Tietoevry Oyj

OMXH:TIETO

Earnings Call Transcript 2017-Q4

[Tanja Lounevirta, Head of Investor Relations]

Good morning, ladies and gentlemen, and welcome to discuss our fourth quarter results and the outlook for 2018. We had a solid quarter and many exciting achievements during the year. Those will be presented to you by Kimmo Alkio, our President and CEO and later also Lasse Heinonen, our CFO will join us for the Q&A session. My name is Tanja Lounevirta, I'm Head of Investor Relations. But let's move on, Kimmo, please.

[Kimmo Alkio, Chief Executive Officer and President]

Thank you, Tanja. And a warm welcome, as Tanja mentioned, to our fourth quarter results announcement and also for actually summarizing the full year 2017. It feels actually really good that we ended up fiscal year 2017 in a very strong manner and overall, we are indeed pleased with the continued positive trajectory of building Tieto into one of the leading technology companies in Europe. Overall fourth quarter is characterized by strong performance very well in alignment with our own expectations, strong cash flow, good profitability, strong order backlog providing a good foundation for 2018, we have -- as we have aimed at accelerating our growth in Sweden full year 8%, 9% for the fourth quarter and during the fourth quarter also completed the Avega acquisition with the overall foundation leaving the opportunity -- providing the opportunity for the board to recommend an increased dividend of EUR 1.40.I would like to in the beginning briefly also recap 2017 and after which, as usual I'll go into the more in-depth assessment of the fourth quarter. 2017 in a very interesting manner was a really balanced and a good year on behalf of all Tieto constituents. First of all, all-time record in customer experience as measured by the net promoter score. In -- right at the turn of the calendar year meaning early January, we were nominated into Global Technology Top 100 whereby 14 European companies and 3 Nordic companies are included. In this assessment special attention is being paid on longer-term financial performance, longer-term innovation capability, longer-term returns for shareholders and longer-term attention on corporate social responsibility. And then the third very important dimension; employee satisfaction, employee well-being, continued improvement in employee engagement and belief in the company's future.And finally, the very important part for Tieto shareholders; with the strong cash flow, strong continued overall financial performance, the opportunity to increase dividends for the seventh year in a row. So overall in a somewhat unique really positive manner, a well-balanced year on behalf of all our constituents. The overall financial development. As briefly referred to earlier, we continued to carry a positive trajectory from a standpoint of accelerating our growth for 2017; 4% organic growth, healthy profitability development, adjusted EBIT at EUR 161.5 million slightly over 10%, EBIT -- clean EBIT EUR 139.2 million at 9% level while maintaining an important and relatively high level of investments, which again keeps on developing a more and more competitive Tieto. And with this in mind, I think it is indeed a positive signal that the longer-term development in a favorable manner continues regarding the full change agenda that we have initiated some years ago.As usual, I'll begin the fourth quarter or the past quarter in this case Q4 review by the kind of market conditions, a few words on the industry reshaping. Regarding the macro economy as a whole, we do not see any significant changes. I've said for 6 years, the market is not an inhibitor nor an accelerator for Tieto getting done what we need to and want to get done. Economic environment is healthy and I think the overall investment appetite from a customer standpoint to take advantage of the data-driven world is creating a really dynamic market out there while parts of the business naturally is experiencing price erosion, which I'll talk a bit about in a second. I think the main point is that the market remains attractive for us, no fundamental changes in it. Regarding the industry kind of a development, this is very much a similar type of a perspective we have offered quarter-after-quarter.It is also very important, very positive from Tieto standpoint that in early 2014, we started putting in place our growth investments and our start-up operations and we are very actively part of reshaping the whole IT software and services sector. And I do believe we are very well on pace with the development of the worldwide market, which is experiencing very similar factors of new data-driven standard investments and new businesses; whether it's customer experience management, whether it's IoT, moving into artificial intelligence, machine learning and the likes. That's the part where the market reshaping is happening while the traditional services of infrastructure and application management worldwide as a combination tends to be somewhat shrinking. And this market development in my view has been pretty well predictable, it is very consistent with our prior beliefs how the market worldwide is being shaped.And as mentioned, it's good to see that we do play a very active role in reshaping the market in the geographies, primarily Nordics, where we operate. From a standpoint of the growth businesses, which are the fundamental, the parts that are reshaping also Tieto's company profile, I want to as usual talk a bit about the growth investments, the growth that we have made. Our software businesses and our data-driven businesses growing by about 6%. Not quite at the level where our ambition is for software, but well in pace with the market development as such. Our Customer Experience Management business growing by about 26%, good progress also throughout 2017. Our Security business growing by about 19%. And our cloud business, I want to say a few more words on as I did also at the end of the third quarter. Our cloud business as we have reported during 2017 10% growth.It's also interesting that as we have looked at the most recent market statistics; public cloud tends to be growing about 25% to 30%, private cloud more in the 10% to 15% range. The latest estimates say that the combined cloud market is growing between 15% and 20%. When we look at our pure Infrastructure as a Service cloud and Platform as a Service, we are actually growing over 15%, well in line with the market. There is actually a bit of a scripting at the bottom of this page that we are working on redefinition of our cloud services how we reported historically. We have had some other type of shared services, which are not purely in the definition of IaaS and PaaS, Infrastructure and Platform as a Service. The point here being that we do believe that looking forward, we'll be in alignment how the public and private cloud market in aggregate will be proceeding and when we look at the IaaS and PaaS growth for Q4 as an example, we are well in alignment with that market development.So that view actually on cloud is somewhat more positive compared to how we reflected on our cloud as an example at the end of the third quarter. Happy to take questions on that if you have naturally towards the end. And specifically into our Q4 numbers, we had predicted Q4 can be somewhat challenging. We are, in the back of a very strong set of comparison numbers Q4 of '16, happy to report growth in local currencies little bit over 2%; naturally below, our full year average local currency growth for the year was 4%. Our adjusted profitability EUR 49.3 million, 12%; clean EBIT of EUR 48 million. I think very clearly in the healthy part of our own expectations; good execution, good care, good attention of project quality; all the basics of the operations well conducted throughout the fourth quarter. Happy to also report the growth in order backlog.And if you have looked at the details, one will see that the [ 2000 ] and related order backlog is solid would be showing order backlog for the new fiscal year of about 6%. Overall in that sense, adding to a firm view of a healthy foundation as we are entering 2018. Furthermore, on a couple of the more important key performance indicators. Strong cash flow driven by naturally strong operative cash flow, tax refund taken place in the second half of the year and adequate management of net working capital. So that also the very normal foundations of healthy cash flow and that is kind of at the level of cash conversion that we indeed do expect. The other part I want to just very briefly mention has to do with the offshore ratio. As you will remember, we have said for 5 years that we will apply offshoring as rapidly as our customers want. We have very good offshoring capability; high quality, high scale, high satisfaction.The only reason it slightly has declined from 49.6% to 48.7% actually purely driven by the inclusion of our new Avega colleagues in Sweden. So very normal development also on that side. Next I'd like to go into description of the distinctive businesses. Here we have the overall growth profile of the service lines and industry groups, maybe 2 items to pinpoint which I'll go into detail in a minute. BCI, Business Consulting Integration, naturally the Avega contribution for December is visible approximately EUR 4 million. That's 1 highlight. Second, naturally is the very good development also in growth terms for our Product Development Services. Everything else very well kind of consistent in -- with the traditional expectations. Let's begin by the overview of our Technology Services and Modernization. So naturally this is a big part of our services, combination of our infrastructure and application services business.For the fourth quarter as well as for the full year 2017, good overall performance for Technology Services and Modernization driven especially by our application services. We made actually really good inroads in the competitiveness win rates and growth of application services; specifically for the fourth quarter 1% growth, adjusted EBIT at 13.2% level. Indeed a twofold development in my view, very much consistent with the worldwide development of infrastructure and application services, good growth in application services, decline in traditional infrastructure about 6%. It's a very usual agenda for applying the new type of hybrid and cloud technologies for enhancing, improving the total cost of ownership. Very much the type of modernization agenda we have been active on with our customers for multiple years and going actually pretty well. I reflected up on a bit early already on the cloud sales so a lot of energy going in.I do believe that the cloud capability through Tieto OneCloud will become and tangibly a competitive advantage for us as we move forward. And naturally the type of performance and profit contributors in this business call for continuous attention on scalability, on standardization, and automation and these are the type of programs we have been running now for multiple years. It's fair to highlight that kind of on a bit of a high level regarding the anticipation of the first quarter of '18, the number of working days nearly 2 days less, clearly will impact the performance of applications service not just in Tieto, equally in the peer group. And also we have typically, especially the infrastructure side, certain price reduction kicking in as usual in Q1 creates a bit of a seasonality there. Business Consulting and Implementation, fourth quarter 11% growth in local currency, as mentioned, supported by the Avega acquisition.Adjusted EBIT fourth quarter, 4.8%, so improvement from a year ago. This is a business where we clearly have upside for the years ahead. We are pretty far from our own ambitions driven by the challenges; specifically in enterprise applications, couple of challenging projects ending at the end of 2017, which have created a type of a somewhat of a downside effect relative to our own ambition. On the other hand, a service area such as customer experience management continuing to make good progress, good competitiveness, good momentum in the marketplace overall. And actually in this type of a business consulting engagements regarding the first quarter, the number -- fewer number of working days will influence this outlook Q1. Overall, I remain comfortable that as we have shared in our Capital Markets Day on the longer-term outlook and ambition also for Business Consulting and Implementation.It will -- it deserves further naturally attention from all of us in the management. Industry Solutions, our software businesses, a steady progress as expected in our own business plans. I would like to remind that this is a period still of investments. Longer-term aim is to be clearly accelerating Tieto's growth and accretive for our overall performance. And during 2018 we have a number of the businesses, new product launches based on new technologies into which we have been investing into and reroad mapping, rearchitecting software businesses, it tends to be a multi-year process. I do believe the predictability of our forecast in the product road maps and technology forecast are holding and we'll see more positive progress especially towards the latter part of 2018. Fourth quarter actually negative growth, background being very strong comparison figures for fourth quarter 2016. Excluding our 1 specific project in Intelligent Transportation, growth would have been 3%.So there are some factors that are kind of been taken care of through actually advancement in certain historical burdens as well. Nevertheless, the profitability level adjusted at 15.8% and we have discussed for a number of years that this is expected to be clearly on the upper end of our total business mix as far as profitability is concerned. We have number of businesses continuing to do well in the health care sector, lifecare solution suite, Tieto SmartUtility for the utility sector doing well and we have investments as I reflected on twice already for rearchitecting some of the software suites that will add to our competitiveness moving ahead. And also then for regarding the first quarter for 2018, we expect the margin to remain at the level of Q1 2017. And also fair to highlight, which is here actually mentioned in the text, the order backlog does fully support our own ambitions for our software businesses for 2018.Product Development Services, a business which has done a remarkable turnaround in the last 2-year time frame, continues to perform really well. Growth of 11% in local currency, adjusted profit at 10.3% level. Overall business mix continues to actually get stronger both in terms of our large existing customers, gaining new customers. Now we have been able to also announce a new reference on the automotive side with HERE, which also signifies the type of momentum in the automotive industry as a whole whereby our R&D capabilities for anything to do with connectivity in car or actually in the kind of proximity of the moving vehicles, the connectivity knowledge through the experience we have in networking is actually being valued a great, great deal. And overall progress regarding 2017 we are very pleased and the stability of the business indeed, as I'm sure you would agree, very different than what we saw a couple of years ago when this was by far the most volatile business in our portfolio.So job really, really well done. And regarding Q1, also the number of working days expected to impact this business when it's so much kind of a project and labor-based type of a business logic. Overall development of the Product Development Services, we see a healthy mix of opportunities so we kind of -- naturally our ambition up on performance such as we are seeing here. We are thinking naturally of ways for further accelerating the business. So that concludes the view of the service lines, which gives kind of an ability to compare Tieto's performance to the peer group across the whole industry. Next, I would like to as usual give a few reflections of the industry groups, which are our primary go-to-markets. Our customers tend to value a great deal the type of industry expertise we bring to every dialogue. We begin as usual with Financial Services. For a number of years, Financial Services has been our stronghold. It will be our stronghold.2017 was not as a whole as good of a year as we are used to. Also specifically regarding fourth quarter, very kind of a high comparison figures, specifically in the software businesses of Financial Services. It's unusual for our FS business to see negative growth, I don't think we'll see this often. And overall, we are gaining actually new good -- continue to gain new references. As an example in the payments area, national payment infrastructures both in Finland and Sweden being able to replicate capabilities and technologies already from 1 market to another. And Financial Services naturally as a sector continues to be positively dynamic and we have also done a few changes to strengthen our team specifically within Financial Services. Public, Healthcare and Welfare, overall 2017 was actually a really good year. Fourth quarter has very strong comparison figures specifically in the Intelligent Transportation systems.That's technically fair logic growth somewhat lower in the fourth quarter, healthy growth for the full year. Both actually in Finland and Sweden, the type of an order intake we experienced and the type -- and the backlog for 2018 continues to be good. A number of important and large new agreements also announced in the fourth quarter as well as the market momentum overall as an example in the health care and welfare sector all around the Nordic naturally is gaining a lot of attention and we tend to play a very important role in the Nordic health care and welfare sector. Our Industrial and Consumer Services business, growth of about 4% for the fourth quarter. Overall here a bit of a mixture within the ICS business. Very good to see strengthening of our capabilities in consulting side. The Avega acquisition supports primarily our industrial and consumer customers. Good development specifically in Sweden, good new references and overall momentum market opportunity we see being indeed healthy.Moving ahead, I'd like to also take the opportunity at the end of a calendar year to give a few reflections. What is the pace of development relative to our 2020 management ambition? You likely remember that we have 4 specific financial objectives in our strategy. There we talk about growth above market average, being consistently over 10% profit, we have talk about a continued improvement enhancement of dividends and the type of leverage in the balance sheet. In our last Capital Markets Day, we also opened up the management ambition. What are the elements through which we think we could potentially go even further? And these we have highlighted in 8 domains and I'd like to give a very brief reflection now within these 8 domains what type of velocity do we have in place. Overall as you see based on the color coding, velocity tends to be quite good. The areas that are moving well, naturally we have the investment capacity.We have been able over the last 2-year time frame of accelerating growth of practically both our IT services and PDS business, efficiency from an operational standpoint and the margin development continues to be kind of a healthy trajectory and kind of the ambition very much feasible. The shared services progress our history as a company and the industry has been a lot about customer services, really driving standardized architectures, actively driving cloudification. We are also having a good pace, naturally our ambition is to do even better. The areas where we seek to do even better than we have delivered in the last 2 years, let me please begin by the top left corner. The software businesses, clearly 2017 we did not get to our or my ambition with our software business and we are paying all the necessary attention to actually get towards and no reason to give up on the 2020 management aim, kind of a step function change in the pace naturally needed in the next couple of years. That's one factor.Second factor, data-driven businesses, we have grown from 0 to a few million in the first year. The world of artificial intelligence is going through a tremendous degree of innovation. I'm so happy we are part of the kind of an AI train in the Nordics, wonderful new capabilities, new talent in the company and we are playing that aggressively while managing naturally the investment level we put into more strategic in the way more high risk level businesses. It's a really good chip in my view for us to continue to play. Increase in the Nordic market share, we'd like to see our growth rates in actually -- in all the countries to further accelerate '17. For Sweden full year 8%, Q4 9% was already good. So, our ambition naturally is to do even better in all the core countries before we would consider to do any further geographical expansion.So overall wanted to take a minute to give a reflection. We are roughly on pace. I don't think there's a perfect pacing; some things go fast, some things might be a bit behind. I think the consistency of execution tends to be really important and the feasibility indeed is healthy that we will follow the planned path in all the 8 domains. Towards the end, I would also like to take as usual a view on our performance drivers. In this case for 2018 and for the first quarter, our performance drivers remain very consistent in how we have looked at the tailwind and the headwind of our business, naturally through the improvement of the business mix into kind of healthier businesses or profitable businesses, more scalable businesses and contribution through growth. These are some of the factors. Then the combination of salary inflation, somewhat increased attrition. There's a bit of a new dynamic in the sector, attrition in IT software services, technology sector currently is a bit higher.So we need to be mindful that we have adequate capacity in the P&L for salary inflation and attrition and we have as expected the normal productivity improvement drivers that we have been able to deliver quite well in the past years as well that we expect to provide the type of a mix that we continue our trajectory of healthy development also in profitability terms. Specifically around Q1, we would like to highlight very openly that the combination of currency exchange and the number of working days combined will have a clear impact specifically on Q1 and I don't think to anybody who has done the analysis, this will be a surprise. Based on January exchange rates, the exchange rate impact would likely be about EUR 2 million and the working day impact for Tieto about EUR 2 million as well. And I believe this kind of quantification is pretty well recognized.And the performance drivers as commented couple of minutes ago, very usual, very similar as how we have looked at the development of the business in past years. With all this in mind, as usual the way we provide guidance, we have -- we see no reason to make changes. With this in mind, we expect the operating profit to increase from the 2017 level of EUR 161.5 million. In summary, Q4 a good quarter concluded a very balanced year 2017. Probably from a value creation to all stakeholders' standpoint, clearly the best year in a long time. From a standpoint of tangible improvement for customer experience, industry recognition, continued development in employee engagement and continued progress in terms of what is most important to shareholders.So this would conclude the CEO part of the update of Q4 and the full year summary. With this in mind, time to move to Q&A. Thank you.

[Tanja Lounevirta, Head of Investor Relations]

Thank you, Kimmo, and welcome, Lasse. So we would now like to also welcome the guests online to join us for the Q&A, therefore, we start with questions from the call. Moderator, please go ahead.

[Operator]

[Operator Instructions] We would take our first question from Daniel.

[Daniel Djurberg, Research Analyst]

Congratulations on stable Q4 numbers. Starting with your comments on the salary inflation outlook for '18, you said roughly 4%, you expect more than half of this to be offset by offshoring and managing the age pyramid. I was thinking about how you see pricing developing if that can help with the rest and also what you did with age pyramid in 2017, can you give us some color on the age pyramid as of the year? And also another question would be on the TSM, the traditional infrastructure was down 6% legacy in the quarter while Platform as a Service up 15%. It would be great if you could give us some color of the relative sizes, i.e., how much percentage of total sales in TSM was legacy traditional infrastructure in the quarter?

[Kimmo Alkio, Chief Executive Officer and President]

So why don't we begin with the inflation. So I think the age pyramid -- and you had number of factors there on the pricing. So age pyramid, we are -- I think every year we have been also more active, more mindful making sure that the renewal of Tieto actually the pace of change increases. It's been really important for us and it's been very good to see. If I look at the type of population in our monthly induction sessions we have, it's quite healthy how the pyramid is working not just in our offshore centers where it's usually the pyramid attention higher, but also the overall profile of the employee base also in our onshore markets. And by the way, even when we want to work on the pyramid, it's very important to recognize that there's equal respect for experience as well as the younger generation. But it's a very fine balance that it's not just a question of efficiency, it is also very important we provide the best possible capabilities and experience for our customers. But this necessity to pay attention on the pyramid continues to gain, as it should, more attention. If I comment briefly on pricing, let's see if Lasse wants to comment further on the age pyramid and offshore kind of ratios. The pricing side, naturally we are used to for pricing of actually being quite dynamic in the market. This is really not different in what we are seeing now compared to what we saw 1 or 2 years ago. So in the traditional infrastructure side, it has been for years very important to actually be good in forward-looking pricing and how to modernize using new technologies, new architectures to be able to drive the type of a TC or reduction for customers and actually in parallel improve productivity of your own operations. So this dynamic, which is quite challenging, it will continue and we have managed to actually adopt to this type of a cycle pretty, pretty well. Some of the business is surprising if we think of consulting led engagements through DevOps. So that is a fundamental evolution in the industry that we are seeing more shorter-term projects, less of the multi 2, 3-year project with fixed prices. DevOps tend to be lot shorter term from kind of run in sprints while the total investment level may actually increase, but there is clearly a change in the way of working in the sector. Nothing dramatic currently. To me, this has been an evolution visible in the last 1 to 1.5 year time frame.

[Lasse Heinonen, Chief Financial Officer]

If I totally add on. So of course there's a competence shift also ongoing in this when we talk about offshoring and pyramid management. It's a lot about in the consulting and PDS type of business is really relevant. There has been a good trend also in 2017 so we don't expect any extraordinary pace change in 2018. In that sense when it comes to pricing, as Kimmo also already commented, normally in software assets we have better capabilities to adjust also prices upwards and time will tell how successful we'll be in this year. Related to your question on TSM, just want to comment. We don't give quarterly specific splits, but a little bit more than 60% is infra, 30% is application services and then the rest is emerging service within TSM. And for Q4, I think there was a comment that the infra went down about 6% and application services grew by about 4%.

[Daniel Djurberg, Research Analyst]

May I just add one more question? And that would be on the software side of industry solutions that if you can give some more colors on the new product launches, will it come early in the year, have you already launched them or -- and also in which areas?

[Kimmo Alkio, Chief Executive Officer and President]

So we have specifically in our health care business and in our payments business. These are multi-year projects and we expect these to materialize towards the second half of the year and actually some of the releases even during the fourth quarter. And the nature of development and the predictability of the R&D projects is at a quite healthy level currently. We have some early stage releases with beta customers earlier. The activity and the interest level, as an example, on hospital information systems whereby we've done the process and flow design jointly with doctors and nurses in the Nordic countries. We expect to have very positive reaction in the marketplace because it's well adhering to the ways of working in the health care and welfare sector specifically in Northern Europe. So we think that actually we'll see a good development.

[Operator]

[Operator Instructions] Now we would take our next question from Sami.

[Sami Sarkamies, Senior Analyst of TMT]

Firstly, on cost savings, are you planning on new efficiency improvement measures to offset for the EUR 30 million salary inflation, you will still see EUR 20 million benefit from the actions from last year?

[Lasse Heinonen, Chief Financial Officer]

Yes. The program we did in 2017 helps us about EUR 20 million in 2018. Of course in each of our business, there is own productivity programs. We don't have a group umbrella to call that program anything, but that work continues every day.

[Kimmo Alkio, Chief Executive Officer and President]

And we expect the restructuring charges to be about 1% to 2% of revenues as we have commented. And like Lasse referred to, the productivity improvement objectives actually exist in all businesses as we have had for several years and when they are actually being led properly, we should have less at the group level. And as you've seen in the past, if we were to run into any unforeseen issues, if needed we could do also group level programs. As Lasse said, currently these are not planned. We believe that the operating plans of the distinctive units should meet the needs of our productivity aim.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. Then secondly on guidance of this year. Can you discuss the outlook on divisional level? So you have issued positive EBIT guidance, will all the divisions be contributing positively or do you anticipate that some are better equipped for earnings improvement in 2018 than others?

[Kimmo Alkio, Chief Executive Officer and President]

It's actually that all businesses will contribute favorably and naturally as I'm sure, you would expect, a different degree of -- differential degrees of contribution. But naturally, there is fair logic that all businesses should be able to contribute.

[Sami Sarkamies, Senior Analyst of TMT]

Then finally, just wanted to check. You mentioned the EUR 2 million FX and calendar day headwinds going into Q1. Were those net sales or EBIT headwinds or both?

[Lasse Heinonen, Chief Financial Officer]

That was roughly the profit impact. So with the historical information we have in first quarter, there is close to 2 working days less so that was reflected in the profit impact. The revenue impact is about 5x more. These are approximate group [ measures ].

[Operator]

[Operator Instructions] Now we would take our next question from Michael.

[Michael Briest]

Just in terms of Slide 22, the profit improvement year-on-year. You're not putting in anything explicitly for Avega, but I guess that's about EUR 5 million of EBIT so consensus is EUR 170 million against EUR 161 million last year given that EUR 5 million contribution. Does that seem reasonable. It’s just the slide seems to suggest a very modest increase? And then I've got a couple more.

[Lasse Heinonen, Chief Financial Officer]

So just to comment on Avega. So yes, the annualized numbers of Avega have been somewhere EUR 40 million and has been making around 10% profit. So you get a good feel on that what you just commented is roughly right. That page is more illustrative about the key drivers.

[Michael Briest]

Okay. And then just on the market outlook. You're talking about a 2% growth for Nordic IT services this year. Last year you were at 2% to 3% and I'm just puzzled why when everything else seems to be seeing inflationary pressures and GDP improving you don't have a better market backdrop? And then also on industry solutions, they had a good Q4 and I think on the Q3 call you highlighted quite a few headwinds. Was it better than you expected the outcome for Q4 on license sales or something?

[Kimmo Alkio, Chief Executive Officer and President]

So let me please take them both. So I think the market, it's quite interesting and which actually very recently it kind of looked at the analyst reports and actually last week to get the feel for what the predictions are. So actually the growth in Sweden for IT software and service is expected to go down to -- the growth rate to decline to about 2.6% -- 2.5% -- 2.4% actually and Finland to about 1.5%. So I think that's the latest market data and I do believe there's a very logical reason why it is the case. So if we think about -- a bit kind of go back to my perspective on the drivers of this industry, which I went through in the early stage of the presentation. If we look at traditional services, the type of price erosion and expectation of cost reductions that customers have through adoption of new technologies, that sector is continuously under price pressure and will see price erosion. So that will be a smaller market [ highs ]. And then the new components around customer experience management, around industrial Internet, machine learning, AI capabilities; that part is clearly making up the growth while the total investment pool is -- we really do believe is growing about 2% and the market data actually supports that very, very tangibly. So our reflection is that the market is positively dynamic meaning the investment appetite, but areas where customers can save also understandably customers are driving a very hard cost-saving agenda. And given the nature of high competitiveness in our business, which we are fully used to, it is leading into a only 2% growth market.

[Lasse Heinonen, Chief Financial Officer]

And maybe just to add on. We have not changed the longer-term view that in the coming years 2% to 3% is still what you see in the text. It was more kind of precise for the near-term future.

[Michael Briest]

Okay. And on Q4 licenses?

[Kimmo Alkio, Chief Executive Officer and President]

Yes, Q4. So overall on the license side, very much according to what we actually expected. We have been naturally so far operationally quite well predictable in our distinctive businesses. So we really had no surprises, neither in industry solutions for the fourth quarter. So these factors were known to us and very, very much as anticipated.

[Lasse Heinonen, Chief Financial Officer]

And as already said at end of quarter 3, the Q4 licenses were not as strong as previous year, for example Financial Services. So that was exactly what happened in line with our expectations.

[Michael Briest]

And the final one, just on Product Development Services. You had a very good 2017 and you talked about the drivers in automotive, which seemed quite sustainable. Would you hope for similar growth or maybe a bit less, but still above average growth from PDS this year?

[Kimmo Alkio, Chief Executive Officer and President]

So well, I think first of all as usual, we want to be a bit careful for giving specific guidance on distinctive businesses, please understand us. I'll try to give some reflection without giving you numbers because we don't want to do that. Naturally when we see a business performing, naturally we aren’t going to let go of the ambition of becoming better. So the growth opportunities are there. Our appetite for growing the part on PDS, which is kind of a very interesting challenge not just for us but any company doing outsource R&D, that how far can you scale the business because it's so labor intensive and the elements of kind of a software-driven scale are almost nonexistent. So here I try to give you a balanced view of appetite for growth. We see kind of the challenges in further enhancing at least the short and mid-term profit level of the business. So that's some reflection unless Lasse wants to add or correct.

[Lasse Heinonen, Chief Financial Officer]

No, I think it's fine. Very good. No need.

[Operator]

[Operator Instructions] It appears there are no further questions at this time. Sir, I would like to turn the conference back to you for any additional or closing remarks.

[Tanja Lounevirta, Head of Investor Relations]

Thank you, moderator. So now we move to the questions on the floor. Please wait for the microphone. We start here from first row.

[Raul Etelämäki, Analyst]

It's Raul Etelamaki from Danske Bank. First, could you comment on the sort of weak performance on the Financial Services given what is going on in the industry about GST2, GDPR, Blockchain and lot of things happening. So why is the growth so slow? And then the second comment on the 2020 target, you mentioned that you want to focus on the industry services so could you give us some little bit more color? What do you want to do to improve the performance? You already mentioned the new products, but if you have something else.

[Kimmo Alkio, Chief Executive Officer and President]

So let's take first the Financial Services. So indeed, like I mentioned hopefully very openly, so '17 was not for Financial Services according to our own expectations. We have a very strong foothold. The reason being primarily actually the fluctuation of the software businesses within Financial Services, that's very tangibly especially towards the year-end. Also in the -- so actually that's a double whammy of the investments we have underway for rearchitecting the software and very high comparison figures. So that gives a bit of a double whammy. That's one factor. Second factor, that we have had somewhat higher attrition in some of our consulting businesses in Financial Services. That's the second factor. Overall, very firm belief that our strong past performance excluding '17 in this sector, we will be strong -- continue to be in Financial Services and I do believe we will see already kind of more normalized '18 performance. Then the point on the 2020 regarding the software businesses. So the way we also originally when we talked about the management ambition in the Capital Markets Day, May of 2016, there we said that our software businesses first we need to get better scale of our existing software assets so we are absolutely on the same path that we then discussed. Timing is roughly fine. They are multi-year projects. Our software businesses are competitive. They are performing if I think of the market engagement and the type of wins we have, we'll need to prove the scale of our existing assets. And then comes the final part, which we have also opened up previously. As we get better scale, proven scale of new technologies in the software businesses, we would be looking into more global expansion. And these are absolutely what we have on our radar and naturally we will come back and report as progress is made. I think that's a tremendously advantageous, the consideration path for us from a standpoint of the whole world is becoming more software-centric. We have very competitive insights for customers, business processes, strong history, good technological knowledge. Now we just need to go over the threshold of actually getting into the bandwagon of the latest technologies and I think we can actually accelerate.

[Lasse Heinonen, Chief Financial Officer]

Maybe just to add and of course you know also our long-term plan to disrupt the new data-centric businesses is assumed to be scalable cases going forward and we have good start-ups and good cases there and time will tell how they will be then adding value towards 2020.

[Raul Etelämäki, Analyst]

Raul Etelamaki, Danske Bank again. Just one final question, a little bit local flavor. Your international competitors have actually acquired quite a few larger companies here in Finland, CGI and [ Avery ]. So have you seen that affect your market position or your competitive position at all in the Finnish market?

[Kimmo Alkio, Chief Executive Officer and President]

I think the nature of competition has been the same for a few years. So no real difference. It's very competitive. It's been for many years. So in a way we always approach this topic very humbly, but there is really no fundamental change now.

[Tanja Lounevirta, Head of Investor Relations]

We have a question from Matti Riikonen.

[Matti Riikonen, Financial Analyst]

Matti Riikonen, Carnegie. One question related to the order dynamics. You have previously mentioned or described the pattern that customers order smaller projects, they don't commit that long and we have seen that in your contract value numbers for instance in this quarter and previous. But we don't see that trend in order backlog, I mean it was still kind of roughly on the same level as last year. So why doesn't it reflect on the order backlog or is it just -- that it was a good quarter?

[Lasse Heinonen, Chief Financial Officer]

Well, actually it does reflect the order backlog vis-a-vis. When you look at the order backlog, it's absolute levels roughly the same as last year, but how much it will be invoiced for 2018 is giving a quite nice growth prospect. So it shows that more of the order backlog is invoiced in the shorter term than it used to be in the past. So that's kind of -- so there is a comment actually in the text also reflecting that 52% of the order backlog will be invoiced for 2018. A year ago from the order backlog was 49%, which was invoiced for the following year. So more of the order backlog goes towards the next 12 months.

[Matti Riikonen, Financial Analyst]

Right. So basically you said last time that roughly 20% of the order numbers could be coming down due to this kind of time shift and that is still the case that you think it would be?

[Lasse Heinonen, Chief Financial Officer]

I think it's still valid that the market, it's more agile ways of buying and the kind of contract periods are not getting longer.

[Tanja Lounevirta, Head of Investor Relations]

Any further questions on the floor? So if not, then it's time to conclude this event. I would like to thank you all for joining us today and interesting to see how the market opens today.

[Kimmo Alkio, Chief Executive Officer and President]

Thank you from all of our behalf in Tieto. Thank you for joining and I hope you have enjoyed this summary of 2017, very interesting one. Thank you.

[Lasse Heinonen, Chief Financial Officer]

Thank you.

[Operator]

Does conclude today's conference. Thank you everyone for your participation.