Translation: Original published in Finnish on 11/4/2024 at 8:10 am EET.

We reiterate our Accumulate recommendation and EUR 4.7 target price for the share. Digital Workforce's Q3 was positive overall. Revenue grew well in line with our expectations but did not quite scale to profitability as expected as the company stepped up its investments. Growth was particularly good in the strategically important Continuous Services. The company also commented that sales were good in Q3 and the sales pipeline remains good, giving confidence for continued growth. We expect the company to grow well ahead of the IT services market in the coming years and to scale this growth to profitability. Relative to the company's earnings growth prospects, the valuation picture (2025e EV/EBIT 12x and SOTP EUR 4.6, DCF EUR 5.7) supports a positive view on the stock.  

Growth continued at the expected good level, but did not scale to profitability due to investments

Digital Workforce's revenue grew by 10% to 6.6 MEUR in Q3, fully in line with our expectations. By business line, the more important Continuous Services revenue continued to grow strongly (16%) to 4.4 MEUR, while Professional Services decreased by 1% to 2.2 MEUR in Q3. EBITDA-% was 2.7%, which was in line with Q2 but below our forecast of 5%. Relative to the comparison period (-1%), the improvement in profitability was supported by the closure of the Danish and Norwegian offices at the end of last year, administrative efficiency measures and revenue growth. The improvement in profitability was limited by accelerated investments in AI-based solutions and new hiring.  

Slightly shifting the focus back to growth

Digital Workforce has now grown significantly faster than the IT services market for two quarters already. Sales have been profitable in the first half of the year and the company commented that the sales pipeline remains good. In the social services and healthcare sector, the company won important new accounts in Q3 and was successful in contract extensions, especially in Finland and the UK. In addition, after several cautious quarters, the number of employees increased by 7 to 183 in Q3. The company seems thus to be investing again and focusing more strongly on growth, whereas previously the focus was heavily on profitability. However, the company stated that it aims to achieve profitable growth in the future.

We expect revenue growth to remain strong and scale to profitability in the coming years

As expected, the company reiterated its guidance and estimates that full-year revenue in 2024 will be higher and adjusted EBITDA will be positive and improve compared to 2023. Overall, due to the well-aligned report, we made only minor absolute changes to the cost base as a result of growth investments. We expect that the company’s revenue will grow by 10% and EBITDA will be 1.0 MEUR or 4% of revenue in 2024 (2023 adj. EBITDA 0.2 MEUR). We estimate that the company will grow to 36 MEUR in 2026 (13% y/y growth) and will be below the target level (50 MEUR or ~25% y/y growth) partly driven by a challenging market. We forecast EBITDA-% to reach the target level of 12% by 2026 on the back of scaling up Continuous Services (target above10%). In addition, we expect the company to accelerate growth through acquisitions. We also see the company as a potential target for acquisition.

Valuation remains attractive thanks to improved growth prospects

In terms of investment profile, Digital Workforce is still a turnaround company whose turnaround in profitable growth has progressed well this year, which has slightly reduced the risk level of the stock. Based on our forecasts and the valuation multiples we accept for the company for the next few years (2025e EV/EBIT 12x, EV/L 0.9x), the sum of the parts (EUR 4.6), the scenario analysis and the DCF (EUR 5.7), we estimate that the fair value range of Digital Workforce’s share is EUR 4.2-5.7 per share (previously EUR 3.8-5.2).