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The IT service sector's Q2 was reasonable overall: strong organic growth was dimmed by profitability challenges in several companies. Customer demand in the market continued to be good and especially organic growth that we monitor closely accelerated to 9% (median Q1’21 7%). The growth figures are strong and still reflect good customer demand. We believe that the acceleration of growth was supported by, e.g., lower turnover. Good organic growth indicates that the company is doing a number of things well, like constantly attracting experts and at the same time employees want to stay in the company (turnover). The pull from acquisitions remained unchanged as reported median revenue growth was 13% (Q1’22: 12%). As a whole, actual revenue was slightly weaker than expected in Q2, when the revenue of one company exceeded expectations, eight were in line with our expectations and two were below.

In the medium term, 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 Q2 reports and comments. For a few companies, turnover in H1 was really low, around ~5%, while the pre-COVID normal was ~10% and last year we estimate that sector turnover was 15% -> 20%.  In addition, several companies in the industry continued to make successful recruitments, and employees are still clearly found from outside listed companies. Many 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 nice growth in the early part of the year. Good employer image and the importance of interesting projects are important factors in competition on the expert market. Digital Workforce and Witted that we started monitoring relatively recently are in a strong growth stage and investments are still limiting profitability, which should be considered when comparing the companies with the sector.  

Profitability decreased in Q2 due to company-specific challenges

The adjusted EBIT margin for the sector was on average 5% in Q2 (Q1’22: 9%) and thus the quarter was challenging in terms of profitability. We have adjusted the EBIT mainly for the amortization of intangible assets related to acquisitions. Comparable profitability decreased from the previous quarter due to company-specific challenges. The profitability of several companies (Digia, Innofactor, Solteq, Vincit, Loihde) was more under pressure than expected due to a number of reasons (investments, project management and wage inflation). Most of the challenges are internal and transient or relatively fast to fix. In terms of the market, lower turnover supported profitability compared to the previous quarters, although we estimate that employee turnover is still higher than normal in the big picture. Gofore and Netum had exceptionally low turnover. At company level, strong recruitments also temporarily restrict profitability, as billable utilization is under pressure but due to the earnings logic these moves are essential to secure growth. Overall, the results were clearly weaker than we expected in Q2, when the operating results of one company exceeded our expectations, one was in line with and 9 below our expectations.

However, in the medium term, profitability is still constrained by fierce competition for talent, with high employee turnover, wage inflation and high recruitment costs as side effects.

Still good growth outlook for 2022 but uncertainty for 2023 has increased slightly

We expect customer demand in the IT services sector to remain strong in 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 that the employee turnover that eases this year improves the utilization of strong customer demand. We estimate that IT service companies will grow organically by 8% (previous median 9%) and 14% (previous median 12%) including M&A  in 2022. Organic growth was also strong in 2021 (median 10% and average 8%). Organic growth estimates are mainly based on recruitments already made, which to some extent reduces the uncertainty associated with the estimates. The corresponding company-specific figures and comments for Q1’22 are available in our May summary.

In summary, the market environment remains relatively good and growth is strong across the sector. While the geopolitical situation has had little effect on the companies in the sector, the general rise in interest rates and the weaker economic situation creates uncertainty in customer demand, especially in 2023.

We expect company-specific challenges to depress profitability in 2022

We expect the median EBIT %, adjusted for goodwill and PPA depreciation, to decrease to 7% in 2022 (2020 and 2021: 9%). Profitability is depressed by company-specific internal challenges in the sector (as mentioned above). On the other hand, we believe that the market outlook has improved in Q2, mainly due to falling turnover. We expect the turnover to continue to calm down more widely in coming quarters. With the general economic uncertainty, we find it possible that turnover will fall temporarily even below "normal" levels, as experts are afraid to change jobs in these uncertain times and many have changed jobs in the past year. Low turnover also curbs the strongest wage inflation, while employers are not changed on the same scale. In the long term, we estimate that the turnover is above the previous normal (10%), driven by the increase in telecommuting and thus the reduction in physical presence and more challenging maintenance of a sense of community. Of course, there are many differences between the companies.

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 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 on an annual level. The main risk to profitability is wage inflation, turnover and higher recruitment costs due to a hot labor market, as well as internal challenges.

Brief company-specific Q2 comments and our 2022 estimates

Digia's Q2 revenue increased by 7% from the comparison period to EUR 41.2 million and was slightly below our estimate. Growth was supported by acquisitions and we believe organic revenue growth amounted to 5% driven by subcontracting and recruitments. Q2 EBITA was 5% of revenue (Q2'21: 10%) and was clearly below our estimate. Profitability was depressed by the training of own personnel on the large-scale own business platform and higher sick leave related to COVID. We believe these expense headwinds should be temporary. We expect Digia to grow by 9% supported by acquisitions in 2022 and EBITA % to decrease to 10.2%, depressed by investments in line with the strategy, trainings, the cost structure normalizing and a lower-margin acquisition in 2022 (2021 EBITA: 11.4%) and to barely be within the guidance.

Digital Workforce's revenue grew by 9% in Q2 and was in line with our estimates.

In the Nordic countries, growth was negatively affected by postponement of customers’ investment decisions due to the uncertain economic outlook. Instead, the UK and US growth markets that are important to the company, grew strongly.

 Positive in terms of revenue was that growth was stronger than we expected in continuously charged services that are at the heart of the strategy and important for the scaling of profitability (H1: +28%). The share of continuously charged services in revenue was over 60%, which in terms of business structure distinguishes the company from pure service companies. The company's EBITA % was -14% which was below estimates. Earnings were depressed by strategic investments in the own platform, growth investments related to internationalization and wage inflation. We cautiously estimate the company to grow by 11% in 2022, driven by continuous services that are scaling up. In addition, we expect investments to keep profitability clearly negative in the coming years.

Gofore's Q2 revenue increased by 40%, driven by strong organic growth (27%), which shows that the company has done many things right for a longer time. The adjusted EBITA was 15% of revenue and exceeded our estimate. Good profitability was supported by low employee turnover (H1: 6%) and the company's ability to export wage inflation to customer prices. Wage inflation was 5.6% in H1 and customer price increases were on average 4.2%. Thus, customer prices compensated nicely for wage inflation, which is a good performance for both parameters in the sector context. We estimate that Gofore will grow by 37% in 2022, driven by strong organic growth (26%). We expect the EBITA % to increase to 14.7% (2021: 14.0%). Profitability improvement is driven by lower turnover, higher customer prices and higher billable utilization.

Innofactor’s Q2 revenue decreased organically by 2% like in Q1 and was slightly below our estimates. Q2's comparable EBITDA decreased and was 8% of revenue, which was clearly below our estimate. The EBITDA drop was due to weak billable utilization, primarily caused by an overshoot in fixed-price projects. Earnings were also depressed by the higher other operating expenses than in the comparison period, which were due to COVID savings ending and a couple of major transactions occurring in Q2 instead of Q3, which should make Q3 performance easier. We estimate that Innofactor's revenue will grow by 4% driven by the Invenco acquisition in 2022. We also expect the adjusted EBITDA to fall to EUR 7.4 million (10.8% of revenue) from EUR 7.5 million in 2021 and be slightly below the guidance.

Loihde Group's Q2 revenue grew by 13% (organic some 5%) to EUR 30.5 million, as expected. The digital development business grew by 24% and we estimate that the Loihde Advisory transaction completed last year generated 14% growth and organic growth was about 10%.

 Loihde commented that especially solutions related to data utilization, analytics and AI, as well as strategic planning related to data and digitization in general are on the rise. The Group's profitability strengthened from a weak comparison period (0.8%), but less than our expectation which was 2% (adjusted EBITA %). For the whole of 2022, we expect Loihde's revenue to increase by 16% and EBITA % to increase to 3.4% (2021: 2.2%). In our view, good revenue growth, the Talent Base acquisition and overall improving efficiency levels are the main earnings drivers. Like other companies, the key risks are related to the ability to compete in the talent market and to customer companies’ investment willingness.

Netum’s 48% revenue growth in H1 was already known. Organic growth was at a strong 23% level and the Cerion acquisition generated 25% inorganic growth.

 The rate of recruitment was also very good (growth from 46 to 263), which supports continued strong growth. EBITA % was also known (11% of revenue) and was weaker than originally expected. The profitability challenges in H1 were largely transient. Strong recruitment is still reflected in the lower revenue per employee ratio and indicates that there is potential for improvement in billable utilization. The company's turnover was also very low (H1: 3.3%), which indicates that job satisfaction is excellent, which in turn gives good preconditions for earnings growth in the future. We expect Netum's revenue to grow by 41%, driven by organic growth (24% points). We also estimate that the EBITA % will fall to 12.5% in 2022, depressed by growth investments and general cost increases (2021 adj. 13.9% and 5-year average 15%).

Siili's Q2 revenue grew strongly by 17% and was fully organic. Growth was driven especially by Siili Auto and Supercharge, but all business activities developed well based on comments. Profitability has improved for 14 quarters in a row and EBITA % was 10%, which was slightly below our estimate for Q2. We believe profitability in early 2022 was supported especially by lower turnover, better billable utilization in the Finnish Core business and a higher share of profitable international business in revenue. We expect revenue to grow by 14% in 2022, mainly organically. In addition, we expect EBITA % to rise close to 11%, driven by better billable utilization (2021: 9%).

Solteq's Q2 revenue decreased by 3%, which was below our expectations. The drop was mainly due to challenges in software product development, when product installations had to be fixed, which weakened customer invoicing and naturally depressed profitability with a lever. Thus adjusted EBIT % was 3%, which was clearly below our 7% estimate. The company also announced it had started updating its business strategy, which will be published in H2.  We expect the company to grow by 2% and EBIT (adj.) to decrease to EUR 3.6 million with decreasing investments and challenges (2021: 7.4 MEUR). Thus we expect that the company will have to lower its earnings guidance again.

Tietoevry's Q2 revenue increased by 2% and exceeded our and consensus expectations. Revenue grew organically by 5% (Q1: 5%), which is a strong performance for Tietoevry considering the headwind of the Ukrainian war. Adjusted EBIT % was 11% of revenue and below market estimates in Q2. The result was depressed by high wage inflation, turnover and COVID savings ending. However, focus was on the company's plans to separate and list the Banking business, which we expect to clarify the structure, better enable business potential, and dissolve undervaluation. We estimate revenue to grow by 3% and by 4% organically. Furthermore, we expect the adjusted EBIT margin to be 13.1% this year (2021: 13.0%).

Vincit's Q2 revenue increased by 14% and exceeded our estimate slightly. Growth was mainly organic and especially strong in the US. Vincit's adjusted EBIT % was 5% in Q2, which is a very poor performance for the company and was clearly below our 11% estimate. Wage inflation depressed profitability. We expect the new entity to grow by 36% (organically by 8%) in 2022. We estimate that EBITA % will be weak at 7% in 2022.

Witted's revenue grew very strongly by 90% in Q2 most of which was organic (66%). Witted does not break down the distribution of growth in more detail, but we estimate that growth was srong both in Finland and internationally and the company did comment that Norway had grown strongly. The EBITA % was -0.4% dropping from the level in the previous year (Q2’21: 3.7%). Witted invested heavily in growth in the early part of the year, establishing offices in the US and Denmark, continued investing in Swedish growth, Witted Data was launched and Maverick’s established offices in Turku, Tampere and Oslo. The margin is still low compared to industry peers due to the company's front-loaded growth investments, but also to the high share of subcontracting with lower margin potential. In 2022, we expect Witted’s revenue to grow strongly by 80% (organically 71%) and EBITA % to stay low (2.5%) due to front-loaded growth investments.



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).