Good morning, and welcome to Tietoevry's 2Q 2023 earnings webcast. My name is Tommi Järvenpää, Head of Tietoevry'sTietoevry's Investor Relations.
We are living very exciting times for the company. Next, our President and CEO, Kimmo Alkio, together with our CFO, Tomi Hyryläinen, will go through the highlights and results of the second quarter.
Kimmo, please go ahead.
Thank you very much, Tommi, and a warm welcome to everybody for the second quarter results announcement. Exciting times indeed, and a lot of good momentum that we are going through as Tietoevry's.
Our highlight for the second quarter: solid underlying performance, growth of 3%, profitability 10.5%. Our growth continues to be driven by the businesses that should be driving our growth: two of the software businesses, Tietoevry Banking, Tietoevry Care, and our digital engineering business, Tietoevry Create.
Fair to recognize the second quarter performance has been impacted by continued high inflation. The inflationary era remains with us and has been impacted by fewer working days, with fewer working days impacting both growth and profitability understandably negatively.
Our ongoing efficiency measures and strong order backlog, which is up organically by 8% for the second half of 2023, will support our full-year performance outlook.
In terms of our strategic reviews, we have an update today in the case of Tietoevry Banking, with conclusions updated to early 2024. We'll cover the details in a few minutes further. Tietoevry Tech Services strategic review is progressing as planned.
Very excitingly, earlier today, we have announced the acquisition of a U.S.-based digital engineering company, MentorMate, with approximately 1,000 employees, really increasing our growth potential in North America overall. I'll cover that background also in further detail.
In the current environment, it's good to offer a perspective on the market as well. We read the market as a mixed market environment.
We see continued healthy opportunities and continued healthy demand worldwide in the areas that drive our industry-wide growth opportunities, specifically in cloud-native application development, data management, machine learning towards AI and GenAI, as well as security services, and from our standpoint, very importantly, healthy continued demand for industry-specific software. This gives a good footing for the growth opportunities moving forward.
In parallel, it is important to highlight that we do continue to see a temporarily softer international market, especially in the second quarter and first quarter in the U.S., and we continue to see, as predicted, a decline in traditional infrastructure services.
In the midst of a mixed market, we have been able to deliver solid financials in the first half of 2023, with over 5% growth and 11.4% profitability. As mentioned, we enter the second half with a really strong order backlog to be realized by the end of this year.
We want to highlight, naturally, given the inflationary era, that it is very important that we continue a high degree of attention on efficiency and price increases, a standard procedure to make sure that we continue attractive profitability improvement.
Short commentary on the dynamics of the market: we have a very active agenda as TietoEVRY, supporting our customers in modernizing their businesses and becoming more competitive in terms of driving a combination of efficiency, agility, and competitiveness. This comes directly from our strategy. Our thinking remains very, very consistent.
The addition we have made in the recent few months, given the developments in generative AI, relates to the opportunities to drive mid- and long-term growth through new products and services with GenAI embedded, and furthermore to drive further delivery-type optimization.
We are running a company-level program, bringing together the expertise, including third parties, to accelerate the impact in the market. We've been able to launch certain use cases already, which are very meaningful, in full support of the larger customer base and the type of data access and proprietary data we have access to, being able to apply GenAI, as an example, in the healthcare sector.
We have a few other interesting live implementations already in place, for example in retail.
This is an area that we expect to be very active moving forward as well.
A couple of reflections on recent customer wins. The commonalities in the customer wins naturally reflect a significant degree of insight into the customers' business processes. Examples would be offshore Norway and the public sector in Norway, in the community of Oslo. Another commonality would be our capabilities in the industry software area and healthcare software, where the data capabilities from a standpoint of data management, data engineering, machine learning, AI towards GenAI, are the factors that help us to win a good degree of share in the marketplace.
I'd also like to reflect here, in the beginning, briefly on the development of our sustainability game plan. We have a very good foundation.
We have systematic implementation recently. I'd say on a continuous basis we have seen a positive trend in diversity, visible in the share of females in new recruits. Furthermore, during the recent months, we have been very active in a multitude of events in our main go-to-market countries, contributing to the societal dialogue around the importance of diversity and our contribution to this important direction.
Lately, we have also been recognized for the third time by EcoVadis as being globally in the top 1% in sustainability performance overall. Sustainability will naturally continue to be very high on the agenda.
To one of the more exciting parts of today, our recent acquisition of MentorMate in the U.S. The company profile: headquarters in Minneapolis, strong customer base in the U.S., and several larger customers in Europe as well.
Fits actually super well our operating model with a highly dynamic and efficient go-to-market, significantly expanding our delivery network. The company having nearly 900 people in Bulgaria, and as mentioned, fits this whole strategy of scaling Tietoevry Create, and the capabilities fit exactly correctly in the areas of design, data, cloud, and AI.
MentorMate 2022 profile, EUR 60 million in revenues, growth of approximately 40%, this business shall be accretive to Tietoevry Create objectives as soon as the integration has started. Furthermore, just to confirm why this is important for our company, this advances the Tietoevry Create ambition to become a leading digital engineering player globally, fully according to our strategy.
This very practically expands our customer base and growth potential in the U.S. market and enables us to consolidate our operations in the U.S. to be able to play much more active market penetration for Tietoevry Create as a whole. Naturally, it strengthens the full talent base and provides an opportunity for talent to have very exciting projects within a global network.
Integration begins immediately. As mentioned earlier, the announcement has practically been done today. A very exciting time and part of our strategic direction and M&A capability, as mentioned as part of our strategy launch in October 2021, has been built into the company, and it's nice to see this progress as well.
Let us next go into an update of significant interest to everybody regarding the strategic reviews.
In the case of Tietoevry Banking, we continue to make good progress. Standalone legal structures have been established. We want to be open that a bit of time is required for the management to finalize the strategy and to establish the operations to become fully independent and able to operate as an independent company.
Furthermore, we expect the strategic review decisions to take place during the early part of 2024, followed by rigid implementation. I'd like to confirm we are fully committed to the strategic review, as announced, and firmly believe we will be concluding in early 2024.
We have a strong asset base within fintech software, and we have now the right leadership in place. Once all considerations have been completed, we will announce the outcomes accordingly.
Next, I'd like to provide an update on the Tech Services side, on the right side. Tech Services strategic review progressing as planned. In the second quarter, naturally, the significant preparatory step was accomplished as the operations became integrated regarding the end-to-end operations, go-to-markets, full operating model management system reporting, and everything that goes with end-to-end operation. The ongoing operation simplification will continue and will improve performance in the second half in combination with the already launched overall efficiency program. The preparations aiming at the potential sale or listing as a spin-off is fully on track as we had originally announced. Next, I'd like to go into our business highlights.
Some of the main group-level figures highlighted already in the beginning: organic growth of 3%, adjusted EBITDA 10.5%, cash flow from operations EUR 11 million, which has to do with the natural seasonality in cash flow, and as mentioned, order backlog for the second half up by 8%, up by 6% in constant currency.
Overall, it's important to note that after six quarters of strong growth, we had only 3% growth. It is very important that we have a healthy backlog going into the second half.
In terms of Tietoevry Create, solid growth in a more challenging market. This we highlighted at the end of the first quarter. Growth currently driven by Austria and Norway, with a temporarily softer international market, specifically the U.S.
I'd like to here highlight that we have seen some early signals of a healthier pipeline, and it's very interesting to see the degree of market bounce back that we predict, and we've seen many of the industry players predicting something similar. Healthy demand in the areas of data and AI, further fueled by customer interest in the potential of generative AI. This is a very interesting domain, specifically on the Create side, given that we have such strong data practices, data machine learning, AI, and towards generative AI.
Naturally, for the second quarter, the fewer working days tangibly impacted growth and profitability on the Create side as a consulting business. We are maintaining stable capacity while temporarily at a lower utilization rate, as we strongly believe in the growth bounce back.
In the case of Tietoevry Banking, continued strong growth.
Second quarter, we had healthy growth across a vast proportion of the banking portfolio, growth in wealth, the financial crime prevention, credit, and the Banking as a Service. As we had predicted, profitability has been impacted by the increased technology cost and increased cost resulting from legal separation, thus deserving further efficiency improvement activities. The profit improvement actions contributing to second half naturally increased the much earlier initiated price increases, efficiency measures, and including all aspects of efficiency, naturally also the technology cost optimization, which is a significant part in the case of Tietoevry Banking.
Regarding Tietoevry Care, we second quarter continued strong performance, so this has been flying steadily at a fine level. Strong growth driven by combination of healthcare and welfare.
For your information, the other services we have in this business have to do with laboratory services, as well as the data platforms for the care sector, this time especially driven by healthcare and welfare, very interesting additional market share gain through the strategic win within the social reform in the country of Finland, winning the district of Ostrobothnia.
A continued strong profitability, as earlier mentioned, the GenAI new type of innovation, and the type of proof of concept initiated in the second quarter through a joint effort between Tietoevry Care and Silo AI as our partner company.
Tietoevry Industry, fine performance, steady performance in the second quarter, growth of 4%, driven by growth in pulp and paper as well as data platforms.
There is a multitude of portfolio in the industry business. This time, the other parts didn't grow faster. This is a bit of a signal that better is also possible in the areas, as an example, of the public sector document management. Growth and profitability impacted by timing of a few customer contracts shifting between the quarters. Here we are mentioning the healthy order backlog for the second half.
An area naturally of a lot of interest in the case of Tietoevry Tech Services, a bit challenging, negative growth of 5%. Naturally, in the second quarter, a lot of effort on the integration. Efficiency measures, including operational simplification, will be contributing to second half performance.
It's fair to highlight that the business mix is evolving towards more scalable data, application, and cloud services, while volume reduction in traditional infrastructure and low-margin hardware and software resale. We'd like to also highlight that the traditional infrastructure of -11%, we believe, was exceptionally low in the second quarter, and we anticipate more normalized levels for the second half of the year.
Cloud platforms and security up by 12%, hardware/software resale down by 13%. That's naturally an area we are to optimize, given the low-margin nature of the business. Profitability impacted by negative growth, naturally, and high salary inflation, as well as the technology cost inflation. The efficiency measures, which I know I've said three times already, are very important and are on schedule as part of our profitability improvement.
Overall, with the consideration I mentioned, that we expect more normalized level in the traditional infrastructure, meaning lower than the minus 11, second half growth outlook, we believe, shall be more favorable. I'd like to hand it over to Tomi.
We delivered strong, solid underlying performance in Q2, as mentioned. Why do I say that? Working day-adjusted growth was approximately 4%, and working day-adjusted profit exceeded prior year level.
The market environment, as mentioned, was mixed during the quarter, with continued healthy demand in software, cloud, and data services, where the traditional infrastructure services declined slightly faster compared to prior quarters. Inflation remained high, both in technology cost and in salaries.
As mentioned, operational integration of Tech Services was completed during Q2 according to plan, with historical restated financials provided at the end of June. Our order backlog development was strong, with overall improvement of 6% and 8% improvement for the backlog realizable in Q2. This improvement gives us confidence to deliver solid full-year performance.
Our one-time cost estimate for 2023 remain unchanged.
On operative cash flow, it was EUR 11 million, which is slightly improved from prior year. To note, Q2 cash flow is seasonally low due to working capital increase, which primarily comes from prepayment changes and changes in personnel-related liabilities. Free cash flow was also impacted by seasonality.
Net debt to EBITDA increased slightly to 1.6x due to seasonally lower cash flow and dividend payment of EUR 86 million in April. Attrition continued to decrease, with 12-month rolling attrition at 12.5% compared to 13.5% at the end of Q1. Our net headcount was slightly down from Q1, reflecting slower recruitment pace due to decrease in attrition, in addition to continued headcount reduction in Tietoevry Tech Services as a result of efficiency measures as mentioned.
We update our salary inflation estimate for the year to 5% from earlier range of 4%-5%.
Next, I'll summarize the performance drivers for Q3. On growth drivers, we expect good momentum to continue in banking and industry to come back to healthy growth levels. We also expect continued healthy underlying growth in Create. However, less working days and high comparable due to Ukrainian currency devaluation prior year will have approximately 5% negative impact to organic growth for Q3.
As discussed already in our Q1 report, the healthcare reform in Finland will impact the demand of Tietoevry Care for H2. Also, decline in traditional infrastructure we expect to continue, driven by acceleration of cloud transformation. On the positive side, our strong order backlog will support our H2 performance.
On profit drivers, inflation is expected to continue at high levels, which makes it demanding for all market participants to maintain or expand margins.
High technology cost will continue to impact banking and tech services. Tech services efficiency measures will start to contribute to Q3 profits. In addition, vacation period will have positive impact to profitability for Q3 and the second half. On other drivers, we expect FX to continue at high levels (-EUR 56 million for Q3), and less working days, similarly to Q2, will have a negative impact on growth of -1.4% at group level. To our Q3 profitability outlook per businesses. Three of the businesses, Create, Banking, and Care, are expected to be below prior year, Industry above, and Tech Services at or above prior year profit levels. Back to you, Kimmo.
Thank you, Tomi. In conclusion, and our typical way of summarizing the way forward, the foundation for our full-year execution, we believe, is good based on our overall solid H1, the already activated efficiency measures, our strong backlog, and seasonally, over the years, a clearly stronger second half.
We continue to advance on Banking and Tech Services strategic reviews to drive and accelerate shareholder value. We continue to operate at a healthy and high engagement level amongst employees, and we see continued good ability to attract talent for professionals in the industry.
I'd like to confirm that the Generative AI does provide attractive business opportunities, and we aim to be one of the leading players in the market, as we have advised over the years our customers in enterprise and public sector across a multitude of tech cycles, and we believe GenAI will again be a very interesting one. With this in mind, indeed, to confirm that the full-year outlook remains intact, and these are the main drivers specifically for now in the overall second quarter report. Time for Q&A.
Thank you, Kimmo. Thank you, Tomi. We are now ready for the questions.
If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Mark Hyatt from Morgan Stanley. Please go ahead.
Hi, good morning, and thanks for taking my question. I've just got two, please. Firstly, on Create, given the slowdown in that division, could you talk a little bit about what you're seeing in that business in terms of the underlying demand environment? Which markets are you seeing the most weakness, and are there any particular verticals that you'd call out there? Secondly, just on salary inflation, clearly, you've upped that your expectations for the full year to 5%, but the overall margin guidance has remained the same. Could you just talk a little bit about what gives you confidence in the second half margin outlook, and how would you offset that slightly upped my expectation on salary inflation? Thanks very much.
Yes, thank you for the two points. On the Create side, so underlying, so the mixed environment has been driven in our case, and I think we've heard it industry-wide quite a bit, has been a lot to do with the U.S. market. This business, more than any other business we have, is dependent on the macro cycle. To be fair, it's in our case, it is visible in the competitor landscape. That would be our perspective. I did mention briefly in my earlier kind of commentary already, that we've actually seen initial signs of pipeline improvement. This will be dependent, on the macro bounce back investment appetite for especially the type of new type of innovations, new projects, so that shall be the dependency.
We are also seeing, to be fair, quite good demand in many of the markets. We've seen positive progress across the Nordic countries. We were maybe a bit behind in some of the quarters in the Nordic countries, so that's why we call it the mixed environment. To be very straight, that's also why we don't talk about it. It's a negative environment. It's a mixed one.
On the salary inflation, yes, we did now update our estimate to 5%. I mean, how do we mitigate against that? There's no other silver bullets to do it than the means that we do it anyway. It's through the price increases, normal efficiency measures, whether it has to do with automation or the other cost optimization measures.
Specifically for second half, it is very important that we have those programs initiated several months ago, and the most critical ones are on schedule. These give us comfort for second half.
Perfect. Thanks very much.
The next question comes from Sami Sarkamies from Danske Bank. Please go ahead.
Hi, I have three questions. We'll take this, one by one. Firstly, starting from Q2 surprises, it seems that the growth probably cooled down a bit more than you had anticipated. Also, you did miss your own margin guidance for Create Banking and Tech Services. Can you please provide some comments regarding these negative surprise in Q2?
Sami, absolutely. If the second quarter... I think as visible to everybody, that Tech Services is -5%. To be fair, that is the predominant and very clear driver. We did see a bit exceptionally, which, to be fair, I hope I commented clearly early on as well, that the traditional infrastructure was temporarily higher. There were a couple of co-factors in the comparables a year ago, but that is a real factor behind.
Your second point, that our softer guidance regarding the businesses, the inflationary impact, of course, is a different story per business. Inflationary impact is recognized. Businesses which have third-party technology costs, third parties are increasing prices as much as they can.
In the case of Create, as we've been very open, utilization rates periodically a bit lower. In our case, it's a factor, and to be fair, it's quite a consistent factor in that business industry-wide.
Okay. Moving on to the full year outlook, can you please explain what gives you the confidence regarding second half? I mean, you're obviously talking about strong order backlog, but, you know, just thinking, if there is a risk for any sort of order cancellations or push-outs. We already talked about salary inflation, but, I'm wondering that you're currently having lower utilization rates at Create. If there is no pickup in sort of customer activity, that might also be the situation in the second half of the year. Just would like to hear your assessment regarding the risk factors going in the second half of the year.
Thank you for that point as well. The foundations, just to play that full thing back, naturally, we have ample proof of our predictability on the top-line side, if we think about over the last few years, the opportunity to maintain a growth trajectory, understandably one factor. Second, very important, earlier mentioned efficiency programs, especially Tech Services, are fully on schedule, these are the fundamental factors. To be fair, in the inflationary era, we have had for around a year and a half, systemic, even higher attention for efficiency improvement across operations, including the aforementioned price increases and everything. Kind of continuously improving efficiency is a must do. These are the factors.
To be fair, then the macro economy, you know, you're as good as a forecaster or better than we are. We are reading the same signals and as everybody else. Subject to the dynamism of macro, that is naturally one element. We tend to be one of the more resilient businesses in the industry, given the proportion we have of long-term contracts and relatively quite a small proportion based on short cycle projects.
Okay, thanks. Finally, just wondering, regarding separation of Tietoevry Banking, that, why was that sort of, decided to postpone, into next year? Is it so that, we will not hear of, the business plan for Tietoevry Banking before early next year?
Thank you for that point as well. We believe it is actually, and hopefully everybody sees it's really natural. Management needs a bit more time to finalize a really fintech software-centric strategy, establishing the fully independent operations. It just takes a bit of time. To be fair, as we had mentioned one year ago, it is also a holistic consideration regarding the total readiness, when is the best time to go out, but that this is the main consideration, a bit more time needed. We will be naturally sharing the outcomes as rapidly as we are in the finish line.
Okay, thank you. I don't have any further questions.
The next question comes from Matti Riikonen from Carnegie Investment Bank. Please go ahead.
Hi, good morning. It's Matti Riikonen, Carnegie. I have a couple of questions. I'll take them one by one. First of all, could you describe your demand trend for new business during Q2? Was it the same throughout the quarter, or did demand weaken towards the end of the quarter?
Thank you, Matti. Overall, we saw the performance being. I shall address your point specifically in a second here. Overall, we saw clearly weaker performance in the beginning of the quarter, clearly healthier towards the end, I would say, including the demand side.
Okay, good. Next, have you seen more project cancellations or postponements in Q2 versus Q1? Do you think that there's an increased risk that they could accelerate in the second half? I think you already commented a bit towards this direction in the previous answers, just what is the kind of gut feeling that you have?
The answer is no, and it's not only a gut feeling.
All right. Regarding order backlog, you have a good order backlog now for delivery in the second half this year, but how does your order backlog look like for 2024 deliveries?
Thank you for the comment. Let me just add a bit of clarification, and of course, Matti shall remember our prior dialogues on the topic. With our business mix, we need to look at... To be very conclusive, we naturally look at the dynamic volume development per business type a lot. It's very different in an outsourcing-type business environment, Tech Services.
When we look at the software businesses, depending on how much you have SaaSified, how much license-based SKU of licenses, and how much you have on maintenance and professional service, the definition and significance of backlog is very different. And then again, it's very different in the case of the Create side.
My open commentary here is not to try to oversimplify a group-level view from a...
We can always talk about per business type, and we are not publishing the backlog per business. The most important part that we have good outlook for second half, like also, thank you also said, we are growth-driven. We have been able to get into the growth bandwagon. Second quarter naturally was very modest. Q1 was continued strong, so we absolutely believe in the strategy of the specialized businesses and opportunity to be driving the growth agenda. I would probably need to leave it at that for the time being.
Okay. The point for my question was that you are strongly highlighting that you have a good order backlog for the second half, but of course, the world doesn't end there. Of course, it would be nice to know what kind of pipeline do you have for 2024 based on the current order backlogs that you have? That's the reason for.
I-
for the question. I understand that the drivers are very different in all your businesses, but it all reverts to the kind of total backlog that you have.
Matti, I can verbally confirm that our backlog for 2024 is stronger now than it was at the same time of prior year for the following year.
All right. Thank you. Finally, this is my last question: In your consulting and software businesses, are you still hiring? Does your hiring activity prepare for top-line growth also for 2024?
The agenda is absolutely also top-line driven, and like we mentioned in the case of Create, that we have maintained the capacity even when temporarily utilizations have been a bit lower, and that is indeed for the reason we absolutely see the growth opportunity. We are mindful how fast we grow, how fast we recruit, given that attrition levels are down overall. It's a fine balance, it's a good balance, and the answer is yes, it is growth-oriented.
All right. That was all from me. Thank you.
The next question comes from Aditya Buddhavarapu from Bank of America. Please go ahead.
In Tech Services, you mentioned that you expect the decline in traditional infrastructure to normalize for the rest of the year. Can you talk about what gives you the confidence in that recovery, and also what drove the acceleration in the decline in Q2?
Second, in Care, you mentioned the impact from the healthcare reform in Finland slowing down decision-making. Can you give us a sense of when that should start to improve as well, and when you expect to see more momentum on that side of things?
Okay. Thank you. The Tech Services, indeed, there were a few exceptionals that existed in the second quarter. To be fair, we have a kind of a quite a lot of proof points that the more typical levels have been historically in the 6-8 roughly range, and we have reported those very transparently. That is the, that's the visibility that we have. And to be fair, there were exceptionals also in the comparables Q2 of last year, with the certain large customers. Those are just the factors why we commented it was exceptional. On the Care side, just to confirm, our game plan, our role in the social, both healthcare, welfare sectors in the Nordics, it's very important.
We are very active. I know your point is about the social reform in the country of Finland, and the consideration is twofolded. A lot of the life care upgrades that were implemented, second end of last year, early this year, there's a very likely timeout that the politicians do take place as they formulate their decisions and investment levels to be healthy again during 2024. I would not yet predict exactly at which point in 2024.
All right. Thank you. Maybe just as a follow-up, in Create, I think you're still talking about some impact from working days and stronger comps in 3Q. Could you also point to where you're seeing weakness in terms of end markets? Is there any particular industry which is weaker, at this point of time? If there's been any, anything in particular which, you know, which changes the growth outlook for that business for the second half or into 2024, given the more volatile macro?
Indeed, thank you. Maybe two factors I talk on the negative side of volatility, which was your prime point. As commented earlier, the U.S. market, the type of how the U.S. has been behaving. To be fair, I know I said it two times, we hear it from more or less any industry participant, that has been the case. Now, I did comment earlier, we have seen early signals of actually healthier pipeline also in the U.S.
To be fair, one other element that has to do with our Create business is the utilization rates with our Ukrainian colleagues, which we continue to support at maximum level.
There has been some utilization, kind of, temporary, of temporary nature, partially in Western Europe. I talk a bit on the more, the areas that are uplifting, the perspectives. Also, I commented the Nordic countries, where we have known we have room to improve. That's why These are the factors why we talk about the mixed environment. We don't think we have any need to talk about a negative environment.
All right. Thank you.
The next question comes from Felix Henriksson from Nordea. Please go ahead.
Hi, it's Felix Henriksson from Nordea. Thanks for taking my questions. I have three. I can go one by one. Starting off with Create, some of your local peers in the Nordics have been sort of flagging increased pricing pressure as a consequence of the softer demand and increased competition. I'm just wondering, what are you seeing on that front, and how does that trend play into your view that price increases in the second half of the year should be supportive of reaching your top line growth guidance?
Thank you, Felix, for that. I can continue from that consideration, that in the last few quarters, we have seen some pricing kind of discrepancies in the market and more aggressive moves. To be fair, that happens when there have been macro-level considerations and some demand fluctuation in industry at large. Yes, that has been visible in the market. We have actually a good ability, given our global delivery network we have, to optimizing the delivery resources based on the pricing drivers that customers have. We have seen this being of similar nature, and we are already managing okay.
We believe that as part of this pipeline development we briefly talked about, mentioned, these are the factors that, at some point in time, we are also predicting, like many others, that there will be market bouncing back to more normalized or healthy level in this area that, in this specific area you now talk about.
Good. Thanks. On, on banking, you were indeed guiding for margins to improve year-on-year for Q2, but they actually contracted by a percentage point, and now you're guiding for margins down year-on-year for Q3. In addition to the technology cost that you've been flagging, what has sort of changed to the negative direction in banking's profitability?
Indeed. Overarching, like you well summarized already, that the technology cost side, the overarching efficiency improvement program, that will happen second half of the year, not contributing, or efficiency initiative not contributing. At this point in time, these are some of the main considerations. To be fair, that the fact that the legal carve-out is done and the building of the end-to-end operations, these have had also implications. For all these reasons, number of activities underway to ensure that the financial profile is appropriate also in terms of time for the intended listing.
Right. Then finally, perhaps a bit broader topic, Generative AI. You basically seem to view that there are more near-term opportunities than threats based on your recent use cases. Also, you talked about longer-term delivery efficiency you might achieve. Are you seeing any sort of negative outcomes or risks from this trend due to lesser need for IPR sourcing eventually?
Should pricing, for example, come under pressure if you manage to deliver to your customers with higher efficiency and lower resources? Would like to hear more about your...
Indy, thank you.
-thoughts around that sort of-
Thank you, Felix, for that. Naturally, a big topic, so let me try to synthesize. We spent a lot of time as a company and us as us personally on the topic. My first reflection would be that there are far too many speculations out there in the market. You have them all possible dimensions. Our perspective is that first of all, this is super early stage. In terms we think about technology innovation cycle, it is predominantly at the conceptual and proof of concept state anywhere in the world in terms of actually yet driving real business value for enterprises. It can be different in the type of a large U.S. tech, kind of centric, consumer-centric businesses. As we know, that's not the business we are in.
In supporting enterprise or public sector to apply, it shall be to the benefit of us and our customers, delivering better services for their clients. It will require tremendous skill level to shift from machine learning, AI, GenAI, and then all the supporting elements to have the project definitions, the right type of technology environments, including definition of the large language models applicable for the customer, the privacy, safety of data, where it's stored, how it is utilized. There shall be a lot of work enabling the GenAI operations to be functional in the future.
Furthermore, with this in mind, we believe it will be a contributor to growth for software businesses in the future. There can be separations of even offering that is GenAI enabled. Our product strategies are not yet that far.
These are the natural considerations as we also mature. Second consideration. It shall be a productivity improvement point for our clients and ourselves. As an example, the briefly mentioned case in retail, it is already delivering, at an early stage, tremendous productivity improvement to our retail client. That would be fairly short one, and it will, of course, lot more will happen.
Okay. Thank you for the discussion. That's all from me.
The next question comes from Christoffer Wang Bjørnsen from DNB Bank ASA. Please go ahead.
Hey, good morning, guys. Just a quick follow-up on the, on the banking business. Is there any way you can help us understand the, let's say, the more comparable development, in the margin? I saw there was a decrease in the, in the central cost. Is that due to the banking taking more of the costs on and adjusted for that, the operating margin was basically flat year-over-year? Yeah, if you could just help us understand that.
Christoffer, can you be more specific on your question on what exactly are you looking for? In terms of the banking margin-
Yeah.
We talked about the technology.
So the banking-
-cost and the. Yeah.
Yeah. The banking business saw the margin coming down compared to last year, right? You say that's partially because of technology costs increasing, but also because it is now a separate business. It is, you know, you're allocating more of these central, maybe administrative costs or whatever, to this business. I'm just trying to understand if you kind of have them comparable year-over-year, If it was in the same setup last year, what would the margin be, right?
Yeah.
just understand how well it is coping with the increased technology costs.
Fully understand. Naturally, Christopher, we don't have a fully independent setup with banking yet, but we are getting there. There's a limited amount of additional cost in the banking compared to prior year. It is a small element of that, but I wouldn't sort of put that as the main driver for the margin improvement at this point in time.
One part, of course, we'll try to clarify, Christopher, your point here. The one part that this is impacting quite a bit is actually this increased technology cost in one of the businesses in banking, and it's an area where the price increases have not yet become effective, to be fair. This as a combination is a significant driver, what we now mentioned.
All right, that's done. Okay, thank you.
The next question comes from Jaakko Tyrväinen from SEB. Please go ahead.
Good morning, and thanks for having my questions. I have a couple of them, and we'll go one by one. The first one is a follow-up on Create and the growth of 5% during the quarter. Could you talk a bit how this splits between pricing and volumes? At least your headcount is probably flat in that segment. Could you elaborate a bit more on those factors?
If I may, I don't think we externally open up a mathematical model on pricing versus volume. The fact remains that we were very open. The utilization rates have been, to be fair, Q1, Q2, a bit lower, and that's from a standpoint that the part of the customer decision-making either delayed or some ending projects, that these are the factors behind potential lower utilization, for which we've been very open about. With this in mind, where as we believe that the demand will pick up, we've seen the early stages, kind of from a pipeline development standpoint through utilization. In this business, we have been driving actively price increases throughout this era of high inflation.
These are the factors how why we believe that it will be actually becoming fine again.
The working day impact actually in this type of business is a bit higher than the average that we have quoted for the group, it's approximately 2%. Working the adjusted growth for Tietoevry Create is 7%.
Okay, great. Thanks. That's, you know, helpful. My second one, on the strong order backlog for the second half, I know and I understand that you don't give too much further details on this, but could you shed some light, has the mix between the segments of the order backlog changed lately and, for example, compared to previous year or normal time?
Indeed. it is fairly, I would say, nicely balanced. We had all the comments we made had to do with this industry. To be fair, also, the book-to-bill in the second quarter for Tech Services was also quite favorable. those are some of the factors.
Really three businesses.
Thanks very much.
... driving this order backlog improvement, and those are Create, Tech Services, and Industry, as Kimmo mentioned.
Okay, great. Thanks. My final one, regarding the restated numbers. You transferred some additional sales, and profit to banking, in connection with the restatements. What kind of work is this, and has there been some related personnel moves, or could you elaborate a bit more around this?
Yeah. So there were two elements with this restatement. One was the combination of Connect and transfer businesses naturally to, into Tech Services. With the legal separation of Banking and Tech Services, we had to move some of the end customer contracts for being in only in one of the businesses, and that's where these, some of these moves happened. It did not change the setup of the FTEs or employee structures. One of the main considerations of these moves was the VAT implication towards the end customer. As you all know, FS services are delivered, VAT-exempt.
Okay, thanks. Very helpful. All from my side.
The next question comes from Daniel Djurberg from Handelsbanken. Please go ahead.
Thank you, operator, hi, guys. Thank you for squeezing in my questions. You did a fairly large M&A announced today, MentorMate in the US. I would ask you first a little bit on if you can give any more details on, you know, the valuation or anything. Given that you comment on the slowing US market, I was wondering why you do this right now. I know that they are specializing at, you know, healthcare, agriculture, and finance, education, such as. Are they more, you know, resilient and, yeah.
Thank you. First of all, thank you for the questions as well. We are highly mindful that the M&A market is a competitive market, and due to this reason, we do not disclose the value of the transaction. On the second point, indeed, there are fantastic growth opportunities in the U.S. market. This has been a well-growing, high-quality, certain level of services, highly rated engineering services, high-end capabilities, exactly in the areas that we look for in this future of type of a digital services for enterprises. The design, data, cloud, and AI capabilities, exactly right. That enables us to actually play a much bigger game in North America moving forward.
The opportunity to create this into a North America hub, and to penetrate the market at very different levels than we've done in the past, we think it's a great opportunity. That would be Daniel's short commentary.
Yeah. It's very hard for us to, you know, evaluate if this is valued or not, given we don't get any, you know, details on the pricing. That said, the CEO, Björn Stansvik, will he stay on in the business, and is it structured with the earn-outs, et cetera?
We do not disclose the transaction structures and the likes. To be fair, that would be quite typical if one looks at the peer group on these type of transactions.
Okay. Can you say something about the 1,000 employees, where they are situated geographically then, perhaps?
So about nine-
-in area?
... 900. About 900 in Bulgaria. There is a very important growth potential through the delivery center in Paraguay, especially clients in the western part of U.S. I'm sure it's well-recognized. They tend to value services from a similar time zone. These considerations-
Yeah
are all in terms of the opportunity to build the business forward. The other consideration, which I know I touched very briefly only earlier, that if we think about the operating model in our Create business, why this fits really well, that we have always a relatively thin operations in the go-to-market itself, and being able to utilize the global delivery network on a rapid kind of scaling rapidly, and this type of methodology on a smaller scale MentorMate has been developing and operating, we believe that will lead into a very fluent integration as well. We naturally have met plenty of times with the management and the interest from MentorMate side to be able to see opportunities for scale, opportunities for international careers.
Indeed, those would be short reflections. Of course, time will tell exactly how well we have executed, the value we have generated, strategically, operationally, all possible M&A qualifications we do, including all accretiveness considerations that is accretive for shareholders. We are comfortable this has been exactly the right move.
That sounds good. Perfect. May I also ask you on the cost of strategic reviews, it hiked to EUR 14 million in the quarter, up from EUR 2.1 million. How much is this related to external legal cost or bankers, and how much is related to banking, and what to expect for second half?
Most of that EUR 14 million relates to the restructuring in the Tech Services. There's the carve-out and legal separation costs, and those relate also equally almost to Banking and Tech Services legal carve-outs.
Okay. Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Okay, thank you very much, everybody, for joining today. Exciting times, our specialization-based strategy is a very important one. Over the last few years, we have made significant progress. Again, what we have shared today and announced the acquisition for Tietoevry Create takes us forward. Maybe other closing commentary, indeed, that for the full year execution, the foundation from H1, current efficiency measures and programs on schedule, the strong backlog, and seasonally strong second half does serve as a good foundation moving forward, naturally, great to share with you then at the end of the third quarter of the progress. Thank you very much for joining.