Tietoevry Oyj

OMXH:TIETO

Earnings Call Transcript 2021-Q4

[Tanja Lounevirta, Head of Financial Communications]

Dear ladies and gentlemen, we have today announced our fourth quarter results. Kimmo Alkio, our President and CEO; and Tomi Hyrylainen, our CFO, will introduce the results, and also discuss our outlook for this year and way forward. [Operator Instructions]My name is Tanja Lounevirta. I'm Head of Financial Communications, and I warmly welcome you all into the call.And now hand over to you, Kimmo, please.

[Kimmo Alkio, CEO & President]

Thank you very much, Tanja, and a very warm welcome also on my behalf to our fourth quarter 2021 results announcement.What an exciting year and fourth quarter it has been. In the fourth quarter, we were able to follow our growth agenda with the 3% growth, and we were able to achieve record order intake since the merger, and we were able to deliver a very strong cash flow for the fourth quarter. Some of the main factors, main messages that we would like to share, the 5, as highlighted on this page.Growth driven by software businesses, and over 20% growth in product development services, and international operations. With this in mind, 4 of our 6 businesses are doing really well. Second very important factor, we have strong wins, strongest since the merger. We have seen in the fourth quarter order backlog up by 5% for year 2022. We were able to deliver a healthy adjusted operating margin of 13.9% and the strong cash flow, and we have the dividend proposal by the Board of Directors at EUR 1.40 per share.Furthermore, we are today announcing further performance acceleration in the Cloud & Infra business to drive cloud growth and achieve adjusted EBITDA margin of over 20% by 2023, targeting annual savings of EUR 50 million. And we do believe we can speed up the time it takes to improve the performance of this business in question.Furthermore, fair to highlight briefly the full year 2021 key financials practically improving across all main performance indicators: revenue EUR 2.8 billion to EUR 3 billion, EBITDA adjusted EUR 368 million, 13%, operating cash flow EUR 368 million, order backlog 3.513 billion, reported EBIT EUR 382 million, 13.5%, and continue to actively deleverage the company, net debt to EBITDA 1.1. And based on the dividend proposal, this would be representing a dividend yield of 5.4%.In addition to financials, I would like to highlight a couple of important operational and strategic drivers and developments during the fiscal year 2021. Growth agenda has been very important for us. Even with the challenges of Cloud & Infra, H2 acceleration has been very promising, practically across the 4 well-performing businesses, the 2 software businesses, product development services and international operations.Furthermore, important to highlight that our integration program, the 2 year integration program is completed with main targets achieved, and operational sanctity, operational quality, efficiency has developed favorably naturally in some of the businesses, e.g. software businesses, road map consolidations. Some of the tooling in Cloud & Infra will continue, but the centralized integration program we believe well completed.Furthermore, very important in the very active and hot talent market that we have continued to develop favorably our employer attractiveness and ability to drive recruitments, over 5,700 recruitments in the year. And we also wish to share the consideration that female participation is up by 4 percentage points in the new recruitments.And furthermore, very important, we believe, less than 2 years from the merger that we did announce our new strategy, highly focused, specialized than expansion-driven, through our 6 end-to-end businesses. And on that implementation, I'll be touching briefly on a bit later on.Furthermore, we'd like to spend a minute on reflecting a bit on the wins during the quarter. As reflected briefly earlier, these are the strongest wins and strongest order intake since the merger. And we are pleased to see especially the development in the consulting side and the Cloud & Infra side. Software has been strong. It continues to be strong. In the consulting domain, we have seen especially strong development and order intake in the ERP domain, which -- an area where we have both on SAP and MS Dynamics very strong capabilities, and we did see a clear bounce back in the fourth quarter.Furthermore, in the consulting domains, and this refers a bit now to product development services, number of very interesting new customers -- customer names, not public at this point in time. So the customer base expansion continuing on the PDS side.Furthermore, in the Cloud & Infra, we also did experience healthy order intake, highly modern multi-cloud services, and we continue to see favorable development also in the ply pipeline into 2022 regarding the Cloud & Infra business. So overall, good developments from a market penetration and customer win standpoint.I would also like in this opening part briefly to reflect on the importance of our ESG agenda, and the progress we are making. We do very firmly drive positive climate impact across our whole operations, across our totality of the value chain. And we'd like to highlight 3 main drivers. Us launching sustainability data services for our customers, co-innovating the future of sustainability data platforms, tremendous degree of interest in the marketplace. A very exciting initiative. I'm sure we'll see a lot more of this in the future.Second important driver, reducing our CO2 emissions in our own operations and in the supply chain, aim to reach carbon-neutral operations by 2025. And we are fully committed to the science-based targets as well.Furthermore, we are implementing the EU taxonomy within this whole notion. We are part of the players in the world of the kind of industrial landscape of having a low environmental impact to begin with, and as contributing with a very large potential to support our clients in their transition to greener operations through our services. And to be fair, also our recently launched brand and identity also supports our considerations and believe in the sustainable development of the environment, whereby our purpose statements calls for the creating purposeful technology that reinvents the world for good. This fits our value base also tremendously well.If we next go into maybe the main part of today, or one of the main parts which relates then to the fourth quarter performance, we'll summarize first the group level. Revenues of EUR 742 million, organic growth, aforementioned 3%, adjusted EBITDA EUR 103.3 million, 13.9%. As already mentioned, strengths in 4 of our 6 businesses, we continue to have negative contribution from the pre-merger impact in the Cloud & Infra side, that has been with us for the full year '21.And fair to highlight that also in the case of TietoEVRY, similarly to the full industry peer group, the higher attrition levels and higher salary inflations do impact overall productivity. So our point being even more we believe is possible. Operating cash flow, very strong at EUR 169 million, and as mentioned earlier, on the back -- favorable backlog development.Regarding digital consulting, our growth did not yet realize, while we see really favorable progress. We did report growth of minus 1% adjusted EBITDA, at 14.1%. And challenge from a revenue standpoint, driven by few ending larger contracts, while starting to win very interesting and important ERP business, and continuing to see attractive growth in the modern and highly future-related cloud data and analytics domains.Very practically, the other factor on the overall development for digital consulting, as we have had flat capacity and higher attrition levels, this by virtue does impact the overall productivity, especially in this type of a consulting business. And the part of -- from a standpoint of us seeing favorable progress, with a strong order intake in the fourth quarter confirming our competitiveness, and laying a really interesting foundation for growth for the year 2022.Furthermore, moving into Cloud & Infra -- and today, we are very open sharing that further performance improvement and acceleration is required, which we are sharing more of during this session. We continue to improve quarter over quarter in performance, and we do believe performance acceleration can be faster, and maintaining our longer term target levels.For the fourth quarter in Cloud & Infra, we had growth of minus 7%, adjusted EBITDA 9.5% level, and our revenue side, the contribution from some of the pre-merger loss customers minus 3%, reduced hardware sales minus 2%. So these are some of the main factors, and the highly predictable decline in traditional infrastructure services. While we are seeing attractive development in the multi-cloud domain, where our primary big driver is the private cloud services, growth of 5% and security services growing over 50%. And as mentioned earlier, very important that order intake was strong, and we have a healthy increase in the order backlog. So with this in mind, the possibilities for year 2022 do look better. And I'll come back to the performance acceleration in a few minutes.Then we follow with the remaining businesses which are actually all performing very strongly. We begin with the industry software, growth of 7%, adjusted EBITDA 25.8%. Here we continue a very steady, very consistent progress with strong performance across all our main businesses. And we would like to highlight regarding fourth quarter, especially the growth and wins in Public 360°. And we continue to develop favorably in the health and care software domain.And overall, our message remains the same as throughout 2021. The drivers around industrial developing -- the research and development, software development capabilities and practices, naturally in the software arena, important to continue with high-high degree. And we confirm as mentioned during last year, the smaller divestments, that they are closed in December.Furthermore, regarding Financial Services, healthy organic growth of 12%, adjusted EBITDA 14.4%. And the goodness of the fourth quarter, we continue to see growth across the portfolio. These would include -- or especially on the credit banking as a service and the card side. So this is an area that has strengthened in our case actually throughout merger era. And we maintained the investments to support further growth opportunities and expansion of this business overall.Product Development services. Strong growth of 70% -- also of 20%, not quite 70%. Pardon me. 20% growth. To be fair, excluding the Nanjing operations, this was very healthy as well. Very healthy, around 7% to 8%. Naturally, the Nanjing operations join in creating the 20% growth. Overall profitability with development, quite favorable at 12% level. Profitability naturally impacted by the attrition and salary inflation levels that's also impacting clearly in this type of business logic.Our development overall in the business has been favorable. The operations in the Nanjing R&D center developing favorably. All short-term objectives met or exceeded. And goodness being that the customer base expansion has very firmly positively continued.Then into our International Operations. One of our very nice success stories for the year 2021, very healthy growth continuing at 26% level. These are the highly modern services fully, according to our new strategy. Here we talk about the cloud native data-oriented services, and here we continue to see interesting expansion within the Fortune 500 category, especially in the U.S.And we are experiencing a degree of positive network effect, given the high quality references we have been able to achieve in the customer base. And we see this indeed being the core of our future around the cloud native data-oriented DevOps ways of working. This is where the industry investments are going into. Will be very interesting to see in the new businesses how this business model we aim to expand further.Today, as mentioned earlier, we are announcing the actions to accelerate performance in Cloud & Infra to drive cloud growth and achieve over 10% profitability. In practice, we are announcing cost savings measures, aiming at annualized savings of EUR 50 million.I would like to briefly highlight the full picture of the current state of this business and related market drivers. The prevailing market drivers call for multi-cloud growth acceleration, and that's an area where we also have a very important play within, while in the market worldwide, we continue to see decline in the traditional infrastructure services. Our way forward is to align our cost structure and accelerate our multi-cloud growth. Very practically, we align our cost structure to volume shift from traditional to cloud, and to the current volume levels in the traditional infrastructure services.Furthermore, we would like to highlight, we have now available market-leading private cloud services across our main markets, Norway, Sweden, and Finland. During the integration era, it has taken a bit of time to get the leading technologies fully operational in 3 markets. And we have onboarded first customers already also in Norway and Sweden.Given the operating model of the end-to-end businesses, we already have in place a dedicated cloud-focused sales and solutioning teams, and we expect to have a much higher activity level and win rates in the market for 2022. Very practically, the -- just to confirm the measures initiated, aiming at annualized savings of EUR 50 million. Savings are related to personnel and external purchases, including subcontracting. We anticipate the potential impact up to 600 rolls primarily in Norway, Sweden, and Finland. And the planning naturally has been initiated according to country procedures, or related to personnel negotiations.We would also like to confirm that these announced actions are in full synchronization with our known strategy and our plans to reach our financial targets for Cloud & Infra by 2023.So this would conclude the fourth quarter summary and highlighting the background and considerations behind the performance acceleration for Cloud & Infra. And now over to Tomi.

[Tomi Hyrylainen, Chief Financial Officer]

Thank you, Kimmo, and good morning, everyone. I'm pleased with our Q4 performance overall.We delivered solid 3% growth and healthy 13.9% profit margin. The market was positively active, however characterized by continued high salary inflation and attrition levels impacting both growth and profitability. Our reported operating profit was strong at EUR 113.4 million or 15.3% compared to 10.9% prior year, reflecting solid underlying profitability combined with reduction in onetime items and positive impact from divestments.We delivered strong operative and free cash flow, and improved our leverage metric net debt EBITDA to 1.1. Our dividend proposal of EUR 1.4 per share reflects our strong financial position and strong overall performance of the company. We reached EUR 97 million synergy run rate at year-end, substantially completing the program. FX revenue tailwind for the quarter was EUR 25 million.As mentioned, we delivered strong operative cash flow at EUR 169 million compared to EUR 125 million of prior year. Working capital development was favorable by EUR 68.5 million, mainly relating to increase in AP, accounts payable, and seasonal working capital changes primarily from vacation accruals. Our free cash flow was also strong at EUR 165 million, representing cash conversion of 1.9 for the quarter, and 1.35 for the full year. Adjusted for divestments full year cash conversion would be also strong at 1.1. As a result of strong cash flow, our net debt ended up to EUR 611 million, and net debt EBITDA to 1.1 as mentioned, compared to 2.5 in prior year.So as mentioned, we reached EUR 97 million of run rate at year-end, substantially completing our EUR 100 million synergy program. Remaining synergies will be rolled into normal business performance reporting in 2022. Accumulative onetime integration cost amounted to EUR 110 million at the end of the year. The remaining EUR 7 million will be incurred in 2022, ending up to EUR 117 million of total integration cost, unchanged from our estimate earlier. The remaining cost EUR 7 million relate mainly to our brand and identity program which we are currently doing.With this Q4 report, we end the era of separately reporting on integration-related synergies and costs. Our Q4 onetime cost amounted to EUR 11 million, fully as expected, with onetime full year cost amounting to EUR 43 million. Total one-time items however were positive, EUR 61 million, driven with our divestment gains of positive EUR 104 million. We have earlier believed to reach 1% onetime items level during 2022. However, due to Cloud & Infra performance acceleration program, as we just went through, we estimated onetime items for 2022 to be slightly elevated at 1.5% to 2% level.CapEx for the quarter amounted to EUR 25 million. The higher CapEx level compared to previous quarters was a result of normal purchases of software licenses and data center investments. CapEx for the full year was EUR 81 million, which is at the same level of prior year. As mentioned, we closed the sale of 3 smaller software businesses in December as planned, and the divestments resulted in capital gain of EUR 31 million and positive net cash impact of EUR 38 million. Effective tax rate for the quarter -- sorry, for the year, ended up to 17.6% which was impacted by nontaxable divestment gains of approximately 5 percentage point impact. So the normalized level would have been between 22% or 22.6%. We expect for 2022 the effective tax rate to be between 22% and 23%.Next, I'll summarize the Q1 performance drivers. We expect good momentum to continue in our software businesses, PDS and International Operations. Cloud & Infra pre-merger loss customer impact has ended. However, the decline in traditional infrastructure services is expected to continue. On profit drivers, salary inflation and attrition are expected to continue at high levels, continuing to impact the speed of performance improvement. The normalized operating environment post-COVID will drive higher cost levels primarily in travel cost category. For Cloud & Infra, the annual price discounts kick in typically in January, and the profit improvement from the announced performance acceleration program will start to contribute to profit mostly in the second half of the year. So not yet in the Q1.Needless to say, but the transition to the new operating model will potentially impact our performance during the early part of the year. We naturally tried to make sure that the activity level stays up, and the interruption to our business will be as limited as possible. FX tailwind is expected to be small at EUR 2 million level and work in the impact of growth plus 0.6%.Next, a brief look at where we stand in relation to our long- term financial targets. We will naturally update our targets to reflect the new existing business structure in the CMD, which we aim to arrange during the second half of the year. Overall, it's fair to say that most of our businesses are tracking well towards their targets. Our software businesses are almost fully meeting or exceeding the target levels already. PDS performance during the second half of '21 was at target levels both in growth and profitability terms.Digital consulting profit is developing fairly towards the target levels. However, growth, which in '21 was impacted by COVID and high attrition, is recovering, while not yet at desired levels. The activity level in the market driven by cloud and data continues to support our growth ambition. As an example, we have been able to deliver over 20% growth in our International Operations. Cloud & Infra is not performing at desired levels, and performance turnaround is essential for us to reach our target levels of 5% growth and 15% margin by 2023.With this, I turn back to Kimmo.

[Kimmo Alkio, CEO & President]

Thank you Tomi. Let us move forward to considerations on '22 guidance and overall strategic considerations.I would like to briefly confirm that our strategy implementation is proceeding currently on schedule. We have 4 main strategic choices, as highlighted mid-October, starting a very transformative era for the company, betting on the future around cloud native and data-related and software-related services and shifting to end-to-end responsibility for our 6 businesses. We did go on schedule live on January 1 with the end-to-end businesses.And as Tomi highlighted, naturally transition of this magnitude will take a few months. We are highly mindful we do believe we have fair experience in such transformations. We have updated our brand and identity internally at the end of December, and externally in -- during the third week of January. Good feedback we have received from customers regarding the clarity of the identities of the businesses, and mostly, I would say, on the clarity of ownership and the speed in the interaction with our clients.We do expect that we are able to at least maintain even short-term the market focus, and we expect to actually increase the market activity level. And so far, we have experienced good employee engagement regarding the strategy implementation.In the beginning of the year 2022 is good to provide our perspective also in terms of the market growth. We have a few drivers. We believe our considerations continue to be very consistent around the thinking on software, cloud native services in the industry growing about -- around 10% level. The traditional managed services, meaning managed infrastructure, managed application services in the industry at large, declining between 5% and 10%, and we believe that the TietoEVRY addressable market is growing approximately by 3% with these factors behind.And then also to recap some of the drivers behind our guidance, and let us then summarize the guidance itself. So entering 2022, we have a strong order backlog and healthy market activity, market dynamics, that are supporting our overall growth ambition. Our software businesses are performing well. And as highlighted earlier, in '21, 4 of the 6 businesses performing really well.We have had underperforming Cloud & Infra due to traditional volume decline and price erosion, and we have a significant turnaround underway as announced today. And furthermore, as Tomi has highlighted, the type of a talent market with the salary inflation will continue to be with us.With these considerations, we expect our organic growth to be between 2% and 4%, and the estimate of the full year adjusted operating margin to be between 13.1% and 13.6%. And currently, we do anticipate that the second half of the year will likely be stronger than the first half of the year, especially due to the contribution of the aforementioned turnaround plan and savings contribution from Cloud & Infra.We expect year 2022 to be very exciting and good for the company. We have seen initial signs of the growth agenda materializing. We believe a lot more responsible and execution shall be through our fast-moving 6 end-to-end businesses. We do have a solid financial position as a foundation for strategy execution, and we are already, and naturally continue to be better and better as the go-to place for tech professionals. As highlighted also in our new identity, we are the developers of digital futures.So this would conclude the perspective on the fourth quarter and full year reflections and the guidance from Tomi and myself. Thank you, and likely time to shift over to Q&A.

[Tanja Lounevirta, Head of Financial Communications]

Yes. Thank you, Kimmo and Tomi. And we are now happy to proceed to the Q&A session. Moderator, Please go ahead.

[Operator]

[Operator Instructions] The first question comes from George Webb from Morgan Stanley.

[George W Webb, Equity Analyst]

I have a few separate questions, please. Firstly, coming to the point of wage inflation for '22 and your 3% expectation there. Can you give us a sense of the dynamics around that? How much risk is there in your view that it could actually end up higher than that assumption? And how have the kind of employee and union discussions been around that topic? Secondly, just looking back at those 2022 targets, slides on Cloud & Infra, the other division that needs to materially step up its margins, its financial services solutions, you're targeting 18% to 22%, you're just under 14% in FY '21. What will drive that more material step-up in FSS over the next couple of years?And then just lastly on -- just on Ukraine. You've obviously got some employee base exposure there. Have you seen any impact so far from the geopolitical concerns? And what sort of business continuity plans do you have in place should the situation deteriorate?

[Kimmo Alkio, CEO & President]

Sure. Okay. So in salary inflation, George, just to clarify, were you're referring to '23 targets or '22 targets?

[George W Webb, Equity Analyst]

On the salary inflation, how you think about 2022?

[Kimmo Alkio, CEO & President]

No, but on the next point -- you had 3 points. Salary inflation, then around the 2022...

[George W Webb, Equity Analyst]

Yes, that is the second point is on 2023, and the FSS target to get to an 18% to 22% margin?

[Tomi Hyrylainen, Chief Financial Officer]

Yes. So on the salary inflation, as we all know, the talent market is active. That's why we, at this point in time, confirm that we think the inflatory component in the salaries will continue to be high. Currently, we see the 3%. We were slightly above 3% last year, 3.1%-ish, somewhere there. We think that that's a reasonable proxy based on what we know now for '22 as well.

[Kimmo Alkio, CEO & President]

So then if I comment the other 2 parts, so financial services overall. So naturally, as we have reflected upon earlier, it's super important to continue to drive the growth of this business. We believe we have well-positioned investments regarding the scale and competitiveness, especially around the banking-as-a-service, the bank -- core banking platform itself. So the foundation towards the higher performance levels.To be fair, similarly, as we have done in the health care business in prior years, that the competitiveness and scale of the software in question supported by the top line contribution. So I think these are the pretty clear drivers for that performance improvement. And to be fair, naturally now when we go into the transition of the newly defined businesses, we'll need to be highly mindful around the efficiency of the go-to-market, as there's a fundamental structural change. To be fair, I just highlight for all the businesses.Regarding Ukraine, so we have had, for many weeks, a very high degree of attention, more or less daily, actually chaired by one of our executive team members, looking at the employee safety, looking at the services continuity for our customers. We have done actually exercises already how to move set of services to some of the adjacent countries where we have our operation centers, and we have a multilayer scenario on which plan to activate, subject to the geopolitical challenge on hand.So -- and that dialogue with customers is very active. We are so far able to well safeguard the business continuity there. But actually, everybody has uncertainty as shared -- as visible in the media.

[Operator]

The next question comes from Nicolas David from ODDO BHF.

[Nicolas David, Analyst]

First is coming back on digital consulting. Could you help us understand the growth trends here, because, I mean, you managed to hire -- considerable hiring in Q4. And I understand that that count was up something like 2% year-on-year in Q4. You had a positive calendar effect also in Q4, and presumably a positive price trend. So -- and nevertheless, you are declining 1% organic. So I guess that you have a lower utilization.So could you share some data here? And what do you expect regarding the utilization rate in 2022? And again on digital consulting, another question is, I mean, you seem happy with the development of your profitability there, and you are turning towards 2022 targets. Does it mean that you don't expect digital consulting profitability to decline in '22, despite solid inflation, and maybe a lower utilization rate at the beginning of the year?And more broadly, when you look at this equation between salary inflation and maybe price increase, do you see it as negative all along the year? Or is it -- are you facing currently a negative phasing between salary which are increasing now, you are implementing price increases a bit later or trying to implement them currently? Is it negative phasing and you expect it to improve during 2022 as you increase prices? Or is it something that you expect to be negative all along the year?

[Kimmo Alkio, CEO & President]

Okay. Thank you very much. So very good -- I think, 2, 3 important points there. So let me first confirm around the head count. So average head count for digital consulting fourth quarter was flat, and for the full year, it was minus 4%. So just on the drivers, because the -- naturally, this business is impacted tremendously by the attrition levels. I would like to also highlight before commenting the profit side that as there's -- the primary driver for the decline was actually a few ending larger contracts.And those were factors with point being that we do not believe that the decline of any part of it would need to be that consistently or sustainably negative. And that -- and the whole consideration that the very strong wins in the ERP business, strong continued growth in cloud, data and analytics, and the overall really strong order intake in the business, are giving us new type of comfort that this will rebound.Profitability naturally in a pre-salary-inflatory era, the profit improvement with the growth appetite would be even faster. So we need to be mindful of exactly what is the progress in the fiscal year in terms of profitability, given that we will experience a higher inflation level. But we are not giving up on continued improvement either on profit.Then relation -- then your last point, kind of salary inflation versus price increases. So we have also, as a company, worked through our plans for price increases. And to be fair, that's a bit difficult to give a silver bullet answer, given that the market will continue to be dynamic on the salary inflation side. We have seen stabilization of our attrition levels in the fourth quarter.On a quarterly level, Q3 was higher than Q4, so elements of stabilization. And it will continue to be a bit dynamic. So overall, recapping, digital consulting, we do, given the volume development from the win side, order intake side, overall, we are more favorable, and we are mindful, naturally working all the time, offsetting the inflatory aspects with productivity increases and price increases.

[Nicolas David, Analyst]

And just to come back on the Q4 growth. So yes, so in the term that head count was flat, but nevertheless -- I mean, you were supposed to have a positive calendar effect and maybe some price -- maybe better price, I don't know, maybe due to offload your price also down. So can you help us reconcile between flattish head count plus which kind of effect versus negative organic growth? Is it price decline or lower digital generate -- which are playing or something that I'm missing?

[Kimmo Alkio, CEO & President]

So when the attrition levels are this high, there's -- like I'm sure you are hearing from all of our peer companies as well, kind of the impact on productivity, onboarding new people and the like. So that does create a dent in the productivity as such. So these are some of the main factors.

[Tomi Hyrylainen, Chief Financial Officer]

Despite the…

[Nicolas David, Analyst]

You expect it to -- yes.

[Tomi Hyrylainen, Chief Financial Officer]

Yes. So I think you have -- you went through from the capacity point of view. So if we take a look at Q4 capacity, it was flat, as Kimmo mentioned. Yes, we were 100 head count at the -- higher at the end of the quarter. But when we put in the higher attrition, which in consulting business is actually a bit higher than what we have in average in the company, it does impact quite a lot of the productivity. Now I don't have a silver bullet model, but when I do a bit of simulation, it does impact in excess of 1% the current increase into our growth and profitability as well. That's just sort of a quote of a metric. There's no sort of good formula to do it, but that's sort of roughly at the levels that the impact is what we are having.

[Operator]

The next question comes from Sami Sarkamies from Nordea Markets.

[Sami Sarkamies, Senior Analyst of TMT]

I would like to discuss 2 topics. First, starting from the order backlog growth. Can you give any color on which segments drove the 5% increase in order backlog year-on-year?

[Tomi Hyrylainen, Chief Financial Officer]

So overall, as a bit mentioned, so it is very specifically visible in both digital consulting and in Cloud & Infra.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. And then moving on to margin progression. If we look back at '21, you ended up at 13%, which was the lower end of your guidance range. What were the main negative surprises during the year? And then when you think about the guidance for this year, have you been a bit more cautious with that in comparison with last year?

[Kimmo Alkio, CEO & President]

So if we look at the development of the company, so the dent, clearly, as I think everybody will -- does see, it is purely from the challenges we have had in Cloud & Infra, and many of the businesses are actually developing really favorably. So I would like to offer a very simple, clear perspective. And this is -- these are the reasons why we are accelerating the improvement of Cloud & Infra.

[Tomi Hyrylainen, Chief Financial Officer]

Yes. And on the guidance side, of course, when you look at our guidance of EUR 13.1 million to EUR 13.6 million, so the main sort of drivers there are that, when one looks at the consulting-related business, there are headwinds in the market, as we have discussed, from the high attrition levels, the active talent market impacting, and the inflatory component in the salaries impacting the speed of profit improvement in that business.Then there's the post-COVID-related cost increases, which will likely now during '22 be materializing. Most of the other cost elements than travel costs are already in the P&L. But travel cost, it is in millions, which one counts, and should be sort of counting for those. Then when you look at our IS margin for '21, it is exceptionally high. And for '22, we're looking to be closer to the CMD target levels. And then the profit -- main profit improvement will be delivered through the Cloud & Infra performance improvement program. So putting those sort of components together, you likely can see how we have thought about it.

[Sami Sarkamies, Senior Analyst of TMT]

Okay. That's very helpful. And then finally, did I understand it right that you're still considering the 15% EBIT margin target for '23 valid, even though it requires quite a material step up after this year, based on the guidance?

[Tomi Hyrylainen, Chief Financial Officer]

We are not giving into that target. It does require, as we all recognize, very good execution on all of our businesses, and particularly in the Cloud & Infra performance turnaround.

[Operator]

The next question comes from Christoffer Bjornsen from DNB Markets.

[Christoffer Wang Bjørnsen, Analyst]

So my first one is on Cloud & Infra. It's been like a -- all like great at the bottom, and now again removing people there. So could you maybe help us understand the 2 things basically, when should we expect to see you guys kind of reaching a trough here where we see the revenue momentum turning around again? Is that already in the next couple of quarters?And then more specifically on the people affected and the cost that you are taking out, can you give us some more granularity on what exactly those people are doing today and then what costs will be removed? And what do you expect with the net EBIT effect of that EUR 50 million?

[Kimmo Alkio, CEO & President]

So I guess, part of this, we can reflect very openly. But on the people side, naturally, these are subject to the negotiations. So we can -- I mean those are purely preliminary considerations. So -- but anyway, let us begin with the development overall expected on Cloud & Infra. So in 2021, we did see a consistent improvement quarter after quarter, and clearly not to the levels we have expected.So we expect this development to continue. And naturally, like Tomi has mentioned, myself a few times here, that the contribution profitability-wise more towards the end of the year or the second half of the year. And also not forgetting that we did talk about the growth agenda of our multi-cloud very specifically with our private cloud services. So these are the very important drivers in that business. So with that in mind, the Cloud & Infra, the kind of a real uplift in performance from a profitability standpoint once the savings program kick into effect, more likely second -- mostly second half.Regarding the considerations on where are the inefficiencies. So very practically, when traditional infrastructure volumes decline, there is less work in traditional infrastructure architectural environments. And we are looking naturally at the roles where the volumes have declined clearly, and we have ample room to increase our offshore rates and offshoring in this business.We may not have gotten as far as originally intended in 2021. So we have quite a granular view actually where the volume differences have taken place and where the cost base is not currently competitive, and these are the ones that we need to now fix. And then practically, the consideration on personnel, those are always very difficult measures, and these will be then subject to the dialogue with the workers' councils. So I think those would be the reflections we can offer today.

[Christoffer Wang Bjørnsen, Analyst]

That's helpful. You're at 9%-plus margin in the business. So -- and then you say like 10% plus by 2023. What kind of -- what are the negative with this improvement, implying that we shouldn't be there already in the next couple of quarters? Just trying to understand the kind of the development you're seeing in Cloud & Infra. I see you're not giving any guidance there because you're kind of shifting to a new structure from Q1. But yes, I'm just not seeing how we get into worst performance from here in the next couple of quarters?

[Kimmo Alkio, CEO & President]

Sure. So some of the drivers in there -- by the way, we are currently not -- we take a prudent approach in the performance improvement. We do not -- while we drive the growth agenda, we do not count on profit improvement on the growth side. Once that would materialize, then we'll actually end up being really successful in the business.Short-term, when we consider the type of drivers behind, that we need to be continuously mindful, as we have highlighted, the usual price discounts kicked in, in January, like they do every year in the traditional outsourcing type of contracts. We have -- also in this business, we have salary inflation. We have third-party agreements that have certain pricing practices.So those are the normal factors behind that we are naturally prepared for. And we believe that driving these cost saving measures will naturally more than offset any of the headwinds that are typical in the type of a traditional infrastructure business. And with this in mind, the faster we move the multi-cloud services, much greater degree of automation, we will be able to run this business in the future with better scale and better profitability.

[Operator]

Your next question comes from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, Research Analyst]

Congrats to very strong cash flow and also to take down the gearing from 2.5 to 1.5 in just 1 year, on net debt to EBITDA. My question is, to start with on the Digital Consulting, if you need to prioritize your 2023 targets on the -- of we can talk Digital Consulting, the 7% to 9%, or the growth, or the EBITDA margin of 15% to 17%, how do you prioritize your growth or margins?

[Kimmo Alkio, CEO & President]

So to be fair, that's a -- I don't think we -- it is always both on the table. So far, when we look at the development of the company over the years, I here included my commentary pre-merger, we have been able to balance them both. In all businesses, of course, the market has -- market is driven by growth. Growth is important. And the more -- better we do on the growth side, the happier the challenge is to consider exactly what investment level.But the growth agenda, growth appetite -- important, managing the related investments properly that we anticipate that both the growth contribution, profitability development. Yes, there can be an era where either is prioritized. But longer term, we do believe that those actually can go and need to go hand-in-hand.

[Daniel Djurberg, Research Analyst]

Okay. And if you look at for 2022, then on Digital Consulting, will you need to further ramp up the recruitment pace to get these people onboarded so they can trigger this 7% to 9% growth in '23? So we will -- might see some negative impact on the EBITDA margin for '22 to drive the '23 growth?

[Kimmo Alkio, CEO & President]

So in the whole area of cloud native services, data management, data platforms, software engineering, when we combine our operations in the future around these advanced services in the Nordic countries, our well-performing international operations, our product development services, so overall, yes, we do believe there's a good market-related growth opportunity.Us having good practices, we can execute more broadly. And yes, this will require further recruitments -- and with -- in this type of era, naturally, it will impact the productivity improvement. But it doesn't mean it wouldn't improve, but it's a question of the slope of the curve, how quickly do you improve. But the improvement is possible, but managing the type of recruitment and onboarding is very important. So those are some of the drivers, but growth-driven, we think, is a very good chapter to step into.

[Daniel Djurberg, Research Analyst]

And I guess by then you expect the attrition level to normalize a bit, because it's quite normal -- it's very high right now, given the post-COVID effects and so forth? Or am I wrong there?

[Kimmo Alkio, CEO & President]

And just to confirm, so -- for our company, we have -- third quarter was the highest in attrition. Fourth quarter was slightly lower. So we see elements of stabilization, and we humbly also expect that this environment will continue. And then when it stabilized more further, so then it will become a few inches easier. But we are prepared in our considerations and in our guidance also that this environment will continue for '22.

[Daniel Djurberg, Research Analyst]

That's great to hear. And also, if I may ask you a little bit if you can -- the smaller business areas, but the PDS and the international did really well in growth organically in the quarter, and driven by telecom, automotive and consumer electronics. Can you comment a little bit on -- was this a certain project that was ended? Or will we see this kind of similar growth factor in '22?

[Kimmo Alkio, CEO & President]

So just to confirm, related to product development services, as we had shared in prior quarters, so expanding the collaboration with Ericsson, with the Nanjing operations, so that did contribute to growth. Excluding the Nanjing operations, it was around 7% to 8% growth. So very healthy to begin with.So these are some of the factors. And now -- and naturally, when we -- the market is active, our reputation is good in the whole area of advanced software engineering. So we see that's an interesting opportunity. But of course, this type of an inorganic case of Nanjing gives an extra boost. But let us see what extra boosters we may find.

[Operator]

[Operator Instructions] The next question comes from Panu Laitinmäki from Danske Bank.

[Panu Laitinmäki, Senior Analyst]

I have 3 questions. First one on the organic growth guidance of 2% to 4%. Can you comment how does it split divisions? Like, which ones could be above that range and which are within and which are below the range? Then the second question is kind of an update to the plans that we heard related -- kind of in connection with the strategy revision.So what are your current thoughts on structural changes related to infrastructure business? Kind of do you need to execute an operational turnaround in that business before you could kind of seek for bigger changes? Or what is the kind of thinking now? And then thirdly, about the noncore business divestments. How much should we expect that there is still left? I mean, can you kind of without identifying which ones are noncore, can you kind of give an idea of how big part of the software is something that you think is noncore in terms of revenues?

[Kimmo Alkio, CEO & President]

Thank you for that. So 3 considerations. So regarding the growth expectations. So naturally, we have -- from a realistic standpoint, on the lowest end is Cloud & Infra. And we have, as we have shared, the flying altitude of 4 of the 6 businesses already good. And we believe Digital Consulting will bounce back. So short commentary that lowest expectation on Cloud & Infra.Regarding strategy -- and if I understood your consideration, that was mostly related to Cloud & Infra. So very specifically -- so this type of reshaping the business operationally and rapidly is very important, because we have not set our fairly set objectives for the business. Just to confirm, we first reset the cost base. We are activating market attack with well competitive, scalable, private cloud services, and what other factors to follow, time will tell. But it's very important that we take control and aim to improve the performance already short term. And to be fair, there is nothing that we can reflect on any potential noncore business.

[Operator]

The next question comes from Christoffer Bjornsen from DNB Markets.

[Christoffer Wang Bjørnsen, Analyst]

There was some more time. There's 2 quick ones. So the first one is on the Cloud & Infra. How does this plan kind of impact your kind of lookout for strategic alternatives in terms of both partnerships or divestments, to kind of find the best form or solution for Cloud & Infra? That's the first question. And then the other question is, you mentioned that the attrition is actually higher than the group average if you look at the consulting business. So any kind of clarification you can give there on what that number is would be very helpful.

[Kimmo Alkio, CEO & President]

Okay. So if I maybe comment and -- so first of all -- so your consideration, Christoffer, builds nicely on Panu's point. And my commentary would begin with the same notion that most important, we upgrade the performance of this business ASAP. And naturally, there's an industry-wide phenomenon on how the multi-cloud area between public, private and traditional infrastructure services are kind of developing. This will continue to be dynamic.I wish not to speculate anything on what may or may not happen. The good news is that, as we shared in strategy, we consider both operational and structural alternatives for this type of business. So those doors are open. And most important that, however we look at this, we will improve the performance of the Cloud & Infra business, and participate in highly modern technologies. To be fair, my reference here, we have one of the very first private cloud, highly secure environments built with VMware, so highly advanced technologies. So that's very important. We are very competitive on a daily basis. On the -- yes.

[Tomi Hyrylainen, Chief Financial Officer]

In terms of attrition, as I mentioned, consulting slightly higher than the average of the company. We don't want to sort of give specific business-related attrition levels. It remains to be true that there is geographical difference in terms of attrition. So specifically in India and some of our offshore nearshore locations, there is higher attrition than in the Nordic countries.

[Operator]

The next question comes from Jaakko Tyrvainen from SEB.

[Jaakko Tyrvainen, Analyst]

It's Jaakko from SEB. One question still from my side. And regarding the Finnish health care reform and the related IT system renewal, which should bring significant boost to the Finnish market for the coming few years. Have you analyzed what is the revenue potential for TietoEVRY? And then on the other hand, do you see risk that you could lose some of your existing business because of the upcoming IT system renewals in the health care side?

[Kimmo Alkio, CEO & President]

Yes, thank you for that point. So absolutely, we have been deep in these considerations for several years. And I do believe that somewhat favorable market momentum currently in light of some of the badly gone big projects, not with our company, but with some American health care software companies, and us having the open EHR standards, open architecture, open platforms. And actually, in the past year, I believe we started to actually gain share in the market. And to be fair, it will be very dynamic. We'll be very competitive. We think, and I believe we have somewhat of a stronghold in the business, but we need to fight hard every day. So I'd rather see it as an opportunity than a threat.

[Operator]

Ladies and gentlemen, there are no further questions. I will now give back the floor to our speakers. Thank you.

[Tanja Lounevirta, Head of Financial Communications]

Thank you. And thank you all for active dialogue today. And naturally, we are available for any further questions you may have. Before Kimmo's closing remarks, I wish you a great day on my behalf.

[Kimmo Alkio, CEO & President]

Yes. So first of all, thank you very much for joining today. Great considerations and great discussion. And what an exciting year 2021 has been. It is ending in with kind of a positive footing, 3% growth, record order intake since the merger, 4 of the 6 businesses doing really well, the future of Digital Consulting clearly brighter, and performance acceleration underway for the Cloud & Infra business.Thank you very much for joining, and we'll connect latest then at the end of the Q1 report. Thank you.