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The Q1 earnings period of the Finnish IT service sector was good across the line, despite the headwinds in the talent market. The sector's customer demand remained good and organic growth that we monitor particularly closely was 7% (median), which now also includes Witted and Digital Workforce, which we started monitoring recently. In Q1, growth comparable with Q4'21 remained at 9% (excluding Digital Workforce and Witted). These are strong growth figures for average growth rates. Growth through acquisitions decreased from Q4 and reported median net sales growth was 12% (Q4’21: 19%). Overall, net sales were slightly better than our expectations in Q1, with two companies exceeding our expectations, five in line with our expectations and one below our expectations.

In the big picture, the availability of talent remains a bottleneck for growth with the high turnover of experts also slowing growth down, although this continued to ease based on Q1 reports and comments. Several companies in the sector were again successful in their recruitment, with many new employees coming from outside of the listed companies. Many companies have also recruited younger talent to address talent shortages and wage inflation. Different salary models are a strength when recruiting the more experienced end of the spectrum because professionals value different things. In addition, in practice, all actors utilize subcontracting to facilitate expert availability and increased use of subcontracting partially explains the solid growth in the early part of the year. Good employer image and the importance of interesting projects are very important factors in competition on the expert market. Digital Workforce and Witted that we recently started monitoring are in a strong growth stage and investments are still limiting profitability, which should be considered when comparing the companies with the sector.  



Profitability increased in Q1 from the previous quarter

The adjusted EBIT margin for the sector was on average 9% in Q1 (Q4’21: 9%). Profitability comparable with Q4 improved to 10% (Q4’21: 9%). We have adjusted the EBIT mainly for the amortization of intangible assets related to acquisitions. Comparable profitability improved from the previous quarter as employee turnover eased, although the rate was still higher than normal. However, COVID-related sickness absences weighed more heavily on Q1 than on previous quarters but did not ruin the results. At company level, strong recruitments also temporarily burdened billable utilization and profitability, but due to the earnings logic these moves are essential to secure growth. Overall, the results were in line with our expectations in Q1, with two companies' net sales exceeding our expectations, four in line with our expectations and two below our expectations.

 However, in the big picture, profitability is still constrained by fierce competition for talent, with high staff turnover, wage inflation and high recruitment costs. In turn, the increased use of subcontracting and thus a weaker cost structure also contributed to the reduced short-term performance.


Growth prospects for 2022 remain good

We expect the IT services sector to remain strong in customer demand in 2022. With healthy, predictable, and growing aggregate demand, the public sector has become a very attractive market in recent years. The private sector also bounced back last year after a small COVID dip and its demand outlook for the full year also looks good. We expect the employee turnover that eases this year to improve the capitalization on the strong customer demand. We estimate that IT service companies will grow organically by 9% (prev. median 8%) and 12% with M&A considered in 2022 (prev. median 11%). Organic growth was also strong in 2021 (median 10% and average 8%). Organic growth forecasts are mainly based on recruitments already made, which to some extent reduces the uncertainty associated with the forecasts. The corresponding company-specific figures and comments for 2021 are available in our March summary. In summary, the market environment remains relatively good, and growth is strong across the sector.

We estimate that profitability improves slightly in 2022

We expect the median of EBIT margins, adjusted for goodwill and PPA depreciation, to increase to 10% in 2022 (2021: 9%). Profitability is mainly driven by decreasing employee turnover in the sector. We expect the turnover to continue to gradually calm down during coming quarters, but we believe, however, that in the big picture turnover will remain above the level seen before the COVID pandemic. Normal turnover prior to the pandemic was about 10%, while during the pandemic it has been close to or sometimes even above 20%. The higher turnover is driven by the increase in telecommuting and thus the decrease in physical presence and more challenging maintenance of a sense of community. Of course, there are many differences between the companies. Another issue that has been discussed at the macro level is inflation. Wage inflation is not a new issue for the IT sector, as the sector has had to live with it for years. In the long term, however, operational efficiency will become increasingly difficult to achieve and cost pressures should be more strongly passed on to customer prices.

The best performing companies in the sector are strong in the public sector (Gofore, Netum and Tietoevry) or have also a stronger software business (Tietoevry). In strong quarters, the sector achieves EBITA levels above 15% in the services business, but this is challenging to sustain for the whole year. The main risk to profitability is wage inflation, turnover and higher recruitment costs due to a hot labor market.

Brief company-specific Q1 comments and our 2022 estimates

's Q1 net sales increased by 8% from the comparison period and slightly exceeded our forecast. We estimate that net sales grew strongly organically (7%) driven by subcontracting and recruitments.  The EBITA margin was 12% and again well above our forecast. In the light of investments (in the own business platform) and the normalization of costs (after COVID), Q1 profitability can be considered very good. We expect Digia's net sales to grow by 8% in 2022, driven by organic growth. We also expect EBITA margin to decrease to 11%, under pressure from investments in line with the strategy, the cost structure normalizing, and a lower-margin acquisition in 2022 (2021 EBITA: 11.4%), but to be above the guidance.. Q1 company update on Digia can be found here (in Finnish).

Digital Workforce 's net sales grew by 7% in Q1. Continuous services that are at the heart of the strategy grew by 23%. The share of continuous services in net sales was already close to 60%, which in terms of business structure distinguishes the company from pure service companies. As expected, profitability was depressed by strategic investments (EBIT-% -10%). We cautiously forecast the company to grow by 10% in 2022, driven by continuous services that are scaling up. In addition, we expect investments to keep profitability clearly negative in the coming years. Our very topical start-of-monitoring report on the company is available here (in Finnish).

Gofore's Q1 net sales grew 40%, driven by strong organic growth (23%). Adjusted EBITA was 14% of net sales. Although profitability was strong in the context of the sector, there is still room for improvement in the company's billable utilization. Profitability was weighed down by sickness absences, seasonality (compared to Q4) and still high turnover. According to the company's comments, staff turnover shows signs of improvement compared to last year that was difficult, which is in line with our assessment of the sector. We predict that Gofore will grow by 34% in 2022, driven by strong organic growth (24%). We expect the EBITA margin to increase to 14.4% (2021: 14.0%). Profitability improvement is driven by lower turnover, higher customer prices and higher billable utilization. Q1 company update on Gofore is available here (in Finnish). 

Innofactor 's Q1 net sales decreased by 5% and organically 2%. Geographically, net sales grew in Denmark and Norway in Q1, but in Finland and Sweden they fell, which was affected by a COVID-caused increase in sickness absences. In Q1, comparable EBITDA grew by 3%, representing 12% of net sales (adj. EBIT% 8%). A positive highlight of the report was that after a long while the number of personnel turned to growth. Personnel development together with a good order backlog provides a good basis for returning to a sustainable growth path and to positive profitability development. We forecast Innofactor's net sales to grow by 1% to EUR 67 million in 2022 and to be slightly above the lower end of the guidance range. In addition, we expect the adjusted EBITDA to improve to EUR 8.0 million (11.9% of net sales) from EUR 7.5 million year-on-year. Q1 company update on Innofactor is available here. 

Loihde Group's Q1 net sales increased by 13% and organically by 5%. The net sales of Loihde’s continuing operations increased by 17% in Q1, slightly exceeding our forecast. In Q1, the company achieved an adjusted EBITDA of EUR 1.2 million and an adjusted operating result of EUR 0.8 million adjusted for goodwill amortization. The significantly improved result was supported by increased net sales and efficiency gains. For the whole of 2022, we expect Loihde's net sales to increase by 11% and EBITA margin to increase by 4% (2021: 2%). In our view, the good growth in net sales and the overall improvement in efficiency levels are the key result drivers. Like other companies, the main risks are related to the ability to compete in the talent market. Q1 company update on Loihde is available here (in Finnish). 

Siili's Q1 net sales increased by 24%, driven by organic growth (14%) and supported by an acquisition. Of the business areas, particularly Siili Core grew strongly, as we understand it, through recruitment and billable utilization. EBITA increased strongly and amounted to 12% of net sales, which was well above our forecast. Profitability was supported by strong organic growth in Siili Core and improved billable utilization. The profitability development can again be considered particularly good, taking into account the hot talent market, high turnover and the company's good organic net recruitments, which have a negative impact on billable utilization. We estimate net sales to grow by 12% to EUR 111 million in 2022, mainly organically. In addition, we expect the adjusted EBIT to increase to EUR 12 million or 11% of net sales, driven by better billable utilization (2021: 9%). Q1 company report on Siili is available here (in Finnish). ). Siili updated its financial targets for the coming years on its Capital Markets Day and talked about a potential share issue, for which our comments can be found here (in Finnish). 

Solteq 's Q1 report was well in line with expectations in the big picture and the result rows slightly exceeded expectations. Net sales grew by 11% and were mainly inorganic (7%). The EBITA margin was 7%. Profit and profitability were weighed down by investments in the internationalization of the Solteq Software segment and product development, as well as a significant increase in the overall cost level during the review period. We estimate that net sales will grow by 12% this year and adjusted EBIT by 8% to EUR 7.7 million, corresponding with a margin of 10% (2021 adj. EBIT: 11 %). Q1 company update on Solteq is available here (in Finnish). 

Tietoevry's Q1 net sales increased by 3% and exceeded our and consensus expectations. Net sales grew organically by 5% (Q4 3%), which is a good level improvement despite the headwinds of the war in Ukraine, and a strong performance for Tietoevry. The adjusted EBITA margin for Q1 was 12%. Overall, historically efficient strategy implementation, good transparency in operations and plans, and predictable execution lower Tietoevry's risk profile. We estimate net sales to grow by 3% and by 4% organically. Furthermore, we expect the adjusted EBITA margin to increase to 13.2% this year (2021: 13.0%). Q1 company report on Tietoevry is available here (in English).

Vincit's net sales increased by 20% in Q1, driven by organic growth (12%). Geographically, particularly the US business grew strongly (>100%). In Q1, the EBITA margin was 10% and slightly better than our expectations, but still below the company's potential. Wage inflation and sickness absences weighed down profitability. The next point of interest is the merger of Vincit with Bilot.  In 2022, we forecast a 14% increase in Vincent’s net sales supported by acquisitions, and we expect the EBITA margin to rise to 11% (2021: 8%). We will consolidate Bilot's forecasts into Vincit when trading in the merged entity begins. Our forecasts don’t include the potential longer-term synergies of the merger. Q1 company update on Vincit can be found here (in Finnish).

Witted 's net sales grew very strongly in Q1, reaching 110%, most of which was organic (98%). Witted doesn’t break down the distribution of growth more accurately, but we estimate that growth was strong both in Finland and internationally. EBITA margin was 3.2% and remained at the previous year's level (Q1’21: 3.3%). The margin is still low compared to industry peers, mainly due to the company's front-loaded growth investments, but also due to the high share of subcontracting with lower margin potential. In 2022, we forecast that net sales grow strongly by 83% (organically 74%) and EBITA margin to stay low (2%) due to front-loaded growth investments. Witted was listed on May 13, and our topical and freely accessible start-of-monitoring report is available here (in Finnish).


Joni Grönqvist

Joni Grönqvist


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Digia is a profitably growing IT service company that helps its customers harness digital opportunities As a visionary partner, Digia develops and innovates solutions that support business operations together with its customers. We adapt our expertise to their specific industries to help them develop digital services, manage operations and utilise information. We employ approximately 1,000 experts in Finland and Sweden. We are expanding our international presence together with our customers. Digia’s net sales were EUR 96.2 million in 2017. The company is listed on Nasdaq Helsinki (DIGIA).