Witted - Next-generation software development company

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Kauppalehti had an article about autumn recruitments:

Demand for technology professionals

One theme repeats itself in companies’ responses above all others: the demand for technology professionals.

Both in the financial sector and the retail sector, professionals are now being sought especially for roles related to data, artificial intelligence, software development, and automation.

OP Pohjola states that it is recruiting experts in artificial intelligence, data, automation, and risk management, among others. In addition, the company is looking for specialists working in customer-facing roles.

Demand is likely high and competition for talent fierce. Isn’t this traditionally the market situation where Witted has excelled precisely when there is competition for talent?

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Witted’s shareholder list has been updated:

Martin Grotenfelt, with a background in Jatkaja, continued his selling, now with a large volume:

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Aki Pyysing is adding to his position:

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Mika Reini, who has a long tenure at Remedy as CFO, among other roles, and is active in the gaming industry overall, increased his holding:

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The company of Panu Ravolainen, who has also spent time working in software development, increased its holding:

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Martinla is about to run out of shares soon. It will be interesting to see if the sell side dries up at that point :face_with_monocle:

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That’s already week 8 (wd8) and we can start waiting for the August net sales (liikevaihto) figures. This August is more interesting than usual, as it remained a bit unclear to me how Sauna’s (Sauna) holidays affect things, and comments on the progress of sales in August will be interesting now that people have returned to work after the summer. The news flow in the economy has been encouraging enough that I certainly expect companies to be in a buying mood (ostohousut jalassa) throughout the autumn.

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@Frans-Mikael_Rostedt couldn’t have hit the forecasts much better for August :grin: Revenue EUR 4.4M (forecast the same) and number of consultants 341 (forecast 342)

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And here are this time the comments on Witted’s August from substitute analyst Joni :slight_smile:

Witted released its business review for August on Thursday. The company’s revenue grew by 4.4% year-on-year to EUR 4.4 million, which was precisely in line with our forecast. The development of the number of experts also matched our expectations almost completely. Although new sales have picked up and demand for artificial intelligence expertise is strong, lower-than-expected project continuity is still slowing down organic growth. Overall, the review was very much in line with our expectations and does not give rise to a need for forecast revisions.

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According to Witted, the outlook still appears to be heading in a positive direction, looking at macro factors and client demand. We no longer really need to wait for a turnaround, but rather the turnaround is underway – and perhaps people are just waiting for it to continue. The company has grown quite briskly in previous years, so chasing higher growth is not necessary, nor is it the main role.

The company may have missed expectations (Q2), but missing expectations doesn’t mean that the company’s performance has been poor – even a bad company can beat expectations by going bankrupt later than expected, for example. Profitability has taken brisk steps forward, and the company will likely push ahead organically.

Witted’s profitability has improved thanks to efficiency measures and better margins, not because of any shady tricks. Software Sauna is operating profitably and will likely increase its role, which will be reflected more clearly in the company’s figures going forward. Norway is also doing better than before, and as I understand it, the entire company now operates more sensibly. So the turnaround appears to be underway. Witted is still considered riskier than its competitors and is valued significantly cheaper, which may limit the downside. Based on my impressions and what I’ve read, looking to the future, Witted might get a value driver from artificial intelligence, while some more “boomer” types use a value calculator. Witted isn’t a big deal in the public sector (cough… well, except it won the Yle contract) :thinking: and pent-up demand is being released in the private sector.

I’ve been thinking myself, and recall reading, that the sector might polarize into outperformers and withering companies, and I think Witted is on the side of the outperformers—some will fall behind while others strengthen at the same time.

The turnaround is of course at an early stage and not yet “confirmed,” so macroeconomic cycles have a moderate impact on a company in a delicate state. In addition, the company still needs a little time to prove that the turnaround won’t stall. Consulting work doesn’t sound all that glamorous in the long run, and we must remember that investors may still be overly pessimistic about the company, which could be reflected in the valuation for longer, even if the company might otherwise deserve a better valuation. Shorter-term market pessimism certainly offers a buying opportunity, but if that attitude becomes chronic until the next problems hit, you can’t rejoice over cheap buying opportunities… well, that was a lazy take too. :smiley:

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What would be the clearest signs to you that Witted can maintain its improved profitability and momentum over the longer term as well? How do you believe the company will perform relative to its Finnish competitors? :slight_smile:

Thanks in advance for your well-reasoned thoughts! :slight_smile:

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If you compare Witted’s profitability to its competitors, the figures are not outrageous by any means. If anything, Witted’s profitability is below the level of its competitors, from which one could deduce that there is potential for clearly better performance in the industry. If, on the other hand, Witted’s business were significantly more profitable than that of its competitors, it would be more relevant to consider how that level can be successfully sustained in the future as well.

Anyone can calculate for themselves what kind of returns an investor can achieve with various levels of profitability and valuation. It quickly becomes clear that even low profitability leads to good returns. Based on the past year as well as management’s actions and comments, I see it as more likely that profitability will rise from here rather than fall. Nor do I see that any major magic tricks, whose sustainability would be questionable, have been used to achieve this modest level of profitability.

As I understand it, Witted has not resorted to slashing prices either. When major competitive bidding processes have been won, they have been secured primarily through quality scores rather than price.

A better economic cycle naturally helps everyone, and there is room in the market for multiple successful players. We saw an example of this in 2021, when every IT boutique seemed to be doing exceptionally well.

Comparing the quality of IT companies is somewhat difficult, especially in Witted’s case, since the company has been listed on the stock exchange for such a short time and has changed shape significantly during this period. The industry as a whole is also not particularly high quality, given the modest margin levels, the difficulty of differentiation, and the abundance of competition.

Therefore, it is difficult to say anything objective about Witted’s level compared to its competitors. Gofore is a stronger player based on its track record, while Vincit is weaker. Is Witted then on par with Siili, better, or worse? Everyone can decide that for themselves.

What makes Witted attractive in my opinion is the company’s valuation and non-existent expectations. An EV/S of 0.4 is a level where even modest profitability and slight growth are enough for Witted to deliver good returns for an investor. The company has plenty of cash on its balance sheet and treasury shares amounting to just under 5% of its total share capital. There is hardly any downside risk when the valuation level is negligible and the market has been weak. In my view, positive surprises are significantly more likely than negative ones.

I don’t know if any of this rambling was helpful :sweat_smile:

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