Innofactor as an Investment

Innofactor Plc Half-Yearly Report July 23, 2019, at 9:00 Finnish time:
Innofactor's operating margin and order backlog significantly better than in comparison periods


The Leading Driver of the Modern Digital Organization in the Nordic Countries

Innofactor is the leading driver of the modern digital organization in the Nordic Countries for its over 1,500 customers in commercial, public and third sector. Innofactor has the widest solution offering and leading know-how in the Microsoft ecosystem in the Nordics. Innofactor has approximately 600 enthusiastic and motivated top specialists in Finland, Sweden, Denmark and Norway. In 2014–2018, the annual growth of Innofactor's net sales has been approximately over 14%. The Innofactor Plc share is listed in the technology section of the main list of NASDAQ Helsinki Oy. #ModernDigitalOrganization

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Q2 2019: Innofactor's operating margin and order backlog significantly better than in comparison periods

January–June 2019 in brief:

  • The net sales were approximately EUR 32.8 million (2018: 33.5), which shows a decrease of 2.0%
  • The operating margin was approximately EUR 2.0 million (2018: 0.4), which shows an increase of 431%
  • Operating profit was EUR 63 thousand (2018: -992), improving by 106%
  • The order backlog at the end of the review period was EUR 44.2 million (2018: 23.6), which shows an increase of 87%
  • The measures for improving profitability, carried out near the end of 2018, started to take an effect in the first quarter as planned and continued in the second quarter of 2019
  • Innofactor got several significant orders in the first half of the year, for example, Traficom VISA, approximately EUR 5.0 million; a decision-making system for the City of Espoo, approximately EUR 1.5 million; a membership management project for a Swedish organization, approximately EUR 1.3 million, and several other, smaller orders

April–June 2019 in brief:

  • The net sales were approximately EUR 16.7 million (2018: 17.0), which shows a decrease of 2.1%
  • The operating margin was approximately EUR 1.1 million (2018: EUR 36 thousand), showing growth of 3032%
  • Operating profit was EUR 153 thousand (2018: -630), improving by 124%

 

Q2 2019 result interview

Innofactor's CEO Sami Ensio's result interview by Inderes' analyst Joni Grönqvist.

Video is in Finnish with English subtitles.

CEO's Review

July 23, 2019

The corrective actions are having the planned effect – the operating margin and order backlog in the first half of the year are the best in Innofactor's history

The net sales in the first half of 2019 were EUR 32.8 million, which shows a decrease of 2.0 percent compared to the previous year. The net sales grew in Finland and Norway, but decreased in Sweden and Denmark. The weaker than expected net sales were partly due to the lower exchange rates of Swedish krona and Norwegian krone in relation to euro. This had an effect of approximately EUR 0.25 million. Due to the taken corrective actions to increase efficiency the net sales per employee grew by 8.3% from the previous year.

The operating margin (EBITDA) grew by 431 percent from the previous year and was EUR 2.0 million (6.1 percent of the net sales). Compared to the second half of 2018, the operating margin improved by EUR 3.4 million (H2/2018: -1.4). The improvement in the operating margin was especially due to the measures in the last quarter of 2018 for reorganizing operation and making it more efficient, cost-cutting, and the changes in handling lease liabilities due to IFRS 16, which had an effect of EUR 0.6 million in the operating margin. Historically, Innofactor's operating margin has improved in every quarter towards the end of the year.

In the second quarter, the order backlog again grew to a record-breaking amount and was EUR 44.2 million at the end of the quarter (2018: 23.6), which shows an increase of 87% compared to the same time in the previous year.

As regards Sweden and Denmark, measures aiming at increasing net sales have already been started. Our goal is to turn the net sales in the countries into growth in the last quarter of 2019 at the latest. In Sweden, the search for a new Country Manager has started, and our goal is to select a new Country Manager during the third quarter.

Innofactor has hired a new CFO for the Group, Markku Puolanne, who will start work on August 12, 2019, and a new General Counsel, Michaela Skrabb, who will start work on August 14, 2019. I am very glad that we will have both of them as it will strengthen the Innofactor team.

The Board of Directors of Innofactor has decided on May 2019 on a share issue of 1.2 million shares directed at the personnel, which was realized in full by the end of June 2019. Subscription contracts were made by a total of 116 persons, and they came from all of the countries Innofactor operates in: Finland, Sweden, Denmark, and Norway. For me personally, it has always been important that a large part of the personnel are owners of the company. I believe that this will further improve the commitment of our brilliant employees to being part of Innofactor's success.

Innofactor's vision is to be the leading implementer of digitalization in each of the Nordic countries. We believe in our chosen Nordic strategy and in reaching our long-term goals. This requires perseverance and determination from the company's management and employees as well as investors. Innofactor is still actively looking for new strategic partnerships in the Nordic countries. The Group's goal is to grow both organically and through acquisitions (however, these are not a priority in 2019).

Sami Ensio
Innofactor's founder, major owner, and CEO

Business Environment

We estimate that the growth rate of the Nordic IT services market will be approximately 3–5 percent in 2019. Our growth target for the next few years is to at least match the market growth rate, and our long-term goal is annual growth of approximately 20 percent. Our task is to help our customers digitalize their business, manage their business operations, promote a collaborative way of working, transfer their services securely into the cloud, and to renew their operations with a data-driven approach. Going forward, we will continue to develop our in-depth customer understanding of commercial, public sector, and membership-based organizations in the Nordic countries. We invest in employing the best Microsoft professionals in the Nordic countries. We offer our customers a proactive and flexible delivery model that creates added value.

We Expect Market Growth in 2019

The key innovation trends and drivers of change in the market include augmented reality, virtual reality, Internet of Things (IoT), artificial intelligence, robotics, and blockchains, with facilitating roles being played by software moving to the cloud, data analytics, social media, and the use of mobile devices. The purchasing behavior of our customers has evolved as part of this business transformation. Our customers' expectations for their IT provider are characterized by a greater focus on business benefits rather than technological benefits. Our customers are looking for more out-of-the-box solutions that do not require extensive customer-specific customization. In addition, customers are increasingly seeking continuous services instead of large one-time projects.

We estimate that the growth rate of the Nordic IT services market was approximately 3–5 percent in 2018. We further estimate that the growth rate of the Nordic IT services market will again be 3–5 percent in 2019. Our estimate is based on forecasts by research institutes and our own views regarding the development of the market.

The competitive landscape for Microsoft-based solutions in the Nordic countries is fragmented. The first group of competitors consists of large enterprises that operate in all of the Nordic countries. They provide a wide range of IT solutions that are needed by organizations using several competing technologies, one of which is the Microsoft ecosystem. The second group consists of medium-sized companies that focus on a niche solution area at the Nordic level, also using several different technologies. The third group consists of medium-sized companies operating in a single country, typically providing a broad range of solutions based on several competing technologies. The fourth group consists of small companies that only operate in their domestic market focusing on certain clearly defined solution areas, technologies, and industries.

Microsoft's fragmented Nordic partner network, which consists of small and medium-sized IT companies, continues to offer interesting acquisition opportunities for us, although these are not a priority for us in 2019. In the future, our acquisition strategy will likely be focused on slightly smaller companies that operate in a single country. This will help us expand our offering at the country-specific level as well as acquire cloud-based product and service business. Good reputation, fast and profitable growth, successful acquisitions, and entrepreneurial spirit make us an attractive partner with whom to develop business.

Mission, Vision and Strategy

Becoming the leading provider of digital transformation in each of the Nordic countries

We have made a strategic choice to focus on solutions implemented with or supported by Microsoft platforms, and we have achieved a leading position in the Nordic countries in this market. Going forward, our aim is to become the leading player in the digital transformation in each of the Nordic countries. Our long-term goal is annual growth of 20 percent, the majority of which will be achieved organically, along with profitability of approximately 20 percent.

Innofactor's mission:

Driving the #ModernDigitalOrganization

Innofactor's vision:

The leading provider of organizations' digital transformation in each of the Nordic Countries (Finland, Sweden, Denmark and Norway)

Innofactor's strategy for achieving this vision includes:

  • The best Nordic professionals in the Microsoft ecosystem
  • Highly productized cloud offering and managed services
  • A proactive, value-adding and flexible delivery model
  • Innovation creation with leading customers in selected industries 

Strategy and its realization in the review period

Innofactor's vision is to be the leading provider of organizations' digital transformation in each of the Nordic countries (Finland, Sweden, Denmark and Norway) The long-term financial goal is to grow profitably by achieving an annual growth of approximately 20 percent, of which majority is intended to be achieved by organic growth, by achieving approximately 20 percent operating margin (EBITDA) in relation to the net sales, and by keeping the cash flow positive and by securing solid financial standing in all situations. In 2019, Innofactor will focus especially on improving its profitability.

In the first half of the year, the operating margin (EBITDA) grew 431 percent from the previous year and was EUR 2.0 million (6.1 percent of the net sales). As regards profitability, Innofactor was able to again improve its performance substantially, but a significant effort is still needed in order to reach the long-term goal of approximately 20 percent.

Innofactor's net sales in the first half of the year were EUR 32.8 million (2018: 33.5), which shows a decrease of 2.0 percent compared to the previous year. The net sales grew in Finland and Norway, but decreased in Sweden and Denmark. It is essential for Innofactor's strategy to gain growth also in Sweden and Denmark. Our goal is to turn the net sales in Sweden and Denmark into growth in the last quarter of 2019 at the latest. The goal of getting the net sales to grow is also supported by the record-breaking order backlog of EUR 44.2 million (2018: 23.6).

Innofactor's operating cash flow in the review period of January 1–June 30, 2019, was EUR 2.1 million (2018: EUR 0.5 million) and the equity ratio at the end of the review period was 39.7 percent (2018: 42.6 percent). The handling of lease liabilities in a new way in accordance with IFRS 16 had a positive effect of approximately EUR 0,6 million in the operating cash flow and approximately 4.3 percentage point negative effect in the equity ratio. The strong operating cash flow supports Innofactor's strategic goal of profitable growth and securing solid financial standing in all situations.

Key Figures

2018

2017

2016

2015

2014

Net sales, EUR thousand

63,144

65,666

59,616

44,452

43,834

Operating profit before depreciation
and amortization (EBITDA), EUR thousand

-1,029

1,308

4,831

3,705

3,794

percentage of net sales

-1.6%

2.0%

8.1%

8.3%

8.7%

Operating profit (EBIT), EUR thousand

-3,872

-1,461

2,332

2,542

2,407

percentage of net sales

-6.1%

-2.2%

3.9%

5.7%

5.5%

Earnings before taxes, EUR thousand

-3,811

-1,579

1,920

1,935

1,946

percentage of net sales

-6.0%

-2.4%

3.2%

4.4%

4.4%

Earnings, EUR thousand

-3,462

-2,007

1,536

1,548

1,556

percentage of net sales

-5.5%

-3.1%

2.6%

3.5%

3.5%

Shareholders' equity, EUR thousand

21,303

24,764

22,501

24,534

22,462

Interest bearing liabilities, EUR thousand

15,418

14,228

16,701

9,219

10,638

Cash and cash equivalents, EUR thousand

258

910

902

843

997

Deferred tax assets, EUR thousand

5,602

5,668

5,760

6,704

7,238

Return on equity

-13.8%

-5.3%

6.5%

6.6%

7.4%

Return on investment

-7.7%

-2.4%

6.4%

7.6%

9.1%

Net Gearing

71.2%

53.8%

70.2%

34.1%

42.9%

Equity ratio

41.2%

43.4%

35.8%

56.9%

48.7%

Balance sheet total, EUR thousand

51,875

58,272

63,587

43,983

47,413

Research and development, EUR thousand

2,860

3,298

3,394

2,495

1,981

percentage of net sales

4.5%

5.0%

5.7%

5.6%

4.5%

Personnel on average during the year

591

610

532

409

421*

Personnel at the end of the year

550

601

591

415

411*

Number of shares at the end of the year

36,188,225

36,188,225

32,901,377

33,453,737

32,153,737

Earnings per share (EUR)

-0.0880

-0.0357

0.0467

0.0475

0.0485

Shareholders' equity per share (EUR)

 0.589

0.684

0.684

0.733

0.699


* Innofactor primarily monitors the number of active personnel. The number of active personnel does not include employees who are on a leave of over 3 months. However, for 2014, the figures include also these persons, so the figures cannot be compared.

Growth and Financial Targets

Annual net sales growth from 2014 to 2018 has been over 14% on average.

 

Innofactor's long term financial goal is to grow profitably:

  • To achieve annual growth of about 20 percent, of which majority is intended to be achieved by organic growth
  • To achieve about 20 percent EBITDA in relation to the net sales
  • To keep the cash flow positive and secure solid financial standing in all situations

The main actions for reaching the approximately 20 percent growth and 20 percent operating margin:

  • Focus on selected industries and solution areas (customer journeys) that provide the highest growth opportunities and allow us to best scale existing offering in the Nordics
  • Focus on current customers and cross sales to get a bigger share of wallet of customers' digital transformation budgets
  • Improving modern digital marketing and sales skills to achieve better and more cost-effective sales results
  • Focus on competence planning, recruiting and resource optimization across Nordics
  • Shifting revenues from projects and professional services toward products, IP-based and continuously managed services that support selected solution areas and industries
  • Strengthening continuously our specialists' professional skills and improving our leading offering in order for our customers to pay hour price above market average
  • Aiming to move to self-organized teams and to reduce organizational layers achieving better communication and faster decision making
  • Continuously improving our flexible value-adding delivery model minimizing number of non-invoiced hours and maximizing customer satisfaction

Customers

Innofactor's business operations were focused on Finland, Sweden, Denmark, and Norway. On January 1–June 30, 2019, approximately 61 percent of the net sales came from Finland, approximately 23 percent from Sweden, approximately 11 percent from Norway, and approximately 5 percent from Denmark. The net sales grew in Finland and Norway, but decreased in Sweden and Denmark.

Of the net sales in January 1–June 30, 2019, approximately 51 percent came from commercial clients, approximately 32 percent from public sector clients, and approximately 17 percent from third sector clients.

Distrubution of net sales January 1–June 30, 2019

 

Innofactor's net sales in the review period of January 1–June 30, 2019, came from the following sources:

  • approximately 5 percent from licenses, of which the share of licensing income to third parties was approximately 4 percent of the net sales
  • approximately 22 percent from services based on recurring service contracts, such as SaaS, cloud and hosting services, and from software maintenance
  • approximately 21 percent from specialist work based on recurring service contracts, such as smaller customer-specific changes and further development of IT systems
  • approximately 52 percent from IT system delivery projects and consulting

Innofactor's 10 largest clients accounted for approximately 24 percent of the net sales during the review period January 1–June 30, 2019.

Get to know our customer stories 

Personnel

Towards a modern digital organization in the Nordics

Highly competent employees, good leading practices and Nordic processes support Innofactor's long-term goals. In 2018, Finland went over to self-organized teams, reduced organization levels and improved information flow. Also, the focal points of key duties were moved closer to the customer interface.

Q2 2019: The number of personnel in Innofactor is clearly lower than in the previous year due to the development actions implemented

 

Primarily, Innofactor monitors the number of active personnel. The number of active personnel does not include employees who are on a leave of over 3 months.

The average number of active personnel in April 1–June 30, 2019, was 540 persons (2018: 597), which shows a decrease of 9.5 percent. At the end of the review period, the number of active personnel was 538 (2018: 588), which shows a decrease of 8.5 percent. The decrease in the number of personnel was especially due to the reorganization implemented in Finland in the last quarter of 2018.

At the end of the review period, the average age among personnel was 40.8 years (2018: 39.4). Women accounted for 26 percent (2018: 31%) of the personnel. Men accounted for 74 percent (2018: 69%) of the personnel.

Get to know our people!

Self-organized teams and lighter organization in Finland

Innofactor renewed its organization in Finland in late 2018. The number of offices and key duties were reassessed, and their focus was changed to serve the current business better. Innofactor decided to adopt self-organized teams in Finland and made a major organizational change to support this. The purpose of the reform is to reduce organizational levels, speed up decision-making and thereby improve employee satisfaction. With the organizational change, we want to strengthen the position of the teams and give superiors a better focus on their management duties.

Towards common Nordic operating models

Innofactor's target is to build a company with Nordic integration that can help its customers to build a modern digital organization. Innofactor continued development projects in 2018 to create a basis for Nordic operating models. Common systems, processes and culture will support Innofactor's strategic targets and co-operation between the countries.

Of the personnel processes, we carried out a performance management process and an employee satisfaction survey in a uniform way in all Nordic countries in 2018. Personnel and superiors were trained in Nordic performance management courses, and development discussions were held using uniform timetables and models. The idea with Nordic superior and personnel training is to ensure systematic communication and a uniform leadership culture throughout the organization. Through performance management, Innofactor will ensure that each employee has clear targets, feedback is received regularly, and personal development is supported systematically. Employee satisfaction was measured with quarterly surveys, selecting areas to develop both in each country and at group level.

The leadership culture supports integration

The leadership training program for team leads, designed to improve leadership culture, was concluded in 2018. The target was to unify leadership culture and improve leadership skills throughout the organization. Approximately 30 team leads from all Nordic countries took part in the programme. The programme focused on networking and superiors' competences in managing experts. According to the feedback, superiors had obtained excellent tools for day-to-day management, coaching, giving feedback and development of their own leadership skills. The target with superior and line managers' training is to ensure good immediate management work quality and leadership coaching throughout the organization.

In addition to leadership training, Innofactor Academy continued to train the rest of the personnel. The focus areas included training based on Microsoft technology, basic induction and tools related to project management (such as ITIL and SCRUM). Through Innofactor Academy personnel were trained both locally and at Nordic level.

Operating models to support modern work better

In 2018, the Microsoft Dynamics 365 Enterprise Resource Planning system (ERP) was expanded to cover all Nordic countries. With the common personnel system, Innofactor renewed its operating model and reporting. Common system increases the level of automation at Innofactor and enables common reporting practices throughout the group.

Integration and modern work methods were supported at Innofactor by renewing both external and internal communication. Communication was developed by
describing, together with the personnel, the principles of communication in the form of an Innofactor Collaboration Playbook. The Playbook defines what tools and communication channels are used for various purposes, and under what principles information is communicated within the company. In addition, Innofactor renewed its intranet pages with the latest SharePoint technology, which supports news mobile use better in the future. In terms of team work, Innofactorilla started actively using Teams in 2018. This enables more fluent and efficient team working and sharing of information regardless of time and place between countries.

In 2018, many of our employees renewed their Microsoft Most Valuable Partner (MVP) awards, and we also received new MVPs. Microsoft MVPs are technology experts who actively share their expertise in communities and want to be among the first to learn about new technologies. MVPs have a deep understanding of Microsoft products and services and an ability to combine a variety of platforms and products to solve problems in the real world.

Offering

We help our customers to build a modern digital organization

Our offering and delivery model are designed to deliver our customers long-term value by leveraging new technology and innovations in ways that take into account their current state and objectives.

Based on years of experience working at the forefront of digitalization with more than 1,500 private, public and third sector customers and the expertise of over 600 leading business and cloud technology professionals, we have developed a vision of a Modern Digital Organization. It's founded on a framework we're successfully using to help our customers take advantage of cloud technology and new innovations across their organization and operations. The approach is simple and effective, delivering quick, tangible results and paving the way for long-term customer relationships. We start with defining the big picture – helping our customers determine their current state, define their objectives and build a digitalization roadmap for their organization. We then continue our joint journey to build a modern digital organization leveraging the five areas of our framework. Innofactor offers leading solutions, services and products in each area, as well as an agile delivery model that helps our customers to successfully design, deploy and continuously develop new solutions.

Our solutions and services for building a modern digital organization

Our modern delivery model ensures effective deployment and adoption to maximize the lifetime value of new solutions

Our delivery model is based on years of experience in delivering both traditional IT projects as well as cloud services. It consists of five stages, each of which delivers our customers quick, tangible value. We offer our customers five productized delivery models, called Journeys, that are founded on our Modern Digital Organization framework. The value of our deliveries is based on not only helping our customers to design and implement a specific solution, but also supporting them in adopting it within their organization and evaluating its impact to their business processes and IT architecture. In our delivery model, we focus on providing managed services and continuous development of our solutions throughout their lifecycle.

read more about our solutions for modern digital organization

Acquisitions

In 2018 Innofactor made no acquisitions, but focused on integrating Cinteros AB, acquired in 2015, and the Lumagate companies, acquired in 2016, into the Innofactor Group. Our past acquisitions are as follows:

 

10 October, 2016
Innofactor signed a contract to acquire the entire share capital of the Lumagate group.
See Stock Exchange Release for more details.


22 December, 2015

Innofactor signed a contract to acquire the entire share capital of the Swedish company Cinteros AB.
See Stock Exchange Release for more details.


22 December, 2015

Finnish Arc Technology, which is focused on HR systems, bought Innofactor Plc's HRM (Human Resources Management) business.
See press release for more details.


31 December, 2013

Innofactor signed a contract to acquire the entire share capital of Enabling Group.
See Stock Exchange Release for more details.


30 September, 2013

Innofactor acquired Dynamic Team (company name Lainetar Oy, based in Tampere, Finland) and its business in order to strengthen its offering in the Microsoft Dynamics AX business area.
See press release for more details.


6 June, 2013

Innofactor signed a contract to acquire the entire share capital of atBusiness Ltd.
See Stock Exchange Release for more details.


30 November, 2012

Innofactor signed a contract to acquire the Microsoft project and project portfolio management solutions business from Tietotalo Infocenter Ltd.


25 June, 2012

Innofactor signed a contract to acquire the entire share capital of Bridgeconsulting A/S.
See Stock Exchange Release for more details.


3 December, 2010

Westend ICT Plc and Innofactor Ltd merged to become the Innofactor Plc Group.
See Stock Exchange Release for more details.


3 June, 2010

Visual Management Ltd became part of Innofactor Software Ltd.


12 October, 2009

Innofactor Software Ltd acquired Software Innovation Finland Ltd.


1 April, 2007

Innofactor purchased the Enfo Ltd business unit responsible for electronic business solutions.


15 December, 2004

Innofactor Software Ltd acquired TietoEnator Plc's parish-software business.

Sustainability

Innofactor is convinced that the company's long-term success is based on sustainable operations. Our digital solutions are in a key position in curbing climate change and promoting sustainable development. Our operation is steered by our Code of Conduct and environmental policy, in addition to which we comply with the leading international sustainability standards, such as the ILO Declaration on Fundamental Principles and Rights at Work, the UN Universal Declaration of Human Rights, the UN Sustainable Development Goals and the principles of the ICC Business Charter for Sustainable Development.

Innofactor's internal operations are managed through predefined core processes and standards. The key processes related to sustainability include the company's processes relating to legal affairs, risk management and human resources, which govern many of the main aspects of corporate responsibility. The framework for Innofactor's operations is provided by the ISO 9001, ISO 27001, ISO 13485 and AQAP-2110 standards, which the company's various processes adhere to.

In 2018, Innofactor conducted a survey to learn about the employees' views of the most material sustainability themes in the organization. The most relevant sustainability themes for the personnel in Finland were providing solutions which enable sustainable growth for our customer organizations, increasing energy efficiency in our operations, improving recycling in our offices and highlighting sustainability issues in our communications.

Innofactor is committed to supporting the achievement of the UN Sustainable Development Goals (SDGs) by 2030. Accordingly, we have mapped the main objectives from the perspective of our business operations.

Read more about Innofactor's sustainability

Future Outlook

Innofactor's future outlook for 2019

Innofactor's net sales in 2019 are estimated to increase from 2018, during which the net sales were EUR 63.1 million, and the operating margin (EBITDA) in 2019 is estimated to grow to EUR 4–6 million, while the operating margin in 2018 was EUR -1.0 million.

Do you want to hear more about Innofactor? Contact us!
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