TietoEVRY Corp
F:TTEB
TietoEVRY Corp
In the bustling realm of technology and digital transformation, TietoEVRY Corp. stands as a stalwart entity, intricately woven into the economic fabric of Northern Europe. Born from the merger of Tieto Corporation and EVRY ASA in 2019, this Helsinki-based company leverages over half a century of experience to drive innovation across various sectors. Its services span a broad spectrum ranging from cloud and infrastructure solutions to consulting and software development. The company adeptly caters to an array of industries, including healthcare, financial services, and the public sector, providing tailored solutions that enhance operational efficiencies and enable digital transformation for its clients.
At the heart of TietoEVRY's business model is its customer-centric approach—melding deep industry expertise with advanced technological capabilities. By offering a diverse portfolio of IT services and products, TietoEVRY capitalizes on the increasing demand for digital solutions. The company's revenue streams are predominantly anchored in long-term service agreements and project-based engagements, allowing it to cultivate lasting relationships with its clients while ensuring a steady flow of income. Simultaneously, its focus on innovation and sustainability not only enhances its competitive positioning but also aligns with broader societal shifts towards digital ecosystems. Through strategic investments and a commitment to delivering tangible business outcomes, TietoEVRY continues to play a pivotal role in enabling digital maturity across diverse sectors.
Earnings Calls
TietoEVRY reflected a challenging Q1 with an organic growth decline of 4%, impacted by a soft market and reduced working days. Adjusted EBITA stood at 10.6%, affected by temporary unallocated costs. The company announced a significant shift, divesting Tech Services to focus on high-growth software and digital engineering sectors, while maintaining cost optimization. Despite current market softness, projected organic growth guidance is set between -2% to +1%, with EBITA margins expected at 12-13%. The company highlights a solid future work pipeline and confirmed strategic investments in AI and care services, aiming to prepare for market recovery.
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Good morning, and welcome to TietoEVRY's first quarter earnings webcast. My name is Tommi Jarvenpaa. I'm the Head of TietoEVRY's Investor Relations. This morning we will go through our earnings development and key highlights of the quarter. At the end of the presentation, we will also go through the special topic of the day, the CEO transition, which we published earlier this morning. After that, we will host the usual Q&A session.
With me here today are our CEO, Kimmo Alkio; and CFO, Tomi Hyrylainen, who will go through the highlights and results of the quarter. Our Chairperson of the Board, Tomas Franzen, and Endre Rangnes, our newly appointed Interim CEO, will join the call towards the end of the presentation.
At this point, I would like to hand over to Kimmo. Please go ahead.
Thank you very much, Tommi, and a warm welcome to our first quarter interim session. Q1 main thematic would be on -- as visible here, performance as anticipated, major step taken in strategic renewal. As Tommi highlighted, we have a multitude of topics. We'll confirm the strategy execution, majority of the focus on Q1 performance, and I'm sure a lot of interest on the third topic, including the information from this morning. And let us begin by the strategic development and strategic focus.
It is fair to highlight that in the recent few years, it has been the most significant strategic transformation in the company's history, meaning over the last 6 decades, now being able to pursue the future as a leading software and digital engineering company. Whereby each of the businesses, 3 of the software businesses: Care; Banking; and Industry, as well as the digital engineering business, Create, were aimed to become some of the world's best performing businesses in the respective categories.
Naturally, strategically, a significant step was taken and achieved during the first quarter as the Tech Services divestment was announced, all of this enable -- enabling the company in the future to focus on asset-light businesses with greater growth and scale potential.
Furthermore, I'd like to confirm the focus and ambition of each of our specialized businesses. First of all, in the case of Create to continue to build internationally scale and customer base, focusing on the type of technologies and consulting domains, incremental demand will be in [indiscernible] markets, centering a great deal around the AI type of expertise.
Furthermore, both the Banking and Care software-centric businesses aiming to drive market expansion primarily in the European continent, building on the proven competitiveness and scalability primarily in the Nordic countries. And furthermore, Tietoevry Industry, building focus scale on vertical expertise, ensuring that greater scalability and addressable market domains would be available.
I would like to now only very briefly touch on the third topic of the day that in light of the strategic evolution of the company, the time is absolutely opportune for me after 14 years to pursue my new chapter and to step down from the role as CEO. And most of you have naturally seen the announcement from earlier today, and we will be addressing this thoroughly as the last topic of the day.
As always, let us go through clearly the primary developments of our first quarter. Organic growth of negative 4%, naturally not according to our longer-term ambitions, while fair to highlight that the soft market environment is also impacting demand for our services similarly to most of our industry. Profitability in terms of adjusted EBITA, 10.6%, and important to recognize the IFRS 5 related temporary cost burden of 1.8 percentage points. And to confirm the numbers we are reporting and I am highlighting here, have to do with the continuing operations.
Furthermore, and on a positive note, strong cash flow and strengthened order backlog, confirming competitiveness in the market space as well as continued successful focus on efficiency in the company, an important customer contracts specifically achieved in Banking and Care. And as well recognized the Tech Services divestment that I commented earlier, and we will be also updating and providing the updated guidance during this session.
As always, fair to take a short moment in terms of the external market influences. Market continues to be soft with limited visibility, that driven a great deal and incrementally by the U.S. tariffs. We are -- we do not believe to be that directly impacted by the considerations what's happening in the U.S., while the indirect implications shall be dependent on the implications on our customers' businesses and demand for their products and services.
It seems to be clear that the increased macroeconomic uncertainty is impacting our customers' decision-making, and this is mostly visible in the consulting domain. And we shall continue in this soft market and low growth era -- no growth era, very critical to keep the company's profitability healthy and continued attention on efficiency. AI market adoption, we are very active, winning footprint in the market, and this is equally relevant for all of our businesses.
I'd like to confirm that we are maintaining also in this era our investments in each business to support the future growth and expansion opportunities, very important to build and prepare for future growth and to a degree, dependent on the market bounce back.
As usual, fair to highlight the competitiveness of our businesses. Very important contract signed in the case of Banking. Has to do with the core banking solutions, specifically for the Norwegian markets, Sparebanken Norge, Fana Sparebank. Furthermore, Tietoevry Care, extending its capabilities in Sweden, industry success in the paper, pulp and fibre within the manufacturing execution systems and a bit longer term opportunity, Create announcing the frame agreement with NATO. Just some of the samples characterizing the movement in the market and success.
A couple of samples on AI and Gen AI. Tietoevry Care we were able to extend the footprint of AI-enabled services also in Sweden. We had done that previously in the Finnish market, Create gaining interesting new projects in AI domain, supporting our customers, improving their competitors, gaining new productivity gains, couple of samples in the industrial equipment sector.
Furthermore, highlighted here in the case of Tietoevry Industry around e-services and has to do with the Purchase-to-Pay automation, AI in its core supporting over 80,000 users. So starting to get interesting degrees of -- let's say, towards scale and towards tangible financial impact.
In terms of summary at the group level, highlighted earlier already the growth and the profitability level. Cash flow from operations, EUR 98 million. This time we want to comment the order backlog through 2 factors. The 18% growth quarter --year-over-year Q1 of '25 compared to Q1 of '24, up by 18%. This has to do with the significant delta or development in the Care business as the primary contributor.
The most fair aspect of looking at the healthiness and constructive development would be the plus 4% here comparing end of Q1 to end of Q4 level. I want to highlight that naturally, the type of order importance and priority on winning business on order intake, gaining backlog, very critical to ensure we shall be returning to growth.
Then we'll do the summary as usual per business. Tietoevry Create continued soft market impacting performance. And I'd like to confirm that this is the business most impacted of our businesses of any type of economic volatility and naturally the soft market being impacted. The low demand environment continues actually in all markets. Furthermore, the developments on the internal revenue impacting the growth side with some other factors.
We are also highlighting like most of the consulting businesses in the industry on degrees of overcapacity, very, very price competitive. Short-term we naturally will be driving further efficiency measures in the business while continue to keep the eye on future growth markets. AI -- activity level on AI, very solidly increasing the number of deals that are being won, while the time to revenue, as expected, will take a bit of time, time to significant revenue contribution was [ met ].
In the case of Banking, stable profitability and as highlighted, very interesting, very important wins in the core banking side in Norway. I'd like to highlight that the underlying performance, fairly okay. Growth being impacted by the Norwegian bank merger by 4 percentage points. Several of the businesses, credit side, cards and financial crime prevention continue to grow. Continued retention and efficiency has been done successfully, stable profitability, strong order backlog and interesting opportunities for the Banking business moving forward.
In the case of Care, healthy underlying performance with our very competitive, open and modular Lifecare software platform. Short-term the growth is being impacted by decline in legacy software and the public sector demand, specifically in Finland, a couple of the won customer contracts are waiting for market [ core ] decision.
And we'd like to confirm that while profitability is slightly below 25%, longer term we absolutely believe in the continued healthy profitability of the business, and we are maintaining and putting in place investments on go-to-market activities and any degree of localization required, we believe the Lifecare software platform will be scaling well in the future. And also furthermore to highlight success with the social care side in Sweden.
In the case of Industry, also negative growth, very specifically impacted by the decline in pulp, paper and fibre. Customers postponing investments recently in the past few quarters, tougher time. Public 360° had been impacted by delays in customer decision-making. While I'd like to confirm that some of the subsegments are starting to see increased activity level, except in the PPF side, the Pulp, Paper and Fibre.
Healthy growth in the Data Platforms and Education. Profitability has been impacted by overcapacity. This is clearly below the levels we are expecting mid and long-term and further efficiency measures are absolutely ongoing.
So this would complete the overall performance summary and highlights of the businesses. And over to Tomi.
Thank you, Kimmo, and good morning, everyone. So the Q1 main operational event was naturally the agreement to sell Tech Services, which we expect to be closing during Q3. This divestment impacts our Q1 reporting so that until closing of Tech Services divestment, Tech Services is reported as discontinued operations and consolidated only in one line in P&L and balance sheet, with cash flow statement being unchanged.
So cash flow statement will continue to include continuing and discontinued operations. This type of accounting results in us reporting profit margins which are not representative of the standalone businesses for either continuing or discontinued operations.
Looking at our Q1 numbers. Organic growth of negative 4% was impacted by weak market environment, as commented, but in addition to less working days having a negative 0.5 percentage point impact on growth. Adjusted EBITA of 10.6% was impacted negatively by the technical accounting from IFRS 5 with cost burden of unallocated costs of approximately EUR 8.5 million, having a negative 1.8 percentage point impact on profitability. In addition, negative working days impacted profit of 0.4 percentage points.
Due to slow market environment, we have had active cost base management ongoing in all of our businesses, which will continue into Q2. We did deliver strong operating cash flow, as mentioned, which was supported by seasonal working capital improvement. Tech Services has discontinued operations, the performance, organic growth, minus 5%. Net loss for the Q1 negative EUR 92.3 million, which includes an impairment loss of EUR 107 million due to remeasurement to fair value less cost to sell.
For the fair value less cost to sell, we have utilized EUR 254 million for the remeasurement, which includes an initial management estimate of the present value of the future earn-out in the amount of EUR 30 million. Earn-out estimate will be updated as needed at each reporting date.
Then to the technical accounting growth and profit bridges. So on the left-hand side of both of these bridges, we have combined Q1. This represents the prior reporting structure and the reported Q1 represents the continuing operations, i.e., the numbers that we're reporting today. In terms of the growth numbers, Tech Services carve-out is relatively straightforward. So we are looking at the true growth numbers for the continuing business at minus 4%.
On the profitability, that's impacted by unallocated costs, as I mentioned, which in Q1 were EUR 8.5 million, impacting the profit margin by negative 1.8 percentage points. Then we have for illustrative purposes estimated the level of transitional services agreement income, which we will be receiving post-closing, which gives a positive profit impact. This impact will last for 3 to 18 months and gradually get smaller. We will naturally optimize our cost base accordingly to the size of the continuing operations going forward.
On the cash flow, briefly, so strong EUR 97 million of operative cash flow. Also strong free cash flow, EUR 63 million. Our interest-bearing net debt declined to EUR 807 million with net debt-to-EBITDA remaining at 2.2x. Reminder that Tech Services divestment will reduce our group net debt by the transaction proceeds and approximately EUR 100 million reduction in lease liabilities.
On employee matters, our LTM attrition is at low levels, at 7.9%, reflecting the soft overall market environment. We have the cost optimization ongoing in all of our businesses in response to the market. And in Q1, Tietoevry Create reduced capacity by approximately 200 FTEs, and these capacity adjustments will continue in Q2, including SG&A reductions. In addition, we have done minor FTE reductions in Banking and Industry. We confirm our group level salary inflation expectation to be between 4% and 5% for the year.
Next, I'll summarize the performance drivers for next quarter. Overall, Q2 we expect to be a negative growth quarter for us while improving from Q1. This is primarily driven by the market softness, which we expect to continue. On growth drivers for the businesses, they are similar to Q1 with negative working day impact to growth being minus 0.7 percentage points.
On growth drivers, soft market conditions increased pressure on margins. Annual salary increases, as you recall, likely kick in from April. Banking is experiencing higher technology costs and the working day impact similar to growth for the profit, the impact is roughly 0.5 percentage points. On other drivers, we expect positive FX impact on revenue to be approximately EUR 6 million.
On Q2 profitability outlook, Create, Care and Industry, we expect to be below prior year Q2 level and Banking at or above prior year level.
Then we -- our guidance update. So we have updated our guidance technically to reflect the Tech Services divestment. So this includes only the continuing operations. We expect the organic growth to be minus 2% to plus 1% and adjusted EBITA 12% to 13%. Main assumptions in the guidance are that market continues to be soft with limited visibility into second half of the year. Our guidance ranges reflect the macroeconomic uncertainty, and there's a negative net impact of minus 1.4 percentage point from the IFRS 5 accounting, which includes an estimate of the cost burden for the year in addition to transition services income, which is assumed to be post-closing.
The logic of the guidance is similar to our prior guidance. So if the market is not recovering, we will be at the lower end of our guidance ranges and with the market recovering towards the mid to high ends.
Looking forward into '25, as mentioned, we expect the market to continue soft with limited visibility. Currently, there are no clear signals of real market recovery. We do continue, obviously, to focus on resilience in all of our businesses, while investing into future growth to be ready when the market truly picks up. Then to confirm, we do plan to host CMD in Q4, with more details to follow.
This would conclude the financial section, and now I will hand over to Tomas.
Okay. Good morning, everyone. As you know, we have today announced a CEO transition taking place in TietoEVRY. President and CEO of TietoEVRY, Kimmo Alkio, has decided to step down after 14 years in his position. Following this, the Board has appointed Endre Rangnes as Interim CEO of TietoEVRY.
Endre Rangnes is entering in the Interim CEO position with extensive leadership experience in technology and the financial sector, including as a publicly-listed CEO. He is currently the Managing Director of TietoEVRY Banking and member of the Group Executive Management team. The transition will become effective on May 5, 2025.
I want to sincerely thank Kimmo for the high dedication and integrity he has demonstrated throughout the years to develop a world-class technology company. Under his tenure, we have seen major advancements on his journey, latest establishing specialization as a strategic foundation for the company. With the recent agreement to divest Tech Services, TietoEVRY is now embarking on its next chapter to reposition itself as an international software and digital engineering company.
In the light of the strategic evolution of the company, it becomes natural for Kimmo to embark on his own new chapter and [ where ] he will leave with our highest respect. So once again, thanking Kimmo for the significant contributions and enabling the next avenues for growth and expansion for TietoEVRY. And I'm very convinced that Endre and the talented Tieto team will succeed with the next steps.
Now over to you again, Kimmo.
Thank you very much, Tomas. And I'd like to offer very openly some of my -- also my main reflections on the topics. In the last few years, it has been the most significant strategic transformation in the company's history and very much needed. At this point, I want to confirm from my standpoint that we are at an inflection point of embarking on the highly focused software and digital engineering future, seeking for market expansion and greater scale in segments where we have strong ability to gain share.
Strategically, from a group portfolio standpoint, the Tech Services divestment being a significant factor enabling this more focused future. This is a new era on our hands and is a great opportunity both for the company and me as the long-time CEO to renew the most senior role in the company. I am really pleased to hand over the Interim CEO role to Endre, a well-proven tech sector executive, and we have worked together very well over a 10-year time frame in different roles.
I very much believe that the opportunity is ambitious in software and digital engineering company will bring great success for all of our stakeholders. This is also a highly opportune time for me to pursue my new chapter. Today, I've done my 74th consecutive earnings call as a listed company CEO. It's been a privilege to serve the company, our customers, employees and shareholders for the last 14 years. And now it is time for me to begin my new chapter.
Over to Endre.
Thank you, Tomas, and thank you, Kimmo. And I will also say a special thank you to Kimmo for a close cooperation during the last 10 years, and I've been a Board member, but also the last 8 months when I've been Managing Director of TietoEVRY Banking. And I must say, quite impressive to have been through 74 consecutive quarters and presentations. Really, really impressive, Kimmo.
When we look at my background, I'm having a background both from the IT services industry as well as the financial services sector. I would also say quite interesting to have been a client of IT services providers in the last 15 years. So I think I will bring part of that perspective also into Tietoevry Group going forward. And like I said also to my colleagues in Tietoevry Banking, everything starts in the market, everything starts with our clients. We should never ever forget that perspective.
And for me, it feels like quite natural also to step into this Interim CEO position now as the Tech Services strategic review has been concluded. Now we can really focus on growing the business going forward with focusing on the specialized software product area businesses, but also digital consulting. You will see that both in Tietoevry Banking and also in Care, we have already launched several market initiatives to really pinpoint some of the markets with our specialized products, and you will see more of that coming forward.
And then on top of that, of course, we have the kind of global presence with Create and under the leadership of Cosimo. So we are actually well positioned now to really focus the business going forward and to grow and get back to black ink growth numbers. So I really look forward to taking on this assignment together with, of course, all my colleagues in TietoEVRY.
Thank you, Endre, Kimmo, Tomas and Tomi. We are now ready for the questions.
[Operator Instructions] The next question comes from Sami Sarkamies from Danske Bank.
I have 3 questions. We'll take this one by one. Starting from margin development in Q1, it looked quite weak at the Industry and Care despite the expected top line. Could you open a bit up the situation starting from Industry? I think you mentioned Pulp and Paper and delayed decision-making at public sector as the main sources of weakness. When do you expect situation to improve?
And then in Care, do I understand it right that existing customers have discontinued your legacy solutions, but they haven't become customers for the new solution yet?
Thank you, Sami, for the question. So if we start with Industry, the main driver is, as you self mentioned, so Public 360° and Pulp, Paper, Fibre. There's a relatively high share of professional services. And when we have a declining top line, that directly impacts the profit margin. We are, as we mentioned, of course, looking at this and addressing this -- these cost levels as we speak.
In terms of the recovery, we are seeing an Industry increasing pipeline. Activity market is increasing, except in the pulp, paper, fibre industry. But otherwise, it's looking to turn around from a market activity point of view.
In terms of the Care, the -- as Kimmo mentioned, it's -- the profitability level is healthy. There is no concern. So we are rather optimizing the investment currently to win in the market to capture the opportunities. There's a lot of activity in the market in the Norway health care sector and also abroad. So this is something it's a continuous investment which we have kept on in the business.
Okay. And then moving on to the earn-out. You're currently estimating EUR 30 million out of total EUR 70 million. Has something changed? Or is this your kind of best estimate for the time being?
This is now the present value of the estimate. We, of course, all understand that it's far out the estimate. So that's why it's at this level at this point in time. And naturally we will revisit this as needed, as commented.
Okay. And then finally, you have raised the one time item guidance to 1.5% to 2% of revenue for continuing operations. Is this somehow impacted by technicality of the divestment? Or have you increased your plans for restructuring? And can you provide the comparable earlier restructuring cost estimate for this year, please?
Yes. So Sami, a good point. So we have the primary OTIs now in Q1, you see that they come from Create business, and this is to address the slow market and the capacity in that business. So yes, we have increased slightly the OTI levels for the year, primarily driven by Create, as mentioned.
Okay. And then finally, thank you to Kimmo for good cooperation over the years.
Thank you.
The next question comes from Felix Henriksson from Nordea.
And also, I'd like to start off with thanking Kimmo for good collaboration over the years. Maybe a bit of a broader question to both Kimmo and Tomas. I'd be curious to hear you reflecting the broader strategy execution since the 2022 Capital Markets Day when you originally announced this sort of repositioning plan and looking ahead, where are you satisfied? And where do you see most room for improvement when it comes to this sort of operational strategy execution?
Sure, Felix. So glad to take that. So indeed, that the specialization-based strategy, I think we all continue to believe it is the best way to compete being faster. It is a trust business. It is based on capabilities as demonstrated in the customer interface. From that era, if we looked at the first 5 quarters, you'll recall right that we went from 3% to 5%, 8%, 9% growth. We were flying absolutely in the right direction. So -- and afterwards -- from that era, a couple of factors, indeed, volatility in the Tech Services business became more significant and the economic environment has impacted us as well.
So I believe, and I'd always like to stay on facts, that naturally, the development in the past 2-year time frame has been unfavorable. We are still at a negative growth era. And like we highlighted one quarter ago, we have believed that the second half outlook, it should be getting towards a more positive tone, but number of fixes needs to be done.
So future opportunity is solid. The past roughly 2-year time frame clearly has been challenging. My -- maybe final reflection that we need to lead very rigid to the company, not just in good times, but also at times which may be challenging. Hopefully, transparency has always been there.
Tomas, any other comments?
Yes. Obviously, we are not really happy with the -- of the strategic execution. And there's a lot of reasons for that. But I think now with the recent divestment of Tech Services we are now in a position that pace can be enhanced much quicker than we have been able to deliver on in the past. So I'm looking forward here to continue to work with Endre on the strategy that we have laid out.
Got it. And then second quick one for me the -- regarding the sort of margin outlook. If I understood correctly, you plan to sort of cover the Tech Services related group overhead costs with the TSA agreement starting post divestment. But given that you said the duration will be 3 to 18 months, how do you sort of plan to tackle the sort of underlying cost base to ensure also high margins when the TSA agreement is over?
Thank you, Felix. It comes quite natural. This is how we plan our future. We look at the top line, we look at the affordability of the cost levels, and we, of course, align accordingly. So this sort of comes naturally from our normal process of addressing the cost base.
The next question comes from Aditya Buddhavarapu from Bank of America.
Also Kimmo, thank you for the collaboration and best of luck as well to you for the future. So just one question from my side. You talked about the limited visibility on Q2 and the weak demand environment. Can you just maybe give some color on some of the recent conversations you've had with clients, especially since probably early April or so far in Q2 on how you're thinking about the more discretionary part of their spending heading into the rest of the year? Any color you can give by market or sector would be much appreciated.
Thank you. So I'll be glad to comment that. So I think we see in the market, I believe, not just in our case, but in the Industry, quite a bit of variability on customer reactions on the macro. Customers that might be looking at investments into new technologies in digital engineering would be quite careful. Currently in the investments it's visible. It is most impacted by the soft economic environment.
The opportunities for starting to pursue incremental volumes in the software side tends to be a bit more stable, but I confirm that it's -- I would not generalize because it is so dependent on the customer-specific outlook and the reflections to confirm that the consulting-oriented optimization, ROI, return -- kind of paybacks on short-term, and it's a market with the overcapacity, a lot of price competitiveness, way to compete, way to keep attractive levels of prices on software is kind of -- is more advantageous. That would be the short reflection.
Understood. So you haven't seen, for example, any customers postponing or delaying certain projects or maybe any sort of licenses, et cetera, recently given the environment?
To a degree in the digital engineering side. Primarily on that side and in several markets.
Please state your name and company.
I'm Daniel here from Handelsbanken. And also from me, good luck in the future, Kimmo, 74 presentations is really impressive.
Thank you.
Yes. And also congrats to a strong order backlog, which is positive, obviously. Can you comment a bit on the percentage of the order backlog that is up for invoicing in '25? And if you have a growth also in the order backlog that is due for invoicing in the '25 time period versus '24?
Yes. Thank you for the question. The order backlog per se looks good in terms of being slightly stronger for the second half, and that's why we're slightly comfortable of a turning around the growth from the first half into the second half. That would be my overall comment. Of course, there's a bit of market dependency. So we always need to be mindful that the visibility into the second half in light of the current situation, it is a bit volatile. So that's the caveat to my comment.
Perfect. May I also ask you a little bit, you mentioned expectation of 4% to 5% salary increases in '25 on average for the group. And I guess that this is equal to a negative yield versus pricing. And we still haven't seen the salary impact in Sweden or Norway, I guess, while in Finland we have seen it from 1st of January. Can you share any view on the potential headwind from this during the year on price versus salaries?
I guess, very well sort of read into the situation what companies are going through. It's extremely difficult to push price increases in this type of market environment. So yes, we're looking at slightly higher price -- sorry, salary inflation compared to the price increases that we can push through to the market. That's why all the other efficiency measures are so important.
Yes. Okay. Fair enough. May I also ask a little bit, I'm curious about your comment that you have multiple important AI wins in Create, including this industrial equipment for AI innovation. To me, AI is quite broad-based, a little bit like IT. Hence, are we talking about -- what kind of projects are we talking about? So can you help us to understand the importance of these kind of projects for Tieto, the sizing, time -- is it time and material? Is it fixed? Is it priced as management consultancy? Just to understand a little bit more on if this is an opportunity or if it's instead a long-term threat with AI?
Thank you, Daniel. So first, I'd like to comment that specifically from the digital engineering side. And there we have seen a positively increased number of project wins. They tend to begin relatively small. They often begin with the proof of concept. We have seen successful expansion of the scope of the projects, both the scope and the number of projects. We are still at an early stage from a standpoint of having significant financial impact, e.g., on revenues. One factor.
Second important factor that we have to be active in the client interface. It is a signal of having the capabilities in new technologies that will influence every customer's business and influencing our business as well. Overall, it's the way to play the new wave of technology and in parallel, improve our own efficiency. In software businesses, it's a different story. AI embedded functionality into the -- in all possible software releases.
And in parallel, we have been able to prove productivity improvement in software R&D for a number of software businesses overall. So over time, it's just a factor to play the whole industry, a way to compete and a way to improve efficiency. I'd rather see it as an opportunity than threat when the company is adequately active, which we are.
The next question comes from Jaakko Tyrvainen from SEB.
It's Jaakko from SEB. I would like to continue on the pricing topic, especially in Create. Could you kind of describe how much the volumes in Create segment would need to rise before we start to see enough or sufficiently improving pricing in order to mitigate the underlying salary inflation? So i.e., I'm asking what is the level of the overcapacity in the markets in general currently?
I'll comment that. So I think that's Jaakko, very fair, but very difficult to give a very punctual view when more or less all companies talk about overcapacity. I have not seen research, so I wouldn't guess I could give an estimate, but it's not based on research.
So overall, I think it will also be a view of the way the capabilities and the pyramid is being built in the type of consulting business. In parallel, we drive all possible efficiency, especially attention on all nonbillable in the type of consulting domains. And very likely, once the macro becomes healthier, this sector will start to grow again and then the profitability levels will become much more normalized. That would be the only view I would have for today.
Okay. Fair enough. Then in the presentation you mentioned the NATO agreement. But in more general, have you seen new demand sparking from the defense sector or the related sector? And could you elaborate a bit your position in the Nordic market when it comes to the defense-related businesses?
Historically, we have not been that active in the defense sector. There's quite a bit of a kind of a momentum overall or dialogue. Exactly what type of business will it result in, to be fair, I think time will tell. It may be more product-oriented than high-tech services, but time will tell.
And so there is no further questions at this point. So I would like to thank everyone and hand over back to Kimmo for final remarks.
Thank you very much. So thank you for joining. It's an exciting era for the company. Today is a good day. It's time to renew the company, and we are all internally in great alignment on the future of the firm. Great to be handing over to Endre. And I fully expect and we all do that we'll see very good things from the company moving forward. Thank you very much for joining, and thank you for the last 14 years. Thank you.