The Board of Directors' Report

Markets and Digia's business operations


During the 2009 fiscal year, the company met with success in achieving its objectives by maintaining good operational profitability and a strong positive cash flow, as well as by lowering its gearing ratio. Despite the challenging market, the company maintained stable net sales while significantly improving its operational profitability.

However, due to the EUR 23.8 million one-off goodwill writedown made for the Mobile Solutions segment at the end of the year, the company ended up making a loss for 2009.

In order to improve long-term operating conditions, the company launched measures aimed at rationalising its site structure in line with market requirements and concentrating its expertise into fewer but larger units. In this way, customers' needs will be met more effectively. Cooperation negotiations related to these streamlining measures were completed in November and led to the termination of 46 employees' employment contracts.

The company repaid EUR 26.3 million in interest-bearing liabilities during the financial year, after which loans from financial institutions stood at a total of EUR 29.0 million. Having reduced its interest-bearing liabilities, the group also significantly lowered its net financial expenses.

During the year, the company's international operations focused on China. In addition to the Chengdu office opened in 2008, the company established a new office in Beijing in the second quarter of 2009. Chinese operations have progressed according to plan and now form an important part of the company's service strategy. The Swedish and Russian units also met with the expected success during the year.

Enterprise Solutions


The customers of Digia's Enterprise Solutions segment are companies, organisations and public bodies. The segment's product and service strategy is based on multi-channel solutions that increase the efficiency of customers' business operations, and on services that cover the entire product lifecycle. An innovative development partner for its customers, Digia introduces to the market products, services and business models that employ new technologies. The segment's core market consists of the Nordic region and Russia, where it seeks to increase its operations mainly through organic growth.

During the financial year, the Enterprise Solutions segment increased its net sales somewhat and significantly improved its profitability, although the overall market decreased slightly. Despite the difficult market, the company met with excellent success, particularly in sales of efficiency-enhancing online information systems and ERP systems thanks to its industry-specific competence and insightful solutions. In ERP systems, demand grew especially in systems related to service and customer experience management.

Mobile Solutions


The customers of Digia's Mobile Solutions segment are globally operational smart phone, machine and equipment manufacturers and telecom operators that utilise Digia's contract engineering services. Some of the pillars of the segment's operations are competence management and continuous competence development. The segment's core competence areas are developed in order to match the company's expertise in the latest technologies with customer needs. On this basis, Digia draws up concrete objectives and measures.

Ongoing technological changes in the market and the introduction of new technologies have led to the fragmentation of demand into a larger number of specialist areas within the Mobile Solutions segment. In certain service and competence fields, demand has decreased and in part shifted towards low-cost countries. In addition, price competition in the service sector has seen continual growth. This, coupled with the general global recession, led to the failure of the Mobile Solutions segment to meet its targets for revenue and profitability. The beginning of the year, and particularly the second quarter, were very difficult with a large drop in demand. Thanks to competence development, an efficient network of sites and enlivened demand, however, the end of the year was slightly more positive. On the whole, the net sales for the period were, however, significantly lower year on year.

By contrast, good performance during the end of the year brought operative profitability for the whole of 2009 to a level with the previous year, although the set targets were not met.

Due to the radical changes in the market, the company re-evaluated the operations and related long-term risks of the Mobile Solutions segment in December, which led to a writedown of EUR 23.8 million in the segment's goodwill.

Financial indicators


The company's operative business was profitable, and its financial position and solvency were good. However, a writedown of EUR 23.8 million towards the end of the year caused the company's net result to be negative. The company's financial indicators are presented in the following table:

 

2009

2008

2007

Net sales

120,335

123,203

105,839

Operating profit

-7,796

13,437

11,080

Operating margin, %

-6%

11%

10%

Return on equity, %

-21%

11%

9%

Equity ratio, %

52%

47%

47%

Net sales


Digia's consolidated net sales for the 2009 fiscal year were EUR 120.3 million, representing a decrease of 2.3 per cent (2008: EUR 123.2 million).

The Enterprise Solutions segment posted net sales of EUR 70.8 million during the year, up 1.5 per cent (EUR 69.8 million). The Mobile Solutions segment posted net sales of EUR 49.5 million, down 7.3 per cent (EUR 53.4 million).

Product business accounted for EUR 18.5 million of net sales (EUR 17.7 million), equivalent to 15.4 per cent (14.4 per cent).

Net sales from international operations totalled EUR 9.7 million (EUR 14.2 million), representing 8.1 per cent of net sales (11.6 per cent). The 2008 comparison figures include EUR 5.4 million in net sales from the Swedish software company UIQ, which was declared bankrupt in early 2009.

Profitability and financial result


Digia's consolidated profit performance and profitability were significantly affected during the 2009 financial year by one-off items. These comprised of a EUR 23.8 goodwill writedown and a EUR 0.9 million restructuring provision related to the closure of sites. The goodwill writedown was entirely attributable to the Mobile Solutions segment. EUR 0.8 million of the restructuring provision was attributable to Mobile Solutions and EUR 0.1 million to Enterprise Solutions. The operating profit before one-off items is an indicator of the company's operational profitability.

Digia's operating profit before one-off items for the year was EUR 16.9 million, up by 26.0 per cent year on year (2008: EUR 13.4 million). Profitability before one-off items was 14.1 per cent (10.9 per cent).

Digia's consolidated operating profit (EBIT) for the fiscal year was EUR -7.8 million (EUR 13.4 million), representing a decrease of 158.0 per cent. Profitability (EBIT %) was -6.5 per cent (10.9 per cent).

The Enterprise Solutions segment recorded an operating profit before one-off items of EUR 12.3 million (EUR 8.8 million), up 39.5 per cent. Mobile Solutions recorded an operating profit before one-off items of EUR 4.6 million, which was level with the previous year (EUR 4.6 million). The 2008 figures for Mobile Solutions are negatively affected by a default credit recorded for UIQ Technologies, which had a EUR -1.8 million effect on the segment's profitability.

The Enterprise Solutions segment recorded an operating profit of EUR 12.2 million for the year (EUR 8.8 million), up 38.4 per cent. The operating profit of the Mobile Solutions segment was EUR -20.0 million (EUR 4.6 million), which was a significant reduction year on year due to the impact of the goodwill writedown and the restructuring provision.

The Group's net financial expenses for 2009 were EUR 2.3 million (EUR 3.0 million).

Consolidated earnings before tax were EUR -10.1 million (EUR 10.4 million), and net profit was EUR -13.7 million (EUR 7.4 million).

Earnings per share for the year were EUR -0.67 (EUR 0.36), which was significantly down due to the negative effect of the goodwill writedown and the restructuring provision.

Financial position and capital expenditure


The Digia Group's balance sheet total at the end of 2009 was EUR 112.8 million (2008 EUR 153.4 million), and the equity ratio was 52.3 per cent (47.1 per cent). Net gearing was 34.3 per cent (52.8 per cent). At the year-end, the Group's liquid assets totalled EUR 10.5 million (EUR 18.9 million).

At the end of the period, the Group had interest-bearing liabilities of EUR 30.4 million (EUR 56.9 million). Interest-bearing liabilities comprised EUR 29.0 million in loans from financial institutions, EUR 1.3 million in financial leasing liabilities and EUR 0.2 million in product development loans. During the financial year, the company repaid EUR 26.3 million in loans, reducing its loans from financial institutions to EUR 29.0 million. Loan covenant terms were modified during the reporting period to stipulate that regardless of the earnings reported for 2009, the company is allowed to distribute a maximum of EUR 3 million in dividends in 2010. In future years, the maximum dividend sum will be 30 per cent of the previous year's net operating profit.

The Group carries out annual impairment tests for goodwill and intangible assets with an indefinite useful life, in accordance with the IAS 36 standard. Impairment testing is described in more detail in the notes to the financial statements, under Note 15 ‘Intangible assets'.

The company has financing, framework and delivery agreements with special terms and conditions for any situation in which control of the company changes hands.

The Group's cash flow from business operations for 2009 was positive by EUR 20.2 million (2008: positive by EUR 15.5 million), cash flow from investments was negative by EUR 1.3 million (negative by EUR 5.3 million) and cash flow from finance was negative by EUR 27.3 million (negative by EUR 3.0 million). Cash flow from finance was negatively affected by a substantial repayment of loans totalling EUR 26.3 million, as well as by the payment of dividends with a total effect of EUR 1.0 million.

The Group's total investments into fixed assets were EUR 1.3 million (EUR 2.5 million). Investments into tangible assets totalled EUR 1.1 million (EUR 2.0 million).

The return on investment (ROI) for the year was -7.1 per cent (11.3 per cent) and return on equity (ROE) was -21.0 per cent (10.5 per cent).

Report on the extent of research and development


The Group made research and development efforts and engaged in product development in all of its divisions. In the 2009 fiscal year, the Group's R&D costs totalled EUR 2.6 million (2008: EUR 2.0 million and 2007: EUR 2.2 million), corresponding to 2.2 per cent of net sales (1.6 per cent and 2.1 per cent).

Risk management


The key risks under Digia's risk management in 2009 were customer, personnel, project, data security, integration and goodwill risks.

Measures for managing customer risks included the active development of the customer structure and the active prevention of potential risk positions. Personnel risks were assessed and managed using a quarterly goal and appraisal discussion process in which key personnel participate. To develop personnel commitment, measures were taken to produce more systematic and effective internal communication through regular personnel events and increased management visibility. The Group carried out key project audits with a view to enhancing project risk management and securing the success of project deliveries to customers. In addition, the Group's certified quality management systems were re-evaluated and approved, and the Group streamlined its project delivery reporting procedures. In order to manage data security risks, the Group carries out data security audits and continuously develops operating models, practices and processes that promote data security. The management team is tasked with managing risks associated with the integration of business operations, unified operating models and best practices, as well as their integrated development. With respect to IFRS-compliant accounting policies, the Group actively monitors goodwill and the related impairment tests as a part of prudent and proactive risk management practices within financial management.

Personnel, management and administration


At the end of 2009, the number of employees totalled 1,471, showing an increase of 134 persons or 10.0 per cent from the end of the previous year (2008: 1,337 persons). The average number of personnel in 2009 was 1,387, up by 73 employees or 5.6 per cent (2008: 1,314).

Cumulative employee turnover came to 4.4 per cent in 2009 (9.4 per cent).

Employee indicators:

 

2009

2008

2007

Average number of personnel

1,387

1,314

1,116

Wages and salaries

59,907

58,606

49,893

Employees by segment, year-end 2009:

 

 2009

Enterprise Solutions

44%

Mobile Solutions

53%

Administration and management

3%

As of the end of the year, 219 employees were working outside of Finland (2008: 123).

The Annual General Meeting (AGM) of 10 March 2009 elected the following Board members: Pekka Sivonen (full-time Chairman), Pertti Kyttälä (Vice Chairman), Kari Karvinen, Martti Mehtälä, Heikki Mäkijärvi and Jari Pasanen.

Juha Varelius has been Digia's President and CEO from 1 January 2008.

In 2009, Digia's Board of Directors had three committees: the Compensation Committee, the Audit Committee, and the Nomination Committee.

The Compensation Committee is tasked by the Board with preparing remuneration schemes and monitoring their effectiveness in meeting Group targets, safeguarding objective decision-making and securing transparent and systematic remuneration schemes. In 2009, the members of the Compensation Committee were Martti Mehtälä (Chairman), Pertti Kyttälä and Jari Pasanen. The Committee convened three times in 2009.

According to an agenda approved by the Board, the purpose of the Audit Committee is to assist the Board of Directors in ensuring that the company's financial reporting, accounting methods, financial statements and other reported financial information are legitimate, balanced, transparent and clear. The methods for doing so are itemised in the agenda. In 2010 the Audit Committee was composed of Pertti Kyttälä (Chairman), Martti Mehtälä and Heikki Mäkijärvi. The committee convened five times in 2009.

According to an agenda approved by the Board, the Nomination Committee's duty is to prepare proposals for the Annual General Meeting concerning the number of members of the Board of Directors, the members of the Board of Directors, the remuneration of the Chairman, Vice Chairman and members of the Board and the remuneration of the chairmen and members of the committees of the Board of Directors. In 2009, the members of the Audit Committee were Pekka Sivonen (Chairman) and Kari Karvinen. The committee convened twice in 2009 prior to the AGM held in the spring.

Ernst & Young Oy, authorised public accountants, are the Group's auditors, with Heikki Ilkka, Authorised Public Accountant, as the chief auditor.

Digia adheres to the Governance Code for Listed Finnish Companies, issued on 28 October 2008 by the Finnish Securities Market Association.

Business acquisitions


During the 2009 fiscal year, the Digia Group made no corporate acquisitions.

Group structure and organisation


At the end of the period, the Digia Group consisted of parent company Digia Plc and its active subsidiaries Digia Finland Ltd (parent company holding 100%), Digia Sweden AB (100%), Digia Estonia Oü (100%), Digia Hong Kong Ltd (100%) and Sunrise Resources Ltd (100%).

Digia Finland Ltd has the wholly owned active subsidiaries Digia Financial Software Ltd (100%) and Digia Service Ltd (100%).

Digia Hong Kong Ltd has the wholly owned subsidiary Digia Software (Chengdu) Co. Ltd (100%), operating in China, which registered a branch in Beijing during the reporting period (18 June 2009).

Sunrise Resources Ltd has an active subsidiary, OOO Digia RUS (100%), in Russia, whose name was changed towards the end of 2009 (previously Sunrise-r Spb).

Digia's business operations are now divided into two main business segments: Enterprise Solutions and Mobile Solutions. Enterprise Solutions is divided into ERP and Financial Administration, Digital Services and Integration Solutions. The Mobile Solutions segment is divided into Contract Engineering Services and User Experience Services.

Shareholders' meetings


Convening on 10 March 2009, Digia Plc's Annual General Meeting (AGM) adopted the financial statements for 2008, released the Board members and the CEO from liability, determined Board emoluments, resolved to raise the number of Board members to six (6), and elected the company's Board of Directors for a new term.

The AGM granted the Board authorisation to carry out a share issue, to buy back of the company's own shares and to decide on the distribution of dividends. On the basis of the authorisations granted by the AGM, the Board of Directors decided:

  • at its meeting on 10 March 2009, to convey own shares as the additional purchase price agreed for Sunrise Resources Oy;
  • at its meeting on 12 June 2009, to pay a dividend of EUR 0.05 per share on the dividend payment date of 3 July 2009; and
  • at its meeting on 30 September, to create incentive schemes based on a directed share issue without payment and shares held by the company for the management and key employees of the company.

Share capital and shares


The nominal share price is EUR 0.10. The number of shares at the end of 2009 totalled 20,853,645.

According to Finnish Central Securities Depository Ltd, Digia had 3,974 shareholders on 31 December 2009. The ten major shareholders were:

Shareholder

Shares and votes

Pekka Sivonen

14.4%

Ingman Group Oy Ab

10.6%

Jyrki Hallikainen

10.2%

Kari Karvinen

7.6%

Matti Savolainen

6.3%

Varma Mutual Pension Insurance Company

3.6%

Veikko Laine Oy

2.8%

Nordea Bank Finland Plc (nominee-registered)

1.6%

Skandinaviska Enskilda Banken (nominee-registered)

1.3%

Etra Trading Oy

1.0%

Distribution of holdings by number of shares held on 31 December 2009

Number of shares

Holding (%)

Shares and votes

1–100

20.3%

0.3%

101–1,000

55.1%

5.0%

1,001–10,000

21.6%

11.6%

10,001–100,000

2.4%

12.9%

100,001–1,000,000

0.5%

21.1%

1,000,001–3,000,000

0.1%

49.1%

Shareholding by sector on 31 December 2009

 

Holding (%)

Shares (%)

Companies

5.2%

19.5%

Financial institutions and insurance companies

0.3%

4.8%

Non-corporate public sector

0.1%

3.7%

Non-profit organisations

0.3%

0.4%

Households

93.6%

70.2%

Foreign holding

0.5%

1.4%


Stock options granted


Stock options

The Group has had stock option schemes since 15 September 1999. Stock options granted after 2003 were recognised in the financial statements for 2007 and 2008 in accordance with the standard IFRS 2, Share-Based Payment. Stock options expire if they are not exercised during a period separately defined in the option scheme. Stock options are also lost if the employee resigns from the company before the right is vested.

During 2009, the Group had a stock option scheme from 2005, but the dilution effect of its outstanding warrants on 31 December 2009 was only a maximum of 0.1 per cent. The stock options are described in more detail in the notes to the financial statements, under Note 20 'Share-based payment'.

Share-based bonuses

In addition to stock option schemes, the company offers share-based bonuses as part of its key personnel commitment and incentive scheme.

The share-based incentive system of the CEO entitles the CEO to a maximum bonus equal to the value of 80,000 company shares for the earning periods 2009 and 2010, meaning a maximum total bonus equalling the value of 160,000 shares.

The incentive system for key personnel offers the personnel in question the possibility of receiving shares in Digia Plc for each period in which specific targets are met. The Board of Directors decides annually on the earning criteria and bonus for each person covered by the scheme. For 2009, certain key personnel were granted a bonus totalling the value of 200,000 shares, payable as a 50/50 combination of shares and cash, in four equal annual instalments beginning in January 2010.

The payment of bonuses according to the share-based incentive schemes is subject to the employee in question being employed by the company on the payment date.

Reported share performance on NASDAQ OMX Helsinki in 2009


Digia Plc shares were in 2009 listed on the Nordic Exchange under Information Technology IT Services. The company's short name is DIG1V. The lowest reported share quotation was EUR 1.39 and the highest was EUR 3.88. The share closed at EUR 3.43 on the last trading day. The trade-weighted average was EUR 2.72. The Group's market capitalisation was EUR 71,528,002 at the end of the period.

The company received the following flagging notifications during the reporting period:

  • Jyrki Hallikainen announced on 6 March 2009 that his holding in the company had exceeded the 5% flagging threshold and amounted to 9.12% of the company's shares and votes.
  • Jyrki Hallikainen announced on 27 March 2009 that his holding in the company had exceeded the 10% flagging threshold and amounted to 10.24% of the company's shares and votes. 
  • Pekka Sivonen announced on 9 November 2009 that his holding in the company had fallen below the 15% flagging threshold and amounted to 14.37% of the company's shares and votes.
  • The Ingman Group announced on 9 November 2009 that the total holding of the Group and its controlled entities had exceeded the 10% flagging threshold and was 10.48% of the company's shares and votes.

Risks and uncertainties


Digia's short-term uncertainties are related to any major changes occurring in the company's core markets. The economic recession, although it is showing signs of yielding, may still have an impact on customers' investment decisions and liquidity, and therefore also on the company's net sales and profit.

In addition, due to the recent writedown of goodwill relating to the Mobile Solutions segment, the company needs to pay special attention to said segment's future development.

Furthermore, the growth in customer project sizes increases the risks related to projects and their profitability.

Prospects for the future


Digia's main objective for 2010 is to focus strongly on creating growth conditions while maintaining a strong positive cash flow and a good level of profitability.

The company will continue to pursue the conservative internationalisation of its business operations, making a concerted effort to seek opportunities for enlarging and developing its product business. Furthermore, it will step up its operations in countries with favourable cost levels, especially China.

The company expects the global economic uncertainty to recede gradually, and the IT market to grow moderately as compared to 2009. The company predicts organic growth of its net sales, at a rate at least equal to the general market rate, and the maintenance of solid profitability.

Digia's long-term focus is first and foremost on strengthening its organic growth and maintaining good cash flow. The company will continue to work on improving sales and invest into further increasing the efficiency of operations.

Major events after the balance sheet date


Proposal for dividend distribution

The unrestricted equity in the balance sheet of the Company as per December 31, 2009 amounted to EUR 41,553,350.95 of which the net result for the financial year amounts to EUR 3,927,765.97. The Board proposes to the Annual General Meeting that based on the balance sheet to be adopted for the accounting period ended December 31, 2009 a dividend of EUR 0.14 per share will be paid. The dividend will be paid to shareholders registered in the Register of Shareholders held by Euroclear Finland Ltd on the record date March 8, 2010. The dividend will be paid on 15 March 2010.