Digital Workforce Q1'25: Momentum should pick up as the year progresses

Translation: Original published in Finnish on 4/28/2025 at 8.40 am EEST.

We reiterate our Accumulate recommendation for the share and lower our target price to EUR 4.1 (was 4.70) reflecting estimate revisions. Digital Workforce's Q1 was weaker than expected in terms of revenue and profitability. The company responded by reorganizing and implementing cost-saving measures. The company has secured some good orders at the start of the year. The company also commented that the sales pipeline remains good and its quality has improved. We lowered our forecasts but expect the company to grow well ahead of the IT services market in the coming years and to scale this growth to profitability. The stock's valuation picture (2025e EV/ 0.9x, sum of parts EUR 4.8) supports our positive view on the stock. 

Revenue and especially result missed expectations in Q1

Digital Workforce’s revenue decreased by 4% to 6.5 MEUR in Q1 and was relatively clearly below our expectations. By business lines, the revenue of Continuous Services increased by 12% to  4.5 MEUR (forecast: 4.8 MEUR), while Professional Services decreased by 27% to 2.0 MEUR (forecast: 2.7 MEUR) during Q1. As a result, both business segments fell short of the forecast, but the more valuable Continuous Services fell short to a lesser extent.

Digital Workforce's adjusted EBITDA was -0.3 MEUR, which was lower than our estimate of 0.5 MEUR. Adjusted EBITDA included one-off charges of 0.9 MEUR related to restructuring. The company responded to the weak performance by significantly reforming and simplifying its organization to sustain its investments in the fast-growing healthcare business and AI agent solutions. In addition, the company implemented significant cost-saving measures, which will partially impact operations from Q2 onwards, as the company is also investing.

Rest of year should be better

The company announced on Friday a major large multi-year contract that will support its growth. In addition, the company has several major delivery projects underway, particularly in the healthcare sector. Furthermore, several major new sales projects were delayed during Q1 due to changes in customer schedules. The company also made important gains at the end of Q1. Taken together, we believe that activity should partially pick up in Q2 and more strongly in H2.

Company set to return to profitable growth path

Digital Workforce expects higher revenue and improved adjusted EBITDA year-on-year in 2025. After a weaker-than-expected Q1, the turnaround in profitability will have to take place to some extent already in Q2. However, this will be supported by the good order book mentioned above. We forecast the company's revenue to grow by 7% and adjusted EBITDA to increase to 1.5 MEUR year-on-year, or to 5% of revenue in 2025 (2024: 1.0 MEUR). In the following years, we expect continued strong growth of ~13% per year, with EBITDA-% scaling up with growth to 12% in 2027. The company has losses of 13 MEUR from previous financial years, which means that it will probably not have to pay taxes for many years to come.

Valuation picture is attractive

In terms of investment profile, Digital Workforce is still a turnaround company whose turnaround in profitable growth progressed well last year, which has reduced the risk level of the stock. With weak profitability, the current year's earnings multiples do not support the valuation, but the low EV/L of 0.9x still illustrates the potential. Next year's profitability estimates are only partially scaled, making the valuation picture (2026e EV/EBIT 10x, P/E 15x) already attractive. What’s more, based on the sum of the parts (EUR 4.8) and the DCF calculation (EUR 5.1), we estimate that the fair value range of Digital Workforce’s share is EUR 3.8-5.1 per share.