Tietoevry Oyj

OMXH:TIETO

Earnings Call Transcript 2022-Q3

[Tommi Järvenpää;TietoEVRY Oyj;Head of Investor Relations, executive]

Good morning, and welcome to Tietoevry's Third Quarter Earnings Webcast. My name is Tommi Jarvenpaa. I started at the company in the beginning of September as the new Head of Investor Relations. Tietoevry's third quarter was good 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, Tommi, and a very warm welcome also on my behalf. What an exciting quarter we have had and naturally, we did the pre-announcement of results already 1 week ago, so I will synthesize naturally the performance. Strong growth of 8%, driven especially by our Create business, our software businesses, specifically in the Banking and Care side, solid development from a margin standpoint, up to 14.2% level.

And as anticipated, our performance improvement programs have contributed adequately towards our second half of '22 profitability objectives, and we anticipate the profit contribution to be further accelerating towards the year-end. And naturally, as announced a week ago, we have provided updated guidance for the year.

A brief summary on the updated guidance. The drivers behind the growth guidance update to 5% to 6%, naturally based on our continued good performance in the areas, which are growing in the marketplace, and we're able to play a very active game in the cloud native in the data domains in the consulting side and our software businesses. And these do support end-of-year growth outlook as well.

Our adjusted operating margin guidance provided in the range of 12.8% to 13.1% and some of the factors and likely well recognizable factors being the era of the inflation and naturally with our type of business mix, there is a certain lead time before the price increases start to contribute even more significantly. And overall, we see being very important to continued positive trajectory in terms of the total performance of the company.

I would also like to briefly pause and summarize our perspective on the market and the economic environment. We see continued fine -- continue to build growth and scale in the software businesses, our cloud-native data and the software engineering side. So our main point here being from -- in terms of market development and fit of our capabilities and strategic focus, we believe that we are absolutely on the right path.

We naturally live in the era of higher inflation that this calls for also our company to pay additional emphasis on productivity and the levels of expected productivity improvements, while recognizing the lead time for the price increases, which do limit the short-term profit improvement while as mentioned, the trajectory being very important.

Macroeconomic instability is one factor that everybody is recognizing. In our case, we believe we have actually quite an attractive business mix providing further resilience through the long-term customer contracts. We have a very significant proportion of our business mix based on long-term and recurring revenues. And this practically covers all software businesses and the more traditional managed services side. So this whole era of geopolitical uncertainty, inflation, naturally calls for even more scrutiny in the totality of efficiency for companies, and we are naturally paying a great deal of attention in these terms as well.

Next to go into the practical performance information and especially today's highlights on the businesses. Before we go to the businesses, let us briefly summarize as already known, organic growth of 8%. And our drivers being the aforementioned software businesses and the new era of the consulting side and adjusted EBITDA at the EUR 97.9 million level being 14.2%. And again, to summarize the performance improvement programs, actually covering 3 of the businesses, Banking, Connect and Transform all materializing as we have anticipated important contribution for the second half of the year, including Q3. Operating cash flow being EUR 40 million. Tomi will talk about a bit further and order backlog operationally up by 3%.

Then let us go into Tietoevry Create, very solid performance in this business continues, organic growth of 19%. And to be fair, the Ukrainian currency devaluation did have a positive impact of 3 percentage points in the business. That's fair to highlight. Market activity I've already talked about our firm view on the incremental opportunities in the international markets can further more in North America and Western Europe. So that naturally increases the addressable market continuously for Tietoevry Create and for the company as a whole.

Furthermore, regarding expectations for the fourth quarter, we expect the adjusted operating margin to be at the level of Q4 '21.

Next into Tietoevry Banking. Healthy growth of 9% and favorable development, to be fair, as anticipated towards the 15.9% level, given the type of efficiency measures we have taken and we have spoken about since the end of Q1 and clearly starting to contribute to the profitability level and the profit improvement, as we have expected.

Healthy growth being driven by 3 of the businesses within banking, the cards business, the payments and financial crime prevention. And also, I would like to confirm that the strategic review of the Banking business is absolutely proceeding on schedule, more specifically in the current era regarding the carve-out project and other preparatory steps towards the outcomes of the strategic review.

Then furthermore, on the fourth quarter, we expect adjusted operating margin to be very healthy at nearly 34% level and the background to the scale of this business naturally being the architectural redefinition that took place a few years regarding especially the hospital information system solution area as called Lifecare. But we continue to see good opportunities in the care business and rather a question of how to optimize the investments to be increasing the growth potential and continued investments in the technologies to drive even, let's say, continuous development in the scale of the business. We expect the fourth quarter adjusted operating margin to be slightly below the Q4 '21 level. We expect this business to be running at healthy profitability also in the fourth quarter.

Next into Tietoevry Industry, very much also according to our own expectations, organic growth approximately 2%. Just as a background of fair to recognize that which we mentioned in prior quarters, large customer contract that had ended impacting about 3 percentage points on the growth side. Growth being good in the Public 360 for the public sector, highly modern software, also cloudified as such, and then furthermore in the pulp, paper and the fiber section or sector of the business.

Profitability being healthy at the 17% level and furthermore, we expect adjusted operating margin to be above the level of the fourth quarter '21 for the fourth quarter of this year.

Next, going into Tietoevry Transform. Q3 organic growth of 1%. Profitability, slightly improving to 6.3% level within the business mix of Transform, actually really healthy growth in the Industry & Forest sector while still challenges in the Telecom & Consumer side. Performance improvement measures did start to contribute to profitability, and I would like to highlight only towards the end of the third quarter. So third quarter for Transform still started from a profitability side a bit weak and the impact of the expected productivity and efficiency programs did kick into effect as we expected towards the end of the quarter, which gives a foundation naturally into the fourth quarter as well. Regarding the fourth quarter, we expect the adjusted operating margin to be above the level of fourth quarter last year.

Then into Tietoevry Connect, organic growth of minus 2%, factors being the traditional infrastructure declining by about 8%, no real surprises. While the growth in cloud platforms and security services up by 6%, we naturally would like to see this being higher than the 6% level. And to confirm that the efficiency measures are on schedule, and that is a factor behind the profitability improvement to the nearly 10% level in the third quarter. Regarding fourth quarter, we expect the adjusted operating margin to be at the levels of fourth quarter last year.

So that would be the brief background or summaries on performance by the businesses. And next, over to Tomi.

[Tomi Hyryläinen, executive]

Thank you, Kimmo, and good morning, everyone. I'm pleased with our Q3 performance overall. As mentioned, we delivered strong organic growth of 8%, driven by Tietoevry Create, Banking and Care. Our adjusted operating margin was good at 14.2% or EUR 97.9 million, supported by our strong revenue growth and performance improvement programs. It's fair to say that our Q3 profit was impacted by the high inflation era that we are living in limiting the pace of profit improvement.

Our operating profit in euros improved compared to prior year, both as adjusted as in reported operating margin. I'll comment cash flow and net debt on the next slide. Our order backlog was at healthy level, up by 3% year-over-year. The overall level was down from Q2, which is fully seasonal with typically lower order intake during the summer month during Q3.

Our CapEx was EUR 23.6 million, which is few millions above our normal run rate due to variations in data center investment levels. Our onetime items were EUR 8.7 million, impacted by performance acceleration programs and the war in Ukraine. And substantially, all of our OTIs related to our efficiency programs are booked. We keep our estimate of OTIs for the year of around 2%.

We delivered EUR 40 million of operating cash flow compared to EUR 92 million of prior year. Our weaker cash flow was due to increase in working capital. The working capital change was fully seasonal from vacation pay accruals and advances received from customers, which we utilize over the course of the year. Compared to prior year, our working capital is higher due to quarterly fluctuations, and we expect our working capital to recover during Q4. This negative working capital impact was also visible in the free cash flow for the quarter. Our net debt-to-EBITDA remained at 1.6, and our interest-bearing net debt was at EUR 700 million.

Attrition levels continue to be high, but they are clearly stabilizing. Our rolling 12-month attrition was 15.3% in Q3 compared to 16.3% in Q2. We increased our net headcount by 150 FTEs during Q3, which was driven by good talent attraction with approximately 1,400 new hires. Over the past 12 months, Tietoevry Create has successfully increased its employee base by approximately 11%, allowing us to deliver the good growth numbers that we are seeing. Similarly, Tietoevry Care is positioned for continued good growth with approximately 11% increased employee base.

On the other hand, in Tietoevry Connect, we have decreased the employee base by 7% approximately, while increasing the offshoring ratio by 9 percentage points to 52% at the end of Q3. We keep our estimate for the salary inflation for the year at approximately 4%.

Next, I'll summarize the performance drivers for Q4. On growth drivers, we expect a good momentum to continue with Tietoevry Create, Banking and Care. Tietoevry Industry will continue to be impacted by the large customer contract ending with negative 3 percentage points. The price increases will start gradually take effect and improve our performance.

On profit drivers, the efficiency measures in Tietoevry Connect, Banking and Transform will contribute to further profit improvement.

End-of-year licenses and software businesses and transaction volumes in data-driven businesses increased the volatility for the Q4. Inflation will continue to be high, including increasing energy prices, and that will have a negative impact to the profitability. On other drivers, the FX impact is estimated to be negative EUR 22 million on revenue and working day impact negative 1.3 percentage points on growth.

Now back to you, Kimmo.

[Kimmo Alkio, executive]

Thank you, Tomi. And I'd like to next cover sustainability and a few considerations on way forward. Regarding sustainability, very important agenda that we have a very rich agenda, a couple of areas we would like to highlight at this point in time. Some of the activities underway, very exciting program that we are sponsoring as Tietoevry to increase the attractiveness of tech field amongst women, a pan-Nordic campaign of being an IT girl, which focuses on students and young professionals, really encouraging people to be joining this very interesting, exciting industry. And these activities are being conducted across different types of networks, including women and tech in Finland and Sweden, Oda in Norway and other local networks as well and a degree of social media visibility embedded naturally.

The other point I wanted to just highlight on activities underway and taken to continue to elevate the gender diversity in the company, very practical activities being conducted succession plans, ensuring both genders represented for all senior positions for recruitments to ensure that both genders presented among the final candidates for all senior positions as well. And then also having already initiated objectives and performance indicators that include the share of women in new recruits in the incentive criteria for senior managers in the company.

So very important developments, and naturally, we continue to drive with our clients, a number of solution domains supporting customer sustainability agenda through the solutions that we deliver. I would like to furthermore highlight a couple of really interesting cool cases that we would like to bring to the forefront. One would be actually around the importance of the energy sector dynamism in the energy sector, whereby with St1, we are increasing flexibility with artificial intelligence enabling utilization and supporting the national electricity grid operations. So very important and applying new technologies in a very, very sensitive and important domain.

The other one I wanted to highlight on the expansion from the Tietoevry Create side, expansion to automotive sound systems based on the existing relationship with Bose and expanding the collaboration to the automotive side and actually establishing a joint center of excellence in Warsaw, Poland, bringing new software engineering capabilities from both companies, enabling also longer-term innovation in these very active domains.

The other one I wanted to highlight around -- in the Tietoevry Banking side, one of the key areas being the payment software, whereby through the partnership with IBM, we are expanding the addressable market for banking payment solutions, whereby IBM acts as a global systems integrator and supporting the market expansion of the competitive software suite we have.

The other point I wanted to highlight here verbally, we did earlier today announce a significant new customer win with Aker BP in Norway whereby we have been selected as Aker BP's new digital services partner, the scope being full-stack services, run and develop covering the application layers, covering cloud technologies as well as the traditional infrastructure side. The contract duration being 5 years with a number of optional years as well, value being significant and services to be starting early 2023. And this significant win and a new customer will contribute to the future outlook of the Tietoevry Transform business.

Then towards the closing and the type of key themes, we believe are very consistent from an operational execution standpoint. We fully anticipate the growth momentum in the company to continue. Furthermore, the performance improvement, very high on the agenda in the extraordinary inflationary era and the profitability improvement program, specifically in Banking, Connect and Transform, as Tomi also highlighted fully expected to contribute to our fourth quarter profitability, and I would also like to highlight furthermore high degree of attention on employee well-being and talent attraction and everything based on our values of openness, trust and respect for diversity. We believe this is becoming a very good place for professionals all around the world within the Tietoevry family.

Finally, I'd like to maybe summarize just very briefly our Capital Markets Day to be held in Stockholm on Wednesday, the 30th of November. We will have an exciting program providing insights into the businesses as well as the future value creation plans for the group as a whole. So we really hope to see many of you in Stockholm on the 30th.

With this in mind, our presentation is complete and time to shift over to Q&A. Thank you.

[Tommi Järvenpää;TietoEVRY Oyj;Head of Investor Relations, executive]

Thank you, Kimmo. And operator, we are now ready for the questions.

[Operator]

[Operator Instructions] We will now take our first question from Panu Laitinmäki of Danske Bank.

[Panu Laitinmaki, analyst]

It's Panu from Danske. I'm here standing in for Sami. I have 3 questions actually. So firstly, you initially guided for 2% to 4% organic growth for this year. And now you have raised the guidance and expect 5% to 6% organic growth. What has surprised you on the upside during this year?

[Kimmo Alkio, executive]

Okay. Shall we take them Panu one by one?

[Panu Laitinmaki, analyst]

Well, whichever you prefer.

[Kimmo Alkio, executive]

You mention all 3. We'll take them then. Thank you.

[Panu Laitinmaki, analyst]

Okay. Yes. Then the second question is that have you become more positive regarding the growth rates going forward because you had like more than 5% organic growth this year and the historical growth rates have been about 2% to 3%.

And then the third question is about the Connect division. You have done quite material EUR 50 million efficiency improvement in this division and achieved quite significant margin improvement in Q3, but then you are guiding for similar margins in Q4 than last year. So why shouldn't we assume that there is more permanent impact from this program? So that's the 3 questions.

[Kimmo Alkio, executive]

Okay. Thank you, Panu. So maybe I'll take the first 2. So first of all, on the driver -- your first 2 relate to the growth profile. So I -- as I think everybody has seen in the prior quarters that we are both in terms of how the market is developing and our strategic choices, which we announced 1 year ago on the specialized businesses, very specifically the software businesses and the highly modern consulting around cloud native applications, everything based on our DevOps based on work in data management, data platforms, these are areas which are growing in the world, in the market as a whole, and we've been able to develop these businesses favorably.

These are some of the very -- I'd be hopeful that everybody is seeing very consistent drivers and factors why we have been able to elevate the view on the growth side. So these are the main factors. Regarding the longer term, maybe I do already want to mention, we do not intend to give guidance for '23. At this point in time, naturally, our growth agenda, we have talked about for -- actually, since we launched a new strategy and the growth agenda is very important. It is materializing. And naturally, we are -- we'll be working, of course, to ensure momentum from a growth standpoint. At which level moving forward, we wish not to speculate -- and actually, we are pleased to see the development -- how far we've gotten so far.

[Tomi Hyryläinen, executive]

On the Connect question specifically from, you're asking, Q3 to Q4, why not seeing a better improvement there. One is building the impact of vacation period, which is highest, the impact, in Q3 and then being lower in Q4 as sort of the headwind that we are seeing there. Of course, the programs will continue to deliver improvement.

[Operator]

We'll now take our next question from Daniel Djurberg of Handelsbanken.

[Daniel Djurberg, analyst]

Yes, and I will also have 3 questions, if I may. First, I would like to ask a little bit on Tietoevry Connect with regards to demand and especially not only Connect, Tietoevry as a whole in Finland, actually. Some of your peers have seen quite large weakness in certain areas following the Russian war against Ukraine and seeing some longer time of decision-making, et cetera. So the first question is really if you can comment a bit on the outlook in Finland in various segments you're. Secondly, in the Connect side, I was wondering a little bit on energy costs. You have data centers, for example, in Sweden, you're also discussing a reduction of the sponsored tax rate in this segment.

So my question is really, if you can elaborate a bit on the -- how important the energy cost side is on the order backlog? If you look at the order backlog, you expect 24% versus 18% to be invoiced in Q4. This, given the increase of the order backlog is also indicating some 34% more Q4 revenue that is known compared to 1 year back, good visibility. Can you share any details on this? Why this has happened, if it's certain projects, certain areas that gives this change year-over-year? Those are the 3 questions.

[Kimmo Alkio, executive]

Okay. Thank you. So let's begin, of course, your first point, and I think you were asking specifically about the Finnish market. Let me also give maybe a bit reflection, a bit broader, then I can very rapidly to your exact point. I think overall, this type of economic downturn, which is visible, the kind of higher inflation era, very likely will drive some type of caution over time in behavior. As I had -- we had highlighted earlier, the market drivers are quite healthy, the signals we are seeing. Naturally, we are also mindful that in an economic downturn, there can be, at some point in time, investment postponements and the likes. They are not very, very concrete at this point in time. We are mindful that the economic downturn implications, that's why we also wanted to talk briefly in the early part about the resilience of the business mix.

Regarding Finland on its own, I would not say there is any clear signal that the market would have become less active or inactive. Naturally, there's -- I would call it as more normal differential decision cycles and decision thresholds on investments that companies are applying. Now what do I mean by that? So one factor might be around the international manufacturing companies. You have some of the -- in the forestry sector to performing really well. You might have other manufacturing companies that are dependent on external energy prices can be impacted. Then we can start to go towards the financial services sector, how these are performing, then we can go further into public sector, public sector investments into a digital agenda likely continues. We can go even further into healthcare, welfare within the public sector, where significant investments are expected for the years to come.

So why did I say that background? I don't think there's any simple answer. I would just maybe a bit aggregate that the type of potential caution, it's good to be mindful and we believe that the market dynamics we are accounting for in our short-term kind of own expectations.

[Tomi Hyryläinen, executive]

On the energy side, if I comment that, so historically, our energy cost for you get a high-level understanding has been approximately EUR 10 million, slightly over EUR 10 million. We hedge our energy in accordance with the company policies, so major part of the volumes are hedged. It means that we will be impacted by some of these price increases immediately. But as I said, major part is hedged. So some of this will fall over towards the end of next year and then '24. But we will be impacted already in Q4 and then the full '23 as all the market participants.

On your order backlog question, of course, it's sort of a combination of the shorter contract cycles that we are experiencing in combination with the higher growth for the Q4. Those would be the sort of primary drivers for the backlog questions.

[Operator]

We'll now move on to our next question from Felix Henriksson of Nordea.

[Felix Henriksson, analyst]

It's Felix from Nordea. I have a couple. Starting with Create, very strong organic growth. And I'm wondering whether you see this type of double-digit progression as sustainable. And how should we think about the performance of this business in a recessionary scenario, given the bit shorter contract durations compared to your other businesses? And secondly, on Industry seeing margin contraction around 350 basis points there from last year's levels. So could you perhaps provide a bit more color on the contraction of such wide magnitude?

[Kimmo Alkio, executive]

Yes. Thank you, Felix. So first of all, I think on the Create side, so we do see this as kind of a positively opportunistic, given that we are playing in a broader international market and the probability of companies continuing to invest and increasing investments in the modern technologies on exactly where our Tietoevry Create delivers its services and significant capabilities. If you think about the cloud native applications, demanding software engineering capabilities and telecom, automotive, we think about the data engineering, data management, data platforms, probability of these being attractive market segments, I would say, is very high. Will this be impacted in case of or in an era of potentially severe downturn can be, I don't think that should hinder what type of business we see opportunities in, and the longer-term potential and our consideration to expand this further.

Then regarding industry software, I would say there's nothing significant in that. I call it, minor fluctuation in profitability. So nothing of significant nature.

[Operator]

We'll move on to our next question from Aditya Buddhavarapu of Bank of America.

[Aditya Buddhavarapu, analyst]

This is Aditya Buddhavarapu from Bank of America. 3 from my side. So you mentioned the significant contract win with Aker BP. Could you maybe just talk about any other sort of large deals in the pipeline and when you might expect to see anything on that? Second question, in Connect, you mentioned that cloud platform was up 6%, but you would like that to grow quicker. So could you just maybe talk about what's happening there? Anything in particular which is maybe impacting the growth and how that maybe could be improved? And then the final question is on the price increases. So you talked about the lead time there. So maybe can you give us an indication of the level of price increases, which should start to come through into Q4 and next year? And also how you're thinking about the ability to raise prices in 2023, if there's a weaker macro environment?

[Kimmo Alkio, executive]

Okay. Thank you. So let us begin indeed with your point on the pipeline. So again, it is good to recognize that, of course, the pipeline we need to kind of describe it to you also or reflect on it per business. If we think about briefly the type of pipeline in Create, the activity level that exists out there in the marketplace, I'd say it's very, very healthy. All of our software businesses are deep in the industries, very deep in client engagement, deep into investment plans with clients. So overarching view on activity level on the software side also healthy.

And then your question might be more centered around Transform and Connect. So this example Aker BP, so it's a very fine one, a new client combines the capabilities of Transform and the infrastructure capabilities coming from Connect and doing the full IT stack dance. So we see -- we do see healthy development. And of course, we need to demonstrate that we maintain healthy win rates in these businesses as visible through then the future views of the business won and future views on the backlog generated. So we do expect also high activity level in this regard for the fourth quarter as well.

Regarding Connect on the growth side, so naturally, greater success in order to uplift that performance in the very modern, very competitive private cloud services we have, ensuring that we penetrate in the marketplace adequately and do further activity in the multi-cloud related professional services. So higher growth is absolutely possible. And to be fair, with that in mind, we're not, in that sense, happy with the 6%. So those would be some of the drivers.

[Tomi Hyryläinen, executive]

On the price increase, maybe if I start from the logic, what type of businesses do we have. So we have Create with shorter life or shorter contract businesses where we have been able to increase our pricing. That impact, we commented, will be visible now in the Q4 growth numbers. We have not been able to do in addition to what we normally do on an annual basis yet on Create either. Then we have the longer-term contracts where the pricing is typically on a calendar year where the beginning of the year price increases happen, they typically follow the indexes, whether it's consumer price index or other indexes relating to salary inflation. Those will happen then towards the '23. But for this year, there has not been a potential to do any price increases basically on those type of contracts. So that's why we comment this delay in pricing increases kicking in and impacting our performance.

Now the levels of what are sort of feasible, of course, sort of the shorter-term contracts, which I refer to Create, they typically follow more or less the salary inflation levels and the market is getting more and more sort of having more appetite in the price increases because it's such a large phenomena, as we know in the market. That would be the sort of the high-level comment on that.

[Operator]

We'll move on to our next question of Jaakko Tyrvainen of SEB.

[Jaakko Tyrväinen, analyst]

It's Jaakko from SEB. Most of my questions have all been asked. But perhaps touching on the salary inflation and the expectations there. Would you dare to give any kind of early indication or expectation for the '23 salary inflation? What are the expectations there? Should we kind of expect salaries inflation to accelerate from the current levels or stay around here? And the second one goes to the attrition and, given the overall economic uncertainty that we are evidencing, do you expect people to look perhaps a bit more at stability and hence the attrition to come down going forward?

[Tomi Hyryläinen, executive]

Yes. So actually, these 2 are combined. So your salary inflation question, it's a bit tied to the attrition as well. I personally -- now I'm guessing, my view is that we will see roughly the same salary inflation next year as we have had this year. I don't foresee huge increases, and it's especially connected to my view of the attrition, which I still see stabilizing, maybe even decreasing a bit due to the economic situation that you also referred to.

[Kimmo Alkio, executive]

Then I think your second point as well, maybe further comments. So normally, what would happen, but there are no significant signals yet that in a recessionary environment, the job market would become a bit cooler, not as hot as it has been. So that would -- there's been some discussion in the industry of that already. We believe that our attrition levels are shared with over 15%, clearly starting to get more normal, and we are not in attrition terms on the higher end relative to the peer group. So we need to be very mindful, continue to actually develop and support the well-being of employees, quite good feedback we are getting from colleagues in the company regarding our modern ways of working, all co-created with employees through crowdsourcing. So I think a number of somewhat favorable signals on the attractiveness of people within Tietoevry family.

[Operator]

We'll now take the question from Daniel Djurberg again from Handelsbanken.

[Daniel Djurberg, analyst]

It's me again here. I was wondering a little bit on the IBM collaboration with Tietoevry Banking. Will IBM Global Services have exclusive rights for a period of time in certain markets? Or is it all non-Nordic markets? And do you have any initial wins or any guarantee revenue from this collaboration already? And also another question is on, if you see any uptick in general in demand for your global delivery centers? You have roughly, I think, 12,750 employees, so more than half of the company in these centers. So -- and I guess if customers start to look more at cost-saving projects, it could be triggering more of this demand for, I guess, cloud-based outsourcing somehow. Yes, those were the 2 questions.

[Kimmo Alkio, executive]

Thank you. So regarding the banking and the payment solution suite, this is quite a typical partnership consideration or program for increasing the addressable market in partnerships there. We don't believe in exclusivity. That's not a good practice. Performance, we'll need to tell how much to actually -- how far to go. So highly in that sense, needs to be expansion-oriented, but very typical type of an SI arrangement on a global level. And then regarding -- so very typical would be my short consideration, nothing exclusive.

Regarding the delivery center, so as we have reflected upon for several years, the global delivery center network we have is a very important competitive asset for the company. We have the combination of being able to support clients' feet on the street close to customers if it is important to a client. And when customers want to prefer or do prefer cost optimization, we have a number of locations to choose from around the world. So that would be my short comment. It's very important part of our competitive equation. And we continue to develop the delivery center work like we've done in recent years.

[Daniel Djurberg, analyst]

Okay. And no major changes in demand pattern?

[Kimmo Alkio, executive]

No significant shift. And it's just a very important factor in every dialogue. And it's actually really, really positive, I would say, flexible. We can be flexible, given that our global delivery centers and that network is well scalable.

[Operator]

We'll now take our last question from Matti Riikonen of Carnegie.

[Matti Riikonen, analyst]

It's Matti Riikonen, Carnegie. I would like to continue on the price increase theme just a bit more, how they work and actually how they work by division. I'm trying to understand how the kind of wage inflation component and other cost inflation elements like energy, how they impact your divisions. So you already said that in Create, you have shorter contracts, it's easier to raise prices. That's quite understandable. But my first question is that how does it work in the software businesses like Care and Industry? Is it also easier to execute the price increases there because they are basically in your own hands?

And secondly, how is the situation with Connect where your prices basically decreased contractually every year? Is it possible to -- and then finally, the same question related to Transform, you have some longer-term contracts, but just how exactly does it work in the contracts? Do you get possibility to make increases due to the other than wage-related inflationary components? That would be helpful.

[Kimmo Alkio, executive]

Okay, so thank you, Matti, for the consideration. So we'll try to give a punctual view on actually complicated topic. So let me first summarize one level above the businesses. Good to recognize that in our industry, it's typical to have a combination of shorter project cycle contracts like the Create, like you summarized. It's also typical to have long-term frame agreements and frame agreements tend to be applied specifically in the public sector, which are highly, highly governed. And then you have outsourcing type of contracts which have prebuilt price discounts built in. So Create, you personally summarized it, Matti, there very punctually.

And Tomi had commented that earlier. Software businesses still need to be slightly broken down between maintenance costs, between license costs and if you are already in the cloud environment, you increase the subscription prices. So point being that there's a lead time into when price -- new price levels kick in, and whenever they are longer term, in the case of license type of contracts, including maintenance, you tend to have index clauses that are applied at a certain point of the year with a certain lead time of kicking in. So that's index-based.

And then the final factor, indeed, that you were a bit alluding to is in the type more outsourcing-oriented contracts, which are in both Connect and Transform, they tend to be long-term contracts with certain price levels being built in. And as recognized, the new type of price points tend to be kicking in, in the first quarter of the new year. Now with that in mind, in Connect and Transform naturally, the part of the business where we do consulting, where we do add-ons, where we do a lot of new type of private cloud platforms, we have the opportunity, of course, to reprice these in the era of higher inflation. So that would be a bit more thorough opening up on how the pricing practically works across the businesses.

[Matti Riikonen, analyst]

All right. So basically, in outsourcing, you can affect the consulting and add-on parts to the project. But to -- I'm just trying to understand the kind of magnitude between consulting and add-on revenue within those contracts and then the contractual, let's say, infrastructure part. So, infrastructure larger, and do you get to change that price based on inflation?

[Tomi Hyryläinen, executive]

So managed services, the pricing is fixed for the duration of the contracts typically. Then as Kimmo referred to add-ons, 2 types, consulting and capacity. Add-ons are typically part of that managed services frame where there is a time point, which is typically, again, I say typically, it's not 100%, it is the beginning of the year when price increases happen. And those tend to be then rate card increases, which typically then follow where it's consulting, it follows the salary inflation and where it's the capacity, there are other indexes that, that it's based on. So that's how it works in practice.

[Kimmo Alkio, executive]

Yes. And I think, Matti, the other point important to recognize about how this industry has been developing for many, many years, the background to that business model is why productivity and automation increases every year to offset any of that, that -- how the price points in the market work. So it's important to recognize that is part of the standard equation for continuing to improve performance of that outsourcing or managed services type of businesses.

[Operator]

It appears there are no further questions at this time. I would like to turn the conference back to the speakers for any additional or closing remarks.

[Tommi Järvenpää;TietoEVRY Oyj;Head of Investor Relations, executive]

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

[Kimmo Alkio, executive]

So thank you very much for joining today. Looking forward to hopefully many joining then for the Capital Markets Day in Stockholm, looking forward to seeing you latest then, and we all look forward to a very exciting fourth quarter. Thank you.