INNOFACTOR. Danish country manager suspected misconduct led to assessment error in financials. IT Services 21 October Result Comment NO RATING

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1 INNOFACTOR IT Services 21 October Result Comment NO RATING PRICE Innofactor 0,78 Price as of High/Low 12m 1,17 / 0,76 COMPANY DATA Mcap 26 EV 36 No. of shares (out) 33,5 No. of shares (dil) 33,5 SHAREHOLDERS Ensio Sami 22,26 % Tilman Tuomo 8,4 % Salminen Jyrki 7,6 % Laiho Rami 4,3 % Freefloat 78 % STOCK DATA Reuters Bloomberg CALENDAR IFA1V.HE IFA1V FH Next report date 01 March 2016 AGM 29 March 2016 SHARE PRICE 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0, QUARTERLY EARNINGS 0,04 0,04 0,03 0,03 0,02 0,02 0,01 0,01 0,00-0,01-0,01 ANALYST Aaron Kaartinen aaron.kaartinen@fim.com Fleminginkatu HELSINKI Innofactor, EUR HEXP Index EPS, EUR Dealing (09) EBIT margin 1Q 2Q 3Q 4Q 1Q 2Q 3Qe 4Qe % 1 1 8% 6% 4% Danish country manager suspected misconduct led to assessment error in financials Innofactor reported a relatively weak Q3 report with negative sales and resulting negative surprise in EBITDA. However, the key information in the report was the suspected misconduct of the Danish country manager and the resulting assessment error in financials of 0,6 million for years The management has been restructured in Denmark and the company does not see changes in the underlying operational performance. However, this unfortunate event can result in short term uncertainty on the underlying profitability of the Danish operations. Sales growth missed our estimate with -3,5% YoY decline resulting in revenue of 9,3 million (estimate 10,2 million). Sales miss resulted in EBITDA of 0,8 million thus falling short of our estimate of 1,1 million. The licensing deals were still lagging behind and no pick-up was seen from the slow start to the year. Management was still confident in strong performance in the seasonally important Q4. The sales split between commercial and public & third sector clients was relatively stable at 48% / 5 during Q1-Q3/2015. Sales split between Finland and Denmark was 8 / 18% implying the reduced sales in Denmark due to the assessment error in financials. Sales split between integration services (73%), licenses (3%) and recurring services (24%) was still weak regarding the license revenues. Innofactor has hired a new executive to lead the licensing business. Innofactor announced updated strategy with no major changes. Based on discussion with the management we see mid-term growth potential in the digitalization growth initiatives of the Finnish government. This supports growth prospects from H2/2016 onwards We expect some short-term headwinds to M&A talks due to the uncertainty related to the assessment error in financials. However, the financing arrangement related to the upcoming redeeming of the hybrid bond is positive in terms of increasing financial flexibility for possible acquisitions. Innofactor share is trading at 0,78, maintaining a premium to the Nordic peers and some discount to HiQ, which we consider a relevant peer. However, we see some risks in the valuation due to slowdown in organic growth rate and lack of acquisitions to speed up growth. However, Innofactor has a significant tax asset of 7,1 million ( 0,21 per share) that is not reflected in the market multiples giving support to the share price. Figures in EURm e 2016e 2017e Sales 17,2 18,8 32,7 43,8 44,7 46,5 48,8 Sales growth 74,5 % 9,4 % 73,7 % 34,1 % 2,0 % 4,0 % 5,0 % EBIT 0,9 0,6 2,9 2,3 2,7 3,3 3,7 EBIT margin 5 % 3 % 9 % 5 % 6 % 7 % 8 % EBITDA 1,4 1,2 3,9 3,7 3,9 4,6 5,0 EBITDA margin 8,4 % 6,5 % 12,1 % 8,5 % 8,6 % 9,9 % 10,3 % PTP 0,9 0,6 2,7 1,7 2,0 2,9 3,3 EPS 0,02 0,02 0,07 0,04 0,05 0,07 0,08 DPS 0,00 0,00 0,00 0,00 0,00 0,00 0,00 Yield 0 % 0 % 0 % 0 % 0 % 0 % 0 % P/E 25,5 31,8 19,2 18,5 16,4 11,4 10,0 EV/EBITDA 11,7 12,4 13,9 10,1 9,3 7,1 5,8 EV/Sales 1,0 0,8 1,7 0,9 0,8 0,7 0,6 P/B 1,4 1,0 2,2 1,1 1,0 1,1 1,0 ROE 5 % 3 % 14 % 6 % 7 % 7 % 9 % ROCE 7 % 4 % 12 % 7 % 8 % 8 % 10 % Net Gearing -5 % 5 % 56 % 57 % 39 % 28 % 11 % FCF/share -0,04 0,00 0,09-0,01 0,00 0,10 0,09 FIM has made an agreement with the company this study concerns according to which it receives compensation for the research service provided. FIM does not provide any investment recommendation for the share. 1/10

2 Assessment error in financials Innofactor reported in connection with the Q3 report that it had terminated the contract of the Country Manager in Denmark on September 16, The contract was terminated due to suspected misconduct and lack of confidence. This has been part of the reasons leading to errors in the previously released financials. The interim reports for Q1 and Q have been corrected and for the time preceding the current financial period the figures are corrected to the last quarter of The effect of corrections in the group operating margin for 2015 is approximately -0,24 million and for 2014 operating margin -0,31 million. According to the company the suspected misconduct was executed among few participants and it does not result in changes in current business offering. Anthony Gyursanszky (Innofactor COO) has been appointed as Country Manager. We expect that the assessment error to be an unfortunate but isolated case and it has limited implications in the future, although additional costs are possible if some of the misconducts are not currently known. Furthermore, the profitability in the Danish operations was overstated which has resulted in somewhat lower estimates. The assessment error has resulted in a change to the company guidance. Although it is a technical change as the previous year financial have been changed. 2/10

3 Deviation table Sales missed our estimates due to still slow licensing sales and profitability was somewhat weak 3Q15 3Q15e Actual 2015e 2015 m Actual FIMe vs. FIMe FIMe Guidance Total Sales 9,3 10,2-9,3 % 44,7 >43,8 EBITDA (adjusted) 0,8 1,1-51,2 % 3,9 >3,8 EBITDA-% 8,1 % 11,2 % -3,1 pp 8,6 % EBIT (adjusted) 0,6 0,8-41 % 2,7 EBIT-% 6,0 % 1,4 % 4,6 pp 6,0 % PTP 0,5 0,7-43 % 2,0 EPS (adjusted) 0,01 0,02-37 % 0,03 DPS 0,0 0,00 Source: FIM Estimates, Innofactor Guidance The guidance was qualitatively unchanged but due to assessment error the guidance is lower in absolute terms Innofactor s net sales and operating margin (EBITDA) in 2015 is estimated to increase from 2014, during which the net sales were EUR 43.8 million and operating margin was EUR 3.8 million. 3/10

4 Forecast GROUP (EURm) Q14 2Q14 3Q14 4Q Q15 2Q15 3Q15e 4Q15e 2015e 2016e Net sales 32,7 10,7 11,2 9,7 12,2 43,8 11,2 11,4 9,3 12,8 44,7 46,5 Growth, y/y 73,7 % 93,4 % 45,1 % 16,1 % 10,3 % 34,1 % 4,4 % 1,1 % -3,5 % 5,0 % 2,0 % 4,0 % Growth, q/q -3,4 % 4,7 % -14,0 % 26,6 % -8,5 % 1,5 % -17,9 % 37,8 % Depreciation -1,0-0,3-0,4-0,4-0,3-1,4-0,4-0,3-0,2-0,3-1,2-1,2 EBIT Adjusted 2,9 0,4 0,2 0,6 1,1 2,3 0,4 0,1 0,6 1,6 2,7 3,3 EBIT margin 8,9 % 3,5 % 2,0 % 6,2 % 9,3 % 5,3 % 3,3 % 1,2 % 6,0 % 12,4 % 6,0 % 7,2 % Net financials -0,2-0,1-0,1-0,1-0,2-0,6-0,1-0,3-0,1-0,1-0,7-0,4 Associates profit 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 PTP 2,7 0,2 0,1 0,5 0,9 1,7 0,3-0,2 0,5 1,5 2,0 2,9 Taxes -0,5-0,1-0,1 0,0-0,2-0,4-0,1 0,0-0,1-0,3-0,4-0,6 Minority interest 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Net profit 2,3 0,1 0,0 0,5 0,7 1,3 0,2-0,2 0,4 1,2 1,6 2,3 EPS Adjusted 0,07 0,00 0,00 0,01 0,02 0,04 0,01 0,00 0,01 0,03 0,05 0,07 BALANCE SHEET (EURm) Q14 2Q14 3Q14 4Q Q15 2Q15 3Q15e 4Q15e 2015e 2016e Intangibles 3,9 3,9 3,7 3,6 3,4 3,4 3,3 3,2 3,1 3,0 3,0 2,5 Goodwill 19,3 19,5 19,6 19,6 19,6 19,6 19,6 19,6 19,6 19,6 19,6 19,6 Tangibles 0,9 0,9 0,9 0,8 0,7 0,7 0,6 0,6 0,6 0,6 0,6 0,6 Inventory 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Receivables 14,0 14,2 16,1 15,7 15,5 15,5 13,0 13,8 14,0 16,3 16,3 16,9 Cash 1,0 0,7 0,5 0,6 1,0 1,0 3,6 1,1 0,5 3,2 3,2 3,3 Assets 46,7 46,7 48,1 47,6 47,4 47,4 47,2 45,5 44,8 49,4 49,4 49,0 Equity 19,6 21,6 22,0 22,0 22,5 22,5 22,7 23,0 24,0 25,1 25,1 23,4 Capital notes 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Reserves obligatory 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Pension liabilities 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Long non-ib debt 0,9 0,9 0,9 0,9 0,8 0,8 0,9 0,9 0,9 0,9 0,9 0,9 Long ib debt 10,0 9,7 8,7 8,2 7,7 7,7 6,8 6,2 5,5 5,5 5,5 5,5 Short ib debt 1,9 0,8 3,3 4,5 2,9 2,9 2,8 3,1 4,2 4,2 4,2 4,2 Short non-ib debt 14,2 13,6 13,2 12,0 13,5 13,5 14,1 12,3 10,3 13,7 13,7 15,1 Advances received 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 Equity and liabilities 46,7 46,7 48,1 47,6 47,4 47,4 47,2 45,5 44,8 49,4 49,4 49,0 Equity Ratio, % 42,1 % 46,4 % 45,8 % 46,3 % 47,4 % 47,4 % 48,0 % 50,7 % 53,5 % 50,8 % 50,8 % 47,7 % Net Gearing, % 55,9 % 60,4 % 66,8 % 69,6 % 57,2 % 57,2 % 40,7 % 49,0 % 51,7 % 38,5 % 38,5 % 27,6 % Net debt 11,0 13,1 14,7 15,3 12,8 12,8 9,2 11,3 12,4 9,7 9,7 6,4 ROE 13,6 % 6,4 % 6,7 % 0,0 % ROCE 12,5 % 7,2 % 7,8 % 0,0 % 4/10

5 Financials SALES GROWTH 74% 74% 43% 34% 9% 4% ROE ROCE 15% 14% 1 5% 7% 5% 3% 6% 7% 1 8% 6% 4% EBIT MARGIN 8,9 % 7,1 % 7,2 % 6,0 % 5,3 % 5,3 % 3,3 % Assets/Sales Working capital/sales 198% 143% 107% 118% 108% 111% 105% 9% 1-8% -1% 5% 6% 4% GEARING 56% 57% 39% 28% 5% -5% -14% Payout ratio Investments/Sales % 9% 1 8% % 3% 1% 1% 6% 4% 5/10

6 Valuation ,1 P/E ,8 25,5 19,2 18,5 16,4 11, P/BOOK 3,9 2,2 1,4 1,0 1,1 1,0 1,1 1% 1% -1% DIVIDEND YIELD 1,7 % 0,0 % 0,0 % 0,0 % 0,0 % 0,0 % 0,0 % 6 4 4,7 EV/S 2 0 1,7 1,0 0,8 0,9 0,8 0, ,3 EV/EBIT ,2 18,6 18,8 16,1 13,4 9,7 EV/EBITDA , ,7 12,4 13,9 10,1 9,3 7,1 6/10

7 Peer Group Analysis 7/10

8 8/10

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10 CONTACT INFORMATION Equities Hans Segercrantz Richard Johansson Kari Lappalainen Sami Listola Jussi Matinlompolo Antti Pajukka Thomas Pirker FIM Direct, Order Routing Janne Siik Anna Zayas Janne Virtanen Clearing, Settlement and Custody Services Heli Sirkiä Research Kim Gorschelnik Mika Metsälä Aaron Kaartinen firstname.lastname@fim.com Fleminginkatu HELSINKI Dealing (09) /10