0RFO Siili Solutions Oyj

Siili Solutions Plc Half-year report 1 January – 30 June 2023 (Unaudited)

Siili Solutions Plc Half-year report 1 January – 30 June 2023 (Unaudited)

WHILE SIILI GREW, THE CHALLENGING MARKET AFFECTED PROFITS

Siili Solutions Plc Half-year report 16 August 2023 at 8.45

JANUARY-JUNE 2023

• Revenue EUR 65,288 (58,875) thousand
• Revenue growth EUR 6,413 thousand, or 10.9%
• Organic revenue growth EUR 3,484 thousand, or 5.6%
• EBITA EUR 5,010 (6,448) thousand, -22.3%
• EBITA margin 7.7% (11.0%) of revenue

JANUARY–JUNE	Jan.–Jun./2023	Jan.–Jun./2022	Jan.–Dec./20221
Revenue, EUR 1,000	65,288	58,875	118,334
Share of international revenue, %	25.9%	23.9%	25.2%
Adjusted EBITA, EUR 1,0002	5,010	6,448	11,868
EBITA, EUR 1,000	5,010	6,448	11,629
EBITA, % of revenue	7.7%	11.0%	9.8%
EBIT, EUR 1,000	4,149	5,704	10,149
Number of employees at the end of the period	1,061	942	1,045
Number of full-time employees and subcontractors (FTE) at the end of the period	1,248	1,127	1,226

1 The figures of the Haallas Finland Oy have been consolidated into Siili’s figures as of 1 October 2022.

2 Reported starting from H1 2023, see alternative performance measures.

APRIL-JUNE 2023

• Revenue EUR 31,664 (29,520) thousand
• Revenue growth EUR 2,144 thousand, or 7.3%
• Organic revenue growth EUR 829 thousand, or 2.7%
• EBITA EUR 1,661 (2,922) thousand, -43.1%
• EBITA margin 5.2% (9.9%) of revenue

APRIL–JUNE	Apr.–Jun./2023	Apr.–Jun./2022
Revenue, EUR 1,000	31,664	29,520
Adjusted EBITA, EUR 1,000	1,661	2,922
EBITA, EUR 1,000	1,661	2,922
EBITA, % of revenue	5.2%	9.9%
Number of employees at the end of the period	1,061	942
Number of full-time employees and subcontractors (FTE) at the end of the period	1,248	1,127

OUTLOOK FOR 2023 AND FINANCIAL TARGETS FOR 2023-2026

The updated financial guidance of revenue for 2023 is estimated to be EUR 120-140 million and EBITA EUR 8.3-11.8 million.

The previous guidance for the current year’s group revenue was EUR 125–145 million and EBITA EUR 12-15.5 million.

On 11 May 2022, the company published new long-term financial targets for 2023–2026. The targets for the period 2023–2026 are as follows:

• Annual revenue growth of 20%, with organic growth accounting for about half.
• EBITA 12% of revenue. Operating profit before amortisation and impairment for fair value adjustments on acquisitions.
• Net debt / EBITDA < 2. The target for the ratio of net debt and EBITDA remains below two.
• The target continues to be to pay a dividend corresponding to 30–70% of net profit annually. The dividend policy remains unchanged.

CEO TOMI PIENIMÄKI:

From an operational and service quality perspective, Siili performed well in the first year-half. We were successful in new sales to the public sector in Finland, which has particular strategic importance for us. However, we faced a weakening market in all businesses towards the summer.

Revenue grew from the previous year, but tightening market conditions at the end of the period weighed on growth. In the first half of the year, revenue grew organically by 6%, as opposed to over 15% a year earlier. The rapid slowdown in revenue growth was driven in particular by the weak second quarter and a rapid change in market conditions in the Siili Group’s areas of operation.

Profitability was impaired by the slowdown in revenue growth and a rise in the general cost level. EBITA came in below estimates in January–June, to stand at 7.7% of revenue. In the second quarter of the year, the EBITA ratio was 5%, representing a decline from about 10% a year earlier. Due to the developments in the first year-half, we downgraded our guidance for the current period in mid-July.

The rapid change in the market situation and operating environment, both in Finland and internationally, has slowed down the launch of certain new projects, while also tightening price competition both in the private and public sector. Tighter price competition made it challenging to integrate rising costs into customer prices.

We are intensifying and increasing our actions to boost sales and improve cost efficiency. We are also adjusting our operations and cost structure to the altered market climate. In the transformation negotiations initiated in August, we seek different solutions to restore our competitiveness and profitability. Siili will continue to ensure its competitiveness as a diverse technology powerhouse.

While the markets evolve, our strengths and capabilities will carry us forward. As an example, we can be satisfied with our success in the Tax Administration's extensive tender. We were chosen as one of the suppliers for a six-year contract period whose estimated total value reaches almost EUR 90 million. Another significant deal was concluded with the Finnish Food Authority, marking a continuation of our strong existing cooperation. The estimated total value of the five-year contract in the areas including Siili as one of the suppliers is almost EUR 50 million.

We continued the implementation of our growth strategy and the recruitment of new talent in April by acquiring Talentree Ltd’s business focusing on software development. We are at the forefront in the use of innovative technologies and tools. Artificial intelligence-assisted development represents a wealth of new and interesting opportunities for our customers and employees, and hence we decided to channel the potential into a newly founded subsidiary, Siili Spaiks Ltd, which will have close cooperation with the entire Siili Group in order to share best practices and to develop top tier services.

Siili’s personnel grew to 1,061 experts during the period, and the availability of new experts on the markets has eased during the second quarter. Attrition has also decreased. We take care of the continuous learning and development of the Siilis by renewing our operating models actively.

We have a positive outlook on the future even if there are headwinds in the markets. Our key task at present is to look after our clients and competitiveness. During the remainder of the year, we will responsibly align Siili’s activities with the new market conditions. We will protect our strengths – the ability to deliver and a strong customer satisfaction – while maintaining the agility of our operating model even in the face of rapid changes in the operating environment. Concurrently we believe that there will be strong demand for Siilis' solid expertise also in the future as digitalisation continues strong.

I want to extend my thanks again to all Siilis for a job well done and to our customers for their trust. Despite the current downturn in the markets, we continue to look confidently forward to the autumn.

REVENUE AND PERFORMANCE

In the first half of 2023, the Group’s revenue increased by 10.9% (20.8%) year-on-year. Revenue grew by EUR 6,413 (10,135) thousand, totalling EUR 65,288 (58,875) thousand. Organic revenue growth was EUR 3,484 (7,618) thousand, or 5.6% (15.6%). The share of international operations of the Group’s revenue for the review period was 25.9% (23.9%). Revenue growth slowed down both domestically and in the international operations due to a rapid change in market conditions towards the end of the year-half.

Subcontracting costs arising from the use of external services increased year-on-year, amounting to EUR 14,236 (12,793) thousand. As a proportion of revenue, subcontracting costs remained largely unchanged at 21.8% (21.7%). Employee benefit expenses for the review period totalled EUR 37,826 (32,806) thousand, or 57.9% (55.7%) of revenue. The growth of employee benefit expenses was driven, among other things, by a general rise in the wage level. The number of employees at the end of the half-year period was 1,061 (942), representing a year-on-year increase of 12.6% (14%). The total cost arising from subcontracting and employee benefits in proportion to revenue increased from a year earlier, to stand at 79.7% (77.5%) of revenue. Other operating expenses amounted to EUR 6,541 (5,374) thousand, or 10.0% (9.1%) of revenue. The growth of other operating expenses reflected the acquisition of Haallas Finland Oy and a year-on-year increase in ICT expenses.

The Group’s EBITDA for the review period was EUR 6,814 (8,034) thousand, or 10.4% (13.6%) of revenue. EBITDA decreased by 15.2% year-on-year. EBITA was EUR 5,010 (6,448) thousand, or 7.7% (11.0%) of revenue. The Group's profitability weakened in the review period as a result of the slowdown in revenue growth and a general rise in the cost level.

Half-yearly EBIT stood at EUR 4,149 (5,704) thousand. Net financial income for the financial period totalled EUR 415 (-1,372) thousand. In the review period, the Group recognised financial income of EUR 1,522 (-904) thousand from fair value adjustments on contingent consideration liabilities. The profit for the period before taxes was EUR 4,564 (4,217) thousand, and earnings per share were EUR 0.38 (0.44).

FINANCING AND CAPITAL EXPENDITURE

The Group’s statement of financial position totalled EUR 100,267 (96,506) thousand at the end of the first year-half. The Group’s equity ratio was 40.9% (41.4%), return on investment (ROI) was 15.5% (19.1%), and the net debt to EBITDA ratio was 0.29 (-0.30).

During the review period, the Group’s cash flow from operations was EUR 3,301 (6,726) thousand, representing a decrease of 50.9% year-on-year. Cash flow from operations was reduced partly due to the weakening of the Group's operating result from the comparison period.

Cash flow from investing activities for the first year-half was EUR -4,488 (-649) thousand, including a contingent consideration of EUR 2,546 thousand paid for the acquisition of Haallas Finland Oy and a consideration of EUR 1,093 thousand paid to the minority interest for the acquisition of an additional stake in Vala Group Oy.

Cash flow from financing activities in the review period amounted to EUR -6,112 (10,416) thousand. The company repaid a total of EUR 1,259 thousand of its bank loans in the review period. The shareholders of Siili Solutions Plc were paid a dividend of EUR 1,622 thousand out of the result for the financial period 2022, and EUR 731 thousand was paid to the non-controlling shareholders of Supercharge Kft.

At the end of the review period, the Group’s liquid funds totalled EUR 28,953 (36,741) thousand, and the Group had EUR 2,500 thousand in unused credit facilities. At the end of the review period, the Group’s interest-bearing bank loans stood at EUR 10,000 (12,512) thousand, of which EUR 2,513 thousand consisted of short-term loans.

RISK FACTORS AND UNCERTAINTIES

Siili may be exposed to various risk factors relating to Siili’s operations and operative environment. Realization of such risks may have adverse effect to Siili’s business, economic position or to the company’s valuation. Key risks relating to Siili’s business have been described below. In addition, Siili has identified other risks that may become material in the future. Furthermore, there exists risk of which Siili is not necessarily aware of and which may become material.

• Losing one or more key customers, material decline in customer demand, customer’s economic difficuties or changes in their strategy that have adverse effects to Siili.
• Failure to meet quantitative or qualitative recruitment objectives or failure to meet customer demand in a timely manner.
• Failures in customer pricing, planning, delivery or improving cost efficiency. The propability and potential adverse effects of the aforementioned risks increase during the economically uncertain operational environment.
• Losing key personnel or decline in employee brand image.
• Realisation of information security risks, e.g. due human errors.
• General negative or weakened economical development and related uncertainties in customer’s operative environment. General economic cycle and changes in customer’s operating environment may have adverse effects in IT investments, e.g. due to postponed decision-making or postponed or terminated projects.

The war in Ukraine neither has nor is anticipated to have a direct impact on Siili’s business. Increased economic uncertainty, inflation and increased interest rate environment may neverheless affect us and our customers in the future. Although these impacts are difficult to foresee, we mitigate them by focusing on customer satisfaction and cost-efficiency.

More information on the company's risks and risk management are presented in the Annual Review 2022 as well as the Report of the Board of Directors and the Consolidated Financial Statements.

KEY EVENTS AFTER THE REVIEW PERIOD

The company announced on 13 July 2023 that it decreases the financial guidance for revenue and EBITA for year 2023. According to the updated guidance the revenue for 2023 is estimated to be EUR 120-140 million and EBITA EUR 8.3-11.8 million. The previous guidance for the current year’s group revenue was EUR 125–145 million and EBITA EUR 12–15.5 million.

Furthermore, the company announced on 8 August 2023 that it initiates change negotiations to address the weakened market conditions. The negotiations concern Siili Group's support functions and the Continuous Services business unit, and they cover a total of approximately 80 employees. According to the preliminary estimate, the change negotiations could result in a reduction of a total of 15 employees. During the change negotiations, other possibilities to reduce costs and adapt operations will also be carefully considered.

In addition to the above, the company’s management is not aware of any other events of material importance after the review period that might have affected the preparation of the half-year report.

FINANCIAL CALENDAR 2023

Siili publishes Q3 business review for the period 1 January – 30 September 2023 (Q3) on 24 October 2023.

Siili has updated its disclosure policy and started bilingual communications as from 1 July 2023. Going forward, all Siili’s releases and annual reports will be published both in Finnish and English.

In Helsinki 16 August 2023

Board of Directors

Siili Solutions Plc

Further information:

CEO Tomi PienimäkiPhone: +358 40 834 1399

CFO Aleksi KankainenPhone: +358 40 5342 709

Siili Solutions in brief:

Siili Solutions Oyj is a unique combination of a digital design agency and a technology powerhouse. The starting point for all our work is a deep understanding of human behavior. Siili is the best partner for the customer when it comes to seeking growth, efficiency and competitive advantage through digital solutions. Siili has offices in Finland, Germany, Poland, Hungary, the UK, Austria and the USA. Siili Solutions Plc's shares are listed on the stock exchange list of Nasdaq Helsinki Oy. Siili has grown profitably since its inception in 2005.

Attachment

• Siili Solutions Plc Half-year report 1 January - 30 June 2023 (unaudited)