.5 million, as well as the payment of EUR 2.1 million in dividends. Additionally, a long-term loan of EUR 4.0 million was taken out during the period for the Qt acquisition.

The Group’s investments in fixed assets during the review period totalled EUR 0.4 (2.1) million. Acquisitions of tangible fixed assets totalled EUR 0.3 (1.8) million. Cash flow from investments into intangible rights was EUR 15.4 million.

Return on investment (ROI) for the period was 14.3 (-41.2) per cent, and return on equity (ROE) was 13.4 (-59.7) per cent.

The Group carries out quarterly impairment testing of goodwill and intangible assets with an indefinite useful life. The table below shows the distribution of goodwill and values subject to testing at the end of the reporting period:

Present values were calculated for the forecast period based on the following assumptions: Net sales and operating profit for the first three quarters of the forecast period according to the confirmed figures for the current year, and for the fourth quarter according to budget; after this, annual growth in net sales of 3.0 per cent and in operating profit of 10.0 per cent, and a pre-tax discount rate of 8.9 per cent. Cash flows after the forecast period were estimated by means of cash-flow extrapolation, applying the assumptions given above.

According to a completed sensitivity analysis, the goodwill requires either net sales to remain at the current level with profitability of 5.5 per cent, or a 7.1 per cent growth in net sales with profitability of 0.1 per cent. The management sees no risk of goodwill impairment.

HUMAN RESOURCES, MANAGEMENT, AND ADMINISTRATION

At the end of the period, the total number of Group personnel was 1,044, representing a decrease of 131 employees, or 11.1 per cent, since the end of 2011 (1,175). During the reporting period, the number of employees averaged 1,030, a decrease of 423 employees or 29.1 per cent from the 2011 average (1,453).

Employees by function at the end of the period:

As of the end of the period, 230 employees were working abroad (12/2011: 161).

The Digia Plc Annual General Meeting of 13 March 2012 re-elected Robert Ingman, Kari Karvinen, Pertti Kyttälä and Tommi Uhari as members of the Board. Päivi Hokkanen, Seppo Ruotsalainen and Leena Saarinen were elected as new members. At the organisation meeting of the Board, Pertti Kyttälä was elected Chairman of the Board and Robert Ingman Vice Chairman.

Juha Varelius has been Digia Plc’s President and CEO since 1 January 2008.

Anja Wasenius started as Acting CFO in June 2012.

Ernst & Young Oy, authorised public accountants, are the Group’s auditors, with Authorised Public Accountant Heikki Ilkka as the principal auditor.

RISKS AND UNCERTAINTIES

The company’s short-term business risks and uncertainties were described in the Financial Statements for 2011. These are essentially unchanged.

Due to the Qt business acquisition that became effective in the third quarter, however, the Qt business will have an increasingly significant influence on the company’s operations and financial performance. This means that any shifts in the competitive scenario or market for that business may have a major impact on the company’s future net sales and profitability.

The company considers Qt technology to have significant potential and business opportunities, which the company hopes to utilise with the completed deal. If the business fails to develop according to the company’s expectations, the investments made in the Qt business and the related costs may prove to be a significant burden operational profitability in the short term.

FUTURE PROSPECTS

The company’s principal objective for 2012 has been to increase its scalable product business. Besides pursuing organic growth, the company will continue actively to look out for opportunities to make carefully considered business acquisitions that support its strategy. The main cornerstones of the company’s operations are still high profitability and a positive cash flow.

The company expects the IT market to remain at roughly the level of 2011 in 2012-13. However, risks associated with the Eurozone debt crisis and general inflation may affect demand for IT services and the development of business profitability. Slightly greater uncertainty is therefore related to the economic prospects.

The company expects demand for its ERP systems, operational systems and integration services to remain good, although increased caution on the customer side and lengthening sales cycles may have an effect on future order intake.

In the last quarter of this year the company will complete the necessary measures for adjusting its mobile contract engineering business to the prevailing market situation.

The company will continue to seek expansion in the growing Russian market, especially through its Business Intelligence solutions, ERP systems and complementary products and services in the trade and logistics customer segments.

The Chinese unit will continue to be realigned to increasingly serve the Qt business.

The company expects net sales from the Qt business to continue growing. The transfer of personnel to the company as part of the Qt acquisition have, however, led to an increase in personnel expenses. These, combined with the costs arising from taking over the acquired Qt business, will have a significant negative impact on the operating profit and profitability of the Qt business and the company as a whole, especially in the fourth quarter of 2012. The company predicts that it may make a temporary operating loss in Q4, but that as the planned streamlining measures take effect and the Qt business develops, the profitability will rise again to a good level in 2013.

OTHER EVENTS DURING THE REVIEW PERIOD

Convening on 13 March 2012, the Digia Plc Annual General Meeting (AGM) approved the financial statements for 2011, released the Board members and the CEO from liability, determined Board emoluments, resolved to keep the number of Board members at seven, and elected the Board of Directors for the new term.

With regard to profit distribution for 2011, the AGM approved the Board’s proposal to make a repayment of capital of EUR 0.10 per share to all shareholders listed on the shareholder list maintained by Euroclear Finland Ltd on the reconciliation date of 16 March 2012. The date for the repayment of capital was set to be 23 March 2012.

The AGM granted the following authorisations to the Board:

Authorisation of the Board of Directors to decide on buying back own shares and/or accepting them as collateral

The AGM authorised the Board to decide on the buyback and/or acceptance as collateral of not more than 2,000,000 shares in the company. This buyback can only be executed by means of the company’s unrestricted equity. The Board shall decide on how these shares are to be bought. Own shares may be bought back in disproportion to the holdings of the shareholders. The authorisation also includes acquisition of shares through public trading organised by NASDAQ OMX Helsinki Oy in accordance with the rules and instructions of NASDAQ OMX Helsinki and Euroclear Finland Ltd, or through offers made to shareholders. Shares may be acquired in order to improve the company’s capital structure, to fund acquisitions or other business transactions, for offering share-based incentive schemes, to sell on, or to be annulled. The shares must be acquired at the market price in public trading. This authorisation supersedes that granted by the AGM of 16 March 2011 and is valid for 18 months – i.e. until 13 September 2013.

Authorising the Board of Directors to decide on a share issue and granting of special rights

The AGM authorised the Board to decide on an ordinary or bonus issue of shares and the granting of special rights (as defined in Section 1, Chapter 10 of the Limited Liability Companies Act) in one or more instalments, as follows: The issue may total, at a maximum, 4,000,000 shares. The authorisation applies both to new shares and to treasury shares held by the company. By virtue of the authorisation, the Board has the right to decide on share issues and the granting of special rights, in deviation from the pre-emptive subscription rights of the shareholders (a directed issue). The authorisation may be used to fund or complete acquisitions or other business transactions, for offering share-based incentive schemes, to develop the company’s capital structure, or for other purposes. The Board was authorised to decide on all terms related to the share issue or special rights, including the subscription price, its payment in cash or (partly or wholly) in capital contributed in kind or its being written off against the subscriber’s receivables, and its recognition in the company's balance sheet. This authorisation supersedes that granted by the AGM of 16 March 2011 and is valid for 18 months – i.e. until 13 September 2013.

SHARE CAPITAL AND SHARES

On 30 September 2012, the number of Digia Plc shares totalled 20,875,645.

At the end of the period, according to Finnish Central Securities Depository Ltd, Digia had 5,910 shareholders.

The 10 biggest shareholders were:

Distribution of holdings by number of shares held on 30 September 2012

Shareholding by sector on 30 September 2012

The weighted average number of shares during the reporting period, adjusted for share issues, came to 20,760,321. The number of outstanding shares came to 20,772,523 in total at the end of the review period.

The company held a total of 103,122 treasury shares at the end of the reporting period. The accounting counter value of these treasury shares is EUR 0.10 per share. The company held about 0.5 per cent of the capital stock as of 30 September 2012. In relation to the company’s performance-based incentive system, Digia has financed the acquisition of 300,000 own shares. At the end of the review period, 12,424 of these shares remained undistributed and were under the management of Evli Alexander Management Ltd.

REPORTED SHARE PERFORMANCE ON THE HELSINKI STOCK EXCHANGE

Digia Plc shares are listed on the Nordic Exchange under ‘Information Technology IT Services’. The company's short name is DIG1V. The lowest reported share quotation was EUR 2.28 and the highest was EUR 3.30. The share officially closed at EUR 2.77 on the last trading day. The trade-weighted average was EUR 2.87. The Group’s market capitalisation totalled EUR 57,825,537 at the end of the period.

The company received no flagging notifications during the reporting period.

STOCK OPTION SCHEMES

Digia Plc had no outstanding options.

Helsinki, 26 October 2012

Digia Plc

Board of Directors

BRIEFING FOR ANALYSTS

Digia will hold a briefing on its financial statement for analysts on Friday 26 October 2012, at 11 am, at WTC Sodexo, in the Marski cabinet of the World Trade Center, Aleksanterinkatu 17, 00100 Helsinki, Finland. All are welcome.

SOURCES OF FURTHER INFORMATION

Juha Varelius, President and CEO, Mobile: +358 400 855 849, E-mail: juha.varelius@digia.com

The Interim Report and presentation thereof will be available at the company’s website at www.digia.com in the ‘Investors’ section, from 11 am.

DISTRIBUTION

NASDAQ OMX Helsinki
Key media

ABBREVIATED FINANCIAL STATEMENTS AND ATTACHMENTS

Consolidated Income Statement
Consolidated Balance Sheet
Consolidated Cash Flow Statement
Consolidated Statement of Changes In Shareholders’ Equity
Notes to the Accounts

The interim report has been prepared in compliance with IFRS and the IAS 34 standard.
This interim report is based on unaudited figures.

CONSOLIDATED INCOME STATEMENT, EUR 1,000

 CONSOLIDATED BALANCE SHEET, EUR 1,000

 CONSOLIDATED CASH FLOW STATEMENT, EUR 1,000

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY, EUR 1,000

a = share capital
b = rights issue
c = share premium
d = unrestricted invested shareholders’ equity
e = other reserves
f = currency translation differences
g = retained earnings
h = total shareholders’ equity

NOTES TO THE ACCOUNTS

Accounting principles:
The interim report has been drafted in line with IFRS. In other respects, the same accounting principles have been applied as in the 2011 Financial Statements. The accounting principles and formulas for the calculation of key figures and ratios are unchanged and are presented in the 2011 Financial Statements.

Seasonal nature of business:
The Group's business is affected by the number of workdays each month, as well as by holiday seasons.

Dividends paid:
Dividends paid during the reporting period totalled EUR 2,077,252.30.

Related-party transactions:
Digia Group’s related parties include the CEO and the members of the Board of Directors and Group Management Team. Digia Group had no significant transactions with related parties during the reporting period.

M&A transactions completed:
On 8 August the company made a deal to buy Qt software technology and the related business from Nokia Plc. With the acquisition, 88 employees in Norway, Germany and Finland were transferred to the company’s employ. The deal became effective on 18 September 2012 and the net acquisition price was EUR 4.0 million, comprising the sale price of EUR 16.2 million related to the assets and business transferred, minus a bill of EUR 12.2 million from Digia to Nokia.

Of the sale price of EUR 16.2 million, EUR 6.6 million of goodwill pertained to intangible rights, EUR 2.9 million to the brand, EUR 4.1 million to technology and EUR 1.0 million to the customer relationship with Nokia. According to Finnish Accounting Standards (FAS) the depreciation of the goodwill is deductible in taxation. Additionally, EUR 0.2 million was recorded as an expense and EUR 1.5 million as a loan repayment related to an expense from 2012 covered as a part of the deal.

The aforementioned bill from Digia to Nokia related to the granting to Nokia of the right to continue using Qt in its own business, to a three-year competition and transfer restriction applying to the technology acquired by Digia, and to Nokia’s fixed-term obligation to provide Digia with services facilitating the takeover of the acquired business, which were valued in total at EUR 12.2 million. Of the total sum, EUR 9.2 million was related to the right of use granted to Nokia and is considered to make up income for the company; of this, EUR 3,8 million was allocated to the third quarter and the other EUR 5.4 million will be recognised evenly over the next three years.

Consolidated income statement by quarter:

Group key figures and ratios:

Formulae for key figures and ratios are presented in the 2011 financial statements. These formulae remained unchanged during the reporting period.