Good morning, ladies and gentlemen, and welcome to our conference call. We are happy to introduce our third quarter results and summarize the new strategy we announced earlier this month. Here in the studio, we have Kimmo Alkio, our President and CEO, and Tomi Hyryläinen, our CFO. After the presentation, we will continue to a Q&A session. If you have any questions, please dial in to our conference call. Now, Kimmo, please go ahead.
Thank you very much, Tanja, and a very warm welcome to everybody for our third quarter results announcement session. What an exciting quarter we have had. Overarching considerations, main messages, solid profitability and strong performance, especially in our software businesses. We had op-adjusted operating margin of 14.5%, organic growth of 1%, and overall, software businesses driving growth of 10% in industry software, 7% in financial services, continuing the positive and sustainable trajectory, the overall development in our software businesses. Very importantly, in the current era of the very active talent market, importantly, we have recruited over 1,600 new colleagues to the company, very important.
I shall already now mention, as the attrition levels have remained at the high level, they seemed to be stabilizing towards the end of the third quarter. A very important part, naturally, of our agenda to building the capabilities and the staff. Then, as recognized, I'm sure by everybody, the new strategy announced a specialization-based strategy driving further growth and expansion opportunities for the quarters and years to come. Before going into the actual results per business, maybe a couple of considerations fair to highlight in terms of the dynamics in the marketplace as a whole. The activity level with customers intend to actually be shifting investments to the parts of the business which support their business' competitiveness through cloud technologies, data embedded into services, and very active modernization agenda.
Modernization here referring to, the very firm drive for further efficiency, which are then the primary foundations for funding the new investments around cloud and data. Quite consistent view, activity level fine in the marketplace overall. Talent market we'll be touching a number of times. This is the second time in my first three minutes. Indeed, active while stabilizing, and very importantly that throughout this year, we have been accelerating, our recruitment globally, and, especially in the third quarter, we continued to make, again, good progress in that sense. Furthermore, fair to highlight that, also in TietoEVRY's case, we do have the hybrid working model in effect, that's more or less business as usual in today's environment.
We would furthermore just wish to highlight that we shall continue to be highly mindful and care for our people's well-being in light of recognizing that it is still unknown how the pandemic shall evolve. Just confirming that consideration that we are prepared in case the pandemic continues to create surprises, as we've seen in recent days also all across Europe, on the infection rates. Overall, currently for our case, the business continuity, care for employee well-being has been working fine. Furthermore, I'll of course, towards the end of this presentation, be summarizing the core parts of strategy.
So far, we have very clear feedback from all of our constituents, from customers, employees, shareholders, that the clarity on strategy is a good thing to do, and also timing-wise, less than two years into the integration itself, many of us feel it is indeed timely, also in terms of the change happening in the marketplace. This would be a bit on the overarching considerations. Recent customer wins, we are also seeing some traditional customers continuing very close collaboration with TietoEVRY. Telia, one of the largest operators in the Nordic countries, cloud-first strategies continuing also very actively in the application modernization side. Furthermore, OP Financial Group renewal and modernization of applications, and continued collaboration there as well.
Furthermore, also Aibel in Norway, infrastructure and cloud-based services extending towards all of their services worldwide. Furthermore, on the case of Ilmarinen, traditional longer-term customer in the pension side, also digitalizing core processes and also towards the type of an automated and more efficient set of services. Significant wins and healthily also adding to our order book during the quarter. Furthermore, then going into the actual results, we did experience organic growth of 1% during the third quarter, adjusted EBITA of EUR 94 million. That is 14.5%. From a strength standpoint, good to see that fine and healthy organic growth in industry software, in financial services, in product development services, and in international operations.
Naturally we have enormous drive underway to get the full portfolio to be contributing to growth of the company, and as recognized, that is not yet the case. Furthermore, we would like to highlight that the pre-merger loss customers in cloud and infra do continue to impact the revenue development throughout this year, impact approximately 2% at the group level. Furthermore, good to clarify that the profitability improvement was driven by the strong performance in the software businesses and continuous attention on synergy realization, while important to recognize that the higher attrition and salary inflation does constrain profitability, and nevertheless a fair progress towards the 14.5% level. Furthermore, from a cash flow standpoint, healthy operating cash flow of EUR 92 million.
Overall, the development for the third quarter was fairly fine, I would say in light of the consideration that the early part of Q3 was somewhat slower and fairly fine, rebounding towards the end of Q3, and this was especially the case in digital consulting. That is a bit the reasoning behind the organic negative growth of 1%, and naturally we are not satisfied with that level, and to confirm beginning of quarter somewhat slower and slowly rebounding towards the end of Q3. Growth has continued to accelerate in cloud data and analytics. It is not yet offsetting the decline in the traditional application services side, and furthermore productivity naturally in this type of business impacted by the higher attrition although a net increase of 140 in personnel since the second quarter.
Furthermore, it is also fair to highlight that the capacity in headcount for the third quarter was 4% less than in the comparable quarter one year ago, and that is also a decisive factor in terms of why growth was not on the positive footing yet. From a standpoint of anticipation towards the end of the year, we anticipate the adjusted operating margin to be below Q4 2020 level, while we do expect this business to be rebounding to growth. Cloud and infrastructure, we have a consistent perspective of our turnaround story. Organic growth still highly challenged at -10%. Drivers being too familiar is the pre-merger lost customers, approximately 6%. Furthermore, given the global supply challenges in hardware, this actually impacted the revenues of this business by approximately 3%.
This supply chain shortage impacting cloud and infra clearly. Turnaround program very high on our agenda, on schedule, and capacity reduction in legacy services and automation continue to drive the profit improvement, and this profit improvement will continue to deserve very significant attention from our side until the numbers start to look where we expect them to be. In light of the end of year, we anticipate the revenue decline to be less than in the third quarter and operating margin expected to be at or above the Q4 2020 level. Moving forward to our industry software, healthy performance growth of 10%, nice continuation of the trajectory we have been implementing.
Adjusted EBITDA very healthy at 27.8% level and good performance in the software businesses across the board, also in the health and care, which is the largest one of our IS portfolio. The profit development continues to be driven by the focus on the healthy top-line development, and here the continuous productivity improvement refers a lot to the R&D practices, R&D architecture for scalable software, scalable deployments. Furthermore, good to also highlight which was communicated a week ago on the continuation of portfolio development or pruning three small businesses divested in the industrial sector. At that point in time, we have been open about consideration portfolio pruning in case these do not provide the type of growth potential, scale potential nor investment nor fitting our investment priorities.
Normal activity, fully in that sense. For IES, the operating margin is anticipated to be below Q4 2020 level. A little bit of background that the Q4 revenue and profit is anticipated to be impacted by higher license sales that we experienced in the second and third quarter in the industry software category. We had additional license sales approximately 5% in the Q2 report and approximately 2% here in the third quarter, which historically have been heavily skewed towards the fourth quarter timeframe. This type of a perspective we also offered in our Q2 report as we have seen some change in customer behavior, decision-making actually to our favor in terms of winning more market share. Financial services, healthy performance overall, organic growth 7%, adjusted EBITDA 16.3%.
The healthiness also in the portfolio of financial services, growth contribution by the main units across the core banking, credit and the cards businesses. Profit development naturally continues to be driven by the revenue contribution and the continuous attention on efficiency improvement, including R&D practices. For the year-end, we anticipate the adjusted operating margin to be at or above Q4 2020 level. Furthermore, in our one of our exciting global businesses, product development services, organic growth of 7%, profitability at 11.3% level, top-line contribution through the businesses in mobile networks and automotive industries. We are also highlighting entry into an adjacent sector on electronics sector, and strong overall pipeline development within PDS visible.
Profitability here similarly as in digital consulting, naturally given the labor intensity impacted by attrition and actually increased subcontracting that utilize specifically in PDS and also salary inflation. Activities have been done to mitigate attrition, in some cases, as mentioned, implementing incremental salary rounds as well. To confirm the extended partnership with Ericsson to build the R&D center in Nanjing, China, that was announced earlier, revenue contribution to be starting in November with approximately 330 employees having joined the company. This is about 53% of the employees. Our target was to have about 75%. We are very comfortable with the business case overall as the additional capacity was planned to be used for other customers than the one in question here.
Regarding fourth quarter, adjusted operating margin anticipated to be below the Q4 2020 level. Our international operations, we have a very similar message as in the second quarter. Overall, a good strong development growth of 22%. This is absolutely in the category of cloud-native and data-oriented services, and we are continuing successfully in the so-called land and expand with existing clients and winning actually new footprint as well. Continued favorable development, naturally a foundation we'll be looking into developing further from. That would be a brief summary of the business dynamics for the third quarter and core commentary by business.
Naturally, given that this year, after year 2020 was the year of integration and now the agenda towards growth orientation and delivering growth, going fairly consistently according to our own plans. Our software businesses proceeding very consistently, and we have the growth agenda materializing in majority of our businesses. Group growth as shared and as seen, now growth of 1%. To be fair, our original plan was to get digital consulting into growth in the third quarter. With the higher attrition levels and the lower headcount, we were still -1%, and as commented, we anticipate this to be rebounding for the end of the year. Cloud and infra having negative impact throughout this year as we had originally anticipated, and international operations continue to develop really favorably.
Here also commentary on the growth dynamics providing us a fairly fine foundation, actually then based on these assets and the capabilities we have, the track record in several of the businesses to then consider how to expand even faster, through the specialized businesses, which we'll be coming back to briefly also in this session. Now over to Tomi.
Thank you, Kim, and good afternoon. I'm pleased with our Q3 performance overall. We delivered a healthy 14.5% profit, as discussed earlier, driven by our software businesses and continued synergy contribution. Our reported profit was at EUR 72.2 million or 11.4% compared to 4.4% prior year, reflecting the overall profit improvement of the company and reduction in the one-time items in accordance with our plans. We delivered a good cash flow and continued to improve our leverage metric with net debt/EBITDA amounting to 1.4 at the end of Q3. On cash flow, we are back with more normalized levels with EUR 92 million operative cash flow.
Our working capital was relatively stable with a small increase of EUR 11.6 million due to seasonality, which is visible in decrease in personnel-related accruals, mainly in vacation accruals and advances received from customers, which we are utilizing over the course of the year. Due to healthy cash flow, our net debt ended up to EUR 702 million and net debt/EBITDA to 1.4 compared to 2.9 last year at the same period. Our synergy takeout continues as planned with EUR 90 million run rate executed at the end of Q3. We estimate to reach EUR 95 million at the end of the year. The remaining synergy takeout relates to procurement and facility-related efficiencies with some further process and IT optimization activities. The one-time integration cost, we keep the total guidance intact with EUR 110 million-EUR 120 million.
Our one-time items in Q3 were EUR 10 million, fully as expected. Q4 one-time items are estimated to be only slightly higher, in the range of EUR 10 million-EUR 14 million due to increased activity in the area of brand and identity and facility consolidation. The divestment of the three smaller software businesses, which was mentioned in IS, will have a positive one-time item impact in Q4 of approximately EUR 26 million. We estimate the full year one-time items to be positive in the range of EUR 52 million-EUR 56 million. The recently announced divestment, as mentioned in industry software, was in line with our strategy to seek focus and scale with our businesses. The transaction is expected to close in Q4, resulting in capital gain of 26, as mentioned, after deducting net assets, including the share of goodwill from the sales price.
The valuation of the business was at the level of our earlier oil and gas divestment. CapEx for the quarter amounted to EUR 16 million, and we estimate the full year CapEx to be slightly below the 2020 level, which was EUR 83.5 million. Next, I'll summarize the Q4 performance drivers. Cloud and infra pre-merger lost customer impact is approximately -1%. We estimate the supply chain challenges for hardware sales to continue impacting growth by -1%. Synergy contribution will continue with net impact of 5% for Q4. Higher attrition and salary inflation will continue to constrain profitability as we're entering Q4 with almost 7% higher quarterly attrition rate compared to prior year.
On salary inflation, the heated talent market has increased our actual inflation for the year to approximately 3% from original 2%, and that increase is difficult to mitigate in the short term, therefore impacting or constraining the profitability. FX tailwind is expected to continue, and working day impact to growth is expected to be positive 1%. Back to you, Kim.
Thank you, Tomi Hyryläinen. Now towards the end, we'd like to provide a recap, a synopsis of the recently announced strategy, and the main factors behind it. First of all, we do believe this is a fantastic time to step ahead and reshape our future. We are discovering on a global arena clear market opportunities. I'll summarize in a minute. We have made very respectable progress throughout our integration, practically now in the one year and nine-month timeframe. All our core teams are integrated, consistency of processes, tooling, which enables us to actually take a step forward, and foundational services which are competitive, which are scalable, and we believe we can create even more value through even sharper choices for the businesses.
One of the most important part of our strategic consideration is the perspective on the future market, and here I would like to summarize the three main considerations. Our customers' agenda and investments are geared into the right-hand side on the cloud native continuously at a faster and faster pace, which will be the domains where future growth will be driven by and derived from. Considerations on data and analytics, cloud consulting, cloud managed services, and as well shifting the software businesses towards a SaaS-ified world, areas that we are familiar with and we believe will open up significant opportunities by greater focus. Second important point which goes to the left-hand side, we believe it's important to recognize that the traditional services, traditional infra, traditional application services will require further scale, and the price erosion in the years to come will accelerate.
This all opens up also the market in between for modernization, very active modernization of our customers' businesses, the business processes, application landscapes, infrastructure landscapes. To be fair, we believe that's also a market segment we whereby we could win greater share and not being so much focused with our current customer base. The common denominator in the future state of the market is the call for high degree of specialization in every interaction with the clients. Furthermore, if I do a bit of a bridge from the third quarter report, we are able to tell that our business mix is actively developing towards the cloud native and software worlds.
This quarter, we had a good performance in the international businesses, in the industry software, in financial services, and the product development services side, a foundation that is already fine and clear, giving us a number of ideas and consideration how to build even further. While it is fair to recognize that lower demand in the traditional application and infrastructure services, whereby the need for scale is also in our case. When we think about the core choice of our strategy, it is actually a growth and expansion-oriented strategy, a set of clear business choices to capture the growth and expansion opportunities. We are making choices on the end-to-end businesses through specialization with full accountability and overall faster decision-making, faster time to react into the ever more fast or faster changing market environment.
Third component, very importantly, the focused investments to expand cloud-native capabilities and the scalable software businesses, and furthermore, to be driving partnerships to scale in the areas where further scale is required, managed application and managed infrastructure services. We firmly believe that towards all of our key stakeholders, the future strategy will bring even more value. The part that we wanted to open up in the strategy communication is the clear categorization of our investment priorities. The area where we expect to invest to expand are the business that are already quite scalable, financial services, health and care software, business design and engineering, comprises of the international operations growing over 20%, already cloud native, our product development services, highly advanced software engineering, and then the advanced side of the digital consulting side around cloud and data in the Nordic countries.
Really stepping into the future of cloud native in the category of invest to expand. We also wanted to be very open on the center category on the partnering to scale, both for enterprise modernization and cloud platform services in the future, likely somewhat different dynamics between the businesses. In the enterprise modernization, one would typically look into the technology partners, as an example, SAP on public cloud or RPA type of partnerships or leverage investments already made by partner companies. Then also we have the ability to jointly invest and scale, and that would be especially the case for cloud platform services side, where the future scale needs, we believe, are significant.
Furthermore, we wish to be very clear that the third category focus for value on the industry software, and we'll be doing that portfolio development actively as we have demonstrated already. We feel it's very important that we are able to publicly share the priorities and also in terms of the investment allocation, including M&A capacity, given the current deleverage of company, which we by now already can start to think about and work on. Furthermore, to confirm from a financial standpoint, our main considerations, our financial targets are unchanged from the December 2020 Capital Markets Day, all financial targets intact, and we firmly believe that our potential and commitment for continued dividend attractiveness will be highly advantageous to our current and future shareholders.
In summary, the main considerations we have five. Also, as the closing commentary from the launch last week, the market is being reshaped, and that reshaping of the tech sector opens up further growth opportunities for companies such as TietoEVRY. I would say especially for us, given the presence we have in the Nordic market and already towards international expansion, specifically around cloud data, engineering, and software, they really being the likely stars of the future business domains. The third component, we subsequently reshaped the function in TietoEVRY through specialized end-to-end businesses, and as a consequence, we also changed our structure and leadership nominations were also shared last week, as we'll be going live with the end-to-end business setup in January next year.
Just to confirm, as mentioned, the financial target's fully maintained. With this background in mind, the summary of our total Q3 report continued solid performance led by software businesses, cloud data and software driving the growth agenda. We have a strong global recruitment focus, and we wish to be very open, as we have been in recent quarters on the attrition levels. We have seen record high number of recruitments. As commented, the attrition levels have been high. They were stabilizing towards the end of the third quarter. The new strategy, as announced, we believe opens up very exciting avenues for the quarters and years to come. With this in mind, this would be the summary and time to go to Q&A.
Thank you, Kimmo and Tomi. We are ready to proceed to the Q&A session. Moderator, please go ahead.
Thank you. Ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypads now. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel. Our first question comes from the line of George Webb at Morgan Stanley. Please go ahead, your line is open.
Morning, Kimmo and Tomi. A few questions, please. First of all, just starting off in cloud and infra, can you kind of clarify the trajectory of the lost customer impact you're expecting there? Like, I guess you've lapped a full year of the first impacts from Q3 2020, but there's still a step down effect going on, given you're expecting that to continue into Q4.
Is Q4 the last quarter you expect those headwinds to occur, or are you expecting that to continue until into 2022? Secondly, on digital consulting, you mentioned the higher attrition. Can you put any numbers around that? Is that, you know, high teens, low 20s? Anything around that would be helpful. Just lastly, I noticed in the report you kind of flagged you're expecting 3% salary inflation for FY 2021. What's the latest in terms of how you're expecting that to trend to FY 2022? Thank you.
Yeah, thank you for the question. The first one on the lost customers. There will be only very limited minimal impact for 2022. The vast majority we are now experiencing in 2021. The second one maybe.
Digital consulting, attrition. Maybe a consideration. As the attrition levels and the group average third quarter was about 16.6%, that is actually seven points higher than a year earlier. Digital consulting is rather on the upper end of that, slightly above. To be fair, it varies significantly by location. The higher numbers have been clearly in the offshore locations and less in the Nordic countries. To confirm, also clearly stabilizing, as an example, and also in India at the end of Q3. The salary level, the 3% level, we anticipate this to actually be intact as we enter also into next year.
Yeah. Likely around 3% for 2022 as well.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Daniel Djurberg of Handelsbanken. Please go ahead, your line is open.
Thank you for taking my question, and congratulations on a very strong report in terms of software sales. The question could be on Digital Consulting again, on your comment that you will be below the adjusted EBITDA level in Q4. Year-over-year it was 17%, I believe. Is this mainly due to high recruiting costs or due to this utilization level, or is it more of a salary inflation that is hitting? Also, if I may, comment on Industry Software, you also comment that you're winning share, but there are more, you know, evenly split revenue, I guess, and that you don't expect it to reach the 26% adjusted EBITDA margin as you saw last year.
If you can comment a bit on the granularity there. Is it, you know, much below, or is it, you know, 100, 200 basis points below or something? It would be great to understand the impact.
Sure.
Thank you.
Let us take the digital consulting first. Digital consulting tends to be by nature now impacted by the combination of attrition and new joiners coming in. That era when this happens, you incur clearly a less productive environment than without this type of a big kind of a transition. That's one factor. Utilization rates have been developing in a fine manner towards the quarter end. As reflected, and hopefully very openly earlier as well, that the early part of Q3 was clearly a bit quiet and the rebounding to much more normal levels towards the end of third quarter. These are the primary factors on the digital consulting side.
Attrition and high recruitment and managing this, as a process, does have implications. On the IS side, just to confirm the consideration that, when we have traditionally had more of the skew of license sales into the fourth quarter, it has been a very clear contributor and now we have seen these coming in a bit earlier. This is the background to our consideration, but, that's more or less, I think on that one.
Yeah. Maybe to add on the DC, of course, the inflationary component, which has been discussed earlier, that impacts the DC profit levels for Q4 as well.
Yeah. May I add one more question just to get some color on your thinking, you have done some divestments in the oil and gas and also more recently Jyda.com and at least EUR 22 million to EG. Can you comment a little bit on the divestment process and should we expect more, and why don't you think these companies could scale similar to the rest of your business and Industry Software, and how do we know that you're not selling too cheap, so to say?
First of all, thank you for that question as well. We have had for about the five-year timeframe, I would like to call it actually like a highly structured process for any type of M&A or divestment consideration. Starting with the typical components in that consideration, the strategic fit on the scale, accessibility to the global market, investment requirements, our capabilities and, of course, our investment priorities as a company. That's a process that we've had well functioning for several years, that we utilize also for the portfolio development, whether from an acquisitive mindset or with a divestment mindset.
As we had reflected, also in the Capital Markets Day almost a year ago, that it's also very typical and required post-merger to do active portfolio considerations where you see the greatest value of the future and what may not be the priority for you as a company, and then rather find other avenues, and these actually also source of funding for rather the acquisition side. We do, as always, the valuation benchmarks and look at the industry peers and what we believe are highly respectable if we were to go forward. Tomi, anything else to add?
That was a good summary. Nothing to add.
Okay. Thank you. Now Gautam Pillai.
Thank you. Our next question comes from the line of Gautam Pillai of Goldman Sachs. Please go ahead. Your line is open.
Great. Thanks for taking my questions. Firstly, on the Industry Software segment, can you please talk about the pull-forward of license sales, which happened in Q2 and Q3? Was it specifically related to some large one-off contracts? How do you see this segment? You already flagged that Q4's gonna be a bit soft, but in the medium term, how do you see the prospects in the segment? Secondly, can you share any thoughts on early thoughts on 2022 margins? If travel and physical events are coming back combined with the pace of hiring you're doing, should we expect some sort of headwinds to margins going into 2022? Thank you.
Indeed. Thank you for those two points. The on the industry software side, to confirm that the impact of about 5% in the second quarter report we also had, and the background was actually extending the collaboration with a number of hospital districts for co-developing the future functionality of hospital information systems. That was an extension, and the timing in a positive manner just, you know, happened in the second quarter. That's very much a favorable development in greater market access and aim to gain more market share. The third quarter, we had impact of approximately 2%. Nothing unusual as such the timing, just shifting from what it would have been in recent years, rather Q4-centric.
Regarding the 2022, this would be a bit too early to provide guidance on 2022. We'll be doing that, of course, at a later stage.
Okay. Thank you.
Thank you. Our next question comes from the line of Michael Briest at UBS. Please go ahead. Your line is open.
Yes. Thank you. Good morning. A few from me as well. Just could we drill into the international operations just to understand it a bit better? I mean, you've got 5,000 people generating, you know, it looks like about EUR 150 million of revenue, so 30,000 odd a year. It seems, you know, quite low. Can you just talk a bit more about what they're doing? Secondly, just on Estonia, I know it's a small country, but the headcount's dropped from 300 odd to 117 year to date. Can you just address what's going on there? And then on the strategic initiatives, particularly around cloud and infrastructure, can you talk about the relationship now that's been reconstructed with IBM? I seem to recall EVRY had a 10-year contract from 2015.
To what extent does that limit your scope? Or, you know, how has discussions with IBM about this potential partnership strategy evolved? Then finally, Tomi, just on cash exceptionals, I think the guidance was for EUR 70-80 million in the year. You gave a number for Q1 and Q2. Can you give the Q3 cash exceptional and say what it's gonna be for the year? Thank you. Okay.
Thank you, Michael, for those considerations. International. This business comprises of. I'll give you the granular list of considerations, but this is more or less all offshore and nearshore. That's a bit of a background to your, let's say, your quantification on the yield side.
Business we conduct from Ukraine towards Western Europe and the U.S., this was built over the last years by EVRY India towards the U.S. to larger customers in sectors such as insurance and couple of industry sectors where we have been gaining very significant customers doing actually cloud native, cloud modernization, data platforms, data science type of really advanced deliveries in this business. That's one part of it. The second part would be, which would come from the former Tieto side, like the business in Austria, business in Russia, which has been declining over the years, and business in the Baltic region. That's just a backgrounder.
The most significant growth contribution comes from the, what I would like to call the land and expand relationships in the US and Western Europe. We've seen this now being scalable as a on a continuous basis over last quarters. We think the scale foundation, however one looks at it, is health.
If I add, Kim, on that one, just to be clear now, Michael, on your comment of 5,000 people. This category other of 4,918 includes also our support functions, which is roughly 1,000 FTEs. The size of the international business is 1,000 less.
Yeah. Yeah. Good point. Maybe your consideration Estonia, so very practically, the call center location changing from Tallinn to actually Vaasa as a multilingual location happens to be in Finland, but serving also Swedish clients. That's just a background on that one. On the strategic side, on the cloud and infra, the rearrangement in your consideration here with IBM does not hinder any future moves. It had to be a total revamp of the relationship, that should not set any prejudice on what may follow in the future. It's fully a clean sheet on how we think about the future scale.
Last-
Thanks for the cash exceptionals. Yeah.
Yeah. Last one on the cash OTI. I took away that metric since we are getting close to cash equaling the OTI number. Good assumption is the EUR 10 million for the cash OTIs for Q3.
Thank you. For next year, any thoughts on continuing exceptionals? You should be down at 1% of sales from a P&L perspective, so should we assume the same from a cash perspective?
Yes, roughly so. That'd be good.
Okay
Good assumption.
Thank you.
Thank you. Our next question comes from the line of Sami Sarkamies of Nordea. Please go ahead. Your line is open.
Hi. I have four questions. On digital consulting, your growth rate fell from positive 1% in Q2 to -1% in the third quarter. Can you still explain what was the reason? Was this driven by customer demand, your ability to supply, or just timing for the new projects? Secondly, on cloud and infra, your margins improved from the second quarter, and this was probably mostly driven by elimination of extra costs. Can you explain since when those extra costs were sort of terminated and what will be sort of the additional improvements in the Q4? Further on cloud and infra, you're complaining about headwinds related to hardware sales.
What is the sort of total level of hardware sales and what's your sort of plan for this going forward? Fourthly, on industry software outlook for Q4, I think you highlighted five percentage point impact in second quarter and two percentage points in the third quarter from extra software sales. Should this be deducted from 26% of last year you had in Q4?
Okay. Very good points. We start with the digital consulting. Just to confirm the capacity, the headcount was 4% less than one year ago. This was one very clear factor. Second factor, just from an output standpoint, we did see the rebounding towards the end of third quarter. Main factor being the headcount, yes, activity level fine, utilization rates becoming much more normal towards the quarter end. I think that's the short and hopefully the crisp view on DC.
Infra turnaround, of course, the capacity reductions continue as visible also in the FTE count of that unit. That good work that we initiated at Q1 is continuing, and we are, as mentioned, on schedule on that. Of course, for Q3, we have the positiveness from the vacation accruals impacting also cloud and infra margin a bit. We anticipate Q4 then, as mentioned, a continuous improvement compared to the prior year.
On your consideration on the hardware resale, we are mindful on that type of volume ambition. It's been traditionally very low margin business. That's why it is not in the category where we aim to grow super fast, given the nature of that business. That's just a backgrounder. Indeed, as we commented, we expect the shortage of supply to be impacting, be a factor into the fourth quarter.
IS was the last one on the 5% and 2%. We highlighted this in anticipation of what will happen in Q4, not that it will exactly happen.
Yeah.
We, of course, as a company hope that it wouldn't impact Q4 that much, but it is a realistic assumption that it will have some impact.
Okay. Can I still check what is roughly the level of hardware sales at cloud and infra?
For the full year, this business, including the financing, is a bit short of EUR 100 million.
Okay, thanks.
Thank you. Our next question comes from the line of Christoffer Wang Bjørnsen of DNB. Please go ahead, your line is open.
Good morning. Most of my questions have already been answered, so just keep the one on digital consulting. It seems like compared to your expectations, you're a bit behind. Maybe give some kind of clarification on why you're so confident in that kind of improving in terms of top-line momentum in Q4, what you're seeing that's driving that? You know, what kind of level of growth should we be looking at? Just to kind of give us some kind of confidence that that's actually turning around now would be very helpful. Thank you.
Yes. Yeah, thank you, Christoffer, for that consideration. Overall, we have seen, of course, the potential, throughout the year, not in Q1, as we all remember. Second quarter, the opportunity realizing, the attrition wave kind of kicking into Q3 with the 4% less headcount, and that visible from the total productivity side as well of the team, for the first months of Q3. The productivity headcount kind of the recruitments and, the productivity side clearly improving towards the Q3 end. That gives us comfort. Then when we look at underneath from the business mix standpoint, we do anticipate the future-oriented practices, specifically in cloud data and insight and customer experience management, to follow the similar path as we saw at the end of Q3.
That gives us comfort that we should be growing. Of course, that is still all to be executed, but these are the factors in our consideration.
Thank you. That's all for me.
Thank you. Our next question comes from the line of Matti Riikonen of Carnegie. Please go ahead, your line is open.
Good morning. It's Matti Riikonen. I have three questions, one by one. First of all, regarding the salary inflation, do you think that you are able to mitigate that salary inflation by price increases before the year next year starts? Or have you already been executing price increases to the customers?
We take one by one. Overall, as usual, the inflationary aspects we account for in our next year's business plan and the priorities, and it's quite an unusual environment and era, and we'll be working on the price increases as well as one component.
Right. Okay. Could you tell about the revenue split between cloud and traditional in your cloud and infra business? Where are we standing at the moment?
That we have not opened up in the reporting itself. Naturally with our business mix, we have ample proportion in the more traditional, whether one thinks about mainframes or the Unix SPARCs installations and the likes, and then rather of course faster developing. I don't have the proportions here with me. I would need to check that because that's a continuously evolving part. Background being that we also transform the legacy environments to private and public cloud. These new technologies, these environments are gaining in proportion. If I may, as I don't have the answer, Matti, I don't want to guess that one.
Our aim naturally is to shift customers towards the modern environments rather faster as they are more scalable, more automated, and to be fair, more productive and profitable as well.
Right. As you understand, when you talk about declining businesses and growing businesses, that information is fairly kind of irrelevant unless we know what are the base numbers that we are coming from. That information, I think, would be very valuable for all investors going forward, just in kind of having educated guesses how the business could be developing going forward with the base numbers that you probably provide at a later stage.
Yeah. Fair point.
Thanks for.
Good input.
Thanks for that. A small thing. What was the EBIT contribution of the three divested software businesses? You mentioned that they had EUR 70 million net sales on an annual basis, but roughly, did they have better or weaker than average performance within the IS unit?
They were roughly on average at the levels of the oil and gas business as well.
Okay. Thank you. That's all from me.
Thank you. Our next question comes from the line of Panu Laitinmäki of Danske Bank. Please go ahead, your line is open.
Yes. Thank you. I have three questions. Firstly, on Digital Consulting, on this application management business, I mean, how much did this impact the organic growth, and what is the outlook of this business? So, I mean, yeah. What kind of a headwind is that for the organic growth on top of the attrition? That's the first question. The second question is still on Industry Software. Just wanted to know what is really driving the growth. You touched it on this, but can you be a bit more specific what products were driving growth? Was it new customers or just extension with these hospital districts that you mentioned? Any color on that would be helpful.
The third question is on the targets that you gave earlier for the current divisions. Do you still see these as valid or should we think of any changes to that? I mean, industry software has been stronger than you were kind of targeting and then cloud and infra and maybe consulting seems to be doing less than targeted levels. Are these valid from your point of view? Thanks.
Okay. Let's take them one by one. Thanks, Panu. First of all, on the digital consulting side, the application services side, that is about 40% of the digital consulting and that business is declining. We don't give the percentages externally, but that's the factor, the background, that the new business in DC are not yet growing fast enough to offset that. It was the case in the second quarter, but not now in the third quarter, given that the totality of our headcount was down the aforementioned 4%. That's why in the current environment, in the current setup, the digital consulting is a combination a bit on the legacy application services and the new world consulting services.
As we shift to the specialized businesses, we'll be playing the cloud native end to end separately. On the IS side, the background, if I hopefully understood your question correctly, what was behind the IS, the +5%, +2%, extensively on the health and care side based on the Lifecare investment made between 2016 and 2020, that total Lifecare renewal, and these are extensions on that in recent quarters and years towards a fairly fine scalable platform. That's the background there.
On the long-term targets, we don't see a reason to start changing those now. Now, as communicated, we will then in H2 next year arrange a CMD and give the targets for the new specialized businesses as discussed.
Okay. Thanks. Can I just have a follow-up on the application services? Is it so that the trend has kind of continued unchanged, or did it weaken in Q3 in that business?
It's slightly weakened. There is some fluctuation quarter in, quarter out, depending on the customer projects in question. It would not be, if I may, here I use a sample set over several years, that there are kind of quarterly fluctuations. Now this was clearly this part negatively impacting Q3.
All right. Thank you.
Thank you. Our next question is a follow-up from Daniel Djurberg of Handelsbanken Capital Markets. Please go ahead. Your line is open.
Thank you, and wo questions if I may. Starting off on the changed strategy that you spoke about October 13 and also today, my question is if you can give some color on how this has been considered or seen in the company so far. We saw that the attrition rate was rebounding and stabilizing. The risk for this change to now change that positive trend and also or on the opposite side, could it be supportive in terms of lowering the attrition rate instead? That would be my first question.
Sure. The feedback so far, I always say this humbly because everything needs to be delivered and executed. The feedback is absolutely in the positive category from all of our constituents. I add a bit of flavor, naturally the degree I can externally when we have done now throughout the merger process, our pulse surveys, approximately every two to three months, which have developed actually during the very demanding integration and the pandemic era continuously in a fine manner at very really competitive levels. The one factor that people have been highlighting, I would say in the last, maybe two to three quarters, not necessarily yet in 2020 that much, that what is the future vision of the company post-merger?
To be fair, I mean, our strategy process, as everybody recognizes, this usually take approximately one year. Our foundation for strategy rethink, in our case tends to be whenever we see the signals in the market changing, and then we rethink the company. It is very much possible that also in terms of the value proposition and comfort for employees, this is also a further favorable development.
Perfect. Also tell me, is that your view, because I guess your group of people will need to work quite heavily here again on this? Changes in all the, you know, business group accounting, and also sales and marketing of course. Your view would be great as well.
Thank you for asking that from my point of view as well. Luckily and fortunately now, as Kim also has mentioned that from the integration point of view, we are far enough with our IT systems and processes, like from the ERP just to give you a data point, over 90% of our businesses are in the common ERP system. This makes it a bit easier from my point of view to deliver the new numbers and restructure the organization for the new end-to-end specialized businesses. Yes, the level of the integration makes this a lot easier from my end.
Sounds great. Okay. Thanks, for that.
Thank you. We have one further person in the queue. That's Jaakko Tyrväinen of SEB. Please go ahead, your line is open.
Yes, good morning. A good follow-up on the attrition. Are you seeing any specific pattern in terms of leaving customers? Are they leaving to certain rivals? Is it someone being more aggressive on that side? Or, and is the salary being the key driver of the employees leaving?
First of all, if we think about the market dynamics, market has been, is and will be very price competitive, one of the drivers for customers when it's a question of modernization, meaning efficiency, is a lot to do with price competitiveness and risk levels that are taken. These are the very natural competitive factors that you have to have in great shape when you win, and sometimes somebody else might have gone more aggressive. I would like to highlight that the competitive natures of your, I think your first sub-consideration was this customer potential customer attrition. To be fair, naturally, when we are further and further integration, our mindfulness for penetrating new customers and new market segments, we naturally expect to become much more active.
On the attrition, the reasoning at the employee side, it tends to be two factors. It tends to be around the pace at which new opportunities are visible inside the company, and that's where we need to promote rotation even more. I wish to share this very openly. It is actually in the top three factors is then the remuneration, especially in certain geographies where the remunerations are developing very rapidly, and here, as an example, India. The activity of course, as we have commented before in the talent market, is impacted by our customers recruiting the same competencies as IT service providers.
Yeah.
That dimension is visible as well.
Yeah.
On the kind of research, we are at very similar levels of attrition as the peer group in our industry.
Right. Understand. Still on the employee side, has your kind of employee age pyramid changed notably during this year of relatively high attrition?
This has, through proactive mechanisms, been an objective for us throughout the integration process, because we need to develop the pyramid continuously and more actively than actually either company pre-merger. With this in mind, that pyramid development will continue. I don't have an analysis of attrition per age group, so I do not wish to guess that.
Okay. Understand. Lastly, what is your current analysis, how the Finnish healthcare reform will impact your business looking towards 2022 and 2023?
Overall, the healthcare sector across the Nordic countries, I call it positively dynamic, and we are very happy to bet on our open systems, open platform, open API strategy. We were the first company in the world actually to apply the openEHR standard, which is standard vocabulary and dictionary for the medical professionals. Open standards approach, I think the overall momentum is much more towards this type of phenomenon than the legacy large scale players, as an example from North America. We are very happy to fight hard in this market.
Okay. Excellent. Thank you. That's all from my end.
Thank you. As there are no further questions in the queue, I'll hand back to our speakers for the closing comments.
Thank you. If no further questions, I would like to thank you all for joining us today. Before Kim's closing words, on my behalf, I wish you all a delightful day.
Thank you everybody for joining, and great questions and for the interaction. Really nice participation, and hope you got the clarifications for everything that you looked for. Exciting third quarter, a fair performance. Yes, we think we can do better. Very important to drive for increasing personnel and the recruitment capacity and very important, the highly transformative direction we announced in the company strategy. We are sure that the next quarter shall continue to be at least as exciting. Thank you very much for joining us today.