Translation: Original published in Finnish on 4/30/2025 at 8:00 am EEST.

We reiterate our Accumulate recommendation for Tietoevry and lower our target price to EUR 19.0 (was 20.0) reflecting estimate revisions. Tietoevry's Q1 was slightly softer than we expected, and the recovery was slower than anticipated. As a result, we have slightly lowered our forecasts and expect the new structure's revenue to decline slightly and profitability to improve in 2025, driven by efficiency measures. Our estimates are at the lower end of the new guidance. The share's valuation picture is still attractive from several angles (DCF EUR 19 and dividend-% 9%). 

Organic revenue decline in all businesses in Q1

Tietoevry's Q1 revenue decreased by -4% to 471 MEUR, under pressure from the continued weak IT market, but slightly better than our expectations (466 MEUR). The weak demand for Tietoevry spread in Q3 and is affecting all businesses in one way or another. Tietoevry Create's revenue fell by 6%, Banking by 4%, Care by 2% and Industry by 2%. However, the order book turned upwards and grew by 4% from the previous quarter, driven by Banking and Care, supporting a turnaround in revenue growth towards the end of the year.

Adjusted result down year-on-year and below expectations

Tietoevry’s adjusted EBITA was 50 MEUR or 10.6% of revenue (Q1’24: 60 MEUR). The result was weighed down by 1.8 pp by an item related to IFRS 5 and Tietoevry Tech Services. This results in a headwind of slightly more than 8 MEUR until Q3, which will decrease significantly in Q4 and gradually thereafter. Profitability was supported by efficiency measures in all businesses. The company implemented new efficiency measures in Tietoevry Create (200 FTEs) in Q1 and will continue to implement new measures in Q2. Profitability was again constrained by pressure on invoicing rates due to lower revenue, price pressure on customer prices and one working day less than in the comparison period.

Operational cash flow amounted to 97 MEUR (continuing and discontinued operations combined) in Q1, significantly higher than the previous year's level of 72 MEUR. Cash flow was supported by a change in net working capital of 31 MEUR. Cash flow from investing activities was -20 MEUR.

We expect revenue to decline and profitability to improve in 2025

The company now issued new guidance in Q1 that reflects the new structure. Tietoevry expects its organic growth to be in the range of -2% to +1% and an adjusted EBITA margin of 12.0-13.0%. Following the Q1 report, we lowered our earnings forecasts for the coming years by an average of 7%. We expect Tietoevry's revenue to fall by 1.5% to 1,851 MEUR (excluding Tech Services). In addition, we expect the adjusted EBITA-% to increase to 12.1% in 2025, driven by efficiency measures. The company will hold a capital markets day in Q4, where it will provide information on the new remaining entity and its financial targets.

Sale of Tech Services transform Tietoevry's profile into a more credible earnings growth company

The positive aspect is that the Tech Services transaction will clarify Tietoevry's structure. The remaining businesses are positioned in growing areas of the market, and the profile of the company is thus changing more clearly towards an earnings growth company. For years, the now sold Tech Services business has been a brake on the group's development. Tietoevry is now a more purely international company offering software, development and consulting services. On our estimates, the adjusted P/E multiples for 2025-2026 are 13-11x and the EV/EBIT multiples are 12-11x. The multiples are ~25% below international peers. One-time costs will decline in the future, making them more comparable to peers. In our view, the absolute valuation of the share is attractive and the relative valuation is even very attractive. For the next few years, with our estimates at the lower end of the consensus (consensus 2025e EUR 1.40 and Inderes EUR 1.30 per share), the dividend yield is a good 8%, which in itself provides support for owning the share.