IT service sector Q2’25: Recovery is taking its time

Translation: Original published in Finnish on 9/2/2025 at 8:56 am EEST.

Rule of 20, Q2'25, organic growth-% + EBITA-%, performance level marked by lines from satisfactory to excellent

Source: Inderes

The IT service sector entered the Q2 earnings season in a cautious mood, albeit with expectations of a turnaround. In reality, however, the situation deteriorated even further, with revenue falling more than before and beyond our expectations and profitability remaining at a very low level. Digia and Digital Workforce achieved the best performance in the IT service sector, as measured by our Rule of 20, but within our over-the-cycle range, this is a weak performance.

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, however, the outlook for the near future is foggy, and there is no clear sign of improvement on the horizon. In a way, economic uncertainty has decreased slightly now in Q3, following the creation of a tariff agreement. However, it was already evident in advance that the tariffs would not directly impact the IT service sector. Nonetheless, indirect effects from tariffs (though no longer from uncertainty) are still likely.

We expect the performance of the IT service sector to remain poor in 2025. Driven by a more challenging Q2 than estimated, our revenue forecasts decreased slightly, and our profitability forecasts decreased again by about 1 percentage point for the full year. We now expect revenue to decline by 3% organically and adjusted EBITA-% to remain at the level of the comparison period of around 5% in 2025. This is below the "normal" level of 7–8% that we have seen in the sector.

 

When viewed through the "Rule of 20," Q2 actually represented a very weak performance at the sector level

Last year, we launched our own Rule of 20 for the IT services sector, which we believe works well, or even as the best single parameter, 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 Q2 is illustrated by the fact that not a single listed IT service sector company achieved even a satisfactory performance as measured by the Rule of 20. The best performers in the sector were Digia (9%), Digital Workforce (7%) and Tietoevry (5%), which is a weak performance in our range that looks beyond cycles. The performance of the rest of the companies in the sector can be considered very weak.

Rule of 20, Q2'25, organic growth-% + EBITA-%, performance level marked by lines from satisfactory to excellent

Source: Inderes

Organic revenue decline accelerated slightly in Q2 and fell broadly below our expectations

Overall, the revenues of the Finnish IT service sector developed more weakly than we had expected in relative terms. The revenue of the companies in our coverage decreased organically by 5%. There was one working day less than in the comparison period, which has an impact of slightly less than -2%. Thus, taking working days into account, the decline in revenue was -3% (Q1’25: -2%). However, the decline slowed down compared to H2’24 (-4% ... -5%). 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 challenging due to today's lower price level and companies' profitability targets. Due to the sector's overcapacity, 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 developed at their weakest pace in our 3-year monitoring period, as well as compared to our expectations in Q2, with 0 companies above, 4 in line with and 6 below our forecast.

Listed IT services 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 Q2. The market situation in the public sector remains difficult overall due to its need to save money. Occasional cautiously positive signals are emerging from the private sector, but it is still too early to talk about a turnaround. Engineering companies' order books showed strong development in Q2, providing a slightly positive impetus. On the other hand, engineering companies are not the largest buyers of IT. The tariff agreement alleviated some uncertainty surrounding the issue, but indirect effects through customers are still to be expected. Digia and Digital Workforce stood out from the crowd in Q2 in terms of organic growth because they were the only ones able to grow.

Organic revenue growth Q2'25

Source: Inderes

Over the past couple of years, the companies that have fared well or satisfactorily in relation to the difficult market situation are those with more recurring revenue, long-term contracts, deep and strategic customer relationships, those operating in the public sector, and generally those that make business-critical solutions for customers. Such players have been Digia, Netum, Loihde and Gofore, although Netum and Gofore are now facing clearer challenges in terms of customer demand. Companies with a high emphasis on the private sector and customized software development especially fared the weakest. 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 represents an opportunity but, on the other hand, poses a significant threat of disruption, especially in software development. We believe that AI revolution will further separate the winners from the losers. Artificial intelligence skills will be a mandatory area of expertise in the future. Companies with strong existing customer relationships will continue to thrive in the market, even if they are not at the forefront of AI expertise. They 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.

Price competition due to overcapacity is still fierce, especially in the public sector, and this is our main concern for the sector. Price competition puts pressure on profitability when wages aren't adjusted in the same way. There is no sign of improvement in price competition yet. Prices would naturally improve with an upturn in demand, which, in our view, 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 quarterly decline in the number of employees remained (-1%) at the same level in Q2 as in the previous year. However, the median change was at the same level as in the comparison period. Now, the number of employees at two companies grew organically from the previous quarter (Solteq and Digital Workforce). The number of employees at Siili and Digia increased due to acquisitions. On the other hand, the number of employees will decrease in a few companies (Siili and Vincit) due to change negotiations and increase in a few companies due to acquisitions (Digital Workforce and Gofore).

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 Q2, weighed down by revenue

The average adjusted EBIT margin for the sector was 3.8% in Q2, which was below the comparison period's 5.1% but on par with 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 reported new efficiency measures in Q2, and we expect many more to announce new cost savings in Q3. In H1, six out of ten companies 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, EBITA levels below 5% should prompt consideration of possible adjustment measures.

Profitability was generally weak or very weak. Only Tietoevry and Digia 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). The underperforming companies in the sector have definite potential to improve their profitability once the revenue decline is overcome.  

Listed IT services sector in Finland, profitability

Source: Inderes

EBITA-% (adj.) Q2'25

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, 3 in line (within 1 percentage point), and 6 below our forecast. In aggregate, the net effect of differences in profitability expectations was -21.4 percentage points (Q1'25: -24.1%). This is largely explained by Gofore's and Vincit's significantly weaker-than-expected profitability (-7% and -6%). As before, if the weakness in demand continues or expands, new change negotiations are likely in the sector. If the decline and difficult market situation persist, companies will also be under additional pressure to adjust their more fixed cost items. Now almost everyone has adjusted their operations at some point (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. On the other hand, demand in the IT services sector is cyclical in nature, which seemed to be a bit forgotten before the current weak cycle, as the market situation remained so good for so long.

EBITA vs. expectations

Source: Inderes

Profit warnings and change negotiations reflect difficult market conditions

In 2025, six out of ten companies have already reported at least one round of change negotiations, and we will certainly see more in H2. This clearly reflects the continued very weak market situation and the fact that there is no immediate prospect of an improvement in the market situation. However, considering the numerous change negotiations and weak market conditions, there have not yet been a large number of profit warnings. But this can partly be explained by the fact that we're only halfway through the year, and the situation will probably look different when the Q3 reports are released. Then again, the guidances given at the beginning of the year have already been somewhat cautious or loose, so the risk isn't that present for everyone, even though performance has been weak.

2025: A very challenging year with no clear signs of improvement on the horizon

We expect the performance of the IT service sector to remain poor in 2025. Driven by a more challenging Q2 than estimated, our revenue forecasts decreased slightly, and our profitability forecasts decreased again by about 1 percentage point for the full year. We now expect revenue to decline by 3% and adjusted EBITA-% to remain at the level of the comparison period of around 5% in 2025. This is below the "normal" level of 7- 8% that we have seen in the sector. At the company level, we project that only three companies will experience organic revenue growth in 2025. The range of profitability is also wide (1-12%), and only three companies exceed the historical average (7-8%), which is, however, below the companies' own levels. As we previously stated in this review, continued revenue decline makes profitability management challenging because adjustment measures inevitably lag behind. 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. However, there is no clear sign of a pickup yet. Summer is usually a minor turning point in the year, and we eagerly await the first comments on the market situation after the summer, beginning with this September. The Q2 reports were released during or too soon after the holidays to provide a clear picture of the post-holiday market situation.

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.

Company-specific Q2 comments and forecasts:

Digia (in Finnish)

Digital Workforce

Gofore (in Finnish)

Loihde (in Finnish)

Netum (in Finnish)

Siili (in Finnish)

Solteq (in Finnish)

Tietoevry

Vincit (in Finnish)

Witted (in Finnish)