INNOFACTOR Software/Finland, June 2, 2017 Company report

Transcription

1 Target: Leader in all Nordic countries Rating BUY We initiate coverage of Innofactor with BUY recommendation and target price of EUR Innofactor s acquisition driven growth phase is shifting towards a focus on organic growth and improving margins. The outlook for the Nordic IT-services market is healthy and improving economic conditions support growth. Microsoft growing, especially in cloud services Microsoft s strong position in enterprise solutions in combination with a growing fragmented multibillion market provides a good opportunity for Innofactor. Microsoft s sales in global enterprise solutions are estimated to grow at around 10 % E. Price/EUR 1,8 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 0 06/12 06/13 06/14 06/15 06/16 06/17 Innofactor DJ STOXX 600 Shift from acquisition driven growth to organic growth Innofactor has grown aggressively through acquisitions during the past years, which has had an effect on profitability. The company has now built a pan-nordic platform from which it aims to grow organically and focus on improving its profitability. We estimate Innofactor to grow at a 5.6 % CAGR between E. Synergies and mix to improve margins A key driver for improving profitability lies in Innofactor s ability to transition sales from low margin projects to higher margin continuous services and to a greater extent being able to include own software products and services in the offering. In addition to the aforementioned, the company can achieve some cost synergies on group level from streamlining operations after acquisitions. We estimate the EBITDA-margin to reach 10 % in We initiate coverage with BUY rating and TP of EUR 1.85 Our target price and recommendation is based on our DCF valuation and peer multiples. Our EV/EBITDA estimate of 11.0x for 2017 is slightly above our Nordic peer group but our 2018 multiples are in line with peers. The value from our DCF model and the multiples imply a target price of EUR KEY FIGURES Share price, EUR (Last trading 1.67 day s closing price) Target price, EUR 1.85 Latest change in 2-June-17 Latest report on company - Research paid by issuer: YES No. of shares outstanding, 36,188 No. of shares fully diluted, 36,188 Market cap, EURm 60 Free float, %EUR 34.8 Exchange rate - Reuters code IFA1V.HE Bloomberg code IFA1V FH Average daily volume, EURm - Next interim report 01-Aug-17 Web site Analyst Telephone Jerker Salokivi, Jonas Forslund jerker.salokivi@evli.com BUY HOLD SELL Sales EBIT EBIT Ptx profit EPS P/E EV/Sales P/CF EV/EBIT DPS EURm EURm % EURm EUR (x) (x) (x) (x) EUR % % E % E % E % Market cap, EURm 60 BV per share 2017E, EUR 0.8 CAGR EPS , % 42.2 Net debt 2017E, EURm 12 Price/book 2017E 2.0 CAGR sales , % 9.9 Enterprise value, EURm 72 Dividend yield 2017E, % 0.0 ROE 2017E, % 10.3 Total assets 2017E, EURm 65 Tax rate 2017E, % 20.0 ROCE 2017E, % 9.4 Goodwill 2017E, EURm 28 Equity ratio 2017E, % 45.5 PEG, P/E 17/CAGR 0.9 All the important disclosures can be found on the last pages of this report. 1(26)

2 Investment summary Leading Nordic Microsoft solutions provider Growth outlook for ITservices market improving Microsoft s enterprise solutions growing, especially cloud services Shift from acquisition driven growth to organic growth and margin improvement Synergies and mix to improve margins Main risks to investment case BUY with target price of EUR 1.85 Innofactor is a leading Nordic IT-services company. The company s core business is being an integrator of Microsoft based solutions and the company has a leading position in the Nordic countries within its focus area. Innofactor also develops and sells own software products and solutions. Customers include commercial, public sector, and membershipbased organizations in the Nordic countries. Innofactor employs 600 people and has offices in Finland, Sweden, Denmark, and Norway. The growth in the Nordic IT-services market during 2016 has been estimated at around 2-3 % and the growth is expected to pick up in 2017, with Innofactor estimating growth of around 3-4 %. The growth in certain areas within IT-services, such as the cloud, mobility, and analytics, are assumed to notably surpass the upper end of the estimated growth spectrum. IDC has projected an annual growth of 21 % in the Nordic public cloud services market until Microsoft s strong position in enterprise solutions in combination with a growing fragmented multibillion market provides a good opportunity for Innofactor. Microsoft s sales in global enterprise solutions are estimated to grow at around 10 %. Microsoft is also at the forefront of developing A.I., machine learning and advanced analytics capabilities into its solutions, which provides a tailwind to service providers like Innofactor. Innofactor has grown aggressively through acquisitions during the past years, which has had an effect on profitability. The company has now built a pan-nordic platform from which it aims to grow organically and focus on improving its profitability. We estimate Innofactor to grow at a 5.6 % CAGR during E. Our sales growth estimates are based on the healthy outlook of the Nordic IT-services market and the aforementioned growth pockets within the market (e.g. cloud and digital leap), improving economic conditions favoring increased IT-investments, and the strong outlook for Microsoft s enterprise solutions. A key driver for improving profitability lies in Innofactor s ability to transition sales from low margin projects to higher margin continuous services and to a greater extent being able to include own software products and services in the offering. In addition to the aforementioned, the company can achieve some cost synergies on group level from streamlining operations after acquisitions. We estimate the EBITDA-margin to reach 10 % in The main risks to our investment case are Innofactor failing to 1) improve mix between projects and recurring revenue (including own products) 2) achieve planned synergies 3) to attract skilled professionals, and 4) Microsoft losing its leading position in enterprise space. Our target price and recommendation is based on our DCF valuation and peer multiples. Our EV/EBITDA estimate of 11.0x for 2017 is slightly above our Nordic peer group but our 2018 multiples are in line with peers. The fair value from our DCF model and the multiples imply a target price of EUR (26)

3 Company and business overview Leading Nordic system integrator within Microsoft-based solutions Leading Nordic system integrator within Microsoft-based solutions Innofactor is a leading Nordic IT-services company. The company s core business is being an integrator of Microsoft based solutions and the company has a leading position in the Nordic countries within its focus area. Innofactor also develops and sells own software products and solutions. Innofactor s customers include over 1500 commercial, public sector, and membershipbased organizations in the Nordic countries. Innofactor has offices in Finland, Sweden, Denmark, and Norway. Figure 1: Revenue by customers, country, and source (Q1/2017) Source: Innofactor, Evli Strong acquisition based growth Improved geographical dispersion, Finland 54 % of sales As a result of a merger with Westend ICT, Innofactor listed on NASDAQ Helsinki in The strong growth of Innofactor before the merger has since continued, with an acquisition fuelled sales CAGR of 28.2 % from Since 2011 seven acquisitions have been made, both in Finland and in other Nordic countries. Revenue in 2016 amounted to EUR 59.6m and the company now has over 600 employees. Innofactor operates in the Nordic IT-services market. In 2015, before the acquisitions of Cinteros and Lumagate, Finland accounted for 82 % of sales and Denmark for 18 %. As a result of the acquisitions the geographical distribution has changed significantly and in the first quarter of 2017 Finland accounted for 54 % of sales and Sweden as the second largest country with 29 %. Denmark and Norway stood for 9 % and 8 % respectively. Innofactor SWOT-analysis Strengths Pan-Nordic presence Strong offering with Microsoft focus Growth track record, customer references Opportunities Increasing share of own products and services Scaling up through better sales mix Fragmented market Digitalization trend Cross selling and business optimization Weaknesses Scalability historically Project dependency Risks associated with acquisitions Threats Competition for skilled workers Increases in personnel costs Failing to capture synergies from acquisitions Failing to improve sales mix Microsoft losing its position 3(26)

4 Business solution areas Microsoft technology at the core Innofactor s core business is being an integrator of Microsoft-based systems. This means that the business is very much focused around client projects and project deliveries, as well as consulting. The company s solutions are divided into five areas, which are described below. The Digital Vision and Processes solution area is focused on consulting work in regards to developing a customer s operations from a digital point of view. Digital Business solutions are focused on creating and moving customers operations to the web and providing a modern service environment for customers and their end-users. The solutions include: Service design, Digital marketing, Websites and mobile applications, and Digital customer service Products and platforms include: Microsoft Office 365, Dynamics CRM, Microsoft Azure, Episerver, and Sitecore The Business Productivity focus on improvements and integration of business processes. Solutions in the area include: CRM and xrm, PPM, ERP and Customized Solutions, Information, Case and Quality Management, and Business Intelligence. Products and platforms include: Microsoft Dynamics 365, Power BI and SQL, Innofactor Business Cloud, and Innofactor Quality First Flexible Collaboration solutions provide customers with ways of improving accessibility to information, by enabling safe access to information on any device, and enhancing communication. The solutions include: Mobile productivity, Digital collaboration, and Enterprise communication Products and tools include: Innofactor OnePoint, Microsoft Teams, Yammer, and Skype for Business Images: Innofactor Intelligent Cloud solutions help to create customized cloud services, integrate devices, move data to the cloud, and to improve processing and analysis of data. Solutions in Intelligent Cloud include: Azure managed services, Enterprise mobility services, Analytics and machine learning, and Internet of Things Platforms and tools include: Azure, AD, EMS, OMS, and Power BI 4(26)

5 Own software products and services Own products and services improve profitability R&D could rise to around 10 % of net sales Limited distribution through third party networks Innofactor also develops its own software products on top of Microsoft s solutions. According to the company, their own products complement their Microsoft based offering and function as a competitive advantage for them. The company s product and service development organization employs around 40 experts in cloud technology and architecture. The focus lies on productized cloud solutions that are delivered as part of the solutions in Innofactor s business solution areas. Examples of own products are Innofactor Skilli, Innofactor Prime, and Innofactor OnePoint. In 2016 the company invested 5.7 % of net sales in research and product development. The company sees potential to attain more revenue from own products and services and has indicated that investments in research and product development could rise to a level of 10 % of net sales. Excluding R&D costs, the operating margins of the own products are closer to 100 %, thus offering good potential for enhanced profitability. Most of Innofactor s own products are sold directly to customers in connection with projects. Some of the more standardized products are sold through third party digital distribution networks, but this represents only a small part of the revenue streams. We see limited potential at the moment for Innofactor to increase its digital distribution of own software, unless it would significantly invest in this area. Own product examples Innofactor Skilli Data analytics tool for primary and secondary schools Enables collection of data and use of the information for planning teaching Innofactor Prime Software platform accesed through a browser-based user interface Scalable solution for online publications, communication and eservices. Innofactor OnePoint Mobile and cloud focused package solution Tool for flexible communication and collaboration in organizations Revenue and business models Innofactor operates under one business segment and reports revenue for four different sources. Innofactor sources of revenue: Delivery projects and consulting Recurring revenues professional services Recurring revenues managed services and maintenance Licenses 5(26)

6 62 % of revenue from projects and consulting Recurring revenues increase business stability Managed services and maintenance; professional services High margin licenses roughly 5 % of revenue Projects Delivery projects and consulting typically includes assignments where Innofactor integrates a systems solution for the customer. 62 % of revenue in 2016 was created through projects. In obtaining new projects a certain amount of sales activity is generally required, but previous references and customer-specific needs can also lead to direct engagement from the customer. Project pricing is usually based on spent hours or on a fixed price. In fixed price projects there exists a risk that the costs for completing the costs are wrongly estimated and projects become unprofitable. In general the margins in projects are typically quite low partly due to competition in obtaining projects. Recurring revenues Recurring revenues are generated through long-term contracts with customers, often lasting over 10 years, with payments occuring at pre-specified intervals. Typically the contracts are a result of a project where customers have ordered a product or systems solution and wish to outsource any further development and maintenance needs, as well as support activities, to Innofactor. The continuous contracts decrease the seasonal variation and provide a stability to the business. Recurring revenues are divided into managed services and maintenance and professional services. Managed services and maintenance concern continuous services and support, such as SaaS-solutions, support services and customer service. Professional services concerns continuous development and modifications and would likely be based on a certain amount of development hours per time unit. The margins in recurring revenues are higher due to the lower need for sales activity as compared to projects, as well as significantly lower cost base. Margins from managed services and maintenance are generally higher as the need for development work and the therefrom arising labor costs from the hours spent are lower. In some cases operating margins can be closer to 50 %. Licenses Revenue is also generated through the sale of licenses, both own and third-party. Approximately 2 % of revenue in 2016 was generated through sales of third-party licenses, where Innofactor receives a share of the revenue. Roughly 3 % was generated from own licenses, where the scalability significantly improves profitability. Excluding R&D costs, the operating margins of the own products sold through licenses are closer to 100 %. Figure 2: Estimated range for average operating margins per revenue source 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5 % 0 % Projects Source: Evli est. RR - Professional services RR - Managed serv. and maint. Licenses 6(26)

7 Acquisitions Acquisitions since 2011 added EUR 35-43m to revenue Innofactor has since 2011 made seven acquisitions, of which the most significant acquisitions by size have been atbusiness, Cinteros, and Lumagate. We estimate that the acquisitions since 2011 have added revenue in the range of EUR 35-43m. With the effect of acquisitions taken into account, we estimate organic growth of between % for Innofactor nearly doubled its size in 2013 after acquiring Finnish company atbusiness. The company was at the time one of the leading providers of Microsoft-based technology solutions to commercial and public sector clients with over 200 employees. The deal expanded Innofactor s offering in enterprise resource planning and human resource management systems. atbusiness was consolidated into Innofactor June 1st, The company had revenue of EUR 17.4m in In 2015 Innofactor acquired the Swedish company Cinteros, a leading IT services company in Sweden focusing on Microsoft Dynamics CRM-based solutions. The company employed over 100 people in three locations in Sweden. Cinteros was consolidated into Innofactor January 1st, Cinteros revenue in 2014 was around EUR 7.9m. Innofactor acquired Lumagate group in Lumagate is a leading Nordic Microsoft Azure and infrastructure services provider, with over 70 employees, focusing on cloudbased solutions in the Microsoft ecosystem. Through the acquisition Innofactor expanded its business to Norway and strengthened its position in Sweden and Denmark. Lumagate was consolidated into Innofactor October 1st, The revenue in 2015 was approximately EUR 8.7m. Possible future M&A activity likely smaller scale and strategically focused Company managament has indicated that the M&A activity will slow down at least in the near future. Acquisitions may continue, but the scope is expected to be smaller, with focus on strategic acquisitions that enable unification of country-specific offerings. According to company management this could mean acquisition of for instance CRM and ERP business in Denmark and Norway. Competitors and competitive landscape Fragmented market with small niche players and large IT-companies Large IT generalists Mid-sized competitors Through the acquistions of Cinteros and Lumagate, Innofactor now has a presence in all of the nordic countries and competes with an increasing number of companies. The generally fragmented Nordic IT services market includes small niche players in addition to mid-sized and large competitors. Size-wise Innofactor is positioned in between the small niche players and large IT-companies. The large competitors typically have a presence in all nordic countries or a global presence. These large players are IT generalists, which mean that they offer a vast amount of different IT-services, and have large resources and offshoring capabilities at their disposal. They also do not focus strictly on one technology for providing business solutions, but instead provide solutions from multiple competing platforms. Innofactor does not use off-shoring, instead it relies on local skilled professionals. The large competitors include such companies as Accenture, CGI, Fujitsu, and Tieto. In the mid-sized firms, competitors consist of both firms with a more local geographic focus and firms with a presence in the Nordic markets. Companies with a more local focus tend to have a broader offering than the geographically more dispersed companies and the mid-sized firms in general do not focus on single platforms. Competitors with stronger focus to one or a few nordic countries include Siili, Solita, Digia, Net-Company, and Precio Fishbone. Competitors with presence in all Nordic markets include Affecto, Atea, HiQ, Knowit, and EG. 7(26)

8 Small competitors The smaller competitors usually have limited their presence to the home market. Their size also limits their possibilities to offer solutions on multiple platforms and as such the companies are often niche players with a focused offering. Smaller competitors include Sulava, Cloudriven, and Proactive. Figure 3: Innofactor s competitive positioning Innofactor s size provides flexibility Focus on Microsoft solutions Innofactor is positioned between the small and large competitors. Compared to the large competitors, Innofactor competes by being more flexible and offering local skilled professionals. As a listed company with a long customer reference track record, Innofactor is able to compete well against smaller firms. Innofactor s competitive positioning is described in Figure 3. Innofactor s strategic positioning relies heavily on Microsoft-based solutions in addition to a few other complementing platforms. Nordic IT services market is estimated to about 25 billion euros, of which Innofactor estimates that approximately 40% or some 10 billion euros to be related to Microsoft IT-services. According to Innofactor they are the number one Microsoft-based service provider in both Finland and in the Nordics. 8(26)

9 Customers Over 1500 customers, 10 largest account for 29 % of net sales Innofactor has a dispersed customer base from the commercial sector, public sector, and membership-based organizations, of which the commercial sector accounts for the largest part. The number of customers is over 1500, of which the ten largest customers accounted for 29 % of net sales in Figure 4: Innofactor s customers Market overview Market growth expected to pick up, public cloud services market to experience strong growth Growth in Finland historically weaker, conditions improving The size of the Nordic IT-services market is roughly EUR 25 billion (IDC), of which Innofactor has estimated the Mircosoft market to be approximately EUR 10 billion. The growth in the Nordic IT-services market during 2016 has been estimated at around 2-3 % and the growth is expected to pick up in 2017, with Innofactor estimating growth of 3-4 %. We expect the generally improved economic conditions and market trends, such as companies moving increasingly towards cloud-based solutions, to have a positive effect on the growth in IT-services. The growth in certain areas within IT-services, such as the cloud, mobility, and analytics, are assumed to notably surpass the upper end of the growth spectrum. IDC has projected an annual growth of 21 % in the Nordic public cloud services market until In Finland, Innofactor s largest market in the Nordics, the growth has not been quite as good as in the other Nordic countries. Gartner has estimated the growth in 2016 to be 2.2 % and the size of the Finnish IT-market in 2017 to be EUR 6,85 billion, with a growth of 3.1 % (Marketvisio). The IT-services market accounts for roughly 55 % of the total ITmarket in Finland. Gartner has estimated the Finnish IT-services market size at EUR 3.8b, growing 4 % in 2016, and growth to increase slightly in 2017 and 2018 (Marketvisio). Growth is expected to be fuelled by areas such as the cloud, mobile solutions and the Internet of Things. The planned Social and Healthcare reform (SOTE) in Finland and the resulting new organizational sturcture on municipality level could provide additional market opportunities for Innofactor. 9(26)

10 Microsoft Ecosystem Microsoft leading provider in Innofactor s strategic focus areas Microsoft s position in the global enterprise solutions space is strong. Microsoft is a leading global provider in Innofactor s strategic focus areas such as Cloud, Analytics, CRM and ERP. According to Innofactor, if Microsoft were to lose its leading position in some or all of Innofactor s focus areas, Innofactor could transition to other software partners in these areas. Figure 5: Microsoft s position as a provider within Innofactor s focus areas 10(26)

11 Microsoft sales growing Microsoft heavily involved in A.I, cloud, machine learning, Internet of Things PC s and PC related products have been weak for a longer time already, but Microsoft s position in enterprise solutions has been growing thanks to their succesful strategy and execution in areas such as cloud and mobility. Below we have collected the concensus growth estimates for Microsoft s Productivity and Business Processes and Intelligent Cloud units. Concensus expects MS enterprise solutions to grow at a strong pace, which will be supportive for Innofactor. Microsoft is also at the forefront of developing A.I., machine learning and advanced analytics capabilities into its solutions, which provides a tailwind to service providers like Innofactor. Figure 6: Microsoft sales growth estimates per business unit MEUR E 2018E 2019E 2020E Productivity and Business Processes % 15 % 10 % 9 % Intelligent Cloud % 10 % 11 % 10 % More Personal Computing % 0 % 1 % 4 % Source: Factset Strategy and targets Microsoft focus Vision: Leading Microsoftbased solutions provider in all Nordic countries Stronger focus on organic growth, room for strategic acquisitions Innofactor s strategic focus revolves around the Microsoft ecosystem. A large part of the solutions are Microsoft-based and the company uses other platforms mainly in areas where the Microsoft ecosystem provides limited solutions. By focusing heavily on the Microsoft ecosystem, Innofactor strives to improve its competitive positioning by creating a strong base of know-how and obtaining better deals through the increasing partnership with Microsoft. Innofactor s updated its vision and financial targets in October As a result of the Acquisition of Lumagate the company considers itself having reached the previous vision of becoming the leading provider of Microsoft-based solutions in the Nordics. The vision going forward is to become the leading provider of Microsoft-based solutions in all of the Nordic countries. For the years the focus has been set on unifying the country-wise offering. After the strong M&A activity in the recent years the company now has a presence in all the Nordic countries a stronger focus on organic growth is to be expected. The progressing integration of acquired companies and the freeing up of resources on the group level should have a positive effect on profitability. Innofactor has set the following financial targets to be achieved by the year 2020: Annual organic growth of around 20 percent 20 percent EBITDA in relation to net sales Keeping a positive cash flow and securing a solid financial standing in all situations 11(26)

12 2017 guidance: Net sales and EBITDA to increase from 2016 Growth targets well above expected market growth Guidance for 2017 According to the guidance from Innofactor the net sales and EBITDA are expected to increase from 2016 figures. In 2016 the net sales was EUR 59.6 million and EBITDA EUR 4.8 million. The financial targets posted for sales growth for the period was an average annual growth of % (new targets solely based on organic growth). The previous growth targets were achieved as a result of the strong M&A activity. Innofactor intends to achieve the stronger growth through the following measures: Focusing on industries providing highest growth opportunities and scalability in existing offering, e.g. healthcare Focus on current customers and obtaining larger part of customer s digital transformation budget through cross sales Improving modern digital marketing and sales skill to achieve better sales results Operating margin target raised from 10 % to 20 % The operating margin fell short of the target of 10 % for the period but was raised to 20 %, to be achieved by To reach the new target the company intends to: Move focus towards own products and productized services Further develop employee skills to create higher value services that customers are willing to pay more for Improve the flexible and value-adding delivery model to minimize non-invoiced hours and maximize customer satisfaction Create operative synergies and cost savings on the Nordic level, e.g. through the currently under implementation Nordic ERP Aim to pay dividends by 2020 Innofactor has previously not paid dividends, largely due to the focus on growth in the previous strategy. The company has defined a dividend distribution policy in which it aims to distribute the maximum dividend allowed from the part of the operating margin that exceeds 10 %. With regards to the dividend policy and the financial targets the company aims to pay dividends to its shareholders in 2020 at the latest. 12(26)

13 Cost savings and margin improvement Project profitability improvements through controlled project pricing and keeping costs in line Strives to achieve synergies from focusing support activities A large part of the revenue comes from projects, and we see that a significant part of revenue will be generated through projects also in the future. As these projects have low margins but often are necessary for obtaining continuous contracts, the profitability of these projects would need to improve for targets to be reached. The two main determinants for the margins are 1) the price at which the project is sold, and 2) how well the project costs are kept in line with the price. Company management has indicated following measures for improving the prices from projects: Focusing on segments valuing Innofactors higher value services and on existing key customers Focusing on selling products and productized services And for keeping project costs in line: Improving pre-project evaluation of project model (Time & Material, fixed, or hybrid price) Improving processes around and implementation of workload estimates and project planning and using more change management in projects to decrease non-billable work The companies that have been acquired more recently have had geographically dispersed activities and support functions of their own. With the integration of the companies some of these functions will be overlapping with existing ones. Innofactor is seeking to reduce costs in these areas and focusing support activities. This could for instance mean focusing financial administration to one or two countries. Company management has indicated that a reduction of some tens of percent of costs relating to support activities could be achievable. This could translate into total savings of few percentages on the group level. The Nordic ERP system that has already been implemented in some countries will also provide synergies and cost saving potential. The company has employed some 5-10 people for developing the ERP system, and these resources will be gradually released as the implementation progresses. 13(26)

14 Financial performance and estimates Strong M&A growth expected to transition towards organic growth and improving margins Innofactor has been able to grow rapidly while maintaining a relatively stable operating margin. As a labour intensive business the revenue development follows the amount of employees quite closely and scalability has been limited. We see a small increase in the revenue per employee figures beginning in We expect the growth to continue at a slower pace with improving margins as focus shifts on integration of acquired companies and achieving cost synergies on the group level. Figure 7: Revenue and average employees (LTM) Acquisition related amortizations impact on EBIT The EBIT-margin since 2013 has been affected by amortizations of intangibles relating to acquisitions, which in 2016 were EUR 2 million. With an estimated amortization period of five years the amortizations of previously acquired businesses will decrease gradually from 2018 onwards. Figure 8: Innofactor s revenue and margins (MEUR) E 2018E 2019E 14% 12% 10% 8% 6% 4% 2% 0% Source: Innofactor, Evli est. Revenue EBITDA-% Adj. EBIT-% 14(26)

15 2017 Q1: Sales increased 20 % and EBITDA 27.1 % Several significant orders received In the first quarter of 2017 Innofactor s net sales increased by 20 % Q-on-Q to EUR 17.5m, affected by the Lumagate acquisition. The operating margin increased by 27.1 % to EUR 1.2m. Operational efficiency was still burdened by the acquisition but according to management the actions taken had a desired effect from March onwards, despite some additional costs related to the actions taken. Innofactor has during the beginning of the year received several significant orders. Innofactor reported new orders in the Q1 interim report from HUS (~EUR 1.8m), TVR (~EUR 1.0m) and IF Metall in Sweden (EUR 0.6-4m). An order of approx. EUR 1.2m was also received from HUS in May. Balance sheet Large goodwill in assets Debt in shape, additional purchase price from acquisitions Goodwill and other intangible assets make up over half of Innofactor s balance sheet. The intangibles have mainly been obtained from acquisitions and consist of customer relationships and technology. Goodwill is the largest item in the assets stemming from the acquisition driven strategy. Innofactor has been able to keep the debt at decent levels. Net gearing was 70.2 % in 2016, partly due to loans taken to finance acquisitions. The company has been able to pay back loans and we expect the debt levels to decrease. The non-interest bearing liabilities contain some liabilities for the additional purchase price of acquisitions. The company has indicated that these compensations would primarily be paid with shares, in which case a share issue may be necessary. The company issued new shares to pay a Cinteros-acquisition related compensation in Q1. The preliminary acquisition cost calculation for the Lumagate conditional compensation is ~EUR 2m, which is intended to be paid in Figure 9: Innofactor s balance sheet composition (2016) Source: Evli Research 15(26)

16 Estimates Estimated organic growth of 5-7 % Large margin improvements require shift from project deliveries Additional purchase price from acquisitions marginal effect on EPS Innofactor has estimated a growth rate for the Nordic IT-services market of 3-4 % in Gartner has estimated the growth in Finland to be 3.1 % in 2017 (Marketvisio). The Competitiveness Pact signed in 2016 in Finland is also expected to contribute marginally to growth due to the extension of annual working time by 24 hours. Growth within areas in the IT-services market is expected to vary substantially, with areas such as the cloud, mobility, and analytics growing stronger than the market. IDC has projected an annual growth of 21 % in the Nordic public cloud services market until We estimate 5-7 % growth (2017: 17.8 %, affected by inorganic Lumagate growth) for E. Our estimates are based on the healthy outlook of the Nordic IT-services market and the aforementioned growth pockets within the market (e.g. cloud and digital leap), improving economic outlook favoring increased IT-investments, and the strong outlook for Microsoft s enterprise solutions A key driver for improving profitability lies in the ability to transition sales from low margin project deliveries to higher margin continuous services and to a greater extent being able to include own software products and services in the offering. The Lumagate acquisition also added some new products to Innofactors own products. We expect the competition to keep margins in projects low. We estimate Innofactor to be able to slightly improve the sales mix with an increasing amount of revenue from Recurring Revenue and Licenses. In addition we estimate margin improvement from synergies at the group level. We estimate the EBITDA-margin to reach 10 % by 2018 and further long-term improvement. Innofactor has some additional purchase price allocations from the Lumagate acquisition that according to the company would be primarily paid in shares. If the company were to issue new shares in a directed share issue, this would have a diminishing effect on the earnings per share. We estimate this effect to be marginal and the conditional compensation is according to Innofactor estimated to be paid in Valuation BUY with a target price of EUR 1.85 EUR Relative valuation in line with peers We initiate coverage of Innofactor with BUY recommendation and a target price of EUR 1.85 based on our DCF fair value and the peer multiples. Our DCF model implies a value of EUR 1.9 per share. Our multiples for 2017 are somewhat above the peer group median but are in line with the peer group in P/E and return on equity figures differ from the peer group due to the additional purchase price from acquisitions in the short term but the P/E multiple improves toward the peer median in We assign larger weight for our DCF value and give a target price of EUR Valuation Implied value DCF 1,90 DCF diluted* 1,85 Peer EV/EBITDA (18E) 1,60 Peer EV/SALES (18E) 1,75 Target price 1,85 *If conditional compensation financed by directed issue 16(26)

17 Figure 10: Innofactor s peer group MCAP EV/EBITDA EV/EBITDA EV/EBITDA EV/Sales EV/Sales EV/Sales P/E P/E P/E Net debt/ebitda PEER GROUP EUR Tieto ,1x 10,4x 9,9x 1,4x 1,4x 1,3x 17,2x 16,5x 15,7x 0,6x Bouvet 177 9,9x 9,2x 8,6x 1,0x 0,9x 0,9x 16,8x 15,6x 14,5x -0,6x HiQ ,6x 11,8x 10,9x 1,7x 1,6x 1,5x 18,1x 16,7x 15,5x -0,9x Siili Solutions 74 11,1x 9,6x 8,6x 1,1x 1,0x 0,9x 17,6x 15,0x 13,3x -2,3x Atea ASA ,6x 8,5x 7,9x 0,4x 0,3x 0,3x 17,8x 15,2x 13,6x 0,3x Knowit 264 9,5x 8,8x 8,4x 1,0x 0,9x 0,9x 13,4x 12,0x 11,3x -0,5x Digia 53 7,0x 6,5x 5,8x 0,7x 0,7x 0,7x 12,5x 9,5x 7,3x 1,4x Affecto 78 10,4x 7,6x 6,2x 0,7x 0,7x 0,7x 15,3x 11,1x 8,6x -0,3x Enea 127 9,1x 7,6x 6,9x 2,0x 1,9x 1,8x 13,5x 11,7x 5,7x -1,8x Solteq 28 9,5x 7,7x 7,5x 0,7x 0,7x 0,7x 16,3x 13,6x 12,5x Peer Group Average ,0x 8,8x 8,1x 1,1x 1,0x 1,0x 15,9x 13,7x 11,8x -0,5x Peer Group Median 152 9,7x 8,7x 8,2x 1,0x 0,9x 0,9x 16,6x 14,3x 12,9x -0,5x Innofactor (Evli est.) 55 11,1x 9,0x 7,5x 1,0x 0,9x 0,8x 23,2x 15,4x 13,0x 1,9x Innofactor premium/discount to peer median 14 % 4 % -8 % 4 % -4 % -13 % 40 % 8 % 0 % Sales CAGR ROE-% ROE-% ROE-% Div. yield Div. yield Div. yield PEER GROUP Tieto 3 % 24 % 26 % 27 % 4,6 % 4,9 % 5,0 % Bouvet 8 % 48 % 44 % 40 % 4,1 % 4,3 % 4,3 % HiQ 7 % 23 % 24 % 26 % 5,5 % 5,8 % 6,0 % Siili Solutions 14 % 22 % 23 % 24 % 3,7 % 4,5 % 5,8 % Atea ASA 4 % 19 % 22 % 24 % 6,4 % 6,6 % 6,8 % Knowit 7 % 22 % 21 % 20 % 3,0 % 3,0 % 3,0 % Digia 5 % 5 % 15 % 3,2 % 3,5 % 3,9 % Affecto 2 % 8 % 9 % 5,0 % 5,6 % 6,9 % Enea 11 % 17 % 16 % 27 % 3,3 % 3,8 % 8,4 % Solteq 5 % 5 % 10 % 10 % 3,7 % 4,3 % 4,9 % Peer Group Average 7 % 19 % 21 % 20 % 4,3 % 4,6 % 5,5 % Peer Group Median 6 % 20 % 22 % 24 % 3,9 % 4,4 % 5,4 % Innofactor (Evli est.) 10 % 10 % 12 % 12 % 0 % 0 % 0,6 % Source: Bloomberg, Evli Research Sales growth EBITDA-margin PEER GROUP Tieto -5 % -4 % 2 % 4 % 3 % 3 % 13 % 12 % 14 % 13 % 14 % 14 % Bouvet -5 % 2 % 4 % 13 % 5 % 4 % 8 % 9 % 10 % 10 % 10 % 10 % HiQ 0 % 6 % 9 % 6 % 6 % 6 % 11 % 13 % 13 % 13 % 14 % 14 % Siili Solutions 57 % 42 % 16 % 19 % 12 % 10 % 9 % 10 % 11 % 10 % 11 % 11 % Atea ASA 4 % 6 % 8 % 2 % 4 % 3 % 4 % 3 % 4 % 4 % 4 % 4 % Knowit -2 % 6 % 9 % 5 % 4 % 4 % 7 % 7 % 9 % 10 % 10 % 10 % Digia -2 % -17 % 7 % 9 % 6 % 0 % 6 % 11 % 9 % 10 % 11 % 12 % Affecto -8 % -5 % -3 % 4 % 4 % 0 % 9 % 9 % 7 % 7 % 9 % 11 % Enea 0 % 9 % 3 % 16 % 6 % 8 % 26 % 27 % 28 % 22 % 25 % 26 % Solteq 7 % 32 % 16 % 4 % 8 % 4 % 9 % 9 % 11 % 8 % 9 % 9 % Peer group median -1 % 6 % 7 % 5 % 5 % 4 % 9 % 9 % 10 % 10 % 10 % 11 % Peer group average 5 % 8 % 7 % 8 % 6 % 4 % 10 % 11 % 12 % 11 % 12 % 12 % Innofactor (Evli est.) 35 % 1 % 34 % 18 % 7 % 5 % 9 % 8 % 8 % 9 % 10 % 10 % Source: Factset, Evli Research 17(26)

18 VALUATION RESULTS BASE CASE DETAILS VALUATION ASSUMPTIONS ASSUMPTIONS FOR WACC Current share price 1.67 PV of Free Cash Flow 34 Long-term growth, % 2.5 Risk-free interest rate, % 2.25 DCF share value 1.92 PV of Horizon value 52 WACC, % 8.4 Market risk premium, % 5.8 Share price potential, % 14.8 Unconsolidated equity 0 Spread, % 0.5 Debt risk premium, % 2.8 Maximum value 2.1 Marketable securities 1 Minimum WACC, % 7.9 Equity beta coefficient 1.00 Minimum value 1.7 Debt - dividend -17 Maximum WACC, % 8.9 Target debt ratio, % 20 Horizon value, % 60.5 Value of stock 69 Nr of shares, Mn 36.2 Effective tax rate, % 21 DCF valuation, EURm E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E Horizon Net sales Sales growth, % Operating income (EBIT) EBIT margin, % Depreciation+amort Income taxes Change in NWC NWC / Sales, % Change in other liabs Capital Expenditure Investments / Sales, % Other items = Unlevered Free CF (FCF) = Discounted FCF (DFCF) = DFCF min WACC = DFCF max WACC (26)

19 INTERIM FIGURES EVLI ESTIMATES, EURm 2016Q1 2016Q2 2016Q3 2016Q Q1 2017Q2E 2017Q3E 2017Q4E 2017E 2018E 2019E Net sales EBITDA EBITDA margin (%) EBIT EBIT margin (%) Net financial items Pre-tax profit Tax Tax rate (%) Net profit EPS EPS adjusted (diluted no. of shares) Dividend per share SALES, EURm Innofactor Total SALES GROWTH, Y/Y % Innofactor Total EBIT, EURm Innofactor Total EBIT margin, % Innofactor Total (26)

20 INCOME STATEMENT, EURm E 2018E 2019E Sales Sales growth (%) Costs Reported EBITDA Extraordinary items in EBITDA EBITDA margin (%) Depreciation EBITA Goodwill amortization / writedown Reported EBIT EBIT margin (%) Net financials Pre-tax profit Extraordinary items Taxes Minority shares Net profit BALANCE SHEET, EURm Assets Fixed assets % of sales Goodwill % of sales Inventory % of sales Receivables % of sales Liquid funds % of sales Total assets Liabilities Equity % of sales Deferred taxes % of sales Interest bearing debt % of sales Non-interest bearing current liabilities % of sales Other interest free debt % of sales Total liabilities CASH FLOW, EURm + EBITDA Net financial items Taxes Increase in Net Working Capital /- Other = Cash flow from operations Capex Acquisitions Divestments = Net cash flow /- Change in interest-bearing debt /- New issues/buybacks Paid dividend /- Change in loan receivables Change in cash (26)

21 KEY FIGURES E 2018E 2019E M-cap Net debt Enterprise value Sales EBITDA EBIT Pre-tax Earnings Book value Valuation multiples EV/sales EV/EBITDA EV/EBITA EV/EBIT EV/operating cash flow EV/cash earnings P/E P/E excl. goodwill P/B P/sales P/CF Target EV/EBIT Target P/E Target P/B Per share measures Number of shares 30,909 32,154 33,454 33,454 36,188 36,188 36,188 Number of shares (diluted) 30,909 32,154 33,454 33,454 36,188 36,188 36,188 EPS EPS excl. goodwill Cash EPS Operating cash flow per share Capital employed per share Book value per share Book value excl. goodwill Dividend per share Dividend payout ratio, % Dividend yield, % Efficiency measures ROE ROCE Financial ratios Capex/sales, % Capex/depreciation excl. goodwill,% -1, Net debt/ebitda, book-weighted Debt/equity, market-weighted Equity ratio, book-weighted Gearing Number of employees, average Sales per employee, EUR 106, , , , , , ,602 EBIT per employee, EUR 7,345 5,717 6,218 4,383 6,235 8,245 9,251 21(26)

22 COMPANY DESCRIPTION: Innofactor provides software products and solutions. It specializes in Microsoft-based cloud solutions and digital transformation. The company offers process innovation, digital business, flexible collaboration, business productivity, and intelligent cloud solutions to commercial, public sector, and membership-based organizations in the Nordic countries. INVESTMENT CASE: OWNERSHIP STRUCTURE SHARES EURm % Ensio Sami 7,460, % Tilman Tuomo Tapani 2,747, % Ilmarinen Mutual Pension Insurance Company 1,550, % Laiho Rami Tapani 1,355, % Linturi Kaija ja Risto 1,261, % Arje Matias Juhanpoika 923, % Maki Antti Jussi 897, % Muukkonen Teemu Heikki 522, % Jarvenpaa Janne-Olli 322, % Kukkonen Heikki-Harri 316, % Ten largest 17,356, % Residual 18,832, % Total 36,188, % EARNINGS CALENDAR August 01, 2017 October 31, 2017 Q2 report Q3 report OTHER EVENTS COMPANY MISCELLANEOUS CEO: Sami Ensio Keilaranta 9, FI Espoo CFO: Patrik Pehrsson Tel: +358 (0) IR: 22(26)

23 DEFINITIONS P/E Price per share Earnings per share EPS Profit before extraordinary items and taxes income taxes + minority interest Number of shares P/Sales Market cap Sales DPS Dividend for the financial period per share P/BV Price per share Shareholders' equity + taxedprovisions per share CEPS Gross cash flow from operations Number of shares P/CF Price per share Operating cash flow per share EV/Share Enterprise value Number of shares EV (Enterprise value) Market cap + net debt + minority interest at market value share of associated companies at market value Sales/Share Sales Number of shares Net debt Interest bearing debt financialassets EBITDA/Share Earnings before interest, tax, depreciation and amortisation Number of shares EV/Sales Enterprise value Sales EBIT/Share Operatingprofit Number of shares EV/EBITDA Enterprise value Earnings before interest, tax, depreciation and amortisation EAFI/Share Pretax profit Number of shares EV/EBIT Enterprise value Operating profit Capital employed/share Total assets non interest bearing debt Number of shares Div yield, % Dividend per share Price per share Total assets Balance sheet total Payout ratio, % Total dividends Earnings before extraordinary items and taxes income taxes + minority interest Interest coverage (x) Operatingprofit Financialitems Net cash/share Financial assets interest bearing debt Number of shares Asset turnover (x) Turnover Balance sheet total(average) ROA, % Operatingprofit + Balance sheet total financial income + extraordinary items interest free short termdebt long termadvances receivedand accounts payable (average) ROCE, % Profit before extraordinary items + interest expenses + other financialcosts Balance sheet total noninterest bearing debt (average) ROE, % Profit before extraordinary items and taxes income taxes Shareholders' equity + minority interest + taxedprovisions (average) Debt/Equity, % Interest bearing debt Shareholders' equity + minority interest + taxed provisions Equity ratio, % Shareholders' equity + minority interest + taxedprovisions Total assets interest freeloans CAGR, % Cumulative annual growthrate = Average growthper year 23(26)

24 Important Disclosures Evli Research Partners Plc ( ERP ) uses 12-month target prices. Target prices are defined by utilizing analytical techniques based on financial theory including (but not limited to) discounted cash flow analysis and comparative valuation. The selection of valuation methods depends on different circumstances. Target prices may be altered on the basis of new information coming to light in the underlying company or changes in interest rates, changes in foreign exchange rates, other securities prices or market indices or outlook for the aforementioned factors or other factors that may change the conditions of financial markets. Recommendations and changes by analysts are available at Detailed information about the valuation or methodology and the underlying assumptions is accessible via ERP: Investment recommendations are defined as follows: Target price compared to share price Recommendation < -10 % SELL -10 (+10) % HOLD > 10 % BUY ERP s investment recommendation of the analyzed company is in general updated 2 4 per year. The graph above shows the distribution of ERP s recommendations of companies under coverage in 22nd of February If recommendation is not given, it is not mentioned here. Name(s) of the analyst(s): Salokivi, Forslund This research report has been prepared by Evli Research Partners Plc ( ERP ). ERP is a subsidiary of Evli Bank Plc. Production of the investment recommendation has been concluded on [ , 8:30]. None of the analysts contributing to this report, persons under their guardianship or corporations under their control have a position in the shares of the company or related securities. The date and time for any price of financial instruments mentioned in the recommendation refer to the previous trading day s closing price(s) unless otherwise stated in the report. Each analyst responsible for the content of this report assures that the expressed views accurately reflect the personal views of each analyst on the covered companies and securities. Each analyst assures that (s)he has not been, nor are or will be, receiving direct or indirect compensation related to the specific recommendations or views contained in this report. Companies in the Evli Group, affiliates or staff of companies in the Evli Group, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the publication or report. Neither ERP nor any company within the Evli Group have managed or co-managed a public offering of the company s securities during the last 12 months prior to, received compensation for investment banking services from the company during the last 12 months prior to the publication of the research report. ERP may pursue an assignment from the issuer(s) of the financial instruments mentioned in the recommendation or this report. These assignments may have a limited economic or financial impact on ERP and/or Evli. Under such assignments ERP may perform services including, but not limited to, arranging investor meetings or events, investor relations communication advisory and production of research material. ERP has signed an agreement with the issuer of the financial instruments mentioned in the recommendation, which includes production of research reports. This assignment has a limited economic and financial impact on ERP and/or Evli. Under the assignment ERP performs services including, but not limited to, arranging investor meetings or events, investor relations communication advisory and production of research material. ERP or another company within the Evli Group does not have an agreement with the company to perform market making services. For the prevention and avoidance of conflicts of interests with respect to this report, there is an information barrier (Chinese wall) between Investment Research and Corporate Finance units concerning unpublished investment banking services to the company. The remuneration of the analyst(s) is not tied directly or indirectly to investment banking transactions performed by Evli Bank Plc or any company within Evli Group. This report has been disclosed to the company prior to its dissemination. The company has not made any amendments to its contents. Selected portions of the report were provided to the company for fact checking purposes only. 24(26)