Innofactor Plc Financial Statement 2018 (IFRS)

Innofactor Plc Financial Statement March 5, 2019, at 9:00 Finnish time

The last quarter of 2018 was very challenging, the net sales and operating margin were under the target, also for the entire year 2018 – the cooperation negotiations in the last quarter together with other actions are believed to have an effect already starting from the first quarter of 2019

Quarter 10–12/2018

• The net sales were approximately EUR 15.9 million (2017: 17.1), which shows a decrease of 7.3%.
• The operating margin was approximately EUR -0.9 million (2017:   0.5), which shows a decrease of 272.1%.
• The weaker than expected profitability was contributed to by the fact that
  • customers’ purchase habits in Finland in the last quarter of the year differed significantly from previous years, as regards the Dynasty product family updates, as customers decided to wait for the turn of the year and a new version of the product family.
  • The net sales in Denmark in the fourth quarter were significantly lower than estimated.
  • Additionally, a need for write-offs arose, for example, in relation to project deliveries.
• The operating loss was EUR -1.7 million (2017: operating loss -0.2), which shows a decrease of 629.8%.
• On October 8, 2018, Innofactor announced in a stock exchange release that it estimates that its result prospects for 2018 will be weaker than previously stated, due to reorganization.
• Innofactor got several significant orders in the last quarter, for example, the renewal of the Hilma service for Hansel, approximately EUR 4.0 million, and the delivery of the Dynasty 10 case management system for 13 municipalities in the North Karelia region, approximately EUR 0.5 million.

Year 1–12/2018:

• The net sales were approximately EUR 63.1 million (2017: 65.7), which shows a decrease of 3.8%.
• The operating margin was approximately EUR -1.0 million (2017: 1.3), which shows a decrease of 178.7%.
• The operating loss was approximately EUR -3,9 million (2017: operating loss -1.5), decreasing by 165% due to increased write-offs related to acquisitions, in accordance with IFRS 3, resulting in a decrease of EUR 2,030 thousand (2017: 2,030).

*) In accordance with IFRS 3, the operating result for October 1–December 31, 2018, includes EUR 507 thousand (2017: 507) in depreciations related to acquisitions, consisting of allocations of the purchase price to intangible assets. Adjusted for the said depreciations, Innofactor’s operative business loss for the review period of October 1–December 31, 2018, would have been EUR 1,187 thousand (2017: operating profit 275), the operative business result before taxes EUR -824 thousand (2017: 499), the operative business result EUR -659 thousand (2017: 400), and the operative business result per share EUR -0.0182 (2017: -0.0110). In accordance with IFRS 3, the operating result for January 1–December 31, 2018, includes EUR 2,030 thousand (2017: 2,030) in depreciations related to acquisitions, consisting of allocations of the purchase price to intangible assets. Adjusted for the said depreciations, Innofactor’s operative business profit for the review period of January 1–December 31, 2018, would have been EUR -1,842 thousand (2017: 569), the operative business result before taxes EUR -1,782 thousand (2017: 451), the operative business result EUR -1,425 thousand (2017: 383), and the operative business result per share EUR -0.0394 (2017: 0,0102).

**) The Innofactor Group monitors the number of active personnel. The number of active personnel does not include employees who are on a leave of over 3 months.

Innofactor’s future outlook for 2019

Innofactor’s net sales and operating margin (EBITDA) in 2019 is estimated to increase from 2018, during which the net sales were EUR 63.1 million and operating margin was EUR -1.0 million.

CEO Sami Ensio's review: 2018 was a big disappointment – I trust there will be a significant change in 2019

The net sales decreased by 7.3 percent in the last quarter of 2018 (net sales EUR 15.9 million). Especially the net sales from licensing was significantly lower than we expected. In the last quarter of 2018, the operating margin (EBITDA) was EUR -0.9 million (5.7 percent of the net sales) and decreased by 71.2 percent from the previous year.

For the entire year, the decrease in net sales was 3.8 percent (net sales EUR 63.1 million). The operating margin (EBITDA) for the entire year was EUR -1.0 million (1.6 percent of the net sales) and decreased by 178.7 percent from the previous year.

2018 was extremely challenging for our business operations. It was definitely one of the hardest years in Innofactor’s 19 years history. The last time we had major challenges like this was during the first couple of years of Innofactor’s operation in the early 2000s. For me personally, it is especially painful that we could not fulfill the financial promises we had made to the market. My apologies for that.

The weak profitability was especially due to the lower than expected net sales on the second half of the year, for example, due to customers’ purchase habits in Finland differing significantly from previous years, as regards the Dynasty product family updates, as customers decided to wait for the turn of the year and a new version of the product family. Also, the net sales in Denmark in the fourth quarter were significantly lower than estimated. Additionally, an unforeseen need for write-offs arose, for example, in relation to project deliveries. 

In the first quarter of 2018, Innofactor focused on integrating the Nordic companies acquired in previous years in Sweden, Denmark and Norway. The common Nordic ERP system was finally implemented in all countries at the beginning of July. As the top management was focused on the implementation of the Nordic integration, the Finnish business operations met unforeseen hardships, which weakened the result on the second half of 2018. Innofactor implemented corrective actions in autumn 2018, for example, by having cooperation negotiations in its Finnish companies. In these companies, self-organized teams were introduced, the number of supervisors was reduced from 50 to 16, and the number of organization levels was reduced from 7 to 4. The total effect of these actions in 2019 is estimated to be EUR 2.4 million.

Innofactor's vision is to be the leading implementer of digitalization in each of the Nordic Countries. We believe in our chosen Nordic strategy and in reaching our long term goals. This requires perseverance and determination from the company's management and employees as well as investors. In 2019, Innofactor will focus on improving the profitability of its business operations. This will be done with hard work, immense perseverance, but also with a twinkle in our eyes. Our goal is to improve our profitability right at the beginning of the year. This is now our most important task with our top personnel. It is the basis for all of our future actions and development.

2019 has started positively. We have made several significant deals, for example, Traficom selected Innofactor as the development and maintenance provider for their technical platform for digital services (VISA) (value of the procurement is approximately EUR 5.0 million), which is the largest individual deal in Innofactor’s history, and a Swedish organization selected Innofactor to implement their membership management project (value of the procurement is approximately EUR 1.3 million). Up to the date of publishing this release, we have sold a total of 38 updates for our Dynasty 10 case management software. We estimate that the delay in these updates affected the 2018 result negatively, and they will now have a positive effect on 2019.

Innofactor’s order book development at the beginning of the year has been very positive, and is currently the largest in its history, approximately EUR 32 million what is about 40% increase compered same time in 2018. As of the first quarter of 2019, we will also report our order book to our investors.

Strategy and its realization in the review period

Innofactor is the leading provider of modern digital organization for companies, public administration and third sector for its over 1,500 customers in the Nordic Countries. Innofactor has the widest solution offering and leading know-how in the Microsoft ecosystem in the Nordic Countries. Innofactor has approximately 600 enthusiastic and motivated top specialists in Finland, Sweden, Denmark and Norway. The focus of our strategy in the Nordic level is even more strongly in our five application areas (Journeys) and selected industries for which Innofactor strives to create a uniform operating model and offering in the Nordic Countries. Unifying the offering may take place either through organic growth or selected acquisitions.

Innofactor's mission: Driving the #ModernDigitalOrganization

Innofactor's vision: The leading provider of organizations' digital transformation in each of the Nordic Countries (Finland, Sweden, Denmark and Norway)

Innofactor's strategy for achieving this vision includes:

• The best Nordic professionals in the Microsoft ecosystem
• Highly productized cloud offering and managed services
• A proactive, value-adding and flexible delivery model
• Innovation creation with leading customers in selected industries

Innofactor's long term financial goal is to grow profitably:

• To achieve annual growth of about 20 percent, of which majority is intended to be achieved by organic growth
• To achieve about 20 percent EBITDA in relation to the net sales
• To keep the cash flow positive and secure solid financial standing in all situations

The main actions for reaching the approximately 20 percent growth and 20 percent operating margin:

• Focus on selected industries and solution areas (customer journeys) that provide the highest growth opportunities and allow us to best scale existing offering in the Nordics
• Focus on current customers and cross sales to get a bigger share of wallet of customers' digital transformation budgets
• Improving modern digital marketing and sales skills to achieve better and more cost-effective sales results
• Focus on competence planning, recruiting and resource optimization across Nordics
• Shifting revenues from projects and professional services toward products, IP-based and continuously managed services that support selected solution areas and industries
• Strengthening continuously our specialists' professional skills and improving our leading offering in order for our customers to pay hour price above market average
• Aiming to move to self-organized teams and to reduce organizational layers achieving better communication and faster decision making
• Continuously improving our flexible value-adding delivery model minimizing number of non-invoiced hours and maximizing customer satisfaction

In the review period of January 1–December 31, 2018, Innofactor's net sales decreased by 3.8 percent. The company did not reach the goal it had set for organic growth.

Innofactor's operating margin (EBITDA) in relation to net sales was -1.6 percent in the review period. This is a record low and very far away from the set target level of 20 percent.

Innofactor’s operating cash flow in the review period of January 1–December 31, 2018, was EUR -0.6 million positive (2017: EUR 4.2 million). Net gearing at the end of the review period was 71.2 percent (2017: 53.8 percent).

Board of Director’s proposal on the dividend

Innofactor is a growing company and intends to use its operating profit on actions promoting growth, for example, on realizing mergers. Innofactor has defined a dividend distribution policy according to which the aim of the Board of Directors is to provide an opportunity for the shareholders to distribute, from the part of the operating margin (EBITDA) that exceeds 10%, the maximum dividend allowed by the state of the business. For 2018, the operating margin (EBITDA) was -1.6% of the net sales. In making the proposal on the dividend, the Board of Directors takes into account the company's financial situation, profitability and near-term outlook.

At the end of the financial period of 2018, the distributable assets of the Group's parent company were EUR 27,236,831.73.

The Board of Directors proposes that no dividend be distributed for the financial period of 2018.

Espoo, March 5, 2019

INNOFACTOR PLC

Board of Directors

Additional information:

CEO Sami Ensio, Innofactor Plc
Tel. +358 50 584 2029
sami.ensio@innofactor.com

Briefings concerning the financial statement of January 1–December 31, 2018

On March 5, 2019, at 10:00 Finnish time, Innofactor will hold a briefing concerning the financial statement in Finnish for the media, investors and analysts at the company's premises at Keilaranta 9, Espoo. The report will be presented by CEO Sami Ensio and CFO Marko Lehtonen.

Innofactor will also hold a corresponding conference call in English on March 5, 2019, at 12:00 Finnish time.

Please register for the briefings beforehand by sending email to ir@innofactor.com.

The presentations of the briefings will be available on Innofactor's web site after the briefings.

Financial releases in 2019

The annual report for 2018 will be published on the company's web site on Tuesday, March 12, 2019.

The Annual General Meeting will be held on Tuesday April 2, 2019, at 9:00 Finnish time.

The schedule for financial releases in 2019 is as follows:

• Interim Report January−March 2019 (Q1) on Tuesday May 14, 2019
• Half-Yearly Report January−June 2019 (Q2) on Tuesday, July 23, 2019
• Interim Report January−September 2019 (Q3) on Tuesday, October 29, 2019

Distribution:
NASDAQ Helsinki
Main media
www.innofactor.com

Innofactor
Innofactor is the leading driver of the modern digital organization in the Nordic Countries for its over 1,500 customers in commercial, public and third sector. Innofactor has the widest solution offering and leading know-how in the Microsoft ecosystem in the Nordics. Innofactor has approximately 600 enthusiastic and motivated top specialists in Finland, Sweden, Denmark and Norway. In 2014–2018, the annual growth of Innofactor's net sales has been approximately over 14%. The Innofactor Plc share is listed in the technology section of the main list of NASDAQ Helsinki Oy. www.innofactor.com #ModernDigitalOrganization

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