TIETO’s interim report 2/2009 (January-June) – IT market continues to be weak, Tieto’s profitability improves slightly from the first quarter

April-June highlights

• Net sales totalled EUR 444.8 (480.1) million, down 7%. In local    currencies, net sales declined by 3%.
• Operating profit amounted to EUR 10.4 (29.6) million,    representing an operating margin of 2.3% (6.2).
• Operating profit excluding one-off items amounted to EUR 24.6    (33.2) million, 5.5% (6.9) of net sales.
• Profit after taxes was EUR 10.0 (18.7) million.
• Net cash flow from operations amounted to EUR -12.1 (53.9)    million.
• Tieto concluded several important agreements during the quarter,    such as for application management services with Elisa and IT    infrastructure services with Itella.
• The outlook for 2009 remains unchanged.
  

January-June highlights

• Net sales totalled EUR 882.8 (948.4) million, down 7%. In local    currencies, net sales declined by 2%.
• Operating profit amounted to EUR 15.3 (54.2) million,    representing an operating margin of 1.7% (5.7).
• Operating profit, excluding one-off items, amounted to EUR 39.4    (70.9) million, 4.5% (7.5) of net sales.
• Profit after taxes was EUR 11.0 (35.0) million.
• Net cash flow from operations amounted to EUR 29.9 (118.5)    million.
  

Hannu Syrjдlд, President and CEO:

“The IT market continues to be weak, and the telecom sector hasremained the most challenging area for us. Although we signed severallarge agreements in the second quarter, Tieto’s net sales were down7%. Due to the declining sales and one-off costs, our profitabilitywas clearly down from last year, but improved slightly from the firstquarter.

We have continued to streamline our operations in Tieto with a focuson improving our utilization rate and accelerating the implementationof the global delivery model. We are also putting a lot of emphasison driving new sales and creating market for our advanced offerings.Many of Tieto’s core services help our customers to meet theirproductivity and efficiency requirements during these difficulttimes.

Outsourcing continues to offer the strongest growth potential for Tieto in all our main markets, and this is the area where we aredirecting more and more of our sales efforts currently. In a recentstudy by EquaTerra, Tieto was ranked as the best provider ofapplication management services in the Nordic countries. The positivefeedback we have received from our customers is a clear indicationthat our efforts in quality and innovation are now starting to payoff.”

MARKET DEVELOPMENT
Polarization of the IT services market continued during the secondquarter of 2009. On the one hand, the market for new, large-scale ITprojects has declined in most sectors. On the other, the outsourcingmarket is active and the size of new potential cases has grown.Customers are seeking to cut costs and improve productivity. Pricepressure remained hard during the quarter, especially in the telecomsector.

Demand for IT services continued at a good level in the government,healthcare and welfare sectors as well as the utilities sector. Inthe finance sector, demand has been weak. The Finnish finance marketis fairly stable, but competition is fierce in Sweden. There isgrowing interest towards outsourcing in Tieto’s main markets.

In the telecom sector, competition has remained tough and industrytransformation continues. Customers have implemented aggressive costsavings and supplier consolidation programmes. Demand for offshoreproduction has increased and customers are shifting their coreoperations and decision-making to Asia, especially China and India.Overall IT demand has remained weak and investments by operators andtelecom equipment manufacturers are expected to be low for some time.

Uncertainty has continued in the IT market. New investments are beingpostponed, unless they offer clear short-term productivity benefits.However, companies’ efforts to achieve cost savings by rationalizingtheir operations are opening up new business opportunities and, as aresult, balance the changes in demand. Close to 60% of Tieto’sbusiness is related to application and ICT infrastructure managementas well as maintenance, which are more resilient to the impacts of aneconomic downturn.

Market development by countryIn Finland, the outsourcing market continues to grow. Additionally,customers are in the market to buy enhancements to existingapplications. However, demand for new IT projects and consultancy hascontinued to slide. The decline in the telecom sector has beenfollowed by that of the Finnish exports sector, especially the metaland forest industries. IT budgets in the public sector have not beenaffected so far.

In Sweden, weak demand in the telecom sector has continued during thesecond quarter. Due to general cautiousness, the trend is that onlyfew new development projects are started. On the other hand, newoutsourcing-related opportunities have opened up, especially in thefinance and public sectors.

Outside Finland and Sweden, the recession has also hit the IT marketshard, but impacts vary country by country. In general, telecom andfinance are the most affected sectors. Companies are shifting theircore operations and decision-making to Asia, rapidly increasingpressure to accelerate offshoring. This is experienced especially ininternational sectors, such as telecom and forest.

In Germany, the automotive sector has been hit the hardest and is nowgoing through a heavy transformation process. Additionally, themarket for local telecom R&D has deteriorated during the quarter.Energy and healthcare markets are active.

In Norway, the local market is slowing down despite the fact that theeconomy has been hit less hard. However, the global oil & gas marketis at a reasonable level. Additionally, regulatory changes in thefinance sector create new opportunities for capital market solutions.

TIETO’S BUSINESS TRANSACTIONS AND MAJOR AGREEMENTS IN JANUARY-JUNE
In June, the company divested its holding in TietoSaab Systems Oy,previously owned by Tieto Corporation (60%) and Saab Corporation(40%). In 2008, net sales of TietoSaab Systems amounted to EUR 9.3million. Tieto booked EUR 5.2 million in capital gain from thedivestment.

In June, Tieto agreed on the acquisition of 20% of the shares in TKPTieto Oy and as of 1 July owns the entire share capital of thecompany. TKP Tieto Oy was a joint venture, owned by Tieto Corporation(80%) and Finnish pension insurance institutions (20%). In 2008, netsales of TKP Tieto amounted to around EUR 32 million and the numberof personnel totalled 211.

Tieto also concluded several important agreements during the quarter,such as for application management services with Elisa and ITinfrastructure services with Itella.

STREAMLINING ACTIONS
The targets set for Tieto’s Performance Improvement Programmelaunched in 2008 were reached and the programme was completed duringthe first quarter of 2009. To further adjust its operations to thecurrent market situation and to address the declining trend indemand, the company started new streamlining actions during the firstquarter of 2009.

The company’s target is to achieve additional annualized cost-savingsamounting to EUR 100 million, of which approximately EUR 70 millionis expected to materialize in 2009, mainly in the third and fourthquarters. The streamlining measures include personnel adjustments,decreased use of subcontractors, accelerated utilization of offshoreresources, consolidation of offices and cutting business expensesthroughout the Group.

Costs of EUR 16.4 million related to the Performance ImprovementProgramme materialized in the first quarter. In addition, Tietoestimates that it will book approximately EUR 35 million in one-offcosts related to the new streamlining actions in 2009, of which EUR24.9 million were booked in the second quarter. All costs have a cashflow effect which will materialize mainly in the third and fourthquarter.

FINANCIAL PERFORMANCE IN APRIL-JUNE
Second-quarter net sales declined by 7% and amounted to EUR 444.8(480.1) million. As close to 40% of Tieto’s net sales are generatedin non-euro countries, the weakened currencies, especially theSwedish currency (SEK), had a negative impact on net sales in euros.In local currencies, net sales declined by 3%. Net sales dropped inmost customer industries, reflecting cautiousness in starting newprojects. The telecom market continued to be challenging and Tieto’snet sales in the sector declined by 13%, having a substantialnegative impact on the Group’s net sales.

Second-quarter operating profit amounted to EUR 10.4 (29.6) million,representing a margin of 2.3% (6.2). Operating profit includedone-off costs of EUR 24.9 million related to streamlining actions andone-off income totalling EUR 10.7 million. One-off income includesEUR 5.2 million in capital gain from the TietoSaab divestment inFinland and a positive revenue recognition estimate of EUR 5.5million in Tieto International. Operating profit excluding one-offitems amounted to EUR 24.6 (33.2) million, representing a margin of5.5% (6.9). The number of employees was somewhat down during thequarter, resulting in a decrease in personnel costs and animprovement in the utilization rate. However, net sales declined at afaster rate than costs.

Net financial expenses stood at EUR 1.6 (5.8) million in the secondquarter. Net interest expenses were EUR 1.7 (2.2) million and netgains from foreign exchange transactions EUR 0.8 (negative 0.9)million, of which EUR 1.1 million were unrealized net gains. Otherfinancial income and expenses amounted to EUR 0.7 (2.7) million.

Second-quarter earnings per share (EPS) totalled EUR 0.14 (0.26).

Operating profit (EBIT) includes EUR 2.3 (2.4) million fromamortization on allocated intangible assets.

The 12-month rolling return on capital employed (ROCE) was 18.5% andthe return on shareholders’ equity (ROE) 7.8%.

The order backlog, which only comprises services ordered with bindingcontracts, amounted to EUR 1 122 (1 178) million at the end of theperiod. In total, 49% (40) of the backlog is expected to be invoicedthis year.

In Finland, net sales remained flat. The market for new outsourcingcases was strong and Tieto concluded several new small and mid-sizeddeals and agreement renewals, e.g. those with Elisa, Nordea,TeliaSonera, Itella and Varma. However, the new agreements were notsufficient to compensate for the expired contracts. Telecom was themost challenging sector, whereas sales to the healthcare and welfareand public sectors continued to grow. Flat revenue with costinflation led to lower profitability. Second-quarter operating profitamounted to EUR 25.2 (31.6) million including EUR 7.3 million inprovisions related to personnel reductions and EUR 5.2 million incapital gains. Operating margin excluding one-off items totalled11.9%.

In Sweden, net sales declined by 19%. In local currency, the declinewas 7%. Excluding the currency impact, the drop in sales was mainlyattributable to the weak development in the telecom sector. Telecomaccounts for close to half of Tieto’s net sales in Sweden. Thestrongest developing sectors were healthcare and welfare, public,retail and logistics. Operating profit totalled EUR -6.7 (7.4)million and included EUR 7.4 million in restructuring costs.Operating margin excluding one-off items totalled 0.6%. The declinein net sales and exchange rates were the main reasons for theweakened profitability. Costs declined, but not sufficiently tooffset the negative effect. Part of the costs are in currencies otherthan the Swedish currency (SEK).

In International, demand in the healthcare and energy sectors was ata reasonable level, whereas net sales in the finance and telecomsectors were dropping off. Denmark and the UK were the mostchallenging markets. In the second quarter, Tieto’s net sales in itsinternational markets remained unchanged. Net sales include anone-off income of EUR 5.5 million due to a change in the revenuerecognition estimate. Excluding this income and currency impacts, netsales declined by 3%. Second-quarter operating profit amounted to EUR-6.6 (2.1) million and included EUR 9.9 million in restructuringcosts and EUR 5.5 million in one-off income. Operating marginexcluding one-off items totalled -1.5%.

In the telecom sector, Tieto’s net sales fell by 13%. Customers arerunning aggressive cost savings programmes and cutting newinvestments. About half of the drop in net sales is attributable tolower volumes. Additionally, weaker currencies had a major impact onnet sales. Despite the shrinking market, Tieto has been able to holdon to its strong market position. Operating profit declined duringthe quarter due to the lower utilization rate and prices.

In the finance sector, net sales fell by 8%. Exchange rate changesaccount for more than half of the drop.Additionally, two major contracts that expired in 2008 had a negativeimpact on net sales. Business has been stable in Finland but morechallenging in Sweden and the international market. Products sufferthe most from the current market situation. Operating profit declinedbut remained at a fairly good level.

In the industry sectors, net sales declined by 2%. Net sales includeincome of EUR 5.5 million due to a change in the revenue recognitionestimate. Excluding the one-off income and currency impacts, netsales declined by 2%. In Tieto’s reporting, the industry sectorscover customers in healthcare and welfare, forest, energy,manufacturing, automotive, public, retail and logistics.Manufacturing, forest and automotive were the weakest areas duringthe second quarter. The market for manufacturing has deteriorated,especially in the metal industry, reducing investments in new ITsolutions. Net sales continued to grow in the healthcare and welfareas well as public sectors. Profitability in most of the industrysectors was at a healthy level.

FINANCIAL PERFORMANCE IN JANUARY-JUNE
Net sales declined by 7% and amounted to EUR 882.8 (948.4) million.The weakened currencies had a negative impact on net sales in euros.In local currencies, net sales declined by 2%. Sweden was the mostchallenging market.
Operating profit amounted to EUR 15.3 (54.2) million includingone-off income totalling EUR 18.4 million and one-off costs of EUR42.5 million mainly related to the Performance Improvement Programmeand new streamlining actions. Operating profit excluding one-offitems amounted to EUR 39.4 (70.9) million, representing a margin of4.5% (7.5).

Net financial expenses stood at EUR 4.4 (8.7) million in the firsthalf. Net interest expenses were EUR 3.5 (4.5) million and net lossesfrom foreign exchange transactions EUR 0.5 (2.3) million, of whichEUR 1.2 million were unrealized net gains. Other financial income andexpenses amounted to EUR 0.4 (1.9) million.

Six-month earnings per share (EPS) totalled EUR 0.15 (0.48).

Operating profit (EBIT) includes EUR 4.6 (4.9) million fromamortization on allocated intangible assets.

Cash flow and financingSecond-quarter net cash flow from operations, including the increaseof EUR 25.8 (decrease 19.5) million in net working capital, amountedto EUR -12.1 million (53.9). The increase in net working capitalwas mainly attributable to the decrease in accounts payable andaccruals.

Six-month net cash flow from operations declined to EUR 29.9 (118.5)million, reflecting negative cash flow in the second quarter. Netcash flow from operations includes the decrease of EUR 2.3 (41.2)million in net working capital.

Tax payments amounted to EUR 16.6 (9.5) million in the six-monthperiod.

Acquisitions totalled EUR 3.3 (11.6) million in the six-month period.

The equity ratio was 40.7% (38.8). Gearing was 30.1% (29.3).Interest-bearing net debt totalled EUR 139.2 (138.1) million,including EUR 240.5 million in interest-bearing debt, EUR 11.9million in finance lease liabilities, EUR 11.4 million in financelease receivables and EUR 101.7 million in cash and cash equivalents.

The interest-bearing long-term debt consists of EUR 150 million inbonds, of which EUR 100 million will mature in December 2013 and EUR50 million (private placement) in July 2012. Short-terminterest-bearing loans include EUR 55 million drawn from the EUR 250million syndicated revolving credit facility maturing in December2011, EUR 34.8 million in commercial papers issued under the EUR 250million Commercial Paper Programme and EUR 0.6 million usage of othershort-term credit lines.

InvestmentsAccrual-based investments totalled EUR 30.5 (59.4) million for thesix-month period. Capital expenditure, including financial leasing,accounted for EUR 29.3 (47.2) million and investments in subsidiaryand associated company shares for EUR 1.2 (12.2) million.

PERSONNEL
In February, Tieto started personnel negotiations to decrease thenumber of employees by some 350 people, of which approximately 170are in Sweden and 180 in Tieto International. The adjustments werepart of the Performance Improvement Programme.

On 7 April, Tieto started new Group-wide personnel adjustments inselected operating countries, mainly in Europe. The adjustments arepart of new streamlining actions targeting at annualized cost-savingsof EUR 100 million. In Finland, the negotiations were concluded on 28May, and as a result, Tieto will make a total of 220 personsredundant and temporarily lay off no more than 1 500 employees during2009 either for a fixed period or until further notice. In Sweden,personnel negotiations are expected to lead to a reduction of 150employees and in International, 170 employees.

As a result of the completed personnel negotiations, approximately500 employees have been made redundant by the end of June.

The number of full-time employees totalled 16 195 (16 301) at the endof June. From the beginning of 2009, the net number of employeesdecreased by 447 in onshore countries, and increased by 192 inoffshore sites. Acquisitions, divestments and new outsourcingcontracts added the net number of employees by a total of 35.  Yearon year, the number of employees in the global delivery centres hadincreased by 21% and totalled about 4 480 (3 700), or 26% (21) of thetotal headcount at the end of June. Global operations have grownfast, especially in India and China.

The employee turnover for January-June stood at 6.2% and the 12-monthrolling turnover at 8.9% at the end of June. The average number offull-time employees was 16 650 (16 361) in the six-month period.

MANAGEMENT
Per Johanson started in his new position as Executive Vice President,Financial Services and as a member of the Leadership Team on 16 May.

SHARES AND SHARE-BASED INCENTIVES
On 26 March, the Board of Directors decided to convey a total of74 260 existing shares held by the company, for free, to the keypersonnel participating in Tieto’s Share Ownership Plan 2006-2008, asa proportion of the reward to be paid as shares on the basis of theearning period 2008. The conveyance took place at the end of April.

During the second quarter, Tieto completed the share repurchaseprogramme of 252 610 shares. The share repurchases relate to thecompany’s incentive programme for key personnel announced in December2008 (Performance Share Plan 2009-2011). The plan includes onethree-year earning period, which will end on 31 December 2011. Ownshares were purchased with the company’s distributable funds,reducing the company’s distributable non-restricted equity.
At the end of June, the total number of shares amounted to 72 023 173and the share capital to EUR 75 841 523. The number of shares in thecompany’s possession totalled 540 000, representing 0.7% of the totalnumber of shares and voting rights. The outstanding number of shares,excluding the shares in the company’s possession, was 71 483 173.

CHANGE OF THE COMPANY NAME AND DOMICILE
TietoEnator Corporation’s company name was changed to TietoCorporation (Tieto Oyj in Finnish and Tieto Abp in Swedish) on 30April 2009, and the company’s new domicile is Helsinki, Finland.These changes were decided by the Annual General Meeting on 26 Marchand they were entered in the Trade Register on 30 April.

NEAR-TERM RISKS AND UNCERTAINTIES
As close to 40% of Tieto’s net sales are generated in non-eurocountries, further weakening of currencies, especially the Swedishcurrency (SEK), would have a negative impact on net sales andoperating profit translated into euro.

Weak demand for IT services might lead to lower utilization ofresources and hence lower profitability if the company is not able toadjust its cost base fast enough to compensate for negative changesin the market situation.

Changes in the company structure and the ongoing streamlining actionsincluding personnel reductions may create uncertainty. Additionally,credit risks related to receivables might pose a growing risk.

A comprehensive description of the major long-term risks is availableon the company’s website.

OUTLOOK FOR 2009
Uncertainty continues in the IT market. In the full year, Tietoexpects the IT services market to decline and tough market conditionsto continue. Therefore Tieto expects its full-year net sales andoperating profit to decline from last year.
In the Nordic countries, the best prospects for growth in 2009 areseen in the outsourcing of application and ICT infrastructuremanagement.

Financial calendar for 2009Interim report for January-September 2009 on 21 October

Accounting policies in 2009The interim report has been prepared in accordance with InternationalAccounting Standard (IAS) 34, Interim Financial Reporting, as adoptedby the EU.

Tieto has reclassified all internal long-term loans to Swedishsubsidiaries as a net investment in a foreign operation according toIAS 21. All related unrealized foreign exchange gains and losses fromthe net investment are recognized directly in shareholders’ equity.Excluding this change the accounting policies adopted are consistentwith those used in the annual financial statements for the year ended31 December 2008 and as described in the annual financial statements.Of the new standards and interpretations Tieto adopted in 2009, IFRS8 “Operating Segments” is the only one with a major impact on theGroup’s financial statements.

Tieto adopted a new financial reporting structure at the beginning of2009. The countries are the main operating segments and its reportingcovers Finland, Sweden and International. Reportable segments aredefined based on IFRS 8, “Operating Segments”. Deviating from IFRS 8,Tieto will start to report the Group’s net sales by products andservices in 2010.

TIETO CORPORATION
Tieto is an IT service company providing IT, R&D and consultingservices. With approximately 16 000 experts, we are among the leadingIT service companies in Northern Europe and the global leader inselected segments. We specialize in areas where we have the deepestunderstanding of our customers’ businesses and needs. Our superiorcustomer centricity and Nordic expertise set us apart from ourcompetitors.