Shares in Nordic IT services vendor TietoEnator slumped 15% after the company’s second-quarter results revealed an unexpected drop in net profit.
For the three months to the end of June, TietoEnator reported net profit of 5.0m euros ($6.9m), down from 17.4m euros ($24.0m) in the same period the previous year, on revenue that grew 5.4% to 434.2m euros ($599.4m). The dip in profitability was partly due to restructuring expenses totaling 3.3m euros ($4.6m) and capital losses of 4.9m euros ($6.8m) relating to the divestment of parts of the company’s banking and insurance business in Germany.
According to TietoEnator, higher labor and subcontracting costs also had a negative impact on profit levels. The company added: In some parts of the solution-based business profitability suffered from loss-making delivery projects and high development costs.
Following its poor second-quarter performance, TietoEnator said that reaching its full-year operating profit guidance of 124m euros ($171.2m) would be difficult. Restructuring and related costs are expected to exceed the 12.4m euros ($17.1m) reported in 2006, while TietoEnator is also struggling to turn around its struggling banking and insurance and healthcare business units.
Revenue from the banking and insurance division fell on an organic basis during the quarter and the business made an operating loss of 7.6m euros ($10.5m), compared to a profit of 4.9m euros ($6.8m) in the same period the previous year. The healthcare and welfare segment also made a loss on sales that fell 5%.
On a brighter note, TietoEnator’s largest division, telecom and media, looks to have bounced back from its terrible start to the year. The operation reported an operating profit of 12.5m euros ($17.3m), up from 7.7m euros ($10.6m) in the second quarter of last year, on revenue that grew 21% to 162m euros ($223.6m).
After a solid performance in the first three months of the year, TietoEnator looked to have bounced back from a difficult 2006. However, its second quarter performance suggests that serious underlying problems persist and the company was forced to admit that it would struggle to meet full-year earnings targets.
TietoEnator said that higher labor costs had been at least partly responsible for the fall in its profit level, with collective agreements in Finland and Sweden expected to increase pressure on salaries going forward. The company is attempting to relieve some of this pressure by moving work to lower cost locations such as Poland, the Czech Republic and Belarus, but this might be a case of too little, too late.
Indian outsourcing vendors are rapidly increasing their presence in the Nordic region and winning contracts with customers such as stock exchange group OMX and Danske Bank. The most notable move came just over 12 months ago, when Wipro acquired Finnish mobile telecom software development firm Saraware. TietoEnator will need to ramp up its presence in low-cost locations, and quickly, if it is remain competitive against the Indian giants.