The Board of Directors' Report

Markets and Digia's business operations

 

2010 began in uncertain terms, but economic insecurity abated during the year and the IT market has recovered somewhat from the crash following the financial crisis. Thanks to an upturn in overall market demand and a boost to the company's sales, net sales grew significantly faster than the overall market. Digia was also able to maintain a strong positive cash flow and good operational profitability. The operating profit and earnings per share increased slightly from the comparable figures from 2009. There was some cost impact towards the end of the year from recruitment of new experts and investments into developing the scalable product business, which lowered operational profitability slightly from the like-for-like figures for 2009.

Cash flow from operations remained positive, allowing the company to pay off a total of EUR 7.1 million of its liabilities during the financial year. This meant that at the end of the year the company only had EUR 22 million left in loans from financial institutions. The company's cash reserves will allow it to continue paying off its debts ahead of schedule or invest in expanding its operations.

With regard to international operations in 2010, Digia improved the offering and expertise of its units in China and Russia, especially in relation to serving local customers. Digia's Chinese unit generates product development and maintenance services, thanks to which the company is able to serve customers at various points in their product development cycle. The unit's capacity is utilised both in projects within China and for global customer relationships. The Russian unit operates as a near-shore resource for Digia's Finnish customers and also sells services directly to local customers. The company obtained its first local customers in both countries during 2010.

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.

Demand for ERP systems was good throughout the year. Meanwhile, demand for e-business and customer experience management solutions grew during the year, reaching a pleasing level in the fourth quarter.

Demand for software and IT services also grew in 2010 within the retail and service sector. The mood in the financial and insurance sector was more cautious, although positive. Demand for system work was weak in the public sector.

During the year, the company focused on creating suitable conditions for growth, for example by recruiting new experts and developing sector-specific solutions for increasing customers' operational efficiency and for customer experience management. Digia began offering its Digia Enterprise ERP system as a cloud service in response to demand for new service models.

Overall, the Enterprise Solutions segment increased its net sales moderately during the fiscal year, but its operating profit and operational profitability fell.

Mobile Solutions

 

The customers of Digia's Mobile Solutions segment are globally operational smartphone, machine and equipment manufacturers and telecom operators that utilise Digia's contract engineering services. Some of the cornerstones 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.

Demand for software and user experience development for smartphones was higher in 2010 than was forecast in conjunction with the goodwill writedown in 2009. Growth was particularly good in Linux-based software development and user experience-enhancing software development and consulting.

During the year, the company focused on improving delivery capacity for Linux-based software and reinforcing its service selection to cover the entire customer needs lifecycle. Digia also launched the Device Cloud solution, which allows development teams that are scattered around the world to access the devices under development via the internet.

The Mobile Solutions segment as a whole considerably increased its net sales and operating profit during the year.

Financial indicators

 

The group's operations were profitable, and its financial position and solvency were good. The group's financial indicators are presented in the following table:

 

2010

2009

2008

 2007 2006

Net sales

 130,825

120,335

123,203

105,839 84,968

Operating profit

17,164

-7,796

13,437

11,080 8,354

Operating margin, %

13%
-6%

11%

 10%
10%

Return on equity, %

 18%

-21%

11%

 9%
8%

Equity ratio, %

59%
52%

47%

47%
44%
           

  

More detailed key figures for the last five years are provided in the notes to the financial statements (Note 30).

Net sales

 

Digia's consolidated net sales for the fiscal year were EUR 130.8 (120.3) million, up 8.7 per cent on 2009.

The Enterprise Solutions segment posted net sales of EUR 75.7 (70.8) million, up 6.8 per cent. The Mobile Solutions segment had net sales of EUR 55.2 (49.5) million, up 11.4 per cent.

During the reporting period, the product business accounted for EUR 19.7 (18.5) million or 15.1 (15.4) per cent of consolidated net sales.

International operations accounted for EUR 10.6 (9.7) million or 8.1 (8.1) per cent of consolidated net sales.

Profitability and financial result

 

Digia's consolidated operating profit (EBIT) for the fiscal year was EUR 17.2 (-7.8) million and profitability (EBIT%) was 13.1 (-6.5) per cent. In 2009, the like-for-like operating profit before extraordinary items was EUR 16.9 million and the profitability before extraordinary items was (EBIT-%) 14.1 per cent. The extraordinary non-recurrent items for 2009 comprised a EUR 23.8 million goodwill writedown and a EUR 0.9 million restructuring provision related to the closure of sites. Profitability was favourably affected by the organic growth in consolidated net sales and by the relatively high billing rate. However, investments aimed at recruiting new experts and expanding the replicable product business caused a decrease in operational profitability as compared to the figures before extraordinary items for 2009.

The Enterprise Solutions segment's operating profit was EUR 11.0 (12.2) million, down 9.9 per cent. Operating profit before extraordinary items for 2009 totalled EUR 12.3 million.

The Mobile Solutions segment's operating profit was EUR 6.2 (-20.0) million, while its operating profit before extraordinary items for 2009 was EUR 4.6 million.

The Group's net financial expenses for 2010 totalled EUR 1.4 (2.3) million. Consolidated earnings before tax for the year totalled EUR 15.7 (-10.1) million, and net profit was EUR 11.5 (-13.7) million.

Earnings per share for the fiscal year were EUR 0.56 (-0.67). Earnings per share before extraordinary items for 2009 totalled EUR 0.53.

Financial position and capital expenditure


At the end of the reporting period, the Digia Group's consolidated balance sheet total stood at EUR 115.4 (112.8) million and the equity ratio was 58.8 (52.3) per cent. Net gearing was 20.2 (34.3) per cent. At the end of the year the Group's liquid assets totalled EUR 9.7 (10.5) million.

At the end of the year, the Group had interest-bearing liabilities of EUR 23.3 (30.4) million. Interest-bearing liabilities comprised of EUR 22.0 million in loans from financial institutions, EUR 1.2 million in financial leasing liabilities and EUR 0.1 million in product development loans. During the reporting period, the company repaid EUR 7 million in loans from financial institutions.

The Group carries out quarterly impairment testing on goodwill and intangible assets with an indefinite useful life. 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 2010 was positive by EUR 11.1 million (positive by EUR 20.2 million), cash flow from investments was negative by EUR 2.0 million (negative by EUR 1.3 million) and cash flow from financing was negative by EUR 9.9 million (negative by EUR 27.3 million). Cash flow from operations was lower than in the previous year due to the fact that some receivables were received in advance, before the end of the previous financial year. Cash flow from investments was negatively impacted in the last quarter by furniture purchases for the sum of EUR 0.5 million, made in conjunction with the consolidation of the three Helsinki offices. Cash flow from financing was negatively affected by a repayment of loans totalling EUR 7.0 million, as well as by the payment of dividends with a total effect of EUR 2.9 million.

The Group's total investments into fixed assets were EUR 2.0 (1.3) million. Acquisitions of tangible fixed assets totalled EUR 1.7 (1.1) million.

Return on investment (ROI) for 2010 was 19.3 (-7.1) per cent and return on equity (ROE) was 18.3 (-21.0) 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 2010 fiscal year, the Group's R&D costs totalled EUR 3.0 million (2009: EUR 2.6 million and 2008: EUR 2.0 million), corresponding to 2.3 per cent of net sales (2009: 2.2 per cent and 2008: 1.6 per cent).

Personnel, management and administration

 

At the end of 2010, the number of Group employees totalled 1,558, showing an increase of 87 employees or 5.9 per cent from the end of the previous year (1,471). The number of employees for the period averaged 1,508, an increase of 121 employees or 8.7 per cent over the 2009 average (1,387).

Cumulative employee turnover was 8.5 per cent in 2010 (4.4 per cent).

Employee indicators:

 

2010

2009

2008

Average number of personnel

1,508 1,387

1,314

Wages and salaries

 65,172

59,907

58,606

       

Employees by segment, year-end 2010:

 

 2010

Enterprise Solutions

 47%

Mobile Solutions

 50%

Administration and management 3%
   

 

As of the end of the year, 196 (219) employees were working outside of Finland. The reduction in personnel since the end of 2009 was due to the closure of the Yaroslaw unit in Russia and to the natural attrition of personnel in Chengdu, China.

Digia Plc's Annual General Meeting of 3 March 2010 re-elected Kari Karvinen, Pertti Kyttälä, Martti Mehtälä and Pekka Sivonen as members of the Board, and elected Robert Ingman, Tommi Uhari and Marjatta Virtanen as new members. At the organisation meeting of the Board, Pertti Kyttälä was elected as Chairman of the Board and Martti Mehtälä as Vice Chairman. The separate employment contract applying to Pekka Sivonen's term as full-time Chairman of the Board ended upon the conclusion of the Annual General Meeting.

Juha Varelius has been Digia Plc's President and CEO since 1 January 2008. Harri Savolainen started as the new CFO in September 2010.

In 2010, Digia's Board of Directors had three committees: the Compensation Committee, the Audit Committee, and the Nomination Committee.

Digia's Compensation Committee's task is to prepare and follow management remuneration schemes in order to ensure that the company's targets are met, that the objectivity of decision-making is maintained, and that the schemes are transparent and systematic. The members of the Compensation Committee in 2010 were Martti Mehtälä (Chairman), Pekka Sivonen and Tommi Uhari. In 2010, the committee convened three times, with full attendance by all members.

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 financial information provided by the company are balanced, transparent and clear. In 2010 the Audit Committee was made up of Pertti Kyttälä (Chairman), Kari Karvinen and Marjatta Virtanen. The committee convened four times in 2010, with full attendance.

The Nomination Committee will prepare proposals for the Annual General Meeting of the shareholders concerning the number of members of the Board of Directors, the members of the Board of Directors, the remuneration for the Chairman, Vice Chairman and members of the Board of Directors and the remuneration for the Chairman and members of the committees of the Board of Directors. In 2010, the members of the Nomination Committee were Pekka Sivonen (Chairman), Kari Karvinen and Robert Ingman. The Nomination Committee convened once with full attendance.

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 15 June 2010 by the Finnish Securities Market Association. Digia's corporate governance system is based on the Companies Act, the Securities Markets Act, general corporate governance recommendations, and the company's Articles of Association and in-company rules and regulations on corporate governance. The Governance Code and a separate review of the group's corporate governance and management system made for this annual report can be seen at www.digia.com.

Business acquisitions


During the 2010 fiscal year, the Digia Group made no corporate acquisitions.

Group structure and organisation


At the end of the year, 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%), with a registered branch in Beijing. Sunrise Resources Oy has a subsidiary, OOO Digia RUS (100%), operating in Russia.

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


Digia Plc's Annual General Meeting (AGM) was held on 3 March 2010.

The AGM adopted the financial statements for 2009, released the Board members and the CEO from liability, specified the dividend payment, determined Board emoluments, resolved to raise the number of Board members to seven (7), elected the company's Board of Directors for a new term, and amended Section 9 of the Articles of Association, concerning the convocation of the AGM. The AGM granted the following authorisations to the Board:

Authorisation of the Board of Directors to decide on the buyback of own shares

The AGM authorised the Board to decide on the buyback of a maximum of 2,000,000 shares in the company using the company's unrestricted equity. The Board shall decide on how the shares are acquired. Own shares can be bought back in disproportion to the holdings of the shareholders. The authorisation also includes the acquisition of shares through public trading organised by NASDAQ OMX Helsinki Oy in accordance with the rules and instructions of NASDAQ OMX Helsinki and Euroclear Finland Ltd, or through offers made to shareholders. Shares may be acquired in order to improve the company's capital structure, to fund acquisitions or other business transactions, to offer share-based incentive schemes, to sell on or to be annulled. The shares must be acquired at the going price in public trading. The authorisation replaces the authorisation granted by the Shareholders' Meeting on 10 March 2009 and is valid for 18 months from the authorisation, i.e. until 3 September 2011.

Authorising the Board of Directors to decide on a share issue and granting of special rights

The AGM authorised the Board to decide on an ordinary or bonus issue of shares and the granting of special rights in one or more instalments, as follows: the issue can total a maximum of 4,000,000 shares. The authorisation applies both to new shares and own shares held by the company. By virtue of the authorisation, the Board has the right to decide on share issues and the granting of special rights, waiving the pre-emptive subscription rights of the shareholders (directed issue). The authorisation can be used to fund or complete acquisitions or other business transactions, to offer share-based incentive schemes, to develop the company's capital structure, or for other purposes. The Board was authorised to decide on all terms relating to the share issue or special rights, including the subscription price, its payment and its recognition in the company's balance sheet. The authorisation replaces the authorisation granted by the Shareholders' Meeting on 10 March 2009 and is valid for 18 months from the authorisation, i.e. until 3 September 2011.

Based on authorisation received from the AGM, the Board of Directors decided to establish a new stock-based incentive scheme for the Chief Executive Officer and the other members of the Group Management Team. The scheme comprises four earning periods, which are the calendar years 2010–2013. The earnings principles are the consolidated earnings per share and the growth in consolidated net sales compared to the budget, according to formulae settled separately by the Board. According to the scheme, rewards totalling a maximum value equivalent to 40,000 shares will be paid for the 2010 earning period, and a maximum value of 200,000 shares will be paid for each of the earning periods from 2011 to 2013. Of the rewards paid, one half will be awarded to the CEO and one half to the other management team members in total. The reward will be paid as a 50/50 combination of shares and cash. The cash portion of the bonus will primarily be used to cover taxes and other comparable costs of the scheme.

The Annual General Meeting will take place on Wednesday 16 March 2011 from 10 am at the company's headquarters at Valimotie 21, 00380 Helsinki.

Share capital and shares

 

 

The nominal share price is EUR 0.10. The number of shares at the end of 2010 totalled 20,864,645.

31 December 2010, according to Finnish Central Securities Depository Ltd, Digia had 5,540 shareholders. The ten major shareholders were:

Shareholder

Shares and votes

Ingman Group Oy Ab

 14.4%

Pekka Sivonen

 12.6%

Jyrki Hallikainen

 10.2%

Kari Karvinen

 6.5%

Matti Savolainen

 6.1%

Varma Mutual Pension Insurance Company

 3.6%

Nordea Bank Finland Plc (nominee-registered)

 3.1%

OMXBS/Skandinaviska Enskilda Banken (nominee-registered)

 1.7%

Etola Oy

 1.0%

Olli Ahonen

 0.9%

   

 

Distribution of holdings by number of shares held on 31 December 2010

Number of shares

Holding (%)

Shares and votes

1–100

 21.6%

0.4%

101–1,000

59.1%

 7.2%

1,001–10,000

17.5%

 12.7%

10,001–100,000

1.4%

 10.8%

100,001–1,000,000

0.3%

 19.1%

1,000,001–3,000,000

0.1%

 49.8%

     

 

Shareholding by sector on 31 December 2010

 

 

 

 

 

Holding (%)

Shares (%)

Companies

5.0%

 19.6%

Financial institutions and insurance companies

0.3%

 7.1%

Non-corporate public sector

0.1%

 3.6%

Non-profit organisations

0.3%

 0.6%

Households

94.0%

 68.0%

Foreign holding

0.3%

 1.1%

     

Stock options granted

Stock options

 

The Group has had stock option schemes since 15 September 1999. Stock options granted after 2003 are recognised in the financial statements in accordance with the standard IFRS 2, Share-Based Payment.

During the reporting period, the company had a stock option scheme from 2005 as part of its key personnel incentive scheme. The number of warrants under that scheme totalled 900,000, of which 300,000 were marked as 2005A, 300,000 as 2005B and 300,000 as 2005C. The warrants entitle their holders to subscribe a maximum total of 900,000 Digia Plc shares.

At the end of the 2010 financial year, all A options in the 2005 scheme had expired. 11,000 B options were held by previous employees of the company, while all the rest had been returned to the company. All C options had been returned. The returned options will not be exercised for subscribing shares.

The maximum dilution effect of the outstanding options was only 0.1 per cent on 31 December 2010. After the end of the reporting period, the remaining 11,000 B options were returned to the company, and therefore as of the annual report issue date, the company had no outstanding options.

Share incentive scheme and management ownership

 

The company has a share bonus system as a part of its key personnel commitment and incentive scheme.

The share-based incentive scheme of the President and CEO was specified by the Board in autumn 2009 and spring 2010 according to authorisation received at the AGM.

The system set in autumn 2009 covers the earning periods 2009 and 2010 and entitles the CEO to a maximum bonus for each period equivalent to the value of 80,000 shares. The minimum required result is an EPS of EUR 0.41 (entitling the CEO to a value of 20,000 shares) for an earning period, whereafter the bonus will increase in steps so that the maximum bonus will become payable when the EPS reaches EUR 0.69 for the earning period.

The scheme specified in spring 2010 comprises four earning periods, which are the calendar years 2010–2013. The earnings principles are the consolidated earnings per share and the growth in consolidated net sales compared to the budget, according to formulae settled annually by the Board. According to the scheme, rewards totalling a maximum value equivalent to 20,000 shares will be paid for the 2010 earning period, and a maximum value of 100,000 shares will be paid for each of the earning periods from 2011 to 2013. For 2010 the requirement for the minimum bonus (5,000 shares) was an EPS of EUR 0.41 and the maximum bonus required an EPS of EUR 0.69, or at least an EPS of EUR 0.615 plus consolidated net sales that exceeded the budget by 15 per cent.

In addition to the CEO, the scheme that finished in spring 2010 applied to the company's other management team members, who were entitled to share the same share bonus that the CEO received.

In addition, the company has a share incentive scheme for specific key persons, who, based on the financial results for 2009, could receive a total maximum bonus equivalent to 200,000 shares, paid out 50/50 in 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.

According to the list of shareholders dated 31 December 2010, Digia's Board of Directors and CEO owned shares in the company as follows:

Pertti Kyttälä 0
Martti Mehtälä 0
Robert Ingman 20,000
Kari Karvinen 1,353,901
Pekka Sivonen 2,631,613
Tommi Uhari 0
Marjatta Virtanen 0
Juha Varelius 113,750

 

At the end of the year, the shares held by the Board members and the CEO represented 19.7% of the company's shares and votes.

Reported share performance on NASDAQ OMX Helsinki in 2010


Digia Plc shares were during the fiscal year listed on NASDAQ OMX Helsinki exchange under IT Services. The company's short name is DIG1V. The lowest reported share quotation was EUR 3.36 and the highest was EUR 5.89. The share closed at EUR 5.03 on the last trading day. The trade-weighted average was EUR 5.01. The Group's market capitalisation was EUR 104,949,164 at the end of the fiscal year.

The company received no flagging notifications during the year.

Risks and uncertainties


The main risks and uncertainties of the company's business have remained unchanged, although there is more uncertainty in the development of the mobile market.

The key risks under Digia's risk management in 2010 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.

Short-term uncertainties are related to any major changes occurring in the company's core markets. Certain customer segments are still recovering from the long global recession, and this may still affect the company's customers' investment decisions and liquidity, and therefore also Digia's net sales and profit. Furthermore, the growth in customer project sizes increases the risks related to projects and their profitability.

Prospects for the future

 

The company's main objective for 2011 is to increase its net sales. To do this, it will continue to increase its human resources, develop its sales operations and implement efficiency-enhancing measures. In addition to carrying out its core business operations, the company will continue to invest into expanding its scalable product business. Digia will also continue to develop its international operations, particularly in China and Russia.

Despite these growth efforts, the cornerstones of the company's operations will continue to be maintaining a positive cash flow and a good level of profitability.

The company predicts continued moderate growth in the sale of ERP systems in 2011.

The increase in popularity of smartphones and their related services will create opportunities for favourable development of the company's sales. The technology revolution, leading to the arrival of new technologies on the market, and the fact that customers are buying increasingly large packages of products and services will help to uphold demand for Digia's services. On the other hand, the development of the mobile market is somewhat more uncertain than before.

The outsourcing of testing and maintenance services to low-cost countries continues. Digia is making long-term efforts in improving its delivery capacity for new technologies. It will continue to increase its competence in producing conceptualisation and user experience services, and its ability to provide services that cover entire life cycles on various technological platforms for global clients.

As a whole, the company predicts the IT market to continue growing moderately from 2010 levels.The company expects its net sales to grow organically, at least at the predicted market level,and estimates that it will maintain its good level of operational profitability.

Major events after the balance sheet date

 

There have been no significant events after the end of the financial year.

Board's dividend proposal

 

At the end of 2010, the distributable shareholders' equity of Digia Plc was EUR 41,919,216.74, of which EUR 2,946,031.47 was the net profit for the year. The Board of Directors will propose at the Annual General Meeting of 16 March 2011 that the dividend according to the confirmed statement of financial position for the fiscal year ending 31 December 2010 be EUR 0.27 per share. Dividends are paid to shareholders listed in the shareholder register maintained by Euroclear Finland Oy on the dividend reconciliation date, 21 March 2011. Dividends will be paid on 28 March 2011.

The company's loan covenant terms were modified during the period to stipulate that the company is allowed to distribute a maximum of 50 per cent of the consolidated net profit for 2010 in dividends in 2011.