Near-term risks and uncertainties
Consolidated net sales and profitability are sensitive to volatility in exchange rates, especially that of the Swedish Krona and Norwegian Krona. Sales for Sweden and Norway represent 47% of the Group sales. Further details on management of currency risks are provided in the Financial Statements and on currency impacts at www.tieto.com/currency-impact.
Slow growth in Europe might lead to weakness in the IT services market as well. The company’s development is relatively sensitive to changes in the demand from large customers as Tieto’s top 10 customers currently account for 30% of its net sales. However, the share has decreased by around four percentage points from 2014.
The major transformation of the IT industry may result in continuous actions to renew competences. This change coupled with the offshoring trend may drive continued restructuring within companies as well as the need to recruit new competences. That may lead to temporarily overlapping personnel costs and uncertainty among personnel.
As is typical of the industry, the large size of individual deals may have a strong effect on growth, and price pressure might lead to weak profitability. Additionally, new technologies, such as cloud computing, drive customer demand towards standardized and less labour-intensive solutions. All these changes might result in the need for continuous restructuring.
The risks related to Russia are limited as the share of sales in Russia is less than 1%. However, if the instability was to affect the Finnish economy, it would have an indirect impact on the IT services market in Finland.
As is typical of Product Development Services, visibility is limited due to the short order backlog. PDS booked goodwill impairment in 2014 due to the reduction in business volumes and has efficiently adjusted its cost base. Overall, volatility in the operating environment might lead to volatility and potential goodwill impairments also going forward.
Typical risks faced by the IT service industry involve additional technology licence fees, the quality of deliveries and related project overruns. The transition related to the Managed Services automation programme, increasing use of global delivery centres as well as the ongoing organizational change pose risks of project losses and penalties.
Companies around the world are facing new risks arising from tax audits. Should the macroeconomic environment remain weak, some countries may introduce new regulation. Additionally, changes in the tax authorities’ interpretations could have unfavourable impacts on tax-payers.