TietoEnator Interim Report 3/2001

TietoEnator Interim Report 3/2001 · Continued growth in high-value-added IT services · Operating profit before non-comparable items grew by 56% for the full period and by 60% to EUR 27.0 million (16.9) for the quarter isolated · Business area net sales grew by 13% · Operating margin grew to 10.7% (7.0) · Earnings per share grew by 24% to EUR 0.88 (0.71) MARKET OVERVIEW IT spending overall continued to grow during the third quarter of 2001, but at a slower pace than during the first six months of the year. The growth rate decreased to a single-digit figure owing to the general economic slowdown. Despite this trend interest in outsourcing and partnerships increased further during the third quarter, especially within the complex high- value-added outsourcing business where TietoEnator has its stronghold. In high-value-added outsourcing TietoEnator offers a central support role, combining systems development and processing responsibilities in one offer, based on its industry-specific competence and the latest IT technology. Previously, the driver behind such contracts was the desire for new technology and increased security; now, however, the focus is shifting to fast implementation where the key words are cost-cutting and the possibility for rapid adaptation to new market conditions. TietoEnator signed several new large outsourcing agreements during the third quarter with among others Nokia and Sampo. All TietoEnator's major industry sectors were affected to different degrees by the changes in the business environment during the third quarter. The fastest moving and also most volatile sector was telecom, whereas development in the finance, public and forest sectors was more stable. Finland, Sweden and Norway, the main markets for TietoEnator, continued to develop largely as before. The Finnish market showed only minor signs of a slowdown, while the Swedish market was flat. TietoEnator's strong focus on the leading Nordic industry sectors and its deep industrial expertise give the company unique possibilities to support its customers in the transition to the digital economy. These factors, paired with the company's well established long-term partnership strategy, give TietoEnator a comparatively high resistance to downturns in the economy. NET SALES Net sales growth for the six business areas during the third quarter amounted to 14%. In local currencies the growth was 17%. Net sales for the full period increased by 13% to EUR 818.4 million (724.6). In local currencies the growth was 16%. The banking and finance segment accounted for 23% of total sales, telecom for 14%, public sales for 25%, and the forest segment for 7% of the total. Organic growth was 12% for the third quarter and 11% for the full period.1) Geographically growth was 25% in Finland, while Sweden decreased by 9% (in local currency the Swedish development was -1%). The highest growth rates were recorded in Norway with 43%, Denmark 23% and Germany 21%. The order backlog at 30 September was EUR 251 million higher than last year and totalled EUR 713 million (462). Close to 30 % of this is expected to be invoiced during 2001. The figure comprises only services ordered with binding contracts. In many partnership relationships binding agreements are renegotiated and renewed during the last part of the year, which causes quarterly fluctuations in the order backlog. 1) Organic growth is defined as development of sales to existing customers as well as sales to new customers, including new outsourcing deals and partnerships. The effect of changes in the group structure is excluded. Acquisition growth consists of acquiring companies or operations, including their customer bases. PROFITABILITY Isolated for the third quarter, the operating profit (EBIT) before non- comparable items 2) was EUR 27.0 million (16.9), corresponding to a margin of 10.5% (6.9). Operating profit (EBIT) after non-comparable items amounted to EUR 27.2 million (17.9), corresponding to 10.6% (7.3). Operating profit before non-comparable items for the full period amounted to EUR 87.9 million (56.5), representing a margin of 10.7% (7.0). Operating profit after non-comparable items for the same period was EUR 108.8 million (82.0). The results of the structural changes that took place during 2000 and the first part of 2001 continued to affect profits and margins positively. During the third quarter TietoEnator's stake in the defence related company AerotechTelub was divested to Saab. The agreement was approved by the Swedish competition authorities in October and will be recorded in the final quarter of 2001. This divestment creates a capital gain before tax of EUR 99 million, and EUR 89 million after tax, giving TietoEnator a cash increase of EUR 105 million in October 2001. Net cash flow from operations amounted to EUR 102.1 million (48.8) and together with investing activities, paid dividend and purchase of own shares amounted net cash flow to EUR 2.6 million (-27.1). Earnings per share, excluding goodwill amortisation, for the full period was EUR 1.02 (0.81) and after goodwill amortisation EUR 0.88 (0.71). The rolling 12-month return on capital employed (ROCE) was 36.3% and on equity 23.2%. 2) Non-comparable items are defined as non-recurring items + social costs for personnel warrants. SHARE BUY-BACKS TietoEnator's Board of Directors decided to exercise its right to buy back company shares as approved by the AGM. The purpose of this action, started at the beginning of October, is to improve capital efficiency. Company shares are being purchased to reduce negative gearing (net borrowing in relation to shareholders' equity). The share buy-back will not prevent TietoEnator's growth targets from being implemented. A total of 871 060 shares has so far been bought back to a total price of EUR 19.1 million. PERSONNEL Net recruitment slowed down during the third quarter. A total of 356 (385) new persons were employed within the business areas. Together with acquisitions, divestments and leaves, the net increase amounted to altogether 242 (86). For the full period the net increase was 1 048 (338) persons. The group had an average of 9 859 (9 897) employees during the period and 10 314 (9 996) by 30 September. The employee turnover rate in the business areas was 10.6% on a rolling 12-month basis. Hence the clearly decreasing personnel turnover rate visible during the first half of the year continued through the third quarter. Investments in competence development continued on all levels. TietoEnator is running an extensive management-training program together with the IMD Business School in Lausanne, Switzerland. The target group is 150 top managers of TietoEnator and the program is focused on two themes - internationalisation and growth - aiming to increase the competitiveness of TietoEnator in the international marketplace. A company-wide program will be launched in late 2001 to further safeguard awareness and understanding of the TietoEnator strategy and guiding principles throughout the organisation. TE Academy, TietoEnator's web- based learning platform, is continuously updated and enhanced to offer skills development and training on several different levels. DEVELOPMENT BY BUSINESS AREA Finance Sector The overall slowdown in the economy has been affecting demand for consulting assignments and large development projects. TietoEnator's close and long-term customer relations countered this trend, however, and there are signs that the solutions business might benefit from the situation. The Nordic partnership business that is the foundation of the business area continued to grow strongly in sales and profits. An extensive co- operation contract was signed with the Sampo finance and insurance group in Finland. Action is also being taken to further increase and activate relations with potential large-scale customers outside Finland. Within the e-Finance solutions area, TietoEnator strengthened its position as the leading supplier of fund management systems in the Nordic countries through the acquisition of the Swedish enterprise Eumetrix. Agreements were also made with important international customers like the Fortis Bank in the Netherlands. Visa International selected TietoEnator as partner for introducing chip card technology in their systems. Net sales for the third quarter was EUR 37.6 million (35.8), an increase of 5 % compared to last year. Operating profit before goodwill amortisation was at the same level as last year EUR 4.4 million (4.4). Telecom & Media The whole telecom market - vendors, operators and media - have been affected by the weakened economy. Several customers have launched cost- cutting programs including layoffs, freezing of investments and shelving of projects to counter the problems, one of the largest being the cash flow of the operators. This development is leading to increased price pressure and slow market growth. TietoEnator's strong position among several key customers enabled the company to increase market share despite the overall development. The strong position also enables TietoEnator to play an active role in ongoing outsourcing and partnership discussions. During the quarter TietoEnator signed a partnering agreement concerning product development for Nokia's Mobile Networks. The agreement, the first of its kind for TietoEnator, includes the transfer of 320 people to TietoEnator, which will now be able to provide full-scale research and development services for Nokia Networks. Net sales for the third quarter was EUR 36.1 million (34.6), an increase of 4 % compared to last year. Operating profit before goodwill amortisation decreased by 19% to EUR 3.4 million (4.2). Public Sector The overall market continued to grow steadily during the quarter. The strongest growth was evident in solutions for digital government services and products for the healthcare sector, while products for social welfare and education developed more weakly. The organisation's activities to create increased focus on growth and profit were successful. During the third quarter the business area finalised the acquisition of part of the business of the IT consultancy company Arrowhead Technology & Solutions. This acquisition, adding some 50 new employees, strengthens TietoEnator's position as a supplier of IT services and solutions for the public sector within operational development, system development and system administration. Several major digital government projects are running successfully in Sweden and Finland. Net sales for the third quarter was EUR 35.1 million (29.9), an increase of 17 % compared to last year. Operating profit before goodwill amortisation increased by 45% to EUR 3.1 million (2.1). Production & Logistics Demand for IT services within the industry sectors remained relatively high, mirroring the increasing need for effective business support in a tough environment. Several key customers, however, are actively looking at further outsourcing while at the same taking cost-cutting measures and postponing investments in non-critical areas. Hard competition from both global and local players is increasing overall pressure on prices. The forest sector continued to improve strongly, while development in the Energy sector, although still on a high level, was somewhat slower during the third quarter compared to the first six months of the year. A framework agreement was signed with the Swedish power utility Vattenfall, and TietoEnator's new US office in Houston is working with its first project for BP/Amoco. The TietoKesko integration proceeded as planned and the Rautaruukki outsourcing deal continued successfully. Net sales for the third quarter was EUR 47.3 million (40.1), an increase of 18% compared to last year. Operating profit before goodwill amortisation increased notably to EUR 3.9 million (-0.5). Processing & Network Demand for outsourcing is growing in Finland and in Sweden, fuelled by the slowdown in the economy. Cost-cutting is increasingly a clear driver behind this demand. The international competitors are increasing their efforts to enter the markets in Denmark, Sweden and Finland. TietoEnator strengthened its position on the Finnish market after signing a large outsourcing agreement with Sampo, together with business area Finance Sector. Agreements were also signed with the Finnish telecom operator Sonera, among others. Net sales for the third quarter was EUR 74.9 million (66.1), an increase of 13 % compared to last year. Operating profit before goodwill amortisation increased by 18% to EUR 12.3 million (10.4). Resource Management During the third quarter business conditions were good in Finland, stable in Sweden, and more turbulent in Denmark and Norway. The driving force behind the continued strong development in Finland was the euro conversion. Other factors contributing to the business area's growth are increasing outsourcing of payroll handling and document management. Clients, while striving to reduce costs, are also looking for value- added services and solutions. This benefits TietoEnator, a strong player in digital solutions like invoice hotels, archives and portal services. Operations were partly restructured during the period to increase efficiency. Emphasis was given to training of sales organisations, customer events and marketing in order to create new business opportunities in 2002. Net sales for the third quarter was EUR 40.3 million (37.4), an increase of 8% compared to last year. Operating profit before goodwill amortisation increased by 2% to EUR 5.5 million (5.4). PROSPECTS FOR THE FULL YEAR Demand for high-value-added IT services continues to grow. The slowdown in economic growth and the resultant corporate restructuring is cutting overall IT spending and reducing market visibility. On the other hand the economic slowdown is supporting outsourcing and ready-made solutions that quickly cut costs and increase productivity. TietoEnator´s strategic emphasis on high-value-added services, outsourcing in partnership with its clients and focused acquisitions will maintain growth in net sales. Growth for the full year is expected to be in line with the actual 9-month growth. The improvement in net sales and the structural changes made in 2000 will boost profitability this year. The Group´s operating profit in 2001 is expected to improve significantly on the previous year and to exceed the 10% margin target. FINANCIAL STATEMENT FOR 2001 TietoEnator will publish the Financial Statement for 2001 on Thursday 14th February 2002. INTERIM REPORTS FOR 2002 TietoEnator will publish three interim reports in 2002. The publishing dates are: - Interim Report for the period January - March: Thursday 25 April 2002 - Interim Report for the period January - June: Thursday 25 July 2002 - Interim Report for the period January - September: Friday 25 October 2002 ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2001/10/31/20011031BIT00030/bit0001.doc The full report http://www.waymaker.net/bitonline/2001/10/31/20011031BIT00030/bit0001.pdf The full report