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Tieto To Cut 30% of its Telecoms R&D Services Unit

Tieto is to cut ~900 to ~950 roles. 300 to 350 of the job cuts will be in Finland and the remaining 600 in APAC (China and India) and Eastern Europe (Poland and Czech Republic). The job redundancy program results from the decision by a major client, representing several percentage points of Tieto's revenues, to insource some of its R&D services. The financial impact is significant for Tieto: a goodwill impairment charge of ~€40m impacting its Q3 2014 P&L; and up to ~€20m in restructuring costs (Q4 2014).

This is a major contract loss as Tieto is to decrease its headcount in its Product Development Services (PDS) unit by around 30%! PDS mostly services telecom equipment manufacturers whether on the device or on the network equipment side. The unit has suffered from the poor market conditions for years, although the deterioration has accelerated in 2013 and H1 2014, largely due to in-sourcing of contracts such as the one announced today.

Tieto has been working for around 18 months on expanding its client base toward the semi conductor industry and looking at the U.S. market The company gained 10 new clients but revenues from those were minimal and not large enough to balance its decline in its traditional telecom Nordics market.

The job cuts announcement raises a number of questions. In recent interactions with the financial community, the company had not guided whatsoever to such sharp decline. Surely, a client willing to cut 900 positions would have shared its plans with its Tieto ahead of the decision or at least organized a transitioning period between its R&D teams and those of Tieto, if only for skill transfer?

It is not currently clear what Tieto will do with PDS now. The unit is becoming niche with a headcount of 2,000 in spite of its specialization. Tieto’s commercial activity to reverse revenue decline will take some time to take effect. One option would be sell this unit. However, given its immediate lack of growth prospects, valuation this unit is likely to be small and it would have to be a vendor able and willing (with the associated cost) to potentially re-skill engineers and transfer them to other clients.

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