Tietoevry Oyj

OMXH:TIETO

Earnings Call Transcript 2021-Q3

[Tanja Lounevirta, Head of Financial Communications]

Good morning, ladies and gentlemen, and welcome to our conference call. We are happy to introduce our third quarter results and summarize the new strategy we announced earlier this month. Here in the studio, we have Kimmo Alkio, our President and CEO; and Tomi Hyrylainen, our CFO. After the presentation, we will continue to a Q&A session. [Operator Instructions] Now Kimmo, please go ahead.

[Kimmo Alkio, CEO & President]

Thank you very much, Tanja, and a very warm welcome to everybody for -- to our third quarter results announcement session. What an exciting quarter we have had, overarching considerations, main message is solid profitability and strong performance, especially in our software businesses. We had adjusted operating margin of 14.5%, organic growth of 1% and overall, software businesses driving growth of 10% in Industry Software; 7% in Financial Services, continuing the positive and sustainable trajectory, the overall development in our software businesses. And very importantly, in the current era of the very active talent market, importantly, we have recruited over 1,600 new colleagues to the company, very important. And I shall already now mention as the attrition levels have remained at the high level, they seemed to be stabilizing towards the end of the third quarter, a very important part, naturally, of our agenda to building the capabilities and the staff. And then as recognized, I'm sure by everybody, the new strategy announced specialization-based strategy, driving further growth and expansion opportunities for the quarters and years to come. Before going into the actual results per business, maybe a couple of considerations fair to highlight in terms of the dynamics in the marketplace as a whole. Customers -- the activity level with customers, customers' intent to actually be shifting investments to be parts of the business, which support their businesses' competitiveness through cloud technologies, data embedded into services and very active modernization agenda, modernization here referring to the very firm drive for further efficiency which are then the primary foundations for funding the new investments around cloud and data. So quite consistent view. Activity level fine in the marketplace overall. Talent market, we'll be touching a number of times. This is the second time in my first 3 minutes. Indeed active while stabilizing and very importantly that throughout this year, we have been accelerating our recruitment globally. And especially in the third quarter, we continue to make, again, good progress in that sense. Furthermore, fair to highlight that also in TietoEVRY's case, we do have the hybrid working model in effect, that's more or less business as usual. In today's environment, we would furthermore just wish to highlight that we shall continue to be highly mindful and care for our people's well-being in light of recognizing that it is still unknown how the pandemic shall evolve, so just confirming that consideration that we are prepared in case the pandemic continues to create surprises as we've seen in recent days also all across Europe on the infection rates. But overall, currently for our case, the business continuity, care for employee well-being has been working fine. Furthermore, I'll of course, towards the end of this presentation be summarizing the core parts of strategy. So far, we have very clear feedback from all of our constituents from customers, employees, shareholders that the clarity on strategy is a good thing to do. And also timing-wise, less than 2 years into the integration itself many, many of us feel it is indeed timely also in terms of the change happening in the marketplace. So this would be a bit on the overarching considerations. Recent customer wins. We are also seeing some traditional customers continuing very close collaboration with TietoEVRY. Telia, one of the largest operators in the Nordic countries, cloud-first strategies continuing also very actively in the application modernization side. Furthermore OP Financial Group renewal and modernization of applications and continued collaboration there as well. And furthermore, also Aibel in Norway, infrastructure and cloud-based services, extending towards all of their services worldwide. And also furthermore, on the case of Illmarinen, traditional longer-term customer in the pension side, also digitalizing core processes and also towards the type of an automated and more efficient set of services, significant wins and healthily also adding to our order book during the quarter. Furthermore, then going into the actual results. We did experience organic growth of 1% during the third quarter. Adjusted EBITA of EUR 94 million, that is the 14.5%. On a -- from a strength standpoint, good to see that fine and healthy organic growth in Industry Software, in Financial Services, in Product Development Services and in International Operations. And naturally, we have enormous drive underway to get the full portfolio to be contributing to growth of the company. And as recognized, that is not yet the case. Furthermore, we would like to highlight that the premerger lost customers in Cloud & Infra do continue to impact the revenue development throughout this year, impact approximately 2% at the group level. Furthermore, good to clarify that the profitability improvement was driven by the strong performance in the software businesses and continuous attention on synergy realization, while important to recognize that the higher attrition and salary inflation does constrain profitability, and nevertheless, a fair progress towards the 14.5% level. And furthermore, from a cash flow standpoint, healthy operating cash flow of EUR 92 million. So overall, the development for the third quarter fairly fine, I would say, in light of the consideration that the early part of Q3 was somewhat slower and fairly fine rebounding towards the end of Q3, and this was especially the case in Digital Consulting that is a bit the reasoning behind the organic negative growth of 1%. And naturally, we are not satisfied with that level. And to confirm, beginning of quarter somewhat slower and solid rebounding towards the end of Q3. Growth has continued to accelerate in Cloud, Data & Analytics. It is not yet offsetting the decline in the Traditional Application Services side. And furthermore, productivity, naturally, in this type of business impacted by the higher attrition, although a net increase of 140 million in personnel since the second quarter. Furthermore, also fair to highlight that the capacity in head count for the third quarter was 4% less than in the comparable quarter 1 year ago, and that is also a decisive factor in terms of why growth was not on the positive footing yet. From a standpoint of anticipation towards the end of year, we anticipate the adjusted operating margin to be below Q4 '20 level, while we do expect this business to be rebounding to growth. Cloud & Infrastructure. We have a consistent perspective of our turnaround story. Organic growth still highly challenged at minus 10%, drivers being 2 familiarize the premerger lost customers, approximately 6%; and furthermore, given the global supply challenges in hardware this actually impacted the revenues of this business by approximately 3%. So this supply chain shortage impacting Cloud & Infra clearly. Turnaround program, very high on our agenda, on schedule and capacity reduction in Legacy Services and Automation continue to drive the profit improvement and this profit improvement will continue to deserve very significant attention from our side until the numbers start to look where we expect them to be. In light of the end of year, we anticipate revenue decline to be less than in the third quarter and our operating margin expected to be at or above the Q4 '20 level. Then moving forward to our Industry Software, healthy performance growth of 10%, nice continuation of the trajectory we have been implementing. Adjusted EBITA, very healthy at 27.8% level and good performance in the software businesses across the board, also in the Health & Care, which is the largest one of our IS portfolio. And the profit development continues to be driven by the focus on healthy top line development. And here, the continuous productivity improvement refers a lot to the R&D practices, R&D architecture for scalable software, scalable deployments. And furthermore, good to also highlight which was communicated a week ago on the continuation of portfolio development or pruning, 3 small businesses divested in the industrial sector at that point in time, and we have been open about consideration portfolio pruning in case these do not provide the type of growth potential, scale potential nor investment -- nor fitting our investment priorities. So normal activity fully in that sense. For IS, the operating margin is anticipated to be below Q4 '20 level. A little bit of background that the Q4 revenue and profit is anticipated to be impacted by higher license sales that were experienced in the second and third quarter in the Industry Software category. We had additional license sales approximately 5% in the Q2 report and approximately 2% here in the third quarter, which historically have been heavily skewed towards the fourth quarter timeframe and this type of a perspective we also offered in our Q2 report as we've seen some change in customer behavior, decision-making actually to our favor in terms of winning more market share. Financial Services. Healthy performance overall. Organic growth, 7%. Adjusted EBITA 16.3%. And the healthiness also in the portfolio of Financial Services growth contribution by the main units across the core banking credit and the cards businesses. And profit development naturally continues to be driven by the revenue contribution and a continuous attention on efficiency improvement, including R&D practices. And for the year-end, we anticipate the adjusted operating margin to be at or above Q4 '20 level. Furthermore, in our -- one of our exciting global businesses, Product Development Services, organic growth of 7%, profitability at 11.3% level, top line contribution through the businesses in mobile networks and automotive industries, we are also highlighting entry into an adjacent sector in electronics sector and strong overall pipeline development within PDS visible. Profitability here similarly as in digital consulting, naturally, given the labor intensity impacted by attrition and actually increased subcontracting that utilize specifically in PDS and also salary inflation. So activities have been done to mitigate attrition in some cases, as mentioned, implementing incremental salary rounds as well. And to confirm, the extended partnership with Ericsson to build the R&D center in Nanjing, China, that was announced earlier, revenue contribution to be starting in November, with approximately 330 employees having joined the company. This is about 53% of the employees. Our target was to have about 75%. We are very comfortable with the business case overall as the additional capacity was planned to be used for other customers than the one in question here. Regarding fourth quarter, adjusted operating margin anticipated to be below the Q4 '20 level. And then our international operations, we have a very similar message as in the second quarter. Overall, a good, strong development growth of 22%. This is absolutely in the category of cloud-native and data-oriented services, and we are continuing successfully in the so-called land and expand with existing clients and winning actually new footprint as well. So continued favorable development. Naturally, a foundation will be looking into developing further from. So that would be a brief summary of the business dynamics for the third quarter and core commentary by business. Naturally, given that this year, we -- as year 2020 was the year of integration and now the agenda towards growth orientation and delivering growth going fairly consistently according to our own plans, our Software Businesses proceeding very consistently, and we have the growth agenda materializing in majority of our businesses, group growth as shared and as seen now growth of 1%. And to be fair, our original plan was to get Digital Consulting into growth in the third quarter, with the higher attrition levels and the lower headcount, we were still minus 1%. And as commented, we anticipate this to be rebounding for the end of the year. And Cloud & Infra having negative impact throughout this year as we had originally anticipated, and International Operations continue to develop really favorably. So here also commentary on the growth dynamics, providing us a fairly fine foundation actually then based on these assets and the capabilities we have, the track record in several of the businesses to then consider how to expand even faster through the specialized businesses, which we'll be coming back to briefly also in this session. And now over to Tomi.

[Tomi Hyrylainen, Chief Financial Officer]

Thank you, Kimmo, and good afternoon. I'm pleased with our Q3 performance overall. We delivered a healthy 14.5% profit, as discussed earlier, driven by our Software Businesses and continued synergy contribution. Our reported profit was at EUR 72.2 million or 11.4% compared to 4.4% prior year, reflecting the overall profit improvement of the company and reduction in the onetime items in accordance with our plans. We delivered a good cash flow, and continue to improve our leverage metric with net debt EBITDA amounting to 1.4 at the end of Q3. On cash flow, we are back with more normalized levels with EUR 92 million operative cash flow. Our working capital was relatively stable with a small increase of EUR 11.6 million due to seasonality, which is visible in decrease in personnel-related accruals, mainly in vacation accruals and advances received from customers, which we are utilizing over the course of the year. Due to healthy cash flow, our net debt ended up to EUR 702 million and net debt to EBITDA to 1.4 compared to 2.9 last year at the same period. Our synergy takeout continues as planned, with EUR 90 million run rate executed at the end of Q3. We estimate to reach EUR 95 million at the end of the year. The remaining synergy takeout relates to procurement and facility-related efficiencies with some further process and IT optimization activities. The onetime integration cost, we keep the total guidance intact with EUR 110 million to EUR 120 million. Our onetime items in Q3 were EUR 10 million fully as expected. Q4 onetime items are estimated to be only slightly higher in the range of EUR 10 million to EUR 14 million due to increased activity in the area of brand and identity and facility consolidation. The divestment of the 3 smaller software businesses, which was mentioned in IS, will have a positive onetime item impact in Q4 of approximately EUR 26 million. We estimate the full year onetime items to be positive in the range of EUR 52 million to EUR 56 million. The recently announced divestment, as mentioned, in Industry Software was in line with our strategy to see focus and scale with our businesses. The transaction is expected to close in Q4, resulting in capital gain of EUR 26 million, as mentioned, after deducting net assets, including the share of goodwill from the sales price. The valuation of the business was at the level of our earlier oil and gas divestment. CapEx for the quarter amounted to EUR 16 million, and we estimate the full year CapEx to be slightly below the 2020 level, which was EUR 83.5 million. Next, I'll summarize the Q4 performance drivers. Cloud & Infra premerger lost customer impact is approximately minus 1%. We estimate the supply chain challenges for hardware sales to continue, impacting growth by minus 1%. Synergy contribution will continue with net impact of 5% for Q4. Higher attrition and salary inflation will continue to constrain profitability as we're entering Q4 with almost 7% higher quarterly attrition rate compared to prior year. On salary inflation, the heated talent market has increased our actual inflation for the year to approximately 3% from original 2% and that increase is difficult to mitigate in the short term, therefore, impacting the -- or constraining the profitability. FX tailwind is expected to continue and working day impact to growth is expected to be positive 1%. Back to you, Kimmo.

[Kimmo Alkio, CEO & President]

Thank you, Tomi. And now towards the end, we'd like to provide a recap or synopsis of the recently announced strategy and the main factors behind it. First of all, we do believe this is a fantastic time to step ahead and reshape our future. We are discovering on a global arena clear market opportunities, I'll go to -- I'll summarize in a minute. We are -- we have made very respectable progress throughout our integration, practically now in the 1-year and 9-month timeframe. All our core teams are integrated, consistency of processes, tooling, which enables us to actually take a step forward; and foundation of services, which are competitive, which are scalable; and we believe we can create even more value through even sharper choices for the businesses. One of the most important part of our strategic consideration is the perspective on the future market. And here, I would like to summarize the 3 main considerations. Our customers' agenda and investments are geared into the right-hand side on the cloud native continuously at a faster and faster pace, which will be the domains where future growth will be driven by and derived from. Considerations on data and analytics, cloud consulting, cloud managed services and as well shifting the software businesses towards a SaaSified world, areas that we are familiar with and we believe will open up significant opportunities by greater focus. Second important point, which goes to the left-hand side, we believe it's important to recognize that the traditional services, traditional infra, traditional application services will require further scale and the price erosion in the years to come will accelerate. And this all opens up also the market in between for modernization, very active modernization of our customers' businesses, the business processes, application landscape, infrastructure landscape. And to be fair, we believe that's also a market segment whereby we could win greater share and not being so much focused with our current customer base. The common denominator in the future state of the market is the call for high degree of specialization in every interaction with the clients. Our -- furthermore, if I do a bit of a bridge from the third quarter report, we are able to tell that our business mix is actively developing towards the cloud native and software worlds. This quarter, we had good performance in the international businesses, in the Industry Software, in Financial Services and the Product Development Services side, a foundation that is already fine and clear, giving us a number of ideas and consideration how to build even further. While it is fair to recognize that lower demand in the Traditional Application and Infrastructure Services, whereby the need for scale is also in our case. When we think about the core choice of our strategy, it is actually a growth and expansion-oriented strategy, set of clear business choices to capture the growth and expansion opportunities. We are making choices on the end-to-end businesses through specialization with full accountability and overall faster decision-making, faster time to react into the ever more fast -- or faster changing market environment. And third component, very importantly, the focused investments to expand cloud native capabilities and the scalable software businesses. And furthermore, to be driving partnerships to scale in the areas where further scale is required, Managed Application and Managed Infrastructure Services. And we firmly believe that towards all of our key stakeholders, the future strategy will bring even more value. The part that we wanted to open up in the strategy communication is the clear categorization of our investment priorities, the area where we expect to invest, to expand other businesses that are already quite scalable: Financial Services, Health & Care Software, Business Design and Engineering, comprises of the international operations growing over 20% already, cloud native, our product development services, highly advanced software engineering and then the advanced side of the digital consulting side around cloud and data in the Nordic countries. So really stepping into the future of cloud native in the category of invest to expand. We also wanted to be very open on the center category on the partner to scale, both for enterprise modernization and cloud platform services in the future, likely somewhat different dynamics between the businesses. In the enterprise modernization, one would typically look into the technology partners, as an example, SAP on public cloud or RPA type of partnership or leverage the investments already made by partner companies. And then also, we are seeking for partners, both operational and structural to ensure that we have the ability to jointly invest and scale, and that would be especially the case for Cloud Platform Services side where the future scale needs, we believe, are significant. And furthermore, we wish to be very clear that the third category focus for value on the Industry Software, and we'll be doing that portfolio development actively as we have demonstrated already. So we feel it's very important that we are able to publicly share the priorities and also in terms of the investment allocation, including M&A capacity given the current deleverage of company, which we nowadays already can start to think about and work on. Furthermore, to confirm, from a financial standpoint, our main considerations, our financial targets are unchanged from the December 2020 Capital Markets Day. All financial targets intact, and we firmly believe that our potential and commitment for continued dividend attractiveness will be highly advantageous to our current and future shareholders. And in summary, the main considerations, we have 5 in -- also as the closing commentary from the launch last week, the market is being reshaped and that reshaping of the tech sector opens up further growth opportunities for companies such as TietoEVRY. And I would say, especially for us, given the presence we have in the Nordic market and already towards international expansion, specifically around cloud, data, engineering and software really being the likely stars of the future business domains. And the third component, we subsequently reshaped the we function we function in TietoEVRY through specialized end-to-end businesses. And as a consequence, we also changed our structure and leadership nominations were also shared last week as we'll be going live with the end-to-end business setup in January next year. And just to confirm, as mentioned, the financial targets fully maintained. With this background in mind, the summary of our total Q3 report: continued solid performance led by Software Businesses, Cloud, Data & Software driving the growth agenda. We have a strong global recruitment focus, and we wish to be very open as we have been in recent quarters on the attrition levels and we have seen record high number of recruitments. And as commented, the attrition levels have been high. They were stabilizing towards the end of the third quarter. And the new strategy, as announced, we believe, opens up very exciting avenues for the quarters and years to come. So with this in mind, this would be the summary and time to go to Q&A.

[Tomi Hyrylainen, Chief Financial Officer]

Thank you, Kimmo and Tomi. So we are ready to proceed to the Q&A session. Moderator, please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of George Webb at Morgan Stanley.

[George W Webb, Equity Analyst]

I have a few questions, please. So first of all, just starting off in Cloud & Infra. Can you kind of clarify the trajectory of the lost customer impact you're expecting there? I guess, you've lapped a full year of the first impacts from Q3 2020, but there's still a step down affect going on given you're expecting that to continue into Q4. Is Q4 the last quarter you expect those headwinds to occur? Or are you expecting that to continue till into 2022?Secondly, on Digital Consulting, you mentioned the higher attrition. Can you put any numbers around that? Is that high-teens, low-20s? Anything around that would be helpful. And then just lastly, I noticed in the report you kind of flagged you're expecting 3% salary inflation for FY '21. What's the latest in terms of how you're expecting that to trend for FY '22?

[Tomi Hyrylainen, Chief Financial Officer]

Yes. Thank you for the question. The first one on the lost customers. So there will be only very, very limited minimal impact for 2022. So the vast majority we are now experiencing in '21. The second one may be...

[Kimmo Alkio, CEO & President]

Digital Consulting attrition. So maybe a consideration, so as the attrition levels on the group average third quarter was about 16.6%, that is actually about 6 points higher than -- actually 7 points higher than a year earlier and Digital Consulting is rather on the upper end of that, slightly above. And to be fair, it varies significantly by location, and the higher numbers have been clearly in the offshore locations and less in the Nordic countries. And to confirm also clearly stabilizing, as an example, and also in India at the end of Q3. And the salary level, the 3% level, we anticipate this to actually be intact as we enter then -- also into next year.

[Tomi Hyrylainen, Chief Financial Officer]

Yes. So likely around 3% for '22 as well.

[Operator]

Our next question comes from the line of Daniel Djurberg of Handelsbanken.

[Daniel Djurberg, Research Analyst]

Congratulation to very strong report in terms of software sales. The question could be on Digital Consulting again on your comment on that you will be below the adjusted EBITA level in Q4, and year-over-year, it was 17%, I believe. Is this mainly due to higher recruiting costs or due to this utilization level or is it more of a salary inflation that this hitting? And also, if I may, if you can comment on Industry Software? You also comment that you are winning share, but there are more even split revenue, I guess, and that you don't expect it to reach the 26% adjusted EBITA margin as you saw last year? And if you can comment a bit on the granularity there, is it much below or is it 100 to 200 basis points below or something? It would be great to understand the impact.

[Kimmo Alkio, CEO & President]

Sure. So indeed, so let us take the Digital Consulting first. So Digital Consulting tends to be, by nature, now impacted by the combination of attrition and new joiners coming in. So that era, when this happens, you -- it's kind of -- you incur clearly a less productive environment than without this type of a big kind of a transition. So that's 1 factor. Utilization rates have been developing in a fine manner towards the quarter end. And as reflected and hopefully very openly earlier as well, that the early part of Q3 was clearly a bit quiet and rebounding to much more normal levels towards the end of third quarter. So these are the primary factors on the Digital Consulting side. Attrition and high recruitment and managing this as a process does have implications. On the IS side, just to confirm the consideration that when we have traditionally had more of the skew of license sales into the fourth quarter, it has been a very clear contributor. And now we have seen this coming in a bit earlier. So this is the background to our consideration. But that's more or less, I think, on that one.

[Tomi Hyrylainen, Chief Financial Officer]

Yes. Maybe to add on the DC, of course, the inflatory component, which has been discussed earlier, that impacts the DC profit levels for Q4 as well.

[Daniel Djurberg, Research Analyst]

Yes. And 1 more question, just to get some color on your thinking in -- you have done some divestments in oil and gas and also more recently Jydacom, Alystra and TRYGG/2000 can you comment a little bit on the divestment process? And should we expect more? And why didn't you think these companies could scale similar to your rest of the business in industry software? And how do we know that you're not selling too cheap, so to say?

[Kimmo Alkio, CEO & President]

So first of all, thank you for that question as well. So we have had for about a 5-year timeframe. I would like to call it actually like a highly structured process for any type of M&A or de-consideration, starting the typical components in that consideration, the strategic fit on the scale, accessibility to the global market, investment requirements, our capabilities and, of course, our investment priorities as a company. So that's a process that we've had well functioning for actually several years that be utilized also for the portfolio development, whether from an acquisitive mindset from or with a divestment mindset. And then as we had reflected also in the Capital Markets Day, almost a year ago that it's also very typical and required post merger to do active portfolio considerations where you see the greatest value of the future and what may not be the priority for you as a company and then rather find other avenues. And this actually also a source of funding for rather the acquisition side. And then we do, as always, took the valuation benchmarks and look at the industry peers and what we believe are highly respectable if we were to go forward. Tomi, anything else to add?

[Tomi Hyrylainen, Chief Financial Officer]

That was a good summary. Nothing to add.

[Operator]

Our next question comes from the line of Gautam Pillai of Goldman Sachs.

[Gautam Pillai, Equity Analyst]

Great. Firstly, on the Industry Software segment. Can you please talk about the pull forward of license sales which happened in Q2 and Q3? Was it specifically related to some large one-off contracts? And how do you see the segment? You already flagged that OP was going to be a bit soft, but in the medium term, how do you see the prospects in the segment? Secondly, can you share any thoughts on early -- thoughts on 2022 margins? If travel and physical events are coming back, combined with the pace of hiring you're doing, should we expect some sort of headwinds to margins going into '22?

[Kimmo Alkio, CEO & President]

Indeed. So thank you for those 2 points. So on the Industry Software side, to confirm that the impact of about 5% in the second quarter report we also had and the background was actually extending the collaboration with a number of hospital districts for codeveloping the future functionality of hospital information systems. So that was an extension, and the timing in a positive manner just happened in the second quarter, but that's very much a favorable development in greater market access and aim to gain more market share. And the second -- the third quarter, we had impact of approximately 2%. So nothing unusual. As such, the timing just shifting from what it would have been in recent years, rather Q4 centric. And then regarding the '22, this would be a bit too early to provide guidance on '22. We'll be doing that, of course, at a later stage.

[Operator]

And our next question comes from the line of Michael Briest at UBS.

[Michael Briest]

Yes. A few for me as well. Just could we drill into the international operations, just to understand it a bit better? I mean you've got 5,000 people generating, it looks like, about EUR 150 million of revenue, so EUR 30,000-odd a year. It seems quite low. Can you just talk a bit more about what they're doing? Secondly, just on Estonia. I know it's a small country, but the head count has dropped from 300 to 117 year-to-date. Can you just address what's going on there? And then on the strategic initiatives, particularly around cloud and infrastructure. Can you talk about the relationship now that's been reconstructed with IBM. I seem to recall EVRY had a 10-year contract from 2015. So to what extent does that limit your scope? Or how has discussions with IBM about this potential partnership strategy evolved? And then finally, Tomi, just on cash exceptionals. I think the guidance was for EUR 70 million to EUR 80 million in the year. You gave a number for Q1 and Q2. Can you give the Q3 cash exceptional and say what it's going to be for the year?

[Kimmo Alkio, CEO & President]

Okay. Thank you, Michael, for those considerations. So International. So this business comprises of -- I'll give you the granular list of consideration, but this is more or less all offshore and nearshore. That's a bit of a background to your -- let's say, your quantification on the yield side. So business we conduct from Ukraine towards Western Europe and the U.S. This was built in the -- over the last years by ex EVRY India towards U.S., to larger customers in sectors such as insurance and a couple of also industry sectors where we have been gaining very significant customers doing actually cloud-native, cloud modernization, data platforms, data science type of really advanced deliveries in this business. So that's 1 part of it. And the second part would be which should come from the former Tieto side like the business in Austria business in Russia, which has been declining over the years and business in the Baltic region. So that's just the background. And the most significant growth contribution comes from the, what I would like to call, the land and expand relationships in the U.S. and Western Europe. And we've seen this now being scalable as a -- on a continuous basis over last quarters, and we think the scale foundation, however, one looks at it is healthy.

[Tomi Hyrylainen, Chief Financial Officer]

If I add, Kimmo, on that one, just to be clear now, Michael, on your comment of 5,000 people. So this category Other of 4,918 includes also our support functions, which is roughly 1,000 FTEs. So the size of the international business is 1,000 less.

[Kimmo Alkio, CEO & President]

Yes, yes. Good point. And then maybe your consideration in Estonia. So very practically, the call center location changing from Tallinn to actually Vaasa as a multilingual location happens to be in Finland, but serving also Swedish clients. So that's just a background on that one. On the strategic side, on the Cloud & Infra. So the rearrangement in your consideration here with IBM does not hinder any future moves. It had to be a total revamp of the relationship. So that should not set any prejudice on what may follow in the future. So it's a fully clean sheet on how we think about the future scale.

[Tomi Hyrylainen, Chief Financial Officer]

Yes. Last one on the cash OTI. So I took away that metric since we are getting close to cash equal in the OTI number, so good assumption is the EUR 10 million for the cash OTIs for Q3.

[Michael Briest]

And for next year, any thoughts on continuing exceptionals? You should be down at 1% of sales from a P&L perspective, so should we assume the same from a cash perspective?

[Tomi Hyrylainen, Chief Financial Officer]

Yes. Roughly so, that will be good assumption.

[Operator]

Our next question comes from the line of Sami Sarkamies of Nordea.

[Sami Sarkamies, Senior Analyst of TMT]

I have 4 questions. On Digital Consulting, your growth rate fell from a positive 1% in Q2 to negative 1% in the third quarter. Can you still explain what was the reason? Was this driven by customer demand, your ability to supply or just timing for the new projects? Then secondly, on Cloud & Infra, your margins improved from the second quarter, and this was probably mostly driven by elimination of extra costs. Can you explain since when those extra costs were sort of terminated? And what will be sort of the additional improvements in Q4? And then further on Cloud & Infra, you're complaining about headwinds related to hardware sales. What is the sort of total level of hardware sales? And what's your sort of plan for this going forward? And then fourthly, on the industry software outlook for Q4. I think that you highlighted 5 percentage point impact in second quarter and 2 percentage points in the third quarter from extra software sales, should this be deducted from 26% of last year you had in Q4?

[Kimmo Alkio, CEO & President]

Okay. So very good points. Why don't -- so we start with the Digital Consulting. So just to confirm, the capacity, the headcount was 4% less than 1 year ago. This was 1 very clear factor. Second factor, just that as an -- from an output standpoint, we did see the rebounding towards the end of third quarter. So the main factor being the headcount. Yes, activity level, fine; utilization rates becoming much more normal towards the quarter end. So I think that's the short, and hopefully, the crisp view on DC.

[Tomi Hyrylainen, Chief Financial Officer]

And the Cloud & Infra turnaround, of course, the capacity reductions continue as visible also in the FTE count of that unit. So that good work that we initiated at Q1 is continuing, and we are, as mentioned, on schedule on that. Of course, for Q3, we have the positiveness from the vacation accruals impacting also Cloud & Infra margin a bit. And we anticipate Q4 then, as mentioned, a continuous improvement compared to then prior year.

[Kimmo Alkio, CEO & President]

Yes. Then on your consideration on the hardware resale. So we are mindful on that type of a volume ambition. It's been traditionally very, very low-margin business. So that's why we -- it is not in the category where we aim to grow super fast given the nature of that business. That's just a background. And indeed, as we commented, we expect the shortage of supply to be impacting -- being a factor into the fourth quarter.

[Tomi Hyrylainen, Chief Financial Officer]

And then IS was the last one on the 5% and 2%. So we highlighted this in anticipation of what will happen in Q4, not that it will exactly happen.

[Kimmo Alkio, CEO & President]

Yes.

[Tomi Hyrylainen, Chief Financial Officer]

We, of course, as a company hope that it wouldn't impact Q4 that much, but it is a realistic assumption that it will have some of the impact.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. Can I still check what is roughly the level of hardware sales at Cloud & Infra?

[Tomi Hyrylainen, Chief Financial Officer]

So for the full year, this business, including the financing is a bit short of EUR 100 million.

[Operator]

Our next question comes from the line of Christoffer Bjørnsen of DNB.

[Christoffer Wang Bjørnsen, Analyst]

Most of my questions are already answered, so I'll just keep to one. On Digital Consulting, it seems like compared to your expectations, you're a bit behind. So maybe give some kind of clarification on why you're so confident in that kind of improving net of top line momentum in Q4? What are you seeing that's driving that? What kind of level of growth should we be looking at? Just to kind of give us some kind of confidence that that's actually turning around now, that would be very helpful.

[Kimmo Alkio, CEO & President]

Yes. Thank you, Christoffer, for that consideration. So overall, we have seen, of course, the potential throughout the year, not in Q1, as we all remember, second quarter, the opportunity realizing the attrition wave kind of kicking into Q3 with the 4% less head count and that's visible in the -- from the total productivity side as well of the team for the first months of Q3 and the productivity headcount, kind of the recruitments and the productivity side clearly improving towards the Q3 end. So that gives us comfort. And then when we look at underneath from the business mix standpoint, we do anticipate the future-oriented practices, specifically in cloud data and insight and customer experience management to follow the similar path as we saw at the end of Q3. So that gives us comfort that we should be growing. Of course, that is still all to be executed, but these are the factors in our consideration.

[Operator]

And our next question comes from the line of Matti Riikonen of Carnegie.

[Matti Riikonen, Financial Analyst]

It's Matti Riikonen. I have 3 questions, 1 by 1. First of all, regarding the salary inflation, do you think that you can -- you are able to mitigate that salary inflation by price increases before the year -- next year starts? Or have you already been executing price increases to the customers?

[Kimmo Alkio, CEO & President]

Okay. So okay, we take 1 by 1. So overall, so as usual, the inflatory aspects we account for in our next year's business plan and the priorities and it's quite an unusual environment and era, and we'll be working on the price increases as well as 1 component.

[Matti Riikonen, Financial Analyst]

Right. Okay. Then could you tell about the revenue split between cloud and traditional in your Cloud & Infra business? So where are we standing at the moment?

[Kimmo Alkio, CEO & President]

So that we have not opened up in the reporting itself. Naturally with our business mix, we have ample proportion in the more traditional, whether one thinks about mainframes or the unique sparks, installations and the likes. And then rather, of course, faster developing. I don't have the proportions here with me. I would need to check that because that's a continuously evolving part, background being that we also transform the legacy environments to private and public cloud. So these new technologies, these environments are gaining in proportion. And if I may, as I don't have the answer, Matti, I don't want to guess that one. Our aim naturally is to shift customers towards the modern environments rather faster as they are more scalable, more automated and to be fair, more productive and profitable as well.

[Matti Riikonen, Financial Analyst]

Right. But as you understand, when you talk about declining businesses and growing businesses that information is fairly kind of irrelevant, unless we know what are the base numbers that we are coming from. So that information, I think, would be very valuable for all investors going forward just in kind of having educated guesses how the business could be developing going forward with the base numbers that you probably provide at the later stage.

[Kimmo Alkio, CEO & President]

Yes. Yes. Fair point. So good input.

[Matti Riikonen, Financial Analyst]

Then a small thing, what was the EBIT contribution of the 3 divested software businesses? You mentioned that they had EUR 17 million net sales on an annual basis, but roughly did they have better or weaker than average performance within the IS unit?

[Kimmo Alkio, CEO & President]

So they were roughly on average at the levels of the oil and gas business as well.

[Operator]

And our next question comes from the line of Panu Laitinmäki of Danske Bank.

[Panu Laitinmäki, Senior Analyst]

I have 3 questions. Firstly, on Digital Consulting. On this application management business, I mean how much did this impact the organic growth? And what is the outlook of this business? So -- I mean, yes, what kind of a headwind is that for the organic growth on top of the attrition? That's the first question. The second question is still on Industry Software. Just wanted to know what is really driving the growth? You touched on this, but can you be a bit more specific, what products were driving growth? Was it new customers or just the extension with these hospital districts that you mentioned? Any color on that would be helpful. And then the third question is on the targets that you gave earlier for the current divisions, do you still see this as valid or should we think of any changes to that? I mean that Industry Software has been stronger than you were kind of targeting and then Cloud & Infra and maybe Consulting seems to be doing less than targeted levels. So are these valid from your point of view?

[Kimmo Alkio, CEO & President]

Okay. So let's take them 1 by 1. Thanks, Panu. So first of all, on the Digital Consulting side, the application services side, that is about 40% of the digital consulting and that business is declining. So we don't give the percentages externally, but that's the factor, the background that the new business in DC are not yet growing fast enough to offset that. It was the case in the second quarter, but not now in the third quarter given that the totality of our headcount was down the aforementioned 4%. So that's why in the current environment, in the current setup, the Digital Consulting is a combination a bit on the legacy application services and the new-world consulting services as we shift to the specialized businesses, we'll be playing the cloud-native end-to-end separately. On the IS side, so the background, if I hopefully understood your question correctly, what was behind the IS, the plus 5%, plus 2% extensively on the Health & Care side on the -- based on the Lifecare investment made between 2016 and 2020, that total Lifecare renewal and these are extensions on that in recent quarters and years towards a fairly fine scalable platform. That's the backgrounder.

[Tomi Hyrylainen, Chief Financial Officer]

On the long-term target, so we don't see a reason to start changing those. Now as communicated, we will then, in H2 next year, arrange a CMD and give the targets for the new specialized businesses as discussed.

[Panu Laitinmäki, Senior Analyst]

Okay. Can I just have a follow-up on the Application Services? So is it so that the trend has kind of continued unchanged or did it weaken in Q3 in that business?

[Kimmo Alkio, CEO & President]

It slightly weakened. There is some fluctuation quarter in quarter out, depending on the customer projects in question. So it would not be, if I may, here, I use a sample set over several years that there are kind of quarterly fluctuations. But now this was clearly this part negatively impacting Q3.

[Operator]

Our next question is a follow-up from Daniel Djurberg of Handelsbanken.

[Daniel Djurberg, Research Analyst]

Two questions, if I may? Starting off on the changed strategy that you spoke about October 13 and also today. My question is if you can give some color on how this has been considered or seen in the company so far? We saw that the attrition rate was rebounding and stabilizing. So sort of the risk for this change to now change that positive trend and also -- or on the opposite side, could it be supportive in terms of lowering the attrition rate? And that would be my first question.

[Kimmo Alkio, CEO & President]

Sure. So the feedback, so far, I always say this humbly because everything needs to be delivered and executed, the feedback is absolutely in the positive category from all of our constituents. I had a bit of flavor, naturally the degree I can like externally. When we have done now throughout the merger process, our pulse surveys approximately every 2 to 3 months, which have developed actually during the very demanding integration and the pandemic era continuously in a fine manner at very competitive levels. The 1 factor that people have been highlighting, I would say, in the last maybe 2 to 3 quarters, not necessarily yet in 2020 that much, that what is the future vision of the company post merger? So to be fair, I mean, our strategy process, as everybody recognizes, this usually take approximately 1 year and a foundation for strategy rethink, in our case, tends to be whenever we see the signals in the market changing and then we rethink the company. And it is very much possible that also in terms of the value proposition and comfort for employees, this is also a further favorable development.

[Daniel Djurberg, Research Analyst]

Perfect. And I guess for Tomi is that your view in -- because I guess your group of people will need to work quite heavily here again on these changes of the business group, accounting and also sales and marketing, of course, yes. So your view would be great as well.

[Tomi Hyrylainen, Chief Financial Officer]

So thank you for asking that from my point of view as well. So luckily and fortunately now, as Kimmo also has mentioned that from the integration point of view, we are far enough with our IT systems and processes like from the ERP, just to give you a data point, over 90% of our businesses are in the common ERP system. So this makes it a bit easier from my point of view to deliver the new numbers and restructure the organization for the new end-to-end specialized businesses. But yes, the level of the integration makes this a lot easier from my end.

[Operator]

And we have 1 further person in the queue that's Jaakko Tyrvainen of SEB.

[Jaakko Tyrvainen, Analyst]

I could follow up on the attrition. Are you seeing any specific pattern in terms of leaving customers, are they leaving to certain rivals? Is someone being more and more aggressive on that side? Or -- and is the salary being the key driver of the employees leaving?

[Kimmo Alkio, CEO & President]

So first of all, if we think about the market dynamics, so market has been, is and will be very price competitive. And one of the drivers for customers when it's a question of modernization, meaning efficiency, is a lot to do with price competitiveness and risk levels that are taken. So these are the very natural competitive factors that you have to have in great shape when you win and sometimes somebody else might have gone more aggressive. So I would like to highlight that the competitive natures of your -- I think your first sub consideration was this customer -- potential customer attrition. And to be fair, naturally, when we are further and further integration, our mindfulness for penetrating new customers and new market segments, we naturally expect to become much, much more active. Then on the attrition, the reasoning at the employee side, it tends to be 2 factors, it tends to be around the pace at which new opportunities are visible inside the company and that's where we need to promote rotation even more. We -- I wish to share this very openly. And then it is actually in the top 3 factors is then the remuneration, especially in certain geographies where the remunerations are developing very rapidly, and here, as an example, India.

[Tomi Hyrylainen, Chief Financial Officer]

Yes, the activity, of course, as we have commented before in the talent market is impacted by our customers recruiting the same competencies as IT service providers. That dimension is visible as well.

[Kimmo Alkio, CEO & President]

And on the kind of research, we have also naturally conducted. We are at very similar levels of attrition as the peer group in our industry.

[Jaakko Tyrvainen, Analyst]

Right. I understand. Still on the employee side, has your kind of employee age parameter changed notably during this year of relatively high attrition?

[Kimmo Alkio, CEO & President]

No. This has on -- from -- through proactive mechanisms has been an objective for us throughout the integration process because we need to develop the pyramid continuously and more actively than actually either company premerger. So with this in mind, so that pyramid development will continue. I don't have an analysis of attrition per age group, so I do not wish to guess that.

[Jaakko Tyrvainen, Analyst]

Okay. I understand. Then lastly, what is your current analysis? How the Finnish health care reform will impact your business looking towards '22 and '23?

[Kimmo Alkio, CEO & President]

So overall, the health care sector across the Nordic countries, I call it positively dynamic. And we are very happy to bet on our open systems, open platform, open API strategy. We were the first company in the world actually to apply the open EHS standard, which is a standard vocabulary and dictionary for the medical professionals. So open standards approach, I think the overall momentum is much more towards this type of phenomenon than the legacy large-scale players, as an example, from North America. So we are very happy to fight hard in this market.

[Operator]

And as there are no further questions in the queue, I'll hand back to our speakers for the closing comments.

[Tanja Lounevirta, Head of Financial Communications]

Thank you. So if no further questions, I would like to thank you all for joining us today. Before Kimmo's closing words on my behalf, I wish you all a delightful day.

[Kimmo Alkio, CEO & President]

So thank you, everybody, for joining and great questions and for the interaction, really nice participation, and I hope you got the clarifications for everything that you looked for. Exciting third quarter, a fair performance. Yes, we think we can do better. Very important drive for increasing personnel and the recruitment capacity. And very important, the highly transformative direction we announced in the company strategy. So we are sure that the next quarter shall continue to be at least as exciting. Thank you very much for joining us today.