IT service sector Q3’25: Performance remained subdued

Translation: Original published in Finnish on 11/26/2025 at 10:38 pm EET

The IT service sector's Q3 earnings season began with cautious optimism, as the market looked for signs of a gradual turnaround in the IT service market. Unfortunately, the sentiment remained mostly cautious. The decline in revenue eased, but profitability remained at a very weak level. Tieto and Digia achieved the best performance in the IT service sector, as measured by our Rule of 20, which, however, is only a satisfactory level in our over-the-cycle range.

The IT service sector is facing widespread challenges as revenues decline and efficiency measures are "naturally" implemented after the fact, which makes managing profitability difficult. Therefore, it would be important for companies to stabilize their revenue and improve their profitability. Unfortunately, visibility into the near future remains cloudy, and a clear turn for the better is not yet in sight, even though general market uncertainty has partially decreased since spring. The private sector has also shown cautious signs of improvement, but here too, development has been company- and industry-specific.

2025 will be very weak by many indicators. We expect the sector's organic revenue to decline by 3% (median) and the adjusted EBITA% to remain at 4%. We expect the IT service sector's performance to improve slightly in 2026, but the beginning of the year remains difficult. Next year, we expect the sector's organic revenue to turn to a small 1% growth and profitability to improve to 6% (median), driven by cost savings and small growth, which is, however, below the 7-8% "normal" level we have seen in the sector.

Recently, productization of services has emerged as a stronger strategic trend. This is, in a way, already built in for many, but now we feel productization has been put higher on the strategic priority list than before, and the companies seem to be driving a larger part of their business in this direction. Productization has historically been difficult for companies in the sector, and there has not been a particularly strong need for it due to customer purchasing behavior and strong demand. Now, however, with the rapid development of AI and the decreased demand for tailored software development, we feel the need for successful productization is more critical than before.

Viewed through the "Rule of 20," Q3 was still a very weak performance at sector level

Last year, we launched our own Rule of 20 for the IT service sector, which we believe works well, or even as the best single indicator, to measure the sector's and especially companies' operational performance, especially when viewed over the cycle. The current market situation is more challenging than in the previous 10 years, and achieving an excellent level in the Rule of 20 is more difficult, whereas in the past, more companies achieved excellent performance.

The difficult market situation in Q3 is illustrated by the fact that only two listed IT service sector companies achieved even a satisfactory performance as measured by the Rule of 20. On the other hand, no company achieved this in Q2, but Q3's performance is still very weak. The best performers in the sector were Tietoevry (14%) and Digia (11%), which is still only a satisfactory performance in our over-the-cycle perspective. The performance of the remaining companies in the sector can be considered poor or very poor.

Source: Inderes, Rule of 20 = Organic growth-% + EBITA-% EBITA-%

Organic revenue decline eased slightly in Q3 but still fell short of our expectations

As a whole, revenues in the Finnish IT service sector continued to develop more weakly than we expected. Revenue of the companies in our coverage declined organically by 2%, largely continuing the previous quarter's working-day adjusted trend of -3% (Q1’25: -2%). However, the decline slowed down compared to H2’24 (~-4,4 %). Progress was still constrained by customers' need to save money, which has led to IT projects being scaled down, put on hold, or new launches being postponed. At the same time, achieving new sales is still challenging due to today's lower price level and companies' profitability targets. In the sector's overcapacity situation, client companies have also been able to recruit experts to their own payrolls more effectively than before, which has weighed on the revenue of consulting companies. Overall, revenues continued to develop very weakly in Q3, with 1 company above, 5 in line with, and 4 below our estimates. 

Listed IT service sector in Finland, revenue

Source: Inderes

Revenue vs. expectations

Source: Inderes

Thus, in general, the market situation in the IT service sector remained challenging in Q3. We had expected confirmation of improvement in the private sector, but these cautious statements from Q2 were partly retracted in Q3. The market situation in the public sector remains difficult overall due to the need to save money. Engineering companies' order books have developed strongly in Q2 and Q3, providing a slightly positive impetus. On the other hand, engineering companies are not the largest buyers of IT. The tariff agreement removed some of the uncertainty during the summer, but even this did not help boost customer investment activity. There was relatively stable, subdued development between the companies in Q3, and in terms of organic growth, the only growth was seen in Loihde (+2%), supported by its well-developed security business. On the weaker side, Vincit (-22%) and Netum (-23%) were clear underperformers. 

Organic revenue growth Q3'25

Source: Inderes

The market weakness has already progressed to such an extent that there are no longer clear differences; instead, everyone suffers in one way or another, regardless of customer focus or offering. For nearly two years, there has been a trend in the market among large clients where buyers are concentrating their purchases on fewer suppliers. In our view, this trend has supported those operators with a comprehensive lifecycle service offering, sufficient delivery capacity and/or specialized expertise required for the customer relationship, such as Digia. In general, we expect companies with clear competitive advantages to stand out more prominently in the future. The losers will be companies that lack critical (e.g., data, AI) or differentiating capabilities, deep customer relationships (management consulting, integration and continuity services contribute), or a deep understanding of the customer's business through industry focus.

AI has been a hot topic for quite some time now. It is an opportunity, but on the other hand, the disruptive threat it brings is also a significant risk, especially in software development. In our view, the AI transformation will further separate the winners from the losers, and AI expertise will be a mandatory area of expertise in the future. Companies with strong existing customer relationships will continue to succeed in the market, even if they are not at the forefront of AI expertise. These companies already know their customers well and understand better how to utilize AI in those particular customer relationships. We estimate that new sales and thus "infiltrating" customer relationships will continue to be challenging in the future, unless you have a broad service offering or cutting-edge AI expertise. We predict that companies without existing strong customer relationships or with average to weak AI skills are the ones that won't make it.

Recently, productization has also emerged as a stronger strategic trend. Good examples of this are the Danish company Netcompany, which is strongly striving to transform into a platform company, and Tieto, which continues to focus on the software business. Productization has been on the agenda for many companies before, but now we believe productization has been put higher on the strategic priority list, and companies seem to be driving a larger part of the business in this direction. Productization has historically been difficult for companies in the sector, and there has not been a particularly strong need for it due to customer purchasing behavior and strong demand. However, we now estimate that due to rapid AI development and decreased demand for tailored software development, the need for successful productization is more critical than before.

Price competition due to overcapacity is still fierce, especially in the public sector, and this is our main concern for the sector. In the private sector, price pressure no longer appears to be tightening significantly, but drawing more precise conclusions is very difficult. The most important driver for price development would naturally be a pick-up in demand, which we believe requires a stronger economic environment to increase customer companies' willingness to invest. Meanwhile, IT suppliers have also been reducing their workforce (supply) for several years, which should, in theory, reduce price competition. However, this naturally depends on the balance between supply and demand, and as demand has fallen, we do not yet see these two factors (supply and demand) as aligned.  

The average quarter-on-quarter drop in the number of employees slightly steepened again (median -3%) in Q3, which is not surprising given the weak revenue development. The average change was at the same level, adjusted for Gofore's large Huld acquisition. None of the companies' headcounts grew quarter-on-quarter. Compared to the end of last year, excluding the impact of acquisitions, only Solteq managed to increase its number of employees (+3%) and Witted its number of experts (+5% at the end of October). Gofore’s total capacity grew by just under 400 people due to the Huld acquisition.

Own personnel, change % Q/Q

Source: Inderes

Total number of employees as reported by the companies. Gofore, Siili, Vincit and Witted calculated on the basis of the FTE reported by the companies. 

Profitability remained weak in Q3, weighed down by revenue

The average adjusted EBIT margin for the sector was 4.8% in Q3, which was below the comparison period's 7.2% but above the previous quarter. In the current situation, managing profitability is very challenging, with revenues falling across the board and efficiency measures inevitably "always" lagging behind. Several companies announced new efficiency measures in Q2, but not all of them had an impact yet. We expected the situation in Q3 to require new efficiency measures, and many companies likely implemented them, but they did not necessarily exceed the disclosure threshold. This year, seven out of ten companies have reported at least one change negotiation. While these effects will partly support profitability in H2, the impact will be diluted for many due to continued revenue decline. In our view, naturally depending on the company's profile, EBITA levels below 5% should raise questions about possible adjustment measures.

Profitability was generally weak or very weak. Only Tietoevry, Digia, and Gofore reached historic levels (7-8%) or slightly above in the sector context, though still below their own levels. This is partly explained by the relatively high share of recurring business in the companies, the software business (Digia and Tietoevry), and the stable public sector contract portfolio across the board (although there is price pressure on new contracts). We believe that the underperforming companies in the sector have definite potential to improve their profitability once the revenue decline is overcome.

EBITA-% (adj.)  

Source: Inderes

EBITA-% (adj.) Q3'25

Source: Inderes

Forecasting profitability on a quarterly basis is challenging at the moment, because the revenue trend is uncertain and has a leverage effect on profitability. In addition, it is difficult to assess the timing of the effects of the various efficiency measures. As a whole, profitability levels were clearly weaker than we expected, with 1 company above, 1 in line (within 1 percentage point), and as many as 8 below our forecast. In aggregate, the net effect of differences in profitability expectations was -1 percentage points (Q2'25: -21.4%). The profitability misses were relatively evenly 1-3 pp below expectations this time, which is nevertheless a clear miss. As before, if the weakness in demand continues or expands, new change negotiations are still likely in the sector. If the decline and difficult market situation persist, companies will be under additional pressure to also adjust their more fixed cost items. Now, almost everyone has adjusted their operations to some extent (or more often) in recent years. Thus, change negotiations are becoming a normal way to adjust to changes in the market situation, and it is not as dramatic as it used to be. In our view, this also creates an opportunity for more steadily developing companies to profile themselves as secure workplaces and strengthen their employer image. 

Adj. EBITA vs. expectations

Source: Inderes

Profit warnings and change negotiations reflect difficult market conditions

In 2025, seven out of ten companies have already reported at least one round of change negotiations, and new ones will certainly be seen in Q4. This reflects the continued weak market situation and the fact that a better market situation is not immediately in sight. Despite numerous change negotiations and a weak market situation, the sector has not yet seen many profit warnings. However, we expect more companies to issue a profit warning or are close to doing so.

2026: Slight improvement in estimates, but the early part of the year is still weak

2025 can be described as very weak by several indicators. We expect the sector's organic revenue to decrease by 3% (median) and the median adjusted EBITA-% to remain at 4%. We expect the IT service sector's performance to improve slightly in 2026, but the beginning of the year is still difficult. We estimate that the sector's organic revenue will turn to a sluggish 1% growth. We expect profitability to improve to 6% (median), driven by cost savings and slight growth, which is, however, below the 7-8% "normal" level we see in the sector. At the company level, we project that only four companies will experience organic growth of 2% or more in 2025. The profitability range is also wide (3-14%), and only three companies exceed the historical average (7-8%). As we previously stated in this review, continued revenue decline makes profitability management difficult because adjustment measures inevitably lag. In the short term, we expect the competitive situation to remain tight, but the expected strengthening of the general economic development in Finland and Europe, the US-European tariff agreement and lower interest rates will create the conditions for a gradual improvement in the demand outlook. A significant negative driver next year continues to be public sector austerity measures, and overall, a clear pick-up in demand is not yet in sight, even though some positive signals have been seen. However, investors should note that in the IT service sector, the situation can also turn around quite quickly if the investment environment improves. In the long term, customer prices and wages will be balanced again, making it possible to run a healthy business once more. Under those circumstances, we consider average EBITA levels of 7-8% to be realistic again.