Tietoevry Oyj

OMXH:TIETO

Earnings Call Transcript 2023-Q1

[Tommi Jarvenpaa, executive]

Good morning, and welcome to Tietoevry's First Quarter 2023 Earnings Webcast. My name is Tommi Jarvenpaa, the Head of Tietoevry Investor Relations. We had a good start for the year with strong growth and solid profitability. Next, our President and CEO, Kimmo Alkio, together with our CFO, Tomi Hyrylainen, will go through the highlights and results of the quarter. Kimmo, please go ahead.

[Kimmo Alkio, executive]

Thank you very much, and a warm welcome also on my behalf to our first quarter results announcement. Very pleased to be sharing today our good start for the year, and our continued consistent execution of our specialization based strategy. Q1 is characterized as strong growth and solid profitability, as well as strong overall financial performance across all key indicators. We were able to deliver revenue growth of 8%, driven especially by 2 of our software businesses, Banking & Care and the digital engineering business create adjusted EBITDA margin of 12.3% and importantly, profitability improving in all of our businesses. And furthermore, today, we are confirming that our 2 strategic reviews, Tietoevry Banking and TietoevryTech Services are progressing exactly towards our original plan.

In light of the dynamism of economy and geopolitics, I'd like to confirm our view of the market and current customer expectations. Very fair to confirm the perspective of continued healthy demand into technologies, cloud data and security which actually drive our customers' competitiveness and support the important objectives for our clients on business resilience, efficiency and the importance of business continuity. So these factors on market characteristics, customer requirements, we see being consistent with our last couple of prior quarters and important to confirm the investment appetite into these areas of cloud data and security.

We also naturally want to confirm the era of high inflation. Inflation remains at high levels. And we'll further deserve attention to our pricing practices and drive for efficiency at a similar level of urgency and importance as in prior quarters. And we are naturally confirming given that we have approximately 2,200 colleagues in Ukraine, our full commitment -- full continued commitment to support the safety and well-being of our Ukrainian colleagues and their families, very important for the company.

I'd also like to offer the perspective of our strategic fit to the main dynamics in the global marketplace of technology services and software. We continue to very actively drive our shareholder value acceleration by our specialization based strategy and related businesses. We continue to take advantage after cloud data and software related market momentum and the customer appetite for investing into these technologies. Furthermore, our strategic reviews of banking and tech services continue to be integral parts of our planned value acceleration. And now after 5 quarters of executing our new specialization based strategy, we are well on our way of repositioning the company as a leading software and digital engineering company towards scalable market segments.

I would like to furthermore provide our status in relation to the commitment to science-based targets as exactly 1 year ago, we received the validation for our commitments, which are aligned with the highest ambitions to limit global warming below 1.5 degrees. Some of the main developments to share today. We have committed to reduce 90% of our emissions by 2026 and our achievement to date is 70% already. Currently, we use 95% of renewable electricity compared to our 100% target level by 2026. We have furthermore achieved 83% reduction of travel-related greenhouse gas emissions per person as compared to pre-COVID levels that also reflect the new virtual ways of working and very practically refined and update the travel policies. Also, 30% -- 34% of our biggest suppliers by emissions have their commitments towards science-based targets.

Overall, the importance of sustainability remains at a very high level, and we continue to drive our part of the ambitious corporate climate actions that we can contribute to jointly with our customers. I'd like to naturally again share some of the customer successes in the beginning of 2023. I'd like to share 4 samples that reflect the good competitiveness as Tietoevry we have. In the example of Goodyear partnering with our Create business for driving new type of innovation, both in terms of efficiency, sustainability and competitiveness by providing the state-of-the-art fleet and tire management solutions, naturally utilizing all the latest and highly advanced technologies.

Furthermore, in the health care sector, we have been able to drive market expansion with 12 of 21 counties in the country of Finland by utilizing our health data platform, enabling a 360-degree patient history for higher patient care quality and very importantly, care personnel experience, better access to data and better productivity. Again, utilizing the latest data-centric technologies and the type of integration across a multitude of back-end systems. Furthermore, a long-term customer of insurance, extending the partnership with our tech services for modernization -- driving modernization and us being the adviser on the future cloud journey. And furthermore, in the case of the software business in banking, extending the agreement in Norway, which Para Bank and West for the core banking cards as well as the very important part of financial crime prevention.

So some of the samples that reflect our good momentum in the marketplace, as mentioned in the early part of this year.

And then we move into our financial performance and the business highlights. So to confirm our -- the success in Q1 across all core financial indicators, the revenue of EUR 744 million, the earlier mentioned 8% in adjusted EBITDA, EUR 92 million, 12.3%, furthermore and importantly, healthy cash flow of EUR 104 million and order backlog at EUR 3.39 billion organically up by 5%, also in terms of the realizable backlog for this year. So good to see that all important indicators on performance have given us a really solid start for the year. Let us then move into the business-specific overviews. In the case of Tietoevry Create, revenues of EUR 223 million, a healthy growth of 9% and adjusted EBITDA of 15.2% level. We -- I want to confirm we continue to see the high market activity within the digital and software engineering services category. And while we do see some early signals in very specific regions of potential delays or intermittent pauses in customers' decision-making, very soft and early signals, I believe, not unusual in the case of some of the economic volatility and we naturally continue to highly believe in the market opportunity and the global expansion potential that we have.

We did experience strong growth in our international businesses over 15% and actually in Norway, 10%, and we see favorable development to be fair, also across our Nordic countries. And profitability naturally supported by growth and paying attention on productivity improvement. Tietoevry banking experiencing continued strong revenue growth, revenues of EUR 131 million, 15% growth, a 10.7% adjusted EBITDA. From a top line standpoint, strong growth driven healthily across the portfolio of our banking solutions in Q1 covering cards, wealth, credit and financial crime prevention and importantly, furthermore to highlight here that we did in Q1, have a few percentage points of positive impact from earlier project closures than originally planned, thus potentially impacting the second quarter. And to confirm the profitability supported by -- naturally by growth and the 2022 efficiency measures that we did run throughout the last fiscal year.

And in Tietoevry banking, the combination of personnel cost inflation and technology-related partnership cost levels do impact the speed of profitability improvement and plenty of actions to be conducted to offset the impact of these higher inflation components. Tietoevry Care continuing on its strong path, both in terms of growth and profitability, revenue growth of 15%, profitability slightly over 30%. From a top line standpoint, as in this business, we have 4 domains. We have the health care, social care, laboratory and data-centric services, the health care side up by over 20%. In this highly software-centric business through our LifeCare platform, we did see further positive revenue development due to the social and health reform in the country of Finland, and this high level of activity, which took place also in the fourth quarter of last year and Q1 of this year may impact the demand in the second half of the year. And we are confirming very straightforward that the favorable profitability development continues, given the foundation of scalable software-centric business.

Next, we go into Tietoevry industry. Here, we have a consistent perspective in relation to prior quarters, consistent performance in terms of revenue, modest 4% and profitability healthy at slightly over 17%. Within the business, Q1, strong progress in our case management. Public 360 software over 20% growth and in pulp and paper over 10%. We are running slightly over 60% of the paper and pulp manufacturing sites in the industry at large is growing over 10%. And to confirm, and this is like the last time we do mention, as many remember from the past year, the large customer contract ending approximately 1 year ago in the data platform services did have a negative impact still of 2 percentage points on the top line. And we continue to drive the profitability consistently. Then we go into more towards the managed services type of business, both Transform followed by Connect.

Tietoevry Transform, continuing its healthy and good turnaround since approximately 4, 5 quarters ago, again delivering similarly to the fourth quarter, healthy growth and improved profitability, revenue growth of 6% and profitability slightly over 9%. Strong growth driven of over 10% in the subindustry sectors of industries at large, the forest and public while decline in retail and financial services, that's to give a bit of a reflection on the dynamics within the Transform business. And profitability improvement continues to be driven by the focus on efficiency and naturally being contributed by the actions taken during fiscal year 2022.

This is the other business where we have seen slight signals of potential delays in customers' decision-making. And now as we have mentioned, this has been visible in 2 of our businesses slightly in the Create business and here in Transform. And then into our Connect business, the first quarter organic growth of flat being 0%, profitability slightly over 5%. Continued healthy development in the more scalable side of the Connect business in cloud platforms and security growth of 16%, while traditional infrastructure services continue to decline by approximately 6% level. Profitability drive continues to be high on the agenda supported by the efficiency programs from the past year. To be fair, and as expected, partly offset by the annual price discounts that do kick in early Q1 each year, and naturally the inflation on the cost side, both in personnel and from the technology cost standpoint.

So this would conclude the business overviews of our 6 businesses. And naturally, next time we'll be reporting 5 as Tietoevry Transform and Connect are combined as of April 1 into tech services. Next, I would like to confirm our progress and plan in relation to 2 of our strategic reviews, both for banking and tech services and we want to confirm these are both progressing on schedule. Both follow the original 12- to 18-month time frame as originally announced. In the case of Tietoevry Banking, this was announced on the 22nd of July last year. We have done naturally a lot of the preparatory steps. At this stage, the stand-alone legal structure designs completed, implementation underway.

Current activities extensively in confirming and defining the stand-alone strategy, the long-term business plan and financials. And naturally, preparations are full speed moving ahead towards a stand-alone listed company. And we anticipate the strategic review decisions to be taking -- they're taken according to the original schedule during the third and fourth quarter of this year.

Next, into the Tietoevry Tech Services, and this was announced on 30th of November last year and to confirm the 12- to 18-month time frame remains valid and integration has gone well. It's big integration, a lot of work taking place in the first quarter of this year going live on the first of April. And we shall be doing the Q2 reporting in the new structure. Furthermore, as we drive the integration, it includes reworking the operating structure, driving operational simplification. And as announced earlier today, efficiency measures have been initiated, leading to a potential reduction of up to 500 roles. The preparations for stand-alone strategy, long-term business plan and financials are ongoing, aiming as originally announced at the potential sale or listing as a spin-off.

I'd like to furthermore add a little bit of color to the earlier announcement of this morning in relation to the Tech Services announcement, which was sent out in the press release. As the combined tech services, we have very rich set of capabilities for driving enterprise-wide transformation, leading technologies capabilities, covering the full stack of IT services and modernization from the data layer, application layer to the infrastructure layer, and we believe that this combination is very competitive in the marketplace.

To confirm, currently, the focus is on integration to improve competitiveness through a highly customer-centric operating model, a lot of responsibility being given to the customer teams highly as mentioned, customer-centric structure, including the financial structures behind to be driving the operational simplification and very importantly, driving efficiency, given the price sensitivity of this business in the market and our aim to further improve financial performance for Tech Services as we move forward.

And further to confirm on the announcement today, efficiency measures leading up to this -- potentially up to 500 roles. This will follow the implementation, naturally the local regulatory practices as they relate to each country. The realization of efficiency and related measures, we anticipate to take place during the third quarter and onwards. With this in mind, next we go into the CFO.

[Tomi Hyryläinen, executive]

Thank you, Kimmo, and good morning, everyone. I'm very pleased with our Q1 performance. We delivered a strong quarter with all key financial metrics as commented, including revenue growth, profit and cash flow. Our organic growth was strong at 8% with reported growth at 2% due to heavy FX headwind of EUR 46 million arising from the depreciation of Norwegian and Swedish currencies. We delivered solid profitability of 12.3% improving in all 6 businesses as commented during this high inflation era.

Our profit improvement was supported by strong growth, continuous attention to efficiency and tailwind from our 22 efficiency programs. Our onetime cost estimate for the year is 1%. However, as we have communicated, the strategic reviews will generate additional onetime costs. Our best estimate as of today is that this cost will be approximately 1.5 percentage of revenues. These costs include all strategic review related costs, including all transaction-related costs, legal separation cost, refinancing-related costs and cost for the today announced Tech Services operational simplification. Good to note that the strategic review related onetime costs are not time stamped for 2023 but will occur when we make progress with the strategic reviews.

Effective tax rate for Q1 was 22%, which is the same as the effective tax rate for the full year. For 2023, we will be booking the quarterly taxes using the estimated effective tax rate for the full year, which reduces the volatility between the quarters. On cash flow, as mentioned, we delivered strong operating cash flow of EUR 104 million compared to EUR 62 million of Q1 '22. Our strong cash flow was driven by improved profitability and decrease in net working capital. Net working capital decrease was due to normal seasonality with increase in customer prepayments and vacation pay accruals. Our free cash flow was also strong at EUR 69 million taking our net debt down to EUR 632 million at the end of Q1. Overall, the company is in a very strong financial position with net debt-to-EBITDA at 1.3x at the end of Q1.

On attrition, it continues to decrease with 12-month rolling attrition being 13.5% at the end of Q1 compared to 14.4% at year-end. Our net headcount was slightly down from Q4 due to slower recruitment pace in response to lower attrition and continued planned headcount decline in Connect and Transform. We keep our salary inflation estimate for the year at 4% to 5% and remind that significant portion of this will impact already Q2 results, which is consistent with prior years. Next, I'll summarize the performance drivers for Q2. On growth drivers, we expect continued good momentum in Tietoevry Create, Banking and Care. The decline in traditional infrastructure, which is anticipated to continue driven by acceleration of cloud transformation. And on profit drivers, the inflation is expected to continue at high levels, consistent of the few prior quarters, creating it the demanding agenda for all market participants to maintain and expand margins.

High technology cost, as commented, will continue impacting primarily banking and connect businesses. And banking legal demerger will result in additional cost having negative 1.5 percentage point impact to banking profitability. This cost increase is due to Norwegian financial activity tax which is a specific tax for the financial services, legal entities. On the positive side, efficiency measures, as commented executed during '22 will give a tailwind still into Q2. FX headwind, we expect to continue at very high levels, negative 46% if the currency rates continue at these levels. In addition, working day impact will be significant having negative 1.4 percentage point impact to Q2 organic growth.

Next, a brief look into our Q2 profit outlook per business. Two of the businesses, Banking and Transform, we expect to be above the prior year Q2 profit level. Two businesses, Create and Connect, we expect to be at or above prior year levels. And Care, we expect to be at or below prior year with the industry expected to be below Q2 of prior year. Good to remind as mentioned that connect and transform will be reported as a combined business of Tech Services in Q2 reporting. Now back to you, Kimmo.

[Kimmo Alkio, executive]

Thank you, Tomi. So then on the -- towards the end of our presentation today, a bit of a synthesis of our start for the year. So we have seen a positive start for 2023. This is consistent with our plans and expectations. We do expect continued good execution of our specialization based strategy. Our drivers for the next quarters remain consistently around driving continued profitable growth in the categories that in the marketplace have investment and growth appetite, specifically in software and digital engineering businesses.

Our strategic reviews continue to be high on the agenda and we also naturally continue a lot of attention on offsetting the inflatory implications of the business. And furthermore, employee engagement at a healthy level, the value base is very strong, attracting great talent, and we anticipate to build a great place for our 24,000 colleagues and also attracting further talent. So this would be concluding, Tomi's and my overview of the report. Thank you.

[Tommi Jarvenpaa, executive]

Thank you, Kimmo, and thank you, Tomi. We are now ready for the questions.

[Operator]

[Operator Instructions] The next question comes from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

Thank you, a couple of questions from my side, if I may. Congratulations to our strong numbers, I think. First and foremost, if you can comment a bit more on your order backlog and order intake and possibly give a little bit more flavor on the graphical touch and perhaps on the business segment. Where do you see the pros and cons from your perspective in the.order backlog?

[Tomi Hyryläinen, executive]

So thank you for the question, Daniel. Order backlog development, as Kimmo reflected in the presentation, was favorable. So we increased our order backlog from Q4 into Q1, approximately organically over 5%. In addition, when we compare the order backlog into Q1 of prior year, we are organically -- I call it organically, there's an FX difference there compared to reporting. We are 5% better including the realizable for the year, that's also 5% higher level. And on the sort of book-to-bill, we didn't report it and we don't tend to report, but naturally, that was over 1 for Q1.

[Daniel Djurberg, analyst]

And is it possible to give a flavor from what you see on the geographical or a business segment perspective, i.e., is it very strong somewhere and why is it light in other segments or countries.

[Tomi Hyryläinen, executive]

So if we look at businesses, it was actually strong across all the businesses. On geographics, at sort of -- I don't actually now have those numbers, but I would tend to say it was across the geographies as well.

[Daniel Djurberg, analyst]

Okay. And if I may, you comment about that we do have, obviously, inflation in the OpEx and salary uptake, et cetera, that you highlight, and you will balance this with pricing, automation and I guess, the age pyramid. At the same time, we've seen a couple of your -- or at least one of your competitors here in Sweden talking about that it's quite tough to get the younger or consulting into high utilization. And my question is really, if you see a similar thing in creating if that could impact to this pyramid age play to get to balance the value inflation.

[Tomi Hyryläinen, executive]

Yes, that's, of course, an interesting question. We don't see that in our business, to be honest. And our productivity improvement in create as well, which we reflected doesn't sort of talk towards that type of scenario.

[Kimmo Alkio, executive]

And to confirm, the attrition levels are lower, similar to the fourth quarter. So we are seeing that clearly. And then we tend to have our young graduate programs for specific time of the year. So we think it's very important to continue to bring young talent in for a multitude of reasons, including the efficiency side.

[Daniel Djurberg, analyst]

And if I may, I have one final question here. Obviously, good cash flow and net debt to EBITDA were low now at 1.3. I also know, obviously, about your strategy here on the banking and tech services strategic reviews. But if those processes hampering or excluding but you also can do niche or focused M&A or acquisition in some areas to strengthen other parts of the business. So can you comment a little bit on your acquisition strategy at these times when you do this? Strategic reviews at the same time?

[Kimmo Alkio, executive]

So we -- I think here, we are glad to confirm our consideration on the inorganic. And to be fair, this was also shared when we launched the new strategy in October 2021, we were very open that we are building M&A capacity most likely into the kind of categories with higher growth and scale. And there we commented and I confirm that it's more likely in the areas of Banking, Care and Create. So with that in mind, we confirm it is a vehicle in our toolbox.

[Daniel Djurberg, analyst]

And I guess it's a little bit too early to talk about the cash flow effect from the new program. You commented that it will not be fully impacting the 23 numbers on the cost side. So I guess it's -- would be on the cash flow, similar 2024 play mainly or is it possible to say anything about the 500 employees here in Tech Services?

[Tomi Hyryläinen, executive]

So this announcement today, we are planning to have that completed before the end of this year. Yes, we can confirm that.

[Operator]

The next question comes from Matti Riikonen from Carnegie Investment Bank.

[Matti Riikonen, analyst]

I have 5 small questions. First, related to banking. You talked about technology cost inflation. And could you go a bit deeper what that means? Is it more like OpEx-related cost or is it related to potentially third-party licenses, which -- where the prices increase. So where does it actually come from?

[Tomi Hyryläinen, executive]

So Matti, this is exactly OpEx. This is software and hardware costs in general, yes, including licenses.

[Matti Riikonen, analyst]

Then in Care, you flagged that there would be or could be lower demand in the second half of the year. I was wondering that when you reported very good growth numbers in Q4 and Q1, did that include any kind of additional element of license revenue or was this purely kind of consulting, which peaked in Q4 and Q1?

[Kimmo Alkio, executive]

So to confirm, so here, our perspective would be very consistent with the view we had as part of Q4 report. That in this case, this is about the LifeCare solutions suite, which has become well competitive, well scalable, and when we do the release of new software versions, it is intended to create additional revenues. And this has impacted fourth quarter and first quarter and we have been mindful that as the other reform in the country of Finland goes into effect, there is potential or likely delays in decision-making because it's political. So these are the factors behind why we anticipate there can be slower decision-making in the second half.

[Matti Riikonen, analyst]

Then related to the strategic review and the 1.5% additional cost of sales that you introduced now in this report that included Tech Services and the restructuring of 500 -- or potentially 500 employees, which you announced this morning. So I was wondering what's the share of Tech Services out of that 1.5%? Can you talk something about that?

[Tomi Hyryläinen, executive]

Yes. Good point, Matti. Of course, now, as you rightly pointed out, we gave a number for this onetime cost, which we were prepared to give at the time of Q4. Now our estimate is this 1.5% and it will be roughly 50-50 divided between Banking and Transform strategic reviews.

[Matti Riikonen, analyst]

And but you're not kind of willing to say how much the Tech Services -- is it so that the tech services part is the part that we saw in today's announcement that you will consider personnel reductions there? And will Tech Services have other kind of costs that are included in the 1.5%?

[Tomi Hyryläinen, executive]

So let me try to be more specific. So 1.5% includes strategic reviews -- review cost for both Banking strategic review and Tech Services strategic review. And half of that is Banking, 0.75% and half of that is Tech Services. And these cost elements are all transaction-related costs. So this reads as bankers cost. And naturally, those will occur, if any transactions occur and specifically at that point in time. So that's why we don't time stamp this 1.5 when it's going to occur. It will occur when we make progress with each of these reviews. Hopefully, that clarified.

[Matti Riikonen, analyst]

To some extent, but I'm thinking about the restructuring cost related to the announcement this morning. So will that be included in the 1.5% on the Tech Services side? Or is this going to be kind of additional?

[Tomi Hyryläinen, executive]

No, absolutely. It is included. Yes. Good to clarify.

[Matti Riikonen, analyst]

Then regarding industry, you talked about case management growing by over 20% and Pulp & Paper over 10%, yet the reported organic growth was 4%. There was this 2 percentage point impact on data platform services. So I'm kind of figuring out what were the areas that declined in order to get to only 4% if these that you talked about where clearly higher than that. So which areas were softer?

[Kimmo Alkio, executive]

So in the other sectors, just to confirm, so the other sectors that in the business are there is the data platform, it's the energy and utilities and industrial and education. So as known, this business has a multitude of so-called niche software businesses. So Matti, that would be the answer, then naturally, these remaining parts were not performing at better levels.

[Matti Riikonen, analyst]

And then finally, what do you consider as a normal attrition rate for Tieto? We see that, of course, the attrition rates have been coming down in the whole industry and it is constantly coming down in your numbers. But what's the kind of end level that you think you can land and then that's basically the normal. So are we talking about 10% or something else?

[Tomi Hyryläinen, executive]

Yes. So we actually have been talking about this internally as well. We think a normal healthy attrition is somewhere around 10%. Pre-COVID, we were there, 10%, 11%. Now it's 13.5%, it's a rolling number. We start to come close to this pre-COVID. Whether we call them now normalized levels, that's a matter of -- or choosing the term.

[Operator]

The next question comes from Sami Sarkamies from Danske Bank.

[Sami Sarkamies, analyst]

I have a couple of questions. Firstly, going back to the cost savings topic we just discussed. Can you give the savings amount in euros regarding the plan that was announced today for Tech Services. And is that included in the earlier 1% one-time item estimate or in the new 1.5% one-time item estimated rate separations.

[Tomi Hyryläinen, executive]

Yes. Thank you for the questions. We don't give out a savings target for this externally. And yes, it is included in this 1.5%.

[Sami Sarkamies, analyst]

And can you provide guidance on when this program will start to have an impact on your financials?

[Tomi Hyryläinen, executive]

Yes, we expect the impact to begin starting Q3.

[Sami Sarkamies, analyst]

Then other question on Banking. You did flag 1.5 percentage point margin headwind in Q2 related to separation. Did you already have these costs in Q1? And will this be the level also going forward?

[Tomi Hyryläinen, executive]

Yes. So good question. We did not. This relates to the legal separation of the Banking business, and it will be a new cost element for Q2 and naturally it reflects the existing setup that we have.

[Sami Sarkamies, analyst]

And then finally, on the demand outlook, you did flag some cautiousness at Create and Transform. Could you disclose which geographic regions you were referring to and sort of which customer industries have become more hesitant?

[Kimmo Alkio, executive]

So I think our comment here would be the following that in the case of Transform, so I'm sure as recognized, the Transform business is extensively Nordic-centric. So that naturally relates, with that in mind, to Norway, Sweden, Finland, there's nothing, I would say, profound, nothing systemic. First of all, but it's just a reflection, good to see that there can be some delays in decision-making.

In the case of Create, that's well recognized over half the businesses outside the Nordics, so the international growth potential is tremendous. And we do not comment which country, but the main signals have been very country-specific and actually outside Nordic.

[Operator]

The next question comes from Jaakko Tyrvainen from SEB.

[Jaakko Tyrväinen, analyst]

A couple of questions from my side. I'll take them one by one, and start with Create where you head count continued to decrease quarter-on-quarter basis. Are you preparing for a slower demand growth here? Or would you like to see higher headcount in this segment in order to respond to demand growth.

[Tomi Hyryläinen, executive]

Yes, very good question, Jaakko, and good to notice that when you look at the reported number, the exit from Russia is in the Create number. So there's an additional 100 FTE reduction, which is inorganic. So it's not all sort of operational decline, okay? And then sort of overall, we are trying to be mindful of the attrition decline. In my view, we are now at the end of Q1, a bit low, which is visible in the productivity of the business and the over 15% margin currently. We expect to be picking up on the recruitment pace towards the end of Q2 and in Q3, specifically.

[Jaakko Tyrväinen, analyst]

Then on Banking and the growth, quite nice growth in the segment. Could you shed some light how much share of the growth is coming from so-called existing customers? And how much growth is coming from totally new clients?

And also a follow-up, how is the growth looking outside the Nordics. It is -- can you say is it above or below the segment overall?

[Kimmo Alkio, executive]

Okay. So I think -- so a reflection on the business mix of Banking, so good to recognize that there are 6 businesses within Banking. The banking as a service, which relates to core banking, there's the cards, there are payments, there's wealth, credit and financial crime prevention. There is a strong installed base in each of the businesses, the business growing, driving the predominant international growth in a positive way relates to payments.

So with that in mind, the potential likelihood of winning new footprint and new clients internationally is more likely in the payments category. Then further other details to be fair, we don't open up externally. But with that in mind, with the strong installed base, so that gives elements, of course, of visibility into the short and midterm revenues.

[Jaakko Tyrväinen, analyst]

Then a bit more general one regarding Finland. We know that the likely coalition of the new government is indicating a healthy spending cuts. What is your kind of internal assessment on this customer? Do you expect the public spending in -- on IT to decline going towards '24 and which segment in your case would be the most impacted?

[Kimmo Alkio, executive]

So we -- our expectation would be the following. We expect this whole consideration for capacity services and the type of efficiency drive, just to continue. It's been there many years. And it's very fair to assume that will continue, meaning the kind of cost efficiency and price erosion in the managed services side. That's sort of political question on which government in place. But that's business logic and industry phenomenon that will just continue.

Second factor, investments into cloud and data technologies across the different parts of the government, I would anticipate that -- I mean, that modernizing the way governments serve, the citizens also in the country of Finland, that will continue, will there be some volatility? Your guess is as good as ours, but we don't expect anything very significant. Then in the Sote reform, we have a very deep and broad footprint in supporting actually the health care and social care systems in the country. And we have one of the most advanced open -- EHR open architecture. And as today referred to a winning number of the regions already within this Patient 360, where we integrate even up to 80 systems for the benefit of doctors and nurses.

So independent of the way the investment levels, it will be a very dynamic competitive market and we are playing hard to win more.

[Operator]

The next question comes from Felix Henriksson from Nordea.

[Felix Henriksson, analyst]

I have a few. I can go one by one. Firstly, starting on great, you did flag some hesitancy in customer decision-making in certain pockets and could you perhaps comment a bit on the trend in the utilization rates in the months of Q1? Was there sort of a trend going on one way or the other in terms of that metric?

[Kimmo Alkio, executive]

So maybe I'll make a short comment. Tomi will add if he wants to. So first of all, I want to confirm that we have a very strong belief that the market that Create is and addressing in the cloud native data, data management, data platforms, analytics towards machine learning, AI, that market will very likely continue to be very active and attractive short term, midterm and long term. So the investments in the world probability of being geared to these segments where create place, we think it's a really good opportunity.

Our comment today was very specifically on delays of decision-making, as earlier mentioned, relates to very one specific part of the world, so given the macro volatility, we thought it's fair to share that perspective as we did see that in some of the customer negotiations. Then regarding the type of utilization levels, so a slight improvement in utilization. There has been, as Tomi commented, lower attrition levels. We expect to manage well the type of utilization, billability and headcount increase towards the end of the year, to continue to build and scale this business to win market share.

[Felix Henriksson, analyst]

Then regarding Care, obviously, strong 15% organic growth for Q1 driven by the social health reform in Finland. But could you perhaps give any color on the growth rates in Care that you witnessed outside of Finland?

[Kimmo Alkio, executive]

So in the Care business, we have slightly different business mix in the different countries, so that one can read it also positively that there's plenty of upside. And it is -- and we have shared it open that we tend to have large footprint in the social care, specifically in Sweden. So these are some of the factors that are providing the good footprint across the Nordic countries and giving us also opportunities to extend the portfolio over time into even richer set of software-centric services. First across the Nordic region, over time potentially towards Europe.

[Felix Henriksson, analyst]

And then on Banking, obviously, strong growth there, but there's been quite a bit of turbulence around the financial sector during the quarter. Has this been in any way, visible in your discussions with your clients?

[Kimmo Alkio, executive]

Given that the customer base is extensively Nordic-centric, no. We have not seen impact as commented earlier, payments is more global. We think that in the payment side, we are strong, as an example, in virtual account management, kind of on the corporate side. So, I think we are seeing interesting opportunities in different markets. And of course, we are always mindful considering might there be some market slowdown, nothing tangible in the banking side, a very fair question.

[Felix Henriksson, analyst]

And then a final one for me. You highlighted the margin headwind for Q4 for banking from the Norwegian financial tax, just to make sure what's this sort of a headwind that's isolated for the second quarter? Or will this also be a headwind for the quarters going forward as well?

[Tomi Hyryläinen, executive]

Yes. Good question. So this is for the Q2, this 1.5%, which we said. And then, of course, depending on the structure of banking, it might vary then going forward. But this is nothing that will go out and be only Q2 specific, this tax element. So it will stay with the banking.

[Operator]

The next question comes from Aditya Buddhavarapu from Bank of America.

[Aditya Buddhavarapu, analyst]

Just very quickly following up on your comments on some of the delays you talked about in decision-making. You said that's very specific to a few regions. Can you just maybe talk about the general tone of conversation with customers and on where you're seeing the delays. Is there any -- I mean, what gives you any sort of signs that, that could pick up for the rest of the year?

[Kimmo Alkio, executive]

So to be fair, that's a bit difficult to forecast. We have only given a heads up at this point in time, we are comfortable with our forward-looking projections. So with that in mind, we do not expect anything systemic because -- anything like a broader slowdown. Not at this point in time. Might it impact a month or a quarter in a business, these were some of the kind of signals we had offered today. We stand very firm with our annual plan in each of the businesses.

[Aditya Buddhavarapu, analyst]

Just and then on the cost savings. So you've announced the additional adjusted. Is that already included in your margin guidance for the year as you start to get some of the benefits of that in Q3 and then in Q4?

[Tomi Hyryläinen, executive]

So we will be touching the guidance if there is a need to, that's short and sweet. And of course, this was announced today, and we will be executing towards the end of this year, the full plan.

[Aditya Buddhavarapu, analyst]

So it's already reflected in the guidance for the year in terms of the margins?

[Tomi Hyryläinen, executive]

Only if there is a need to change the guidance, we will change. So...

[Aditya Buddhavarapu, analyst]

But just final question. I mean, there's been obviously a lot of news flowing around AI and then some of the impacts of that. So could you talk about how you look at AI in terms of your own business, maybe across different segments in terms of the opportunities and the risks?

[Kimmo Alkio, executive]

Indeed. So I'm a bit quite hopeful that the type of new technology innovations, we should be used to considering the timeliness and appropriate investment levels, why did I mention it this way also to be mindful that we educate ourselves into profound new technologies, whether we originally thought about advanced analytics towards machine learning than towards AI. It's very important as a tech company. It's a fundamental part of the learning journey of all employees in the company. And this is one of the important curriculums in our learning platform that people -- all of us are spending time on actively.

Now, naturally how machine learning towards AI is being utilized in different businesses and different functions, by nature, varies significantly. We are already using artificial intelligence in a couple of the areas. One example would be around financial crime prevention. We have early signs of that in our health care data platform in certain research activities with some of the very advanced university hospitals. Are these yet scalable? Not necessarily because there's so much innovation to be done. We use automation by nature in our data center, meaning infrastructure services, for fault prevention and fault prediction, naturally on application services and automation of application management.

So why did I mention it this way? It's a natural part of running the businesses better every day. And we are not betting on any crown jewel on AI while it's part of our continuous learning journey. That would be the current view.

[Operator]

The next question comes from George Webb from Morgan Stanley.

[George Webb, analyst]

Just one final one from my side. On the integration of Transform and connecting to Tech Services, has anything that have changed operationally in the business? Or I guess, why did you not do this at the time of the split out into the individual business units previously.

[Kimmo Alkio, executive]

So just to confirm, so our recognition that there is further opportunity and a need for greater scale in this business. We came to that conclusion as I think everybody recognized for the CMD end of November. And we believe that in terms of how fast the market is developing, this is exactly the right thing to do. And yes, part of this operational simplification, we do believe that it will become even more productive, driving efficiency and the competitive -- it is a competitive business in the marketplace that enables us to pursue the strategic review in an attractive manner by building a more and more competitive business on an ongoing basis.

And to confirm, the integration work has been very active, it's been high quality. And under the leadership of [ Satuiskinen ], we are on a -- of course, it's a demanding program to run. We have made good progress up to now and expect the next months and quarters to follow.

[Operator]

The next question comes from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

Just a follow-up from my side. And again, on the customer decision-making delays that you see a little bit in Create, as I understand it, in the international business outside of the Nordic making up 40% of the business revenue, I guess, in this segment. Is this some of your competence centers a need, for example, in China or in India that you would need to do some downsizing of these on back of this? Or is it much too early to speculate about that?

[Kimmo Alkio, executive]

Very good. So of course, I understand the number of questions on this topic. So I think it's good to confirm that the signals are marginal. And from a standpoint that it's good that we are mindful on how we plan the headcount development to make sure that utilizations and billing rates and all these happen in a fine performing manner.

And then on the interesting part that in some of these delivery locations, I do not kind of open them publicly. But in some of these delivery centers that we have very well functioning, we have been, if there has been an ending contract actually shifting staff to new clients are quite, quite successfully. So with that in mind, we firmly believe, I firmly believe there is good demand in the market. Our addressable market is still relatively small in relation to the market potential, I think we'll find interesting avenues for expansion as we move forward.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Tommi Jarvenpaa, executive]

Thank you for the questions, and I will now hand over back to Kimmo for final remarks.

[Kimmo Alkio, executive]

Very good. So thank you very much for joining today and for a very active and good dialogue and exciting start for '23. We have a very exciting strategy, very exciting value acceleration agenda, and I'm sure we'll have many exciting dialogues to have next one naturally at the end of second quarter. Thank you very much for joining.