IT service sector: Q4 was tough, as was 2024
Translation: Original published in Finnish on 3/14/2025 at 7:52 am EET.
The Q4 earnings season for the IT service sector started on a cautious note, with six companies in the sector issuing profit warnings in the final months of the year, signaling that the market was still tough on many fronts. The decline in organic revenue for companies in the sector accelerated but was still slightly better than our expectations. Overall profitability was in line with the comparison period, but the group was still clearly divided between strong and weak performers. The beginning of the year has already seen new change negotiations in the sector. The trends in Q4 were similar to previous quarters. Our main concern remains the fierce price competition resulting from overcapacity, which is eating deeper and deeper into order books and will slow the recovery over time. Looking at the year as a whole, the difficult market situation is illustrated by the fact that none of the listed companies in the IT service sector achieved excellent or even good performance according to the Rule of 20 we have introduced. The best performers in the sector were Netum and Digia, which is still only a satisfactory performance in our over-the-cycle perspective.
Organic revenue performance steepened, but still slightly better than expected in Q4
The year-end weakness was already evident after the summer, when several companies in the sector started to issue profit warnings in turn (6 in total: Innofactor, Silicon, Solteq, Tietoevry, Vincit and Netum). On the whole, however, revenue in the Finnish IT service sector developed slightly better than expected. Revenue of the companies in our coverage declined organically by 5%, a steeper decline than in Q3 (-3%). Progress continued to be constrained by customers' need to save money, which led to IT projects being put on hold and launches being postponed. The number of working days was the same as in the comparison period. Overall, then, revenues were slightly better than expected in Q4, with 3 companies above, 5 in line with and 2 below our forecast.
Source: Inderes
Those that have performed well or satisfactorily in a difficult market environment are companies with more recurring revenue, long-term contracts, deep and strategic customer relationships, those operating in the public sector, and generally those who make business-critical solutions for customers. These include Digia, Netum, Loihde and Gofore. However, the best growth was again seen in Digital Workforce (11%), where demand for its automation offering is strong. Companies with a high emphasis on the private sector and customized software development still fared the weakest (Vincit and Witted). In addition, Solteq continued to face challenges, especially in its own software business. Throughout last year, there was a trend in the market that buyers at large customers were concentrating their purchases on a narrower range of suppliers. If this trend gains momentum, we see it supporting operators with a comprehensive lifecycle service offering, sufficient delivery capacity and/or the specialized expertise required by the customer. In general, we expect companies with clear competitive advantages to stand out more prominently in the future. The losers will be companies that lack critical (e.g., data, AI) or differentiating capabilities, deep customer relationships (management consulting, integration and continuity services contribute), or a deep understanding of the customer's business through industry focus.
Price competition due to overcapacity is still fierce, especially in the public sector, and this is our main concern for the sector. Price competition puts pressure on profitability when wages aren't adjusted in the same way. We do not see an end to price competition until demand picks up, which we believe will require a strengthening of the economic environment, which would in turn increase the investment appetite of customer companies.
The quarter-on-quarter decline in the number of employees continued (-1%) in Q4 but has slowed compared to the turn of last year (Q4’23: -4% and Q1’24: -2%). This gives some confidence that the bottom of demand is near. The number of employees at Digia and Loihde increased in Q4.
Overall, it could be said that profitability in Q4 was flat year-on-year
The sector's average adjusted EBIT margin was 5.9% in Q4 (Innofactor no longer included), up from 5.1% in the comparison period and down from a good 7.3% in the previous quarter. The average was boosted by a significant increase in profitability at Digital Workforce and Solteq, while several companies saw a slight decline in profitability. The median EBITA-%, meanwhile, decreased from 6.4% in the comparison period to 5.1%. Profitability drivers were company specific, but several continued to be supported by efficiency measures, while on the other hand, declines continued to be driven by weak revenue development.
Profitability in Q4 continued to be split between mostly strong and weak, with little evidence of flat profitability. Gofore, Tietoevry and Digia all reported strong profitability, all above 10%. This is partly explained by the relatively high share of recurring business in the companies, the software business (Digia and Tietoevry), and the stable public sector contract portfolio across the board (although there is price pressure on new contracts). The underperforming companies in the sector have definite potential to improve their profitability once the revenue decline is overcome. Digital Workforce is currently growing strongly, but growth investments are limiting the company's profitability development.
Forecasting profitability on a quarterly basis is challenging at the moment, as the revenue trend is uncertain and has a leverage effect on profitability. In addition, it is difficult to assess the timing of the effects of the various efficiency measures. As a whole, profitability levels were slightly weaker than we expected, with 2 companies above, 4 in line (within 1 percentage point), and 4 below our forecast. Together, the net effect of the differences in profitability expectations was -5.5 percentage points. Siili and Vincit have announced new change negotiations in the first months of the year to improve profitability. If the weakness in demand continues or spreads to further areas of expertise or customer sectors, new change negotiations in the sector are likely. If the decline and the difficult market situation persist, the companies will also be under additional pressure to adjust their more fixed cost items. On the other hand, companies that make it through a difficult cycle without change negotiations will, in our view, strengthen their employer brand.
Source: Inderes
Now that companies have sharpened their cost structures after years of strong investment, as the economy and demand recover, we may see profitability return to much better levels, at least temporarily. We will publish our updated expectations for the IT services sector in 2025 in the near future.
Source: Inderes
Viewed through the Rule of 20, Netum and Digia were among the best in the sector in 2024
At the beginning of the year, we launched our own Rule of 20 for the IT services sector, which we believe works well, if not best, as a single parameter to measure the operational performance of the sector and - in particular - of companies. The current market environment is more challenging than in the previous 10 years, and the Rule of 20 is more difficult to achieve, with several companies in history having delivered excellent performance.
The difficult market situation of 2024 is illustrated by the fact that none of the listed companies in the IT service sector achieved excellent or even good performance according to the Rule of 20. The best performers in the sector were Netum and Digia with 13%, which is still only a decent performance in our over-the-cycle perspective. Other companies with decent performance were Digital Workforce, Tietoevry and Gofore. The performance of the remaining companies in the sector can be considered poor or very poor for several of them.
Company-specific Q4 comments and forecasts:
Digia (in Finnish)
Gofore (in Finnish)
Loihde (in Finnish)
Netum (in Finnish)
Siili (in Finnish)
Solteq (in Finnish)
Vincit (in Finnish)
Witted (in Finnish)
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