Operational Efficiency And Cost Management To Maintain Profitability Despite Market Challenges

Key Takeaways

• Tangible progress in Tech Services review and U.S. expansion in AI could enhance revenue growth and core business focus.
  
• Strong Banking order backlog and cost efficiency efforts could ensure stable future revenues and maintain profitability.
  
• Challenging market conditions and sector-specific budget reductions could pressure TietoEVRY's revenue growth, net margins, and operational efficiency.

Catalysts

Operates as a software and services company.

• Tietoevry has made tangible progress in its Tech Services strategic review, with a sales process expected to be concluded soon, which may lead to a strategic realignment and increased focus on core business areas, potentially impacting future revenues and margins positively.
  
• The company anticipates a gradual market recovery in the second half of 2025, especially in its Create business, driven by increasing demand for AI-embedded software, which could lead to higher revenues.
  
• Significant wins in the AI and data services side, along with market expansion efforts, such as the Create business gaining traction in the U.S., are likely to enhance revenue growth prospects.
  
• The company has a record high order backlog in its Banking business, supported by long-term contracts, which provides a stable outlook for future revenue streams.
  
• Operational efficiency drives and continued attention on cost management could maintain solid profitability, impacting earnings positively despite current market softness.

TietoEVRY Oyj Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TietoEVRY Oyj's revenue will decrease by 0.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.2% today to 6.6% in 3 years time.
• Analysts expect earnings to reach €190.0 million (and earnings per share of €1.66) by about April 2028, up from €-62.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €218.7 million in earnings, and the most bearish expecting €160 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.7x on those 2028 earnings, up from -30.0x today. This future PE is lower than the current PE for the GB IT industry at 15.4x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.97%, as per the Simply Wall St company report.

TietoEVRY Oyj Future Earnings Per Share Growth

Risks

• TietoEVRY's market environment is challenging, with a Q4 2024 revenue decline of negative 7% due to weaker demand across all businesses, which could impact future revenue growth prospects.
  
• The company's organic growth was negative 2% for the full year 2024, with notable softness expected to continue into the first half of 2025, affecting overall earnings and revenue projections.
  
• Tietoevry's profitability in certain business segments, like Industry and Tech Services, has been impacted by price pressures and market softness, which could further pressure net margins.
  
• Macroeconomic factors and sector-specific budget reductions, particularly in public sector and telecom, might continue to weigh on various divisions, potentially limiting revenue and growth recovery prospects.
  
• The company is facing temporary overcapacity in some areas, indicating inefficiencies in workforce management that could hinder cost effectiveness and margin improvement.

Valuation

• The analysts have a consensus price target of €18.17 for TietoEVRY Oyj based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €22.0, and the most bearish reporting a price target of just €15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €2.9 billion, earnings will come to €190.0 million, and it would be trading on a PE ratio of 14.7x, assuming you use a discount rate of 9.0%.
• Given the current share price of €15.86, the analyst price target of €18.17 is 12.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.