Innofactor Plc's Interim Report for January 1–September 30, 2018 (IFRS)

30.10.2018 09:00 CEST/EET (UTC +2)

Innofactor Plc Interim Report October 30, 2018, at 9:00 Finnish time

 

In the third quarter, losses were slightly smaller than in the comparison period, although the net sales did not reach the goal – as a result of the cooperation negotiations, we will strive for an annual positive effect of ca. EUR 2,4 million in the operating margin

July–September 2018 in brief:

• The net sales were approximately EUR 13.8 million (2017: 14.1), which shows a decrease of 2.5%.
• The operating loss was approximately EUR -503 thousand (2017: -681), which shows an improvement of 26.1%.
• The weaker than expected profitability was contributed to by the lower than expected net sales.
• The operating loss was EUR 1,186 thousand (2017: -1,348), which shows an improvement of 12.1%.
• In the third quarter, Innofactor got several major orders, for example: The Funding Centre for Social Welfare and Health Organizations (STEA), approximately EUR 2.1 million; Kuntien Tiera Oy, approximately EUR 2 million; and a private Finnish healthcare company, approximately EUR 0.5 million. However, these have not yet had time to improve the net sales much.

January–September 2018 in brief:

• The net sales were approximately EUR 47.3 million (2017: 48.5), which shows a decrease of 2.6%.
• The operating margin was EUR -124 thousand (2017: 784), which shows a decrease of 115.9%.
• The operating loss was EUR 2,177 thousand (2017: operating loss -1,229), which shows a decrease of 77.2%.
• The weaker than expected profitability was contributed to by the lower than expected net sales.

After the review period, Innofactor started cooperation negotiations based on its updated strategy and related to the development of its organization, and estimated that its result for 2018 would be weaker due to reorganization. Cooperation negotiations have been concluded and actions based on them are estimated to have ca. 2,4 million euros positive impact on profit from 2019 onwards.

		Jul 1–Sep 30, 2018	Jul 1–Sep 30, 2017	Change		Jan 1–Sep 30, 2018	Jan 1–Sep 30, 2017	Change		Jan 1–Dec 31, 2017
Net sales, EUR thousand		13,773	14,126	-2.5%		47,253	48,527	-2.6%		65,666
Growth of net sales		-2.5%	19.7%			-2.6%	16.6%			10.1%
Operating profit before depreciation and amortization (EBITDA), EUR thousand		-503	-681	26.1%		-124	784	-115.9%		1,308
percentage of net sales*		-3.7%	-4.8%			-0.3%	1.6%			2.0%
Operating profit/loss (EBIT), EUR thousand*		-1,186	-1,348	12.1%		-2,177	-1,229	-77.2%		-1,461
percentage of net sales*		-8.6%	-9.5%			-4.6%	-2.5%			-2.2%
Earnings before taxes, EUR thousand*		-1,223	-1,421	14.0%		-2,480	-1,571	-57.9%		-1,579
percentage of net sales*		-8.9%	-10.1%			-5.2%	-3.2%			-2.4%
Earnings, EUR thousand*		-763	-1,137	32.9%		-2,227	-1,624	-37.1%		-2,007
percentage of net sales*		-5.5%	-8.0%			-4.7%	-3.3%			-3.1%
Net gearing		71.4%	55.7%			71.4%	55.7%			53.8%
Equity ratio		41.2%	43,8%			41.2%	43.8%			43.4%
Active personnel on average during the review period**		591	623	-5.1%		598	609	-1.8%		610
Earnings per share (EUR)		-0.0271	-0.0314	13.8%		-0.0548	-0.0359	-52.9%		-0.0357

 

*) In accordance with IFRS 3, the operating result for April 1–September 30, 2018, includes EUR 507 thousand (2017: 507) in depreciations related to acquisitions, consisting of allocations of the purchase price to intangible assets. In accordance with IFRS 3, the operating result for January 1–September 30, 2018, includes EUR 1,521 thousand (2017: 1,521) in depreciations related to acquisitions, consisting of allocations of the purchase price to intangible assets.

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

 

Innofactor's future outlook for 2018

Innofactor reassessed its future outlook in a stock exchange release on October 8th, 2018. Net sales in 2018 is estimated to remain on approximately the same level as in 2017, when the net sales were EUR 65.7 million, and the operating margin (EBITDA) to be positive, but weaker than in 2017, when the operating margin was EUR 1.3 million.

*) The net sales and operating margin for 2017 have been adjusted in accordance with the IFRS 15 standard. A separate release on this was published on May 7, 2018.

CEO Sami Ensio's review: The actions we took before the summer were not enough – as a result of the cooperation negotiations, we will make significant changes in our operating model in Finland in order to gain an annual positive effect of ca. EUR 2,4 million in the operating margin starting from 2019

The net sales in the third quarter of 2018 were EUR 13.8 million, which shows a decrease of 2.5 percent from the last year. The operating margin (EBITDA) was EUR -0.5 million (-3.7 percent of the net sales) and improved by 26.1 percent from the previous year. The result was significantly lower than the goals we had set.

Especially in the second quarter, we made plenty of corrective actions and we estimate that they will significantly improve our profitability in the second half of the year. However, these actions proved to be not enough, and we did not manage to get enough new orders in the third quarter, especially at the beginning of it, to be able to increase our net sales as planned and, thus, it remained 2.5 percent lower than in the previous year, and the cutting of costs did not affect the profitability enough.

On October 8, 2018, we published a release concerning the updating of our strategy, which stated that our new mission is to further modern digitalization in organizations – Driving the #ModernDigitalOrganization. In order to reach the goals defined in the strategy, Innofactor published a release on October 8, 2018, about cooperation negotiations on production-related and financial grounds in its Finnish companies. In accordance with the release published on October 30, 2018, Innofactor has completed the negotiations. Innofactor will lay off a total of 12 or 13 persons, which will result in annual savings of EUR 1.4 million starting from 2019. Additionally, tasks will be reorganized so that persons, who have previously worked either partially or totally in internal tasks, can be transferred to customer work. This is estimated to improve the operating margin approximately EUR 1.0 million annually. In total, starting from 2019, the current actions are estimated to result in a positive annual effect of EUR 2.4 million in the operating margin.

In the Finnish delivery organization, we managed to remove three levels of organization. This can be achieved by replacing the current 50 supervisors, most of who are acting as supervisors in addition to their actual tasks, with 16 full-time supervisors and line supervisors, which means that a significant part of current supervisors will have much more time for sales and customer work, and also by an arrangement in which the Innofactor Group's CEO Sami Ensio will handle also the tasks of the Finnish Country Manager. In Finland, there will be only two supervisors between a consultant and the CEO.

I am very sorry for all the persons we had to lay off in this situation. Many good people will have to go, because their roles do not exist anymore in the new organization. I wish to take the opportunity here to thank them publicly for all the work they have done for Innofactor. At the same time, I am enthusiastic about our new organization and my role in it. In the reorganization, the teams in Finland will become self-organized. I believe this will improve customer orientation, work quality, efficiency and employee satisfaction. Decreasing organization levels will recreate the entrepreneurial spirit of the times when Innofactor was started, make it faster to implement decisions in practice, and help us reach our business goals. I enjoy very much working with customers, and my new, expanded role will give me better possibilities for it. I believe these changes will rejuvenate Innofactor's operation.

Innofactor's vision is to be the provider of organizations' digital transformation in each of the Nordic Countries (Finland, Sweden, Denmark and Norway). 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.

 

Strategy and its realization in the review period

Innofactor is the leading provider of modern digital organization for companies, public administration and third sector for its over 1,500 customers in the Nordic Countries. Innofactor has the widest solution offering and leading know-how in the Microsoft ecosystem in the Nordic Countries. Innofactor has approximately 600 enthusiastic and motivated top specialists in Finland, Sweden, Denmark and Norway. The focus of our strategy in the Nordic level is even more strongly in our five application areas (Journeys) and selected industries for which Innofactor strives to create a uniform operating model and offering in the Nordic Countries. Unifying the offering may take place either through organic growth or selected acquisitions.

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

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

In the review period of January 1–September 30, 2018, Innofactor's net sales decreased by 2.6 percent. The company did not reach the goal it had set for organic growth.

Innofactor's operating margin (EBITDA) in relation to net sales was -0.3 percent in the review period of January 1–September 30, 2018. This is low and very far away from the set target level of 20 percent.

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

Innofactor's operating cash flow in the review period of January 1–September 30, 2018, was EUR 1.9 million negative (2017: EUR 3.1 million). Net gearing at the end of the review period was 71.4 percent (2017: 55.7%).

 

Espoo, October 30, 2018

INNOFACTOR PLC

Board of Directors

 

Additional information:
CEO Sami Ensio, Innofactor Plc
Tel. +358 50 584 2029
sami.ensio@innofactor.com

 

Briefings concerning the third Interim Report January 1–September 30, 2018

A briefing in Finnish concerning the interim report will be held for media, investors and analysts on October 30, 2018, at 10:00 Finnish time, at the company's premises at Keilaranta 9, Espoo. The report will be presented by CEO Sami Ensio and CFO Marko Lehtonen. The corresponding conference call in English will be held at 12:00 Finnish time, and the presenter will be CFO Marko Lehtonen.

Please register for the briefings beforehand by sending email to ir@innofactor.com.

The presentations will be available on Innofactor's web site after the briefing.

Distribution:
NASDAQ Helsinki
Main media
www.innofactor.com

Innofactor
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 2013–2017, the annual growth of Innofactor's net sales has been approximately over 20%. The Innofactor Plc share is listed in the technology section of the main list of NASDAQ Helsinki Oy. www.innofactor.com #ModernDigitalOrganization

 

Attachment: Innofactor Plc's Interim Report for January 1–September 30, 2018 (IFRS).pdf